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 811-09491
Allianz Variable Insurance Products Trust
(Exact name of registrant as specified in charter)
5701 Golden Hills Drive, Minneapolis, MN | 55416-1297 | |
(Address of principal executive offices) | (Zip code) |
Citi Fund Services Ohio, Inc., 3435 Stelzer Road, Columbus, OH 43219-8000
(Name and address of agent for service)
Registrant’s telephone number, including area code: 877-833-7113
Date of fiscal year end: December 31
Date of reporting period: December 31, 2013
Item 1. Reports to Stockholders.
AZL® BlackRock Capital Appreciation Fund
Annual Report
December 31, 2013
Table of Contents
Management Discussion and Analysis
Page 1
Expense Examples and Portfolio Composition
Page 3
Schedule of Portfolio Investments
Page 4
Statement of Assets and Liabilities
Page 6
Statement of Operations
Page 6
Statements of Changes in Net Assets
Page 7
Financial Highlights
Page 8
Notes to the Financial Statements
Page 9
Report of Independent Registered Public Accounting Firm
Page 13
Other Federal Income Tax Information
Page 14
Other Information
Page 15
Approval of Investment Advisory and Subadvisory Agreements
Page 16
Information about the Board of Trustees and Officers
Page 19
This report is submitted for the general information of the shareholder of the Fund. The report is not authorized for distribution to prospective investors in the Fund unless preceded or accompanied by an effective prospectus, which contains details concerning the sales charges and other pertinent information.
AZL® BlackRock Capital Appreciation Fund Review (unaudited)
Allianz Investment Management LLC serves as the Manager for the AZL® BlackRock Capital Appreciation Fund and BlackRock Capital Management, Inc. serves as Subadviser to the Fund.
What factors affected the Fund’s performance during the year ended December 31, 2013?
For the year ended December 31, 2013 the AZL® BlackRock Capital Appreciation Fund returned 33.44%1. That compared to a 33.48% return for its benchmark, the Russell 1000® Growth Index2.
U.S. stocks posted very strong performance during the period. Equity markets posted strong returns early in the period before pulling back after a May announcement by Federal Reserve Chairman Ben Bernanke that the Fed may begin tapering its quantitative easing efforts. Stocks regained their upward momentum as the Fed appeared less likely to begin tapering during the period, and finished off the year with strong gains. Late in the year, news that Congress was making progress on a budget agreement helped buoy markets, as did a series of better-than-expected economic data, including upward revisions to third-quarter gross domestic product3 growth. All told, the S&P 500 Index4 posted its largest annual return since 1995.
The strength of the recovering economy helped improve cyclical sectors, which were among the best performers during the period. The information technology and industrial sectors outperformed the markets, while defensive sectors lagged.
The Fund slightly underperformed its benchmark during the 12-month period. The largest detractor of relative performance was stock selection in the health care sector, particularly due to holdings of a pharmacy benefit manager, which saw its share price drop after missing revenue targets early in the period. The subsequent rally in the stock was largely offset by uncertainty surrounding a shift by large employers toward private health insurance exchanges in the third quarter. Meanwhile, the Fund was also hurt by its exposure to a drug maker that faced delays in rolling out a new product. The energy sector also detracted from the Fund’s relative performance, as many of the Fund’s holdings traded lower due to the decline in commodity prices.*
Contributing positively to the Fund’s relative performance was stock selection within the information technology sector. Some of the holdings in that sector were the Fund’s best performers during the period—most notably an Internet firm that benefited from its partial ownership of a strong-performing Asian Internet company. The Fund’s underweight position in an American technology firm was
yet another positive factor in this sector as the company’s share price suffered when it missed earnings expectations for the first time since 2005.*
The Fund’s overweight position in the consumer discretionary sector helped improve relative performance, mainly due to stock selection in that sector that aided the Fund’s performance, with a media company and an Asian casino operator acting as the main drivers of outperformance. The former benefited from strong earnings and a doubling of its stock repurchase program, while the latter benefited from growth in the mass market in China. An underweight position in consumer staples contributed positively to relative performance, as that defensive sector lagged the benchmark due to a larger appetite for risk among investors.*
Past performance does not guarantee future results.
* | The Fund’s portfolio composition is subject to change. There is no guarantee that any sectors mentioned will continue to perform well or that securities in such sectors will be held by the Fund in the future. The information contained in this commentary is for informational purposes only and should not be construed as a recommendation to purchase or sell securities in the sector mentioned. The Fund’s holdings and weightings are as of December 31, 2013. |
1 | The recent growth rate in the stock market has helped to produce short-term returns that are not typical and may not continue in the future. Because of ongoing market volatility, Fund performance may be subject to substantial short-term changes. |
2 | The Russell 1000® Growth Index measures the performance of the large-cap growth segment of the U.S. equity universe. It includes those Russell 1000 companies with higher price-to-book ratios and higher forecasted growth values. Investors cannot invest directly in an index. |
3 | The Gross Domestic Product (GDP) is the measure of the market value of the goods and services produced by labor and property in the United States. |
4 | The Standard & Poor’s 500 Index (“S&P 500”) is representative of 500 selected common stocks, most of which are listed on the New York Stock Exchange, and is a measure of the U.S. Stock market as a whole. |
1
AZL® BlackRock Capital Appreciation Fund Review (unaudited)
Fund Objective
The Fund’s investment objective is to seek long-term growth of capital. This objective may be changed by the Trustees of the Fund without shareholder approval. The Fund seeks to achieve its objective by investing primarily in a diversified portfolio consisting of primarily common stock of U.S. companies that the Subadviser believes have exhibited above-average growth rates in earnings over the long term.
Investment Concerns
Equity securities (stocks) are more volatile and carry more risk than other forms of investments, including investments in high-grade fixed income securities. The net asset value per share of this Fund will fluctuate as the value of the securities in the portfolio changes.
Small- to mid-capitalization companies typically have a higher risk of failure and historically have experienced a greater degree of volatility.
Growth based investments can perform differently from the market as a whole and can be more volatile than other types of securities.
International investing may involve risk of capital loss from unfavorable fluctuations in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations.
For a complete description of these and other risks associated with investing in a mutual Fund, please refer to the Fund’s prospectus.
Growth of $10,000 Investment
The chart above represents a comparison of a hypothetical investment in the Fund versus a similar investment in the Fund’s benchmark, and represents the reinvestment of dividends and capital gains in the Fund.
Average Annual Total Returns as of December 31, 2013
Since | ||||||||||||||||
1 | 3 | 5 | Inception | |||||||||||||
Year | Year | Year | (4/29/05) | |||||||||||||
AZL® BlackRock Capital Appreciation Fund | 33.44 | %1 | 11.32 | % | 17.37 | % | 7.87 | % | ||||||||
Russell 1000® Growth Index | 33.48 | % | 16.45 | % | 20.39 | % | 9.07 | % |
Past performance does not guarantee future results. The performance data quoted represents past performance and current returns may be lower or higher. The investment return and principal value will fluctuate so that an investor’s shares, when redeemed may be worth more or less than the original cost. To obtain performance information current to the most recent month end, please visit www.Allianzlife.com.
Expense Ratio | Gross | |||
AZL® BlackRock Capital Appreciation Fund | 1.11 | % |
The above expense ratio is based on the current Fund prospectus dated April 29, 2013. The Manager voluntarily reduced the management fee to 0.70%. The Manager and the Fund have entered into a written contract limiting operating expenses, excluding certain expenses (such as interest expense), to 1.20% through April 30, 2015. Additional information pertaining to the December 31, 2013 expense ratios can be found in the financial highlights.
1 | The recent growth rate in the stock market has helped to produce short-term returns that are not typical and may not continue in the future. Because of ongoing market volatility, Fund performance may be subject to substantial short-term changes. |
The total return of the Fund does not reflect the effect of any insurance charges, the annual maintenance fee or the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. Such charges, fees and tax payments would reduce the performance quoted. |
The Fund’s performance is measured against the Russell 1000® Growth Index, an unmanaged index that measures the performance of the large-cap growth segment of the U.S. equity universe. It includes those Russell 1000 companies with higher price-to-book ratios and higher forecasted growth values. The index does not reflect the deduction of fees associated with a mutual fund, such as investment management and fund accounting fees. The Fund’s performance reflects the deduction of fees for services provided to the Fund. Investors cannot invest directly in an index. |
2
AZL BlackRock Capital Appreciation Fund
(Unaudited)
As a shareholder of the AZL BlackRock Capital Appreciation Fund (the “Fund”), you incur ongoing costs, including management fees, distribution fees, and other Fund expenses. These examples are intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. Please note that the expenses shown in each table do not reflect expenses that apply to the subaccount or the insurance contract. If the expenses that apply to the subaccount of the insurance contract were included, your costs would have been higher.
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the periods presented below.
The Actual Expense table below provides information about actual account values and actual expenses. You may use the information below, 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 table under the heading entitled “Expenses Paid During Period” to estimate the expenses you paid on your account during this period.
Beginning Account Value 7/1/13 | Ending Account Value 12/31/13 | Expenses Paid During Period 7/1/13 - 12/31/13* | Annualized Expense Ratio During Period 7/1/13 - 12/31/13 | |||||||||||||||||
AZL BlackRock Capital Appreciation Fund | $ | 1,000.00 | $ | 1,235.00 | $ | 5.63 | 1.00 | % |
The Hypothetical Expense table below provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.
Beginning Account Value 7/1/13 | Ending Account Value 12/31/13 | Expenses Paid During Period 7/1/13 - 12/31/13* | Annualized Expense Ratio During Period 7/1/13 - 12/31/13 | |||||||||||||||||
AZL BlackRock Capital Appreciation Fund | $ | 1,000.00 | $ | 1,020.16 | $ | 5.09 | 1.00 | % |
* | Expenses are equal to the average account value over the period, multiplied by the Fund’s annualized expense ratio, multiplied by 184/365 (to reflect the one half year period). |
Portfolio Composition
(Unaudited)
Investments | Percent of net assets | ||||
Information Technology | 33.0 | % | |||
Consumer Discretionary | 28.2 | ||||
Industrials | 13.5 | ||||
Health Care | 13.0 | ||||
Energy | 3.4 | ||||
Financials | 3.2 | ||||
Consumer Staples | 2.3 | ||||
Materials | 2.0 | ||||
Telecommunication Services | 1.3 | ||||
|
| ||||
Total Common Stock | 99.9 | ||||
Securities Held as Collateral for Securities on Loan | 1.5 | ||||
Money Market | 0.5 | ||||
|
| ||||
Total Investment Securities | 101.9 | ||||
Net other assets (liabilities) | (1.9 | ) | |||
|
| ||||
Net Assets | 100.0 | % | |||
|
|
3
AZL BlackRock Capital Appreciation Fund
Schedule of Portfolio Investments
December 31, 2013
Shares | Fair Value | |||||||
| Common Stocks (99.9%): |
| ||||||
| Aerospace & Defense (5.2%): |
| ||||||
86,662 | Precision Castparts Corp. | $ | 23,338,077 | |||||
122,838 | United Technologies Corp. | 13,978,964 | ||||||
|
| |||||||
37,317,041 | ||||||||
|
| |||||||
| Auto Components (0.9%): |
| ||||||
106,665 | Delphi Automotive plc | 6,413,766 | ||||||
|
| |||||||
| Biotechnology (6.0%): |
| ||||||
200,692 | Gilead Sciences, Inc.* | 15,082,004 | ||||||
44,648 | Regeneron Pharmaceuticals, Inc.* | 12,288,916 | ||||||
133,815 | United Therapeutics Corp.* | 15,131,800 | ||||||
|
| |||||||
42,502,720 | ||||||||
|
| |||||||
| Chemicals (2.0%): |
| ||||||
44,411 | Eastman Chemical Co. | 3,583,968 | ||||||
91,042 | Monsanto Co. | 10,610,945 | ||||||
|
| |||||||
14,194,913 | ||||||||
|
| |||||||
| Consumer Finance (0.9%): |
| ||||||
111,452 | Discover Financial Services | 6,235,739 | ||||||
|
| |||||||
| Diversified Financial Services (2.3%): |
| ||||||
33,528 | IntercontinentalExchange Group, Inc. | 7,541,118 | ||||||
112,323 | Moody’s Corp. | 8,813,986 | ||||||
|
| |||||||
16,355,104 | ||||||||
|
| |||||||
| Diversified Telecommunication Services (1.3%): |
| ||||||
359,416 | Vivendi | 9,507,284 | ||||||
|
| |||||||
| Electrical Equipment (4.0%): |
| ||||||
226,337 | Eaton Corp. plc | 17,228,772 | ||||||
40,460 | Roper Industries, Inc. | 5,610,993 | ||||||
103,488 | Solarcity Corp.* | 5,880,188 | ||||||
|
| |||||||
28,719,953 | ||||||||
|
| |||||||
| Energy Equipment & Services (1.1%): |
| ||||||
143,166 | FMC Technologies, Inc.* | 7,474,697 | ||||||
|
| |||||||
| Food Products (1.0%): |
| ||||||
197,211 | Mondelez International, Inc., Class A | 6,961,548 | ||||||
|
| |||||||
| Health Care Equipment & Supplies (1.7%): |
| ||||||
32,020 | Intuitive Surgical, Inc.* | 12,298,242 | ||||||
|
| |||||||
| Hotels, Restaurants & Leisure (4.1%): |
| ||||||
154,041 | Melco Crown Entertainment, Ltd., ADR* | 6,041,488 | ||||||
158,421 | Starbucks Corp. | 12,418,623 | ||||||
55,316 | Wynn Resorts, Ltd. | 10,742,920 | ||||||
|
| |||||||
29,203,031 | ||||||||
|
| |||||||
| Internet & Catalog Retail (7.5%): |
| ||||||
66,513 | Amazon.com, Inc.* | 26,524,719 | ||||||
151,809 | Expedia, Inc. | 10,575,015 | ||||||
14,184 | Priceline.com, Inc. | 16,487,482 | ||||||
|
| |||||||
53,587,216 | ||||||||
|
| |||||||
| Internet Software & Services (17.4%): |
| ||||||
94,500 | AOL, Inc.* | 4,405,590 | ||||||
134,693 | eBay, Inc.* | 7,393,299 | ||||||
88,282 | Facebook, Inc., Class A* | 4,825,496 | ||||||
30,143 | Google, Inc., Class A* | 33,781,559 | ||||||
69,207 | LinkedIn Corp., Class A* | 15,006,154 | ||||||
143,296 | SINA Corp.* | 12,072,688 | ||||||
481,307 | Yahoo!, Inc.* | 19,464,055 | ||||||
199,830 | Yandex NV* | 8,622,665 | ||||||
Shares | Fair Value | |||||||
| Common Stocks, continued |
| ||||||
| Internet Software & Services, continued |
| ||||||
186,880 | Yelp, Inc.* | $ | 12,885,375 | |||||
188,595 | Youku.com, Inc., ADR* | 5,714,429 | ||||||
|
| |||||||
124,171,310 | ||||||||
|
| |||||||
| IT Services (6.9%): |
| ||||||
40,016 | Alliance Data Systems Corp.*^ | 10,521,407 | ||||||
10,478 | MasterCard, Inc., Class A | 8,753,950 | ||||||
132,233 | Visa, Inc., Class A | 29,445,644 | ||||||
|
| |||||||
48,721,001 | ||||||||
|
| |||||||
| Media (11.8%): |
| ||||||
413,715 | Comcast Corp., Class A | 21,498,701 | ||||||
203,690 | Liberty Global plc, Class A* | 18,126,373 | ||||||
3,375,872 | Sirius XM Holdings, Inc.* | 11,781,793 | ||||||
244,256 | Time Warner, Inc. | 17,029,528 | ||||||
203,746 | Walt Disney Co. (The) | 15,566,194 | ||||||
|
| |||||||
84,002,589 | ||||||||
|
| |||||||
| Oil, Gas & Consumable Fuels (2.3%): |
| ||||||
141,247 | Cabot Oil & Gas Corp. | 5,474,734 | ||||||
44,762 | Concho Resources, Inc.* | 4,834,296 | ||||||
228,872 | Laredo Petroleum Holdings, Inc.* | 6,337,465 | ||||||
|
| |||||||
16,646,495 | ||||||||
|
| |||||||
| Personal Products (1.3%): |
| ||||||
119,027 | Estee Lauder Co., Inc. (The), Class A | 8,965,114 | ||||||
|
| |||||||
| Pharmaceuticals (5.3%): |
| ||||||
280,444 | Abbvie, Inc. | 14,810,247 | ||||||
64,844 | Allergan, Inc. | 7,202,872 | ||||||
134,535 | Valeant Pharmaceuticals International, Inc.* | 15,794,409 | ||||||
|
| |||||||
37,807,528 | ||||||||
|
| |||||||
| Professional Services (1.0%): |
| ||||||
112,299 | Verisk Analytics, Inc., Class A* | 7,380,290 | ||||||
|
| |||||||
| Road & Rail (3.2%): |
| ||||||
33,974 | Canadian Pacific Railway, Ltd. | 5,140,946 | ||||||
103,810 | Union Pacific Corp. | 17,440,080 | ||||||
|
| |||||||
22,581,026 | ||||||||
|
| |||||||
| Software (5.0%): |
| ||||||
350,605 | Autodesk, Inc.* | 17,645,949 | ||||||
147,002 | Splunk, Inc.* | 10,094,627 | ||||||
275 | Verint Systems, Inc.* | 11,809 | ||||||
85,184 | VMware, Inc., Class A* | 7,641,857 | ||||||
|
| |||||||
35,394,242 | ||||||||
|
| |||||||
| Specialty Retail (1.3%): |
| ||||||
112,088 | CarMax, Inc.* | 5,270,377 | ||||||
36,085 | Lumber Liquidators Holdings, Inc.* | 3,712,786 | ||||||
|
| |||||||
8,983,163 | ||||||||
|
| |||||||
| Textiles, Apparel & Luxury Goods (2.6%): |
| ||||||
41,548 | Michael Kors Holdings, Ltd.* | 3,373,282 | ||||||
192,608 | Nike, Inc., Class B | 15,146,693 | ||||||
|
| |||||||
18,519,975 | ||||||||
|
| |||||||
| Trading Companies & Distributors (0.1%): |
| ||||||
10,126 | United Rentals, Inc.* | 789,322 | ||||||
|
| |||||||
| Wireless Telecommunication Services (3.7%): |
| ||||||
583,753 | SoftBank Corp., ADR^ | 25,574,219 | ||||||
|
| |||||||
| Total Common Stocks (Cost $541,983,557) | 710,307,528 | ||||||
|
|
Continued
4
AZL BlackRock Capital Appreciation Fund
Schedule of Portfolio Investments
December 31, 2013
Contracts, Shares, Notional Amount or Principal Amount | Fair Value | |||||||
| Securities Held as Collateral for Securities on Loan (1.5%): |
| ||||||
$ | 10,584,981 | Allianz Variable Insurance Products Securities Lending Collateral Trust(a) | $ | 10,584,981 | ||||
|
| |||||||
| Total Securities Held as Collateral for Securities on Loan | 10,584,981 | ||||||
|
| |||||||
| Unaffiliated Investment Company (0.5%): |
| ||||||
3,545,347 | Dreyfus Treasury Prime Cash Management Fund, Institutional Shares, 0.00%(b) | 3,545,347 | ||||||
|
| |||||||
| Total Unaffiliated Investment Company (Cost $3,545,347) | 3,545,347 | ||||||
|
| |||||||
| Total Investment Securities | |||||||
| (Cost $556,113,885)(c) — 101.9% | 724,437,856 | ||||||
| Net other assets (liabilities) — (1.9)% | (13,304,859 | ) | |||||
|
| |||||||
| Net Assets — 100.0% | $ | 711,132,997 | |||||
|
|
Percentages indicated are based on net assets as of December 31, 2013.
ADR—American Depositary Receipt
* | Non-income producing security. |
^ | This security or a partial position of this security was on loan as of December 31, 2013. The total value of securities on loan as of December 31, 2013, was $10,481,506. |
(a) | Purchased with cash collateral held from securities lending. The value of the collateral could include collateral held for securities that were sold on or before December 31, 2013. |
(b) | The rate represents the effective yield at December 31, 2013. |
(c) | See Federal Tax Information listed in the Notes to the Financial Statements. |
The following represents the concentrations by country of risk (based on the domicile of the security issuer) relative to the total fair value of investments as of December 31, 2013:
Country | Percentage | |||
Canada | 2.9 | % | ||
Cayman Islands | 2.5 | % | ||
France | 1.3 | % | ||
Hong Kong | 1.3 | % | ||
Ireland (Republic of) | 2.4 | % | ||
Japan | 3.5 | % | ||
Netherlands | 1.2 | % | ||
United Kingdom | 0.9 | % | ||
United States | 84.0 | % | ||
|
| |||
100.0 | % | |||
|
|
See accompanying notes to the financial statements.
5
AZL BlackRock Capital Appreciation Fund
Statement of Assets and Liabilities
December 31, 2013
Assets: | |||||
Investment securities, at cost | $ | 556,113,885 | |||
|
| ||||
Investment securities, at value* | $ | 724,437,856 | |||
Interest and dividends receivable | 451,274 | ||||
Receivable for capital shares issued | 2,983 | ||||
Receivable for investments sold | 7,138,707 | ||||
Reclaims receivable | 403 | ||||
|
| ||||
Total Assets | 732,031,223 | ||||
|
| ||||
Liabilities: | |||||
Payable for investments purchased | 8,955,378 | ||||
Payable for capital shares redeemed | 730,696 | ||||
Payable for collateral received on loaned securities | 10,584,981 | ||||
Manager fees payable | 410,377 | ||||
Administration fees payable | 23,687 | ||||
Distribution fees payable | 146,562 | ||||
Custodian fees payable | 6,103 | ||||
Administrative and compliance services fees payable | 2,774 | ||||
Trustee fees payable | 21 | ||||
Other accrued liabilities | 37,647 | ||||
|
| ||||
Total Liabilities | 20,898,226 | ||||
|
| ||||
Net Assets | $ | 711,132,997 | |||
|
| ||||
Net Assets Consist of: | |||||
Capital | $ | 484,766,060 | |||
Accumulated net investment income/(loss) | — | ||||
Accumulated net realized gains/(losses) from investment transactions | 58,042,966 | ||||
Net unrealized appreciation/(depreciation) on investments | 168,323,971 | ||||
|
| ||||
Net Assets | $ | 711,132,997 | |||
|
| ||||
Shares of beneficial interest (unlimited number of shares authorized, no par value) | 37,494,448 | ||||
Net Asset Value (offering and redemption price per share) | $ | 18.97 | |||
|
|
* | Includes securities on loan of $10,481,506. |
For the Year Ended December 31, 2013
Investment Income: | |||||
Dividends | $ | 4,777,530 | |||
Interest | 824 | ||||
Income from securities lending | 109,622 | ||||
Foreign withholding tax | (4,393 | ) | |||
|
| ||||
Total Investment Income | 4,883,583 | ||||
|
| ||||
Expenses: | |||||
Manager fees | 4,998,379 | ||||
Administration fees | 190,072 | ||||
Distribution fees | 1,561,991 | ||||
Custodian fees | 26,051 | ||||
Administrative and compliance services fees | 12,477 | ||||
Trustee fees | 32,200 | ||||
Professional fees | 32,690 | ||||
Shareholder reports | 41,499 | ||||
Other expenses | 17,884 | ||||
|
| ||||
Total expenses before reductions | 6,913,243 | ||||
Less expenses voluntarily waived/reimbursed by the Manager | (624,792 | ) | |||
Less expenses paid indirectly | (47,127 | ) | |||
|
| ||||
Net expenses | 6,241,324 | ||||
|
| ||||
Net Investment Income/(Loss) | (1,357,741 | ) | |||
|
| ||||
Realized and Unrealized Gains/(Losses) on Investments: | |||||
Net realized gains/(losses) on securities transactions | 128,641,753 | ||||
Change in net unrealized appreciation/depreciation on investments | 55,425,199 | ||||
|
| ||||
Net Realized/Unrealized Gains/(Losses) on Investments | 184,066,952 | ||||
|
| ||||
Change in Net Assets Resulting From Operations | $ | 182,709,211 | |||
|
|
See accompanying notes to the financial statements.
6
Statements of Changes in Net Assets
AZL BlackRock Capital Appreciation Fund | ||||||||||
For the Year Ended December 31, 2013 | For the Year Ended December 31, 2012 | |||||||||
Change in Net Assets: | ||||||||||
Operations: | ||||||||||
Net investment income/(loss) | $ | (1,357,741 | ) | $ | 3,318,025 | |||||
Net realized gains/(losses) on investment transactions | 128,641,753 | 13,671,717 | ||||||||
Change in unrealized appreciation/depreciation on investments | 55,425,199 | 49,401,218 | ||||||||
|
|
|
| |||||||
Change in net assets resulting from operations | 182,709,211 | 66,390,960 | ||||||||
|
|
|
| |||||||
Dividends to Shareholders: | ||||||||||
From net investment income | (3,318,026 | ) | (227,841 | ) | ||||||
|
|
|
| |||||||
Change in net assets resulting from dividends to shareholders | (3,318,026 | ) | (227,841 | ) | ||||||
|
|
|
| |||||||
Capital Transactions: | ||||||||||
Proceeds from shares issued | 39,281,631 | 70,471,104 | ||||||||
Proceeds from dividends reinvested | 3,318,026 | 227,841 | ||||||||
Value of shares redeemed | (68,680,901 | ) | (56,658,353 | ) | ||||||
|
|
|
| |||||||
Change in net assets resulting from capital transactions | (26,081,244 | ) | 14,040,592 | |||||||
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Change in net assets | 153,309,941 | 80,203,711 | ||||||||
Net Assets: | ||||||||||
Beginning of period | 557,823,056 | 477,619,345 | ||||||||
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End of period | $ | 711,132,997 | $ | 557,823,056 | ||||||
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Accumulated net investment income/(loss) | $ | — | $ | 3,317,989 | ||||||
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Share Transactions: | ||||||||||
Shares issued | 2,445,729 | 5,093,938 | ||||||||
Dividends reinvested | 198,803 | 15,866 | ||||||||
Shares redeemed | (4,183,127 | ) | (4,072,115 | ) | ||||||
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Change in shares | (1,538,595 | ) | 1,037,689 | |||||||
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See accompanying notes to the financial statements.
7
AZL BlackRock Capital Appreciation Fund
(Selected data for a share of beneficial interest outstanding throughout the periods indicated)
Year Ended December 31, | |||||||||||||||||||||||||
2013 | 2012 | 2011 | 2010 | 2009 | |||||||||||||||||||||
Net Asset Value, Beginning of Period | $ | 14.29 | $ | 12.57 | $ | 13.83 | $ | 11.73 | $ | 8.66 | |||||||||||||||
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Investment Activities: | |||||||||||||||||||||||||
Net Investment Income/(Loss) | (0.03 | ) | 0.09 | 0.01 | (0.01 | ) | 0.01 | ||||||||||||||||||
Net Realized and Unrealized Gains/(Losses) on Investments | 4.80 | 1.64 | (1.27 | ) | 2.24 | 3.06 | |||||||||||||||||||
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Total from Investment Activities | 4.77 | 1.73 | (1.26 | ) | 2.23 | 3.07 | |||||||||||||||||||
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Dividends to Shareholders From: | |||||||||||||||||||||||||
Net Investment Income | (0.09 | ) | (0.01 | ) | — | (0.01 | ) | — | (a) | ||||||||||||||||
Net Realized Gains | — | — | — | (0.12 | ) | — | |||||||||||||||||||
Return of Capital | — | — | — | — | (a) | — | |||||||||||||||||||
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Total Dividends | (0.09 | ) | (0.01 | ) | — | (0.13 | ) | — | (a) | ||||||||||||||||
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Net Asset Value, End of Period | $ | 18.97 | $ | 14.29 | $ | 12.57 | $ | 13.83 | $ | 11.73 | |||||||||||||||
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Total Return(b) | 33.44 | % | 13.73 | % | (9.11 | )% | 19.20 | % | 35.46 | % | |||||||||||||||
Ratios to Average Net Assets/Supplemental Data: | |||||||||||||||||||||||||
Net Assets, End of Period (000’s) | $ | 711,133 | $ | 557,823 | $ | 477,619 | $ | 562,801 | $ | 489,930 | |||||||||||||||
Net Investment Income/(Loss) | (0.22 | )% | 0.62 | % | 0.05 | % | (0.06 | )% | 0.11 | % | |||||||||||||||
Expenses Before Reductions(c) | 1.11 | % | 1.11 | % | 1.13 | % | 1.13 | % | 1.15 | % | |||||||||||||||
Expenses Net of Reductions | 1.00 | % | 1.01 | % | 1.02 | % | 1.00 | % | 1.07 | % | |||||||||||||||
Expenses Net of Reductions, Excluding Expenses Paid Indirectly(d) | 1.01 | % | 1.01 | % | 1.02 | % | 1.00 | % | 1.07 | % | |||||||||||||||
Portfolio Turnover Rate(e) | 161 | % | 62 | % | 81 | % | 80 | %(f) | 80 | %(g) |
(a) | Represents less than $0.005. |
(b) | The returns include reinvested dividends and fund level expenses, but exclude insurance contract charges. If these charges were included, the returns would have been lower. |
(c) | Excludes fee reductions. If such fee reductions had not occurred, the ratios would have been as indicated. |
(d) | Expenses net of reductions excludes expenses paid indirectly, pursuant to a “commission recapture” program, under which brokers remit a portion of the brokerage commission which is used to pay certain Fund expenses. See note 2 in the Notes to the Financial Statements. |
(e) | The portfolio turnover rate can be volatile due to the amount and timing of purchases and sales of fund shares during the period. |
(f) | Cost of purchases and proceeds from sales of portfolio securities incurred to realign the Fund’s portfolio after a fund merger are excluded from the portfolio turnover rate. If such amounts had not been excluded, the portfolio turnover rate would have been 81%. |
(g) | Cost of purchases and proceeds from sales of portfolio securities incurred to realign the Fund’s portfolio after a fund merger are excluded from the portfolio turnover rate. If such amounts had not been excluded, the portfolio turnover rate would have been 102%. |
See accompanying notes to the financial statements.
8
AZL BlackRock Capital Appreciation Fund
Notes to the Financial Statements
December 31, 2013
1. Organization
The Allianz Variable Insurance Products Trust (the “Trust”) was organized as a Delaware statutory trust on July 13, 1999. The Trust is a diversified open-end management investment company registered under the Investment Company Act of 1940. The Trust consists of 29 separate investment portfolios (collectively, the “Funds”), of which one is included in this report, the AZL BlackRock Capital Appreciation Fund (the “Fund”), and 28 are presented in separate reports.
The Trust is authorized to issue an unlimited number of shares of the Fund without par value. Shares of the Fund are available through the variable annuity contracts and variable life insurance policies offered through the separate accounts of participating insurance companies.
Under the Trust’s organizational documents, its officers and trustees are indemnified against certain liabilities arising out of the performance of their duties to the Fund. In addition, in the normal course of business, the Fund may enter into contracts with its vendors and others that provide for general indemnifications. The Fund’s maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Fund. However, based on experience, the Fund expects the risk of loss to be remote.
2. Significant Accounting Policies
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. The policies conform with U.S. generally accepted accounting principles (“U.S. GAAP”). The preparation of financial statements requires management to make certain 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 increases and decreases in net assets from operations during the reporting period. Actual results could differ from those estimates.
Security Valuation
The Fund records its investments at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between willing market participants at the measurement date. The valuation techniques used to determine fair value are further described in Note 4 below.
Investment Transactions and Investment Income
Investment transactions are recorded not later than on the business day following trade date. However, for financial reporting purposes, investment transactions are accounted for on trade date. Net realized gains and losses on investments sold and on foreign currency transactions are recorded on the basis of identified cost. Interest income is recorded on the accrual basis and includes, where applicable, the amortization of premiums or accretion of discounts. Dividend income is recorded on the ex-dividend date except in the case of foreign securities, in which case dividends are recorded as soon as such information becomes available.
Real Estate Investment Trusts
The Fund may own shares of real estate investment trusts (“REITs”) which report information on the source of their distributions annually. Certain distributions received from REITs during the year, which are known to be a return of capital, are recorded as a reduction to the cost of the individual REIT.
Foreign Currency Translation
The accounting records of the Fund are maintained in U.S. dollars. Foreign currency amounts are translated into U.S. dollars at the current rate of exchange to determine the fair value of investments, assets and liabilities. Purchases and sales of securities, and income and expenses are translated at the prevailing rate of exchange on the respective dates of such transactions. The Fund does not isolate that portion of the results of operations resulting from changes in foreign exchange rates on investments from fluctuations arising from changes in market prices of securities held. Such fluctuations are included in the net realized and unrealized gain or loss on investments and foreign currencies. Income received by the Fund from sources within foreign countries may be subject to withholding and other income or similar taxes imposed by such countries. The Funds accrue such taxes, as applicable, based on their current interpretation of tax rules in the foreign markets in which they invest.
Dividends to Shareholders
Dividends to shareholders are recorded on the ex-dividend date. The Fund distributes its dividends from net investment income and net realized capital gains, if any, on an annual basis. The amount of dividends from net investment income and from net realized gains is determined in accordance with federal income tax regulations, which may differ from U.S. GAAP. These “book/tax” differences are either temporary or permanent in nature. To the extent these differences are permanent in nature (e.g., return of capital, net operating loss, reclassification of certain market discounts, gain/loss, paydowns, and distributions), such amounts are reclassified within the composition of net assets based on their federal tax-basis treatment; temporary differences (e.g., wash sales and post October losses) do not require reclassification. Dividends to shareholders that exceed net investment income and net realized gains for tax purposes are reported as distributions of capital.
Expense Allocation
Expenses directly attributable to the Fund are charged directly to the Fund, while expenses attributable to more than one Fund are allocated among the respective Funds based upon relative net assets or some other reasonable method. Expenses which are attributable to more than one Trust are allocated across the Allianz Variable Insurance Products and Allianz Variable Insurance Products Fund of Funds Trusts based upon relative net assets or another reasonable basis. Allianz Investment Management LLC (the “Manager”), serves as the investment manager for the Trust and the Allianz Variable Insurance Products Fund of Funds Trust.
9
AZL BlackRock Capital Appreciation Fund
Notes to the Financial Statements
December 31, 2013
Securities Lending
To generate additional income, the Fund may lend up to 33 1/3% of its assets pursuant to agreements requiring that the loan be continuously secured by any combination of cash, U.S. government or U.S. government agency securities, equal initially to at least 102% of the fair value plus accrued interest on the securities loaned (105% for foreign securities). The borrower of securities is at all times required to post collateral to the Fund in an amount equal to 100% of the fair value of the securities loaned based on the previous day’s fair value of the securities loaned, marked-to-market daily. Any collateral shortfalls are adjusted the next business day. The Fund bears all of the gains and losses on such investments. The Fund receives payments from borrowers equivalent to the dividends and interest that would have been earned on securities lent while simultaneously seeking to earn income on the investment of cash collateral received. In extremely low interest rate environments, the broker rebate fee may exceed the interest earned or the cash collateral which would result in a loss to the Fund. The investment of cash collateral deposited by the borrower is subject to inherent market risks such as interest rate risk, credit risk, liquidity risk, and other risks that are present in the market, and as such, the value of these investments may not be sufficient, when liquidated, to repay the borrower when the loaned security is returned. There may be risks of delay in recovery of the securities or even loss of rights in the collateral should the borrower of the securities fail financially. However, loans will be made only to borrowers, such as broker-dealers, banks or institutional borrowers of securities, deemed by the Manager to be of good standing and credit worthy and when in its judgment, the consideration which can be earned currently from such securities loans justifies the attendant risks. Loans are subject to termination by the Trust or the borrower at any time, and are, therefore, not considered to be illiquid investments. Securities on loan at December 31, 2013 are presented on the Fund’s Schedule of Portfolio Investments. The average outstanding amount of securities on loan was $11.9 million for the year ended December 31, 2013.
Cash collateral received in connection with securities lending is invested in the Allianz Variable Insurance Products Securities Lending Collateral Trust (the “Securities Lending Collateral Trust”) managed by The Dreyfus Corporation, an affiliate of the Custodian and Securities Lending Agent. The Securities Lending Collateral Trust invests in short-term investments that have a remaining maturity of 397 days or less as calculated in accordance with Rule 2a-7 under the 1940 Act. The Fund paid securities lending fees of $10,618 during the year ended December 31, 2013. These fees have been netted against “Income from securities lending” on the Statement of Operations.
Commission Recapture
Certain Funds of the Trust participate in a commission recapture program. The Fund will utilize the recaptured commissions to pay for, in whole or part, certain expenses of the Fund, excluding investment advisory fees. Any amounts received by the Fund, if applicable, are disclosed as “Expenses paid indirectly” on the Statement of Operations.
Effective January 6, 2014, the Manager, on behalf of the Trust, requested the Fund cease participation in the program until further notice.
3. Related Party Transactions
The Manager provides investment advisory and management services for the Fund. The Manager has retained an independent money management organization (the “Subadviser”), to make investment decisions on behalf of the Fund. Pursuant to a subadvisory agreement with BlackRock Capital Management, Inc. (“BlackRock Capital”), BlackRock Capital provides investment advisory services as the Subadviser for the Fund subject to the general supervision of the Trustees and the Manager. The Manager is entitled to a fee, computed daily and paid monthly, based on the average daily net assets of the Fund. Expenses incurred by the Fund for investment advisory and management services are reflected on the Statement of Operations as “Manager fees.” For its services, the Subadviser is entitled to a fee payable by the Manager. The Manager has contractually agreed to waive fees and reimburse the Fund to limit the annual expenses, excluding interest expense (e.g., cash overdraft fees), taxes, brokerage commissions, other expenditures that are capitalized in accordance with U.S. GAAP and other extraordinary expenses not incurred in the ordinary course of the Fund’s business, based on the daily net assets of the Fund, through April 30, 2015.
For the year ended December 31, 2013, the annual rate due to the Manager and the annual expense limit were as follows:
Annual Rate* | Annual Expense Limit | |||||||||
AZL BlackRock Capital Appreciation Fund | 0.80 | % | 1.20 | % |
* | The Manager voluntarily reduced the management fee to 0.70% on all assets. The Manager reserves the right to increase the management fee to the amount shown in the table above at any time. |
Any amounts contractually waived or reimbursed by the Manager in a particular fiscal year will be subject to repayment by the Fund to the Manager to the extent that from time to time through the next three fiscal years the repayment will not cause the Fund’s expenses to exceed the lesser of the stated limit at the time of the waiver or the current stated limit. Any amounts recouped by the Manager during the year are reflected on the Statement of Operations as “Recoupment of prior expenses reimbursed by the Manager.” At December 31, 2013, there were no remaining contractual reimbursements that are subject to repayment by the Fund in subsequent years.
In addition, the Manager may voluntarily waive or reimburse additional fees in order to maintain more competitive expense ratios. Any voluntary waivers or reimbursements are not subject to repayment in subsequent years. Information on the total amount waived/reimbursed by the Manager or repaid to the Manager by the Fund during the year can be found on the Statement of Operations.
Pursuant to separate agreements between the Funds and the Manager, the Manager provides a Chief Compliance Officer (“CCO”) and certain compliance oversight and regulatory filing services to the Trust. Under these agreements the Manager is entitled to an amount equal to a portion of the compensation and certain other expenses related to the individuals performing the CCO and compliance oversight services, as well as $75 per hour for time incurred in connection with the preparation and filing of certain documents with the Securities and Exchange Commission. The fees are paid to the Manager on a quarterly basis. The total expenses incurred by the Fund for these services are reflected on the Statement of Operations as “Administrative and compliance services fees.”
Citi Fund Services Ohio, Inc. (“Citi” or the “Administrator”), a wholly owned subsidiary of Citigroup, Inc., with which an officer of the Trust is affiliated, serves as the Trust’s administrator, transfer agent, and fund accountant, and assists the Trust in all aspects of its administration and operation. The Administrator is entitled to a Trust-wide asset-based fee, which is based on the following schedule: 0.05% of daily average net assets on the first $4 billion, 0.04% of daily average net assets on the next $2 billion, 0.02% of daily average net assets on the next $2 billion and 0.01% of daily average net assets over $8 billion. The overall Trust-wide fees are accrued daily and paid monthly and are subject to a minimum annual fee. In addition, the Administrator is entitled to annual account fees related to the transfer agency system, an annual fee for each additional class of shares of any Fund, certain annual fees in supporting fair value services, and a Trust-wide annual fee for providing infrastructure and support in implementing the
10
AZL BlackRock Capital Appreciation Fund
Notes to the Financial Statements
December 31, 2013
written policies and procedures comprising the Fund’s compliance program. Fees payable to the Administrator are subject to certain reductions associated with services provided to new funds. The Administrator is also reimbursed for certain expenses incurred. The total expenses incurred by the Fund for these services are reflected on the Statement of Operations as “Administration fees.”
Allianz Life Financial Services, LLC (“ALFS”), an affiliate of the Manager, serves as distributor of the Fund and receives 12b-1 fees directly from the Fund, plus a Trust-wide annual fee of $42,500, paid by the Manager from its profits and not by the Trust, for recordkeeping and reporting services.
The Trust has adopted a distribution and service plan in conformance with Rule 12b-1 of the 1940 Act. Pursuant to this plan, the Fund is authorized to pay certain fees for the sale and distribution of its shares and services provided to its shareholders at an annual rate not to exceed 0.25% of the Fund’s average daily net assets. These fees are reflected on the Statement of Operations as “Distribution fees.”
In addition, certain legal fees and expenses are paid to a law firm, Dorsey & Whitney LLP, of which the Secretary of the Fund is a partner. During the year ended December 31, 2013, $7,852 was paid from the Fund relating to these fees and expenses.
Certain Officers and Trustees of the Trust are affiliated with the Manager or the Administrator. Such Officers (except for the Trust’s CCO as noted above) and Trustees receive no compensation from the Trust for serving in their respective roles. For their service to the Trust and to the Allianz Variable Insurance Products Fund of Funds Trust, each non-interested Trustee receives a $139,000 annual Board retainer. In addition, the Trustees are reimbursed for certain expenses associated with attending Board meetings. Compensation to the Trustees is allocated between the Trust and the Allianz Variable Insurance Products Fund of Funds Trust in proportion to the assets under management of each trust. During the year ended December 31, 2013, actual Trustee compensation was $973,000 in total for both trusts.
At a meeting of the Board of Trustees on December 4, 2013, the Trustees approved a fee increase to the Officers and Trustees who are paid a fee for their services to the Trust and to the Allianz Variable Insurance Products Fund of Funds Trust. Effective January 1, 2014, each non-interested Trustee will receive a $163,000 annual retainer.
4. Investment Valuation Summary
The valuation techniques employed by the Fund, as described below, maximize the use of observable inputs and minimize the use of unobservable inputs in determining fair value. The inputs used for valuing the Fund’s investments are summarized in the three broad levels listed below:
— | Level 1 — quoted prices in active markets for identical assets |
— | Level 2 — other significant observable inputs (including quoted prices for similar securities, interest rates, prepayments speeds, credit risk, etc.) |
— | Level 3 — significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of investments) |
Changes in valuation techniques may result in transfers in or out of an assigned level within the disclosure hierarchy. The Fund determines transfers between fair value hierarchy levels at the reporting period end. The inputs or methodology used for valuing investments is not necessarily an indication of the risk associated with investing in those investments.
Security prices are generally provided by an independent third party pricing service approved by the Trust’s Board of Trustees (“Trustees”) as of the close of the New York Stock Exchange (“NYSE”) (generally 4:00 pm Eastern Time). Equity securities are valued at the last quoted sale price or, if there is no sale, the last quoted bid price is used for long securities and the last quoted ask price is used for securities sold short. Securities listed on NASDAQ Stock Market, Inc. (“NASDAQ”) are valued at the official closing price as reported by NASDAQ. In each of these situations, valuations are typically categorized as a Level 1 in the fair value hierarchy. Investments in open-end investment companies are valued at their respective net asset value as reported by such companies and are typically categorized as Level 1 in the fair value hierarchy.
Debt and other fixed income securities are generally valued at an evaluated bid price provided by an independent pricing source approved by the Trustees. To value debt securities, pricing services may use various pricing techniques which take into account appropriate factors such as market activity, yield, quality, coupon rate, maturity, type of issue, trading characteristics, call features, credit ratings and other data, as well as broker quotes. Short term securities of sufficient credit quality with sixty days or less remaining until maturity may be valued at amortized cost, which approximates fair value. In each of these situations, valuations are typically categorized as Level 2 in the fair value hierarchy.
Other assets and securities for which market quotations are not readily available, or are deemed unreliable are valued at fair value as determined in good faith by the Trustees or persons acting on the behalf of the Trustees. Fair value pricing may be used for significant events such as securities whose trading has been suspended, whose price has become stale or for which there is no currently available price at the close of the NYSE. Depending on the source and relative significance of valuation inputs, these instruments may be classified as Level 2 or Level 3 in the fair value hierarchy. The Fund utilizes a pricing service to assist in determining the fair value of securities when certain significant events occur that may affect the value of foreign securities.
In accordance with procedures adopted by the Trustees, fair value pricing may be used if events materially affecting the value of foreign securities occur between the time when the exchange on which they are traded closes and the time when the Fund’s net asset value is calculated. Management identifies possible fluctuation in international securities by monitoring the increase or decrease in the value of a designated benchmark index. In the event of an increase or decrease greater than predetermined levels, the Fund may use a systematic valuation model provided by an independent third party to fair value its international equity securities which are then typically categorized as Level 2 in the fair value hierarchy.
For the year ended December 31, 2013, there were no Level 3 investments for which significant unobservable inputs were used to determine fair value.
The following is a summary of the valuation inputs used as of December 31, 2013 in valuing the Fund’s investments based upon the three levels defined above:
Investment Securities: | Level 1 | Level 2 | Total | ||||||||||||
Common Stocks | |||||||||||||||
Diversified Telecommunication Services | $ | — | $ | 9,507,284 | $ | 9,507,284 | |||||||||
All Other Common Stocks+ | 700,800,244 | 700,800,244 | |||||||||||||
Securities Held as Collateral for Securities on Loan | — | 10,584,981 | 10,584,981 | ||||||||||||
Unaffiliated Investment Company | 3,545,347 | — | 3,545,347 | ||||||||||||
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Total Investment Securities | $ | 704,345,591 | $ | 20,092,265 | $ | 724,437,856 | |||||||||
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11
AZL BlackRock Capital Appreciation Fund
Notes to the Financial Statements
December 31, 2013
For detailed industry descriptions, see the accompanying Schedule of Portfolio Investments.
5. Security Purchases and Sales
For the year ended December 31, 2013, cost of purchases and proceeds from sales of securities (excluding securities maturing less than one year from acquisition) were as follows:
Purchases | Sales | |||||||||
AZL BlackRock Capital Appreciation Fund | $ | 993,077,180 | $ | 1,001,859,964 |
6. Investment Risks
Foreign Securities and Currencies Risk: Investments in securities of foreign issuers carry certain risks not ordinarily associated with investments in securities of domestic issuers. Such risks include future political and economic developments, and the possible imposition of exchange controls or other foreign governmental laws and restrictions. In addition, with respect to certain countries, there is the possibility of expropriation of assets, confiscatory taxation, political or social instability or diplomatic developments which could adversely affect investments in those securities.
7. Federal Tax Information
It is the Fund’s policy to continue to comply with the requirements of the Internal Revenue Code under Subchapter M, applicable to regulated investment companies, and to distribute all of its taxable income, including any net realized gains on investments, to its shareholders. Therefore, no provision is made for federal income taxes.
Management of the Fund has reviewed tax positions taken in tax years that remain subject to examination by all major tax jurisdictions, including federal (i.e., the last four tax year ends and the interim tax period since then, as applicable). Management believes that there is no tax liability resulting from unrecognized tax benefits related to uncertain tax positions taken.
Cost for federal income tax purposes at December 31, 2013 is $557,365,881. The gross unrealized appreciation/ (depreciation) on a tax basis is as follows:
Unrealized appreciation | $ | 169,444,033 | |||
Unrealized depreciation | (2,372,058 | ) | |||
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| ||||
Net unrealized appreciation/(depreciation) | $ | 167,071,975 | |||
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During the year ended December 31, 2013, the Fund utilized $68,940,964 in capital loss carry forwards to offset capital gains.
The tax character of dividends paid to shareholders during the year ended December 31, 2013 were as follows:
Ordinary Income | Net Long-Term Capital Gains | Total Distributions(a) | |||||||||||||
AZL BlackRock Capital Appreciation Fund | $ | 3,317,990 | $ | 36 | $ | 3,318,026 |
(a) | Total distributions paid may differ from the Statements of Changes in Net Assets because dividends are recognized when actually paid for tax purposes. |
The tax character of dividends paid to shareholders during the year ended December 31, 2012 was as follows:
Ordinary Income | Net Long-Term Capital Gains | Total Distributions(a) | |||||||||||||
AZL BlackRock Capital Appreciation Fund | $ | 227,841 | $ | — | $ | 227,841 |
(a) | Total distributions paid may differ from the Statements of Changes in Net Assets because dividends are recognized when actually paid for tax purposes. |
As of December 31, 2013, the components of accumulated earnings on a tax basis were as follows:
Undistributed Ordinary Income | Undistributed Long-Term Capital Gains | Accumulated Capital and Other Losses | Unrealized Appreciation/ (Depreciation)(a) | Total Accumulated Earnings/ (Deficit) | |||||||||||||||||||||
AZL BlackRock Capital Appreciation Fund | $ | — | $ | 59,294,962 | $ | — | $ | 167,071,975 | $ | 226,366,937 |
(a) | The difference between book-basis and tax-basis unrealized appreciation/(depreciation) is attributable primarily to tax deferral of losses on wash sales. |
8. Subsequent Events
Management has evaluated events and transactions subsequent to period end through the date the financial statements were issued, for purposes of recognition or disclosure in these financial statements and there are no subsequent events to report.
12
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Shareholders and Board of Trustees of
Allianz Variable Insurance Products Trust:
We have audited the accompanying statement of assets and liabilities of AZL BlackRock Capital Appreciation Fund (the “Fund”) of the Allianz Variable Insurance Products Trust, including the schedule of portfolio investments, as of December 31, 2013, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the years in the two-year period then ended, and the financial highlights for each of the years in the five-year period then ended. These financial statements and financial highlights are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of December 31, 2013, by correspondence with the custodian and brokers or by other appropriate auditing procedures. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of the Fund as of December 31, 2013, the results of its operations for the year then ended, the changes in its net assets for each of the years in the two-year period then ended, and the financial highlights for each of the years in the five-year period then ended, in conformity with U.S. generally accepted accounting principles.
/s/ KPMG LLP
Columbus, Ohio
February 25, 2014
13
Other Federal Income Tax Information (Unaudited)
For the year ended December 31, 2013, 100.00% of the total ordinary income dividends paid by the Fund qualify for the corporate dividends received deduction available to corporate shareholders.
During the year ended December 31, 2013, the Fund declared net long-term capital gain distributions of $36.
14
A description of the policies and procedures that the Fund uses to determine how to vote proxies relating to portfolio securities is available, without charge, upon request, by visiting the Securities and Exchange Commission’s (“Commission”) website at www.sec.gov, or by calling 800-624-0197.
Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30th is available (i) without charge, upon request, by calling 800-624-0197; (ii) on the Allianz Variable Insurance Products Trust’s website at https://www.allianzlife.com; and (iii) on the Commission’s website at http://www.sec.gov.
The Fund files complete Schedules of Portfolio Holdings with the Commission for the first and third quarters of each fiscal year on Form N-Q. Schedules of Portfolio Holdings for the Fund in this report are available without charge on the Commission’s website at http://www.sec.gov, or may be reviewed and copied at the Commission’s Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 800-SEC-0330.
15
Approval of Investment Advisory and Subadvisory Agreements (Unaudited)
The Allianz Variable Insurance Products Trust (the “Trust”) is a manager-of-managers fund. That means that the Trust’s Manager (“Allianz Investment Management LLC”) is responsible for monitoring the various Subadvisers that have day-to-day responsibility for the decisions made for each of the Trust’s investment portfolios. The Trust’s Manager is responsible for determining, in the first instance, which investment advisers to consider recommending for selection as a Subadviser.
In reviewing the services provided by the Manager and the terms of the investment management agreement, the Board receives and reviews information related to the Manager’s experience and expertise in the variable insurance marketplace. Currently, the Funds are offered only through variable annuities and variable life insurance policies, and not in the retail fund market. In addition, the Board receives information regarding the Manager’s expertise with regard to portfolio diversification and asset allocation requirements within variable insurance products issued by Allianz Life Insurance Company of North America and its subsidiary, Allianz Life Insurance Company of New York. Currently, the Funds are offered only through Allianz Life and Allianz of New York variable products.
The Trust’s Manager has adopted policies and procedures to assist it in the process of analyzing each potential Subadviser with expertise in particular asset classes for purposes of making the recommendation that a specific investment adviser be selected. The Trust’s Board reviews and considers the information provided by the Manager in deciding which investment advisers to select. After an investment adviser becomes a Subadviser, a similarly rigorous process is instituted by the Manager to monitor the investment performance and other responsibilities of the Subadviser. The Manager reports to the Trust’s Board on its analysis at the regular meetings of the Board, which are held at least quarterly. Where warranted, the Manager will add or remove a particular Subadviser from a “watch” list that it maintains. Watch list criteria include, for example: (a) Fund performance over various time periods; (b) Fund risk issues, such as changes in key personnel involved with Fund management, changes in investment philosophy or process, or “capacity” concerns; and (c) organizational risk issues, such as regulatory, compliance or legal concerns, or changes in the ownership of the Subadviser. The Manager may place a Fund on the watch list for other reasons, and if so, will explain its rationale to the Trustees. Funds which are on the watch list are subject to special scrutiny of the Manager and the Board of Trustees. Funds may be removed from such watch list, if for example, performance improves or regulatory matters are satisfactorily resolved. However, in some situations where Funds which have been on the watch list, the Manager has recommended the retention of a new Subadviser, and the Board of Trustees has subsequently approved new Subadvisory Agreements with such Subadvisers.
In assessing the Manager’s and Subadvisers’ (collectively, the “Advisory Organizations”), performance of their obligations, the Board considers whether there has occurred a circumstance or event that would constitute a reason for it to not renew an advisory contract. In this regard, the Board is mindful of the potential disruption of a Fund’s operations and various risks, uncertainties and other effects that could occur as a result of a decision to terminate or not renew a contract.
As required by the Investment Company Act of 1940 (“1940 Act”), the Trust’s Board has reviewed and approved the Trust’s Investment Management Agreement with the Manager (the “Advisory Agreement”) and portfolio management agreements (the “Subadvisory Agreements”) with the Subadvisers. The Board’s decision to approve these contracts reflects the exercise of its business judgment on whether to approve new arrangements and continue the existing arrangements. During its review of these contracts, the Board considers many factors, among the most material of which are: the Fund’s investment objectives and long term performance; the Advisory Organizations’ management philosophy, personnel, and processes, including their compliance history and the adequacy of their compliance processes; the preferences and expectations of Fund shareholders (and underlying contract owners) and their relative sophistication; the continuing state of competition in the mutual fund industry; and comparable fees in the mutual fund industry.
The Board also considers the compensation and benefits received by the Advisory Organizations. This includes fees received for services provided to the Fund by affiliated persons of the Advisory Organizations and research services received by the Advisory Organizations from brokers that execute Fund trades, as well as advisory fees. The Board considered the fact that: (1) the Manager and the Trust are parties to an Administrative Service Agreement, a Compliance Services Agreement, and a Chief Compliance Officer Agreement, under which the Manager is compensated by the Trust for performing certain administrative and compliance services including providing an employee of the Manager or one of its affiliates to act as the Trust’s Chief Compliance Officer; and (2) Allianz Life Financial Services, LLC, an affiliated person of the Manager, is a registered securities broker-dealer and receives (along with its affiliated persons) payments made by the Trust pursuant to Rule 12b-1.
The Board is aware that various courts have interpreted provisions of the 1940 Act and have indicated in their decisions that the following factors may be relevant to an adviser’s compensation: the nature and quality of the services provided by the adviser, including the performance of the fund; the adviser’s cost of providing the services; the extent to which the adviser may realize “economies of scale” as the fund grows larger; any indirect benefits that may accrue to the adviser and its affiliates as a result of the adviser’s relationship with the fund; performance and expenses of comparable funds; and the extent to which the independent Board members are fully informed about all facts bearing on the adviser’s service and fee. The Trust’s Board is aware of these factors and takes them into account in its review of the Trust’s advisory contracts.
The Board considered and weighed these circumstances in light of its experience in governing the Trust and working with the Advisory Organizations on matters relating to the Funds, and is assisted in its deliberations by the advice of legal counsel to the Independent Trustees. In this regard, the Board requests and receives a significant amount of information about the Funds and the Advisory Organizations. Some of this information is provided at each regular meeting of the Board; additional information is provided in connection with the particular meeting or meetings at which the Board’s formal review of an advisory contract occurs. In between regularly scheduled meetings, the Board may receive information on particular matters as the need arises. Thus, the Board’s evaluation of an advisory contract is informed by reports covering such matters as: an Advisory Organization’s investment philosophy, personnel, and processes; the Fund’s short- and long-term performance (in absolute terms as well as in relationship to its benchmark(s), certain competitor or “peer group” funds and similar funds managed by the particular Subadviser), and comments on the reasons for performance; the Fund’s expenses (including the advisory fee itself and the overall expense structure of the Fund, both in absolute terms and relative to similar and/or competing funds, with due regard for contractual or voluntary expense limitations); the use and allocation of brokerage commissions derived from trading the Fund’s portfolio securities; the nature and extent of the advisory and other services provided to the Fund by the Advisory Organizations and their affiliates; compliance and audit reports concerning the Funds and the companies that service them; and relevant developments in the mutual fund industry and how the Funds and/or Advisory Organizations are responding to them.
The Board also receives financial information about Advisory Organizations, including reports on the compensation and benefits the Advisory Organizations derive from their relationships with the Funds. These reports cover not only the fees under the advisory contracts, but also fees, if any, received for providing other services to the Funds. The reports also discuss any indirect or “fall out” benefits an Advisory Organization may derive from its relationship with the Funds.
The Advisory and Subadvisory Agreements (collectively, the “Agreements”) were most recently considered at Board of Trustees meetings held in the fall of 2013. Information relevant to the approval of such Agreements was considered at a telephonic Board of Trustees meeting on October 16, 2013, and at an “in person” Board of Trustees meeting held October 22, 2013. The Agreements were approved at the Board meeting of October 22, 2013. At such meeting the Board also approved an Expense Limitation Agreement between the Manager and the Trust for the period ending April 30, 2015. In connection with such meetings, the Trustees requested and evaluated extensive materials from the Manager, including performance and expense information for other investment companies with similar investment objectives derived from data compiled by an independent third party provider and other sources believed to be reliable by the Manager. Prior to voting, the Trustees reviewed the proposed approval/continuance of the Agreements with management and with experienced counsel who are independent of the Manager and received a memorandum from such counsel discussing the legal standards for their consideration of the proposed approvals/continuances. The independent (“disinterested”) Trustees also discussed the proposed approvals/continuances in a private session with such counsel at which no representatives of the Manager were present. In reaching their determinations relating to the approval and/or continuance of
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the Agreements, in respect of each Fund, the Trustees considered all factors they believed relevant. The Board based its decision to approve the Agreements on the totality of the circumstances and relevant factors, and with a view to past and future long-term considerations. Not all of the factors and considerations discussed above and below are necessarily relevant to every Fund, and the Board did not assign relative weights to factors discussed herein or deem any one or group of them to be controlling in and of themselves.
An SEC Rule requires that shareholder reports include a discussion of certain factors relating to the selection of investment advisers and the approval of advisory fees. The “factors” enumerated by the SEC are set forth below in italics, as well as the Board’s conclusions regarding such factors:
(1) The nature, extent and quality of services provided by the Manager and Subadvisers. The Trustees noted that the Manager, subject to the control of the Board of Trustees, administers each Fund’s business and other affairs. Under the Advisory Agreement, the Manager holds the sole and exclusive responsibility to provide, or arrange for other to provide, the management of the Funds’ assets and the placement of orders for the purchase and sale of the securities of the Funds. As the Trust is a manager of managers fund, the Manager is authorized, under the Advisory Agreement, to retain one or more Subadvisers for each Fund to handle day-to-day management of the Funds’ investment portfolios; the Manager is responsible for determining, in the first instance, which investment advisers to recommend to the Board of Trustees for selection as a Subadviser. The Trustees were aware that, notwithstanding the retention of the Subadvisers to handle day-to-day portfolio management, the Manager remains responsible for substantial other matters, including continuously monitoring compliance by each Subadviser with the investment policies and restrictions of the respective Funds, with such other limitations or directions of the Board of Trustees, and with all legal requirements under federal or state law or regulation. The Manager also is responsible primarily to provide statistical information and other data to the Trustees regarding the Funds’ portfolio investments and to make available to the Funds’ administrator such information as is necessary for the conduct of its duties.
The Trustees also noted that the Manager provides the Trust and each Fund with such administrative and other services (exclusive of, and in addition to, any such services provided by any others retained by the Trust on behalf of the Funds) and executive and other personnel as are necessary for the operation of the Trust and the Funds. Except for the Trust’s Chief Compliance Officer, the Manager pays all of the compensation of Trustees and officers of the Trust who are employees of the Manager or its affiliates.
The Trustees considered the scope and quality of services provided by the Manager and the Subadvisers and noted that the scope of such services provided had expanded as a result of recent regulatory and other developments. The Trustees noted that, for example, the Manager and Subadvisers are responsible for maintaining and monitoring their own compliance programs, and these compliance programs are continuously refined and enhanced in light of new regulatory requirements. The Trustees considered the capabilities and resources which the Manager has dedicated to performing services on behalf of the Trust and its Funds. The quality of administrative and other services, including the Manager’s role in coordinating the activities of the Trust’s other service providers, also were considered. The Trustees concluded that, overall, they were satisfied with the nature, extent and quality of services provided (and expected to be provided) to the Trust and to each of the Funds under the Agreements.
(2) The investment performance of the Funds, the Manager and the Subadvisers. In connection with every in-person quarterly Board of Trustees meeting, Trustees receive extensive information on the performance results of each of the Funds. This includes, for example, performance information on all of the Funds for the previous quarter, and previous one, three and five-year periods, and since inception. (For Funds which have been in existence for less than five years, Trustees may receive performance information on comparable funds managed by the particular Subadviser for periods prior to the creation of a particular Fund.) Such performance information includes information on absolute total return, performance versus Subadvisers’ comparable fund(s), performance versus the appropriate benchmark(s), and performance versus peer groups. For example, in connection with the Board of Trustees meetings held September 10-11, 2013, the Manager reported that for the three year period ended June 30, 2013, 12 Funds were in the top 40%, eight were in the middle 20% and eight were in the bottom 40%, and for the one year period ended June 30, 2013, 8 Funds were in the top 40%, seven were in the middle 20%, and 14 were in the bottom 40%. The Manager also reported that for the five year period ended June 30, 2013, 10 Funds were in the top 40%, four were in the middle 20%, and six were in the bottom 40%. At the Board of Trustees meeting held October 22, 2013, the Trustees determined that the overall investment performance of the Funds was acceptable.
(3) The costs of services to be provided and profits to be realized by the Manager and the Subadvisers and their affiliates from their relationship with the Funds. The Manager has supplied information to the Board of Trustees pertaining to the level of investment advisory fees to which the Funds are subject. The Manager has agreed to temporarily “cap” Fund expenses at certain levels, and information is provided to Trustees setting forth “contractual” advisory fees and “actual” fees after taking expense caps into account. Based upon the information provided, the “actual” advisory fees payable by the Funds overall are generally comparable to the average level of fees paid by Fund peer groups. For the 30 Funds reviewed by the Board of Trustees in the fall of 2013, 27 Funds paid “actual” advisory fees in a percentage amount within the 65th percentile or lower for each Fund’s applicable category. The Trustees recognized that it is difficult to make comparisons of advisory fees because there are variations in the services that are included in the fees paid by other funds. The Board has concluded that the advisory fees to be paid to the Manager by the Funds are not unreasonable.
The Manager has also supplied information to the Board of Trustees pertaining to total Fund expenses (which includes advisory fees, the 25 basis point 12b-1 fee paid by the Funds, and other Fund expenses). As noted above, the Manager has agreed to “cap” Fund expenses at certain levels. Based upon the information provided, the overall total expense ratio ranking in 2013 for the 30 Funds was as follows: (1) 28 of the Funds had total expense rankings below the 65th percentile (with 20 Funds at or below the 50th percentile); (2) the AZL Russell 1000 Value Fund had a total expense ranking in the 66th percentile; the Manager reported that there is only a limited peer group for such Fund; and (3) the AZL Morgan Stanley Global Real Estate Fund had a total expense ranking in the 72nd percentile; it was reported by the Manager that there is only a limited peer group for such Fund, such Fund’s expense ratio has declined, and such Fund’s expense ratio is comparable to funds of similar size.
The Manager has committed to providing the Funds with a high quality of service and working to reduce Fund expenses over time, particularly as the Funds grow larger. The Trustees concluded therefore that the expense ratios of the Funds were not unreasonable.
The Manager provided information concerning the profitability of the Manager’s investment advisory activities for the period from 2011 through June 30, 2013. The Trustees recognized that it is difficult to make comparisons of profitability from investment company advisory agreements because comparative information is not generally publicly available and is affected by numerous factors, including the structure of the particular adviser, the types of funds it manages, its business mix, numerous assumptions regarding allocation of expenses and the adviser’s capital structure and cost of capital. In considering profitability information, the Trustees considered the possible effect of certain fall-out benefits to the Manager and its affiliates. The Trustees focused on profitability of the Manager’s relationships with the Funds before taxes and distribution expenses. The Trustees recognized that the Manager should, in the abstract, be entitled to earn a reasonable level of profits for the services it provides to each Fund and, based on their review, concluded that they were satisfied that the Manager’s level of profitability from its relationship with the Funds was not excessive.
The Manager, on behalf of the Board of Trustees, endeavored to obtain information on the profitability of each Subadviser in connection with its relationship with the Fund or Funds which it subadvises. The Manager was unable to obtain meaningful profitability information from some of the unaffiliated Subadvisers. The Manager assured the Board of Trustees that the Agreements with the Subadvisers which are not affiliated with it were negotiated on an “arm’s length” basis, so that arguably, such profitability information should be less relevant. The Trustees were also provided with certain information on the profitability for the Subadviser which is affiliated with the Manager. Trustees recognized the difficulty of allocating costs to multiple advisory accounts and products of a large advisory organization. Based upon the information provided, the Trustees determined that there was no evidence that the level of such profitability attributable to subadvising the Funds was excessive.
(4) and (5) The extent to which economies of scale would be realized as the Funds grow, and whether fee levels reflect these economies of scale. The Trustees noted that most of the advisory fee schedules for the Funds do not contain breakpoints that reduce the fee rate on assets above specified levels, although certain Subadvisory
17
Agreements have such “breakpoints.” The Trustees recognized that breakpoints may be an appropriate way for the Manager to share its economies of scale, if any, with Funds that have substantial assets. However, they also recognized that there may not be a direct relationship between any economies of scale realized by Funds and those realized by the Manager as assets increase. The Trustees do not believe there is a uniform methodology for establishing breakpoints that give effect to Fund-specific service provided by the Manager. The Trustees noted that in the fund industry as a whole, as well as among funds similar to the Funds, there is no uniformity or pattern in the fees and asset levels at which breakpoints (if any) apply. Depending on the age, size, and other characteristics of a particular fund and its manager’s cost structure, different conclusions can be drawn as to whether there are economies of scale to be realized at any particular level of assets, notwithstanding the intuitive conclusion that such economies exist, or will be realized at some level of total assets. Moreover, because different managers have different cost structures and service models, it is difficult to draw meaningful conclusions from the breakpoints that may have been adopted by other funds. The Trustees also noted that the advisory agreements for many funds do not have breakpoints at all, or if breakpoints exist, they may be at asset levels significantly greater than those of the individual Funds. The Trustees also noted that the total assets in all of the Funds as of June 30, 2013 were approximately $12.85 billion, and that no single non-money market Fund had assets in excess of $616 million.
The Trustees noted that the Manager has agreed to temporarily “cap” Fund expenses at certain levels, which has the effect of reducing expenses as would the implementation of advisory fee breakpoints. The Manager has committed to continue to consider the continuation of fee “caps” and/or advisory fee breakpoints as the Funds grow larger. The Board receives quarterly reports on the level of Fund assets. It expects to consider whether or not to approve the Agreements at a meeting to be held prior to December 31, 2014, and will at that time, or prior thereto, consider: (a) the extent to which economies of scale can be realized, and (b) whether the advisory fee should be modified to reflect such economies of scale, if any.
Having taken these factors into account, the Trustees concluded that the absence of breakpoints in certain of the Funds’ advisory fee rate schedules was acceptable under each Fund’s circumstances.
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Information about the Board of Trustees and Officers (Unaudited)
The Trust is managed by the Trustees in accordance with the laws of the state of Delaware governing business trusts. There are currently eight Trustees, two of whom are “interested persons” of the Trust within the meaning of that term under the 1940 Act. The Trustees and Officers of the Trust, their addresses, ages, their positions held with the Trust, their terms of office with the Trust and length of time served, their principal occupation(s) during the past five years, the number of portfolios in the Trust they oversee, and their other directorships held are as follows:
Non-Interested Trustees(1)
Name, Address, and Age | Positions Held with VIP Trust and FOF Trust | Term of Office(2)/Length of Time Served | Principal Occupation(s) During Past 5 Years | Number of Portfolios Overseen for VIP Trust and FOF Trust | Other Directorships Held Outside the AZL Fund Complex | |||||
Peter R. Burnim, Age 66 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/07 | Chairman, Argus Investment Strategies Fund Ltd., February 2013 to present; Managing Director, iQ Venture Advisors, LLC. 2005 to 2012; Chairman, Northstar Group Holdings Ltd. Bermuda, 2011 to present; Expert Witness, Massachusetts Department of Revenue, 2011 to 2012; Executive Vice President, Northstar Companies, 2002 to 2005; Senior Officer, Citibank and Citicorp for over 25 years | 41 | Argus Group Holdings; Northstar Group Holdings, NRIL, Sterling Centrecorp Inc.; Highland Financial Holdings; and Bank of Bermuda NY | |||||
Peggy L. Ettestad, Age 56 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/07 | Managing Director, Red Canoe Management Consulting LLC, 2008 to present; Senior Managing Director, Residential Capital LLC, 2003 to 2008; Chief Operations Officer, Transamerica Reinsurance 2002 to 2003 | 41 | Luther College | |||||
Roger Gelfenbien, Age 70 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 10/99 | Retired; Partner of Accenture 1983 to 1999 | 41 | Virtus Funds (8 Funds) | |||||
Claire R. Leonardi, Age 58 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/04 | Chief Executive Officer, Connecticut Innovations, Inc., 2012 to present; General Partner, Fairview Capital, L.P., 1994 to 2012 | 41 | The Natural History Museum of the Adirondacks | |||||
Dickson W. Lewis, Age 65 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/04 | Retired; Consultant to Lifetouch National School Studios; Vice President/General Manager, Yearbooks & Canada-Lifetouch National School Studios, 2006 to 2013; Vice President/General Manager of Jostens, Inc., 2002 to 2006; Senior Vice President of Fortis Group, 1997 to 2002 | 41 | None | |||||
Peter W. McClean, Age 69 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/04 | Retired; President and CEO of Measurisk, LLC, 2001 to 2003; Chief Risk Management Officer at Bank of Bermuda Ltd., 1996 to 2001 | 41 | PNMAC Opportunity Fund; Northeast Bank; and FHI | |||||
Arthur C. Reeds III, Age 69 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 10/99 | Retired; Senior Investment Officer, Hartford Foundation for Public Giving, 2000 to 2003; Chairman, Chief Executive and President of Conning Corp., 1999 to 2000; Investment Consultant, 1997 to 1999 | 41 | Connecticut Water Service, Inc. |
Interested Trustees(3)
Name, Address, and Age | Positions Held with VIP Trust and FOF Trust | Term of Office(2)/Length of Time Served | Principal Occupation(s) During Past 5 Years | Number of Portfolios Overseen for VIP Trust and FOF Trust | Other Directorships Held Outside the AZL Fund Complex | |||||
Robert DeChellis, Age 46 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 3/08 | President and CEO, Allianz Life Financial Services, LLC, 2007 to present | 41 | None | |||||
Brian Muench, Age 43 5701 Golden Hills Drive | Trustee | Since 6/11 | President, Allianz Investment Management LLC, November 2010 to present; Vice President, Allianz Life, April 2011 to present; Vice President, Advisory Management, Allianz Investment Management LLC from December 2005 to November 2010 | 41 | None |
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Officers
Name, Address, and Age | Positions Held with VIP and VIP FOF Trust | Term of Office(2)/Length of Time Served | Principal Occupation(s) During Past 5 Years | |||
Brian Muench, Age 43 5701 Golden Hills Drive Minneapolis, MN 55416 | President | Since 11/10 | President, Allianz Investment Management LLC from November 2010, to present; Vice President, Allianz Life from April 2011 to present; Vice President, Allianz Investment Management LLC from December 2005 to November 2010. | |||
Michael Radmer, Age 68 Dorsey & Whitney LLP, Suite 1500 50 South Sixth Street Minneapolis, MN 55402-1498 | Secretary | Since 2/02 | Partner, Dorsey and Whitney LLP since 1976. | |||
Ty Edwards, Age 47 Citi Fund Services Ohio, Inc. 3435 Stelzer Road Columbus, OH 43219 | Treasurer, Principal Accounting Officer and Principal Financial Officer | Since 4/10 | Senior Vice President, Financial Administration, Citi Fund Services Ohio, Inc., December 2009 to present; Director, Product Management, Columbia Management, April 2007 to April 2009; Deputy Treasurer, Columbia Funds and Director, Fund Administration, Columbia Management, January 2006 to April 2007. | |||
Christopher R. Pheiffer, Age 45(4) 5701 Golden Hills Drive Minneapolis, MN 55416 | Chief Compliance Officer(5) and Anti-Money Laundering Compliance Officer | Since 2/14 (interim) | Deputy Chief Compliance Officer of the Trusts, 2007-2014. |
(1) | Member of the Audit Committee. |
(2) | Indefinite. |
(3) | Is an “interested person”, as defined by the 1940 Act, due to employment by Allianz. |
(4) | Stephen G. Simon, previously the Chief Compliance Officer of the Trusts, resigned all of his positions with Allianz effective February 21, 2014. Mr. Pheiffer, previously the Deputy Chief Compliance Officer of the Trusts, has been named Chief Compliance Officer of the Trusts on an interim basis while a search for a permanent replacement is conducted. |
(5) | The Manager and the Trust are parties to a Chief Compliance Officer Agreement under which the Manager is compensated by the Trust for providing an employee of the Manager or one of its affiliates to act as the Trust’s Chief Compliance Officer. The Chief Compliance Officer and Anti-Money Laundering Compliance Officer is not considered a corporate officer or executive employee of the Trust. |
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The Allianz VIP Funds are distributed by Allianz Life Financial Services, LLC. These Funds are not FDIC Insured. | ANNRPT1213 2/14 |
AZL® BlackRock Global Allocation Fund
Annual Report
December 31, 2013
Table of Contents
Management Discussion and Analysis
Page 1
Consolidated Expense Examples and Portfolio Composition
Page 3
Consolidated Schedule of Portfolio Investments
Page 4
Consolidated Statement of Assets and Liabilities
Page 23
Consolidated Statement of Operations
Page 23
Consolidated Statements of Changes in Net Assets
Page 24
Consolidated Financial Highlights
Page 25
Notes to the Consolidated Financial Statements
Page 26
Report of Independent Registered Public Accounting Firm
Page 37
Other Federal Income Tax Information
Page 38
Other Information
Page 39
Approval of Investment Advisory and Subadvisory Agreements
Page 40
Information about the Board of Trustees and Officers
Page 43
This report is submitted for the general information of the shareholder of the Fund. The report is not authorized for distribution to prospective investors in the Fund unless preceded or accompanied by an effective prospectus, which contains details concerning the sales charges and other pertinent information.
AZL® BlackRock Global Allocation Fund Review (unaudited)
Allianz Investment Management LLC serves as the Manager for the AZL® BlackRock Global Allocation Fund and BlackRock Investment Management, LLC serves as Subadviser to the Fund.
What factors affected the Fund’s performance during the year ended December 31, 2013?
For the year ended December 31, 2013 the AZL® BlackRock Global Allocation Fund returned 14.11%. That compared to a 13.42% return for the Fund’s Balanced Composite Index. The benchmark is comprised of 36% S&P 500 Index1; 24% FTSE All-World ex U.S. Index2 (Excluding U.S.); 24% BofA Merrill Lynch 5-Year U.S. Treasury Bond Index3; and 16% Citigroup Non-U.S. Dollar World Government Bond Index4.
In general, equity markets strongly outperformed fixed income markets for the 12-month period. Investors maintained their appetite for riskier assets as the global economy continued on a slow path to recovery, driven mostly by the recovering U.S. economy. Meanwhile, news in May reported that the U.S. Federal Reserve (the “Fed”) may reduce its efforts toward quantitative easing created concern surrounding global liquidity, which negatively affected many fixed income markets around the world. Midway through the period, market volatility increased due in part to escalations in the Egyptian revolution and the civil war in Syria. In addition, concerns that the United States would enter a technical default as it neared its debt limit late in the third quarter added to volatility in global markets. Nevertheless, a budget resolution that allowed the U.S. federal government to reopen and meet its debt obligations helped spur equities to strong gains late in the period.
The Fund outperformed its comparative composite performance benchmark for the period under review primarily due to a combination of stock selection, country, sector, and currency allocation and an overall underweight allocation to fixed income. From a country perspective, stock selection in Japan, Hong Kong, and Europe helped boost the Fund’s relative performance, as did the overweight position in Japan. From a sector perspective, stock selection in the information technology, industrials and consumer discretionary sectors all contributed positively to returns. Additionally, stock selection and an overweight position to the health care sector as well as stock selection and an underweight position in consumer staples benefited the Fund’s relative performance. Within the Fund’s fixed income allocation, an overweight position in convertible bonds and U.S. corporate bonds boosted the Fund’s returns. Moreover, from a currency perspective, underweight positions to the Japanese Yen and the Australian dollar boosted performance as those two currencies struggled during the period.*
The Fund’s relative performance was hurt by stock selection and an underweight position in U.S. equities. In particular, stock selection and an overweight position in the materials sector dragged on relative returns. The sector was notably
weighed down by poor performance among gold-related securities. Within fixed income, an overweight position in Brazilian sovereign bonds weighed on returns as that country was negatively impacted by the global liquidity concerns brought about by news that the Fed may reduce its quantitative easing efforts. The Fund’s overweight position in cash, used to balance portfolio volatility and to fund new opportunities, also weighed on returns.*
The Fund uses derivatives to boost performance and as a hedge to protect the value of its assets against adverse movements in currency exchange rates, interest rates and movements in the securities markets. The Fund’s use of derivatives during the period added modestly to relative performance.*
Past performance does not guarantee future results.
* | The Fund’s portfolio composition is subject to change. There is no guarantee that any sectors mentioned will continue to perform well or that securities in such sectors will be held by the Fund in the future. The information contained in this commentary is for informational purposes only and should not be construed as a recommendation to purchase or sell securities in the sector mentioned. The Fund’s holdings and weightings are as of December 31, 2013. |
1 | The Standard & Poor’s 500 Index (“S&P 500”) is representative of 500 selected common stocks, most of which are listed on the New York Stock Exchange, and is a measure of the U.S. Stock market as a whole. |
2 | The Financial Times Stock Exchange All-World ex U.S. Index (“FTSE World Index”) is part of a range of indexes designed to help United States investors benchmark their international investments. The index comprises large- (84%) and mid- (16%) cap stocks providing coverage of Developed and Emerging Markets (46 countries) excluding the United States. The index is derived from the FTSE Global Equity Index Series (GEIS), which covers 98% of the world’s investable market capitalization. |
3 | The BofA Merrill Lynch 5-Year U.S. Treasury Bond Index is designed to track the total return of the current coupon 5-Year U.S. Treasury bond. |
4 | The Citigroup Non-U.S. Dollar World Government Bond Index is a market capitalization-weighted index that tracks 10 government bond indices, excluding the United States. |
Investors cannot invest directly in an index. |
1
AZL® BlackRock Global Allocation Fund Review (unaudited)
Fund Objective
The Fund’s investment objective is to seek high total investment return. This objective may be changed by the Trustees of the Fund without shareholder approval. The Fund seeks to achieve its objective by investing in a portfolio of equity, debt and money market securities.
Investment Concerns
Equity securities (stocks) are more volatile and carry more risk than other forms of investments, including investments in high-grade fixed income securities. The net asset value per share of this Fund will fluctuate as the value of the securities in the portfolio changes.
Small- to mid-capitalization companies typically have a higher risk of failure and historically have experienced a greater degree of volatility.
Investments in the Fund are subject to the risks related to direct investment in real estate, such as real estate risk, regulatory risks, concentration risk, and diversification risk. By itself the Fund does not constitute a complete investment plan and should be considered a long-term investment for investors who can afford to weather changes in the value of their investments.
The Fund is subject to the risk that principal value reacts in opposition to the movement of interest rates and that a rising interest rate environment increases the risk of loss of principal.
International investing may involve risk of capital loss from unfavorable fluctuations in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations.
Emerging market investing may be subject to additional economic, political, liquidity, and currency risks not associated with more developed countries.
Investing in derivatives instruments involves risks that may be different from or greater than the risk associated with investing directly in securities or other traditional instruments.
For a complete description of these and other risks associated with investing in a mutual Fund, please refer to the Fund’s prospectus.
Growth of $10,000 Investment
The chart above represents a comparison of a hypothetical investment in the Fund versus a similar investment in the Fund’s benchmarks as well as the component indices of the Fund’s benchmark, and represents the reinvestment of dividends and capital gains in the Fund.
Average Annual Total Returns as of December 31, 2013
Since | ||||||||
1 | Inception | |||||||
Year | (1/10/12) | |||||||
AZL® BlackRock Global Allocation Fund | 14.11 | % | 10.70 | % | ||||
Balanced Composite Index | 13.42 | % | 11.58 | % | ||||
S&P 500 Index | 32.39 | % | 22.54 | % | ||||
FTSE All-World ex U.S. Index | 15.63 | % | 15.83 | % | ||||
BofA Merrill Lynch 5-Year U.S. Treasury Bond Index | -2.42 | % | -0.08 | % | ||||
Citigroup Non-U.S. Dollar World Government Bond Index | -4.56 | % | -1.15 | % | ||||
Barclays U.S. Aggregate Bond Index | -2.02 | % | 1.09 | % |
Past performance does not guarantee future results. The performance data quoted represents past performance and current returns may be lower or higher. The investment return and principal value will fluctuate so that an investor’s shares, when redeemed may be worth more or less than the original cost. To obtain performance information current to the most recent month end, please visit www.Allianzlife.com.
Expense Ratio | Gross | |||
AZL® BlackRock Global Allocation Fund | 1.15 | % |
The above expense ratio is based on the current Fund prospectus dated April 29, 2013. The Manager and the Fund have entered into a written contract limiting operating expenses, excluding certain expenses (such as interest expense), to 1.19% through April 30, 2015. Additional information pertaining to the December 31, 2013 expense ratios can be found in the financial highlights.
The total return of the Fund does not reflect the effect of any insurance charges, the annual maintenance fee or the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. Such charges, fees and tax payments would reduce the performance quoted.
The Fund’s performance is measured against a composite index (the “Balanced Composite Index”), which is comprised of 36% Standard & Poor’s 500 Index (“S&P 500”); 24% FTSE All-World ex U.S. Index; 24% BofA Merrill Lynch 5-Year U.S. Treasury Bond Index; and 16% Citigroup Non-U.S. Dollar World Government Bond Index. The S&P 500 is representative of 500 selected common stocks, most of which are listed on the New York Stock Exchange, and is a measure of the U.S. Stock market as a whole. The FTSE All-World ex U.S. Index is part of a range of indexes designed to help U.S. investors benchmark their international investments. The index comprises large- (84%) and mid- (16%) cap stocks providing coverage of Developed and Emerging Markets (46 countries) excluding the United States. The index is derived from the FTSE Global Equity Index Series (GEIS), which covers 98% of the world’s investable market capitalization. The BofA Merrill Lynch 5-Year U.S. Treasury Bond Index is designed to track the total return of the current coupon 5-Year U.S. Treasury bond. The Citigroup Non-U.S. Dollar World Government Bond Index is a market capitalization-weighted index that tracks 10 government bond indices, excluding the United States. These indices are unmanaged and do not reflect the deduction of fees associated with a mutual fund, such as investment management and fund accounting fees. The Fund’s performance reflects the deduction of fees for services provided to the Fund. Investors cannot invest directly in an index.
2 |
AZL BlackRock Global Allocation Fund
(Unaudited)
As a shareholder of the AZL BlackRock Global Allocation Fund (the “Fund”), you incur ongoing costs, including management fees, distribution fees, and other Fund expenses. These examples are intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. Please note that the expenses shown in each table do not reflect expenses that apply to the subaccount or the insurance contract. If the expenses that apply to the subaccount of the insurance contract were included, your costs would have been higher.
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the periods presented below.
The Actual Expense table below provides information about actual account values and actual expenses. You may use the information below, 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 table under the heading entitled “Expenses Paid During Period” to estimate the expenses you paid on your account during this period.
Beginning Account Value 7/1/13 | Ending Account Value 12/31/13 | Expenses Paid During Period 7/1/13 - 12/31/13* | Annualized Expense Ratio During Period 7/1/13 - 12/31/13 | |||||||||||||||||
AZL BlackRock Global Allocation Fund | $ | 1,000.00 | $ | 1,096.50 | $ | 5.87 | 1.11 | % |
The Hypothetical Expense table below provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.
Beginning Account Value 7/1/13 | Ending Account Value 12/31/13 | Expenses Paid During Period 7/1/13 - 12/31/13* | Annualized Expense Ratio During Period 7/1/13 - 12/31/13 | |||||||||||||||||
AZL BlackRock Global Allocation Fund | $ | 1,000.00 | $ | 1,019.61 | $ | 5.65 | 1.11 | % |
* | Expenses are equal to the average account value over the period, multiplied by the Fund’s annualized expense ratio, multiplied by 184/365 (to reflect the one half year period). |
Portfolio Composition
(Unaudited)
Investments | Percent of net assets | ||||
Common Stock | 64.4 | % | |||
U.S. Treasury Obligation | 18.2 | ||||
Foreign Bond | 7.0 | ||||
Yankee Dollar | 2.1 | ||||
Corporate Bond | 2.1 | ||||
Convertible Bond | 1.8 | ||||
Securities Held as Collateral for Securities on Loan | 1.5 | ||||
Preferred Stock | 1.4 | ||||
Exchange Traded Fund | 1.1 | ||||
Other Investments | 2.0 | ||||
|
| ||||
Total Investment Securities | 101.6 | ||||
Net other assets (liabilities) | (1.6 | ) | |||
|
| ||||
Net Assets | 100.0 | % | |||
|
|
Investments | Percent of net assets | ||||
United States | 58.0 | % | |||
Japan | 9.4 | ||||
United Kingdom | 6.3 | ||||
Germany | 3.9 | ||||
France | 3.8 | ||||
Switzerland | 2.3 | ||||
Canada | 1.8 | ||||
Australia | 1.8 | ||||
Brazil | 1.5 | ||||
All other countries | 12.8 | ||||
|
| ||||
Total Investment Securities | 101.6 | ||||
Net other assets (liabilities) | (1.6 | ) | |||
|
| ||||
Net Assets | 100.0 | % | |||
|
|
3
AZL BlackRock Global Allocation Fund
Consolidated Schedule of Portfolio Investments
December 31, 2013
Shares | Fair Value | |||||||
| Common Stocks (64.4%): | |||||||
| Aerospace & Defense (2.0%): | |||||||
34,170 | European Aeronautic Defence & Space Co. NV | $ | 2,633,546 | |||||
609 | General Dynamics Corp. | 58,190 | ||||||
542 | L-3 Communications Holdings, Inc. | 57,918 | ||||||
1,260 | Northrop Grumman Corp. | 144,409 | ||||||
4,928 | Precision Castparts Corp. | 1,327,110 | ||||||
963 | Raytheon Co. | 87,344 | ||||||
57,781 | Safran SA | 4,017,853 | ||||||
10,696 | Textron, Inc. | 393,185 | ||||||
29,654 | United Technologies Corp. | 3,374,624 | ||||||
|
| |||||||
12,094,179 | ||||||||
|
| |||||||
| Air Freight & Logistics (0.3%): | |||||||
6,160 | FedEx Corp. | 885,623 | ||||||
9,699 | United Parcel Service, Inc., Class B | 1,019,171 | ||||||
|
| |||||||
1,904,794 | ||||||||
|
| |||||||
| Airlines (0.5%): | |||||||
19,900 | Japan Airlines Co., Ltd. | 982,001 | ||||||
58,454 | United Continental Holdings, Inc.* | 2,211,315 | ||||||
|
| |||||||
3,193,316 | ||||||||
|
| |||||||
| Auto Components (1.3%): | |||||||
18,700 | Aisin Sieki Co., Ltd. | 761,102 | ||||||
10,270 | BorgWarner, Inc. | 574,196 | ||||||
34,800 | Bridgestone Corp. | 1,319,533 | ||||||
121,683 | Cheng Shin Rubber Industry Co., Ltd. | 318,735 | ||||||
3,209 | Compagnie Generale des Establissements Michelin SCA, Class B | 342,420 | ||||||
8,895 | Delphi Automotive plc | 534,856 | ||||||
24,500 | DENSO Corp. | 1,295,634 | ||||||
11,600 | Futaba Industrial Co., Ltd.* | 44,697 | ||||||
688 | Hyundai Wia Corp.* | 124,054 | ||||||
16,097 | Johnson Controls, Inc. | 825,775 | ||||||
900 | Lear Corp. | 72,873 | ||||||
29,100 | Toyota Industries Corp. | 1,315,493 | ||||||
7,740 | TRW Automotive Holdings Corp.* | 575,779 | ||||||
|
| |||||||
8,105,147 | ||||||||
|
| |||||||
| Automobiles (2.2%): | |||||||
8,066 | Bayerische Motoren Werke AG (BMW) | 945,855 | ||||||
8,900 | Daihatsu Motor Co., Ltd. | 151,001 | ||||||
90,000 | Dongfeng Motor Corp., H Shares | 141,905 | ||||||
111,120 | Ford Motor Co. | 1,714,582 | ||||||
114,100 | Fuji Heavy Industries, Ltd. | 3,278,247 | ||||||
56,768 | General Motors Co. | 2,320,108 | ||||||
39,000 | Honda Motor Co., Ltd. | 1,608,775 | ||||||
3,196 | Hyundai Motor Co.* | 724,176 | ||||||
4,166 | Renault SA | 336,326 | ||||||
70,800 | Suzuki Motor Corp. | 1,907,392 | ||||||
17,100 | Toyota Motor Corp. | 1,040,775 | ||||||
142,770 | Yulon Motor Co., Ltd. | 258,902 | ||||||
|
| |||||||
14,428,044 | ||||||||
|
|
Shares | Fair Value | |||||||
| Common Stocks, continued | |||||||
| Beverages (1.1%): | |||||||
10,294 | Anheuser-Busch InBev NV | $ | 1,097,501 | |||||
2,726 | Beam, Inc. | 185,532 | ||||||
76,032 | Coca-Cola Co. (The) | 3,140,881 | ||||||
1,607 | Constellation Brands, Inc., Class A* | 113,101 | ||||||
7,223 | Diageo plc, ADR | 956,470 | ||||||
5,518 | Diageo plc | 182,240 | ||||||
2,962 | Fomento Economico Mexicano SAB de C.V., ADR | 289,891 | ||||||
15,074 | SABMiller plc | 776,173 | ||||||
16,000 | Suntory Beverage & Food, Ltd. | 510,224 | ||||||
|
| |||||||
7,252,013 | ||||||||
|
| |||||||
| Biotechnology (1.0%): | |||||||
8,929 | Amgen, Inc. | 1,019,335 | ||||||
3,668 | Biogen Idec, Inc.* | 1,026,123 | ||||||
8,376 | Celgene Corp.* | 1,415,209 | ||||||
6,542 | Cubist Pharmaceuticals, Inc.* | 450,548 | ||||||
20,400 | Gilead Sciences, Inc.* | 1,533,059 | ||||||
53,533 | Mesoblast, Ltd.* | 279,737 | ||||||
6,093 | Vertex Pharmaceuticals, Inc.* | 452,710 | ||||||
|
| |||||||
6,176,721 | ||||||||
|
| |||||||
| Building Products (0.4%): | |||||||
30,992 | Compagnie de Saint-Gobain SA | 1,712,847 | ||||||
10,100 | Daikin Industries, Ltd. | 630,395 | ||||||
1,299,223 | Yuanda China Holdings, Ltd. | 114,261 | ||||||
|
| |||||||
2,457,503 | ||||||||
|
| |||||||
| Capital Markets (0.9%): | |||||||
651 | Ameriprise Financial, Inc. | 74,898 | ||||||
19,999 | Bank of New York Mellon Corp. (The) | 698,765 | ||||||
14,995 | Credit Suisse Group AG, Registered Shares | 460,503 | ||||||
28,336 | Deutsche Bank AG, Registered Shares | 1,351,908 | ||||||
7,018 | Goldman Sachs Group, Inc. (The) | 1,244,010 | ||||||
15,698 | Morgan Stanley | 492,289 | ||||||
11,822 | State Street Corp. | 867,617 | ||||||
49,610 | UBS AG, Registered Shares | 945,352 | ||||||
|
| |||||||
6,135,342 | ||||||||
|
| |||||||
| Chemicals (2.1%): | |||||||
10,469 | Agrium, Inc. | 957,704 | ||||||
13,242 | Akzo Nobel NV | 1,027,343 | ||||||
7,097 | Arkema, Inc. | 831,189 | ||||||
68,000 | Asahi Kasei Corp. | 533,075 | ||||||
345 | CF Industries Holdings, Inc. | 80,399 | ||||||
3,232 | Cheil Industries, Inc.* | 271,495 | ||||||
217,460 | China BlueChemical, Ltd., H shares | 136,466 | ||||||
1,463 | Eastman Chemical Co. | 118,064 | ||||||
15,267 | FMC Corp. | 1,152,048 | ||||||
34,500 | Hitachi Chemical Co., Ltd. | 550,765 | ||||||
37,700 | JSR Corp. | 731,151 | ||||||
12,098 | Koninklijke DSM NV | 953,410 | ||||||
59,200 | Kuraray Co., Ltd. | 706,427 | ||||||
4,986 | Lanxess AG | 333,078 |
Continued
4
AZL BlackRock Global Allocation Fund
Consolidated Schedule of Portfolio Investments
December 31, 2013
Shares | Fair Value | |||||||
| Common Stocks, continued | |||||||
| Chemicals, continued | |||||||
4,167 | Linde AG | $ | 872,656 | |||||
16,000 | Nitto Denko Corp. | 677,477 | ||||||
863 | PPG Industries, Inc. | 163,677 | ||||||
50,200 | PTT Global Chemical pcl | 120,721 | ||||||
21,100 | Shin-Etsu Chemical Co., Ltd. | 1,234,020 | ||||||
1,247 | Sigma Aldrich Corp. | 117,230 | ||||||
4,803 | Syngenta AG, Registered Shares | 1,915,189 | ||||||
149,000 | Ube Industries, Ltd. | 319,041 | ||||||
|
| |||||||
13,802,625 | ||||||||
|
| |||||||
| Commercial Banks (3.8%): | |||||||
71,171 | Banco Bilbao Vizcaya Argentaria SA | 881,767 | ||||||
47,812 | Banco Santander Brasil SA, ADR^ | 291,653 | ||||||
16,773 | Banco Santander Chile SA, ADR | 395,340 | ||||||
8,683 | Bank of Nova Scotia | 543,086 | ||||||
27,294 | BB&T Corp. | 1,018,612 | ||||||
34,944 | BNP Paribas SA | 2,735,995 | ||||||
8,902 | Commonwealth Bank of Australia | 620,128 | ||||||
13,163 | Hana Financial Holdings | 548,235 | ||||||
227,781 | HSBC Holdings plc | 2,497,918 | ||||||
381,830 | Intesa Sanpaolo SpA | 947,805 | ||||||
4,546 | KB Financial Group, Inc.* | 183,031 | ||||||
1,028,730 | Lloyds Banking Group plc* | 1,344,431 | ||||||
99,800 | Mitsubishi UFJ Financial Group, Inc. | 660,009 | ||||||
20,984 | National Australia Bank, Ltd. | 654,928 | ||||||
61,000 | Oversea-Chinese Banking Corp., Ltd. | 493,943 | ||||||
203,107 | Sberbank of Russia | 629,037 | ||||||
16,373 | Societe Generale | 956,067 | ||||||
38,200 | Sumitomo Mitsui Financial Group, Inc. | 1,973,081 | ||||||
19,913 | Svenska Handelsbanken AB, A Shares | 983,945 | ||||||
24,346 | U.S. Bancorp | 983,578 | ||||||
121,114 | UniCredit SpA | 901,780 | ||||||
85,304 | Wells Fargo & Co. | 3,872,801 | ||||||
9,566 | Westpac Banking Corp. | 277,744 | ||||||
|
| |||||||
24,394,914 | ||||||||
|
| |||||||
| Communications Equipment (0.9%): | |||||||
104,117 | Cisco Systems, Inc. | 2,337,426 | ||||||
2,284 | El Towers SpA | 105,347 | ||||||
1,618 | Harris Corp. | 112,953 | ||||||
1,657 | Motorola Solutions, Inc. | 111,848 | ||||||
43,135 | QUALCOMM, Inc. | 3,202,773 | ||||||
|
| |||||||
5,870,347 | ||||||||
|
| |||||||
| Computers & Peripherals (0.6%): | |||||||
153 | Apple, Inc. | 85,850 | ||||||
154,614 | EMC Corp. | 3,888,542 | ||||||
1,048 | Western Digital Corp. | 87,927 | ||||||
|
| |||||||
4,062,319 | ||||||||
|
| |||||||
| Construction & Engineering (0.3%): | |||||||
33,000 | JGC Corp. | 1,296,397 | ||||||
5,063 | KBR, Inc. | 161,459 | ||||||
66,000 | Okumura Corp. | 305,868 |
Shares | Fair Value | |||||||
| Common Stocks, continued | |||||||
| Construction & Engineering, continued | |||||||
85,000 | Toda Corp. | $ | 295,845 | |||||
|
| |||||||
2,059,569 | ||||||||
|
| |||||||
| Construction Materials (0.1%): | |||||||
4,361 | HeidelbergCement AG | 330,936 | ||||||
|
| |||||||
| Consumer Finance (0.6%): | |||||||
19,522 | American Express Co. | 1,771,230 | ||||||
14,375 | Capital One Financial Corp. | 1,101,269 | ||||||
21,509 | Discover Financial Services | 1,203,429 | ||||||
|
| |||||||
4,075,928 | ||||||||
|
| |||||||
| Containers & Packaging (0.3%): | |||||||
7,138 | Avery Dennison Corp. | 358,256 | ||||||
14,061 | Crown Holdings, Inc.* | 626,699 | ||||||
22,906 | Sealed Air Corp. | 779,949 | ||||||
|
| |||||||
1,764,904 | ||||||||
|
| |||||||
| Diversified Consumer Services (0.1%): | |||||||
8,600 | Benesse Holdings, Inc. | 345,507 | ||||||
|
| |||||||
| Diversified Financial Services (2.1%): | |||||||
166,417 | Bank of America Corp. | 2,591,113 | ||||||
10,502 | Berkshire Hathaway, Inc., Class B* | 1,245,117 | ||||||
61,788 | Citigroup, Inc. | 3,219,773 | ||||||
8,207 | Deutsche Boerse AG | 681,447 | ||||||
500,000 | General Electric Capital Corp., Series B | 516,250 | ||||||
97,680 | ING Groep NV* | 1,365,816 | ||||||
72,606 | JPMorgan Chase & Co. | 4,245,999 | ||||||
|
| |||||||
13,865,515 | ||||||||
|
| |||||||
| Diversified Metals & Mining (0.0%): | |||||||
152,000 | Jiangxi Copper Co., Ltd. | 276,227 | ||||||
|
| |||||||
| Diversified Telecommunication Services (1.4%): | |||||||
156,369 | BT Group plc | 984,415 | ||||||
79,969 | Deutsche Telekom AG, Registered Shares | 1,367,618 | ||||||
129,289 | Koninklijke (Royal) KPN NV* | 418,205 | ||||||
10,250 | KT Corp., ADR* | 152,418 | ||||||
8,400 | Nippon Telegraph & Telephone Corp. | 452,227 | ||||||
287,000 | Singapore Telecommunications, Ltd. | 834,427 | ||||||
890 | Swisscom AG, Registered Shares | 470,772 | ||||||
39,362 | TDC A/S | 381,925 | ||||||
32,883 | Telecom Italia SpA | 25,821 | ||||||
514,652 | Telecom Italia SpA | 512,094 | ||||||
43,010 | Telefonica Deutschland Holding AG | 355,569 | ||||||
32,435 | Telefonica SA | 529,447 | ||||||
9,883 | Telefonica SA, ADR | 161,488 | ||||||
196,600 | Telekom Malaysia Berhad | 333,300 | ||||||
41,220 | Verizon Communications, Inc. | 2,025,551 | ||||||
|
| |||||||
9,005,277 | ||||||||
|
| |||||||
| Electric Utilities (0.8%): | |||||||
16,009 | American Electric Power Co., Inc. | 748,261 | ||||||
16,800 | Chubu Electric Power Co., Inc. | 217,191 | ||||||
10,502 | Duke Energy Corp. | 724,743 | ||||||
19,811 | NextEra Energy, Inc. | 1,696,218 |
Continued
5
AZL BlackRock Global Allocation Fund
Consolidated Schedule of Portfolio Investments
December 31, 2013
Shares | Fair Value | |||||||
| Common Stocks, continued | |||||||
| Electric Utilities, continued | |||||||
28,223 | PPL Corp. | $ | 849,230 | |||||
36,591 | Scottish & Southern Energy plc | 831,980 | ||||||
|
| |||||||
5,067,623 | ||||||||
|
| |||||||
| Electrical Equipment (0.7%): | |||||||
16,424 | Eaton Corp. plc | 1,250,195 | ||||||
57,000 | Mitsubishi Electric Corp. | 716,983 | ||||||
14,933 | Rockwell Automation, Inc. | 1,764,483 | ||||||
39,900 | Sumitomo Electric Industries, Ltd. | 666,902 | ||||||
|
| |||||||
4,398,563 | ||||||||
|
| |||||||
| Electronic Equipment, Instruments & Components (0.6%): |
| ||||||
2,646 | Avnet, Inc. | 116,715 | ||||||
174,000 | Hitachi, Ltd. | 1,319,476 | ||||||
35,400 | HOYA Corp. | 985,439 | ||||||
300 | Keyence Corp. | 128,500 | ||||||
7,400 | Kyocera Corp. | 370,216 | ||||||
8,600 | Murata Manufacturing Co., Ltd. | 764,651 | ||||||
3,200 | Omron Corp. | 141,659 | ||||||
6,121 | Rexel SA | 161,210 | ||||||
1,200 | TE Connectivity, Ltd. | 66,132 | ||||||
|
| |||||||
4,053,998 | ||||||||
|
| |||||||
| Energy Equipment & Services (0.9%): | |||||||
572 | Diamond Offshore Drilling, Inc. | 32,558 | ||||||
17,496 | Dresser-Rand Group, Inc.* | 1,043,286 | ||||||
722 | Helmerich & Payne, Inc. | 60,706 | ||||||
16,399 | National-Oilwell Varco, Inc. | 1,304,213 | ||||||
22,669 | Schlumberger, Ltd. | 2,042,704 | ||||||
13,201 | Technip-Coflexip SA | 1,271,412 | ||||||
|
| |||||||
5,754,879 | ||||||||
|
| |||||||
| Food & Staples Retailing (0.5%): | |||||||
5,388 | Casino Guichard-Perrachon SA | 622,760 | ||||||
6,342 | CVS Caremark Corp. | 453,897 | ||||||
2,196 | Fresh Market, Inc. (The)* | 88,938 | ||||||
1,680 | Kroger Co. (The) | 66,410 | ||||||
70,049 | Tesco plc | 387,892 | ||||||
16,478 | Wal-Mart Stores, Inc. | 1,296,654 | ||||||
|
| |||||||
2,916,551 | ||||||||
|
| |||||||
| Food Products (1.5%): | |||||||
48,000 | Ajinomoto Co., Inc. | 695,679 | ||||||
37,560 | Cosan, Ltd., A Shares | 515,323 | ||||||
5,187 | Danone SA | 374,164 | ||||||
9,257 | General Mills, Inc. | 462,017 | ||||||
22,100 | Hillshire Brands Co. | 739,024 | ||||||
7,903 | Mead Johnson Nutrition Co. | 661,955 | ||||||
45,138 | Nestle SA, Registered Shares | 3,314,417 | ||||||
23,924 | SLC Agricola SA | 206,875 | ||||||
3,945 | Unilever NV, NYS | 158,707 | ||||||
39,032 | Unilever NV | 1,575,805 | ||||||
4,361 | Unilever plc, ADR^ | 179,673 | ||||||
14,761 | Unilever plc | 605,384 |
Shares | Fair Value | |||||||
| Common Stocks, continued | |||||||
| Food Products, continued | |||||||
31,356 | Unilever plc*# | $ | — | |||||
|
| |||||||
9,489,023 | ||||||||
|
| |||||||
| Gas Utilities (0.2%): | |||||||
287,000 | Tokyo Gas Co., Ltd. | 1,414,468 | ||||||
|
| |||||||
| Health Care Equipment & Supplies (0.7%): | |||||||
18,905 | Baxter International, Inc. | 1,314,843 | ||||||
784 | Becton, Dickinson & Co. | 86,624 | ||||||
20,533 | Boston Scientific Corp.* | 246,807 | ||||||
19,427 | Covidien plc | 1,322,979 | ||||||
6,740 | Getinge AB, B Shares | 231,251 | ||||||
576 | Intuitive Surgical, Inc.* | 221,230 | ||||||
14,719 | Medtronic, Inc. | 844,723 | ||||||
11,572 | Mindray Medical International, Ltd., ADR^ | 420,758 | ||||||
1,066 | Stryker Corp. | 80,099 | ||||||
|
| |||||||
4,769,314 | ||||||||
|
| |||||||
| Health Care Providers & Services (3.1%): | |||||||
21,442 | Aetna, Inc. | 1,470,707 | ||||||
27,588 | Al Noor Hospitals Group plc* | 410,947 | ||||||
1,594 | AmerisourceBergen Corp. | 112,074 | ||||||
143,800 | Bangkok Dusit Medical Services pcl, Class F | 515,809 | ||||||
75,500 | Bumrungrad Hospital Public Co., Ltd. | 202,129 | ||||||
32,545 | Cardinal Health, Inc. | 2,174,331 | ||||||
9,415 | DaVita, Inc.* | 596,629 | ||||||
12,076 | Envision Healthcare Holdings, Inc.* | 428,940 | ||||||
20,756 | Express Scripts Holding Co.* | 1,457,901 | ||||||
6,307 | Fresenius SE & Co. KGaA | 968,441 | ||||||
27,877 | HCA Holdings, Inc.* | 1,330,012 | ||||||
12,338 | HealthSouth Corp. | 411,102 | ||||||
12,979 | Humana, Inc. | 1,339,692 | ||||||
869,100 | IHH Healthcare Berhad* | 1,025,413 | ||||||
90,857 | Life Healthcare Group Holdings Pte, Ltd. | 364,026 | ||||||
8,765 | McKesson, Inc. | 1,414,671 | ||||||
51,975 | NMC Health plc | 377,272 | ||||||
282,799 | PT Siloam International Hospital Tbk* | 221,110 | ||||||
88,000 | Raffles Medical Group, Ltd. | 217,126 | ||||||
7,800 | Ship Healthcare Holdings, Inc. | 302,964 | ||||||
126,797 | Sinopharm Group Co., H Shares | 366,567 | ||||||
10,926 | Tenet Healthcare Corp.* | 460,203 | ||||||
30,147 | UnitedHealth Group, Inc. | 2,270,070 | ||||||
19,785 | Universal Health Services, Inc., Class B | 1,607,729 | ||||||
1,195 | WellPoint, Inc. | 110,406 | ||||||
|
| |||||||
20,156,271 | ||||||||
|
| |||||||
| Hotels, Restaurants & Leisure (0.4%): | |||||||
8,140 | Extended Stay America, Inc.* | 213,756 | ||||||
31,200 | Hilton Worldwide Holdings, Inc.* | 694,200 | ||||||
7,956 | International Game Technology | 144,481 | ||||||
16,152 | McDonald’s Corp. | 1,567,229 | ||||||
1,631 | Wyndham Worldwide Corp. | 120,188 | ||||||
|
| |||||||
2,739,854 | ||||||||
|
|
Continued
6
AZL BlackRock Global Allocation Fund
Consolidated Schedule of Portfolio Investments
December 31, 2013
Shares | Fair Value | |||||||
| Common Stocks, continued | |||||||
| Household Durables (0.4%): | |||||||
123,316 | Barratt Developments plc | $ | 713,212 | |||||
47,253 | Cyrela Brazil Realty SA Empreendimentos e Participacoes | 288,927 | ||||||
5,745 | Electrolux AB, Series B | 151,290 | ||||||
80,917 | MRV Engenharia e Participacoes SA | 289,361 | ||||||
4,700 | Rinnai Corp. | 366,375 | ||||||
371,633 | Taylor Wimpey plc | 688,870 | ||||||
|
| |||||||
2,498,035 | ||||||||
|
| |||||||
| Household Products (0.9%): | |||||||
4,891 | Church & Dwight Co., Inc. | 324,175 | ||||||
12,859 | Colgate-Palmolive Co. | 838,535 | ||||||
645 | Energizer Holdings, Inc. | 69,815 | ||||||
7,367 | Kimberly-Clark Corp. | 769,557 | ||||||
44,156 | Procter & Gamble Co. (The) | 3,594,740 | ||||||
|
| |||||||
5,596,822 | ||||||||
|
| |||||||
| Independent Power Producers & Energy Traders (0.3%): |
| ||||||
82,179 | AES Corp. (The) | 1,192,417 | ||||||
38,510 | Calpine Corp.* | 751,330 | ||||||
|
| |||||||
1,943,747 | ||||||||
|
| |||||||
| Industrial Conglomerates (2.0%): | |||||||
8,192 | 3M Co. | 1,148,928 | ||||||
157,719 | Beijing Enterprises Holdings, Ltd. | 1,565,942 | ||||||
9,692 | Danaher Corp. | 748,222 | ||||||
200,336 | General Electric Co. | 5,615,418 | ||||||
26,566 | Siemens AG, Registered Shares | 3,629,532 | ||||||
|
| |||||||
12,708,042 | ||||||||
|
| |||||||
| Insurance (2.5%): |
| ||||||
18,579 | ACE, Ltd. | 1,923,484 | ||||||
13,000 | AFLAC, Inc. | 868,400 | ||||||
10,354 | Allstate Corp. (The) | 564,707 | ||||||
14,038 | American International Group, Inc. | 716,640 | ||||||
4,730 | Arch Capital Group, Ltd.* | 282,334 | ||||||
47,213 | Aviva plc | 351,727 | ||||||
51,389 | AXA SA | 1,433,291 | ||||||
1,300 | Axis Capital Holdings, Ltd. | 61,841 | ||||||
4,453 | Chubb Corp. (The) | 430,293 | ||||||
1,440 | CNA Financial Corp. | 61,762 | ||||||
3,491 | Lincoln National Corp. | 180,205 | ||||||
1,297 | Marsh & McLennan Cos., Inc. | 62,723 | ||||||
26,830 | MetLife, Inc. | 1,446,673 | ||||||
12,000 | MS&AD Insurance Group Holdings, Inc. | 322,897 | ||||||
10,900 | NKSJ Holdings, Inc. | 304,096 | ||||||
16,107 | Progressive Corp. (The) | 439,238 | ||||||
12,816 | Prudential Financial, Inc. | 1,181,892 | ||||||
32,874 | QBE Insurance Group, Ltd. | 338,426 | ||||||
1,448 | Reinsurance Group of America, Inc. | 112,090 | ||||||
2,996 | RenaissanceRe Holdings, Ltd. | 291,630 | ||||||
32,200 | Sony Financial Holdings, Inc. | 586,694 | ||||||
68,200 | Tokio Marine Holdings, Inc. | 2,284,934 | ||||||
748 | Torchmark Corp. | 58,456 |
Shares | Fair Value | |||||||
| Common Stocks, continued | |||||||
| Insurance, continued |
| ||||||
7,794 | Travelers Cos., Inc. (The) | $ | 705,669 | |||||
1,879 | UnumProvident Corp. | 65,915 | ||||||
39,157 | XL Group plc, Class B | 1,246,759 | ||||||
|
| |||||||
16,322,776 | ||||||||
|
| |||||||
| Internet & Catalog Retail (0.1%): |
| ||||||
2,075 | Amazon.com, Inc.* | 827,489 | ||||||
|
| |||||||
| Internet Software & Services (2.0%): |
| ||||||
23,291 | eBay, Inc.* | 1,278,443 | ||||||
5,687 | Google, Inc., Class A* | 6,373,479 | ||||||
18,506 | Project Eagle Shell, Series D*(b)(c) | 1,060,116 | ||||||
240 | Project Eagle Shell, Class A*(b)(c) | 13,748 | ||||||
20,670 | Project Eagle Shell*(b)(c) | 1,184,081 | ||||||
8,705 | SINA Corp.* | 733,396 | ||||||
36,229 | Twitter, Inc.*^ | 2,305,976 | ||||||
|
| |||||||
12,949,239 | ||||||||
|
| |||||||
| IT Services (2.0%): |
| ||||||
700 | Accenture plc, Class A | 57,554 | ||||||
747 | Alliance Data Systems Corp.* | 196,409 | ||||||
1,684 | Amdocs, Ltd. | 69,448 | ||||||
18,164 | Atos Origin SA | 1,649,151 | ||||||
1,459 | Cap Gemini SA | 98,927 | ||||||
23,249 | Cielo SA | 647,407 | ||||||
2,414 | Computer Sciences Corp. | 134,894 | ||||||
2,525 | Fidelity National Information Services, Inc. | 135,542 | ||||||
6,445 | MasterCard, Inc., Class A | 5,384,540 | ||||||
19,948 | Visa, Inc., Class A | 4,442,021 | ||||||
|
| |||||||
12,815,893 | ||||||||
|
| |||||||
| Leisure Equipment & Products (0.1%): |
| ||||||
15,411 | Mattel, Inc. | 733,255 | ||||||
|
| |||||||
| Life Sciences Tools & Services (0.7%): |
| ||||||
21,168 | Agilent Technologies, Inc. | 1,210,598 | ||||||
1,818 | Mettler-Toledo International, Inc.* | 441,029 | ||||||
11,998 | PerkinElmer, Inc. | 494,678 | ||||||
13,114 | Thermo Fisher Scientific, Inc. | 1,460,243 | ||||||
6,565 | Waters Corp.* | 656,500 | ||||||
|
| |||||||
4,263,048 | ||||||||
|
| |||||||
| Machinery (1.5%): |
| ||||||
3,670 | Andritz AG | 230,504 | ||||||
4,016 | CNH Industrial NV* | 45,577 | ||||||
170,052 | CNH Industrial NV* | 1,941,928 | ||||||
65,394 | Cummins India, Ltd. | 506,898 | ||||||
6,022 | Cummins, Inc. | 848,921 | ||||||
1,187 | Dover Corp. | 114,593 | ||||||
2,200 | Fanuc, Ltd. | 403,505 | ||||||
98,090 | Haitian International Holdings, Ltd. | 222,244 | ||||||
22,000 | Hino Motors, Ltd. | 346,789 | ||||||
74,000 | IHI Corp. | 320,034 | ||||||
60,498 | Invensys plc | 510,410 | ||||||
58,000 | Kubota Corp. | 961,768 | ||||||
6,691 | Metso Corp. OYJ | 286,365 |
Continued
7
AZL BlackRock Global Allocation Fund
Consolidated Schedule of Portfolio Investments
December 31, 2013
Shares | Fair Value | |||||||
| Common Stocks, continued | |||||||
| Machinery, continued |
| ||||||
59,000 | Mitsubishi Heavy Industries, Ltd. | $ | 365,766 | |||||
9,883 | PACCAR, Inc. | 584,777 | ||||||
482 | Parker Hannifin Corp. | 62,004 | ||||||
10,222 | Samsung Heavy Industries Co., Ltd.* | 369,625 | ||||||
800 | SMC Corp. | 202,117 | ||||||
12,383 | Stanley Black & Decker, Inc. | 999,185 | ||||||
560 | Valmont Industries, Inc. | 83,507 | ||||||
|
| |||||||
9,406,517 | ||||||||
|
| |||||||
| Media (1.2%): |
| ||||||
4,632 | Charter Communications, Inc., Class A* | 633,472 | ||||||
42,145 | Comcast Corp., Class A | 2,190,066 | ||||||
2,660 | DISH Network Corp., Class A* | 154,067 | ||||||
54,638 | Grupo Televisa SAB | 329,591 | ||||||
160 | Kabel Deutschland Holding AG | 20,760 | ||||||
8,116 | Liberty Media Corp.* | 1,188,588 | ||||||
18,582 | Manchester United plc, Class A*^ | 288,578 | ||||||
110,901 | Mediaset* | 535,618 | ||||||
6,229 | RTL Group | 804,963 | ||||||
31,426 | Shaw Communications, Inc., Class B^ | 764,864 | ||||||
974 | Time Warner Cable, Inc. | 131,977 | ||||||
1,295 | Viacom, Inc., Class B | 113,105 | ||||||
48,742 | Zon Multimedia Servicos de Telecommunicacoes e Multimedia SGPS SA^ | 362,223 | ||||||
|
| |||||||
7,517,872 | ||||||||
|
| |||||||
| Metals & Mining (2.2%): |
| ||||||
105,781 | Antofagasta plc | 1,451,198 | ||||||
73,618 | BHP Billiton plc | 2,282,244 | ||||||
5,156 | BHP Billiton, Ltd. | 175,306 | ||||||
18,791 | Boliden AB | 289,019 | ||||||
94,131 | Eldorado Gold Corp. | 534,422 | ||||||
41,012 | First Quantum Minerals, Ltd. | 739,073 | ||||||
201,351 | Fortescue Metals Group, Ltd. | 1,050,475 | ||||||
45,361 | Freeport-McMoRan Copper & Gold, Inc. | 1,711,924 | ||||||
71,813 | Goldcorp, Inc. | 1,556,187 | ||||||
303,956 | Platinum Group Metals, Ltd. | 363,453 | ||||||
35,439 | Polyus Gold International, Ltd. | 117,117 | ||||||
48,283 | Rio Tinto plc | 2,724,194 | ||||||
23,103 | Silver Wheaton Corp. | 466,450 | ||||||
12,327 | Southern Copper Corp. | 353,908 | ||||||
25,879 | Teck Resources, Ltd., Class B | 673,113 | ||||||
|
| |||||||
14,488,083 | ||||||||
|
| |||||||
| Multiline Retail (0.1%): |
| ||||||
922 | Macy’s, Inc. | 49,235 | ||||||
4,600 | Ryohin Keikaku Co., Ltd. | 497,531 | ||||||
|
| |||||||
546,766 | ||||||||
|
| |||||||
| Multi-Utilities (0.6%): |
| ||||||
20,086 | CenterPoint Energy, Inc. | 465,593 | ||||||
15,409 | CMS Energy Corp. | 412,499 | ||||||
19,268 | Dominion Resources, Inc. | 1,246,448 | ||||||
95,293 | National Grid plc | 1,244,958 |
Shares | Fair Value | |||||||
| Common Stocks, continued | |||||||
| Multi-Utilities, continued |
| ||||||
6,344 | Sempra Energy | $ | 569,437 | |||||
|
| |||||||
3,938,935 | ||||||||
|
| |||||||
| Oil, Gas & Consumable Fuels (4.8%): |
| ||||||
6,430 | Anadarko Petroleum Corp. | 510,028 | ||||||
76,378 | Athabasca Oil Corp.* | 465,991 | ||||||
83,085 | BG Group plc | 1,790,245 | ||||||
15,589 | BP plc, ADR | 757,781 | ||||||
56,529 | BP plc | 457,862 | ||||||
32,913 | Cameco Corp. | 683,603 | ||||||
22,517 | Canadian Natural Resources, Ltd. | 761,976 | ||||||
7,666 | Chevron Corp. | 957,560 | ||||||
27,798 | Cobalt International Energy, Inc.* | 457,277 | ||||||
8,962 | Devon Energy Corp. | 554,479 | ||||||
92,721 | Eni SpA | 2,241,781 | ||||||
5,169 | EOG Resources, Inc. | 867,565 | ||||||
18,163 | Genel Energy plc* | 324,037 | ||||||
94,400 | INPEX Corp. | 1,210,586 | ||||||
34,038 | KazMunaiGas Exploration Production JSC, Registered Shares, GDR | 535,248 | ||||||
310,000 | Kunlun Energy Co., Ltd. | 547,505 | ||||||
39,347 | Lundin Petroleum AB* | 768,257 | ||||||
77,291 | Marathon Oil Corp. | 2,728,372 | ||||||
36,122 | Marathon Petroleum Corp. | 3,313,472 | ||||||
893 | Murphy Oil Corp. | 57,938 | ||||||
14,162 | Occidental Petroleum Corp. | 1,346,806 | ||||||
45,161 | Petroleo Brasileiro SA, ADR | 622,319 | ||||||
23,365 | Phillips 66 | 1,802,142 | ||||||
9,617 | Royal Dutch Shell plc, A Shares | 342,757 | ||||||
29,805 | Royal Dutch Shell plc, ADR | 2,124,203 | ||||||
69,916 | Statoil ASA | 1,698,784 | ||||||
13,735 | Suncor Energy, Inc. | 481,585 | ||||||
1,282 | Suncor Energy, Inc. | 44,934 | ||||||
18,632 | Total SA, ADR | 1,141,583 | ||||||
15,033 | Total SA | 921,437 | ||||||
2,950 | Valero Energy Corp. | 148,680 | ||||||
6,271 | Whiting Petroleum Corp.* | 387,987 | ||||||
|
| |||||||
31,054,780 | ||||||||
|
| |||||||
| Paper & Forest Products (0.0%): |
| ||||||
2,595 | International Paper Co. | 127,233 | ||||||
|
| |||||||
| Personal Products (0.2%): |
| ||||||
4,085 | Beiersdorf AG | 414,697 | ||||||
49,257 | Hypermarcas SA | 370,019 | ||||||
8,700 | Kao Corp. | 274,059 | ||||||
|
| |||||||
1,058,775 | ||||||||
|
| |||||||
| Pharmaceuticals (3.5%): |
| ||||||
49,506 | Abbvie, Inc. | 2,614,412 | ||||||
6,970 | Allergan, Inc. | 774,228 | ||||||
10,000 | Astellas Pharma, Inc. | 592,636 | ||||||
24,934 | AstraZeneca plc | 1,478,774 | ||||||
19,191 | Bristol-Myers Squibb Co. | 1,020,002 |
Continued
8
AZL BlackRock Global Allocation Fund
Consolidated Schedule of Portfolio Investments
December 31, 2013
Shares | Fair Value | |||||||
| Common Stocks, continued | |||||||
| Pharmaceuticals, continued |
| ||||||
21,848 | Novartis AG, Registered Shares | $ | 1,748,996 | |||||
23,300 | Otsuka Holdings Co., Ltd. | 673,038 | ||||||
4,007 | Perrigo Co. plc | 614,914 | ||||||
153,133 | Pfizer, Inc. | 4,690,464 | ||||||
14,166 | Roche Holding AG | 3,972,082 | ||||||
28,911 | Sanofi-Aventis SA | 3,077,218 | ||||||
891 | Sanofi-Aventis SA, ADR | 47,784 | ||||||
26,717 | Shire plc | 1,258,769 | ||||||
240,000 | Sino Biopharmaceutical, Ltd. | 190,687 | ||||||
|
| |||||||
22,754,004 | ||||||||
|
| |||||||
| Professional Services (0.1%): |
| ||||||
36,714 | Qualicorp SA* | 350,522 | ||||||
|
| |||||||
| Real Estate Investment Trusts (REITs) (0.7%): |
| ||||||
15,306 | American Capital Agency Corp. | 295,253 | ||||||
10,920 | American Tower Corp. | 871,634 | ||||||
22,189 | Equity Residential Property Trust | 1,150,943 | ||||||
105,231 | Fibra Uno Amdinistracion SA | 337,313 | ||||||
6,863 | Health Care REIT, Inc., Series I | 352,587 | ||||||
130,465 | Link REIT (The) | 634,792 | ||||||
4,638 | Simon Property Group, Inc. | 705,718 | ||||||
185,109 | TF Administradora Industrial S de RL de C.V. | 333,286 | ||||||
|
| |||||||
4,681,526 | ||||||||
|
| |||||||
| Real Estate Management & Development (0.7%): |
| ||||||
44,059 | BR Malls Participacoes SA | 320,011 | ||||||
10,419 | Brookfield Asset Management, Inc., Class A | 404,570 | ||||||
285,000 | CapitaLand, Ltd.(c) | 686,356 | ||||||
6,100 | Daito Trust Construction Co., Ltd. | 570,383 | ||||||
59,321 | St. Joe Co. (The)*^ | 1,138,370 | ||||||
107,000 | Sun Hung Kai Properties, Ltd. | 1,363,349 | ||||||
|
| |||||||
4,483,039 | ||||||||
|
| |||||||
| Road & Rail (1.0%): |
| ||||||
96,867 | Asciano, Ltd. | 500,329 | ||||||
11,616 | Canadian National Railway Co. | 662,344 | ||||||
20,700 | East Japan Railway Co. | 1,652,306 | ||||||
8,389 | J.B. Hunt Transport Services, Inc. | 648,470 | ||||||
14,824 | Union Pacific Corp. | 2,490,432 | ||||||
13,900 | West Japan Railway Co. | 603,359 | ||||||
|
| |||||||
6,557,240 | ||||||||
|
| |||||||
| Semiconductors & Semiconductor Equipment (0.8%): |
| ||||||
39,745 | Freescale Semiconductor, Ltd.* | 637,908 | ||||||
824 | KLA-Tencor Corp. | 53,115 | ||||||
12,900 | ROHM Co., Ltd. | 629,201 | ||||||
2,092 | Samsung Electronics Co., Ltd. | 2,734,622 | ||||||
1,483 | Samsung Electronics Co., Ltd. | 1,427,587 | ||||||
|
| |||||||
5,482,433 | ||||||||
|
| |||||||
| Software (1.9%): |
| ||||||
1,906 | Adobe Systems, Inc.* | 114,131 | ||||||
1,620 | CA, Inc. | 54,513 | ||||||
1,742 | Check Point Software Technologies, Ltd.* | 112,394 | ||||||
21,826 | Citrix Systems, Inc.* | 1,380,496 |
Shares | Fair Value | |||||||
| Common Stocks, continued | |||||||
| Software, continued |
| ||||||
48,179 | Electronic Arts, Inc.* | $ | 1,105,226 | |||||
1,497 | Intuit, Inc. | 114,251 | ||||||
11,838 | Microsoft Corp. | 443,096 | ||||||
4,600 | Nintendo Co., Ltd. | 615,217 | ||||||
112,899 | Oracle Corp. | 4,319,517 | ||||||
16,064 | Red Hat, Inc.* | 900,227 | ||||||
3,909 | Symantec Corp. | 92,174 | ||||||
41,851 | TIBCO Software, Inc.* | 940,810 | ||||||
37,081 | UbiSoft Entertainment SA* | 525,733 | ||||||
14,214 | Veeva Systems, Inc., Class A*^ | 456,269 | ||||||
8,994 | VMware, Inc., Class A* | 806,852 | ||||||
|
| |||||||
11,980,906 | ||||||||
|
| |||||||
| Specialty Retail (0.3%): |
| ||||||
11,551 | American Eagle Outfitters, Inc. | 166,334 | ||||||
7,100 | Nitori Co., Ltd. | 673,408 | ||||||
660 | Ross Stores, Inc. | 49,454 | ||||||
3,942 | Williams-Sonoma, Inc. | 229,740 | ||||||
221,800 | Yamada Denki Co., Ltd. | 725,887 | ||||||
192,260 | Zhongsheng Group Holdings, Ltd.^ | 266,504 | ||||||
|
| |||||||
2,111,327 | ||||||||
|
| |||||||
| Textiles, Apparel & Luxury Goods (0.3%): |
| ||||||
24,122 | Coach, Inc. | 1,353,968 | ||||||
3,116 | LVMH Moet Hennessy Louis Vuitton SA | 570,373 | ||||||
|
| |||||||
1,924,341 | ||||||||
|
| |||||||
| Trading Companies & Distributors (0.9%): |
| ||||||
24,578 | Fastenal Co. | 1,167,701 | ||||||
67,600 | Mitsubishi Corp. | 1,297,679 | ||||||
191,100 | Mitsui & Co., Ltd. | 2,665,270 | ||||||
55,200 | Sumitomo Corp. | 694,455 | ||||||
|
| |||||||
5,825,105 | ||||||||
|
| |||||||
| Transportation Infrastructure (0.1%): |
| ||||||
615,711 | Delta Topco, Ltd.*(b)(c) | 400,890 | ||||||
19,464 | Novorossiysk Commercial Sea Trade Port JSC, Registered Shares, GDR^ | 120,313 | ||||||
|
| |||||||
521,203 | ||||||||
|
| |||||||
| Water Utilities (0.1%): |
| ||||||
14,666 | American Water Works Co., Inc. | 619,785 | ||||||
|
| |||||||
| Wireless Telecommunication Services (1.0%): |
| ||||||
14,748 | America Movil SAB de C.V., Series L, ADR | 344,661 | ||||||
340,600 | Axiata Group Berhad | 717,706 | ||||||
9,398 | Crown Castle International Corp.* | 690,095 | ||||||
132,029 | Far EasTone Telecommunications Co., Ltd. | 290,487 | ||||||
26,500 | KDDI Corp. | 1,634,686 | ||||||
6,999 | Rogers Communications, Inc., Class B | 316,705 | ||||||
94,000 | Taiwan Mobile Co., Ltd. | 303,908 | ||||||
28,321 | Vodafone Group plc, ADR | 1,113,298 | ||||||
220,011 | Vodafone Group plc | 864,756 | ||||||
|
| |||||||
6,276,302 | ||||||||
|
| |||||||
| Total Common Stocks (Cost $350,034,057) | 414,726,711 | ||||||
|
|
Continued
9
AZL BlackRock Global Allocation Fund
Consolidated Schedule of Portfolio Investments
December 31, 2013
Shares | Fair Value | |||||||
| Preferred Stocks (1.4%): |
| ||||||
| Auto Components (0.1%): |
| ||||||
12,219 | Mobileye N.V., Series F, Preferred Shares*(b)(c) | $ | 426,443 | |||||
|
| |||||||
| Automobiles (0.4%): |
| ||||||
8,380 | Volkswagen AG, Preferred Shares | 2,354,185 | ||||||
|
| |||||||
| Commercial Banks (0.6%): |
| ||||||
22,882 | Citigroup Capital XIII, Preferred Shares | 623,535 | ||||||
28,200 | GMAC Capital Trust I, Series 2, Preferred Shares | 754,067 | ||||||
14,233 | HSBC Holdings plc, Series 2, Preferred Shares | 383,437 | ||||||
31,916 | Itau Unibanco Holding SA, Preferred Shares | 432,433 | ||||||
13,440 | RBS Capital Funding Trust VII, Series G, Preferred Shares | 281,971 | ||||||
2,900 | Royal Bank of Scotland Group plc, Series Q, Preferred Shares, ADR | 62,843 | ||||||
9,100 | Royal Bank of Scotland Group plc, Series M, Preferred Shares, ADR | 190,190 | ||||||
13,469 | Royal Bank of Scotland Group plc, Series T, Preferred Shares, ADR^ | 323,256 | ||||||
7,409 | U.S. Bancorp, Series G, Preferred Shares | 202,784 | ||||||
13,409 | U.S. Bancorp, Series F, Preferred Shares | 352,657 | ||||||
511,000 | USB Capital IX, Preferred Shares | 396,025 | ||||||
|
| |||||||
4,003,198 | ||||||||
|
| |||||||
| Communications Equipment (0.1%): |
| ||||||
5,571 | Corwn Castle International Corp., Series A, Preferred Shares | 559,189 | ||||||
|
| |||||||
| Diversified Financial Services (0.0%): |
| ||||||
31,451 | Fannie Mae, Series S, Preferred Shares | 275,196 | ||||||
|
| |||||||
| Food & Staples Retailing (0.1%): |
| ||||||
12,235 | Companhia Brasileira de Destribuicao Grupo Pao de Acucar, Preferred Shares | 546,568 | ||||||
|
| |||||||
| Machinery (0.0%): |
| ||||||
1,723 | Stanley Black & Decker, Inc., Preferred Shares | 177,814 | ||||||
|
| |||||||
| Real Estate Management & Development (0.1%): |
| ||||||
14,600 | Forestar Group, Inc., Preferred Shares | 409,384 | ||||||
|
| |||||||
| Total Preferred Stocks (Cost $7,851,611) | 8,751,977 | ||||||
|
| |||||||
| Warrant (0.0%): |
| ||||||
| Paper & Forest Products (0.0%): |
| ||||||
157,250 | TFS Corp., Ltd.*(a) | 64,868 | ||||||
|
| |||||||
| Total Warrant (Cost $—) | 64,868 | ||||||
|
| |||||||
| Convertible Preferred Stocks (0.2%): |
| ||||||
| Aerospace & Defense (0.0%): |
| ||||||
4,687 | United Technologies Corp., 0.46% | 306,858 | ||||||
|
| |||||||
| Airlines (0.0%): |
| ||||||
650 | Continental Airlines Finance Trust II, 3.11% | 31,322 | ||||||
|
| |||||||
| Commercial Banks (0.0%): |
| ||||||
207 | Wells Fargo & Co., Series L, Class A, 0.03% | 229,770 | ||||||
|
| |||||||
| Electric Utilities (0.2%): |
| ||||||
8,384 | NextEra Energy, Inc., 0.39% | 482,080 | ||||||
6,900 | PPL Corp., 0.66% | 364,872 | ||||||
|
| |||||||
846,952 | ||||||||
|
|
Shares | Fair Value | |||||||
| Convertible Preferred Stocks, continued |
| ||||||
| Health Care Providers & Services (0.0%): |
| ||||||
4,738 | Omnicare Capital Trust II, Series B | $ | 350,760 | |||||
|
| |||||||
| Metals & Mining (0.0%): |
| ||||||
12,824 | Cliffs Natural Resources, Inc., Series A, 1.22% | 294,439 | ||||||
|
| |||||||
| Total Convertible Preferred Stocks (Cost $1,860,535) | 2,060,101 | ||||||
|
| |||||||
| Private Placements (0.4%): |
| ||||||
| Commercial Banks (0.1%): |
| ||||||
365,000 | CIT Group, Inc.^(a) | 378,231 | ||||||
200,000 | Vnesheconombank(a) | 204,000 | ||||||
|
| |||||||
582,231 | ||||||||
|
| |||||||
| Diversified Financial Services (0.1%): |
| ||||||
449,000 | Daimler Finance NA LLC(a) | 450,504 | ||||||
199,000 | Hyundai Capital America, Inc.(a) | 197,639 | ||||||
|
| |||||||
648,143 | ||||||||
|
| |||||||
| Media (0.0%): |
| ||||||
200,000 | NBCUniversal Enterprise, Inc.(a) | 198,000 | ||||||
|
| |||||||
| Oil, Gas & Consumable Fuels (0.1%): |
| ||||||
237,600 | Odebrecht Drilling VIII/IX (a) | 243,540 | ||||||
399,748 | Odebrecht Offshore Drilling Finance, Ltd.(a) | 409,142 | ||||||
|
| |||||||
652,682 | ||||||||
|
| |||||||
| Software (0.1%): |
| ||||||
687,000 | Salesforce.com, Inc.(a) | 746,683 | ||||||
|
| |||||||
746,683 | ||||||||
|
| |||||||
| Tobacco (0.0%): |
| ||||||
300,000 | B.A.T. International Finance plc(a) | 303,364 | ||||||
|
| |||||||
| Total Private Placements (Cost $3,071,273) | 3,131,103 | ||||||
|
| |||||||
Contracts, Shares, Notional Amount or Principal Amount | Fair Value | |||||||
| Convertible Bonds (1.9%): |
| ||||||
| Automobiles (0.2%): |
| ||||||
$ | 800,000 | Volkswagen International Finance NV, 5.50%, 11/9/15+(a) | 1,365,048 | |||||
|
| |||||||
| Biotechnology (0.5%): |
| ||||||
120,000 | BioMarin Pharmaceutical, Inc., 0.75%, 10/15/18 | 127,125 | ||||||
120,000 | BioMarin Pharmaceutical, Inc., 1.50%, 10/15/20 | 128,325 | ||||||
209,000 | Cubist Pharmaceuticals, Inc., 2.50%, 11/1/17 | 508,392 | ||||||
25,000 | Gilead Sciences, Inc., 1.63%, 5/1/16 | 82,453 | ||||||
574,000 | Gilead Sciences, Inc., Series D, 1.63%, 5/1/16 | 1,893,123 | ||||||
|
| |||||||
2,739,418 | ||||||||
|
| |||||||
| Commercial Banks (0.1%): |
| ||||||
648,000 | JPMorgan Chase & Co., Series Q, 5.15%, 12/31/49, Callable 5/1/23 @ 100(d) | 581,580 | ||||||
|
|
Continued
10
AZL BlackRock Global Allocation Fund
Consolidated Schedule of Portfolio Investments
December 31, 2013
Contracts, Shares, Notional Amount or Principal Amount | Fair Value | |||||||
| Convertible Bonds, continued |
| ||||||
| Computers & Peripherals (0.0%): |
| ||||||
$ | 97,000 | SanDisk Corp., 0.50%, 10/15/20(a) | $ | 96,030 | ||||
|
| |||||||
| Diversified Financial Services (0.1%): |
| ||||||
2,000,000 | Wharf Finance (2014), Ltd., 2.30%, 6/7/14+ | 258,576 | ||||||
20,000,000 | Zeus (Cayman) II, Ltd., Series REGS, 1.02%, 8/18/16+(b) | 330,943 | ||||||
|
| |||||||
589,519 | ||||||||
|
| |||||||
| Diversified Telecommunication Services (0.1%): |
| ||||||
500,000 | Telecom Italia SpA, Series TIT, 6.13%, 11/15/16+(a) | 722,963 | ||||||
|
| |||||||
| Electrical Equipment (0.0%): |
| ||||||
143,000 | Suzlon Energy, Ltd., 32.58%, 7/25/14 | 82,940 | ||||||
|
| |||||||
| Food & Staples Retailing (0.1%): |
| ||||||
500,000 | Olam International, Ltd., 6.00%, 10/15/16(a) | 493,750 | ||||||
|
| |||||||
493,750 | ||||||||
|
| |||||||
| Food Products (0.0%): |
| ||||||
400,000 | REI Agro, Ltd., Series REGS, 5.50%, 11/13/14(b) | 201,000 | ||||||
|
| |||||||
| Health Care Providers & Services (0.0%): |
| ||||||
40,000 | Brookdale Senior Living, Inc., 2.75%, 6/15/18 | 47,500 | ||||||
|
| |||||||
| Internet Software & Services (0.0%): |
| ||||||
213,000 | SINA Corp., 1.00%, 12/1/18, Callable 12/1/16 @ 100(a) | 216,328 | ||||||
|
| |||||||
| Oil, Gas & Consumable Fuels (0.1%): |
| ||||||
796,000 | Cobalt International Energy, Inc., 2.63%, 12/1/19^ | 703,963 | ||||||
300,000 | �� | Essar Energy plc, 4.25%, 2/1/16(a) | 225,750 | |||||
|
| |||||||
929,713 | ||||||||
|
| |||||||
| Pharmaceuticals (0.2%): |
| ||||||
402,000 | Mylan, Inc., 3.75%, 9/15/15 | 1,318,058 | ||||||
|
| |||||||
| Real Estate Management & Development (0.4%): |
| ||||||
750,000 | CapitaLand, Ltd., 2.10%, 11/15/16, Callable 10/17/18 @ 100+(a) | 591,909 | ||||||
1,250,000 | CapitaLand, Ltd., Series CAPL, 2.95%, 6/20/22, Callable 6/20/17 @ 100+(a) | 984,613 | ||||||
500,000 | CapitaLand, Ltd., 1.95%, 10/17/23, Callable 10/17/18 @ 100+(a) | 390,377 | ||||||
250,000 | CapitaLand, Ltd., 1.95%, 10/17/23, Callable 10/17/18 @ 100+(a) | 195,189 | ||||||
353,000 | Forest City Enterprises, Inc., 4.25%, 8/15/18 | 392,713 | ||||||
|
| |||||||
2,554,801 | ||||||||
|
| |||||||
| Software (0.1%): |
| ||||||
500,000 | Take-Two Interactive Software, Inc., 1.75%, 12/1/16^ | 576,875 | ||||||
|
| |||||||
576,875 | ||||||||
|
| |||||||
| Total Convertible Bonds (Cost $11,021,381) | 12,515,523 | ||||||
|
|
Contracts, Shares, Notional Amount or Principal Amount | Fair Value | |||||||
| Floating Rate Loans (0.9%): |
| ||||||
| Energy Equipment & Services (0.1%): |
| ||||||
$ | 130,285 | Drillships Financing Holdings, Inc., 5.50%, 7/15/16(d) | $ | 131,969 | ||||
260,572 | Drillships Financing Holdings, Inc., 6.00%, 3/31/21(d) | 265,783 | ||||||
405,533 | Fieldwood Energy LLC, 0.44%, 9/20/20(d) | 413,644 | ||||||
|
| |||||||
811,396 | ||||||||
|
| |||||||
| Hotels, Restaurants & Leisure (0.3%): |
| ||||||
304,147 | Autobahn Tank & Rast Holding GmbH, 0.20%, 12/4/18+(d) | 418,035 | ||||||
122,640 | Autobahn Tank & Rast Holding GmbH, 0.20%, 12/4/19+(d) | 169,804 | ||||||
1,467,632 | Hilton Worldwide Finance LLC, 4.00%, 9/23/20(d) | 1,478,639 | ||||||
|
| |||||||
2,066,478 | ||||||||
|
| |||||||
| Insurance (0.1%): |
| ||||||
571,000 | Delta Debtco, Ltd., 9.25%, 10/30/19(b)(d) | 594,554 | ||||||
|
| |||||||
| Media (0.1%): |
| ||||||
394,023 | Univision Communications, Inc., 4.50%, 3/1/20(d) | 396,134 | ||||||
|
| |||||||
| Metals & Mining (0.0%): |
| ||||||
103,220 | Constellium Holdco BV, 6.00%, 2/25/20(d) | 105,671 | ||||||
103,480 | Constellium Holdco BV, 6.50%, 2/25/20+(d) | 144,304 | ||||||
105,860 | Essar Steel Algoma, Inc., 8.75%, 9/18/14(d) | 106,391 | ||||||
|
| |||||||
356,366 | ||||||||
|
| |||||||
| Oil, Gas & Consumable Fuels (0.2%): |
| ||||||
237,973 | Quintero SA, 1.25%, 6/20/23(d) | 198,946 | ||||||
94,533 | Sheridan Production Partners, 0.03%, 12/2/20(d) | 94,888 | ||||||
679,400 | Sheridan Production Partners, 0.03%, 12/2/20(d) | 681,947 | ||||||
35,267 | Sheridan Production Partners, 0.03%, 12/2/20(d) | 35,399 | ||||||
|
| |||||||
1,011,180 | ||||||||
|
| |||||||
| Pharmaceuticals (0.1%): |
| ||||||
382,113 | Valeant Pharmaceuticals International, Inc., 4.50%, 6/26/20(d) | 384,420 | ||||||
|
| |||||||
| Wireless Telecommunication Services (0.0%): |
| ||||||
253,725 | Cricket Communications, Inc., 4.75%, 2/26/20(d) | 254,574 | ||||||
|
| |||||||
| Total Floating Rate Loans (Cost $5,751,779) | 5,875,102 | ||||||
|
| |||||||
| Corporate Bonds (2.1%): |
| ||||||
| Beverages (0.0%): |
| ||||||
238,000 | Anheuser-Busch InBev NV Worldwide, Inc., 1.38%, 7/15/17 | 237,500 | ||||||
|
| |||||||
| Capital Markets (0.2%): |
| ||||||
408,000 | Ford Motor Credit Co. LLC, 2.38%, 1/16/18 | 412,063 | ||||||
232,000 | General Electric Capital Corp., Series A, 5.55%, 5/4/20, MTN | 266,969 |
Continued
11
AZL BlackRock Global Allocation Fund
Consolidated Schedule of Portfolio Investments
December 31, 2013
Contracts, Shares, Notional Amount or Principal Amount | Fair Value | |||||||
| Corporate Bonds, continued |
| ||||||
| Capital Markets, continued |
| ||||||
$ | 108,000 | General Electric Capital Corp., 6.38%, 11/15/67, Callable 11/15/17 @ 100(d) | $ | 117,180 | ||||
311,000 | Merrill Lynch & Co., 6.88%, 4/25/18, MTN | 367,716 | ||||||
168,000 | Morgan Stanley, Series G, 7.30%, 5/13/19 | 204,021 | ||||||
|
| |||||||
1,367,949 | ||||||||
|
| |||||||
| Commercial Banks (0.2%): |
| ||||||
258,000 | Ally Financial, Inc., 4.50%, 2/11/14 | 258,968 | ||||||
528,000 | Ally Financial, Inc., 2.75%, 1/30/17 | 529,979 | ||||||
310,000 | HSBC USA, Inc., 1.63%, 1/16/18 | 305,678 | ||||||
265,000 | JPMorgan Chase & Co., 6.13%, 6/27/17 | 300,992 | ||||||
|
| |||||||
1,395,617 | ||||||||
|
| |||||||
| Communications Equipment (0.0%): |
| ||||||
60,000 | Hughes Satellite Systems Corp., 7.63%, 6/15/21 | 66,900 | ||||||
|
| |||||||
| Computers & Peripherals (0.1%): |
| ||||||
803,000 | Apple, Inc., 1.00%, 5/3/18 | 776,458 | ||||||
|
| |||||||
| Construction Materials (0.0%): |
| ||||||
75,000 | Building Materials Corp., 6.88%, 8/15/18, Callable 8/15/14 @ 103.44(a) | 79,688 | ||||||
134,000 | Texas Industries, Inc., 9.25%, 8/15/20, Callable 8/15/15 @ 104.63 | 149,242 | ||||||
|
| |||||||
228,930 | ||||||||
|
| |||||||
| Consumer Finance (0.1%): |
| ||||||
340,000 | Ally Financial, Inc., 3.50%, 7/18/16 | 350,827 | ||||||
|
| |||||||
| Diversified Financial Services (0.2%): |
| ||||||
274,000 | Bank of America Corp., Series L, 1.35%, 11/21/16 | 273,887 | ||||||
478,000 | Bank of America Corp., 2.00%, 1/11/18, MTN | 477,151 | ||||||
267,000 | Bank of America Corp., 1.32%, 3/22/18, MTN^(d) | 270,546 | ||||||
273,000 | Citigroup, Inc., Series A, 5.95%, 12/29/49, Callable 1/30/23 @ 100(d) | 252,621 | ||||||
|
| |||||||
1,274,205 | ||||||||
|
| |||||||
| Diversified Telecommunication (0.4%): |
| ||||||
2,714,000 | Verizon Communications, Inc., 1.99%, 9/14/18(d) | 2,853,766 | ||||||
|
| |||||||
| Health Care Providers & Services (0.0%): |
| ||||||
70,000 | DaVita, Inc., 6.38%, 11/1/18, Callable 2/13/14 @ 104.78 | 73,500 | ||||||
|
| |||||||
| IT Services (0.0%): |
| ||||||
263,000 | SunGard Data Systems, Inc., 7.38%, 11/15/18, Callable 2/13/14 @ 105.33 | 278,451 | ||||||
|
| |||||||
| Media (0.0%): |
| ||||||
235,000 | Cablevision Systems Corp., 5.88%, 9/15/22^ | 225,013 | ||||||
|
| |||||||
| Office Electronics (0.0%): |
| ||||||
213,000 | Xerox Corp., 6.35%, 5/15/18 | 243,433 | ||||||
|
| |||||||
| Oil, Gas & Consumable Fuels (0.2%): |
| ||||||
545,000 | Consol Energy, Inc., 8.00%, 4/1/17, Callable 4/1/14 @ 104 | 574,294 |
Contracts, Shares, Notional Amount or Principal Amount | Fair Value | |||||||
| Corporate Bonds, continued |
| ||||||
| Oil, Gas & Consumable Fuels, continued |
| ||||||
$ | 325,000 | Reliance Holdings USA, Inc., 4.50%, 10/19/20(a) | $ | 321,129 | ||||
270,000 | Sabine Pass Liquefaction LLC, 5.63%, 4/15/23(a) | 252,450 | ||||||
|
| |||||||
1,147,873 | ||||||||
|
| |||||||
| Paper & Forest Products (0.0%): |
| ||||||
245,000 | International Paper Co., 7.95%, 6/15/18 | 297,600 | ||||||
|
| |||||||
| Pharmaceuticals (0.0%): |
| ||||||
289,000 | Mylan, Inc., 2.55%, 3/28/19 | 286,116 | ||||||
|
| |||||||
| Thrifts & Mortgage Finance (0.1%): |
| ||||||
365,000 | Capital One Bank USA NA, Series BNKT, 2.15%, 11/21/18, Callable 10/21/18 @ 100 | 362,908 | ||||||
|
| |||||||
| Transportation Infrastructure (0.1%): |
| ||||||
509,075 | Delta Topco, Ltd., 10.00%, 11/24/60(b)(c) | 504,627 | ||||||
|
| |||||||
| Wireless Telecommunication Services (0.2%): |
| ||||||
875,000 | AT&T, Inc., 2.38%, 11/27/18^ | 875,751 | ||||||
391,000 | Cricket Communications, Inc., | |||||||
7.75%, 10/15/20, Callable | ||||||||
10/15/15 @ 103.88 | 445,740 | |||||||
|
| |||||||
1,321,491 | ||||||||
|
| |||||||
| Total Corporate Bonds (Cost $13,149,429) | 13,293,164 | ||||||
|
| |||||||
| Foreign Bonds (7.0%): |
| ||||||
| Commercial Banks (0.2%): |
| ||||||
610,000 | Lloyds TSB Bank plc, Series E, 13.00%, 1/29/49, Callable 1/21/29 @ 100+(d) | 1,604,359 | ||||||
|
| |||||||
| Media (0.1%): |
| ||||||
320,000 | Nara Cable Funding, Ltd., 8.88%, 12/1/18, Callable 12/1/18 @ 108.88+(a) | 477,200 | ||||||
|
| |||||||
| Pharmaceuticals (0.0%): |
| ||||||
100,000 | Capsugel FinanceCo SCA, 9.88%, 8/1/19, Callable 8/1/14 @ 107.41+(a) | 153,722 | ||||||
|
| |||||||
| Sovereign Bonds (6.7%): |
| ||||||
3,379,000 | Australian Government, Series 133, 5.50%, 4/21/23+ | 3,332,367 | ||||||
1,447,000 | Brazil Nota do Tesouro Nacional, Series NTNB, 6.00%, 8/15/22+(e) | 1,445,273 | ||||||
7,182,000 | Brazil Nota do Tesouro Nacional, Series NTNF, 1.16%, 1/1/23+(e) | 2,571,491 | ||||||
786,000 | Brazil Nota do Tesouro Nacional, Series NTNB, 6.00%, 8/15/24+(e) | 781,282 | ||||||
3,861,012 | Bundesrepublik Deutschland, Series 2007, 4.25%, 7/4/17+ | 5,995,254 | ||||||
3,034,238 | Bundesrepublik Deutschland, Series 9, 3.50%, 7/4/19+ | 4,715,161 | ||||||
558,000 | Canadian Government, 4.00%, 6/1/16+ | 560,784 |
Continued
12
AZL BlackRock Global Allocation Fund
Consolidated Schedule of Portfolio Investments
December 31, 2013
Contracts, Shares, Notional Amount or Principal Amount | Fair Value | |||||||
| Foreign Bonds, continued |
| ||||||
| Sovereign Bonds, continued |
| ||||||
929,000 | Canadian Government, 1.50%, 3/1/17+ | $ | 877,980 | |||||
707,000 | Canadian Government, 3.50%, 6/1/20+ | 715,707 | ||||||
60,000,000 | Japan Treasury Bill, Series 379, 0.08%, 1/15/14+(f) | 569,845 | ||||||
200,000,000 | Japan Treasury Bill, Series 405, 0.06%, 1/27/14+(f) | 1,899,451 | ||||||
170,000,000 | Japan Treasury Bill, Series 386, 0.08%, 2/10/14+(f) | 1,614,504 | ||||||
130,000,000 | Japan Treasury Bill, Series 415, 0.06%, 3/17/14+(f) | 1,234,547 | ||||||
3,229,000 | Malaysian Government, Series 2/04, 5.09%, 4/30/14+ | 992,771 | ||||||
75,570,800 | Mexican Cetes, Series BI , 1/9/14+(g) | 578,779 | ||||||
92,870,000 | Mexican Cetes, Series BI , 2/6/14+(g) | 709,532 | ||||||
132,350,000 | Mexican Cetes, Series BI , 3/20/14+(g) | 1,006,850 | ||||||
99,200,000 | Mexican Cetes, Series BI , 4/3/14+(g) | 753,658 | ||||||
141,050,300 | Mexican Cetes, Series BI , 4/30/14+(g) | 1,068,725 | ||||||
56,279,700 | Mexican Cetes, Series BI , 5/15/14+(g) | 425,942 | ||||||
33,204,700 | Mexican Cetes, Series BI , 5/29/14+(g) | 250,947 | ||||||
2,589,000 | Queensland Treasury Corp., Series 17, 6.00%, 9/14/17+ | 2,526,119 | ||||||
1,001,000 | Queensland Treasury Corp., Series 21, 6.00%, 6/14/21+ | 994,044 | ||||||
4,431,697 | United Kingdom Treasury Note, 1.25%, 7/22/18+ | 7,135,461 | ||||||
|
| |||||||
42,756,474 | ||||||||
|
| |||||||
| Wireless Telecommunication Services (0.0%): | |||||||
100,000 | Ziggo BV, 3.63%, 3/27/20+(a) | 137,757 | ||||||
|
| |||||||
| Total Foreign Bonds (Cost $46,077,221) | 45,129,512 | ||||||
|
| |||||||
| Yankee Dollars (2.1%): |
| ||||||
| Capital Markets (0.3%): | |||||||
858,310 | Dana Gas Sukuk, Ltd., 9.00%, 10/31/17, Callable 10/13/17 @ 105(a) | 832,561 | ||||||
1,098,330 | Dana Gas Sukuk, Ltd., 7.00%, 10/31/17(a) | 1,076,362 | ||||||
|
| |||||||
1,908,923 | ||||||||
|
| |||||||
| Commercial Banks (0.6%): |
| ||||||
400,000 | Banco Bradesco (Cayman), 4.50%, 1/12/17(a) | 423,000 | ||||||
275,000 | Banco Estado Chile, 2.03%, 4/2/15 | 279,330 | ||||||
450,000 | Banco Santander Chile, 2.12%, 6/7/18(a)(d) | 451,351 | ||||||
1,052,000 | BNP Paribas SA, 2.40%, 12/12/18 | 1,048,738 | ||||||
200,000 | Export-Import Bank of Korea, 1.25%, 11/20/15 | 200,616 | ||||||
505,000 | Intesa Sanpaolo SpA, 3.13%, 1/15/16 | 514,626 | ||||||
221,000 | Intesa Sanpaolo SpA, 3.88%, 1/16/18 | 226,300 | ||||||
200,000 | Lloyds Bank plc, 2.30%, 11/27/18 | 199,481 | ||||||
430,000 | Nordea Bank AB, 3.13%, 3/20/17(a) | 449,643 | ||||||
250,000 | Rabobank Nederland, 3.95%, 11/9/22 | 242,248 | ||||||
200,000 | UBS AG Stamford CT, Series BKNT, 5.88%, 12/20/17 | 229,505 | ||||||
|
| |||||||
4,264,838 | ||||||||
|
|
Contracts, Shares, Notional Amount or Principal Amount | Fair Value | |||||||
| Yankee Dollars, continued |
| ||||||
| Diversified Financial Services (0.1%): |
| ||||||
300,000 | CSG Guernsey I, Ltd., Series REGS, 7.88%, 2/24/41, Callable 8/24/16 @ 100(a)(d) | $ | 326,250 | |||||
200,000 | Odebrecht Finance, Ltd., 5.13%, 6/26/22(a) | 195,750 | ||||||
|
| |||||||
522,000 | ||||||||
|
| |||||||
| Industrial Conglomerates (0.1%): | |||||||
400,000 | Hutchison Whampoa International 11, Ltd., 3.50%, 1/13/17(a) | 417,468 | ||||||
|
| |||||||
| Media (0.0%): | |||||||
200,000 | Nara Cable Funding, Ltd., 8.88%, 12/1/18, Callable 2/13/14 @ 108.88(a) | 213,000 | ||||||
200,000 | Unitymedia Hessen GmbH & Co., KG/Unitymedia NRW GmbH, 5.50%, 1/15/23, Callable 1/15/18 @ 102.75(a) | 194,000 | ||||||
|
| |||||||
407,000 | ||||||||
|
| |||||||
| Metals & Mining (0.1%): | |||||||
139,000 | FMG Resources August 2006, 6.00%, 4/1/17, Callable 4/1/15 @ 103(a) | 147,688 | ||||||
98,000 | FMG Resources August 2006, 6.88%, 4/1/22, Callable 4/1/17 @ 103.44^(a) | 106,820 | ||||||
126,000 | FMG Resources Pty, Ltd., 8.25%, 11/1/19, Callable 11/1/15 @ 104.13^(a) | 141,435 | ||||||
|
| |||||||
395,943 | ||||||||
|
| |||||||
| Oil, Gas & Consumable Fuels (0.3%): | |||||||
240,000 | Bumi Investment Pte, Ltd., 10.75%, 10/6/17, Callable 10/6/14 @ 105.38(a) | 163,200 | ||||||
130,000 | Dana Gas Sukuk, Ltd., Registered Shares, 9.00%, 10/31/17, Callable 2/10/14 @ 105(a) | 126,100 | ||||||
1,318,000 | OGX Austria GmbH, 8.50%, 6/1/18, Callable 6/1/15 @ 104.25(a)(k) | 105,440 | ||||||
164,000 | Petrobras Global Finance BV, 2.00%, 5/20/16 | 163,870 | ||||||
937,000 | Petrobras Global Finance BV, 2.38%, 1/15/19(d) | 915,918 | ||||||
481,000 | YPF SA, 8.88%, 12/19/18^(a) | 499,038 | ||||||
|
| |||||||
1,973,566 | ||||||||
|
| |||||||
| Paper & Forest Products (0.1%): | |||||||
425,000 | TFS Corp., Ltd., 11.00%, 7/15/18, Callable 7/15/15 @ 108.00(b) | 437,219 | ||||||
|
| |||||||
| Real Estate Management & Development (0.0%): | |||||||
200,000 | Sun Hung Kai Properties, Ltd., Series E, 4.50%, 2/14/22(a) | 200,723 | ||||||
|
| |||||||
| Road & Rail (0.0%): | |||||||
408,482 | Inversiones Alsacia SA, 8.00%, 8/18/18, Callable 2/18/15 @ 104(b) | 296,149 | ||||||
87,000 | Viterra, Inc., 5.95%, 8/1/20(a) | 92,402 | ||||||
|
| |||||||
388,551 | ||||||||
|
| |||||||
| Sovereign Bonds (0.4%): | |||||||
100,000 | Federal Republic of Brazil, 5.88%, 1/15/19^ | 112,000 | ||||||
632,000 | Netherlands Government, 1.00%, 2/24/17(a) | 632,346 | ||||||
1,028,000 | Republic of Turkey, 6.75%, 4/3/18 | 1,116,408 |
Continued
13
AZL BlackRock Global Allocation Fund
Consolidated Schedule of Portfolio Investments
December 31, 2013
Contracts, Shares, Notional Amount or Principal Amount | Fair Value | |||||||
| Yankee Dollars, continued |
| ||||||
| Sovereign Bonds, continued | |||||||
292,000 | United Mexican States, 5.95%, 3/19/19 | $ | 337,260 | |||||
|
| |||||||
2,198,014 | ||||||||
|
| |||||||
| Wireless Telecommunication Services (0.1%): | |||||||
200,000 | Colombia Telecomm SA Esp, 5.38%, 9/27/22, Callable 9/27/17 @ 102.69(a) | 187,000 | ||||||
399,000 | Intelsat Jackson Holdings SA, 7.50%, 4/1/21, Callable 4/1/15 @ 103.75 | 439,898 | ||||||
|
| |||||||
626,898 | ||||||||
|
| |||||||
| Total Yankee Dollars (Cost $14,108,703) | 13,741,143 | ||||||
|
| |||||||
| U.S. Treasury Obligations (18.2%): | |||||||
| U.S. Treasury Bills (11.8%) | |||||||
800,000 | 0.04%, 1/2/14(f) | 800,000 | ||||||
19,675,000 | 0.04%, 1/9/14(f) | 19,674,960 | ||||||
4,700,000 | 0.04%, 1/16/14(f) | 4,699,977 | ||||||
5,100,000 | 0.03%, 1/30/14(f) | 5,099,929 | ||||||
8,150,000 | 0.03%, 2/6/14(f) | 8,149,878 | ||||||
1,600,000 | 0.03%, 2/13/14(f) | 1,599,976 | ||||||
800,000 | 0.09%, 3/6/14(f) | 799,926 | ||||||
6,000,000 | 0.07%, 4/10/14(f) | 5,999,226 | ||||||
11,200,000 | 0.08%, 4/17/14(f) | 11,198,778 | ||||||
3,400,000 | 0.07%, 5/8/14(f) | 3,399,317 | ||||||
10,500,000 | 0.06%, 5/15/14(f) | 10,497,962 | ||||||
3,500,000 | 0.08%, 6/19/14(f) | 3,498,695 | ||||||
|
| |||||||
75,418,624 | ||||||||
|
| |||||||
| U.S. Treasury Notes (6.4%) | |||||||
3,335,000 | 0.25%, 3/31/15 | 3,336,824 | ||||||
4,451,000 | 2.25%, 3/31/16 | 4,628,693 | ||||||
2,646,500 | 0.63%, 9/30/17 | 2,591,503 | ||||||
5,140,400 | 1.00%, 5/31/18 | 5,027,954 | ||||||
5,080,300 | 1.38%, 7/31/18 | 5,034,659 | ||||||
1,469,400 | 1.38%, 9/30/18 | 1,451,491 | ||||||
8,022,500 | 1.25%, 10/31/18 | 7,865,187 | ||||||
3,360,700 | 1.25%, 11/30/18 | 3,288,761 |
Contracts, Shares, Notional Amount or Principal Amount | Fair Value | |||||||
| U.S. Treasury Obligations, continued | |||||||
| U.S. Treasury Notes, continued | |||||||
2,659,500 | 1.50%, 12/31/18 | $ | 2,629,581 | |||||
794,700 | 2.00%, 11/15/21 | 758,504 | ||||||
991,100 | 1.75%, 5/15/22 | 916,458 | ||||||
2,657,700 | 2.50%, 8/15/23 | 2,552,221 | ||||||
686,700 | 2.75%, 11/15/23 | 671,786 | ||||||
|
| |||||||
40,753,622 | ||||||||
|
| |||||||
| Total U.S. Treasury Obligations (Cost $116,643,566) | 116,172,246 | ||||||
|
| |||||||
| Purchased Swaptions (0.0%): |
| ||||||
| Total Purchased Swaptions (Cost $668,805) | 283,885 | ||||||
|
| |||||||
| Purchased Options (0.4%): |
| ||||||
| Total Purchased Options (Cost $3,549,137) | 2,741,831 | ||||||
|
| |||||||
| Exchange Traded Funds (1.1%): | |||||||
53,073 | Market Vectors Gold Miners, ETF | 1,120,902 | ||||||
3,924 | ETFS Platinum Trust(h) | 525,384 | ||||||
4,648 | ETFS Physical Palladium Shares(h) | 324,477 | ||||||
75,708 | iShares Gold Trust(h) | 884,269 | ||||||
38,952 | SPDR Gold Trust(h) | 4,525,054 | ||||||
|
| |||||||
| Total Exchange Traded Fund (Cost $9,279,335) | 7,380,086 | ||||||
|
| |||||||
| Securities Held as Collateral for Securities on Loan (1.5%): |
| ||||||
9,409,419 | Allianz Variable Insurance Products Securities Lending Collateral Trust(i) | 9,409,419 | ||||||
|
| |||||||
| Total Securities Held as Collateral for Securities on Loan | 9,409,419 | ||||||
|
| |||||||
| Unaffiliated Investment Company (0.3%): | |||||||
1,690,824 | Dreyfus Treasury Prime Cash Management Fund, Institutional Shares, 0.00%(f) | 1,690,824 | ||||||
|
| |||||||
| Total Unaffiliated Investment Company (Cost $1,690,824) | 1,690,824 | ||||||
|
| |||||||
| Total Investment Securities | 656,967,495 | ||||||
| Net other assets (liabilities) — (1.6)% | (10,278,723 | ) | |||||
|
| |||||||
| Net Assets — 100.0% | $ | 646,688,772 | |||||
|
|
Percentages indicated are based on net assets as of December 31, 2013.
ADR—American Depositary Receipt
GDR—Global Depositary Receipt
JPY—Notional amount stated is in Japanese Yen.
MTN—Medium Term Note
NYS—New York Shares
SPDR—Standard & Poor’s Depository Receipts
* | Non-income producing security. |
^ | This security or a partial position of this security was on loan as of December 31, 2013. The total value of securities on loan as of December 31, 2013, was $9,280,885. |
# | Security issued in connection with a pending litigation settlement. |
+ | The principal amount is disclosed in local currency and the fair value is disclosed in U.S. Dollars. |
(a) | Rule 144A, Section 4(2) or other security which is restricted to resale to institutional investors. The sub-adviser has deemed these securities to be liquid based on procedures approved by the Board of Trustees. |
Continued
14
AZL BlackRock Global Allocation Fund
Consolidated Schedule of Portfolio Investments
December 31, 2013
(b) | Rule 144A, Section 4(2) or other security which is restricted to resale to institutional investors. The sub-adviser has deemed these securities to be illiquid based on procedures approved by the Board of Trustees. As of December 31, 2013, these securities represent 0.84% of the net assets of the fund. |
(c) | Security was valued in good faith pursuant to procedures approved by the Board of Trustees as of December 31, 2013. The total of all such securities represent 0.66% of the net assets of the fund. |
(d) | Variable rate security. The rate presented represents the rate in effect at December 31, 2013. The date presented represents the final maturity date. |
(e) | Principal amount is stated in 1,000 Brazilian Real Units. |
(f) | The rate represents the effective yield at December 31, 2013. |
(g) | Principal amount is stated in 100 Mexican Peso Units. |
(h) | All or a portion of these securities are held by the AZL Cayman Global Allocation Fund, Ltd. (the “Subsidiary”). |
(i) | Purchased with cash collateral held from securities lending. The value of the collateral could include collateral held for securities that were sold on or before December 31, 2013. |
(j) | See Federal Tax Information listed in the Notes to the Financial Statements. |
(k) | Defaulted bond. |
Amounts shown as ”—” are either $0 or round to less than $1.
The following represents the concentrations by country of risk (based on the domicile of the security issuer) relative to the total fair value of investments as of December 31, 2013:
Country | Percentage | |||
Argentina | 0.1 | % | ||
Australia | 1.8 | % | ||
Austria | — | %NM | ||
Belgium | 0.2 | % | ||
Bermuda | 0.3 | % | ||
Brazil | 1.5 | % | ||
British Virgin Islands | — | %NM | ||
Canada | 1.8 | % | ||
Cayman Islands | 0.4 | % | ||
Chile | 0.3 | % | ||
China | 0.2 | % | ||
Colombia | — | %NM | ||
Denmark | 0.1 | % | ||
Finland | — | %NM | ||
France | 3.7 | % | ||
Germany | 3.8 | % | ||
Guernsey | — | % | ||
Hong Kong | 0.7 | % | ||
India | 0.1 | % | ||
Indonesia | — | %NM | ||
Ireland | 0.3 | % | ||
Ireland (Republic of) | 0.5 | % | ||
Israel | — | %NM | ||
Italy | 0.9 | % |
Country | Percentage | |||
Japan | 9.3 | % | ||
Jersey | 0.4 | % | ||
Kazakhstan | 0.1 | % | ||
Korea, Republic Of | 0.3 | % | ||
Luxembourg | 0.3 | % | ||
Malaysia | 0.5 | % | ||
Mexico | 1.0 | % | ||
Netherlands | 2.5 | % | ||
Norway | 0.3 | % | ||
Portugal | 0.1 | % | ||
Republic of Korea (South) | 0.7 | % | ||
Russian Federation | 0.1 | % | ||
Singapore | 0.7 | % | ||
South Africa | 0.1 | % | ||
Spain | 0.2 | % | ||
Sweden | 0.5 | % | ||
Switzerland | 2.3 | % | ||
Taiwan | 0.2 | % | ||
Thailand | 0.1 | % | ||
Turkey | 0.2 | % | ||
United Arab Emirates | 0.1 | % | ||
United Kingdom | 6.2 | % | ||
United States | 57.1 | % | ||
|
| |||
100.0 | % | |||
|
|
Continued
15
AZL BlackRock Global Allocation Fund
Consolidated Schedule of Portfolio Investments
December 31, 2013
NM | Not meaningful, amount is less than 0.05%. |
Futures Contracts
Cash of $1,935,000 has been segregated to cover margin requirements for the following open contracts as of December 31, 2013:
Description | Type | Expiration Date | Number of Contracts | Notional Value | Unrealized Appreciation/ (Depreciation) | |||||||||||||||
MSCI EAFE Index E-Mini March Futures (U.S. Dollar) | Short | 3/21/14 | (163 | ) | $ | (8,286,920 | ) | $ | (225,126 | ) | ||||||||||
FTSE 100 Index March Futures (British Pounds) | Short | 3/21/14 | (5 | ) | (554,454 | ) | (925 | ) | ||||||||||||
DJ EURO STOXX 50 March Futures (Euro) | Short | 3/21/14 | (216 | ) | (9,234,731 | ) | (314,174 | ) | ||||||||||||
NIKKEI 225 Index March Futures (Japanses Yen) | Short | 3/13/14 | (10 | ) | (775,952 | ) | (5,979 | ) | ||||||||||||
S&P 500 Index E-Mini March Futures (U.S. Dollar) | Short | 3/21/14 | (90 | ) | (8,284,950 | ) | (156,703 | ) | ||||||||||||
CAC40 10 Euro January Futures (Euro) | Long | 1/20/14 | 6 | 354,779 | 15,520 | |||||||||||||||
ASX SPI 200 Index March Futures (Australian Dollar) | Long | 3/20/14 | 2 | 237,368 | 10,669 | |||||||||||||||
German Stock Index March Futures (Euro) | Long | 3/21/14 | 4 | 1,321,324 | 55,584 | |||||||||||||||
S&P/Toronto Stock Exchange 60 Index March Futures (Canadian Dollar) | Long | 3/20/14 | 2 | 294,098 | 10,414 | |||||||||||||||
|
| |||||||||||||||||||
Total | $ | (610,720 | ) | |||||||||||||||||
|
|
Option Contracts
At December 31, 2013, the Fund’s open purchased exchange-traded options contracts were as follows:
Number of Contracts | Description | Fair Value | ||||||
| Call Options: |
| ||||||
90 | On Anadarko Petroleum Corp., Strike @ 98 Exp 2/22/14 | $ | 945 | |||||
1,033 | On Barrick Gold Corp., Strike @ 80 Exp 1/18/14 | 1,033 | ||||||
183 | On Freeport-Mcmoran Copper & Gold, Inc., Strike @ 34 Exp 2/22/14 | 70,455 | ||||||
646 | On Goldcorp, Inc., Strike @ 80 Exp 1/18/14 | 646 | ||||||
52 | On MetLife, Inc., Strike @ 50 Exp 1/17/15 | 38,090 | ||||||
827 | On Newmont Mining Corp., Strike @ 90 Exp 1/18/14 | 827 | ||||||
34 | On Prudential Financial, Inc., Strike @ 83 Exp 1/17/15 | 48,535 | ||||||
|
| |||||||
| Total Call Options (Cost $160,083) | $ | 160,531 | |||||
|
| |||||||
| Put Options: |
| ||||||
62 | On Cubist Pharmaceuticals, Inc., Strike @ 55 Exp 1/18/14 | $ | 620 | |||||
50 | On S&P 500 Index, Strike @ 1720 Exp 1/18/14 | 9,250 | ||||||
17 | On S&P 500 Index, Strike @ 1740 Exp 1/18/14 | 3,910 | ||||||
|
| |||||||
| Total Put Options (Cost $241,133) | $ | 13,780 | |||||
|
|
At December 31, 2013, the Fund’s open purchased over-the-counter options contracts were as follows:
Number of Contracts | Description | Fair Value | ||||||
| Call Options: |
| ||||||
27,342 | On Activision Blizzard, Inc., Strike @ 20 Exp 1/17/14, with Goldman Sachs | $ | 326 | |||||
20,464 | On Agnico-Eagle Mines, Ltd., Strike @ 85 Exp 1/17/14, with Deutsche Bank | — | ||||||
49,392 | On Alcoa, Inc., Strike @ 15 Exp 1/17/14, with Goldman Sachs | 97 | ||||||
32,636 | On Anadarko Petroleum Corp., Strike @ 83 Exp 5/16/14, with Deutsche Bank | 134,152 | ||||||
19,628 | On Anadarko Petroleum Corp., Strike @ 85 Exp 7/18/14, with Credit Suisse First Boston | 84,140 | ||||||
24,268 | On AngloGold, Ltd., Strike @ 65 Exp 1/17/14, with Deutsche Bank | — | ||||||
2,073 | On Autozone, Inc., Strike @ 550 Exp 1/17/14, with Goldman Sachs | 1 | ||||||
157,232 | On Bank of America Corp., Strike @ 17 Exp 1/16/15, with Citibank | 174,708 | ||||||
26,460 | On Broadcom Corp., Strike @ 55 Exp 1/17/14, with Goldman Sachs | — | ||||||
28,665 | On Caterpillar, Inc., Strike @ 135 Exp 1/17/14, with Goldman Sachs | 2 | ||||||
44,025 | On Citigroup, Inc., Strike @ 60 Exp 1/16/15, with Bank of America | 102,940 | ||||||
130,514 | On Coca-Cola Co. (The), Strike @ 45 Exp 1/16/15, with Deutsche Bank | 142,675 |
Continued
16
AZL BlackRock Global Allocation Fund
Consolidated Schedule of Portfolio Investments
December 31, 2013
Number of Contracts | Description | Fair Value | ||||||
9,709 | On Coeur d’Alene Mines Corp., Strike @ 40 Exp 1/17/14, with Deutsche Bank | $ | — | |||||
46,607 | On Corning, Inc., Strike @ 20 Exp 1/17/14, with Goldman Sachs | 743 | ||||||
28,813 | On Eldorado Gold Corp., Strike @ 25 Exp 1/17/14, with Deutsche Bank | — | ||||||
77,175 | On EMC Corp., Strike @ 40 Exp 1/17/14, with Goldman Sachs | — | ||||||
7,715 | On Endeavour Silver Corp., Strike @ 20 Exp 1/17/14, with Deutsche Bank | — | ||||||
4,874 | On First Majestic Silver Corp., Strike @ 35 Exp 1/17/14, with Deutsche Bank | — | ||||||
59,535 | On Freeport-Mcmoran Copper & Gold, Inc., Strike @ 64 Exp 1/17/14, with Goldman Sachs | — | ||||||
110,249 | On General Electric Co., Strike @ 35 Exp 1/17/14, with Goldman Sachs | 18 | ||||||
59,566 | On Gold Fields, Ltd., Strike @ 22 Exp 1/17/14, with Deutsche Bank | — | ||||||
13,965 | On Halliburton Co., Strike @ 55 Exp 1/18/14, with Goldman Sachs | 1,391 | ||||||
15,193 | On Harmony Gold Mining Co., Ltd., Strike @ 15 Exp 1/17/14, with Deutsche Bank | — | ||||||
94,086 | On Hewlett-Packard Co., Strike @ 30 Exp 1/17/14, with Goldman Sachs | 15,190 | ||||||
13,049 | On Humana, Inc., Strike @ 130 Exp 1/16/15, with Goldman Sachs | 42,178 | ||||||
25,625 | On IAMGOLD Corp., Strike @ 30 Exp 1/17/14, with Deutsche Bank | — | ||||||
11,466 | On IBM Corp., Strike @ 295 Exp 1/17/14, with Goldman Sachs | — | ||||||
110,249 | On Intel Corp., Strike @ 40 Exp 1/18/14, with Goldman Sachs | — | ||||||
30,870 | On J.C. Penney Co., Inc., Strike @ 55 Exp 1/17/14, with Goldman Sachs | — | ||||||
78,616 | On JPMorgan Chase & Co., Strike @ 65 Exp 1/16/15, with Bank of America | 181,430 | ||||||
110,307 | On Kinross Gold Corp., Strike @ 20 Exp 1/17/14, with Deutsche Bank | — | ||||||
63,945 | On Marvell Tech Group, Ltd., Strike @ 20 Exp 1/17/14, with Goldman Sachs | 459 | ||||||
19,845 | On McDonald’s Corp., Strike @ 135 Exp 1/17/14, with Goldman Sachs | — | ||||||
130,514 | On Merck & Co., Inc., Strike @ 55 Exp 1/16/15, with Deutsche Bank | 185,069 | ||||||
15,435 | On Monster Beverage Corp., Strike @ 105 Exp 1/17/14, with Goldman Sachs | 2 | ||||||
36,162 | On NetApp, Inc., Strike @ 60 Exp 1/17/14, with Goldman Sachs | 1 | ||||||
16,343 | On New Gold, Inc., Strike @ 22 Exp 1/17/14, with Deutsche Bank | — | ||||||
15,102 | On NovaGold Resources, Inc., Strike @ 12 Exp 1/17/14, with Deutsche Bank | — | ||||||
65,257 | On Oracle Corp., Strike @ 42 Exp 1/16/15, with Deutsche Bank | 51,735 | ||||||
27,555 | On Pan American Silver Corp., Strike @ 50 Exp 1/17/14, with Deutsche Bank | — | ||||||
32,700 | On QEP Resources, Inc., Strike @ 35 Exp 4/17/14, with Goldman Sachs | 18,680 | ||||||
44,100 | On Qualcomm, Inc., Strike @ 95 Exp 1/17/14, with Goldman Sachs | 4 | ||||||
3,720 | On Randgold Resources, Ltd., Strike @ 165 Exp 1/17/14, with Deutsche Bank | — | ||||||
3,664 | On Royal Gold, Inc., Strike @ 125 Exp 1/17/14, with Deutsche Bank | — | ||||||
2,414 | On S&P 500 Index, Strike @ 30 Exp 1/17/14, with Deutsche Bank | — | ||||||
16,314 | On SeaBridge Gold Inc., Strike @ 150 Exp 1/16/15, with Deutsche Bank | 86,425 | ||||||
6,746 | On Silver Standard Resources, Inc., Strike @ 30 Exp 1/17/14, with Deutsche Bank | — | ||||||
27,673 | On Silver Wheaton Corp., Strike @ 55 Exp 1/17/14, with Deutsche Bank | — | ||||||
15,738 | On Silvercorp Metals, Inc., Strike @ 15 Exp 1/17/14, with Deutsche Bank | — | ||||||
94,106 | On Staples, Inc., Strike @ 20 Exp 1/17/14, with Goldman Sachs | — | ||||||
6,615 | On Starwood Hotels & Worldwide, Inc., Strike @ 85 Exp 1/17/14, with Goldman Sachs | 671 | ||||||
17,649 | On Stillwater Mining Co., Strike @ 25 Exp 1/17/14, with Deutsche Bank | — | ||||||
7,148 | On Takeda Pharmaceutical Co., Ltd., Strike @ 4906 Exp 10/9/14, with Goldman Sachs | 14,700 | ||||||
8,000 | On Takeda Pharmaceutical Co., Ltd., Strike @ 5109 Exp 1/29/15, with JPMorgan Chase | 16,408 | ||||||
1,004 | On Topix Index, Strike @ 1154 Exp 6/13/14, with Bank of America | 169,162 | ||||||
153,558 | On Topix Index, Strike @ 1157 Exp 4/11/14, with UBS Warburg | 220,439 | ||||||
1,281 | On Topix Index, Strike @ 1164 Exp 5/9/14, with JPMorgan Chase Chase | 197,478 | ||||||
148,791 | On Topix Index, Strike @ 1247 Exp 9/12/14, with Citibank | 155,796 | ||||||
153,154 | On Topix Index, Strike @ 1271 Exp 3/14/14, with BNP Paribas | 90,065 | ||||||
230,041 | On Topix Index, Strike @ 1291 Exp 7/11/14, with Goldman Sachs | 166,114 | ||||||
16,758 | On United Technologies Corp., Strike @ 120 Exp 1/17/14, with Goldman Sachs | 2,193 | ||||||
22,050 | On UnitedHealth Group, Inc., Strike @ 85 Exp 1/17/14, with Goldman Sachs | 687 | ||||||
7,412 | On Visa, Inc., Strike @ 190 Exp 1/17/14, with Goldman Sachs | 239,091 | ||||||
15,435 | On Western Union Co., Strike @ 25 Exp 1/17/14, with Goldman Sachs | — | ||||||
66,238 | On Yamana Gold, Inc., Strike @ 30 Exp 1/17/14, with Deutsche Bank | — | ||||||
15,435 | On Yum! Brands, Inc., Strike @ 100 Exp 1/17/14, with Goldman Sachs | — | ||||||
|
| |||||||
| Total Call Options (Cost $2,922,469) | $ | 2,495,170 | |||||
|
|
Continued
17
AZL BlackRock Global Allocation Fund
Consolidated Schedule of Portfolio Investments
December 31, 2013
Number of Contracts | Description | Fair Value | ||||||
| Put Options: |
| ||||||
1,847 | On S&P 500 Index, Strike @ 1752 Exp 2/21/14, with Goldman Sachs | $ | 19,573 | |||||
1,848 | On S&P 500 Index, Strike @ 1746 Exp 2/21/14, with Credit Suisse First Boston | 18,332 | ||||||
1,857 | On S&P 500 Index, Strike @ 1744 Exp 2/21/14, with BNP Paribas | 18,048 | ||||||
1,750 | On SPX Corp., Strike @ 1741 Exp 2/21/14, with JPMorgan Chase | 16,397 | ||||||
|
| |||||||
| Total Put Options (Cost $225,452) | $ | 72,350 | |||||
|
|
At December 31, 2013, the Fund’s open written exchange-traded options contracts were as follows:
Number of Contracts | Description | Fair Value | ||||||
| Call Options: |
| ||||||
12 | On ACE, Ltd., Strike @ 93 Exp 2/22/14 | $ | (13,140 | ) | ||||
127 | On Marathon Petroleum Corp., Strike @ 78 Exp 1/18/14 | (181,610 | ) | |||||
96 | On Marathon Petroleum Corp., Strike @ 80 Exp 4/19/14 | (129,120 | ) | |||||
64 | On Marathon Petroleum Corp., Strike @ 85 Exp 4/19/14 | (63,680 | ) | |||||
33 | On S&P 500 Index, Strike @ 1800 Exp 1/18/14 | (171,765 | ) | |||||
34 | On S&P 500 Index, Strike @ 1825 Exp 1/18/14 | (106,930 | ) | |||||
13 | On Travelers Cos., Inc. (The), Strike @ 83 Exp 1/18/14 | (10,465 | ) | |||||
22 | On Williams-Sonoma, Inc., Strike @ 53 Exp 1/18/14 | (12,870 | ) | |||||
16 | On Williams-Sonoma, Inc., Strike @ 55 Exp 1/18/14 | (5,680 | ) | |||||
35 | On XL Group plc, Strike @ 32 Exp 4/19/14 | (4,270 | ) | |||||
|
| |||||||
| Total Call Options (Premiums Received $253,433) | $ | (699,530 | ) | ||||
|
| |||||||
| Put Options: |
| ||||||
125 | On Consol Energy, Inc., Strike @ 35 Exp 4/19/14 | $ | (17,313 | ) | ||||
126 | On Dresser Rand Group, Inc., Strike @ 60 Exp 3/22/14 | (38,745 | ) | |||||
47 | On EOG Resources, Inc., Strike @ 165 Exp 4/19/14 | (39,363 | ) | |||||
90 | On Marathon Petroleum Corp., Strike @ 63 Exp 4/19/14 | (2,700 | ) | |||||
90 | On Marathon Petroleum Corp., Strike @ 65 Exp 4/19/14 | (3,150 | ) | |||||
120 | On Phillips 66, Strike @ 58 Exp 5/17/14 | (6,000 | ) | |||||
109 | On Pultegroup, Inc., Strike @ 15 Exp 1/18/14 | (218 | ) | |||||
|
| |||||||
| Total Put Options (Premiums Received $337,487) | $ | (107,489 | ) | ||||
|
|
At December 31, 2013, the Fund’s open written over-the-counter options contracts were as follows:
Number of Contracts | Description | Fair Value | ||||||
| Call Options: |
| ||||||
13,965 | On Halliburton Co., Strike @ 55 Exp 1/17/14, with Deutsche Bank | $ | (1,238 | ) | ||||
1,848 | On S&P 500 Index, Strike @ 1835 Exp 2/21/14, with Credit Suisse First Boston | (64,700 | ) | |||||
1,857 | On S&P 500 Index, Strike @ 1842 Exp 2/21/14, with BNP Paribas | (57,477 | ) | |||||
|
| |||||||
| Total Call Options (Premiums Received $66,791) | $ | (123,415 | ) | ||||
|
| |||||||
| Put Options: |
| ||||||
32,700 | On QEP Resources, Inc., Strike @ 25 Exp 4/17/14, with Goldman Sachs | $ | (20,822 | ) | ||||
1,857 | On S&P 500 Index, Strike @ 1566 Exp 2/21/14, with BNP Paribas | (2,774 | ) | |||||
1,848 | On S&P 500 Index, Strike @ 1568 Exp 2/21/14, with Credit Suisse First Boston | (2,807 | ) | |||||
1,847 | On S&P 500 Index, Strike @ 1573 Exp 2/21/14, with Goldman Sachs | (2,960 | ) | |||||
1,750 | On SPX Corp., Strike @ 1563 Exp 2/21/14, with JPMorgan Chase | (2,538 | ) | |||||
|
| |||||||
| Total Put Options (Premiums Received $56,660) | $ | (31,901 | ) | ||||
|
|
Continued
18
AZL BlackRock Global Allocation Fund
Consolidated Schedule of Portfolio Investments
December 31, 2013
At December 31, 2013, the Fund’s open purchased over-the-counter swaptions were as follows:
Number of Contracts | Description | Fair Value | ||||||
| Call Swaptions: |
| ||||||
3,271 | 5-Year Interest Rate, Pay 6-Month USD LIBOR, Exercise @ 1.60%, Exp 6/3/14 (USD), with Goldman Sachs | $ | 50,662 | |||||
3,270 | 5-Year Interest Rate, Pay 6-Month USD LIBOR, Exercise @ 1.60%, Exp 6/3/14 (USD), with Goldman Sachs | 50,663 | ||||||
822 | 5-Year Interest Rate, Pay 6-Month USD LIBOR, Exercise @ 1.65%, Exp 6/4/14 (USD), with Deutsche Bank | 16,462 | ||||||
|
| |||||||
| Total Call Swaptions (Cost $433,443) | $ | 117,787 | |||||
|
| |||||||
| Put Swaptions: |
| ||||||
1,586 | �� | 2-Year Interest Rate, Pay 6-Month USD LIBOR, Exercise @ 3.50%, Exp 12/17/15 (USD), with Goldman Sachs | $ | 117,723 | ||||
13,242 | 5-Year Interest Rate, Pay 6-Month JPY LIBOR, Exercise @ 1.60%, Exp 12/17/18 (JPY), with Goldman Sachs | 25,516 | ||||||
1,006,980 | 5-Year Interest Rate, Pay 6-Month JPY LIBOR, Exercise @ 1.07%, Exp 4/4/18 (JPY), with Deutsche Bank | 22,859 | ||||||
|
| |||||||
| Total Put Swaptions (Cost $235,362) | $ | 166,098 | |||||
|
|
At December 31, 2013, the Fund’s open written over-the-counter swaptions were as follows:
Number of Contracts | Description | Fair Value | ||||||
| Put Swaptions: |
| ||||||
822 | 5-Year Interest Rate, Pay 6-Month USD LIBOR, Exercise @ 2.30%, Exp 6/4/14 (USD), with Deutsche Bank | $ | (137,226 | ) | ||||
1,586 | 2-Year Interest Rate, Pay 6-Month USD LIBOR, Exercise @ 5.75%, Exp 12/17/15 (USD), with Goldman Sachs | (153,272 | ) | |||||
971 | 5-Year Interest Rate, Pay 6-Month USD LIBOR, Exercise @ 2.25%, Exp 6/3/14 (USD), with Goldman Sachs | (74,541 | ) | |||||
1,635 | 5-Year Interest Rate, Pay 6-Month USD LIBOR, Exercise @ 2.25%, Exp 6/3/14 (USD), with Goldman Sachs | (125,524 | ) | |||||
|
| |||||||
| Total Put Swaptions (Premiums Received $329,441) | $ | (490,563 | ) | ||||
|
|
Forward Currency Contracts
At December 31, 2013, the Fund's open forward currency contracts were as follows:
Type of Contract | Counterparty | Delivery Date | Contract Amount (Local Currency) | Contract Value | Value | Net Unrealized Appreciation/ (Depreciation) | ||||||||||||||
Short Contracts: | ||||||||||||||||||||
Australian Dollar | Morgan Stanley | 1/24/14 | 1,216,400 | $ | 1,135,412 | $ | 1,084,082 | $ | 51,330 | |||||||||||
Brazilian Real | Deutsche Bank | 1/30/14 | 1,385,386 | 593,364 | 582,781 | 10,583 | ||||||||||||||
Brazilian Real | Morgan Stanley | 1/31/14 | 1,382,936 | 580,188 | 581,616 | (1,428 | ) | |||||||||||||
British Pound | Deutsche Bank | 1/24/14 | 1,488,000 | 2,401,141 | 2,463,273 | (62,132 | ) | |||||||||||||
European Euro | BNP Paribas | 1/9/14 | 326,516 | 438,636 | 449,151 | (10,515 | ) | |||||||||||||
European Euro | Barclays Bank | 1/17/14 | 859,700 | 1,166,622 | 1,182,587 | (15,965 | ) | |||||||||||||
European Euro | Deutsche Bank | 1/24/14 | 420,600 | 569,099 | 578,567 | (9,468 | ) | |||||||||||||
European Euro | Morgan Stanley | 1/30/14 | 1,125,500 | 1,548,553 | 1,548,207 | 346 | ||||||||||||||
European Euro | Credit Suisse First Boston | 2/6/14 | 679,200 | 935,123 | 934,286 | 837 | ||||||||||||||
European Euro | Deutsche Bank | 2/6/14 | 474,500 | 653,197 | 652,707 | 490 | ||||||||||||||
European Euro | UBS Warburg | 2/6/14 | 1,049,100 | 1,444,084 | 1,443,109 | 975 | ||||||||||||||
Japanese Yen | Bank of America | 1/9/14 | 132,480,125 | 1,330,603 | 1,258,299 | 72,304 | ||||||||||||||
Japanese Yen | Goldman Sachs | 1/9/14 | 139,235,470 | 1,397,736 | 1,322,462 | 75,274 | ||||||||||||||
Japanese Yen | UBS Warburg | 1/15/14 | 60,000,000 | 614,125 | 569,899 | 44,226 | ||||||||||||||
Japanese Yen | BNP Paribas | 1/16/14 | 138,029,027 | 1,348,422 | 1,311,050 | 37,372 | ||||||||||||||
Japanese Yen | Credit Suisse First Boston | 1/16/14 | 73,626,625 | 719,010 | 699,333 | 19,677 | ||||||||||||||
Japanese Yen | Credit Suisse First Boston | 1/17/14 | 130,308,950 | 1,275,001 | 1,237,729 | 37,272 | ||||||||||||||
Japanese Yen | Goldman Sachs | 1/17/14 | 135,349,060 | 1,326,236 | 1,285,602 | 40,634 | ||||||||||||||
Japanese Yen | Barclays Bank | 1/23/14 | 107,007,872 | 1,068,803 | 1,016,437 | 52,366 | ||||||||||||||
Japanese Yen | UBS Warburg | 1/23/14 | 44,530,365 | 438,000 | 422,981 | 15,019 | ||||||||||||||
Japanese Yen | UBS Warburg | 1/27/14 | 200,000,000 | 2,027,493 | 1,899,782 | 127,711 | ||||||||||||||
Japanese Yen | UBS Warburg | 1/30/14 | 88,344,619 | 860,220 | 839,191 | 21,029 | ||||||||||||||
Japanese Yen | Goldman Sachs | 1/31/14 | 180,594,222 | 1,766,531 | 1,715,483 | 51,048 | ||||||||||||||
Japanese Yen | Bank of America | 2/6/14 | 140,913,360 | 1,373,103 | 1,338,591 | 34,512 | ||||||||||||||
Japanese Yen | Morgan Stanley | 2/7/14 | 271,047,855 | 2,626,458 | 2,574,800 | 51,658 | ||||||||||||||
Japanese Yen | Deutsche Bank | 2/10/14 | 170,000,000 | 1,725,888 | 1,614,928 | 110,960 |
Continued
19
AZL BlackRock Global Allocation Fund
Consolidated Schedule of Portfolio Investments
December 31, 2013
Type of Contract | Counterparty | Delivery Date | Contract Amount (Local Currency) | Contract Value | Value | Net Unrealized Appreciation/ (Depreciation) | ||||||||||||||
Japanese Yen | Morgan Stanley | 3/17/14 | 130,000,000 | $ | 1,262,847 | $ | 1,235,179 | $ | 27,668 | |||||||||||
Mexican Peso | UBS Warburg | 1/9/14 | 7,557,080 | 588,929 | 578,817 | 10,112 | ||||||||||||||
Mexican Peso | UBS Warburg | 2/6/14 | 9,287,000 | 681,855 | 709,730 | (27,875 | ) | |||||||||||||
Mexican Peso | Credit Suisse First Boston | 3/20/14 | 13,235,000 | 1,016,354 | 1,008,204 | 8,150 | ||||||||||||||
Mexican Peso | Credit Suisse First Boston | 4/3/14 | 9,920,000 | 764,276 | 754,843 | 9,433 | ||||||||||||||
Mexican Peso | Credit Suisse First Boston | 4/30/14 | 5,064,500 | 389,337 | 384,580 | 4,757 | ||||||||||||||
Mexican Peso | Morgan Stanley | 4/30/14 | 9,040,530 | 689,564 | 686,506 | 3,058 | ||||||||||||||
Mexican Peso | Morgan Stanley | 5/15/14 | 5,627,970 | 430,358 | 426,879 | 3,479 | ||||||||||||||
Mexican Peso | UBS Warburg | 5/29/14 | 3,320,470 | 253,193 | 251,587 | 1,606 | ||||||||||||||
|
|
|
|
|
| |||||||||||||||
$ | 37,439,761 | $ | 36,643,258 | $ | 796,503 | |||||||||||||||
|
|
|
|
|
| |||||||||||||||
Long Contracts: | ||||||||||||||||||||
Australian Dollar | Morgan Stanley | 1/24/14 | 1,216,400 | $ | 1,080,334 | $ | 1,084,082 | $ | 3,748 | |||||||||||
European Euro | Brown Brothers Harriman | 1/3/14 | 124,003 | 169,498 | 170,576 | 1,078 | ||||||||||||||
European Euro | Brown Brothers Harriman | 1/13/14 | 451,300 | 617,931 | 620,801 | 2,870 | ||||||||||||||
European Euro | Brown Brothers Harriman | 1/13/14 | 730,100 | 981,826 | 1,004,313 | 22,487 | ||||||||||||||
Norwegian Krone | Goldman Sachs | 1/2/14 | 482,744 | 78,499 | 79,616 | 1,117 | ||||||||||||||
Swedish Krona | Goldman Sachs | 1/2/14 | 552,318 | 84,140 | 85,898 | 1,758 | ||||||||||||||
|
|
|
|
|
| |||||||||||||||
$ | 3,012,228 | $ | 3,045,286 | $ | 33,058 | |||||||||||||||
|
|
|
|
|
|
At December 31, 2013, the Fund's open forward cross currency contracts were as follows:
Purchase/Sale | Counterparty | Amount Purchased | Amount Sold | Contract Value | Value | Net Unrealized Appreciation/ (Depreciation) | ||||||||||||||
European Euro/Japanese Yen | Barclays Bank | 1,027,200 EUR | 145,287,168 JPY | $ | 1,415,779 | $ | 1,448,668 | $ | 32,889 | |||||||||||
|
|
|
|
|
| |||||||||||||||
$ | 1,415,779 | $ | 1,448,668 | $ | 32,889 | |||||||||||||||
|
|
|
|
|
|
Centrally Cleared Credit Default Swap Agreements—Buy Protection(a)
At December 31, 2013, the Fund's open centrally cleared credit default swap agreements were as follows:
Underlying Instrument | Clearing Agent | Expiration Date | Implied Credit Spread at December 31, 2013 (b) | Notional Amount (c) | Fixed Rate | Value | Premiums Paid/ (Received) | Unrealized Appreciation/ (Depreciation) | ||||||||||||||||||||
CDX North America High Yield Index Swap Agreement with JPMorgan Chase Bank, N.A., Series 21 | JPMorgan Chase | 12/20/18 | 3.08 | % | $ | 3,466,000 | 5.00 | % | $ | (295,152 | ) | $ | (237,340 | ) | $ | (57,812 | ) | |||||||||||
|
|
|
|
|
| |||||||||||||||||||||||
$ | (295,152 | ) | $ | (237,340 | ) | $ | (57,812 | ) | ||||||||||||||||||||
|
|
|
|
|
|
Centrally Cleared Credit Default Swap Agreements—Sell Protection(a)
At December 31, 2013, the Fund's open centrally cleared credit default swap agreements were as follows:
Underlying Instrument | Clearing Agent | Expiration Date | Implied Credit Spread at December 31, 2013 (b) | Notional Amount (c) | Fixed Rate | Value | Premiums Paid/ (Received) | Unrealized Appreciation/ (Depreciation) | ||||||||||||||||||||
CDX North America Investment Grade Index Swap Agreement with JPMorgan Chase Bank, N.A., Series 21 | JPMorgan Chase | 12/20/18 | 0.63 | % | $ | (831,000 | ) | 1.00 | % | $ | 14,868 | $ | 8,737 | $ | 6,131 | |||||||||||||
|
|
|
|
|
| |||||||||||||||||||||||
$ | 14,868 | $ | 8,737 | $ | 6,131 | |||||||||||||||||||||||
|
|
|
|
|
|
Continued
20
AZL BlackRock Global Allocation Fund
Consolidated Schedule of Portfolio Investments
December 31, 2013
Over-the-Counter Interest Rate Swap Agreements
At December 31, 2013, the Fund’s open over-the-counter interest rate swap agreements were as follows:
Pay/Receive Floating Rate | Floating Rate Index | Fixed Rate | Expiration Date | Counterparty | Notional Amount (Local) | Value | Unrealized Appreciation/ (Depreciation) | |||||||||||||||||||||
Receive | 3-Month U.S. Dollar LIBOR BBA | 0.49% | 9/14/15 | Deutsche Bank | 560,000 | USD | $ | (1,455 | ) | $ | (1,455 | ) | ||||||||||||||||
Receive | 3-Month U.S. Dollar LIBOR BBA | 0.50% | 9/17/15 | JPMorgan Chase | 1,490,000 | USD | (4,138 | ) | (4,138 | ) | ||||||||||||||||||
Receive | 3-Month U.S. Dollar LIBOR BBA | 0.60% | 9/17/15 | Deutsche Bank | 600,000 | USD | (2,829 | ) | (2,829 | ) | ||||||||||||||||||
Receive | 3-Month U.S. Dollar LIBOR BBA | 0.49% | 9/17/15 | Deutsche Bank | 400,000 | USD | (1,031 | ) | (1,031 | ) | ||||||||||||||||||
Pay | 3-Month U.S. Dollar LIBOR BBA | 1.30% | 8/17/16 | Deutsche Bank | 1,253,000 | USD | 1,024 | 1,024 | ||||||||||||||||||||
Pay | 3-Month U.S. Dollar LIBOR BBA | 1.03% | 9/27/16 | Deutsche Bank | 200,000 | USD | (615 | ) | (615 | ) | ||||||||||||||||||
Pay | 3-Month U.S. Dollar LIBOR BBA | 0.83% | 9/27/16 | Deutsche Bank | 1,150,000 | USD | (5,773 | ) | (5,773 | ) | ||||||||||||||||||
Pay | 3-Month U.S. Dollar LIBOR BBA | 1.01% | 9/27/16 | Deutsche Bank | 540,052 | USD | (1,771 | ) | (1,771 | ) | ||||||||||||||||||
Pay | 3-Month U.S. Dollar LIBOR BBA | 1.50% | 9/27/16 | Deutsche Bank | 1,700,000 | USD | 2,637 | 2,637 | ||||||||||||||||||||
Pay | 3-Month U.S. Dollar LIBOR BBA | 1.46% | 9/28/16 | Deutsche Bank | 1,600,000 | USD | 1,727 | 1,727 | ||||||||||||||||||||
Pay | 3-Month U.S. Dollar LIBOR BBA | 1.00% | 9/28/16 | Deutsche Bank | 1,350,000 | USD | (4,613 | ) | (4,613 | ) | ||||||||||||||||||
Pay | 3-Month U.S. Dollar LIBOR BBA | 1.00% | 9/28/16 | Goldman Sachs | 6,073,000 | USD | (20,783 | ) | (20,783 | ) | ||||||||||||||||||
Pay | 3-Month U.S. Dollar LIBOR BBA | 1.04% | 9/28/16 | Deutsche Bank | 1,200,000 | USD | (3,641 | ) | (3,641 | ) | ||||||||||||||||||
Pay | 3-Month U.S. Dollar LIBOR BBA | 1.16% | 9/14/18 | Deutsche Bank | 250,000 | USD | (4,817 | ) | (4,817 | ) | ||||||||||||||||||
Pay | 3-Month U.S. Dollar LIBOR BBA | 1.19% | 9/17/18 | JPMorgan Chase | 610,300 | USD | (11,103 | ) | (11,103 | ) | ||||||||||||||||||
Pay | 3-Month U.S. Dollar LIBOR BBA | 1.13% | 9/17/18 | Deutsche Bank | 200,000 | USD | (4,204 | ) | (4,204 | ) | ||||||||||||||||||
Pay | 3-Month U.S. Dollar LIBOR BBA | 1.49% | 9/17/18 | Deutsche Bank | 200,000 | USD | (690 | ) | (690 | ) | ||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||
$ | (62,075 | ) | $ | (62,075 | ) | |||||||||||||||||||||||
|
|
|
|
Centrally Cleared Interest Rate Swap Agreements
At December 31, 2013, the Fund's open centrally cleared interest rate swap agreements were as follows:
Pay/ Receive Floating Rate | Floating Rate Index | Fixed Rate | Expiration Date | Counterparty | Notional Amount (Local) | Premiums Paid/ (Received) | Value | Unrealized Appreciation/ (Depreciation) | ||||||||||||||||||||
Pay | 3-Month U.S. Dollar LIBOR BBA | 1.78% | 9/27/16 | JPMorgan Chase | 940,000 USD | $ | 11 | $ | 3,868 | $ | 3,857 | |||||||||||||||||
Pay | 3-Month U.S. Dollar LIBOR BBA | 1.26% | 9/28/16 | JPMorgan Chase | 550,000 USD | — | (582 | ) | (582 | ) | ||||||||||||||||||
Pay | 3-Month U.S. Dollar LIBOR BBA | 1.05% | 9/28/16 | JPMorgan Chase | 600,000 USD | 7 | (1,882 | ) | (1,889 | ) | ||||||||||||||||||
Pay | 3-Month U.S. Dollar LIBOR BBA | 3.91% | 11/13/19 | JPMorgan Chase | 6,620,000 USD | 82 | (15,631 | ) | (15,713 | ) | ||||||||||||||||||
Pay | 3-Month U.S. Dollar LIBOR BBA | 3.92% | 11/13/19 | JPMorgan Chase | 6,620,000 USD | 82 | (15,033 | ) | (15,115 | ) | ||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||
$ | (29,260 | ) | $ | (29,442 | ) | |||||||||||||||||||||||
|
|
|
|
Total Return Swaps at December 31, 2013
Counterparty | Receive/Pay Total Return | Expiration Date | Notional Amount (Local) | Unrealized Appreciation/ (Depreciation) | ||||||||
Citibank NA | KOSPI 200 Index March Futures | 3/13/14 | 2,493,877,300 KRW | $ | 34,991 | |||||||
BNP Paribas SA | NIKKEI 225 Dividend Index E-Mini March Futures | 4/5/16 | 26,350,000 JPY | 12,632 | ||||||||
BNP Paribas SA | NIKKEI 225 Dividend Index E-Mini March Futures | 4/5/16 | 26,800,000 JPY | 8,358 | ||||||||
BNP Paribas SA | NIKKEI 225 Dividend Index E-Mini March Futures | 4/5/17 | 25,515,000 JPY | 20,173 | ||||||||
BNP Paribas SA | NIKKEI 225 Dividend Index E-Mini March Futures | 4/5/17 | 27,805,000 JPY | 27,163 | ||||||||
|
| |||||||||||
$ | 103,317 | |||||||||||
|
|
(a) | When a credit event occurs as defined under the terms of the swap agreement, the Fund as a seller of credit protection will either (i) pay to the buyer of protection an amount equal to the par value of the defaulted reference entity and take delivery of the reference entity or (ii) pay a net amount equal to the par value of the defaulted reference entity less its recovery value. Alternatively, the Fund as a buyer of credit protection will either (i) receive from the seller of protection an amount equal to the par value of the defaulted reference entity and deliver the reference entity to the seller or (ii) receive a net amount of equal to the par value of the defaulted reference entity less its recovery value. |
Continued
21
AZL BlackRock Global Allocation Fund
Consolidated Schedule of Portfolio Investments
December 31, 2013
(b) | Implied credit spread, represented in absolute terms, utilized in determining the market value of the credit default swap agreements as of period end will serve as an indicator of the current status of the payment/performance risk and represent the likelihood or risk of default for the credit derivative. The implied credit spread of a referenced entity reflects the cost of buying/selling protection and may include upfront or daily payments required to be made to enter into the agreement. Generally, wider credit spreads represent a perceived deterioration of the referenced entity’s credit soundness and a greater likelihood or risk of default or other credit event occurring as defined under the terms of the swap agreement. |
(c) | The notional amount represents the maximum potential amount the Fund could be required to make as a buyer or seller of credit protection if a credit event occurs, as defined under the terms of the swap agreement. |
See accompanying notes to the financial statements.
22
AZL BlackRock Global Allocation Fund
Consolidated Statement of Assets and Liabilities
December 31, 2013
Assets: | |||||
Investment securities, at cost | $ | 594,167,075 | |||
|
| ||||
Investment securities, at value* | $ | 656,967,495 | |||
Cash | 55,436 | ||||
Segregated cash for collateral | 2,410,000 | ||||
Interest and dividends receivable | 1,525,409 | ||||
Unrealized appreciation on forward currency contracts | 989,833 | ||||
Unrealized appreciation on swap agreements | 108,705 | ||||
Receivable for capital shares issued | 1,096,174 | ||||
Receivable for investments sold | 520,573 | ||||
Receivable for variation margin on swaps | 550 | ||||
Receivable for variation margin on futures contracts | 2,178 | ||||
Reclaims receivable | 59,229 | ||||
Prepaid expenses | 7,792 | ||||
|
| ||||
Total Assets | 663,743,374 | ||||
|
| ||||
Liabilities: | |||||
Cash received as collateral for derivatives | 1,700,000 | ||||
Written options and swaptions (Premiums received $1,043,812) | 1,452,898 | ||||
Foreign currency, at value (cost $67,198) | 64,843 | ||||
Unrealized depreciation on forward currency contracts | 127,383 | ||||
Unrealized depreciation on swap agreements | 67,463 | ||||
Payable for collateral received on loaned securities | 9,409,419 | ||||
Payable for investments purchased | 3,437,396 | ||||
Payable for variation margin on futures contracts | 98,930 | ||||
Payable for variation margin on swaps | 21,879 | ||||
Manager fees payable | 399,897 | ||||
Administration fees payable | 35,488 | ||||
Distribution fees payable | 133,298 | ||||
Custodian fees payable | 76,155 | ||||
Administrative and compliance services fees payable | 2,466 | ||||
Trustee fees payable | 19 | ||||
Other accrued liabilities | 27,068 | ||||
|
| ||||
Total Liabilities | 17,054,602 | ||||
|
| ||||
Net Assets | $ | 646,688,772 | |||
|
| ||||
Net Assets Consist of: | |||||
Capital | $ | 565,978,918 | |||
Accumulated net investment income/(loss) | 3,393,450 | ||||
Accumulated net realized gains/(losses) from investment transactions | 14,707,931 | ||||
Net unrealized appreciation/(depreciation) on investments | 62,608,473 | ||||
|
| ||||
Net Assets | $ | 646,688,772 | |||
|
| ||||
Shares of beneficial interest (unlimited number of shares authorized, no par value) | 53,656,713 | ||||
Net Asset Value (offering and redemption price per share) | $ | 12.05 | |||
|
|
* | Includes securities on loan of $9,280,885. |
Consolidated Statement of Operations
For the Year Ended December 31, 2013
Investment Income: | |||||
Dividends | $ | 6,222,195 | |||
Interest | 2,831,040 | ||||
Income from securities lending | 95,394 | ||||
Foreign withholding tax | (324,935 | ) | |||
|
| ||||
Total Investment Income | 8,823,694 | ||||
|
| ||||
Expenses: | |||||
Manager fees | 3,557,181 | ||||
Administration fees | 277,149 | ||||
Distribution fees | 1,185,727 | ||||
Custodian fees | 286,457 | ||||
Administrative and compliance services fees | 8,830 | ||||
Trustee fees | 22,291 | ||||
Professional fees | 26,041 | ||||
Shareholder reports | 17,897 | ||||
Other expenses | 16,350 | ||||
|
| ||||
Total expenses before reductions | 5,397,923 | ||||
Less expenses paid indirectly | (2,915 | ) | |||
|
| ||||
Net expenses | 5,395,008 | ||||
|
| ||||
Net Investment Income/(Loss) | 3,428,686 | ||||
|
| ||||
Realized and Unrealized Gains/(Losses) on Investments: | |||||
Net realized gains (losses) on securities transactions | 10,873,126 | ||||
Net realized gains (losses) on futures contracts | 1,575,442 | ||||
Net realized gains (losses) on options contracts | 1,494,591 | ||||
Net realized gains (losses) on swap agreements | (441,830 | ) | |||
Net realized gains (losses) on forward currency contracts | 2,035,723 | ||||
Change in net unrealized appreciation/depreciation on investments | 43,890,720 | ||||
|
| ||||
Net Realized/Unrealized Gains/(Losses) on Investments | 59,427,772 | ||||
|
| ||||
Change in Net Assets Resulting From Operations | $ | 62,856,458 | |||
|
|
See accompanying notes to the consolidated financial statements.
23
Consolidated Statements of Changes in Net Assets
AZL BlackRock Global Allocation Fund | ||||||||||
For the Year Ended December 31, 2013 | January 10, 2012 December 31, 2012(a) | |||||||||
Change in Net Assets: | ||||||||||
Operations: | ||||||||||
Net investment income/(loss) | $ | 3,428,686 | $ | 3,610,899 | ||||||
Net realized gains/(losses) on investment transactions | 15,537,052 | (347,310 | ) | |||||||
Change in unrealized appreciation/depreciation on investments | 43,890,720 | 18,717,753 | ||||||||
|
|
|
| |||||||
Change in net assets resulting from operations | 62,856,458 | 21,981,342 | ||||||||
|
|
|
| |||||||
Dividends to Shareholders: | ||||||||||
From net investment income | (48,119 | ) | (3,796,449 | ) | ||||||
From net realized gains | (976,480 | ) | — | |||||||
|
|
|
| |||||||
Change in net assets resulting from dividends to shareholders | (1,024,599 | ) | (3,796,449 | ) | ||||||
|
|
|
| |||||||
Capital Transactions: | ||||||||||
Proceeds from shares issued | 276,183,753 | 599,008,995 | ||||||||
Proceeds from dividends reinvested | 1,024,599 | 3,796,449 | ||||||||
Value of shares redeemed | (1,414,434 | ) | (311,927,342 | ) | ||||||
|
|
|
| |||||||
Change in net assets resulting from capital transactions | 275,793,918 | 290,878,102 | ||||||||
|
|
|
| |||||||
Change in net assets | 337,625,777 | 309,062,995 | ||||||||
Net Assets: | ||||||||||
Beginning of period | 309,062,995 | — | ||||||||
|
|
|
| |||||||
End of period | $ | 646,688,772 | $ | 309,062,995 | ||||||
|
|
|
| |||||||
Accumulated net investment income/(loss) | $ | 3,393,450 | $ | (248,340 | ) | |||||
|
|
|
| |||||||
Share Transactions: | ||||||||||
Shares issued | 24,476,115 | 59,030,503 | ||||||||
Dividends reinvested | 89,877 | 360,194 | ||||||||
Shares redeemed | (120,241 | ) | (30,179,735 | ) | ||||||
|
|
|
| |||||||
Change in shares | 24,445,751 | 29,210,962 | ||||||||
|
|
|
|
(a) | Period from commencement of operations. |
See accompanying notes to the consolidated financial statements.
24
AZL BlackRock Global Allocation Fund
Consolidated Financial Highlights
(Selected data for a share of beneficial interest outstanding throughout the periods indicated)
Year Ended December 31, | January 10, 2012 December 31, 2012(a) | |||||||||
Net Asset Value, Beginning of Period | $ | 10.58 | $ | 10.00 | ||||||
|
|
|
| |||||||
Investment Activities: | ||||||||||
Net Investment Income/(Loss) | 0.07 | 0.13 | ||||||||
Net Realized and Unrealized Gains/(Losses) on Investments | 1.42 | 0.58 | ||||||||
|
|
|
| |||||||
Total from Investment Activities | 1.49 | 0.71 | ||||||||
|
|
|
| |||||||
Dividends to Shareholders From: | ||||||||||
Net Investment Income | — | (b) | (0.13 | ) | ||||||
Realized Gains | (0.02 | ) | — | |||||||
|
|
|
| |||||||
Total Dividends | (0.02 | ) | (0.13 | ) | ||||||
|
|
|
| |||||||
Net Asset Value, End of Period | $ | 12.05 | $ | 10.58 | ||||||
|
|
|
| |||||||
Total Return(c) | 14.11 | % | 7.13 | %(d) | ||||||
Ratios to Average Net Assets/Supplemental Data: | ||||||||||
Net Assets, End of Period (000’s) | $ | 646,689 | $ | 309,063 | ||||||
Net Investment Income/(Loss)(e) | 0.72 | % | 1.09 | % | ||||||
Expenses Before Reductions(e)(f) | 1.14 | % | 1.15 | % | ||||||
Expenses Net of Reductions(e) | 1.14 | % | 1.14 | % | ||||||
Expenses Net of Reductions, Excluding Expenses Paid Indirectly(e)(g) | 1.14 | % | 1.15 | % | ||||||
Portfolio Turnover Rate | 50 | % | 74 | %(d) |
(a) | Period from commencement of operations. |
(b) | Less than $0.005. |
(c) | The return includes reinvested dividends and fund level expenses, but excludes insurance contract charges. If these charges were included, the returns would have been lower. |
(d) | Not annualized. |
(e) | Annualized for periods less than one year. |
(f) | Excludes fee reductions. If such fee reductions had not occurred, the ratios would have been as indicated. |
(g) | Expenses net of reductions excludes expenses paid indirectly, pursuant to a “commission recapture” program, which is used to pay certain Fund Expenses. See Note 2 in Notes to Consolidated Financial Statements. |
See accompanying notes to the consolidated financial statements.
25
AZL BlackRock Global Allocation Fund
Notes to the Consolidated Financial Statements
December 31, 2013
1. Organization
The Allianz Variable Insurance Products Trust (the “Trust”) was organized as a Delaware statutory trust on July 13, 1999. The Trust is a diversified open-end management investment company registered under the Investment Company Act of 1940. The Trust consists of 29 separate investment portfolios (collectively, the “Funds”), of which one is included in this report, the AZL BlackRock Global Allocation Fund (the “Fund”), and 28 are presented in separate reports.
The Trust is authorized to issue an unlimited number of shares of the Fund without par value. Shares of the Fund are available through the variable annuity contracts and variable life insurance policies offered through the separate accounts of participating insurance companies.
Under the Trust’s organizational documents, its officers and trustees are indemnified against certain liabilities arising out of the performance of their duties to the Fund. In addition, in the normal course of business, the Fund may enter into contracts with its vendors and others that provide for general indemnifications. The Fund’s maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Fund. However, based on experience, the Fund expects the risk of loss to be remote.
2. Significant Accounting Policies
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. The policies conform with U.S. generally accepted accounting principles (“U.S. GAAP”). The preparation of financial statements requires management to make certain 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 increases and decreases in net assets from operations during the reporting period. Actual results could differ from those estimates.
Security Valuation
The Fund records its investments at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between willing market participants at the measurement date. The valuation techniques used to determine fair value are further described in Note 4 below.
Investment Transactions and Investment Income
Investment transactions are recorded not later than on the business day following trade date. However, for financial reporting purposes, investment transactions are accounted for on trade date. Net realized gains and losses on investments sold are recorded on the basis of identified cost. Interest income is recorded on the accrual basis and includes, where applicable, the amortization of premiums or accretion of discounts. Dividend income is recorded on the ex-dividend date except in the case of foreign securities, in which case dividends are recorded as soon as such information becomes available.
Consolidation of Subsidiaries
The Fund’s primary vehicle for gaining exposure to the commodities markets is through investment in the AZL Cayman Global Allocation Fund, Ltd. (the “Subsidiary”), a wholly-owned and controlled subsidiary of the Fund formed in the Cayman Islands, which invests primarily in commodity-related instruments.
As of December 31, 2013, the Fund’s aggregate investment in the Subsidiary was $6,255,746, representing 0.97% of the Fund’s net assets.
The Fund’s operations have been consolidated with the operations of the Subsidiary.
Real Estate Investment Trusts
The Fund may own shares of real estate investment trusts (“REITs”) which report information on the source of their distributions annually. Certain distributions received from REITs during the year, which are known to be a return of capital, are recorded as a reduction to the cost of the individual REIT.
Foreign Currency Translation
The accounting records of the Fund are maintained in U.S. dollars. Foreign currency amounts are translated into U.S. dollars at the current rate of exchange to determine the fair value of investments, assets and liabilities. Purchases and sales of securities, and income and expenses are translated at the prevailing rate of exchange on the respective dates of such transactions. The Fund does not isolate that portion of the results of operations resulting from changes in foreign exchange rates on investments from fluctuations arising from changes in market prices of securities held. Such fluctuations are included in the net realized and unrealized gain or loss on investments and foreign currencies. Income received by the Fund from sources within foreign countries may be subject to withholding and other income or similar taxes imposed by such countries. The Funds accrue such taxes, as applicable, based on their current interpretation of tax rules in the foreign markets in which they invest.
Floating Rate Loans
The Fund may invest in floating rate loans, which usually take the form of loan participations and assignments. These loans are made by banks and other large financial institutions to various companies and are typically senior in the borrowing companies’ capital structure. Coupon rates are floating, not fixed and are tied to a benchmark lending rate. Loans involve a risk of loss in case of default or insolvency of the financial intermediaries who are parties to the transactions. A Fund records an investment when the borrower withdraws money and records the interest as earned.
Dividends to Shareholders
Dividends to shareholders are recorded on the ex-dividend date. The Fund distributes its dividends from net investment income and net realized capital gains, if any, on an annual basis. The amount of dividends from net investment income and from net realized gains is determined in accordance with federal income tax regulations, which may
26
AZL BlackRock Global Allocation Fund
Notes to the Consolidated Financial Statements
December 31, 2013
differ from U.S. GAAP. These “book/tax” differences are either temporary or permanent in nature. To the extent these differences are permanent in nature (e.g., return of capital, net operating loss, reclassification of certain market discounts, gain/loss, paydowns, and distributions), such amounts are reclassified within the composition of net assets based on their federal tax-basis treatment; temporary differences (e.g., wash sales and post October losses) do not require reclassification. Dividends to shareholders that exceed net investment income and net realized gains for tax purposes are reported as distributions of capital.
Expense Allocation
Expenses directly attributable to the Fund are charged directly to the Fund, while expenses attributable to more than one Fund are allocated among the respective Funds based upon relative net assets or some other reasonable method. Expenses which are attributable to more than one Trust are allocated across the Allianz Variable Insurance Products and Allianz Variable Insurance Products Fund of Funds Trusts based upon relative net assets or another reasonable basis. Allianz Investment Management LLC (the “Manager”), serves as the investment manager for the Trust and the Allianz Variable Insurance Products Fund of Funds Trust.
Securities Lending
To generate additional income, the Fund may lend up to 33 1/3% of its assets pursuant to agreements requiring that the loan be continuously secured by any combination of cash, U.S. government or U.S. government agency securities, equal initially to at least 102% of the fair value plus accrued interest on the securities loaned (105% for foreign securities). The borrower of securities is at all times required to post collateral to the Fund in an amount equal to 100% of the fair value of the securities loaned based on the previous day’s fair value of the securities loaned, marked-to-market daily. Any collateral shortfalls are adjusted the next business day. The Fund bears all of the gains and losses on such investments. The Fund receives payments from borrowers equivalent to the dividends and interest that would have been earned on securities lent while simultaneously seeking to earn income on the investment of cash collateral received. In extremely low interest rate environments, the broker rebate fee may exceed the interest earned or the cash collateral which would result in a loss to the Fund. The investment of cash collateral deposited by the borrower is subject to inherent market risks such as interest rate risk, credit risk, liquidity risk, and other risks that are present in the market, and as such, the value of these investments may not be sufficient, when liquidated, to repay the borrower when the loaned security is returned. There may be risks of delay in recovery of the securities or even loss of rights in the collateral should the borrower of the securities fail financially. However, loans will be made only to borrowers, such as broker-dealers, banks or institutional borrowers of securities, deemed by the Manager to be of good standing and credit worthy and when in its judgment, the consideration which can be earned currently from such securities loans justifies the attendant risks. Loans are subject to termination by the Trust or the borrower at any time, and are, therefore, not considered to be illiquid investments. Securities on loan at December 31, 2013 are presented on the Fund’s Consolidated Schedule of Portfolio Investments. The average outstanding amount of securities on loan was $6.6 million for the year ended December 31, 2013.
Cash collateral received in connection with securities lending is invested in the Allianz Variable Insurance Products Securities Lending Collateral Trust (the “Securities Lending Collateral Trust”) managed by The Dreyfus Corporation, an affiliate of the Custodian and Securities Lending Agent. The Securities Lending Collateral Trust invests in short-term investments that have a remaining maturity of 397 days or less as calculated in accordance with Rule 2a-7 under the 1940 Act. The Fund paid securities lending fees of $9,466 during the year ended December 31, 2013. These fees have been netted against “Income from securities lending” on the Consolidated Statement of Operations.
Commission Recapture
Certain Funds of the Trust participate in a commission recapture program. The Fund will utilize the recaptured commissions to pay for, in whole or part, certain expenses of the Fund, excluding investment advisory fees. Any amounts received by the Fund, if applicable, are disclosed as “Expenses paid indirectly” on the Consolidated Statement of Operations.
Effective January 6, 2014, the Manager, on behalf of the Trust, requested the Fund cease participation in the program until further notice.
Derivative Instruments
All open derivative positions at period end are reflected on the Fund’s Consolidated Schedule of Portfolio Investments. The following is a description of the derivative instruments utilized by the Fund, including the primary underlying risk exposures related to each instrument type.
Forward Currency Contracts
During the year ended December 31, 2013, the Fund entered into forward currency contracts as an economic hedge against either specific transactions or portfolio instruments or to obtain exposure to foreign currencies. In addition to the foreign currency risk related to the use of these contracts, the Fund could be exposed to risks if the counterparties to the contracts are unable to meet the terms of their contracts and from unanticipated movements in the value of a foreign currency relative to the U.S. dollar. In the event of default by the counterparty to the transaction, the Fund’s maximum amount of loss, as either the buyer or the seller, is the unrealized appreciation of the contract. The forward currency contracts are adjusted by the daily exchange rate of the underlying currency and any gains or losses are recorded for financial statement purposes as unrealized gains or losses until the contract settlement date. When the contract is closed, the Fund records a realized gain or loss equal to the difference between the value at the time it was opened and the value at the time it was closed. The contract amount of forward currency contracts outstanding was $41.9 million as of December 31, 2013. The monthly average amount for these contracts was $51.0 million for the year ended December 31, 2013.
Futures Contracts
During the year ended December 31, 2013, the Fund used futures contracts to gain exposure to, or economically hedge against changes in the value of equity securities. Futures contracts are valued based upon their quoted daily settlement prices. Upon entering into a futures contract, the Fund is required to segregate liquid assets in accordance with the initial margin requirements of the broker or exchange. Futures contracts are marked to market daily and a payable or receivable for the change in value (“variation margin”) is recorded by the Fund. Gains or losses are recognized but not considered realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, elements of market risk (generally equity price risk related to stock futures, interest rate risk related to bond futures, and foreign currency risk related to currency futures) and exposure to loss in excess of the variation margin disclosed in the Consolidated Statement of Assets and Liabilities. The primary risks associated with
27
AZL BlackRock Global Allocation Fund
Notes to the Consolidated Financial Statements
December 31, 2013
the use of futures contracts are the imperfect correlation between the change in fair value of the underlying securities and the prices of futures contracts, the possibility of an illiquid market, and the inability of the counterparty to meet the terms of the contract. The notional amount of futures contracts outstanding was $29.3 million as of December 31, 2013. The monthly average notional amount for these contracts was $12.5 million for the year ended December 31, 2013.
Options Contracts
The Fund may purchase or write put and call options on a security or an index of securities. During the year ended December 31, 2013, the Fund purchased and wrote call and put options to increase or decrease its exposure to underlying instruments (including equity risk, interest rate risk and/or foreign currency exchange rate risk) and/or, in the case of options written, to generate gains from options premiums.
Purchased Options Contracts — The Fund pays a premium which is included in “Investments, at value” on the Consolidated Statement of Assets and Liabilities and marked to market to reflect the current value of the option. Premiums paid for purchasing put options that expire are treated as realized losses. When a put option is exercised or closed, premiums paid for purchasing put options are offset against proceeds to determine the realized gain/loss on the transaction. The Fund bears the risk of loss of the premium and change in value should the counterparty not perform under the contract.
Written Options Contracts — The Fund receives a premium which is recorded as a liability and is subsequently adjusted to the current value of the options written. Premiums received from writing options that expire are treated as realized gains. Premiums received from writing options that are either exercised or closed are offset against the proceeds received or the amount paid on the transaction to determine realized gains or losses. The risk associated with writing an option is that the Fund bears the market risk of an unfavorable change in the price of an underlying asset and is required to buy or sell an underlying asset under the contractual terms of the option at a price different from the current value.
Realized gains and losses are reported as “Net realized gains/(losses) on options contracts” on the Consolidated Statement of Operations.
The Fund had the following transactions in purchased call and put options during the year ended December 31, 2013:
| Number of Contracts |
| Cost | |||||||||||||||||||
Options outstanding at December 31, 2012 | 2,952,883 | $ | 3,097,758 | |||||||||||||||||||
Options purchased | 3,448,549 | 7,785,463 | ||||||||||||||||||||
Options exercised | (29,067 | ) | (252,443 | ) | ||||||||||||||||||
Options expired | (174,871 | ) | (2,602,542 | ) | ||||||||||||||||||
Options closed | (2,179,757 | ) | (3,810,294 | ) | ||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||
Options outstanding at December 31, 2013 | 4,017,737 | $ | 4,217,942 | |||||||||||||||||||
|
|
|
|
The Fund had the following transactions in written call and put options during the year ended December 31, 2013:
| Number of Contracts |
| Premiums Received | |||||||||||||||||
Options outstanding at December 31, 2012 | (82,982 | ) | $ | (911,438 | ) | |||||||||||||||
Options written | (1,937,253 | ) | (3,474,272 | ) | ||||||||||||||||
Options exercised | 1,941 | 201,878 | ||||||||||||||||||
Options expired | 260,392 | 685,401 | ||||||||||||||||||
Options closed | 1,694,057 | 2,454,619 | ||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||
Options outstanding at December 31, 2013 | (63,845 | ) | $ | (1,043,812 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
Swap Agreements
The Fund may invest in swap agreements. A swap is an agreement to exchange the return generated by one instrument for the return generated by another instrument. Swap agreements are privately negotiated in the over-the-counter (“OTC”) market and may be entered into as a bilateral contract (“OTC swaps”) or centrally cleared (“centrally cleared swaps”). The Fund may enter into swap agreements to manage its exposure to market, interest rate and credit risk. The value of swap agreements are equal to the Fund’s obligations (or rights) under swap agreements, which will generally be equal to the net amounts to be paid or received under the agreements based upon the relative values of the positions held by each party to the agreements. In connection with these arrangements, securities may be indentified as collateral in accordance with the terms of the swap agreements to provide assets of value and recourse in the event of default or bankruptcy by the counterparty.
Swaps are marked to market daily using pricing sources approved by the Trustees and the change in value, if any, is recorded as unrealized gain or loss. For OTC swaps, payments received or made at the beginning of the measurement period are recorded as realized gain or loss upon termination or maturity of the OTC swap. A liquidation payment received or made at the termination of the OTC swap is recorded as a realized gain or loss. Net periodic payments received or paid by the Fund are included as part of realized gains (losses). Upon entering a centrally cleared swap, the Fund is required to deposit initial margin with the broker in the form of cash or assets determined to be liquid (the amount is subject to the clearing organization that clears the trade). Daily changes in valuation of centrally cleared swaps, if any, are recorded as a receivable or payable, as applicable, for variation margin on centrally cleared swaps.
Swap agreements involve, to varying degrees, elements of market risk and exposure to loss. The primary risks associated with the use of swap agreements are imperfect correlation between movements in the notional amount and the price of the underlying instruments and the inability of counterparties or clearing house to perform. The counterparty risk for centrally cleared swap agreements is generally lower than for OTC swap agreements because generally a clearing organization becomes substituted for each counterparty to a centrally cleared swap agreement and, in effect, guarantees the parties’ performance under the contract as each party to a trade looks only to a clearing house for performance of financial obligations. However, there can be no assurance that the clearing house, or its members will satisfy its obligations to the Fund.
28
AZL BlackRock Global Allocation Fund
Notes to the Consolidated Financial Statements
December 31, 2013
The notional amounts reflect the extent of the total investment exposure each Fund has under the swap agreement. The Fund bears the risk of loss of the amount expected to be received under a swap agreement (i.e., any unrealized appreciation) in the event of the default or bankruptcy of the swap agreement counterparty. The notional amount and related unrealized appreciation (depreciation) of each swap agreement at period end is disclosed in the swap tables in the Consolidated Schedule of Portfolio Investments. The Fund is party to International Swap Dealers Association, Inc. Master Agreements (“ISDA Master Agreements”) with select counterparties that govern transactions, such as OTC swap contracts, entered into by the Fund, through the Subsidiary, and those counterparties. The ISDA Master Agreements maintain provisions for general obligations, representations, agreements, collateral and events of default or termination. Events of termination include conditions that may entitle counterparties to elect to terminate early and cause settlement of all outstanding OTC swap transactions under the applicable ISDA Master Agreement.
Interest rate swaps involve the exchange of commitments to pay and receive interest based on a notional amount and are subject to interest rate risk exposure. Interest rate swaps do not involve the delivery of securities, other underlying assets or principal. Accordingly, the risk of loss with respect to interest rate swaps is limited to the net amount of interest payments that a Fund is contractually obligated to make. If the other party to an interest rate swap defaults, a Fund’s risk of loss consists of the net amount of interest payments that the Fund is contractually entitled to receive. As of December 31, 2013, the Fund entered into OTC and centrally cleared interest rate swap agreements to gain or reduce exposure to interest rates or to manage duration, the yield curve or interest rate risk by economically hedging the value of the fixed rate bonds which may decrease when interest rates rise (interest rate risk). The gross notional amount of interest rate swaps outstanding was $34.7 million as of December 31, 2013. The monthly average gross notional amount for interest rate swaps was $35.6 million for the year ended December 31, 2013.
Total return swap agreements involve commitments to pay interest in exchange for a market-linked return, both based on notional amounts. To the extent the total return of the security or index underlying the transaction exceeds or falls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty. The gross notional amount of total return swaps outstanding was $44.2 million as of December 31, 2013. The monthly average gross notional amount for total return swaps was $13.1 million to the year ended December 31, 2013.
Credit default swap agreements may have as reference obligations one or more securities that are not currently held by the Fund. The protection “buyer” in a credit default contract is generally obligated to pay the protection “seller” an upfront, periodic, or daily stream of payments over the term of the contract provided that no credit event, such as a default, on a reference obligation has occurred. If a credit event occurs, the seller generally must pay the buyer the “par value” (full notional value) of the swap in exchange for an equal face amount of deliverable obligations of the reference entity described in the swap, or the seller may be required to deliver the related net cash amount, if the swap is cash settled. A Fund may be either the buyer or seller in the transaction. If the Fund is a buyer and no credit event occurs, the Fund may recover nothing if the swap is held through its termination date. However, if a credit event occurs, the buyer generally may elect to receive the full notional value of the swap in exchange for an equal face amount of deliverable obligations of the reference entity whose value may have significantly decreased. As a seller, a Fund generally receives an upfront payment or a fixed rate of income throughout the term of the swap provided that there is no credit event. As the seller, a Fund would effectively add leverage to its portfolio because, in addition to its total net assets, a Fund would be subject to investment exposure on the notional amount of the swap.
Credit default swap agreements involve greater risks than if a Fund had invested in the reference obligation directly since, in addition to general market risks, credit default swaps are subject to illiquidity risk, counterparty risk and credit risk. A Fund will enter into credit default swap agreements only with counterparties that meet certain standards of creditworthiness. A buyer generally also will lose its investment and recover nothing should no credit event occur and the swap is held to its termination date. If a credit event were to occur, the value of any deliverable obligation received by the seller, coupled with the upfront, periodic, or daily payments previously received, may be less than the full notional value it pays to the buyer, resulting in a loss of value to the seller. The Fund’s obligations under a credit default swap agreement will be accrued daily (offset against any amounts owing to the Fund). In connection with credit default swaps in which a Fund is the buyer, the Fund will segregate or “earmark” cash or assets determined to be liquid, or enter into certain offsetting positions, with a value at least equal to the Fund’s exposure (any accrued but unpaid net amounts owed by the Fund to any counterparty), on a marked-to-market basis. In connection with credit default swaps in which a Fund is the seller, the Fund will segregate or “earmark” cash or assets determined to be liquid, or enter into offsetting positions, with a value at least equal to the full notional amount of the swap (minus any amounts owed to the Fund). Such segregation or “earmarking” will ensure that the Fund has assets available to satisfy its obligations with respect to the transaction and will limit any potential leveraging of the Fund’s portfolio. Such segregation or “earmarking” will not limit the Fund’s exposure to loss. As of December 31, 2013, the Fund entered into OTC and centrally cleared credit default swaps to manage its exposure to the market or certain sectors of the market, to reduce its risk exposure to defaults of corporate and/or sovereign issuers or to create exposure to corporate and/or sovereign issuers to which they are not otherwise exposed (credit risk). The gross notional amount of OTC and centrally cleared credit default swaps outstanding was $4.3 million as of December 31, 2013. The monthly average gross notional amount for credit default swaps was $3.4 million for the year ended December 31, 2013.
Summary of Derivative Instruments
The following is a summary of the fair values of derivative instruments on the Fund's Consolidated Statement of Assets and Liabilities, categorized by risk exposure, as of December 31, 2013:
Asset Derivatives | Liability Derivatives | |||||||||||
Primary Risk Exposure | Consolidated Statement of Assets and Liabilities Location | Total Fair Value | Consolidated Statement of Assets and Liabilities Location | Total Fair Value | ||||||||
Equity Risk Exposure | ||||||||||||
Futures Contracts | Receivable for variation margin on futures contracts* | $ | 92,187 | Payable for variation margin on futures contracts* | $ | 702,907 | ||||||
Option Contracts | Investment securities, at value (purchased options) | 3,025,716 | Written options | 1,452,898 | ||||||||
Total Return Swap Agreements | Unrealized appreciation on swap agreements | 103,317 | Unrealized depreciation on swap agreements | — | ||||||||
Credit Risk Exposure | ||||||||||||
Credit Default Swap Agreements | Unrealized appreciation on swap agreements+ | 6,131 | Unrealized depreciation on swap agreements+ | 57,812 |
29
AZL BlackRock Global Allocation Fund
Notes to the Consolidated Financial Statements
December 31, 2013
Asset Derivatives | Liability Derivatives | |||||||||||
Primary Risk Exposure | Consolidated Statement of Assets and Liabilities Location | Total Fair Value | Consolidated Statement of Assets and Liabilities Location | Total Fair Value | ||||||||
Interest Rate Risk | ||||||||||||
Interest Rate Swap Agreements | Unrealized appreciation on swap agreements+ | $ | 9,245 | Unrealized depreciation on swap agreements+ | $ | 100,762 | ||||||
Foreign Exchange Rate Risk Exposure | ||||||||||||
Forward Currency Contracts | Unrealized appreciation on forward currency contracts | 989,833 | Unrealized depreciation on forward currency contracts | 127,383 |
* | For futures contracts, the amounts represent the cumulative appreciation/(depreciation) of these futures contracts as reported in the Consolidated Schedule of Portfolio Investments. Only current day’s variation margin is reported within the Consolidated Statement of Assets and Liabilities as Variation margin on futures contracts. |
+ | For swap agreements, the amounts represent the cumulative appreciation/(depreciation) of these agreements as reported in the Consolidated Schedule of Portfolio Investments. Only current day’s variation margin is reported within the Consolidated Statement of Assets and Liabilities as Variation margin on swaps. |
The following is a summary of the effect of derivative instruments on the Consolidated Statement of Operations, categorized by risk exposure, for the year ended December 31, 2013:
Realized Gain (Loss) on Derivatives Recognized as a Result from Operations | Change in Unrealized Appreciation (Depreciation) on Derivatives Recognized as a Result from Operations | ||||||||||||||||||||||||
Net Realized Gains (Losses) on Futures Contracts | Net Realized Gains (Losses) on Swap Agreements | Net Realized Gains (Losses) on Option Contracts | Net Realized Gains (Losses) on Forward Currency Contracts | Change in Net Unrealized Appreciation/Depreciation on Investments | |||||||||||||||||||||
Equity Risk Exposure | $ | 1,575,442 | $ | — | $ | 1,494,591 | $ | — | $ | (1,429,247 | ) | ||||||||||||||
Credit Risk Exposure | — | (207,391 | ) | — | — | (53,839 | ) | ||||||||||||||||||
Interest Rate Risk Exposure | — | (234,439 | ) | — | — | (122,871 | ) | ||||||||||||||||||
Foreign Exchange Rate Risk Exposure | — | — | — | 2,035,723 | 731,136 |
Effective January 1, 2013, the Fund adopted Financial Accounting Standards Board Accounting Standards Update (“ASU”) No. 2013-01 “Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities” (“ASU 2013-01”) which amended Accounting Standards Codification Subtopic 210-20, Balance Sheet Offsetting. ASU 2013-01 clarified the scope of ASU No. 2011-11 “Disclosures about Offsetting Assets and Liabilities” (“ASU 2011-11”). ASU 2011-11 requires an entity to disclose information about offsetting and related arrangements to enable users of that entity’s financial statements to understand the effect of those arrangements on its financial position. The objective of this disclosure is to facilitate comparison between those entities that prepare their financial statements on the basis of U.S. GAAP and those entities that prepare their financial statements on the basis of International Financial Reporting Standards. ASU 2013-01 clarifies the scope of ASU 2011-11 as applying to derivatives accounted for in accordance with Topic 815, Derivatives and Hedging, including bifurcated embedded derivatives, repurchase agreements and reverse repurchase agreements, and securities borrowing and securities lending transactions that are offset either in accordance with other requirements of U.S. GAAP or subject to an enforceable master netting arrangement or similar agreement.
The Fund is generally subject to master netting agreements that allow for amounts owed between the Fund and the counterparty to be netted. The party that has the larger payable pays the excess of the larger amount over the smaller amount to the other party. The master netting agreements do not apply to amounts owed to/from different counterparties. The amounts shown in the Consolidated Statement of Assets and Liabilities do not take into consideration the effects of legally enforceable master netting agreements. The table below presents the gross and net amounts of these assets and liabilities with any offsets to reflect the Fund’s ability to reflect the master netting agreements at December 31, 2013. For financial reporting purposes, the Fund does not offset derivative assets and derivative liabilities that are subject to master netting arrangements in the Consolidated Statement of Assets and Liabilities. This table also summarizes the fair values of derivative instruments on the Fund’s Consolidated Statement of Assets and Liabilities, categorized by risk exposure, as of December 31, 2013.
As of December 31, 2013, the Fund’s derivative assets and liabilities by type are as follows:
Assets | Liabilities | |||||||||
Derivative Financial Instruments: | ||||||||||
Futures contracts | $ | 2,178 | $ | 98,930 | ||||||
Forward currency contracts | 989,833 | 127,383 | ||||||||
Option contracts* | 3,025,716 | 1,452,898 | ||||||||
Swap agreements | 109,255 | 89,342 | ||||||||
|
|
|
| |||||||
Total derivative assets and liabilities in the Consolidated Statement of Assets and Liabilities | 4,126,982 | 1,768,553 | ||||||||
Derivatives not subject to a master netting agreement or similar agreement (“MNA”) | (203,474 | ) | (922,828 | ) | ||||||
|
|
|
| |||||||
Total assets and liabilities subject to a MNA | $ | 3,923,508 | $ | 840,725 | ||||||
|
|
|
|
* | Includes option contracts purchased at value as reported in the Consolidated Statement of Assets and Liabilities. |
30
AZL BlackRock Global Allocation Fund
Notes to the Consolidated Financial Statements
December 31, 2013
The following table presents the Fund’s derivative assets by counterparty net of amounts available for offset under a MNA and net of the related collateral received by the Fund as of December 31, 2013:
Counterparty | Derivative Assets Subject to a MNA by Counterparty | Derivatives Available for Offset | Non-cash Collateral Received* | Cash Collateral Received* | Net Amount of Derivative Assets | ||||||||||||||||||||
Bank of America | $ | 560,348 | $ | — | $ | — | $ | (560,348 | ) | $ | — | ||||||||||||||
Barclays Bank | 85,255 | (15,965 | ) | — | — | 69,290 | |||||||||||||||||||
BNP Paribas | 213,811 | (70,766 | ) | — | — | 143,045 | |||||||||||||||||||
Citibank | 365,495 | — | — | — | 365,495 | ||||||||||||||||||||
Credit Suisse First Boston | 182,598 | (67,507 | ) | — | — | 115,091 | |||||||||||||||||||
Deutsche Bank | 766,798 | (241,503 | ) | — | (525,295 | ) | — | ||||||||||||||||||
Goldman Sachs | 936,516 | (397,902 | ) | — | (500,000 | ) | 38,614 | ||||||||||||||||||
JPMorgan Chase | 230,283 | (17,779 | ) | — | — | 212,504 | |||||||||||||||||||
Morgan Stanley | 141,287 | (1,428 | ) | — | — | 139,859 | |||||||||||||||||||
UBS Warburg | 441,117 | (27,875 | ) | — | — | 413,242 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Total | $ | 3,923,508 | $ | (840,725 | ) | $ | — | $ | (1,585,643 | ) | $ | 1,497,140 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
The following table presents the Fund’s derivative liabilities by counterparty net of amounts available for offset under a MNA and net of the related collateral pledged by the Fund as of December 31, 2013:
Counterparty | Derivative Liabilities Subject to a MNA by Counterparty | Derivatives Available for Offset | Non-cash Collateral Pledged* | Cash Collateral Pledged* | Net Amount of Derivative Liabilities | ||||||||||||||||||||
Barclays Bank | $ | 15,965 | $ | (15,965 | ) | $ | — | $ | — | $ | — | ||||||||||||||
BNP Paribas | 70,766 | (70,766 | ) | — | — | — | |||||||||||||||||||
Credit Suisse First Boston | 67,507 | (67,507 | ) | — | — | — | |||||||||||||||||||
Deutsche Bank | 241,503 | (241,503 | ) | — | — | — | |||||||||||||||||||
Goldman Sachs | 397,902 | (397,902 | ) | — | — | — | |||||||||||||||||||
JPMorgan Chase | 17,779 | (17,779 | ) | — | — | — | |||||||||||||||||||
Morgan Stanley | 1,428 | (1,428 | ) | — | — | — | |||||||||||||||||||
UBS Warburg | 27,875 | (27,875 | ) | — | — | — | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Total | $ | 840,725 | $ | (840,725 | ) | $ | — | $ | — | $ | — | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
* | The actual collateral received or pledged may be in excess of the amounts shown in the table. The table only reflects collateral amounts up to the amount of the financial instrument disclosed on the Consolidated Statement of Assets and Liabilities. |
3. Related Party Transactions
The Manager provides investment advisory and management services for the Fund. The Manager has retained an independent money management organization (the “Subadviser”), to make investment decisions on behalf of the Fund. Pursuant to a subadvisory agreement with BlackRock Investment Management, LLC (“BlackRock Investment”), BlackRock Investment provides investment advisory services as the Subadviser for the Fund subject to the general supervision of the Trustees and the Manager. The Manager is entitled to a fee, computed daily and paid monthly, based on the average daily net assets of the Fund. Expenses incurred by the Fund for investment advisory and management services are reflected on the Consolidated Statement of Operations as “Manager fees.” For its services, the Subadviser is entitled to a fee payable by the Manager. The Manager has contractually agreed to waive fees and reimburse the Fund to limit the annual expenses, excluding interest expense (e.g., cash overdraft fees), taxes, brokerage commissions, other expenditures that are capitalized in accordance with U.S. GAAP and other extraordinary expenses not incurred in the ordinary course of the Fund’s business, based on the daily net assets of the Fund, through April 30, 2015.
For the year ended December 31, 2013, the annual rate due to the Manager and the annual expense limit were as follows:
Annual Rate | Annual Expense Limit | |||||||||
AZL BlackRock Global Allocation Fund | 0.75 | % | 1.19 | % |
Any amounts contractually waived or reimbursed by the Manager in a particular fiscal year will be subject to repayment by the Fund to the Manager to the extent that from time to time through the next three fiscal years the repayment will not cause the Fund’s expenses to exceed the lesser of the stated limit at the time of the waiver or the current stated limit. Any amounts recouped by the Manager during the year are reflected on the Consolidated Statement of Operations as “Recoupment of prior expenses reimbursed by the Manager.” At December 31, 2013, there were no remaining contractual reimbursements that are subject to repayment by the Fund in subsequent years.
31
AZL BlackRock Global Allocation Fund
Notes to the Consolidated Financial Statements
December 31, 2013
In addition, the Manager may voluntarily waive or reimburse additional fees in order to maintain more competitive expense ratios. Any voluntary waivers or reimbursements are not subject to repayment in subsequent years. Information on the total amount waived/reimbursed by the Manager or repaid to the Manager by the Fund during the year can be found on the Consolidated Statement of Operations. During the year ended December 31, 2013, there were no voluntary waivers.
Pursuant to separate agreements between the Funds and the Manager, the Manager provides a Chief Compliance Officer (“CCO”) and certain compliance oversight and regulatory filing services to the Trust. Under these agreements the Manager is entitled to an amount equal to a portion of the compensation and certain other expenses related to the individuals performing the CCO and compliance oversight services, as well as $75 per hour for time incurred in connection with the preparation and filing of certain documents with the Securities and Exchange Commission. The fees are paid to the Manager on a quarterly basis. The total expenses incurred by the Fund for these services are reflected on the Statement of Operations as “Administrative and compliance services fees.”
Citi Fund Services Ohio, Inc. (“Citi” or the “Administrator”), a wholly owned subsidiary of Citigroup, Inc., with which an officer of the Trust is affiliated, serves as the Trust’s administrator, transfer agent, and fund accountant, and assists the Trust in all aspects of its administration and operation. The Administrator is entitled to a Trust-wide asset-based fee, which is based on the following schedule: 0.05% of daily average net assets on the first $4 billion, 0.04% of daily average net assets on the next $2 billion, 0.02% of daily average net assets on the next $2 billion and 0.01% of daily average net assets over $8 billion. The overall Trust-wide fees are accrued daily and paid monthly and are subject to a minimum annual fee. In addition, the Administrator is entitled to annual account fees related to the transfer agency system, an annual fee for each additional class of shares of any Fund, certain annual fees in supporting fair value services, and a Trust-wide annual fee for providing infrastructure and support in implementing the written policies and procedures comprising the Fund’s compliance program. Fees payable to the Administrator are subject to certain reductions associated with services provided to new funds. The Administrator is also reimbursed for certain expenses incurred. The total expenses incurred by the Fund for these services are reflected on the Consolidated Statement of Operations as “Administration fees.”
Allianz Life Financial Services, LLC (“ALFS”), an affiliate of the Manager, serves as distributor of the Fund and receives 12b-1 fees directly from the Fund, plus a Trust-wide annual fee of $42,500, paid by the Manager from its profits and not by the Trust, for recordkeeping and reporting services.
The Trust has adopted a distribution and service plan in conformance with Rule 12b-1 of the 1940 Act. Pursuant to this plan, the Fund is authorized to pay certain fees for the sale and distribution of its shares and services provided to its shareholders at an annual rate not to exceed 0.25% of the Fund’s average daily net assets. These fees are reflected on the Consolidated Statement of Operations as “Distribution fees.”
In addition, certain legal fees and expenses are paid to a law firm, Dorsey & Whitney LLP, of which the Secretary of the Fund is a partner. During the year ended December 31, 2013, $5,574 was paid from the Fund relating to these fees and expenses.
Certain Officers and Trustees of the Trust are affiliated with the Manager or the Administrator. Such Officers (except for the Trust’s CCO as noted above) and Trustees receive no compensation from the Trust for serving in their respective roles. For their service to the Trust and to the Allianz Variable Insurance Products Fund of Funds Trust, each non-interested Trustee receives a $139,000 annual Board retainer. In addition, the Trustees are reimbursed for certain expenses associated with attending Board meetings. Compensation to the Trustees is allocated between the Trust and the Allianz Variable Insurance Products Fund of Funds Trust in proportion to the assets under management of each trust. During the year ended December 31, 2013, actual Trustee compensation was $973,000 in total for both trusts.
At a meeting of the Board of Trustees on December 4, 2013, the Trustees approved a fee increase to the Officers and Trustees who are paid a fee for their services to the Trust and to the Allianz Variable Insurance Products Fund of Funds Trust. Effective January 1, 2014, each non-interested Trustee will receive a $163,000 annual retainer.
4. Investment Valuation Summary
The valuation techniques employed by the Fund, as described below, maximize the use of observable inputs and minimize the use of unobservable inputs in determining fair value. The inputs used for valuing the Fund’s investments are summarized in the three broad levels listed below:
— | Level 1 — quoted prices in active markets for identical assets |
— | Level 2 — other significant observable inputs (including quoted prices for similar securities, interest rates, prepayments speeds, credit risk, etc.) |
— | Level 3 — significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of investments) |
Changes in valuation techniques may result in transfers in or out of an assigned level within the disclosure hierarchy. The Fund determines transfers between fair value hierarchy levels at the reporting period end. The inputs or methodology used for valuing investments is not necessarily an indication of the risk associated with investing in those investments.
Security prices are generally provided by an independent third party pricing service approved by the Trust’s Board of Trustees (“Trustees”) as of the close of the New York Stock Exchange (“NYSE”) (generally 4:00 pm Eastern Time). Equity securities are valued at the last quoted sale price or, if there is no sale, the last quoted bid price is used for long securities and the last quoted ask price is used for securities sold short. Securities listed on NASDAQ Stock Market, Inc. (“NASDAQ”) are valued at the official closing price as reported by NASDAQ. In each of these situations, valuations are typically categorized as a Level 1 in the fair value hierarchy. Investments in open-end investment companies are valued at their respective net asset value as reported by such companies and are typically categorized as Level 1 in the fair value hierarchy.
Debt and other fixed income securities are generally valued at an evaluated bid price provided by an independent pricing source approved by the Trustees. To value debt securities, pricing services may use various pricing techniques which take into account appropriate factors such as market activity, yield, quality, coupon rate, maturity, type of issue, trading characteristics, call features, credit ratings and other data, as well as broker quotes. Short term securities of sufficient credit quality with sixty days or less remaining until maturity may be valued at amortized cost, which approximates fair value. In each of these situations, valuations are typically categorized as Level 2 in the fair value hierarchy.
Futures contracts are valued at the last sales price as of the close of the primary exchange and are typically categorized as Level 1 in the fair value hierarchy. Options are generally valued at the average of the closing bid and ask quotations on the principal exchange on which the option is traded, which are then typically categorized as Level 1 in the fair value hierarchy.
Forward currency contracts are generally valued at the foreign currency exchange rate as of the close of the NYSE and are typically categorized as Level 2 in the fair value hierarchy. Non exchange-traded derivatives, such as swaps and certain options, are generally valued by approved independent pricing services utilizing techniques which take
32
AZL BlackRock Global Allocation Fund
Notes to the Consolidated Financial Statements
December 31, 2013
into account factors such as yields, quality, maturity, type of issue, trading characteristics, call features, credit ratings and other data, as well as broker quotes and are typically categorized as Level 2 in the fair value hierarchy.
Other assets and securities for which market quotations are not readily available, or are deemed unreliable are valued at fair value as determined in good faith by the Trustees or persons acting on the behalf of the Trustees. Fair value pricing may be used for significant events such as securities whose trading has been suspended, whose price has become stale or for which there is no currently available price at the close of the NYSE. Depending on the source and relative significance of valuation inputs, these instruments may be classified as Level 2 or Level 3 in the fair value hierarchy. The Fund utilizes a pricing service to assist in determining the fair value of securities when certain significant events occur that may affect the value of foreign securities.
In accordance with procedures adopted by the Trustees, fair value pricing may be used if events materially affecting the value of foreign securities occur between the time when the exchange on which they are traded closes and the time when the Fund’s net asset value is calculated. Management identifies possible fluctuation in international securities by monitoring the increase or decrease in the value of a designated benchmark index. In the event of an increase or decrease greater than predetermined levels, the Fund may use a systematic valuation model provided by an independent third party to fair value its international equity securities which are then typically categorized as Level 2 in the fair value hierarchy.
