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) 878-4066
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Date of fiscal year end: 12/31
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Date of reporting period: 12/31/09
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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, 450 Fifth Street, NW,
Washington, DC 20549-0609. The OMB has reviewed this collection of information
under the clearance requirements of 44 U.S.C. ss. 3507.
ITEM 1. REPORTS TO STOCKHOLDERS.
Annual Report
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December 31, 2009
Annual Report
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TOUCHSTONE VARIABLE SERIES TRUST
Touchstone Baron Small Cap Growth Fund
Touchstone Core Bond Fund
Touchstone High Yield Fund
Touchstone Large Cap Core Equity Fund
Touchstone Mid Cap Growth Fund
Touchstone Money Market Fund
Touchstone Third Avenue Value Fund
Touchstone Aggressive ETF Fund
Touchstone Conservative ETF Fund
Touchstone Enhanced ETF Fund
Touchstone Moderate ETF Fund
[LOGO] TOUCHSTONE INVESTMENTS(R)
3
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TOUCHSTONE VARIABLE SERIES TRUST
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LETTER FROM THE PRESIDENT
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Dear Shareholder:
We are pleased to provide you with the Touchstone Variable Series Trust Annual
Report. Inside you will find key financial information, as well as manager
commentaries for the year ended December 31, 2009.
After the series of events in 2008 that took such a heavy toll on financial
markets, government programs implemented have had a positive effect on financial
markets, helping 2009 become a truly extraordinary year. Improving confidence in
the economy and very strong technicals have combined to fuel a rally. Spreads in
most sectors have narrowed considerably, particularly in the corporate and
mortgage sectors, and the Federal Reserve is expected to remain accommodative
into 2010 as the economy remains weak.
Though troubled by the historically significant loss of global capital, concern
for inflationary pressure from growth, and Treasury debt issuance, the impact on
the bond market was one of improving liquidity. Market conditions during the
quarter were dominated by global optimism for a recovery, led by expectations of
inventory rebuilding and signs of improved interest in home buying. Economic
data was less mixed, with strength evidenced by a rebound in consumer optimism
and the stock market, although the domestic U.S. economy is still laboring under
high unemployment.
Despite the fact that some forecasters believe the economy could remain sluggish
for some time, continued government stimulus, higher exports due to the dollar
weakness, and higher revenues combined with improving cost containment should
lead to a restocking cycle, as well as improving employment prospects and wage
gains in 2010.
We continue to believe that diversification is essential to balancing risk and
return. We recommend that you continue to work with your financial professional
to employ a sound asset allocation strategy that invests in a combination of
stock, bond, and money market mutual funds to help keep your financial strategy
on course. In today's market climate, it is critical to maintain a long-term
approach to gain the full potential benefits of investing.
Touchstone is committed to helping investors achieve their financial goals by
providing access to a distinctive selection of institutional asset managers who
are known and respected for proficiency in their specific area of expertise. We
hope that you will find the enclosed commentaries helpful.
We greatly appreciate your continued support. Thank you for including Touchstone
as part of your investment plan.
Sincerely,
/s/ Jill T. McGruder
Jill T. McGruder
President
Touchstone Variable Series Trust
4
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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, 2009
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 BARON SMALL CAP GROWTH FUND
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SECTOR ALLOCATION (% OF NET ASSETS)
Consumer Discretionary 33.8
Financials 13.2
Health Care 13.1
Energy 11.4
Industrials 9.5
Consumer Staples 6.1
Utilities 2.6
Telecommunication Services 2.1
Information Technology 1.4
Investment Funds 30.0
Other Assets/Liabilities (Net) (23.2)
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TOTAL 100.0
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TOUCHSTONE HIGH YIELD FUND
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CREDIT QUALITY (% OF TOTAL INVESTMENTS)
A/A 0.8
BBB/Baa 1.4
BB 37.9
B 52.6
CCC 7.3
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TOTAL 100.0
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TOUCHSTONE MID CAP GROWTH FUND
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SECTOR ALLOCATION (% OF NET ASSETS)
Information Technology 18.0
Industrials 16.2
Health Care 14.9
Consumer Discretionary 12.1
Financials 11.8
Energy 10.3
Materials 7.2
Consumer Staples 4.4
Utilities 2.0
Telecommunication Services 1.2
Investment Funds 22.5
Other Assets/Liabilities (Net) (20.6)
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TOTAL 100.0
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TOUCHSTONE THIRD AVENUE VALUE FUND
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SECTOR ALLOCATION (% OF NET ASSETS)
Financials 36.4
Energy 20.4
Information Technology 14.1
Materials 13.4
Consumer Discretionary 9.2
Health Care 2.2
Industrials 1.0
Investment Funds 18.9
Other Assets/Liabilities (Net) (15.6)
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TOTAL 100.0
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TOUCHSTONE CORE BOND FUND
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CREDIT QUALITY (% OF TOTAL INVESTMENTS)
U.S. Treasury 21.2
U.S. Agency 15.3
AAA/Aaa 9.9
AA/Aa 4.8
A/A 13.2
BBB/Baa 18.7
BB/Ba 5.3
B/B 8.6
CCC/Caa 2.2
Other 0.8
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TOTAL 100.0
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TOUCHSTONE LARGE CAP CORE EQUITY FUND
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SECTOR ALLOCATION (% OF NET ASSETS)
Information Technology 23.6
Financials 11.8
Energy 11.6
Industrials 11.4
Health Care 11.3
Consumer Discretionary 10.3
Consumer Staples 9.4
Materials 3.9
Utilities 2.5
Telecommunication Services 2.2
Investment Funds 15.4
Other Assets/Liabilities (Net) (13.4)
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TOTAL 100.0
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TOUCHSTONE MONEY MARKET FUND
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CREDIT QUALITY (% OF TOTAL INVESTMENTS)
A-1/P-1F-1 96.3
FW1(NR) 3.7
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TOTAL 100.0
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PORTFOLIO ALLOCATION (% OF NET ASSETS)
Variable Rate Demand Notes 58.2
Corporate Notes/Commercial Paper 16.2
U.S. Government Securities 12.4
Taxable Municipal Bonds 10.4
Bank CD/TD 2.5
Other Assets/Liabilities (Net) 0.3
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TOTAL 100.0
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5
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TOUCHSTONE VARIABLE SERIES TRUST
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TOUCHSTONE AGGRESSIVE ETF FUND
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SECTOR ALLOCATION (% OF NET ASSETS)
Exchange Traded Funds 99.2
Investment Funds 27.3
Other Assets/Liabilities (Net) (26.5)
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TOTAL 100.0
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TOUCHSTONE CONSERVATIVE ETF FUND
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SECTOR ALLOCATION (% OF NET ASSETS)
Exchange Traded Funds 98.9
Investment Funds 22.8
Other Assets/Liabilities (Net) (21.7)
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TOTAL 100.0
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TOUCHSTONE ENHANCED ETF FUND
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SECTOR ALLOCATION (% OF NET ASSETS)
Exchange Traded Funds 99.3
Investment Funds 28.7
Other Assets/Liabilities (Net) (28.0)
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TOTAL 100.0
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TOUCHSTONE MODERATE ETF FUND
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SECTOR ALLOCATION (% OF NET ASSETS)
Exchange Traded Funds 99.0
Investment Funds 21.2
Other Assets/Liabilities (Net) (20.2)
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TOTAL 100.0
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6
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TOUCHSTONE BARON SMALL CAP GROWTH FUND
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MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE
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(Unaudited)
Touchstone Baron Small Cap Growth Fund
SUB-ADVISED BY BAMCO, INC.
PERFORMANCE AND MARKET OVERVIEW
The total return of the Touchstone Baron Small Cap Growth Fund was 32.94% for
the year ended December 31, 2009. The total return of the Russell 2000(R) Growth
Index was 34.47% for the same period.
During the year, the Fund maintained its investment focus in what are believed
to be well-managed growth businesses that have large opportunities and
significant barriers to competition.
PORTFOLIO REVIEW
The Fund's relative underperformance in 2009 was due primarily to an underweight
position in the Information Technology sector and security selection in the
Consumer Discretionary and Consumer Staples sectors. Contributing positively to
relative performance was security selection in the Financials sector, as well as
security selection and an overweight position in the Energy sector. The Fund's
top performers were FMC Technologies Inc., Dick's Sporting Goods Inc. and J.
Crew Group Inc. The Fund's worst performers were DeVry Inc., Arch Capital Group
Ltd. and PSS World Medical Inc.
FMC Technologies Inc. is one of the leading suppliers of equipment for onshore
and offshore oil and gas with a particular emphasis on deepwater production
equipment. As oil prices rebounded during the year, the economics for deepwater
oilfield development improved substantially. We believe this drove investors who
were on the outlook for a rebound in orders and backlog to be more bullish. For
much of the past decade, FMC has been one of the premier growth companies in the
Energy sector and during 2009, its shares significantly outpaced its peers.
Dick's Sporting Goods Inc. performed well as the economy started to improve and
retail concepts that survived the recession, like Dick's, gained market share.
We believe that the bankruptcies of sporting goods retailers in the Pacific
Northwest will provide opportunities for Dick's to expand. The company has
improved its balance sheet by reducing debt and inventory per square foot, which
we think will ensure its survival during the current economy. We believe the
company is well-positioned for an eventual economic recovery.
J. Crew Group Inc. continued to outperform its retail peers. Earnings grew
dramatically in 2009 and we believe they will be positive again in 2010. We
continue to like J. Crew's competitive positioning. The management team, led by
CEO Mickey Drexler, is experienced in managing growth and launching new
concepts, such as the successful Old Navy line that Drexler launched while CEO
of The Gap. We think the company's goal of providing "affordable luxury" meshes
well with the present economic environment where consumers are trading down from
designer brands but don't want to sacrifice quality.
DeVry Inc. performance did not reflect, in our view, its excellent operating
results and earnings growth in 2009. New and continuing enrollment was at or
near record levels, operating margins surpassed prior peaks as DeVry largely
completed the last of several years of investment spending, and campus
capacities were filled through higher student count. The integration of recent
acquisitions in the high-demand areas of Allied Health and Nursing continued
smoothly and we expect these businesses to be positive contributors. We also
expect DeVry to be a beneficiary of contracting capacity at public institutions
that are facing budget shortfalls due to state budget crises. In spite of these
positive developments, DeVry, along with the entire education sector, suffered
from concerns that the Obama administration would take a less friendly posture
towards for-profit education. This view we do not share.
7
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TOUCHSTONE BARON SMALL CAP GROWTH FUND
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Arch Capital Group Ltd. detracted from relative performance during the year;
however we think Arch is a high quality Bermuda-based property and casualty
insurance company with a conservative investment portfolio, diverse lines of
business, a great management team, and excess reserves and capital. We believe
this is why shares of Arch never plummeted last year like many insurers with
more aggressive investment portfolios and less capital. In 2009, those insurers
rebounded and had better stock performance. Long-term, we think Arch should
continue to post mid- to upper-teen return on equity and should have little
problem growing its book value per share toward $80. While insurance rates are
currently soft, the trend is starting to turn and we expect the stock will start
to perform better.
Shares of PSS World Medical Inc. underperformed in 2009 as the company
experienced modest sales growth due to lower-than-normal patient volumes,
particularly in the first half of the year. Additionally, investors moved away
from the Health Care sector due to the uncertainty associated with health-reform
efforts. We no longer own this position in the Fund.
CURRENT STRATEGY AND OUTLOOK
We believe the companies the Fund owns will continue to grow at healthy and
sustainable rates, and we expect that their share prices will continue to
reflect their attractive prospects.
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Average Annual Total Return
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One Year Five Years Ten Years
Ended Ended Ended
12/31/09 12/31/09 12/31/09
32.94% 2.91% 6.21%
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Cumulative Total Return
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Ten Years
Ended
12/31/09
82.64%
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GROWTH OF A $10,000 INVESTMENT
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Touchstone Baron Small Cap Growth Fund Russell 2000(R) Growth Index
Date Balance Date Balance
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12/31/99 10,000 12/31/99 10,000
12/31/00 10,125 12/31/00 7,757
12/31/01 10,793 12/31/01 7,041
12/31/02 9,277 12/31/02 4,910
12/31/03 12,378 12/31/03 7,294
12/31/04 15,822 12/31/04 8,338
12/31/05 17,038 12/31/05 8,684
12/31/06 20,149 12/31/06 9,843
12/31/07 20,706 12/31/07 10,537
12/31/08 13,740 12/31/08 6,476
12/31/09 18,266 12/31/09 8,708
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.
8
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TOUCHSTONE BARON SMALL CAP GROWTH FUND
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SCHEDULE OF INVESTMENTS
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December 31, 2009
Market
Shares Value
COMMON STOCKS -- 93.2%
CONSUMER DISCRETIONARY -- 33.8%
Cheesecake Factory, Inc. (The)* 4,000 $ 86,360
Choice Hotels International, Inc.+ 12,000 379,920
DeVry, Inc. 16,500 936,045
Dick's Sporting Goods, Inc.* 30,000 746,100
Interactive Data Corp. 1,500 37,950
J. Crew Group, Inc.*+ 11,250 503,325
Lamar Advertising Co.- Class A*+ 5,000 155,450
LKQ Corp.* 24,000 470,160
Mohawk Industries, Inc.* 5,000 238,000
Morningstar, Inc.* 5,500 265,870
Panera Bread Co.- Class A*+ 3,000 200,910
Peet's Coffee & Tea, Inc.*+ 10,000 333,300
Penn National Gaming, Inc.* 10,000 271,800
Penske Auto Group, Inc.*+ 20,000 303,600
Polo Ralph Lauren Corp. 6,000 485,880
Sonic Corp.* 5,000 50,350
Strayer Education, Inc.+ 3,500 743,715
Under Armour, Inc.- Class A*+ 7,500 204,525
Vail Resorts, Inc.*+ 10,000 378,000
Wynn Resorts Ltd.+ 1,359 79,135
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6,870,395
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FINANCIALS -- 13.2%
Alexander's, Inc. REIT* 1,500 456,630
Alexandria Real Estate
Equities, Inc. REIT+ 2,500 160,725
Arch Capital Group Ltd.* 12,000 858,600
Cohen & Steers, Inc. 5,500 125,620
Digital Realty Trust, Inc. REIT+ 2,752 138,370
Eaton Vance Corp. 9,000 273,690
Interactive Brokers Group, Inc. -
Class A*+ 11,000 194,920
Jefferies Group, Inc.* 20,000 474,600
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2,683,155
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HEALTH CARE -- 13.1%
AMERIGROUP Corp.* 16,000 431,360
Charles River Laboratories
International, Inc.* 5,000 168,450
Chemed Corp. 3,000 143,910
Community Health Systems, Inc.* 12,700 452,120
Edwards Lifesciences Corp.* 11,000 955,350
Gen-Probe, Inc.* 3,500 150,150
IDEXX Laboratories, Inc.* 800 42,752
Techne Corp.+ 1,000 68,560
VCA Antech, Inc.* 9,825 244,839
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2,657,491
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ENERGY -- 11.4%
Atlas Energy, Inc. 2,900 87,493
Carbo Ceramics, Inc. 1,000 68,170
Encore Acquisition Co.* 15,000 720,300
FMC Technologies, Inc.* 13,000 751,920
SEACOR Holdings, Inc.* 5,000 381,250
Southern Union Co. 14,000 317,800
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2,326,933
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INDUSTRIALS -- 9.5%
Aecom Technology Corp.* 5,500 151,250
Copart, Inc.* 15,000 549,450
CoStar Group, Inc.*+ 6,500 271,505
Genesee & Wyoming, Inc.- Class A* 15,750 514,080
Tetra Tech, Inc.* 10,000 271,700
Valmont Industries, Inc.+ 2,200 172,590
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1,930,575
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CONSUMER STAPLES -- 6.1%
Church & Dwight Co., Inc. 7,000 423,150
Diamond Foods, Inc. 409 14,536
Ralcorp Holdings, Inc.* 8,000 477,680
Treehouse Foods, Inc.*+ 5,000 194,300
Whole Foods Market, Inc.*+ 5,000 137,250
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1,246,916
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UTILITIES -- 2.6%
ITC Holdings Corp. 10,000 520,900
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TELECOMMUNICATION SERVICES -- 2.1%
SBA Communications
Corp.- Class A* 12,500 427,000
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INFORMATION TECHNOLOGY -- 1.4%
Blackboard, Inc.* 2,164 98,224
WebMD Health Corp.*+ 5,000 192,450
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290,674
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TOTAL COMMON STOCKS $ 18,954,039
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INVESTMENT FUNDS --30.0%
Invesco AIM Liquid
Assets Portfolio** 4,649,106 4,649,106
Touchstone Institutional
Money Market Fund^ 1,442,618 1,442,618
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TOTAL INVESTMENT FUNDS $ 6,091,724
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TOTAL INVESTMENT SECURITIES -- 123.2%
(COST $17,535,261) $ 25,045,763
LIABILITIES IN EXCESS
OF OTHER ASSETS -- (23.2%) (4,716,307)
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NET ASSETS -- 100.0% $ 20,329,456
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* Non-income producing security.
+ All or a portion of the security is on loan. The total value of the
securities on loan as of December 31, 2009, was $4,490,262.
** Represents collateral for securities loaned.
^ Affiliated Fund, sub-advised by Fort Washington Investment Advisors, Inc.
See Note 3.
PORTFOLIO ABBREVIATIONS:
REIT -- Real Estate Investment Trust
OTHER INFORMATION:
The inputs or methodology used for valuing securities may not be an indication
of the risk associated with investing in those securities. For more information
on valuation inputs, and their aggregation into the levels used in the table
below, please refer to the security valuation section in the accompanying notes
to financial statements.
Valuation Inputs at Reporting Date:
Description Level 1 Level 2 Level 3 Total
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Common Stocks $ 18,954,039 $ -- $ -- $ 18,954,039
Investment Funds 6,091,724 -- -- 6,091,724
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$ 25,045,763
The accompanying notes are an integral part of the financial statements.
9
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TOUCHSTONE CORE BOND FUND
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MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE
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(Unaudited)
Touchstone Core Bond Fund
SUB-ADVISED BY FORT WASHINGTON INVESTMENT ADVISORS, INC.
PERFORMANCE AND MARKET OVERVIEW
The total return of the Touchstone Core Bond Fund was 14.90% for the year ended
December 31, 2009. The total return of the Barclays Capital Aggregate Bond Index
was 5.93% for the same period.
The events of late 2008 and early 2009 provided the backdrop for the markets
during the past year. Following the demise of Lehman Brothers, Fannie Mae,
Freddie Mac, AIG, and many other financial institutions, policy makers have been
attempting to limit the damage to the economy and lay the foundation for future
growth. The Obama Administration and Congress passed a $787 billion stimulus
package and are working to implement reforms to more tightly regulate the
financial system. The Federal Reserve has cut interest rates to essentially zero
and embarked on a number of unconventional policies, including the commitment to
purchase $1.75 Trillion in long-term fixed-income securities to support the
credit markets. Long-term interest rates rose considerably during 2009 as the
economy and the financial markets recovered. The Fed kept short-term interest
rates essentially at zero for all of 2009, which helped to anchor short-term
Treasury yields.
PORTFOLIO REVIEW
The Touchstone Core Bond Fund's outperformance was driven primarily by narrowing
risk premiums in many sectors of the credit markets and due to being positioned
with less interest rate risk. Inflation expectations, as measured by Treasury
Inflation Protected Securities (TIPS), were driven to extremely low levels at
the end of 2008, but rose throughout 2009 as policy-makers continued to
stimulate growth. The Fund had an allocation to TIPS for most of 2009, which
also contributed to performance.
The non-agency mortgage-backed securities market has been a source of tremendous
volatility. At the beginning of 2009, prices were depressed due to the weakness
in the housing market and a lack of liquidity. During 2009, there was an
improvement in both of those factors, which helped a recovery in prices. The
Fund had an allocation to this sector in 2009, which was a positive for
performance. A similar pattern can be found in the investment grade and high
yield corporate bond markets. At the end of 2008, risk premiums remained near
historical high levels. The Fund was overweight investment grade corporate bonds
for the period and the recovery in the sector during 2009, along with benefits
from security selection, contributed to positive performance. The Fund's
allocation to the high yield market aided performance over the past year as
well.
CURRENT STRATEGY AND OUTLOOK
Because the current business cycle is very different from previous ones, there
is no clear guide as to how the economy will perform in the coming year.
Throughout the post-war era, U.S. recessions followed a common pattern; they
began when the Federal Reserve tightened monetary policy to control inflation,
and recoveries generally followed when inflation subsided and the Fed reversed
course. The typical cycle was "V-shaped" -- the steeper the decline in output,
the more powerful the ensuing upturn, with growth rates of 5%-6% common in the
first year of recovery. By comparison, the primary factor contributing to the
2008-2009 recession was a contraction in credit to the private sector. The
"credit crunch" started in the United States in the second half of 2007 when the
housing bubble burst and financial institutions were affected, and it spread
around the world in the autumn of 2008 when Lehman Brothers failed and other
financial institutions were on the ropes. The Federal Reserve and other central
banks responded by injecting massive reserves into the banking systems, but some
observers were skeptical about the effectiveness of these actions, contending
that central banks were merely "pushing on a string." As noted earlier, there is
clearer evidence today that expansionary monetary and fiscal policies are having
the intended effect of bolstering the world's financial system and the global
economy. The economic upturn began in China and other parts of Emerging Asia in
the second quarter of this year, and it has since spread to other parts of the
world.
10
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TOUCHSTONE CORE BOND FUND
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Management's Discussion of Fund Performance continued
Looking ahead, we expect some of the same factors that contributed to the recent
upturn to support growth of about 3% in the coming year. U.S. manufacturers, for
example, should benefit both from a worldwide expansion and a cheap dollar.
Furthermore, with inventories falling in relation to sales, businesses should be
in position to begin rebuilding inventories. The swing in inventories alone
could add between 1.0% to 1.5% to overall economic growth. To generate
self-sustaining growth, however, domestic demand will have to accelerate at some
point. The business sector is the leading candidate to jump-start the process
because of the massive adjustments that were undertaken during the period of
financial panic: U.S. businesses slashed capital spending at about a 30% annual
rate between the fourth quarter of 2008 and first quarter of 2009, and they also
laid off workers at an unprecedented pace over the past year. While these
actions exacerbated the decline in economic activity, businesses are now
beginning to reap benefits by way of improved profit margins. Indeed, the rally
in stocks and bonds since March has been underpinned by increased labor
productivity and corporate profitability stemming from massive cost-cutting and
lower costs of raw materials.
A key uncertainty at this stage is how U.S. businesses will respond to the
improved financial landscape. On the positive side, capital spending is resuming
and the pace of job layoffs has moderated in recent months. However, new job
creation is anemic, and there is uncertainty about when it will resume.
Normally, small businesses are the first to hire in an economic downturn, but
many of them are constrained from doing so now, due to being unable to obtain
bank loans. Based on economic models, it is estimated that payroll gains need to
average 100,000 workers on a monthly basis just to keep the unemployment rate
from rising, and the consensus view is that it may take until midyear for job
growth to reach that level. By then, the unemployment rate could be close to
10.5% and, if underemployed workers are included, the tally could approach 18%.
Futures markets currently are pricing in that the federal funds rate will be
increased to about 1.0% by the end of 2010. We consider this to be a reasonable
estimate, and our outlook for financial markets would not be materially
different if the rate ended the year somewhat higher. Once Fed tightening comes
into play, we would expect market volatility to rise. However, policy tightening
of this sort should be fairly benign for financial markets, as policy would
still be accommodative and such action could reassure investors that economic
conditions are normalizing.
With the Fed indicating they will keep interest rates low for some time and
further evidence of economic recovery, we anticipate that short-term interest
rates will remain low in the near term and that long-term treasury yields will
continue to be at risk as the economy rebounds and the massive amount of
Treasury supply puts upward pressure on interest rates. In addition, we believe
that economic growth is likely to continue to be positive in 2010; however, the
pace of growth may be more moderate than in past recoveries.
11
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-------------------------
TOUCHSTONE CORE BOND FUND
-------------------------
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Going forward the Fund will be positioned for higher, long-term interest rates,
including an allocation to Treasury Inflation Protected Securities (TIPS). It
remains overweight corporate bonds as the risk premiums offer a yield advantage
to Treasuries, which will offer some protection against rising interest rates.
The Fund will continue to be invested opportunistically in the high yield market
as risk premiums offer extremely attractive levels. We will look for
opportunities in mortgage-backed securities as the Government reduces support,
potentially creating low prices for the sector. We continue to view Treasuries
and other government bond sectors as relatively unattractive.
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Average Annual Total Return
- --------------------------------------------------------------------------------
One Year Five Years Ten Years
Ended Ended Ended
12/31/09 12/31/09 12/31/09
14.90% 4.40% 5.36%
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Cumulative Total Return
- --------------------------------------------------------------------------------
Ten Years
Ended
12/31/09
68.53%
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GROWTH OF A $10,000 INVESTMENT
- --------------------------------------------------------------------------------
Touchstone Core Bond Fund Barclays Capital Aggregate Bond Index
Date Balance Date Balance
---- ------- ---- -------
12/31/99 10,000 12/31/99 10,000
12/31/00 10,920 12/31/00 11,163
12/31/01 11,777 12/31/01 12,105
12/31/02 12,711 12/31/02 13,346
12/31/03 13,155 12/31/03 13,894
12/31/04 13,590 12/31/04 14,497
12/31/05 13,819 12/31/05 14,849
12/31/06 14,378 12/31/06 15,493
12/31/07 15,162 12/31/07 16,573
12/31/08 14,667 12/31/08 17,441
12/31/09 16,853 12/31/09 18,475
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.
12
- -----
- -------------------------
TOUCHSTONE CORE BOND FUND
- -------------------------
SCHEDULE OF INVESTMENTS
- --------------------------------------------------------------------------------
December 31, 2009
Principal Market
Amount Value
CORPORATE BONDS -- 44.7%
FINANCIALS -- 10.0%
$ 235,000 American Express Credit
Corp., 5.875%, 5/2/13 $ 252,192
155,000 AvalonBay Communities, Inc.,
5.750%, 9/15/16 158,747
235,000 Bank of America Corp., 7.375%, 5/15/14 266,658
200,000 Brandywine Operating
Partnership LP, 5.400%, 11/1/14 186,870
190,000 Caterpillar Financial Services Corp.,
5.450%, 4/15/18 197,900
170,000 Citigroup, Inc., 5.500%, 4/11/13 176,250
290,000 General Electric Capital Corp.,
5.625%, 5/1/18 297,175
200,000 Goldman Sachs Group, Inc.,
7.500%, 2/15/19 233,161
250,000 Iberdrola Finance Ireland Ltd. 144a,
3.800%, 9/11/14 251,130
235,000 John Deere Capital Corp., 5.350%, 4/3/18 248,358
125,000 JPMorgan Chase & Co., 6.300%, 4/23/19 137,510
190,000 KeyBank NA, 5.500%, 9/17/12 196,472
160,000 Metropolitan Life Global Funding I
144a, 5.125%, 6/10/14 169,328
225,000 Morgan Stanley, 5.625%, 1/9/12 237,447
15,000 Reynolds Group ISS 144a, Ser 144a,
7.750%, 10/15/16 15,337
145,000 Teachers Insurance & Annuity
Assoc. 144a, 6.850%, 12/16/39 149,892
175,000 WCI Finance LLC 144a, 5.700%, 10/1/16 179,973
250,000 Williams Cos., Inc. Credit Linked
Certificates Trust V 144a, 6.375%, 10/1/10 254,525
220,000 Xstrata Finance Canada Ltd. 144a,
5.500%, 11/16/11 230,908
- --------------------------------------------------------------------------------
3,839,833
- --------------------------------------------------------------------------------
UTILITIES -- 8.1%
135,000 AES Corp., 8.000%, 10/15/17 138,544
180,000 American Water Capital Corp.,
6.593%, 10/15/37 181,191
215,000 Centerpoint Energy, Inc., 5.950%, 2/1/17 213,244
135,000 Copano Energy LLC Finance Co.,
8.125%, 3/1/16 136,350
155,000 Electricite De France 144a,
6.500%, 1/26/19 174,006
160,000 Enel Finance International SA 144a,
6.250%, 9/15/17 175,916
145,000 FPL Group Capital, Inc.,
6.350%, 10/1/16 (a) 134,125
135,000 Holly Energy Partners, 6.250%, 3/1/15 128,925
110,000 Intergen NV 144a, 9.000%, 6/30/17 114,675
125,000 MarkWest Energy Partners ,
Ser B, 8.750%, 4/15/18 128,750
210,000 Midamerican Energy Holdings Co.,
6.125%, 4/1/36 215,080
180,000 Nisource Finance Corp., 6.150%, 3/1/13 191,656
135,000 NRG Energy, Inc., 7.250%, 2/1/14 136,687
140,000 Plains All American Pipeline LP ,
6.650%, 1/15/37 142,834
165,000 PPL Energy Supply LLC,
6.500%, 5/1/18 172,045
40,000 Regency Energy Partners LP 144a,
9.375%, 6/1/16 42,600
195,000 Rockies Express Pipeline LLC 144a,
6.250%, 7/15/13 213,054
135,000 RRI Energy, Inc., 7.875%, 6/15/17 132,637
175,000 Southern Power Co., Ser D,
4.875%, 7/15/15 182,143
145,000 Spectra Energy Capital LLC,
8.000%, 10/1/19 169,697
- --------------------------------------------------------------------------------
3,124,159
- --------------------------------------------------------------------------------
CONSUMER DISCRETIONARY -- 5.3%
60,000 Cequel Communications
Holdings 144a, 8.625%, 11/15/17 60,600
17,000 Clear Channel Worldwide
Holdings, Inc. 144a, Ser 144a,
9.250%, 12/15/17 17,510
1,000 Clear Channel Worldwide
Holdings, Inc. 144a, 9.250%, 12/15/17 1,020
195,000 Comcast Corp., 5.700%, 7/1/19 204,564
100,000 CSC Holdings LLC 144a,
8.625%, 2/15/19 107,625
140,000 Federated Retail Holding,
5.350%, 3/15/12 142,975
100,000 Interpublic Group, 6.250%, 11/15/14 96,000
90,000 Macy's Retail Holdings, Inc.,
8.875%, 1/15/10 99,225
25,000 Navistar Intl. Corp., 8.250%, 11/1/21 25,625
175,000 News America, Inc., 6.900%, 3/1/19 197,184
135,000 Sealy Mattress Co. 144a,
10.875%, 4/15/16 150,188
280,000 Time Warner Cable, Inc.,
6.200%, 7/1/13 307,568
225,000 Time Warner, Inc., 6.875%, 5/1/12 246,317
135,000 Valassis Communications, Inc.,
8.250%, 3/1/15 134,662
225,000 Viacom, Inc., 6.250%, 4/30/16 245,223
- --------------------------------------------------------------------------------
2,036,286
- --------------------------------------------------------------------------------
TELECOMMUNICATION SERVICES -- 4.4%
225,000 AT&T, Inc., 6.550%, 2/15/39 237,074
45,000 Cricket Communications Leap,
7.750%, 5/15/16 44,887
175,000 Deutsche Telekom International
Finance BV, 5.375%, 3/23/11 182,480
190,000 France Telecom SA, 4.375%, 7/8/14 198,543
45,000 MetroPCS Wireless, Inc., 9.250%, 11/1/14 45,563
135,000 Qwest Communications Intl.,
Inc. 144a, 8.000%, 10/1/15 138,712
180,000 Rogers Communications, Inc.,
7.500%, 3/15/15 210,239
45,000 Sprint Capital Corp., 8.750%, 3/15/32 42,413
75,000 Sprint Nextel Corp., 8.375%, 8/15/17 76,500
175,000 Verizon Communications, Inc.,
6.250%, 4/1/37 177,487
The accompanying notes are an integral part of the financial statements.