The following is a summary of the valuation inputs used as of December 31, 2013 in valuing the Fund’s investments based upon the three levels defined above:
Investment Securities: | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||
Common Stocks | ||||||||||||||||||||
Aerospace & Defense | $ | 5,442,780 | $ | 6,651,399 | $ | — | $ | 12,094,179 | ||||||||||||
Airlines | 2,211,315 | 982,001 | — | 3,193,316 | ||||||||||||||||
Auto Components | 2,583,479 | 5,521,668 | — | 8,105,147 | ||||||||||||||||
Automobiles | 4,034,690 | 10,393,354 | — | 14,428,044 | ||||||||||||||||
Beverages | 4,685,875 | 2,566,138 | — | 7,252,013 | ||||||||||||||||
Biotechnology | 5,896,984 | 279,737 | — | 6,176,721 | ||||||||||||||||
Building Products | — | 2,457,503 | — | 2,457,503 | ||||||||||||||||
Capital Markets | 3,377,579 | 2,757,763 | — | 6,135,342 | ||||||||||||||||
Chemicals | 2,589,122 | 11,213,503 | — | 13,802,625 | ||||||||||||||||
Commercial Banks | 7,105,070 | 17,289,844 | — | 24,394,914 | ||||||||||||||||
Communications Equipment | 5,765,000 | 105,347 | — | 5,870,347 | ||||||||||||||||
Construction & Engineering | 161,459 | 1,898,110 | — | 2,059,569 | ||||||||||||||||
Construction Materials | — | 330,936 | — | 330,936 | ||||||||||||||||
Diversified Consumer Services | — | 345,507 | — | 345,507 | ||||||||||||||||
Diversified Financial Services | 11,302,002 | 2,563,513 | — | 13,865,515 | ||||||||||||||||
Diversified Metals & Mining | — | 276,227 | — | 276,227 | ||||||||||||||||
Diversified Telecommunication Services | 2,339,457 | 6,665,820 | — | 9,005,277 | ||||||||||||||||
Electric Utilities | 4,018,452 | 1,049,171 | — | 5,067,623 | ||||||||||||||||
Electrical Equipment | 3,014,678 | 1,383,885 | — | 4,398,563 | ||||||||||||||||
Electronic Equipment, Instruments & Components | 182,847 | 3,871,151 | — | 4,053,998 | ||||||||||||||||
Energy Equipment & Services | 4,483,467 | 1,271,412 | — | 5,754,879 | ||||||||||||||||
Food & Staples Retailing | 1,905,899 | 1,010,652 | — | 2,916,551 | ||||||||||||||||
Food Products | 2,716,699 | 6,772,324 | — | 9,489,023 | ||||||||||||||||
Gas Utilities | — | 1,414,468 | — | 1,414,468 | ||||||||||||||||
Health Care Equipment & Supplies | 4,538,063 | 231,251 | — | 4,769,314 | ||||||||||||||||
Health Care Providers & Services | 15,184,467 | 4,971,804 | — | 20,156,271 | ||||||||||||||||
Household Durables | — | 2,498,035 | — | 2,498,035 | ||||||||||||||||
Industrial Conglomerates | 7,512,568 | 5,195,474 | — | 12,708,042 | ||||||||||||||||
Insurance | 10,700,711 | 5,622,065 | — | 16,322,776 | ||||||||||||||||
Internet Software & Services | 10,691,294 | 2,257,945 | — | 12,949,239 | ||||||||||||||||
IT Services | 10,420,408 | 2,395,485 | — | 12,815,893 | ||||||||||||||||
Machinery | 2,738,564 | 6,667,953 | — | 9,406,517 | ||||||||||||||||
Media | 5,794,308 | 1,723,564 | — | 7,517,872 | ||||||||||||||||
Metals & Mining | 6,398,530 | 8,089,553 | — | 14,488,083 | ||||||||||||||||
Multiline Retail | 49,235 | 497,531 | — | 546,766 | ||||||||||||||||
Multi-Utilities | 2,693,977 | 1,244,958 | — | 3,938,935 | ||||||||||||||||
Oil, Gas & Consumable Fuels | 20,216,281 | 10,838,499 | — | 31,054,780 | ||||||||||||||||
Personal Products | — | 1,058,775 | — | 1,058,775 | ||||||||||||||||
Pharmaceuticals | 9,761,804 | 12,992,200 | — | 22,754,004 | ||||||||||||||||
Professional Services | — | 350,522 | — | 350,522 | ||||||||||||||||
Real Estate Investment Trusts (REITs) | 4,046,734 | 634,792 | — | 4,681,526 | ||||||||||||||||
Real Estate Management & Development | 1,542,940 | 2,940,099 | — | 4,483,039 | ||||||||||||||||
Road & Rail | 3,801,246 | 2,755,994 | — | 6,557,240 | ||||||||||||||||
Semiconductors & Semiconductor Equipment | 691,023 | 4,791,410 | — | 5,482,433 | ||||||||||||||||
Software | 10,839,956 | 1,140,950 | — | 11,980,906 |
33
AZL BlackRock Global Allocation Fund
Notes to the Consolidated Financial Statements
December 31, 2013
Investment Securities: | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||
Specialty Retail | $ | 445,528 | $ | 1,665,799 | $ | — | $ | 2,111,327 | ||||||||||||
Textiles, Apparel & Luxury Goods | 1,353,968 | 570,373 | — | 1,924,341 | ||||||||||||||||
Trading Companies & Distributors | 1,167,701 | 4,657,404 | — | 5,825,105 | ||||||||||||||||
Transportation Infrastructure | — | 120,313 | 400,890 | 521,203 | ||||||||||||||||
Wireless Telecommunication Services | 2,464,759 | 3,811,543 | — | 6,276,302 | ||||||||||||||||
All Other Common Stocks+ | 28,659,178 | — | — | 28,659,178 | ||||||||||||||||
Preferred Stocks | ||||||||||||||||||||
Auto Components | — | — | 426,443 | 426,443 | ||||||||||||||||
Commercial Banks | 3,174,740 | 828,458 | — | 4,003,198 | ||||||||||||||||
Diversified Financial Services | 275,196 | — | — | 275,196 | ||||||||||||||||
Machinery | 177,814 | — | — | 177,814 | ||||||||||||||||
All Other Preferred Stocks+ | — | 3,869,326 | — | 3,869,326 | ||||||||||||||||
Warrant+ | — | 64,868 | — | 64,868 | ||||||||||||||||
Convertible Preferred Stocks | ||||||||||||||||||||
Airlines | — | 31,322 | — | 31,322 | ||||||||||||||||
Commercial Banks | — | 229,770 | — | 229,770 | ||||||||||||||||
Health Care Providers & Services | — | 350,760 | — | 350,760 | ||||||||||||||||
All Other Convertible Preferred Stocks+ | 1,448,249 | — | — | 1,448,249 | ||||||||||||||||
Private Placements+ | — | 3,131,103 | — | 3,131,103 | ||||||||||||||||
Convertible Bonds+ | — | 12,515,523 | — | 12,515,523 | ||||||||||||||||
Floating Rate Loans+ | — | 5,875,102 | — | 5,875,102 | ||||||||||||||||
Corporate Bonds | ||||||||||||||||||||
Transportation Infrastructure | — | — | 504,627 | 504,627 | ||||||||||||||||
All Other Corporate Bonds+ | — | 12,788,537 | — | 12,788,537 | ||||||||||||||||
Foreign Bonds+ | — | 45,129,512 | — | 45,129,512 | ||||||||||||||||
Yankee Dollars+ | — | 13,741,143 | — | 13,741,143 | ||||||||||||||||
U.S. Treasury Obligations | — | 116,172,246 | — | 116,172,246 | ||||||||||||||||
Purchased Swaptions | — | 283,885 | — | 283,885 | ||||||||||||||||
Purchased Options | 174,311 | 2,567,520 | — | 2,741,831 | ||||||||||||||||
Exchange Traded Fund | 7,380,086 | — | — | 7,380,086 | ||||||||||||||||
Securities Held as Collateral for Securities on Loan | — | 9,409,419 | — | 9,409,419 | ||||||||||||||||
Unaffiliated Investment Company | 1,690,824 | — | — | 1,690,824 | ||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||
Total Investment Securities | $ | 249,851,317 | $ | 405,784,218 | $ | 1,331,960 | $ | 656,967,495 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||||||
Other Financial Instruments: | — | |||||||||||||||||||
Futures Contracts | (610,720 | ) | — | — | (610,720 | ) | ||||||||||||||
Written Call Options | (699,530 | ) | (123,415 | ) | — | (822,945 | ) | |||||||||||||
Written Put Options | (107,489 | ) | (31,901 | ) | — | (139,390 | ) | |||||||||||||
Written Swaptions | — | (490,563 | ) | — | (490,563 | ) | ||||||||||||||
Forward Currency Contracts | — | 862,450 | — | 862,450 | ||||||||||||||||
Centrally Cleared Credit Default Swaps | — | (51,681 | ) | — | (51,681 | ) | ||||||||||||||
Over-the-Counter Interest Rate Swaps | — | (62,075 | ) | — | (62,075 | ) | ||||||||||||||
Centrally Cleared Interest Rate Swaps | — | (29,442 | ) | — | (29,442 | ) | ||||||||||||||
Total Return Swaps | — | 103,317 | — | 103,317 | ||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||
Total Investments | $ | 248,433,578 | $ | 405,960,908 | $ | 1,331,960 | $ | 655,726,446 | ||||||||||||
|
|
|
|
|
|
|
|
+ | For detailed industry descriptions, see the accompanying Consolidated Schedule of Portfolio Investments. |
* | Other Financial Instruments would include any derivative instruments, such as futures contracts, written options, forward currency contacts, and swaps. These investments are generally recorded in the financial statements at the unrealized gain or loss on the investment. |
A reconciliation of assets in which level 3 inputs are used in determining fair value, along with additional quantitative disclosures, are presented when there are significant level 3 investments at the end of the period.
34
AZL BlackRock Global Allocation Fund
Notes to the Consolidated Financial Statements
December 31, 2013
5. Security Purchases and Sales
For the year ended December 31, 2013, cost of purchases and proceeds from sales of securities (excluding securities maturing less than one year from acquisition) were as follows:
Purchases | Sales | |||||||||
AZL BlackRock Global Allocation Fund | $ | 434,910,170 | $ | 190,762,751 |
For the year ended December 31, 2013, purchases and sales on long-term U.S. government securities were as follows:
Purchases | Sales | |||||||||
AZL BlackRock Global Allocation Fund | $ | 54,790,850 | $ | 38,248,361 |
6. Restricted Securities
A restricted security is a security which has been purchased through a private offering and cannot be resold to the general public without prior registration under the Securities Act of 1933 (the “1933 Act”) or pursuant to the resale limitations provided by Rule 144A under the 1933 Act, or an exemption from the registration requirements of the 1933 Act. Whether a restricted security is illiquid is determined pursuant to guidelines established by the Board of Trustees. Not all restricted securities are considered illiquid. The illiquid restricted securities held as of December 31, 2013 are identified below.
Security | Acquisition Date(a) | Acquisition Cost | Shares or Principal Amount | Fair Value | Percentage of Net Assets | ||||||||||||||||||||
Delta Debtco, Ltd., 9.25%, 10/30/19 | 10/17/12 | $ | 562,435 | $ | 571,000 | $ | 594,554 | 0.09 | % | ||||||||||||||||
Delta Topco, Ltd. | 5/2/12 | 379,997 | 615,711 | 400,890 | 0.06 | % | |||||||||||||||||||
Delta Topco, Ltd., 10.00%, 11/24/60 | 5/2/12 | 518,956 | 509,075 | 504,627 | 0.08 | % | |||||||||||||||||||
Inversiones Alsacia SA, | 2/1/12 | 346,498 | 408,482 | 296,149 | 0.05 | % | |||||||||||||||||||
Mobileye N.V., Series F, Preferred Shares | 8/15/13 | 426,443 | 12,219 | 426,443 | 0.07 | % | |||||||||||||||||||
Project Eagle Shell | 12/27/12 | 350,890 | 20,670 | 1,184,081 | 0.18 | % | |||||||||||||||||||
Project Eagle Shell, Class A | 2/26/13 | 4,089 | 240 | 13,748 | 0.00 | % | |||||||||||||||||||
Project Eagle Shell, Class D | 12/27/12 | 314,602 | 18,506 | 1,060,116 | 0.16 | % | |||||||||||||||||||
REI Agro, Ltd., Series REGS, 5.50%, 11/13/14 | 2/7/12 | 300,000 | 400,000 | 201,000 | 0.03 | % | |||||||||||||||||||
TFS Corp., Ltd., 11.00%, 7/15/18, | 6/6/12 | 409,063 | 425,000 | 437,219 | 0.07 | % | |||||||||||||||||||
Zeus (Cayman) II, Ltd., Series REGS, | 1/25/12 | 19,100,000 | 20,000,000 | 330,943 | 0.05 | % |
(a) | Acquisition date represents the initial purchase date of the security. |
+ | The principal amount is disclosed in local currency and the fair value is disclosed in U.S. Dollars. |
7. Investment Risks
Commodities-Related Investment Risk: Exposure to the commodities markets may subject the Fund to greater volatility than investments in traditional securities. The value of commodity-linked derivative investments may be affected by changes in overall market movements, commodity index volatility, changes in interest rates, or sectors affecting a particular industry or commodity, such as drought, floods, weather, embargoes, tariffs and international economic, political and regulatory developments. The U.S. Commodities Futures Trading Commission has proposed changes to certain of its rules governing investment in commodities by mutual funds, such as the Fund. In the event these changes are adopted, or if there are changes in the tax treatment of the Fund’s direct and indirect investments in commodities, the Fund may be unable to obtain exposure to commodity markets, or may be limited in the extent to which or manner in which it can obtain such exposure.
Derivatives Risk: The Fund may invest in derivatives as a principal strategy. A derivative is a financial contract whose value depends on, or is derived from, the value of an underlying asset, reference rate, or risk. Use of derivative instruments involves risks different from, or possibly greater than, the risks associated with investing directly in securities and other traditional investments. Derivatives are subject to a number of other risks, such as liquidity risk, interest rate risk, market risk, credit risk, and selection risk. Derivatives also involve the risk of mispricing or improper valuation and the risk that changes in the value may not correlate perfectly with the underlying asset, rate, or index. Using derivatives may result in losses, possibly in excess of the principal amount invested. Also, suitable derivative transactions may not be available in all circumstances. The counterparty to a derivatives contract could default. As required by applicable law, a Fund that invests in derivatives segregates cash or liquid securities, or both, to the extent that its obligations under the instrument are not covered through ownership of the underlying security, financial instrument, or currency.
Emerging Markets Risk: Emerging markets may have less developed trading markets and exchanges which may make it more difficult to sell securities at an acceptable price and their prices may be more volatile than securities of companies in more developed markets. Settlements of trades may be subject to greater delays so that the Fund may not receive the proceeds of a sale of a security on a timely basis. Emerging countries may also have less developed legal and accounting systems and investments may be subject to greater risks of government restrictions, nationalization, or confiscation.
Foreign Securities and Currencies Risk: Investments in securities of foreign issuers carry certain risks not ordinarily associated with investments in securities of domestic issuers. Such risks include future political and economic developments, and the possible imposition of exchange controls or other foreign governmental laws and restrictions.
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AZL BlackRock Global Allocation Fund
Notes to the Consolidated Financial Statements
December 31, 2013
In addition, with respect to certain countries, there is the possibility of expropriation of assets, confiscatory taxation, political or social instability or diplomatic developments which could adversely affect investments in those securities.
Security Quality Risk (also known as “High Yield Risk”): The Fund may invest in high yield, high risk debt securities and unrated securities of similar credit quality (commonly known as “junk bonds”) may be subject to greater levels of credit and liquidity risk than funds that do not invest in such securities. These securities are considered predominately speculative with respect to the issuer’s continuing ability to make principal and interest payments. An economic downturn or period of rising interest rates could adversely affect the market for these securities and reduce the Fund’s ability to sell these securities (liquidity risk). If the issuer of a security is in default with respect to interest or principal payments, the Fund may lose the value of its entire investment.
8. Federal Tax Information
It is the Fund’s policy to continue to comply with the requirements of the Internal Revenue Code under Subchapter M, applicable to regulated investment companies, and to distribute all of its taxable income, including any net realized gains on investments, to its shareholders. Therefore, no provision is made for federal income taxes.
Management of the Fund has reviewed tax positions taken in tax years that remain subject to examination by all major tax jurisdictions, including federal (i.e., the last four tax year ends and the interim tax period since then, as applicable). Management believes that there is no tax liability resulting from unrecognized tax benefits related to uncertain tax positions taken.
Cost for federal income tax purposes at December 31, 2013 is $595,633,460. The gross unrealized appreciation/ (depreciation) on a tax basis is as follows:
Unrealized appreciation | $ | 74,140,309 | |||
Unrealized depreciation | (12,806,274 | ) | |||
|
| ||||
Net unrealized appreciation/(depreciation) | $ | 61,334,035 | |||
|
|
The tax character of dividends paid to shareholders during the year ended December 31, 2013 were as follows:
Ordinary Income | Net Long-Term | Total Distributions(a) | |||||||||||||
AZL BlackRock Global Allocation Fund | $ | 1,024,599 | $ | — | $ | 1,024,599 |
(a) | Total distributions paid may differ from the Consolidated Statements of Changes in Net Assets because dividends are recognized when actually paid for tax purposes. |
The tax character of dividends paid to shareholders during the year ended December 31, 2012 was as follows:
Ordinary Income | Net Long-Term Capital Gains | Total Distributions(a) | |||||||||||||
AZL BlackRock Global Allocation Fund | $ | 3,796,449 | $ | — | $ | 3,796,449 |
(a) | Total distributions paid may differ from the Consolidated Statements of Changes in Net Assets because dividends are recognized when actually paid for tax purposes. |
As of December 31, 2013, the components of accumulated earnings on a tax basis were as follows:
Undistributed Ordinary Income | Undistributed Long-Term Capital Gains | Accumulated Capital and Other Losses | Unrealized Appreciation/ | Total Accumulated Earnings/ | |||||||||||||||||||||
AZL BlackRock Global Allocation Fund | $ | 10,588,934 | $ | 8,900,442 | $ | — | $ | 61,240,378 | $ | 80,729,754 |
(a) | The difference between book-basis and tax-basis unrealized appreciation/(depreciation) is attributable primarily to tax deferral of losses on wash sales and the mark to market of unrealized appreciation on passive foreign investment companies. |
9. Ownership and Principal Holders
The beneficial ownership, either directly or indirectly, of more than 25% of the voting securities of a fund creates presumptions of control of the fund, under section 2 (a)(9) of the 1940 Act. As of December 31, 2013, the Fund had an individual shareholder account which is affiliated with the Investment Adviser representing ownership in excess of 90% of the Fund.
10. Subsequent Events
Management has evaluated events and transactions subsequent to period end through the date the financial statements were issued, for purposes of recognition or disclosure in these financial statements and there are no subsequent events to report.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Shareholders and Board of Trustees of
Allianz Variable Insurance Products Trust:
We have audited the accompanying consolidated statement of assets and liabilities of AZL BlackRock Global Allocation Fund and Subsidiary (the “Fund”) of the Allianz Variable Insurance Products Trust, including the consolidated schedule of portfolio investments, as of December 31, 2013, the related consolidated statement of operations for the year then ended, and the consolidated statements of changes in net assets and the financial highlights for each of the periods in the two-year period then ended. These consolidated financial statements and consolidated financial highlights are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these consolidated financial statements and consolidated financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements and consolidated financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of December 31, 2013, by correspondence with the custodian and brokers or by other appropriate auditing procedures. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements and consolidated financial highlights referred to above present fairly, in all material respects, the financial position of the Fund as of December 31, 2013, the results of its operations for the year then ended, and the changes in its net assets and the financial highlights for each of the periods in the two-year period then ended, in conformity with U.S. generally accepted accounting principles.
/s/ KPMG LLP
Columbus, Ohio
February 25, 2014
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Other Federal Income Tax Information (Unaudited)
For the year ended December 31, 2013, 51.05% of the total ordinary income dividends paid by the Fund qualify for the corporate dividends received deduction available to corporate shareholders.
During the year ended December 31, 2013, the Fund declared net short-term capital gain distributions of $976,480.
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A description of the policies and procedures that the Fund uses to determine how to vote proxies relating to portfolio securities is available, without charge, upon request, by visiting the Securities and Exchange Commission’s (“Commission”) website at www.sec.gov, or by calling 800-624-0197.
Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30th is available (i) without charge, upon request, by calling 800-624-0197; (ii) on the Allianz Variable Insurance Products Trust’s website at https://www.allianzlife.com; and (iii) on the Commission’s website at http://www.sec.gov.
The Fund files complete Schedules of Portfolio Holdings with the Commission for the first and third quarters of each fiscal year on Form N-Q. Schedules of Portfolio Holdings for the Fund in this report are available without charge on the Commission’s website at http://www.sec.gov, or may be reviewed and copied at the Commission’s Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 800-SEC-0330.
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Approval of Investment Advisory and Subadvisory Agreements (Unaudited)
The Allianz Variable Insurance Products Trust (the “Trust”) is a manager-of-managers fund. That means that the Trust’s Manager (“Allianz Investment Management LLC”) is responsible for monitoring the various Subadvisers that have day-to-day responsibility for the decisions made for each of the Trust’s investment portfolios. The Trust’s Manager is responsible for determining, in the first instance, which investment advisers to consider recommending for selection as a Subadviser.
In reviewing the services provided by the Manager and the terms of the investment management agreement, the Board receives and reviews information related to the Manager’s experience and expertise in the variable insurance marketplace. Currently, the Funds are offered only through variable annuities and variable life insurance policies, and not in the retail fund market. In addition, the Board receives information regarding the Manager’s expertise with regard to portfolio diversification and asset allocation requirements within variable insurance products issued by Allianz Life Insurance Company of North America and its subsidiary, Allianz Life Insurance Company of New York. Currently, the Funds are offered only through Allianz Life and Allianz of New York variable products.
The Trust’s Manager has adopted policies and procedures to assist it in the process of analyzing each potential Subadviser with expertise in particular asset classes for purposes of making the recommendation that a specific investment adviser be selected. The Trust’s Board reviews and considers the information provided by the Manager in deciding which investment advisers to select. After an investment adviser becomes a Subadviser, a similarly rigorous process is instituted by the Manager to monitor the investment performance and other responsibilities of the Subadviser. The Manager reports to the Trust’s Board on its analysis at the regular meetings of the Board, which are held at least quarterly. Where warranted, the Manager will add or remove a particular Subadviser from a “watch” list that it maintains. Watch list criteria include, for example: (a) Fund performance over various time periods; (b) Fund risk issues, such as changes in key personnel involved with Fund management, changes in investment philosophy or process, or “capacity” concerns; and (c) organizational risk issues, such as regulatory, compliance or legal concerns, or changes in the ownership of the Subadviser. The Manager may place a Fund on the watch list for other reasons, and if so, will explain its rationale to the Trustees. Funds which are on the watch list are subject to special scrutiny of the Manager and the Board of Trustees. Funds may be removed from such watch list, if for example, performance improves or regulatory matters are satisfactorily resolved. However, in some situations where Funds which have been on the watch list, the Manager has recommended the retention of a new Subadviser, and the Board of Trustees has subsequently approved new Subadvisory Agreements with such Subadvisers.
In assessing the Manager’s and Subadvisers’ (collectively, the “Advisory Organizations”), performance of their obligations, the Board considers whether there has occurred a circumstance or event that would constitute a reason for it to not renew an advisory contract. In this regard, the Board is mindful of the potential disruption of a Fund’s operations and various risks, uncertainties and other effects that could occur as a result of a decision to terminate or not renew a contract.
As required by the Investment Company Act of 1940 (“1940 Act”), the Trust’s Board has reviewed and approved the Trust’s Investment Management Agreement with the Manager (the “Advisory Agreement”) and portfolio management agreements (the “Subadvisory Agreements”) with the Subadvisers. The Board’s decision to approve these contracts reflects the exercise of its business judgment on whether to approve new arrangements and continue the existing arrangements. During its review of these contracts, the Board considers many factors, among the most material of which are: the Fund’s investment objectives and long term performance; the Advisory Organizations’ management philosophy, personnel, and processes, including their compliance history and the adequacy of their compliance processes; the preferences and expectations of Fund shareholders (and underlying contract owners) and their relative sophistication; the continuing state of competition in the mutual fund industry; and comparable fees in the mutual fund industry.
The Board also considers the compensation and benefits received by the Advisory Organizations. This includes fees received for services provided to the Fund by affiliated persons of the Advisory Organizations and research services received by the Advisory Organizations from brokers that execute Fund trades, as well as advisory fees. The Board considered the fact that: (1) the Manager and the Trust are parties to an Administrative Service Agreement, a Compliance Services Agreement, and a Chief Compliance Officer Agreement, under which the Manager is compensated by the Trust for performing certain administrative and compliance services including providing an employee of the Manager or one of its affiliates to act as the Trust’s Chief Compliance Officer; and (2) Allianz Life Financial Services, LLC, an affiliated person of the Manager, is a registered securities broker-dealer and receives (along with its affiliated persons) payments made by the Trust pursuant to Rule 12b-1.
The Board is aware that various courts have interpreted provisions of the 1940 Act and have indicated in their decisions that the following factors may be relevant to an adviser’s compensation: the nature and quality of the services provided by the adviser, including the performance of the fund; the adviser’s cost of providing the services; the extent to which the adviser may realize “economies of scale” as the fund grows larger; any indirect benefits that may accrue to the adviser and its affiliates as a result of the adviser’s relationship with the fund; performance and expenses of comparable funds; and the extent to which the independent Board members are fully informed about all facts bearing on the adviser’s service and fee. The Trust’s Board is aware of these factors and takes them into account in its review of the Trust’s advisory contracts.
The Board considered and weighed these circumstances in light of its experience in governing the Trust and working with the Advisory Organizations on matters relating to the Funds, and is assisted in its deliberations by the advice of legal counsel to the Independent Trustees. In this regard, the Board requests and receives a significant amount of information about the Funds and the Advisory Organizations. Some of this information is provided at each regular meeting of the Board; additional information is provided in connection with the particular meeting or meetings at which the Board’s formal review of an advisory contract occurs. In between regularly scheduled meetings, the Board may receive information on particular matters as the need arises. Thus, the Board’s evaluation of an advisory contract is informed by reports covering such matters as: an Advisory Organization’s investment philosophy, personnel, and processes; the Fund’s short- and long-term performance (in absolute terms as well as in relationship to its benchmark(s), certain competitor or “peer group” funds and similar funds managed by the particular Subadviser), and comments on the reasons for performance; the Fund’s expenses (including the advisory fee itself and the overall expense structure of the Fund, both in absolute terms and relative to similar and/or competing funds, with due regard for contractual or voluntary expense limitations); the use and allocation of brokerage commissions derived from trading the Fund’s portfolio securities; the nature and extent of the advisory and other services provided to the Fund by the Advisory Organizations and their affiliates; compliance and audit reports concerning the Funds and the companies that service them; and relevant developments in the mutual fund industry and how the Funds and/or Advisory Organizations are responding to them.
The Board also receives financial information about Advisory Organizations, including reports on the compensation and benefits the Advisory Organizations derive from their relationships with the Funds. These reports cover not only the fees under the advisory contracts, but also fees, if any, received for providing other services to the Funds. The reports also discuss any indirect or “fall out” benefits an Advisory Organization may derive from its relationship with the Funds.
The Advisory and Subadvisory Agreements (collectively, the “Agreements”) were most recently considered at Board of Trustees meetings held in the fall of 2013. Information relevant to the approval of such Agreements was considered at a telephonic Board of Trustees meeting on October 16, 2013, and at an “in person” Board of Trustees meeting held October 22, 2013. The Agreements were approved at the Board meeting of October 22, 2013. At such meeting the Board also approved an Expense Limitation Agreement between the Manager and the Trust for the period ending April 30, 2015. In connection with such meetings, the Trustees requested and evaluated extensive materials from the Manager, including performance and expense information for other investment companies with similar investment objectives derived from data compiled by an independent third party provider and other sources believed to be reliable by the Manager. Prior to voting, the Trustees reviewed the proposed approval/continuance of the Agreements with management and with experienced counsel who are independent of the Manager and received a memorandum from such counsel discussing the legal standards for their consideration of the proposed approvals/continuances. The independent (“disinterested”) Trustees also discussed the proposed approvals/continuances in a private session with such counsel at which no representatives of the Manager were present. In reaching their determinations relating to the approval and/or continuance of
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the Agreements, in respect of each Fund, the Trustees considered all factors they believed relevant. The Board based its decision to approve the Agreements on the totality of the circumstances and relevant factors, and with a view to past and future long-term considerations. Not all of the factors and considerations discussed above and below are necessarily relevant to every Fund, and the Board did not assign relative weights to factors discussed herein or deem any one or group of them to be controlling in and of themselves.
An SEC Rule requires that shareholder reports include a discussion of certain factors relating to the selection of investment advisers and the approval of advisory fees. The “factors” enumerated by the SEC are set forth below in italics, as well as the Board’s conclusions regarding such factors:
(1) The nature, extent and quality of services provided by the Manager and Subadvisers. The Trustees noted that the Manager, subject to the control of the Board of Trustees, administers each Fund’s business and other affairs. Under the Advisory Agreement, the Manager holds the sole and exclusive responsibility to provide, or arrange for other to provide, the management of the Funds’ assets and the placement of orders for the purchase and sale of the securities of the Funds. As the Trust is a manager of managers fund, the Manager is authorized, under the Advisory Agreement, to retain one or more Subadvisers for each Fund to handle day-to-day management of the Funds’ investment portfolios; the Manager is responsible for determining, in the first instance, which investment advisers to recommend to the Board of Trustees for selection as a Subadviser. The Trustees were aware that, notwithstanding the retention of the Subadvisers to handle day-to-day portfolio management, the Manager remains responsible for substantial other matters, including continuously monitoring compliance by each Subadviser with the investment policies and restrictions of the respective Funds, with such other limitations or directions of the Board of Trustees, and with all legal requirements under federal or state law or regulation. The Manager also is responsible primarily to provide statistical information and other data to the Trustees regarding the Funds’ portfolio investments and to make available to the Funds’ administrator such information as is necessary for the conduct of its duties.
The Trustees also noted that the Manager provides the Trust and each Fund with such administrative and other services (exclusive of, and in addition to, any such services provided by any others retained by the Trust on behalf of the Funds) and executive and other personnel as are necessary for the operation of the Trust and the Funds. Except for the Trust’s Chief Compliance Officer, the Manager pays all of the compensation of Trustees and officers of the Trust who are employees of the Manager or its affiliates.
The Trustees considered the scope and quality of services provided by the Manager and the Subadvisers and noted that the scope of such services provided had expanded as a result of recent regulatory and other developments. The Trustees noted that, for example, the Manager and Subadvisers are responsible for maintaining and monitoring their own compliance programs, and these compliance programs are continuously refined and enhanced in light of new regulatory requirements. The Trustees considered the capabilities and resources which the Manager has dedicated to performing services on behalf of the Trust and its Funds. The quality of administrative and other services, including the Manager’s role in coordinating the activities of the Trust’s other service providers, also were considered. The Trustees concluded that, overall, they were satisfied with the nature, extent and quality of services provided (and expected to be provided) to the Trust and to each of the Funds under the Agreements.
(2) The investment performance of the Funds, the Manager and the Subadvisers. In connection with every in-person quarterly Board of Trustees meeting, Trustees receive extensive information on the performance results of each of the Funds. This includes, for example, performance information on all of the Funds for the previous quarter, and previous one, three and five-year periods, and since inception. (For Funds which have been in existence for less than five years, Trustees may receive performance information on comparable funds managed by the particular Subadviser for periods prior to the creation of a particular Fund.) Such performance information includes information on absolute total return, performance versus Subadvisers’ comparable fund(s), performance versus the appropriate benchmark(s), and performance versus peer groups. For example, in connection with the Board of Trustees meetings held September 10-11, 2013, the Manager reported that for the three year period ended June 30, 2013, 12 Funds were in the top 40%, eight were in the middle 20% and eight were in the bottom 40%, and for the one year period ended June 30, 2013, 8 Funds were in the top 40%, seven were in the middle 20%, and 14 were in the bottom 40%. The Manager also reported that for the five year period ended June 30, 2013, 10 Funds were in the top 40%, four were in the middle 20%, and six were in the bottom 40%. At the Board of Trustees meeting held October 22, 2013, the Trustees determined that the overall investment performance of the Funds was acceptable.
(3) The costs of services to be provided and profits to be realized by the Manager and the Subadvisers and their affiliates from their relationship with the Funds. The Manager has supplied information to the Board of Trustees pertaining to the level of investment advisory fees to which the Funds are subject. The Manager has agreed to temporarily “cap” Fund expenses at certain levels, and information is provided to Trustees setting forth “contractual” advisory fees and “actual” fees after taking expense caps into account. Based upon the information provided, the “actual” advisory fees payable by the Funds overall are generally comparable to the average level of fees paid by Fund peer groups. For the 30 Funds reviewed by the Board of Trustees in the fall of 2013, 27 Funds paid “actual” advisory fees in a percentage amount within the 65th percentile or lower for each Fund’s applicable category. The Trustees recognized that it is difficult to make comparisons of advisory fees because there are variations in the services that are included in the fees paid by other funds. The Board has concluded that the advisory fees to be paid to the Manager by the Funds are not unreasonable.
The Manager has also supplied information to the Board of Trustees pertaining to total Fund expenses (which includes advisory fees, the 25 basis point 12b-1 fee paid by the Funds, and other Fund expenses). As noted above, the Manager has agreed to “cap” Fund expenses at certain levels. Based upon the information provided, the overall total expense ratio ranking in 2013 for the 30 Funds was as follows: (1) 28 of the Funds had total expense rankings below the 65th percentile (with 20 Funds at or below the 50th percentile); (2) the AZL Russell 1000 Value Fund had a total expense ranking in the 66th percentile; the Manager reported that there is only a limited peer group for such Fund; and (3) the AZL Morgan Stanley Global Real Estate Fund had a total expense ranking in the 72nd percentile; it was reported by the Manager that there is only a limited peer group for such Fund, such Fund’s expense ratio has declined, and such Fund’s expense ratio is comparable to funds of similar size.
The Manager has committed to providing the Funds with a high quality of service and working to reduce Fund expenses over time, particularly as the Funds grow larger. The Trustees concluded therefore that the expense ratios of the Funds were not unreasonable.
The Manager provided information concerning the profitability of the Manager’s investment advisory activities for the period from 2011 through June 30, 2013. The Trustees recognized that it is difficult to make comparisons of profitability from investment company advisory agreements because comparative information is not generally publicly available and is affected by numerous factors, including the structure of the particular adviser, the types of funds it manages, its business mix, numerous assumptions regarding allocation of expenses and the adviser’s capital structure and cost of capital. In considering profitability information, the Trustees considered the possible effect of certain fall-out benefits to the Manager and its affiliates. The Trustees focused on profitability of the Manager’s relationships with the Funds before taxes and distribution expenses. The Trustees recognized that the Manager should, in the abstract, be entitled to earn a reasonable level of profits for the services it provides to each Fund and, based on their review, concluded that they were satisfied that the Manager’s level of profitability from its relationship with the Funds was not excessive.
The Manager, on behalf of the Board of Trustees, endeavored to obtain information on the profitability of each Subadviser in connection with its relationship with the Fund or Funds which it subadvises. The Manager was unable to obtain meaningful profitability information from some of the unaffiliated Subadvisers. The Manager assured the Board of Trustees that the Agreements with the Subadvisers which are not affiliated with it were negotiated on an “arm’s length” basis, so that arguably, such profitability information should be less relevant. The Trustees were also provided with certain information on the profitability for the Subadviser which is affiliated with the Manager. Trustees recognized the difficulty of allocating costs to multiple advisory accounts and products of a large advisory organization. Based upon the information provided, the Trustees determined that there was no evidence that the level of such profitability attributable to subadvising the Funds was excessive.
(4) and (5) The extent to which economies of scale would be realized as the Funds grow, and whether fee levels reflect these economies of scale. The Trustees noted that most of the advisory fee schedules for the Funds do not contain breakpoints that reduce the fee rate on assets above specified levels, although certain Subadvisory Agreements have such “breakpoints.” The Trustees recognized that breakpoints may be an appropriate way for the Manager to share its economies of scale, if any, with Funds that have substantial assets. However, they also recognized that there may not be a direct relationship between any economies of scale realized by Funds and those realized by the Manager as assets increase. The Trustees do not believe there is a uniform methodology for establishing breakpoints that give effect to Fund-specific service provided by the Manager. The Trustees noted that in the fund industry as a whole, as well as among funds similar to the Funds, there is no uniformity or pattern in the fees and asset levels at which breakpoints (if any) apply. Depending on the age, size, and other characteristics of a particular fund and its manager’s cost structure, different conclusions can be drawn as to whether there are economies of scale to be realized at any particular level of assets, notwithstanding the intuitive conclusion that such economies exist, or will be realized at some level of total assets. Moreover, because different managers have different cost structures and service models, it is difficult to draw meaningful conclusions from the breakpoints that may have been adopted by other funds. The Trustees also noted that the advisory agreements for many funds do not have breakpoints at all, or if breakpoints exist, they may be at asset levels significantly greater than those of the individual Funds. The Trustees also noted that the total assets in all of the Funds as of June 30, 2013 were approximately $12.85 billion, and that no single non-money market Fund had assets in excess of $616 million.
The Trustees noted that the Manager has agreed to temporarily “cap” Fund expenses at certain levels, which has the effect of reducing expenses as would the implementation of advisory fee breakpoints. The Manager has committed to continue to consider the continuation of fee “caps” and/or advisory fee breakpoints as the Funds grow larger. The Board receives quarterly reports on the level of Fund assets. It expects to consider whether or not to approve the Agreements at a meeting to be held prior to December 31, 2014, and will at that time, or prior thereto, consider: (a) the extent to which economies of scale can be realized, and (b) whether the advisory fee should be modified to reflect such economies of scale, if any.
Having taken these factors into account, the Trustees concluded that the absence of breakpoints in certain of the Funds’ advisory fee rate schedules was acceptable under each Fund’s circumstances.
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Information about the Board of Trustees and Officers (Unaudited)
The Trust is managed by the Trustees in accordance with the laws of the state of Delaware governing business trusts. There are currently eight Trustees, two of whom are “interested persons” of the Trust within the meaning of that term under the 1940 Act. The Trustees and Officers of the Trust, their addresses, ages, their positions held with the Trust, their terms of office with the Trust and length of time served, their principal occupation(s) during the past five years, the number of portfolios in the Trust they oversee, and their other directorships held are as follows:
Non-Interested Trustees(1)
Name, Address, and Age | Positions Held with VIP Trust FOF Trust | Term of Office(2)/Length | Principal Occupation(s) During Past 5 Years | Number of Portfolios FOF Trust | Other Directorships Held Outside the AZL Fund Complex | |||||
Peter R. Burnim, Age 66 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/07 | Chairman, Argus Investment Strategies Fund Ltd., Feburary 2013 to present; Managing Director, iQ Venture Advisors, LLC. 2005 to 2012; Chairman, Northstar Group Holdings Ltd. Bermuda, 2011 to present; Expert Witness, Massachusetts Department of Revenue, 2011 to 2012; Executive Vice President, Northstar Companies, 2002 to 2005; Senior Officer, Citibank and Citicorp for over 25 years | 41 | Argus Group Holdings; Northstar Group Holdings, NRIL, Sterling Centrecorp Inc.; Highland Financial Holdings; and Bank of Bermuda NY | |||||
Peggy L. Ettestad, Age 56 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/07 | Managing Director, Red Canoe Management Consulting LLC, 2008 to present; Senior Managing Director, Residential Capital LLC, 2003 to 2008; Chief Operations Officer, Transamerica Reinsurance 2002 to 2003 | 41 | Luther College | |||||
Roger Gelfenbien, Age 70 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 10/99 | Retired; Partner of Accenture 1983 to 1999 | 41 | Virtus Funds (8 Funds) | |||||
Claire R. Leonardi, Age 58 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/04 | Chief Executive Officer, Connecticut Innovations, Inc., 2012 to present; General Partner, Fairview Capital, L.P., 1994 to 2012 | 41 | The Natural History Museum of the Adirondacks | |||||
Dickson W. Lewis, Age 65 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/04 | Retired; Consultant to Lifetouch National School Studios; Vice President/General Manager, Yearbooks & Canada-Lifetouch National School Studios, 2006 to 2013; Vice President/General Manager of Jostens, Inc., 2002 to 2006; Senior Vice President of Fortis Group, 1997 to 2002 | 41 | None | |||||
Peter W. McClean, Age 69 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/04 | Retired; President and CEO of Measurisk, LLC, 2001 to 2003; Chief Risk Management Officer at Bank of Bermuda Ltd., 1996 to 2001 | 41 | PNMAC Opportunity Fund; Northeast Bank; and FHI | |||||
Arthur C. Reeds III, Age 69 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 10/99 | Retired; Senior Investment Officer, Hartford Foundation for Public Giving, 2000 to 2003; Chairman, Chief Executive and President of Conning Corp., 1999 to 2000; Investment Consultant, 1997 to 1999 | 41 | Connecticut Water Service, Inc. |
Interested Trustees(3)
Name, Address, and Age | Positions Held with VIP Trust FOF Trust | Term of Office/Length of Time Served | Principal Occupation(s) During Past 5 Years | Number of Portfolios FOF Trust | Other Directorships Held Outside the AZL Fund Complex | |||||
Robert DeChellis, Age 46 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 3/08 | President and CEO, Allianz Life Financial Services, LLC, 2007 to present | 41 | None | |||||
Brian Muench, Age 43 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 6/11 | President, Allianz Investment Management LLC, November 2010 to present; Vice President, Allianz Life, April 2011 to present; Vice President, Advisory Management, Allianz Investment Management LLC from December 2005 to November 2010 | 41 | None |
43
Officers
Name, Address, and Age | Positions Held with VIP and VIP FOF Trust | Term of Office(2)/Length of Time Served | Principal Occupation(s) During Past 5 Years | |||
Brian Muench, Age 43 5701 Golden Hills Drive Minneapolis, MN 55416 | President | Since 11/10 | President, Allianz Investment Management LLC from November 2010, to present; Vice President, Allianz Life from April 2011 to present; Vice President, Allianz Investment Management LLC from December 2005 to November 2010. | |||
Michael Radmer, Age 68 Dorsey & Whitney LLP, Suite 1500 50 South Sixth Street Minneapolis, MN 55402-1498 | Secretary | Since 2/02 | Partner, Dorsey and Whitney LLP since 1976. | |||
Ty Edwards, Age 47 Citi Fund Services Ohio, Inc. 3435 Stelzer Road Columbus, OH 43219 | Treasurer, Principal Accounting Officer and Principal Financial Officer | Since 4/10 | Senior Vice President, Financial Administration, Citi Fund Services Ohio, Inc., December 2009 to present; Director, Product Management, Columbia Management, April 2007 to April 2009; Deputy Treasurer, Columbia Funds and Director, Fund Administration, Columbia Management, January 2006 to April 2007. | |||
Christopher R. Pheiffer, Age 45(4) 5701 Golden Hills Drive Minneapolis, MN 55416 | Chief Compliance Officer(5) and Anti-Money Laundering Compliance Officer | Since 2/14 (interim) | Deputy Chief Compliance Officer of the Trusts, 2007-2014. |
(1) | Member of the Audit Committee. |
(2) | Indefinite. |
(3) | Is an “interested person”, as defined by the 1940 Act, due to employment by Allianz. |
(4) | Stephen G. Simon, previously the Chief Compliance Officer of the Trusts, resigned all of his positions with Allianz effective February 21, 2014. Mr. Pheiffer, previously the Deputy Chief Compliance Officer of the Trusts, has been named Chief Compliance Officer of the Trusts on an interim basis while a search for a permanent replacement is conducted. |
(5) | The Manager and the Trust are parties to a Chief Compliance Officer Agreement under which the Manager is compensated by the Trust for providing an employee of the Manager or one of its affiliates to act as the Trust’s Chief Compliance Officer. The Chief Compliance Officer and Anti-Money Laundering Compliance Officer is not considered a corporate officer or executive employee of the Trust. |
44
The Allianz VIP Fund of Funds are distributed by Allianz Life Financial Services, LLC. | ||
These Funds are not FDIC Insured. | ANNRPT1213 2/14 |
AZL® Columbia Mid Cap Value Fund
Annual Report
December 31, 2013
Table of Contents
Management Discussion and Analysis
Page 1
Expense Examples and Portfolio Composition
Page 3
Schedule of Portfolio Investments
Page 4
Statement of Assets and Liabilities
Page 6
Statement of Operations
Page 6
Statements of Changes in Net Assets
Page 7
Financial Highlights
Page 8
Notes to the Financial Statements
Page 9
Report of Independent Registered Public Accounting Firm
Page 14
Other Federal Income Tax Information
Page 15
Other Information
Page 16
Approval of New Subadvisory Agreement
Page 17
Approval of Investment Advisory and Subadvisory Agreements
Page 17
Information about the Board of Trustees and Officers
Page 21
This report is submitted for the general information of the shareholder of the Fund. The report is not authorized for distribution to prospective investors in the Fund unless preceded or accompanied by an effective prospectus, which contains details concerning the sales charges and other pertinent information.
AZL® Columbia Mid Cap Value Fund Review (unaudited)
Allianz Investment Management LLC serves as the Manager for the AZL® Columbia Mid Cap Value Fund and Columbia Management Investment Advisers, LLC serves as Subadviser to the Fund.
What factors affected the Fund’s performance during the year ended December 31, 2013?
For the year ended December 31, 2013, the AZL® Columbia Mid Cap Value Fund returned 34.91%1. That compared to a return of 33.46% for its benchmark, the Russell Midcap® Value Index2.
The U.S. financial markets began 2013 on a strong note and continued to rally through most of the year. The stock market dipped slightly mid-year after the Federal Reserve Bank hinted that it would taper its bond purchasing program. However, the drop was short-lived.
The U.S. economy showed signs of continued recovery in the second half of the year, as job gains improved, manufacturing activity accelerated and housing prices rebounded. Late in the period, the Federal Reserve officially announced it would slow down its buyback of bonds, and Congress approved a bipartisan budget deal. Investors welcomed both pieces of news, and stocks climbed higher as the period came to a close.
The Fund’s relative performance was bolstered by its strong stock selection, especially in the financials, materials and health care sectors. For example, shares of a pharmaceutical company advanced following its acquisition of a competitor. An underweight position in REITs relative to the benchmark also contributed to the Fund’s relative return, as the Fund avoided many poor performers. Overweight positions in industrials and the wireless telecommunication industry also helped boost relative performance.*
The Fund’s cash holdings, though not significant, detracted from its relative return, as would be expected in a strong equity market. The weak performance of the Fund’s information technology sector stocks also dragged down the Fund’s return relative to the benchmark.*
Past performance does not guarantee future results.
* | The Fund’s portfolio composition is subject to change. There is no guarantee that any sectors mentioned will continue to perform well or that securities in such sectors will be held by the Fund in the future. The information contained in this commentary is for informational purposes only and should not be construed as a recommendation to purchase or sell securities in the sector mentioned. The Fund’s holdings and weightings are as of December 31, 2013. |
1 | The recent growth rate in the stock market has helped to produce short-term returns that are not typical and may not continue in the future. Because of ongoing market volatility, Fund performance may be subject to substantial short-term changes. |
2 | The Russell Midcap® Value Index measures the performance of the mid-cap value segment of the U.S. equity universe. It includes those Russell Midcap Index companies with lower price-to-book ratios and lower forecasted growth values. Investors cannot invest directly in an index. |
1
AZL® Columbia Mid Cap Value Fund Review (unaudited)
Fund Objective
The Fund’s investment objective is to seek long-term growth of capital. This objective may be changed by the Trustees of the Fund without shareholder approval. The Fund seeks to achieve its objective by investing at least 80% of net assets in equity securities of companies that have market capitalizations in the range of the companies in the Russell Midcap® Value Index.
Investment Concerns
Equity securities (stocks) are more volatile and carry more risk than other forms of investments, including investments in high-grade fixed income securities. The net asset value per share of this Fund will fluctuate as the value of the securities in the portfolio changes.
Small- to mid-capitalization companies typically have a higher risk of failure and historically have experienced a greater degree of volatility.
Value-based investments are subject to the risk that the broad market may not recognize their intrinsic value.
International investing may involve risk of capital loss from unfavorable fluctuations in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations.
Investments in the Fund are subject to the risks related to direct investment in real estate, such as real estate risk, regulatory risks, concentration risk, and diversification risk. By itself the Fund does not constitute a complete investment plan and should be considered a long-term investment for investors who can afford to weather changes in the value of their investments.
For a complete description of these and other risks associated with investing in a mutual Fund, please refer to the Fund’s prospectus.
Growth of $10,000 Investment
The chart above represents a comparison of a hypothetical investment in the Fund versus a similar investment in the Fund’s benchmark, and represents the reinvestment of dividends and capital gains in the Fund.
Average Annual Total Returns as of December 31, 2013
Since | ||||||||||||||||
1 | 3 | 5 | Inception | |||||||||||||
Year | Year | Year | (5/1/06) | |||||||||||||
AZL® Columbia Mid Cap Value Fund | 34.91 | %1 | 14.71 | % | 19.63 | % | 2.83 | % | ||||||||
Russell Midcap® Value Index | 33.46 | % | 15.97 | % | 21.16 | % | 7.63 | % |
Past performance does not guarantee future results. The performance data quoted represents past performance and current returns may be lower or higher. The investment return and principal value will fluctuate so that an investor’s shares, when redeemed may be worth more or less than the original cost. To obtain performance information current to the most recent month end, please visit www.Allianzlife.com.
Expense Ratio | Gross | |||
AZL® Columbia Mid Cap Value Fund | 1.07 | % |
The above expense ratio is based on the current Fund prospectus dated April 29, 2013. The Manager and the Fund have entered into a written contract limiting operating expenses, excluding certain expenses (such as interest expense), to 1.30% through April 30, 2015. Additional information pertaining to the December 31, 2013 expense ratios can be found in the financial highlights.
1 | The recent growth rate in the stock market has helped to produce short-term returns that are not typical and may not continue in the future. Because of ongoing market volatility, Fund performance may be subject to substantial short-term changes. |
The total return of the Fund does not reflect the effect of any insurance charges, the annual maintenance fee or the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. Such charges, fees and tax payments would reduce the performance quoted.
The Fund’s performance is measured against the Russell Midcap® Value Index, an unmanaged index that measures the performance of the mid-cap value segment of the U.S. equity universe. It includes those Russell Midcap Index companies with lower price-to-book ratios and lower forecasted growth values. The index does not reflect the deduction of fees associated with a mutual fund, such as investment management and fund accounting fees. The Fund’s performance reflects the deduction of fees for services provided to the Fund. Investors cannot invest directly in an index.
2 |
AZL Columbia Mid Cap Value Fund
(Unaudited)
As a shareholder of the AZL Columbia Mid Cap Value Fund (the “Fund”), you incur ongoing costs, including management fees, distribution fees, and other Fund expenses. These examples are intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. Please note that the expenses shown in each table do not reflect expenses that apply to the subaccount or the insurance contract. If the expenses that apply to the subaccount of the insurance contract were included, your costs would have been higher.
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the periods presented below.
The Actual Expense table below provides information about actual account values and actual expenses. You may use the information below, 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 table under the heading entitled “Expenses Paid During Period” to estimate the expenses you paid on your account during this period.
Beginning Account Value 7/1/13 | Ending Account Value 12/31/13 | Expenses Paid During Period 7/1/13 - 12/31/13* | Annualized Expense Ratio During Period 7/1/13 - 12/31/13 | |||||||||||||||||
AZL Columbia Mid Cap Value Fund | $ | 1,000.00 | $ | 1,171.50 | $ | 5.75 | 1.05 | % |
The Hypothetical Expense table below provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.
Beginning Account Value 7/1/13 | Ending Account Value 12/31/13 | Expenses Paid During Period 7/1/13 - 12/31/13* | Annualized Expense Ratio During Period 7/1/13 - 12/31/13 | |||||||||||||||||
AZL Columbia Mid Cap Value Fund | $ | 1,000.00 | $ | 1,019.91 | $ | 5.35 | 1.05 | % |
* | Expenses are equal to the average account value over the period, multiplied by the Fund’s annualized expense ratio, multiplied by 184/365 (to reflect the one half year period). |
Portfolio Composition
(Unaudited)
Investments | Percent of net assets | ||||
Financials | 28.8 | % | |||
Industrials | 11.4 | ||||
Consumer Discretionary | 10.7 | ||||
Information Technology | 10.3 | ||||
Energy | 9.5 | ||||
Health Care | 8.0 | ||||
Utilities | 7.9 | ||||
Materials | 4.8 | ||||
Consumer Staples | 1.5 | ||||
Telecommunication Services | 1.4 | ||||
Services | 0.4 | ||||
|
| ||||
Total Common Stock | 94.7 | ||||
Money Market | 5.3 | ||||
Securities Held as Collateral for Securities on Loan | 1.6 | ||||
|
| ||||
Total Investment Securities | 101.6 | ||||
Net other assets (liabilities) | (1.6 | ) | |||
|
| ||||
Net Assets | 100.0 | % | |||
|
|
3
AZL Columbia Mid Cap Value Fund
Schedule of Portfolio Investments
December 31, 2013
Shares | Fair Value | |||||||
| Common Stocks (94.7%): | |||||||
| Airlines (0.8%): | |||||||
47,600 | United Continental Holdings, Inc.* | $ | 1,800,708 | |||||
|
| |||||||
| Auto Components (1.2%): | |||||||
37,175 | TRW Automotive Holdings Corp.* | 2,765,448 | ||||||
|
| |||||||
| Automobiles (1.0%): | |||||||
32,311 | Harley-Davidson, Inc. | 2,237,214 | ||||||
|
| |||||||
| Building Products (1.1%): | |||||||
85,900 | USG Corp.* | 2,437,842 | ||||||
|
| |||||||
| Capital Markets (3.5%): | |||||||
82,375 | Raymond James Financial, Inc. | 4,299,151 | ||||||
121,550 | TD Ameritrade Holding Corp. | 3,724,292 | ||||||
|
| |||||||
8,023,443 | ||||||||
|
| |||||||
| Chemicals (2.1%): | |||||||
17,850 | International Flavor & Fragrances, Inc. | 1,534,743 | ||||||
18,050 | Methanex Corp. | 1,069,282 | ||||||
11,598 | PPG Industries, Inc. | 2,199,677 | ||||||
|
| |||||||
4,803,702 | ||||||||
|
| |||||||
| Commercial Banks (8.7%): | |||||||
87,125 | CIT Group, Inc. | 4,541,826 | ||||||
32,960 | City National Corp. | 2,611,091 | ||||||
30,275 | Cullen/Frost Bankers, Inc. | 2,253,368 | ||||||
74,100 | East West Bancorp, Inc. | 2,591,277 | ||||||
175,366 | Fifth Third Bancorp | 3,687,947 | ||||||
21,776 | SVB Financial Group* | 2,283,431 | ||||||
76,656 | Zions Bancorp | 2,296,614 | ||||||
|
| |||||||
20,265,554 | ||||||||
|
| |||||||
| Communications Equipment (1.9%): | |||||||
43,150 | Aruba Networks, Inc.* | 772,385 | ||||||
16,900 | F5 Networks, Inc.* | 1,535,534 | ||||||
93,000 | Juniper Networks, Inc.* | 2,099,010 | ||||||
|
| |||||||
4,406,929 | ||||||||
|
| |||||||
| Containers & Packaging (1.7%): | |||||||
36,300 | Packaging Corp. of America | 2,297,064 | ||||||
47,975 | Sealed Air Corp. | 1,633,549 | ||||||
|
| |||||||
3,930,613 | ||||||||
|
| |||||||
| Diversified Consumer Services (0.4%): | |||||||
58,447 | Houghton Mifflin Harcourt Co.* | 991,261 | ||||||
|
| |||||||
| Electric Utilities (3.1%): | |||||||
74,800 | Great Plains Energy, Inc. | 1,813,152 | ||||||
110,950 | Portland General Electric Co. | 3,350,690 | ||||||
69,600 | PPL Corp. | 2,094,264 | ||||||
|
| |||||||
7,258,106 | ||||||||
|
| |||||||
| Electrical Equipment (0.8%): | |||||||
51,600 | Babcock & Wilcox Co. (The) | 1,764,204 | ||||||
|
| |||||||
| Electronic Equipment, Instruments & Components (1.2%): | |||||||
25,750 | Arrow Electronics, Inc.* | 1,396,937 | ||||||
42,425 | FLIR Systems, Inc. | 1,276,993 | ||||||
|
| |||||||
2,673,930 | ||||||||
|
| |||||||
| Energy Equipment & Services (3.6%): | |||||||
19,700 | Cameron International Corp.* | 1,172,741 | ||||||
30,544 | Frank’s International NV | 824,688 | ||||||
16,475 | Oceaneering International, Inc. | 1,299,548 | ||||||
89,400 | Superior Energy Services, Inc.* | 2,378,934 | ||||||
167,175 | Weatherford International, Ltd.* | 2,589,541 | ||||||
|
| |||||||
8,265,452 | ||||||||
|
|
Shares | Fair Value | |||||||
| Common Stocks, continued | |||||||
| Food Products (1.5%): | |||||||
14,875 | Hershey Co. | $ | 1,446,296 | |||||
20,031 | J.M. Smucker Co. (The) | 2,075,612 | ||||||
|
| |||||||
3,521,908 | ||||||||
|
| |||||||
| Gas Utilities (0.9%): | |||||||
90,350 | Questar Corp. | 2,077,147 | ||||||
|
| |||||||
| Health Care Equipment & Supplies (2.7%): | |||||||
29,050 | Teleflex, Inc. | 2,726,633 | ||||||
36,800 | Zimmer Holdings, Inc. | 3,429,392 | ||||||
|
| |||||||
6,156,025 | ||||||||
|
| |||||||
| Health Care Providers & Services (0.7%): | |||||||
39,850 | Community Health Systems, Inc.* | 1,564,910 | ||||||
|
| |||||||
| Hotels, Restaurants & Leisure (2.1%): | |||||||
40,625 | Royal Caribbean Cruises, Ltd. | 1,926,438 | ||||||
38,825 | Starwood Hotels & Resorts Worldwide, Inc. | 3,084,646 | ||||||
|
| |||||||
5,011,084 | ||||||||
|
| |||||||
| Household Durables (1.7%): | |||||||
175,325 | D.R. Horton, Inc. | 3,913,254 | ||||||
|
| |||||||
| Independent Power Producers & Energy Traders (2.4%): | |||||||
206,700 | AES Corp. (The) | 2,999,217 | ||||||
90,900 | NRG Energy, Inc. | 2,610,648 | ||||||
|
| |||||||
5,609,865 | ||||||||
|
| |||||||
| Industrial Conglomerates (0.9%): | |||||||
25,450 | Carlisle Cos., Inc. | 2,020,730 | ||||||
|
| |||||||
| Insurance (7.2%): | |||||||
44,750 | Aon plc | 3,754,078 | ||||||
70,400 | Brown & Brown, Inc. | 2,209,856 | ||||||
105,114 | Hartford Financial Services Group, Inc. (The) | 3,808,279 | ||||||
62,925 | Lincoln National Corp. | 3,248,189 | ||||||
75,497 | Principal Financial Group, Inc. | 3,722,757 | ||||||
|
| |||||||
16,743,159 | ||||||||
|
| |||||||
| Internet & Catalog Retail (1.1%): | |||||||
84,025 | Liberty Media Corp. – Interactive, Class A* | 2,466,134 | ||||||
|
| |||||||
| Machinery (3.8%): | |||||||
28,425 | Crane Co. | 1,911,581 | ||||||
46,150 | Dover Corp. | 4,455,321 | ||||||
61,400 | Navistar International Corp.*^ | 2,344,866 | ||||||
|
| |||||||
8,711,768 | ||||||||
|
| |||||||
| Media (2.5%): | |||||||
68,356 | DISH Network Corp., Class A* | 3,959,179 | ||||||
104,625 | Interpublic Group of Cos., Inc. (The) | 1,851,863 | ||||||
|
| |||||||
5,811,042 | ||||||||
|
| |||||||
| Metals & Mining (1.0%): | |||||||
115,025 | Steel Dynamics, Inc. | 2,247,589 | ||||||
|
| |||||||
| Multiline Retail (1.1%): | |||||||
47,375 | Macy’s, Inc. | 2,529,825 | ||||||
|
| |||||||
| Multi-Utilities (1.5%): | |||||||
54,725 | CMS Energy Corp. | 1,464,988 | ||||||
21,927 | Sempra Energy | 1,968,168 | ||||||
|
| |||||||
3,433,156 | ||||||||
|
| |||||||
| Office Electronics (1.1%): | |||||||
216,000 | Xerox Corp. | 2,628,720 | ||||||
|
|
Continued
4
AZL Columbia Mid Cap Value Fund
Schedule of Portfolio Investments
December 31, 2013
Shares | Fair Value | |||||||
| Common Stocks, continued | |||||||
| Oil, Gas & Consumable Fuels (5.9%): | |||||||
42,925 | Cabot Oil & Gas Corp. | $ | 1,663,773 | |||||
20,601 | Cimarex Energy Co. | 2,161,251 | ||||||
19,400 | HollyFrontier Corp. | 963,986 | ||||||
30,750 | Marathon Petroleum Corp. | 2,820,697 | ||||||
64,950 | Noble Energy, Inc. | 4,423,744 | ||||||
26,602 | Whiting Petroleum Corp.* | 1,645,866 | ||||||
|
| |||||||
13,679,317 | ||||||||
|
| |||||||
| Pharmaceuticals (4.6%): | |||||||
17,378 | Actavis, Inc. plc* | 2,919,504 | ||||||
41,450 | Forest Laboratories, Inc.* | 2,488,244 | ||||||
28,725 | Jazz Pharmaceuticals plc* | 3,635,435 | ||||||
17,100 | Salix Pharmaceuticals, Ltd.* | 1,537,974 | ||||||
|
| |||||||
10,581,157 | ||||||||
|
| |||||||
| Real Estate Investment Trusts (REITs) (7.3%): | |||||||
47,400 | Colony Financial, Inc. | 961,746 | ||||||
188,623 | Host Hotels & Resorts, Inc. | 3,666,830 | ||||||
51,547 | Rayonier, Inc. | 2,170,129 | ||||||
33,100 | SL Green Realty Corp. | 3,057,777 | ||||||
30,325 | Taubman Centers, Inc. | 1,938,374 | ||||||
111,850 | UDR, Inc. | 2,611,698 | ||||||
87,335 | Weyerhaeuser Co. | 2,757,166 | ||||||
|
| |||||||
17,163,720 | ||||||||
|
| |||||||
| Real Estate Management & Development (1.0%): | |||||||
86,250 | CBRE Group, Inc.* | 2,268,375 | ||||||
|
| |||||||
| Road & Rail (1.8%): | |||||||
81,300 | Hertz Global Holdings, Inc.* | 2,326,806 | ||||||
24,475 | Ryder System, Inc. | 1,805,766 | ||||||
|
| |||||||
4,132,572 | ||||||||
|
| |||||||
| Semiconductors & Semiconductor Equipment (4.0%): | |||||||
26,500 | Avago Technologies, Ltd. | 1,401,585 | ||||||
27,775 | KLA-Tencor Corp. | 1,790,377 | ||||||
37,125 | Lam Research Corp.* | 2,021,456 | ||||||
91,200 | Micron Technology, Inc.* | 1,984,512 | ||||||
28,050 | Nxp Semiconductors NV* | 1,288,337 | ||||||
26,300 | Skyworks Solutions, Inc.* | 751,128 | ||||||
|
| |||||||
9,237,395 | ||||||||
|
|
Shares | Fair Value | |||||||
| Common Stocks, continued | |||||||
| Software (2.1%): | |||||||
49,975 | Autodesk, Inc.* | $ | 2,515,242 | |||||
17,650 | Citrix Systems, Inc.* | 1,116,363 | ||||||
36,675 | PTC, Inc.* | 1,297,928 | ||||||
|
| |||||||
4,929,533 | ||||||||
|
| |||||||
| Thrifts & Mortgage Finance (1.1%): | |||||||
162,250 | People’s United Financial, Inc. | 2,453,220 | ||||||
|
| |||||||
| Trading Companies & Distributors (2.2%): | |||||||
70,421 | AerCap Holdings NV* | 2,700,645 | ||||||
16,500 | United Rentals, Inc.* | 1,286,175 | ||||||
14,200 | WESCO International, Inc.*^ | 1,293,194 | ||||||
|
| |||||||
5,280,014 | ||||||||
|
| |||||||
| Wireless Telecommunication Services (1.4%): | |||||||
28,850 | SBA Communications Corp., Class A* | 2,591,884 | ||||||
26,950 | Telephone & Data Systems, Inc. | 694,771 | ||||||
|
| |||||||
3,286,655 | ||||||||
|
| |||||||
| Total Common Stocks (Cost $159,990,625) | 219,082,680 | ||||||
|
| |||||||
Contracts, Shares, Notional Amount or Principal Amount | Fair Value | |||||||
| Securities Held as Collateral for Securities on Loan (1.6%): |
| ||||||
$ | 3,613,952 | Allianz Variable Insurance Products Securities Lending Collateral Trust(a) | $ | 3,613,952 | ||||
|
| |||||||
| Total Securities Held as Collateral for Securities on Loan | 3,613,952 | ||||||
|
| |||||||
| Unaffiliated Investment Company (5.3%): |
| ||||||
12,209,900 | Dreyfus Treasury Prime Cash Management Fund, Institutional Shares, 0.00%(b) | 12,209,900 | ||||||
|
| |||||||
| Total Unaffiliated Investment Company (Cost $12,209,900) | 12,209,900 | ||||||
|
| |||||||
| Total Investment Securities (Cost $175,814,477)(c) — 101.6% | 234,906,532 | ||||||
| Net other assets (liabilities) — (1.6)% | (3,773,209 | ) | |||||
|
| |||||||
| Net Assets — 100.0% | $ | 231,133,323 | |||||
|
|
Percentages indicated are based on net assets as of December 31, 2013.
* | Non-income producing security. |
^ | This security or a partial position of this security was on loan as of December 31, 2013. The total value of securities on loan as of December 31, 2013, was $3,565,299. |
(a) | Purchased with cash collateral held from securities lending. The value of the collateral could include collateral held for securities that were sold on or before December 31, 2013. |
(b) | The rate represents the effective yield at December 31, 2013. |
(c) | See Federal Tax Information listed in the Notes to the Financial Statements. |
See accompanying notes to the financial statements.
5
AZL Columbia Mid Cap Value Fund
Statement of Assets and Liabilities
December 31, 2013
Assets: | |||||
Investment securities, at cost | $ | 175,814,477 | |||
|
| ||||
Investment securities, at value* | $ | 234,906,532 | |||
Cash | 9,693 | ||||
Interest and dividends receivable | 254,902 | ||||
Receivable for capital shares issued | 68,603 | ||||
|
| ||||
Total Assets | 235,239,730 | ||||
|
| ||||
Liabilities: | |||||
Payable for capital shares redeemed | 278,356 | ||||
Payable for collateral received on loaned securities | 3,613,952 | ||||
Manager fees payable | 143,417 | ||||
Administration fees payable | 7,846 | ||||
Distribution fees payable | 47,806 | ||||
Custodian fees payable | 2,409 | ||||
Administrative and compliance services fees payable | 909 | ||||
Trustee fees payable | 7 | ||||
Other accrued liabilities | 11,705 | ||||
|
| ||||
Total Liabilities | 4,106,407 | ||||
|
| ||||
Net Assets | $ | 231,133,323 | |||
|
| ||||
Net Assets Consist of: | |||||
Capital | $ | 161,935,595 | |||
Accumulated net investment income/(loss) | 758,631 | ||||
Accumulated net realized gains/(losses) from investment transactions | 9,347,042 | ||||
Net unrealized appreciation/(depreciation) on investments | 59,092,055 | ||||
|
| ||||
Net Assets | $ | 231,133,323 | |||
|
| ||||
Shares of beneficial interest (unlimited number of shares authorized, no par value) | 19,507,035 | ||||
Net Asset Value (offering and redemption price per share) | $ | 11.85 | |||
|
|
* | Includes securities on loan of $3,565,299. |
For the Year Ended December 31, 2013
Investment Income: | |||||
Dividends | $ | 2,885,757 | |||
Interest | 251 | ||||
Income from securities lending | 9,816 | ||||
Foreign withholding tax | (3,166 | ) | |||
|
| ||||
Total Investment Income | 2,892,658 | ||||
|
| ||||
Expenses: | |||||
Manager fees | 1,518,668 | ||||
Administration fees | 64,576 | ||||
Distribution fees | 506,223 | ||||
Custodian fees | 10,206 | ||||
Administrative and compliance services fees | 4,130 | ||||
Trustee fees | 10,566 | ||||
Professional fees | 10,854 | ||||
Shareholder reports | 13,108 | ||||
Other expenses | 5,510 | ||||
|
| ||||
Total expenses before reductions | 2,143,841 | ||||
Less expenses paid indirectly | (21,067 | ) | |||
|
| ||||
Net expenses | 2,122,774 | ||||
|
| ||||
Net Investment Income/(Loss) | 769,884 | ||||
|
| ||||
Realized and Unrealized Gains/(Losses) on Investments: | |||||
Net realized gains/(losses) on securities transactions | 24,239,007 | ||||
Change in net unrealized appreciation/depreciation on investments | 34,739,768 | ||||
|
| ||||
Net Realized/Unrealized Gains/(Losses) on Investments | 58,978,775 | ||||
|
| ||||
Change in Net Assets Resulting From Operations | $ | 59,748,659 | |||
|
|
See accompanying notes to the financial statements.
6
Statements of Changes in Net Assets
AZL Columbia Mid Cap Value Fund | ||||||||||
For the Year Ended December 31, 2013 | For the Year Ended December 31, 2012 | |||||||||
Change in Net Assets: | �� | |||||||||
Operations: | ||||||||||
Net investment income/(loss) | $ | 769,884 | $ | 1,343,018 | ||||||
Net realized gains/(losses) on investment transactions | 24,239,007 | 11,024,760 | ||||||||
Change in unrealized appreciation/depreciation on investments | 34,739,768 | 10,002,097 | ||||||||
|
|
|
| |||||||
Change in net assets resulting from operations | 59,748,659 | 22,369,875 | ||||||||
|
|
|
| |||||||
Dividends to Shareholders: | ||||||||||
From net investment income | (1,337,872 | ) | (878,246 | ) | ||||||
|
|
|
| |||||||
Change in net assets resulting from dividends to shareholders | (1,337,872 | ) | (878,246 | ) | ||||||
|
|
|
| |||||||
Capital Transactions: | ||||||||||
Proceeds from shares issued | 28,141,862 | 27,816,912 | ||||||||
Proceeds from dividends reinvested | 1,337,872 | 878,246 | ||||||||
Value of shares redeemed | (25,888,263 | ) | (13,845,489 | ) | ||||||
|
|
|
| |||||||
Change in net assets resulting from capital transactions | 3,591,471 | 14,849,669 | ||||||||
|
|
|
| |||||||
Change in net assets | 62,002,258 | 36,341,298 | ||||||||
Net Assets: | ||||||||||
Beginning of period | 169,131,065 | 132,789,767 | ||||||||
|
|
|
| |||||||
End of period | $ | 231,133,323 | $ | 169,131,065 | ||||||
|
|
|
| |||||||
Accumulated net investment income/(loss) | $ | 758,631 | $ | 1,337,865 | ||||||
|
|
|
| |||||||
Share Transactions: | ||||||||||
Shares issued | 2,749,328 | 3,351,896 | ||||||||
Dividends reinvested | 125,152 | 102,122 | ||||||||
Shares redeemed | (2,494,993 | ) | (1,657,298 | ) | ||||||
|
|
|
| |||||||
Change in shares | 379,487 | 1,796,720 | ||||||||
|
|
|
|
See accompanying notes to the financial statements.
7
AZL Columbia Mid Cap Value Fund
(Selected data for a share of beneficial interest outstanding throughout the periods indicated)
Year Ended December 31, | |||||||||||||||||||||||||
2013 | 2012 | 2011 | 2010 | 2009 | |||||||||||||||||||||
Net Asset Value, Beginning of Period | $ | 8.84 | $ | 7.66 | $ | 8.02 | $ | 6.58 | $ | 5.01 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Investment Activities: | |||||||||||||||||||||||||
Net Investment Income/(Loss) | 0.04 | 0.07 | 0.05 | 0.07 | 0.03 | ||||||||||||||||||||
Net Realized and Unrealized Gains/(Losses) on Investments | 3.04 | 1.16 | (0.34 | ) | 1.41 | 1.59 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Total from Investment Activities | 3.08 | 1.23 | (0.29 | ) | 1.48 | 1.62 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Dividends to Shareholders From: | |||||||||||||||||||||||||
Net Investment Income | (0.07 | ) | (0.05 | ) | (0.07 | ) | (0.04 | ) | (0.05 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Total Dividends | (0.07 | ) | (0.05 | ) | (0.07 | ) | (0.04 | ) | (0.05 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Net Asset Value, End of Period | $ | 11.85 | $ | 8.84 | $ | 7.66 | $ | 8.02 | $ | 6.58 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Total Return(a) | 34.91 | % | 16.03 | % | (3.57 | )% | 22.66 | % | 32.30 | % | |||||||||||||||
Ratios to Average Net Assets/Supplemental Data: | |||||||||||||||||||||||||
Net Assets, End of Period (000’s) | $ | 231,133 | $ | 169,131 | $ | 132,790 | $ | 133,340 | $ | 100,908 | |||||||||||||||
Net Investment Income/(Loss) | 0.38 | % | 0.88 | % | 0.62 | % | 1.12 | % | 0.98 | % | |||||||||||||||
Expenses Before Reductions(b) | 1.06 | % | 1.07 | % | 1.08 | % | 1.10 | % | 1.13 | % | |||||||||||||||
Expenses Net of Reductions | 1.05 | % | 1.05 | % | 1.06 | % | 1.04 | % | 1.07 | % | |||||||||||||||
Expenses Net of Reductions, Excluding Expenses Paid Indirectly(c) | 1.06 | % | 1.07 | % | 1.08 | % | 1.10 | % | 1.13 | % | |||||||||||||||
Portfolio Turnover Rate | 59 | % | 50 | % | 53 | % | 71 | % | 67 | % |
(a) | The returns include reinvested dividends and fund level expenses, but exclude insurance contract charges. If these charges were included, the returns would have been lower. |
(b) | Excludes fee reductions. If such fee reductions had not occurred, the ratios would have been as indicated. |
(c) | Expenses net of reductions excludes expenses paid indirectly, pursuant to a “commission recapture” program, under which brokers remit a portion of the brokerage commission which is used to pay certain Fund expenses. See note 2 in the Notes to the Financial Statements. |
See accompanying notes to the financial statements.
8
AZL Columbia Mid Cap Value Fund
Notes to the Financial Statements
December 31, 2013
1. Organization
The Allianz Variable Insurance Products Trust (the “Trust”) was organized as a Delaware statutory trust on July 13, 1999. The Trust is a diversified open-end management investment company registered under the Investment Company Act of 1940. The Trust consists of 29 separate investment portfolios (collectively, the “Funds”), of which one is included in this report, the AZL Columbia Mid Cap Value Fund (the “Fund”), and 28 are presented in separate reports.
The Trust is authorized to issue an unlimited number of shares of the Fund without par value. Shares of the Fund are available through the variable annuity contracts and variable life insurance policies offered through the separate accounts of participating insurance companies.
Under the Trust’s organizational documents, its officers and trustees are indemnified against certain liabilities arising out of the performance of their duties to the Fund. In addition, in the normal course of business, the Fund may enter into contracts with its vendors and others that provide for general indemnifications. The Fund’s maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Fund. However, based on experience, the Fund expects the risk of loss to be remote.
2. Significant Accounting Policies
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. The policies conform with U.S. generally accepted accounting principles (“U.S. GAAP”). The preparation of financial statements requires management to make certain 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 increases and decreases in net assets from operations during the reporting period. Actual results could differ from those estimates.
Security Valuation
The Fund records its investments at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between willing market participants at the measurement date. The valuation techniques used to determine fair value are further described in Note 4 below.
Investment Transactions and Investment Income
Investment transactions are recorded not later than on the business day following trade date. However, for financial reporting purposes, investment transactions are accounted for on trade date. Net realized gains and losses on investments sold and on foreign currency transactions are recorded on the basis of identified cost. Interest income is recorded on the accrual basis and includes, where applicable, the amortization of premiums or accretion of discounts. Dividend income is recorded on the ex-dividend date except in the case of foreign securities, in which case dividends are recorded as soon as such information becomes available.
Real Estate Investment Trusts
The Fund may own shares of real estate investment trusts (“REITs”) which report information on the source of their distributions annually. Certain distributions received from REITs during the year, which are known to be a return of capital, are recorded as a reduction to the cost of the individual REIT.
Foreign Currency Translation
The accounting records of the Fund are maintained in U.S. dollars. Foreign currency amounts are translated into U.S. dollars at the current rate of exchange to determine the fair value of investments, assets and liabilities. Purchases and sales of securities, and income and expenses are translated at the prevailing rate of exchange on the respective dates of such transactions. The Fund does not isolate that portion of the results of operations resulting from changes in foreign exchange rates on investments from fluctuations arising from changes in market prices of securities held. Such fluctuations are included in the net realized and unrealized gain or loss on investments and foreign currencies. Income received by the Fund from sources within foreign countries may be subject to withholding and other income or similar taxes imposed by such countries. The Funds accrue such taxes, as applicable, based on their current interpretation of tax rules in the foreign markets in which they invest.
Dividends to Shareholders
Dividends to shareholders are recorded on the ex-dividend date. The Fund distributes its dividends from net investment income and net realized capital gains, if any, on an annual basis. The amount of dividends from net investment income and from net realized gains is determined in accordance with federal income tax regulations, which may differ from U.S. GAAP. These “book/tax” differences are either temporary or permanent in nature. To the extent these differences are permanent in nature (e.g., return of capital, net operating loss, reclassification of certain market discounts, gain/loss, paydowns, and distributions), such amounts are reclassified within the composition of net assets based on their federal tax-basis treatment; temporary differences (e.g., wash sales and post October losses) do not require reclassification. Dividends to shareholders that exceed net investment income and net realized gains for tax purposes are reported as distributions of capital.
Expense Allocation
Expenses directly attributable to the Fund are charged directly to the Fund, while expenses attributable to more than one Fund are allocated among the respective Funds based upon relative net assets or some other reasonable method. Expenses which are attributable to more than one Trust are allocated across the Allianz Variable Insurance Products and Allianz Variable Insurance Products Fund of Funds Trusts based upon relative net assets or another reasonable basis. Allianz Investment Management LLC (the “Manager”), serves as the investment manager for the Trust and the Allianz Variable Insurance Products Fund of Funds Trust.
Securities Lending
To generate additional income, the Fund may lend up to 33 1/3% of its assets pursuant to agreements requiring that the loan be continuously secured by any combination of cash, U.S. government or U.S. government agency securities, equal initially to at least 102% of the fair value plus accrued interest on the securities loaned (105% for foreign
9
AZL Columbia Mid Cap Value Fund
Notes to the Financial Statements
December 31, 2013
securities). The borrower of securities is at all times required to post collateral to the Fund in an amount equal to 100% of the fair value of the securities loaned based on the previous day’s fair value of the securities loaned, marked-to-market daily. Any collateral shortfalls are adjusted the next business day. The Fund bears all of the gains and losses on such investments. The Fund receives payments from borrowers equivalent to the dividends and interest that would have been earned on securities lent while simultaneously seeking to earn income on the investment of cash collateral received. In extremely low interest rate environments, the broker rebate fee may exceed the interest earned or the cash collateral which would result in a loss to the Fund. The investment of cash collateral deposited by the borrower is subject to inherent market risks such as interest rate risk, credit risk, liquidity risk, and other risks that are present in the market, and as such, the value of these investments may not be sufficient, when liquidated, to repay the borrower when the loaned security is returned. There may be risks of delay in recovery of the securities or even loss of rights in the collateral should the borrower of the securities fail financially. However, loans will be made only to borrowers, such as broker-dealers, banks or institutional borrowers of securities, deemed by the Manager to be of good standing and credit worthy and when in its judgment, the consideration which can be earned currently from such securities loans justifies the attendant risks. Loans are subject to termination by the Trust or the borrower at any time, and are, therefore, not considered to be illiquid investments. Securities on loan at December 31, 2013 are presented on the Fund’s Schedule of Portfolio Investments. The average outstanding amount of securities on loan was $3.3 million for the year ended December 31, 2013.
Cash collateral received in connection with securities lending is invested in the Allianz Variable Insurance Products Securities Lending Collateral Trust (the “Securities Lending Collateral Trust”) managed by The Dreyfus Corporation, an affiliate of the Custodian and Securities Lending Agent. The Securities Lending Collateral Trust invests in short-term investments that have a remaining maturity of 397 days or less as calculated in accordance with Rule 2a-7 under the 1940 Act. The Fund paid securities lending fees of $970 during the year ended December 31, 2013. These fees have been netted against “Income from securities lending” on the Statement of Operations.
Commission Recapture
Certain Funds of the Trust participate in a commission recapture program. The Fund will utilize the recaptured commissions to pay for, in whole or part, certain expenses of the Fund, excluding investment advisory fees. Any amounts received by the Fund, if applicable, are disclosed as “Expenses paid indirectly” on the Statement of Operations.
Effective January 6, 2014, the Manager, on behalf of the Trust, requested the Fund cease participation in the program until further notice.
3. Related Party Transactions
The Manager provides investment advisory and management services for the Fund. The Manager has retained an independent money management organization (the “Subadviser”), to make investment decisions on behalf of the Fund. Pursuant to a subadvisory agreement with Columbia Management Investment Advisers, LLC (“CMIA”), CMIA provides investment advisory services as the Subadviser for the Fund subject to the general supervision of the Trustees and the Manager. The Manager is entitled to a fee, computed daily and paid monthly, based on the average daily net assets of the Fund. Expenses incurred by the Fund for investment advisory and management services are reflected on the Statement of Operations as “Manager fees.” For its services, the Subadviser is entitled to a fee payable by the Manager. The Manager has contractually agreed to waive fees and reimburse the Fund to limit the annual expenses, excluding interest expense (e.g., cash overdraft fees), taxes, brokerage commissions, other expenditures that are capitalized in accordance with U.S. GAAP and other extraordinary expenses not incurred in the ordinary course of the Fund’s business, based on the daily net assets of the Fund, through April 30, 2015.
For the year ended December 31, 2013, the annual rate due to the Manager and the annual expense limit were as follows:
Annual Rate | Annual Expense Limit | |||||||||
AZL Columbia Mid Cap Value Fund | 0.75 | % | 1.30 | % |
Any amounts contractually waived or reimbursed by the Manager in a particular fiscal year will be subject to repayment by the Fund to the Manager to the extent that from time to time through the next three fiscal years the repayment will not cause the Fund’s expenses to exceed the lesser of the stated limit at the time of the waiver or the current stated limit. Any amounts recouped by the Manager during the year are reflected on the Statement of Operations as “Recoupment of prior expenses reimbursed by the Manager.” At December 31, 2013, there were no remaining contractual reimbursements that are subject to repayment by the Fund in subsequent years.
In addition, the Manager may voluntarily waive or reimburse additional fees in order to maintain more competitive expense ratios. Any voluntary waivers or reimbursements are not subject to repayment in subsequent years. Information on the total amount waived/reimbursed by the Manager or repaid to the Manager by the Fund during the year can be found on the Statement of Operations. During the year ended December 31, 2013, there were no voluntary waivers.
Pursuant to separate agreements between the Funds and the Manager, the Manager provides a Chief Compliance Officer (“CCO”) and certain compliance oversight and regulatory filing services to the Trust. Under these agreements the Manager is entitled to an amount equal to a portion of the compensation and certain other expenses related to the individuals performing the CCO and compliance oversight services, as well as $75 per hour for time incurred in connection with the preparation and filing of certain documents with the Securities and Exchange Commission. The fees are paid to the Manager on a quarterly basis. The total expenses incurred by the Fund for these services are reflected on the Statement of Operations as “Administrative and compliance services fees.”
Citi Fund Services Ohio, Inc. (“Citi” or the “Administrator”), a wholly owned subsidiary of Citigroup, Inc., with which an officer of the Trust is affiliated, serves as the Trust’s administrator, transfer agent, and fund accountant, and assists the Trust in all aspects of its administration and operation. The Administrator is entitled to a Trust-wide asset-based fee, which is based on the following schedule: 0.05% of daily average net assets on the first $4 billion, 0.04% of daily average net assets on the next $2 billion, 0.02% of daily average net assets on the next $2 billion and 0.01% of daily average net assets over $8 billion. The overall Trust-wide fees are accrued daily and paid monthly and are subject to a minimum annual fee. In addition, the Administrator is entitled to annual account fees related to the transfer agency system, an annual fee for each additional class of shares of any Fund, certain annual fees in supporting fair value services, and a Trust-wide annual fee for providing infrastructure and support in implementing the written policies and procedures comprising the Fund’s compliance program. Fees payable to the Administrator are subject to certain reductions associated with services provided to new funds. The Administrator is also reimbursed for certain expenses incurred. The total expenses incurred by the Fund for these services are reflected on the Statement of Operations as “Administration fees.”
Allianz Life Financial Services, LLC (“ALFS”), an affiliate of the Manager, serves as distributor of the Fund and receives 12b-1 fees directly from the Fund, plus a Trust-wide annual fee of $42,500, paid by the Manager from its profits and not by the Trust, for recordkeeping and reporting services.
10
AZL Columbia Mid Cap Value Fund
Notes to the Financial Statements
December 31, 2013
The Trust has adopted a distribution and service plan in conformance with Rule 12b-1 of the 1940 Act. Pursuant to this plan, the Fund is authorized to pay certain fees for the sale and distribution of its shares and services provided to its shareholders at an annual rate not to exceed 0.25% of the Fund’s average daily net assets. These fees are reflected on the Statement of Operations as “Distribution fees.”
In addition, certain legal fees and expenses are paid to a law firm, Dorsey & Whitney LLP, of which the Secretary of the Fund is a partner. During the year ended December 31, 2013, $2,504 was paid from the Fund relating to these fees and expenses.
Certain Officers and Trustees of the Trust are affiliated with the Manager or the Administrator. Such Officers (except for the Trust’s CCO as noted above) and Trustees receive no compensation from the Trust for serving in their respective roles. For their service to the Trust and to the Allianz Variable Insurance Products Fund of Funds Trust, each non-interested Trustee receives a $139,000 annual Board retainer. In addition, the Trustees are reimbursed for certain expenses associated with attending Board meetings. Compensation to the Trustees is allocated between the Trust and the Allianz Variable Insurance Products Fund of Funds Trust in proportion to the assets under management of each trust. During the year ended December 31, 2013, actual Trustee compensation was $973,000 in total for both trusts.
At a meeting of the Board of Trustees on December 4, 2013, the Trustees approved a fee increase to the Officers and Trustees who are paid a fee for their services to the Trust and to the Allianz Variable Insurance Products Fund of Funds Trust. Effective January 1, 2014, each non-interested Trustee will receive a $163,000 annual retainer.
4. Investment Valuation Summary
The valuation techniques employed by the Fund, as described below, maximize the use of observable inputs and minimize the use of unobservable inputs in determining fair value. The inputs used for valuing the Fund’s investments are summarized in the three broad levels listed below:
— | Level 1 — quoted prices in active markets for identical assets |
— | Level 2 — other significant observable inputs (including quoted prices for similar securities, interest rates, prepayments speeds, credit risk, etc.) |
— | Level 3 — significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of investments) |
Changes in valuation techniques may result in transfers in or out of an assigned level within the disclosure hierarchy. The Fund determines transfers between fair value hierarchy levels at the reporting period end. The inputs or methodology used for valuing investments is not necessarily an indication of the risk associated with investing in those investments.
Security prices are generally provided by an independent third party pricing service approved by the Trust’s Board of Trustees (“Trustees”) as of the close of the New York Stock Exchange (“NYSE”) (generally 4:00 pm Eastern Time). Equity securities are valued at the last quoted sale price or, if there is no sale, the last quoted bid price is used for long securities and the last quoted ask price is used for securities sold short. Securities listed on NASDAQ Stock Market, Inc. (“NASDAQ”) are valued at the official closing price as reported by NASDAQ. In each of these situations, valuations are typically categorized as a Level 1 in the fair value hierarchy. Investments in open-end investment companies are valued at their respective net asset value as reported by such companies and are typically categorized as Level 1 in the fair value hierarchy.
Debt and other fixed income securities are generally valued at an evaluated bid price provided by an independent pricing source approved by the Trustees. To value debt securities, pricing services may use various pricing techniques which take into account appropriate factors such as market activity, yield, quality, coupon rate, maturity, type of issue, trading characteristics, call features, credit ratings and other data, as well as broker quotes. Short term securities of sufficient credit quality with sixty days or less remaining until maturity may be valued at amortized cost, which approximates fair value. In each of these situations, valuations are typically categorized as Level 2 in the fair value hierarchy.
Other assets and securities for which market quotations are not readily available, or are deemed unreliable are valued at fair value as determined in good faith by the Trustees or persons acting on the behalf of the Trustees. Fair value pricing may be used for significant events such as securities whose trading has been suspended, whose price has become stale or for which there is no currently available price at the close of the NYSE. Depending on the source and relative significance of valuation inputs, these instruments may be classified as Level 2 or Level 3 in the fair value hierarchy. The Fund utilizes a pricing service to assist in determining the fair value of securities when certain significant events occur that may affect the value of foreign securities.
In accordance with procedures adopted by the Trustees, fair value pricing may be used if events materially affecting the value of foreign securities occur between the time when the exchange on which they are traded closes and the time when the Fund’s net asset value is calculated. Management identifies possible fluctuation in international securities by monitoring the increase or decrease in the value of a designated benchmark index. In the event of an increase or decrease greater than predetermined levels, the Fund may use a systematic valuation model provided by an independent third party to fair value its international equity securities which are then typically categorized as Level 2 in the fair value hierarchy.
For the year ended December 31, 2013, there were no Level 3 investments for which significant unobservable inputs were used to determine fair value.
The following is a summary of the valuation inputs used as of December 31, 2013 in valuing the Fund’s investments based upon the three levels defined above:
Investment Securities: | Level 1 | Level 2 | Total | ||||||||||||
Common Stocks+ | $ | 219,082,680 | $ | — | $ | 219,082,680 | |||||||||
Securities Held as Collateral for Securities on Loan | — | 3,613,952 | 3,613,952 | ||||||||||||
Unaffiliated Investment Company | 12,209,900 | — | 12,209,900 | ||||||||||||
|
|
|
|
|
| ||||||||||
Total Investment Securities | $ | 231,292,580 | $ | 3,613,952 | $ | 234,906,532 | |||||||||
|
|
|
|
|
|
+ | For detailed industry descriptions, see the accompanying Schedule of Portfolio Investments. |
11
AZL Columbia Mid Cap Value Fund
Notes to the Financial Statements
December 31, 2013
5. Security Purchases and Sales
For the year ended December 31, 2013, cost of purchases and proceeds from sales of securities (excluding securities maturing less than one year from acquisition) were as follows:
Purchases | Sales | |||||||||
AZL Columbia Mid Cap Value Fund | $ | 114,713,250 | $ | 118,616,993 |
6. Investment Risks
Foreign Securities and Currencies Risk: Investments in securities of foreign issuers carry certain risks not ordinarily associated with investments in securities of domestic issuers. Such risks include future political and economic developments, and the possible imposition of exchange controls or other foreign governmental laws and restrictions. In addition, with respect to certain countries, there is the possibility of expropriation of assets, confiscatory taxation, political or social instability or diplomatic developments which could adversely affect investments in those securities.
7. Federal Tax Information
It is the Fund’s policy to continue to comply with the requirements of the Internal Revenue Code under Subchapter M, applicable to regulated investment companies, and to distribute all of its taxable income, including any net realized gains on investments, to its shareholders. Therefore, no provision is made for federal income taxes.
Management of the Fund has reviewed tax positions taken in tax years that remain subject to examination by all major tax jurisdictions, including federal (i.e., the last four tax year ends and the interim tax period since then, as applicable). Management believes that there is no tax liability resulting from unrecognized tax benefits related to uncertain tax positions taken.
Cost for federal income tax purposes at December 31, 2013 is $176,252,314. The gross unrealized appreciation/ (depreciation) on a tax basis is as follows:
Unrealized appreciation | $ | 59,977,764 | |||
Unrealized depreciation | (1,323,546 | ) | |||
|
| ||||
Net unrealized appreciation/(depreciation) | $ | 58,654,218 | |||
|
|
During the year ended December 31, 2013, the Fund utilized $14,402,159 in capital loss carry forwards to offset capital gains.
The tax character of dividends paid to shareholders during the year ended December 31, 2013 were as follows:
Ordinary Income | Net Long-Term Capital Gains | Total Distributions(a) | |||||||||||||
AZL Columbia Mid Cap Value Fund | $ | 1,337,872 | $ | — | $ | 1,337,872 |
(a) | Total distributions paid may differ from the Statements of Changes in Net Assets because dividends are recognized when actually paid for tax purposes. |
The tax character of dividends paid to shareholders during the year ended December 31, 2012 was as follows:
Ordinary Income | Net Long-Term Capital Gains | Total Distributions(a) | |||||||||||||
AZL Columbia Mid Cap Value Fund | $ | 878,246 | $ | — | $ | 878,246 |
(a) | Total distributions paid may differ from the Statements of Changes in Net Assets because dividends are recognized when actually paid for tax purposes. |
As of December 31, 2013, the components of accumulated earnings on a tax basis were as follows:
Undistributed Ordinary Income | Undistributed Long-Term Capital Gains | Accumulated Capital and Other Losses | Unrealized Appreciation/ (Depreciation)(a) | Total Accumulated Earnings/ (Deficit) | |||||||||||||||||||||
AZL Columbia Mid Cap Value Fund | $ | 758,631 | $ | 9,784,879 | $ | — | $ | 58,654,218 | $ | 69,197,728 |
(a) | The difference between book-basis and tax-basis unrealized appreciation/(depreciation) is attributable primarily to tax deferral of losses on wash sales. |
12
AZL Columbia Mid Cap Value Fund
Notes to the Financial Statements
December 31, 2013
8. Subsequent Events
Effective at close of business on January 24, 2014, Massachusetts Financial Services Company replaced Columbia Management Investment Advisers, LLC as the subadviser to the AZL Columbia Mid Cap Value Fund and the following name change was effective at close of business on January 24, 2014.
Name Effective on January 24, 2014 | Previous Name | |
AZL® MFS Mid Cap Value Fund | AZL® Columbia Mid Cap Value Fund |
Management has evaluated events and transactions subsequent to period end through the date the financial statements were issued, for purposes of recognition or disclosure in these financial statements and there are no additional subsequent events to report.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Shareholders and Board of Trustees of
Allianz Variable Insurance Products Trust:
We have audited the accompanying statement of assets and liabilities of AZL Columbia Mid Cap Value Fund (the “Fund”) of the Allianz Variable Insurance Products Trust, including the schedule of portfolio investments, as of December 31, 2013, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the years in the two-year period then ended, and the financial highlights for each of the years in the five-year period then ended. These financial statements and financial highlights are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of December 31, 2013, by correspondence with the custodian. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of the Fund as of December 31, 2013, the results of its operations for the year then ended, the changes in its net assets for each of the years in the two-year period then ended, and the financial highlights for each of the years in the five-year period then ended, in conformity with U.S. generally accepted accounting principles.
/s/KPMG LLP
Columbus, Ohio
February 25, 2014
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Other Federal Income Tax Information (Unaudited)
For the year ended December 31, 2013, 100.00% of the total ordinary income dividends paid by the Fund qualify for the corporate dividends received deduction available to corporate shareholders.
15
A description of the policies and procedures that the Fund uses to determine how to vote proxies relating to portfolio securities is available, without charge, upon request, by visiting the Securities and Exchange Commission’s (“Commission”) website at www.sec.gov, or by calling 800-624-0197.
Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30th is available (i) without charge, upon request, by calling 800-624-0197; (ii) on the Allianz Variable Insurance Products Trust’s website at https://www.allianzlife.com; and (iii) on the Commission’s website at http://www.sec.gov.
The Fund files complete Schedules of Portfolio Holdings with the Commission for the first and third quarters of each fiscal year on Form N-Q. Schedules of Portfolio Holdings for the Fund in this report are available without charge on the Commission’s website at http://www.sec.gov, or may be reviewed and copied at the Commission’s Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 800-SEC-0330.
16
Approval of New Subadvisory Agreement — September 11, 2013 (Unaudited)
At an in person meeting of the Board of Trustees (the “Board” or the “Trustees”) of Allianz Variable Insurance Products Trust (the “Trust”) held on September 11, 2013, the Board considered a recommendation by Allianz Investment Management LLC (the “Manager”), the investment manager to the AZL Columbia Mid Cap Value Fund (the “Fund”), to (a) approve a subadvisory agreement (the “MFS Agreement”) between the Manager and Massachusetts Financial Services Company (“MFS”), pursuant to which MFS would replace Columbia Management Investment Advisers, LLC (“Columbia”) as subadviser to the Fund, and to terminate the subadvisory agreement (the “Columbia Agreement”) between the Manager and Columbia, and (b) change the name of the Fund to “AZL MFS Mid Cap Value Fund.” At the September 11 meeting, the Board voted unanimously to approve the MFS Agreement, which became effective as to the Fund on January 24, 2014. At the meeting, the Board reviewed materials furnished by the Manager pertaining to MFS and the MFS Agreement.
The Manager, as investment manager of all of the outstanding series of the Trust, is charged with researching and recommending subadvisers for the Trust. The Manager has adopted policies and procedures to assist it in analyzing each subadviser with expertise in a particular asset class for purposes of making the recommendation that a specific subadviser be selected. The Board reviews and considers the information provided by the Manager in deciding which investment advisers to approve. After an investment adviser becomes a subadviser, a similarly rigorous process is instituted by the Manager to monitor and evaluate the investment performance and other responsibilities of the subadviser. As part of its ongoing obligation to monitor and evaluate the performance of the Fund’s subadviser, the Manager reviewed and evaluated Columbia’s management of the Fund, with a focus on the Fund’s investment performance in relation to its benchmark.
The Board, including a majority of the independent Trustees, with the assistance of independent counsel to the independent Trustees, considered whether to approve the MFS Agreement for the Fund in light of its experience in governing the Trust and working with the Manager and the subadvisers on matters relating to the mutual funds that are outstanding series of the Trust. The independent Trustees are those Trustees who are not “interested persons” of the Trust within the meaning of the 1940 Act, and are not employees of or affiliated with the Fund, the Manager, Columbia or MFS. At least annually, the Board receives from experienced counsel who are independent of the Manager a memorandum discussing the legal standards for the Board’s consideration of proposed investment advisory or subadvisory agreements. In its deliberations, the Board considered all factors that the Trustees believed were relevant. The Board based its decision to approve the MFS Agreement on the totality of the circumstances and relevant factors, and with a view to past and future long-term considerations. The Board approved the termination of the Columbia Agreement and determined that the MFS Agreement was reasonable and in the best interests of the Fund, and approved MFS as the Fund’s new subadviser. The Board’s decision to approve the MFS Agreement reflects the exercise of its business judgment on whether to approve new arrangements and continue existing arrangements. In reaching this decision, the Board did not assign relative weights to factors discussed herein, or deem any one or group of them to be controlling in and of themselves.
A rule adopted by the SEC under the 1940 Act requires a discussion of certain factors relating to the selection of investment managers and subadvisers and the approval of advisory and subadvisory fees. The factors enumerated by the SEC in the rule are set forth below in italics followed by the Board’s conclusions regarding each factor.
(1) The nature, extent, and quality of services provided by the Subadviser. In deciding to approve MFS, the Board considered the reputation, financial strength and resources of MFS, and the experience and reputation of its portfolio management team to be involved with the Fund. The Board also considered MFS’s investment philosophy and process, particularly in the mid-cap value area. The Board determined that, based upon the Manager’s report, the proposed change to MFS as the subadviser likely would benefit the Fund and its shareholders.
In reviewing various other matters, the Board concluded that MFS was a recognized firm capable of competently managing the Fund; that the nature, extent and quality of services that MFS could provide were at a level at least equal to the services provided by Columbia; that the services contemplated by the MFS Agreement are substantially the same as those provided under the Columbia Agreement; that the MFS Agreement contains provisions generally comparable to those of other subadvisory agreements for other mutual funds; that MFS is staffed with qualified personnel and has significant research capabilities; and that the investment performance of MFS in managing a similar fund, as discussed below, is at least satisfactory.
(2) The investment performance of MFS. The Board received information about the performance of MFS in managing a mid-cap value fund that is generally comparable to the Fund. The performance information, which covered the five years ending June 30, 2013, included returns, risk, tracking error, performance versus a benchmark (the Russell Midcap Value Index) and performance rankings relative to a peer group of comparable funds. The Board noted, for example, that, while past performance is not a guarantee of future results, the MFS-managed fund (which has been managed by personnel and pursuant to the process which will be used for the Fund) consistently outperformed the Fund over the two-, three- and four-year periods ended June 30, 2013.
(3) The costs of services to be provided and profits to be realized by MFS from its relationship with the Fund. The Board compared the fee schedule in the MFS Agreement to the fee schedule in the Columbia Agreement. The Board noted that the fee schedules in both agreements require that the Manager pay the subadviser the same annual fee on average daily net assets. The Board noted that the fee schedule in the MFS Agreement was the result of arm’s-length negotiation between the Manager and MFS. The Manager also reported that the Fund’s total expense ratio (which includes management fees and operating expenses) was in the 37th percentile in the category of mid-cap value funds. Based upon its review, the Board concluded that the fees proposed to be paid to MFS were reasonable. As of September 11, 2013, MFS had not begun to act as subadviser to the Fund, and no estimated profitability information for acting as subadviser to the Fund was received.
(4) and (5) The extent to which economies of scale would be realized as the Fund grows, and whether fee levels reflect these economies of scale. The Board noted that the fee schedule in the MFS Agreement contains breakpoints that reduce the fee rate on assets above $250 million. The Board also noted that the Fund had approximately $197.5 million in net assets at June 30, 2013. The Board considered the possibility that MFS, or the Manager, may realize certain economies of scale as the Fund grows larger. The Board noted that in the fund industry as a whole, as well as among funds similar to the Fund, there is no uniformity or pattern in the fees and asset levels at which breakpoints, if any, apply. Depending on the age, size, and other characteristics of a particular fund and its manager’s cost structure, different conclusions can be drawn as to whether there are economies of scale to be realized at any particular level of assets, notwithstanding the intuitive conclusion that such economies exist, or will be realized at some level of total assets. Moreover, because different managers have different cost structures and models, it is difficult to draw meaningful conclusions from the breakpoints that may have been adopted by other funds. The Board also noted that the advisory agreements for many funds do not have breakpoints at all.
The Trustees also noted that the fee schedule in the Management Agreement with the Manager does not contain breakpoints that would reduce the fee rate as assets increase. The Manager also has agreed to “cap” the Fund’s expenses at certain levels, which could have the effect of reducing expenses as does the advisory/subadvisory fee breakpoints. The Manager has committed to continue to consider the continuation of fee “caps” and/or additional advisory/subadvisory fee breakpoints as the Fund grows larger. The Board receives quarterly reports on the level of Fund assets. The Board expects to consider whether or not to reapprove the MFS Agreement at a meeting to be held prior to December 31, 2014, and will at that time, or prior thereto, consider: (a) the extent to which economies of scale can be realized, and (b) whether the subadvisory fee schedule should be modified to reflect such economies of scale, if any.
Having taken these factors into account, the Trustees concluded that the fee schedule in the MFS Agreement was acceptable.
The Allianz Variable Insurance Products Trust (the “Trust”) is a manager-of-managers fund. That means that the Trust’s Manager (“Allianz Investment Management LLC”) is responsible for monitoring the various Subadvisers that have day-to-day responsibility for the decisions made for each of the Trust’s investment portfolios. The Trust’s Manager is responsible for determining, in the first instance, which investment advisers to consider recommending for selection as a Subadviser.
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Approval of Investment Advisory and Subadvisory Agreements — October 22, 2013 (Unaudited)
In reviewing the services provided by the Manager and the terms of the investment management agreement, the Board receives and reviews information related to the Manager’s experience and expertise in the variable insurance marketplace. Currently, the Funds are offered only through variable annuities and variable life insurance policies, and not in the retail fund market. In addition, the Board receives information regarding the Manager’s expertise with regard to portfolio diversification and asset allocation requirements within variable insurance products issued by Allianz Life Insurance Company of North America and its subsidiary, Allianz Life Insurance Company of New York. Currently, the Funds are offered only through Allianz Life and Allianz of New York variable products.
The Trust’s Manager has adopted policies and procedures to assist it in the process of analyzing each potential Subadviser with expertise in particular asset classes for purposes of making the recommendation that a specific investment adviser be selected. The Trust’s Board reviews and considers the information provided by the Manager in deciding which investment advisers to select. After an investment adviser becomes a Subadviser, a similarly rigorous process is instituted by the Manager to monitor the investment performance and other responsibilities of the Subadviser. The Manager reports to the Trust’s Board on its analysis at the regular meetings of the Board, which are held at least quarterly. Where warranted, the Manager will add or remove a particular Subadviser from a “watch” list that it maintains. Watch list criteria include, for example: (a) Fund performance over various time periods; (b) Fund risk issues, such as changes in key personnel involved with Fund management, changes in investment philosophy or process, or “capacity” concerns; and (c) organizational risk issues, such as regulatory, compliance or legal concerns, or changes in the ownership of the Subadviser. The Manager may place a Fund on the watch list for other reasons, and if so, will explain its rationale to the Trustees. Funds which are on the watch list are subject to special scrutiny of the Manager and the Board of Trustees. Funds may be removed from such watch list, if for example, performance improves or regulatory matters are satisfactorily resolved. However, in some situations where Funds which have been on the watch list, the Manager has recommended the retention of a new Subadviser, and the Board of Trustees has subsequently approved new Subadvisory Agreements with such Subadvisers.
In assessing the Manager’s and Subadvisers’ (collectively, the “Advisory Organizations”), performance of their obligations, the Board considers whether there has occurred a circumstance or event that would constitute a reason for it to not renew an advisory contract. In this regard, the Board is mindful of the potential disruption of a Fund’s operations and various risks, uncertainties and other effects that could occur as a result of a decision to terminate or not renew a contract.
As required by the Investment Company Act of 1940 (“1940 Act”), the Trust’s Board has reviewed and approved the Trust’s Investment Management Agreement with the Manager (the “Advisory Agreement”) and portfolio management agreements (the “Subadvisory Agreements”) with the Subadvisers. The Board’s decision to approve these contracts reflects the exercise of its business judgment on whether to approve new arrangements and continue the existing arrangements. During its review of these contracts, the Board considers many factors, among the most material of which are: the Fund’s investment objectives and long term performance; the Advisory Organizations’ management philosophy, personnel, and processes, including their compliance history and the adequacy of their compliance processes; the preferences and expectations of Fund shareholders (and underlying contract owners) and their relative sophistication; the continuing state of competition in the mutual fund industry; and comparable fees in the mutual fund industry.
The Board also considers the compensation and benefits received by the Advisory Organizations. This includes fees received for services provided to the Fund by affiliated persons of the Advisory Organizations and research services received by the Advisory Organizations from brokers that execute Fund trades, as well as advisory fees. The Board considered the fact that: (1) the Manager and the Trust are parties to an Administrative Service Agreement, a Compliance Services Agreement, and a Chief Compliance Officer Agreement, under which the Manager is compensated by the Trust for performing certain administrative and compliance services including providing an employee of the Manager or one of its affiliates to act as the Trust’s Chief Compliance Officer; and (2) Allianz Life Financial Services, LLC, an affiliated person of the Manager, is a registered securities broker-dealer and receives (along with its affiliated persons) payments made by the Trust pursuant to Rule 12b-1.
The Board is aware that various courts have interpreted provisions of the 1940 Act and have indicated in their decisions that the following factors may be relevant to an adviser’s compensation: the nature and quality of the services provided by the adviser, including the performance of the fund; the adviser’s cost of providing the services; the extent to which the adviser may realize “economies of scale” as the fund grows larger; any indirect benefits that may accrue to the adviser and its affiliates as a result of the adviser’s relationship with the fund; performance and expenses of comparable funds; and the extent to which the independent Board members are fully informed about all facts bearing on the adviser’s service and fee. The Trust’s Board is aware of these factors and takes them into account in its review of the Trust’s advisory contracts.
The Board considered and weighed these circumstances in light of its experience in governing the Trust and working with the Advisory Organizations on matters relating to the Funds, and is assisted in its deliberations by the advice of legal counsel to the Independent Trustees. In this regard, the Board requests and receives a significant amount of information about the Funds and the Advisory Organizations. Some of this information is provided at each regular meeting of the Board; additional information is provided in connection with the particular meeting or meetings at which the Board’s formal review of an advisory contract occurs. In between regularly scheduled meetings, the Board may receive information on particular matters as the need arises. Thus, the Board’s evaluation of an advisory contract is informed by reports covering such matters as: an Advisory Organization’s investment philosophy, personnel, and processes; the Fund’s short- and long-term performance (in absolute terms as well as in relationship to its benchmark(s), certain competitor or “peer group” funds and similar funds managed by the particular Subadviser), and comments on the reasons for performance; the Fund’s expenses (including the advisory fee itself and the overall expense structure of the Fund, both in absolute terms and relative to similar and/or competing funds, with due regard for contractual or voluntary expense limitations); the use and allocation of brokerage commissions derived from trading the Fund’s portfolio securities; the nature and extent of the advisory and other services provided to the Fund by the Advisory Organizations and their affiliates; compliance and audit reports concerning the Funds and the companies that service them; and relevant developments in the mutual fund industry and how the Funds and/or Advisory Organizations are responding to them.
The Board also receives financial information about Advisory Organizations, including reports on the compensation and benefits the Advisory Organizations derive from their relationships with the Funds. These reports cover not only the fees under the advisory contracts, but also fees, if any, received for providing other services to the Funds. The reports also discuss any indirect or “fall out” benefits an Advisory Organization may derive from its relationship with the Funds.
The Advisory and Subadvisory Agreements (collectively, the “Agreements”) were most recently considered at Board of Trustees meetings held in the fall of 2013. Information relevant to the approval of such Agreements was considered at a telephonic Board of Trustees meeting on October 16, 2013, and at an “in person” Board of Trustees meeting held October 22, 2013. The Agreements were approved at the Board meeting of October 22, 2013. At such meeting the Board also approved an Expense Limitation Agreement between the Manager and the Trust for the period ending April 30, 2015. In connection with such meetings, the Trustees requested and evaluated extensive materials from the Manager, including performance and expense information for other investment companies with similar investment objectives derived from data compiled by an independent third party provider and other sources believed to be reliable by the Manager. Prior to voting, the Trustees reviewed the proposed approval/continuance of the Agreements with management and with experienced counsel who are independent of the Manager and received a memorandum from such counsel discussing the legal standards for their consideration of the proposed approvals/continuances. The independent (“disinterested”) Trustees also discussed the proposed approvals/continuances in a private session with such counsel at which no representatives of the Manager were present. In reaching their determinations relating to the approval and/or continuance of the Agreements, in respect of each Fund, the Trustees considered all factors they believed relevant. The Board based its decision to approve the Agreements on the totality of the circumstances and relevant factors, and with a view to past and future long-term considerations. Not all of the factors and considerations discussed above and below are necessarily relevant to every Fund, and the Board did not assign relative weights to factors discussed herein or deem any one or group of them to be controlling in and of themselves.
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An SEC Rule requires that shareholder reports include a discussion of certain factors relating to the selection of investment advisers and the approval of advisory fees. The “factors” enumerated by the SEC are set forth below in italics, as well as the Board’s conclusions regarding such factors:
(1) The nature, extent and quality of services provided by the Manager and Subadvisers. The Trustees noted that the Manager, subject to the control of the Board of Trustees, administers each Fund’s business and other affairs. Under the Advisory Agreement, the Manager holds the sole and exclusive responsibility to provide, or arrange for other to provide, the management of the Funds’ assets and the placement of orders for the purchase and sale of the securities of the Funds. As the Trust is a manager of managers fund, the Manager is authorized, under the Advisory Agreement, to retain one or more Subadvisers for each Fund to handle day-to-day management of the Funds’ investment portfolios; the Manager is responsible for determining, in the first instance, which investment advisers to recommend to the Board of Trustees for selection as a Subadviser. The Trustees were aware that, notwithstanding the retention of the Subadvisers to handle day-to-day portfolio management, the Manager remains responsible for substantial other matters, including continuously monitoring compliance by each Subadviser with the investment policies and restrictions of the respective Funds, with such other limitations or directions of the Board of Trustees, and with all legal requirements under federal or state law or regulation. The Manager also is responsible primarily to provide statistical information and other data to the Trustees regarding the Funds’ portfolio investments and to make available to the Funds’ administrator such information as is necessary for the conduct of its duties.
The Trustees also noted that the Manager provides the Trust and each Fund with such administrative and other services (exclusive of, and in addition to, any such services provided by any others retained by the Trust on behalf of the Funds) and executive and other personnel as are necessary for the operation of the Trust and the Funds. Except for the Trust’s Chief Compliance Officer, the Manager pays all of the compensation of Trustees and officers of the Trust who are employees of the Manager or its affiliates.
The Trustees considered the scope and quality of services provided by the Manager and the Subadvisers and noted that the scope of such services provided had expanded as a result of recent regulatory and other developments. The Trustees noted that, for example, the Manager and Subadvisers are responsible for maintaining and monitoring their own compliance programs, and these compliance programs are continuously refined and enhanced in light of new regulatory requirements. The Trustees considered the capabilities and resources which the Manager has dedicated to performing services on behalf of the Trust and its Funds. The quality of administrative and other services, including the Manager’s role in coordinating the activities of the Trust’s other service providers, also were considered. The Trustees concluded that, overall, they were satisfied with the nature, extent and quality of services provided (and expected to be provided) to the Trust and to each of the Funds under the Agreements.
(2) The investment performance of the Funds, the Manager and the Subadvisers. In connection with every in-person quarterly Board of Trustees meeting, Trustees receive extensive information on the performance results of each of the Funds. This includes, for example, performance information on all of the Funds for the previous quarter, and previous one, three and five-year periods, and since inception. (For Funds which have been in existence for less than five years, Trustees may receive performance information on comparable funds managed by the particular Subadviser for periods prior to the creation of a particular Fund.) Such performance information includes information on absolute total return, performance versus Subadvisers’ comparable fund(s), performance versus the appropriate benchmark(s), and performance versus peer groups. For example, in connection with the Board of Trustees meetings held September 10-11, 2013, the Manager reported that for the three year period ended June 30, 2013, 12 Funds were in the top 40%, eight were in the middle 20% and eight were in the bottom 40%, and for the one year period ended June 30, 2013, 8 Funds were in the top 40%, seven were in the middle 20%, and 14 were in the bottom 40%. The Manager also reported that for the five year period ended June 30, 2013, 10 Funds were in the top 40%, four were in the middle 20%, and six were in the bottom 40%. At the Board of Trustees meeting held October 22, 2013, the Trustees determined that the overall investment performance of the Funds was acceptable.
(3) The costs of services to be provided and profits to be realized by the Manager and the Subadvisers and their affiliates from their relationship with the Funds. The Manager has supplied information to the Board of Trustees pertaining to the level of investment advisory fees to which the Funds are subject. The Manager has agreed to temporarily “cap” Fund expenses at certain levels, and information is provided to Trustees setting forth “contractual” advisory fees and “actual” fees after taking expense caps into account. Based upon the information provided, the “actual” advisory fees payable by the Funds overall are generally comparable to the average level of fees paid by Fund peer groups. For the 30 Funds reviewed by the Board of Trustees in the fall of 2013, 27 Funds paid “actual” advisory fees in a percentage amount within the 65th percentile or lower for each Fund’s applicable category. The Trustees recognized that it is difficult to make comparisons of advisory fees because there are variations in the services that are included in the fees paid by other funds. The Board has concluded that the advisory fees to be paid to the Manager by the Funds are not unreasonable.
The Manager has also supplied information to the Board of Trustees pertaining to total Fund expenses (which includes advisory fees, the 25 basis point 12b-1 fee paid by the Funds, and other Fund expenses). As noted above, the Manager has agreed to “cap” Fund expenses at certain levels. Based upon the information provided, the overall total expense ratio ranking in 2013 for the 30 Funds was as follows: (1) 28 of the Funds had total expense rankings below the 65th percentile (with 20 Funds at or below the 50th percentile); (2) the AZL Russell 1000 Value Fund had a total expense ranking in the 66th percentile; the Manager reported that there is only a limited peer group for such Fund; and (3) the AZL Morgan Stanley Global Real Estate Fund had a total expense ranking in the 72nd percentile; it was reported by the Manager that there is only a limited peer group for such Fund, such Fund’s expense ratio has declined, and such Fund’s expense ratio is comparable to funds of similar size.
The Manager has committed to providing the Funds with a high quality of service and working to reduce Fund expenses over time, particularly as the Funds grow larger. The Trustees concluded therefore that the expense ratios of the Funds were not unreasonable.
The Manager provided information concerning the profitability of the Manager’s investment advisory activities for the period from 2011 through June 30, 2013. The Trustees recognized that it is difficult to make comparisons of profitability from investment company advisory agreements because comparative information is not generally publicly available and is affected by numerous factors, including the structure of the particular adviser, the types of funds it manages, its business mix, numerous assumptions regarding allocation of expenses and the adviser’s capital structure and cost of capital. In considering profitability information, the Trustees considered the possible effect of certain fall-out benefits to the Manager and its affiliates. The Trustees focused on profitability of the Manager’s relationships with the Funds before taxes and distribution expenses. The Trustees recognized that the Manager should, in the abstract, be entitled to earn a reasonable level of profits for the services it provides to each Fund and, based on their review, concluded that they were satisfied that the Manager’s level of profitability from its relationship with the Funds was not excessive.
The Manager, on behalf of the Board of Trustees, endeavored to obtain information on the profitability of each Subadviser in connection with its relationship with the Fund or Funds which it subadvises. The Manager was unable to obtain meaningful profitability information from some of the unaffiliated Subadvisers. The Manager assured the Board of Trustees that the Agreements with the Subadvisers which are not affiliated with it were negotiated on an “arm’s length” basis, so that arguably, such profitability information should be less relevant. The Trustees were also provided with certain information on the profitability for the Subadviser which is affiliated with the Manager. Trustees recognized the difficulty of allocating costs to multiple advisory accounts and products of a large advisory organization. Based upon the information provided, the Trustees determined that there was no evidence that the level of such profitability attributable to subadvising the Funds was excessive.
(4) and (5) The extent to which economies of scale would be realized as the Funds grow, and whether fee levels reflect these economies of scale. The Trustees noted that most of the advisory fee schedules for the Funds do not contain breakpoints that reduce the fee rate on assets above specified levels, although certain Subadvisory Agreements have such “breakpoints.” The Trustees recognized that breakpoints may be an appropriate way for the Manager to share its economies of scale, if any, with Funds that have substantial assets. However, they also recognized that there may not be a direct relationship between any economies of scale realized by Funds and those realized by the Manager as assets increase. The Trustees do not believe there is a uniform methodology for establishing breakpoints that give effect to Fund-specific service provided by the Manager. The Trustees noted that in the fund industry as a whole, as well as among funds similar to the Funds, there is no uniformity or pattern in the fees
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and asset levels at which breakpoints (if any) apply. Depending on the age, size, and other characteristics of a particular fund and its manager’s cost structure, different conclusions can be drawn as to whether there are economies of scale to be realized at any particular level of assets, notwithstanding the intuitive conclusion that such economies exist, or will be realized at some level of total assets. Moreover, because different managers have different cost structures and service models, it is difficult to draw meaningful conclusions from the breakpoints that may have been adopted by other funds. The Trustees also noted that the advisory agreements for many funds do not have breakpoints at all, or if breakpoints exist, they may be at asset levels significantly greater than those of the individual Funds. The Trustees also noted that the total assets in all of the Funds as of June 30, 2013 were approximately $12.85 billion, and that no single non-money market Fund had assets in excess of $616 million.
The Trustees noted that the Manager has agreed to temporarily “cap” Fund expenses at certain levels, which has the effect of reducing expenses as would the implementation of advisory fee breakpoints. The Manager has committed to continue to consider the continuation of fee “caps” and/or advisory fee breakpoints as the Funds grow larger. The Board receives quarterly reports on the level of Fund assets. It expects to consider whether or not to approve the Agreements at a meeting to be held prior to December 31, 2014, and will at that time, or prior thereto, consider: (a) the extent to which economies of scale can be realized, and (b) whether the advisory fee should be modified to reflect such economies of scale, if any.
Having taken these factors into account, the Trustees concluded that the absence of breakpoints in certain of the Funds’ advisory fee rate schedules was acceptable under each Fund’s circumstances.
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Information about the Board of Trustees and Officers (Unaudited)
The Trust is managed by the Trustees in accordance with the laws of the state of Delaware governing business trusts. There are currently eight Trustees, two of whom are “interested persons” of the Trust within the meaning of that term under the 1940 Act. The Trustees and Officers of the Trust, their addresses, ages, their positions held with the Trust, their terms of office with the Trust and length of time served, their principal occupation(s) during the past five years, the number of portfolios in the Trust they oversee, and their other directorships held are as follows:
Non-Interested Trustees(1)
Name, Address, and Age | Positions Held with VIP Trust and FOF Trust | Term of Office(2)/Length of Time Served | Principal Occupation(s) During Past 5 Years | Number of Portfolios Overseen for VIP Trust and FOF Trust | Other Directorships Held Outside the AZL Fund Complex | |||||
Peter R. Burnim, Age 66 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/07 | Chairman, Argus Investment Strategies Fund Ltd., February 2013 to present; Managing Director, iQ Venture Advisors, LLC. 2005 to 2012; Chairman, Northstar Group Holdings Ltd. Bermuda, 2011 to present; Expert Witness, Massachusetts Department of Revenue, 2011 to 2012; Executive Vice President, Northstar Companies, 2002 to 2005; Senior Officer, Citibank and Citicorp for over 25 years | 41 | Argus Group Holdings; Northstar Group Holdings, NRIL, Sterling Centrecorp Inc.; Highland Financial Holdings; and Bank of Bermuda NY | |||||
Peggy L. Ettestad, Age 56 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/07 | Managing Director, Red Canoe Management Consulting LLC, 2008 to present; Senior Managing Director, Residential Capital LLC, 2003 to 2008; Chief Operations Officer, Transamerica Reinsurance 2002 to 2003 | 41 | Luther College | |||||
Roger Gelfenbien, Age 70 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 10/99 | Retired; Partner of Accenture 1983 to 1999 | 41 | Virtus Funds (8 Funds) | |||||
Claire R. Leonardi, Age 58 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/04 | Chief Executive Officer, Connecticut Innovations, Inc., 2012 to present; General Partner, Fairview Capital, L.P., 1994 to 2012 | 41 | The Natural History Museum of the Adirondacks | |||||
Dickson W. Lewis, Age 65 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/04 | Retired; Consultant to Lifetouch National School Studios; Vice President/General Manager, Yearbooks & Canada-Lifetouch National School Studios, 2006 to 2013; Vice President/General Manager of Jostens, Inc., 2002 to 2006; Senior Vice President of Fortis Group, 1997 to 2002 | 41 | None | |||||
Peter W. McClean, Age 69 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/04 | Retired; President and CEO of Measurisk, LLC, 2001 to 2003; Chief Risk Management Officer at Bank of Bermuda Ltd., 1996 to 2001 | 41 | PNMAC Opportunity Fund; Northeast Bank; and FHI | |||||
Arthur C. Reeds III, Age 69 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 10/99 | Retired; Senior Investment Officer, Hartford Foundation for Public Giving, 2000 to 2003; Chairman, Chief Executive and President of Conning Corp., 1999 to 2000; Investment Consultant, 1997 to 1999 | 41 | Connecticut Water Service, Inc. |
Interested Trustees(3)
Name, Address, and Age | Positions Held with VIP Trust and FOF Trust | Term of Office(2)/Length of Time Served | Principal Occupation(s) During Past 5 Years | Number of Portfolios Overseen for VIP Trust and FOF Trust | Other Directorships Held Outside the AZL Fund Complex | |||||
Robert DeChellis, Age 46 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 3/08 | President and CEO, Allianz Life Financial Services, LLC, 2007 to present | 41 | None | |||||
Brian Muench, Age 43 5701 Golden Hills Drive | Trustee | Since 6/11 | President, Allianz Investment Management LLC, November 2010 to present; Vice President, Allianz Life, April 2011 to present; Vice President, Advisory Management, Allianz Investment Management LLC from December 2005 to November 2010 | 41 | None |
21
Officers
Name, Address, and Age | Positions Held with VIP and VIP FOF Trust | Term of Office(2)/Length of Time Served | Principal Occupation(s) During Past 5 Years | |||
Brian Muench, Age 43 5701 Golden Hills Drive Minneapolis, MN 55416 | President | Since 11/10 | President, Allianz Investment Management LLC from November 2010, to present; Vice President, Allianz Life from April 2011 to present; Vice President, Allianz Investment Management LLC from December 2005 to November 2010. | |||
Michael Radmer, Age 68 Dorsey & Whitney LLP, Suite 1500 50 South Sixth Street Minneapolis, MN 55402-1498 | Secretary | Since 2/02 | Partner, Dorsey and Whitney LLP since 1976. | |||
Ty Edwards, Age 47 Citi Fund Services Ohio, Inc. 3435 Stelzer Road Columbus, OH 43219 | Treasurer, Principal Accounting Officer and Principal Financial Officer | Since 4/10 | Senior Vice President, Financial Administration, Citi Fund Services Ohio, Inc., December 2009 to present; Director, Product Management, Columbia Management, April 2007 to April 2009; Deputy Treasurer, Columbia Funds and Director, Fund Administration, Columbia Management, January 2006 to April 2007. | |||
Christopher R. Pheiffer, Age 45(4) 5701 Golden Hills Drive Minneapolis, MN 55416 | Chief Compliance Officer(5) and Anti-Money Laundering Compliance Officer | Since 2/14 (interim) | Deputy Chief Compliance Officer of the Trusts, 2007-2014. |
(1) | Member of the Audit Committee. |
(2) | Indefinite. |
(3) | Is an “interested person”, as defined by the 1940 Act, due to employment by Allianz. |
(4) | Stephen G. Simon, previously the Chief Compliance Officer of the Trusts, resigned all of his positions with Allianz effective February 21, 2014. Mr. Pheiffer, previously the Deputy Chief Compliance Officer of the Trusts, has been named Chief Compliance Officer of the Trusts on an interim basis while a search for a permanent replacement is conducted. |
(5) | The Manager and the Trust are parties to a Chief Compliance Officer Agreement under which the Manager is compensated by the Trust for providing an employee of the Manager or one of its affiliates to act as the Trust’s Chief Compliance Officer. The Chief Compliance Officer and Anti-Money Laundering Compliance Officer is not considered a corporate officer or executive employee of the Trust. |
22
The Allianz VIP Funds are distributed by Allianz Life Financial Services, LLC. | ||
These Funds are not FDIC Insured. | ANNRPT1213 2/14 |
AZL® Dreyfus Research Growth Fund
Annual Report
December 31, 2013
Table of Contents
Management Discussion and Analysis
Page 1
Expense Examples and Portfolio Composition
Page 3
Schedule of Portfolio Investments
Page 4
Statement of Assets and Liabilities
Page 6
Statement of Operations
Page 6
Statements of Changes in Net Assets
Page 7
Financial Highlights
Page 8
Notes to the Financial Statements
Page 9
Report of Independent Registered Public Accounting Firm
Page 13
Other Federal Income Tax Information
Page 14
Other Information
Page 15
Approval of Investment Advisory and Subadvisory Agreements
Page 16
Information about the Board of Trustees and Officers
Page 19
This report is submitted for the general information of the shareholder of the Fund. The report is not authorized for distribution to prospective investors in the Fund unless preceded or accompanied by an effective prospectus, which contains details concerning the sales charges and other pertinent information.
AZL® Dreyfus Research Growth Fund Review (unaudited)
Allianz Investment Management LLC serves as the Manager for the AZL® Dreyfus Research Growth Fund and The Dreyfus Corporation serves as Subadviser to the Fund.
What factors affected the Fund’s performance during the year ended December 31, 2013?
For the year ended December 31, 2013, the AZL® Dreyfus Research Growth Fund returned 36.00%1. That compared to a 33.48% total return for its benchmark, the Russell 1000® Growth Index2.
Investor sentiment continued to improve in 2013, helping many global markets finish the year in positive territory. U.S. stocks led the way. Equities rallied in the first quarter following news that reinforced the global economic recovery, including monetary policies in Japan aimed at curbing deflation and reviving the declining Japanese economy, as well the decision by U.S. lawmakers to extend the $16.4 trillion debt ceiling. A volatile second quarter produced mixed, albeit positive, returns across most equity indices, as investors prepared for the fallout from government spending cuts. However, signs of a strengthening global economy fueled higher equity returns in the third quarter. That rally continued through the end of year, bolstered by the U.S. Federal Reserve’s announcement that it would begin tapering its bond-buying program.
The Fund’s relative performance benefited from individual stock selection in the healthcare, financials and consumer discretionary sectors. Within healthcare, an investment in a developer of human therapeutics to treat life-threatening diseases traded higher throughout the year. An investment in a biopharmaceutical company also traded sharply higher on increased merger and acquisition speculation during the period.*
The Fund’s lack of exposure to REITs improved its relative performance, as that segment lagged all the others in the financials sector. In addition, investments in textiles, leisure, Internet and catalog retail sectors benefited the Fund’s relative return.*
Investments in the materials sector, specifically the construction materials and chemicals segment, hindered the Fund’s relative performance. For instance, shares of an agricultural product maker slumped due to weakening corn prices and concern that fewer acres would be planted in the U.S. in the future. For these reasons, the Fund exited the position during the period.*
Past performance does not guarantee future results.
* | The Fund’s portfolio composition is subject to change. There is no guarantee that any sectors mentioned will continue to perform well or that securities in such sectors will be held by the Fund in the future. The information contained in this commentary is for informational purposes only and should not be construed as a recommendation to purchase or sell securities in the sector mentioned. The Fund’s holdings and weightings are as of December 31, 2013. |
1 | The recent growth rate in the stock market has helped to produce short-term returns that are not typical and may not continue in the future. Because of ongoing market volatility, Fund performance may be subject to substantial short-term changes. |
2 | The Russell 1000® Growth Index measures the performance of the large-cap growth segment of the U.S. equity universe. It includes those Russell 1000 companies with higher price-to-book ratios and higher forecasted growth values. Investors cannot invest directly in an index. |
1
AZL® Dreyfus Research Growth Fund Review (unaudited)
Fund Objective
The Fund’s investment objective is to seek long-term growth of capital and income. This objective may be changed by the Trustees of the Fund without shareholder approval. The Fund seeks to achieve its objective by investing at least 80% of its net assets, plus any borrowings for investment purposes, in stocks that are included in a widely recognized index of stock market performance.
Investment Concerns
Equity securities (stocks) are more volatile and carry more risk than other forms of investments, including investments in high-grade fixed income securities. The net asset value per share of this Fund will fluctuate as the value of the securities in the portfolio changes.
International investing may involve risk of capital loss from unfavorable fluctuations in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations.
Growth based investments can perform differently from the market as a whole and can be more volatile than other types of securities.
Investing in a single industry or sector, or concentrating investments in a limited number of industries or sectors, tends to increase the risk that economic, political, or regulatory developments affecting certain industries or sectors will have a large impact on the value of the portfolio.
For a complete description of these and other risks associated with investing in a mutual Fund, please refer to the Fund’s prospectus.
Growth of $10,000 Investment
The chart above represents a comparison of a hypothetical investment in the Fund versus a similar investment in the Fund’s benchmark, and represents the reinvestment of dividends and capital gains in the Fund.
Average Annual Total Returns as of December 31, 2013
1 | 3 | 5 | 10 | |||||||||||||
Year | Year | Year | Year | |||||||||||||
AZL® Dreyfus Research Growth Fund | 36.00 | %1 | 15.74 | % | 20.76 | % | 7.56 | % | ||||||||
Russell 1000® Growth Index | 33.48 | % | 16.45 | % | 20.39 | % | 7.83 | % |
Past performance does not guarantee future results. The performance data quoted represents past performance and current returns may be lower or higher. The investment return and principal value will fluctuate so that an investor’s shares, when redeemed may be worth more or less than the original cost. To obtain performance information current to the most recent month end, please visit www.Allianzlife.com.
Expense Ratio | Gross | |||
AZL® Dreyfus Research Growth Fund | 1.07 | % |
The above expense ratio is based on the current Fund prospectus dated April 29, 2013. The Manager has voluntarily reduced the management fee to 0.70%. The Manager and the Fund have entered into a written contract limiting operating expenses, excluding certain expenses (such as interest expense), to 1.20% through April 30, 2015. Additional information pertaining to the December 31, 2013 expense ratios can be found in the financial highlights.
1 | The recent growth rate in the stock market has helped to produce short-term returns that are not typical and may not continue in the future. Because of ongoing market volatility, Fund performance may be subject to substantial short-term changes. |
The total return of the Fund does not reflect the effect of any insurance charges, the annual maintenance fee or the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. Such charges, fees and tax payments would reduce the performance quoted.
The Fund’s performance is measured against the Russell 1000® Growth Index, an unmanaged index that measures the performance of the large-cap growth segment of the U.S. equity universe. It includes those Russell 1000 companies with higher price-to-book ratios and higher forecasted growth values. The index does not reflect the deduction of fees associated with a mutual fund, such as investment management and fund accounting fees. The Fund’s performance reflects the deduction of fees for services provided to the Fund. Investors cannot invest directly in an index.
2
AZL Dreyfus Research Growth Fund
(Unaudited)
As a shareholder of the AZL Dreyfus Research Growth Fund (the “Fund”), you incur ongoing costs, including management fees, distribution fees, and other Fund expenses. These examples are intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. Please note that the expenses shown in each table do not reflect expenses that apply to the subaccount or the insurance contract. If the expenses that apply to the subaccount of the insurance contract were included, your costs would have been higher.
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the periods presented below.
The Actual Expense table below provides information about actual account values and actual expenses. You may use the information below, 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 table under the heading entitled “Expenses Paid During Period” to estimate the expenses you paid on your account during this period.
Beginning Account Value 7/1/13 | Ending Account Value 12/31/13 | Expenses Paid During Period 7/1/13 - 12/31/13* | Annualized Expense Ratio During Period 7/1/13 - 12/31/13 | |||||||||||||||||
AZL Dreyfus Research Growth Fund | $ | 1,000.00 | $ | 1,234.20 | $ | 5.63 | 1.00 | % |
The Hypothetical Expense table below provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.
Beginning Account Value 7/1/13 | Ending Account Value 12/31/13 | Expenses Paid During Period 7/1/13 - 12/31/13* | Annualized Expense Ratio During Period 7/1/13 - 12/31/13 | |||||||||||||||||
AZL Dreyfus Research Growth Fund | $ | 1,000.00 | $ | 1,020.16 | $ | 5.09 | 1.00 | % |
* | Expenses are equal to the average account value over the period, multiplied by the Fund’s annualized expense ratio, multiplied by 184/365 (to reflect the one half year period). |
Portfolio Composition
(Unaudited)
Investments | Percent of net assets | ||||
Information Technology | 27.3 | % | |||
Consumer Discretionary | 19.5 | ||||
Health Care | 14.1 | ||||
Consumer Staples | 11.3 | ||||
Industrials | 10.1 | ||||
Financials | 5.7 | ||||
Energy | 4.5 | ||||
Materials | 3.7 | ||||
Entertainment — Diversified | 1.3 | ||||
Technology | 0.7 | ||||
|
| ||||
Total Common Stock | 98.2 | ||||
Affiliated Investment Company | 0.2 | ||||
|
| ||||
Total Investment Securities | 98.4 | ||||
Net other assets (liabilities) | 1.6 | ||||
|
| ||||
Net Assets | 100.0 | % | |||
|
|
3
AZL Dreyfus Research Growth Fund
Schedule of Portfolio Investments
December 31, 2013
Shares | Fair Value | |||||||
| Common Stocks (98.2%): |
| ||||||
| Aerospace & Defense (2.3%): |
| ||||||
29,180 | Precision Castparts Corp. | $ | 7,858,173 | |||||
|
| |||||||
| Air Freight & Logistics (1.0%): | |||||||
25,000 | FedEx Corp. | 3,594,250 | ||||||
|
| |||||||
| Auto Components (1.2%): | |||||||
72,110 | Delphi Automotive plc | 4,335,974 | ||||||
|
| |||||||
| Beverages (3.8%): | |||||||
106,460 | Coca-Cola Enterprises, Inc. | 4,698,080 | ||||||
107,930 | PepsiCo, Inc. | 8,951,714 | ||||||
|
| |||||||
13,649,794 | ||||||||
|
| |||||||
| Biotechnology (9.1%): | |||||||
34,440 | Alexion Pharmaceuticals, Inc.* | 4,582,586 | ||||||
39,350 | Amgen, Inc. | 4,492,196 | ||||||
19,650 | Biogen Idec, Inc.* | 5,497,088 | ||||||
34,050 | Celgene Corp.* | 5,753,088 | ||||||
111,110 | Gilead Sciences, Inc.* | 8,349,916 | ||||||
8,540 | Regeneron Pharmaceuticals, Inc.* | 2,350,550 | ||||||
24,410 | Vertex Pharmaceuticals, Inc.* | 1,813,663 | ||||||
|
| |||||||
32,839,087 | ||||||||
|
| |||||||
| Capital Markets (2.2%): | |||||||
37,080 | Ameriprise Financial, Inc. | 4,266,054 | ||||||
43,570 | T. Rowe Price Group, Inc. | 3,649,859 | ||||||
|
| |||||||
7,915,913 | ||||||||
|
| |||||||
| Chemicals (2.9%): | |||||||
49,130 | Eastman Chemical Co. | 3,964,791 | ||||||
50,710 | Praxair, Inc. | 6,593,821 | ||||||
|
| |||||||
10,558,612 | ||||||||
|
| |||||||
| Commercial Services & Supplies (1.3%): | |||||||
116,740 | Tyco International, Ltd. | 4,791,010 | ||||||
|
| |||||||
| Communications Equipment (1.2%): | |||||||
192,790 | Juniper Networks, Inc.* | 4,351,270 | ||||||
|
| |||||||
| Computers & Peripherals (1.2%): | |||||||
167,290 | EMC Corp. | 4,207,344 | ||||||
|
| |||||||
| Construction & Engineering (1.4%): | |||||||
63,500 | Fluor Corp. | 5,098,415 | ||||||
|
| |||||||
| Construction Materials (0.8%): | |||||||
28,270 | Martin Marietta Materials, Inc. | 2,825,304 | ||||||
|
| |||||||
| Consumer Finance (2.3%): | |||||||
59,590 | American Express Co. | 5,406,600 | ||||||
49,430 | Discover Financial Services | 2,765,609 | ||||||
|
| |||||||
8,172,209 | ||||||||
|
| |||||||
| Diversified Financial Services (1.2%): | |||||||
19,690 | IntercontinentalExchange Group, Inc. | 4,428,675 | ||||||
|
| |||||||
| Electrical Equipment (1.0%): | |||||||
48,540 | Eaton Corp. plc | 3,694,865 | ||||||
|
| |||||||
| Energy Equipment & Services (3.1%): | |||||||
39,570 | National-Oilwell Varco, Inc. | 3,147,002 | ||||||
89,580 | Schlumberger, Ltd. | 8,072,054 | ||||||
|
| |||||||
11,219,056 | ||||||||
|
|
Shares | Fair Value | |||||||
| Common Stocks, continued |
| ||||||
| Food & Staples Retailing (3.9%): | |||||||
42,950 | Costco Wholesale Corp. | $ | 5,111,479 | |||||
54,800 | CVS Caremark Corp. | 3,922,036 | ||||||
88,180 | Whole Foods Market, Inc. | 5,099,449 | ||||||
|
| |||||||
14,132,964 | ||||||||
|
| |||||||
| Food Products (1.1%): | |||||||
115,660 | Mondelez International, Inc., Class A | 4,082,798 | ||||||
|
| |||||||
| Health Care Providers & Services (1.5%): |
| ||||||
32,430 | McKesson, Inc. | 5,234,202 | ||||||
|
| |||||||
| Hotels, Restaurants & Leisure (2.9%): | |||||||
62,960 | Las Vegas Sands Corp. | 4,965,655 | ||||||
68,860 | Starbucks Corp. | 5,397,936 | ||||||
|
| |||||||
10,363,591 | ||||||||
|
| |||||||
| Industrial Conglomerates (1.3%): | |||||||
62,930 | Danaher Corp. | 4,858,196 | ||||||
|
| |||||||
| Internet & Catalog Retail (4.0%): | |||||||
23,590 | Amazon.com, Inc.* | 9,407,456 | ||||||
4,240 | Priceline.com, Inc.* | 4,928,576 | ||||||
|
| |||||||
14,336,032 | ||||||||
|
| |||||||
| Internet Software & Services (7.8%): | |||||||
126,300 | Facebook, Inc., Class A* | 6,903,558 | ||||||
13,530 | Google, Inc., Class A* | 15,163,207 | ||||||
17,080 | LinkedIn Corp., Class A* | 3,703,456 | ||||||
39,473 | Twitter, Inc.* | 2,512,456 | ||||||
|
| |||||||
28,282,677 | ||||||||
|
| |||||||
| IT Services (6.0%): | |||||||
81,440 | Accenture plc, Class A | 6,695,997 | ||||||
52,700 | Cognizant Technology Solutions Corp., Class A* | 5,321,646 | ||||||
11,630 | MasterCard, Inc., Class A | 9,716,400 | ||||||
|
| |||||||
21,734,043 | ||||||||
|
| |||||||
| Life Sciences Tools & Services (1.1%): | |||||||
35,190 | Illumina, Inc.* | 3,892,718 | ||||||
|
| |||||||
| Machinery (1.8%): | |||||||
47,040 | Cummins, Inc. | 6,631,229 | ||||||
|
| |||||||
| Media (4.7%): | |||||||
147,150 | Comcast Corp., Class A | 7,646,650 | ||||||
128,650 | Twenty-First Century Fox, Inc. | 4,525,907 | ||||||
54,570 | Viacom, Inc., Class B | 4,766,144 | ||||||
|
| |||||||
16,938,701 | ||||||||
|
| |||||||
| Multiline Retail (0.6%): | |||||||
35,760 | Dollar General Corp.* | 2,157,043 | ||||||
|
| |||||||
| Oil, Gas & Consumable Fuels (1.4%): | |||||||
30,570 | EOG Resources, Inc. | 5,130,869 | ||||||
|
| |||||||
| Pharmaceuticals (2.4%): | |||||||
104,460 | Bristol-Myers Squibb Co. | 5,552,049 | ||||||
21,320 | Perrigo Co. plc | 3,271,767 | ||||||
|
| |||||||
8,823,816 | ||||||||
|
| |||||||
| Semiconductors & Semiconductor Equipment (3.6%): |
| ||||||
50,990 | Analog Devices, Inc. | 2,596,921 |
Continued
4
AZL Dreyfus Research Growth Fund
Schedule of Portfolio Investments
December 31, 2013
Shares | Fair Value | |||||||
| Common Stocks, continued |
| ||||||
| Semiconductors & Semiconductor Equipment, continued |
| ||||||
146,040 | Texas Instruments, Inc. | $ | 6,412,616 | |||||
84,380 | Xilinx, Inc. | 3,874,730 | ||||||
|
| |||||||
12,884,267 | ||||||||
|
| |||||||
| Software (8.2%): | |||||||
69,420 | Adobe Systems, Inc.* | 4,156,870 | ||||||
68,670 | Intuit, Inc. | 5,240,894 | ||||||
345,210 | Microsoft Corp. | 12,921,210 | ||||||
94,960 | Salesforce.com, Inc.* | 5,240,842 | ||||||
31,620 | ServiceNow, Inc.* | 1,771,036 | ||||||
|
| |||||||
29,330,852 | ||||||||
|
| |||||||
| Specialty Retail (2.5%): | |||||||
80,630 | Home Depot, Inc. (The) | 6,639,074 | ||||||
65,990 | Urban Outfitters, Inc.* | 2,448,229 | ||||||
|
| |||||||
9,087,303 | ||||||||
|
| |||||||
| Textiles, Apparel & Luxury Goods (4.9%): | |||||||
50,920 | Michael Kors Holdings, Ltd.* | 4,134,195 | ||||||
62,500 | Nike, Inc., Class B | 4,915,000 | ||||||
27,510 | PVH Corp. | 3,741,910 | ||||||
55,770 | Under Armour, Inc., Class A* | 4,868,721 | ||||||
|
| |||||||
17,659,826 | ||||||||
|
| |||||||
| Tobacco (2.5%): | |||||||
103,750 | Philip Morris International, Inc. | 9,039,738 | ||||||
|
| |||||||
| Total Common Stocks (Cost $240,843,655) | 354,140,816 | ||||||
|
|
Contracts, Shares, Notional Amount or Principal Amount | Fair Value | |||||||
| Affiliated Investment Company (0.2%): | |||||||
698,325 | Dreyfus Treasury Prime Cash Management Fund, Institutional Shares, 0.00%(a) | $ | 698,325 | |||||
|
| |||||||
| Total Affiliated Investment Company (Cost $698,325) | 698,325 | ||||||
|
| |||||||
| Total Investment Securities | 354,839,141 | ||||||
| Net other assets (liabilities) — 1.6% | 5,934,736 | ||||||
|
| |||||||
| Net Assets — 100.0% | $ | 360,773,877 | |||||
|
|
Percentages indicated are based on net assets as of December 31, 2013.
* | Non-income producing security. |
(a) | The rate represents the effective yield at December 31, 2013. |
(b) | See Federal Tax Information listed in the Notes to the Financial Statements. |
The following represents the concentrations by country of risk (based on the domicile of the security issuer) relative to the total fair value of investments as of December 31, 2013:
Country | Percentage | |||
Hong Kong | 1.2 | % | ||
Ireland | 0.9 | % | ||
Ireland (Republic of) | 2.9 | % | ||
Netherlands | 2.3 | % | ||
Switzerland | 1.4 | % | ||
United Kingdom | 1.2 | % | ||
United States | 90.1 | % | ||
|
| |||
100.0 | % | |||
|
|
See accompanying notes to the financial statements.
5
AZL Dreyfus Research Growth Fund
Statement of Assets and Liabilities
December 31, 2013
Assets: | |||||
Investments in non-affiliates, at cost | $ | 240,843,655 | |||
Investments in affiliates, at cost | 698,325 | ||||
|
| ||||
Total Investments in securities, at cost | $ | 241,541,980 | |||
|
| ||||
Investments in non-affiliates, at value | $ | 354,140,816 | |||
Investments in affiliates, at value | 698,325 | ||||
|
| ||||
Total Investment securities, at value | 354,839,141 | ||||
Interest and dividends receivable | 329,460 | ||||
Receivable for investments sold | 6,203,358 | ||||
|
| ||||
Total Assets | 361,371,959 | ||||
|
| ||||
Liabilities: | |||||
Payable for capital shares redeemed | 278,863 | ||||
Manager fees payable | 209,174 | ||||
Administration fees payable | 11,818 | ||||
Distribution fees payable | 74,705 | ||||
Custodian fees payable | 3,090 | ||||
Administrative and compliance services fees payable | 1,419 | ||||
Trustee fees payable | 11 | ||||
Other accrued liabilities | 19,002 | ||||
|
| ||||
Total Liabilities | 598,082 | ||||
|
| ||||
Net Assets | $ | 360,773,877 | |||
|
| ||||
Net Assets Consist of: | |||||
Capital | $ | 229,506,593 | |||
Accumulated net investment income/(loss) | 643,780 | ||||
Accumulated net realized gains/(losses) from investment transactions | 17,326,343 | ||||
Net unrealized appreciation/(depreciation) on investments | 113,297,161 | ||||
|
| ||||
Net Assets | $ | 360,773,877 | |||
|
| ||||
Shares of beneficial interest (unlimited number of shares authorized, no par value) | 24,461,616 | ||||
Net Asset Value (offering and redemption price per share) | $ | 14.75 | |||
|
|
For the Year Ended December 31, 2013
Investment Income: | |||||
Dividends | $ | 3,819,638 | |||
Dividends from affiliates | 1 | ||||
|
| ||||
Total Investment Income | 3,819,639 | ||||
|
| ||||
Expenses: | |||||
Manager fees | 2,425,264 | ||||
Administration fees | 97,513 | ||||
Distribution fees | 795,921 | ||||
Custodian fees | 11,116 | ||||
Administrative and compliance services fees | 6,405 | ||||
Trustee fees | 16,485 | ||||
Professional fees | 16,790 | ||||
Shareholder reports | 20,409 | ||||
Other expenses | 8,817 | ||||
|
| ||||
Total expenses before reductions | 3,398,720 | ||||
Less expenses voluntarily waived/reimbursed by the Manager | (196,690 | ) | |||
Less expenses paid indirectly | (26,195 | ) | |||
|
| ||||
Net expenses | 3,175,835 | ||||
|
| ||||
Net Investment Income/(Loss) | 643,804 | ||||
|
| ||||
Realized and Unrealized Gains/(Losses) on Investments: | |||||
Net realized gains/(losses) on securities transactions | 29,632,495 | ||||
Change in net unrealized appreciation/depreciation on investments | 68,018,427 | ||||
|
| ||||
Net Realized/Unrealized Gains/(Losses) on Investments | 97,650,922 | ||||
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| ||||
Change in Net Assets Resulting From Operations | $ | 98,294,726 | |||
|
|
See accompanying notes to the financial statements.
6
Statements of Changes in Net Assets
AZL Dreyfus Research Growth Fund | ||||||||||
For the Year Ended December 31, 2013 | For the Year Ended December 31, 2012 | |||||||||
Change in Net Assets: | ||||||||||
Operations: | ||||||||||
Net investment income/(loss) | $ | 643,804 | $ | 1,356,079 | ||||||
Net realized gains/(losses) on investment transactions | 29,632,495 | 10,773,774 | ||||||||
Change in unrealized appreciation/depreciation on investments | 68,018,427 | 26,709,150 | ||||||||
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|
|
| |||||||
Change in net assets resulting from operations | 98,294,726 | 38,839,003 | ||||||||
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|
| |||||||
Dividends to Shareholders: | ||||||||||
From net investment income | (1,345,946 | ) | (924,194 | ) | ||||||
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|
|
| |||||||
Change in net assets resulting from dividends to shareholders | (1,345,946 | ) | (924,194 | ) | ||||||
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|
|
| |||||||
Capital Transactions: | ||||||||||
Proceeds from shares issued | 20,353,105 | 46,130,028 | ||||||||
Proceeds from dividends reinvested | 1,345,946 | 924,194 | ||||||||
Value of shares redeemed | (39,532,733 | ) | (23,030,219 | ) | ||||||
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|
|
| |||||||
Change in net assets resulting from capital transactions | (17,833,682 | ) | 24,024,003 | |||||||
|
|
|
| |||||||
Change in net assets | 79,115,098 | 61,938,812 | ||||||||
Net Assets: | ||||||||||
Beginning of period | 281,658,779 | 219,719,967 | ||||||||
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|
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| |||||||
End of period | $ | 360,773,877 | $ | 281,658,779 | ||||||
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|
|
| |||||||
Accumulated net investment income/(loss) | $ | 643,780 | $ | 1,345,922 | ||||||
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|
| |||||||
Share Transactions: | ||||||||||
Shares issued | 1,617,698 | 4,320,043 | ||||||||
Dividends reinvested | 102,353 | 84,866 | ||||||||
Shares redeemed | (3,128,891 | ) | (2,210,379 | ) | ||||||
|
|
|
| |||||||
Change in shares | (1,408,840 | ) | 2,194,530 | |||||||
|
|
|
|
See accompanying notes to the financial statements.
7
AZL Dreyfus Research Growth Fund
(Selected data for a share of beneficial interest outstanding throughout the periods indicated)
Year Ended December 31, | |||||||||||||||||||||||||
2013 | 2012 | 2011 | 2010 | 2009 | |||||||||||||||||||||
Net Asset Value, Beginning of Period | $ | 10.89 | $ | 9.28 | $ | 9.62 | $ | 7.86 | $ | 5.86 | |||||||||||||||
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|
|
|
|
|
|
| ||||||||||||||||
Investment Activities: | |||||||||||||||||||||||||
Net Investment Income/(Loss) | 0.03 | 0.05 | 0.03 | 0.05 | 0.04 | ||||||||||||||||||||
Net Realized and Unrealized Gains/(Losses) on Investments | 3.88 | 1.60 | (0.34 | ) | 1.75 | 1.99 | |||||||||||||||||||
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|
|
|
|
|
|
|
|
| ||||||||||||||||
Total from Investment Activities | 3.91 | 1.65 | (0.31 | ) | 1.80 | 2.03 | |||||||||||||||||||
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|
|
|
|
|
|
|
| ||||||||||||||||
Dividends to Shareholders From: | |||||||||||||||||||||||||
Net Investment Income | (0.05 | ) | (0.04 | ) | (0.03 | ) | (0.04 | ) | (0.03 | ) | |||||||||||||||
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|
|
|
|
|
|
|
| ||||||||||||||||
Total Dividends | (0.05 | ) | (0.04 | ) | (0.03 | ) | (0.04 | ) | (0.03 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Net Asset Value, End of Period | $ | 14.75 | $ | 10.89 | $ | 9.28 | $ | 9.62 | $ | 7.86 | |||||||||||||||
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|
|
|
|
|
|
|
|
| ||||||||||||||||
Total Return(a) | 36.00 | % | 17.75 | % | (3.20 | )% | 22.92 | % | 34.76 | % | |||||||||||||||
Ratios to Average Net Assets/Supplemental Data: | |||||||||||||||||||||||||
Net Assets, End of Period (000’s) | $ | 360,774 | $ | 281,659 | $ | 219,720 | $ | 193,126 | $ | 154,388 | |||||||||||||||
Net Investment Income/(Loss) | 0.20 | % | 0.53 | % | 0.43 | % | 0.49 | % | 0.49 | % | |||||||||||||||
Expenses Before Reductions(b) | 1.07 | % | 1.07 | % | 1.10 | % | 1.11 | % | 1.12 | % | |||||||||||||||
Expenses Net of Reductions | 1.00 | % | 1.00 | % | 1.00 | % | 0.99 | % | 0.97 | % | |||||||||||||||
Expenses Net of Reductions, Excluding Expenses Paid Indirectly(c) | 1.00 | % | 1.02 | % | 1.03 | % | 1.04 | % | 1.05 | % | |||||||||||||||
Portfolio Turnover Rate(d) | 48 | % | 53 | % | 109 | % | 112 | % | 165 | % |
(a) | The returns include reinvested dividends and fund level expenses, but exclude insurance contract charges. If these charges were included, the returns would have been lower. |
(b) | Excludes fee reductions. If such fee reductions had not occurred, the ratios would have been as indicated. |
(c) | Expenses net of reductions excludes expenses paid indirectly, pursuant to a “commission recapture” program, under which brokers remit a portion of the brokerage commission which is used to pay certain Fund expenses. See note 2 in the Notes to the Financial Statements. |
(d) | The portfolio turnover rate can be volatile due to the amount and timing of purchases and sales of fund shares during the period. |
See accompanying notes to the financial statements.
8
AZL Dreyfus Research Growth Fund
Notes to the Financial Statements
December 31, 2013
1. Organization
The Allianz Variable Insurance Products Trust (the “Trust”) was organized as a Delaware statutory trust on July 13, 1999. The Trust is a diversified open-end management investment company registered under the Investment Company Act of 1940. The Trust consists of 29 separate investment portfolios (collectively, the “Funds”), of which one is included in this report, the AZL Dreyfus Research Growth Fund (the “Fund”), and 28 are presented in separate reports.
The Trust is authorized to issue an unlimited number of shares of the Fund without par value. Shares of the Fund are available through the variable annuity contracts and variable life insurance policies offered through the separate accounts of participating insurance companies.
Under the Trust’s organizational documents, its officers and trustees are indemnified against certain liabilities arising out of the performance of their duties to the Fund. In addition, in the normal course of business, the Fund may enter into contracts with its vendors and others that provide for general indemnifications. The Fund’s maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Fund. However, based on experience, the Fund expects the risk of loss to be remote.
2. Significant Accounting Policies
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. The policies conform with U.S. generally accepted accounting principles (“U.S. GAAP”). The preparation of financial statements requires management to make certain 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 increases and decreases in net assets from operations during the reporting period. Actual results could differ from those estimates.
Security Valuation
The Fund records its investments at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between willing market participants at the measurement date. The valuation techniques used to determine fair value are further described in Note 4 below.
Investment Transactions and Investment Income
Investment transactions are recorded not later than on the business day following trade date. However, for financial reporting purposes, investment transactions are accounted for on trade date. Net realized gains and losses on investments sold and on foreign currency transactions are recorded on the basis of identified cost. Interest income is recorded on the accrual basis and includes, where applicable, the amortization of premiums or accretion of discounts. Dividend income is recorded on the ex-dividend date except in the case of foreign securities, in which case dividends are recorded as soon as such information becomes available.
Real Estate Investment Trusts
The Fund may own shares of real estate investment trusts (“REITs”) which report information on the source of their distributions annually. Certain distributions received from REITs during the year, which are known to be a return of capital, are recorded as a reduction to the cost of the individual REIT.
Foreign Currency Translation
The accounting records of the Fund are maintained in U.S. dollars. Foreign currency amounts are translated into U.S. dollars at the current rate of exchange to determine the fair value of investments, assets and liabilities. Purchases and sales of securities, and income and expenses are translated at the prevailing rate of exchange on the respective dates of such transactions. The Fund does not isolate that portion of the results of operations resulting from changes in foreign exchange rates on investments from fluctuations arising from changes in market prices of securities held. Such fluctuations are included in the net realized and unrealized gain or loss on investments and foreign currencies. Income received by the Fund from sources within foreign countries may be subject to withholding and other income or similar taxes imposed by such countries. The Funds accrue such taxes, as applicable, based on their current interpretation of tax rules in the foreign markets in which they invest.
Dividends to Shareholders
Dividends to shareholders are recorded on the ex-dividend date. The Fund distributes its dividends from net investment income and net realized capital gains, if any, on an annual basis. The amount of dividends from net investment income and from net realized gains is determined in accordance with federal income tax regulations, which may differ from U.S. GAAP. These “book/tax” differences are either temporary or permanent in nature. To the extent these differences are permanent in nature (e.g., return of capital, net operating loss, reclassification of certain market discounts, gain/loss, paydowns, and distributions), such amounts are reclassified within the composition of net assets based on their federal tax-basis treatment; temporary differences (e.g., wash sales and post October losses) do not require reclassification. Dividends to shareholders that exceed net investment income and net realized gains for tax purposes are reported as distributions of capital.
Expense Allocation
Expenses directly attributable to the Fund are charged directly to the Fund, while expenses attributable to more than one Fund are allocated among the respective Funds based upon relative net assets or some other reasonable method. Expenses which are attributable to more than one Trust are allocated across the Allianz Variable Insurance Products and Allianz Variable Insurance Products Fund of Funds Trusts based upon relative net assets or another reasonable basis. Allianz Investment Management LLC (the “Manager”), serves as the investment manager for the Trust and the Allianz Variable Insurance Products Fund of Funds Trust.
Commission Recapture
Certain Funds of the Trust participate in a commission recapture program. The Fund will utilize the recaptured commissions to pay for, in whole or part, certain expenses of the Fund, excluding investment advisory fees. Any amounts received by the Fund, if applicable, are disclosed as “Expenses paid indirectly” on the Statement of Operations.
9
AZL Dreyfus Research Growth Fund
Notes to the Financial Statements
December 31, 2013
Effective January 6, 2014, the Manager, on behalf of the Trust, requested the Fund cease participation in the program until further notice.
3. Related Party Transactions
The Manager provides investment advisory and management services for the Fund. The Manager has retained an independent money management organization (the “Subadviser”), to make investment decisions on behalf of the Fund. Pursuant to a portfolio management agreement with The Dreyfus Corporation (“Dreyfus”), Dreyfus provides investment advisory services as the Subadviser for the Fund subject to the general supervision of the Trustees and the Manager. The Manager is entitled to a fee, computed daily and paid monthly, based on the average daily net assets of the Fund. Expenses incurred by the Fund for investment advisory and management services are reflected on the Statement of Operations as “Manager fees.” For its services, the Subadviser is entitled to a fee payable by the Manager. The Manager has contractually agreed to waive fees and reimburse the Fund to limit the annual expenses, excluding interest expense (e.g., cash overdraft fees), taxes, brokerage commissions, other expenditures that are capitalized in accordance with U.S. GAAP and other extraordinary expenses not incurred in the ordinary course of the Fund’s business, based on the daily net assets of the Fund, through April 30, 2015.
For the year ended December 31, 2013, the annual rate due to the Manager and the annual expense limit were as follows:
Annual Rate* | Annual Expense Limit | |||||||||
AZL Dreyfus Research Growth Fund | 1.00 | % | 1.20 | % |
* | The fees payable to the Manager are based on a tiered structure for various net assets levels as follows: the first $10 million at 1.00%, the next $10 million at 0.875% and above $20 million at 0.75%. The Manager voluntarily reduced management fees to 0.70%. The Manager reserves the right to stop reducing the manager fee at any time. |
Any amounts contractually waived or reimbursed by the Manager in a particular fiscal year will be subject to repayment by the Fund to the Manager to the extent that from time to time through the next three fiscal years the repayment will not cause the Fund’s expenses to exceed the lesser of the stated limit at the time of the waiver or the current stated limit. Any amounts recouped by the Manager during the year are reflected on the Statement of Operations as “Recoupment of prior expenses reimbursed by the Manager.” At December 31, 2013, there were no remaining contractual reimbursements that are subject to repayment by the Fund in subsequent years.
In addition, the Manager may voluntarily waive or reimburse additional fees in order to maintain more competitive expense ratios. Any voluntary waivers or reimbursements are not subject to repayment in subsequent years. Information on the total amount waived/reimbursed by the Manager or repaid to the Manager by the Fund during the year can be found on the Statement of Operations.
Pursuant to separate agreements between the Funds and the Manager, the Manager provides a Chief Compliance Officer (“CCO”) and certain compliance oversight and regulatory filing services to the Trust. Under these agreements the Manager is entitled to an amount equal to a portion of the compensation and certain other expenses related to the individuals performing the CCO and compliance oversight services, as well as $75 per hour for time incurred in connection with the preparation and filing of certain documents with the Securities and Exchange Commission. The fees are paid to the Manager on a quarterly basis. The total expenses incurred by the Fund for these services are reflected on the Statement of Operations as “Administrative and compliance services fees.”
Citi Fund Services Ohio, Inc. (“Citi” or the “Administrator”), a wholly owned subsidiary of Citigroup, Inc., with which an officer of the Trust is affiliated, serves as the Trust’s administrator, transfer agent, and fund accountant, and assists the Trust in all aspects of its administration and operation. The Administrator is entitled to a Trust-wide asset-based fee, which is based on the following schedule: 0.05% of daily average net assets on the first $4 billion, 0.04% of daily average net assets on the next $2 billion, 0.02% of daily average net assets on the next $2 billion and 0.01% of daily average net assets over $8 billion. The overall Trust-wide fees are accrued daily and paid monthly and are subject to a minimum annual fee. In addition, the Administrator is entitled to annual account fees related to the transfer agency system, an annual fee for each additional class of shares of any Fund, certain annual fees in supporting fair value services, and a Trust-wide annual fee for providing infrastructure and support in implementing the written policies and procedures comprising the Fund’s compliance program. Fees payable to the Administrator are subject to certain reductions associated with services provided to new funds. The Administrator is also reimbursed for certain expenses incurred. The total expenses incurred by the Fund for these services are reflected on the Statement of Operations as “Administration fees.”
Allianz Life Financial Services, LLC (“ALFS”), an affiliate of the Manager, serves as distributor of the Fund and receives 12b-1 fees directly from the Fund, plus a Trust-wide annual fee of $42,500, paid by the Manager from its profits and not by the Trust, for recordkeeping and reporting services.
The Trust has adopted a distribution and service plan in conformance with Rule 12b-1 of the 1940 Act. Pursuant to this plan, the Fund is authorized to pay certain fees for the sale and distribution of its shares and services provided to its shareholders at an annual rate not to exceed 0.25% of the Fund’s average daily net assets. These fees are reflected on the Statement of Operations as “Distribution fees.”
In addition, certain legal fees and expenses are paid to a law firm, Dorsey & Whitney LLP, of which the Secretary of the Fund is a partner. During the year ended December 31, 2013, $3,991 was paid from the Fund relating to these fees and expenses.
Certain Officers and Trustees of the Trust are affiliated with the Manager or the Administrator. Such Officers (except for the Trust’s CCO as noted above) and Trustees receive no compensation from the Trust for serving in their respective roles. For their service to the Trust and to the Allianz Variable Insurance Products Fund of Funds Trust, each non-interested Trustee receives a $139,000 annual Board retainer. In addition, the Trustees are reimbursed for certain expenses associated with attending Board meetings. Compensation to the Trustees is allocated between the Trust and the Allianz Variable Insurance Products Fund of Funds Trust in proportion to the assets under management of each trust. During the year ended December 31, 2013, actual Trustee compensation was $973,000 in total for both trusts.
At a meeting of the Board of Trustees on December 4, 2013, the Trustees approved a fee increase to the Officers and Trustees who are paid a fee for their services to the Trust and to the Allianz Variable Insurance Products Fund of Funds Trust. Effective January 1, 2014, each non-interested Trustee will receive a $163,000 annual retainer.
During the year ended December 31, 2013, the Fund paid approximately $41,814 to affiliated broker/dealers of the Subadvisor on the execution of purchases and sales of the Fund’s portfolio investments.
10
AZL Dreyfus Research Growth Fund
Notes to the Financial Statements
December 31, 2013
4. Investment Valuation Summary
The valuation techniques employed by the Fund, as described below, maximize the use of observable inputs and minimize the use of unobservable inputs in determining fair value. The inputs used for valuing the Fund’s investments are summarized in the three broad levels listed below:
— | Level 1 — quoted prices in active markets for identical assets |
— | Level 2 — other significant observable inputs (including quoted prices for similar securities, interest rates, prepayments speeds, credit risk, etc.) |
— | Level 3 — significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of investments) |
Changes in valuation techniques may result in transfers in or out of an assigned level within the disclosure hierarchy. The Fund determines transfers between fair value hierarchy levels at the reporting period end. The inputs or methodology used for valuing investments is not necessarily an indication of the risk associated with investing in those investments.
Security prices are generally provided by an independent third party pricing service approved by the Trust’s Board of Trustees (“Trustees”) as of the close of the New York Stock Exchange (“NYSE”) (generally 4:00 pm Eastern Time). Equity securities are valued at the last quoted sale price or, if there is no sale, the last quoted bid price is used for long securities and the last quoted ask price is used for securities sold short. Securities listed on NASDAQ Stock Market, Inc. (“NASDAQ”) are valued at the official closing price as reported by NASDAQ. In each of these situations, valuations are typically categorized as a Level 1 in the fair value hierarchy. Investments in open-end investment companies are valued at their respective net asset value as reported by such companies and are typically categorized as Level 1 in the fair value hierarchy.
Debt and other fixed income securities are generally valued at an evaluated bid price provided by an independent pricing source approved by the Trustees. To value debt securities, pricing services may use various pricing techniques which take into account appropriate factors such as market activity, yield, quality, coupon rate, maturity, type of issue, trading characteristics, call features, credit ratings and other data, as well as broker quotes. Short term securities of sufficient credit quality with sixty days or less remaining until maturity may be valued at amortized cost, which approximates fair value. In each of these situations, valuations are typically categorized as Level 2 in the fair value hierarchy.
Other assets and securities for which market quotations are not readily available, or are deemed unreliable are valued at fair value as determined in good faith by the Trustees or persons acting on the behalf of the Trustees. Fair value pricing may be used for significant events such as securities whose trading has been suspended, whose price has become stale or for which there is no currently available price at the close of the NYSE. Depending on the source and relative significance of valuation inputs, these instruments may be classified as Level 2 or Level 3 in the fair value hierarchy. The Fund utilizes a pricing service to assist in determining the fair value of securities when certain significant events occur that may affect the value of foreign securities.
In accordance with procedures adopted by the Trustees, fair value pricing may be used if events materially affecting the value of foreign securities occur between the time when the exchange on which they are traded closes and the time when the Fund’s net asset value is calculated. Management identifies possible fluctuation in international securities by monitoring the increase or decrease in the value of a designated benchmark index. In the event of an increase or decrease greater than predetermined levels, the Fund may use a systematic valuation model provided by an independent third party to fair value its international equity securities which are then typically categorized as Level 2 in the fair value hierarchy.
For the year ended December 31, 2013, there were no Level 3 investments for which significant unobservable inputs were used to determine fair value.
The following is a summary of the valuation inputs used as of December 31, 2013 in valuing the Fund’s investments based upon the three levels defined above:
Investment Securities: | Level 1 | Level 2 | Total | ||||||||||||
Common Stocks+ | $ | 354,140,816 | $ | — | $ | 354,140,816 | |||||||||
Affiliated Investment Company | 698,325 | — | 698,325 | ||||||||||||
|
|
|
|
|
| ||||||||||
Total Investment Securities | $ | 354,839,141 | $ | — | $ | 354,839,141 | |||||||||
|
|
|
|
|
|
+ | For detailed industry descriptions, see the accompanying Schedule of Portfolio Investments. |
5. Security Purchases and Sales
For the year ended December 31, 2013, cost of purchases and proceeds from sales of securities (excluding securities maturing less than one year from acquisition) were as follows:
Purchases | Sales | |||||||||
AZL Dreyfus Research Growth Fund | $ | 148,894,347 | $ | 167,732,654 |
6. Investment Risks
Foreign Securities and Currencies Risk: Investments in securities of foreign issuers carry certain risks not ordinarily associated with investments in securities of domestic issuers. Such risks include future political and economic developments, and the possible imposition of exchange controls or other foreign governmental laws and restrictions. In addition, with respect to certain countries, there is the possibility of expropriation of assets, confiscatory taxation, political or social instability or diplomatic developments which could adversely affect investments in those securities.
7. Federal Tax Information
It is the Fund’s policy to continue to comply with the requirements of the Internal Revenue Code under Subchapter M, applicable to regulated investment companies, and to distribute all of its taxable income, including any net realized gains on investments, to its shareholders. Therefore, no provision is made for federal income taxes.
11
AZL Dreyfus Research Growth Fund
Notes to the Financial Statements
December 31, 2013
Management of the Fund has reviewed tax positions taken in tax years that remain subject to examination by all major tax jurisdictions, including federal (i.e., the last four tax year ends and the interim tax period since then, as applicable). Management believes that there is no tax liability resulting from unrecognized tax benefits related to uncertain tax positions taken.
Cost for federal income tax purposes at December 31, 2013 is $241,819,980. The gross unrealized appreciation/ (depreciation) on a tax basis is as follows:
Unrealized appreciation | $ | 113,342,986 | |||
Unrealized depreciation | (323,825 | ) | |||
|
| ||||
Net unrealized appreciation/(depreciation) | $ | 113,019,161 | |||
|
|
During the year ended December 31, 2013, the Fund utilized $11,560,566 in capital loss carry forwards to offset capital gains.
The tax character of dividends paid to shareholders during the year ended December 31, 2013 were as follows:
Ordinary Income | Net Long-Term Capital Gains | Total Distributions(a) | |||||||||||||
AZL Dreyfus Research Growth Fund | $ | 1,345,946 | $ | — | $ | 1,345,946 |
(a) | Total distributions paid may differ from the Statements of Changes in Net Assets because dividends are recognized when actually paid for tax purposes. |
The tax character of dividends paid to shareholders during the year ended December 31, 2012 was as follows:
Ordinary Income | Net Long-Term Capital Gains | Total Distributions(a) | |||||||||||||
AZL Dreyfus Research Growth Fund | $ | 924,194 | $ | — | $ | 924,194 |
(a) | Total distributions paid may differ from the Statements of Changes in Net Assets because dividends are recognized when actually paid for tax purposes. |
As of December 31, 2013, the components of accumulated earnings on a tax basis were as follows:
Undistributed Ordinary Income | Undistributed Long-Term Capital Gains | Accumulated Capital and Other Losses | Unrealized Appreciation/ (Depreciation)(a) | Total Accumulated Earnings/ (Deficit) | |||||||||||||||||||||
AZL Dreyfus Research Growth Fund | $ | 643,781 | $ | 17,604,342 | $ | — | $ | 113,019,161 | $ | 131,267,284 |
(a) | The difference between book-basis and tax-basis unrealized appreciation/(depreciation) is attributable primarily to tax deferral of losses on wash sales. |
8. Subsequent Events
Management has evaluated events and transactions subsequent to period end through the date the financial statements were issued, for purposes of recognition or disclosure in these financial statements and there are no subsequent events to report.
12
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Shareholders and Board of Trustees of
Allianz Variable Insurance Products Trust:
We have audited the accompanying statement of assets and liabilities of AZL Dreyfus Research Growth Fund (the “Fund”) of the Allianz Variable Insurance Products Trust, including the schedule of portfolio investments, as of December 31, 2013, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the years in the two-year period then ended, and the financial highlights for each of the years in the five-year period then ended. These financial statements and financial highlights are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of December 31, 2013, by correspondence with the custodian. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of the Fund as of December 31, 2013, the results of its operations for the year then ended, the changes in its net assets for each of the years in the two-year period then ended, and the financial highlights for each of the years in the five-year period then ended, in conformity with U.S. generally accepted accounting principles.
/s/ KPMG LLP
Columbus, Ohio
February 25, 2014
13
Other Federal Income Tax Information (Unaudited)
For the year ended December 31, 2013, 100.00% of the total ordinary income dividends paid by the Fund qualify for the corporate dividends received deduction available to corporate shareholders.
14
A description of the policies and procedures that the Fund uses to determine how to vote proxies relating to portfolio securities is available, without charge, upon request, by visiting the Securities and Exchange Commission’s (“Commission”) website at www.sec.gov, or by calling 800-624-0197.
Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30th is available (i) without charge, upon request, by calling 800-624-0197; (ii) on the Allianz Variable Insurance Products Trust’s website at https://www.allianzlife.com; and (iii) on the Commission’s website at http://www.sec.gov.
The Fund files complete Schedules of Portfolio Holdings with the Commission for the first and third quarters of each fiscal year on Form N-Q. Schedules of Portfolio Holdings for the Fund in this report are available without charge on the Commission’s website at http://www.sec.gov, or may be reviewed and copied at the Commission’s Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 800-SEC-0330.
15
Approval of Investment Advisory and Subadvisory Agreements (Unaudited)
The Allianz Variable Insurance Products Trust (the “Trust”) is a manager-of-managers fund. That means that the Trust’s Manager (“Allianz Investment Management LLC”) is responsible for monitoring the various Subadvisers that have day-to-day responsibility for the decisions made for each of the Trust’s investment portfolios. The Trust’s Manager is responsible for determining, in the first instance, which investment advisers to consider recommending for selection as a Subadviser.
In reviewing the services provided by the Manager and the terms of the investment management agreement, the Board receives and reviews information related to the Manager’s experience and expertise in the variable insurance marketplace. Currently, the Funds are offered only through variable annuities and variable life insurance policies, and not in the retail fund market. In addition, the Board receives information regarding the Manager’s expertise with regard to portfolio diversification and asset allocation requirements within variable insurance products issued by Allianz Life Insurance Company of North America and its subsidiary, Allianz Life Insurance Company of New York. Currently, the Funds are offered only through Allianz Life and Allianz of New York variable products.
The Trust’s Manager has adopted policies and procedures to assist it in the process of analyzing each potential Subadviser with expertise in particular asset classes for purposes of making the recommendation that a specific investment adviser be selected. The Trust’s Board reviews and considers the information provided by the Manager in deciding which investment advisers to select. After an investment adviser becomes a Subadviser, a similarly rigorous process is instituted by the Manager to monitor the investment performance and other responsibilities of the Subadviser. The Manager reports to the Trust’s Board on its analysis at the regular meetings of the Board, which are held at least quarterly. Where warranted, the Manager will add or remove a particular Subadviser from a “watch” list that it maintains. Watch list criteria include, for example: (a) Fund performance over various time periods; (b) Fund risk issues, such as changes in key personnel involved with Fund management, changes in investment philosophy or process, or “capacity” concerns; and (c) organizational risk issues, such as regulatory, compliance or legal concerns, or changes in the ownership of the Subadviser. The Manager may place a Fund on the watch list for other reasons, and if so, will explain its rationale to the Trustees. Funds which are on the watch list are subject to special scrutiny of the Manager and the Board of Trustees. Funds may be removed from such watch list, if for example, performance improves or regulatory matters are satisfactorily resolved. However, in some situations where Funds which have been on the watch list, the Manager has recommended the retention of a new Subadviser, and the Board of Trustees has subsequently approved new Subadvisory Agreements with such Subadvisers.
In assessing the Manager’s and Subadvisers’ (collectively, the “Advisory Organizations”), performance of their obligations, the Board considers whether there has occurred a circumstance or event that would constitute a reason for it to not renew an advisory contract. In this regard, the Board is mindful of the potential disruption of a Fund’s operations and various risks, uncertainties and other effects that could occur as a result of a decision to terminate or not renew a contract.
As required by the Investment Company Act of 1940 (“1940 Act”), the Trust’s Board has reviewed and approved the Trust’s Investment Management Agreement with the Manager (the “Advisory Agreement”) and portfolio management agreements (the “Subadvisory Agreements”) with the Subadvisers. The Board’s decision to approve these contracts reflects the exercise of its business judgment on whether to approve new arrangements and continue the existing arrangements. During its review of these contracts, the Board considers many factors, among the most material of which are: the Fund’s investment objectives and long term performance; the Advisory Organizations’ management philosophy, personnel, and processes, including their compliance history and the adequacy of their compliance processes; the preferences and expectations of Fund shareholders (and underlying contract owners) and their relative sophistication; the continuing state of competition in the mutual fund industry; and comparable fees in the mutual fund industry.
The Board also considers the compensation and benefits received by the Advisory Organizations. This includes fees received for services provided to the Fund by affiliated persons of the Advisory Organizations and research services received by the Advisory Organizations from brokers that execute Fund trades, as well as advisory fees. The Board considered the fact that: (1) the Manager and the Trust are parties to an Administrative Service Agreement, a Compliance Services Agreement, and a Chief Compliance Officer Agreement, under which the Manager is compensated by the Trust for performing certain administrative and compliance services including providing an employee of the Manager or one of its affiliates to act as the Trust’s Chief Compliance Officer; and (2) Allianz Life Financial Services, LLC, an affiliated person of the Manager, is a registered securities broker-dealer and receives (along with its affiliated persons) payments made by the Trust pursuant to Rule 12b-1.
The Board is aware that various courts have interpreted provisions of the 1940 Act and have indicated in their decisions that the following factors may be relevant to an adviser’s compensation: the nature and quality of the services provided by the adviser, including the performance of the fund; the adviser’s cost of providing the services; the extent to which the adviser may realize “economies of scale” as the fund grows larger; any indirect benefits that may accrue to the adviser and its affiliates as a result of the adviser’s relationship with the fund; performance and expenses of comparable funds; and the extent to which the independent Board members are fully informed about all facts bearing on the adviser’s service and fee. The Trust’s Board is aware of these factors and takes them into account in its review of the Trust’s advisory contracts.
The Board considered and weighed these circumstances in light of its experience in governing the Trust and working with the Advisory Organizations on matters relating to the Funds, and is assisted in its deliberations by the advice of legal counsel to the Independent Trustees. In this regard, the Board requests and receives a significant amount of information about the Funds and the Advisory Organizations. Some of this information is provided at each regular meeting of the Board; additional information is provided in connection with the particular meeting or meetings at which the Board’s formal review of an advisory contract occurs. In between regularly scheduled meetings, the Board may receive information on particular matters as the need arises. Thus, the Board’s evaluation of an advisory contract is informed by reports covering such matters as: an Advisory Organization’s investment philosophy, personnel, and processes; the Fund’s short- and long-term performance (in absolute terms as well as in relationship to its benchmark(s), certain competitor or “peer group” funds and similar funds managed by the particular Subadviser), and comments on the reasons for performance; the Fund’s expenses (including the advisory fee itself and the overall expense structure of the Fund, both in absolute terms and relative to similar and/or competing funds, with due regard for contractual or voluntary expense limitations); the use and allocation of brokerage commissions derived from trading the Fund’s portfolio securities; the nature and extent of the advisory and other services provided to the Fund by the Advisory Organizations and their affiliates; compliance and audit reports concerning the Funds and the companies that service them; and relevant developments in the mutual fund industry and how the Funds and/or Advisory Organizations are responding to them.
The Board also receives financial information about Advisory Organizations, including reports on the compensation and benefits the Advisory Organizations derive from their relationships with the Funds. These reports cover not only the fees under the advisory contracts, but also fees, if any, received for providing other services to the Funds. The reports also discuss any indirect or “fall out” benefits an Advisory Organization may derive from its relationship with the Funds.
The Advisory and Subadvisory Agreements (collectively, the “Agreements”) were most recently considered at Board of Trustees meetings held in the fall of 2013. Information relevant to the approval of such Agreements was considered at a telephonic Board of Trustees meeting on October 16, 2013, and at an “in person” Board of Trustees meeting held October 22, 2013. The Agreements were approved at the Board meeting of October 22, 2013. At such meeting the Board also approved an Expense Limitation Agreement between the Manager and the Trust for the period ending April 30, 2015. In connection with such meetings, the Trustees requested and evaluated extensive materials from the Manager, including performance and expense information for other investment companies with similar investment objectives derived from data compiled by an independent third party provider and other sources believed to be reliable by the Manager. Prior to voting, the Trustees reviewed the proposed approval/continuance of the Agreements with management and with experienced counsel who are independent of the Manager and received a memorandum from such counsel discussing the legal standards for their consideration of the proposed approvals/continuances. The independent (“disinterested”) Trustees also discussed the proposed approvals/continuances in a private session with such counsel at which no representatives of the Manager were present. In reaching their determinations relating to the approval and/or continuance of
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the Agreements, in respect of each Fund, the Trustees considered all factors they believed relevant. The Board based its decision to approve the Agreements on the totality of the circumstances and relevant factors, and with a view to past and future long-term considerations. Not all of the factors and considerations discussed above and below are necessarily relevant to every Fund, and the Board did not assign relative weights to factors discussed herein or deem any one or group of them to be controlling in and of themselves.
An SEC Rule requires that shareholder reports include a discussion of certain factors relating to the selection of investment advisers and the approval of advisory fees. The “factors” enumerated by the SEC are set forth below in italics, as well as the Board’s conclusions regarding such factors:
(1) The nature, extent and quality of services provided by the Manager and Subadvisers. The Trustees noted that the Manager, subject to the control of the Board of Trustees, administers each Fund’s business and other affairs. Under the Advisory Agreement, the Manager holds the sole and exclusive responsibility to provide, or arrange for other to provide, the management of the Funds’ assets and the placement of orders for the purchase and sale of the securities of the Funds. As the Trust is a manager of managers fund, the Manager is authorized, under the Advisory Agreement, to retain one or more Subadvisers for each Fund to handle day-to-day management of the Funds’ investment portfolios; the Manager is responsible for determining, in the first instance, which investment advisers to recommend to the Board of Trustees for selection as a Subadviser. The Trustees were aware that, notwithstanding the retention of the Subadvisers to handle day-to-day portfolio management, the Manager remains responsible for substantial other matters, including continuously monitoring compliance by each Subadviser with the investment policies and restrictions of the respective Funds, with such other limitations or directions of the Board of Trustees, and with all legal requirements under federal or state law or regulation. The Manager also is responsible primarily to provide statistical information and other data to the Trustees regarding the Funds’ portfolio investments and to make available to the Funds’ administrator such information as is necessary for the conduct of its duties.
The Trustees also noted that the Manager provides the Trust and each Fund with such administrative and other services (exclusive of, and in addition to, any such services provided by any others retained by the Trust on behalf of the Funds) and executive and other personnel as are necessary for the operation of the Trust and the Funds. Except for the Trust’s Chief Compliance Officer, the Manager pays all of the compensation of Trustees and officers of the Trust who are employees of the Manager or its affiliates.
The Trustees considered the scope and quality of services provided by the Manager and the Subadvisers and noted that the scope of such services provided had expanded as a result of recent regulatory and other developments. The Trustees noted that, for example, the Manager and Subadvisers are responsible for maintaining and monitoring their own compliance programs, and these compliance programs are continuously refined and enhanced in light of new regulatory requirements. The Trustees considered the capabilities and resources which the Manager has dedicated to performing services on behalf of the Trust and its Funds. The quality of administrative and other services, including the Manager’s role in coordinating the activities of the Trust’s other service providers, also were considered. The Trustees concluded that, overall, they were satisfied with the nature, extent and quality of services provided (and expected to be provided) to the Trust and to each of the Funds under the Agreements.
(2) The investment performance of the Funds, the Manager and the Subadvisers. In connection with every in-person quarterly Board of Trustees meeting, Trustees receive extensive information on the performance results of each of the Funds. This includes, for example, performance information on all of the Funds for the previous quarter, and previous one, three and five-year periods, and since inception. (For Funds which have been in existence for less than five years, Trustees may receive performance information on comparable funds managed by the particular Subadviser for periods prior to the creation of a particular Fund.) Such performance information includes information on absolute total return, performance versus Subadvisers’ comparable fund(s), performance versus the appropriate benchmark(s), and performance versus peer groups. For example, in connection with the Board of Trustees meetings held September 10-11, 2013, the Manager reported that for the three year period ended June 30, 2013, 12 Funds were in the top 40%, eight were in the middle 20% and eight were in the bottom 40%, and for the one year period ended June 30, 2013, 8 Funds were in the top 40%, seven were in the middle 20%, and 14 were in the bottom 40%. The Manager also reported that for the five year period ended June 30, 2013, 10 Funds were in the top 40%, four were in the middle 20%, and six were in the bottom 40%. At the Board of Trustees meeting held October 22, 2013, the Trustees determined that the overall investment performance of the Funds was acceptable.
(3) The costs of services to be provided and profits to be realized by the Manager and the Subadvisers and their affiliates from their relationship with the Funds. The Manager has supplied information to the Board of Trustees pertaining to the level of investment advisory fees to which the Funds are subject. The Manager has agreed to temporarily “cap” Fund expenses at certain levels, and information is provided to Trustees setting forth “contractual” advisory fees and “actual” fees after taking expense caps into account. Based upon the information provided, the “actual” advisory fees payable by the Funds overall are generally comparable to the average level of fees paid by Fund peer groups. For the 30 Funds reviewed by the Board of Trustees in the fall of 2013, 27 Funds paid “actual” advisory fees in a percentage amount within the 65th percentile or lower for each Fund’s applicable category. The Trustees recognized that it is difficult to make comparisons of advisory fees because there are variations in the services that are included in the fees paid by other funds. The Board has concluded that the advisory fees to be paid to the Manager by the Funds are not unreasonable.
The Manager has also supplied information to the Board of Trustees pertaining to total Fund expenses (which includes advisory fees, the 25 basis point 12b-1 fee paid by the Funds, and other Fund expenses). As noted above, the Manager has agreed to “cap” Fund expenses at certain levels. Based upon the information provided, the overall total expense ratio ranking in 2013 for the 30 Funds was as follows: (1) 28 of the Funds had total expense rankings below the 65th percentile (with 20 Funds at or below the 50th percentile); (2) the AZL Russell 1000 Value Fund had a total expense ranking in the 66th percentile; the Manager reported that there is only a limited peer group for such Fund; and (3) the AZL Morgan Stanley Global Real Estate Fund had a total expense ranking in the 72nd percentile; it was reported by the Manager that there is only a limited peer group for such Fund, such Fund’s expense ratio has declined, and such Fund’s expense ratio is comparable to funds of similar size.
The Manager has committed to providing the Funds with a high quality of service and working to reduce Fund expenses over time, particularly as the Funds grow larger. The Trustees concluded therefore that the expense ratios of the Funds were not unreasonable.
The Manager provided information concerning the profitability of the Manager’s investment advisory activities for the period from 2011 through June 30, 2013. The Trustees recognized that it is difficult to make comparisons of profitability from investment company advisory agreements because comparative information is not generally publicly available and is affected by numerous factors, including the structure of the particular adviser, the types of funds it manages, its business mix, numerous assumptions regarding allocation of expenses and the adviser’s capital structure and cost of capital. In considering profitability information, the Trustees considered the possible effect of certain fall-out benefits to the Manager and its affiliates. The Trustees focused on profitability of the Manager’s relationships with the Funds before taxes and distribution expenses. The Trustees recognized that the Manager should, in the abstract, be entitled to earn a reasonable level of profits for the services it provides to each Fund and, based on their review, concluded that they were satisfied that the Manager’s level of profitability from its relationship with the Funds was not excessive.
The Manager, on behalf of the Board of Trustees, endeavored to obtain information on the profitability of each Subadviser in connection with its relationship with the Fund or Funds which it subadvises. The Manager was unable to obtain meaningful profitability information from some of the unaffiliated Subadvisers. The Manager assured the Board of Trustees that the Agreements with the Subadvisers which are not affiliated with it were negotiated on an “arm’s length” basis, so that arguably, such profitability information should be less relevant. The Trustees were also provided with certain information on the profitability for the Subadviser which is affiliated with the Manager. Trustees recognized the difficulty of allocating costs to multiple advisory accounts and products of a large advisory organization. Based upon the information provided, the Trustees determined that there was no evidence that the level of such profitability attributable to subadvising the Funds was excessive.
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(4) and (5) The extent to which economies of scale would be realized as the Funds grow, and whether fee levels reflect these economies of scale. The Trustees noted that most of the advisory fee schedules for the Funds do not contain breakpoints that reduce the fee rate on assets above specified levels, although certain Subadvisory Agreements have such “breakpoints.” The Trustees recognized that breakpoints may be an appropriate way for the Manager to share its economies of scale, if any, with Funds that have substantial assets. However, they also recognized that there may not be a direct relationship between any economies of scale realized by Funds and those realized by the Manager as assets increase. The Trustees do not believe there is a uniform methodology for establishing breakpoints that give effect to Fund-specific service provided by the Manager. The Trustees noted that in the fund industry as a whole, as well as among funds similar to the Funds, there is no uniformity or pattern in the fees and asset levels at which breakpoints (if any) apply. Depending on the age, size, and other characteristics of a particular fund and its manager’s cost structure, different conclusions can be drawn as to whether there are economies of scale to be realized at any particular level of assets, notwithstanding the intuitive conclusion that such economies exist, or will be realized at some level of total assets. Moreover, because different managers have different cost structures and service models, it is difficult to draw meaningful conclusions from the breakpoints that may have been adopted by other funds. The Trustees also noted that the advisory agreements for many funds do not have breakpoints at all, or if breakpoints exist, they may be at asset levels significantly greater than those of the individual Funds. The Trustees also noted that the total assets in all of the Funds as of June 30, 2013 were approximately $12.85 billion, and that no single non-money market Fund had assets in excess of $616 million.
The Trustees noted that the Manager has agreed to temporarily “cap” Fund expenses at certain levels, which has the effect of reducing expenses as would the implementation of advisory fee breakpoints. The Manager has committed to continue to consider the continuation of fee “caps” and/or advisory fee breakpoints as the Funds grow larger. The Board receives quarterly reports on the level of Fund assets. It expects to consider whether or not to approve the Agreements at a meeting to be held prior to December 31, 2014, and will at that time, or prior thereto, consider: (a) the extent to which economies of scale can be realized, and (b) whether the advisory fee should be modified to reflect such economies of scale, if any.
Having taken these factors into account, the Trustees concluded that the absence of breakpoints in certain of the Funds’ advisory fee rate schedules was acceptable under each Fund’s circumstances.
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Information about the Board of Trustees and Officers (Unaudited)
The Trust is managed by the Trustees in accordance with the laws of the state of Delaware governing business trusts. There are currently eight Trustees, two of whom are “interested persons” of the Trust within the meaning of that term under the 1940 Act. The Trustees and Officers of the Trust, their addresses, ages, their positions held with the Trust, their terms of office with the Trust and length of time served, their principal occupation(s) during the past five years, the number of portfolios in the Trust they oversee, and their other directorships held are as follows:
Non-Interested Trustees(1)
Name, Address, and Age | Positions Held with VIP Trust and FOF Trust | Term of Office(2)/Length of Time Served | Principal Occupation(s) During Past 5 Years | Number of Portfolios Overseen for VIP Trust and FOF Trust | Other Directorships Held Outside the AZL Fund Complex | |||||
Peter R. Burnim, Age 66 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/07 | Chairman, Argus Investment Strategies Fund Ltd., February 2013 to present; Managing Director, iQ Venture Advisors, LLC. 2005 to 2012; Chairman, Northstar Group Holdings Ltd. Bermuda, 2011 to present; Expert Witness, Massachusetts Department of Revenue, 2011 to 2012; Executive Vice President, Northstar Companies, 2002 to 2005; Senior Officer, Citibank and Citicorp for over 25 years | 41 | Argus Group Holdings; Northstar Group Holdings, NRIL, Sterling Centrecorp Inc.; Highland Financial Holdings; and Bank of Bermuda NY | |||||
Peggy L. Ettestad, Age 56 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/07 | Managing Director, Red Canoe Management Consulting LLC, 2008 to present; Senior Managing Director, Residential Capital LLC, 2003 to 2008; Chief Operations Officer, Transamerica Reinsurance 2002 to 2003 | 41 | Luther College | |||||
Roger Gelfenbien, Age 70 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 10/99 | Retired; Partner of Accenture 1983 to 1999 | 41 | Virtus Funds (8 Funds) | |||||
Claire R. Leonardi, Age 58 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/04 | Chief Executive Officer, Connecticut Innovations, Inc., 2012 to present; General Partner, Fairview Capital, L.P., 1994 to 2012 | 41 | The Natural History Museum of the Adirondacks | |||||
Dickson W. Lewis, Age 65 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/04 | Retired; Consultant to Lifetouch National School Studios; Vice President/General Manager, Yearbooks & Canada-Lifetouch National School Studios, 2006 to 2013; Vice President/General Manager of Jostens, Inc., 2002 to 2006; Senior Vice President of Fortis Group, 1997 to 2002 | 41 | None | |||||
Peter W. McClean, Age 69 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/04 | Retired; President and CEO of Measurisk, LLC, 2001 to 2003; Chief Risk Management Officer at Bank of Bermuda Ltd., 1996 to 2001 | 41 | PNMAC Opportunity Fund; Northeast Bank; and FHI | |||||
Arthur C. Reeds III, Age 69 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 10/99 | Retired; Senior Investment Officer, Hartford Foundation for Public Giving, 2000 to 2003; Chairman, Chief Executive and President of Conning Corp., 1999 to 2000; Investment Consultant, 1997 to 1999 | 41 | Connecticut Water Service, Inc. |
Interested Trustees(3)
Name, Address, and Age | Positions Held with VIP Trust and FOF Trust | Term of Office(2)/Length of Time Served | Principal Occupation(s) During Past 5 Years | Number of Portfolios Overseen for VIP Trust and FOF Trust | Other Directorships Held Outside the AZL Fund Complex | |||||
Robert DeChellis, Age 46 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 3/08 | President and CEO, Allianz Life Financial Services, LLC, 2007 to present | 41 | None | |||||
Brian Muench, Age 43 5701 Golden Hills Drive | Trustee | Since 6/11 | President, Allianz Investment Management LLC, November 2010 to present; Vice President, Allianz Life, April 2011 to present; Vice President, Advisory Management, Allianz Investment Management LLC from December 2005 to November 2010 | 41 | None |
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Officers
Name, Address, and Age | Positions Held with VIP and VIP FOF Trust | Term of Office(2)/Length of Time Served | Principal Occupation(s) During Past 5 Years | |||
Brian Muench, Age 43 5701 Golden Hills Drive Minneapolis, MN 55416 | President | Since 11/10 | President, Allianz Investment Management LLC from November 2010, to present; Vice President, Allianz Life from April 2011 to present; Vice President, Allianz Investment Management LLC from December 2005 to November 2010. | |||
Michael Radmer, Age 68 Dorsey & Whitney LLP, Suite 1500 50 South Sixth Street Minneapolis, MN 55402-1498 | Secretary | Since 2/02 | Partner, Dorsey and Whitney LLP since 1976. | |||
Ty Edwards, Age 47 Citi Fund Services Ohio, Inc. 3435 Stelzer Road Columbus, OH 43219 | Treasurer, Principal Accounting Officer and Principal Financial Officer | Since 4/10 | Senior Vice President, Financial Administration, Citi Fund Services Ohio, Inc., December 2009 to present; Director, Product Management, Columbia Management, April 2007 to April 2009; Deputy Treasurer, Columbia Funds and Director, Fund Administration, Columbia Management, January 2006 to April 2007. | |||
Christopher R. Pheiffer, Age 45(4) 5701 Golden Hills Drive Minneapolis, MN 55416 | Chief Compliance Officer(5) and Anti-Money Laundering Compliance Officer | Since 2/14 (interim) | Deputy Chief Compliance Officer of the Trusts, 2007-2014. |
(1) | Member of the Audit Committee. |
(2) | Indefinite. |
(3) | Is an “interested person”, as defined by the 1940 Act, due to employment by Allianz. |
(4) | Stephen G. Simon, previously the Chief Compliance Officer of the Trusts, resigned all of his positions with Allianz effective February 21, 2014. Mr. Pheiffer, previously the Deputy Chief Compliance Officer of the Trusts, has been named Chief Compliance Officer of the Trusts on an interim basis while a search for a permanent replacement is conducted. |
(5) | The Manager and the Trust are parties to a Chief Compliance Officer Agreement under which the Manager is compensated by the Trust for providing an employee of the Manager or one of its affiliates to act as the Trust’s Chief Compliance Officer. The Chief Compliance Officer and Anti-Money Laundering Compliance Officer is not considered a corporate officer or executive employee of the Trust. |
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The Allianz VIP Funds are distributed by Allianz Life Financial Services, LLC. | ||
These Funds are not FDIC Insured. | ANNRPT1213 2/14 |
AZL® Enhanced Bond Index Fund
Annual Report
December 31, 2013
Table of Contents
Management Discussion and Analysis
Page 1
Expense Examples and Portfolio Composition
Page 3
Schedule of Portfolio Investments
Page 4
Statement of Assets and Liabilities
Page 13
Statement of Operations
Page 13
Statements of Changes in Net Assets
Page 14
Financial Highlights
Page 15
Notes to the Financial Statements
Page 16
Report of Independent Registered Public Accounting Firm
Page 23
Other Federal Income Tax Information
Page 24
Other Information
Page 25
Approval of Investment Advisory and Subadvisory Agreements
Page 26
Information about the Board of Trustees and Officers
Page 29
This report is submitted for the general information of the shareholder of the Fund. The report is not authorized for distribution to prospective investors in the Fund unless preceded or accompanied by an effective prospectus, which contains details concerning the sales charges and other pertinent information.
AZL® Enhanced Bond Index Fund Review (unaudited)
Allianz Investment Management LLC serves as the Manager for the AZL® Enhanced Bond Index Fund and BlackRock Financial Management, Inc. serves as Subadviser to the Fund.
What factors affected the Fund’s performance during the year ended December 31, 2013?
For the year ended December 31, 2013, the AZL® Enhanced Bond Index Fund had a total return of -2.32%. That compared to a -2.02% total return for its benchmark, the Barclays U.S. Aggregate Bond Index1.
During the 12-month period, investors were increasingly willing to take on additional risk. The low interest rate environment continued to push investors to seek out higher yields in what proved to be a challenging year for fixed-income markets. In particular, the Federal Reserve’s (the “Fed”) announcement in May that it might begin tapering its quantitative easing efforts led to concerns that both short- and long-term interest rates would rise. Treasuries, especially, suffered in that environment as interest rates rose throughout the period.
The Fund’s absolute return suffered due to the challenging interest rate environment it faced. The largest detractor from absolute return was Treasuries, which is the primary component of the Fund’s benchmark index. In addition to the rising rates triggered by speculation about tapering, Treasuries tend to perform poorly during periods when investors are willing to target riskier investments. Meanwhile, the commercial mortgage-backed securities sector was the only sector to boost the Fund’s absolute return. These bonds performed relatively well in a rising-rate environment.*
The Fund’s underweight allocation to corporate bonds detracted from its relative performance. These bonds benefited from the improvement in corporate earnings and the general increase in investors’ appetite for risk.*
However, a bias toward short duration throughout the year helped boost the Fund’s relative return. In particular, the position proved to be a positive factor during the volatile summer period following the Fed’s announcement that it may begin tapering. Additionally, security selection among corporate bonds provided a boost to relative performance, specifically; the Fund benefited from its exposure to a new debt offering by a major telecommunications company.*
Past performance does not guarantee future results.
* | The Fund’s portfolio composition is subject to change. There is no guarantee that any sectors mentioned will continue to perform well or that securities in such sectors will be held by the Fund in the future. The information contained in this commentary is for informational purposes only and should not be construed as a recommendation to purchase or sell securities in the sector mentioned. The Fund’s holdings and weightings are as of December 31, 2013. |
1 | The Barclays U.S. Aggregate Bond Index is a market value-weighted performance benchmark for investment-grade fixed-rate debt issues, including government, corporate, asset-backed, and mortgage-backed securities, with maturities of at least one year. Investors cannot invest directly in an index. |
1
AZL® Enhanced Bond Index Fund Review (unaudited)
Fund Objective
The Fund’s investment objective is to exceed the total return of the Barclays U.S. Aggregate Bond Index. This objective may be changed by the Trustees of the Fund without shareholder approval. The Fund seeks to achieve its objective by investing at least 80% of its net assets in investment-grade debt securities (those of medium and high quality) of all types and repurchase agreements for those securities.
Investment Concerns
Bonds offer a relatively stable level of income, although bond prices will fluctuate, providing the potential for principal gain or loss. Intermediate-term, higher-quality bonds generally offer less risk than longer-term bonds and a lower rate of return.
Mortgage-backed investments involve risk of loss due to prepayments and, like any bond, due to default. Because of the sensitivity of mortgage-related securities to changes in interest rates, the Fund’s performance may be more volatile than if it did not hold these securities.
Investing in derivatives instruments involves risks that may be different from or greater than the risk associated with investing directly in securities or other traditional instruments.
The performance of the Fund is expected to be lower than that of the Index because of Fund fees and expenses. Securities in which the Fund will invest may involve substantial risk and may be subject to sudden severe price declines.
For a complete description of these and other risks associated with investing in a mutual Fund, please refer to the Fund’s prospectus.
Growth of $10,000 Investment
The chart above represents a comparison of a hypothetical investment in the Fund versus a similar investment in the Fund’s benchmark, and represents the reinvestment of dividends and capital gains in the Fund.
Average Annual Total Returns as of December 31, 2013
Since | ||||||||||||
1 | 3 | Inception | ||||||||||
Year | Year | (7/10/09) | ||||||||||
AZL® Enhanced Bond Index Fund | -2.32 | % | 2.98 | % | 3.33 | % | ||||||
Barclays U.S. Aggregate Bond Index | -2.02 | % | 3.26 | % | 4.26 | % |
Past performance does not guarantee future results. The performance data quoted represents past performance and current returns may be lower or higher. The investment return and principal value will fluctuate so that an investor’s shares, when redeemed may be worth more or less than the original cost. To obtain performance information current to the most recent month end, please visit www.Allianzlife.com.
Expense Ratio1 | Gross | |||
AZL® Enhanced Bond Index Fund | 0.71 | % |
The above expense ratio is based on the current Fund prospectus dated April 29, 2013. The Manager and the Fund have entered into a written contract limiting operating expenses, excluding certain expenses (such as interest expense and Acquired Fund fees and expenses), to 0.70% through April 30, 2015. Additional information pertaining to the December 31, 2013 expense ratios can be found in the financial highlights.
1 | Acquired Fund Fees and Expenses are incurred indirectly by the Fund through the valuation of the Fund’s investments in the other investment companies. Accordingly, Acquired Fund Fees and Expenses affect the Fund’s total returns. Because these fees and expenses are not included in the Fund’s financial highlights, the Fund’s total annual fund operating expenses do not correlate to the ratios of expenses to average net assets shown in the financial highlights table. Without Acquired Fund Fees and Expenses the Fund’s gross ratio would be 0.68%. |
The total return of the Fund does not reflect the effect of any insurance charges, the annual maintenance fee or the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. Such charges, fees and tax payments would reduce the performance quoted.
The Fund’s performance is measured against the Barclays U.S. Aggregate Bond Index, which is an unmanaged market value-weighted performance benchmark for investment-grade fixed-rate debt issues, including government, corporate, asset-backed, and mortgage-backed securities, with maturities of at least one year. The index does not reflect the deduction of fees associated with a mutual fund, such as investment management and fund accounting fees. The Fund’s performance reflects the deduction of fees for services provided to the Fund. Investors cannot invest directly in an index.
2 |
AZL Enhanced Bond Index Fund
(Unaudited)
As a shareholder of the AZL Enhanced Bond Index Fund (the “Fund”), you incur ongoing costs, including management fees, distribution fees, and other Fund expenses. These examples are intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. Please note that the expenses shown in each table do not reflect expenses that apply to the subaccount or the insurance contract. If the expenses that apply to the subaccount of the insurance contract were included, your costs would have been higher.
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the periods presented below.
The Actual Expense table below provides information about actual account values and actual expenses. You may use the information below, 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 table under the heading entitled “Expenses Paid During Period” to estimate the expenses you paid on your account during this period.
Beginning Account Value 7/1/13 | Ending Account Value 12/31/13 | Expenses Paid During Period 7/1/13 - 12/31/13* | Annualized Expense Ratio During Period 7/1/13 - 12/31/13 | |||||||||||||||||
AZL Enhanced Bond Index Fund | $ | 1,000.00 | $ | 1,003.70 | $ | 3.33 | 0.66 | % |
The Hypothetical Expense table below provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.
Beginning Account Value 7/1/13 | Ending Account Value 12/31/13 | Expenses Paid During Period 7/1/13 - 12/31/13* | Annualized Expense Ratio During Period 7/1/13 - 12/31/13 | |||||||||||||||||
AZL Enhanced Bond Index Fund | $ | 1,000.00 | $ | 1,021.88 | $ | 3.36 | 0.66 | % |
* | Expenses are equal to the average account value over the period, multiplied by the Fund’s annualized expense ratio, multiplied by 184/365 (to reflect the one half year period). |
Portfolio Composition
(Unaudited)
Investments | Percent of net assets | ||||
U.S. Government Agency Mortgages | 33.4 | % | |||
Money Market | 20.0 | ||||
U.S. Treasury Obligation | 19.1 | ||||
Corporate Bond | 16.0 | ||||
Yankee Dollar | 9.2 | ||||
Asset Backed Securities | 7.8 | ||||
Securities Held as Collateral for Securities on Loan | 7.4 | ||||
Collateralized Mortgage Obligations | 6.2 | ||||
Convertible Preferred Stock | 0.1 | ||||
|
| ||||
Total Investment Securities | 119.2 | ||||
Net other assets (liabilities) | (19.2 | ) | |||
|
| ||||
Net Assets | 100.0 | % | |||
|
|
3
Schedule of Portfolio Investments
December 31, 2013
Principal Amount | Fair Value | |||||||
| Asset Backed Securities (7.8%): |
| ||||||
$ | 1,500,000 | AmeriCredit Automobile Receivables Trust, Class B, Series 2012-5, 1.12%, 11/8/17 | $ | 1,497,412 | ||||
2,360,000 | AmeriCredit Automobile Receivables Trust, Class A3, Series 2013-5, 0.90%, 9/8/18 | 2,362,539 | ||||||
1,786,642 | Ares Collateralized Loan Obligation Funds, Class A2, Series 2007-3RA, 0.47%, 4/16/21(a)(b) | 1,753,267 | ||||||
606,200 | Auto ABS Compartment, Class A, Series 2012-2, 2.80%, 4/27/25(b) | 840,381 | ||||||
2,160,000 | Cabela’s Master Credit Card Trust, Class A2, Series 2013-2A, 0.82%, 8/16/21(a)(b) | 2,162,971 | ||||||
1,750,000 | Capital Auto Receivables Asset Trust, Class A2, Series 2013-1, 0.62%, 7/20/16 | 1,748,741 | ||||||
2,560,000 | Chrysler Capital Auto Receivables Trust, Class A3, Series 2013-BA, 0.97%, 5/15/18(b) | 2,559,761 | ||||||
1,270,000 | Chrysler Capital Auto Receivables Trust, Class B, Series 2013-BA, 1.91%, 6/17/19(b) | 1,269,842 | ||||||
1,460,000 | Chrysler Capital Auto Receivables Trust, Class D, Series 2013-BA, 3.01%, 10/15/20(b) | 1,459,526 | ||||||
2,090,000 | CNH Equipment Trust, Class A3, Series 2013-A, 0.69%, 6/15/18 | 2,088,257 | ||||||
1,920,000 | Credit Acceptance Auto Loan Trust, Class A, Series 2013-1A, 1.21%, 10/15/20(b) | 1,919,754 | ||||||
1,253,255 | First Investors Auto Owner Trust, Class A2, Series 2013-1A, 0.90%, 10/15/18(b) | 1,250,588 | ||||||
915,765 | Ford Credit Auto Lease Trust, Class A3, Series 2012-A, 0.85%, 1/15/15 | 916,458 | ||||||
1,821,000 | Ford Credit Auto Owner Trust, Class A3, Series 2013-A, 0.55%, 7/15/17 | 1,820,228 | ||||||
955,000 | Ford Credit Floorplan Master Owner Trust, Class D, Series 2012-1, 2.27%, 1/15/16(a) | 955,477 | ||||||
2,025,000 | Ford Credit Floorplan Master Owner Trust, Class A, Series 2012-2, 1.92%, 1/15/19 | 2,062,292 | ||||||
1,595,000 | Golden Credit Card Trust, Class A, Series 2013-1A, 0.42%, 2/15/18(a)(b) | 1,591,677 | ||||||
2,205,000 | HLSS Servicer Advance Receivables Backed Notes, Class AT6, Series 2013-T6, 1.29%, 9/15/44(b) | 2,203,677 | ||||||
2,265,000 | HLSS Servicer Advance Receivables Trust, Class A2, Series 2013-T2, 1.15%, 5/16/44(a)(b) | 2,256,810 | ||||||
2,115,000 | Nationstar Mortgage Advance Receivables Trust, Class A2, Series 2013-T2, 1.68%, 6/20/46(b) | 2,111,786 | ||||||
1,830,000 | Nissan Master Owner Trust Receivables, Class A, Series 2013-A, 0.47%, 2/15/18(a) | 1,826,689 | ||||||
1,595,000 | PFS Financing Corp., Class A, Series 2012-BA, 0.87%, 10/17/16(a)(b) | 1,595,001 | ||||||
1,735,000 | PFS Financing Corp., Class A, Series 2013-AA, 0.72%, 2/15/18(a)(b) | 1,733,910 | ||||||
1,640,182 | Prestige Auto Receivables Trust, Class A2, Series 2013-1A, 1.09%, 2/15/18(b) | 1,644,448 | ||||||
561,493 | Santander Consumer Acquired Receivables Trust, Class B, Series 2011-S1A, 1.66%, 8/15/16(b) | 562,035 | ||||||
2,000,000 | Santander Drive Auto Receivables Trust, Class B, Series 2013-5, 1.55%, 10/15/18 | 1,994,007 |
Principal Amount | Fair Value | |||||||
| Asset Backed Securities, continued |
| ||||||
$ | 76,855 | Santander Drive Auto Receivables Trust, Class A3, Series 2010-A, 1.83%, 11/17/14(b) | $ | 76,910 | ||||
830,000 | Santander Drive Auto Receivables Trust, Class C, Series 2011-4, 3.82%, 5/15/15 | 853,748 | ||||||
134,833 | Santander Drive Auto Receivables Trust, Class B, Series 2011-S1A, 1.48%, 5/15/17(b) | 134,996 | ||||||
315,000 | Santander Drive Auto Receivables Trust, Class C, Series 2011-3, 3.09%, 5/15/17 | 320,250 | ||||||
1,330,000 | Santander Drive Auto Receivables Trust, Class B, Series 2012-5, 1.56%, 8/15/18 | 1,340,536 | ||||||
1,040,000 | Santander Drive Auto Receivables Trust, Class B, Series 2012-3, 1.94%, 12/15/16 | 1,049,567 | ||||||
1,160,000 | Santander Drive Auto Receivables Trust, Class B, Series 2012-4, 1.83%, 3/15/17 | 1,170,869 | ||||||
1,200,000 | Santander Drive Auto Receivables Trust, Class C, Series 2012-6, 1.94%, 4/16/18 | 1,206,501 | ||||||
1,785,000 | Santander Drive Auto Receivables Trust, Class B, Series 2013-2, 1.33%, 3/15/18 | 1,778,480 | ||||||
1,900,000 | Santander Drive Auto Receivables Trust, Class C, Series 2013-4, 3.25%, 1/15/20 | 1,951,919 | ||||||
2,500,000 | Santander Drive Auto Receivables Trust, Class A3, Series 2013-A, 1.02%, 1/16/18(b) | 2,508,090 | ||||||
2,075,000 | Santander Drive Auto Receivables Trust, Class B, Series 2013-A, 1.89%, 10/15/19(b) | 2,083,741 | ||||||
568,797 | SLM Student Loan Trust, Class A2, Series 2004-B, 0.44%, 6/15/21(a) | 562,079 | ||||||
860,477 | SLM Student Loan Trust, Class A1, Series 2012-A, 1.57%, 4/15/16(a)(b) | 868,742 | ||||||
162,209 | Structured Receivables Finance LLC, Class A, Series 2010-B, 3.73%, 2/16/26(b) | 165,938 | ||||||
1,115,000 | World Financial Network Credit Card Master Trust, Class A, Series 2012-A, 3.14%, 1/17/23 | 1,145,011 | ||||||
|
| |||||||
| Total Asset Backed Securities (Cost $61,184,832) | 61,404,911 | ||||||
|
| |||||||
| Collateralized Mortgage Obligations (6.2%): |
| ||||||
44,466 | Banc of America Commercial Mortgage, Inc., Class A2, Series 2007-3, 5.65%, 6/10/49(a) | 44,423 | ||||||
1,878,942 | Banc of America Commercial Mortgage, Inc., Class A1A, Series 2007-3, 5.65%, 6/10/49(a) | 2,046,040 | ||||||
876,374 | Banc of America Commercial Mortgage, Inc., Class A3, Series 2007-4, 5.81%, 8/10/14(a) | 893,355 | ||||||
1,295,000 | Banc of America Large Loan, Class A4B, Series 2010-UB4, 5.01%, 12/20/41(a)(b) | 1,295,518 | ||||||
1,330,000 | Bank of America Re-Remic Trust, Class A, Series 2012-CLRN, 1.32%, 8/15/29(a)(b) | 1,330,851 | ||||||
50,000 | Bear Stearns Commercial Mortgage Securities, Inc., Class AM, Series 2005-PW10, 5.45%, 12/15/15(a) | 53,388 | ||||||
1,832,255 | Bear Stearns Commercial Mortgage Securities, Inc., Class A1A, Series 2006-PW14, 5.19%, 12/11/38 | 2,002,772 | ||||||
625,000 | Bear Stearns Commercial Mortgage Securities, Inc., Class AM, Series 2007-PW16, 5.71%, 6/1/40(a) | 700,309 | ||||||
2,061,155 | Commercial Mortgage Loan Trust, Class A1A, Series 2008-LS1, 6.01%, 12/10/49(a) | 2,325,111 |
Continued
4
AZL Enhanced Bond Index Fund
Schedule of Portfolio Investments
December 31, 2013
Principal Amount | Fair Value | |||||||
| Collateralized Mortgage Obligations, continued |
| ||||||
$ | 590,000 | Commercial Mortgage Pass-Through Certificates, Class AM, Series 2006-C8, 5.35%, 12/10/16 | $ | 644,500 | ||||
828,000 | Commercial Mortgage Trust, Class B, Series 2012-LTRT, 3.80%, 10/5/30(b) | 759,551 | ||||||
1,065,000 | Commercial Mortgage Trust, Class AM, Series 2013-CR11, 4.71%, 10/10/46(a) | 1,104,374 | ||||||
2,390,000 | Commercial Mortgage Trust, Class A, Series 2013-FL3, 1.68%, 10/13/28(a)(b) | 2,398,137 | ||||||
855,000 | Credit Suisse Commercial Mortgage Trust, Class AM, Series 2006-C5, 5.34%, 12/15/39 | 912,842 | ||||||
100,000 | Credit Suisse Mortgage Capital Certificates, Class AM, Series 2006-C3, 5.79%, 6/15/16(a) | 108,406 | ||||||
25,510 | Credit Suisse Mortgage Capital Certificates, Class A2, Series 2007-C2, 5.45%, 1/15/49(a) | 25,459 | ||||||
1,272,904 | DBRR Trust, Class A, Series 2012-EZ1, 0.95%, 9/25/45(b) | 1,272,789 | ||||||
2,287,133 | DBRR Trust, Class A, Series 2013-EZ3, 1.64%, 12/18/49(a)(b) | 2,290,708 | ||||||
1,320,000 | DBUBS Mortgage Trust, Class A2, Series 2011-LC1A, 4.53%, 7/1/19(b) | 1,434,143 | ||||||
1,055,450 | DBUBS Mortgage Trust, Class A1, Series 2011-LC1A, 3.74%, 6/10/17(b) | 1,103,368 | ||||||
700,000 | Federal Home Loan Mortgage Corporation Structured Pass-Through Certificates, Class A2, Series K032, 3.31%, 5/25/23(a) | 691,645 | ||||||
564,635 | FREMF Mortgage Trust, Class B, Series 2013-K712, 3.37%, 5/25/45(a)(b) | 541,768 | ||||||
10,900,921 | GS Mortgage Securities Trust, Class XA, Series 2013-GC10, 1.77%, 2/10/46(a) | 1,164,393 | ||||||
1,100,000 | GS Mortgage Securities Trust, Class A, Series 2012-SHOP, 2.93%, 6/5/31(b) | 1,098,920 | ||||||
1,500,000 | Hilton USA Trust, Class AFX, Series 2013-HLT, 2.66%, 11/5/30(b) | 1,484,979 | ||||||
348,292 | Holmes Master Issuer plc, Class A2, Series 2010-1A, 1.64%, 10/15/54(a)(b) | 349,136 | ||||||
58,668 | JPMorgan Chase Commercial Mortgage Securities Corp., Class A3B, Series 2006-LDP8, 5.45%, 5/15/45 | 59,843 | ||||||
401,483 | JPMorgan Chase Commercial Mortgage Securities Corp., Class A2, Series 2007-LD11, 5.79%, 6/15/49(a) | 404,535 | ||||||
600,000 | JPMorgan Chase Commercial Mortgage Securities Corp., Class A, Series 2012-WLDN, 3.90%, 5/5/30(b) | 591,239 | ||||||
5,085,895 | JPMorgan Chase Commercial Mortgage Securities Corp., Class XA, Series 2012-CBX, 2.01%, 6/15/45(a) | 499,938 | ||||||
11,502,954 | JPMorgan Chase Commercial Mortgage Securities Corp., Class XA, Series 2013-LC11, 1.59%, 4/15/46(a) | 1,103,214 | ||||||
1,332,229 | Lanark Master Issuer plc, Class 1A, Series 2012-2A, 1.64%, 12/22/54(a)(b) | 1,351,546 | ||||||
1,200,000 | LB Commercial Conduit Mortgage Trust, Class AM, Series 2007-C3, 5.88%, 7/15/44(a) | 1,332,109 | ||||||
1,120,782 | Merrill Lynch Mortgage Trust, Class A4, Series 2004-KEY2, 4.86%, 8/12/39(a) | 1,138,405 |
Principal Amount | Fair Value | |||||||
| Collateralized Mortgage Obligations, continued |
| ||||||
$ | 1,641,251 | Merrill Lynch Mortgage Trust, Class A1A, Series 2007-C1, 5.86%, 6/12/50(a) | $ | 1,756,761 | ||||
1,690,991 | ML-CFC Commercial Mortgage Trust, Class A1A, Series 2006-4, 5.17%, 12/12/49(a) | 1,843,269 | ||||||
2,124,235 | ML-CFC Commercial Mortgage Trust, Class A1A, Series 2006-3, 5.41%, 7/12/46(a) | 2,321,863 | ||||||
1,395,000 | Morgan Stanley BAML Trust, Class C, Series 2013-C13, 4.90%, 11/15/46(a) | 1,363,063 | ||||||
2,109,095 | Morgan Stanley Capital I Trust, Class A1A, Series 2007-IQ13, 5.31%, 3/15/44 | 2,310,421 | ||||||
1,400,000 | Morgan Stanley Re-Remic Trust, Class B, Series 2011-I0 , 3/23/51(b) | 1,343,916 | ||||||
909,510 | Morgan Stanley Re-Remic Trust, Class A, Series 2012-XA, 2.00%, 7/28/49(b) | 916,786 | ||||||
542,227 | Morgan Stanley Re-Remic Trust, Class AXB1, Series 2012-IO, 1.00%, 3/29/51(b) | 542,217 | ||||||
1,010,000 | Motel 6 Trust, Class B, Series 2012-MTL6, 2.74%, 10/5/25(b) | 1,001,750 | ||||||
620,000 | RBSCF Trust, Class WBTA, Series 2010-RR3, 5.92%, 4/16/17(a)(b) | 677,349 | ||||||
677,731 | STRIPS, Class A, Series 2012-1A, 1.50%, 12/25/44(b) | 670,954 | ||||||
|
| |||||||
| Total Collateralized Mortgage Obligations (Cost $49,610,854) | 49,306,063 | ||||||
|
| |||||||
| Corporate Bonds (16.0%): |
| ||||||
| Aerospace & Defense (0.3%): |
| ||||||
355,000 | Precision Castparts Corp., 2.50%, 1/15/23, Callable 10/15/22 @ 100 | 321,624 | ||||||
1,225,000 | United Technologies Corp., 3.10%, 6/1/22 | 1,197,783 | ||||||
640,000 | United Technologies Corp., 4.50%, 6/1/42 | 621,496 | ||||||
|
| |||||||
2,140,903 | ||||||||
|
| |||||||
| Beverages (0.3%): |
| ||||||
1,520,000 | Anheuser-Busch InBev Finance, Inc., 2.63%, 1/17/23 | 1,395,887 | ||||||
460,000 | Anheuser-Busch InBev NV Worldwide, Inc., 5.00%, 4/15/20 | 520,587 | ||||||
620,000 | Anheuser-Busch InBev NV Worldwide, Inc., 2.50%, 7/15/22 | 573,480 | ||||||
|
| |||||||
2,489,954 | ||||||||
|
| |||||||
| Biotechnology (0.2%): |
| ||||||
450,000 | Amgen, Inc., 3.63%, 5/15/22, Callable 2/15/22 @ 100 | 445,794 | ||||||
935,000 | Amgen, Inc., 5.38%, 5/15/43, Callable 11/15/42 @ 100 | 959,979 | ||||||
|
| |||||||
1,405,773 | ||||||||
|
| |||||||
| Capital Markets (1.7%): |
| ||||||
1,055,000 | Ford Motor Credit Co. LLC, 8.13%, 1/15/20 | 1,319,225 | ||||||
370,000 | General Electric Capital Corp., 4.38%, 9/16/20 | 401,002 | ||||||
555,000 | General Electric Capital Corp., Series G, 6.15%, 8/7/37, MTN | 647,507 | ||||||
905,000 | Goldman Sachs Group, Inc. (The), 0.70%, 3/22/16(a) | 901,895 | ||||||
915,000 | Goldman Sachs Group, Inc. (The), Series FRN, 1.44%, 4/30/18(a) | 925,810 | ||||||
932,000 | Goldman Sachs Group, Inc. (The), 2.90%, 7/19/18 | 948,472 |
Continued
5
AZL Enhanced Bond Index Fund
Schedule of Portfolio Investments
December 31, 2013
Principal Amount | Fair Value | |||||||
| Corporate Bonds, continued |
| ||||||
| Capital Markets, continued |
| ||||||
$ | 300,000 | Goldman Sachs Group, Inc. (The), 5.75%, 1/24/22 | $ | 337,706 | ||||
1,515,000 | Goldman Sachs Group, Inc. (The), 3.63%, 1/22/23 | 1,467,055 | ||||||
2,525,000 | Morgan Stanley, 6.00%, 4/28/15, MTN | 2,689,211 | ||||||
960,000 | Morgan Stanley, 3.75%, 2/25/23 | 934,142 | ||||||
615,000 | Morgan Stanley, 4.10%, 5/22/23 | 595,167 | ||||||
650,000 | Morgan Stanley, 5.00%, 11/24/25 | 651,944 | ||||||
275,741 | SteelRiver Transmission Co. LLC, 4.71%, 6/30/17(b) | 284,124 | ||||||
|
| |||||||
12,103,260 | ||||||||
|
| |||||||
| Chemicals (0.1%): |
| ||||||
555,000 | Eastman Chemical Co., 2.40%, 6/1/17 | 560,947 | ||||||
|
| |||||||
| Commercial Banks (0.6%): |
| ||||||
1,350,000 | JPMorgan Chase & Co., Series G, 0.86%, 2/26/16(a) | 1,355,550 | ||||||
1,565,000 | Wells Fargo & Co., 1.25%, 7/20/16 | 1,576,609 | ||||||
1,170,000 | Wells Fargo & Co., 0.87%, 4/23/18(a) | 1,176,461 | ||||||
575,000 | Wells Fargo & Co., 4.13%, 8/15/23 | 566,863 | ||||||
|
| |||||||
4,675,483 | ||||||||
|
| |||||||
| Computers & Peripherals (0.0%): |
| ||||||
238,000 | Apple, Inc., 2.40%, 5/3/23 | 214,012 | ||||||
|
| |||||||
| Diversified Consumer Services (0.1%): |
| ||||||
1,090,000 | General Electric Capital Corp., 0.96%, 4/2/18(a) | 1,098,646 | ||||||
|
| |||||||
| Diversified Financial Services (3.2%): |
| ||||||
425,000 | Bank of America Corp., Series L, 7.38%, 5/15/14, MTN | 435,577 | ||||||
1,650,000 | Bank of America Corp., 1.50%, 10/9/15 | 1,666,614 | ||||||
430,000 | Bank of America Corp., Series 1, 3.75%, 7/12/16 | 457,140 | ||||||
1,245,000 | Bank of America Corp., 6.50%, 8/1/16 | 1,405,715 | ||||||
820,000 | Bank of America Corp., 5.63%, 10/14/16 | 913,794 | ||||||
1,315,000 | Bank of America Corp., 0.50%, 10/14/16(a) | 1,300,940 | ||||||
1,050,000 | Bank of America Corp., Series L, 1.35%, 11/21/16 | 1,049,567 | ||||||
1,065,000 | Bank of America Corp., 1.32%, 3/22/18, MTN(a) | 1,079,143 | ||||||
1,925,000 | Bank of America Corp., 2.60%, 1/15/19 | 1,933,496 | ||||||
545,000 | Bank of America Corp., 5.70%, 1/24/22 | 616,861 | ||||||
1,155,000 | Caterpillar Financial Services Corp., 1.10%, 5/29/15, MTN | 1,164,306 | ||||||
1,710,000 | Citigroup, Inc., 4.59%, 12/15/15 | 1,827,330 | ||||||
1,165,000 | Citigroup, Inc., 1.25%, 1/15/16 | 1,168,867 | ||||||
1,035,000 | Citigroup, Inc., 1.04%, 4/1/16(a) | 1,041,756 | ||||||
1,260,000 | Citigroup, Inc., 1.30%, 4/1/16 | 1,262,930 | ||||||
585,000 | Citigroup, Inc., 5.50%, 9/13/25 | 616,145 | ||||||
1,375,000 | Daimler Finance NA LLC, 1.88%, 9/15/14(b) | 1,386,897 | ||||||
1,090,000 | Daimler Finance NA LLC, 1.88%, 1/11/18(b) | 1,073,696 | ||||||
730,000 | JPMorgan Chase & Co., 2.00%, 8/15/17 | 740,478 | ||||||
720,000 | JPMorgan Chase & Co., 6.00%, 1/15/18 | 829,063 | ||||||
775,000 | JPMorgan Chase & Co., 1.14%, 1/25/18(a) | 782,744 | ||||||
125,000 | JPMorgan Chase & Co., 4.50%, 1/24/22 | 132,216 | ||||||
130,000 | JPMorgan Chase & Co., 3.25%, 9/23/22 | 124,582 | ||||||
1,270,000 | JPMorgan Chase & Co., 3.20%, 1/25/23 | 1,203,993 | ||||||
360,000 | JPMorgan Chase & Co., 5.63%, 8/16/43 | 380,439 | ||||||
|
| |||||||
24,594,289 | ||||||||
|
|
Principal Amount | Fair Value | |||||||
| Corporate Bonds, continued |
| ||||||
| Diversified Telecommunication (0.9%): |
| ||||||
$ | 4,500,000 | Verizon Communications, Inc., 2.50%, 9/15/16 | $ | 4,653,162 | ||||
1,230,000 | Verizon Communications, Inc., 5.15%, 9/15/23 | 1,320,641 | ||||||
1,190,000 | Verizon Communications, Inc., 6.55%, 9/15/43 | 1,392,251 | ||||||
|
| |||||||
7,366,054 | ||||||||
|
| |||||||
| Diversified Telecommunication Services (0.3%): |
| ||||||
860,000 | AT&T, Inc., 0.90%, 2/12/16 | 855,630 | ||||||
975,000 | Verizon Communications, Inc., 2.45%, 11/1/22, Callable 8/1/22 @ 100 | 863,114 | ||||||
950,000 | Verizon Communications, Inc., 3.85%, 11/1/42, Callable 5/1/42 @ 100 | 775,964 | ||||||
|
| |||||||
2,494,708 | ||||||||
|
| |||||||
| Electric Utilities (0.4%): |
| ||||||
355,000 | DTE Electric Co., Series A, 4.00%, 4/1/43, Callable 10/1/42 @ 100 | 315,961 | ||||||
1,350,000 | Oncor Electric Delivery Co. LLC, 6.38%, 1/15/15 | 1,424,259 | ||||||
180,000 | Oncor Electric Delivery Co. LLC, 7.00%, 9/1/22 | 214,738 | ||||||
635,000 | Pacific Gas & Electric Co., 5.13%, 11/15/43, Callable 5/15/43 @ 100 | 655,737 | ||||||
220,000 | Southern California Edison Co., Series 06-E, 5.55%, 1/15/37 | 243,010 | ||||||
185,000 | Virginia Electric & Power Co., Series A, 6.00%, 5/15/37 | 216,117 | ||||||
25,000 | Virginia Electric & Power Co., 6.35%, 11/30/37 | 30,132 | ||||||
200,000 | Virginia Electric & Power Co., 4.00%, 1/15/43, Callable 7/15/42 @ 100 | 178,090 | ||||||
|
| |||||||
3,278,044 | ||||||||
|
| |||||||
| Electrical Equipment (0.3%): |
| ||||||
840,000 | Eaton Corp., 1.50%, 11/2/17 | 823,479 | ||||||
255,000 | Eaton Corp., 4.00%, 11/2/32 | 234,195 | ||||||
1,720,000 | General Electric Co., 2.70%, 10/9/22 | 1,609,918 | ||||||
|
| |||||||
2,667,592 | ||||||||
|
| |||||||
| Electronic Equipment, Instruments & Components (0.1%): |
| ||||||
675,000 | Agilent Technologies, Inc., 6.50%, 11/1/17 | 781,879 | ||||||
|
| |||||||
| Food & Staples Retailing (0.2%): |
| ||||||
550,000 | CVS Caremark Corp., 4.00%, 12/5/23, Callable 9/5/23 @ 100 | 548,836 | ||||||
630,000 | Kraft Foods Group, Inc., 2.25%, 6/5/17 | 637,921 | ||||||
256,000 | Kraft Foods Group, Inc., 5.38%, 2/10/20 | 288,820 | ||||||
|
| |||||||
1,475,577 | ||||||||
|
| |||||||
| Food Products (0.3%): |
| ||||||
1,425,000 | Wm. Wrigley Jr. Co., 1.40%, 10/21/16(b) | 1,427,159 | ||||||
705,000 | Wm. Wrigley Jr. Co., 3.38%, 10/21/20(b) | 696,904 | ||||||
|
| |||||||
2,124,063 | ||||||||
|
| |||||||
| Health Care Providers & Services (0.3%): |
| ||||||
380,000 | Aetna, Inc., 4.13%, 11/15/42, Callable 5/15/42 @ 100 | 332,357 | ||||||
725,000 | UnitedHealth Group, Inc., 1.40%, 10/15/17 | 715,847 | ||||||
200,000 | UnitedHealth Group, Inc., 3.88%, 10/15/20, Callable 7/15/20 @ 100 | 210,836 | ||||||
410,000 | UnitedHealth Group, Inc., 4.25%, 3/15/43, Callable 9/15/42 @ 100 | 367,946 | ||||||
325,000 | WellPoint, Inc., 3.30%, 1/15/23 | 303,295 | ||||||
300,000 | WellPoint, Inc., 5.10%, 1/15/44 | 297,494 | ||||||
|
| |||||||
2,227,775 | ||||||||
|
|
Continued
6
AZL Enhanced Bond Index Fund
Schedule of Portfolio Investments
December 31, 2013
Principal Amount | Fair Value | |||||||
| Corporate Bonds, continued |
| ||||||
| Independent Power Producers & Energy Traders (0.8%): |
| ||||||
$ | 220,000 | Carolina Power & Light Co., 5.70%, 4/1/35 | $ | 242,597 | ||||
430,000 | Carolina Power & Light Co., 4.10%, 3/15/43, Callable 9/15/42 @ 100 | 396,604 | ||||||
300,000 | Columbus Southern Power Co., 6.05%, 5/1/18 | 342,937 | ||||||
100,000 | Duke Energy Corp., 3.95%, 9/15/14 | 102,374 | ||||||
65,000 | Florida Power & Light Co., 5.95%, 2/1/38 | 76,168 | ||||||
845,000 | Florida Power Corp., 6.40%, 6/15/38 | 1,041,844 | ||||||
40,000 | MidAmerican Energy Holdings Co., 5.95%, 5/15/37 | 43,771 | ||||||
450,000 | MidAmerican Energy Holdings Co., 6.50%, 9/15/37 | 522,693 | ||||||
850,000 | PacifiCorp, 5.65%, 7/15/18 | 976,410 | ||||||
395,000 | PacifiCorp, 5.75%, 4/1/37 | 451,723 | ||||||
630,000 | PacifiCorp, 4.10%, 2/1/42, Callable 8/1/41 @ 100 | 569,115 | ||||||
350,000 | Progress Energy Carolinas, Inc., 5.30%, 1/15/19 | 398,097 | ||||||
865,000 | Public Service Electric & Gas Co., 2.38%, 5/15/23, Callable 2/15/23 @ 100 | 777,779 | ||||||
|
| |||||||
5,942,112 | ||||||||
|
| |||||||
| Insurance (1.2%): |
| ||||||
410,000 | ACE INA Holdings, Inc., 4.15%, 3/13/43 | 371,647 | ||||||
310,000 | American International Group, Inc., 3.00%, 3/20/15 | 318,396 | ||||||
635,000 | American International Group, Inc., 3.80%, 3/22/17 | 678,116 | ||||||
125,000 | American International Group, Inc., Series MP, 5.45%, 5/18/17, MTN | 139,715 | ||||||
1,080,000 | American International Group, Inc., 4.88%, 6/1/22 | 1,160,809 | ||||||
690,000 | American International Group, Inc., 4.13%, 2/15/24 | 686,000 | ||||||
405,000 | Berkshire Hathaway Finance Corp., 4.30%, 5/15/43 | 364,745 | ||||||
185,000 | Berkshire Hathaway, Inc., 2.20%, 8/15/16 | 191,086 | ||||||
555,000 | Loews Corp., 4.13%, 5/15/43, Callable 11/15/42 @ 100 | 472,683 | ||||||
1,120,000 | MetLife Global Funding I, 2.00%, 1/10/14(b) | 1,120,383 | ||||||
1,710,000 | MetLife Institutional Funding II LLC, 1.63%, 4/2/15(b) | 1,729,305 | ||||||
1,125,000 | MetLife, Inc., 6.75%, 6/1/16 | 1,279,160 | ||||||
905,000 | New York Life Global Funding, 1.65%, 5/15/17(b) | 905,995 | ||||||
90,000 | Prudential Financial, Inc., Series D, 4.75%, 9/17/15, MTN | 95,908 | ||||||
|
| |||||||
9,513,948 | ||||||||
|
| |||||||
| IT Services (0.3%): |
| ||||||
715,000 | IBM Corp., 0.55%, 2/6/15 | 716,059 | ||||||
1,450,000 | IBM Corp., 1.95%, 7/22/16 | 1,489,653 | ||||||
|
| |||||||
2,205,712 | ||||||||
|
| |||||||
| Life Sciences Tools & Services (0.0%): |
| ||||||
280,000 | Thermo Fisher Scientific, Inc., 5.30%, 2/1/44, Callable 8/1/43 @ 100 | 283,129 | ||||||
|
| |||||||
| Machinery (0.1%): |
| ||||||
605,000 | Deere & Co., 2.60%, 6/8/22, Callable 3/8/22 @ 100 | 565,715 | ||||||
|
|
Principal Amount | Fair Value | |||||||
| Corporate Bonds, continued |
| ||||||
| Media (0.8%): |
| ||||||
$ | 200,000 | Comcast Corp., 6.50%, 11/15/35 | $ | 233,281 | ||||
330,000 | Comcast Corp., 6.45%, 3/15/37 | 382,979 | ||||||
675,000 | Comcast Corp., 4.65%, 7/15/42 | 628,158 | ||||||
575,000 | Cox Communications, Inc., 4.70%, 12/15/42(b) | 482,900 | ||||||
575,000 | DIRECTV Holdings LLC / DIRECTV Financing Co., Inc., 3.50%, 3/1/16 | 603,571 | ||||||
1,135,000 | NBCUniversal Enterprise, Inc., 0.93%, 4/15/18(a)(b) | 1,139,155 | ||||||
280,000 | NBCUniversal Media LLC, 5.15%, 4/30/20 | 312,969 | ||||||
129,000 | NBCUniversal Media LLC, 5.95%, 4/1/41 | 141,105 | ||||||
816,000 | NBCUniversal Media LLC, 4.45%, 1/15/43 | 730,992 | ||||||
525,000 | Omnicom Group, Inc., 5.90%, 4/15/16 | 580,345 | ||||||
820,000 | Scripps Networks Interactive, Inc., 2.70%, 12/15/16 | 852,523 | ||||||
325,000 | Time Warner Cable, Inc., 3.40%, 6/15/22^ | 317,150 | ||||||
|
| |||||||
6,405,128 | ||||||||
|
| |||||||
| Multiline Retail (0.0%): |
| ||||||
390,000 | Target Corp., 4.00%, 7/1/42 | 338,290 | ||||||
|
| |||||||
| Multi-Utilities (0.4%): |
| ||||||
155,000 | CenterPoint Energy Resources Corp., 6.25%, 2/1/37 | 172,368 | ||||||
675,000 | CMS Energy Corp., 5.05%, 3/15/22, Callable 12/15/21 @ 100^ | 728,710 | ||||||
415,000 | CMS Energy Corp., 4.70%, 3/31/43, Callable 9/30/42 @ 100 | 387,208 | ||||||
900,000 | DTE Energy Co., Series F, 3.85%, 12/1/23, Callable 9/1/23 @ 100 | 889,007 | ||||||
505,000 | Duke Energy Carolinas LLC, 6.10%, 6/1/37 | 577,693 | ||||||
285,000 | Sempra Energy, 6.00%, 10/15/39 | 313,062 | ||||||
|
| |||||||
3,068,048 | ||||||||
|
| |||||||
| Office REITs (0.0%): |
| ||||||
350,000 | Boston Properties, LP, 3.85%, 2/1/23, Callable 11/1/22 @ 100 | 341,967 | ||||||
|
| |||||||
| Oil, Gas & Consumable Fuels (0.9%): |
| ||||||
150,000 | Anadarko Petroleum Corp., 7.63%, 3/15/14 | 151,994 | ||||||
58,000 | Anadarko Petroleum Corp., 5.75%, 6/15/14 | 59,216 | ||||||
2,025,000 | Anadarko Petroleum Corp., 6.38%, 9/15/17 | 2,324,841 | ||||||
216,000 | El Paso Pipeline Partners Operating Co. LLC, 6.50%, 4/1/20 | 248,059 | ||||||
1,295,000 | Energy Transfer Partners LP, 4.15%, 10/1/20, Callable 8/1/20 @ 100 | 1,313,882 | ||||||
550,000 | Energy Transfer Partners LP, 6.50%, 2/1/42, Callable 8/1/41 @ 100 | 591,115 | ||||||
200,000 | Enterprise Products Operating LP, 4.85%, 8/15/42, Callable 2/15/42 @ 100 | 188,353 | ||||||
270,000 | Halliburton Co., 4.75%, 8/1/43 | 265,153 | ||||||
515,000 | Noble Energy, Inc., 5.25%, 11/15/43, Callable 5/15/43 @ 100 | 514,579 | ||||||
540,000 | Ruby Pipeline LLC, 6.00%, 4/1/22(b) | 566,863 | ||||||
800,000 | Williams Cos., Inc. (The), 3.70%, 1/15/23, Callable 10/15/22 @ 100 | 698,246 | ||||||
480,000 | Williams Partners LP, 4.00%, 11/15/21 | 474,056 | ||||||
|
| |||||||
7,396,357 | ||||||||
|
|
Continued
7
AZL Enhanced Bond Index Fund
Schedule of Portfolio Investments
December 31, 2013
Principal Amount | Fair Value | |||||||
| Corporate Bonds, continued |
| ||||||
| Paper & Forest Products (0.2%): |
| ||||||
$ | 400,000 | Georgia-Pacific LLC, 7.70%, 6/15/15 | $ | 437,968 | ||||
1,240,000 | International Paper Co., 4.75%, 2/15/22, Callable 11/15/21 @ 100 | 1,300,042 | ||||||
|
| |||||||
1,738,010 | ||||||||
|
| |||||||
| Pharmaceuticals (0.8%): |
| ||||||
1,240,000 | AbbVie, Inc., 1.20%, 11/6/15 | 1,252,603 | ||||||
795,000 | AbbVie, Inc., 2.00%, 11/6/18 | 786,422 | ||||||
1,325,000 | AbbVie, Inc., 2.90%, 11/6/22 | 1,238,419 | ||||||
375,000 | AbbVie, Inc., 4.40%, 11/6/42 | 349,753 | ||||||
1,020,000 | Merck & Co., Inc., 0.60%, 5/18/18(a) | 1,022,675 | ||||||
345,000 | Merck & Co., Inc., 4.15%, 5/18/43 | 315,189 | ||||||
410,000 | Pfizer, Inc., 4.30%, 6/15/43 | 385,544 | ||||||
995,000 | Watson Pharmaceuticals, Inc., 1.88%, 10/1/17 | 984,623 | ||||||
|
| |||||||
6,335,228 | ||||||||
|
| |||||||
| Road & Rail (0.0%): |
| ||||||
370,000 | Burlington North Santa Fe LLC, 4.45%, 3/15/43, Callable 9/15/42 @ 100 | 335,483 | ||||||
|
| |||||||
| Software (0.2%): |
| ||||||
1,145,000 | Microsoft Corp., 3.63%, 12/15/23, Callable 9/15/23 @ 100 | 1,146,790 | ||||||
505,000 | Oracle Corp., 3.63%, 7/15/23 | 500,943 | ||||||
|
| |||||||
1,647,733 | ||||||||
|
| |||||||
| Specialty Retail (0.2%): |
| ||||||
365,000 | Home Depot, Inc., 4.88%, 2/15/44, Callable 8/15/43 @ 100 | 369,588 | ||||||
510,000 | Lowe’s Cos., Inc., 5.00%, 9/15/43, Callable 3/15/43 @ 100 | 521,448 | ||||||
815,000 | Penske Truck Leasing Co. LP, 3.13%, 5/11/15(b) | 838,212 | ||||||
|
| |||||||
1,729,248 | ||||||||
|
| |||||||
| Thrifts & Mortgage Finance (0.4%): |
| ||||||
975,000 | Capital One Bank USA NA, Series BKNT, 1.15%, 11/21/16, Callable 10/21/16 @ 100 | 972,167 | ||||||
440,000 | Capital One Bank USA NA, 3.38%, 2/15/23 | 409,059 | ||||||
1,435,000 | Novus USA Trust, Series 2013-1, 1.54%, 2/28/14(a)(b) | 1,436,794 | ||||||
|
| |||||||
2,818,020 | ||||||||
|
| |||||||
| Tobacco (0.2%): |
| ||||||
525,000 | Altria Group, Inc., 5.38%, 1/31/44 | 527,174 | ||||||
155,000 | Philip Morris International, Inc., 4.50%, 3/20/42 | 144,783 | ||||||
20,000 | Philip Morris International, Inc., 3.88%, 8/21/42 | 16,930 | ||||||
1,325,000 | Philip Morris International, Inc., 4.13%, 3/4/43 | 1,159,930 | ||||||
|
| |||||||
1,848,817 | ||||||||
|
| |||||||
| Wireless Telecommunication Services (0.2%): |
| ||||||
535,000 | Crown Castle Towers LLC, 6.11%, 1/15/20(b) | 599,912 | ||||||
522,000 | GTE Corp., 6.84%, 4/15/18 | 608,003 | ||||||
400,000 | SBA Tower Trust, 4.25%, 4/15/15(b) | 404,996 | ||||||
|
| |||||||
1,612,911 | ||||||||
|
| |||||||
| Total Corporate Bonds (Cost $126,118,233) | 125,824,815 | ||||||
|
| |||||||
| Convertible Preferred Stock(0.1%): |
| ||||||
| Capital Markets (0.1%): |
| ||||||
1,165,000 | State Street Capital Trust IV, 1.24%, 6/15/37, Callable 2/13/14 @ 100(a) | 880,158 | ||||||
|
| |||||||
| Total Convertible Preferred Stock (Cost $996,226) | 880,158 | ||||||
|
|
Principal Amount | Fair Value | |||||||
| Yankee Dollars (9.2%): |
| ||||||
| Capital Markets (0.2%): |
| ||||||
$ | 1,355,000 | Credit Suisse Guernsey, Ltd., 2.60%, 5/27/16(b) | $ | 1,409,422 | ||||
|
| |||||||
| Chemicals (0.2%): |
| ||||||
1,330,000 | LyondellBasell Industries NV, 5.00%, 4/15/19, Callable 1/15/19 @ 100 | 1,477,126 | ||||||
|
| |||||||
| Commercial Banks (3.8%): |
| ||||||
1,805,000 | Achmea Hypotheekbank NV, 0.59%, 11/3/14(a)(b) | 1,808,954 | ||||||
2,130,000 | Bank of England Euro Note, Series REGS, 0.50%, 3/6/15(b) | 2,134,337 | ||||||
790,000 | Caixa Economica Federal, 2.38%, 11/6/17(b) | 733,713 | ||||||
410,000 | Credit Suisse Group AG, 5.40%, 1/14/20 | 455,647 | ||||||
240,000 | Eksportfinans A/S, 3.00%, 11/17/14 | 240,960 | ||||||
1,115,000 | ING Bank NV, 3.75%, 3/7/17(b) | 1,174,340 | ||||||
1,465,000 | Kommunalbanken AS, 0.26%, 1/26/15(a)(b) | 1,464,552 | ||||||
1,856,000 | Kommunalbanken AS, 0.37%, 10/31/16(a)(b) | 1,858,964 | ||||||
1,110,000 | National Bank of Canada, 1.50%, 6/26/15 | 1,124,310 | ||||||
805,000 | Nederlandse Financierings-Maatschappij voor Ontwikkelingslanden NV, Series G, 1.50%, 2/12/18(b) | 796,416 | ||||||
1,740,000 | Nederlandse Waterschapsbank NV, Series E, 3.00%, 3/17/15(b) | 1,794,539 | ||||||
555,000 | Nordea Eiendomskreditt AS, 2.13%, 9/22/16(b) | 569,802 | ||||||
2,610,000 | Oesterreichische Kontrollbank AG, Series G, 1.13%, 7/6/15 | 2,638,292 | ||||||
275,000 | Rabobank Nederland, 5.75%, 12/1/43 | 291,524 | ||||||
990,000 | Royal Bank of Canada, 1.45%, 10/30/14 | 999,307 | ||||||
2,005,000 | Royal Bank of Canada, 1.13%, 7/22/16 | 2,004,741 | ||||||
810,000 | Santander UK plc, 5.00%, 11/7/23(b) | 813,013 | ||||||
2,300,000 | Toronto-Dominion Bank, 2.20%, 7/29/15(b) | 2,360,950 | ||||||
2,540,000 | UBS AG London, 1.88%, 1/23/15(b) | 2,575,560 | ||||||
2,915,000 | Westpac Banking Corp., 1.38%, 7/17/15(b) | 2,949,980 | ||||||
1,490,000 | Westpac Banking Corp., 2.45%, 11/28/16^(b) | 1,545,577 | ||||||
|
| |||||||
30,335,478 | ||||||||
|
| |||||||
| Diversified Financial Services (0.4%): |
| ||||||
575,000 | BP Capital Markets plc, 4.74%, 3/11/21 | 628,972 | ||||||
2,190,000 | CDP Financial, Inc., 4.40%, 11/25/19(b) | 2,410,870 | ||||||
|
| |||||||
3,039,842 | ||||||||
|
| |||||||
| Energy Equipment & Services (0.1%): |
| ||||||
600,000 | Schlumberger Investment SA, 3.30%, 9/14/21, Callable 6/14/21 @ 100(b) | 596,519 | ||||||
|
| |||||||
| Food Products (0.2%): |
| ||||||
1,415,000 | B.A.T. International Finance plc, 3.25%, 6/7/22(b) | 1,355,287 | ||||||
|
| |||||||
| Hotels, Restaurants & Leisure (0.2%): |
| ||||||
1,595,000 | Carnival Corp., 1.20%, 2/5/16 | 1,590,591 | ||||||
|
| |||||||
| Insurance (0.0%): |
| ||||||
310,000 | Manulife Financial Corp., 3.40%, 9/17/15 | 322,688 | ||||||
|
| |||||||
| Metals & Mining (0.4%): |
| ||||||
1,310,000 | BHP Billiton Finance USA, Ltd., 1.13%, 11/21/14 | 1,319,432 | ||||||
160,000 | BHP Billiton Finance USA, Ltd., 2.88%, 2/24/22 | 153,011 | ||||||
385,000 | BHP Billiton Finance USA, Ltd., 5.00%, 9/30/43 | 391,445 | ||||||
120,000 | Codelco, Inc., 3.75%, 11/4/20(b) | 119,954 |
Continued
8
AZL Enhanced Bond Index Fund
Schedule of Portfolio Investments
December 31, 2013
Principal Amount | Fair Value | |||||||
| Yankee Dollars, continued |
| ||||||
| Metals & Mining, continued |
| ||||||
$ | 665,000 | Codelco, Inc., 3.88%, 11/3/21(b) | $ | 650,420 | ||||
815,000 | Xstrata Canada Financial Corp., 2.85%, 11/10/14(b) | 826,312 | ||||||
|
| |||||||
3,460,574 | ||||||||
|
| |||||||
| Multi-National (1.1%): |
| ||||||
2,385,000 | African Development Bank, 0.75%, 10/18/16 | 2,379,849 | ||||||
1,640,000 | FMS Wertmanagement, 0.63%, 4/18/16 | 1,623,000 | ||||||
2,790,000 | FMS Wertmanagement, 1.63%, 11/20/18 | 2,753,730 | ||||||
1,700,000 | International Finance Corp., 0.88%, 6/15/18 | 1,641,372 | ||||||
|
| |||||||
8,397,951 | ||||||||
|
| |||||||
| Oil, Gas & Consumable Fuels (1.4%): |
| ||||||
945,000 | BP Capital Markets plc, 0.75%, 5/10/18(a) | 944,224 | ||||||
575,000 | BP Capital Markets plc, 2.75%, 5/10/23 | 525,030 | ||||||
1,080,000 | Petrobras International Finance Co., 3.88%, 1/27/16 | 1,111,819 | ||||||
50,000 | Petroleos Mexicanos, 8.00%, 5/3/19 | 60,500 | ||||||
107,000 | Petroleos Mexicanos, 6.00%, 3/5/20 | 118,877 | ||||||
278,000 | Petroleos Mexicanos, 5.50%, 1/21/21 | 298,850 | ||||||
1,100,000 | Petroleos Mexicanos, 4.88%, 1/24/22 | 1,130,250 | ||||||
43,000 | Petroleos Mexicanos, 3.50%, 1/30/23 | 39,399 | ||||||
924,000 | Petroleos Mexicanos, 3.50%, 1/30/23 | 846,615 | ||||||
1,373,000 | Petroleos Mexicanos, 4.88%, 1/18/24 | 1,373,000 | ||||||
1,120,000 | Shell International Finance BV, 2.00%, 11/15/18 | 1,121,362 | ||||||
295,000 | Shell International Finance BV, 4.55%, 8/12/43 | 287,726 | ||||||
800,000 | Statoil ASA, 2.45%, 1/17/23 | 729,210 | ||||||
1,100,000 | Statoil ASA, 3.70%, 3/1/24 | 1,092,108 | ||||||
1,345,000 | Transocean, Inc., 3.80%, 10/15/22, Callable 7/15/22 @ 100 | 1,274,826 | ||||||
|
| |||||||
10,953,796 | ||||||||
|
| |||||||
| Personal Products (0.2%): |
| ||||||
690,000 | GlaxoSmithKline Capital plc, 2.85%, 5/8/22 | 650,771 | ||||||
670,000 | Takeda Pharmaceutical Co., Ltd., 1.63%, 3/17/17(b) | 668,514 | ||||||
|
| |||||||
1,319,285 | ||||||||
|
| |||||||
| Pharmaceuticals (0.1%): |
| ||||||
650,000 | Perrigo Co. plc, 4.00%, 11/15/23, Callable 8/15/23 @ 100(b) | 637,712 | ||||||
|
| |||||||
| Real Estate Investment Trusts (REITs) (0.1%): |
| ||||||
680,000 | CDP Financial, Inc., 3.00%, 11/25/14(b) | 696,461 | ||||||
|
| |||||||
| Sovereign Bonds (0.2%): |
| ||||||
1,349,000 | Federal Republic of Brazil, 4.88%, 1/22/21 | 1,423,195 | ||||||
|
| |||||||
| Thrifts & Mortgage Finance (0.5%): |
| ||||||
4,158,000 | Credit Suisse Guernsey, Ltd., 1.63%, 3/6/15(b) | 4,209,975 | ||||||
|
| |||||||
| Wireless Telecommunication Services (0.1%): |
| ||||||
315,000 | Virgin Media Secured Finance plc, 6.50%, 1/15/18, Callable 1/15/14 @ 103.25 | 326,419 | ||||||
765,000 | Vodafone Group plc, 4.15%, 6/10/14 | 777,204 | ||||||
|
| |||||||
1,103,623 | ||||||||
|
| |||||||
| Total Yankee Dollars (Cost $72,614,572) | 72,329,525 | ||||||
|
| |||||||
| U.S. Government Agency Mortgages (33.4%): |
| ||||||
| Federal Farm Credit Bank (0.2%) |
| ||||||
2,120,000 | 2.35%, 4/24/23, Callable 4/24/14 @ 100 | 1,950,765 |
Principal Amount | Fair Value | |||||||
| U.S. Government Agency Mortgages, continued |
| ||||||
| Federal Home Loan Bank (0.7%) |
| ||||||
$ | 2,680,000 | 0.63%, 12/28/16 | $ | 2,668,765 | ||||
2,815,000 | 1.63%, 6/19/18, Callable 2/19/14 @ 100 | 2,783,765 | ||||||
|
| |||||||
5,452,530 | ||||||||
|
| |||||||
| Federal Home Loan Mortgage Corporation (5.7%) |
| ||||||
2,100,000 | 0.60%, 3/28/16, Callable 2/28/14 @ 100 | 2,101,453 | ||||||
1,299,000 | 1.00%, 9/27/17 | 1,282,113 | ||||||
5,100,000 | 2.02%, 7/16/18, Callable 7/16/14 @ 100 | 5,111,587 | ||||||
6,265 | Class KC, Series 2890, 4.50%, 2/15/19 | 6,302 | ||||||
1,548,345 | Class BW, Series 3738, 3.50%, 10/15/28 | 1,611,566 | ||||||
1,187,000 | 6.75%, 3/15/31 | 1,570,503 | ||||||
1,288,000 | 6.25%, 7/15/32 | 1,629,332 | ||||||
207,324 | 5.00%, 7/1/35, Pool #G01840 | 224,399 | ||||||
277,196 | 5.00%, 7/1/35, Pool #G01838 | 299,981 | ||||||
828,194 | 4.00%, 12/1/40, Pool #A95575 | 852,512 | ||||||
307,184 | 4.00%, 12/1/40, Pool #A95656 | 316,254 | ||||||
386,516 | 4.00%, 12/1/40, Pool #A95856 | 397,819 | ||||||
187,311 | 3.14%, 3/1/41, Pool #1B8062(a) | 195,000 | ||||||
2,793,328 | 5.50%, 6/1/41, Pool #G07553 | 3,044,376 | ||||||
1,775,841 | Class BU, Series 4150, 4.00%, 2/15/42 | 1,876,273 | ||||||
597,627 | 3.50%, 4/1/42, Pool #C03811 | 594,428 | ||||||
231,948 | 4.00%, 5/1/42, Pool #Q08313 | 238,399 | ||||||
288,716 | 4.00%, 5/1/42, Pool #G08492 | 296,785 | ||||||
117,643 | 4.00%, 6/1/42, Pool #Q08656 | 120,933 | ||||||
40,279 | 4.00%, 6/1/42, Pool #C09001 | 41,405 | ||||||
390,308 | 2.03%, 7/1/42, Pool #2B0646(a) | 399,080 | ||||||
642,637 | 3.50%, 11/1/42, Pool #Q12841 | 638,518 | ||||||
699,676 | 3.00%, 3/1/43, Pool #Q16567 | 663,685 | ||||||
579,708 | 3.00%, 3/1/43, Pool #Q16673 | 549,888 | ||||||
194,989 | 3.00%, 4/1/43, Pool #Q17095 | 184,967 | ||||||
2,190,000 | 3.00%, 8/1/43, Pool #G07550 | 2,077,347 | ||||||
6,800,000 | 3.50%, 1/15/44 | 6,746,874 | ||||||
3,200,000 | 3.00%, 1/15/44 | 3,031,000 | ||||||
600,000 | 5.00%, 1/15/44 | 647,063 | ||||||
4,800,000 | 4.50%, 2/15/44 | 5,062,312 | ||||||
700,000 | 5.50%, 2/15/44 | 764,094 | ||||||
2,000,000 | 4.00%, 2/15/44 | 2,047,656 | ||||||
|
| |||||||
44,623,904 | ||||||||
|
| |||||||
| Federal National Mortgage Association (20.3%) |
| ||||||
1,065,000 | 5.00%, 3/2/15, Pool #AQ6099 | 1,124,022 | ||||||
835,000 | 0.50%, 3/30/16 | 834,102 | ||||||
295,470 | 4.00%, 7/1/19, Pool #AE0968 | 313,051 | ||||||
37,384 | Class NT, Series 2009-70, 4.00%, 8/25/19 | 39,240 | ||||||
506,923 | 4.00%, 7/1/24, Pool #AL1938 | 537,161 | ||||||
566,074 | 5.50%, 7/1/25, Pool #AE0096 | 621,764 | ||||||
2,074,446 | 5.50%, 11/1/25, Pool #AL3919 | 2,243,890 | ||||||
620,708 | 4.00%, 9/1/26, Pool #AL2683 | 657,733 | ||||||
1,500,000 | 4.00%, 1/25/28 | 1,589,414 | ||||||
1,796,991 | 2.50%, 4/1/28, Pool #AB9189 | 1,780,530 | ||||||
2,660,569 | 2.50%, 4/1/28, Pool #AB9171 | 2,636,198 | ||||||
6,802,909 | 2.50%, 5/1/28, Pool #310125 | 6,740,594 | ||||||
100,000 | 4.50%, 1/25/29 | 106,402 | ||||||
7,800,000 | 3.00%, 1/25/29 | 7,959,960 | ||||||
1,105,347 | Class CD, Series 2011-56, 3.50%, 1/25/29 | 1,152,508 | ||||||
1,100,000 | 5.00%, 1/25/29 | 1,170,984 |
Continued
9
AZL Enhanced Bond Index Fund
Schedule of Portfolio Investments
December 31, 2013
Principal Amount | Fair Value | |||||||
| U.S. Government Agency Mortgages, continued |
| ||||||
| Federal National Mortgage Association, continued |
| ||||||
$ | 1,200,000 | 5.50%, 1/25/29 | $ | 1,275,187 | ||||
3,300,000 | 3.50%, 1/25/29 | 3,450,949 | ||||||
507,785 | 5.50%, 1/1/33, Pool #676661 | 559,503 | ||||||
332,661 | 5.50%, 5/1/33, Pool #555424 | 366,609 | ||||||
224,683 | 5.00%, 7/1/34, Pool #725589 | 244,129 | ||||||
783,762 | 5.50%, 2/1/35, Pool #735989 | 863,854 | ||||||
63,849 | 6.00%, 4/1/35, Pool #735504 | 71,646 | ||||||
1,795,121 | 5.50%, 9/1/36, Pool #995113 | 1,975,248 | ||||||
208,501 | 5.50%, 2/1/38, Pool #961545 | 228,859 | ||||||
75,370 | 6.00%, 3/1/38, Pool #889529 | 83,851 | ||||||
525,641 | 5.50%, 5/1/38, Pool #889692 | 577,252 | ||||||
221,184 | 6.00%, 5/1/38, Pool #889466 | 245,689 | ||||||
392,984 | 5.50%, 5/1/38, Pool #889441 | 431,689 | ||||||
374,264 | 5.50%, 6/1/38, Pool #995018 | 411,116 | ||||||
104,103 | 5.50%, 9/1/38, Pool #889995 | 114,283 | ||||||
258,532 | 6.00%, 10/1/38, Pool #889983 | 286,283 | ||||||
248,657 | 5.50%, 10/1/39, Pool #AD0362 | 274,335 | ||||||
224,906 | 5.50%, 12/1/39, Pool #AD0571 | 248,498 | ||||||
1,657,616 | 6.00%, 4/1/40, Pool #AL4141 | 1,834,099 | ||||||
344,170 | 6.50%, 5/1/40, Pool #AL1704 | 379,993 | ||||||
4,697,776 | 5.00%, 5/1/40, Pool #AD4085 | 5,104,729 | ||||||
179,727 | 6.00%, 9/1/40, Pool #AE0823 | 198,822 | ||||||
1,245,000 | Class CY, Series 2010-136, 4.00%, 12/25/40 | 1,236,163 | ||||||
230,799 | 2.93%, 2/1/41, Pool #AH6958(a) | 239,674 | ||||||
1,736,272 | 5.00%, 4/1/41, Pool #AH6283 | 1,896,006 | ||||||
2,288,957 | 5.00%, 4/1/41, Pool #AH6176 | 2,496,553 | ||||||
354,853 | 6.00%, 6/1/41, Pool #AL4142 | 392,792 | ||||||
434,753 | 3.25%, 7/1/41, Pool #AL0533(a) | 458,877 | ||||||
186,834 | 4.00%, 5/1/42, Pool #AT6144 | 193,204 | ||||||
86,865 | 3.50%, 6/1/42, Pool #AO3107 | 86,460 | ||||||
2,774,818 | 4.50%, 6/1/42, Pool #AL3817 | 2,947,554 | ||||||
89,848 | 3.50%, 7/1/42, Pool #AO8011 | 89,401 | ||||||
427,965 | 2.02%, 7/1/42, Pool #AP0006(a) | 437,657 | ||||||
145,378 | 2.32%, 7/1/42, Pool #AO6482(a) | 149,844 | ||||||
1,049,074 | 3.00%, 1/1/43, Pool #AB7497 | 997,038 | ||||||
1,130,632 | 3.00%, 1/1/43, Pool #AB7567 | 1,074,590 | ||||||
1,047,379 | 3.00%, 1/1/43, Pool #AB7458 | 995,515 | ||||||
1,447,025 | 3.00%, 2/1/43, Pool #AL3162 | 1,375,680 | ||||||
681,372 | 3.00%, 2/1/43, Pool #AB7767 | 647,575 | ||||||
668,077 | 3.00%, 2/1/43, Pool #AB8529 | 634,907 | ||||||
2,682,685 | 3.00%, 2/1/43, Pool #AR2001 | 2,549,796 | ||||||
1,041,294 | 3.00%, 2/1/43, Pool #AB7766 | 989,644 | ||||||
4,900,000 | 5.00%, 2/25/43 | 5,306,164 | ||||||
5,900,000 | 4.50%, 2/25/43 | 6,211,824 | ||||||
159,793 | 3.00%, 3/1/43, Pool #AR7568 | 151,865 | ||||||
99,218 | 3.50%, 3/1/43, Pool #AR9222 | 98,694 | ||||||
193,194 | 3.00%, 3/1/43, Pool #AR7576 | 183,682 | ||||||
93,175 | 3.00%, 3/1/43, Pool #AB8712 | 88,567 | ||||||
718,300 | 3.00%, 3/1/43, Pool #AB8701 | 682,799 | ||||||
255,335 | 3.00%, 3/1/43, Pool #AB8830 | 242,716 | ||||||
767,101 | 3.00%, 3/1/43, Pool #AR9194 | 729,262 | ||||||
284,623 | 3.00%, 3/1/43, Pool #AR9218 | 270,595 | ||||||
195,139 | 3.00%, 4/1/43, Pool #AB8923 | 185,468 | ||||||
291,188 | 3.00%, 4/1/43, Pool #AR8630 | 276,742 | ||||||
375,233 | 3.00%, 4/1/43, Pool #AT2040 | 356,731 |
Principal Amount | Fair Value | |||||||
| U.S. Government Agency Mortgages, continued |
| ||||||
| Federal National Mortgage Association, continued |
| ||||||
$ | 676,786 | 3.00%, 4/1/43, Pool #AB9016 | $ | 643,336 | ||||
94,370 | 3.00%, 4/1/43, Pool #AB9033 | 89,705 | ||||||
197,218 | 3.00%, 4/1/43, Pool #AT2043 | 187,459 | ||||||
193,164 | 3.00%, 4/1/43, Pool #AB8924 | 183,617 | ||||||
124,578 | 3.00%, 4/1/43, Pool #AT2037 | 118,426 | ||||||
485,890 | 3.00%, 5/1/43, Pool #AB9173 | 461,940 | ||||||
344,738 | 3.00%, 5/1/43, Pool #AB9462 | 327,828 | ||||||
290,148 | 3.00%, 5/1/43, Pool #AL3759 | 276,230 | ||||||
2,092,301 | 3.00%, 5/1/43, Pool #AB9239 | 1,988,611 | ||||||
195,663 | 3.50%, 5/1/43, Pool #AB9357 | 194,632 | ||||||
2,865,076 | 3.00%, 5/1/43, Pool #AT5974 | 2,724,026 | ||||||
773,423 | 3.00%, 5/1/43, Pool #AT2719 | 735,319 | ||||||
290,305 | 3.00%, 5/1/43, Pool #AT6654 | 276,019 | ||||||
296,603 | 3.50%, 6/1/43, Pool #AT6308 | 295,134 | ||||||
410,265 | 3.00%, 6/1/43, Pool #AB9662 | 390,145 | ||||||
131,982 | 3.00%, 6/1/43, Pool #AT7676 | 125,487 | ||||||
26,980 | 3.00%, 6/1/43, Pool #AB9564 | 25,654 | ||||||
1,098,356 | 3.50%, 6/1/43, Pool #AT7682 | 1,092,921 | ||||||
99,017 | 3.50%, 7/1/43, Pool #AT9149 | 98,496 | ||||||
98,050 | 3.50%, 7/1/43, Pool #AT9215 | 97,534 | ||||||
3,045,323 | 3.50%, 7/1/43, Pool #AL4014 | 3,032,057 | ||||||
295,268 | 3.50%, 7/1/43, Pool #AT9147 | 293,805 | ||||||
296,662 | 3.50%, 7/1/43, Pool #AL3921 | 295,271 | ||||||
893,358 | 3.50%, 7/1/43, Pool #AL4010 | 889,190 | ||||||
2,930,985 | 3.50%, 7/1/43, Pool #AL4009 | 2,919,134 | ||||||
881,632 | 3.50%, 7/1/43, Pool #AB9864 | 877,258 | ||||||
385,697 | 3.50%, 8/1/43, Pool #AS0207 | 383,668 | ||||||
985,975 | 3.50%, 8/1/43, Pool #AS0209 | 981,389 | ||||||
99,296 | 3.50%, 8/1/43, Pool #AU3270 | 98,835 | ||||||
3,749,192 | 3.50%, 8/1/43, Pool #AU3741 | 3,730,587 | ||||||
298,100 | 3.50%, 8/1/43, Pool #AU3765 | 296,530 | ||||||
198,110 | 3.50%, 8/1/43, Pool #AU3271 | 197,130 | ||||||
99,311 | 3.50%, 8/1/43, Pool #AU3267 | 98,912 | ||||||
294,308 | 3.50%, 8/1/43, Pool #AU0567 | 292,851 | ||||||
198,302 | 3.50%, 8/1/43, Pool #AU0570 | 197,380 | ||||||
198,598 | 3.50%, 8/1/43, Pool #AU2861 | 197,552 | ||||||
198,409 | 3.50%, 8/1/43, Pool #AU0613 | 197,486 | ||||||
198,356 | 3.50%, 8/1/43, Pool #AU0577 | 197,313 | ||||||
297,760 | 3.50%, 8/1/43, Pool #AU0600 | 296,282 | ||||||
995,038 | 4.50%, 9/1/43, Pool #AS0428 | 1,055,653 | ||||||
217,169 | 4.00%, 9/1/43, Pool #AU5750 | 224,024 | ||||||
396,779 | 4.00%, 9/1/43, Pool #AS0547 | 409,329 | ||||||
1,284,483 | 4.50%, 9/1/43, Pool #AS0564 | 1,362,730 | ||||||
1,687,732 | 4.00%, 9/1/43, Pool #AS0531 | 1,741,114 | ||||||
197,123 | 4.50%, 9/1/43, Pool #AS0570 | 209,131 | ||||||
1,424,728 | 4.00%, 10/1/43, Pool #AL4311 | 1,467,603 | ||||||
74,061 | 4.00%, 10/1/43, Pool #AV0438 | 76,405 | ||||||
5,663,878 | 4.50%, 10/1/43, Pool #AU6939 | 6,009,295 | ||||||
467,982 | 4.00%, 10/1/43, Pool #AL4312 | 482,065 | ||||||
1,955,000 | 4.00%, 11/1/43, Pool #890567 | 2,013,833 | ||||||
100,000 | 4.00%, 12/1/43, Pool #AV3914 | 103,209 | ||||||
800,000 | 4.00%, 12/1/43, Pool #AV4889 | 825,306 | ||||||
599,236 | 4.00%, 12/1/43, Pool #AS1201 | 618,190 | ||||||
99,859 | 4.00%, 12/1/43, Pool #AS1232 | 103,064 | ||||||
600,000 | 5.50%, 1/25/44 | 659,977 |
Continued
10
AZL Enhanced Bond Index Fund
Schedule of Portfolio Investments
December 31, 2013
Principal Amount | Fair Value | |||||||
| U.S. Government Agency Mortgages, continued |
| ||||||
| Federal National Mortgage Association, continued |
| ||||||
19,200,000 | 4.00%, 1/25/44 | 19,763,999 | ||||||
1,700,000 | 3.00%, 1/25/44 | 1,613,805 | ||||||
2,600,000 | 3.50%, 1/25/44 | 2,582,734 | ||||||
1,200,000 | 2.50%, 1/25/44 | 1,085,906 | ||||||
2,900,000 | 6.00%, 2/25/44 | 3,213,789 | ||||||
1,794,000 | 4.00%, 12/31/49, Pool #AL4598 | 1,850,343 | ||||||
2,300,000 | 4.00%, 12/31/49, Pool #AL4597 | 2,372,234 | ||||||
1,390,000 | 3.50%, 12/31/49, Pool #AL4543 | 1,383,484 | ||||||
|
| |||||||
160,440,586 | ||||||||
|
| |||||||
| Government National Mortgage Association (6.5%) |
| ||||||
64,975 | 4.50%, 9/15/33, Pool #615516 | 70,026 | ||||||
237,304 | 5.00%, 12/15/33, Pool #783571 | 259,992 | ||||||
80,400 | 6.50%, 8/20/38, Pool #4223 | 89,523 | ||||||
118,355 | 6.50%, 10/15/38, Pool #673213 | 131,918 | ||||||
44,038 | 6.50%, 11/20/38, Pool #4292 | 49,356 | ||||||
92,849 | 6.50%, 12/15/38, Pool #782510 | 105,144 | ||||||
790,642 | 5.00%, 1/15/39, Pool #782557 | 863,082 | ||||||
549,697 | 5.00%, 4/15/39, Pool #782619 | 597,010 | ||||||
57,169 | 5.00%, 6/15/39, Pool #782696 | 62,805 | ||||||
433,889 | 5.00%, 10/20/39, Pool #4559 | 475,146 | ||||||
125,752 | 4.50%, 1/15/40, Pool #728627 | 134,477 | ||||||
347,902 | 5.00%, 5/15/40, Pool #782958 | 378,652 | ||||||
343,791 | 4.50%, 7/15/40, Pool #745793 | 367,579 | ||||||
577,229 | 4.50%, 10/15/40, Pool #783609 | 619,480 | ||||||
181,705 | 4.50%, 2/15/41, Pool #738019 | 194,496 | ||||||
32,632 | 5.00%, 4/20/41, Pool #5018 | 35,643 | ||||||
69,977 | 5.00%, 6/20/41, Pool #5083 | 76,444 | ||||||
518,309 | 4.50%, 6/20/41, Pool #783590 | 556,373 | ||||||
346,202 | 4.50%, 7/20/41, Pool #783584 | 371,627 | ||||||
36,515 | 5.00%, 7/20/41, Pool #5116$ | 39,885 | ||||||
1,166,777 | 4.50%, 7/20/41, Pool #5115 | 1,249,367 | ||||||
2,139,605 | Class DA, Series 2013-111, 3.50%, 8/20/41 | 2,244,046 | ||||||
408,325 | 4.50%, 11/15/41, Pool #783610 | 438,108 | ||||||
2,286,323 | Class DM, Series 2013-98, 3.50%, 7/20/42 | 2,381,830 | ||||||
4,915,558 | 3.50%, 4/20/43, Pool #MA0934 | 4,966,760 | ||||||
14,371,689 | 4.00%, 11/20/43, Pool #MA1449 | 14,977,991 | ||||||
500,000 | 5.00%, 1/15/44 | 541,934 | ||||||
400,000 | 4.50%, 1/15/44 | 426,781 | ||||||
3,700,000 | 3.50%, 1/15/44 | 3,729,051 | ||||||
3,300,000 | 4.50%, 1/20/44 | 3,528,164 |
Principal Amount | Fair Value | |||||||
| U.S. Government Agency Mortgages, continued |
| ||||||
| Government National Mortgage Association, continued |
| ||||||
$ | 3,500,000 | 3.50%, 1/20/44 | $ | 3,530,762 | ||||
1,100,000 | 3.00%, 2/15/44 | 1,062,273 | ||||||
6,700,000 | 3.00%, 2/20/44 | 6,473,352 | ||||||
|
| |||||||
51,029,077 | ||||||||
|
| |||||||
| Total U.S. Government Agency Mortgages (Cost $265,665,481) | 263,496,862 | ||||||
|
| |||||||
| U.S. Treasury Obligations (19.1%): |
| ||||||
| U.S. Treasury Bonds (4.2%) |
| ||||||
1,900,000 | 8.88%, 8/15/17 | 2,424,282 | ||||||
650,000 | 8.50%, 2/15/20 | 891,160 | ||||||
5,655,000 | 8.75%, 8/15/20 | 7,936,442 | ||||||
4,285,000 | 4.50%, 2/15/36 | 4,767,731 | ||||||
2,600,000 | 4.75%, 2/15/37 | 2,991,219 | ||||||
431,000 | 2.75%, 8/15/42 | 341,500 | ||||||
890,000 | 2.88%, 5/15/43 | 721,317 | ||||||
13,945,000 | 3.75%, 11/15/43 | 13,478,707 | ||||||
|
| |||||||
33,552,358 | ||||||||
|
| |||||||
| U.S. Treasury Notes (14.9%) |
| ||||||
6,695,000 | 0.25%, 11/30/15^ | 6,681,664 | ||||||
39,205,000 | 0.25%, 12/31/15 | 39,100,873 | ||||||
31,665,000 | 0.63%, 12/15/16^ | 31,536,377 | ||||||
12,800 | 1.00%, 5/31/18 | 12,520 | ||||||
24,120,000 | 1.25%, 11/30/18^ | 23,603,687 | ||||||
1,505,000 | 1.50%, 12/31/18 | 1,488,069 | ||||||
14,980,000 | 2.75%, 11/15/23 | 14,654,649 | ||||||
117,077,839 | ||||||||
|
| |||||||
| Total U.S. Treasury Obligations (Cost $152,313,193) | 150,630,197 | ||||||
|
| |||||||
| Securities Held as Collateral for Securities on Loan (7.4%): |
| ||||||
58,717,501 | Allianz Variable Insurance Products Securities Lending Collateral Trust(c) | 58,717,501 | ||||||
|
| |||||||
| Total Securities Held as Collateral for Securities on Loan | 58,717,501 | ||||||
|
| |||||||
| Unaffiliated Investment Company (20.0%): |
| ||||||
157,662,909 | Dreyfus Treasury Prime Cash Management Fund, Institutional Shares, 0.00%(d) | 157,662,909 | ||||||
|
| |||||||
| Total Unaffiliated Investment Company (Cost $157,662,909) | 157,662,909 | ||||||
|
| |||||||
| Total Investment Securities (Cost $944,883,801)(e) — 119.2% | 940,252,941 | ||||||
| Net other assets (liabilities) — (19.2)% | (151,339,605 | ) | |||||
|
| |||||||
| Net Assets — 100.0% | $ | 788,913,336 | |||||
|
|
Percentages indicated are based on net assets as of December 31, 2013.