13
-----
-------------------------
TOUCHSTONE CORE BOND FUND
-------------------------
- --------------------------------------------------------------------------------
Principal Market
Amount Value
CORPORATE BONDS -- 44.7% - Continued
TELECOMMUNICATION SERVICES -- 4.4% - continued
$ 90,000 Virgin Media Finance PLC,
8.375%, 10/15/19 $ 92,588
100,000 Wind Acquisition Finance SA 144a,
Ser 144a, 11.750%, 7/15/17 109,250
135,000 Windstream Corp., 8.625%, 8/1/16 137,362
- --------------------------------------------------------------------------------
1,693,098
- --------------------------------------------------------------------------------
INDUSTRIALS -- 3.7%
190,000 Allied Waste North America, Inc.,
6.125%, 2/15/14 193,303
135,000 ARAMARK Corp., 8.500%, 2/1/15 139,050
180,000 BAE Systems Holdings, Inc. 144a,
6.400%, 12/15/11 191,169
155,000 Clean Harbors, Inc., 7.625%, 8/15/16 157,131
225,000 FedEx Corp., 7.375%, 1/15/14 255,296
135,000 Iron Mountain, Inc., 8.000%, 6/15/20 137,025
230,000 Norfolk Southern Corp., 5.750%, 4/1/18 243,298
90,000 RSC Equipment Rental, Inc. 144a,
10.000%, 7/15/17 97,875
- --------------------------------------------------------------------------------
1,414,147
- --------------------------------------------------------------------------------
ENERGY -- 3.4%
90,000 Atlas Energy Operating Co. LLC,
12.125%, 8/1/17 102,150
135,000 Basic Energy Services, 11.625%, 8/1/14 144,450
200,000 Cenovus Energy, Inc. 144a,
4.500%, 9/15/14 206,449
120,000 EnCana Corp., 6.500%, 8/15/34 128,608
50,000 Helix Energy Solutions Group, Inc.
144a, 9.500%, 1/15/16 51,250
75,000 Hilcorp Energy 144a, 9.000%, 6/1/16 76,125
50,000 Hilcorp Energy 144a, 7.750%, 11/1/15 49,000
105,000 Petrohawk Energy Corp.,
10.500%, 8/1/14 114,713
135,000 Sabine Pass LNG LP, 7.250%, 11/30/13 122,513
125,000 Total Capital SA, 3.125%, 10/2/15 123,455
195,000 Valero Logistics LP, 6.050%, 3/15/13 205,243
- --------------------------------------------------------------------------------
1,323,956
- --------------------------------------------------------------------------------
MATERIALS -- 3.1%
220,000 ArcelorMittal, 5.375%, 6/1/13 232,155
27,000 Cascades, Inc. 144a, 7.750%, 12/15/17 27,270
15,000 Cascades, Inc. 144a, 7.875%, 1/15/20 15,225
90,000 Cellu Tissue Holdings, Inc.,
11.500%, 6/1/14 99,900
30,000 Cloud Peak Energy Resources LLC
144a, 8.500%, 12/15/19 30,600
255,000 CRH America, Inc., 5.300%, 10/15/13 265,756
30,000 Koppers, Inc. 144a, 7.875%, 12/1/19 30,300
165,000 Nucor Corp., 5.000%, 6/1/13 174,917
225,000 Rio Tinto Finance USA Ltd.,
6.500%, 7/15/18 247,158
75,000 Texas Industries, Inc., Ser UNRE,
7.250%, 7/15/13 73,688
- --------------------------------------------------------------------------------
1,196,969
- --------------------------------------------------------------------------------
HEALTH CARE -- 2.5%
135,000 Apria Healthcare Group, Inc. 144a,
11.250%, 11/1/14 148,163
135,000 HCA, Inc., 9.625%, 11/15/16 146,137
260,000 Roche Holdings, Inc. 144a,
5.000%, 3/1/14 278,158
180,000 Service Corp. Intl., 8.000%, 11/15/21 177,300
190,000 St Jude Medical, Inc., 3.750%, 7/15/14 192,050
40,000 StoneMor, Cornerstone, OSIR 144a,
10.250%, 12/1/17 40,700
- --------------------------------------------------------------------------------
982,508
- --------------------------------------------------------------------------------
CONSUMER STAPLES -- 1.5%
190,000 Anheuser-Busch InBev Worldwide,
Inc. 144a, 8.200%, 1/15/39 240,255
135,000 Ingles Markets, Inc., 8.875%, 5/15/17 140,400
170,000 Kroger Co., 6.800%, 4/1/11 180,521
- --------------------------------------------------------------------------------
561,176
- --------------------------------------------------------------------------------
INFORMATION TECHNOLOGY -- 1.4%
117,000 Communications & Power
Industries, Inc., 8.000%, 2/1/12 116,561
175,000 IBM Corp., 7.625%, 10/15/18 213,700
220,000 Oracle Corp., 5.000%, 7/8/19 226,885
- --------------------------------------------------------------------------------
557,146
- --------------------------------------------------------------------------------
SOVEREIGN BOND -- 1.3%
285,000 Province of Ontario Canada,
4.950%, 11/28/16 305,437
210,000 Province of Quebec Canada,
4.625%, 5/14/18 214,693
- --------------------------------------------------------------------------------
520,130
- --------------------------------------------------------------------------------
TOTAL CORPORATE BONDS $ 17,249,408
- --------------------------------------------------------------------------------
U.S. TREASURY OBLIGATIONS -- 21.1%
3,270,202 U.S. Treasury Inflation Index
Note, 3.000%, 7/15/12 3,515,977
2,500,000 U.S. Treasury Note, 1.375%, 9/15/12 2,488,280
1,475,000 U.S. Treasury Note, 1.375%, 10/15/12 1,466,703
700,000 U.S. Treasury Note, 3.375%, 11/15/19 673,316
- --------------------------------------------------------------------------------
TOTAL U.S. TREASURY OBLIGATIONS $ 8,144,276
- --------------------------------------------------------------------------------
ASSET-BACKED SECURITIES -- 16.4%
129,156 Bear Stearns Commercial Mortgage,
Ser 2002-TOP6, Class A1,
5.920%, 10/15/36 131,532
550,000 Bear Stearns Commercial Mortgage,
Ser 2007-PW16, Class A4,
5.719%, 1/1/10(a) 499,934
575,000 Bear Stearns Commercial Mortgage ,
Ser 2005-PWR9, Class A4A,
4.871%, 9/11/42 551,244
135,000 Commercial Mortgage Pass Through
Certificates, Ser 2005-C6,
Class A5A, 5.116%, 1/10/10(a) 131,078
550,453 Countrywide Securities, Ser 2007-S1,
Class A5, 6.018%, 1/25/10(a) 226,454
168,069 Credit Suisse First Boston Mortgage
Securities Corp., Ser 2002-CKN2,
Class A2, 5.939%, 4/15/37 172,471
519,088 Credit Suisse First Boston Mortgage
Securities Corp., Ser 2005-9,
Class 2A1, 5.500%, 10/25/35 439,522
The accompanying notes are an integral part of the financial statements.
14
- -----
- -------------------------
TOUCHSTONE CORE BOND FUND
- -------------------------
- --------------------------------------------------------------------------------
Schedule of Investments continued
Principal Market
Amount Value
ASSET-BACKED SECURITIES -- 16.4% - continued
$ 250,000 CW Capital Cobalt , Ser 2006-C1,
Class A4, 5.223%, 8/15/48 $ 218,014
366,820 Deutsche Bank Alternative Loan
Trust, Ser 2003-2XS, Class A6,
4.970%, 9/25/33 336,559
700,000 Deutsche Bank Alternative Loan
Trust, Ser 2005-3, Class 4A4,
5.250%, 6/25/35 562,038
600,000 GE Capital Commercial Mortgage
Corp., Ser 2002-2A, Class A3,
5.349%, 8/11/36 622,936
314,428 GE Capital Commercial Mortgage
Corp., Ser 2004-C1, Class A2,
3.915%, 11/10/38 316,394
222,327 JP Morgan Chase Commercial Mortgage
Securities , Ser 2006-LDP8, Class A1,
5.241%, 5/15/45 226,079
199,850 Merrill Lynch Mortgage Trust, Ser
2003-KEY1, Class A2, 4.435%, 11/12/35 201,466
40,439 Morgan Stanley Capital I, Ser 2006-HQ8,
Class A1, 5.124%, 3/12/44 40,531
700,000 Morgan Stanley Mortgage Loan Trust,
Ser 2007-3XS, Class 2A4S,
5.963%, 1/25/47 386,528
259,463 Residential Asset Securitization Trust,
Ser 2005-A6CB, Class A8, 5.500%, 6/25/35 141,854
311,277 Residential Asset Securitization Trust,
Ser 2006-A1, Class 1A3, 6.000%, 4/25/36 223,702
148,723 Residential Funding Mortgage Securities I,
Ser 2006-S2, Class A2, 5.750%, 2/25/36 100,405
343,988 Structured Asset Securities Corp.,
Ser 2005-17, Class 5A1, 5.500%, 10/25/35 308,460
268,869 Wachovia Bank Commercial Mortgage
Trust, Ser 2006-C28, Class A1,
5.323%, 10/15/48 273,496
270,146 Washington Mutual Alternative
Loan Trust, Ser 2005-9, Class 2A4,
5.500%, 11/25/35 231,361
- --------------------------------------------------------------------------------
TOTAL ASSET-BACKED SECURITIES $ 6,342,058
- --------------------------------------------------------------------------------
U.S. GOVERNMENT MORTGAGE-BACKED OBLIGATIONS -- 8.6%
159,053 FNMA, Pool #254759, 4.500%, 6/1/18 165,781
273,031 FNMA, Pool #974403, 4.500%, 4/1/23 281,424
232,022 FNMA, Pool #974401, 4.500%, 4/1/23 239,154
760,472 FNMA, Pool #983610, 5.000%, 5/1/23 795,575
212,503 FNMA, Pool #984256, 5.000%, 6/1/23 222,313
260,237 FNMA, Pool #995472, 5.000%, 11/1/23 272,250
250,020 FNMA, Pool #995529, 5.500%, 11/1/22 264,935
274,859 FNMA, Pool #889734, 5.500%, 6/1/37 287,986
215,172 FNMA, Pool #995220, 6.000%, 11/1/23 230,195
28,268 FNMA, Pool #561741, 7.500%, 1/1/31 31,898
34,437 FNMA, Pool #535290, 8.000%, 5/1/30 39,483
430,767 FNMA , Pool #988107, 5.000%, 8/1/23 450,651
41,574 GNMA, Ser 2003-11, Class GJ,
Pool #2003-11 GJ, 4.000%, 10/17/29 42,750
- --------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT
MORTGAGE-BACKED OBLIGATIONS $ 3,324,395
- --------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCY OBLIGATIONS -- 6.7%
2,475,000 FNMA , 4.500%, 1/1/18 2,545,384
27,384 GNMA, Pool #G2 8503, 3.625%, 9/20/24 28,027
4,290 GNMA, Pool #434792, 8.000%, 7/15/30 4,670
- --------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT AGENCY OBLIGATIONS $ 2,578,081
- --------------------------------------------------------------------------------
MUNICIPAL BOND -- 0.5%
CALIFORNIA -- 0.5%
180,000 California State UTGO, Ser 2009
5.950%, 4/1/16 $ 182,417
- --------------------------------------------------------------------------------
Market
Shares Value
PREFERRED STOCK --0.4%
FINANCIALS --0.4%
7,900 Citigroup Capital VIII, 6.95% $ 163,925
- --------------------------------------------------------------------------------
INVESTMENT FUND -- 9.1%
3,499,554 Touchstone Institutional
Money Market Fund^ $ 3,499,554
- --------------------------------------------------------------------------------
TOTAL INVESTMENT SECURITIES -- 107.5%
(COST $41,926,136) $ 41,484,114
LIABILITIES IN EXCESS OF OTHER ASSETS -- (7.5%) (2,897,821)
- --------------------------------------------------------------------------------
NET ASSETS -- 100.0% $ 38,586,293
- --------------------------------------------------------------------------------
(a) Variable rate security - the rate reflected is the rate in effect as of
December 31, 2009.
^ Affiliated Fund, sub-advised by Fort Washington Investment Advisors, Inc.
See Note 3.
PORTFOLIO ABBREVIATIONS:
FNMA -- Federal National Mortgage Association
GNMA -- Government National Mortgage Association
PLC -- Public Liability Company
UTGO -- Unlimited Tax General Obligation
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
transactions exempt from registration, normally to qualified institutional
buyers. At December 31, 2009, these securities were valued at $4,038,788
or 10.5% of net assets.
OTHER INFORMATION:
The inputs or methodology used for valuing securities may not be an indication
of the risk associated with investing in those securities. For more information
on valuation inputs, and their aggregation into the levels used in the table
below, please refer to the security valuation section in the accompanying notes
to financial statements.
Valuation Inputs at Reporting Date:
Description Level 1 Level 2 Level 3 Total
- --------------------------------------------------------------------------------
Corporate Bonds $ -- $ 17,249,408 $ -- $ 17,249,408
U.S. Treasury
Obligations -- 8,144,276 -- 8,144,276
Asset-Backed
Securities -- 6,342,058 -- 6,342,058
Investment Fund 3,499,554 -- -- 3,499,554
U.S. Government
Mortgage-Backed
Obligations -- 3,324,395 -- 3,324,395
U.S. Government
Agency Obligations -- 2,578,081 -- 2,578,081
Municipal Bond -- 182,417 -- 182,417
Preferred Stock 163,925 -- -- 163,925
-------------------------------------------------------
$ 41,484,114
The accompanying notes are an integral part of the financial statements.
15
-----
--------------------------
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 OVERVIEW
The total return of the Touchstone High Yield Fund was 46.90% for the year ended
December 31, 2009. The total return of the Merrill Lynch High Yield Master Index
was 56.28% for the same period.
Although the High Yield rally has been rather astonishing, it showed no signs of
decelerating. Spreads continued to tighten, and the Merrill Lynch High Yield
Master Index generated an impressive record calendar year return for the Index,
easily surpassing the prior record set in 1991. As dramatic as the sell-off was
in 2008, the recovery may be equally as remarkable. Calendar year 2009 was also
a record year for High Yield new issuance with nearly $153 billion of U.S.
denominated issues being priced.
As remarkable as this High Yield rally has been, it would be inappropriate to
characterize it as unwarranted. In fact, it can be logically explained by
considering the rather dramatic improvement in the investing environment coupled
with record wide spreads in the High Yield market at the beginning of the year.
In December of 2008, the High Yield market was discounting default rates
approaching 20% due to an impaired banking sector, limited access to capital and
a recession of unknown length and depth. The application of unprecedented
stimulus and government intervention resuscitated the banking system and quickly
improved access to capital. Additionally, the recession ended up being shorter
than feared and default rates were lower than anticipated. As a result of
improving prospects, spreads tightened to more normal levels generating record
returns. It should come as no surprise that the lowest quality segment
(CCC-rated securities) performed best while the higher quality segments (B-rated
and BB-rated securities) lagged considerably. As has been the case throughout
2009, those sectors with a large component of distressed securities performed
best while those sectors comprised of higher quality issuers lagged the market.
PORTFOLIO REVIEW
The Fund lagged the broad benchmarks due to its higher quality bias, but
performed in line with BB/B Constrained benchmarks. From a security selection
standpoint, value was added within the Utilities and Energy sectors. The
positive contribution within these sectors resulted from the recovery of
securities that had underperformed in the prior quarters. Conversely, the Fund's
relatively higher quality holdings within the Telecommunication Services and
Information Technology sectors resulted in negative contributions from security
selection. Contribution from sector allocation was substantially negative.
Although unfortunate, this is consistent with the Fund's philosophy of focusing
on the more stable sectors that provide attractive risk adjusted returns over
the long term. The Fund's underweight to the Insurance and Banking sectors
detracted materially from performance. These sectors were among the best
performing sectors and the Fund has limited exposure to them. We continue to
assess the underweight exposure to these sectors and are looking for appropriate
relative value opportunities consistent with the Fund's philosophy and process.
16
- -----
- --------------------------
TOUCHSTONE HIGH YIELD FUND
- --------------------------
- --------------------------------------------------------------------------------
Management's Discussion of Fund Performance continued
CURRENT STRATEGY AND OUTLOOK
We look for market returns in 2010 to be moderate, following exceptional gains
in 2009. As investors begin to anticipate monetary tightening, the U.S. treasury
yield curve is likely to shift higher, while equity markets could become more
volatile. However, improving corporate profits should underpin moderate gains in
the stock market and provide good stock-pickers with ample opportunities to add
value. Aside from unforeseen "black swans," the main risks to this outlook arise
from potential policy errors and possible aftershocks in the banking system.
With respect to High Yield bonds, a firming economy and a declining default rate
suggest the fundamental underpinnings remain adequate. As such, we remain
constructive, but with tempered expectations. Whereas 2009 returns were
comprised primarily of capital appreciation, we anticipate returns going forward
to be comprised primarily of yield. That said, we believe High Yield offers
attractive relative value, particularly when compared to other fixed income
asset classes. We remain comfortable with the Fund's composition and continue to
believe it is properly constructed. As such, we feel the Fund is well positioned
for the current environment.
The strength of Fort Washington's High Yield strategy has historically been
fundamental credit analysis with particular emphasis on avoiding problem
credits. We believe this will continue to add value as negative credit events
may have a material impact on returns in this lower return environment. We trust
this core competency will provide considerable value to shareholders and will
continue to construct the Fund to exhibit less volatility than the broad market
and to deliver attractive risk adjusted returns. It is designed for performance
over a full market cycle with focus on protecting principal in down markets, a
style that we believe will outperform over the long-term.
17
-----
--------------------------
TOUCHSTONE HIGH YIELD FUND
--------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Average Annual Total Return
- --------------------------------------------------------------------------------
One Year Five Years Ten Years
Ended Ended Ended
12/31/09 12/31/09 12/31/09
46.90% 4.75% 6.46%
- --------------------------------------------------------------------------------
Cumulative Total Return
- --------------------------------------------------------------------------------
Ten Years
Ended
12/31/09
87.03%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
GROWTH OF A $10,000 INVESTMENT
- --------------------------------------------------------------------------------
Touchstone High Yield Fund Merrill Lynch High Yield Master Index
Date Balance Date Balance
---- ------- ---- -------
12/31/99 10,000 12/31/99 10,000
12/31/00 9,932 12/31/00 9,621
12/31/01 10,620 12/31/01 10,218
12/31/02 10,920 12/31/02 10,101
12/31/03 13,539 12/31/03 12,851
12/31/04 14,832 12/31/04 14,234
12/31/05 15,317 12/31/05 14,638
12/31/06 16,528 12/31/06 16,342
12/31/07 16,822 12/31/07 16,696
12/31/08 12,732 12/31/08 12,319
12/31/09 18,704 12/31/09 19,253
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.
18
- -----
- --------------------------
TOUCHSTONE HIGH YIELD FUND
- --------------------------
SCHEDULE OF INVESTMENTS
- --------------------------------------------------------------------------------
December 31, 2009
Principal Market
Amount Value
CORPORATE BONDS -- 97.4%
CONSUMER DISCRETIONARY -- 23.3%
$ 432,000 ACE Hardware Corp. 144a,
9.125%, 6/1/16 $ 457,380
12,000 Asbury Automotive Group, Inc.,
7.625%, 3/15/17 11,310
503,000 Asbury Automotive Group, Inc.,
8.000%, 3/15/14 494,198
315,000 Beazer Homes USA, Inc., 6.875%, 7/15/15 237,825
400,000 Cequel Communications Holdings
144a, 8.625%, 11/15/17 404,000
120,000 Clear Channel Worldwide Holdings,
Inc. 144a, Ser 144a, 9.250%, 12/15/17 123,600
7,000 Clear Channel Worldwide Holdings,
Inc. 144a, 9.250%, 12/15/17 7,140
365,000 CSC Holdings LLC 144a, 8.625%, 2/15/19 392,831
164,000 CSC Holdings LLC 144a, 8.500%, 6/15/15 174,660
191,000 Fisher Communications, Inc.,
8.625%, 9/15/14 183,121
200,000 Inergy LP, 8.250%, 3/1/16 203,000
37,000 Interpublic Group, 6.250%, 11/15/14 35,520
272,000 Jarden Corp., 7.500%, 5/1/17 271,320
100,000 Jarden Corp., 8.000%, 5/1/16 103,250
308,000 Lamar Media Corp., 7.250%, 1/1/13 + 307,230
363,000 Lamar Media Corp., 9.750%, 4/1/14 400,661
139,000 Lamar Media Corp., Ser B, 6.625%, 8/15/15 133,440
400,000 M/I Homes, Inc., 6.875%, 4/1/12 377,000
250,000 Meritage Homes Corp., 6.250%, 3/15/15 230,000
166,000 Navistar Intl. Corp., 8.250%, 11/1/21 170,150
346,000 Penske Auto Group, Inc.,
7.750%, 12/15/16 334,755
135,000 Quebecor Media, Inc., 7.750%, 3/15/16 134,663
152,000 Quebecor Media, Inc., 7.750%, 3/15/16 151,620
350,000 QVC, Inc. 144a, 7.500%, 10/1/19 357,000
23,000 Sealy Mattress Co. 144a, 10.875%, 4/15/16 25,587
129,000 Sealy Mattress Co., 8.250%, 6/15/14 129,000
500,000 Tenneco, Inc., Ser B, 10.250%, 7/15/13 516,875
263,000 Valassis Communications, Inc.,
8.250%, 3/1/15 262,343
148,000 Videotron Ltee, 9.125%, 4/15/18 162,800
64,000 Videotron Ltee, 6.875%, 1/15/14 64,320
390,000 Virgin Media Finance PLC, Ser 1,
9.500%, 8/15/16 418,762
10,000 Virgin Media Finance PLC,
8.750%, 4/15/14 10,325
535,000 Visant Holding Corp., 8.750%, 12/1/13 549,712
240,000 WMG Acquisition Corp., 7.375%, 4/15/14 231,900
100,000 Wyndham Worldwide Corp.,
9.875%, 5/1/14 111,168
- --------------------------------------------------------------------------------
8,178,466
- --------------------------------------------------------------------------------
UTILITIES -- 18.1%
520,000 AES Corp., 8.000%, 10/15/17 533,650
700,000 Atlas Pipeline Partners LP,
8.125%, 12/15/15 619,500
164,000 Atlas Pipeline Partners LP,
.750%, 6/15/18 145,140
827,000 Copano Energy LLC Finance Co.,
8.125%, 3/1/16 835,270
18,000 Edison Mission Energy, 7.000%, 5/15/17 14,220
200,000 Enterprise Products, Ser A,
8.375%, 2/1/10 (a) 195,000
367,000 Enterprise Products, 7.000%, 6/1/10 (a) 324,795
350,000 Holly Energy Partners, 6.250%, 3/1/15 334,250
350,000 Intergen NV 144a, 9.000%, 6/30/17 364,875
792,000 MarkWest Energy Partners , Ser B,
8.750%, 4/15/18 815,760
85,000 North American Energy 144a,
10.875%, 6/1/16 90,312
750,000 NRG Energy, Inc., 7.250%, 2/1/14 759,375
215,000 PNM Resources, Inc., 9.250%, 5/15/15 226,019
104,000 Puget Sound Energy, Inc., Ser A,
6.974%, 6/1/10 (a) 91,601
320,000 Regency Energy Partners,
8.375%, 12/15/13 331,200
51,000 RRI Energy, Inc., 7.625%, 6/15/14 50,490
329,000 Targa Resource Partners 144a,
11.250%, 7/15/17 362,311
259,000 Targa Resource Partners, 8.250%, 7/1/16 256,734
- --------------------------------------------------------------------------------
6,350,502
- --------------------------------------------------------------------------------
ENERGY -- 12.5%
49,000 Chesapeake Energy Corp.,
6.500%, 8/15/17 48,020
396,000 Chesapeake Energy Corp.,
9.500%, 2/15/15 434,610
311,000 Connacher Oil and Gas Ltd. 144a,
10.250%, 12/15/15 284,565
187,000 Forest Oil Corp., 7.250%, 6/15/19 184,662
685,000 Gibson Energy 144a, 11.750%, 5/27/14 743,225
644,000 Helix Energy Solutions Group,
Inc. 144a, 9.500%, 1/15/16 660,100
44,000 Hilcorp Energy 144a, 9.000%, 6/1/16 44,660
529,000 Hilcorp Energy 144a, 7.750%, 11/1/15 518,420
348,000 Petrohawk Energy Corp., 10.500%, 8/1/14 380,190
492,000 Sabine Pass LNG LP, 7.250%, 11/30/13 446,490
682,000 United Refining Co., Ser 2,
10.500%, 8/15/12 642,785
- --------------------------------------------------------------------------------
4,387,727
- --------------------------------------------------------------------------------
MATERIALS -- 11.8%
448,000 Buckeye Technologies, Inc., 8.500%, 10/1/13 457,520
228,000 Cascades, Inc. 144a, 7.750%, 12/15/17 230,280
416,000 Cellu Tissue Holdings, Inc.,
11.500%, 6/1/14 461,760
202,000 Cloud Peak Energy Resources LLC
144a, 8.500%, 12/15/19 206,040
184,000 Koppers, Inc. 144a, 7.875%, 12/1/19 185,840
926,000 Massey Energy Co., 6.875%, 12/15/13 924,842
The accompanying notes are an integral part of the financial statements.
19
-----
--------------------------
TOUCHSTONE HIGH YIELD FUND
--------------------------
- --------------------------------------------------------------------------------
Principal Market
Amount Value
CORPORATE BONDS -- 97.4% - Continued
MATERIALS -- 11.8% - continued
$ 317,000 Novelis, Inc., 7.250%, 2/15/10 $ 301,942
150,000 PolyOne Corp., 8.875%, 5/1/12 154,500
30,000 Solo Cup Co. 144a, 10.500%, 11/1/13 31,950
181,000 Steel Dynamics, Inc., 7.375%, 11/1/12 186,430
147,000 Steel Dynamics, Inc., 6.750%, 4/1/15 145,714
15,000 Texas Industries, Inc., 7.250%, 7/15/13 14,738
605,000 Texas Industries, Inc., Ser UNRE,
7.250%, 7/15/13 594,413
405,000 US Concrete, Inc., 8.375%, 4/1/14 243,506
- --------------------------------------------------------------------------------
4,139,475
- --------------------------------------------------------------------------------
TELECOMMUNICATION SERVICES -- 8.6%
371,000 Cincinnati Bell, Inc., 7.000%, 2/15/15 366,363
330,000 Cricket Communications Leap,
7.750%, 5/15/16 329,175
190,000 Cricket Communications, Inc.,
10.000%, 7/15/15 192,613
250,000 Frontier Communications Corp.,
8.125%, 10/1/18 253,125
80,000 Frontier Communications Corp.,
6.250%, 1/15/13 80,200
299,000 GCI, Inc., 7.250%, 2/15/14 296,384
132,000 MetroPCS Wireless, Inc., 9.250%, 11/1/14 133,650
139,000 Nextel Communications, Inc., Ser E,
6.875%, 10/31/13 134,830
139,000 Sprint Capital Corp., 8.750%, 3/15/32 131,007
400,000 Sprint Capital Corp., 7.625%, 1/30/11 409,500
324,000 Sprint Nextel Corp., 8.375%, 8/15/17 330,480
231,000 Wind Acquisition Finance SA 144a,
Ser 144a, 11.750%, 7/15/17 252,367
84,000 Windstream Corp., 8.625%, 8/1/16 85,470
- --------------------------------------------------------------------------------
2,995,164
- --------------------------------------------------------------------------------
INDUSTRIALS -- 8.1%
197,000 Ashtead Capital, Inc. 144a, 9.000%, 8/15/16 197,246
90,000 Ashtead Holdings PLC 144a, 8.625%, 8/1/15 90,450
100,000 BE Aerospace, Inc., 8.500%, 7/1/18 106,000
150,000 Browning-Ferris Industries, Inc.,
9.250%, 5/1/21 178,100
78,000 Clean Harbors, Inc., 7.625%, 8/15/16 79,073
12,000 General Cable Corp., 7.125%, 4/1/17 11,790
610,000 Gibraltar Industries, Inc., Ser B,
8.000%, 12/1/15 582,550
290,000 Iron Mountain, Inc., 8.375%, 8/15/21 299,425
200,000 Iron Mountain, Inc., 8.000%, 6/15/20 203,000
120,000 Moog, Inc., 7.250%, 6/15/18 115,950
492,000 Mueller Water Products, Inc.,
7.375%, 6/1/17 455,100
194,000 RSC Equipment Rental, Inc. 144a,
10.000%, 7/15/17 210,975
32,000 TransDigm, Inc. 144a, 7.750%, 7/15/14 32,480
200,000 Trinity Industries, Inc., 6.500%, 3/15/14 201,250
77,000 United Rentals North America, Inc.,
10.875%, 6/15/16 83,738
- --------------------------------------------------------------------------------
2,847,127
- --------------------------------------------------------------------------------
HEALTH CARE -- 6.8%
200,000 Apria Healthcare Group, Inc. 144a,
11.250%, 11/1/14 219,500
250,000 Axcan Intermediate Holdings, Inc.,
9.250%, 3/1/15 269,687
32,000 DaVita, Inc., 7.250%, 3/15/15 32,080
200,000 DaVita, Inc., 6.625%, 3/15/13 200,500
260,000 HCA, Inc., 5.750%, 3/15/14 244,400
250,346 HCA, Inc., 9.625%, 11/15/16 271,000
45,000 Iasis Healthcare, 8.750%, 6/15/14 45,563
316,000 Invacare Corp., 9.750%, 2/15/15 329,430
253,000 Res-Care, Inc., 7.750%, 10/15/13 251,735
290,000 StoneMor, Cornerstone, OSIR 144a,
10.250%, 12/1/17 295,075
38,000 Talecris Biotherapeutics Holdings
Corp. 144a, 7.750%, 11/15/16 38,570
208,000 Universal Hospital Services, Inc.,
3.859%, 5/31/10 (a) 175,240
- --------------------------------------------------------------------------------
2,372,780
- --------------------------------------------------------------------------------
INFORMATION TECHNOLOGY -- 4.0%
109,000 Crown Castle International
Corp., 9.000%, 1/15/15 116,085
349,000 First Data Corp., 9.875%, 9/24/15 325,442
483,000 Sensata Technologies BV, 8.000%, 5/1/14 473,340
309,000 SunGard Data Systems, Inc.,
9.125%, 8/15/13 316,725
177,000 Viasat, Inc. 144a, 8.875%, 9/15/16 182,310
- --------------------------------------------------------------------------------
1,413,902
- --------------------------------------------------------------------------------
FINANCIALS -- 3.4%
300,000 Ford Motor Credit Co. LLC,
7.000%, 10/1/13 299,548
161,000 Glencore Funding LLC 144a,
6.000%, 4/15/14 164,715
162,000 GMAC, Inc. 144a, 6.875%, 9/15/11 159,570
265,000 GMAC, Inc. 144a, 6.625%, 5/15/12 259,700
341,000 PPF Funding, Inc. 144a, 5.700%, 4/15/17 251,173
60,000 Reynolds Group ISS 144a, Ser 144a,
7.750%, 10/15/16 61,350
- --------------------------------------------------------------------------------
1,196,056
- --------------------------------------------------------------------------------
CONSUMER STAPLES -- 0.8%
250,000 Ingles Markets, Inc., 8.875%, 5/15/17 260,000
- --------------------------------------------------------------------------------
TOTAL CORPORATE BONDS $ 34,141,199
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements.
20
- -----
- --------------------------
TOUCHSTONE HIGH YIELD FUND
- --------------------------
- --------------------------------------------------------------------------------
Schedule of Investments continued
Market
Shares Value
PREFERRED STOCK --0.2%
FINANCIALS --0.2%
90 GMAC, Inc. 144a, 7.00%, Series 144a $ 59,321
- --------------------------------------------------------------------------------
INVESTMENT FUNDS -- 1.6%
321,195 Invesco AIM Liquid Assets Portfolio** 321,195
220,834 Touchstone Institutional
Money Market Fund^ 220,834
- --------------------------------------------------------------------------------
TOTAL INVESTMENT FUNDS $ 542,029
- --------------------------------------------------------------------------------
TOTAL INVESTMENT SECURITIES -- 99.2%
(COST $32,966,545) $ 34,742,549
OTHER ASSETS IN EXCESS OF LIABILITIES -- 0.8% 295,403
- --------------------------------------------------------------------------------
NET ASSETS -- 100.0% $ 35,037,952
- --------------------------------------------------------------------------------
+ All or a portion of the security is on loan. The total value of the
securities on loan as of December 31, 2009, was $303,689.
(a) Variable rate security - the rate reflected is the rate in effect as of
December 31, 2009.
** Represents collateral for securities loaned.
^ Affiliated Fund, sub-advised by Fort Washington Investment Advisors, Inc.
See Note 3.
PORTFOLIO ABBREVIATIONS:
PLC -- Public Liability Company
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
transactions exempt from registration, normally to qualified institutional
buyers. At December 31, 2009, these securities were valued at $8,139,578
or 23.2% of net assets.