MTN—Medium Term Note
REMIC—Real Estate Mortgage Investment Conduit
^ | This security or a partial position of this security was on loan as of December 31, 2013. The total value of securities on loan as of December 31, 2013, was $57,426,100. |
(a) | Variable rate security. The rate presented represents the rate in effect at December 31, 2013. The date presented represents the final maturity date. |
(b) | Rule 144A, Section 4(2) or other security which is restricted to resale to institutional investors. The sub-adviser has deemed these securities to be liquid based on procedures approved by the Board of Trustees. |
(c) | Purchased with cash collateral held from securities lending. The value of the collateral could include collateral held for securities that were sold on or before December 31, 2013. |
(d) | The rate represents the effective yield at December 31, 2013. |
(e) | See Federal Tax Information listed in the Notes to the Financial Statements. |
Continued
11
AZL Enhanced Bond Index Fund
Schedule of Portfolio Investments
December 31, 2013
Securities Sold Short (-0.9%):
Security Description | Coupon Rate | Maturity Date | Par Amount | Proceeds Received | Fair Value | Unrealized Appreciation/ Deprecation | ||||||||||||||
Government National Mortgage Association – January TBA | 4.00% | 1/20/44 | $ | (7,800,000 | ) | $ | (8,124,188 | ) | $ | (8,109,868 | ) | $ | 14,320 | |||||||
|
|
|
|
|
| |||||||||||||||
$ | (8,124,188 | ) | $ | (8,109,868 | ) | $ | 14,320 | |||||||||||||
|
|
|
|
|
|
Futures Contracts
Description | Type | Expiration Date | Number of Contracts | Notional Value | Unrealized Appreciation/ (Depreciation) | |||||||||||||||
U.S. Treasury 10-Year Note March Futures | Short | 3/20/14 | (6 | ) | $ | (738,281 | ) | $ | (7 | ) | ||||||||||
U.S. Treasury 2-Year Note March Futures | Short | 3/31/14 | (29 | ) | (6,374,563 | ) | 11,924 | |||||||||||||
U.S. Treasury 30-Year Note March Futures | Long | 3/20/14 | 252 | 32,334,750 | (400,845 | ) | ||||||||||||||
U.S. Treasury 5-Year Note March Futures | Long | 3/31/14 | 197 | 23,504,563 | (198,858 | ) | ||||||||||||||
|
| |||||||||||||||||||
Total | $ | (587,786 | ) | |||||||||||||||||
|
|
Forward Currency Contracts
At December 31, 2013, the Fund’s open forward currency contracts were as follows:
Type of Contract | Counterparty | Delivery Date | Contract Amount (Local Currency) | Contract Value | Value | Net Unrealized Appreciation/ (Depreciation) | ||||||||||||||
Short Contracts: |
| |||||||||||||||||||
European Euro | Barclays Bank | 1/22/14 | 604,000 | $ | 815,626 | $ | 830,849 | $ | (15,223 | ) | ||||||||||
|
|
|
|
|
| |||||||||||||||
$ | 815,626 | $ | 830,849 | $ | (15,223 | ) | ||||||||||||||
|
|
|
|
|
|
See accompanying notes to the financial statements.
12
AZL Enhanced Bond Index Fund
Statement of Assets and Liabilities
December 31, 2013
Assets: | |||||
Investment securities, at cost | $ | 944,883,801 | |||
|
| ||||
Investment securities, at value* | $ | 940,252,941 | |||
Cash | 12,849 | ||||
Interest and dividends receivable | 3,209,623 | ||||
Foreign currency, at value (cost $162,915) | 168,380 | ||||
Receivable for capital shares issued | 615,310 | ||||
Receivable for investments sold | 75,259,840 | ||||
Receivable for variation margin on futures contracts | 334 | ||||
|
| ||||
Total Assets | 1,019,519,277 | ||||
|
| ||||
Liabilities: | |||||
Unrealized depreciation on forward currency contracts | 15,223 | ||||
Payable for investments purchased | 163,156,922 | ||||
Payable for collateral received on loaned securities | 58,717,501 | ||||
Securities sold short (Proceeds received $8,124,188) | 8,109,868 | ||||
Payable for variation margin on futures contracts | 140,572 | ||||
Manager fees payable | 229,887 | ||||
Administration fees payable | 30,511 | ||||
Distribution fees payable | 164,206 | ||||
Custodian fees payable | 9,366 | ||||
Administrative and compliance services fees payable | 3,076 | ||||
Trustee fees payable | 23 | ||||
Other accrued liabilities | 28,786 | ||||
|
| ||||
Total Liabilities | 230,605,941 | ||||
|
| ||||
Net Assets | $ | 788,913,336 | |||
|
| ||||
Net Assets Consist of: | |||||
Capital | $ | 794,039,769 | |||
Accumulated net investment income/(loss) | 8,936,842 | ||||
Accumulated net realized gains/(losses) from investment transactions | (8,849,191 | ) | |||
Net unrealized appreciation/(depreciation) on investments | (5,214,084 | ) | |||
|
| ||||
Net Assets | $ | 788,913,336 | |||
|
| ||||
Shares of beneficial interest (unlimited number of shares authorized, no par value) | 73,957,817 | ||||
Net Asset Value (offering and redemption price per share) | $ | 10.67 | |||
|
|
* | Includes securities on loan of $57,426,100. |
For the Year Ended December 31, 2013
Investment Income: | |||||
Interest | $ | 11,407,106 | |||
Dividends | 34 | ||||
Income from securities lending | 43,863 | ||||
Foreign withholding tax | (18 | ) | |||
|
| ||||
Total Investment Income | 11,450,985 | ||||
|
| ||||
Expenses: | |||||
Manager fees | 2,233,059 | ||||
Administration fees | 241,101 | ||||
Distribution fees | 1,595,046 | ||||
Custodian fees | 33,314 | ||||
Administrative and compliance services fees | 11,407 | ||||
Trustee fees | 29,319 | ||||
Professional fees | 30,643 | ||||
Shareholder reports | 17,294 | ||||
Other expenses | 15,892 | ||||
|
| ||||
Total expenses | 4,207,075 | ||||
|
| ||||
Net Investment Income/(Loss) | 7,243,910 | ||||
|
| ||||
Realized and Unrealized Gains/(Losses) on Investments: | |||||
Net realized gains/(losses) on securities transactions | (7,740,214 | ) | |||
Net realized gains/(losses) on futures contracts | 1,101,591 | ||||
Net realized gains/(losses) on forward currency contracts | 27,119 | ||||
Change in net unrealized appreciation/depreciation on investments | (14,704,971 | ) | |||
|
| ||||
Net Realized/Unrealized Gains/(Losses) on Investments | (21,316,475 | ) | |||
|
| ||||
Change in Net Assets Resulting From Operations | $ | (14,072,565 | ) | ||
|
|
See accompanying notes to the financial statements.
13
Statements of Changes in Net Assets
AZL Enhanced Bond Index Fund | ||||||||||
For the Year Ended | For the Year Ended | |||||||||
Change in Net Assets: | ||||||||||
Operations: | ||||||||||
Net investment income/(loss) | $ | 7,243,910 | $ | 5,925,119 | ||||||
Net realized gains/(losses) on investment transactions | (6,611,504 | ) | 8,974,678 | |||||||
Change in unrealized appreciation/depreciation on investments | (14,704,971 | ) | 2,634,226 | |||||||
|
|
|
| |||||||
Change in net assets resulting from operations | (14,072,565 | ) | 17,534,023 | |||||||
|
|
|
| |||||||
Dividends to Shareholders: | ||||||||||
From net investment income | (7,329,474 | ) | (5,330,161 | ) | ||||||
From net realized gains | (7,727,147 | ) | (7,712,608 | ) | ||||||
|
|
|
| |||||||
Change in net assets resulting from dividends to shareholders | (15,056,621 | ) | (13,042,769 | ) | ||||||
|
|
|
| |||||||
Capital Transactions: | ||||||||||
Proceeds from shares issued | 317,585,411 | 185,385,544 | ||||||||
Proceeds from dividends reinvested | 15,056,621 | 13,042,769 | ||||||||
Value of shares redeemed | (18,147,991 | ) | (40,589,771 | ) | ||||||
|
|
|
| |||||||
Change in net assets resulting from capital transactions | 314,494,041 | 157,838,542 | ||||||||
|
|
|
| |||||||
Change in net assets | 285,364,855 | 162,329,796 | ||||||||
Net Assets: | ||||||||||
Beginning of period | 503,548,481 | 341,218,685 | ||||||||
|
|
|
| |||||||
End of period | $ | 788,913,336 | $ | 503,548,481 | ||||||
|
|
|
| |||||||
Accumulated net investment income/(loss) | $ | 8,936,842 | $ | 7,303,079 | ||||||
|
|
|
| |||||||
Share Transactions: | ||||||||||
Shares issued | 29,111,948 | 16,592,447 | ||||||||
Dividends reinvested | 1,427,168 | 1,173,967 | ||||||||
Shares redeemed | (1,679,500 | ) | (3,622,879 | ) | ||||||
|
|
|
| |||||||
Change in shares | 28,859,616 | 14,143,535 | ||||||||
|
|
|
|
See accompanying notes to the financial statements.
14
Financial Highlights
(Selected data for a share of beneficial interest outstanding throughout the periods indicated)
Year Ended 2013 | Year Ended 2012 | Year Ended 2011 | Year Ended 2010 | July 10, 2009 to | |||||||||||||||||||||
Net Asset Value, Beginning of Period | $ | 11.17 | $ | 11.02 | $ | 10.51 | $ | 10.04 | $ | 10.00 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Investment Activities: | |||||||||||||||||||||||||
Net Investment Income/(Loss) | 0.05 | 0.09 | 0.11 | 0.15 | 0.03 | ||||||||||||||||||||
Net Realized and Unrealized Gains/(Losses) on Investments | (0.31 | ) | 0.38 | 0.65 | 0.41 | 0.01 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Total from Investment Activities | (0.26 | ) | 0.47 | 0.76 | 0.56 | 0.04 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Dividends to Shareholders From: | |||||||||||||||||||||||||
Net Investment Income | (0.12 | ) | (0.13 | ) | (0.13 | ) | (0.03 | ) | — | ||||||||||||||||
Net Realized Gains | (0.12 | ) | (0.19 | ) | (0.12 | ) | (0.06 | ) | — | ||||||||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Total Dividends | (0.24 | ) | (0.32 | ) | (0.25 | ) | (0.09 | ) | — | ||||||||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Net Asset Value, End of Period | $ | 10.67 | $ | 11.17 | $ | 11.02 | $ | 10.51 | $ | 10.04 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Total Return(b) | (2.32 | )% | 4.22 | % | 7.28 | % | 5.62 | % | 0.40 | %(c) | |||||||||||||||
Ratios to Average Net Assets/Supplemental Data: | |||||||||||||||||||||||||
Net Assets, End of Period (000’s) | $ | 788,913 | $ | 503,548 | $ | 341,219 | $ | 205,572 | $ | 127,833 | |||||||||||||||
Net Investment Income/(Loss)(d) | 1.14 | % | 1.35 | % | 1.69 | % | 2.01 | % | 1.34 | % | |||||||||||||||
Expenses Before Reductions(d)(e) | 0.66 | % | 0.68 | % | 0.69 | % | 0.71 | % | 0.76 | % | |||||||||||||||
Expenses Net of Reductions(d) | 0.66 | % | 0.68 | % | 0.69 | % | 0.70 | % | 0.70 | % | |||||||||||||||
Portfolio Turnover Rate(f) | 663 | % | 385 | % | 407 | % | 700 | % | 366 | %(c) |
(a) | Period from commencement of operations. |
(b) | The returns include reinvested dividends and fund level expenses, but exclude insurance contract charges. If these charges were included, the returns would have been lower. |
(c) | Not annualized. |
(d) | Annualized for periods less than one year. |
(e) | Excludes fee reductions. If such fee reductions had not occurred, the ratios would have been as indicated. |
(f) | The portfolio turnover rate can be volatile due to the amount and timing of purchases and sales of fund shares during the period. |
See accompanying notes to the financial statements.
15
Notes to the Financial Statements
December 31, 2013
1. Organization
The Allianz Variable Insurance Products Trust (the “Trust”) was organized as a Delaware statutory trust on July 13, 1999. The Trust is a diversified open-end management investment company registered under the Investment Company Act of 1940. The Trust consists of 29 separate investment portfolios (collectively, the “Funds”), of which one is included in this report, the AZL Enhanced Bond Index Fund (the “Fund”), and 28 are presented in separate reports.
The Trust is authorized to issue an unlimited number of shares of the Fund without par value. Shares of the Fund are available through the variable annuity contracts and variable life insurance policies offered through the separate accounts of participating insurance companies.
Under the Trust’s organizational documents, its officers and trustees are indemnified against certain liabilities arising out of the performance of their duties to the Fund. In addition, in the normal course of business, the Fund may enter into contracts with its vendors and others that provide for general indemnifications. The Fund’s maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Fund. However, based on experience, the Fund expects the risk of loss to be remote.
2. Significant Accounting Policies
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. The policies conform with U.S. generally accepted accounting principles (“U.S. GAAP”). The preparation of financial statements requires management to make certain 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 increases and decreases in net assets from operations during the reporting period. Actual results could differ from those estimates.
Security Valuation
The Fund records its investments at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between willing market participants at the measurement date. The valuation techniques used to determine fair value are further described in Note 4 below.
Investment Transactions and Investment Income
Investment transactions are recorded not later than on the business day following trade date. However, for financial reporting purposes, investment transactions are accounted for on trade date. Net realized gains and losses on investments sold and on foreign currency transactions are recorded on the basis of identified cost. Interest income is recorded on the accrual basis and includes, where applicable, the amortization of premiums or accretion of discounts. Dividend income is recorded on the ex-dividend date except in the case of foreign securities, in which case dividends are recorded as soon as such information becomes available.
Real Estate Investment Trusts
The Fund may own shares of real estate investment trusts (“REITs”) which report information on the source of their distributions annually. Certain distributions received from REITs during the year, which are known to be a return of capital, are recorded as a reduction to the cost of the individual REIT.
Foreign Currency Translation
The accounting records of the Fund are maintained in U.S. dollars. Foreign currency amounts are translated into U.S. dollars at the current rate of exchange to determine the fair value of investments, assets and liabilities. Purchases and sales of securities, and income and expenses are translated at the prevailing rate of exchange on the respective dates of such transactions. The Fund does not isolate that portion of the results of operations resulting from changes in foreign exchange rates on investments from fluctuations arising from changes in market prices of securities held. Such fluctuations are included in the net realized and unrealized gain or loss on investments and foreign currencies. Income received by the Fund from sources within foreign countries may be subject to withholding and other income or similar taxes imposed by such countries. The Funds accrue such taxes, as applicable, based on their current interpretation of tax rules in the foreign markets in which they invest.
Securities Purchased on a When-Issued Basis
The Fund may purchase securities on a when-issued basis. When-issued securities are securities purchased for delivery beyond the normal settlement date at a stated price and yield and thereby involve risk that the yield obtained in the transaction will be less than that available in the market when the delivery takes place. A Fund will not pay for such securities or start earning interest on them until they are received. When a Fund agrees to purchase securities on a when-issued basis, the Fund will segregate or designate cash or liquid assets equal to the amount of the commitment. Securities purchased on a when-issued basis are recorded as an asset and are subject to changes in the value based upon changes in the general level of interest rates. A Fund may sell when-issued securities before they are delivered, which may result in a capital gain or loss.
Short Sales
The Fund may engage in short sales against the box (i.e., where the Fund owns or has an unconditional right to acquire at no additional cost a security substantially similar to the security sold short) for hedging purposes to limit exposure to a possible market decline in the value of its portfolio securities. In a short sale, the Fund sells a borrowed security and has a corresponding obligation to the lender to return the identical security. The Fund may also incur an interest expense if a security that has been sold short has an interest payment. When a Fund engages in a short sale, the Fund records a liability for securities sold short and records an asset equal to the proceeds received. The amount of the liability is subsequently marked to market to reflect the fair value of the securities sold short. To borrow the security, a Fund also may be required to pay a premium, which would increase the cost of the security sold.
16
AZL Enhanced Bond Index Fund
Notes to the Financial Statements
December 31, 2013
Dividends to Shareholders
Dividends to shareholders are recorded on the ex-dividend date. The Fund distributes its dividends from net investment income and net realized capital gains, if any, on an annual basis. The amount of dividends from net investment income and from net realized gains is determined in accordance with federal income tax regulations, which may differ from U.S. GAAP. These “book/tax” differences are either temporary or permanent in nature. To the extent these differences are permanent in nature (e.g., return of capital, net operating loss, reclassification of certain market discounts, gain/loss, paydowns, and distributions), such amounts are reclassified within the composition of net assets based on their federal tax-basis treatment; temporary differences (e.g., wash sales and post October losses) do not require reclassification. Dividends to shareholders that exceed net investment income and net realized gains for tax purposes are reported as distributions of capital.
Expense Allocation
Expenses directly attributable to the Fund are charged directly to the Fund, while expenses attributable to more than one Fund are allocated among the respective Funds based upon relative net assets or some other reasonable method. Expenses which are attributable to more than one Trust are allocated across the Allianz Variable Insurance Products and Allianz Variable Insurance Products Fund of Funds Trusts based upon relative net assets or another reasonable basis. Allianz Investment Management LLC (the “Manager”), serves as the investment manager for the Trust and the Allianz Variable Insurance Products Fund of Funds Trust.
Securities Lending
To generate additional income, the Fund may lend up to 33 1/3% of its assets pursuant to agreements requiring that the loan be continuously secured by any combination of cash, U.S. government or U.S. government agency securities, equal initially to at least 102% of the fair value plus accrued interest on the securities loaned (105% for foreign securities). The borrower of securities is at all times required to post collateral to the Fund in an amount equal to 100% of the fair value of the securities loaned based on the previous day’s fair value of the securities loaned, marked-to-market daily. Any collateral shortfalls are adjusted the next business day. The Fund bears all of the gains and losses on such investments. The Fund receives payments from borrowers equivalent to the dividends and interest that would have been earned on securities lent while simultaneously seeking to earn income on the investment of cash collateral received. In extremely low interest rate environments, the broker rebate fee may exceed the interest earned or the cash collateral which would result in a loss to the Fund. The investment of cash collateral deposited by the borrower is subject to inherent market risks such as interest rate risk, credit risk, liquidity risk, and other risks that are present in the market, and as such, the value of these investments may not be sufficient, when liquidated, to repay the borrower when the loaned security is returned. There may be risks of delay in recovery of the securities or even loss of rights in the collateral should the borrower of the securities fail financially. However, loans will be made only to borrowers, such as broker-dealers, banks or institutional borrowers of securities, deemed by the Manager to be of good standing and credit worthy and when in its judgment, the consideration which can be earned currently from such securities loans justifies the attendant risks. Loans are subject to termination by the Trust or the borrower at any time, and are, therefore, not considered to be illiquid investments. Securities on loan at December 31, 2013 are presented on the Fund’s Schedule of Portfolio Investments. The average outstanding amount of securities on loan was $12.6 million for the year ended December 31, 2013.
Cash collateral received in connection with securities lending is invested in the Allianz Variable Insurance Products Securities Lending Collateral Trust (the “Securities Lending Collateral Trust”) managed by The Dreyfus Corporation, an affiliate of the Custodian and Securities Lending Agent. The Securities Lending Collateral Trust invests in short-term investments that have a remaining maturity of 397 days or less as calculated in accordance with Rule 2a-7 under the 1940 Act. The Fund paid securities lending fees of $4,371 during the year ended December 31, 2013. These fees have been netted against “Income from securities lending” on the Statement of Operations.
Derivative Instruments
All open derivative positions at period end are reflected on the Fund’s Schedule of Portfolio Investments. The following is a description of the derivative instruments utilized by the Fund, including the primary underlying risk exposures related to each instrument type.
Forward Currency Contracts
During the year ended December 31, 2013, the Fund entered into forward currency contracts in connection with planned purchases or sales of securities or to hedge the U.S. dollar value of securities denominated in a particular currency. In addition to the foreign currency risk related to the use of these contracts, the Fund could be exposed to risks if the counterparties to the contracts are unable to meet the terms of their contracts and from unanticipated movements in the value of a foreign currency relative to the U.S. dollar. In the event of default by the counterparty to the transaction, the Fund’s maximum amount of loss, as either the buyer or the seller, is the unrealized appreciation of the contract. The forward currency contracts are adjusted by the daily exchange rate of the underlying currency and any gains or losses are recorded for financial statement purposes as unrealized gains or losses until the contract settlement date. When the contract is closed, the Fund records a realized gain or loss equal to the difference between the value at the time it was opened and the value at the time it was closed. The contract amount of forward currency contracts outstanding was $0.8 million as of December 31, 2013. The monthly average amount for these contracts was $1.4 million for the year ended December 31, 2013.
Futures Contracts
During the year ended December 31, 2013, the Fund used futures contracts to provide market exposure on the Fund’s cash balances. Futures contracts are valued based upon their quoted daily settlement prices. Upon entering into a futures contract, the Fund is required to segregate liquid assets in accordance with the initial margin requirements of the broker or exchange. Futures contracts are marked to market daily and a payable or receivable for the change in value (“variation margin”) is recorded by the Fund. Gains or losses are recognized but not considered realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, elements of market risk (generally equity price risk related to stock futures, interest rate risk related to bond futures, and foreign currency risk related to currency futures) and exposure to loss in excess of the variation margin disclosed in the Statement of Assets and Liabilities. The primary risks associated with the use of futures contracts are the imperfect correlation between the change in fair value of the underlying securities and the prices of futures contracts, the possibility of an illiquid market, and the inability of the counterparty to meet the terms of the contract. The notional amount of futures contracts outstanding was $63.0 million as of December 31, 2013. The monthly average notional amount for these contracts was $232.7 million for the year ended December 31, 2013. Realized gains and losses are reported as “Net realized gains/(losses) on futures contracts” on the Statement of Operations.
17
AZL Enhanced Bond Index Fund
Notes to the Financial Statements
December 31, 2013
Summary of Derivative Instruments
The following is a summary of the fair values of derivative instruments on the Fund’s Statement of Assets and Liabilities, categorized by risk exposure, as of December 31, 2013:
Asset Derivatives | Liability Derivatives | |||||||||||
Primary Risk Exposure | Statement of Assets and Liabilities Location | Total Fair Value | Statement of Assets and Liabilities Location | Total Fair Value | ||||||||
Foreign Currency Contracts | Unrealized appreciation on forward currency contracts | $ | — | Unrealized depreciation on forward currency contracts | $ | 15,223 | ||||||
Interest Rate Contracts | Receivable for variation margin on futures contracts* | 11,924 | Payable for variation margin on futures contracts* | 599,710 |
* | For futures contracts, the amounts represent the cumulative appreciation/(depreciation) of these futures contracts as reported in the Schedule of Portfolio Investments. Only the current day’s variation margin is reported within the Statement of Assets and Liabilities as Variation Margin on Futures Contracts. |
The following is a summary of the effect of derivative instruments on the Statement of Operations, categorized by risk exposure, for the year ended December 31, 2013:
Primary Risk Exposure | Location of Gains/(Losses) on Derivatives Recognized in Income | Realized Gains/(Losses) on Derivatives Recognized in Income | Change in Unrealized Appreciation/ Depreciation on Derivatives Recognized in Income | |||||||
Foreign Currency Contracts | Net realized gains/(losses) on forward currency contracts / change in unrealized appreciation/depreciation on investments | $ | 27,119 | $ | (13,926 | ) | ||||
Interest Rate Contracts | Net realized gains/(losses) on futures contracts / change in unrealized appreciation/depreciation on investments | 1,101,591 | (676,321 | ) |
Effective January 1, 2013, the Fund adopted Financial Accounting Standards Board Accounting Standards Update (“ASU”) No. 2013-01 “Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities” (“ASU 2013-01”) which amended Accounting Standards Codification Subtopic 210-20, Balance Sheet Offsetting. ASU 2013-01 clarified the scope of ASU No. 2011-11 “Disclosures about Offsetting Assets and Liabilities” (“ASU 2011-11”). ASU 2011-11 requires an entity to disclose information about offsetting and related arrangements to enable users of that entity’s financial statements to understand the effect of those arrangements on its financial position. The objective of this disclosure is to facilitate comparison between those entities that prepare their financial statements on the basis of U.S. GAAP and those entities that prepare their financial statements on the basis of International Financial Reporting Standards. ASU 2013-01 clarifies the scope of ASU 2011-11 as applying to derivatives accounted for in accordance with Topic 815, Derivatives and Hedging, including bifurcated embedded derivatives, repurchase agreements and reverse repurchase agreements, and securities borrowing and securities lending transactions that are offset either in accordance with other requirements of U.S. GAAP or subject to an enforceable master netting arrangement or similar agreement.
The Fund is generally subject to master netting agreements that allow for amounts owed between the Fund and the counterparty to be netted. The party that has the larger payable pays the excess of the larger amount over the smaller amount to the other party. The master netting agreements do not apply to amounts owed to/from different counterparties. The amounts shown in the Statement of Assets and Liabilities do not take into consideration the effects of legally enforceable master netting agreements. The table below presents the gross and net amounts of these assets and liabilities with any offsets to reflect the Fund’s ability to reflect the master netting agreements at December 31, 2013. For financial reporting purposes, the Fund does not offset derivative assets and derivative liabilities that are subject to master netting arrangements in the Statement of Assets and Liabilities. This table also summarizes the fair values of derivative instruments on the Fund’s Statement of Assets and Liabilities, categorized by risk exposure, as of December 31, 2013.
As of December 31, 2013, the Fund’s derivative assets and liabilities by type are as follows:
Assets | Liabilities | |||||||||
Derivative Financial Instruments: | ||||||||||
Futures contracts | $ | 334 | $ | 140,572 | ||||||
Forward currency contracts | — | 15,223 | ||||||||
|
|
|
| |||||||
Total derivative assets and liabilities in the Statement of Assets and Liabilities | 334 | 155,795 | ||||||||
Derivatives not subject to a master netting agreement or similar agreement (“MNA”) | (334 | ) | (140,572 | ) | ||||||
|
|
|
| |||||||
Total assets and liabilities subject to a MNA | $ | — | $ | 15,223 | ||||||
|
|
|
|
18
AZL Enhanced Bond Index Fund
Notes to the Financial Statements
December 31, 2013
The following table presents the Fund’s derivative liabilities by counterparty net of amounts available for offset under a MNA and net of the related collateral pledged by the Fund as of December 31, 2013:
Counterparty | Derivative Liabilities Subject to a MNA by Counterparty | Derivatives Available for Offset | Non-cash Collateral Pledged* | Cash Collateral Pledged* | Net Amount of Derivative Liabilities | ||||||||||||||||||||
Barclays Bank | $15,223 | $ | — | $— | $ | — | $ | 15,223 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Total | $15,223 | $ | — | $— | $ | — | $ | 15,223 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
* | The actual collateral received or pledged may be in excess of the amounts shown in the table. The table only reflects collateral amounts up to the amount of the financial instrument disclosed on the Statement of Assets and Liabilities. |
3. Related Party Transactions
The Manager provides investment advisory and management services for the Fund. The Manager has retained an independent money management organization (the “Subadviser”), to make investment decisions on behalf of the Fund. Pursuant to a subadvisory agreement with BlackRock Financial Management, Inc. (“BlackRock Financial”), BlackRock Financial provides investment advisory services as the Subadviser for the Fund subject to the general supervision of the Trustees and the Manager. The Manager is entitled to a fee, computed daily and paid monthly, based on the average daily net assets of the Fund. Expenses incurred by the Fund for investment advisory and management services are reflected on the Statement of Operations as “Manager fees.” For its services, the Subadviser is entitled to a fee payable by the Manager. The Manager has contractually agreed to waive fees and reimburse the Fund to limit the annual expenses, excluding interest expense (e.g., cash overdraft fees), taxes, brokerage commissions, other expenditures that are capitalized in accordance with U.S. GAAP and other extraordinary expenses not incurred in the ordinary course of the Fund’s business, based on the daily net assets of the Fund, through April 30, 2015.
For the year ended December 31, 2013, the annual rate due to the Manager and the annual expense limit were as follows:
Annual Rate | Annual Expense Limit | |||||||||
AZL Enhanced Bond Index Fund | 0.35 | % | 0.70 | % |
Any amounts contractually waived or reimbursed by the Manager in a particular fiscal year will be subject to repayment by the Fund to the Manager to the extent that from time to time through the next three fiscal years the repayment will not cause the Fund’s expenses to exceed the lesser of the stated limit at the time of the waiver or the current stated limit. Any amounts recouped by the Manager during the year are reflected on the Statement of Operations as “Recoupment of prior expenses reimbursed by the Manager.” At December 31, 2013, there were no remaining contractual reimbursements that are subject to repayment by the Fund in subsequent years.
In addition, the Manager may voluntarily waive or reimburse additional fees in order to maintain more competitive expense ratios. Any voluntary waivers or reimbursements are not subject to repayment in subsequent years. Information on the total amount waived/reimbursed by the Manager or repaid to the Manager by the Fund during the year can be found on the Statement of Operations. During the year ended December 31, 2013, there were no voluntary waivers.
Pursuant to separate agreements between the Funds and the Manager, the Manager provides a Chief Compliance Officer (“CCO”) and certain compliance oversight and regulatory filing services to the Trust. Under these agreements the Manager is entitled to an amount equal to a portion of the compensation and certain other expenses related to the individuals performing the CCO and compliance oversight services, as well as $75 per hour for time incurred in connection with the preparation and filing of certain documents with the Securities and Exchange Commission. The fees are paid to the Manager on a quarterly basis. The total expenses incurred by the Fund for these services are reflected on the Statement of Operations as “Administrative and compliance services fees.”
Citi Fund Services Ohio, Inc. (“Citi” or the “Administrator”), a wholly owned subsidiary of Citigroup, Inc., with which an officer of the Trust is affiliated, serves as the Trust’s administrator, transfer agent, and fund accountant, and assists the Trust in all aspects of its administration and operation. The Administrator is entitled to a Trust-wide asset-based fee, which is based on the following schedule: 0.05% of daily average net assets on the first $4 billion, 0.04% of daily average net assets on the next $2 billion, 0.02% of daily average net assets on the next $2 billion and 0.01% of daily average net assets over $8 billion. The overall Trust-wide fees are accrued daily and paid monthly and are subject to a minimum annual fee. In addition, the Administrator is entitled to annual account fees related to the transfer agency system, an annual fee for each additional class of shares of any Fund, certain annual fees in supporting fair value services, and a Trust-wide annual fee for providing infrastructure and support in implementing the written policies and procedures comprising the Fund’s compliance program. Fees payable to the Administrator are subject to certain reductions associated with services provided to new funds. The Administrator is also reimbursed for certain expenses incurred. The total expenses incurred by the Fund for these services are reflected on the Statement of Operations as “Administration fees.”
Allianz Life Financial Services, LLC (“ALFS”), an affiliate of the Manager, serves as distributor of the Fund and receives 12b-1 fees directly from the Fund, plus a Trust-wide annual fee of $42,500, paid by the Manager from its profits and not by the Trust, for recordkeeping and reporting services.
The Trust has adopted a distribution and service plan in conformance with Rule 12b-1 of the 1940 Act. Pursuant to this plan, the Fund is authorized to pay certain fees for the sale and distribution of its shares and services provided to its shareholders at an annual rate not to exceed 0.25% of the Fund’s average daily net assets. These fees are reflected on the Statement of Operations as “Distribution fees.”
In addition, certain legal fees and expenses are paid to a law firm, Dorsey & Whitney LLP, of which the Secretary of the Fund is a partner. During the year ended December 31, 2013, $7,778 was paid from the Fund relating to these fees and expenses.
Certain Officers and Trustees of the Trust are affiliated with the Manager or the Administrator. Such Officers (except for the Trust’s CCO as noted above) and Trustees receive no compensation from the Trust for serving in their respective roles. For their service to the Trust and to the Allianz Variable Insurance Products Fund of Funds Trust, each non-interested Trustee receives a $139,000 annual Board retainer. In addition, the Trustees are reimbursed for certain expenses associated with attending Board meetings. Compensation to the Trustees is allocated between the Trust and the Allianz Variable Insurance Products Fund of Funds Trust in proportion to the assets under management of each trust. During the year ended December 31, 2013, actual Trustee compensation was $973,000 in total for both trusts.
19
AZL Enhanced Bond Index Fund
Notes to the Financial Statements
December 31, 2013
At a meeting of the Board of Trustees on December 4, 2013, the Trustees approved a fee increase to the Officers and Trustees who are paid a fee for their services to the Trust and to the Allianz Variable Insurance Products Fund of Funds Trust. Effective January 1, 2014, each non-interested Trustee will receive a $163,000 annual retainer.
4. Investment Valuation Summary
The valuation techniques employed by the Fund, as described below, maximize the use of observable inputs and minimize the use of unobservable inputs in determining fair value. The inputs used for valuing the Fund’s investments are summarized in the three broad levels listed below:
— | Level 1 — quoted prices in active markets for identical assets |
— | Level 2 — other significant observable inputs (including quoted prices for similar securities, interest rates, prepayments speeds, credit risk, etc.) |
— | Level 3 — significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of investments) |
Changes in valuation techniques may result in transfers in or out of an assigned level within the disclosure hierarchy. The Fund determines transfers between fair value hierarchy levels at the reporting period end. The inputs or methodology used for valuing investments is not necessarily an indication of the risk associated with investing in those investments.
Security prices are generally provided by an independent third party pricing service approved by the Trust’s Board of Trustees (“Trustees”) as of the close of the New York Stock Exchange (“NYSE”) (generally 4:00 pm Eastern Time). Equity securities are valued at the last quoted sale price or, if there is no sale, the last quoted bid price is used for long securities and the last quoted ask price is used for securities sold short. Securities listed on NASDAQ Stock Market, Inc. (“NASDAQ”) are valued at the official closing price as reported by NASDAQ. In each of these situations, valuations are typically categorized as a Level 1 in the fair value hierarchy. Investments in open-end investment companies are valued at their respective net asset value as reported by such companies and are typically categorized as Level 1 in the fair value hierarchy.
Debt and other fixed income securities are generally valued at an evaluated bid price provided by an independent pricing source approved by the Trustees. To value debt securities, pricing services may use various pricing techniques which take into account appropriate factors such as market activity, yield, quality, coupon rate, maturity, type of issue, trading characteristics, call features, credit ratings and other data, as well as broker quotes. Short term securities of sufficient credit quality with sixty days or less remaining until maturity may be valued at amortized cost, which approximates fair value. In each of these situations, valuations are typically categorized as Level 2 in the fair value hierarchy.
Futures contracts are valued at the last sales price as of the close of the primary exchange and are typically categorized as Level 1 in the fair value hierarchy.
Forward currency contracts are generally valued at the foreign currency exchange rate as of the close of the NYSE and are typically categorized as Level 2 in the fair value hierarchy.
Other assets and securities for which market quotations are not readily available, or are deemed unreliable are valued at fair value as determined in good faith by the Trustees or persons acting on the behalf of the Trustees. Fair value pricing may be used for significant events such as securities whose trading has been suspended, whose price has become stale or for which there is no currently available price at the close of the NYSE. Depending on the source and relative significance of valuation inputs, these instruments may be classified as Level 2 or Level 3 in the fair value hierarchy. The Fund utilizes a pricing service to assist in determining the fair value of securities when certain significant events occur that may affect the value of foreign securities.
In accordance with procedures adopted by the Trustees, fair value pricing may be used if events materially affecting the value of foreign securities occur between the time when the exchange on which they are traded closes and the time when the Fund’s net asset value is calculated. Management identifies possible fluctuation in international securities by monitoring the increase or decrease in the value of a designated benchmark index. In the event of an increase or decrease greater than predetermined levels, the Fund may use a systematic valuation model provided by an independent third party to fair value its international equity securities which are then typically categorized as Level 2 in the fair value hierarchy.
For the year ended December 31, 2013, there were no Level 3 investments for which significant unobservable inputs were used to determine fair value.
The following is a summary of the valuation inputs used as of December 31, 2013 in valuing the Fund’s investments based upon the three levels defined above:
Investment Securities: | Level 1 | Level 2 | Total | ||||||||||||
Asset Backed Securities | $ | — | $ | 61,404,911 | $ | 61,404,911 | |||||||||
Collateralized Mortgage Obligations | — | 49,306,063 | 49,306,063 | ||||||||||||
Corporate Bonds+ | — | 125,824,815 | 125,824,815 | ||||||||||||
Convertible Preferred Stock+ | — | 880,158 | 880,158 | ||||||||||||
Yankee Dollars+ | — | 72,329,525 | 72,329,525 | ||||||||||||
U.S. Government Agency Mortgages | — | 263,496,862 | 263,496,862 | ||||||||||||
U.S. Treasury Obligations | — | 150,630,197 | 150,630,197 | ||||||||||||
Securities Held as Collateral for Securities on Loan | — | 58,717,501 | 58,717,501 | ||||||||||||
Unaffiliated Investment Company | 157,662,909 | — | 157,662,909 | ||||||||||||
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| ||||||||||
Total Investment Securities | 157,662,909 | 782,589,762 | 940,252,941 | ||||||||||||
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| ||||||||||
Securities Sold Short | — | (8,109,868 | ) | (8,109,868 | ) | ||||||||||
Other Financial Instruments:* | |||||||||||||||
Futures Contracts | (587,786 | ) | — | (587,786 | ) | ||||||||||
Forward Currency Contracts | — | (15,223 | ) | (15,223 | ) | ||||||||||
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|
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| ||||||||||
Total Investments | $ | 157,075,123 | $ | 774,464,671 | $ | 931,540,064 | |||||||||
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+ | For detailed industry descriptions, see the accompanying Schedule of Portfolio Investments. |
20
AZL Enhanced Bond Index Fund
Notes to the Financial Statements
December 31, 2013
* | Other Financial Instruments would include any derivative instruments, such as futures and forward currency contracts. These investments are generally recorded in the financial statements at the unrealized gain or loss on the investment. |
5. Security Purchases and Sales
For the year ended December 31, 2013, cost of purchases and proceeds from sales of securities (excluding securities maturing less than one year from acquisition) were as follows:
Purchases | Sales | |||||||||
AZL Enhanced Bond Index Fund | $ | 3,818,632,999 | $ | 3,620,560,372 |
For the year ended December 31, 2013, purchases and sales on long-term U.S. government securities were as follows:
Purchases | Sales | |||||||||
AZL Enhanced Bond Index Fund | $ | 3,522,743,473 | $ | 3,397,594,494 |
6. Investment Risks
Derivatives Risk: The Fund may invest in derivatives as a principal strategy. A derivative is a financial contract whose value depends on, or is derived from, the value of an underlying asset, reference rate, or risk. Use of derivative instruments involves risks different from, or possibly greater than, the risks associated with investing directly in securities and other traditional investments. Derivatives are subject to a number of other risks, such as liquidity risk, interest rate risk, market risk, credit risk, and selection risk. Derivatives also involve the risk of mispricing or improper valuation and the risk that changes in the value may not correlate perfectly with the underlying asset, rate, or index. Using derivatives may result in losses, possibly in excess of the principal amount invested. Also, suitable derivative transactions may not be available in all circumstances. The counterparty to a derivatives contract could default. As required by applicable law, a Fund that invests in derivatives segregates cash or liquid securities, or both, to the extent that its obligations under the instrument are not covered through ownership of the underlying security, financial instrument, or currency.
Foreign Securities and Currencies Risk: Investments in securities of foreign issuers carry certain risks not ordinarily associated with investments in securities of domestic issuers. Such risks include future political and economic developments, and the possible imposition of exchange controls or other foreign governmental laws and restrictions. In addition, with respect to certain countries, there is the possibility of expropriation of assets, confiscatory taxation, political or social instability or diplomatic developments which could adversely affect investments in those securities.
Mortgage-Related and Other Asset-Backed Risk: The Fund may invest in a variety of mortgage-related and other asset-backed securities, which are subject to certain additional risks. Generally, rising interest rates tend to extend the duration of fixed rate mortgage-related securities, making them more sensitive to changes in interest rates. As a result, in a period of rising interest rates, a Fund that holds mortgage-related securities may exhibit additional volatility. This is known as extension risk. In addition, adjustable and fixed rate mortgage-related securities are subject to call risk. When interest rates decline, borrowers may pay off their mortgages sooner than expected. This can reduce the returns of a Fund because the Fund will have to reinvest that money at the lower prevailing interest rates. If a Fund purchases mortgage-backed or asset-backed securities that are subordinated to other interests in the same mortgage pool, the Fund may receive payments only after the pool’s obligations to other investors have been satisfied. An unexpectedly high rate of defaults on the mortgages held by a mortgage pool may limit substantially the pool’s ability to make payments of principal or interest to the Fund as a holder of such subordinated securities, reducing the values of those securities or in some cases rendering them worthless. An unexpectedly high or low rate of prepayments on a pool’s underlying mortgages may have a similar effect on subordinated securities. A mortgage pool may issue securities subject to various levels of subordination. The risk of non-payment affects securities at each level, although the risk is greater in the case of more highly subordinated securities. A Fund’s investments in other asset-backed securities are subject to risks similar to those associated with mortgage-related securities, as well as additional risks associated with the nature of the assets and the servicing of those assets.
7. Federal Tax Information
It is the Fund’s policy to continue to comply with the requirements of the Internal Revenue Code under Subchapter M, applicable to regulated investment companies, and to distribute all of its taxable income, including any net realized gains on investments, to its shareholders. Therefore, no provision is made for federal income taxes.
Management of the Fund has reviewed tax positions taken in tax years that remain subject to examination by all major tax jurisdictions, including federal (i.e., the last four tax year ends and the interim tax period since then, as applicable). Management believes that there is no tax liability resulting from unrecognized tax benefits related to uncertain tax positions taken.
Cost for federal income tax purposes at December 31, 2013 is $945,629,114. The gross unrealized appreciation/ (depreciation) on a tax basis is as follows:
Unrealized appreciation | $ | 3,754,600 | |||
Unrealized depreciation | (9,130,773 | ) | |||
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| ||||
Net unrealized appreciation/(depreciation) | $ | (5,376,173 | ) | ||
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|
As of the end of its tax year ended December 31, 2013, the Fund has capital loss carry forwards (“CLCFs”) as summarized in the tables below. CLCFs subject to expiration are applied as short-term capital loss regardless of whether the originating capital loss was short-term or long-term. CLCFs that are not subject to expiration must be utilized before those that are subject to expiration. The Board does not intend to authorize a distribution of any realized gain for the Fund until any applicable CLCF has been offset or expires.
21
AZL Enhanced Bond Index Fund
Notes to the Financial Statements
December 31, 2013
CLCFs not subject to expiration:
Short Term Amount | Long Term Amount | Total Amount | |||||||||||||
AZL Enhanced Bond Index Fund | $ | 8,685,941 | $ | — | $ | 8,685,941 |
The tax character of dividends paid to shareholders during the year ended December 31, 2013 were as follows:
Ordinary Income | Net Long-Term Capital Gains | Total Distributions(a) | |||||||||||||
AZL Enhanced Bond Index Fund | $ | 13,419,467 | $ | 1,637,154 | $ | 15,056,621 |
(a) | Total distributions paid may differ from the Statements of Changes in Net Assets because dividends are recognized when actually paid for tax purposes. |
The tax character of dividends paid to shareholders during the year ended December 31, 2012 was as follows:
Ordinary Income | Net Long-Term Capital Gains | Total Distributions(a) | |||||||||||||
AZL Enhanced Bond Index Fund | $ | 12,979,458 | $ | 63,311 | $ | 13,042,769 |
(a) | Total distributions paid may differ from the Statements of Changes in Net Assets because dividends are recognized when actually paid for tax purposes. |
As of December 31, 2013, the components of accumulated earnings on a tax basis were as follows:
Undistributed Ordinary Income | Undistributed Long-Term Capital Gains | Accumulated Capital and Other Losses | Unrealized Appreciation/ | Total Earnings/ | |||||||||||||||||||||
AZL Enhanced Bond Index Fund | $ | 8,934,759 | $ | — | $ | (8,685,941 | ) | $ | (5,375,251 | ) | $ | (5,126,433 | ) |
(a) | The difference between book-basis and tax-basis unrealized appreciation/(depreciation) is attributable primarily to tax deferral of losses on wash sales. |
8. Subsequent Events
Management has evaluated events and transactions subsequent to period end through the date the financial statements were issued, for purposes of recognition or disclosure in these financial statements and there are no subsequent events to report.
22
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Shareholders and Board of Trustees of
Allianz Variable Insurance Products Trust:
We have audited the accompanying statement of assets and liabilities of AZL Enhanced Bond Index Fund (the “Fund”) of the Allianz Variable Insurance Products Trust, including the schedule of portfolio investments, as of December 31, 2013, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the years in the two-year period then ended, and the financial highlights for each of the periods in the five-year period then ended. These financial statements and financial highlights are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of December 31, 2013, by correspondence with the custodian and brokers or by other appropriate auditing procedures. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of the Fund as of December 31, 2013, the results of its operations for the year then ended, the changes in its net assets for each of the years in the two-year period then ended, and the financial highlights for each of the periods in the five-year period then ended, in conformity with U.S. generally accepted accounting principles.
/s/KPMG LLP
Columbus, Ohio
February 25, 2014
23
Other Federal Income Tax Information (Unaudited)
During the year ended December 31, 2013, the Fund declared net long-term capital gain distributions of $1,637,154.
During the year ended December 31, 2013, the Fund declared net short-term capital gain distributions of $6,089,957.
24
A description of the policies and procedures that the Fund uses to determine how to vote proxies relating to portfolio securities is available, without charge, upon request, by visiting the Securities and Exchange Commission’s (“Commission”) website at www.sec.gov, or by calling 800-624-0197.
Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30th is available (i) without charge, upon request, by calling 800-624-0197; (ii) on the Allianz Variable Insurance Products Trust’s website at https://www.allianzlife.com; and (iii) on the Commission’s website at http://www.sec.gov.
The Fund files complete Schedules of Portfolio Holdings with the Commission for the first and third quarters of each fiscal year on Form N-Q. Schedules of Portfolio Holdings for the Fund in this report are available without charge on the Commission’s website at http://www.sec.gov, or may be reviewed and copied at the Commission’s Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 800-SEC-0330.
25
Approval of Investment Advisory and Subadvisory Agreements (Unaudited)
The Allianz Variable Insurance Products Trust (the “Trust”) is a manager-of-managers fund. That means that the Trust’s Manager (“Allianz Investment Management LLC”) is responsible for monitoring the various Subadvisers that have day-to-day responsibility for the decisions made for each of the Trust’s investment portfolios. The Trust’s Manager is responsible for determining, in the first instance, which investment advisers to consider recommending for selection as a Subadviser.
In reviewing the services provided by the Manager and the terms of the investment management agreement, the Board receives and reviews information related to the Manager’s experience and expertise in the variable insurance marketplace. Currently, the Funds are offered only through variable annuities and variable life insurance policies, and not in the retail fund market. In addition, the Board receives information regarding the Manager’s expertise with regard to portfolio diversification and asset allocation requirements within variable insurance products issued by Allianz Life Insurance Company of North America and its subsidiary, Allianz Life Insurance Company of New York. Currently, the Funds are offered only through Allianz Life and Allianz of New York variable products.
The Trust’s Manager has adopted policies and procedures to assist it in the process of analyzing each potential Subadviser with expertise in particular asset classes for purposes of making the recommendation that a specific investment adviser be selected. The Trust’s Board reviews and considers the information provided by the Manager in deciding which investment advisers to select. After an investment adviser becomes a Subadviser, a similarly rigorous process is instituted by the Manager to monitor the investment performance and other responsibilities of the Subadviser. The Manager reports to the Trust’s Board on its analysis at the regular meetings of the Board, which are held at least quarterly. Where warranted, the Manager will add or remove a particular Subadviser from a “watch” list that it maintains. Watch list criteria include, for example: (a) Fund performance over various time periods; (b) Fund risk issues, such as changes in key personnel involved with Fund management, changes in investment philosophy or process, or “capacity” concerns; and (c) organizational risk issues, such as regulatory, compliance or legal concerns, or changes in the ownership of the Subadviser. The Manager may place a Fund on the watch list for other reasons, and if so, will explain its rationale to the Trustees. Funds which are on the watch list are subject to special scrutiny of the Manager and the Board of Trustees. Funds may be removed from such watch list, if for example, performance improves or regulatory matters are satisfactorily resolved. However, in some situations where Funds which have been on the watch list, the Manager has recommended the retention of a new Subadviser, and the Board of Trustees has subsequently approved new Subadvisory Agreements with such Subadvisers.
In assessing the Manager’s and Subadvisers’ (collectively, the “Advisory Organizations”), performance of their obligations, the Board considers whether there has occurred a circumstance or event that would constitute a reason for it to not renew an advisory contract. In this regard, the Board is mindful of the potential disruption of a Fund’s operations and various risks, uncertainties and other effects that could occur as a result of a decision to terminate or not renew a contract.
As required by the Investment Company Act of 1940 (“1940 Act”), the Trust’s Board has reviewed and approved the Trust’s Investment Management Agreement with the Manager (the “Advisory Agreement”) and portfolio management agreements (the “Subadvisory Agreements”) with the Subadvisers. The Board’s decision to approve these contracts reflects the exercise of its business judgment on whether to approve new arrangements and continue the existing arrangements. During its review of these contracts, the Board considers many factors, among the most material of which are: the Fund’s investment objectives and long term performance; the Advisory Organizations’ management philosophy, personnel, and processes, including their compliance history and the adequacy of their compliance processes; the preferences and expectations of Fund shareholders (and underlying contract owners) and their relative sophistication; the continuing state of competition in the mutual fund industry; and comparable fees in the mutual fund industry.
The Board also considers the compensation and benefits received by the Advisory Organizations. This includes fees received for services provided to the Fund by affiliated persons of the Advisory Organizations and research services received by the Advisory Organizations from brokers that execute Fund trades, as well as advisory fees. The Board considered the fact that: (1) the Manager and the Trust are parties to an Administrative Service Agreement, a Compliance Services Agreement, and a Chief Compliance Officer Agreement, under which the Manager is compensated by the Trust for performing certain administrative and compliance services including providing an employee of the Manager or one of its affiliates to act as the Trust’s Chief Compliance Officer; and (2) Allianz Life Financial Services, LLC, an affiliated person of the Manager, is a registered securities broker-dealer and receives (along with its affiliated persons) payments made by the Trust pursuant to Rule 12b-1.
The Board is aware that various courts have interpreted provisions of the 1940 Act and have indicated in their decisions that the following factors may be relevant to an adviser’s compensation: the nature and quality of the services provided by the adviser, including the performance of the fund; the adviser’s cost of providing the services; the extent to which the adviser may realize “economies of scale” as the fund grows larger; any indirect benefits that may accrue to the adviser and its affiliates as a result of the adviser’s relationship with the fund; performance and expenses of comparable funds; and the extent to which the independent Board members are fully informed about all facts bearing on the adviser’s service and fee. The Trust’s Board is aware of these factors and takes them into account in its review of the Trust’s advisory contracts.
The Board considered and weighed these circumstances in light of its experience in governing the Trust and working with the Advisory Organizations on matters relating to the Funds, and is assisted in its deliberations by the advice of legal counsel to the Independent Trustees. In this regard, the Board requests and receives a significant amount of information about the Funds and the Advisory Organizations. Some of this information is provided at each regular meeting of the Board; additional information is provided in connection with the particular meeting or meetings at which the Board’s formal review of an advisory contract occurs. In between regularly scheduled meetings, the Board may receive information on particular matters as the need arises. Thus, the Board’s evaluation of an advisory contract is informed by reports covering such matters as: an Advisory Organization’s investment philosophy, personnel, and processes; the Fund’s short- and long-term performance (in absolute terms as well as in relationship to its benchmark(s), certain competitor or “peer group” funds and similar funds managed by the particular Subadviser), and comments on the reasons for performance; the Fund’s expenses (including the advisory fee itself and the overall expense structure of the Fund, both in absolute terms and relative to similar and/or competing funds, with due regard for contractual or voluntary expense limitations); the use and allocation of brokerage commissions derived from trading the Fund’s portfolio securities; the nature and extent of the advisory and other services provided to the Fund by the Advisory Organizations and their affiliates; compliance and audit reports concerning the Funds and the companies that service them; and relevant developments in the mutual fund industry and how the Funds and/or Advisory Organizations are responding to them.
The Board also receives financial information about Advisory Organizations, including reports on the compensation and benefits the Advisory Organizations derive from their relationships with the Funds. These reports cover not only the fees under the advisory contracts, but also fees, if any, received for providing other services to the Funds. The reports also discuss any indirect or “fall out” benefits an Advisory Organization may derive from its relationship with the Funds.
The Advisory and Subadvisory Agreements (collectively, the “Agreements”) were most recently considered at Board of Trustees meetings held in the fall of 2013. Information relevant to the approval of such Agreements was considered at a telephonic Board of Trustees meeting on October 16, 2013, and at an “in person” Board of Trustees meeting held October 22, 2013. The Agreements were approved at the Board meeting of October 22, 2013. At such meeting the Board also approved an Expense Limitation Agreement between the Manager and the Trust for the period ending April 30, 2015. In connection with such meetings, the Trustees requested and evaluated extensive materials from the Manager, including performance and expense information for other investment companies with similar investment objectives derived from data compiled by an independent third party provider and other sources believed to be reliable by the Manager. Prior to voting, the Trustees reviewed the proposed approval/continuance of the Agreements with management and with experienced counsel who are independent of the Manager and received a memorandum from such counsel discussing the legal standards for their consideration of the proposed approvals/continuances. The independent (“disinterested”) Trustees also discussed the proposed approvals/continuances in a private session with such counsel at which no representatives of the Manager were present. In reaching their determinations relating to the approval and/or continuance of
26
the Agreements, in respect of each Fund, the Trustees considered all factors they believed relevant. The Board based its decision to approve the Agreements on the totality of the circumstances and relevant factors, and with a view to past and future long-term considerations. Not all of the factors and considerations discussed above and below are necessarily relevant to every Fund, and the Board did not assign relative weights to factors discussed herein or deem any one or group of them to be controlling in and of themselves.
An SEC Rule requires that shareholder reports include a discussion of certain factors relating to the selection of investment advisers and the approval of advisory fees. The “factors” enumerated by the SEC are set forth below in italics, as well as the Board’s conclusions regarding such factors:
(1) The nature, extent and quality of services provided by the Manager and Subadvisers. The Trustees noted that the Manager, subject to the control of the Board of Trustees, administers each Fund’s business and other affairs. Under the Advisory Agreement, the Manager holds the sole and exclusive responsibility to provide, or arrange for other to provide, the management of the Funds’ assets and the placement of orders for the purchase and sale of the securities of the Funds. As the Trust is a manager of managers fund, the Manager is authorized, under the Advisory Agreement, to retain one or more Subadvisers for each Fund to handle day-to-day management of the Funds’ investment portfolios; the Manager is responsible for determining, in the first instance, which investment advisers to recommend to the Board of Trustees for selection as a Subadviser. The Trustees were aware that, notwithstanding the retention of the Subadvisers to handle day-to-day portfolio management, the Manager remains responsible for substantial other matters, including continuously monitoring compliance by each Subadviser with the investment policies and restrictions of the respective Funds, with such other limitations or directions of the Board of Trustees, and with all legal requirements under federal or state law or regulation. The Manager also is responsible primarily to provide statistical information and other data to the Trustees regarding the Funds’ portfolio investments and to make available to the Funds’ administrator such information as is necessary for the conduct of its duties.
The Trustees also noted that the Manager provides the Trust and each Fund with such administrative and other services (exclusive of, and in addition to, any such services provided by any others retained by the Trust on behalf of the Funds) and executive and other personnel as are necessary for the operation of the Trust and the Funds. Except for the Trust’s Chief Compliance Officer, the Manager pays all of the compensation of Trustees and officers of the Trust who are employees of the Manager or its affiliates.
The Trustees considered the scope and quality of services provided by the Manager and the Subadvisers and noted that the scope of such services provided had expanded as a result of recent regulatory and other developments. The Trustees noted that, for example, the Manager and Subadvisers are responsible for maintaining and monitoring their own compliance programs, and these compliance programs are continuously refined and enhanced in light of new regulatory requirements. The Trustees considered the capabilities and resources which the Manager has dedicated to performing services on behalf of the Trust and its Funds. The quality of administrative and other services, including the Manager’s role in coordinating the activities of the Trust’s other service providers, also were considered. The Trustees concluded that, overall, they were satisfied with the nature, extent and quality of services provided (and expected to be provided) to the Trust and to each of the Funds under the Agreements.
(2) The investment performance of the Funds, the Manager and the Subadvisers. In connection with every in-person quarterly Board of Trustees meeting, Trustees receive extensive information on the performance results of each of the Funds. This includes, for example, performance information on all of the Funds for the previous quarter, and previous one, three and five-year periods, and since inception. (For Funds which have been in existence for less than five years, Trustees may receive performance information on comparable funds managed by the particular Subadviser for periods prior to the creation of a particular Fund.) Such performance information includes information on absolute total return, performance versus Subadvisers’ comparable fund(s), performance versus the appropriate benchmark(s), and performance versus peer groups. For example, in connection with the Board of Trustees meetings held September 10-11, 2013, the Manager reported that for the three year period ended June 30, 2013, 12 Funds were in the top 40%, eight were in the middle 20% and eight were in the bottom 40%, and for the one year period ended June 30, 2013, 8 Funds were in the top 40%, seven were in the middle 20%, and 14 were in the bottom 40%. The Manager also reported that for the five year period ended June 30, 2013, 10 Funds were in the top 40%, four were in the middle 20%, and six were in the bottom 40%. At the Board of Trustees meeting held October 22, 2013, the Trustees determined that the overall investment performance of the Funds was acceptable.
(3) The costs of services to be provided and profits to be realized by the Manager and the Subadvisers and their affiliates from their relationship with the Funds. The Manager has supplied information to the Board of Trustees pertaining to the level of investment advisory fees to which the Funds are subject. The Manager has agreed to temporarily “cap” Fund expenses at certain levels, and information is provided to Trustees setting forth “contractual” advisory fees and “actual” fees after taking expense caps into account. Based upon the information provided, the “actual” advisory fees payable by the Funds overall are generally comparable to the average level of fees paid by Fund peer groups. For the 30 Funds reviewed by the Board of Trustees in the fall of 2013, 27 Funds paid “actual” advisory fees in a percentage amount within the 65th percentile or lower for each Fund’s applicable category. The Trustees recognized that it is difficult to make comparisons of advisory fees because there are variations in the services that are included in the fees paid by other funds. The Board has concluded that the advisory fees to be paid to the Manager by the Funds are not unreasonable.
The Manager has also supplied information to the Board of Trustees pertaining to total Fund expenses (which includes advisory fees, the 25 basis point 12b-1 fee paid by the Funds, and other Fund expenses). As noted above, the Manager has agreed to “cap” Fund expenses at certain levels. Based upon the information provided, the overall total expense ratio ranking in 2013 for the 30 Funds was as follows: (1) 28 of the Funds had total expense rankings below the 65th percentile (with 20 Funds at or below the 50th percentile); (2) the AZL Russell 1000 Value Fund had a total expense ranking in the 66th percentile; the Manager reported that there is only a limited peer group for such Fund; and (3) the AZL Morgan Stanley Global Real Estate Fund had a total expense ranking in the 72nd percentile; it was reported by the Manager that there is only a limited peer group for such Fund, such Fund’s expense ratio has declined, and such Fund’s expense ratio is comparable to funds of similar size.
The Manager has committed to providing the Funds with a high quality of service and working to reduce Fund expenses over time, particularly as the Funds grow larger. The Trustees concluded therefore that the expense ratios of the Funds were not unreasonable.
The Manager provided information concerning the profitability of the Manager’s investment advisory activities for the period from 2011 through June 30, 2013. The Trustees recognized that it is difficult to make comparisons of profitability from investment company advisory agreements because comparative information is not generally publicly available and is affected by numerous factors, including the structure of the particular adviser, the types of funds it manages, its business mix, numerous assumptions regarding allocation of expenses and the adviser’s capital structure and cost of capital. In considering profitability information, the Trustees considered the possible effect of certain fall-out benefits to the Manager and its affiliates. The Trustees focused on profitability of the Manager’s relationships with the Funds before taxes and distribution expenses. The Trustees recognized that the Manager should, in the abstract, be entitled to earn a reasonable level of profits for the services it provides to each Fund and, based on their review, concluded that they were satisfied that the Manager’s level of profitability from its relationship with the Funds was not excessive.
The Manager, on behalf of the Board of Trustees, endeavored to obtain information on the profitability of each Subadviser in connection with its relationship with the Fund or Funds which it subadvises. The Manager was unable to obtain meaningful profitability information from some of the unaffiliated Subadvisers. The Manager assured the Board of Trustees that the Agreements with the Subadvisers which are not affiliated with it were negotiated on an “arm’s length” basis, so that arguably, such profitability information should be less relevant. The Trustees were also provided with certain information on the profitability for the Subadviser which is affiliated with the Manager. Trustees recognized the difficulty of allocating costs to multiple advisory accounts and products of a large advisory organization. Based upon the information provided, the Trustees determined that there was no evidence that the level of such profitability attributable to subadvising the Funds was excessive.
27
(4) and (5) The extent to which economies of scale would be realized as the Funds grow, and whether fee levels reflect these economies of scale. The Trustees noted that most of the advisory fee schedules for the Funds do not contain breakpoints that reduce the fee rate on assets above specified levels, although certain Subadvisory Agreements have such “breakpoints.” The Trustees recognized that breakpoints may be an appropriate way for the Manager to share its economies of scale, if any, with Funds that have substantial assets. However, they also recognized that there may not be a direct relationship between any economies of scale realized by Funds and those realized by the Manager as assets increase. The Trustees do not believe there is a uniform methodology for establishing breakpoints that give effect to Fund-specific service provided by the Manager. The Trustees noted that in the fund industry as a whole, as well as among funds similar to the Funds, there is no uniformity or pattern in the fees and asset levels at which breakpoints (if any) apply. Depending on the age, size, and other characteristics of a particular fund and its manager’s cost structure, different conclusions can be drawn as to whether there are economies of scale to be realized at any particular level of assets, notwithstanding the intuitive conclusion that such economies exist, or will be realized at some level of total assets. Moreover, because different managers have different cost structures and service models, it is difficult to draw meaningful conclusions from the breakpoints that may have been adopted by other funds. The Trustees also noted that the advisory agreements for many funds do not have breakpoints at all, or if breakpoints exist, they may be at asset levels significantly greater than those of the individual Funds. The Trustees also noted that the total assets in all of the Funds as of June 30, 2013 were approximately $12.85 billion, and that no single non-money market Fund had assets in excess of $616 million.
The Trustees noted that the Manager has agreed to temporarily “cap” Fund expenses at certain levels, which has the effect of reducing expenses as would the implementation of advisory fee breakpoints. The Manager has committed to continue to consider the continuation of fee “caps” and/or advisory fee breakpoints as the Funds grow larger. The Board receives quarterly reports on the level of Fund assets. It expects to consider whether or not to approve the Agreements at a meeting to be held prior to December 31, 2014, and will at that time, or prior thereto, consider: (a) the extent to which economies of scale can be realized, and (b) whether the advisory fee should be modified to reflect such economies of scale, if any.
Having taken these factors into account, the Trustees concluded that the absence of breakpoints in certain of the Funds’ advisory fee rate schedules was acceptable under each Fund’s circumstances.
28
Information about the Board of Trustees and Officers (Unaudited)
The Trust is managed by the Trustees in accordance with the laws of the state of Delaware governing business trusts. There are currently eight Trustees, two of whom are “interested persons” of the Trust within the meaning of that term under the 1940 Act. The Trustees and Officers of the Trust, their addresses, ages, their positions held with the Trust, their terms of office with the Trust and length of time served, their principal occupation(s) during the past five years, the number of portfolios in the Trust they oversee, and their other directorships held are as follows:
Non-Interested Trustees(1)
Name, Address, and Age | Positions Held with VIP Trust and FOF Trust | Term of Office(2)/Length of Time Served | Principal Occupation(s) During Past 5 Years | Number of Portfolios Overseen for VIP Trust and FOF Trust | Other Directorships Held Outside the AZL Fund Complex | |||||
Peter R. Burnim, Age 66 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/07 | Chairman, Argus Investment Strategies Fund Ltd., February 2013 to present; Managing Director, iQ Venture Advisors, LLC. 2005 to 2012; Chairman, Northstar Group Holdings Ltd. Bermuda, 2011 to present; Expert Witness, Massachusetts Department of Revenue, 2011 to 2012; Executive Vice President, Northstar Companies, 2002 to 2005; Senior Officer, Citibank and Citicorp for over 25 years | 41 | Argus Group Holdings; Northstar Group Holdings, NRIL, Sterling Centrecorp Inc.; Highland Financial Holdings; and Bank of Bermuda NY | |||||
Peggy L. Ettestad, Age 56 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/07 | Managing Director, Red Canoe Management Consulting LLC, 2008 to present; Senior Managing Director, Residential Capital LLC, 2003 to 2008; Chief Operations Officer, Transamerica Reinsurance 2002 to 2003 | 41 | Luther College | |||||
Roger Gelfenbien, Age 70 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 10/99 | Retired; Partner of Accenture 1983 to 1999 | 41 | Virtus Funds (8 Funds) | |||||
Claire R. Leonardi, Age 58 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/04 | Chief Executive Officer, Connecticut Innovations, Inc., 2012 to present; General Partner, Fairview Capital, L.P., 1994 to 2012 | 41 | The Natural History Museum of the Adirondacks | |||||
Dickson W. Lewis, Age 65 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/04 | Retired; Consultant to Lifetouch National School Studios; Vice President/General Manager, Yearbooks & Canada-Lifetouch National School Studios, 2006 to 2013; Vice President/General Manager of Jostens, Inc., 2002 to 2006; Senior Vice President of Fortis Group, 1997 to 2002 | 41 | None | |||||
Peter W. McClean, Age 69 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/04 | Retired; President and CEO of Measurisk, LLC, 2001 to 2003; Chief Risk Management Officer at Bank of Bermuda Ltd., 1996 to 2001 | 41 | PNMAC Opportunity Fund; Northeast Bank; and FHI | |||||
Arthur C. Reeds III, Age 69 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 10/99 | Retired; Senior Investment Officer, Hartford Foundation for Public Giving, 2000 to 2003; Chairman, Chief Executive and President of Conning Corp., 1999 to 2000; Investment Consultant, 1997 to 1999 | 41 | Connecticut Water Service, Inc. |
Interested Trustees(3)
Name, Address, and Age | Positions Held with VIP Trust and FOF Trust | Term of Office(2)/Length of Time Served | Principal Occupation(s) During Past 5 Years | Number of Portfolios Overseen for VIP Trust and FOF Trust | Other Directorships Held Outside the AZL Fund Complex | |||||
Robert DeChellis, Age 46 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 3/08 | President and CEO, Allianz Life Financial Services, LLC, 2007 to present | 41 | None | |||||
Brian Muench, Age 43 5701 Golden Hills Drive | Trustee | Since 6/11 | President, Allianz Investment Management LLC, November 2010 to present; Vice President, Allianz Life, April 2011 to present; Vice President, Advisory Management, Allianz Investment Management LLC from December 2005 to November 2010 | 41 | None |
29
Officers
Name, Address, and Age | Positions Held with VIP and VIP FOF Trust | Term of Office(2)/Length of Time Served | Principal Occupation(s) During Past 5 Years | |||
Brian Muench, Age 43 5701 Golden Hills Drive Minneapolis, MN 55416 | President | Since 11/10 | President, Allianz Investment Management LLC from November 2010, to present; Vice President, Allianz Life from April 2011 to present; Vice President, Allianz Investment Management LLC from December 2005 to November 2010. | |||
Michael Radmer, Age 68 Dorsey & Whitney LLP, Suite 1500 50 South Sixth Street Minneapolis, MN 55402-1498 | Secretary | Since 2/02 | Partner, Dorsey and Whitney LLP since 1976. | |||
Ty Edwards, Age 47 Citi Fund Services Ohio, Inc. 3435 Stelzer Road Columbus, OH 43219 | Treasurer, Principal Accounting Officer and Principal Financial Officer | Since 4/10 | Senior Vice President, Financial Administration, Citi Fund Services Ohio, Inc., December 2009 to present; Director, Product Management, Columbia Management, April 2007 to April 2009; Deputy Treasurer, Columbia Funds and Director, Fund Administration, Columbia Management, January 2006 to April 2007. | |||
Christopher R. Pheiffer, Age 45(4) 5701 Golden Hills Drive Minneapolis, MN 55416 | Chief Compliance Officer(5) and Anti-Money Laundering Compliance Officer | Since 2/14 (interim) | Deputy Chief Compliance Officer of the Trusts, 2007-2014. |
(1) | Member of the Audit Committee. |
(2) | Indefinite. |
(3) | Is an “interested person”, as defined by the 1940 Act, due to employment by Allianz. |
(4) | Stephen G. Simon, previously the Chief Compliance Officer of the Trusts, resigned all of his positions with Allianz effective February 21, 2014. Mr. Pheiffer, previously the Deputy Chief Compliance Officer of the Trusts, has been named Chief Compliance Officer of the Trusts on an interim basis while a search for a permanent replacement is conducted. |
(5) | The Manager and the Trust are parties to a Chief Compliance Officer Agreement under which the Manager is compensated by the Trust for providing an employee of the Manager or one of its affiliates to act as the Trust’s Chief Compliance Officer. The Chief Compliance Officer and Anti-Money Laundering Compliance Officer is not considered a corporate officer or executive employee of the Trust. |
30
The Allianz VIP Funds are distributed by Allianz Life Financial Services, LLC. | ||
These Funds are not FDIC Insured. | ANNRPT1213 2/14 |
AZL® Federated Clover Small Value Fund
Annual Report
December 31, 2013
Table of Contents
Management Discussion and Analysis
Page 1
Expense Examples and Portfolio Composition
Page 3
Schedule of Portfolio Investments
Page 4
Statement of Assets and Liabilities
Page 7
Statement of Operations
Page 7
Statements of Changes in Net Assets
Page 8
Financial Highlights
Page 9
Notes to the Financial Statements
Page 10
Report of Independent Registered Public Accounting Firm
Page 15
Special Meeting of Shareholders
Page 16
Other Federal Income Tax Information
Page 17
Other Information
Page 18
Approval of Investment Advisory and Subadvisory Agreements
Page 19
Information about the Board of Trustees and Officers
Page 22
This report is submitted for the general information of the shareholder of the Fund. The report is not authorized for distribution to prospective investors in the Fund unless preceded or accompanied by an effective prospectus, which contains details concerning the sales charges and other pertinent information.
AZL® Federated Clover Small Value Fund Review (unaudited)
Allianz Investment Management LLC serves as the Manager for the AZL® Federated Clover Small Value Fund and Federated Global Investment Management Corp. serves as Subadviser to the Fund.
What factors affected the Fund’s performance during the year ended December 31, 2013?
For the year ended December 31, 2013, the AZL® Federated Clover Small Value Fund returned 32.00%1. That compared to a 34.52% total return for its benchmark, the Russell 2000® Value Index2.
The Fund’s sub-advisor, Federated Clover Investment Advisors, employs a bottom-up stock selection process. As a result, the portfolio frequently contains industry and security allocations that may be significantly different from those of the index.*
Stocks performed extremely well during the 12-month period. A strengthening U.S. economy and improving corporate fundamentals helped drive that strong performance. During periods of strong cyclical growth, small-cap stocks are typically among the strongest performers. That was the case during the period under review, and the Fund performed extremely well in that environment.*
The Fund’s relative performance benefited from individual stock selection in the real estate market. We avoided agency REITs, which typically perform poorly in rising-rate environments. Interest rates rose considerably during the period, in part due to comments by Federal Reserve Board Chairman Ben Bernanke that the Fed was considering beginning to taper its economic stimulus efforts. Our general avoidance of agency REITs, and security selection among commercial mortgage REITs, benefited the Fund’s relative performance.*
An overweight position in shares of select insurance companies also aided relative performance. In particular, the Fund’s holdings of life insurance companies performed well due to company-specific reasons combined with investors anticipating higher earnings from these companies due to rising interest rates.*
Individual stock selection in the health care sector—particularly among biotechnology, pharmaceutical and hospital companies—added to the Fund’s performance relative to its benchmark. In addition, the Fund benefited
from its exposure to a packaging company in the materials sector that performed well after making several acquisitions during the period.*
The Fund was hurt by stock selection in the energy sector. In particular, shares of several energy exploration and production firms dragged on the Fund’s relative returns. Additionally, stock selection in the industrial and consumer discretionary sectors hurt performance. Among consumer discretionary holdings, the Fund’s exposure to certain apparel retailers weighed on relative performance. These companies experienced weakness in profitability, and saw declining consumer traffic and same-store sales figures.*
The Fund’s performance relative to its benchmark was also hurt by the portfolio’s cash component. We typically hold an average of 2.5% of the Fund’s portfolio in cash, while the benchmark does not include a cash component. As a result, the Fund missed some of the strong returns in the small-cap sector during the period.*
Past performance does not guarantee future results.
* | The Fund’s portfolio composition is subject to change. There is no guarantee that any sectors mentioned will continue to perform well or that securities in such sectors will be held by the Fund in the future. The information contained in this commentary is for informational purposes only and should not be construed as a recommendation to purchase or sell securities in the sector mentioned. The Fund’s holdings and weightings are as of December 31, 2013. |
1 | The recent growth rate in the stock market has helped to produce short-term returns that are not typical and may not continue in the future. Because of ongoing market volatility, Fund performance may be subject to substantial short-term changes. |
2 | The Russell 2000® Value Index measures the performance of the small-cap value segment of the U.S. equity universe. It includes those Russell 2000 companies with lower price-to-book ratios and lower forecasted growth values. |
Investors cannot invest directly in an index. |
1
AZL® Federated Clover Small Value Fund Review (unaudited)
Fund Objective
The Fund’s investment objective is to seek capital appreciation. This objective may be changed by the Trustees of the Fund without shareholder approval. The Fund seeks to achieve its objective by investing at least 80% of its net assets, plus any borrowings for investment purposes, in investments of small-capitalization companies.
Investment Concerns
Equity securities (stocks) are more volatile and carry more risk than other forms of investments, including investments in high-grade fixed income securities. The net asset value per share of this Fund will fluctuate as the value of the securities in the portfolio changes.
Small- to mid-capitalization companies typically have a higher risk of failure and historically have experienced a greater degree of volatility.
Value-based investments are subject to the risk that the broad market may not recognize their intrinsic value.
Investing in a single industry or sector, or concentrating investments in a limited number of industries or sectors, tends to increase the risk that economic, political, or regulatory developments affecting certain industries or sectors will have a large impact on the value of the portfolio.
Investments in the Fund are subject to the risks related to direct investment in real estate, such as real estate risk, regulatory risks, concentration risk, and diversification risk. By itself the Fund does not constitute a complete investment plan and should be considered a long-term investment for investors who can afford to weather changes in the value of their investments.
For a complete description of these and other risks associated with investing in a mutual Fund, please refer to the Fund’s prospectus.
Growth of $10,000 Investment
The chart above represents a comparison of a hypothetical investment in the Fund versus a similar investment in the Fund’s benchmark, and represents the reinvestment of dividends and capital gains in the Fund.
Average Annual Total Returns as of December 31, 2013
1 | 3 | 5 | 10 | |||||||||||||
Year | Year | Year | Year | |||||||||||||
AZL® Federated Clover Small Value Fund | 32.00 | %1 | 13.18 | % | 19.21 | % | 8.78 | % | ||||||||
Russell 2000® Value Index | 34.52 | % | 14.49 | % | 17.64 | % | 8.61 | % |
Past performance does not guarantee future results. The performance data quoted represents past performance and current returns may be lower or higher. The investment return and principal value will fluctuate so that an investor’s shares, when redeemed may be worth more or less than the original cost. To obtain performance information current to the most recent month end, please visit www.Allianzlife.com.
Expense Ratio2 | Gross | |||
AZL® Federated Clover Small Value Fund | 1.10 | % |
The above expense ratio is based on the current Fund prospectus dated April 29, 2013. The Manager and the Fund have entered into a written contract limiting operating expenses, excluding certain expenses (such as interest expense and Acquired Fund fees and expenses), to 1.35% through April 30, 2015. Additional information pertaining to the December 31, 2013 expense ratios can be found in the financial highlights.
1 | The recent growth rate in the stock market has helped to produce short-term returns that are not typical and may not continue in the future. Because of ongoing market volatility, Fund performance may be subject to substantial short-term changes. |
2 | Acquired Fund Fees and Expenses are incurred indirectly by the Fund through the valuation of the Fund’s investments in the other investment companies. Accordingly, Acquired Fund Fees and Expenses affect the Fund’s total returns. Because these fees and expenses are not included in the Fund’s financial highlights, the Fund’s total annual fund operating expenses do not correlate to the ratios of expenses to average net assets shown in the financial highlights table. Without Acquired Fund Fees and Expenses the Fund’s gross ratio would be 1.07%. |
The total return of the Fund does not reflect the effect of any insurance charges, the annual maintenance fee or the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. Such charges, fees and tax payments would reduce the performance quoted.
The Fund’s performance is measured against the Russell 2000® Value Index, an unmanaged index that measures the performance of the small-cap value segment of the U.S. equity universe. It includes those Russell 2000 companies with lower price-to-book ratios and lower forecasted growth values. The index does not reflect the deduction of fees associated with a mutual fund, such as investment management and fund accounting fees. The Fund’s performance reflects the deduction of fees for services provided to the Fund. Investors cannot invest directly in an index.
2 |
AZL Federated Clover Small Value Fund
(Unaudited)
As a shareholder of the AZL Federated Clover Small Value Fund (the “Fund”), you incur ongoing costs, including management fees, distribution fees, and other Fund expenses. These examples are intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. Please note that the expenses shown in each table do not reflect expenses that apply to the subaccount or the insurance contract. If the expenses that apply to the subaccount of the insurance contract were included, your costs would have been higher.
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the periods presented below.
The Actual Expense table below provides information about actual account values and actual expenses. You may use the information below, 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 table under the heading entitled “Expenses Paid During Period” to estimate the expenses you paid on your account during this period.
Beginning Account Value 7/1/13 | Ending Account Value 12/31/13 | Expenses Paid During Period 7/1/13 - 12/31/13* | Annualized Expense Ratio During Period 7/1/13 - 12/31/13 | |||||||||||||||||
AZL Federated Clover Small Value Fund | $ | 1,000.00 | $ | 1,147.80 | $ | 5.95 | 1.10 | % |
The Hypothetical Expense table below provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.
Beginning Account Value 7/1/13 | Ending Account Value 12/31/13 | Expenses Paid During Period 7/1/13 - 12/31/13* | Annualized Expense Ratio During Period 7/1/13 - 12/31/13 | |||||||||||||||||
AZL Federated Clover Small Value Fund | $ | 1,000.00 | $ | 1,019.66 | $ | 5.60 | 1.10 | % |
* | Expenses are equal to the average account value over the period, multiplied by the Fund’s annualized expense ratio, multiplied by 184/365 (to reflect the one half year period). |
Portfolio Composition
(Unaudited)
Investments | Percent of net assets | ||||
Financials | 32.4 | % | |||
Industrials | 12.5 | ||||
Information Technology | 10.4 | ||||
Consumer Discretionary | 9.8 | ||||
Materials | 8.8 | ||||
Health Care | 7.0 | ||||
Energy | 6.7 | ||||
Utilities | 6.1 | ||||
Consumer Staples | 3.1 | ||||
Telecommunication Services | 0.4 | ||||
|
| ||||
Total Common Stock | 97.2 | ||||
Securities Held as Collateral for Securities on Loan | 5.6 | ||||
Money Market | 2.6 | ||||
|
| ||||
Total Investment Securities | 105.4 | ||||
Net other assets (liabilities) | (5.4 | ) | |||
|
| ||||
Net Assets | 100.0 | % | |||
|
|
3
AZL Federated Clover Small Value Fund
Schedule of Portfolio Investments
December 31, 2013
Shares | Fair Value | |||||||
| Common Stocks (97.2%): | |||||||
| Aerospace & Defense (2.8%): | |||||||
81,050 | Curtiss-Wright Corp. | $ | 5,043,742 | |||||
55,290 | Esterline Technologies Corp.* | 5,637,368 | ||||||
37,825 | Triumph Group, Inc. | 2,877,348 | ||||||
|
| |||||||
13,558,458 | ||||||||
|
| |||||||
| Auto Components (1.0%): | |||||||
185,961 | Spartan Motors, Inc. | 1,245,939 | ||||||
66,050 | Tenneco, Inc.* | 3,736,448 | ||||||
|
| |||||||
4,982,387 | ||||||||
|
| |||||||
| Biotechnology (1.4%): | |||||||
69,775 | Alkermes plc* | 2,837,052 | ||||||
37,500 | Cubist Pharmaceuticals, Inc.* | 2,582,625 | ||||||
86,550 | InterMune, Inc.* | 1,274,882 | ||||||
|
| |||||||
6,694,559 | ||||||||
|
| |||||||
| Building Products (0.5%): | |||||||
83,150 | USG Corp.* | 2,359,797 | ||||||
|
| |||||||
| Capital Markets (0.6%): | |||||||
184,975 | American Capital, Ltd.* | 2,893,009 | ||||||
|
| |||||||
| Chemicals (3.9%): | |||||||
123,750 | Axiall Corp. | 5,870,700 | ||||||
65,725 | Cabot Corp. | 3,378,265 | ||||||
244,575 | Huntsman Corp. | 6,016,545 | ||||||
101,475 | OM Group, Inc.* | 3,694,705 | ||||||
|
| |||||||
18,960,215 | ||||||||
|
| |||||||
| Commercial Banks (11.2%): | |||||||
178,618 | Capital Bank Financial Corp.* | 4,063,560 | ||||||
57,485 | City Holding Co.^ | 2,663,280 | ||||||
117,375 | East West Bancorp, Inc. | 4,104,604 | ||||||
442,650 | F.N.B. Corp. | 5,586,242 | ||||||
166,675 | FirstMerit Corp. | 3,705,185 | ||||||
60,320 | Independent Bank Corp. | 2,363,941 | ||||||
156,150 | Investors Bancorp, Inc. | 3,994,317 | ||||||
119,975 | PacWest Bancorp | 5,065,345 | ||||||
98,275 | Popular, Inc.* | 2,823,441 | ||||||
438,850 | Susquehanna Bancshares, Inc. | 5,634,833 | ||||||
605,950 | Synovus Financial Corp. | 2,181,420 | ||||||
280,925 | Webster Financial Corp. | 8,759,241 | ||||||
71,275 | Wintrust Financial Corp. | 3,287,203 | ||||||
|
| |||||||
54,232,612 | ||||||||
|
| |||||||
| Commercial Services & Supplies (1.2%): | |||||||
369,200 | Acco Brands Corp.* | 2,481,024 | ||||||
32,050 | UniFirst Corp. | 3,429,350 | ||||||
|
| |||||||
5,910,374 | ||||||||
|
| |||||||
| Communications Equipment (2.3%): | |||||||
69,525 | Black Box Corp. | 2,071,845 | ||||||
187,175 | Finisar Corp.* | 4,477,226 | ||||||
225,075 | SeaChange International, Inc.* | 2,736,912 | ||||||
28,075 | ViaSat, Inc.* | 1,758,899 | ||||||
|
| |||||||
11,044,882 | ||||||||
|
|
Shares | Fair Value | |||||||
| Common Stocks, continued | |||||||
| Computers & Peripherals (0.4%): | |||||||
1,568,491 | Quantum Corp.* | $ | 1,882,189 | |||||
|
| |||||||
| Construction & Engineering (0.8%): | |||||||
122,600 | Foster Wheeler AG* | 4,048,251 | ||||||
|
| |||||||
| Diversified Financial Services (0.5%): | |||||||
90,300 | PHH Corp.* | 2,198,805 | ||||||
|
| |||||||
| Diversified Telecommunication Services (0.4%): | |||||||
290,900 | Iridium Communications, Inc.*^ | 1,821,034 | ||||||
|
| |||||||
| Electric Utilities (4.8%): | |||||||
152,075 | Cleco Corp. | 7,089,737 | ||||||
150,575 | IDACORP, Inc. | 7,805,808 | ||||||
266,825 | Portland General Electric Co. | 8,058,114 | ||||||
|
| |||||||
22,953,659 | ||||||||
|
| |||||||
| Electrical Equipment (0.6%): | |||||||
102,375 | General Cable Corp. | 3,010,849 | ||||||
|
| |||||||
| Electronic Equipment, Instruments & Components (2.0%): | |||||||
43,850 | Anixter International, Inc. | 3,939,484 | ||||||
75,998 | CTS Corp. | 1,513,120 | ||||||
72,775 | Insight Enterprises, Inc.* | 1,652,720 | ||||||
150,300 | Sanmina Corp.* | 2,510,010 | ||||||
|
| |||||||
9,615,334 | ||||||||
|
| |||||||
| Energy Equipment & Services (2.7%): | |||||||
43,250 | Dril-Quip, Inc.* | 4,754,472 | ||||||
120,225 | Exterran Holdings, Inc.* | 4,111,695 | ||||||
433,425 | Willbros Group, Inc.* | 4,082,864 | ||||||
|
| |||||||
12,949,031 | ||||||||
|
| |||||||
| Food Products (3.1%): | |||||||
35,875 | Cal-Maine Foods, Inc. | 2,160,751 | ||||||
113,550 | Hillshire Brands Co. | 3,797,112 | ||||||
118,875 | Pinnacle Foods, Inc. | 3,264,308 | ||||||
247,600 | WhiteWave Foods Co., Class A* | 5,679,944 | ||||||
|
| |||||||
14,902,115 | ||||||||
|
| |||||||
| Gas Utilities (1.3%): | |||||||
136,475 | Atmos Energy Corp. | 6,198,695 | ||||||
|
| |||||||
| Health Care Equipment & Supplies (3.1%): | |||||||
70,325 | Alere, Inc.* | 2,545,765 | ||||||
96,275 | Cynosure, Inc., Class A* | 2,568,617 | ||||||
160,084 | Merit Medical Systems, Inc.* | 2,519,722 | ||||||
116,525 | Tornier NV* | 2,189,505 | ||||||
164,250 | Wright Medical Group, Inc.* | 5,044,118 | ||||||
|
| |||||||
14,867,727 | ||||||||
|
| |||||||
| Health Care Providers & Services (1.3%): | |||||||
47,375 | Magellan Health Services, Inc.* | 2,838,236 | ||||||
41,600 | Universal Health Services, Inc., Class B | 3,380,416 | ||||||
|
| |||||||
6,218,652 | ||||||||
|
| |||||||
| Hotels, Restaurants & Leisure (1.3%): | |||||||
226,850 | Orient-Express Hotel, Ltd.* | 3,427,704 | ||||||
39,225 | Vail Resorts, Inc. | 2,950,897 | ||||||
|
| |||||||
6,378,601 | ||||||||
|
|
Continued
4
AZL Federated Clover Small Value Fund
Schedule of Portfolio Investments
December 31, 2013
Shares | Fair Value | |||||||
| Common Stocks, continued | |||||||
| Household Durables (0.8%): | |||||||
200,850 | KB Home^ | $ | 3,671,538 | |||||
|
| |||||||
| Insurance (6.9%): | |||||||
189,875 | American Equity Investment Life Holding Co. | 5,008,903 | ||||||
125,247 | Argo Group International Holdings, Ltd. | 5,822,733 | ||||||
355,800 | CNO Financial Group, Inc. | 6,294,101 | ||||||
216,500 | Fidelity & Guaranty Life* | 4,100,510 | ||||||
104,275 | Hanover Insurance Group, Inc. (The) | 6,226,260 | ||||||
334,700 | Maiden Holdings, Ltd. | 3,658,271 | ||||||
39,425 | ProAssurance Corp. | 1,911,324 | ||||||
|
| |||||||
33,022,102 | ||||||||
|
| |||||||
| Internet & Catalog Retail (0.5%): | |||||||
56,025 | HomeAway, Inc.* | 2,290,302 | ||||||
|
| |||||||
| Internet Software & Services (0.4%): | |||||||
34,575 | j2 Global, Inc. | 1,729,096 | ||||||
|
| |||||||
| IT Services (1.0%): | |||||||
62,025 | CSG Systems International, Inc. | 1,823,535 | ||||||
93,275 | Unisys Corp.* | 3,131,242 | ||||||
|
| |||||||
4,954,777 | ||||||||
|
| |||||||
| Life Sciences Tools & Services (0.4%): | |||||||
106,700 | Bruker Corp.* | 2,109,459 | ||||||
|
| |||||||
| Machinery (4.1%): | |||||||
114,225 | Barnes Group, Inc. | 4,375,960 | ||||||
125,550 | Manitowoc Co., Inc. (The) | 2,927,826 | ||||||
98,175 | Terex Corp. | 4,122,368 | ||||||
91,450 | Trinity Industries, Inc. | 4,985,854 | ||||||
277,475 | Wabash National Corp.* | 3,426,816 | ||||||
|
| |||||||
19,838,824 | ||||||||
|
| |||||||
| Media (2.2%): | |||||||
102,750 | Cinemark Holdings, Inc. | 3,424,658 | ||||||
67,850 | Imax Corp.*^ | 2,000,218 | ||||||
90,800 | Lions Gate Entertainment Corp.^ | 2,874,728 | ||||||
75,350 | National CineMedia, Inc. | 1,503,986 | ||||||
38,850 | World Wrestling Entertainment, Inc., Class A | 644,133 | ||||||
|
| |||||||
10,447,723 | ||||||||
|
| |||||||
| Metals & Mining (3.1%): | |||||||
125,200 | Allegheny Technologies, Inc. | 4,460,876 | ||||||
422,375 | Aurico Gold, Inc. | 1,545,893 | ||||||
112,425 | Coeur d’Alene Mines Corp.* | 1,219,811 | ||||||
333,900 | Stillwater Mining Co.* | 4,120,326 | ||||||
117,925 | United States Steel Corp.^ | 3,478,788 | ||||||
|
| |||||||
14,825,694 | ||||||||
|
| |||||||
| Oil, Gas & Consumable Fuels (4.0%): | |||||||
223,850 | Bill Barrett Corp.*^ | 5,994,702 | ||||||
56,925 | PDC Energy, Inc.* | 3,029,549 | ||||||
45,825 | SM Energy Co. | 3,808,516 | ||||||
134,950 | Teekay Shipping Corp. | 6,478,949 | ||||||
|
| |||||||
19,311,716 | ||||||||
|
|
Shares | Fair Value | |||||||
| Common Stocks, continued | |||||||
| Paper & Forest Products (1.8%): | |||||||
105,575 | KapStone Paper & Packaging Corp.* | $ | 5,897,419 | |||||
162,925 | Louisiana-Pacific Corp.* | 3,015,742 | ||||||
|
| |||||||
8,913,161 | ||||||||
|
| |||||||
| Pharmaceuticals (0.8%): | |||||||
49,900 | Impax Laboratories, Inc.* | 1,254,486 | ||||||
68,450 | Medicines Co. (The)* | 2,643,539 | ||||||
|
| |||||||
3,898,025 | ||||||||
|
| |||||||
| Professional Services (0.7%): | |||||||
139,000 | Trueblue, Inc.* | 3,583,420 | ||||||
|
| |||||||
| Real Estate Investment Trusts (REITs) (10.8%): | |||||||
165,575 | Associated Estates Realty Corp.^ | 2,657,479 | ||||||
670,800 | FelCor Lodging Trust, Inc.* | 5,473,727 | ||||||
293,200 | First Potomac Realty Trust | 3,409,916 | ||||||
163,075 | LaSalle Hotel Properties | 5,032,495 | ||||||
495,850 | Lexington Realty Trust^ | 5,062,629 | ||||||
68,100 | LTC Properties, Inc. | 2,410,059 | ||||||
494,175 | MFA Financial, Inc.^ | 3,488,876 | ||||||
667,000 | New Residential Investment Corp. | 4,455,560 | ||||||
509,800 | NorthStar Realty Finance Corp. | 6,856,809 | ||||||
317,625 | Starwood Property Trust, Inc. | 8,798,213 | ||||||
111,650 | Sun Communities, Inc. | 4,760,756 | ||||||
|
| |||||||
52,406,519 | ||||||||
|
| |||||||
| Road & Rail (0.8%): | |||||||
100,725 | Con-way, Inc. | 3,999,790 | ||||||
|
| |||||||
| Semiconductors & Semiconductor Equipment (3.8%): | |||||||
126,750 | Advanced Energy Industries, Inc.* | 2,897,505 | ||||||
265,800 | Brooks Automation, Inc. | 2,788,242 | ||||||
269,125 | Cypress Semiconductor Corp.^ | 2,825,813 | ||||||
243,000 | Fairchild Semiconductor International, Inc.* | 3,244,049 | ||||||
387,550 | Lattice Semiconductor Corp.* | 2,135,401 | ||||||
87,050 | MKS Instruments, Inc. | 2,606,277 | ||||||
84,200 | Tessera Technologies, Inc. | 1,659,582 | ||||||
|
| |||||||
18,156,869 | ||||||||
|
| |||||||
| Software (0.5%): | |||||||
51,675 | Verint Systems, Inc.* | 2,218,925 | ||||||
|
| |||||||
| Specialty Retail (1.6%): | |||||||
38,750 | Group 1 Automotive, Inc. | 2,752,025 | ||||||
68,400 | Rent-A-Center, Inc. | 2,280,456 | ||||||
133,625 | Select Comfort Corp.* | 2,818,151 | ||||||
|
| |||||||
7,850,632 | ||||||||
|
| |||||||
| Textiles, Apparel & Luxury Goods (2.4%): | |||||||
142,825 | Crocs, Inc.* | 2,273,774 | ||||||
68,750 | Deckers Outdoor Corp.* | 5,806,625 | ||||||
98,725 | Skechers U.S.A., Inc., Class A* | 3,270,759 | ||||||
|
| |||||||
11,351,158 | ||||||||
|
| |||||||
| Thrifts & Mortgage Finance (2.4%): | |||||||
212,403 | Flushing Financial Corp. | 4,396,742 | ||||||
249,900 | Radian Group, Inc.^ | 3,528,588 |
Continued
5
AZL Federated Clover Small Value Fund
Schedule of Portfolio Investments
December 31, 2013
Shares | Fair Value | |||||||
| Common Stocks, continued | |||||||
| Thrifts & Mortgage Finance, continued | |||||||
46,325 | WSFS Financial Corp. | $ | 3,591,577 | |||||
|
| |||||||
11,516,907 | ||||||||
|
| |||||||
| Trading Companies & Distributors (1.0%): | |||||||
61,125 | United Rentals, Inc.* | 4,764,693 | ||||||
|
| |||||||
| Total Common Stocks (Cost $396,276,849) | 468,542,565 | ||||||
|
| |||||||
Contracts, Shares, Notional Amount or Principal Amount | Fair Value | |||||||
| Securities Held as Collateral for Securities on Loan (5.6%): |
| ||||||
$ | 27,036,134 | Allianz Variable Insurance Products Securities Lending Collateral Trust(a) | 27,036,134 | |||||
|
| |||||||
| Total Securities Held as Collateral for Securities on Loan | 27,036,134 | ||||||
|
|
Contracts, Shares, Notional Amount or Principal Amount | Fair Value | |||||||
| Unaffiliated Investment Company (2.6%): |
| ||||||
$ | 12,386,483 | Dreyfus Treasury Prime Cash Management Fund, Institutional Shares, 0.00%(b) | $ | 12,386,483 | ||||
|
| |||||||
| Total Unaffiliated Investment Company (Cost $12,386,483) | 12,386,483 | ||||||
|
| |||||||
| Total Investment Securities (Cost $435,699,466)(c) — 105.4% | 507,965,182 | ||||||
| Net other assets (liabilities) — (5.4)% | (26,076,534 | ) | |||||
|
| |||||||
| Net Assets — 100.0% | $ | 481,888,648 | |||||
|
|
Percentages indicated are based on net assets as of December 31, 2013.
* | Non-income producing security. |
^ | This security or a partial position of this security was on loan as of December 31, 2013. The total value of securities on loan as of December 31, 2013, was $25,797,458. |
(a) | Purchased with cash collateral held from securities lending. The value of the collateral could include collateral held for securities that were sold on or before December 31, 2013. |
(b) | The rate represents the effective yield at December 31, 2013. |
(c) | See Federal Tax Information listed in the Notes to the Financial Statements. |
See accompanying notes to the financial statements.
6
AZL Federated Clover Small Value Fund
Statement of Assets and Liabilities
December 31, 2013
Assets: | |||||
Investment securities, at cost | $ | 435,699,466 | |||
|
| ||||
Investment securities, at value* | $ | 507,965,182 | |||
Interest and dividends receivable | 1,097,363 | ||||
Receivable for capital shares issued | 6,051 | ||||
Receivable for investments sold | 954,166 | ||||
|
| ||||
Total Assets | 510,022,762 | ||||
|
| ||||
Liabilities: | |||||
Payable for capital shares redeemed | 479,970 | ||||
Payable for collateral received on loaned securities | 27,036,134 | ||||
Manager fees payable | 300,899 | ||||
Administration fees payable | 19,327 | ||||
Distribution fees payable | 100,300 | ||||
Custodian fees payable | 103,001 | ||||
Administrative and compliance services fees payable | 2,522 | ||||
Trustee fees payable | 19 | ||||
Other accrued liabilities | 91,942 | ||||
|
| ||||
Total Liabilities | 28,134,114 | ||||
|
| ||||
Net Assets | $ | 481,888,648 | |||
|
| ||||
Net Assets Consist of: | |||||
Capital | $ | 354,182,754 | |||
Accumulated net investment income/(loss) | 3,958,416 | ||||
Accumulated net realized gains/(losses) from investment transactions | 51,481,762 | ||||
Net unrealized appreciation/(depreciation) on investments | 72,265,716 | ||||
|
| ||||
Net Assets | $ | 481,888,648 | |||
|
| ||||
Shares of beneficial interest (unlimited number of shares authorized, no par value) | 20,363,244 | ||||
Net Asset Value (offering and redemption price per share) | $ | 23.66 | |||
|
|
* | Includes securities on loan of $25,797,458. |
For the Year Ended December 31, 2013
Investment Income: | |||||
Dividends | $ | 6,711,998 | |||
Interest | 39,549 | ||||
Income from securities lending | 358,535 | ||||
Foreign withholding tax | (1,693 | ) | |||
|
| ||||
Total Investment Income | 7,108,389 | ||||
|
| ||||
Expenses: | |||||
Manager fees | 2,344,434 | ||||
Administration fees | 95,936 | ||||
Distribution fees | 781,478 | ||||
Custodian fees | 64,417 | ||||
Administrative and compliance services fees | 4,879 | ||||
Trustee fees | 11,666 | ||||
Professional fees | 27,973 | ||||
Shareholder reports | 46,417 | ||||
Other expenses | 7,785 | ||||
|
| ||||
Total expenses before reductions | 3,384,985 | ||||
Less expenses paid indirectly | (235,411 | ) | |||
|
| ||||
Net expenses | 3,149,574 | ||||
|
| ||||
Net Investment Income/(Loss) | 3,958,815 | ||||
|
| ||||
Realized and Unrealized Gains/(Losses) on Investments: | |||||
Net realized gains/(losses) on securities transactions | 54,010,895 | ||||
Change in net unrealized appreciation/depreciation on investments | 29,950,075 | ||||
|
| ||||
Net Realized/Unrealized Gains/(Losses) on Investments | 83,960,970 | ||||
|
| ||||
Change in Net Assets Resulting From Operations | $ | 87,919,785 | |||
|
|
See accompanying notes to the financial statements.
7
Statements of Changes in Net Assets
AZL Federated Clover Small Value Fund | ||||||||||
For the Year Ended December 31, 2013 | For the Year Ended December 31, 2012 | |||||||||
Change in Net Assets: | ||||||||||
Operations: | ||||||||||
Net investment income/(loss) | $ | 3,958,815 | $ | 2,163,716 | ||||||
Net realized gains/(losses) on investment transactions | 54,010,895 | 49,092,905 | ||||||||
Change in unrealized appreciation/depreciation on investments | 29,950,075 | (24,071,883 | ) | |||||||
|
|
|
| |||||||
Change in net assets resulting from operations | 87,919,785 | 27,184,738 | ||||||||
|
|
|
| |||||||
Dividends to Shareholders: | ||||||||||
From net investment income | (2,163,714 | ) | (1,295,502 | ) | ||||||
From net realized gains | (1,287,134 | ) | — | |||||||
|
|
|
| |||||||
Change in net assets resulting from dividends to shareholders | (3,450,848 | ) | (1,295,502 | ) | ||||||
|
|
|
| |||||||
Capital Transactions: | ||||||||||
Proceeds from shares issued | 17,347,315 | 59,281,549 | ||||||||
Proceeds from shares issued in merger | 164,648,332 | — | ||||||||
Proceeds from dividends reinvested | 3,450,848 | 1,295,502 | ||||||||
Value of shares redeemed | (49,757,745 | ) | (23,754,974 | ) | ||||||
|
|
|
| |||||||
Change in net assets resulting from capital transactions | 135,688,750 | 36,822,077 | ||||||||
|
|
|
| |||||||
Change in net assets | 220,157,687 | 62,711,313 | ||||||||
Net Assets: | ||||||||||
Beginning of period | 261,730,961 | 199,019,648 | ||||||||
|
|
|
| |||||||
End of period | $ | 481,888,648 | $ | 261,730,961 | ||||||
|
|
|
| |||||||
Accumulated net investment income/(loss) | $ | 3,958,416 | $ | 2,163,709 | ||||||
|
|
|
| |||||||
Share Transactions: | ||||||||||
Shares issued | 826,337 | 3,280,233 | ||||||||
Shares issued in merger | 7,290,861 | — | ||||||||
Dividends reinvested | 161,936 | 72,173 | ||||||||
Shares redeemed | (2,346,338 | ) | (1,393,283 | ) | ||||||
|
|
|
| |||||||
Change in shares | 5,932,796 | 1,959,123 | ||||||||
|
|
|
|
See accompanying notes to the financial statements.
8
AZL Federated Clover Small Value Fund
(Selected data for a share of beneficial interest outstanding throughout the periods indicated)
Year Ended December 31, | |||||||||||||||||||||||||
2013 | 2012 | 2011 | 2010 | 2009 | |||||||||||||||||||||
Net Asset Value, Beginning of Period | $ | 18.14 | $ | 15.96 | $ | 16.72 | $ | 13.27 | $ | 10.31 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Investment Activities: | |||||||||||||||||||||||||
Net Investment Income/(Loss) | 0.20 | 0.15 | 0.11 | 0.09 | 0.15 | ||||||||||||||||||||
Net Realized and Unrealized Gains/(Losses) on Investments | 5.58 | 2.13 | (0.77 | ) | 3.48 | 3.01 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Total from Investment Activities | 5.78 | 2.28 | (0.66 | ) | 3.57 | 3.16 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Dividends to Shareholders From: | |||||||||||||||||||||||||
Net Investment Income | (0.16 | ) | (0.10 | ) | (0.10 | ) | (0.12 | ) | (0.20 | ) | |||||||||||||||
Net Realized Gains | (0.10 | ) | — | — | — | — | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Total Dividends | (0.26 | ) | (0.10 | ) | (0.10 | ) | (0.12 | ) | (0.20 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Net Asset Value, End of Period | $ | 23.66 | $ | 18.14 | $ | 15.96 | $ | 16.72 | $ | 13.27 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Total Return(a) | 32.00 | % | 14.32 | % | (3.92 | )% | 27.11 | % | 30.61 | % | |||||||||||||||
Ratios to Average Net Assets/Supplemental Data: | |||||||||||||||||||||||||
Net Assets, End of Period (000’s) | $ | 481,889 | $ | 261,731 | $ | 199,020 | $ | 234,305 | $ | 187,475 | |||||||||||||||
Net Investment Income/(Loss) | 1.27 | % | 0.96 | % | 0.60 | % | 0.59 | % | 0.96 | % | |||||||||||||||
Expenses Before Reductions(b) | 1.08 | % | 1.07 | % | 1.09 | % | 1.08 | % | 1.12 | % | |||||||||||||||
Expenses Net of Reductions | 1.01 | % | 0.99 | % | 1.09 | % | 1.08 | % | 1.12 | % | |||||||||||||||
Expenses Net of Reductions, Excluding Expenses Paid Indirectly(c) | 1.08 | % | 1.07 | % | 1.09 | % | 1.08 | % | 1.12 | % | |||||||||||||||
Portfolio Turnover Rate | 97 | %(d) | 156 | %(e) | 15 | % | 23 | % | 10 | % |
(a) | The returns include reinvested dividends and fund level expenses, but exclude insurance contract charges. If these charges were included, the returns would have been lower. |
(b) | Excludes fee reductions. If such fee reductions had not occurred, the ratios would have been as indicated. |
(c) | Expenses net of reductions excludes expenses paid indirectly, pursuant to a “commission recapture” program, under which brokers remit a portion of the brokerage commission which is used to pay certain Fund expenses. See note 2 in the Notes to the Financial Statements. |
(d) | Cost of purchases and proceeds from sales of portfolio securities incurred to realign the Fund’s portfolio after the fund merger are excluded from the portfolio turnover rate. If such amounts had not been excluded, the portfolio turnover rate would have been 140%. |
(e) | Effective February 24, 2012, the Subadviser changed from Franklin Advisory Services LLC to Federated Global Investment Management Corp. Costs of purchase and proceeds from sales of portfolio securities associated with the change in the Subadviser contributed to a higher portfolio turnover rate for the year ended December 31, 2012 as compared to prior years. |
See accompanying notes to the financial statements.
9
AZL Federated Clover Small Value Fund
Notes to the Financial Statements
December 31, 2013
1. Organization
The Allianz Variable Insurance Products Trust (the “Trust”) was organized as a Delaware statutory trust on July 13, 1999. The Trust is a diversified open-end management investment company registered under the Investment Company Act of 1940. The Trust consists of 29 separate investment portfolios (collectively, the “Funds”), of which one is included in this report, the AZL Federated Clover Small Value Fund (the “Fund”), and 28 are presented in separate reports.
The Trust is authorized to issue an unlimited number of shares of the Fund without par value. Shares of the Fund are available through the variable annuity contracts and variable life insurance policies offered through the separate accounts of participating insurance companies.
Under the Trust’s organizational documents, its officers and trustees are indemnified against certain liabilities arising out of the performance of their duties to the Fund. In addition, in the normal course of business, the Fund may enter into contracts with its vendors and others that provide for general indemnifications. The Fund’s maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Fund. However, based on experience, the Fund expects the risk of loss to be remote.
2. Significant Accounting Policies
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. The policies conform with U.S. generally accepted accounting principles (“U.S. GAAP”). The preparation of financial statements requires management to make certain 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 increases and decreases in net assets from operations during the reporting period. Actual results could differ from those estimates.
Security Valuation
The Fund records its investments at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between willing market participants at the measurement date. The valuation techniques used to determine fair value are further described in Note 4 below.
Investment Transactions and Investment Income
Investment transactions are recorded not later than on the business day following trade date. However, for financial reporting purposes, investment transactions are accounted for on trade date. Net realized gains and losses on investments sold and on foreign currency transactions are recorded on the basis of identified cost. Interest income is recorded on the accrual basis and includes, where applicable, the amortization of premiums or accretion of discounts. Dividend income is recorded on the ex-dividend date except in the case of foreign securities, in which case dividends are recorded as soon as such information becomes available.
Real Estate Investment Trusts
The Fund may own shares of real estate investment trusts (“REITs”) which report information on the source of their distributions annually. Certain distributions received from REITs during the year, which are known to be a return of capital, are recorded as a reduction to the cost of the individual REIT.
Foreign Currency Translation
The accounting records of the Fund are maintained in U.S. dollars. Foreign currency amounts are translated into U.S. dollars at the current rate of exchange to determine the fair value of investments, assets and liabilities. Purchases and sales of securities, and income and expenses are translated at the prevailing rate of exchange on the respective dates of such transactions. The Fund does not isolate that portion of the results of operations resulting from changes in foreign exchange rates on investments from fluctuations arising from changes in market prices of securities held. Such fluctuations are included in the net realized and unrealized gain or loss on investments and foreign currencies. Income received by the Fund from sources within foreign countries may be subject to withholding and other income or similar taxes imposed by such countries. The Funds accrue such taxes, as applicable, based on their current interpretation of tax rules in the foreign markets in which they invest.
Dividends to Shareholders
Dividends to shareholders are recorded on the ex-dividend date. The Fund distributes its dividends from net investment income and net realized capital gains, if any, on an annual basis. The amount of dividends from net investment income and from net realized gains is determined in accordance with federal income tax regulations, which may differ from U.S. GAAP. These “book/tax” differences are either temporary or permanent in nature. To the extent these differences are permanent in nature (e.g., return of capital, net operating loss, reclassification of certain market discounts, gain/loss, paydowns, and distributions), such amounts are reclassified within the composition of net assets based on their federal tax-basis treatment; temporary differences (e.g., wash sales and post October losses) do not require reclassification. Dividends to shareholders that exceed net investment income and net realized gains for tax purposes are reported as distributions of capital.
Expense Allocation
Expenses directly attributable to the Fund are charged directly to the Fund, while expenses attributable to more than one Fund are allocated among the respective Funds based upon relative net assets or some other reasonable method. Expenses which are attributable to more than one Trust are allocated across the Allianz Variable Insurance Products and Allianz Variable Insurance Products Fund of Funds Trusts based upon relative net assets or another reasonable basis. Allianz Investment Management LLC (the “Manager”), serves as the investment manager for the Trust and the Allianz Variable Insurance Products Fund of Funds Trust.
10
AZL Federated Clover Small Value Fund
Notes to the Financial Statements
December 31, 2013
Securities Lending
To generate additional income, the Fund may lend up to 33 1/3% of its assets pursuant to agreements requiring that the loan be continuously secured by any combination of cash, U.S. government or U.S. government agency securities, equal initially to at least 102% of the fair value plus accrued interest on the securities loaned (105% for foreign securities). The borrower of securities is at all times required to post collateral to the Fund in an amount equal to 100% of the fair value of the securities loaned based on the previous day’s fair value of the securities loaned, marked-to-market daily. Any collateral shortfalls are adjusted the next business day. The Fund bears all of the gains and losses on such investments. The Fund receives payments from borrowers equivalent to the dividends and interest that would have been earned on securities lent while simultaneously seeking to earn income on the investment of cash collateral received. In extremely low interest rate environments, the broker rebate fee may exceed the interest earned or the cash collateral which would result in a loss to the Fund. The investment of cash collateral deposited by the borrower is subject to inherent market risks such as interest rate risk, credit risk, liquidity risk, and other risks that are present in the market, and as such, the value of these investments may not be sufficient, when liquidated, to repay the borrower when the loaned security is returned. There may be risks of delay in recovery of the securities or even loss of rights in the collateral should the borrower of the securities fail financially. However, loans will be made only to borrowers, such as broker-dealers, banks or institutional borrowers of securities, deemed by the Manager to be of good standing and credit worthy and when in its judgment, the consideration which can be earned currently from such securities loans justifies the attendant risks. Loans are subject to termination by the Trust or the borrower at any time, and are, therefore, not considered to be illiquid investments. Securities on loan at December 31, 2013 are presented on the Fund’s Schedule of Portfolio Investments. The average outstanding amount of securities on loan was $34.4 million for the year ended December 31, 2013.
Cash collateral received in connection with securities lending is invested in the Allianz Variable Insurance Products Securities Lending Collateral Trust (the “Securities Lending Collateral Trust”) managed by The Dreyfus Corporation, an affiliate of the Custodian and Securities Lending Agent. The Securities Lending Collateral Trust invests in short-term investments that have a remaining maturity of 397 days or less as calculated in accordance with Rule 2a-7 under the 1940 Act. The Fund paid securities lending fees of $49,245 during the year ended December 31, 2013. These fees have been netted against “Income from securities lending” on the Statement of Operations.
Commission Recapture
Certain Funds of the Trust participate in a commission recapture program. The Fund will utilize the recaptured commissions to pay for, in whole or part, certain expenses of the Fund, excluding investment advisory fees. Any amounts received by the Fund, if applicable, are disclosed as “Expenses paid indirectly” on the Statement of Operations.
Effective January 6, 2014, the Manager, on behalf of the Trust, requested the Fund cease participation in the program until further notice.
3. Related Party Transactions
The Manager provides investment advisory and management services for the Fund. The Manager has retained an independent money management organization (the “Subadviser”), to make investment decisions on behalf of the Fund. Pursuant to a portfolio management agreement with Federated Global Investment Management Corp. (“Federated”), Federated provides investment advisory services as the Subadviser for the Fund subject to the general supervision of the Trustees and the Manager. The Manager is entitled to a fee, computed daily and paid monthly, based on the average daily net assets of the Fund. Expenses incurred by the Fund for investment advisory and management services are reflected on the Statement of Operations as “Manager fees.” For its services, the Subadviser is entitled to a fee payable by the Manager. The Manager has contractually agreed to waive fees and reimburse the Fund to limit the annual expenses, excluding interest expense (e.g., cash overdraft fees), taxes, brokerage commissions, other expenditures that are capitalized in accordance with U.S. GAAP and other extraordinary expenses not incurred in the ordinary course of the Fund’s business, based on the daily net assets of the Fund, through April 30, 2015.
For the year ended December 31, 2013, the annual rate due to the Manager and the annual expense limit were as follows:
Annual Rate | Annual Expense Limit | |||||||||
AZL Federated Clover Small Value Fund | 0.75 | % | 1.35 | % |
Any amounts contractually waived or reimbursed by the Manager in a particular fiscal year will be subject to repayment by the Fund to the Manager to the extent that from time to time through the next three fiscal years the repayment will not cause the Fund’s expenses to exceed the lesser of the stated limit at the time of the waiver or the current stated limit. Any amounts recouped by the Manager during the year are reflected on the Statement of Operations as “Recoupment of prior expenses reimbursed by the Manager.” At December 31, 2013, there were no remaining contractual reimbursements that are subject to repayment by the Fund in subsequent years.
In addition, the Manager may voluntarily waive or reimburse additional fees in order to maintain more competitive expense ratios. Any voluntary waivers or reimbursements are not subject to repayment in subsequent years. Information on the total amount waived/reimbursed by the Manager or repaid to the Manager by the Fund during the year can be found on the Statement of Operations. During the year ended December 31, 2013, there were no voluntary waivers.
Pursuant to separate agreements between the Funds and the Manager, the Manager provides a Chief Compliance Officer (“CCO”) and certain compliance oversight and regulatory filing services to the Trust. Under these agreements the Manager is entitled to an amount equal to a portion of the compensation and certain other expenses related to the individuals performing the CCO and compliance oversight services, as well as $75 per hour for time incurred in connection with the preparation and filing of certain documents with the Securities and Exchange Commission. The fees are paid to the Manager on a quarterly basis. The total expenses incurred by the Fund for these services are reflected on the Statement of Operations as “Administrative and compliance services fees.”
Citi Fund Services Ohio, Inc. (“Citi” or the “Administrator”), a wholly owned subsidiary of Citigroup, Inc., with which an officer of the Trust is affiliated, serves as the Trust’s administrator, transfer agent, and fund accountant, and assists the Trust in all aspects of its administration and operation. The Administrator is entitled to a Trust-wide asset-based fee, which is based on the following schedule: 0.05% of daily average net assets on the first $4 billion, 0.04% of daily average net assets on the next $2 billion, 0.02% of daily average net assets on the next $2 billion and 0.01% of daily average net assets over $8 billion. The overall Trust-wide fees are accrued daily and paid monthly and are subject to a minimum annual fee. In addition, the Administrator is entitled to annual account fees related to the transfer agency system, an annual fee for each additional class of shares of any Fund, certain annual fees in supporting fair value services, and a Trust-wide annual fee for providing infrastructure and support in implementing the written policies and procedures comprising the Fund’s compliance program. Fees payable to the Administrator are subject to certain reductions associated with services provided to new funds. The Administrator is also reimbursed for certain expenses incurred. The total expenses incurred by the Fund for these services are reflected on the Statement of Operations as “Administration fees.”
11
AZL Federated Clover Small Value Fund
Notes to the Financial Statements
December 31, 2013
Allianz Life Financial Services, LLC (“ALFS”), an affiliate of the Manager, serves as distributor of the Fund and receives 12b-1 fees directly from the Fund, plus a Trust-wide annual fee of $42,500, paid by the Manager from its profits and not by the Trust, for recordkeeping and reporting services.
The Trust has adopted a distribution and service plan in conformance with Rule 12b-1 of the 1940 Act. Pursuant to this plan, the Fund is authorized to pay certain fees for the sale and distribution of its shares and services provided to its shareholders at an annual rate not to exceed 0.25% of the Fund’s average daily net assets. These fees are reflected on the Statement of Operations as “Distribution fees.”
In addition, certain legal fees and expenses are paid to a law firm, Dorsey & Whitney LLP, of which the Secretary of the Fund is a partner. During the year ended December 31, 2013, $15,581 was paid from the Fund relating to these fees and expenses.
Certain Officers and Trustees of the Trust are affiliated with the Manager or the Administrator. Such Officers (except for the Trust’s CCO as noted above) and Trustees receive no compensation from the Trust for serving in their respective roles. For their service to the Trust and to the Allianz Variable Insurance Products Fund of Funds Trust, each non-interested Trustee receives a $139,000 annual Board retainer. In addition, the Trustees are reimbursed for certain expenses associated with attending Board meetings. Compensation to the Trustees is allocated between the Trust and the Allianz Variable Insurance Products Fund of Funds Trust in proportion to the assets under management of each trust. During the year ended December 31, 2013, actual Trustee compensation was $973,000 in total for both trusts.
At a meeting of the Board of Trustees on December 4, 2013, the Trustees approved a fee increase to the Officers and Trustees who are paid a fee for their services to the Trust and to the Allianz Variable Insurance Products Fund of Funds Trust. Effective January 1, 2014, each non-interested Trustee will receive a $163,000 annual retainer.
4. Investment Valuation Summary
The valuation techniques employed by the Fund, as described below, maximize the use of observable inputs and minimize the use of unobservable inputs in determining fair value. The inputs used for valuing the Fund’s investments are summarized in the three broad levels listed below:
— | Level 1 — quoted prices in active markets for identical assets |
— | Level 2 — other significant observable inputs (including quoted prices for similar securities, interest rates, prepayments speeds, credit risk, etc.) |
— | Level 3 — significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of investments) |
Changes in valuation techniques may result in transfers in or out of an assigned level within the disclosure hierarchy. The Fund determines transfers between fair value hierarchy levels at the reporting period end. The inputs or methodology used for valuing investments is not necessarily an indication of the risk associated with investing in those investments.
Security prices are generally provided by an independent third party pricing service approved by the Trust’s Board of Trustees (“Trustees”) as of the close of the New York Stock Exchange (“NYSE”) (generally 4:00 pm Eastern Time). Equity securities are valued at the last quoted sale price or, if there is no sale, the last quoted bid price is used for long securities and the last quoted ask price is used for securities sold short. Securities listed on NASDAQ Stock Market, Inc. (“NASDAQ”) are valued at the official closing price as reported by NASDAQ. In each of these situations, valuations are typically categorized as a Level 1 in the fair value hierarchy. Investments in open-end investment companies are valued at their respective net asset value as reported by such companies and are typically categorized as Level 1 in the fair value hierarchy.
Debt and other fixed income securities are generally valued at an evaluated bid price provided by an independent pricing source approved by the Trustees. To value debt securities, pricing services may use various pricing techniques which take into account appropriate factors such as market activity, yield, quality, coupon rate, maturity, type of issue, trading characteristics, call features, credit ratings and other data, as well as broker quotes. Short term securities of sufficient credit quality with sixty days or less remaining until maturity may be valued at amortized cost, which approximates fair value. In each of these situations, valuations are typically categorized as Level 2 in the fair value hierarchy.
Other assets and securities for which market quotations are not readily available, or are deemed unreliable are valued at fair value as determined in good faith by the Trustees or persons acting on the behalf of the Trustees. Fair value pricing may be used for significant events such as securities whose trading has been suspended, whose price has become stale or for which there is no currently available price at the close of the NYSE. Depending on the source and relative significance of valuation inputs, these instruments may be classified as Level 2 or Level 3 in the fair value hierarchy. The Fund utilizes a pricing service to assist in determining the fair value of securities when certain significant events occur that may affect the value of foreign securities.
In accordance with procedures adopted by the Trustees, fair value pricing may be used if events materially affecting the value of foreign securities occur between the time when the exchange on which they are traded closes and the time when the Fund’s net asset value is calculated. Management identifies possible fluctuation in international securities by monitoring the increase or decrease in the value of a designated benchmark index. In the event of an increase or decrease greater than predetermined levels, the Fund may use a systematic valuation model provided by an independent third party to fair value its international equity securities which are then typically categorized as Level 2 in the fair value hierarchy.
For the year ended December 31, 2013, there were no Level 3 investments for which significant unobservable inputs were used to determine fair value.
The following is a summary of the valuation inputs used as of December 31, 2013 in valuing the Fund’s investments based upon the three levels defined above:
Investment Securities: | Level 1 | Level 2 | Total | ||||||||||||
Common Stocks+ | $ | 468,542,565 | $ | — | $ | 468,542,565 | |||||||||
Securities Held as Collateral for Securities on Loan | — | 27,036,134 | 27,036,134 | ||||||||||||
Unaffiliated Investment Company | 12,386,483 | — | 12,386,483 | ||||||||||||
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| ||||||||||
Total Investment Securities | $ | 480,929,048 | $ | 27,036,134 | $ | 507,965,182 | |||||||||
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+ | For detailed industry descriptions, see the accompanying Schedule of Portfolio Investments. |
12
AZL Federated Clover Small Value Fund
Notes to the Financial Statements
December 31, 2013
5. Security Purchases and Sales
For the year ended December 31, 2013, cost of purchases and proceeds from sales of securities (excluding securities maturing less than one year from acquisition) were as follows:
Purchases | Sales | |||||||||
AZL Federated Clover Small Value Fund | $ | 400,870,671 | * | $ | 300,165,506 | * |
* | Costs of purchases and proceeds from sales of portfolio securities incurred to realign the Fund’s portfolio after a fund merger are excluded from these amounts. The costs of purchases and proceeds from sales amounts excluded were $531,733,449 and $432,467,109, respectively. |
6. Investment Risks
Foreign Securities and Currencies Risk: Investments in securities of foreign issuers carry certain risks not ordinarily associated with investments in securities of domestic issuers. Such risks include future political and economic developments, and the possible imposition of exchange controls or other foreign governmental laws and restrictions. In addition, with respect to certain countries, there is the possibility of expropriation of assets, confiscatory taxation, political or social instability or diplomatic developments which could adversely affect investments in those securities.
7. Federal Tax Information
It is the Fund’s policy to continue to comply with the requirements of the Internal Revenue Code under Subchapter M, applicable to regulated investment companies, and to distribute all of its taxable income, including any net realized gains on investments, to its shareholders. Therefore, no provision is made for federal income taxes.
Management of the Fund has reviewed tax positions taken in tax years that remain subject to examination by all major tax jurisdictions, including federal (i.e., the last four tax year ends and the interim tax period since then, as applicable). Management believes that there is no tax liability resulting from unrecognized tax benefits related to uncertain tax positions taken.
Cost for federal income tax purposes at December 31, 2013 is $436,678,610. The gross unrealized appreciation/ (depreciation) on a tax basis is as follows:
Unrealized appreciation | $ | 76,667,520 | |||
Unrealized depreciation | (5,380,948 | ) | |||
|
| ||||
Net unrealized appreciation/(depreciation) | $ | 71,286,572 | |||
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|
The tax character of dividends paid to shareholders during the year ended December 31, 2013 were as follows:
Ordinary Income | Net Long-Term Capital Gains | Total Distributions(a) | |||||||||||||
AZL Federated Clover Small Value Fund | $ | 2,163,714 | $ | 1,287,134 | $ | 3,450,848 |
(a) | Total distributions paid may differ from the Statements of Changes in Net Assets because dividends are recognized when actually paid for tax purposes. |
The tax character of dividends paid to shareholders during the year ended December 31, 2012 was as follows:
Ordinary Income | Net Long-Term | Total Distributions(a) | |||||||||||||
AZL Federated Clover Small Value Fund | $ | 1,935,597 | $ | 2,833,041 | $ | 4,768,638 |
(a) | Total distributions paid may differ from the Statements of Changes in Net Assets because dividends are recognized when actually paid for tax purposes. |
As of December 31, 2013, the components of accumulated earnings on a tax basis were as follows:
Undistributed Ordinary Income | Undistributed Long-Term Capital Gains | Accumulated Capital and Other Losses | Unrealized Appreciation/ (Depreciation)(a) | Total Accumulated Earnings/ (Deficit) | |||||||||||||||||||||
AZL Federated Clover Small Value Fund | $ | 12,212,537 | $ | 44,206,785 | $ | — | $ | 71,286,572 | $ | 127,705,894 |
(a) | The difference between book-basis and tax-basis unrealized appreciation/(depreciation) is attributable primarily to tax deferral of losses on wash sales. |
8. Acquisition of Funds
On November 15, 2013, the Fund acquired all of the net assets of the AZL Columbia Small Cap Value Fund, an open-end investment company, pursuant to a plan of reorganization approved by AZL Columbia Small Cap Value Fund shareholders on November 13, 2013. The purpose of the transaction was to combine two funds managed by the Manager with comparable investment objectives and strategies. The acquisition was accomplished by a tax-free exchange of 7,290,861 shares of the Fund, valued at $164,648,332, for 13,890,997 shares of the AZL Columbia Small Cap Value Fund outstanding on November 15, 2013.
13
AZL Federated Clover Small Value Fund
Notes to the Financial Statements
December 31, 2013
The investment portfolio of the AZL Columbia Small Cap Value Fund, with a fair value of $164,695,001 and identified cost of $129,598,076 at November 15, 2013, was the principal asset acquired by the Fund. For financial reporting purposes, assets received and shares issued by the Fund were recorded at fair value; however, the cost basis of the investments received from the AZL Columbia Small Cap Value Fund was carried forward to align ongoing reporting of the Fund’s realized and unrealized gains and losses with amounts distributable to shareholders for tax purposes. Immediately prior to the merger, the net assets of the Fund were $307,055,448. Fees and expenses incurred by the AZL Columbia Small Cap Value Fund and the Fund directly in connection with the plan of reorganization were borne by the Manager and the Funds.
Assuming the acquisition had been completed on January 1, 2013, the beginning of the annual reporting period of the Fund, the Fund’s pro forma results of operations for the year ended December 31, 2013, are as follows:
Net investment income/(loss) | $ | 4,413,950 | |||
Net realized/unrealized gains/losses) | 121,321,372 | ||||
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| ||||
Change in net assets resulting from operations | $ | 125,735,322 | |||
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Because the combined investment portfolios have been managed as a single integrated portfolio since the acquisition was completed, it is not practicable to separate the amounts of revenue and earnings of the AZL Columbia Small Cap Value Fund that have been included in the Fund’s statement of operations since November 15, 2013.
9. Subsequent Events
Management has evaluated events and transactions subsequent to period end through the date the financial statements were issued, for purposes of recognition or disclosure in these financial statements and there are no subsequent events to report.
14
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Shareholders and Board of Trustees of
Allianz Variable Insurance Products Trust:
We have audited the accompanying statement of assets and liabilities of AZL Federated Clover Small Value Fund (the “Fund”) of the Allianz Variable Insurance Products Trust, including the schedule of portfolio investments, as of December 31, 2013, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the years in the two-year period then ended, and the financial highlights for each of the years in the five-year period then ended. These financial statements and financial highlights are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of December 31, 2013, by correspondence with the custodian. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of the Fund as of December 31, 2013, the results of its operations for the year then ended, the changes in its net assets for each of the years in the two-year period then ended, and the financial highlights for each of the years in the five-year period then ended, in conformity with U.S. generally accepted accounting principles.
/s/KPMG LLP
Columbus, Ohio
February 25, 2014
15
Special Meeting of Shareholders (Unaudited)
November 13, 2013
We, the undersigned, as record holder of 11,782,985.949 shares representing the AZL Columbia Small Cap Value Fund (the “Fund”), an outstanding series of the Allianz Variable Insurance Products Trust (the “VIP Trust”), hereby vote the votes entitled to be cast by such shares (one vote for each dollar of each share’s net asset value) for the Proposal for the AZL Fund as follows:
The manner in which the votes were cast at the Special Meeting for the Fund with respect to the Proposal was as follows:
— | To approve an Agreement and Plan of Reorganization (the “Plan”) among the AZL Columbia Small Cap Value Fund, which is a series of the VIP Trust, and the AZL Federated Clover Small Value Fund (the “Acquiring Fund”), which is another series of the VIP Trust; |
Under the Plan, the Acquiring Fund would acquire all of the assets and assume all of the liabilities of the corresponding Fund in exchange for shares of the Acquiring Fund, which would be distributed proportionately to the shareholders of the Fund in complete liquidation of the Fund, and the assumption of the Fund’s liabilities.
FUND | FOR | AGAINST | ABSTAIN | ||||||||||||||
AZL Columbia Small Cap Value Fund | Votes(1) | 10,290,262.534 | 384,534.645 | 1,108,188.770 | |||||||||||||
% of votes entitled to be cast | 87.332% | 3.263% | 9.405% | ||||||||||||||
Shares(2) | 1,131,558.807 | 41,927.179 | 121,646.998 | ||||||||||||||
% of shares outstanding | 9.603% | 0.356% | 1.032% | ||||||||||||||
AZL Columbia Small Cap Value Fund (NAV)(8/23/2013 -$13.35) | Votes(1) | 137,375,004.829 | 5,133,537.511 | 14,794,320.080 | |||||||||||||
% of votes entitled to be cast | 87.332% | 3.263% | 9.405% | ||||||||||||||
Shares(2) | 15,063,310.073 | 559,727.840 | 1,623,987.423 | ||||||||||||||
% of shares outstanding | 9.603% | 0.356% | 1.032% |
(1) | Echo Voting |
(2) | Non-Echo Voting |
16
Other Federal Income Tax Information (Unaudited)
For the year ended December 31, 2013, 100.00% of the total ordinary income dividends paid by the Fund qualify for the corporate dividends received deduction available to corporate shareholders.
During the year ended December 31, 2013, the Fund declared net long-term capital gain distributions of $1,287,134.
17
A description of the policies and procedures that the Fund uses to determine how to vote proxies relating to portfolio securities is available, without charge, upon request, by visiting the Securities and Exchange Commission’s (“Commission”) website at www.sec.gov, or by calling 800-624-0197.
Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30th is available (i) without charge, upon request, by calling 800-624-0197; (ii) on the Allianz Variable Insurance Products Trust’s website at https://www.allianzlife.com; and (iii) on the Commission’s website at http://www.sec.gov.
The Fund files complete Schedules of Portfolio Holdings with the Commission for the first and third quarters of each fiscal year on Form N-Q. Schedules of Portfolio Holdings for the Fund in this report are available without charge on the Commission’s website at http://www.sec.gov, or may be reviewed and copied at the Commission’s Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 800-SEC-0330.
18
Approval of Investment Advisory and Subadvisory Agreements (Unaudited)
The Allianz Variable Insurance Products Trust (the “Trust”) is a manager-of-managers fund. That means that the Trust’s Manager (“Allianz Investment Management LLC”) is responsible for monitoring the various Subadvisers that have day-to-day responsibility for the decisions made for each of the Trust’s investment portfolios. The Trust’s Manager is responsible for determining, in the first instance, which investment advisers to consider recommending for selection as a Subadviser.
In reviewing the services provided by the Manager and the terms of the investment management agreement, the Board receives and reviews information related to the Manager’s experience and expertise in the variable insurance marketplace. Currently, the Funds are offered only through variable annuities and variable life insurance policies, and not in the retail fund market. In addition, the Board receives information regarding the Manager’s expertise with regard to portfolio diversification and asset allocation requirements within variable insurance products issued by Allianz Life Insurance Company of North America and its subsidiary, Allianz Life Insurance Company of New York. Currently, the Funds are offered only through Allianz Life and Allianz of New York variable products.
The Trust’s Manager has adopted policies and procedures to assist it in the process of analyzing each potential Subadviser with expertise in particular asset classes for purposes of making the recommendation that a specific investment adviser be selected. The Trust’s Board reviews and considers the information provided by the Manager in deciding which investment advisers to select. After an investment adviser becomes a Subadviser, a similarly rigorous process is instituted by the Manager to monitor the investment performance and other responsibilities of the Subadviser. The Manager reports to the Trust’s Board on its analysis at the regular meetings of the Board, which are held at least quarterly. Where warranted, the Manager will add or remove a particular Subadviser from a “watch” list that it maintains. Watch list criteria include, for example: (a) Fund performance over various time periods; (b) Fund risk issues, such as changes in key personnel involved with Fund management, changes in investment philosophy or process, or “capacity” concerns; and (c) organizational risk issues, such as regulatory, compliance or legal concerns, or changes in the ownership of the Subadviser. The Manager may place a Fund on the watch list for other reasons, and if so, will explain its rationale to the Trustees. Funds which are on the watch list are subject to special scrutiny of the Manager and the Board of Trustees. Funds may be removed from such watch list, if for example, performance improves or regulatory matters are satisfactorily resolved. However, in some situations where Funds which have been on the watch list, the Manager has recommended the retention of a new Subadviser, and the Board of Trustees has subsequently approved new Subadvisory Agreements with such Subadvisers.
In assessing the Manager’s and Subadvisers’ (collectively, the “Advisory Organizations”), performance of their obligations, the Board considers whether there has occurred a circumstance or event that would constitute a reason for it to not renew an advisory contract. In this regard, the Board is mindful of the potential disruption of a Fund’s operations and various risks, uncertainties and other effects that could occur as a result of a decision to terminate or not renew a contract.
As required by the Investment Company Act of 1940 (“1940 Act”), the Trust’s Board has reviewed and approved the Trust’s Investment Management Agreement with the Manager (the “Advisory Agreement”) and portfolio management agreements (the “Subadvisory Agreements”) with the Subadvisers. The Board’s decision to approve these contracts reflects the exercise of its business judgment on whether to approve new arrangements and continue the existing arrangements. During its review of these contracts, the Board considers many factors, among the most material of which are: the Fund’s investment objectives and long term performance; the Advisory Organizations’ management philosophy, personnel, and processes, including their compliance history and the adequacy of their compliance processes; the preferences and expectations of Fund shareholders (and underlying contract owners) and their relative sophistication; the continuing state of competition in the mutual fund industry; and comparable fees in the mutual fund industry.
The Board also considers the compensation and benefits received by the Advisory Organizations. This includes fees received for services provided to the Fund by affiliated persons of the Advisory Organizations and research services received by the Advisory Organizations from brokers that execute Fund trades, as well as advisory fees. The Board considered the fact that: (1) the Manager and the Trust are parties to an Administrative Service Agreement, a Compliance Services Agreement, and a Chief Compliance Officer Agreement, under which the Manager is compensated by the Trust for performing certain administrative and compliance services including providing an employee of the Manager or one of its affiliates to act as the Trust’s Chief Compliance Officer; and (2) Allianz Life Financial Services, LLC, an affiliated person of the Manager, is a registered securities broker-dealer and receives (along with its affiliated persons) payments made by the Trust pursuant to Rule 12b-1.
The Board is aware that various courts have interpreted provisions of the 1940 Act and have indicated in their decisions that the following factors may be relevant to an adviser’s compensation: the nature and quality of the services provided by the adviser, including the performance of the fund; the adviser’s cost of providing the services; the extent to which the adviser may realize “economies of scale” as the fund grows larger; any indirect benefits that may accrue to the adviser and its affiliates as a result of the adviser’s relationship with the fund; performance and expenses of comparable funds; and the extent to which the independent Board members are fully informed about all facts bearing on the adviser’s service and fee. The Trust’s Board is aware of these factors and takes them into account in its review of the Trust’s advisory contracts.
The Board considered and weighed these circumstances in light of its experience in governing the Trust and working with the Advisory Organizations on matters relating to the Funds, and is assisted in its deliberations by the advice of legal counsel to the Independent Trustees. In this regard, the Board requests and receives a significant amount of information about the Funds and the Advisory Organizations. Some of this information is provided at each regular meeting of the Board; additional information is provided in connection with the particular meeting or meetings at which the Board’s formal review of an advisory contract occurs. In between regularly scheduled meetings, the Board may receive information on particular matters as the need arises. Thus, the Board’s evaluation of an advisory contract is informed by reports covering such matters as: an Advisory Organization’s investment philosophy, personnel, and processes; the Fund’s short- and long-term performance (in absolute terms as well as in relationship to its benchmark(s), certain competitor or “peer group” funds and similar funds managed by the particular Subadviser), and comments on the reasons for performance; the Fund’s expenses (including the advisory fee itself and the overall expense structure of the Fund, both in absolute terms and relative to similar and/or competing funds, with due regard for contractual or voluntary expense limitations); the use and allocation of brokerage commissions derived from trading the Fund’s portfolio securities; the nature and extent of the advisory and other services provided to the Fund by the Advisory Organizations and their affiliates; compliance and audit reports concerning the Funds and the companies that service them; and relevant developments in the mutual fund industry and how the Funds and/or Advisory Organizations are responding to them.
The Board also receives financial information about Advisory Organizations, including reports on the compensation and benefits the Advisory Organizations derive from their relationships with the Funds. These reports cover not only the fees under the advisory contracts, but also fees, if any, received for providing other services to the Funds. The reports also discuss any indirect or “fall out” benefits an Advisory Organization may derive from its relationship with the Funds.
The Advisory and Subadvisory Agreements (collectively, the “Agreements”) were most recently considered at Board of Trustees meetings held in the fall of 2013. Information relevant to the approval of such Agreements was considered at a telephonic Board of Trustees meeting on October 16, 2013, and at an “in person” Board of Trustees meeting held October 22, 2013. The Agreements were approved at the Board meeting of October 22, 2013. At such meeting the Board also approved an Expense Limitation Agreement between the Manager and the Trust for the period ending April 30, 2015. In connection with such meetings, the Trustees requested and evaluated extensive materials from the Manager, including performance and expense information for other investment companies with similar investment objectives derived from data compiled by an independent third party provider and other sources believed to be reliable by the Manager. Prior to voting, the Trustees reviewed the proposed approval/continuance of the Agreements with management and with experienced counsel who are independent of the Manager and received a memorandum from such counsel discussing the legal standards for their consideration of the proposed approvals/continuances. The independent (“disinterested”) Trustees also discussed the proposed approvals/continuances in a private session with such counsel at which no representatives of the Manager were present. In reaching their determinations relating to the approval and/or continuance of
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the Agreements, in respect of each Fund, the Trustees considered all factors they believed relevant. The Board based its decision to approve the Agreements on the totality of the circumstances and relevant factors, and with a view to past and future long-term considerations. Not all of the factors and considerations discussed above and below are necessarily relevant to every Fund, and the Board did not assign relative weights to factors discussed herein or deem any one or group of them to be controlling in and of themselves.
An SEC Rule requires that shareholder reports include a discussion of certain factors relating to the selection of investment advisers and the approval of advisory fees. The “factors” enumerated by the SEC are set forth below in italics, as well as the Board’s conclusions regarding such factors:
(1) The nature, extent and quality of services provided by the Manager and Subadvisers. The Trustees noted that the Manager, subject to the control of the Board of Trustees, administers each Fund’s business and other affairs. Under the Advisory Agreement, the Manager holds the sole and exclusive responsibility to provide, or arrange for other to provide, the management of the Funds’ assets and the placement of orders for the purchase and sale of the securities of the Funds. As the Trust is a manager of managers fund, the Manager is authorized, under the Advisory Agreement, to retain one or more Subadvisers for each Fund to handle day-to-day management of the Funds’ investment portfolios; the Manager is responsible for determining, in the first instance, which investment advisers to recommend to the Board of Trustees for selection as a Subadviser. The Trustees were aware that, notwithstanding the retention of the Subadvisers to handle day-to-day portfolio management, the Manager remains responsible for substantial other matters, including continuously monitoring compliance by each Subadviser with the investment policies and restrictions of the respective Funds, with such other limitations or directions of the Board of Trustees, and with all legal requirements under federal or state law or regulation. The Manager also is responsible primarily to provide statistical information and other data to the Trustees regarding the Funds’ portfolio investments and to make available to the Funds’ administrator such information as is necessary for the conduct of its duties.
The Trustees also noted that the Manager provides the Trust and each Fund with such administrative and other services (exclusive of, and in addition to, any such services provided by any others retained by the Trust on behalf of the Funds) and executive and other personnel as are necessary for the operation of the Trust and the Funds. Except for the Trust’s Chief Compliance Officer, the Manager pays all of the compensation of Trustees and officers of the Trust who are employees of the Manager or its affiliates.
The Trustees considered the scope and quality of services provided by the Manager and the Subadvisers and noted that the scope of such services provided had expanded as a result of recent regulatory and other developments. The Trustees noted that, for example, the Manager and Subadvisers are responsible for maintaining and monitoring their own compliance programs, and these compliance programs are continuously refined and enhanced in light of new regulatory requirements. The Trustees considered the capabilities and resources which the Manager has dedicated to performing services on behalf of the Trust and its Funds. The quality of administrative and other services, including the Manager’s role in coordinating the activities of the Trust’s other service providers, also were considered. The Trustees concluded that, overall, they were satisfied with the nature, extent and quality of services provided (and expected to be provided) to the Trust and to each of the Funds under the Agreements.
(2) The investment performance of the Funds, the Manager and the Subadvisers. In connection with every in-person quarterly Board of Trustees meeting, Trustees receive extensive information on the performance results of each of the Funds. This includes, for example, performance information on all of the Funds for the previous quarter, and previous one, three and five-year periods, and since inception. (For Funds which have been in existence for less than five years, Trustees may receive performance information on comparable funds managed by the particular Subadviser for periods prior to the creation of a particular Fund.) Such performance information includes information on absolute total return, performance versus Subadvisers’ comparable fund(s), performance versus the appropriate benchmark(s), and performance versus peer groups. For example, in connection with the Board of Trustees meetings held September 10-11, 2013, the Manager reported that for the three year period ended June 30, 2013, 12 Funds were in the top 40%, eight were in the middle 20% and eight were in the bottom 40%, and for the one year period ended June 30, 2013, 8 Funds were in the top 40%, seven were in the middle 20%, and 14 were in the bottom 40%. The Manager also reported that for the five year period ended June 30, 2013, 10 Funds were in the top 40%, four were in the middle 20%, and six were in the bottom 40%. At the Board of Trustees meeting held October 22, 2013, the Trustees determined that the overall investment performance of the Funds was acceptable.
(3) The costs of services to be provided and profits to be realized by the Manager and the Subadvisers and their affiliates from their relationship with the Funds. The Manager has supplied information to the Board of Trustees pertaining to the level of investment advisory fees to which the Funds are subject. The Manager has agreed to temporarily “cap” Fund expenses at certain levels, and information is provided to Trustees setting forth “contractual” advisory fees and “actual” fees after taking expense caps into account. Based upon the information provided, the “actual” advisory fees payable by the Funds overall are generally comparable to the average level of fees paid by Fund peer groups. For the 30 Funds reviewed by the Board of Trustees in the fall of 2013, 27 Funds paid “actual” advisory fees in a percentage amount within the 65th percentile or lower for each Fund’s applicable category. The Trustees recognized that it is difficult to make comparisons of advisory fees because there are variations in the services that are included in the fees paid by other funds. The Board has concluded that the advisory fees to be paid to the Manager by the Funds are not unreasonable.
The Manager has also supplied information to the Board of Trustees pertaining to total Fund expenses (which includes advisory fees, the 25 basis point 12b-1 fee paid by the Funds, and other Fund expenses). As noted above, the Manager has agreed to “cap” Fund expenses at certain levels. Based upon the information provided, the overall total expense ratio ranking in 2013 for the 30 Funds was as follows: (1) 28 of the Funds had total expense rankings below the 65th percentile (with 20 Funds at or below the 50th percentile); (2) the AZL Russell 1000 Value Fund had a total expense ranking in the 66th percentile; the Manager reported that there is only a limited peer group for such Fund; and (3) the AZL Morgan Stanley Global Real Estate Fund had a total expense ranking in the 72nd percentile; it was reported by the Manager that there is only a limited peer group for such Fund, such Fund’s expense ratio has declined, and such Fund’s expense ratio is comparable to funds of similar size.
The Manager has committed to providing the Funds with a high quality of service and working to reduce Fund expenses over time, particularly as the Funds grow larger. The Trustees concluded therefore that the expense ratios of the Funds were not unreasonable.
The Manager provided information concerning the profitability of the Manager’s investment advisory activities for the period from 2011 through June 30, 2013. The Trustees recognized that it is difficult to make comparisons of profitability from investment company advisory agreements because comparative information is not generally publicly available and is affected by numerous factors, including the structure of the particular adviser, the types of funds it manages, its business mix, numerous assumptions regarding allocation of expenses and the adviser’s capital structure and cost of capital. In considering profitability information, the Trustees considered the possible effect of certain fall-out benefits to the Manager and its affiliates. The Trustees focused on profitability of the Manager’s relationships with the Funds before taxes and distribution expenses. The Trustees recognized that the Manager should, in the abstract, be entitled to earn a reasonable level of profits for the services it provides to each Fund and, based on their review, concluded that they were satisfied that the Manager’s level of profitability from its relationship with the Funds was not excessive.
The Manager, on behalf of the Board of Trustees, endeavored to obtain information on the profitability of each Subadviser in connection with its relationship with the Fund or Funds which it subadvises. The Manager was unable to obtain meaningful profitability information from some of the unaffiliated Subadvisers. The Manager assured the Board of Trustees that the Agreements with the Subadvisers which are not affiliated with it were negotiated on an “arm’s length” basis, so that arguably, such profitability information should be less relevant. The Trustees were also provided with certain information on the profitability for the Subadviser which is affiliated with the Manager. Trustees recognized the difficulty of allocating costs to multiple advisory accounts and products of a large advisory organization. Based upon the information provided, the Trustees determined that there was no evidence that the level of such profitability attributable to subadvising the Funds was excessive.
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(4) and (5) The extent to which economies of scale would be realized as the Funds grow, and whether fee levels reflect these economies of scale. The Trustees noted that most of the advisory fee schedules for the Funds do not contain breakpoints that reduce the fee rate on assets above specified levels, although certain Subadvisory Agreements have such “breakpoints.” The Trustees recognized that breakpoints may be an appropriate way for the Manager to share its economies of scale, if any, with Funds that have substantial assets. However, they also recognized that there may not be a direct relationship between any economies of scale realized by Funds and those realized by the Manager as assets increase. The Trustees do not believe there is a uniform methodology for establishing breakpoints that give effect to Fund-specific service provided by the Manager. The Trustees noted that in the fund industry as a whole, as well as among funds similar to the Funds, there is no uniformity or pattern in the fees and asset levels at which breakpoints (if any) apply. Depending on the age, size, and other characteristics of a particular fund and its manager’s cost structure, different conclusions can be drawn as to whether there are economies of scale to be realized at any particular level of assets, notwithstanding the intuitive conclusion that such economies exist, or will be realized at some level of total assets. Moreover, because different managers have different cost structures and service models, it is difficult to draw meaningful conclusions from the breakpoints that may have been adopted by other funds. The Trustees also noted that the advisory agreements for many funds do not have breakpoints at all, or if breakpoints exist, they may be at asset levels significantly greater than those of the individual Funds. The Trustees also noted that the total assets in all of the Funds as of June 30, 2013 were approximately $12.85 billion, and that no single non-money market Fund had assets in excess of $616 million.
The Trustees noted that the Manager has agreed to temporarily “cap” Fund expenses at certain levels, which has the effect of reducing expenses as would the implementation of advisory fee breakpoints. The Manager has committed to continue to consider the continuation of fee “caps” and/or advisory fee breakpoints as the Funds grow larger. The Board receives quarterly reports on the level of Fund assets. It expects to consider whether or not to approve the Agreements at a meeting to be held prior to December 31, 2014, and will at that time, or prior thereto, consider: (a) the extent to which economies of scale can be realized, and (b) whether the advisory fee should be modified to reflect such economies of scale, if any.
Having taken these factors into account, the Trustees concluded that the absence of breakpoints in certain of the Funds’ advisory fee rate schedules was acceptable under each Fund’s circumstances.
21
Information about the Board of Trustees and Officers (Unaudited)
The Trust is managed by the Trustees in accordance with the laws of the state of Delaware governing business trusts. There are currently eight Trustees, two of whom are “interested persons” of the Trust within the meaning of that term under the 1940 Act. The Trustees and Officers of the Trust, their addresses, ages, their positions held with the Trust, their terms of office with the Trust and length of time served, their principal occupation(s) during the past five years, the number of portfolios in the Trust they oversee, and their other directorships held are as follows:
Non-Interested Trustees(1)
Name, Address, and Age | Positions Held with VIP Trust and FOF Trust | Term of Office(2)/Length of Time Served | Principal Occupation(s) During Past 5 Years | Number of Portfolios Overseen for VIP Trust and FOF Trust | Other Directorships Held Outside the AZL Fund Complex | |||||
Peter R. Burnim, Age 66 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/07 | Chairman, Argus Investment Strategies Fund Ltd., February 2013 to present; Managing Director, iQ Venture Advisors, LLC. 2005 to 2012; Chairman, Northstar Group Holdings Ltd. Bermuda, 2011 to present; Expert Witness, Massachusetts Department of Revenue, 2011 to 2012; Executive Vice President, Northstar Companies, 2002 to 2005; Senior Officer, Citibank and Citicorp for over 25 years | 41 | Argus Group Holdings; Northstar Group Holdings, NRIL, Sterling Centrecorp Inc.; Highland Financial Holdings; and Bank of Bermuda NY | |||||
Peggy L. Ettestad, Age 56 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/07 | Managing Director, Red Canoe Management Consulting LLC, 2008 to present; Senior Managing Director, Residential Capital LLC, 2003 to 2008; Chief Operations Officer, Transamerica Reinsurance 2002 to 2003 | 41 | Luther College | |||||
Roger Gelfenbien, Age 70 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 10/99 | Retired; Partner of Accenture 1983 to 1999 | 41 | Virtus Funds (8 Funds) | |||||
Claire R. Leonardi, Age 58 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/04 | Chief Executive Officer, Connecticut Innovations, Inc., 2012 to present; General Partner, Fairview Capital, L.P., 1994 to 2012 | 41 | The Natural History Museum of the Adirondacks | |||||
Dickson W. Lewis, Age 65 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/04 | Retired; Consultant to Lifetouch National School Studios; Vice President/General Manager, Yearbooks & Canada-Lifetouch National School Studios, 2006 to 2013; Vice President/General Manager of Jostens, Inc., 2002 to 2006; Senior Vice President of Fortis Group, 1997 to 2002 | 41 | None | |||||
Peter W. McClean, Age 69 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/04 | Retired; President and CEO of Measurisk, LLC, 2001 to 2003; Chief Risk Management Officer at Bank of Bermuda Ltd., 1996 to 2001 | 41 | PNMAC Opportunity Fund; Northeast Bank; and FHI | |||||
Arthur C. Reeds III, Age 69 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 10/99 | Retired; Senior Investment Officer, Hartford Foundation for Public Giving, 2000 to 2003; Chairman, Chief Executive and President of Conning Corp., 1999 to 2000; Investment Consultant, 1997 to 1999 | 41 | Connecticut Water Service, Inc. |
Interested Trustees(3)
Name, Address, and Age | Positions Held with VIP Trust and FOF Trust | Term of Office(2)/Length of Time Served | Principal Occupation(s) During Past 5 Years | Number of Portfolios Overseen for VIP Trust and FOF Trust | Other Directorships Held Outside the AZL Fund Complex | |||||
Robert DeChellis, Age 46 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 3/08 | President and CEO, Allianz Life Financial Services, LLC, 2007 to present | 41 | None | |||||
Brian Muench, Age 43 5701 Golden Hills Drive | Trustee | Since 6/11 | President, Allianz Investment Management LLC, November 2010 to present; Vice President, Allianz Life, April 2011 to present; Vice President, Advisory Management, Allianz Investment Management LLC from December 2005 to November 2010 | 41 | None |
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Officers
Name, Address, and Age | Positions Held with VIP and VIP FOF Trust | Term of Office(2)/Length of Time Served | Principal Occupation(s) During Past 5 Years | |||
Brian Muench, Age 43 5701 Golden Hills Drive Minneapolis, MN 55416 | President | Since 11/10 | President, Allianz Investment Management LLC from November 2010, to present; Vice President, Allianz Life from April 2011 to present; Vice President, Allianz Investment Management LLC from December 2005 to November 2010. | |||
Michael Radmer, Age 68 Dorsey & Whitney LLP, Suite 1500 50 South Sixth Street Minneapolis, MN 55402-1498 | Secretary | Since 2/02 | Partner, Dorsey and Whitney LLP since 1976. | |||
Ty Edwards, Age 47 Citi Fund Services Ohio, Inc. 3435 Stelzer Road Columbus, OH 43219 | Treasurer, Principal Accounting Officer and Principal Financial Officer | Since 4/10 | Senior Vice President, Financial Administration, Citi Fund Services Ohio, Inc., December 2009 to present; Director, Product Management, Columbia Management, April 2007 to April 2009; Deputy Treasurer, Columbia Funds and Director, Fund Administration, Columbia Management, January 2006 to April 2007. | |||
Christopher R. Pheiffer, Age 45(4) 5701 Golden Hills Drive Minneapolis, MN 55416 | Chief Compliance Officer(5) and Anti-Money Laundering Compliance Officer | Since 2/14 (interim) | Deputy Chief Compliance Officer of the Trusts, 2007-2014. |
(1) | Member of the Audit Committee. |
(2) | Indefinite. |
(3) | Is an “interested person”, as defined by the 1940 Act, due to employment by Allianz. |
(4) | Stephen G. Simon, previously the Chief Compliance Officer of the Trusts, resigned all of his positions with Allianz effective February 21, 2014. Mr. Pheiffer, previously the Deputy Chief Compliance Officer of the Trusts, has been named Chief Compliance Officer of the Trusts on an interim basis while a search for a permanent replacement is conducted. |
(5) | The Manager and the Trust are parties to a Chief Compliance Officer Agreement under which the Manager is compensated by the Trust for providing an employee of the Manager or one of its affiliates to act as the Trust’s Chief Compliance Officer. The Chief Compliance Officer and Anti-Money Laundering Compliance Officer is not considered a corporate officer or executive employee of the Trust. |
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The Allianz VIP Funds are distributed by Allianz Life Financial Services, LLC. | ||
These Funds are not FDIC Insured. | ANNRPT1213 2/14 |
AZL® Franklin Templeton
Founding Strategy Plus Fund
Annual Report
December 31, 2013
Table of Contents
Management Discussion and Analysis
Page 1
Expense Examples and Portfolio Composition
Page 3
Schedule of Portfolio Investments
Page 4
Statement of Assets and Liabilities
Page 24
Statement of Operations
Page 24
Statements of Changes in Net Assets
Page 25
Financial Highlights
Page 26
Notes to the Financial Statements
Page 27
Report of Independent Registered Public Accounting Firm
Page 36
Other Federal Income Tax Information
Page 37
Other Information
Page 38
Approval of Investment Advisory and Subadvisory Agreements
Page 39
Information about the Board of Trustees and Officers
Page 42
This report is submitted for the general information of the shareholder of the Fund. The report is not authorized for distribution to prospective investors in the Fund unless preceded or accompanied by an effective prospectus, which contains details concerning the sales charges and other pertinent information.
AZL® Franklin Templeton Founding Strategy Plus Fund Review (unaudited)
Allianz Investment Management LLC serves as the Manager for the AZL® Franklin Templeton Founding Strategy Plus Fund. Franklin Mutual Advisers, LLC serves as Subadviser to the Mutual Shares Strategy, Templeton Global Advisors Limited serves as Subadviser to the Templeton Growth Strategy, and Franklin Advisers Inc. serves as Subadviser to the Franklin Income Strategy and the Templeton Global Bond Strategy.
What factors affected the Fund’s performance during the year ended December 31, 2013?
For the year ended December 31, 2013, the AZL® Franklin Templeton Founding Strategy Plus Fund returned 18.12%. That compared to a 17.73% total return for its benchmark, the Balanced Composite Index, which is comprised of a 60% weighting in the S&P 500 Index1 and a 40% weighting in the Barclays U.S. Aggregate Bond Index2.
The Fund invests in a combination of subportfolios, or strategies, each of which is managed by a Franklin Templeton asset manager. Two of the strategies invest primarily in U.S. and foreign equity securities, one portfolio invests in U.S. stocks and bonds, and the fourth portfolio invests in foreign fixed-income securities. The Fund generally makes equal allocations–approximately 25%–to each of the following four strategies:
• | Mutual Shares Strategy |
• | Templeton Growth Strategy |
• | Franklin Income Strategy |
• | Templeton Global Bond Strategy |
Financial markets and the global economy progressed in 2013 due to the stabilization of key financial institutions and declining equity correlations, which allowed investors to refocus on fundamentals. In the United States, economic growth and employment trends exceeded expectations throughout the period. The Federal Reserve Bank announced late in the year that it would reduce its bond-purchasing program. Abroad, the Eurozone emerged from recession during the second half of the year, and Japan set an inflation target and established new monetary policies aimed at achieving that goal. Though emerging market equities and regional currencies depreciated during the period, they rallied at the year’s end.
The Fund benefited in absolute terms from its component funds’ holdings in the financials, industrials, and consumer discretionary sectors, although select positions in telecommunications did detract from the Fund’s absolute return.*
Strong stock selection, specifically in the industrials and information technology sectors, helped boost the Fund’s performance relative to its balance composite benchmark. An underweighting and stock selection in the materials sector, improved the relative return. European, U.S., and Japanese stock shares contributed positively as well. The Franklin Mutual Shares Strategy Fund’s investments in a mobile telephone operating company, a global software firm, and a managed healthcare company also aided the Fund’s relative performance.*
The Fund’s relative performance was hindered by the Templeton Growth Strategy Fund’s stock selection in the telecommunication services sector, and an overweight position in the energy sector.*
Additionally, an overweighting in Asia, with the exception of Japan, was detrimental to the Fund’s relative return. The Franklin Mutual Shares Strategy Fund’s holdings in an integrated energy company, a metal and mining group, and a heavy equipment manufacturer also detracted from the Fund’s relative performance.
During the period, some of the Fund’s underlying funds employed currency positions, to a varying effect. For instance, the Franklin Mutual Shares Strategy Fund held currency forwards with the goal of hedging the currency risk of the Fund’s non-U.S. dollar investments. The hedges had a small negative effect on the Fund’s performance. In addition, the Templeton Global Bond Strategy Fund’s currency positioning in Asia, and especially its net negative exposure to the Japanese yen, contributed to the Fund’s performance.*
Past performance does not guarantee future results.
* | The Fund’s portfolio composition is subject to change. There is no guarantee that any sectors mentioned will continue to perform well or that securities in such sectors will be held by the Fund in the future. The information contained in this commentary is for informational purposes only and should not be construed as a recommendation to purchase or sell securities in the sector mentioned. The Fund’s holdings and weightings are as of December 31, 2013. |
1 | The Standard & Poor’s 500 Index (“S&P 500”) is representative of 500 selected common stocks, most of which are listed on the New York Stock Exchange, and is a measure of the U.S. Stock market as a whole. |
2 | The Barclays U.S. Aggregate Bond Index is a market value-weighted performance benchmark for investment-grade fixed-rate debt issues, including government, corporate, asset-backed, and mortgage-backed securities, with maturities of at least one year. |
Investors cannot invest directly in an index. |
1
AZL® Franklin Templeton Founding Strategy Plus Fund Review (unaudited)
Fund Objective
The Fund’s investment objective is to seek long-term capital appreciation, with income as a secondary goal. This objective may be changed by the Trustees of the Fund without shareholder approval. The Fund seeks to achieve its objective by investing in a combination of subportfolios or strategies.
Investment Concerns
Equity securities (stocks) are more volatile and carry more risk than other forms of investments, including investments in high-grade fixed income securities. The net asset value per share of this Fund will fluctuate as the value of the securities in the portfolio changes.
Small- to mid-capitalization companies typically have a higher risk of failure and historically have experienced a greater degree of volatility.
International investing may involve risk of capital loss from unfavorable fluctuations in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations.
Investing in a single industry or sector, or concentrating investments in a limited number of industries or sectors, tends to increase the risk that economic, political, or regulatory developments affecting certain industries or sectors will have a large impact on the value of the portfolio.
Emerging market investing may be subject to additional economic, political, liquidity, and currency risks not associated with more developed countries.
Bonds offer a relatively stable level of income, although bond prices will fluctuate, providing the potential for principal gain or loss. Intermediate-term, higher-quality bonds generally offer less risk than longer-term bonds and a lower rate of return.
Investing in derivatives instruments involves risks that may be different from or greater than the risk associated with investing directly in securities or other traditional instruments.
For a complete description of these and other risks associated with investing in a mutual Fund, please refer to the Fund’s prospectus.
Growth of $10,000 Investment
The chart above represents a comparison of a hypothetical investment in the Fund versus a similar investment in the Fund’s benchmark, as well as the two component indices of the Fund’s benchmark, and represents the reinvestment of dividends and capital gains in the Fund.
Average Annual Total Returns as of December 31, 2013
Since | ||||||||||||
1 | 3 | Inception | ||||||||||
Year | Year | (10/23/09) | ||||||||||
AZL® Franklin Templeton Founding Strategy Plus Fund | 18.12 | % | 10.00 | % | 10.16 | % | ||||||
Balanced Composite Index | 17.73 | % | 11.24 | % | 11.54 | % | ||||||
S&P 500 Index | 32.39 | % | 16.18 | % | 16.14 | % | ||||||
Barclays U.S. Aggregate Bond Index | -2.02 | % | 3.26 | % | 3.94 | % |
Past performance does not guarantee future results. The performance data quoted represents past performance and current returns may be lower or higher. The investment return and principal value will fluctuate so that an investor’s shares, when redeemed may be worth more or less than the original cost. To obtain performance information current to the most recent month end, please visit www.Allianzlife.com.
Expense Ratio | Gross | |||
AZL® Franklin Templeton Founding Strategy Plus Fund | 1.09 | % |
The above expense ratio is based on the current Fund prospectus dated April 29, 2013. The Manager and the Funds have entered into a written contract limiting operating expenses, excluding certain expenses (such as interest expense), to 1.20% through April 30, 2015. Additional information pertaining to the December 31, 2013 expense ratios can be found in the financial highlights.
The total return of the Fund does not reflect the effect of any insurance charges, the annual maintenance fee or the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. Such charges, fees and tax payments would reduce the performance quoted.
The Fund’s performance is measured against a composite index (the “Balanced Composite Index”), which is comprised of 60% of the Standard & Poor’s 500 Index (“S&P 500”) and 40% of the Barclays U.S. Aggregate Bond Index. The S&P 500 is representative of 500 selected common stocks, most of which are listed on the New York Stock Exchange, and is a measure of the U.S. Stock market as a whole. The Barclays U.S. Aggregate Bond Index is a market value-weighted performance benchmark for investment-grade fixed-rate debt issues, including government, corporate, asset-backed, and mortgage-backed securities, with maturities of at least one year. These indices are unmanaged and do not reflect the deduction of fees associated with a mutual fund, such as investment management and fund accounting fees. The Fund’s performance reflects the deduction of fees for services provided to the Fund. Investors cannot invest directly in an index.
2 |
AZL Franklin Templeton Founding Strategy Plus Fund
Expense Examples
(Unaudited)
As a shareholder of the AZL Franklin Templeton Founding Strategy Plus Fund (the “Fund”), you incur ongoing costs, including management fees, distribution fees, and other Fund expenses. These examples are intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. Please note that the expenses shown in each table do not reflect expenses that apply to the subaccount or the insurance contract. If the expenses that apply to the subaccount of the insurance contract were included, your costs would have been higher.
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the periods presented below.
The Actual Expense table below provides information about actual account values and actual expenses. You may use the information below, 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 table under the heading entitled “Expenses Paid During Period” to estimate the expenses you paid on your account during this period.
Beginning Account Value 7/1/13 | Ending Account Value 12/31/13 | Expenses Paid During Period 7/1/13 - 12/31/13* | Annualized Expense Ratio During Period 7/1/13 - 12/31/13 | |||||||||||||||||
AZL Franklin Templeton Founding Strategy Plus Fund | $ | 1,000.00 | $ | 1,115.30 | $ | 5.60 | 1.05 | % |
The Hypothetical Expense table below provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.
Beginning Account Value 7/1/13 | Ending Account Value 12/31/13 | Expenses Paid During Period 7/1/13 - 12/31/13* | Annualized Expense Ratio During Period 7/1/13 - 12/31/13 | |||||||||||||||||
AZL Franklin Templeton Founding Strategy Plus Fund | $ | 1,000.00 | $ | 1,019.91 | $ | 5.35 | 1.05 | % |
* | Expenses are equal to the average account value over the period, multiplied by the Fund’s annualized expense ratio, multiplied by 184/365 (to reflect the one half year period). |
Portfolio Composition
(Unaudited)
Investments | Percent of net assets | ||||
Common Stock | 59.4 | % | |||
Foreign Bond | 15.7 | ||||
Corporate Bond | 7.6 | ||||
Money Market | 6.5 | ||||
U.S. Government Agency Mortgages | 4.2 | ||||
Yankee Dollar | 3.1 | ||||
Securities Held as Collateral for Securities on Loan | 1.9 | ||||
U.S. Treasury Obligation | 1.2 | ||||
Floating Rate Loan | 0.8 | ||||
Other Investments | 0.8 | ||||
|
| ||||
Total Investment Securities | 101.2 | ||||
Net other assets (liabilities) | (1.2 | ) | |||
|
| ||||
Net Assets | 100.0 | % | |||
|
|
Investments | Percent of net assets | ||||
United States | 54.9 | % | |||
United Kingdom | 8.2 | ||||
Republic of Korea (South) | 4.9 | ||||
France | 3.2 | ||||
Netherlands | 3.2 | ||||
Switzerland | 2.5 | ||||
Poland | 2.2 | ||||
Malaysia | 2.1 | ||||
Germany | 1.9 | ||||
All other countries | 18.5 | ||||
|
| ||||
Total Investment Securities | 101.6 | ||||
Net other assets (liabilities) | (1.6 | ) | |||
|
| ||||
Net Assets | 100.0 | % | |||
|
|
3
AZL Franklin Templeton Founding Strategy Plus Fund
Schedule of Portfolio Investments
December 31, 2013
Shares | Fair Value | |||||||
| Common Stocks (59.4%): |
| ||||||
| Aerospace & Defense (0.6%): |
| ||||||
87,790 | BAE Systems plc | $ | 634,364 | |||||
21,880 | Huntington Ingalls Industries, Inc. | 1,969,419 | ||||||
7,200 | Lockheed Martin Corp. | 1,070,352 | ||||||
6,370 | Raytheon Co. | 577,759 | ||||||
|
| |||||||
4,251,894 | ||||||||
|
| |||||||
| Air Freight & Logistics (0.5%): |
| ||||||
9,890 | FedEx Corp. | 1,421,885 | ||||||
188,765 | TNT Express NV | 1,755,632 | ||||||
7,110 | United Parcel Service, Inc., Class B | 747,119 | ||||||
|
| |||||||
3,924,636 | ||||||||
|
| |||||||
| Airlines (1.0%): |
| ||||||
129,500 | Deutsche Lufthansa AG, Registered Shares* | 2,747,735 | ||||||
487,640 | International Consolidated Airlines Group SA* | 3,243,648 | ||||||
|
| |||||||
5,991,383 | ||||||||
|
| |||||||
| Auto Components (0.4%): |
| ||||||
25,441 | Compagnie Generale des Establissements Michelin SCA, Class B | 2,714,709 | ||||||
|
| |||||||
| Automobiles (1.0%): |
| ||||||
34,130 | Ford Motor Co. | 526,626 | ||||||
60,162 | General Motors Co. | 2,458,821 | ||||||
176,000 | Mazda Motor Corp.* | 912,707 | ||||||
232,100 | Nissan Motor Co., Ltd. | 1,954,280 | ||||||
23,400 | Toyota Motor Corp. | 1,424,218 | ||||||
|
| |||||||
7,276,652 | ||||||||
|
| |||||||
| Beverages (0.8%): |
| ||||||
28,090 | Coca-Cola Co. (The) | 1,160,398 | ||||||
29,516 | Coca-Cola Enterprises, Inc. | 1,302,541 | ||||||
20,470 | Dr Pepper Snapple Group, Inc. | 997,298 | ||||||
14,350 | PepsiCo, Inc. | 1,190,189 | ||||||
4,803 | Pernod Ricard SA | 548,359 | ||||||
|
| |||||||
5,198,785 | ||||||||
|
| |||||||
| Biotechnology (0.4%): |
| ||||||
22,270 | Amgen, Inc. | 2,542,343 | ||||||
|
| |||||||
| Capital Markets (1.0%): |
| ||||||
78,450 | China Cinda Asset Management Co., Ltd., Class H* | 48,968 | ||||||
82,988 | Credit Suisse Group AG, Registered Shares | 2,548,600 | ||||||
106,233 | Morgan Stanley | 3,331,467 | ||||||
38,310 | UBS AG, Registered Shares | 730,022 | ||||||
|
| |||||||
6,659,057 | ||||||||
|
| |||||||
| Chemicals (1.3%): |
| ||||||
12,000 | Agrium, Inc. | 1,097,760 | ||||||
32,908 | Akzo Nobel NV | 2,553,075 | ||||||
62,170 | Dow Chemical Co. (The) | 2,760,348 | ||||||
17,620 | E.I. du Pont de Nemours & Co. | 1,144,771 | ||||||
15,000 | LyondellBasell Industries NV, Class A | 1,204,200 | ||||||
13,950 | Mosaic Co. (The) | 659,417 | ||||||
7,560 | Potash Corp. of Saskatchewan, Inc. | 249,178 | ||||||
|
| |||||||
9,668,749 | ||||||||
|
|
Shares | Fair Value | |||||||
| Common Stocks, continued |
| ||||||
| Commercial Banks (4.5%): |
| ||||||
46,750 | Barclays plc | $ | 211,494 | |||||
32,810 | BNP Paribas SA | 2,568,909 | ||||||
23,852 | CIT Group, Inc. | 1,243,405 | ||||||
9,886 | Columbia Banking System, Inc. | 271,964 | ||||||
71,610 | Commerzbank AG* | 1,153,979 | ||||||
5,306 | Commonwealth Bank of Australia | 369,625 | ||||||
164,930 | Credit Agricole SA* | 2,119,769 | ||||||
97,000 | DBS Group Holdings, Ltd. | 1,318,780 | ||||||
148,152 | HSBC Holdings plc | 1,614,458 | ||||||
38,540 | HSBC Holdings plc | 422,642 | ||||||
8,000 | ICICI Bank, Ltd., ADR | 297,360 | ||||||
711,196 | Intesa Sanpaolo SpA | 1,765,379 | ||||||
80,977 | KB Financial Group, Inc.* | 3,260,295 | ||||||
41,482 | PNC Financial Services Group, Inc. | 3,218,174 | ||||||
14,452 | Societe Generale | 843,894 | ||||||
89,023 | SunTrust Banks, Inc. | 3,276,937 | ||||||
2,000 | Toronto-Dominion Bank (The) | 188,513 | ||||||
338,229 | UniCredit SpA | 2,518,357 | ||||||
110,021 | Wells Fargo & Co. | 4,994,952 | ||||||
|
| |||||||
31,658,886 | ||||||||
|
| |||||||
| Commercial Services & Supplies (0.3%): |
| ||||||
230 | CEVA Group plc*(a) | 218,168 | ||||||
20,350 | Republic Services, Inc. | 675,620 | ||||||
48,600 | Serco Group plc | 401,581 | ||||||
16,210 | Waste Management, Inc. | 727,343 | ||||||
|
| |||||||
2,022,712 | ||||||||
|
| |||||||
| Communications Equipment (1.2%): |
| ||||||
174,630 | Brocade Communications Systems, Inc.* | 1,548,968 | ||||||
234,529 | Cisco Systems, Inc. | 5,265,176 | ||||||
127,750 | Telefonaktiebolaget LM Ericsson, B Shares | 1,564,860 | ||||||
|
| |||||||
8,379,004 | ||||||||
|
| |||||||
| Computers & Peripherals (1.4%): |
| ||||||
10,739 | Apple, Inc. | 6,025,760 | ||||||
131,044 | Hewlett-Packard Co. | 3,666,611 | ||||||
|
| |||||||
9,692,371 | ||||||||
|
| |||||||
| Construction & Engineering (0.1%): |
| ||||||
16,150 | Carillion plc | 88,625 | ||||||
14,770 | FLSmidth & Co. A/S^ | 809,919 | ||||||
|
| |||||||
898,544 | ||||||||
|
| |||||||
| Construction Materials (0.3%): |
| ||||||
96,711 | CRH plc | 2,453,303 | ||||||
|
| |||||||
| Containers & Packaging (0.2%): |
| ||||||
39,611 | MeadWestvaco Corp. | 1,462,834 | ||||||
|
| |||||||
| Diversified Banks (0.1%): |
| ||||||
9,100 | Royal Bank of Canada | 611,836 | ||||||
|
| |||||||
| Diversified Financial Services (2.6%): |
| ||||||
100,000 | Bank of America Corp. | 1,557,000 | ||||||
1,251 | Bond Street Holdings LLC, Class A*(b) | 17,514 | ||||||
91,220 | Citigroup, Inc. | 4,753,474 |
Continued
4
AZL Franklin Templeton Founding Strategy Plus Fund
Schedule of Portfolio Investments
December 31, 2013
Shares | Fair Value | |||||||
| Common Stocks, continued |
| ||||||
| Diversified Financial Services , continued |
| ||||||
12,380 | Deutsche Boerse AG | $ | 1,027,942 | |||||
303,048 | ING Groep NV* | 4,237,386 | ||||||
116,880 | JPMorgan Chase & Co. | 6,835,143 | ||||||
|
| |||||||
18,428,459 | ||||||||
|
| |||||||
| Diversified Telecommunication Services (1.0%): |
| ||||||
35,820 | AT&T, Inc. | 1,259,431 | ||||||
23,993 | China Telecom Corp., Ltd., ADR | 1,213,326 | ||||||
35,720 | France Telecom SA | 443,941 | ||||||
480,520 | Singapore Telecommunications, Ltd. | 1,396,540 | ||||||
151,897 | Telefonica SA | 2,479,463 | ||||||
84,310 | Telstra Corp., Ltd. | 395,215 | ||||||
41,092 | Vivendi | 1,086,967 | ||||||
|
| |||||||
8,274,883 | ||||||||
|
| |||||||
| Electric Utilities (1.6%): |
| ||||||
15,000 | American Electric Power Co., Inc. | 701,100 | ||||||
30,897 | Duke Energy Corp. | 2,132,203 | ||||||
23,342 | Entergy Corp. | 1,476,848 | ||||||
62,019 | Exelon Corp. | 1,698,700 | ||||||
24,000 | FirstEnergy Corp. | 791,520 | ||||||
16,670 | NextEra Energy, Inc. | 1,427,285 | ||||||
13,620 | Pepco Holdings, Inc. | 260,551 | ||||||
22,920 | PPL Corp. | 689,663 | ||||||
48,220 | Southern Co. (The) | 1,982,324 | ||||||
|
| |||||||
11,160,194 | ||||||||
|
| |||||||
| Electrical Equipment (0.2%): |
| ||||||
47,390 | Alstom SA | 1,731,259 | ||||||
101,615 | Dongfang Electric Corp., Ltd., H Shares | 178,405 | ||||||
1,159 | Osram Licht AG* | 65,500 | ||||||
|
| |||||||
1,975,164 | ||||||||
|
| |||||||
| Electronic Equipment, Instruments & Components (0.2%): |
| ||||||
49,730 | Flextronics International, Ltd.* | 386,402 | ||||||
14,882 | TE Connectivity, Ltd. | 820,147 | ||||||
|
| |||||||
1,206,549 | ||||||||
|
| |||||||
| Energy Equipment & Services (2.1%): |
| ||||||
99,901 | Baker Hughes, Inc. | 5,520,529 | ||||||
12,396 | Ensco plc, Class A, ADR | 708,803 | ||||||
20,846 | Fugro NV | 1,246,885 | ||||||
50,904 | Halliburton Co. | 2,583,378 | ||||||
35,370 | Noble Corp. plc | 1,325,314 | ||||||
12,590 | Schlumberger, Ltd. | 1,134,485 | ||||||
52,434 | Transocean, Ltd. | 2,591,288 | ||||||
6,000 | Weatherford International, Ltd.* | 92,940 | ||||||
|
| |||||||
15,203,622 | ||||||||
|
| |||||||
| Food & Staples Retailing (2.3%): |
| ||||||
70,145 | CVS Caremark Corp. | 5,020,278 | ||||||
64,800 | Kroger Co. (The) | 2,561,544 | ||||||
13,330 | Metro AG | 645,579 | ||||||
23,540 | Safeway, Inc. | 766,698 | ||||||
766,630 | Tesco plc | 4,245,166 |
Shares | Fair Value | |||||||
| Common Stocks, continued |
| ||||||
| Food & Staples Retailing, continued |
| ||||||
53,398 | Walgreen Co. | $ | 3,067,181 | |||||
|
| |||||||
16,306,446 | ||||||||
|
| |||||||
| Gas Utilities (0.0%): |
| ||||||
2,870 | AGL Resources, Inc. | 135,550 | ||||||
|
| |||||||
| Health Care Equipment & Supplies (1.2%): |
| ||||||
33,025 | Getinge AB, B Shares | 1,133,094 | ||||||
105,284 | Medtronic, Inc. | 6,042,248 | ||||||
10,362 | Stryker Corp. | 778,601 | ||||||
|
| |||||||
7,953,943 | ||||||||
|
| |||||||
| Health Care Providers & Services (0.7%): |
| ||||||
40,176 | CIGNA Corp. | 3,514,597 | ||||||
1,420 | UnitedHealth Group, Inc. | 106,926 | ||||||
14,201 | WellPoint, Inc. | 1,312,030 | ||||||
|
| |||||||
4,933,553 | ||||||||
|
| |||||||
| Hotels, Restaurants & Leisure (0.0%): |
| ||||||
2,680 | McDonald’s Corp. | 260,040 | ||||||
|
| |||||||
| Independent Power Producers & Energy Traders (0.3%): |
| ||||||
15,370 | Dynegy, Inc.*^ | 330,762 | ||||||
51,758 | NRG Energy, Inc. | 1,486,490 | ||||||
|
| |||||||
1,817,252 | ||||||||
|
| |||||||
| Industrial Conglomerates (0.9%): |
| ||||||
89,340 | General Electric Co. | 2,504,200 | ||||||
50,410 | Koninklijke Philips Electronics NV | 1,858,123 | ||||||
12,570 | Siemens AG, Registered Shares | 1,717,353 | ||||||
|
| |||||||
6,079,676 | ||||||||
|
| |||||||
| Insurance (3.3%): |
| ||||||
28,637 | ACE, Ltd. | 2,964,790 | ||||||
137,722 | AEGON NV | 1,300,116 | ||||||
4,353 | Alleghany Corp.* | 1,741,026 | ||||||
108,636 | American International Group, Inc. | 5,545,867 | ||||||
252,117 | Aviva plc | 1,878,219 | ||||||
75,793 | AXA SA | 2,113,943 | ||||||
48,567 | MetLife, Inc. | 2,618,733 | ||||||
7,290 | Muenchener Rueckversicherungs-Gesellschaft AG, Registered Shares | 1,606,550 | ||||||
21,130 | Swiss Re AG | 1,953,685 | ||||||
980 | White Mountains Insurance Group, Ltd. | 591,018 | ||||||
3,951 | Zurich Insurance Group AG | 1,149,262 | ||||||
|
| |||||||
23,463,209 | ||||||||
|
| |||||||
| Life Sciences Tools & Services (0.0%): |
| ||||||
3,360 | Lonza Group AG, Registered Shares | 319,928 | ||||||
|
| |||||||
| Machinery (0.9%): |
| ||||||
17,240 | Caterpillar, Inc. | 1,565,565 | ||||||
110,004 | CNH Industrial NV* | 1,256,203 | ||||||
8,060 | Deere & Co. | 736,120 | ||||||
3,788 | Federal Signal Corp.* | 55,494 | ||||||
39,476 | Navistar International Corp.*^ | 1,507,588 | ||||||
10,541 | Stanley Black & Decker, Inc. | 850,553 | ||||||
|
| |||||||
5,971,523 | ||||||||
|
|
Continued
5
AZL Franklin Templeton Founding Strategy Plus Fund
Schedule of Portfolio Investments
December 31, 2013
Shares | Fair Value | |||||||
| Common Stocks, continued |
| ||||||
| Marine (0.4%): |
| ||||||
227 | A.P. Moller – Maersk A/S, Class B | $ | 2,476,018 | |||||
|
| |||||||
| Media (2.9%): |
| ||||||
12,561 | British Sky Broadcasting Group plc | 175,678 | ||||||
31,812 | CBS Corp., Class B | 2,027,697 | ||||||
46,672 | Comcast Corp., Special Class A | 2,327,999 | ||||||
73,410 | News Corp., Class A* | �� | 1,322,848 | |||||
56,390 | Reed Elsevier NV | 1,198,051 | ||||||
193,180 | Reed Elsevier plc | 2,879,008 | ||||||
27,491 | Time Warner Cable, Inc. | 3,725,032 | ||||||
2,462 | Tribune Co., B Shares* | 190,559 | ||||||
5,213 | Tribune Co.*(a)(c) | — | ||||||
4,015 | Tribune Co.*^ | 310,761 | ||||||
50,710 | Twenty-First Century Fox, Inc. | 1,783,978 | ||||||
105,244 | Twenty-First Century Fox, Inc., Class B | 3,641,442 | ||||||
11,320 | Viacom, Inc., Class B | 988,689 | ||||||
7,300 | Walt Disney Co. (The) | 557,720 | ||||||
|
| |||||||
21,129,462 | ||||||||
|
| |||||||
| Metals & Mining (2.2%): |
| ||||||
46,430 | Anglo American plc | 1,020,214 | ||||||
11,046 | AngloGold Ashanti, Ltd., ADR | 129,459 | ||||||
27,100 | Barrick Gold Corp. | 477,773 | ||||||
65,240 | BHP Billiton plc | 2,022,516 | ||||||
116,315 | Freeport-McMoRan Copper & Gold, Inc. | 4,389,728 | ||||||
33,460 | Goldcorp, Inc. | 725,078 | ||||||
26,402 | Mining and Metallurgical Co. Norilsk Nickel, ADR | 441,177 | ||||||
38,760 | Newmont Mining Corp. | 892,643 | ||||||
7,451 | POSCO | 2,312,592 | ||||||
49,478 | Rio Tinto plc, Registered Shares, ADR^ | 2,792,044 | ||||||
51,106 | ThyssenKrupp AG* | 1,246,768 | ||||||
|
| |||||||
16,449,992 | ||||||||
|
| |||||||
| Multiline Retail (0.5%): |
| ||||||
25,070 | Kohl’s Corp. | 1,422,723 | ||||||
147,710 | Marks & Spencer Group plc | 1,061,605 | ||||||
24,240 | Target Corp. | 1,533,664 | ||||||
|
| |||||||
4,017,992 | ||||||||
|
| |||||||
| Multi-Utilities (0.8%): |
| ||||||
17,270 | Dominion Resources, Inc. | 1,117,196 | ||||||
36,671 | GDF Suez | 865,289 | ||||||
38,710 | PG&E Corp. | 1,559,239 | ||||||
22,060 | Public Service Enterprise Group, Inc. | 706,802 | ||||||
11,070 | Sempra Energy | 993,643 | ||||||
3,650 | TECO Energy, Inc.^ | 62,926 | ||||||
27,390 | Xcel Energy, Inc. | 765,277 | ||||||
|
| |||||||
6,070,372 | ||||||||
|
| |||||||
| Office Electronics (0.6%): |
| ||||||
146,100 | Konica Minolta Holdings, Inc. | 1,464,860 | ||||||
212,973 | Xerox Corp. | 2,591,881 | ||||||
|
| |||||||
4,056,741 | ||||||||
|
|
Shares | Fair Value | |||||||
| Common Stocks, continued |
| ||||||
| Oil, Gas & Consumable Fuels (6.8%): |
| ||||||
4,470 | Anadarko Petroleum Corp. | $ | 354,560 | |||||
34,310 | Apache Corp. | 2,948,602 | ||||||
73,139 | BG Group plc | 1,575,937 | ||||||
55,000 | BP plc, ADR | 2,673,550 | ||||||
341,941 | BP plc | 2,769,585 | ||||||
39,300 | Canadian Oil Sands, Ltd. | 739,303 | ||||||
15,000 | Chesapeake Energy Corp. | 407,100 | ||||||
16,180 | Chevron Corp. | 2,021,044 | ||||||
272,500 | China Shenhua Energy Co., Ltd., H Shares | 864,745 | ||||||
45,190 | CONSOL Energy, Inc. | 1,719,028 | ||||||
90,836 | Eni SpA | 2,196,206 | ||||||
23,580 | Exxon Mobil Corp. | 2,386,296 | ||||||
125,480 | Galp Energia SGPS SA, B Shares | 2,060,057 | ||||||
6,842 | LUKOIL, ADR | 431,867 | ||||||
83,336 | Marathon Oil Corp. | 2,941,761 | ||||||
18,910 | Murphy Oil Corp. | 1,226,881 | ||||||
125,624 | Petroleo Brasileiro SA, ADR | 1,845,417 | ||||||
48,457 | Petroleo Brasileiro SA, ADR | 667,737 | ||||||
75,966 | Royal Dutch Shell plc*# | — | ||||||
48,068 | Royal Dutch Shell plc, B Shares | 1,808,662 | ||||||
430 | Royal Dutch Shell plc, A Shares | 15,441 | ||||||
56,209 | Royal Dutch Shell plc, ADR | 4,006,016 | ||||||
82,109 | Royal Dutch Shell plc, A Shares | 2,926,424 | ||||||
22,490 | Spectra Energy Corp. | 801,094 | ||||||
218,854 | Talisman Energy, Inc. | 2,544,814 | ||||||
82,329 | Talisman Energy, Inc. | 959,133 | ||||||
23,740 | Total SA, ADR | 1,454,550 | ||||||
46,090 | Total SA | 2,825,054 | ||||||
23,280 | Williams Cos., Inc. (The) | 897,910 | ||||||
11,538 | WPX Energy, Inc.* | 235,144 | ||||||
|
| |||||||
48,303,918 | ||||||||
|
| |||||||
| Paper & Forest Products (0.4%): |
| ||||||
6,054 | Domtar Corp. | 571,134 | ||||||
51,352 | International Paper Co. | 2,517,789 | ||||||
|
| |||||||
3,088,923 | ||||||||
|
| |||||||
| Personal Products (0.2%): |
| ||||||
69,815 | Avon Products, Inc. | 1,202,214 | ||||||
|
| |||||||
| Pharmaceuticals (5.2%): |
| ||||||
51,503 | Eli Lilly & Co. | 2,626,653 | ||||||
36,540 | Forest Laboratories, Inc.* | 2,193,496 | ||||||
99,140 | GlaxoSmithKline plc | 2,643,846 | ||||||
19,547 | Hospira, Inc.* | 806,900 | ||||||
15,000 | Johnson & Johnson Co. | 1,373,850 | ||||||
204,864 | Merck & Co., Inc. | 10,253,444 | ||||||
9,620 | Merck KGaA | 1,733,103 | ||||||
130,280 | Pfizer, Inc. | 3,990,477 | ||||||
17,200 | Roche Holding AG | 4,822,803 | ||||||
18,800 | Sanofi-Aventis SA | 2,001,027 | ||||||
15,000 | Sanofi-Aventis SA, ADR | 804,450 | ||||||
103,002 | Teva Pharmaceutical Industries, Ltd., ADR | 4,128,320 | ||||||
|
| |||||||
37,378,369 | ||||||||
|
|
Continued
6
AZL Franklin Templeton Founding Strategy Plus Fund
Schedule of Portfolio Investments
December 31, 2013
Shares | Fair Value | |||||||
| Common Stocks, continued |
| ||||||
| Professional Services (0.2%): |
| ||||||
22,565 | Randstad Holding NV | $ | 1,465,042 | |||||
|
| |||||||
| Real Estate Investment Trusts (REITs) (0.1%): |
| ||||||
2,556 | Alexander’s, Inc. | 843,480 | ||||||
28,600 | Westfield Retail Trust | 75,852 | ||||||
|
| |||||||
919,332 | ||||||||
|
| |||||||
| Real Estate Management & Development (0.1%): |
| ||||||
21,128 | Brookfield Properties Corp. | 406,714 | ||||||
13,131 | Canary Wharf Group plc*(a) | 67,853 | ||||||
3,700 | Forestar Group, Inc.* | 78,699 | ||||||
|
| |||||||
553,266 | ||||||||
|
| |||||||
| Semiconductors & Semiconductor Equipment (1.2%): |
| ||||||
71,480 | Intel Corp. | 1,855,620 | ||||||
24,150 | Maxim Integrated Products, Inc. | 674,027 | ||||||
3,528 | Samsung Electronics Co., Ltd. | 4,611,734 | ||||||
205,000 | Taiwan Semiconductor Manufacturing Co., Ltd. | 722,410 | ||||||
19,910 | Texas Instruments, Inc. | 874,248 | ||||||
|
| |||||||
8,738,039 | ||||||||
|
| |||||||
| Software (2.1%): |
| ||||||
274,732 | Microsoft Corp. | 10,283,219 | ||||||
4,190 | Nintendo Co., Ltd. | 560,382 | ||||||
19,930 | Oracle Corp. | 762,522 | ||||||
12,060 | SAP AG | 1,033,944 | ||||||
104,136 | Symantec Corp. | 2,455,527 | ||||||
|
| |||||||
15,095,594 | ||||||||
|
| |||||||
| Specialty Retail (0.3%): |
| ||||||
384,971 | Kingfisher plc | 2,460,710 | ||||||
|
| |||||||
| Tobacco (1.4%): |
| ||||||
47,098 | Altria Group, Inc. | 1,808,092 | ||||||
55,407 | British American Tobacco plc | 2,972,381 | ||||||
43,808 | Imperial Tobacco Group plc | 1,699,904 | ||||||
39,910 | Lorillard, Inc. | 2,022,639 | ||||||
11,117 | Philip Morris International, Inc. | 968,624 | ||||||
|
| |||||||
9,471,640 | ||||||||
|
| |||||||
| Trading Companies & Distributors (0.0%): |
| ||||||
133,000 | Noble Group, Ltd. | 113,278 | ||||||
|
| |||||||
| Wireless Telecommunication Services (1.6%): |
| ||||||
46,000 | China Mobile, Ltd. | 478,856 | ||||||
54,348 | Sprint Corp.*^ | 584,241 | ||||||
83,707 | Turkcell Iletisim Hizmetleri AS, ADR* | 1,117,488 | ||||||
2,043,570 | Vodafone Group plc | 8,032,274 | ||||||
|
| |||||||
10,212,859 | ||||||||
|
| |||||||
| Total Common Stocks (Cost $340,337,414) | 422,101,450 | ||||||
|
| |||||||
| Preferred Stocks (0.0%): |
| ||||||
| Commercial Banks (0.0%): |
| ||||||
6,800 | GMAC Capital Trust I, Series 2, Preferred Shares | 181,832 | ||||||
|
|
Shares | Fair Value | |||||||
| Preferred Stocks, continued |
| ||||||
| Metals & Mining (0.0%): |
| ||||||
10,480 | Vale SA, Preferred Shares, ADR | $ | 146,825 | |||||
|
| |||||||
| Total Preferred Stocks (Cost $458,947) | 328,657 | ||||||
|
| |||||||
| Convertible Preferred Stocks (0.3%): |
| ||||||
| Commercial Banks (0.1%): |
| ||||||
116 | Wells Fargo & Co., Series L, Class A, 0.03% | 128,760 | ||||||
300 | Wells Fargo & Co., Series L, Class A, 0.03% | 333,000 | ||||||
|
| |||||||
461,760 | ||||||||
|
| |||||||
| Commercial Services & Supplies (0.0%): |
| ||||||
6 | CEVA Group plc, Series A-1(a) | 7,800 | ||||||
49 | CEVA Group plc, Series A-2(a) | 46,123 | ||||||
|
| |||||||
53,923 | ||||||||
|
| |||||||
| Diversified Financial Services (0.1%): |
| ||||||
800 | Bank of America Corp., Series L, 7.25% | 848,799 | ||||||
|
| |||||||
| Insurance (0.0%): |
| ||||||
4,200 | MetLife, Inc., 0.63% | 132,468 | ||||||
|
| |||||||
| Multi-Utilities (0.0%): |
| ||||||
2,500 | Dominion Resources, Inc., Series B, 6.00% | 135,525 | ||||||
2,500 | Dominion Resources, Inc., Series A, 6.13% | 135,300 | ||||||
|
| |||||||
270,825 | ||||||||
|
| |||||||
| Oil, Gas & Consumable Fuels (0.1%): |
| ||||||
100 | Chesapeake Energy Corp., Series A, 5.75%(b) | 115,875 | ||||||
3,500 | SandRidge Energy, Inc., 0.28% | 346,938 | ||||||
|
| |||||||
462,813 | ||||||||
|
| |||||||
| Real Estate Investment Trusts (REITs) (0.0%): |
| ||||||
2,500 | FelCor Lodging Trust, Inc., Series A, 32.16% | 60,625 | ||||||
|
| |||||||
| Total Convertible Preferred Stocks (Cost $1,993,947) | 2,291,213 | ||||||
|
| |||||||
Contracts, Shares, Notional Amount or Principal Amount | Fair Value | |||||||
| Convertible Bonds (0.5%): |
| ||||||
| Automobiles (0.4%): |
| ||||||
$ | 1,500,000 | Volkswagen International Finance NV, 5.50%, 11/9/15(b) | 2,559,466 | |||||
|
| |||||||
| Construction Materials (0.1%): |
| ||||||
455,000 | Cemex SAB de C.V., 3.25%, 3/15/16 | 599,463 | ||||||
300,000 | Cemex SAB de C.V., 3.75%, 3/15/18 | 406,875 | ||||||
|
| |||||||
1,006,338 | ||||||||
|
| |||||||
| Total Convertible Bonds (Cost $2,676,531) | 3,565,804 | ||||||
|
| |||||||
| Floating Rate Loans (0.8%): |
| ||||||
| Diversified Financial Services (0.2%): |
| ||||||
3,860,813 | Lehman Brothers Holdings, Inc. , 12/31/49(d)(e) | 1,708,410 | ||||||
|
| |||||||
| Electric Utilities (0.0%): |
| ||||||
149,307 | Texas Competitive Electric Holdings Co. LLC, 4.67%, 10/10/17(d) | 103,116 | ||||||
|
|
Continued
7
AZL Franklin Templeton Founding Strategy Plus Fund
Schedule of Portfolio Investments
December 31, 2013
Contracts, Shares, Notional Amount or Principal Amount | Fair Value | |||||||
| Corporate Bonds, continued |
| ||||||
| Energy (0.0%): |
| ||||||
$ | 27,680 | NGPL PipeCo LLC, 6.75%, 9/15/17(d) | $ | 25,737 | ||||
|
| |||||||
| Hotels, Restaurants & Leisure (0.1%): |
| ||||||
95,000 | Caesars Entertainment Operating Co., Inc., 4.49%, 1/28/18(d) | 89,670 | ||||||
454,000 | Caesars Entertainment Operating Co., Inc., 5.49%, 1/28/18(d) | 432,907 | ||||||
|
| |||||||
522,577 | ||||||||
|
| |||||||
| Machinery (0.1%): |
| ||||||
483,718 | Navistar International Corp., 5.75%, 8/17/17(d) | 490,219 | ||||||
|
| |||||||
| Media (0.3%): |
| ||||||
469,349 | Cengage Learning Acquisitions, Inc., 4.75%, 7/3/14(d)(e) | 364,332 | ||||||
10,468 | Clear Channel Communications, Inc., Tranche C, 3.82%, 1/19/16(d) | 10,007 | ||||||
135,447 | Clear Channel Communications, Inc., Delayed Draw Term, 3.82%, 1/29/16(d) | 131,026 | ||||||
430,631 | Clear Channel Communications, Inc., 6.92%, 1/30/19(d) | 410,714 | ||||||
1,000,000 | Cumulus Media Holdings, Inc., 2nd Lien Term Loan, 7.50%, 9/16/18(d) | 1,018,999 | ||||||
|
| |||||||
1,935,078 | ||||||||
|
| |||||||
| Oil, Gas & Consumable Fuels (0.1%): |
| ||||||
1,000,000 | Fieldwood Energy LLC , 9/30/20(d) | 1,020,000 | ||||||
|
| |||||||
| Total Floating Rate Loans (Cost $5,711,814) | 5,805,137 | ||||||
|
| |||||||
| Corporate Bonds (7.6%): |
| ||||||
| Airlines (0.1%): |
| ||||||
585,000 | American Airlines, Inc., 7.50%, 3/15/16, Callable 2/18/14 @ 105.62(b) | 606,938 | ||||||
|
| |||||||
| Auto Components (0.3%): |
| ||||||
100,000 | Goodyear Tire & Rubber Co., 8.25%, 8/15/20, Callable 8/15/15 @ 104.13^ | 111,750 | ||||||
1,600,000 | Goodyear Tire & Rubber Co., 6.50%, 3/1/21, Callable 3/1/16 @ 104.88 | 1,696,000 | ||||||
|
| |||||||
1,807,750 | ||||||||
|
| |||||||
| Automobiles (0.1%): |
| ||||||
200,000 | Chrysler GP / Chrysler CG Co. Issuer, 8.00%, 6/15/19, Callable 6/15/15 @ 104 | 221,000 | ||||||
400,000 | Chrysler GP / Chrysler CG Co. Issuer, 8.25%, 6/15/21, Callable 6/15/15 @ 104.13 | 455,000 | ||||||
|
| |||||||
676,000 | ||||||||
|
| |||||||
| Beverages (0.0%): |
| ||||||
250,000 | Innovation Ventures LLC / Innovation Ventures Finance Corp., 9.50%, 8/15/19, Callable 8/15/15 @ 107.13^(b) | 241,250 | ||||||
|
| |||||||
| Capital Markets (0.1%): |
| ||||||
500,000 | E*TRADE Financial Corp., 6.00%, 11/15/17, Callable 11/15/14 @ 103 | 531,250 | ||||||
|
|
Contracts, Shares, Notional Amount or Principal Amount | Fair Value | |||||||
| Corporate Bonds, continued |
| ||||||
| Commercial Banks (0.1%): |
| ||||||
$ | 250,000 | JPMorgan Chase & Co., Series 1, 7.90%, 4/29/49, Callable 4/30/18 @ 100(d) | $ | 275,625 | ||||
20,000 | Wells Fargo & Co., 7.00%(b) | 562,840 | ||||||
|
| |||||||
838,465 | ||||||||
|
| |||||||
| Commercial Services & Supplies (0.1%): |
| ||||||
475,000 | CEVA Group plc, 4.00%, 5/1/18, Callable 2/17/14 @ 102(b) | 415,625 | ||||||
|
| |||||||
| Diversified Consumer Services (0.1%): |
| ||||||
500,000 | Laureate Education, Inc., 9.25%, 9/1/19, Callable 9/1/15 @ 106.94(b) | 543,750 | ||||||
|
| |||||||
| Diversified Financial Services (0.2%): |
| ||||||
75,000 | Citigroup, Inc., Series 0000, 6.00%, 10/10/14(b) | 1,119,000 | ||||||
|
| |||||||
| Diversified Telecommunication (0.3%): |
| ||||||
200,000 | CenturyLink, Inc., Series W, 6.75%, 12/1/23 | 202,500 | ||||||
1,700,000 | Verizon Communications, Inc., 5.15%, 9/15/23 | 1,825,276 | ||||||
|
| |||||||
2,027,776 | ||||||||
|
| |||||||
| Electronic Equipment, Instruments & Components (0.1%): |
| ||||||
500,000 | Sanmina-SCI Corp., 7.00%, 5/15/19, Callable 5/15/14 @ 105.25(b) | 531,875 | ||||||
|
| |||||||
| Energy (0.1%): |
| ||||||
315,000 | NGPL PipeCo LLC, 7.12%, 12/15/17^(b) | 285,075 | ||||||
469,000 | NGPL PipeCo LLC, 9.63%, 6/1/19, Callable 6/1/15 @ 107.22^(b) | 458,448 | ||||||
|
| |||||||
743,523 | ||||||||
|
| |||||||
| Food & Staples Retailing (0.1%): |
| ||||||
300,000 | JBS USA LLC / JBS USA Finance Corp., 8.25%, 2/1/20, Callable 2/1/15 @ 106.19(b) | 325,499 | ||||||
161,000 | JBS USA LLC / JBS USA Finance Corp., 7.25%, 6/1/21, Callable 6/1/15 @ 105.44(b) | 167,843 | ||||||
135,000 | SuperValu, Inc., 8.00%, 5/1/16^ | 149,344 | ||||||
200,000 | US Foods, Inc., 8.50%, 6/30/19, Callable 6/30/14 @ 106.38 | 219,000 | ||||||
|
| |||||||
861,686 | ||||||||
|
| |||||||
| Health Care Providers & Services (0.4%): |
| ||||||
299,000 | HCA, Inc., 6.50%, 2/15/16 | 327,031 | ||||||
800,000 | HCA, Inc., 7.50%, 2/15/22 | 878,000 | ||||||
400,000 | Tenet Healthcare Corp., 9.25%, 2/1/15 | 431,000 | ||||||
1,400,000 | Tenet Healthcare Corp., 8.13%, 4/1/22 | 1,508,500 | ||||||
|
| |||||||
3,144,531 | ||||||||
|
| |||||||
| Hotels, Restaurants & Leisure (0.3%): |
| ||||||
500,000 | Caesars Entertainment Corp., 9.00%, 2/15/20, Callable 2/15/16 @ 104.5 | 486,250 | ||||||
324,000 | ClubCorp Club Operations, Inc., 10.00%, 12/1/18, Callable 12/1/14 @ 105 | 358,830 | ||||||
500,000 | Landry’s, Inc., 9.38%, 5/1/20, Callable 5/1/15 @ 107.03(b) | 545,000 |
Continued
8
AZL Franklin Templeton Founding Strategy Plus Fund
Schedule of Portfolio Investments
December 31, 2013
Contracts, Shares, Notional Amount or Principal Amount | Fair Value | |||||||
| Corporate Bonds, continued |
| ||||||
| Hotels, Restaurants & Leisure, continued |
| ||||||
$ | 500,000 | MGM Resorts International, 10.00%, 11/1/16 | $ | 600,000 | ||||
200,000 | MGM Resorts International, 6.75%, 10/1/20 | 214,000 | ||||||
|
| |||||||
2,204,080 | ||||||||
|
| |||||||
| Household Products (0.2%): |
| ||||||
300,000 | Reynolds Group Issuer LLC / Reynolds Group Issuer, Inc., 7.88%, 8/15/19, Callable 8/15/15 @ 103.94 | 331,500 | ||||||
200,000 | Reynolds Group Issuer LLC / Reynolds Group Issuer, Inc., 9.88%, 8/15/19, Callable 8/15/15 @ 104.94 | 222,500 | ||||||
500,000 | Reynolds Group Issuer LLC / Reynolds Group Issuer, Inc., 5.75%, 10/15/20, Callable 10/15/15 @ 104.31 | 510,000 | ||||||
600,000 | Reynolds Group Issuer LLC / Reynolds Group Issuer, Inc., 8.25%, 2/15/21, Callable 2/15/16 @ 104.13 | 640,500 | ||||||
|
| |||||||
1,704,500 | ||||||||
|
| |||||||
| Independent Power Producers & Energy Traders (0.4%): |
| ||||||
160,000 | Calpine Corp., 7.88%, 7/31/20, Callable 7/31/15 @ 103.94(b) | 175,200 | ||||||
200,000 | Calpine Corp., 7.50%, 2/15/21, Callable 11/1/15 @ 103.75(b) | 218,250 | ||||||
400,000 | Calpine Corp., 7.88%, 1/15/23, Callable 1/15/17 @ 103.94(b) | 437,000 | ||||||
410,000 | Dynegy Holdings, Inc., 7.50%, 6/1/15(a)(c)(e) | — | ||||||
50,000 | Dynegy Holdings, Inc., 8.38%, 5/1/16(a)(c)(e) | — | ||||||
170,000 | Dynegy Holdings, Inc., 7.75%, 6/1/19(a)(c)(e) | — | ||||||
115,000 | RRI Energy, Inc., 7.88%, 6/15/17 | 126,500 | ||||||
195,000 | Texas Competitive Electric Holdings Co. LLC, Series A, 10.25%, 11/1/15, Callable 2/18/14 @ 100 | 12,188 | ||||||
2,581,000 | Texas Competitive Electric Holdings Co. LLC, 11.50%, 10/1/20, Callable 4/1/16 @ 105.75(b) | 1,897,035 | ||||||
|
| |||||||
2,866,173 | ||||||||
|
| |||||||
| IT Services (0.0%): |
| ||||||
200,000 | SRA International, Inc., 11.00%, 10/1/19, Callable 10/1/15 @ 105.5 | 208,000 | ||||||
|
| |||||||
| Machinery (0.1%): |
| ||||||
245,000 | Aviation Capital Group Corp., 6.75%, 4/6/21(b) | 266,421 | ||||||
400,000 | Navistar International Corp., 8.25%, 11/1/21, Callable 11/1/14 @ 104.13^ | 414,000 | ||||||
|
| |||||||
680,421 | ||||||||
|
| |||||||
| Media (1.2%): |
| ||||||
325,000 | Cablevision Systems Corp., 8.63%, 9/15/17 | 378,625 | ||||||
100,000 | Cablevision Systems Corp., 7.75%, 4/15/18 | 111,625 | ||||||
1,000,000 | CCO Holdings LLC / CCO Holdings Capital Corp., 7.00%, 1/15/19, Callable 1/15/14 @ 105.25 | 1,053,750 |
Contracts, Shares, Notional Amount or Principal Amount | Fair Value | |||||||
| Corporate Bonds, continued |
| ||||||
| Media, continued |
| ||||||
$ | 500,000 | CCO Holdings LLC / CCO Holdings Capital Corp., 6.50%, 4/30/21, Callable 4/30/15 @ 104.88 | $ | 513,750 | ||||
1,548,000 | Clear Channel Communications, Inc., 9.00%, 12/15/19, Callable 7/15/15 @ 104.5 | 1,578,960 | ||||||
1,000,000 | Clear Channel Communications, Inc., 9.00%, 3/1/21, Callable 3/1/16 @ 104.5 | 1,015,500 | ||||||
700,000 | CSC Holdings LLC, 6.75%, 11/15/21 | 754,250 | ||||||
175,000 | Cumulus Media Holdings, Inc., 7.75%, 5/1/19, Callable 5/1/15 @ 103.88 | 184,625 | ||||||
1,000,000 | Dish DBS Corp., 5.88%, 7/15/22 | 1,000,000 | ||||||
500,000 | Dish DBS Corp., 5.00%, 3/15/23 | 466,250 | ||||||
1,000,000 | Univision Communications, Inc., 5.13%, 5/15/23, Callable 5/15/18 @ 102.56(b) | 998,750 | ||||||
200,000 | Visant Corp., 10.00%, 10/1/17, Callable 2/18/14 @ 107.5 | 194,000 | ||||||
|
| |||||||
8,250,085 | ||||||||
|
| |||||||
| Metals & Mining (0.1%): |
| ||||||
500,000 | Dynacast International LLC / Dynacast Finance, Inc., 9.25%, 7/15/19, Callable 7/15/15 @ 104.63 | 551,250 | ||||||
500,000 | Molycorp, Inc., 10.00%, 6/1/20, Callable 6/1/16 @ 105 | 496,250 | ||||||
|
| |||||||
1,047,500 | ||||||||
|
| |||||||
| Multiline Retail (0.1%): |
| ||||||
711,794 | J.C. Penney Co., Inc., 6.00%, 5/22/18(d) | 695,423 | ||||||
|
| |||||||
| Office Electronics (0.0%): |
| ||||||
32,000 | CDW LLC / CDW Finance Corp., 12.54%, 10/12/17, Callable 2/18/14 @ 104.18 | 33,440 | ||||||
|
| |||||||
| Oil & Gas Exploration & Production (0.0%): |
| ||||||
300,000 | SandRidge Energy, Inc., 7.50%, 3/15/21, Callable 3/15/16 @ 103.75 | 314,250 | ||||||
|
| |||||||
| Oil, Gas & Consumable Fuels (1.6%): |
| ||||||
196,000 | Antero Resources Finance Corp., 7.25%, 8/1/19, Callable 8/1/14 @ 105.44 | 210,700 | ||||||
200,000 | Antero Resources Finance Corp., 5.38%, 11/1/21, Callable 11/1/16 @ 104.03(b) | 202,000 | ||||||
250,000 | Arch Coal, Inc., 7.00%, 6/15/19, Callable 6/15/15 @ 103.5^ | 198,750 | ||||||
750,000 | Arch Coal, Inc., 7.25%, 6/15/21, Callable 6/15/16 @ 103.63 | 573,750 | ||||||
500,000 | Bill Barrett Corp., 7.00%, 10/15/22, Callable 10/15/17 @ 103.5 | 518,750 | ||||||
345,000 | Chesapeake Energy Corp., 6.50%, 8/15/17 | 388,988 | ||||||
200,000 | Chesapeake Energy Corp., 7.25%, 12/15/18 | 231,000 | ||||||
1,700,000 | Chesapeake Energy Corp., 5.75%, 3/15/23^ | 1,750,999 | ||||||
500,000 | Energy XXI Gulf Coast, Inc., 9.25%, 12/15/17, Callable 12/15/14 @ 104.63 | 556,250 | ||||||
500,000 | EP Energy/EP Finance, Inc., 9.38%, 5/1/20, Callable 5/1/16 @ 104.69 | 576,875 | ||||||
400,000 | EXCO Resources, Inc., 7.50%, 9/15/18, Callable 9/15/14 @ 103.75 | 380,000 |
Continued
9
AZL Franklin Templeton Founding Strategy Plus Fund
Schedule of Portfolio Investments
December 31, 2013
Contracts, Shares, Notional Amount or Principal Amount | Fair Value | |||||||
| Corporate Bonds, continued |
| ||||||
| Oil, Gas & Consumable Fuels, continued |
| ||||||
$ | 500,000 | Halcon Resources Corp., 9.75%, 7/15/20, Callable 7/15/16 @ 104.88 | $ | 521,250 | ||||
400,000 | Halcon Resources Corp., 8.88%, 5/15/21, Callable 11/15/16 @ 104.44 | 404,000 | ||||||
1,300,000 | Kinder Morgan, Inc., 5.63%, 11/15/23, Callable 8/15/23 @ 100(b) | 1,258,707 | ||||||
100,000 | Linn Energy LLC / Linn Energy Finance Corp., 8.63%, 4/15/20, Callable 4/15/15 @ 104.31 | 108,000 | ||||||
325,000 | Midstates Petroleum Co., Inc. / Midstates Petroleum Co. LLC, 10.75%, 10/1/20, Callable 10/1/16 @ 105.38 | 353,438 | ||||||
200,000 | Peabody Energy Corp., 6.25%, 11/15/21 | 202,000 | ||||||
900,000 | Samson Investment Co., 9.75%, 2/15/20, Callable 2/15/16 @ 104.88(b) | 981,000 | ||||||
900,000 | Sanchez Energy Corp., 7.75%, 6/15/21, Callable 6/15/17 @ 103.88(b) | 920,250 | ||||||
500,000 | SandRidge Energy, Inc., 8.75%, 1/15/20, Callable 1/15/15 @ 104.38 | 538,750 | ||||||
400,000 | W&T Offshore, Inc., 8.50%, 6/15/19, Callable 6/15/15 @ 104.25 | 423,000 | ||||||
|
| |||||||
11,298,457 | ||||||||
|
| |||||||
| Pharmaceuticals (0.0%): |
| ||||||
100,000 | Grifols, Inc., 8.25%, 2/1/18, Callable 2/1/14 @ 106.19 | 106,625 | ||||||
|
| |||||||
| Professional Services (0.0%): |
| ||||||
100,000 | United Rentals (North America), Inc., 8.38%, 9/15/20, Callable 9/15/15 @ 104.19^ | 111,500 | ||||||
|
| |||||||
| Semiconductors & Semiconductor Equipment (0.2%): |
| ||||||
510,000 | Freescale Semiconductor, Inc., 8.05%, 2/1/20, Callable 6/1/15 @ 104.03^ | 548,250 | ||||||
480,000 | Freescale Semiconductor, Inc., 10.75%, 8/1/20, Callable 8/1/15 @ 105.38 | 544,800 | ||||||
|
| |||||||
1,093,050 | ||||||||
|
| |||||||
| Software (0.4%): |
| ||||||
389,000 | First Data Corp., 11.25%, 3/31/16, Callable 3/31/16 @ 100^ | 389,973 | ||||||
600,000 | First Data Corp., 12.63%, 1/15/21, Callable 1/15/16 @ 112.63 | 704,250 | ||||||
1,389,000 | First Data Corp., 8.25%, 1/15/21, Callable 1/15/16 @ 104.13^(b) | 1,477,548 | ||||||
141,000 | First Data Corp., PIK, 8.75%, 1/15/22, Callable 1/15/16 @ 104.38(b) | 150,518 | ||||||
200,000 | Infor (US), Inc., 9.38%, 4/1/19, Callable 4/1/15 @ 107.03 | 225,000 | ||||||
|
| |||||||
2,947,289 | ||||||||
|
| |||||||
| Specialty Retail (0.1%): |
| ||||||
400,000 | Academy, Ltd., 9.25%, 8/1/19, Callable 8/1/14 @ 106.94(b) | 442,000 | ||||||
|
| |||||||
| Thrifts & Mortgage Finance (0.1%): |
| ||||||
900,000 | Nuveen Investments, Inc., 9.50%, 10/15/20, Callable 10/15/16 @ 104.75(b) | 902,250 | ||||||
|
|
Contracts, Shares, Notional Amount or Principal Amount | Fair Value | |||||||
| Corporate Bonds, continued |
| ||||||
| Wireless Telecommunication Services (0.7%): |
| ||||||
$ | 511,930 | Avaya, Inc., 4.74%, 10/26/17(d) | $ | 500,155 | ||||
125,898 | Avaya, Inc., 8.00%, 3/31/18(d) | 127,566 | ||||||
339,000 | Avaya, Inc., 7.00%, 4/1/19, Callable 4/1/15 @ 103.5(b) | 332,220 | ||||||
480,000 | Avaya, Inc., 10.50%, 3/1/21, Callable 3/1/17 @ 107.88^(b) | 458,400 | ||||||
500,000 | Cricket Communications, Inc., 7.75%, 10/15/20, Callable 10/15/15 @ 103.88 | 570,000 | ||||||
100,000 | Frontier Communications Corp., 8.50%, 4/15/20 | 112,000 | ||||||
700,000 | Sprint Nextel Corp., 9.13%, 3/1/17 | 822,500 | ||||||
500,000 | Sprint Nextel Corp., 9.00%, 11/15/18(b) | 602,500 | ||||||
500,000 | Sprint Nextel Corp., 11.50%, 11/15/21 | 655,000 | ||||||
900,000 | T-Mobile USA, Inc., 6.54%, 4/28/20, Callable 4/28/16 @ 103.27 | 956,251 | ||||||
|
| |||||||
5,136,592 | ||||||||
|
| |||||||
| Total Corporate Bonds (Cost $51,130,307) | 54,131,054 | ||||||
|
| |||||||
| Foreign Bonds (15.7%): |
| ||||||
| Chemicals (0.1%): |
| ||||||
100,000 | Kerling plc, 10.63%, 2/1/17, Callable 2/1/14 @ 105.31+(b) | 145,813 | ||||||
450,000 | Orion Engineered Carbons Bondco GmbH, 10.00%, 6/15/18, Callable 6/15/14 @ 107.5+(b) | 684,013 | ||||||
|
| |||||||
829,826 | ||||||||
|
| |||||||
| Commercial Banks (0.2%): |
| ||||||
250,000 | Boparan Finance plc, 9.88%, 4/30/18, Callable 4/30/14 @ 107.41+(b) | 453,292 | ||||||
2,990,000 | Export-Import Bank of Korea (The), 1.45%, 5/19/14+(b) | 465,680 | ||||||
|
| |||||||
918,972 | ||||||||
|
| |||||||
| Sovereign Bonds (15.4%): |
| ||||||
290,000 | Bank Negara Monetary Notes, Series 0213, 2.86%, 1/9/14+(f) | 88,525 | ||||||
590,000 | Bank Negara Monetary Notes, Series 0413, 2.83%, 1/16/14+(f) | 180,059 | ||||||
90,000 | Bank Negara Monetary Notes, Series 4013, 2.88%, 1/23/14+(f) | 27,442 | ||||||
220,000 | Bank Negara Monetary Notes, Series 4213, 2.89%, 1/30/14+(f) | 67,043 | ||||||
120,000 | Bank Negara Monetary Notes, Series 0613, 2.81%, 2/6/14+(f) | 36,548 | ||||||
1,725,000 | Bank Negara Monetary Notes, Series 0713, 2.81%, 2/18/14+(f) | 524,875 | ||||||
1,465,000 | Bank Negara Monetary Notes, Series 0813, 2.82%, 2/20/14+(f) | 445,692 | ||||||
1,375,000 | Bank Negara Monetary Notes, Series 0913, 2.84%, 2/25/14+(f) | 418,144 | ||||||
105,000 | Bank Negara Monetary Notes, Series 1213, 2.87%, 3/13/14+(f) | 31,890 |
Continued
10
AZL Franklin Templeton Founding Strategy Plus Fund
Schedule of Portfolio Investments
December 31, 2013
Contracts, Shares, Notional Amount or Principal Amount | Fair Value | |||||||
| Foreign Bonds, continued |
| ||||||
| Sovereign Bond, continued |
| ||||||
$ | 200,000 | Bank Negara Monetary Notes, Series 1313, 2.85%, 3/20/14+(f) | $ | 60,709 | ||||
240,000 | Bank Negara Monetary Notes, Series 1413, 2.82%, 3/27/14+(f) | 72,821 | ||||||
80,000 | Bank Negara Monetary Notes, Series 1613, 2.84%, 4/3/14+(f) | 24,262 | ||||||
600,000 | Bank Negara Monetary Notes, Series 2113, 2.83%, 4/24/14+(f) | 181,622 | ||||||
170,000 | Bank Negara Monetary Notes, Series 2813, 2.84%, 5/15/14+(f) | 51,373 | ||||||
520,000 | Bank Negara Monetary Notes, Series 2913, 2.81%, 5/20/14+(f) | 157,076 | ||||||
395,000 | Bank Negara Monetary Notes, Series 3113, 2.83%, 5/27/14+(f) | 119,249 | ||||||
700,000 | Bank Negara Monetary Notes, Series 3313, 2.83%, 6/3/14+(f) | 211,207 | ||||||
876,000 | Bank Negara Monetary Notes, Series 3513, 2.84%, 6/5/14+(f) | 264,268 | ||||||
1,270,000 | Bank Negara Monetary Notes, Series 3613, 2.83%, 6/10/14+(f) | 382,971 | ||||||
170,000 | Bank Negara Monetary Notes, Series 6913, 2.90%, 6/12/14+(f) | 51,255 | ||||||
810,000 | Bank Negara Monetary Notes, Series 3713, 2.87%, 6/17/14+(f) | 244,117 | ||||||
1,310,000 | Bank Negara Monetary Notes, Series 3813, 2.87%, 6/19/14+(f) | 394,742 | ||||||
330,000 | Bank Negara Monetary Notes, Series 7413, 2.84%, 7/3/14+(f) | 99,325 | ||||||
280,000 | Bank Negara Monetary Notes, Series 4313, 2.82%, 7/8/14+(f) | 84,241 | ||||||
240,000 | Bank Negara Monetary Notes, Series 4413, 2.84%, 7/15/14+(f) | 72,165 | ||||||
340,000 | Bank Negara Monetary Notes, Series 4613, 2.84%, 7/24/14+(f) | 102,157 | ||||||
860,000 | Bank Negara Monetary Notes, Series 4813, 2.85%, 8/5/14+(f) | 258,144 | ||||||
870,000 | Bank Negara Monetary Notes, Series 4913, 2.82%, 8/14/14+(f) | 260,957 | ||||||
230,000 | Bank Negara Monetary Notes, Series 5113, 2.89%, 8/21/14+(f) | 68,950 | ||||||
85,000 | Bank Negara Monetary Notes, Series 5113, 2.83%, 8/21/14+(f) | 25,482 | ||||||
40,000 | Bank Negara Monetary Notes, Series 5513, 2.79%, 9/9/14+(f) | 11,973 | ||||||
40,000 | Bank Negara Monetary Notes, Series 5713, 2.79%, 9/18/14+(f) | 11,964 | ||||||
260,000 | Bank Negara Monetary Notes, Series 6013, 2.86%, 10/2/14+(f) | 77,682 | ||||||
10,900,000 | Bank Negara Monetary Notes, Series 6213, 2.85%, 10/16/14+(f) | 3,253,038 | ||||||
215,000 | Bank Negara Monetary Notes, Series 6213, 2.86%, 10/16/14+(f) | 64,165 |
Contracts, Shares, Notional Amount or Principal Amount | Fair Value | |||||||
| Foreign Bonds, continued |
| ||||||
| Sovereign Bonds, continued |
| ||||||
$ | 1,465,000 | Bank Negara Monetary Notes, Series 6613, 2.89%, 10/28/14+(f) | $ | 436,802 | ||||
350,000 | Bank Negara Monetary Notes, Series 6713, 2.83%, 11/6/14+(f) | 104,281 | ||||||
250,000 | Bank Negara Monetary Notes, Series 7013, 2.89%, 11/18/14+(f) | 74,425 | ||||||
365,000 | Brazil Nota do Tesouro Nacional, Series NTNB, 6.00%, 5/15/15+(g) | 375,350 | ||||||
75,000 | Brazil Nota do Tesouro Nacional, Series NTNB, 6.00%, 8/15/16+(g) | 77,560 | ||||||
3,200,000 | Brazil Nota do Tesouro Nacional, Series NTNF, 1.88%, 1/1/17+(g) | 1,282,386 | ||||||
230,000 | Brazil Nota do Tesouro Nacional, Series NTNB, 6.00%, 8/15/18+(g) | 234,464 | ||||||
4,910,000 | Brazil Nota do Tesouro Nacional, Series NTNF, 2.06%, 1/1/19+(g) | 1,879,072 | ||||||
630,000 | Brazil Nota do Tesouro Nacional, Series NTNF, 2.01%, 1/1/21+(g) | 232,145 | ||||||
910,000 | Brazil Nota do Tesouro Nacional, Series NTNB, 6.00%, 8/15/22+(g) | 908,914 | ||||||
1,790,000 | Brazil Nota do Tesouro Nacional, Series NTNF, 1.88%, 1/1/23+(g) | 640,903 | ||||||
140,000 | Brazil Nota do Tesouro Nacional, Series NTNB, 6.00%, 5/15/45+(g) | 132,059 | ||||||
1,153,000 | Canadian Government, 1.00%, 2/1/14+ | 1,085,520 | ||||||
251,000 | Canadian Government, 2.00%, 3/1/14+ | 236,714 | ||||||
214,000 | Canadian Government, 0.75%, 5/1/14+ | 201,353 | ||||||
340,000 | Canadian Government, 2.25%, 8/1/14+ | 322,467 | ||||||
678,000 | Canadian Government, 1.00%, 11/1/14+ | 638,415 | ||||||
609,000 | Canadian Government, 2.00%, 12/1/14+ | 578,662 | ||||||
1,672,000 | Canadian Government, 1.00%, 2/1/15+ | 1,574,224 | ||||||
18,000,000 | Hungary Government Bond, Series 14/C, 5.50%, 2/12/14+ | 83,574 | ||||||
52,720,000 | Hungary Government Bond, Series 14/D, 6.75%, 8/22/14+ | 249,534 | ||||||
7,800,000 | Hungary Government Bond, Series 15/A, 8.00%, 2/12/15+ | 38,019 | ||||||
15,720,000 | Hungary Government Bond, Series 15/C, 7.75%, 8/24/15+ | 77,873 | ||||||
12,500,000 | Hungary Government Bond, Series 16/C, 5.50%, 2/12/16+ | 60,092 | ||||||
502,340,000 | Hungary Government Bond, Series 16/D, 5.50%, 12/22/16+ | 2,417,987 | ||||||
486,400,000 | Hungary Government Bond, Series 17/B, 6.75%, 2/24/17+ | 2,418,224 | ||||||
54,160,000 | Hungary Government Bond, Series 17/A, 6.75%, 11/24/17+ | 271,750 | ||||||
12,610,000 | Hungary Government Bond, Series 18/A, 5.50%, 12/20/18+ | 60,394 | ||||||
162,600,000 | Hungary Government Bond, Series 19/A, 6.50%, 6/24/19+ | 811,891 | ||||||
9,040,000 | Hungary Government Bond, Series 20/A, 7.50%, 11/12/20+ | 47,088 |
Continued
11
AZL Franklin Templeton Founding Strategy Plus Fund
Schedule of Portfolio Investments
December 31, 2013
Contracts, Shares, Notional Amount or Principal Amount | Fair Value | |||||||
| Foreign Bonds, continued |
| ||||||
| Sovereign Bonds, continued |
| ||||||
$ | 14,460,000 | Hungary Government Bond, Series 22/A, 7.00%, 6/24/22+ | $ | 73,079 | ||||
124,950,000 | Hungary Government Bond, Series 23/A, 6.00%, 11/24/23+ | 593,163 | ||||||
5,330,000 | Hungary Treasury Bill, Series 1Y, 5.16%, 1/8/14+(f) | 24,653 | ||||||
4,770,000 | Hungary Treasury Bill, 4.07%, 6/25/14+(f) | 21,791 | ||||||
47,000,000 | Indonesia Government, Series FR31, 11.00%, 11/15/20+ | 4,383 | ||||||
5,300,000,000 | Indonesia Government, Series FR34, 12.80%, 6/15/21+ | 542,640 | ||||||
120,000,000 | Indonesia Government, Series FR53, 8.25%, 7/15/21+ | 9,748 | ||||||
3,200,000,000 | Indonesia Government, Series FR44, 10.00%, 9/15/24+ | 285,000 | ||||||
3,300,000,000 | Indonesia Government, Series FR47, 10.00%, 2/15/28+ | 291,735 | ||||||
934,700 | Ireland Treasury Bill, 5.50%, 10/18/17+ | 1,461,306 | ||||||
246,000 | Irish Government, 4.50%, 10/18/18+ | 375,175 | ||||||
597,000 | Irish Government, 4.40%, 6/18/19+ | 901,196 | ||||||
1,175,000 | Irish Government, 5.90%, 10/18/19+ | 1,896,861 | ||||||
552,000 | Irish Government, 4.50%, 4/18/20+ | 830,301 | ||||||
1,821,000 | Irish Government, 5.00%, 10/18/20+ | 2,815,617 | ||||||
958,580 | Irish Government, 5.40%, 3/13/25+ | 1,499,644 | ||||||
9,070,000 | Kommuninvest I Sverige AB, Series 1405, 2.25%, 5/5/14+ | 1,417,402 | ||||||
211,700,000 | Korea Monetary Stab Bond, Series 1402, 3.47%, 2/2/14+ | 200,768 | ||||||
311,140,000 | Korea Monetary Stab Bond, Series 1404, 3.59%, 4/2/14+ | 295,595 | ||||||
151,900,000 | Korea Monetary Stab Bond, Series 1405, 2.55%, 5/9/14+ | 143,923 | ||||||
368,910,000 | Korea Monetary Stab Bond, Series 1406, 3.28%, 6/2/14+ | 350,535 | ||||||
1,107,000,000 | Korea Monetary Stab Bond, Series 1406, 2.57%, 6/9/14+ | 1,048,862 | ||||||
258,700,000 | Korea Monetary Stab Bond, Series 1408, 2.82%, 8/2/14+ | 245,416 | ||||||
1,092,000,000 | Korea Monetary Stab Bond, Series 1409, 2.72%, 9/9/14+ | 1,035,289 | ||||||
2,081,000,000 | Korea Monetary Stab Bond, Series 1410, 2.78%, 10/2/14+ | 1,973,645 | ||||||
768,130,000 | Korea Monetary Stab Bond, Series 1412, 2.84%, 12/2/14+ | 729,052 | ||||||
1,013,290,000 | Korea Monetary Stab Bond, Series 1502, 2.74%, 2/2/15+ | 960,587 | ||||||
434,060,000 | Korea Monetary Stab Bond, Series 1504, 2.47%, 4/2/15+ | 410,107 | ||||||
1,618,900,000 | Korea Monetary Stab Bond, Series 1506, 2.76%, 6/2/15+ | 1,534,600 | ||||||
2,757,580,000 | Korea Monetary Stab Bond, Series 1508, 2.80%, 8/2/15+ | 2,615,436 |
Contracts, Shares, Notional Amount or Principal Amount | Fair Value | |||||||
| Foreign Bonds, continued |
| ||||||
| Sovereign Bonds, continued |
| ||||||
$ | 6,041,000,000 | Korea Monetary Stab Bond, Series 1510, 2.81%, 10/2/15+ | $ | 5,730,495 | ||||
2,618,100,000 | Korea Monetary Stab Bond, Series 1512, 2.90%, 12/2/15+ | 2,486,679 | ||||||
347,060,000 | Korea Treasury Bond, Series 1412, 3.25%, 12/10/14+ | 330,661 | ||||||
314,700,000 | Korea Treasury Bond, Series 1506, 3.25%, 6/10/15+ | 300,344 | ||||||
2,224,930,000 | Korea Treasury Bond, Series 1512, 2.75%, 12/10/15+ | 2,106,879 | ||||||
880,600,000 | Korea Treasury Bond, Series 1606, 2.75%, 6/10/16+ | 833,018 | ||||||
946,400,000 | Korea Treasury Bond, Series 1612, 3.00%, 12/10/16+ | 900,572 | ||||||
1,170,000 | Letra do Tesouro Nacional, Series LTN, 9.56%, 4/1/14+(f)(g) | 484,205 | ||||||
96,000 | Letra do Tesouro Nacional, Series LTN, 10.13%, 1/1/15+(f)(g) | 36,743 | ||||||
1,660,000 | Letra do Tesouro Nacional, Series LTN, 12.19%, 1/1/16+(f)(g) | 563,351 | ||||||
3,160,000 | Letra do Tesouro Nacional, Series LTN, 13.41%, 1/1/17+(f)(g) | 943,373 | ||||||
50,000 | Malaysia Treasury Bill, Series 364, 2.86%, 5/30/14+(f) | 15,088 | ||||||
4,895,000 | Malaysian Government, Series 0211, 3.43%, 8/15/14+ | 1,499,386 | ||||||
1,615,000 | Malaysian Government, Series 0409, 3.74%, 2/27/15+ | 495,733 | ||||||
2,100,000 | Malaysian Government, Series 0110, 3.84%, 8/12/15+ | 646,669 | ||||||
3,105,000 | Malaysian Government, Series 2/05, 4.72%, 9/30/15+ | 971,510 | ||||||
890,000 | Malaysian Government, Series 0312, 3.20%, 10/15/15+ | 271,292 | ||||||
6,000,000 | Malaysian Government, Series 0113, 3.17%, 7/15/16+ | 1,825,456 | ||||||
29,022,000 | Mexican Cetes, Series BI, 1/9/14+(h) | 222,273 | ||||||
27,370,000 | Mexican Cetes, Series BI, 3/20/14+(h) | 208,217 | ||||||
14,650,000 | Mexican Cetes, Series BI, 4/3/14+(h) | 111,301 | ||||||
41,270,000 | Mexican Cetes, Series BI, 4/30/14+(h) | 312,787 | ||||||
91,025,000 | Mexican Cetes, Series BI, 10/16/14+(h) | 678,022 | ||||||
115,860,000 | Mexican Cetes, Series BI, 84.88%, 12/11/14+(h) | 858,216 | ||||||
717,834 | Mexican Udibonos, 4.50%, 12/18/14+(d)(h) | 57,581 | ||||||
1,831,261 | Mexican Udibonos, 5.00%, 6/16/16+(d)(h) | 154,782 | ||||||
1,558,089 | Mexican Udibonos, 3.50%, 12/14/17+(d)(h) | 128,731 | ||||||
940,924 | Mexican Udibonos, 4.00%, 6/13/19+(d)(h) | 79,679 | ||||||
758,810 | Mexican Udibonos, 2.50%, 12/10/20+(d)(h) | 58,941 | ||||||
3,690,000 | Mexico Bonos Desarr, Series M, 7.00%, 6/19/14+(d)(h) | 287,274 | ||||||
11,130,000 | Mexico Bonos Desarr, Series MI10, 9.50%, 12/18/14+(d)(h) | 899,110 |
Continued
12
AZL Franklin Templeton Founding Strategy Plus Fund
Schedule of Portfolio Investments
December 31, 2013
Contracts, Shares, Notional Amount or Principal Amount | Fair Value | |||||||
| Foreign Bonds, continued |
| ||||||
| Sovereign Bonds, continued |
| ||||||
$ | 3,650,000 | Mexico Bonos Desarr, Series M, 6.00%, 6/18/15+(d)(h) | $ | 288,759 | ||||
19,710,000 | Mexico Bonos Desarr, Series M 10, 8.00%, 12/17/15+(d)(h) | 1,629,042 | ||||||
18,156,000 | Mexico Bonos Desarr, Series M, 6.25%, 6/16/16+(d)(h) | 1,461,332 | ||||||
2,407,000 | Mexico Bonos Desarr, Series M 10, 7.25%, 12/15/16+(d)(h) | 198,556 | ||||||
3,070,000 | Philippine Government International Bond, Series 5-67, 6.25%, 1/27/14+ | 69,459 | ||||||
3,030,000 | Philippine Government International Bond, Series 7-48, 7.00%, 1/27/16+ | 75,094 | ||||||
500,000 | Philippine Government International Bond, Series 3-20, 1.63%, 4/25/16+ | 11,145 | ||||||
1,830,000 | Philippine Government International Bond, Series 1042, 9.13%, 9/4/16+ | 48,600 | ||||||
1,380,000 | Philippine Treasury Bill, 0.61%, 1/8/14+(f) | 31,090 | ||||||
2,360,000 | Philippine Treasury Bill, 0.52%, 2/5/14+(f) | 53,169 | ||||||
6,730,000 | Philippine Treasury Bill, 0.55%, 3/5/14+(f) | 151,597 | ||||||
8,150,000 | Philippine Treasury Bill, 0.20%, 4/2/14+(f) | 183,576 | ||||||
3,980,000 | Philippine Treasury Bill, 0.07%, 4/10/14+(f) | 89,542 | ||||||
1,720,000 | Philippine Treasury Bill, 0.96%, 7/2/14+(f) | 38,690 | ||||||
1,580,000 | Philippine Treasury Bill, 0.71%, 8/6/14+(f) | 35,525 | ||||||
6,740,000 | Philippine Treasury Bill, 0.72%, 9/3/14+(f) | 151,145 | ||||||
15,445,000 | Philippine Treasury Bill, 0.15%, 10/8/14+(f) | 345,826 | ||||||
60,000 | Philippine Treasury Bill, 0.14%, 11/5/14+(f) | 1,342 | ||||||
2,675,000 | Poland Government Bond, Series 0114, 4.07%, 1/25/14+(f) | 884,696 | ||||||
10,255,000 | Poland Government Bond, Series 0414, 5.75%, 4/25/14+ | 3,432,368 | ||||||
1,090,000 | Poland Government Bond, Series 0714, 3.92%, 7/25/14+(f) | 356,268 | ||||||
1,201,000 | Poland Government Bond, Series 0415, 5.50%, 4/25/15+ | 411,878 | ||||||
1,146,000 | Poland Government Bond, Series 0715, 2.91%, 7/25/15+(f) | 363,746 | ||||||
15,863,000 | Poland Government Bond, Series 1015, 6.25%, 10/24/15+ | 5,568,845 | ||||||
7,029,000 | Poland Government Bond, Series 0116, 2.93%, 1/25/16+(f) | 2,188,704 | ||||||
2,155,000 | Poland Government Bond, Series 0416, 5.00%, 4/25/16+ | 743,842 | ||||||
3,343,000 | Poland Government Bond, Series 0117, 2.71%, 1/25/17+(d) | 1,103,407 | ||||||
3,391,000 | Poland Government Bond, Series 0121, 2.71%, 1/25/21+(d) | 1,097,458 | ||||||
180,000 | Republic of Hungary, 4.38%, 7/4/17+(b) | 259,125 | ||||||
260,000 | Republic of Hungary, 5.75%, 6/11/18+(b) | 387,647 | ||||||
70,000 | Republic of Hungary, 6.00%, 1/11/19+(b) | 105,439 | ||||||
3,300,000 | Singapore Government, 0.25%, 2/1/14+ | 2,615,458 | ||||||
200,000 | Singapore Government, 3.63%, 7/1/14+ | 161,144 | ||||||
350,000 | Singapore Government, 1.13%, 4/1/16+ | 282,343 |
Contracts, Shares, Notional Amount or Principal Amount | Fair Value | |||||||
| Foreign Bonds, continued |
| ||||||
| Sovereign Bonds, continued |
| ||||||
$ | 330,000 | Singapore Treasury Bill, Series 84, 0.30%, 1/3/14+(f) | $ | 261,571 | ||||
255,000 | Singapore Treasury Bill, Series 183, 0.25%, 1/10/14+(f) | 202,114 | ||||||
50,000 | Singapore Treasury Bill, Series 183, 0.23%, 1/24/14+(f) | 39,627 | ||||||
140,000 | Singapore Treasury Bill, Series 87, 0.29%, 2/3/14+(f) | 110,948 | ||||||
230,000 | Singapore Treasury Bill, Series 84, 0.31%, 2/7/14+(f) | 182,267 | ||||||
425,000 | Singapore Treasury Bill, Series 179, 0.30%, 2/7/14+(f) | 336,797 | ||||||
250,000 | Singapore Treasury Bill, Series 84, 0.30%, 2/14/14+(f) | 198,107 | ||||||
210,000 | Singapore Treasury Bill, Series 183, 0.30%, 2/21/14+(f) | 166,403 | ||||||
360,000 | Singapore Treasury Bill, Series 182, 0.29%, 4/4/14+(f) | 285,172 | ||||||
711,000 | Singapore Treasury Bill, Series 365, 0.25%, 5/2/14+(f) | 563,092 | ||||||
230,000 | Singapore Treasury Bill, Series 182, 0.28%, 5/2/14+(f) | 182,154 | ||||||
260,000 | Singapore Treasury Bill, Series 182, 0.28%, 5/16/14+(f) | 205,890 | ||||||
190,000 | Singapore Treasury Bill, Series 182, 0.29%, 5/30/14+(f) | 150,441 | ||||||
39,910,000 | Swedish Government Bond, Series 1041, 6.75%, 5/5/14+ | 6,328,223 | ||||||
100,000 | Ukraine Government, 4.95%, 10/13/15+(b) | 131,273 | ||||||
|
| |||||||
109,234,088 | ||||||||
|
| |||||||
| Total Foreign Bonds (Cost $108,082,515) | 110,982,886 | ||||||
|
| |||||||
| Yankee Dollars (3.1%): |
| ||||||
| Chemicals (0.0%): |
| ||||||
300,000 | Ineos Finance plc, 8.38%, 2/15/19, Callable 2/15/15 @ 106.28(b) | 333,750 | ||||||
|
| |||||||
| Commercial Banks (0.1%): |
| ||||||
7,500 | Barclays Bank plc, 6.00%, 12/24/14(b) | 466,050 | ||||||
|
| |||||||
| Construction & Engineering (0.1%): |
| ||||||
400,000 | Abengoa Finance SAU, 8.88%, 11/1/17(b) | 430,000 | ||||||
280,000 | Cemex SAB de C.V., 9.00%, 1/11/18, Callable 1/11/15 @ 104.5(b) | 307,300 | ||||||
|
| |||||||
737,300 | ||||||||
|
| |||||||
| Construction Materials (0.2%): |
| ||||||
500,000 | Cemex Sab de C.V., 7.25%, 1/15/21, Callable 1/15/18 @ 103.63(b) | 517,500 | ||||||
300,000 | Cemex SAB de C.V., 5.88%, 3/25/19, Callable 3/25/16 @ 102.94(b) | 300,750 | ||||||
|
| |||||||
818,250 | ||||||||
|
|
Continued
13
AZL Franklin Templeton Founding Strategy Plus Fund
Schedule of Portfolio Investments
December 31, 2013
Contracts, Shares, Notional Amount or Principal Amount | Fair Value | |||||||
| Yankee Dollars, continued |
| ||||||
| Energy Equipment & Services (0.1%): |
| ||||||
$ | 500,000 | CGGVeritas, 6.50%, 6/1/21, Callable 6/1/16 @ 103.25 | $ | 512,500 | ||||
111,000 | Expro Finance Luxembourg, 8.50%, 12/15/16, Callable 2/18/14 @ 104.25(b) | 115,718 | ||||||
|
| |||||||
628,218 | ||||||||
|
| |||||||
| Independent Power Producers & Energy Traders (0.1%): |
| ||||||
1,000,000 | InterGen NV, 7.00%, 6/30/23, Callable 6/30/18 @ 103.5^(b) | 1,035,000 | ||||||
|
| |||||||
| Metals & Mining (0.2%): |
| ||||||
500,000 | FMG Resources Pty, Ltd., 6.88%, 2/1/18, Callable 2/1/14 @ 105.16^(b) | 526,250 | ||||||
250,000 | FMG Resources Pty, Ltd., 8.25%, 11/1/19, Callable 11/1/15 @ 104.13^(b) | 280,625 | ||||||
400,000 | Inmet Mining Corp., 8.75%, 6/1/20, Callable 6/1/16 @ 104.38(b) | 434,000 | ||||||
|
| |||||||
1,240,875 | ||||||||
|
| |||||||
| Oil, Gas & Consumable Fuels (0.0%): |
| ||||||
200,000 | Offshore Group Investment, Ltd., 7.50%, 11/1/19, Callable 11/1/15 @ 105.62^ | 218,000 | ||||||
|
| |||||||
| Real Estate Investment Trusts (REITs) (0.1%): |
| ||||||
500,000 | Algeco Scotsman Global Finance plc, 8.50%, 10/15/18, Callable 10/15/15 @ 104.25(b) | 541,250 | ||||||
|
| |||||||
| Sovereign Bonds (2.2%): |
| ||||||
200,000 | Financing of Infrastructure, 7.40%, 4/20/18(b) | 177,750 | ||||||
430,000 | Republic of Hungary, 4.13%, 2/19/18 | 434,730 | ||||||
1,077,000 | Republic of Hungary, 6.25%, 1/29/20 | 1,161,814 | ||||||
542,000 | Republic of Hungary, 6.38%, 3/29/21 | 581,295 | ||||||
800,000 | Republic of Hungary, 5.38%, 2/21/23^ | 790,000 | ||||||
240,000 | Republic of Iceland, 5.88%, 5/11/22(b) | 244,800 | ||||||
230,000 | Republic of Lithuania, 7.38%, 2/11/20(b) | 276,345 | ||||||
100,000 | Republic of Lithuania, 7.38%, 2/11/20(b) | 120,150 | ||||||
150,000 | Republic of Lithuania, 6.13%, 3/9/21(b) | 169,920 | ||||||
200,000 | Republic of Serbia, 5.25%, 11/21/17(b) | 200,500 | ||||||
300,000 | Republic of Serbia, 4.88%, 2/25/20(b) | 283,650 | ||||||
320,000 | Republic of Serbia, 7.25%, 9/28/21(b) | 336,800 | ||||||
1,400,000 | Republic of Slovenia, 5.50%, 10/26/22(b) | 1,396,500 | ||||||
1,025,000 | Republic of Slovenia, 5.85%, 5/10/23(b) | 1,040,375 | ||||||
529,100 | Russia Foreign Bond, 7.50%, 3/31/30(b) | 616,507 | ||||||
100,000 | Socialist Republic of Vietnam, 6.75%, 1/29/20(b) | 108,250 | ||||||
600,000 | Ukraine Government, 7.95%, 6/4/14(b) | 600,000 | ||||||
200,000 | Ukraine Government, 6.25%, 6/17/16(b) | 187,700 | ||||||
100,000 | Ukraine Government, 6.58%, 11/21/16(b) | 93,750 |
Contracts, Shares, Notional Amount or Principal Amount | Fair Value | |||||||
| Yankee Dollars, continued |
| ||||||
| Sovereign Bonds, continued |
| ||||||
$ | 360,000 | Ukraine Government, 9.25%, 7/24/17(b) | $ | 358,949 | ||||
1,400,000 | Ukraine Government, 6.75%, 11/14/17(b) | 1,288,000 | ||||||
620,000 | Ukraine Government, 7.75%, 9/23/20(b) | 571,950 | ||||||
1,430,000 | Ukraine Government, 7.95%, 2/23/21(b) | 1,319,175 | ||||||
1,240,000 | Ukraine Government, 7.80%, 11/28/22^(b) | 1,119,100 | ||||||
2,400,000 | Ukraine Government, 7.50%, 4/17/23(b) | 2,149,199 | ||||||
|
| |||||||
15,627,209 | ||||||||
|
| |||||||
| Wireless Telecommunication Services (0.0%): |
| ||||||
100,000 | Wind Acquisition Finance SA, 11.75%, 7/15/17, Callable 7/15/17 @ 105.88(b) | 106,375 | ||||||
|
| |||||||
| Total Yankee Dollars (Cost $20,804,545) | 21,752,277 | ||||||
|
| |||||||
| U.S. Treasury Obligations (1.2%): |
| ||||||
| U.S. Treasury Bills (1.2%) |
| ||||||
2,000,000 | 0.05%, 1/2/14(f) | 2,000,000 | ||||||
1,000,000 | 0.07%, 1/30/14(f) | 999,986 | ||||||
600,000 | 0.07%, 2/20/14(f) | 599,981 | ||||||
1,000,000 | 0.04%, 3/20/14(f)(i) | 999,872 | ||||||
1,000,000 | 0.06%, 4/24/14(f) | 999,813 | ||||||
1,500,000 | 0.08%, 5/1/14(f) | 1,499,739 | ||||||
1,500,000 | 0.09%, 6/26/14(f) | 1,499,399 | ||||||
|
| |||||||
8,598,790 | ||||||||
|
| |||||||
| Total U.S. Treasury Obligations (Cost $8,598,677) | 8,598,790 | ||||||
|
| |||||||
| U.S. Government Agency Mortgages (4.2%): |
| ||||||
30,000,000 | Federal Home Loan Bank, 1/2/14(f) | 30,000,000 | ||||||
|
| |||||||
| Total U.S. Government Agency Mortgages (Cost $30,000,000) | 30,000,000 | ||||||
|
| |||||||
| Purchased Put Options (0.0%): |
| ||||||
152 | Verizon Communications., Strike @ 55 Exp 02/22/14 | 98,040 | ||||||
|
| |||||||
| Total Purchased Put Options (Cost $112,029) | 98,040 | ||||||
|
| |||||||
| Securities Held as Collateral for Securities on Loan (1.9%): |
| ||||||
$ | 13,827,477 | Allianz Variable Insurance Products Securities Lending Collateral Trust(j) | 13,827,477 | |||||
|
| |||||||
| Total Securities Held as Collateral for Securities on Loan | 13,827,477 | ||||||
|
| |||||||
| Unaffiliated Investment Company (6.5%): |
| ||||||
46,344,695 | Dreyfus Treasury Prime Cash Management Fund, Institutional Shares, 0.00%(f) | 46,344,695 | ||||||
|
| |||||||
| Total Unaffiliated Investment Company (Cost $46,344,695) | 46,344,695 | ||||||
|
| |||||||
| Total Investment Securities (Cost $630,078,898)(k) — 101.2% | 719,827,480 | ||||||
| Net other assets (liabilities) — (1.2)% | (8,613,950 | ) | |||||
|
| |||||||
| Net Assets — 100.0% | $ | 711,213,530 | |||||
|
|
Percentages indicated are based on net assets as of December 31, 2013.
ADR—American Depositary Receipt
PIK—Payment-in Kind
* | Non-income producing security. |
^ | This security or a partial position of this security was on loan as of December 31, 2013. The total value of securities on loan as of December 31, 2013, was $13,352,215. |
Continued
14
AZL Franklin Templeton Founding Strategy Plus Fund
Schedule of Portfolio Investments
December 31, 2013
# | Security issued in connection with a pending litigation settlement. |
+ | The principal amount is disclosed in local currency and the fair value is disclosed in U.S. Dollars. |
(a) | Security was valued in good faith pursuant to procedures approved by the Board of Trustees as of December 31, 2013. The total of all such securities represent 0.00% of the net assets of the fund. |
(b) | Rule 144A, Section 4(2) or other security which is restricted to resale to institutional investors. The sub-adviser has deemed these securities to be liquid based on procedures approved by the Board of Trustees. |
(c) | Rule 144A, Section 4(2) or other security which is restricted to resale to institutional investors. The sub-adviser has deemed these securities to be illiquid based on procedures approved by the Board of Trustees. As of December 31, 2013, these securities represent 0.00% of the net assets of the fund. |
(d) | Variable rate security. The rate presented represents the rate in effect at December 31, 2013. The date presented represents the final maturity date. |
(e) | Defaulted bond. |
(f) | The rate represents the effective yield at December 31, 2013. |
(g) | Principal amount is stated in 1,000 Brazilian Real Units. |
(h) | Principal amount is stated in 100 Mexican Peso Units. |
(i) | A portion of this security was held in a segregated account for the benefit of forward currency contract counterparties in the event of default. At December 31, 2013, the aggregate amount held in a segregated account was $260,000. |
(j) | Purchased with cash collateral held from securities lending. The value of the collateral could include collateral held for securities that were sold on or before December 31, 2013. |
(k) | See Federal Tax Information listed in the Notes to the Financial Statements. |
The following represents the concentrations by country of risk (based on the domicile of the security issuer) relative to the total fair value of investments as of December 31, 2013:
Country | Percentage | |||
Australia | 0.2 | % | ||
Bermuda | 0.1 | % | ||
Brazil | 1.4 | % | ||
Canada | 1.8 | % | ||
Cayman Islands | — | %NM | ||
China | 0.3 | % | ||
Denmark | 0.5 | % | ||
France | 3.2 | % | ||
Germany | 1.9 | % | ||
Hong Kong | 0.1 | % | ||
Hungary | 1.5 | % | ||
Iceland | — | %NM | ||
India | — | %NM | ||
Indonesia | 0.2 | % | ||
Ireland (Republic of) | 1.7 | % | ||
Israel | 0.6 | % | ||
Italy | 0.9 | % | ||
Japan | 0.9 | % | ||
Lithuania | 0.1 | % | ||
Luxembourg | — | %NM | ||
Malaysia | 2.1 | % |
Country | Percentage | |||
Mexico | 1.4 | % | ||
Netherlands | 3.2 | % | ||
Philippines | 0.2 | % | ||
Poland | 2.2 | % | ||
Portugal | 0.3 | % | ||
Republic of Korea (South) | 4.8 | % | ||
Russian Federation | 0.2 | % | ||
Serbia (Republic of) | 0.1 | % | ||
Singapore | 1.2 | % | ||
Slovenia | 0.3 | % | ||
South Africa | — | %NM | ||
Spain | 0.9 | % | ||
Sweden | 1.5 | % | ||
Switzerland | 2.5 | % | ||
Taiwan | 0.1 | % | ||
Turkey | 0.2 | % | ||
Ukraine | 1.1 | % | ||
United Kingdom | 8.1 | % | ||
United States | 54.2 | % | ||
Vietnam | — | %NM | ||
|
| |||
100.0 | % | |||
|
|
NM | Not meaningful, amount is less than 0.05%. |
Continued
15
AZL Franklin Templeton Founding Strategy Plus Fund
Schedule of Portfolio Investments
December 31, 2013
Forward Currency Contracts
At December 31, 2013, the Fund’s open forward currency contracts were as follows:
Type of Contract | Counterparty | Delivery Date | Contract Amount (Local Currency) | Contract Value | Value | Net Unrealized Appreciation/ (Depreciation) | ||||||||||||||
Short Contracts: | ||||||||||||||||||||
British Pound | Bank of America | 2/19/14 | 6,011,638 | $ | 9,379,556 | $ | 9,949,968 | $ | (570,412 | ) | ||||||||||
British Pound | Barclays Bank | 2/19/14 | 2,774,502 | 4,316,522 | 4,592,128 | (275,606 | ) | |||||||||||||
British Pound | Credit Suisse First Boston | 2/19/14 | 844,635 | 1,345,490 | 1,397,970 | (52,480 | ) | |||||||||||||
British Pound | HSBC Bank | 2/19/14 | 465,257 | 736,970 | 770,056 | (33,086 | ) | |||||||||||||
European Euro | Deutsche Bank | 1/7/14 | 312,372 | 410,519 | 429,695 | (19,176 | ) | |||||||||||||
European Euro | Bank of America | 1/17/14 | 1,686,784 | 2,224,155 | 2,320,308 | (96,153 | ) | |||||||||||||
European Euro | Barclays Bank | 1/17/14 | 1,066,702 | 1,392,963 | 1,467,334 | (74,371 | ) | |||||||||||||
European Euro | Credit Suisse First Boston | 1/17/14 | 448,609 | 602,668 | 617,098 | (14,430 | ) | |||||||||||||
European Euro | Deutsche Bank | 1/17/14 | 84,105 | 111,357 | 115,693 | (4,336 | ) | |||||||||||||
European Euro | HSBC Bank | 1/17/14 | 569,256 | 767,840 | 783,058 | (15,218 | ) | |||||||||||||
European Euro | State Street Bank | 1/17/14 | 49,659 | 67,547 | 68,310 | (763 | ) | |||||||||||||
European Euro | Barclays Bank | 1/21/14 | 97,000 | 127,492 | 133,431 | (5,939 | ) | |||||||||||||
European Euro | Deutsche Bank | 1/24/14 | 1,650,000 | 2,203,328 | 2,269,701 | (66,373 | ) | |||||||||||||
European Euro | Deutsche Bank | 2/11/14 | 1,411,000 | 1,893,463 | 1,940,922 | (47,459 | ) | |||||||||||||
European Euro | JPMorgan Chase | 2/19/14 | 30,000 | 40,094 | 41,267 | (1,173 | ) | |||||||||||||
European Euro | Barclays Bank | 2/20/14 | 210,000 | 280,316 | 288,867 | (8,551 | ) | |||||||||||||
European Euro | Goldman Sachs | 2/21/14 | 17,000 | 22,756 | 23,385 | (629 | ) | |||||||||||||
European Euro | Barclays Bank | 2/26/14 | 60,139 | 80,173 | 82,725 | (2,552 | ) | |||||||||||||
European Euro | Barclays Bank | 2/27/14 | 110,723 | 147,898 | 152,306 | (4,408 | ) | |||||||||||||
European Euro | Deutsche Bank | 2/27/14 | 277,730 | 367,303 | 382,033 | (14,730 | ) | |||||||||||||
European Euro | UBS Warburg | 2/28/14 | 76,694 | 102,713 | 105,497 | (2,784 | ) | |||||||||||||
European Euro | Deutsche Bank | 3/5/14 | 43,000 | 56,008 | 59,149 | (3,141 | ) | |||||||||||||
European Euro | Barclays Bank | 3/7/14 | 107,759 | 140,996 | 148,227 | (7,231 | ) | |||||||||||||
European Euro | Deutsche Bank | 3/7/14 | 660,000 | 863,874 | 907,860 | (43,986 | ) | |||||||||||||
European Euro | Barclays Bank | 3/10/14 | 33,304 | 43,386 | 45,811 | (2,425 | ) | |||||||||||||
European Euro | Citibank | 3/10/14 | 1,704,605 | 2,226,981 | 2,344,756 | (117,775 | ) | |||||||||||||
European Euro | HSBC Bank | 3/10/14 | 15,000 | 19,575 | 20,633 | (1,058 | ) | |||||||||||||
European Euro | Morgan Stanley | 3/10/14 | 43,000 | 56,190 | 59,148 | (2,958 | ) | |||||||||||||
European Euro | JPMorgan Chase | 3/13/14 | 15,000 | 19,771 | 20,633 | (862 | ) | |||||||||||||
European Euro | Barclays Bank | 3/17/14 | 10,012 | 13,028 | 13,772 | (744 | ) | |||||||||||||
European Euro | Deutsche Bank | 3/17/14 | 134,000 | 173,941 | 184,321 | (10,380 | ) | |||||||||||||
European Euro | Citibank | 3/18/14 | 10,643 | 13,817 | 14,640 | (823 | ) | |||||||||||||
European Euro | Barclays Bank | 3/21/14 | 9,076 | 11,786 | 12,484 | (698 | ) | |||||||||||||
European Euro | Deutsche Bank | 3/21/14 | 173,000 | 224,468 | 237,966 | (13,498 | ) | |||||||||||||
European Euro | Citibank | 3/26/14 | 13,451 | 17,496 | 18,502 | (1,006 | ) | |||||||||||||
European Euro | Deutsche Bank | 3/26/14 | 78,000 | 101,342 | 107,291 | (5,949 | ) | |||||||||||||
European Euro | Barclays Bank | 3/27/14 | 200,000 | 270,070 | 275,104 | (5,034 | ) | |||||||||||||
European Euro | Deutsche Bank | 3/31/14 | 4,566 | 5,887 | 6,281 | (394 | ) | |||||||||||||
European Euro | Deutsche Bank | 4/3/14 | 10,660 | 13,700 | 14,663 | (963 | ) | |||||||||||||
European Euro | Deutsche Bank | 4/4/14 | 182,000 | 234,261 | 250,345 | (16,084 | ) | |||||||||||||
European Euro | Barclays Bank | 4/7/14 | 17,912 | 23,054 | 24,638 | (1,584 | ) | |||||||||||||
European Euro | HSBC Bank | 4/10/14 | 73,000 | 95,402 | 100,414 | (5,012 | ) | |||||||||||||
European Euro | Deutsche Bank | 4/11/14 | 77,961 | 102,031 | 107,238 | (5,207 | ) | |||||||||||||
European Euro | UBS Warburg | 4/11/14 | 37,000 | 48,442 | 50,895 | (2,453 | ) | |||||||||||||
European Euro | JPMorgan Chase | 4/14/14 | 99,000 | 129,759 | 136,179 | (6,420 | ) | |||||||||||||
European Euro | Deutsche Bank | 4/15/14 | 370,000 | 486,698 | 508,951 | (22,253 | ) | |||||||||||||
European Euro | HSBC Bank | 4/16/14 | 78,849 | 103,208 | 108,460 | (5,252 | ) | |||||||||||||
European Euro | Barclays Bank | 4/22/14 | 16,935 | 22,303 | 23,295 | (992 | ) | |||||||||||||
European Euro | JPMorgan Chase | 4/22/14 | 5,188 | 6,791 | 7,136 | (345 | ) | |||||||||||||
European Euro | Deutsche Bank | 4/23/14 | 319,000 | 418,113 | 438,803 | (20,690 | ) | |||||||||||||
European Euro | Barclays Bank | 4/25/14 | 154,898 | 202,328 | 213,072 | (10,744 | ) | |||||||||||||
European Euro | Barclays Bank | 4/30/14 | 11,783 | 15,367 | 16,208 | (841 | ) | |||||||||||||
European Euro | Deutsche Bank | 4/30/14 | 380,000 | 504,496 | 522,718 | (18,222 | ) |
Continued
16
AZL Franklin Templeton Founding Strategy Plus Fund
Schedule of Portfolio Investments
December 31, 2013
Type of Contract | Counterparty | Delivery Date | Contract Amount (Local Currency) | Contract Value | Value | Net Unrealized Appreciation/ (Depreciation) | ||||||||||||||
European Euro | Barclays Bank | 5/5/14 | 228,900 | $ | 303,393 | $ | 314,871 | $ | (11,478 | ) | ||||||||||
European Euro | Barclays Bank | 5/7/14 | 112,000 | 146,983 | 154,066 | (7,083 | ) | |||||||||||||
European Euro | Goldman Sachs | 5/7/14 | 317,570 | 417,795 | 436,845 | (19,050 | ) | |||||||||||||
European Euro | Goldman Sachs | 5/8/14 | 181,000 | 237,039 | 248,981 | (11,942 | ) | |||||||||||||
European Euro | Goldman Sachs | 5/12/14 | 112,000 | 147,969 | 154,067 | (6,098 | ) | |||||||||||||
European Euro | UBS Warburg | 5/12/14 | 56,000 | 73,941 | 77,033 | (3,092 | ) | |||||||||||||
European Euro | Citibank | 5/13/14 | 136,787 | 180,538 | 188,164 | (7,626 | ) | |||||||||||||
European Euro | Goldman Sachs | 5/13/14 | 117,000 | 156,464 | 160,945 | (4,481 | ) | |||||||||||||
European Euro | Bank of America | 5/15/14 | 2,255,520 | 3,034,863 | 3,102,695 | (67,832 | ) | |||||||||||||
European Euro | Barclays Bank | 5/15/14 | 41,976 | 57,617 | 57,742 | (125 | ) | |||||||||||||
European Euro | HSBC Bank | 5/15/14 | 51,173 | 70,476 | 70,394 | 82 | ||||||||||||||
European Euro | State Street Bank | 5/15/14 | 92,659 | 127,826 | 127,461 | 365 | ||||||||||||||
European Euro | Barclays Bank | 5/16/14 | 266,076 | 351,695 | 366,015 | (14,320 | ) | |||||||||||||
European Euro | Bank of America | 5/19/14 | 86,147 | 116,540 | 118,504 | (1,964 | ) | |||||||||||||
European Euro | Goldman Sachs | 5/20/14 | 289,000 | 374,472 | 397,551 | (23,079 | ) | |||||||||||||
European Euro | Barclays Bank | 5/21/14 | 363,741 | 468,226 | 500,367 | (32,141 | ) | |||||||||||||
European Euro | JPMorgan Chase | 5/23/14 | 172,504 | 223,032 | 237,299 | (14,267 | ) | |||||||||||||
European Euro | Barclays Bank | 5/30/14 | 72,758 | 94,003 | 100,088 | (6,085 | ) | |||||||||||||
European Euro | Goldman Sachs | 5/30/14 | 760,000 | 979,906 | 1,045,478 | (65,572 | ) | |||||||||||||
European Euro | Barclays Bank | 6/5/14 | 237,868 | 310,236 | 327,221 | (16,985 | ) | |||||||||||||
European Euro | Deutsche Bank | 6/9/14 | 285,500 | 374,883 | 392,748 | (17,865 | ) | |||||||||||||
European Euro | Deutsche Bank | 6/13/14 | 124,000 | 164,641 | 170,581 | (5,940 | ) | |||||||||||||
European Euro | Barclays Bank | 6/20/14 | 28,929 | 38,843 | 39,797 | (954 | ) | |||||||||||||
European Euro | Deutsche Bank | 6/20/14 | 420,000 | 578,025 | 577,781 | 244 | ||||||||||||||
European Euro | Barclays Bank | 7/16/14 | 82,000 | 107,207 | 112,812 | (5,605 | ) | |||||||||||||
European Euro | Morgan Stanley | 7/16/14 | 277,000 | 361,377 | 381,083 | (19,706 | ) | |||||||||||||
European Euro | UBS Warburg | 7/16/14 | 514,000 | 671,240 | 707,136 | (35,896 | ) | |||||||||||||
European Euro | Barclays Bank | 7/18/14 | 129,000 | 169,667 | 177,473 | (7,806 | ) | |||||||||||||
European Euro | Deutsche Bank | 7/21/14 | 470,000 | 619,916 | 646,612 | (26,696 | ) | |||||||||||||
European Euro | Deutsche Bank | 7/22/14 | 71,000 | 93,139 | 97,680 | (4,541 | ) | |||||||||||||
European Euro | Morgan Stanley | 7/22/14 | 366,000 | 479,438 | 503,533 | (24,095 | ) | |||||||||||||
European Euro | Deutsche Bank | 7/23/14 | 93,795 | 123,248 | 129,041 | (5,793 | ) | |||||||||||||
European Euro | Deutsche Bank | 7/25/14 | 207,975 | 275,089 | 286,129 | (11,040 | ) | |||||||||||||
European Euro | Goldman Sachs | 7/25/14 | 197,000 | 260,800 | 271,030 | (10,230 | ) | |||||||||||||
European Euro | Citibank | 7/28/14 | 60,360 | 79,936 | 83,043 | (3,107 | ) | |||||||||||||
European Euro | Barclays Bank | 7/29/14 | 19,995 | 26,506 | 27,509 | (1,003 | ) | |||||||||||||
European Euro | Deutsche Bank | 7/29/14 | 9,978 | 13,225 | 13,728 | (503 | ) | |||||||||||||
European Euro | JPMorgan Chase | 7/31/14 | 380,000 | 505,178 | 522,807 | (17,629 | ) | |||||||||||||
European Euro | UBS Warburg | 8/1/14 | 380,000 | 505,742 | 522,808 | (17,066 | ) | |||||||||||||
European Euro | Barclays Bank | 8/4/14 | 97,592 | 129,588 | 134,269 | (4,681 | ) | |||||||||||||
European Euro | HSBC Bank | 8/4/14 | 380,000 | 503,663 | 522,813 | (19,150 | ) | |||||||||||||
European Euro | Barclays Bank | 8/5/14 | 229,000 | 303,709 | 315,064 | (11,355 | ) | |||||||||||||
European Euro | JPMorgan Chase | 8/6/14 | 269,500 | 356,468 | 370,786 | (14,318 | ) | |||||||||||||
European Euro | Citibank | 8/8/14 | 34,482 | 45,906 | 47,442 | (1,536 | ) | |||||||||||||
European Euro | Citibank | 8/11/14 | 9,686 | 12,906 | 13,326 | (420 | ) | |||||||||||||
European Euro | Deutsche Bank | 8/11/14 | 180,000 | 240,003 | 247,653 | (7,650 | ) | |||||||||||||
European Euro | JPMorgan Chase | 8/11/14 | 239,500 | 318,923 | 329,516 | (10,593 | ) | |||||||||||||
European Euro | Goldman Sachs | 8/12/14 | 61,000 | 81,669 | 83,927 | (2,258 | ) | |||||||||||||
European Euro | Morgan Stanley | 8/15/14 | 66,000 | 87,581 | 90,807 | (3,226 | ) | |||||||||||||
European Euro | Barclays Bank | 8/19/14 | 237,000 | 314,061 | 326,083 | (12,022 | ) | |||||||||||||
European Euro | Deutsche Bank | 8/20/14 | 133,000 | 177,627 | 182,992 | (5,365 | ) | |||||||||||||
European Euro | JPMorgan Chase | 8/20/14 | 263,000 | 351,379 | 361,857 | (10,478 | ) | |||||||||||||
European Euro | Barclays Bank | 8/25/14 | 75,988 | 101,869 | 104,552 | (2,683 | ) | |||||||||||||
European Euro | Deutsche Bank | 8/29/14 | 28,980 | 38,700 | 39,874 | (1,174 | ) | |||||||||||||
European Euro | Deutsche Bank | 9/3/14 | 49,000 | 64,891 | 67,421 | (2,530 | ) | |||||||||||||
European Euro | Deutsche Bank | 9/5/14 | 137,800 | 181,853 | 189,605 | (7,752 | ) | |||||||||||||
European Euro | Barclays Bank | 9/19/14 | 19,406 | 25,926 | 26,703 | (777 | ) |
Continued
17
AZL Franklin Templeton Founding Strategy Plus Fund
Schedule of Portfolio Investments
December 31, 2013
Type of Contract | Counterparty | Delivery Date | Contract Amount (Local Currency) | Contract Value | Value | Net Unrealized Appreciation/ (Depreciation) | ||||||||||||||
European Euro | Deutsche Bank | 9/23/14 | 229,000 | $ | 310,712 | $ | 315,107 | $ | (4,395 | ) | ||||||||||
European Euro | Barclays Bank | 9/24/14 | 45,864 | 62,089 | 63,110 | (1,021 | ) | |||||||||||||
European Euro | Deutsche Bank | 9/26/14 | 107,000 | 144,388 | 147,234 | (2,846 | ) | |||||||||||||
European Euro | Barclays Bank | 9/29/14 | 200,000 | 270,190 | 275,207 | (5,017 | ) | |||||||||||||
European Euro | Deutsche Bank | 9/30/14 | 1,320,000 | 1,782,488 | 1,816,371 | (33,883 | ) | |||||||||||||
European Euro | Goldman Sachs | 9/30/14 | 130,000 | 175,410 | 178,885 | (3,475 | ) | |||||||||||||
European Euro | HSBC Bank | 9/30/14 | 180,000 | 243,340 | 247,687 | (4,347 | ) | |||||||||||||
European Euro | Deutsche Bank | 10/9/14 | 420,000 | 570,520 | 577,950 | (7,430 | ) | |||||||||||||
European Euro | Deutsche Bank | 10/15/14 | 320,000 | 432,698 | 440,350 | (7,652 | ) | |||||||||||||
European Euro | Barclays Bank | 10/21/14 | 3,724,000 | 5,092,570 | 5,124,663 | (32,093 | ) | |||||||||||||
European Euro | Deutsche Bank | 10/21/14 | 570,000 | 779,931 | 784,387 | (4,456 | ) | |||||||||||||
European Euro | Barclays Bank | 10/27/14 | 20,617 | 28,386 | 28,372 | 14 | ||||||||||||||
European Euro | Deutsche Bank | 10/31/14 | 1,747,075 | 2,412,728 | 2,404,247 | 8,481 | ||||||||||||||
European Euro | Deutsche Bank | 11/3/14 | 7,376 | 10,150 | 10,151 | (1 | ) | |||||||||||||
European Euro | Barclays Bank | 11/5/14 | 49,418 | 66,833 | 68,008 | (1,175 | ) | |||||||||||||
European Euro | Citibank | 11/7/14 | 1,793,000 | 2,414,678 | 2,467,495 | (52,817 | ) | |||||||||||||
European Euro | Deutsche Bank | 11/7/14 | 3,620,000 | 4,880,665 | 4,981,780 | (101,115 | ) | |||||||||||||
European Euro | JPMorgan Chase | 11/12/14 | 278,508 | 371,374 | 383,283 | (11,909 | ) | |||||||||||||
European Euro | Citibank | 11/17/14 | 1,801,000 | 2,421,841 | 2,478,572 | (56,731 | ) | |||||||||||||
European Euro | Deutsche Bank | 11/17/14 | 335,703 | 451,259 | 462,001 | (10,742 | ) | |||||||||||||
European Euro | Morgan Stanley | 11/17/14 | 66,000 | 88,822 | 90,831 | (2,009 | ) | |||||||||||||
European Euro | Deutsche Bank | 11/19/14 | 93,863 | 126,424 | 129,177 | (2,753 | ) | |||||||||||||
European Euro | Deutsche Bank | 11/20/14 | 130,000 | 175,936 | 178,910 | (2,974 | ) | |||||||||||||
European Euro | JPMorgan Chase | 11/20/14 | 327,027 | 442,656 | 450,065 | (7,409 | ) | |||||||||||||
European Euro | Deutsche Bank | 12/4/14 | 100,000 | 135,466 | 137,628 | (2,162 | ) | |||||||||||||
European Euro | Standard Charter | 12/9/14 | 76,800 | 104,919 | 105,700 | (781 | ) | |||||||||||||
European Euro | JPMorgan Chase | 12/15/14 | 97,000 | 133,796 | 133,504 | 292 | ||||||||||||||
European Euro | Deutsche Bank | 12/17/14 | 525,093 | 721,898 | 722,703 | (805 | ) | |||||||||||||
Indian Rupee | Citibank | 1/6/14 | 12,666,000 | 204,093 | 204,485 | (392 | ) | |||||||||||||
Japanese Yen | Deutsche Bank | 1/7/14 | 5,989,000 | 69,174 | 56,883 | 12,291 | ||||||||||||||
Japanese Yen | Citibank | 1/10/14 | 1,520,000 | 17,421 | 14,437 | 2,984 | ||||||||||||||
Japanese Yen | UBS Warburg | 1/14/14 | 4,550,000 | 52,032 | 43,217 | 8,815 | ||||||||||||||
Japanese Yen | HSBC Bank | 1/15/14 | 5,640,000 | 64,237 | 53,571 | 10,666 | ||||||||||||||
Japanese Yen | Deutsche Bank | 1/16/14 | 1,520,000 | 17,132 | 14,438 | 2,694 | ||||||||||||||
Japanese Yen | UBS Warburg | 1/16/14 | 7,340,000 | 82,703 | 69,718 | 12,985 | ||||||||||||||
Japanese Yen | Deutsche Bank | 1/17/14 | 37,020,000 | 417,605 | 351,631 | 65,974 | ||||||||||||||
Japanese Yen | JPMorgan Chase | 1/17/14 | 67,230,000 | 759,289 | 638,579 | 120,710 | ||||||||||||||
Japanese Yen | UBS Warburg | 1/27/14 | 7,610,000 | 86,262 | 72,287 | 13,975 | ||||||||||||||
Japanese Yen | Deutsche Bank | 1/28/14 | 7,248,281 | 80,941 | 68,851 | 12,090 | ||||||||||||||
Japanese Yen | HSBC Bank | 1/28/14 | 9,353,364 | 104,507 | 88,847 | 15,660 | ||||||||||||||
Japanese Yen | UBS Warburg | 1/31/14 | 121,466,500 | 1,228,361 | 1,153,823 | 74,538 | ||||||||||||||
Japanese Yen | Citibank | 2/10/14 | 5,590,000 | 56,744 | 53,103 | 3,641 | ||||||||||||||
Japanese Yen | Goldman Sachs | 2/12/14 | 3,771,000 | 40,627 | 35,823 | 4,804 | ||||||||||||||
Japanese Yen | HSBC Bank | 2/12/14 | 53,860,000 | 579,065 | 511,652 | 67,413 | ||||||||||||||
Japanese Yen | JPMorgan Chase | 2/12/14 | 53,831,000 | 579,058 | 511,377 | 67,681 | ||||||||||||||
Japanese Yen | Citibank | 2/13/14 | 71,350,000 | 772,123 | 677,805 | 94,318 | ||||||||||||||
Japanese Yen | JPMorgan Chase | 2/13/14 | 35,730,000 | 386,074 | 339,425 | 46,649 | ||||||||||||||
Japanese Yen | Goldman Sachs | 2/18/14 | 964,860 | 10,366 | 9,166 | 1,200 | ||||||||||||||
Japanese Yen | JPMorgan Chase | 2/18/14 | 37,560,000 | 405,549 | 356,818 | 48,731 | ||||||||||||||
Japanese Yen | Citibank | 2/19/14 | 35,630,000 | 386,030 | 338,485 | 47,545 | ||||||||||||||
Japanese Yen | Goldman Sachs | 2/19/14 | 35,780,000 | 385,991 | 339,910 | 46,081 | ||||||||||||||
Japanese Yen | HSBC Bank | 2/24/14 | 4,020,000 | 43,018 | 38,191 | 4,827 | ||||||||||||||
Japanese Yen | Barclays Bank | 2/25/14 | 17,870,000 | 193,035 | 169,770 | 23,265 | ||||||||||||||
Japanese Yen | JPMorgan Chase | 2/25/14 | 4,000,000 | 43,149 | 38,001 | 5,148 | ||||||||||||||
Japanese Yen | Barclays Bank | 2/27/14 | 35,700,000 | 386,011 | 339,163 | 46,848 | ||||||||||||||
Japanese Yen | Deutsche Bank | 2/27/14 | 11,991,000 | 131,000 | 113,919 | 17,081 | ||||||||||||||
Japanese Yen | JPMorgan Chase | 3/3/14 | 4,600,000 | 50,585 | 43,703 | 6,882 |
Continued
18
AZL Franklin Templeton Founding Strategy Plus Fund
Schedule of Portfolio Investments
December 31, 2013
Type of Contract | Counterparty | Delivery Date | Contract Amount (Local Currency) | Contract Value | Value | Net Unrealized Appreciation/ (Depreciation) | ||||||||||||||
Japanese Yen | HSBC Bank | 3/4/14 | 4,600,000 | $ | 50,522 | $ | 43,703 | $ | 6,819 | |||||||||||
Japanese Yen | UBS Warburg | 3/4/14 | 5,100,000 | 55,477 | 48,453 | 7,024 | ||||||||||||||
Japanese Yen | Barclays Bank | 3/7/14 | 64,145,400 | 646,999 | 609,433 | 37,566 | ||||||||||||||
Japanese Yen | JPMorgan Chase | 3/14/14 | 44,142,850 | 461,287 | 419,410 | 41,877 | ||||||||||||||
Japanese Yen | Citibank | 3/17/14 | 2,260,084 | 23,608 | 21,474 | 2,134 | ||||||||||||||
Japanese Yen | Citibank | 3/19/14 | 46,322,000 | 487,589 | 440,128 | 47,461 | ||||||||||||||
Japanese Yen | Morgan Stanley | 3/19/14 | 7,060,000 | 73,799 | 67,081 | 6,718 | ||||||||||||||
Japanese Yen | Barclays Bank | 3/24/14 | 20,980,000 | 221,783 | 199,347 | 22,436 | ||||||||||||||
Japanese Yen | Deutsche Bank | 3/24/14 | 20,538,000 | 217,534 | 195,147 | 22,387 | ||||||||||||||
Japanese Yen | Barclays Bank | 3/25/14 | 4,542,830 | 47,895 | 43,165 | 4,730 | ||||||||||||||
Japanese Yen | Deutsche Bank | 4/7/14 | 399,565,980 | 4,110,000 | 3,796,936 | 313,064 | ||||||||||||||
Japanese Yen | Morgan Stanley | 4/16/14 | 68,447,040 | 692,552 | 650,470 | 42,082 | ||||||||||||||
Japanese Yen | Barclays Bank | 4/21/14 | 32,710,000 | 336,258 | 310,863 | 25,395 | ||||||||||||||
Japanese Yen | JPMorgan Chase | 4/21/14 | 19,660,000 | 201,822 | 186,841 | 14,981 | ||||||||||||||
Japanese Yen | Citibank | 4/22/14 | 3,500,000 | 35,767 | 33,263 | 2,504 | ||||||||||||||
Japanese Yen | JPMorgan Chase | 4/22/14 | 24,420,000 | 249,461 | 232,080 | 17,381 | ||||||||||||||
Japanese Yen | Citibank | 5/12/14 | 5,590,000 | 56,661 | 53,133 | 3,528 | ||||||||||||||
Japanese Yen | Goldman Sachs | 5/13/14 | 7,475,000 | 75,492 | 71,051 | 4,441 | ||||||||||||||
Japanese Yen | UBS Warburg | 5/13/14 | 5,588,000 | 56,425 | 53,115 | 3,310 | ||||||||||||||
Japanese Yen | Citibank | 5/14/14 | 5,587,000 | 55,533 | 53,105 | 2,428 | ||||||||||||||
Japanese Yen | Goldman Sachs | 5/30/14 | 48,990,000 | 480,153 | 465,712 | 14,441 | ||||||||||||||
Japanese Yen | Citibank | 6/9/14 | 51,300,000 | 517,294 | 487,707 | 29,587 | ||||||||||||||
Japanese Yen | HSBC Bank | 6/9/14 | 76,900,000 | 776,689 | 731,085 | 45,604 | ||||||||||||||
Japanese Yen | JPMorgan Chase | 6/9/14 | 51,500,000 | 517,250 | 489,608 | 27,642 | ||||||||||||||
Japanese Yen | Barclays Bank | 6/10/14 | 60,420,000 | 620,863 | 574,415 | 46,448 | ||||||||||||||
Japanese Yen | HSBC Bank | 6/10/14 | 64,350,000 | 665,240 | 611,777 | 53,463 | ||||||||||||||
Japanese Yen | JPMorgan Chase | 6/10/14 | 43,640,000 | 443,512 | 414,887 | 28,625 | ||||||||||||||
Japanese Yen | Deutsche Bank | 6/11/14 | 21,300,000 | 221,653 | 202,501 | 19,152 | ||||||||||||||
Japanese Yen | JPMorgan Chase | 6/11/14 | 59,620,000 | 620,889 | 566,813 | 54,076 | ||||||||||||||
Japanese Yen | Citibank | 6/16/14 | 2,416,000 | 25,432 | 22,970 | 2,462 | ||||||||||||||
Japanese Yen | JPMorgan Chase | 6/17/14 | 25,100,000 | 265,651 | 238,638 | 27,013 | ||||||||||||||
Japanese Yen | Deutsche Bank | 6/20/14 | 69,330,000 | 674,771 | 659,170 | 15,601 | ||||||||||||||
Japanese Yen | Barclays Bank | 6/30/14 | 16,411,000 | 168,664 | 156,043 | 12,621 | ||||||||||||||
Japanese Yen | Deutsche Bank | 7/11/14 | 26,073,000 | 258,866 | 247,943 | 10,923 | ||||||||||||||
Japanese Yen | Morgan Stanley | 7/22/14 | 50,187,445 | 501,884 | 477,319 | 24,565 | ||||||||||||||
Japanese Yen | Citibank | 7/24/14 | 74,785,000 | 751,712 | 711,275 | 40,437 | ||||||||||||||
Japanese Yen | JPMorgan Chase | 7/24/14 | 115,000,000 | 1,154,271 | 1,093,758 | 60,513 | ||||||||||||||
Japanese Yen | JPMorgan Chase | 7/25/14 | 40,100,000 | 404,540 | 381,393 | 23,147 | ||||||||||||||
Japanese Yen | Barclays Bank | 7/29/14 | 8,700,000 | 87,650 | 82,750 | 4,900 | ||||||||||||||
Japanese Yen | Barclays Bank | 8/11/14 | 2,240,000 | 23,148 | 21,309 | 1,839 | ||||||||||||||
Japanese Yen | Citibank | 8/11/14 | 2,240,000 | 23,148 | 21,309 | 1,839 | ||||||||||||||
Japanese Yen | Deutsche Bank | 8/12/14 | 2,240,000 | 23,312 | 21,309 | 2,003 | ||||||||||||||
Japanese Yen | Citibank | 8/13/14 | 46,922,100 | 487,890 | 446,371 | 41,519 | ||||||||||||||
Japanese Yen | JPMorgan Chase | 8/29/14 | 22,800,000 | 234,654 | 216,935 | 17,719 | ||||||||||||||
Japanese Yen | Barclays Bank | 9/18/14 | 2,251,755 | 22,874 | 21,429 | 1,445 | ||||||||||||||
Japanese Yen | JPMorgan Chase | 9/29/14 | 2,255,332 | 22,954 | 21,466 | 1,488 | ||||||||||||||
Japanese Yen | JPMorgan Chase | 10/20/14 | 63,490,000 | 646,801 | 604,433 | 42,368 | ||||||||||||||
Japanese Yen | Barclays Bank | 10/22/14 | 26,770,000 | 274,508 | 254,859 | 19,649 | ||||||||||||||
Japanese Yen | Deutsche Bank | 10/29/14 | 20,662,500 | 212,974 | 196,729 | 16,245 | ||||||||||||||
Japanese Yen | JPMorgan Chase | 11/4/14 | 91,650,000 | 936,408 | 872,663 | 63,745 | ||||||||||||||
Japanese Yen | Barclays Bank | 11/5/14 | 536,000,000 | 5,472,515 | 5,103,682 | 368,833 | ||||||||||||||
Japanese Yen | Citibank | 11/12/14 | 94,163,000 | 952,853 | 896,670 | 56,183 | ||||||||||||||
Japanese Yen | HSBC Bank | 11/12/14 | 3,336,000 | 33,834 | 31,767 | 2,067 | ||||||||||||||
Japanese Yen | JPMorgan Chase | 11/13/14 | 36,450,000 | 368,591 | 347,100 | 21,491 | ||||||||||||||
Japanese Yen | Deutsche Bank | 11/14/14 | 45,848,000 | 461,489 | 436,598 | 24,891 | ||||||||||||||
Japanese Yen | Citibank | 11/19/14 | 7,667,000 | 76,748 | 73,015 | 3,733 | ||||||||||||||
Japanese Yen | Deutsche Bank | 11/19/14 | 6,194,000 | 61,965 | 58,987 | 2,978 | ||||||||||||||
Japanese Yen | Citibank | 11/20/14 | 8,613,000 | 86,424 | 82,025 | 4,399 | ||||||||||||||
Japanese Yen | HSBC Bank | 11/20/14 | 1,616,000 | 16,207 | 15,390 | 817 |
Continued
19
AZL Franklin Templeton Founding Strategy Plus Fund
Schedule of Portfolio Investments
December 31, 2013
Type of Contract | Counterparty | Delivery Date | Contract Amount (Local Currency) | Contract Value | Value | Net Unrealized Appreciation/ (Depreciation) | ||||||||||||||
Japanese Yen | JPMorgan Chase | 11/20/14 | 5,564,000 | $ | 55,790 | $ | 52,988 | $ | 2,802 | |||||||||||
Japanese Yen | Morgan Stanley | 12/15/14 | 41,392,500 | 404,427 | 394,304 | 10,123 | ||||||||||||||
Japanese Yen | Deutsche Bank | 12/22/14 | 69,210,000 | 674,769 | 659,343 | 15,426 | ||||||||||||||
Japanese Yen | HSBC Bank | 12/22/14 | 69,320,000 | 674,805 | 660,391 | 14,414 | ||||||||||||||
Japanese Yen | Barclays Bank | 12/26/14 | 34,730,000 | 334,925 | 330,877 | 4,048 | ||||||||||||||
Japanese Yen | Citibank | 12/26/14 | 54,180,000 | 522,492 | 516,179 | 6,313 | ||||||||||||||
Korean Won | Bank of America | 2/12/14 | 432,225,134 | 384,634 | 409,054 | (24,420 | ) | |||||||||||||
Korean Won | Credit Suisse First Boston | 2/12/14 | 924,361,336 | 830,266 | 874,807 | (44,541 | ) | |||||||||||||
Korean Won | Deutsche Bank | 2/12/14 | 643,701,325 | 572,932 | 609,193 | (36,261 | ) | |||||||||||||
Korean Won | HSBC Bank | 2/12/14 | 587,323,136 | 535,158 | 555,837 | (20,679 | ) | |||||||||||||
Malaysian Ringgit | JPMorgan Chase | 1/2/14 | 2,405,000 | 738,523 | 734,575 | 3,948 | ||||||||||||||
|
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|
|
|
| |||||||||||||||
$ | 115,909,343 | $ | 115,871,165 | $ | 38,178 | |||||||||||||||
|
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Long Contracts: | ||||||||||||||||||||
Brazilian Real | Deutsche Bank | 4/29/14 | 435,000 | $ | 190,706 | $ | 179,327 | $ | (11,379 | ) | ||||||||||
British Pound | Bank of America | 2/19/14 | 55,776 | 91,252 | 92,316 | 1,064 | ||||||||||||||
British Pound | Barclays Bank | 2/19/14 | 10,919 | 17,816 | 18,072 | 256 | ||||||||||||||
British Pound | Credit Suisse First Boston | 2/19/14 | 171,700 | 277,465 | 284,184 | 6,719 | ||||||||||||||
British Pound | HSBC Bank | 2/19/14 | 21,838 | 35,624 | �� | 36,144 | 520 | |||||||||||||
British Pound | State Street Bank | 2/19/14 | 94,224 | 154,109 | 155,952 | 1,843 | ||||||||||||||
Chilean Peso | Morgan Stanley | 1/13/14 | 8,700,000 | 17,678 | 16,538 | (1,140 | ) | |||||||||||||
Chilean Peso | Barclays Bank | 2/11/14 | 4,400,000 | 8,921 | 8,338 | (583 | ) | |||||||||||||
Chilean Peso | Deutsche Bank | 2/12/14 | 4,400,000 | 8,909 | 8,337 | (572 | ) | |||||||||||||
Chilean Peso | Deutsche Bank | 2/14/14 | 3,930,000 | 7,972 | 7,445 | (527 | ) | |||||||||||||
Chilean Peso | Morgan Stanley | 2/14/14 | 10,560,000 | 21,361 | 20,005 | (1,356 | ) | |||||||||||||
Chilean Peso | Deutsche Bank | 2/18/14 | 4,400,000 | 8,924 | 8,332 | (592 | ) | |||||||||||||
Chilean Peso | JPMorgan Chase | 2/21/14 | 4,300,000 | 8,740 | 8,140 | (600 | ) | |||||||||||||
Chilean Peso | JPMorgan Chase | 2/24/14 | 7,300,000 | 14,809 | 13,815 | (994 | ) | |||||||||||||
Chilean Peso | Morgan Stanley | 2/24/14 | 5,200,000 | 10,519 | 9,841 | (678 | ) | |||||||||||||
Chilean Peso | Deutsche Bank | 2/25/14 | 3,890,000 | 7,865 | 7,361 | (504 | ) | |||||||||||||
Chilean Peso | Deutsche Bank | 2/26/14 | 2,610,000 | 5,273 | 4,938 | (335 | ) | |||||||||||||
Chilean Peso | Morgan Stanley | 2/26/14 | 5,600,000 | 11,321 | 10,595 | (726 | ) | |||||||||||||
Chilean Peso | Deutsche Bank | 2/27/14 | 6,500,000 | 13,133 | 12,296 | (837 | ) | |||||||||||||
Chilean Peso | JPMorgan Chase | 2/28/14 | 3,900,000 | 7,884 | 7,377 | (507 | ) | |||||||||||||
Chilean Peso | Deutsche Bank | 3/3/14 | 700,000 | 1,414 | 1,324 | (90 | ) | |||||||||||||
Chilean Peso | Barclays Bank | 3/5/14 | 12,000,000 | 24,230 | 22,687 | (1,543 | ) | |||||||||||||
Chilean Peso | Deutsche Bank | 3/5/14 | 700,000 | 1,410 | 1,323 | (87 | ) | |||||||||||||
Chilean Peso | Morgan Stanley | 3/10/14 | 2,500,000 | 5,051 | 4,724 | (327 | ) | |||||||||||||
Chilean Peso | JPMorgan Chase | 3/12/14 | 990,530,400 | 1,891,047 | 1,871,190 | (19,857 | ) | |||||||||||||
Chilean Peso | JPMorgan Chase | 3/21/14 | 4,300,000 | 8,696 | 8,115 | (581 | ) | |||||||||||||
Chilean Peso | Morgan Stanley | 5/12/14 | 4,500,000 | 9,128 | 8,447 | (681 | ) | |||||||||||||
Chilean Peso | Deutsche Bank | 7/10/14 | 162,750,000 | 307,511 | 303,674 | (3,837 | ) | |||||||||||||
Chilean Peso | Morgan Stanley | 7/18/14 | 305,012,200 | 578,496 | 568,668 | (9,828 | ) | |||||||||||||
Chilean Peso | Morgan Stanley | 7/31/14 | 8,010,000 | 15,055 | 14,915 | (140 | ) | |||||||||||||
Chilean Peso | Morgan Stanley | 8/20/14 | 4,010,000 | 7,535 | 7,452 | (83 | ) | |||||||||||||
Chilean Peso | Citibank | 10/20/14 | 2,148,010,500 | 4,128,408 | 3,967,294 | (161,114 | ) | |||||||||||||
Chilean Peso | Barclays Bank | 10/27/14 | 153,759,000 | 294,163 | 283,787 | (10,376 | ) | |||||||||||||
Chilean Peso | Deutsche Bank | 10/29/14 | 307,366,000 | 585,236 | 567,180 | (18,056 | ) | |||||||||||||
European Euro | Bank of America | 1/17/14 | 19,690 | 27,099 | 27,085 | (14 | ) | |||||||||||||
European Euro | Barclays Bank | 1/17/14 | 53,913 | 74,002 | 74,162 | 160 | ||||||||||||||
European Euro | HSBC Bank | 1/17/14 | 35,542 | 48,806 | 48,891 | 85 | ||||||||||||||
European Euro | State Street Bank | 1/17/14 | 13,089 | 18,008 | 18,005 | (3 | ) | |||||||||||||
Indian Rupee | Citibank | 1/6/14 | 12,666,000 | 195,895 | 204,485 | 8,590 | ||||||||||||||
Indian Rupee | HSBC Bank | 2/13/14 | 8,549,600 | 131,461 | 136,798 | 5,337 | ||||||||||||||
Indian Rupee | JPMorgan Chase | 2/13/14 | 26,253,400 | 403,926 | 420,067 | 16,141 | ||||||||||||||
Indian Rupee | Deutsche Bank | 2/18/14 | 8,080,848 | 123,269 | 129,156 | 5,887 | ||||||||||||||
Indian Rupee | HSBC Bank | 2/18/14 | 8,645,260 | 131,980 | 138,177 | 6,197 |
Continued
20
AZL Franklin Templeton Founding Strategy Plus Fund
Schedule of Portfolio Investments
December 31, 2013
Type of Contract | Counterparty | Delivery Date | Contract Amount (Local Currency) | Contract Value | Value | Net Unrealized Appreciation/ (Depreciation) | ||||||||||||||
Indian Rupee | JPMorgan Chase | 2/18/14 | 14,490,000 | $ | 221,139 | $ | 231,593 | $ | 10,454 | |||||||||||
Indian Rupee | Deutsche Bank | 2/26/14 | 4,760,000 | 74,267 | 75,946 | 1,679 | ||||||||||||||
Indian Rupee | Deutsche Bank | 2/27/14 | 9,520,000 | 148,488 | 151,858 | 3,370 | ||||||||||||||
Indian Rupee | JPMorgan Chase | 2/28/14 | 16,610,000 | 259,596 | 264,896 | 5,300 | ||||||||||||||
Indian Rupee | Citibank | 3/3/14 | 12,790,000 | 197,590 | 203,831 | 6,241 | ||||||||||||||
Indian Rupee | JPMorgan Chase | 3/13/14 | 26,253,400 | 419,911 | 417,372 | (2,539 | ) | |||||||||||||
Indian Rupee | Deutsche Bank | 3/26/14 | 4,760,000 | 74,831 | 75,433 | 602 | ||||||||||||||
Indian Rupee | Deutsche Bank | 3/28/14 | 9,520,000 | 150,324 | 150,792 | 468 | ||||||||||||||
Indian Rupee | Citibank | 4/7/14 | 12,666,000 | 200,221 | 200,165 | (56 | ) | |||||||||||||
Korean Won | Bank of America | 2/12/14 | 111,576,647 | 104,604 | 105,595 | 991 | ||||||||||||||
Korean Won | Credit Suisse First Boston | 2/12/14 | 8,138,235 | 7,510 | 7,702 | 192 | ||||||||||||||
Korean Won | HSBC Bank | 2/12/14 | 112,576,799 | 104,852 | 106,542 | 1,690 | ||||||||||||||
Korean Won | JPMorgan Chase | 5/15/14 | 258,825,900 | 230,000 | 244,291 | 14,291 | ||||||||||||||
Korean Won | JPMorgan Chase | 5/16/14 | 44,818,000 | 40,000 | 42,300 | 2,300 | ||||||||||||||
Korean Won | JPMorgan Chase | 5/20/14 | 213,852,600 | 190,000 | 201,812 | 11,812 | ||||||||||||||
Korean Won | JPMorgan Chase | 5/21/14 | 270,144,000 | 240,000 | 254,925 | 14,925 | ||||||||||||||
Korean Won | Deutsche Bank | 6/27/14 | 316,000,000 | 270,478 | 297,851 | 27,373 | ||||||||||||||
Korean Won | HSBC Bank | 9/26/14 | 317,000,000 | 290,027 | 298,096 | 8,069 | ||||||||||||||
Malaysian Ringgit | JPMorgan Chase | 1/2/14 | 2,405,000 | 752,433 | 734,575 | (17,858 | ) | |||||||||||||
Malaysian Ringgit | JPMorgan Chase | 2/4/14 | 2,661,000 | 845,164 | 811,021 | (34,143 | ) | |||||||||||||
Malaysian Ringgit | HSBC Bank | 2/18/14 | 1,235,558 | 366,417 | 376,301 | 9,884 | ||||||||||||||
Malaysian Ringgit | HSBC Bank | 2/20/14 | 720,000 | 220,723 | 219,260 | (1,463 | ) | |||||||||||||
Malaysian Ringgit | HSBC Bank | 3/11/14 | 2,909,811 | 918,269 | 885,141 | (33,128 | ) | |||||||||||||
Malaysian Ringgit | JPMorgan Chase | 3/12/14 | 735,120 | 232,126 | 223,603 | (8,523 | ) | |||||||||||||
Malaysian Ringgit | Deutsche Bank | 3/18/14 | 964,663 | 289,776 | 293,312 | 3,536 | ||||||||||||||
Malaysian Ringgit | JPMorgan Chase | 4/2/14 | 1,202,500 | 368,018 | 365,282 | (2,736 | ) | |||||||||||||
Malaysian Ringgit | HSBC Bank | 5/15/14 | 2,524,088 | 825,000 | 764,868 | (60,132 | ) | |||||||||||||
Malaysian Ringgit | Deutsche Bank | 5/19/14 | 2,093,018 | 685,000 | 634,098 | (50,902 | ) | |||||||||||||
Malaysian Ringgit | HSBC Bank | 5/20/14 | 2,114,160 | 690,000 | 640,467 | (49,533 | ) | |||||||||||||
Malaysian Ringgit | HSBC Bank | 6/20/14 | 900,000 | 274,365 | 272,166 | (2,199 | ) | |||||||||||||
Malaysian Ringgit | JPMorgan Chase | 7/2/14 | 1,976,500 | 606,482 | 597,299 | (9,183 | ) | |||||||||||||
Malaysian Ringgit | Deutsche Bank | 7/3/14 | 177,180 | 54,999 | 53,541 | (1,458 | ) | |||||||||||||
Malaysian Ringgit | HSBC Bank | 10/24/14 | 812,462 | 250,915 | 243,944 | (6,971 | ) | |||||||||||||
Malaysian Ringgit | JPMorgan Chase | 10/27/14 | 805,012 | 251,307 | 241,666 | (9,641 | ) | |||||||||||||
Malaysian Ringgit | JPMorgan Chase | 10/31/14 | 359,000 | 112,258 | 107,748 | (4,510 | ) | |||||||||||||
Malaysian Ringgit | Deutsche Bank | 11/19/14 | 62,320 | 19,124 | 18,684 | (440 | ) | |||||||||||||
Malaysian Ringgit | HSBC Bank | 11/20/14 | 39,000 | 11,978 | 11,692 | (286 | ) | |||||||||||||
Mexican Peso | Citibank | 1/10/14 | 3,813,785 | 291,685 | 292,084 | 399 | ||||||||||||||
Mexican Peso | HSBC Bank | 3/10/14 | 10,223,640 | 778,232 | 779,427 | 1,195 | ||||||||||||||
Mexican Peso | JPMorgan Chase | 3/13/14 | 28,297,935 | 2,070,000 | 2,156,854 | 86,854 | ||||||||||||||
Mexican Peso | Citibank | 3/14/14 | 903,100 | 68,607 | 68,828 | 221 | ||||||||||||||
Mexican Peso | Citibank | 3/24/14 | 2,637,800 | 193,467 | 200,876 | 7,409 | ||||||||||||||
Mexican Peso | Citibank | 6/9/14 | 2,731,280 | 206,365 | 206,770 | 405 | ||||||||||||||
Mexican Peso | Citibank | 6/10/14 | 2,728,000 | 205,800 | 206,506 | 706 | ||||||||||||||
Mexican Peso | Citibank | 6/12/14 | 5,548,030 | 419,178 | 419,915 | 737 | ||||||||||||||
Mexican Peso | Citibank | 6/13/14 | 3,454,600 | 257,954 | 261,449 | 3,495 | ||||||||||||||
Mexican Peso | Citibank | 6/20/14 | 2,146,000 | 161,222 | 162,325 | 1,103 | ||||||||||||||
Mexican Peso | Citibank | 7/10/14 | 3,689,235 | 277,957 | 278,625 | 668 | ||||||||||||||
Mexican Peso | HSBC Bank | 9/3/14 | 11,644,900 | 849,807 | 875,688 | 25,881 | ||||||||||||||
Mexican Peso | Deutsche Bank | 10/14/14 | 19,592,000 | 1,446,972 | 1,468,566 | 21,594 | ||||||||||||||
Mexican Peso | Citibank | 10/22/14 | 6,418,829 | 487,707 | 480,836 | (6,871 | ) | |||||||||||||
Mexican Peso | HSBC Bank | 11/7/14 | 27,672,950 | 2,050,000 | 2,070,375 | 20,375 | ||||||||||||||
Mexican Peso | Citibank | 12/16/14 | 3,316,000 | 249,868 | 247,326 | (2,542 | ) | |||||||||||||
Mexican Peso | Citibank | 12/18/14 | 1,589,750 | 119,413 | 118,554 | (859 | ) | |||||||||||||
Phillipine Peso | JPMorgan Chase | 6/25/14 | 9,600,000 | 216,753 | 216,940 | 187 | ||||||||||||||
Phillipine Peso | Deutsche Bank | 6/26/14 | 16,461,720 | 372,917 | 372,005 | (912 | ) |
Continued
21
AZL Franklin Templeton Founding Strategy Plus Fund
Schedule of Portfolio Investments
December 31, 2013
Type of Contract | Counterparty | Delivery Date | Contract Amount (Local Currency) | Contract Value | Value | Net Unrealized Appreciation/ (Depreciation) | ||||||||||||||
Phillipine Peso | JPMorgan Chase | 6/27/14 | 4,900,000 | $ | 112,385 | $ | 110,732 | $ | (1,653 | ) | ||||||||||
Phillipine Peso | JPMorgan Chase | 7/11/14 | 9,520,000 | 218,178 | 215,135 | (3,043 | ) | |||||||||||||
Phillipine Peso | Deutsche Bank | 7/18/14 | 28,970,800 | 668,871 | 654,676 | (14,195 | ) | |||||||||||||
Singapore Dollar | JPMorgan Chase | 1/24/14 | 348,966 | 281,424 | 276,611 | (4,813 | ) | |||||||||||||
Singapore Dollar | Deutsche Bank | 2/7/14 | 123,000 | 96,612 | 97,498 | 886 | ||||||||||||||
Singapore Dollar | HSBC Bank | 2/7/14 | 123,000 | 99,426 | 97,498 | (1,928 | ) | |||||||||||||
Singapore Dollar | Barclays Bank | 2/12/14 | 34,819 | 27,442 | 27,600 | 158 | ||||||||||||||
Singapore Dollar | HSBC Bank | 2/18/14 | 77,000 | 60,918 | 61,035 | 117 | ||||||||||||||
Singapore Dollar | Deutsche Bank | 2/27/14 | 172,000 | 134,501 | 136,339 | 1,838 | ||||||||||||||
Singapore Dollar | Deutsche Bank | 2/28/14 | 132,000 | 104,795 | 104,632 | (163 | ) | |||||||||||||
Singapore Dollar | HSBC Bank | 3/13/14 | 499,540 | 400,000 | 395,973 | (4,027 | ) | |||||||||||||
Singapore Dollar | HSBC Bank | 3/14/14 | 215,700 | 172,947 | 170,980 | (1,967 | ) | |||||||||||||
Singapore Dollar | Deutsche Bank | 3/19/14 | 220,800 | 173,117 | 175,023 | 1,906 | ||||||||||||||
Singapore Dollar | HSBC Bank | 3/19/14 | 252,000 | 201,996 | 199,755 | (2,241 | ) | |||||||||||||
Singapore Dollar | JPMorgan Chase | 3/19/14 | 156,000 | 121,757 | 123,658 | 1,901 | ||||||||||||||
Singapore Dollar | Citibank | 5/16/14 | 260,154 | 210,000 | 206,247 | (3,753 | ) | |||||||||||||
Singapore Dollar | Deutsche Bank | 5/19/14 | 77,000 | 60,721 | 61,045 | 324 | ||||||||||||||
Singapore Dollar | HSBC Bank | 5/19/14 | 167,000 | 133,921 | 132,397 | (1,524 | ) | |||||||||||||
Singapore Dollar | JPMorgan Chase | 5/19/14 | 60,863 | 48,913 | 48,252 | (661 | ) | |||||||||||||
Singapore Dollar | JPMorgan Chase | 5/20/14 | 229,983 | 185,000 | 182,330 | (2,670 | ) | |||||||||||||
Singapore Dollar | Deutsche Bank | 5/30/14 | 748,020 | 592,257 | 593,045 | 788 | ||||||||||||||
Singapore Dollar | HSBC Bank | 6/20/14 | 190,000 | 150,913 | 150,645 | (268 | ) | |||||||||||||
Singapore Dollar | Deutsche Bank | 6/23/14 | 237,700 | 189,417 | 188,467 | (950 | ) | |||||||||||||
Singapore Dollar | Deutsche Bank | 6/24/14 | 910,000 | 717,722 | 721,519 | 3,797 | ||||||||||||||
Singapore Dollar | Deutsche Bank | 8/12/14 | 246,000 | 194,374 | 195,058 | 684 | ||||||||||||||
Singapore Dollar | Barclays Bank | 8/18/14 | 103,000 | 81,102 | 81,671 | 569 | ||||||||||||||
Singapore Dollar | HSBC Bank | 8/19/14 | 77,000 | 60,745 | 61,055 | 310 | ||||||||||||||
Singapore Dollar | Deutsche Bank | 8/19/14 | 77,000 | 60,735 | 61,055 | 320 | ||||||||||||||
Singapore Dollar | Deutsche Bank | 8/27/14 | 172,000 | 134,554 | 136,384 | 1,830 | ||||||||||||||
Singapore Dollar | HSBC Bank | 11/7/14 | 3,474,156 | 2,800,000 | 2,754,939 | (45,061 | ) | |||||||||||||
Swedish Krona | Deutsche Bank | 5/19/14 | 20,440,000 | 3,057,317 | 3,171,561 | 114,244 | ||||||||||||||
|
|
|
|
|
| |||||||||||||||
$ | 43,206,263 | $ | 43,039,391 | $ | (166,872 | ) | ||||||||||||||
|
|
|
|
|
|
At December 31, 2013, the Fund’s open forward cross currency contracts were as follows:
Purchase/Sale | Counterparty | Amount Purchased | Amount Sold | Contract Value | Value | Net Unrealized Appreciation/ (Depreciation) | ||||||||||||||
Polish Zloty/European Euro | Barclays Bank | 233,000 PLN | 54,057 EUR | $ | 72,855 | $ | 75,480 | $ | 2,625 | |||||||||||
Polish Zloty/European Euro | Deutsche Bank | 233,000 PLN | 54,172 EUR | 72,855 | 75,321 | 2,466 | ||||||||||||||
Polish Zloty/European Euro | Deutsche Bank | 233,000 PLN | 54,077 EUR | 72,971 | 75,555 | 2,584 | ||||||||||||||
Polish Zloty/European Euro | Morgan Stanley | 91,000 PLN | 21,321 EUR | 27,425 | 27,973 | 548 | ||||||||||||||
Polish Zloty/European Euro | Deutsche Bank | 700,000 PLN | 163,540 EUR | 225,035 | 227,671 | 2,636 | ||||||||||||||
Hungarian Forint/European Euro | Deutsche Bank | 88,267,600 HUF | 279,525 EUR | 367,533 | 390,236 | 22,703 | ||||||||||||||
Hungarian Forint/European Euro | JPMorgan Chase | 26,454,170 HUF | 83,857 EUR | 109,937 | 116,627 | 6,690 | ||||||||||||||
Hungarian Forint/European Euro | JPMorgan Chase | 44,259,000 HUF | 139,764 EUR | 181,558 | 193,475 | 11,917 | ||||||||||||||
Hungarian Forint/European Euro | JPMorgan Chase | 44,021,000 HUF | 139,763 EUR | 180,709 | 191,519 | 10,810 | ||||||||||||||
Hungarian Forint/European Euro | JPMorgan Chase | 43,445,000 HUF | 143,312 EUR | 193,385 | 194,790 | 1,405 | ||||||||||||||
Hungarian Forint/European Euro | JPMorgan Chase | 34,778,000 HUF | 113,565 EUR | 153,593 | 156,294 | 2,701 | ||||||||||||||
Swedish Krona/European Euro | Deutsche Bank | 5,900,000 SEK | 677,188 EUR | 913,025 | 896,260 | (16,765 | ) | |||||||||||||
Swedish Krona/European Euro | Deutsche Bank | 4,380,000 SEK | 494,552 EUR | 680,545 | 677,694 | (2,851 | ) | |||||||||||||
|
|
|
|
|
| |||||||||||||||
$ | 3,251,426 | $ | 3,298,895 | $ | 47,469 | |||||||||||||||
|
|
|
|
|
|
Continued
22
AZL Franklin Templeton Founding Strategy Plus Fund
Schedule of Portfolio Investments
December 31, 2013
Over-the-Counter Interest Rate Swap Agreements
At December 31, 2013, the Fund’s open over-the-counter interest rate swap agreements were as follows:
Pay/ Receive Floating Rate | Floating Rate Index | Fixed Rate | Expiration Date | Counterparty | Notional Amount (Local) | Value | Unrealized Appreciation/ (Depreciation) | |||||||||||||||||
Receive | 3-Month U.S. Dollar LIBOR BBA | 3.018% | 8/22/23 | JPMorgan Chase | 3,910,000 USD | $ | (41,522 | ) | $ | (41,522 | ) | |||||||||||||
Receive | 3-Month U.S. Dollar LIBOR BBA | 3.848% | 8/22/43 | JPMorgan Chase | 2,230,000 USD | (59,136 | ) | (59,136 | ) | |||||||||||||||
|
|
|
| |||||||||||||||||||||
$ | (100,658 | ) | $ | (100,658 | ) | |||||||||||||||||||
|
|
|
|
Continued
23
AZL Franklin Templeton Founding Strategy Plus Fund
Statement of Assets and Liabilities
December 31, 2013
Assets: | |||||
Investment securities, at cost | $ | 630,078,898 | |||
|
| ||||
Investment securities, at value* | $ | 719,827,480 | |||
Cash | 540,774 | ||||
Interest and dividends receivable | 3,509,397 | ||||
Foreign currency, at value (cost $2,635,471) | 2,652,167 | ||||
Unrealized appreciation on forward currency contracts | 3,359,861 | ||||
Receivable for capital shares issued | 211,097 | ||||
Receivable for investments sold | 112,639 | ||||
Reclaims receivable | 187,293 | ||||
|
| ||||
Total Assets | 730,400,708 | ||||
|
| ||||
Liabilities: | |||||
Unrealized depreciation on forward currency contracts | 3,441,086 | ||||
Payable for investments purchased | 1,118,405 | ||||
Payable for capital shares redeemed | 21,574 | ||||
Unrealized depreciation on swap agreements | 100,658 | ||||
Payable for collateral received on loaned securities | 13,827,477 | ||||
Manager fees payable | 410,057 | ||||
Administration fees payable | 26,529 | ||||
Distribution fees payable | 146,448 | ||||
Custodian fees payable | 56,428 | ||||
Administrative and compliance services fees payable | 2,735 | ||||
Trustee fees payable | 21 | ||||
Other accrued liabilities | 35,760 | ||||
|
| ||||
Total Liabilities | 19,187,178 | ||||
|
| ||||
Net Assets | $ | 711,213,530 | |||
|
| ||||
Net Assets Consist of: | |||||
Capital | $ | 597,264,723 | |||
Accumulated net investment income/(loss) | 11,906,144 | ||||
Accumulated net realized gains/(losses) from investment transactions | 12,430,264 | ||||
Net unrealized appreciation/(depreciation) on investments | 89,612,399 | ||||
|
| ||||
Net Assets | $ | 711,213,530 | |||
|
| ||||
Shares of beneficial interest (unlimited number of shares authorized, no par value) | 51,318,585 | ||||
Net Asset Value (offering and redemption price per share) | $ | 13.86 | |||
|
|
* | Includes securities on loan of $13,352,215. |
Statement of Operations
For the Year Ended December 31, 2013
Investment Income: | |||||
Dividends | $ | 8,970,412 | |||
Interest | 8,670,981 | ||||
Income from securities lending | 240,582 | ||||
Foreign withholding tax | (498,470 | ) | |||
|
| ||||
Total Investment Income | 17,383,505 | ||||
|
| ||||
Expenses: | |||||
Manager fees | 3,858,682 | ||||
Administration fees | 239,373 | ||||
Distribution fees | 1,378,096 | ||||
Custodian fees | 210,185 | ||||
Administrative and compliance services fees | 10,824 | ||||
Trustee fees | 27,302 | ||||
Professional fees | 30,776 | ||||
Shareholder reports | 33,958 | ||||
Other expenses | 17,576 | ||||
|
| ||||
Total expenses before reductions | 5,806,772 | ||||
Less expenses paid indirectly | (1,394 | ) | |||
|
| ||||
Net expenses | 5,805,378 | ||||
|
| ||||
Net Investment Income/(Loss) | 11,578,127 | ||||
|
| ||||
Realized and Unrealized Gains/(Losses) on Investments: | |||||
Net realized gains/(losses) on securities transactions | 11,882,490 | ||||
Net realized gains/(losses) on options contracts | 32,961 | ||||
Net realized gains/(losses) on forward currency contracts | 547,677 | ||||
Change in net unrealized appreciation/depreciation on investments | 66,386,266 | ||||
|
| ||||
Net Realized/Unrealized Gains/(Losses) on Investments | 78,849,394 | ||||
|
| ||||
Change in Net Assets Resulting From Operations | $ | 90,427,521 | |||
|
|
See accompanying notes to the financial statements.
24
Statements of Changes in Net Assets
AZL Franklin Templeton Founding Strategy Plus Fund | ||||||||||
For the 2013 | For the 2012 | |||||||||
Change in Net Assets: | ||||||||||
Operations: | ||||||||||
Net investment income/(loss) | $ | 11,578,127 | $ | 10,060,639 | ||||||
Net realized gains/(losses) on investment transactions | 12,463,128 | 6,149,746 | ||||||||
Change in unrealized appreciation/depreciation on investments | 66,386,266 | 32,969,901 | ||||||||
|
|
|
| |||||||
Change in net assets resulting from operations | 90,427,521 | 49,180,286 | ||||||||
|
|
|
| |||||||
Dividends to Shareholders: | ||||||||||
From net investment income | (9,755,765 | ) | (8,640,680 | ) | ||||||
From net realized gains | (4,135,980 | ) | (1,692,782 | ) | ||||||
|
|
|
| |||||||
Change in net assets resulting from dividends to shareholders | (13,891,745 | ) | (10,333,462 | ) | ||||||
|
|
|
| |||||||
Capital Transactions: | ||||||||||
Proceeds from shares issued | 286,382,484 | 112,715,893 | ||||||||
Proceeds from dividends reinvested | 13,891,744 | 10,333,462 | ||||||||
Value of shares redeemed | (75,479,718 | ) | (54,604,484 | ) | ||||||
|
|
|
| |||||||
Change in net assets resulting from capital transactions | 224,794,510 | 68,444,871 | ||||||||
|
|
|
| |||||||
Change in net assets | 301,330,286 | 107,291,695 | ||||||||
Net Assets: | ||||||||||
Beginning of period | 409,883,244 | 302,591,549 | ||||||||
|
|
|
| |||||||
End of period | $ | 711,213,530 | $ | 409,883,244 | ||||||
|
|
|
| |||||||
Accumulated net investment income/(loss) | $ | 11,906,144 | $ | 10,410,064 | ||||||
|
|
|
| |||||||
Share Transactions: | ||||||||||
Shares issued | 21,891,005 | 9,825,450 | ||||||||
Dividends reinvested | 1,063,686 | 887,754 | ||||||||
Shares redeemed | (5,767,982 | ) | (4,730,854 | ) | ||||||
|
|
|
| |||||||
Change in shares | 17,186,709 | 5,982,350 | ||||||||
|
|
|
|
See accompanying notes to the financial statements.
25
AZL Franklin Templeton Founding Strategy Plus Fund
Financial Highlights
(Selected data for a share of beneficial interest outstanding throughout the periods indicated)
Year Ended December 31, 2013 | Year Ended December 31, 2012 | Year Ended December 31, 2011 | Year Ended December 31, 2010 | October 23, 2009 December 31, | |||||||||||||||||||||
Net Asset Value, Beginning of Period | $ | 12.01 | $ | 10.75 | $ | 10.99 | $ | 10.20 | $ | 10.00 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Investment Activities: | |||||||||||||||||||||||||
Net Investment Income/(Loss) | 0.15 | 0.27 | 0.23 | 0.20 | 0.04 | ||||||||||||||||||||
Net Realized and Unrealized Gains/(Losses) on Investments | 2.01 | 1.31 | (0.43 | ) | 0.82 | 0.21 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Total from Investment Activities | 2.16 | 1.58 | (0.20 | ) | 1.02 | 0.25 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Dividends to Shareholders From: | |||||||||||||||||||||||||
Net Investment Income | (0.22 | ) | (0.27 | ) | (0.02 | ) | (0.18 | ) | (0.05 | ) | |||||||||||||||
Net Realized Gains | (0.09 | ) | (0.05 | ) | (0.02 | ) | (0.05 | ) | — | ||||||||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Total Dividends | (0.31 | ) | (0.32 | ) | (0.04 | ) | (0.23 | ) | (0.05 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Net Asset Value, End of Period | $ | 13.86 | $ | 12.01 | $ | 10.75 | $ | 10.99 | $ | 10.20 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Total Return(b) | 18.12 | % | 14.78 | % | (1.83 | )% | 10.02 | % | 2.45 | %(c) | |||||||||||||||
Ratios to Average Net Assets/Supplemental Data: | |||||||||||||||||||||||||
Net Assets, End of Period (000’s) | $ | 711,214 | $ | 409,883 | $ | 302,592 | $ | 156,980 | $ | 54,952 | |||||||||||||||
Net Investment Income/(Loss)(d) | 2.10 | % | 2.80 | % | 2.90 | % | 3.13 | % | 2.11 | % | |||||||||||||||
Expenses Before Reductions(d)(e) | 1.05 | % | 1.09 | % | 1.16 | % | 1.25 | % | 1.20 | % | |||||||||||||||
Expenses Net of Reductions(d) | 1.05 | % | 1.09 | % | 1.16 | % | 1.19 | % | 1.20 | % | |||||||||||||||
Expenses Net of Reductions, Excluding Expenses Paid Indirectly(d)(f) | 1.05 | % | 1.09 | % | 1.16 | % | 1.19 | % | 1.20 | % | |||||||||||||||
Portfolio Turnover Rate | 24 | % | 19 | % | 17 | % | 17 | % | 2 | %(c) |
(a) | Period from commencement of operations. |
(b) | The returns include reinvested dividends and fund level expenses, but exclude insurance contract charges. If these charges were included, the returns would have been lower. |
(c) | Not annualized. |
(d) | Annualized for periods less than one year. |
(e) | Excludes fee reductions. If such fee reductions had not occurred, the ratios would have been as indicated. |
(f) | Expenses net of reductions excludes expenses paid indirectly, pursuant to a “commission recapture” program, under which brokers remit a portion of the brokerage commission which is used to pay certain Fund expenses. See note 2 in the Notes to the Financial Statements. |
See accompanying notes to the financial statements.
26
AZL Franklin Templeton Founding Strategy Plus Fund
Notes to the Financial Statements
December 31, 2013
1. Organization
The Allianz Variable Insurance Products Trust (the “Trust”) was organized as a Delaware statutory trust on July 13, 1999. The Trust is a diversified open-end management investment company registered under the Investment Company Act of 1940. The Trust consists of 29 separate investment portfolios (collectively, the “Funds”), of which one is included in this report, the AZL Franklin Templeton Founding Strategy Plus Fund (the “Fund”), and 28 are presented in separate reports.
The Trust is authorized to issue an unlimited number of shares of the Fund without par value. Shares of the Fund are available through the variable annuity contracts and variable life insurance policies offered through the separate accounts of participating insurance companies.
Under the Trust’s organizational documents, its officers and trustees are indemnified against certain liabilities arising out of the performance of their duties to the Fund. In addition, in the normal course of business, the Fund may enter into contracts with its vendors and others that provide for general indemnifications. The Fund’s maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Fund. However, based on experience, the Fund expects the risk of loss to be remote.
2. Significant Accounting Policies
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. The policies conform with U.S. generally accepted accounting principles (“U.S. GAAP”). The preparation of financial statements requires management to make certain 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 increases and decreases in net assets from operations during the reporting period. Actual results could differ from those estimates.
Security Valuation
The Fund records its investments at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between willing market participants at the measurement date. The valuation techniques used to determine fair value are further described in Note 4 below.
Investment Transactions and Investment Income
Investment transactions are recorded not later than on the business day following trade date. However, for financial reporting purposes, investment transactions are accounted for on trade date. Net realized gains and losses on investments sold and on foreign currency transactions are recorded on the basis of identified cost. Interest income is recorded on the accrual basis and includes, where applicable, the amortization of premiums or accretion of discounts. Dividend income is recorded on the ex-dividend date except in the case of foreign securities, in which case dividends are recorded as soon as such information becomes available.
Real Estate Investment Trusts
The Fund may own shares of real estate investment trusts (“REITs”) which report information on the source of their distributions annually. Certain distributions received from REITs during the year, which are known to be a return of capital, are recorded as a reduction to the cost of the individual REIT.
Foreign Currency Translation
The accounting records of the Fund are maintained in U.S. dollars. Foreign currency amounts are translated into U.S. dollars at the current rate of exchange to determine the fair value of investments, assets and liabilities. Purchases and sales of securities, and income and expenses are translated at the prevailing rate of exchange on the respective dates of such transactions. The Fund does not isolate that portion of the results of operations resulting from changes in foreign exchange rates on investments from fluctuations arising from changes in market prices of securities held. Such fluctuations are included in the net realized and unrealized gain or loss on investments and foreign currencies. Income received by the Fund from sources within foreign countries may be subject to withholding and other income or similar taxes imposed by such countries. The Funds accrue such taxes, as applicable, based on their current interpretation of tax rules in the foreign markets in which they invest.
Floating Rate Loans
The Fund may invest in floating rate loans, which usually take the form of loan participations and assignments. These loans are made by banks and other large financial institutions to various companies and are typically senior in the borrowing companies’ capital structure. Coupon rates are floating, not fixed and are tied to a benchmark lending rate. Loans involve a risk of loss in case of default or insolvency of the financial intermediaries who are parties to the transactions. A Fund records an investment when the borrower withdraws money and records the interest as earned.
Structured Notes
The Fund may invest in structured notes, the values of which are based on the price movements of a reference security or index. Structured notes are derivative debt securities, the interest rate or principal of which is determined by an unrelated indicator. The terms of the structured notes may provide that in certain circumstances no principal is due at maturity and therefore, may result in a loss of invested capital. Structured notes may be positively or negatively indexed, so that appreciation of the reference may produce an increase or a decrease in the interest rate or the value of the structured note at maturity may be calculated as a specified multiple of the change in the value of the reference; therefore, the value of such security may be very volatile. Structured notes may entail a greater degree of market risk than other types of debt securities because the investor bears the risk of the reference. Structured notes may also be more volatile, less liquid, and more difficult to accurately price than less complex securities or more traditional debt securities.
Securities Purchased on a When-Issued Basis
The Fund may purchase securities on a when-issued basis. When-issued securities are securities purchased for delivery beyond the normal settlement date at a stated price and yield and thereby involve risk that the yield obtained in the transaction will be less than that available in the market when the delivery takes place. A Fund will not pay for
27
AZL Franklin Templeton Founding Strategy Plus Fund
Notes to the Financial Statements
December 31, 2013
such securities or start earning interest on them until they are received. When a Fund agrees to purchase securities on a when-issued basis, the Fund will segregate or designate cash or liquid assets equal to the amount of the commitment. Securities purchased on a when-issued basis are recorded as an asset and are subject to changes in the value based upon changes in the general level of interest rates. A Fund may sell when-issued securities before they are delivered, which may result in a capital gain or loss.
Short Sales
The Fund may engage in short sales against the box (i.e., where the Fund owns or has an unconditional right to acquire at no additional cost a security substantially similar to the security sold short) for hedging purposes to limit exposure to a possible market decline in the value of its portfolio securities. In a short sale, the Fund sells a borrowed security and has a corresponding obligation to the lender to return the identical security. The Fund may also incur an interest expense if a security that has been sold short has an interest payment. When a Fund engages in a short sale, the Fund records a liability for securities sold short and records an asset equal to the proceeds received. The amount of the liability is subsequently marked to market to reflect the fair value of the securities sold short. To borrow the security, a Fund also may be required to pay a premium, which would increase the cost of the security sold.
Dividends to Shareholders
Dividends to shareholders are recorded on the ex-dividend date. The Fund distributes its dividends from net investment income and net realized capital gains, if any, on an annual basis. The amount of dividends from net investment income and from net realized gains is determined in accordance with federal income tax regulations, which may differ from U.S. GAAP. These “book/tax” differences are either temporary or permanent in nature. To the extent these differences are permanent in nature (e.g., return of capital, net operating loss, and reclassification of certain distributions), such amounts are reclassified within the composition of net assets based on their federal tax-basis treatment; temporary differences (e.g., wash sales and post October losses) do not require reclassification. Dividends to shareholders that exceed net investment income and net realized gains for tax purposes are reported as distributions of capital.
Expense Allocation
Expenses directly attributable to the Fund are charged directly to the Fund, while expenses attributable to more than one Fund are allocated among the respective Funds based upon relative net assets or some other reasonable method. Expenses which are attributable to more than one Trust are allocated across the Allianz Variable Insurance Products and Allianz Variable Insurance Products Fund of Funds Trusts based upon relative net assets or another reasonable basis. Allianz Investment Management LLC (the “Manager”), serves as the investment manager for the Trust and the Allianz Variable Insurance Products Fund of Funds Trust.
Securities Lending
To generate additional income, the Fund may lend up to 33 1/3% of its assets pursuant to agreements requiring that the loan be continuously secured by any combination of cash, U.S. government or U.S. government agency securities, equal initially to at least 102% of the fair value plus accrued interest on the securities loaned (105% for foreign securities). The borrower of securities is at all times required to post collateral to the Fund in an amount equal to 100% of the fair value of the securities loaned based on the previous day’s fair value of the securities loaned, marked-to-market daily. Any collateral shortfalls are adjusted the next business day. The Fund bears all of the gains and losses on such investments. The Fund receives payments from borrowers equivalent to the dividends and interest that would have been earned on securities lent while simultaneously seeking to earn income on the investment of cash collateral received. In extremely low interest rate environments, the broker rebate fee may exceed the interest earned or the cash collateral which would result in a loss to the Fund. The investment of cash collateral deposited by the borrower is subject to inherent market risks such as interest rate risk, credit risk, liquidity risk, and other risks that are present in the market, and as such, the value of these investments may not be sufficient, when liquidated, to repay the borrower when the loaned security is returned. There may be risks of delay in recovery of the securities or even loss of rights in the collateral should the borrower of the securities fail financially. However, loans will be made only to borrowers, such as broker-dealers, banks or institutional borrowers of securities, deemed by the Manager to be of good standing and credit worthy and when in its judgment, the consideration which can be earned currently from such securities loans justifies the attendant risks. Loans are subject to termination by the Trust or the borrower at any time, and are, therefore, not considered to be illiquid investments. Securities on loan at December 31, 2013 are presented on the Fund’s Schedule of Portfolio Investments. The average outstanding amount of securities on loan was $16.3 million for the year ended December 31, 2013.
Cash collateral received in connection with securities lending is invested in the Allianz Variable Insurance Products Securities Lending Collateral Trust (the “Securities Lending Collateral Trust”) managed by The Dreyfus Corporation, an affiliate of the Custodian and Securities Lending Agent. The Securities Lending Collateral Trust invests in short-term investments that have a remaining maturity of 397 days or less as calculated in accordance with Rule 2a-7 under the 1940 Act. The Fund paid securities lending fees of $23,670 during the year ended December 31, 2013. These fees have been netted against “Income from securities lending” on the Statement of Operations.
Commission Recapture
Certain Funds of the Trust participate in a commission recapture program. The Fund will utilize the recaptured commissions to pay for, in whole or part, certain expenses of the Fund, excluding investment advisory fees. Any amounts received by the Fund, if applicable, are disclosed as “Expenses paid indirectly” on the Statement of Operations.
Effective January 6, 2014, the Manager, on behalf of the Trust, requested the Fund cease participation in the program until further notice.
Derivative Instruments
All open derivative positions at period end are reflected on the Fund’s Schedule of Portfolio Investments. The following is a description of the derivative instruments utilized by the Fund, including the primary underlying risk exposures related to each instrument type.
Forward Currency Contracts
During the year ended December 31, 2013, the Fund entered into forward currency contracts in connection with planned purchases or sales of securities or to hedge the U.S. dollar value of securities denominated in a particular currency. In addition to the foreign currency risk related to the use of these contracts, the Fund could be exposed to risks
28
AZL Franklin Templeton Founding Strategy Plus Fund
Notes to the Financial Statements
December 31, 2013
if the counterparties to the contracts are unable to meet the terms of their contracts and from unanticipated movements in the value of a foreign currency relative to the U.S. dollar. In the event of default by the counterparty to the transaction, the Fund’s maximum amount of loss, as either the buyer or the seller, is the unrealized appreciation of the contract. The forward currency contracts are adjusted by the daily exchange rate of the underlying currency and any gains or losses are recorded for financial statement purposes as unrealized gains or losses until the contract settlement date. When the contract is closed, the Fund records a realized gain or loss equal to the difference between the value at the time it was opened and the value at the time it was closed. The contract amount of forward currency contracts outstanding was $162.4 million as of December 31, 2013. The monthly average amount for these contracts was $120.4 million for the year ended December 31, 2013.
Options Contracts
The Fund may purchase or write put and call options on a security or an index of securities. During the year ended December 31, 2013, the Fund used written call options to hedge against security prices (equity risk). A stock index fluctuates with changes in the fair values of the stocks included in the index, and therefore options on stock indexes and options on stocks involve elements of equity price risk.
Purchased Options Contracts — The Fund pays a premium which is included in “Investments, at value” on the Statement of Assets and Liabilities and marked to market to reflect the current value of the option. Premiums paid for purchasing put options that expire are treated as realized losses. When a put option is exercised or closed, premiums paid for purchasing put options are offset against proceeds to determine the realized gain/loss on the transaction. The Fund bears the risk of loss of the premium and change in value should the counterparty not perform under the contract.
Written Options Contracts — The Fund receives a premium which is recorded as a liability and is subsequently adjusted to the current value of the options written. Premiums received from writing options that expire are treated as realized gains. Premiums received from writing options that are either exercised or closed are offset against the proceeds received or the amount paid on the transaction to determine realized gains or losses. The risk associated with writing an option is that the Fund bears the market risk of an unfavorable change in the price of an underlying asset and is required to buy or sell an underlying asset under the contractual terms of the option at a price different from the current value.
Realized gains and losses are reported as “Net realized gains/(losses) on options contracts” on the Statement of Operations.
The Fund had the following transactions in purchased call and put options during the year ended December 31, 2013:
Number of Contracts | Cost | |||||||||
Options outstanding at December 31, 2012 | — | $ | — | |||||||
Options purchased | 290 | 175,928 | ||||||||
Options exercised | — | — | ||||||||
Options expired | — | — | ||||||||
Options closed | (138 | ) | (63,899 | ) | ||||||
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|
|
| |||||||
Options outstanding at December 31, 2013 | 152 | $ | 112,029 | |||||||
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|
|
|
The Fund had the following transactions in written call and put options during the year ended December 31, 2013:
Number of Contracts | Premiums Received | |||||||||
Options outstanding at December 31, 2012 | — | $ | — | |||||||
Options written | (1 | ) | (999 | ) | ||||||
Options exercised | — | — | ||||||||
Options expired | — | — | ||||||||
Options closed | 1 | 999 | ||||||||
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|
|
| |||||||
Options outstanding at December 31, 2013 | — | $ | — | |||||||
|
|
|
|
Swap Agreements
The Fund may invest in swap agreements. A swap is an agreement to exchange the return generated by one instrument for the return generated by another instrument. The Fund may enter into swap agreements to manage its exposure to market, interest rate and credit risk. The value of swap agreements are equal to the Fund’s obligations (or rights) under swap agreements, which will generally be equal to the net amounts to be paid or received under the agreements based upon the relative values of the positions held by each party to the agreements. In connection with these arrangements, securities may be identified as collateral in accordance with the terms of the swap agreements to provide assets of value and recourse in the event of default or bankruptcy by the counterparty.
Swaps are marked to market daily using pricing sources approved by the Trustees and the change in value, if any, is recorded as unrealized gain or loss. Payments received or made at the beginning of the measurement period are recorded as realized gain or loss upon termination or maturity of the swap. A liquidation payment received or made at the termination of the swap is recorded as a realized gain or loss. Net periodic payments received or paid by the Fund are included as part of realized gains (losses). Swap agreements involve, to varying degrees, elements of market risk and exposure to loss. The primary risks associated with the use of swap agreements are imperfect correlation between movements in the notional amount and the price of the underlying instruments and the inability of counterparties or clearing house to perform. The counterparty risk for cleared swap agreements is generally lower than for uncleared over-the-counter swap agreements because generally a clearing organization becomes substituted for each counterparty to a cleared swap agreement and, in effect, guarantees the parties’ performance under the contract as each party to a trade looks only to a clearing house for performance of financial obligations. However, there can be no assurance that the clearing house, or its members, will satisfy its obligations to the Fund. The notional amounts reflect the extent of the total investment exposure each Fund has under the swap agreement. The Fund bears the risk of loss of the amount expected to be received under a swap agreement (i.e., any unrealized appreciation) in the event of the default or bankruptcy of the swap agreement counterparty. The notional amount and related unrealized appreciation (depreciation) of each swap agreement at period end is disclosed in the swap tables in the Schedule of Portfolio Investments.
29
AZL Franklin Templeton Founding Strategy Plus Fund
Notes to the Financial Statements
December 31, 2013
Interest rate swaps involve the exchange of commitments to pay and receive interest based on a notional amount and are subject to interest rate risk exposure. Interest rate swaps do not involve the delivery of securities, other underlying assets or principal. Accordingly, the risk of loss with respect to interest rate swaps is limited to the net amount of interest payments that a Fund is contractually obligated to make. If the other party to an interest rate swap defaults, a Fund’s risk of loss consists of the net amount of interest payments that the Fund is contractually entitled to receive. As of December 31, 2013, the Fund entered into interest rate swap agreements to gain or reduce exposure to interest rates or to manage duration, the yield curve or interest rate risk by economically hedging the value of the fixed rate bonds which may decrease when interest rates rise (interest rate risk). The gross notional amount of interest rate swaps outstanding was $6.1 million as of December 31, 2013. The monthly average gross notional amount for interest rate swaps was $2.6 million for the year ended December 31, 2013.
Summary of Derivative Instruments
The following is a summary of the fair values of derivative instruments on the Fund’s Statement of Assets and Liabilities, categorized by risk exposure, as of December 31, 2013:
Asset Derivatives | Liability Derivatives | |||||||||||
Primary Risk Exposure | Statement of Assets and Liabilities Location | Total Fair Value | Statement of Assets and Liabilities Location | Total Fair Value | ||||||||
Equity Risk Exposure | ||||||||||||
Option Contracts | Investment securities, at value (purchased options) | $ | 98,040 | Written options | $ | — | ||||||
Interest Rate Risk | ||||||||||||
Interest Rate Swap Agreements | Unrealized appreciation on swap agreements | — | Unrealized depreciation on swap agreements | 100,658 | ||||||||
Foreign Exchange Rate Risk Exposure | ||||||||||||
Forward Currency Contracts | Unrealized appreciation on forward currency contracts | 3,359,861 | Unrealized depreciation on forward currency contracts | 3,441,086 |
The following is a summary of the effect of derivative instruments on the Statement of Operations, categorized by risk exposure, for the year ended December 31, 2013:
Realized Gain (Loss) on Derivatives Recognized as a Result from Operations | Net Change in Unrealized Appreciation (Depreciation) on Derivatives Recognized as a Result from Operations | |||||||||||||||
Net Realized Gains (Losses) on Swap Agreements | Net Realized Gains (Losses) on Option Contracts | Net Realized Gains (Losses) on Forward Currency Contracts | Change in Net Unrealized Appreciation/Depreciation on Investments | |||||||||||||
Equity Risk Exposure | $— | $ | 32,961 | $ | — | $ | (13,989 | ) | ||||||||
Interest Rate Risk Exposure | — | — | — | (100,658 | ) | |||||||||||
Foreign Exchange Rate Risk Exposure | — | — | 547,677 | 259,587 |
Effective January 1, 2013, the Fund adopted Financial Accounting Standards Board Accounting Standards Update (“ASU”) No. 2013-01 “Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities” (“ASU 2013-01”) which amended Accounting Standards Codification Subtopic 210-20, Balance Sheet Offsetting. ASU 2013-01 clarified the scope of ASU No. 2011-11 “Disclosures about Offsetting Assets and Liabilities” (“ASU 2011-11”). ASU 2011-11 requires an entity to disclose information about offsetting and related arrangements to enable users of that entity’s financial statements to understand the effect of those arrangements on its financial position. The objective of this disclosure is to facilitate comparison between those entities that prepare their financial statements on the basis of U.S. GAAP and those entities that prepare their financial statements on the basis of International Financial Reporting Standards. ASU 2013-01 clarifies the scope of ASU 2011-11 as applying to derivatives accounted for in accordance with Topic 815, Derivatives and Hedging, including bifurcated embedded derivatives, repurchase agreements and reverse repurchase agreements, and securities borrowing and securities lending transactions that are offset either in accordance with other requirements of U.S. GAAP or subject to an enforceable master netting arrangement or similar agreement.
The Fund is generally subject to master netting agreements that allow for amounts owed between the Fund and the counterparty to be netted. The party that has the larger payable pays the excess of the larger amount over the smaller amount to the other party. The master netting agreements do not apply to amounts owed to/from different counterparties. The amounts shown in the Statement of Assets and Liabilities do not take into consideration the effects of legally enforceable master netting agreements. The table below presents the gross and net amounts of these assets and liabilities with any offsets to reflect the Fund’s ability to reflect the master netting agreements at December 31, 2013. For financial reporting purposes, the Fund dose not offset derivative assets and derivative liabilities that are subject to master netting arrangements in the Statements of Assets and Liabilities. This table also summarizes the fair values of derivative instruments on the Fund’s Statement of Assets and Liabilities, categorized by risk exposure, as of December 31, 2013.
30
AZL Franklin Templeton Founding Strategy Plus Fund
Notes to the Financial Statements
December 31, 2013
As of December 31, 2013, the Fund’s derivative assets and liabilities by type are as follows:
Assets | Liabilities | |||||||||
Derivative Financial Instruments: | ||||||||||
Forward currency contracts | $ | 3,359,861 | $ | 3,441,086 | ||||||
Option contracts* | 98,040 | — | ||||||||
Swap agreements | — | 100,658 | ||||||||
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| |||||||
Total derivative assets and liabilities in the Statement of Assets and Liabilities | 3,457,901 | 3,541,744 | ||||||||
Derivatives not subject to a master netting agreement or similar agreement (“MNA”) | (1,468,510 | ) | (2,215,112 | ) | ||||||
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| |||||||
Total assets and liabilities subject to a MNA | $ | 1,989,391 | $ | 1,326,632 | ||||||
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* | Includes option contracts purchased at value as reported in the Statement of Assets and Liabilities. |
The following table presents the Fund’s derivative assets by counterparty net of amounts available for offset under a MNA and net of the related collateral received by the Fund as of December 31, 2013:
Counterparty | Derivative Assets Subject to a MNA by Counterparty | Derivatives Available for Offset | Non-cash Collateral Received* | Cash Collateral Received* | Net Amount of Derivative Assets | ||||||||||||||||||||
Barclays Bank | $ | 623,805 | $ | (588,631 | ) | $ | — | $ | (35,174 | ) | $ | — | |||||||||||||
Citibank | 422,989 | (417,428 | ) | — | — | 5,561 | |||||||||||||||||||
JPMorgan Chase | 942,597 | (320,573 | ) | (554,338 | ) | — | 67,686 | ||||||||||||||||||
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| ||||||||||||||||
Total | $ | 1,989,391 | $ | (1,326,632 | ) | $ | (554,338 | ) | $ | (35,174 | ) | $ | 73,247 | ||||||||||||
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The following table presents the Fund’s derivative liabilities by counterparty net of amounts available for offset under a MNA and net of the related collateral pledged by the Fund as of December 31, 2013:
Counterparty | Derivative Liabilities Subject to a MNA by Counterparty | Derivatives Available for Offset | Non-cash Collateral Pledged* | Cash Collateral Pledged* | Net Amount of Derivative Liabilities | ||||||||||||||||||||
Barclays Bank | $ | 588,631 | $ | (588,631 | ) | $ | — | $ | — | $ | — | ||||||||||||||
Citibank | 417,428 | (417,428 | ) | — | — | — | |||||||||||||||||||
JPMorgan Chase | 320,573 | (320,573 | ) | — | — | — | |||||||||||||||||||
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|
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| ||||||||||||||||
Total | $ | 1,326,632 | $ | (1,326,632 | ) | $ | — | $ | — | $ | — | ||||||||||||||
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* | The actual collateral received or pledged may be in excess of the amounts shown in the table. The table only reflects collateral amounts up to the amount of the financial instrument disclosed on the Statement of Assets and Liabilities. |
3. Related Party Transactions
The Manager provides investment advisory and management services for the Fund. The Manager has retained three independent money management organizations (the “Subadvisers”), Franklin Advisers, Inc. (“Advisers”), Franklin Mutual Advisers, LLC (“Franklin Mutual”) and Templeton Global Advisors Limited (“Global Advisors”) to make investment decisions on behalf of the Fund. Pursuant to subadvisory agreements with the Manager and Advisers, the Manager and Franklin Mutual, and the Manager and Global Advisors, and the Trust, Advisers, Franklin Mutual and Global Advisors provide investment advisory services as the Subadvisers for the Fund subject to the general supervision of the Trustees and the Manager. The Manager is entitled to a fee, computed daily and paid monthly, based on the average daily net assets of the Fund. Expenses incurred by the Fund for investment advisory and management services are reflected on the Statement of Operations as “Manager fees.” For its services, the Subadvisers are entitled to a fee payable by the Manager. The Manager has contractually agreed to waive fees and reimburse the Fund to limit the annual expenses, excluding interest expense (e.g., cash overdraft fees), taxes, brokerage commissions, other expenditures that are capitalized in accordance with U.S. GAAP and other extraordinary expenses not incurred in the ordinary course of the Fund’s business, based on the daily net assets of the Fund, through April 30, 2015.
For the year ended December 31, 2013, the annual rate due to the Manager and the annual expense limit were as follows:
Annual Rate | Annual Expense Limit | |||||||||
AZL Franklin Templeton Founding Strategy Plus Fund | 0.70 | % | 1.20 | % |
Any amounts contractually waived or reimbursed by the Manager in a particular fiscal year will be subject to repayment by the Fund to the Manager to the extent that from time to time through the next three fiscal years the repayment will not cause the Fund’s expenses to exceed the lesser of the stated limit at the time of the waiver or the current stated limit. Any amounts recouped by the Manager during the year are reflected on the Statement of Operations as “Recoupment of prior expenses reimbursed by the Manager.” At December 31, 2013, there were no remaining contractual reimbursements that are subject to repayment by the Fund in subsequent years.
In addition, the Manager may voluntarily waive or reimburse additional fees in order to maintain more competitive expense ratios. Any voluntary waivers or reimbursements are not subject to repayment in subsequent years. Information on the total amount waived/reimbursed by the Manager or repaid to the Manager by the Fund during the year can be found on the Statement of Operations. During the year ended December 31, 2013, there were no voluntary waivers.
31
AZL Franklin Templeton Founding Strategy Plus Fund
Notes to the Financial Statements
December 31, 2013
Pursuant to separate agreements between the Funds and the Manager, the Manager provides a Chief Compliance Officer (“CCO”) and certain compliance oversight and regulatory filing services to the Trust. Under these agreements the Manager is entitled to an amount equal to a portion of the compensation and certain other expenses related to the individuals performing the CCO and compliance oversight services, as well as $75 per hour for time incurred in connection with the preparation and filing of certain documents with the Securities and Exchange Commission. The fees are paid to the Manager on a quarterly basis. The total expenses incurred by the Fund for these services are reflected on the Statement of Operations as ���Administrative and compliance services fees.”
Citi Fund Services Ohio, Inc. (“Citi” or the “Administrator”), a wholly owned subsidiary of Citigroup, Inc., with which an officer of the Trust is affiliated, serves as the Trust’s administrator, transfer agent, and fund accountant, and assists the Trust in all aspects of its administration and operation. The Administrator is entitled to a Trust-wide asset-based fee, which is based on the following schedule: 0.05% of daily average net assets on the first $4 billion, 0.04% of daily average net assets on the next $2 billion, 0.02% of daily average net assets on the next $2 billion and 0.01% of daily average net assets over $8 billion. The overall Trust-wide fees are accrued daily and paid monthly and are subject to a minimum annual fee. In addition, the Administrator is entitled to annual account fees related to the transfer agency system, an annual fee for each additional class of shares of any Fund, certain annual fees in supporting fair value services, and a Trust-wide annual fee for providing infrastructure and support in implementing the written policies and procedures comprising the Fund’s compliance program. Fees payable to the Administrator are subject to certain reductions associated with services provided to new funds. The Administrator is also reimbursed for certain expenses incurred. The total expenses incurred by the Fund for these services are reflected on the Statement of Operations as “Administration fees.”
Allianz Life Financial Services, LLC (“ALFS”), an affiliate of the Manager, serves as distributor of the Fund and receives 12b-1 fees directly from the Fund, plus a Trust-wide annual fee of $42,500, paid by the Manager from its profits and not by the Trust, for recordkeeping and reporting services.
The Trust has adopted a distribution and service plan in conformance with Rule 12b-1 of the 1940 Act. Pursuant to this plan, the Fund is authorized to pay certain fees for the sale and distribution of its shares and services provided to its shareholders at an annual rate not to exceed 0.25% of the Fund’s average daily net assets. These fees are reflected on the Statement of Operations as “Distribution fees.”
In addition, certain legal fees and expenses are paid to a law firm, Dorsey & Whitney LLP, of which the Secretary of the Fund is a partner. During the year ended December 31, 2013, $6,652 was paid from the Fund relating to these fees and expenses.
Certain Officers and Trustees of the Trust are affiliated with the Manager or the Administrator. Such Officers (except for the Trust’s CCO as noted above) and Trustees receive no compensation from the Trust for serving in their respective roles. For their service to the Trust and to the Allianz Variable Insurance Products Fund of Funds Trust, each non-interested Trustee receives a $139,000 annual Board retainer. In addition, the Trustees are reimbursed for certain expenses associated with attending Board meetings. Compensation to the Trustees is allocated between the Trust and the Allianz Variable Insurance Products Fund of Funds Trust in proportion to the assets under management of each trust. During the year ended December 31, 2013, actual Trustee compensation was $973,000 in total for both trusts.
At a meeting of the Board of Trustees on December 4, 2013, the Trustees approved a fee increase to the Officers and Trustees who are paid a fee for their services to the Trust and to the Allianz Variable Insurance Products Fund of Funds Trust. Effective January 1, 2014, each non-interested Trustee will receive a $163,000 annual retainer.
4. Investment Valuation Summary
The valuation techniques employed by the Fund, as described below, maximize the use of observable inputs and minimize the use of unobservable inputs in determining fair value. The inputs used for valuing the Fund’s investments are summarized in the three broad levels listed below:
— | Level 1 — quoted prices in active markets for identical assets |
— | Level 2 — other significant observable inputs (including quoted prices for similar securities, interest rates, prepayments speeds, credit risk, etc.) |
— | Level 3 — significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of investments) |
Changes in valuation techniques may result in transfers in or out of an assigned level within the disclosure hierarchy. The Fund determines transfers between fair value hierarchy levels at the reporting period end. The inputs or methodology used for valuing investments is not necessarily an indication of the risk associated with investing in those investments.
Security prices are generally provided by an independent third party pricing service approved by the Trust’s Board of Trustees (“Trustees”) as of the close of the New York Stock Exchange (“NYSE”) (generally 4:00 pm Eastern Time). Equity securities are valued at the last quoted sale price or, if there is no sale, the last quoted bid price is used for long securities and the last quoted ask price is used for securities sold short. Securities listed on NASDAQ Stock Market, Inc. (“NASDAQ”) are valued at the official closing price as reported by NASDAQ. In each of these situations, valuations are typically categorized as a Level 1 in the fair value hierarchy. Investments in open-end investment companies are valued at their respective net asset value as reported by such companies and are typically categorized as Level 1 in the fair value hierarchy.
Debt and other fixed income securities are generally valued at an evaluated bid price provided by an independent pricing source approved by the Trustees. To value debt securities, pricing services may use various pricing techniques which take into account appropriate factors such as market activity, yield, quality, coupon rate, maturity, type of issue, trading characteristics, call features, credit ratings and other data, as well as broker quotes. Short term securities of sufficient credit quality with sixty days or less remaining until maturity may be valued at amortized cost, which approximates fair value. In each of these situations, valuations are typically categorized as Level 2 in the fair value hierarchy.
Futures contracts are valued at the last sales price as of the close of the primary exchange and are typically categorized as Level 1 in the fair value hierarchy. Options are generally valued at the average of the closing bid and ask quotations on the principal exchange on which the option is traded, which are then typically categorized as Level 1 in the fair value hierarchy.
Forward currency contracts are generally valued at the foreign currency exchange rate as of the close of the NYSE and are typically categorized as Level 2 in the fair value hierarchy. Non exchange-traded derivatives, such as swaps and certain options, are generally valued by approved independent pricing services utilizing techniques which take into account factors such as yield, quality, maturity, type of issue, trading characteristics, call features, credit ratings and other data, as well as broker quotes and are typically categorized as Level 2 in the far value hierarchy.
32
AZL Franklin Templeton Founding Strategy Plus Fund
Notes to the Financial Statements
December 31, 2013
Other assets and securities for which market quotations are not readily available, or are deemed unreliable are valued at fair value as determined in good faith by the Trustees or persons acting on the behalf of the Trustees. Fair value pricing may be used for significant events such as securities whose trading has been suspended, whose price has become stale or for which there is no currently available price at the close of the NYSE. Depending on the source and relative significance of valuation inputs, these instruments may be classified as Level 2 or Level 3 in the fair value hierarchy. The Fund utilizes a pricing service to assist in determining the fair value of securities when certain significant events occur that may affect the value of foreign securities.
In accordance with procedures adopted by the Trustees, fair value pricing may be used if events materially affecting the value of foreign securities occur between the time when the exchange on which they are traded closes and the time when the Fund’s net asset value is calculated. Management identifies possible fluctuation in international securities by monitoring the increase or decrease in the value of a designated benchmark index. In the event of an increase or decrease greater than predetermined levels, the Fund may use a systematic valuation model provided by an independent third party to fair value its international equity securities which are then typically categorized as Level 2 in the fair value hierarchy.
The following is a summary of the valuation inputs used as of December 31, 2013 in valuing the Fund’s investments based upon the three levels defined above:
Investment Securities: | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||
Common Stocks | ||||||||||||||||||||
Aerospace & Defense | $ | 3,617,530 | $ | 634,364 | $ | — | $ | 4,251,894 | ||||||||||||
Air Freight & Logistics | 2,169,004 | 1,755,632 | — | 3,924,636 | ||||||||||||||||
Automobiles | 2,985,447 | 4,291,205 | — | 7,276,652 | ||||||||||||||||
Beverages | 4,650,426 | 548,359 | — | 5,198,785 | ||||||||||||||||
Biotechnology | 2,542,343 | — | — | 2,542,343 | ||||||||||||||||
Capital Markets | 3,380,435 | 3,278,622 | — | 6,659,057 | ||||||||||||||||
Chemicals | 7,115,674 | 2,553,075 | — | 9,668,749 | ||||||||||||||||
Commercial Banks | 13,491,305 | 18,167,581 | — | 31,658,886 | ||||||||||||||||
Commercial Services & Supplies | 1,402,963 | 619,749 | — | 2,022,712 | ||||||||||||||||
Communications Equipment | 6,814,144 | 1,564,860 | — | 8,379,004 | ||||||||||||||||
Computers & Peripherals | 9,692,371 | — | — | 9,692,371 | ||||||||||||||||
Containers & Packaging | 1,462,834 | — | — | 1,462,834 | ||||||||||||||||
Diversified Banks | 611,836 | — | — | 611,836 | ||||||||||||||||
Diversified Financial Services | 13,145,617 | 5,282,842 | — | 18,428,459 | ||||||||||||||||
Diversified Telecommunication Services | 2,472,757 | 5,802,126 | — | 8,274,883 | ||||||||||||||||
Electric Utilities | 11,160,194 | — | — | 11,160,194 | ||||||||||||||||
Electronic Equipment, Instruments & Components | 1,206,549 | — | — | 1,206,549 | ||||||||||||||||
Energy Equipment & Services | 13,956,737 | 1,246,885 | — | 15,203,622 | ||||||||||||||||
Food & Staples Retailing | 11,415,701 | 4,890,745 | — | 16,306,446 | ||||||||||||||||
Gas Utilities | 135,550 | — | — | 135,550 | ||||||||||||||||
Health Care Equipment & Supplies | 6,820,849 | 1,133,094 | — | 7,953,943 | ||||||||||||||||
Health Care Providers & Services | 4,933,553 | — | — | 4,933,553 | ||||||||||||||||
Hotels, Restaurants & Leisure | 260,040 | — | — | 260,040 | ||||||||||||||||
Independent Power Producers & Energy Traders | 1,817,252 | — | — | ^ | 1,817,252 | |||||||||||||||
Industrial Conglomerates | 2,504,200 | 3,575,476 | — | 6,079,676 | ||||||||||||||||
Insurance | 13,461,434 | 10,001,775 | — | 23,463,209 | ||||||||||||||||
Machinery | 4,715,320 | 1,256,203 | — | 5,971,523 | ||||||||||||||||
Media | 16,375,405 | 4,754,057 | — | ^ | 21,129,462 | |||||||||||||||
Metals & Mining | 9,847,902 | 6,602,090 | — | 16,449,992 | ||||||||||||||||
Multiline Retail | 2,956,387 | 1,061,605 | — | 4,017,992 | ||||||||||||||||
Multi-Utilities | 5,205,083 | 865,289 | — | 6,070,372 | ||||||||||||||||
Office Electronics | 2,591,881 | 1,464,860 | — | 4,056,741 | ||||||||||||||||
Oil, Gas & Consumable Fuels | 31,261,807 | 17,042,111 | — | ^ | 48,303,918 | |||||||||||||||
Paper & Forest Products | 3,088,923 | — | — | �� | 3,088,923 | |||||||||||||||
Personal Products | 1,202,214 | — | — | 1,202,214 | ||||||||||||||||
Pharmaceuticals | 26,177,590 | 11,200,779 | — | 37,378,369 | ||||||||||||||||
Real Estate Investment Trusts (REITs) | 843,480 | 75,852 | — | 919,332 | ||||||||||||||||
Real Estate Management & Development | 485,413 | — | 67,853 | 553,266 | ||||||||||||||||
Semiconductors & Semiconductor Equipment | 3,403,895 | 5,334,144 | — | 8,738,039 | ||||||||||||||||
Software | 13,501,268 | 1,594,326 | — | 15,095,594 | ||||||||||||||||
Tobacco | 4,799,355 | 4,672,285 | — | 9,471,640 | ||||||||||||||||
Wireless Telecommunication Services | 1,701,729 | 8,511,130 | — | 10,212,859 | ||||||||||||||||
Total Other Common Stocks | — | 20,868,079 | — | 20,868,079 | ||||||||||||||||
Preferred Stocks | ||||||||||||||||||||
Commercial Banks | 181,832 | — | — | 181,832 | ||||||||||||||||
Metals & Mining | 146,825 | — | — | 146,825 |
33
AZL Franklin Templeton Founding Strategy Plus Fund
Notes to the Financial Statements
December 31, 2013
Investment Securities: | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||
Convertible Preferred Stocks+ | ||||||||||||||||||||
Commercial Banks | $ | — | $ | 461,760 | $ | — | $ | 461,760 | ||||||||||||
Commercial Services & Supplies | — | 53,923 | — | 53,923 | ||||||||||||||||
Oil, Gas & Consumable Fuels | — | 462,813 | — | 462,813 | ||||||||||||||||
Real Estate Investment Trusts (REITs) | — | 60,625 | — | 60,625 | ||||||||||||||||
Total Other Convertible Preferred Stocks | 1,252,092 | — | — | 1,252,092 | ||||||||||||||||
Convertible Bonds | ||||||||||||||||||||
Automobiles | — | 2,559,466 | — | 2,559,466 | ||||||||||||||||
Construction Materials | — | 1,006,338 | — | 1,006,338 | ||||||||||||||||
Floating Rate Loans | — | 5,805,137 | — | 5,805,137 | ||||||||||||||||
Corporate Bonds+ | — | 54,131,054 | — | 54,131,054 | ||||||||||||||||
Foreign Bonds | — | 110,982,886 | — | 110,982,886 | ||||||||||||||||
Yankee Dollars | — | 21,752,277 | �� | — | 21,752,277 | |||||||||||||||
U.S. Treasury Obligations | — | 8,598,790 | — | 8,598,790 | ||||||||||||||||
U.S. Government Agency Mortgages | — | 30,000,000 | — | 30,000,000 | ||||||||||||||||
Securities Held as Collateral for Securities on Loan | — | 13,827,477 | — | 13,827,477 | ||||||||||||||||
Unaffiliated Investment Company | 46,344,695 | — | — | 46,344,695 | ||||||||||||||||
Purchased Put Option | 98,040 | — | — | 98,040 | ||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||
Total Investment Securities | 319,407,881 | 400,351,746 | 67,853 | 719,827,480 | ||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||
Other Financial Instruments* | ||||||||||||||||||||
Forward Currency Contracts | — | (81,225 | ) | — | (81,225 | ) | ||||||||||||||
Interest Rate Swaps | — | (100,658 | ) | — | (100,658 | ) | ||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||
Total Investments | $ | 319,407,881 | $ | 400,169,863 | $ | 67,853 | $ | 719,645,597 | ||||||||||||
|
|
|
|
|
|
|
|
+ | For detailed industry descriptions, see the accompanying Schedule of Portfolio Investments. |
* | Other Financial Instruments would include any derivative instruments, such as Forward Currency Contracts and Swaps. These investments are generally recorded in the financial statements at the unrealized gain or loss on the investment. |
A reconciliation of assets in which level 3 inputs are used in determining fair value, along with additional quantitative disclosures, are presented when there are significant level 3 investments at the end of the period.
^ | Represents the interest in securities that were determined to have a value of zero at December 31, 2013. |
5. Security Purchases and Sales
For the year ended December 31, 2013, cost of purchases and proceeds from sales of securities (excluding securities maturing less than one year from acquisition) were as follows:
Purchases | Sales | |||||||||
AZL Franklin Templeton Founding Strategy Plus Fund | $ | 266,514,543 | $ | 111,760,664 |
6. Restricted Securities
A restricted security is a security which has been purchased through a private offering and cannot be resold to the general public without prior registration under the Securities Act of 1933 (the “1933 Act”) or pursuant to the resale limitations provided by Rule 144A under the 1933 Act, or an exemption from the registration requirements of the 1933 Act. Whether a restricted security is illiquid is determined pursuant to guidelines established by the Board of Trustees. Not all restricted securities are considered illiquid. The illiquid restricted securities held as of December 31, 2013 are identified below.
Security | Acquisition Date(a) | Acquisition Cost | Shares or Principal Amount | Fair Value | Percentage of Net Assets | ||||||||||||||||||||
Dynegy Holdings, Inc., 7.50%, 6/1/15 | 10/1/12 | — | 410,000 | — | — | % | |||||||||||||||||||
Dynegy Holdings, Inc., 8.38%, 5/1/16 | 10/1/12 | — | 50,000 | — | — | % | |||||||||||||||||||
Dynegy Holdings, Inc., 7.75%, 6/1/19 | 10/1/12 | — | 170,000 | — | — | % | |||||||||||||||||||
Tribune Co. | 12/31/12 | — | 5,213 | — | — | % |
(a) | Acquisition date represents initial purchase date of the security. |
7. Investment Risks
Derivatives Risk: The Fund may invest in derivatives as a principal strategy. A derivative is a financial contract whose value depends on, or is derived from, the value of an underlying asset, reference rate, or risk. Use of derivative instruments involves risks different from, or possibly greater than, the risks associated with investing directly in
34
AZL Franklin Templeton Founding Strategy Plus Fund
Notes to the Financial Statements
December 31, 2013
securities and other traditional investments. Derivatives are subject to a number of other risks, such as liquidity risk, interest rate risk, market risk, credit risk, and selection risk. Derivatives also involve the risk of mispricing or improper valuation and the risk that changes in the value may not correlate perfectly with the underlying asset, rate, or index. Using derivatives may result in losses, possibly in excess of the principal amount invested. Also, suitable derivative transactions may not be available in all circumstances. The counterparty to a derivatives contract could default. As required by applicable law, a Fund that invests in derivatives segregates cash or liquid securities, or both, to the extent that its obligations under the instrument are not covered through ownership of the underlying security, financial instrument, or currency.
Emerging Markets Risk: Emerging markets may have less developed trading markets and exchanges which may make it more difficult to sell securities at an acceptable price and their prices may be more volatile than securities of companies in more developed markets. Settlements of trades may be subject to greater delays so that the Fund may not receive the proceeds of a sale of a security on a timely basis. Emerging countries may also have less developed legal and accounting systems and investments may be subject to greater risks of government restrictions, nationalization, or confiscation.
Foreign Securities and Currencies Risk: Investments in securities of foreign issuers carry certain risks not ordinarily associated with investments in securities of domestic issuers. Such risks include future political and economic developments, and the possible imposition of exchange controls or other foreign governmental laws and restrictions. In addition, with respect to certain countries, there is the possibility of expropriation of assets, confiscatory taxation, political or social instability or diplomatic developments which could adversely affect investments in those securities.
Security Quality Risk (also known as “High Yield Risk”): The Fund may invest in high yield, high risk debt securities and unrated securities of similar credit quality (commonly known as “junk bonds”) may be subject to greater levels of credit and liquidity risk than funds that do not invest in such securities. These securities are considered predominately speculative with respect to the issuer’s continuing ability to make principal and interest payments. An economic downturn or period of rising interest rates could adversely affect the market for these securities and reduce the Fund’s ability to sell these securities (liquidity risk). If the issuer of a security is in default with respect to interest or principal payments, the Fund may lose the value of its entire investment.
8. Federal Tax Information
It is the Fund’s policy to continue to comply with the requirements of the Internal Revenue Code under Subchapter M, applicable to regulated investment companies, and to distribute all of its taxable income, including any net realized gains on investments, to its shareholders. Therefore, no provision is made for federal income taxes.
Management of the Fund has reviewed tax positions taken in tax years that remain subject to examination by all major tax jurisdictions, including federal (i.e., the last four tax year ends and the interim tax period since then, as applicable). Management believes that there is no tax liability resulting from unrecognized tax benefits related to uncertain tax positions taken.
Cost for federal income tax purposes at December 31, 2013 is $630,688,257. The gross unrealized appreciation/ (depreciation) on a tax basis is as follows:
Unrealized appreciation | $ | 99,321,212 | |||
Unrealized depreciation | (10,181,989 | ) | |||
|
| ||||
Net unrealized appreciation/(depreciation) | $ | 89,139,223 | |||
|
|
The tax character of dividends paid to shareholders during the year ended December 31, 2013 were as follows:
Ordinary Income | Net Long-Term Capital Gains | Total Distributions(a) | |||||||||||||
AZL Franklin Templeton Founding Strategy Plus Fund | $ | 11,523,700 | $ | 2,368,045 | $ | 13,891,745 |
(a) | Total distributions paid may differ from the Statements of Changes in Net Assets because dividends are recognized when actually paid for tax purposes. |
The tax character of dividends paid to shareholders during the year ended December 31, 2012 was as follows:
Ordinary Income | Net Long-Term | Total Distributions(a) | |||||||||||||
AZL Franklin Templeton Founding Strategy Plus Fund | $ | 8,640,680 | $ | 1,692,782 | $ | 10,333,462 |
(a) | Total distributions paid may differ from the Statements of Changes in Net Assets because dividends are recognized when actually paid for tax purposes. |
As of December 31, 2013, the components of accumulated earnings on a tax basis were as follows:
Undistributed Ordinary Income | Undistributed Long-Term Capital Gains | Accumulated Capital and Other Losses | Unrealized Appreciation/ | Total Accumulated Earnings/ (Deficit) | |||||||||||||||||||||
AZL Franklin Templeton Founding Strategy Plus Fund | $ | 14,780,659 | $ | 10,598,973 | $ | — | $ | 88,569,175 | $ | 113,948,807 |
(a) | The difference between book-basis and tax-basis unrealized appreciation/(depreciation) is attributable primarily to tax deferral of losses on wash sales. |
9. Subsequent Events
Management has evaluated events and transactions subsequent to period end through the date the financial statements were issued, for purposes of recognition or disclosure in these financial statements and there are no subsequent events to report.
35
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Shareholders and Board of Trustees of
Allianz Variable Insurance Products Trust:
We have audited the accompanying statement of assets and liabilities of AZL Franklin Templeton Founding Strategy Plus Fund (the “Fund”) of the Allianz Variable Insurance Products Trust, including the schedule of portfolio investments, as of December 31, 2013, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the years in the two-year period then ended, and the financial highlights for each of the periods in the five-year period then ended. These financial statements and financial highlights are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of December 31, 2013, by correspondence with the custodian and brokers or by other appropriate auditing procedures. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of the Fund as of December 31, 2013, the results of its operations for the year then ended, the changes in its net assets for each of the years in the two-year period then ended, and the financial highlights for each of the periods in the five-year period then ended, in conformity with U.S. generally accepted accounting principles.
/s/KPMG LLP
Columbus, Ohio
February 25, 2014
36
Other Federal Income Tax Information (Unaudited)
For the year ended December 31, 2013, 25.91% of the total ordinary income dividends paid by the Fund qualify for the corporate dividends received deduction available to corporate shareholders.
During the year ended December 31, 2013, the Fund declared net long-term capital gain distributions of $2,368,044.
During the year ended December 31, 2013, the Fund declared net short-term capital gain distributions of $1,767,936.
37
Other Information (Unaudited)
A description of the policies and procedures that the Fund uses to determine how to vote proxies relating to portfolio securities is available, without charge, upon request, by visiting the Securities and Exchange Commission’s (“Commission”) website at www.sec.gov, or by calling 800-624-0197.
Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30th is available (i) without charge, upon request, by calling 800-624-0197; (ii) on the Allianz Variable Insurance Products Trust’s website at https://www.allianzlife.com; and (iii) on the Commission’s website at http://www.sec.gov.
The Fund files complete Schedules of Portfolio Holdings with the Commission for the first and third quarters of each fiscal year on Form N-Q. Schedules of Portfolio Holdings for the Fund in this report are available without charge on the Commission’s website at http://www.sec.gov, or may be reviewed and copied at the Commission’s Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 800-SEC-0330.
38
Approval of Investment Advisory and Subadvisory Agreements (Unaudited)
The Allianz Variable Insurance Products Trust (the “Trust”) is a manager-of-managers fund. That means that the Trust’s Manager (“Allianz Investment Management LLC”) is responsible for monitoring the various Subadvisers that have day-to-day responsibility for the decisions made for each of the Trust’s investment portfolios. The Trust’s Manager is responsible for determining, in the first instance, which investment advisers to consider recommending for selection as a Subadviser.
In reviewing the services provided by the Manager and the terms of the investment management agreement, the Board receives and reviews information related to the Manager’s experience and expertise in the variable insurance marketplace. Currently, the Funds are offered only through variable annuities and variable life insurance policies, and not in the retail fund market. In addition, the Board receives information regarding the Manager’s expertise with regard to portfolio diversification and asset allocation requirements within variable insurance products issued by Allianz Life Insurance Company of North America and its subsidiary, Allianz Life Insurance Company of New York. Currently, the Funds are offered only through Allianz Life and Allianz of New York variable products.
The Trust’s Manager has adopted policies and procedures to assist it in the process of analyzing each potential Subadviser with expertise in particular asset classes for purposes of making the recommendation that a specific investment adviser be selected. The Trust’s Board reviews and considers the information provided by the Manager in deciding which investment advisers to select. After an investment adviser becomes a Subadviser, a similarly rigorous process is instituted by the Manager to monitor the investment performance and other responsibilities of the Subadviser. The Manager reports to the Trust’s Board on its analysis at the regular meetings of the Board, which are held at least quarterly. Where warranted, the Manager will add or remove a particular Subadviser from a “watch” list that it maintains. Watch list criteria include, for example: (a) Fund performance over various time periods; (b) Fund risk issues, such as changes in key personnel involved with Fund management, changes in investment philosophy or process, or “capacity” concerns; and (c) organizational risk issues, such as regulatory, compliance or legal concerns, or changes in the ownership of the Subadviser. The Manager may place a Fund on the watch list for other reasons, and if so, will explain its rationale to the Trustees. Funds which are on the watch list are subject to special scrutiny of the Manager and the Board of Trustees. Funds may be removed from such watch list, if for example, performance improves or regulatory matters are satisfactorily resolved. However, in some situations where Funds which have been on the watch list, the Manager has recommended the retention of a new Subadviser, and the Board of Trustees has subsequently approved new Subadvisory Agreements with such Subadvisers.
In assessing the Manager’s and Subadvisers’ (collectively, the “Advisory Organizations”), performance of their obligations, the Board considers whether there has occurred a circumstance or event that would constitute a reason for it to not renew an advisory contract. In this regard, the Board is mindful of the potential disruption of a Fund’s operations and various risks, uncertainties and other effects that could occur as a result of a decision to terminate or not renew a contract.
As required by the Investment Company Act of 1940 (“1940 Act”), the Trust’s Board has reviewed and approved the Trust’s Investment Management Agreement with the Manager (the “Advisory Agreement”) and portfolio management agreements (the “Subadvisory Agreements”) with the Subadvisers. The Board’s decision to approve these contracts reflects the exercise of its business judgment on whether to approve new arrangements and continue the existing arrangements. During its review of these contracts, the Board considers many factors, among the most material of which are: the Fund’s investment objectives and long term performance; the Advisory Organizations’ management philosophy, personnel, and processes, including their compliance history and the adequacy of their compliance processes; the preferences and expectations of Fund shareholders (and underlying contract owners) and their relative sophistication; the continuing state of competition in the mutual fund industry; and comparable fees in the mutual fund industry.
The Board also considers the compensation and benefits received by the Advisory Organizations. This includes fees received for services provided to the Fund by affiliated persons of the Advisory Organizations and research services received by the Advisory Organizations from brokers that execute Fund trades, as well as advisory fees. The Board considered the fact that: (1) the Manager and the Trust are parties to an Administrative Service Agreement, a Compliance Services Agreement, and a Chief Compliance Officer Agreement, under which the Manager is compensated by the Trust for performing certain administrative and compliance services including providing an employee of the Manager or one of its affiliates to act as the Trust’s Chief Compliance Officer; and (2) Allianz Life Financial Services, LLC, an affiliated person of the Manager, is a registered securities broker-dealer and receives (along with its affiliated persons) payments made by the Trust pursuant to Rule 12b-1.
The Board is aware that various courts have interpreted provisions of the 1940 Act and have indicated in their decisions that the following factors may be relevant to an adviser’s compensation: the nature and quality of the services provided by the adviser, including the performance of the fund; the adviser’s cost of providing the services; the extent to which the adviser may realize “economies of scale” as the fund grows larger; any indirect benefits that may accrue to the adviser and its affiliates as a result of the adviser’s relationship with the fund; performance and expenses of comparable funds; and the extent to which the independent Board members are fully informed about all facts bearing on the adviser’s service and fee. The Trust’s Board is aware of these factors and takes them into account in its review of the Trust’s advisory contracts.
The Board considered and weighed these circumstances in light of its experience in governing the Trust and working with the Advisory Organizations on matters relating to the Funds, and is assisted in its deliberations by the advice of legal counsel to the Independent Trustees. In this regard, the Board requests and receives a significant amount of information about the Funds and the Advisory Organizations. Some of this information is provided at each regular meeting of the Board; additional information is provided in connection with the particular meeting or meetings at which the Board’s formal review of an advisory contract occurs. In between regularly scheduled meetings, the Board may receive information on particular matters as the need arises. Thus, the Board’s evaluation of an advisory contract is informed by reports covering such matters as: an Advisory Organization’s investment philosophy, personnel, and processes; the Fund’s short- and long-term performance (in absolute terms as well as in relationship to its benchmark(s), certain competitor or “peer group” funds and similar funds managed by the particular Subadviser), and comments on the reasons for performance; the Fund’s expenses (including the advisory fee itself and the overall expense structure of the Fund, both in absolute terms and relative to similar and/or competing funds, with due regard for contractual or voluntary expense limitations); the use and allocation of brokerage commissions derived from trading the Fund’s portfolio securities; the nature and extent of the advisory and other services provided to the Fund by the Advisory Organizations and their affiliates; compliance and audit reports concerning the Funds and the companies that service them; and relevant developments in the mutual fund industry and how the Funds and/or Advisory Organizations are responding to them.
The Board also receives financial information about Advisory Organizations, including reports on the compensation and benefits the Advisory Organizations derive from their relationships with the Funds. These reports cover not only the fees under the advisory contracts, but also fees, if any, received for providing other services to the Funds. The reports also discuss any indirect or “fall out” benefits an Advisory Organization may derive from its relationship with the Funds.
The Advisory and Subadvisory Agreements (collectively, the “Agreements”) were most recently considered at Board of Trustees meetings held in the fall of 2013. Information relevant to the approval of such Agreements was considered at a telephonic Board of Trustees meeting on October 16, 2013, and at an “in person” Board of Trustees meeting held October 22, 2013. The Agreements were approved at the Board meeting of October 22, 2013. At such meeting the Board also approved an Expense Limitation Agreement between the Manager and the Trust for the period ending April 30, 2015. In connection with such meetings, the Trustees requested and evaluated extensive materials from the Manager, including performance and expense information for other investment companies with similar investment objectives derived from data compiled by an independent third party provider and other sources believed to be reliable by the Manager. Prior to voting, the Trustees reviewed the proposed approval/continuance of the Agreements with management and with experienced counsel who are independent of the Manager and received a memorandum from such counsel discussing the legal standards for their consideration of the proposed approvals/continuances. The independent (“disinterested”) Trustees also discussed the proposed approvals/continuances in a private session with such counsel at which no representatives of the Manager were present. In reaching their determinations relating to the approval and/or continuance of the Agreements, in respect of each Fund, the Trustees considered all factors they believed relevant. The Board based its decision to approve the Agreements on the totality of
39
the circumstances and relevant factors, and with a view to past and future long-term considerations. Not all of the factors and considerations discussed above and below are necessarily relevant to every Fund, and the Board did not assign relative weights to factors discussed herein or deem any one or group of them to be controlling in and of themselves.
An SEC Rule requires that shareholder reports include a discussion of certain factors relating to the selection of investment advisers and the approval of advisory fees. The “factors” enumerated by the SEC are set forth below in italics, as well as the Board’s conclusions regarding such factors:
(1) The nature, extent and quality of services provided by the Manager and Subadvisers. The Trustees noted that the Manager, subject to the control of the Board of Trustees, administers each Fund’s business and other affairs. Under the Advisory Agreement, the Manager holds the sole and exclusive responsibility to provide, or arrange for other to provide, the management of the Funds’ assets and the placement of orders for the purchase and sale of the securities of the Funds. As the Trust is a manager of managers fund, the Manager is authorized, under the Advisory Agreement, to retain one or more Subadvisers for each Fund to handle day-to-day management of the Funds’ investment portfolios; the Manager is responsible for determining, in the first instance, which investment advisers to recommend to the Board of Trustees for selection as a Subadviser. The Trustees were aware that, notwithstanding the retention of the Subadvisers to handle day-to-day portfolio management, the Manager remains responsible for substantial other matters, including continuously monitoring compliance by each Subadviser with the investment policies and restrictions of the respective Funds, with such other limitations or directions of the Board of Trustees, and with all legal requirements under federal or state law or regulation. The Manager also is responsible primarily to provide statistical information and other data to the Trustees regarding the Funds’ portfolio investments and to make available to the Funds’ administrator such information as is necessary for the conduct of its duties.
The Trustees also noted that the Manager provides the Trust and each Fund with such administrative and other services (exclusive of, and in addition to, any such services provided by any others retained by the Trust on behalf of the Funds) and executive and other personnel as are necessary for the operation of the Trust and the Funds. Except for the Trust’s Chief Compliance Officer, the Manager pays all of the compensation of Trustees and officers of the Trust who are employees of the Manager or its affiliates.
The Trustees considered the scope and quality of services provided by the Manager and the Subadvisers and noted that the scope of such services provided had expanded as a result of recent regulatory and other developments. The Trustees noted that, for example, the Manager and Subadvisers are responsible for maintaining and monitoring their own compliance programs, and these compliance programs are continuously refined and enhanced in light of new regulatory requirements. The Trustees considered the capabilities and resources which the Manager has dedicated to performing services on behalf of the Trust and its Funds. The quality of administrative and other services, including the Manager’s role in coordinating the activities of the Trust’s other service providers, also were considered. The Trustees concluded that, overall, they were satisfied with the nature, extent and quality of services provided (and expected to be provided) to the Trust and to each of the Funds under the Agreements.
(2) The investment performance of the Funds, the Manager and the Subadvisers. In connection with every in-person quarterly Board of Trustees meeting, Trustees receive extensive information on the performance results of each of the Funds. This includes, for example, performance information on all of the Funds for the previous quarter, and previous one, three and five-year periods, and since inception. (For Funds which have been in existence for less than five years, Trustees may receive performance information on comparable funds managed by the particular Subadviser for periods prior to the creation of a particular Fund.) Such performance information includes information on absolute total return, performance versus Subadvisers’ comparable fund(s), performance versus the appropriate benchmark(s), and performance versus peer groups. For example, in connection with the Board of Trustees meetings held September 10-11, 2013, the Manager reported that for the three year period ended June 30, 2013, 12 Funds were in the top 40%, eight were in the middle 20% and eight were in the bottom 40%, and for the one year period ended June 30, 2013, 8 Funds were in the top 40%, seven were in the middle 20%, and 14 were in the bottom 40%. The Manager also reported that for the five year period ended June 30, 2013, 10 Funds were in the top 40%, four were in the middle 20%, and six were in the bottom 40%. At the Board of Trustees meeting held October 22, 2013, the Trustees determined that the overall investment performance of the Funds was acceptable.
(3) The costs of services to be provided and profits to be realized by the Manager and the Subadvisers and their affiliates from their relationship with the Funds. The Manager has supplied information to the Board of Trustees pertaining to the level of investment advisory fees to which the Funds are subject. The Manager has agreed to temporarily “cap” Fund expenses at certain levels, and information is provided to Trustees setting forth “contractual” advisory fees and “actual” fees after taking expense caps into account. Based upon the information provided, the “actual” advisory fees payable by the Funds overall are generally comparable to the average level of fees paid by Fund peer groups. For the 30 Funds reviewed by the Board of Trustees in the fall of 2013, 27 Funds paid “actual” advisory fees in a percentage amount within the 65th percentile or lower for each Fund’s applicable category. The Trustees recognized that it is difficult to make comparisons of advisory fees because there are variations in the services that are included in the fees paid by other funds. The Board has concluded that the advisory fees to be paid to the Manager by the Funds are not unreasonable.
The Manager has also supplied information to the Board of Trustees pertaining to total Fund expenses (which includes advisory fees, the 25 basis point 12b-1 fee paid by the Funds, and other Fund expenses). As noted above, the Manager has agreed to “cap” Fund expenses at certain levels. Based upon the information provided, the overall total expense ratio ranking in 2013 for the 30 Funds was as follows: (1) 28 of the Funds had total expense rankings below the 65th percentile (with 20 Funds at or below the 50th percentile); (2) the AZL Russell 1000 Value Fund had a total expense ranking in the 66th percentile; the Manager reported that there is only a limited peer group for such Fund; and (3) the AZL Morgan Stanley Global Real Estate Fund had a total expense ranking in the 72nd percentile; it was reported by the Manager that there is only a limited peer group for such Fund, such Fund’s expense ratio has declined, and such Fund’s expense ratio is comparable to funds of similar size.
The Manager has committed to providing the Funds with a high quality of service and working to reduce Fund expenses over time, particularly as the Funds grow larger. The Trustees concluded therefore that the expense ratios of the Funds were not unreasonable.
The Manager provided information concerning the profitability of the Manager’s investment advisory activities for the period from 2011 through June 30, 2013. The Trustees recognized that it is difficult to make comparisons of profitability from investment company advisory agreements because comparative information is not generally publicly available and is affected by numerous factors, including the structure of the particular adviser, the types of funds it manages, its business mix, numerous assumptions regarding allocation of expenses and the adviser’s capital structure and cost of capital. In considering profitability information, the Trustees considered the possible effect of certain fall-out benefits to the Manager and its affiliates. The Trustees focused on profitability of the Manager’s relationships with the Funds before taxes and distribution expenses. The Trustees recognized that the Manager should, in the abstract, be entitled to earn a reasonable level of profits for the services it provides to each Fund and, based on their review, concluded that they were satisfied that the Manager’s level of profitability from its relationship with the Funds was not excessive.
The Manager, on behalf of the Board of Trustees, endeavored to obtain information on the profitability of each Subadviser in connection with its relationship with the Fund or Funds which it subadvises. The Manager was unable to obtain meaningful profitability information from some of the unaffiliated Subadvisers. The Manager assured the Board of Trustees that the Agreements with the Subadvisers which are not affiliated with it were negotiated on an “arm’s length” basis, so that arguably, such profitability information should be less relevant. The Trustees were also provided with certain information on the profitability for the Subadviser which is affiliated with the Manager. Trustees recognized the difficulty of allocating costs to multiple advisory accounts and products of a large advisory organization. Based upon the information provided, the Trustees determined that there was no evidence that the level of such profitability attributable to subadvising the Funds was excessive.
(4) and (5) The extent to which economies of scale would be realized as the Funds grow, and whether fee levels reflect these economies of scale. The Trustees noted that most of the advisory fee schedules for the Funds do not contain breakpoints that reduce the fee rate on assets above specified levels, although certain Subadvisory Agreements have such “breakpoints.” The Trustees recognized that breakpoints may be an appropriate way for the Manager to share its economies of scale, if any, with
40
Funds that have substantial assets. However, they also recognized that there may not be a direct relationship between any economies of scale realized by Funds and those realized by the Manager as assets increase. The Trustees do not believe there is a uniform methodology for establishing breakpoints that give effect to Fund-specific service provided by the Manager. The Trustees noted that in the fund industry as a whole, as well as among funds similar to the Funds, there is no uniformity or pattern in the fees and asset levels at which breakpoints (if any) apply. Depending on the age, size, and other characteristics of a particular fund and its manager’s cost structure, different conclusions can be drawn as to whether there are economies of scale to be realized at any particular level of assets, notwithstanding the intuitive conclusion that such economies exist, or will be realized at some level of total assets. Moreover, because different managers have different cost structures and service models, it is difficult to draw meaningful conclusions from the breakpoints that may have been adopted by other funds. The Trustees also noted that the advisory agreements for many funds do not have breakpoints at all, or if breakpoints exist, they may be at asset levels significantly greater than those of the individual Funds. The Trustees also noted that the total assets in all of the Funds as of June 30, 2013 were approximately $12.85 billion, and that no single non-money market Fund had assets in excess of $616 million.
The Trustees noted that the Manager has agreed to temporarily “cap” Fund expenses at certain levels, which has the effect of reducing expenses as would the implementation of advisory fee breakpoints. The Manager has committed to continue to consider the continuation of fee “caps” and/or advisory fee breakpoints as the Funds grow larger. The Board receives quarterly reports on the level of Fund assets. It expects to consider whether or not to approve the Agreements at a meeting to be held prior to December 31, 2014, and will at that time, or prior thereto, consider: (a) the extent to which economies of scale can be realized, and (b) whether the advisory fee should be modified to reflect such economies of scale, if any.
Having taken these factors into account, the Trustees concluded that the absence of breakpoints in certain of the Funds’ advisory fee rate schedules was acceptable under each Fund’s circumstances.
41
Information about the Board of Trustees and Officers (Unaudited)
The Trust is managed by the Trustees in accordance with the laws of the state of Delaware governing business trusts. There are currently eight Trustees, two of whom are “interested persons” of the Trust within the meaning of that term under the 1940 Act. The Trustees and Officers of the Trust, their addresses, ages, their positions held with the Trust, their terms of office with the Trust and length of time served, their principal occupation(s) during the past five years, the number of portfolios in the Trust they oversee, and their other directorships held are as follows:
Non-Interested Trustees(1)
Name, Address, and Age | Positions Held with VIP Trust and FOF Trust | Term of Office(2)/Length of Time Served | Principal Occupation(s) During Past 5 Years | Number of Portfolios Overseen for VIP Trust and FOF Trust | Other Directorships Held Outside the AZL Fund Complex | |||||
Peter R. Burnim, Age 66 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/07 | Chairman, Argus Investment Strategies Fund Ltd., February 2013 to present; Managing Director, iQ Venture Advisors, LLC. 2005 to 2012; Chairman, Northstar Group Holdings Ltd. Bermuda, 2011 to present; Expert Witness, Massachusetts Department of Revenue, 2011 to 2012; Executive Vice President, Northstar Companies, 2002 to 2005; Senior Officer, Citibank and Citicorp for over 25 years | 41 | Argus Group Holdings; Northstar Group Holdings, NRIL, Sterling Centrecorp Inc.; Highland Financial Holdings; and Bank of Bermuda NY | |||||
Peggy L. Ettestad, Age 56 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/07 | Managing Director, Red Canoe Management Consulting LLC, 2008 to present; Senior Managing Director, Residential Capital LLC, 2003 to 2008; Chief Operations Officer, Transamerica Reinsurance 2002 to 2003 | 41 | Luther College | |||||
Roger Gelfenbien, Age 70 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 10/99 | Retired; Partner of Accenture 1983 to 1999 | 41 | Virtus Funds (8 Funds) | |||||
Claire R. Leonardi, Age 58 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/04 | Chief Executive Officer, Connecticut Innovations, Inc., 2012 to present; General Partner, Fairview Capital, L.P., 1994 to 2012 | 41 | The Natural History Museum of the Adirondacks | |||||
Dickson W. Lewis, Age 65 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/04 | Retired; Consultant to Lifetouch National School Studios; Vice President/General Manager, Yearbooks & Canada-Lifetouch National School Studios, 2006 to 2013; Vice President/General Manager of Jostens, Inc., 2002 to 2006; Senior Vice President of Fortis Group, 1997 to 2002 | 41 | None | |||||
Peter W. McClean, Age 69 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/04 | Retired; President and CEO of Measurisk, LLC, 2001 to 2003; Chief Risk Management Officer at Bank of Bermuda Ltd., 1996 to 2001 | 41 | PNMAC Opportunity Fund; Northeast Bank; and FHI | |||||
Arthur C. Reeds III, Age 69 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 10/99 | Retired; Senior Investment Officer, Hartford Foundation for Public Giving, 2000 to 2003; Chairman, Chief Executive and President of Conning Corp., 1999 to 2000; Investment Consultant, 1997 to 1999 | 41 | Connecticut Water Service, Inc. |
Interested Trustees(3)
Name, Address, and Age | Positions Held with VIP Trust and FOF Trust | Term of Office(2)/Length of Time Served | Principal Occupation(s) During Past 5 Years | Number of Portfolios Overseen for VIP Trust and FOF Trust | Other Directorships Held Outside the AZL Fund Complex | |||||
Robert DeChellis, Age 46 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 3/08 | President and CEO, Allianz Life Financial Services, LLC, 2007 to present | 41 | None | |||||
Brian Muench, Age 43 5701 Golden Hills Drive | Trustee | Since 6/11 | President, Allianz Investment Management LLC, November 2010 to present; Vice President, Allianz Life, April 2011 to present; Vice President, Advisory Management, Allianz Investment Management LLC from December 2005 to November 2010 | 41 | None |
42
Officers
Name, Address, and Age | Positions Held with VIP and VIP FOF Trust | Term of Office(2)/Length of Time Served | Principal Occupation(s) During Past 5 Years | |||
Brian Muench, Age 43 5701 Golden Hills Drive Minneapolis, MN 55416 | President | Since 11/10 | President, Allianz Investment Management LLC from November 2010, to present; Vice President, Allianz Life from April 2011 to present; Vice President, Allianz Investment Management LLC from December 2005 to November 2010. | |||
Michael Radmer, Age 68 Dorsey & Whitney LLP, Suite 1500 50 South Sixth Street Minneapolis, MN 55402-1498 | Secretary | Since 2/02 | Partner, Dorsey and Whitney LLP since 1976. | |||
Ty Edwards, Age 47 Citi Fund Services Ohio, Inc. 3435 Stelzer Road Columbus, OH 43219 | Treasurer, Principal Accounting Officer and Principal Financial Officer | Since 4/10 | Senior Vice President, Financial Administration, Citi Fund Services Ohio, Inc., December 2009 to present; Director, Product Management, Columbia Management, April 2007 to April 2009; Deputy Treasurer, Columbia Funds and Director, Fund Administration, Columbia Management, January 2006 to April 2007. | |||
Christopher R. Pheiffer, Age 45(4) 5701 Golden Hills Drive Minneapolis, MN 55416 | Chief Compliance Officer(5) and Anti-Money Laundering Compliance Officer | Since 2/14 (interim) | Deputy Chief Compliance Officer of the Trusts, 2007-2014. |
(1) | Member of the Audit Committee. |
(2) | Indefinite. |
(3) | Is an “interested person”, as defined by the 1940 Act, due to employment by Allianz. |
(4) | Stephen G. Simon, previously the Chief Compliance Officer of the Trusts, resigned all of his positions with Allianz effective February 21, 2014. Mr. Pheiffer, previously the Deputy Chief Compliance Officer of the Trusts, has been named Chief Compliance Officer of the Trusts on an interim basis while a search for a permanent replacement is conducted. |
(5) | The Manager and the Trust are parties to a Chief Compliance Officer Agreement under which the Manager is compensated by the Trust for providing an employee of the Manager or one of its affiliates to act as the Trust’s Chief Compliance Officer. The Chief Compliance Officer and Anti-Money Laundering Compliance Officer is not considered a corporate officer or executive employee of the Trust. |
43
The Allianz VIP Funds are distributed by Allianz Life Financial Services, LLC. These Funds are not FDIC Insured. | ANNRPT1213 2/14 |
AZL® Gateway Fund
Annual Report
December 31, 2013
Table of Contents
Management Discussion and Analysis
Page 1
Expense Examples and Portfolio Composition
Page 3
Schedule of Portfolio Investments
Page 4
Statement of Assets and Liabilities
Page 9
Statement of Operations
Page 9
Statements of Changes in Net Assets
Page 10
Financial Highlights
Page 11
Notes to the Financial Statements
Page 12
Report of Independent Registered Public Accounting Firm
Page 18
Other Federal Income Tax Information
Page 19
Other Information
Page 20
Approval of Investment Advisory and Subadvisory Agreements
Page 21
Information about the Board of Trustees and Officers
Page 24
This report is submitted for the general information of the shareholder of the Fund. The report is not authorized for distribution to prospective investors in the Fund unless preceded or accompanied by an effective prospectus, which contains details concerning the sales charges and other pertinent information.
AZL® Gateway Fund Review (unaudited)
Allianz Investment Management LLC serves as the Manager for the AZL® Gateway Fund and Gateway Investment Advisers, LLC serves as Subadviser to the Fund.
What factors affected the Fund’s performance during the year ended December 31, 2013?
For the year ended December 31, 2013, the AZL® Gateway Fund returned 8.44%. That compared to a 32.39% total return for its benchmark, the S&P 500 Index1. The Fund’s performance reflects its hedged-equity strategy, which seeks to reduce wide swings in the portfolio’s value that can be caused by stock market volatility.
The Fund’s objective is to capture the majority of returns of equity market investments, however at a reduced level of risk. To pursue this strategy, the Fund holds a broadly diversified portfolio of stocks while also using index options to generate cash inflow and reduce the risk associated with un-hedged equity market investments. Selling index call options reduces the Fund’s volatility and provides steady cash flow that is an important source of the Fund’s return, although, the use of these options limits the Fund’s ability to profit from increases in the value of its equity portfolio. The Fund also purchases put options to protect against sudden, short-term stock market declines.*
The Fund’s performance during the period was affected by trends related to investor risk tolerance and assessment of market volatility. There were two short-term spikes in overall market volatility as measured by the Chicago Board Options Exchange Volatility Index® (the “VIX®”)2. One spike occurred in late June and the other in early October. Apart from these two short-term spikes, volatility remained suppressed for much of the 12-month period.*
The low levels of volatility during much of the period dragged on the Fund’s returns. The monthly average for the VIX during the period was 14.78%—well below the 20.20% monthly averages since 1990. A lower VIX results in less cash flow for the sale of call options, and that reduced cash flow acts as a headwind against the Fund’s performance.
As expected, the nature of the Fund’s strategy also limits relative returns in times when the S&P 500 posts strong gains in a short period, such as the first and fourth quarters
of 2013. When the S&P 500 rises far above the level of premiums the Fund earned from selling call options, the Fund’s relative returns suffer. As a result, when the S&P 500 posted returns of 10.61% and 10.49%, respectively, in the first and fourth quarters of 2013, the Fund gained 3.60% and 3.37% for the same periods.*
The second and third quarters of 2013 were the weakest quarters of the year for equities, as the S&P 500 was up 2.92% and 5.25%, respectively. During these quarters the Fund was up 0.09% and 1.17%, respectively. During both quarters, equity markets exhibited choppy behavior as strong rallies were interrupted by sharp declines. As an illustration of the effectiveness of the Fund’s hedging strategy, the Fund’s August return was -1.14% while the S&P 500 returned
-2.90%.
Past performance does not guarantee future results.
* | The Fund’s portfolio composition is subject to change. There is no guarantee that any sectors mentioned will continue to perform well or that securities in such sectors will be held by the Fund in the future. The information contained in this commentary is for informational purposes only and should not be construed as a recommendation to purchase or sell securities in the sector mentioned. The Fund’s holdings and weightings are as of December 31, 2013. |
1 | The Standard & Poor’s 500® Index (“S&P 500”) is representative of 500 selected common stocks, most of which are listed on the New York Stock Exchange, and is a measure of the U.S. Stock market as a whole. |
2 | Chicago Board Options Exchange Market Volatility Index® (VIX®) is a key measure of market expectations of near-term volatility conveyed by the S&P 500 Index options. |
Investors cannot invest directly in an index.
1 |
AZL® Gateway Fund Review (unaudited)
Fund Objective
The Fund’s investment objective is to seek to capture the majority of the returns associated with equity market investments, while exposing investors to less risk than other equity investments. This objective may be changed by the Trustees of the Fund without shareholder approval. The Fund seeks to achieve its objective by investing in a broadly diversified portfolio of common stocks, while also selling index call options and buying index put options.
Investment Concerns
Equity securities (stocks) are more volatile and carry more risk than other forms of investments, including investments in high-grade fixed income securities. The net asset value per share of this Fund will fluctuate as the value of the securities in the portfolio changes.
International investing may involve risk of capital loss from unfavorable fluctuations in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations.
Investments in the Fund are subject to the risks related to direct investment in real estate, such as real estate risk, regulatory risks, concentration risk, and diversification risk. By itself the Fund does not constitute a complete investment plan and should be considered a long-term investment for investors who can afford to weather changes in the value of their investments.
Investing in derivatives instruments involves risks that may be different from or greater than the risk associated with investing directly in securities or other traditional instruments.
For a complete description of these and other risks associated with investing in a mutual Fund, please refer to the Fund’s prospectus.
Growth of $10,000 Investment
The chart above represents a comparison of a hypothetical investment in the Fund versus a similar investment in the Fund’s benchmark and represents the reinvestment of dividends and capital gains in the Fund.
Average Annual Total Returns as of December 31, 2013
Since | ||||||||||||
1 | 3 | Inception | ||||||||||
Year | Year | (4/30/10) | ||||||||||
AZL® Gateway Fund | 8.44 | % | 5.19 | % | 4.78 | % | ||||||
S&P 500 Index | 32.39 | % | 16.18 | % | 15.30 | % |
Past performance does not guarantee future results. The performance data quoted represents past performance and current returns may be lower or higher. The investment return and principal value will fluctuate so that an investor’s shares, when redeemed may be worth more or less than the original cost. To obtain performance information current to the most recent month end, please visit www.Allianzlife.com.
Expense Ratio1 | Gross | |||
AZL® Gateway Fund | 1.15 | % |
The above expense ratio is based on the current Fund prospectus dated April 29, 2013. The Manager and the Fund have entered into a written contract limiting operating expenses, excluding certain expenses (such as interest expense and Acquired Fund fees and expenses), to 1.25% through April 30, 2015. Additional information pertaining to the December 31, 2013 expense ratios can be found in the financial highlights.
1 | Acquired Fund Fees and Expenses are incurred indirectly by the Fund through the valuation of the Fund’s investments in the other investment companies. Accordingly, Acquired Fund Fees and Expenses affect the Fund’s total returns. Because these fees and expenses are not included in the Fund’s financial highlights, the Fund’s total annual fund operating expenses do not correlate to the ratios of expenses to average net assets shown in the financial highlights table. Without Acquired Fund Fees and Expenses the Fund’s gross ratio would be 1.14%. |
The total return of the Fund does not reflect the effect of any insurance charges, the annual maintenance fee or the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. Such charges, fees and tax payments would reduce the performance quoted.
The Fund’s performance is measured against the Standard & Poor’s 500 Index (“S&P 500”), an unmanaged index that is representative of 500 selected common stocks, most of which are listed on the New York Stock Exchange, which is a measure of the U.S. Stock market as a whole. The index does not reflect the deduction of fees associated with a mutual fund, such as investment management and fund accounting fees. The Fund’s performance reflects the deduction of fees for services provided to the Fund. Investors cannot invest directly in an index.
2 |
AZL Gateway Fund
(Unaudited)
As a shareholder of the AZL Gateway Fund (the “Fund”), you incur ongoing costs, including management fees, distribution fees, and other Fund expenses. These examples are intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. Please note that the expenses shown in each table do not reflect expenses that apply to the subaccount or the insurance contract. If the expenses that apply to the subaccount of the insurance contract were included, your costs would have been higher.
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the periods presented below.
The Actual Expense table below provides information about actual account values and actual expenses. You may use the information below, 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 table under the heading entitled “Expenses Paid During Period” to estimate the expenses you paid on your account during this period.
Beginning Account Value 7/1/13 | Ending Account Value 12/31/13 | Expenses Paid During Period 7/1/13 - 12/31/13* | Annualized Expense Ratio During Period 7/1/13 - 12/31/13 | |||||||||||||||||
AZL Gateway Fund | $ | 1,000.00 | $ | 1,045.80 | $ | 5.67 | 1.10 | % |
The Hypothetical Expense table below provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.
Beginning Account Value 7/1/13 | Ending Account Value 12/31/13 | Expenses Paid During Period 7/1/13 - 12/31/13* | Annualized Expense Ratio During Period 7/1/13 - 12/31/13 | |||||||||||||||||
AZL Gateway Fund | $ | 1,000.00 | $ | 1,019.66 | $ | 5.60 | 1.10 | % |
* | Expenses are equal to the average account value over the period, multiplied by the Fund’s annualized expense ratio, multiplied by 184/365 (to reflect the one half year period). |
Portfolio Composition
(Unaudited)
Investments | Percent of net assets | ||||
Information Technology | 18.6 | % | |||
Financials | 15.1 | ||||
Consumer Discretionary | 12.5 | ||||
Health Care | 12.5 | ||||
Industrials | 11.2 | ||||
Energy | 9.9 | ||||
Consumer Staples | 9.7 | ||||
Materials | 3.7 | ||||
Utilities | 3.0 | ||||
Telecommunication Services | 2.4 | ||||
|
| ||||
Total Common Stock | 98.6 | ||||
Purchased Put Options | 0.2 | ||||
Money Market | 4.1 | ||||
|
| ||||
Total Investment Securities | 102.9 | ||||
Net other assets (liabilities) | (2.9 | ) | |||
|
| ||||
Net Assets | 100.0 | % | |||
|
|
3
AZL Gateway Fund
Schedule of Portfolio Investments
December 31, 2013
Shares | Fair Value | |||||||
| Common Stocks+ (98.6%): |
| ||||||
| Aerospace & Defense (2.8%): |
| ||||||
13,590 | Boeing Co. (The) | $ | 1,854,898 | |||||
17,375 | Honeywell International, Inc. | 1,587,554 | ||||||
8,555 | Raytheon Co. | 775,939 | ||||||
14,605 | United Technologies Corp. | 1,662,049 | ||||||
|
| |||||||
5,880,440 | ||||||||
|
| |||||||
| Air Freight & Logistics (0.8%): | |||||||
17,050 | United Parcel Service, Inc., Class B | 1,791,614 | ||||||
|
| |||||||
| Auto Components (0.0%): | |||||||
4,150 | Cooper Tire & Rubber Co. | 99,766 | ||||||
|
| |||||||
| Automobiles (0.3%): | |||||||
37,310 | Ford Motor Co. | 575,693 | ||||||
|
| |||||||
| Beverages (2.2%): | |||||||
55,310 | Coca-Cola Co. (The) | 2,284,857 | ||||||
3,038 | Monster Beverage Corp.* | 205,885 | ||||||
25,045 | PepsiCo, Inc. | 2,077,232 | ||||||
|
| |||||||
4,567,974 | ||||||||
|
| |||||||
| Biotechnology (2.7%): | |||||||
14,615 | Amgen, Inc. | 1,668,448 | ||||||
3,800 | Biogen Idec, Inc.* | 1,063,050 | ||||||
4,200 | Celgene Corp.* | 709,632 | ||||||
24,890 | Gilead Sciences, Inc.* | 1,870,484 | ||||||
1,000 | Regeneron Pharmaceuticals, Inc.* | 275,240 | ||||||
1,440 | Vertex Pharmaceuticals, Inc.* | 106,992 | ||||||
|
| |||||||
5,693,846 | ||||||||
|
| |||||||
| Capital Markets (2.3%): | |||||||
300 | Affiliated Managers Group, Inc.* | 65,064 | ||||||
42,190 | Charles Schwab Corp. (The) | 1,096,940 | ||||||
9,125 | Eaton Vance Corp. | 390,459 | ||||||
7,690 | Goldman Sachs Group, Inc. (The) | 1,363,129 | ||||||
12,745 | Legg Mason, Inc. | 554,153 | ||||||
23,590 | Morgan Stanley | 739,782 | ||||||
10,050 | TD Ameritrade Holding Corp. | 307,932 | ||||||
6,125 | Waddell & Reed Financial, Inc., Class A | 398,860 | ||||||
|
| |||||||
4,916,319 | ||||||||
|
| |||||||
| Chemicals (2.2%): | |||||||
23,330 | Dow Chemical Co. (The) | 1,035,851 | ||||||
14,970 | E.I. du Pont de Nemours & Co. | 972,601 | ||||||
7,540 | Eastman Chemical Co. | 608,478 | ||||||
8,870 | LyondellBasell Industries NV, Class A | 712,084 | ||||||
7,290 | Monsanto Co. | 849,650 | ||||||
9,430 | Olin Corp. | 272,056 | ||||||
2,500 | Potash Corp. of Saskatchewan, Inc. | 82,400 | ||||||
8,260 | RPM International, Inc. | 342,873 | ||||||
|
| |||||||
4,875,993 | ||||||||
|
| |||||||
| Commercial Banks (2.2%): | |||||||
4,330 | Associated Banc-Corp. | 75,342 | ||||||
3,380 | FirstMerit Corp. | 75,137 | ||||||
4,450 | Old National Bancorp | 68,397 | ||||||
27,805 | U.S. Bancorp | 1,123,322 | ||||||
72,155 | Wells Fargo & Co. | 3,275,837 | ||||||
|
| |||||||
4,618,035 | ||||||||
|
| |||||||
| Commercial Services & Supplies (0.7%): | |||||||
5,920 | ADT Corp. (The) | 239,582 | ||||||
9,690 | R.R. Donnelley & Sons Co. | 196,513 |
Shares | Fair Value | |||||||
| Common Stocks+, continued |
| ||||||
| Commercial Services & Supplies, continued |
| ||||||
9,040 | Tyco International, Ltd. | $ | 371,002 | |||||
12,065 | Waste Management, Inc. | 541,357 | ||||||
|
| |||||||
1,348,454 | ||||||||
|
| |||||||
| Communications Equipment (1.6%): | |||||||
69,170 | Cisco Systems, Inc. | 1,552,866 | ||||||
6,099 | Motorola Solutions, Inc. | 411,683 | ||||||
15,620 | QUALCOMM, Inc. | 1,159,785 | ||||||
9,670 | Telefonaktiebolaget LM Ericsson, Sponsored ADR | 118,361 | ||||||
|
| |||||||
3,242,695 | ||||||||
|
| |||||||
| Computers & Peripherals (3.8%): | |||||||
11,585 | Apple, Inc. | 6,500,459 | ||||||
26,730 | EMC Corp. | 672,260 | ||||||
26,245 | Hewlett-Packard Co. | 734,335 | ||||||
5,610 | Seagate Technology plc | 315,058 | ||||||
|
| |||||||
8,222,112 | ||||||||
|
| |||||||
| Consumer Finance (0.9%): | |||||||
14,560 | American Express Co. | 1,321,029 | ||||||
12,180 | Discover Financial Services | 681,471 | ||||||
|
| |||||||
2,002,500 | ||||||||
|
| |||||||
| Containers & Packaging (0.4%): | |||||||
6,565 | Avery Dennison Corp. | 329,497 | ||||||
12,140 | MeadWestvaco Corp. | 448,331 | ||||||
3,010 | Sonoco Products Co. | 125,577 | ||||||
|
| |||||||
903,405 | ||||||||
|
| |||||||
| Distributors (0.3%): | |||||||
7,435 | Genuine Parts Co. | 618,518 | ||||||
|
| |||||||
| Diversified Financial Services (5.0%): | |||||||
108,935 | Bank of America Corp. | 1,696,118 | ||||||
20,430 | Berkshire Hathaway, Inc., Class B* | 2,422,181 | ||||||
44,268 | Citigroup, Inc. | 2,306,805 | ||||||
8,285 | CME Group, Inc. | 650,041 | ||||||
985 | IntercontinentalExchange Group, Inc. | 221,546 | ||||||
58,420 | JPMorgan Chase & Co. | 3,416,402 | ||||||
|
| |||||||
10,713,093 | ||||||||
|
| |||||||
| Diversified Telecommunication Services (2.4%): | |||||||
80,045 | AT&T, Inc. | 2,814,382 | ||||||
17,614 | Frontier Communications Corp. | 81,905 | ||||||
43,135 | Verizon Communications, Inc. | 2,119,654 | ||||||
|
| |||||||
5,015,941 | ||||||||
|
| |||||||
| Electric Utilities (1.2%): | |||||||
23,371 | Duke Energy Corp. | 1,612,833 | ||||||
1,970 | Hawaiian Electric Industries, Inc. | 51,338 | ||||||
8,320 | OGE Energy Corp. | 282,048 | ||||||
18,265 | Pepco Holdings, Inc. | 349,409 | ||||||
|
| |||||||
2,295,628 | ||||||||
|
| |||||||
| Electrical Equipment (1.3%): | |||||||
14,280 | Eaton Corp. plc | 1,086,994 | ||||||
16,040 | Emerson Electric Co. | 1,125,687 | ||||||
2,670 | Hubbell, Inc., Class B | 290,763 | ||||||
|
| |||||||
2,503,444 | ||||||||
|
|
Continued
4
AZL Gateway Fund
Schedule of Portfolio Investments
December 31, 2013
Shares | Fair Value | |||||||
| Common Stocks+, continued |
| ||||||
| Electronic Equipment, Instruments & Components (0.4%): |
| ||||||
25,880 | Corning, Inc. | $ | 461,182 | |||||
6,950 | TE Connectivity, Ltd. | 383,014 | ||||||
|
| |||||||
844,196 | ||||||||
|
| |||||||
| Energy Equipment & Services (2.2%): | |||||||
9,800 | Baker Hughes, Inc. | 541,548 | ||||||
1,495 | CARBO Ceramics, Inc. | 174,212 | ||||||
3,550 | Diamond Offshore Drilling, Inc. | 202,066 | ||||||
21,500 | Halliburton Co. | 1,091,125 | ||||||
13,635 | Patterson-UTI Energy, Inc. | 345,238 | ||||||
22,931 | Schlumberger, Ltd. | 2,066,312 | ||||||
2,000 | Seadrill, Ltd. | 82,160 | ||||||
3,170 | Tidewater, Inc. | 187,886 | ||||||
|
| |||||||
4,690,547 | ||||||||
|
| |||||||
| Food & Staples Retailing (1.9%): | |||||||
22,085 | CVS Caremark Corp. | 1,580,623 | ||||||
10,100 | Walgreen Co. | 580,144 | ||||||
24,480 | Wal-Mart Stores, Inc. | 1,926,332 | ||||||
|
| |||||||
4,087,099 | ||||||||
|
| |||||||
| Food Products (1.4%): | |||||||
23,530 | ConAgra Foods, Inc. | 792,961 | ||||||
13,640 | Kraft Foods Group, Inc., Class A | 735,469 | ||||||
41,070 | Mondelez International, Inc., Class A | 1,449,771 | ||||||
|
| |||||||
2,978,201 | ||||||||
|
| |||||||
| Gas Utilities (0.6%): | |||||||
1,776 | AGL Resources, Inc. | 83,880 | ||||||
4,880 | National Fuel Gas Co. | 348,432 | ||||||
11,360 | ONEOK, Inc. | 706,365 | ||||||
3,350 | WGL Holdings, Inc. | 134,201 | ||||||
|
| |||||||
1,272,878 | ||||||||
|
| |||||||
| Health Care Equipment & Supplies (2.0%): | |||||||
30,400 | Abbott Laboratories | 1,165,231 | ||||||
12,810 | Baxter International, Inc. | 890,936 | ||||||
35,380 | Boston Scientific Corp.* | 425,268 | ||||||
7,390 | Covidien plc | 503,259 | ||||||
520 | Intuitive Surgical, Inc.* | 199,722 | ||||||
18,775 | Medtronic, Inc. | 1,077,497 | ||||||
|
| |||||||
4,261,913 | ||||||||
|
| |||||||
| Health Care Providers & Services (1.8%): | |||||||
14,444 | Aetna, Inc. | 990,714 | ||||||
10,045 | Express Scripts Holding Co.* | 705,561 | ||||||
3,320 | HCA Holdings, Inc.* | 158,397 | ||||||
16,080 | UnitedHealth Group, Inc. | 1,210,824 | ||||||
3,790 | Universal Health Services, Inc., Class B | 307,975 | ||||||
4,720 | WellPoint, Inc. | 436,081 | ||||||
|
| |||||||
3,809,552 | ||||||||
|
| |||||||
| Hotels, Restaurants & Leisure (1.8%): | |||||||
14,460 | International Game Technology | 262,594 | ||||||
5,650 | Las Vegas Sands Corp. | 445,616 | ||||||
20,205 | McDonald’s Corp. | 1,960,490 | ||||||
7,820 | Melco Crown Entertainment, Ltd., Sponsored ADR* | 306,700 | ||||||
9,990 | MGM Resorts International* | 234,965 | ||||||
1,460 | Tim Hortons, Inc. | 85,235 | ||||||
5,690 | Wendy’s Co. (The) | 49,617 |
Shares | Fair Value | |||||||
| Common Stocks+, continued |
| ||||||
| Hotels, Restaurants & Leisure, continued |
| ||||||
2,420 | Wynn Resorts, Ltd. | $ | 469,988 | |||||
|
| |||||||
3,815,205 | ||||||||
|
| |||||||
| Household Durables (1.0%): | |||||||
13,160 | Leggett & Platt, Inc. | 407,170 | ||||||
14,825 | Newell Rubbermaid, Inc. | 480,479 | ||||||
11,790 | Toll Brothers, Inc.* | 436,230 | ||||||
4,195 | Tupperware Brands Corp. | 396,553 | ||||||
2,640 | Whirlpool Corp. | 414,110 | ||||||
|
| |||||||
2,134,542 | ||||||||
|
| |||||||
| Household Products (2.2%): |
| ||||||
14,160 | Colgate-Palmolive Co. | 923,374 | ||||||
7,545 | Kimberly-Clark Corp. | 788,151 | ||||||
35,355 | Procter & Gamble Co. (The) | 2,878,250 | ||||||
|
| |||||||
4,589,775 | ||||||||
|
| |||||||
| Industrial Conglomerates (2.5%): | |||||||
9,695 | 3M Co. | 1,359,724 | ||||||
142,805 | General Electric Co. | 4,002,824 | ||||||
|
| |||||||
5,362,548 | ||||||||
|
| |||||||
| Insurance (3.0%): | |||||||
1,350 | AEGON NV, NYS, Registered Shares, Sponsored ADR | 12,798 | ||||||
6,600 | AFLAC, Inc. | 440,880 | ||||||
13,780 | Allstate Corp. (The) | 751,561 | ||||||
22,570 | American International Group, Inc. | 1,152,199 | ||||||
4,370 | Aon plc | 366,599 | ||||||
6,800 | Arthur J. Gallagher & Co. | 319,124 | ||||||
9,015 | Fidelity National Financial, Inc., Class A | 292,537 | ||||||
10,860 | Lincoln National Corp. | 560,593 | ||||||
14,965 | Marsh & McLennan Cos., Inc. | 723,707 | ||||||
2,380 | Mercury General Corp. | 118,310 | ||||||
12,420 | Old Republic International Corp. | 214,493 | ||||||
6,670 | Principal Financial Group, Inc. | 328,898 | ||||||
6,960 | Travelers Cos., Inc. (The) | 630,158 | ||||||
10,685 | XL Group plc, Class B | 340,210 | ||||||
|
| |||||||
6,252,067 | ||||||||
|
| |||||||
| Internet & Catalog Retail (1.2%): | |||||||
5,945 | Amazon.com, Inc.* | 2,370,806 | ||||||
650 | Netflix, Inc.* | 239,311 | ||||||
|
| |||||||
2,610,117 | ||||||||
|
| |||||||
| Internet Software & Services (2.8%): | |||||||
5,340 | Akamai Technologies, Inc.* | 251,941 | ||||||
1,590 | Baidu, Inc., Sponsored ADR* | 282,829 | ||||||
19,040 | eBay, Inc.* | 1,045,106 | ||||||
3,475 | Google, Inc., Class A* | 3,894,466 | ||||||
1,150 | LinkedIn Corp., Class A* | 249,355 | ||||||
6,020 | VeriSign, Inc.* | 359,876 | ||||||
|
| |||||||
6,083,573 | ||||||||
|
| |||||||
| IT Services (3.8%): | |||||||
16,710 | Automatic Data Processing, Inc. | 1,350,335 | ||||||
4,060 | Broadridge Financial Solutions, Inc. | 160,451 | ||||||
6,420 | Cognizant Technology Solutions Corp., Class A* | 648,292 | ||||||
8,990 | Fidelity National Information Services, Inc. | 482,583 | ||||||
13,135 | International Business Machines Corp. | 2,463,732 | ||||||
21,015 | Paychex, Inc. | 956,813 |
Continued
5
AZL Gateway Fund
Schedule of Portfolio Investments
December 31, 2013
Shares | Fair Value | |||||||
| Common Stocks+, continued |
| ||||||
| IT Services, continued |
| ||||||
7,910 | Visa, Inc., Class A | $ | 1,761,399 | |||||
19,355 | Western Union Co. | 333,874 | ||||||
|
| |||||||
8,157,479 | ||||||||
|
| |||||||
| Leisure Equipment & Products (0.4%): | |||||||
17,800 | Mattel, Inc. | 846,924 | ||||||
|
| |||||||
| Machinery (2.4%): |
| ||||||
9,500 | Caterpillar, Inc. | 862,695 | ||||||
6,470 | Cummins, Inc. | 912,077 | ||||||
6,480 | Deere & Co. | 591,818 | ||||||
6,145 | Parker Hannifin Corp. | 790,493 | ||||||
5,429 | Pentair, Ltd., Registered Shares | 421,670 | ||||||
2,745 | Snap-On, Inc. | 300,632 | ||||||
4,445 | SPX Corp. | 442,766 | ||||||
6,730 | Stanley Black & Decker, Inc. | 543,044 | ||||||
4,970 | Timken Co. | 273,698 | ||||||
|
| |||||||
5,138,893 | ||||||||
|
| |||||||
| Media (3.8%): | |||||||
25,300 | Comcast Corp., Class A | 1,314,715 | ||||||
1,077 | Liberty Global plc, Series C* | 90,813 | ||||||
1,909 | Liberty Global plc, Class A* | 169,882 | ||||||
6,186 | News Corp., Class B* | 110,296 | ||||||
9,385 | Omnicom Group, Inc. | 697,962 | ||||||
61,020 | Sirius XM Holdings, Inc.* | 212,960 | ||||||
7,720 | Time Warner Cable, Inc. | 1,046,060 | ||||||
20,390 | Time Warner, Inc. | 1,421,591 | ||||||
24,895 | Twenty-First Century Fox, Inc., Class B | 861,367 | ||||||
29,150 | Walt Disney Co. (The) | 2,227,059 | ||||||
|
| |||||||
8,152,705 | ||||||||
|
| |||||||
| Metals & Mining (1.1%): | |||||||
20,235 | Alcoa, Inc. | 215,098 | ||||||
22,170 | Freeport-McMoRan Copper & Gold, Inc. | 836,696 | ||||||
5,815 | Gerdau SA, Sponsored ADR | 45,590 | ||||||
9,930 | Nucor Corp. | 530,063 | ||||||
6,750 | Silver Wheaton Corp. | 136,283 | ||||||
5,259 | Southern Copper Corp. | 150,986 | ||||||
12,700 | Steel Dynamics, Inc. | 248,158 | ||||||
2,970 | Worthington Industries, Inc. | 124,978 | ||||||
|
| |||||||
2,287,852 | ||||||||
|
| |||||||
| Multiline Retail (0.9%): | |||||||
4,545 | J.C. Penney Co., Inc.* | 41,587 | ||||||
11,390 | Macy’s, Inc. | 608,226 | ||||||
7,150 | Nordstrom, Inc. | 441,870 | ||||||
1,520 | Sears Holdings Corp.* | 74,541 | ||||||
10,910 | Target Corp. | 690,275 | ||||||
|
| |||||||
1,856,499 | ||||||||
|
| |||||||
| Multi-Utilities (1.3%): | |||||||
16,240 | Ameren Corp. | 587,238 | ||||||
15,030 | CenterPoint Energy, Inc. | 348,395 | ||||||
16,185 | Consolidated Edison, Inc. | 894,708 | ||||||
5,515 | Integrys Energy Group, Inc. | 300,071 | ||||||
22,510 | Public Service Enterprise Group, Inc. | 721,220 | ||||||
|
| |||||||
2,851,632 | ||||||||
|
|
Shares | Fair Value | |||||||
| Common Stocks+, continued |
| ||||||
| Oil, Gas & Consumable Fuels (7.7%): | |||||||
18,575 | Chesapeake Energy Corp. | $ | 504,126 | |||||
27,900 | Chevron Corp. | 3,484,989 | ||||||
1,270 | CNOOC, Ltd., Sponsored ADR | 238,328 | ||||||
29,410 | ConocoPhillips | 2,077,817 | ||||||
12,590 | CONSOL Energy, Inc. | 478,924 | ||||||
57,910 | Exxon Mobil Corp. | 5,860,491 | ||||||
2,150 | HollyFrontier Corp. | 106,834 | ||||||
16,270 | Occidental Petroleum Corp. | 1,547,277 | ||||||
13,080 | Phillips 66 | 1,008,860 | ||||||
16,045 | Southwestern Energy Co.* | 631,050 | ||||||
3,210 | Statoil ASA, Sponsored ADR | 77,457 | ||||||
1,890 | Total SA, Sponsored ADR | 115,800 | ||||||
|
| |||||||
16,131,953 | ||||||||
|
| |||||||
| Personal Products (0.2%): | |||||||
13,740 | Avon Products, Inc. | 236,603 | ||||||
2,090 | Herbalife, Ltd. | 164,483 | ||||||
|
| |||||||
401,086 | ||||||||
|
| |||||||
| Pharmaceuticals (6.0%): | |||||||
29,850 | Abbvie, Inc. | 1,576,379 | ||||||
27,370 | Bristol-Myers Squibb Co. | 1,454,716 | ||||||
16,710 | Eli Lilly & Co. | 852,210 | ||||||
4,510 | GlaxoSmithKline plc, Sponsored ADR | 240,789 | ||||||
37,010 | Johnson & Johnson Co. | 3,389,745 | ||||||
967 | Mallinckrodt plc* | 50,535 | ||||||
44,100 | Merck & Co., Inc. | 2,207,205 | ||||||
98,495 | Pfizer, Inc. | 3,016,902 | ||||||
|
| |||||||
12,788,481 | ||||||||
|
| |||||||
| Professional Services (0.1%): | |||||||
1,890 | Dun & Bradstreet Corp. | 231,998 | ||||||
|
| |||||||
| Real Estate Investment Trusts (REITs) (1.5%): | |||||||
29,440 | American Capital Agency Corp. | 567,897 | ||||||
46,230 | Annaly Capital Management, Inc. | 460,913 | ||||||
28,220 | Duke Realty Corp. | 424,429 | ||||||
6,340 | Hatteras Financial Corp. | 103,596 | ||||||
3,180 | Healthcare Realty Trust, Inc. | 67,766 | ||||||
10,870 | Liberty Property Trust | 368,167 | ||||||
10,895 | Mack-Cali Realty Corp. | 234,025 | ||||||
12,225 | Senior Housing Properties Trust | 271,762 | ||||||
13,068 | Ventas, Inc. | 748,534 | ||||||
|
| |||||||
3,247,089 | ||||||||
|
| |||||||
| Road & Rail (0.6%): | |||||||
34,435 | CSX Corp. | 990,695 | ||||||
12,780 | Hertz Global Holdings, Inc.* | 365,764 | ||||||
|
| |||||||
1,356,459 | ||||||||
|
| |||||||
| Semiconductors & Semiconductor Equipment (2.5%): |
| ||||||
18,490 | Advanced Micro Devices, Inc.* | 71,556 | ||||||
8,630 | Altera Corp. | 280,734 | ||||||
8,940 | Analog Devices, Inc. | 455,314 | ||||||
30,330 | Applied Materials, Inc. | 536,538 | ||||||
1,720 | First Solar, Inc.* | 93,981 | ||||||
74,115 | Intel Corp. | 1,924,024 | ||||||
7,865 | Linear Technology Corp. | 358,251 | ||||||
9,695 | Microchip Technology, Inc. | 433,851 | ||||||
11,935 | NVIDIA Corp. | 191,199 |
Continued
6
AZL Gateway Fund
Schedule of Portfolio Investments
December 31, 2013
Shares | Fair Value | |||||||
| Common Stocks+, continued |
| ||||||
| Semiconductors & Semiconductor Equipment, continued |
| ||||||
5,360 | Skyworks Solutions, Inc.* | $ | 153,082 | |||||
10,460 | Texas Instruments, Inc. | 459,299 | ||||||
7,750 | Xilinx, Inc. | 355,880 | ||||||
|
| |||||||
5,313,709 | ||||||||
|
| |||||||
| Software (3.7%): | |||||||
14,790 | Activision Blizzard, Inc. | 263,706 | ||||||
11,875 | Adobe Systems, Inc.* | 711,075 | ||||||
8,270 | Autodesk, Inc.* | 416,229 | ||||||
110,345 | Microsoft Corp. | 4,130,212 | ||||||
4,430 | Nuance Communications, Inc.* | 67,336 | ||||||
47,125 | Oracle Corp. | 1,803,003 | ||||||
14,470 | Symantec Corp. | 341,203 | ||||||
5,890 | TIBCO Software, Inc.* | 132,407 | ||||||
|
| |||||||
7,865,171 | ||||||||
|
| |||||||
| Specialty Retail (2.7%): | |||||||
3,290 | Abercrombie & Fitch Co., Class A | 108,274 | ||||||
10,230 | American Eagle Outfitters, Inc. | 147,312 | ||||||
100 | AutoZone, Inc.* | 47,794 | ||||||
5,845 | Best Buy Co., Inc. | 233,099 | ||||||
5,590 | Foot Locker, Inc. | 231,650 | ||||||
11,825 | Gap, Inc. (The) | 462,121 | ||||||
23,015 | Home Depot, Inc. (The) | 1,895,054 | ||||||
9,820 | L Brands, Inc. | 607,367 | ||||||
24,510 | Lowe’s Cos., Inc. | 1,214,471 | ||||||
5,350 | Tiffany & Co. | 496,373 | ||||||
5,960 | TJX Cos., Inc. (The) | 379,831 | ||||||
|
| |||||||
5,823,346 | ||||||||
|
| |||||||
| Thrifts & Mortgage Finance (0.2%): | |||||||
23,675 | New York Community Bancorp, Inc. | 398,924 | ||||||
|
| |||||||
| Tobacco (1.8%): | |||||||
35,270 | Altria Group, Inc. | 1,354,015 | ||||||
21,715 | Philip Morris International, Inc. | 1,892,028 | ||||||
9,670 | Reynolds American, Inc. | 483,403 | ||||||
4,107 | Vector Group, Ltd. | 67,232 | ||||||
|
| |||||||
3,796,678 | ||||||||
|
|
Shares | Fair Value | |||||||
| Common Stocks+, continued |
| ||||||
| Trading Companies & Distributors (0.1%): | |||||||
3,185 | GATX Corp. | $ | 166,161 | |||||
|
| |||||||
| Total Common Stocks (Cost $160,236,576) | 209,490,722 | ||||||
|
| |||||||
Contracts, Shares, Notional Amount or Principal Amount | Fair Value | |||||||
| Purchased Put Options (0.2%): | |||||||
432 | On S&P 500 Index, Strike @ 1625 Exp 1/18/14 | 38,880 | ||||||
213 | On S&P 500 Index, Strike @ 1650 Exp 1/18/14 | 20,235 | ||||||
153 | On S&P 500 Index, Strike @ 1600 Exp 2/22/14 | 40,545 | ||||||
153 | On S&P 500 Index, Strike @ 1650 Exp 2/22/14 | 58,905 | ||||||
171 | On S&P 500 Index, Strike @ 1675 Exp 3/22/14 | 159,885 | ||||||
|
| |||||||
| Total Purchased Put Options (Cost $941,257) | 318,450 | ||||||
|
| |||||||
| Unaffiliated Investment Company (4.1%): | |||||||
8,602,612 | Dreyfus Treasury Prime Cash Management Fund, Institutional Shares, 0.00%(a) | 8,602,612 | ||||||
|
| |||||||
| Total Unaffiliated Investment Company (Cost $8,602,612) | 8,602,612 | ||||||
|
| |||||||
| Total Investment Securities (Cost | 218,411,784 | ||||||
| Net other assets (liabilities) — (2.9)% | (6,247,926 | ) | |||||
|
| |||||||
| Net Assets — 100.0% | $ | 212,163,858 | |||||
|
|
Percentages indicated are based on net assets as of December 31, 2013.
ADR—American Depositary Receipt
NYS—New York Shares
* | Non-income producing security. |
+ | All or a portion of each common stock has been pledged as collateral for outstanding call options written. |
(a) | The rate represents the effective yield at December 31, 2013. |
(b) | See Federal Tax Information listed in the Notes to the Financial Statements. |
Continued
7
AZL Gateway Fund
Schedule of Portfolio Investments
December 31, 2013
Written Options
Number of Contracts | Fair Value | |||||||
| Written Call Options (-2.8%) | |||||||
(125) | On S&P 500 Index, Strike @ 1780 Exp 1/3/14 | $ | (893,750 | ) | ||||
(134) | On S&P 500 Index, Strike @ 1810 Exp 1/10/14 | (592,950 | ) | |||||
(124) | On S&P 500 Index, Strike @ 1775 Exp 1/18/14 | (926,900 | ) | |||||
(105) | On S&P 500 Index, Strike @ 1790 Exp 1/18/14 | (639,975 | ) | |||||
(135) | On S&P 500 Index, Strike @ 1800 Exp 1/18/14 | (702,675 | ) | |||||
(124) | On S&P 500 Index, Strike @ 1810 Exp 1/18/14 | (538,780 | ) | |||||
(132) | On S&P 500 Index, Strike @ 1800 Exp 2/22/14 | (812,460 | ) | |||||
(105) | On S&P 500 Index, Strike @ 1810 Exp 2/22/14 | (568,575 | ) | |||||
(138) | On S&P 500 Index, Strike @ 1840 Exp 2/22/14 | (471,270 | ) | |||||
|
| |||||||
| Total Written Call Options (Premiums Received $(3,078,945)) | $ | (6,147,335 | ) | ||||
|
|
See accompanying notes to the financial statements.
8
AZL Gateway Fund
Statement of Assets and Liabilities
December 31, 2013
Assets: | |||||
Investment securities, at cost | $ | 169,780,445 | |||
|
| ||||
Investment securities, at value | $ | 218,411,784 | |||
Interest and dividends receivable | 347,339 | ||||
Reclaims receivable | 2,279 | ||||
|
| ||||
Total Assets | 218,761,402 | ||||
|
| ||||
Liabilities: | |||||
Payable for capital shares redeemed | 242,385 | ||||
Written Options (Premiums received $3,078,945) | 6,147,335 | ||||
Manager fees payable | 142,128 | ||||
Administration fees payable | 7,568 | ||||
Distribution fees payable | 44,415 | ||||
Custodian fees payable | 2,856 | ||||
Administrative and compliance services fees payable | 1,048 | ||||
Trustee fees payable | 8 | ||||
Other accrued liabilities | 9,801 | ||||
|
| ||||
Total Liabilities | 6,597,544 | ||||
|
| ||||
Net Assets | $ | 212,163,858 | |||
|
| ||||
Net Assets Consist of: | |||||
Capital | $ | 196,097,335 | |||
Accumulated net investment income/(loss) | 2,576,767 | ||||
Accumulated net realized gains/(losses) from investment transactions | (32,073,193 | ) | |||
Net unrealized appreciation/(depreciation) on investments | 45,562,949 | ||||
|
| ||||
Net Assets | $ | 212,163,858 | |||
|
| ||||
Shares of beneficial interest (unlimited number of shares authorized, no par value) | 18,213,063 | ||||
Net Asset Value (offering and redemption price per share) | $ | 11.65 | |||
|
|
For the Year Ended December 31, 2013
Investment Income: | |||||
Dividends | $ | 4,672,842 | |||
Foreign withholding tax | (1,147 | ) | |||
|
| ||||
Total Investment Income | 4,671,695 | ||||
|
| ||||
Expenses: | |||||
Manager fees | 1,527,217 | ||||
Administration fees | 63,390 | ||||
Distribution fees | 477,254 | ||||
Custodian fees | 9,827 | ||||
Administrative and compliance services fees | 4,063 | ||||
Trustee fees | 10,543 | ||||
Professional fees | 10,617 | ||||
Shareholder reports | 7,174 | ||||
Other expenses | 6,022 | ||||
|
| ||||
Total expenses before reductions | 2,116,107 | ||||
Less expenses paid indirectly | (18,590 | ) | |||
|
| ||||
Net expenses | 2,097,517 | ||||
|
| ||||
Net Investment Income/(Loss) | 2,574,178 | ||||
|
| ||||
Realized and Unrealized Gains/(Losses) on Investments: | |||||
Net realized gains/(losses) on securities transactions | 3,962,452 | ||||
Net realized gains/(losses) on options contracts | (32,116,883 | ) | |||
Change in net unrealized appreciation/depreciation on investments | 40,871,485 | ||||
|
| ||||
Net Realized/Unrealized Gains/(Losses) on Investments | 12,717,054 | ||||
|
| ||||
Change in Net Assets Resulting From Operations | $ | 15,291,232 | |||
|
|
See accompanying notes to the financial statements.
9
Statements of Changes in Net Assets
AZL Gateway Fund | ||||||||||
For the Year Ended December 31, 2013 | For the Year Ended December 31, 2012 | |||||||||
Change in Net Assets: | ||||||||||
Operations: | ||||||||||
Net investment income/(loss) | $ | 2,574,178 | $ | 1,649,440 | ||||||
Net realized gains/(losses) on investment transactions | (28,154,431 | ) | (3,853,022 | ) | ||||||
Change in unrealized appreciation/depreciation on investments | 40,871,485 | 3,825,648 | ||||||||
|
|
|
| |||||||
Change in net assets resulting from operations | 15,291,232 | 1,622,066 | ||||||||
|
|
|
| |||||||
Dividends to Shareholders: | ||||||||||
From net investment income | (1,613,620 | ) | (446,840 | ) | ||||||
|
|
|
| |||||||
Change in net assets resulting from dividends to shareholders | (1,613,620 | ) | (446,840 | ) | ||||||
|
|
|
| |||||||
Capital Transactions: | ||||||||||
Proceeds from shares issued | 48,460,939 | 129,063,847 | ||||||||
Proceeds from dividends reinvested | 1,613,620 | 446,840 | ||||||||
Value of shares redeemed | (21,384,395 | ) | (13,005,502 | ) | ||||||
|
|
|
| |||||||
Change in net assets resulting from capital transactions | 28,690,164 | 116,505,185 | ||||||||
|
|
|
| |||||||
Change in net assets | 42,367,776 | 117,680,411 | ||||||||
Net Assets: | ||||||||||
Beginning of period | 169,796,082 | 52,115,671 | ||||||||
|
|
|
| |||||||
End of period | $ | 212,163,858 | $ | 169,796,082 | ||||||
|
|
|
| |||||||
Accumulated net investment income/(loss) | $ | 2,576,767 | $ | 1,653,291 | ||||||
|
|
|
| |||||||
Share Transactions: | ||||||||||
Shares issued | 4,277,413 | 11,864,273 | ||||||||
Dividends reinvested | 142,798 | 40,957 | ||||||||
Shares redeemed | (1,891,764 | ) | (1,214,131 | ) | ||||||
|
|
|
| |||||||
Change in shares | 2,528,447 | 10,691,099 | ||||||||
|
|
|
|
See accompanying notes to the financial statements.
10
AZL Gateway Fund
(Selected data for a share of beneficial interest outstanding throughout the periods indicated)
Year Ended December 31, 2013 | Year Ended December 31, 2012 | Year Ended December 31, 2011 | April 30, 2010 to December 31, 2010(a) | |||||||||||||||||
Net Asset Value, Beginning of Period | $ | 10.83 | $ | 10.44 | $ | 10.13 | $ | 10.00 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||||||
Investment Activities: | ||||||||||||||||||||
Net Investment Income/(Loss) | 0.13 | 0.06 | 0.09 | 0.07 | ||||||||||||||||
Net Realized and Unrealized Gains/(Losses) on Investments | 0.78 | 0.37 | 0.22 | 0.13 | ||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||
Total from Investment Activities | 0.91 | 0.43 | 0.31 | 0.20 | ||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||
Dividends to Shareholders From: | ||||||||||||||||||||
Net Investment Income | (0.09 | ) | (0.04 | ) | — | (0.07 | ) | |||||||||||||
|
|
|
|
|
|
|
| |||||||||||||
Total Dividends | (0.09 | ) | (0.04 | ) | — | (0.07 | ) | |||||||||||||
|
|
|
|
|
|
|
| |||||||||||||
Net Asset Value, End of Period | $ | 11.65 | $ | 10.83 | $ | 10.44 | $ | 10.13 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||||||
Total Return(b) | 8.44 | % | 4.15 | % | 3.06 | % | 1.98 | %(c) | ||||||||||||
Ratios to Average Net Assets/Supplemental Data: | ||||||||||||||||||||
Net Assets, End of Period (000’s) | $ | 212,164 | $ | 169,796 | $ | 52,116 | $ | 16,217 | ||||||||||||
Net Investment Income/(Loss)(d) | 1.35 | % | 1.74 | % | 1.37 | % | 1.38 | % | ||||||||||||
Expenses Before Reductions(d)(e) | 1.11 | % | 1.14 | % | 1.25 | % | 1.59 | % | ||||||||||||
Expenses Net of Reductions(d) | 1.10 | % | 1.11 | % | 1.24 | % | 1.25 | % | ||||||||||||
Expenses Net of Reductions, Excluding Expenses Paid Indirectly(d)(f) | 1.11 | % | 1.14 | % | 1.25 | % | 1.25 | % | ||||||||||||
Portfolio Turnover Rate | 16 | % | 5 | % | 12 | % | 28 | %(c) |
(a) | Period from commencement of operations. |
(b) | The returns include reinvested dividends and fund level expenses, but exclude insurance contract charges. If these charges were included, the returns would have been lower. |
(c) | Not annualized. |
(d) | Annualized for periods less than one year. |
(e) | Excludes fee reductions. If such fee reductions had not occurred, the ratios would have been as indicated. |
(f) | Expenses net of reductions excludes expenses paid indirectly, pursuant to a “commission recapture” program, under which brokers remit a portion of the brokerage commission which is used to pay certain Fund expenses. See note 2 in the Notes to the Financial Statements. |
See accompanying notes to the financial statements.
11
AZL Gateway Fund
Notes to the Financial Statements
December 31, 2013
1. Organization
The Allianz Variable Insurance Products Trust (the “Trust”) was organized as a Delaware statutory trust on July 13, 1999. The Trust is a diversified open-end management investment company registered under the Investment Company Act of 1940. The Trust consists of 29 separate investment portfolios (collectively, the “Funds”), of which one is included in this report, the AZL Gateway Fund (the “Fund”), and 28 are presented in separate reports.
The Trust is authorized to issue an unlimited number of shares of the Fund without par value. Shares of the Fund are available through the variable annuity contracts and variable life insurance policies offered through the separate accounts of participating insurance companies.
Under the Trust’s organizational documents, its officers and trustees are indemnified against certain liabilities arising out of the performance of their duties to the Fund. In addition, in the normal course of business, the Fund may enter into contracts with its vendors and others that provide for general indemnifications. The Fund’s maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Fund. However, based on experience, the Fund expects the risk of loss to be remote.
2. Significant Accounting Policies
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. The policies conform with U.S. generally accepted accounting principles (“U.S. GAAP”). The preparation of financial statements requires management to make certain 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 increases and decreases in net assets from operations during the reporting period. Actual results could differ from those estimates.
Security Valuation
The Fund records its investments at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between willing market participants at the measurement date. The valuation techniques used to determine fair value are further described in Note 4 below.
Investment Transactions and Investment Income
Investment transactions are recorded not later than on the business day following trade date. However, for financial reporting purposes, investment transactions are accounted for on trade date. Net realized gains and losses on investments sold and on foreign currency transactions are recorded on the basis of identified cost. Interest income is recorded on the accrual basis and includes, where applicable, the amortization of premiums or accretion of discounts. Dividend income is recorded on the ex-dividend date except in the case of foreign securities, in which case dividends are recorded as soon as such information becomes available.
Real Estate Investment Trusts
The Fund may own shares of real estate investment trusts (“REITs”) which report information on the source of their distributions annually. Certain distributions received from REITs during the year, which are known to be a return of capital, are recorded as a reduction to the cost of the individual REIT.
Foreign Currency Translation
The accounting records of the Fund are maintained in U.S. dollars. Foreign currency amounts are translated into U.S. dollars at the current rate of exchange to determine the fair value of investments, assets and liabilities. Purchases and sales of securities, and income and expenses are translated at the prevailing rate of exchange on the respective dates of such transactions. The Fund does not isolate that portion of the results of operations resulting from changes in foreign exchange rates on investments from fluctuations arising from changes in market prices of securities held. Such fluctuations are included in the net realized and unrealized gain or loss on investments and foreign currencies. Income received by the Fund from sources within foreign countries may be subject to withholding and other income or similar taxes imposed by such countries. The Funds accrue such taxes, as applicable, based on their current interpretation of tax rules in the foreign markets in which they invest.
Dividends to Shareholders
Dividends to shareholders are recorded on the ex-dividend date. The Fund distributes its dividends from net investment income and net realized capital gains, if any, on an annual basis. The amount of dividends from net investment income and from net realized gains is determined in accordance with federal income tax regulations, which may differ from U.S. GAAP. These “book/tax” differences are either temporary or permanent in nature. To the extent these differences are permanent in nature (e.g., return of capital, net operating loss, reclassification of certain market discounts, gain/loss, paydowns, and distributions), such amounts are reclassified within the composition of net assets based on their federal tax-basis treatment; temporary differences (e.g., wash sales and post October losses) do not require reclassification. Dividends to shareholders that exceed net investment income and net realized gains for tax purposes are reported as distributions of capital.
Expense Allocation
Expenses directly attributable to the Fund are charged directly to the Fund, while expenses attributable to more than one Fund are allocated among the respective Funds based upon relative net assets or some other reasonable method. Expenses which are attributable to more than one Trust are allocated across the Allianz Variable Insurance Products and Allianz Variable Insurance Products Fund of Funds Trusts based upon relative net assets or another reasonable basis. Allianz Investment Management LLC (the “Manager”), serves as the investment manager for the Trust and the Allianz Variable Insurance Products Fund of Funds Trust.
Commission Recapture
Certain Funds of the Trust participate in a commission recapture program. The Fund will utilize the recaptured commissions to pay for, in whole or part, certain expenses of the Fund, excluding investment advisory fees. Any amounts received by the Fund, if applicable, are disclosed as “Expenses paid indirectly” on the Statement of Operations.
12
AZL Gateway Fund
Notes to the Financial Statements
December 31, 2013
Effective January 6, 2014, the Manager, on behalf of the Trust, requested the Fund cease participation in the program until further notice.
Derivative Instruments
All open derivative positions at period end are reflected on the Fund’s Schedule of Portfolio Investments. The following is a description of the derivative instruments utilized by the Fund, including the primary underlying risk exposures related to each instrument type.
Options Contracts
The Fund may purchase or write put and call options on a security or an index of securities. During the year ended December 31, 2013, the Fund used written call options to hedge against security prices (equity risk).
A stock index fluctuates with changes in the fair values of the stocks included in the index, and therefore options on stock indexes and options on stocks involve elements of equity price risk.
Purchased Options Contracts – The Fund pays a premium which is included in “Investments, at value” on the Statement of Assets and Liabilities and marked to market to reflect the current value of the option. Premiums paid for purchasing put options that expire are treated as realized losses. When a put option is exercised or closed, premiums paid for purchasing put options are offset against proceeds to determine the realized gain/loss on the transaction. The Fund bears the risk of loss of the premium and change in value should the counterparty not perform under the contract.
Written Options Contracts – The Fund receives a premium which is recorded as a liability and is subsequently adjusted to the current value of the options written. Premiums received from writing options that expire are treated as realized gains. Premiums received from writing options that are either exercised or closed are offset against the proceeds received or the amount paid on the transaction to determine realized gains or losses. The risk associated with writing an option is that the Fund bears the market risk of an unfavorable change in the price of an underlying asset and is required to buy or sell an underlying asset under the contractual terms of the option at a price different from the current value.
Realized gains and losses are reported as “Net realized gains/(losses) on options contracts” on the Statement of Operations.
The Fund had the following transactions in purchased call and put options during the year ended December 31, 2013:
Number of Contracts | Cost | |||||||||
Options outstanding at December 31, 2012 | 1,165 | $ | 1,461,813 | |||||||
Options purchased | 7,627 | 7,448,205 | ||||||||
Options exercised | — | — | ||||||||
Options expired | (1,264 | ) | (1,418,463 | ) | ||||||
Options closed | (6,406 | ) | (6,550,300 | ) | ||||||
|
|
|
| |||||||
Options outstanding at December 31, 2013 | 1,122 | $ | 941,255 | |||||||
|
|
|
|
The Fund had the following transactions in written call and put options during the year ended December 31, 2013:
Number of Contracts | Premiums Received | |||||||||
Options outstanding at December 31, 2012 | (1,165 | ) | $ | (4,068,892 | ) | |||||
Options written | (11,047 | ) | (33,663,844 | ) | ||||||
Options exercised | — | — | ||||||||
Options expired | — | — | ||||||||
Options closed | 11,090 | 34,653,791 | ||||||||
|
|
|
| |||||||
Options outstanding at December 31, 2013 | (1,122 | ) | $ | (3,078,945 | ) | |||||
|
|
|
|
Summary of Derivative Instruments
The following is a summary of the fair values of derivative instruments on the Fund’s Statement of Assets and Liabilities, categorized by risk exposure, as of December 31, 2013:
Asset Derivatives | Liability Derivatives | |||||||||||
Primary Risk Exposure | Statement of Assets and Liabilities Location | Total Fair Value | Statement of Assets and Liabilities Location | Total Fair Value | ||||||||
Equity Contracts | Investment securities, at value (purchased options) | $ | 318,450 | Written options | $ | 6,147,335 |
13
AZL Gateway Fund
Notes to the Financial Statements
December 31, 2013
The following is a summary of the effect of derivative instruments on the Statement of Operations, categorized by risk exposure, for the year ended December 31, 2013:
Primary Risk Exposure | Location of Gains/(Losses) on Derivatives Recognized in Income | Realized Gains/(Losses) on Derivatives Recognized in Income | Change in Unrealized Appreciation/ Depreciation on Derivatives Recognized in Income | |||||||
Equity Contracts | Net realized gains/(losses) on options contracts / change in unrealized appreciation/depreciation on investments | $ | (32,116,883 | ) | $ | 2,374,042 |
3. Related Party Transactions
The Manager provides investment advisory and management services for the Fund. The Manager has retained an independent money management organization (the “Subadviser”), to make investment decisions on behalf of the Fund. Pursuant to a subadvisory agreement with Gateway Investment Advisers, LLC (“Gateway”), Gateway provides investment advisory services as the Subadviser for the Fund subject to the general supervision of the Trustees and the Manager. The Manager is entitled to a fee, computed daily and paid monthly, based on the average daily net assets of the Fund. Expenses incurred by the Fund for investment advisory and management services are reflected on the Statement of Operations as “Manager fees.” For its services, the Subadviser is entitled to a fee payable by the Manager. The Manager has contractually agreed to waive fees and reimburse the Fund to limit the annual expenses, excluding interest expense (e.g., cash overdraft fees), taxes, brokerage commissions, other expenditures that are capitalized in accordance with U.S. GAAP and other extraordinary expenses not incurred in the ordinary course of the Fund’s business, based on the daily net assets of the Fund, through April 30, 2015.
For the year ended December 31, 2013, the annual rate due to the Manager and the annual expense limit were as follows:
Annual Rate | Annual Expense Limit | |||||||||
AZL Gateway Fund | 0.80 | % | 1.25 | % |
Any amounts contractually waived or reimbursed by the Manager in a particular fiscal year will be subject to repayment by the Fund to the Manager to the extent that from time to time through the next three fiscal years the repayment will not cause the Fund’s expenses to exceed the lesser of the stated limit at the time of the waiver or the current stated limit. Any amounts recouped by the Manager during the year are reflected on the Statement of Operations as “Recoupment of prior expenses reimbursed by the Manager.” At December 31, 2013, there were no remaining contractual reimbursements that are subject to repayment by the Fund in subsequent years.
In addition, the Manager may voluntarily waive or reimburse additional fees in order to maintain more competitive expense ratios. Any voluntary waivers or reimbursements are not subject to repayment in subsequent years. Information on the total amount waived/reimbursed by the Manager or repaid to the Manager by the Fund during the year can be found on the Statement of Operations. During the year ended December 31, 2013, there were no voluntary waivers.
Pursuant to separate agreements between the Funds and the Manager, the Manager provides a Chief Compliance Officer (“CCO”) and certain compliance oversight and regulatory filing services to the Trust. Under these agreements the Manager is entitled to an amount equal to a portion of the compensation and certain other expenses related to the individuals performing the CCO and compliance oversight services, as well as $75 per hour for time incurred in connection with the preparation and filing of certain documents with the Securities and Exchange Commission. The fees are paid to the Manager on a quarterly basis. The total expenses incurred by the Fund for these services are reflected on the Statement of Operations as “Administrative and compliance services fees.”
Citi Fund Services Ohio, Inc. (“Citi” or the “Administrator”), a wholly owned subsidiary of Citigroup, Inc., with which an officer of the Trust is affiliated, serves as the Trust’s administrator, transfer agent, and fund accountant, and assists the Trust in all aspects of its administration and operation. The Administrator is entitled to a Trust-wide asset-based fee, which is based on the following schedule: 0.05% of daily average net assets on the first $4 billion, 0.04% of daily average net assets on the next $2 billion, 0.02% of daily average net assets on the next $2 billion and 0.01% of daily average net assets over $8 billion. The overall Trust-wide fees are accrued daily and paid monthly and are subject to a minimum annual fee. In addition, the Administrator is entitled to annual account fees related to the transfer agency system, an annual fee for each additional class of shares of any Fund, certain annual fees in supporting fair value services, and a Trust-wide annual fee for providing infrastructure and support in implementing the written policies and procedures comprising the Fund’s compliance program. Fees payable to the Administrator are subject to certain reductions associated with services provided to new funds. The Administrator is also reimbursed for certain expenses incurred. The total expenses incurred by the Fund for these services are reflected on the Statement of Operations as “Administration fees.”
Allianz Life Financial Services, LLC (“ALFS”), an affiliate of the Manager, serves as distributor of the Fund and receives 12b-1 fees directly from the Fund, plus a Trust-wide annual fee of $42,500, paid by the Manager from its profits and not by the Trust, for recordkeeping and reporting services.
The Trust has adopted a distribution and service plan in conformance with Rule 12b-1 of the 1940 Act. Pursuant to this plan, the Fund is authorized to pay certain fees for the sale and distribution of its shares and services provided to its shareholders at an annual rate not to exceed 0.25% of the Fund’s average daily net assets. These fees are reflected on the Statement of Operations as “Distribution fees.”
In addition, certain legal fees and expenses are paid to a law firm, Dorsey & Whitney LLP, of which the Secretary of the Fund is a partner. During the year ended December 31, 2013, $2,398 was paid from the Fund relating to these fees and expenses.
Certain Officers and Trustees of the Trust are affiliated with the Manager or the Administrator. Such Officers (except for the Trust’s CCO as noted above) and Trustees receive no compensation from the Trust for serving in their respective roles. For their service to the Trust and to the Allianz Variable Insurance Products Fund of Funds Trust, each non-interested Trustee receives a $139,000 annual Board retainer. In addition, the Trustees are reimbursed for certain expenses associated with attending Board meetings. Compensation to the Trustees is allocated between the Trust and the Allianz Variable Insurance Products Fund of Funds Trust in proportion to the assets under management of each trust. During the year ended December 31, 2013, actual Trustee compensation was $973,000 in total for both trusts.
At a meeting of the Board of Trustees on December 4, 2013, the Trustees approved a fee increase to the Officers and Trustees who are paid a fee for their services to the Trust and to the Allianz Variable Insurance Products Fund of Funds Trust. Effective January 1, 2014, each non-interested Trustee will receive a $163,000 annual retainer.
14
AZL Gateway Fund
Notes to the Financial Statements
December 31, 2013
4. Investment Valuation Summary
The valuation techniques employed by the Fund, as described below, maximize the use of observable inputs and minimize the use of unobservable inputs in determining fair value. The inputs used for valuing the Fund’s investments are summarized in the three broad levels listed below:
— | Level 1 — quoted prices in active markets for identical assets |
— | Level 2 — other significant observable inputs (including quoted prices for similar securities, interest rates, prepayments speeds, credit risk, etc.) |
— | Level 3 — significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of investments) |
Changes in valuation techniques may result in transfers in or out of an assigned level within the disclosure hierarchy. The Fund determines transfers between fair value hierarchy levels at the reporting period end. The inputs or methodology used for valuing investments is not necessarily an indication of the risk associated with investing in those investments.
Security prices are generally provided by an independent third party pricing service approved by the Trust’s Board of Trustees (“Trustees”) as of the close of the New York Stock Exchange (“NYSE”) (generally 4:00 pm Eastern Time). Equity securities are valued at the last quoted sale price or, if there is no sale, the last quoted bid price is used for long securities and the last quoted ask price is used for securities sold short. Securities listed on NASDAQ Stock Market, Inc. (“NASDAQ”) are valued at the official closing price as reported by NASDAQ. In each of these situations, valuations are typically categorized as a Level 1 in the fair value hierarchy. Investments in open-end investment companies are valued at their respective net asset value as reported by such companies and are typically categorized as Level 1 in the fair value hierarchy.
Debt and other fixed income securities are generally valued at an evaluated bid price provided by an independent pricing source approved by the Trustees. To value debt securities, pricing services may use various pricing techniques which take into account appropriate factors such as market activity, yield, quality, coupon rate, maturity, type of issue, trading characteristics, call features, credit ratings and other data, as well as broker quotes. Short term securities of sufficient credit quality with sixty days or less remaining until maturity may be valued at amortized cost, which approximates fair value. In each of these situations, valuations are typically categorized as Level 2 in the fair value hierarchy.
Options are generally valued at the average of the closing bid and ask quotations on the principal exchange on which the option is traded, which are then typically categorized as Level 1 in the fair value hierarchy. Non exchange-traded derivatives, such as swaps and certain options, are generally valued by approved independent pricing services utilizing techniques which take into account factors such as yields, quality, maturity, type of issue, trading characteristics, call features, credit ratings and other data, as well as broker quotes and are typically categorized as Level 2 in the fair value hierarchy.
The Fund generally values index options at the average of the closing bid and ask quotations on the principal exchange on which the option is traded and are typically categorized as Level 1 in the fair value hierarchy. For options where market quotations are not readily available, fair value procedures as described below may be applied. Other assets and securities for which market quotations are not readily available, or are deemed unreliable are valued at fair value as determined in good faith by the Trustees or persons acting on the behalf of the Trustees. Fair value pricing may be used for significant events such as securities whose trading has been suspended, whose price has become stale or for which there is no currently available price at the close of the NYSE. Depending on the source and relative significance of valuation inputs, these instruments may be classified as Level 2 or Level 3 in the fair value hierarchy. The Fund utilizes a pricing service to assist in determining the fair value of securities when certain significant events occur that may affect the value of foreign securities.
In accordance with procedures adopted by the Trustees, fair value pricing may be used if events materially affecting the value of foreign securities occur between the time when the exchange on which they are traded closes and the time when the Fund’s net asset value is calculated. Management identifies possible fluctuation in international securities by monitoring the increase or decrease in the value of a designated benchmark index. In the event of an increase or decrease greater than predetermined levels, the Fund may use a systematic valuation model provided by an independent third party to fair value its international equity securities which are then typically categorized as Level 2 in the fair value hierarchy. For the year ended December 31, 2013, there were no Level 3 investments for which significant unobservable inputs were used to determine fair value.
The following is a summary of the valuation inputs used as of December 31, 2013 in valuing the Fund’s investments based upon the three levels defined above:
Investment Securities: | Level 1 | Level 2 | Total | ||||||||||||
Common Stocks+ | $ | 209,490,722 | $ | — | $ | 209,490,722 | |||||||||
Purchased Put Options | 318,450 | — | 318,450 | ||||||||||||
Unaffiliated Investment Company | 8,602,612 | — | 8,602,612 | ||||||||||||
|
|
|
|
|
| ||||||||||
Total Investment Securities | 218,411,784 | — | 218,411,784 | ||||||||||||
|
|
|
|
|
| ||||||||||
Other Financial Instruments*: | |||||||||||||||
Written Call Options | (3,068,388 | ) | — | (3,068,388 | ) | ||||||||||
|
|
|
|
|
| ||||||||||
Total Investments | $ | 215,343,396 | $ | — | $ | 215,343,396 | |||||||||
|
|
|
|
|
|
+ | For detailed industry descriptions, see the accompanying Schedule of Portfolio Investments. |
* | Other Financial Instruments would include any derivative instruments, such as written options. These investments are generally recorded in the financial statements at the unrealized gain or loss on the investment. |
5. Security Purchases and Sales
For the year ended December 31, 2013, cost of purchases and proceeds from sales of securities (excluding securities maturing less than one year from acquisition) were as follows:
Purchases | Sales | |||||||||
AZL Gateway Fund | $ | 29,726,284 | $ | 34,252,370 |
15
AZL Gateway Fund
Notes to the Financial Statements
December 31, 2013
6. Investment Risks
Derivatives Risk: The Fund may invest in derivatives as a principal strategy. A derivative is a financial contract whose value depends on, or is derived from, the value of an underlying asset, reference rate, or risk. Use of derivative instruments involves risks different from, or possibly greater than, the risks associated with investing directly in securities and other traditional investments. Derivatives are subject to a number of other risks, such as liquidity risk, interest rate risk, market risk, credit risk, and selection risk. Derivatives also involve the risk of mispricing or improper valuation and the risk that changes in the value may not correlate perfectly with the underlying asset, rate, or index. Using derivatives may result in losses, possibly in excess of the principal amount invested. Also, suitable derivative transactions may not be available in all circumstances. The counterparty to a derivatives contract could default. As required by applicable law, a Fund that invests in derivatives segregates cash or liquid securities, or both, to the extent that its obligations under the instrument are not covered through ownership of the underlying security, financial instrument, or currency.
Foreign Securities and Currencies Risk: Investments in securities of foreign issuers carry certain risks not ordinarily associated with investments in securities of domestic issuers. Such risks include future political and economic developments, and the possible imposition of exchange controls or other foreign governmental laws and restrictions. In addition, with respect to certain countries, there is the possibility of expropriation of assets, confiscatory taxation, political or social instability or diplomatic developments which could adversely affect investments in those securities.
7. Federal Tax Information
It is the Fund’s policy to continue to comply with the requirements of the Internal Revenue Code under Subchapter M, applicable to regulated investment companies, and to distribute all of its taxable income, including any net realized gains on investments, to its shareholders. Therefore, no provision is made for federal income taxes.
Management of the Fund has reviewed tax positions taken in tax years that remain subject to examination by all major tax jurisdictions, including federal (i.e., the last four tax year ends and the interim tax period since then, as applicable). Management believes that there is no tax liability resulting from unrecognized tax benefits related to uncertain tax positions taken.
Cost for federal income tax purposes at December 31, 2013 is $170,383,508. The gross unrealized appreciation/ (depreciation) on a tax basis is as follows:
Unrealized appreciation | $ | 50,704,516 | |||
Unrealized depreciation | (2,676,240 | ) | |||
|
| ||||
Net unrealized appreciation/(depreciation) | $ | 48,028,276 | |||
|
|
As of the end of its tax year ended December 31, 2013, the Fund has capital loss carry forwards (“CLCFs”) as summarized in the tables below. CLCFs subject to expiration are applied as short-term capital loss regardless of whether the originating capital loss was short-term or long-term. CLCFs that are not subject to expiration must be utilized before those that are subject to expiration. The Board does not intend to authorize a distribution of any realized gain for the Fund until any applicable CLCF has been offset or expires.
CLCFs subject to expiration:
Expires 12/31/2018 | |||||
AZL Gateway Fund | $ | 10,170 |
CLCFs not subject to expiration:
Short Term Amount | Long Term Amount | Total Amount | |||||||||||||
AZL Gateway Fund | $ | 15,485,569 | $ | 19,653,046 | $ | 35,138,615 |
The tax character of dividends paid to shareholders during the year ended December 31, 2013 were as follows:
Ordinary Income | Net Long-Term Capital Gains | Total Distributions(a) | |||||||||||||
AZL Gateway Fund | $ | 1,613,620 | $ | — | $ | 1,613,620 |
(a) | Total distributions paid may differ from the Statements of Changes in Net Assets because dividends are recognized when actually paid for tax purposes. |
The tax character of dividends paid to shareholders during the year ended December 31, 2012 was as follows:
Ordinary Income | Net Long-Term Capital Gains | Total Distributions(a) | |||||||||||||
AZL Gateway Fund | $ | 446,840 | $ | — | $ | 446,840 |
(a) | Total distributions paid may differ from the Statements of Changes in Net Assets because dividends are recognized when actually paid for tax purposes. |
16
AZL Gateway Fund
Notes to the Financial Statements
December 31, 2013
As of December 31, 2013, the components of accumulated earnings on a tax basis were as follows:
Undistributed Ordinary Income | Undistributed Long-Term Capital Gains | Accumulated Capital and Other Losses | Unrealized Appreciation/ (Depreciation)(a) | Total Accumulated Earnings/ (Deficit) | |||||||||||||||||||||
AZL Gateway Fund | $ | 2,564,227 | $ | — | $ | (35,148,785 | ) | $ | 48,651,081 | $ | 16,066,523 |
(a) | The difference between book-basis and tax-basis unrealized appreciation/(depreciation) is attributable primarily to tax deferral of losses on wash sales. |
8. Subsequent Events
Management has evaluated events and transactions subsequent to period end through the date the financial statements were issued, for purposes of recognition or disclosure in these financial statements and there are no subsequent events to report.
17
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Shareholders and Board of Trustees of
Allianz Variable Insurance Products Trust:
We have audited the accompanying statement of assets and liabilities of AZL Gateway Fund (the “Fund”) of the Allianz Variable Insurance Products Trust, including the schedule of portfolio investments, as of December 31, 2013, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the years in the two-year period then ended, and the financial highlights for each of the periods in the four-year period then ended. These financial statements and financial highlights are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of December 31, 2013, by correspondence with the custodian and brokers. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of the Fund as of December 31, 2013, the results of its operations for the year then ended, the changes in its net assets for each of the years in the two-year period then ended, and the financial highlights for each of the periods in the four-year period then ended, in conformity with U.S. generally accepted accounting principles.
/s/ KPMG LLP
Columbus, Ohio
February 25, 2014
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Other Federal Income Tax Information (Unaudited)
For the year ended December 31, 2013, 100.00% of the total ordinary income dividends paid by the Fund qualify for the corporate dividends received deduction available to corporate shareholders.
19
A description of the policies and procedures that the Fund uses to determine how to vote proxies relating to portfolio securities is available, without charge, upon request, by visiting the Securities and Exchange Commission’s (“Commission”) website at www.sec.gov, or by calling 800-624-0197.
Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30th is available (i) without charge, upon request, by calling 800-624-0197; (ii) on the Allianz Variable Insurance Products Trust’s website at https://www.allianzlife.com; and (iii) on the Commission’s website at http://www.sec.gov.
The Fund files complete Schedules of Portfolio Holdings with the Commission for the first and third quarters of each fiscal year on Form N-Q. Schedules of Portfolio Holdings for the Fund in this report are available without charge on the Commission’s website at http://www.sec.gov, or may be reviewed and copied at the Commission’s Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 800-SEC-0330.
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Approval of Investment Advisory and Subadvisory Agreements (Unaudited)
The Allianz Variable Insurance Products Trust (the “Trust”) is a manager-of-managers fund. That means that the Trust’s Manager (“Allianz Investment Management LLC”) is responsible for monitoring the various Subadvisers that have day-to-day responsibility for the decisions made for each of the Trust’s investment portfolios. The Trust’s Manager is responsible for determining, in the first instance, which investment advisers to consider recommending for selection as a Subadviser.
In reviewing the services provided by the Manager and the terms of the investment management agreement, the Board receives and reviews information related to the Manager’s experience and expertise in the variable insurance marketplace. Currently, the Funds are offered only through variable annuities and variable life insurance policies, and not in the retail fund market. In addition, the Board receives information regarding the Manager’s expertise with regard to portfolio diversification and asset allocation requirements within variable insurance products issued by Allianz Life Insurance Company of North America and its subsidiary, Allianz Life Insurance Company of New York. Currently, the Funds are offered only through Allianz Life and Allianz of New York variable products.
The Trust’s Manager has adopted policies and procedures to assist it in the process of analyzing each potential Subadviser with expertise in particular asset classes for purposes of making the recommendation that a specific investment adviser be selected. The Trust’s Board reviews and considers the information provided by the Manager in deciding which investment advisers to select. After an investment adviser becomes a Subadviser, a similarly rigorous process is instituted by the Manager to monitor the investment performance and other responsibilities of the Subadviser. The Manager reports to the Trust’s Board on its analysis at the regular meetings of the Board, which are held at least quarterly. Where warranted, the Manager will add or remove a particular Subadviser from a “watch” list that it maintains. Watch list criteria include, for example: (a) Fund performance over various time periods; (b) Fund risk issues, such as changes in key personnel involved with Fund management, changes in investment philosophy or process, or “capacity” concerns; and (c) organizational risk issues, such as regulatory, compliance or legal concerns, or changes in the ownership of the Subadviser. The Manager may place a Fund on the watch list for other reasons, and if so, will explain its rationale to the Trustees. Funds which are on the watch list are subject to special scrutiny of the Manager and the Board of Trustees. Funds may be removed from such watch list, if for example, performance improves or regulatory matters are satisfactorily resolved. However, in some situations where Funds which have been on the watch list, the Manager has recommended the retention of a new Subadviser, and the Board of Trustees has subsequently approved new Subadvisory Agreements with such Subadvisers.
In assessing the Manager’s and Subadvisers’ (collectively, the “Advisory Organizations”), performance of their obligations, the Board considers whether there has occurred a circumstance or event that would constitute a reason for it to not renew an advisory contract. In this regard, the Board is mindful of the potential disruption of a Fund’s operations and various risks, uncertainties and other effects that could occur as a result of a decision to terminate or not renew a contract.
As required by the Investment Company Act of 1940 (“1940 Act”), the Trust’s Board has reviewed and approved the Trust’s Investment Management Agreement with the Manager (the “Advisory Agreement”) and portfolio management agreements (the “Subadvisory Agreements”) with the Subadvisers. The Board’s decision to approve these contracts reflects the exercise of its business judgment on whether to approve new arrangements and continue the existing arrangements. During its review of these contracts, the Board considers many factors, among the most material of which are: the Fund’s investment objectives and long term performance; the Advisory Organizations’ management philosophy, personnel, and processes, including their compliance history and the adequacy of their compliance processes; the preferences and expectations of Fund shareholders (and underlying contract owners) and their relative sophistication; the continuing state of competition in the mutual fund industry; and comparable fees in the mutual fund industry.
The Board also considers the compensation and benefits received by the Advisory Organizations. This includes fees received for services provided to the Fund by affiliated persons of the Advisory Organizations and research services received by the Advisory Organizations from brokers that execute Fund trades, as well as advisory fees. The Board considered the fact that: (1) the Manager and the Trust are parties to an Administrative Service Agreement, a Compliance Services Agreement, and a Chief Compliance Officer Agreement, under which the Manager is compensated by the Trust for performing certain administrative and compliance services including providing an employee of the Manager or one of its affiliates to act as the Trust’s Chief Compliance Officer; and (2) Allianz Life Financial Services, LLC, an affiliated person of the Manager, is a registered securities broker-dealer and receives (along with its affiliated persons) payments made by the Trust pursuant to Rule 12b-1.
The Board is aware that various courts have interpreted provisions of the 1940 Act and have indicated in their decisions that the following factors may be relevant to an adviser’s compensation: the nature and quality of the services provided by the adviser, including the performance of the fund; the adviser’s cost of providing the services; the extent to which the adviser may realize “economies of scale” as the fund grows larger; any indirect benefits that may accrue to the adviser and its affiliates as a result of the adviser’s relationship with the fund; performance and expenses of comparable funds; and the extent to which the independent Board members are fully informed about all facts bearing on the adviser’s service and fee. The Trust’s Board is aware of these factors and takes them into account in its review of the Trust’s advisory contracts.
The Board considered and weighed these circumstances in light of its experience in governing the Trust and working with the Advisory Organizations on matters relating to the Funds, and is assisted in its deliberations by the advice of legal counsel to the Independent Trustees. In this regard, the Board requests and receives a significant amount of information about the Funds and the Advisory Organizations. Some of this information is provided at each regular meeting of the Board; additional information is provided in connection with the particular meeting or meetings at which the Board’s formal review of an advisory contract occurs. In between regularly scheduled meetings, the Board may receive information on particular matters as the need arises. Thus, the Board’s evaluation of an advisory contract is informed by reports covering such matters as: an Advisory Organization’s investment philosophy, personnel, and processes; the Fund’s short- and long-term performance (in absolute terms as well as in relationship to its benchmark(s), certain competitor or “peer group” funds and similar funds managed by the particular Subadviser), and comments on the reasons for performance; the Fund’s expenses (including the advisory fee itself and the overall expense structure of the Fund, both in absolute terms and relative to similar and/or competing funds, with due regard for contractual or voluntary expense limitations); the use and allocation of brokerage commissions derived from trading the Fund’s portfolio securities; the nature and extent of the advisory and other services provided to the Fund by the Advisory Organizations and their affiliates; compliance and audit reports concerning the Funds and the companies that service them; and relevant developments in the mutual fund industry and how the Funds and/or Advisory Organizations are responding to them.
The Board also receives financial information about Advisory Organizations, including reports on the compensation and benefits the Advisory Organizations derive from their relationships with the Funds. These reports cover not only the fees under the advisory contracts, but also fees, if any, received for providing other services to the Funds. The reports also discuss any indirect or “fall out” benefits an Advisory Organization may derive from its relationship with the Funds.
The Advisory and Subadvisory Agreements (collectively, the “Agreements”) were most recently considered at Board of Trustees meetings held in the fall of 2013. Information relevant to the approval of such Agreements was considered at a telephonic Board of Trustees meeting on October 16, 2013, and at an “in person” Board of Trustees meeting held October 22, 2013. The Agreements were approved at the Board meeting of October 22, 2013. At such meeting the Board also approved an Expense Limitation Agreement between the Manager and the Trust for the period ending April 30, 2015. In connection with such meetings, the Trustees requested and evaluated extensive materials from the Manager, including performance and expense information for other investment companies with similar investment objectives derived from data compiled by an independent third party provider and other sources believed to be reliable by the Manager. Prior to voting, the Trustees reviewed the proposed approval/continuance of the Agreements with management and with experienced counsel who are independent of the Manager and received a memorandum from such counsel discussing the legal standards for their consideration of the proposed approvals/continuances. The independent (“disinterested”) Trustees also discussed the proposed approvals/continuances in a private session with such counsel at which no representatives of the Manager were present. In reaching their determinations relating to the approval and/or continuance of
21
the Agreements, in respect of each Fund, the Trustees considered all factors they believed relevant. The Board based its decision to approve the Agreements on the totality of the circumstances and relevant factors, and with a view to past and future long-term considerations. Not all of the factors and considerations discussed above and below are necessarily relevant to every Fund, and the Board did not assign relative weights to factors discussed herein or deem any one or group of them to be controlling in and of themselves.
An SEC Rule requires that shareholder reports include a discussion of certain factors relating to the selection of investment advisers and the approval of advisory fees. The “factors” enumerated by the SEC are set forth below in italics, as well as the Board’s conclusions regarding such factors:
(1) The nature, extent and quality of services provided by the Manager and Subadvisers. The Trustees noted that the Manager, subject to the control of the Board of Trustees, administers each Fund’s business and other affairs. Under the Advisory Agreement, the Manager holds the sole and exclusive responsibility to provide, or arrange for other to provide, the management of the Funds’ assets and the placement of orders for the purchase and sale of the securities of the Funds. As the Trust is a manager of managers fund, the Manager is authorized, under the Advisory Agreement, to retain one or more Subadvisers for each Fund to handle day-to-day management of the Funds’ investment portfolios; the Manager is responsible for determining, in the first instance, which investment advisers to recommend to the Board of Trustees for selection as a Subadviser. The Trustees were aware that, notwithstanding the retention of the Subadvisers to handle day-to-day portfolio management, the Manager remains responsible for substantial other matters, including continuously monitoring compliance by each Subadviser with the investment policies and restrictions of the respective Funds, with such other limitations or directions of the Board of Trustees, and with all legal requirements under federal or state law or regulation. The Manager also is responsible primarily to provide statistical information and other data to the Trustees regarding the Funds’ portfolio investments and to make available to the Funds’ administrator such information as is necessary for the conduct of its duties.
The Trustees also noted that the Manager provides the Trust and each Fund with such administrative and other services (exclusive of, and in addition to, any such services provided by any others retained by the Trust on behalf of the Funds) and executive and other personnel as are necessary for the operation of the Trust and the Funds. Except for the Trust’s Chief Compliance Officer, the Manager pays all of the compensation of Trustees and officers of the Trust who are employees of the Manager or its affiliates.
The Trustees considered the scope and quality of services provided by the Manager and the Subadvisers and noted that the scope of such services provided had expanded as a result of recent regulatory and other developments. The Trustees noted that, for example, the Manager and Subadvisers are responsible for maintaining and monitoring their own compliance programs, and these compliance programs are continuously refined and enhanced in light of new regulatory requirements. The Trustees considered the capabilities and resources which the Manager has dedicated to performing services on behalf of the Trust and its Funds. The quality of administrative and other services, including the Manager’s role in coordinating the activities of the Trust’s other service providers, also were considered. The Trustees concluded that, overall, they were satisfied with the nature, extent and quality of services provided (and expected to be provided) to the Trust and to each of the Funds under the Agreements.
(2) The investment performance of the Funds, the Manager and the Subadvisers. In connection with every in-person quarterly Board of Trustees meeting, Trustees receive extensive information on the performance results of each of the Funds. This includes, for example, performance information on all of the Funds for the previous quarter, and previous one, three and five-year periods, and since inception. (For Funds which have been in existence for less than five years, Trustees may receive performance information on comparable funds managed by the particular Subadviser for periods prior to the creation of a particular Fund.) Such performance information includes information on absolute total return, performance versus Subadvisers’ comparable fund(s), performance versus the appropriate benchmark(s), and performance versus peer groups. For example, in connection with the Board of Trustees meetings held September 10-11, 2013, the Manager reported that for the three year period ended June 30, 2013, 12 Funds were in the top 40%, eight were in the middle 20% and eight were in the bottom 40%, and for the one year period ended June 30, 2013, 8 Funds were in the top 40%, seven were in the middle 20%, and 14 were in the bottom 40%. The Manager also reported that for the five year period ended June 30, 2013, 10 Funds were in the top 40%, four were in the middle 20%, and six were in the bottom 40%. At the Board of Trustees meeting held October 22, 2013, the Trustees determined that the overall investment performance of the Funds was acceptable.
(3) The costs of services to be provided and profits to be realized by the Manager and the Subadvisers and their affiliates from their relationship with the Funds. The Manager has supplied information to the Board of Trustees pertaining to the level of investment advisory fees to which the Funds are subject. The Manager has agreed to temporarily “cap” Fund expenses at certain levels, and information is provided to Trustees setting forth “contractual” advisory fees and “actual” fees after taking expense caps into account. Based upon the information provided, the “actual” advisory fees payable by the Funds overall are generally comparable to the average level of fees paid by Fund peer groups. For the 30 Funds reviewed by the Board of Trustees in the fall of 2013, 27 Funds paid “actual” advisory fees in a percentage amount within the 65th percentile or lower for each Fund’s applicable category. The Trustees recognized that it is difficult to make comparisons of advisory fees because there are variations in the services that are included in the fees paid by other funds. The Board has concluded that the advisory fees to be paid to the Manager by the Funds are not unreasonable.
The Manager has also supplied information to the Board of Trustees pertaining to total Fund expenses (which includes advisory fees, the 25 basis point 12b-1 fee paid by the Funds, and other Fund expenses). As noted above, the Manager has agreed to “cap” Fund expenses at certain levels. Based upon the information provided, the overall total expense ratio ranking in 2013 for the 30 Funds was as follows: (1) 28 of the Funds had total expense rankings below the 65th percentile (with 20 Funds at or below the 50th percentile); (2) the AZL Russell 1000 Value Fund had a total expense ranking in the 66th percentile; the Manager reported that there is only a limited peer group for such Fund; and (3) the AZL Morgan Stanley Global Real Estate Fund had a total expense ranking in the 72nd percentile; it was reported by the Manager that there is only a limited peer group for such Fund, such Fund’s expense ratio has declined, and such Fund’s expense ratio is comparable to funds of similar size.
The Manager has committed to providing the Funds with a high quality of service and working to reduce Fund expenses over time, particularly as the Funds grow larger. The Trustees concluded therefore that the expense ratios of the Funds were not unreasonable.
The Manager provided information concerning the profitability of the Manager’s investment advisory activities for the period from 2011 through June 30, 2013. The Trustees recognized that it is difficult to make comparisons of profitability from investment company advisory agreements because comparative information is not generally publicly available and is affected by numerous factors, including the structure of the particular adviser, the types of funds it manages, its business mix, numerous assumptions regarding allocation of expenses and the adviser’s capital structure and cost of capital. In considering profitability information, the Trustees considered the possible effect of certain fall-out benefits to the Manager and its affiliates. The Trustees focused on profitability of the Manager’s relationships with the Funds before taxes and distribution expenses. The Trustees recognized that the Manager should, in the abstract, be entitled to earn a reasonable level of profits for the services it provides to each Fund and, based on their review, concluded that they were satisfied that the Manager’s level of profitability from its relationship with the Funds was not excessive.
The Manager, on behalf of the Board of Trustees, endeavored to obtain information on the profitability of each Subadviser in connection with its relationship with the Fund or Funds which it subadvises. The Manager was unable to obtain meaningful profitability information from some of the unaffiliated Subadvisers. The Manager assured the Board of Trustees that the Agreements with the Subadvisers which are not affiliated with it were negotiated on an “arm’s length” basis, so that arguably, such profitability information should be less relevant. The Trustees were also provided with certain information on the profitability for the Subadviser which is affiliated with the Manager. Trustees recognized the difficulty of allocating costs to multiple advisory accounts and products of a large advisory organization. Based upon the information provided, the Trustees determined that there was no evidence that the level of such profitability attributable to subadvising the Funds was excessive.
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(4) and (5) The extent to which economies of scale would be realized as the Funds grow, and whether fee levels reflect these economies of scale. The Trustees noted that most of the advisory fee schedules for the Funds do not contain breakpoints that reduce the fee rate on assets above specified levels, although certain Subadvisory Agreements have such “breakpoints.” The Trustees recognized that breakpoints may be an appropriate way for the Manager to share its economies of scale, if any, with Funds that have substantial assets. However, they also recognized that there may not be a direct relationship between any economies of scale realized by Funds and those realized by the Manager as assets increase. The Trustees do not believe there is a uniform methodology for establishing breakpoints that give effect to Fund-specific service provided by the Manager. The Trustees noted that in the fund industry as a whole, as well as among funds similar to the Funds, there is no uniformity or pattern in the fees and asset levels at which breakpoints (if any) apply. Depending on the age, size, and other characteristics of a particular fund and its manager’s cost structure, different conclusions can be drawn as to whether there are economies of scale to be realized at any particular level of assets, notwithstanding the intuitive conclusion that such economies exist, or will be realized at some level of total assets. Moreover, because different managers have different cost structures and service models, it is difficult to draw meaningful conclusions from the breakpoints that may have been adopted by other funds. The Trustees also noted that the advisory agreements for many funds do not have breakpoints at all, or if breakpoints exist, they may be at asset levels significantly greater than those of the individual Funds. The Trustees also noted that the total assets in all of the Funds as of June 30, 2013 were approximately $12.85 billion, and that no single non-money market Fund had assets in excess of $616 million.
The Trustees noted that the Manager has agreed to temporarily “cap” Fund expenses at certain levels, which has the effect of reducing expenses as would the implementation of advisory fee breakpoints. The Manager has committed to continue to consider the continuation of fee “caps” and/or advisory fee breakpoints as the Funds grow larger. The Board receives quarterly reports on the level of Fund assets. It expects to consider whether or not to approve the Agreements at a meeting to be held prior to December 31, 2014, and will at that time, or prior thereto, consider: (a) the extent to which economies of scale can be realized, and (b) whether the advisory fee should be modified to reflect such economies of scale, if any.
Having taken these factors into account, the Trustees concluded that the absence of breakpoints in certain of the Funds’ advisory fee rate schedules was acceptable under each Fund’s circumstances.
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Information about the Board of Trustees and Officers (Unaudited)
The Trust is managed by the Trustees in accordance with the laws of the state of Delaware governing business trusts. There are currently eight Trustees, two of whom are “interested persons” of the Trust within the meaning of that term under the 1940 Act. The Trustees and Officers of the Trust, their addresses, ages, their positions held with the Trust, their terms of office with the Trust and length of time served, their principal occupation(s) during the past five years, the number of portfolios in the Trust they oversee, and their other directorships held are as follows:
Non-Interested Trustees(1)
Name, Address, and Age | Positions Held with VIP Trust and FOF Trust | Term of Office(2)/Length of Time Served | Principal Occupation(s) During Past 5 Years | Number of Portfolios Overseen for VIP Trust and FOF Trust | Other Directorships Held Outside the AZL Fund Complex | |||||
Peter R. Burnim, Age 66 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/07 | Chairman, Argus Investment Strategies Fund Ltd., February 2013 to present; Managing Director, iQ Venture Advisors, LLC. 2005 to 2012; Chairman, Northstar Group Holdings Ltd. Bermuda, 2011 to present; Expert Witness, Massachusetts Department of Revenue, 2011 to 2012; Executive Vice President, Northstar Companies, 2002 to 2005; Senior Officer, Citibank and Citicorp for over 25 years | 41 | Argus Group Holdings; Northstar Group Holdings, NRIL, Sterling Centrecorp Inc.; Highland Financial Holdings; and Bank of Bermuda NY | |||||
Peggy L. Ettestad, Age 56 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/07 | Managing Director, Red Canoe Management Consulting LLC, 2008 to present; Senior Managing Director, Residential Capital LLC, 2003 to 2008; Chief Operations Officer, Transamerica Reinsurance 2002 to 2003 | 41 | Luther College | |||||
Roger Gelfenbien, Age 70 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 10/99 | Retired; Partner of Accenture 1983 to 1999 | 41 | Virtus Funds (8 Funds) | |||||
Claire R. Leonardi, Age 58 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/04 | Chief Executive Officer, Connecticut Innovations, Inc., 2012 to present; General Partner, Fairview Capital, L.P., 1994 to 2012 | 41 | The Natural History Museum of the Adirondacks | |||||
Dickson W. Lewis, Age 65 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/04 | Retired; Consultant to Lifetouch National School Studios; Vice President/General Manager, Yearbooks & Canada-Lifetouch National School Studios, 2006 to 2013; Vice President/General Manager of Jostens, Inc., 2002 to 2006; Senior Vice President of Fortis Group, 1997 to 2002 | 41 | None | |||||
Peter W. McClean, Age 69 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/04 | Retired; President and CEO of Measurisk, LLC, 2001 to 2003; Chief Risk Management Officer at Bank of Bermuda Ltd., 1996 to 2001 | 41 | PNMAC Opportunity Fund; Northeast Bank; and FHI | |||||
Arthur C. Reeds III, Age 69 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 10/99 | Retired; Senior Investment Officer, Hartford Foundation for Public Giving, 2000 to 2003; Chairman, Chief Executive and President of Conning Corp., 1999 to 2000; Investment Consultant, 1997 to 1999 | 41 | Connecticut Water Service, Inc. |
Interested Trustees(3)
Name, Address, and Age | Positions Held with VIP Trust and FOF Trust | Term of Office(2)/Length of Time Served | Principal Occupation(s) During Past 5 Years | Number of Portfolios Overseen for VIP Trust and FOF Trust | Other Directorships Held Outside the AZL Fund Complex | |||||
Robert DeChellis, Age 46 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 3/08 | President and CEO, Allianz Life Financial Services, LLC, 2007 to present | 41 | None | |||||
Brian Muench, Age 43 5701 Golden Hills Drive | Trustee | Since 6/11 | President, Allianz Investment Management LLC, November 2010 to present; Vice President, Allianz Life, April 2011 to present; Vice President, Advisory Management, Allianz Investment Management LLC from December 2005 to November 2010 | 41 | None |
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Officers
Name, Address, and Age | Positions Held with VIP and VIP FOF Trust | Term of Office(2)/Length of Time Served | Principal Occupation(s) During Past 5 Years | |||
Brian Muench, Age 43 5701 Golden Hills Drive Minneapolis, MN 55416 | President | Since 11/10 | President, Allianz Investment Management LLC from November 2010, to present; Vice President, Allianz Life from April 2011 to present; Vice President, Allianz Investment Management LLC from December 2005 to November 2010. | |||
Michael Radmer, Age 68 Dorsey & Whitney LLP, Suite 1500 50 South Sixth Street Minneapolis, MN 55402-1498 | Secretary | Since 2/02 | Partner, Dorsey and Whitney LLP since 1976. | |||
Ty Edwards, Age 47 Citi Fund Services Ohio, Inc. 3435 Stelzer Road Columbus, OH 43219 | Treasurer, Principal Accounting Officer and Principal Financial Officer | Since 4/10 | Senior Vice President, Financial Administration, Citi Fund Services Ohio, Inc., December 2009 to present; Director, Product Management, Columbia Management, April 2007 to April 2009; Deputy Treasurer, Columbia Funds and Director, Fund Administration, Columbia Management, January 2006 to April 2007. | |||
Christopher R. Pheiffer, Age 45(4) 5701 Golden Hills Drive Minneapolis, MN 55416 | Chief Compliance Officer(5) and Anti-Money Laundering Compliance Officer | Since 2/14 (interim) | Deputy Chief Compliance Officer of the Trusts, 2007-2014. |
(1) | Member of the Audit Committee. |
(2) | Indefinite. |
(3) | Is an “interested person”, as defined by the 1940 Act, due to employment by Allianz. |
(4) | Stephen G. Simon, previously the Chief Compliance Officer of the Trusts, resigned all of his positions with Allianz effective February 21, 2014. Mr. Pheiffer, previously the Deputy Chief Compliance Officer of the Trusts, has been named Chief Compliance Officer of the Trusts on an interim basis while a search for a permanent replacement is conducted. |
(5) | The Manager and the Trust are parties to a Chief Compliance Officer Agreement under which the Manager is compensated by the Trust for providing an employee of the Manager or one of its affiliates to act as the Trust’s Chief Compliance Officer. The Chief Compliance Officer and Anti-Money Laundering Compliance Officer is not considered a corporate officer or executive employee of the Trust. |
25
The Allianz VIP Funds are distributed by Allianz Life Financial Services, LLC. These Funds are not FDIC Insured. | ANNRPT1213 2/14 |
AZL® International Index Fund
Annual Report
December 31, 2013
Table of Contents
Management Discussion and Analysis
Page 1
Expense Examples and Portfolio Composition
Page 3
Schedule of Portfolio Investments
Page 4
Statement of Assets and Liabilities
Page 15
Statement of Operations
Page 15
Statements of Changes in Net Assets
Page 16
Financial Highlights
Page 17
Notes to the Financial Statements
Page 18
Report of Independent Registered Public Accounting Firm
Page 24
Other Information
Page 25
Approval of Investment Advisory and Subadvisory Agreements
Page 26
Information about the Board of Trustees and Officers
Page 29
This report is submitted for the general information of the shareholder of the Fund. The report is not authorized for distribution to prospective investors in the Fund unless preceded or accompanied by an effective prospectus, which contains details concerning the sales charges and other pertinent information.
AZL® International Index Fund Review (unaudited)
Allianz Investment Management LLC serves as the Manager for the AZL® International Index Fund and BlackRock Investment Management, LLC serves as Subadviser to the Fund.
What factors affected the Fund’s performance during the year ended December 31, 2013?
For the year ended December 31, 2013, the AZL® International Index Fund returned 21.36%1. That compared to a 23.29% total return for its benchmark, the MSCI EAFE Index2.
The Fund attempts to replicate the performance of the MSCI EAFE index, which tracks the performance of 22 international equity markets.
International equities began the period with a powerful rally after the United States averted the worst of its potential fiscal crisis with a last-minute tax deal. The rally softened in February, however, as global economic momentum slowed. Uncertainty in the Italian presidential elections and a banking crisis in Cyprus later in the first half of the period reminded investors of the ongoing risks of European financial and political instability. Midway through the period, speculation surrounding future monetary policy dominated equity markets, particularly news in May that the U.S. Federal Reserve might begin gradually reducing (or tapering) its monetary stimulus efforts before the end of the year.
The third quarter was marked by strong rallies interrupted by periods of volatility brought on by escalations in the Egyptian revolution and the civil war in Syria, and, later on, concerns that the United States would enter a technical default as it neared its debt limit. Equities finished the year on a strong note, however, as investors responded positively to the Fed’s announcement in mid-December that it would begin tapering in 2014 but maintain short-term interest rates at their low levels. Investors saw the decision as a signal of improving U.S. economic growth.
Equity markets in all of the developed countries represented in the Fund’s benchmark moved higher for the period, in U.S. dollar terms. Finland and Ireland posted the biggest gains in the index, followed by Germany, which has a significant representation in the index composition. Japanese equities also posted strong gains for the 12-month period as a
weakening yen benefited the nation’s exporters, which make up a large portion of the country’s equity market.
The Fund’s underperformance of its benchmark is primarily the result of Fund expenses that are not incurred by the benchmark and fair value pricing of holdings trading on international exchanges. Fair valuation estimations may deviate somewhat from prices tracked by the benchmark, which may in turn lead to variations in performance between the Fund and its benchmark.
Consumer-driven areas of the index were the strongest performers fueled by low interest rates, and rising home prices. In particular, the telecommunication services sector generated the highest returns, followed by strong performance from the consumer discretionary, health care and information technology sectors. The growth-sensitive materials sector generated only modest returns in the tepid economic environment.
Past performance does not guarantee future results.
* | The Fund’s portfolio composition is subject to change. There is no guarantee that any sectors mentioned will continue to perform well or that securities in such sectors will be held by the Fund in the future. The information contained in this commentary is for informational purposes only and should not be construed as a recommendation to purchase or sell securities in the sector mentioned. The Fund’s holdings and weightings are as of December 31, 2013. |
1 | The recent growth rate in the stock market has helped to produce short-term returns that are not typical and may not continue in the future. Because of ongoing market volatility, Fund performance may be subject to substantial short-term changes. |
2 | The Morgan Stanley Capital International, Europe, Australasia and Far East (“MSCI EAFE”) Index is a free float-adjusted market capitalization-weighted index that is designed to measure the equity market performance of developed markets, excluding the U.S. & Canada. Investors cannot invest directly in an index. |
1
AZL® International Index Fund Review (unaudited)
Fund Objective
The Fund’s investment objective is to seek to match the performance of the Morgan Stanley Capital International Europe, Australasia and Far East Index (“MSCI EAFE® Index”) as closely as possible. This objective may be changed by the Trustees of the Fund without shareholder approval. The Fund seeks to achieve its objective by investing at least 80% of its net assets in a statistically selected sampling of equity securities of companies included in the MSCI EAFE Index and in derivative instruments linked to the MSCI EAFE Index, primarily futures contracts.
Investment Concerns
Equity securities (stocks) are more volatile and carry more risk than other forms of investments, including investments in high-grade fixed income securities. The net asset value per share of this Fund will fluctuate as the value of the securities in the portfolio changes.
International investing may involve risk of capital loss from unfavorable fluctuations in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations.
Emerging market investing may be subject to additional economic, political, liquidity, and currency risks not associated with more developed countries.
The performance of the Fund is expected to be lower than that of the Index because of Fund fees and expenses. Securities in which the Fund will invest may involve substantial risk and may be subject to sudden severe price declines.
For a complete description of these and other risks associated with investing in a mutual Fund, please refer to the Fund’s prospectus.
Growth of $10,000 Investment
The chart above represents a comparison of a hypothetical investment in the Fund versus a similar investment in the Fund’s benchmark, and represents the reinvestment of dividends and capital gains in the Fund.
Average Annual Total Returns as of December 31, 2013
Since | ||||||||||||
1 | 3 | Inception | ||||||||||
Year | Year | (5/1/09) | ||||||||||
AZL® International Index Fund | 21.36 | %1 | 7.71 | % | 13.17 | % | ||||||
MSCI EAFE Index (gross of withholding taxes) | 23.29 | % | 8.66 | % | 14.59 | % | ||||||
MSCI EAFE Index (net of withholding taxes) | 22.78 | % | 8.17 | % | 14.08 | % |
Past performance does not guarantee future results. The performance data quoted represents past performance and current returns may be lower or higher. The investment return and principal value will fluctuate so that an investor’s shares, when redeemed may be worth more or less than the original cost. To obtain performance information current to the most recent month end, please visit www.Allianzlife.com.
Expense Ratio | Gross | |||
AZL® International Index Fund | 0.80 | % |
The above expense ratio is based on the current Fund prospectus dated April 29, 2013. The Manager and the Fund have entered into a written contact limiting operating expenses, excluding certain expenses (such as interest expense), to 0.77% through April 30, 2015. Additional information pertaining to the December 31, 2013 expense ratios can be found in the financial highlights.
1 | The recent growth rate in the stock market has helped to produce short-term returns that are not typical and may not continue in the future. Because of ongoing market volatility, Fund performance may be subject to substantial short-term changes. |
The total return of the Fund does not reflect the effect of any insurance charges, the annual maintenance fee or the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. Such charges, fees and tax payments would reduce the performance quoted.
The Fund’s performance is measured against the Morgan Stanley Capital International, Europe, Australasia and Far East (“MSCI EAFE”) Index, which is an unmanaged free float-adjusted market capitalization-weighted index that is designed to measure the equity market performance of developed markets, excluding the U.S. & Canada. The index noted as “gross of withholding taxes” does not reflect the deduction of fees associated with a mutual fund, such as investment management and fund accounting fees. The index noted as “net of withholding taxes” reflects the reinvestment of dividends after the deduction of withholding taxes, using (for international indices) a tax rate applicable to non-resident institutional investors who do not benefit from double taxation treaties. The Fund’s performance reflects the deduction of fees for services provided to the Fund. Investors cannot invest directly in an index.
2 |
AZL International Index Fund
(Unaudited)
As a shareholder of the AZL International Index Fund (the “Fund”), you incur ongoing costs, including management fees, distribution fees, and other Fund expenses. These examples are intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. Please note that the expenses shown in each table do not reflect expenses that apply to the subaccount or the insurance contract. If the expenses that apply to the subaccount of the insurance contract were included, your costs would have been higher.
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the periods presented below.
The Actual Expense table below provides information about actual account values and actual expenses. You may use the information below, 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 table under the heading entitled “Expenses Paid During Period” to estimate the expenses you paid on your account during this period.
Beginning Account Value 7/1/13 | Ending Account Value 12/31/13 | Expenses Paid During Period 7/1/13 - 12/31/13* | Annualized Expense Ratio During Period 7/1/13 - 12/31/13 | |||||||||||||||||
AZL International Index Fund | $ | 1,000.00 | $ | 1,175.60 | $ | 4.22 | 0.77 | % |
The Hypothetical Expense table below provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.