OTHER INFORMATION:
The inputs or methodology used for valuing securities may not be an indication
of the risk associated with investing in those securities. For more information
on valuation inputs, and their aggregation into the levels used in the table
below, please refer to the security valuation section in the accompanying notes
to financial statements.
Valuation Inputs at Reporting Date:
Description Level 1 Level 2 Level 3 Total
- --------------------------------------------------------------------------------
Corporate Bonds $ -- $34,141,199 $ -- $ 34,141,199
Investment Funds 542,029 -- -- 542,029
Preferred Stock 59,321 -- -- 59,321
--------------------------------------------------------
$ 34,742,549
The accompanying notes are an integral part of the financial statements.
21
-----
-------------------------------------
TOUCHSTONE LARGE CAP CORE EQUITY FUND
-------------------------------------
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE
- --------------------------------------------------------------------------------
(Unaudited)
Touchstone Large Cap Core Equity Fund
SUB-ADVISED BY TODD-VEREDUS ASSET MANAGEMENT LLC
PERFORMANCE AND MARKET OVERVIEW
The total return of the Touchstone Large Cap Core Equity Fund was 24.06% for the
year ended December 31, 2009. The total return of the Russell 1000(R) Index was
28.43% for the same period.
This past year was one of the most volatile for equity markets that many
investors have witnessed. Trends shifted during the year, from the safety trade
early in the year to the beta and growth outperformance in the second half of
the year. Low quality stocks outperformed high quality stocks during the year
and high beta stocks outperformed their low beta counterparts. Both of these
factors were headwinds for our style, because we favor larger, higher quality
companies with less volatility in our selection process.
PORTFOLIO REVIEW
At this stage of the market recovery, investors have sought more volatile
companies, and not focused as much on the larger, high quality companies with
attractive valuations. Market cycles have distinct phases and last year was an
early recovery year, much like 2003. During an early recovery year, investors
seek out riskier, lower quality investments. The premise behind this is that if
a company has survived the worst of a recession then it has high leverage to a
recovery. In practice, this means that companies that were most worrisome during
the bear market, and were probably driven to very low prices, become the
standouts of the early recovery.
A traditional economic recovery is unfolding, and we think that growth could be
better than anyone expects in the first half of 2010. To take advantage of this,
we have recently raised the Fund's allocation in the Consumer Discretionary
sector stocks through the purchase of several retailers focused on the off price
and dollar store segments. Current trends in place suggest the "Frugal
Consumer," a phenomenon that will be with us for some time. We want to take
advantage of that trend.
We have maintained the Fund's overweight in the Information Technology and
Industrials sectors. During the year, we expected these areas to benefit from
the trend of dollar weakness and better exports. The stocks have benefitted from
these trends, and Information Technology was the best performing sector for the
year. As we move into 2010, our sense is that the Industrials sector and other
later stage cyclical stocks will probably have their time in the sun. The Fund
has moved to an underweight in defensive stocks over the past year, and is
expected to maintain a below market weight in those stocks. History suggests it
is the wrong part of the economic cycle for defensive stocks to outperform. If
the prospect of a double dip recession becomes likely, we will revisit that
underweighted bias. We are also underweight the Financials sector.
Stock selection in the Consumer Staples, Energy, and Industrials sectors
outperformed the Index. Stock selection in the Consumer Discretionary,
Materials, Telecommunication Services, Financials, Information Technology and
Health Care sectors underperformed.
22
- -----
- -------------------------------------
TOUCHSTONE LARGE CAP CORE EQUITY FUND
- -------------------------------------
- --------------------------------------------------------------------------------
Management's Discussion of Fund Performance continued
Individual stocks that contributed to performance during the year were Microsoft
Corp., Cisco Systems Inc. and Amphenol Corp. (all from the Information
Technology sector), Best Buy Co. Inc. (Consumer Discretionary sector), and
Goldman Sachs Group Inc. (Financials sector).
We sold some stocks from the Financials sector in the first quarter to limit the
Fund's risk within that group. We sold Wells Fargo & Co. early last year, a
mistake in hindsight. Other detractors from performance were Cardinal Health
Inc. (Health Care sector), ConocoPhillips (Energy sector), General Electric Co.
(Industrials sector), and AFLAC Inc. (Financials sector).
CURRENT STRATEGY AND OUTLOOK
Last year saw many different trends within the market, but it can be summed up
as the bottom followed by an early phase recovery. During this type of recovery,
investors begin by looking for the beaten down names that barely survived the
bear market, so they can get leverage to the recovery. That's exactly what we
saw last year, and is the type of market in which our strategy returns will
generally trail the Index returns. As we move into a later phase recovery,
investors tend to return to the higher quality names. We expect that to occur
this year and we believe the Fund is well positioned to take advantage of this
trend.
We believe the market is in the midst of a multi year run that will likely move
the markets higher, though we would point out that it probably will not move in
a straight line. We think several trends are likely to show up in 2010,
including:
o the economy will continue to recover and should move into expansion at
some point
o short rates are too low at this point, but the Fed will probably leave
them alone until unemployment improves
o volatility will probably stay lower than last year, but investors will
continue to fear it, and earnings are recovering, especially for the U.S.
multinationals
The Fund is overweight in the Information Technology, Industrials and Consumer
Discretionary sectors in an effort to take advantage of the recovery. We
continue to believe that economic growth could be better than most investors
anticipate.
23
-----
-------------------------------------
TOUCHSTONE LARGE CAP CORE EQUITY FUND
-------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Average Annual Total Return
- --------------------------------------------------------------------------------
One Year Five Years Ten Years
Ended Ended Ended
12/31/09 12/31/09 12/31/09
24.06% 0.77% (0.43%)
- --------------------------------------------------------------------------------
Cumulative Total Return
- --------------------------------------------------------------------------------
Ten Years
Ended
12/31/09
(4.24%)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
GROWTH OF A $10,000 INVESTMENT
- --------------------------------------------------------------------------------
Touchstone Large Cap Core Equity Fund Russell 1000(R) Index
Date Balance Date Balance
---- ------- ---- -------
12/31/99 10,000 12/31/99 10,000
12/31/00 9,705 12/31/00 9,221
12/31/01 8,594 12/31/01 8,073
12/31/02 6,646 12/31/02 6,325
12/31/03 8,772 12/31/03 8,216
12/31/04 9,218 12/31/04 9,152
12/31/05 8,936 12/31/05 9,726
12/31/06 11,310 12/31/06 11,230
12/31/07 11,912 12/31/07 11,878
12/31/08 7,719 12/31/08 7,412
12/31/09 9,576 12/31/09 9,519
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.
24
- -----
- -------------------------------------
TOUCHSTONE LARGE CAP CORE EQUITY FUND
- -------------------------------------
Schedule of Investments
- --------------------------------------------------------------------------------
December 31, 2009
Market
Shares Value
COMMON STOCKS -- 98.0%
INFORMATION TECHNOLOGY -- 23.6%
Amphenol Corp.- Class A+ 25,773 $ 1,190,197
Cisco Systems, Inc.* 74,311 1,779,005
Fiserv, Inc.* 12,710 616,181
Hewlett-Packard Co. 31,747 1,635,288
Intel Corp. 68,596 1,399,358
International Business Machines Corp. 10,080 1,319,472
Microsoft Corp. 74,800 2,280,652
Oracle Corp. 72,139 1,770,291
QUALCOMM, Inc. 34,175 1,580,936
Tyco Electronics Ltd.* 26,740 656,467
Western Union Co. 38,707 729,627
- --------------------------------------------------------------------------------
14,957,474
- --------------------------------------------------------------------------------
FINANCIALS -- 11.8%
AFLAC, Inc.+ 41,810 1,933,713
Allstate Corp. 30,252 908,770
American Express Co. 31,716 1,285,132
Goldman Sachs Group, Inc. 9,170 1,548,263
Morgan Stanley 46,100 1,364,560
State Street Corp.+ 10,550 459,347
- --------------------------------------------------------------------------------
7,499,785
- --------------------------------------------------------------------------------
ENERGY -- 11.6%
Chesapeake Energy Corp.+ 43,090 1,115,169
Chevron Corp. 19,956 1,536,413
ENSCO International, Inc.- ADR 26,464 1,056,972
Marathon Oil Corp. 46,714 1,458,411
Transocean Ltd.* 11,934 988,135
XTO Energy, Inc. 25,011 1,163,762
- --------------------------------------------------------------------------------
7,318,862
- --------------------------------------------------------------------------------
INDUSTRIALS -- 11.4%
Danaher Corp. 12,659 951,957
Emerson Electric Co.+ 21,650 922,290
Honeywell International, Inc. 14,852 582,198
Illinois Tool Works, Inc. 27,155 1,303,168
Union Pacific Corp. 20,864 1,333,210
United Technologies Corp. 30,161 2,093,475
- --------------------------------------------------------------------------------
7,186,298
- --------------------------------------------------------------------------------
HEALTH CARE -- 11.3%
Johnson & Johnson 16,708 1,076,162
Laboratory Corp. of America
Holdings* 20,057 1,501,066
McKesson Corp. 21,128 1,320,500
Novartis AG- ADR 28,375 1,544,451
Teva Pharmaceutical Industries
Ltd.- ADR+ 16,920 950,566
WellPoint, Inc.* 12,946 754,622
- --------------------------------------------------------------------------------
7,147,367
- --------------------------------------------------------------------------------
CONSUMER DISCRETIONARY -- 10.3%
Best Buy Co., Inc. 31,673 1,249,817
Dollar Tree, Inc.* 17,610 850,563
Honda Motor Co. Ltd.- ADR 29,637 1,004,694
McDonald's Corp. 16,815 1,049,929
Ross Stores, Inc. 18,780 802,094
Target Corp. 32,896 1,591,179
- --------------------------------------------------------------------------------
6,548,276
- --------------------------------------------------------------------------------
CONSUMER STAPLES -- 9.4%
Altria Group, Inc. 43,017 844,424
CVS Caremark Corp. 26,320 847,767
Kimberly-Clark Corp. 19,132 1,218,900
PepsiCo, Inc. 19,000 1,155,200
Philip Morris International, Inc. 39,487 1,902,878
- --------------------------------------------------------------------------------
5,969,169
- --------------------------------------------------------------------------------
MATERIALS -- 3.9%
BHP Billiton Ltd.- ADR+ 14,100 1,079,778
Praxair, Inc. 17,629 1,415,785
- --------------------------------------------------------------------------------
2,495,563
- --------------------------------------------------------------------------------
UTILITIES -- 2.5%
Dominion Resources, Inc.+ 40,619 1,580,892
- --------------------------------------------------------------------------------
TELECOMMUNICATION SERVICES -- 2.2%
AT&T, Inc. 48,703 1,365,145
- --------------------------------------------------------------------------------
TOTAL COMMON STOCKS $ 62,068,831
- --------------------------------------------------------------------------------
INVESTMENT FUNDS --15.4%
Invesco AIM Liquid Assets Portfolio** 8,491,028 8,491,028
Touchstone Institutional
Money Market Fund^ 1,256,821 1,256,821
- --------------------------------------------------------------------------------
TOTAL INVESTMENT FUNDS $ 9,747,849
- --------------------------------------------------------------------------------
TOTAL INVESTMENT SECURITIES -- 113.4%
(COST $69,221,506) $ 71,816,680
LIABILITIES IN EXCESS OF OTHER ASSETS -- (13.4%) (8,500,346)
- --------------------------------------------------------------------------------
NET ASSETS -- 100.0% $ 63,316,334
- --------------------------------------------------------------------------------
+ All or a portion of the security is on loan. The total value of the
securities on loan as of December 31, 2009, was $8,226,921.
* Non-income producing security.
** Represents collateral for securities loaned.
^ Affiliated Fund, sub-advised by Fort Washington Investment Advisors, Inc.
See Note 3.
PORTFOLIO ABBREVIATIONS:
ADR -- American Depositary Receipt
OTHER INFORMATION:
The inputs or methodology used for valuing securities may not be an indication
of the risk associated with investing in those securities. For more information
on valuation inputs, and their aggregation into the levels used in the table
below, please refer to the security valuation section in the accompanying notes
to financial statements.
Valuation Inputs at Reporting Date:
Description Level 1 Level 2 Level 3 Total
- --------------------------------------------------------------------------------
Common Stocks $ 62,068,831 $ -- $ -- $ 62,068,831
Investment Funds 9,747,849 -- -- 9,747,849
-------------------------------------------------------
$ 71,816,680
The accompanying notes are an integral part of the financial statements.
25
-----
------------------------------
TOUCHSTONE MID CAP GROWTH FUND
------------------------------
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE
- --------------------------------------------------------------------------------
(Unaudited)
Touchstone Mid Cap Growth Fund
SUB-ADVISED BY TCW INVESTMENT MANAGEMENT COMPANY LLC
WESTFIELD CAPITAL MANAGEMENT COMPANY LLC
PERFORMANCE AND MARKET OVERVIEW
The total return of the Touchstone Mid Cap Growth Fund was 38.99% for the year
ended December 31, 2009. The total return of the Russell Midcap(R) Growth Index
was 46.29% for the same period.
The remarkable recovery of the U.S. financial markets continued through year
end. With a greater than 50% rebound off of the dramatic lows of March, most
market averages finished 2009 with their best annual gains since 2003. As the
year progressed, financial market mechanics improved with a return to more
normal IPO activity, a dramatic pickup in announced Mergers & Acquisitions
volume, and a continued narrowing of corporate debt spreads. Investors seemed to
view the economic glass as half full. While the unemployment rate remained
stubbornly high, trends in initial jobless claims and temporary employment
suggested improvement in the employment picture. Similarly, a pickup in retail
sales and online transactions in the holiday season implied an improvement in
consumer confidence. Extensive worldwide monetary easing prompted some worry
that inflationary pressures would undermine financial asset pricing. However,
slack in both labor markets and industrial capacity has kept inflation at bay.
During the past year, investors faced a pronounced recession and severe banking
crisis that crushed stock prices, followed by a quick and generally unexpected
market upswing. Though trends continue to be choppy, many economic markers are
at much improved levels than they were at the March lows. Jobless claims,
consumer confidence, the ISM Manufacturing Purchasing Manager's Index, home
sales and retail sales point to an economy rebuilding from the depths of the
recession. Stocks also benefited from improving earnings expectations as
companies have not yet increased costs to meet improved demand. Bank
non-performers also appear to be peaking. As a result, the relief rally in
"low-quality" stocks (i.e. those companies with higher leverage) continued into
year-end, and "high-quality" and late-cycle generally underperformed.
TCW INVESTMENT MANAGEMENT COMPANY LLC
PORTFOLIO REVIEW
The hallmark of our investing style is to purchase high quality companies
undergoing some period of near-term earnings trauma. This process performs well
over market cycles and worked particularly well on a relative basis when the
market soured in early 2009. While a number of the Fund's early cyclical stocks
bounced significantly off the March lows, our portion of the Fund's tilt towards
higher quality companies prevented the portfolio's full participation in the
rally. On a relative return basis, it underperformed the benchmark partially due
to not participating in the REITs bounce and several underperforming stocks in
the Financials sector, specifically within Commercial Banks (Fifth Third
Bancorp, Synovus Financial Corp. and KeyCorp).
The Health Care, Industrials, and Telecommunication Services sectors contributed
to performance during 2009, while the Consumer Discretionary, Financials, and
Materials sectors were the largest detractors. The strong bounce in REITs
hampered relative performance, as the portfolio is not exposed to a sector that
comprises 10% of the benchmark and more than doubled off of the March lows. We
remain concerned by valuations that are at multi-year highs despite the
potential for falling rent rolls and higher interest costs. For a group of
stocks that are, in theory, steady dividend plays, we remain unconvinced that
they are trading at discounts to intrinsic value.
26
- -----
- ------------------------------
TOUCHSTONE MID CAP GROWTH FUND
- ------------------------------
- --------------------------------------------------------------------------------
Management's Discussion of Fund Performance continued
The portfolio's best performing stocks included Cerner Corp. (Health Care
sector), a healthcare information technology company that is a leader in
digitizing healthcare records, a priority of the Obama administration; Joy
Global Inc. (Industrials sector), a mining equipment company, bounced solidly on
stronger commodity demand; Broadcom Corp. (Information Technology sector), a
leading integrated circuit company, benefitted from strong demand for wireless
applications, set-top boxes, and high-speed networking; Maxim Integrated
Products Inc. (Information Technology sector), and American Eagle Outfitters
Inc. (Consumer Discretionary sector).
Stocks that detracted from performance included Synovus Financial Corp.
(Financials sector), an Atlanta-based bank which declined on concerns over the
quality of its loan portfolio, though we are comfortable that management has
taken appropriate, conservative measures to stem non-performers. Value-oriented
retail stocks mostly helped performance; one that hurt performance was Burger
King Holdings Inc. (Consumer Discretionary sector), where high unemployment
rates and a fickle consumer hurt returns. However, we believe management is
making the right moves, including the launch of value-priced items, which should
improve earnings. Arch Capital Group Ltd. (Financials sector), a
conservatively-run insurance and re-insurance company, provided decent ballast
during the downturn, but was flat for the year, which detracted on a relative
basis in a group that moved higher. We believe its shares have compelling value.
Other detractors from performance were Alliant Techsystems Inc. (Industrials
sector), Teleflex Inc. (Health Care sector) and Fifth Third Bancorp (Financials
sector).
During the past two years, correct macroeconomic calls mostly trumped individual
stock-picking as stocks traded one-way in both 2008 (mostly down) and in 2009
(mostly up). Though the Fund successfully outperformed in 2008, and though
2009's absolute performance was strong, 2009 proved more difficult on a relative
basis as our investment philosophy does not embrace chasing momentum. However,
we believe the stock market is shifting towards one that should benefit
stock-picking as the economy swings from its early cyclical recovery stage to a
more mature growth phase.
CURRENT STRATEGY AND OUTLOOK
In the near-term, markets will probably benefit from solid corporate
profitability and improving employment statistics. However, many believe the
recent rise in global short-term interest rates (due to economic growth, higher
commodity prices, and renewed concerns of inflation rather than deflation)
suggest the market is maturing and volatility is likely to return.
Also, although economic factors generally point to economic expansion, the
recovery absent governmental stimulus and Chinese demand is still anemic. Should
either waiver, especially if Washington's anti-business rhetoric heightens,
and/or as the extent of impending tax hikes becomes more evident, the market may
suffer a fair level of anxiety. We are also wary of the Fed's ability to
accurately raise rates at "the right time" - will they keep rates too low for
too long, thereby spurring the next bubble, or will they raise rates too soon,
cutting off the nascent recovery?
27
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TOUCHSTONE MID CAP GROWTH FUND
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- --------------------------------------------------------------------------------
During these periods, our investing style remains unchanged. We continue to
search for turnaround stories, unrecognized asset plays, and undervalued growth
stocks that are trading below intrinsic value and sell those that have reached
our price objective. Our disciplined investment approach necessitates taking a
long-term view. Although redeploying funds from stocks that are working (i.e.
Cerner, Edwards Lifesciences) into those that aren't displaying near-term
momentum can impact short-term results, we believe this strict and patient
adherence to our value discipline works over the long-term.
WESTFIELD CAPITAL MANAGEMENT COMPANY LLC
PORTFOLIO REVIEW
Our portion of the Fund's holdings in the Energy, Telecommunication Services,
Utilities, Industrials, and Consumer Staples sectors contributed positively to
relative results; however, results within the Materials, Financials, Health Care
and Consumer Discretionary sectors offset those gains.
Most notably, a large position in Energy sector stock, coal producer Massey
Energy Co. contributed meaningfully to results after the company's management
highlighted that for the first time they were shipping coal to Asia. While a
thermal coal market remained relatively weak, demand for metallurgical coal
continued to increase. Metallurgical coal has been in short supply given record
levels of steel production in China and India. We believed that a modest pickup
in exports could tighten the relatively small Eastern coal market in which
Massey competes. Weakness in oil markets provided an opportunity to establish a
position in oil services company Weatherford International Ltd. during the first
quarter of the year. We believed that limited excess OPEC capacity created
upside risk to commodity prices with a return to normalized demand growth.
Weatherford should be a prime beneficiary of the need to further identify and
develop crude reserves. This oil service company was among the best performing
positions in our portion of the Fund during the year. We remain optimistic about
the company's prospects and applaud their strategic capital spending during the
economic downturn and their unique ability to fully capitalize on the ultimate
recovery as a consequence. The company has made prudent entry into key markets
like Mexico, Russia and Iraq and has invested in critical technologies such as
drilling and evaluation, managed pressure drilling and completions.
In the Information Technology sector, Data Domain, a provider of deduplication
storage devices, was added to the Fund's portfolio in the first quarter after
meetings with management gave us the confidence that their meaningful
competitive lead in this rapidly growing area was sustainable. In late May, Data
Domain and NetApp Inc. announced a definitive agreement, and after EMC
Corporation responded by launching an unsolicited offer for the company 20%
higher than NetApp's, the position in Data Domain was sold. Brocade
Communications Systems Inc. also contributed meaningfully to results. In late
April, the company announced an OEM relationship with International Business
Machines to provide them with switching products. As IBM makes more of a
definitive push into networking and storage, we think Brocade is well positioned
to capitalize on these competitive efforts as a top player in the Ethernet
switching market. Alcatel-Lucent was originally purchased based on our belief
that telecom carrier spending would improve in the latter half of 2009 and that
the company was well positioned given the consolidation of equipment providers.
We felt the company's new management had gotten very serious about controlling
costs and that improvements in telecommunications spending would be significant.
However, despite their competitive positioning in 4G wireless and our optimism
about the prospect for further share gains in the enterprise routing space
relative to Cisco Systems and Juniper Networks Inc., the stock was sold.
28
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TOUCHSTONE MID CAP GROWTH FUND
- ------------------------------
- --------------------------------------------------------------------------------
Management's Discussion of Fund Performance continued
Stocks within the Industrials sector also added to relative results. Cummins
Inc., a manufacturer of engines and power generation systems, modestly beat
estimates over the course of the year and demonstrated good cost control. Their
conservative management team did not plan for a U.S. or European recovery until
late 2010. Business in overseas markets like India and Brazil indeed improved,
and over the course of the year, the stock began to reflect a lot of optimism
for a return to peak earnings. The stock was among the largest contributors to
relative performance of the Industrials holdings, but our price target
discipline led to the sale of the stock. Elsewhere we attempted to identify
management teams within the sector that had reduced costs in order to be
profitable at operating rates well below their effective capacity. Railroad
operator CSX Corp. was one such company and reported better-than-anticipated
results in the second half of the year on great cost controls, operating
improvements and strong pricing. The stock has since been sold as it traded
through our internal price objective and further price appreciation would
require significant improvement in industry volumes, in our opinion.
The Consumer Staples sector was a source of relative performance gains during
the year. Global agribusiness company Bunge Ltd. was purchased early in the
second quarter and was a positive contributor to relative returns. The large and
growing demand for soybeans out of China is one of the biggest drivers of price
strength. Bunge's agribusiness and fertilizer capacity in both Brazil and the
U.S. positions them well to be a prime beneficiary of continued strong soybean
prices and crop production, which drive strong "crush margins" and fertilizer
volumes and margins. Also added to the Fund's portfolio in the second quarter
and contributing to relative results was Avon Products Inc. A persistently high
rate of unemployment has driven an increase of over one million sales
representatives over the past year. We expect more marketing muscle combined
with the company's "smart value" strategy to allow them to capitalize on current
consumer willingness to trade down in this difficult economic environment. We
think recent restructuring efforts should help drive margin improvement over the
next several years, particularly if the company delivers upon the expected
acceleration in top line results.
Some of the most significant contributions to absolute returns came from stocks
within the Consumer Discretionary sector. Certain stocks within apparel retail,
restaurants, and broadcasting traded up over 50% in the period. Weakness within
housewares and specialties and education services, however, contributed to the
underperformance relative to the benchmark. Newell Rubbermaid Inc., a
manufacturer of branded consumer and commercial products, traded lower early in
the year. Falling resin prices were thought to have been enough to improve
margins and protect earnings in a difficult market for discretionary goods. The
company, however, suffered from consumer trends toward generic substitution
which pressured prices. International sales, which had been a stabilizing force,
also turned decidedly lower. The stock was sold. DeVry Inc., a for-profit
education company, traded lower early in the year and then failed to keep pace
with the advancing sector despite reporting enviable enrollment growth and
earnings that were in line with lofty Wall Street expectations. The
counter-cyclical nature of education stocks has made them great performers
during the market decline, and they have suffered from selling pressure now that
investors have, at least temporarily, adopted a more optimistic consumer
outlook. It is our contention that DeVry is among the higher quality publically
traded education companies and we think Wall Street estimates for their earnings
are too low for both this year and next. We believe this is a company that will
likely thrive even when employment trends begin to improve. An additional source
of weakness came from GameStop Corp., a leading seller of new and used video
games that was purchased in early October. We liked their exposure to hardware
price cuts and the associate impact on game sales, as well as their unique
positioning in the highly profitable used game business. Unexpectedly, Walmart
took price cuts of 15-20% on 25 new game titles which impacted the relative
attractiveness of used games. While uncertain about the permanence of this
strategic action, the risk of margin degradation associated with increased
promotional activity was too great to endure, and the stock was sold.
29
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TOUCHSTONE MID CAP GROWTH FUND
------------------------------
- --------------------------------------------------------------------------------
The Health Care sector, normally a positive performance differentiator in
volatile markets, was the source of relative underperformance. Despite some
strong results within Life Sciences Tools & Services and Health Care Equipment,
stock selection elsewhere was less positive. Early in the year Shire PLC, a
specialty biopharmaceutical company, reported earnings that disappointed
investors. Their earnings miss was related to a sales shortfall for Adderall XR,
a drug for the treatment of Attention Deficit Hyperactivity Disorder. The
company is currently working to switch patients from this drug to Vyvanse before
a competitor launches an authorized generic substitute. Because of the breadth
of their product portfolio and the fact that new product sales represent nearly
40% of revenues, we believe that the company will return to 15-20% earnings
growth in short order. Celgene Corp. received approval for Revlimid for use in
Multiple Myeloma patients in the U.K., and this therapy was the subject of a
number of phase II studies that evaluated its use in various hematologic
malignancies. Those positive developments were overshadowed by the negative
impact of a modest earnings per share shortfall, a misguided short report on
Revlimid inventories, and fears of major healthcare reform. We continue to
believe Celgene is one of the better healthcare opportunities given the prospect
of strong growth in earnings from launch activity for Revlimid worldwide, Vidaza
in the E.U. and U.S., and Thalomid in the E.U. Potential use of Revlimid in
other indications merely enhances the growth outlook, in our opinion.
The Financials sector negatively impacted results and portfolio exposure to the
sector remains modest. A position initiated in Fidelity National Financial Inc.,
a title insurer, weighed heavily on aggregate results from the sector. The stock
was purchased given our confidence that government efforts to lower mortgage
rates will spur refinancings and ultimately, home purchases. The loan
modification programs will also require re-appraisals and re-titling of
residential properties. While the current business is being driven predominantly
by government-led intervention in mortgage markets, skepticism remains that
purchase mortgages will again become the dominant driver of the title insurance
business. The stock was sold. Shares of Fifth Third Bancorp were also sold in
late January and therefore missed the sharp advance off of the March lows.
Deteriorating credit conditions in their core Midwest markets and more severe
issues in their newer operations in Florida and Georgia motivated the sale. In
late September, a portfolio position was initiated in Lazard Ltd., an
international financial advisory firm best known for their work in mergers and
acquisitions. Shortly after the purchase, CEO Bruce Wasserstein unexpectedly
passed away. In a business that depends on the so-called rainmakers, investors
worried not only about a leadership void, but also about the company's ability
to complete deals. We feel confident in the depth of the management and banking
talent and used the market uncertainty as an opportunity to add to the portfolio
position. The prompt appointment of CEO Kenneth Jacobs should quell concerns
about a rudderless organization and should improve the prospects for talent
retention.
30
- -----
- ------------------------------
TOUCHSTONE MID CAP GROWTH FUND
- ------------------------------
- --------------------------------------------------------------------------------
Management's Discussion of Fund Performance continued
The Materials sector detracted from performance due to limited exposure to this
leadership sector and some selection issues. Owens-Illinois Inc., a manufacturer
of glass containers, was purchased in the third quarter. The stock has been
under pressure on the heels of disappointing North American glass shipment data
that suggested an accelerating decline. It is our view that inventory destocking
is largely complete in the U.S. and is reflected in management's full year
outlook. We have used this opportunity to add to the stock as we continue to
like their exposure to international consumer growth where per capita
consumption of basic consumer staples like bottled beverages is in early
innings. Also, the company remains in the midst of rationalizing plants, which
entails consolidating volumes in more state of the art, energy efficient plants
which should ultimately lead to higher margins and returns.
CURRENT STRATEGY AND OUTLOOK
The stock market move off of the March lows was fueled, in part, by an increase
in appetite for risk. Price-to-earnings multiples expanded dramatically from
depressed levels as many of the worst performing stocks from 2008 became the
best performing stocks of 2009. Simply surviving the great recession drove major
price moves. We remain constructive on the outlook for stocks but believe that
selectivity will be critical in 2010. Sentiment indicators and insider selling
activity might suggest that a market top is in the offing. Widespread talk of
another Fed-induced bubble and record flows into bond funds suggest that enough
skepticism exists about the prospects for equity markets that stocks can indeed
march higher. The benefit of a rising tide may soon subside and, as such,
identifying improving fundamentals and attractive valuations will differentiate
results.
31
-----
------------------------------
TOUCHSTONE MID CAP GROWTH FUND
------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Average Annual Total Return
- --------------------------------------------------------------------------------
One Year Five Years Ten Years
Ended Ended Ended
12/31/09 12/31/09 12/31/09
38.99% 5.14% 7.59%
- --------------------------------------------------------------------------------
Cumulative Total Return
- --------------------------------------------------------------------------------
Ten Years
Ended
12/31/09
107.86%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
GROWTH OF A $10,000 INVESTMENT
- --------------------------------------------------------------------------------
Touchstone Mid Cap Growth Fund Russell Mid Cap(R) Growth Index
Date Balance Date Balance
---- ------- ---- -------
12/31/99 10,000 12/31/99 10,000
12/31/00 12,962 12/31/00 8,825
12/31/01 12,622 12/31/01 7,047
12/31/02 9,806 12/31/02 5,115
12/31/03 14,441 12/31/03 7,300
12/31/04 16,182 12/31/04 8,430
12/31/05 18,657 12/31/05 9,450
12/31/06 21,675 12/31/06 10,457
12/31/07 24,803 12/31/07 11,653
12/31/08 14,956 12/31/08 6,488
12/31/09 20,788 12/31/09 9,492
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.