Beginning Account Value 7/1/13 | Ending Account Value 12/31/13 | Expenses Paid During Period 7/1/13 - 12/31/13* | Annualized Expense Ratio During Period 7/1/13 - 12/31/13 | |||||||||||||||||
AZL International Index Fund | $ | 1,000.00 | $ | 1,021.32 | $ | 3.92 | 0.77 | % |
* | Expenses are equal to the average account value over the period, multiplied by the Fund’s annualized expense ratio, multiplied by 184/365 (to reflect the one half year period). |
Portfolio Composition
(Unaudited)
Investments | Percent of net assets | ||||
Financials | 25.1 | % | |||
Industrials | 12.6 | ||||
Consumer Discretionary | 11.7 | ||||
Consumer Staples | 10.6 | ||||
Health Care | 9.8 | ||||
Materials | 8.3 | ||||
Energy | 6.7 | ||||
Telecommunication Services | 5.6 | ||||
Information Technology | 4.7 | ||||
Utilities | 3.5 | ||||
|
| ||||
Total Common Stock, Preferred Stock and Rights | 98.6 | ||||
Securities Held as Collateral for Securities on Loan | 0.7 | ||||
Money Market | 0.1 | ||||
|
| ||||
Total Investment Securities | 99.4 | ||||
Net other assets (liabilities) | 0.6 | ||||
|
| ||||
Net Assets | 100.0 | % | |||
|
|
3
AZL International Index Fund
Schedule of Portfolio Investments
December 31, 2013
Shares | Fair Value | |||||||
| Common Stocks (98.0%): |
| ||||||
| Aerospace & Defense (1.1%): |
| ||||||
194,809 | BAE Systems plc | $ | 1,407,675 | |||||
67,493 | Cobham plc | 306,892 | ||||||
35,259 | European Aeronautic Defence & Space Co. NV | 2,717,477 | ||||||
25,787 | Finmeccanica SpA* | 197,763 | ||||||
46,471 | Meggitt plc | 406,997 | ||||||
112,229 | Rolls-Royce Holdings plc | 2,376,617 | ||||||
9,340,804 | Rolls-Royce Holdings plc*# | — | ||||||
16,401 | Safran SA | 1,140,457 | ||||||
97,000 | Singapore Technologies Engineering, Ltd. | 305,384 | ||||||
5,633 | Thales SA | 363,108 | ||||||
2,093 | Zodiac Aerospace | 371,609 | ||||||
|
| |||||||
9,593,979 | ||||||||
|
| |||||||
| Air Freight & Logistics (0.3%): |
| ||||||
54,742 | Deutsche Post AG | 1,996,043 | ||||||
20,260 | TNT Express NV | 188,431 | ||||||
43,939 | Toll Holdings, Ltd. | 222,872 | ||||||
21,500 | Yamato Holdings Co., Ltd. | 435,340 | ||||||
|
| |||||||
2,842,686 | ||||||||
|
| |||||||
| Airlines (0.0%): |
| ||||||
69,000 | All Nippon Airways Co., Ltd.^ | 137,852 | ||||||
71,000 | Cathay Pacific Airways, Ltd. | 150,347 | ||||||
14,473 | Deutsche Lufthansa AG, Registered Shares* | 307,089 | ||||||
9,954 | easyJet plc | 253,390 | ||||||
58,573 | International Consolidated Airlines Group SA* | 390,135 | ||||||
3,435 | Japan Airlines Co., Ltd. | 169,506 | ||||||
57,609 | Qantas Airways, Ltd.* | 56,567 | ||||||
1,200 | Ryanair Holdings plc, ADR* | 56,316 | ||||||
34,000 | Singapore Airlines, Ltd. | 280,915 | ||||||
|
| |||||||
1,802,117 | ||||||||
|
| |||||||
| Auto Components (1.1%): |
| ||||||
11,700 | Aisin Sieki Co., Ltd. | 476,198 | ||||||
39,000 | Bridgestone Corp. | 1,478,787 | ||||||
11,096 | Compagnie Generale des Establissements Michelin SCA, Class B | 1,184,010 | ||||||
6,671 | Continental AG | 1,463,290 | ||||||
29,300 | DENSO Corp. | 1,549,472 | ||||||
99,758 | GKN plc | 617,465 | ||||||
5,000 | Koito Manufacturing Co., Ltd. | 95,817 | ||||||
11,000 | NGK Spark Plug Co., Ltd. | 260,913 | ||||||
9,600 | NHK SPRING Co., Ltd. | 108,531 | ||||||
5,300 | NOK Corp. | 86,834 | ||||||
7,027 | Nokian Renkaat OYJ | 338,054 | ||||||
13,415 | Pirelli & C. SpA | 232,822 | ||||||
9,000 | Stanley Electric Co., Ltd. | 206,292 | ||||||
10,000 | Sumitomo Rubber Industries, Ltd. | 142,426 | ||||||
11,000 | The Yokohama Rubber Co., Ltd. | 108,396 | ||||||
3,700 | Toyoda Gosei Co., Ltd. | 86,228 | ||||||
3,100 | Toyota Boshoku Corp. | 38,757 | ||||||
10,100 | Toyota Industries Corp. | 456,580 | ||||||
4,437 | Valeo SA | 491,560 | ||||||
|
| |||||||
9,422,432 | ||||||||
|
| |||||||
| Automobiles (3.8%): |
| ||||||
19,887 | Bayerische Motoren Werke AG (BMW) | 2,332,038 | ||||||
12,000 | Daihatsu Motor Co., Ltd. | 203,597 | ||||||
57,804 | Daimler AG, Registered Shares | 5,003,169 |
Shares | Fair Value | |||||||
| Common Stocks, continued |
| ||||||
| Automobiles, continued |
| ||||||
53,342 | Fiat SpA* | $ | 437,758 | |||||
35,000 | Fuji Heavy Industries, Ltd. | 1,005,597 | ||||||
97,900 | Honda Motor Co., Ltd. | 4,038,439 | ||||||
73,000 | Isuzu Motors, Ltd. | 455,231 | ||||||
164,000 | Mazda Motor Corp.* | 850,477 | ||||||
25,100 | Mitsubishi Motors Corp.*^ | 271,002 | ||||||
148,700 | Nissan Motor Co., Ltd. | 1,252,053 | ||||||
11,457 | Renault SA | 924,937 | ||||||
22,200 | Suzuki Motor Corp. | 598,080 | ||||||
165,700 | Toyota Motor Corp. | 10,085,170 | ||||||
1,727 | Volkswagen AG | 467,943 | ||||||
17,100 | Yamaha Motor Co., Ltd. | 256,994 | ||||||
|
| |||||||
28,182,485 | ||||||||
|
| |||||||
| Beverages (2.3%): |
| ||||||
48,260 | Anheuser-Busch InBev NV | 5,145,269 | ||||||
23,100 | Asahi Breweries, Ltd. | 651,968 | ||||||
6,373 | Carlsberg A/S, Class B | 708,060 | ||||||
33,388 | Coca-Cola Amatil, Ltd. | 359,295 | ||||||
12,509 | Coca-Cola HBC AG | 365,368 | ||||||
3,100 | Coca-Cola West Co., Ltd. | 65,704 | ||||||
150,792 | Diageo plc | 4,980,129 | ||||||
6,248 | Heineken Holding NV | 396,201 | ||||||
13,705 | Heineken NV | 927,929 | ||||||
54,000 | Kirin Holdings Co., Ltd. | 777,984 | ||||||
12,859 | Pernod Ricard SA | 1,468,112 | ||||||
1,475 | Remy Cointreau SA | 123,970 | ||||||
57,960 | SABMiller plc | 2,984,410 | ||||||
7,900 | Suntory Beverage & Food, Ltd. | 251,923 | ||||||
36,895 | Treasury Wine Estates, Ltd. | 158,801 | ||||||
|
| |||||||
19,365,123 | ||||||||
|
| |||||||
| Biotechnology (0.4%): |
| ||||||
6,185 | Actelion, Ltd., Registered Shares | 524,457 | ||||||
29,387 | CSL, Ltd. | 1,813,581 | ||||||
9,048 | Grifols SA | 433,408 | ||||||
|
| |||||||
2,771,446 | ||||||||
|
| |||||||
| Building Products (0.6%): |
| ||||||
63,000 | Asahi Glass Co., Ltd. | 392,086 | ||||||
19,898 | Assa Abloy AB, Class B | 1,055,255 | ||||||
24,987 | Compagnie de Saint-Gobain SA | 1,380,967 | ||||||
13,900 | Daikin Industries, Ltd. | 867,573 | ||||||
2,221 | Geberit AG, Registered Shares | 679,615 | ||||||
16,300 | Lixil Group Corp. | 447,725 | ||||||
18,000 | TOTO, Ltd. | 285,810 | ||||||
|
| |||||||
5,109,031 | ||||||||
|
| |||||||
| Capital Markets (2.1%): |
| ||||||
59,663 | 3i Group plc | 380,589 | ||||||
56,635 | Aberdeen Asset Management plc | 471,578 | ||||||
91,231 | Credit Suisse Group AG, Registered Shares | 2,801,746 | ||||||
98,300 | Daiwa Securities Group, Inc. | 984,625 | ||||||
61,292 | Deutsche Bank AG, Registered Shares | 2,924,235 | ||||||
31,809 | ICAP plc | 238,291 | ||||||
35,628 | Investec plc | 258,325 | ||||||
13,474 | Julius Baer Group, Ltd. | 649,891 | ||||||
17,024 | Macquarie Group, Ltd. | 839,368 | ||||||
32,373 | Mediobanca SpA* | 284,821 |
Continued
4
AZL International Index Fund
Schedule of Portfolio Investments
December 31, 2013
Shares | Fair Value | |||||||
| Common Stocks, continued |
| ||||||
| Capital Markets, continued |
| ||||||
219,200 | Nomura Holdings, Inc. | $ | 1,696,819 | |||||
991 | Partners Group Holding AG | 264,474 | ||||||
11,690 | SBI Holdings, Inc. | 177,451 | ||||||
6,431 | Schroders plc | 277,647 | ||||||
219,034 | UBS AG, Registered Shares | 4,173,838 | ||||||
|
| |||||||
16,423,698 | ||||||||
|
| |||||||
| Chemicals (3.4%): |
| ||||||
18,613 | Air Liquide SA | 2,638,399 | ||||||
8,000 | Air Water, Inc. | 108,537 | ||||||
14,572 | Akzo Nobel NV | 1,130,528 | ||||||
3,884 | Arkema, Inc. | 454,888 | ||||||
76,000 | Asahi Kasei Corp. | 595,790 | ||||||
55,160 | BASF SE | 5,881,516 | ||||||
8,319 | Croda International plc | 338,702 | ||||||
18,000 | Daicel Chemical Industries, Ltd. | 146,718 | ||||||
508 | Ems-Chemie Holding AG | 181,078 | ||||||
506 | Givaudan SA, Registered Shares | 725,128 | ||||||
5,400 | Hitachi Chemical Co., Ltd. | 86,207 | ||||||
91,314 | Incitec Pivot, Ltd. | 218,561 | ||||||
25,087 | Israel Chemicals, Ltd. | 209,233 | ||||||
163 | Israel Corp., Ltd. (The)* | 85,973 | ||||||
12,552 | Johnson Matthey plc | 683,351 | ||||||
10,000 | JSR Corp. | 193,939 | ||||||
10,653 | K+S AG, Registered Shares | 328,036 | ||||||
15,000 | Kaneka Corp. | 98,569 | ||||||
13,000 | Kansai Paint Co., Ltd. | 192,644 | ||||||
9,316 | Koninklijke DSM NV | 734,168 | ||||||
19,600 | Kuraray Co., Ltd. | 233,884 | ||||||
5,206 | Lanxess AG | 347,774 | ||||||
11,147 | Linde AG | 2,334,413 | ||||||
83,000 | Mitsubishi Chemical Holdings Corp. | 384,106 | ||||||
25,000 | Mitsubishi Gas Chemical Co., Inc. | 184,287 | ||||||
43,000 | Mitsui Chemicals, Inc. | 103,974 | ||||||
10,000 | Nippon Paint Co., Ltd. | 166,467 | ||||||
10,100 | Nitto Denko Corp. | 427,657 | ||||||
13,528 | Novozymes A/S, B Shares | 572,349 | ||||||
21,818 | Orica, Ltd. | 464,936 | ||||||
24,800 | Shin-Etsu Chemical Co., Ltd. | 1,450,412 | ||||||
88,000 | Showa Denko K.K.^ | 124,804 | ||||||
133 | Sika AG, Bearer Shares | 473,084 | ||||||
3,466 | Solvay SA | 548,566 | ||||||
91,000 | Sumitomo Chemical Co., Ltd. | 357,040 | ||||||
5,577 | Syngenta AG, Registered Shares | 2,223,820 | ||||||
12,000 | Taiyo Nippon Sanso Corp. | 85,504 | ||||||
62,000 | Teijin, Ltd. | 138,176 | ||||||
89,000 | Toray Industries, Inc. | 616,754 | ||||||
61,000 | Ube Industries, Ltd. | 130,614 | ||||||
7,101 | Umicore | 331,709 | ||||||
10,809 | Yara International ASA | 467,130 | ||||||
|
| |||||||
27,199,425 | ||||||||
|
| |||||||
| Commercial Banks (13.6%): |
| ||||||
61,000 | Aozora Bank, Ltd. | 172,879 | ||||||
164,763 | Australia & New Zealand Banking Group, Ltd. | 4,742,115 | ||||||
357,240 | Banca Monte dei Paschi di Siena SpA*^ | 86,707 | ||||||
347,948 | Banco Bilbao Vizcaya Argentaria SA | 4,310,872 | ||||||
198,570 | Banco de Sabadell SA | 518,958 |
Shares | Fair Value | |||||||
| Common Stocks, continued |
| ||||||
| Commercial Banks, continued |
| ||||||
97,520 | Banco Espirito Santo SA* | $ | 139,503 | |||||
75,447 | Banco Popular Espanol SA* | 455,492 | ||||||
682,388 | Banco Santander SA | 6,157,598 | ||||||
64,650 | Bank Hapoalim BM | 362,995 | ||||||
71,361 | Bank Leumi Le* | 291,989 | ||||||
77,600 | Bank of East Asia, Ltd. (The) | 329,032 | ||||||
1,366,242 | Bank of Ireland* | 474,163 | ||||||
21,000 | Bank of Kyoto, Ltd. (The) | 175,768 | ||||||
18,744 | Bank of Queensland, Ltd. | 204,014 | ||||||
69,000 | Bank of Yokohama, Ltd. (The) | 385,336 | ||||||
247,083 | Bankia SA* | 423,767 | ||||||
917,670 | Barclays plc | 4,151,486 | ||||||
25,785 | Bendigo and Adelaide Bank, Ltd. | 270,565 | ||||||
59,787 | BNP Paribas SA | 4,681,115 | ||||||
224,000 | BOC Hong Kong Holdings, Ltd. | 720,488 | ||||||
47,000 | Chiba Bank, Ltd. (The) | 317,690 | ||||||
9,000 | Chugoku Bank, Ltd. (The) | 114,314 | ||||||
198,030 | Chuo Mitsui Trust Holdings, Inc. | 1,046,370 | ||||||
58,171 | Commerzbank AG* | 937,413 | ||||||
96,806 | Commonwealth Bank of Australia | 6,743,670 | ||||||
60,620 | Credit Agricole SA* | 779,121 | ||||||
103,024 | Criteria Caixacorp SA | 536,925 | ||||||
39,992 | Danske Bank A/S* | 920,856 | ||||||
104,000 | DBS Group Holdings, Ltd. | 1,413,949 | ||||||
57,909 | DnB NOR ASA | 1,038,126 | ||||||
15,900 | Erste Group Bank AG | 556,208 | ||||||
47,000 | Fukuoka Financial Group, Inc. | 206,501 | ||||||
20,000 | Gunma Bank, Ltd. (The) | 111,895 | ||||||
28,000 | Hachijuni Bank, Ltd. (The) | 163,512 | ||||||
46,200 | Hang Seng Bank, Ltd. | 750,646 | ||||||
33,000 | Hiroshima Bank, Ltd. (The) | 136,841 | ||||||
65,000 | Hokuhoku Financial Group, Inc. | 129,783 | ||||||
1,120,467 | HSBC Holdings plc | 12,287,393 | ||||||
703,378 | Intesa Sanpaolo SpA | 1,745,972 | ||||||
14,000 | Iyo Bank, Ltd. (The) | 137,502 | ||||||
38,000 | Joyo Bank, Ltd. (The) | 194,477 | ||||||
15,289 | KBC Groep NV | 870,075 | ||||||
2,999,967 | Lloyds Banking Group plc* | 3,920,610 | ||||||
765,500 | Mitsubishi UFJ Financial Group, Inc. | 5,062,492 | ||||||
8,445 | Mizrahi Tefahot Bank, Ltd. | 110,708 | ||||||
1,381,639 | Mizuho Financial Group, Inc. | 2,992,920 | ||||||
141,057 | National Australia Bank, Ltd. | 4,402,499 | ||||||
55,329 | Natixis | 326,712 | ||||||
35,000 | Nishi-Nippon City Bank, Ltd. (The) | 94,365 | ||||||
181,225 | Nordea Bank AB | 2,454,718 | ||||||
154,000 | Oversea-Chinese Banking Corp., Ltd. | 1,247,004 | ||||||
2,976 | Raiffeisen International Bank-Holding AG^ | 105,048 | ||||||
110,987 | Resona Holdings, Inc. | 566,203 | ||||||
128,433 | Royal Bank of Scotland Group plc* | 722,921 | ||||||
33,400 | Seven Bank, Ltd. | 130,712 | ||||||
103,000 | Shinsei Bank, Ltd. | 252,113 | ||||||
35,000 | Shizuoka Bank, Ltd. (The) | 374,486 | ||||||
90,464 | Skandinaviska Enskilda Banken AB, Class A | 1,197,193 | ||||||
43,423 | Societe Generale | 2,535,595 | ||||||
145,555 | Standard Chartered plc | 3,279,146 | ||||||
76,569 | Sumitomo Mitsui Financial Group, Inc. | 3,954,891 |
Continued
5
AZL International Index Fund
Schedule of Portfolio Investments
December 31, 2013
Shares | Fair Value | |||||||
| Common Stocks, continued |
| ||||||
| Commercial Banks, continued |
| ||||||
11,000 | Suruga Bank, Ltd. | $ | 197,743 | |||||
29,753 | Svenska Handelsbanken AB, A Shares | 1,470,161 | ||||||
54,167 | Swedbank AB, A Shares | 1,528,536 | ||||||
53,527 | UBI Banca – Unione di Banche Italiane SCPA | 365,504 | ||||||
261,125 | UniCredit SpA | 1,944,263 | ||||||
76,000 | United Overseas Bank, Ltd. | 1,281,701 | ||||||
186,393 | Westpac Banking Corp. | 5,411,822 | ||||||
11,000 | Yamaguchi Financial Group, Inc. | 102,030 | ||||||
|
| |||||||
106,226,177 | ||||||||
|
| |||||||
| Commercial Services & Supplies (0.6%): |
| ||||||
16,527 | Aggreko plc | 468,083 | ||||||
22,175 | Babcock International Group plc | 497,658 | ||||||
93,836 | Brambles, Ltd. | 766,766 | ||||||
35,000 | Dai Nippon Printing Co., Ltd. | 371,996 | ||||||
11,989 | Edenred | 402,170 | ||||||
90,212 | G4S plc | 392,374 | ||||||
6,600 | Park24 Co., Ltd. | 124,501 | ||||||
12,800 | SECOM Co., Ltd. | 773,122 | ||||||
18,326 | Securitas AB, B Shares | 195,334 | ||||||
27,887 | Serco Group plc | 230,430 | ||||||
1,677 | Societe BIC SA | 205,536 | ||||||
32,000 | Toppan Printing Co., Ltd. | 256,407 | ||||||
|
| |||||||
4,684,377 | ||||||||
|
| |||||||
| Communications Equipment (0.7%): |
| ||||||
170,427 | Alcatel-Lucent*^ | 764,485 | ||||||
226,289 | Nokia OYJ* | 1,825,568 | ||||||
184,036 | Telefonaktiebolaget LM Ericsson, B Shares | 2,254,329 | ||||||
|
| |||||||
4,844,382 | ||||||||
|
| |||||||
| Computers & Peripherals (0.3%): |
| ||||||
110,000 | Fujitsu, Ltd.* | 569,610 | ||||||
4,821 | Gemalto NV | 533,217 | ||||||
145,000 | NEC Corp. | 327,396 | ||||||
20,175 | Seek, Ltd. | 242,531 | ||||||
240,000 | Toshiba Corp. | 1,010,171 | ||||||
|
| |||||||
2,682,925 | ||||||||
|
| |||||||
| Construction & Engineering (0.8%): |
| ||||||
8,441 | ACS, Actividades de Construccion y Servicios SA | 292,582 | ||||||
11,582 | Bouygues SA | 439,149 | ||||||
11,000 | Chiyoda Corp. | 160,124 | ||||||
23,898 | Ferrovial SA | 464,721 | ||||||
1,835 | Hochtief AG | 157,075 | ||||||
12,000 | JGC Corp. | 471,416 | ||||||
51,000 | Kajima Corp. | 191,983 | ||||||
9,000 | Kinden Corp. | 94,086 | ||||||
4,970 | Koninklijke Boskalis Westminster NV | 263,498 | ||||||
9,194 | Leighton Holdings, Ltd. | 132,897 | ||||||
40,000 | Obayashi Corp. | 228,143 | ||||||
5,165 | OCI NV* | 232,785 | ||||||
38,000 | Shimizu Corp. | 192,206 | ||||||
23,030 | Skanska AB, B Shares | 473,008 | ||||||
59,000 | TAISEI Corp. | 268,788 | ||||||
28,695 | Vinci SA | 1,890,679 | ||||||
|
| |||||||
5,953,140 | ||||||||
|
|
Shares | Fair Value | |||||||
| Common Stocks, continued |
| ||||||
| Construction Materials (0.6%): |
| ||||||
44,376 | Boral, Ltd. | $ | 189,875 | |||||
44,305 | CRH plc | 1,123,901 | ||||||
43,202 | Fletcher Building, Ltd. | 300,763 | ||||||
8,620 | HeidelbergCement AG | 654,132 | ||||||
13,764 | Holcim, Ltd., Registered Shares | 1,035,113 | ||||||
1,887 | Imerys SA | 164,563 | ||||||
27,322 | James Hardie Industries SE | 317,760 | ||||||
11,185 | Lafarge SA | 841,617 | ||||||
68,000 | Taiheiyo Cement Corp. | 261,438 | ||||||
|
| |||||||
4,889,162 | ||||||||
|
| |||||||
| Consumer Finance (0.1%): |
| ||||||
20,700 | ACOM Co., Ltd.* | 70,434 | ||||||
3,700 | Aeon Credit Service Co., Ltd. | 99,434 | ||||||
9,000 | Credit Saison Co., Ltd. | 237,418 | ||||||
|
| |||||||
407,286 | ||||||||
|
| |||||||
| Containers & Packaging (0.2%): |
| ||||||
72,819 | Amcor, Ltd. | 688,460 | ||||||
48,646 | Rexam plc | 427,693 | ||||||
9,800 | Toyo Seikan Kaisha, Ltd. | 211,008 | ||||||
|
| |||||||
1,327,161 | ||||||||
|
| |||||||
| Distributors (0.1%): |
| ||||||
6,000 | Jardine Cycle & Carriage, Ltd. | 171,491 | ||||||
344,000 | Li & Fung, Ltd. | 444,542 | ||||||
|
| |||||||
616,033 | ||||||||
|
| |||||||
| Diversified Consumer Services (0.0%): |
| ||||||
4,000 | Benesse Holdings, Inc. | 160,701 | ||||||
|
| |||||||
| Diversified Financial Services (1.2%): |
| ||||||
11,441 | ASX, Ltd. | 375,566 | ||||||
11,494 | Deutsche Boerse AG | 954,375 | ||||||
1,699 | Eurazeo | 133,214 | ||||||
5,559 | EXOR SpA | 221,606 | ||||||
149,750 | First Pacific Co., Ltd. | 171,131 | ||||||
4,757 | Groupe Bruxelles Lambert SA | 437,487 | ||||||
12,202 | Hargreaves Lansdown plc | 274,338 | ||||||
56,000 | Hong Kong Exchanges & Clearing, Ltd. | 938,409 | ||||||
8,009 | Industrivarden AB, C Shares | 152,756 | ||||||
230,655 | ING Groep NV* | 3,225,146 | ||||||
27,299 | Investor AB, B Shares | 942,238 | ||||||
15,300 | Japan Exchange Group, Inc. | 435,703 | ||||||
13,465 | Kinnevik Investment AB, Class B | 625,164 | ||||||
10,613 | London Stock Exchange Group plc | 304,632 | ||||||
34,100 | Mitsubishi UFJ Lease & Finance Co., Ltd. | 209,735 | ||||||
76,900 | ORIX Corp. | 1,354,869 | ||||||
1,458 | Pargesa Holding SA | 117,800 | ||||||
8,153 | Pohjola Bank plc | 164,199 | ||||||
54,000 | Singapore Exchange, Ltd. | 311,472 | ||||||
|
| |||||||
11,349,840 | ||||||||
|
| |||||||
| Diversified Telecommunication Services (3.0%): |
| ||||||
9,463 | Belgacom SA | 279,947 | ||||||
119,553 | Bezeq The Israeli Telecommunication Corp., Ltd. | 202,810 | ||||||
475,260 | BT Group plc | 2,991,982 | ||||||
174,138 | Deutsche Telekom AG, Registered Shares | 2,978,082 | ||||||
8,147 | Elisa OYJ | 216,042 | ||||||
110,343 | France Telecom SA^ | 1,371,382 |
Continued
6
AZL International Index Fund
Schedule of Portfolio Investments
December 31, 2013
Shares | Fair Value | |||||||
| Common Stocks, continued |
| ||||||
| Diversified Telecommunication Services, continued |
| ||||||
149,000 | HKT Trust & HKT, Ltd. | $ | 147,282 | |||||
1,530 | Iliad SA | 313,431 | ||||||
28,073 | Inmarsat plc | 351,637 | ||||||
196,105 | Koninklijke (Royal) KPN NV* | 634,332 | ||||||
22,376 | Nippon Telegraph & Telephone Corp. | 1,204,648 | ||||||
210,000 | PCCW, Ltd. | 94,006 | ||||||
40,719 | Portugal Telecom SGPS SA, Registered Shares^ | 177,159 | ||||||
479,000 | Singapore Telecommunications, Ltd. | 1,392,650 | ||||||
1,415 | Swisscom AG, Registered Shares | 748,475 | ||||||
47,703 | TDC A/S | 462,857 | ||||||
105,243 | Telecom Corp. of New Zealand, Ltd. | 199,525 | ||||||
593,256 | Telecom Italia SpA | 590,308 | ||||||
341,324 | Telecom Italia SpA | 268,017 | ||||||
15,280 | Telefonica Deutschland Holding AG | 126,322 | ||||||
245,965 | Telefonica SA | 4,014,965 | ||||||
13,949 | Telekom Austria AG | 105,612 | ||||||
3,024 | Telenet Group Holding NV | 180,785 | ||||||
40,431 | Telenor ASA | 965,787 | ||||||
144,836 | TeliaSonera AB | 1,208,321 | ||||||
262,125 | Telstra Corp., Ltd. | 1,228,748 | ||||||
72,069 | Vivendi | 1,906,372 | ||||||
8,867 | Ziggo NV | 405,774 | ||||||
|
| |||||||
24,767,258 | ||||||||
|
| |||||||
| Electric Utilities (1.9%): |
| ||||||
39,000 | Cheung Kong Infrastructure Holdings, Ltd. | 246,460 | ||||||
37,600 | Chubu Electric Power Co., Inc. | 486,095 | ||||||
18,700 | Chugoku Electric Power Co., Inc. (The) | 291,195 | ||||||
106,500 | CLP Holdings, Ltd. | 843,886 | ||||||
19,882 | Contact Energy, Ltd. | 83,841 | ||||||
108,905 | E.ON AG | 2,006,799 | ||||||
117,552 | EDP – Energias de Portugal SA | 431,772 | ||||||
14,544 | Electricite de France | 514,998 | ||||||
397,184 | Enel SpA | 1,739,946 | ||||||
25,989 | Fortum OYJ | 594,929 | ||||||
9,600 | Hokkaido Electric Power Co., Inc.* | 110,518 | ||||||
11,200 | Hokuriku Electric Power Co. | 152,149 | ||||||
84,500 | Hongkong Electric Holdings, Ltd. | 673,228 | ||||||
280,418 | Iberdrola SA | 1,793,377 | ||||||
42,400 | Kansai Electric Power Co., Inc. (The)* | 488,122 | ||||||
26,100 | Kyushu Electric Power Co., Inc.* | 333,561 | ||||||
6,025 | Red Electrica Corporacion SA | 402,752 | ||||||
57,737 | Scottish & Southern Energy plc | 1,312,782 | ||||||
10,000 | Shikoku Electric Power Co., Inc.* | 150,017 | ||||||
114,914 | SP AusNet | 127,845 | ||||||
88,680 | Terna – Rete Elettrica Nationale SpA | 445,656 | ||||||
28,400 | Tohoku Electric Power Co., Inc.* | 319,798 | ||||||
84,600 | Tokyo Electric Power Co., Inc. (The)* | 416,096 | ||||||
|
| |||||||
13,965,822 | ||||||||
|
| |||||||
| Electrical Equipment (1.3%): |
| ||||||
132,048 | ABB, Ltd. | 3,489,605 | ||||||
13,191 | Alstom SA | 481,896 | ||||||
37,000 | Fuji Electric Holdings Co., Ltd. | 173,351 | ||||||
15,742 | Legrand SA | 868,025 | ||||||
1,700 | Mabuchi Motor Co., Ltd. | 101,129 | ||||||
115,000 | Mitsubishi Electric Corp. | 1,446,546 |
Shares | Fair Value | |||||||
| Common Stocks, continued |
| ||||||
| Electrical Equipment, continued |
| ||||||
6,000 | Nidec Corp. | $ | 588,517 | |||||
5,222 | Osram Licht AG* | 295,118 | ||||||
12,754 | Prysmian SpA | 328,822 | ||||||
31,964 | Schneider Electric SA | 2,805,303 | ||||||
45,000 | Sumitomo Electric Industries, Ltd. | 752,145 | ||||||
|
| |||||||
11,330,457 | ||||||||
|
| |||||||
| Electronic Equipment, Instruments & Components (1.2%): |
| ||||||
14,500 | Citizen Holdings Co., Ltd. | 122,469 | ||||||
28,300 | Fujifilm Holdings Corp. | 803,777 | ||||||
4,000 | Hamamatsu Photonics K.K. | 160,281 | ||||||
14,533 | Hexagon AB, B Shares | 461,059 | ||||||
1,900 | Hirose Electric Co., Ltd. | 270,901 | ||||||
3,500 | Hitachi High-Technologies Corp. | 88,068 | ||||||
292,100 | Hitachi, Ltd. | 2,215,051 | ||||||
26,400 | HOYA Corp. | 734,904 | ||||||
7,600 | IBIDEN Co., Ltd. | 142,286 | ||||||
2,670 | Keyence Corp. | 1,143,651 | ||||||
19,500 | Kyocera Corp. | 975,570 | ||||||
12,100 | Murata Manufacturing Co., Ltd. | 1,075,846 | ||||||
25,000 | Nippon Electric Glass Co., Ltd. | 131,408 | ||||||
12,500 | Omron Corp. | 553,355 | ||||||
13,210 | Rexel SA | 347,914 | ||||||
13,000 | Shimadzu Corp. | 113,230 | ||||||
7,600 | TDK Corp. | 364,903 | ||||||
12,000 | Yaskawa Electric Corp. | 190,346 | ||||||
12,900 | Yokogawa Electric Corp. | 198,521 | ||||||
|
| |||||||
10,093,540 | ||||||||
|
| |||||||
| Energy Equipment & Services (0.6%): |
| ||||||
10,552 | Aker Solutions ASA | 188,718 | ||||||
17,616 | AMEC plc | 318,078 | ||||||
8,923 | Compagnie Generale de Geophysique-Veritas* | 154,847 | ||||||
3,972 | Fugro NV | 237,582 | ||||||
16,323 | Petrofac, Ltd. | 331,216 | ||||||
16,365 | Saipem SpA | 353,263 | ||||||
22,327 | Seadrill, Ltd. | 915,430 | ||||||
15,851 | Subsea 7 SA | 304,033 | ||||||
6,151 | Technip-Coflexip SA | 592,414 | ||||||
28,588 | Tenaris SA | 624,748 | ||||||
21,860 | Transocean, Ltd. | 1,070,342 | ||||||
11,649 | WorleyParsons, Ltd. | 172,693 | ||||||
|
| |||||||
5,263,364 | ||||||||
|
| |||||||
| Food & Staples Retailing (1.8%): |
| ||||||
37,500 | Aeon Co., Ltd. | 508,652 | ||||||
37,043 | Carrefour SA | 1,468,835 | ||||||
3,357 | Casino Guichard-Perrachon SA | 388,011 | ||||||
4,308 | Colruyt SA | 240,924 | ||||||
6,241 | Delhaize Group | 371,824 | ||||||
37,764 | Distribuidora Internacional de Alimentacion SA | 337,813 | ||||||
3,700 | FamilyMart Co., Ltd. | 169,094 | ||||||
74,414 | J Sainsbury plc | 450,703 | ||||||
15,701 | Jeronimo Martins SGPS SA | 307,192 | ||||||
59,916 | Koninklijke Ahold NV | 1,075,731 | ||||||
3,900 | LAWSON, Inc. | 291,979 | ||||||
57,202 | Metcash, Ltd.^ | 161,368 | ||||||
7,751 | Metro AG | 375,385 | ||||||
85,000 | Olam International, Ltd.^ | 103,758 |
Continued
7
AZL International Index Fund
Schedule of Portfolio Investments
December 31, 2013
Shares | Fair Value | |||||||
| Common Stocks, continued |
| ||||||
| Food & Staples Retailing, continued |
| ||||||
44,900 | Seven & I Holdings Co., Ltd. | $ | 1,788,482 | |||||
483,239 | Tesco plc | 2,675,905 | ||||||
59,524 | Wesfarmers, Ltd. | 2,343,599 | ||||||
134,588 | William Morrison Supermarkets plc | 582,790 | ||||||
74,687 | Woolworths, Ltd. | 2,257,494 | ||||||
|
| |||||||
15,899,539 | ||||||||
|
| |||||||
| Food Products (3.6%): |
| ||||||
36,000 | Ajinomoto Co., Inc. | 521,758 | ||||||
5,369 | Aryzta AG | 412,846 | ||||||
21,466 | Associated British Foods plc | 869,489 | ||||||
121 | Barry Callebaut AG, Registered Shares | 151,840 | ||||||
4,400 | Calbee, Inc. | 107,073 | ||||||
34,100 | Danone SA | 2,459,805 | ||||||
390,382 | Golden Agri-Resources, Ltd. | 168,970 | ||||||
9,079 | Kerry Group plc, Class A | 630,825 | ||||||
10,000 | Kikkoman Corp. | 189,486 | ||||||
50 | Lindt & Spruengli AG | 225,436 | ||||||
6 | Lindt & Spruengli AG, Registered Shares | 323,646 | ||||||
3,426 | Meiji Holdings Co., Ltd. | 220,573 | ||||||
193,682 | Nestle SA, Registered Shares | 14,221,784 | ||||||
11,000 | Nippon Meat Packers, Inc. | 189,063 | ||||||
12,650 | Nisshin Seifun Group, Inc. | 130,924 | ||||||
3,500 | Nissin Foods Holdings Co., Ltd. | 147,880 | ||||||
4,781 | Suedzucker AG | 129,045 | ||||||
28,564 | Tate & Lyle plc | 382,955 | ||||||
5,000 | Toyo Suisan Kaisha, Ltd. | 150,349 | ||||||
97,822 | Unilever NV | 3,949,281 | ||||||
77,105 | Unilever plc | 3,162,258 | ||||||
92,936 | Unilever plc*# | — | ||||||
110,000 | Wilmar International, Ltd. | 298,657 | ||||||
5,600 | Yakult Honsha Co., Ltd. | 283,171 | ||||||
6,000 | Yamazaki Baking Co., Ltd. | 61,577 | ||||||
|
| |||||||
29,388,691 | ||||||||
|
| |||||||
| Gas Utilities (0.5%): |
| ||||||
51,712 | APA Group | 277,141 | ||||||
10,800 | Enagas | 282,708 | ||||||
21,397 | Gas Natural SDG SA | 552,071 | ||||||
343,027 | Hong Kong & China Gas Co., Ltd. | 787,875 | ||||||
115,000 | Osaka Gas Co., Ltd. | 452,030 | ||||||
122,344 | Snam Rete Gas SpA | 685,727 | ||||||
28,000 | Toho Gas Co., Ltd. | 136,445 | ||||||
146,000 | Tokyo Gas Co., Ltd. | 719,555 | ||||||
|
| |||||||
3,893,552 | ||||||||
|
| |||||||
| Health Care Equipment & Supplies (0.7%): |
| ||||||
3,306 | Cochlear, Ltd. | 173,944 | ||||||
6,838 | Coloplast A/S, Class B^ | 453,629 | ||||||
21,140 | Elekta AB, B Shares | 324,418 | ||||||
12,221 | Essilor International SA Cie Generale d’Optique | 1,301,928 | ||||||
12,446 | Getinge AB, B Shares | 427,025 | ||||||
14,600 | Olympus Co., Ltd.* | 463,150 | ||||||
54,072 | Smith & Nephew plc | 771,019 | ||||||
3,018 | Sonova Holding AG, Registered Shares | 406,958 | ||||||
4,200 | Sysmex Corp. | 248,122 | ||||||
9,500 | Terumo Corp. | 459,020 | ||||||
1,418 | William Demant Holding A/S* | 137,882 | ||||||
|
| |||||||
5,167,095 | ||||||||
|
|
Shares | Fair Value | |||||||
| Common Stocks, continued |
| ||||||
| Health Care Providers & Services (0.5%): |
| ||||||
2,700 | Alfresa Holdings Corp. | $ | 134,163 | |||||
5,600 | Celesio AG^ | 177,192 | ||||||
12,747 | Fresenius Medical Care AG & Co., KGaA | 907,133 | ||||||
7,440 | Fresenius SE & Co. KGaA | 1,142,413 | ||||||
7,600 | Medipal Holdings Corp. | 100,449 | ||||||
3,300 | Miraca Holdings, Inc. | 155,673 | ||||||
8,216 | Ramsay Health Care, Ltd. | 318,039 | ||||||
21,805 | Ryman Healthcare, Ltd. | 140,607 | ||||||
23,193 | Sonic Healthcare, Ltd. | 344,624 | ||||||
3,900 | Suzuken Co., Ltd. | 126,336 | ||||||
|
| |||||||
3,546,629 | ||||||||
|
| |||||||
| Health Care Technology (0.0%): |
| ||||||
44 | M3, Inc. | 110,403 | ||||||
|
| |||||||
| Hotels, Restaurants & Leisure (1.4%): |
| ||||||
9,449 | Accor SA | 446,699 | ||||||
11,178 | Carnival plc | 461,537 | ||||||
108,027 | Compass Group plc | 1,731,837 | ||||||
24,746 | Crown, Ltd. | 372,364 | ||||||
45,904 | Echo Entertainment Group, Ltd. | 100,838 | ||||||
3,662 | Flight Centre, Ltd. | 155,488 | ||||||
127,000 | Galaxy Entertainment Group, Ltd.* | 1,140,426 | ||||||
372,757 | Genting Singapore plc | 443,107 | ||||||
16,229 | InterContinental Hotels Group plc | 541,199 | ||||||
3,429 | McDonald’s Holdings Co., Ltd.^ | 87,565 | ||||||
60,400 | MGM China Holdings, Ltd. | 259,082 | ||||||
3,100 | Oriental Land Co., Ltd. | 447,097 | ||||||
144,100 | Sands China, Ltd. | 1,179,555 | ||||||
87,333 | Shangri-La Asia, Ltd. | 170,496 | ||||||
120,000 | SJM Holdings, Ltd. | 406,314 | ||||||
5,544 | Sodexo, Inc. | 562,901 | ||||||
39,804 | Tabcorp Holdings, Ltd. | 129,034 | ||||||
79,000 | Tatts Group, Ltd. | 219,045 | ||||||
26,115 | Tui Travel plc | 178,764 | ||||||
10,891 | Whitbread plc | 676,818 | ||||||
50,988 | William Hill plc | 339,367 | ||||||
95,600 | Wynn Macau, Ltd. | 437,096 | ||||||
|
| |||||||
10,486,629 | ||||||||
|
| |||||||
| Household Durables (0.6%): |
| ||||||
12,300 | Casio Computer Co., Ltd. | 150,784 | ||||||
14,740 | Electrolux AB, Series B | 388,167 | ||||||
21,564 | Husqvarna AB, B Shares | 130,263 | ||||||
7,800 | Iida Group Holdings Co., Ltd.* | 155,718 | ||||||
132,300 | Panasonic Corp. | 1,542,569 | ||||||
18,074 | Persimmon plc | 371,253 | ||||||
1,900 | Rinnai Corp. | 148,109 | ||||||
27,000 | Sekisui Chemical Co., Ltd. | 331,971 | ||||||
33,000 | Sekisui House, Ltd. | 462,155 | ||||||
84,000 | Sharp Corp.* | 266,981 | ||||||
61,500 | Sony Corp. | 1,062,424 | ||||||
|
| |||||||
5,010,394 | ||||||||
|
| |||||||
| Household Products (0.5%): |
| ||||||
7,857 | Henkel AG & Co. KGaA | 819,083 | ||||||
38,868 | Reckitt Benckiser Group plc | 3,094,095 | ||||||
7,000 | Unicharm Corp. | 399,667 | ||||||
|
| |||||||
4,312,845 | ||||||||
|
|
Continued
8
AZL International Index Fund
Schedule of Portfolio Investments
December 31, 2013
��
Shares | Fair Value | |||||||
| Common Stocks, continued |
| ||||||
| Independent Power Producers & Energy Traders (0.0%): |
| ||||||
6,700 | Electric Power Development Co., Ltd. | $ | 195,433 | |||||
100,836 | Enel Green Power SpA | 254,114 | ||||||
|
| |||||||
449,547 | ||||||||
|
| |||||||
| Industrial Conglomerates (1.5%): |
| ||||||
222 | Delek Group, Ltd. | 84,933 | ||||||
70,000 | Hankyu Hanshin Holdings, Inc. | 378,777 | ||||||
127,000 | Hutchison Whampoa, Ltd. | 1,734,894 | ||||||
88,200 | Keppel Corp., Ltd. | 784,353 | ||||||
58,304 | Koninklijke Philips Electronics NV | 2,149,097 | ||||||
77,500 | NWS Holdings, Ltd. | 118,135 | ||||||
47,037 | Orkla ASA | 367,748 | ||||||
63,000 | SembCorp Industries, Ltd. | 274,527 | ||||||
47,618 | Siemens AG, Registered Shares | 6,505,723 | ||||||
22,985 | Smiths Group plc | 565,122 | ||||||
1,830 | Wendel | 266,781 | ||||||
|
| |||||||
13,230,090 | ||||||||
|
| |||||||
| Insurance (5.4%): |
| ||||||
11,865 | Admiral Group plc | 257,508 | ||||||
106,539 | AEGON NV | 1,005,744 | ||||||
13,097 | Ageas NV | 559,092 | ||||||
723,200 | AIA Group, Ltd. | 3,646,033 | ||||||
27,386 | Allianz SE, Registered Shares+ | 4,911,937 | ||||||
176,152 | AMP, Ltd. | 691,544 | ||||||
69,584 | Assicurazioni Generali SpA | 1,653,594 | ||||||
177,931 | Aviva plc | 1,325,549 | ||||||
108,146 | AXA SA | 3,016,300 | ||||||
2,847 | Baloise Holding AG, Registered Shares | 363,837 | ||||||
9,540 | CNP Assurances | 195,594 | ||||||
51,200 | Dai-ichi Life Insurance Co., Ltd. (The) | 858,304 | ||||||
11,912 | Delta Lloyd NV | 296,330 | ||||||
65,977 | Direct Line Insurance Group plc | 273,108 | ||||||
12,692 | Gjensidige Forsikring ASA | 242,370 | ||||||
3,729 | Hannover Rueckversicherung AG, Registered Shares | 322,035 | ||||||
124,562 | Insurance Australia Group, Ltd. | 647,360 | ||||||
353,499 | Legal & General Group plc | 1,304,186 | ||||||
63,211 | Mapfre SA | 271,305 | ||||||
30,711 | MS&AD Insurance Group Holdings, Inc. | 826,374 | ||||||
10,768 | Muenchener Rueckversicherungs-Gesellschaft AG, Registered Shares | 2,373,022 | ||||||
20,425 | NKSJ Holdings, Inc. | 569,831 | ||||||
292,441 | Old Mutual plc | 916,252 | ||||||
153,683 | Prudential plc | 3,439,088 | ||||||
73,548 | QBE Insurance Group, Ltd. | 757,150 | ||||||
86,263 | Resolution, Ltd. | 507,288 | ||||||
212,664 | RSA Insurance Group plc | 322,011 | ||||||
25,249 | Sampo OYJ, A Shares | 1,246,057 | ||||||
9,485 | SCOR SE | 346,707 | ||||||
10,400 | Sony Financial Holdings, Inc. | 189,491 | ||||||
140,750 | Standard Life plc | 838,570 | ||||||
76,809 | Suncorp-Metway, Ltd. | 902,044 | ||||||
1,973 | Swiss Life Holding AG, Registered Shares | 410,755 | ||||||
21,238 | Swiss Re AG | 1,963,671 | ||||||
34,836 | T&D Holdings, Inc. | 488,074 | ||||||
41,800 | Tokio Marine Holdings, Inc. | 1,400,444 | ||||||
1,593 | Tryg A/S | 154,157 |
Shares | Fair Value | |||||||
| Common Stocks, continued |
| ||||||
| Insurance, continued |
| ||||||
2,104 | Vienna Insurance Group Weiner Staeditische Versicherung AG | $ | 105,058 | |||||
8,982 | Zurich Insurance Group AG | 2,612,674 | ||||||
|
| |||||||
42,210,448 | ||||||||
|
| |||||||
| Internet & Catalog Retail (0.1%): |
| ||||||
44,400 | Rakuten, Inc. | 660,729 | ||||||
|
| |||||||
| Internet Software & Services (0.1%): |
| ||||||
6,200 | DeNA Co., Ltd.^ | 130,573 | ||||||
5,200 | Gree, Inc.^ | 51,407 | ||||||
8,700 | Kakaku.com, Inc. | 153,022 | ||||||
6,591 | United Internet AG, Registered Shares | 280,764 | ||||||
87,300 | Yahoo! Japan Corp. | 486,365 | ||||||
|
| |||||||
1,102,131 | ||||||||
|
| |||||||
| IT Services (0.3%): |
| ||||||
22,476 | Amadeus IT Holding SA, A Shares | 962,664 | ||||||
4,106 | Atos Origin SA | 372,793 | ||||||
8,815 | Cap Gemini SA | 597,697 | ||||||
29,719 | Computershare, Ltd. | 302,599 | ||||||
1,200 | Itochu Techno-Solutions Corp. | 48,703 | ||||||
5,800 | Nomura Research Institute, Ltd. | 182,944 | ||||||
7,600 | NTT Data Corp. | 281,288 | ||||||
900 | Otsuka Corp. | 114,897 | ||||||
|
| |||||||
2,863,585 | ||||||||
|
| |||||||
| Leisure Equipment & Products (0.2%): |
| ||||||
11,400 | Namco Bandai Holdings, Inc. | 253,298 | ||||||
21,300 | Nikon Corp. | 407,373 | ||||||
3,200 | Sankyo Co., Ltd. | 147,682 | ||||||
11,700 | Sega Sammy Holdings, Inc. | 298,441 | ||||||
4,700 | Shimano, Inc. | 404,380 | ||||||
8,900 | Yamaha Corp. | 141,575 | ||||||
|
| |||||||
1,652,749 | ||||||||
|
| |||||||
| Life Sciences Tools & Services (0.0%): |
| ||||||
3,025 | Lonza Group AG, Registered Shares | 288,030 | ||||||
14,641 | QIAGEN NV* | 341,542 | ||||||
|
| |||||||
629,572 | ||||||||
|
| |||||||
| Machinery (2.7%): |
| ||||||
19,201 | Alfa Laval AB | 494,066 | ||||||
23,000 | AMADA Co., Ltd. | 203,332 | ||||||
4,129 | Andritz AG | 259,333 | ||||||
40,283 | Atlas Copco AB, A Shares | 1,123,839 | ||||||
23,700 | Atlas Copco AB, B Shares | 603,684 | ||||||
57,952 | CNH Industrial NV* | 661,790 | ||||||
11,600 | Fanuc, Ltd. | 2,127,571 | ||||||
11,138 | GEA Group AG | 530,212 | ||||||
15,000 | Hino Motors, Ltd. | 236,447 | ||||||
6,900 | Hitachi Construction Machinery Co., Ltd. | 147,817 | ||||||
83,000 | IHI Corp. | 358,957 | ||||||
19,375 | IMI plc | 491,010 | ||||||
40,768 | Invensys plc | 343,952 | ||||||
19,000 | Japan Steel Works, Ltd. (The) | 106,453 | ||||||
13,200 | JTEKT Corp. | 225,702 | ||||||
88,000 | Kawasaki Heavy Industries, Ltd. | 369,977 | ||||||
56,700 | Komatsu, Ltd. | 1,154,344 | ||||||
18,708 | Kone OYJ, B Shares^ | 848,149 |
Continued
9
AZL International Index Fund
Schedule of Portfolio Investments
December 31, 2013
Shares | Fair Value | |||||||
| Common Stocks, continued |
| ||||||
| Machinery, continued |
| ||||||
64,000 | Kubota Corp. | $ | 1,061,261 | |||||
5,900 | Kurita Water Industries, Ltd. | 122,503 | ||||||
6,700 | Makita Corp. | 352,622 | ||||||
2,234 | MAN AG | 274,282 | ||||||
77,688 | Melrose Industries plc | 393,475 | ||||||
7,726 | Metso Corp. OYJ^ | 330,661 | ||||||
181,000 | Mitsubishi Heavy Industries, Ltd. | 1,122,096 | ||||||
6,500 | Nabtesco Corp. | 150,138 | ||||||
16,000 | NGK Insulators, Ltd. | 304,903 | ||||||
27,000 | NSK, Ltd. | 337,030 | ||||||
63,977 | Sandvik AB | 905,888 | ||||||
19,599 | Scania AB, B Shares | 385,082 | ||||||
1,239 | Schindler Holding AG, Registered Shares | 182,837 | ||||||
2,765 | Schindler Holding AG | 408,172 | ||||||
49,000 | SembCorp Marine, Ltd.^ | 173,243 | ||||||
23,498 | SKF AB, B Shares | 616,853 | ||||||
3,100 | SMC Corp. | 783,203 | ||||||
1,372 | Sulzer AG, Registered Shares | 222,006 | ||||||
30,000 | Sumitomo Heavy Industries, Ltd. | 138,268 | ||||||
7,200 | THK Co., Ltd. | 179,963 | ||||||
6,284 | Vallourec SA | 343,836 | ||||||
92,223 | Volvo AB, B Shares | 1,216,017 | ||||||
10,712 | Wartsila Corp. OYJ | 530,052 | ||||||
12,908 | Weir Group plc (The) | 456,066 | ||||||
104,250 | Yangzijiang Shipbuilding Holdings, Ltd. | 98,294 | ||||||
9,457 | Zardoya Otis SA | 171,030 | ||||||
|
| |||||||
21,546,416 | ||||||||
|
| |||||||
| Marine (0.4%): |
| ||||||
35 | A.P. Moller – Maersk A/S, Class A | 360,953 | ||||||
81 | A.P. Moller – Maersk A/S, Class B | 883,513 | ||||||
3,282 | Kuehne & Nagel International AG, Registered Shares | 431,770 | ||||||
62,000 | Mitsui O.S.K. Lines, Ltd. | 279,870 | ||||||
92,000 | Nippon Yusen Kabushiki Kaisha | 294,511 | ||||||
|
| |||||||
2,250,617 | ||||||||
|
| |||||||
| Media (1.4%): |
| ||||||
2,392 | Axel Springer AG | 153,709 | ||||||
62,674 | British Sky Broadcasting Group plc | 876,556 | ||||||
12,977 | Dentsu, Inc. | 532,034 | ||||||
9,032 | Eutelsat Communications SA | 281,790 | ||||||
15,400 | Hakuhodo DY Holdings, Inc. | 119,550 | ||||||
222,238 | ITV plc | 714,256 | ||||||
3,622 | JC Decaux SA | 149,572 | ||||||
1,278 | Kabel Deutschland Holding AG | 165,818 | ||||||
7,055 | Lagardere S.C.A. | 262,273 | ||||||
48,580 | Pearson plc | 1,078,882 | ||||||
10,930 | ProSiebenSat.1 Media AG, Registered Shares | 542,168 | ||||||
10,998 | Publicis Groupe | 1,009,514 | ||||||
3,075 | REA Group, Ltd. | 103,689 | ||||||
41,377 | Reed Elsevier NV | 879,087 | ||||||
71,043 | Reed Elsevier plc | 1,058,771 | ||||||
2,271 | RTL Group | 293,477 | ||||||
18,171 | SES, Class A | 588,322 | ||||||
66,768 | Singapore Press Holdings, Ltd.^ | 218,460 | ||||||
25,726 | Sky Deutschland AG* | 284,115 | ||||||
7,400 | Toho Co., Ltd. | 162,889 |
Shares | Fair Value | |||||||
| Common Stocks, continued |
| ||||||
| Media, continued |
| ||||||
17,586 | Wolters Kluwer NV | $ | 503,252 | |||||
80,645 | WPP plc | 1,850,367 | ||||||
|
| |||||||
11,828,551 | ||||||||
|
| |||||||
| Metals & Mining (3.5%): |
| ||||||
147,224 | Alumina, Ltd.* | 146,572 | ||||||
84,037 | Anglo American plc | 1,846,559 | ||||||
24,134 | Antofagasta plc | 331,092 | ||||||
59,947 | ArcelorMittal^ | 1,071,704 | ||||||
126,832 | BHP Billiton plc | 3,931,940 | ||||||
192,881 | BHP Billiton, Ltd. | 6,558,026 | ||||||
15,340 | Boliden AB | 235,940 | ||||||
15,000 | Daido Steel Co., Ltd. | 74,609 | ||||||
94,422 | Fortescue Metals Group, Ltd. | 492,612 | ||||||
11,318 | Fresnillo plc | 140,320 | ||||||
638,461 | Glencore International plc | 3,318,578 | ||||||
13,000 | Hitachi Metals, Ltd. | 183,961 | ||||||
23,792 | Iluka Resources, Ltd. | 183,358 | ||||||
29,800 | JFE Holdings, Inc. | 710,705 | ||||||
145,000 | Kobe Steel, Ltd.* | 248,625 | ||||||
2,600 | Maruichi Steel Tube, Ltd. | 65,747 | ||||||
70,000 | Mitsubishi Materials Corp. | 258,788 | ||||||
44,650 | Newcrest Mining, Ltd. | 312,262 | ||||||
455,480 | Nippon Steel Corp. | 1,528,111 | ||||||
78,960 | Norsk Hydro ASA | 353,089 | ||||||
5,355 | Randgold Resources, Ltd. | 335,953 | ||||||
76,348 | Rio Tinto plc | 4,307,660 | ||||||
26,407 | Rio Tinto, Ltd. | 1,607,665 | ||||||
33,000 | Sumitomo Metal & Mining Co., Ltd. | 432,783 | ||||||
27,160 | ThyssenKrupp AG* | 662,588 | ||||||
6,984 | Voestalpine AG | 338,189 | ||||||
2,900 | Yamato Kogyo Co., Ltd. | 92,789 | ||||||
|
| |||||||
29,770,225 | ||||||||
|
| |||||||
| Multiline Retail (0.4%): |
| ||||||
3,200 | Don Quijote Co., Ltd. | 194,310 | ||||||
26,712 | Harvey Norman Holdings, Ltd.^ | 75,377 | ||||||
22,200 | Isetan Mitsukoshi Holdings, Ltd. | 316,606 | ||||||
28,000 | J. Front Retailing Co., Ltd. | 212,395 | ||||||
95,615 | Marks & Spencer Group plc | 687,194 | ||||||
14,500 | MARUI GROUP Co., Ltd. | 147,607 | ||||||
9,371 | Next plc | 845,807 | ||||||
4,513 | Pinault Printemps Redoute | 954,346 | ||||||
18,000 | Takashimaya Co., Ltd. | 179,735 | ||||||
|
| |||||||
3,613,377 | ||||||||
|
| |||||||
| Multi-Utilities (1.1%): |
| ||||||
34,311 | AGL Energy, Ltd. | 460,506 | ||||||
310,933 | Centrica plc | 1,790,421 | ||||||
79,141 | GDF Suez | 1,867,411 | ||||||
224,480 | National Grid plc | 2,932,725 | ||||||
29,216 | RWE AG | 1,068,308 | ||||||
16,237 | Suez Environnement Co. | 290,947 | ||||||
20,949 | Veolia Environnement | 342,286 | ||||||
|
| |||||||
8,752,604 | ||||||||
|
| |||||||
| Office Electronics (0.4%): |
| ||||||
15,300 | Brother Industries, Ltd. | 209,517 | ||||||
67,800 | Canon, Inc. | 2,158,513 |
Continued
10
AZL International Index Fund
Schedule of Portfolio Investments
December 31, 2013
Shares | Fair Value | |||||||
| Common Stocks, continued |
| ||||||
| Office Electronics, continued |
| ||||||
29,500 | Konica Minolta Holdings, Inc. | $ | 295,779 | |||||
41,000 | Ricoh Co., Ltd. | 437,588 | ||||||
|
| |||||||
3,101,397 | ||||||||
|
| |||||||
| Oil, Gas & Consumable Fuels (6.2%): |
| ||||||
204,456 | BG Group plc | 4,405,445 | ||||||
1,132,067 | BP plc | 9,169,288 | ||||||
7,152 | Caltex Australia, Ltd. | 128,426 | ||||||
152,763 | Eni SpA | 3,693,459 | ||||||
2,256 | Fuchs Petrolub AG | 220,749 | ||||||
21,542 | Galp Energia SGPS SA, B Shares | 353,664 | ||||||
6,000 | Idemitsu Kosan Co., Ltd. | 136,641 | ||||||
53,400 | INPEX Corp. | 684,802 | ||||||
1,500 | Japan Petroleum Exploration Co., Ltd. | 56,859 | ||||||
133,070 | JX Holdings, Inc. | 685,267 | ||||||
13,881 | Lundin Petroleum AB* | 271,029 | ||||||
8,464 | Neste Oil OYJ | 168,314 | ||||||
8,980 | OMV AG | 430,064 | ||||||
66,050 | Origin Energy, Ltd. | 829,973 | ||||||
50,239 | Repsol YPF SA | 1,269,249 | ||||||
150,882 | Royal Dutch Shell plc, B Shares | 5,677,260 | ||||||
229,517 | Royal Dutch Shell plc, A Shares | 8,241,763 | ||||||
58,149 | Santos, Ltd. | 762,255 | ||||||
11,800 | Showa Shell Sekiyu K.K. | 119,992 | ||||||
66,470 | Statoil ASA | 1,615,054 | ||||||
19,000 | TonenGeneral Sekiyu K.K.^ | 174,405 | ||||||
128,466 | Total SA | 7,874,232 | ||||||
54,538 | Tullow Oil plc | 774,336 | ||||||
39,552 | Woodside Petroleum, Ltd. | 1,373,929 | ||||||
|
| |||||||
49,116,455 | ||||||||
|
| |||||||
| Paper & Forest Products (0.2%): |
| ||||||
47,000 | Oji Paper Co., Ltd. | 241,564 | ||||||
33,306 | Stora Enso OYJ, R Shares | 335,616 | ||||||
34,945 | Svenska Cellulosa AB, B Shares | 1,079,987 | ||||||
32,208 | UPM-Kymmene OYJ | 544,875 | ||||||
|
| |||||||
2,202,042 | ||||||||
|
| |||||||
| Personal Products (0.6%): |
| ||||||
6,119 | Beiersdorf AG | �� | 621,183 | |||||
30,500 | Kao Corp. | 960,781 | ||||||
14,606 | L’Oreal SA | 2,571,910 | ||||||
22,300 | Shiseido Co., Ltd. | 359,164 | ||||||
|
| |||||||
4,513,038 | ||||||||
|
| |||||||
| Pharmaceuticals (8.4%): |
| ||||||
26,300 | Astellas Pharma, Inc. | 1,558,634 | ||||||
75,218 | AstraZeneca plc | 4,460,992 | ||||||
49,664 | Bayer AG | 6,966,982 | ||||||
13,900 | Chugai Pharmaceutical Co., Ltd. | 307,809 | ||||||
40,700 | Daiichi Sankyo Co., Ltd. | 745,741 | ||||||
10,500 | Dainippon Sumitomo Pharma Co., Ltd. | 164,532 | ||||||
15,500 | Eisai Co., Ltd. | 600,981 | ||||||
294,207 | GlaxoSmithKline plc | 7,845,856 | ||||||
3,900 | Hisamitsu Pharmaceutical Co., Inc. | 196,524 | ||||||
13,000 | Kyowa Hakko Kogyo Co., Ltd. | 143,400 | ||||||
3,876 | Merck KGaA | 698,286 | ||||||
13,200 | Mitsubishi Tanabe Pharma Corp. | 184,045 | ||||||
138,152 | Novartis AG, Registered Shares | 11,059,468 |
Shares | Fair Value | |||||||
| Common Stocks, continued |
| ||||||
| Pharmaceuticals, continued |
| ||||||
23,917 | Novo Nordisk A/S, B Shares | $ | 4,406,708 | |||||
4,900 | Ono Pharmaceutical Co., Ltd. | 429,201 | ||||||
5,781 | Orion OYJ, Class B | 162,748 | ||||||
22,300 | Otsuka Holdings Co., Ltd. | 644,152 | ||||||
2 | Perrigo Co. plc | 260 | ||||||
42,196 | Roche Holding AG | 11,831,572 | ||||||
71,713 | Sanofi-Aventis SA | 7,632,960 | ||||||
4,300 | Santen Pharmaceutical Co., Ltd. | 200,736 | ||||||
18,600 | Shionogi & Co., Ltd. | 404,156 | ||||||
33,432 | Shire plc | 1,575,146 | ||||||
1,700 | Taisho Pharmaceutical Holdings Co., Ltd. | 116,949 | ||||||
47,300 | Takeda Pharmacuetical Co., Ltd. | 2,171,732 | ||||||
50,883 | Teva Pharmaceutical Industries, Ltd. | 2,041,436 | ||||||
3,200 | Tsumura & Co. | 84,823 | ||||||
6,479 | UCB SA | 482,692 | ||||||
|
| |||||||
67,118,521 | ||||||||
|
| |||||||
| Professional Services (0.5%): |
| ||||||
8,052 | Adecco SA, Registered Shares | 639,673 | ||||||
21,554 | ALS, Ltd. | 169,595 | ||||||
13,542 | Bureau Veritas SA | 396,680 | ||||||
39,378 | Capita Group plc | 677,285 | ||||||
59,587 | Experian plc | 1,099,592 | ||||||
9,984 | Intertek Group plc | 520,813 | ||||||
7,510 | Randstad Holding NV | 487,590 | ||||||
333 | SGS SA, Registered Shares | 769,284 | ||||||
|
| |||||||
4,760,512 | ||||||||
|
| |||||||
| Real Estate Investment Trusts (REITs) (1.5%): |
| ||||||
114,000 | Ascendas Real Estate Investment Trust | 199,193 | ||||||
57,111 | British Land Co. plc | 595,177 | ||||||
88,606 | CaitaMalls Asia, Ltd. | 138,097 | ||||||
108,000 | CapitaCommercial Trust | 124,308 | ||||||
137,000 | CapitaMall Trust | 207,258 | ||||||
131,863 | CFS Retail Property Trust | 229,536 | ||||||
3,927 | Corio NV | 176,278 | ||||||
270,888 | Dexus Property Group | 243,116 | ||||||
80,308 | Federation Centres | 167,812 | ||||||
1,715 | Fonciere des Regions SA | 148,136 | ||||||
1,273 | Gecina SA | 168,216 | ||||||
105,263 | GPT Group | 320,347 | ||||||
43,409 | Hammerson plc+ | 360,965 | ||||||
2,040 | ICADE | 190,263 | ||||||
52 | Japan Prime Realty Investment Corp. | 166,617 | ||||||
76 | Japan Real Estate Investment Corp. | 407,767 | ||||||
139 | Japan Retail Fund Investment Corp. | 283,099 | ||||||
5,714 | Klepierre | 264,815 | ||||||
47,143 | Land Securities Group plc | 752,490 | ||||||
41,765 | Liberty International plc | 214,736 | ||||||
138,500 | Link REIT (The) | 673,887 | ||||||
100,146 | Macquarie Goodman Group | 424,055 | ||||||
225,581 | Mirvac Group | 338,441 | ||||||
86 | Nippon Building Fund, Inc. | 500,718 | ||||||
18 | Nippon Prologis REIT, Inc. | 172,123 | ||||||
18 | Nomura Real Estate Office Fund, Inc. | 83,762 | ||||||
43,073 | SERGO plc | 238,320 | ||||||
134,084 | Stockland Trust Group | 433,405 | ||||||
5,879 | Unibail-Rodamco SE | 1,509,618 |
Continued
11
AZL International Index Fund
Schedule of Portfolio Investments
December 31, 2013
Shares | Fair Value | |||||||
| Common Stocks, continued |
| ||||||
| Real Estate Investment Trusts (REITs), continued |
| ||||||
146 | United Urban Investment Corp. | $ | 210,034 | |||||
124,824 | Westfield Group | 1,124,777 | ||||||
176,965 | Westfield Retail Trust | 469,342 | ||||||
|
| |||||||
11,536,708 | ||||||||
|
| |||||||
| Real Estate Management & Development (1.9%): |
| ||||||
7,260 | AEON Mall Co., Ltd. | 204,016 | ||||||
74,028 | BGP Holdings plc*(a) | — | ||||||
157,000 | CapitaLand, Ltd. | 378,098 | ||||||
83,000 | Cheung Kong Holdings, Ltd. | 1,314,726 | ||||||
26,000 | City Developments, Ltd. | 198,398 | ||||||
4,500 | Daito Trust Construction Co., Ltd. | 420,774 | ||||||
36,000 | Daiwa House Industry Co., Ltd. | 697,101 | ||||||
17,460 | Deutsche Wohnen AG | 338,824 | ||||||
182,000 | Global Logistic Properties, Ltd. | 417,713 | ||||||
132,000 | Hang Lung Properties, Ltd. | 419,366 | ||||||
65,300 | Henderson Land Development Co., Ltd. | 373,363 | ||||||
34,000 | Hopewell Holdings, Ltd. | 115,192 | ||||||
15,200 | Hulic Co., Ltd. | 225,613 | ||||||
37,000 | Hysan Development Co., Ltd. | 159,543 | ||||||
7,136 | IMMOEAST AG NPV(BR)* | — | ||||||
54,352 | Immofinanz Immobilien Anlagen AG | 252,202 | ||||||
40,000 | Keppel Land, Ltd. | 106,289 | ||||||
37,000 | Kerry Properties, Ltd. | 128,577 | ||||||
33,642 | Lend Lease Group | 334,734 | ||||||
75,000 | Mitsubishi Estate Co., Ltd. | 2,247,940 | ||||||
50,000 | Mitsui Fudosan Co., Ltd. | 1,803,954 | ||||||
238,000 | New World Development Co., Ltd. | 301,040 | ||||||
8,100 | Nomura Real Estate Holdings, Inc. | 182,624 | ||||||
7,200 | NTT Urban Development Corp. | 83,050 | ||||||
169,600 | Sino Land Co., Ltd. | 232,286 | ||||||
21,000 | Sumitomo Realty & Development Co., Ltd. | 1,046,904 | ||||||
96,000 | Sun Hung Kai Properties, Ltd. | 1,223,191 | ||||||
41,000 | Swire Pacific, Ltd., Class A | 481,510 | ||||||
67,400 | Swire Properties, Ltd. | 170,480 | ||||||
3,091 | Swiss Prime Site AG | 239,882 | ||||||
24,000 | Tokyo Tatemono Co., Ltd. | 267,405 | ||||||
30,800 | Tokyu Fudosan Holdings Corp.* | 290,700 | ||||||
31,000 | UOL Group, Ltd. | 152,292 | ||||||
92,300 | Wharf Holdings, Ltd. (The) | 706,683 | ||||||
52,000 | Wheelock & Co., Ltd. | 239,680 | ||||||
|
| |||||||
15,754,150 | ||||||||
|
| |||||||
| Road & Rail (0.8%): |
| ||||||
55,784 | Asciano, Ltd. | 288,131 | ||||||
124,745 | Aurizon Holdings, Ltd. | 544,807 | ||||||
8,700 | Central Japan Railway Co. | 1,026,317 | ||||||
117,000 | ComfortDelGro Corp., Ltd. | 186,540 | ||||||
10,676 | DSV A/S | 350,886 | ||||||
20,113 | East Japan Railway Co. | 1,605,450 | ||||||
27,000 | Keihin Electric Express Railway Co., Ltd. | 223,188 | ||||||
33,000 | Keio Corp. | 220,549 | ||||||
16,000 | Keisei Electric Railway Co., Ltd. | 147,524 | ||||||
104,000 | Kintetsu Corp. | 364,827 | ||||||
90,000 | MTR Corp., Ltd. | 341,488 | ||||||
45,000 | Nippon Express Co., Ltd. | 218,271 | ||||||
38,000 | Odakyu Electric Railway Co., Ltd. | 344,509 | ||||||
61,000 | Tobu Railway Co., Ltd. | 296,085 |
Shares | Fair Value | |||||||
| Common Stocks, continued |
| ||||||
| Road & Rail, continued |
| ||||||
70,000 | Tokyu Corp. | $ | 454,637 | |||||
10,300 | West Japan Railway Co. | 447,094 | ||||||
|
| |||||||
7,060,303 | ||||||||
|
| |||||||
| Semiconductors & Semiconductor Equipment (0.7%): |
| ||||||
8,700 | Advantest Corp. | 108,346 | ||||||
83,932 | ARM Holdings plc | 1,526,176 | ||||||
13,100 | ASM Pacific Technology, Ltd. | 109,734 | ||||||
21,497 | ASML Holding NV | 2,018,520 | ||||||
64,634 | Infineon Technologies AG | 690,147 | ||||||
5,600 | ROHM Co., Ltd. | 273,141 | ||||||
36,468 | STMicroelectronics NV | 293,757 | ||||||
5,500 | SUMCO Corp. | 48,543 | ||||||
10,500 | Tokyo Electron, Ltd. | 579,317 | ||||||
|
| |||||||
5,647,681 | ||||||||
|
| |||||||
| Software (1.0%): |
| ||||||
3,762 | Dassault Systemes SA | 467,410 | ||||||
20,000 | Gungho Online Enetertainment, Inc.*^ | 144,351 | ||||||
5,600 | Konami Corp. | 129,683 | ||||||
5,800 | Nexon Co., Ltd. | 53,562 | ||||||
3,460 | NICE Systems, Ltd. | 141,865 | ||||||
6,500 | Nintendo Co., Ltd. | 869,328 | ||||||
1,900 | Oracle Corp. | 69,549 | ||||||
68,312 | Sage Group plc | 458,033 | ||||||
55,332 | SAP AG | 4,743,797 | ||||||
6,100 | Trend Micro, Inc. | 213,824 | ||||||
|
| |||||||
7,291,402 | ||||||||
|
| |||||||
| Specialty Retail (1.0%): |
| ||||||
1,400 | ABC-Mart, Inc. | 61,208 | ||||||
3,200 | Fast Retailing Co., Ltd. | 1,324,721 | ||||||
57,009 | Hennes & Mauritz AB, B Shares | 2,635,215 | ||||||
13,168 | Industria de Diseno Textil SA | 2,178,738 | ||||||
141,890 | Kingfisher plc | 906,952 | ||||||
2,000 | Nitori Co., Ltd. | 189,692 | ||||||
2,700 | Sanrio Co., Ltd.^ | 113,816 | ||||||
1,200 | Shimamura Co., Ltd. | 112,602 | ||||||
13,100 | USS Co., Ltd. | 180,008 | ||||||
50,800 | Yamada Denki Co., Ltd. | 166,254 | ||||||
|
| |||||||
7,869,206 | ||||||||
|
| |||||||
| Textiles, Apparel & Luxury Goods (1.4%): |
| ||||||
12,501 | Adidas AG | 1,593,529 | ||||||
8,800 | ASICS Corp. | 150,338 | ||||||
26,955 | Burberry Group plc | 677,115 | ||||||
3,188 | Christian Dior SA | 603,496 | ||||||
31,358 | Compagnie Financiere Richemont SA, Registered Shares | 3,138,840 | ||||||
1,954 | Hugo Boss AG | 278,256 | ||||||
10,182 | Luxottica Group SpA | 546,840 | ||||||
15,270 | LVMH Moet Hennessy Louis Vuitton SA | 2,795,122 | ||||||
2,678 | Swatch Group AG (The), Registered Shares | 302,790 | ||||||
1,867 | Swatch Group AG (The) | 1,239,173 | ||||||
45,000 | Yue Yuen Industrial Holdings, Ltd. | 150,569 | ||||||
|
| |||||||
11,476,068 | ||||||||
|
| |||||||
| Tobacco (1.3%): |
| ||||||
114,277 | British American Tobacco plc | 6,130,538 | ||||||
57,999 | Imperial Tobacco Group plc | 2,250,565 |
Continued
12
AZL International Index Fund
Schedule of Portfolio Investments
December 31, 2013
Shares | Fair Value | |||||||
| Common Stocks, continued |
| ||||||
| Tobacco, continued |
| ||||||
66,000 | Japan Tobacco, Inc. | $ | 2,147,856 | |||||
12,386 | Swedish Match AB, Class B | 398,393 | ||||||
|
| |||||||
10,927,352 | ||||||||
|
| |||||||
| Trading Companies & Distributors (1.1%): |
| ||||||
3,027 | Brenntag AG | 562,288 | ||||||
19,384 | Bunzl plc | 465,741 | ||||||
89,300 | ITOCHU Corp. | 1,105,428 | ||||||
98,000 | Marubeni Corp. | 705,357 | ||||||
83,600 | Mitsubishi Corp. | 1,604,822 | ||||||
104,900 | Mitsui & Co., Ltd. | 1,463,039 | ||||||
268,090 | Noble Group, Ltd. | 228,336 | ||||||
73,700 | Sojitz Corp. | 131,269 | ||||||
67,400 | Sumitomo Corp. | 847,940 | ||||||
13,200 | Toyota Tsushu Corp. | 327,869 | ||||||
14,482 | Travis Perkins plc | 450,692 | ||||||
15,949 | Wolseley plc | 905,601 | ||||||
|
| |||||||
8,798,382 | ||||||||
|
| |||||||
| Transportation Infrastructure (0.4%): |
| ||||||
22,777 | Abertis Infraestructuras SA | 507,253 | ||||||
1,880 | Aeroports de Paris | 213,396 | ||||||
22,079 | Atlantia SpA | 499,080 | ||||||
67,946 | Auckland International Airport, Ltd. | 197,214 | ||||||
2,171 | Fraport AG | 163,218 | ||||||
34,287 | Groupe Eurotunnel SA | 360,403 | ||||||
296,000 | Hutchison Port Holdings Trust | 199,923 | ||||||
16,000 | Kamigumi Co., Ltd. | 146,919 | ||||||
4,027 | Koninklijke Vopak NV | 235,922 | ||||||
8,000 | Mitsubishi Logistics Corp. | 126,909 | ||||||
67,857 | Sydney Airport | 230,744 | ||||||
86,172 | Transurban Group | 526,709 | ||||||
|
| |||||||
3,407,690 | ||||||||
|
| |||||||
| Water Utilities (0.1%): |
| ||||||
14,068 | Severn Trent plc | 397,233 | ||||||
39,786 | United Utilities Group plc | 443,521 | ||||||
|
| |||||||
840,754 | ||||||||
|
| |||||||
| Wireless Telecommunication Services (2.5%): |
| ||||||
32,300 | KDDI Corp. | 1,992,467 | ||||||
4,045 | Millicom International Cellular SA, SDR | 403,164 | ||||||
90,900 | NTT DoCoMo, Inc. | 1,493,785 | ||||||
57,700 | SoftBank Corp. | 5,059,093 |
Shares | Fair Value | |||||||
| Common Stocks, continued |
| ||||||
| Wireless Telecommunication Services, continued |
| ||||||
41,202 | StarHub, Ltd. | $ | 140,405 | |||||
18,335 | Tele2 AB | 208,061 | ||||||
2,909,898 | Vodafone Group plc | 11,437,385 | ||||||
|
| |||||||
20,734,360 | ||||||||
|
| |||||||
| Total Common Stocks (Cost $621,546,832) | 791,806,486 | ||||||
|
| |||||||
| Preferred Stocks (0.6%): |
| ||||||
| Automobiles (0.4%): |
| ||||||
3,235 | Bayerische Motoren Werke AG (BMW), Preferred Shares | 276,358 | ||||||
9,154 | Porsche Automobil Holding SE, Preferred Shares | 955,305 | ||||||
8,684 | Volkswagen AG, Preferred Shares | 2,439,587 | ||||||
|
| |||||||
3,671,250 | ||||||||
|
| |||||||
| Household Products (0.2%): |
| ||||||
10,763 | Henkel AG & Co. KGaA, Preferred Shares | 1,248,528 | ||||||
|
| |||||||
| Total Preferred Stocks (Cost $2,664,020) | 4,919,778 | ||||||
|
| |||||||
| Right (0.0%): |
| ||||||
| Oil, Gas & Consumable Fuels (0.0%): |
| ||||||
50,239 | Repsol SA* | 34,278 | ||||||
|
| |||||||
| Total Right (Cost $—) | 34,278 | ||||||
|
| |||||||
Contracts, Shares, Notional Amount or Principal Amount | Fair Value | |||||||
| Securities Held as Collateral for Securities on Loan (0.7%): |
| ||||||
$5,792,315 | Allianz Variable Insurance Products Securities Lending Collateral Trust(b) | 5,792,315 | ||||||
|
| |||||||
| Total Securities Held as Collateral for Securities on Loan | 5,792,315 | ||||||
|
| |||||||
| Unaffiliated Investment Company (0.1%): |
| ||||||
534,914 | Dreyfus Treasury Prime Cash Management Fund, Institutional Shares, 0.00%(c) | 534,914 | ||||||
|
| |||||||
| Total Unaffiliated Investment Company (Cost $534,914) | 534,914 | ||||||
|
| |||||||
| Total Investment Securities | 803,087,771 | ||||||
| Net other assets (liabilities) — 0.6% | 5,107,797 | ||||||
|
| |||||||
| Net Assets — 100.0% | $ | 808,195,568 | |||||
|
|
Percentages indicated are based on net assets as of December 31, 2013.
ADR—American Depositary Receipt
SDR—Swedish Depository Receipt
* | Non-income producing security. |
^ | This security or a partial position of this security was on loan as of December 31, 2013. The total value of securities on loan as of December 31, 2013, was $5,517,188. |
# | Security issued in connection with a pending litigation settlement. |
+ | Affiliated Securities |
(a) | Security was valued in good faith pursuant to procedures approved by the Board of Trustees as of December 31, 2013. The total of all such securities represent 0.00% of the net assets of the fund. |
(b) | Purchased with cash collateral held from securities lending. The value of the collateral could include collateral held for securities that were sold on or before December 31, 2013. |
(c) | The rate represents the effective yield at December 31, 2013. |
(d) | See Federal Tax Information listed in the Notes to the Financial Statements. |
Continued
13
AZL International Index Fund
Schedule of Portfolio Investments
December 31, 2013
The following represents the concentrations by country of risk (based on the domicile of the security issuer) relative to the total fair value of investments as of December 31, 2013:
Country | Percentage | |||
Australia | 7.3 | % | ||
Austria | 0.3 | % | ||
Belgium | 1.2 | % | ||
Bermuda | 0.1 | % | ||
Denmark | 1.2 | % | ||
Finland | 0.9 | % | ||
France | 9.3 | % | ||
Germany | 9.3 | % | ||
Guernsey | 0.1 | % | ||
Hong Kong | 2.9 | % | ||
Ireland | 0.1 | % | ||
Ireland (Republic of) | 0.6 | % | ||
Israel | 0.4 | % | ||
Italy | 2.1 | % | ||
Japan | 20.7 | % | ||
Jersey | 0.5 | % | ||
Luxembourg | 0.3 | % | ||
Netherlands | 3.3 | % | ||
New Zealand | 0.1 | % | ||
Norway | 0.7 | % | ||
Portugal | 0.2 | % | ||
Singapore | 1.4 | % | ||
Spain | 3.3 | % | ||
Sweden | 3.2 | % | ||
Switzerland | 8.9 | % | ||
United Kingdom | 20.7 | % | ||
United States | 0.9 | % | ||
|
| |||
100.0 | % | |||
|
|
Futures Contracts
Cash of $774,200 has been segregated to cover margin requirements for the following open contracts as of December 31, 2013:
Description | Type | Expiration Date | Number of Contracts | Notional Value | Unrealized Appreciation/ (Depreciation) | |||||||||||||||
ASX SPI 200 Index March Futures (Australian Dollar) | Long | 3/20/14 | 11 | $ | 1,305,526 | $ | 48,774 | |||||||||||||
FTSE 100 Index March Futures (British Pounds) | Long | 3/21/14 | 32 | 3,548,521 | 109,708 | |||||||||||||||
SGX NIKKEI 225 Index March Futures (Japanese Yen) | Long | 3/13/14 | 40 | 3,087,663 | 131,701 | |||||||||||||||
DJ EURO STOXX 50 March Futures (Euro) | Long | 3/21/14 | 91 | 3,890,558 | 163,045 | |||||||||||||||
|
| |||||||||||||||||||
Total | $ | 453,228 | ||||||||||||||||||
|
|
See accompanying notes to the financial statements.
14
AZL International Index Fund
Statement of Assets and Liabilities
December 31, 2013
Assets: | |||||
Investments in non-affiliates, at cost | $ | 627,024,432 | |||
Investments in affiliates, at cost | 3,513,649 | ||||
|
| ||||
Total Investment securities, at cost | $ | 630,538,081 | |||
|
| ||||
Investments in non-affiliates, at value* | $ | 797,814,869 | |||
Investments in affiliates, at value | 5,272,902 | ||||
|
| ||||
Total Investment securities, at value | 803,087,771 | ||||
Segregated cash for collateral | 774,200 | ||||
Interest and dividends receivable | 740,203 | ||||
Foreign currency, at value (cost $10,023,996) | 10,252,375 | ||||
Receivable for investments sold | 82,294 | ||||
Reclaims receivable | 300,318 | ||||
|
| ||||
Total Assets | 815,237,161 | ||||
|
| ||||
Liabilities: | |||||
Payable for capital shares redeemed | 619,186 | ||||
Payable for collateral received on loaned securities | 5,792,315 | ||||
Payable for variation margin on futures contracts | 9,343 | ||||
Manager fees payable | 255,601 | ||||
Administration fees payable | 34,517 | ||||
Distribution fees payable | 165,670 | ||||
Custodian fees payable | 67,578 | ||||
Administrative and compliance services fees payable | 3,102 | ||||
Trustee fees payable | 23 | ||||
Other accrued liabilities | 94,258 | ||||
|
| ||||
Total Liabilities | 7,041,593 | ||||
|
| ||||
Net Assets | $ | 808,195,568 | |||
|
| ||||
Net Assets Consist of: | |||||
Capital | $ | 725,904,389 | |||
Accumulated net investment income/(loss) | 12,698,316 | ||||
Accumulated net realized gains/(losses) from investment transactions | (103,655,364 | ) | |||
Net unrealized appreciation/(depreciation) on investments | 173,248,227 | ||||
|
| ||||
Net Assets | $ | 808,195,568 | |||
|
| ||||
Shares of beneficial interest (unlimited number of shares authorized, no par value) | 48,759,923 | ||||
Net Asset Value (offering and redemption price per share) | $ | 16.57 | |||
|
|
* | Includes securities on loan of $5,517,188. |
For the Year Ended December 31, 2013
Investment Income: | |||||
Dividends | $ | 22,275,835 | |||
Dividends from affiliates | 148,290 | ||||
Income from securities lending | 643,576 | ||||
Foreign withholding tax | (2,879,915 | ) | |||
|
| ||||
Total Investment Income | 20,187,786 | ||||
|
| ||||
Expenses: | |||||
Manager fees | 2,360,348 | ||||
Administration fees | 306,302 | ||||
Distribution fees | 1,685,966 | ||||
Custodian fees | 239,056 | ||||
Administrative and compliance services fees | 12,495 | ||||
Trustee fees | 32,045 | ||||
Professional fees | 49,351 | ||||
Shareholder reports | 18,178 | ||||
Recoupment of prior expenses reimbursed by the manager | 202,224 | ||||
Other expenses | 237,452 | ||||
|
| ||||
Total expenses | 5,143,417 | ||||
|
| ||||
Net Investment Income/(Loss) | 15,044,369 | ||||
|
| ||||
Realized and Unrealized Gains/(Losses) on Investments: | |||||
Net realized gains/(losses) on securities transactions | (1,801,053 | ) | |||
Net realized gains/(losses) on futures contracts | 1,563,188 | ||||
Change in net unrealized appreciation/depreciation on investments | 117,539,416 | ||||
|
| ||||
Net Realized/Unrealized Gains/(Losses) on Investments | 117,301,551 | ||||
|
| ||||
Change in Net Assets Resulting From Operations | $ | 132,345,920 | |||
|
|
See accompanying notes to the financial statements.
15
Statements of Changes in Net Assets
AZL International Index Fund | ||||||||||
For the Year Ended December 31, 2013 | For the Year Ended December 31, 2012 | |||||||||
Change in Net Assets: | ||||||||||
Operations: | ||||||||||
Net investment income/(loss) | $ | 15,044,369 | $ | 12,656,375 | ||||||
Net realized gains/(losses) on investment transactions | (237,865 | ) | (3,543,799 | ) | ||||||
Change in unrealized appreciation/depreciation on investments | 117,539,416 | 71,577,016 | ||||||||
|
|
|
| |||||||
Change in net assets resulting from operations | 132,345,920 | 80,689,592 | ||||||||
|
|
|
| |||||||
Dividends to Shareholders: | ||||||||||
From net investment income | (13,742,662 | ) | (9,725,273 | ) | ||||||
|
|
|
| |||||||
Change in net assets resulting from dividends to shareholders | (13,742,662 | ) | (9,725,273 | ) | ||||||
|
|
|
| |||||||
Capital Transactions: | ||||||||||
Proceeds from shares issued | 148,440,908 | 144,520,419 | ||||||||
Proceeds from dividends reinvested | 13,742,662 | 9,725,273 | ||||||||
Value of shares redeemed | (39,829,157 | ) | (38,735,049 | ) | ||||||
|
|
|
| |||||||
Change in net assets resulting from capital transactions | 122,354,413 | 115,510,643 | ||||||||
|
|
|
| |||||||
Change in net assets | 240,957,671 | 186,474,962 | ||||||||
Net Assets: | ||||||||||
Beginning of period | 567,237,897 | 380,762,935 | ||||||||
|
|
|
| |||||||
End of period | $ | 808,195,568 | $ | 567,237,897 | ||||||
|
|
|
| |||||||
Accumulated net investment income/(loss) | $ | 12,698,316 | $ | 12,226,032 | ||||||
|
|
|
| |||||||
Share Transactions: | ||||||||||
Shares issued | 9,792,221 | 11,279,527 | ||||||||
Dividends reinvested | 892,961 | 745,803 | ||||||||
Shares redeemed | (2,632,954 | ) | (2,971,673 | ) | ||||||
|
|
|
| |||||||
Change in shares | 8,052,228 | 9,053,657 | ||||||||
|
|
|
|
See accompanying notes to the financial statements.
16
AZL International Index Fund
(Selected data for a share of beneficial interest outstanding throughout the periods indicated)
Year Ended December 31, 2013 | Year Ended December 31, 2012 | Year Ended December 31, 2011 | Year Ended December 31, 2010 | May 1, 2009 to December 31, 2009(a) | |||||||||||||||||||||
Net Asset Value, Beginning of Period | $ | 13.93 | $ | 12.03 | $ | 13.99 | $ | 13.31 | $ | 10.00 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Investment Activities: | |||||||||||||||||||||||||
Net Investment Income/(Loss) | 0.29 | 0.26 | 0.28 | 0.15 | 0.10 | ||||||||||||||||||||
Net Realized and Unrealized Gains/(Losses) on Investments | 2.65 | 1.89 | (2.07 | ) | 0.77 | 3.21 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Total from Investment Activities | 2.94 | 2.15 | (1.79 | ) | 0.92 | 3.31 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Dividends to Shareholders From: | |||||||||||||||||||||||||
Net Investment Income | (0.30 | ) | (0.25 | ) | (0.17 | ) | (0.07 | ) | — | ||||||||||||||||
Net Realized Gains | — | — | — | (0.17 | ) | — | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Total Dividends | (0.30 | ) | (0.25 | ) | (0.17 | ) | (0.24 | ) | — | ||||||||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Net Asset Value, End of Period | $ | 16.57 | $ | 13.93 | $ | 12.03 | $ | 13.99 | $ | 13.31 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Total Return(b) | 21.36 | % | 18.04 | % | (12.78 | )% | 7.12 | % | 33.10 | %(c) | |||||||||||||||
Ratios to Average Net Assets/Supplemental Data: | |||||||||||||||||||||||||
Net Assets, End of Period (000’s) | $ | 808,196 | $ | 567,238 | $ | 380,763 | $ | 340,781 | $ | 161,184 | |||||||||||||||
Net Investment Income/(Loss)(d) | 2.23 | % | 2.66 | % | 2.70 | % | 2.07 | % | 1.79 | % | |||||||||||||||
Expenses Before Reductions(d)(e) | 0.76 | % | 0.80 | % | 0.83 | % | 0.83 | % | 0.91 | % | |||||||||||||||
Expenses Net of Reductions(d) | 0.76 | % | 0.77 | % | 0.74 | % | 0.70 | % | 0.70 | % | |||||||||||||||
Portfolio Turnover Rate | 2 | % | 3 | % | 12 | % | 3 | % | 23 | %(c)(f) |
(a) | Period from commencement of operations. |
(b) | The returns include reinvested dividends and fund level expenses, but exclude insurance contract charges. If these charges were included, the returns would have been lower. |
(c) | Not annualized. |
(d) | Not annualized. |
(e) | Excludes fee reductions. If such fee reductions had not occurred, the ratios would have been as indicated. |
(f) | Cost of purchases and proceeds from sales of portfolio securities incurred to realign the Fund’s portfolio after a fund merger are excluded from the portfolio turnover rate. If such amounts had not been excluded, the portfolio turnover rate would have been 42%. |
See accompanying notes to the financial statements.
17
AZL International Index Fund
Notes to the Financial Statements
December 31, 2013
1. Organization
The Allianz Variable Insurance Products Trust (the “Trust”) was organized as a Delaware statutory trust on July 13, 1999. The Trust is a diversified open-end management investment company registered under the Investment Company Act of 1940. The Trust consists of 29 separate investment portfolios (collectively, the “Funds”), of which one is included in this report, the AZL International Index Fund (the “Fund”), and 28 are presented in separate reports.
The Trust is authorized to issue an unlimited number of shares of the Fund without par value. Shares of the Fund are available through the variable annuity contracts and variable life insurance policies offered through the separate accounts of participating insurance companies.
Under the Trust’s organizational documents, its officers and trustees are indemnified against certain liabilities arising out of the performance of their duties to the Fund. In addition, in the normal course of business, the Fund may enter into contracts with its vendors and others that provide for general indemnifications. The Fund’s maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Fund. However, based on experience, the Fund expects the risk of loss to be remote.
2. Significant Accounting Policies
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. The policies conform with U.S. generally accepted accounting principles (“U.S. GAAP”). The preparation of financial statements requires management to make certain 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 increases and decreases in net assets from operations during the reporting period. Actual results could differ from those estimates.
Security Valuation
The Fund records its investments at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between willing market participants at the measurement date. The valuation techniques used to determine fair value are further described in Note 4 below.
Investment Transactions and Investment Income
Investment transactions are recorded not later than on the business day following trade date. However, for financial reporting purposes, investment transactions are accounted for on trade date. Net realized gains and losses on investments sold and on foreign currency transactions are recorded on the basis of identified cost. Interest income is recorded on the accrual basis and includes, where applicable, the amortization of premiums or accretion of discounts. Dividend income is recorded on the ex-dividend date except in the case of foreign securities, in which case dividends are recorded as soon as such information becomes available.
Real Estate Investment Trusts
The Fund may own shares of real estate investment trusts (“REITs”) which report information on the source of their distributions annually. Certain distributions received from REITs during the year, which are known to be a return of capital, are recorded as a reduction to the cost of the individual REIT.
Foreign Currency Translation
The accounting records of the Fund are maintained in U.S. dollars. Foreign currency amounts are translated into U.S. dollars at the current rate of exchange to determine the fair value of investments, assets and liabilities. Purchases and sales of securities, and income and expenses are translated at the prevailing rate of exchange on the respective dates of such transactions. The Fund does not isolate that portion of the results of operations resulting from changes in foreign exchange rates on investments from fluctuations arising from changes in market prices of securities held. Such fluctuations are included in the net realized and unrealized gain or loss on investments and foreign currencies. Income received by the Fund from sources within foreign countries may be subject to withholding and other income or similar taxes imposed by such countries. The Funds accrue such taxes, as applicable, based on their current interpretation of tax rules in the foreign markets in which they invest.
Dividends to Shareholders
Dividends to shareholders are recorded on the ex-dividend date. The Fund distributes its dividends from net investment income and net realized capital gains, if any, on an annual basis. The amount of dividends from net investment income and from net realized gains is determined in accordance with federal income tax regulations, which may differ from U.S. GAAP. These “book/tax” differences are either temporary or permanent in nature. To the extent these differences are permanent in nature (e.g., return of capital, net operating loss, reclassification of certain market discounts, gain/loss, paydowns, and distributions), such amounts are reclassified within the composition of net assets based on their federal tax-basis treatment; temporary differences (e.g., wash sales and post October losses) do not require reclassification. Dividends to shareholders that exceed net investment income and net realized gains for tax purposes are reported as distributions of capital.
Expense Allocation
Expenses directly attributable to the Fund are charged directly to the Fund, while expenses attributable to more than one Fund are allocated among the respective Funds based upon relative net assets or some other reasonable method. Expenses which are attributable to more than one Trust are allocated across the Allianz Variable Insurance Products and Allianz Variable Insurance Products Fund of Funds Trusts based upon relative net assets or another reasonable basis. Allianz Investment Management LLC (the “Manager”), serves as the investment manager for the Trust and the Allianz Variable Insurance Products Fund of Funds Trust.
Securities Lending
To generate additional income, the Fund may lend up to 33 1/3% of its assets pursuant to agreements requiring that the loan be continuously secured by any combination of cash, U.S. government or U.S. government agency securities, equal initially to at least 102% of the fair value plus accrued interest on the securities loaned (105% for foreign
18
AZL International Index Fund
Notes to the Financial Statements
December 31, 2013
securities). The borrower of securities is at all times required to post collateral to the Fund in an amount equal to 100% of the fair value of the securities loaned based on the previous day’s fair value of the securities loaned, marked-to-market daily. Any collateral shortfalls are adjusted the next business day. The Fund bears all of the gains and losses on such investments. The Fund receives payments from borrowers equivalent to the dividends and interest that would have been earned on securities lent while simultaneously seeking to earn income on the investment of cash collateral received. In extremely low interest rate environments, the broker rebate fee may exceed the interest earned or the cash collateral which would result in a loss to the Fund. The investment of cash collateral deposited by the borrower is subject to inherent market risks such as interest rate risk, credit risk, liquidity risk, and other risks that are present in the market, and as such, the value of these investments may not be sufficient, when liquidated, to repay the borrower when the loaned security is returned. There may be risks of delay in recovery of the securities or even loss of rights in the collateral should the borrower of the securities fail financially. However, loans will be made only to borrowers, such as broker-dealers, banks or institutional borrowers of securities, deemed by the Manager to be of good standing and credit worthy and when in its judgment, the consideration which can be earned currently from such securities loans justifies the attendant risks. Loans are subject to termination by the Trust or the borrower at any time, and are, therefore, not considered to be illiquid investments. Securities on loan at December 31, 2013 are presented on the Fund’s Schedule of Portfolio Investments. The average outstanding amount of securities on loan was $23.3 million for the year ended December 31, 2013.
Cash collateral received in connection with securities lending is invested in the Allianz Variable Insurance Products Securities Lending Collateral Trust (the “Securities Lending Collateral Trust”) managed by The Dreyfus Corporation, an affiliate of the Custodian and Securities Lending Agent. The Securities Lending Collateral Trust invests in short-term investments that have a remaining maturity of 397 days or less as calculated in accordance with Rule 2a-7 under the 1940 Act. The Fund paid securities lending fees of $63,657 during the year ended December 31, 2013. These fees have been netted against “Income from securities lending” on the Statement of Operations.
Commission Recapture
Certain Funds of the Trust participate in a commission recapture program. The Fund will utilize the recaptured commissions to pay for, in whole or part, certain expenses of the Fund, excluding investment advisory fees. Any amounts received by the Fund, if applicable, are disclosed as “Expenses paid indirectly” on the Statement of Operations.
Effective January 6, 2014, the Manager, on behalf of the Trust, requested the Fund cease participation in the program until further notice.
Derivative Instruments
All open derivative positions at period end are reflected on the Fund’s Schedule of Portfolio Investments. The following is a description of the derivative instruments utilized by the Fund, including the primary underlying risk exposures related to each instrument type.
Futures Contracts
During the year ended December 31, 2013, the Fund used futures contracts to provide equity exposure on the Fund’s cash balances. Futures contracts are valued based upon their quoted daily settlement prices. Upon entering into a futures contract, the Fund is required to segregate liquid assets in accordance with the initial margin requirements of the broker or exchange. Futures contracts are marked to market daily and a payable or receivable for the change in value (“variation margin”) is recorded by the Fund. Gains or losses are recognized but not considered realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, elements of market risk (generally equity price risk related to stock futures, interest rate risk related to bond futures, and foreign currency risk related to currency futures) and exposure to loss in excess of the variation margin disclosed in the Statement of Assets and Liabilities. The primary risks associated with the use of futures contracts are the imperfect correlation between the change in fair value of the underlying securities and the prices of futures contracts, the possibility of an illiquid market, and the inability of the counterparty to meet the terms of the contract. The notional amount of futures contracts outstanding was $11.8 million as of December 31, 2013. The monthly average notional amount for these contracts was $10.9 million for the year ended December 31, 2013. Realized gains and losses are reported as “Net realized gains/(losses) on futures contracts” on the Statement of Operations.
Summary of Derivative Instruments
The following is a summary of the fair values of derivative instruments on the Fund’s Statement of Assets and Liabilities, categorized by risk exposure, as of December 31, 2013:
Asset Derivatives | Liability Derivatives | |||||||||||
Primary Risk Exposure | Statement of Assets and Liabilities Location | Total Fair Value* | Statement of Assets and Liabilities Location | Total Fair Value* | ||||||||
Equity Contracts | Receivable for variation margin on futures contracts | $ | 453,228 | Payable for variation margin on futures contracts | $ | — |
* | For futures contracts, the amounts represent the cumulative appreciation/(depreciation) of these futures contracts as reported in the Schedule of Portfolio Investments. Only the current day’s variation margin is reported within the Statement of Assets and Liabilities as Variation Margin on Futures Contracts. |
The following is a summary of the effect of derivative instruments on the Statement of Operations, categorized by risk exposure, for the year ended December 31, 2013:
Primary Risk Exposure | Location of Gains/(Losses) on Derivatives Recognized in Income | Realized Gains/(Losses) on Derivatives Recognized in Income | Change in Unrealized Appreciation/ Depreciation on Derivatives Recognized in Income | |||||||
Equity Contracts | Net realized gains/(losses) on futures contracts/change in unrealized appreciation/depreciation on investments | $ | 1,563,188 | $ | 407,500 |
19
AZL International Index Fund
Notes to the Financial Statements
December 31, 2013
3. Related Party Transactions
The Manager provides investment advisory and management services for the Fund. The Manager has retained an independent money management organization (the “Subadviser”), to make investment decisions on behalf of the Fund. Pursuant to a subadvisory agreement with BlackRock Investment Management, LLC (“BlackRock Investment”), BlackRock Investment provides investment advisory services as the Subadviser for the Fund subject to the general supervision of the Trustees and the Manager. The Manager is entitled to a fee, computed daily and paid monthly, based on the average daily net assets of the Fund. Expenses incurred by the Fund for investment advisory and management services are reflected on the Statement of Operations as “Manager fees.” For its services, the Subadviser is entitled to a fee payable by the Manager. The Manager has contractually agreed to waive fees and reimburse the Fund to limit the annual expenses, excluding interest expense (e.g., cash overdraft fees), taxes, brokerage commissions, other expenditures that are capitalized in accordance with U.S. GAAP and other extraordinary expenses not incurred in the ordinary course of the Fund’s business, based on the daily net assets of the Fund, through April 30, 2015.
For the year ended December 31, 2013, the annual rate due to the Manager and the annual expense limit were as follows:
Annual Rate | Annual Expense Limit | |||||||||
AZL International Index Fund | 0.35 | % | 0.77 | % |
Any amounts contractually waived or reimbursed by the Manager in a particular fiscal year will be subject to repayment by the Fund to the Manager to the extent that from time to time through the next three fiscal years the repayment will not cause the Fund’s expenses to exceed the lesser of the stated limit at the time of the waiver or the current stated limit. Any amounts recouped by the Manager during the year are reflected on the Statement of Operations as “Recoupment of prior expenses reimbursed by the Manager.”
At December 31, 2013, the contractual reimbursements that are subject to repayment by the Fund in subsequent years were as follows:
Expires 12/31/2014 | Expires 12/31/2015 | Total | |||||||||||||
AZL International Index Fund | $ | 322,520 | $ | 126,982 | $ | 449,502 |
In addition, the Manager may voluntarily waive or reimburse additional fees in order to maintain more competitive expense ratios. Any voluntary waivers or reimbursements are not subject to repayment in subsequent years. Information on the total amount waived/reimbursed by the Manager or repaid to the Manager by the Fund during the year can be found on the Statement of Operations. During the year ended December 31, 2013, there were no voluntary waivers.
Pursuant to separate agreements between the Funds and the Manager, the Manager provides a Chief Compliance Officer (“CCO”) and certain compliance oversight and regulatory filing services to the Trust. Under these agreements the Manager is entitled to an amount equal to a portion of the compensation and certain other expenses related to the individuals performing the CCO and compliance oversight services, as well as $75 per hour for time incurred in connection with the preparation and filing of certain documents with the Securities and Exchange Commission. The fees are paid to the Manager on a quarterly basis. The total expenses incurred by the Fund for these services are reflected on the Statement of Operations as “Administrative and compliance services fees.”
Citi Fund Services Ohio, Inc. (“Citi” or the “Administrator”), a wholly owned subsidiary of Citigroup, Inc., with which an officer of the Trust is affiliated, serves as the Trust’s administrator, transfer agent, and fund accountant, and assists the Trust in all aspects of its administration and operation. The Administrator is entitled to a Trust-wide asset-based fee, which is based on the following schedule: 0.05% of daily average net assets on the first $4 billion, 0.04% of daily average net assets on the next $2 billion, 0.02% of daily average net assets on the next $2 billion and 0.01% of daily average net assets over $8 billion. The overall Trust-wide fees are accrued daily and paid monthly and are subject to a minimum annual fee. In addition, the Administrator is entitled to annual account fees related to the transfer agency system, an annual fee for each additional class of shares of any Fund, certain annual fees in supporting fair value services, and a Trust-wide annual fee for providing infrastructure and support in implementing the written policies and procedures comprising the Fund’s compliance program. Fees payable to the Administrator are subject to certain reductions associated with services provided to new funds. The Administrator is also reimbursed for certain expenses incurred. The total expenses incurred by the Fund for these services are reflected on the Statement of Operations as “Administration fees.”
Allianz Life Financial Services, LLC (“ALFS”), an affiliate of the Manager, serves as distributor of the Fund and receives 12b-1 fees directly from the Fund, plus a Trust-wide annual fee of $42,500, paid by the Manager from its profits and not by the Trust, for recordkeeping and reporting services.
The Trust has adopted a distribution and service plan in conformance with Rule 12b-1 of the 1940 Act. Pursuant to this plan, the Fund is authorized to pay certain fees for the sale and distribution of its shares and services provided to its shareholders at an annual rate not to exceed 0.25% of the Fund’s average daily net assets. These fees are reflected on the Statement of Operations as “Distribution fees.”
In addition, certain legal fees and expenses are paid to a law firm, Dorsey & Whitney LLP, of which the Secretary of the Fund is a partner. During the year ended December 31, 2013, $8,353 was paid from the Fund relating to these fees and expenses.
Certain Officers and Trustees of the Trust are affiliated with the Manager or the Administrator. Such Officers (except for the Trust’s CCO as noted above) and Trustees receive no compensation from the Trust for serving in their respective roles. For their service to the Trust and to the Allianz Variable Insurance Products Fund of Funds Trust, each non-interested Trustee receives a $139,000 annual Board retainer. In addition, the Trustees are reimbursed for certain expenses associated with attending Board meetings. Compensation to the Trustees is allocated between the Trust and the Allianz Variable Insurance Products Fund of Funds Trust in proportion to the assets under management of each trust. During the year ended December 31, 2013, actual Trustee compensation was $973,000 in total for both trusts.
At a meeting of the Board of Trustees on December 4, 2013, the Trustees approved a fee increase to the Officers and Trustees who are paid a fee for their services to the Trust and to the Allianz Variable Insurance Products Fund of Funds Trust. Effective January 1, 2014, each non-interested Trustee will receive a $163,000 annual retainer.
20
AZL International Index Fund
Notes to the Financial Statements
December 31, 2013
4. Investment Valuation Summary
The valuation techniques employed by the Fund, as described below, maximize the use of observable inputs and minimize the use of unobservable inputs in determining fair value. The inputs used for valuing the Fund’s investments are summarized in the three broad levels listed below:
— | Level 1 — quoted prices in active markets for identical assets |
— | Level 2 — other significant observable inputs (including quoted prices for similar securities, interest rates, prepayments speeds, credit risk, etc.) |
— | Level 3 — significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of investments) |
Changes in valuation techniques may result in transfers in or out of an assigned level within the disclosure hierarchy. The Fund determines transfers between fair value hierarchy levels at the reporting period end. The inputs or methodology used for valuing investments is not necessarily an indication of the risk associated with investing in those investments.
Security prices are generally provided by an independent third party pricing service approved by the Trust’s Board of Trustees (“Trustees”) as of the close of the New York Stock Exchange (“NYSE”) (generally 4:00 pm Eastern Time). Equity securities are valued at the last quoted sale price or, if there is no sale, the last quoted bid price is used for long securities and the last quoted ask price is used for securities sold short. Securities listed on NASDAQ Stock Market, Inc. (“NASDAQ”) are valued at the official closing price as reported by NASDAQ. In each of these situations, valuations are typically categorized as a Level 1 in the fair value hierarchy. Investments in open-end investment companies are valued at their respective net asset value as reported by such companies and are typically categorized as Level 1 in the fair value hierarchy. Debt and other fixed income securities are generally valued at an evaluated bid price provided by an independent pricing source approved by the Trustees. To value debt securities, pricing services may use various pricing techniques which take into account appropriate factors such as market activity, yield, quality, coupon rate, maturity, type of issue, trading characteristics, call features, credit ratings and other data, as well as broker quotes. Short term securities of sufficient credit quality with sixty days or less remaining until maturity may be valued at amortized cost, which approximates fair value. In each of these situations, valuations are typically categorized as Level 2 in the fair value hierarchy.
Futures contracts are valued at the last sales price as of the close of the primary exchange and are typically categorized as Level 1 in the fair value hierarchy.
Other assets and securities for which market quotations are not readily available, or are deemed unreliable are valued at fair value as determined in good faith by the Trustees or persons acting on the behalf of the Trustees. Fair value pricing may be used for significant events such as securities whose trading has been suspended, whose price has become stale or for which there is no currently available price at the close of the NYSE. Depending on the source and relative significance of valuation inputs, these instruments may be classified as Level 2 or Level 3 in the fair value hierarchy. The Fund utilizes a pricing service to assist in determining the fair value of securities when certain significant events occur that may affect the value of foreign securities.
In accordance with procedures adopted by the Trustees, fair value pricing may be used if events materially affecting the value of foreign securities occur between the time when the exchange on which they are traded closes and the time when the Fund’s net asset value is calculated. Management identifies possible fluctuation in international securities by monitoring the increase or decrease in the value of a designated benchmark index. In the event of an increase or decrease greater than predetermined levels, the Fund may use a systematic valuation model provided by an independent third party to fair value its international equity securities which are then typically categorized as Level 2 in the fair value hierarchy.
The following is a summary of the valuation inputs used as of December 31, 2013 in valuing the Fund’s investments based upon the three levels defined above:
Investment Securities: | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||
Common Stocks | ||||||||||||||||||||
Airlines | $ | 56,316 | $ | 1,745,801 | $ | — | $ | 1,802,117 | ||||||||||||
Household Durables | 155,718 | 4,854,676 | — | 5,010,394 | ||||||||||||||||
Pharmaceuticals | 260 | 67,118,261 | — | 67,118,521 | ||||||||||||||||
Real Estate Management & Development | — | 15,754,150 | — | ^ | 15,754,150 | |||||||||||||||
All Other Common Stocks+ | — | 702,121,304 | — | 702,121,304 | ||||||||||||||||
Preferred Stocks+ | — | 4,919,778 | — | 4,919,778 | ||||||||||||||||
Right | 34,278 | — | — | 34,278 | ||||||||||||||||
Securities Held as Collateral for Securities on Loan | — | 5,792,315 | — | 5,792,315 | ||||||||||||||||
Unaffiliated Investment Company | 534,914 | — | — | 534,914 | ||||||||||||||||
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|
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| |||||||||||||
Total Investment Securities | $ | 781,486 | $ | 802,306,285 | $ | — | $ | 803,087,771 | ||||||||||||
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|
|
|
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|
| |||||||||||||
Other Financial Instruments* | ||||||||||||||||||||
Futures Contracts | 453,228 | — | — | 453,228 | ||||||||||||||||
|
|
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|
|
|
| |||||||||||||
Total Investments | $ | 1,234,714 | $ | 802,306,285 | $ | — | $ | 803,540,999 | ||||||||||||
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|
|
|
|
|
+ | For detailed industry descriptions, see the accompanying Schedule of Portfolio Investments. |
* | Other Financial Instruments would include any derivative instruments, such as futures contracts. These investments are generally recorded in the financial statements at the unrealized gain or loss on the investment. |
A reconciliation of assets in which level 3 inputs are used in determining fair value, along with additional quantitative disclosures, are presented when there are significant level 3 investments at the end of the period.
^ | Represents interest in securities that were determined to have a value of zero at December 31, 2013. |
21
AZL International Index Fund
Notes to the Financial Statements
December 31, 2013
5. Security Purchases and Sales
For the year ended December 31, 2013, cost of purchases and proceeds from sales of securities (excluding securities maturing less than one year from acquisition) were as follows:
Purchases | Sales | |||||||||
AZL International Index Fund | $ | 135,138,025 | $ | 14,665,211 |
6. Investment Risks
Derivatives Risk: The Fund may invest in derivatives as a principal strategy. A derivative is a financial contract whose value depends on, or is derived from, the value of an underlying asset, reference rate, or risk. Use of derivative instruments involves risks different from, or possibly greater than, the risks associated with investing directly in securities and other traditional investments. Derivatives are subject to a number of other risks, such as liquidity risk, interest rate risk, market risk, credit risk, and selection risk. Derivatives also involve the risk of mispricing or improper valuation and the risk that changes in the value may not correlate perfectly with the underlying asset, rate, or index. Using derivatives may result in losses, possibly in excess of the principal amount invested. Also, suitable derivative transactions may not be available in all circumstances. The counterparty to a derivatives contract could default. As required by applicable law, a Fund that invests in derivatives segregates cash or liquid securities, or both, to the extent that its obligations under the instrument are not covered through ownership of the underlying security, financial instrument, or currency.
Emerging Markets Risk: Emerging markets may have less developed trading markets and exchanges which may make it more difficult to sell securities at an acceptable price and their prices may be more volatile than securities of companies in more developed markets. Settlements of trades may be subject to greater delays so that the Fund may not receive the proceeds of a sale of a security on a timely basis. Emerging countries may also have less developed legal and accounting systems and investments may be subject to greater risks of government restrictions, nationalization, or confiscation.
Foreign Securities and Currencies Risk: Investments in securities of foreign issuers carry certain risks not ordinarily associated with investments in securities of domestic issuers. Such risks include future political and economic developments, and the possible imposition of exchange controls or other foreign governmental laws and restrictions. In addition, with respect to certain countries, there is the possibility of expropriation of assets, confiscatory taxation, political or social instability or diplomatic developments which could adversely affect investments in those securities.
7. Federal Tax Information
It is the Fund’s policy to continue to comply with the requirements of the Internal Revenue Code under Subchapter M, applicable to regulated investment companies, and to distribute all of its taxable income, including any net realized gains on investments, to its shareholders. Therefore, no provision is made for federal income taxes.
Management of the Fund has reviewed tax positions taken in tax years that remain subject to examination by all major tax jurisdictions, including federal (i.e., the last four tax year ends and the interim tax period since then, as applicable). Management believes that there is no tax liability resulting from unrecognized tax benefits related to uncertain tax positions taken.
Cost for federal income tax purposes at December 31, 2013 is $637,798,196. The gross unrealized appreciation/ (depreciation) on a tax basis is as follows:
Unrealized appreciation | $ | 191,394,684 | |||
Unrealized depreciation | (26,105,109 | ) | |||
|
| ||||
Net unrealized appreciation/(depreciation) | $ | 165,289,575 | |||
|
|
As of the end of its tax year ended December 31, 2013, the Fund has capital loss carry forwards (“CLCFs”) as summarized in the tables below. CLCFs subject to expiration are applied as short-term capital loss regardless of whether the originating capital loss was short-term or long-term. CLCFs that are not subject to expiration must be utilized before those that are subject to expiration. The Board does not intend to authorize a distribution of any realized gain for the Fund until any applicable CLCF has been offset or expires.
CLCFs subject to expiration:
Expires 12/31/2015 | Expires 12/31/2016 | Total | |||||||||||||
AZL International Index Fund | $ | 42,234,498 | $ | 55,890,176 | $ | 98,124,674 |
CLCFs not subject to expiration:
Short Term Amount | Long Term Amount | Total Amount | |||||||||||||
AZL International Index Fund | $ | 686,764 | $ | — | $ | 686,764 |
The tax character of dividends paid to shareholders during the year ended December 31, 2013 were as follows:
Ordinary Income | Net Long-Term Capital Gains | Total Distributions(a) | |||||||||||||
AZL International Index Fund | $ | 13,742,662 | $ | — | $ | 13,742,662 |
(a) | Total distributions paid may differ from the Statements of Changes in Net Assets because dividends are recognized when actually paid for tax purposes. |
22
AZL International Index Fund
Notes to the Financial Statements
December 31, 2013
The tax character of dividends paid to shareholders during the year ended December 31, 2012 was as follows:
Ordinary Income | Net Long-Term Capital Gains | Total Distributions(a) | |||||||||||||
AZL International Index Fund | $ | 9,725,273 | $ | — | $ | 9,725,273 |
(a) | Total distributions paid may differ from the Statements of Changes in Net Assets because dividends are recognized when actually paid for tax purposes. |
As of December 31, 2013, the components of accumulated earnings on a tax basis were as follows:
Undistributed Ordinary Income | Undistributed Long-Term Capital Gains | Accumulated Capital and Other Losses | Unrealized Appreciation/ | Total Accumulated Earnings/ | |||||||||||||||||||||
AZL International Index Fund | $ | 15,224,213 | $ | — | $ | (98,811,438 | ) | $ | 165,878,404 | $ | 82,291,179 |
(a) | The difference between book-basis and tax-basis unrealized appreciation/(depreciation) is attributable primarily to tax deferral of losses on wash sales and the mark to market of unrealized appreciation on passive foreign investment companies. |
8. Subsequent Events
Management has evaluated events and transactions subsequent to period end through the date the financial statements were issued, for purposes of recognition or disclosure in these financial statements and there are no subsequent events to report.
23
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Shareholders and Board of Trustees of
Allianz Variable Insurance Products Trust:
We have audited the accompanying statement of assets and liabilities of AZL International Index Fund (the “Fund”) of the Allianz Variable Insurance Products Trust, including the schedule of portfolio investments, as of December 31, 2013, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the years in the two-year period then ended, and the financial highlights for each of the periods in the five-year period then ended. These financial statements and financial highlights are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of December 31, 2013, by correspondence with the custodian and brokers. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of the Fund as of December 31, 2013, the results of its operations for the year then ended, the changes in its net assets for each of the years in the two-year period then ended, and the financial highlights for each of the periods in the five-year period then ended, in conformity with U.S. generally accepted accounting principles.
/s/KPMG LLP
Columbus, Ohio
February 25, 2014
24
A description of the policies and procedures that the Fund uses to determine how to vote proxies relating to portfolio securities is available, without charge, upon request, by visiting the Securities and Exchange Commission’s (“Commission”) website at www.sec.gov, or by calling 800-624-0197.
Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30th is available (i) without charge, upon request, by calling 800-624-0197; (ii) on the Allianz Variable Insurance Products Trust’s website at https://www.allianzlife.com; and (iii) on the Commission’s website at http://www.sec.gov.
The Fund files complete Schedules of Portfolio Holdings with the Commission for the first and third quarters of each fiscal year on Form N-Q. Schedules of Portfolio Holdings for the Fund in this report are available without charge on the Commission’s website at http://www.sec.gov, or may be reviewed and copied at the Commission’s Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 800-SEC-0330.
25
Approval of Investment Advisory and Subadvisory Agreements (Unaudited)
The Allianz Variable Insurance Products Trust (the “Trust”) is a manager-of-managers fund. That means that the Trust’s Manager (“Allianz Investment Management LLC”) is responsible for monitoring the various Subadvisers that have day-to-day responsibility for the decisions made for each of the Trust’s investment portfolios. The Trust’s Manager is responsible for determining, in the first instance, which investment advisers to consider recommending for selection as a Subadviser.
In reviewing the services provided by the Manager and the terms of the investment management agreement, the Board receives and reviews information related to the Manager’s experience and expertise in the variable insurance marketplace. Currently, the Funds are offered only through variable annuities and variable life insurance policies, and not in the retail fund market. In addition, the Board receives information regarding the Manager’s expertise with regard to portfolio diversification and asset allocation requirements within variable insurance products issued by Allianz Life Insurance Company of North America and its subsidiary, Allianz Life Insurance Company of New York. Currently, the Funds are offered only through Allianz Life and Allianz of New York variable products.
The Trust’s Manager has adopted policies and procedures to assist it in the process of analyzing each potential Subadviser with expertise in particular asset classes for purposes of making the recommendation that a specific investment adviser be selected. The Trust’s Board reviews and considers the information provided by the Manager in deciding which investment advisers to select. After an investment adviser becomes a Subadviser, a similarly rigorous process is instituted by the Manager to monitor the investment performance and other responsibilities of the Subadviser. The Manager reports to the Trust’s Board on its analysis at the regular meetings of the Board, which are held at least quarterly. Where warranted, the Manager will add or remove a particular Subadviser from a “watch” list that it maintains. Watch list criteria include, for example: (a) Fund performance over various time periods; (b) Fund risk issues, such as changes in key personnel involved with Fund management, changes in investment philosophy or process, or “capacity” concerns; and (c) organizational risk issues, such as regulatory, compliance or legal concerns, or changes in the ownership of the Subadviser. The Manager may place a Fund on the watch list for other reasons, and if so, will explain its rationale to the Trustees. Funds which are on the watch list are subject to special scrutiny of the Manager and the Board of Trustees. Funds may be removed from such watch list, if for example, performance improves or regulatory matters are satisfactorily resolved. However, in some situations where Funds which have been on the watch list, the Manager has recommended the retention of a new Subadviser, and the Board of Trustees has subsequently approved new Subadvisory Agreements with such Subadvisers.
In assessing the Manager’s and Subadvisers’ (collectively, the “Advisory Organizations”), performance of their obligations, the Board considers whether there has occurred a circumstance or event that would constitute a reason for it to not renew an advisory contract. In this regard, the Board is mindful of the potential disruption of a Fund’s operations and various risks, uncertainties and other effects that could occur as a result of a decision to terminate or not renew a contract.
As required by the Investment Company Act of 1940 (“1940 Act”), the Trust’s Board has reviewed and approved the Trust’s Investment Management Agreement with the Manager (the “Advisory Agreement”) and portfolio management agreements (the “Subadvisory Agreements”) with the Subadvisers. The Board’s decision to approve these contracts reflects the exercise of its business judgment on whether to approve new arrangements and continue the existing arrangements. During its review of these contracts, the Board considers many factors, among the most material of which are: the Fund’s investment objectives and long term performance; the Advisory Organizations’ management philosophy, personnel, and processes, including their compliance history and the adequacy of their compliance processes; the preferences and expectations of Fund shareholders (and underlying contract owners) and their relative sophistication; the continuing state of competition in the mutual fund industry; and comparable fees in the mutual fund industry.
The Board also considers the compensation and benefits received by the Advisory Organizations. This includes fees received for services provided to the Fund by affiliated persons of the Advisory Organizations and research services received by the Advisory Organizations from brokers that execute Fund trades, as well as advisory fees. The Board considered the fact that: (1) the Manager and the Trust are parties to an Administrative Service Agreement, a Compliance Services Agreement, and a Chief Compliance Officer Agreement, under which the Manager is compensated by the Trust for performing certain administrative and compliance services including providing an employee of the Manager or one of its affiliates to act as the Trust’s Chief Compliance Officer; and (2) Allianz Life Financial Services, LLC, an affiliated person of the Manager, is a registered securities broker-dealer and receives (along with its affiliated persons) payments made by the Trust pursuant to Rule 12b-1.
The Board is aware that various courts have interpreted provisions of the 1940 Act and have indicated in their decisions that the following factors may be relevant to an adviser’s compensation: the nature and quality of the services provided by the adviser, including the performance of the fund; the adviser’s cost of providing the services; the extent to which the adviser may realize “economies of scale” as the fund grows larger; any indirect benefits that may accrue to the adviser and its affiliates as a result of the adviser’s relationship with the fund; performance and expenses of comparable funds; and the extent to which the independent Board members are fully informed about all facts bearing on the adviser’s service and fee. The Trust’s Board is aware of these factors and takes them into account in its review of the Trust’s advisory contracts.
The Board considered and weighed these circumstances in light of its experience in governing the Trust and working with the Advisory Organizations on matters relating to the Funds, and is assisted in its deliberations by the advice of legal counsel to the Independent Trustees. In this regard, the Board requests and receives a significant amount of information about the Funds and the Advisory Organizations. Some of this information is provided at each regular meeting of the Board; additional information is provided in connection with the particular meeting or meetings at which the Board’s formal review of an advisory contract occurs. In between regularly scheduled meetings, the Board may receive information on particular matters as the need arises. Thus, the Board’s evaluation of an advisory contract is informed by reports covering such matters as: an Advisory Organization’s investment philosophy, personnel, and processes; the Fund’s short- and long-term performance (in absolute terms as well as in relationship to its benchmark(s), certain competitor or “peer group” funds and similar funds managed by the particular Subadviser), and comments on the reasons for performance; the Fund’s expenses (including the advisory fee itself and the overall expense structure of the Fund, both in absolute terms and relative to similar and/or competing funds, with due regard for contractual or voluntary expense limitations); the use and allocation of brokerage commissions derived from trading the Fund’s portfolio securities; the nature and extent of the advisory and other services provided to the Fund by the Advisory Organizations and their affiliates; compliance and audit reports concerning the Funds and the companies that service them; and relevant developments in the mutual fund industry and how the Funds and/or Advisory Organizations are responding to them.
The Board also receives financial information about Advisory Organizations, including reports on the compensation and benefits the Advisory Organizations derive from their relationships with the Funds. These reports cover not only the fees under the advisory contracts, but also fees, if any, received for providing other services to the Funds. The reports also discuss any indirect or “fall out” benefits an Advisory Organization may derive from its relationship with the Funds.
The Advisory and Subadvisory Agreements (collectively, the “Agreements”) were most recently considered at Board of Trustees meetings held in the fall of 2013. Information relevant to the approval of such Agreements was considered at a telephonic Board of Trustees meeting on October 16, 2013, and at an “in person” Board of Trustees meeting held October 22, 2013. The Agreements were approved at the Board meeting of October 22, 2013. At such meeting the Board also approved an Expense Limitation Agreement between the Manager and the Trust for the period ending April 30, 2015. In connection with such meetings, the Trustees requested and evaluated extensive materials from the Manager, including performance and expense information for other investment companies with similar investment objectives derived from data compiled by an independent third party provider and other sources believed to be reliable by the Manager. Prior to voting, the Trustees reviewed the proposed approval/continuance of the Agreements with management and with experienced counsel who are independent of the Manager and received a memorandum from such counsel discussing the legal standards for their consideration of the proposed approvals/continuances. The independent (“disinterested”) Trustees also discussed the proposed approvals/continuances in a private session with such counsel at which no representatives of the Manager were present. In reaching their determinations relating to the approval and/or continuance of
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the Agreements, in respect of each Fund, the Trustees considered all factors they believed relevant. The Board based its decision to approve the Agreements on the totality of the circumstances and relevant factors, and with a view to past and future long-term considerations. Not all of the factors and considerations discussed above and below are necessarily relevant to every Fund, and the Board did not assign relative weights to factors discussed herein or deem any one or group of them to be controlling in and of themselves.
An SEC Rule requires that shareholder reports include a discussion of certain factors relating to the selection of investment advisers and the approval of advisory fees. The “factors” enumerated by the SEC are set forth below in italics, as well as the Board’s conclusions regarding such factors:
(1) The nature, extent and quality of services provided by the Manager and Subadvisers. The Trustees noted that the Manager, subject to the control of the Board of Trustees, administers each Fund’s business and other affairs. Under the Advisory Agreement, the Manager holds the sole and exclusive responsibility to provide, or arrange for other to provide, the management of the Funds’ assets and the placement of orders for the purchase and sale of the securities of the Funds. As the Trust is a manager of managers fund, the Manager is authorized, under the Advisory Agreement, to retain one or more Subadvisers for each Fund to handle day-to-day management of the Funds’ investment portfolios; the Manager is responsible for determining, in the first instance, which investment advisers to recommend to the Board of Trustees for selection as a Subadviser. The Trustees were aware that, notwithstanding the retention of the Subadvisers to handle day-to-day portfolio management, the Manager remains responsible for substantial other matters, including continuously monitoring compliance by each Subadviser with the investment policies and restrictions of the respective Funds, with such other limitations or directions of the Board of Trustees, and with all legal requirements under federal or state law or regulation. The Manager also is responsible primarily to provide statistical information and other data to the Trustees regarding the Funds’ portfolio investments and to make available to the Funds’ administrator such information as is necessary for the conduct of its duties.
The Trustees also noted that the Manager provides the Trust and each Fund with such administrative and other services (exclusive of, and in addition to, any such services provided by any others retained by the Trust on behalf of the Funds) and executive and other personnel as are necessary for the operation of the Trust and the Funds. Except for the Trust’s Chief Compliance Officer, the Manager pays all of the compensation of Trustees and officers of the Trust who are employees of the Manager or its affiliates.
The Trustees considered the scope and quality of services provided by the Manager and the Subadvisers and noted that the scope of such services provided had expanded as a result of recent regulatory and other developments. The Trustees noted that, for example, the Manager and Subadvisers are responsible for maintaining and monitoring their own compliance programs, and these compliance programs are continuously refined and enhanced in light of new regulatory requirements. The Trustees considered the capabilities and resources which the Manager has dedicated to performing services on behalf of the Trust and its Funds. The quality of administrative and other services, including the Manager’s role in coordinating the activities of the Trust’s other service providers, also were considered. The Trustees concluded that, overall, they were satisfied with the nature, extent and quality of services provided (and expected to be provided) to the Trust and to each of the Funds under the Agreements.
(2) The investment performance of the Funds, the Manager and the Subadvisers. In connection with every in-person quarterly Board of Trustees meeting, Trustees receive extensive information on the performance results of each of the Funds. This includes, for example, performance information on all of the Funds for the previous quarter, and previous one, three and five-year periods, and since inception. (For Funds which have been in existence for less than five years, Trustees may receive performance information on comparable funds managed by the particular Subadviser for periods prior to the creation of a particular Fund.) Such performance information includes information on absolute total return, performance versus Subadvisers’ comparable fund(s), performance versus the appropriate benchmark(s), and performance versus peer groups. For example, in connection with the Board of Trustees meetings held September 10-11, 2013, the Manager reported that for the three year period ended June 30, 2013, 12 Funds were in the top 40%, eight were in the middle 20% and eight were in the bottom 40%, and for the one year period ended June 30, 2013, 8 Funds were in the top 40%, seven were in the middle 20%, and 14 were in the bottom 40%. The Manager also reported that for the five year period ended June 30, 2013, 10 Funds were in the top 40%, four were in the middle 20%, and six were in the bottom 40%. At the Board of Trustees meeting held October 22, 2013, the Trustees determined that the overall investment performance of the Funds was acceptable.
(3) The costs of services to be provided and profits to be realized by the Manager and the Subadvisers and their affiliates from their relationship with the Funds. The Manager has supplied information to the Board of Trustees pertaining to the level of investment advisory fees to which the Funds are subject. The Manager has agreed to temporarily “cap” Fund expenses at certain levels, and information is provided to Trustees setting forth “contractual” advisory fees and “actual” fees after taking expense caps into account. Based upon the information provided, the “actual” advisory fees payable by the Funds overall are generally comparable to the average level of fees paid by Fund peer groups. For the 30 Funds reviewed by the Board of Trustees in the fall of 2013, 27 Funds paid “actual” advisory fees in a percentage amount within the 65th percentile or lower for each Fund’s applicable category. The Trustees recognized that it is difficult to make comparisons of advisory fees because there are variations in the services that are included in the fees paid by other funds. The Board has concluded that the advisory fees to be paid to the Manager by the Funds are not unreasonable.
The Manager has also supplied information to the Board of Trustees pertaining to total Fund expenses (which includes advisory fees, the 25 basis point 12b-1 fee paid by the Funds, and other Fund expenses). As noted above, the Manager has agreed to “cap” Fund expenses at certain levels. Based upon the information provided, the overall total expense ratio ranking in 2013 for the 30 Funds was as follows: (1) 28 of the Funds had total expense rankings below the 65th percentile (with 20 Funds at or below the 50th percentile); (2) the AZL Russell 1000 Value Fund had a total expense ranking in the 66th percentile; the Manager reported that there is only a limited peer group for such Fund; and (3) the AZL Morgan Stanley Global Real Estate Fund had a total expense ranking in the 72nd percentile; it was reported by the Manager that there is only a limited peer group for such Fund, such Fund’s expense ratio has declined, and such Fund’s expense ratio is comparable to funds of similar size.
The Manager has committed to providing the Funds with a high quality of service and working to reduce Fund expenses over time, particularly as the Funds grow larger. The Trustees concluded therefore that the expense ratios of the Funds were not unreasonable.
The Manager provided information concerning the profitability of the Manager’s investment advisory activities for the period from 2011 through June 30, 2013. The Trustees recognized that it is difficult to make comparisons of profitability from investment company advisory agreements because comparative information is not generally publicly available and is affected by numerous factors, including the structure of the particular adviser, the types of funds it manages, its business mix, numerous assumptions regarding allocation of expenses and the adviser’s capital structure and cost of capital. In considering profitability information, the Trustees considered the possible effect of certain fall-out benefits to the Manager and its affiliates. The Trustees focused on profitability of the Manager’s relationships with the Funds before taxes and distribution expenses. The Trustees recognized that the Manager should, in the abstract, be entitled to earn a reasonable level of profits for the services it provides to each Fund and, based on their review, concluded that they were satisfied that the Manager’s level of profitability from its relationship with the Funds was not excessive.
The Manager, on behalf of the Board of Trustees, endeavored to obtain information on the profitability of each Subadviser in connection with its relationship with the Fund or Funds which it subadvises. The Manager was unable to obtain meaningful profitability information from some of the unaffiliated Subadvisers. The Manager assured the Board of Trustees that the Agreements with the Subadvisers which are not affiliated with it were negotiated on an “arm’s length” basis, so that arguably, such profitability information should be less relevant. The Trustees were also provided with certain information on the profitability for the Subadviser which is affiliated with the Manager. Trustees recognized the difficulty of allocating costs to multiple advisory accounts and products of a large advisory organization. Based upon the information provided, the Trustees determined that there was no evidence that the level of such profitability attributable to subadvising the Funds was excessive.
27
(4) and (5) The extent to which economies of scale would be realized as the Funds grow, and whether fee levels reflect these economies of scale. The Trustees noted that most of the advisory fee schedules for the Funds do not contain breakpoints that reduce the fee rate on assets above specified levels, although certain Subadvisory Agreements have such “breakpoints.” The Trustees recognized that breakpoints may be an appropriate way for the Manager to share its economies of scale, if any, with Funds that have substantial assets. However, they also recognized that there may not be a direct relationship between any economies of scale realized by Funds and those realized by the Manager as assets increase. The Trustees do not believe there is a uniform methodology for establishing breakpoints that give effect to Fund-specific service provided by the Manager. The Trustees noted that in the fund industry as a whole, as well as among funds similar to the Funds, there is no uniformity or pattern in the fees and asset levels at which breakpoints (if any) apply. Depending on the age, size, and other characteristics of a particular fund and its manager’s cost structure, different conclusions can be drawn as to whether there are economies of scale to be realized at any particular level of assets, notwithstanding the intuitive conclusion that such economies exist, or will be realized at some level of total assets. Moreover, because different managers have different cost structures and service models, it is difficult to draw meaningful conclusions from the breakpoints that may have been adopted by other funds. The Trustees also noted that the advisory agreements for many funds do not have breakpoints at all, or if breakpoints exist, they may be at asset levels significantly greater than those of the individual Funds. The Trustees also noted that the total assets in all of the Funds as of June 30, 2013 were approximately $12.85 billion, and that no single non-money market Fund had assets in excess of $616 million.
The Trustees noted that the Manager has agreed to temporarily “cap” Fund expenses at certain levels, which has the effect of reducing expenses as would the implementation of advisory fee breakpoints. The Manager has committed to continue to consider the continuation of fee “caps” and/or advisory fee breakpoints as the Funds grow larger. The Board receives quarterly reports on the level of Fund assets. It expects to consider whether or not to approve the Agreements at a meeting to be held prior to December 31, 2014, and will at that time, or prior thereto, consider: (a) the extent to which economies of scale can be realized, and (b) whether the advisory fee should be modified to reflect such economies of scale, if any.
Having taken these factors into account, the Trustees concluded that the absence of breakpoints in certain of the Funds’ advisory fee rate schedules was acceptable under each Fund’s circumstances.
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Information about the Board of Trustees and Officers (Unaudited)
The Trust is managed by the Trustees in accordance with the laws of the state of Delaware governing business trusts. There are currently eight Trustees, two of whom are “interested persons” of the Trust within the meaning of that term under the 1940 Act. The Trustees and Officers of the Trust, their addresses, ages, their positions held with the Trust, their terms of office with the Trust and length of time served, their principal occupation(s) during the past five years, the number of portfolios in the Trust they oversee, and their other directorships held are as follows:
Non-Interested Trustees(1)
Name, Address, and Age | Positions Held with VIP Trust and FOF Trust | Term of Office(2)/Length of Time Served | Principal Occupation(s) During Past 5 Years | Number of Portfolios Overseen for VIP Trust and FOF Trust | Other Directorships Held Outside the AZL Fund Complex | |||||
Peter R. Burnim, Age 66 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/07 | Chairman, Argus Investment Strategies Fund Ltd., February 2013 to present; Managing Director, iQ Venture Advisors, LLC. 2005 to 2012; Chairman, Northstar Group Holdings Ltd. Bermuda, 2011 to present; Expert Witness, Massachusetts Department of Revenue, 2011 to 2012; Executive Vice President, Northstar Companies, 2002 to 2005; Senior Officer, Citibank and Citicorp for over 25 years | 41 | Argus Group Holdings; Northstar Group Holdings, NRIL, Sterling Centrecorp Inc.; Highland Financial Holdings; and Bank of Bermuda NY | |||||
Peggy L. Ettestad, Age 56 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/07 | Managing Director, Red Canoe Management Consulting LLC, 2008 to present; Senior Managing Director, Residential Capital LLC, 2003 to 2008; Chief Operations Officer, Transamerica Reinsurance 2002 to 2003 | 41 | Luther College | |||||
Roger Gelfenbien, Age 70 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 10/99 | Retired; Partner of Accenture 1983 to 1999 | 41 | Virtus Funds (8 Funds) | |||||
Claire R. Leonardi, Age 58 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/04 | Chief Executive Officer, Connecticut Innovations, Inc., 2012 to present; General Partner, Fairview Capital, L.P., 1994 to 2012 | 41 | The Natural History Museum of the Adirondacks | |||||
Dickson W. Lewis, Age 65 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/04 | Retired; Consultant to Lifetouch National School Studios; Vice President/General Manager, Yearbooks & Canada-Lifetouch National School Studios, 2006 to 2013; Vice President/General Manager of Jostens, Inc., 2002 to 2006; Senior Vice President of Fortis Group, 1997 to 2002 | 41 | None | |||||
Peter W. McClean, Age 69 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/04 | Retired; President and CEO of Measurisk, LLC, 2001 to 2003; Chief Risk Management Officer at Bank of Bermuda Ltd., 1996 to 2001 | 41 | PNMAC Opportunity Fund; Northeast Bank; and FHI | |||||
Arthur C. Reeds III, Age 69 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 10/99 | Retired; Senior Investment Officer, Hartford Foundation for Public Giving, 2000 to 2003; Chairman, Chief Executive and President of Conning Corp., 1999 to 2000; Investment Consultant, 1997 to 1999 | 41 | Connecticut Water Service, Inc. |
Interested Trustees(3)
Name, Address, and Age | Positions Held with VIP Trust and FOF Trust | Term of Office(2)/Length of Time Served | Principal Occupation(s) During Past 5 Years | Number of Portfolios Overseen for VIP Trust and FOF Trust | Other Directorships Held Outside the AZL Fund Complex | |||||
Robert DeChellis, Age 46 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 3/08 | President and CEO, Allianz Life Financial Services, LLC, 2007 to present | 41 | None | |||||
Brian Muench, Age 43 5701 Golden Hills Drive | Trustee | Since 6/11 | President, Allianz Investment Management LLC, November 2010 to present; Vice President, Allianz Life, April 2011 to present; Vice President, Advisory Management, Allianz Investment Management LLC from December 2005 to November 2010 | 41 | None |
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Officers
Name, Address, and Age | Positions Held with VIP and VIP FOF Trust | Term of Office(2)/Length of Time Served | Principal Occupation(s) During Past 5 Years | |||
Brian Muench, Age 43 5701 Golden Hills Drive Minneapolis, MN 55416 | President | Since 11/10 | President, Allianz Investment Management LLC from November 2010, to present; Vice President, Allianz Life from April 2011 to present; Vice President, Allianz Investment Management LLC from December 2005 to November 2010. | |||
Michael Radmer, Age 68 Dorsey & Whitney LLP, Suite 1500 50 South Sixth Street Minneapolis, MN 55402-1498 | Secretary | Since 2/02 | Partner, Dorsey and Whitney LLP since 1976. | |||
Ty Edwards, Age 47 Citi Fund Services Ohio, Inc. 3435 Stelzer Road Columbus, OH 43219 | Treasurer, Principal Accounting Officer and Principal Financial Officer | Since 4/10 | Senior Vice President, Financial Administration, Citi Fund Services Ohio, Inc., December 2009 to present; Director, Product Management, Columbia Management, April 2007 to April 2009; Deputy Treasurer, Columbia Funds and Director, Fund Administration, Columbia Management, January 2006 to April 2007. | |||
Christopher R. Pheiffer, Age 45(4) 5701 Golden Hills Drive Minneapolis, MN 55416 | Chief Compliance Officer(5) and Anti-Money Laundering Compliance Officer | Since 2/14 (interim) | Deputy Chief Compliance Officer of the Trusts, 2007-2014. |
(1) | Member of the Audit Committee. |
(2) | Indefinite. |
(3) | Is an “interested person”, as defined by the 1940 Act, due to employment by Allianz. |
(4) | Stephen G. Simon, previously the Chief Compliance Officer of the Trusts, resigned all of his positions with Allianz effective February 21, 2014. Mr. Pheiffer, previously the Deputy Chief Compliance Officer of the Trusts, has been named Chief Compliance Officer of the Trusts on an interim basis while a search for a permanent replacement is conducted. |
(5) | The Manager and the Trust are parties to a Chief Compliance Officer Agreement under which the Manager is compensated by the Trust for providing an employee of the Manager or one of its affiliates to act as the Trust’s Chief Compliance Officer. The Chief Compliance Officer and Anti-Money Laundering Compliance Officer is not considered a corporate officer or executive employee of the Trust. |
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The Allianz VIP Funds are distributed by Allianz Life Financial Services, LLC. These Funds are not FDIC Insured. | ANNRPT1213 2/14 |
AZL® Invesco Equity and Income Fund
Annual Report
December 31, 2013
Table of Contents
Management Discussion and Analysis
Page 1
Expense Examples and Portfolio Composition
Page 3
Schedule of Portfolio Investments
Page 4
Statement of Assets and Liabilities
Page 13
Statement of Operations
Page 13
Statements of Changes in Net Assets
Page 14
Financial Highlights
Page 15
Notes to the Financial Statements
Page 16
Report of Independent Registered Public Accounting Firm
Page 22
Other Federal Income Tax Information
Page 23
Other Information
Page 24
Approval of Investment Advisory and Subadvisory Agreements
Page 25
Information about the Board of Trustees and Officers
Page 28
This report is submitted for the general information of the shareholder of the Fund. The report is not authorized for distribution to prospective investors in the Fund unless preceded or accompanied by an effective prospectus, which contains details concerning the sales charges and other pertinent information.
AZL® Invesco Equity and Income Fund Review (unaudited)
Allianz Investment Management LLC serves as the Manager for the AZL® Invesco Equity and Income Fund and Invesco Advisers, Inc. serves as Subadviser to the Fund.
What factors affected the Fund’s performance during the year ended December 31, 2013?
For the year ended December 31, 2013, the AZL® Invesco Equity and Income Fund returned 24.67%1 compared to a 32.39% and -2.02% total return for its benchmarks, the S&P 500 Index2 and the Barclays U.S. Aggregate Bond Index3, respectively.
The 12 months through December 31, 2013, were characterized by steady improvement in the U.S. economy and strong U.S. equity market returns. Stocks rose during the first half of the year as consumer confidence improved based on the recovery of the U.S. housing market. Nevertheless in May, capital markets declined following U.S. Federal Reserve Chairman Ben Bernanke’s comments suggesting that the Fed would start reducing the size of its bond-buying program, known as quantitative easing (QE). This sell-off was brief but broad, and few asset classes were immune.
Markets stabilized in mid-summer and equities then rallied through the last three months of the year. In December, when the Fed officially announced plans to reduce QE in early 2014, the news was widely anticipated and largely priced into stock valuations. As a result, equities continued to rise despite the Fed’s action.
The Fund attempts to remain fully invested, and although we held an average cash position within our acceptable range during the period, cash detracted from the Fund’s relative performance in the strong equity market. Stock selection in the health care and energy sectors detracted from the Fund’s performance versus its equity benchmark. Additionally, stock selection and an underweight position in the industrials sectors—specifically, select holdings within commercial and professional services and a low exposure to transportation—also hurt relative performance.*
The Fund’s relative performance benefited from strong stock selection within the financial sector. A lack of exposure to real estate improved the Fund’s relative performance, as the returns for real estate industry shares were flat during the period. In addition, stock selection and underweight positions in the telecommunication services, consumer staples and materials sectors also helped the Fund’s relative performance.*
The fixed-income portion of the Fund’s portfolio outperformed its fixed income benchmark and was a valuable source of income, helping to dampen overall portfolio volatility. Although, holding these investments reduced the Fund’s overall performance, a rising interest-rate environment hurt bonds during the reporting period. An allocation to convertible bonds provided positive absolute returns while detracting from relative performance, as convertible bonds underperformed the equity benchmark.*
During the period, we used currency forward contracts to hedge currency exposure of non-U.S.-based companies held in the Fund. The use of these currency forward contracts had a slight negative impact on the Fund’s performance relative to its equity benchmark.*
Past performance does not guarantee future results.
* | The Fund’s portfolio composition is subject to change. There is no guarantee that any sectors mentioned will continue to perform well or that securities in such sectors will be held by the Fund in the future. The information contained in this commentary is for informational purposes only and should not be construed as a recommendation to purchase or sell securities in the sector mentioned. The Fund’s holdings and weightings are as of December 31, 2013. |
1 | The recent growth rate in the stock market has helped to produce short-term returns that are not typical and may not continue in the future. Because of ongoing market volatility, Fund performance may be subject to substantial short-term changes. |
2 | The Standard & Poor’s 500 Index (“S&P 500”) is representative of 500 selected common stocks, most of which are listed on the New York Stock Exchange, and is a measure of the U.S. Stock market as a whole. |
3 | The Barclays U.S. Aggregate Bond Index is a market value-weighted performance benchmark for investment-grade fixed-rate debt issues, including government, corporate, asset-backed, and mortgage-backed securities, with maturities of at least one year. |
Investors cannot invest directly in an index.
1
AZL® Invesco Equity and Income Fund Review (unaudited)
Fund Objective
The Fund’s investment objective is to seek the highest possible income consistent with safety of principal, with long-term growth of capital as an important secondary objective. This objective may be changed by the Trustees of the Fund without shareholder approval. The Fund seeks to achieve its objective by investing at least 65% of its total assets in income-producing equity securities.
Investment Concerns
Equity securities (stocks) are more volatile and carry more risk than other forms of investments, including investments in high-grade fixed income securities. The net asset value per share of this Fund will fluctuate as the value of the securities in the portfolio changes.
International investing may involve risk of capital loss from unfavorable fluctuations in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations.
Emerging market investing may be subject to additional economic, political, liquidity, and currency risks not associated with more developed countries.
Value-based investments are subject to the risk that the broad market may not recognize their intrinsic value.
Bonds offer a relatively stable level of income, although bond prices will fluctuate providing the potential for principal gain or loss. Intermediate-term, higher-quality bonds generally offer less risk than longer-term bonds and a lower rate of return.
The Fund is subject to the risk that principal value reacts in opposition to the movement of interest rates and that a rising interest rate environment increases the risk of loss of principal.
For a complete description of these and other risks associated with investing in a mutual Fund, please refer to the Fund’s prospectus.
Growth of $10,000 Investment
The chart above represents a comparison of a hypothetical investment in the Fund versus a similar investment in the Fund’s benchmarks, and represents the reinvestment of dividends and capital gains in the Fund.
Average Annual Total Returns as of December 31, 2013
Since | ||||||||||||||||
1 | 3 | 5 | Inception | |||||||||||||
Year | Year | Year | (5/3/04) | |||||||||||||
AZL® Invesco Equity and Income Fund | 24.67 | %1 | 10.92 | % | 13.38 | % | 7.01 | % | ||||||||
S&P 500 Index | 32.39 | % | 16.18 | % | 17.94 | % | 7.56 | % | ||||||||
Barclays U.S. Aggregate Bond Index | -2.02 | % | 3.26 | % | 4.44 | % | 4.71 | % |
Past performance does not guarantee future results. The performance data quoted represents past performance and current returns may be lower or higher. The investment return and principal value will fluctuate so that an investor’s shares, when redeemed may be worth more or less than the original cost. To obtain performance information current to the most recent month end, please visit www.Allianzlife.com.
Expense Ratio2 | Gross | |||
AZL® Invesco Equity and Income Fund | 1.09 | % |
The above expense ratio is based on the current Fund prospectus dated April 29, 2013. The Manager voluntarily reduced the management fee to 0.70% on the first $100 million of assets, 0.675% on the next $100 million, and 0.65% on assets above $200 million. The Manager and the Fund have entered into a written contract limiting operating expenses, excluding certain expenses (such as interest expense and Acquired Fund fees and expenses), to 1.20% through April 30, 2015. Additional information pertaining to the December 31, 2013 expense ratios can be found in the financial highlights.
1 | The recent growth rate in the stock market has helped to produce short-term returns that are not typical and may not continue in the future. Because of ongoing market volatility, Fund performance may be subject to substantial short-term changes. |
2 | Acquired Fund Fees and Expenses are incurred indirectly by the Fund through the valuation of the Fund’s investments in the other investment companies. Accordingly, Acquired Fees and Expenses affect the Fund’s total returns. Because these fees and expenses are not included in the Fund’s financial highlights, the Fund’s total annual fund operating expenses do not correlate to the ratios of expenses to average net assets shown in the financial highlights table. Without Acquired Fund Fees and expenses the Fund’s gross ratio would be 1.07%. |
The total return of the Fund does not reflect the effect of any insurance charges, the annual maintenance fee or the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. Such charges, fees and tax payments would reduce the performance quoted.
The Fund’s performance is measured against the Standard & Poor’s 500 Index (“S&P 500”) and the Barclays U.S. Aggregate Bond Index. The S&P 500 is representative of 500 selected common stocks, most of which are listed on the New York Stock Exchange, and is a measure of the U.S. Stock market as a whole. The Barclays U.S. Aggregate Bond Index is a market value-weighted performance benchmark for investment-grade fixed-rate debt issues, including government, corporate, asset-backed, and mortgage-backed securities, with maturities of at least one year. These indices are unmanaged and do not reflect the deduction of fees associated with a mutual fund, such as investment management and fund accounting fees. The Fund’s performance reflects the deduction of fees for services provided to the Fund. Investors cannot invest directly in an index.
2 |
AZL Invesco Equity and Income Fund
(Unaudited)
As a shareholder of the AZL Invesco Equity and Income Fund (the “Fund”), you incur ongoing costs, including management fees, distribution fees, and other Fund expenses. These examples are intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. Please note that the expenses shown in each table do not reflect expenses that apply to the subaccount or the insurance contract. If the expenses that apply to the subaccount of the insurance contract were included, your costs would have been higher.
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the periods presented below.
The Actual Expense table below provides information about actual account values and actual expenses. You may use the information below, 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 table under the heading entitled “Expenses Paid During Period” to estimate the expenses you paid on your account during this period.
Beginning Account Value 7/1/13 | Ending Account Value 12/31/13 | Expenses Paid During Period 7/1/13 - 12/31/13* | Annualized Expense Ratio During Period 7/1/13 - 12/31/13 | |||||||||||||||||
AZL Invesco Equity and Income Fund | $ | 1,000.00 | $ | 1,105.90 | $ | 5.10 | 0.96 | % |
The Hypothetical Expense table below provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.
Beginning Account Value 7/1/13 | Ending Account Value 12/31/13 | Expenses Paid During Period 7/1/13 - 12/31/13* | Annualized Expense Ratio During Period 7/1/13 - 12/31/13 | |||||||||||||||||
AZL Invesco Equity and Income Fund | $ | 1,000.00 | $ | 1,020.37 | $ | 4.89 | 0.96 | % |
* | Expenses are equal to the average account value over the period, multiplied by the Fund’s annualized expense ratio, multiplied by 184/365 (to reflect the one half year period). |
Portfolio Composition
(Unaudited)
Investments | Percent of net assets | ||||
Financials | 18.4 | % | |||
Information Technology | 8.0 | ||||
Health Care | 7.8 | ||||
Consumer Discretionary | 7.2 | ||||
Energy | 6.5 | ||||
Consumer Staples | 5.4 | ||||
Industrials | 5.1 | ||||
Materials | 1.8 | ||||
Telecommunication Services | 1.5 | ||||
Utilities | 1.1 | ||||
|
| ||||
Total Common Stock | 62.8 | ||||
Money Market | 9.7 | ||||
Securities Held as Collateral for Securities on Loan | 3.5 | ||||
|
| ||||
Total Investment Securities | 76.0 | ||||
Net other assets (liabilities) | 24.0 | ||||
|
| ||||
Net Assets | 100.0 | % | |||
|
|
3
AZL Invesco Equity and Income Fund
Schedule of Portfolio Investments
December 31, 2013
Shares | Fair Value | |||||||
| Common Stocks (62.4%): |
| ||||||
| Aerospace & Defense (0.5%): |
| ||||||
58,800 | General Dynamics Corp. | $ | 5,618,340 | |||||
|
| |||||||
| Automobiles (0.9%): | |||||||
234,460 | General Motors Co. | 9,582,380 | ||||||
|
| |||||||
| Biotechnology (0.9%): | |||||||
89,058 | Amgen, Inc. | 10,166,861 | ||||||
|
| |||||||
| Capital Markets (4.5%): | |||||||
416,689 | Charles Schwab Corp. (The) | 10,833,914 | ||||||
38,328 | Goldman Sachs Group, Inc. (The) | 6,794,021 | ||||||
508,310 | Morgan Stanley | 15,940,603 | ||||||
116,263 | Northern Trust Corp. | 7,195,517 | ||||||
102,655 | State Street Corp. | 7,533,850 | ||||||
|
| |||||||
48,297,905 | ||||||||
|
| |||||||
| Chemicals (1.4%): | |||||||
219,615 | Dow Chemical Co. (The) | 9,750,906 | ||||||
29,372 | PPG Industries, Inc. | 5,570,694 | ||||||
|
| |||||||
15,321,600 | ||||||||
|
| |||||||
| Commercial Banks (3.9%): | |||||||
200,982 | BB&T Corp. | 7,500,648 | ||||||
146,698 | Comerica, Inc. | 6,974,023 | ||||||
284,486 | Fifth Third Bancorp | 5,982,741 | ||||||
169,281 | PNC Financial Services Group, Inc. | 13,132,820 | ||||||
184,247 | Wells Fargo & Co. | 8,364,814 | ||||||
|
| |||||||
41,955,046 | ||||||||
|
| |||||||
| Commercial Services & Supplies (1.7%): | |||||||
180,021 | ADT Corp. (The) | 7,285,450 | ||||||
276,302 | Tyco International, Ltd. | 11,339,434 | ||||||
|
| |||||||
18,624,884 | ||||||||
|
| |||||||
| Diversified Financial Services (6.9%): | |||||||
424,271 | Bank of America Corp. | 6,605,899 | ||||||
490,117 | Citigroup, Inc. | 25,539,997 | ||||||
67,597 | CME Group, Inc. | 5,303,661 | ||||||
131,931 | ING U.S., Inc. | 4,637,375 | ||||||
540,816 | JPMorgan Chase & Co. | 31,626,920 | ||||||
|
| |||||||
73,713,852 | ||||||||
|
| |||||||
| Diversified Telecommunication Services (0.3%): | |||||||
67,066 | Verizon Communications, Inc. | 3,295,623 | ||||||
|
| |||||||
| Electric Utilities (1.1%): | |||||||
37,973 | Allegion plc* | 1,678,027 | ||||||
64,771 | Edison International | 2,998,897 | ||||||
51,934 | FirstEnergy Corp. | 1,712,783 | ||||||
96,957 | Pinnacle West Capital Corp. | 5,130,965 | ||||||
|
| |||||||
11,520,672 | ||||||||
|
| |||||||
| Electronic Equipment, Instruments & Components (0.8%): | |||||||
452,991 | Corning, Inc. | 8,072,300 | ||||||
|
| |||||||
| Energy Equipment & Services (1.1%): | |||||||
159,676 | Baker Hughes, Inc. | 8,823,695 | ||||||
65,210 | Halliburton Co. | 3,309,408 | ||||||
|
| |||||||
12,133,103 | ||||||||
|
|
Shares | Fair Value | |||||||
| Common Stocks, continued |
| ||||||
| Food & Staples Retailing (0.7%): | |||||||
216,386 | Sysco Corp. | $ | 7,811,535 | |||||
|
| |||||||
| Food Products (2.5%): | |||||||
203,598 | Archer-Daniels-Midland Co. | 8,836,153 | ||||||
369,447 | Mondelez International, Inc., Class A | 13,041,479 | ||||||
127,078 | Unilever NV, NYS | 5,112,348 | ||||||
|
| |||||||
26,989,980 | ||||||||
|
| |||||||
| Health Care Equipment & Supplies (0.9%): |
| ||||||
175,555 | Medtronic, Inc. | 10,075,101 | ||||||
|
| |||||||
| Health Care Providers & Services (2.0%): | |||||||
70,089 | CIGNA Corp. | 6,131,386 | ||||||
91,793 | UnitedHealth Group, Inc. | 6,912,013 | ||||||
90,348 | WellPoint, Inc. | 8,347,251 | ||||||
|
| |||||||
21,390,650 | ||||||||
|
| |||||||
| Hotels, Restaurants & Leisure (1.0%): | |||||||
279,301 | Carnival Corp. | 11,219,521 | ||||||
|
| |||||||
| Household Products (1.0%): | |||||||
135,369 | Procter & Gamble Co. (The) | 11,020,390 | ||||||
|
| |||||||
| Industrial Conglomerates (1.6%): | |||||||
618,072 | General Electric Co. | 17,324,558 | ||||||
|
| |||||||
| Insurance (2.8%): | |||||||
78,958 | Aon plc | 6,623,787 | ||||||
49,655 | Chubb Corp. (The) | 4,798,163 | ||||||
278,288 | Marsh & McLennan Cos., Inc. | 13,458,007 | ||||||
107,167 | Willis Group Holdings plc | 4,802,153 | ||||||
|
| |||||||
29,682,110 | ||||||||
|
| |||||||
| Internet Software & Services (1.6%): | |||||||
304,187 | eBay, Inc.* | 16,696,824 | ||||||
|
| |||||||
| IT Services (0.7%): | |||||||
173,980 | Amdocs, Ltd. | 7,174,935 | ||||||
|
| |||||||
| Machinery (0.6%): | |||||||
109,885 | Ingersoll-Rand plc | 6,768,916 | ||||||
|
| |||||||
| Media (4.8%): | |||||||
270,008 | Comcast Corp., Class A | 14,030,966 | ||||||
118,903 | Thomson Reuters Corp.^ | 4,497,066 | ||||||
88,942 | Time Warner Cable, Inc. | 12,051,641 | ||||||
63,192 | Time Warner, Inc. | 4,405,746 | ||||||
192,590 | Viacom, Inc., Class B | 16,820,812 | ||||||
|
| |||||||
51,806,231 | ||||||||
|
| |||||||
| Metals & Mining (0.4%): | |||||||
121,762 | Freeport-McMoRan Copper & Gold, Inc. | 4,595,298 | ||||||
|
| |||||||
| Oil, Gas & Consumable Fuels (5.3%): | |||||||
76,675 | Anadarko Petroleum Corp. | 6,081,861 | ||||||
90,220 | Apache Corp. | 7,753,507 | ||||||
237,454 | Canadian Natural Resources, Ltd. | 8,035,116 | ||||||
87,585 | Occidental Petroleum Corp. | 8,329,333 | ||||||
399,876 | Royal Dutch Shell plc, A Shares | 14,359,210 | ||||||
184,146 | Total SA | 11,287,099 | ||||||
|
| |||||||
55,846,126 | ||||||||
|
|
Continued
4
AZL Invesco Equity and Income Fund
Schedule of Portfolio Investments
December 31, 2013
Shares | Fair Value | |||||||
| Common Stocks, continued |
| ||||||
| Personal Products (1.2%): | |||||||
724,944 | Avon Products, Inc. | $ | 12,483,536 | |||||
|
| |||||||
| Pharmaceuticals (4.0%): | |||||||
140,390 | Bristol-Myers Squibb Co. | 7,461,729 | ||||||
117,865 | Eli Lilly & Co. | 6,011,115 | ||||||
235,726 | Merck & Co., Inc. | 11,798,085 | ||||||
109,734 | Novartis AG, Registered Shares | 8,784,524 | ||||||
6,283 | Novartis AG, ADR | 505,028 | ||||||
260,120 | Pfizer, Inc. | 7,967,476 | ||||||
|
| |||||||
42,527,957 | ||||||||
|
| |||||||
| Road & Rail (0.7%): | |||||||
251,925 | CSX Corp. | 7,247,882 | ||||||
|
| |||||||
| Semiconductors & Semiconductor Equipment (2.0%): |
| ||||||
730,816 | Applied Materials, Inc. | 12,928,135 | ||||||
25,257 | Broadcom Corp., Class A | 748,870 | ||||||
168,422 | Texas Instruments, Inc. | 7,395,410 | ||||||
|
| |||||||
21,072,415 | ||||||||
|
| |||||||
| Software (2.9%): | |||||||
219,407 | Adobe Systems, Inc.* | 13,138,091 | ||||||
202,660 | Microsoft Corp. | 7,585,564 | ||||||
418,460 | Symantec Corp. | 9,867,287 | ||||||
|
| |||||||
30,590,942 | ||||||||
|
| |||||||
| Specialty Retail (0.5%): | |||||||
169,993 | Abercrombie & Fitch Co., Class A | 5,594,470 | ||||||
|
| |||||||
| Wireless Telecommunication Services (1.2%): | |||||||
317,602 | Vodafone Group plc, ADR | 12,484,935 | ||||||
|
| |||||||
| Total Common Stocks (Cost $494,826,974) | 668,706,878 | ||||||
|
| |||||||
| Preferred Stocks (0.4%): | |||||||
| Commercial Banks (0.3%): | |||||||
13,608 | KeyCorp, Series A | 1,751,179 | ||||||
32,000 | Wells Fargo & Co. | 754,240 | ||||||
|
| |||||||
2,505,419 | ||||||||
|
| |||||||
| Oil, Gas & Consumable Fuels (0.1%): | |||||||
27,346 | El Paso Energy Capital Trust I | 1,526,249 | ||||||
|
| |||||||
| Total Preferred Stocks (Cost $3,036,896) | 4,031,668 | ||||||
|
| |||||||
Contracts, Shares, Notional Amount or Principal Amount | Fair Value | |||||||
| Convertible Bonds (11.8%): | |||||||
| Biotechnology (0.8%): | |||||||
$ | 1,819,000 | Cubist Pharmaceuticals, Inc., 1.13%, 9/1/18(a) | 2,092,987 | |||||
1,307,000 | Cubist Pharmaceuticals, Inc., 1.88%, 9/1/20(a) | 1,494,064 | ||||||
1,361,000 | Gilead Sciences, Inc., Series D, 1.63%, 5/1/16 | 4,488,748 | ||||||
|
| |||||||
8,075,799 | ||||||||
|
|
Contracts, Shares, Notional Amount or Principal Amount | Fair Value | |||||||
| Convertible Bonds, continued |
| ||||||
| Capital Markets (0.7%): | |||||||
$ | 455,000 | Bank of New York Mellon Corp. (The), Series D, 4.50%, Callable 6/20/23 @ 100, Perpetual Bond(b) | $ | 404,950 | ||||
600,000 | General Electric Capital Corp., 5.25%, Callable 6/15/23 @ 100, Perpetual Bond(b) | 561,000 | ||||||
1,200,000 | Goldman Sachs Group, Inc. (The), 1.00%, 3/15/17, Callable 3/13/15 @ 100(a) | 1,486,716 | ||||||
4,530,000 | Goldman Sachs Group, Inc. (The), 1.00%, 9/28/20(a) | 4,613,986 | ||||||
|
| |||||||
7,066,652 | ||||||||
|
| |||||||
| Chemicals (0.0%): | |||||||
200,000 | Dow Chemical Co. (The), 4.38%, 11/15/42, Callable 5/15/42 @ 100 | 175,606 | ||||||
|
| |||||||
| Commercial Banks (0.0%): | |||||||
425,000 | JPMorgan Chase & Co., Series Q, 5.15%, Callable 5/1/23 @ 100, Perpetual Bond(b) | 381,438 | ||||||
110,000 | Wells Fargo & Co., 1.50%, 1/16/18 | 109,289 | ||||||
|
| |||||||
490,727 | ||||||||
|
| |||||||
| Communications Equipment (0.6%): | |||||||
948,000 | Ciena Corp., 4.00%, 12/15/20(a) | 1,394,745 | ||||||
1,696,000 | Ciena Corp., 4.00%, 12/15/20 | 2,495,240 | ||||||
1,465,000 | JDS Uniphase Corp., 0.63%, 8/15/33, Callable 8/20/18 @ 100(a) | 1,468,663 | ||||||
868,000 | JDS Uniphase Corp., 0.63%, 8/15/33, Callable 8/20/18 @ 100(a) | 870,170 | ||||||
|
| |||||||
6,228,818 | ||||||||
|
| |||||||
| Computers & Peripherals (0.7%): | |||||||
295,000 | SanDisk Corp., 1.50%, 8/15/17 | 434,756 | ||||||
4,424,000 | SanDisk Corp., 1.50%, 8/15/17 | 6,519,870 | ||||||
1,095,000 | SanDisk Corp., 0.50%, 10/15/20(a) | 1,084,050 | ||||||
|
| |||||||
8,038,676 | ||||||||
|
| |||||||
| Construction Materials (0.6%): | |||||||
5,432,000 | Cemex SAB de C.V., 4.88%, 3/15/15 | 6,436,920 | ||||||
|
| |||||||
| Diversified Financial Services (0.1%): | |||||||
665,000 | Citigroup, Inc., 3.50%, 5/15/23 | 619,641 | ||||||
|
| |||||||
| Energy Equipment & Services (0.1%): | |||||||
1,127,000 | Helix Energy Solutions Group, Inc., 3.25%, 3/15/32, Callable 3/20/18 @ 100^ | 1,348,878 | ||||||
|
| |||||||
| Food & Beverages (0.0%): | |||||||
175,000 | Brown-Forman Corp., 2.25%, 1/15/23, Callable 10/15/22 @ 100 | 154,970 | ||||||
|
| |||||||
| Health Care Equipment & Supplies (1.1%): | |||||||
2,875,000 | HealthSouth Corp., 2.00%, 12/1/43, Callable 12/1/18 @ 100(a) | 3,029,531 | ||||||
1,252,000 | LifePoint Hospitals, Inc., 3.50%, 5/15/14^ | 1,360,768 | ||||||
2,492,000 | LifePoint Hospitals, Inc., 3.50%, 5/15/14 | 2,708,493 | ||||||
1,899,000 | NuVasive, Inc., 2.75%, 7/1/17 | 2,056,854 | ||||||
2,955,000 | Volcano Corp., 1.75%, 12/1/17 | 2,899,594 | ||||||
217,000 | Volcano Corp., 1.75%, 12/1/17 | 212,931 | ||||||
|
| |||||||
12,268,171 | ||||||||
|
|
Continued
5
AZL Invesco Equity and Income Fund
Schedule of Portfolio Investments
December 31, 2013
Contracts, Shares, Notional Amount or Principal Amount | Fair Value | |||||||
| Convertible Bonds, continued |
| ||||||
| Health Care Providers & Services (1.3%): | |||||||
$ | 1,124,000 | Brookdale Senior Living, Inc., 2.75%, 6/15/18^ | $ | 1,334,750 | ||||
1,157,000 | Brookdale Senior Living, Inc., 2.75%, 6/15/18 | 1,373,938 | ||||||
771,000 | Omnicare, Inc., 3.25%, 12/15/35 | 824,006 | ||||||
871,000 | Omnicare, Inc., Series OCR, 3.25%, 12/15/35, Callable 12/15/15 @ 100 | 930,881 | ||||||
117,000 | Omnicare, Inc., 3.75%, 4/1/42, Callable 4/1/16 @ 100 | 176,670 | ||||||
1,298,000 | Omnicare, Inc., 3.75%, 4/1/42, Callable 4/1/16 @ 100 | 1,959,979 | ||||||
1,407,000 | Omnicare, Inc., 3.50%, 2/15/44, Callable 2/15/19 @ 93.09 | 1,418,432 | ||||||
3,354,000 | WellPoint, Inc., 2.75%, 10/15/42 | 4,540,477 | ||||||
|
| |||||||
12,559,133 | ||||||||
|
| |||||||
| Hotels, Restaurants & Leisure (0.9%): | |||||||
196,000 | International Game Technology, Inc., 3.25%, 5/1/14^ | 207,760 | ||||||
1,957,000 | International Game Technology, Inc., 3.25%, 5/1/14 | 2,074,420 | ||||||
2,027,000 | MGM Resorts International, 4.25%, 4/15/15 | 7,874,625 | ||||||
|
| |||||||
10,156,805 | ||||||||
|
| |||||||
| Independent Power Producers & Energy Traders (0.0%): | |||||||
405,000 | Baltimore Gas And Electric Co., 3.35%, 7/1/23 | 388,843 | ||||||
|
| |||||||
| Insurance (0.2%): | |||||||
1,295,000 | Radian Group, Inc., 3.00%, 11/15/17 | 1,837,281 | ||||||
243,000 | Radian Group, Inc., 2.25%, 3/1/19 | 356,299 | ||||||
|
| |||||||
2,193,580 | ||||||||
|
| |||||||
| Internet & Catalog Retail (0.1%): | |||||||
1,250,000 | QVC, Inc., 7.50%, 10/1/19, Callable 10/1/14 @ 103.75(a) | 1,347,309 | ||||||
|
| |||||||
| Machinery (0.4%): | |||||||
727,000 | Greenbrier Cos., Inc., 3.50%, 4/1/18 | 859,678 | ||||||
460,000 | Linear Technology Corp., 3.00%, 5/1/27(a) | 524,400 | ||||||
277,000 | Linear Technology Corp., Series A, 3.00%, 5/1/27, Callable 5/1/14 @ 100 | 315,780 | ||||||
2,375,000 | Linear Technology Corp., 3.00%, 5/1/27 | 2,707,500 | ||||||
|
| |||||||
4,407,358 | ||||||||
|
| |||||||
| Media (0.3%): | |||||||
415,000 | Comcast Corp., 4.25%, 1/15/33 | 385,501 | ||||||
200,000 | Interpublic Group of Cos., Inc., 2.25%, 11/15/17 | 197,176 | ||||||
443,000 | Liberty Interactive LLC, 0.75%, 3/30/43, Callable 4/5/23 @ 100(a) | 552,089 | ||||||
1,343,000 | Liberty Media Corp., 1.38%, 10/15/23(a) | 1,340,482 | ||||||
490,000 | Liberty Media Corp., 1.38%, 10/15/23 | 489,081 | ||||||
|
| |||||||
2,964,329 | ||||||||
|
| |||||||
| Metals & Mining (0.3%): | |||||||
350,000 | Southern Copper Corp., 5.25%, 11/8/42 | 283,842 | ||||||
2,416,000 | United States Steel Corp., 2.75%, 4/1/19 | 3,198,180 | ||||||
|
| |||||||
3,482,022 | ||||||||
|
|
Contracts, Shares, Notional Amount or Principal Amount | Fair Value | |||||||
| Convertible Bonds, continued |
| ||||||
| Oil, Gas & Consumable Fuels (0.8%): |
| ||||||
$ | 335,000 | Chevron Corp., 1.72%, 6/24/18, Callable 5/24/18 @ 100 | $ | 333,736 | ||||
1,357,000 | Cobalt International Energy, Inc., 2.63%, 12/1/19 | 1,200,097 | ||||||
3,385,000 | Cobalt International Energy, Inc., 2.63%, 12/1/19 | 2,993,609 | ||||||
3,337,000 | Stone Energy Corp., 1.75%, 3/1/17^ | 3,683,214 | ||||||
|
| |||||||
8,210,656 | ||||||||
|
| |||||||
| Personal Products (0.0%): | |||||||
100,000 | Avon Products, Inc., 2.38%, 3/15/16 | 100,663 | ||||||
|
| |||||||
| Pharmaceuticals (0.5%): | |||||||
885,000 | Abbvie, Inc., 1.20%, 11/6/15 | 893,995 | ||||||
670,000 | Mylan, Inc., 6.00%, 11/15/18, Callable 11/15/14 @ 103(a) | 713,949 | ||||||
2,366,000 | Salix Pharmaceuticals, Ltd., 1.50%, 3/15/19 | 3,526,819 | ||||||
|
| |||||||
5,134,763 | ||||||||
|
| |||||||
| Real Estate Investment Trusts (REITs) (0.0%): | |||||||
515,000 | EPR Properties, 5.25%, 7/15/23, Callable 4/15/23 @ 100 | 503,106 | ||||||
|
| |||||||
| Semiconductors & Semiconductor Equipment (1.5%): | |||||||
399,000 | Lam Research Corp., 1.25%, 5/15/18^ | 485,284 | ||||||
2,425,000 | Lam Research Corp., 1.25%, 5/15/18 | 2,949,405 | ||||||
2,307,000 | Micron Technology, Inc., Series E, 1.63%, 2/15/33, Callable 2/20/18 @ 100(a) | 4,677,442 | ||||||
1,467,000 | Novellus Systems, Inc., 2.63%, 5/15/41 | 2,451,724 | ||||||
1,961,000 | NVIDIA Corp., 1.00%, 12/1/18(a) | 2,007,574 | ||||||
512,000 | Xilinx, Inc., 3.13%, 3/15/37(a) | 810,560 | ||||||
1,029,000 | Xilinx, Inc., 3.13%, 3/15/37 | 1,629,036 | ||||||
|
| |||||||
15,011,025 | ||||||||
|
| |||||||
| Specialty Retail (0.1%): | |||||||
1,400,000 | O’Reilly Automotive, Inc., 4.88%, 1/14/21, Callable 10/14/20 @ 100 | 1,467,445 | ||||||
|
| |||||||
| Thrifts & Mortgage Finance (0.7%): | |||||||
2,062,000 | MGIC Investment Corp., 5.00%, 5/1/17^ | 2,330,060 | ||||||
1,376,000 | MGIC Investment Corp., 5.00%, 5/1/17 | 1,554,880 | ||||||
245,000 | MGIC Investment Corp., 2.00%, 4/1/20^ | 338,100 | ||||||
1,312,000 | MGIC Investment Corp., 2.00%, 4/1/20 | 1,810,560 | ||||||
898,000 | Radian Group, Inc., 2.25%, 3/1/19 | 1,316,693 | ||||||
|
| |||||||
7,350,293 | ||||||||
|
| |||||||
| Total Convertible Bonds (Cost $109,270,757) | 126,182,188 | ||||||
|
| |||||||
| Corporate Bonds (4.0%): | |||||||
| Aerospace & Defense (0.0%): | |||||||
200,000 | Precision Castparts Corp., 2.50%, 1/15/23, Callable 10/15/22 @ 100 | 181,197 | ||||||
|
| |||||||
| Air Freight & Logistics (0.0%): | |||||||
160,000 | United Parcel Service, Inc., 2.45%, 10/1/22 | 147,026 | ||||||
|
|
Continued
6
AZL Invesco Equity and Income Fund
Schedule of Portfolio Investments
December 31, 2013
Contracts, Shares, Notional Amount or Principal Amount | Fair Value | |||||||
| Corporate Bonds, continued | |||||||
| Airlines (0.0%): | |||||||
$ | 93,670 | Continental Airlines 2010-A, Series A, 4.75%, 1/12/21 | $ | 99,524 | ||||
292,617 | Continental Airlines 2012-A, Series A, 4.15%, 4/11/24 | 292,995 | ||||||
68,250 | Delta Air Lines, Inc., 6.20%, 7/2/18 | 76,099 | ||||||
|
| |||||||
468,618 | ||||||||
|
| |||||||
| Automobiles (0.0%): | |||||||
550,000 | Ford Motor Co., 4.75%, 1/15/43 | 496,031 | ||||||
|
| |||||||
| Beverages (0.0%): | |||||||
20,000 | Anheuser-Busch InBev NV Worldwide, Inc., 5.38%, 11/15/14 | 20,831 | ||||||
135,000 | Anheuser-Busch InBev NV Worldwide, Inc., 3.63%, 4/15/15 | 140,418 | ||||||
175,000 | Anheuser-Busch InBev NV Worldwide, Inc., 0.80%, 7/15/15 | 175,871 | ||||||
80,000 | FBG Finance, Ltd., 5.13%, 6/15/15(a) | 84,877 | ||||||
|
| |||||||
421,997 | ||||||||
|
| |||||||
| Biotechnology (0.0%): |
| ||||||
335,000 | Celgene Corp., 4.00%, 8/15/23 | 329,840 | ||||||
|
| |||||||
| Capital Markets (0.3%): | |||||||
120,000 | Bear Stearns Co., Inc., 7.25%, 2/1/18 | 143,685 | ||||||
180,000 | Charles Schwab Corp. (The), 4.45%, 7/22/20 | 194,576 | ||||||
240,000 | Ford Motor Credit Co. LLC, 2.50%, 1/15/16 | 246,226 | ||||||
75,000 | General Electric Capital Corp., Series G, 6.00%, 8/7/19, MTN | 87,998 | ||||||
115,000 | Goldman Sachs Group, Inc. (The), 6.15%, 4/1/18 | 131,868 | ||||||
175,000 | Goldman Sachs Group, Inc. (The), 5.25%, 7/27/21 | 191,597 | ||||||
500,000 | Goldman Sachs Group, Inc. (The), 5.75%, 1/24/22 | 562,844 | ||||||
140,000 | Goldman Sachs Group, Inc. (The), 6.75%, 10/1/37 | 155,756 | ||||||
70,000 | Merrill Lynch & Co., 6.88%, 4/25/18, MTN | 82,766 | ||||||
235,000 | Morgan Stanley, 4.00%, 7/24/15 | 245,374 | ||||||
295,000 | Morgan Stanley, 3.45%, 11/2/15 | 307,067 | ||||||
300,000 | Morgan Stanley, 3.80%, 4/29/16 | 317,349 | ||||||
120,000 | Morgan Stanley, 5.75%, 1/25/21 | 135,752 | ||||||
365,000 | Morgan Stanley, 6.38%, 7/24/42 | 427,518 | ||||||
90,000 | National Rural Utilities Cooperative Finance Corp., 3.05%, 2/15/22, Callable 11/15/21 @ 100 | 87,432 | ||||||
|
| |||||||
3,317,808 | ||||||||
|
| |||||||
| Chemicals (0.0%): | |||||||
200,000 | Monsanto Co., 3.60%, 7/15/42, Callable 1/15/42 @ 100 | 163,052 | ||||||
|
| |||||||
| Commercial Banks (0.2%): | |||||||
330,000 | Bank of America Corp., 1.25%, 1/11/16, MTN | 331,485 | ||||||
295,000 | Bank of America Corp., 5.75%, 12/1/17 | 335,743 | ||||||
175,000 | Bank of America Corp., 5.65%, 5/1/18, MTN | 199,197 |
Contracts, Shares, Notional Amount or Principal Amount | Fair Value | |||||||
| Corporate Bonds, continued | |||||||
| Commercial Banks, continued | |||||||
$ | 140,000 | Capital One Financial Corp., 6.75%, 9/15/17 | $ | 163,619 | ||||
105,000 | HBOS plc, 6.75%, 5/21/18(a) | 118,768 | ||||||
130,000 | PNC Funding Corp., 5.13%, 2/8/20 | 146,011 | ||||||
250,000 | U.S. Bank NA, 3.78%, 4/29/20, Callable 4/29/15 @ 100(b) | 258,715 | ||||||
879,000 | Wells Fargo & Co., 4.13%, 8/15/23 | 866,561 | ||||||
|
| |||||||
2,420,099 | ||||||||
|
| |||||||
| Commercial Services & Supplies (0.0%): | |||||||
160,000 | International Lease Finance Corp., 5.88%, 8/15/22 | 159,600 | ||||||
|
| |||||||
| Consumer Finance (0.0%): | |||||||
500,000 | SLM Corp., 3.88%, 9/10/15 | 516,875 | ||||||
|
| |||||||
| Containers & Packaging (0.1%): | |||||||
905,000 | Packaging Corp. of America, 4.50%, 11/1/23, Callable 8/1/23 @ 100 | 907,365 | ||||||
|
| |||||||
| Diversified Financial Services (0.3%): | |||||||
630,000 | Bank of America Corp., 2.60%, 1/15/19 | 632,781 | ||||||
135,000 | Citigroup, Inc., 6.13%, 11/21/17 | 155,616 | ||||||
220,000 | Citigroup, Inc., 8.50%, 5/22/19 | 281,950 | ||||||
275,000 | Citigroup, Inc., 4.05%, 7/30/22 | 271,936 | ||||||
595,000 | Citigroup, Inc., 6.68%, 9/13/43 | 684,623 | ||||||
120,000 | JPMorgan Chase & Co., 6.00%, 1/15/18 | 138,177 | ||||||
65,000 | JPMorgan Chase & Co., 6.30%, 4/23/19 | 76,717 | ||||||
150,000 | JPMorgan Chase & Co., 4.40%, 7/22/20 | 161,244 | ||||||
215,000 | JPMorgan Chase & Co., 4.50%, 1/24/22 | 227,412 | ||||||
475,000 | Moody’s Corp., 4.50%, 9/1/22, Callable 6/1/22 @ 100 | 467,754 | ||||||
|
| |||||||
3,098,210 | ||||||||
|
| |||||||
| Diversified Telecommunication (0.4%): | |||||||
1,000,000 | Verizon Communications, Inc., 5.15%, 9/15/23 | 1,073,692 | ||||||
1,375,000 | Verizon Communications, Inc., 6.40%, 9/15/33 | 1,581,415 | ||||||
890,000 | Verizon Communications, Inc., 6.55%, 9/15/43 | 1,041,264 | ||||||
|
| |||||||
3,696,371 | ||||||||
|
| |||||||
| Electrical Equipment (0.0%): | |||||||
405,000 | Eaton Corp., 0.95%, 11/2/15 | 406,515 | ||||||
|
| |||||||
| Food & Staples Retailing (0.1%): | |||||||
85,000 | Corn Products International, Inc., 6.63%, 4/15/37 | 94,646 | ||||||
135,000 | Kraft Foods, Inc., 7.00%, 8/11/37 | 165,175 | ||||||
15,000 | Kraft Foods, Inc., 6.88%, 2/1/38 | 18,274 | ||||||
1,085,000 | Kroger Co. (The), 3.30%, 1/15/21, Callable 12/20/20 @ 100 | 1,077,849 | ||||||
|
| |||||||
1,355,944 | ||||||||
|
| |||||||
| Food Products (0.0%): | |||||||
190,000 | Mondelez International, Inc., 6.50%, 2/9/40 | 227,050 | ||||||
|
| |||||||
| Health Care Equipment & Supplies (0.1%): | |||||||
525,000 | Edwards Lifesciences Corp., 2.88%, 10/15/18 | 521,936 | ||||||
290,000 | Medtronic, Inc., 4.00%, 4/1/43, Callable 10/1/42 @ 100 | 255,592 | ||||||
|
| |||||||
777,528 | ||||||||
|
|
Continued
7
AZL Invesco Equity and Income Fund
Schedule of Portfolio Investments
December 31, 2013
Contracts, Shares, Notional Amount or Principal Amount | Fair Value | |||||||
| Corporate Bonds, continued | |||||||
| Health Care Providers & Services (0.1%): | |||||||
$ | 220,000 | Aetna, Inc., 3.95%, 9/1/20 | $ | 230,007 | ||||
160,000 | Aetna, Inc., 4.13%, 11/15/42, Callable 5/15/42 @ 100 | 139,940 | ||||||
295,000 | UnitedHealth Group, Inc., 1.63%, 3/15/19 | 284,077 | ||||||
|
| |||||||
654,024 | ||||||||
|
| |||||||
| Hotels, Restaurants & Leisure (0.1%): | |||||||
305,000 | Wyndham Worldwide Corp., 2.95%, 3/1/17, Callable 2/1/17 @ 100 | 309,346 | ||||||
225,000 | Wyndham Worldwide Corp., 5.63%, 3/1/21 | 240,253 | ||||||
|
| |||||||
549,599 | ||||||||
|
| |||||||
| Household Durables (0.1%): | |||||||
635,000 | MDC Holdings, Inc., 6.00%, 1/15/43, Callable 10/15/42 @ 100 | 547,858 | ||||||
|
| |||||||
| Household Products (0.1%): | |||||||
695,000 | Tupperware Brands Corp., 4.75%, 6/1/21, Callable 6/1/21 @ 100 | 698,957 | ||||||
|
| |||||||
| Independent Power Producers & Energy Traders (0.0%): | |||||||
175,000 | Louisville Gas & Electric Co., 1.63%, 11/15/15 | 178,345 | ||||||
125,000 | Ohio Power Co., Series M, 5.38%, 10/1/21 | 139,463 | ||||||
|
| |||||||
317,808 | ||||||||
|
| |||||||
| Insurance (0.4%): | |||||||
205,000 | Berkley (WR) Corp., 4.63%, 3/15/22 | 207,349 | ||||||
115,000 | CNA Financial Corp., 5.88%, 8/15/20 | 131,104 | ||||||
395,000 | ING U.S., Inc., 5.50%, 7/15/22 | 429,559 | ||||||
320,000 | Lincoln National Corp., 4.00%, 9/1/23 | 315,798 | ||||||
210,000 | Markel Corp., 5.00%, 3/30/43 | 196,391 | ||||||
295,000 | Marsh & McLennan Cos., Inc., 4.05%, 10/15/23, Callable 7/15/23 @ 100 | 290,625 | ||||||
454,000 | MetLife, Inc., Series D, 4.37%, 9/15/23 | 463,482 | ||||||
75,000 | Pacific Life Corp., 6.00%, 2/10/20(a) | 83,668 | ||||||
80,000 | Prudential Financial, Inc., Series D, 4.75%, 9/17/15, MTN | 85,251 | ||||||
20,000 | Prudential Financial, Inc., 7.38%, 6/15/19, MTN | 24,554 | ||||||
35,000 | Prudential Financial, Inc., 6.63%, 12/1/37, MTN | 41,969 | ||||||
280,000 | Prudential Financial, Inc., 5.10%, 8/15/43, MTN | 278,084 | ||||||
560,000 | Reinsurance Group of America, Inc., 4.70%, 9/15/23 | 565,223 | ||||||
440,000 | Travelers Cos., Inc. (The), 4.60%, 8/1/43 | 429,906 | ||||||
|
| |||||||
3,542,963 | ||||||||
|
| |||||||
| IT Services (0.0%): | |||||||
315,000 | Computer Sciences Corp., 4.45%, 9/15/22 | 303,830 | ||||||
195,000 | Hewlett-Packard Co., 2.63%, 12/9/14 | 198,240 | ||||||
|
| |||||||
502,070 | ||||||||
|
| |||||||
| Machinery (0.1%): | |||||||
655,000 | Deere & Co., 2.60%, 6/8/22, Callable 3/8/22 @ 100 | 612,468 |
Contracts, Shares, Notional Amount or Principal Amount | Fair Value | |||||||
| Corporate Bonds, continued | |||||||
| Machinery, continued | |||||||
$ | 160,000 | General Electric Co., 5.25%, 12/6/17 | $ | 181,111 | ||||
135,000 | Waste Management, Inc., 5.00%, 3/15/14 | 136,164 | ||||||
|
| |||||||
929,743 | ||||||||
|
| |||||||
| Media (0.2%): | |||||||
135,000 | Comcast Corp., 5.70%, 5/15/18 | 155,014 | ||||||
245,000 | Comcast Corp., 6.45%, 3/15/37 | 284,334 | ||||||
70,000 | Cox Communications, Inc., 5.45%, 12/15/14 | 73,154 | ||||||
20,000 | Cox Communications, Inc., 8.38%, 3/1/39(a) | 24,255 | ||||||
240,000 | Cox Communications, Inc., 4.70%, 12/15/42(a) | 201,558 | ||||||
110,000 | DIRECTV Holdings LLC / DIRECTV Financing Co., Inc., 2.40%, 3/15/17 | 111,986 | ||||||
210,000 | DIRECTV Holdings LLC / DIRECTV Financing Co., Inc., 1.75%, 1/15/18 | 206,004 | ||||||
185,000 | DIRECTV Holdings LLC / DIRECTV Financing Co., Inc., 5.15%, 3/15/42 | 166,149 | ||||||
80,000 | NBCUniversal Media LLC, 2.10%, 4/1/14 | 80,341 | ||||||
65,000 | NBCUniversal Media LLC, 5.15%, 4/30/20 | 72,653 | ||||||
75,000 | NBCUniversal Media LLC, 5.95%, 4/1/41 | 82,038 | ||||||
160,000 | Time Warner Cable, Inc., 5.88%, 11/15/40, Callable 5/15/40 @ 100 | 138,407 | ||||||
40,000 | Time Warner, Inc., 5.88%, 11/15/16 | 45,127 | ||||||
|
| |||||||
1,641,020 | ||||||||
|
| |||||||
| Metals & Mining (0.1%): | |||||||
350,000 | Barrick NA Finance LLC, 5.70%, 5/30/41 | 300,688 | ||||||
215,000 | Freeport-McMoRan Copper & Gold, Inc., 1.40%, 2/13/15 | 216,200 | ||||||
425,000 | Newmont Mining Corp., 3.50%, 3/15/22, Callable 12/15/21 @ 100 | 361,753 | ||||||
|
| |||||||
878,641 | ||||||||
|
| |||||||
| Oil & Gas Exploration & Production (0.0%): | |||||||
365,000 | Southwestern Energy Co., 4.10%, 3/15/22, Callable 12/15/21 @ 100 | 361,828 | ||||||
|
| |||||||
| Oil, Gas & Consumable Fuels (0.3%): | |||||||
1,400,000 | Anadarko Petroleum Corp., 5.75%, 6/15/14 | 1,429,363 | ||||||
55,000 | Enterprise Products Operating LP, 5.25%, 1/31/20 | 61,321 | ||||||
75,000 | Enterprise Products Partners LP, 6.50%, 1/31/19 | 87,979 | ||||||
640,000 | Noble Energy, Inc., 5.25%, 11/15/43, Callable 5/15/43 @ 100 | 639,477 | ||||||
190,000 | Phillips 66, 1.95%, 3/5/15 | 192,647 | ||||||
175,000 | Plains All American Pipeline LP, 3.65%, 6/1/22, Callable 3/1/22 @ 100 | 171,936 | ||||||
45,000 | Spectra Energy Capital Corp., 7.50%, 9/15/38 | 51,745 | ||||||
45,000 | Texas East Transmission, 7.00%, 7/15/32 | 53,691 | ||||||
|
| |||||||
2,688,159 | ||||||||
|
| |||||||
| Paper & Forest Products (0.0%): |
| ||||||
125,000 | International Paper Co., 6.00%, 11/15/41, Callable 5/15/41 @ 100 | 135,745 | ||||||
|
|
Continued
8
AZL Invesco Equity and Income Fund
Schedule of Portfolio Investments
December 31, 2013
Contracts, Shares, Notional Amount or Principal Amount | Fair Value | |||||||
| Corporate Bonds, continued | |||||||
| Pharmaceuticals (0.1%): | |||||||
$ | 110,000 | Express Scripts, Inc., 3.13%, 5/15/16 | $ | 114,808 | ||||
85,000 | GlaxoSmithKline plc, 5.65%, 5/15/18 | 97,847 | ||||||
75,000 | Medco Health Solutions, Inc., 2.75%, 9/15/15 | 77,420 | ||||||
95,000 | Merck & Co., Inc., 5.00%, 6/30/19 | 107,606 | ||||||
213,000 | Zoetis, Inc., 4.70%, 2/1/43, Callable 8/1/42 @ 100 | 199,083 | ||||||
|
| |||||||
596,764 | ||||||||
|
| |||||||
| Real Estate Investment Trusts (REITs) (0.2%): | |||||||
55,000 | American Tower Corp., 4.63%, 4/1/15 | 57,526 | ||||||
443,000 | American Tower Corp., 4.50%, 1/15/18 | 474,570 | ||||||
510,000 | American Tower Corp., 3.40%, 2/15/19 | 519,207 | ||||||
115,000 | Digital Realty Trust LP, 4.50%, 7/15/15^ | 119,619 | ||||||
460,000 | Health Care REIT, Inc., 4.50%, 1/15/24, Callable 10/15/23 @ 100 | 454,180 | ||||||
185,000 | Senior Housing Properties Trust, 4.30%, 1/15/16, Callable 10/15/15 @ 100 | 192,705 | ||||||
115,000 | Simon Property Group LP, 4.75%, 3/15/42, Callable 9/15/41 @ 100 | 111,263 | ||||||
240,000 | Ventas Realty LP / Capital Corp., 2.70%, 4/1/20, Callable 1/1/20 @ 100 | 229,488 | ||||||
95,000 | Ventas Realty LP / Capital Corp., 4.25%, 3/1/22 | 95,598 | ||||||
155,000 | Ventas Realty LP / Capital Corp., 5.70%, 9/30/43, Callable 3/30/43 @ 100 | 159,222 | ||||||
|
| |||||||
2,413,378 | ||||||||
|
| |||||||
| Real Estate Management & Development (0.0%): | |||||||
75,000 | WEA Finance LLC, 7.13%, 4/15/18(a) | 89,050 | ||||||
|
| |||||||
| Road & Rail (0.2%): | |||||||
1,370,000 | Burlington Northern Santa Fe LLC, 5.15%, 9/1/43, Callable 3/1/43 @ 100 | 1,391,760 | ||||||
140,000 | CSX Corp., 5.50%, 4/15/41, Callable 10/15/40 @ 100 | 147,235 | ||||||
105,000 | Ryder System, Inc., 3.15%, 3/2/15, MTN | 107,563 | ||||||
18,000 | Union Pacific Corp., 3.65%, 2/15/24(a) | 17,392 | ||||||
|
| |||||||
1,663,950 | ||||||||
|
| |||||||
| Software (0.0%): | |||||||
75,000 | Adobe Systems, Inc., 4.75%, 2/1/20 | 80,961 | ||||||
|
| |||||||
| Specialty Retail (0.2%): | |||||||
100,000 | Advance Auto Parts, Inc., 5.75%, 5/1/20 | 108,669 | ||||||
520,000 | Advance Auto Parts, Inc., 4.50%, 12/1/23, Callable 9/1/23 @ 100 | 519,746 | ||||||
667,117 | CVS Pass-Through Trust, 6.04%, 12/10/28 | 733,905 | ||||||
365,000 | Penske Truck Leasing Co. LP, 2.50%, 3/15/16(a) | 373,949 | ||||||
355,000 | Target Corp., 2.90%, 1/15/22 | 340,536 | ||||||
15,000 | Wal-Mart Stores, Inc., 6.50%, 8/15/37 | 18,764 | ||||||
|
| |||||||
2,095,569 | ||||||||
|
| |||||||
| Textiles, Apparel & Luxury Goods (0.0%): | |||||||
195,000 | Cintas Corp., 2.85%, 6/1/16 | 201,142 | ||||||
|
|
Contracts, Shares, Notional Amount or Principal Amount | Fair Value | |||||||
| Corporate Bonds, continued | |||||||
| Tobacco (0.1%): | |||||||
$ | 310,000 | Philip Morris International, Inc., 3.60%, 11/15/23 | $ | 300,065 | ||||
925,000 | Philip Morris International, Inc., 4.88%, 11/15/43 | 916,333 | ||||||
|
| |||||||
1,216,398 | ||||||||
|
| |||||||
| Wireless Telecommunication Services (0.2%): | |||||||
515,000 | ALLTEL Corp., 7.00%, 3/15/16 | 577,796 | ||||||
285,000 | AT&T, Inc., 3.00%, 2/15/22 | 268,514 | ||||||
1,000 | AT&T, Inc., 8.00%, 11/15/31 | 1,331 | ||||||
28,000 | AT&T, Inc., 5.35%, 9/1/40 | 27,704 | ||||||
730,000 | Crown Castle Towers LLC, 6.11%, 1/15/20(a) | 818,572 | ||||||
25,000 | SBC Communications, Inc., 6.15%, 9/15/34 | 27,170 | ||||||
65,000 | Verizon Communications, Inc., 3.00%, 4/1/16 | 67,782 | ||||||
120,000 | Verizon Communications, Inc., 6.40%, 2/15/38 | 134,756 | ||||||
|
| |||||||
1,923,625 | ||||||||
|
| |||||||
| Total Corporate Bonds (Cost $42,075,692) | 42,820,378 | ||||||
|
| |||||||
| Yankee Dollars (1.1%): | |||||||
| Aerospace & Defense (0.0%): | |||||||
275,000 | BAA Funding, Ltd., 2.50%, 6/25/15(a) | 278,632 | ||||||
|
| |||||||
| Airlines (0.0%): | |||||||
245,000 | Virgin Australia Holdings, Ltd., 5.00%, 10/23/23(a) | 250,053 | ||||||
|
| |||||||
| Commercial Banks (0.5%): | |||||||
65,000 | Abbey National Treasury Services plc, 2.88%, 4/25/14 | 65,445 | ||||||
235,000 | Abbey National Treasury Services plc, 3.88%, 11/10/14(a) | 241,418 | ||||||
100,000 | Barclays Bank plc, 2.75%, 2/23/15 | 102,259 | ||||||
175,000 | Barclays Bank plc, 6.75%, 5/22/19 | 210,922 | ||||||
110,000 | Barclays Bank plc, 5.14%, 10/14/20 | 117,136 | ||||||
1,280,000 | Credit Suisse AG, 6.50%, 8/8/23(a) | 1,356,800 | ||||||
255,000 | HSBC Bank plc, 4.13%, 8/12/20(a) | 269,812 | ||||||
375,000 | ING Bank NV, 3.75%, 3/7/17(a) | 394,958 | ||||||
485,000 | ING Bank NV, 5.80%, 9/25/23(a) | 507,113 | ||||||
435,000 | Lloyds Bank plc, 2.30%, 11/27/18 | 433,871 | ||||||
125,000 | National Australia Bank, 3.75%, 3/2/15(a) | 129,658 | ||||||
180,000 | Rabobank Nederland NV, 4.75%, 1/15/20(a) | 194,906 | ||||||
100,000 | Santander U.S. Debt SA, 3.72%, 1/20/15(a) | 101,993 | ||||||
305,000 | Societe Generale, 2.50%, 1/15/14(a) | 305,141 | ||||||
100,000 | Standard Chartered plc, 3.85%, 4/27/15(a) | 103,840 | ||||||
35,000 | UBS AG Stamford CT, Series BKNT, 5.88%, 12/20/17 | 40,163 | ||||||
120,000 | UBS AG Stamford CT, Series BKNT, 5.75%, 4/25/18 | 137,766 | ||||||
|
| |||||||
4,713,201 | ||||||||
|
| |||||||
| Food & Staples Retailing (0.0%): | |||||||
100,000 | Grupo Bimbo SAB de C.V., 4.88%, 6/30/20(a) | 103,480 | ||||||
|
| |||||||
| Independent Power Producers & Energy Traders (0.0%): | |||||||
50,000 | Electricite de France, 4.60%, 1/27/20(a) | 54,101 |
Continued
9
AZL Invesco Equity and Income Fund
Schedule of Portfolio Investments
December 31, 2013
Contracts, Shares, Notional Amount or Principal Amount | Fair Value | |||||||
| Yankee Dollars, continued | |||||||
| Independent Power Producers & Energy Traders, continued |
| ||||||
$ | 100,000 | Iberdrola Finance Ireland, Ltd., 3.80%, 9/11/14(a) | $ | 102,007 | ||||
|
| |||||||
156,108 | ||||||||
|
| |||||||
| Insurance (0.0%): | |||||||
100,000 | AEGON NV, 4.63%, 12/1/15 | 106,679 | ||||||
|
| |||||||
| Internet Software & Services (0.1%): | |||||||
455,000 | Baidu, Inc., 3.25%, 8/6/18 | 459,913 | ||||||
|
| |||||||
| Media (0.0%): | |||||||
355,000 | Rogers Communications, Inc., 4.50%, 3/15/43, Callable 9/15/42 @ 100 | 310,886 | ||||||
|
| |||||||
| Metals & Mining (0.2%): | |||||||
100,000 | Anglo American Capital plc, 9.38%, 4/8/19(a) | 126,710 | ||||||
205,000 | ArcelorMittal, 4.25%, 8/5/15 | 212,175 | ||||||
145,000 | ArcelorMittal, 9.85%, 6/1/19 | 183,425 | ||||||
30,000 | ArcelorMittal, 7.25%, 3/1/41 | 28,650 | ||||||
265,000 | Gold Fields Holdings Co., Ltd., 4.88%, 10/7/20(a) | 214,297 | ||||||
100,000 | Rio Tinto Finance (USA), Ltd., 9.00%, 5/1/19 | 130,562 | ||||||
110,000 | Rio Tinto Finance (USA), Ltd., 7.13%, 7/15/28 | 135,285 | ||||||
380,000 | Vale Overseas, Ltd., 5.63%, 9/15/19 | 412,257 | ||||||
65,000 | Vale SA, 5.63%, 9/11/42 | 59,006 | ||||||
230,000 | Xstrata Finance Canada, 1.80%, 10/23/15(a) | 232,927 | ||||||
230,000 | Xstrata Finance Canada, 2.70%, 10/25/17(a) | 232,611 | ||||||
|
| |||||||
1,967,905 | ||||||||
|
| |||||||
| Miscellaneous Manufacturing (0.0%): | |||||||
350,000 | Pentair Finance SA, 5.00%, 5/15/21, Callable 2/15/21 @ 100 | 365,849 | ||||||
|
| |||||||
| Oil, Gas & Consumable Fuels (0.0%): | |||||||
150,000 | Husky Energy, Inc., 3.95%, 4/15/22, Callable 1/15/22 @ 100 | 148,055 | ||||||
70,000 | Noble Holding International, Ltd., 2.50%, 3/15/17 | 70,221 | ||||||
390,000 | Petrobras Global Finance Co., 5.63%, 5/20/43 | 318,362 | ||||||
40,000 | Shell International Finance B.V., 3.10%, 6/28/15 | 41,511 | ||||||
|
| |||||||
578,149 | ||||||||
|
| |||||||
| Pharmaceuticals (0.0%): | |||||||
310,000 | Perrigo Co., Ltd., 2.30%, 11/8/18(a) | 305,979 | ||||||
190,000 | Teva Pharmaceutical Finance BV, 2.95%, 12/18/22 | 172,021 | ||||||
|
| |||||||
478,000 | ||||||||
|
| |||||||
| Real Estate Management & Development (0.1%): | |||||||
430,000 | Dexus Diversified Trust / Dexus Office Trust, 5.60%, 3/15/21(a) | 453,220 | ||||||
|
| |||||||
| Thrifts & Mortgage Finance (0.0%): | |||||||
180,000 | Nationwide Building Society, 6.25%, 2/25/20(a) | 206,004 | ||||||
|
| |||||||
| Wireless Telecommunication Services (0.2%): | |||||||
200,000 | America Movil SAB de C.V., 2.38%, 9/8/16 | 205,834 |
Contracts, Shares, Notional Amount or Principal Amount | Fair Value | |||||||
| Yankee Dollars, continued | |||||||
| Wireless Telecommunication Services, continued |
| ||||||
$ | 335,000 | America Movil SAB de C.V., 4.38%, 7/16/42 | $ | 278,321 | ||||
75,000 | Deutsche Telekom International Finance BV, 6.00%, 7/8/19 | 86,826 | ||||||
760,000 | Virgin Media Secured Finance plc, 6.50%, 1/15/18, Callable 1/15/14 @ 103.25 | 787,550 | ||||||
|
| |||||||
1,358,531 | ||||||||
|
| |||||||
| Total Yankee Dollars (Cost $11,627,520) | 11,786,610 | ||||||
|
| |||||||
| Municipal Bond (0.0%): | |||||||
| Texas (0.0%): | |||||||
80,000 | Texas State Transportation Commission, Build America Bonds, Revenue, Series B, 5.03%, 4/1/26 | 85,971 | ||||||
|
| |||||||
| Total Municipal Bond (Cost $80,000) | 85,971 | ||||||
|
| |||||||
| U.S. Treasury Obligations (10.3%): | |||||||
| U.S. Treasury Bonds (0.5%) | |||||||
2,300,000 | 4.50%, 2/15/36 | 2,559,109 | ||||||
875,000 | 3.50%, 2/15/39 | 824,004 | ||||||
2,681,000 | 3.63%, 8/15/43 | 2,531,869 | ||||||
|
| |||||||
5,914,982 | ||||||||
|
| |||||||
| U.S. Treasury Notes (9.8%) | |||||||
1,350,000 | 1.75%, 3/31/14 | 1,355,431 | ||||||
2,000,000 | 0.25%, 4/30/14 | 2,001,016 | ||||||
200,000 | 2.63%, 6/30/14 | 202,484 | ||||||
2,470,000 | 2.25%, 1/31/15 | 2,524,997 | ||||||
4,000,000 | 0.25%, 12/31/15 | 3,989,376 | ||||||
13,500,000 | 2.63%, 4/30/16 | 14,162,337 | ||||||
32,000,000 | 0.63%, 12/15/16^ | 31,870,016 | ||||||
200,000 | 0.63%, 5/31/17 | 197,391 | ||||||
8,000,000 | 0.75%, 6/30/17 | 7,915,624 | ||||||
13,200,000 | 0.75%, 2/28/18 | 12,852,470 | ||||||
19,089,000 | 1.50%, 12/31/18 | 18,874,249 | ||||||
6,200,000 | 1.25%, 1/31/19 | 6,046,451 | ||||||
6,000 | 3.63%, 2/15/20 | 6,531 | ||||||
400,000 | 2.63%, 11/15/20 | 406,500 | ||||||
2,574,000 | 2.75%, 11/15/23 | 2,518,095 | ||||||
|
| |||||||
104,922,968 | ||||||||
|
| |||||||
| Total U.S. Treasury Obligations (Cost $111,588,334) | 110,837,950 | ||||||
|
| |||||||
| U.S. Government Agency Mortgages (0.2%): |
| ||||||
1,200,000 | Federal Home Loan Mortgage Corporation, 4.88%, 6/13/18 | 1,333,489 | ||||||
725,000 | Federal National Mortgage Association, 6.63%, 11/15/30 | 818,714 | ||||||
|
| |||||||
2,152,203 | ||||||||
|
| |||||||
| Total U.S. Government Agency Mortgages (Cost $2,014,252) | 2,152,203 | ||||||
|
| |||||||
| Securities Held as Collateral for Securities on Loan (3.5%): |
| ||||||
37,845,988 | Allianz Variable Insurance Products Securities Lending Collateral Trust(c) | 37,845,988 | ||||||
|
| |||||||
| Total Securities Held as Collateral for Securities on Loan | 37,845,988 | ||||||
|
|
Continued
10
AZL Invesco Equity and Income Fund
Schedule of Portfolio Investments
December 31, 2013
Contracts, Shares, Notional Amount or Principal Amount | Fair Value | |||||||
| Unaffiliated Investment Company (9.7%): | |||||||
$ | 104,009,810 | Dreyfus Treasury Prime Cash Management Fund, Institutional Shares, 0.00%(d) | $ | 104,009,810 | ||||
|
| |||||||
| Total Unaffiliated Investment Company (Cost $104,009,810) | 104,009,810 | ||||||
|
| |||||||
| Total Investment Securities | 1,108,459,644 | ||||||
| Net other assets (liabilities) — (3.4)% | (36,446,061 | ) | |||||
|
| |||||||
| Net Assets — 100.0% | $ | 1,072,013,583 | |||||
|
|
Percentages indicated are based on net assets as of December 31, 2013.
ADR—American Depositary Receipt
MTN—Medium Term Note
NYS—New York Shares
* | Non-income producing security. |
^ | This security or a partial position of this security was on loan as of December 31, 2013. The total value of securities on loan as of December 31, 2013, was $36,859,747. |
(a) | Rule 144A, Section 4(2) or other security which is restricted to resale to institutional investors. The sub-adviser has deemed these securities to be liquid based on procedures approved by the Board of Trustees. |
(b) | Variable rate security. The rate presented represents the rate in effect at December 31, 2013. The date presented represents the final maturity date. |
(c) | Purchased with cash collateral held from securities lending. The value of the collateral could include collateral held for securities that were sold on or before December 31, 2013. |
(d) | The rate represents the effective yield at December 31, 2013. |
(e) | See Federal Tax Information listed in the Notes to the Financial Statements. |
Continued
11
AZL Invesco Equity and Income Fund
Schedule of Portfolio Investments
December 31, 2013
The following represents the concentrations by country of risk (based on the domicile of the security issuer) relative to the total fair value of investments as of December 31, 2013:
Country | Percentage | |||
Australia | 0.1 | % | ||
Brazil | — | %NM | ||
British Virgin Islands | — | %NM | ||
Canada | 1.2 | % | ||
Cayman Islands | 0.1 | % | ||
France | 1.0 | % | ||
Guernsey | 0.6 | % | ||
Ireland | 0.2 | % | ||
Ireland (Republic of) | 0.6 | % | ||
Israel | — | %NM | ||
Jersey | — | %NM | ||
Luxembourg | 0.1 | % | ||
Mexico | 0.7 | % | ||
Netherlands | 0.6 | % | ||
Panama | 1.0 | % | ||
Spain | — | %NM | ||
Switzerland | 2.1 | % | ||
United Kingdom | 3.7 | % | ||
United States | 88.0 | % | ||
|
| |||
100.0 | % | |||
|
|
NM | Not meaningful, amount is less than 0.05%. |
Forward Currency Contracts
At December 31, 2013, the Fund’s open forward currency contracts were as follows:
Type of Contract | Counterparty | Delivery Date | Contract Amount (Local Currency) | Contract Value | Value | Net Unrealized Appreciation/ (Depreciation) | ||||||||||||||||
Short Contracts: |
| |||||||||||||||||||||
British Pound | Bank of New York Mellon | 1/10/14 | 3,532,730 | $ | 5,797,599 | $ | 5,848,762 | $ | (51,163 | ) | ||||||||||||
British Pound | State Street | 1/10/14 | 7,890,871 | 12,941,857 | 13,064,068 | (122,211 | ) | |||||||||||||||
Canadian Dollar | Bank of New York Mellon | 1/10/14 | 5,380,682 | 5,045,745 | 5,064,808 | (19,063 | ) | |||||||||||||||
Canadian Dollar | State Street | 1/10/14 | 4,792,550 | 4,494,055 | 4,511,202 | (17,147 | ) | |||||||||||||||
European Euro | Bank of New York Mellon | 1/10/14 | 2,464,472 | 3,347,640 | 3,390,091 | (42,451 | ) | |||||||||||||||
European Euro | State Street | 1/10/14 | 5,944,232 | 8,070,663 | 8,176,798 | (106,135 | ) | |||||||||||||||
Israeli Shekel | State Street | 1/10/14 | 9,824,338 | 2,789,183 | 2,831,561 | (42,378 | ) | |||||||||||||||
Swiss Franc | Bank of New York Mellon | 1/10/14 | 3,201,178 | 3,539,677 | 3,589,838 | (50,161 | ) | |||||||||||||||
Swiss Franc | State Street | 1/10/14 | 3,221,954 | 3,561,902 | 3,613,136 | (51,234 | ) | |||||||||||||||
|
|
|
|
|
| |||||||||||||||||
$ | 49,588,321 | $ | 50,090,264 | $ | (501,943 | ) | ||||||||||||||||
|
|
|
|
|
| |||||||||||||||||
Long Contracts: |
| |||||||||||||||||||||
Israeli Shekel | State Street | 1/10/14 | 9,824,338 | $ | 2,806,713 | $ | 2,831,561 | $ | 24,848 | |||||||||||||
|
|
|
|
|
| |||||||||||||||||
$ | 2,806,713 | $ | 2,831,561 | $ | 24,848 | |||||||||||||||||
|
|
|
|
|
|
See accompanying notes to the financial statements.
12
AZL Invesco Equity and Income Fund
Statement of Assets and Liabilities
December 31, 2013
Assets: | |||||
Investment securities, at cost | $ | 916,376,223 | |||
|
| ||||
Investment securities, at value* | $ | 1,108,459,644 | |||
Cash | 234 | ||||
Interest and dividends receivable | 2,817,427 | ||||
Foreign currency, at value (cost $109,961) | 110,773 | ||||
Unrealized appreciation on forward currency contracts | 24,848 | ||||
Receivable for capital shares issued | 1,031,348 | ||||
Reclaims receivable | 40,566 | ||||
|
| ||||
Total Assets | 1,112,484,840 | ||||
|
| ||||
Liabilities: | |||||
Unrealized depreciation on forward currency contracts | 501,943 | ||||
Payable for capital shares redeemed | 1,224,655 | ||||
Payable for collateral received on loaned securities | 37,845,988 | ||||
Manager fees payable | 582,501 | ||||
Administration fees payable | 36,148 | ||||
Distribution fees payable | 221,589 | ||||
Custodian fees payable | 10,248 | ||||
Administrative and compliance services fees payable | 4,114 | ||||
Trustee fees payable | 31 | ||||
Other accrued liabilities | 44,040 | ||||
|
| ||||
Total Liabilities | 40,471,257 | ||||
|
| ||||
Net Assets | $ | 1,072,013,583 | |||
|
| ||||
Net Assets Consist of: | |||||
Capital | $ | 841,765,360 | |||
Accumulated net investment income/(loss) | 8,838,814 | ||||
Accumulated net realized gains/(losses) from investment transactions | 29,800,848 | ||||
Net unrealized appreciation/(depreciation) on investments | 191,608,561 | ||||
|
| ||||
Net Assets | $ | 1,072,013,583 | |||
|
| ||||
Shares of beneficial interest (unlimited number of shares authorized, no par value) | 68,143,061 | ||||
Net Asset Value (offering and redemption price per share) | $ | 15.73 | |||
|
|
For the Year Ended December 31, 2013
Investment Income: | |||||
Dividends | $ | 11,903,593 | |||
Interest | 5,380,822 | ||||
Income from securities lending | 140,718 | ||||
Foreign withholding tax | (93,283 | ) | |||
|
| ||||
Total Investment Income | 17,331,850 | ||||
|
| ||||
Expenses: | |||||
Manager fees | 5,984,373 | ||||
Administration fees | 279,394 | ||||
Distribution fees | 1,994,791 | ||||
Custodian fees | 36,251 | ||||
Administrative and compliance services fees | 16,019 | ||||
Trustee fees | 40,490 | ||||
Professional fees | 45,283 | ||||
Shareholder reports | 43,487 | ||||
Other expenses | 21,596 | ||||
|
| ||||
Total expenses before reductions | 8,461,684 | ||||
Less expenses voluntarily waived/reimbursed by the Manager | (722,914 | ) | |||
Less expenses paid indirectly | (19,538 | ) | |||
|
| ||||
Net expenses | 7,719,232 | ||||
|
| ||||
Net Investment Income/(Loss) | 9,612,618 | ||||
|
| ||||
Realized and Unrealized Gains/(Losses) on Investments: | |||||
Net realized gains/(losses) on securities transactions | 36,844,056 | ||||
Net realized gains/(losses) on forward currency contracts | (255,142 | ) | |||
Change in net unrealized appreciation/depreciation on investments | 120,836,618 | ||||
|
| ||||
Net Realized/Unrealized Gains/(Losses) on Investments | 157,425,532 | ||||
|
| ||||
Change in Net Assets Resulting From Operations | $ | 167,038,150 | |||
|
|
* | Includes securities on loan of $36,859,747. |
See accompanying notes to the financial statements.
13
Statements of Changes in Net Assets
AZL Invesco Equity and Income Fund | ||||||||||
For the Year Ended December 31, 2013 | For the Year Ended December 31, 2012 | |||||||||
Change in Net Assets: | ||||||||||
Operations: | ||||||||||
Net investment income/(loss) | $ | 9,612,618 | $ | 7,659,510 | ||||||
Net realized gains/(losses) on investment transactions | 36,588,914 | 8,933,731 | ||||||||
Change in unrealized appreciation/depreciation on investments | 120,836,618 | 39,568,346 | ||||||||
|
|
|
| |||||||
Change in net assets resulting from operations | 167,038,150 | 56,161,587 | ||||||||
|
|
|
| |||||||
Dividends to Shareholders: | ||||||||||
From net investment income | (7,820,810 | ) | (8,001,873 | ) | ||||||
|
|
|
| |||||||
Change in net assets resulting from dividends to shareholders | (7,820,810 | ) | (8,001,873 | ) | ||||||
|
|
|
| |||||||
Capital Transactions: | ||||||||||
Proceeds from shares issued | 381,039,836 | 137,294,246 | ||||||||
Proceeds from dividends reinvested | 7,820,810 | 8,001,873 | ||||||||
Value of shares redeemed | (51,132,119 | ) | (60,784,468 | ) | ||||||
|
|
|
| |||||||
Change in net assets resulting from capital transactions | 337,728,527 | 84,511,651 | ||||||||
|
|
|
| |||||||
Change in net assets | 496,945,867 | 132,671,365 | ||||||||
Net Assets: | ||||||||||
Beginning of period | 575,067,716 | 442,396,351 | ||||||||
|
|
|
| |||||||
End of period | $ | 1,072,013,583 | $ | 575,067,716 | ||||||
|
|
|
| |||||||
Accumulated net investment income/(loss) | $ | 8,838,814 | $ | 7,012,987 | ||||||
|
|
|
| |||||||
Share Transactions: | ||||||||||
Shares issued | 25,992,523 | 11,179,382 | ||||||||
Dividends reinvested | 529,865 | 638,108 | ||||||||
Shares redeemed | (3,554,718 | ) | (4,979,034 | ) | ||||||
|
|
|
| |||||||
Change in shares | 22,967,670 | 6,838,456 | ||||||||
|
|
|
|
See accompanying notes to the financial statements.
14
AZL Invesco Equity and Income Fund
(Selected data for a share of beneficial interest outstanding throughout the periods indicated)
Year Ended December 31, | |||||||||||||||||||||||||
2013 | 2012 | 2011 | 2010 | 2009 | |||||||||||||||||||||
Net Asset Value, Beginning of Period | $ | 12.73 | $ | 11.54 | $ | 11.95 | $ | 10.83 | $ | 9.00 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Investment Activities: | |||||||||||||||||||||||||
Net Investment Income/(Loss) | 0.11 | 0.15 | 0.14 | 0.12 | 0.07 | ||||||||||||||||||||
Net Realized and Unrealized Gains/(Losses) on Investments | 3.02 | 1.22 | (0.41 | ) | 1.14 | 1.98 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Total from Investment Activities | 3.13 | 1.37 | (0.27 | ) | 1.26 | 2.05 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Dividends to Shareholders From: | |||||||||||||||||||||||||
Net Investment Income | (0.13 | ) | (0.18 | ) | (0.14 | ) | (0.14 | ) | (0.22 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Total Dividends | (0.13 | ) | (0.18 | ) | (0.14 | ) | (0.14 | ) | (0.22 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Net Asset Value, End of Period | $ | 15.73 | $ | 12.73 | $ | 11.54 | $ | 11.95 | $ | 10.83 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Total Return(a) | 24.67 | % | 11.91 | % | (2.18 | )%(b) | 11.74 | % | 22.85 | % | |||||||||||||||
Ratios to Average Net Assets/Supplemental Data: | |||||||||||||||||||||||||
Net Assets, End of Period (000’s) | $ | 1,072,014 | $ | 575,068 | $ | 442,396 | $ | 351,159 | $ | 242,485 | |||||||||||||||
Net Investment Income/(Loss) | 1.20 | % | 1.46 | % | 1.57 | % | 1.49 | % | 1.80 | % | |||||||||||||||
Expenses Before Reductions(c) | 1.06 | % | 1.07 | % | 1.09 | % | 1.10 | % | 1.13 | % | |||||||||||||||
Expenses Net of Reductions | 0.97 | % | 0.98 | % | 1.01 | % | 1.02 | % | 1.07 | % | |||||||||||||||
Expenses Net of Reductions, Excluding Expenses Paid Indirectly(d) | 0.97 | % | 0.99 | % | 1.01 | % | 1.02 | % | 1.07 | % | |||||||||||||||
Portfolio Turnover Rate | 52 | % | 29 | % | 28 | % | 37 | % | 69 | % |
(a) | The returns include reinvested dividends and fund level expenses, but exclude insurance contract charges. If these charges were included, the returns would have been lower. |
(b) | During the year ended December 31, 2011, Invesco Advisers, Inc. reimbursed $1,491 to the Fund related to violation of certain investment policies and limitations. The corresponding impact to the return was less than 0.005%. |
(c) | Excludes fee reductions. If such fee reductions had not occurred, the ratios would have been as indicated. |
(d) | Expenses net of reductions excludes expenses paid indirectly, pursuant to a “commission recapture” program, under which brokers remit a portion of the brokerage commission which is used to pay certain Fund expenses. See note 2 in the Notes to the Financial Statements. |
See accompanying notes to the financial statements.
15
AZL Invesco Equity and Income Fund
Notes to the Financial Statements
December 31, 2013
1. Organization
The Allianz Variable Insurance Products Trust (the “Trust”) was organized as a Delaware statutory trust on July 13, 1999. The Trust is a diversified open-end management investment company registered under the Investment Company Act of 1940. The Trust consists of 29 separate investment portfolios (collectively, the “Funds”), of which one is included in this report, the AZL Invesco Equity and Income Fund (the “Fund”), and 28 are presented in separate reports.
The Trust is authorized to issue an unlimited number of shares of the Fund without par value. Shares of the Fund are available through the variable annuity contracts and variable life insurance policies offered through the separate accounts of participating insurance companies.
Under the Trust’s organizational documents, its officers and trustees are indemnified against certain liabilities arising out of the performance of their duties to the Fund. In addition, in the normal course of business, the Fund may enter into contracts with its vendors and others that provide for general indemnifications. The Fund’s maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Fund. However, based on experience, the Fund expects the risk of loss to be remote.
2. Significant Accounting Policies
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. The policies conform with U.S. generally accepted accounting principles (“U.S. GAAP”). The preparation of financial statements requires management to make certain 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 increases and decreases in net assets from operations during the reporting period. Actual results could differ from those estimates.
Security Valuation
The Fund records its investments at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between willing market participants at the measurement date. The valuation techniques used to determine fair value are further described in Note 4 below.
Investment Transactions and Investment Income
Investment transactions are recorded not later than on the business day following trade date. However, for financial reporting purposes, investment transactions are accounted for on trade date. Net realized gains and losses on investments sold and on foreign currency transactions are recorded on the basis of identified cost. Interest income is recorded on the accrual basis and includes, where applicable, the amortization of premiums or accretion of discounts. Dividend income is recorded on the ex-dividend date except in the case of foreign securities, in which case dividends are recorded as soon as such information becomes available.
Real Estate Investment Trusts
The Fund may own shares of real estate investment trusts (“REITs”) which report information on the source of their distributions annually. Certain distributions received from REITs during the year, which are known to be a return of capital, are recorded as a reduction to the cost of the individual REIT.
Foreign Currency Translation
The accounting records of the Fund are maintained in U.S. dollars. Foreign currency amounts are translated into U.S. dollars at the current rate of exchange to determine the fair value of investments, assets and liabilities. Purchases and sales of securities, and income and expenses are translated at the prevailing rate of exchange on the respective dates of such transactions. The Fund does not isolate that portion of the results of operations resulting from changes in foreign exchange rates on investments from fluctuations arising from changes in market prices of securities held. Such fluctuations are included in the net realized and unrealized gain or loss on investments and foreign currencies. Income received by the Fund from sources within foreign countries may be subject to withholding and other income or similar taxes imposed by such countries. The Funds accrue such taxes, as applicable, based on their current interpretation of tax rules in the foreign markets in which they invest.
Dividends to Shareholders
Dividends to shareholders are recorded on the ex-dividend date. The Fund distributes its dividends from net investment income and net realized capital gains, if any, on an annual basis. The amount of dividends from net investment income and from net realized gains is determined in accordance with federal income tax regulations, which may differ from U.S. GAAP. These “book/tax” differences are either temporary or permanent in nature. To the extent these differences are permanent in nature (e.g., return of capital, net operating loss, and reclassification of certain distributions), such amounts are reclassified within the composition of net assets based on their federal tax-basis treatment; temporary differences (e.g., wash sales and post October losses) do not require reclassification. Dividends to shareholders that exceed net investment income and net realized gains for tax purposes are reported as distributions of capital.
Expense Allocation
Expenses directly attributable to the Fund are charged directly to the Fund, while expenses attributable to more than one Fund are allocated among the respective Funds based upon relative net assets or some other reasonable method. Expenses which are attributable to more than one Trust are allocated across the Allianz Variable Insurance Products and Allianz Variable Insurance Products Fund of Funds Trusts based upon relative net assets or another reasonable basis. Allianz Investment Management LLC (the “Manager”), serves as the investment manager for the Trust and the Allianz Variable Insurance Products Fund of Funds Trust.
Securities Lending
To generate additional income, the Fund may lend up to 33 1/3% of its assets pursuant to agreements requiring that the loan be continuously secured by any combination of cash, U.S. government or U.S. government agency securities, equal initially to at least 102% of the fair value plus accrued interest on the securities loaned (105% for foreign
16
AZL Invesco Equity and Income Fund
Notes to the Financial Statements
December 31, 2013
securities). The borrower of securities is at all times required to post collateral to the Fund in an amount equal to 100% of the fair value of the securities loaned based on the previous day’s fair value of the securities loaned, marked-to-market daily. Any collateral shortfalls are adjusted the next business day. The Fund bears all of the gains and losses on such investments. The Fund receives payments from borrowers equivalent to the dividends and interest that would have been earned on securities lent while simultaneously seeking to earn income on the investment of cash collateral received. In extremely low interest rate environments, the broker rebate fee may exceed the interest earned or the cash collateral which would result in a loss to the Fund. The investment of cash collateral deposited by the borrower is subject to inherent market risks such as interest rate risk, credit risk, liquidity risk, and other risks that are present in the market, and as such, the value of these investments may not be sufficient, when liquidated, to repay the borrower when the loaned security is returned. There may be risks of delay in recovery of the securities or even loss of rights in the collateral should the borrower of the securities fail financially. However, loans will be made only to borrowers, such as broker-dealers, banks or institutional borrowers of securities, deemed by the Manager to be of good standing and credit worthy and when in its judgment, the consideration which can be earned currently from such securities loans justifies the attendant risks. Loans are subject to termination by the Trust or the borrower at any time, and are, therefore, not considered to be illiquid investments. Securities on loan at December 31, 2013 are presented on the Fund’s Schedule of Portfolio Investments. The average outstanding amount of securities on loan was $12.3 million for the year ended December 31, 2013.
Cash collateral received in connection with securities lending is invested in the Allianz Variable Insurance Products Securities Lending Collateral Trust (the “Securities Lending Collateral Trust”) managed by The Dreyfus Corporation, an affiliate of the Custodian and Securities Lending Agent. The Securities Lending Collateral Trust invests in short-term investments that have a remaining maturity of 397 days or less as calculated in accordance with Rule 2a-7 under the 1940 Act. The Fund paid securities lending fees of $13,963 during the year ended December 31, 2013. These fees have been netted against “Income from securities lending” on the Statement of Operations.
Commission Recapture
Certain Funds of the Trust participate in a commission recapture program. The Fund will utilize the recaptured commissions to pay for, in whole or part, certain expenses of the Fund, excluding investment advisory fees. Any amounts received by the Fund, if applicable, are disclosed as “Expenses paid indirectly” on the Statement of Operations.
Effective January 6, 2014, the Manager, on behalf of the Trust, requested the Fund cease participation in the program until further notice.
Derivative Instruments
All open derivative positions at period end are reflected on the Fund’s Schedule of Portfolio Investments. The following is a description of the derivative instruments utilized by the Fund, including the primary underlying risk exposures related to each instrument type.
Forward Currency Contracts
During the year ended December 31, 2013, the Fund entered into forward currency contracts in connection with planned purchases or sales of securities or to hedge the U.S. dollar value of securities denominated in a particular currency. In addition to the foreign currency risk related to the use of these contracts, the Fund could be exposed to risks if the counterparties to the contracts are unable to meet the terms of their contracts and from unanticipated movements in the value of a foreign currency relative to the U.S. dollar. In the event of default by the counterparty to the transaction, the Fund’s maximum amount of loss, as either the buyer or the seller, is the unrealized appreciation of the contract. The forward currency contracts are adjusted by the daily exchange rate of the underlying currency and any gains or losses are recorded for financial statement purposes as unrealized gains or losses until the contract settlement date. When the contract is closed, the Fund records a realized gain or loss equal to the difference between the value at the time it was opened and the value at the time it was closed. The contract amount of forward currency contracts outstanding was $52.4 million as of December 31, 2013. The monthly average amount for these contracts was $27.2 million for the year ended December 31, 2013.
Summary of Derivative Instruments
The following is a summary of the fair values of derivative instruments on the Fund’s Statement of Assets and Liabilities, categorized by risk exposure, as of December 31, 2013:
Asset Derivatives | Liability Derivatives | |||||||||||
Primary Risk Exposure | Statement of Assets and Liabilities Location | Total Fair Value | Statement of Assets and Liabilities Location | Total Fair Value | ||||||||
Foreign Currency Contracts | Unrealized appreciation on forward currency contracts | $ | 24,848 | Unrealized depreciation on forward currency contracts | $ | 501,943 |
The following is a summary of the effect of derivative instruments on the Statement of Operations, categorized by risk exposure, for the year ended December 31, 2013:
Primary Risk Exposure | Location of Gains/(Losses) on Derivatives Recognized in Income | Realized Gains/(Losses) on Derivatives Recognized in Income | Change in Unrealized Appreciation/ Depreciation on Derivatives Recognized in Income | |||||||
Foreign Currency Contracts | Net realized gains/(losses) on forward currency contracts / change in unrealized appreciation/depreciation on investments | $ | (255,142 | ) | $ | (291,455 | ) |
3. Related Party Transactions
The Manager provides investment advisory and management services for the Fund. The Manager has retained an independent money management organization (the “Subadviser”), to make investment decisions on behalf of the Fund. Pursuant to a subadvisory agreement with Invesco Advisers, Inc. (“Invesco”), Invesco provides investment
17
AZL Invesco Equity and Income Fund
Notes to the Financial Statements
December 31, 2013
advisory services as the Subadviser for the Fund subject to the general supervision of the Trustees and the Manager. The Manager is entitled to a fee, computed daily and paid monthly, based on the average daily net assets of the Fund. Expenses incurred by the Fund for investment advisory and management services are reflected on the Statement of Operations as “Manager fees.” For its services, the Subadviser is entitled to a fee payable by the Manager. The Manager has contractually agreed to waive fees and reimburse the Fund to limit the annual expenses, excluding interest expense (e.g., cash overdraft fees), taxes, brokerage commissions, other expenditures that are capitalized in accordance with U.S. GAAP and other extraordinary expenses not incurred in the ordinary course of the Fund’s business, based on the daily net assets of the Fund, through April 30, 2015.
For the year ended December 31, 2013, the annual rate due to the Manager and the annual expense limit were as follows:
Annual Rate* | Annual Expense Limit | |||||||||
AZL Invesco Equity and Income Fund | 0.75 | % | 1.20 | % |
* | The Manager voluntarily reduced the management fee to 0.70% on the first $100 million in assets, 0.675% on the next $100 million in assets, and 0.65% on assets above $200 million. The Manager reserves the right to increase the management fee to the amount shown in the table above at any time. |
Any amounts contractually waived or reimbursed by the Manager in a particular fiscal year will be subject to repayment by the Fund to the Manager to the extent that from time to time through the next three fiscal years the repayment will not cause the Fund’s expenses to exceed the lesser of the stated limit at the time of the waiver or the current stated limit. Any amounts recouped by the Manager during the year are reflected on the Statement of Operations as “Recoupment of prior expenses reimbursed by the Manager.” At December 31, 2013, there were no remaining contractual reimbursements that are subject to repayment by the Fund in subsequent years.
In addition, the Manager may voluntarily waive or reimburse additional fees in order to maintain more competitive expense ratios. Any voluntary waivers or reimbursements are not subject to repayment in subsequent years. Information on the total amount waived/reimbursed by the Manager or repaid to the Manager by the Fund during the year can be found on the Statement of Operations.
Pursuant to separate agreements between the Funds and the Manager, the Manager provides a Chief Compliance Officer (“CCO”) and certain compliance oversight and regulatory filing services to the Trust. Under these agreements the Manager is entitled to an amount equal to a portion of the compensation and certain other expenses related to the individuals performing the CCO and compliance oversight services, as well as $75 per hour for time incurred in connection with the preparation and filing of certain documents with the Securities and Exchange Commission. The fees are paid to the Manager on a quarterly basis. The total expenses incurred by the Fund for these services are reflected on the Statement of Operations as “Administrative and compliance services fees.”
Citi Fund Services Ohio, Inc. (“Citi” or the “Administrator”), a wholly owned subsidiary of Citigroup, Inc., with which an officer of the Trust is affiliated, serves as the Trust’s administrator, transfer agent, and fund accountant, and assists the Trust in all aspects of its administration and operation. The Administrator is entitled to a Trust-wide asset-based fee, which is based on the following schedule: 0.05% of daily average net assets on the first $4 billion, 0.04% of daily average net assets on the next $2 billion, 0.02% of daily average net assets on the next $2 billion and 0.01% of daily average net assets over $8 billion. The overall Trust-wide fees are accrued daily and paid monthly and are subject to a minimum annual fee. In addition, the Administrator is entitled to annual account fees related to the transfer agency system, an annual fee for each additional class of shares of any Fund, certain annual fees in supporting fair value services, and a Trust-wide annual fee for providing infrastructure and support in implementing the written policies and procedures comprising the Fund’s compliance program. Fees payable to the Administrator are subject to certain reductions associated with services provided to new funds. The Administrator is also reimbursed for certain expenses incurred. The total expenses incurred by the Fund for these services are reflected on the Statement of Operations as “Administration fees.”
Allianz Life Financial Services, LLC (“ALFS”), an affiliate of the Manager, serves as distributor of the Fund and receives 12b-1 fees directly from the Fund, plus a Trust-wide annual fee of $42,500, paid by the Manager from its profits and not by the Trust, for recordkeeping and reporting services.
The Trust has adopted a distribution and service plan in conformance with Rule 12b-1 of the 1940 Act. Pursuant to this plan, the Fund is authorized to pay certain fees for the sale and distribution of its shares and services provided to its shareholders at an annual rate not to exceed 0.25% of the Fund’s average daily net assets. These fees are reflected on the Statement of Operations as “Distribution fees.”
In addition, certain legal fees and expenses are paid to a law firm, Dorsey & Whitney LLP, of which the Secretary of the Fund is a partner. During the year ended December 31, 2013, $9,543 was paid from the Fund relating to these fees and expenses.
Certain Officers and Trustees of the Trust are affiliated with the Manager or the Administrator. Such Officers (except for the Trust’s CCO as noted above) and Trustees receive no compensation from the Trust for serving in their respective roles. For their service to the Trust and to the Allianz Variable Insurance Products Fund of Funds Trust, each non-interested Trustee receives a $139,000 annual Board retainer. In addition, the Trustees are reimbursed for certain expenses associated with attending Board meetings. Compensation to the Trustees is allocated between the Trust and the Allianz Variable Insurance Products Fund of Funds Trust in proportion to the assets under management of each trust. During the year ended December 31, 2013, actual Trustee compensation was $973,000 in total for both trusts.
At a meeting of the Board of Trustees on December 4, 2013, the Trustees approved a fee increase to the Officers and Trustees who are paid a fee for their services to the Trust and to the Allianz Variable Insurance Products Fund of Funds Trust. Effective January 1, 2014, each non-interested Trustee will receive a $163,000 annual retainer.
4. Investment Valuation Summary
The valuation techniques employed by the Fund, as described below, maximize the use of observable inputs and minimize the use of unobservable inputs in determining fair value. The inputs used for valuing the Fund’s investments are summarized in the three broad levels listed below:
— | Level 1 — quoted prices in active markets for identical assets |
— | Level 2 — other significant observable inputs (including quoted prices for similar securities, interest rates, prepayments speeds, credit risk, etc.) |
— | Level 3 — significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of investments) |
18
AZL Invesco Equity and Income Fund
Notes to the Financial Statements
December 31, 2013
Changes in valuation techniques may result in transfers in or out of an assigned level within the disclosure hierarchy. The Fund determines transfers between fair value hierarchy levels at the reporting period end. The inputs or methodology used for valuing investments is not necessarily an indication of the risk associated with investing in those investments.
Security prices are generally provided by an independent third party pricing service approved by the Trust’s Board of Trustees (“Trustees”) as of the close of the New York Stock Exchange (“NYSE”) (generally 4:00 pm Eastern Time). Equity securities are valued at the last quoted sale price or, if there is no sale, the last quoted bid price is used for long securities and the last quoted ask price is used for securities sold short. Securities listed on NASDAQ Stock Market, Inc. (“NASDAQ”) are valued at the official closing price as reported by NASDAQ. In each of these situations, valuations are typically categorized as a Level 1 in the fair value hierarchy. Investments in open-end investment companies are valued at their respective net asset value as reported by such companies and are typically categorized as Level 1 in the fair value hierarchy.
Debt and other fixed income securities are generally valued at an evaluated bid price provided by an independent pricing source approved by the Trustees. To value debt securities, pricing services may use various pricing techniques which take into account appropriate factors such as market activity, yield, quality, coupon rate, maturity, type of issue, trading characteristics, call features, credit ratings and other data, as well as broker quotes. Short term securities of sufficient credit quality with sixty days or less remaining until maturity may be valued at amortized cost, which approximates fair value. In each of these situations, valuations are typically categorized as Level 2 in the fair value hierarchy.
Forward currency contracts are generally valued at the foreign currency exchange rate as of the close of the NYSE and are typically categorized as Level 2 in the fair value hierarchy.
Other assets and securities for which market quotations are not readily available, or are deemed unreliable are valued at fair value as determined in good faith by the Trustees or persons acting on the behalf of the Trustees. Fair value pricing may be used for significant events such as securities whose trading has been suspended, whose price has become stale or for which there is no currently available price at the close of the NYSE. Depending on the source and relative significance of valuation inputs, these instruments may be classified as Level 2 or Level 3 in the fair value hierarchy. The Fund utilizes a pricing service to assist in determining the fair value of securities when certain significant events occur that may affect the value of foreign securities.
In accordance with procedures adopted by the Trustees, fair value pricing may be used if events materially affecting the value of foreign securities occur between the time when the exchange on which they are traded closes and the time when the Fund’s net asset value is calculated. Management identifies possible fluctuation in international securities by monitoring the increase or decrease in the value of a designated benchmark index. In the event of an increase or decrease greater than predetermined levels, the Fund may use a systematic valuation model provided by an independent third party to fair value its international equity securities which are then typically categorized as Level 2 in the fair value hierarchy. For the year ended December 31, 2013, there were no Level 3 investments for which significant unobservable inputs were used to determine fair value.
For the year ended December 31, 2013, there were no Level 3 investments for which significant unobservable inputs were used to determine fair value.
The following is a summary of the valuation inputs used as of December 31, 2013 in valuing the Fund’s investments based upon the three levels defined above:
Investment Securities: | Level 1 | Level 2 | Total | ||||||||||||
Common Stocks | |||||||||||||||
Oil, Gas & Consumable Fuels | $ | 30,199,817 | $ | 25,646,309 | �� | $ | 55,846,126 | ||||||||
Pharmaceuticals | 33,743,433 | 8,784,524 | 42,527,957 | ||||||||||||
All Other Common Stocks+ | 570,332,795 | — | 570,332,795 | ||||||||||||
Preferred Stocks | |||||||||||||||
Commercial Banks | 754,240 | 1,751,179 | 2,505,419 | ||||||||||||
Oil, Gas & Consumable Fuels | — | 1,526,249 | 1,526,249 | ||||||||||||
Convertible Bonds+ | — | 126,182,188 | 126,182,188 | ||||||||||||
Corporate Bonds+ | — | 42,820,378 | 42,820,378 | ||||||||||||
Yankee Dollars+ | — | 11,786,610 | 11,786,610 | ||||||||||||
Municipal Bond | — | 85,971 | 85,971 | ||||||||||||
U.S. Treasury Obligations | — | 110,837,950 | 110,837,950 | ||||||||||||
U.S. Government Agency Mortgages | — | 2,152,203 | 2,152,203 | ||||||||||||
Securities Held as Collateral for Securities on Loan | — | 37,845,988 | 37,845,988 | ||||||||||||
Unaffiliated Investment Company | 104,009,810 | — | 104,009,810 | ||||||||||||
|
|
|
|
|
| ||||||||||
Total Investment Securities | 739,040,095 | 369,419,549 | 1,108,459,644 | ||||||||||||
|
|
|
|
|
| ||||||||||
Other Financial Instruments:* | |||||||||||||||
Forward Currency Contracts | — | (477,095 | ) | (477,095 | ) | ||||||||||
|
|
|
|
|
| ||||||||||
Total Investments | $ | 739,040,095 | $ | 368,942,454 | $ | 1,107,982,549 | |||||||||
|
|
|
|
|
|
+ | For detailed industry descriptions, see the accompanying Schedule of Portfolio Investments. |
* | Other Financial Instruments would include any derivative instruments, such as futures contracts. These investments are generally recorded in the financial statements at the unrealized gain or loss on the investment. |
19
AZL Invesco Equity and Income Fund
Notes to the Financial Statements
December 31, 2013
5. Security Purchases and Sales
For the year ended December 31, 2013, cost of purchases and proceeds from sales of securities (excluding securities maturing less than one year from acquisition) were as follows:
Purchases | Sales | |||||||||
AZL Invesco Equity and Income Fund | $ | 648,357,618 | $ | 383,806,317 |
For the year ended December 31, 2013, purchases and sales on long-term U.S. government securities were as follows:
Purchases | Sales | |||||||||
AZL Invesco Equity and Income Fund | $ | 230,137,817 | $ | 189,340,160 |
6. Investment Risks
Derivatives Risk: The Fund may invest in derivatives as a principal strategy. A derivative is a financial contract whose value depends on, or is derived from, the value of an underlying asset, reference rate, or risk. Use of derivative instruments involves risks different from, or possibly greater than, the risks associated with investing directly in securities and other traditional investments. Derivatives are subject to a number of other risks, such as liquidity risk, interest rate risk, market risk, credit risk, and selection risk. Derivatives also involve the risk of mispricing or improper valuation and the risk that changes in the value may not correlate perfectly with the underlying asset, rate, or index. Using derivatives may result in losses, possibly in excess of the principal amount invested. Also, suitable derivative transactions may not be available in all circumstances. The counterparty to a derivatives contract could default. As required by applicable law, a Fund that invests in derivatives segregates cash or liquid securities, or both, to the extent that its obligations under the instrument are not covered through ownership of the underlying security, financial instrument, or currency.
Emerging Markets Risk: Emerging markets may have less developed trading markets and exchanges which may make it more difficult to sell securities at an acceptable price and their prices may be more volatile than securities of companies in more developed markets. Settlements of trades may be subject to greater delays so that the Fund may not receive the proceeds of a sale of a security on a timely basis. Emerging countries may also have less developed legal and accounting systems and investments may be subject to greater risks of government restrictions, nationalization, or confiscation.
Foreign Securities and Currencies Risk: Investments in securities of foreign issuers carry certain risks not ordinarily associated with investments in securities of domestic issuers. Such risks include future political and economic developments, and the possible imposition of exchange controls or other foreign governmental laws and restrictions. In addition, with respect to certain countries, there is the possibility of expropriation of assets, confiscatory taxation, political or social instability or diplomatic developments which could adversely affect investments in those securities.
Mortgage-Related and Other Asset-Backed Risk: The Fund may invest in a variety of mortgage-related and other asset-backed securities, which are subject to certain additional risks. Generally, rising interest rates tend to extend the duration of fixed rate mortgage-related securities, making them more sensitive to changes in interest rates. As a result, in a period of rising interest rates, a Fund that holds mortgage-related securities may exhibit additional volatility. This is known as extension risk. In addition, adjustable and fixed rate mortgage-related securities are subject to call risk. When interest rates decline, borrowers may pay off their mortgages sooner than expected. This can reduce the returns of a Fund because the Fund will have to reinvest that money at the lower prevailing interest rates. If a Fund purchases mortgage-backed or asset-backed securities that are subordinated to other interests in the same mortgage pool, the Fund may receive payments only after the pool’s obligations to other investors have been satisfied. An unexpectedly high rate of defaults on the mortgages held by a mortgage pool may limit substantially the pool’s ability to make payments of principal or interest to the Fund as a holder of such subordinated securities, reducing the values of those securities or in some cases rendering them worthless. An unexpectedly high or low rate of prepayments on a pool’s underlying mortgages may have a similar effect on subordinated securities. A mortgage pool may issue securities subject to various levels of subordination. The risk of non-payment affects securities at each level, although the risk is greater in the case of more highly subordinated securities. A Fund’s investments in other asset-backed securities are subject to risks similar to those associated with mortgage-related securities, as well as additional risks associated with the nature of the assets and the servicing of those assets.
7. Federal Tax Information
It is the Fund’s policy to continue to comply with the requirements of the Internal Revenue Code under Subchapter M, applicable to regulated investment companies, and to distribute all of its taxable income, including any net realized gains on investments, to its shareholders. Therefore, no provision is made for federal income taxes.
Management of the Fund has reviewed tax positions taken in tax years that remain subject to examination by all major tax jurisdictions, including federal (i.e., the last four tax year ends and the interim tax period since then, as applicable). Management believes that there is no tax liability resulting from unrecognized tax benefits related to uncertain tax positions taken.
Cost for federal income tax purposes at December 31, 2013 is $919,902,632. The gross unrealized appreciation/ (depreciation) on a tax basis is as follows:
Unrealized appreciation | $ | 194,884,119 | |||
Unrealized depreciation | (6,327,107 | ) | |||
|
| ||||
Net unrealized appreciation/(depreciation) | $ | 188,557,012 | |||
|
|
During the year ended December 31, 2013, the Fund utilized $4,432,600 in capital loss carry forwards to offset capital gains.
20
AZL Invesco Equity and Income Fund
Notes to the Financial Statements
December 31, 2013
The tax character of dividends paid to shareholders during the year ended December 31, 2013 were as follows:
Ordinary Income | Net Long-Term Capital Gains | Total Distributions(a) | |||||||||||||
AZL Invesco Equity and Income Fund | $ | 7,820,810 | $ | — | $ | 7,820,810 |
(a) | Total distributions paid may differ from the Statements of Changes in Net Assets because dividends are recognized when actually paid for tax purposes. |
The tax character of dividends paid to shareholders during the year ended December 31, 2012 was as follows:
Ordinary Income | Net Long-Term Capital Gains | Total Distributions(a) | |||||||||||||
AZL Invesco Equity and Income Fund | $ | 8,001,873 | $ | — | $ | 8,001,873 |
(a) | Total distributions paid may differ from the Statements of Changes in Net Assets because dividends are recognized when actually paid for tax purposes. |
As of December 31, 2013, the components of accumulated earnings on a tax basis were as follows:
Undistributed Ordinary Income | Undistributed Long-Term Capital Gains | Accumulated Capital and Other Losses | Unrealized Appreciation/ (Depreciation)(a) | Total Accumulated Earnings/ (Deficit) | |||||||||||||||||||||
AZL Invesco Equity and Income Fund | $ | 9,539,132 | $ | 32,149,845 | $ | — | $ | 188,559,246 | $ | 230,248,223 |
(a) | The difference between book-basis and tax-basis unrealized appreciation/(depreciation) is attributable primarily to tax deferral of losses on wash sales. |
8. Subsequent Events
Management has evaluated events and transactions subsequent to period end through the date the financial statements were issued, for purposes of recognition or disclosure in these financial statements and there are no subsequent events to report.
21
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Shareholders and Board of Trustees of
Allianz Variable Insurance Products Trust:
We have audited the accompanying statement of assets and liabilities of AZL Invesco Equity and Income Fund (the Fund) of the Allianz Variable Insurance Products Trust, including the schedule of portfolio investments, as of December 31, 2013, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the years in the two-year period then ended, and the financial highlights for each of the years in the five-year period then ended. These financial statements and financial highlights are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of December 31, 2013, by correspondence with the custodian and brokers. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of the Fund as of December 31, 2013, the results of its operations for the year then ended, the changes in its net assets for each of the years in the two-year period then ended, and the financial highlights for each of the years in the five-year period then ended, in conformity with U.S. generally accepted accounting principles.
/s/ KPMG LLP
Columbus, Ohio
February 25, 2014
22
Other Federal Income Tax Information (Unaudited)
For the year ended December 31, 2013, 91.43% of the total ordinary income dividends paid by the Fund qualify for the corporate dividends received deduction available to corporate shareholders.
23
A description of the policies and procedures that the Fund uses to determine how to vote proxies relating to portfolio securities is available, without charge, upon request, by visiting the Securities and Exchange Commission’s (“Commission”) website at www.sec.gov, or by calling 800-624-0197.
Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30th is available (i) without charge, upon request, by calling 800-624-0197; (ii) on the Allianz Variable Insurance Products Trust’s website at https://www.allianzlife.com; and (iii) on the Commission’s website at http://www.sec.gov.
The Fund files complete Schedules of Portfolio Holdings with the Commission for the first and third quarters of each fiscal year on Form N-Q. Schedules of Portfolio Holdings for the Fund in this report are available without charge on the Commission’s website at http://www.sec.gov, or may be reviewed and copied at the Commission’s Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 800-SEC-0330.
24
Approval of Investment Advisory and Subadvisory Agreements (Unaudited)
The Allianz Variable Insurance Products Trust (the “Trust”) is a manager-of-managers fund. That means that the Trust’s Manager (“Allianz Investment Management LLC”) is responsible for monitoring the various Subadvisers that have day-to-day responsibility for the decisions made for each of the Trust’s investment portfolios. The Trust’s Manager is responsible for determining, in the first instance, which investment advisers to consider recommending for selection as a Subadviser.
In reviewing the services provided by the Manager and the terms of the investment management agreement, the Board receives and reviews information related to the Manager’s experience and expertise in the variable insurance marketplace. Currently, the Funds are offered only through variable annuities and variable life insurance policies, and not in the retail fund market. In addition, the Board receives information regarding the Manager’s expertise with regard to portfolio diversification and asset allocation requirements within variable insurance products issued by Allianz Life Insurance Company of North America and its subsidiary, Allianz Life Insurance Company of New York. Currently, the Funds are offered only through Allianz Life and Allianz of New York variable products.
The Trust’s Manager has adopted policies and procedures to assist it in the process of analyzing each potential Subadviser with expertise in particular asset classes for purposes of making the recommendation that a specific investment adviser be selected. The Trust’s Board reviews and considers the information provided by the Manager in deciding which investment advisers to select. After an investment adviser becomes a Subadviser, a similarly rigorous process is instituted by the Manager to monitor the investment performance and other responsibilities of the Subadviser. The Manager reports to the Trust’s Board on its analysis at the regular meetings of the Board, which are held at least quarterly. Where warranted, the Manager will add or remove a particular Subadviser from a “watch” list that it maintains. Watch list criteria include, for example: (a) Fund performance over various time periods; (b) Fund risk issues, such as changes in key personnel involved with Fund management, changes in investment philosophy or process, or “capacity” concerns; and (c) organizational risk issues, such as regulatory, compliance or legal concerns, or changes in the ownership of the Subadviser. The Manager may place a Fund on the watch list for other reasons, and if so, will explain its rationale to the Trustees. Funds which are on the watch list are subject to special scrutiny of the Manager and the Board of Trustees. Funds may be removed from such watch list, if for example, performance improves or regulatory matters are satisfactorily resolved. However, in some situations where Funds which have been on the watch list, the Manager has recommended the retention of a new Subadviser, and the Board of Trustees has subsequently approved new Subadvisory Agreements with such Subadvisers.
In assessing the Manager’s and Subadvisers’ (collectively, the “Advisory Organizations”), performance of their obligations, the Board considers whether there has occurred a circumstance or event that would constitute a reason for it to not renew an advisory contract. In this regard, the Board is mindful of the potential disruption of a Fund’s operations and various risks, uncertainties and other effects that could occur as a result of a decision to terminate or not renew a contract.
As required by the Investment Company Act of 1940 (“1940 Act”), the Trust’s Board has reviewed and approved the Trust’s Investment Management Agreement with the Manager (the “Advisory Agreement”) and portfolio management agreements (the “Subadvisory Agreements”) with the Subadvisers. The Board’s decision to approve these contracts reflects the exercise of its business judgment on whether to approve new arrangements and continue the existing arrangements. During its review of these contracts, the Board considers many factors, among the most material of which are: the Fund’s investment objectives and long term performance; the Advisory Organizations’ management philosophy, personnel, and processes, including their compliance history and the adequacy of their compliance processes; the preferences and expectations of Fund shareholders (and underlying contract owners) and their relative sophistication; the continuing state of competition in the mutual fund industry; and comparable fees in the mutual fund industry.
The Board also considers the compensation and benefits received by the Advisory Organizations. This includes fees received for services provided to the Fund by affiliated persons of the Advisory Organizations and research services received by the Advisory Organizations from brokers that execute Fund trades, as well as advisory fees. The Board considered the fact that: (1) the Manager and the Trust are parties to an Administrative Service Agreement, a Compliance Services Agreement, and a Chief Compliance Officer Agreement, under which the Manager is compensated by the Trust for performing certain administrative and compliance services including providing an employee of the Manager or one of its affiliates to act as the Trust’s Chief Compliance Officer; and (2) Allianz Life Financial Services, LLC, an affiliated person of the Manager, is a registered securities broker-dealer and receives (along with its affiliated persons) payments made by the Trust pursuant to Rule 12b-1.
The Board is aware that various courts have interpreted provisions of the 1940 Act and have indicated in their decisions that the following factors may be relevant to an adviser’s compensation: the nature and quality of the services provided by the adviser, including the performance of the fund; the adviser’s cost of providing the services; the extent to which the adviser may realize “economies of scale” as the fund grows larger; any indirect benefits that may accrue to the adviser and its affiliates as a result of the adviser’s relationship with the fund; performance and expenses of comparable funds; and the extent to which the independent Board members are fully informed about all facts bearing on the adviser’s service and fee. The Trust’s Board is aware of these factors and takes them into account in its review of the Trust’s advisory contracts.
The Board considered and weighed these circumstances in light of its experience in governing the Trust and working with the Advisory Organizations on matters relating to the Funds, and is assisted in its deliberations by the advice of legal counsel to the Independent Trustees. In this regard, the Board requests and receives a significant amount of information about the Funds and the Advisory Organizations. Some of this information is provided at each regular meeting of the Board; additional information is provided in connection with the particular meeting or meetings at which the Board’s formal review of an advisory contract occurs. In between regularly scheduled meetings, the Board may receive information on particular matters as the need arises. Thus, the Board’s evaluation of an advisory contract is informed by reports covering such matters as: an Advisory Organization’s investment philosophy, personnel, and processes; the Fund’s short- and long-term performance (in absolute terms as well as in relationship to its benchmark(s), certain competitor or “peer group” funds and similar funds managed by the particular Subadviser), and comments on the reasons for performance; the Fund’s expenses (including the advisory fee itself and the overall expense structure of the Fund, both in absolute terms and relative to similar and/or competing funds, with due regard for contractual or voluntary expense limitations); the use and allocation of brokerage commissions derived from trading the Fund’s portfolio securities; the nature and extent of the advisory and other services provided to the Fund by the Advisory Organizations and their affiliates; compliance and audit reports concerning the Funds and the companies that service them; and relevant developments in the mutual fund industry and how the Funds and/or Advisory Organizations are responding to them.
The Board also receives financial information about Advisory Organizations, including reports on the compensation and benefits the Advisory Organizations derive from their relationships with the Funds. These reports cover not only the fees under the advisory contracts, but also fees, if any, received for providing other services to the Funds. The reports also discuss any indirect or “fall out” benefits an Advisory Organization may derive from its relationship with the Funds.
The Advisory and Subadvisory Agreements (collectively, the “Agreements”) were most recently considered at Board of Trustees meetings held in the fall of 2013. Information relevant to the approval of such Agreements was considered at a telephonic Board of Trustees meeting on October 16, 2013, and at an “in person” Board of Trustees meeting held October 22, 2013. The Agreements were approved at the Board meeting of October 22, 2013. At such meeting the Board also approved an Expense Limitation Agreement between the Manager and the Trust for the period ending April 30, 2015. In connection with such meetings, the Trustees requested and evaluated extensive materials from the Manager, including performance and expense information for other investment companies with similar investment objectives derived from data compiled by an independent third party provider and other sources believed to be reliable by the Manager. Prior to voting, the Trustees reviewed the proposed approval/continuance of the Agreements with management and with experienced counsel who are independent of the Manager and received a memorandum from such counsel discussing the legal standards for their consideration of the proposed approvals/continuances. The independent (“disinterested”) Trustees also discussed the proposed approvals/continuances in a private session with such counsel at which no representatives of the Manager were present. In reaching their determinations relating to the approval and/or continuance of
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the Agreements, in respect of each Fund, the Trustees considered all factors they believed relevant. The Board based its decision to approve the Agreements on the totality of the circumstances and relevant factors, and with a view to past and future long-term considerations. Not all of the factors and considerations discussed above and below are necessarily relevant to every Fund, and the Board did not assign relative weights to factors discussed herein or deem any one or group of them to be controlling in and of themselves.
An SEC Rule requires that shareholder reports include a discussion of certain factors relating to the selection of investment advisers and the approval of advisory fees. The “factors” enumerated by the SEC are set forth below in italics, as well as the Board’s conclusions regarding such factors:
(1) The nature, extent and quality of services provided by the Manager and Subadvisers. The Trustees noted that the Manager, subject to the control of the Board of Trustees, administers each Fund’s business and other affairs. Under the Advisory Agreement, the Manager holds the sole and exclusive responsibility to provide, or arrange for other to provide, the management of the Funds’ assets and the placement of orders for the purchase and sale of the securities of the Funds. As the Trust is a manager of managers fund, the Manager is authorized, under the Advisory Agreement, to retain one or more Subadvisers for each Fund to handle day-to-day management of the Funds’ investment portfolios; the Manager is responsible for determining, in the first instance, which investment advisers to recommend to the Board of Trustees for selection as a Subadviser. The Trustees were aware that, notwithstanding the retention of the Subadvisers to handle day-to-day portfolio management, the Manager remains responsible for substantial other matters, including continuously monitoring compliance by each Subadviser with the investment policies and restrictions of the respective Funds, with such other limitations or directions of the Board of Trustees, and with all legal requirements under federal or state law or regulation. The Manager also is responsible primarily to provide statistical information and other data to the Trustees regarding the Funds’ portfolio investments and to make available to the Funds’ administrator such information as is necessary for the conduct of its duties.
The Trustees also noted that the Manager provides the Trust and each Fund with such administrative and other services (exclusive of, and in addition to, any such services provided by any others retained by the Trust on behalf of the Funds) and executive and other personnel as are necessary for the operation of the Trust and the Funds. Except for the Trust’s Chief Compliance Officer, the Manager pays all of the compensation of Trustees and officers of the Trust who are employees of the Manager or its affiliates.
The Trustees considered the scope and quality of services provided by the Manager and the Subadvisers and noted that the scope of such services provided had expanded as a result of recent regulatory and other developments. The Trustees noted that, for example, the Manager and Subadvisers are responsible for maintaining and monitoring their own compliance programs, and these compliance programs are continuously refined and enhanced in light of new regulatory requirements. The Trustees considered the capabilities and resources which the Manager has dedicated to performing services on behalf of the Trust and its Funds. The quality of administrative and other services, including the Manager’s role in coordinating the activities of the Trust’s other service providers, also were considered. The Trustees concluded that, overall, they were satisfied with the nature, extent and quality of services provided (and expected to be provided) to the Trust and to each of the Funds under the Agreements.
(2) The investment performance of the Funds, the Manager and the Subadvisers. In connection with every in-person quarterly Board of Trustees meeting, Trustees receive extensive information on the performance results of each of the Funds. This includes, for example, performance information on all of the Funds for the previous quarter, and previous one, three and five-year periods, and since inception. (For Funds which have been in existence for less than five years, Trustees may receive performance information on comparable funds managed by the particular Subadviser for periods prior to the creation of a particular Fund.) Such performance information includes information on absolute total return, performance versus Subadvisers’ comparable fund(s), performance versus the appropriate benchmark(s), and performance versus peer groups. For example, in connection with the Board of Trustees meetings held September 10-11, 2013, the Manager reported that for the three year period ended June 30, 2013, 12 Funds were in the top 40%, eight were in the middle 20% and eight were in the bottom 40%, and for the one year period ended June 30, 2013, 8 Funds were in the top 40%, seven were in the middle 20%, and 14 were in the bottom 40%. The Manager also reported that for the five year period ended June 30, 2013, 10 Funds were in the top 40%, four were in the middle 20%, and six were in the bottom 40%. At the Board of Trustees meeting held October 22, 2013, the Trustees determined that the overall investment performance of the Funds was acceptable.
(3) The costs of services to be provided and profits to be realized by the Manager and the Subadvisers and their affiliates from their relationship with the Funds. The Manager has supplied information to the Board of Trustees pertaining to the level of investment advisory fees to which the Funds are subject. The Manager has agreed to temporarily “cap” Fund expenses at certain levels, and information is provided to Trustees setting forth “contractual” advisory fees and “actual” fees after taking expense caps into account. Based upon the information provided, the “actual” advisory fees payable by the Funds overall are generally comparable to the average level of fees paid by Fund peer groups. For the 30 Funds reviewed by the Board of Trustees in the fall of 2013, 27 Funds paid “actual” advisory fees in a percentage amount within the 65th percentile or lower for each Fund’s applicable category. The Trustees recognized that it is difficult to make comparisons of advisory fees because there are variations in the services that are included in the fees paid by other funds. The Board has concluded that the advisory fees to be paid to the Manager by the Funds are not unreasonable.