32
- -----
- ------------------------------
TOUCHSTONE MID CAP GROWTH FUND
- ------------------------------
SCHEDULE OF INVESTMENTS
- --------------------------------------------------------------------------------
December 31, 2009
Market
Shares Value
COMMON STOCKS -- 98.1%
INFORMATION TECHNOLOGY -- 18.0%
Agilent Technologies, Inc.* 6,425 $ 199,625
Avago Technologies Ltd.* 9,150 167,354
Avnet, Inc.* 5,225 157,586
BMC Software, Inc.* 5,700 228,570
Broadcom Corp.- Class A* 6,025 189,486
Brocade Communication
Systems, Inc.*+ 33,200 253,316
Ciena Corp.*+ 8,500 92,140
Gartner, Inc.* 18,000 324,720
Global Payments, Inc. 4,650 250,449
LSI Corp.* 40,500 243,405
Maxim Integrated Products, Inc. 9,680 196,504
McAfee, Inc.* 5,200 210,964
Microchip Technology, Inc.+ 5,650 164,189
NICE Systems Ltd.- ADR* 12,100 375,584
ON Semiconductor Corp.* 46,800 412,308
QLogic Corp.* 7,650 144,355
Quest Software, Inc.* 16,800 309,120
Red Hat, Inc.* 8,650 267,285
Verigy Ltd.* 10,001 128,713
Xilinx, Inc.+ 10,900 273,154
- --------------------------------------------------------------------------------
4,588,827
- --------------------------------------------------------------------------------
INDUSTRIALS -- 16.2%
AMETEK, Inc.+ 7,200 275,328
Cooper Industries PLC 5,250 223,860
Corrections Corp. of America* 8,900 218,495
Delta Air Lines, Inc.* 19,500 221,910
Dover Corp. 4,495 187,037
Hexcel Corp.* 16,275 211,250
IDEX Corp.+ 9,800 305,270
ITT Corp. 5,900 293,466
Jacobs Engineering Group, Inc.*+ 2,850 107,188
Joy Global, Inc. 3,340 172,311
Kennametal, Inc.+ 5,025 130,248
Kirby Corp.*+ 8,000 278,640
MSC Industrial Direct Co.- Class A+ 8,050 378,350
Precision Castparts Corp. 2,970 327,740
Rockwell Collins, Inc. 3,825 211,752
Roper Industries, Inc.+ 5,900 308,983
Snap-On, Inc. 2,675 113,045
SPX Corp. 3,080 168,476
- --------------------------------------------------------------------------------
4,133,349
- --------------------------------------------------------------------------------
HEALTH CARE -- 14.9%
Beckman Coulter, Inc. 1,435 93,906
Celgene Corp.* 5,900 328,512
Covance, Inc.*+ 2,850 155,525
DaVita, Inc.* 4,700 276,078
Elan Corp. PLC- ADR* 35,250 229,830
Life Technologies Corp.* 6,800 355,164
Mettler-Toledo International, Inc.*+ 4,200 440,958
Shire PLC - ADR 6,050 355,135
Thermo Fisher Scientific, Inc.* 3,360 160,238
United Therapeutics Corp.* 3,200 168,480
Varian Medical Systems, Inc.* 8,900 416,965
Vertex Pharmaceuticals, Inc.*+ 11,150 477,778
Warner Chilcott PLC- Class A* 12,300 350,181
- --------------------------------------------------------------------------------
3,808,750
- --------------------------------------------------------------------------------
CONSUMER DISCRETIONARY -- 12.1%
Abercrombie & Fitch Co.- Class A 5,000 174,250
American Eagle Outfitters, Inc. 8,875 150,698
Bed Bath & Beyond, Inc.* 10,450 403,683
Burger King Holdings, Inc. 8,025 151,030
Coach, Inc. 9,250 337,902
DeVry, Inc. 2,750 156,007
Discovery Communications, Inc.-
Class A*+ 9,000 276,030
Lennar Corp.- Class A 7,270 92,838
Macy's, Inc. 9,210 154,360
Marriott International, Inc.- Class A+ 7,251 197,590
Starbucks Corp.*+ 12,800 295,168
TJX Cos., Inc. 5,500 201,025
Toll Brothers, Inc.* 4,675 87,937
Urban Outfitters, Inc.* 6,200 216,938
WABCO Holdings, Inc. 7,415 191,233
- --------------------------------------------------------------------------------
3,086,689
- --------------------------------------------------------------------------------
FINANCIALS -- 11.8%
Ameriprise Financial, Inc. 7,000 271,740
Annaly Capital Management, Inc. REIT 16,500 286,275
Arch Capital Group Ltd.* 3,271 234,040
Assurant, Inc. 4,420 130,301
Federated Investors, Inc.- Class B+ 5,900 162,250
First Horizon National Corp.*+ 7,973 106,840
Hudson City Bancorp, Inc. 8,560 117,529
Invesco, Ltd. 7,530 176,880
KeyCorp 25,525 141,664
Knight Capital Group, Inc.- Class A* 9,875 152,075
Lazard Ltd.- Class A 5,750 218,327
New York Community Bancorp, Inc.+ 9,131 132,491
Northern Trust Corp.+ 2,575 134,930
PartnerRe, Ltd. 1,750 130,655
People's United Financial, Inc. 9,081 151,653
Synovus Financial Corp.+ 36,230 74,271
TCF Financial Corp.+ 12,800 174,336
Willis Group Holdings, Ltd. 7,710 203,390
- --------------------------------------------------------------------------------
2,999,647
- --------------------------------------------------------------------------------
ENERGY -- 10.3%
Cameron International Corp.* 4,550 190,190
CONSOL Energy, Inc. 9,300 463,140
Denbury Resources, Inc.*+ 16,400 242,720
Massey Energy Co. 10,750 451,608
Murphy Oil Corp. 2,726 147,749
National Oilwell Varco, Inc. 9,832 433,493
PetroHawk Energy Corp.* 7,500 179,925
Weatherford International Ltd.* 29,435 527,181
- --------------------------------------------------------------------------------
2,636,006
- --------------------------------------------------------------------------------
MATERIALS -- 7.2%
Commercial Metals Co. 9,575 149,849
Crown Holdings, Inc.* 11,550 295,449
Cytec Industries, Inc. 6,055 220,523
Ecolab, Inc. 5,000 222,950
The accompanying notes are an integral part of the financial statements.
33
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TOUCHSTONE MID CAP GROWTH FUND
------------------------------
- --------------------------------------------------------------------------------
Market
Shares Value
COMMON STOCKS -- 98.1% - Continued
MATERIALS -- 7.2% - continued
International Flavors & Fragrances, Inc. 4,385 $ 180,399
Owens-Illinois, Inc.* 10,100 331,987
Pactiv Corp.* 6,275 151,478
Yamana Gold, Inc. 24,500 278,810
- --------------------------------------------------------------------------------
1,831,445
- --------------------------------------------------------------------------------
CONSUMER STAPLES -- 4.4%
Avon Products, Inc. 7,000 220,500
Bunge Ltd.+ 2,600 165,958
H.J. Heinz Co. 4,350 186,006
J.M. Smucker Co. (The) 2,675 165,181
Molson Coors Brewing Co. - Class B 2,850 128,706
Ralcorp Holdings, Inc.* 4,300 256,753
- --------------------------------------------------------------------------------
1,123,104
- --------------------------------------------------------------------------------
UTILITIES -- 2.0%
Consolidated Edison, Inc.+ 3,970 180,357
Hawaiian Electric Industies, Inc.+ 6,290 131,461
PG&E Corp. 350 15,628
Wisconsin Energy Corp. 3,845 191,596
- --------------------------------------------------------------------------------
519,042
- --------------------------------------------------------------------------------
TELECOMMUNICATION SERVICES -- 1.2%
NII Holdings, Inc.* 9,400 315,652
- --------------------------------------------------------------------------------
TOTAL COMMON STOCKS $ 25,042,511
- --------------------------------------------------------------------------------
INVESTMENT FUNDS --22.5%
Invesco AIM Liquid Assets Portfolio** 5,190,126 5,190,126
Touchstone Institutional
Money Market Fund^ 541,918 541,918
- --------------------------------------------------------------------------------
TOTAL INVESTMENT FUNDS $ 5,732,044
- --------------------------------------------------------------------------------
TOTAL INVESTMENT SECURITIES -- 120.6%
(COST $29,036,678) $ 30,774,555
LIABILITIES IN EXCESS OF OTHER ASSETS -- (20.6%) (5,253,172)
- --------------------------------------------------------------------------------
NET ASSETS -- 100.0% $ 25,521,383
- --------------------------------------------------------------------------------
* Non-income producing security.
+ All or a portion of the security is on loan. The total value of the
securities on loan as of December 31, 2009, was $5,019,591.
** Represents collateral for securities loaned.
^ Affiliated Fund, sub-advised by Fort Washington Investment Advisors, Inc.
See Note 3.
PORTFOLIO ABBREVIATIONS:
ADR -- American Depositary Receipt
PLC -- Public Liability Company
REIT -- Real Estate Investment Trust
OTHER INFORMATION:
The inputs or methodology used for valuing securities may not be an indication
of the risk associated with investing in those securities. For more information
on valuation inputs, and their aggregation into the levels used in the table
below, please refer to the security valuation section in the accompanying notes
to financial statements.
Valuation Inputs at Reporting Date:
Description Level 1 Level 2 Level 3 Total
- --------------------------------------------------------------------------------
Common Stocks $ 25,042,511 $ -- $ -- $ 25,042,511
Investment Funds 5,732,044 -- -- 5,732,044
--------------------------------------------------------
$ 30,774,555
The accompanying notes are an integral part of the financial statements.
34
- -----
- ----------------------------
TOUCHSTONE MONEY MARKET FUND
- ----------------------------
SCHEDULE OF INVESTMENTS
- --------------------------------------------------------------------------------
December 31, 2009
Principal Interest Maturity
Amount Rate Date Value
CORPORATE BONDS -- 12.9%
$ 375,000 Caterpillar Financial
Services Corp. 4.15 1/15/10 $ 375,435
255,000 Credit Suisse
USA, Inc. 4.13 1/15/10 255,330
600,000 General Electric
Capital Corp. 7.38 1/19/10 601,847
2,310,000 Mellon Funding Corp.
(BNY Mellon) 6.38 2/15/10 2,321,237
2,250,000 NSTAR 8.00 2/15/10 2,266,152
543,000 Goldman Sachs
Group, Inc. FRN 0.46 3/2/10 542,140
250,000 BP Capital
Markets PLC 4.88 3/15/10 252,165
592,000 National City Bank 4.50 3/15/10 596,701
500,000 Canada Mortgage
& Housing 3.88 4/1/10 503,556
130,000 Export Development
Canada 4.63 4/1/10 131,174
753,000 EI du Pont de
Nemours 4.13 4/30/10 761,487
1,500,000 Wells Fargo & Co. 4.63 8/9/10 1,532,719
130,000 Deutsche Bank
AG London 5.00 10/12/10 134,277
- --------------------------------------------------------------------------------
TOTAL CORPORATE BONDS $ 10,274,220
- --------------------------------------------------------------------------------
MUNICIPAL BONDS -- 10.4%
2,000,000 Allen Co OH Hosp
Facs Rev (Catholic
Hlth) Class A (LOC:
Bank of America NA) 0.23 1/1/10 2,000,000
800,000 Cuyahoga Co OH
Rev Subser B1
(Cleveland Clinic)
(LOC:JPMorgan
Chase Bank) 0.10 1/1/10 800,000
500,000 Columbus IN Sch
Bldg Corp Rev BANS 2.00 3/1/10 500,000
300,000 Gahanna-Jefferson
City OH
LTGO BANS 3.00 3/10/10 300,276
1,500,000 Franklin Co OH
Spl Oblig BANS 3.10 3/12/10 1,501,894
795,000 Butler Co OH
LTGO BANS 1.65 8/5/10 795,000
700,000 Woodbridge St
UTGO BANS 2.00 8/26/10 700,759
700,000 AMP OH Elec Rev
UTGO BANS
Class B 2.00 10/28/10 702,877
1,000,000 Ramapo NY UTGO
BANS Class B 2.00 12/15/10 1,005,925
- --------------------------------------------------------------------------------
TOTAL TAXABLE MUNICIPAL BONDS $ 8,306,731
- --------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCY
OBLIGATIONS -- 12.4%
2,000,000 Overseas Private
Investment Corp.
FRCOP 0.16 1/6/10 2,000,000
3,400,000 Overseas Private
Investment Corp.
FRCOP 0.16 1/6/10 3,400,000
2,087,070 Overseas Private
Investment Corp.
FRCOP 0.16 1/6/10 2,087,070
2,000,000 Overseas Private
Investment Corp.
FRCOP 0.16 1/7/10 2,000,000
200,000 FNMA 4.30 2/17/10 200,969
160,000 FNMA 4.40 3/8/10 161,116
- --------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT AGENCY OBLIGATIONS $ 9,849,155
- --------------------------------------------------------------------------------
CERTIFICATE OF DEPOSIT -- 2.5%
2,000,000 Rabobank
Nederland 5.00 5/25/10 $ 2,032,411
- --------------------------------------------------------------------------------
COMMERCIAL PAPER -- 3.3%
2,631,000 BNP Paribas
Finance, Inc. 1/4/10 $ 2,630,996
- --------------------------------------------------------------------------------
VARIABLE RATE DEMAND NOTES -- 58.2%
700,000 Concordia College
(LOC:Bank
of America) 0.30 1/1/10 700,000
465,000 Diaz-Upton LLC
(LOC:State
Street Bank) 0.29 1/1/10 465,000
2,470,000 Washington St
Hsg Fin Agy Rev
(Auburn Meadows-
Ser B) Class B
(LOC:Wells
Fargo Bank) 0.35 1/1/10 2,470,000
3,060,000 486 Lesser Street
LLC (LOC:Comerica
Bank) 0.75 1/6/10 3,060,000
250,000 Chattanooga TN
Hlth Edl & Hsg
Fac Bd MFH
(Windridgde-B)
Class B
(LOC:FNMA) 0.42 1/6/10 250,000
2,000,000 Miami-Dade Co
FL IDA IDR (Dolphin
Stadium Pj)
(LOC:Societe
Generale) 0.34 1/6/10 2,000,000
1,360,000 NJ Economic Dev
Auth Rev (Cascade
Corp.-Ser C) Class C
(LOC:Bank of
America NA) 0.70 1/6/10 1,360,000
The accompanying notes are an integral part of the financial statements.
35
-----
----------------------------
TOUCHSTONE MONEY MARKET FUND
----------------------------
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
VARIABLE RATE DEMAND NOTES -- 58.2% - Continued
$ 700,000 NY St Hsg Fin Agy
Rev Class B
(LOC:FHLMC) 0.23 1/6/10 $ 700,000
2,700,000 Raleigh NC COP
(LOC:Wachovia
Bank NA) 0.24 1/6/10 2,700,000
1,230,000 Tennis for Charity, Inc.
OH Rev (LOC:JPMorgan
Chase Bank) 0.58 1/6/10 1,230,000
795,000 Agra Enterprises LLC
(LOC:US Bank NA) 0.80 1/7/10 795,000
570,000 Butler Co OH Cap
Fdg Rev (CCAO Low
Cost) Class B
(LOC:US Bank NA) 0.80 1/7/10 570,000
2,000,000 CA State Enterprise
Dev Auth IDR
(Tri-Tool Inc.-B)
Class B
(LOC:Comerica Bank) 3.75 1/7/10 2,000,000
290,000 CA Statewide CDA
MFH (Sunrise Fresno)
Class B (LOC:FNMA) 0.40 1/7/10 290,000
745,000 Corporate Finance
Managers, Inc. (LOC:
Wells Fargo Bank) 0.24 1/7/10 745,000
490,000 Driftwood Landing
Corp. (LOC:National
City Bank) 0.33 1/7/10 490,000
307,000 Fitch Denny Funeral
Home, Inc.
(LOC:FHLB) 0.58 1/7/10 307,000
140,000 FL HFC MFH
(Avalon Reserve)
(LOC:FNMA) 0.45 1/7/10 140,000
3,520,000 Goson Project
(LOC:FHLB) 0.57 1/7/10 3,520,000
585,000 IL Fin Auth
(Community Action
Ser B) RB Class B
(LOC:Harris NA) 0.55 1/7/10 585,000
545,000 JL Capital One LLC
(LOC:Wells
Fargo Bank) 0.29 1/7/10 545,000
515,000 Lake Oswego OR
Redev Agy Tax
Increment Rev Ser B
Class B (LOC:Wells
Fargo Bank) 0.29 1/7/10 515,000
2,000,000 Lavonia O Frick
Family Trust
(LOC:FHLB) 0.40 1/7/10 2,000,000
3,945,000 Lexington Financial
Services LLC
(LOC:LaSalle Bank) 0.30 1/7/10 3,944,999
3,420,000 Mequon WI IDR
(Gateway Plastics)
Class B
(LOC:Bank One ) 1.90 1/7/10 3,420,000
1,875,000 Miarko, Inc.
(LOC:PNC
Bank NA) 0.33 1/7/10 1,875,000
1,700,000 Midwestern
University Series A
Class A (LOC:Royal
Bank of Canada) 0.30 1/7/10 1,700,000
979,000 Mill St Village LLC
(LOC:FHLB) 0.72 1/7/10 979,000
1,325,000 Mountain Agency, Inc.
(LOC:US Bank NA) 0.48 1/7/10 1,325,000
1,515,000 Phoenix Realty MFH
Rev (Brightons Mark)
(LOC:Northern
Trust Co.) 0.45 1/7/10 1,515,000
445,000 Sacramento Co CA
Hsg Auth MFH Rev
(Deer Park Apts)
(LOC:FNMA) 0.37 1/7/10 445,000
945,000 SGM Funding Corp. I
(LOC:US Bank NA) 0.80 1/7/10 945,000
500,000 Simi Valley CA MFH
Rev (Parker Ranch)
(LOC:FNMA) 0.37 1/7/10 500,000
430,000 St Paul MN Port
Auth Dist (LOC:
Deutsche Bank) 0.28 1/7/10 430,000
150,000 Suffolk Co NY IDA
(Hampton Day School)
Class B (LOC:
JPMorgan Chase
Bank) 0.73 1/7/10 150,000
300,000 Volusia Co FL Dev
Auth Ind Rev Class B
(LOC:LaSalle Bank) 0.28 1/7/10 300,000
1,434,000 WAI Enterprises
LLC Ser 2004
(LOC:FHLB) 0.80 1/7/10 1,434,000
- --------------------------------------------------------------------------------
TOTAL VARIABLE RATE DEMAND NOTES $ 46,399,999
- --------------------------------------------------------------------------------
TOTAL INVESTMENT SECURITIES -- 99.7%
(COST $79,493,512) $ 79,493,512
OTHER ASSETS IN EXCESS OF LIABILITIES -- 0.3% 255,166
- --------------------------------------------------------------------------------
NET ASSETS -- 100.0% $ 79,748,678
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements.
36
- -----
- ----------------------------
TOUCHSTONE MONEY MARKET FUND
- ----------------------------
- --------------------------------------------------------------------------------
Schedule of Investments continued
PORTFOLIO ABBREVIATIONS:
BANS -- Bond Anticipation Notes
CCAO -- County Commissioners' Association of Ohio
CDA -- Communities Development Authority
COP -- Certificates of Participation
FNMA -- Federal National Mortgage Association
FHLB -- Federal Home Loan Bank
FHLMC -- Federal Home Loan Mortgage Corp.
FRCOP -- Floating Rate Certification of Participation
FRN -- Floating Rate Note
HFC -- Housing Finance Corp.
IDA -- Industrial Development Authority/Agency
IDR -- Industrial Development Revenue
LOC -- Letter of Credit
LTGO -- Limited Tax General Obligation
MFH -- Multi-Family Housing
PLC -- Public Liability Company
RB -- Revenue Bond
UTGO -- Unlimited Tax General Obligation
OTHER INFORMATION:
The inputs or methodology used for valuing securities may not be an indication
of the risk associated with investing in those securities. For more information
on valuation inputs, and their aggregation into the levels used in the table
below, please refer to the security valuation section in the accompanying notes
to financial statements.
Valuation Inputs at Reporting Date:
Description Level 1 Level 2 Level 3 Total
- --------------------------------------------------------------------------------
Variable Rate
Demand Notes $ -- $ 46,399,999 $ -- $ 46,399,999
Corporate Bonds -- 10,274,220 -- 10,274,220
U.S. Government
Agency Obligations -- 9,849,155 -- 9,849,155
Municipal Bonds -- 8,306,731 -- 8,306,731
Commercial Paper -- 2,630,996 -- 2,630,996
Certificate
of Deposit -- 2,032,411 -- 2,032,411
---------------------------------------------------------
$ 79,493,512
The accompanying notes are an integral part of the financial statements.
37
-----
----------------------------------
TOUCHSTONE THIRD AVENUE VALUE FUND
----------------------------------
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE
- --------------------------------------------------------------------------------
(Unaudited)
Touchstone Third Avenue Value Fund
SUB-ADVISED BY THIRD AVENUE MANAGEMENT LLC
PERFORMANCE AND MARKET OVERVIEW
The total return of the Touchstone Third Avenue Value Fund was 31.39% for the
year ended December 31, 2009. The total return of the Russell 3000(R) Value
Index was 19.76% for the same period.
Third Avenue adheres to a disciplined value approach to investing. It performs a
thorough, bottom-up analysis to identify companies that are believed to be "safe
and cheap," based on their financial strength, quality management teams, readily
available financial information and disclosure, and prices below their private
market values. Third Avenue also looks for companies with strong balance sheets,
believed to be an indicator of a company's long term staying power and its
ability to outperform in rough times.
PORTFOLIO REVIEW
The Financials sector was one of the Fund's top contributing sectors during the
year. This was primarily due to solid performance in the Fund's real estate and
related holdings, including Hong Kong-based Henderson Land Development Co. Ltd.
and Canadian firm Brookfield Asset Management Inc. Henderson Land Development
has made substantial progress in selling its residential inventory in both Hong
Kong and China, as well as acquiring new land for future development.
Additionally, the stock benefited as investment sentiment turned positive in the
region due to a rebound in the economy. We believe Henderson stands to benefit
from its strong financial footing as the real estate market continues to offer
attractive redevelopment opportunities. Brookfield Asset Management has been
able to opportunistically invest its excess capital during the year. For
instance, the company completed a $1.7 billion recapitalization of a global
infrastructure business in the fall. Additionally, Brookfield's underlying cash
flows have remained steady as the company's commercial real estate portfolio was
96 percent occupied at year end.
The Materials sector was another contributor to relative performance during the
year, led by Korean steel maker POSCO. The company has remained profitable and
free cash flow generative, even in an environment where most steel companies
have continued to lose money, and in some cases have been forced to raise
equity.
Some of the Fund's Energy-related names, such as Cimarex Energy Co. (a U.S.
exploration and production company) and Bristow Group Inc. (a provider of
helicopter services to the offshore Energy industry) were also contributors
during the year as both benefited from a rebound in commodity prices. Cimarex
recently appreciated from an increased interest in unconventional gas plays,
highlighted by a rise in merger and acquisition activity in the sector. The
company has high quality assets and one of the strongest balance sheets in the
industry. Additionally, it has been able to manage drilling risk through
commodity cycles with a prudent capital deployment approach and a geographically
diverse portfolio of assets. We believe Bristow remains well-positioned to
capitalize on the positive dynamics in the oil and gas industry, especially in
light of its longer-term contracts and exposure to production-related activities
that help shield it from swings in pricing, and its upgraded fleet.
38
- -----
- ----------------------------------
TOUCHSTONE THIRD AVENUE VALUE FUND
- ----------------------------------
- --------------------------------------------------------------------------------
Management's Discussion of Fund Performance continued
The Fund's positive performance was somewhat mitigated by declines in several
securities, most notably Legg Mason Inc., and to a lesser extent Capital
Southwest Corp. and Pfizer Inc. Please note that Legg Mason and Pfizer were sold
during the year.
CURRENT STRATEGY AND OUTLOOK
Third Avenue Management does not manage to a benchmark or invest using an asset
allocation model; rather we analyze companies from the bottom up, focusing on
business fundamentals in keeping with our time-tested "safe and cheap"
investment philosophy. We invest in well-capitalized companies with competent
management teams and strong long-term growth prospects. We seek to limit
potential investment risk by purchasing the securities of such sound companies
at a significant discount to our conservative estimate of net asset value.
Despite the recent market rally, we continue to see opportunities in select
securities that meet our strict investment criteria. We believe that our focus
on the merits of individual companies enables the Fund to be well positioned for
the long run regardless of the macro environment.
- --------------------------------------------------------------------------------
Average Annual Total Return
- --------------------------------------------------------------------------------
One Year Five Years Ten Years
Ended Ended Ended
12/31/09 12/31/09 12/31/09
31.39% 1.54% 7.25%
- --------------------------------------------------------------------------------
Cumulative Total Return
- --------------------------------------------------------------------------------
Ten Years
Ended
12/31/09
101.44%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
GROWTH OF A $10,000 INVESTMENT
- --------------------------------------------------------------------------------
Touchstone Third Avenue Value Fund Russell 3000(R) Value Index
Date Balance Date Balance
---- ------- ---- -------
12/31/99 10,000 12/31/99 10,000
12/31/00 11,116 12/31/00 10,804
12/31/01 12,809 12/31/01 10,336
12/31/02 10,569 12/31/02 8,767
12/31/03 14,816 12/31/03 11,497
12/31/04 18,658 12/31/04 13,445
12/31/05 21,906 12/31/05 14,366
12/31/06 25,383 12/31/06 17,575
12/31/07 24,929 12/31/07 17,398
12/31/08 15,331 12/31/08 11,091
12/31/09 20,144 12/31/09 13,283
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 December 14, 1992.
39
-----
----------------------------------
TOUCHSTONE THIRD AVENUE VALUE FUND
----------------------------------
SCHEDULE OF INVESTMENTS
- --------------------------------------------------------------------------------
December 31, 2009
Market
Shares Value
COMMON STOCKS -- 96.7%
FINANCIALS -- 36.4%
Arch Capital Group Ltd.* 7,500 $ 536,625
Bank of New York Mellon Corp. 79,258 2,216,846
Brookfield Asset Management, Inc.-
Class A+ 95,737 2,123,447
Capital Southwest Corp.+ 4,173 328,832
Cheung Kong Holdings Ltd. 100,000 1,284,852
Forest City Enterprises, Inc.-
Class A*+ 67,500 795,150
Hang Lung Group Ltd. 120,000 593,386
Henderson Land
Development Co. Ltd. 448,000 3,347,352
Investment Technology Group, Inc.* 48,523 955,903
Investor AB- Class A 165,000 3,028,025
Mitsui Fudosan Co. Ltd. 50,000 845,865
St. Joe Company (The)*+ 9,600 277,344
Tokio Marine Holdings, Inc.- ADR 58,525 1,588,954
Westwood Holdings Group, Inc.+ 32,297 1,173,673
Wheelock & Co. Ltd. 120,000 365,987
- --------------------------------------------------------------------------------
19,462,241
- --------------------------------------------------------------------------------
ENERGY -- 20.4%
Bristow Group, Inc.* 61,155 2,351,410
Bronco Drilling Co., Inc.*+ 112,693 571,353
Cenovus Energy, Inc. 49,400 1,244,880
Cimarex Energy Co.+ 43,148 2,285,550
EnCana Corp. 49,400 1,600,066
Nabors Industries Ltd.*+ 20,000 437,800
Pioneer Drilling Co.* 141,359 1,116,736
Tidewater, Inc.+ 27,000 1,294,650
- --------------------------------------------------------------------------------
10,902,445
- --------------------------------------------------------------------------------
INFORMATION TECHNOLOGY -- 14.1%
AVX Corp. 161,000 2,039,870
Bel Fuse, Inc.- Class B 24,600 528,654
Electro Scientific Industries, Inc.* 55,500 600,510
Electronics for Imaging, Inc.*+ 62,600 814,426
Lexmark International, Inc.- Class A* 30,600 794,988
Sycamore Networks, Inc. 38,780 810,890
Synopsys, Inc.* 30,700 683,996
Tellabs, Inc.* 223,000 1,266,640
- --------------------------------------------------------------------------------
7,539,974
- --------------------------------------------------------------------------------
MATERIALS -- 13.4%
Lanxess AG 58,700 2,216,286
P.H. Glatfelter Co. 64,187 779,872
POSCO ADR- ADR 22,300 2,923,530
Timberwest Forest Corp.*+ 100,000 413,984
Westlake Chemical Corp.+ 33,780 842,135
- --------------------------------------------------------------------------------
7,175,807
- --------------------------------------------------------------------------------
CONSUMER DISCRETIONARY -- 9.2%
Jakks Pacific, Inc.* 7,650 92,718
Journal Communications, Inc.- Class A 61,687 239,962
MDC Holdings, Inc. 12,210 378,998
Skyline Corp. 21,000 386,400
Superior Industries International, Inc.+ 33,733 516,115
Toyota Industries Corp. 110,000 3,287,041
- --------------------------------------------------------------------------------
4,901,234
- --------------------------------------------------------------------------------
HEALTH CARE -- 2.2%
Cross Country Healthcare, Inc.* 60,800 602,528
Sanofi-Aventis SA 7,500 589,077
- --------------------------------------------------------------------------------
1,191,605
- --------------------------------------------------------------------------------
INDUSTRIALS -- 1.0%
Alamo Group, Inc. 31,800 545,370
- --------------------------------------------------------------------------------
TOTAL COMMON STOCKS $ 51,718,676
- --------------------------------------------------------------------------------
INVESTMENT FUNDS --18.9%
Invesco AIM Liquid Assets Portfolio** 8,253,336 8,253,336
Touchstone Institutional
Money Market Fund^ 1,855,737 1,855,737
- --------------------------------------------------------------------------------
TOTAL INVESTMENT FUNDS $ 10,109,073
- --------------------------------------------------------------------------------
TOTAL INVESTMENT SECURITIES -- 115.6%
(COST $53,210,860) $ 61,827,749
LIABILITIES IN EXCESS OF OTHER ASSETS -- (15.6%) (8,323,053)
- --------------------------------------------------------------------------------
NET ASSETS -- 100.0% $ 53,504,696
- --------------------------------------------------------------------------------
* Non-income producing security.
+ All or a portion of the security is on loan. The total value of the
securities on loan as of December 31, 2009, was $7,971,762.
** Represents collateral for securities loaned.
^ Affiliated Fund, sub-advised by Fort Washington Investment Advisors, Inc.
See Note 3.
PORTFOLIO ABBREVIATIONS:
ADR -- American Depositary Receipt
OTHER INFORMATION:
The inputs or methodology used for valuing securities may not be an indication
of the risk associated with investing in those securities. For more information
on valuation inputs, and their aggregation into the levels used in the table
below, please refer to the security valuation section in the accompanying notes
to financial statements.
Valuation Inputs at Reporting Date:
Description Level 1 Level 2 Level 3 Total
- --------------------------------------------------------------------------------
Common Stocks $ 36,160,806 $ 15,557,870 $ -- $ 51,718,676
Investment Funds 10,109,073 -- -- 10,109,073
--------------------------------------------------------
$ 61,827,749
The accompanying notes are an integral part of the financial statements.
40
- -----
- --------------------
TOUCHSTONE ETF FUNDS
- --------------------
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE
- --------------------------------------------------------------------------------
(Unaudited)
TOUCHSTONE ETF FUNDS
SUB-ADVISED BY TODD-VEREDUS ASSET MANAGEMENT
Touchstone Aggressive ETF Fund
Touchstone Conservative ETF Fund
Touchstone Enhanced ETF Fund
Touchstone Moderate ETF Fund
Four Exchanged Traded Funds (ETFs) are available for investors seeking
"lifestyle" products for their annuity holdings. Strategic options include the
Conservative, Moderate and Aggressive ETF Funds. These funds use asset
allocations of up to nine ETFs that should not change dramatically over time,
with higher bond weights for the more conservative funds, and lower bond weights
for the more aggressive funds. The fourth option, the Enhanced ETF Fund, uses a
tactical asset allocation in an effort to generate better returns.
PERFORMANCE AND MARKET OVERVIEW
The Touchstone Conservative ETF Fund's total return was 11.79% for the year
ended December 31, 2009. The total return of the Barclays Capital Aggregate Bond
Index was 5.93% for the same period. The Touchstone Moderate ETF Fund's total
return was 17.44%, the Touchstone Aggressive ETF Fund 21.72%, and the Touchstone
Enhanced ETF Fund 22.17% for the year ended December 31, 2009. The total return
of the S&P 1500 Composite Index was 27.27% for the same period. The specific
blended benchmark returns were 13.40% for the Conservative ETF Fund, 18.73% for
the Moderate ETF Fund, 23.00% for the Aggressive ETF Fund, and 25.13% for the
Enhanced ETF Fund.
PORTFOLIO REVIEW
During the year, the strategically-oriented Conservative, Moderate and
Aggressive ETF Funds, as well as the tactical Enhanced ETF Fund slightly
underperformed their blended benchmarks primarily due to an overweight position
in value sectors earlier in the year, which underperformed the market. During
the fourth quarter, the Funds' international exposure restrained returns as the
Index gained less than half of what the domestic indexes gained. However, over
time we believe exposure to international investments is the correct asset
allocation to employ.
CURRENT STRATEGY AND OUTLOOK
Allocations for the strategically-oriented Funds holdings were adjusted as of
May 1, 2009 and are adjusted annually based on longer-term market signals. In
addition, their bond weights are pre-determined. The Conservative ETF Fund
targets 65 percent bonds, while the Moderate and Aggressive target 40 percent
and 20 percent, respectively. Within the remaining stock portion, approximately
20 percent is allocated to international stocks through the ETF that tracks the
MSCI EAFE Index. The remaining stock allocations are formed by analyzing
long-term risk/return patterns to determine the relative attractiveness and risk
associated with each potential investment.
41
-----
--------------------
TOUCHSTONE ETF FUNDS
--------------------
- --------------------------------------------------------------------------------
Consequently, the strategically-oriented Funds favored mid-cap and small-cap
stocks as compared with the S&P 1500 Index. The Funds also tend to slightly
favor growth over value. We believe this allocation strategy positions the Funds
for a favorable trade-off of risk and return over the long term.
The tactically-oriented Enhanced ETF Fund holdings were adjusted on November 1,
2009 and are adjusted semi-annually based on shorter-term market signals in an
attempt to provide higher return with a minimal increase in risk. Because of
shifts in market preferences during 2009, the Fund's allocations were adjusted
to favor large-cap growth, large-cap value, mid-cap growth and international.