The Manager has also supplied information to the Board of Trustees pertaining to total Fund expenses (which includes advisory fees, the 25 basis point 12b-1 fee paid by the Funds, and other Fund expenses). As noted above, the Manager has agreed to “cap” Fund expenses at certain levels. Based upon the information provided, the overall total expense ratio ranking in 2013 for the 30 Funds was as follows: (1) 28 of the Funds had total expense rankings below the 65th percentile (with 20 Funds at or below the 50th percentile); (2) the AZL Russell 1000 Value Fund had a total expense ranking in the 66th percentile; the Manager reported that there is only a limited peer group for such Fund; and (3) the AZL Morgan Stanley Global Real Estate Fund had a total expense ranking in the 72nd percentile; it was reported by the Manager that there is only a limited peer group for such Fund, such Fund’s expense ratio has declined, and such Fund’s expense ratio is comparable to funds of similar size.
The Manager has committed to providing the Funds with a high quality of service and working to reduce Fund expenses over time, particularly as the Funds grow larger. The Trustees concluded therefore that the expense ratios of the Funds were not unreasonable.
The Manager provided information concerning the profitability of the Manager’s investment advisory activities for the period from 2011 through June 30, 2013. The Trustees recognized that it is difficult to make comparisons of profitability from investment company advisory agreements because comparative information is not generally publicly available and is affected by numerous factors, including the structure of the particular adviser, the types of funds it manages, its business mix, numerous assumptions regarding allocation of expenses and the adviser’s capital structure and cost of capital. In considering profitability information, the Trustees considered the possible effect of certain fall-out benefits to the Manager and its affiliates. The Trustees focused on profitability of the Manager’s relationships with the Funds before taxes and distribution expenses. The Trustees recognized that the Manager should, in the abstract, be entitled to earn a reasonable level of profits for the services it provides to each Fund and, based on their review, concluded that they were satisfied that the Manager’s level of profitability from its relationship with the Funds was not excessive.
The Manager, on behalf of the Board of Trustees, endeavored to obtain information on the profitability of each Subadviser in connection with its relationship with the Fund or Funds which it subadvises. The Manager was unable to obtain meaningful profitability information from some of the unaffiliated Subadvisers. The Manager assured the Board of Trustees that the Agreements with the Subadvisers which are not affiliated with it were negotiated on an “arm’s length” basis, so that arguably, such profitability information should be less relevant. The Trustees were also provided with certain information on the profitability for the Subadviser which is affiliated with the Manager. Trustees recognized the difficulty of allocating costs to multiple advisory accounts and products of a large advisory organization. Based upon the information provided, the Trustees determined that there was no evidence that the level of such profitability attributable to subadvising the Funds was excessive.
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(4) and (5) The extent to which economies of scale would be realized as the Funds grow, and whether fee levels reflect these economies of scale. The Trustees noted that most of the advisory fee schedules for the Funds do not contain breakpoints that reduce the fee rate on assets above specified levels, although certain Subadvisory Agreements have such “breakpoints.” The Trustees recognized that breakpoints may be an appropriate way for the Manager to share its economies of scale, if any, with Funds that have substantial assets. However, they also recognized that there may not be a direct relationship between any economies of scale realized by Funds and those realized by the Manager as assets increase. The Trustees do not believe there is a uniform methodology for establishing breakpoints that give effect to Fund-specific service provided by the Manager. The Trustees noted that in the fund industry as a whole, as well as among funds similar to the Funds, there is no uniformity or pattern in the fees and asset levels at which breakpoints (if any) apply. Depending on the age, size, and other characteristics of a particular fund and its manager’s cost structure, different conclusions can be drawn as to whether there are economies of scale to be realized at any particular level of assets, notwithstanding the intuitive conclusion that such economies exist, or will be realized at some level of total assets. Moreover, because different managers have different cost structures and service models, it is difficult to draw meaningful conclusions from the breakpoints that may have been adopted by other funds. The Trustees also noted that the advisory agreements for many funds do not have breakpoints at all, or if breakpoints exist, they may be at asset levels significantly greater than those of the individual Funds. The Trustees also noted that the total assets in all of the Funds as of June 30, 2013 were approximately $12.85 billion, and that no single non-money market Fund had assets in excess of $616 million.
The Trustees noted that the Manager has agreed to temporarily “cap” Fund expenses at certain levels, which has the effect of reducing expenses as would the implementation of advisory fee breakpoints. The Manager has committed to continue to consider the continuation of fee “caps” and/or advisory fee breakpoints as the Funds grow larger. The Board receives quarterly reports on the level of Fund assets. It expects to consider whether or not to approve the Agreements at a meeting to be held prior to December 31, 2014, and will at that time, or prior thereto, consider: (a) the extent to which economies of scale can be realized, and (b) whether the advisory fee should be modified to reflect such economies of scale, if any.
Having taken these factors into account, the Trustees concluded that the absence of breakpoints in certain of the Funds’ advisory fee rate schedules was acceptable under each Fund’s circumstances.
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Information about the Board of Trustees and Officers (Unaudited)
The Trust is managed by the Trustees in accordance with the laws of the state of Delaware governing business trusts. There are currently eight Trustees, two of whom are “interested persons” of the Trust within the meaning of that term under the 1940 Act. The Trustees and Officers of the Trust, their addresses, ages, their positions held with the Trust, their terms of office with the Trust and length of time served, their principal occupation(s) during the past five years, the number of portfolios in the Trust they oversee, and their other directorships held are as follows:
Non-Interested Trustees(1)
Name, Address, and Age | Positions Held with VIP Trust and FOF Trust | Term of Office(2)/Length of Time Served | Principal Occupation(s) During Past 5 Years | Number of Portfolios Overseen for VIP Trust and FOF Trust | Other Directorships Held Outside the AZL Fund Complex | |||||
Peter R. Burnim, Age 66 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/07 | Chairman, Argus Investment Strategies Fund Ltd., February 2013 to present; Managing Director, iQ Venture Advisors, LLC. 2005 to 2012; Chairman, Northstar Group Holdings Ltd. Bermuda, 2011 to present; Expert Witness, Massachusetts Department of Revenue, 2011 to 2012; Executive Vice President, Northstar Companies, 2002 to 2005; Senior Officer, Citibank and Citicorp for over 25 years | 41 | Argus Group Holdings; Northstar Group Holdings, NRIL, Sterling Centrecorp Inc.; Highland Financial Holdings; and Bank of Bermuda NY | |||||
Peggy L. Ettestad, Age 56 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/07 | Managing Director, Red Canoe Management Consulting LLC, 2008 to present; Senior Managing Director, Residential Capital LLC, 2003 to 2008; Chief Operations Officer, Transamerica Reinsurance 2002 to 2003 | 41 | Luther College | |||||
Roger Gelfenbien, Age 70 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 10/99 | Retired; Partner of Accenture 1983 to 1999 | 41 | Virtus Funds (8 Funds) | |||||
Claire R. Leonardi, Age 58 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/04 | Chief Executive Officer, Connecticut Innovations, Inc., 2012 to present; General Partner, Fairview Capital, L.P., 1994 to 2012 | 41 | The Natural History Museum of the Adirondacks | |||||
Dickson W. Lewis, Age 65 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/04 | Retired; Consultant to Lifetouch National School Studios; Vice President/General Manager, Yearbooks & Canada-Lifetouch National School Studios, 2006 to 2013; Vice President/General Manager of Jostens, Inc., 2002 to 2006; Senior Vice President of Fortis Group, 1997 to 2002 | 41 | None | |||||
Peter W. McClean, Age 69 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/04 | Retired; President and CEO of Measurisk, LLC, 2001 to 2003; Chief Risk Management Officer at Bank of Bermuda Ltd., 1996 to 2001 | 41 | PNMAC Opportunity Fund; Northeast Bank; and FHI | |||||
Arthur C. Reeds III, Age 69 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 10/99 | Retired; Senior Investment Officer, Hartford Foundation for Public Giving, 2000 to 2003; Chairman, Chief Executive and President of Conning Corp., 1999 to 2000; Investment Consultant, 1997 to 1999 | 41 | Connecticut Water Service, Inc. |
Interested Trustees(3)
Name, Address, and Age | Positions Held with VIP Trust and FOF Trust | Term of Office(2)/Length of Time Served | Principal Occupation(s) During Past 5 Years | Number of Portfolios Overseen for VIP Trust and FOF Trust | Other Directorships Held Outside the AZL Fund Complex | |||||
Robert DeChellis, Age 46 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 3/08 | President and CEO, Allianz Life Financial Services, LLC, 2007 to present | 41 | None | |||||
Brian Muench, Age 43 5701 Golden Hills Drive | Trustee | Since 6/11 | President, Allianz Investment Management LLC, November 2010 to present; Vice President, Allianz Life, April 2011 to present; Vice President, Advisory Management, Allianz Investment Management LLC from December 2005 to November 2010 | 41 | None |
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Officers
Name, Address, and Age | Positions Held with VIP and VIP FOF Trust | Term of Office(2)/Length of Time Served | Principal Occupation(s) During Past 5 Years | |||
Brian Muench, Age 43 5701 Golden Hills Drive Minneapolis, MN 55416 | President | Since 11/10 | President, Allianz Investment Management LLC from November 2010, to present; Vice President, Allianz Life from April 2011 to present; Vice President, Allianz Investment Management LLC from December 2005 to November 2010. | |||
Michael Radmer, Age 68 Dorsey & Whitney LLP, Suite 1500 50 South Sixth Street Minneapolis, MN 55402-1498 | Secretary | Since 2/02 | Partner, Dorsey and Whitney LLP since 1976. | |||
Ty Edwards, Age 47 Citi Fund Services Ohio, Inc. 3435 Stelzer Road Columbus, OH 43219 | Treasurer, Principal Accounting Officer and Principal Financial Officer | Since 4/10 | Senior Vice President, Financial Administration, Citi Fund Services Ohio, Inc., December 2009 to present; Director, Product Management, Columbia Management, April 2007 to April 2009; Deputy Treasurer, Columbia Funds and Director, Fund Administration, Columbia Management, January 2006 to April 2007. | |||
Christopher R. Pheiffer, Age 45(4) 5701 Golden Hills Drive Minneapolis, MN 55416 | Chief Compliance Officer(5) and Anti-Money Laundering Compliance Officer | Since 2/14 (interim) | Deputy Chief Compliance Officer of the Trusts, 2007-2014. |
(1) | Member of the Audit Committee. |
(2) | Indefinite. |
(3) | Is an “interested person”, as defined by the 1940 Act, due to employment by Allianz. |
(4) | Stephen G. Simon, previously the Chief Compliance Officer of the Trusts, resigned all of his positions with Allianz effective February 21, 2014. Mr. Pheiffer, previously the Deputy Chief Compliance Officer of the Trusts, has been named Chief Compliance Officer of the Trusts on an interim basis while a search for a permanent replacement is conducted. |
(5) | The Manager and the Trust are parties to a Chief Compliance Officer Agreement under which the Manager is compensated by the Trust for providing an employee of the Manager or one of its affiliates to act as the Trust’s Chief Compliance Officer. The Chief Compliance Officer and Anti-Money Laundering Compliance Officer is not considered a corporate officer or executive employee of the Trust. |
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The Allianz VIP Funds are distributed by Allianz Life Financial Services, LLC. These Funds are not FDIC Insured. | ANNRPT1213 2/14 |
AZL® Invesco Growth and Income Fund
Annual Report
December 31, 2013
Table of Contents
Management Discussion and Analysis
Page 1
Expense Examples and Portfolio Composition
Page 3
Schedule of Portfolio Investments
Page 4
Statement of Assets and Liabilities
Page 7
Statement of Operations
Page 7
Statements of Changes in Net Assets
Page 8
Financial Highlights
Page 9
Notes to the Financial Statements
Page 10
Report of Independent Registered Public Accounting Firm
Page 15
Other Federal Income Tax Information
Page 16
Other Information
Page 17
Approval of Investment Advisory and Subadvisory Agreements
Page 18
Information about the Board of Trustees and Officers
Page 21
This report is submitted for the general information of the shareholder of the Fund. The report is not authorized for distribution to prospective investors in the Fund unless preceded or accompanied by an effective prospectus, which contains details concerning the sales charges and other pertinent information.
AZL® Invesco Growth and Income Fund Review (unaudited)
Allianz Investment Management LLC serves as the Manager for the AZL® Invesco Growth and Income Fund and Invesco Advisers, Inc. serves as Subadviser to the Fund.
What factors affected the Fund’s performance during the year ended December 31, 2013?
For the year ended December 31, 2013, the AZL® Invesco Growth and Income Fund returned 33.69%1. That compared to a 32.53% total return for its benchmark, the Russell 1000® Value Index2.
The 12 months through December 31, 2013, were characterized by steady improvement in the U.S. economy and strong U.S. equity market returns. Stocks rose during the first half of the year as consumer confidence improved based on the recovery of the U.S. housing market. Nevertheless in May, capital markets declined following U.S. Federal Reserve Chairman Ben Bernanke’s comments suggesting that the Fed would start reducing the size of its bond-buying program, known as quantitative easing (QE). This sell-off was brief but broad, and few asset classes were immune.
Markets stabilized in mid-summer and equities then rallied through the last three months of the year. In December, when the Fed officially announced plans to reduce QE in early 2014, the news was widely anticipated and largely priced into stock valuations. As a result, equities continued to rise despite the Fed’s action.
During the period, all sectors of the Russell 1000® Value Index with the exception of real estate posted double-digit returns. In this environment, the Fund’s lack of exposure to real estate was a large driver of its relative performance versus the benchmark. Strong stock selection within the financials sector also boosted the Fund’s relative performance. Additionally, stock selection and underweight positions in the telecommunication services, materials, and energy sectors also were large contributors to the Fund’s performance. An underweight position in the utilities sector helped the Fund’s relative performance, as it was the second-worst performing sector in the benchmark. At the same time, overweight positions in the health care sector and consumer discretionary stocks enhanced relative performance.*
The Fund attempts to remain fully invested, and although we held an average cash position within our acceptable range during the reporting period, cash detracted from the Fund’s relative performance in a strong equity market. The
Fund’s relative performance also suffered because of stock selection in the consumer staples sector. In addition, stock selection and an underweight position in the industrials sector also weighed on performance. Specifically, select holdings within commercial and professional services and little exposure to transportation hurt relative performance. Moreover, stock selection in the software and services industry also detracted from relative performance, as did having low exposure to technology hardware and equipment companies as the hardware equipment industry generally performed well during the period.*
During the period, we used currency forward contracts during the reporting period for the purpose of hedging the currency exposure of non-U.S.-based companies held in the Fund. The use of currency forward contracts had a negligible impact on the Fund’s relative performance.*
Past performance does not guarantee future results.
* | The Fund’s portfolio composition is subject to change. There is no guarantee that any sectors mentioned will continue to perform well or that securities in such sectors will be held by the Fund in the future. The information contained in this commentary is for informational purposes only and should not be construed as a recommendation to purchase or sell securities in the sector mentioned. The Fund’s holdings and weightings are as of December 31, 2013. |
1 | The recent growth rate in the stock market has helped to produce short-term returns that are not typical and may not continue in the future. Because of ongoing market volatility, Fund performance may be subject to substantial short-term changes. |
2 | The Russell 1000® Value Index measures the performance of the large-cap value segment of the U.S. equity universe. It includes those Russell 1000 companies with lower price-to-book ratios and lower expected growth values. Investors cannot invest directly in an index. |
1
AZL® Invesco Growth and Income Fund Review (unaudited)
Fund Objective
The Fund’s investment objective is to seek income and long-term growth of capital. This objective may be changed by the Trustees of the Fund without shareholder approval. The Fund seeks to achieve its objective by investing primarily in income-producing equity securities, including common stocks and convertible securities.
Investment Concerns
Equity securities (stocks) are more volatile and carry more risk than other forms of investments, including investments in high-grade fixed income securities. The net asset value per share of this Fund will fluctuate as the value of the securities in the portfolio changes.
Value-based investments are subject to the risk that the broad market may not recognize their intrinsic value.
International investing may involve risk of capital loss from unfavorable fluctuations in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations.
Emerging market investing may be subject to additional economic, political, liquidity, and currency risks not associated with more developed countries.
The Fund is subject to the risk that principal value reacts in opposition to the movement of interest rates and that a rising interest rate environment increases the risk of loss of principal.
For a complete description of these and other risks associated with investing in a mutual Fund, please refer to the Fund’s prospectus.
Growth of $10,000 Investment
The chart above represents a comparison of a hypothetical investment in the Fund versus a similar investment in the Fund’s benchmark, and represents the reinvestment of dividends and capital gains in the Fund.
Average Annual Total Returns as of December 31, 2013
1 | 3 | 5 | 10 | |||||||||||||
Year | Year | Year | Year | |||||||||||||
AZL® Invesco Growth and Income Fund | 33.69 | %1 | 14.44 | % | 15.80 | % | 7.54 | % | ||||||||
Russell 1000® Value Index | 32.53 | % | 16.06 | % | 16.67 | % | 7.58 | % |
Past performance does not guarantee future results. The performance data quoted represents past performance and current returns may be lower or higher. The investment return and principal value will fluctuate so that an investor’s shares, when redeemed may be worth more or less than the original cost. To obtain performance information current to the most recent month end, please visit www.Allianzlife.com.
Expense Ratio2 | Gross | |||
AZL® Invesco Growth and Income Fund | 1.09 | % |
The above expense ratio is based on the current Fund prospectus dated April 29, 2013. The Manager voluntarily reduced the management fee to 0.675% on the first $100 million of assets and 0.65% on assets above $100 million. The Manager and the Fund have entered into a written contract limiting operating expenses, excluding certain expenses (such as interest expense and Acquired Fund fees and expenses), to 1.20% through April 30, 2015. Additional information pertaining to the December 31, 2013 expense ratios can be found in the financial highlights.
1 | The recent growth rate in the stock market has helped to produce short-term returns that are not typical and may not continue in the future. Because of ongoing market volatility, Fund performance may be subject to substantial short-term changes. |
2 | Acquired Fund Fees and Expenses are incurred indirectly by the Fund through the valuation of the Fund’s investments in the other investment companies. Accordingly, Acquired Fees and Expenses affect the Fund’s total returns. Because these fees and expenses are not included in the Fund’s financial highlights, the Fund’s total annual fund operating expenses do not correlate to the ratios of expenses to average net assets shown in the financial highlights table. Without Acquired Fund Fees and expenses the Fund’s gross ratio would be 1.07%. |
The total return of the Fund does not reflect the effect of any insurance charges, the annual maintenance fee or the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. Such charges, fees and tax payments would reduce the performance quoted. |
The Fund’s performance is measured against the Russell 1000® Value Index, an unmanaged index that measures the performance of the large-cap value segment of the U.S. equity universe. It includes those Russell 1000 companies with lower price-to-book ratios and lower expected growth values. The index does not reflect the deduction of fees associated with a mutual fund, such as investment management and fund accounting fees. The Fund’s performance reflects the deduction of fees for services provided to the Fund. Investors cannot invest directly in an index. |
2
AZL Invesco Growth and Income Fund
(Unaudited)
As a shareholder of the AZL Invesco Growth and Income Fund (the “Fund”), you incur ongoing costs, including management fees, distribution fees, and other Fund expenses. These examples are intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. Please note that the expenses shown in each table do not reflect expenses that apply to the subaccount or the insurance contract. If the expenses that apply to the subaccount of the insurance contract were included, your costs would have been higher.
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the periods presented below.
The Actual Expense table below provides information about actual account values and actual expenses. You may use the information below, 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 table under the heading entitled “Expenses Paid During Period” to estimate the expenses you paid on your account during this period.
Beginning Account Value 7/1/13 | Ending Account Value 12/31/13 | Expenses Paid During Period 7/1/13 - 12/31/13* | Annualized Expense Ratio During Period 7/1/13 - 12/31/13 | |||||||||||||||||
AZL Invesco Growth and Income Fund | $ | 1,000.00 | $ | 1,138.50 | $ | 5.17 | 0.96 | % |
The Hypothetical Expense table below provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.
Beginning Account Value 7/1/13 | Ending Account Value 12/31/13 | Expenses Paid During Period 7/1/13 - 12/31/13* | Annualized Expense Ratio During Period 7/1/13 - 12/31/13 | |||||||||||||||||
AZL Invesco Growth and Income Fund | $ | 1,000.00 | $ | 1,020.37 | $ | 4.89 | 0.96 | % |
* | Expenses are equal to the average account value over the period, multiplied by the Fund’s annualized expense ratio, multiplied by 184/365 (to reflect the one half year period). |
Portfolio Composition
(Unaudited)
Investments | Percent of net assets | ||||
Financials | 27.4 | % | |||
Health Care | 12.3 | ||||
Information Technology | 11.9 | ||||
Consumer Discretionary | 11.1 | ||||
Energy | 9.5 | ||||
Consumer Staples | 8.3 | ||||
Industrials | 7.9 | ||||
Materials | 2.8 | ||||
Telecommunication Services | 2.3 | ||||
Utilities | 1.7 | ||||
|
| ||||
Total Common Stock | 95.2 | ||||
Money Market | 4.8 | ||||
Securities Held as Collateral for Securities on Loan | 1.6 | ||||
|
| ||||
Total Investment Securities | 101.6 | ||||
Net other assets (liabilities) | (1.6 | ) | |||
|
| ||||
Net Assets | 100.0 | % | |||
|
|
3
AZL Invesco Growth and Income Fund
Schedule of Portfolio Investments
December 31, 2013
Shares | Fair Value | |||||||
| Common Stocks (95.2%): |
| ||||||
| Aerospace & Defense (0.8%): |
| ||||||
35,520 | General Dynamics Corp. | $ | 3,393,936 | |||||
|
| |||||||
| Automobiles (1.4%): |
| ||||||
148,886 | General Motors Co. | 6,084,971 | ||||||
|
| |||||||
| Biotechnology (1.6%): |
| ||||||
60,513 | Amgen, Inc. | 6,908,164 | ||||||
|
| |||||||
| Capital Markets (7.0%): |
| ||||||
277,716 | Charles Schwab Corp. (The) | 7,220,615 | ||||||
23,497 | Goldman Sachs Group, Inc. (The) | 4,165,078 | ||||||
329,147 | Morgan Stanley | 10,322,049 | ||||||
71,103 | Northern Trust Corp. | 4,400,565 | ||||||
63,399 | State Street Corp. | 4,652,853 | ||||||
|
| |||||||
30,761,160 | ||||||||
|
| |||||||
| Chemicals (2.2%): |
| ||||||
136,484 | Dow Chemical Co. (The) | 6,059,890 | ||||||
18,253 | PPG Industries, Inc. | 3,461,864 | ||||||
|
| |||||||
9,521,754 | ||||||||
|
| |||||||
| Commercial Banks (6.0%): |
| ||||||
122,844 | BB&T Corp. | 4,584,538 | ||||||
98,361 | Comerica, Inc. | 4,676,082 | ||||||
174,407 | Fifth Third Bancorp | 3,667,779 | ||||||
104,545 | PNC Financial Services Group, Inc. | 8,110,602 | ||||||
113,166 | Wells Fargo & Co. | 5,137,736 | ||||||
|
| |||||||
26,176,737 | ||||||||
|
| |||||||
| Commercial Services & Supplies (2.7%): |
| ||||||
113,051 | ADT Corp. (The)^ | 4,575,174 | ||||||
186,797 | Tyco International, Ltd. | 7,666,149 | ||||||
|
| |||||||
12,241,323 | ||||||||
|
| |||||||
| Diversified Financial Services (10.2%): |
| ||||||
260,105 | Bank of America Corp. | 4,049,835 | ||||||
300,469 | Citigroup, Inc. | 15,657,439 | ||||||
41,340 | CME Group, Inc. | 3,243,536 | ||||||
72,910 | ING U.S., Inc. | 2,562,787 | ||||||
332,181 | JPMorgan Chase & Co. | 19,425,944 | ||||||
|
| |||||||
44,939,541 | ||||||||
|
| |||||||
| Diversified Telecommunication Services (0.5%): |
| ||||||
41,615 | Verizon Communications, Inc. | 2,044,961 | ||||||
|
| |||||||
| Electric Utilities (1.7%): |
| ||||||
23,498 | Allegion plc* | 1,038,377 | ||||||
41,216 | Edison International | 1,908,301 | ||||||
35,628 | FirstEnergy Corp. | 1,175,011 | ||||||
66,659 | Pinnacle West Capital Corp. | 3,527,595 | ||||||
|
| |||||||
7,649,284 | ||||||||
|
| |||||||
| Electronic Equipment, Instruments & Components (1.1%): |
| ||||||
282,655 | Corning, Inc. | 5,036,912 | ||||||
|
| |||||||
| Energy Equipment & Services (1.8%): |
| ||||||
101,667 | Baker Hughes, Inc. | 5,618,119 | ||||||
43,811 | Halliburton Co. | 2,223,408 | ||||||
|
| |||||||
7,841,527 | ||||||||
|
|
Shares | Fair Value | |||||||
| Common Stocks, continued |
| ||||||
| Food & Staples Retailing (1.1%): |
| ||||||
133,591 | Sysco Corp. | $ | 4,822,635 | |||||
|
| |||||||
| Food Products (3.7%): |
| ||||||
122,908 | Archer-Daniels-Midland Co. | 5,334,207 | ||||||
227,783 | Mondelez International, Inc., Class A | 8,040,740 | ||||||
80,478 | Unilever NV, NYS | 3,237,630 | ||||||
|
| |||||||
16,612,577 | ||||||||
|
| |||||||
| Health Care Equipment & Supplies (1.5%): |
| ||||||
115,659 | Medtronic, Inc. | 6,637,670 | ||||||
|
| |||||||
| Health Care Providers & Services (3.0%): |
| ||||||
43,050 | CIGNA Corp. | 3,766,014 | ||||||
56,379 | UnitedHealth Group, Inc. | 4,245,339 | ||||||
55,492 | WellPoint, Inc. | 5,126,906 | ||||||
|
| |||||||
13,138,259 | ||||||||
|
| |||||||
| Hotels, Restaurants & Leisure (1.6%): |
| ||||||
171,623 | Carnival Corp. | 6,894,096 | ||||||
|
| |||||||
| Household Products (1.6%): |
| ||||||
84,519 | Procter & Gamble Co. (The) | 6,880,692 | ||||||
|
| |||||||
| Industrial Conglomerates (2.4%): |
| ||||||
375,196 | General Electric Co. | 10,516,744 | ||||||
|
| |||||||
| Insurance (4.2%): |
| ||||||
48,763 | Aon plc | 4,090,728 | ||||||
30,667 | Chubb Corp. (The) | 2,963,352 | ||||||
171,864 | Marsh & McLennan Cos., Inc. | 8,311,343 | ||||||
65,736 | Willis Group Holdings plc | 2,945,630 | ||||||
|
| |||||||
18,311,053 | ||||||||
|
| |||||||
| Internet Software & Services (2.3%): |
| ||||||
182,245 | eBay, Inc.* | 10,003,428 | ||||||
|
| |||||||
| IT Services (1.1%): |
| ||||||
117,617 | Amdocs, Ltd. | 4,850,525 | ||||||
|
| |||||||
| Machinery (1.0%): |
| ||||||
70,709 | Ingersoll-Rand plc | 4,355,674 | ||||||
|
| |||||||
| Media (7.3%): |
| ||||||
173,691 | Comcast Corp., Class A | 9,025,853 | ||||||
71,813 | Thomson Reuters Corp.^ | 2,716,061 | ||||||
54,295 | Time Warner Cable, Inc. | 7,356,973 | ||||||
39,988 | Time Warner, Inc. | 2,787,963 | ||||||
118,895 | Viacom, Inc., Class B | 10,384,289 | ||||||
|
| |||||||
32,271,139 | ||||||||
|
| |||||||
| Metals & Mining (0.6%): |
| ||||||
71,836 | Freeport-McMoRan Copper & Gold, Inc. | 2,711,091 | ||||||
|
| |||||||
| Oil, Gas & Consumable Fuels (7.7%): |
| ||||||
47,336 | Anadarko Petroleum Corp. | 3,754,692 | ||||||
53,731 | Apache Corp. | 4,617,642 | ||||||
155,339 | Canadian Natural Resources, Ltd. | 5,256,457 | ||||||
54,150 | Occidental Petroleum Corp. | 5,149,665 | ||||||
239,212 | Royal Dutch Shell plc, A Shares | 8,589,902 | ||||||
110,027 | Total SA | 6,744,027 | ||||||
|
| |||||||
34,112,385 | ||||||||
|
|
Continued
4
AZL Invesco Growth and Income Fund
Schedule of Portfolio Investments
December 31, 2013
Shares | Fair Value | |||||||
| Common Stocks, continued |
| ||||||
| Personal Products (1.9%): |
| ||||||
490,107 | Avon Products, Inc. | $ | 8,439,643 | |||||
|
| |||||||
| Pharmaceuticals (6.2%): |
| ||||||
89,611 | Bristol-Myers Squibb Co. | 4,762,825 | ||||||
73,205 | Eli Lilly & Co. | 3,733,455 | ||||||
150,466 | Merck & Co., Inc. | 7,530,823 | ||||||
69,684 | Novartis AG, Registered Shares | 5,578,405 | ||||||
4,975 | Novartis AG, ADR | 399,891 | ||||||
161,659 | Pfizer, Inc. | 4,951,615 | ||||||
|
| |||||||
26,957,014 | ||||||||
|
| |||||||
| Road & Rail (1.0%): |
| ||||||
158,205 | CSX Corp. | 4,551,558 | ||||||
|
| |||||||
| Semiconductors & Semiconductor Equipment (3.1%): |
| ||||||
490,335 | Applied Materials, Inc. | 8,674,026 | ||||||
15,021 | Broadcom Corp., Class A | 445,373 | ||||||
105,503 | Texas Instruments, Inc. | 4,632,637 | ||||||
|
| |||||||
13,752,036 | ||||||||
|
| |||||||
| Software (4.3%): |
| ||||||
134,990 | Adobe Systems, Inc.* | 8,083,201 | ||||||
126,453 | Microsoft Corp. | 4,733,136 | ||||||
255,912 | Symantec Corp. | 6,034,405 | ||||||
|
| |||||||
18,850,742 | ||||||||
|
| |||||||
| Specialty Retail (0.8%): |
| ||||||
101,844 | Abercrombie & Fitch Co., Class A | 3,351,686 | ||||||
|
| |||||||
| Wireless Telecommunication Services (1.8%): |
| ||||||
199,499 | Vodafone Group plc, ADR | 7,842,306 | ||||||
|
| |||||||
| Total Common Stocks (Cost $288,986,702) | 418,463,223 | ||||||
|
|
Contracts, Shares, Notional Amount or Principal Amount | Fair Value | |||||||
| Securities Held as Collateral for Securities on Loan (1.6%): |
| ||||||
$ | 7,110,171 | Allianz Variable Insurance Products Securities Lending Collateral Trust(a) | $ | 7,110,171 | ||||
|
| |||||||
| Total Securities Held as Collateral for Securities on Loan | 7,110,171 | ||||||
|
| |||||||
| Unaffiliated Investment Company (4.8%): |
| ||||||
21,095,066 | Dreyfus Treasury Prime Cash Management Fund, Institutional Shares, 0.00%(b) | 21,095,066 | ||||||
|
| |||||||
| Total Unaffiliated Investment Company (Cost $21,095,066) | 21,095,066 | ||||||
|
| |||||||
| Total Investment Securities (Cost $317,191,939)(c) — 101.6% | 446,668,460 | ||||||
| Net other assets (liabilities) — (1.6)% | (7,204,455 | ) | |||||
|
| |||||||
| Net Assets — 100.0% | $ | 439,464,005 | |||||
|
|
Percentages indicated are based on net assets as of December 31, 2013.
ADR—American Depositary Receipt
NYS—New York Shares
* | Non-income producing security. |
^ | This security or a partial position of this security was on loan as of December 31, 2013. The total value of securities on loan as of December 31, 2013, was $6,869,335. |
(a) | Purchased with cash collateral held from securities lending. The value of the collateral could include collateral held for securities that were sold on or before December 31, 2013. |
(b) | The rate represents the effective yield at December 31, 2013. |
(c) | See Federal Tax Information listed in the Notes to the Financial Statements. |
Continued
5
AZL Invesco Growth and Income Fund
Schedule of Portfolio Investments
December 31, 2013
The following represents the concentrations by country of risk (based on the domicile of the security issuer) relative to the total fair value of investments as of December 31, 2013:
Country | Percentage | |||
Canada | 1.8 | % | ||
France | 1.5 | % | ||
Guernsey | 1.1 | % | ||
Ireland | 0.2 | % | ||
Ireland (Republic of) | 1.0 | % | ||
Netherlands | 0.7 | % | ||
Panama | 1.5 | % | ||
Switzerland | 3.1 | % | ||
United Kingdom | 5.3 | % | ||
United States | 83.8 | % | ||
|
| |||
100.0 | % | |||
|
|
Forward Currency Contracts
At December 31, 2013, the Fund’s open forward currency contracts were as follows:
Type of Contract | Counterparty | Delivery Date | Contract Amount (Local Currency) | Contract Value | Value | Net Unrealized Appreciation/ (Depreciation) | ||||||||||||||||||
Short Contracts: | ||||||||||||||||||||||||
British Pound | Bank of New York Mellon | 1/10/14 | 2,104,660 | $ | 3,453,979 | $ | 3,484,460 | $ | (30,481 | ) | ||||||||||||||
British Pound | State Street | 1/10/14 | 4,701,069 | 7,710,247 | 7,783,055 | (72,808 | ) | |||||||||||||||||
Canadian Dollar | Bank of New York Mellon | 1/10/14 | 3,325,632 | 3,118,618 | 3,130,400 | (11,782 | ) | |||||||||||||||||
Canadian Dollar | State Street | 1/10/14 | 2,962,126 | 2,777,635 | 2,788,234 | (10,599 | ) | |||||||||||||||||
European Euro | Bank of New York Mellon | 1/10/14 | 1,465,039 | 1,990,050 | 2,015,286 | (25,236 | ) | |||||||||||||||||
European Euro | State Street | 1/10/14 | 3,533,629 | 4,797,714 | 4,860,807 | (63,093 | ) | |||||||||||||||||
Israeli Shekel | State Street | 1/10/14 | 5,867,157 | 1,665,718 | 1,691,026 | (25,308 | ) | |||||||||||||||||
Swiss Franc | Bank of New York Mellon | 1/10/14 | 1,981,380 | 2,190,895 | 2,221,942 | (31,047 | ) | |||||||||||||||||
Swiss Franc | State Street | 1/10/14 | 1,994,240 | 2,204,652 | 2,236,364 | (31,712 | ) | |||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
$ | 29,909,508 | $ | 30,211,574 | $ | (302,066 | ) | ||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Long Contracts: | ||||||||||||||||||||||||
Israeli Shekel | State Street | 1/10/14 | 5,867,157 | $ | 1,676,187 | $ | 1,691,027 | $ | 14,840 | |||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
$ | 1,676,187 | $ | 1,691,027 | $ | 14,840 | |||||||||||||||||||
|
|
|
|
|
|
See accompanying notes to the financial statements.
6
AZL Invesco Growth and Income Fund
Statement of Assets and Liabilities
December 31, 2013
Assets: | |||||
Investment securities, at cost | $ | 317,191,939 | |||
|
| ||||
Investment securities, at value* | $ | 446,668,460 | |||
Interest and dividends receivable | 782,284 | ||||
Foreign currency, at value (cost $65,772) | 67,245 | ||||
Unrealized appreciation on forward currency contracts | 14,840 | ||||
Receivable for capital shares issued | 121,327 | ||||
Reclaims receivable | 31,825 | ||||
|
| ||||
Total Assets | 447,685,981 | ||||
|
| ||||
Liabilities: | |||||
Unrealized depreciation on forward currency contracts | 302,066 | ||||
Payable for capital shares redeemed | 436,403 | ||||
Payable for collateral received on loaned securities | 7,110,171 | ||||
Manager fees payable | 239,419 | ||||
Administration fees payable | 14,719 | ||||
Distribution fees payable | 91,268 | ||||
Custodian fees payable | 4,628 | ||||
Administrative and compliance services fees payable | 1,743 | ||||
Trustee fees payable | 13 | ||||
Other accrued liabilities | 21,546 | ||||
|
| ||||
Total Liabilities | 8,221,976 | ||||
|
| ||||
Net Assets | $ | 439,464,005 | |||
|
| ||||
Net Assets Consist of: | |||||
Capital | $ | 293,019,343 | |||
Accumulated net investment income/(loss) | 4,524,356 | ||||
Accumulated net realized gains/(losses) from investment transactions | 12,728,343 | ||||
Net unrealized appreciation/(depreciation) on investments | 129,191,963 | ||||
|
| ||||
Net Assets | $ | 439,464,005 | |||
|
| ||||
Shares of beneficial interest (unlimited number of shares authorized, no par value) | 28,340,489 | ||||
Net Asset Value (offering and redemption price per share) | $ | 15.51 | |||
|
|
* | Includes securities on loan of $6,869,335. |
For the Year Ended December 31, 2013
Investment Income: | |||||
Dividends | $ | 8,347,925 | |||
Interest | 7,563 | ||||
Income from securities lending | 35,516 | ||||
Foreign withholding tax | (55,113 | ) | |||
|
| ||||
Total Investment Income | 8,335,891 | ||||
|
| ||||
Expenses: | |||||
Manager fees | 2,920,963 | ||||
Administration fees | 120,569 | ||||
Distribution fees | 977,054 | ||||
Custodian fees | 20,771 | ||||
Administrative and compliance services fees | 7,944 | ||||
Trustee fees | 20,472 | ||||
Professional fees | 22,508 | ||||
Shareholder reports | 22,419 | ||||
Other expenses | 10,764 | ||||
|
| ||||
Total expenses before reductions | 4,123,464 | ||||
Less expenses voluntarily waived/reimbursed by the Manager | (355,617 | ) | |||
Less expenses paid indirectly | (13,630 | ) | |||
|
| ||||
Net expenses | 3,754,217 | ||||
|
| ||||
Net Investment Income/(Loss) | 4,581,674 | ||||
|
| ||||
Realized and Unrealized Gains/(Losses) on Investments: | |||||
Net realized gains/(losses) on securities transactions | 24,495,051 | ||||
Net realized gains/(losses) on forward currency contracts | (113,007 | ) | |||
Change in net unrealized appreciation/depreciation on investments | 81,222,964 | ||||
|
| ||||
Net Realized/Unrealized Gains/(Losses) on Investments | 105,605,008 | ||||
|
| ||||
Change in Net Assets Resulting From Operations | $ | 110,186,682 | |||
|
|
See accompanying notes to the financial statements.
7
Statements of Changes in Net Assets
AZL Invesco Growth and Income Fund | ||||||||||
For the Year Ended | For the Year Ended | |||||||||
Change in Net Assets: | ||||||||||
Operations: | ||||||||||
Net investment income/(loss) | $ | 4,581,674 | $ | 4,119,748 | ||||||
Net realized gains/(losses) on investment transactions | 24,382,044 | 12,045,476 | ||||||||
Change in unrealized appreciation/depreciation on investments | 81,222,964 | 19,984,546 | ||||||||
|
|
|
| |||||||
Change in net assets resulting from operations | 110,186,682 | 36,149,770 | ||||||||
|
|
|
| |||||||
Dividends to Shareholders: | ||||||||||
From net investment income | (3,756,211 | ) | (4,164,632 | ) | ||||||
|
|
|
| |||||||
Change in net assets resulting from dividends to shareholders | (3,756,211 | ) | (4,164,632 | ) | ||||||
|
|
|
| |||||||
Capital Transactions: | ||||||||||
Proceeds from shares issued | 45,473,781 | 62,724,559 | ||||||||
Proceeds from dividends reinvested | 3,756,211 | 4,164,632 | ||||||||
Value of shares redeemed | (44,881,583 | ) | (21,490,741 | ) | ||||||
|
|
|
| |||||||
Change in net assets resulting from capital transactions | 4,348,409 | 45,398,450 | ||||||||
|
|
|
| |||||||
Change in net assets | 110,778,880 | 77,383,588 | ||||||||
Net Assets: | ||||||||||
Beginning of period | 328,685,125 | 251,301,537 | ||||||||
|
|
|
| |||||||
End of period | $ | 439,464,005 | $ | 328,685,125 | ||||||
|
|
|
| |||||||
Accumulated net investment income/(loss) | $ | 4,524,356 | $ | 3,919,381 | ||||||
|
|
|
| |||||||
Share Transactions: | ||||||||||
Shares issued | 3,283,999 | 5,455,817 | ||||||||
Dividends reinvested | 262,856 | 360,574 | ||||||||
Shares redeemed | (3,280,232 | ) | (1,934,920 | ) | ||||||
|
|
|
| |||||||
Change in shares | 266,623 | 3,881,471 | ||||||||
|
|
|
|
See accompanying notes to the financial statements.
8
AZL Invesco Growth and Income Fund
(Selected data for a share of beneficial interest outstanding throughout the periods indicated)
Year Ended December 31, | |||||||||||||||||||||||||
2013 | 2012 | 2011 | 2010 | 2009 | |||||||||||||||||||||
Net Asset Value, Beginning of Period | $ | 11.71 | $ | 10.39 | $ | 10.70 | $ | 9.61 | $ | 7.95 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Investment Activities: | |||||||||||||||||||||||||
Net Investment Income/(Loss) | 0.16 | 0.14 | 0.15 | 0.07 | 0.12 | ||||||||||||||||||||
Net Realized and Unrealized Gains/(Losses) on Investments | 3.77 | 1.35 | (0.36 | ) | 1.11 | 1.75 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Total from Investment Activities | 3.93 | 1.49 | (0.21 | ) | 1.18 | 1.87 | |||||||||||||||||||
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Dividends to Shareholders From: | |||||||||||||||||||||||||
Net Investment Income | (0.13 | ) | (0.17 | ) | (0.10 | ) | (0.09 | ) | (0.21 | ) | |||||||||||||||
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Total Dividends | (0.13 | ) | (0.17 | ) | (0.10 | ) | (0.09 | ) | (0.21 | ) | |||||||||||||||
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Net Asset Value, End of Period | $ | 15.51 | $ | 11.71 | $ | 10.39 | $ | 10.70 | $ | 9.61 | |||||||||||||||
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Total Return(a) | 33.69 | % | 14.33 | % | (1.94 | )%(b) | 12.37 | % | 23.64 | % | |||||||||||||||
Ratios to Average Net Assets/Supplemental Data: | |||||||||||||||||||||||||
Net Assets, End of Period (000’s) | $ | 439,464 | $ | 328,685 | $ | 251,302 | $ | 267,458 | $ | 183,359 | |||||||||||||||
Net Investment Income/(Loss) | 1.17 | % | 1.43 | % | 1.32 | % | 1.03 | % | 1.32 | % | |||||||||||||||
Expenses Before Reductions(c) | 1.05 | % | 1.07 | % | 1.09 | % | 1.10 | % | 1.13 | % | |||||||||||||||
Expenses Net of Reductions | 0.96 | % | 0.97 | % | 0.98 | % | 0.99 | % | 1.00 | % | |||||||||||||||
Expenses Net of Reductions, Excluding Expenses Paid Indirectly(d) | 0.96 | % | 0.98 | % | 0.99 | % | 1.00 | % | 1.03 | % | |||||||||||||||
Portfolio Turnover Rate | 31 | % | 32 | % | 22 | % | 34 | % | 54 | % |
(a) | The returns include reinvested dividends and fund level expenses, but exclude insurance contract charges. If these charges were included, the returns would have been lower. |
(b) | During the year ended December 31, 2011, Invesco Advisers, Inc. reimbursed $1,687 to the Fund related to violation of certain investment policies and limitations. The corresponding impact to the return was less than 0.005%. |
(c) | Excludes fee reductions. If such fee reductions had not occurred, the ratios would have been as indicated. |
(d) | Expenses net of reductions excludes expenses paid indirectly, pursuant to a “commission recapture” program, under which brokers remit a portion of the brokerage commission which is used to pay certain Fund expenses. See note 2 in the Notes to the Financial Statements. |
See accompanying notes to the financial statements.
9
AZL Invesco Growth and Income Fund
Notes to the Financial Statements
December 31, 2013
1. Organization
The Allianz Variable Insurance Products Trust (the “Trust”) was organized as a Delaware statutory trust on July 13, 1999. The Trust is a diversified open-end management investment company registered under the Investment Company Act of 1940. The Trust consists of 29 separate investment portfolios (collectively, the “Funds”), of which one is included in this report, the AZL Invesco Growth and Income Fund (the “Fund”), and 28 are presented in separate reports.
The Trust is authorized to issue an unlimited number of shares of the Fund without par value. Shares of the Fund are available through the variable annuity contracts and variable life insurance policies offered through the separate accounts of participating insurance companies.
Under the Trust’s organizational documents, its officers and trustees are indemnified against certain liabilities arising out of the performance of their duties to the Fund. In addition, in the normal course of business, the Fund may enter into contracts with its vendors and others that provide for general indemnifications. The Fund’s maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Fund. However, based on experience, the Fund expects the risk of loss to be remote.
2. Significant Accounting Policies
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. The policies conform with U.S. generally accepted accounting principles (“U.S. GAAP”). The preparation of financial statements requires management to make certain 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 increases and decreases in net assets from operations during the reporting period. Actual results could differ from those estimates.
Security Valuation
The Fund records its investments at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between willing market participants at the measurement date. The valuation techniques used to determine fair value are further described in Note 4 below.
Investment Transactions and Investment Income
Investment transactions are recorded not later than on the business day following trade date. However, for financial reporting purposes, investment transactions are accounted for on trade date. Net realized gains and losses on investments sold and on foreign currency transactions are recorded on the basis of identified cost. Interest income is recorded on the accrual basis and includes, where applicable, the amortization of premiums or accretion of discounts. Dividend income is recorded on the ex-dividend date except in the case of foreign securities, in which case dividends are recorded as soon as such information becomes available.
Real Estate Investment Trusts
The Fund may own shares of real estate investment trusts (“REITs”) which report information on the source of their distributions annually. Certain distributions received from REITs during the year, which are known to be a return of capital, are recorded as a reduction to the cost of the individual REIT.
Foreign Currency Translation
The accounting records of the Fund are maintained in U.S. dollars. Foreign currency amounts are translated into U.S. dollars at the current rate of exchange to determine the fair value of investments, assets and liabilities. Purchases and sales of securities, and income and expenses are translated at the prevailing rate of exchange on the respective dates of such transactions. The Fund does not isolate that portion of the results of operations resulting from changes in foreign exchange rates on investments from fluctuations arising from changes in market prices of securities held. Such fluctuations are included in the net realized and unrealized gain or loss on investments and foreign currencies. Income received by the Fund from sources within foreign countries may be subject to withholding and other income or similar taxes imposed by such countries. The Funds accrue such taxes, as applicable, based on their current interpretation of tax rules in the foreign markets in which they invest.
Dividends to Shareholders
Dividends to shareholders are recorded on the ex-dividend date. The Fund distributes its dividends from net investment income and net realized capital gains, if any, on an annual basis. The amount of dividends from net investment income and from net realized gains is determined in accordance with federal income tax regulations, which may differ from U.S. GAAP. These “book/tax” differences are either temporary or permanent in nature. To the extent these differences are permanent in nature (e.g., return of capital, net operating loss, reclassification of certain market discounts, gain/loss, paydowns, and distributions), such amounts are reclassified within the composition of net assets based on their federal tax-basis treatment; temporary differences (e.g., wash sales and post October losses) do not require reclassification. Dividends to shareholders that exceed net investment income and net realized gains for tax purposes are reported as distributions of capital.
Expense Allocation
Expenses directly attributable to the Fund are charged directly to the Fund, while expenses attributable to more than one Fund are allocated among the respective Funds based upon relative net assets or some other reasonable method. Expenses which are attributable to more than one Trust are allocated across the Allianz Variable Insurance Products and Allianz Variable Insurance Products Fund of Funds Trusts based upon relative net assets or another reasonable basis. Allianz Investment Management LLC (the “Manager”), serves as the investment manager for the Trust and the Allianz Variable Insurance Products Fund of Funds Trust.
Securities Lending
To generate additional income, the Fund may lend up to 33 1/3% of its assets pursuant to agreements requiring that the loan be continuously secured by any combination of cash, U.S. government or U.S. government agency securities, equal initially to at least 102% of the fair value plus accrued interest on the securities loaned (105% for foreign
10
AZL Invesco Growth and Income Fund
Notes to the Financial Statements
December 31, 2013
securities). The borrower of securities is at all times required to post collateral to the Fund in an amount equal to 100% of the fair value of the securities loaned based on the previous day’s fair value of the securities loaned, marked-to-market daily. Any collateral shortfalls are adjusted the next business day. The Fund bears all of the gains and losses on such investments. The Fund receives payments from borrowers equivalent to the dividends and interest that would have been earned on securities lent while simultaneously seeking to earn income on the investment of cash collateral received. In extremely low interest rate environments, the broker rebate fee may exceed the interest earned or the cash collateral which would result in a loss to the Fund. The investment of cash collateral deposited by the borrower is subject to inherent market risks such as interest rate risk, credit risk, liquidity risk, and other risks that are present in the market, and as such, the value of these investments may not be sufficient, when liquidated, to repay the borrower when the loaned security is returned. There may be risks of delay in recovery of the securities or even loss of rights in the collateral should the borrower of the securities fail financially. However, loans will be made only to borrowers, such as broker-dealers, banks or institutional borrowers of securities, deemed by the Manager to be of good standing and credit worthy and when in its judgment, the consideration which can be earned currently from such securities loans justifies the attendant risks. Loans are subject to termination by the Trust or the borrower at any time, and are, therefore, not considered to be illiquid investments. Securities on loan at December 31, 2013 are presented on the Fund’s Schedule of Portfolio Investments. The average outstanding amount of securities on loan was $2.2 million for the year ended December 31, 2013.
Cash collateral received in connection with securities lending is invested in the Allianz Variable Insurance Products Securities Lending Collateral Trust (the “Securities Lending Collateral Trust”) managed by The Dreyfus Corporation, an affiliate of the Custodian and Securities Lending Agent. The Securities Lending Collateral Trust invests in short-term investments that have a remaining maturity of 397 days or less as calculated in accordance with Rule 2a-7 under the 1940 Act. The Fund paid securities lending fees of $3,515 during the year ended December 31, 2013. These fees have been netted against “Income from securities lending” on the Statement of Operations.
Commission Recapture
Certain Funds of the Trust participate in a commission recapture program. The Fund will utilize the recaptured commissions to pay for, in whole or part, certain expenses of the Fund, excluding investment advisory fees. Any amounts received by the Fund, if applicable, are disclosed as “Expenses paid indirectly” on the Statement of Operations.
Effective January 6, 2014, the Manager, on behalf of the Trust, requested the Fund cease participation in the program until further notice.
Derivative Instruments
All open derivative positions at period end are reflected on the Fund’s Schedule of Portfolio Investments. The following is a description of the derivative instruments utilized by the Fund, including the primary underlying risk exposures related to each instrument type.
Forward Currency Contracts
During the year ended December 31, 2013, the Fund entered into forward currency contracts in connection with planned purchases or sales of securities or to hedge the U.S. dollar value of securities denominated in a particular currency. In addition to the foreign currency risk related to the use of these contracts, the Fund could be exposed to risks if the counterparties to the contracts are unable to meet the terms of their contracts and from unanticipated movements in the value of a foreign currency relative to the U.S. dollar. In the event of default by the counterparty to the transaction, the Fund’s maximum amount of loss, as either the buyer or the seller, is the unrealized appreciation of the contract. The forward currency contracts are adjusted by the daily exchange rate of the underlying currency and any gains or losses are recorded for financial statement purposes as unrealized gains or losses until the contract settlement date. When the contract is closed, the Fund records a realized gain or loss equal to the difference between the value at the time it was opened and the value at the time it was closed. The contract amount of forward currency contracts outstanding was $31.6 million as of December 31, 2013. The monthly average amount for these contracts was $19.2 million for the year ended December 31, 2013.
Summary of Derivative Instruments
The following is a summary of the fair values of derivative instruments on the Fund’s Statement of Assets and Liabilities, categorized by risk exposure, as of December 31, 2013:
Asset Derivatives | Liability Derivatives | |||||||||||
Primary Risk Exposure | Statements of Assets and Liabilities Location | Total Fair Value | Statements of Assets and Liabilities Location | Total Fair Value | ||||||||
Foreign Currency Contracts | Unrealized appreciation on forward currency contracts | $ | 14,840 | Unrealized depreciation on forward currency contracts | $ | 302,066 |
The following is a summary of the effect of derivative instruments on the Statement of Operations, categorized by risk exposure, for the year ended December 31, 2013:
Primary Risk Exposure | Location of Gains/(Losses) on Derivatives Recognized in Income | Realized Gains/(Losses) on Derivatives Recognized in Income | Change in Unrealized Appreciation/ Depreciation on Derivatives Recognized in Income | |||||||||||
Foreign Currency Contracts | Net realized gains/(losses) on forward currency contracts/change in unrealized appreciation/depreciation on investments | $ | (113,007 | ) | $ | (124,048 | ) |
11
AZL Invesco Growth and Income Fund
Notes to the Financial Statements
December 31, 2013
3. Related Party Transactions
The Manager provides investment advisory and management services for the Fund. The Manager has retained an independent money management organization (the “Subadviser”), to make investment decisions on behalf of the Fund. Pursuant to a subadvisory agreement with Invesco Advisers, Inc. (“Invesco”), Invesco provides investment advisory services as the Subadviser for the Fund subject to the general supervision of the Trustees and the Manager. The Manager is entitled to a fee, computed daily and paid monthly, based on the average daily net assets of the Fund. Expenses incurred by the Fund for investment advisory and management services are reflected on the Statement of Operations as “Manager fees.” For its services, the Subadviser is entitled to a fee payable by the Manager. The Manager has contractually agreed to waive fees and reimburse the Fund to limit the annual expenses, excluding interest expense (e.g., cash overdraft fees), taxes, brokerage commissions, other expenditures that are capitalized in accordance with U.S. GAAP and other extraordinary expenses not incurred in the ordinary course of the Fund’s business, based on the daily net assets of the Fund, through April 30, 2015.
For the year ended December 31, 2013, the annual rate due to the Manager and the annual expense limit were as follows:
Annual Rate* | Annual Expense Limit | |||||||||
AZL Invesco Growth and Income Fund | 0.78 | % | 1.20 | % |
* | The fees payable to the Manager are based on a tiered structure for various net assets levels as follows: the first $100 million at 0.775%, the next $150 million at 0.75%, the next $250 million at 0.725% and above $500 million at 0.675%. The Manager voluntarily reduced the management fees as follows: the first $100 million at 0.675% and above $100 million at 0.65%. The Manager reserves the right to stop reducing the manager fee at any time. |
Any amounts contractually waived or reimbursed by the Manager in a particular fiscal year will be subject to repayment by the Fund to the Manager to the extent that from time to time through the next three fiscal years the repayment will not cause the Fund’s expenses to exceed the lesser of the stated limit at the time of the waiver or the current stated limit. Any amounts recouped by the Manager during the year are reflected on the Statement of Operations as “Recoupment of prior expenses reimbursed by the Manager.” At December 31, 2013, there were no remaining contractual reimbursements that are subject to repayment by the Fund in subsequent years.
In addition, the Manager may voluntarily waive or reimburse additional fees in order to maintain more competitive expense ratios. Any voluntary waivers or reimbursements are not subject to repayment in subsequent years. Information on the total amount waived/reimbursed by the Manager or repaid to the Manager by the Fund during the year can be found on the Statement of Operations.
Pursuant to separate agreements between the Funds and the Manager, the Manager provides a Chief Compliance Officer (“CCO”) and certain compliance oversight and regulatory filing services to the Trust. Under these agreements the Manager is entitled to an amount equal to a portion of the compensation and certain other expenses related to the individuals performing the CCO and compliance oversight services, as well as $75 per hour for time incurred in connection with the preparation and filing of certain documents with the Securities and Exchange Commission. The fees are paid to the Manager on a quarterly basis. The total expenses incurred by the Fund for these services are reflected on the Statement of Operations as “Administrative and compliance services fees.”
Citi Fund Services Ohio, Inc. (“Citi” or the “Administrator”), a wholly owned subsidiary of Citigroup, Inc., with which an officer of the Trust is affiliated, serves as the Trust’s administrator, transfer agent, and fund accountant, and assists the Trust in all aspects of its administration and operation. The Administrator is entitled to a Trust-wide asset-based fee, which is based on the following schedule: 0.05% of daily average net assets on the first $4 billion, 0.04% of daily average net assets on the next $2 billion, 0.02% of daily average net assets on the next $2 billion and 0.01% of daily average net assets over $8 billion. The overall Trust-wide fees are accrued daily and paid monthly and are subject to a minimum annual fee. In addition, the Administrator is entitled to annual account fees related to the transfer agency system, an annual fee for each additional class of shares of any Fund, certain annual fees in supporting fair value services, and a Trust-wide annual fee for providing infrastructure and support in implementing the written policies and procedures comprising the Fund’s compliance program. Fees payable to the Administrator are subject to certain reductions associated with services provided to new funds. The Administrator is also reimbursed for certain expenses incurred. The total expenses incurred by the Fund for these services are reflected on the Statement of Operations as “Administration fees.”
Allianz Life Financial Services, LLC (“ALFS”), an affiliate of the Manager, serves as distributor of the Fund and receives 12b-1 fees directly from the Fund, plus a Trust-wide annual fee of $42,500, paid by the Manager from its profits and not by the Trust, for recordkeeping and reporting services.
The Trust has adopted a distribution and service plan in conformance with Rule 12b-1 of the 1940 Act. Pursuant to this plan, the Fund is authorized to pay certain fees for the sale and distribution of its shares and services provided to its shareholders at an annual rate not to exceed 0.25% of the Fund’s average daily net assets. These fees are reflected on the Statement of Operations as “Distribution fees.”
In addition, certain legal fees and expenses are paid to a law firm, Dorsey & Whitney LLP, of which the Secretary of the Fund is a partner. During the year ended December 31, 2013, $4,849 was paid from the Fund relating to these fees and expenses.
Certain Officers and Trustees of the Trust are affiliated with the Manager or the Administrator. Such Officers (except for the Trust’s CCO as noted above) and Trustees receive no compensation from the Trust for serving in their respective roles. For their service to the Trust and to the Allianz Variable Insurance Products Fund of Funds Trust, each non-interested Trustee receives a $139,000 annual Board retainer. In addition, the Trustees are reimbursed for certain expenses associated with attending Board meetings. Compensation to the Trustees is allocated between the Trust and the Allianz Variable Insurance Products Fund of Funds Trust in proportion to the assets under management of each trust. During the year ended December 31, 2013, actual Trustee compensation was $973,000 in total for both trusts.
At a meeting of the Board of Trustees on December 4, 2013, the Trustees approved a fee increase to the Officers and Trustees who are paid a fee for their services to the Trust and to the Allianz Variable Insurance Products Fund of Funds Trust. Effective January 1, 2014, each non-interested Trustee will receive a $163,000 annual retainer.
4. Investment Valuation Summary
The valuation techniques employed by the Fund, as described below, maximize the use of observable inputs and minimize the use of unobservable inputs in determining fair value. The inputs used for valuing the Fund’s investments are summarized in the three broad levels listed below:
— | Level 1 — quoted prices in active markets for identical assets |
12
AZL Invesco Growth and Income Fund
Notes to the Financial Statements
December 31, 2013
— | Level 2 — other significant observable inputs (including quoted prices for similar securities, interest rates, prepayments speeds, credit risk, etc.) |
— | Level 3 — significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of investments) |
Changes in valuation techniques may result in transfers in or out of an assigned level within the disclosure hierarchy. The Fund determines transfers between fair value hierarchy levels at the reporting period end. The inputs or methodology used for valuing investments is not necessarily an indication of the risk associated with investing in those investments.
Security prices are generally provided by an independent third party pricing service approved by the Trust’s Board of Trustees (“Trustees”) as of the close of the New York Stock Exchange (“NYSE”) (generally 4:00 pm Eastern Time). Equity securities are valued at the last quoted sale price or, if there is no sale, the last quoted bid price is used for long securities and the last quoted ask price is used for securities sold short. Securities listed on NASDAQ Stock Market, Inc. (“NASDAQ”) are valued at the official closing price as reported by NASDAQ. In each of these situations, valuations are typically categorized as a Level 1 in the fair value hierarchy. Investments in open-end investment companies are valued at their respective net asset value as reported by such companies and are typically categorized as Level 1 in the fair value hierarchy.
Debt and other fixed income securities are generally valued at an evaluated bid price provided by an independent pricing source approved by the Trustees. To value debt securities, pricing services may use various pricing techniques which take into account appropriate factors such as market activity, yield, quality, coupon rate, maturity, type of issue, trading characteristics, call features, credit ratings and other data, as well as broker quotes. Short term securities of sufficient credit quality with sixty days or less remaining until maturity may be valued at amortized cost, which approximates fair value. In each of these situations, valuations are typically categorized as Level 2 in the fair value hierarchy.
Forward currency contracts are generally valued at the foreign currency exchange rate as of the close of the NYSE and are typically categorized as Level 2 in the fair value hierarchy.
Other assets and securities for which market quotations are not readily available, or are deemed unreliable are valued at fair value as determined in good faith by the Trustees or persons acting on the behalf of the Trustees. Fair value pricing may be used for significant events such as securities whose trading has been suspended, whose price has become stale or for which there is no currently available price at the close of the NYSE. Depending on the source and relative significance of valuation inputs, these instruments may be classified as Level 2 or Level 3 in the fair value hierarchy. The Fund utilizes a pricing service to assist in determining the fair value of securities when certain significant events occur that may affect the value of foreign securities.
In accordance with procedures adopted by the Trustees, fair value pricing may be used if events materially affecting the value of foreign securities occur between the time when the exchange on which they are traded closes and the time when the Fund’s net asset value is calculated. Management identifies possible fluctuation in international securities by monitoring the increase or decrease in the value of a designated benchmark index. In the event of an increase or decrease greater than predetermined levels, the Fund may use a systematic valuation model provided by an independent third party to fair value its international equity securities which are then typically categorized as Level 2 in the fair value hierarchy.
For the year ended December 31, 2013, there were no Level 3 investments for which significant unobservable inputs were used to determine fair value.
The following is a summary of the valuation inputs used as of December 31, 2013 in valuing the Fund’s investments based upon the three levels defined above:
Investment Securities: | Level 1 | Level 2 | Total | ||||||||||||
Common Stocks+ | |||||||||||||||
Oil, Gas & Consumable Fuels | $ | 18,778,456 | $ | 15,333,929 | $ | 34,112,385 | |||||||||
Pharmaceuticals | 21,378,609 | 5,578,405 | 26,957,014 | ||||||||||||
All Other Common Stocks | 357,393,824 | — | 357,393,824 | ||||||||||||
Securities Held as Collateral for Securities on Loan | — | 7,110,171 | 7,110,171 | ||||||||||||
Unaffiliated Investment Company | 21,095,066 | — | 21,095,066 | ||||||||||||
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Total Investment Securities | 418,645,955 | 28,022,505 | 446,668,460 | ||||||||||||
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Other Financial Instruments:* | |||||||||||||||
Forward Currency Contracts | — | (287,226 | ) | (287,226 | ) | ||||||||||
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Total Investments | $ | 418,645,955 | $ | 27,735,279 | $ | 446,381,234 | |||||||||
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+ | For detailed industry descriptions, see the accompanying Schedule of Portfolio Investments. |
* | Other Financial Instruments would include any derivative instruments, such as futures contracts. These investments are generally recorded in the financial statements at the unrealized gain or loss on the investment. |
5. Security Purchases and Sales
For the year ended December 31, 2013, cost of purchases and proceeds from sales of securities (excluding securities maturing less than one year from acquisition) were as follows:
Purchases | Sales | |||||||||
AZL Invesco Growth and Income Fund | $ | 117,574,650 | $ | 114,790,015 |
6. Investment Risks
Derivatives Risk: The Fund may invest in derivatives as a principal strategy. A derivative is a financial contract whose value depends on, or is derived from, the value of an underlying asset, reference rate, or risk. Use of derivative instruments involves risks different from, or possibly greater than, the risks associated with investing directly in
13
AZL Invesco Growth and Income Fund
Notes to the Financial Statements
December 31, 2013
securities and other traditional investments. Derivatives are subject to a number of other risks, such as liquidity risk, interest rate risk, market risk, credit risk, and selection risk. Derivatives also involve the risk of mispricing or improper valuation and the risk that changes in the value may not correlate perfectly with the underlying asset, rate, or index. Using derivatives may result in losses, possibly in excess of the principal amount invested. Also, suitable derivative transactions may not be available in all circumstances. The counterparty to a derivatives contract could default. As required by applicable law, a Fund that invests in derivatives segregates cash or liquid securities, or both, to the extent that its obligations under the instrument are not covered through ownership of the underlying security, financial instrument, or currency.
Foreign Securities and Currencies Risk: Investments in securities of foreign issuers carry certain risks not ordinarily associated with investments in securities of domestic issuers. Such risks include future political and economic developments, and the possible imposition of exchange controls or other foreign governmental laws and restrictions. In addition, with respect to certain countries, there is the possibility of expropriation of assets, confiscatory taxation, political or social instability or diplomatic developments which could adversely affect investments in those securities.
7. Federal Tax Information
It is the Fund’s policy to continue to comply with the requirements of the Internal Revenue Code under Subchapter M, applicable to regulated investment companies, and to distribute all of its taxable income, including any net realized gains on investments, to its shareholders. Therefore, no provision is made for federal income taxes.
Management of the Fund has reviewed tax positions taken in tax years that remain subject to examination by all major tax jurisdictions, including federal (i.e., the last four tax year ends and the interim tax period since then, as applicable). Management believes that there is no tax liability resulting from unrecognized tax benefits related to uncertain tax positions taken.
Cost for federal income tax purposes at December 31, 2013 is $317,990,871. The gross unrealized appreciation/ (depreciation) on a tax basis is as follows:
Unrealized appreciation | $ | 130,834,382 | |||
Unrealized depreciation | (2,156,793 | ) | |||
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| ||||
Net unrealized appreciation/(depreciation) | $ | 128,677,589 | |||
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|
During the year ended December 31, 2013, the Fund utilized $10,799,255 in capital loss carry forwards to offset capital gains.
The tax character of dividends paid to shareholders during the year ended December 31, 2013 were as follows:
Ordinary Income | Net Long-Term Capital Gains | Total Distributions(a) | |||||||||||||
AZL Invesco Growth and Income Fund | $ | 3,756,211 | $ | — | $ | 3,756,211 |
(a) | Total distributions paid may differ from the Statements of Changes in Net Assets because dividends are recognized when actually paid for tax purposes. |
The tax character of dividends paid to shareholders during the year ended December 31, 2012 was as follows:
Ordinary Income | Net Long-Term Capital Gains | Total Distributions(a) | |||||||||||||
AZL Invesco Growth and Income Fund | $ | 4,164,632 | $ | — | $ | 4,164,632 |
(a) | Total distributions paid may differ from the Statements of Changes in Net Assets because dividends are recognized when actually paid for tax purposes. |
As of December 31, 2013, the components of accumulated earnings on a tax basis were as follows:
Undistributed Ordinary Income | Undistributed Long-Term Capital Gains | Accumulated Capital and Other Losses | Unrealized Appreciation/ | Total Earnings/ | |||||||||||||||||||||
AZL Invesco Growth and Income Fund | $ | 4,237,131 | $ | 13,527,274 | $ | — | $ | 128,680,257 | $ | 146,444,662 |
(a) | The difference between book-basis and tax-basis unrealized appreciation/(depreciation) is attributable primarily to tax deferral of losses on wash sales. |
8. Subsequent Events
Management has evaluated events and transactions subsequent to period end through the date the financial statements were issued, for purposes of recognition or disclosure in these financial statements and there are no subsequent events to report.
14
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Shareholders and Board of Trustees of
Allianz Variable Insurance Products Trust:
We have audited the accompanying statement of assets and liabilities of AZL Invesco Growth and Income Fund (the “Fund”) of the Allianz Variable Insurance Products Trust, including the schedule of portfolio investments, as of December 31, 2013, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the years in the two-year period then ended, and the financial highlights for each of the years in the five-year period then ended. These financial statements and financial highlights are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of December 31, 2013, by correspondence with the custodian and brokers or by other appropriate auditing procedures. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of the Fund as of December 31, 2013, the results of its operations for the year then ended, the changes in its net assets for each of the years in the two-year period then ended, and the financial highlights for each of the years in the five-year period then ended, in conformity with U.S. generally accepted accounting principles.
/s/ KPMG LLP
Columbus, Ohio
February 25, 2014
15
Other Federal Income Tax Information (Unaudited)
For the year ended December 31, 2013, 100.00% of the total ordinary income dividends paid by the Fund qualify for the corporate dividends received deduction available to corporate shareholders.
16
A description of the policies and procedures that the Fund uses to determine how to vote proxies relating to portfolio securities is available, without charge, upon request, by visiting the Securities and Exchange Commission’s (“Commission”) website at www.sec.gov, or by calling 800-624-0197.
Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30th is available (i) without charge, upon request, by calling 800-624-0197; (ii) on the Allianz Variable Insurance Products Trust’s website at https://www.allianzlife.com; and (iii) on the Commission’s website at http://www.sec.gov.
The Fund files complete Schedules of Portfolio Holdings with the Commission for the first and third quarters of each fiscal year on Form N-Q. Schedules of Portfolio Holdings for the Fund in this report are available without charge on the Commission’s website at http://www.sec.gov, or may be reviewed and copied at the Commission’s Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 800-SEC-0330.
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Approval of Investment Advisory and Subadvisory Agreements (Unaudited)
The Allianz Variable Insurance Products Trust (the “Trust”) is a manager-of-managers fund. That means that the Trust’s Manager (“Allianz Investment Management LLC”) is responsible for monitoring the various Subadvisers that have day-to-day responsibility for the decisions made for each of the Trust’s investment portfolios. The Trust’s Manager is responsible for determining, in the first instance, which investment advisers to consider recommending for selection as a Subadviser.
In reviewing the services provided by the Manager and the terms of the investment management agreement, the Board receives and reviews information related to the Manager’s experience and expertise in the variable insurance marketplace. Currently, the Funds are offered only through variable annuities and variable life insurance policies, and not in the retail fund market. In addition, the Board receives information regarding the Manager’s expertise with regard to portfolio diversification and asset allocation requirements within variable insurance products issued by Allianz Life Insurance Company of North America and its subsidiary, Allianz Life Insurance Company of New York. Currently, the Funds are offered only through Allianz Life and Allianz of New York variable products.
The Trust’s Manager has adopted policies and procedures to assist it in the process of analyzing each potential Subadviser with expertise in particular asset classes for purposes of making the recommendation that a specific investment adviser be selected. The Trust’s Board reviews and considers the information provided by the Manager in deciding which investment advisers to select. After an investment adviser becomes a Subadviser, a similarly rigorous process is instituted by the Manager to monitor the investment performance and other responsibilities of the Subadviser. The Manager reports to the Trust’s Board on its analysis at the regular meetings of the Board, which are held at least quarterly. Where warranted, the Manager will add or remove a particular Subadviser from a “watch” list that it maintains. Watch list criteria include, for example: (a) Fund performance over various time periods; (b) Fund risk issues, such as changes in key personnel involved with Fund management, changes in investment philosophy or process, or “capacity” concerns; and (c) organizational risk issues, such as regulatory, compliance or legal concerns, or changes in the ownership of the Subadviser. The Manager may place a Fund on the watch list for other reasons, and if so, will explain its rationale to the Trustees. Funds which are on the watch list are subject to special scrutiny of the Manager and the Board of Trustees. Funds may be removed from such watch list, if for example, performance improves or regulatory matters are satisfactorily resolved. However, in some situations where Funds which have been on the watch list, the Manager has recommended the retention of a new Subadviser, and the Board of Trustees has subsequently approved new Subadvisory Agreements with such Subadvisers.
In assessing the Manager’s and Subadvisers’ (collectively, the “Advisory Organizations”), performance of their obligations, the Board considers whether there has occurred a circumstance or event that would constitute a reason for it to not renew an advisory contract. In this regard, the Board is mindful of the potential disruption of a Fund’s operations and various risks, uncertainties and other effects that could occur as a result of a decision to terminate or not renew a contract.
As required by the Investment Company Act of 1940 (“1940 Act”), the Trust’s Board has reviewed and approved the Trust’s Investment Management Agreement with the Manager (the “Advisory Agreement”) and portfolio management agreements (the “Subadvisory Agreements”) with the Subadvisers. The Board’s decision to approve these contracts reflects the exercise of its business judgment on whether to approve new arrangements and continue the existing arrangements. During its review of these contracts, the Board considers many factors, among the most material of which are: the Fund’s investment objectives and long term performance; the Advisory Organizations’ management philosophy, personnel, and processes, including their compliance history and the adequacy of their compliance processes; the preferences and expectations of Fund shareholders (and underlying contract owners) and their relative sophistication; the continuing state of competition in the mutual fund industry; and comparable fees in the mutual fund industry.
The Board also considers the compensation and benefits received by the Advisory Organizations. This includes fees received for services provided to the Fund by affiliated persons of the Advisory Organizations and research services received by the Advisory Organizations from brokers that execute Fund trades, as well as advisory fees. The Board considered the fact that: (1) the Manager and the Trust are parties to an Administrative Service Agreement, a Compliance Services Agreement, and a Chief Compliance Officer Agreement, under which the Manager is compensated by the Trust for performing certain administrative and compliance services including providing an employee of the Manager or one of its affiliates to act as the Trust’s Chief Compliance Officer; and (2) Allianz Life Financial Services, LLC, an affiliated person of the Manager, is a registered securities broker-dealer and receives (along with its affiliated persons) payments made by the Trust pursuant to Rule 12b-1.
The Board is aware that various courts have interpreted provisions of the 1940 Act and have indicated in their decisions that the following factors may be relevant to an adviser’s compensation: the nature and quality of the services provided by the adviser, including the performance of the fund; the adviser’s cost of providing the services; the extent to which the adviser may realize “economies of scale” as the fund grows larger; any indirect benefits that may accrue to the adviser and its affiliates as a result of the adviser’s relationship with the fund; performance and expenses of comparable funds; and the extent to which the independent Board members are fully informed about all facts bearing on the adviser’s service and fee. The Trust’s Board is aware of these factors and takes them into account in its review of the Trust’s advisory contracts.
The Board considered and weighed these circumstances in light of its experience in governing the Trust and working with the Advisory Organizations on matters relating to the Funds, and is assisted in its deliberations by the advice of legal counsel to the Independent Trustees. In this regard, the Board requests and receives a significant amount of information about the Funds and the Advisory Organizations. Some of this information is provided at each regular meeting of the Board; additional information is provided in connection with the particular meeting or meetings at which the Board’s formal review of an advisory contract occurs. In between regularly scheduled meetings, the Board may receive information on particular matters as the need arises. Thus, the Board’s evaluation of an advisory contract is informed by reports covering such matters as: an Advisory Organization’s investment philosophy, personnel, and processes; the Fund’s short- and long-term performance (in absolute terms as well as in relationship to its benchmark(s), certain competitor or “peer group” funds and similar funds managed by the particular Subadviser), and comments on the reasons for performance; the Fund’s expenses (including the advisory fee itself and the overall expense structure of the Fund, both in absolute terms and relative to similar and/or competing funds, with due regard for contractual or voluntary expense limitations); the use and allocation of brokerage commissions derived from trading the Fund’s portfolio securities; the nature and extent of the advisory and other services provided to the Fund by the Advisory Organizations and their affiliates; compliance and audit reports concerning the Funds and the companies that service them; and relevant developments in the mutual fund industry and how the Funds and/or Advisory Organizations are responding to them.
The Board also receives financial information about Advisory Organizations, including reports on the compensation and benefits the Advisory Organizations derive from their relationships with the Funds. These reports cover not only the fees under the advisory contracts, but also fees, if any, received for providing other services to the Funds. The reports also discuss any indirect or “fall out” benefits an Advisory Organization may derive from its relationship with the Funds.
The Advisory and Subadvisory Agreements (collectively, the “Agreements”) were most recently considered at Board of Trustees meetings held in the fall of 2013. Information relevant to the approval of such Agreements was considered at a telephonic Board of Trustees meeting on October 16, 2013, and at an “in person” Board of Trustees meeting held October 22, 2013. The Agreements were approved at the Board meeting of October 22, 2013. At such meeting the Board also approved an Expense Limitation Agreement between the Manager and the Trust for the period ending April 30, 2015. In connection with such meetings, the Trustees requested and evaluated extensive materials from the Manager, including performance and expense information for other investment companies with similar investment objectives derived from data compiled by an independent third party provider and other sources believed to be reliable by the Manager. Prior to voting, the Trustees reviewed the proposed approval/continuance of the Agreements with management and with experienced counsel who are independent of the Manager and received a memorandum from such counsel discussing the legal standards for their consideration of the proposed approvals/continuances. The independent (“disinterested”) Trustees also discussed the proposed approvals/continuances in a private session with such counsel at which no representatives of the Manager were present. In reaching their determinations relating to the approval and/or continuance of
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the Agreements, in respect of each Fund, the Trustees considered all factors they believed relevant. The Board based its decision to approve the Agreements on the totality of the circumstances and relevant factors, and with a view to past and future long-term considerations. Not all of the factors and considerations discussed above and below are necessarily relevant to every Fund, and the Board did not assign relative weights to factors discussed herein or deem any one or group of them to be controlling in and of themselves.
An SEC Rule requires that shareholder reports include a discussion of certain factors relating to the selection of investment advisers and the approval of advisory fees. The “factors” enumerated by the SEC are set forth below in italics, as well as the Board’s conclusions regarding such factors:
(1) The nature, extent and quality of services provided by the Manager and Subadvisers. The Trustees noted that the Manager, subject to the control of the Board of Trustees, administers each Fund’s business and other affairs. Under the Advisory Agreement, the Manager holds the sole and exclusive responsibility to provide, or arrange for other to provide, the management of the Funds’ assets and the placement of orders for the purchase and sale of the securities of the Funds. As the Trust is a manager of managers fund, the Manager is authorized, under the Advisory Agreement, to retain one or more Subadvisers for each Fund to handle day-to-day management of the Funds’ investment portfolios; the Manager is responsible for determining, in the first instance, which investment advisers to recommend to the Board of Trustees for selection as a Subadviser. The Trustees were aware that, notwithstanding the retention of the Subadvisers to handle day-to-day portfolio management, the Manager remains responsible for substantial other matters, including continuously monitoring compliance by each Subadviser with the investment policies and restrictions of the respective Funds, with such other limitations or directions of the Board of Trustees, and with all legal requirements under federal or state law or regulation. The Manager also is responsible primarily to provide statistical information and other data to the Trustees regarding the Funds’ portfolio investments and to make available to the Funds’ administrator such information as is necessary for the conduct of its duties.
The Trustees also noted that the Manager provides the Trust and each Fund with such administrative and other services (exclusive of, and in addition to, any such services provided by any others retained by the Trust on behalf of the Funds) and executive and other personnel as are necessary for the operation of the Trust and the Funds. Except for the Trust’s Chief Compliance Officer, the Manager pays all of the compensation of Trustees and officers of the Trust who are employees of the Manager or its affiliates.
The Trustees considered the scope and quality of services provided by the Manager and the Subadvisers and noted that the scope of such services provided had expanded as a result of recent regulatory and other developments. The Trustees noted that, for example, the Manager and Subadvisers are responsible for maintaining and monitoring their own compliance programs, and these compliance programs are continuously refined and enhanced in light of new regulatory requirements. The Trustees considered the capabilities and resources which the Manager has dedicated to performing services on behalf of the Trust and its Funds. The quality of administrative and other services, including the Manager’s role in coordinating the activities of the Trust’s other service providers, also were considered. The Trustees concluded that, overall, they were satisfied with the nature, extent and quality of services provided (and expected to be provided) to the Trust and to each of the Funds under the Agreements.
(2) The investment performance of the Funds, the Manager and the Subadvisers. In connection with every in-person quarterly Board of Trustees meeting, Trustees receive extensive information on the performance results of each of the Funds. This includes, for example, performance information on all of the Funds for the previous quarter, and previous one, three and five-year periods, and since inception. (For Funds which have been in existence for less than five years, Trustees may receive performance information on comparable funds managed by the particular Subadviser for periods prior to the creation of a particular Fund.) Such performance information includes information on absolute total return, performance versus Subadvisers’ comparable fund(s), performance versus the appropriate benchmark(s), and performance versus peer groups. For example, in connection with the Board of Trustees meetings held September 10-11, 2013, the Manager reported that for the three year period ended June 30, 2013, 12 Funds were in the top 40%, eight were in the middle 20% and eight were in the bottom 40%, and for the one year period ended June 30, 2013, 8 Funds were in the top 40%, seven were in the middle 20%, and 14 were in the bottom 40%. The Manager also reported that for the five year period ended June 30, 2013, 10 Funds were in the top 40%, four were in the middle 20%, and six were in the bottom 40%. At the Board of Trustees meeting held October 22, 2013, the Trustees determined that the overall investment performance of the Funds was acceptable.
(3) The costs of services to be provided and profits to be realized by the Manager and the Subadvisers and their affiliates from their relationship with the Funds. The Manager has supplied information to the Board of Trustees pertaining to the level of investment advisory fees to which the Funds are subject. The Manager has agreed to temporarily “cap” Fund expenses at certain levels, and information is provided to Trustees setting forth “contractual” advisory fees and “actual” fees after taking expense caps into account. Based upon the information provided, the “actual” advisory fees payable by the Funds overall are generally comparable to the average level of fees paid by Fund peer groups. For the 30 Funds reviewed by the Board of Trustees in the fall of 2013, 27 Funds paid “actual” advisory fees in a percentage amount within the 65th percentile or lower for each Fund’s applicable category. The Trustees recognized that it is difficult to make comparisons of advisory fees because there are variations in the services that are included in the fees paid by other funds. The Board has concluded that the advisory fees to be paid to the Manager by the Funds are not unreasonable.
The Manager has also supplied information to the Board of Trustees pertaining to total Fund expenses (which includes advisory fees, the 25 basis point 12b-1 fee paid by the Funds, and other Fund expenses). As noted above, the Manager has agreed to “cap” Fund expenses at certain levels. Based upon the information provided, the overall total expense ratio ranking in 2013 for the 30 Funds was as follows: (1) 28 of the Funds had total expense rankings below the 65th percentile (with 20 Funds at or below the 50th percentile); (2) the AZL Russell 1000 Value Fund had a total expense ranking in the 66th percentile; the Manager reported that there is only a limited peer group for such Fund; and (3) the AZL Morgan Stanley Global Real Estate Fund had a total expense ranking in the 72nd percentile; it was reported by the Manager that there is only a limited peer group for such Fund, such Fund’s expense ratio has declined, and such Fund’s expense ratio is comparable to funds of similar size.
The Manager has committed to providing the Funds with a high quality of service and working to reduce Fund expenses over time, particularly as the Funds grow larger. The Trustees concluded therefore that the expense ratios of the Funds were not unreasonable.
The Manager provided information concerning the profitability of the Manager’s investment advisory activities for the period from 2011 through June 30, 2013. The Trustees recognized that it is difficult to make comparisons of profitability from investment company advisory agreements because comparative information is not generally publicly available and is affected by numerous factors, including the structure of the particular adviser, the types of funds it manages, its business mix, numerous assumptions regarding allocation of expenses and the adviser’s capital structure and cost of capital. In considering profitability information, the Trustees considered the possible effect of certain fall-out benefits to the Manager and its affiliates. The Trustees focused on profitability of the Manager’s relationships with the Funds before taxes and distribution expenses. The Trustees recognized that the Manager should, in the abstract, be entitled to earn a reasonable level of profits for the services it provides to each Fund and, based on their review, concluded that they were satisfied that the Manager’s level of profitability from its relationship with the Funds was not excessive.
The Manager, on behalf of the Board of Trustees, endeavored to obtain information on the profitability of each Subadviser in connection with its relationship with the Fund or Funds which it subadvises. The Manager was unable to obtain meaningful profitability information from some of the unaffiliated Subadvisers. The Manager assured the Board of Trustees that the Agreements with the Subadvisers which are not affiliated with it were negotiated on an “arm’s length” basis, so that arguably, such profitability information should be less relevant. The Trustees were also provided with certain information on the profitability for the Subadviser which is affiliated with the Manager. Trustees recognized the difficulty of allocating costs to multiple advisory accounts and products of a large advisory organization. Based upon the information provided, the Trustees determined that there was no evidence that the level of such profitability attributable to subadvising the Funds was excessive.
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(4) and (5) The extent to which economies of scale would be realized as the Funds grow, and whether fee levels reflect these economies of scale. The Trustees noted that most of the advisory fee schedules for the Funds do not contain breakpoints that reduce the fee rate on assets above specified levels, although certain Subadvisory Agreements have such “breakpoints.” The Trustees recognized that breakpoints may be an appropriate way for the Manager to share its economies of scale, if any, with Funds that have substantial assets. However, they also recognized that there may not be a direct relationship between any economies of scale realized by Funds and those realized by the Manager as assets increase. The Trustees do not believe there is a uniform methodology for establishing breakpoints that give effect to Fund-specific service provided by the Manager. The Trustees noted that in the fund industry as a whole, as well as among funds similar to the Funds, there is no uniformity or pattern in the fees and asset levels at which breakpoints (if any) apply. Depending on the age, size, and other characteristics of a particular fund and its manager’s cost structure, different conclusions can be drawn as to whether there are economies of scale to be realized at any particular level of assets, notwithstanding the intuitive conclusion that such economies exist, or will be realized at some level of total assets. Moreover, because different managers have different cost structures and service models, it is difficult to draw meaningful conclusions from the breakpoints that may have been adopted by other funds. The Trustees also noted that the advisory agreements for many funds do not have breakpoints at all, or if breakpoints exist, they may be at asset levels significantly greater than those of the individual Funds. The Trustees also noted that the total assets in all of the Funds as of June 30, 2013 were approximately $12.85 billion, and that no single non-money market Fund had assets in excess of $616 million.
The Trustees noted that the Manager has agreed to temporarily “cap” Fund expenses at certain levels, which has the effect of reducing expenses as would the implementation of advisory fee breakpoints. The Manager has committed to continue to consider the continuation of fee “caps” and/or advisory fee breakpoints as the Funds grow larger. The Board receives quarterly reports on the level of Fund assets. It expects to consider whether or not to approve the Agreements at a meeting to be held prior to December 31, 2014, and will at that time, or prior thereto, consider: (a) the extent to which economies of scale can be realized, and (b) whether the advisory fee should be modified to reflect such economies of scale, if any.
Having taken these factors into account, the Trustees concluded that the absence of breakpoints in certain of the Funds’ advisory fee rate schedules was acceptable under each Fund’s circumstances.
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Information about the Board of Trustees and Officers (Unaudited)
The Trust is managed by the Trustees in accordance with the laws of the state of Delaware governing business trusts. There are currently eight Trustees, two of whom are “interested persons” of the Trust within the meaning of that term under the 1940 Act. The Trustees and Officers of the Trust, their addresses, ages, their positions held with the Trust, their terms of office with the Trust and length of time served, their principal occupation(s) during the past five years, the number of portfolios in the Trust they oversee, and their other directorships held are as follows:
Non-Interested Trustees(1)
Name, Address, and Age | Positions Held with VIP Trust and FOF Trust | Term of Office(2)/Length of Time Served | Principal Occupation(s) During Past 5 Years | Number of Portfolios Overseen for VIP Trust and FOF Trust | Other Directorships Held Outside the AZL Fund Complex | |||||
Peter R. Burnim, Age 66 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/07 | Chairman, Argus Investment Strategies Fund Ltd., February 2013 to present; Managing Director, iQ Venture Advisors, LLC. 2005 to 2012; Chairman, Northstar Group Holdings Ltd. Bermuda, 2011 to present; Expert Witness, Massachusetts Department of Revenue, 2011 to 2012; Executive Vice President, Northstar Companies, 2002 to 2005; Senior Officer, Citibank and Citicorp for over 25 years | 41 | Argus Group Holdings; Northstar Group Holdings, NRIL, Sterling Centrecorp Inc.; Highland Financial Holdings; and Bank of Bermuda NY | |||||
Peggy L. Ettestad, Age 56 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/07 | Managing Director, Red Canoe Management Consulting LLC, 2008 to present; Senior Managing Director, Residential Capital LLC, 2003 to 2008; Chief Operations Officer, Transamerica Reinsurance 2002 to 2003 | 41 | Luther College | |||||
Roger Gelfenbien, Age 70 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 10/99 | Retired; Partner of Accenture 1983 to 1999 | 41 | Virtus Funds (8 Funds) | |||||
Claire R. Leonardi, Age 58 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/04 | Chief Executive Officer, Connecticut Innovations, Inc., 2012 to present; General Partner, Fairview Capital, L.P., 1994 to 2012 | 41 | The Natural History Museum of the Adirondacks | |||||
Dickson W. Lewis, Age 65 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/04 | Retired; Consultant to Lifetouch National School Studios; Vice President/General Manager, Yearbooks & Canada-Lifetouch National School Studios, 2006 to 2013; Vice President/General Manager of Jostens, Inc., 2002 to 2006; Senior Vice President of Fortis Group, 1997 to 2002 | 41 | None | |||||
Peter W. McClean, Age 69 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/04 | Retired; President and CEO of Measurisk, LLC, 2001 to 2003; Chief Risk Management Officer at Bank of Bermuda Ltd., 1996 to 2001 | 41 | PNMAC Opportunity Fund; Northeast Bank; and FHI | |||||
Arthur C. Reeds III, Age 69 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 10/99 | Retired; Senior Investment Officer, Hartford Foundation for Public Giving, 2000 to 2003; Chairman, Chief Executive and President of Conning Corp., 1999 to 2000; Investment Consultant, 1997 to 1999 | 41 | Connecticut Water Service, Inc. |
Interested Trustees(3)
Name, Address, and Age | Positions Held with VIP Trust and FOF Trust | Term of Office(2)/Length of Time Served | Principal Occupation(s) During Past 5 Years | Number of Portfolios Overseen for VIP Trust and FOF Trust | Other Directorships Held Outside the AZL Fund Complex | |||||
Robert DeChellis, Age 46 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 3/08 | President and CEO, Allianz Life Financial Services, LLC, 2007 to present | 41 | None | |||||
Brian Muench, Age 43 5701 Golden Hills Drive | Trustee | Since 6/11 | President, Allianz Investment Management LLC, November 2010 to present; Vice President, Allianz Life, April 2011 to present; Vice President, Advisory Management, Allianz Investment Management LLC from December 2005 to November 2010 | 41 | None |
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Officers
Name, Address, and Age | Positions Held with VIP and VIP FOF Trust | Term of Office(2)/Length of Time Served | Principal Occupation(s) During Past 5 Years | |||
Brian Muench, Age 43 5701 Golden Hills Drive Minneapolis, MN 55416 | President | Since 11/10 | President, Allianz Investment Management LLC from November 2010, to present; Vice President, Allianz Life from April 2011 to present; Vice President, Allianz Investment Management LLC from December 2005 to November 2010. | |||
Michael Radmer, Age 68 Dorsey & Whitney LLP, Suite 1500 50 South Sixth Street Minneapolis, MN 55402-1498 | Secretary | Since 2/02 | Partner, Dorsey and Whitney LLP since 1976. | |||
Ty Edwards, Age 47 Citi Fund Services Ohio, Inc. 3435 Stelzer Road Columbus, OH 43219 | Treasurer, Principal Accounting Officer and Principal Financial Officer | Since 4/10 | Senior Vice President, Financial Administration, Citi Fund Services Ohio, Inc., December 2009 to present; Director, Product Management, Columbia Management, April 2007 to April 2009; Deputy Treasurer, Columbia Funds and Director, Fund Administration, Columbia Management, January 2006 to April 2007. | |||
Christopher R. Pheiffer, Age 45(4) 5701 Golden Hills Drive Minneapolis, MN 55416 | Chief Compliance Officer(5) and Anti-Money Laundering Compliance Officer | Since 2/14 (interim) | Deputy Chief Compliance Officer of the Trusts, 2007-2014. |
(1) | Member of the Audit Committee. |
(2) | Indefinite. |
(3) | Is an “interested person”, as defined by the 1940 Act, due to employment by Allianz. |
(4) | Stephen G. Simon, previously the Chief Compliance Officer of the Trusts, resigned all of his positions with Allianz effective February 21, 2014. Mr. Pheiffer, previously the Deputy Chief Compliance Officer of the Trusts, has been named Chief Compliance Officer of the Trusts on an interim basis while a search for a permanent replacement is conducted. |
(5) | The Manager and the Trust are parties to a Chief Compliance Officer Agreement under which the Manager is compensated by the Trust for providing an employee of the Manager or one of its affiliates to act as the Trust’s Chief Compliance Officer. The Chief Compliance Officer and Anti-Money Laundering Compliance Officer is not considered a corporate officer or executive employee of the Trust. |
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The Allianz VIP Funds are distributed by Allianz Life Financial Services, LLC. These Funds are not FDIC Insured. | ANNRPT1213 2/14 |
AZL® Invesco International Equity Fund
Annual Report
December 31, 2013
Table of Contents
Management Discussion and Analysis
Page 1
Expense Examples and Portfolio Composition
Page 3
Schedule of Portfolio Investments
Page 4
Statement of Assets and Liabilities
Page 7
Statement of Operations
Page 7
Statements of Changes in Net Assets
Page 8
Financial Highlights
Page 9
Notes to the Financial Statements
Page 10
Report of Independent Registered Public Accounting Firm
Page 15
Other Federal Income Tax Information
Page 16
Other Information
Page 17
Approval of Investment Advisory and Subadvisory Agreements
Page 18
Information about the Board of Trustees and Officers
Page 20
This report is submitted for the general information of the shareholder of the Fund. The report is not authorized for distribution to prospective investors in the Fund unless preceded or accompanied by an effective prospectus, which contains details concerning the sales charges and other pertinent information.
AZL® Invesco International Equity Fund Review (unaudited)
Allianz Investment Management LLC serves as the Manager for the AZL® Invesco International Equity Fund and Invesco Advisers, Inc. serves as Subadviser to the Fund.
What factors affected the Fund’s performance during the year ended December 31, 2013?
For the year ended December 31, 2013, the AZL® Invesco International Equity Fund returned 18.78%, that compared to a 23.29% total return for its benchmark, the MSCI EAFE Index1.
The U.S. and global equity markets enjoyed generally strong returns for the period ended December 31, 2013. Despite a contentious battle over extending the nation’s debt ceiling and a two-week federal government shutdown in October, the U.S. economy grew throughout 2013. European equity markets rose during the period due to reduced political uncertainty and improving macroeconomic data, such as the eurozone officially exiting recession in late summer. Japanese equities also rose sharply, based on investors’ hopes that the new government led by Prime Minister Shinzo Abe, along with new leadership at the Bank of Japan, would finally arrest deflation. However, those gains slowed later in the year when optimism about potential reforms waned and concern emerged over political developments in China. By contrast, emerging economies had a difficult year, with slowing world trade and abrupt corrections to their equity, bond, and currency markets after the U.S. Federal Reserve indicated mid-year that it might reduce its bond-buying program.
In this environment, we continued to construct the portfolio with a bottom-up approach, selecting stocks on an individual basis. The portfolio posted positive returns in nine of the 10 invested sectors, however underperformed the benchmark during the year. The Fund’s single-digit cash position throughout the year contributed to that underperformance, as equity markets rebounded during the period. Stock selection and underweight positions in the financials and telecommunication services sectors detracted from relative performance. Weak stock selection in the energy sector was a relative detractor as well.*
Geographically, overweight exposure to Latin America and off-benchmark exposure to Brazil and Canada hurt relative results. Additionally, the Fund’s underweight exposure to Japan also detracted from relative performance. Although this market delivered strong results over the reporting period, it was difficult to identify Japanese companies that met our criteria for earnings, quality, and valuation.*
The Fund’s relative performance benefited from overweight exposure to and strong stock selection in the information technology sector. Specifically, holdings in the Internet software and services industry boosted performance. A significant underweight position in the materials sector, the benchmark index’s worst performing sector, also boosted relative results. The Fund’s holdings in the media, multiline retail, and hotels, restaurants, and leisure industries were particularly strong. Geographically, European holdings were the primary driver of relative performance due to strong stock selection. The United Kingdom, Sweden, and Hong Kong were top country-level contributors to relative performance, also driven chiefly by stock selection.*
Past performance does not guarantee future results.
* | The Fund’s portfolio composition is subject to change. There is no guarantee that any sectors mentioned will continue to perform well or that securities in such sectors will be held by the Fund in the future. The information contained in this commentary is for informational purposes only and should not be construed as a recommendation to purchase or sell securities in the sector mentioned. The Fund’s holdings and weightings are as of December 31, 2013. |
1 | The Morgan Stanley Capital International, Europe, Australasia and Far East (“MSCI EAFE”) Index is a free float-adjusted market capitalization-weighted index that is designed to measure the equity market performance of developed markets, excluding the U.S. & Canada. Investors cannot invest directly in an index. |
1
AZL® Invesco International Equity Fund Review (unaudited)
Fund Objective
The Fund’s investment objective is to seek to provide long-term growth of capital. This objective may be changed by the Trustees of the Fund without shareholder approval. The Fund seeks to achieve its objective by investing at least 80% of its net assets, plus any borrowings for investment purposes, in a diversified portfolio of equity securities of foreign issuers that are considered by the Fund’s subadviser to have strong earnings growth.
Investment Concerns
Equity securities (stocks) are more volatile and carry more risk than other forms of investments, including investments in high-grade fixed income securities. The net asset value per share of this Fund will fluctuate as the value of the securities in the portfolio changes.
International investing may involve risk of capital loss from unfavorable fluctuations in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations.
Emerging market investing may be subject to additional economic, political, liquidity, and currency risks not associated with more developed countries.
The value of convertible securities may be affected by interest rates, default by the issuer on principal or interest payments, and the value of underlying stock into which the securities may be converted.
For a complete description of these and other risks associated with investing in a mutual Fund, please refer to the Fund’s prospectus.
Growth of $10,000 Investment
The chart above represents a comparison of a hypothetical investment in the Fund versus a similar investment in the Fund’s benchmark, and represents the reinvestment of dividends and capital gains in the Fund.
Average Annual Total Returns as of December 31, 2013
1 | 3 | 5 | 10 | |||||||||||||
Year | Year | Year | Year | |||||||||||||
AZL® Invesco International Equity Fund | 18.78 | % | 8.36 | % | 13.97 | % | 8.82 | % | ||||||||
MSCI EAFE Index (gross of withholding taxes) | 23.29 | % | 8.66 | % | 12.96 | % | 7.39 | % | ||||||||
MSCI EAFE Index (net of withholding taxes) | 22.78 | % | 8.17 | % | 12.44 | % | 6.91 | % |
Past performance does not guarantee future results. The performance data quoted represents past performance and current returns may be lower or higher. The investment return and principal value will fluctuate so that an investor’s shares, when redeemed may be worth more or less than the original cost. To obtain performance information current to the most recent month end, please visit www.Allianzlife.com.
Expense Ratio1 | Gross | |||
AZL® Invesco International Equity Fund | 1.27 | % |
The above expense ratio is based on the current Fund prospectus dated April 29, 2013. The Manager voluntarily reduced the management fee to 0.85%. The Manager and the Fund have entered into a written contract limiting operating expenses, excluding certain expenses (such as interest expense and Acquired Fund fees and expenses), to 1.45% through April 30, 2015. Additional information pertaining to the December 31, 2013 expense ratios can be found in the financial highlights.
1 | Acquired Fund Fees and Expenses are incurred indirectly by the Fund through the valuation of the Fund’s investments in the other investment companies. Accordingly, Acquired Fees and Expenses affect the Fund’s total returns. Because these fees and expenses are not included in the Fund’s financial highlights, the Fund’s total annual fund operating expenses do not correlate to the ratios of expenses to average net assets shown in the financial highlights table. Without Acquired Fund Fees and expenses the Fund’s gross ratio would be 1.25%. |
The total return of the Fund does not reflect the effect of any insurance charges, the annual maintenance fee or the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. Such charges, fees and tax payments would reduce the performance quoted. |
The Fund’s performance is measured against the Morgan Stanley Capital International, Europe, Australasia and Far East (“MSCI EAFE”) Index, which is an unmanaged free float-adjusted market capitalization-weighted index that is designed to measure the equity market performance of developed markets, excluding the U.S. & Canada. The Index noted as “gross of withholding taxes” does not reflect the deduction of fees associated with a mutual fund, such as investment management and fund accounting fees. The Index noted as “net of withholding taxes” reflects the reinvestment of dividends after the deduction of withholding taxes, using (for international indices) a tax rate applicable to non-resident institutional investors who do not benefit from double taxation treaties. The Fund’s performance reflects the deduction of fees for services provided to the Fund. Investors cannot invest directly in an index. |
2
AZL Invesco International Equity Fund
(Unaudited)
As a shareholder of the AZL Invesco International Equity Fund (the “Fund”), you incur ongoing costs, including management fees, distribution fees, and other Fund expenses. These examples are intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. Please note that the expenses shown in each table do not reflect expenses that apply to the subaccount or the insurance contract. If the expenses that apply to the subaccount of the insurance contract were included, your costs would have been higher.
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the periods presented below.
The Actual Expense table below provides information about actual account values and actual expenses. You may use the information below, 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 table under the heading entitled “Expenses Paid During Period” to estimate the expenses you paid on your account during this period.
Beginning 7/1/13 | Ending Account Value 12/31/13 | Expenses Paid During Period 7/1/13 - 12/31/13* | Annualized Expense Ratio During Period 7/1/13 - 12/31/13 | |||||||||||||||||
AZL Invesco International Equity Fund | $ | 1,000.00 | $ | 1,170.90 | $ | 6.46 | 1.18 | % |
The Hypothetical Expense table below provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.
Beginning Account Value 7/1/13 | Ending Account Value 12/31/13 | Expenses Paid During Period 7/1/13 - 12/31/13* | Annualized Expense Ratio During Period 7/1/13 - 12/31/13 | |||||||||||||||||
AZL Invesco International Equity Fund | $ | 1,000.00 | $ | 1,019.26 | $ | 6.01 | 1.18 | % |
* | Expenses are equal to the average account value over the period, multiplied by the Fund’s annualized expense ratio, multiplied by 184/365 (to reflect the one half year period). |
Portfolio Composition
(Unaudited)
Investments | Percent of net assets | ||||
Consumer Discretionary | 23.6 | % | |||
Financials | 14.2 | ||||
Information Technology | 13.4 | ||||
Industrials | 10.6 | ||||
Consumer Staples | 9.7 | ||||
Health Care | 8.9 | ||||
Energy | 7.9 | ||||
Materials | 3.2 | ||||
Telecommunication Services | 1.9 | ||||
Utilities | 1.0 | ||||
|
| ||||
Total Common Stock | 94.4 | ||||
Money Market | 5.3 | ||||
|
| ||||
Total Investment Securities | 99.7 | ||||
Net other assets (liabilities) | 0.3 | ||||
|
| ||||
Net Assets | 100.0 | % | |||
|
|
3
AZL Invesco International Equity Fund
Schedule of Portfolio Investments
December 31, 2013
Shares | Fair Value | |||||||
| Common Stocks (93.2%): |
| ||||||
| Air Freight & Logistics (1.1%): |
| ||||||
170,934 | Deutsche Post AG | $ | 6,232,720 | |||||
|
| |||||||
| Auto Components (2.4%): |
| ||||||
94,200 | DENSO Corp. | 4,981,581 | ||||||
32,983 | Hyundai Mobis Co., Ltd. | 9,184,348 | ||||||
|
| |||||||
14,165,929 | ||||||||
|
| |||||||
| Automobiles (1.4%): |
| ||||||
140,200 | Toyota Motor Corp. | 8,533,137 | ||||||
|
| |||||||
| Beverages (3.7%): |
| ||||||
87,774 | Anheuser-Busch InBev NV | 9,358,081 | ||||||
84,658 | Carlsberg A/S, Class B | 9,405,759 | ||||||
29,073 | Fomento Economico Mexicano SAB de C.V., ADR | 2,845,375 | ||||||
|
| |||||||
21,609,215 | ||||||||
|
| |||||||
| Biotechnology (0.7%): |
| ||||||
67,873 | CSL, Ltd. | 4,188,695 | ||||||
|
| |||||||
| Capital Markets (2.9%): |
| ||||||
884,417 | Aberdeen Asset Management plc | 7,364,206 | ||||||
138,346 | Julius Baer Group, Ltd. | 6,672,843 | ||||||
193,677 | UBS AG, Registered Shares | 3,690,643 | ||||||
|
| |||||||
17,727,692 | ||||||||
|
| |||||||
| Chemicals (1.9%): |
| ||||||
44,041 | Agrium, Inc. | 4,029,248 | ||||||
18,425 | Syngenta AG, Registered Shares | 7,346,940 | ||||||
|
| |||||||
11,376,188 | ||||||||
|
| |||||||
| Commercial Banks (5.3%): |
| ||||||
1,476,589 | Akbank T.A.S. | 4,639,125 | ||||||
605,740 | Banco Bradesco SA, ADR | 7,589,922 | ||||||
9,259,000 | Industrial & Commercial Bank of China | 6,295,524 | ||||||
199,605 | Swedbank AB, A Shares | 5,632,645 | ||||||
386,352 | United Overseas Bank, Ltd. | 6,515,628 | ||||||
|
| |||||||
30,672,844 | ||||||||
|
| |||||||
| Commercial Services & Supplies (1.1%): |
| ||||||
804,554 | Brambles, Ltd. | 6,574,282 | ||||||
|
| |||||||
| Communications Equipment (0.7%): |
| ||||||
351,039 | Telefonaktiebolaget LM Ericsson, B Shares | 4,300,013 | ||||||
|
| |||||||
| Containers & Packaging (1.3%): |
| ||||||
782,121 | Amcor, Ltd. | 7,394,484 | ||||||
53,644 | Orora, Ltd.* | 55,550 | ||||||
|
| |||||||
7,450,034 | ||||||||
|
| |||||||
| Diversified Financial Services (5.1%): |
| ||||||
2,160,000 | Bm&f Bovespa SA | 10,139,616 | ||||||
84,660 | Deutsche Boerse AG | 7,029,528 | ||||||
215,655 | Investor AB, B Shares | 7,443,439 | ||||||
125,152 | Kinnevik Investment AB, Class B | 5,810,655 | ||||||
|
| |||||||
30,423,238 | ||||||||
|
| |||||||
| Diversified Telecommunication Services (1.2%): |
| ||||||
420,426 | Deutsche Telekom AG, Registered Shares | 7,190,063 | ||||||
|
| |||||||
| Electrical Equipment (2.7%): |
| ||||||
339,186 | ABB, Ltd. | 8,963,599 | ||||||
78,147 | Schneider Electric SA | 6,858,530 | ||||||
|
| |||||||
15,822,129 | ||||||||
|
| |||||||
| Electronic Equipment, Instruments & Components (1.0%): |
| ||||||
13,685 | Keyence Corp. | 5,861,749 | ||||||
|
|
Shares | Fair Value | |||||||
| Common Stocks, continued |
| ||||||
| Food Products (2.6%): |
| ||||||
109,463 | Nestle SA, Registered Shares | $ | 8,037,707 | |||||
172,121 | Unilever NV | 6,948,890 | ||||||
168,678 | Unilever plc*# | — | ||||||
|
| |||||||
14,986,597 | ||||||||
|
| |||||||
| Health Care Equipment & Supplies (1.2%): |
| ||||||
500,792 | Smith & Nephew plc | 7,140,856 | ||||||
|
| |||||||
| Hotels, Restaurants & Leisure (4.0%): |
| ||||||
884,031 | Compass Group plc | 14,172,358 | ||||||
1,116,000 | Galaxy Entertainment Group, Ltd.* | 10,021,385 | ||||||
|
| |||||||
24,193,743 | ||||||||
|
| |||||||
| Industrial Conglomerates (3.0%): |
| ||||||
677,000 | Hutchison Whampoa, Ltd. | 9,248,214 | ||||||
919,841 | Keppel Corp., Ltd. | 8,180,047 | ||||||
|
| |||||||
17,428,261 | ||||||||
|
| |||||||
| Insurance (0.9%): |
| ||||||
13,282 | Fairfax Financial Holdings, Ltd. | 5,303,671 | ||||||
|
| |||||||
| Internet Software & Services (1.9%): |
| ||||||
63,178 | Baidu, Inc., ADR* | 11,238,103 | ||||||
|
| |||||||
| IT Services (1.8%): |
| ||||||
252,247 | Amadeus IT Holding SA, A Shares | 10,803,924 | ||||||
|
| |||||||
| Life Sciences Tools & Services (0.0%): |
| ||||||
160,422 | Art Advanced Research Technologies, Inc.*(a) | — | ||||||
165,100 | Art Advanced Research Technologies, Inc.*(a) | — | ||||||
50,591 | Art Advanced Research Technologies, Inc.*(a) | — | ||||||
|
| |||||||
— | ||||||||
|
| |||||||
| Machinery (1.8%): |
| ||||||
38,100 | Fanuc, Ltd. | 6,987,975 | ||||||
167,500 | Komatsu, Ltd. | 3,410,098 | ||||||
|
| |||||||
10,398,073 | ||||||||
|
| |||||||
| Media (10.7%): |
| ||||||
755,717 | British Sky Broadcasting Group plc | 10,569,425 | ||||||
252,490 | Grupo Televisa SA, ADR | 7,640,347 | ||||||
571,917 | Informa plc | 5,433,682 | ||||||
122,359 | Publicis Groupe | 11,231,405 | ||||||
1,125,255 | Reed Elsevier plc | 16,769,948 | ||||||
519,547 | WPP plc | 11,920,798 | ||||||
|
| |||||||
63,565,605 | ||||||||
|
| |||||||
| Multiline Retail (0.8%): |
| ||||||
52,715 | Next plc | 4,757,951 | ||||||
|
| |||||||
| Multi-Utilities (1.0%): |
| ||||||
989,886 | Centrica plc | 5,699,982 | ||||||
|
| |||||||
| Oil, Gas & Consumable Fuels (7.9%): |
| ||||||
176,770 | Cenovus Energy, Inc. | 5,059,606 | ||||||
4,504,000 | CNOOC, Ltd. | 8,425,408 | ||||||
235,088 | EnCana Corp. | 4,245,352 | ||||||
243,202 | Royal Dutch Shell plc, B Shares | 9,150,999 | ||||||
332,556 | Suncor Energy, Inc. | 11,660,282 | ||||||
149,481 | Total SA | 9,162,332 | ||||||
|
| |||||||
47,703,979 | ||||||||
|
| |||||||
| Pharmaceuticals (7.0%): |
| ||||||
80,975 | Novartis AG, Registered Shares | 6,482,283 | ||||||
31,422 | Novo Nordisk A/S, B Shares | 5,789,505 |
Continued
4
AZL Invesco International Equity Fund
Schedule of Portfolio Investments
December 31, 2013
Shares | Fair Value | |||||||
| Common Stocks, continued |
| ||||||
| Pharmaceuticals, continued |
| ||||||
43,504 | Roche Holding AG | $ | 12,198,327 | |||||
161,845 | Shire plc | 7,625,315 | ||||||
223,727 | Teva Pharmaceutical Industries, Ltd., ADR | 8,966,978 | ||||||
|
| |||||||
41,062,408 | ||||||||
|
| |||||||
| Road & Rail (0.9%): |
| ||||||
89,458 | Canadian National Railway Co. | 5,100,816 | ||||||
|
| |||||||
| Semiconductors & Semiconductor Equipment (4.6%): |
| ||||||
192,684 | Avago Technologies, Ltd. | 10,191,057 | ||||||
7,768 | Samsung Electronics Co., Ltd. | 10,154,182 | ||||||
401,105 | Taiwan Semiconductor Manufacturing Co., Ltd., ADR | 6,995,271 | ||||||
|
| |||||||
27,340,510 | ||||||||
|
| |||||||
| Software (3.4%): |
| ||||||
234,580 | CGI Group, Inc., Class A* | 7,849,518 | ||||||
148,268 | SAP AG | 12,711,510 | ||||||
|
| |||||||
20,561,028 | ||||||||
|
| |||||||
| Specialty Retail (1.7%): |
| ||||||
3,579,000 | Belle International Holdings, Ltd. | 4,164,173 | ||||||
888,920 | Kingfisher plc | 5,681,920 | ||||||
|
| |||||||
9,846,093 | ||||||||
|
| |||||||
| Textiles, Apparel & Luxury Goods (1.4%): |
| ||||||
67,265 | Adidas AG | 8,574,413 | ||||||
|
|
Shares | Fair Value | |||||||
| Common Stocks, continued |
| ||||||
| Tobacco (3.4%): |
| ||||||
219,896 | British American Tobacco plc | $ | 11,796,606 | |||||
207,981 | Imperial Tobacco Group plc | 8,070,394 | ||||||
|
| |||||||
19,867,000 | ||||||||
|
| |||||||
| Wireless Telecommunication Services (0.7%): |
| ||||||
376,500 | China Mobile, Ltd. | 3,919,332 | ||||||
|
| |||||||
| Total Common Stocks (Cost $384,841,237) | 551,620,273 | ||||||
|
| |||||||
| Preferred Stock (1.2%): |
| ||||||
| Automobiles (1.2%): |
| ||||||
26,047 | Volkswagen AG, Preferred Shares | 7,317,356 | ||||||
|
| |||||||
| Total Preferred Stock (Cost $4,096,639) | 7,317,356 | ||||||
|
| |||||||
Contracts, Shares, Notional Amount or Principal Amount | Fair Value | |||||||
| Unaffiliated Investment Company (5.3%): |
| ||||||
31,478,286 | Dreyfus Treasury Prime Cash Management Fund, Institutional Shares, 0.00%(b) | 31,478,286 | ||||||
|
| |||||||
| Total Unaffiliated Investment Company (Cost $31,478,286) | 31,478,286 | ||||||
|
| |||||||
| Total Investment Securities (Cost $420,416,162)(c) — 99.7% | 590,415,915 | ||||||
| Net other assets (liabilities) — 0.3% | 1,929,419 | ||||||
|
| |||||||
| Net Assets — 100.0% | $ | 592,345,334 | |||||
|
|
Percentages indicated are based on net assets as of December 31, 2013.
ADR—American Depositary Receipt
* | Non-income producing security. |
# | Security issued in connection with a pending litigation settlement. |
(a) | Security was valued in good faith pursuant to procedures approved by the Board of Trustees as of December 31, 2013. The total of all such securities represent 0.00% of the net assets of the fund. |
(b) | The rate represents the effective yield at December 31, 2013. |
(c) | See Federal Tax Information listed in the Notes to the Financial Statements. |
Continued
5
AZL Invesco International Equity Fund
Schedule of Portfolio Investments
December 31, 2013
The following represents the concentrations by country of risk (based on the domicile of the security issuer) relative to the total fair value of investments as of December 31, 2013:
Country | Percentage | |||
Australia | 3.1 | % | ||
Belgium | 1.6 | % | ||
Brazil | 3.0 | % | ||
Canada | 7.3 | % | ||
Cayman Islands | 1.9 | % | ||
Denmark | 2.6 | % | ||
France | 4.6 | % | ||
Germany | 8.3 | % | ||
Hong Kong | 7.1 | % | ||
Ireland (Republic of) | 2.0 | % | ||
Israel | 1.5 | % | ||
Japan | 5.0 | % | ||
Mexico | 1.8 | % | ||
Netherlands | 1.2 | % | ||
Republic of Korea (South) | 3.3 | % | ||
Singapore | 4.2 | % | ||
Spain | 1.8 | % | ||
Sweden | 3.9 | % | ||
Switzerland | 9.1 | % | ||
Taiwan | 1.2 | % | ||
Turkey | 0.8 | % | ||
United Kingdom | 19.4 | % | ||
United States | 5.3 | % | ||
|
| |||
100.0 | % | |||
|
|
See accompanying notes to the financial statements.
6
AZL Invesco International Equity Fund
Statement of Assets and Liabilities
December 31, 2013
Assets: | |||||
Investment securities, at cost | $ | 420,416,162 | |||
|
| ||||
Investment securities, at value | $ | 590,415,915 | |||
Cash | 48,171 | ||||
Interest and dividends receivable | 342,909 | ||||
Foreign currency, at value (cost $1,710,301) | 1,651,398 | ||||
Receivable for investments sold | 915,642 | ||||
Reclaims receivable | 221,357 | ||||
|
| ||||
Total Assets | 593,595,392 | ||||
|
| ||||
Liabilities: | |||||
Payable for investments purchased | 322,041 | ||||
Payable for capital shares redeemed | 289,823 | ||||
Manager fees payable | 414,837 | ||||
Administration fees payable | 21,259 | ||||
Distribution fees payable | 122,010 | ||||
Custodian fees payable | 45,794 | ||||
Administrative and compliance services fees payable | 2,293 | ||||
Trustee fees payable | 17 | ||||
Other accrued liabilities | 31,984 | ||||
|
| ||||
Total Liabilities | 1,250,058 | ||||
|
| ||||
Net Assets | $ | 592,345,334 | |||
|
| ||||
Net Assets Consist of: | |||||
Capital | $ | 435,239,714 | |||
Accumulated net investment income/(loss) | 5,509,413 | ||||
Accumulated net realized gains/(losses) from investment transactions | (18,361,442 | ) | |||
Net unrealized appreciation/(depreciation) on investments | 169,957,649 | ||||
|
| ||||
Net Assets | $ | 592,345,334 | |||
|
| ||||
Shares of beneficial interest (unlimited number of shares authorized, no par value) | 31,815,417 | ||||
Net Asset Value (offering and redemption price per share) | $ | 18.62 | |||
|
|
For the Year Ended December 31, 2013
Investment Income: | |||||
Dividends | $ | 14,401,008 | |||
Interest | 199 | ||||
Income from securities lending | 348,932 | ||||
Foreign withholding tax | (1,384,491 | ) | |||
|
| ||||
Total Investment Income | 13,365,648 | ||||
|
| ||||
Expenses: | |||||
Manager fees | 4,909,974 | ||||
Administration fees | 186,798 | ||||
Distribution fees | 1,363,881 | ||||
Custodian fees | 165,478 | ||||
Administrative and compliance services fees | 10,593 | ||||
Trustee fees | 27,439 | ||||
Professional fees | 40,268 | ||||
Shareholder reports | 30,061 | ||||
Other expenses | 19,722 | ||||
|
| ||||
Total expenses before reductions | 6,754,214 | ||||
Less expenses voluntarily waived/reimbursed by the Manager | (272,784 | ) | |||
Less expenses paid indirectly | (13,317 | ) | |||
|
| ||||
Net expenses | 6,468,113 | ||||
|
| ||||
Net Investment Income/(Loss) | 6,897,535 | ||||
|
| ||||
Realized and Unrealized Gains/(Losses) on Investments: | |||||
Net realized gains/(losses) on securities transactions | 19,529,354 | ||||
Change in net unrealized appreciation/depreciation on investments | 68,272,980 | ||||
|
| ||||
Net Realized/Unrealized Gains/(Losses) on Investments | 87,802,334 | ||||
|
| ||||
Change in Net Assets Resulting From Operations | $ | 94,699,869 | |||
|
|
See accompanying notes to the financial statements.
7
Statements of Changes in Net Assets
AZL Invesco International Equity Fund | ||||||||||
For the Year Ended December 31, 2013 | For the Year Ended December 31, 2012 | |||||||||
Change in Net Assets: | ||||||||||
Operations: | ||||||||||
Net investment income/(loss) | $ | 6,897,535 | $ | 5,553,695 | ||||||
Net realized gains/(losses) on investment transactions | 19,529,354 | 230,345 | ||||||||
Change in unrealized appreciation/depreciation on investments | 68,272,980 | 66,186,545 | ||||||||
|
|
|
| |||||||
Change in net assets resulting from operations | 94,699,869 | 71,970,585 | ||||||||
|
|
|
| |||||||
Dividends to Shareholders: | ||||||||||
From net investment income | (6,852,326 | ) | (8,911,624 | ) | ||||||
|
|
|
| |||||||
Change in net assets resulting from dividends to shareholders | (6,852,326 | ) | (8,911,624 | ) | ||||||
|
|
|
| |||||||
Capital Transactions: | ||||||||||
Proceeds from shares issued | 32,525,953 | 47,401,586 | ||||||||
Proceeds from dividends reinvested | 6,852,326 | 8,911,624 | ||||||||
Value of shares redeemed | (44,765,774 | ) | (69,015,486 | ) | ||||||
|
|
|
| |||||||
Change in net assets resulting from capital transactions | (5,387,495 | ) | (12,702,276 | ) | ||||||
|
|
|
| |||||||
Change in net assets | 82,460,048 | 50,356,685 | ||||||||
Net Assets: | ||||||||||
Beginning of period | 509,885,286 | 459,528,601 | ||||||||
|
|
|
| |||||||
End of period | $ | 592,345,334 | $ | 509,885,286 | ||||||
|
|
|
| |||||||
Accumulated net investment income/(loss) | $ | 5,509,413 | $ | 5,524,873 | ||||||
|
|
|
| |||||||
Share Transactions: | ||||||||||
Shares issued | 1,914,600 | 3,197,343 | ||||||||
Dividends reinvested | 395,631 | 585,906 | ||||||||
Shares redeemed | (2,630,848 | ) | (4,543,523 | ) | ||||||
|
|
|
| |||||||
Change in shares | (320,617 | ) | (760,274 | ) | ||||||
|
|
|
|
See accompanying notes to the financial statements.
8
AZL Invesco International Equity Fund
(Selected data for a share of beneficial interest outstanding throughout the periods indicated)
Year Ended December 31, | |||||||||||||||||||||||||
2013 | 2012 | 2011 | 2010 | 2009 | |||||||||||||||||||||
Net Asset Value, Beginning of Period | $ | 15.87 | $ | 13.97 | $ | 15.24 | $ | 13.61 | $ | 10.31 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Investment Activities: | |||||||||||||||||||||||||
Net Investment Income/(Loss) | 0.22 | 0.16 | 0.28 | 0.12 | 0.08 | ||||||||||||||||||||
Net Realized and Unrealized Gains/(Losses) on Investments | 2.74 | 2.00 | (1.40 | ) | 1.58 | 3.45 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Total from Investment Activities | 2.96 | 2.16 | (1.12 | ) | 1.70 | 3.53 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Dividends to Shareholders From: | |||||||||||||||||||||||||
Net Investment Income | (0.21 | ) | (0.26 | ) | (0.15 | ) | (0.07 | ) | (0.23 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Total Dividends | (0.21 | ) | (0.26 | ) | (0.15 | ) | (0.07 | ) | (0.23 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Net Asset Value, End of Period | $ | 18.62 | $ | 15.87 | $ | 13.97 | $ | 15.24 | $ | 13.61 | |||||||||||||||
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Total Return(a) | 18.78 | % | 15.56 | % | (7.32 | )%(b) | 12.52 | %(c) | 34.33 | % | |||||||||||||||
Ratios to Average Net Assets/Supplemental Data: | |||||||||||||||||||||||||
Net Assets, End of Period (000’s) | $ | 592,345 | $ | 509,885 | $ | 459,529 | $ | 556,045 | $ | 405,230 | |||||||||||||||
Net Investment Income/(Loss) | 1.26 | % | 1.12 | % | 1.72 | % | 1.04 | % | 1.09 | % | |||||||||||||||
Expenses Before Reductions(d) | 1.24 | % | 1.25 | % | 1.27 | % | 1.28 | % | 1.32 | % | |||||||||||||||
Expenses Net of Reductions | 1.19 | % | 1.20 | % | 1.19 | % | 1.15 | % | 1.28 | % | |||||||||||||||
Expenses Net of Reductions, Excluding Expenses Paid Indirectly(e) | 1.19 | % | 1.20 | % | 1.19 | % | 1.15 | % | 1.28 | % | |||||||||||||||
Portfolio Turnover Rate | 28 | % | 27 | % | 30 | % | 39 | % | 35 | %(f) |
(a) | The returns include reinvested dividends and fund level expenses, but exclude insurance contract charges. If these charges were included, the returns would have been lower. |
(b) | During the year ended December 31, 2011, Invesco Advisers, Inc. reimbursed $13,257 to the Fund related to violation of certain investment policies and limitations. The corresponding impact to the return was less than 0.005%. |
(c) | During the year ended December 31, 2010, Invesco Advisers, Inc. reimbursed $45,566 to the Fund related to violation of certain investment policies and limitations. The corresponding impact to the return was 0.01%. |
(d) | Excludes fee reductions. If such fee reductions had not occurred, the ratios would have been as indicated. |
(e) | Expenses net of reductions excludes expenses paid indirectly, pursuant to a “commission recapture” program, under which brokers remit a portion of the brokerage commission which is used to pay certain Fund expenses. See note 2 in the Notes to the Financial Statements. |
(f) | Cost of purchases and proceeds from sales of portfolio securities incurred to realign the Fund’s portfolio after a fund merger are excluded from the portfolio turnover rate. If such amounts had not been excluded, the portfolio turnover rate would have been 77%. |
See accompanying notes to the financial statements.
9
AZL Invesco International Equity Fund
Notes to the Financial Statements
December 31, 2013
1. Organization
The Allianz Variable Insurance Products Trust (the “Trust”) was organized as a Delaware statutory trust on July 13, 1999. The Trust is a diversified open-end management investment company registered under the Investment Company Act of 1940. The Trust consists of 29 separate investment portfolios (collectively, the “Funds”), of which one is included in this report, the AZL Invesco International Equity Fund (the “Fund”), and 28 are presented in separate reports.
The Trust is authorized to issue an unlimited number of shares of the Fund without par value. Shares of the Fund are available through the variable annuity contracts and variable life insurance policies offered through the separate accounts of participating insurance companies.
Under the Trust’s organizational documents, its officers and trustees are indemnified against certain liabilities arising out of the performance of their duties to the Fund. In addition, in the normal course of business, the Fund may enter into contracts with its vendors and others that provide for general indemnifications. The Fund’s maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Fund. However, based on experience, the Fund expects the risk of loss to be remote.
2. Significant Accounting Policies
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. The policies conform with U.S. generally accepted accounting principles (“U.S. GAAP”). The preparation of financial statements requires management to make certain 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 increases and decreases in net assets from operations during the reporting period. Actual results could differ from those estimates.
Security Valuation
The Fund records its investments at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between willing market participants at the measurement date. The valuation techniques used to determine fair value are further described in Note 4 below.
Investment Transactions and Investment Income
Investment transactions are recorded not later than on the business day following trade date. However, for financial reporting purposes, investment transactions are accounted for on trade date. Net realized gains and losses on investments sold and on foreign currency transactions are recorded on the basis of identified cost. Interest income is recorded on the accrual basis and includes, where applicable, the amortization of premiums or accretion of discounts. Dividend income is recorded on the ex-dividend date except in the case of foreign securities, in which case dividends are recorded as soon as such information becomes available.
Real Estate Investment Trusts
The Fund may own shares of real estate investment trusts (“REITs”) which report information on the source of their distributions annually. Certain distributions received from REITs during the year, which are known to be a return of capital, are recorded as a reduction to the cost of the individual REIT.
Foreign Currency Translation
The accounting records of the Fund are maintained in U.S. dollars. Foreign currency amounts are translated into U.S. dollars at the current rate of exchange to determine the fair value of investments, assets and liabilities. Purchases and sales of securities, and income and expenses are translated at the prevailing rate of exchange on the respective dates of such transactions. The Fund does not isolate that portion of the results of operations resulting from changes in foreign exchange rates on investments from fluctuations arising from changes in market prices of securities held. Such fluctuations are included in the net realized and unrealized gain or loss on investments and foreign currencies. Income received by the Fund from sources within foreign countries may be subject to withholding and other income or similar taxes imposed by such countries. The Funds accrue such taxes, as applicable, based on their current interpretation of tax rules in the foreign markets in which they invest.
Dividends to Shareholders
Dividends to shareholders are recorded on the ex-dividend date. The Fund distributes its dividends from net investment income and net realized capital gains, if any, on an annual basis. The amount of dividends from net investment income and from net realized gains is determined in accordance with federal income tax regulations, which may differ from U.S. GAAP. These “book/tax” differences are either temporary or permanent in nature. To the extent these differences are permanent in nature (e.g., return of capital, net operating loss, reclassification of certain market discounts, gain/loss, paydowns, and distributions), such amounts are reclassified within the composition of net assets based on their federal tax-basis treatment; temporary differences (e.g., wash sales and post October losses) do not require reclassification. Dividends to shareholders that exceed net investment income and net realized gains for tax purposes are reported as distributions of capital.
Expense Allocation
Expenses directly attributable to the Fund are charged directly to the Fund, while expenses attributable to more than one Fund are allocated among the respective Funds based upon relative net assets or some other reasonable method. Expenses which are attributable to more than one Trust are allocated across the Allianz Variable Insurance Products and Allianz Variable Insurance Products Fund of Funds Trusts based upon relative net assets or another reasonable basis. Allianz Investment Management LLC (the “Manager”), serves as the investment manager for the Trust and the Allianz Variable Insurance Products Fund of Funds Trust.
Securities Lending
To generate additional income, the Fund may lend up to 33 1/3% of its assets pursuant to agreements requiring that the loan be continuously secured by any combination of cash, U.S. government or U.S. government agency securities, equal initially to at least 102% of the fair value plus accrued interest on the securities loaned (105% for foreign
10
AZL Invesco International Equity Fund
Notes to the Financial Statements
December 31, 2013
securities). The borrower of securities is at all times required to post collateral to the Fund in an amount equal to 100% of the fair value of the securities loaned based on the previous day’s fair value of the securities loaned, marked-to-market daily. Any collateral shortfalls are adjusted the next business day. The Fund bears all of the gains and losses on such investments. The Fund receives payments from borrowers equivalent to the dividends and interest that would have been earned on securities lent while simultaneously seeking to earn income on the investment of cash collateral received. In extremely low interest rate environments, the broker rebate fee may exceed the interest earned or the cash collateral which would result in a loss to the Fund. The investment of cash collateral deposited by the borrower is subject to inherent market risks such as interest rate risk, credit risk, liquidity risk, and other risks that are present in the market, and as such, the value of these investments may not be sufficient, when liquidated, to repay the borrower when the loaned security is returned. There may be risks of delay in recovery of the securities or even loss of rights in the collateral should the borrower of the securities fail financially. However, loans will be made only to borrowers, such as broker-dealers, banks or institutional borrowers of securities, deemed by the Manager to be of good standing and credit worthy and when in its judgment, the consideration which can be earned currently from such securities loans justifies the attendant risks. Loans are subject to termination by the Trust or the borrower at any time, and are, therefore, not considered to be illiquid investments. Securities on loan at December 31, 2013 are presented on the Fund’s Schedule of Portfolio Investments. The average outstanding amount of securities on loan was $11.1 million for the year ended December 31, 2013.
Cash collateral received in connection with securities lending is invested in the Allianz Variable Insurance Products Securities Lending Collateral Trust (the “Securities Lending Collateral Trust”) managed by The Dreyfus Corporation, an affiliate of the Custodian and Securities Lending Agent. The Securities Lending Collateral Trust invests in short-term investments that have a remaining maturity of 397 days or less as calculated in accordance with Rule 2a-7 under the 1940 Act. The Fund paid securities lending fees of $34,504 during the year ended December 31, 2013. These fees have been netted against “Income from securities lending” on the Statement of Operations.
Commission Recapture
Certain Funds of the Trust participate in a commission recapture program. The Fund will utilize the recaptured commissions to pay for, in whole or part, certain expenses of the Fund, excluding investment advisory fees. Any amounts received by the Fund, if applicable, are disclosed as “Expenses paid indirectly” on the Statement of Operations.
Effective January 6, 2014, the Manager, on behalf of the Trust, requested the Fund cease participation in the program until further notice.
3. Related Party Transactions
The Manager provides investment advisory and management services for the Fund. The Manager has retained an independent money management organization (the “Subadviser”), to make investment decisions on behalf of the Fund. Pursuant to a portfolio management agreement with Invesco Advisers, Inc. (“Invesco”), Invesco provides investment advisory services as the Subadviser for the Fund subject to the general supervision of the Trustees and the Manager. The Manager is entitled to a fee, computed daily and paid monthly, based on the average daily net assets of the Fund. Expenses incurred by the Fund for investment advisory and management services are reflected on the Statement of Operations as “Manager fees.” For its services, the Subadviser is entitled to a fee payable by the Manager. The Manager has contractually agreed to waive fees and reimburse the Fund to limit the annual expenses, excluding interest expense (e.g., cash overdraft fees), taxes, brokerage commissions, other expenditures that are capitalized in accordance with U.S. GAAP and other extraordinary expenses not incurred in the ordinary course of the Fund’s business, based on the daily net assets of the Fund, through April 30, 2015.
For the year ended December 31, 2013, the annual rate due to the Manager and the annual expense limit were as follows:
Annual Rate* | Annual Expense Limit | |||||||||
AZL Invesco International Equity Fund | 0.90 | % | 1.45 | % |
* | The Manager voluntarily reduced the management fee to 0.85% on all assets. The Manager reserves the right to increase the management fee to the amount shown in the table above at any time. |
Any amounts contractually waived or reimbursed by the Manager in a particular fiscal year will be subject to repayment by the Fund to the Manager to the extent that from time to time through the next three fiscal years the repayment will not cause the Fund’s expenses to exceed the lesser of the stated limit at the time of the waiver or the current stated limit. Any amounts recouped by the Manager during the year are reflected on the Statement of Operations as “Recoupment of prior expenses reimbursed by the Manager.” At December 31, 2013, there were no remaining contractual reimbursements that are subject to repayment by the Fund in subsequent years.
In addition, the Manager may voluntarily waive or reimburse additional fees in order to maintain more competitive expense ratios. Any voluntary waivers or reimbursements are not subject to repayment in subsequent years. Information on the total amount waived/reimbursed by the Manager or repaid to the Manager by the Fund during the year can be found on the Statement of Operations.
Pursuant to separate agreements between the Funds and the Manager, the Manager provides a Chief Compliance Officer (“CCO”) and certain compliance oversight and regulatory filing services to the Trust. Under these agreements the Manager is entitled to an amount equal to a portion of the compensation and certain other expenses related to the individuals performing the CCO and compliance oversight services, as well as $75 per hour for time incurred in connection with the preparation and filing of certain documents with the Securities and Exchange Commission. The fees are paid to the Manager on a quarterly basis. The total expenses incurred by the Fund for these services are reflected on the Statement of Operations as “Administrative and compliance services fees.”
Citi Fund Services Ohio, Inc. (“Citi” or the “Administrator”), a wholly owned subsidiary of Citigroup, Inc., with which an officer of the Trust is affiliated, serves as the Trust’s administrator, transfer agent, and fund accountant, and assists the Trust in all aspects of its administration and operation. The Administrator is entitled to a Trust-wide asset-based fee, which is based on the following schedule: 0.05% of daily average net assets on the first $4 billion, 0.04% of daily average net assets on the next $2 billion, 0.02% of daily average net assets on the next $2 billion and 0.01% of daily average net assets over $8 billion. The overall Trust-wide fees are accrued daily and paid monthly and are subject to a minimum annual fee. In addition, the Administrator is entitled to annual account fees related to the transfer agency system, an annual fee for each additional class of shares of any Fund, certain annual fees in supporting fair value services, and a Trust-wide annual fee for providing infrastructure and support in implementing the written policies and procedures comprising the Fund’s compliance program. Fees payable to the Administrator are subject to certain reductions associated with services provided to new funds. The Administrator is also reimbursed for certain expenses incurred. The total expenses incurred by the Fund for these services are reflected on the Statement of Operations as “Administration fees.”
11
AZL Invesco International Equity Fund
Notes to the Financial Statements
December 31, 2013
Allianz Life Financial Services, LLC (“ALFS”), an affiliate of the Manager, serves as distributor of the Fund and receives 12b-1 fees directly from the Fund, plus a Trust-wide annual fee of $42,500, paid by the Manager from its profits and not by the Trust, for recordkeeping and reporting services.
The Trust has adopted a distribution and service plan in conformance with Rule 12b-1 of the 1940 Act. Pursuant to this plan, the Fund is authorized to pay certain fees for the sale and distribution of its shares and services provided to its shareholders at an annual rate not to exceed 0.25% of the Fund’s average daily net assets. These fees are reflected on the Statement of Operations as “Distribution fees.”
In addition, certain legal fees and expenses are paid to a law firm, Dorsey & Whitney LLP, of which the Secretary of the Fund is a partner. During the year ended December 31, 2013, $6,939 was paid from the Fund relating to these fees and expenses.
Certain Officers and Trustees of the Trust are affiliated with the Manager or the Administrator. Such Officers (except for the Trust’s CCO as noted above) and Trustees receive no compensation from the Trust for serving in their respective roles. For their service to the Trust and to the Allianz Variable Insurance Products Fund of Funds Trust, each non-interested Trustee receives a $139,000 annual Board retainer. In addition, the Trustees are reimbursed for certain expenses associated with attending Board meetings. Compensation to the Trustees is allocated between the Trust and the Allianz Variable Insurance Products Fund of Funds Trust in proportion to the assets under management of each trust. During the year ended December 31, 2013, actual Trustee compensation was $973,000 in total for both trusts.
At a meeting of the Board of Trustees on December 4, 2013, the Trustees approved a fee increase to the Officers and Trustees who are paid a fee for their services to the Trust and to the Allianz Variable Insurance Products Fund of Funds Trust. Effective January 1, 2014, each non-interested Trustee will receive a $163,000 annual retainer.
4. Investment Valuation Summary
The valuation techniques employed by the Fund, as described below, maximize the use of observable inputs and minimize the use of unobservable inputs in determining fair value. The inputs used for valuing the Fund’s investments are summarized in the three broad levels listed below:
— | Level 1 — quoted prices in active markets for identical assets |
— | Level 2 — other significant observable inputs (including quoted prices for similar securities, interest rates, prepayments speeds, credit risk, etc.) |
— | Level 3 — significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of investments) |
Changes in valuation techniques may result in transfers in or out of an assigned level within the disclosure hierarchy. The Fund determines transfers between fair value hierarchy levels at the reporting period end. The inputs or methodology used for valuing investments is not necessarily an indication of the risk associated with investing in those investments.
Security prices are generally provided by an independent third party pricing service approved by the Trust’s Board of Trustees (“Trustees”) as of the close of the New York Stock Exchange (“NYSE”) (generally 4:00 pm Eastern Time). Equity securities are valued at the last quoted sale price or, if there is no sale, the last quoted bid price is used for long securities and the last quoted ask price is used for securities sold short. Securities listed on NASDAQ Stock Market, Inc. (“NASDAQ”) are valued at the official closing price as reported by NASDAQ. In each of these situations, valuations are typically categorized as a Level 1 in the fair value hierarchy. Investments in open-end investment companies are valued at their respective net asset value as reported by such companies and are typically categorized as Level 1 in the fair value hierarchy.
Debt and other fixed income securities are generally valued at an evaluated bid price provided by an independent pricing source approved by the Trustees. To value debt securities, pricing services may use various pricing techniques which take into account appropriate factors such as market activity, yield, quality, coupon rate, maturity, type of issue, trading characteristics, call features, credit ratings and other data, as well as broker quotes. Short term securities of sufficient credit quality with sixty days or less remaining until maturity may be valued at amortized cost, which approximates fair value. In each of these situations, valuations are typically categorized as Level 2 in the fair value hierarchy.
Other assets and securities for which market quotations are not readily available, or are deemed unreliable are valued at fair value as determined in good faith by the Trustees or persons acting on the behalf of the Trustees. Fair value pricing may be used for significant events such as securities whose trading has been suspended, whose price has become stale or for which there is no currently available price at the close of the NYSE. Depending on the source and relative significance of valuation inputs, these instruments may be classified as Level 2 or Level 3 in the fair value hierarchy. The Fund utilizes a pricing service to assist in determining the fair value of securities when certain significant events occur that may affect the value of foreign securities.
In accordance with procedures adopted by the Trustees, fair value pricing may be used if events materially affecting the value of foreign securities occur between the time when the exchange on which they are traded closes and the time when the Fund’s net asset value is calculated. Management identifies possible fluctuation in international securities by monitoring the increase or decrease in the value of a designated benchmark index. In the event of an increase or decrease greater than predetermined levels, the Fund may use a systematic valuation model provided by an independent third party to fair value its international equity securities which are then typically categorized as Level 2 in the fair value hierarchy.
The following is a summary of the valuation inputs used as of December 31, 2013 in valuing the Fund’s investments based upon the three levels defined above:
Investment Securities: | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||
Common Stocks+ | ||||||||||||||||||||
Beverages | $ | 2,845,375 | $ | 18,763,840 | $ | — | $ | 21,609,215 | ||||||||||||
Chemicals | 4,029,248 | 7,346,940 | — | 11,376,188 | ||||||||||||||||
Commercial Banks | 7,589,922 | 23,082,922 | — | 30,672,844 | ||||||||||||||||
Containers & Packaging | 55,550 | 7,394,484 | — | 7,450,034 | ||||||||||||||||
Insurance | 5,303,671 | — | — | 5,303,671 | ||||||||||||||||
Internet Software & Services | 11,238,103 | — | — | 11,238,103 | ||||||||||||||||
Life Sciences Tools & Services | — | — | — | ^ | — | |||||||||||||||
Media | 7,640,347 | 55,925,258 | — | 63,565,605 | ||||||||||||||||
Oil, Gas & Consumable Fuels | 20,965,240 | 26,738,739 | — | 47,703,979 |
12
AZL Invesco International Equity Fund
Notes to the Financial Statements
December 31, 2013
Investment Securities: | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||
Pharmaceuticals | $ | 8,966,978 | $ | 32,095,430 | $ | — | $ | 41,062,408 | ||||||||||||
Road & Rail | 5,100,816 | — | — | 5,100,816 | ||||||||||||||||
Semiconductors & Semiconductor Equipment | 17,186,328 | 10,154,182 | — | 27,340,510 | ||||||||||||||||
Software | 7,849,518 | 12,711,510 | — | 20,561,028 | ||||||||||||||||
All Other Common Stocks | — | 258,635,872 | — | 258,635,872 | ||||||||||||||||
Preferred Stock+ | — | 7,317,356 | — | 7,317,356 | ||||||||||||||||
Unaffiliated Investment Company | 31,478,286 | — | — | 31,478,286 | ||||||||||||||||
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Total Investment Securities | $ | 130,249,382 | $ | 460,166,533 | $ | — | $ | 590,415,915 | ||||||||||||
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+ | For detailed industry descriptions, see the accompanying Schedule of Portfolio Investments. |
A reconciliation of assets in which Level 3 inputs are used in determining fair value, along with additional quantitative disclosures, are presented when there are significant Level 3 investments at the end of the period.
^ | Represents the interest in securities that were determined to have a value of zero at December 31, 2013. |
5. Security Purchases and Sales
For the year ended December 31, 2013, cost of purchases and proceeds from sales of securities (excluding securities maturing less than one year from acquisition) were as follows:
Purchases | Sales | |||||||||
AZL Invesco International Equity Fund | $ | 145,793,224 | $ | 139,069,545 |
6. Investment Risks
Emerging Markets Risk: Emerging markets may have less developed trading markets and exchanges which may make it more difficult to sell securities at an acceptable price and their prices may be more volatile than securities of companies in more developed markets. Settlements of trades may be subject to greater delays so that the Fund may not receive the proceeds of a sale of a security on a timely basis. Emerging countries may also have less developed legal and accounting systems and investments may be subject to greater risks of government restrictions, nationalization, or confiscation.
Foreign Securities and Currencies Risk: Investments in securities of foreign issuers carry certain risks not ordinarily associated with investments in securities of domestic issuers. Such risks include future political and economic developments, and the possible imposition of exchange controls or other foreign governmental laws and restrictions. In addition, with respect to certain countries, there is the possibility of expropriation of assets, confiscatory taxation, political or social instability or diplomatic developments which could adversely affect investments in those securities.
7. Federal Tax Information
It is the Fund’s policy to continue to comply with the requirements of the Internal Revenue Code under Subchapter M, applicable to regulated investment companies, and to distribute all of its taxable income, including any net realized gains on investments, to its shareholders. Therefore, no provision is made for federal income taxes.
Management of the Fund has reviewed tax positions taken in tax years that remain subject to examination by all major tax jurisdictions, including federal (i.e., the last four tax year ends and the interim tax period since then, as applicable). Management believes that there is no tax liability resulting from unrecognized tax benefits related to uncertain tax positions taken.
Cost for federal income tax purposes at December 31, 2013 is $427,689,318. The gross unrealized appreciation/ (depreciation) on a tax basis is as follows:
Unrealized appreciation | $ | 177,101,653 | |||
Unrealized depreciation | (14,375,056 | ) | |||
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| ||||
Net unrealized appreciation/(depreciation) | $ | 162,726,597 | |||
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As of the end of its tax year ended December 31, 2013, the Fund has capital loss carry forwards (“CLCFs”) as summarized in the tables below. CLCFs subject to expiration are applied as short-term capital loss regardless of whether the originating capital loss was short-term or long-term. CLCFs that are not subject to expiration must be utilized before those that are subject to expiration. The Board does not intend to authorize a distribution of any realized gain for the Fund until any applicable CLCF has been offset or expires.
CLCFs subject to expiration:
Expires 12/31/2016 | Expires 12/31/2017 | Total | |||||||||||||
AZL Invesco International Equity Fund | $ | 49,811 | $ | 14,096,888 | $ | 14,146,699 |
During the year ended December 31, 2013, the Fund utilized $18,167,077 in CLCFs to offset capital gains.
13
AZL Invesco International Equity Fund
Notes to the Financial Statements
December 31, 2013
The tax character of dividends paid to shareholders during the year ended December 31, 2013 were as follows:
Ordinary Income | Net Long-Term | Total Distributions(a) | |||||||||||||
AZL Invesco International Equity Fund | $ | 6,852,326 | $ | — | $ | 6,852,326 |
(a) | Total distributions paid may differ from the Statements of Changes in Net Assets because dividends are recognized when actually paid for tax purposes. |
The tax character of dividends paid to shareholders during the year ended December 31, 2012 was as follows:
Ordinary Income | Net Long-Term | Total Distributions(a) | |||||||||||||
AZL Invesco International Equity Fund | $ | 8,911,624 | $ | — | $ | 8,911,624 |
(a) | Total distributions paid may differ from the Statements of Changes in Net Assets because dividends are recognized when actually paid for tax purposes. |
As of December 31, 2013, the components of accumulated earnings on a tax basis were as follows:
Undistributed Ordinary Income | Undistributed Long-Term Capital Gains | Accumulated Capital and Other Losses | Unrealized Appreciation/ | Total Accumulated Earnings/ | |||||||||||||||||||||
AZL Invesco International Equity Fund | $ | 8,563,203 | $ | — | $ | (14,146,699 | ) | $ | 162,689,116 | $ | 157,105,620 |
(a) | The difference between book-basis and tax-basis unrealized appreciation/(depreciation) is attributable primarily to tax deferral of losses on wash sales and the mark to market of unrealized appreciation on passive foreign investment companies. |
8. Subsequent Events
Management has evaluated events and transactions subsequent to period end through the date the financial statements were issued, for purposes of recognition or disclosure in these financial statements and there are no subsequent events to report.
14
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Shareholders and Board of Trustees of
Allianz Variable Insurance Products Trust:
We have audited the accompanying statement of assets and liabilities of AZL Invesco International Equity Fund (the “Fund”) of the Allianz Variable Insurance Products Trust, including the schedule of portfolio investments, as of December 31, 2013, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the years in the two-year period then ended, and the financial highlights for each of the years in the five-year period then ended. These financial statements and financial highlights are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of December 31, 2013, by correspondence with the custodian and brokers or by other appropriate auditing procedures. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of the Fund as of December 31, 2013, the results of its operations for the year then ended, the changes in its net assets for each of the years in the two-year period then ended, and the financial highlights for each of the years in the five-year period then ended, in conformity with U.S. generally accepted accounting principles.
/s/KPMG LLP
Columbus, Ohio
February 25, 2014
15
A description of the policies and procedures that the Fund uses to determine how to vote proxies relating to portfolio securities is available, without charge, upon request, by visiting the Securities and Exchange Commission’s (“Commission”) website at www.sec.gov, or by calling 800-624-0197.
Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30th is available (i) without charge, upon request, by calling 800-624-0197; (ii) on the Allianz Variable Insurance Products Trust’s website at https://www.allianzlife.com; and (iii) on the Commission’s website at http://www.sec.gov.
The Fund files complete Schedules of Portfolio Holdings with the Commission for the first and third quarters of each fiscal year on Form N-Q. Schedules of Portfolio Holdings for the Fund in this report are available without charge on the Commission’s website at http://www.sec.gov, or may be reviewed and copied at the Commission’s Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 800-SEC-0330.
16
Approval of Investment Advisory and Subadvisory Agreements (Unaudited)
The Allianz Variable Insurance Products Trust (the “Trust”) is a manager-of-managers fund. That means that the Trust’s Manager (“Allianz Investment Management LLC”) is responsible for monitoring the various Subadvisers that have day-to-day responsibility for the decisions made for each of the Trust’s investment portfolios. The Trust’s Manager is responsible for determining, in the first instance, which investment advisers to consider recommending for selection as a Subadviser.
In reviewing the services provided by the Manager and the terms of the investment management agreement, the Board receives and reviews information related to the Manager’s experience and expertise in the variable insurance marketplace. Currently, the Funds are offered only through variable annuities and variable life insurance policies, and not in the retail fund market. In addition, the Board receives information regarding the Manager’s expertise with regard to portfolio diversification and asset allocation requirements within variable insurance products issued by Allianz Life Insurance Company of North America and its subsidiary, Allianz Life Insurance Company of New York. Currently, the Funds are offered only through Allianz Life and Allianz of New York variable products.
The Trust’s Manager has adopted policies and procedures to assist it in the process of analyzing each potential Subadviser with expertise in particular asset classes for purposes of making the recommendation that a specific investment adviser be selected. The Trust’s Board reviews and considers the information provided by the Manager in deciding which investment advisers to select. After an investment adviser becomes a Subadviser, a similarly rigorous process is instituted by the Manager to monitor the investment performance and other responsibilities of the Subadviser. The Manager reports to the Trust’s Board on its analysis at the regular meetings of the Board, which are held at least quarterly. Where warranted, the Manager will add or remove a particular Subadviser from a “watch” list that it maintains. Watch list criteria include, for example: (a) Fund performance over various time periods; (b) Fund risk issues, such as changes in key personnel involved with Fund management, changes in investment philosophy or process, or “capacity” concerns; and (c) organizational risk issues, such as regulatory, compliance or legal concerns, or changes in the ownership of the Subadviser. The Manager may place a Fund on the watch list for other reasons, and if so, will explain its rationale to the Trustees. Funds which are on the watch list are subject to special scrutiny of the Manager and the Board of Trustees. Funds may be removed from such watch list, if for example, performance improves or regulatory matters are satisfactorily resolved. However, in some situations where Funds which have been on the watch list, the Manager has recommended the retention of a new Subadviser, and the Board of Trustees has subsequently approved new Subadvisory Agreements with such Subadvisers.
In assessing the Manager’s and Subadvisers’ (collectively, the “Advisory Organizations”), performance of their obligations, the Board considers whether there has occurred a circumstance or event that would constitute a reason for it to not renew an advisory contract. In this regard, the Board is mindful of the potential disruption of a Fund’s operations and various risks, uncertainties and other effects that could occur as a result of a decision to terminate or not renew a contract.
As required by the Investment Company Act of 1940 (“1940 Act”), the Trust’s Board has reviewed and approved the Trust’s Investment Management Agreement with the Manager (the “Advisory Agreement”) and portfolio management agreements (the “Subadvisory Agreements”) with the Subadvisers. The Board’s decision to approve these contracts reflects the exercise of its business judgment on whether to approve new arrangements and continue the existing arrangements. During its review of these contracts, the Board considers many factors, among the most material of which are: the Fund’s investment objectives and long term performance; the Advisory Organizations’ management philosophy, personnel, and processes, including their compliance history and the adequacy of their compliance processes; the preferences and expectations of Fund shareholders (and underlying contract owners) and their relative sophistication; the continuing state of competition in the mutual fund industry; and comparable fees in the mutual fund industry.
The Board also considers the compensation and benefits received by the Advisory Organizations. This includes fees received for services provided to the Fund by affiliated persons of the Advisory Organizations and research services received by the Advisory Organizations from brokers that execute Fund trades, as well as advisory fees. The Board considered the fact that: (1) the Manager and the Trust are parties to an Administrative Service Agreement, a Compliance Services Agreement, and a Chief Compliance Officer Agreement, under which the Manager is compensated by the Trust for performing certain administrative and compliance services including providing an employee of the Manager or one of its affiliates to act as the Trust’s Chief Compliance Officer; and (2) Allianz Life Financial Services, LLC, an affiliated person of the Manager, is a registered securities broker-dealer and receives (along with its affiliated persons) payments made by the Trust pursuant to Rule 12b-1.
The Board is aware that various courts have interpreted provisions of the 1940 Act and have indicated in their decisions that the following factors may be relevant to an adviser’s compensation: the nature and quality of the services provided by the adviser, including the performance of the fund; the adviser’s cost of providing the services; the extent to which the adviser may realize “economies of scale” as the fund grows larger; any indirect benefits that may accrue to the adviser and its affiliates as a result of the adviser’s relationship with the fund; performance and expenses of comparable funds; and the extent to which the independent Board members are fully informed about all facts bearing on the adviser’s service and fee. The Trust’s Board is aware of these factors and takes them into account in its review of the Trust’s advisory contracts.
The Board considered and weighed these circumstances in light of its experience in governing the Trust and working with the Advisory Organizations on matters relating to the Funds, and is assisted in its deliberations by the advice of legal counsel to the Independent Trustees. In this regard, the Board requests and receives a significant amount of information about the Funds and the Advisory Organizations. Some of this information is provided at each regular meeting of the Board; additional information is provided in connection with the particular meeting or meetings at which the Board’s formal review of an advisory contract occurs. In between regularly scheduled meetings, the Board may receive information on particular matters as the need arises. Thus, the Board’s evaluation of an advisory contract is informed by reports covering such matters as: an Advisory Organization’s investment philosophy, personnel, and processes; the Fund’s short- and long-term performance (in absolute terms as well as in relationship to its benchmark(s), certain competitor or “peer group” funds and similar funds managed by the particular Subadviser), and comments on the reasons for performance; the Fund’s expenses (including the advisory fee itself and the overall expense structure of the Fund, both in absolute terms and relative to similar and/or competing funds, with due regard for contractual or voluntary expense limitations); the use and allocation of brokerage commissions derived from trading the Fund’s portfolio securities; the nature and extent of the advisory and other services provided to the Fund by the Advisory Organizations and their affiliates; compliance and audit reports concerning the Funds and the companies that service them; and relevant developments in the mutual fund industry and how the Funds and/or Advisory Organizations are responding to them.
The Board also receives financial information about Advisory Organizations, including reports on the compensation and benefits the Advisory Organizations derive from their relationships with the Funds. These reports cover not only the fees under the advisory contracts, but also fees, if any, received for providing other services to the Funds. The reports also discuss any indirect or “fall out” benefits an Advisory Organization may derive from its relationship with the Funds.
The Advisory and Subadvisory Agreements (collectively, the “Agreements”) were most recently considered at Board of Trustees meetings held in the fall of 2013. Information relevant to the approval of such Agreements was considered at a telephonic Board of Trustees meeting on October 16, 2013, and at an “in person” Board of Trustees meeting held October 22, 2013. The Agreements were approved at the Board meeting of October 22, 2013. At such meeting the Board also approved an Expense Limitation Agreement between the Manager and the Trust for the period ending April 30, 2015. In connection with such meetings, the Trustees requested and evaluated extensive materials from the Manager, including performance and expense information for other investment companies with similar investment objectives derived from data compiled by an independent third party provider and other sources believed to be reliable by the Manager. Prior to voting, the Trustees reviewed the proposed approval/continuance of the Agreements with management and with experienced counsel who are independent of the Manager and received a memorandum from such counsel discussing the legal standards for their consideration of the proposed approvals/continuances. The independent (“disinterested”) Trustees also discussed the proposed approvals/continuances in a private session with such counsel at which no representatives of the Manager were present. In reaching their determinations relating to the approval and/or continuance of
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the Agreements, in respect of each Fund, the Trustees considered all factors they believed relevant. The Board based its decision to approve the Agreements on the totality of the circumstances and relevant factors, and with a view to past and future long-term considerations. Not all of the factors and considerations discussed above and below are necessarily relevant to every Fund, and the Board did not assign relative weights to factors discussed herein or deem any one or group of them to be controlling in and of themselves.
An SEC Rule requires that shareholder reports include a discussion of certain factors relating to the selection of investment advisers and the approval of advisory fees. The “factors” enumerated by the SEC are set forth below in italics, as well as the Board’s conclusions regarding such factors:
(1) The nature, extent and quality of services provided by the Manager and Subadvisers. The Trustees noted that the Manager, subject to the control of the Board of Trustees, administers each Fund’s business and other affairs. Under the Advisory Agreement, the Manager holds the sole and exclusive responsibility to provide, or arrange for other to provide, the management of the Funds’ assets and the placement of orders for the purchase and sale of the securities of the Funds. As the Trust is a manager of managers fund, the Manager is authorized, under the Advisory Agreement, to retain one or more Subadvisers for each Fund to handle day-to-day management of the Funds’ investment portfolios; the Manager is responsible for determining, in the first instance, which investment advisers to recommend to the Board of Trustees for selection as a Subadviser. The Trustees were aware that, notwithstanding the retention of the Subadvisers to handle day-to-day portfolio management, the Manager remains responsible for substantial other matters, including continuously monitoring compliance by each Subadviser with the investment policies and restrictions of the respective Funds, with such other limitations or directions of the Board of Trustees, and with all legal requirements under federal or state law or regulation. The Manager also is responsible primarily to provide statistical information and other data to the Trustees regarding the Funds’ portfolio investments and to make available to the Funds’ administrator such information as is necessary for the conduct of its duties.
The Trustees also noted that the Manager provides the Trust and each Fund with such administrative and other services (exclusive of, and in addition to, any such services provided by any others retained by the Trust on behalf of the Funds) and executive and other personnel as are necessary for the operation of the Trust and the Funds. Except for the Trust’s Chief Compliance Officer, the Manager pays all of the compensation of Trustees and officers of the Trust who are employees of the Manager or its affiliates.
The Trustees considered the scope and quality of services provided by the Manager and the Subadvisers and noted that the scope of such services provided had expanded as a result of recent regulatory and other developments. The Trustees noted that, for example, the Manager and Subadvisers are responsible for maintaining and monitoring their own compliance programs, and these compliance programs are continuously refined and enhanced in light of new regulatory requirements. The Trustees considered the capabilities and resources which the Manager has dedicated to performing services on behalf of the Trust and its Funds. The quality of administrative and other services, including the Manager’s role in coordinating the activities of the Trust’s other service providers, also were considered. The Trustees concluded that, overall, they were satisfied with the nature, extent and quality of services provided (and expected to be provided) to the Trust and to each of the Funds under the Agreements.
(2) The investment performance of the Funds, the Manager and the Subadvisers. In connection with every in-person quarterly Board of Trustees meeting, Trustees receive extensive information on the performance results of each of the Funds. This includes, for example, performance information on all of the Funds for the previous quarter, and previous one, three and five-year periods, and since inception. (For Funds which have been in existence for less than five years, Trustees may receive performance information on comparable funds managed by the particular Subadviser for periods prior to the creation of a particular Fund.) Such performance information includes information on absolute total return, performance versus Subadvisers’ comparable fund(s), performance versus the appropriate benchmark(s), and performance versus peer groups. For example, in connection with the Board of Trustees meetings held September 10-11, 2013, the Manager reported that for the three year period ended June 30, 2013, 12 Funds were in the top 40%, eight were in the middle 20% and eight were in the bottom 40%, and for the one year period ended June 30, 2013, 8 Funds were in the top 40%, seven were in the middle 20%, and 14 were in the bottom 40%. The Manager also reported that for the five year period ended June 30, 2013, 10 Funds were in the top 40%, four were in the middle 20%, and six were in the bottom 40%. At the Board of Trustees meeting held October 22, 2013, the Trustees determined that the overall investment performance of the Funds was acceptable.
(3) The costs of services to be provided and profits to be realized by the Manager and the Subadvisers and their affiliates from their relationship with the Funds. The Manager has supplied information to the Board of Trustees pertaining to the level of investment advisory fees to which the Funds are subject. The Manager has agreed to temporarily “cap” Fund expenses at certain levels, and information is provided to Trustees setting forth “contractual” advisory fees and “actual” fees after taking expense caps into account. Based upon the information provided, the “actual” advisory fees payable by the Funds overall are generally comparable to the average level of fees paid by Fund peer groups. For the 30 Funds reviewed by the Board of Trustees in the fall of 2013, 27 Funds paid “actual” advisory fees in a percentage amount within the 65th percentile or lower for each Fund’s applicable category. The Trustees recognized that it is difficult to make comparisons of advisory fees because there are variations in the services that are included in the fees paid by other funds. The Board has concluded that the advisory fees to be paid to the Manager by the Funds are not unreasonable.
The Manager has also supplied information to the Board of Trustees pertaining to total Fund expenses (which includes advisory fees, the 25 basis point 12b-1 fee paid by the Funds, and other Fund expenses). As noted above, the Manager has agreed to “cap” Fund expenses at certain levels. Based upon the information provided, the overall total expense ratio ranking in 2013 for the 30 Funds was as follows: (1) 28 of the Funds had total expense rankings below the 65th percentile (with 20 Funds at or below the 50th percentile); (2) the AZL Russell 1000 Value Fund had a total expense ranking in the 66th percentile; the Manager reported that there is only a limited peer group for such Fund; and (3) the AZL Morgan Stanley Global Real Estate Fund had a total expense ranking in the 72nd percentile; it was reported by the Manager that there is only a limited peer group for such Fund, such Fund’s expense ratio has declined, and such Fund’s expense ratio is comparable to funds of similar size.
The Manager has committed to providing the Funds with a high quality of service and working to reduce Fund expenses over time, particularly as the Funds grow larger. The Trustees concluded therefore that the expense ratios of the Funds were not unreasonable.
The Manager provided information concerning the profitability of the Manager’s investment advisory activities for the period from 2011 through June 30, 2013. The Trustees recognized that it is difficult to make comparisons of profitability from investment company advisory agreements because comparative information is not generally publicly available and is affected by numerous factors, including the structure of the particular adviser, the types of funds it manages, its business mix, numerous assumptions regarding allocation of expenses and the adviser’s capital structure and cost of capital. In considering profitability information, the Trustees considered the possible effect of certain fall-out benefits to the Manager and its affiliates. The Trustees focused on profitability of the Manager’s relationships with the Funds before taxes and distribution expenses. The Trustees recognized that the Manager should, in the abstract, be entitled to earn a reasonable level of profits for the services it provides to each Fund and, based on their review, concluded that they were satisfied that the Manager’s level of profitability from its relationship with the Funds was not excessive.
The Manager, on behalf of the Board of Trustees, endeavored to obtain information on the profitability of each Subadviser in connection with its relationship with the Fund or Funds which it subadvises. The Manager was unable to obtain meaningful profitability information from some of the unaffiliated Subadvisers. The Manager assured the Board of Trustees that the Agreements with the Subadvisers which are not affiliated with it were negotiated on an “arm’s length” basis, so that arguably, such profitability information should be less relevant. The Trustees were also provided with certain information on the profitability for the Subadviser which is affiliated with the Manager. Trustees recognized the difficulty of allocating costs to multiple advisory accounts and products of a large advisory organization. Based upon the information provided, the Trustees determined that there was no evidence that the level of such profitability attributable to subadvising the Funds was excessive.
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(4) and (5) The extent to which economies of scale would be realized as the Funds grow, and whether fee levels reflect these economies of scale. The Trustees noted that most of the advisory fee schedules for the Funds do not contain breakpoints that reduce the fee rate on assets above specified levels, although certain Subadvisory Agreements have such “breakpoints.” The Trustees recognized that breakpoints may be an appropriate way for the Manager to share its economies of scale, if any, with Funds that have substantial assets. However, they also recognized that there may not be a direct relationship between any economies of scale realized by Funds and those realized by the Manager as assets increase. The Trustees do not believe there is a uniform methodology for establishing breakpoints that give effect to Fund-specific service provided by the Manager. The Trustees noted that in the fund industry as a whole, as well as among funds similar to the Funds, there is no uniformity or pattern in the fees and asset levels at which breakpoints (if any) apply. Depending on the age, size, and other characteristics of a particular fund and its manager’s cost structure, different conclusions can be drawn as to whether there are economies of scale to be realized at any particular level of assets, notwithstanding the intuitive conclusion that such economies exist, or will be realized at some level of total assets. Moreover, because different managers have different cost structures and service models, it is difficult to draw meaningful conclusions from the breakpoints that may have been adopted by other funds. The Trustees also noted that the advisory agreements for many funds do not have breakpoints at all, or if breakpoints exist, they may be at asset levels significantly greater than those of the individual Funds. The Trustees also noted that the total assets in all of the Funds as of June 30, 2013 were approximately $12.85 billion, and that no single non-money market Fund had assets in excess of $616 million.
The Trustees noted that the Manager has agreed to temporarily “cap” Fund expenses at certain levels, which has the effect of reducing expenses as would the implementation of advisory fee breakpoints. The Manager has committed to continue to consider the continuation of fee “caps” and/or advisory fee breakpoints as the Funds grow larger. The Board receives quarterly reports on the level of Fund assets. It expects to consider whether or not to approve the Agreements at a meeting to be held prior to December 31, 2014, and will at that time, or prior thereto, consider: (a) the extent to which economies of scale can be realized, and (b) whether the advisory fee should be modified to reflect such economies of scale, if any.
Having taken these factors into account, the Trustees concluded that the absence of breakpoints in certain of the Funds’ advisory fee rate schedules was acceptable under each Fund’s circumstances.
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Information about the Board of Trustees and Officers (Unaudited)
The Trust is managed by the Trustees in accordance with the laws of the state of Delaware governing business trusts. There are currently eight Trustees, two of whom are “interested persons” of the Trust within the meaning of that term under the 1940 Act. The Trustees and Officers of the Trust, their addresses, ages, their positions held with the Trust, their terms of office with the Trust and length of time served, their principal occupation(s) during the past five years, the number of portfolios in the Trust they oversee, and their other directorships held are as follows:
Non-Interested Trustees(1)
Name, Address, and Age | Positions Held with VIP Trust and FOF Trust | Term of Office(2)/Length of Time Served | Principal Occupation(s) During Past 5 Years | Number of Portfolios Overseen for VIP Trust and FOF Trust | Other Directorships Held Outside the AZL Fund Complex | |||||
Peter R. Burnim, Age 66 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/07 | Chairman, Argus Investment Strategies Fund Ltd., February 2013 to present; Managing Director, iQ Venture Advisors, LLC. 2005 to 2012; Chairman, Northstar Group Holdings Ltd. Bermuda, 2011 to present; Expert Witness, Massachusetts Department of Revenue, 2011 to 2012; Executive Vice President, Northstar Companies, 2002 to 2005; Senior Officer, Citibank and Citicorp for over 25 years | 41 | Argus Group Holdings; Northstar Group Holdings, NRIL, Sterling Centrecorp Inc.; Highland Financial Holdings; and Bank of Bermuda NY | |||||
Peggy L. Ettestad, Age 56 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/07 | Managing Director, Red Canoe Management Consulting LLC, 2008 to present; Senior Managing Director, Residential Capital LLC, 2003 to 2008; Chief Operations Officer, Transamerica Reinsurance 2002 to 2003 | 41 | Luther College | |||||
Roger Gelfenbien, Age 70 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 10/99 | Retired; Partner of Accenture 1983 to 1999 | 41 | Virtus Funds (8 Funds) | |||||
Claire R. Leonardi, Age 58 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/04 | Chief Executive Officer, Connecticut Innovations, Inc., 2012 to present; General Partner, Fairview Capital, L.P., 1994 to 2012 | 41 | The Natural History Museum of the Adirondacks | |||||
Dickson W. Lewis, Age 65 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/04 | Retired; Consultant to Lifetouch National School Studios; Vice President/General Manager, Yearbooks & Canada-Lifetouch National School Studios, 2006 to 2013; Vice President/General Manager of Jostens, Inc., 2002 to 2006; Senior Vice President of Fortis Group, 1997 to 2002 | 41 | None | |||||
Peter W. McClean, Age 69 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/04 | Retired; President and CEO of Measurisk, LLC, 2001 to 2003; Chief Risk Management Officer at Bank of Bermuda Ltd., 1996 to 2001 | 41 | PNMAC Opportunity Fund; Northeast Bank; and FHI | |||||
Arthur C. Reeds III, Age 69 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 10/99 | Retired; Senior Investment Officer, Hartford Foundation for Public Giving, 2000 to 2003; Chairman, Chief Executive and President of Conning Corp., 1999 to 2000; Investment Consultant, 1997 to 1999 | 41 | Connecticut Water Service, Inc. |
Interested Trustees(3)
Name, Address, and Age | Positions Held with VIP Trust and FOF Trust | Term of Office(2)/Length of Time Served | Principal Occupation(s) During Past 5 Years | Number of Portfolios Overseen for VIP Trust and FOF Trust | Other Directorships Held Outside the AZL Fund Complex | |||||
Robert DeChellis, Age 46 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 3/08 | President and CEO, Allianz Life Financial Services, LLC, 2007 to present | 41 | None | |||||
Brian Muench, Age 43 5701 Golden Hills Drive | Trustee | Since 6/11 | President, Allianz Investment Management LLC, November 2010 to present; Vice President, Allianz Life, April 2011 to present; Vice President, Advisory Management, Allianz Investment Management LLC from December 2005 to November 2010 | 41 | None |
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Officers
Name, Address, and Age | Positions Held with VIP and VIP FOF Trust | Term of Office(2)/Length of Time Served | Principal Occupation(s) During Past 5 Years | |||
Brian Muench, Age 43 5701 Golden Hills Drive Minneapolis, MN 55416 | President | Since 11/10 | President, Allianz Investment Management LLC from November 2010, to present; Vice President, Allianz Life from April 2011 to present; Vice President, Allianz Investment Management LLC from December 2005 to November 2010. | |||
Michael Radmer, Age 68 Dorsey & Whitney LLP, Suite 1500 50 South Sixth Street Minneapolis, MN 55402-1498 | Secretary | Since 2/02 | Partner, Dorsey and Whitney LLP since 1976. | |||
Ty Edwards, Age 47 Citi Fund Services Ohio, Inc. 3435 Stelzer Road Columbus, OH 43219 | Treasurer, Principal Accounting Officer and Principal Financial Officer | Since 4/10 | Senior Vice President, Financial Administration, Citi Fund Services Ohio, Inc., December 2009 to present; Director, Product Management, Columbia Management, April 2007 to April 2009; Deputy Treasurer, Columbia Funds and Director, Fund Administration, Columbia Management, January 2006 to April 2007. | |||
Christopher R. Pheiffer, Age 45(4) 5701 Golden Hills Drive Minneapolis, MN 55416 | Chief Compliance Officer(5) and Anti-Money Laundering Compliance Officer | Since 2/14 (interim) | Deputy Chief Compliance Officer of the Trusts, 2007-2014. |
(1) | Member of the Audit Committee. |
(2) | Indefinite. |
(3) | Is an “interested person”, as defined by the 1940 Act, due to employment by Allianz. |
(4) | Stephen G. Simon, previously the Chief Compliance Officer of the Trusts, resigned all of his positions with Allianz effective February 21, 2014. Mr. Pheiffer, previously the Deputy Chief Compliance Officer of the Trusts, has been named Chief Compliance Officer of the Trusts on an interim basis while a search for a permanent replacement is conducted. |
(5) | The Manager and the Trust are parties to a Chief Compliance Officer Agreement under which the Manager is compensated by the Trust for providing an employee of the Manager or one of its affiliates to act as the Trust’s Chief Compliance Officer. The Chief Compliance Officer and Anti-Money Laundering Compliance Officer is not considered a corporate officer or executive employee of the Trust. |
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The Allianz VIP Funds are distributed by Allianz Life Financial Services, LLC. These Funds are not FDIC Insured. | ANNRPT1213 2/14 |
AZL® JPMorgan
International Opportunities Fund
Annual Report
December 31, 2013
Table of Contents
Management Discussion and Analysis
Page 1
Expense Examples and Portfolio Composition
Page 3
Schedule of Portfolio Investments
Page 4
Statement of Assets and Liabilities
Page 7
Statement of Operations
Page 7
Statements of Changes in Net Assets
Page 8
Financial Highlights
Page 9
Notes to the Financial Statements
Page 10
Report of Independent Registered Public Accounting Firm
Page 16
Other Information
Page 17
Approval of Investment Advisory and Subadvisory Agreements
Page 18
Information about the Board of Trustees and Officers
Page 21
This report is submitted for the general information of the shareholder of the Fund. The report is not authorized for distribution to prospective investors in the Fund unless preceded or accompanied by an effective prospectus, which contains details concerning the sales charges and other pertinent information.
AZL® JPMorgan International Opportunities Fund Review (unaudited)
Allianz Investment Management LLC serves as the Manager for the AZL® JPMorgan International Opportunities Fund and J.P. Morgan Investment Management Inc. serves as Subadviser to the Fund.
What factors affected the Fund’s performance during the year ended December 31, 2013?
For the year ended December 31, 2013, the AZL® JPMorgan International Opportunities Fund returned 20.69%1. That compared to a 23.29% total return for its benchmark, the MSCI EAFE Index2.
Equity markets worldwide closed the year on a strong note, fueled by signs that the global economy continues to improve, though at a pace modest enough to allow most major central banks to maintain accommodative policies. Though the euro zone has emerged from the recession, the fragile nature of the recovery, combined with a lack of inflationary pressures, prompted a surprise interest rate cut by the European Central Bank.
However, the Bank of England did not change interest rates or its asset purchase target, despite three straight quarters of GDP growth3 in the United Kingdom. In Japan, economic growth slowed, although remained positive. In the United States, the Federal Reserve Bank in December announced it would scale back bond purchases. Despite market anxiety about the tapering, investors reacted favorably to the move, interpreting it as confirmation of the U.S. economy’s continued recovery.
The Fund’s performance relative to its benchmark was hurt by holdings of a Japanese maker of specialty materials. The company, a leading manufacturer of specialty films used in LCDs and touch screens, cut its profit forecast twice in the fourth quarter, citing competition from new entrants in the market and weaker demand for computer tablets. The Fund was hurt by stock selection in several sectors, including retail, energy, and technology. Stock selection in emerging markets and in Canada also dragged on the Fund’s relative performance during the period.*
The Fund benefited from its exposure to a German tire and auto parts company, which performed well during the period after raising its 2013 earnings forecast, citing lower rubber costs, and growth in China and North America. Stock selection in several sectors also helped boost relative performance. In particular, holdings in the utilities, telecommunications, and basic industries sectors helped relative performance. In addition, an underweight position in Pacific Rim shares and strong stock selection in continental Europe benefited the Fund’s relative performance.*
Past performance does not guarantee future results.
* | The Fund’s portfolio composition is subject to change. There is no guarantee that any sectors mentioned will continue to perform well or that securities in such sectors will be held by the Fund in the future. The information contained in this commentary is for informational purposes only and should not be construed as a recommendation to purchase or sell securities in the sector mentioned. The Fund’s holdings and weightings are as of December 31, 2013. |
1 | The recent growth rate in the stock market has helped to produce short-term returns that are not typical and may not continue in the future. Because of ongoing market volatility, Fund performance may be subject to substantial short-term changes. |
2 | The Morgan Stanley Capital International, Europe, Australasia and Far East (“MSCI EAFE”) Index is a free float-adjusted market capitalization-weighted index that is designed to measure the equity market performance of developed markets, excluding the U.S. & Canada. Investors cannot invest directly in an index. |
3 | The Gross Domestic Product (GDP) is the measure of the market value of the goods and services produced by labor and property in the United Kingdom. |
1
AZL® JPMorgan International Opportunities Fund Review (unaudited)
Fund Objective
The Fund’s investment objective is to seek long-term capital appreciation. This objective may be changed by the Trustees of the Fund without shareholder approval. The Fund seeks to achieve its objective by investing primarily in equity securities of companies from developed countries other than the United States.
Investment Concerns
Equity securities (stocks) are more volatile and carry more risk than other forms of investments, including investments in high-grade fixed income securities. The net asset value per share of this Fund will fluctuate as the value of the securities in the portfolio changes.
International investing may involve risk of capital loss from unfavorable fluctuations in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations.
Emerging market investing may be subject to additional economic, political, liquidity, and currency risks not associated with more developed countries.
Investing in derivatives instruments involves risks that may be different from or greater than the risk associated with investing directly in securities or other traditional instruments.
For a complete description of these and other risks associated with investing in a mutual Fund, please refer to the Fund’s prospectus.
Growth of $10,000 Investment
The chart above represents a comparison of a hypothetical investment in the Fund versus a similar investment in the Fund’s benchmark, and represents the reinvestment of dividends and capital gains in the Fund.
Average Annual Total Returns as of December 31, 2013
1 | 3 | 5 | 10 | |||||||||||||
Year | Year | Year | Year | |||||||||||||
AZL® JPMorgan International Opportunities Fund | 20.69 | %1 | 7.92 | % | 10.96 | % | 7.20 | % | ||||||||
MSCI EAFE Index (gross of withholding taxes) | 23.29 | % | 8.66 | % | 12.96 | % | 7.39 | % | ||||||||
MSCI EAFE Index (net of withholding taxes) | 22.78 | % | 8.17 | % | 12.44 | % | 6.91 | % |
Past performance does not guarantee future results. The performance data quoted represents past performance and current returns may be lower or higher. The investment return and principal value will fluctuate so that an investor’s shares, when redeemed may be worth more or less than the original cost. To obtain performance information current to the most recent month end, please visit www.Allianzlife.com.
Expense Ratio | Gross | |||
AZL® JPMorgan International Opportunities Fund | 1.30 | % |
The above expense ratio is based on the current Fund prospectus dated April 29, 2013. The Manager voluntarily reduced the management fee to 0.85%. The Manager and the Fund have entered into a written contract limiting operating expenses, excluding certain expenses (such as interest expense), to 1.39% through April 30, 2015. Additional information pertaining to the December 31, 2013 expense ratios can be found in the financial highlights.
1 | The recent growth rate in the stock market has helped to produce short-term returns that are not typical and may not continue in the future. Because of ongoing market volatility, Fund performance may be subject to substantial short-term changes. |
The total return of the Fund does not reflect the effect of any insurance charges, the annual maintenance fee or the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. Such charges, fees and tax payments would reduce the performance quoted. |
The Fund’s performance is measured against the Morgan Stanley Capital International Europe, Australasia and Far East (“MSCI EAFE”) Index, which is an unmanaged free float-adjusted market capitalization-weighted index that is designed to measure the equity market performance of developed markets, excluding the U.S. & Canada. The Index noted as “gross of withholding taxes” does not reflect the deduction of fees associated with a mutual fund, such as investment management and fund accounting fees. The Index noted as “net of withholding taxes” does reflect the reinvestment of dividends after the deduction of withholding taxes, using (for international indices) a tax rate applicable to non-resident institutional investors who do not benefit from double taxation treaties. The Fund’s performance reflects the deduction of fees for services provided to the Fund. Investors cannot invest directly in an index. |
2 |
AZL JPMorgan International Opportunities Fund
(Unaudited)
As a shareholder of the AZL JPMorgan International Opportunities Fund (the “Fund”), you incur ongoing costs, including management fees, distribution fees, and other Fund expenses. These examples are intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. Please note that the expenses shown in each table do not reflect expenses that apply to the subaccount or the insurance contract. If the expenses that apply to the subaccount of the insurance contract were included, your costs would have been higher.
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the periods presented below.
The Actual Expense table below provides information about actual account values and actual expenses. You may use the information below, 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 table under the heading entitled “Expenses Paid During Period” to estimate the expenses you paid on your account during this period.
Beginning Account Value 7/1/13 | Ending Account Value 12/31/13 | Expenses Paid During Period 7/1/13 - 12/31/13* | Annualized Expense Ratio During Period 7/1/13 - 12/31/13 | |||||||||||||||||
AZL JPMorgan International Opportunities Fund | $ | 1,000.00 | $ | 1,183.10 | $ | 6.49 | 1.18 | % |
The Hypothetical Expense table below provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.
Beginning Account Value 7/1/13 | Ending Account Value 12/31/13 | Expenses Paid During Period 7/1/13 - 12/31/13* | Annualized Expense Ratio During Period 7/1/13 - 12/31/13 | |||||||||||||||||
AZL JPMorgan International Opportunities Fund | $ | 1,000.00 | $ | 1,019.26 | $ | 6.01 | 1.18 | % |
* | Expenses are equal to the average account value over the period, multiplied by the Fund’s annualized expense ratio, multiplied by 184/365 (to reflect the one half year period). |
Portfolio Composition
(Unaudited)
Investments | Percent of net assets | ||||
Financials | 22.9 | % | |||
Consumer Discretionary | 19.1 | ||||
Consumer Staples | 10.4 | ||||
Health Care | 10.2 | ||||
Industrials | 9.1 | ||||
Materials | 7.1 | ||||
Information Technology | 7.0 | ||||
Energy | 6.4 | ||||
Telecommunication Services | 3.3 | ||||
Utilities | 3.1 | ||||
|
| ||||
Total Common Stock, Preferred Stock and Rights | 98.6 | ||||
Money Market | 1.4 | ||||
|
| ||||
Total Investment Securities | 100.0 | ||||
Net other assets (liabilities) | — | ^ | |||
|
| ||||
Net Assets | 100.0 | % | |||
|
|
^ | Represents less than 0.05%. |
3
AZL JPMorgan International Opportunities Fund
Schedule of Portfolio Investments
December 31, 2013
Shares | Fair Value | |||||||
| Common Stocks (96.3%): |
| ||||||
| Air Freight & Logistics (0.5%): |
| ||||||
180,100 | Yamato Holdings Co., Ltd. | $ | 3,646,731 | |||||
|
| |||||||
| Airlines (0.5%): |
| ||||||
74,700 | Japan Airlines Co., Ltd. | 3,686,206 | ||||||
|
| |||||||
| Auto Components (2.8%): |
| ||||||
51,741 | Continental AG | 11,349,433 | ||||||
69,428 | Valeo SA | 7,691,687 | ||||||
|
| |||||||
19,041,120 | ||||||||
|
| |||||||
| Automobiles (2.5%): |
| ||||||
242,300 | Honda Motor Co., Ltd. | 9,995,031 | ||||||
114,400 | Toyota Motor Corp. | 6,962,845 | ||||||
|
| |||||||
16,957,876 | ||||||||
|
| |||||||
| Beverages (2.6%): |
| ||||||
272,967 | Diageo plc | 9,015,138 | ||||||
162,524 | SABMiller plc | 8,368,501 | ||||||
|
| |||||||
17,383,639 | ||||||||
|
| |||||||
| Building Products (2.9%): |
| ||||||
185,598 | Compagnie de Saint-Gobain SA | 10,257,520 | ||||||
148,600 | Daikin Industries, Ltd. | 9,274,922 | ||||||
|
| |||||||
19,532,442 | ||||||||
|
| |||||||
| Capital Markets (2.5%): |
| ||||||
817,300 | Nomura Holdings, Inc. | 6,326,686 | ||||||
553,973 | UBS AG, Registered Shares | 10,556,322 | ||||||
|
| |||||||
16,883,008 | ||||||||
|
| |||||||
| Chemicals (3.5%): |
| ||||||
98,008 | BASF SE | 10,450,246 | ||||||
14,888 | LG Chem, Ltd.* | 4,268,335 | ||||||
56,913 | Solvay SA | 9,007,660 | ||||||
|
| |||||||
23,726,241 | ||||||||
|
| |||||||
| Commercial Banks (11.3%): |
| ||||||
308,999 | Australia & New Zealand Banking Group, Ltd. | 8,893,433 | ||||||
135,678 | BNP Paribas SA | 10,623,120 | ||||||
229,276 | Danske Bank A/S* | 5,279,309 | ||||||
1,637,933 | HSBC Holdings plc | 17,962,087 | ||||||
1,783,300 | Mitsubishi UFJ Financial Group, Inc. | 11,793,524 | ||||||
233,972 | Sumitomo Mitsui Financial Group, Inc. | 12,084,965 | ||||||
321,141 | Swedbank AB, A Shares | 9,062,265 | ||||||
|
| |||||||
75,698,703 | ||||||||
|
| |||||||
| Communications Equipment (1.3%): |
| ||||||
705,722 | Telefonaktiebolaget LM Ericsson, B Shares | 8,644,663 | ||||||
|
| |||||||
| Diversified Financial Services (1.5%): |
| ||||||
559,600 | ORIX Corp. | 9,859,357 | ||||||
|
| |||||||
| Diversified Telecommunication Services (1.2%): |
| ||||||
1,264,444 | BT Group plc | 7,960,261 | ||||||
|
| |||||||
| Electric Utilities (0.5%): |
| ||||||
92,639 | Electricite de France | 3,280,315 | ||||||
|
| |||||||
| Electrical Equipment (2.7%): |
| ||||||
121,149 | Schneider Electric SA | 10,632,578 | ||||||
449,400 | Sumitomo Electric Industries, Ltd. | 7,511,418 | ||||||
|
| |||||||
18,143,996 | ||||||||
|
| |||||||
| Electronic Equipment, Instruments & Components (1.1%): |
| ||||||
978,000 | Hitachi, Ltd. | 7,416,361 | ||||||
|
| |||||||
| Energy Equipment & Services (0.6%): |
| ||||||
210,315 | Petrofac, Ltd. | 4,267,569 | ||||||
|
|
Shares | Fair Value | |||||||
| Common Stocks, continued |
| ||||||
| Food & Staples Retailing (1.2%): |
| ||||||
203,700 | Seven & I Holdings Co., Ltd. | $ | 8,113,891 | |||||
|
| |||||||
| Food Products (2.5%): |
| ||||||
327,295 | Tate & Lyle plc | 4,388,014 | ||||||
302,049 | Unilever NV | 12,194,359 | ||||||
295,691 | Unilever plc*# | — | ||||||
|
| |||||||
16,582,373 | ||||||||
|
| |||||||
| Gas Utilities (0.6%): |
| ||||||
536,000 | Enn Energy Holdings, Ltd. | 3,977,472 | ||||||
|
| |||||||
| Hotels, Restaurants & Leisure (4.7%): |
| ||||||
370,578 | InterContinental Hotels Group plc | 12,357,912 | ||||||
1,036,800 | Sands China, Ltd. | 8,486,903 | ||||||
107,970 | Sodexo, Inc. | 10,962,558 | ||||||
|
| |||||||
31,807,373 | ||||||||
|
| |||||||
| Household Durables (2.4%): |
| ||||||
248,196 | Electrolux AB, Series B | 6,536,058 | ||||||
119,780 | Persimmon plc | 2,460,368 | ||||||
572,000 | Sekisui Chemical Co., Ltd. | 7,032,861 | ||||||
|
| |||||||
16,029,287 | ||||||||
|
| |||||||
| Industrial Conglomerates (1.0%): |
| ||||||
479,000 | Hutchison Whampoa, Ltd. | 6,543,419 | ||||||
|
| |||||||
| Insurance (5.7%): |
| ||||||
196,115 | Assicurazioni Generali SpA | 4,660,478 | ||||||
321,689 | AXA SA | 8,972,228 | ||||||
510,000 | Ping An Insurance Group Co. of China | 4,611,241 | ||||||
555,447 | Prudential plc | 12,429,683 | ||||||
77,364 | Swiss Re AG | 7,153,096 | ||||||
|
| |||||||
37,826,726 | ||||||||
|
| |||||||
| IT Services (0.8%): |
| ||||||
174,300 | Nomura Research Institute, Ltd. | 5,497,769 | ||||||
|
| |||||||
| Machinery (0.8%): |
| ||||||
1,239,000 | Kawasaki Heavy Industries, Ltd. | 5,209,104 | ||||||
|
| |||||||
| Media (2.4%): |
| ||||||
90,600 | Dentsu, Inc. | 3,714,441 | ||||||
296,012 | Pearson plc | 6,573,939 | ||||||
55,826 | Publicis Groupe | 5,124,301 | ||||||
|
| |||||||
15,412,681 | ||||||||
|
| |||||||
| Metals & Mining (2.3%): |
| ||||||
328,512 | First Quantum Minerals, Ltd. | 5,920,083 | ||||||
161,920 | Rio Tinto plc | 9,135,752 | ||||||
|
| |||||||
15,055,835 | ||||||||
|
| |||||||
| Multi-Utilities (2.0%): |
| ||||||
777,369 | Centrica plc | 4,476,263 | ||||||
182,559 | GDF Suez | 4,307,661 | ||||||
248,071 | Suez Environnement Co. | 4,445,122 | ||||||
|
| |||||||
13,229,046 | ||||||||
|
| |||||||
| Oil, Gas & Consumable Fuels (5.8%): |
| ||||||
568,186 | BG Group plc | 12,242,791 | ||||||
1,558,000 | China Shenhua Energy Co., Ltd., H Shares | 4,944,119 | ||||||
267,681 | Repsol YPF SA | 6,762,751 | ||||||
312,410 | Royal Dutch Shell plc, A Shares | 11,134,517 | ||||||
300,000 | Royal Dutch Shell plc*# | — | ||||||
335,187 | Tullow Oil plc | 4,759,016 | ||||||
|
| |||||||
39,843,194 | ||||||||
|
|
Continued
4
AZL JPMorgan International Opportunities Fund
Schedule of Portfolio Investments
December 31, 2013
Shares | Fair Value | |||||||
| Common Stocks, continued |
| ||||||
| Paper & Forest Products (1.3%): |
| ||||||
433,040 | Stora Enso OYJ, R Shares | $ | 4,363,634 | |||||
261,665 | UPM-Kymmene OYJ | 4,426,682 | ||||||
|
| |||||||
8,790,316 | ||||||||
|
| |||||||
| Pharmaceuticals (10.2%): |
| ||||||
63,981 | AstraZeneca plc | 3,794,554 | ||||||
125,203 | Bayer AG | 17,563,773 | ||||||
208,172 | Novartis AG, Registered Shares | 16,664,771 | ||||||
46,988 | Novo Nordisk A/S, B Shares | 8,657,541 | ||||||
59,452 | Roche Holding AG | 16,670,076 | ||||||
122,296 | Shire plc | 5,761,967 | ||||||
|
| |||||||
69,112,682 | ||||||||
|
| |||||||
| Real Estate Management & Development (1.9%): |
| ||||||
1,380,000 | China Overseas Land & Investment, Ltd. | 3,897,977 | ||||||
159,000 | Mitsubishi Estate Co., Ltd. | 4,765,630 | ||||||
536,000 | Wharf Holdings, Ltd. (The) | 4,103,814 | ||||||
|
| |||||||
12,767,421 | ||||||||
|
| |||||||
| Road & Rail (0.7%): |
| ||||||
55,600 | East Japan Railway Co. | 4,438,078 | ||||||
|
| |||||||
| Semiconductors & Semiconductor Equipment (2.5%): |
| ||||||
111,715 | ASML Holding NV | 10,489,787 | ||||||
4,652 | Samsung Electronics Co., Ltd. | 6,081,006 | ||||||
|
| |||||||
16,570,793 | ||||||||
|
| |||||||
| Software (1.3%): |
| ||||||
101,268 | SAP AG | 8,682,043 | ||||||
|
| |||||||
| Specialty Retail (1.6%): |
| ||||||
2,628,000 | Belle International Holdings, Ltd. | 3,057,683 | ||||||
1,190,348 | Kingfisher plc | 7,608,628 | ||||||
|
| |||||||
10,666,311 | ||||||||
|
| |||||||
| Textiles, Apparel & Luxury Goods (1.4%): |
| ||||||
93,089 | Compagnie Financiere Richemont SA, Registered Shares | 9,317,926 | ||||||
|
|
Shares | Fair Value | |||||||
| Common Stocks, continued |
| ||||||
| Tobacco (3.1%): |
| ||||||
227,909 | British American Tobacco plc | $ | 12,226,474 | |||||
260,200 | Japan Tobacco, Inc. | 8,467,759 | ||||||
|
| |||||||
20,694,233 | ||||||||
|
| |||||||
| Wireless Telecommunication Services (2.1%): |
| ||||||
3,610,383 | Vodafone Group plc | 14,190,649 | ||||||
|
| |||||||
| Total Common Stocks (Cost $515,731,224) | 646,487,110 | ||||||
|
| |||||||
| Preferred Stocks (2.3%): |
| ||||||
| Automobiles (1.3%): |
| ||||||
31,364 | Volkswagen AG, Preferred Shares | 8,811,055 | ||||||
|
| |||||||
| Household Products (1.0%): |
| ||||||
59,368 | Henkel AG & Co. KGaA, Preferred Shares | 6,886,799 | ||||||
|
| |||||||
| Total Preferred Stocks (Cost $9,222,668) | 15,697,854 | ||||||
|
| |||||||
| Right (0.0%): |
| ||||||
| Oil, Gas & Consumable Fuels (0.0%): |
| ||||||
267,681 | Repsol SA* | 182,637 | ||||||
|
| |||||||
| Total Right (Cost $—) | 182,637 | ||||||
|
| |||||||
Contracts, Shares, Notional Amount or Principal Amount | Fair Value | |||||||
| Unaffiliated Investment Company (1.4%): |
| ||||||
9,406,037 | Dreyfus Treasury Prime Cash Management Fund, Institutional Shares, 0.00%(a) | 9,406,037 | ||||||
|
| |||||||
| Total Unaffiliated Investment Company (Cost $9,406,037) | 9,406,037 | ||||||
|
| |||||||
| Total Investment Securities (Cost $534,359,929)(b) — 100.0% | 671,773,638 | ||||||
| Net other assets (liabilities) — 0.0% | (201,345 | ) | |||||
|
| |||||||
| Net Assets — 100.0% | $ | 671,572,293 | |||||
|
|
Percentages indicated are based on net assets as of December 31, 2013.
* | Non-income producing security. |
# | Security issued in connection with a pending litigation settlement. |
(a) | The rate represents the effective yield at December 31, 2013. |
(b) | See Federal Tax Information listed in the Notes to the Financial Statements. |
The following represents the concentrations by country of risk (based on the domicile of the security issuer) relative to the total fair value of investments as of December 31, 2013:
Country | Percentage | |||
Australia | 1.3 | % | ||
Belgium | 1.3 | % | ||
Canada | 0.9 | % | ||
China | 2.0 | % | ||
Denmark | 2.1 | % | ||
Finland | 1.3 | % | ||
France | 11.4 | % | ||
Germany | 9.5 | % | ||
Hong Kong | 3.9 | % | ||
Italy | 0.7 | % |
Country | Percentage | |||
Japan | 20.2 | % | ||
Netherlands | 3.4 | % | ||
Republic of Korea (South) | 1.5 | % | ||
Spain | 1.0 | % | ||
Sweden | 3.6 | % | ||
Switzerland | 9.0 | % | ||
United Kingdom | 25.5 | % | ||
United States | 1.4 | % | ||
|
| |||
100.0 | % | |||
|
|
Continued
5
AZL JPMorgan International Opportunities Fund
Schedule of Portfolio Investments
December 31, 2013
Forward Currency Contracts
At December 31, 2013, the Fund’s open forward currency contracts were as follows:
Type of Contract | Counterparty | Delivery Date | Contract Amount (Local Currency) | Contract Value | Value | Net Unrealized Appreciation/ (Depreciation) | ||||||||||||||
Short Contracts: |
| |||||||||||||||||||
British Pound | Goldman Sachs | 3/14/14 | 868,971 | $ | 1,424,495 | $ | 1,438,001 | $ | (13,506 | ) | ||||||||||
British Pound | Societe Generale North America | 3/14/14 | 1,185,966 | 1,941,101 | 1,962,575 | (21,474 | ) | |||||||||||||
British Pound | Toronto Dominion Bank | 3/14/14 | 8,379,871 | 13,709,470 | 13,867,286 | (157,816 | ) | |||||||||||||
Canadian Dollar | Barclays Bank | 3/14/14 | 4,798,498 | 4,519,296 | 4,509,942 | 9,354 | ||||||||||||||
Danish Krone | Barclays Bank | 3/14/14 | 21,334,065 | 3,940,056 | 3,937,008 | 3,048 | ||||||||||||||
European Euro | Barclays Bank | 3/14/14 | 324,088 | 446,071 | 445,795 | 276 | ||||||||||||||
Hong Kong Dollar | Toronto Dominion Bank | 3/14/14 | 145,944,883 | 18,821,641 | 18,824,506 | (2,865 | ) | |||||||||||||
Swedish Krona | Royal Bank of Scotland | 3/14/14 | 18,475,212 | 2,818,311 | 2,869,820 | (51,509 | ) | |||||||||||||
Swiss Franc | Barclays Bank | 3/14/14 | 336,979 | 380,050 | 378,085 | 1,965 | ||||||||||||||
|
|
|
|
|
| |||||||||||||||
$ | 48,000,491 | $ | 48,233,018 | $ | (232,527 | ) | ||||||||||||||
|
|
|
|
|
| |||||||||||||||
Long Contracts: | ||||||||||||||||||||
Australian Dollar | Citigroup Global Markets | 3/14/14 | 44,016,143 | $ | 39,852,348 | $ | 39,104,601 | $ | (747,747 | ) | ||||||||||
Japanese Yen | Citigroup Global Markets | 3/14/14 | 82,333,388 | 803,758 | 782,266 | (21,492 | ) | |||||||||||||
Norwegian Krone | Toronto Dominion Bank | 3/14/14 | 26,762,206 | 4,361,507 | 4,402,121 | 40,614 | ||||||||||||||
Singapore Dollar | Citigroup Global Markets | 3/14/14 | 12,439,280 | 9,946,920 | 9,860,304 | (86,616 | ) | |||||||||||||
|
|
|
|
|
| |||||||||||||||
$ | 54,964,533 | $ | 54,149,292 | $ | (815,241 | ) | ||||||||||||||
|
|
|
|
|
|
At December 31, 2013, the Fund’s open forward cross currency contracts were as follows:
Purchase/Sale | Counterparty | Amount Purchased | Amount Sold | Contract Value | Value | Net Unrealized Appreciation/ (Depreciation) | ||||||||||||||
Britsh Pound/Hong Kong Dollar | Westpac Banking Corp | 1,273,331 GBP | 16,223,676 HKD | $ | 2,092,882 | $ | 2,107,443 | $ | 14,561 | |||||||||||
Japanese Yen/European Euro | Citigroup Global Markets | 149,083,187 JPY | 1,049,207 EUR | 1,433,110 | 1,406,357 | (26,753 | ) | |||||||||||||
|
|
|
|
|
| |||||||||||||||
$ | 3,525,992 | $ | 3,513,800 | $ | (12,192 | ) | ||||||||||||||
|
|
|
|
|
|
See accompanying notes to the financial statements.
6
AZL JPMorgan International Opportunities Fund
Statement of Assets and Liabilities
December 31, 2013
Assets: | |||||
Investment securities, at cost | $ | 534,359,929 | |||
|
| ||||
Investment securities, at value | $ | 671,773,638 | |||
Interest and dividends receivable | 509,134 | ||||
Foreign currency, at value (cost $965,365) | 928,664 | ||||
Unrealized appreciation on forward currency contracts | 69,818 | ||||
Reclaims receivable | 279,103 | ||||
|
| ||||
Total Assets | 673,560,357 | ||||
|
| ||||
Liabilities: | |||||
Unrealized depreciation on forward currency contracts | 1,129,778 | ||||
Payable for capital shares redeemed | 142,995 | ||||
Manager fees payable | 470,939 | ||||
Administration fees payable | 23,542 | ||||
Distribution fees payable | 138,512 | ||||
Custodian fees payable | 41,986 | ||||
Administrative and compliance services fees payable | 2,618 | ||||
Trustee fees payable | 20 | ||||
Other accrued liabilities | 37,674 | ||||
|
| ||||
Total Liabilities | 1,988,064 | ||||
|
| ||||
Net Assets | $ | 671,572,293 | |||
|
| ||||
Net Assets Consist of: | |||||
Capital | $ | 555,944,912 | |||
Accumulated net investment income/(loss) | 5,161,624 | ||||
Accumulated net realized gains/(losses) from investment transactions | (25,873,143 | ) | |||
Net unrealized appreciation/(depreciation) on investments | 136,338,900 | ||||
|
| ||||
Net Assets | $ | 671,572,293 | |||
|
| ||||
Shares of beneficial interest (unlimited number of shares authorized, no par value) | 35,891,838 | ||||
Net Asset Value (offering and redemption price per share) | $ | 18.71 | |||
|
|
For the Year Ended December 31, 2013
Investment Income: | |||||
Dividends | $ | 18,030,108 | |||
Interest | 138 | ||||
Income from securities lending | 664,703 | ||||
Foreign withholding tax | (2,133,029 | ) | |||
|
| ||||
Total Investment Income | 16,561,920 | ||||
|
| ||||
Expenses: | |||||
Manager fees | 5,879,411 | ||||
Administration fees | 211,293 | ||||
Distribution fees | 1,547,210 | ||||
Custodian fees | 169,560 | ||||
Administrative and compliance services fees | 12,353 | ||||
Trustee fees | 32,058 | ||||
Professional fees | 53,208 | ||||
Shareholder reports | 37,031 | ||||
Other expenses | 21,263 | ||||
|
| ||||
Total expenses before reductions | 7,963,387 | ||||
Less expenses voluntarily waived/reimbursed by the Manager | (618,879 | ) | |||
Less expenses paid indirectly | (2,429 | ) | |||
|
| ||||
Net expenses | 7,342,079 | ||||
|
| ||||
Net Investment Income/(Loss) | 9,219,841 | ||||
|
| ||||
Realized and Unrealized Gains/(Losses) on Investments: | |||||
Net realized gains/(losses) on securities transactions | 9,128,638 | ||||
Net realized gains/(losses) on forward currency contracts | (3,061,454 | ) | |||
Change in net unrealized appreciation/depreciation on investments | 101,600,441 | ||||
|
| ||||
Net Realized/Unrealized Gains/(Losses) on Investments | 107,667,625 | ||||
|
| ||||
Change in Net Assets Resulting From Operations | $ | 116,887,466 | |||
|
|
See accompanying notes to the financial statements.
7
Statements of Changes in Net Assets
AZL JPMorgan International Opportunities Fund | ||||||||||
For the Year Ended December 31, 2013 | For the Year Ended December 31, 2012 | |||||||||
Change in Net Assets: | ||||||||||
Operations: | ||||||||||
Net investment income/(loss) | $ | 9,219,841 | $ | 9,856,648 | ||||||
Net realized gains/(losses) on investment transactions | 6,067,184 | (13,694,500 | ) | |||||||
Change in unrealized appreciation/depreciation on investments | 101,600,441 | 90,210,731 | ||||||||
|
|
|
| |||||||
Change in net assets resulting from operations | 116,887,466 | 86,372,879 | ||||||||
|
|
|
| |||||||
Dividends to Shareholders: | ||||||||||
From net investment income | (13,943,101 | ) | (8,519,620 | ) | ||||||
|
|
|
| |||||||
Change in net assets resulting from dividends to shareholders | (13,943,101 | ) | (8,519,620 | ) | ||||||
|
|
|
| |||||||
Capital Transactions: | ||||||||||
Proceeds from shares issued | 42,931,802 | 133,521,756 | ||||||||
Proceeds from dividends reinvested | 13,943,101 | 8,519,620 | ||||||||
Value of shares redeemed | (67,038,138 | ) | (39,786,858 | ) | ||||||
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|
|
| |||||||
Change in net assets resulting from capital transactions | (10,163,235 | ) | 102,254,518 | |||||||
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|
| |||||||
Change in net assets | 92,781,130 | 180,107,777 | ||||||||
Net Assets: | ||||||||||
Beginning of period | 578,791,163 | 398,683,386 | ||||||||
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| |||||||
End of period | $ | 671,572,293 | $ | 578,791,163 | ||||||
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| |||||||
Accumulated net investment income/(loss) | $ | 5,161,624 | $ | 13,230,066 | ||||||
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|
|
| |||||||
Share Transactions: | ||||||||||
Shares issued | 2,524,365 | 8,985,901 | ||||||||
Dividends reinvested | 798,574 | 577,993 | ||||||||
Shares redeemed | (3,943,254 | ) | (2,753,072 | ) | ||||||
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|
| |||||||
Change in shares | (620,315 | ) | 6,810,822 | |||||||
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|
|
See accompanying notes to the financial statements.
8
AZL JPMorgan International Opportunities Fund
(Selected data for a share of beneficial interest outstanding throughout the periods indicated)
Year Ended December 31, | |||||||||||||||||||||||||
2013 | 2012 | 2011 | 2010 | 2009 | |||||||||||||||||||||
Net Asset Value, Beginning of Period | $ | 15.85 | $ | 13.42 | $ | 15.62 | $ | 14.90 | $ | 12.77 | |||||||||||||||
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Investment Activities: | |||||||||||||||||||||||||
Net Investment Income/(Loss) | 0.27 | 0.26 | 0.21 | 0.27 | 0.26 | ||||||||||||||||||||
Net Realized and Unrealized Gains/(Losses) on Investments | 2.98 | 2.44 | (2.31 | ) | 0.61 | 3.06 | |||||||||||||||||||
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| ||||||||||||||||
Total from Investment Activities | 3.25 | 2.70 | (2.10 | ) | 0.88 | 3.32 | |||||||||||||||||||
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Dividends to Shareholders From: | |||||||||||||||||||||||||
Net Investment Income | (0.39 | ) | (0.27 | ) | (0.10 | ) | (0.07 | ) | (1.19 | ) | |||||||||||||||
Net Realized Gains | — | — | — | (0.09 | ) | — | |||||||||||||||||||
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| ||||||||||||||||
Total Dividends | (0.39 | ) | (0.27 | ) | (0.10 | ) | (0.16 | ) | (1.19 | ) | |||||||||||||||
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| ||||||||||||||||
Net Asset Value, End of Period | $ | 18.71 | $ | 15.85 | $ | 13.42 | $ | 15.62 | $ | 14.90 | |||||||||||||||
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| ||||||||||||||||
Total Return(a) | 20.69 | % | 20.26 | % | (13.41 | )% | 5.95 | % | 26.32 | % | |||||||||||||||
Ratios to Average Net Assets/Supplemental Data: | |||||||||||||||||||||||||
Net Assets, End of Period (000’s) | $ | 671,572 | $ | 578,791 | $ | 398,683 | $ | 331,815 | $ | 362,547 | |||||||||||||||
Net Investment Income/(Loss) | 1.49 | % | 2.08 | % | 1.88 | % | 1.68 | % | 1.51 | % | |||||||||||||||
Expenses Before Reductions(b) | 1.29 | % | 1.30 | % | 1.32 | % | 1.33 | % | 1.33 | % | |||||||||||||||
Expenses Net of Reductions | 1.19 | % | 1.20 | % | 1.21 | % | 1.18 | % | 1.26 | % | |||||||||||||||
Expenses Net of Reductions, Excluding Expenses Paid Indirectly(c) | 1.19 | % | 1.20 | % | 1.21 | % | 1.18 | % | 1.26 | % | |||||||||||||||
Portfolio Turnover Rate | 42 | % | 37 | % | 128 | %(d) | 35 | % | 30 | %(e) |
(a) | The returns include reinvested dividends and fund level expenses, but exclude insurance contract charges. If these charges were included, the returns would have been lower. |
(b) | Excludes fee reductions. If such fee reductions had not occurred, the ratios would have been as indicated. |
(c) | Expenses net of reductions excludes expenses paid indirectly, pursuant to a “commission recapture” program, under which brokers remit a portion of the brokerage commission which is used to pay certain Fund expenses. See note 2 in the Notes to the Financial Statements. |
(d) | Effective May 1, 2011, the Subadviser changed from Morgan Stanley Management, Inc. to J.P. Morgan Investment Management, Inc. Costs of purchases and proceeds from sales of portfolio securities associated with the change in the Subadviser contributed to a higher portfolio turnover rate for the year ended December 31, 2011 as compared to prior years. |
(e) | Cost of purchases and proceeds from sales of portfolio securities incurred to realign the Fund’s portfolio after a fund merger are excluded from the portfolio turnover rate. If such amounts had not been excluded, the portfolio turnover rate would have been 153%. |
See accompanying notes to the financial statements.
9
AZL JPMorgan International Opportunities Fund
Notes to the Financial Statements
December 31, 2013
1. Organization
The Allianz Variable Insurance Products Trust (the “Trust”) was organized as a Delaware statutory trust on July 13, 1999. The Trust is a diversified open-end management investment company registered under the Investment Company Act of 1940. The Trust consists of 29 separate investment portfolios (collectively, the “Funds”), of which one is included in this report, the AZL JPMorgan International Opportunities Fund (the “Fund”), and 28 are presented in separate reports.
The Trust is authorized to issue an unlimited number of shares of the Fund without par value. Shares of the Fund are available through the variable annuity contracts and variable life insurance policies offered through the separate accounts of participating insurance companies.
Under the Trust’s organizational documents, its officers and trustees are indemnified against certain liabilities arising out of the performance of their duties to the Fund. In addition, in the normal course of business, the Fund may enter into contracts with its vendors and others that provide for general indemnifications. The Fund’s maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Fund. However, based on experience, the Fund expects the risk of loss to be remote.
2. Significant Accounting Policies
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. The policies conform with U.S. generally accepted accounting principles (“U.S. GAAP”). The preparation of financial statements requires management to make certain 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 increases and decreases in net assets from operations during the reporting period. Actual results could differ from those estimates.
Security Valuation
The Fund records its investments at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between willing market participants at the measurement date. The valuation techniques used to determine fair value are further described in Note 4 below.
Investment Transactions and Investment Income
Investment transactions are recorded not later than on the business day following trade date. However, for financial reporting purposes, investment transactions are accounted for on trade date. Net realized gains and losses on investments sold and on foreign currency transactions are recorded on the basis of identified cost. Interest income is recorded on the accrual basis and includes, where applicable, the amortization of premiums or accretion of discounts. Dividend income is recorded on the ex-dividend date except in the case of foreign securities, in which case dividends are recorded as soon as such information becomes available.
Real Estate Investment Trusts
The Fund may own shares of real estate investment trusts (“REITs”) which report information on the source of their distributions annually. Certain distributions received from REITs during the year, which are known to be a return of capital, are recorded as a reduction to the cost of the individual REIT.
Foreign Currency Translation
The accounting records of the Fund are maintained in U.S. dollars. Foreign currency amounts are translated into U.S. dollars at the current rate of exchange to determine the fair value of investments, assets and liabilities. Purchases and sales of securities, and income and expenses are translated at the prevailing rate of exchange on the respective dates of such transactions. The Fund does not isolate that portion of the results of operations resulting from changes in foreign exchange rates on investments from fluctuations arising from changes in market prices of securities held. Such fluctuations are included in the net realized and unrealized gain or loss on investments and foreign currencies. Income received by the Fund from sources within foreign countries may be subject to withholding and other income or similar taxes imposed by such countries. The Funds accrue such taxes, as applicable, based on their current interpretation of tax rules in the foreign markets in which they invest.
Dividends to Shareholders
Dividends to shareholders are recorded on the ex-dividend date. The Fund distributes its dividends from net investment income and net realized capital gains, if any, on an annual basis. The amount of dividends from net investment income and from net realized gains is determined in accordance with federal income tax regulations, which may differ from U.S. GAAP. These “book/tax” differences are either temporary or permanent in nature. To the extent these differences are permanent in nature (e.g., return of capital, net operating loss, reclassification of certain market discounts, gain/loss, paydowns, and distributions), such amounts are reclassified within the composition of net assets based on their federal tax-basis treatment; temporary differences (e.g., wash sales and post October losses) do not require reclassification. Dividends to shareholders that exceed net investment income and net realized gains for tax purposes are reported as distributions of capital.
Expense Allocation
Expenses directly attributable to the Fund are charged directly to the Fund, while expenses attributable to more than one Fund are allocated among the respective Funds based upon relative net assets or some other reasonable method. Expenses which are attributable to more than one Trust are allocated across the Allianz Variable Insurance Products and Allianz Variable Insurance Products Fund of Funds Trusts based upon relative net assets or another reasonable basis. Allianz Investment Management LLC (the “Manager”), serves as the investment manager for the Trust and the Allianz Variable Insurance Products Fund of Funds Trust.
Securities Lending
To generate additional income, the Fund may lend up to 33 1/3% of its assets pursuant to agreements requiring that the loan be continuously secured by any combination of cash, U.S. government or U.S. government agency securities, equal initially to at least 102% of the fair value plus accrued interest on the securities loaned (105% for foreign
10
AZL JPMorgan International Opportunities Fund
Notes to the Financial Statements
December 31, 2013
securities). The borrower of securities is at all times required to post collateral to the Fund in an amount equal to 100% of the fair value of the securities loaned based on the previous day’s fair value of the securities loaned, marked-to-market daily. Any collateral shortfalls are adjusted the next business day. The Fund bears all of the gains and losses on such investments. The Fund receives payments from borrowers equivalent to the dividends and interest that would have been earned on securities lent while simultaneously seeking to earn income on the investment of cash collateral received. In extremely low interest rate environments, the broker rebate fee may exceed the interest earned or the cash collateral which would result in a loss to the Fund. The investment of cash collateral deposited by the borrower is subject to inherent market risks such as interest rate risk, credit risk, liquidity risk, and other risks that are present in the market, and as such, the value of these investments may not be sufficient, when liquidated, to repay the borrower when the loaned security is returned. There may be risks of delay in recovery of the securities or even loss of rights in the collateral should the borrower of the securities fail financially. However, loans will be made only to borrowers, such as broker-dealers, banks or institutional borrowers of securities, deemed by the Manager to be of good standing and credit worthy and when in its judgment, the consideration which can be earned currently from such securities loans justifies the attendant risks. Loans are subject to termination by the Trust or the borrower at any time, and are, therefore, not considered to be illiquid investments. Securities on loan at December 31, 2013 are presented on the Fund’s Schedule of Portfolio Investments. The average outstanding amount of securities on loan was $14.5 million for the year ended December 31, 2013.
Cash collateral received in connection with securities lending is invested in the Allianz Variable Insurance Products Securities Lending Collateral Trust (the “Securities Lending Collateral Trust”) managed by The Dreyfus Corporation, an affiliate of the Custodian and Securities Lending Agent. The Securities Lending Collateral Trust invests in short-term investments that have a remaining maturity of 397 days or less as calculated in accordance with Rule 2a-7 under the 1940 Act. The Fund paid securities lending fees of $65,733 during the year ended December 31, 2013. These fees have been netted against “Income from securities lending” on the Statement of Operations.
Commission Recapture
Certain Funds of the Trust participate in a commission recapture program. The Fund will utilize the recaptured commissions to pay for, in whole or part, certain expenses of the Fund, excluding investment advisory fees. Any amounts received by the Fund, if applicable, are disclosed as “Expenses paid indirectly” on the Statement of Operations.
Effective January 6, 2014, the Manager, on behalf of the Trust, requested the Fund cease participation in the program until further notice.
Derivative Instruments
All open derivative positions at period end are reflected on the Fund’s Schedule of Portfolio Investments. The following is a description of the derivative instruments utilized by the Fund, including the primary underlying risk exposures related to each instrument type.
Forward Currency Contracts
During the year ended December 31, 2013, the Fund entered into forward currency contracts in connection with planned purchases or sales of securities or to hedge the U.S. dollar value of securities denominated in a particular currency. In addition to the foreign currency risk related to the use of these contracts, the Fund could be exposed to risks if the counterparties to the contracts are unable to meet the terms of their contracts and from unanticipated movements in the value of a foreign currency relative to the U.S. dollar. In the event of default by the counterparty to the transaction, the Fund’s maximum amount of loss, as either the buyer or the seller, is the unrealized appreciation of the contract. The forward currency contracts are adjusted by the daily exchange rate of the underlying currency and any gains or losses are recorded for financial statement purposes as unrealized gains or losses until the contract settlement date. When the contract is closed, the Fund records a realized gain or loss equal to the difference between the value at the time it was opened and the value at the time it was closed. The contract amount of forward currency contracts outstanding was $106.5 million as of December 31, 2013. The monthly average amount for these contracts was $186.4 million for the year ended December 31, 2013.
Summary of Derivative Instruments
The following is a summary of the fair values of derivative instruments on the Fund’s Statement of Assets and Liabilities, categorized by risk exposure, as of December 31, 2013:
Asset Derivatives | Liability Derivatives | |||||||||||
Primary Risk Exposure | Statement of Assets and Liabilities Location | Total Fair Value | Statement of Assets and Liabilities Location | Total Fair Value | ||||||||
Foreign Currency Contracts | Unrealized appreciation on forward currency contracts | $ | 69,818 | Unrealized depreciation on forward currency contracts | $ | 1,129,778 |
The following is a summary of the effect of derivative instruments on the Statement of Operations, categorized by risk exposure, for the year ended December 31, 2013:
Primary Risk Exposure | Location of Gains/(Losses) on Derivatives Recognized in Income | Realized Gains/(Losses) on Derivatives Recognized in Income | Change in Unrealized Appreciation/ Depreciation on Derivatives Recognized in Income | |||||||
Foreign Currency Contracts | Net realized gains/(losses) on forward currency contracts/ change in unrealized appreciation/depreciation on investments | $ | (3,061,454 | ) | $ | (1,013,558 | ) |
3. Related Party Transactions
The Manager provides investment advisory and management services for the Fund. The Manager has retained an independent money management organization (the “Subadviser”), to make investment decisions on behalf of the Fund. Pursuant to a subadvisory agreement with J.P. Morgan Investment Management Inc. (“JPMIM”),
11
AZL JPMorgan International Opportunities Fund
Notes to the Financial Statements
December 31, 2013
JPMIM provides investment advisory services as the Subadviser for the Fund subject to the general supervision of the Trustees and the Manager. The Manager is entitled to a fee, computed daily and paid monthly, based on the average daily net assets of the Fund. Expenses incurred by the Fund for investment advisory and management services are reflected on the Statement of Operations as “Manager fees.” For its services, the Subadviser is entitled to a fee payable by the Manager. The Manager has contractually agreed to waive fees and reimburse the Fund to limit the annual expenses, excluding interest expense (e.g., cash overdraft fees), taxes, brokerage commissions, other expenditures that are capitalized in accordance with U.S. GAAP and other extraordinary expenses not incurred in the ordinary course of the Fund’s business, based on the daily net assets of the Fund, through April 30, 2015.
For the year ended December 31, 2013, the annual rate due to the Manager and the annual expense limit were as follows:
Annual Rate* | Annual Expense Limit | |||||||||
AZL JPMorgan International Opportunities Fund | 0.95 | % | 1.39 | % |
* | The Manager voluntarily reduced the management fee to 0.85% on all assets. The Manager reserves the right to increase the management fee to the amount shown in the table above at any time. |
Any amounts contractually waived or reimbursed by the Manager in a particular fiscal year will be subject to repayment by the Fund to the Manager to the extent that from time to time through the next three fiscal years the repayment will not cause the Fund’s expenses to exceed the lesser of the stated limit at the time of the waiver or the current stated limit. Any amounts recouped by the Manager during the year are reflected on the Statement of Operations as “Recoupment of prior expenses reimbursed by the Manager.” At December 31, 2013, there were no remaining contractual reimbursements that are subject to repayment by the Fund in subsequent years.
In addition, the Manager may voluntarily waive or reimburse additional fees in order to maintain more competitive expense ratios. Any voluntary waivers or reimbursements are not subject to repayment in subsequent years. Information on the total amount waived/reimbursed by the Manager or repaid to the Manager by the Fund during the year can be found on the Statement of Operations.
Pursuant to separate agreements between the Funds and the Manager, the Manager provides a Chief Compliance Officer (“CCO”) and certain compliance oversight and regulatory filing services to the Trust. Under these agreements the Manager is entitled to an amount equal to a portion of the compensation and certain other expenses related to the individuals performing the CCO and compliance oversight services, as well as $75 per hour for time incurred in connection with the preparation and filing of certain documents with the Securities and Exchange Commission. The fees are paid to the Manager on a quarterly basis. The total expenses incurred by the Fund for these services are reflected on the Statement of Operations as “Administrative and compliance services fees.”
Citi Fund Services Ohio, Inc. (“Citi” or the “Administrator”), a wholly owned subsidiary of Citigroup, Inc., with which an officer of the Trust is affiliated, serves as the Trust’s administrator, transfer agent, and fund accountant, and assists the Trust in all aspects of its administration and operation. The Administrator is entitled to a Trust-wide asset-based fee, which is based on the following schedule: 0.05% of daily average net assets on the first $4 billion, 0.04% of daily average net assets on the next $2 billion, 0.02% of daily average net assets on the next $2 billion and 0.01% of daily average net assets over $8 billion. The overall Trust-wide fees are accrued daily and paid monthly and are subject to a minimum annual fee. In addition, the Administrator is entitled to annual account fees related to the transfer agency system, an annual fee for each additional class of shares of any Fund, certain annual fees in supporting fair value services, and a Trust-wide annual fee for providing infrastructure and support in implementing the written policies and procedures comprising the Fund’s compliance program. Fees payable to the Administrator are subject to certain reductions associated with services provided to new funds. The Administrator is also reimbursed for certain expenses incurred. The total expenses incurred by the Fund for these services are reflected on the Statement of Operations as “Administration fees.”
Allianz Life Financial Services, LLC (“ALFS”), an affiliate of the Manager, serves as distributor of the Fund and receives 12b-1 fees directly from the Fund, plus a Trust-wide annual fee of $42,500, paid by the Manager from its profits and not by the Trust, for recordkeeping and reporting services.
The Trust has adopted a distribution and service plan in conformance with Rule 12b-1 of the 1940 Act. Pursuant to this plan, the Fund is authorized to pay certain fees for the sale and distribution of its shares and services provided to its shareholders at an annual rate not to exceed 0.25% of the Fund’s average daily net assets. These fees are reflected on the Statement of Operations as “Distribution fees.”
In addition, certain legal fees and expenses are paid to a law firm, Dorsey & Whitney LLP, of which the Secretary of the Fund is a partner. During the year ended December 31, 2013, $7,860 was paid from the Fund relating to these fees and expenses.
Certain Officers and Trustees of the Trust are affiliated with the Manager or the Administrator. Such Officers (except for the Trust’s CCO as noted above) and Trustees receive no compensation from the Trust for serving in their respective roles. For their service to the Trust and to the Allianz Variable Insurance Products Fund of Funds Trust, each non-interested Trustee receives a $139,000 annual Board retainer. In addition, the Trustees are reimbursed for certain expenses associated with attending Board meetings. Compensation to the Trustees is allocated between the Trust and the Allianz Variable Insurance Products Fund of Funds Trust in proportion to the assets under management of each trust. During the year ended December 31, 2013, actual Trustee compensation was $973,000 in total for both trusts.
At a meeting of the Board of Trustees on December 4, 2013, the Trustees approved a fee increase to the Officers and Trustees who are paid a fee for their services to the Trust and to the Allianz Variable Insurance Products Fund of Funds Trust. Effective January 1, 2014, each non-interested Trustee will receive a $163,000 annual retainer.
4. Investment Valuation Summary
The valuation techniques employed by the Fund, as described below, maximize the use of observable inputs and minimize the use of unobservable inputs in determining fair value. The inputs used for valuing the Fund’s investments are summarized in the three broad levels listed below:
— | Level 1 — quoted prices in active markets for identical assets |
— | Level 2 — other significant observable inputs (including quoted prices for similar securities, interest rates, prepayments speeds, credit risk, etc.) |
— | Level 3 — significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of investments) |
12
AZL JPMorgan International Opportunities Fund
Notes to the Financial Statements
December 31, 2013
Changes in valuation techniques may result in transfers in or out of an assigned level within the disclosure hierarchy. The Fund determines transfers between fair value hierarchy levels at the reporting period end. The inputs or methodology used for valuing investments is not necessarily an indication of the risk associated with investing in those investments.
Security prices are generally provided by an independent third party pricing service approved by the Trust’s Board of Trustees (“Trustees”) as of the close of the New York Stock Exchange (“NYSE”) (generally 4:00 pm Eastern Time). Equity securities are valued at the last quoted sale price or, if there is no sale, the last quoted bid price is used for long securities and the last quoted ask price is used for securities sold short. Securities listed on NASDAQ Stock Market, Inc. (“NASDAQ”) are valued at the official closing price as reported by NASDAQ. In each of these situations, valuations are typically categorized as a Level 1 in the fair value hierarchy. Investments in open-end investment companies are valued at their respective net asset value as reported by such companies and are typically categorized as Level 1 in the fair value hierarchy.
Debt and other fixed income securities are generally valued at an evaluated bid price provided by an independent pricing source approved by the Trustees. To value debt securities, pricing services may use various pricing techniques which take into account appropriate factors such as market activity, yield, quality, coupon rate, maturity, type of issue, trading characteristics, call features, credit ratings and other data, as well as broker quotes. Short term securities of sufficient credit quality with sixty days or less remaining until maturity may be valued at amortized cost, which approximates fair value. In each of these situations, valuations are typically categorized as Level 2 in the fair value hierarchy.
Forward currency contracts are generally valued at the foreign currency exchange rate as of the close of the NYSE and are typically categorized as Level 2 in the fair value hierarchy.
Other assets and securities for which market quotations are not readily available, or are deemed unreliable are valued at fair value as determined in good faith by the Trustees or persons acting on the behalf of the Trustees. Fair value pricing may be used for significant events such as securities whose trading has been suspended, whose price has become stale or for which there is no currently available price at the close of the NYSE. Depending on the source and relative significance of valuation inputs, these instruments may be classified as Level 2 or Level 3 in the fair value hierarchy. The Fund utilizes a pricing service to assist in determining the fair value of securities when certain significant events occur that may affect the value of foreign securities.
In accordance with procedures adopted by the Trustees, fair value pricing may be used if events materially affecting the value of foreign securities occur between the time when the exchange on which they are traded closes and the time when the Fund’s net asset value is calculated. Management identifies possible fluctuation in international securities by monitoring the increase or decrease in the value of a designated benchmark index. In the event of an increase or decrease greater than predetermined levels, the Fund may use a systematic valuation model provided by an independent third party to fair value its international equity securities which are then typically categorized as Level 2 in the fair value hierarchy.
For the year ended December 31, 2013, there were no Level 3 investments for which significant unobservable inputs were used to determine fair value.
The following is a summary of the valuation inputs used as of December 31, 2013 in valuing the Fund’s investments based upon the three levels defined above:
Investment Securities: | Level 1 | Level 2 | Total | ||||||||||||
Common Stocks | |||||||||||||||
Metals & Mining | $ | 5,920,083 | $ | 9,135,752 | $ | 15,055,835 | |||||||||
All Other Common Stocks+ | — | 631,431,275 | 631,431,275 | ||||||||||||
Preferred Stocks+ | — | 15,697,854 | 15,697,854 | ||||||||||||
Right+ | 182,637 | — | 182,637 | ||||||||||||
Unaffiliated Investment Company | 9,406,037 | — | 9,406,037 | ||||||||||||
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| ||||||||||
Total Investment Securities | $ | 15,508,757 | $ | 656,264,881 | $ | 671,773,638 | |||||||||
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|
|
| ||||||||||
Other Financial Instruments:* | |||||||||||||||
Forward Currency Contracts | — | (1,059,960 | ) | (1,059,960 | ) | ||||||||||
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|
|
|
|
| ||||||||||
Total Investments | $ | 15,508,757 | $ | 655,204,921 | $ | 670,713,678 | |||||||||
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|
|
|
|
+ | For detailed industry descriptions, see the accompanying Schedule of Portfolio Investments. |
* | Other Financial Instruments would include any derivative instruments, such as forward currency contracts. These investments are generally recorded in the financial statements at the unrealized gain or loss on the investment. |
5. Security Purchases and Sales
For the year ended December 31, 2013, cost of purchases and proceeds from sales of securities (excluding securities maturing less than one year from acquisition) were as follows:
Purchases | Sales | |||||||||
AZL JPMorgan International Opportunities Fund | $ | 255,559,277 | $ | 272,012,758 |
6. Investment Risks
Derivatives Risk: The Fund may invest in derivatives as a principal strategy. A derivative is a financial contract whose value depends on, or is derived from, the value of an underlying asset, reference rate, or risk. Use of derivative instruments involves risks different from, or possibly greater than, the risks associated with investing directly in securities and other traditional investments. Derivatives are subject to a number of other risks, such as liquidity risk, interest rate risk, market risk, credit risk, and selection risk. Derivatives also involve the risk of mispricing or improper valuation and the risk that changes in the value may not correlate perfectly with the underlying asset, rate, or
13
AZL JPMorgan International Opportunities Fund
Notes to the Financial Statements
December 31, 2013
index. Using derivatives may result in losses, possibly in excess of the principal amount invested. Also, suitable derivative transactions may not be available in all circumstances. The counterparty to a derivatives contract could default. As required by applicable law, a Fund that invests in derivatives segregates cash or liquid securities, or both, to the extent that its obligations under the instrument are not covered through ownership of the underlying security, financial instrument, or currency.
Emerging Markets Risk: Emerging markets may have less developed trading markets and exchanges which may make it more difficult to sell securities at an acceptable price and their prices may be more volatile than securities of companies in more developed markets. Settlements of trades may be subject to greater delays so that the Fund may not receive the proceeds of a sale of a security on a timely basis. Emerging countries may also have less developed legal and accounting systems and investments may be subject to greater risks of government restrictions, nationalization, or confiscation.
Foreign Securities and Currencies Risk: Investments in securities of foreign issuers carry certain risks not ordinarily associated with investments in securities of domestic issuers. Such risks include future political and economic developments, and the possible imposition of exchange controls or other foreign governmental laws and restrictions. In addition, with respect to certain countries, there is the possibility of expropriation of assets, confiscatory taxation, political or social instability or diplomatic developments which could adversely affect investments in those securities.
7. Federal Tax Information
It is the Fund’s policy to continue to comply with the requirements of the Internal Revenue Code under Subchapter M, applicable to regulated investment companies, and to distribute all of its taxable income, including any net realized gains on investments, to its shareholders. Therefore, no provision is made for federal income taxes.
Management of the Fund has reviewed tax positions taken in tax years that remain subject to examination by all major tax jurisdictions, including federal (i.e., the last four tax year ends and the interim tax period since then, as applicable). Management believes that there is no tax liability resulting from unrecognized tax benefits related to uncertain tax positions taken.
Cost for federal income tax purposes at December 31, 2013 is $540,042,765. The gross unrealized appreciation/ (depreciation) on a tax basis is as follows:
Unrealized appreciation | $ | 148,894,061 | |||
Unrealized depreciation | (17,163,188 | ) | |||
|
| ||||
Net unrealized appreciation/(depreciation) | $ | 131,730,873 | |||
|
|
As of the end of its tax year ended December 31, 2013, the Fund has capital loss carry forwards (“CLCFs”) as summarized in the tables below. CLCFs subject to expiration are applied as short-term capital loss regardless of whether the originating capital loss was short-term or long-term. CLCFs that are not subject to expiration must be utilized before those that are subject to expiration. The Board does not intend to authorize a distribution of any realized gain for the Fund until any applicable CLCF has been offset or expires.
CLCFs subject to expiration:
Expires 12/31/2015 | Expires 12/31/2016 | Expires 12/31/2018 | Total | |||||||||||||||||
AZL JPMorgan International Opportunities Fund | $ | 4,478,674 | $ | 6,813,930 | $ | 3,127,390 | $ | 14,419,994 |
CLCFs not subject to expiration:
Short Term Amount | Long Term Amount | Total Amount | |||||||||||||
AZL JPMorgan International Opportunities Fund | $ | 8,860,092 | $ | 1,244,973 | $ | 10,105,065 |
The tax character of dividends paid to shareholders during the year ended December 31, 2013 were as follows:
Ordinary Income | Net Long-Term Capital Gains | Total Distributions(a) | |||||||||||||
AZL JPMorgan International Opportunities Fund | $ | 13,943,101 | $ | — | $ | 13,943,101 |
(a) | Total distributions paid may differ from the Statements of Changes in Net Assets because dividends are recognized when actually paid for tax purposes. |
The tax character of dividends paid to shareholders during the year ended December 31, 2012 was as follows:
Ordinary Income | Net Long-Term Capital Gains | Total Distributions(a) | |||||||||||||
AZL JPMorgan International Opportunities Fund | $ | 8,519,620 | $ | — | $ | 8,519,620 |
(a) | Total distributions paid may differ from the Statements of Changes in Net Assets because dividends are recognized when actually paid for tax purposes. |
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AZL JPMorgan International Opportunities Fund
Notes to the Financial Statements
December 31, 2013
As of December 31, 2013, the components of accumulated earnings on a tax basis were as follows:
Undistributed Ordinary Income | Undistributed Long-Term Capital Gains | Accumulated Capital and Other Losses | Unrealized Appreciation/ (Depreciation)(a) | Total Accumulated Earnings/ (Deficit) | |||||||||||||||||||||
AZL JPMorgan International Opportunities Fund | $ | 8,522,557 | $ | — | $ | (24,525,059 | ) | $ | 131,629,883 | $ | 115,627,381 |
(a) | The difference between book-basis and tax-basis unrealized appreciation/(depreciation) is attributable primarily to tax deferral of losses on wash sales. |
8. Subsequent Events
Management has evaluated events and transactions subsequent to period end through the date the financial statements were issued, for purposes of recognition or disclosure in these financial statements and there are no subsequent events to report.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Shareholders and Board of Trustees of
Allianz Variable Insurance Products Trust:
We have audited the accompanying statement of assets and liabilities of AZL JPMorgan International Opportunities Fund (the “Fund”) of the Allianz Variable Insurance Products Trust, including the schedule of portfolio investments, as of December 31, 2013, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the years in the two-year period then ended, and the financial highlights for each of the years in the five-year period then ended. These financial statements and financial highlights are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of December 31, 2013, by correspondence with the custodian and brokers. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of the Fund as of December 31, 2013, the results of its operations for the year then ended, the changes in its net assets for each of the years in the two-year period then ended, and the financial highlights for each of the years in the five-year period then ended, in conformity with U.S. generally accepted accounting principles.
/s/KPMG LLP
Columbus, Ohio
February 25, 2014
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A description of the policies and procedures that the Fund uses to determine how to vote proxies relating to portfolio securities is available, without charge, upon request, by visiting the Securities and Exchange Commission’s (“Commission”) website at www.sec.gov, or by calling 800-624-0197.
Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30th is available (i) without charge, upon request, by calling 800-624-0197; (ii) on the Allianz Variable Insurance Products Trust’s website at https://www.allianzlife.com; and (iii) on the Commission’s website at http://www.sec.gov.
The Fund files complete Schedules of Portfolio Holdings with the Commission for the first and third quarters of each fiscal year on Form N-Q. Schedules of Portfolio Holdings for the Fund in this report are available without charge on the Commission’s website at http://www.sec.gov, or may be reviewed and copied at the Commission’s Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 800-SEC-0330.
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Approval of Investment Advisory and Subadvisory Agreements (Unaudited)
The Allianz Variable Insurance Products Trust (the “Trust”) is a manager-of-managers fund. That means that the Trust’s Manager (“Allianz Investment Management LLC”) is responsible for monitoring the various Subadvisers that have day-to-day responsibility for the decisions made for each of the Trust’s investment portfolios. The Trust’s Manager is responsible for determining, in the first instance, which investment advisers to consider recommending for selection as a Subadviser.
In reviewing the services provided by the Manager and the terms of the investment management agreement, the Board receives and reviews information related to the Manager’s experience and expertise in the variable insurance marketplace. Currently, the Funds are offered only through variable annuities and variable life insurance policies, and not in the retail fund market. In addition, the Board receives information regarding the Manager’s expertise with regard to portfolio diversification and asset allocation requirements within variable insurance products issued by Allianz Life Insurance Company of North America and its subsidiary, Allianz Life Insurance Company of New York. Currently, the Funds are offered only through Allianz Life and Allianz of New York variable products.
The Trust’s Manager has adopted policies and procedures to assist it in the process of analyzing each potential Subadviser with expertise in particular asset classes for purposes of making the recommendation that a specific investment adviser be selected. The Trust’s Board reviews and considers the information provided by the Manager in deciding which investment advisers to select. After an investment adviser becomes a Subadviser, a similarly rigorous process is instituted by the Manager to monitor the investment performance and other responsibilities of the Subadviser. The Manager reports to the Trust’s Board on its analysis at the regular meetings of the Board, which are held at least quarterly. Where warranted, the Manager will add or remove a particular Subadviser from a “watch” list that it maintains. Watch list criteria include, for example: (a) Fund performance over various time periods; (b) Fund risk issues, such as changes in key personnel involved with Fund management, changes in investment philosophy or process, or “capacity” concerns; and (c) organizational risk issues, such as regulatory, compliance or legal concerns, or changes in the ownership of the Subadviser. The Manager may place a Fund on the watch list for other reasons, and if so, will explain its rationale to the Trustees. Funds which are on the watch list are subject to special scrutiny of the Manager and the Board of Trustees. Funds may be removed from such watch list, if for example, performance improves or regulatory matters are satisfactorily resolved. However, in some situations where Funds which have been on the watch list, the Manager has recommended the retention of a new Subadviser, and the Board of Trustees has subsequently approved new Subadvisory Agreements with such Subadvisers.
In assessing the Manager’s and Subadvisers’ (collectively, the “Advisory Organizations”), performance of their obligations, the Board considers whether there has occurred a circumstance or event that would constitute a reason for it to not renew an advisory contract. In this regard, the Board is mindful of the potential disruption of a Fund’s operations and various risks, uncertainties and other effects that could occur as a result of a decision to terminate or not renew a contract.
As required by the Investment Company Act of 1940 (“1940 Act”), the Trust’s Board has reviewed and approved the Trust’s Investment Management Agreement with the Manager (the “Advisory Agreement”) and portfolio management agreements (the “Subadvisory Agreements”) with the Subadvisers. The Board’s decision to approve these contracts reflects the exercise of its business judgment on whether to approve new arrangements and continue the existing arrangements. During its review of these contracts, the Board considers many factors, among the most material of which are: the Fund’s investment objectives and long term performance; the Advisory Organizations’ management philosophy, personnel, and processes, including their compliance history and the adequacy of their compliance processes; the preferences and expectations of Fund shareholders (and underlying contract owners) and their relative sophistication; the continuing state of competition in the mutual fund industry; and comparable fees in the mutual fund industry.
The Board also considers the compensation and benefits received by the Advisory Organizations. This includes fees received for services provided to the Fund by affiliated persons of the Advisory Organizations and research services received by the Advisory Organizations from brokers that execute Fund trades, as well as advisory fees. The Board considered the fact that: (1) the Manager and the Trust are parties to an Administrative Service Agreement, a Compliance Services Agreement, and a Chief Compliance Officer Agreement, under which the Manager is compensated by the Trust for performing certain administrative and compliance services including providing an employee of the Manager or one of its affiliates to act as the Trust’s Chief Compliance Officer; and (2) Allianz Life Financial Services, LLC, an affiliated person of the Manager, is a registered securities broker-dealer and receives (along with its affiliated persons) payments made by the Trust pursuant to Rule 12b-1.
The Board is aware that various courts have interpreted provisions of the 1940 Act and have indicated in their decisions that the following factors may be relevant to an adviser’s compensation: the nature and quality of the services provided by the adviser, including the performance of the fund; the adviser’s cost of providing the services; the extent to which the adviser may realize “economies of scale” as the fund grows larger; any indirect benefits that may accrue to the adviser and its affiliates as a result of the adviser’s relationship with the fund; performance and expenses of comparable funds; and the extent to which the independent Board members are fully informed about all facts bearing on the adviser’s service and fee. The Trust’s Board is aware of these factors and takes them into account in its review of the Trust’s advisory contracts.
The Board considered and weighed these circumstances in light of its experience in governing the Trust and working with the Advisory Organizations on matters relating to the Funds, and is assisted in its deliberations by the advice of legal counsel to the Independent Trustees. In this regard, the Board requests and receives a significant amount of information about the Funds and the Advisory Organizations. Some of this information is provided at each regular meeting of the Board; additional information is provided in connection with the particular meeting or meetings at which the Board’s formal review of an advisory contract occurs. In between regularly scheduled meetings, the Board may receive information on particular matters as the need arises. Thus, the Board’s evaluation of an advisory contract is informed by reports covering such matters as: an Advisory Organization’s investment philosophy, personnel, and processes; the Fund’s short- and long-term performance (in absolute terms as well as in relationship to its benchmark(s), certain competitor or “peer group” funds and similar funds managed by the particular Subadviser), and comments on the reasons for performance; the Fund’s expenses (including the advisory fee itself and the overall expense structure of the Fund, both in absolute terms and relative to similar and/or competing funds, with due regard for contractual or voluntary expense limitations); the use and allocation of brokerage commissions derived from trading the Fund’s portfolio securities; the nature and extent of the advisory and other services provided to the Fund by the Advisory Organizations and their affiliates; compliance and audit reports concerning the Funds and the companies that service them; and relevant developments in the mutual fund industry and how the Funds and/or Advisory Organizations are responding to them.
The Board also receives financial information about Advisory Organizations, including reports on the compensation and benefits the Advisory Organizations derive from their relationships with the Funds. These reports cover not only the fees under the advisory contracts, but also fees, if any, received for providing other services to the Funds. The reports also discuss any indirect or “fall out” benefits an Advisory Organization may derive from its relationship with the Funds.
The Advisory and Subadvisory Agreements (collectively, the “Agreements”) were most recently considered at Board of Trustees meetings held in the fall of 2013. Information relevant to the approval of such Agreements was considered at a telephonic Board of Trustees meeting on October 16, 2013, and at an “in person” Board of Trustees meeting held October 22, 2013. The Agreements were approved at the Board meeting of October 22, 2013. At such meeting the Board also approved an Expense Limitation Agreement between the Manager and the Trust for the period ending April 30, 2015. In connection with such meetings, the Trustees requested and evaluated extensive materials from the Manager, including performance and expense information for other investment companies with similar investment objectives derived from data compiled by an independent third party provider and other sources believed to be reliable by the Manager. Prior to voting, the Trustees reviewed the proposed approval/continuance of the Agreements with management and with experienced counsel who are independent of the Manager and received a memorandum from such counsel discussing the legal standards for their consideration of the proposed approvals/continuances. The independent (“disinterested”) Trustees also discussed the proposed approvals/continuances in a private session with such counsel at which no representatives of the Manager were present. In reaching their determinations relating to the approval and/or continuance of
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the Agreements, in respect of each Fund, the Trustees considered all factors they believed relevant. The Board based its decision to approve the Agreements on the totality of the circumstances and relevant factors, and with a view to past and future long-term considerations. Not all of the factors and considerations discussed above and below are necessarily relevant to every Fund, and the Board did not assign relative weights to factors discussed herein or deem any one or group of them to be controlling in and of themselves.
An SEC Rule requires that shareholder reports include a discussion of certain factors relating to the selection of investment advisers and the approval of advisory fees. The “factors” enumerated by the SEC are set forth below in italics, as well as the Board’s conclusions regarding such factors:
(1) The nature, extent and quality of services provided by the Manager and Subadvisers. The Trustees noted that the Manager, subject to the control of the Board of Trustees, administers each Fund’s business and other affairs. Under the Advisory Agreement, the Manager holds the sole and exclusive responsibility to provide, or arrange for other to provide, the management of the Funds’ assets and the placement of orders for the purchase and sale of the securities of the Funds. As the Trust is a manager of managers fund, the Manager is authorized, under the Advisory Agreement, to retain one or more Subadvisers for each Fund to handle day-to-day management of the Funds’ investment portfolios; the Manager is responsible for determining, in the first instance, which investment advisers to recommend to the Board of Trustees for selection as a Subadviser. The Trustees were aware that, notwithstanding the retention of the Subadvisers to handle day-to-day portfolio management, the Manager remains responsible for substantial other matters, including continuously monitoring compliance by each Subadviser with the investment policies and restrictions of the respective Funds, with such other limitations or directions of the Board of Trustees, and with all legal requirements under federal or state law or regulation. The Manager also is responsible primarily to provide statistical information and other data to the Trustees regarding the Funds’ portfolio investments and to make available to the Funds’ administrator such information as is necessary for the conduct of its duties.
The Trustees also noted that the Manager provides the Trust and each Fund with such administrative and other services (exclusive of, and in addition to, any such services provided by any others retained by the Trust on behalf of the Funds) and executive and other personnel as are necessary for the operation of the Trust and the Funds. Except for the Trust’s Chief Compliance Officer, the Manager pays all of the compensation of Trustees and officers of the Trust who are employees of the Manager or its affiliates.
The Trustees considered the scope and quality of services provided by the Manager and the Subadvisers and noted that the scope of such services provided had expanded as a result of recent regulatory and other developments. The Trustees noted that, for example, the Manager and Subadvisers are responsible for maintaining and monitoring their own compliance programs, and these compliance programs are continuously refined and enhanced in light of new regulatory requirements. The Trustees considered the capabilities and resources which the Manager has dedicated to performing services on behalf of the Trust and its Funds. The quality of administrative and other services, including the Manager’s role in coordinating the activities of the Trust’s other service providers, also were considered. The Trustees concluded that, overall, they were satisfied with the nature, extent and quality of services provided (and expected to be provided) to the Trust and to each of the Funds under the Agreements.
(2) The investment performance of the Funds, the Manager and the Subadvisers. In connection with every in-person quarterly Board of Trustees meeting, Trustees receive extensive information on the performance results of each of the Funds. This includes, for example, performance information on all of the Funds for the previous quarter, and previous one, three and five-year periods, and since inception. (For Funds which have been in existence for less than five years, Trustees may receive performance information on comparable funds managed by the particular Subadviser for periods prior to the creation of a particular Fund.) Such performance information includes information on absolute total return, performance versus Subadvisers’ comparable fund(s), performance versus the appropriate benchmark(s), and performance versus peer groups. For example, in connection with the Board of Trustees meetings held September 10-11, 2013, the Manager reported that for the three year period ended June 30, 2013, 12 Funds were in the top 40%, eight were in the middle 20% and eight were in the bottom 40%, and for the one year period ended June 30, 2013, 8 Funds were in the top 40%, seven were in the middle 20%, and 14 were in the bottom 40%. The Manager also reported that for the five year period ended June 30, 2013, 10 Funds were in the top 40%, four were in the middle 20%, and six were in the bottom 40%. At the Board of Trustees meeting held October 22, 2013, the Trustees determined that the overall investment performance of the Funds was acceptable.
(3) The costs of services to be provided and profits to be realized by the Manager and the Subadvisers and their affiliates from their relationship with the Funds. The Manager has supplied information to the Board of Trustees pertaining to the level of investment advisory fees to which the Funds are subject. The Manager has agreed to temporarily “cap” Fund expenses at certain levels, and information is provided to Trustees setting forth “contractual” advisory fees and “actual” fees after taking expense caps into account. Based upon the information provided, the “actual” advisory fees payable by the Funds overall are generally comparable to the average level of fees paid by Fund peer groups. For the 30 Funds reviewed by the Board of Trustees in the fall of 2013, 27 Funds paid “actual” advisory fees in a percentage amount within the 65th percentile or lower for each Fund’s applicable category. The Trustees recognized that it is difficult to make comparisons of advisory fees because there are variations in the services that are included in the fees paid by other funds. The Board has concluded that the advisory fees to be paid to the Manager by the Funds are not unreasonable.
The Manager has also supplied information to the Board of Trustees pertaining to total Fund expenses (which includes advisory fees, the 25 basis point 12b-1 fee paid by the Funds, and other Fund expenses). As noted above, the Manager has agreed to “cap” Fund expenses at certain levels. Based upon the information provided, the overall total expense ratio ranking in 2013 for the 30 Funds was as follows: (1) 28 of the Funds had total expense rankings below the 65th percentile (with 20 Funds at or below the 50th percentile); (2) the AZL Russell 1000 Value Fund had a total expense ranking in the 66th percentile; the Manager reported that there is only a limited peer group for such Fund; and (3) the AZL Morgan Stanley Global Real Estate Fund had a total expense ranking in the 72nd percentile; it was reported by the Manager that there is only a limited peer group for such Fund, such Fund’s expense ratio has declined, and such Fund’s expense ratio is comparable to funds of similar size.
The Manager has committed to providing the Funds with a high quality of service and working to reduce Fund expenses over time, particularly as the Funds grow larger. The Trustees concluded therefore that the expense ratios of the Funds were not unreasonable.
The Manager provided information concerning the profitability of the Manager’s investment advisory activities for the period from 2011 through June 30, 2013. The Trustees recognized that it is difficult to make comparisons of profitability from investment company advisory agreements because comparative information is not generally publicly available and is affected by numerous factors, including the structure of the particular adviser, the types of funds it manages, its business mix, numerous assumptions regarding allocation of expenses and the adviser’s capital structure and cost of capital. In considering profitability information, the Trustees considered the possible effect of certain fall-out benefits to the Manager and its affiliates. The Trustees focused on profitability of the Manager’s relationships with the Funds before taxes and distribution expenses. The Trustees recognized that the Manager should, in the abstract, be entitled to earn a reasonable level of profits for the services it provides to each Fund and, based on their review, concluded that they were satisfied that the Manager’s level of profitability from its relationship with the Funds was not excessive.
The Manager, on behalf of the Board of Trustees, endeavored to obtain information on the profitability of each Subadviser in connection with its relationship with the Fund or Funds which it subadvises. The Manager was unable to obtain meaningful profitability information from some of the unaffiliated Subadvisers. The Manager assured the Board of Trustees that the Agreements with the Subadvisers which are not affiliated with it were negotiated on an “arm’s length” basis, so that arguably, such profitability information should be less relevant. The Trustees were also provided with certain information on the profitability for the Subadviser which is affiliated with the Manager. Trustees recognized the difficulty of allocating costs to multiple advisory accounts and products of a large advisory organization. Based upon the information provided, the Trustees determined that there was no evidence that the level of such profitability attributable to subadvising the Funds was excessive.
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(4) and (5) The extent to which economies of scale would be realized as the Funds grow, and whether fee levels reflect these economies of scale. The Trustees noted that most of the advisory fee schedules for the Funds do not contain breakpoints that reduce the fee rate on assets above specified levels, although certain Subadvisory Agreements have such “breakpoints.” The Trustees recognized that breakpoints may be an appropriate way for the Manager to share its economies of scale, if any, with Funds that have substantial assets. However, they also recognized that there may not be a direct relationship between any economies of scale realized by Funds and those realized by the Manager as assets increase. The Trustees do not believe there is a uniform methodology for establishing breakpoints that give effect to Fund-specific service provided by the Manager. The Trustees noted that in the fund industry as a whole, as well as among funds similar to the Funds, there is no uniformity or pattern in the fees and asset levels at which breakpoints (if any) apply. Depending on the age, size, and other characteristics of a particular fund and its manager’s cost structure, different conclusions can be drawn as to whether there are economies of scale to be realized at any particular level of assets, notwithstanding the intuitive conclusion that such economies exist, or will be realized at some level of total assets. Moreover, because different managers have different cost structures and service models, it is difficult to draw meaningful conclusions from the breakpoints that may have been adopted by other funds. The Trustees also noted that the advisory agreements for many funds do not have breakpoints at all, or if breakpoints exist, they may be at asset levels significantly greater than those of the individual Funds. The Trustees also noted that the total assets in all of the Funds as of June 30, 2013 were approximately $12.85 billion, and that no single non-money market Fund had assets in excess of $616 million.
The Trustees noted that the Manager has agreed to temporarily “cap” Fund expenses at certain levels, which has the effect of reducing expenses as would the implementation of advisory fee breakpoints. The Manager has committed to continue to consider the continuation of fee “caps” and/or advisory fee breakpoints as the Funds grow larger. The Board receives quarterly reports on the level of Fund assets. It expects to consider whether or not to approve the Agreements at a meeting to be held prior to December 31, 2014, and will at that time, or prior thereto, consider: (a) the extent to which economies of scale can be realized, and (b) whether the advisory fee should be modified to reflect such economies of scale, if any.
Having taken these factors into account, the Trustees concluded that the absence of breakpoints in certain of the Funds’ advisory fee rate schedules was acceptable under each Fund’s circumstances.
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Information about the Board of Trustees and Officers (Unaudited)
The Trust is managed by the Trustees in accordance with the laws of the state of Delaware governing business trusts. There are currently eight Trustees, two of whom are “interested persons” of the Trust within the meaning of that term under the 1940 Act. The Trustees and Officers of the Trust, their addresses, ages, their positions held with the Trust, their terms of office with the Trust and length of time served, their principal occupation(s) during the past five years, the number of portfolios in the Trust they oversee, and their other directorships held are as follows:
Non-Interested Trustees(1)
Name, Address, and Age | Positions Held with VIP Trust and FOF Trust | Term of Office(2)/Length of Time Served | Principal Occupation(s) During Past 5 Years | Number of Portfolios Overseen for VIP Trust and FOF Trust | Other Directorships Held Outside the AZL Fund Complex | |||||
Peter R. Burnim, Age 66 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/07 | Chairman, Argus Investment Strategies Fund Ltd., February 2013 to present; Managing Director, iQ Venture Advisors, LLC. 2005 to 2012; Chairman, Northstar Group Holdings Ltd. Bermuda, 2011 to present; Expert Witness, Massachusetts Department of Revenue, 2011 to 2012; Executive Vice President, Northstar Companies, 2002 to 2005; Senior Officer, Citibank and Citicorp for over 25 years | 41 | Argus Group Holdings; Northstar Group Holdings, NRIL, Sterling Centrecorp Inc.; Highland Financial Holdings; and Bank of Bermuda NY | |||||
Peggy L. Ettestad, Age 56 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/07 | Managing Director, Red Canoe Management Consulting LLC, 2008 to present; Senior Managing Director, Residential Capital LLC, 2003 to 2008; Chief Operations Officer, Transamerica Reinsurance 2002 to 2003 | 41 | Luther College | |||||
Roger Gelfenbien, Age 70 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 10/99 | Retired; Partner of Accenture 1983 to 1999 | 41 | Virtus Funds (8 Funds) | |||||
Claire R. Leonardi, Age 58 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/04 | Chief Executive Officer, Connecticut Innovations, Inc., 2012 to present; General Partner, Fairview Capital, L.P., 1994 to 2012 | 41 | The Natural History Museum of the Adirondacks | |||||
Dickson W. Lewis, Age 65 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/04 | Retired; Consultant to Lifetouch National School Studios; Vice President/General Manager, Yearbooks & Canada-Lifetouch National School Studios, 2006 to 2013; Vice President/General Manager of Jostens, Inc., 2002 to 2006; Senior Vice President of Fortis Group, 1997 to 2002 | 41 | None | |||||
Peter W. McClean, Age 69 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/04 | Retired; President and CEO of Measurisk, LLC, 2001 to 2003; Chief Risk Management Officer at Bank of Bermuda Ltd., 1996 to 2001 | 41 | PNMAC Opportunity Fund; Northeast Bank; and FHI | |||||
Arthur C. Reeds III, Age 69 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 10/99 | Retired; Senior Investment Officer, Hartford Foundation for Public Giving, 2000 to 2003; Chairman, Chief Executive and President of Conning Corp., 1999 to 2000; Investment Consultant, 1997 to 1999 | 41 | Connecticut Water Service, Inc. |
Interested Trustees(3)
Name, Address, and Age | Positions Held with VIP Trust and FOF Trust | Term of Office(2)/Length of Time Served | Principal Occupation(s) During Past 5 Years | �� | Number of Portfolios Overseen for VIP Trust and FOF Trust | Other Directorships Held Outside the AZL Fund Complex | ||||
Robert DeChellis, Age 46 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 3/08 | President and CEO, Allianz Life Financial Services, LLC, 2007 to present | 41 | None | |||||
Brian Muench, Age 43 5701 Golden Hills Drive | Trustee | Since 6/11 | President, Allianz Investment Management LLC, November 2010 to present; Vice President, Allianz Life, April 2011 to present; Vice President, Advisory Management, Allianz Investment Management LLC from December 2005 to November 2010 | 41 | None |
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Officers
Name, Address, and Age | Positions Held with VIP and VIP FOF Trust | Term of Office(2)/Length of Time Served | Principal Occupation(s) During Past 5 Years | |||
Brian Muench, Age 43 5701 Golden Hills Drive Minneapolis, MN 55416 | President | Since 11/10 | President, Allianz Investment Management LLC from November 2010, to present; Vice President, Allianz Life from April 2011 to present; Vice President, Allianz Investment Management LLC from December 2005 to November 2010. | |||
Michael Radmer, Age 68 Dorsey & Whitney LLP, Suite 1500 50 South Sixth Street Minneapolis, MN 55402-1498 | Secretary | Since 2/02 | Partner, Dorsey and Whitney LLP since 1976. | |||
Ty Edwards, Age 47 Citi Fund Services Ohio, Inc. 3435 Stelzer Road Columbus, OH 43219 | Treasurer, Principal Accounting Officer and Principal Financial Officer | Since 4/10 | Senior Vice President, Financial Administration, Citi Fund Services Ohio, Inc., December 2009 to present; Director, Product Management, Columbia Management, April 2007 to April 2009; Deputy Treasurer, Columbia Funds and Director, Fund Administration, Columbia Management, January 2006 to April 2007. | |||
Christopher R. Pheiffer, Age 45(4) 5701 Golden Hills Drive Minneapolis, MN 55416 | Chief Compliance Officer(5) and Anti-Money Laundering Compliance Officer | Since 2/14 (interim) | Deputy Chief Compliance Officer of the Trusts, 2007-2014. |
(1) | Member of the Audit Committee. |
(2) | Indefinite. |
(3) | Is an “interested person”, as defined by the 1940 Act, due to employment by Allianz. |
(4) | Stephen G. Simon, previously the Chief Compliance Officer of the Trusts, resigned all of his positions with Allianz effective February 21, 2014. Mr. Pheiffer, previously the Deputy Chief Compliance Officer of the Trusts, has been named Chief Compliance Officer of the Trusts on an interim basis while a search for a permanent replacement is conducted. |
(5) | The Manager and the Trust are parties to a Chief Compliance Officer Agreement under which the Manager is compensated by the Trust for providing an employee of the Manager or one of its affiliates to act as the Trust’s Chief Compliance Officer. The Chief Compliance Officer and Anti-Money Laundering Compliance Officer is not considered a corporate officer or executive employee of the Trust. |
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The Allianz VIP Funds are distributed by Allianz Life Financial Services, LLC. These Funds are not FDIC Insured. | ANNRPT1213 2/14 |
AZL® JPMorgan U.S. Equity Fund
Annual Report
December 31, 2013
Table of Contents
Management Discussion and Analysis
Page 1
Expense Examples and Portfolio Composition
Page 3
Schedule of Portfolio Investments
Page 4
Statement of Assets and Liabilities
Page 7
Statement of Operations
Page 7
Statements of Changes in Net Assets
Page 8
Financial Highlights
Page 9
Notes to the Financial Statements
Page 10
Report of Independent Registered Public Accounting Firm
Page 15
Other Federal Income Tax Information
Page 16
Other Information
Page 17
Approval of Investment Advisory and Subadvisory Agreements
Page 18
Information about the Board of Trustees and Officers
Page 21
This report is submitted for the general information of the shareholder of the Fund. The report is not authorized for distribution to prospective investors in the Fund unless preceded or accompanied by an effective prospectus, which contains details concerning the sales charges and other pertinent information.