Our system for determining sectors to overweight uses relative strength, a
factor that does not usually work well during turning point years for the
market. We believe this should work better as 2010 unfolds.
42
- -----
- ------------------------------
TOUCHSTONE AGGRESSIVE ETF FUND
- ------------------------------
- --------------------------------------------------------------------------------
Management's Discussion of Fund Performance continued
- --------------------------------------------------------------------------------
Average Annual Total Return
- --------------------------------------------------------------------------------
One Year Five Years Since
Ended Ended Inception
12/31/09 12/31/09 7/16/04
21.72% 1.50% 2.92%
- --------------------------------------------------------------------------------
Cumulative Total Return
- --------------------------------------------------------------------------------
Since
Inception
7/16/04
17.00%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
GROWTH OF A $10,000 INVESTMENT
- --------------------------------------------------------------------------------
Touchstone Aggressive ETF Fund S&P 1500 Index (Major Index)
Date Balance Date Balance
---- ------- ---- -------
7/16/2004 10,000 7/16/2004 10,000
12/31/2004 10,862 12/31/2004 11,148
12/31/2005 11,365 12/31/2005 11,782
12/31/2006 12,901 12/31/2006 13,596
12/31/2007 13,562 12/31/2007 14,350
12/31/2008 9,613 12/31/2008 9,082
12/31/2009 11,701 12/31/2009 11,559
Blend: 80% S&P 1500 Index - 20% Barclays Capital Aggregate Bond Index
(Minor Index)
Date Balance
---- -------
7/16/2004 10,000
12/31/2004 10,976
12/31/2005 11,529
12/31/2006 13,049
12/31/2007 13,809
12/31/2008 9,899
12/31/2009 12,175
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.
43
-----
--------------------------------
TOUCHSTONE CONSERVATIVE ETF FUND
--------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Average Annual Total Return
- --------------------------------------------------------------------------------
One Year Five Years Since
Ended Ended Inception
12/31/09 12/31/09 7/16/04
11.79% 3.64% 4.29%
- --------------------------------------------------------------------------------
Cumulative Total Return
- --------------------------------------------------------------------------------
Since
Inception
7/16/04
25.80%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
GROWTH OF A $10,000 INVESTMENT
- --------------------------------------------------------------------------------
Touchstone Conservative ETF Fund Barclays Capital Aggregate Bond Index
(Major Index)
Date Balance Date Balance
---- ------- ---- -------
7/16/2004 10,000 7/16/2004 10,000
12/31/2004 10,522 12/31/2004 10,288
12/31/2005 10,871 12/31/2005 10,538
12/31/2006 11,757 12/31/2006 10,994
12/31/2007 12,435 12/31/2007 11,761
12/31/2008 11,255 12/31/2008 12,377
12/31/2009 12,581 12/31/2009 13,111
Blend: 35% S&P 1500 Index - 65% Barclays Capital Aggregate Bond Index
(Minor Index)
Date Balance
---- -------
7/16/2004 10,000
12/31/2004 10,589
12/31/2005 10,967
12/31/2006 11,867
12/31/2007 12,635
12/31/2008 11,442
12/31/2009 12,975
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.
44
- -----
- ----------------------------
TOUCHSTONE ENHANCED ETF FUND
- ----------------------------
- --------------------------------------------------------------------------------
Management's Discussion of Fund Performance continued
- --------------------------------------------------------------------------------
Average Annual Total Return
- --------------------------------------------------------------------------------
One Year Five Years Since
Ended Ended Inception
12/31/09 12/31/09 7/16/04
22.17% 1.30% 3.54%
- --------------------------------------------------------------------------------
Cumulative Total Return
- --------------------------------------------------------------------------------
Since
Inception
7/16/04
20.90%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
GROWTH OF A $10,000 INVESTMENT
- --------------------------------------------------------------------------------
Touchstone Enhanced ETF Fund S&P 1500 Index (Major Index)
Date Balance Date Balance
---- ------- ---- -------
7/16/2004 10,000 7/16/2004 10,000
12/31/2004 11,336 12/31/2004 11,148
12/31/2005 12,018 12/31/2005 11,782
12/31/2006 13,867 12/31/2006 13,596
12/31/2007 14,426 12/31/2007 14,350
12/31/2008 9,896 12/31/2008 9,082
12/31/2009 12,090 12/31/2009 11,559
Blend: 90% S&P 1500 Index - 10% Barclays Capital Aggregate Bond Index
(Minor Index)
Date Balance
---- -------
7/16/2004 10,000
12/31/2004 11,062
12/31/2005 11,655
12/31/2006 13,321
12/31/2007 14,078
12/31/2008 9,501
12/31/2009 11,889
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.
45
-----
----------------------------
TOUCHSTONE MODERATE ETF FUND
----------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Average Annual Total Return
- --------------------------------------------------------------------------------
One Year Five Years Since
Ended Ended Inception
12/31/09 12/31/09 7/16/04
17.44% 2.57% 3.72%
- --------------------------------------------------------------------------------
Cumulative Total Return
- --------------------------------------------------------------------------------
Since
Inception
7/16/04
22.07%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
GROWTH OF A $10,000 INVESTMENT
- --------------------------------------------------------------------------------
Touchstone Moderate ETF Fund S&P 1500 Index (Major Index)
Date Balance Date Balance
---- ------- ---- -------
7/16/2004 10,000 7/16/2004 10,000
12/31/2004 10,751 12/31/2004 11,148
12/31/2005 11,174 12/31/2005 11,782
12/31/2006 12,399 12/31/2006 13,596
12/31/2007 13,049 12/31/2007 14,350
12/31/2008 10,395 12/31/2008 9,082
12/31/2009 12,208 12/31/2009 11,559
Blend: 60% S&P 1500 Index - 40% Barclays Capital Aggregate Bond Index
(Minor Index)
Date Balance
---- -------
7/16/2004 10,000
12/31/2004 10,804
12/31/2005 11,278
12/31/2006 12,515
12/31/2007 13,280
12/31/2008 10,634
12/31/2009 12,626
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.
46
- -----
- ------------------------------
TOUCHSTONE AGGRESSIVE ETF FUND
- ------------------------------
SCHEDULE OF INVESTMENTS
- --------------------------------------------------------------------------------
December 31, 2009
Shares Value
EXCHANGE TRADED FUNDS -- 99.2%
28,890 iShares Barclays Aggregate Bond Fund $ 2,981,159
52,510 iShares MSCI EAFE Index Fund+ 2,903,803
73,810 iShares S&P 500 Growth Index Fund+ 4,280,242
11,150 iShares S&P 500 Index Fund/US+ 1,244,452
67,320 iShares S&P 500 Value Index Fund+ 3,568,633
9,330 iShares S&P MidCap 400
Growth Index Fund 725,034
11,050 iShares S&P MidCap 400/BARRA
Value Index Fund+ 728,747
6,020 iShares S&P SmallCap 600 Value
Index Fund+ 351,448
9,450 iShares S&P SmallCap 600/BARRA
Growth Index Fund+ 539,973
- --------------------------------------------------------------------------------
TOTAL EXCHANGE TRADED FUNDS $ 17,323,491
- --------------------------------------------------------------------------------
INVESTMENT FUNDS -- 27.3%
4,500,171 Invesco AIM Liquid Assets Portfolio** 4,500,171
267,582 Touchstone Institutional
Money Market Fund^ 267,582
- --------------------------------------------------------------------------------
TOTAL INVESTMENT FUNDS $ 4,767,753
- --------------------------------------------------------------------------------
TOTAL INVESTMENT SECURITIES -- 126.5%
(COST $22,315,364) $ 22,091,244
LIABILITIES IN EXCESS OF OTHER ASSETS -- (26.5%) (4,621,504)
- --------------------------------------------------------------------------------
NET ASSETS -- 100.0% $ 17,469,740
- --------------------------------------------------------------------------------
+ All or a portion of the security is on loan. The total value of the
securities on loan as of December 31, 2009, was $4,347,637.
** Represents collateral for securities loaned.
^ Affiliated Fund, sub-advised by Fort Washington Investment Advisors, Inc.
See Note 3.
OTHER INFORMATION:
The inputs or methodology used for valuing securities may not be an indication
of the risk associated with investing in those securities. For more information
on valuation inputs, and their aggregation into the levels used in the table
below, please refer to the security valuation section in the accompanying notes
to financial statements.
Valuation Inputs at Reporting Date:
Description Level 1 Level 2 Level 3 Total
- --------------------------------------------------------------------------------
Exchange Traded
Funds $ 17,323,491 $ -- $ -- $ 17,323,491
Investment Funds 4,767,753 -- -- 4,767,753
--------------------------------------------------------
$ 22,091,244
The accompanying notes are an integral part of the financial statements.
47
-----
--------------------------------
TOUCHSTONE CONSERVATIVE ETF FUND
--------------------------------
SCHEDULE OF INVESTMENTS
- --------------------------------------------------------------------------------
December 31, 2009
Shares Value
EXCHANGE TRADED FUNDS -- 98.9%
26,810 iShares Barclays 1-3 Year
Treasury Bond Fund+ $ 2,223,890
108,900 iShares Barclays Aggregate Bond Fund 11,237,391
32,670 iShares MSCI EAFE Index Fund+ 1,806,651
43,700 iShares S&P 500 Growth Index Fund 2,534,163
9,020 iShares S&P 500 Index Fund/US 1,006,722
38,170 iShares S&P 500 Value Index Fund+ 2,023,392
6,590 iShares S&P MidCap 400
Growth Index Fund+ 512,109
7,780 iShares S&P MidCap 400/BARRA
Value Index Fund+ 513,091
4,330 iShares S&P SmallCap 600
Value Index Fund 252,785
4,480 iShares S&P SmallCap 600/BARRA
Growth Index Fund+ 255,988
- --------------------------------------------------------------------------------
TOTAL EXCHANGE TRADED FUNDS $ 22,366,182
- --------------------------------------------------------------------------------
INVESTMENT FUNDS -- 22.8%
4,880,213 Invesco AIM Liquid Assets Portfolio** 4,880,213
288,488 Touchstone Institutional
Money Market Fund^ 288,488
- --------------------------------------------------------------------------------
TOTAL INVESTMENT FUNDS $ 5,168,701
- --------------------------------------------------------------------------------
TOTAL INVESTMENT SECURITIES -- 121.7%
(COST $26,480,303) $ 27,534,883
LIABILITIES IN EXCESS OF OTHER ASSETS -- (21.7%) (4,908,859)
- --------------------------------------------------------------------------------
NET ASSETS -- 100.0% $ 22,626,024
- --------------------------------------------------------------------------------
+ All or a portion of the security is on loan. The total value of the
securities on loan as of December 31, 2009, was $4,738,288.
** Represents collateral for securities loaned.
^ Affiliated Fund, sub-advised by Fort Washington Investment Advisors, Inc.
See Note 3.
OTHER INFORMATION:
The inputs or methodology used for valuing securities may not be an indication
of the risk associated with investing in those securities. For more information
on valuation inputs, and their aggregation into the levels used in the table
below, please refer to the security valuation section in the accompanying notes
to financial statements.
Valuation Inputs at Reporting Date:
Description Level 1 Level 2 Level 3 Total
- --------------------------------------------------------------------------------
Exchange Traded
Funds $ 22,366,182 $ -- $ -- $ 22,366,182
Investment Funds 5,168,701 -- -- 5,168,701
--------------------------------------------------------
$ 27,534,883
The accompanying notes are an integral part of the financial statements.
48
- -----
- ----------------------------
TOUCHSTONE ENHANCED ETF FUND
- ----------------------------
SCHEDULE OF INVESTMENTS
- --------------------------------------------------------------------------------
December 31, 2009
Shares Value
EXCHANGE TRADED FUNDS -- 99.3%
4,670 iShares Barclays Aggregate Bond Fund $ 481,897
66,240 iShares MSCI EAFE Index Fund 3,663,072
65,990 iShares S&P 500 Growth Index Fund 3,826,760
71,960 iShares S&P 500 Value Index Fund+ 3,814,600
49,790 iShares S&P MidCap 400
Growth Index Fund 3,869,181
8,160 iShares S&P MidCap 400/BARRA
Value Index Fund+ 538,152
9,250 iShares S&P SmallCap 600
Value Index Fund+ 540,015
9,450 iShares S&P SmallCap 600/BARRA
Growth Index Fund+ 539,972
- --------------------------------------------------------------------------------
TOTAL EXCHANGE TRADED FUNDS $ 17,273,649
- --------------------------------------------------------------------------------
INVESTMENT FUNDS -- 28.7%
4,992,362 Invesco AIM Liquid Assets Portfolio** 4,992,362
4,458 Touchstone Institutional
Money Market Fund^ 4,458
- --------------------------------------------------------------------------------
TOTAL INVESTMENT FUNDS $ 4,996,820
- --------------------------------------------------------------------------------
TOTAL INVESTMENT SECURITIES -- 128.0%
(COST $21,428,608) $ 22,270,469
LIABILITIES IN EXCESS OF OTHER ASSETS -- (28.0%) (4,867,098)
- --------------------------------------------------------------------------------
NET ASSETS -- 100.0% $ 17,403,371
- --------------------------------------------------------------------------------
+ All or a portion of the security is on loan. The total value of the
securities on loan as of December 31, 2009, was $4,808,079.
** Represents collateral for securities loaned.
^ Affiliated Fund, sub-advised by Fort Washington Investment Advisors, Inc.
See Note 3.
OTHER INFORMATION:
The inputs or methodology used for valuing securities may not be an indication
of the risk associated with investing in those securities. For more information
on valuation inputs, and their aggregation into the levels used in the table
below, please refer to the security valuation section in the accompanying notes
to financial statements.
Valuation Inputs at Reporting Date:
Description Level 1 Level 2 Level 3 Total
- --------------------------------------------------------------------------------
Exchange Traded
Funds $ 17,273,649 $ -- $ -- $ 17,273,649
Investment Funds 4,996,820 -- -- 4,996,820
--------------------------------------------------------
$ 22,270,469
The accompanying notes are an integral part of the financial statements.
49
-----
----------------------------
TOUCHSTONE MODERATE ETF FUND
----------------------------
SCHEDULE OF INVESTMENTS
- --------------------------------------------------------------------------------
December 31, 2009
Shares Value
EXCHANGE TRADED FUNDS -- 99.0%
176,150 iShares Barclays Aggregate Bond Fund+ $ 18,176,918
124,370 iShares MSCI EAFE Index Fund+ 6,877,661
173,780 iShares S&P 500 Growth Index Fund 10,077,502
29,980 iShares S&P 500 Index Fund/US 3,346,068
158,320 iShares S&P 500 Value Index Fund+ 8,392,543
21,860 iShares S&P MidCap 400
Growth Index Fund 1,698,741
25,940 iShares S&P MidCap 400/BARRA
Value Index Fund+ 1,710,743
9,440 iShares S&P SmallCap 600
Value Index Fund 551,107
19,630 iShares S&P SmallCap 600/BARRA
Growth Index Fund+ 1,121,658
- --------------------------------------------------------------------------------
TOTAL EXCHANGE TRADED FUNDS $ 51,952,941
- --------------------------------------------------------------------------------
INVESTMENT FUNDS -- 21.2%
10,574,294 Invesco AIM Liquid Assets Portfolio** 10,574,294
568,304 Touchstone Institutional
Money Market Fund^ 568,304
- --------------------------------------------------------------------------------
TOTAL INVESTMENT FUNDS $ 11,142,598
- --------------------------------------------------------------------------------
TOTAL INVESTMENT SECURITIES -- 120.2%
(COST $65,706,403) $ 63,095,539
LIABILITIES IN EXCESS OF OTHER ASSETS -- (20.2%) (10,591,251)
- --------------------------------------------------------------------------------
NET ASSETS -- 100.0% $ 52,504,288
- --------------------------------------------------------------------------------
+ All or a portion of the security is on loan. The total value of the
securities on loan as of December 31, 2009, was $10,218,990.
** Represents collateral for securities loaned.
^ Affiliated Fund, sub-advised by Fort Washington Investment Advisors, Inc.
See Note 3.
OTHER INFORMATION:
The inputs or methodology used for valuing securities may not be an indication
of the risk associated with investing in those securities. For more information
on valuation inputs, and their aggregation into the levels used in the table
below, please refer to the security valuation section in the accompanying notes
to financial statements.
Valuation Inputs at Reporting Date:
Description Level 1 Level 2 Level 3 Total
- --------------------------------------------------------------------------------
Exchange Traded
Funds $ 51,952,941 $ -- $ -- $ 51,952,941
Investment Funds 11,142,598 -- -- 11,142,598
--------------------------------------------------------
$ 63,095,539
The accompanying notes are an integral part of the financial statements.
50
- -----
- --------------------------------
TOUCHSTONE VARIABLE SERIES TRUST
- --------------------------------
STATEMENTS OF ASSETS AND LIABILITIES
- --------------------------------------------------------------------------------
December 31, 2009
TOUCHSTONE TOUCHSTONE
BARON SMALL TOUCHSTONE TOUCHSTONE LARGE CAP
CAP GROWTH CORE BOND HIGH YIELD CORE EQUITY
FUND FUND FUND FUND
Assets:
Investments, at cost $ 17,535,261 $ 41,926,136 $ 32,966,545 $ 69,221,506
- ------------------------------------------------------------------------------------------------------------------------------------
Affiliated securities, at market value $ 1,442,618 $ 3,499,554 $ 220,834 $ 1,256,821
Non-affiliated securities, at market value 23,603,145 37,984,560 34,521,715 70,559,859
- ------------------------------------------------------------------------------------------------------------------------------------
Investments, at value - including $4,490,262, $303,689, and $ 25,045,763 $ 41,484,114 $ 34,742,549 $ 71,816,680
$8,226,921 of securities loaned for the Baron Small
Cap Growth Fund, High Yield Fund, and Large Cap Core
Equity Fund, respectively.
Receivable for:
Dividends 9,538 -- -- 94,992
Interest -- 415,487 701,410 --
Fund shares sold -- 201 -- --
Securities lending income 833 1 76 393
Other assets -- 98 -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets 25,056,134 41,899,901 35,444,035 71,912,065
- ------------------------------------------------------------------------------------------------------------------------------------
LIABILITIES:
Payable for:
Return of collateral for securities on loan 4,649,106 -- 321,195 8,491,028
Fund shares redeemed 3,045 5,035 18,372 9,451
Investments purchased 8,966 3,238,608 -- --
Payable to Investment Advisor 17,732 18,038 14,771 34,868
Payable to other affiliates 4,128 7,765 6,814 11,811
Payable to Trustees 4,145 4,145 4,145 4,145
Other accrued expenses 39,556 40,017 40,786 44,428
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities 4,726,678 3,313,608 406,083 8,595,731
- ------------------------------------------------------------------------------------------------------------------------------------
NET ASSETS $ 20,329,456 $ 38,586,293 $ 35,037,952 $ 63,316,334
- ------------------------------------------------------------------------------------------------------------------------------------
Shares of beneficial interest outstanding
(unlimited number of shares authorized, no par value) 1,517,447 3,720,948 4,586,549 7,722,350
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value, offering price and redemption price per share $ 13.40 $ 10.37 $ 7.64 $ 8.20
- ------------------------------------------------------------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
Paid-in capital $ 14,905,220 $ 37,545,018 $ 34,908,531 $ 83,111,837
Accumulated net investment income 244 1,536,202 2,820,989 751,347
Accumulated net realized losses on investments (2,086,510) (52,905) (4,467,572) (23,142,024)
Net unrealized appreciation (depreciation) on investments 7,510,502 (442,022) 1,776,004 2,595,174
- ------------------------------------------------------------------------------------------------------------------------------------
NET ASSETS APPLICABLE TO SHARES OUTSTANDING $ 20,329,456 $ 38,586,293 $ 35,037,952 $ 63,316,334
====================================================================================================================================
The accompanying notes are an integral part of the financial statements.
51
-----
--------------------------------
TOUCHSTONE VARIABLE SERIES TRUST
--------------------------------
- --------------------------------------------------------------------------------
TOUCHSTONE TOUCHSTONE TOUCHSTONE
MID CAP MONEY THIRD AVENUE
GROWTH MARKET VALUE
FUND FUND FUND
Assets:
Investments, at cost $ 29,036,678 $ 79,493,512 $ 53,210,860
- ------------------------------------------------------------------------------------------------------------------------------------
Affiliated securities, at market value $ 541,918 $ -- $ 1,855,737
Non-affiliated securities, at market value 30,232,637 79,493,512 59,972,012
- ------------------------------------------------------------------------------------------------------------------------------------
Investments, at value - including $5,019,591and $7,971,762 $ 30,774,555 $ 79,493,512 $ 61,827,749
of securities loaned for the Mid Cap Growth Fund
and Third Avenue Value Fund, respectively.
Cash -- 829 --
Receivable for:
Dividends 23,327 -- 20,359
Interest -- 363,737 --
Fund shares sold -- -- 5,630
Investments sold 26,069 -- --
Securities lending income 344 -- 1,911
Tax reclaim receivable -- -- 2,563
Other assets 88 -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets 30,824,383 79,858,078 61,858,212
- ------------------------------------------------------------------------------------------------------------------------------------
LIABILITIES:
Payable for:
Return of collateral for securities on loan 5,190,126 -- 8,253,336
Fund shares redeemed 8,566 -- 4,667
Investments purchased 45,997 -- --
Payable to Investment Advisor 16,816 7,406 35,589
Payable to other affiliates 4,806 16,428 7,918
Payable to Trustees 4,145 4,788 4,145
Other accrued expenses 32,544 80,778 47,861
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities 5,303,000 109,400 8,353,516
- ------------------------------------------------------------------------------------------------------------------------------------
NET ASSETS $ 25,521,383 $ 79,748,678 $ 53,504,696
- ------------------------------------------------------------------------------------------------------------------------------------
Shares of beneficial interest outstanding
(unlimited number of shares authorized, no par value) 2,311,084 79,738,272 3,427,033
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value, offering price and redemption price per share $ 11.04 $ 1.00 $ 15.61
- ------------------------------------------------------------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
Paid-in capital $ 29,864,472 $ 79,748,836 $ 59,038,869
Accumulated net investment income 57,224 -- 673,356
Accumulated net realized losses on investments
and foreign currency transactions (6,138,190) (158) (14,824,418)
Net unrealized appreciation on investments
and foreign currency transactions 1,737,877 -- 8,616,889
- ------------------------------------------------------------------------------------------------------------------------------------
NET ASSETS APPLICABLE TO SHARES OUTSTANDING $ 25,521,383 $ 79,748,678 $ 53,504,696
====================================================================================================================================
The accompanying notes are an integral part of the financial statements.
52
- -----
- --------------------------------
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 $ 22,315,364 $ 26,480,303 $ 21,428,608 $ 65,706,403
- ------------------------------------------------------------------------------------------------------------------------------------
Affiliated securities, at market value $ 267,582 $ 288,488 $ 4,458 $ 568,304
Non-affiliated securities, at market value 21,823,662 27,246,395 22,266,011 62,527,235
- ------------------------------------------------------------------------------------------------------------------------------------
Investments, at value - including $4,347,637, $4,738,288, $ 22,091,244 $ 27,534,883 $ 22,270,469 $ 63,095,539
$4,808,079 and $10,218,990 of securities loaned for
the Aggressive ETF Fund, Conservative ETF Fund,
Enhanced ETF Fund and Moderate ETF Fund, respectively.
Receivable for:
Dividends 8,724 35,138 1,464 56,341
Fund shares sold -- 41,676 -- 40,549
Investments sold -- -- 234,008 155,950
Securities lending income 1,387 2,325 1,993 4,119
Other assets 4,032 -- 3,995 --
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets 22,105,387 27,614,022 22,511,929 63,352,498
- ------------------------------------------------------------------------------------------------------------------------------------
LIABILITIES:
Payable for:
Return of collateral for securities on loan 4,500,171 4,880,213 4,992,362 10,574,294
Fund shares redeemed 3,093 -- 9,167 6,767
Investments purchased 91,470 61,665 62,131 194,755
Payable to Investment Advisor 3,286 3,612 4,783 18,204
Payable to other affiliates 3,753 3,646 3,801 4,916
Payable to Trustees 4,145 4,145 4,145 4,145
Other accrued expenses 29,729 34,717 32,169 45,129
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities 4,635,647 4,987,998 5,108,558 10,848,210
- ------------------------------------------------------------------------------------------------------------------------------------
NET ASSETS $ 17,469,740 $ 22,626,024 $ 17,403,371 $ 52,504,288
- ------------------------------------------------------------------------------------------------------------------------------------
Shares of beneficial interest outstanding
(unlimited number of shares authorized, no par value) 1,904,998 2,075,373 2,370,489 4,770,284
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value, offering price and redemption price per share $ 9.17 $ 10.90 $ 7.34 $ 11.01
- ------------------------------------------------------------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
Paid-in capital $ 19,799,945 $ 22,945,444 $ 26,852,433 $ 58,934,944
Accumulated net investment income 297,188 504,733 269,875 1,128,898
Accumulated net realized losses on investments (2,403,273) (1,878,733) (10,560,798) (4,948,690)
Net unrealized appreciation (depreciation) on investments (224,120) 1,054,580 841,861 (2,610,864)
- ------------------------------------------------------------------------------------------------------------------------------------
NET ASSETS APPLICABLE TO SHARES OUTSTANDING $ 17,469,740 $ 22,626,024 $ 17,403,371 $ 52,504,288
====================================================================================================================================
The accompanying notes are an integral part of the financial statements.
53
-----
--------------------------------
TOUCHSTONE VARIABLE SERIES TRUST
--------------------------------
STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
For the Year Ended December 31, 2009
TOUCHSTONE TOUCHSTONE
BARON SMALL TOUCHSTONE TOUCHSTONE LARGE CAP
CAP GROWTH CORE BOND HIGH YIELD CORE EQUITY
FUND FUND FUND FUND
Investment income:
Dividends from affiliated securities $ 5,240 $ 37,994 $ 19,453 $ 9,761
Dividends from non-affiliated securities(a) 67,648 13,726 5,611 1,252,128
Interest -- 1,650,408 2,984,351 --
Income from securities loaned 44,735 466 17,615 27,410
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment income 117,623 1,702,594 3,027,030 1,289,299
- ------------------------------------------------------------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees 166,608 200,433 154,889 349,602
Administration fees 31,735 72,885 61,956 107,571
Compliance fees and expenses 2,578 3,422 3,028 3,538
Custody fees 198 833 395 899
Professional fees 16,826 19,243 18,610 20,358
Shareholder servicing fees 38,082 29,154 40,271 53,784
Transfer agent fees 20,100 20,100 20,101 20,096
Trustee fees 6,462 6,463 6,462 6,610
Other expenses 4,722 20,677 19,129 6,909
- ------------------------------------------------------------------------------------------------------------------------------------
Total expenses 287,311 373,210 324,841 569,367
Fees waived by the Administrator (31,735) (8,770) (241) (31,415)
Expenses reimbursed by the Investment Advisor (9,554) -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Net expenses 246,022 364,440 324,600 537,952
- ------------------------------------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME (LOSS) (128,399) 1,338,154 2,702,430 751,347
- ------------------------------------------------------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on investments (472,955) 1,268,713 (1,771,133) (9,400,421)
Net change in unrealized appreciation/depreciation on investments 5,085,482 2,447,479 10,299,698 20,749,848
- ------------------------------------------------------------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN 4,612,527 3,716,192 8,528,565 11,349,427
- ------------------------------------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 4,484,128 $ 5,054,346 $ 11,230,995 $ 12,100,774
====================================================================================================================================
(a) Net of foreign tax withholding of: $ -- $ -- $ -- $ 9,696
The accompanying notes are an integral part of the financial statements.
54
- -----
- --------------------------------
TOUCHSTONE VARIABLE SERIES TRUST
- --------------------------------
- --------------------------------------------------------------------------------
Statements of Operations continued
TOUCHSTONE TOUCHSTONE TOUCHSTONE
MID CAP MONEY THIRD AVENUE
GROWTH MARKET VALUE
FUND FUND FUND
Investment income:
Dividends from affiliated securities $ 5,513 $ -- $ 37,618
Dividends from non-affiliated securities(a) 288,770 -- 1,168,347
Interest -- 1,952,144 --
Income from securities loaned 14,344 -- 52,479
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment income 308,627 1,952,144 1,258,444
- ------------------------------------------------------------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees 173,033 206,753 436,961
Administration fees 43,259 229,363 109,241
Compliance fees and expenses 2,546 6,709 3,789
Custody fees 183 2,725 3,562
Money market insurance -- 47,551 --
Professional fees 18,771 30,233 20,698
Shareholder servicing fees - Class I 30,281 171,390 120,164
Shareholder servicing fees - Class SC -- 69,562 --
Transfer agent fees 20,182 20,101 20,182
Trustee fees 6,487 9,187 6,488
Other expenses 7,346 34,124 12,944
- ------------------------------------------------------------------------------------------------------------------------------------
Total expenses 302,088 827,698 734,029
Fees waived by the Administrator (43,259) (5,188) (109,241)
Expenses reimbursed by the Investment Advisor (7,426) -- (5,032)
- ------------------------------------------------------------------------------------------------------------------------------------
Net expenses 251,403 822,510 619,756
- ------------------------------------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME 57,224 1,129,634 638,688
- ------------------------------------------------------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on:
Investments (2,439,965) 849 (10,652,440)
Foreign currency -- -- (11,492)
- ------------------------------------------------------------------------------------------------------------------------------------
(2,439,965) 849 (10,663,932)
- ------------------------------------------------------------------------------------------------------------------------------------
Net change in unrealized appreciation/depreciation on investments 9,533,445 -- 25,086,833
- ------------------------------------------------------------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN 7,093,480 849 14,422,901
- ------------------------------------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 7,150,704 $ 1,130,483 $ 15,061,589
====================================================================================================================================
(a) Net of foreign tax withholding of: $ 27 $ -- $ 61,395
The accompanying notes are an integral part of the financial statements.
55
-----
--------------------------------
TOUCHSTONE VARIABLE SERIES TRUST
--------------------------------
- --------------------------------------------------------------------------------
TOUCHSTONE TOUCHSTONE TOUCHSTONE TOUCHSTONE
AGGRESSIVE CONSERVATIVE ENHANCED MODERATE
ETF ETF ETF ETF
FUND FUND FUND FUND
INVESTMENT INCOME:
Dividends from affiliated securities $ 1,904 $ 1,986 $ 1,189 $ 4,560
Dividends from non-affiliated securities 383,903 632,694 384,501 1,447,728
Income from securities loaned 15,566 21,147 20,456 39,266
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment income 401,373 655,827 406,146 1,491,554
- ------------------------------------------------------------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees 55,869 80,632 72,753 193,560
Administration fees 27,935 40,316 36,377 96,847
Compliance fees and expenses 2,695 2,872 2,500 3,733
Custody fees 174 252 227 494
Professional fees 17,339 18,238 18,729 19,936
Shareholder servicing fees - Class I 29,801 42,931 43,438 86,829
Shareholder servicing fees - Class SC 5,078 7,397 1,997 12,412
Transfer agent fees 20,100 20,182 20,099 20,211
Trustees fees 6,463 6,486 6,463 6,822
Other expenses 5,115 5,411 4,875 7,506
- ------------------------------------------------------------------------------------------------------------------------------------
Total expenses 170,569 224,717 207,458 448,350
Fees waived by the Administrator (27,935) (40,316) (36,377) (85,163)
Fees waived and/or expenses reimbursed by the Advisor (37,858) (33,306) (34,805) --
- ------------------------------------------------------------------------------------------------------------------------------------
Net expenses 104,776 151,095 136,276 363,187
- ------------------------------------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME 296,597 504,732 269,870 1,128,367
- ------------------------------------------------------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS):
Net realized loss on investments (2,168,709) (1,263,994) (2,812,766) (3,528,439)
Net change in unrealized appreciation/depreciation on investments 4,787,900 2,960,608 5,715,196 10,009,515
- ------------------------------------------------------------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN 2,619,191 1,696,614 2,902,430 6,481,076
- ------------------------------------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 2,915,788 $ 2,201,346 $ 3,172,300 $ 7,609,443
====================================================================================================================================
The accompanying notes are an integral part of the financial statements.