AZL® JPMorgan U.S. Equity Fund Review (unaudited)
Allianz Investment Management LLC serves as the Manager for the AZL® JPMorgan U.S. Equity Fund and J.P. Morgan Investment Management Inc. serves as Subadviser to the Fund.
What factors affected the Fund’s performance during the year ended December 31, 2013?
For the year ended December 31, 2013, the AZL® JPMorgan U.S. Equity Fund returned 36.90%1. That compared to a 32.39% total return for its benchmark, the S&P 500 Index2.
The U.S. equity markets rallied for most of 2013, despite crises including the 16-day U.S. government shutdown and the possibility of the United States attacking Syria. Investors started the year skeptical about the prospects of global growth, while stateside the March employment report and several regional manufacturing surveys came in below expectations.
The S&P 500 saw a large correction between the end of May and the end of June following the Federal Reserve Board Chairman’s acknowledgement that its bond purchasing program could slow. Stocks rallied into the end of the year following Congress’ approval of a budget and the Federal Reserve’s confirmation of the planned taper, with investors viewing the move as a vote of confidence in the economy.
The Fund outperformed its benchmark over the year, with its investments in the autos & transportation, pharmaceuticals and medical technology and REITs sectors adding value. An overweight position in a company that designs and supplies semiconductor devices benefited the Fund, as did an underweight position in a technology services company that missed revenue targets throughout the period.*
The Fund’s relative performance was hindered by an overweight position in an energy company that was challenged by weak coking coal prices. Additionally, an overweight position in an insurance carrier, which underperformed compared to its competitors, also detracted from the Fund’s relative return.*
Past performance does not guarantee future results.
* | The Fund’s portfolio composition is subject to change. There is no guarantee that any sectors mentioned will continue to perform well or that securities in such sectors will be held by the Fund in the future. The information contained in this commentary is for informational purposes only and should not be construed as a recommendation to purchase or sell securities in the sector mentioned. The Fund’s holdings and weightings are as of December 31, 2013. |
1 | The recent growth rate in the stock market has helped to produce short-term returns that are not typical and may not continue in the future. Because of ongoing market volatility, Fund performance may be subject to substantial short-term changes. |
2 | The Standard & Poor’s 500 Index (“S&P 500”) is representative of 500 selected common stocks, most of which are listed on the New York Stock Exchange, and is a measure of the U.S. stock market as a whole. Investors cannot invest directly in an index. |
1
AZL® JPMorgan U.S. Equity Fund Review (unaudited)
Fund Objective
The Fund’s investment objective is to seek to provide high total return from a portfolio of selected equity securities. This objective may be changed by the Trustees of the Fund without shareholder approval. The Fund seeks to achieve its objective by investing at least 80% of its net assets, plus any borrowings for investment purposes, primarily in large- and medium-capitalization U.S. companies.
Investment Concerns
Equity securities (stocks) are more volatile and carry more risk than other forms of investments, including investments in high-grade fixed income securities. The net asset value per share of this Fund will fluctuate as the value of the securities in the portfolio changes.
International investing may involve risk of capital loss from unfavorable fluctuations in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations.
Small- to mid-capitalization companies typically have a higher risk of failure and historically have experienced a greater degree of volatility.
Value-based investments are subject to the risk that the broad market may not recognize their intrinsic value.
Investments in the Fund are subject to the risks related to direct investment in real estate, such as real estate risk, regulatory risks, concentration risk, and diversification risk. By itself the Fund does not constitute a complete investment plan and should be considered a long-term investment for investors who can afford to weather changes in the value of their investments.
For a complete description of these and other risks associated with investing in a mutual Fund, please refer to the Fund’s prospectus.
Growth of $10,000 Investment
The chart above represents a comparison of a hypothetical investment in the Fund versus a similar investment in the Fund’s benchmark, and represents the reinvestment of dividends and capital gains in the Fund.
Average Annual Total Returns as of December 31, 2013
Since | ||||||||||||||||
1 | 3 | 5 | Inception | |||||||||||||
Year | Year | Year | (5/3/04) | |||||||||||||
AZL® JPMorgan U.S. Equity Fund | 36.90 | %1 | 16.18 | % | 18.83 | % | 7.32 | % | ||||||||
S&P 500 Index | 32.39 | % | 16.18 | % | 17.94 | % | 7.56 | % |
Past performance does not guarantee future results. The performance data quoted represents past performance and current returns may be lower or higher. The investment return and principal value will fluctuate so that an investor’s shares, when redeemed may be worth more or less than the original cost. To obtain performance information current to the most recent month end, please visit www.Allianzlife.com.
Expense Ratio | Gross | |||
AZL® JPMorgan U.S. Equity Fund | 1.12 | % |
The above expense ratio is based on the current Fund prospectus dated April 29, 2013. The Manager has voluntarily reduced the management fee to 0.75% on the first $100 million of assets and 0.70% on assets above $100 million. The Manager and the Fund have entered into a written contract limiting operating expenses, excluding certain expenses (such as interest expense), to 1.20% through April 30, 2015. Additional information pertaining to the December 31, 2013 expense ratios can be found in the financial highlights.
1 | The recent growth rate in the stock market has helped to produce short-term returns that are not typical and may not continue in the future. Because of ongoing market volatility, Fund performance may be subject to substantial short-term changes. |
The total return of the Fund does not reflect the effect of any insurance charges, the annual maintenance fee or the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. Such charges, fees and tax payments would reduce the performance quoted. |
The Fund’s performance is measured against the Standard & Poor’s 500 Index (“S&P 500”), an unmanaged index that is representative of 500 selected common stocks, most of which are listed on the New York Stock Exchange, which is a measure of the U.S. Stock market as a whole. The index does not reflect the deduction of fees associated with a mutual fund, such as investment management and fund accounting fees. The Fund’s performance reflects the deduction of fees for services provided to the Fund. Investors cannot invest directly in an index. |
2
AZL JPMorgan U.S. Equity Fund
(Unaudited)
As a shareholder of the AZL JPMorgan U.S. Equity Fund (the “Fund”), you incur ongoing costs, including management fees, distribution fees, and other Fund expenses. These examples are intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. Please note that the expenses shown in each table do not reflect expenses that apply to the subaccount or the insurance contract. If the expenses that apply to the subaccount of the insurance contract were included, your costs would have been higher.
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the periods presented below.
The Actual Expense table below provides information about actual account values and actual expenses. You may use the information below, 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 table under the heading entitled “Expenses Paid During Period” to estimate the expenses you paid on your account during this period.
Beginning Account Value 7/1/13 | Ending Account Value 12/31/13 | Expenses Paid During Period 7/1/13 - 12/31/13* | Annualized Expense Ratio During Period 7/1/13 - 12/31/13 | |||||||||||||||||
AZL JPMorgan U.S. Equity Fund | $ | 1,000.00 | $ | 1,191.20 | $ | 5.63 | 1.02 | % |
The Hypothetical Expense table below provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.
Beginning Account Value 7/1/13 | Ending Account Value 12/31/13 | Expenses Paid During Period 7/1/13 - 12/31/13* | Annualized Expense Ratio During Period 7/1/13 - 12/31/13 | |||||||||||||||||
AZL JPMorgan U.S. Equity Fund | $ | 1,000.00 | $ | 1,020.06 | $ | 5.19 | 1.02 | % |
* | Expenses are equal to the average account value over the period, multiplied by the Fund’s annualized expense ratio, multiplied by 184/365 (to reflect the one half year period). |
Portfolio Composition
(Unaudited)
Investments | Percent of net assets | ||||
Information Technology | 20.9 | % | |||
Consumer Discretionary | 15.3 | ||||
Financials | 15.1 | ||||
Health Care | 13.4 | ||||
Energy | 10.7 | ||||
Industrials | 10.7 | ||||
Consumer Staples | 6.4 | ||||
Materials | 4.5 | ||||
Utilities | 1.2 | ||||
Telecommunication Services | 1.0 | ||||
|
| ||||
Total Common Stock | 99.2 | ||||
Money Market | 0.8 | ||||
Securities Held as Collateral for Securities on Loan | 0.7 | ||||
|
| ||||
Total Investment Securities | 100.7 | ||||
Net other assets (liabilities) | (0.7 | ) | |||
|
| ||||
Net Assets | 100.0 | % | |||
|
|
3
AZL JPMorgan U.S. Equity Fund
Schedule of Portfolio Investments
December 31, 2013
Shares | Fair Value | |||||||
| Common Stocks (99.2%): |
| ||||||
| Aerospace & Defense (3.7%): |
| ||||||
87,865 | Honeywell International, Inc. | $ | 8,028,225 | |||||
7,922 | Textron, Inc. | 291,213 | ||||||
92,427 | United Technologies Corp. | 10,518,192 | ||||||
|
| |||||||
18,837,630 | ||||||||
|
| |||||||
| Airlines (0.7%): |
| ||||||
103,870 | Delta Air Lines, Inc. | 2,853,309 | ||||||
14,528 | United Continental Holdings, Inc.* | 549,594 | ||||||
|
| |||||||
3,402,903 | ||||||||
|
| |||||||
| Auto Components (0.3%): |
| ||||||
11,318 | Dana Holding Corp. | 222,059 | ||||||
24,837 | Johnson Controls, Inc. | 1,274,138 | ||||||
|
| |||||||
1,496,197 | ||||||||
|
| |||||||
| Automobiles (2.3%): |
| ||||||
286,468 | General Motors Co. | 11,707,947 | ||||||
|
| |||||||
| Beverages (1.5%): |
| ||||||
82,885 | Coca-Cola Co. (The) | 3,423,979 | ||||||
8,375 | Constellation Brands, Inc., Class A* | 589,433 | ||||||
1,000 | Molson Coors Brewing Co., Class B | 56,150 | ||||||
44,529 | PepsiCo, Inc. | 3,693,235 | ||||||
|
| |||||||
7,762,797 | ||||||||
|
| |||||||
| Biotechnology (3.0%): |
| ||||||
4,733 | Aegerion Pharmaceuticals, Inc.* | 335,854 | ||||||
15,845 | Alexion Pharmaceuticals, Inc.* | 2,108,336 | ||||||
21,462 | Biogen Idec, Inc.* | 6,003,994 | ||||||
26,360 | Celgene Corp.* | 4,453,786 | ||||||
34,438 | Vertex Pharmaceuticals, Inc.* | 2,558,743 | ||||||
|
| |||||||
15,460,713 | ||||||||
|
| |||||||
| Building Products (0.4%): |
| ||||||
86,980 | Masco Corp. | 1,980,535 | ||||||
|
| |||||||
| Capital Markets (3.2%): |
| ||||||
30,269 | Ameriprise Financial, Inc. | 3,482,448 | ||||||
12,984 | Goldman Sachs Group, Inc. (The) | 2,301,544 | ||||||
70,586 | Invesco, Ltd. | 2,569,330 | ||||||
158,404 | Morgan Stanley | 4,967,549 | ||||||
8,313 | Northern Trust Corp. | 514,492 | ||||||
23,664 | State Street Corp. | 1,736,701 | ||||||
16,668 | TD Ameritrade Holding Corp. | 510,708 | ||||||
|
| |||||||
16,082,772 | ||||||||
|
| |||||||
| Chemicals (2.2%): |
| ||||||
12,851 | Air Products & Chemicals, Inc. | 1,436,485 | ||||||
29,984 | Axiall Corp. | 1,422,441 | ||||||
91,681 | Dow Chemical Co. (The) | 4,070,636 | ||||||
17,779 | Methanex Corp. | 1,053,228 | ||||||
28,191 | Monsanto Co. | 3,285,661 | ||||||
|
| |||||||
11,268,451 | ||||||||
|
| |||||||
| Commercial Banks (3.1%): |
| ||||||
21,009 | SunTrust Banks, Inc. | 773,341 | ||||||
299,877 | Wells Fargo & Co. | 13,614,416 | ||||||
39,241 | Zions Bancorp | 1,175,660 | ||||||
|
| |||||||
15,563,417 | ||||||||
|
|
Shares | Fair Value | |||||||
| Common Stocks, continued |
| ||||||
| Communications Equipment (3.2%): |
| ||||||
369,188 | Cisco Systems, Inc. | $ | 8,288,271 | |||||
104,533 | QUALCOMM, Inc. | 7,761,575 | ||||||
|
| |||||||
16,049,846 | ||||||||
|
| |||||||
| Computers & Peripherals (3.2%): |
| ||||||
25,722 | Apple, Inc. | 14,432,872 | ||||||
30,043 | Hewlett-Packard Co. | 840,603 | ||||||
11,647 | SanDisk Corp. | 821,579 | ||||||
|
| |||||||
16,095,054 | ||||||||
|
| |||||||
| Construction & Engineering (1.5%): |
| ||||||
89,404 | Fluor Corp. | 7,178,247 | ||||||
7,300 | Jacobs Engineering Group, Inc.* | 459,827 | ||||||
|
| |||||||
7,638,074 | ||||||||
|
| |||||||
| Consumer Finance (0.7%): |
| ||||||
12,532 | American Express Co. | 1,137,028 | ||||||
34,521 | Capital One Financial Corp. | 2,644,654 | ||||||
|
| |||||||
3,781,682 | ||||||||
|
| |||||||
| Diversified Financial Services (4.2%): |
| ||||||
553,365 | Bank of America Corp. | 8,615,893 | ||||||
142,191 | Citigroup, Inc. | 7,409,573 | ||||||
24,096 | IntercontinentalExchange Group, Inc. | 5,419,672 | ||||||
|
| |||||||
21,445,138 | ||||||||
|
| |||||||
| Diversified Telecommunication Services (1.0%): |
| ||||||
103,831 | Verizon Communications, Inc. | 5,102,255 | ||||||
|
| |||||||
| Electric Utilities (0.8%): |
| ||||||
20,413 | American Electric Power Co., Inc. | 954,104 | ||||||
33,520 | NextEra Energy, Inc. | 2,869,982 | ||||||
|
| |||||||
3,824,086 | ||||||||
|
| |||||||
| Electrical Equipment (1.0%): |
| ||||||
35,889 | Eaton Corp. plc | 2,731,870 | ||||||
37,266 | Emerson Electric Co. | 2,615,328 | ||||||
|
| |||||||
5,347,198 | ||||||||
|
| |||||||
| Energy Equipment & Services (3.1%): |
| ||||||
18,252 | Ensco plc, Class A, ADR | 1,043,649 | ||||||
39,469 | Halliburton Co. | 2,003,052 | ||||||
140,529 | Schlumberger, Ltd. | 12,663,069 | ||||||
|
| |||||||
15,709,770 | ||||||||
|
| |||||||
| Food & Staples Retailing (1.3%): |
| ||||||
20,227 | Costco Wholesale Corp. | 2,407,215 | ||||||
37,554 | CVS Caremark Corp. | 2,687,740 | ||||||
18,355 | Wal-Mart Stores, Inc. | 1,444,355 | ||||||
|
| |||||||
6,539,310 | ||||||||
|
| |||||||
| Food Products (1.0%): |
| ||||||
32,039 | General Mills, Inc. | 1,599,066 | ||||||
95,872 | Mondelez International, Inc., Class A | 3,384,282 | ||||||
|
| |||||||
4,983,348 | ||||||||
|
| |||||||
| Health Care Equipment & Supplies (0.4%): |
| ||||||
25,310 | Stryker Corp. | 1,901,793 | ||||||
|
|
Continued
4
AZL JPMorgan U.S. Equity Fund
Schedule of Portfolio Investments
December 31, 2013
Shares | Fair Value | |||||||
| Common Stocks, continued |
| ||||||
| Health Care Providers & Services (3.2%): |
| ||||||
20,536 | Humana, Inc. | $ | 2,119,726 | |||||
11,379 | McKesson, Inc. | 1,836,571 | ||||||
166,594 | UnitedHealth Group, Inc. | 12,544,528 | ||||||
|
| |||||||
16,500,825 | ||||||||
|
| |||||||
| Health Care Technology (0.3%): |
| ||||||
26,094 | Cerner Corp.* | 1,454,480 | ||||||
|
| |||||||
| Hotels, Restaurants & Leisure (1.3%): |
| ||||||
24,384 | McDonald’s Corp. | 2,365,980 | ||||||
30,860 | Royal Caribbean Cruises, Ltd. | 1,463,381 | ||||||
35,928 | Yum! Brands, Inc. | 2,716,516 | ||||||
|
| |||||||
6,545,877 | ||||||||
|
| |||||||
| Household Durables (0.6%): |
| ||||||
28,026 | Lennar Corp. | 1,108,709 | ||||||
44,138 | Toll Brothers, Inc.* | 1,633,105 | ||||||
3,272 | Whirlpool Corp. | 513,246 | ||||||
|
| |||||||
3,255,060 | ||||||||
|
| |||||||
| Household Products (1.8%): |
| ||||||
24,857 | Colgate-Palmolive Co. | 1,620,925 | ||||||
89,491 | Procter & Gamble Co. (The) | 7,285,462 | ||||||
|
| |||||||
8,906,387 | ||||||||
|
| |||||||
| Insurance (3.9%): |
| ||||||
96,014 | ACE, Ltd. | 9,940,329 | ||||||
4,400 | Axis Capital Holdings, Ltd. | 209,308 | ||||||
36,125 | Hartford Financial Services Group, Inc. (The) | 1,308,809 | ||||||
71,794 | Marsh & McLennan Cos., Inc. | 3,471,958 | ||||||
86,445 | MetLife, Inc. | 4,661,114 | ||||||
|
| |||||||
19,591,518 | ||||||||
|
| |||||||
| Internet & Catalog Retail (1.3%): |
| ||||||
9,486 | Amazon.com, Inc.* | 3,782,922 | ||||||
2,634 | Priceline.com, Inc.* | 3,061,762 | ||||||
|
| |||||||
6,844,684 | ||||||||
|
| |||||||
| Internet Software & Services (4.1%): |
| ||||||
103,648 | eBay, Inc.* | 5,689,239 | ||||||
7,758 | Facebook, Inc., Class A* | 424,052 | ||||||
13,233 | Google, Inc., Class A* | 14,830,355 | ||||||
|
| |||||||
20,943,646 | ||||||||
|
| |||||||
| IT Services (2.1%): |
| ||||||
22,244 | Accenture plc, Class A | 1,828,902 | ||||||
3,498 | Alliance Data Systems Corp.*^ | 919,729 | ||||||
15,659 | Cognizant Technology Solutions Corp., Class A* | 1,581,246 | ||||||
25,562 | Genpact, Ltd.* | 469,574 | ||||||
24,508 | Visa, Inc., Class A | 5,457,441 | ||||||
|
| |||||||
10,256,892 | ||||||||
|
| |||||||
| Machinery (1.5%): |
| ||||||
21,793 | Flowserve Corp. | 1,717,942 | ||||||
72,617 | PACCAR, Inc. | 4,296,747 | ||||||
7,428 | Pentair, Ltd., Registered Shares | 576,933 | ||||||
10,155 | SPX Corp. | 1,011,540 | ||||||
|
| |||||||
7,603,162 | ||||||||
|
|
Shares | Fair Value | |||||||
| Common Stocks, continued |
| ||||||
| Media (5.7%): |
| ||||||
29,940 | CBS Corp., Class B | $ | 1,908,376 | |||||
148,616 | Comcast Corp., Class A | 7,722,830 | ||||||
26,895 | DISH Network Corp., Class A* | 1,557,758 | ||||||
11,035 | Time Warner Cable, Inc. | 1,495,243 | ||||||
184,152 | Time Warner, Inc. | 12,839,078 | ||||||
41,731 | Walt Disney Co. (The) | 3,188,248 | ||||||
|
| |||||||
28,711,533 | ||||||||
|
| |||||||
| Metals & Mining (2.2%): |
| ||||||
254,253 | Alcoa, Inc. | 2,702,709 | ||||||
180,681 | Freeport-McMoRan Copper & Gold, Inc. | 6,818,901 | ||||||
49,673 | United States Steel Corp.^ | 1,465,354 | ||||||
|
| |||||||
10,986,964 | ||||||||
|
| |||||||
| Multi-Utilities (0.4%): |
| ||||||
15,623 | NiSource, Inc. | 513,684 | ||||||
16,441 | Sempra Energy | 1,475,744 | ||||||
|
| |||||||
1,989,428 | ||||||||
|
| |||||||
| Oil, Gas & Consumable Fuels (7.6%): |
| ||||||
20,166 | Anadarko Petroleum Corp. | 1,599,567 | ||||||
17,964 | Apache Corp. | 1,543,826 | ||||||
17,347 | Cheniere Energy, Inc.* | 748,003 | ||||||
52,142 | Chevron Corp. | 6,513,057 | ||||||
8,128 | EOG Resources, Inc. | 1,364,204 | ||||||
138,740 | Exxon Mobil Corp. | 14,040,488 | ||||||
23,252 | Marathon Oil Corp. | 820,796 | ||||||
21,596 | Marathon Petroleum Corp. | 1,981,001 | ||||||
57,020 | Occidental Petroleum Corp. | 5,422,602 | ||||||
32,824 | Phillips 66 | 2,531,715 | ||||||
41,309 | QEP Resources, Inc. | 1,266,121 | ||||||
37,480 | Williams Cos., Inc. (The) | 1,445,604 | ||||||
|
| |||||||
39,276,984 | ||||||||
|
| |||||||
| Paper & Forest Products (0.1%): |
| ||||||
9,058 | International Paper Co. | 444,114 | ||||||
|
| |||||||
| Pharmaceuticals (6.5%): |
| ||||||
117,640 | Bristol-Myers Squibb Co. | 6,252,566 | ||||||
239,149 | Johnson & Johnson Co. | 21,903,658 | ||||||
86,795 | Merck & Co., Inc. | 4,344,090 | ||||||
6,060 | Perrigo Co. plc | 929,968 | ||||||
|
| |||||||
33,430,282 | ||||||||
|
| |||||||
| Road & Rail (1.8%): |
| ||||||
185,669 | CSX Corp. | 5,341,697 | ||||||
7,006 | Norfolk Southern Corp. | 650,367 | ||||||
19,034 | Union Pacific Corp. | 3,197,712 | ||||||
|
| |||||||
9,189,776 | ||||||||
|
| |||||||
| Semiconductors & Semiconductor Equipment (4.3%): |
| ||||||
16,244 | Altera Corp. | 528,417 | ||||||
160,360 | Applied Materials, Inc. | 2,836,768 | ||||||
153,363 | Avago Technologies, Ltd. | 8,111,369 | ||||||
16,338 | Broadcom Corp., Class A | 484,422 | ||||||
50,349 | Freescale Semiconductor Holdings I, Ltd.* | 808,101 | ||||||
47,855 | KLA-Tencor Corp. | 3,084,733 |
Continued
5
AZL JPMorgan U.S. Equity Fund
Schedule of Portfolio Investments
December 31, 2013
Shares | Fair Value | |||||||
| Common Stocks, continued |
| ||||||
| Semiconductors & Semiconductor Equipment, continued |
| ||||||
84,361 | Lam Research Corp.* | $ | 4,593,457 | |||||
44,378 | Teradyne, Inc.*^ | 781,940 | ||||||
12,429 | Xilinx, Inc. | 570,740 | ||||||
|
| |||||||
21,799,947 | ||||||||
|
| |||||||
| Software (4.0%): |
| ||||||
29,611 | Adobe Systems, Inc.* | 1,773,107 | ||||||
22,717 | Citrix Systems, Inc.* | 1,436,850 | ||||||
305,326 | Microsoft Corp. | 11,428,352 | ||||||
150,523 | Oracle Corp. | 5,759,010 | ||||||
|
| |||||||
20,397,319 | ||||||||
|
| |||||||
| Specialty Retail (3.0%): |
| ||||||
6,284 | AutoZone, Inc.* | 3,003,375 | ||||||
83,626 | Home Depot, Inc. (The) | 6,885,765 | ||||||
53,131 | Lowe’s Cos., Inc. | 2,632,641 | ||||||
39,338 | TJX Cos., Inc. (The) | 2,507,011 | ||||||
|
| |||||||
15,028,792 | ||||||||
|
| |||||||
| Textiles, Apparel & Luxury Goods (0.8%): |
| ||||||
22,390 | Lululemon Athletica, Inc.*^ | 1,321,682 | ||||||
38,440 | V.F. Corp. | 2,396,350 | ||||||
|
| |||||||
3,718,032 | ||||||||
|
| |||||||
| Tobacco (0.8%): |
| ||||||
48,583 | Philip Morris International, Inc. | 4,233,037 | ||||||
|
| |||||||
| Trading Companies & Distributors (0.1%): |
| ||||||
2,819 | W.W. Grainger, Inc. | 720,029 | ||||||
|
| |||||||
| Total Common Stocks (Cost $371,961,166) | 503,809,684 | ||||||
|
|
Contracts, Shares, Notional Amount or Principal Amount | Fair Value | |||||||
| Securities Held as Collateral for Securities on Loan (0.7%): |
| ||||||
$ | 3,356,883 | Allianz Variable Insurance Products Securities Lending Collateral Trust(a) | $ | 3,356,883 | ||||
|
| |||||||
| Total Securities Held as Collateral for Securities on Loan | 3,356,883 | ||||||
|
| |||||||
| Unaffiliated Investment Company (0.8%): |
| ||||||
4,200,817 | Dreyfus Treasury Prime Cash Management Fund, Institutional Shares, 0.00%(b) | 4,200,817 | ||||||
|
| |||||||
| Total Unaffiliated Investment Company (Cost $4,200,817) | 4,200,817 | ||||||
|
| |||||||
| Total Investment Securities (Cost $379,518,866)(c) — 100.7% | 511,367,384 | ||||||
| Net other assets (liabilities) — (0.7)% | (3,557,422 | ) | |||||
|
| |||||||
| Net Assets — 100.0% | $ | 507,809,962 | |||||
|
|
Percentages indicated are based on net assets as of December 31, 2013.
ADR—American Depositary Receipt
* | Non-income producing security. |
^ | This security or a partial position of this security was on loan as of December 31, 2013. The total value of securities on loan as of December 31, 2013, was $3,291,206. |
(a) | Purchased with cash collateral held from securities lending. The value of the collateral could include collateral held for securities that were sold on or before December 31, 2013. |
(b) | The rate represents the effective yield at December 31, 2013. |
(c) | See Federal Tax Information listed in the Notes to the Financial Statements. |
See accompanying notes to the financial statements.
6
AZL JPMorgan U.S. Equity Fund
Statement of Assets and Liabilities
December 31, 2013
Assets: | |||||
Investment securities, at cost | $ | 379,518,866 | |||
|
| ||||
Investment securities, at value* | $ | 511,367,384 | |||
Cash | 42,325 | ||||
Interest and dividends receivable | 523,173 | ||||
Receivable for capital shares issued | 15,743 | ||||
Receivable for investments sold | 1,298,222 | ||||
|
| ||||
Total Assets | 513,246,847 | ||||
|
| ||||
Liabilities: | |||||
Payable for investments purchased | 1,509,776 | ||||
Payable for capital shares redeemed | 105,498 | ||||
Payable for collateral received on loaned securities | 3,356,883 | ||||
Manager fees payable | 299,001 | ||||
Administration fees payable | 17,136 | ||||
Distribution fees payable | 105,269 | ||||
Custodian fees payable | 12,826 | ||||
Administrative and compliance services fees payable | 2,358 | ||||
Trustee fees payable | 18 | ||||
Other accrued liabilities | 28,120 | ||||
|
| ||||
Total Liabilities | 5,436,885 | ||||
|
| ||||
Net Assets | $ | 507,809,962 | |||
|
| ||||
Net Assets Consist of: | |||||
Capital | $ | 475,768,298 | |||
Accumulated net investment income/(loss) | 3,756,523 | ||||
Accumulated net realized gains/(losses) from investment transactions | (103,563,377 | ) | |||
Net unrealized appreciation/(depreciation) on investments | 131,848,518 | ||||
|
| ||||
Net Assets | $ | 507,809,962 | |||
|
| ||||
Shares of beneficial interest (unlimited number of shares authorized, no par value) | 34,933,061 | ||||
Net Asset Value (offering and redemption price per share) | $ | 14.54 | |||
|
|
* | Includes securities on loan of $3,291,206. |
For the Year Ended December 31, 2013
Investment Income: | |||||
Dividends | $ | 8,314,623 | |||
Interest | 12,136 | ||||
Income from securities lending | 25,402 | ||||
Foreign withholding tax | (1,558 | ) | |||
|
| ||||
Total Investment Income | 8,350,603 | ||||
|
| ||||
Expenses: | |||||
Manager fees | 3,616,528 | ||||
Administration fees | 139,777 | ||||
Distribution fees | 1,130,163 | ||||
Custodian fees | 46,326 | ||||
Administrative and compliance services fees | 9,487 | ||||
Trustee fees | 24,385 | ||||
Professional fees | 24,823 | ||||
Shareholder reports | 25,031 | ||||
Other expenses | 13,363 | ||||
|
| ||||
Total expenses before reductions | 5,029,883 | ||||
Less expenses voluntarily waived/reimbursed by the Manager | (402,064 | ) | |||
Less expenses paid indirectly | (36,676 | ) | |||
|
| ||||
Net expenses | 4,591,143 | ||||
|
| ||||
Net Investment Income/(Loss) | 3,759,460 | ||||
|
| ||||
Realized and Unrealized Gains/(Losses) on Investments: | |||||
Net realized gains/(losses) on securities transactions | 65,573,449 | ||||
Net realized gains/(losses) on futures contracts | 149,975 | ||||
Change in net unrealized appreciation/depreciation on investments | 71,200,773 | ||||
|
| ||||
Net Realized/Unrealized Gains/(Losses) on Investments | 136,924,197 | ||||
|
| ||||
Change in Net Assets Resulting From Operations | $ | 140,683,657 | |||
|
|
See accompanying notes to the financial statements.
7
Statements of Changes in Net Assets
AZL JPMorgan U.S. Equity Fund | ||||||||||
For the Year Ended | For the Year Ended | |||||||||
Change in Net Assets: | ||||||||||
Operations: | ||||||||||
Net investment income/(loss) | $ | 3,759,460 | $ | 4,272,697 | ||||||
Net realized gains/(losses) on investment transactions | 65,723,424 | 21,122,061 | ||||||||
Change in unrealized appreciation/depreciation on investments | 71,200,773 | 30,428,643 | ||||||||
|
|
|
| |||||||
Change in net assets resulting from operations | 140,683,657 | 55,823,401 | ||||||||
|
|
|
| |||||||
Dividends to Shareholders: | ||||||||||
From net investment income | (4,265,547 | ) | (2,890,566 | ) | ||||||
|
|
|
| |||||||
Change in net assets resulting from dividends to shareholders | (4,265,547 | ) | (2,890,566 | ) | ||||||
|
|
|
| |||||||
Capital Transactions: | ||||||||||
Proceeds from shares issued | 37,012,375 | 60,259,051 | ||||||||
Proceeds from dividends reinvested | 4,265,547 | 2,890,566 | ||||||||
Value of shares redeemed | (63,611,318 | ) | (34,633,820 | ) | ||||||
|
|
|
| |||||||
Change in net assets resulting from capital transactions | (22,333,396 | ) | 28,515,797 | |||||||
|
|
|
| |||||||
Change in net assets | 114,084,714 | 81,448,632 | ||||||||
Net Assets: | ||||||||||
Beginning of period | 393,725,248 | 312,276,616 | ||||||||
|
|
|
| |||||||
End of period | $ | 507,809,962 | $ | 393,725,248 | ||||||
|
|
|
| |||||||
Accumulated net investment income/(loss) | $ | 3,756,523 | $ | 4,267,400 | ||||||
|
|
|
| |||||||
Share Transactions: | ||||||||||
Shares issued | 2,983,087 | 5,919,940 | ||||||||
Dividends reinvested | 327,615 | 271,415 | ||||||||
Shares redeemed | (5,089,833 | ) | (3,361,647 | ) | ||||||
|
|
|
| |||||||
Change in shares | (1,779,131 | ) | 2,829,708 | |||||||
|
|
|
|
See accompanying notes to the financial statements.
8
AZL JPMorgan U.S. Equity Fund
(Selected data for a share of beneficial interest outstanding throughout the periods indicated)
Year Ended December 31, | |||||||||||||||||||||||||
2013 | 2012 | 2011 | 2010 | 2009 | |||||||||||||||||||||
Net Asset Value, Beginning of Period | $ | 10.72 | $ | 9.22 | $ | 9.50 | $ | 8.46 | $ | 6.35 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Investment Activities: | |||||||||||||||||||||||||
Net Investment Income/(Loss) | 0.11 | 0.11 | 0.09 | 0.07 | — | (a) | |||||||||||||||||||
Net Realized and Unrealized Gains/(Losses) on Investments | 3.83 | 1.47 | (0.30 | ) | 1.02 | 2.14 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Total from Investment Activities | 3.94 | 1.58 | (0.21 | ) | 1.09 | 2.14 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Dividends to Shareholders From: | |||||||||||||||||||||||||
Net Investment Income | (0.12 | ) | (0.08 | ) | (0.07 | ) | (0.05 | ) | (0.03 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Total Dividends | (0.12 | ) | (0.08 | ) | (0.07 | ) | (0.05 | ) | (0.03 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Net Asset Value, End of Period | $ | 14.54 | $ | 10.72 | $ | 9.22 | $ | 9.50 | $ | 8.46 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Total Return(b) | 36.90 | %(e) | 17.13 | % | (2.20 | )% | 12.97 | % | 33.71 | % | |||||||||||||||
Ratios to Average Net Assets/Supplemental Data: | |||||||||||||||||||||||||
Net Assets, End of Period (000’s) | $ | 507,810 | $ | 393,725 | $ | 312,277 | $ | 325,037 | $ | 301,111 | |||||||||||||||
Net Investment Income/(Loss) | 0.83 | % | 1.16 | % | 0.90 | % | 0.79 | % | 0.97 | % | |||||||||||||||
Expenses Before Reductions(c) | 1.11 | % | 1.12 | % | 1.13 | % | 1.13 | % | 1.20 | % | |||||||||||||||
Expenses Net of Reductions | 1.01 | % | 1.03 | % | 1.08 | % | 1.08 | % | 1.15 | % | |||||||||||||||
Expenses Net of Reductions, Excluding Expenses Paid Indirectly(d) | 1.02 | % | 1.04 | % | 1.08 | % | 1.08 | % | 1.15 | % | |||||||||||||||
Portfolio Turnover Rate | 81 | % | 71 | % | 81 | % | 86 | % | 103 | % |
(a) | Represents less than $0.005. |
(b) | The returns include reinvested dividends and fund level expenses, but exclude insurance contract charges. If these charges were included, the returns would have been lower. |
(c) | Excludes fee reductions. If such fee reductions had not occurred, the ratios would have been as indicated. |
(d) | Expenses net of reductions excludes expenses paid indirectly, pursuant to a “commission recapture” program, under which brokers remit a portion of the brokerage commission which is used to pay certain Fund expenses. See note 2 in the Notes to the Financial Statements. |
(e) | During the year ended December 31, 2013, the Fund received monies related to certain nonrecurring litigation settlements. The corresponding impact to the total return was 0.09%. |
See accompanying notes to the financial statements.
9
AZL JPMorgan U.S. Equity Fund
Notes to the Financial Statements
December 31, 2013
1. Organization
The Allianz Variable Insurance Products Trust (the “Trust”) was organized as a Delaware statutory trust on July 13, 1999. The Trust is a diversified open-end management investment company registered under the Investment Company Act of 1940. The Trust consists of 29 separate investment portfolios (collectively, the “Funds”), of which one is included in this report, the AZL JPMorgan U.S. Equity Fund (the “Fund”), and 28 are presented in separate reports.
The Trust is authorized to issue an unlimited number of shares of the Fund without par value. Shares of the Fund are available through the variable annuity contracts and variable life insurance policies offered through the separate accounts of participating insurance companies.
Under the Trust’s organizational documents, its officers and trustees are indemnified against certain liabilities arising out of the performance of their duties to the Fund. In addition, in the normal course of business, the Fund may enter into contracts with its vendors and others that provide for general indemnifications. The Fund’s maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Fund. However, based on experience, the Fund expects the risk of loss to be remote.
2. Significant Accounting Policies
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. The policies conform with U.S. generally accepted accounting principles (“U.S. GAAP”). The preparation of financial statements requires management to make certain 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 increases and decreases in net assets from operations during the reporting period. Actual results could differ from those estimates.
Security Valuation
The Fund records its investments at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between willing market participants at the measurement date. The valuation techniques used to determine fair value are further described in Note 4 below.
Investment Transactions and Investment Income
Investment transactions are recorded not later than on the business day following trade date. However, for financial reporting purposes, investment transactions are accounted for on trade date. Net realized gains and losses on investments sold and on foreign currency transactions are recorded on the basis of identified cost. Interest income is recorded on the accrual basis and includes, where applicable, the amortization of premiums or accretion of discounts. Dividend income is recorded on the ex-dividend date except in the case of foreign securities, in which case dividends are recorded as soon as such information becomes available.
Real Estate Investment Trusts
The Fund may own shares of real estate investment trusts (“REITs”) which report information on the source of their distributions annually. Certain distributions received from REITs during the year, which are known to be a return of capital, are recorded as a reduction to the cost of the individual REIT.
Foreign Currency Translation
The accounting records of the Fund are maintained in U.S. dollars. Foreign currency amounts are translated into U.S. dollars at the current rate of exchange to determine the fair value of investments, assets and liabilities. Purchases and sales of securities, and income and expenses are translated at the prevailing rate of exchange on the respective dates of such transactions. The Fund does not isolate that portion of the results of operations resulting from changes in foreign exchange rates on investments from fluctuations arising from changes in market prices of securities held. Such fluctuations are included in the net realized and unrealized gain or loss on investments and foreign currencies. Income received by the Fund from sources within foreign countries may be subject to withholding and other income or similar taxes imposed by such countries. The Funds accrue such taxes, as applicable, based on their current interpretation of tax rules in the foreign markets in which they invest.
Dividends to Shareholders
Dividends to shareholders are recorded on the ex-dividend date. The Fund distributes its dividends from net investment income and net realized capital gains, if any, on an annual basis. The amount of dividends from net investment income and from net realized gains is determined in accordance with federal income tax regulations, which may differ from U.S. GAAP. These “book/tax” differences are either temporary or permanent in nature. To the extent these differences are permanent in nature (e.g., return of capital, net operating loss, reclassification of certain market discounts, gain/loss, paydowns, and distributions), such amounts are reclassified within the composition of net assets based on their federal tax-basis treatment; temporary differences (e.g., wash sales and post October losses) do not require reclassification. Dividends to shareholders that exceed net investment income and net realized gains for tax purposes are reported as distributions of capital.
Expense Allocation
Expenses directly attributable to the Fund are charged directly to the Fund, while expenses attributable to more than one Fund are allocated among the respective Funds based upon relative net assets or some other reasonable method. Expenses which are attributable to more than one Trust are allocated across the Allianz Variable Insurance Products and Allianz Variable Insurance Products Fund of Funds Trusts based upon relative net assets or another reasonable basis. Allianz Investment Management LLC (the “Manager”), serves as the investment manager for the Trust and the Allianz Variable Insurance Products Fund of Funds Trust.
Securities Lending
To generate additional income, the Fund may lend up to 33 1/3% of its assets pursuant to agreements requiring that the loan be continuously secured by any combination of cash, U.S. government or U.S. government agency securities, equal initially to at least 102% of the fair value plus accrued interest on the securities loaned (105% for foreign
10
AZL JPMorgan U.S. Equity Fund
Notes to the Financial Statements
December 31, 2013
securities). The borrower of securities is at all times required to post collateral to the Fund in an amount equal to 100% of the fair value of the securities loaned based on the previous day’s fair value of the securities loaned, marked-to-market daily. Any collateral shortfalls are adjusted the next business day. The Fund bears all of the gains and losses on such investments. The Fund receives payments from borrowers equivalent to the dividends and interest that would have been earned on securities lent while simultaneously seeking to earn income on the investment of cash collateral received. In extremely low interest rate environments, the broker rebate fee may exceed the interest earned or the cash collateral which would result in a loss to the Fund. The investment of cash collateral deposited by the borrower is subject to inherent market risks such as interest rate risk, credit risk, liquidity risk, and other risks that are present in the market, and as such, the value of these investments may not be sufficient, when liquidated, to repay the borrower when the loaned security is returned. There may be risks of delay in recovery of the securities or even loss of rights in the collateral should the borrower of the securities fail financially. However, loans will be made only to borrowers, such as broker-dealers, banks or institutional borrowers of securities, deemed by the Manager to be of good standing and credit worthy and when in its judgment, the consideration which can be earned currently from such securities loans justifies the attendant risks. Loans are subject to termination by the Trust or the borrower at any time, and are, therefore, not considered to be illiquid investments. Securities on loan at December 31, 2013 are presented on the Fund’s Schedule of Portfolio Investments. The average outstanding amount of securities on loan was $2.9 million for the year ended December 31, 2013.
Cash collateral received in connection with securities lending is invested in the Allianz Variable Insurance Products Securities Lending Collateral Trust (the “Securities Lending Collateral Trust”) managed by The Dreyfus Corporation, an affiliate of the Custodian and Securities Lending Agent. The Securities Lending Collateral Trust invests in short-term investments that have a remaining maturity of 397 days or less as calculated in accordance with Rule 2a-7 under the 1940 Act. The Fund paid securities lending fees of $2,508 during the year ended December 31, 2013. These fees have been netted against “Income from securities lending” on the Statement of Operations.
Commission Recapture
Certain Funds of the Trust participate in a commission recapture program. The Fund will utilize the recaptured commissions to pay for, in whole or part, certain expenses of the Fund, excluding investment advisory fees. Any amounts received by the Fund, if applicable, are disclosed as “Expenses paid indirectly” on the Statement of Operations.
Effective January 6, 2014, the Manager, on behalf of the Trust, requested the Fund cease participation in the program until further notice.
Derivative Instruments
All open derivative positions at period end are reflected on the Fund’s Schedule of Portfolio Investments. The following is a description of the derivative instruments utilized by the Fund, including the primary underlying risk exposures related to each instrument type.
Futures Contracts
During the year ended December 31, 2013, the Fund used futures contracts to provide equity exposure on the Fund’s cash balances. Futures contracts are valued based upon their quoted daily settlement prices. Upon entering into a futures contract, the Fund is required to segregate liquid assets in accordance with the initial margin requirements of the broker or exchange. Futures contracts are marked to market daily and a payable or receivable for the change in value (“variation margin”) is recorded by the Fund. Gains or losses are recognized but not considered realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, elements of market risk (generally equity price risk related to stock futures, interest rate risk related to bond futures, and foreign currency risk related to currency futures) and exposure to loss in excess of the variation margin disclosed in the Statement of Assets and Liabilities. The primary risks associated with the use of futures contracts are the imperfect correlation between the change in fair value of the underlying securities and the prices of futures contracts, the possibility of an illiquid market, and the inability of the counterparty to meet the terms of the contract. There were not open futures contracts as of December 31, 2013. The monthly average notional amount for these contracts was $0.9 million for the year ended December 31, 2013. Realized gains and losses are reported as “Net realized gains/(losses) on futures contracts” on the Statement of Operations.
Summary of Derivative Instruments
The following is a summary of the fair values of derivative instruments on the Fund’s Statement of Assets and Liabilities, categorized by risk exposure, as of December 31, 2013:
Asset Derivatives | Liability Derivatives | |||||||||||
Primary Risk Exposure | Statement of Assets and Liabilities Location | Total Fair Value* | Statement of Assets and Liabilities Location | Total Fair Value* | ||||||||
Equity Contracts | Receivable for variation margin on futures contracts | $ | — | Payable for variation margin on futures contracts | $ | — |
* | For futures contracts, the amounts represent the cumulative appreciation/depreciation of these futures contracts as reported in the Schedule of Portfolio Investments. Only current day’s variation margin is reported within the Statement of Assets and Liabilities as Variation Margin on Futures Contracts. |
The following is a summary of the effect of derivative instruments on the Statement of Operations, categorized by risk exposure, for the year ended December 31, 2013:
Primary Risk Exposure | Location of Gains/(Losses) on Derivatives Recognized in Income | Realized Gains/(Losses) on Derivatives Recognized in Income | Change in Unrealized Appreciation/ Depreciation on Derivatives Recognized in Income | |||||||
Equity Contracts | Net realized gains/(losses) on futures contracts/ change in unrealized appreciation/ depreciation on investments | $ | 149,975 | $ | 10,002 |
11
AZL JPMorgan U.S. Equity Fund
Notes to the Financial Statements
December 31, 2013
3. Related Party Transactions
The Manager provides investment advisory and management services for the Fund. The Manager has retained an independent money management organization (the “Subadviser”), to make investment decisions on behalf of the Fund. Pursuant to a subadvisory agreement with J.P. Morgan Investment Management Inc. (“JPMIM”), JPMIM provides investment advisory services as the Subadviser for the Fund subject to the general supervision of the Trustees and the Manager. The Manager is entitled to a fee, computed daily and paid monthly, based on the average daily net assets of the Fund. Expenses incurred by the Fund for investment advisory and management services are reflected on the Statement of Operations as “Manager fees.” For its services, the Subadviser is entitled to a fee payable by the Manager. The Manager has contractually agreed to waive fees and reimburse the Fund to limit the annual expenses, excluding interest expense (e.g., cash overdraft fees), taxes, brokerage commissions, other expenditures that are capitalized in accordance with U.S. GAAP and other extraordinary expenses not incurred in the ordinary course of the Fund’s business, based on the daily net assets of the Fund, through April 30, 2015.
For the year ended December 31, 2013, the annual rate due to the Manager and the annual expense limit were as follows:
Annual Rate* | Annual Expense Limit | |||||||||
AZL JPMorgan U.S. Equity Fund | 0.80 | % | 1.20 | % |
* | The Manager voluntarily reduced the management fee to 0.75% on the first $100 million of assets and 0.70% on assets above $100 million. The Manager reserves the right to increase the management fee to the amount shown in the table. |
Any amounts contractually waived or reimbursed by the Manager in a particular fiscal year will be subject to repayment by the Fund to the Manager to the extent that from time to time through the next three fiscal years the repayment will not cause the Fund’s expenses to exceed the lesser of the stated limit at the time of the waiver or the current stated limit. Any amounts recouped by the Manager during the year are reflected on the Statement of Operations as “Recoupment of prior expenses reimbursed by the Manager.” At December 31, 2013, there were no remaining contractual reimbursements that are subject to repayment by the Fund in subsequent years.
In addition, the Manager may voluntarily waive or reimburse additional fees in order to maintain more competitive expense ratios. Any voluntary waivers or reimbursements are not subject to repayment in subsequent years. Information on the total amount waived/reimbursed by the Manager or repaid to the Manager by the Fund during the year can be found on the Statement of Operations.
Pursuant to separate agreements between the Funds and the Manager, the Manager provides a Chief Compliance Officer (“CCO”) and certain compliance oversight and regulatory filing services to the Trust. Under these agreements the Manager is entitled to an amount equal to a portion of the compensation and certain other expenses related to the individuals performing the CCO and compliance oversight services, as well as $75 per hour for time incurred in connection with the preparation and filing of certain documents with the Securities and Exchange Commission. The fees are paid to the Manager on a quarterly basis. The total expenses incurred by the Fund for these services are reflected on the Statement of Operations as “Administrative and compliance services fees.”
Citi Fund Services Ohio, Inc. (“Citi” or the “Administrator”), a wholly owned subsidiary of Citigroup, Inc., with which an officer of the Trust is affiliated, serves as the Trust’s administrator, transfer agent, and fund accountant, and assists the Trust in all aspects of its administration and operation. The Administrator is entitled to a Trust-wide asset-based fee, which is based on the following schedule: 0.05% of daily average net assets on the first $4 billion, 0.04% of daily average net assets on the next $2 billion, 0.02% of daily average net assets on the next $2 billion and 0.01% of daily average net assets over $8 billion. The overall Trust-wide fees are accrued daily and paid monthly and are subject to a minimum annual fee. In addition, the Administrator is entitled to annual account fees related to the transfer agency system, an annual fee for each additional class of shares of any Fund, certain annual fees in supporting fair value services, and a Trust-wide annual fee for providing infrastructure and support in implementing the written policies and procedures comprising the Fund’s compliance program. Fees payable to the Administrator are subject to certain reductions associated with services provided to new funds. The Administrator is also reimbursed for certain expenses incurred. The total expenses incurred by the Fund for these services are reflected on the Statement of Operations as “Administration fees.”
Allianz Life Financial Services, LLC (“ALFS”), an affiliate of the Manager, serves as distributor of the Fund and receives 12b-1 fees directly from the Fund, plus a Trust-wide annual fee of $42,500, paid by the Manager from its profits and not by the Trust, for recordkeeping and reporting services.
The Trust has adopted a distribution and service plan in conformance with Rule 12b-1 of the 1940 Act. Pursuant to this plan, the Fund is authorized to pay certain fees for the sale and distribution of its shares and services provided to its shareholders at an annual rate not to exceed 0.25% of the Fund’s average daily net assets. These fees are reflected on the Statement of Operations as “Distribution fees.”
In addition, certain legal fees and expenses are paid to a law firm, Dorsey & Whitney LLP, of which the Secretary of the Fund is a partner. During the year ended December 31, 2013, $5,642 was paid from the Fund relating to these fees and expenses.
Certain Officers and Trustees of the Trust are affiliated with the Manager or the Administrator. Such Officers (except for the Trust’s CCO as noted above) and Trustees receive no compensation from the Trust for serving in their respective roles. For their service to the Trust and to the Allianz Variable Insurance Products Fund of Funds Trust, each non-interested Trustee receives a $139,000 annual Board retainer. In addition, the Trustees are reimbursed for certain expenses associated with attending Board meetings. Compensation to the Trustees is allocated between the Trust and the Allianz Variable Insurance Products Fund of Funds Trust in proportion to the assets under management of each trust. During the year ended December 31, 2013, actual Trustee compensation was $973,000 in total for both trusts.
At a meeting of the Board of Trustees on December 4, 2013, the Trustees approved a fee increase to the Officers and Trustees who are paid a fee for their services to the Trust and to the Allianz Variable Insurance Products Fund of Funds Trust. Effective January 1, 2014, each non-interested Trustee will receive a $163,000 annual retainer.
4. Investment Valuation Summary
The valuation techniques employed by the Fund, as described below, maximize the use of observable inputs and minimize the use of unobservable inputs in determining fair value. The inputs used for valuing the Fund’s investments are summarized in the three broad levels listed below:
— | Level 1 — quoted prices in active markets for identical assets |
— | Level 2 — other significant observable inputs (including quoted prices for similar securities, interest rates, prepayments speeds, credit risk, etc.) |
— | Level 3 — significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of investments) |
12
AZL JPMorgan U.S. Equity Fund
Notes to the Financial Statements
December 31, 2013
Changes in valuation techniques may result in transfers in or out of an assigned level within the disclosure hierarchy. The Fund determines transfers between fair value hierarchy levels at the reporting period end. The inputs or methodology used for valuing investments is not necessarily an indication of the risk associated with investing in those investments.
Security prices are generally provided by an independent third party pricing service approved by the Trust’s Board of Trustees (“Trustees”) as of the close of the New York Stock Exchange (“NYSE”) (generally 4:00 pm Eastern Time). Equity securities are valued at the last quoted sale price or, if there is no sale, the last quoted bid price is used for long securities and the last quoted ask price is used for securities sold short. Securities listed on NASDAQ Stock Market, Inc. (“NASDAQ”) are valued at the official closing price as reported by NASDAQ. In each of these situations, valuations are typically categorized as a Level 1 in the fair value hierarchy. Investments in open-end investment companies are valued at their respective net asset value as reported by such companies and are typically categorized as Level 1 in the fair value hierarchy.
Debt and other fixed income securities are generally valued at an evaluated bid price provided by an independent pricing source approved by the Trustees. To value debt securities, pricing services may use various pricing techniques which take into account appropriate factors such as market activity, yield, quality, coupon rate, maturity, type of issue, trading characteristics, call features, credit ratings and other data, as well as broker quotes. Short term securities of sufficient credit quality with sixty days or less remaining until maturity may be valued at amortized cost, which approximates fair value. In each of these situations, valuations are typically categorized as Level 2 in the fair value hierarchy.
Futures contracts are valued at the last sales price as of the close of the primary exchange and are typically categorized as Level 1 in the fair value hierarchy.
Other assets and securities for which market quotations are not readily available, or are deemed unreliable are valued at fair value as determined in good faith by the Trustees or persons acting on the behalf of the Trustees. Fair value pricing may be used for significant events such as securities whose trading has been suspended, whose price has become stale or for which there is no currently available price at the close of the NYSE. Depending on the source and relative significance of valuation inputs, these instruments may be classified as Level 2 or Level 3 in the fair value hierarchy. The Fund utilizes a pricing service to assist in determining the fair value of securities when certain significant events occur that may affect the value of foreign securities.
In accordance with procedures adopted by the Trustees, fair value pricing may be used if events materially affecting the value of foreign securities occur between the time when the exchange on which they are traded closes and the time when the Fund’s net asset value is calculated. Management identifies possible fluctuation in international securities by monitoring the increase or decrease in the value of a designated benchmark index. In the event of an increase or decrease greater than predetermined levels, the Fund may use a systematic valuation model provided by an independent third party to fair value its international equity securities which are then typically categorized as Level 2 in the fair value hierarchy.
For the year ended December 31, 2013, there were no Level 3 investments for which significant unobservable inputs were used to determine fair value.
The following is a summary of the valuation inputs used as of December 31, 2013 in valuing the Fund’s investments based upon the three levels defined above:
Investment Securities: | Level 1 | Level 2 | Total | ||||||||||||
Common Stocks+ | $ | 503,809,684 | $ | — | $ | 503,809,684 | |||||||||
Securities Held as Collateral for Securities on Loan | — | 3,356,883 | 3,356,883 | ||||||||||||
Unaffiliated Investment Company | 4,200,817 | — | 4,200,817 | ||||||||||||
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Total Investments | $ | 508,010,501 | $ | 3,356,883 | $ | 511,367,384 | |||||||||
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+ | For detailed industry descriptions, see the accompanying Schedule of Portfolio Investments. |
5. Security Purchases and Sales
For the year ended December 31, 2013, cost of purchases and proceeds from sales of securities (excluding securities maturing less than one year from acquisition) were as follows:
Purchases | Sales | |||||||||
AZL JPMorgan U.S. Equity Fund | $ | 360,400,512 | $ | 380,749,675 |
6. Investment Risks
Derivatives Risk: The Fund may invest in derivatives as a principal strategy. A derivative is a financial contract whose value depends on, or is derived from, the value of an underlying asset, reference rate, or risk. Use of derivative instruments involves risks different from, or possibly greater than, the risks associated with investing directly in securities and other traditional investments. Derivatives are subject to a number of other risks, such as liquidity risk, interest rate risk, market risk, credit risk, and selection risk. Derivatives also involve the risk of mispricing or improper valuation and the risk that changes in the value may not correlate perfectly with the underlying asset, rate, or index. Using derivatives may result in losses, possibly in excess of the principal amount invested. Also, suitable derivative transactions may not be available in all circumstances. The counterparty to a derivatives contract could default. As required by applicable law, a Fund that invests in derivatives segregates cash or liquid securities, or both, to the extent that its obligations under the instrument are not covered through ownership of the underlying security, financial instrument, or currency.
Foreign Securities and Currencies Risk: Investments in securities of foreign issuers carry certain risks not ordinarily associated with investments in securities of domestic issuers. Such risks include future political and economic developments, and the possible imposition of exchange controls or other foreign governmental laws and restrictions. In addition, with respect to certain countries, there is the possibility of expropriation of assets, confiscatory taxation, political or social instability or diplomatic developments which could adversely affect investments in those securities.
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AZL JPMorgan U.S. Equity Fund
Notes to the Financial Statements
December 31, 2013
7. Federal Tax Information
It is the Fund’s policy to continue to comply with the requirements of the Internal Revenue Code under Subchapter M, applicable to regulated investment companies, and to distribute all of its taxable income, including any net realized gains on investments, to its shareholders. Therefore, no provision is made for federal income taxes.
Management of the Fund has reviewed tax positions taken in tax years that remain subject to examination by all major tax jurisdictions, including federal (i.e., the last four tax year ends and the interim tax period since then, as applicable). Management believes that there is no tax liability resulting from unrecognized tax benefits related to uncertain tax positions taken.
Cost for federal income tax purposes at December 31, 2013 is $383,846,595. The gross unrealized appreciation/ (depreciation) on a tax basis is as follows:
Unrealized appreciation | $ | 132,336,184 | |||
Unrealized depreciation | (4,815,395 | ) | |||
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Net unrealized appreciation/(depreciation) | $ | 127,520,789 | |||
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As of the end of its tax year ended December 31, 2013, the Fund has capital loss carry forwards (“CLCFs”) as summarized in the tables below. CLCFs subject to expiration are applied as short-term capital loss regardless of whether the originating capital loss was short-term or long-term. CLCFs that are not subject to expiration must be utilized before those that are subject to expiration. The Board does not intend to authorize a distribution of any realized gain for the Fund until any applicable CLCF has been offset or expires.
CLCFs subject to expiration:
Expires 12/31/2016 | Expires 12/31/2017 | Total | |||||||||||||
AZL JPMorgan U.S. Equity Fund | $ | 85,268,431 | $ | 13,967,218 | $ | 99,235,649 |
During the year ended December 31, 2013, the Fund utilized $63,108,021 in capital loss carry forwards to offset capital gains.
The tax character of dividends paid to shareholders during the year ended December 31, 2013 were as follows:
Ordinary Income | Net Long-Term Capital Gains | Total Distributions(a) | |||||||||||||
AZL JPMorgan U.S. Equity Fund | $ | 4,265,547 | $ | — | $ | 4,265,547 |
(a) | Total distributions paid may differ from the Statements of Changes in Net Assets because dividends are recognized when actually paid for tax purposes. |
The tax character of dividends paid to shareholders during the year ended December 31, 2012 was as follows:
Ordinary Income | Net Long-Term Capital Gains | Total Distributions(a) | |||||||||||||
AZL JPMorgan U.S. Equity Fund | $ | 2,890,566 | $ | — | $ | 2,890,566 |
(a) | Total distributions paid may differ from the Statements of Changes in Net Assets because dividends are recognized when actually paid for tax purposes. |
As of December 31, 2013, the components of accumulated earnings on a tax basis were as follows:
Undistributed Ordinary Income | Undistributed Long-Term Capital Gains | Accumulated Capital and Other Losses | Unrealized Appreciation/ (Depreciation)(a) | Total Accumulated Earnings/ (Deficit) | |||||||||||||||||||||
AZL JPMorgan U.S. Equity Fund | $ | 3,756,524 | $ | — | $ | (99,235,649 | ) | $ | 127,520,789 | $ | 32,041,664 |
(a) | The difference between book-basis and tax-basis unrealized appreciation/(depreciation) is attributable primarily to tax deferral of losses on wash sales. |
8. Subsequent Events
Management has evaluated events and transactions subsequent to period end through the date the financial statements were issued, for purposes of recognition or disclosure in these financial statements and there are no subsequent events to report.
14
Report of Independent Registered Public Accounting Firm
The Shareholders and Board of Trustees of
Allianz Variable Insurance Products Trust:
We have audited the accompanying statement of assets and liabilities of AZL JPMorgan U.S. Equity Fund (the “Fund”) of the Allianz Variable Insurance Products Trust, including the schedule of portfolio investments, as of December 31, 2013, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the years in the two-year period then ended, and the financial highlights for each of the years in the five-year period then ended. These financial statements and financial highlights are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of December 31, 2013, by correspondence with the custodian and brokers or by other appropriate auditing procedures. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of the Fund as of December 31, 2013, the results of its operations for the year then ended, the changes in its net assets for each of the years in the two-year period then ended, and the financial highlights for each of the years in the five-year period then ended, in conformity with U.S. generally accepted accounting principles.
/s/KPMG LLP
Columbus, Ohio
February 25, 2014
15
Other Federal Income Tax Information (Unaudited)
For the year ended December 31, 2013, 100.00% of the total ordinary income dividends paid by the Fund qualify for the corporate dividends received deduction available to corporate shareholders.
16
A description of the policies and procedures that the Fund uses to determine how to vote proxies relating to portfolio securities is available, without charge, upon request, by visiting the Securities and Exchange Commission’s (“Commission”) website at www.sec.gov, or by calling 800-624-0197.
Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30th is available (i) without charge, upon request, by calling 800-624-0197; (ii) on the Allianz Variable Insurance Products Trust’s website at https://www.allianzlife.com; and (iii) on the Commission’s website at http://www.sec.gov.
The Fund files complete Schedules of Portfolio Holdings with the Commission for the first and third quarters of each fiscal year on Form N-Q. Schedules of Portfolio Holdings for the Fund in this report are available without charge on the Commission’s website at http://www.sec.gov, or may be reviewed and copied at the Commission’s Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 800-SEC-0330.
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Approval of Investment Advisory and Subadvisory Agreements (Unaudited)
The Allianz Variable Insurance Products Trust (the “Trust”) is a manager-of-managers fund. That means that the Trust’s Manager (“Allianz Investment Management LLC”) is responsible for monitoring the various Subadvisers that have day-to-day responsibility for the decisions made for each of the Trust’s investment portfolios. The Trust’s Manager is responsible for determining, in the first instance, which investment advisers to consider recommending for selection as a Subadviser.
In reviewing the services provided by the Manager and the terms of the investment management agreement, the Board receives and reviews information related to the Manager’s experience and expertise in the variable insurance marketplace. Currently, the Funds are offered only through variable annuities and variable life insurance policies, and not in the retail fund market. In addition, the Board receives information regarding the Manager’s expertise with regard to portfolio diversification and asset allocation requirements within variable insurance products issued by Allianz Life Insurance Company of North America and its subsidiary, Allianz Life Insurance Company of New York. Currently, the Funds are offered only through Allianz Life and Allianz of New York variable products.
The Trust’s Manager has adopted policies and procedures to assist it in the process of analyzing each potential Subadviser with expertise in particular asset classes for purposes of making the recommendation that a specific investment adviser be selected. The Trust’s Board reviews and considers the information provided by the Manager in deciding which investment advisers to select. After an investment adviser becomes a Subadviser, a similarly rigorous process is instituted by the Manager to monitor the investment performance and other responsibilities of the Subadviser. The Manager reports to the Trust’s Board on its analysis at the regular meetings of the Board, which are held at least quarterly. Where warranted, the Manager will add or remove a particular Subadviser from a “watch” list that it maintains. Watch list criteria include, for example: (a) Fund performance over various time periods; (b) Fund risk issues, such as changes in key personnel involved with Fund management, changes in investment philosophy or process, or “capacity” concerns; and (c) organizational risk issues, such as regulatory, compliance or legal concerns, or changes in the ownership of the Subadviser. The Manager may place a Fund on the watch list for other reasons, and if so, will explain its rationale to the Trustees. Funds which are on the watch list are subject to special scrutiny of the Manager and the Board of Trustees. Funds may be removed from such watch list, if for example, performance improves or regulatory matters are satisfactorily resolved. However, in some situations where Funds which have been on the watch list, the Manager has recommended the retention of a new Subadviser, and the Board of Trustees has subsequently approved new Subadvisory Agreements with such Subadvisers.
In assessing the Manager’s and Subadvisers’ (collectively, the “Advisory Organizations”), performance of their obligations, the Board considers whether there has occurred a circumstance or event that would constitute a reason for it to not renew an advisory contract. In this regard, the Board is mindful of the potential disruption of a Fund’s operations and various risks, uncertainties and other effects that could occur as a result of a decision to terminate or not renew a contract.
As required by the Investment Company Act of 1940 (“1940 Act”), the Trust’s Board has reviewed and approved the Trust’s Investment Management Agreement with the Manager (the “Advisory Agreement”) and portfolio management agreements (the “Subadvisory Agreements”) with the Subadvisers. The Board’s decision to approve these contracts reflects the exercise of its business judgment on whether to approve new arrangements and continue the existing arrangements. During its review of these contracts, the Board considers many factors, among the most material of which are: the Fund’s investment objectives and long term performance; the Advisory Organizations’ management philosophy, personnel, and processes, including their compliance history and the adequacy of their compliance processes; the preferences and expectations of Fund shareholders (and underlying contract owners) and their relative sophistication; the continuing state of competition in the mutual fund industry; and comparable fees in the mutual fund industry.
The Board also considers the compensation and benefits received by the Advisory Organizations. This includes fees received for services provided to the Fund by affiliated persons of the Advisory Organizations and research services received by the Advisory Organizations from brokers that execute Fund trades, as well as advisory fees. The Board considered the fact that: (1) the Manager and the Trust are parties to an Administrative Service Agreement, a Compliance Services Agreement, and a Chief Compliance Officer Agreement, under which the Manager is compensated by the Trust for performing certain administrative and compliance services including providing an employee of the Manager or one of its affiliates to act as the Trust’s Chief Compliance Officer; and (2) Allianz Life Financial Services, LLC, an affiliated person of the Manager, is a registered securities broker-dealer and receives (along with its affiliated persons) payments made by the Trust pursuant to Rule 12b-1.
The Board is aware that various courts have interpreted provisions of the 1940 Act and have indicated in their decisions that the following factors may be relevant to an adviser’s compensation: the nature and quality of the services provided by the adviser, including the performance of the fund; the adviser’s cost of providing the services; the extent to which the adviser may realize “economies of scale” as the fund grows larger; any indirect benefits that may accrue to the adviser and its affiliates as a result of the adviser’s relationship with the fund; performance and expenses of comparable funds; and the extent to which the independent Board members are fully informed about all facts bearing on the adviser’s service and fee. The Trust’s Board is aware of these factors and takes them into account in its review of the Trust’s advisory contracts.
The Board considered and weighed these circumstances in light of its experience in governing the Trust and working with the Advisory Organizations on matters relating to the Funds, and is assisted in its deliberations by the advice of legal counsel to the Independent Trustees. In this regard, the Board requests and receives a significant amount of information about the Funds and the Advisory Organizations. Some of this information is provided at each regular meeting of the Board; additional information is provided in connection with the particular meeting or meetings at which the Board’s formal review of an advisory contract occurs. In between regularly scheduled meetings, the Board may receive information on particular matters as the need arises. Thus, the Board’s evaluation of an advisory contract is informed by reports covering such matters as: an Advisory Organization’s investment philosophy, personnel, and processes; the Fund’s short- and long-term performance (in absolute terms as well as in relationship to its benchmark(s), certain competitor or “peer group” funds and similar funds managed by the particular Subadviser), and comments on the reasons for performance; the Fund’s expenses (including the advisory fee itself and the overall expense structure of the Fund, both in absolute terms and relative to similar and/or competing funds, with due regard for contractual or voluntary expense limitations); the use and allocation of brokerage commissions derived from trading the Fund’s portfolio securities; the nature and extent of the advisory and other services provided to the Fund by the Advisory Organizations and their affiliates; compliance and audit reports concerning the Funds and the companies that service them; and relevant developments in the mutual fund industry and how the Funds and/or Advisory Organizations are responding to them.
The Board also receives financial information about Advisory Organizations, including reports on the compensation and benefits the Advisory Organizations derive from their relationships with the Funds. These reports cover not only the fees under the advisory contracts, but also fees, if any, received for providing other services to the Funds. The reports also discuss any indirect or “fall out” benefits an Advisory Organization may derive from its relationship with the Funds.
The Advisory and Subadvisory Agreements (collectively, the “Agreements”) were most recently considered at Board of Trustees meetings held in the fall of 2013. Information relevant to the approval of such Agreements was considered at a telephonic Board of Trustees meeting on October 16, 2013, and at an “in person” Board of Trustees meeting held October 22, 2013. The Agreements were approved at the Board meeting of October 22, 2013. At such meeting the Board also approved an Expense Limitation Agreement between the Manager and the Trust for the period ending April 30, 2015. In connection with such meetings, the Trustees requested and evaluated extensive materials from the Manager, including performance and expense information for other investment companies with similar investment objectives derived from data compiled by an independent third party provider and other sources believed to be reliable by the Manager. Prior to voting, the Trustees reviewed the proposed approval/continuance of the Agreements with management and with experienced counsel who are independent of the Manager and received a memorandum from such counsel discussing the legal
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standards for their consideration of the proposed approvals/continuances. The independent (“disinterested”) Trustees also discussed the proposed approvals/continuances in a private session with such counsel at which no representatives of the Manager were present. In reaching their determinations relating to the approval and/or continuance of the Agreements, in respect of each Fund, the Trustees considered all factors they believed relevant. The Board based its decision to approve the Agreements on the totality of the circumstances and relevant factors, and with a view to past and future long-term considerations. Not all of the factors and considerations discussed above and below are necessarily relevant to every Fund, and the Board did not assign relative weights to factors discussed herein or deem any one or group of them to be controlling in and of themselves.
An SEC Rule requires that shareholder reports include a discussion of certain factors relating to the selection of investment advisers and the approval of advisory fees. The “factors” enumerated by the SEC are set forth below in italics, as well as the Board’s conclusions regarding such factors:
(1) The nature, extent and quality of services provided by the Manager and Subadvisers. The Trustees noted that the Manager, subject to the control of the Board of Trustees, administers each Fund’s business and other affairs. Under the Advisory Agreement, the Manager holds the sole and exclusive responsibility to provide, or arrange for other to provide, the management of the Funds’ assets and the placement of orders for the purchase and sale of the securities of the Funds. As the Trust is a manager of managers fund, the Manager is authorized, under the Advisory Agreement, to retain one or more Subadvisers for each Fund to handle day-to-day management of the Funds’ investment portfolios; the Manager is responsible for determining, in the first instance, which investment advisers to recommend to the Board of Trustees for selection as a Subadviser. The Trustees were aware that, notwithstanding the retention of the Subadvisers to handle day-to-day portfolio management, the Manager remains responsible for substantial other matters, including continuously monitoring compliance by each Subadviser with the investment policies and restrictions of the respective Funds, with such other limitations or directions of the Board of Trustees, and with all legal requirements under federal or state law or regulation. The Manager also is responsible primarily to provide statistical information and other data to the Trustees regarding the Funds’ portfolio investments and to make available to the Funds’ administrator such information as is necessary for the conduct of its duties.
The Trustees also noted that the Manager provides the Trust and each Fund with such administrative and other services (exclusive of, and in addition to, any such services provided by any others retained by the Trust on behalf of the Funds) and executive and other personnel as are necessary for the operation of the Trust and the Funds. Except for the Trust’s Chief Compliance Officer, the Manager pays all of the compensation of Trustees and officers of the Trust who are employees of the Manager or its affiliates.
The Trustees considered the scope and quality of services provided by the Manager and the Subadvisers and noted that the scope of such services provided had expanded as a result of recent regulatory and other developments. The Trustees noted that, for example, the Manager and Subadvisers are responsible for maintaining and monitoring their own compliance programs, and these compliance programs are continuously refined and enhanced in light of new regulatory requirements. The Trustees considered the capabilities and resources which the Manager has dedicated to performing services on behalf of the Trust and its Funds. The quality of administrative and other services, including the Manager’s role in coordinating the activities of the Trust’s other service providers, also were considered. The Trustees concluded that, overall, they were satisfied with the nature, extent and quality of services provided (and expected to be provided) to the Trust and to each of the Funds under the Agreements.
(2) The investment performance of the Funds, the Manager and the Subadvisers. In connection with every in-person quarterly Board of Trustees meeting, Trustees receive extensive information on the performance results of each of the Funds. This includes, for example, performance information on all of the Funds for the previous quarter, and previous one, three and five-year periods, and since inception. (For Funds which have been in existence for less than five years, Trustees may receive performance information on comparable funds managed by the particular Subadviser for periods prior to the creation of a particular Fund.) Such performance information includes information on absolute total return, performance versus Subadvisers’ comparable fund(s), performance versus the appropriate benchmark(s), and performance versus peer groups. For example, in connection with the Board of Trustees meetings held September 10-11, 2013, the Manager reported that for the three year period ended June 30, 2013, 12 Funds were in the top 40%, eight were in the middle 20% and eight were in the bottom 40%, and for the one year period ended June 30, 2013, 8 Funds were in the top 40%, seven were in the middle 20%, and 14 were in the bottom 40%. The Manager also reported that for the five year period ended June 30, 2013, 10 Funds were in the top 40%, four were in the middle 20%, and six were in the bottom 40%. At the Board of Trustees meeting held October 22, 2013, the Trustees determined that the overall investment performance of the Funds was acceptable.
(3) The costs of services to be provided and profits to be realized by the Manager and the Subadvisers and their affiliates from their relationship with the Funds. The Manager has supplied information to the Board of Trustees pertaining to the level of investment advisory fees to which the Funds are subject. The Manager has agreed to temporarily “cap” Fund expenses at certain levels, and information is provided to Trustees setting forth “contractual” advisory fees and “actual” fees after taking expense caps into account. Based upon the information provided, the “actual” advisory fees payable by the Funds overall are generally comparable to the average level of fees paid by Fund peer groups. For the 30 Funds reviewed by the Board of Trustees in the fall of 2013, 27 Funds paid “actual” advisory fees in a percentage amount within the 65th percentile or lower for each Fund’s applicable category. The Trustees recognized that it is difficult to make comparisons of advisory fees because there are variations in the services that are included in the fees paid by other funds. The Board has concluded that the advisory fees to be paid to the Manager by the Funds are not unreasonable.
The Manager has also supplied information to the Board of Trustees pertaining to total Fund expenses (which includes advisory fees, the 25 basis point 12b-1 fee paid by the Funds, and other Fund expenses). As noted above, the Manager has agreed to “cap” Fund expenses at certain levels. Based upon the information provided, the overall total expense ratio ranking in 2013 for the 30 Funds was as follows: (1) 28 of the Funds had total expense rankings below the 65th percentile (with 20 Funds at or below the 50th percentile); (2) the AZL Russell 1000 Value Fund had a total expense ranking in the 66th percentile; the Manager reported that there is only a limited peer group for such Fund; and (3) the AZL Morgan Stanley Global Real Estate Fund had a total expense ranking in the 72nd percentile; it was reported by the Manager that there is only a limited peer group for such Fund, such Fund’s expense ratio has declined, and such Fund’s expense ratio is comparable to funds of similar size.
The Manager has committed to providing the Funds with a high quality of service and working to reduce Fund expenses over time, particularly as the Funds grow larger. The Trustees concluded therefore that the expense ratios of the Funds were not unreasonable.
The Manager provided information concerning the profitability of the Manager’s investment advisory activities for the period from 2011 through June 30, 2013. The Trustees recognized that it is difficult to make comparisons of profitability from investment company advisory agreements because comparative information is not generally publicly available and is affected by numerous factors, including the structure of the particular adviser, the types of funds it manages, its business mix, numerous assumptions regarding allocation of expenses and the adviser’s capital structure and cost of capital. In considering profitability information, the Trustees considered the possible effect of certain fall-out benefits to the Manager and its affiliates. The Trustees focused on profitability of the Manager’s relationships with the Funds before taxes and distribution expenses. The Trustees recognized that the Manager should, in the abstract, be entitled to earn a reasonable level of profits for the services it provides to each Fund and, based on their review, concluded that they were satisfied that the Manager’s level of profitability from its relationship with the Funds was not excessive.
The Manager, on behalf of the Board of Trustees, endeavored to obtain information on the profitability of each Subadviser in connection with its relationship with the Fund or Funds which it subadvises. The Manager was unable to obtain meaningful profitability information from some of the unaffiliated Subadvisers. The Manager assured the Board of Trustees that the Agreements with the Subadvisers which are not affiliated with it were negotiated on an “arm’s length” basis, so that arguably, such profitability information should be less relevant. The Trustees were also provided with certain information on the profitability for the Subadviser which is affiliated with the Manager. Trustees recognized the difficulty of allocating costs to multiple advisory accounts and products of a large advisory organization. Based upon the information provided, the Trustees determined that there was no evidence that the level of such profitability attributable to subadvising the Funds was excessive.
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(4) and (5) The extent to which economies of scale would be realized as the Funds grow, and whether fee levels reflect these economies of scale. The Trustees noted that most of the advisory fee schedules for the Funds do not contain breakpoints that reduce the fee rate on assets above specified levels, although certain Subadvisory Agreements have such “breakpoints.” The Trustees recognized that breakpoints may be an appropriate way for the Manager to share its economies of scale, if any, with Funds that have substantial assets. However, they also recognized that there may not be a direct relationship between any economies of scale realized by Funds and those realized by the Manager as assets increase. The Trustees do not believe there is a uniform methodology for establishing breakpoints that give effect to Fund-specific service provided by the Manager. The Trustees noted that in the fund industry as a whole, as well as among funds similar to the Funds, there is no uniformity or pattern in the fees and asset levels at which breakpoints (if any) apply. Depending on the age, size, and other characteristics of a particular fund and its manager’s cost structure, different conclusions can be drawn as to whether there are economies of scale to be realized at any particular level of assets, notwithstanding the intuitive conclusion that such economies exist, or will be realized at some level of total assets. Moreover, because different managers have different cost structures and service models, it is difficult to draw meaningful conclusions from the breakpoints that may have been adopted by other funds. The Trustees also noted that the advisory agreements for many funds do not have breakpoints at all, or if breakpoints exist, they may be at asset levels significantly greater than those of the individual Funds. The Trustees also noted that the total assets in all of the Funds as of June 30, 2013 were approximately $12.85 billion, and that no single non-money market Fund had assets in excess of $616 million.
The Trustees noted that the Manager has agreed to temporarily “cap” Fund expenses at certain levels, which has the effect of reducing expenses as would the implementation of advisory fee breakpoints. The Manager has committed to continue to consider the continuation of fee “caps” and/or advisory fee breakpoints as the Funds grow larger. The Board receives quarterly reports on the level of Fund assets. It expects to consider whether or not to approve the Agreements at a meeting to be held prior to December 31, 2014, and will at that time, or prior thereto, consider: (a) the extent to which economies of scale can be realized, and (b) whether the advisory fee should be modified to reflect such economies of scale, if any.
Having taken these factors into account, the Trustees concluded that the absence of breakpoints in certain of the Funds’ advisory fee rate schedules was acceptable under each Fund’s circumstances.
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Information about the Board of Trustees and Officers (Unaudited)
The Trust is managed by the Trustees in accordance with the laws of the state of Delaware governing business trusts. There are currently eight Trustees, two of whom are “interested persons” of the Trust within the meaning of that term under the 1940 Act. The Trustees and Officers of the Trust, their addresses, ages, their positions held with the Trust, their terms of office with the Trust and length of time served, their principal occupation(s) during the past five years, the number of portfolios in the Trust they oversee, and their other directorships held are as follows:
Non-Interested Trustees(1)
Name, Address, and Age | Positions Held with VIP Trust and FOF Trust | Term of Office(2)/Length of Time Served | Principal Occupation(s) During Past 5 Years | Number of Portfolios Overseen for VIP Trust and FOF Trust | Other Directorships Held Outside the AZL Fund Complex | |||||
Peter R. Burnim, Age 66 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/07 | Chairman, Argus Investment Strategies Fund Ltd., February 2013 to present; Managing Director, iQ Venture Advisors, LLC. 2005 to 2012; Chairman, Northstar Group Holdings Ltd. Bermuda, 2011 to present; Expert Witness, Massachusetts Department of Revenue, 2011 to 2012; Executive Vice President, Northstar Companies, 2002 to 2005; Senior Officer, Citibank and Citicorp for over 25 years | 41 | Argus Group Holdings; Northstar Group Holdings, NRIL, Sterling Centrecorp Inc.; Highland Financial Holdings; and Bank of Bermuda NY | |||||
Peggy L. Ettestad, Age 56 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/07 | Managing Director, Red Canoe Management Consulting LLC, 2008 to present; Senior Managing Director, Residential Capital LLC, 2003 to 2008; Chief Operations Officer, Transamerica Reinsurance 2002 to 2003 | 41 | Luther College | |||||
Roger Gelfenbien, Age 70 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 10/99 | Retired; Partner of Accenture 1983 to 1999 | 41 | Virtus Funds (8 Funds) | |||||
Claire R. Leonardi, Age 58 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/04 | Chief Executive Officer, Connecticut Innovations, Inc., 2012 to present; General Partner, Fairview Capital, L.P., 1994 to 2012 | 41 | The Natural History Museum of the Adirondacks | |||||
Dickson W. Lewis, Age 65 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/04 | Retired; Consultant to Lifetouch National School Studios; Vice President/General Manager, Yearbooks & Canada-Lifetouch National School Studios, 2006 to 2013; Vice President/General Manager of Jostens, Inc., 2002 to 2006; Senior Vice President of Fortis Group, 1997 to 2002 | 41 | None | |||||
Peter W. McClean, Age 69 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/04 | Retired; President and CEO of Measurisk, LLC, 2001 to 2003; Chief Risk Management Officer at Bank of Bermuda Ltd., 1996 to 2001 | 41 | PNMAC Opportunity Fund; Northeast Bank; and FHI | |||||
Arthur C. Reeds III, Age 69 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 10/99 | Retired; Senior Investment Officer, Hartford Foundation for Public Giving, 2000 to 2003; Chairman, Chief Executive and President of Conning Corp., 1999 to 2000; Investment Consultant, 1997 to 1999 | 41 | Connecticut Water Service, Inc. |
Interested Trustees(3)
Name, Address, and Age | Positions Held with VIP Trust and FOF Trust | Term of Office(2)/Length of Time Served | Principal Occupation(s) During Past 5 Years | Number of Portfolios Overseen for VIP Trust and FOF Trust | Other Directorships Held Outside the AZL Fund Complex | |||||
Robert DeChellis, Age 46 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 3/08 | President and CEO, Allianz Life Financial Services, LLC, 2007 to present | 41 | None | |||||
Brian Muench, Age 43 5701 Golden Hills Drive | Trustee | Since 6/11 | President, Allianz Investment Management LLC, November 2010 to present; Vice President, Allianz Life, April 2011 to present; Vice President, Advisory Management, Allianz Investment Management LLC from December 2005 to November 2010 | 41 | None |
21
Officers
Name, Address, and Age | Positions Held with VIP and VIP FOF Trust | Term of Office(2)/Length of Time Served | Principal Occupation(s) During Past 5 Years | |||
Brian Muench, Age 43 5701 Golden Hills Drive Minneapolis, MN 55416 | President | Since 11/10 | President, Allianz Investment Management LLC from November 2010, to present; Vice President, Allianz Life from April 2011 to present; Vice President, Allianz Investment Management LLC from December 2005 to November 2010. | |||
Michael Radmer, Age 68 Dorsey & Whitney LLP, Suite 1500 50 South Sixth Street Minneapolis, MN 55402-1498 | Secretary | Since 2/02 | Partner, Dorsey and Whitney LLP since 1976. | |||
Ty Edwards, Age 47 Citi Fund Services Ohio, Inc. 3435 Stelzer Road Columbus, OH 43219 | Treasurer, Principal Accounting Officer and Principal Financial Officer | Since 4/10 | Senior Vice President, Financial Administration, Citi Fund Services Ohio, Inc., December 2009 to present; Director, Product Management, Columbia Management, April 2007 to April 2009; Deputy Treasurer, Columbia Funds and Director, Fund Administration, Columbia Management, January 2006 to April 2007. | |||
Christopher R. Pheiffer, Age 45(4) 5701 Golden Hills Drive Minneapolis, MN 55416 | Chief Compliance Officer(5) and Anti-Money Laundering Compliance Officer | Since 2/14 (interim) | Deputy Chief Compliance Officer of the Trusts, 2007-2014. |
(1) | Member of the Audit Committee. |
(2) | Indefinite. |
(3) | Is an “interested person”, as defined by the 1940 Act, due to employment by Allianz. |
(4) | Stephen G. Simon, previously the Chief Compliance Officer of the Trusts, resigned all of his positions with Allianz effective February 21, 2014. Mr. Pheiffer, previously the Deputy Chief Compliance Officer of the Trusts, has been named Chief Compliance Officer of the Trusts on an interim basis while a search for a permanent replacement is conducted. |
(5) | The Manager and the Trust are parties to a Chief Compliance Officer Agreement under which the Manager is compensated by the Trust for providing an employee of the Manager or one of its affiliates to act as the Trust’s Chief Compliance Officer. The Chief Compliance Officer and Anti-Money Laundering Compliance Officer is not considered a corporate officer or executive employee of the Trust. |
22
The Allianz VIP Funds are distributed by Allianz Life Financial Services, LLC. These Funds are not FDIC Insured. | ANNRPT1213 2/14 |
AZL® MFS Investors Trust Fund
Annual Report
December 31, 2013
Table of Contents
Management Discussion and Analysis
Page 1
Expense Examples and Portfolio Composition
Page 3
Schedule of Portfolio Investments
Page 4
Statement of Assets and Liabilities
Page 6
Statement of Operations
Page 6
Statements of Changes in Net Assets
Page 7
Financial Highlights
Page 8
Notes to the Financial Statements
Page 9
Report of Independent Registered Public Accounting Firm
Page 14
Other Federal Income Tax Information
Page 15
Other Information
Page 16
Approval of Investment Advisory and Subadvisory Agreements
Page 17
Information about the Board of Trustees and Officers
Page 20
This report is submitted for the general information of the shareholder of the Fund. The report is not authorized for distribution to prospective investors in the Fund unless preceded or accompanied by an effective prospectus, which contains details concerning the sales charges and other pertinent information.
AZL® MFS Investors Trust Fund Review (unaudited)
Allianz Investment Management LLC serves as the Manager for the AZL® MFS Investors Trust Fund and Massachusetts Financial Services Company serves as Subadviser to the Fund.
What factors affected the Fund’s performance during the year ended December 31, 2013?
For the year ended December 31, 2013, the AZL® MFS Investors Trust Fund returned 31.77%1. That compared to a 32.39% total return for its benchmark, the S&P 500 Index2.
Investor sentiment rose early in the period in response to several factors, including an agreement among U.S. lawmakers to end the standoff over the so-called “fiscal cliff,” and improving global macroeconomic indicators. However, some concerns remained. In particular, Federal Reserve Chairman Ben Bernanke in late May suggested the Fed would begin tapering its economic stimulus efforts. Stocks declined in the wake of that announcement. Later in the period, more fiscal cliff negotiations and a partial government shutdown introduced volatility to the equity markets. Subsequent budget and debt deals that reopened the government, along with steady economic growth in the U.S., helped buoy investor confidence and contributed to strong performance among stocks during the period.
The Fund performed well in that environment. However, it slightly underperformed its benchmark during the period. The Fund’s stock selection in the consumer staples, retailing and energy sectors were among the largest detractors from relative performance. Specifically, holdings of an international food producer and a wine and alcoholic beverage producer dragged on relative performance. The Fund was hurt by individual holdings in the technology sector, including shares of a data storage systems provider and a semiconductor company. The Fund’s cash and cash equivalent holdings, which are not reflected in the Fund’s benchmark, also dragged on relative performance.*
The Fund benefited from individual stock selection in the financial services and health care sectors. In financials, holdings of an asset management firm and two-transaction processing and payments-related service providers all outperformed the benchmark, boosting the Fund’s relative
performance. In health care, the Fund benefited from holdings in a life sciences supply company, a cardiovascular device maker and a pharmaceutical company. An underweight position in the utilities and communications sector helped relative performance as that sector underperformed the benchmark. We avoided exposure to a diversified technology products and services company, which benefited the Fund’s relative performance as that company’s stock performed poorly during the period.*
Past performance does not guarantee future results.
* | The Fund’s portfolio composition is subject to change. There is no guarantee that any sectors mentioned will continue to perform well or that securities in such sectors will be held by the Fund in the future. The information contained in this commentary is for informational purposes only and should not be construed as a recommendation to purchase or sell securities in the sector mentioned. The Fund’s holdings and weightings are as of December 31, 2013. |
1 | The recent growth rate in the stock market has helped to produce short-term returns that are not typical and may not continue in the future. Because of ongoing market volatility, Fund performance may be subject to substantial short-term changes. |
2 | The Standard & Poor’s 500 Index (“S&P 500”) is representative of 500 selected common stocks, most of which are listed on the New York Stock Exchange, and is a measure of the U.S. Stock market as a whole. Investors cannot invest directly in an index. |
1 |
AZL® MFS Investors Trust Fund Review (unaudited)
Fund Objective
The Fund’s investment objective is to seek capital appreciation. This objective may be changed by the Trustees of the Fund without shareholder approval. The Fund seeks to achieve its objective by investing primarily in equity securities.
Investment Concerns
Equity securities (stocks) are more volatile and carry more risk than other forms of investments, including investments in high-grade fixed income securities. The net asset value per share of this Fund will fluctuate as the value of the securities in the portfolio changes.
Value-based investments are subject to the risk that the broad market may not recognize their intrinsic value.
Growth based investments can perform differently from the market as a whole and can be more volatile than other types of securities.
International investing may involve risk of capital loss from unfavorable fluctuations in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations.
For a complete description of these and other risks associated with investing in a mutual Fund, please refer to the Fund’s prospectus.
Growth of $10,000 Investment
The chart above represents a comparison of a hypothetical investment in the Fund versus a similar investment in the Fund’s benchmark, and represents the reinvestment of dividends and capital gains in the Fund.
Average Annual Total Returns as of December 31, 2013
Since | ||||||||||||||||
1 | 3 | 5 | Inception | |||||||||||||
Year | Year | Year | (4/29/05) | |||||||||||||
AZL® MFS Investors Trust Fund | 31.77 | %1 | 15.30 | % | 20.90 | % | 10.56 | % | ||||||||
S&P 500 Index | 32.39 | % | 16.18 | % | 17.94 | % | 7.81 | % |
Past performance does not guarantee future results. The performance data quoted represents past performance and current returns may be lower or higher. The investment return and principal value will fluctuate so that an investor’s shares, when redeemed may be worth more or less than the original cost. To obtain performance information current to the most recent month end, please visit www.Allianzlife.com.
Expense Ratio | Gross | |||
AZL® MFS Investors Trust Fund | 1.07 | % |
The above expense ratio is based on the current Fund prospectus dated April 29, 2013. The Manager voluntarily reduced the management fee to 0.70% on assets above $100 million. The Manager and the Fund have entered into a written contract limiting operating expenses, excluding certain expenses (such as interest expense), to 1.20% through April 30, 2015. Additional information pertaining to the December 31, 2013 expense ratios can be found in the financial highlights.
1 | The recent growth rate in the stock market has helped to produce short-term returns that are not typical and may not continue in the future. Because of ongoing market volatility, Fund performance may be subject to substantial short-term changes. |
The total return of the Fund does not reflect the effect of any insurance charges, the annual maintenance fee or the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. Such charges, fees and tax payments would reduce the performance quoted. |
The Fund’s performance is measured against the Standard & Poor’s 500 (“S&P 500”) Index, which is an unmanaged index that is representative of 500 selected common stocks, most of which are listed on the New York Stock Exchange, and is a measure of the U.S. Stock market as a whole. The index does not reflect the deduction of fees associated with a mutual fund, such as investment management and fund accounting fees. The Fund’s performance reflects the deduction of fees for services provided to the Fund. Investors cannot invest directly in an index |
2
AZL MFS Investors Trust Fund
(Unaudited)
As a shareholder of the AZL MFS Investors Trust Fund (the “Fund”), you incur ongoing costs, including management fees, distribution fees, and other Fund expenses. These examples are intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. Please note that the expenses shown in each table do not reflect expenses that apply to the subaccount or the insurance contract. If the expenses that apply to the subaccount of the insurance contract were included, your costs would have been higher.
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the periods presented below.
The Actual Expense table below provides information about actual account values and actual expenses. You may use the information below, 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 table under the heading entitled “Expenses Paid During Period” to estimate the expenses you paid on your account during this period.
Beginning Account Value 7/1/13 | Ending Account Value 12/31/13 | Expenses Paid During Period 7/1/13 - 12/31/13* | Annualized Expense Ratio During Period 7/1/13 - 12/31/13 | |||||||||||||||||
AZL MFS Investors Trust Fund | $ | 1,000.00 | $ | 1,173.60 | $ | 5.59 | 1.02 | % |
The Hypothetical Expense table below provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.
Beginning Account Value 7/1/13 | Ending Account Value 12/31/13 | Expenses Paid During Period 7/1/13 - 12/31/13* | Annualized Expense Ratio During Period 7/1/13 - 12/31/13 | |||||||||||||||||
AZL MFS Investors Trust Fund | $ | 1,000.00 | $ | 1,020.06 | $ | 5.19 | 1.02 | % |
* | Expenses are equal to the average account value over the period, multiplied by the Fund’s annualized expense ratio, multiplied by 184/365 (to reflect the one half year period). |
Portfolio Composition
(Unaudited)
Investments | Percent of net assets | ||||
Information Technology | 21.5 | % | |||
Financials | 16.0 | ||||
Health Care | 13.6 | ||||
Industrials | 12.3 | ||||
Consumer Discretionary | 12.3 | ||||
Energy | 8.9 | ||||
Consumer Staples | 8.5 | ||||
Materials | 3.7 | ||||
Utilities | 2.2 | ||||
|
| ||||
Total Common Stock | 99.0 | ||||
Money Market | 1.1 | ||||
|
| ||||
Total Investment Securities | 100.1 | ||||
Net other assets (liabilities) | (0.1 | ) | |||
|
| ||||
Net Assets | 100.0 | % | |||
|
|
3
AZL MFS Investors Trust Fund
Schedule of Portfolio Investments
December 31, 2013
Shares | Fair Value | |||||||
| Common Stocks (99.0%): |
| ||||||
| Aerospace & Defense (5.2%): |
| ||||||
75,470 | Honeywell International, Inc. | $ | 6,895,694 | |||||
25,482 | Precision Castparts Corp. | 6,862,303 | ||||||
64,604 | United Technologies Corp. | 7,351,935 | ||||||
|
| |||||||
21,109,932 | ||||||||
|
| |||||||
| Air Freight & Logistics (0.9%): |
| ||||||
34,440 | United Parcel Service, Inc., Class B | 3,618,955 | ||||||
|
| |||||||
| Auto Components (0.5%): |
| ||||||
33,900 | Delphi Automotive plc | 2,038,407 | ||||||
|
| |||||||
| Automobiles (0.4%): |
| ||||||
12,433 | Bayerische Motoren Werke AG (BMW) | 1,457,949 | ||||||
|
| |||||||
| Beverages (2.1%): |
| ||||||
110,746 | Diageo plc | 3,657,550 | ||||||
28,841 | Heineken NV | 1,952,747 | ||||||
25,921 | Pernod Ricard SA | 2,959,402 | ||||||
|
| |||||||
8,569,699 | ||||||||
|
| |||||||
| Biotechnology (0.7%): |
| ||||||
40,428 | Gilead Sciences, Inc.* | 3,038,164 | ||||||
|
| |||||||
| Capital Markets (4.9%): |
| ||||||
21,555 | BlackRock, Inc., Class A | 6,821,511 | ||||||
28,782 | Franklin Resources, Inc. | 1,661,585 | ||||||
39,788 | Goldman Sachs Group, Inc. (The) | 7,052,821 | ||||||
69,600 | Morgan Stanley | 2,182,656 | ||||||
30,432 | State Street Corp. | 2,233,404 | ||||||
|
| |||||||
19,951,977 | ||||||||
|
| |||||||
| Chemicals (3.7%): |
| ||||||
34,420 | FMC Corp. | 2,597,333 | ||||||
17,624 | Linde AG | 3,690,832 | ||||||
28,192 | Praxair, Inc. | 3,665,806 | ||||||
13,130 | Sherwin Williams Co. | 2,409,355 | ||||||
28,170 | W.R. Grace & Co.* | 2,785,168 | ||||||
|
| |||||||
15,148,494 | ||||||||
|
| |||||||
| Commercial Banks (1.9%): |
| ||||||
167,572 | Wells Fargo & Co. | 7,607,769 | ||||||
|
| |||||||
| Computers & Peripherals (5.4%): |
| ||||||
13,472 | Apple, Inc. | 7,559,273 | ||||||
315,659 | EMC Corp. | 7,938,823 | ||||||
232,970 | Hewlett-Packard Co. | 6,518,501 | ||||||
|
| |||||||
22,016,597 | ||||||||
|
| |||||||
| Construction & Engineering (0.8%): |
| ||||||
40,780 | Fluor Corp. | 3,274,226 | ||||||
|
| |||||||
| Consumer Finance (1.9%): |
| ||||||
83,860 | American Express Co. | 7,608,618 | ||||||
|
| |||||||
| Diversified Financial Services (4.1%): |
| ||||||
263,728 | Bank of America Corp. | 4,106,245 | ||||||
216,540 | JPMorgan Chase & Co. | 12,663,259 | ||||||
|
| |||||||
16,769,504 | ||||||||
|
| |||||||
| Electric Utilities (0.8%): |
| ||||||
72,059 | American Electric Power Co., Inc. | 3,368,038 | ||||||
|
| |||||||
| Energy Equipment & Services (3.7%): |
| ||||||
71,460 | Cameron International Corp.* | 4,254,014 | ||||||
68,800 | Dresser-Rand Group, Inc.* | 4,102,544 | ||||||
46,881 | National-Oilwell Varco, Inc. | 3,728,446 |
Shares | Fair Value | |||||||
| Common Stocks, continued |
| ||||||
| Energy Equipment & Services, continued |
| ||||||
31,375 | Schlumberger, Ltd. | $ | 2,827,201 | |||||
|
| |||||||
14,912,205 | ||||||||
|
| |||||||
| Food Products (2.8%): |
| ||||||
67,627 | Danone SA | 4,878,277 | ||||||
33,456 | General Mills, Inc. | 1,669,789 | ||||||
141,010 | Mondelez International, Inc., Class A | 4,977,653 | ||||||
|
| |||||||
11,525,719 | ||||||||
|
| |||||||
| Health Care Equipment & Supplies (4.0%): |
| ||||||
82,050 | Abbott Laboratories | 3,144,977 | ||||||
97,940 | Covidien plc | 6,669,714 | ||||||
66,552 | St. Jude Medical, Inc. | 4,122,896 | ||||||
34,040 | Stryker Corp. | 2,557,766 | ||||||
|
| |||||||
16,495,353 | ||||||||
|
| |||||||
| Hotels, Restaurants & Leisure (1.1%): |
| ||||||
46,334 | McDonald’s Corp. | 4,495,788 | ||||||
|
| |||||||
| Household Products (3.0%): |
| ||||||
54,261 | Colgate-Palmolive Co. | 3,538,360 | ||||||
104,366 | Procter & Gamble Co. (The) | 8,496,436 | ||||||
|
| |||||||
12,034,796 | ||||||||
|
| |||||||
| Industrial Conglomerates (2.8%): |
| ||||||
146,338 | Danaher Corp. | 11,297,294 | ||||||
|
| |||||||
| Insurance (1.8%): |
| ||||||
70,190 | ACE, Ltd. | 7,266,771 | ||||||
|
| |||||||
| Internet Software & Services (3.3%): |
| ||||||
20,710 | Facebook, Inc., Class A* | 1,132,009 | ||||||
10,817 | Google, Inc., Class A* | 12,122,720 | ||||||
|
| |||||||
13,254,729 | ||||||||
|
| |||||||
| IT Services (7.5%): |
| ||||||
64,525 | Accenture plc, Class A | 5,305,246 | ||||||
49,420 | Cognizant Technology Solutions Corp., Class A* | 4,990,432 | ||||||
77,050 | Fidelity National Information Services, Inc. | 4,136,044 | ||||||
8,024 | MasterCard, Inc., Class A | 6,703,731 | ||||||
40,215 | Visa, Inc., Class A | 8,955,075 | ||||||
|
| |||||||
30,090,528 | ||||||||
|
| |||||||
| Life Sciences Tools & Services (1.7%): |
| ||||||
62,790 | Thermo Fisher Scientific, Inc. | 6,991,667 | ||||||
|
| |||||||
| Machinery (0.6%): |
| ||||||
30,550 | Stanley Black & Decker, Inc. | 2,465,080 | ||||||
|
| |||||||
| Media (5.5%): |
| ||||||
109,590 | Comcast Corp., Class A | 5,694,844 | ||||||
49,930 | Time Warner, Inc. | 3,481,120 | ||||||
140,350 | Twenty-First Century Fox, Inc. | 4,937,513 | ||||||
107,897 | Walt Disney Co. (The) | 8,243,330 | ||||||
|
| |||||||
22,356,807 | ||||||||
|
| |||||||
| Multiline Retail (2.0%): |
| ||||||
57,997 | Kohl’s Corp. | 3,291,330 | ||||||
74,938 | Target Corp. | 4,741,327 | ||||||
|
| |||||||
8,032,657 | ||||||||
|
| |||||||
| Multi-Utilities (1.4%): |
| ||||||
132,620 | CMS Energy Corp. | 3,550,237 | ||||||
48,008 | Wisconsin Energy Corp. | 1,984,651 | ||||||
|
| |||||||
5,534,888 | ||||||||
|
|
Continued
4
AZL MFS Investors Trust Fund
Schedule of Portfolio Investments
December 31, 2013
Shares | Fair Value | |||||||
| Common Stocks, continued |
| ||||||
| Oil, Gas & Consumable Fuels (5.2%): |
| ||||||
42,621 | Chevron Corp. | $ | 5,323,789 | |||||
22,038 | EOG Resources, Inc. | 3,698,858 | ||||||
80,551 | Exxon Mobil Corp. | 8,151,761 | ||||||
43,592 | Occidental Petroleum Corp. | 4,145,599 | ||||||
|
| |||||||
21,320,007 | ||||||||
|
| |||||||
| Pharmaceuticals (7.2%): |
| ||||||
53,510 | Bristol-Myers Squibb Co. | 2,844,057 | ||||||
54,130 | Endo Health Solutions, Inc.* | 3,651,610 | ||||||
91,129 | Johnson & Johnson Co. | 8,346,505 | ||||||
303,370 | Pfizer, Inc. | 9,292,222 | ||||||
44,730 | Valeant Pharmaceuticals International, Inc.* | 5,251,302 | ||||||
|
| |||||||
29,385,696 | ||||||||
|
| |||||||
| Real Estate Investment Trusts (REITs) (1.4%): |
| ||||||
71,434 | American Tower Corp. | 5,701,862 | ||||||
|
| |||||||
| Road & Rail (1.1%): |
| ||||||
79,900 | Canadian National Railway Co. | 4,555,898 | ||||||
|
| |||||||
| Semiconductors & Semiconductor Equipment (2.6%): |
| ||||||
122,460 | Altera Corp. | 3,983,624 | ||||||
148,101 | Microchip Technology, Inc. | 6,627,520 | ||||||
|
| |||||||
10,611,144 | ||||||||
|
| |||||||
| Software (2.7%): |
| ||||||
43,480 | Autodesk, Inc.* | 2,188,348 | ||||||
48,810 | Citrix Systems, Inc.* | 3,087,233 | ||||||
151,955 | Oracle Corp. | 5,813,798 | ||||||
|
| |||||||
11,089,379 | ||||||||
|
|
Shares | Fair Value | |||||||
| Common Stocks, continued |
| ||||||
| Textiles, Apparel & Luxury Goods (2.8%): |
| ||||||
20,202 | LVMH Moet Hennessy Louis Vuitton SA | $ | 3,697,907 | |||||
44,536 | Nike, Inc., Class B | 3,502,311 | ||||||
68,280 | V.F. Corp. | 4,256,575 | ||||||
|
| |||||||
11,456,793 | ||||||||
|
| |||||||
| Tobacco (0.6%): |
| ||||||
30,324 | Philip Morris International, Inc. | 2,642,130 | ||||||
|
| |||||||
| Trading Companies & Distributors (0.9%): |
| ||||||
14,021 | W.W. Grainger, Inc. | 3,581,244 | ||||||
|
| |||||||
| Total Common Stocks (Cost $261,083,792) | 402,676,764 | ||||||
|
| |||||||
Contracts, Shares, Notional Amount or Principal Amount | Fair Value | |||||||
| Unaffiliated Investment Company (1.1%): |
| ||||||
4,442,619 | Dreyfus Treasury Prime Cash Management Fund, Institutional Shares, 0.00%(a) | 4,442,619 | ||||||
|
| |||||||
| Total Unaffiliated Investment Company (Cost $4,442,619) | 4,442,619 | ||||||
|
| |||||||
| Total Investment Securities (Cost $265,526,411)(b) — 100.1% | 407,119,383 | ||||||
| Net other assets (liabilities) — (0.1)% | (266,803 | ) | |||||
|
| |||||||
| Net Assets — 100.0% | $ | 406,852,580 | |||||
|
|
Percentages indicated are based on net assets as of December 31, 2013.
* | Non-income producing security. |
(a) | The rate represents the effective yield at December 31, 2013. |
(b) | See Federal Tax Information listed in the Notes to the Financial Statements. |
The following represents the concentrations by country of risk (based on the domicile of the security issuer) relative to the total fair value of investments as of December 31, 2013:
Country | Percentage | |||
Canada | 2.4 | % | ||
France | 2.8 | % | ||
Germany | 1.3 | % | ||
Ireland (Republic of) | 2.9 | % | ||
Netherlands | 1.2 | % | ||
Switzerland | 1.8 | % | ||
United Kingdom | 1.4 | % | ||
United States | 86.2 | % | ||
|
| |||
100.0 | % | |||
|
|
See accompanying notes to the financial statements.
5
AZL MFS Investors Trust Fund
Statement of Assets and Liabilities
December 31, 2013
Assets: | |||||
Investment securities, at cost | $ | 265,526,411 | |||
|
| ||||
Investment securities, at value | $ | 407,119,383 | |||
Cash | 13,889 | ||||
Interest and dividends receivable | 331,591 | ||||
Receivable for capital shares issued | 7,281 | ||||
Reclaims receivable | 602 | ||||
|
| ||||
Total Assets | 407,472,746 | ||||
|
| ||||
Liabilities: | |||||
Payable for capital shares redeemed | 252,105 | ||||
Manager fees payable | 240,248 | ||||
Administration fees payable | 14,315 | ||||
Distribution fees payable | 84,286 | ||||
Custodian fees payable | 6,443 | ||||
Administrative and compliance services fees payable | 1,612 | ||||
Trustee fees payable | 12 | ||||
Other accrued liabilities | 21,145 | ||||
|
| ||||
Total Liabilities | 620,166 | ||||
|
| ||||
Net Assets | $ | 406,852,580 | |||
|
| ||||
Net Assets Consist of: | |||||
Capital | $ | 256,156,607 | |||
Accumulated net investment income/(loss) | 2,874,774 | ||||
Accumulated net realized gains/(losses) from investment transactions | 6,228,191 | ||||
Net unrealized appreciation/(depreciation) on investments | 141,593,008 | ||||
|
| ||||
Net Assets | $ | 406,852,580 | |||
|
| ||||
Shares of beneficial interest (unlimited number of shares authorized, no par value) | 19,101,835 | ||||
Net Asset Value (offering and redemption price per share) | $ | 21.30 | |||
|
|
For the Year Ended December 31, 2013
Investment Income: | |||||
Dividends | $ | 6,724,029 | |||
Interest | 2,171 | ||||
Income from securities lending | 38,789 | ||||
Foreign withholding tax | (93,724 | ) | |||
|
| ||||
Total Investment Income | 6,671,265 | ||||
|
| ||||
Expenses: | |||||
Manager fees | 2,789,861 | ||||
Administration fees | 115,503 | ||||
Distribution fees | 929,954 | ||||
Custodian fees | 23,851 | ||||
Administrative and compliance services fees | 7,311 | ||||
Trustee fees | 18,879 | ||||
Professional fees | 19,742 | ||||
Shareholder reports | 22,017 | ||||
Other expenses | 9,988 | ||||
|
| ||||
Total expenses before reductions | 3,937,106 | ||||
Less expenses voluntarily waived/reimbursed by the Manager | (135,995 | ) | |||
Less expenses paid indirectly | (5,122 | ) | |||
|
| ||||
Net expenses | 3,795,989 | ||||
|
| ||||
Net Investment Income/(Loss) | 2,875,276 | ||||
|
| ||||
Realized and Unrealized Gains/(Losses) on Investments: | |||||
Net realized gains/(losses) on securities transactions | 23,945,686 | ||||
Change in net unrealized appreciation/depreciation on investments | 74,525,722 | ||||
|
| ||||
Net Realized/Unrealized Gains/(Losses) on Investments | 98,471,408 | ||||
|
| ||||
Change in Net Assets Resulting From Operations | $ | 101,346,684 | |||
|
|
See accompanying notes to the financial statements.
6
Statements of Changes in Net Assets
AZL MFS Investors Trust Fund | ||||||||||
For the Year Ended December 31, 2013 | For the Year Ended December 31, 2012 | |||||||||
Change In Net Assets: | ||||||||||
Operations: | ||||||||||
Net investment income/(loss) | $ | 2,875,276 | $ | 3,096,989 | ||||||
Net realized gains/(losses) on investment transactions | 23,945,686 | 13,970,002 | ||||||||
Change in unrealized appreciation/depreciation on investments | 74,525,722 | 34,669,478 | ||||||||
|
|
|
| |||||||
Change in net assets resulting from operations | 101,346,684 | 51,736,469 | ||||||||
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|
|
| |||||||
Dividends to Shareholders: | ||||||||||
From net investment income | (2,913,024 | ) | (2,217,543 | ) | ||||||
|
|
|
| |||||||
Change in net assets resulting from dividends to shareholders | (2,913,024 | ) | (2,217,543 | ) | ||||||
|
|
|
| |||||||
Capital Transactions: | ||||||||||
Proceeds from shares issued | 26,030,545 | 36,908,970 | ||||||||
Proceeds from dividends reinvested | 2,913,024 | 2,217,543 | ||||||||
Value of shares redeemed | (47,016,565 | ) | (34,489,096 | ) | ||||||
|
|
|
| |||||||
Change in net assets resulting from capital transactions | (18,072,996 | ) | 4,637,417 | |||||||
|
|
|
| |||||||
Change in net assets | 80,360,664 | 54,156,343 | ||||||||
Net Assets: | ||||||||||
Beginning of period | 326,491,916 | 272,335,573 | ||||||||
|
|
|
| |||||||
End of period | $ | 406,852,580 | $ | 326,491,916 | ||||||
|
|
|
| |||||||
Accumulated net investment income/(loss) | $ | 2,874,774 | $ | 3,095,483 | ||||||
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|
|
| |||||||
Share Transactions: | ||||||||||
Shares issued | 1,415,289 | 2,404,738 | ||||||||
Dividends reinvested | 151,169 | 138,596 | ||||||||
Shares redeemed | (2,501,123 | ) | (2,252,526 | ) | ||||||
|
|
|
| |||||||
Change in shares | (934,665 | ) | 290,808 | |||||||
|
|
|
|
See accompanying notes to the financial statements.
7
AZL MFS Investors Trust Fund
(Selected data for a share of beneficial interest outstanding throughout the periods indicated)
Year Ended December 31, | |||||||||||||||||||||||||
2013 | 2012 | 2011 | 2010 | 2009 | |||||||||||||||||||||
Net Asset Value, Beginning of Period | $ | 16.29 | $ | 13.79 | $ | 14.20 | $ | 12.81 | $ | 8.44 | |||||||||||||||
|
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|
|
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|
|
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| ||||||||||||||||
Investment Activities: | |||||||||||||||||||||||||
Net Investment Income/(Loss) | 0.16 | 0.15 | 0.12 | 0.10 | 0.02 | ||||||||||||||||||||
Net Realized and Unrealized Gains/(Losses) on Investments | 5.00 | 2.46 | (0.44 | ) | 1.31 | 4.35 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Total from Investment Activities | 5.16 | 2.61 | (0.32 | ) | 1.41 | 4.37 | |||||||||||||||||||
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|
|
|
|
|
|
|
|
| ||||||||||||||||
Dividends to Shareholders From: | |||||||||||||||||||||||||
Net Investment Income | (0.15 | ) | (0.11 | ) | (0.09 | ) | (0.02 | ) | — | (a) | |||||||||||||||
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|
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|
|
|
|
|
| ||||||||||||||||
Total Dividends | (0.15 | ) | (0.11 | ) | (0.09 | ) | (0.02 | ) | — | (a) | |||||||||||||||
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|
|
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|
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| ||||||||||||||||
Net Asset Value, End of Period | $ | 21.30 | $ | 16.29 | $ | 13.79 | $ | 14.20 | $ | 12.81 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Total Return(b) | 31.77 | % | 18.95 | % | (2.22 | )% | 11.01 | % | 51.80 | % | |||||||||||||||
Ratios to Average Net Assets/Supplemental Data: | |||||||||||||||||||||||||
Net Assets, End of Period (000’s) | $ | 406,853 | $ | 326,492 | $ | 272,336 | $ | 314,596 | $ | 354,622 | |||||||||||||||
Net Investment Income/(Loss) | 0.77 | % | 1.01 | % | 0.79 | % | 0.62 | % | 0.15 | % | |||||||||||||||
Expenses Before Reductions(c) | 1.06 | % | 1.07 | % | 1.09 | % | 1.10 | % | 1.10 | % | |||||||||||||||
Expenses Net of Reductions | 1.02 | % | 1.03 | % | 1.05 | % | 1.06 | % | 1.04 | % | |||||||||||||||
Expenses Net of Reductions, Excluding Expenses Paid Indirectly(d) | 1.02 | % | 1.03 | % | 1.05 | % | 1.06 | % | 1.07 | % | |||||||||||||||
Portfolio Turnover Rate | 21 | % | 31 | % | 22 | % | 21 | %(e) | 193 | % |
(a) | Represents less than $0.005. |
(b) | The returns include reinvested dividends and fund level expenses, but exclude insurance contract charges. If these charges were included, the returns would have been lower. |
(c) | Excludes fee reductions. If such fee reductions had not occurred, the ratios would have been as indicated. |
(d) | Expenses net of reductions excludes expenses paid indirectly, pursuant to a “commission recapture” program, under which brokers remit a portion of the brokerage commission which is used to pay certain Fund expenses. See note 2 in the Notes to the Financial Statements. |
(e) | Effective October 26, 2009, the Subadviser changed from Jennison Associates LLC to Massachusetts Financial Services Company (“MFS”). Implementation of MFS’ investment strategy has contributed to a lower portfolio turnover rate for the year ended December 31, 2010 as compared to prior years. |
See accompanying notes to the financial statements.
8
AZL MFS Investors Trust Fund
Notes to the Financial Statements
December 31, 2013
1. Organization
The Allianz Variable Insurance Products Trust (the “Trust”) was organized as a Delaware statutory trust on July 13, 1999. The Trust is a diversified open-end management investment company registered under the Investment Company Act of 1940. The Trust consists of 29 separate investment portfolios (collectively, the “Funds”), of which one is included in this report, the AZL MFS Investors Trust Fund (the “Fund”), and 28 are presented in separate reports.
The Trust is authorized to issue an unlimited number of shares of the Fund without par value. Shares of the Fund are available through the variable annuity contracts and variable life insurance policies offered through the separate accounts of participating insurance companies.
Under the Trust’s organizational documents, its officers and trustees are indemnified against certain liabilities arising out of the performance of their duties to the Fund. In addition, in the normal course of business, the Fund may enter into contracts with its vendors and others that provide for general indemnifications. The Fund’s maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Fund. However, based on experience, the Fund expects the risk of loss to be remote.
2. Significant Accounting Policies
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. The policies conform with U.S. generally accepted accounting principles (“U.S. GAAP”). The preparation of financial statements requires management to make certain 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 increases and decreases in net assets from operations during the reporting period. Actual results could differ from those estimates.
Security Valuation
The Fund records its investments at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between willing market participants at the measurement date. The valuation techniques used to determine fair value are further described in Note 4 below.
Investment Transactions and Investment Income
Investment transactions are recorded not later than on the business day following trade date. However, for financial reporting purposes, investment transactions are accounted for on trade date. Net realized gains and losses on investments sold and on foreign currency transactions are recorded on the basis of identified cost. Interest income is recorded on the accrual basis and includes, where applicable, the amortization of premiums or accretion of discounts. Dividend income is recorded on the ex-dividend date except in the case of foreign securities, in which case dividends are recorded as soon as such information becomes available.
Real Estate Investment Trusts
The Fund may own shares of real estate investment trusts (“REITs”) which report information on the source of their distributions annually. Certain distributions received from REITs during the year, which are known to be a return of capital, are recorded as a reduction to the cost of the individual REIT.
Foreign Currency Translation
The accounting records of the Fund are maintained in U.S. dollars. Foreign currency amounts are translated into U.S. dollars at the current rate of exchange to determine the fair value of investments, assets and liabilities. Purchases and sales of securities, and income and expenses are translated at the prevailing rate of exchange on the respective dates of such transactions. The Fund does not isolate that portion of the results of operations resulting from changes in foreign exchange rates on investments from fluctuations arising from changes in market prices of securities held. Such fluctuations are included in the net realized and unrealized gain or loss on investments and foreign currencies. Income received by the Fund from sources within foreign countries may be subject to withholding and other income or similar taxes imposed by such countries. The Funds accrue such taxes, as applicable, based on their current interpretation of tax rules in the foreign markets in which they invest.
Dividends to Shareholders
Dividends to shareholders are recorded on the ex-dividend date. The Fund distributes its dividends from net investment income and net realized capital gains, if any, on an annual basis. The amount of dividends from net investment income and from net realized gains is determined in accordance with federal income tax regulations, which may differ from U.S. GAAP. These “book/tax” differences are either temporary or permanent in nature. To the extent these differences are permanent in nature (e.g., return of capital, net operating loss, reclassification of certain market discounts, gain/loss, paydowns, and distributions), such amounts are reclassified within the composition of net assets based on their federal tax-basis treatment; temporary differences (e.g., wash sales and post October losses) do not require reclassification. Dividends to shareholders that exceed net investment income and net realized gains for tax purposes are reported as distributions of capital.
Expense Allocation
Expenses directly attributable to the Fund are charged directly to the Fund, while expenses attributable to more than one Fund are allocated among the respective Funds based upon relative net assets or some other reasonable method. Expenses which are attributable to more than one Trust are allocated across the Allianz Variable Insurance Products and Allianz Variable Insurance Products Fund of Funds Trusts based upon relative net assets or another reasonable basis. Allianz Investment Management LLC (the “Manager”), serves as the investment manager for the Trust and the Allianz Variable Insurance Products Fund of Funds Trust.
Securities Lending
To generate additional income, the Fund may lend up to 33 1/3% of its assets pursuant to agreements requiring that the loan be continuously secured by any combination of cash, U.S. government or U.S. government agency securities, equal initially to at least 102% of the fair value plus accrued interest on the securities loaned (105% for foreign securities). The borrower of securities is at all times required to post collateral to the Fund in an amount equal to 100% of the fair value of the securities loaned based on the
9
AZL MFS Investors Trust Fund
Notes to the Financial Statements
December 31, 2013
previous day’s fair value of the securities loaned, marked-to-market daily. Any collateral shortfalls are adjusted the next business day. The Fund bears all of the gains and losses on such investments. The Fund receives payments from borrowers equivalent to the dividends and interest that would have been earned on securities lent while simultaneously seeking to earn income on the investment of cash collateral received. In extremely low interest rate environments, the broker rebate fee may exceed the interest earned or the cash collateral which would result in a loss to the Fund. The investment of cash collateral deposited by the borrower is subject to inherent market risks such as interest rate risk, credit risk, liquidity risk, and other risks that are present in the market, and as such, the value of these investments may not be sufficient, when liquidated, to repay the borrower when the loaned security is returned. There may be risks of delay in recovery of the securities or even loss of rights in the collateral should the borrower of the securities fail financially. However, loans will be made only to borrowers, such as broker-dealers, banks or institutional borrowers of securities, deemed by the Manager to be of good standing and credit worthy and when in its judgment, the consideration which can be earned currently from such securities loans justifies the attendant risks. Loans are subject to termination by the Trust or the borrower at any time, and are, therefore, not considered to be illiquid investments. Securities on loan at December 31, 2013 are presented on the Fund’s Schedule of Portfolio Investments. The average outstanding amount of securities on loan was $1.9 million for the year ended December 31, 2013.
Cash collateral received in connection with securities lending is invested in the Allianz Variable Insurance Products Securities Lending Collateral Trust (the “Securities Lending Collateral Trust”) managed by The Dreyfus Corporation, an affiliate of the Custodian and Securities Lending Agent. The Securities Lending Collateral Trust invests in short-term investments that have a remaining maturity of 397 days or less as calculated in accordance with Rule 2a-7 under the 1940 Act. The Fund paid securities lending fees of $3,835 during the year ended December 31, 2013. These fees have been netted against “Income from securities lending” on the Statement of Operations.
Commission Recapture
Certain Funds of the Trust participate in a commission recapture program. The Fund will utilize the recaptured commissions to pay for, in whole or part, certain expenses of the Fund, excluding investment advisory fees. Any amounts received by the Fund, if applicable, are disclosed as “Expenses paid indirectly” on the Statement of Operations.
Effective January 6, 2014, the Manager, on behalf of the Trust, requested the Fund cease participation in the program until further notice.
3. Related Party Transactions
The Manager provides investment advisory and management services for the Fund. The Manager has retained an independent money management organization (the “Subadviser”), to make investment decisions on behalf of the Fund. Pursuant to a portfolio management agreement with Massachusetts Financial Services Company (“MFS”), MFS provides investment advisory services as the Subadviser for the Fund subject to the general supervision of the Trustees and the Manager. The Manager is entitled to a fee, computed daily and paid monthly, based on the average daily net assets of the Fund. Expenses incurred by the Fund for investment advisory and management services are reflected on the Statement of Operations as “Manager fees.” For its services, the Subadviser is entitled to a fee payable by the Manager. The Manager has contractually agreed to waive fees and reimburse the Fund to limit the annual expenses, excluding interest expense (e.g., cash overdraft fees), taxes, brokerage commissions, other expenditures that are capitalized in accordance with U.S. GAAP and other extraordinary expenses not incurred in the ordinary course of the Fund’s business, based on the daily net assets of the Fund, through April 30, 2015.
For the year ended December 31, 2013, the annual rate due to the Manager and the annual expense limit were as follows:
Annual Rate* | Annual Expense Limit | |||||||||
AZL MFS Investors Trust Fund | 0.75 | % | 1.20 | % |
* | The Manager voluntarily reduced the management fee to 0.70% on assets above $100 million. The Manager reserves the right to increase the management fee to the amount shown in the table above at any time. |
Any amounts contractually waived or reimbursed by the Manager in a particular fiscal year will be subject to repayment by the Fund to the Manager to the extent that from time to time through the next three fiscal years the repayment will not cause the Fund’s expenses to exceed the lesser of the stated limit at the time of the waiver or the current stated limit. Any amounts recouped by the Manager during the year are reflected on the Statement of Operations as “Recoupment of prior expenses reimbursed by the Manager.” At December 31, 2013, there were no remaining contractual reimbursements that are subject to repayment by the Fund in subsequent years.
In addition, the Manager may voluntarily waive or reimburse additional fees in order to maintain more competitive expense ratios. Any voluntary waivers or reimbursements are not subject to repayment in subsequent years. Information on the total amount waived/reimbursed by the Manager or repaid to the Manager by the Fund during the year can be found on the Statement of Operations.
Pursuant to separate agreements between the Funds and the Manager, the Manager provides a Chief Compliance Officer (“CCO”) and certain compliance oversight and regulatory filing services to the Trust. Under these agreements the Manager is entitled to an amount equal to a portion of the compensation and certain other expenses related to the individuals performing the CCO and compliance oversight services, as well as $75 per hour for time incurred in connection with the preparation and filing of certain documents with the Securities and Exchange Commission. The fees are paid to the Manager on a quarterly basis. The total expenses incurred by the Fund for these services are reflected on the Statement of Operations as “Administrative and compliance services fees.”
Citi Fund Services Ohio, Inc. (“Citi” or the “Administrator”), a wholly owned subsidiary of Citigroup, Inc., with which an officer of the Trust is affiliated, serves as the Trust’s administrator, transfer agent, and fund accountant, and assists the Trust in all aspects of its administration and operation. The Administrator is entitled to a Trust-wide asset-based fee, which is based on the following schedule: 0.05% of daily average net assets on the first $4 billion, 0.04% of daily average net assets on the next $2 billion, 0.02% of daily average net assets on the next $2 billion and 0.01% of daily average net assets over $8 billion. The overall Trust-wide fees are accrued daily and paid monthly and are subject to a minimum annual fee. In addition, the Administrator is entitled to annual account fees related to the transfer agency system, an annual fee for each additional class of shares of any Fund, certain annual fees in supporting fair value services, and a Trust-wide annual fee for providing infrastructure and support in implementing the written policies and procedures comprising the Fund’s compliance program. Fees payable to the Administrator are subject to certain reductions associated with services provided to new funds. The Administrator is also reimbursed for certain expenses incurred. The total expenses incurred by the Fund for these services are reflected on the Statement of Operations as “Administration fees.”
Allianz Life Financial Services, LLC (“ALFS”), an affiliate of the Manager, serves as distributor of the Fund and receives 12b-1 fees directly from the Fund, plus a Trust-wide annual fee of $42,500, paid by the Manager from its profits and not by the Trust, for recordkeeping and reporting services.
10
AZL MFS Investors Trust Fund
Notes to the Financial Statements
December 31, 2013
The Trust has adopted a distribution and service plan in conformance with Rule 12b-1 of the 1940 Act. Pursuant to this plan, the Fund is authorized to pay certain fees for the sale and distribution of its shares and services provided to its shareholders at an annual rate not to exceed 0.25% of the Fund’s average daily net assets. These fees are reflected on the Statement of Operations as “Distribution fees.”
In addition, certain legal fees and expenses are paid to a law firm, Dorsey & Whitney LLP, of which the Secretary of the Fund is a partner. During the year ended December 31, 2013, $4,655 was paid from the Fund relating to these fees and expenses.
Certain Officers and Trustees of the Trust are affiliated with the Manager or the Administrator. Such Officers (except for the Trust’s CCO as noted above) and Trustees receive no compensation from the Trust for serving in their respective roles. For their service to the Trust and to the Allianz Variable Insurance Products Fund of Funds Trust, each non-interested Trustee receives a $139,000 annual Board retainer. In addition, the Trustees are reimbursed for certain expenses associated with attending Board meetings. Compensation to the Trustees is allocated between the Trust and the Allianz Variable Insurance Products Fund of Funds Trust in proportion to the assets under management of each trust. During the year ended December 31, 2013, actual Trustee compensation was $973,000 in total for both trusts.
At a meeting of the Board of Trustees on December 4, 2013, the Trustees approved a fee increase to the Officers and Trustees who are paid a fee for their services to the Trust and to the Allianz Variable Insurance Products Fund of Funds Trust. Effective January 1, 2014, each non-interested Trustee will receive a $163,000 annual retainer.
4. Investment Valuation Summary
The valuation techniques employed by the Fund, as described below, maximize the use of observable inputs and minimize the use of unobservable inputs in determining fair value. The inputs used for valuing the Fund’s investments are summarized in the three broad levels listed below:
— | Level 1 — quoted prices in active markets for identical assets |
— | Level 2 — other significant observable inputs (including quoted prices for similar securities, interest rates, prepayments speeds, credit risk, etc.) |
— | Level 3 — significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of investments) |
Changes in valuation techniques may result in transfers in or out of an assigned level within the disclosure hierarchy. The Fund determines transfers between fair value hierarchy levels at the reporting period end. The inputs or methodology used for valuing investments is not necessarily an indication of the risk associated with investing in those investments.
Security prices are generally provided by an independent third party pricing service approved by the Trust’s Board of Trustees (“Trustees”) as of the close of the New York Stock Exchange (“NYSE”) (generally 4:00 pm Eastern Time). Equity securities are valued at the last quoted sale price or, if there is no sale, the last quoted bid price is used for long securities and the last quoted ask price is used for securities sold short. Securities listed on NASDAQ Stock Market, Inc. (“NASDAQ”) are valued at the official closing price as reported by NASDAQ. In each of these situations, valuations are typically categorized as a Level 1 in the fair value hierarchy. Investments in open-end investment companies are valued at their respective net asset value as reported by such companies and are typically categorized as Level 1 in the fair value hierarchy.
Debt and other fixed income securities are generally valued at an evaluated bid price provided by an independent pricing source approved by the Trustees. To value debt securities, pricing services may use various pricing techniques which take into account appropriate factors such as market activity, yield, quality, coupon rate, maturity, type of issue, trading characteristics, call features, credit ratings and other data, as well as broker quotes. Short term securities of sufficient credit quality with sixty days or less remaining until maturity may be valued at amortized cost, which approximates fair value. In each of these situations, valuations are typically categorized as Level 2 in the fair value hierarchy.
Other assets and securities for which market quotations are not readily available, or are deemed unreliable are valued at fair value as determined in good faith by the Trustees or persons acting on the behalf of the Trustees. Fair value pricing may be used for significant events such as securities whose trading has been suspended, whose price has become stale or for which there is no currently available price at the close of the NYSE. Depending on the source and relative significance of valuation inputs, these instruments may be classified as Level 2 or Level 3 in the fair value hierarchy. The Fund utilizes a pricing service to assist in determining the fair value of securities when certain significant events occur that may affect the value of foreign securities.
In accordance with procedures adopted by the Trustees, fair value pricing may be used if events materially affecting the value of foreign securities occur between the time when the exchange on which they are traded closes and the time when the Fund’s net asset value is calculated. Management identifies possible fluctuation in international securities by monitoring the increase or decrease in the value of a designated benchmark index. In the event of an increase or decrease greater than predetermined levels, the Fund may use a systematic valuation model provided by an independent third party to fair value its international equity securities which are then typically categorized as Level 2 in the fair value hierarchy. For the year ended December 31, 2013, there were no Level 3 investments for which significant unobservable inputs were used to determine fair value.
For the year ended December 31, 2013, there were no Level 3 investments for which significant unobservable inputs were used to determine fair value.
The following is a summary of the valuation inputs used as of December 31, 2013 in valuing the Fund’s investments based upon the three levels defined above:
Investment Securities: | Level 1 | Level 2 | Total | ||||||||||||
Common Stocks | |||||||||||||||
Automobiles | $ | — | $ | 1,457,949 | $ | 1,457,949 | |||||||||
Beverages | — | 8,569,699 | 8,569,699 | ||||||||||||
Chemicals | 11,457,662 | 3,690,832 | 15,148,494 | ||||||||||||
Food Products | 6,647,442 | 4,878,277 | 11,525,719 | ||||||||||||
Textiles, Apparel & Luxury Goods | 7,758,886 | 3,697,907 | 11,456,793 | ||||||||||||
All Other Common Stocks+ | 354,518,110 | — | 354,518,110 | ||||||||||||
Unaffiliated Investment Company | 4,442,619 | — | 4,442,619 | ||||||||||||
|
|
|
|
|
| ||||||||||
Total Investment Securities | $ | 384,824,719 | $ | 22,294,664 | $ | 407,119,383 | |||||||||
|
|
|
|
|
|
+ | For detailed industry descriptions, see the accompanying Schedule of Portfolio Investments. |
11
AZL MFS Investors Trust Fund
Notes to the Financial Statements
December 31, 2013
5. Security Purchases and Sales
For the year ended December 31, 2013, cost of purchases and proceeds from sales of securities (excluding securities maturing less than one year from acquisition) were as follows:
Purchases | Sales | |||||||||
AZL MFS Investors Trust Fund | $ | 77,490,117 | $ | 96,386,804 |
6. Investment Risks
Foreign Securities and Currencies Risk: Investments in securities of foreign issuers carry certain risks not ordinarily associated with investments in securities of domestic issuers. Such risks include future political and economic developments, and the possible imposition of exchange controls or other foreign governmental laws and restrictions. In addition, with respect to certain countries, there is the possibility of expropriation of assets, confiscatory taxation, political or social instability or diplomatic developments which could adversely affect investments in those securities.
7. Federal Tax Information
It is the Fund’s policy to continue to comply with the requirements of the Internal Revenue Code under Subchapter M, applicable to regulated investment companies, and to distribute all of its taxable income, including any net realized gains on investments, to its shareholders. Therefore, no provision is made for federal income taxes.
Management of the Fund has reviewed tax positions taken in tax years that remain subject to examination by all major tax jurisdictions, including federal (i.e., the last four tax year ends and the interim tax period since then, as applicable). Management believes that there is no tax liability resulting from unrecognized tax benefits related to uncertain tax positions taken.
Cost for federal income tax purposes at December 31, 2013 is $266,722,790. The gross unrealized appreciation/ (depreciation) on a tax basis is as follows:
Unrealized appreciation | $ | 140,899,965 | |||
Unrealized depreciation | (503,372 | ) | |||
|
| ||||
Net unrealized appreciation/(depreciation) | $ | 140,396,593 | |||
|
|
During the year ended December 31, 2013, the Fund utilized $16,620,137 in capital loss carry forwards to offset capital gains.
The tax character of dividends paid to shareholders during the year ended December 31, 2013 were as follows:
Ordinary Income | Net Long-Term Capital Gains | Total Distributions(a) | |||||||||||||
AZL MFS Investors Trust Fund | $ | 2,913,024 | $ | — | 2,913,024 |
(a) | Total distributions paid may differ from the Statements of Changes in Net Assets because dividends are recognized when actually paid for tax purposes. |
The tax character of dividends paid to shareholders during the year ended December 31, 2012 was as follows:
Ordinary Income | Net Long-Term Capital Gains | Total Distributions(a) | |||||||||||||
AZL MFS Investors Trust Fund | $ | 2,217,543 | $ | — | $ | 2,217,543 |
(a) | Total distributions paid may differ from the Statements of Changes in Net Assets because dividends are recognized when actually paid for tax purposes. |
As of December 31, 2013, the components of accumulated earnings on a tax basis were as follows:
Undistributed Ordinary Income | Undistributed Long-Term Capital Gains | Accumulated Capital and Other Losses | Unrealized Appreciation/ (Depreciation)(a) | Total Accumulated Earnings/ (Deficit) | |||||||||||||||||||||
AZL MFS Investors Trust Fund | $ | 2,874,772 | $ | 7,424,571 | $ | — | $ | 140,396,630 | $ | 150,695,973 |
(a) | The difference between book-basis and tax-basis unrealized appreciation/(depreciation) is attributable primarily to tax deferral of losses on wash sales. |
12
AZL MFS Investors Trust Fund
Notes to the Financial Statements
December 31, 2013
8. Subsequent Events
Management has evaluated events and transactions subsequent to period end through the date the financial statements were issued, for purposes of recognition or disclosure in these financial statements and there are no subsequent events to report.
13
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Shareholders and Board of Trustees of
Allianz Variable Insurance Products Trust:
We have audited the accompanying statement of assets and liabilities of AZL MFS Investors Trust Fund (the “Fund”) of the Allianz Variable Insurance Products Trust, including the schedule of portfolio investments, as of December 31, 2013, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the years in the two-year period then ended, and the financial highlights for each of the years in the five-year period then ended. These financial statements and financial highlights are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of December 31, 2013, by correspondence with the custodian. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of the Fund as of December 31, 2013, the results of its operations for the year then ended, the changes in its net assets for each of the years in the two-year period then ended, and the financial highlights for each of the years in the five-year period then ended, in conformity with U.S. generally accepted accounting principles.
/s/ KPMG LLP
Columbus, Ohio
February 25, 2014
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Other Federal Income Tax Information (Unaudited)
For the year ended December 31, 2013, 100.00% of the total ordinary income dividends paid by the Fund qualify for the corporate dividends received deduction available to corporate shareholders.
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A description of the policies and procedures that the Fund uses to determine how to vote proxies relating to portfolio securities is available, without charge, upon request, by visiting the Securities and Exchange Commission’s (“Commission”) website at www.sec.gov, or by calling 800-624-0197.
Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30th is available (i) without charge, upon request, by calling 800-624-0197; (ii) on the Allianz Variable Insurance Products Trust’s website at https://www.allianzlife.com; and (iii) on the Commission’s website at http://www.sec.gov.
The Fund files complete Schedules of Portfolio Holdings with the Commission for the first and third quarters of each fiscal year on Form N-Q. Schedules of Portfolio Holdings for the Fund in this report are available without charge on the Commission’s website at http://www.sec.gov, or may be reviewed and copied at the Commission’s Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 800-SEC-0330.
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Approval of Investment Advisory and Subadvisory Agreements (Unaudited)
The Allianz Variable Insurance Products Trust (the “Trust”) is a manager-of-managers fund. That means that the Trust’s Manager (“Allianz Investment Management LLC”) is responsible for monitoring the various Subadvisers that have day-to-day responsibility for the decisions made for each of the Trust’s investment portfolios. The Trust’s Manager is responsible for determining, in the first instance, which investment advisers to consider recommending for selection as a Subadviser.
In reviewing the services provided by the Manager and the terms of the investment management agreement, the Board receives and reviews information related to the Manager’s experience and expertise in the variable insurance marketplace. Currently, the Funds are offered only through variable annuities and variable life insurance policies, and not in the retail fund market. In addition, the Board receives information regarding the Manager’s expertise with regard to portfolio diversification and asset allocation requirements within variable insurance products issued by Allianz Life Insurance Company of North America and its subsidiary, Allianz Life Insurance Company of New York. Currently, the Funds are offered only through Allianz Life and Allianz of New York variable products.
The Trust’s Manager has adopted policies and procedures to assist it in the process of analyzing each potential Subadviser with expertise in particular asset classes for purposes of making the recommendation that a specific investment adviser be selected. The Trust’s Board reviews and considers the information provided by the Manager in deciding which investment advisers to select. After an investment adviser becomes a Subadviser, a similarly rigorous process is instituted by the Manager to monitor the investment performance and other responsibilities of the Subadviser. The Manager reports to the Trust’s Board on its analysis at the regular meetings of the Board, which are held at least quarterly. Where warranted, the Manager will add or remove a particular Subadviser from a “watch” list that it maintains. Watch list criteria include, for example: (a) Fund performance over various time periods; (b) Fund risk issues, such as changes in key personnel involved with Fund management, changes in investment philosophy or process, or “capacity” concerns; and (c) organizational risk issues, such as regulatory, compliance or legal concerns, or changes in the ownership of the Subadviser. The Manager may place a Fund on the watch list for other reasons, and if so, will explain its rationale to the Trustees. Funds which are on the watch list are subject to special scrutiny of the Manager and the Board of Trustees. Funds may be removed from such watch list, if for example, performance improves or regulatory matters are satisfactorily resolved. However, in some situations where Funds which have been on the watch list, the Manager has recommended the retention of a new Subadviser, and the Board of Trustees has subsequently approved new Subadvisory Agreements with such Subadvisers.
In assessing the Manager’s and Subadvisers’ (collectively, the “Advisory Organizations”), performance of their obligations, the Board considers whether there has occurred a circumstance or event that would constitute a reason for it to not renew an advisory contract. In this regard, the Board is mindful of the potential disruption of a Fund’s operations and various risks, uncertainties and other effects that could occur as a result of a decision to terminate or not renew a contract.
As required by the Investment Company Act of 1940 (“1940 Act”), the Trust’s Board has reviewed and approved the Trust’s Investment Management Agreement with the Manager (the “Advisory Agreement”) and portfolio management agreements (the “Subadvisory Agreements”) with the Subadvisers. The Board’s decision to approve these contracts reflects the exercise of its business judgment on whether to approve new arrangements and continue the existing arrangements. During its review of these contracts, the Board considers many factors, among the most material of which are: the Fund’s investment objectives and long term performance; the Advisory Organizations’ management philosophy, personnel, and processes, including their compliance history and the adequacy of their compliance processes; the preferences and expectations of Fund shareholders (and underlying contract owners) and their relative sophistication; the continuing state of competition in the mutual fund industry; and comparable fees in the mutual fund industry.
The Board also considers the compensation and benefits received by the Advisory Organizations. This includes fees received for services provided to the Fund by affiliated persons of the Advisory Organizations and research services received by the Advisory Organizations from brokers that execute Fund trades, as well as advisory fees. The Board considered the fact that: (1) the Manager and the Trust are parties to an Administrative Service Agreement, a Compliance Services Agreement, and a Chief Compliance Officer Agreement, under which the Manager is compensated by the Trust for performing certain administrative and compliance services including providing an employee of the Manager or one of its affiliates to act as the Trust’s Chief Compliance Officer; and (2) Allianz Life Financial Services, LLC, an affiliated person of the Manager, is a registered securities broker-dealer and receives (along with its affiliated persons) payments made by the Trust pursuant to Rule 12b-1.
The Board is aware that various courts have interpreted provisions of the 1940 Act and have indicated in their decisions that the following factors may be relevant to an adviser’s compensation: the nature and quality of the services provided by the adviser, including the performance of the fund; the adviser’s cost of providing the services; the extent to which the adviser may realize “economies of scale” as the fund grows larger; any indirect benefits that may accrue to the adviser and its affiliates as a result of the adviser’s relationship with the fund; performance and expenses of comparable funds; and the extent to which the independent Board members are fully informed about all facts bearing on the adviser’s service and fee. The Trust’s Board is aware of these factors and takes them into account in its review of the Trust’s advisory contracts.
The Board considered and weighed these circumstances in light of its experience in governing the Trust and working with the Advisory Organizations on matters relating to the Funds, and is assisted in its deliberations by the advice of legal counsel to the Independent Trustees. In this regard, the Board requests and receives a significant amount of information about the Funds and the Advisory Organizations. Some of this information is provided at each regular meeting of the Board; additional information is provided in connection with the particular meeting or meetings at which the Board’s formal review of an advisory contract occurs. In between regularly scheduled meetings, the Board may receive information on particular matters as the need arises. Thus, the Board’s evaluation of an advisory contract is informed by reports covering such matters as: an Advisory Organization’s investment philosophy, personnel, and processes; the Fund’s short- and long-term performance (in absolute terms as well as in relationship to its benchmark(s), certain competitor or “peer group” funds and similar funds managed by the particular Subadviser), and comments on the reasons for performance; the Fund’s expenses (including the advisory fee itself and the overall expense structure of the Fund, both in absolute terms and relative to similar and/or competing funds, with due regard for contractual or voluntary expense limitations); the use and allocation of brokerage commissions derived from trading the Fund’s portfolio securities; the nature and extent of the advisory and other services provided to the Fund by the Advisory Organizations and their affiliates; compliance and audit reports concerning the Funds and the companies that service them; and relevant developments in the mutual fund industry and how the Funds and/or Advisory Organizations are responding to them.
The Board also receives financial information about Advisory Organizations, including reports on the compensation and benefits the Advisory Organizations derive from their relationships with the Funds. These reports cover not only the fees under the advisory contracts, but also fees, if any, received for providing other services to the Funds. The reports also discuss any indirect or “fall out” benefits an Advisory Organization may derive from its relationship with the Funds.
The Advisory and Subadvisory Agreements (collectively, the “Agreements”) were most recently considered at Board of Trustees meetings held in the fall of 2013. Information relevant to the approval of such Agreements was considered at a telephonic Board of Trustees meeting on October 16, 2013, and at an “in person” Board of Trustees meeting held October 22, 2013. The Agreements were approved at the Board meeting of October 22, 2013. At such meeting the Board also approved an Expense Limitation Agreement between the Manager and the Trust for the period ending April 30, 2015. In connection with such meetings, the Trustees requested and evaluated extensive materials from the Manager, including performance and expense information for other investment companies with similar investment objectives derived from data compiled by an independent third party provider and other sources believed to be reliable by the Manager. Prior to voting, the Trustees reviewed the proposed approval/continuance of the Agreements with management and with experienced counsel who are independent of the Manager and received a memorandum from such counsel discussing the legal standards for their consideration of the proposed approvals/continuances. The independent (“disinterested”) Trustees also discussed the proposed approvals/continuances in a private session with such counsel at which no representatives of the Manager were present. In reaching their determinations relating to the approval and/or continuance of
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the Agreements, in respect of each Fund, the Trustees considered all factors they believed relevant. The Board based its decision to approve the Agreements on the totality of the circumstances and relevant factors, and with a view to past and future long-term considerations. Not all of the factors and considerations discussed above and below are necessarily relevant to every Fund, and the Board did not assign relative weights to factors discussed herein or deem any one or group of them to be controlling in and of themselves.
An SEC Rule requires that shareholder reports include a discussion of certain factors relating to the selection of investment advisers and the approval of advisory fees. The “factors” enumerated by the SEC are set forth below in italics, as well as the Board’s conclusions regarding such factors:
(1) The nature, extent and quality of services provided by the Manager and Subadvisers. The Trustees noted that the Manager, subject to the control of the Board of Trustees, administers each Fund’s business and other affairs. Under the Advisory Agreement, the Manager holds the sole and exclusive responsibility to provide, or arrange for other to provide, the management of the Funds’ assets and the placement of orders for the purchase and sale of the securities of the Funds. As the Trust is a manager of managers fund, the Manager is authorized, under the Advisory Agreement, to retain one or more Subadvisers for each Fund to handle day-to-day management of the Funds’ investment portfolios; the Manager is responsible for determining, in the first instance, which investment advisers to recommend to the Board of Trustees for selection as a Subadviser. The Trustees were aware that, notwithstanding the retention of the Subadvisers to handle day-to-day portfolio management, the Manager remains responsible for substantial other matters, including continuously monitoring compliance by each Subadviser with the investment policies and restrictions of the respective Funds, with such other limitations or directions of the Board of Trustees, and with all legal requirements under federal or state law or regulation. The Manager also is responsible primarily to provide statistical information and other data to the Trustees regarding the Funds’ portfolio investments and to make available to the Funds’ administrator such information as is necessary for the conduct of its duties.
The Trustees also noted that the Manager provides the Trust and each Fund with such administrative and other services (exclusive of, and in addition to, any such services provided by any others retained by the Trust on behalf of the Funds) and executive and other personnel as are necessary for the operation of the Trust and the Funds. Except for the Trust’s Chief Compliance Officer, the Manager pays all of the compensation of Trustees and officers of the Trust who are employees of the Manager or its affiliates.
The Trustees considered the scope and quality of services provided by the Manager and the Subadvisers and noted that the scope of such services provided had expanded as a result of recent regulatory and other developments. The Trustees noted that, for example, the Manager and Subadvisers are responsible for maintaining and monitoring their own compliance programs, and these compliance programs are continuously refined and enhanced in light of new regulatory requirements. The Trustees considered the capabilities and resources which the Manager has dedicated to performing services on behalf of the Trust and its Funds. The quality of administrative and other services, including the Manager’s role in coordinating the activities of the Trust’s other service providers, also were considered. The Trustees concluded that, overall, they were satisfied with the nature, extent and quality of services provided (and expected to be provided) to the Trust and to each of the Funds under the Agreements.
(2) The investment performance of the Funds, the Manager and the Subadvisers. In connection with every in-person quarterly Board of Trustees meeting, Trustees receive extensive information on the performance results of each of the Funds. This includes, for example, performance information on all of the Funds for the previous quarter, and previous one, three and five-year periods, and since inception. (For Funds which have been in existence for less than five years, Trustees may receive performance information on comparable funds managed by the particular Subadviser for periods prior to the creation of a particular Fund.) Such performance information includes information on absolute total return, performance versus Subadvisers’ comparable fund(s), performance versus the appropriate benchmark(s), and performance versus peer groups. For example, in connection with the Board of Trustees meetings held September 10-11, 2013, the Manager reported that for the three year period ended June 30, 2013, 12 Funds were in the top 40%, eight were in the middle 20% and eight were in the bottom 40%, and for the one year period ended June 30, 2013, 8 Funds were in the top 40%, seven were in the middle 20%, and 14 were in the bottom 40%. The Manager also reported that for the five year period ended June 30, 2013, 10 Funds were in the top 40%, four were in the middle 20%, and six were in the bottom 40%. At the Board of Trustees meeting held October 22, 2013, the Trustees determined that the overall investment performance of the Funds was acceptable.
(3) The costs of services to be provided and profits to be realized by the Manager and the Subadvisers and their affiliates from their relationship with the Funds. The Manager has supplied information to the Board of Trustees pertaining to the level of investment advisory fees to which the Funds are subject. The Manager has agreed to temporarily “cap” Fund expenses at certain levels, and information is provided to Trustees setting forth “contractual” advisory fees and “actual” fees after taking expense caps into account. Based upon the information provided, the “actual” advisory fees payable by the Funds overall are generally comparable to the average level of fees paid by Fund peer groups. For the 30 Funds reviewed by the Board of Trustees in the fall of 2013, 27 Funds paid “actual” advisory fees in a percentage amount within the 65th percentile or lower for each Fund’s applicable category. The Trustees recognized that it is difficult to make comparisons of advisory fees because there are variations in the services that are included in the fees paid by other funds. The Board has concluded that the advisory fees to be paid to the Manager by the Funds are not unreasonable.
The Manager has also supplied information to the Board of Trustees pertaining to total Fund expenses (which includes advisory fees, the 25 basis point 12b-1 fee paid by the Funds, and other Fund expenses). As noted above, the Manager has agreed to “cap” Fund expenses at certain levels. Based upon the information provided, the overall total expense ratio ranking in 2013 for the 30 Funds was as follows: (1) 28 of the Funds had total expense rankings below the 65th percentile (with 20 Funds at or below the 50th percentile); (2) the AZL Russell 1000 Value Fund had a total expense ranking in the 66th percentile; the Manager reported that there is only a limited peer group for such Fund; and (3) the AZL Morgan Stanley Global Real Estate Fund had a total expense ranking in the 72nd percentile; it was reported by the Manager that there is only a limited peer group for such Fund, such Fund’s expense ratio has declined, and such Fund’s expense ratio is comparable to funds of similar size.
The Manager has committed to providing the Funds with a high quality of service and working to reduce Fund expenses over time, particularly as the Funds grow larger. The Trustees concluded therefore that the expense ratios of the Funds were not unreasonable.
The Manager provided information concerning the profitability of the Manager’s investment advisory activities for the period from 2011 through June 30, 2013. The Trustees recognized that it is difficult to make comparisons of profitability from investment company advisory agreements because comparative information is not generally publicly available and is affected by numerous factors, including the structure of the particular adviser, the types of funds it manages, its business mix, numerous assumptions regarding allocation of expenses and the adviser’s capital structure and cost of capital. In considering profitability information, the Trustees considered the possible effect of certain fall-out benefits to the Manager and its affiliates. The Trustees focused on profitability of the Manager’s relationships with the Funds before taxes and distribution expenses. The Trustees recognized that the Manager should, in the abstract, be entitled to earn a reasonable level of profits for the services it provides to each Fund and, based on their review, concluded that they were satisfied that the Manager’s level of profitability from its relationship with the Funds was not excessive.
The Manager, on behalf of the Board of Trustees, endeavored to obtain information on the profitability of each Subadviser in connection with its relationship with the Fund or Funds which it subadvises. The Manager was unable to obtain meaningful profitability information from some of the unaffiliated Subadvisers. The Manager assured the Board of Trustees that the Agreements with the Subadvisers which are not affiliated with it were negotiated on an “arm’s length” basis, so that arguably, such profitability information should be less relevant. The Trustees were also provided with certain information on the profitability for the Subadviser which is affiliated with the Manager. Trustees recognized the difficulty of allocating costs to multiple advisory accounts and products of a large advisory organization. Based upon the information provided, the Trustees determined that there was no evidence that the level of such profitability attributable to subadvising the Funds was excessive.
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(4) and (5) The extent to which economies of scale would be realized as the Funds grow, and whether fee levels reflect these economies of scale. The Trustees noted that most of the advisory fee schedules for the Funds do not contain breakpoints that reduce the fee rate on assets above specified levels, although certain Subadvisory Agreements have such “breakpoints.” The Trustees recognized that breakpoints may be an appropriate way for the Manager to share its economies of scale, if any, with Funds that have substantial assets. However, they also recognized that there may not be a direct relationship between any economies of scale realized by Funds and those realized by the Manager as assets increase. The Trustees do not believe there is a uniform methodology for establishing breakpoints that give effect to Fund-specific service provided by the Manager. The Trustees noted that in the fund industry as a whole, as well as among funds similar to the Funds, there is no uniformity or pattern in the fees and asset levels at which breakpoints (if any) apply. Depending on the age, size, and other characteristics of a particular fund and its manager’s cost structure, different conclusions can be drawn as to whether there are economies of scale to be realized at any particular level of assets, notwithstanding the intuitive conclusion that such economies exist, or will be realized at some level of total assets. Moreover, because different managers have different cost structures and service models, it is difficult to draw meaningful conclusions from the breakpoints that may have been adopted by other funds. The Trustees also noted that the advisory agreements for many funds do not have breakpoints at all, or if breakpoints exist, they may be at asset levels significantly greater than those of the individual Funds. The Trustees also noted that the total assets in all of the Funds as of June 30, 2013 were approximately $12.85 billion, and that no single non-money market Fund had assets in excess of $616 million.
The Trustees noted that the Manager has agreed to temporarily “cap” Fund expenses at certain levels, which has the effect of reducing expenses as would the implementation of advisory fee breakpoints. The Manager has committed to continue to consider the continuation of fee “caps” and/or advisory fee breakpoints as the Funds grow larger. The Board receives quarterly reports on the level of Fund assets. It expects to consider whether or not to approve the Agreements at a meeting to be held prior to December 31, 2014, and will at that time, or prior thereto, consider: (a) the extent to which economies of scale can be realized, and (b) whether the advisory fee should be modified to reflect such economies of scale, if any.
Having taken these factors into account, the Trustees concluded that the absence of breakpoints in certain of the Funds’ advisory fee rate schedules was acceptable under each Fund’s circumstances.
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Information about the Board of Trustees and Officers (Unaudited)
The Trust is managed by the Trustees in accordance with the laws of the state of Delaware governing business trusts. There are currently eight Trustees, two of whom are “interested persons” of the Trust within the meaning of that term under the 1940 Act. The Trustees and Officers of the Trust, their addresses, ages, their positions held with the Trust, their terms of office with the Trust and length of time served, their principal occupation(s) during the past five years, the number of portfolios in the Trust they oversee, and their other directorships held are as follows:
Non-Interested Trustees(1)
Name, Address, and Age | Positions Held with VIP Trust and FOF Trust | Term of Office(2)/Length of Time Served | Principal Occupation(s) During Past 5 Years | Number of Portfolios Overseen for VIP Trust and FOF Trust | Other Directorships Held Outside the AZL Fund Complex | |||||
Peter R. Burnim, Age 66 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/07 | Chairman, Argus Investment Strategies Fund Ltd., February 2013 to present; Managing Director, iQ Venture Advisors, LLC. 2005 to 2012; Chairman, Northstar Group Holdings Ltd. Bermuda, 2011 to present; Expert Witness, Massachusetts Department of Revenue, 2011 to 2012; Executive Vice President, Northstar Companies, 2002 to 2005; Senior Officer, Citibank and Citicorp for over 25 years | 41 | Argus Group Holdings; Northstar Group Holdings, NRIL, Sterling Centrecorp Inc.; Highland Financial Holdings; and Bank of Bermuda NY | |||||
Peggy L. Ettestad, Age 56 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/07 | Managing Director, Red Canoe Management Consulting LLC, 2008 to present; Senior Managing Director, Residential Capital LLC, 2003 to 2008; Chief Operations Officer, Transamerica Reinsurance 2002 to 2003 | 41 | Luther College | |||||
Roger Gelfenbien, Age 70 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 10/99 | Retired; Partner of Accenture 1983 to 1999 | 41 | Virtus Funds (8 Funds) | |||||
Claire R. Leonardi, Age 58 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/04 | Chief Executive Officer, Connecticut Innovations, Inc., 2012 to present; General Partner, Fairview Capital, L.P., 1994 to 2012 | 41 | The Natural History Museum of the Adirondacks | |||||
Dickson W. Lewis, Age 65 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/04 | Retired; Consultant to Lifetouch National School Studios; Vice President/General Manager, Yearbooks & Canada-Lifetouch National School Studios, 2006 to 2013; Vice President/General Manager of Jostens, Inc., 2002 to 2006; Senior Vice President of Fortis Group, 1997 to 2002 | 41 | None | |||||
Peter W. McClean, Age 69 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/04 | Retired; President and CEO of Measurisk, LLC, 2001 to 2003; Chief Risk Management Officer at Bank of Bermuda Ltd., 1996 to 2001 | 41 | PNMAC Opportunity Fund; Northeast Bank; and FHI | |||||
Arthur C. Reeds III, Age 69 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 10/99 | Retired; Senior Investment Officer, Hartford Foundation for Public Giving, 2000 to 2003; Chairman, Chief Executive and President of Conning Corp., 1999 to 2000; Investment Consultant, 1997 to 1999 | 41 | Connecticut Water Service, Inc. |
Interested Trustees(3)
Name, Address, and Age | Positions Held with VIP Trust and FOF Trust | Term of Office(2)/Length of Time Served | Principal Occupation(s) During Past 5 Years | Number of Portfolios Overseen for VIP Trust and FOF Trust | Other Directorships Held Outside the AZL Fund Complex | |||||
Robert DeChellis, Age 46 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 3/08 | President and CEO, Allianz Life Financial Services, LLC, 2007 to present | 41 | None | |||||
Brian Muench, Age 43 5701 Golden Hills Drive | Trustee | Since 6/11 | President, Allianz Investment Management LLC, November 2010 to present; Vice President, Allianz Life, April 2011 to present; Vice President, Advisory Management, Allianz Investment Management LLC from December 2005 to November 2010 | 41 | None |
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Officers
Name, Address, and Age | Positions Held with VIP and VIP FOF Trust | Term of Office(2)/Length of Time Served | Principal Occupation(s) During Past 5 Years | |||
Brian Muench, Age 43 5701 Golden Hills Drive Minneapolis, MN 55416 | President | Since 11/10 | President, Allianz Investment Management LLC from November 2010, to present; Vice President, Allianz Life from April 2011 to present; Vice President, Allianz Investment Management LLC from December 2005 to November 2010. | |||
Michael Radmer, Age 68 Dorsey & Whitney LLP, Suite 1500 50 South Sixth Street Minneapolis, MN 55402-1498 | Secretary | Since 2/02 | Partner, Dorsey and Whitney LLP since 1976. | |||
Ty Edwards, Age 47 Citi Fund Services Ohio, Inc. 3435 Stelzer Road Columbus, OH 43219 | Treasurer, Principal Accounting Officer and Principal Financial Officer | Since 4/10 | Senior Vice President, Financial Administration, Citi Fund Services Ohio, Inc., December 2009 to present; Director, Product Management, Columbia Management, April 2007 to April 2009; Deputy Treasurer, Columbia Funds and Director, Fund Administration, Columbia Management, January 2006 to April 2007. | |||
Christopher R. Pheiffer, Age 45(4) 5701 Golden Hills Drive Minneapolis, MN 55416 | Chief Compliance Officer(5) and Anti-Money Laundering Compliance Officer | Since 2/14 (interim) | Deputy Chief Compliance Officer of the Trusts, 2007-2014 |
(1) | Member of the Audit Committee. |
(2) | Indefinite. |
(3) | Is an “interested person”, as defined by the 1940 Act, due to employment by Allianz. |
(4) | Stephen G. Simon, previously the Chief Compliance Officer of the Trusts, resigned all of his positions with Allianz effective February 21, 2014. Mr. Pheiffer, previously the Deputy Chief Compliance Officer of the Trusts, has been named Chief Compliance Officer of the Trusts on an interim basis while a search for a permanent replacement is conducted. |
(5) | The Manager and the Trust are parties to a Chief Compliance Officer Agreement under which the Manager is compensated by the Trust for providing an employee of the Manager or one of its affiliates to act as the Trust’s Chief Compliance Officer. The Chief Compliance Officer and Anti-Money Laundering Compliance Officer is not considered a corporate officer or executive employee of the Trust. |
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The Allianz VIP Funds are distributed by Allianz Life Financial Services, LLC. These Funds are not FDIC Insured. | ANNRPT1213 2/14 |
AZL® MFS Value Fund
Annual Report
December 31, 2013
Table of Contents
Management Discussion and Analysis
Page 1
Expense Examples and Portfolio Composition
Page 3
Schedule of Portfolio Investments
Page 4
Statement of Assets and Liabilities
Page 6
Statement of Operations
Page 6
Statements of Changes in Net Assets
Page 7
Financial Highlights
Page 8
Notes to the Financial Statements
Page 9
Report of Independent Registered Public Accounting Firm
Page 14
Other Federal Income Tax Information
Page 15
Other Information
Page 16
Approval of Investment Advisory and Subadvisory Agreements
Page 17
Information about the Board of Trustees and Officers
Page 20
This report is submitted for the general information of the shareholder of the Fund. The report is not authorized for distribution to prospective investors in the Fund unless preceded or accompanied by an effective prospectus, which contains details concerning the sales charges and other pertinent information.
AZL® MFS Value Fund Review (unaudited)
Allianz Investment Management LLC serves as the Manager for the AZL® MFS Value Fund and Massachusetts Financial Services company serves as Subadviser to the Fund.
What factors affected the Fund’s performance during the year ended December 31, 2013?
For the year ended December 31, 2013, the AZL® MFS Value Fund returned 35.42%1, which compared to a 32.53% total return for its benchmark, the Russell 1000® Value Index2.
During the period, stocks performed very well and investor sentiment rose early in the period in response to several factors, including an agreement among U.S. lawmakers to end the standoff over the so-called “fiscal cliff,” and improving global macroeconomic indicators. However, some concerns remained; in particular the Federal Reserve Chairman Ben Bernanke suggested the Fed would begin to taper its economic stimulus efforts. Stocks declined in the wake of that announcement. Later in the period, more fiscal cliff negotiations and a partial government shutdown introduced volatility to the equity markets. Subsequent budget and debt deals that reopened the government, along with steady economic growth in the U.S., helped buoy investor confidence and contributed to strong performance among stocks during the period.
The Fund performed well in that environment. It outperformed its benchmark due in part to stock selection in the financial services sector. Specifically, overweight positions in two insurance companies boosted the Fund’s relative performance as those two stocks outperformed the benchmark. An underweight allocation and stock selection in the utilities and communications sector also helped to improve the Fund’s relative performance as that sector underperformed the benchmark. Meanwhile, the overweight exposure to a defense contractor that performed extremely well during the period helped to enhance Fund performance.*
Stock selection in technology and consumer staples hurt the Fund’s relative performance during the period. In the technology sector, holdings of a diversified technology products and services company detracted from relative performance. In consumer staples, an overweight position in a tobacco company created the largest drag on relative performance of any single holding. In addition, the Fund’s cash and cash equivalent holdings hurt the Fund’s performance given the strong performance of equity markets in the period.*
Past performance does not guarantee future results.
* | The Fund’s portfolio composition is subject to change. There is no guarantee that any sectors mentioned will continue to perform well or that securities in such sectors will be held by the Fund in the future. The information contained in this commentary is for informational purposes only and should not be construed as a recommendation to purchase or sell securities in the sector mentioned. The Fund’s holdings and weightings are as of December 31, 2013. |
1 | The recent growth rate in the stock market has helped to produce short-term returns that are not typical and may not continue in the future. Because of ongoing market volatility, Fund performance may be subject to substantial short-term changes. |
2 | The Russell 1000® Value Index measures the performance of the large-cap value segment of the U.S. equity universe. It includes those Russell 1000 companies with lower price-to-book ratios and lower expected growth values. Investors cannot invest directly in an index. |
1
AZL® MFS Value Fund Review (unaudited)
Fund Objective
The Fund’s investment objective is to seek capital appreciation. This objective may be changed by the Trustees of the Fund without shareholder approval. The Fund seeks to achieve its objective by investing primarily in equity securities.
Investment Concerns
Equity securities (stocks) are more volatile and carry more risk than other forms of investments, including investments in high-grade fixed income securities. The net asset value per share of this Fund will fluctuate as the value of the securities in the portfolio changes.
Value-based investments are subject to the risk that the broad market may not recognize their intrinsic value.
International investing may involve risk of capital loss from unfavorable fluctuations in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations.
For a complete description of these and other risks associated with investing in a mutual Fund, please refer to the Fund’s prospectus.
Growth of $10,000 Investment
The chart above represents a comparison of a hypothetical investment in the Fund versus a similar investment in the Fund’s benchmark, and represents the reinvestment of dividends and capital gains in the Fund.
Average Annual Total Returns as of December 31, 2013
1 | 3 | 5 | 10 | |||||||||||||
Year | Year | Year | Year | |||||||||||||
AZL® MFS Value Fund | 35.42 | %1 | 14.72 | % | 15.97 | % | 6.31 | % | ||||||||
Russell 1000® Value Index | 32.53 | % | 16.06 | % | 16.67 | % | 7.58 | % |
Past performance does not guarantee future results. The performance data quoted represents past performance and current returns may be lower or higher. The investment return and principal value will fluctuate so that an investor’s shares, when redeemed may be worth more or less than the original cost. To obtain performance information current to the most recent month end, please visit www.Allianzlife.com.
Expense Ratio | Gross | |||
AZL® MFS Value Fund | 1.06 | % |
The above expense ratio is based on the current Fund prospectus dated April 29, 2013. The Manager voluntarily reduced the management fee to 0.75% on the first $100 million of assets, 0.70% on the next $400 million, and 0.65% on assets above $500 million. The Manager and the Fund have entered into a written contract limiting operating expenses, excluding certain expenses (such as interest expense), to 1.20% through April 30, 2015. Additional information pertaining to the December 31, 2013 expense ratios can be found in the financial highlights.
1 | The recent growth rate in the stock market has helped to produce short-term returns that are not typical and may not continue in the future. Because of ongoing market volatility, Fund performance may be subject to substantial short-term changes. |
The total return of the Fund does not reflect the effect of any insurance charges, the annual maintenance fee or the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. Such charges, fees and tax payments would reduce the performance quoted. |
The Fund’s performance is measured against the Russell 1000® Value Index, an unmanaged index that measures the performance of the large-cap value segment of the U.S. equity universe. It includes those Russell 1000 companies with lower price-to-book ratios and lower expected growth values. The index does not reflect the deduction of fees associated with a mutual fund, such as investment management and fund accounting fees. The Fund’s performance reflects the deduction of fees for services provided to the Fund. Investors cannot invest directly in an index. |
2
AZL MFS Value Fund
(Unaudited)
As a shareholder of the AZL MFS Value Fund (the “Fund”), you incur ongoing costs, including management fees, distribution fees, and other Fund expenses. These examples are intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. Please note that the expenses shown in each table do not reflect expenses that apply to the subaccount or the insurance contract. If the expenses that apply to the subaccount of the insurance contract were included, your costs would have been higher.
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the periods presented below.
The Actual Expense table below provides information about actual account values and actual expenses. You may use the information below, 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 table under the heading entitled “Expenses Paid During Period” to estimate the expenses you paid on your account during this period.
Beginning Account Value 7/1/13 | Ending Account Value 12/31/13 | Expenses Paid During Period 7/1/13 - 12/31/13* | Annualized Expense Ratio During Period 7/1/13 - 12/31/13 | |||||||||||||||||
AZL MFS Value Fund | $ | 1,000.00 | $ | 1,163.70 | $ | 5.51 | 1.01 | % |
The Hypothetical Expense table below provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.
Beginning Account Value 7/1/13 | Ending Account Value 12/31/13 | Expenses Paid During Period 7/1/13 - 12/31/13* | Annualized Expense Ratio During Period 7/1/13 - 12/31/13 | |||||||||||||||||
AZL MFS Value Fund | $ | 1,000.00 | $ | 1,020.11 | $ | 5.14 | 1.01 | % |
* | Expenses are equal to the average account value over the period, multiplied by the Fund’s annualized expense ratio, multiplied by 184/365 (to reflect the one half year period). |
Portfolio Composition
(Unaudited)
Investments | Percent of net assets | ||||
Financials | 22.9 | % | |||
Industrials | 17.2 | ||||
Consumer Staples | 14.3 | ||||
Health Care | 14.1 | ||||
Consumer Discretionary | 11.0 | ||||
Information Technology | 7.3 | ||||
Energy | 6.1 | ||||
Telecommunication Services | 3.4 | ||||
Materials | 1.9 | ||||
Utilities | 0.7 | ||||
|
| ||||
Total Common Stock and Convertible Preferred Stock | 98.9 | ||||
Money Market | 0.4 | ||||
|
| ||||
Total Investment Securities | 99.3 | ||||
Net other assets (liabilities) | 0.7 | ||||
|
| ||||
Net Assets | 100.0 | % | |||
|
|
3
AZL MFS Value Fund
Schedule of Portfolio Investments
December 31, 2013
Shares | Fair Value | |||||||
| Common Stocks (98.8%): |
| ||||||
| Aerospace & Defense (7.9%): |
| ||||||
110,930 | Honeywell International, Inc. | $ | 10,135,674 | |||||
112,920 | Lockheed Martin Corp. | 16,786,688 | ||||||
45,880 | Northrop Grumman Corp. | 5,258,307 | ||||||
96,020 | United Technologies Corp. | 10,927,076 | ||||||
|
| |||||||
43,107,745 | ||||||||
|
| |||||||
| Air Freight & Logistics (1.7%): | |||||||
86,930 | United Parcel Service, Inc., Class B | 9,134,604 | ||||||
|
| |||||||
| Auto Components (1.7%): | |||||||
56,650 | Delphi Automotive plc | 3,406,365 | ||||||
117,890 | Johnson Controls, Inc. | 6,047,757 | ||||||
|
| |||||||
9,454,122 | ||||||||
|
| |||||||
| Automobiles (0.2%): | |||||||
30,800 | General Motors Co. | 1,258,796 | ||||||
|
| |||||||
| Beverages (2.4%): | |||||||
44,650 | Coca-Cola Enterprises, Inc. | 1,970,405 | ||||||
263,046 | Diageo plc | 8,687,481 | ||||||
50,590 | Dr Pepper Snapple Group, Inc. | 2,464,745 | ||||||
|
| |||||||
13,122,631 | ||||||||
|
| |||||||
| Capital Markets (6.5%): | |||||||
232,930 | Bank of New York Mellon Corp. (The) | 8,138,574 | ||||||
16,342 | BlackRock, Inc., Class A | 5,171,753 | ||||||
88,743 | Franklin Resources, Inc. | 5,123,133 | ||||||
64,790 | Goldman Sachs Group, Inc. (The) | 11,484,676 | ||||||
72,870 | State Street Corp. | 5,347,929 | ||||||
|
| |||||||
35,266,065 | ||||||||
|
| |||||||
| Chemicals (1.6%): | |||||||
12,010 | Air Products & Chemicals, Inc. | 1,342,478 | ||||||
37,902 | PPG Industries, Inc. | 7,188,493 | ||||||
7,070 | Valspar Corp. (The) | 504,020 | ||||||
|
| |||||||
9,034,991 | ||||||||
|
| |||||||
| Commercial Banks (4.1%): | |||||||
47,400 | PNC Financial Services Group, Inc. | 3,677,292 | ||||||
69,550 | U.S. Bancorp | 2,809,820 | ||||||
357,300 | Wells Fargo & Co. | 16,221,420 | ||||||
|
| |||||||
22,708,532 | ||||||||
|
| |||||||
| Commercial Services & Supplies (1.1%): | |||||||
146,430 | Tyco International, Ltd. | 6,009,487 | ||||||
|
| |||||||
| Computers & Peripherals (0.2%): | |||||||
40,160 | Hewlett-Packard Co. | 1,123,677 | ||||||
|
| |||||||
| Containers & Packaging (0.3%): | |||||||
35,670 | Crown Holdings, Inc.* | 1,589,812 | ||||||
|
| |||||||
| Diversified Financial Services (4.8%): | |||||||
377,760 | JPMorgan Chase & Co. | 22,091,406 | ||||||
28,620 | Moody’s Corp. | 2,245,811 | ||||||
56,258 | NASDAQ OMX Group, Inc. (The) | 2,239,068 | ||||||
|
| |||||||
26,576,285 | ||||||||
|
| |||||||
| Diversified Telecommunication Services (2.1%): | |||||||
153,140 | AT&T, Inc. | 5,384,402 | ||||||
128,600 | Verizon Communications, Inc. | 6,319,404 | ||||||
|
| |||||||
11,703,806 | ||||||||
|
| |||||||
| Electric Utilities (0.5%): | |||||||
25,640 | Duke Energy Corp. | 1,769,416 |
Shares | Fair Value | |||||||
| Common Stocks, continued |
| ||||||
| Electric Utilities, continued | |||||||
40,680 | PPL Corp. | $ | 1,224,061 | |||||
|
| |||||||
2,993,477 | ||||||||
|
| |||||||
| Electrical Equipment (0.9%): |
| ||||||
65,100 | Eaton Corp. plc | 4,955,412 | ||||||
|
| |||||||
| Food & Staples Retailing (1.8%): | |||||||
134,880 | CVS Caremark Corp. | 9,653,362 | ||||||
|
| |||||||
| Food Products (4.2%): | |||||||
61,717 | Danone SA | 4,451,958 | ||||||
150,060 | General Mills, Inc. | 7,489,495 | ||||||
25,880 | Kellogg Co. | 1,580,492 | ||||||
130,813 | Nestle SA, Registered Shares | 9,605,405 | ||||||
|
| |||||||
23,127,350 | ||||||||
|
| |||||||
| Health Care Equipment & Supplies (3.6%): | |||||||
160,790 | Abbott Laboratories | 6,163,080 | ||||||
45,420 | Covidien plc | 3,093,102 | ||||||
106,390 | Medtronic, Inc. | 6,105,722 | ||||||
72,270 | St. Jude Medical, Inc. | 4,477,127 | ||||||
|
| |||||||
19,839,031 | ||||||||
|
| |||||||
| Health Care Providers & Services (1.2%): | |||||||
66,960 | Express Scripts Holding Co.* | 4,703,270 | ||||||
35,650 | Quest Diagnostics, Inc. | 1,908,701 | ||||||
|
| |||||||
6,611,971 | ||||||||
|
| |||||||
| Hotels, Restaurants & Leisure (0.9%): | |||||||
53,628 | McDonald’s Corp. | 5,203,525 | ||||||
|
| |||||||
| Household Products (0.5%): | |||||||
35,490 | Procter & Gamble Co. (The) | 2,889,241 | ||||||
|
| |||||||
| Industrial Conglomerates (3.3%): | |||||||
80,720 | 3M Co. | 11,320,980 | ||||||
89,380 | Danaher Corp. | 6,900,136 | ||||||
|
| |||||||
18,221,116 | ||||||||
|
| |||||||
| Insurance (7.5%): | |||||||
57,840 | ACE, Ltd. | 5,988,175 | ||||||
61,770 | Aon plc | 5,181,885 | ||||||
37,570 | Chubb Corp. (The) | 3,630,389 | ||||||
207,430 | MetLife, Inc. | 11,184,626 | ||||||
75,430 | Prudential Financial, Inc. | 6,956,155 | ||||||
84,890 | Travelers Cos., Inc. (The) | 7,685,941 | ||||||
|
| |||||||
40,627,171 | ||||||||
|
| |||||||
| IT Services (5.1%): | |||||||
139,250 | Accenture plc, Class A | 11,449,134 | ||||||
29,090 | Fidelity National Information Services, Inc. | 1,561,551 | ||||||
52,130 | Fiserv, Inc.* | 3,078,277 | ||||||
55,181 | International Business Machines Corp. | 10,350,300 | ||||||
92,250 | Western Union Co. | 1,591,313 | ||||||
|
| |||||||
28,030,575 | ||||||||
|
| |||||||
| Leisure Equipment & Products (0.5%): | |||||||
48,640 | Hasbro, Inc. | 2,675,686 | ||||||
|
| |||||||
| Life Sciences Tools & Services (1.3%): | |||||||
65,930 | Thermo Fisher Scientific, Inc. | 7,341,306 | ||||||
|
| |||||||
| Machinery (1.6%): | |||||||
28,700 | Illinois Tool Works, Inc. | 2,413,096 | ||||||
32,830 | Pentair, Ltd., Registered Shares | 2,549,906 | ||||||
48,840 | Stanley Black & Decker, Inc. | 3,940,900 | ||||||
|
| |||||||
8,903,902 | ||||||||
|
|
Continued
4
AZL MFS Value Fund
Schedule of Portfolio Investments
December 31, 2013
Shares | Fair Value | |||||||
| Common Stocks, continued | |||||||
| Media (4.9%): | |||||||
109,670 | Comcast Corp., Special Class A | $ | 5,470,340 | |||||
28,990 | McGraw-Hill Cos., Inc. (The) | 2,267,018 | ||||||
89,910 | Omnicom Group, Inc. | 6,686,607 | ||||||
54,030 | Viacom, Inc., Class B | 4,718,980 | ||||||
100,420 | Walt Disney Co. (The) | 7,672,087 | ||||||
|
| |||||||
26,815,032 | ||||||||
|
| |||||||
| Multiline Retail (1.7%): | |||||||
23,880 | Kohl’s Corp. | 1,355,190 | ||||||
127,830 | Target Corp. | 8,087,804 | ||||||
|
| |||||||
9,442,994 | ||||||||
|
| |||||||
| Multi-Utilities (0.2%): | |||||||
26,070 | Public Service Enterprise Group, Inc. | 835,283 | ||||||
|
| |||||||
| Oil, Gas & Consumable Fuels (6.1%): | |||||||
29,160 | Apache Corp. | 2,506,010 | ||||||
70,531 | Chevron Corp. | 8,810,027 | ||||||
11,408 | EOG Resources, Inc. | 1,914,719 | ||||||
129,040 | Exxon Mobil Corp. | 13,058,848 | ||||||
78,180 | Occidental Petroleum Corp. | 7,434,918 | ||||||
|
| |||||||
33,724,522 | ||||||||
|
| |||||||
| Pharmaceuticals (8.0%): | |||||||
198,760 | Johnson & Johnson Co. | 18,204,429 | ||||||
100,990 | Merck & Co., Inc. | 5,054,550 | ||||||
556,480 | Pfizer, Inc. | 17,044,982 | ||||||
11,627 | Roche Holding AG | 3,260,159 | ||||||
4,790 | Zoetis, Inc. | 156,585 | ||||||
|
| |||||||
43,720,705 | ||||||||
|
| |||||||
| Road & Rail (0.6%): | |||||||
60,370 | Canadian National Railway Co. | 3,442,297 | ||||||
|
| |||||||
| Semiconductors & Semiconductor Equipment (0.6%): | |||||||
131,730 | Intel Corp. | 3,419,711 | ||||||
|
| |||||||
| Software (1.4%): | |||||||
197,100 | Oracle Corp. | 7,541,046 | ||||||
|
|
Shares | Fair Value | |||||||
| Common Stocks, continued | |||||||
| Specialty Retail (1.1%): | |||||||
32,000 | Advance Auto Parts, Inc. | $ | 3,541,760 | |||||
140,720 | Staples, Inc. | 2,236,041 | ||||||
|
| |||||||
5,777,801 | ||||||||
|
| |||||||
| Tobacco (5.4%): | |||||||
67,590 | Altria Group, Inc. | 2,594,780 | ||||||
27,145 | Imperial Tobacco Group plc | 1,053,321 | ||||||
123,270 | Lorillard, Inc. | 6,247,324 | ||||||
229,370 | Philip Morris International, Inc. | 19,985,008 | ||||||
|
| |||||||
29,880,433 | ||||||||
|
| |||||||
| Wireless Telecommunication Services (1.3%): | |||||||
1,767,153 | Vodafone Group plc | 6,945,814 | ||||||
|
| |||||||
| Total Common Stocks (Cost $392,405,195) | 542,709,316 | ||||||
|
| |||||||
| Convertible Preferred Stock (0.1%): | |||||||
| Aerospace & Defense (0.1%): | |||||||
7,000 | United Technologies Corp., 0.46% | 458,290 | ||||||
|
| |||||||
| Total Convertible Preferred Stock (Cost $403,403) | 458,290 | ||||||
|
| |||||||
Contracts, Shares, Notional Amount or Principal Amount | Fair Value | |||||||
| Unaffiliated Investment Company (0.4%): |
| ||||||
2,430,001 | Dreyfus Treasury Prime Cash Management Fund, Institutional Shares, 0.00%(a) | 2,430,001 | ||||||
|
| |||||||
| Total Unaffiliated Investment Company (Cost $2,430,001) | 2,430,001 | ||||||
|
| |||||||
| Total Investment Securities (Cost $395,238,599)(b) — 99.3% | 545,597,607 | ||||||
| Net other assets (liabilities) — 0.7% | 4,102,108 | ||||||
|
| |||||||
| Net Assets — 100.0% | $ | 549,699,715 | |||||
|
|
Percentages indicated are based on net assets as of December 31, 2013.
* | Non-income producing security. |
(a) | The rate represents the effective yield at December 31, 2013. |
(b) | See Federal Tax Information listed in the Notes to the Financial Statements. |
The following represents the concentrations by country of risk (based on the domicile of the security issuer) relative to the total fair value of investments as of December 31, 2013:
Country | Percentage | |||
Canada | 0.6 | % | ||
France | 0.8 | % | ||
Ireland (Republic of) | 3.6 | % | ||
Switzerland | 4.5 | % | ||
United Kingdom | 4.5 | % | ||
United States | 86.0 | % | ||
|
| |||
100.0 | % | |||
|
|
See accompanying notes to the financial statements.
5
AZL MFS Value Fund
Statement of Assets and Liabilities
December 31, 2013
Assets: | |||||
Investment securities, at cost | $ | 395,238,599 | |||
|
| ||||
Investment securities, at value | $ | 545,597,607 | |||
Cash | 10,458 | ||||
Interest and dividends receivable | 824,286 | ||||
Foreign currency, at value (cost $315) | 315 | ||||
Receivable for capital shares issued | 6,837 | ||||
Receivable for investments sold | 4,236,670 | ||||
Reclaims receivable | 56,734 | ||||
|
| ||||
Total Assets | 550,732,907 | ||||
|
| ||||
Liabilities: | |||||
Payable for capital shares redeemed | 540,597 | ||||
Manager fees payable | 321,443 | ||||
Administration fees payable | 18,754 | ||||
Distribution fees payable | 113,832 | ||||
Custodian fees payable | 7,316 | ||||
Administrative and compliance services fees payable | 2,186 | ||||
Trustee fees payable | 16 | ||||
Other accrued liabilities | 29,048 | ||||
|
| ||||
Total Liabilities | 1,033,192 | ||||
|
| ||||
Net Assets | $ | 549,699,715 | |||
|
| ||||
Net Assets Consist of: | |||||
Capital | $ | 457,107,977 | |||
Accumulated net investment income/(loss) | 7,224,526 | ||||
Accumulated net realized gains/(losses) from investment transactions | (64,997,563 | ) | |||
Net unrealized appreciation/(depreciation) on investments | 150,364,775 | ||||
|
| ||||
Net Assets | $ | 549,699,715 | |||
|
| ||||
Shares of beneficial interest (unlimited number of shares authorized, no par value) | 45,866,410 | ||||
Net Asset Value (offering and redemption price per share) | $ | 11.98 | |||
|
|
For the Year Ended December 31, 2013
Investment Income: | |||||
Dividends | $ | 12,254,309 | |||
Interest | 153 | ||||
Income from securities lending | 54,835 | ||||
Foreign withholding tax | (124,611 | ) | |||
|
| ||||
Total Investment Income | 12,184,686 | ||||
|
| ||||
Expenses: | |||||
Manager fees | 3,658,672 | ||||
Administration fees | 151,591 | ||||
Distribution fees | 1,232,927 | ||||
Custodian fees | 27,889 | ||||
Administrative and compliance services fees | 9,892 | ||||
Trustee fees | 25,495 | ||||
Professional fees | 27,306 | ||||
Shareholder reports | 31,319 | ||||
Other expenses | 12,891 | ||||
|
| ||||
Total expenses before reductions | 5,177,982 | ||||
Less expenses voluntarily waived/reimbursed by the Manager | (160,794 | ) | |||
Less expenses paid indirectly | (15,581 | ) | |||
|
| ||||
Net expenses | 5,001,607 | ||||
|
| ||||
Net Investment Income/(Loss) | 7,183,079 | ||||
|
| ||||
Realized and Unrealized Gains/(Losses) on Investments: | |||||
Net realized gains/(losses) on securities transactions | 17,240,418 | ||||
Change in net unrealized appreciation/depreciation on investments | 122,989,459 | ||||
|
| ||||
Net Realized/Unrealized Gains/(Losses) on Investments | 140,229,877 | ||||
|
| ||||
Change in Net Assets Resulting From Operations | $ | 147,412,956 | |||
|
|
See accompanying notes to the financial statements.
6
Statements of Changes in Net Assets
AZL MFS Value Fund | ||||||||||
For the Year Ended December 31, 2013 | For the Year Ended December 31, 2012 | |||||||||
Change in Net Assets: | ||||||||||
Operations: | ||||||||||
Net investment income/(loss) | $ | 7,183,079 | $ | 7,442,686 | ||||||
Net realized gains/(losses) on investment transactions | 17,240,418 | 77,954,079 | ||||||||
Change in unrealized appreciation/depreciation on investments | 122,989,459 | (10,403,396 | ) | |||||||
|
|
|
| |||||||
Change in net assets resulting from operations | 147,412,956 | 74,993,369 | ||||||||
|
|
|
| |||||||
Dividends to Shareholders: | ||||||||||
From net investment income | (7,468,004 | ) | (6,349,213 | ) | ||||||
|
|
|
| |||||||
Change in net assets resulting from dividends to shareholders | (7,468,004 | ) | (6,349,213 | ) | ||||||
|
|
|
| |||||||
Capital Transactions: | ||||||||||
Proceeds from shares issued | 41,951,702 | (60,280,683 | ) | |||||||
Proceeds from dividends reinvested | 7,468,004 | 6,349,213 | ||||||||
Value of shares redeemed | (63,453,634 | ) | (147,736,755 | ) | ||||||
|
|
|
| |||||||
Change in net assets resulting from capital transactions | (14,033,928 | ) | (81,106,859 | ) | ||||||
|
|
|
| |||||||
Change in net assets | 125,911,024 | (12,462,703 | ) | |||||||
Net Assets: | ||||||||||
Beginning of period | 423,788,691 | 436,251,394 | ||||||||
|
|
|
| |||||||
End of period | $ | 549,699,715 | $ | 423,788,691 | ||||||
|
|
|
| |||||||
Accumulated net investment income/(loss) | $ | 7,224,526 | $ | 7,502,474 | ||||||
|
|
|
| |||||||
Share Transactions: | ||||||||||
Shares issued | 3,999,588 | 7,151,952 | ||||||||
Dividends reinvested | 688,930 | 719,865 | ||||||||
Shares redeemed | (6,034,797 | ) | (16,628,090 | ) | ||||||
|
|
|
| |||||||
Change in shares | (1,346,279 | ) | (8,756,273 | ) | ||||||
|
|
|
|
See accompanying notes to the financial statements.
7
AZL MFS Value Fund
(Selected data for a share of beneficial interest outstanding throughout the periods indicated)
Year Ended December 31, | |||||||||||||||||||||||||
2013 | 2012 | 2011 | 2010 | 2009 | |||||||||||||||||||||
Net Asset Value, Beginning of Period | $ | 8.98 | $ | 7.79 | $ | 8.24 | $ | 7.59 | $ | 6.17 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Investment Activities: | |||||||||||||||||||||||||
Net Investment Income/(Loss) | 0.16 | 0.15 | 0.13 | 0.07 | 0.10 | ||||||||||||||||||||
Net Realized and Unrealized Gains/(Losses) on Investments | 3.00 | 1.15 | (0.50 | ) | 0.67 | 1.53 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Total from Investment Activities | 3.16 | 1.30 | (0.37 | ) | 0.74 | 1.63 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Dividends to Shareholders From: | |||||||||||||||||||||||||
Net Investment Income | (0.16 | ) | (0.11 | ) | (0.08 | ) | (0.09 | ) | (0.21 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Total Dividends | (0.16 | ) | (0.11 | ) | (0.08 | ) | (0.09 | ) | (0.21 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
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Net Asset Value, End of Period | $ | 11.98 | $ | 8.98 | $ | 7.79 | $ | 8.24 | $ | 7.59 | |||||||||||||||
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Total Return(a) | 35.42 | % | 16.67 | % | (4.45 | )% | 9.83 | % | 26.53 | % | |||||||||||||||
Ratios to Average Net Assets/Supplemental Data: | |||||||||||||||||||||||||
Net Assets, End of Period (000’s) | $ | 549,700 | $ | 423,789 | $ | 436,251 | $ | 484,333 | $ | 408,379 | |||||||||||||||
Net Investment Income/(Loss) | 1.46 | % | 1.59 | % | 1.40 | % | 1.02 | % | 1.36 | % | |||||||||||||||
Expenses Before Reductions(b) | 1.05 | % | 1.06 | % | 1.07 | % | 1.08 | % | 1.10 | % | |||||||||||||||
Expenses Net of Reductions | 1.01 | % | 1.02 | % | 1.04 | % | 1.05 | % | 1.05 | % | |||||||||||||||
Expenses Net of Reductions, Excluding Expenses Paid Indirectly(c) | 1.02 | % | 1.02 | % | 1.04 | % | 1.05 | % | 1.07 | % | |||||||||||||||
Portfolio Turnover Rate | 17 | % | 95 | %(d) | 49 | % | 34 | % | 118 | % |
(a) | The returns include reinvested dividends and fund level expenses, but exclude insurance contract charges. If these charges were included, the returns would have been lower. |
(b) | Excludes fee reductions. If such fee reductions had not occurred, the ratios would have been as indicated. |
(c) | Expenses net of reductions excludes expenses paid indirectly, pursuant to a “commission recapture” program, under which brokers remit a portion of the brokerage commission which is used to pay certain Fund expenses. See note 2 in the Notes to the Financial Statements. |
(d) | Effective September 15, 2012, the Subadviser changed from Eaton Vance Management to Massachusetts Financial Services Company. Costs of purchases and proceeds from sales of portfolio securities associates with the change in the Subadviser contributed to a higher portfolio turnover rate for the year ended December 31, 2012 as compared to prior years. |
See accompanying notes to the financial statements.
8
AZL MFS Value Fund
Notes to the Financial Statements
December 31, 2013
1. Organization
The Allianz Variable Insurance Products Trust (the “Trust”) was organized as a Delaware statutory trust on July 13, 1999. The Trust is a diversified open-end management investment company registered under the Investment Company Act of 1940. The Trust consists of 29 separate investment portfolios (collectively, the “Funds”), of which one is included in this report, the AZL MFS Value Fund (the “Fund”), and 28 are presented in separate reports.
The Trust is authorized to issue an unlimited number of shares of the Fund without par value. Shares of the Fund are available through the variable annuity contracts and variable life insurance policies offered through the separate accounts of participating insurance companies.
Under the Trust’s organizational documents, its officers and trustees are indemnified against certain liabilities arising out of the performance of their duties to the Fund. In addition, in the normal course of business, the Fund may enter into contracts with its vendors and others that provide for general indemnifications. The Fund’s maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Fund. However, based on experience, the Fund expects the risk of loss to be remote.
2. Significant Accounting Policies
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. The policies conform with U.S. generally accepted accounting principles (“U.S. GAAP”). The preparation of financial statements requires management to make certain 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 increases and decreases in net assets from operations during the reporting period. Actual results could differ from those estimates.
Security Valuation
The Fund records its investments at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between willing market participants at the measurement date. The valuation techniques used to determine fair value are further described in Note 4 below.
Investment Transactions and Investment Income
Investment transactions are recorded not later than on the business day following trade date. However, for financial reporting purposes, investment transactions are accounted for on trade date. Net realized gains and losses on investments sold and on foreign currency transactions are recorded on the basis of identified cost. Interest income is recorded on the accrual basis and includes, where applicable, the amortization of premiums or accretion of discounts. Dividend income is recorded on the ex-dividend date except in the case of foreign securities, in which case dividends are recorded as soon as such information becomes available.
Real Estate Investment Trusts
The Fund may own shares of real estate investment trusts (“REITs”) which report information on the source of their distributions annually. Certain distributions received from REITs during the year, which are known to be a return of capital, are recorded as a reduction to the cost of the individual REIT.
Foreign Currency Translation
The accounting records of the Fund are maintained in U.S. dollars. Foreign currency amounts are translated into U.S. dollars at the current rate of exchange to determine the fair value of investments, assets and liabilities. Purchases and sales of securities, and income and expenses are translated at the prevailing rate of exchange on the respective dates of such transactions. The Fund does not isolate that portion of the results of operations resulting from changes in foreign exchange rates on investments from fluctuations arising from changes in market prices of securities held. Such fluctuations are included in the net realized and unrealized gain or loss on investments and foreign currencies. Income received by the Fund from sources within foreign countries may be subject to withholding and other income or similar taxes imposed by such countries. The Funds accrue such taxes, as applicable, based on their current interpretation of tax rules in the foreign markets in which they invest.
Dividends to Shareholders
Dividends to shareholders are recorded on the ex-dividend date. The Fund distributes its dividends from net investment income and net realized capital gains, if any, on an annual basis. The amount of dividends from net investment income and from net realized gains is determined in accordance with federal income tax regulations, which may differ from U.S. GAAP. These “book/tax” differences are either temporary or permanent in nature. To the extent these differences are permanent in nature (e.g., return of capital, net operating loss, reclassification of certain market discounts, gain/loss, paydowns, and distributions), such amounts are reclassified within the composition of net assets based on their federal tax-basis treatment; temporary differences (e.g., wash sales and post October losses) do not require reclassification. Dividends to shareholders that exceed net investment income and net realized gains for tax purposes are reported as distributions of capital.
Expense Allocation
Expenses directly attributable to the Fund are charged directly to the Fund, while expenses attributable to more than one Fund are allocated among the respective Funds based upon relative net assets or some other reasonable method. Expenses which are attributable to more than one Trust are allocated across the Allianz Variable Insurance Products and Allianz Variable Insurance Products Fund of Funds Trusts based upon relative net assets or another reasonable basis. Allianz Investment Management LLC (the “Manager”), serves as the investment manager for the Trust and the Allianz Variable Insurance Products Fund of Funds Trust.
Securities Lending
To generate additional income, the Fund may lend up to 33 1/3% of its assets pursuant to agreements requiring that the loan be continuously secured by any combination of cash, U.S. government or U.S. government agency securities, equal initially to at least 102% of the fair value plus accrued interest on the securities loaned (105% for foreign
9
AZL MFS Value Fund
Notes to the Financial Statements
December 31, 2013
securities). The borrower of securities is at all times required to post collateral to the Fund in an amount equal to 100% of the fair value of the securities loaned based on the previous day’s fair value of the securities loaned, marked-to-market daily. Any collateral shortfalls are adjusted the next business day. The Fund bears all of the gains and losses on such investments. The Fund receives payments from borrowers equivalent to the dividends and interest that would have been earned on securities lent while simultaneously seeking to earn income on the investment of cash collateral received. In extremely low interest rate environments, the broker rebate fee may exceed the interest earned or the cash collateral which would result in a loss to the Fund. The investment of cash collateral deposited by the borrower is subject to inherent market risks such as interest rate risk, credit risk, liquidity risk, and other risks that are present in the market, and as such, the value of these investments may not be sufficient, when liquidated, to repay the borrower when the loaned security is returned. There may be risks of delay in recovery of the securities or even loss of rights in the collateral should the borrower of the securities fail financially. However, loans will be made only to borrowers, such as broker-dealers, banks or institutional borrowers of securities, deemed by the Manager to be of good standing and credit worthy and when in its judgment, the consideration which can be earned currently from such securities loans justifies the attendant risks. Loans are subject to termination by the Trust or the borrower at any time, and are, therefore, not considered to be illiquid investments. Securities on loan at December 31, 2013 are presented on the Fund’s Schedule of Portfolio Investments. The average outstanding amount of securities on loan was $4.2 million for the year ended December 31, 2013.
Cash collateral received in connection with securities lending is invested in the Allianz Variable Insurance Products Securities Lending Collateral Trust (the “Securities Lending Collateral Trust”) managed by The Dreyfus Corporation, an affiliate of the Custodian and Securities Lending Agent. The Securities Lending Collateral Trust invests in short-term investments that have a remaining maturity of 397 days or less as calculated in accordance with Rule 2a-7 under the 1940 Act. The Fund paid securities lending fees of $5,422 during the year ended December 31, 2013. These fees have been netted against “Income from securities lending” on the Statement of Operations.
Commission Recapture
Certain Funds of the Trust participate in a commission recapture program. The Fund will utilize the recaptured commissions to pay for, in whole or part, certain expenses of the Fund, excluding investment advisory fees. Any amounts received by the Fund, if applicable, are disclosed as “Expenses paid indirectly” on the Statement of Operations.
Effective January 6, 2014, the Manager, on behalf of the Trust, requested the Fund cease participation in the program until further notice.
3. Related Party Transactions
The Manager provides investment advisory and management services for the Fund. The Manager has retained an independent money management organization (the “Subadviser”), to make investment decisions on behalf of the Fund. Pursuant to a subadvisory agreement with Massachusetts Financial Services Company (“MFS”), MFS provides investment advisory services as the Subadviser for the Fund subject to the general supervision of the Trustees and the Manager. The Manager is entitled to a fee, computed daily and paid monthly, based on the average daily net assets of the Fund. Expenses incurred by the Fund for investment advisory and management services are reflected on the Statement of Operations as “Manager fees.” For its services, the Subadviser is entitled to a fee payable by the Manager. The Manager has contractually agreed to waive fees and reimburse the Fund to limit the annual expenses, excluding interest expense (e.g., cash overdraft fees), taxes, brokerage commissions, other expenditures that are capitalized in accordance with U.S. GAAP and other extraordinary expenses not incurred in the ordinary course of the Fund’s business, based on the daily net assets of the Fund, through April 30, 2015.
For the year ended December 31, 2013, the annual rate due to the Manager and the annual expense limit were as follows:
Annual Rate* | Annual Expense Limit | |||||||||
AZL MFS Value Fund | 0.78 | % | 1.20 | % |
* | The fees payable to the Manager are based on a tiered structure for various net assets levels as follows: the first $100 million at 0.775%, the next $150 million at 0.75%, the next $250 million at 0.725% and above $500 million at 0.675%. The Manager voluntarily reduced the management fees as follows: the first $100 million at 0.75%, the next $400 million at 0.70% and above $500 million at 0.65%. The Manager reserves the right to stop reducing the manager fee at any time. |
Any amounts contractually waived or reimbursed by the Manager in a particular fiscal year will be subject to repayment by the Fund to the Manager to the extent that from time to time through the next three fiscal years the repayment will not cause the Fund’s expenses to exceed the lesser of the stated limit at the time of the waiver or the current stated limit. Any amounts recouped by the Manager during the year are reflected on the Statement of Operations as “Recoupment of prior expenses reimbursed by the Manager.” At December 31, 2013, there were no remaining contractual reimbursements that are subject to repayment by the Fund in subsequent years.
In addition, the Manager may voluntarily waive or reimburse additional fees in order to maintain more competitive expense ratios. Any voluntary waivers or reimbursements are not subject to repayment in subsequent years. Information on the total amount waived/reimbursed by the Manager or repaid to the Manager by the Fund during the year can be found on the Statement of Operations.
Pursuant to separate agreements between the Funds and the Manager, the Manager provides a Chief Compliance Officer (“CCO”) and certain compliance oversight and regulatory filing services to the Trust. Under these agreements the Manager is entitled to an amount equal to a portion of the compensation and certain other expenses related to the individuals performing the CCO and compliance oversight services, as well as $75 per hour for time incurred in connection with the preparation and filing of certain documents with the Securities and Exchange Commission. The fees are paid to the Manager on a quarterly basis. The total expenses incurred by the Fund for these services are reflected on the Statement of Operations as “Administrative and compliance services fees.”
Citi Fund Services Ohio, Inc. (“Citi” or the “Administrator”), a wholly owned subsidiary of Citigroup, Inc., with which an officer of the Trust is affiliated, serves as the Trust’s administrator, transfer agent, and fund accountant, and assists the Trust in all aspects of its administration and operation. The Administrator is entitled to a Trust-wide asset-based fee, which is based on the following schedule: 0.05% of daily average net assets on the first $4 billion, 0.04% of daily average net assets on the next $2 billion, 0.02% of daily average net assets on the next $2 billion and 0.01% of daily average net assets over $8 billion. The overall Trust-wide fees are accrued daily and paid monthly and are subject to a minimum annual fee. In addition, the Administrator is entitled to annual account fees related to the transfer agency system, an annual fee for each additional class of shares of any Fund, certain annual fees in supporting fair value services, and a Trust-wide annual fee for providing infrastructure and support in
10
AZL MFS Value Fund
Notes to the Financial Statements
December 31, 2013
implementing the written policies and procedures comprising the Fund’s compliance program. Fees payable to the Administrator are subject to certain reductions associated with services provided to new funds. The Administrator is also reimbursed for certain expenses incurred. The total expenses incurred by the Fund for these services are reflected on the Statement of Operations as “Administration fees.”
Allianz Life Financial Services, LLC (“ALFS”), an affiliate of the Manager, serves as distributor of the Fund and receives 12b-1 fees directly from the Fund, plus a Trust-wide annual fee of $42,500, paid by the Manager from its profits and not by the Trust, for recordkeeping and reporting services.
The Trust has adopted a distribution and service plan in conformance with Rule 12b-1 of the 1940 Act. Pursuant to this plan, the Fund is authorized to pay certain fees for the sale and distribution of its shares and services provided to its shareholders at an annual rate not to exceed 0.25% of the Fund’s average daily net assets. These fees are reflected on the Statement of Operations as “Distribution fees.”
In addition, certain legal fees and expenses are paid to a law firm, Dorsey & Whitney LLP, of which the Secretary of the Fund is a partner. During the year ended December 31, 2013, $6,145 was paid from the Fund relating to these fees and expenses.
Certain Officers and Trustees of the Trust are affiliated with the Manager or the Administrator. Such Officers (except for the Trust’s CCO as noted above) and Trustees receive no compensation from the Trust for serving in their respective roles. For their service to the Trust and to the Allianz Variable Insurance Products Fund of Funds Trust, each non-interested Trustee receives a $139,000 annual Board retainer. In addition, the Trustees are reimbursed for certain expenses associated with attending Board meetings. Compensation to the Trustees is allocated between the Trust and the Allianz Variable Insurance Products Fund of Funds Trust in proportion to the assets under management of each trust. During the year ended December 31, 2013, actual Trustee compensation was $973,000 in total for both trusts.
At a meeting of the Board of Trustees on December 4, 2013, the Trustees approved a fee increase to the Officers and Trustees who are paid a fee for their services to the Trust and to the Allianz Variable Insurance Products Fund of Funds Trust. Effective January 1, 2014, each non-interested Trustee will receive a $163,000 annual retainer.
4. Investment Valuation Summary
The valuation techniques employed by the Fund, as described below, maximize the use of observable inputs and minimize the use of unobservable inputs in determining fair value. The inputs used for valuing the Fund’s investments are summarized in the three broad levels listed below:
— | Level 1 — quoted prices in active markets for identical assets |
— | Level 2 — other significant observable inputs (including quoted prices for similar securities, interest rates, prepayments speeds, credit risk, etc.) |
— | Level 3 — significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of investments) |
Changes in valuation techniques may result in transfers in or out of an assigned level within the disclosure hierarchy. The Fund determines transfers between fair value hierarchy levels at the reporting period end. The inputs or methodology used for valuing investments is not necessarily an indication of the risk associated with investing in those investments.
Security prices are generally provided by an independent third party pricing service approved by the Trust’s Board of Trustees (“Trustees”) as of the close of the New York Stock Exchange (“NYSE”) (generally 4:00 pm Eastern Time). Equity securities are valued at the last quoted sale price or, if there is no sale, the last quoted bid price is used for long securities and the last quoted ask price is used for securities sold short. Securities listed on NASDAQ Stock Market, Inc. (“NASDAQ”) are valued at the official closing price as reported by NASDAQ. In each of these situations, valuations are typically categorized as a Level 1 in the fair value hierarchy. Investments in open-end investment companies are valued at their respective net asset value as reported by such companies and are typically categorized as Level 1 in the fair value hierarchy.
Debt and other fixed income securities are generally valued at an evaluated bid price provided by an independent pricing source approved by the Trustees. To value debt securities, pricing services may use various pricing techniques which take into account appropriate factors such as market activity, yield, quality, coupon rate, maturity, type of issue, trading characteristics, call features, credit ratings and other data, as well as broker quotes. Short term securities of sufficient credit quality with sixty days or less remaining until maturity may be valued at amortized cost, which approximates fair value. In each of these situations, valuations are typically categorized as Level 2 in the fair value hierarchy.
Forward currency contracts are generally valued at the foreign currency exchange rate as of the close of the NYSE and are typically categorized as Level 2 in the fair value hierarchy.
Other assets and securities for which market quotations are not readily available, or are deemed unreliable are valued at fair value as determined in good faith by the Trustees or persons acting on the behalf of the Trustees. Fair value pricing may be used for significant events such as securities whose trading has been suspended, whose price has become stale or for which there is no currently available price at the close of the NYSE. Depending on the source and relative significance of valuation inputs, these instruments may be classified as Level 2 or Level 3 in the fair value hierarchy. The Fund utilizes a pricing service to assist in determining the fair value of securities when certain significant events occur that may affect the value of foreign securities.
In accordance with procedures adopted by the Trustees, fair value pricing may be used if events materially affecting the value of foreign securities occur between the time when the exchange on which they are traded closes and the time when the Fund’s net asset value is calculated. Management identifies possible fluctuation in international securities by monitoring the increase or decrease in the value of a designated benchmark index. In the event of an increase or decrease greater than predetermined levels, the Fund may use a systematic valuation model provided by an independent third party to fair value its international equity securities which are then typically categorized as Level 2 in the fair value hierarchy.
For the year ended December 31, 2013, there were no Level 3 investments for which significant unobservable inputs were used to determine fair value.
11
AZL MFS Value Fund
Notes to the Financial Statements
December 31, 2013
The following is a summary of the valuation inputs used as of December 31, 2013 in valuing the Fund’s investments based upon the three levels defined above:
Investment Securities: | Level 1 | Level 2 | Total | ||||||||||||
Common Stocks+ | |||||||||||||||
Beverages | $ | 4,435,150 | $ | 8,687,481 | $ | 13,122,631 | |||||||||
Food Products | 9,069,987 | 14,057,363 | 23,127,350 | ||||||||||||
Pharmaceuticals | 40,460,546 | 3,260,159 | 43,720,705 | ||||||||||||
Tobacco | 28,827,112 | 1,053,321 | 29,880,433 | ||||||||||||
Wireless Telecommunication Services | — | 6,945,814 | 6,945,814 | ||||||||||||
All Other Common Stocks | 425,912,383 | 425,912,383 | |||||||||||||
Convertible Preferred Stock+ | 458,290 | — | 458,290 | ||||||||||||
Unaffiliated Investment Company | 2,430,001 | — | 2,430,001 | ||||||||||||
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Total Investment Securities | $ | 511,593,469 | $ | 34,004,138 | $ | 545,597,607 | |||||||||
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+ | For detailed industry descriptions, see the accompanying Schedule of Portfolio Investments. |
5. Security Purchases and Sales
For the year ended December 31, 2013, cost of purchases and proceeds from sales of securities (excluding securities maturing less than one year from acquisition) were as follows:
Purchases | Sales | |||||||||
AZL MFS Value Fund | $ | 84,480,289 | $ | 99,477,249 |
6. Investment Risks
Foreign Securities and Currencies Risk: Investments in securities of foreign issuers carry certain risks not ordinarily associated with investments in securities of domestic issuers. Such risks include future political and economic developments, and the possible imposition of exchange controls or other foreign governmental laws and restrictions. In addition, with respect to certain countries, there is the possibility of expropriation of assets, confiscatory taxation, political or social instability or diplomatic developments which could adversely affect investments in those securities.
Security Quality Risk (also known as “High Yield Risk”): The Fund may invest in high yield, high risk debt securities and unrated securities of similar credit quality (commonly known as “junk bonds”) may be subject to greater levels of credit and liquidity risk than funds that do not invest in such securities. These securities are considered predominately speculative with respect to the issuer’s continuing ability to make principal and interest payments. An economic downturn or period of rising interest rates could adversely affect the market for these securities and reduce the Fund’s ability to sell these securities (liquidity risk). If the issuer of a security is in default with respect to interest or principal payments, the Fund may lose the value of its entire investment.
7. Federal Tax Information
It is the Fund’s policy to continue to comply with the requirements of the Internal Revenue Code under Subchapter M, applicable to regulated investment companies, and to distribute all of its taxable income, including any net realized gains on investments, to its shareholders. Therefore, no provision is made for federal income taxes.
Management of the Fund has reviewed tax positions taken in tax years that remain subject to examination by all major tax jurisdictions, including federal (i.e., the last four tax year ends and the interim tax period since then, as applicable). Management believes that there is no tax liability resulting from unrecognized tax benefits related to uncertain tax positions taken.
Cost for federal income tax purposes at December 31, 2013 is $398,238,816. The gross unrealized appreciation/ (depreciation) on a tax basis is as follows:
Unrealized appreciation | $ | 148,009,367 | |||
Unrealized depreciation | (650,576 | ) | |||
|
| ||||
Net unrealized appreciation/(depreciation) | $ | 147,358,791 | |||
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As of the end of its tax year ended December 31, 2013, the Fund has capital loss carry forwards (“CLCFs”) as summarized in the tables below. CLCFs subject to expiration are applied as short-term capital loss regardless of whether the originating capital loss was short-term or long-term. CLCFs that are not subject to expiration must be utilized before those that are subject to expiration. The Board does not intend to authorize a distribution of any realized gain for the Fund until any applicable CLCF has been offset or expires.
CLCFs subject to expiration:
Expires 12/31/2017 | Expires 12/31/2018 | Total | |||||||||||||
AZL MFS Value Fund | $ | 56,512,198 | $ | 5,491,128 | $ | 62,003,326 |
During the year ended December 31, 2013, the Fund utilized $17,184,462 in CLCFs to offset capital gains.
12
AZL MFS Value Fund
Notes to the Financial Statements
December 31, 2013
The tax character of dividends paid to shareholders during the year ended December 31, 2013 were as follows:
Ordinary Income | Net Long-Term | Total Distributions(a) | |||||||||||||
AZL MFS Value Fund | $ | 7,468,004 | $ | — | $ | 7,468,004 |
(a) | Total distributions paid may differ from the Statements of Changes in Net Assets because dividends are recognized when actually paid for tax purposes. |
The tax character of dividends paid to shareholders during the year ended December 31, 2012 was as follows:
Ordinary Income | Net Long-Term Capital Gains | Total Distributions(a) | |||||||||||||
AZL MFS Value Fund | $ | 6,349,213 | $ | — | $ | 6,349,213 |
(a) | Total distributions paid may differ from the Statements of Changes in Net Assets because dividends are recognized when actually paid for tax purposes. |
As of December 31, 2013, the components of accumulated earnings on a tax basis were as follows:
Undistributed Ordinary Income | Undistributed Long-Term Capital Gains | Accumulated Capital and Other Losses | Unrealized Appreciation/ | Total Earnings/ | |||||||||||||||||||||
AZL MFS Value Fund | $ | 7,231,024 | $ | — | $ | (62,003,326 | ) | $ | 147,364,040 | $ | 92,591,738 |
(a) | The difference between book-basis and tax-basis unrealized appreciation/(depreciation) is attributable primarily to tax deferral of losses on wash sales. |
8. Subsequent Events
Management has evaluated events and transactions subsequent to period end through the date the financial statements were issued, for purposes of recognition or disclosure in these financial statements and there are no subsequent events to report.
13
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Shareholders and Board of Trustees of
Allianz Variable Insurance Products Trust:
We have audited the accompanying statement of assets and liabilities of AZL MFS Value Fund (the “Fund”) of the Allianz Variable Insurance Products Trust, including the schedule of portfolio investments, as of December 31, 2013, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the years in the two-year period then ended, and the financial highlights for each of the years in the five-year period then ended. These financial statements and financial highlights are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of December 31, 2013, by correspondence with the custodian. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of the Fund as of December 31, 2013, the results of its operations for the year then ended, the changes in its net assets for each of the years in the two-year period then ended, and the financial highlights for each of the years in the five-year period then ended, in conformity with U.S. generally accepted accounting principles.
/s/ KPMG LLP
Columbus, Ohio
February 25, 2014
14
Other Federal Income Tax Information (Unaudited)
For the year ended December 31, 2013, 100.00% of the total ordinary income dividends paid by the Fund qualify for the corporate dividends received deduction available to corporate shareholders.
15
A description of the policies and procedures that the Fund uses to determine how to vote proxies relating to portfolio securities is available, without charge, upon request, by visiting the Securities and Exchange Commission’s (“Commission”) website at www.sec.gov, or by calling 800-624-0197.
Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30th is available (i) without charge, upon request, by calling 800-624-0197; (ii) on the Allianz Variable Insurance Products Trust’s website at https://www.allianzlife.com; and (iii) on the Commission’s website at http://www.sec.gov.
The Fund files complete Schedules of Portfolio Holdings with the Commission for the first and third quarters of each fiscal year on Form N-Q. Schedules of Portfolio Holdings for the Fund in this report are available without charge on the Commission’s website at http://www.sec.gov, or may be reviewed and copied at the Commission’s Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 800-SEC-0330.
16
Approval of Investment Advisory and Subadvisory Agreements (Unaudited)
The Allianz Variable Insurance Products Trust (the “Trust”) is a manager-of-managers fund. That means that the Trust’s Manager (“Allianz Investment Management LLC”) is responsible for monitoring the various Subadvisers that have day-to-day responsibility for the decisions made for each of the Trust’s investment portfolios. The Trust’s Manager is responsible for determining, in the first instance, which investment advisers to consider recommending for selection as a Subadviser.
In reviewing the services provided by the Manager and the terms of the investment management agreement, the Board receives and reviews information related to the Manager’s experience and expertise in the variable insurance marketplace. Currently, the Funds are offered only through variable annuities and variable life insurance policies, and not in the retail fund market. In addition, the Board receives information regarding the Manager’s expertise with regard to portfolio diversification and asset allocation requirements within variable insurance products issued by Allianz Life Insurance Company of North America and its subsidiary, Allianz Life Insurance Company of New York. Currently, the Funds are offered only through Allianz Life and Allianz of New York variable products.
The Trust’s Manager has adopted policies and procedures to assist it in the process of analyzing each potential Subadviser with expertise in particular asset classes for purposes of making the recommendation that a specific investment adviser be selected. The Trust’s Board reviews and considers the information provided by the Manager in deciding which investment advisers to select. After an investment adviser becomes a Subadviser, a similarly rigorous process is instituted by the Manager to monitor the investment performance and other responsibilities of the Subadviser. The Manager reports to the Trust’s Board on its analysis at the regular meetings of the Board, which are held at least quarterly. Where warranted, the Manager will add or remove a particular Subadviser from a “watch” list that it maintains. Watch list criteria include, for example: (a) Fund performance over various time periods; (b) Fund risk issues, such as changes in key personnel involved with Fund management, changes in investment philosophy or process, or “capacity” concerns; and (c) organizational risk issues, such as regulatory, compliance or legal concerns, or changes in the ownership of the Subadviser. The Manager may place a Fund on the watch list for other reasons, and if so, will explain its rationale to the Trustees. Funds which are on the watch list are subject to special scrutiny of the Manager and the Board of Trustees. Funds may be removed from such watch list, if for example, performance improves or regulatory matters are satisfactorily resolved. However, in some situations where Funds which have been on the watch list, the Manager has recommended the retention of a new Subadviser, and the Board of Trustees has subsequently approved new Subadvisory Agreements with such Subadvisers.
In assessing the Manager’s and Subadvisers’ (collectively, the “Advisory Organizations”), performance of their obligations, the Board considers whether there has occurred a circumstance or event that would constitute a reason for it to not renew an advisory contract. In this regard, the Board is mindful of the potential disruption of a Fund’s operations and various risks, uncertainties and other effects that could occur as a result of a decision to terminate or not renew a contract.
As required by the Investment Company Act of 1940 (“1940 Act”), the Trust’s Board has reviewed and approved the Trust’s Investment Management Agreement with the Manager (the “Advisory Agreement”) and portfolio management agreements (the “Subadvisory Agreements”) with the Subadvisers. The Board’s decision to approve these contracts reflects the exercise of its business judgment on whether to approve new arrangements and continue the existing arrangements. During its review of these contracts, the Board considers many factors, among the most material of which are: the Fund’s investment objectives and long term performance; the Advisory Organizations’ management philosophy, personnel, and processes, including their compliance history and the adequacy of their compliance processes; the preferences and expectations of Fund shareholders (and underlying contract owners) and their relative sophistication; the continuing state of competition in the mutual fund industry; and comparable fees in the mutual fund industry.
The Board also considers the compensation and benefits received by the Advisory Organizations. This includes fees received for services provided to the Fund by affiliated persons of the Advisory Organizations and research services received by the Advisory Organizations from brokers that execute Fund trades, as well as advisory fees. The Board considered the fact that: (1) the Manager and the Trust are parties to an Administrative Service Agreement, a Compliance Services Agreement, and a Chief Compliance Officer Agreement, under which the Manager is compensated by the Trust for performing certain administrative and compliance services including providing an employee of the Manager or one of its affiliates to act as the Trust’s Chief Compliance Officer; and (2) Allianz Life Financial Services, LLC, an affiliated person of the Manager, is a registered securities broker-dealer and receives (along with its affiliated persons) payments made by the Trust pursuant to Rule 12b-1.
The Board is aware that various courts have interpreted provisions of the 1940 Act and have indicated in their decisions that the following factors may be relevant to an adviser’s compensation: the nature and quality of the services provided by the adviser, including the performance of the fund; the adviser’s cost of providing the services; the extent to which the adviser may realize “economies of scale” as the fund grows larger; any indirect benefits that may accrue to the adviser and its affiliates as a result of the adviser’s relationship with the fund; performance and expenses of comparable funds; and the extent to which the independent Board members are fully informed about all facts bearing on the adviser’s service and fee. The Trust’s Board is aware of these factors and takes them into account in its review of the Trust’s advisory contracts.
The Board considered and weighed these circumstances in light of its experience in governing the Trust and working with the Advisory Organizations on matters relating to the Funds, and is assisted in its deliberations by the advice of legal counsel to the Independent Trustees. In this regard, the Board requests and receives a significant amount of information about the Funds and the Advisory Organizations. Some of this information is provided at each regular meeting of the Board; additional information is provided in connection with the particular meeting or meetings at which the Board’s formal review of an advisory contract occurs. In between regularly scheduled meetings, the Board may receive information on particular matters as the need arises. Thus, the Board’s evaluation of an advisory contract is informed by reports covering such matters as: an Advisory Organization’s investment philosophy, personnel, and processes; the Fund’s short- and long-term performance (in absolute terms as well as in relationship to its benchmark(s), certain competitor or “peer group” funds and similar funds managed by the particular Subadviser), and comments on the reasons for performance; the Fund’s expenses (including the advisory fee itself and the overall expense structure of the Fund, both in absolute terms and relative to similar and/or competing funds, with due regard for contractual or voluntary expense limitations); the use and allocation of brokerage commissions derived from trading the Fund’s portfolio securities; the nature and extent of the advisory and other services provided to the Fund by the Advisory Organizations and their affiliates; compliance and audit reports concerning the Funds and the companies that service them; and relevant developments in the mutual fund industry and how the Funds and/or Advisory Organizations are responding to them.
The Board also receives financial information about Advisory Organizations, including reports on the compensation and benefits the Advisory Organizations derive from their relationships with the Funds. These reports cover not only the fees under the advisory contracts, but also fees, if any, received for providing other services to the Funds. The reports also discuss any indirect or “fall out” benefits an Advisory Organization may derive from its relationship with the Funds.
The Advisory and Subadvisory Agreements (collectively, the “Agreements”) were most recently considered at Board of Trustees meetings held in the fall of 2013. Information relevant to the approval of such Agreements was considered at a telephonic Board of Trustees meeting on October 16, 2013, and at an “in person” Board of Trustees meeting held October 22, 2013. The Agreements were approved at the Board meeting of October 22, 2013. At such meeting the Board also approved an Expense Limitation Agreement between the Manager and the Trust for the period ending April 30, 2015. In connection with such meetings, the Trustees requested and evaluated extensive materials from the Manager, including performance and expense information for other investment companies with similar investment objectives derived from data compiled by an independent third party provider and other sources believed to be reliable by the Manager. Prior to voting, the Trustees reviewed the proposed approval/continuance of the Agreements with management and with experienced counsel who are independent of the Manager and received a memorandum from such counsel discussing the legal
17
standards for their consideration of the proposed approvals/continuances. The independent (“disinterested”) Trustees also discussed the proposed approvals/continuances in a private session with such counsel at which no representatives of the Manager were present. In reaching their determinations relating to the approval and/or continuance of the Agreements, in respect of each Fund, the Trustees considered all factors they believed relevant. The Board based its decision to approve the Agreements on the totality of the circumstances and relevant factors, and with a view to past and future long-term considerations. Not all of the factors and considerations discussed above and below are necessarily relevant to every Fund, and the Board did not assign relative weights to factors discussed herein or deem any one or group of them to be controlling in and of themselves.
An SEC Rule requires that shareholder reports include a discussion of certain factors relating to the selection of investment advisers and the approval of advisory fees. The “factors” enumerated by the SEC are set forth below in italics, as well as the Board’s conclusions regarding such factors:
(1) The nature, extent and quality of services provided by the Manager and Subadvisers. The Trustees noted that the Manager, subject to the control of the Board of Trustees, administers each Fund’s business and other affairs. Under the Advisory Agreement, the Manager holds the sole and exclusive responsibility to provide, or arrange for other to provide, the management of the Funds’ assets and the placement of orders for the purchase and sale of the securities of the Funds. As the Trust is a manager of managers fund, the Manager is authorized, under the Advisory Agreement, to retain one or more Subadvisers for each Fund to handle day-to-day management of the Funds’ investment portfolios; the Manager is responsible for determining, in the first instance, which investment advisers to recommend to the Board of Trustees for selection as a Subadviser. The Trustees were aware that, notwithstanding the retention of the Subadvisers to handle day-to-day portfolio management, the Manager remains responsible for substantial other matters, including continuously monitoring compliance by each Subadviser with the investment policies and restrictions of the respective Funds, with such other limitations or directions of the Board of Trustees, and with all legal requirements under federal or state law or regulation. The Manager also is responsible primarily to provide statistical information and other data to the Trustees regarding the Funds’ portfolio investments and to make available to the Funds’ administrator such information as is necessary for the conduct of its duties.
The Trustees also noted that the Manager provides the Trust and each Fund with such administrative and other services (exclusive of, and in addition to, any such services provided by any others retained by the Trust on behalf of the Funds) and executive and other personnel as are necessary for the operation of the Trust and the Funds. Except for the Trust’s Chief Compliance Officer, the Manager pays all of the compensation of Trustees and officers of the Trust who are employees of the Manager or its affiliates.
The Trustees considered the scope and quality of services provided by the Manager and the Subadvisers and noted that the scope of such services provided had expanded as a result of recent regulatory and other developments. The Trustees noted that, for example, the Manager and Subadvisers are responsible for maintaining and monitoring their own compliance programs, and these compliance programs are continuously refined and enhanced in light of new regulatory requirements. The Trustees considered the capabilities and resources which the Manager has dedicated to performing services on behalf of the Trust and its Funds. The quality of administrative and other services, including the Manager’s role in coordinating the activities of the Trust’s other service providers, also were considered. The Trustees concluded that, overall, they were satisfied with the nature, extent and quality of services provided (and expected to be provided) to the Trust and to each of the Funds under the Agreements.
(2) The investment performance of the Funds, the Manager and the Subadvisers. In connection with every in-person quarterly Board of Trustees meeting, Trustees receive extensive information on the performance results of each of the Funds. This includes, for example, performance information on all of the Funds for the previous quarter, and previous one, three and five-year periods, and since inception. (For Funds which have been in existence for less than five years, Trustees may receive performance information on comparable funds managed by the particular Subadviser for periods prior to the creation of a particular Fund.) Such performance information includes information on absolute total return, performance versus Subadvisers’ comparable fund(s), performance versus the appropriate benchmark(s), and performance versus peer groups. For example, in connection with the Board of Trustees meetings held September 10-11, 2013, the Manager reported that for the three year period ended June 30, 2013, 12 Funds were in the top 40%, eight were in the middle 20% and eight were in the bottom 40%, and for the one year period ended June 30, 2013, 8 Funds were in the top 40%, seven were in the middle 20%, and 14 were in the bottom 40%. The Manager also reported that for the five year period ended June 30, 2013, 10 Funds were in the top 40%, four were in the middle 20%, and six were in the bottom 40%. At the Board of Trustees meeting held October 22, 2013, the Trustees determined that the overall investment performance of the Funds was acceptable.
(3) The costs of services to be provided and profits to be realized by the Manager and the Subadvisers and their affiliates from their relationship with the Funds. The Manager has supplied information to the Board of Trustees pertaining to the level of investment advisory fees to which the Funds are subject. The Manager has agreed to temporarily “cap” Fund expenses at certain levels, and information is provided to Trustees setting forth “contractual” advisory fees and “actual” fees after taking expense caps into account. Based upon the information provided, the “actual” advisory fees payable by the Funds overall are generally comparable to the average level of fees paid by Fund peer groups. For the 30 Funds reviewed by the Board of Trustees in the fall of 2013, 27 Funds paid “actual” advisory fees in a percentage amount within the 65th percentile or lower for each Fund’s applicable category. The Trustees recognized that it is difficult to make comparisons of advisory fees because there are variations in the services that are included in the fees paid by other funds. The Board has concluded that the advisory fees to be paid to the Manager by the Funds are not unreasonable.
The Manager has also supplied information to the Board of Trustees pertaining to total Fund expenses (which includes advisory fees, the 25 basis point
12b-1 fee paid by the Funds, and other Fund expenses). As noted above, the Manager has agreed to “cap” Fund expenses at certain levels. Based upon the information provided, the overall total expense ratio ranking in 2013 for the 30 Funds was as follows: (1) 28 of the Funds had total expense rankings below the 65th percentile (with 20 Funds at or below the 50th percentile); (2) the AZL Russell 1000 Value Fund had a total expense ranking in the 66th percentile; the Manager reported that there is only a limited peer group for such Fund; and (3) the AZL Morgan Stanley Global Real Estate Fund had a total expense ranking in the 72nd percentile; it was reported by the Manager that there is only a limited peer group for such Fund, such Fund’s expense ratio has declined, and such Fund’s expense ratio is comparable to funds of similar size.
The Manager has committed to providing the Funds with a high quality of service and working to reduce Fund expenses over time, particularly as the Funds grow larger. The Trustees concluded therefore that the expense ratios of the Funds were not unreasonable.
The Manager provided information concerning the profitability of the Manager’s investment advisory activities for the period from 2011 through June 30, 2013. The Trustees recognized that it is difficult to make comparisons of profitability from investment company advisory agreements because comparative information is not generally publicly available and is affected by numerous factors, including the structure of the particular adviser, the types of funds it manages, its business mix, numerous assumptions regarding allocation of expenses and the adviser’s capital structure and cost of capital. In considering profitability information, the Trustees considered the possible effect of certain fall-out benefits to the Manager and its affiliates. The Trustees focused on profitability of the Manager’s relationships with the Funds before taxes and distribution expenses. The Trustees recognized that the Manager should, in the abstract, be entitled to earn a reasonable level of profits for the services it provides to each Fund and, based on their review, concluded that they were satisfied that the Manager’s level of profitability from its relationship with the Funds was not excessive.
The Manager, on behalf of the Board of Trustees, endeavored to obtain information on the profitability of each Subadviser in connection with its relationship with the Fund or Funds which it subadvises. The Manager was unable to obtain meaningful profitability information from some of the unaffiliated Subadvisers. The Manager assured the Board of Trustees that the Agreements with the Subadvisers which are not affiliated with it were negotiated on an “arm’s length” basis, so that arguably, such profitability information should be less relevant. The Trustees were also provided with certain information on the profitability for the Subadviser which is affiliated with the Manager. Trustees recognized the difficulty of allocating costs to multiple advisory accounts and products of a large advisory organization. Based upon the information provided, the Trustees determined that there was no evidence that the level of such profitability attributable to subadvising the Funds was excessive.
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(4) and (5) The extent to which economies of scale would be realized as the Funds grow, and whether fee levels reflect these economies of scale. The Trustees noted that most of the advisory fee schedules for the Funds do not contain breakpoints that reduce the fee rate on assets above specified levels, although certain Subadvisory Agreements have such “breakpoints.” The Trustees recognized that breakpoints may be an appropriate way for the Manager to share its economies of scale, if any, with Funds that have substantial assets. However, they also recognized that there may not be a direct relationship between any economies of scale realized by Funds and those realized by the Manager as assets increase. The Trustees do not believe there is a uniform methodology for establishing breakpoints that give effect to Fund-specific service provided by the Manager. The Trustees noted that in the fund industry as a whole, as well as among funds similar to the Funds, there is no uniformity or pattern in the fees and asset levels at which breakpoints (if any) apply. Depending on the age, size, and other characteristics of a particular fund and its manager’s cost structure, different conclusions can be drawn as to whether there are economies of scale to be realized at any particular level of assets, notwithstanding the intuitive conclusion that such economies exist, or will be realized at some level of total assets. Moreover, because different managers have different cost structures and service models, it is difficult to draw meaningful conclusions from the breakpoints that may have been adopted by other funds. The Trustees also noted that the advisory agreements for many funds do not have breakpoints at all, or if breakpoints exist, they may be at asset levels significantly greater than those of the individual Funds. The Trustees also noted that the total assets in all of the Funds as of June 30, 2013 were approximately $12.85 billion, and that no single non-money market Fund had assets in excess of $616 million.
The Trustees noted that the Manager has agreed to temporarily “cap” Fund expenses at certain levels, which has the effect of reducing expenses as would the implementation of advisory fee breakpoints. The Manager has committed to continue to consider the continuation of fee “caps” and/or advisory fee breakpoints as the Funds grow larger. The Board receives quarterly reports on the level of Fund assets. It expects to consider whether or not to approve the Agreements at a meeting to be held prior to December 31, 2014, and will at that time, or prior thereto, consider: (a) the extent to which economies of scale can be realized, and (b) whether the advisory fee should be modified to reflect such economies of scale, if any.
Having taken these factors into account, the Trustees concluded that the absence of breakpoints in certain of the Funds’ advisory fee rate schedules was acceptable under each Fund’s circumstances.
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Information about the Board of Trustees and Officers (Unaudited)
The Trust is managed by the Trustees in accordance with the laws of the state of Delaware governing business trusts. There are currently eight Trustees, two of whom are “interested persons” of the Trust within the meaning of that term under the 1940 Act. The Trustees and Officers of the Trust, their addresses, ages, their positions held with the Trust, their terms of office with the Trust and length of time served, their principal occupation(s) during the past five years, the number of portfolios in the Trust they oversee, and their other directorships held are as follows:
Non-Interested Trustees(1)
Name, Address, and Age | Positions Held with VIP Trust and FOF Trust | Term of Office(2)/Length of Time Served | Principal Occupation(s) During Past 5 Years | Number of Portfolios Overseen for VIP Trust and FOF Trust | Other Directorships Held Outside the AZL Fund Complex | |||||
Peter R. Burnim, Age 66 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/07 | Chairman, Argus Investment Strategies Fund Ltd., February 2013 to present; Managing Director, iQ Venture Advisors, LLC. 2005 to 2012; Chairman, Northstar Group Holdings Ltd. Bermuda, 2011 to present; Expert Witness, Massachusetts Department of Revenue, 2011 to 2012; Executive Vice President, Northstar Companies, 2002 to 2005; Senior Officer, Citibank and Citicorp for over 25 years | 41 | Argus Group Holdings; Northstar Group Holdings, NRIL, Sterling Centrecorp Inc.; Highland Financial Holdings; and Bank of Bermuda NY | |||||
Peggy L. Ettestad, Age 56 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/07 | Managing Director, Red Canoe Management Consulting LLC, 2008 to present; Senior Managing Director, Residential Capital LLC, 2003 to 2008; Chief Operations Officer, Transamerica Reinsurance 2002 to 2003 | 41 | Luther College | |||||
Roger Gelfenbien, Age 70 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 10/99 | Retired; Partner of Accenture 1983 to 1999 | 41 | Virtus Funds (8 Funds) | |||||
Claire R. Leonardi, Age 58 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/04 | Chief Executive Officer, Connecticut Innovations, Inc., 2012 to present; General Partner, Fairview Capital, L.P., 1994 to 2012 | 41 | The Natural History Museum of the Adirondacks | |||||
Dickson W. Lewis, Age 65 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/04 | Retired; Consultant to Lifetouch National School Studios; Vice President/General Manager, Yearbooks & Canada-Lifetouch National School Studios, 2006 to 2013; Vice President/General Manager of Jostens, Inc., 2002 to 2006; Senior Vice President of Fortis Group, 1997 to 2002 | 41 | None | |||||
Peter W. McClean, Age 69 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/04 | Retired; President and CEO of Measurisk, LLC, 2001 to 2003; Chief Risk Management Officer at Bank of Bermuda Ltd., 1996 to 2001 | 41 | PNMAC Opportunity Fund; Northeast Bank; and FHI | |||||
Arthur C. Reeds III, Age 69 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 10/99 | Retired; Senior Investment Officer, Hartford Foundation for Public Giving, 2000 to 2003; Chairman, Chief Executive and President of Conning Corp., 1999 to 2000; Investment Consultant, 1997 to 1999 | 41 | Connecticut Water Service, Inc. |
Interested Trustees(3)
Name, Address, and Age | Positions Held with VIP Trust and FOF Trust | Term of Office(2)/Length of Time Served | Principal Occupation(s) During Past 5 Years | Number of Portfolios Overseen for VIP Trust and FOF Trust | Other Directorships Held Outside the AZL Fund Complex | |||||
Robert DeChellis, Age 46 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 3/08 | President and CEO, Allianz Life Financial Services, LLC, 2007 to present | 41 | None | |||||
Brian Muench, Age 43 5701 Golden Hills Drive | Trustee | Since 6/11 | President, Allianz Investment Management LLC, November 2010 to present; Vice President, Allianz Life, April 2011 to present; Vice President, Advisory Management, Allianz Investment Management LLC from December 2005 to November 2010 | 41 | None |
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Officers
Name, Address, and Age | Positions Held with VIP and VIP FOF Trust | Term of Office(2)/Length of Time Served | Principal Occupation(s) During Past 5 Years | |||
Brian Muench, Age 43 5701 Golden Hills Drive Minneapolis, MN 55416 | President | Since 11/10 | President, Allianz Investment Management LLC from November 2010, to present; Vice President, Allianz Life from April 2011 to present; Vice President, Allianz Investment Management LLC from December 2005 to November 2010. | |||
Michael Radmer, Age 68 Dorsey & Whitney LLP, Suite 1500 50 South Sixth Street Minneapolis, MN 55402-1498 | Secretary | Since 2/02 | Partner, Dorsey and Whitney LLP since 1976. | |||
Ty Edwards, Age 47 Citi Fund Services Ohio, Inc. 3435 Stelzer Road Columbus, OH 43219 | Treasurer, Principal Accounting Officer and Principal Financial Officer | Since 4/10 | Senior Vice President, Financial Administration, Citi Fund Services Ohio, Inc., December 2009 to present; Director, Product Management, Columbia Management, April 2007 to April 2009; Deputy Treasurer, Columbia Funds and Director, Fund Administration, Columbia Management, January 2006 to April 2007. | |||
Christopher R. Pheiffer, Age 45(4) 5701 Golden Hills Drive Minneapolis, MN 55416 | Chief Compliance Officer(5) and Anti-Money Laundering Compliance Officer | Since 2/14 (interim) | Deputy Chief Compliance Officer of the Trusts, 2007-2014 |
(1) | Member of the Audit Committee. |
(2) | Indefinite. |
(3) | Is an “interested person”, as defined by the 1940 Act, due to employment by Allianz. |
(4) | Stephen G. Simon, previously the Chief Compliance Officer of the Trusts, resigned all of his positions with Allianz effective February 21, 2014. Mr. Pheiffer, previously the Deputy Chief Compliance Officer of the Trusts, has been named Chief Compliance Officer of the Trusts on an interim basis while a search for a permanent replacement is conducted. |
(5) | The Manager and the Trust are parties to a Chief Compliance Officer Agreement under which the Manager is compensated by the Trust for providing an employee of the Manager or one of its affiliates to act as the Trust’s Chief Compliance Officer. The Chief Compliance Officer and Anti-Money Laundering Compliance Officer is not considered a corporate officer or executive employee of the Trust. |
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The Allianz VIP Funds are distributed by Allianz Life Financial Services, LLC. These Funds are not FDIC Insured. | ANNRPT1213 2/14 |
AZL® Mid Cap Index Fund
Annual Report
December 31, 2013
Table of Contents
Management Discussion and Analysis
Page 1
Expense Examples and Portfolio Composition
Page 3
Schedule of Portfolio Investments
Page 4
Statement of Assets and Liabilities
Page 10
Statement of Operations
Page 10
Statements of Changes in Net Assets
Page 11
Financial Highlights
Page 12
Notes to the Financial Statements
Page 13
Report of Independent Registered Public Accounting Firm
Page 18
Other Federal Income Tax Information
Page 19
Other Information
Page 20
Approval of Investment Advisory and Subadvisory Agreements
Page 21
Information about the Board of Trustees and Officers
Page 24
This report is submitted for the general information of the shareholder of the Fund. The report is not authorized for distribution to prospective investors in the Fund unless preceded or accompanied by an effective prospectus, which contains details concerning the sales charges and other pertinent information.
AZL® Mid Cap Index Fund Review (unaudited)
Allianz Investment Management LLC serves as the Manager for the AZL® Mid Cap Index Fund and BlackRock Investment Management, LLC serves as Subadviser to the Fund.
What factors affected the Fund’s performance during the year ended December 31, 2013?
For the year ended December 31, 2013, the AZL® Mid Cap Index Fund returned 32.71%1, which compared to a 33.50% total return for its benchmark, the S&P MidCap 400 Index2.
The Fund attempts to replicate the performance of the S&P MidCap 400 index of mid-cap U.S. stocks.
Equities began the period with a powerful rally after the United States averted the worst of its potential fiscal crisis with a last-minute tax deal. The rally softened as political and financial instability in Europe—including a stalemate in Italian presidential elections and a banking crisis in Cyprus—gave investors pause later in the first half of the period. However, equities soon regained their momentum as low interest rates and increased global liquidity spurred stock prices higher.
In May, stocks responded negatively to news that the Federal Reserve might begin gradually reducing (or tapering) its monetary stimulus efforts before the end of the year, although stocks rebounded once it became clear that the Fed remained undecided about the timing of the taper. Meanwhile, the modest pace of economic growth boded well for corporate profit margins as the economic recovery was strong enough to support revenues but not so strong as to boost wage growth.
September brought another sharp rally in stock prices, as the Fed decided to delay the taper, despite market expectations to the contrary. The rally was interrupted as budget and debt ceiling negotiations led to a partial government shutdown and fears of a potential technical default in the national debt. Stocks regained their momentum in the fourth quarter once the government reopened and economic indicators improved. The Fed’s announcement in mid-December that it would begin tapering in 2014, but maintain short-term interest rates at their low levels, alleviated the market’s anxiety over the interest rate uncertainty. Investors responded positively, pushing stocks higher to close out the period.
The underperformance of the Fund compared to its benchmark was the result of Fund expenses that are not incurred by the benchmark.
Consumer-driven sectors of the benchmark were the top performers for the period, fueled by low interest rates, buoyant equity markets and rising housing prices. The health care sector was one of the strongest performing sectors of the period. The industrial and consumer discretionary sectors also generated strong returns. Significant gains also came from the worst performing sectors of the index, namely information technology, energy and utilities.*
Past performance does not guarantee future results.
* | The Fund’s portfolio composition is subject to change. There is no guarantee that any sectors mentioned will continue to perform well or that securities in such sectors will be held by the Fund in the future. The information contained in this commentary is for informational purposes only and should not be construed as a recommendation to purchase or sell securities in the sector mentioned. The Fund’s holdings and weightings are as of December 31, 2013. |
1 | The recent growth rate in the stock market has helped to produce short-term returns that are not typical and may not continue in the future. Because of ongoing market volatility, Fund performance may be subject to substantial short-term changes. |
2 | The Standard & Poor’s MidCap 400 Index (“S&P 400”) is the most widely used index for mid-sized companies. The S&P 400 covers 7% of the U.S. equities market, and is part of a series of S&P U.S. indices that can be used as building blocks for portfolio composition. Investors cannot invest directly in an index. |
1 |
AZL® Mid Cap Index Fund Review (unaudited)
Fund Objective
The Fund’s investment objective is to seek to match the performance of the Standard & Poor’s MidCap 400 Index (“S&P 400”) as closely as possible. This objective may be changed by the Trustees of the Fund without shareholder approval. The Fund seeks to achieve its objective by investing at least 80% of its net assets in a statistically selected sampling of equity securities of companies included in the S&P 400 and in derivative instruments linked to the S&P 400, primarily futures contracts.
Investment Concerns
Equity securities (stocks) are more volatile and carry more risk than other forms of investments, including investments in high-grade fixed income securities. The net asset value per share of this Fund will fluctuate as the value of the securities in the portfolio changes.
Small- to mid-capitalization companies typically have a higher risk of failure and historically have experienced a greater degree of volatility.
Investing in derivatives instruments involves risks that may be different from or greater than the risk associated with investing directly in securities or other traditional instruments.
The Fund does not attempt to manage market volatility or reduce the effects of poor stock performance. In addition, factors such as Fund expenses, selection of a representative portfolio, changes in the composition of the Index, or the timing of purchases or redemptions of Fund shares may affect the correlation between the performance of the Index and the Fund’s performance.
The performance of the Fund is expected to be lower than that of the Index because of Fund fees and expenses. Securities in which the Fund will invest may involve substantial risk and may be subject to sudden severe price declines.
For a complete description of these and other risks associated with investing in a mutual Fund, please refer to the Fund’s prospectus.
Growth of $10,000 Investment
The chart above represents a comparison of a hypothetical investment in the Fund versus a similar investment in the Fund’s benchmark, and represents the reinvestment of dividends and capital gains in the Fund.
Average Annual Total Returns as of December 31, 2013
Since | ||||||||||||
1 | 3 | Inception | ||||||||||
Year | Year | (5/1/09) | ||||||||||
AZL® Mid Cap Index Fund | 32.71 | %1 | 14.97 | % | 21.47 | % | ||||||
S&P MidCap 400 Index | 33.50 | % | 15.64 | % | 22.46 | % |
Past performance does not guarantee future results. The performance data quoted represents past performance and current returns may be lower or higher. The investment return and principal value will fluctuate so that an investor’s shares, when redeemed may be worth more or less than the original cost. To obtain performance information current to the most recent month end, please visit www.Allianzlife.com.
Expense Ratio2 | Gross | |||
AZL® Mid Cap Index Fund | 0.62 | % |
The above expense ratio is based on the current Fund prospectus dated April 29, 2013. The Manager and the Fund have entered into a written contract limiting operating expenses, excluding certain expenses (such as interest expense and Acquired Fund fees and expenses), to 0.71% through April 30, 2015. Additional information pertaining to the December 31, 2013 expense ratios can be found in the financial highlights.
1 | The recent growth rate in the stock market has helped to produce short-term returns that are not typical and may not continue in the future. Because of ongoing market volatility, Fund performance may be subject to substantial short-term changes. |
2 | Acquired Fund Fees and Expenses are incurred indirectly by the Fund through the valuation of the Fund’s investments in the other investment companies. Accordingly, Acquired Fees and Expenses affect the Fund’s total returns. Because these fees and expenses are not included in the Fund’s financial highlights, the Fund’s total annual fund operating expenses do not correlate to the ratios of expenses to average net assets shown in the financial highlights table. Without Acquired Fund Fees and expenses the Fund’s gross ratio would be 0.60%. |
The total return of the Fund does not reflect the effect of any insurance charges, the annual maintenance fee or the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. Such charges, fees and tax payments would reduce the performance quoted. |
The Fund’s performance is measured against the Standard & Poor’s MidCap 400 Index (“S&P 400”), which is the most widely used index for mid-sized companies. The S&P 400 covers 7% of the U.S. equities market, and is part of a series of S&P U.S. indices that can be used as building blocks for portfolio composition. The index is unmanaged and does not reflect the deduction of fees associated with a mutual fund, such as investment management and fund accounting fees. The Fund’s performance reflects the deduction of fees for services provided to the Fund. Investors cannot invest directly in an index. |
2 |
AZL Mid Cap Index Fund
(Unaudited)
As a shareholder of the AZL Mid Cap Index Fund (the “Fund”), you incur ongoing costs, including management fees, distribution fees, and other Fund expenses. These examples are intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. Please note that the expenses shown in each table do not reflect expenses that apply to the subaccount or the insurance contract. If the expenses that apply to the subaccount of the insurance contract were included, your costs would have been higher.
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the periods presented below.
The Actual Expense table below provides information about actual account values and actual expenses. You may use the information below, 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 table under the heading entitled “Expenses Paid During Period” to estimate the expenses you paid on your account during this period.
Beginning Account Value 7/1/13 | Ending Account Value 12/31/13 | Expenses Paid During Period 7/1/13 - 12/31/13* | Annualized Expense Ratio During Period 7/1/13 - 12/31/13 | |||||||||||||||||
AZL Mid Cap Index Fund | $ | 1,000.00 | $ | 1,161.70 | $ | 3.16 | 0.58 | % |
The Hypothetical Expense table below provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.