56
- -----
- --------------------------------
TOUCHSTONE VARIABLE SERIES TRUST
- --------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
TOUCHSTONE TOUCHSTONE TOUCHSTONE
BARON SMALL CAP CORE BOND HIGH YIELD
GROWTH 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,
2009 2008 2009 2008 2009 2008
FROM OPERATIONS:
Net investment income (loss) $ (128,399) $ (104,576) $ 1,338,154 $ 1,875,563 $ 2,702,430 $ 2,027,665
Net realized gain (loss) on
investments (472,955) (1,600,432) 1,268,713 (328,508) (1,771,133) (758,200)
Net change in unrealized
appreciation/depreciation
on investments 5,085,482 (6,131,217) 2,447,479 (2,926,808) 10,299,698 (7,182,895)
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in
net assets from operations 4,484,128 (7,836,225) 5,054,346 (1,379,753) 11,230,995 (5,913,430)
- ------------------------------------------------------------------------------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS
TO SHAREHOLDERS FROM:
Net investment income -- -- (1,889,191) (1,783,848) (2,027,665) (2,349,654)
Realized capital gains -- (3,402,506) -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total dividends and distributions -- (3,402,506) (1,889,191) (1,783,848) (2,027,665) (2,349,654)
- ------------------------------------------------------------------------------------------------------------------------------------
SHARE TRANSACTIONS:
Proceeds from shares sold 6,798,776 2,515,962 2,856,635 6,743,080 16,823,773 22,487,185
Reinvestment of dividends and
distributions -- 3,402,506 1,889,191 1,783,849 2,027,664 2,349,655
Cost of shares redeemed (5,196,619) (6,652,418) (4,760,104) (9,575,212) (22,098,046) (15,411,019)
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) from
share transactions 1,602,157 (733,950) (14,278) (1,048,283) (3,246,609) 9,425,821
- ------------------------------------------------------------------------------------------------------------------------------------
Total increase (decrease) in net
assets 6,086,285 (11,972,681) 3,150,877 (4,211,884) 5,956,721 1,162,737
NET ASSETS:
Beginning of year 14,243,171 26,215,852 35,435,416 39,647,300 29,081,231 27,918,494
- ------------------------------------------------------------------------------------------------------------------------------------
End of year $ 20,329,456 $ 14,243,171 $ 38,586,293 $ 35,435,416 $ 35,037,952 $ 29,081,231
- ------------------------------------------------------------------------------------------------------------------------------------
Accumulated net investment income $ 244 $ 244 $ 1,536,202 $ 1,889,191 $ 2,820,989 $ 2,027,665
====================================================================================================================================
The accompanying notes are an integral part of the financial statements.
57
-----
--------------------------------
TOUCHSTONE VARIABLE SERIES TRUST
--------------------------------
- --------------------------------------------------------------------------------
TOUCHSTONE TOUCHSTONE
LARGE CAP MID CAP GROWTH
CORE EQUITY 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,
2009 2008 2009 2008
FROM OPERATIONS:
Net investment income $ 751,347 $ 761,831 $ 57,224 $ 22,151
Net realized loss on investments (9,400,421) (6,812,912) (2,439,965) (3,005,563)
Net change in unrealized appreciation/depreciation on investments 20,749,848 (19,314,678) 9,533,445 (12,379,160)
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets from operations 12,100,774 (25,365,759) 7,150,704 (15,362,572)
- ------------------------------------------------------------------------------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (761,831) (499,159) (22,151) --
Realized capital gains -- (3,349,815) -- (5,702,417)
- ------------------------------------------------------------------------------------------------------------------------------------
Total dividends and distributions (761,831) (3,848,974) (22,151) (5,702,417)
- ------------------------------------------------------------------------------------------------------------------------------------
SHARE TRANSACTIONS:
Proceeds from shares sold 12,738,129 4,874,772 3,113,706 3,273,356
Reinvestment of dividends and distributions 761,831 3,848,972 22,152 5,702,417
Proceeds from shares issued in connection with acquisition(a) -- 63,380,471 -- --
Cost of shares redeemed (10,787,158) (18,987,125) (5,456,457) (13,553,155)
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) from share transactions 2,712,802 53,117,090 (2,320,599) (4,577,382)
- ------------------------------------------------------------------------------------------------------------------------------------
Total increase (decrease) in net assets 14,051,745 23,902,357 4,807,954 (25,642,371)
NET ASSETS:
Beginning of year 49,264,589 25,362,232 20,713,429 46,355,800
- ------------------------------------------------------------------------------------------------------------------------------------
End of year $ 63,316,334 $ 49,264,589 $ 25,521,383 $ 20,713,429
- ------------------------------------------------------------------------------------------------------------------------------------
Accumulated net investment income $ 751,347 $ 761,831 $ 57,224 $ 22,151
====================================================================================================================================
(a) See Footnote 9 in notes to financial statements.
The accompanying notes are an integral part of the financial statements.
58
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- --------------------------------
TOUCHSTONE VARIABLE SERIES TRUST
- --------------------------------
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets continued
TOUCHSTONE TOUCHSTONE
MONEY MARKET THIRD AVENUE
FUND VALUE 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,
2009(a) 2008 2009 2008
FROM OPERATIONS:
Net investment income $ 1,129,634 $ 3,852,800 $ 638,688 $ 1,001,538
Net realized gain (loss) on:
Investments 849 -- (10,652,440) 1,686,607
Foreign currency -- -- (11,492) (101)
- ------------------------------------------------------------------------------------------------------------------------------------
849 -- (10,663,932) 1,686,506
- ------------------------------------------------------------------------------------------------------------------------------------
Net change in unrealized appreciation/depreciation on investments -- -- 25,086,833 (42,348,407)
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets from operations 1,130,483 3,852,800 15,061,589 (39,660,363)
- ------------------------------------------------------------------------------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income, Class I (693,334) (1,553,396) (977,362) (1,369,720)
Net investment income, Class SC (436,300) (2,299,404) -- --
Realized capital gains, Class I -- -- (3,380,340) (10,752,926)
- ------------------------------------------------------------------------------------------------------------------------------------
Total dividends and distributions (1,129,634) (3,852,800) (4,357,702) (12,122,646)
- ------------------------------------------------------------------------------------------------------------------------------------
SHARE TRANSACTIONS:
CLASS I
Proceeds from shares sold 135,344,659 66,890,577 4,407,927 8,202,184
Reinvestment of dividends and distributions 690,535 1,551,365 4,357,704 12,122,649
Cost of shares redeemed (109,071,564) (60,640,101) (24,073,567) (31,150,402)
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) from Class I share transactions 26,963,630 7,801,841 (15,307,936) (10,825,569)
- ------------------------------------------------------------------------------------------------------------------------------------
CLASS SC
Proceeds from shares sold 23,035,799 104,207,881 -- --
Reinvestment of dividends and distributions 430,742 2,298,410 -- --
Cost of shares redeemed (113,748,510) (71,814,146) -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) from Class SC share transactions (90,281,969) 34,692,145 -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total increase (decrease) in net assets (63,317,490) 42,493,986 (4,604,049) (62,608,578)
NET ASSETS:
Beginning of year 143,066,168 100,572,182 58,108,745 120,717,323
- ------------------------------------------------------------------------------------------------------------------------------------
End of year $ 79,748,678 $ 143,066,168 $ 53,504,696 $ 58,108,745
- ------------------------------------------------------------------------------------------------------------------------------------
Accumulated net investment income $ -- $ -- $ 673,356 $ 977,362
====================================================================================================================================
(a) Class SC represents the period from January 1, 2009 through April 26,
2009.
The accompanying notes are an integral part of the financial statements.
59
-----
--------------------------------
TOUCHSTONE VARIABLE SERIES TRUST
--------------------------------
- --------------------------------------------------------------------------------
TOUCHSTONE TOUCHSTONE
AGGRESSIVE ETF CONSERVATIVE ETF
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,
2009(a) 2008 2009(a) 2008
FROM OPERATIONS:
Net investment income $ 296,597 $ 371,904 $ 504,732 $ 719,602
Net realized gain (loss) on investments (2,168,709) 43,577 (1,263,994) (337,588)
Net change in unrealized appreciation/depreciation on investments 4,787,900 (6,036,298) 2,960,608 (2,554,010)
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets from operations 2,915,788 (5,620,817) 2,201,346 (2,171,996)
- ------------------------------------------------------------------------------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income, Class I (371,904) (225,423) (719,618) (349,665)
Net investment income, Class SC -- (180,865) -- (313,975)
Realized capital gains, Class I (228,228) (762,241) (217,064) (267,859)
Realized capital gains, Class SC -- (601,724) -- (259,598)
- ------------------------------------------------------------------------------------------------------------------------------------
Total dividends and distributions (600,132) (1,770,253) (936,682) (1,191,097)
- ------------------------------------------------------------------------------------------------------------------------------------
SHARE TRANSACTIONS:
CLASS I
Proceeds from shares sold 11,277,511 354,389 13,883,940 2,197,753
Reinvestment of dividends and distributions 600,132 987,664 936,682 617,524
Cost of shares redeemed (816,950) (2,333,846) (3,022,766) (6,283,909)
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) from Class I share transactions 11,060,693 (991,793) 11,797,856 (3,468,632)
- ------------------------------------------------------------------------------------------------------------------------------------
CLASS SC
Proceeds from shares sold 2,169,026 2,284,922 707,710 6,779,187
Reinvestment of dividends and distributions -- 782,589 -- 573,572
Cost of shares redeemed (11,317,860) (1,133,381) (11,675,336) (2,819,829)
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) from Class SC share transactions (9,148,834) 1,934,130 (10,967,626) 4,532,930
- ------------------------------------------------------------------------------------------------------------------------------------
Total increase (decrease) in net assets 4,227,515 (6,448,733) 2,094,894 (2,298,795)
NET ASSETS:
Beginning of year 13,242,225 19,690,958 20,531,130 22,829,925
- ------------------------------------------------------------------------------------------------------------------------------------
End of year $ 17,469,740 $ 13,242,225 $ 22,626,024 $ 20,531,130
- ------------------------------------------------------------------------------------------------------------------------------------
Accumulated net investment income $ 297,168 $ 374,539 $ 504,733 $ 720,602
====================================================================================================================================
(a) Class SC represents the period from January 1, 2009 through April 26,
2009.
The accompanying notes are an integral part of the financial statements.
60
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- --------------------------------
TOUCHSTONE VARIABLE SERIES TRUST
- --------------------------------
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets continued
TOUCHSTONE TOUCHSTONE
ENHANCED ETF MODERATE ETF
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,
2009(a) 2008 2009(a) 2008
FROM OPERATIONS:
Net investment income $ 269,870 $ 512,143 $ 1,128,367 $ 1,603,350
Net realized loss on investments (2,812,766) (7,715,153) (3,528,439) (1,314,636)
Net change in unrealized appreciation/depreciation on investments 5,715,196 (4,525,410) 10,009,515 (14,564,489)
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets from operations 3,172,300 (11,728,420) 7,609,443 (14,275,775)
- ------------------------------------------------------------------------------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income, Class I (512,143) (468,633) (1,603,350) (699,181)
Net investment income, Class SC -- (68,590) -- (352,694)
Realized capital gains, Class I -- (6,172,466) -- (519,160)
Realized capital gains, Class SC -- (879,250) -- (260,072)
- ------------------------------------------------------------------------------------------------------------------------------------
Total dividends and distributions (512,143) (7,588,939) (1,603,350) (1,831,107)
- ------------------------------------------------------------------------------------------------------------------------------------
SHARE TRANSACTIONS:
CLASS I
Proceeds from shares sold 3,098,780 449,740 20,700,506 4,085,751
Reinvestment of dividends and distributions 512,143 6,641,099 1,604,021 1,218,339
Proceeds from shares issued in connection with merger(b) -- -- -- 24,321,868
Cost of shares redeemed (6,136,584) (9,994,273) (4,076,597) (14,183,288)
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) from Class I share transactions (2,525,661) (2,903,434) 18,227,930 15,442,670
- ------------------------------------------------------------------------------------------------------------------------------------
CLASS SC
Proceeds from shares sold 51,481 1,095,900 825,177 7,318,605
Reinvestment of dividends and distributions -- 947,840 -- 612,765
Cost of shares redeemed (5,195,370) (1,046,439) (22,856,001) (5,202,633)
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) from Class SC share transactions (5,143,889) 997,301 (22,030,824) 2,728,737
- ------------------------------------------------------------------------------------------------------------------------------------
Total increase (decrease) in net assets (5,009,393) (21,223,492) 2,203,199 2,064,525
NET ASSETS:
Beginning of year 22,412,764 43,636,256 50,301,089 48,236,564
- ------------------------------------------------------------------------------------------------------------------------------------
End of year $ 17,403,371 $ 22,412,764 $ 52,504,288 $ 50,301,089
- ------------------------------------------------------------------------------------------------------------------------------------
Accumulated net investment income $ 269,875 $ 529,579 $ 1,128,898 $ 1,606,733
====================================================================================================================================
(a) Class SC represents the period from January 1, 2009 through April 26,
2009.
(b) See Footnote 9 in notes to financial statements.
The accompanying notes are an integral part of the financial statements.
61
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--------------------------------
TOUCHSTONE VARIABLE SERIES TRUST
--------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
Selected data for a share outstanding:
TOUCHSTONE BARON SMALL CAP GROWTH FUND
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------
2009 2008 2007 2006 2005
NET ASSET VALUE, BEGINNING OF YEAR $ 10.08 $ 20.52 $ 22.86 $ 19.89 $ 18.47
- ------------------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment loss (0.08) (0.07) (0.16) (0.11) (0.21)
Net realized and unrealized gain (loss) on investments 3.40 (7.11) 0.87 3.75 1.63
- ------------------------------------------------------------------------------------------------------------------------------------
Total from investment operations 3.32 (7.18) 0.71 3.64 1.42
- ------------------------------------------------------------------------------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Realized capital gains -- (3.26) (3.05) (0.67) --
- ------------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $ 13.40 $ 10.08 $ 20.52 $ 22.86 $ 19.89
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN(a) 32.94% (33.64%) 2.76% 18.26% 7.69%
RATIOS AND SUPPLEMENTAL DATA:
Net assets at end of year (000s) $ 20,329 $ 14,243 $ 26,216 $ 29,103 $ 27,443
Ratios to average net assets:
Net expenses 1.55% 1.55% 1.49% 1.51% 1.54%
Net investment loss (0.81%) (0.51%) (0.71%) (0.51%) (1.15%)
Portfolio turnover 9% 7% 19% 19% 14%
- ------------------------------------------------------------------------------------------------------------------------------------
TOUCHSTONE CORE BOND FUND
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------
2009 2008 2007 2006 2005
NET ASSET VALUE, BEGINNING OF YEAR $ 9.49 $ 10.33 $ 10.24 $ 10.28 $ 10.11
- ------------------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment income 0.39 0.54 0.46 0.50 0.40
Net realized and unrealized gain (loss) on investments 1.02 (0.88) 0.10 (0.08) (0.23)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from investment operations 1.41 (0.34) 0.56 0.42 0.17
- ------------------------------------------------------------------------------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (0.48) (0.50) (0.47) (0.46) --
Distributions in excess of net investment income (0.05) -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total dividends and distributions (0.53) (0.50) (0.47) (0.46) --
- ------------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $ 10.37 $ 9.49 $ 10.33 $ 10.24 $ 10.28
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN(a) 14.90% (3.26%) 5.45% 4.05% 1.68%
RATIOS AND SUPPLEMENTAL DATA:
Net assets at end of year (000s) $ 38,586 $ 35,435 $ 39,647 $ 37,358 $ 39,049
Ratios to average net assets:
Net expenses 1.00% 1.00% 0.75% 0.75% 0.75%
Net investment income 3.67% 4.75% 4.67% 4.41% 3.76%
Portfolio turnover 422% 171% 283% 231% 149%
- ------------------------------------------------------------------------------------------------------------------------------------
See Notes to Financial Highlights on page 69.
The accompanying notes are an integral part of the financial statements.
62
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- --------------------------------
TOUCHSTONE VARIABLE SERIES TRUST
- --------------------------------
- --------------------------------------------------------------------------------
Financial Highlights continued
Selected data for a share outstanding:
TOUCHSTONE HIGH YIELD FUND
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------
2009 2008 2007 2006 2005
NET ASSET VALUE, BEGINNING OF YEAR $ 5.52 $ 7.94 $ 8.54 $ 8.53 $ 8.26
- ------------------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment income 0.67 0.21 0.87 0.61 0.61
Net realized and unrealized gain (loss) on investments 1.92 (2.14) (0.72) 0.06 (0.34)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from investment operations 2.59 (1.93) 0.15 0.67 0.27
- ------------------------------------------------------------------------------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (0.47) (0.49) (0.75) (0.66) --
- ------------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $ 7.64 $ 5.52 $ 7.94 $ 8.54 $ 8.53
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN(a) 46.90% (24.31%) 1.78% 7.90% 3.27%
RATIOS AND SUPPLEMENTAL DATA:
Net assets at end of year (000s) $ 35,038 $ 29,081 $ 27,918 $ 37,361 $ 37,853
Ratios to average net assets:
Net expenses 1.05% 1.05% 0.80% 0.80% 0.80%
Net investment income 8.72% 8.01% 6.88% 6.84% 6.91%
Portfolio turnover 61% 52% 62% 46% 69%
- ------------------------------------------------------------------------------------------------------------------------------------
TOUCHSTONE LARGE CAP CORE EQUITY FUND
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------
2009 2008 2007 2006 2005
NET ASSET VALUE, BEGINNING OF YEAR $ 6.69 $ 11.22 $ 10.99 $ 8.88 $ 9.16
- ------------------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment income (loss) 0.09 (0.05) 0.24 0.28 0.20
Net realized and unrealized gain (loss) on investments 1.52 (3.92) 0.35 2.08 (0.48)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from investment operations 1.61 (3.97) 0.59 2.36 (0.28)
- ------------------------------------------------------------------------------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (0.10) (0.07) (0.25) (0.25) --
Realized capital gains -- (0.49) (0.11) -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total dividends and distributions (0.10) (0.56) (0.36) (0.25) --
- ------------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $ 8.20 $ 6.69 $ 11.22 $ 10.99 $ 8.88
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN(a) 24.06% (35.20%) 5.32% 26.57% (3.06%)
RATIOS AND SUPPLEMENTAL DATA:
Net assets at end of year (000s) $ 63,316 $ 49,265 $ 25,362 $ 26,285 $ 25,360
Ratios to average net assets:
Net expenses 1.00% 1.00% 0.75% 0.75% 0.75%
Net investment income 1.40% 1.42% 1.91% 2.31% 2.23%
Portfolio turnover 38% 81% 124% 53% 48%
- ------------------------------------------------------------------------------------------------------------------------------------
See Notes to Financial Highlights on page 69.
The accompanying notes are an integral part of the financial statements.
63
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--------------------------------
TOUCHSTONE VARIABLE SERIES TRUST
--------------------------------
- --------------------------------------------------------------------------------
TOUCHSTONE MID CAP GROWTH FUND
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------
2009 2008 2007 2006 2005
NET ASSET VALUE, BEGINNING OF YEAR $ 7.95 $ 18.55 $ 19.38 $ 17.63 $ 20.89
- ------------------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment income (loss) 0.03 0.02 (0.05) (0.09) (0.08)
Net realized and unrealized gain (loss) on investments 3.07 (7.54) 2.85 2.95 3.28
- ------------------------------------------------------------------------------------------------------------------------------------
Total from investment operations 3.10 (7.52) 2.80 2.86 3.20
- ------------------------------------------------------------------------------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (0.01) -- -- -- --
Realized capital gains -- (3.08) (3.63) (1.11) (6.46)
- ------------------------------------------------------------------------------------------------------------------------------------
Total dividends and distributions (0.01) (3.08) (3.63) (1.11) (6.46)
- ------------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $ 11.04 $ 7.95 $ 18.55 $ 19.38 $ 17.63
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN(a) 38.99% (39.70%) 14.43% 16.18% 15.29%
RATIOS AND SUPPLEMENTAL DATA:
Net assets at end of year (000s) $ 25,521 $ 20,713 $ 46,356 $ 35,216 $ 33,511
Ratios to average net assets:
Net expenses 1.16% 1.16% 1.15% 1.15% 1.15%
Net investment income (loss) 0.26% 0.06% (0.29%) (0.49%) (0.50%)
Portfolio turnover 71% 73% 83% 104% 70%
- ------------------------------------------------------------------------------------------------------------------------------------
TOUCHSTONE MONEY MARKET FUND - CLASS I
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------
2009 2008 2007 2006 2005
NET ASSET VALUE, BEGINNING OF YEAR $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
- ------------------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment income 0.01 0.03 0.05 0.05 0.03
Net realized and unrealized loss on investments (0.00)(b) -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total from investment operations 0.01 0.03 0.05 0.05 0.03
- ------------------------------------------------------------------------------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (0.01) (0.03) (0.05) (0.05) (0.03)
- ------------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN(a) 0.88% 2.99% 5.17% 4.94% 3.16%
RATIOS AND SUPPLEMENTAL DATA:
Net assets at end of year (000s) $ 79,749 $ 52,790 $ 44,988 $ 37,256 $ 42,614
Ratios to average net assets:
Net expenses 0.71%(c) 0.65% 0.28% 0.28% 0.28%
Net investment income 0.80% 2.94% 5.06% 4.82% 3.13%
- ------------------------------------------------------------------------------------------------------------------------------------
See Notes to Financial Highlights on page 69.
The accompanying notes are an integral part of the financial statements.
64
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- --------------------------------
TOUCHSTONE VARIABLE SERIES TRUST
- --------------------------------
- --------------------------------------------------------------------------------
Financial Highlights continued
Selected data for a share outstanding:
TOUCHSTONE MONEY MARKET FUND - CLASS SC
FOR THE
PERIOD FOR THE YEAR ENDED DECEMBER 31,
ENDED --------------------------------------------------------------------
APRIL 26, 2009(d) 2008 2007 2006 2005 2004
NET ASSET VALUE, BEGINNING OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
- ------------------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.00(b) 0.03 0.05 0.05 0.03 0.01
Net realized and unrealized gain
on investments 0.00(b) -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total from investment operations 0.00 0.03 0.05 0.05 0.03 0.01
- ------------------------------------------------------------------------------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS
TO SHAREHOLDERS FROM:
Net investment income 0.00(b) (0.03) (0.05) (0.05) (0.03) (0.01)
- ------------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN(a) 1.56%(e) 2.93% 4.90% 4.66% 2.90% 1.08%
RATIOS AND SUPPLEMENTAL DATA:
Net assets at end of period (000s) $ 138,211 $ 90,276 $ 55,584 $ 39,111 $ 37,342 $ 25,727
Ratios to average net assets:
Net expenses 0.74%(e)(f) 0.71% 0.54% 0.54% 0.54% 0.54%
Net investment income 1.57%(e) 2.86% 4.80% 4.61% 2.89% 1.06%
- ------------------------------------------------------------------------------------------------------------------------------------
TOUCHSTONE THIRD AVENUE VALUE FUND
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------
2009 2008 2007 2006 2005
NET ASSET VALUE, BEGINNING OF YEAR $ 12.93 $ 26.70 $ 29.24 $ 26.89 $ 23.51
- ------------------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment income 0.26 0.23 0.30 0.22 0.11
Net realized and unrealized
gain (loss) on investments 3.78 (10.68) (0.79) 4.05 3.98
- ------------------------------------------------------------------------------------------------------------------------------------
Total from investment operations 4.04 (10.45) (0.49) 4.27 4.09
- ------------------------------------------------------------------------------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS
TO SHAREHOLDERS FROM:
Net investment income (0.29) (0.31) (0.20) (0.11) 0.00(b)
Realized capital gains (1.07) (3.01) (1.85) (1.81) (0.71)
- ------------------------------------------------------------------------------------------------------------------------------------
Total dividends and distributions (1.36) (3.32) (2.05) (1.92) (0.71)
- ------------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $ 15.61 $ 12.93 $ 26.70 $ 29.24 $ 26.89
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN(a) 31.39% (38.50%) (1.79%) 15.87% 17.41%
RATIOS AND SUPPLEMENTAL DATA:
Net assets at end of year (000s) $ 53,505 $ 58,109 $ 120,717 $ 125,330 $ 117,142
Ratios to average net assets:
Net expenses 1.13% 1.06% 1.05% 1.05% 1.05%
Net investment income 1.17% 1.08% 1.03% 0.77% 0.48%
Portfolio turnover 4% 12% 18% 10% 17%
- ------------------------------------------------------------------------------------------------------------------------------------
See Notes to Financial Highlights on page 69.
The accompanying notes are an integral part of the financial statements.
65
-----
--------------------------------
TOUCHSTONE VARIABLE SERIES TRUST
--------------------------------
- --------------------------------------------------------------------------------
TOUCHSTONE AGGRESSIVE ETF FUND - CLASS I
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------
2009 2008 2007 2006 2005
NET ASSET VALUE, BEGINNING OF YEAR $ 7.80 $ 12.70 $ 12.65 $ 11.30 $ 10.80
- ------------------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment income (loss) (0.09) 0.26 0.40 0.24 0.13
Net realized and unrealized gain (loss) on investments 1.78 (4.00) 0.25 1.29 0.37
- ------------------------------------------------------------------------------------------------------------------------------------
Total from investment operations 1.69 (3.74) 0.65 1.53 0.50
- ------------------------------------------------------------------------------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (0.20) (0.25) (0.22) (0.12) --
Realized capital gains (0.12) (0.91) (0.38) (0.06) --
- ------------------------------------------------------------------------------------------------------------------------------------
Total dividends and distributions (0.32) (1.16) (0.60) (0.18) --
- ------------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $ 9.17 $ 7.80 $ 12.70 $ 12.65 $ 11.30
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN(a) 21.72% (29.12%) 5.12% 13.52% 4.63%
RATIOS AND SUPPLEMENTAL DATA:
Net assets at end of year (000s) $ 17,470 $ 7,361 $ 12,610 $ 17,171 $ 14,845
Ratios to average net assets:
Net expenses 0.75% 0.75% 0.50% 0.50% 0.50%
Net investment income 2.18% 2.15% 1.86% 1.94% 1.80%
Portfolio turnover 45% 20% 39% 33% 38%
- ------------------------------------------------------------------------------------------------------------------------------------
TOUCHSTONE AGGRESSIVE ETF FUND - CLASS SC
FOR THE
FOR THE FOR THE YEAR PERIOD
PERIOD ENDED DECEMBER 31, ENDED
ENDED ------------------------ DECEMBER 31,
APRIL 26, 2009(d) 2008 2007 2006(g)
NET ASSET VALUE, BEGINNING OF PERIOD $ 7.77 $ 12.65 $ 12.64 $ 11.69
- ------------------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment income 0.05 0.23 0.21 0.09
Net realized and unrealized gain (loss) on investments (0.31) (3.95) 0.40 1.04
- ------------------------------------------------------------------------------------------------------------------------------------
Total from investment operations (0.26) (3.72) 0.61 1.13
- ------------------------------------------------------------------------------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income -- (0.25) (0.22) (0.12)
Realized capital gains -- (0.91) (0.38) (0.06)
- ------------------------------------------------------------------------------------------------------------------------------------
Total dividends and distributions -- (1.16) (0.60) (0.18)
- ------------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 7.51 $ 7.77 $ 12.65 $ 12.64
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN(a) (3.35%)(h) (29.08%) 4.79% 9.65%(h)
RATIOS AND SUPPLEMENTAL DATA:
Net assets at end of period (000s) $ 7,431 $ 5,881 $ 7,081 $ 1,728
Ratios to average net assets:
Net expenses 0.75%(e) 0.75% 0.75% 0.75%(e)
Net investment income 1.79%(e) 2.28% 2.01% 3.45%(e)
Portfolio turnover 45% 20% 39% 33%
- ------------------------------------------------------------------------------------------------------------------------------------
See Notes to Financial Highlights on page 69.
The accompanying notes are an integral part of the financial statements.
66
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- --------------------------------
- --------------------------------------------------------------------------------
TOUCHSTONE CONSERVATIVE ETF FUND - CLASS I
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------
2009 2008 2007 2006 2005
NET ASSET VALUE, BEGINNING OF YEAR $ 10.17 $ 11.92 $ 11.50 $ 10.72 $ 10.38
- ------------------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment income (loss) (0.04) 0.53 0.35 0.22 0.16
Net realized and unrealized gain (loss) on investments 1.24 (1.67) 0.31 0.65 0.19
- ------------------------------------------------------------------------------------------------------------------------------------
Total from investment operations 1.20 (1.14) 0.66 0.87 0.35
- ------------------------------------------------------------------------------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (0.36) (0.34) (0.20) (0.08) --
Realized capital gains (0.11) (0.27) (0.04) (0.01) (0.01)
- ------------------------------------------------------------------------------------------------------------------------------------
Total dividends and distributions (0.47) (0.61) (0.24) (0.09) (0.01)
- ------------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $ 10.90 $ 10.17 $ 11.92 $ 11.50 $ 10.72
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN(a) 11.79% (9.49%) 5.76% 8.15% 3.32%
RATIOS AND SUPPLEMENTAL DATA:
Net assets at end of year (000s) $ 22,626 $ 10,835 $ 16,197 $ 14,213 $ 8,098
Ratios to average net assets:
Net expenses 0.75% 0.75% 0.50% 0.50% 0.50%
Net investment income 2.61% 3.10% 3.24% 3.19% 3.01%
Portfolio turnover 40% 39% 23% 14% 19%
- ------------------------------------------------------------------------------------------------------------------------------------
TOUCHSTONE CONSERVATIVE ETF FUND - CLASS SC
FOR THE
FOR THE FOR THE YEAR PERIOD
PERIOD ENDED DECEMBER 31, ENDED
ENDED ------------------------ DECEMBER 31,
APRIL 26, 2009(d) 2008 2007 2006(g)
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.13 $ 11.88 $ 11.49 $ 10.88
- ------------------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment income 0.06 0.29 0.26 0.11
Net realized and unrealized gain (loss) on investments (0.18) (1.43) 0.37 0.59
- ------------------------------------------------------------------------------------------------------------------------------------
Total from investment operations (0.12) (1.14) 0.63 0.70
- ------------------------------------------------------------------------------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income -- (0.34) (0.20) (0.08)
Realized capital gains -- (0.27) (0.04) (0.01)
- ------------------------------------------------------------------------------------------------------------------------------------
Total dividends and distributions -- (0.61) (0.24) (0.09)
- ------------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 10.01 $ 10.13 $ 11.88 $ 11.49
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN(a) (1.18%)(h) (9.52%) 5.47% 6.46%(h)
RATIOS AND SUPPLEMENTAL DATA:
Net assets at end of period (000s) $ 9,606 $ 9,696 $ 6,633 $ 2,961
Ratios to average net assets:
Net expenses 0.75%(e) 0.75% 0.75% 0.75%(e)
Net investment income 1.88%(e) 3.35% 3.16% 3.87%(e)
Portfolio turnover 40% 39% 23% 14%
- ------------------------------------------------------------------------------------------------------------------------------------
See Notes to Financial Highlights on page 69.
The accompanying notes are an integral part of the financial statements.
67
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--------------------------------
- --------------------------------------------------------------------------------
TOUCHSTONE ENHANCED ETF FUND - CLASS I
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------
2009 2008 2007 2006 2005
NET ASSET VALUE, BEGINNING OF YEAR $ 6.19 $ 13.88 $ 13.73 $ 11.98 $ 11.30
- ------------------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment income 0.17 0.13 0.21 0.13 0.05
Net realized and unrealized gain (loss) on investments 1.20 (4.69) 0.35 1.71 0.63
- ------------------------------------------------------------------------------------------------------------------------------------
Total from investment operations 1.37 (4.56) 0.56 1.84 0.68
- ------------------------------------------------------------------------------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (0.22) (0.15) (0.17) (0.03) --
Realized capital gains -- (2.98) (0.24) (0.06) --
- ------------------------------------------------------------------------------------------------------------------------------------
Total dividends and distributions (0.22) (3.13) (0.41) (0.09) --
- ------------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $ 7.34 $ 6.19 $ 13.88 $ 13.73 $ 11.98
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN(a) 22.17% (31.40%) 4.03% 15.38% 6.02%
RATIOS AND SUPPLEMENTAL DATA:
Net assets at end of year (000s) $ 17,403 $ 19,557 $ 39,526 $ 47,264 $ 26,864
Ratios to average net assets:
Net expenses 0.75% 0.75% 0.50% 0.50% 0.50%
Net investment income 1.50% 1.54% 1.13% 1.26% 1.09%
Portfolio turnover 75% 78% 88% 62% 64%
- ------------------------------------------------------------------------------------------------------------------------------------
TOUCHSTONE ENHANCED ETF FUND - CLASS SC
FOR THE
FOR THE FOR THE YEAR PERIOD
PERIOD ENDED DECEMBER 31, ENDED
ENDED ------------------------ DECEMBER 31,
APRIL 26, 2009(d) 2008 2007 2006(g)
NET ASSET VALUE, BEGINNING OF PERIOD $ 6.18 $ 13.85 $ 13.72 $ 12.45
- ------------------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment income 0.02 0.13 0.07 0.11
Net realized and unrealized gain (loss) on investments (0.19) (4.67) 0.45 1.25
- ------------------------------------------------------------------------------------------------------------------------------------
Total from investment operations (0.17) (4.54) 0.52 1.36
- ------------------------------------------------------------------------------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income -- (0.15) (0.15) (0.03)
Realized capital gains -- (2.98) (0.24) (0.06)
- ------------------------------------------------------------------------------------------------------------------------------------
Total dividends and distributions -- (3.13) (0.39) (0.09)
- ------------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 6.01 $ 6.18 $ 13.85 $ 13.72
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN(a) (2.75%)(h) (31.32%) 3.74% 10.94%(h)
RATIOS AND SUPPLEMENTAL DATA:
Net assets at end of period (000s) $ 2,594 $ 2,856 $ 4,110 $ 1,407
Ratios to average net assets:
Net expenses 0.75%(e) 0.75% 0.75% 0.75%(e)
Net investment income 1.08%(e) 1.61% 1.20% 3.29%(e)
Portfolio turnover 75% 78% 88% 62%
- ------------------------------------------------------------------------------------------------------------------------------------
See Notes to Financial Highlights on page 69.
The accompanying notes are an integral part of the financial statements.
68
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- --------------------------------------------------------------------------------
Financial Highlights continued
Selected data for a share outstanding:
TOUCHSTONE MODERATE ETF FUND - CLASS I
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------
2009 2008 2007 2006 2005
NET ASSET VALUE, BEGINNING OF YEAR $ 9.67 $ 12.60 $ 12.21 $ 11.11 $ 10.69
- ------------------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment income 0.19 0.17 0.33 0.22 0.14
Net realized and unrealized gain (loss) on investments 1.50 (2.74) 0.31 1.00 0.28
- ------------------------------------------------------------------------------------------------------------------------------------
Total from investment operations 1.69 (2.57) 0.64 1.22 0.42
- ------------------------------------------------------------------------------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (0.35) (0.21) (0.16) (0.10) --
Realized capital gains -- (0.15) (0.09) (0.02) --
- ------------------------------------------------------------------------------------------------------------------------------------
Total dividends and distributions (0.35) (0.36) (0.25) (0.12) --
- ------------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $ 11.01 $ 9.67 $ 12.60 $ 12.21 $ 11.11
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN(a) 17.44% (20.34%) 5.24% 10.97% 3.93%
RATIOS AND SUPPLEMENTAL DATA:
Net assets at end of year (000s) $ 52,504 $ 33,476 $ 29,017 $ 27,991 $ 19,137
Ratios to average net assets:
Net expenses 0.75% 0.75% 0.50% 0.50% 0.50%
Net investment income 2.37% 2.85% 2.59% 2.57% 2.48%
Portfolio turnover 24% 29% 12% 15% 21%
- ------------------------------------------------------------------------------------------------------------------------------------
TOUCHSTONE MODERATE ETF FUND - CLASS SC
FOR THE
FOR THE FOR THE YEAR PERIOD
PERIOD ENDED DECEMBER 31, ENDED
ENDED ------------------------ DECEMBER 31,
APRIL 26, 2009(d) 2008 2007 2006(g)
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.63 $ 12.55 $ 12.18 $ 11.39
- ------------------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment income 0.06 0.31 0.20 0.10
Net realized and unrealized gain (loss) on investments (0.28) (2.87) 0.41 0.81
- ------------------------------------------------------------------------------------------------------------------------------------
Total from investment operations (0.22) (2.56) 0.61 0.91
- ------------------------------------------------------------------------------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income -- (0.21) (0.15) (0.10)
Realized capital gains -- (0.15) (0.09) (0.02)
- ------------------------------------------------------------------------------------------------------------------------------------
Total dividends and distributions -- (0.36) (0.24) (0.12)
- ------------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 9.41 $ 9.63 $ 12.55 $ 12.18
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN(a) (2.28%)(h) (20.35%) 4.99% 7.98%(h)
RATIOS AND SUPPLEMENTAL DATA:
Net assets at end of period (000s) $ 16,186 $ 16,825 $ 19,220 $ 1,762
Ratios to average net assets:
Net expenses 0.75%(e) 0.75% 0.75% 0.75%(e)
Net investment income 1.94%(e) 2.74% 2.92% 3.73%(e)
Portfolio turnover 24% 29% 12% 15%
- ------------------------------------------------------------------------------------------------------------------------------------
See Notes to Financial Highlights on page 69.
The accompanying notes are an integral part of the financial statements.
69
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TOUCHSTONE VARIABLE SERIES TRUST
--------------------------------
NOTES TO FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
(a) Total returns do not include any insurance, sales or administrative
charges of variable annuity or life insurance contracts. If these charges
were included, the return would be lower.
(b) Less than $0.01 per share.
(c) Absent money market insurance, the ratio of net expenses to average net
assets would have been 0.67%.
(d) On April 27, 2009, Class SC shares were exchanged for Class I shares.
(e) Annualized.
(f) Absent money market insurance, the ratio of net expenses to average net
assets would have been 0.68%.
(g) Represents the period from commencement of operations (July 31, 2006)
through December 31, 2006.
(h) Not annualized.
The accompanying notes are an integral part of the financial statements.
70
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TOUCHSTONE VARIABLE SERIES TRUST
- --------------------------------
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
December 31, 2009
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 Baron Small Cap Growth Fund, Touchstone
Core Bond Fund, Touchstone High Yield Fund, Touchstone Large Cap Core Equity
Fund, Touchstone Mid Cap Growth Fund, Touchstone Money Market Fund, Touchstone
Third Avenue Value 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, 2009, 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.
Prior to April 27, 2009, the Funds were registered to offer different classes of
shares: Class I shares and Class SC shares. The Touchstone Money Market Fund,
Touchstone Aggressive ETF Fund, Touchstone Conservative ETF Fund, Touchstone
Enhanced ETF Fund, and Touchstone Moderate ETF Fund offered two classes of
shares: Class I shares and Class SC shares. Effective April 27, 2009, Class SC
shares were exchanged for Class I shares and all Funds now offer a single class
of shares: Class I shares. The assets of each Fund are segregated, and a
shareholder's interest is limited to the Fund in which shares are held. The
Funds' prospectus provides a description of each Fund's investment objectives,
policies, and strategies along with information on the classes of shares
currently being offered.
ESTIMATES. The preparation of financial statements in conformity with U.S.
generally accepted accounting principles (GAAP) 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.
SHARE VALUATION. The net asset value per share is calculated daily by dividing
the total value of the Fund's assets, less liabilities, by its number of shares
outstanding.
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 by
the Advisor 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 value. Under the amortized cost
valuation method, the discount or premium is amortized on a constant basis to
the maturity of the security.
71
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--------------------------------
- --------------------------------------------------------------------------------
The Funds have adopted FASB ASC 820 "Fair Value Measurements." This standard
establishes a single authoritative definition of fair value, sets out a
framework for measuring fair value and requires additional disclosures about
fair value measurements. Fair Value Measurements applies to fair value
measurements already required or permitted by existing standards. The changes to
current (GAAP from the application of this Statement relate to the definition of
fair value, the methods used to measure fair value, and the expanded disclosures
about fair value measurements.
Various inputs are used in determining the value of the Funds investments. These
inputs are summarized in the three broad levels listed below:
o Level 1 - quoted prices in active markets for identical securities
o Level 2 - other significant observable inputs (including quoted prices for
similar securities, interest rates, prepayment speeds, credit risk,
etc.)
o Level 3 - significant unobservable inputs (including the Fund's own
assumptions in determining the fair value of investments)
The inputs or methodology used for valuing securities are not necessarily an
indication of the risk associated with investing in those securities. For
example, money market securities are valued using amortized cost, in accordance
with rules under the Investment Company Act of 1940. Generally, amortized cost
approximates the current fair value of a security, but since the value is not
obtained from a quoted price in an active market, such securities are reflected
as Level 2.
The aggregate value by input level, as of December 31, 2009, for each Fund's
investments, is included in each Fund's Portfolio of Investments, which also
includes a breakdown of the Fund's investments by geographic/industry
concentration.
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.
72
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TOUCHSTONE VARIABLE SERIES TRUST
- --------------------------------
- --------------------------------------------------------------------------------
Notes to Financial Statements continued
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.
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, 2009, the following Funds loaned
securities and received collateral as follows:
Fair Value of Value of
Fund Securities Loaned Collateral Received
- --------------------------------------------------------------------------------
Touchstone Baron Small Cap Growth Fund $ 4,490,262 $ 4,649,106
Touchstone High Yield Fund $ 303,689 $ 321,195
Touchstone Large Cap Core Equity Fund $ 8,226,921 $ 8,491,028
Touchstone Mid Cap Growth Fund $ 5,019,591 $ 5,190,126
Touchstone Third Avenue Value Fund $ 7,971,762 $ 8,253,336
Touchstone Aggressive ETF Fund $ 4,347,637 $ 4,500,171
Touchstone Conservative ETF Fund $ 4,738,288 $ 4,880,213
Touchstone Enhanced ETF Fund $ 4,808,079 $ 4,992,362
Touchstone Moderate ETF Fund $ 10,218,990 $ 10,574,294
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 securities 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.
73
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--------------------------------
- --------------------------------------------------------------------------------
FORWARD FOREIGN CURRENCY AND SPOT CONTRACTS. Certain Funds 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 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, 2009, there were no open forward foreign currency contracts.
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.
74
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- --------------------------------
- --------------------------------------------------------------------------------
Notes to Financial Statements continued
3. Transactions with Affiliates
Certain officers of the Trust are also officers of the Advisor (Touchstone
Advisors, Inc.), the Underwriter (Touchstone Securities, Inc.) and/or JPMorgan
Chase Bank, N.A. (JPMorgan) the Sub-Administrator and Transfer Agent to the
Funds. The Advisor and the Underwriter are each wholly-owned indirect
subsidiaries of Western-Southern.
ADVISORY AGREEMENT. The Advisor provides general investment supervisory services
for the Funds, under the terms of an Advisory Agreement. Under the Advisory
Agreement, the Funds pay the Advisor a fee, which is computed and accrued daily
and paid monthly, at an annual rate based on average daily net assets as
follows:
- ------------------------------------------------------------------------------------------------
Touchstone Baron Small Cap Growth Fund 1.05%
- ------------------------------------------------------------------------------------------------
Touchstone Core Bond Fund 0.55% on the first $100 million
0.50% of the next $100 million
0.45% of the next $100 million
0.40% of such assets in excess of $300 million.
- ------------------------------------------------------------------------------------------------
Touchstone High Yield Fund 0.50% on the first $100 million
0.45% of the next $100 million
0.40% of the next $100 million
0.35% of such assets in excess of $300 million.
- ------------------------------------------------------------------------------------------------
Touchstone Large Cap Core Equity Fund 0.65% on the first $100 million
0.60% of the next $100 million
0.55% of the next $100 million
0.50% of such assets in excess of $300 million.
- ------------------------------------------------------------------------------------------------
Touchstone Mid Cap Growth Fund 0.80%
- ------------------------------------------------------------------------------------------------
Touchstone Money Market Fund 0.18%
- ------------------------------------------------------------------------------------------------
Touchstone Third Avenue Value Fund 0.80% on the first $100 million
0.75% of the next $100 million
0.70% of the next $100 million
0.65% of such assets in excess of $300 million.
- ------------------------------------------------------------------------------------------------
Touchstone Aggressive ETF Fund 0.40% on the first $50 million
Touchstone Conservative ETF Fund 0.38% of the next $50 million
Touchstone Enhanced ETF Fund 0.36% of such assets in excess of $100 million.
Touchstone Moderate ETF Fund
- ------------------------------------------------------------------------------------------------
75
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--------------------------------
- --------------------------------------------------------------------------------
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 Funds)
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,
2009, the following sub-advisory agreements were in place:
TOUCHSTONE BARON SMALL BAMCO, Inc.
CAP GROWTH FUND
TOUCHSTONE CORE BOND FUND Fort Washington Investment
Advisors, Inc.
TOUCHSTONE HIGH YIELD FUND Fort Washington Investment
Advisors, Inc.
TOUCHSTONE LARGE CAP Todd/Veredus Asset Management, LLC
CORE EQUITY FUND
TOUCHSTONE MID CAP TCW Investment Management
GROWTH FUND Company and Westfield Capital
Management Company LP
TOUCHSTONE MONEY MARKET FUND Fort Washington Investment
Advisors, Inc.
TOUCHSTONE THIRD AVENUE Third Avenue Management LLC
VALUE FUND
TOUCHSTONE AGGRESSIVE ETF FUND Todd/Veredus Asset Management, LLC
TOUCHSTONE CONSERVATIVE ETF FUND Todd/Veredus Asset Management, LLC
TOUCHSTONE ENHANCED ETF FUND Todd/Veredus Asset Management, LLC
TOUCHSTONE MODERATE ETF FUND Todd/Veredus Asset Management, LLC
Fort Washington Investment Advisors, Inc. is an affiliate of the Advisor and of
Western-Southern.
ADMINISTRATION AND ACCOUNTING SERVICES AGREEMENT. The Advisor entered into an
Administration and Accounting Services Agreement with the Trust, whereby the
Advisor is responsible for supplying executive and regulatory compliance
services, supervises the preparation of tax returns, and coordinates the
preparation of reports to shareholders and reports to, and filings with, the
Securities and Exchange Commission and state securities authorities, materials
for meetings of the Board of Trustees, calculating the daily net asset value per
share and maintaining the financial books and records of each Fund. For its
services, the Advisor receives an annual fee of 0.20% of average daily net
assets of the Trust up to and including $1 billion; 0.16% of the next $1 billion
of average daily net assets; and 0.12% of all such assets in excess of $2
billion. The fee is allocated among the Funds on the basis of relative daily net
assets.
The Advisor has engaged JPMorgan as the Sub-Administrator to the Trust. JPMorgan
provides administrative and accounting services to the Trust and is compensated
directly by the Advisor, not the Trust.
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Notes to Financial Statements continued
TRANSFER AGENT AGREEMENT. The Trust entered into a Transfer Agent Agreement
between the Trust and JPMorgan. JPMorgan maintains the records of each
shareholder's account, answers shareholders' inquiries concerning their
accounts, processes purchases and redemptions of each Fund's shares, acts as
dividend and distribution disbursing agent and performs other shareholder
service functions. For these services, JPMorgan received a minimum annual fee
from each Fund through August 31, 2009. Effective September 1, 2009, JPMorgan no
longer receives a minimum annual fee from each Fund for its services. In
addition, each Fund pays JPMorgan out-of-pocket expenses including, but not
limited to, postage and supplies.
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 entered into a Shareholder Servicing Plan for
all share classes of the Trust which provides for a fee of 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 JPMorgan, JPMorgan provides certain compliance
services to the Trust and provides administrative support services to the Funds'
Compliance Program and Chief Compliance Officer. For these services, JPMorgan
receives a quarterly fee from each Fund.
AFFILIATED INVESTMENTS. 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 exemptive 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 will not be waived or reimbursed.
A summary of each Fund's investment in the Touchstone Institutional Money Market
Fund, if any, for the year ended December 31, 2009, is noted below:
SHARE ACTIVITY
------------------------------------------------------
Balance Balance Value
12/31/08 Purchases Sales 12/31/09 Dividends 12/31/09
- ------------------------------------------------------------------------------------------------------------------------------------
Touchstone Baron Small
Cap Growth Fund 348,169 6,529,452 (5,435,003) 1,442,618 $ 5,240 $ 1,442,618
Touchstone Core Bond Fund 3,226,594 52,636,973 (52,364,013) 3,499,554 $ 37,994 $ 3,499,554
Touchstone High Yield Fund 10,599,230 20,229,746 (30,608,142) 220,834 $ 19,453 $ 220,834
Touchstone Large Cap
Core Equity Fund 731,719 20,390,734 (19,865,632) 1,256,821 $ 9,761 $ 1,256,821
Touchstone Mid Cap Growth Fund 702,185 10,928,418 (11,088,685) 541,918 $ 5,513 $ 541,918
Touchstone Third Avenue
Value Fund 2,726,733 21,180,343 (22,051,339) 1,855,737 $ 37,618 $ 1,855,737
Touchstone Aggressive ETF Fund 203,258 8,094,126 (8,029,802) 267,582 $ 1,904 $ 267,582
Touchstone Conservative ETF Fund -- 8,352,138 (8,063,650) 288,488 $ 1,986 $ 288,488
Touchstone Enhanced ETF Fund 362,583 4,806,883 (5,165,008) 4,458 $ 1,189 $ 4,458
Touchstone Moderate ETF Fund 561,626 11,603,922 (11,597,244) 568,304 $ 4,560 $ 568,304
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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 Baron Small Touchstone Core
Cap Growth Fund Bond 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,
2009 2008 2009 2008
Shares issued 581,749 144,391 283,169 655,150
Shares reinvested -- 366,649 182,178 187,971
Shares redeemed (477,507) (375,523) (479,291) (947,755)
- --------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in shares outstanding 104,242 135,517 (13,944) (104,634)
Shares outstanding, beginning of year 1,413,205 1,277,688 3,734,892 3,839,526
- --------------------------------------------------------------------------------------------------------------------
Shares outstanding, end of year 1,517,447 1,413,205 3,720,948 3,734,892
Touchstone High Touchstone Large Cap
Yield Fund Core Equity 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,
2009 2008 2009 2008
Shares issued 2,713,474 3,356,003 1,798,398 642,613
Shares reinvested 265,401 424,892 92,906 590,762
Shares issued in connection with acquisition(a) -- -- -- 6,038,510
Shares redeemed (3,664,252) (2,023,863) (1,531,030) (2,170,202)
- --------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in shares outstanding (685,377) 1,757,032 360,274 5,101,683
Shares outstanding, beginning of year 5,271,926 3,514,894 7,362,076 2,260,393
- --------------------------------------------------------------------------------------------------------------------
Shares outstanding, end of year 4,586,549 5,271,926 7,722,350 7,362,076
Touchstone Mid Cap Touchstone Third
Growth Fund Avenue Value 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,
2009 2008 2009 2008
Shares issued 327,051 207,161 312,030 367,946
Shares reinvested 2,006 753,292 278,470 963,424
Shares redeemed (623,055) (853,679) (1,658,939) (1,357,368)
- --------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in shares outstanding (293,998) 106,774 (1,068,439) (25,998)
Shares outstanding, beginning of year 2,605,082 2,498,308 4,495,472 4,521,470
- --------------------------------------------------------------------------------------------------------------------
Shares outstanding, end of year 2,311,084 2,605,082 3,427,033 4,495,472
(a) See Footnote 9 in notes to financial statements.
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Notes to Financial Statements continued
Touchstone Aggressive Touchstone Conservative
ETF Fund ETF Fund
Class I Class SC Class I Class SC
-------------------------- -------------------------- ------------------------- --------------------------
For the For the For the For the For the For the For the For the
Year Year Period Year Year Year Period Year
Ended Ended Ended Ended Ended Ended Ended Ended
December 31, December 31, December 31, December 31, December 31, December 31, December 31, December 31,
2009 2008 2009(a) 2008 2009 2008 2009(a) 2008
Shares issued 1,408,451 35,365 311,687 199,515 1,351,942 201,601 73,930 597,997
Shares reinvested 65,071 128,022 -- 101,831 85,263 60,772 -- 56,672
Shares redeemed (512,452) (212,623) (1,069,075) (103,740) (427,125) (555,712) (1,030,740) (256,174)
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase
(decrease) in
shares outstanding 961,070 (49,236) (757,388) 197,606 1,010,080 (293,339) (956,810) 398,495
Shares outstanding,
beginning of period 943,928 993,164 757,388 559,782 1,065,293 1,358,632 956,810 558,315
- ------------------------------------------------------------------------------------------------------------------------------------
Shares outstanding,
end of period 1,904,998 943,928 -- 757,388 2,075,373 1,065,293 -- 956,810
Touchstone Enhanced Touchstone Moderate
ETF Fund ETF Fund
Class I Class SC Class I Class SC
-------------------------- -------------------------- ------------------------- --------------------------
For the For the For the For the For the For the For the For the
Year Year Period Year Year Year Period Year
Ended Ended Ended Ended Ended Ended Ended Ended
December 31, December 31, December 31, December 31, December 31, December 31, December 31, December 31,
2009 2008 2009(a) 2008 2009 2008 2009(a) 2008
Shares issued 503,350 43,884 9,229 94,222 2,144,540 381,842 92,703 619,211
Shares reinvested 69,774 1,114,844 -- 159,370 145,696 127,126 -- 64,203
Shares issued in
connection with
merger(b) -- -- -- -- -- 1,962,139 -- --
Shares redeemed (1,359,913) (849,521) (471,515) (88,097) (981,704) (1,311,429) (1,839,702) (467,390)
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase
(decrease)
in shares
outstanding (786,789) 309,207 (462,286) 165,495 1,308,532 1,159,678 (1,746,999) 216,024
Shares outstanding,
beginning of period 3,157,278 2,848,071 462,286 296,791 3,461,752 2,302,074 1,746,999 1,530,975
- ------------------------------------------------------------------------------------------------------------------------------------
Shares outstanding,
end of period 2,370,489 3,157,278 -- 462,286 4,770,284 3,461,752 -- 1,746,999
(a) Class SC represents the period from January 1, 2009 through April 26,
2009.
(b) See Footnote 9 in notes to financial statements.
5. Expense Reductions
The Advisor has contractually agreed to waive its fees 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.
Some Funds may participate in the Custody Fee Offset Program offered by the
Custodian when they execute security trades where the Custodian is the broker.
If a Fund chooses to participate in the Custody Fee Offset Program, a rebate
amount will be applied to and credited against the fees payable by the Fund to
the Custodian. For financial reporting purposes for the year ended December 31,
2009, there were no fees reduced by the Custodian. Effective June 1, 2009, the
Custody Fee Offset Program was terminated.
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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 is the
Administration fees waived by the Administrator and the amount of other expenses
reimbursed by the Advisor for each Fund for the year ended December 31, 2009:
Touchstone Touchstone
Baron Small Touchstone Touchstone Large Cap
Cap Growth Core Bond High Yield Core Equity
Fund Fund Fund Fund
Expense cap 1.55% 1.00% 1.05% 1.00%
Administration fees waived $ 31,735 $ 8,770 $ 241 $ 31,415
Expenses reimbursed $ 9,554 $ -- $ -- $ --
- --------------------------------------------------------------------------------
Touchstone Touchstone
Mid Cap Touchstone Third Avenue
Growth Money Market Value
Fund Fund Fund(a)
Expense cap 1.17% 0.75% 1.17%
Administration fees waived $ 43,259 $ 5,188 $ 109,241
Expenses reimbursed $ 7,426 $ -- $ 5,032
- --------------------------------------------------------------------------------
Touchstone Touchstone Touchstone Touchstone
Aggressive Aggressive Conservative Conservative
ETF Fund ETF Fund ETF Fund ETF Fund
Expense cap 0.75% 0.75% 0.75% 0.75%
Administration fees waived $ 27,935 $ 40,316 $ 36,377 $ 85,163
Advisory fees waived and/or expenses reimbursed $ 37,858 $ 33,306 $ 34,805 $ --
- ---------------------------------------------------------------------------------------------------------
(a) Effective May 1, 2009, the Fund changed its expense limit from 1.09%.
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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, 2009 were as follows:
Touchstone
Baron Small Touchstone Touchstone
Cap Growth Core Bond High Yield
Fund Fund Fund
Cost of Purchases $ 1,773,399 $ 32,088,522 $ 20,289,728
Proceeds from Sales $ 1,345,704 $ 35,067,253 $ 16,590,667
- --------------------------------------------------------------------------------
Touchstone Touchstone Touchstone
Large Cap Mid Cap Third Avenue
Core Equity Growth Value
Fund Fund Fund
Cost of Purchases $ 22,359,877 $ 14,953,411 $ 2,125,965
Proceeds from Sales $ 20,055,507 $ 17,037,962 $ 20,277,578
- --------------------------------------------------------------------------------
Touchstone Touchstone Touchstone Touchstone
Aggressive Conservative Enhanced Moderate
ETF Fund ETF Fund ETF Fund ETF Fund
Cost of Purchases $ 7,894,722 $ 8,314,051 $13,597,925 $11,656,530
Proceeds from Sales $ 6,316,914 $ 7,947,949 $21,448,592 $15,942,369
- --------------------------------------------------------------------------------
7. Federal Tax Information
The tax character of distributions paid for the periods ended December 31, 2009
and 2008 was as follows:
Touchstone Touchstone
Baron Small Touchstone Touchstone Large Cap
Cap Growth Core Bond High Yield Core Equity
Fund Fund Fund Fund
2009 2008 2009 2008 2009 2008 2009 2008
From ordinary income $ -- $ -- $1,889,191 $1,783,848 $2,027,665 $2,349,654 $ 761,831 $1,038,605
From long-term capital gains -- 3,402,506 -- -- -- -- -- 2,810,369
- ------------------------------------------------------------------------------------------------------------------------------------
$ -- $3,402,506 $1,889,191 $1,783,848 $2,027,665 $2,349,654 $ 761,831 $3,848,974
- ------------------------------------------------------------------------------------------------------------------------------------
Touchstone Touchstone
Touchstone Money Third Avenue
Mid Cap Growth Market Value
Fund Fund Fund
2009 2008 2009 2008 2009 2008
From ordinary income $ 22,151 $ 1,217,508 $ 1,129,634 $ 3,852,800 $ 977,362 $ 1,626,068
From long-term capital gains -- 4,484,909 -- -- 3,380,340 10,496,578
- ----------------------------------------------------------------------------------------------------------------------
$ 22,151 $ 5,702,417 $ 1,129,634 $ 3,852,800 $ 4,357,702 $12,122,646
- ----------------------------------------------------------------------------------------------------------------------
Touchstone Touchstone Touchstone Touchstone
Aggressive Conservative Enhanced Moderate
ETF ETF ETF ETF
Fund Fund Fund Fund
2009 2008 2009 2008 2009 2008 2009 2008
From ordinary income $ 371,904 $ 406,288 $ 719,618 $ 669,583 $ 512,143 $1,962,696 $1,603,350 $1,051,875
From long-term capital gains 228,228 1,363,965 217,064 521,514 -- 5,626,243 -- 779,232
- ------------------------------------------------------------------------------------------------------------------------------------
$ 600,132 $1,770,253 $ 936,682 $1,191,097 $ 512,143 $7,588,939 $1,603,350 $1,831,107
- ------------------------------------------------------------------------------------------------------------------------------------
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The following information is computed on a tax basis for each item as of
December 31, 2009:
Touchstone Touchstone
Baron Small Touchstone Touchstone Large Cap
Cap Growth Core Bond High Yield Core Equity
Fund Fund Fund Fund
Tax cost of portfolio investments $ 17,535,017 $ 41,926,349 $ 32,966,833 $ 74,981,191
- ------------------------------------------------------------------------------------------------------------------------------------
Gross unrealized appreciation 7,745,467 908,191 2,421,536 3,591,210
Gross unrealized depreciation (234,721) (1,350,426) (645,820) (6,755,721)
- ------------------------------------------------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) 7,510,746 (442,235) 1,775,716 (3,164,511)
Capital loss carryforward (2,086,510) (52,692) (4,467,284) (17,363,313)
Post October losses -- -- -- (19,026)
Undistributed ordinary income -- 1,536,202 2,820,989 751,347
- ------------------------------------------------------------------------------------------------------------------------------------
Accumulated earnings (deficit) $ 5,424,236 $ 1,041,275 $ 129,421 $(19,795,503)
- ------------------------------------------------------------------------------------------------------------------------------------
Touchstone Touchstone
Touchstone Money Third Avenue
Mid Cap Growth Market Value
Fund Fund Fund
Tax cost of portfolio investments $ 29,586,166 $ 79,493,512 $ 55,599,808
- ----------------------------------------------------------------------------------------------------------------
Gross unrealized appreciation 3,382,293 -- 12,957,720
Gross unrealized depreciation (2,193,904) -- (6,729,779)
- ----------------------------------------------------------------------------------------------------------------
Net unrealized appreciation 1,188,389 -- 6,227,941
Capital loss carryforward (5,588,702) (158) (14,824,418)
Undistributed ordinary income 57,224 -- 3,062,304
- ----------------------------------------------------------------------------------------------------------------
Accumulated deficit $ (4,343,089) $ (158) $ (5,534,173)
- ----------------------------------------------------------------------------------------------------------------
Touchstone Touchstone Touchstone Touchstone
Aggressive Conservative Enhanced Moderate
ETF ETF ETF ETF
Fund Fund Fund Fund
Tax cost of portfolio investments $ 23,691,207 $ 28,023,030 $ 21,888,946 $ 68,666,110
- ------------------------------------------------------------------------------------------------------------------------------------
Gross unrealized appreciation 942,198 941,715 1,327,800 1,723,254
Gross unrealized depreciation (2,542,161) (1,429,862) (946,277) (7,293,825)
- ------------------------------------------------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) (1,599,963) (488,147) 381,523 (5,570,571)
Capital loss carryforward (1,026,841) (336,006) (9,994,980) (1,977,883)
Post October losses -- -- (105,480) (10,570)
Undistributed ordinary income 296,597 504,732 269,870 1,128,367
- ------------------------------------------------------------------------------------------------------------------------------------
Accumulated deficit $ (2,330,207) $ (319,421) $ (9,449,067) $ (6,430,657)
- ------------------------------------------------------------------------------------------------------------------------------------
The difference between the tax cost of portfolio investments and the financial
statement cost is primarily due to wash sales loss deferrals, investments in
passive foreign investment companies, regulated investment companies, and real
estate investment trusts.
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Notes to Financial Statements continued
During the year ended December 31, 2009, the following Funds utilized capital
loss carryforwards as follows:
Amount
Core Bond Fund $ 792,093
Money Market Fund 244,587
During the year ended December 31, 2009, the Money Market Fund had $243,738 of
capital loss carryforwards expire unutilized.
The capital loss carryforwards as of December 31, 2009 in the table above expire
as follows:
Amount Expiration Date
Baron Small Cap Growth Fund $ 893,256 December 31, 2016
1,193,254 December 31, 2017
------------
$ 2,086,510
------------
Core Bond Fund $ 52,692 December 31, 2016
------------
High Yield Fund $ 254,454 December 31, 2010
1,376,648 December 31, 2011
935,126 December 31, 2016
1,901,056 December 31, 2017
------------
$ 4,467,284
------------
Large Cap Core Equity Fund* $ 4,692,851 December 31, 2010
2,118,382 December 31, 2015
2,591,468 December 31, 2016
7,960,612 December 31, 2017
------------
$ 17,363,313
------------
Mid Cap Growth Fund $ 1,915,049 December 31, 2016
3,673,653 December 31, 2017
------------
$ 5,588,702
------------
Money Market Fund $ 28 December 31, 2010
130 December 31, 2011
------------
$ 158
------------
Third Avenue Value Fund* $ 1,828,749 December 31, 2010
216,360 December 31, 2011
22,282 December 31, 2013
11,333 December 31, 2014
12,745,694 December 31, 2017
------------
$ 14,824,418
------------
Aggressive ETF Fund $ 1,026,841 December 31, 2017
------------
Conservative ETF Fund $ 336,006 December 31, 2017
------------
Enhanced ETF Fund $ 3,002,781 December 31, 2016
6,992,199 December 31, 2017
------------
$ 9,994,980
------------
Moderate ETF Fund $ 58,366 December 31, 2015
64,383 December 31, 2016
1,855,134 December 31, 2017
------------
$ 1,977,883
------------
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.
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From November 1, 2009 to December 31, 2009, the following Funds incurred the
following net losses ("Post-October losses"). The Funds intend to elect to defer
these losses and treat them as arising on January 1, 2010:
Amount
Large Cap Core Equity Fund $ 19,026
Enhanced ETF Fund 105,480
Moderate ETF Fund 10,570
Reclassification of capital accounts - Reclassifications result primarily from
the difference in the tax treatment of paydown gains/losses on mortgage backed
and asset backed securities, expiration of capital losses, net investment
losses, foreign currency gains/losses, gains/losses of passive foreign
investment companies, and gains/losses of regulated investment companies. 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
Baron Small Cap Growth Fund $ 128,399 $ -- $(128,399)
Core Bond Fund 198,048 (198,048) --
High Yield Fund 118,559 (118,559) --
Money Market Fund -- 243,738 (243,738)
Third Avenue Value Fund 34,668 (34,668) --
Aggressive ETF Fund (2,044) 2,044 --
Conservative ETF Fund (983) 983 --
Enhanced ETF Fund (17,431) 17,431 --
Moderate ETF Fund (2,852) 2,852 --
The funds evaluate tax positions taken or expected to be taken in the course of
preparing the funds' tax returns to determine whether the tax positions are
"more-likely-than-not" of being sustained by the applicable tax authorities. Tax
positions not deemed to meet the more-likely-than-not threshold are recorded as
tax benefits or expenses in the current year. Management has analyzed the funds'
tax positions taken on federal income tax returns for all open tax years (tax
years ended December 31, 2006 - December 31, 2009), and has concluded that no
provision for federal income tax is required in the funds' financial statements.
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.
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Notes to Financial Statements continued
9. Fund Mergers
On April 25, 2008, a Special Meeting of Shareholders was held to approve or
disapprove an Agreement and Plan of Reorganization providing for the transfer of
all of assets and liabilities of the Eagle Capital Appreciation Fund, Growth &
Income Fund, and Value Plus Fund to the Large Cap Core Equity Fund in exchange
for shares of the Large Cap Core Equity Fund and the subsequent liquidation of
the Eagle Capital Appreciation Fund, Growth & Income Fund, and Value Plus Fund.
The Agreement and Plan of Reorganization was approved and the merger took place
April 25, 2008.
The merger was approved as follows:
Number of Votes
--------------------------------------
For Against Abstain
Eagle Capital Appreciation Fund 1,166,230 42,543 78,134
Growth & Income Fund 1,292,858 11,777 68,580
Value Plus Fund 861,169 11,375 92,826
The following is a summary of shares outstanding, net assets, net asset value
per share, unrealized appreciation (depreciation) and realized gain (loss)
immediately before and after the reorganization:
After
Before Reorganization Reorganization
------------------------------------------------------------ --------------
Eagle
Capital Growth & Value Large Cap Large Cap
Appreciation Income Plus Core Equity Core Equity
Fund Fund Fund Fund Fund
Shares 2,110,008 2,735,664 1,061,313 2,065,150 8,133,929
Net Assets $ 29,383,669 $ 22,422,153 $ 11,892,474 $ 21,675,049 $ 85,373,345
Net Asset Value $ 13.93 $ 8.20 $ 11.21 $ 10.50 $ 10.50
Unrealized Appreciation
(Depreciation) $ 66,673 $ (20,156) $ 71,420 $ (938,416) $ (820,479)
Accumulated Net
Realized Gain (Loss) $ (4,195,354) $ (526,206) $ (2,124,687) $ 3,472,934 $ (3,373,313)
On April 25, 2008, a Special Meeting of Shareholders was held to approve or
disapprove an Agreement and Plan of Reorganization providing for the transfer of
all of assets and liabilities of the Balanced Fund to the Moderate ETF Fund in
exchange for shares of the Moderate ETF Fund and the subsequent liquidation of
the Balanced Fund. The Agreement and Plan of Reorganization was approved and the
merger took place April 25, 2008. In conjunction with this merger, Class I
shares of the Touchstone Balanced Fund were exchanged for Class I shares of the
Touchstone Moderate ETF Fund.
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The merger was approved as follows:
Number of Votes
--------------------------------
For Against Abstain
1,318,658 20,946 167,983
The following is a summary of shares outstanding, net assets, net asset value
per share, unrealized appreciation and realized gain (loss) immediately before
and after the reorganization:
Before After
Reorganization Reorganization
------------------------------ --------------
Balanced Moderate ETF Moderate ETF
Fund Fund Fund
------------ ------------ ------------
Shares:
Class I 1,898,502 2,204,182 4,176,175
Class SC -- 1,733,248 1,733,248
Net Assets:
Class I $ 24,444,917 $ 27,325,985 $ 51,770,902
Class SC $ -- $ 21,401,361 $ 21,401,361
Net Asset Value:
Class I $ 12.88 $ 12.40 $ 12.40
Class SC $ -- $ 12.35 $ 12.35
Unrealized Appreciation $ 61,448 $ 760,244 $ 821,692
Accumulated Net Realized Gain (Loss) $ (58,366) $ 848,386 $ 790,020
10. Subsequent Events
The Funds evaluated subsequent events from December 31, 2009, the date of these
financial statements, through February 26, 2010, the date these financial
statements were issued and available. There were no subsequent events to report
that would have a material impact on the Funds' financial statements.
86
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REPORT OF INDEPENDENT REGISTERED
- --------------------------------------------------------------------------------
PUBLIC ACCOUNTING FIRM
To 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 Baron Small Cap Growth Fund, Core Bond Fund, Mid Cap Growth Fund, High Yield
Fund, Large Cap Core Equity Fund, Money Market Fund, Third Avenue Value Fund,
Aggressive ETF Fund, Conservative ETF Fund, Enhanced ETF Fund, and Moderate ETF
Fund (the "Funds"), as of December 31, 2009, 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 the 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, 2009, 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, 2009, 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 U.S. generally accepted accounting principles.
/s/ Ernst & Young LLP
Cincinnati, Ohio
February 26, 2010
87
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--------------------------------
OTHER ITEMS (UNAUDITED)
- --------------------------------------------------------------------------------
December 31, 2009
Dividend Received Deduction
For corporate shareholders, the following ordinary distributions paid during the
current fiscal year ended December 31, 2009 qualifiy for the corporate dividends
received deduction:
Core Bond Fund 1%
Third Avenue Value Fund 72%
Conservative ETF Fund 83%
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.
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.
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, 2009 through December 31, 2009).
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, 2009" to estimate the expenses you paid on your
account during this period.
88
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Other Items continued
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.
Expenses
Net Expense Ratio Beginning Ending Paid During the
Annualized Account Value Account Value Six Months Ended
December 31, July 1, December 31, December 31,
2009 2009 2009 2009*
TOUCHSTONE BARON SMALL CAP GROWTH FUND
Actual 1.55% $1,000.00 $1,194.30 $8.56
Hypothetical 1.55% $1,000.00 $1,017.41 $7.87
TOUCHSTONE CORE BOND FUND
Actual 1.00% $1,000.00 $1,080.70 $5.24
Hypothetical 1.00% $1,000.00 $1,020.17 $5.09
TOUCHSTONE HIGH YIELD FUND
Actual 1.05% $1,000.00 $1,178.60 $5.74
Hypothetical 1.05% $1,000.00 $1,019.94 $5.32
TOUCHSTONE LARGE CAP CORE EQUITY FUND
Actual 1.00% $1,000.00 $1,197.70 $5.54
Hypothetical 1.00% $1,000.00 $1,020.17 $5.09
TOUCHSTONE MID CAP GROWTH FUND
Actual 1.16% $1,000.00 $1,251.40 $6.59
Hypothetical 1.16% $1,000.00 $1,019.36 $5.91
TOUCHSTONE MONEY MARKET FUND
Actual 0.73% $1,000.00 $1,001.80 $3.68
Hypothetical 0.73% $1,000.00 $1,021.53 $3.72
TOUCHSTONE THIRD AVENUE VALUE FUND
Actual 1.21% $1,000.00 $1,235.50 $6.80
Hypothetical 1.21% $1,000.00 $1,019.13 $6.14
TOUCHSTONE AGGRESSIVE ETF FUND
Actual 0.75% $1,000.00 $1,185.30 $4.13
Hypothetical 0.75% $1,000.00 $1,021.43 $3.82
TOUCHSTONE CONSERVATIVE ETF FUND
Actual 0.75% $1,000.00 $1,096.30 $3.95
Hypothetical 0.75% $1,000.00 $1,021.44 $3.81
TOUCHSTONE ENHANCED ETF FUND
Actual 0.75% $1,000.00 $1,192.80 $4.14
Hypothetical 0.75% $1,000.00 $1,021.43 $3.82
TOUCHSTONE MODERATE ETF FUND
Actual 0.75% $1,000.00 $1,147.20 $4.06
Hypothetical 0.75% $1,000.00 $1,021.43 $3.82
* 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 [or 366]] (to reflect the one-half
year period).
89
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Advisory Agreement Approval Disclosure
At a meeting held on November 19, 2009, the Board of Trustees (the "Board" or
"Trustees") of the Touchstone Variable Series Trust (the `Trust"), and by a
separate vote, the Independent Trustees of the Trust, approved the continuance
of the Investment Advisory Agreement between the Trust and the Advisor with
respect to each Fund of the Trust and of the Sub-Advisory Agreement(s) with
respect to each Fund between the Advisor and the respective Sub-Advisor(s).
In determining whether to approve the continuation of the Investment Advisory
Agreement and the Sub-Advisory Agreements, the Advisor furnished information
necessary for a majority of the Independent Trustees to make the determination
that the continuance of the Investment Advisory Agreement and of the respective
Sub-Advisory Agreement(s) was in the best 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
and its affiliates' revenues and costs of providing services to the Funds; and
(4) information about the Advisor's and Sub-Advisors' personnel. Prior to
voting, the Independent Trustees reviewed the proposed continuance of the
Investment Advisory Agreement and the Sub-Advisory Agreements with management
and with experienced independent legal counsel and received materials from such
counsel discussing the legal standards for their consideration of the proposed
continuation of the Investment Advisory Agreement and the Sub-Advisory
Agreement(s) with respect to each Fund. The Independent Trustees also reviewed
the proposed continuation of the Investment Advisory Agreement and the
Sub-Advisory Agreement(s) with respect to each of the Funds in private sessions
with independent legal counsel at which no representatives of management were
present.
In approving the Funds' Investment 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) a comparison of fees and
performance with other advisers; (4) economies of scale; and (5) the terms of
the Investment 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 each Sub-Advisor, including those
that were affiliates of the Advisor, and the Advisor's 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 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 Fund
by the Advisor under the Investment 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
(including the Sub-Advisors to certain of the Funds) 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
Board noted that the Advisor waived advisory fees for certain Funds. The Board
also noted that the Advisor pays the Sub-Advisors' sub-advisory fees out of the
advisory fees the Advisor receives from the Funds. The Board reviewed the
profitability of the Advisor's relationship with the Funds both before and after
tax expenses and whether the Advisor has the financial wherewithal to continue
to provide a high level of services to the Funds, noting the ongoing commitment
of the Advisor's parent company with respect to providing support and resources
as needed. The Board also considered that the Funds' distributor, an affiliate
of the Advisor, receives Rule 12b-1 distribution fees from the Funds. The Board
also noted that the Advisor derives benefits to its reputation and other
benefits from its association with the Funds. The Board also considered that
affiliates of the Advisor may benefit from certain indirect tax benefits,
including those relating to dividend received deductions.
The Board recognized that the Advisor should be entitled to earn a reasonable
level of profits in exchange for the level of services it provided to each Fund
and the entrepreneurial risk that it assumes as Advisor. Based upon their
review, the Trustees concluded that the Advisor and its affiliates' level of
profitability, if any, from its relationship with each Fund was reasonable and
not excessive.
Expenses and Performance. The Board compared the respective advisory fees and
total expense ratios for each of the Funds with various comparative data,
including the median and average advisory fees and total expense ratios of each
Fund's respective peer group. The Board also considered, among other data, the
Funds' respective performance results during the six-month, twelve-period, and
thirty-six month periods ended September 30, 2009, and noted that the Board
reviews on a quarterly basis detailed information about each Fund's performance
results, portfolio composition and investment strategies. The Board also took
into account current market conditions and their effect on the Funds'
performance.
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 had waived
advisory fees for certain Funds in order to reduce those Funds' respective
operating expenses to targeted levels. The Board noted that the sub-advisory
fees under the Sub-Advisory Agreement(s) with respect to each Fund were paid by
the Advisor out of the advisory fees it receives from the Fund and the impact of
such sub-advisory fees on the profitability of the Advisor. In reviewing the
respective expense ratios and performance of each 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 Board considered, among other data, the specific factors and related
conclusions set forth below with respect to each Fund:
Touchstone Baron Small Cap Fund. The Fund's advisory fee was at the median of
its peer group and its total expense ratio (net of applicable expense waivers)
was above the median of its peer group. The Board noted that the Advisor was
currently waiving a portion of its advisory fee. The Board took into account
management's discussion of the Fund's expenses, including the impact that the
relatively small size of the Fund has upon expenses. The Fund's performance for
the six-month period ended September 30, 2009 was in the 4th quartile of its
peer group, and the Fund's performance for the twelve-month and thirty-six month
periods ended September 30, 2009 was in the 2nd quartile of its peer group. The
Board noted management's explanation for the Fund's recent underperformance.
Based upon their review, the Trustees concluded that the Fund's performance over
the long-term was satisfactory and that the advisory fee was reasonable in light
of the high quality of services received by the Fund from the Advisor and the
other factors considered.
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Touchstone Core Bond Fund. The Fund's advisory fee and total expense ratio (net
of applicable expense waivers) were below the median and above the median,
respectively, of its peer group. The Board noted that the Advisor was currently
waiving a portion of its advisory fee. The Board took into account management's
discussion of the Fund's expenses, including the impact that the relatively
small size of the Fund has upon expenses. The Fund's performance for the
six-month and twelve-month periods ended September 30, 2009 was in the 2nd
quartile of its peer group and in the 3rd quartile for the thirty-six month
period ended September 30, 2009. 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 from
the Advisor and the other factors considered.
Touchstone High Yield Fund. The Fund's advisory fee and total expense ratio (net
of applicable expense waivers) were below the median and above the median,
respectively, of its peer group. The Board noted that the Advisor was currently
waiving a portion of its advisory fee. The Board took into account management's
discussion of the Fund's expenses, including the impact that the relatively
small size of the Fund has upon expenses. The Fund's performance for the
six-month period ended September 30, 2009 was in the 1st quartile of its peer
group and in the 2nd quartile for the twelve-month and thirty-six month periods
ended September 30, 2009. 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 from the Advisor.
Touchstone Mid Cap Growth 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 noted that the Advisor was currently waiving a portion of its advisory
fee. The Fund's performance for the six-month and thirty-six-month periods ended
September 30, 2009 was in the 2nd quartile of its peer group and in the 3rd
quartile of its peer group for the twelve-month period ended September 30, 2009.
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 from the Advisor and the other factors
considered.
Touchstone Money Market Fund. The Fund's advisory fee and total expense ratio
were below the median of its peer group. The Board noted that the Advisor was
currently reimbursing a portion of the Fund's expenses. The Fund's performance
for the six-month, twelve-month, and thirty-six month periods ended September
30, 2009 was in the 1st quartile of its 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 from the Advisor and the other factors considered.
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 noted that the Advisor was currently waiving a portion of its
advisory fee. The Board took into account management's discussion of the Fund's
expenses, including the impact that the relatively small size of the Fund has
upon expenses. The Fund's performance for the six-month and thirty-six month
periods ended September 30, 2009 was in the 1st quartile of its peer group and
in the 4th quartile for the twelve-month period ended September 30, 2009. The
Board also noted that the Fund had implemented a change to its investment
strategy on May 21, 2008. The Board also noted management's explanation for the
Fund's underperformance for the twelve-month period. Based upon their review,
the Trustees concluded that the Fund's overall performance was satisfactory and
that the advisory fee was reasonable in light of the high quality of services
received by the Fund from the Advisor and the other factors considered.
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Other Items continued
Economies of Scale. The Board considered the effect of each Fund's current size
and potential growth on its performance and fees. The Board took into account
management's discussion of the Funds' advisory fee structure. The Board
considered the effective advisory fees under the Investment Advisory Agreement
as a percentage of assets at different asset levels and possible economies of
scale that might be realized if the assets of each Fund increase. The Board
noted that the advisory fee schedules for some of the Funds contain breakpoints
that would reduce the respective advisory fee rate on assets above specified
levels as the respective Fund's assets increased and considered the necessity of
adding breakpoints with respect to the Funds that did not currently have such
breakpoints in their advisory fee schedules. The Board determined that adding
breakpoints at specified levels to the advisory fee schedule of such Funds was
not appropriate at this time given each Fund's current size. The Board also
noted that if a Fund's assets increase over time, the Fund might realize other
economies of scale if assets increase proportionally more than certain other
expenses. The Board also considered the fact that, under the Investment Advisory
Agreement, the advisory fee payable to the Advisor by a Fund was reduced by the
total sub-advisory fee(s) paid by the Advisor to the Fund's Sub-Advisor(s).
Conclusion. In considering the renewal of the Funds' Investment Advisory
Agreement, the Board, including the Independent Trustees, did not identify any
single factor as controlling, and each Trustee may have 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' Investment Advisory Agreement with the Advisor, among others: (a) the
Advisor had demonstrated that it possessed the capability and resources to
perform the duties required of it under the Investment Advisory Agreement; (b)
the Advisor maintains an appropriate compliance program; (c) the performance of
each Fund is satisfactory in relation to the performance of funds with similar
investment objectives and to relevant indices; and (d) each Fund's advisory fee
is reasonable in relation to those of similar funds and to the services to be
provided by the Advisor. Based on their conclusions, the Trustees determined
with respect to each Fund that continuation of the Investment Advisory Agreement
was in the best interests of the 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, among them:
(1) the nature, extent and quality of services provided to the Fund, including
the personnel providing services; (2) the Sub-Advisor's compensation; (3) a
comparison of the sub-advisory fee 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.
93
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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-Advisors to certain of
the Funds with the Advisor, noting any potential conflicts of interest. The
Board also noted that, on a periodic basis, the Board meets with portfolio
managers of the Sub-Advisors to discuss their respective performance and
investment processes 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 Board also
noted each Sub-Advisor's brokerage practices. The Board also considered each
Sub-Advisor's regulatory and compliance history. The Board noted that the
Advisor's compliance monitoring processes includes quarterly reviews of
compliance reports and annual compliance visits to the Sub-Advisors and that
compliance issues, if any, 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 each Sub-Advisor of its relationship
with the Funds, the Board noted the undertakings of the Advisor to maintain
expense limitations for the Funds and also noted that the sub-advisory fees
under the Sub-Advisory Agreements were paid by the Advisor out of the advisory
fees that it receives under the Investment Advisory Agreement and in addition,
with respect to the unaffiliated Sub-Advisors, are negotiated at arms-length. As
a consequence, the profitability to each Sub-Advisor of its relationship with a
Fund was not a substantial factor in the Board's deliberations. For similar
reasons, the Board did not consider the potential economies of scale in each
Sub-Advisor's management of the respective Fund to be a substantial factor in
its consideration, although the Board noted that the sub-advisory fee schedules
for most of the Funds contained breakpoints that would reduce the sub-advisory
fee rate on assets above specified levels if the respective Fund's assets
increased.
Sub-Advisory Fees and Fund Performance. The Board considered that each Fund pays
an advisory fee to the Advisor and that the Advisor pays the sub-advisory fee to
the respective Sub-Advisor(s). The Board also compared the sub-advisory fees
paid by the Advisor to fees charged by the Sub-Advisor to manage comparable
institutional separate accounts. The Board considered the amount retained by the
Advisor and the sub-advisory fee paid to each Sub-Advisor with respect to the
various services provided by the Advisor and the Sub-Advisor. The Board compared
the sub-advisory fee(s) for each Fund with various comparative data, if
available, including the median and average sub-advisory fees of each Fund's
peer group, and considered the following information:
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 quality of services received
by the Fund from the Sub-Advisor 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 quality of services received by
the Fund from the Sub-Advisor and the other factors considered.
94
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Other Items continued
Touchstone High Yield Fund. The Fund's sub-advisory fee was at the median of its
peer group. Based upon their review, the Trustees concluded that the
sub-advisory fee was reasonable in light of the quality of services received by
the Fund from the Sub-Advisor and the other factors considered.
Touchstone Mid Cap Growth Fund. The Fund's sub-advisory fees were 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 quality of services received
by the Fund from the Sub-Advisor 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 quality of services received by
the Fund from the Sub-Advisor and the other factors considered.
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 quality of services received
by the Fund from the Sub-Advisor and the other factors considered.
As noted above, the Board considered each Fund's performance during the
six-month, twelve-month, and thirty-six month periods ended September 30, 2009,
as compared to each Fund's peer group and noted that the Board reviews on a
quarterly basis detailed information about each Fund's performance results,
portfolio composition and investment strategies. The Board noted the Advisor's
expertise and resources in monitoring the performance, investment style and risk
adjusted performance of each Sub-Advisor. The Board was mindful of the Advisor's
focus on each Sub-Advisor's performance and the Advisor's ways of addressing
underperformance.
Conclusion. In considering the renewal of the Sub-Advisory Agreement(s) with
respect to each Fund, the Board, including the Independent Trustees, did not
identify any single factor as controlling, and each Trustee may have attributed
different weights to the various factors. The Board reached the following
conclusions regarding each Sub-Advisory Agreement, among others: (a) the
Sub-Advisor was qualified to manage each Fund's assets in accordance with that
Fund's investment objectives and policies; (b) the Sub-Advisor maintains an
appropriate compliance program; (c) the performance of each Fund was
satisfactory in relation to the performance of funds with similar investment
objectives and to relevant indices; (d) each Fund's advisory fees 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 investment objectives of each Fund. Based on its
conclusions, the Board determined that approval of the Sub-Advisory Agreement(s)
with respect to each Fund was in the best interests of the respective Fund and
its shareholders.
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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
Name Position(s) Term of Office(2) Overseen in Other
Address Held with And Length of Principal Occupation(s) the Touchstone Directorships
Age Trust Time Served During Past 5 Years Fund Complex(3) Held(4)
- ------------------------------------------------------------------------------------------------------------------------------------
Jill T. McGruder Trustee and Until retirement at President and CEO of IFS 48 Director of LaRosa's
Touchstone Advisors, Inc President age 75 or until she Financial Services, Inc. (a restaurant chain),
303 Broadway resigns or is (a holding company). Capital Analysts
Cincinnati, OH removed Incorporated (an
Year of Birth: 1955 Trustee since 1999 investment advisor and
broker-dealer), IFS
Financial Services,
Inc. (a holding
company), IFS Fund
Distributors (a
broker-dealer),
Integrity and National
Integrity Life
Insurance Co.,
Touchstone Securities
(the Trust's
distributor),
Touchstone Advisors
(the Trust's
investment advisor and
administrator), W&S
Brokerage Services (a
broker-dealer) and W&S
Financial Group
Distributors (a
distribution company).
- ------------------------------------------------------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES:
- ------------------------------------------------------------------------------------------------------------------------------------
Phillip R. Cox Trustee Until retirement at President and Chief 48 Director of Cincinnati
105 East Fourth Street age 75 or until he Executive Officer of Cox Bell (a communications
Cincinnati, OH resigns or is Financial Corp. (a company), Bethesda
Year of Birth: 1947 removed financial services Inc. (a hospital),
Trustee since 1994 company). Timken Co. (a
manufacturing
company), Diebold (a
technology solutions
company), and Ohio
Business Alliance for
Higher Education.
- ------------------------------------------------------------------------------------------------------------------------------------
Susan J. Hickenlooper Trustee Until retirement at President and Trustee 48 Trustee of Gateway
c/o Touchstone Advisors, Inc. age 75 or until she of Episcopal Retirement Trust (a charitable
303 Broadway resigns or is Homes Foundation organization), Trustee
Cincinnati, OH removed of Cincinnati Parks
Year of Birth: 1946 Trustee since 2009 Foundation.
- ------------------------------------------------------------------------------------------------------------------------------------
H. Jerome Lerner Trustee Until retirement at Principal of HJL 48 None
c/o Touchstone Advisors, Inc. age 75 or until he Enterprises (a privately
303 Broadway resigns or is held investment
Cincinnati, OH removed company).
Year of Birth: 1938 Trustee since 1999
- ------------------------------------------------------------------------------------------------------------------------------------
Donald C. Siekmann Trustee Until retirement at Executive for Duro Bag 48 None
c/o Touchstone Advisors, Inc. age 75 or until he Manufacturing Co. (a bag
303 Broadway resigns or is manufacturer); President
Cincinnati, OH removed of Shor Foundation for
Year of Birth: 1938 Trustee since 2005 Epilepsy Research (a
charitable foundation);
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Robert E. Stautberg Trustee Until retirement at Retired Partner of KPMG 48 Trustee of Tri-Health
c/o Touchstone Advisors, Inc. age 75 or until he LLP (a certified public Physician Enterprise
303 Broadway resigns or is accounting firm). Vice Corporation.
Cincinnati, OH removed President of St. Xavier
Year of Birth: 1934 Trustee since 1994 High School.
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John P. Zanotti Trustee Until retirement at CEO, Chairman and 48 Director of QMed
c/o Touchstone Advisors, Inc. age 75 or until he Director of Avaton, Inc. (a health care
303 Broadway resigns or is (a wireless entertainment management company).
Cincinnati, OH removed company). President of
Year of Birth: 1948 Trustee since 2002 Cincinnati Biomedical (a
life science and economic
development company).
Chairman of Integrated
Media Technologies (a
media company).
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(1) Ms. McGruder, as a director of the Advisor and the Distributor, and an
officer of affiliates of the Advisor and the Distributor, 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 until he or she
sooner resigns or is removed.
(3) The Touchstone Fund Complex consists of 11 series of the Trust, 20 series
of Touchstone Funds Group Trust, 3 series of Touchstone Institutional
Funds Trust, 4 series of Touchstone In vestment Trust, 6 series of
Touchstone Strategic Trust and 4 series of Touchstone Tax-Free Trust.
(4) Each Trustee is also a Trustee of Touchstone Funds Group Trust, Touchstone
Institutional Funds Trust, Touchstone In vestment Trust, Touchstone
Strategic Trust and Touchstone Tax-Free Trust.
96
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TOUCHSTONE VARIABLE SERIES TRUST
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- --------------------------------------------------------------------------------
PRINCIPAL OFFICERS(1):
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Number of Funds
Name Term of Overseen in Other
Address Position(s) Office And Length Principal Occupation(s) the Touchstone Directorships
Age Held with Trust of Time Served During Past 5 Years Fund Complex(2) Held
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Jill T. McGruder President Until resignation, See biography above. 48 See biography
Touchstone Advisors, Inc. removal or above.
303 Broadway disqualification
Cincinnati, OH President since
Year of Birth: 1955 2004; President from
2000-2002
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Brian E. Hirsch Vice Until resignation, Senior Vice President and 48 None
Touchstone Advisors, Inc. President and removal or Chief Compliance
303 Broadway Chief disqualification Officer of IFS Financial
Cincinnati, OH Compliance Vice President since Services, Inc.
Year of Birth: 1956 Officer 2003
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Steven M. Graziano Vice Until resignation, President of Touchstone 48 None
Touchstone Advisors, Inc. President removal or Advisors, Inc.;
303 Broadway disqualification Executive Vice President
Cincinnati, OH Vice President since of Pioneer Investment
Year of Birth: 1954 2009 Management, Head of Retail
Distribution and
Strategic Marketing
2007 - 2008; Executive
Vice President of Pioneer
Investment Management,
Chief Marketing Officer
2002 - 2007.
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Terrie A. Wiedenheft Controller Until resignation, Chief Financial Officer of 48 None
Touchstone Advisors, Inc. And Treasurer removal or IFS Financial Services,
303 Broadway disqualification Inc.
Cincinnati, OH Controller since 2000
Year of Birth: 1962 Treasurer since 2003
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Jay S. Fitton Secretary Until resignation, Assistant Vice President 48 None
JPMorgan removal or and Senior Counsel at
303 Broadway disqualification JPMorgan Chase Bank, N.A.
Cincinnati, OH Secretary since 2006
Year of Birth: 1970 Assistant Secretary
from 2002-2006
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(1) Each officer also holds the same office with Touchstone Funds Group Trust,
Touchstone Institutional Funds Trust, Touchstone Investment Trust,
Touchstone Strategic Trust and Touchstone Tax-Free Trust.
(2) The Touchstone Fund Complex consists of 11 series of the Trust, 20 series
of Touchstone Funds Group Trust, 3 series of Touchstone Institutional
Funds Trust, 4 series of Touchstone Investment Trust, 6 series of
Touchstone Strategic Trust and 4 series of Touchstone Tax-Free Trust.
97
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================================================================================
PRIVACY PROTECTION POLICY
WE RESPECT YOUR PRIVACY
Thank you for your decision to invest with us. Touchstone and its affiliates
have always placed a high value on the trust and confidence our clients place in
us. We believe that confidence must be earned and validated through time. In
today's world, when technology allows the sharing of information at light
speeds, trust must be reinforced by our sincere pledge to take the steps
necessary to ensure that the information you share with us is treated with
respect and confidentiality.
OUR PLEDGE TO OUR CLIENTS
o We collect only the information we need to service your account and
administer our business.
o We are committed to keeping your information confidential and we place
strict limits and controls on the use and sharing of your information.
o We make every effort to ensure the accuracy of your information.
WE COLLECT THE FOLLOWING NONPUBLIC PERSONAL INFORMATION ABOUT YOU:
o Information we receive from you on or in applications or other forms,
correspondence, or conversations, including, but not limited to, your
name, address, phone number, social security number, assets, income and
date of birth; and
o Information about your transactions with us, our affiliates, or others,
including, but not limited to, your account number and balance, payment
history, parties to transactions, cost basis information, and other
financial information.
CATEGORIES OF INFORMATION WE DISCLOSE AND PARTIES TO WHOM WE DISCLOSE
We do not disclose any nonpublic personal information about our current or
former clients to nonaffiliated third parties, except as required or permitted
by law.
WE PLACE STRICT LIMITS AND CONTROLS ON THE USE AND SHARING OF YOUR INFORMATION
o We restrict access to nonpublic personal information about you to
authorized employees who need the information to administer your business.
o We maintain physical, electronic and procedural safeguards that comply
with federal standards to protect this information.
o We do not disclose any nonpublic personal information about our current or
former clients to anyone, except as required or permitted by law or as
described in this document.
o We will not sell your personal information to anyone.
WE MAY PROVIDE INFORMATION TO SERVICE YOUR ACCOUNT
Sometimes it is necessary to provide information about you to various companies
such as transfer agents, custodians, broker-dealers and marketing service firms
to facilitate the servicing of your account. These organizations have a
legitimate business need to see some of your personal information in order for
us to provide service to you. We may disclose to these various companies the
information that we collect as described above. We require that these companies,
including our own subsidiaries and affiliates, strictly maintain the
confidentiality of this information and abide by all applicable laws. Companies
within our corporate family that may receive this information are financial
service providers and insurance companies. We do not permit these associated
companies to sell the information for their own purposes, and we never sell our
customer information.
This policy is applicable to the following affiliated companies: Touchstone
Funds Group Trust, Touchstone Investment Trust, Touchstone Strategic Trust,
Touchstone Tax-Free Trust, Touchstone Variable Series Trust, Touchstone
Institutional Funds Trust, Touchstone Securities, Inc.*, Capital Analysts
Incorporated and W&S Brokerage Services, Inc.
* Touchstone Securities, Inc. serves as the underwriter to the Touchstone
Funds.
A Member of Western & Southern Financial Group(R)
THE PRIVACY PROTECTION POLICY IS NOT PART OF THE ANNUAL REPORT.
================================================================================
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[LOGO] TOUCHSTONE INVESTMENTS(R)
TSF-1006-TVST-AR-0912
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.
Don Siekmann 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 approximately $138,720 for the December 31,
2009 fiscal year and $153,100 ($8,000 related to filings of Form N-14) for the
December 31, 2008 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 $15,000 ($9,000 paid by
JPMorgan) for the December 31, 2009 fiscal year and $0 for the December 31, 2008
fiscal year. The 2009 fees are related to limited internal control testing in of
the Trust's fund accountant and transfer agent.
(c) Tax Fees. Tax fees totaled $34,100 for the December 31, 2009 fiscal year and
$64,200 ($14,000 related to the dividend deficiency in the Eagle Capital
Appreciation Fund) for the December 31, 2008 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, 2009 or
December 31, 2008 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 $64,100 for the December 31, 2009 fiscal year and $93,200 for
the December 31, 2008 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.
No material changes have been made to the 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, 2004 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
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By (Signature and Title)
/s/ Jill T. McGruder
- ------------------------
Jill T. McGruder
President
Date: March 3, 2010
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 3, 2010
/s/ Terrie A. Wiedenheft
- ------------------------
Terrie A. Wiedenheft
Controller & Treasurer
Date: March 2, 2010