Beginning Account Value 7/1/13 | Ending Account Value 12/31/13 | Expenses Paid During Period 7/1/13 - 12/31/13* | Annualized Expense Ratio During Period 7/1/13 - 12/31/13 | |||||||||||||||||
AZL Mid Cap Index Fund | $ | 1,000.00 | $ | 1,022.28 | $ | 2.96 | 0.58 | % |
* | Expenses are equal to the average account value over the period, multiplied by the Fund’s annualized expense ratio, multiplied by 184/365 (to reflect the one half year period). |
Portfolio Composition
(Unaudited)
Investments | Percent of net assets | ||||
Financials | 21.1 | % | |||
Industrials | 16.7 | ||||
Information Technology | 15.5 | ||||
Consumer Discretionary | 13.7 | ||||
Health Care | 8.7 | ||||
Materials | 6.9 | ||||
Energy | 5.6 | ||||
Utilities | 4.3 | ||||
Consumer Staples | 3.9 | ||||
Telecommunication Services | 0.5 | ||||
|
| ||||
Total Common Stock | 96.9 | ||||
Money Market | 2.9 | ||||
Securities Held as Collateral for Securities on Loan | 2.3 | ||||
|
| ||||
Total Investment Securities | 102.1 | ||||
Net other assets (liabilities) | (2.1 | ) | |||
|
| ||||
Net Assets | 100.0 | % | |||
|
|
3
AZL Mid Cap Index Fund
Schedule of Portfolio Investments
December 31, 2013
Shares | Fair Value | |||||||
| Common Stocks (96.9%): |
| ||||||
| Aerospace & Defense (1.7%): |
| ||||||
9,924 | Alliant Techsystems, Inc. | $ | 1,207,552 | |||||
30,679 | BE Aerospace, Inc.* | 2,669,994 | ||||||
9,770 | Esterline Technologies Corp.* | 996,149 | ||||||
58,565 | Exelis, Inc. | 1,116,249 | ||||||
15,384 | Huntington Ingalls Industries, Inc. | 1,384,714 | ||||||
16,216 | Triumph Group, Inc. | 1,233,551 | ||||||
|
| |||||||
8,608,209 | ||||||||
|
| |||||||
| Air Freight & Logistics (0.1%): | |||||||
28,246 | UTI Worldwide, Inc. | 496,000 | ||||||
|
| |||||||
| Airlines (0.4%): | |||||||
21,665 | Alaska Air Group, Inc. | 1,589,561 | ||||||
67,461 | JetBlue Airways Corp.* | 576,792 | ||||||
|
| |||||||
2,166,353 | ||||||||
|
| |||||||
| Auto Components (0.3%): | |||||||
45,063 | Gentex Corp. | 1,486,628 | ||||||
|
| |||||||
| Automobiles (0.2%): | |||||||
13,949 | Thor Industries, Inc. | 770,403 | ||||||
|
| |||||||
| Biotechnology (0.7%): | |||||||
23,072 | Cubist Pharmaceuticals, Inc.* | 1,588,969 | ||||||
14,388 | United Therapeutics Corp.* | 1,626,995 | ||||||
|
| |||||||
3,215,964 | ||||||||
|
| |||||||
| Building Products (1.0%): | |||||||
23,864 | A.O. Smith Corp. | 1,287,224 | ||||||
51,767 | Fortune Brands Home & Security, Inc. | 2,365,752 | ||||||
14,197 | Lennox International, Inc. | 1,207,597 | ||||||
|
| |||||||
4,860,573 | ||||||||
|
| |||||||
| Capital Markets (2.6%): | |||||||
16,514 | Affiliated Managers Group, Inc.* | 3,581,556 | ||||||
69,724 | Apollo Investment Corp. | 591,260 | ||||||
37,843 | Eaton Vance Corp. | 1,619,302 | ||||||
29,385 | Federated Investors, Inc., Class B^ | 846,288 | ||||||
8,171 | Greenhill & Co., Inc. | 473,428 | ||||||
46,446 | Janus Capital Group, Inc. | 574,537 | ||||||
38,417 | Raymond James Financial, Inc. | 2,004,983 | ||||||
44,674 | SEI Investments Co. | 1,551,528 | ||||||
26,624 | Waddell & Reed Financial, Inc., Class A | 1,733,755 | ||||||
|
| |||||||
12,976,637 | ||||||||
|
| |||||||
| Chemicals (2.8%): | |||||||
25,378 | Albemarle Corp. | 1,608,711 | ||||||
22,462 | Ashland, Inc. | 2,179,712 | ||||||
18,554 | Cabot Corp. | 953,676 | ||||||
11,046 | Cytec Industries, Inc. | 1,029,045 | ||||||
17,205 | Intrepid Potash, Inc.*^ | 272,527 | ||||||
10,709 | Minerals Technologies, Inc. | 643,290 | ||||||
3,550 | NewMarket Corp. | 1,186,233 | ||||||
24,794 | Olin Corp. | 715,307 | ||||||
41,414 | RPM International, Inc. | 1,719,095 | ||||||
13,704 | Scotts Miracle-Gro Co. (The) | 852,663 | ||||||
15,605 | Sensient Technologies Corp. | 757,155 | ||||||
25,115 | Valspar Corp. (The) | 1,790,448 | ||||||
|
| |||||||
13,707,862 | ||||||||
|
| |||||||
| Commercial Banks (4.4%): | |||||||
50,586 | Associated Banc-Corp. | 880,196 | ||||||
26,073 | BancorpSouth, Inc. | 662,776 |
Shares | Fair Value | |||||||
| Common Stocks, continued |
| ||||||
| Commercial Banks, continued |
| ||||||
13,955 | Bank of Hawaii Corp. | $ | 825,299 | |||||
22,826 | Cathay General Bancorp | 610,139 | ||||||
14,786 | City National Corp. | 1,171,347 | ||||||
25,447 | Commerce Bancshares, Inc. | 1,142,823 | ||||||
16,495 | Cullen/Frost Bankers, Inc. | 1,227,723 | ||||||
42,909 | East West Bancorp, Inc. | 1,500,528 | ||||||
73,599 | First Horizon National Corp. | 857,428 | ||||||
109,768 | First Niagara Financial Group, Inc. | 1,165,736 | ||||||
51,375 | FirstMerit Corp. | 1,142,066 | ||||||
59,682 | Fulton Financial Corp. | 780,641 | ||||||
25,572 | Hancock Holding Co. | 937,981 | ||||||
17,778 | International Bancshares Corp. | 469,161 | ||||||
17,719 | Prosperity Bancshares, Inc. | 1,123,207 | ||||||
14,740 | Signature Bank* | 1,583,370 | ||||||
14,233 | SVB Financial Group* | 1,492,472 | ||||||
302,167 | Synovus Financial Corp. | 1,087,801 | ||||||
51,248 | TCF Financial Corp. | 832,780 | ||||||
20,918 | Trustmark Corp. | 561,439 | ||||||
61,859 | Valley National Bancorp^ | 626,013 | ||||||
28,139 | Webster Financial Corp. | 877,374 | ||||||
8,356 | Westamerica Bancorp^ | 471,780 | ||||||
|
| |||||||
22,030,080 | ||||||||
|
| |||||||
| Commercial Services & Supplies (2.0%): |
| ||||||
15,017 | Brink’s Co. (The) | 512,680 | ||||||
17,201 | Clean Harbors, Inc.* | 1,031,372 | ||||||
34,811 | Copart, Inc.* | 1,275,823 | ||||||
36,397 | Corrections Corp. of America | 1,167,252 | ||||||
15,738 | Deluxe Corp. | 821,366 | ||||||
18,352 | Herman Miller, Inc. | 541,751 | ||||||
14,092 | HNI Corp. | 547,192 | ||||||
9,825 | Mine Safety Appliances Co. | 503,138 | ||||||
56,660 | R.R. Donnelley & Sons Co. | 1,149,065 | ||||||
20,004 | Rollins, Inc. | 605,921 | ||||||
38,471 | Waste Connections, Inc. | 1,678,491 | ||||||
|
| |||||||
9,834,051 | ||||||||
|
| |||||||
| Communications Equipment (0.9%): |
| ||||||
17,954 | ADTRAN, Inc. | 484,938 | ||||||
32,150 | Ciena Corp.* | 769,350 | ||||||
12,843 | InterDigital, Inc. | 378,740 | ||||||
72,463 | JDS Uniphase Corp.* | 940,569 | ||||||
13,628 | Plantronics, Inc. | 633,021 | ||||||
44,331 | Polycom, Inc.* | 497,837 | ||||||
50,428 | Riverbed Technology, Inc.* | 911,738 | ||||||
|
| |||||||
4,616,193 | ||||||||
|
| |||||||
| Computers & Peripherals (1.2%): |
| ||||||
29,775 | 3D Systems Corp.*^ | 2,766,990 | ||||||
19,951 | Diebold, Inc. | 658,583 | ||||||
19,360 | Lexmark International, Inc., Class A | 687,667 | ||||||
51,850 | NCR Corp.* | 1,766,011 | ||||||
|
| |||||||
5,879,251 | ||||||||
|
| |||||||
| Construction & Engineering (0.8%): |
| ||||||
30,559 | Aecom Technology Corp.* | 899,351 | ||||||
11,242 | Granite Construction, Inc. | 393,245 | ||||||
46,125 | KBR, Inc. | 1,470,927 |
Continued
4
AZL Mid Cap Index Fund
Schedule of Portfolio Investments
December 31, 2013
Shares | Fair Value | |||||||
| Common Stocks, continued |
| ||||||
| Construction & Engineering, continued |
| ||||||
23,326 | URS Corp. | $ | 1,236,045 | |||||
|
| |||||||
3,999,568 | ||||||||
|
| |||||||
| Construction Materials (0.5%): |
| ||||||
15,568 | Eagle Materials, Inc. | 1,205,430 | ||||||
14,453 | Martin Marietta Materials, Inc. | 1,444,433 | ||||||
|
| |||||||
2,649,863 | ||||||||
|
| |||||||
| Containers & Packaging (1.7%): |
| ||||||
20,519 | AptarGroup, Inc. | 1,391,393 | ||||||
9,489 | Greif, Inc., Class A | 497,224 | ||||||
30,577 | Packaging Corp. of America | 1,934,913 | ||||||
22,443 | Rock-Tenn Co., Class A | 2,356,738 | ||||||
13,630 | Silgan Holdings, Inc. | 654,513 | ||||||
31,780 | Sonoco Products Co. | 1,325,862 | ||||||
|
| |||||||
8,160,643 | ||||||||
|
| |||||||
| Distributors (0.6%): |
| ||||||
93,594 | LKQ Corp.* | 3,079,243 | ||||||
|
| |||||||
| Diversified Consumer Services (0.8%): |
| ||||||
31,092 | Apollo Group, Inc., Class A* | 849,433 | ||||||
17,737 | DeVry, Inc. | 629,664 | ||||||
8,468 | Matthews International Corp., Class A | 360,821 | ||||||
65,947 | Service Corp. International | 1,195,620 | ||||||
21,417 | Sotheby’s | 1,139,384 | ||||||
|
| |||||||
4,174,922 | ||||||||
|
| |||||||
| Diversified Financial Services (0.6%): |
| ||||||
27,170 | CBOE Holdings, Inc. | 1,411,753 | ||||||
36,932 | MSCI, Inc., Class A* | 1,614,667 | ||||||
|
| |||||||
3,026,420 | ||||||||
|
| |||||||
| Diversified Telecommunication Services (0.3%): |
| ||||||
44,907 | TW Telecom, Inc.* | 1,368,316 | ||||||
|
| |||||||
| Electric Utilities (1.6%): |
| ||||||
18,958 | Cleco Corp. | 883,822 | ||||||
47,921 | Great Plains Energy, Inc. | 1,161,605 | ||||||
31,120 | Hawaiian Electric Industries, Inc. | 810,987 | ||||||
15,771 | IDACORP, Inc. | 817,569 | ||||||
61,950 | OGE Energy Corp. | 2,100,104 | ||||||
24,871 | PNM Resources, Inc. | 599,889 | ||||||
39,840 | Westar Energy, Inc. | 1,281,653 | ||||||
|
| |||||||
7,655,629 | ||||||||
|
| |||||||
| Electrical Equipment (1.0%): |
| ||||||
13,375 | Acuity Brands, Inc. | 1,462,155 | ||||||
15,496 | General Cable Corp. | 455,737 | ||||||
16,756 | Hubbell, Inc., Class B | 1,824,729 | ||||||
14,040 | Regal-Beloit Corp. | 1,035,029 | ||||||
|
| |||||||
4,777,650 | ||||||||
|
| |||||||
| Electronic Equipment, Instruments & Components (2.1%): |
| ||||||
31,385 | Arrow Electronics, Inc.* | 1,702,636 | ||||||
42,871 | Avnet, Inc. | 1,891,040 | ||||||
47,900 | Ingram Micro, Inc., Class A* | 1,123,734 | ||||||
12,201 | Itron, Inc.* | 505,487 | ||||||
30,410 | National Instruments Corp. | 973,728 | ||||||
11,735 | Tech Data Corp.* | 605,526 | ||||||
80,301 | Trimble Navigation, Ltd.* | 2,786,445 | ||||||
42,045 | Vishay Intertechnology, Inc.* | 557,517 | ||||||
|
| |||||||
10,146,113 | ||||||||
|
|
Shares | Fair Value | |||||||
| Common Stocks, continued |
| ||||||
| Energy Equipment & Services (2.8%): |
| ||||||
17,971 | Atwood Oceanics, Inc.* | $ | 959,472 | |||||
6,191 | CARBO Ceramics, Inc. | 721,437 | ||||||
23,806 | Dresser-Rand Group, Inc.* | 1,419,552 | ||||||
12,685 | Dril-Quip, Inc.* | 1,394,462 | ||||||
30,701 | Helix Energy Solutions Group, Inc.* | 711,649 | ||||||
33,719 | Oceaneering International, Inc. | 2,659,756 | ||||||
17,199 | Oil States International, Inc.* | 1,749,482 | ||||||
44,941 | Patterson-UTI Energy, Inc. | 1,137,906 | ||||||
49,663 | Superior Energy Services, Inc.* | 1,321,532 | ||||||
15,471 | Tidewater, Inc. | 916,966 | ||||||
13,658 | Unit Corp.* | 705,026 | ||||||
|
| |||||||
13,697,240 | ||||||||
|
| |||||||
| Food & Staples Retailing (0.5%): |
| ||||||
15,443 | Harris Teeter Supermarkets, Inc. | 762,112 | ||||||
61,305 | Supervalu, Inc.* | 446,913 | ||||||
15,410 | United Natural Foods, Inc.* | 1,161,760 | ||||||
|
| |||||||
2,370,785 | ||||||||
|
| |||||||
| Food Products (2.3%): |
| ||||||
29,384 | Dean Foods Co.* | 505,111 | ||||||
54,533 | Flowers Foods, Inc. | 1,170,824 | ||||||
40,852 | �� | Green Mountain Coffee Roasters, Inc.* | 3,087,593 | |||||
14,887 | Hain Celestial Group, Inc.* | 1,351,442 | ||||||
38,359 | Hillshire Brands Co. | 1,282,725 | ||||||
23,917 | Ingredion, Inc. | 1,637,358 | ||||||
6,039 | Lancaster Colony Corp. | 532,338 | ||||||
10,185 | Post Holdings, Inc.* | 501,815 | ||||||
6,283 | Tootsie Roll Industries, Inc. | 204,449 | ||||||
53,997 | WhiteWave Foods Co., Class A* | 1,238,691 | ||||||
|
| |||||||
11,512,346 | ||||||||
|
| |||||||
| Gas Utilities (1.3%): |
| ||||||
28,657 | Atmos Energy Corp. | 1,301,601 | ||||||
26,226 | National Fuel Gas Co. | 1,872,536 | ||||||
46,601 | Questar Corp.+ | 1,071,357 | ||||||
35,843 | UGI Corp. | 1,486,051 | ||||||
16,344 | WGL Holdings, Inc. | 654,741 | ||||||
|
| |||||||
6,386,286 | ||||||||
|
| |||||||
| Health Care Equipment & Supplies (2.3%): |
| ||||||
15,248 | Cooper Cos., Inc. (The) | 1,888,312 | ||||||
18,261 | Hill-Rom Holdings, Inc. | 754,910 | ||||||
85,092 | Hologic, Inc.* | 1,901,806 | ||||||
16,182 | IDEXX Laboratories, Inc.* | 1,721,279 | ||||||
16,003 | Masimo Corp.* | 467,768 | ||||||
44,280 | ResMed, Inc.^ | 2,084,703 | ||||||
18,329 | STERIS Corp. | 880,708 | ||||||
12,837 | Teleflex, Inc. | 1,204,881 | ||||||
17,748 | Thoratec Corp.* | 649,577 | ||||||
|
| |||||||
11,553,944 | ||||||||
|
| |||||||
| Health Care Providers & Services (3.2%): |
| ||||||
29,591 | Community Health Systems, Inc.* | 1,162,039 | ||||||
82,294 | Health Management Associates, Inc., Class A* | 1,078,051 | ||||||
24,718 | Health Net, Inc.* | 733,383 | ||||||
26,752 | Henry Schein, Inc.* | 3,056,683 | ||||||
27,507 | HMS Holdings Corp.* | 625,234 | ||||||
14,634 | LifePoint Hospitals, Inc.* | 773,261 |
Continued
5
AZL Mid Cap Index Fund
Schedule of Portfolio Investments
December 31, 2013
Shares | Fair Value | |||||||
| Common Stocks, continued |
| ||||||
| Health Care Providers & Services, continued |
| ||||||
31,334 | MEDNAX, Inc.* | $ | 1,672,609 | |||||
32,105 | Omnicare, Inc. | 1,937,858 | ||||||
19,666 | Owens & Minor, Inc. | 718,989 | ||||||
27,861 | Universal Health Services, Inc., Class B | 2,263,984 | ||||||
27,610 | VCA Antech, Inc.* | 865,850 | ||||||
13,614 | WellCare Health Plans, Inc.* | 958,698 | ||||||
|
| |||||||
15,846,639 | ||||||||
|
| |||||||
| Health Care Technology (0.2%): |
| ||||||
49,407 | Allscripts Healthcare Solutions, Inc.* | 763,832 | ||||||
|
| |||||||
| Hotels, Restaurants & Leisure (1.6%): |
| ||||||
12,146 | Bally Technologies, Inc.* | 952,854 | ||||||
8,495 | Bob Evans Farms, Inc. | 429,762 | ||||||
20,903 | Brinker International, Inc. | 968,645 | ||||||
15,006 | Cheesecake Factory, Inc. (The) | 724,340 | ||||||
17,370 | Domino’s Pizza, Inc. | 1,209,821 | ||||||
8,575 | International Speedway Corp., Class A | 304,327 | ||||||
12,225 | Life Time Fitness, Inc.* | 574,575 | ||||||
8,347 | Panera Bread Co., Class A* | 1,474,831 | ||||||
15,055 | Scientific Games Corp., Class A* | 254,881 | ||||||
87,627 | Wendy’s Co. (The) | 764,107 | ||||||
|
| |||||||
7,658,143 | ||||||||
|
| |||||||
| Household Durables (1.8%): |
| ||||||
37,266 | Jarden Corp.* | 2,286,270 | ||||||
25,857 | KB Home^ | 472,666 | ||||||
12,193 | M.D.C. Holdings, Inc.* | 393,102 | ||||||
1,306 | NVR, Inc.* | 1,339,969 | ||||||
18,845 | Tempur-Pedic International, Inc.* | 1,016,876 | ||||||
49,556 | Toll Brothers, Inc.* | 1,833,572 | ||||||
15,812 | Tupperware Brands Corp. | 1,494,708 | ||||||
|
| |||||||
8,837,163 | ||||||||
|
| |||||||
| Household Products (1.0%): |
| ||||||
43,293 | Church & Dwight Co., Inc. | 2,869,460 | ||||||
19,412 | Energizer Holdings, Inc. | 2,101,155 | ||||||
|
| |||||||
4,970,615 | ||||||||
|
| |||||||
| Industrial Conglomerates (0.3%): |
| ||||||
19,815 | Carlisle Cos., Inc. | 1,573,311 | ||||||
|
| |||||||
| Insurance (4.7%): |
| ||||||
5,249 | Alleghany Corp.* | 2,099,390 | ||||||
22,367 | American Financial Group, Inc. | 1,291,023 | ||||||
41,061 | Arthur J. Gallagher & Co. | 1,926,993 | ||||||
20,637 | Aspen Insurance Holdings, Ltd. | 852,514 | ||||||
37,230 | Brown & Brown, Inc. | 1,168,650 | ||||||
15,005 | Everest Re Group, Ltd. | 2,338,830 | ||||||
78,024 | Fidelity National Financial, Inc., Class A | 2,531,880 | ||||||
33,091 | First American Financial Corp. | 933,166 | ||||||
13,771 | Hanover Insurance Group, Inc. (The) | 822,266 | ||||||
31,386 | HCC Insurance Holdings, Inc. | 1,448,150 | ||||||
15,990 | Kemper Corp. | 653,671 | ||||||
9,257 | Mercury General Corp. | 460,165 | ||||||
75,481 | Old Republic International Corp. | 1,303,557 | ||||||
24,446 | Protective Life Corp. | 1,238,434 | ||||||
21,996 | Reinsurance Group of America, Inc. | 1,702,710 | ||||||
13,706 | StanCorp Financial Group, Inc. | 908,023 | ||||||
34,415 | W.R. Berkley Corp. | 1,493,267 | ||||||
|
| |||||||
23,172,689 | ||||||||
|
|
Shares | Fair Value | |||||||
| Common Stocks, continued |
| ||||||
| Internet & Catalog Retail (0.1%): |
| ||||||
10,395 | HSN, Inc. | $ | 647,609 | |||||
|
| |||||||
| Internet Software & Services (1.2%): |
| ||||||
24,485 | AOL, Inc.* | 1,141,491 | ||||||
15,528 | Equinix, Inc.* | 2,755,444 | ||||||
35,742 | Rackspace Hosting, Inc.* | 1,398,584 | ||||||
19,538 | ValueClick, Inc.* | 456,603 | ||||||
|
| |||||||
5,752,122 | ||||||||
|
| |||||||
| IT Services (3.2%): |
| ||||||
23,405 | Acxiom Corp.* | 865,517 | ||||||
37,219 | Broadridge Financial Solutions, Inc. | 1,470,895 | ||||||
31,742 | Convergys Corp. | 668,169 | ||||||
29,239 | CoreLogic, Inc.* | 1,038,862 | ||||||
9,260 | DST Systems, Inc. | 840,252 | ||||||
28,766 | Gartner, Inc.* | 2,043,824 | ||||||
22,751 | Global Payments, Inc. | 1,478,587 | ||||||
26,746 | Jack Henry & Associates, Inc. | 1,583,631 | ||||||
22,767 | Leidos Holdings, Inc.^ | 1,058,438 | ||||||
26,667 | Lender Processing Services, Inc. | 996,812 | ||||||
7,389 | ManTech International Corp., Class A | 221,153 | ||||||
17,152 | NeuStar, Inc., Class A* | 855,199 | ||||||
13,022 | Science Applications International Corp. | 430,638 | ||||||
34,032 | VeriFone Systems, Inc.* | 912,738 | ||||||
12,133 | Wex, Inc.* | 1,201,531 | ||||||
|
| |||||||
15,666,246 | ||||||||
|
| |||||||
| Leisure Equipment & Products (0.9%): |
| ||||||
28,338 | Brunswick Corp. | 1,305,248 | ||||||
20,072 | Polaris Industries, Inc. | 2,923,286 | ||||||
|
| |||||||
4,228,534 | ||||||||
|
| |||||||
| Life & Health Insurance (0.1%): |
| ||||||
17,022 | Primerica, Inc. | 730,414 | ||||||
|
| |||||||
| Life Sciences Tools & Services (1.3%): |
| ||||||
6,263 | Bio-Rad Laboratories, Inc., Class A* | 774,169 | ||||||
15,006 | Charles River Laboratories International, Inc.* | 795,918 | ||||||
17,502 | Covance, Inc.* | 1,541,226 | ||||||
9,257 | Mettler-Toledo International, Inc.* | 2,245,657 | ||||||
10,348 | Techne Corp. | 979,645 | ||||||
|
| |||||||
6,336,615 | ||||||||
|
| |||||||
| Machinery (5.3%): |
| ||||||
28,198 | AGCO Corp. | 1,669,040 | ||||||
15,569 | CLARCOR, Inc. | 1,001,865 | ||||||
15,209 | Crane Co. | 1,022,805 | ||||||
41,884 | Donaldson Co., Inc. | 1,820,279 | ||||||
19,058 | Graco, Inc. | 1,488,811 | ||||||
25,165 | Harsco Corp. | 705,375 | ||||||
25,283 | IDEX Corp. | 1,867,150 | ||||||
28,208 | ITT Corp. | 1,224,791 | ||||||
24,419 | Kennametal, Inc. | 1,271,497 | ||||||
25,406 | Lincoln Electric Holdings, Inc. | 1,812,464 | ||||||
18,792 | Nordson Corp. | 1,396,246 | ||||||
26,913 | Oshkosh Corp. | 1,355,877 | ||||||
14,142 | SPX Corp. | 1,408,685 | ||||||
34,693 | Terex Corp. | 1,456,759 | ||||||
24,778 | Timken Co. | 1,364,524 | ||||||
24,343 | Trinity Industries, Inc. | 1,327,180 | ||||||
8,356 | Valmont Industries, Inc. | 1,246,047 |
Continued
6
AZL Mid Cap Index Fund
Schedule of Portfolio Investments
December 31, 2013
Shares | Fair Value | |||||||
| Common Stocks, continued |
| ||||||
| Machinery, continued |
| ||||||
30,023 | Wabtec Corp. | $ | 2,229,807 | |||||
18,858 | Woodward, Inc. | 860,113 | ||||||
|
| |||||||
26,529,315 | ||||||||
|
| |||||||
| Marine (0.5%): |
| ||||||
13,337 | Alexander & Baldwin, Inc. | 556,553 | ||||||
17,674 | Kirby Corp.* | 1,754,145 | ||||||
13,301 | Matson, Inc. | 347,289 | ||||||
|
| |||||||
2,657,987 | ||||||||
|
| |||||||
| Media (1.3%): |
| ||||||
18,505 | AMC Networks, Inc., Class A* | 1,260,376 | ||||||
32,407 | Cinemark Holdings, Inc. | 1,080,125 | ||||||
22,190 | DreamWorks Animation SKG, Inc., Class A* | 787,745 | ||||||
14,454 | John Wiley & Sons, Inc., Class A | 797,861 | ||||||
20,408 | Lamar Advertising Co.* | 1,066,318 | ||||||
11,580 | Meredith Corp. | 599,844 | ||||||
39,081 | New York Times Co. (The), Class A | 620,215 | ||||||
12,007 | Valassis Communications, Inc. | 411,240 | ||||||
|
| |||||||
6,623,724 | ||||||||
|
| |||||||
| Metals & Mining (1.5%): |
| ||||||
16,510 | Carpenter Technology Corp. | 1,026,922 | ||||||
36,397 | Commercial Metals Co. | 739,951 | ||||||
10,443 | Compass Minerals International, Inc. | 835,962 | ||||||
24,098 | Reliance Steel & Aluminum Co. | 1,827,593 | ||||||
20,273 | Royal Gold, Inc. | 933,977 | ||||||
69,073 | Steel Dynamics, Inc. | 1,349,686 | ||||||
16,485 | Worthington Industries, Inc. | 693,689 | ||||||
|
| |||||||
7,407,780 | ||||||||
|
| |||||||
| Multiline Retail (0.3%): |
| ||||||
18,131 | Big Lots, Inc.* | 585,450 | ||||||
94,930 | J.C. Penney Co., Inc.*^ | 868,609 | ||||||
|
| |||||||
1,454,059 | ||||||||
|
| |||||||
| Multi-Utilities (1.1%): |
| ||||||
34,749 | Alliant Energy Corp. | 1,793,048 | ||||||
13,927 | Black Hills Corp. | 731,307 | ||||||
59,017 | MDU Resources Group, Inc. | 1,802,970 | ||||||
25,956 | Vectren Corp. | 921,438 | ||||||
|
| |||||||
5,248,763 | ||||||||
|
| |||||||
| Office Electronics (0.2%): |
| ||||||
15,659 | Zebra Technologies Corp., Class A* | 846,839 | ||||||
|
| |||||||
| Oil, Gas & Consumable Fuels (2.8%): |
| ||||||
68,798 | Alpha Natural Resources, Inc.* | 491,218 | ||||||
15,352 | Bill Barrett Corp.* | 411,127 | ||||||
27,075 | Cimarex Energy Co. | 2,840,438 | ||||||
22,708 | Energen Corp. | 1,606,591 | ||||||
26,228 | Gulfport Energy Corp.* | 1,656,298 | ||||||
61,985 | HollyFrontier Corp. | 3,080,034 | ||||||
19,139 | Rosetta Resources, Inc.* | 919,438 | ||||||
20,938 | SM Energy Co. | 1,740,157 | ||||||
22,621 | World Fuel Services Corp. | 976,322 | ||||||
|
| |||||||
13,721,623 | ||||||||
|
| |||||||
| Paper & Forest Products (0.4%): |
| ||||||
10,103 | Domtar Corp. | 953,117 | ||||||
43,933 | Louisiana-Pacific Corp.* | 813,200 | ||||||
|
| |||||||
1,766,317 | ||||||||
|
|
Shares | Fair Value | |||||||
| Common Stocks, continued |
| ||||||
| Pharmaceuticals (1.0%): |
| ||||||
35,778 | Endo Health Solutions, Inc.* | $ | 2,413,583 | |||||
1,325 | Mallinckrodt plc* | 69,245 | ||||||
16,649 | Mallinckrodt plc* | 870,077 | ||||||
19,591 | Salix Pharmaceuticals, Ltd.* | 1,762,015 | ||||||
|
| |||||||
5,114,920 | ||||||||
|
| |||||||
| Professional Services (1.2%): |
| ||||||
10,498 | Corporate Executive Board Co. (The) | 812,860 | ||||||
12,573 | FTI Consulting, Inc.* | 517,253 | ||||||
24,617 | Manpower, Inc. | 2,113,616 | ||||||
20,122 | Towers Watson & Co., Class A | 2,567,768 | ||||||
|
| |||||||
6,011,497 | ||||||||
|
| |||||||
| Real Estate Investment Trusts (REITs) (7.7%): |
| ||||||
22,630 | Alexandria Real Estate Equities, Inc. | 1,439,721 | ||||||
33,002 | American Campus Communities, Inc. | 1,062,994 | ||||||
60,403 | BioMed Realty Trust, Inc. | 1,094,502 | ||||||
24,347 | BRE Properties, Inc. | 1,332,024 | ||||||
26,769 | Camden Property Trust | 1,522,621 | ||||||
27,514 | Corporate Office Properties Trust | 651,807 | ||||||
102,039 | Duke Realty Corp. | 1,534,667 | ||||||
20,336 | Equity One, Inc. | 456,340 | ||||||
12,011 | Essex Property Trust, Inc. | 1,723,699 | ||||||
34,504 | Extra Space Storage, Inc. | 1,453,654 | ||||||
20,519 | Federal Realty Investment Trust | 2,080,831 | ||||||
28,505 | Highwoods Properties, Inc. | 1,031,026 | ||||||
17,970 | Home Properties, Inc. | 963,551 | ||||||
46,198 | Hospitality Properties Trust | 1,248,732 | ||||||
25,837 | Kilroy Realty Corp. | 1,296,501 | ||||||
46,000 | Liberty Property Trust | 1,558,020 | ||||||
27,925 | Mack-Cali Realty Corp. | 599,829 | ||||||
23,628 | Mid-America Apartment Communities, Inc. | 1,435,165 | ||||||
38,392 | National Retail Properties, Inc.^ | 1,164,429 | ||||||
38,507 | OMEGA Healthcare Investors, Inc. | 1,147,509 | ||||||
12,816 | Potlatch Corp. | 534,940 | ||||||
39,582 | Rayonier, Inc. | 1,666,402 | ||||||
58,089 | Realty Income Corp. | 2,168,461 | ||||||
29,179 | Regency Centers Corp. | 1,350,988 | ||||||
59,198 | Senior Housing Properties Trust | 1,315,972 | ||||||
27,923 | SL Green Realty Corp. | 2,579,526 | ||||||
19,794 | Taubman Centers, Inc. | 1,265,232 | ||||||
78,093 | UDR, Inc. | 1,823,472 | ||||||
35,322 | Weingarten Realty Investors | 968,529 | ||||||
|
| |||||||
�� | 38,471,144 | |||||||
|
| |||||||
| Real Estate Management & Development (0.3%): |
| ||||||
13,942 | Jones Lang LaSalle, Inc. | 1,427,521 | ||||||
|
| |||||||
| Road & Rail (1.4%): |
| ||||||
17,725 | Con-way, Inc. | 703,860 | ||||||
15,853 | Genesee & Wyoming, Inc., Class A* | 1,522,681 | ||||||
28,667 | J.B. Hunt Transport Services, Inc. | 2,215,958 | ||||||
14,247 | Landstar System, Inc. | 818,490 | ||||||
21,701 | Old Dominion Freight Line, Inc.* | 1,150,587 | ||||||
14,161 | Werner Enterprises, Inc. | 350,202 | ||||||
|
| |||||||
6,761,778 | ||||||||
|
| |||||||
| Semiconductors & Semiconductor Equipment (2.4%): |
| ||||||
191,535 | Advanced Micro Devices, Inc.*^ | 741,240 | ||||||
132,336 | Atmel Corp.* | 1,036,191 |
Continued
7
AZL Mid Cap Index Fund
Schedule of Portfolio Investments
December 31, 2013
Shares | Fair Value | |||||||
| Common Stocks, continued |
| ||||||
| Semiconductors & Semiconductor Equipment, continued |
| ||||||
37,616 | Cree, Inc.* | $ | 2,353,634 | |||||
43,264 | Cypress Semiconductor Corp. | 454,272 | ||||||
39,497 | Fairchild Semiconductor International, Inc.* | 527,285 | ||||||
42,719 | Integrated Device Technology, Inc.* | 435,307 | ||||||
22,143 | International Rectifier Corp.* | 577,268 | ||||||
39,658 | Intersil Corp., Class A | 454,877 | ||||||
87,645 | RF Micro Devices, Inc.* | 452,248 | ||||||
21,386 | Semtech Corp.* | 540,638 | ||||||
12,391 | Silicon Laboratories, Inc.* | 536,654 | ||||||
58,492 | Skyworks Solutions, Inc.* | 1,670,532 | ||||||
76,369 | SunEdison, Inc.* | 996,615 | ||||||
59,648 | Teradyne, Inc.* | 1,050,998 | ||||||
|
| |||||||
11,827,759 | ||||||||
|
| |||||||
| Software (4.3%): |
| ||||||
12,010 | ACI Worldwide, Inc.* | 780,650 | ||||||
12,539 | Advent Software, Inc. | 438,740 | ||||||
28,874 | Ansys, Inc.* | 2,517,812 | ||||||
89,520 | Cadence Design Systems, Inc.* | 1,255,070 | ||||||
13,856 | CommVault Systems, Inc.* | 1,037,537 | ||||||
67,336 | Compuware Corp. | 754,837 | ||||||
14,678 | Concur Technologies, Inc.* | 1,514,476 | ||||||
12,553 | FactSet Research Systems, Inc. | 1,363,005 | ||||||
10,813 | Fair Isaac Corp. | 679,489 | ||||||
33,804 | Informatica Corp.* | 1,402,866 | ||||||
30,292 | Mentor Graphics Corp. | 729,128 | ||||||
23,476 | Micros Systems, Inc.* | 1,346,818 | ||||||
37,212 | PTC, Inc.* | 1,316,933 | ||||||
31,779 | Rovi Corp.* | 625,729 | ||||||
20,395 | Solarwinds, Inc.* | 771,543 | ||||||
21,469 | Solera Holdings, Inc. | 1,519,146 | ||||||
48,115 | Synopsys, Inc.* | 1,952,025 | ||||||
47,758 | TIBCO Software, Inc.* | 1,073,600 | ||||||
|
| |||||||
21,079,404 | ||||||||
|
| |||||||
| Specialty Retail (4.5%): |
| ||||||
23,754 | Aaron���s, Inc. | 698,368 | ||||||
23,827 | Abercrombie & Fitch Co., Class A | 784,147 | ||||||
22,698 | Advance Auto Parts, Inc. | 2,512,215 | ||||||
52,858 | American Eagle Outfitters, Inc. | 761,155 | ||||||
14,308 | Ann, Inc.* | 523,100 | ||||||
40,068 | Ascena Retail Group, Inc.* | 847,839 | ||||||
14,522 | Cabela’s, Inc., Class A* | 968,037 | ||||||
49,485 | Chico’s FAS, Inc. | 932,297 | ||||||
23,543 | CST Brands, Inc. | 864,499 | ||||||
31,771 | Dick’s Sporting Goods, Inc. | 1,845,895 | ||||||
46,315 | Foot Locker, Inc. | 1,919,294 | ||||||
18,528 | Guess?, Inc. | 575,665 | ||||||
13,830 | Murphy USA, Inc.* | 574,775 | ||||||
148,535 | Office Depot, Inc.* | 785,750 | ||||||
16,673 | Rent-A-Center, Inc. | 555,878 |
Shares | Fair Value | |||||||
| Common Stocks, continued |
| ||||||
| Specialty Retail, continued |
| ||||||
24,975 | Signet Jewelers, Ltd. | $ | 1,965,533 | |||||
43,498 | Tractor Supply Co. | 3,374,574 | ||||||
27,755 | Williams-Sonoma, Inc. | 1,617,561 | ||||||
|
| |||||||
22,106,582 | ||||||||
|
| |||||||
| Textiles, Apparel & Luxury Goods (1.3%): |
| ||||||
17,003 | Carter’s, Inc. | 1,220,645 | ||||||
10,760 | Deckers Outdoor Corp.* | 908,790 | ||||||
30,874 | Hanesbrands, Inc. | 2,169,516 | ||||||
25,017 | Under Armour, Inc., Class A*^ | 2,183,984 | ||||||
|
| |||||||
6,482,935 | ||||||||
|
| |||||||
| Thrifts & Mortgage Finance (0.7%): |
| ||||||
26,062 | Astoria Financial Corp. | 360,437 | ||||||
137,602 | New York Community Bancorp, Inc.^ | 2,318,594 | ||||||
31,711 | Washington Federal, Inc. | 738,549 | ||||||
|
| |||||||
3,417,580 | ||||||||
|
| |||||||
| Tobacco (0.1%): |
| ||||||
7,230 | Universal Corp. | 394,758 | ||||||
|
| |||||||
| Trading Companies & Distributors (1.0%): |
| ||||||
14,422 | GATX Corp. | 752,396 | ||||||
15,040 | MSC Industrial Direct Co., Inc., Class A | 1,216,285 | ||||||
29,053 | United Rentals, Inc.* | 2,264,681 | ||||||
8,449 | Watsco, Inc. | 811,611 | ||||||
|
| |||||||
5,044,973 | ||||||||
|
| |||||||
| Water Utilities (0.3%): |
| ||||||
55,477 | Aqua America, Inc. | 1,308,702 | ||||||
|
| |||||||
| Wireless Telecommunication Services (0.2%): |
| ||||||
30,797 | Telephone & Data Systems, Inc. | 793,947 | ||||||
|
| |||||||
| Total Common Stocks (Cost $344,426,266) | 477,891,011 | ||||||
|
| |||||||
Contracts, Shares, Notional Amount or Principal Amount | Fair Value | |||||||
| Securities Held as Collateral for Securities on Loan (2.3%): |
| ||||||
$ | 11,407,836 | Allianz Variable Insurance Products Securities Lending Collateral Trust(a) | 11,407,836 | |||||
|
| |||||||
| Total Securities Held as Collateral for Securities on Loan | 11,407,836 | ||||||
|
| |||||||
| Unaffiliated Investment Company (2.9%): |
| ||||||
14,147,411 | Dreyfus Treasury Prime Cash Management Fund, Institutional Shares, 0.00%(b) | 14,147,411 | ||||||
|
| |||||||
| Total Unaffiliated Investment Company | 14,147,411 | ||||||
|
| |||||||
| Total Investment Securities | 503,446,258 | ||||||
| Net other assets (liabilities) — (2.1)% | (10,457,464 | ) | |||||
|
| |||||||
| Net Assets — 100.0% | $ | 492,988,794 | |||||
|
|
Percentages indicated are based on net assets as of December 31, 2013.
* | Non-income producing security. |
^ | This security or a partial position of this security was on loan as of December 31, 2013. The total value of securities on loan as of December 31, 2013, was $11,180,418. |
+ | Affiliated Securities |
Continued
8
AZL Mid Cap Index Fund
Schedule of Portfolio Investments
December 31, 2013
(a) | Purchased with cash collateral held from securities lending. The value of the collateral could include collateral held for securities that were sold on or before December 31, 2013. |
(b) | The rate represents the effective yield at December 31, 2013. |
(c) | See Federal Tax Information listed in the Notes to the Financial Statements. |
Futures Contracts
Cash of $714,000 has been segregated to cover margin requirements for the following open contracts as of December 31, 2013:
Description | Type | Expiration Date | Number of Contracts | Notional Value | Unrealized Appreciation/ (Depreciation) | |||||||||||||||
S&P 400 Index E-mini March Futures | Long | 3/21/14 | 113 | $ | 15,135,220 | $ | 456,433 |
See accompanying notes to the financial statements.
9
AZL Mid Cap Index Fund
Statement of Assets and Liabilities
December 31, 2013
Assets: | |||||
Investments in non-affiliates, at cost | $ | 369,149,601 | |||
Investments in affiliates, at cost | 831,912 | ||||
|
| ||||
Total Investment securities, at cost | $ | 369,981,513 | |||
|
| ||||
Investments in non-affiliates, at value* | $ | 502,374,901 | |||
Investments in affiliates, at value | 1,071,357 | ||||
|
| ||||
Total Investment securities, at value | 503,446,258 | ||||
Segregated cash for collateral | 714,000 | ||||
Interest and dividends receivable | 452,275 | ||||
Receivable for capital shares issued | 287,457 | ||||
Receivable for variation margin on futures contracts | 38,947 | ||||
|
| ||||
Total Assets | 504,938,937 | ||||
|
| ||||
Liabilities: | |||||
Payable for capital shares redeemed | 251,037 | ||||
Payable for collateral received on loaned securities | 11,407,836 | ||||
Manager fees payable | 101,795 | ||||
Administration fees payable | 15,953 | ||||
Distribution fees payable | 101,795 | ||||
Custodian fees payable | 6,785 | ||||
Administrative and compliance services fees payable | 1,911 | ||||
Trustee fees payable | 14 | ||||
Other accrued liabilities | 58,162 | ||||
|
| ||||
Total Liabilities | 11,945,288 | ||||
|
| ||||
Net Assets | $ | 492,993,649 | |||
|
| ||||
Net Assets Consist of: | |||||
Capital | $ | 338,465,637 | |||
Accumulated net investment income/(loss) | 3,473,538 | ||||
Accumulated net realized gains/(losses) from investment transactions | 17,133,296 | ||||
Net unrealized appreciation/(depreciation) on investments | 133,921,178 | ||||
|
| ||||
Net Assets | $ | 492,993,649 | |||
|
| ||||
Shares of beneficial interest (unlimited number of shares authorized, no par value) | 21,976,141 | ||||
Net Asset Value (offering and redemption price per share) | $ | 22.43 | |||
|
|
* | Includes securities on loan of $11,180,418. |
For the Year Ended December 31, 2013
Investment Income: | |||||
Dividends | $ | 5,673,770 | |||
Dividends from affiliates | 32,873 | ||||
Income from securities lending | 128,410 | ||||
|
| ||||
Total Investment Income | 5,835,053 | ||||
|
| ||||
Expenses: | |||||
Manager fees | 1,008,552 | ||||
Administration fees | 127,757 | ||||
Distribution fees | 1,008,552 | ||||
Custodian fees | 26,477 | ||||
Administrative and compliance services fees | 7,875 | ||||
Trustee fees | 19,998 | ||||
Professional fees | 21,071 | ||||
Shareholder reports | 16,422 | ||||
Recoupment of prior expenses reimbursed by the manager | 15,938 | ||||
Other expenses | 92,582 | ||||
|
| ||||
Total expenses | 2,345,224 | ||||
|
| ||||
Net Investment Income/(Loss) | 3,489,829 | ||||
|
| ||||
Realized and Unrealized Gains/(Losses) on Investments: | |||||
Net realized gains/(losses) on securities transactions | 14,004,066 | ||||
Net realized gains/(losses) on futures contracts | 4,042,847 | ||||
Change in net unrealized appreciation/depreciation on investments | 89,611,391 | ||||
|
| ||||
Net Realized/Unrealized Gains/(Losses) on Investments | 107,658,304 | ||||
|
| ||||
Change in Net Assets Resulting From Operations | $ | 111,148,133 | |||
|
|
See accompanying notes to the financial statements.
10
Statements of Changes in Net Assets
AZL Mid Cap Index Fund | ||||||||||
For the Year Ended December 31, 2013 | For the Year Ended December 31, 2012 | |||||||||
Change in Net Assets: | ||||||||||
Operations: | ||||||||||
Net investment income/(loss) | $ | 3,489,829 | $ | 2,763,231 | ||||||
Net realized gains/(losses) on investment transactions | 18,046,913 | 6,089,140 | ||||||||
Change in unrealized appreciation/depreciation on investments | 89,611,391 | 31,500,660 | ||||||||
|
|
|
| |||||||
Change in net assets resulting from operations | 111,148,133 | 40,353,031 | ||||||||
|
|
|
| |||||||
Dividends to Shareholders: | ||||||||||
From net investment income | (2,749,544 | ) | (1,239,816 | ) | ||||||
From net realized gains | (6,424,726 | ) | (5,863,839 | ) | ||||||
|
|
|
| |||||||
Change in net assets resulting from dividends to shareholders | (9,174,270 | ) | (7,103,655 | ) | ||||||
|
|
|
| |||||||
Capital Transactions: | ||||||||||
Proceeds from shares issued | 95,250,096 | 75,192,935 | ||||||||
Proceeds from dividends reinvested | 9,174,270 | 7,103,655 | ||||||||
Value of shares redeemed | (25,383,256 | ) | (13,152,941 | ) | ||||||
|
|
|
| |||||||
Change in net assets resulting from capital transactions | 79,041,110 | 69,143,649 | ||||||||
|
|
|
| |||||||
Change in net assets | 181,014,973 | 102,393,025 | ||||||||
Net Assets: | ||||||||||
Beginning of period | 311,978,676 | 209,585,651 | ||||||||
|
|
|
| |||||||
End of period | $ | 492,993,649 | $ | 311,978,676 | ||||||
|
|
|
| |||||||
Accumulated net investment income/(loss) | $ | 3,473,538 | $ | 2,749,533 | ||||||
|
|
|
| |||||||
Share Transactions: | ||||||||||
Shares issued | 4,734,634 | 4,558,580 | ||||||||
Dividends reinvested | 448,839 | 420,584 | ||||||||
Shares redeemed | (1,276,597 | ) | (794,201 | ) | ||||||
|
|
|
| |||||||
Change in shares | 3,906,876 | 4,184,963 | ||||||||
|
|
|
|
See accompanying notes to the financial statements.
11
AZL Mid Cap Index Fund
(Selected data for a share of beneficial interest outstanding throughout the periods indicated)
Year Ended 2013 | Year Ended 2012 | Year Ended 2011 | Year Ended 2010 | May 1, 2009 to | |||||||||||||||||||||
Net Asset Value, Beginning of Period | $ | 17.27 | $ | 15.10 | $ | 16.17 | $ | 13.09 | $ | 10.00 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Investment Activities: | |||||||||||||||||||||||||
Net Investment Income/(Loss) | 0.14 | 0.14 | 0.07 | 0.05 | 0.06 | ||||||||||||||||||||
Net Realized and Unrealized Gains/(Losses) on Investments | 5.47 | 2.45 | (0.47 | ) | 3.16 | 3.03 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Total from Investment Activities | 5.61 | 2.59 | (0.40 | ) | 3.21 | 3.09 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Dividends to Shareholders From: | |||||||||||||||||||||||||
Net Investment Income | (0.14 | ) | (0.07 | ) | (0.06 | ) | (0.04 | ) | — | ||||||||||||||||
Net Realized Gains | (0.31 | ) | (0.35 | ) | (0.61 | ) | (0.09 | ) | — | ||||||||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Total Dividends | (0.45 | ) | (0.42 | ) | (0.67 | ) | (0.13 | ) | — | ||||||||||||||||
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Net Asset Value, End of Period | $ | 22.43 | $ | 17.27 | $ | 15.10 | $ | 16.17 | $ | 13.09 | |||||||||||||||
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Total Return(b) | 32.71 | % | 17.22 | % | (2.32 | )% | 24.67 | % | 30.90 | %(c) | |||||||||||||||
Ratios to Average Net Assets/Supplemental Data: | |||||||||||||||||||||||||
Net Assets, End of Period (000’s) | $ | 492,994 | $ | 311,979 | $ | 209,586 | $ | 154,995 | $ | 65,210 | |||||||||||||||
Net Investment Income/(Loss)(d) | 0.86 | % | 1.04 | % | 0.66 | % | 0.71 | % | 1.12 | % | |||||||||||||||
Expenses Before Reductions(d)(e) | 0.58 | % | 0.60 | % | 0.63 | % | 0.61 | % | 0.66 | % | |||||||||||||||
Expenses Net of Reductions(d) | 0.58 | % | 0.60 | % | 0.61 | % | 0.60 | % | 0.60 | % | |||||||||||||||
Portfolio Turnover Rate | 12 | % | 9 | % | 15 | % | 34 | % | 27 | %(c) |
(a) | Period from commencement of operations. |
(b) | The returns include reinvested dividends and fund level expenses, but exclude insurance contract charges. If these charges were included, the returns would have been lower. |
(c) | Not annualized. |
(d) | Annualized for periods less than one year. |
(e) | Excludes fee reductions. If such fee reductions had not occurred, the ratios would have been as indicated. |
See accompanying notes to the financial statements.
12
AZL Mid Cap Index Fund
Notes to the Financial Statements
December 31, 2013
1. Organization
The Allianz Variable Insurance Products Trust (the “Trust”) was organized as a Delaware statutory trust on July 13, 1999. The Trust is a diversified open-end management investment company registered under the Investment Company Act of 1940. The Trust consists of 29 separate investment portfolios (collectively, the “Funds”), of which one is included in this report, the AZL Mid Cap Index Fund (the “Fund”), and 28 are presented in separate reports.
The Trust is authorized to issue an unlimited number of shares of the Fund without par value. Shares of the Fund are available through the variable annuity contracts and variable life insurance policies offered through the separate accounts of participating insurance companies.
Under the Trust’s organizational documents, its officers and trustees are indemnified against certain liabilities arising out of the performance of their duties to the Fund. In addition, in the normal course of business, the Fund may enter into contracts with its vendors and others that provide for general indemnifications. The Fund’s maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Fund. However, based on experience, the Fund expects the risk of loss to be remote.
2. Significant Accounting Policies
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. The policies conform with U.S. generally accepted accounting principles (“U.S. GAAP”). The preparation of financial statements requires management to make certain 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 increases and decreases in net assets from operations during the reporting period. Actual results could differ from those estimates.
Security Valuation
The Fund records its investments at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between willing market participants at the measurement date. The valuation techniques used to determine fair value are further described in Note 4 below.
Investment Transactions and Investment Income
Investment transactions are recorded not later than on the business day following trade date. However, for financial reporting purposes, investment transactions are accounted for on trade date. Net realized gains and losses on investments sold and on foreign currency transactions are recorded on the basis of identified cost. Interest income is recorded on the accrual basis and includes, where applicable, the amortization of premiums or accretion of discounts. Dividend income is recorded on the ex-dividend date except in the case of foreign securities, in which case dividends are recorded as soon as such information becomes available.
Real Estate Investment Trusts
The Fund may own shares of real estate investment trusts (“REITs”) which report information on the source of their distributions annually. Certain distributions received from REITs during the year, which are known to be a return of capital, are recorded as a reduction to the cost of the individual REIT.
Foreign Currency Translation
The accounting records of the Fund are maintained in U.S. dollars. Foreign currency amounts are translated into U.S. dollars at the current rate of exchange to determine the fair value of investments, assets and liabilities. Purchases and sales of securities, and income and expenses are translated at the prevailing rate of exchange on the respective dates of such transactions. The Fund does not isolate that portion of the results of operations resulting from changes in foreign exchange rates on investments from fluctuations arising from changes in market prices of securities held. Such fluctuations are included in the net realized and unrealized gain or loss on investments and foreign currencies. Income received by the Fund from sources within foreign countries may be subject to withholding and other income or similar taxes imposed by such countries. The Funds accrue such taxes, as applicable, based on their current interpretation of tax rules in the foreign markets in which they invest.
Dividends to Shareholders
Dividends to shareholders are recorded on the ex-dividend date. The Fund distributes its dividends from net investment income and net realized capital gains, if any, on an annual basis. The amount of dividends from net investment income and from net realized gains is determined in accordance with federal income tax regulations, which may differ from U.S. GAAP. These “book/tax” differences are either temporary or permanent in nature. To the extent these differences are permanent in nature (e.g., return of capital, net operating loss, reclassification of certain market discounts, gain/loss, paydowns, and distributions), such amounts are reclassified within the composition of net assets based on their federal tax-basis treatment; temporary differences (e.g., wash sales and post October losses) do not require reclassification. Dividends to shareholders that exceed net investment income and net realized gains for tax purposes are reported as distributions of capital.
Expense Allocation
Expenses directly attributable to the Fund are charged directly to the Fund, while expenses attributable to more than one Fund are allocated among the respective Funds based upon relative net assets or some other reasonable method. Expenses which are attributable to more than one Trust are allocated across the Allianz Variable Insurance Products and Allianz Variable Insurance Products Fund of Funds Trusts based upon relative net assets or another reasonable basis. Allianz Investment Management LLC (the “Manager”), serves as the investment manager for the Trust and the Allianz Variable Insurance Products Fund of Funds Trust.
Securities Lending
To generate additional income, the Fund may lend up to 33 1/3% of its assets pursuant to agreements requiring that the loan be continuously secured by any combination of cash, U.S. government or U.S. government agency securities, equal initially to at least 102% of the fair value plus accrued interest on the securities loaned (105% for foreign
13
AZL Mid Cap Index Fund
Notes to the Financial Statements
December 31, 2013
securities). The borrower of securities is at all times required to post collateral to the Fund in an amount equal to 100% of the fair value of the securities loaned based on the previous day’s fair value of the securities loaned, marked-to-market daily. Any collateral shortfalls are adjusted the next business day. The Fund bears all of the gains and losses on such investments. The Fund receives payments from borrowers equivalent to the dividends and interest that would have been earned on securities lent while simultaneously seeking to earn income on the investment of cash collateral received. In extremely low interest rate environments, the broker rebate fee may exceed the interest earned or the cash collateral which would result in a loss to the Fund. The investment of cash collateral deposited by the borrower is subject to inherent market risks such as interest rate risk, credit risk, liquidity risk, and other risks that are present in the market, and as such, the value of these investments may not be sufficient, when liquidated, to repay the borrower when the loaned security is returned. There may be risks of delay in recovery of the securities or even loss of rights in the collateral should the borrower of the securities fail financially. However, loans will be made only to borrowers, such as broker-dealers, banks or institutional borrowers of securities, deemed by the Manager to be of good standing and credit worthy and when in its judgment, the consideration which can be earned currently from such securities loans justifies the attendant risks. Loans are subject to termination by the Trust or the borrower at any time, and are, therefore, not considered to be illiquid investments. Securities on loan at December 31, 2013 are presented on the Fund’s Schedule of Portfolio Investments. The average outstanding amount of securities on loan was $12.9 million for the year ended December 31, 2013.
Cash collateral received in connection with securities lending is invested in the Allianz Variable Insurance Products Securities Lending Collateral Trust (the “Securities Lending Collateral Trust”) managed by The Dreyfus Corporation, an affiliate of the Custodian and Securities Lending Agent. The Securities Lending Collateral Trust invests in short-term investments that have a remaining maturity of 397 days or less as calculated in accordance with Rule 2a-7 under the 1940 Act. The Fund paid securities lending fees of $12,696 during the year ended December 31, 2013. These fees have been netted against “Income from securities lending” on the Statement of Operations.
Commission Recapture
Certain Funds of the Trust participate in a commission recapture program. The Fund will utilize the recaptured commissions to pay for, in whole or part, certain expenses of the Fund, excluding investment advisory fees. Any amounts received by the Fund, if applicable, are disclosed as “Expenses paid indirectly” on the Statement of Operations.
Effective January 6, 2014, the Manager, on behalf of the Trust, requested the Fund cease participation in the program until further notice.
Derivative Instruments
All open derivative positions at period end are reflected on the Fund’s Schedule of Portfolio Investments. The following is a description of the derivative instruments utilized by the Fund, including the primary underlying risk exposures related to each instrument type.
Futures Contracts
During the year ended December 31, 2013, the Fund used futures contracts to provide equity exposure on the Fund’s cash balances. Futures contracts are valued based upon their quoted daily settlement prices. Upon entering into a futures contract, the Fund is required to segregate liquid assets in accordance with the initial margin requirements of the broker or exchange. Futures contracts are marked to market daily and a payable or receivable for the change in value (“variation margin”) is recorded by the Fund. Gains or losses are recognized but not considered realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, elements of market risk (generally equity price risk related to stock futures, interest rate risk related to bond futures, and foreign currency risk related to currency futures) and exposure to loss in excess of the variation margin disclosed in the Statement of Assets and Liabilities. The primary risks associated with the use of futures contracts are the imperfect correlation between the change in fair value of the underlying securities and the prices of futures contracts, the possibility of an illiquid market, and the inability of the counterparty to meet the terms of the contract. The notional amount of futures contracts outstanding was $15.1 million as of December 31, 2013. The monthly average notional amount for these contracts was $15.3 million for the year ended December 31, 2013. Realized gains and losses are reported as “Net realized gains/(losses) on futures contracts” on the Statement of Operations.
Summary of Derivative Instruments
The following is a summary of the fair values of derivative instruments on the Fund’s Statement of Assets and Liabilities, categorized by risk exposure, as of December 31, 2013:
Asset Derivatives | Liability Derivatives | |||||||||||
Primary Risk Exposure | Statement of Assets and Liabilities Location | Total Fair Value* | Statement of Assets and Liabilities Location | Total Fair Value* | ||||||||
Equity Contracts | Receivable for variation margin on futures contracts | $ | 456,433 | Payable for variation margin on futures contracts | $ | — |
* | For futures contracts, the amounts represent the cumulative appreciation/(depreciation) of these futures contracts as reported in the Schedule of Portfolio Investments. Only the current day’s variation margin is reported within the Statement of Assets and Liabilities as Variation Margin on Futures Contracts. |
The following is a summary of the effect of derivative instruments on the Statement of Operations, categorized by risk exposure, for the year ended December 31, 2013:
Primary Risk Exposure | Location of Gains/(Losses) on Derivatives Recognized in Income | Realized Gains/(Losses) on Derivatives Recognized in Income | Change in Unrealized Appreciation/ Depreciation on Derivatives Recognized in Income | |||||||
Equity Contracts | Net realized gains/(losses) on futures contracts/change in unrealized appreciation/depreciation on investments | $ | 4,042,847 | $ | 352,288 |
14
AZL Mid Cap Index Fund
Notes to the Financial Statements
December 31, 2013
3. Related Party Transactions
The Manager provides investment advisory and management services for the Fund. The Manager has retained an independent money management organization (the “Subadviser”), to make investment decisions on behalf of the Fund. Pursuant to a subadvisory agreement with BlackRock Investment Management, LLC (“BlackRock Investment”), BlackRock Investment provides investment advisory services as the Subadviser for the Fund subject to the general supervision of the Trustees and the Manager. The Manager is entitled to a fee, computed daily and paid monthly, based on the average daily net assets of the Fund. Expenses incurred by the Fund for investment advisory and management services are reflected on the Statement of Operations as “Manager fees.” For its services, the Subadviser is entitled to a fee payable by the Manager. The Manager has contractually agreed to waive fees and reimburse the Fund to limit the annual expenses, excluding interest expense (e.g., cash overdraft fees), taxes, brokerage commissions, other expenditures that are capitalized in accordance with U.S. GAAP and other extraordinary expenses not incurred in the ordinary course of the Fund’s business, based on the daily net assets of the Fund, through April 30, 2015.
For the year ended December 31, 2013, the annual rate due to the Manager and the annual expense limit were as follows:
Annual Rate | Annual Expense Limit | |||||||||
AZL Mid Cap Index Fund | 0.25 | % | 0.71 | % |
Any amounts contractually waived or reimbursed by the Manager in a particular fiscal year will be subject to repayment by the Fund to the Manager to the extent that from time to time through the next three fiscal years the repayment will not cause the Fund’s expenses to exceed the lesser of the stated limit at the time of the waiver or the current stated limit. Any amounts recouped by the Manager during the year are reflected on the Statement of Operations as “Recoupment of prior expenses reimbursed by the Manager.” At December 31, 2013, there were no remaining contractual reimbursements that are subject to repayment by the Fund in subsequent years.
In addition, the Manager may voluntarily waive or reimburse additional fees in order to maintain more competitive expense ratios. Any voluntary waivers or reimbursements are not subject to repayment in subsequent years. Information on the total amount waived/reimbursed by the Manager or repaid to the Manager by the Fund during the year can be found on the Statement of Operations. During the year ended December 31, 2013, there were no voluntary waivers.
Pursuant to separate agreements between the Funds and the Manager, the Manager provides a Chief Compliance Officer (“CCO”) and certain compliance oversight and regulatory filing services to the Trust. Under these agreements the Manager is entitled to an amount equal to a portion of the compensation and certain other expenses related to the individuals performing the CCO and compliance oversight services, as well as $75 per hour for time incurred in connection with the preparation and filing of certain documents with the Securities and Exchange Commission. The fees are paid to the Manager on a quarterly basis. The total expenses incurred by the Fund for these services are reflected on the Statement of Operations as “Administrative and compliance services fees.”
Citi Fund Services Ohio, Inc. (“Citi” or the “Administrator”), a wholly owned subsidiary of Citigroup, Inc., with which an officer of the Trust is affiliated, serves as the Trust’s administrator, transfer agent, and fund accountant, and assists the Trust in all aspects of its administration and operation. The Administrator is entitled to a Trust-wide asset-based fee, which is based on the following schedule: 0.05% of daily average net assets on the first $4 billion, 0.04% of daily average net assets on the next $2 billion, 0.02% of daily average net assets on the next $2 billion and 0.01% of daily average net assets over $8 billion. The overall Trust-wide fees are accrued daily and paid monthly and are subject to a minimum annual fee. In addition, the Administrator is entitled to annual account fees related to the transfer agency system, an annual fee for each additional class of shares of any Fund, certain annual fees in supporting fair value services, and a Trust-wide annual fee for providing infrastructure and support in implementing the written policies and procedures comprising the Fund’s compliance program. Fees payable to the Administrator are subject to certain reductions associated with services provided to new funds. The Administrator is also reimbursed for certain expenses incurred. The total expenses incurred by the Fund for these services are reflected on the Statement of Operations as “Administration fees.”
Allianz Life Financial Services, LLC (“ALFS”), an affiliate of the Manager, serves as distributor of the Fund and receives 12b-1 fees directly from the Fund, plus a Trust-wide annual fee of $42,500, paid by the Manager from its profits and not by the Trust, for recordkeeping and reporting services.
The Trust has adopted a distribution and service plan in conformance with Rule 12b-1 of the 1940 Act. Pursuant to this plan, the Fund is authorized to pay certain fees for the sale and distribution of its shares and services provided to its shareholders at an annual rate not to exceed 0.25% of the Fund’s average daily net assets. These fees are reflected on the Statement of Operations as “Distribution fees.”
In addition, certain legal fees and expenses are paid to a law firm, Dorsey & Whitney LLP, of which the Secretary of the Fund is a partner. During the year ended December 31, 2013, $4,903 was paid from the Fund relating to these fees and expenses.
Certain Officers and Trustees of the Trust are affiliated with the Manager or the Administrator. Such Officers (except for the Trust’s CCO as noted above) and Trustees receive no compensation from the Trust for serving in their respective roles. For their service to the Trust and to the Allianz Variable Insurance Products Fund of Funds Trust, each non-interested Trustee receives a $139,000 annual Board retainer. In addition, the Trustees are reimbursed for certain expenses associated with attending Board meetings. Compensation to the Trustees is allocated between the Trust and the Allianz Variable Insurance Products Fund of Funds Trust in proportion to the assets under management of each trust. During the year ended December 31, 2013, actual Trustee compensation was $973,000 in total for both trusts.
At a meeting of the Board of Trustees on December 4, 2013, the Trustees approved a fee increase to the Officers and Trustees who are paid a fee for their services to the Trust and to the Allianz Variable Insurance Products Fund of Funds Trust. Effective January 1, 2014, each non-interested Trustee will receive a $163,000 annual retainer.
4. Investment Valuation Summary
The valuation techniques employed by the Fund, as described below, maximize the use of observable inputs and minimize the use of unobservable inputs in determining fair value. The inputs used for valuing the Fund’s investments are summarized in the three broad levels listed below:
— | Level 1 — quoted prices in active markets for identical assets |
— | Level 2 — other significant observable inputs (including quoted prices for similar securities, interest rates, prepayments speeds, credit risk, etc.) |
— | Level 3 — significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of investments) |
15
AZL Mid Cap Index Fund
Notes to the Financial Statements
December 31, 2013
Changes in valuation techniques may result in transfers in or out of an assigned level within the disclosure hierarchy. The Fund determines transfers between fair value hierarchy levels at the reporting period end. The inputs or methodology used for valuing investments is not necessarily an indication of the risk associated with investing in those investments.
Security prices are generally provided by an independent third party pricing service approved by the Trust’s Board of Trustees (“Trustees”) as of the close of the New York Stock Exchange (“NYSE”) (generally 4:00 pm Eastern Time). Equity securities are valued at the last quoted sale price or, if there is no sale, the last quoted bid price is used for long securities and the last quoted ask price is used for securities sold short. Securities listed on NASDAQ Stock Market, Inc. (“NASDAQ”) are valued at the official closing price as reported by NASDAQ. In each of these situations, valuations are typically categorized as a Level 1 in the fair value hierarchy. Investments in open-end investment companies are valued at their respective net asset value as reported by such companies and are typically categorized as Level 1 in the fair value hierarchy.
Debt and other fixed income securities are generally valued at an evaluated bid price provided by an independent pricing source approved by the Trustees. To value debt securities, pricing services may use various pricing techniques which take into account appropriate factors such as market activity, yield, quality, coupon rate, maturity, type of issue, trading characteristics, call features, credit ratings and other data, as well as broker quotes. Short term securities of sufficient credit quality with sixty days or less remaining until maturity may be valued at amortized cost, which approximates fair value. In each of these situations, valuations are typically categorized as Level 2 in the fair value hierarchy.
Futures contracts are valued at the last sales price as of the close of the primary exchange and are typically categorized as Level 1 in the fair value hierarchy.
Other assets and securities for which market quotations are not readily available, or are deemed unreliable are valued at fair value as determined in good faith by the Trustees or persons acting on the behalf of the Trustees. Fair value pricing may be used for significant events such as securities whose trading has been suspended, whose price has become stale or for which there is no currently available price at the close of the NYSE. Depending on the source and relative significance of valuation inputs, these instruments may be classified as Level 2 or Level 3 in the fair value hierarchy. The Fund utilizes a pricing service to assist in determining the fair value of securities when certain significant events occur that may affect the value of foreign securities.
In accordance with procedures adopted by the Trustees, fair value pricing may be used if events materially affecting the value of foreign securities occur between the time when the exchange on which they are traded closes and the time when the Fund’s net asset value is calculated. Management identifies possible fluctuation in international securities by monitoring the increase or decrease in the value of a designated benchmark index. In the event of an increase or decrease greater than predetermined levels, the Fund may use a systematic valuation model provided by an independent third party to fair value its international equity securities which are then typically categorized as Level 2 in the fair value hierarchy.
For the year ended December 31, 2013, there were no Level 3 investments for which significant unobservable inputs were used to determine fair value.
The following is a summary of the valuation inputs used as of December 31, 2013 in valuing the Fund’s investments based upon the three levels defined above:
Investment Securities: | Level 1 | Level 2 | Total | ||||||||||||
Common Stocks+ | $ | 477,891,011 | $ | — | $ | 477,891,011 | |||||||||
Securities Held as Collateral for Securities on Loan | — | 11,407,836 | 11,407,836 | ||||||||||||
Unaffiliated Investment Company | 14,147,411 | — | 14,147,411 | ||||||||||||
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Total Investment Securities | $ | 492,038,422 | $ | 11,407,836 | $ | 503,446,258 | |||||||||
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Other Financial Instruments* | |||||||||||||||
Futures Contracts | 456,433 | — | 456,433 | ||||||||||||
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Total Investments | $ | 492,494,855 | $ | 11,407,836 | $ | 503,902,691 | |||||||||
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+ | For detailed industry descriptions, see the accompanying Schedule of Portfolio Investments. |
* | Other Financial Instruments would include any derivative instruments, such as futures contracts. These investments are generally recorded in the financial statements at the unrealized gain or loss on the investment. |
5. Security Purchases and Sales
For the year ended December 31, 2013, cost of purchases and proceeds from sales of securities (excluding securities maturing less than one year from acquisition) were as follows:
Purchases | Sales | |||||||||
AZL Mid Cap Index Fund | $ | 121,042,193 | $ | 45,369,198 |
6. Investment Risks
Derivatives Risk: The Fund may invest in derivatives as a principal strategy. A derivative is a financial contract whose value depends on, or is derived from, the value of an underlying asset, reference rate, or risk. Use of derivative instruments involves risks different from, or possibly greater than, the risks associated with investing directly in securities and other traditional investments. Derivatives are subject to a number of other risks, such as liquidity risk, interest rate risk, market risk, credit risk, and selection risk. Derivatives also involve the risk of mispricing or improper valuation and the risk that changes in the value may not correlate perfectly with the underlying asset, rate, or index. Using derivatives may result in losses, possibly in excess of the principal amount invested. Also, suitable derivative transactions may not be available in all circumstances. The counterparty to a derivatives contract could default. As required by applicable law, a Fund that invests in derivatives segregates cash or liquid securities, or both, to the extent that its obligations under the instrument are not covered through ownership of the underlying security, financial instrument, or currency.
16
AZL Mid Cap Index Fund
Notes to the Financial Statements
December 31, 2013
7. Federal Tax Information
It is the Fund’s policy to continue to comply with the requirements of the Internal Revenue Code under Subchapter M, applicable to regulated investment companies, and to distribute all of its taxable income, including any net realized gains on investments, to its shareholders. Therefore, no provision is made for federal income taxes.
Management of the Fund has reviewed tax positions taken in tax years that remain subject to examination by all major tax jurisdictions, including federal (i.e., the last four tax year ends and the interim tax period since then, as applicable). Management believes that there is no tax liability resulting from unrecognized tax benefits related to uncertain tax positions taken.
Cost for federal income tax purposes at December 31, 2013 is $371,026,968. The gross unrealized appreciation/ (depreciation) on a tax basis is as follows:
Unrealized appreciation | $ | 138,049,176 | |||
Unrealized depreciation | (5,629,886 | ) | |||
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| ||||
Net unrealized appreciation/(depreciation) | $ | 132,419,290 | |||
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|
The tax character of dividends paid to shareholders during the year ended December 31, 2013 were as follows:
Ordinary Income | Net Long-Term Capital Gains | Total Distributions(a) | |||||||||||||
AZL Mid Cap Index Fund | $ | 4,058,929 | $ | 5,115,341 | $ | 9,174,270 |
(a) | Total distributions paid may differ from the Statements of Changes in Net Assets because dividends are recognized when actually paid for tax purposes. |
The tax character of dividends paid to shareholders during the year ended December 31, 2012 was as follows:
Ordinary Income | Net Long-Term | Total Distributions(a) | |||||||||||||
AZL Mid Cap Index Fund | $ | 2,452,708 | $ | 4,650,947 | $ | 7,103,655 |
(a) | Total distributions paid may differ from the Statements of Changes in Net Assets because dividends are recognized when actually paid for tax purposes. |
As of December 31, 2013, the components of accumulated earnings on a tax basis were as follows:
Undistributed Ordinary Income | Undistributed Long-Term Capital Gains | Accumulated Capital and Other Losses | Unrealized Appreciation/ (Depreciation)(a) | Total Accumulated Earnings/ | |||||||||||||||||||||
AZL Mid Cap Index Fund | $ | 6,675,896 | $ | 15,432,826 | $ | — | $ | 132,419,290 | $ | 154,528,012 |
(a) | The difference between book-basis and tax-basis unrealized appreciation/(depreciation) is attributable primarily to tax deferral of losses on wash sales. |
8. Subsequent Events
Management has evaluated events and transactions subsequent to period end through the date the financial statements were issued, for purposes of recognition or disclosure in these financial statements and there are no subsequent events to report.
17
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Shareholders and Board of Trustees of
Allianz Variable Insurance Products Trust:
We have audited the accompanying statement of assets and liabilities of AZL Mid Cap Index Fund (the “Fund”) of the Allianz Variable Insurance Products Trust, including the schedule of portfolio investments, as of December 31, 2013, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the years in the two-year period then ended, and the financial highlights for each of the periods in the five-year period then ended. These financial statements and financial highlights are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of December 31, 2013, by correspondence with the custodian and brokers. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of the Fund as of December 31, 2013, the results of its operations for the year then ended, the changes in its net assets for each of the years in the two-year period then ended, and the financial highlights for each of the periods in the five-year period then ended, in conformity with U.S. generally accepted accounting principles.
/s/ KPMG LLP
Columbus, Ohio
February 25, 2014
18
Other Federal Income Tax Information (Unaudited)
For the year ended December 31, 2013, 78.59% of the total ordinary income dividends paid by the Fund qualify for the corporate dividends received deduction available to corporate shareholders.
During the year ended December 31, 2013, the Fund declared net long-term capital gain distributions of $5,115,341.
During the year ended December 31, 2013, the Fund declared net short-term capital gain distributions of $1,309,385.
19
A description of the policies and procedures that the Fund uses to determine how to vote proxies relating to portfolio securities is available, without charge, upon request, by visiting the Securities and Exchange Commission’s (“Commission”) website at www.sec.gov, or by calling 800-624-0197
Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30th is available (i) without charge, upon request, by calling 800-624-0197; (ii) on the Allianz Variable Insurance Products Trust’s website at https://www.allianzlife.com; and (iii) on the Commission’s website at http://www.sec.gov.
The Fund files complete Schedules of Portfolio Holdings with the Commission for the first and third quarters of each fiscal year on Form N-Q. Schedules of Portfolio Holdings for the Fund in this report are available without charge on the Commission’s website at http://www.sec.gov, or may be reviewed and copied at the Commission’s Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 800-SEC-0330.
20
Approval of Investment Advisory and Subadvisory Agreements (Unaudited)
The Allianz Variable Insurance Products Trust (the “Trust”) is a manager-of-managers fund. That means that the Trust’s Manager (“Allianz Investment Management LLC”) is responsible for monitoring the various Subadvisers that have day-to-day responsibility for the decisions made for each of the Trust’s investment portfolios. The Trust’s Manager is responsible for determining, in the first instance, which investment advisers to consider recommending for selection as a Subadviser.
In reviewing the services provided by the Manager and the terms of the investment management agreement, the Board receives and reviews information related to the Manager’s experience and expertise in the variable insurance marketplace. Currently, the Funds are offered only through variable annuities and variable life insurance policies, and not in the retail fund market. In addition, the Board receives information regarding the Manager’s expertise with regard to portfolio diversification and asset allocation requirements within variable insurance products issued by Allianz Life Insurance Company of North America and its subsidiary, Allianz Life Insurance Company of New York. Currently, the Funds are offered only through Allianz Life and Allianz of New York variable products.
The Trust’s Manager has adopted policies and procedures to assist it in the process of analyzing each potential Subadviser with expertise in particular asset classes for purposes of making the recommendation that a specific investment adviser be selected. The Trust’s Board reviews and considers the information provided by the Manager in deciding which investment advisers to select. After an investment adviser becomes a Subadviser, a similarly rigorous process is instituted by the Manager to monitor the investment performance and other responsibilities of the Subadviser. The Manager reports to the Trust’s Board on its analysis at the regular meetings of the Board, which are held at least quarterly. Where warranted, the Manager will add or remove a particular Subadviser from a “watch” list that it maintains. Watch list criteria include, for example: (a) Fund performance over various time periods; (b) Fund risk issues, such as changes in key personnel involved with Fund management, changes in investment philosophy or process, or “capacity” concerns; and (c) organizational risk issues, such as regulatory, compliance or legal concerns, or changes in the ownership of the Subadviser. The Manager may place a Fund on the watch list for other reasons, and if so, will explain its rationale to the Trustees. Funds which are on the watch list are subject to special scrutiny of the Manager and the Board of Trustees. Funds may be removed from such watch list, if for example, performance improves or regulatory matters are satisfactorily resolved. However, in some situations where Funds which have been on the watch list, the Manager has recommended the retention of a new Subadviser, and the Board of Trustees has subsequently approved new Subadvisory Agreements with such Subadvisers.
In assessing the Manager’s and Subadvisers’ (collectively, the “Advisory Organizations”), performance of their obligations, the Board considers whether there has occurred a circumstance or event that would constitute a reason for it to not renew an advisory contract. In this regard, the Board is mindful of the potential disruption of a Fund’s operations and various risks, uncertainties and other effects that could occur as a result of a decision to terminate or not renew a contract.
As required by the Investment Company Act of 1940 (“1940 Act”), the Trust’s Board has reviewed and approved the Trust’s Investment Management Agreement with the Manager (the “Advisory Agreement”) and portfolio management agreements (the “Subadvisory Agreements”) with the Subadvisers. The Board’s decision to approve these contracts reflects the exercise of its business judgment on whether to approve new arrangements and continue the existing arrangements. During its review of these contracts, the Board considers many factors, among the most material of which are: the Fund’s investment objectives and long term performance; the Advisory Organizations’ management philosophy, personnel, and processes, including their compliance history and the adequacy of their compliance processes; the preferences and expectations of Fund shareholders (and underlying contract owners) and their relative sophistication; the continuing state of competition in the mutual fund industry; and comparable fees in the mutual fund industry.
The Board also considers the compensation and benefits received by the Advisory Organizations. This includes fees received for services provided to the Fund by affiliated persons of the Advisory Organizations and research services received by the Advisory Organizations from brokers that execute Fund trades, as well as advisory fees. The Board considered the fact that: (1) the Manager and the Trust are parties to an Administrative Service Agreement, a Compliance Services Agreement, and a Chief Compliance Officer Agreement, under which the Manager is compensated by the Trust for performing certain administrative and compliance services including providing an employee of the Manager or one of its affiliates to act as the Trust’s Chief Compliance Officer; and (2) Allianz Life Financial Services, LLC, an affiliated person of the Manager, is a registered securities broker-dealer and receives (along with its affiliated persons) payments made by the Trust pursuant to Rule 12b-1.
The Board is aware that various courts have interpreted provisions of the 1940 Act and have indicated in their decisions that the following factors may be relevant to an adviser’s compensation: the nature and quality of the services provided by the adviser, including the performance of the fund; the adviser’s cost of providing the services; the extent to which the adviser may realize “economies of scale” as the fund grows larger; any indirect benefits that may accrue to the adviser and its affiliates as a result of the adviser’s relationship with the fund; performance and expenses of comparable funds; and the extent to which the independent Board members are fully informed about all facts bearing on the adviser’s service and fee. The Trust’s Board is aware of these factors and takes them into account in its review of the Trust’s advisory contracts.
The Board considered and weighed these circumstances in light of its experience in governing the Trust and working with the Advisory Organizations on matters relating to the Funds, and is assisted in its deliberations by the advice of legal counsel to the Independent Trustees. In this regard, the Board requests and receives a significant amount of information about the Funds and the Advisory Organizations. Some of this information is provided at each regular meeting of the Board; additional information is provided in connection with the particular meeting or meetings at which the Board’s formal review of an advisory contract occurs. In between regularly scheduled meetings, the Board may receive information on particular matters as the need arises. Thus, the Board’s evaluation of an advisory contract is informed by reports covering such matters as: an Advisory Organization’s investment philosophy, personnel, and processes; the Fund’s short- and long-term performance (in absolute terms as well as in relationship to its benchmark(s), certain competitor or “peer group” funds and similar funds managed by the particular Subadviser), and comments on the reasons for performance; the Fund’s expenses (including the advisory fee itself and the overall expense structure of the Fund, both in absolute terms and relative to similar and/or competing funds, with due regard for contractual or voluntary expense limitations); the use and allocation of brokerage commissions derived from trading the Fund’s portfolio securities; the nature and extent of the advisory and other services provided to the Fund by the Advisory Organizations and their affiliates; compliance and audit reports concerning the Funds and the companies that service them; and relevant developments in the mutual fund industry and how the Funds and/or Advisory Organizations are responding to them.
The Board also receives financial information about Advisory Organizations, including reports on the compensation and benefits the Advisory Organizations derive from their relationships with the Funds. These reports cover not only the fees under the advisory contracts, but also fees, if any, received for providing other services to the Funds. The reports also discuss any indirect or “fall out” benefits an Advisory Organization may derive from its relationship with the Funds.
The Advisory and Subadvisory Agreements (collectively, the “Agreements”) were most recently considered at Board of Trustees meetings held in the fall of 2013. Information relevant to the approval of such Agreements was considered at a telephonic Board of Trustees meeting on October 16, 2013, and at an “in person” Board of Trustees meeting held October 22, 2013. The Agreements were approved at the Board meeting of October 22, 2013. At such meeting the Board also approved an Expense Limitation Agreement between the Manager and the Trust for the period ending April 30, 2015. In connection with such meetings, the Trustees requested and evaluated extensive materials from the Manager, including performance and expense information for other investment companies with similar investment objectives derived from data compiled by an independent third party provider and other sources believed to be reliable by the Manager. Prior to voting, the Trustees reviewed the proposed approval/continuance of the Agreements with management and with experienced counsel who are independent of the Manager and received a memorandum from such counsel discussing the legal
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standards for their consideration of the proposed approvals/continuances. The independent (“disinterested”) Trustees also discussed the proposed approvals/continuances in a private session with such counsel at which no representatives of the Manager were present. In reaching their determinations relating to the approval and/or continuance of the Agreements, in respect of each Fund, the Trustees considered all factors they believed relevant. The Board based its decision to approve the Agreements on the totality of the circumstances and relevant factors, and with a view to past and future long-term considerations. Not all of the factors and considerations discussed above and below are necessarily relevant to every Fund, and the Board did not assign relative weights to factors discussed herein or deem any one or group of them to be controlling in and of themselves.
An SEC Rule requires that shareholder reports include a discussion of certain factors relating to the selection of investment advisers and the approval of advisory fees. The “factors” enumerated by the SEC are set forth below in italics, as well as the Board’s conclusions regarding such factors:
(1) The nature, extent and quality of services provided by the Manager and Subadvisers. The Trustees noted that the Manager, subject to the control of the Board of Trustees, administers each Fund’s business and other affairs. Under the Advisory Agreement, the Manager holds the sole and exclusive responsibility to provide, or arrange for other to provide, the management of the Funds’ assets and the placement of orders for the purchase and sale of the securities of the Funds. As the Trust is a manager of managers fund, the Manager is authorized, under the Advisory Agreement, to retain one or more Subadvisers for each Fund to handle day-to-day management of the Funds’ investment portfolios; the Manager is responsible for determining, in the first instance, which investment advisers to recommend to the Board of Trustees for selection as a Subadviser. The Trustees were aware that, notwithstanding the retention of the Subadvisers to handle day-to-day portfolio management, the Manager remains responsible for substantial other matters, including continuously monitoring compliance by each Subadviser with the investment policies and restrictions of the respective Funds, with such other limitations or directions of the Board of Trustees, and with all legal requirements under federal or state law or regulation. The Manager also is responsible primarily to provide statistical information and other data to the Trustees regarding the Funds’ portfolio investments and to make available to the Funds’ administrator such information as is necessary for the conduct of its duties.
The Trustees also noted that the Manager provides the Trust and each Fund with such administrative and other services (exclusive of, and in addition to, any such services provided by any others retained by the Trust on behalf of the Funds) and executive and other personnel as are necessary for the operation of the Trust and the Funds. Except for the Trust’s Chief Compliance Officer, the Manager pays all of the compensation of Trustees and officers of the Trust who are employees of the Manager or its affiliates.
The Trustees considered the scope and quality of services provided by the Manager and the Subadvisers and noted that the scope of such services provided had expanded as a result of recent regulatory and other developments. The Trustees noted that, for example, the Manager and Subadvisers are responsible for maintaining and monitoring their own compliance programs, and these compliance programs are continuously refined and enhanced in light of new regulatory requirements. The Trustees considered the capabilities and resources which the Manager has dedicated to performing services on behalf of the Trust and its Funds. The quality of administrative and other services, including the Manager’s role in coordinating the activities of the Trust’s other service providers, also were considered. The Trustees concluded that, overall, they were satisfied with the nature, extent and quality of services provided (and expected to be provided) to the Trust and to each of the Funds under the Agreements.
(2) The investment performance of the Funds, the Manager and the Subadvisers. In connection with every in-person quarterly Board of Trustees meeting, Trustees receive extensive information on the performance results of each of the Funds. This includes, for example, performance information on all of the Funds for the previous quarter, and previous one, three and five-year periods, and since inception. (For Funds which have been in existence for less than five years, Trustees may receive performance information on comparable funds managed by the particular Subadviser for periods prior to the creation of a particular Fund.) Such performance information includes information on absolute total return, performance versus Subadvisers’ comparable fund(s), performance versus the appropriate benchmark(s), and performance versus peer groups. For example, in connection with the Board of Trustees meetings held September 10-11, 2013, the Manager reported that for the three year period ended June 30, 2013, 12 Funds were in the top 40%, eight were in the middle 20% and eight were in the bottom 40%, and for the one year period ended June 30, 2013, 8 Funds were in the top 40%, seven were in the middle 20%, and 14 were in the bottom 40%. The Manager also reported that for the five year period ended June 30, 2013, 10 Funds were in the top 40%, four were in the middle 20%, and six were in the bottom 40%. At the Board of Trustees meeting held October 22, 2013, the Trustees determined that the overall investment performance of the Funds was acceptable.
(3) The costs of services to be provided and profits to be realized by the Manager and the Subadvisers and their affiliates from their relationship with the Funds. The Manager has supplied information to the Board of Trustees pertaining to the level of investment advisory fees to which the Funds are subject. The Manager has agreed to temporarily “cap” Fund expenses at certain levels, and information is provided to Trustees setting forth “contractual” advisory fees and “actual” fees after taking expense caps into account. Based upon the information provided, the “actual” advisory fees payable by the Funds overall are generally comparable to the average level of fees paid by Fund peer groups. For the 30 Funds reviewed by the Board of Trustees in the fall of 2013, 27 Funds paid “actual” advisory fees in a percentage amount within the 65th percentile or lower for each Fund’s applicable category. The Trustees recognized that it is difficult to make comparisons of advisory fees because there are variations in the services that are included in the fees paid by other funds. The Board has concluded that the advisory fees to be paid to the Manager by the Funds are not unreasonable.
The Manager has also supplied information to the Board of Trustees pertaining to total Fund expenses (which includes advisory fees, the 25 basis point 12b-1 fee paid by the Funds, and other Fund expenses). As noted above, the Manager has agreed to “cap” Fund expenses at certain levels. Based upon the information provided, the overall total expense ratio ranking in 2013 for the 30 Funds was as follows: (1) 28 of the Funds had total expense rankings below the 65th percentile (with 20 Funds at or below the 50th percentile); (2) the AZL Russell 1000 Value Fund had a total expense ranking in the 66th percentile; the Manager reported that there is only a limited peer group for such Fund; and (3) the AZL Morgan Stanley Global Real Estate Fund had a total expense ranking in the 72nd percentile; it was reported by the Manager that there is only a limited peer group for such Fund, such Fund’s expense ratio has declined, and such Fund’s expense ratio is comparable to funds of similar size.
The Manager has committed to providing the Funds with a high quality of service and working to reduce Fund expenses over time, particularly as the Funds grow larger. The Trustees concluded therefore that the expense ratios of the Funds were not unreasonable.
The Manager provided information concerning the profitability of the Manager’s investment advisory activities for the period from 2011 through June 30, 2013. The Trustees recognized that it is difficult to make comparisons of profitability from investment company advisory agreements because comparative information is not generally publicly available and is affected by numerous factors, including the structure of the particular adviser, the types of funds it manages, its business mix, numerous assumptions regarding allocation of expenses and the adviser’s capital structure and cost of capital. In considering profitability information, the Trustees considered the possible effect of certain fall-out benefits to the Manager and its affiliates. The Trustees focused on profitability of the Manager’s relationships with the Funds before taxes and distribution expenses. The Trustees recognized that the Manager should, in the abstract, be entitled to earn a reasonable level of profits for the services it provides to each Fund and, based on their review, concluded that they were satisfied that the Manager’s level of profitability from its relationship with the Funds was not excessive.
The Manager, on behalf of the Board of Trustees, endeavored to obtain information on the profitability of each Subadviser in connection with its relationship with the Fund or Funds which it subadvises. The Manager was unable to obtain meaningful profitability information from some of the unaffiliated Subadvisers. The Manager assured the Board of Trustees that the Agreements with the Subadvisers which are not affiliated with it were negotiated on an “arm’s length” basis, so that arguably, such profitability information should be less relevant. The Trustees were also provided with certain information on the profitability for the Subadviser which is affiliated with the Manager. Trustees recognized the difficulty of allocating costs to multiple advisory accounts and products of a large advisory organization. Based upon the information provided, the Trustees determined that there was no evidence that the level of such profitability attributable to subadvising the Funds was excessive.
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(4) and (5) The extent to which economies of scale would be realized as the Funds grow, and whether fee levels reflect these economies of scale. The Trustees noted that most of the advisory fee schedules for the Funds do not contain breakpoints that reduce the fee rate on assets above specified levels, although certain Subadvisory Agreements have such “breakpoints.” The Trustees recognized that breakpoints may be an appropriate way for the Manager to share its economies of scale, if any, with Funds that have substantial assets. However, they also recognized that there may not be a direct relationship between any economies of scale realized by Funds and those realized by the Manager as assets increase. The Trustees do not believe there is a uniform methodology for establishing breakpoints that give effect to Fund-specific service provided by the Manager. The Trustees noted that in the fund industry as a whole, as well as among funds similar to the Funds, there is no uniformity or pattern in the fees and asset levels at which breakpoints (if any) apply. Depending on the age, size, and other characteristics of a particular fund and its manager’s cost structure, different conclusions can be drawn as to whether there are economies of scale to be realized at any particular level of assets, notwithstanding the intuitive conclusion that such economies exist, or will be realized at some level of total assets. Moreover, because different managers have different cost structures and service models, it is difficult to draw meaningful conclusions from the breakpoints that may have been adopted by other funds. The Trustees also noted that the advisory agreements for many funds do not have breakpoints at all, or if breakpoints exist, they may be at asset levels significantly greater than those of the individual Funds. The Trustees also noted that the total assets in all of the Funds as of June 30, 2013 were approximately $12.85 billion, and that no single non-money market Fund had assets in excess of $616 million.
The Trustees noted that the Manager has agreed to temporarily “cap” Fund expenses at certain levels, which has the effect of reducing expenses as would the implementation of advisory fee breakpoints. The Manager has committed to continue to consider the continuation of fee “caps” and/or advisory fee breakpoints as the Funds grow larger. The Board receives quarterly reports on the level of Fund assets. It expects to consider whether or not to approve the Agreements at a meeting to be held prior to December 31, 2014, and will at that time, or prior thereto, consider: (a) the extent to which economies of scale can be realized, and (b) whether the advisory fee should be modified to reflect such economies of scale, if any.
Having taken these factors into account, the Trustees concluded that the absence of breakpoints in certain of the Funds’ advisory fee rate schedules was acceptable under each Fund’s circumstances.
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Information about the Board of Trustees and Officers (Unaudited)
The Trust is managed by the Trustees in accordance with the laws of the state of Delaware governing business trusts. There are currently eight Trustees, two of whom are “interested persons” of the Trust within the meaning of that term under the 1940 Act. The Trustees and Officers of the Trust, their addresses, ages, their positions held with the Trust, their terms of office with the Trust and length of time served, their principal occupation(s) during the past five years, the number of portfolios in the Trust they oversee, and their other directorships held are as follows:
Non-Interested Trustees(1)
Name, Address, and Age | Positions Held with VIP Trust and FOF Trust | Term of Office(2)/Length of Time Served | Principal Occupation(s) During Past 5 Years | Number of Portfolios Overseen for VIP Trust and FOF Trust | Other Directorships Held Outside the AZL Fund Complex | |||||
Peter R. Burnim, Age 66 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/07 | Chairman, Argus Investment Strategies Fund Ltd., February 2013 to present; Managing Director, iQ Venture Advisors, LLC. 2005 to 2012; Chairman, Northstar Group Holdings Ltd. Bermuda, 2011 to present; Expert Witness, Massachusetts Department of Revenue, 2011 to 2012; Executive Vice President, Northstar Companies, 2002 to 2005; Senior Officer, Citibank and Citicorp for over 25 years | 41 | Argus Group Holdings; Northstar Group Holdings, NRIL, Sterling Centrecorp Inc.; Highland Financial Holdings; and Bank of Bermuda NY | |||||
Peggy L. Ettestad, Age 56 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/07 | Managing Director, Red Canoe Management Consulting LLC, 2008 to present; Senior Managing Director, Residential Capital LLC, 2003 to 2008; Chief Operations Officer, Transamerica Reinsurance 2002 to 2003 | 41 | Luther College | |||||
Roger Gelfenbien, Age 70 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 10/99 | Retired; Partner of Accenture 1983 to 1999 | 41 | Virtus Funds (8 Funds) | |||||
Claire R. Leonardi, Age 58 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/04 | Chief Executive Officer, Connecticut Innovations, Inc., 2012 to present; General Partner, Fairview Capital, L.P., 1994 to 2012 | 41 | The Natural History Museum of the Adirondacks | |||||
Dickson W. Lewis, Age 65 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/04 | Retired; Consultant to Lifetouch National School Studios; Vice President/General Manager, Yearbooks & Canada-Lifetouch National School Studios, 2006 to 2013; Vice President/General Manager of Jostens, Inc., 2002 to 2006; Senior Vice President of Fortis Group, 1997 to 2002 | 41 | None | |||||
Peter W. McClean, Age 69 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/04 | Retired; President and CEO of Measurisk, LLC, 2001 to 2003; Chief Risk Management Officer at Bank of Bermuda Ltd., 1996 to 2001 | 41 | PNMAC Opportunity Fund; Northeast Bank; and FHI | |||||
Arthur C. Reeds III, Age 69 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 10/99 | Retired; Senior Investment Officer, Hartford Foundation for Public Giving, 2000 to 2003; Chairman, Chief Executive and President of Conning Corp., 1999 to 2000; Investment Consultant, 1997 to 1999 | 41 | Connecticut Water Service, Inc. |
Interested Trustees(3)
Name, Address, and Age | Positions Held with VIP Trust and FOF Trust | Term of Office(2)/Length of Time Served | Principal Occupation(s) During Past 5 Years | Number of Portfolios Overseen for VIP Trust and FOF Trust | Other Directorships Held Outside the AZL Fund Complex | |||||
Robert DeChellis, Age 46 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 3/08 | President and CEO, Allianz Life Financial Services, LLC, 2007 to present | 41 | None | |||||
Brian Muench, Age 43 5701 Golden Hills Drive | Trustee | Since 6/11 | President, Allianz Investment Management LLC, November 2010 to present; Vice President, Allianz Life, April 2011 to present; Vice President, Advisory Management, Allianz Investment Management LLC from December 2005 to November 2010 | 41 | None |
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Officers
Name, Address, and Age | Positions Held with VIP and VIP FOF Trust | Term of Office(2)/Length of Time Served | Principal Occupation(s) During Past 5 Years | |||
Brian Muench, Age 43 5701 Golden Hills Drive Minneapolis, MN 55416 | President | Since 11/10 | President, Allianz Investment Management LLC from November 2010, to present; Vice President, Allianz Life from April 2011 to present; Vice President, Allianz Investment Management LLC from December 2005 to November 2010. | |||
Michael Radmer, Age 68 Dorsey & Whitney LLP, Suite 1500 50 South Sixth Street Minneapolis, MN 55402-1498 | Secretary | Since 2/02 | Partner, Dorsey and Whitney LLP since 1976. | |||
Ty Edwards, Age 47 Citi Fund Services Ohio, Inc. 3435 Stelzer Road Columbus, OH 43219 | Treasurer, Principal Accounting Officer and Principal Financial Officer | Since 4/10 | Senior Vice President, Financial Administration, Citi Fund Services Ohio, Inc., December 2009 to present; Director, Product Management, Columbia Management, April 2007 to April 2009; Deputy Treasurer, Columbia Funds and Director, Fund Administration, Columbia Management, January 2006 to April 2007. | |||
Christopher R. Pheiffer, Age 45(4) 5701 Golden Hills Drive Minneapolis, MN 55416 | Chief Compliance Officer(5) and Anti-Money Laundering Compliance Officer | Since 2/14 (interim) | Deputy Chief Compliance Officer of the Trusts, 2007-2014 |
(1) | Member of the Audit Committee. |
(2) | Indefinite. |
(3) | Is an “interested person”, as defined by the 1940 Act, due to employment by Allianz. |
(4) | Stephen G. Simon, previously the Chief Compliance Officer of the Trusts, resigned all of his positions with Allianz effective February 21, 2014. Mr. Pheiffer, previously the Deputy Chief Compliance Officer of the Trusts, has been named Chief Compliance Officer of the Trusts on an interim basis while a search for a permanent replacement is conducted. |
(5) | The Manager and the Trust are parties to a Chief Compliance Officer Agreement under which the Manager is compensated by the Trust for providing an employee of the Manager or one of its affiliates to act as the Trust’s Chief Compliance Officer. The Chief Compliance Officer and Anti-Money Laundering Compliance Officer is not considered a corporate officer or executive employee of the Trust. |
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The Allianz VIP Funds are distributed by Allianz Life Financial Services, LLC. These Funds are not FDIC Insured. | ANNRPT1213 2/14 |
AZL® Money Market Fund
Annual Report
December 31, 2013
Table of Contents
Management Discussion and Analysis
Page 1
Expense Examples and Portfolio Composition
Page 3
Schedule of Portfolio Investments
Page 4
Statement of Assets and Liabilities
Page 7
Statement of Operations
Page 7
Statements of Changes in Net Assets
Page 8
Financial Highlights
Page 9
Notes to the Financial Statements
Page 10
Report of Independent Registered Public Accounting Firm
Page 13
Other Federal Income Tax Information
Page 14
Other Information
Page 15
Approval of Investment Advisory and Subadvisory Agreements
Page 16
Information about the Board of Trustees and Officers
Page 19
This report is submitted for the general information of the shareholder of the Fund. The report is not authorized for distribution to prospective investors in the Fund unless preceded or accompanied by an effective prospectus, which contains details concerning the sales charges and other pertinent information.
AZL® Money Market Fund Review (unaudited)
Allianz Investment Management LLC serves as the Manager for the AZL® Money Market Fund and BlackRock Advisors, LLC serves as Subadviser to the Fund.
What factors affected the Fund’s performance during the year ended December 31, 2013?
The cash management sector continued to be challenged in 2013 by exceptionally low interest rates due to ongoing monetary stimulus from central banks and a prolonged contraction in supply. In an effort to maintain competitive yields, relatively long portfolio duration was maintained (43-57 days) primarily through the purchase of highly rated banks as well as government securities, which also served to augment liquidity positions. Liquidity and diversification were further enhanced by the portfolio’s holdings of municipal variable rate demand notes.
Allocations to U.S. Treasuries fluctuated throughout the year and Treasury securities with maturity dates that would be potentially impacted by a technical default as a result of the debt ceiling situation were avoided or managed out of the portfolio. Specifically, these included Treasury obligations maturing beyond October 17 through November 14.
The SEC released the proposed changes to rule 2a-7 in 2013 and outlined three proposals to further regulate the money market industry. We anticipate this will be finalized within the first half of 2014 and the announcement did not have a direct material impact on portfolio strategy.
Despite the tapering talk which began in May and contributed to heightened volatility at the long end of the fixed income yield curve, there was no material impact on rates inside of one year. While the FOMC announced its decision to reduce its bond purchasing program by $10 billion beginning in January, the short-term cash markets were unaffected. The short-term markets were primarily focused on the FOMC’s guidance to maintain its target range for the Fed Funds rate “well past the time” the unemployment rate falls below 6.5% and rate of inflation is below the Committee’s target of 2%.*
Past performance does not guarantee future results.
* | The Fund’s portfolio composition is subject to change. There is no guarantee that any sectors mentioned will continue to perform well or that securities in such sectors will be held by the Fund in the future. The information contained in this commentary is for informational purposes only and should not be construed as a recommendation to purchase or sell securities in the sector mentioned. The Fund’s holdings and weightings are as of December 31, 2013. |
1
AZL® Money Market Fund Review (unaudited)
Fund Objective
The Fund’s investment objective is to seek current income consistent with stability of principal. The Fund seeks to achieve its objective by investing in a broad range of short-term, high-quality U.S. dollar-denominated money market instruments, including government, U.S. and foreign bank, commercial and other obligations.
Investment Concerns
An investment in the Fund is neither guaranteed nor insured by the FDIC or any other government agency. Although the Fund strives to maintain the value of your investment at $1.00 per share, it is possible to lose money by investing in this Fund. Past performance is not predictive of future performance as yields on money market funds fluctuate daily.
For a complete description of these and other risks associated with investing in a mutual Fund, please refer to the Fund’s prospectus.
Growth of $10,000 Investment
The chart above represents a comparison of a hypothetical investment in the Fund versus a similar investment in the Fund’s benchmark, and represents the reinvestment of dividends and capital gains in the Fund.
Average Annual Total Returns as of December 31, 2013
1 | 3 | 5 | 10 | |||||||||||||
Year | Year | Year | Years | |||||||||||||
AZL® Money Market Fund | 0.00 | % | 0.00 | % | 0.05 | % | 1.50 | % | ||||||||
Three-Month U.S. Treasury Bill Index | 0.06 | % | 0.07 | % | 0.10 | % | 1.57 | % |
Past performance does not guarantee future results. The performance data quoted represents past performance and current returns may be lower or higher. The investment return and principal value will fluctuate so that an investor’s shares, when redeemed may be worth more or less than the original cost. To obtain performance information current to the most recent month end, please visit www.Allianzlife.com.
Expense Ratio | Gross | |||
AZL® Money Market Fund | 0.66 | % |
The above expense ratio is based on the current Fund prospectus dated April 29, 2013. The Manager and the Fund have entered into a written contract limiting operating expenses, excluding certain expenses (such as interest expense), to 0.87% through April 30, 2015. Additional information pertaining to the December 31, 2013 expense ratios can be found in the financial highlights.
The total return of the Fund does not reflect the effect of any insurance charges, the annual maintenance fee or the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. Such charges, fees and tax payments would reduce the performance quoted.
Yield as of December 31, 2013
7 Day | 7 Day | 30 Day | ||||||||||
Average | Effective | Average | ||||||||||
AZL® Money Market Fund | 0.00 | % | 0.00 | % | 0.00 | % |
The Manager has voluntarily undertaken to waive, reimburse, or pay the Fund’s expenses to the extent necessary in order to maintain a minimum daily net investment income for the Fund of 0.00%. The Distributor may waive its Rule 12b-1 fees. The amount waived, reimbursed, or paid by the Manager and/or the Distributor will be repaid to the Manager and/or the Distributor subject to certain limitations as further described in Note 3 to the Financial Statements. The ability of the Manager and/or Distributor to receive such payments could negatively affect the Fund’s future yield.
The 7-day yield quotation is as of December 31, 2013 and more closely reflects the current earnings of the Fund than the total return quotation.
The Fund’s performance is measured against the Three-Month U.S. Treasury Bill Index. The Treasury Bill Index is an unmanaged index and does not reflect the deduction of fees associated with a mutual fund, such as investment management and fund accounting fees. The Fund’s performance reflects the deduction of fees for services provided to the Fund. Investors cannot invest directly in an index.
2 |
AZL Money Market Fund
(Unaudited)
As a shareholder of the AZL Money Market Fund (the “Fund”), you incur ongoing costs, including management fees, distribution fees, and other Fund expenses. These examples are intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. Please note that the expenses shown in each table do not reflect expenses that apply to the subaccount or the insurance contract. If the expenses that apply to the subaccount of the insurance contract were included, your costs would have been higher.
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the periods presented below.
The Actual Expense table below provides information about actual account values and actual expenses. You may use the information below, 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 table under the heading entitled “Expenses Paid During Period” to estimate the expenses you paid on your account during this period.
Beginning Account Value 7/1/13 | Ending Account Value 12/31/13 | Expenses Paid During Period 7/1/13 - 12/31/13* | Annualized Expense Ratio During Period 7/1/13 - 12/31/13 | |||||||||||||||||
AZL Money Market Fund | $ | 1,000.00 | $ | 1,000.00 | $ | 1.06 | 0.21 | % |
The Hypothetical Expense table below provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.
Beginning Account Value 7/1/13 | Ending Account Value 12/31/13 | Expenses Paid During Period 7/1/13 - 12/31/13* | Annualized Expense Ratio During Period 7/1/13 - 12/31/13 | |||||||||||||||||
AZL Money Market Fund | $ | 1,000.00 | $ | 1,024.15 | $ | 1.07 | 0.21 | % |
* | Expenses are equal to the average account value over the period, multiplied by the Fund’s annualized expense ratio, multiplied by 184/365 (to reflect the one half year period). |
Portfolio Composition
(Unaudited)
Investments | Percent of net assets | ||||
Commercial Paper | 40.8 | % | |||
Certificates of Deposit | 39.4 | ||||
Municipal Bonds | 10.2 | ||||
U.S. Treasury Obligations | 9.6 | ||||
Money Market | 4.3 | ||||
|
| ||||
Total Investment Securities | 104.3 | ||||
Net other assets (liabilities) | (4.3 | ) | |||
|
| ||||
Net Assets | 100.0 | % | |||
|
|
3
AZL Money Market Fund
Schedule of Portfolio Investments
December 31, 2013
Shares or Principal Amount | Fair Value | |||||||
| Certificates of Deposit (39.4%): | |||||||
| Commercial Banks (39.4%) | |||||||
$ | 11,000,000 | Bank of Montreal Chicago, 0.24%, 9/5/14(a) | $ | 11,000,000 | ||||
4,000,000 | Bank of Montreal Chicago, 0.34%, 1/10/14(a) | 4,000,000 | ||||||
8,500,000 | Bank of Nova Scotia, 0.24%, 12/1/14(a) | 8,500,000 | ||||||
8,000,000 | Bank of Nova Scotia, 0.24%, 12/4/14(a) | 8,000,000 | ||||||
5,000,000 | Bank of Nova Scotia, 0.39%, 10/6/14(a) | 5,004,913 | ||||||
7,000,000 | BNP Paribas, NY, 0.33%, 2/3/14(a) | 7,000,000 | ||||||
6,750,000 | Canadian Imperial Bank of Commerce, 0.31%, 2/3/14(a) | 6,750,000 | ||||||
8,000,000 | Canadian Imperial Bank of Commerce, 0.27%, 2/4/14(a) | 8,000,000 | ||||||
2,505,000 | Canadian Imperial Bank of Commerce, 0.24%, 6/13/14(a) | 2,505,000 | ||||||
8,000,000 | Canadian Imperial Bank of Commerce, 0.23%, 8/8/14(a) | 8,000,000 | ||||||
12,500,000 | Commonwealth Bank of Australia, 0.26%, 3/28/14(a)(b) | 12,501,852 | ||||||
10,000,000 | Credit Suisse, NY, 0.26%, 4/17/14 | 10,000,000 | ||||||
4,000,000 | Credit Suisse, NY, 0.26%, 3/18/14 | 4,000,000 | ||||||
3,000,000 | Credit Suisse, NY, 0.32%, 6/6/14(a) | 3,000,000 | ||||||
6,000,000 | Deutsche Bank, NY, 0.29%, 2/28/14(a) | 6,000,000 | ||||||
8,000,000 | HSBC Bank PLC, 0.24%, 10/30/14(a)(b) | 8,000,000 | ||||||
9,000,000 | Mitsubishi UFJ Trust & Banking Corp., NY, 0.28%, 2/20/14 | 9,000,000 | ||||||
16,000,000 | Mitsubishi UFJ Trust & Banking Corp., NY, 0.22%, 3/12/14(a) | 16,000,000 | ||||||
10,000,000 | Mizuho Bank Ltd., 0.22%, 1/17/14 | 10,000,000 | ||||||
12,000,000 | National Australia Bank, NY, 0.24%, 8/8/14(a) | 12,000,842 | ||||||
10,000,000 | National Australia Bank, NY, 0.24%, 8/14/14(a) | 10,000,000 | ||||||
9,500,000 | National Australia Bank, NY, 0.25%, 3/7/14 | 9,500,000 | ||||||
10,000,000 | Natixis, NY, 0.29%, 9/8/14(a) | 9,999,319 | ||||||
10,000,000 | Norinchukin Bank, NY, 0.10%, 1/6/14 | 10,000,000 | ||||||
9,000,000 | Rabobank Nederland NV, NY, 0.26%, 4/22/14(a) | 9,000,000 | ||||||
14,000,000 | Rabobank Nederland NV, NY, 0.28%, 9/16/14(a) | 14,000,000 | ||||||
7,000,000 | Rabobank Nederland NV, NY, 0.41%, 1/8/14 | 7,000,000 | ||||||
5,000,000 | Royal Bank of Canada, NY, 0.25%, 12/5/14(a) | 5,000,000 | ||||||
5,750,000 | Royal Bank of Canada, NY, 0.23%, 1/15/14(a) | 5,750,000 | ||||||
5,500,000 | Royal Bank of Canada, NY, 0.27%, 10/10/14(a) | 5,500,000 | ||||||
11,000,000 | Skandinav Enskilda Bank, NY, 0.30%, 5/28/14 | 11,000,668 | ||||||
5,000,000 | Societe Generale, NY, 0.34%, 9/19/14(a) | 5,000,000 | ||||||
13,000,000 | Sumitomo Mitsui Bank, NY, 0.23%, 2/10/14 | 13,000,000 | ||||||
6,100,000 | Svenska Handelsbanken AB, 0.28%, 2/18/14(a)(b) | 6,100,000 | ||||||
5,000,000 | Toronto Dominion Bank, NY, 0.23%, 7/24/14(a) | 5,000,000 | ||||||
5,000,000 | Toronto Dominion Bank, NY, 0.24%, 9/4/14 | 5,000,000 | ||||||
9,000,000 | Toronto Dominion Bank, NY, 0.25%, 8/12/14 | 9,000,000 | ||||||
8,000,000 | Westpac Banking Corp., NY, 0.28%, 7/18/14(a) | 8,000,000 | ||||||
11,000,000 | Westpac Banking Corp., NY, 0.24%, 10/8/14(a) | 11,000,000 | ||||||
|
| |||||||
318,112,594 | ||||||||
|
| |||||||
| Total Certificates of Deposit (Cost $318,112,594) | 318,112,594 | ||||||
|
|
Shares or Principal Amount | Fair Value | |||||||
| Commercial Paper (40.8%): | |||||||
| Commercial Banks (11.0%) | |||||||
$ | 9,000,000 | Commonwealth Bank of Australia, 0.24%, 5/16/14(a)(b) | $ | 8,999,821 | ||||
15,000,000 | Credit Agricole North America, Inc., 0.05%, 1/2/14(c) | 14,999,979 | ||||||
10,000,000 | DNB NOR Bank ASA, 0.26%, 2/6/14(b)(c) | 9,997,450 | ||||||
12,000,000 | DNB NOR Bank ASA, 0.26%, 1/27/14(b)(c) | 11,997,747 | ||||||
10,000,000 | HSBC Bank PLC, 0.25%, 10/22/14(a)(b) | 10,000,000 | ||||||
1,000,000 | Nederlandse Waterschapsbank NV, 0.28%, 7/28/14(a)(b) | 1,000,115 | ||||||
1,000,000 | Nederlandse Waterschapsbank NV, 0.28%, 7/30/14(a)(b) | 1,000,117 | ||||||
15,000,000 | Nordea Bank AB, 0.25%, 1/17/14(b)(c) | 14,998,333 | ||||||
16,000,000 | Westpac Banking Corp., NY, 0.25%, 4/24/14(a)(b) | 16,000,337 | ||||||
|
| |||||||
88,993,899 | ||||||||
|
| |||||||
| Diversified Financial Services (29.8%) | |||||||
10,000,000 | Bedford Row Funding Corp., 0.30%, 4/3/14(b)(c) | 9,992,333 | ||||||
10,000,000 | BNP Paribas Finance, Inc., 0.34%, 3/13/14(c) | 9,993,294 | ||||||
6,000,000 | Caisse Centrale Desjardins, 0.26%, 2/19/14(b)(c) | 5,997,918 | ||||||
8,000,000 | Charta LLC, 0.25%, 2/10/14(b)(c) | 7,997,778 | ||||||
10,000,000 | Collateralized CP Co. LLC, 0.30%, 3/11/14(c) | 9,994,250 | ||||||
5,000,000 | Collateralized CP Co. LLC, 0.30%, 1/30/14(c) | 4,998,792 | ||||||
10,000,000 | Fairway Finance Corp., 0.21%, 4/4/14(a)(b) | 10,000,000 | ||||||
23,950,000 | Gemini Securitization Corp. LLC, 0.10%, 1/2/14(b)(c) | 23,949,932 | ||||||
10,000,000 | Kells Funding LLC, 0.24%, 10/15/14(a)(b) | 9,999,203 | ||||||
12,000,000 | Kells Funding LLC, 0.21%, 7/7/14(a)(b) | 12,000,000 | ||||||
10,000,000 | Kells Funding LLC, 0.24%, 5/12/14(b)(c) | 9,991,267 | ||||||
12,900,000 | LMA Americas LLC, 0.09%, 1/2/14(b)(c) | 12,899,968 | ||||||
11,000,000 | Nieuw Amsterdam Receivables Corp., 0.04%, 1/2/14(b)(c) | 10,999,988 | ||||||
6,000,000 | Northern Pines Funding LLC, 0.25%, 3/6/14(b)(c) | 5,997,333 | ||||||
10,000,000 | Old Line Funding LLC, 0.21%, 5/9/14(a)(b) | 10,000,000 | ||||||
5,000,000 | Old Line Funding LLC, 0.23%, 6/9/14(b)(c) | 4,994,921 | ||||||
8,000,000 | Old Line Funding LLC, 0.24%, 3/17/14(b)(c) | 7,996,000 | ||||||
10,000,000 | Starbird Funding Corp., 0.07%, 1/2/14(b)(c) | 9,999,981 | ||||||
15,000,000 | Svenska Handelsbank, Inc., 0.25%, 2/7/14(b)(c) | 14,996,146 | ||||||
12,000,000 | Svenska Handelsbank, Inc., 0.25%, 1/21/14(b)(c) | 11,998,333 | ||||||
8,000,000 | Sydney Capital Corp., 0.22%, 2/14/14(b)(c) | 7,997,849 | ||||||
5,000,000 | Thunder Bay Funding LLC, 0.23%, 3/26/14(a)(b) | 5,000,000 | ||||||
10,000,000 | Thunder Bay Funding LLC, 0.24%, 3/3/14(b)(c) | 9,995,933 | ||||||
12,000,000 | Thunder Bay Funding LLC, 0.24%, 1/27/14(b)(c) | 11,997,920 | ||||||
|
| |||||||
239,789,139 | ||||||||
|
| |||||||
| Total Commercial Paper (Cost $328,783,038) | 328,783,038 | ||||||
|
|
Continued
4
AZL Money Market Fund
Schedule of Portfolio Investments
December 31, 2013
Shares or Principal Amount | Fair Value | |||||||
| Municipal Bonds (10.2%): | |||||||
| California (4.7%): | |||||||
$ | 16,500,000 | California Health Facilities Financing Authority Revenue, Series B, 0.04%, 10/1/40, LOC: JPMorgan Chase Bank(a) | $ | 16,500,000 | ||||
3,700,000 | California Housing Finance Agency Revenue, Series E-1, 0.04%, 2/1/23, LOC: Freddie Mac, Fannie Mae, AMT(a) | 3,700,000 | ||||||
8,500,000 | Los Angeles Community Redevelopment Agency Multi-Family Housing Revenue, Series A, 0.05%, 4/15/42, LIQ FAC: Fannie Mae, AMT(a) | 8,500,000 | ||||||
9,500,000 | San Francisco City & County Redevelopment Agency Multi-Family Housing Revenue, Series A, 0.04%, 6/15/35, LIQ FAC: Fannie Mae(a) | 9,500,000 | ||||||
|
| |||||||
38,200,000 | ||||||||
|
| |||||||
| New York (4.1%): |
| ||||||
10,000,000 | New York City Housing Development Corp. Multi-Family Rent Revenue, Series A, 0.04%, 5/15/34, LIQ FAC: Fannie Mae, AMT(a) | 10,000,000 | ||||||
15,000,000 | New York City Housing Development Corp. Multi-Family Rent Revenue, Series A, 0.04%, 3/15/36, LIQ FAC: Fannie Mae(a) | 15,000,000 | ||||||
8,000,000 | New York State Dormitory Authority Revenue State Supported Debt, Series D, 0.04%, 7/1/31, LOC: Toronto Dominion Bank(a) | 8,000,000 | ||||||
|
| |||||||
33,000,000 | ||||||||
|
|
Shares or Principal Amount | Fair Value | |||||||
| Municipal Bonds, continued |
| ||||||
| Pennsylvania (1.4%): |
| ||||||
$ | 11,300,000 | Pennsylvania Housing Finance Agency Single Family Mortgage Revenue, Series 83C, 0.07%, 10/1/35, SPA: Bank of Tokyo-Mitsubishi UFJ, AMT(a) | $ | 11,300,000 | ||||
|
| |||||||
| Total Municipal Bonds (Cost $82,500,000) | 82,500,000 | ||||||
|
| |||||||
| U.S. Treasury Obligations (9.6%): | |||||||
| U.S. Treasury Bills (9.6%) | |||||||
20,000,000 | 0.05%, 3/13/14(c) | 19,998,225 | ||||||
10,000,000 | 0.10%, 5/29/14(c) | 9,995,745 | ||||||
12,000,000 | 0.09%, 6/19/14(c) | 11,994,874 | ||||||
25,000,000 | 0.09%, 6/26/14(c) | 24,989,611 | ||||||
10,000,000 | 2.38%, 9/30/14 | 10,167,424 | ||||||
|
| |||||||
77,145,879 | ||||||||
|
| |||||||
| Total U.S. Treasury Obligations (Cost $77,145,879) | 77,145,879 | ||||||
|
| |||||||
| Unaffiliated Investment Company (4.3%): | |||||||
34,951,573 | Dreyfus Treasury Prime Cash Management Fund, Institutional Shares, 0.00%(c) | 34,951,573 | ||||||
|
| |||||||
| Total Unaffiliated Investment Companies (Cost $34,951,573) | 34,951,573 | ||||||
|
| |||||||
| Total Investment Securities | 841,493,084 | ||||||
| Net other assets (liabilities) — (4.3)% | (34,851,360 | ) | |||||
|
| |||||||
| Net Assets — 100.0% | $ | 806,641,724 | |||||
|
|
Percentages indicated are based on net assets as of December 31, 2013.
AMT—Subject to alternative minimum tax
LIQ FAC—Liquidation facility
LOC—Line of credit
SPA—Securities purchase agreement
(a) | Variable Rate Security. The rate represents the rate in effect at December 31, 2013. These securities are deemed to have a maturity remaining until the next adjustment of the interest rate or the longer of the demand period or time to the next readjustment. |
(b) | Rule 144A, Section 4(2) or other security which is restricted to resale to institutional investors. The sub-adviser has deemed these securities to be liquid based on procedures approved by the Board of Trustees. |
(c) | The rate represents the effective yield at December 31, 2013. |
(d) | Aggregate cost for federal income tax and financial reporting purposes is substantially the same. |
Continued
5
AZL Money Market Fund
Schedule of Portfolio Investments
December 31, 2013
The following represents the concentrations by country of risk (based on the domicile of the security issuer) relative to the total fair value of investments as of December 31, 2013:
Country | Percentage | |||
Australia | 11.0 | % | ||
Canada | 12.7 | % | ||
France | 4.4 | % | ||
Germany | 0.7 | % | ||
Japan | 7.1 | % | ||
Netherlands | 3.0 | % | ||
Norway | 2.7 | % | ||
Sweden | 5.8 | % | ||
Switzerland | 2.1 | % | ||
United Kingdom | 2.2 | % | ||
United States | 48.3 | % | ||
|
| |||
100.0 | % | |||
|
|
See accompanying notes to the financial statements.
6
AZL Money Market Fund
Statement of Assets and Liabilities
December 31, 2013
Assets: | |||||
Investment securities, at cost | $ | 841,493,084 | |||
|
| ||||
Investment securities, at value | $ | 841,493,084 | |||
Interest receivable | 228,860 | ||||
Receivable from Manager | 135,612 | ||||
|
| ||||
Total Assets | 841,857,556 | ||||
|
| ||||
Liabilities: | |||||
Cash overdraft | 34,951,319 | ||||
Administration fees payable | 29,500 | ||||
Distribution fees payable | 173,478 | ||||
Custodian fees payable | 8,807 | ||||
Administrative and compliance services fees payable | 4,001 | ||||
Trustee fees payable | 30 | ||||
Other accrued liabilities | 48,697 | ||||
|
| ||||
Total Liabilities | 35,215,832 | ||||
|
| ||||
Net Assets | $ | 806,641,724 | |||
|
| ||||
Net Assets Consist of: | |||||
Capital | $ | 806,585,260 | |||
Accumulated net realized gains/(losses) from investment transactions | 56,464 | ||||
|
| ||||
Net Assets | $ | 806,641,724 | |||
|
| ||||
Shares of beneficial interest (unlimited number of shares authorized, no par value) | 806,585,902 | ||||
Net Asset Value (offering and redemption price per share) | $ | 1.00 | |||
|
|
For the Year Ended December 31, 2013
Investment Income: | |||||
Interest | $ | 1,964,336 | |||
|
| ||||
Total Investment Income | 1,964,336 | ||||
|
| ||||
Expenses: | |||||
Manager fees | 3,067,357 | ||||
Administration fees | 271,587 | ||||
Distribution fees | 2,190,974 | ||||
Custodian fees | 28,652 | ||||
Administrative and compliance services fees | 18,171 | ||||
Trustee fees | 48,849 | ||||
Professional fees | 46,610 | ||||
Shareholder reports | 44,324 | ||||
Other expenses | 24,040 | ||||
|
| ||||
Total expenses before reductions | 5,740,564 | ||||
Less expenses voluntarily waived/reimbursed by the Manager | (3,776,228 | ) | |||
|
| ||||
Net expenses | 1,964,336 | ||||
|
| ||||
Net Investment Income/(Loss) | — | ||||
|
| ||||
Realized and Unrealized Gains/(Losses) on Investments: | |||||
Net realized gains/(losses) on securities transactions | 56,931 | ||||
|
| ||||
Net Realized/Unrealized Gains/(Losses) on Investments | 56,931 | ||||
|
| ||||
Change in Net Assets Resulting From Operations | $ | 56,931 | |||
|
|
See accompanying notes to the financial statements.
7
Statements of Changes in Net Assets
AZL Money Market Fund | ||||||||||
For the Year Ended December 31, 2013 | For the Year Ended December 31, 2012 | |||||||||
Change in Net Assets: | ||||||||||
Operations: | ||||||||||
Net realized gains/(losses) on investment transactions | $ | 56,931 | $ | 16,881 | ||||||
|
|
|
| |||||||
Change in net assets resulting from operations | 56,931 | 16,881 | ||||||||
|
|
|
| |||||||
Dividends to Shareholders: | ||||||||||
From net realized gains | (17,239 | ) | (7,455 | ) | ||||||
|
|
|
| |||||||
Change in net assets resulting from dividends to shareholders | (17,239 | ) | (7,455 | ) | ||||||
|
|
|
| |||||||
Capital Transactions: | ||||||||||
Proceeds from shares issued | 486,550,509 | 492,621,251 | ||||||||
Proceeds from dividends reinvested | 17,239 | 7,455 | ||||||||
Value of shares redeemed | (552,027,334 | ) | (486,202,178 | ) | ||||||
|
|
|
| |||||||
Change in net assets resulting from capital transactions | (65,459,586 | ) | 6,426,528 | |||||||
|
|
|
| |||||||
Change in net assets | (65,419,894 | ) | 6,435,954 | |||||||
Net Assets: | ||||||||||
Beginning of period | 872,061,618 | 865,625,664 | ||||||||
|
|
|
| |||||||
End of period | $ | 806,641,724 | $ | 872,061,618 | ||||||
|
|
|
| |||||||
Share Transactions: | ||||||||||
Shares issued | 486,550,510 | 492,621,251 | ||||||||
Dividends reinvested | 17,239 | 7,455 | ||||||||
Shares redeemed | (552,027,334 | ) | (486,202,178 | ) | ||||||
|
|
|
| |||||||
Change in shares | (65,459,585 | ) | 6,426,528 | |||||||
|
|
|
|
See accompanying notes to the financial statements.
8
AZL Money Market Fund
(Selected data for a share of beneficial interest outstanding throughout the periods indicated)
Year Ended December 31, | |||||||||||||||||||||||||
2013 | 2012 | 2011 | 2010 | 2009 | |||||||||||||||||||||
Net Asset Value, Beginning of Period | $ | 1.00 | $ | 1.00 | $ | 1.00 | $ | 1.00 | $ | 1.00 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Investment Activities: | |||||||||||||||||||||||||
Net Investment Income/(Loss) | — | — | — | — | (a) | — | (a) | ||||||||||||||||||
Net Realized and Unrealized Gains/(Losses) on Investments | — | (a) | — | (a) | — | (a) | — | (a) | — | (a) | |||||||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Total from Investment Activities | — | (a) | — | (a) | — | (a) | — | (a) | — | (a) | |||||||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Dividends to Shareholders From: | |||||||||||||||||||||||||
Net Investment Income | — | — | — | — | (a) | — | (a) | ||||||||||||||||||
Net Realized Gains | — | (a) | — | (a) | — | (a) | — | (a) | — | (a) | |||||||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Total Dividends | — | (a) | — | (a) | — | (a) | — | (a) | — | (a) | |||||||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Net Asset Value, End of Period | $ | 1.00 | $ | 1.00 | $ | 1.00 | $ | 1.00 | $ | 1.00 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Total Return(b) | — | — | — | — | 0.22 | % | |||||||||||||||||||
Ratios to Average Net Assets/Supplemental Data: | |||||||||||||||||||||||||
Net Assets, End of Period (000’s) | $ | 806,642 | $ | 872,062 | $ | 865,626 | $ | 861,070 | $ | 901,771 | |||||||||||||||
Net Investment Income/(Loss) | — | — | — | — | 0.22 | % | |||||||||||||||||||
Expenses Before Reductions(c) | 0.65 | % | 0.66 | % | 0.66 | % | 0.70 | % | 0.69 | % | |||||||||||||||
Expenses Net of Reductions(d) | 0.22 | % | 0.29 | % | 0.28 | % | 0.33 | % | 0.59 | % |
(a) | Represents less than $0.005. |
(b) | The returns include reinvested dividends and fund level expenses, but exclude insurance contract charges. If these charges were included, the returns would have been lower. |
(c) | Excludes fee reductions. If such fee reductions had not occurred, the ratios would have been as indicated. |
(d) | The expense ratio for the period reflects the reduction of certain expenses to maintain a certain minimum yield. |
See accompanying notes to the financial statements.
9
AZL Money Market Fund
Notes to the Financial Statements
December 31, 2013
1. Organization
The Allianz Variable Insurance Products Trust (the “Trust”) was organized as a Delaware statutory trust on July 13, 1999. The Trust is a diversified open-end management investment company registered under the Investment Company Act of 1940. The Trust consists of 29 separate investment portfolios (collectively, the “Funds”), of which one is included in this report, the AZL Money Market Fund (the “Fund”), and 28 are presented in separate reports.
The Trust is authorized to issue an unlimited number of shares of the Fund without par value. Shares of the Fund are available through the variable annuity contracts and variable life insurance policies offered through the separate accounts of participating insurance companies.
Under the Trust’s organizational documents, its officers and trustees are indemnified against certain liabilities arising out of the performance of their duties to the Fund. In addition, in the normal course of business, the Fund may enter into contracts with its vendors and others that provide for general indemnifications. The Fund’s maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Fund. However, based on experience, the Fund expects the risk of loss to be remote.
2. Significant Accounting Policies
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. The policies conform with U.S. generally accepted accounting principles (“U.S. GAAP”). The preparation of financial statements requires management to make certain 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 increases and decreases in net assets from operations during the reporting period. Actual results could differ from those estimates.
Security Valuation
The Fund records its investments at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between willing market participants at the measurement date. The valuation techniques used to determine fair value are further described in Note 4 below. Investments of the Fund are valued, in accordance with Rule 2a-7 of the 1940 Act, at amortized cost, which approximates fair value. Under the amortized cost method, discounts or premiums are amortized on a constant basis to the maturity of the security.
Investment Transactions and Investment Income
Investment transactions are recorded not later than on the business day following trade date. However, for financial reporting purposes, investment transactions are accounted for on trade date. Net realized gains and losses on investments sold and on foreign currency transactions are recorded on the basis of identified cost. Interest income is recorded on the accrual basis and includes, where applicable, the amortization of premiums or accretion of discounts.
Dividends to Shareholders
Dividends from net investment income are declared daily and paid monthly from the Fund. The net realized gains, if any, are declared and paid at least annually by the Fund. The amount of dividends from net investment income and from net realized gains is determined in accordance with federal income tax regulations, which may differ from U.S. GAAP. These “book/tax” differences are either temporary or permanent in nature. To the extent these differences are permanent in nature (e.g., return of capital, net operating loss, reclassification of certain market discounts, gain/loss, paydowns, and distributions), such amounts are reclassified within the composition of net assets based on their federal tax-basis treatment; temporary differences (e.g., wash sales and post October losses) do not require reclassification. Dividends to shareholders that exceed net investment income and net realized gains for tax purposes are reported as distributions of capital.
Expense Allocation
Expenses directly attributable to the Fund are charged directly to the Fund, while expenses attributable to more than one Fund are allocated among the respective Funds based upon relative net assets or some other reasonable method. Expenses which are attributable to more than one Trust are allocated across the Allianz Variable Insurance Products and Allianz Variable Insurance Products Fund of Funds Trusts based upon relative net assets or another reasonable basis. Allianz Investment Management LLC (the “Manager”), serves as the investment manager for the Trust and the Allianz Variable Insurance Products Fund of Funds Trust.
3. Related Party Transactions
The Manager provides investment advisory and management services for the Fund. The Manager has retained an independent money management organization (the “Subadviser”), to make investment decisions on behalf of the Fund. Pursuant to a subadvisory agreement with BlackRock Advisors, LLC (“BlackRock Advisors”), BlackRock Advisors provides investment advisory services as the Subadviser for the Fund subject to the general supervision of the Trustees and the Manager. The Manager is entitled to a fee, computed daily and paid monthly, based on the average daily net assets of the Fund. Expenses incurred by the Fund for investment advisory and management services are reflected on the Statement of Operations as “Manager fees.” For its services, the Subadviser is entitled to a fee payable by the Manager. The Manager has contractually agreed to waive fees and reimburse the Fund to limit the annual expenses, excluding interest expense (e.g., cash overdraft fees), taxes, brokerage commissions, other expenditures that are capitalized in accordance with U.S. GAAP and other extraordinary expenses not incurred in the ordinary course of the Fund’s business, based on the daily net assets of the Fund, through April 30, 2015.
For the year ended December 31, 2013, the annual rate due to the Manager and the annual expense limit were as follows:
Annual Rate | Annual Expense Limit | |||||||||
AZL Money Market Fund | 0.35 | % | 0.87 | % |
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AZL Money Market Fund
Notes to the Financial Statements
December 31, 2013
The Manager has voluntarily agreed to waive, reimburse, or pay Fund expenses to the extent necessary in order to maintain a minimum daily net investment income for the Fund of 0.00%. The Distributor may waive its Rule 12b-1 fees. The amount waived, reimbursed, or paid by the Manager and/or the Distributor will be repaid to the Manager and/or the Distributor subject to the following limitations:
1. The repayments will not cause the Fund’s net investment income to fall below 0.00%.
2. The repayments must be made no later than three years after the end of the fiscal year in which the waiver, reimbursement, or payment took place.
3. Any expense recovery paid by the Fund will not cause its expense ratio to exceed 0.87%
The ability of the Manager and/or Distributor to receive such payments could negatively affect the Fund’s future yield. Amounts waived under this agreement during the year ended December 31, 2013 are reflected on the Statement of Operations as “Expenses voluntarily waived/reimbursed by the Manager.”
Any amounts waived or reimbursed by the Manager in a particular fiscal year will be subject to repayment by the Fund to the Manager to the extent that from time to time through the next three fiscal years the repayment will not cause the Fund’s expenses to exceed the lesser of the stated limit at the time of the waiver or the current stated limit. Any amounts recouped by the Manager during the year are reflected on the Statement of Operations as “Recoupment of prior expenses reimbursed by the Manager.”
At December 31, 2013, the reimbursements that are subject to repayment by the Fund in subsequent years were as follows:
Expires 12/31/2014 | Expires 12/31/2015 | Expires 12/31/2016 | Total | |||||||||||||||||
AZL Money Market Fund | $ | 3,319,064 | $ | 3,224,807 | $ | 3,766,211 | $ | 10,310,082 |
In addition, the Manager may voluntarily waive or reimburse additional fees in order to maintain more competitive expense ratios. Any voluntary waivers or reimbursements are not subject to repayment in subsequent years. Information on the total amount waived/reimbursed by the Manager or repaid to the Manager by the Fund during the year can be found on the Statement of Operations. During the year ended December 31, 2013, there were no voluntary waivers in addition to the amounts disclosed above.
Pursuant to separate agreements between the Funds and the Manager, the Manager provides a Chief Compliance Officer (“CCO”) and certain compliance oversight and regulatory filing services to the Trust. Under these agreements the Manager is entitled to an amount equal to a portion of the compensation and certain other expenses related to the individuals performing the CCO and compliance oversight services, as well as $75 per hour for time incurred in connection with the preparation and filing of certain documents with the Securities and Exchange Commission. The fees are paid to the Manager on a quarterly basis. The total expenses incurred by the Fund for these services are reflected on the Statement of Operations as “Administrative and compliance services fees.”
Citi Fund Services Ohio, Inc. (“Citi” or the “Administrator”), a wholly owned subsidiary of Citigroup, Inc., with which an officer of the Trust is affiliated, serves as the Trust’s administrator, transfer agent, and fund accountant, and assists the Trust in all aspects of its administration and operation. The Administrator is entitled to a Trust-wide asset-based fee, which is based on the following schedule: 0.05% of daily average net assets on the first $4 billion, 0.04% of daily average net assets on the next $2 billion, 0.02% of daily average net assets on the next $2 billion and 0.01% of daily average net assets over $8 billion. The overall Trust-wide fees are accrued daily and paid monthly and are subject to a minimum annual fee. In addition, the Administrator is entitled to annual account fees related to the transfer agency system, an annual fee for each additional class of shares of any Fund, certain annual fees in supporting fair value services, and a Trust-wide annual fee for providing infrastructure and support in implementing the written policies and procedures comprising the Fund’s compliance program. Fees payable to the Administrator are subject to certain reductions associated with services provided to new funds. The Administrator is also reimbursed for certain expenses incurred. The total expenses incurred by the Fund for these services are reflected on the Statement of Operations as “Administration fees.”
Allianz Life Financial Services, LLC (“ALFS”), an affiliate of the Manager, serves as distributor of the Fund and receives 12b-1 fees directly from the Fund, plus a Trust-wide annual fee of $42,500, paid by the Manager from its profits and not by the Trust, for recordkeeping and reporting services.
The Trust has adopted a distribution and service plan in conformance with Rule 12b-1 of the 1940 Act. Pursuant to this plan, the Fund is authorized to pay certain fees for the sale and distribution of its shares and services provided to its shareholders at an annual rate not to exceed 0.25% of the Fund’s average daily net assets. These fees are reflected on the Statement of Operations as “Distribution fees.”
In addition, certain legal fees and expenses are paid to a law firm, Dorsey & Whitney LLP, of which the Secretary of the Fund is a partner. During the year ended December 31, 2013, $11,432 was paid from the Fund relating to these fees and expenses.
Certain Officers and Trustees of the Trust are affiliated with the Manager or the Administrator. Such Officers (except for the Trust’s CCO as noted above) and Trustees receive no compensation from the Trust for serving in their respective roles. For their service to the Trust and to the Allianz Variable Insurance Products Fund of Funds Trust, each non-interested Trustee receives a $139,000 annual Board retainer. In addition, the Trustees are reimbursed for certain expenses associated with attending Board meetings. Compensation to the Trustees is allocated between the Trust and the Allianz Variable Insurance Products Fund of Funds Trust in proportion to the assets under management of each trust. During the year ended December 31, 2013, actual Trustee compensation was $973,000 in total for both trusts.
At a meeting of the Board of Trustees on December 4, 2013, the Trustees approved a fee increase to the Officers and Trustees who are paid a fee for their services to the Trust and to the Allianz Variable Insurance Products Fund of Funds Trust. Effective January 1, 2014, each non-interested Trustee will receive a $163,000 annual retainer.
4. Investment Valuation Summary
The valuation techniques employed by the Fund, as described below, maximize the use of observable inputs and minimize the use of unobservable inputs in determining fair value. The inputs used for valuing the Fund’s investments are summarized in the three broad levels listed below:
— | Level 1 — quoted prices in active markets for identical assets |
— | Level 2 — other significant observable inputs (including quoted prices for similar securities, interest rates, prepayments speeds, credit risk, etc.) |
— | Level 3 — significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of investments) |
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AZL Money Market Fund
Notes to the Financial Statements
December 31, 2013
Changes in valuation techniques may result in transfers in or out of an assigned level within the disclosure hierarchy. The Fund determines transfers between fair value hierarchy levels at the reporting period end. The inputs or methodology used for valuing investments is not necessarily an indication of the risk associated with investing in those investments.
For the year ended December 31, 2013, there were no Level 3 investments for which significant unobservable inputs were used to determine fair value.
The following is a summary of the valuation inputs used as of December 31, 2013 in valuing the Fund’s investments based upon the three levels defined above:
Investment Securities: | Level 1 | Level 2 | Total | ||||||||||||
Certificates of Deposit+ | $ | — | $ | 318,112,594 | $ | 318,112,594 | |||||||||
Commercial Paper | |||||||||||||||
Diversified Financial Services | — | 239,789,139 | 239,789,139 | ||||||||||||
All Other Commercial Paper+ | — | 88,993,899 | 88,993,899 | ||||||||||||
Municipal Bonds | — | 82,500,000 | 82,500,000 | ||||||||||||
U.S. Treasury Obligations | — | 77,145,879 | 77,145,879 | ||||||||||||
Unaffiliated Investment Company | 34,951,573 | — | 34,951,573 | ||||||||||||
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Total Investment Securities | $ | 34,951,573 | $ | 806,541,511 | $ | 841,493,084 | |||||||||
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+ | For detailed industry descriptions, see the accompanying Schedule of Portfolio Investments. |
5. Federal Tax Information
It is the Fund’s policy to continue to comply with the requirements of the Internal Revenue Code under Subchapter M, applicable to regulated investment companies, and to distribute all of its taxable income, including any net realized gains on investments, to its shareholders. Therefore, no provision is made for federal income taxes.
Management of the Fund has reviewed tax positions taken in tax years that remain subject to examination by all major tax jurisdictions, including federal (i.e., the last four tax year ends and the interim tax period since then, as applicable). Management believes that there is no tax liability resulting from unrecognized tax benefits related to uncertain tax positions taken.
The tax character of dividends paid to shareholders during the year ended December 31, 2013 were as follows:
Ordinary Income | Net Long-Term Capital Gains | Total Distributions(a) | |||||||||||||
AZL Money Market Fund | $ | 17,239 | $ | — | $ | 17,239 |
(a) | Total distributions paid may differ from the Statements of Changes in Net Assets because dividends are recognized when actually paid for tax purposes. |
The tax character of dividends paid to shareholders during the year ended December 31, 2012 was as follows:
Ordinary Income | Net Long-Term Capital Gains | Total Distributions(a) | |||||||||||||
AZL Money Market Fund | $ | 7,455 | $ | — | $ | 7,455 |
(a) | Total distributions paid may differ from the Statements of Changes in Net Assets because dividends are recognized when actually paid for tax purposes. |
As of December 31, 2013, the components of accumulated earnings on a tax basis were as follows:
Undistributed Ordinary Income | Undistributed Long-Term Capital Gains | Accumulated Capital and Other Losses | Unrealized Appreciation/ | Total Earnings/ (Deficit) | |||||||||||||||||||||
AZL Money Market Fund | $ | 53,307 | $ | 3,157 | $ | — | $ | — | $ | 56,464 |
6. Subsequent Events
Management has evaluated events and transactions subsequent to period end through the date the financial statements were issued, for purposes of recognition or disclosure in these financial statements and there are no subsequent events to report.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Shareholders and Board of Trustees of
Allianz Variable Insurance Products Trust:
We have audited the accompanying statement of assets and liabilities of AZL Money Market Fund (the “Fund”) of the Allianz Variable Insurance Products Trust, including the schedule of portfolio investments, as of December 31, 2013, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the years in the two-year period then ended, and the financial highlights for each of the years in the five-year period then ended. These financial statements and financial highlights are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of December 31, 2013, by correspondence with the custodian. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of the Fund as of December 31, 2013, the results of its operations for the year then ended, the changes in its net assets for each of the years in the two-year period then ended, and the financial highlights for each of the years in the five-year period then ended, in conformity with U.S. generally accepted accounting principles.
/s/ KPMG LLP
Columbus, Ohio
February 25, 2014
13
Other Federal Income Tax Information (Unaudited)
During the year ended December 31, 2013, the Fund declared net short-term capital gain distributions of $17,239.
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A description of the policies and procedures that the Fund uses to determine how to vote proxies relating to portfolio securities is available, without charge, upon request, by visiting the Securities and Exchange Commission’s (“Commission”) website at www.sec.gov, or by calling 800-624-0197.
Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30th is available (i) without charge, upon request, by calling 800-624-0197; (ii) on the Allianz Variable Insurance Products Trust’s website at https://www.allianzlife.com; and (iii) on the Commission’s website at http://www.sec.gov.
The Fund files complete Schedules of Portfolio Holdings with the Commission for the first and third quarters of each fiscal year on Form N-Q. Schedules of Portfolio Holdings for the Fund in this report are available without charge on the Commission’s website at http://www.sec.gov, or may be reviewed and copied at the Commission’s Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 800-SEC-0330.
The Fund will disclose on its website at www.Allianzlife.com, within five business days after the end of each month, a complete schedule of portfolio holdings and information regarding the weighted average maturity of the Fund. In addition, the Fund will file with the Commission on Form N-MFP, within five business days after the end of each month, more detailed portfolio holdings information. The Fund’s Forms N-MFP will be available on the Commission’s website at http://www.sec.gov, on a delayed basis, and the Fund’s website will also contain a link to these filings.
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Approval of Investment Advisory and Subadvisory Agreements (Unaudited)
The Allianz Variable Insurance Products Trust (the “Trust”) is a manager-of-managers fund. That means that the Trust’s Manager (“Allianz Investment Management LLC”) is responsible for monitoring the various Subadvisers that have day-to-day responsibility for the decisions made for each of the Trust’s investment portfolios. The Trust’s Manager is responsible for determining, in the first instance, which investment advisers to consider recommending for selection as a Subadviser.
In reviewing the services provided by the Manager and the terms of the investment management agreement, the Board receives and reviews information related to the Manager’s experience and expertise in the variable insurance marketplace. Currently, the Funds are offered only through variable annuities and variable life insurance policies, and not in the retail fund market. In addition, the Board receives information regarding the Manager’s expertise with regard to portfolio diversification and asset allocation requirements within variable insurance products issued by Allianz Life Insurance Company of North America and its subsidiary, Allianz Life Insurance Company of New York. Currently, the Funds are offered only through Allianz Life and Allianz of New York variable products.
The Trust’s Manager has adopted policies and procedures to assist it in the process of analyzing each potential Subadviser with expertise in particular asset classes for purposes of making the recommendation that a specific investment adviser be selected. The Trust’s Board reviews and considers the information provided by the Manager in deciding which investment advisers to select. After an investment adviser becomes a Subadviser, a similarly rigorous process is instituted by the Manager to monitor the investment performance and other responsibilities of the Subadviser. The Manager reports to the Trust’s Board on its analysis at the regular meetings of the Board, which are held at least quarterly. Where warranted, the Manager will add or remove a particular Subadviser from a “watch” list that it maintains. Watch list criteria include, for example: (a) Fund performance over various time periods; (b) Fund risk issues, such as changes in key personnel involved with Fund management, changes in investment philosophy or process, or “capacity” concerns; and (c) organizational risk issues, such as regulatory, compliance or legal concerns, or changes in the ownership of the Subadviser. The Manager may place a Fund on the watch list for other reasons, and if so, will explain its rationale to the Trustees. Funds which are on the watch list are subject to special scrutiny of the Manager and the Board of Trustees. Funds may be removed from such watch list, if for example, performance improves or regulatory matters are satisfactorily resolved. However, in some situations where Funds which have been on the watch list, the Manager has recommended the retention of a new Subadviser, and the Board of Trustees has subsequently approved new Subadvisory Agreements with such Subadvisers.
In assessing the Manager’s and Subadvisers’ (collectively, the “Advisory Organizations”), performance of their obligations, the Board considers whether there has occurred a circumstance or event that would constitute a reason for it to not renew an advisory contract. In this regard, the Board is mindful of the potential disruption of a Fund’s operations and various risks, uncertainties and other effects that could occur as a result of a decision to terminate or not renew a contract.
As required by the Investment Company Act of 1940 (“1940 Act”), the Trust’s Board has reviewed and approved the Trust’s Investment Management Agreement with the Manager (the “Advisory Agreement”) and portfolio management agreements (the “Subadvisory Agreements”) with the Subadvisers. The Board’s decision to approve these contracts reflects the exercise of its business judgment on whether to approve new arrangements and continue the existing arrangements. During its review of these contracts, the Board considers many factors, among the most material of which are: the Fund’s investment objectives and long term performance; the Advisory Organizations’ management philosophy, personnel, and processes, including their compliance history and the adequacy of their compliance processes; the preferences and expectations of Fund shareholders (and underlying contract owners) and their relative sophistication; the continuing state of competition in the mutual fund industry; and comparable fees in the mutual fund industry.
The Board also considers the compensation and benefits received by the Advisory Organizations. This includes fees received for services provided to the Fund by affiliated persons of the Advisory Organizations and research services received by the Advisory Organizations from brokers that execute Fund trades, as well as advisory fees. The Board considered the fact that: (1) the Manager and the Trust are parties to an Administrative Service Agreement, a Compliance Services Agreement, and a Chief Compliance Officer Agreement, under which the Manager is compensated by the Trust for performing certain administrative and compliance services including providing an employee of the Manager or one of its affiliates to act as the Trust’s Chief Compliance Officer; and (2) Allianz Life Financial Services, LLC, an affiliated person of the Manager, is a registered securities broker-dealer and receives (along with its affiliated persons) payments made by the Trust pursuant to Rule 12b-1.
The Board is aware that various courts have interpreted provisions of the 1940 Act and have indicated in their decisions that the following factors may be relevant to an adviser’s compensation: the nature and quality of the services provided by the adviser, including the performance of the fund; the adviser’s cost of providing the services; the extent to which the adviser may realize “economies of scale” as the fund grows larger; any indirect benefits that may accrue to the adviser and its affiliates as a result of the adviser’s relationship with the fund; performance and expenses of comparable funds; and the extent to which the independent Board members are fully informed about all facts bearing on the adviser’s service and fee. The Trust’s Board is aware of these factors and takes them into account in its review of the Trust’s advisory contracts.
The Board considered and weighed these circumstances in light of its experience in governing the Trust and working with the Advisory Organizations on matters relating to the Funds, and is assisted in its deliberations by the advice of legal counsel to the Independent Trustees. In this regard, the Board requests and receives a significant amount of information about the Funds and the Advisory Organizations. Some of this information is provided at each regular meeting of the Board; additional information is provided in connection with the particular meeting or meetings at which the Board’s formal review of an advisory contract occurs. In between regularly scheduled meetings, the Board may receive information on particular matters as the need arises. Thus, the Board’s evaluation of an advisory contract is informed by reports covering such matters as: an Advisory Organization’s investment philosophy, personnel, and processes; the Fund’s short- and long-term performance (in absolute terms as well as in relationship to its benchmark(s), certain competitor or “peer group” funds and similar funds managed by the particular Subadviser), and comments on the reasons for performance; the Fund’s expenses (including the advisory fee itself and the overall expense structure of the Fund, both in absolute terms and relative to similar and/or competing funds, with due regard for contractual or voluntary expense limitations); the use and allocation of brokerage commissions derived from trading the Fund’s portfolio securities; the nature and extent of the advisory and other services provided to the Fund by the Advisory Organizations and their affiliates; compliance and audit reports concerning the Funds and the companies that service them; and relevant developments in the mutual fund industry and how the Funds and/or Advisory Organizations are responding to them.
The Board also receives financial information about Advisory Organizations, including reports on the compensation and benefits the Advisory Organizations derive from their relationships with the Funds. These reports cover not only the fees under the advisory contracts, but also fees, if any, received for providing other services to the Funds. The reports also discuss any indirect or “fall out” benefits an Advisory Organization may derive from its relationship with the Funds.
The Advisory and Subadvisory Agreements (collectively, the “Agreements”) were most recently considered at Board of Trustees meetings held in the fall of 2013. Information relevant to the approval of such Agreements was considered at a telephonic Board of Trustees meeting on October 16, 2013, and at an “in person” Board of Trustees meeting held October 22, 2013. The Agreements were approved at the Board meeting of October 22, 2013. At such meeting the Board also approved an Expense Limitation Agreement between the Manager and the Trust for the period ending April 30, 2015. In connection with such meetings, the Trustees requested and evaluated extensive materials from the Manager, including performance and expense information for other investment companies with similar investment objectives derived from data compiled by an independent third party provider and other sources believed to be reliable by the Manager. Prior to voting, the Trustees reviewed the proposed approval/continuance of the Agreements with management and with experienced counsel who are independent of the Manager and received a memorandum from such counsel discussing the legal standards for their consideration of the proposed approvals/continuances. The independent (“disinterested”) Trustees also discussed the proposed approvals/continuances in a private session with such counsel at which no representatives of the Manager were present. In reaching their determinations relating to the approval and/or continuance of
16
the Agreements, in respect of each Fund, the Trustees considered all factors they believed relevant. The Board based its decision to approve the Agreements on the totality of the circumstances and relevant factors, and with a view to past and future long-term considerations. Not all of the factors and considerations discussed above and below are necessarily relevant to every Fund, and the Board did not assign relative weights to factors discussed herein or deem any one or group of them to be controlling in and of themselves.
An SEC Rule requires that shareholder reports include a discussion of certain factors relating to the selection of investment advisers and the approval of advisory fees. The “factors” enumerated by the SEC are set forth below in italics, as well as the Board’s conclusions regarding such factors:
(1) The nature, extent and quality of services provided by the Manager and Subadvisers. The Trustees noted that the Manager, subject to the control of the Board of Trustees, administers each Fund’s business and other affairs. Under the Advisory Agreement, the Manager holds the sole and exclusive responsibility to provide, or arrange for other to provide, the management of the Funds’ assets and the placement of orders for the purchase and sale of the securities of the Funds. As the Trust is a manager of managers fund, the Manager is authorized, under the Advisory Agreement, to retain one or more Subadvisers for each Fund to handle day-to-day management of the Funds’ investment portfolios; the Manager is responsible for determining, in the first instance, which investment advisers to recommend to the Board of Trustees for selection as a Subadviser. The Trustees were aware that, notwithstanding the retention of the Subadvisers to handle day-to-day portfolio management, the Manager remains responsible for substantial other matters, including continuously monitoring compliance by each Subadviser with the investment policies and restrictions of the respective Funds, with such other limitations or directions of the Board of Trustees, and with all legal requirements under federal or state law or regulation. The Manager also is responsible primarily to provide statistical information and other data to the Trustees regarding the Funds’ portfolio investments and to make available to the Funds’ administrator such information as is necessary for the conduct of its duties.
The Trustees also noted that the Manager provides the Trust and each Fund with such administrative and other services (exclusive of, and in addition to, any such services provided by any others retained by the Trust on behalf of the Funds) and executive and other personnel as are necessary for the operation of the Trust and the Funds. Except for the Trust’s Chief Compliance Officer, the Manager pays all of the compensation of Trustees and officers of the Trust who are employees of the Manager or its affiliates.
The Trustees considered the scope and quality of services provided by the Manager and the Subadvisers and noted that the scope of such services provided had expanded as a result of recent regulatory and other developments. The Trustees noted that, for example, the Manager and Subadvisers are responsible for maintaining and monitoring their own compliance programs, and these compliance programs are continuously refined and enhanced in light of new regulatory requirements. The Trustees considered the capabilities and resources which the Manager has dedicated to performing services on behalf of the Trust and its Funds. The quality of administrative and other services, including the Manager’s role in coordinating the activities of the Trust’s other service providers, also were considered. The Trustees concluded that, overall, they were satisfied with the nature, extent and quality of services provided (and expected to be provided) to the Trust and to each of the Funds under the Agreements.
(2) The investment performance of the Funds, the Manager and the Subadvisers. In connection with every in-person quarterly Board of Trustees meeting, Trustees receive extensive information on the performance results of each of the Funds. This includes, for example, performance information on all of the Funds for the previous quarter, and previous one, three and five-year periods, and since inception. (For Funds which have been in existence for less than five years, Trustees may receive performance information on comparable funds managed by the particular Subadviser for periods prior to the creation of a particular Fund.) Such performance information includes information on absolute total return, performance versus Subadvisers’ comparable fund(s), performance versus the appropriate benchmark(s), and performance versus peer groups. For example, in connection with the Board of Trustees meetings held September 10-11, 2013, the Manager reported that for the three year period ended June 30, 2013, 12 Funds were in the top 40%, eight were in the middle 20% and eight were in the bottom 40%, and for the one year period ended June 30, 2013, 8 Funds were in the top 40%, seven were in the middle 20%, and 14 were in the bottom 40%. The Manager also reported that for the five year period ended June 30, 2013, 10 Funds were in the top 40%, four were in the middle 20%, and six were in the bottom 40%. At the Board of Trustees meeting held October 22, 2013, the Trustees determined that the overall investment performance of the Funds was acceptable.
(3) The costs of services to be provided and profits to be realized by the Manager and the Subadvisers and their affiliates from their relationship with the Funds. The Manager has supplied information to the Board of Trustees pertaining to the level of investment advisory fees to which the Funds are subject. The Manager has agreed to temporarily “cap” Fund expenses at certain levels, and information is provided to Trustees setting forth “contractual” advisory fees and “actual” fees after taking expense caps into account. Based upon the information provided, the “actual” advisory fees payable by the Funds overall are generally comparable to the average level of fees paid by Fund peer groups. For the 30 Funds reviewed by the Board of Trustees in the fall of 2013, 27 Funds paid “actual” advisory fees in a percentage amount within the 65th percentile or lower for each Fund’s applicable category. The Trustees recognized that it is difficult to make comparisons of advisory fees because there are variations in the services that are included in the fees paid by other funds. The Board has concluded that the advisory fees to be paid to the Manager by the Funds are not unreasonable.
The Manager has also supplied information to the Board of Trustees pertaining to total Fund expenses (which includes advisory fees, the 25 basis point 12b-1 fee paid by the Funds, and other Fund expenses). As noted above, the Manager has agreed to “cap” Fund expenses at certain levels. Based upon the information provided, the overall total expense ratio ranking in 2013 for the 30 Funds was as follows: (1) 28 of the Funds had total expense rankings below the 65th percentile (with 20 Funds at or below the 50th percentile); (2) the AZL Russell 1000 Value Fund had a total expense ranking in the 66th percentile; the Manager reported that there is only a limited peer group for such Fund; and (3) the AZL Morgan Stanley Global Real Estate Fund had a total expense ranking in the 72nd percentile; it was reported by the Manager that there is only a limited peer group for such Fund, such Fund’s expense ratio has declined, and such Fund’s expense ratio is comparable to funds of similar size.
The Manager has committed to providing the Funds with a high quality of service and working to reduce Fund expenses over time, particularly as the Funds grow larger. The Trustees concluded therefore that the expense ratios of the Funds were not unreasonable.
The Manager provided information concerning the profitability of the Manager’s investment advisory activities for the period from 2011 through June 30, 2013. The Trustees recognized that it is difficult to make comparisons of profitability from investment company advisory agreements because comparative information is not generally publicly available and is affected by numerous factors, including the structure of the particular adviser, the types of funds it manages, its business mix, numerous assumptions regarding allocation of expenses and the adviser’s capital structure and cost of capital. In considering profitability information, the Trustees considered the possible effect of certain fall-out benefits to the Manager and its affiliates. The Trustees focused on profitability of the Manager’s relationships with the Funds before taxes and distribution expenses. The Trustees recognized that the Manager should, in the abstract, be entitled to earn a reasonable level of profits for the services it provides to each Fund and, based on their review, concluded that they were satisfied that the Manager’s level of profitability from its relationship with the Funds was not excessive.
The Manager, on behalf of the Board of Trustees, endeavored to obtain information on the profitability of each Subadviser in connection with its relationship with the Fund or Funds which it subadvises. The Manager was unable to obtain meaningful profitability information from some of the unaffiliated Subadvisers. The Manager assured the Board of Trustees that the Agreements with the Subadvisers which are not affiliated with it were negotiated on an “arm’s length” basis, so that arguably, such profitability information should be less relevant. The Trustees were also provided with certain information on the profitability for the Subadviser which is affiliated with the Manager. Trustees recognized the difficulty of allocating costs to multiple advisory accounts and products of a large advisory organization. Based upon the information provided, the Trustees determined that there was no evidence that the level of such profitability attributable to subadvising the Funds was excessive.
17
(4) and (5) The extent to which economies of scale would be realized as the Funds grow, and whether fee levels reflect these economies of scale. The Trustees noted that most of the advisory fee schedules for the Funds do not contain breakpoints that reduce the fee rate on assets above specified levels, although certain Subadvisory Agreements have such “breakpoints.” The Trustees recognized that breakpoints may be an appropriate way for the Manager to share its economies of scale, if any, with Funds that have substantial assets. However, they also recognized that there may not be a direct relationship between any economies of scale realized by Funds and those realized by the Manager as assets increase. The Trustees do not believe there is a uniform methodology for establishing breakpoints that give effect to Fund-specific service provided by the Manager. The Trustees noted that in the fund industry as a whole, as well as among funds similar to the Funds, there is no uniformity or pattern in the fees and asset levels at which breakpoints (if any) apply. Depending on the age, size, and other characteristics of a particular fund and its manager’s cost structure, different conclusions can be drawn as to whether there are economies of scale to be realized at any particular level of assets, notwithstanding the intuitive conclusion that such economies exist, or will be realized at some level of total assets. Moreover, because different managers have different cost structures and service models, it is difficult to draw meaningful conclusions from the breakpoints that may have been adopted by other funds. The Trustees also noted that the advisory agreements for many funds do not have breakpoints at all, or if breakpoints exist, they may be at asset levels significantly greater than those of the individual Funds. The Trustees also noted that the total assets in all of the Funds as of June 30, 2013 were approximately $12.85 billion, and that no single non-money market Fund had assets in excess of $616 million.
The Trustees noted that the Manager has agreed to temporarily “cap” Fund expenses at certain levels, which has the effect of reducing expenses as would the implementation of advisory fee breakpoints. The Manager has committed to continue to consider the continuation of fee “caps” and/or advisory fee breakpoints as the Funds grow larger. The Board receives quarterly reports on the level of Fund assets. It expects to consider whether or not to approve the Agreements at a meeting to be held prior to December 31, 2014, and will at that time, or prior thereto, consider: (a) the extent to which economies of scale can be realized, and (b) whether the advisory fee should be modified to reflect such economies of scale, if any.
Having taken these factors into account, the Trustees concluded that the absence of breakpoints in certain of the Funds’ advisory fee rate schedules was acceptable under each Fund’s circumstances.
18
Information about the Board of Trustees and Officers (Unaudited)
The Trust is managed by the Trustees in accordance with the laws of the state of Delaware governing business trusts. There are currently eight Trustees, two of whom are “interested persons” of the Trust within the meaning of that term under the 1940 Act. The Trustees and Officers of the Trust, their addresses, ages, their positions held with the Trust, their terms of office with the Trust and length of time served, their principal occupation(s) during the past five years, the number of portfolios in the Trust they oversee, and their other directorships held are as follows:
Non-Interested Trustees(1)
Name, Address, and Age | Positions Held with VIP Trust and FOF Trust | Term of Office(2)/Length of Time Served | Principal Occupation(s) During Past 5 Years | Number of Portfolios Overseen for VIP Trust and FOF Trust | Other Directorships Held Outside the AZL Fund Complex | |||||
Peter R. Burnim, Age 66 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/07 | Chairman, Argus Investment Strategies Fund Ltd., February 2013 to present; Managing Director, iQ Venture Advisors, LLC. 2005 to 2012; Chairman, Northstar Group Holdings Ltd. Bermuda, 2011 to present; Expert Witness, Massachusetts Department of Revenue, 2011 to 2012; Executive Vice President, Northstar Companies, 2002 to 2005; Senior Officer, Citibank and Citicorp for over 25 years | 41 | Argus Group Holdings; Northstar Group Holdings, NRIL, Sterling Centrecorp Inc.; Highland Financial Holdings; and Bank of Bermuda NY | |||||
Peggy L. Ettestad, Age 56 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/07 | Managing Director, Red Canoe Management Consulting LLC, 2008 to present; Senior Managing Director, Residential Capital LLC, 2003 to 2008; Chief Operations Officer, Transamerica Reinsurance 2002 to 2003 | 41 | Luther College | |||||
Roger Gelfenbien, Age 70 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 10/99 | Retired; Partner of Accenture 1983 to 1999 | 41 | Virtus Funds (8 Funds) | |||||
Claire R. Leonardi, Age 58 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/04 | Chief Executive Officer, Connecticut Innovations, Inc., 2012 to present; General Partner, Fairview Capital, L.P., 1994 to 2012 | 41 | The Natural History Museum of the Adirondacks | |||||
Dickson W. Lewis, Age 65 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/04 | Retired; Consultant to Lifetouch National School Studios; Vice President/General Manager, Yearbooks & Canada-Lifetouch National School Studios, 2006 to 2013; Vice President/General Manager of Jostens, Inc., 2002 to 2006; Senior Vice President of Fortis Group, 1997 to 2002 | 41 | None | |||||
Peter W. McClean, Age 69 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/04 | Retired; President and CEO of Measurisk, LLC, 2001 to 2003; Chief Risk Management Officer at Bank of Bermuda Ltd., 1996 to 2001 | 41 | PNMAC Opportunity Fund; Northeast Bank; and FHI | |||||
Arthur C. Reeds III, Age 69 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 10/99 | Retired; Senior Investment Officer, Hartford Foundation for Public Giving, 2000 to 2003; Chairman, Chief Executive and President of Conning Corp., 1999 to 2000; Investment Consultant, 1997 to 1999 | 41 | Connecticut Water Service, Inc. |
Interested Trustees(3)
Name, Address, and Age | Positions Held with VIP Trust and FOF Trust | Term of Office(2)/Length of Time Served | Principal Occupation(s) During Past 5 Years | Number of Portfolios Overseen for VIP Trust and FOF Trust | Other Directorships Held Outside the AZL Fund Complex | |||||
Robert DeChellis, Age 46 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 3/08 | President and CEO, Allianz Life Financial Services, LLC, 2007 to present | 41 | None | |||||
Brian Muench, Age 43 5701 Golden Hills Drive | Trustee | Since 6/11 | President, Allianz Investment Management LLC, November 2010 to present; Vice President, Allianz Life, April 2011 to present; Vice President, Advisory Management, Allianz Investment Management LLC from December 2005 to November 2010 | 41 | None |
19
Officers
Name, Address, and Age | Positions Held with VIP and VIP FOF Trust | Term of Office(2)/Length of Time Served | Principal Occupation(s) During Past 5 Years | |||
Brian Muench, Age 43 5701 Golden Hills Drive Minneapolis, MN 55416 | President | Since 11/10 | President, Allianz Investment Management LLC from November 2010, to present; Vice President, Allianz Life from April 2011 to present; Vice President, Allianz Investment Management LLC from December 2005 to November 2010. | |||
Michael Radmer, Age 68 Dorsey & Whitney LLP, Suite 1500 50 South Sixth Street Minneapolis, MN 55402-1498 | Secretary | Since 2/02 | Partner, Dorsey and Whitney LLP since 1976. | |||
Ty Edwards, Age 47 Citi Fund Services Ohio, Inc. 3435 Stelzer Road Columbus, OH 43219 | Treasurer, Principal Accounting Officer and Principal Financial Officer | Since 4/10 | Senior Vice President, Financial Administration, Citi Fund Services Ohio, Inc., December 2009 to present; Director, Product Management, Columbia Management, April 2007 to April 2009; Deputy Treasurer, Columbia Funds and Director, Fund Administration, Columbia Management, January 2006 to April 2007. | |||
Christopher R. Pheiffer, Age 45(4) 5701 Golden Hills Drive Minneapolis, MN 55416 | Chief Compliance Officer(5) and Anti-Money Laundering Compliance Officer | Since 2/14 (interim) | Deputy Chief Compliance Officer of the Trusts, 2007-2014 |
(1) | Member of the Audit Committee. |
(2) | Indefinite. |
(3) | Is an “interested person”, as defined by the 1940 Act, due to employment by Allianz. |
(4) | Stephen G. Simon, previously the Chief Compliance Officer of the Trusts, resigned all of his positions with Allianz effective February 21, 2014. Mr. Pheiffer, previously the Deputy Chief Compliance Officer of the Trusts, has been named Chief Compliance Officer of the Trusts on an interim basis while a search for a permanent replacement is conducted. |
(5) | The Manager and the Trust are parties to a Chief Compliance Officer Agreement under which the Manager is compensated by the Trust for providing an employee of the Manager or one of its affiliates to act as the Trust’s Chief Compliance Officer. The Chief Compliance Officer and Anti-Money Laundering Compliance Officer is not considered a corporate officer or executive employee of the Trust. |
20
The Allianz VIP Funds are distributed by Allianz Life Financial Services, LLC. These Funds are not FDIC Insured. | ANNRPT1213 2/14 |
AZL® Morgan Stanley Global Real Estate Fund
Annual Report
December 31, 2013
Table of Contents
Management Discussion and Analysis
Page 1
Expense Examples and Portfolio Composition
Page 3
Schedule of Portfolio Investments
Page 4
Statement of Assets and Liabilities
Page 7
Statement of Operations
Page 7
Statements of Changes in Net Assets
Page 8
Financial Highlights
Page 9
Notes to the Financial Statements
Page 10
Report of Independent Registered Public Accounting Firm
Page 15
Other Federal Income Tax Information
Page 16
Other Information
Page 17
Approval of Investment Advisory and Subadvisory Agreements
Page 18
Information about the Board of Trustees and Officers
Page 21
This report is submitted for the general information of the shareholder of the Fund. The report is not authorized for distribution to prospective investors in the Fund unless preceded or accompanied by an effective prospectus, which contains details concerning the sales charges and other pertinent information.
AZL® Morgan Stanley Global Real Estate Fund Review (unaudited)
Allianz Investment Management LLC serves as the Manager for the AZL® Morgan Stanley Global Real Estate Fund and Morgan Stanley Investment Management Inc. serves as Subadviser to the Fund.
What factors affected the Fund’s performance during the year ended December 31, 2013?
For the year ended December 31, 2013, the AZL® Morgan Stanley Global Real Estate Fund returned 3.02%. That compared to a 4.39% return for its benchmark, the FTSE EPRA/NAREIT Developed Real Estate Index1.
The global real estate securities market was volatile during the period. Real estate share prices benefited from strong investor demand for core real estate assets, as well as investors’ search for higher yields in a low interest-rate environment. However, share prices fluctuated with investors’ expectations that the U.S. Federal Reserve would begin to reduce its monthly bond-buying program, known as quantitative easing. During the period, Europe was the top performing region while Asia performed in line with the global average and North America underperformed the global average.
The Fund is composed of three regional portfolios (United States, Europe and Asia) with a global allocation that weights each of the three major regions relative to the benchmark index based on our view of the relative attractiveness of each region in terms of underlying real estate fundamentals and public market valuations. Moreover, each of the regional portfolios reflects our core investment philosophy as a real estate value investor, which results in the ownership of stocks that provide the best valuation relative to their underlying real estate values, while maintaining portfolio diversification. Our company-specific research leads us to specific preferences for sub-segments within each of the property sectors and countries.*
For the period ended December 31, 2013, the Fund was overweight the Asian listed property sector, and underweight the U.S. and European listed property sectors. Top-down global allocation contributed to relative performance during the period.
The Fund’s Asia regional portfolio modestly detracted from relative performance during the period. The primary drivers
of this underperformance were an overweight position and stock selection in Hong Kong and an underweight position in Japan. However, the negative impact of these weightings and investments was partially offset by stock selection in Japan and an underweight position in Singapore.*
The Fund’s U.S. portfolio contributed to relative performance, driven by an overweight position in the hotel sector and underweight positions in the health care and specialty office sectors. Stock selection in the mall sector also contributed to relative performance. These benefits were partially offset by an overweight position and stock selection in the apartment sector, an underweight position in the net lease sector, and stock selection in the health care and suburban office sectors.*
The Fund’s European portfolio also contributed to relative performance, driven by stock selection and an underweight position in Germany, and an overweight position and stock selection in the United Kingdom. However, stock selection in Sweden partially offset these contributions.*
Past performance does not guarantee future results.
* | The Fund’s portfolio composition is subject to change. There is no guarantee that any sectors mentioned will continue to perform well or that securities in such sectors will be held by the Fund in the future. The information contained in this commentary is for informational purposes only and should not be construed as a recommendation to purchase or sell securities in the sector mentioned. The Fund’s holdings and weightings are as of December 31, 2013. |
2 | The Financial Times London Stock Exchange (“FTSE”) European Public Real Estate Association (“EPRA”)/NAREIT Developed Real Estate Index Series, which is designed to represent general trends in eligible real estate stocks worldwide. Relevant real estate activities are defined as the ownership, disposure and development of income-producing real estate. Investors cannot invest directly in an index. |
1
AZL® Morgan Stanley Global Real Estate Fund Review (unaudited)
Fund Objective
The Fund’s investment objective is to seek to provide income and capital appreciation. This objective may be changed by the Trustees of the Fund without shareholder approval. The Fund seeks to achieve its objective by investing at least 80% of the Fund’s assets, plus any borrowings for investment purposes, will be invested in equity securities of companies in the real estate industry, including REOCs, REITs, and foreign real estate companies.
Investment Concerns
Equity securities (stocks) are more volatile and carry more risk than other forms of investments, including investments in high-grade fixed income securities. The net asset value per share of this Fund will fluctuate as the value of the securities in the portfolio changes.
International investing may involve risk of capital loss from unfavorable fluctuations in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations.
Emerging market investing may be subject to additional economic, political, liquidity, and currency risks not associated with more developed countries.
Investments in the Fund are subject to the risks related to direct investment in real estate, such as real estate risk, regulatory risks, concentration risk, and diversification risk. By itself the Fund does not constitute a complete investment plan and should be considered a long-term investment for investors who can afford to weather changes in the value of their investments.
For a complete description of these and other risks associated with investing in a mutual Fund, please refer to the Fund’s prospectus.
Growth of $10,000 Investment
The chart above represents a comparison of a hypothetical investment in the Fund versus a similar investment in the Fund’s benchmark, and represents the reinvestment of dividends and capital gains in the Fund.
Average Annual Total Returns as of December 31, 2013
Since | ||||||||||||||||
1 | 3 | 5 | Inception | |||||||||||||
Year | Year | Year | (5/1/06) | |||||||||||||
AZL® Morgan Stanley Global Real Estate Fund | 3.02 | % | 6.41 | % | 15.34 | % | 2.72 | % | ||||||||
FTSE EPRA/NAREIT Developed Real Estate Index (gross of withholding taxes) | 4.39 | % | 8.15 | % | 16.06 | % | 3.38 | % | ||||||||
FTSE EPRA/NAREIT Developed Real Estate Index (net of withholding taxes) | 3.67 | % | 7.40 | % | 15.24 | % | 2.69 | % |
Past performance does not guarantee future results. The performance data quoted represents past performance and current returns may be lower or higher. The investment return and principal value will fluctuate so that an investor’s shares, when redeemed may be worth more or less than the original cost. To obtain performance information current to the most recent month end, please visit www.Allianzlife.com.
Expense Ratio | Gross | |||
AZL® Morgan Stanley Global Real Estate Fund | 1.31 | % |
The above expense ratio is based on the current Fund prospectus dated April 29, 2013. The Manager and the Fund have entered into a written contract limiting operating expenses, excluding certain expenses (such as interest expense), to 1.35% through April 30, 2015. Additional information pertaining to the December 31, 2013 expense ratios can be found in the financial highlights.
The total return of the Fund does not reflect the effect of any insurance charges, the annual maintenance fee or the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. Such charges, fees and tax payments would reduce the performance quoted.
The Fund’s performance is measured against the Financial Times London Stock Exchange (“FTSE”) European Public Real Estate Association (“EPRA”)/NAREIT Developed Real Estate Index series, which is designed to represent general trends in eligible real estate stocks worldwide. Relevant real estate activities are defined as the ownership, disposure and development of income-producing real estate. The Index noted as “gross of withholding taxes” does not reflect the deduction of fees associated with a mutual fund, such as investment management and fund accounting fees. The Index noted as “net of withholding taxes” reflects the reinvestment of dividends after the deduction of withholding taxes, using (for international indices) a tax rate applicable to non-resident institutional investors who do not benefit from double taxation treaties. The Fund’s performance reflects the deduction of fees for services provided to the Fund. Investors cannot invest directly in an index.
2 |
AZL Morgan Stanley Global Real Estate Fund
(Unaudited)
As a shareholder of the AZL Morgan Stanley Global Real Estate Fund (the “Fund”), you incur ongoing costs, including management fees, distribution fees, and other Fund expenses. These examples are intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. Please note that the expenses shown in each table do not reflect expenses that apply to the subaccount or the insurance contract. If the expenses that apply to the subaccount of the insurance contract were included, your costs would have been higher.
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the periods presented below.
The Actual Expense table below provides information about actual account values and actual expenses. You may use the information below, 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 table under the heading entitled “Expenses Paid During Period” to estimate the expenses you paid on your account during this period.
Beginning Account Value 7/1/13 | Ending Account Value 12/31/13 | Expenses Paid During Period 7/1/13 - 12/31/13* | Annualized Expense Ratio During Period 7/1/13 - 12/31/13 | |||||||||||||||||
AZL Morgan Stanley Global Real Estate Fund | $ | 1,000.00 | $ | 1,023.00 | $ | 6.53 | 1.28 | % |
The Hypothetical Expense table below provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.
Beginning Account Value 7/1/13 | Ending Account Value 12/31/13 | Expenses Paid During Period 7/1/13 - 12/31/13* | Annualized Expense Ratio During Period 7/1/13 - 12/31/13 | |||||||||||||||||
AZL Morgan Stanley Global Real Estate Fund | $ | 1,000.00 | $ | 1,018.75 | $ | 6.51 | 1.28 | % |
* | Expenses are equal to the average account value over the period, multiplied by the Fund’s annualized expense ratio, multiplied by 184/365 (to reflect the one half year period). |
Portfolio Composition
(Unaudited)
Investments | Percent of net assets | ||||
United States | 42.2 | % | |||
Japan | 14.8 | ||||
Hong Kong | 11.0 | ||||
Australia | 6.9 | ||||
United Kingdom | 6.3 | ||||
France | 3.5 | ||||
Singapore | 3.2 | ||||
Canada | 2.7 | ||||
Bermuda | 1.6 | ||||
Germany | 1.2 | ||||
All other countries | 4.0 | ||||
|
| ||||
Total Common Stock and Preferred Stock | 97.4 | ||||
Money Market | 1.8 | ||||
Securities Held as Collateral for Securities on Loan | 0.5 | ||||
|
| ||||
Total Investment Securities | 99.7 | ||||
Net other assets (liabilities) | 0.3 | ||||
|
| ||||
Net Assets | 100.0 | % | |||
|
|
3
AZL Morgan Stanley Global Real Estate Fund
Schedule of Portfolio Investments
December 31, 2013
Shares | Fair Value | |||||||
| Common Stocks (97.4%): |
| ||||||
| Diversified Real Estate Activities (21.1%): |
| ||||||
422,410 | Beni Stabili SpA | $ | 284,883 | |||||
47,500 | BR Properties SA | 374,888 | ||||||
452,000 | CapitaLand, Ltd. | 1,088,536 | ||||||
66,000 | City Developments, Ltd. | 503,625 | ||||||
9,028 | Deutsche Annington Immobilien SE* | 223,554 | ||||||
7,510 | Fabege AB | 89,887 | ||||||
176,000 | Hang Lung Properties, Ltd. | 559,155 | ||||||
115,806 | Henderson Land Development Co., Ltd. | 662,139 | ||||||
41,500 | Hulic Co., Ltd. | 615,982 | ||||||
209,303 | Kerry Properties, Ltd. | 727,337 | ||||||
259,000 | Mitsubishi Estate Co., Ltd. | 7,762,883 | ||||||
191,000 | Mitsui Fudosan Co., Ltd. | 6,891,104 | ||||||
638 | Mobimo Holding AG, Registered Shares | 133,398 | ||||||
981,596 | New World Development Co., Ltd. | 1,241,597 | ||||||
5,900 | Nomura Real Estate Holdings, Inc. | 133,022 | ||||||
8,600 | Rexford Industrial Realty, Inc. | 113,520 | ||||||
115,000 | Sumitomo Realty & Development Co., Ltd. | 5,733,048 | ||||||
560,452 | Sun Hung Kai Properties, Ltd. | 7,141,042 | ||||||
62,000 | Tokyo Tatemono Co., Ltd. | 690,797 | ||||||
119,000 | UOL Group, Ltd. | 584,605 | ||||||
301,035 | Wharf Holdings, Ltd. (The) | 2,304,835 | ||||||
|
| |||||||
37,859,837 | ||||||||
|
| |||||||
| Diversified REITs (10.0%): | |||||||
211,321 | British Land Co. plc | 2,202,263 | ||||||
38,699 | Cousins Properties, Inc. | 398,600 | ||||||
763,348 | Dexus Property Group | 685,087 | ||||||
5,429 | Fonciere des Regions SA | 468,938 | ||||||
2,377 | Gecina SA | 314,100 | ||||||
377,804 | GPT Group | 1,149,772 | ||||||
7,887 | ICADE | 735,592 | ||||||
147,387 | Land Securities Group plc | 2,352,569 | ||||||
8,100 | Liberty Property Trust | 274,347 | ||||||
56,000 | Mapletree Greater China Commerical Trust | 37,351 | ||||||
641,869 | Mirvac Group | 963,002 | ||||||
4,331 | PS Business Parks, Inc. | 330,975 | ||||||
34,163 | Shaftesbury plc | 355,462 | ||||||
610,000 | SPH REIT* | 474,066 | ||||||
337,505 | Stockland Trust Group | 1,090,932 | ||||||
246 | United Urban Investment Corp. | 353,892 | ||||||
62,221 | Vornado Realty Trust | 5,524,603 | ||||||
3,889 | Wereldhave NV | 306,555 | ||||||
4,382 | Winthrop Realty Trust | 48,421 | ||||||
|
| |||||||
18,066,527 | ||||||||
|
| |||||||
| Health Care Services (0.1%): | |||||||
25,410 | Extendicare, Inc. | 154,073 | ||||||
|
| |||||||
| Hotels, Resorts & Cruise Lines (1.3%): | |||||||
30,800 | Starwood Hotels & Resorts Worldwide, Inc. | 2,447,060 | ||||||
|
| |||||||
| Industrial REITs (2.1%): | |||||||
219,000 | Ascendas Real Estate Investment Trust | 382,661 | ||||||
114,638 | DCT Industrial Trust, Inc. | 817,369 | ||||||
373,210 | Macquarie Goodman Group | 1,580,308 | ||||||
70 | Nippon Prologis REIT, Inc. | 669,366 | ||||||
52,411 | SERGO plc | 289,987 | ||||||
|
| |||||||
3,739,691 | ||||||||
|
|
Shares | Fair Value | |||||||
| Common Stocks, continued |
| ||||||
| Office REITs (7.0%): |
| ||||||
66 | Activia Properties, Inc. | $ | 520,109 | |||||
10,920 | Alexandria Real Estate Equities, Inc. | 694,730 | ||||||
15,220 | Alstria Office AG | 191,602 | ||||||
33,837 | Boston Properties, Inc. | 3,396,220 | ||||||
16,147 | Brookfield Canada Office Properties | 404,397 | ||||||
262,000 | CapitaCommercial Trust | 301,562 | ||||||
637 | Cofinimmo SA | 78,702 | ||||||
490,744 | Commonwealth Property Office Fund | 545,464 | ||||||
17,251 | Derwent Valley Holdings plc | 714,077 | ||||||
39,430 | Duke Realty Corp. | 593,027 | ||||||
57,218 | Great Portland Estates plc | 569,285 | ||||||
25,228 | Hudson Pacific Properties, Inc. | 551,736 | ||||||
242 | Japan Real Estate Investment Corp. | 1,298,416 | ||||||
368,000 | Keppel REIT | 345,864 | ||||||
793 | Lexington Realty Trust^ | 8,097 | ||||||
61,158 | Mack-Cali Realty Corp. | 1,313,674 | ||||||
252 | Nippon Building Fund, Inc. | 1,467,223 | ||||||
|
| |||||||
12,994,185 | ||||||||
|
| |||||||
| Real Estate Development (2.5%): |
| ||||||
126,000 | Agile Property Holdings, Ltd. | 135,382 | ||||||
44,626 | Atrium European Real Estate, Ltd. | 256,668 | ||||||
2,485,087 | BGP Holdings plc*(a) | — | ||||||
96,000 | China Overseas Land & Investment, Ltd. | 271,164 | ||||||
407,000 | China Resources Land, Ltd. | 1,012,939 | ||||||
492,318 | Country Garden Holdings Co., Ltd. | 297,532 | ||||||
93,200 | Guangzhou R&F Properties Co., Ltd., H Shares | 136,454 | ||||||
30,400 | Iguatemi Empresa de Shopping Centers SA | 287,780 | ||||||
14,763 | LEG Immobilien AG | 872,251 | ||||||
50,000 | Longfor Properties | 69,945 | ||||||
281,192 | Norwegian Property ASA | 336,062 | ||||||
61,000 | Shimao Property Holdings, Ltd. | 140,453 | ||||||
444,391 | Sino Land Co., Ltd. | 608,643 | ||||||
19,702 | ST Modwen Properties plc | 119,844 | ||||||
|
| |||||||
4,545,117 | ||||||||
|
| |||||||
| Real Estate Operating Companies (11.4%): |
| ||||||
17,712 | Atrium Ljungberg AB, B Shares | 242,703 | ||||||
59,100 | BR Malls Participacoes SA | 429,258 | ||||||
41,101 | Brookfield Properties Corp. | 791,194 | ||||||
59,886 | Capital & Counties Properties plc | 327,470 | ||||||
365,380 | Capital & Regional plc | 267,035 | ||||||
16,100 | Castellum AB | 251,009 | ||||||
7,010 | Deutsche Euroshop AG | 306,897 | ||||||
26,725 | Deutsche Wohnen AG | 518,617 | ||||||
68,022 | Forest City Enterprises, Inc., Class A* | 1,299,220 | ||||||
161,709 | General Growth Properties, Inc. | 3,245,500 | ||||||
333,000 | Global Logistic Properties, Ltd. | 764,279 | ||||||
73,900 | Grainger Trust plc | 250,060 | ||||||
493,500 | Hongkong Land Holdings, Ltd. | 2,921,599 | ||||||
54,837 | Hufvudstaden AB | 735,840 | ||||||
399,346 | Hysan Development Co., Ltd. | 1,721,974 | ||||||
36,944 | Investa Office Fund | 103,254 | ||||||
329,899 | LXB Retail Properties plc* | 698,386 | ||||||
2,700 | NTT Urban Development Corp. | 31,144 | ||||||
32,774 | Prime Office REIT AG* | 139,591 | ||||||
52,340 | ProLogis, Inc. | 1,933,963 |
Continued
4
AZL Morgan Stanley Global Real Estate Fund
Schedule of Portfolio Investments
December 31, 2013
Shares | Fair Value | |||||||
| Common Stocks, continued |
| ||||||
| Real Estate Operating Companies, continued |
| ||||||
13,850 | PSP Swiss Property AG | $ | 1,176,332 | |||||
158,049 | Quintain Estates & Development plc* | 247,329 | ||||||
216,984 | Safestore Holdings, Ltd. | 578,620 | ||||||
70,716 | Sponda Oyj | 333,167 | ||||||
296,850 | Swire Properties, Ltd. | 750,844 | ||||||
5,569 | Swiss Prime Site AG | 432,192 | ||||||
42,197 | Unite Group plc | 281,960 | ||||||
|
| |||||||
20,779,437 | ||||||||
|
| |||||||
| Residential REITs (9.3%): |
| ||||||
14,490 | American Campus Communities, Inc. | 466,723 | ||||||
41,535 | AvalonBay Communities, Inc. | 4,910,683 | ||||||
13,667 | Boardwalk REIT | 770,144 | ||||||
4,305 | BRE Properties, Inc. | 235,527 | ||||||
35,996 | Camden Property Trust | 2,047,452 | ||||||
3,794 | Canadian Apartment Properties REIT | 75,909 | ||||||
24,234 | Equity Lifestyle Properties, Inc. | 877,998 | ||||||
145,682 | Equity Residential Property Trust | 7,556,525 | ||||||
1,269 | Essex Property Trust, Inc. | 182,114 | ||||||
990 | Post Properties, Inc. | 44,778 | ||||||
|
| |||||||
17,167,853 | ||||||||
|
| |||||||
| Retail REITs (22.8%): |
| ||||||
14,324 | Acadia Realty Trust | 355,665 | ||||||
439 | Altarea SCA | 77,271 | ||||||
163,000 | CaitaMalls Asia, Ltd. | 254,043 | ||||||
7,410 | Calloway REIT | 175,535 | ||||||
361,000 | CapitaMall Trust | 546,133 | ||||||
7,760 | CBL & Associates Properties, Inc. | 139,370 | ||||||
214,825 | CFS Retail Property Trust | 373,950 | ||||||
12,513 | Corio NV | 561,691 | ||||||
22,360 | Crombie REIT^ | 285,053 | ||||||
32,490 | DDR Corp. | 499,371 | ||||||
8,928 | Eurocommercial Properties NV | 379,845 | ||||||
8,307 | Federal Realty Investment Trust | 842,413 | ||||||
337,171 | Federation Centres | 704,556 | ||||||
24,470 | First Capital Realty, Inc. | 408,025 | ||||||
182,906 | Hammerson plc | 1,520,946 | ||||||
327 | Japan Retail Fund Investment Corp. | 665,996 | ||||||
9,782 | Klepierre | 453,346 | ||||||
138,155 | Liberty International plc | 710,328 | ||||||
559,215 | Link REIT (The) | 2,720,923 | ||||||
44,216 | Macerich Co. (The) | 2,603,880 | ||||||
116,438 | Mapletree Commercial Trust | 110,001 | ||||||
18,813 | Mercialys SA | 395,235 |
Shares | Fair Value | |||||||
| Common Stocks, continued |
| ||||||
| Retail REITs, continued |
| ||||||
21,340 | National Retail Properties, Inc.^ | $ | 647,242 | |||||
2,160 | Realty Income Corp. | 80,633 | ||||||
60,973 | Regency Centers Corp. | 2,823,050 | ||||||
75,431 | RioCan REIT | 1,759,180 | ||||||
72,669 | Simon Property Group, Inc. | 11,057,314 | ||||||
280,000 | Suntec REIT | 342,254 | ||||||
12,506 | Taubman Centers, Inc. | 799,384 | ||||||
15,052 | Unibail-Rodamco SE | 3,865,073 | ||||||
2,196 | Vastned Retail NV | 99,827 | ||||||
415,524 | Westfield Group | 3,744,244 | ||||||
597,820 | Westfield Retail Trust | 1,585,521 | ||||||
|
| |||||||
41,587,298 | ||||||||
|
| |||||||
| Specialized REITs (9.8%): |
| ||||||
7,234 | Ashford Hospitality Prime, Inc. | 131,659 | ||||||
36,173 | Ashford Hospitality Trust | 299,512 | ||||||
89,361 | HCP, Inc. | 3,245,592 | ||||||
10,230 | Health Care REIT, Inc. | 548,021 | ||||||
34,195 | Healthcare Realty Trust, Inc. | 728,695 | ||||||
286,586 | Host Hotels & Resorts, Inc. | 5,571,232 | ||||||
26,287 | Public Storage, Inc. | 3,956,719 | ||||||
50,920 | Senior Housing Properties Trust | 1,131,952 | ||||||
3,070 | Sovran Self Storage, Inc. | 200,072 | ||||||
34,210 | Ventas, Inc. | 1,959,549 | ||||||
|
| |||||||
17,773,003 | ||||||||
|
| |||||||
| Total Common Stocks (Cost $130,008,039) | 177,114,081 | ||||||
|
| |||||||
Shares or Principal Amount | Fair Value | |||||||
| Securities Held as Collateral for Securities on Loan (0.5%): |
| ||||||
$ | 838,021 | Allianz Variable Insurance Products Securities Lending Collateral Trust(b) | 838,021 | |||||
|
| |||||||
| Total Securities Held as Collateral for Securities on Loan | 838,021 | ||||||
|
| |||||||
| Unaffiliated Investment Company (1.8%): |
| ||||||
3,296,681 | Dreyfus Treasury Prime Cash Management Fund, Institutional Shares, 0.00%(c) | 3,296,681 | ||||||
|
| |||||||
| Total Unaffiliated Investment Company (Cost $3,296,681) | 3,296,681 | ||||||
|
| |||||||
| Total Investment Securities (Cost $134,142,741)(d) — 99.7% | 181,248,783 | ||||||
| Net other assets (liabilities) — 0.3% | 546,545 | ||||||
|
| |||||||
| Net Assets — 100.0% | $ | 181,795,328 | |||||
|
|
Percentages indicated are based on net assets as of December 31, 2013.
* | Non-income producing security. |
^ | This security or a partial position of this security was on loan as of December 31, 2013. The total value of securities on loan as of December 31, 2013, was $812,651. |
(a) | Security was valued in good faith pursuant to procedures approved by the Board of Trustees as of December 31, 2013. The total of all such securities represent 0.00% of the net assets of the fund. |
(b) | Purchased with cash collateral held from securities lending. The value of the collateral could include collateral held for securities that were sold on or before December 31, 2013. |
(c) | The rate represents the effective yield at December 31, 2013. |
(d) | See Federal Tax Information listed in the Notes to the Financial Statements. |
Continued
5
AZL Morgan Stanley Global Real Estate Fund
Schedule of Portfolio Investments
December 31, 2013
The following represents the concentrations by country of risk (based on the domicile of the security issuer) relative to the total fair value of investments as of December 31, 2013:
Country | Percentage | |||
Australia | 6.9 | % | ||
Belgium | — | %NM | ||
Belize | 0.2 | % | ||
Bermuda | 1.6 | % | ||
Brazil | 0.4 | % | ||
Canada | 2.7 | % | ||
China | 0.3 | % | ||
Finland | 0.2 | % | ||
France | 3.5 | % | ||
Germany | 1.2 | % | ||
Hong Kong | 11.0 | % | ||
Italy | 0.2 | % | ||
Japan | 14.8 | % | ||
Jersey | 0.1 | % | ||
Netherlands | 0.7 | % | ||
Norway | 0.2 | % | ||
Singapore | 3.2 | % | ||
Sweden | 0.7 | % | ||
Switzerland | 1.0 | % | ||
United Kingdom | 6.3 | % | ||
United States | 44.8 | % | ||
|
| |||
100.0 | % | |||
|
|
NM | Not meaningful, amount is less than 0.05%. |
See accompanying notes to the financial statements.
6
AZL Morgan Stanley Global Real Estate Fund
Statement of Assets and Liabilities
December 31, 2013
Assets: | |||||
Investment securities, at cost | $ | 134,142,741 | |||
|
| ||||
Investment securities, at value* | $ | 181,248,783 | |||
Cash | 4,891 | ||||
Interest and dividends receivable | 632,941 | ||||
Foreign currency, at value (cost $772,751) | 785,547 | ||||
Receivable for capital shares issued | 89,600 | ||||
Receivable for investments sold | 334,509 | ||||
Reclaims receivable | �� | 26,824 | |||
|
| ||||
Total Assets | 183,123,095 | ||||
|
| ||||
Liabilities: | |||||
Payable for investments purchased | 253,071 | ||||
Payable for collateral received on loaned securities | 838,021 | ||||
Manager fees payable | 137,118 | ||||
Administration fees payable | 8,915 | ||||
Distribution fees payable | 38,089 | ||||
Custodian fees payable | 37,234 | ||||
Administrative and compliance services fees payable | 844 | ||||
Trustee fees payable | 6 | ||||
Other accrued liabilities | 14,469 | ||||
|
| ||||
Total Liabilities | 1,327,767 | ||||
|
| ||||
Net Assets | $ | 181,795,328 | |||
|
| ||||
Net Assets Consist of: | |||||
Capital | $ | 176,655,799 | |||
Accumulated net investment income/(loss) | (651,973 | ) | |||
Accumulated net realized gains/(losses) from investment transactions | (41,327,682 | ) | |||
Net unrealized appreciation/(depreciation) on investments | 47,119,184 | ||||
|
| ||||
Net Assets | $ | 181,795,328 | |||
|
| ||||
Shares of beneficial interest (unlimited number of shares authorized, no par value) | 18,445,905 | ||||
Net Asset Value (offering and redemption price per share) | $ | 9.86 | |||
|
|
For the Year Ended December 31, 2013
Investment Income: | |||||
Dividends | $ | 5,228,018 | |||
Interest | 1,301 | ||||
Income from securities lending | 26,962 | ||||
Foreign withholding tax | (231,379 | ) | |||
|
| ||||
Total Investment Income | 5,024,902 | ||||
|
| ||||
Expenses: | |||||
Manager fees | 1,661,930 | ||||
Administration fees | 85,547 | ||||
Distribution fees | 461,647 | ||||
Custodian fees | 135,518 | ||||
Administrative and compliance services fees | 3,691 | ||||
Trustee fees | 9,722 | ||||
Professional fees | 12,536 | ||||
Shareholder reports | 13,717 | ||||
Other expenses | 5,862 | ||||
|
| ||||
Total expenses before reductions | 2,390,170 | ||||
Less expenses paid indirectly | (10,245 | ) | |||
|
| ||||
Net expenses | 2,379,925 | ||||
|
| ||||
Net Investment Income/(Loss) | 2,644,977 | ||||
|
| ||||
Realized and Unrealized Gains/(Losses) on Investments: | |||||
Net realized gains/(losses) on securities transactions | 10,780,862 | ||||
Change in net unrealized appreciation/depreciation on investments | (7,756,047 | ) | |||
|
| ||||
Net Realized/Unrealized Gains/(Losses) on Investments | 3,024,815 | ||||
|
| ||||
Change in Net Assets Resulting From Operations | $ | 5,669,792 | |||
|
|
* | Includes securities on loan of $812,651. |
See accompanying notes to the financial statements.
7
Statements of Changes in Net Assets
AZL Morgan Stanley Global Real Estate Fund | ||||||||||
For the Year Ended December 31, 2013 | For the Year Ended December 31, 2012 | |||||||||
Change in Net Assets: | ||||||||||
Operations: | ||||||||||
Net investment income/(loss) | $ | 2,644,977 | $ | 3,212,678 | ||||||
Net realized gains/(losses) on investment transactions | 10,780,862 | 7,814,615 | ||||||||
Change in unrealized appreciation/depreciation on investments | (7,756,047 | ) | 38,587,710 | |||||||
|
|
|
| |||||||
Change in net assets resulting from operations | 5,669,792 | 49,615,003 | ||||||||
|
|
|
| |||||||
Dividends to Shareholders: | ||||||||||
From net investment income | (7,518,721 | ) | (3,370,326 | ) | ||||||
|
|
|
| |||||||
Change in net assets resulting from dividends to shareholders | (7,518,721 | ) | (3,370,326 | ) | ||||||
|
|
|
| |||||||
Capital Transactions: | ||||||||||
Proceeds from shares issued | 16,327,346 | 20,423,322 | ||||||||
Proceeds from dividends reinvested | 7,518,721 | 3,370,326 | ||||||||
Value of shares redeemed | (24,042,571 | ) | (54,662,761 | ) | ||||||
|
|
|
| |||||||
Change in net assets resulting from capital transactions | (196,504 | ) | (30,869,113 | ) | ||||||
|
|
|
| |||||||
Change in net assets | (2,045,433 | ) | 15,375,564 | |||||||
Net Assets: | ||||||||||
Beginning of period | 183,840,761 | 168,465,197 | ||||||||
|
|
|
| |||||||
End of period | $ | 181,795,328 | $ | 183,840,761 | ||||||
|
|
|
| |||||||
Accumulated net investment income/(loss) | $ | (651,973 | ) | $ | 2,892,415 | |||||
|
|
|
| |||||||
Share Transactions: | ||||||||||
Shares issued | 1,604,545 | 2,306,013 | ||||||||
Dividends reinvested | 772,736 | 360,849 | ||||||||
Shares redeemed | (2,328,893 | ) | (5,815,526 | ) | ||||||
|
|
|
| |||||||
Change in shares | 48,388 | (3,148,664 | ) | |||||||
|
|
|
|
See accompanying notes to the financial statements.
8
AZL Morgan Stanley Global Real Estate Fund
(Selected data for a share of beneficial interest outstanding throughout the periods indicated)
Year Ended December 31, | |||||||||||||||||||||||||
2013 | 2012 | 2011 | 2010 | 2009 | |||||||||||||||||||||
Net Asset Value, Beginning of Period | $ | 9.99 | $ | 7.82 | $ | 8.99 | $ | 7.57 | $ | 5.46 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Investment Activities: | |||||||||||||||||||||||||
Net Investment Income/(Loss) | 0.16 | 0.16 | 0.13 | 0.23 | 0.11 | ||||||||||||||||||||
Net Realized and Unrealized Gains/(Losses) on Investments | 0.14 | 2.16 | (1.02 | ) | 1.34 | 2.08 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Total from Investment Activities | 0.30 | 2.32 | (0.89 | ) | 1.57 | 2.19 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Dividends to Shareholders From: | |||||||||||||||||||||||||
Net Investment Income | (0.43 | ) | (0.15 | ) | (0.28 | ) | (0.15 | ) | (0.08 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Total Dividends | (0.43 | ) | (0.15 | ) | (0.28 | ) | (0.15 | ) | (0.08 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Net Asset Value, End of Period | $ | 9.86 | $ | 9.99 | $ | 7.82 | $ | 8.99 | $ | 7.57 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Total Return(a) | 3.02 | % | 29.86 | % | (9.94 | )% | 20.86 | % | 40.19 | % | |||||||||||||||
Ratios to Average Net Assets/Supplemental Data: | |||||||||||||||||||||||||
Net Assets, End of Period (000’s) | $ | 181,795 | $ | 183,841 | $ | 168,465 | $ | 185,485 | $ | 144,909 | |||||||||||||||
Net Investment Income/(Loss) | 1.43 | % | 1.69 | % | 1.44 | % | 2.91 | % | 2.08 | % | |||||||||||||||
Expenses Before Reductions(b) | 1.29 | % | 1.34 | % | 1.35 | % | 1.35 | % | 1.40 | % | |||||||||||||||
Expenses Net of Reductions | 1.29 | % | 1.34 | % | 1.35 | % | 1.34 | % | 1.34 | % | |||||||||||||||
Expenses Net of Reductions, Excluding Expenses Paid Indirectly(c) | 1.28 | % | 1.34 | % | 1.35 | % | 1.35 | % | 1.35 | % | |||||||||||||||
Portfolio Turnover Rate | 29 | % | 34 | % | 23 | % | 27 | % | 48 | % |
(a) | The returns include reinvested dividends and fund level expenses, but exclude insurance contract charges. If these charges were included, the returns would have been lower. |
(b) | Excludes fee reductions. If such fee reductions had not occurred, the ratios would have been as indicated. |
(c) | Expenses net of reductions excludes expenses paid indirectly, pursuant to a “commission recapture” program, under which brokers remit a portion of the brokerage commission which is used to pay certain Fund expenses. See note 2 in the Notes to the Financial Statements. |
See accompanying notes to the financial statements.
9
AZL Morgan Stanley Global Real Estate Fund
Notes to the Financial Statements
December 31, 2013
1. Organization
The Allianz Variable Insurance Products Trust (the “Trust”) was organized as a Delaware statutory trust on July 13, 1999. The Trust is a diversified open-end management investment company registered under the Investment Company Act of 1940. The Trust consists of 29 separate investment portfolios (collectively, the “Funds”), of which one is included in this report, the AZL Morgan Stanley Global Real Estate Fund (the “Fund”), and 28 are presented in separate reports.
The Trust is authorized to issue an unlimited number of shares of the Fund without par value. Shares of the Fund are available through the variable annuity contracts and variable life insurance policies offered through the separate accounts of participating insurance companies.
Under the Trust’s organizational documents, its officers and trustees are indemnified against certain liabilities arising out of the performance of their duties to the Fund. In addition, in the normal course of business, the Fund may enter into contracts with its vendors and others that provide for general indemnifications. The Fund’s maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Fund. However, based on experience, the Fund expects the risk of loss to be remote.
2. Significant Accounting Policies
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. The policies conform with U.S. generally accepted accounting principles (“U.S. GAAP”). The preparation of financial statements requires management to make certain 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 increases and decreases in net assets from operations during the reporting period. Actual results could differ from those estimates.
Security Valuation
The Fund records its investments at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between willing market participants at the measurement date. The valuation techniques used to determine fair value are further described in Note 4 below.
Investment Transactions and Investment Income
Investment transactions are recorded not later than on the business day following trade date. However, for financial reporting purposes, investment transactions are accounted for on trade date. Net realized gains and losses on investments sold and on foreign currency transactions are recorded on the basis of identified cost. Interest income is recorded on the accrual basis and includes, where applicable, the amortization of premiums or accretion of discounts. Dividend income is recorded on the ex-dividend date except in the case of foreign securities, in which case dividends are recorded as soon as such information becomes available.
Real Estate Investment Trusts
The Fund may own shares of real estate investment trusts (“REITs”) which report information on the source of their distributions annually. Certain distributions received from REITs during the year, which are known to be a return of capital, are recorded as a reduction to the cost of the individual REIT.
Foreign Currency Translation
The accounting records of the Fund are maintained in U.S. dollars. Foreign currency amounts are translated into U.S. dollars at the current rate of exchange to determine the fair value of investments, assets and liabilities. Purchases and sales of securities, and income and expenses are translated at the prevailing rate of exchange on the respective dates of such transactions. The Fund does not isolate that portion of the results of operations resulting from changes in foreign exchange rates on investments from fluctuations arising from changes in market prices of securities held. Such fluctuations are included in the net realized and unrealized gain or loss on investments and foreign currencies. Income received by the Fund from sources within foreign countries may be subject to withholding and other income or similar taxes imposed by such countries. The Funds accrue such taxes, as applicable, based on their current interpretation of tax rules in the foreign markets in which they invest.
Dividends to Shareholders
Dividends to shareholders are recorded on the ex-dividend date. The Fund distributes its dividends from net investment income and net realized capital gains, if any, on an annual basis. The amount of dividends from net investment income and from net realized gains is determined in accordance with federal income tax regulations, which may differ from U.S. GAAP. These “book/tax” differences are either temporary or permanent in nature. To the extent these differences are permanent in nature (e.g., return of capital, net operating loss, reclassification of certain market discounts, gain/loss, paydowns, and distributions), such amounts are reclassified within the composition of net assets based on their federal tax-basis treatment; temporary differences (e.g., wash sales and post October losses) do not require reclassification. Dividends to shareholders that exceed net investment income and net realized gains for tax purposes are reported as distributions of capital.
Expense Allocation
Expenses directly attributable to the Fund are charged directly to the Fund, while expenses attributable to more than one Fund are allocated among the respective Funds based upon relative net assets or some other reasonable method. Expenses which are attributable to more than one Trust are allocated across the Allianz Variable Insurance Products and Allianz Variable Insurance Products Fund of Funds Trusts based upon relative net assets or another reasonable basis. Allianz Investment Management LLC (the “Manager”), serves as the investment manager for the Trust and the Allianz Variable Insurance Products Fund of Funds Trust.
10
AZL Morgan Stanley Global Real Estate Fund
Notes to the Financial Statements
December 31, 2013
Securities Lending
To generate additional income, the Fund may lend up to 33 1/3% of its assets pursuant to agreements requiring that the loan be continuously secured by any combination of cash, U.S. government or U.S. government agency securities, equal initially to at least 102% of the fair value plus accrued interest on the securities loaned (105% for foreign securities). The borrower of securities is at all times required to post collateral to the Fund in an amount equal to 100% of the fair value of the securities loaned based on the previous day’s fair value of the securities loaned, marked-to-market daily. Any collateral shortfalls are adjusted the next business day. The Fund bears all of the gains and losses on such investments. The Fund receives payments from borrowers equivalent to the dividends and interest that would have been earned on securities lent while simultaneously seeking to earn income on the investment of cash collateral received. In extremely low interest rate environments, the broker rebate fee may exceed the interest earned or the cash collateral which would result in a loss to the Fund. The investment of cash collateral deposited by the borrower is subject to inherent market risks such as interest rate risk, credit risk, liquidity risk, and other risks that are present in the market, and as such, the value of these investments may not be sufficient, when liquidated, to repay the borrower when the loaned security is returned. There may be risks of delay in recovery of the securities or even loss of rights in the collateral should the borrower of the securities fail financially. However, loans will be made only to borrowers, such as broker-dealers, banks or institutional borrowers of securities, deemed by the Manager to be of good standing and credit worthy and when in its judgment, the consideration which can be earned currently from such securities loans justifies the attendant risks. Loans are subject to termination by the Trust or the borrower at any time, and are, therefore, not considered to be illiquid investments. Securities on loan at December 31, 2013 are presented on the Fund’s Schedule of Portfolio Investments. The average outstanding amount of securities on loan was $3.9 million for the year ended December 31, 2013.
Cash collateral received in connection with securities lending is invested in the Allianz Variable Insurance Products Securities Lending Collateral Trust (the “Securities Lending Collateral Trust”) managed by The Dreyfus Corporation, an affiliate of the Custodian and Securities Lending Agent. The Securities Lending Collateral Trust invests in short-term investments that have a remaining maturity of 397 days or less as calculated in accordance with Rule 2a-7 under the 1940 Act. The Fund paid securities lending fees of $2,721 during the year ended December 31, 2013. These fees have been netted against “Income from securities lending” on the Statement of Operations.
Commission Recapture
Certain Funds of the Trust participate in a commission recapture program. The Fund will utilize the recaptured commissions to pay for, in whole or part, certain expenses of the Fund, excluding investment advisory fees. Any amounts received by the Fund, if applicable, are disclosed as “Expenses paid indirectly” on the Statement of Operations.
Effective January 6, 2014, the Manager, on behalf of the Trust, requested the Fund cease participation in the program until further notice.
3. Related Party Transactions
The Manager provides investment advisory and management services for the Fund. The Manager has retained an independent money management organization (the “Subadviser”), to make investment decisions on behalf of the Fund. Pursuant to a subadvisory agreement with Morgan Stanley Investment Management Inc. (“MSIM”), MSIM provides investment advisory services as the Subadviser for the Fund subject to the general supervision of the Trustees and the Manager. The Manager is entitled to a fee, computed daily and paid monthly, based on the average daily net assets of the Fund. Expenses incurred by the Fund for investment advisory and management services are reflected on the Statement of Operations as “Manager fees.” For its services, the Subadviser is entitled to a fee payable by the Manager. The Manager has contractually agreed to waive fees and reimburse the Fund to limit the annual expenses, excluding interest expense (e.g., cash overdraft fees), taxes, brokerage commissions, other expenditures that are capitalized in accordance with U.S. GAAP and other extraordinary expenses not incurred in the ordinary course of the Fund’s business, based on the daily net assets of the Fund, through April 30, 2015.
For the year ended December 31, 2013, the annual rate due to the Manager and the annual expense limit were as follows:
Annual Rate | Annual Expense Limit | |||||||||
AZL Morgan Stanley Global Real Estate Fund | 0.90 | % | 1.35 | % |
Any amounts contractually waived or reimbursed by the Manager in a particular fiscal year will be subject to repayment by the Fund to the Manager to the extent that from time to time through the next three fiscal years the repayment will not cause the Fund’s expenses to exceed the lesser of the stated limit at the time of the waiver or the current stated limit. Any amounts recouped by the Manager during the year are reflected on the Statement of Operations as “Recoupment of prior expenses reimbursed by the Manager.” At December 31, 2013, there were no remaining contractual reimbursements that are subject to repayment by the Fund in subsequent years.
In addition, the Manager may voluntarily waive or reimburse additional fees in order to maintain more competitive expense ratios. Any voluntary waivers or reimbursements are not subject to repayment in subsequent years. Information on the total amount waived/reimbursed by the Manager or repaid to the Manager by the Fund during the year can be found on the Statement of Operations. During the year ended December 31, 2013, there were no voluntary waivers.
Pursuant to separate agreements between the Funds and the Manager, the Manager provides a Chief Compliance Officer (“CCO”) and certain compliance oversight and regulatory filing services to the Trust. Under these agreements the Manager is entitled to an amount equal to a portion of the compensation and certain other expenses related to the individuals performing the CCO and compliance oversight services, as well as $75 per hour for time incurred in connection with the preparation and filing of certain documents with the Securities and Exchange Commission. The fees are paid to the Manager on a quarterly basis. The total expenses incurred by the Fund for these services are reflected on the Statement of Operations as “Administrative and compliance services fees.”
Citi Fund Services Ohio, Inc. (“Citi” or the “Administrator”), a wholly owned subsidiary of Citigroup, Inc., with which an officer of the Trust is affiliated, serves as the Trust’s administrator, transfer agent, and fund accountant, and assists the Trust in all aspects of its administration and operation. The Administrator is entitled to a Trust-wide asset-based fee, which is based on the following schedule: 0.05% of daily average net assets on the first $4 billion, 0.04% of daily average net assets on the next $2 billion, 0.02% of daily average net assets on the next $2 billion and 0.01% of daily average net assets over $8 billion. The overall Trust-wide fees are accrued daily and paid monthly and are subject to a minimum annual fee. In addition, the Administrator is entitled to annual account fees related to the transfer agency system, an annual fee for each additional class of shares of any Fund, certain annual fees in supporting fair value services, and a Trust-wide annual fee for providing infrastructure and support in implementing the written policies and procedures comprising the Fund’s compliance program. Fees payable to the Administrator are subject to certain reductions associated with services provided to new funds. The Administrator is also reimbursed for certain expenses incurred. The total expenses incurred by the Fund for these services are reflected on the Statement of Operations as “Administration fees.”
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AZL Morgan Stanley Global Real Estate Fund
Notes to the Financial Statements
December 31, 2013
Allianz Life Financial Services, LLC (“ALFS”), an affiliate of the Manager, serves as distributor of the Fund and receives 12b-1 fees directly from the Fund, plus a Trust-wide annual fee of $42,500, paid by the Manager from its profits and not by the Trust, for recordkeeping and reporting services.
The Trust has adopted a distribution and service plan in conformance with Rule 12b-1 of the 1940 Act. Pursuant to this plan, the Fund is authorized to pay certain fees for the sale and distribution of its shares and services provided to its shareholders at an annual rate not to exceed 0.25% of the Fund’s average daily net assets. These fees are reflected on the Statement of Operations as “Distribution fees.”
In addition, certain legal fees and expenses are paid to a law firm, Dorsey & Whitney LLP, of which the Secretary of the Fund is a partner. During the year ended December 31, 2013, $2,387 was paid from the Fund relating to these fees and expenses.
Certain Officers and Trustees of the Trust are affiliated with the Manager or the Administrator. Such Officers (except for the Trust’s CCO as noted above) and Trustees receive no compensation from the Trust for serving in their respective roles. For their service to the Trust and to the Allianz Variable Insurance Products Fund of Funds Trust, each non-interested Trustee receives a $139,000 annual Board retainer. In addition, the Trustees are reimbursed for certain expenses associated with attending Board meetings. Compensation to the Trustees is allocated between the Trust and the Allianz Variable Insurance Products Fund of Funds Trust in proportion to the assets under management of each trust. During the year ended December 31, 2013, actual Trustee compensation was $973,000 in total for both trusts.
At a meeting of the Board of Trustees on December 4, 2013, the Trustees approved a fee increase to the Officers and Trustees who are paid a fee for their services to the Trust and to the Allianz Variable Insurance Products Fund of Funds Trust. Effective January 1, 2014, each non-interested Trustee will receive a $163,000 annual retainer.
During the year ended December 31, 2013, the Fund paid approximately $34 to affiliated broker/dealers of the Subadvisor on the execution of purchases and sales of the Fund’s portfolio investments.
4. Investment Valuation Summary
The valuation techniques employed by the Fund, as described below, maximize the use of observable inputs and minimize the use of unobservable inputs in determining fair value. The inputs used for valuing the Fund’s investments are summarized in the three broad levels listed below:
— | Level 1 — quoted prices in active markets for identical assets |
— | Level 2 — other significant observable inputs (including quoted prices for similar securities, interest rates, prepayments speeds, credit risk, etc.) |
— | Level 3 — significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of investments) |
Changes in valuation techniques may result in transfers in or out of an assigned level within the disclosure hierarchy. The Fund determines transfers between fair value hierarchy levels at the reporting period end. The inputs or methodology used for valuing investments is not necessarily an indication of the risk associated with investing in those investments.
Security prices are generally provided by an independent third party pricing service approved by the Trust’s Board of Trustees (“Trustees”) as of the close of the New York Stock Exchange (“NYSE”) (generally 4:00 pm Eastern Time). Equity securities are valued at the last quoted sale price or, if there is no sale, the last quoted bid price is used for long securities and the last quoted ask price is used for securities sold short. Securities listed on NASDAQ Stock Market, Inc. (“NASDAQ”) are valued at the official closing price as reported by NASDAQ. In each of these situations, valuations are typically categorized as a Level 1 in the fair value hierarchy. Investments in open-end investment companies are valued at their respective net asset value as reported by such companies and are typically categorized as Level 1 in the fair value hierarchy.
Debt and other fixed income securities are generally valued at an evaluated bid price provided by an independent pricing source approved by the Trustees. To value debt securities, pricing services may use various pricing techniques which take into account appropriate factors such as market activity, yield, quality, coupon rate, maturity, type of issue, trading characteristics, call features, credit ratings and other data, as well as broker quotes. Short term securities of sufficient credit quality with sixty days or less remaining until maturity may be valued at amortized cost, which approximates fair value. In each of these situations, valuations are typically categorized as Level 2 in the fair value hierarchy.
Other assets and securities for which market quotations are not readily available, or are deemed unreliable are valued at fair value as determined in good faith by the Trustees or persons acting on the behalf of the Trustees. Fair value pricing may be used for significant events such as securities whose trading has been suspended, whose price has become stale or for which there is no currently available price at the close of the NYSE. Depending on the source and relative significance of valuation inputs, these instruments may be classified as Level 2 or Level 3 in the fair value hierarchy. The Fund utilizes a pricing service to assist in determining the fair value of securities when certain significant events occur that may affect the value of foreign securities.
In accordance with procedures adopted by the Trustees, fair value pricing may be used if events materially affecting the value of foreign securities occur between the time when the exchange on which they are traded closes and the time when the Fund’s net asset value is calculated. Management identifies possible fluctuation in international securities by monitoring the increase or decrease in the value of a designated benchmark index. In the event of an increase or decrease greater than predetermined levels, the Fund may use a systematic valuation model provided by an independent third party to fair value its international equity securities which are then typically categorized as Level 2 in the fair value hierarchy. The valuation of these international equity securities may represent a transfer between input levels.
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AZL Morgan Stanley Global Real Estate Fund
Notes to the Financial Statements
December 31, 2013
The following is a summary of the valuation inputs used as of December 31, 2013 in valuing the Fund’s investments based upon the three levels defined above:
Investment Securities: | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||
Common Stocks | ||||||||||||||||||||
Diversified Real Estate Activities | $ | 113,520 | $ | 37,746,317 | $ | — | $ | 37,859,837 | ||||||||||||
Diversified REITs | 6,576,946 | 11,489,581 | — | 18,066,527 | ||||||||||||||||
Industrial REITs | 817,369 | 2,922,322 | — | 3,739,691 | ||||||||||||||||
Office REITs | 6,961,881 | 6,032,304 | — | 12,994,185 | ||||||||||||||||
Real Estate Development | — | 4,545,117 | — | ^ | 4,545,117 | |||||||||||||||
Real Estate Operating Companies | 7,269,877 | 13,509,560 | — | 20,779,437 | ||||||||||||||||
Retail REITs | 22,476,115 | 19,111,183 | — | 41,587,298 | ||||||||||||||||
All Other Common Stocks+ | 37,541,989 | — | — | 37,541,989 | ||||||||||||||||
Securities Held as Collateral for Securities on Loan | — | 838,021 | — | 838,021 | ||||||||||||||||
Unaffiliated Investment Company | 3,296,681 | — | — | 3,296,681 | ||||||||||||||||
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Total Investment Securities | $ | 85,054,378 | $ | 96,194,405 | $ | — | $ | 181,248,783 | ||||||||||||
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+ | For detailed industry descriptions, see the accompanying Schedule of Portfolio Investments. |
A reconciliation of assets in which Level 3 inputs are used in determining fair value, along with additional quantitative disclosures are presented when there are significant Level 3 investments at the end of the period.
^ | Represents the interest in securities that were determined to have a value of zero at December 31, 2013. |
5. Security Purchases and Sales
For the year ended December 31, 2013, cost of purchases and proceeds from sales of securities (excluding securities maturing less than one year from acquisition) were as follows:
Purchases | Sales | |||||||||
AZL Morgan Stanley Global Real Estate Fund | $ | 52,957,493 | $ | 60,252,544 |
6. Investment Risks
Emerging Markets Risk: Emerging markets may have less developed trading markets and exchanges which may make it more difficult to sell securities at an acceptable price and their prices may be more volatile than securities of companies in more developed markets. Settlements of trades may be subject to greater delays so that the Fund may not receive the proceeds of a sale of a security on a timely basis. Emerging countries may also have less developed legal and accounting systems and investments may be subject to greater risks of government restrictions, nationalization, or confiscation.
Foreign Securities and Currencies Risk: Investments in securities of foreign issuers carry certain risks not ordinarily associated with investments in securities of domestic issuers. Such risks include future political and economic developments, and the possible imposition of exchange controls or other foreign governmental laws and restrictions. In addition, with respect to certain countries, there is the possibility of expropriation of assets, confiscatory taxation, political or social instability or diplomatic developments which could adversely affect investments in those securities.
7. Federal Tax Information
It is the Fund’s policy to continue to comply with the requirements of the Internal Revenue Code under Subchapter M, applicable to regulated investment companies, and to distribute all of its taxable income, including any net realized gains on investments, to its shareholders. Therefore, no provision is made for federal income taxes.
Management of the Fund has reviewed tax positions taken in tax years that remain subject to examination by all major tax jurisdictions, including federal (i.e., the last four tax year ends and the interim tax period since then, as applicable). Management believes that there is no tax liability resulting from unrecognized tax benefits related to uncertain tax positions taken.
Cost for federal income tax purposes at December 31, 2013 is $147,102,877. The gross unrealized appreciation/ (depreciation) on a tax basis is as follows:
Unrealized appreciation | $ | 50,695,843 | |||
Unrealized depreciation | (16,549,937 | ) | |||
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Net unrealized appreciation/(depreciation) | $ | 34,145,906 | |||
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As of the end of its tax year ended December 31, 2013, the Fund has capital loss carry forwards (“CLCFs”) as summarized in the tables below. CLCFs subject to expiration are applied as short-term capital loss regardless of whether the originating capital loss was short-term or long-term. CLCFs that are not subject to expiration must be utilized before those that are subject to expiration. The Board does not intend to authorize a distribution of any realized gain for the Fund until any applicable CLCF has been offset or expires.
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AZL Morgan Stanley Global Real Estate Fund
Notes to the Financial Statements
December 31, 2013
CLCFs subject to expiration:
Expires 12/31/2016 | Expires 12/31/2017 | Total | |||||||||||||
AZL Morgan Stanley Global Real Estate Fund | $ | 4,782,989 | $ | 26,029,940 | $ | 30,812,929 |
CLCFs not subject to expiration:
Short Term Amount | Long Term Amount | Total | |||||||||||||
AZL Morgan Stanley Global Real Estate Fund | $ | — | $ | 879 | $ | 879 |
During the year ended December 31, 2013, the Fund utilized $8,082,781 in CLCFs to offset capital gains.
The tax character of dividends paid to shareholders during the year ended December 31, 2013 were as follows:
Ordinary Income | Net Long-Term Capital Gains | Total Distributions(a) | |||||||||||||
AZL Morgan Stanley Global Real Estate Fund | $ | 7,518,721 | $ | — | $ | 7,518,721 |
(a) | Total distributions paid may differ from the Statements of Changes in Net Assets because dividends are recognized when actually paid for tax purposes. |
The tax character of dividends paid to shareholders during the year ended December 31, 2012 was as follows:
Ordinary Income | Net Long-Term Capital Gains | Total Distributions(a) | |||||||||||||
AZL Morgan Stanley Global Real Estate Fund | $ | 3,370,326 | $ | — | $ | 3,370,326 |
(a) | Total distributions paid may differ from the Statements of Changes in Net Assets because dividends are recognized when actually paid for tax purposes. |
As of December 31, 2013, the components of accumulated earnings on a tax basis were as follows:
Undistributed Ordinary Income | Undistributed Long-Term Capital Gains | Accumulated Capital and Other Losses | Unrealized Appreciation/ | Total Earnings/ | |||||||||||||||||||||
AZL Morgan Stanley Global Real Estate Fund | $ | 1,794,506 | $ | — | $ | (30,813,808 | ) | $ | 34,158,831 | $ | 5,139,529 |
(a) | The difference between book-basis and tax-basis unrealized appreciation/(depreciation) is attributable primarily to tax deferral of losses on wash sales. |
8. Subsequent Events
Management has evaluated events and transactions subsequent to period end through the date the financial statements were issued, for purposes of recognition or disclosure in these financial statements and there are no subsequent events to report.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Shareholders and Board of Trustees of
Allianz Variable Insurance Products Trust:
We have audited the accompanying statement of assets and liabilities of AZL Morgan Stanley Global Real Estate Fund (the “Fund”) of the Allianz Variable Insurance Products Trust, including the schedule of portfolio investments, as of December 31, 2013, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the years in the two-year period then ended, and the financial highlights for each of the years in the five-year period then ended. These financial statements and financial highlights are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of December 31, 2013, by correspondence with the custodian and brokers or by other appropriate auditing procedures. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of the Fund as of December 31, 2013, the results of its operations for the year then ended, the changes in its net assets for each of the years in the two-year period then ended, and the financial highlights for each of the years in the five-year period then ended, in conformity with U.S. generally accepted accounting principles.
/s/KPMG LLP
Columbus, Ohio
February 25, 2014
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Other Federal Income Tax Information (Unaudited)
For the year ended December 31, 2013, 1.18% of the total ordinary income dividends paid by the Fund qualify for the corporate dividends received deduction available to corporate shareholders.
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A description of the policies and procedures that the Fund uses to determine how to vote proxies relating to portfolio securities is available, without charge, upon request, by visiting the Securities and Exchange Commission’s (“Commission”) website at www.sec.gov, or by calling 800-624-0197.
Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30th is available (i) without charge, upon request, by calling 800-624-0197; (ii) on the Allianz Variable Insurance Products Trust’s website at https://www.allianzlife.com; and (iii) on the Commission’s website at http://www.sec.gov.
The Fund files complete Schedules of Portfolio Holdings with the Commission for the first and third quarters of each fiscal year on Form N-Q. Schedules of Portfolio Holdings for the Fund in this report are available without charge on the Commission’s website at http://www.sec.gov, or may be reviewed and copied at the Commission’s Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 800-SEC-0330.
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Approval of Investment Advisory and Subadvisory Agreements (Unaudited)
The Allianz Variable Insurance Products Trust (the “Trust”) is a manager-of-managers fund. That means that the Trust’s Manager (“Allianz Investment Management LLC”) is responsible for monitoring the various Subadvisers that have day-to-day responsibility for the decisions made for each of the Trust’s investment portfolios. The Trust’s Manager is responsible for determining, in the first instance, which investment advisers to consider recommending for selection as a Subadviser.
In reviewing the services provided by the Manager and the terms of the investment management agreement, the Board receives and reviews information related to the Manager’s experience and expertise in the variable insurance marketplace. Currently, the Funds are offered only through variable annuities and variable life insurance policies, and not in the retail fund market. In addition, the Board receives information regarding the Manager’s expertise with regard to portfolio diversification and asset allocation requirements within variable insurance products issued by Allianz Life Insurance Company of North America and its subsidiary, Allianz Life Insurance Company of New York. Currently, the Funds are offered only through Allianz Life and Allianz of New York variable products.
The Trust’s Manager has adopted policies and procedures to assist it in the process of analyzing each potential Subadviser with expertise in particular asset classes for purposes of making the recommendation that a specific investment adviser be selected. The Trust’s Board reviews and considers the information provided by the Manager in deciding which investment advisers to select. After an investment adviser becomes a Subadviser, a similarly rigorous process is instituted by the Manager to monitor the investment performance and other responsibilities of the Subadviser. The Manager reports to the Trust’s Board on its analysis at the regular meetings of the Board, which are held at least quarterly. Where warranted, the Manager will add or remove a particular Subadviser from a “watch” list that it maintains. Watch list criteria include, for example: (a) Fund performance over various time periods; (b) Fund risk issues, such as changes in key personnel involved with Fund management, changes in investment philosophy or process, or “capacity” concerns; and (c) organizational risk issues, such as regulatory, compliance or legal concerns, or changes in the ownership of the Subadviser. The Manager may place a Fund on the watch list for other reasons, and if so, will explain its rationale to the Trustees. Funds which are on the watch list are subject to special scrutiny of the Manager and the Board of Trustees. Funds may be removed from such watch list, if for example, performance improves or regulatory matters are satisfactorily resolved. However, in some situations where Funds which have been on the watch list, the Manager has recommended the retention of a new Subadviser, and the Board of Trustees has subsequently approved new Subadvisory Agreements with such Subadvisers.
In assessing the Manager’s and Subadvisers’ (collectively, the “Advisory Organizations”), performance of their obligations, the Board considers whether there has occurred a circumstance or event that would constitute a reason for it to not renew an advisory contract. In this regard, the Board is mindful of the potential disruption of a Fund’s operations and various risks, uncertainties and other effects that could occur as a result of a decision to terminate or not renew a contract.
As required by the Investment Company Act of 1940 (“1940 Act”), the Trust’s Board has reviewed and approved the Trust’s Investment Management Agreement with the Manager (the “Advisory Agreement”) and portfolio management agreements (the “Subadvisory Agreements”) with the Subadvisers. The Board’s decision to approve these contracts reflects the exercise of its business judgment on whether to approve new arrangements and continue the existing arrangements. During its review of these contracts, the Board considers many factors, among the most material of which are: the Fund’s investment objectives and long term performance; the Advisory Organizations’ management philosophy, personnel, and processes, including their compliance history and the adequacy of their compliance processes; the preferences and expectations of Fund shareholders (and underlying contract owners) and their relative sophistication; the continuing state of competition in the mutual fund industry; and comparable fees in the mutual fund industry.
The Board also considers the compensation and benefits received by the Advisory Organizations. This includes fees received for services provided to the Fund by affiliated persons of the Advisory Organizations and research services received by the Advisory Organizations from brokers that execute Fund trades, as well as advisory fees. The Board considered the fact that: (1) the Manager and the Trust are parties to an Administrative Service Agreement, a Compliance Services Agreement, and a Chief Compliance Officer Agreement, under which the Manager is compensated by the Trust for performing certain administrative and compliance services including providing an employee of the Manager or one of its affiliates to act as the Trust’s Chief Compliance Officer; and (2) Allianz Life Financial Services, LLC, an affiliated person of the Manager, is a registered securities broker-dealer and receives (along with its affiliated persons) payments made by the Trust pursuant to Rule 12b-1.
The Board is aware that various courts have interpreted provisions of the 1940 Act and have indicated in their decisions that the following factors may be relevant to an adviser’s compensation: the nature and quality of the services provided by the adviser, including the performance of the fund; the adviser’s cost of providing the services; the extent to which the adviser may realize “economies of scale” as the fund grows larger; any indirect benefits that may accrue to the adviser and its affiliates as a result of the adviser’s relationship with the fund; performance and expenses of comparable funds; and the extent to which the independent Board members are fully informed about all facts bearing on the adviser’s service and fee. The Trust’s Board is aware of these factors and takes them into account in its review of the Trust’s advisory contracts.
The Board considered and weighed these circumstances in light of its experience in governing the Trust and working with the Advisory Organizations on matters relating to the Funds, and is assisted in its deliberations by the advice of legal counsel to the Independent Trustees. In this regard, the Board requests and receives a significant amount of information about the Funds and the Advisory Organizations. Some of this information is provided at each regular meeting of the Board; additional information is provided in connection with the particular meeting or meetings at which the Board’s formal review of an advisory contract occurs. In between regularly scheduled meetings, the Board may receive information on particular matters as the need arises. Thus, the Board’s evaluation of an advisory contract is informed by reports covering such matters as: an Advisory Organization’s investment philosophy, personnel, and processes; the Fund’s short- and long-term performance (in absolute terms as well as in relationship to its benchmark(s), certain competitor or “peer group” funds and similar funds managed by the particular Subadviser), and comments on the reasons for performance; the Fund’s expenses (including the advisory fee itself and the overall expense structure of the Fund, both in absolute terms and relative to similar and/or competing funds, with due regard for contractual or voluntary expense limitations); the use and allocation of brokerage commissions derived from trading the Fund’s portfolio securities; the nature and extent of the advisory and other services provided to the Fund by the Advisory Organizations and their affiliates; compliance and audit reports concerning the Funds and the companies that service them; and relevant developments in the mutual fund industry and how the Funds and/or Advisory Organizations are responding to them.
The Board also receives financial information about Advisory Organizations, including reports on the compensation and benefits the Advisory Organizations derive from their relationships with the Funds. These reports cover not only the fees under the advisory contracts, but also fees, if any, received for providing other services to the Funds. The reports also discuss any indirect or “fall out” benefits an Advisory Organization may derive from its relationship with the Funds.
The Advisory and Subadvisory Agreements (collectively, the “Agreements”) were most recently considered at Board of Trustees meetings held in the fall of 2013. Information relevant to the approval of such Agreements was considered at a telephonic Board of Trustees meeting on October 16, 2013, and at an “in person” Board of Trustees meeting held October 22, 2013. The Agreements were approved at the Board meeting of October 22, 2013. At such meeting the Board also approved an Expense Limitation Agreement between the Manager and the Trust for the period ending April 30, 2015. In connection with such meetings, the Trustees requested and evaluated extensive materials from the Manager, including performance and expense information for other investment companies with similar investment objectives derived from data compiled by an independent third party provider and other sources believed to be reliable by the Manager. Prior to voting, the Trustees reviewed the proposed approval/continuance of the Agreements with management and with experienced counsel who are independent of the Manager and received a memorandum from such counsel discussing the legal
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standards for their consideration of the proposed approvals/continuances. The independent (“disinterested”) Trustees also discussed the proposed approvals/continuances in a private session with such counsel at which no representatives of the Manager were present. In reaching their determinations relating to the approval and/or continuance of the Agreements, in respect of each Fund, the Trustees considered all factors they believed relevant. The Board based its decision to approve the Agreements on the totality of the circumstances and relevant factors, and with a view to past and future long-term considerations. Not all of the factors and considerations discussed above and below are necessarily relevant to every Fund, and the Board did not assign relative weights to factors discussed herein or deem any one or group of them to be controlling in and of themselves.
An SEC Rule requires that shareholder reports include a discussion of certain factors relating to the selection of investment advisers and the approval of advisory fees. The “factors” enumerated by the SEC are set forth below in italics, as well as the Board’s conclusions regarding such factors:
(1) The nature, extent and quality of services provided by the Manager and Subadvisers. The Trustees noted that the Manager, subject to the control of the Board of Trustees, administers each Fund’s business and other affairs. Under the Advisory Agreement, the Manager holds the sole and exclusive responsibility to provide, or arrange for other to provide, the management of the Funds’ assets and the placement of orders for the purchase and sale of the securities of the Funds. As the Trust is a manager of managers fund, the Manager is authorized, under the Advisory Agreement, to retain one or more Subadvisers for each Fund to handle day-to-day management of the Funds’ investment portfolios; the Manager is responsible for determining, in the first instance, which investment advisers to recommend to the Board of Trustees for selection as a Subadviser. The Trustees were aware that, notwithstanding the retention of the Subadvisers to handle day-to-day portfolio management, the Manager remains responsible for substantial other matters, including continuously monitoring compliance by each Subadviser with the investment policies and restrictions of the respective Funds, with such other limitations or directions of the Board of Trustees, and with all legal requirements under federal or state law or regulation. The Manager also is responsible primarily to provide statistical information and other data to the Trustees regarding the Funds’ portfolio investments and to make available to the Funds’ administrator such information as is necessary for the conduct of its duties.
The Trustees also noted that the Manager provides the Trust and each Fund with such administrative and other services (exclusive of, and in addition to, any such services provided by any others retained by the Trust on behalf of the Funds) and executive and other personnel as are necessary for the operation of the Trust and the Funds. Except for the Trust’s Chief Compliance Officer, the Manager pays all of the compensation of Trustees and officers of the Trust who are employees of the Manager or its affiliates.
The Trustees considered the scope and quality of services provided by the Manager and the Subadvisers and noted that the scope of such services provided had expanded as a result of recent regulatory and other developments. The Trustees noted that, for example, the Manager and Subadvisers are responsible for maintaining and monitoring their own compliance programs, and these compliance programs are continuously refined and enhanced in light of new regulatory requirements. The Trustees considered the capabilities and resources which the Manager has dedicated to performing services on behalf of the Trust and its Funds. The quality of administrative and other services, including the Manager’s role in coordinating the activities of the Trust’s other service providers, also were considered. The Trustees concluded that, overall, they were satisfied with the nature, extent and quality of services provided (and expected to be provided) to the Trust and to each of the Funds under the Agreements.
(2) The investment performance of the Funds, the Manager and the Subadvisers. In connection with every in-person quarterly Board of Trustees meeting, Trustees receive extensive information on the performance results of each of the Funds. This includes, for example, performance information on all of the Funds for the previous quarter, and previous one, three and five-year periods, and since inception. (For Funds which have been in existence for less than five years, Trustees may receive performance information on comparable funds managed by the particular Subadviser for periods prior to the creation of a particular Fund.) Such performance information includes information on absolute total return, performance versus Subadvisers’ comparable fund(s), performance versus the appropriate benchmark(s), and performance versus peer groups. For example, in connection with the Board of Trustees meetings held September 10-11, 2013, the Manager reported that for the three year period ended June 30, 2013, 12 Funds were in the top 40%, eight were in the middle 20% and eight were in the bottom 40%, and for the one year period ended June 30, 2013, 8 Funds were in the top 40%, seven were in the middle 20%, and 14 were in the bottom 40%. The Manager also reported that for the five year period ended June 30, 2013, 10 Funds were in the top 40%, four were in the middle 20%, and six were in the bottom 40%. At the Board of Trustees meeting held October 22, 2013, the Trustees determined that the overall investment performance of the Funds was acceptable.
(3) The costs of services to be provided and profits to be realized by the Manager and the Subadvisers and their affiliates from their relationship with the Funds. The Manager has supplied information to the Board of Trustees pertaining to the level of investment advisory fees to which the Funds are subject. The Manager has agreed to temporarily “cap” Fund expenses at certain levels, and information is provided to Trustees setting forth “contractual” advisory fees and “actual” fees after taking expense caps into account. Based upon the information provided, the “actual” advisory fees payable by the Funds overall are generally comparable to the average level of fees paid by Fund peer groups. For the 30 Funds reviewed by the Board of Trustees in the fall of 2013, 27 Funds paid “actual” advisory fees in a percentage amount within the 65th percentile or lower for each Fund’s applicable category. The Trustees recognized that it is difficult to make comparisons of advisory fees because there are variations in the services that are included in the fees paid by other funds. The Board has concluded that the advisory fees to be paid to the Manager by the Funds are not unreasonable.
The Manager has also supplied information to the Board of Trustees pertaining to total Fund expenses (which includes advisory fees, the 25 basis point 12b-1 fee paid by the Funds, and other Fund expenses). As noted above, the Manager has agreed to “cap” Fund expenses at certain levels. Based upon the information provided, the overall total expense ratio ranking in 2013 for the 30 Funds was as follows: (1) 28 of the Funds had total expense rankings below the 65th percentile (with 20 Funds at or below the 50th percentile); (2) the AZL Russell 1000 Value Fund had a total expense ranking in the 66th percentile; the Manager reported that there is only a limited peer group for such Fund; and (3) the AZL Morgan Stanley Global Real Estate Fund had a total expense ranking in the 72nd percentile; it was reported by the Manager that there is only a limited peer group for such Fund, such Fund’s expense ratio has declined, and such Fund’s expense ratio is comparable to funds of similar size.
The Manager has committed to providing the Funds with a high quality of service and working to reduce Fund expenses over time, particularly as the Funds grow larger. The Trustees concluded therefore that the expense ratios of the Funds were not unreasonable.
The Manager provided information concerning the profitability of the Manager’s investment advisory activities for the period from 2011 through June 30, 2013. The Trustees recognized that it is difficult to make comparisons of profitability from investment company advisory agreements because comparative information is not generally publicly available and is affected by numerous factors, including the structure of the particular adviser, the types of funds it manages, its business mix, numerous assumptions regarding allocation of expenses and the adviser’s capital structure and cost of capital. In considering profitability information, the Trustees considered the possible effect of certain fall-out benefits to the Manager and its affiliates. The Trustees focused on profitability of the Manager’s relationships with the Funds before taxes and distribution expenses. The Trustees recognized that the Manager should, in the abstract, be entitled to earn a reasonable level of profits for the services it provides to each Fund and, based on their review, concluded that they were satisfied that the Manager’s level of profitability from its relationship with the Funds was not excessive.
The Manager, on behalf of the Board of Trustees, endeavored to obtain information on the profitability of each Subadviser in connection with its relationship with the Fund or Funds which it subadvises. The Manager was unable to obtain meaningful profitability information from some of the unaffiliated Subadvisers. The Manager assured the Board of Trustees that the Agreements with the Subadvisers which are not affiliated with it were negotiated on an “arm’s length” basis, so that arguably, such profitability information should be less relevant. The Trustees were also provided with certain information on the profitability for the Subadviser which is affiliated with the Manager. Trustees recognized the difficulty of allocating costs to multiple advisory accounts and products of a large advisory organization. Based upon the information provided, the Trustees determined that there was no evidence that the level of such profitability attributable to subadvising the Funds was excessive.
19
(4) and (5) The extent to which economies of scale would be realized as the Funds grow, and whether fee levels reflect these economies of scale. The Trustees noted that most of the advisory fee schedules for the Funds do not contain breakpoints that reduce the fee rate on assets above specified levels, although certain Subadvisory Agreements have such “breakpoints.” The Trustees recognized that breakpoints may be an appropriate way for the Manager to share its economies of scale, if any, with Funds that have substantial assets. However, they also recognized that there may not be a direct relationship between any economies of scale realized by Funds and those realized by the Manager as assets increase. The Trustees do not believe there is a uniform methodology for establishing breakpoints that give effect to Fund-specific service provided by the Manager. The Trustees noted that in the fund industry as a whole, as well as among funds similar to the Funds, there is no uniformity or pattern in the fees and asset levels at which breakpoints (if any) apply. Depending on the age, size, and other characteristics of a particular fund and its manager’s cost structure, different conclusions can be drawn as to whether there are economies of scale to be realized at any particular level of assets, notwithstanding the intuitive conclusion that such economies exist, or will be realized at some level of total assets. Moreover, because different managers have different cost structures and service models, it is difficult to draw meaningful conclusions from the breakpoints that may have been adopted by other funds. The Trustees also noted that the advisory agreements for many funds do not have breakpoints at all, or if breakpoints exist, they may be at asset levels significantly greater than those of the individual Funds. The Trustees also noted that the total assets in all of the Funds as of June 30, 2013 were approximately $12.85 billion, and that no single non-money market Fund had assets in excess of $616 million.
The Trustees noted that the Manager has agreed to temporarily “cap” Fund expenses at certain levels, which has the effect of reducing expenses as would the implementation of advisory fee breakpoints. The Manager has committed to continue to consider the continuation of fee “caps” and/or advisory fee breakpoints as the Funds grow larger. The Board receives quarterly reports on the level of Fund assets. It expects to consider whether or not to approve the Agreements at a meeting to be held prior to December 31, 2014, and will at that time, or prior thereto, consider: (a) the extent to which economies of scale can be realized, and (b) whether the advisory fee should be modified to reflect such economies of scale, if any.
Having taken these factors into account, the Trustees concluded that the absence of breakpoints in certain of the Funds’ advisory fee rate schedules was acceptable under each Fund’s circumstances.
20
Information about the Board of Trustees and Officers (Unaudited)
The Trust is managed by the Trustees in accordance with the laws of the state of Delaware governing business trusts. There are currently eight Trustees, two of whom are “interested persons” of the Trust within the meaning of that term under the 1940 Act. The Trustees and Officers of the Trust, their addresses, ages, their positions held with the Trust, their terms of office with the Trust and length of time served, their principal occupation(s) during the past five years, the number of portfolios in the Trust they oversee, and their other directorships held are as follows:
Non-Interested Trustees(1)
Name, Address, and Age | Positions Held with VIP Trust and FOF Trust | Term of Office(2)/Length of Time Served | Principal Occupation(s) During Past 5 Years | Number of Portfolios Overseen for VIP Trust and FOF Trust | Other Directorships Held Outside the AZL Fund Complex | |||||
Peter R. Burnim, Age 66 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/07 | Chairman, Argus Investment Strategies Fund Ltd., February 2013 to present; Managing Director, iQ Venture Advisors, LLC. 2005 to 2012; Chairman, Northstar Group Holdings Ltd. Bermuda, 2011 to present; Expert Witness, Massachusetts Department of Revenue, 2011 to 2012; Executive Vice President, Northstar Companies, 2002 to 2005; Senior Officer, Citibank and Citicorp for over 25 years | 41 | Argus Group Holdings; Northstar Group Holdings, NRIL, Sterling Centrecorp Inc.; Highland Financial Holdings; and Bank of Bermuda NY | |||||
Peggy L. Ettestad, Age 56 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/07 | Managing Director, Red Canoe Management Consulting LLC, 2008 to present; Senior Managing Director, Residential Capital LLC, 2003 to 2008; Chief Operations Officer, Transamerica Reinsurance 2002 to 2003 | 41 | Luther College | |||||
Roger Gelfenbien, Age 70 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 10/99 | Retired; Partner of Accenture 1983 to 1999 | 41 | Virtus Funds (8 Funds) | |||||
Claire R. Leonardi, Age 58 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/04 | Chief Executive Officer, Connecticut Innovations, Inc., 2012 to present; General Partner, Fairview Capital, L.P., 1994 to 2012 | 41 | The Natural History Museum of the Adirondacks | |||||
Dickson W. Lewis, Age 65 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/04 | Retired; Consultant to Lifetouch National School Studios; Vice President/General Manager, Yearbooks & Canada-Lifetouch National School Studios, 2006 to 2013; Vice President/General Manager of Jostens, Inc., 2002 to 2006; Senior Vice President of Fortis Group, 1997 to 2002 | 41 | None | |||||
Peter W. McClean, Age 69 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/04 | Retired; President and CEO of Measurisk, LLC, 2001 to 2003; Chief Risk Management Officer at Bank of Bermuda Ltd., 1996 to 2001 | 41 | PNMAC Opportunity Fund; Northeast Bank; and FHI | |||||
Arthur C. Reeds III, Age 69 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 10/99 | Retired; Senior Investment Officer, Hartford Foundation for Public Giving, 2000 to 2003; Chairman, Chief Executive and President of Conning Corp., 1999 to 2000; Investment Consultant, 1997 to 1999 | 41 | Connecticut Water Service, Inc. |
Interested Trustees(3)
Name, Address, and Age | Positions Held with VIP Trust and FOF Trust | Term of Office(2)/Length of Time Served | Principal Occupation(s) During Past 5 Years | Number of Portfolios Overseen for VIP Trust and FOF Trust | Other Directorships Held Outside the AZL Fund Complex | |||||
Robert DeChellis, Age 46 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 3/08 | President and CEO, Allianz Life Financial Services, LLC, 2007 to present | 41 | None | |||||
Brian Muench, Age 43 5701 Golden Hills Drive | Trustee | Since 6/11 | President, Allianz Investment Management LLC, November 2010 to present; Vice President, Allianz Life, April 2011 to present; Vice President, Advisory Management, Allianz Investment Management LLC from December 2005 to November 2010 | 41 | None |
21
Officers
Name, Address, and Age | Positions Held with VIP and VIP FOF Trust | Term of Office(2)/Length of Time Served | Principal Occupation(s) During Past 5 Years | |||
Brian Muench, Age 43 5701 Golden Hills Drive Minneapolis, MN 55416 | President | Since 11/10 | President, Allianz Investment Management LLC from November 2010, to present; Vice President, Allianz Life from April 2011 to present; Vice President, Allianz Investment Management LLC from December 2005 to November 2010. | |||
Michael Radmer, Age 68 Dorsey & Whitney LLP, Suite 1500 50 South Sixth Street Minneapolis, MN 55402-1498 | Secretary | Since 2/02 | Partner, Dorsey and Whitney LLP since 1976. | |||
Ty Edwards, Age 47 Citi Fund Services Ohio, Inc. 3435 Stelzer Road Columbus, OH 43219 | Treasurer, Principal Accounting Officer and Principal Financial Officer | Since 4/10 | Senior Vice President, Financial Administration, Citi Fund Services Ohio, Inc., December 2009 to present; Director, Product Management, Columbia Management, April 2007 to April 2009; Deputy Treasurer, Columbia Funds and Director, Fund Administration, Columbia Management, January 2006 to April 2007. | |||
Christopher R. Pheiffer, Age 45(4) 5701 Golden Hills Drive Minneapolis, MN 55416 | Chief Compliance Officer(5) and Anti-Money Laundering Compliance Officer | Since 2/14 (interim) | Deputy Chief Compliance Officer of the Trusts, 2007-2014 |
(1) | Member of the Audit Committee. |
(2) | Indefinite. |
(3) | Is an “interested person”, as defined by the 1940 Act, due to employment by Allianz. |
(4) | Stephen G. Simon, previously the Chief Compliance Officer of the Trusts, resigned all of his positions with Allianz effective February 21, 2014. Mr. Pheiffer, previously the Deputy Chief Compliance Officer of the Trusts, has been named Chief Compliance Officer of the Trusts on an interim basis while a search for a permanent replacement is conducted. |
(5) | The Manager and the Trust are parties to a Chief Compliance Officer Agreement under which the Manager is compensated by the Trust for providing an employee of the Manager or one of its affiliates to act as the Trust’s Chief Compliance Officer. The Chief Compliance Officer and Anti-Money Laundering Compliance Officer is not considered a corporate officer or executive employee of the Trust. |
22
The Allianz VIP Funds are distributed by Allianz Life Financial Services, LLC. These Funds are not FDIC Insured. | ANNRPT1213 2/14 |
AZL® Morgan Stanley Mid Cap Growth Fund
Annual Report
December 31, 2013
Table of Contents
Management Discussion and Analysis
Page 1
Expense Examples and Portfolio Composition
Page 3
Schedule of Portfolio Investments
Page 4
Statement of Assets and Liabilities
Page 7
Statement of Operations
Page 7
Statements of Changes in Net Assets
Page 8
Financial Highlights
Page 9
Notes to the Financial Statements
Page 10
Report of Independent Registered Public Accounting Firm
Page 15
Other Federal Income Tax Information
Page 16
Other Information
Page 17
Approval of Investment Advisory Agreement
Page 18
Information about the Board of Trustees and Officers
Page 21
This report is submitted for the general information of the shareholder of the Fund. The report is not authorized for distribution to prospective investors in the Fund unless preceded or accompanied by an effective prospectus, which contains details concerning the sales charges and other pertinent information.
AZL® Morgan Stanley Mid Cap Growth Fund Review (unaudited)
Allianz Investment Management LLC serves as the Manager for the AZL® Morgan Stanley Mid Cap Growth Fund and Morgan Stanley Investment Management Inc. serves as Subadviser to the Fund.
What factors affected the Fund’s performance during the year ended December 31, 2013?
For the year ended December 31, 2013, the AZL® Morgan Stanley Mid Cap Growth Fund returned 38.94%1. That compared to a 35.74% total return for its benchmark, the Russell Midcap® Growth Index2.
The market was volatile during the 12-month period. Factors such as a spring slowdown in the U.S. economy, concerns about the European debt crisis, and the lack of resolution on the “fiscal cliff” (the automatic tax increases and spending cuts scheduled to happen on January 1, 2013) weighed on the market at different times during the period.
However, measures by the European Central Bank to address the eurozone debt crisis and additional stimulus from the U.S. Federal Reserve— including a third round of quantitative easing measures—helped ease investors’ fears. Corporate earnings growth remained strong, further contributing to market gains during the period.
Despite strong performance for mid-cap stocks during the period, the Fund’s overweight position and stock selection in the technology sector detracted from its performance relative to the benchmark. The Fund’s stock selection and an underweight position in the materials and processing sector hampered relative performance, since the best performing sectors for the benchmarks were materials and processing. Another area of relative weakness was stock selection in the consumer discretionary sector.*
By contrast, the Fund’s stock selection in the producer durables sector was a positive contributor to relative performance. In addition, stock selections in the utilities sector helped the Fund’s performance, although those gains were offset by the negative effect of an overweight position in the utilities sector.*
Past performance does not guarantee future results.
* | The Fund’s portfolio composition is subject to change. There is no guarantee that any sectors mentioned will continue to perform well or that securities in such sectors will be held by the Fund in the future. The information contained in this commentary is for informational purposes only and should not be construed as a recommendation to purchase or sell securities in the sector mentioned. The Fund’s holdings and weightings are as of December 31, 2013. |
1 | The recent growth rate in the stock market has helped to produce short-term returns that are not typical and may not continue in the future. Because of ongoing market volatility, Fund performance may be subject to substantial short-term changes. |
2 | The Russell Midcap® Growth Index measures the performance of the mid-cap growth segment of the U.S. equity universe. It includes those Russell Midcap Index companies with higher price-to-book ratios and higher forecasted growth values. Investors cannot invest directly in an index. |
1
AZL® Morgan Stanley Mid Cap Growth Fund Review (unaudited)
Fund Objective
The Fund’s investment objective is to seek capital growth. This objective may be changed by the Trustees of the Fund without shareholder approval. The Fund seeks to achieve its objective by investing at least 80% of its net assets, plus any borrowings for investment purposes, in common stocks and other equity securities of mid-capitalization growth companies.
Investment Concerns
Equity securities (stocks) are more volatile and carry more risk than other forms of investments, including investments in high-grade fixed income securities. The net asset value per share of this Fund will fluctuate as the value of the securities in the portfolio changes.
Small- to mid-capitalization companies typically have a higher risk of failure and historically have experienced a greater degree of volatility.
Growth based investments can perform differently from the market as a whole and can be more volatile that other types of securities.
International investing may involve risk of capital loss from unfavorable fluctuations in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations.
Emerging market investing may be subject to additional economic, political, liquidity, and currency risks not associated with more developed countries.
For a complete description of these and other risks associated with investing in a mutual Fund, please refer to the Fund’s prospectus.
Growth of $10,000 Investment
The chart above represents a comparison of a hypothetical investment in the Fund versus a similar investment in the Fund’s benchmark, and represents the reinvestment of dividends and capital gains in the Fund.
Average Annual Total Returns as of December 31, 2013
1 | 3 | 5 | 10 | |||||||||||||
Year | Year | Year | Year | |||||||||||||
AZL® Morgan Stanley Mid Cap Growth Fund | 38.94 | %1 | 12.05 | % | 24.06 | % | 11.14 | % | ||||||||
Russell Midcap® Growth Index | 35.74 | % | 15.63 | % | 23.37 | % | 9.77 | % |
Past performance does not guarantee future results. The performance data quoted represents past performance and current returns may be lower or higher. The investment return and principal value will fluctuate so that an investor’s shares, when redeemed may be worth more or less than the original cost. To obtain performance information current to the most recent month end, please visit www.Allianzlife.com.
Expense Ratio2 | Gross | |||
AZL® Morgan Stanley Mid Cap Growth Fund | 1.14 | % |
The above expense ratio is based on the current Fund prospectus dated April 29, 2013. The Manager and the Fund have entered into a written contract limiting operating expenses, excluding certain expenses (such as interest expense and Acquired Fund fees and expenses), to 1.30% through April 30, 2015. Additional information pertaining to the December 31, 2013 expense ratios can be found in the financial highlights.
1 | The recent growth rate in the stock market has helped to produce short-term returns that are not typical and may not continue in the future. Because of ongoing market volatility, Fund performance may be subject to substantial short-term changes. |
2 | Acquired Fund Fees and Expenses are incurred indirectly by the Fund through the valuation of the Fund’s investments in the other investment companies. Accordingly, Acquired Fees and Expenses affect the Fund’s total returns. Because these fees and expenses are not included in the Fund’s financial highlights, the Fund’s total annual fund operating expenses do not correlate to the ratios of expenses to average net assets shown in the financial highlights table. Without Acquired Fund Fees and expenses the Fund’s gross ratio would be 1.13%. |
The total return of the Fund does not reflect the effect of any insurance charges, the annual maintenance fee or the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. Such charges, fees and tax payments would reduce the performance quoted. |
The Fund’s performance is measured against the Russell Midcap® Growth Index, an unmanaged index that measures the performance of the mid-cap growth segment of the U.S. equity universe. It includes those Russell Midcap Index companies with higher price-to-book ratios and higher forecasted growth values. The index does not reflect the deduction of fees associated with a mutual fund, such as investment management and fund accounting fees. The Fund’s performance reflects the deduction of fees for services provided to the Fund. Investors cannot invest directly in an index. |
2
AZL Morgan Stanley Mid Cap Growth Fund
(Unaudited)
As a shareholder of the AZL Morgan Stanley Mid Cap Growth Fund (the “Fund”), you incur ongoing costs, including management fees, distribution fees, and other Fund expenses. These examples are intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. Please note that the expenses shown in each table do not reflect expenses that apply to the subaccount or the insurance contract. If the expenses that apply to the subaccount of the insurance contract were included, your costs would have been higher.
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the periods presented below.
The Actual Expense table below provides information about actual account values and actual expenses. You may use the information below, 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 table under the heading entitled “Expenses Paid During Period” to estimate the expenses you paid on your account during this period.
Beginning Account Value 7/1/13 | Ending Account Value 12/31/13 | Expenses Paid During Period 7/1/13 - 12/31/13* | Annualized Expense Ratio During Period 7/1/13 - 12/31/13 | |||||||||||||||||
AZL Morgan Stanley Mid Cap Growth Fund | $ | 1,000.00 | $ | 1,206.60 | $ | 6.12 | 1.10 | % |
The Hypothetical Expense table below provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.
Beginning Account Value 7/1/13 | Ending Account Value 12/31/13 | Expenses Paid During Period 7/1/13 - 12/31/13* | Annualized Expense Ratio During Period 7/1/13 - 12/31/13 | |||||||||||||||||
AZL Morgan Stanley Mid Cap Growth Fund | $ | 1,000.00 | $ | 1,019.66 | $ | 5.60 | 1.10 | % |
* | Expenses are equal to the average account value over the period, multiplied by the Fund’s annualized expense ratio, multiplied by 184/365 (to reflect the one half year period). |
Portfolio Composition
(Unaudited)
Investments | Percent of net assets | ||||
Information Technology | 31.0 | % | |||
Consumer Discretionary | 19.8 | ||||
Health Care | 14.0 | ||||
Industrials | 13.6 | ||||
Financials | 7.1 | ||||
Consumer Staples | 6.9 | ||||
Technology | 2.0 | ||||
Private Placements | 1.1 | ||||
Energy | 1.0 | ||||
Materials | 0.9 | ||||
|
| ||||
Total Common Stock | 97.4 | ||||
Securities Held as Collateral for Securities on Loan | 6.1 | ||||
Money Market | 2.8 | ||||
|
| ||||
Total Investment Securities | 106.3 | ||||
Net other assets (liabilities) | (6.3 | ) | |||
|
| ||||
Net Assets | 100.0 | % | |||
|
|
3
AZL Morgan Stanley Mid Cap Growth Fund
Schedule of Portfolio Investments
December 31, 2013
Shares | Fair Value | |||||||
| Common Stocks (96.3%): |
| ||||||
| Aerospace & Defense (0.5%): |
| ||||||
16,686 | TransDigm Group, Inc. | $ | 2,686,780 | |||||
|
| |||||||
| Auto Components (2.1%): |
| ||||||
74,826 | Tesla Motors, Inc.*^ | 11,252,334 | ||||||
|
| |||||||
| Beverages (1.1%): |
| ||||||
89,477 | Monster Beverage Corp.* | 6,063,856 | ||||||
|
| |||||||
| Biotechnology (0.8%): |
| ||||||
20,889 | Alnylam Pharmaceuticals, Inc.* | 1,343,789 | ||||||
246,936 | Ironwood Pharmaceuticals, Inc.*^ | 2,866,927 | ||||||
|
| |||||||
4,210,716 | ||||||||
|
| |||||||
| Commercial Services & Supplies (3.8%): |
| ||||||
463,863 | Edenred | 15,560,230 | ||||||
43,228 | Stericycle, Inc.* | 5,021,797 | ||||||
|
| |||||||
20,582,027 | ||||||||
|
| |||||||
| Communications Equipment (3.2%): |
| ||||||
251,279 | Motorola Solutions, Inc. | 16,961,333 | ||||||
|
| |||||||
| Computers & Peripherals (1.6%): |
| ||||||
61,991 | 3D Systems Corp.*^ | 5,760,824 | ||||||
20,847 | Stratasys, Ltd.* | 2,808,091 | ||||||
|
| |||||||
8,568,915 | ||||||||
|
| |||||||
| Construction Materials (0.9%): |
| ||||||
50,620 | Martin Marietta Materials, Inc. | 5,058,963 | ||||||
|
| |||||||
| Diversified Financial Services (2.5%): |
| ||||||
310,158 | MSCI, Inc., Class A* | 13,560,108 | ||||||
|
| |||||||
| Food Products (5.8%): |
| ||||||
66,006 | Green Mountain Coffee Roasters, Inc.* | 4,988,733 | ||||||
154,530 | McCormick & Co. | 10,650,208 | ||||||
185,017 | Mead Johnson Nutrition Co. | 15,497,024 | ||||||
|
| |||||||
31,135,965 | ||||||||
|
| |||||||
| Health Care Equipment & Supplies (2.8%): |
| ||||||
39,172 | Intuitive Surgical, Inc.* | 15,045,182 | ||||||
|
| |||||||
| Health Care Technology (3.0%): |
| ||||||
117,447 | athenahealth, Inc.*^ | 15,796,622 | ||||||
|
| |||||||
| Hotels, Restaurants & Leisure (4.7%): |
| ||||||
269,823 | Dunkin’ Brands Group, Inc. | 13,005,469 | ||||||
68,063 | Panera Bread Co., Class A* | 12,026,051 | ||||||
|
| |||||||
25,031,520 | ||||||||
|
| |||||||
| Insurance (4.6%): |
| ||||||
192,349 | Arch Capital Group, Ltd.* | 11,481,312 | ||||||
466,775 | Progressive Corp. (The) | 12,728,954 | ||||||
|
| |||||||
24,210,266 | ||||||||
|
| |||||||
| Internet & Catalog Retail (3.6%): |
| ||||||
1,120,993 | Groupon, Inc.* | 13,194,087 | ||||||
33,060 | TripAdvisor, Inc.* | 2,738,360 | ||||||
77,732 | zulily, Inc., Class A*^ | 3,220,437 | ||||||
|
| |||||||
19,152,884 | ||||||||
|
| |||||||
| Internet Retail (0.5%): |
| ||||||
27,722 | Asos plc* | 2,813,538 | ||||||
|
|
Shares | Fair Value | |||||||
| Common Stocks, continued |
| ||||||
| Internet Software & Services (14.2%): |
| ||||||
278,463 | Akamai Technologies, Inc.* | $ | 13,137,883 | |||||
58,823 | LinkedIn Corp., Class A* | 12,754,591 | ||||||
34,546 | MercadoLibre, Inc.^ | 3,723,713 | ||||||
108,063 | Qihoo 360 Technology Co., Ltd., ADR* | 8,866,570 | ||||||
35,417 | SINA Corp.* | 2,983,882 | ||||||
178,992 | Twitter, Inc.*^ | 11,392,841 | ||||||
359,843 | Yandex NV, Class A* | 15,527,225 | ||||||
246,308 | Youku.com, Inc., ADR* | 7,463,132 | ||||||
|
| |||||||
75,849,837 | ||||||||
|
| |||||||
| IT Services (5.1%): |
| ||||||
108,710 | FleetCor Technologies, Inc.* | 12,737,551 | ||||||
207,305 | Gartner, Inc.* | 14,729,020 | ||||||
|
| |||||||
27,466,571 | ||||||||
|
| |||||||
| Life Sciences Tools & Services (4.9%): |
| ||||||
235,660 | Illumina, Inc.* | 26,068,709 | ||||||
|
| |||||||
| Machinery (1.1%): |
| ||||||
90,726 | Colfax Corp.* | 5,778,339 | ||||||
|
| |||||||
| Media (2.0%): |
| ||||||
294,664 | Aimia, Inc. | 5,412,762 | ||||||
38,286 | Charter Communications, Inc., Class A* | 5,235,993 | ||||||
|
| |||||||
10,648,755 | ||||||||
|
| |||||||
| Multiline Retail (2.3%): |
| ||||||
218,054 | Dollar Tree, Inc.* | 12,302,607 | ||||||
|
| |||||||
| Oil, Gas & Consumable Fuels (1.0%): |
| ||||||
62,943 | Range Resources Corp. | 5,306,724 | ||||||
|
| |||||||
| Pharmaceuticals (2.5%): |
| ||||||
200,047 | Endo Health Solutions, Inc.* | 13,495,171 | ||||||
|
| |||||||
| Professional Services (8.2%): |
| ||||||
107,678 | IHS, Inc., Class A* | 12,889,057 | ||||||
251,842 | Intertek Group plc | 13,137,274 | ||||||
428,417 | Qualicorp SA* | 4,090,255 | ||||||
203,298 | Verisk Analytics, Inc., Class A* | 13,360,744 | ||||||
|
| |||||||
43,477,330 | ||||||||
|
| |||||||
| Semiconductors & Semiconductor Equipment (0.8%): |
| ||||||
83,012 | First Solar, Inc.* | 4,535,776 | ||||||
|
| |||||||
| Software (8.1%): |
| ||||||
47,465 | NetSuite, Inc.* | 4,889,844 | ||||||
99,910 | ServiceNow, Inc.* | 5,595,959 | ||||||
259,136 | Solera Holdings, Inc. | 18,336,463 | ||||||
82,292 | Splunk, Inc.* | 5,650,992 | ||||||
64,596 | Workday, Inc., Class A* | 5,371,803 | ||||||
729,709 | Zynga, Inc.* | 2,772,894 | ||||||
|
| |||||||
42,617,955 | ||||||||
|
| |||||||
| Specialty Retail (1.3%): |
| ||||||
74,919 | Sally Beauty Holdings, Inc.* | 2,264,801 | ||||||
45,922 | Ulta Salon, Cosmetics & Fragrance, Inc.* | 4,432,392 | ||||||
|
| |||||||
6,697,193 | ||||||||
|
| |||||||
| Textiles, Apparel & Luxury Goods (3.3%): |
| ||||||
170,464 | Carter’s, Inc. | 12,237,611 |
Continued
4
AZL Morgan Stanley Mid Cap Growth Fund
Schedule of Portfolio Investments
December 31, 2013
Shares | Fair Value | |||||||
| Common Stocks, continued |
| ||||||
| Textiles, Apparel & Luxury Goods, continued |
| ||||||
250,503 | Moncler SpA* | $ | 5,444,519 | |||||
|
| |||||||
17,682,130 | ||||||||
|
| |||||||
| Total Common Stocks (Cost $356,221,646) | 514,058,106 | ||||||
|
| |||||||
| Private Placements (1.1%): |
| ||||||
| Internet & Catalog Retail (0.2%): |
| ||||||
37,815 | Flipkart(a)(b) | 895,837 | ||||||
33,446 | Peixe Urbano, Inc.*(a)(b) | 40,470 | ||||||
|
| |||||||
936,307 | ||||||||
|
| |||||||
| Internet Software & Services (0.9%): |
| ||||||
245,606 | Dropbox, Inc.*(a)(b) | 3,374,627 | ||||||
229,712 | Palantir Technologies, Inc., Series G Preferred*(a)(b) | 806,289 | ||||||
67,672 | Palantir Technologies, Inc., Series H Preferred(a) | 237,529 | ||||||
67,672 | Palantir Technologies, Inc., Series H-1 Preferred(a) | 237,528 | ||||||
|
| |||||||
4,655,973 | ||||||||
|
| |||||||
| Transportation Infrastructure (0.0%): |
| ||||||
818,433 | Better Place LLC(a)(b) | — | ||||||
|
| |||||||
| Total Private Placements (Cost $7,415,383) | 5,592,280 | ||||||
|
|
Contracts, Shares, Notional Amount or Principal Amount | Fair Value | |||||||
| Securities Held as Collateral for Securities on Loan (6.1%): |
| ||||||
$ | 32,465,344 | Allianz Variable Insurance Products Securities Lending Collateral Trust(c) | $ | 32,465,344 | ||||
|
| |||||||
| Total Securities Held as Collateral for Securities on Loan | 32,465,344 | ||||||
|
| |||||||
| Unaffiliated Investment Company (2.8%): |
| ||||||
15,051,060 | Dreyfus Treasury Prime Cash Management Fund, Institutional Shares, 0.00%(d) | 15,051,060 | ||||||
|
| |||||||
| Total Unaffiliated Investment Company | 15,051,060 | ||||||
|
| |||||||
| Total Investment Securities | 567,166,790 | ||||||
| Net other assets (liabilities) — (6.3)% | (33,412,822 | ) | |||||
|
| |||||||
| Net Assets — 100.0% | $ | 533,753,968 | |||||
|
|
Percentages indicated are based on net assets as of December 31, 2013.
ADR—American Depositary Receipt
* | Non-income producing security. |
^ | This security or a partial position of this security was on loan as of December 31, 2013. The total value of securities on loan as of December 31, 2013, was $32,368,253. |
(a) | Security was valued in good faith pursuant to procedures approved by the Board of Trustees as of December 31, 2013. The total of all such securities represent 1.05% of the net assets of the fund. |
(b) | Rule 144A, Section 4(2) or other security which is restricted to resale to institutional investors. The sub-adviser has deemed these securities to be illiquid based on procedures approved by the Board of Trustees. As of December 31, 2013, these securities represent 0.96% of the net assets of the fund. |
(c) | Purchased with cash collateral held from securities lending. The value of the collateral could include collateral held for securities that were sold on or before December 31, 2013. |
(d) | The rate represents the effective yield at December 31, 2013. |
(e) | See Federal Tax Information listed in the Notes to the Financial Statements. |
Continued
5
AZL Morgan Stanley Mid Cap Growth Fund
Schedule of Portfolio Investments
December 31, 2013
See accompanying notes to the financial statements.
The following represents the concentrations by country of risk (based on the domicile of the security issuer) relative to the total fair value of investments as of December 31, 2013:
Country | Percentage | |||
Argentina | 0.7 | % | ||
Bermuda | 2.0 | % | ||
Brazil | 0.7 | % | ||
Canada | 1.0 | % | ||
Cayman Islands | 3.4 | % | ||
France | 2.7 | % | ||
Israel | 0.5 | % | ||
Italy | 1.0 | % | ||
Netherlands | 2.7 | % | ||
United Kingdom | 2.8 | % | ||
United States | 82.5 | % | ||
|
| |||
100.0 | % | |||
|
|
6
AZL Morgan Stanley Mid Cap Growth Fund
Statement of Assets and Liabilities
December 31, 2013
Assets: | |||||
Investment securities, at cost | $ | 411,153,433 | |||
|
| ||||
Investment securities, at value* | $ | 567,166,790 | |||
Cash | 48,421 | ||||
Interest and dividends receivable | 232,936 | ||||
Foreign currency, at value (cost $418) | 418 | ||||
Receivable for investments sold | 739,783 | ||||
|
| ||||
Total Assets | 568,188,348 | ||||
|
| ||||
Liabilities: | |||||
Payable for investments purchased | 1,160,309 | ||||
Payable for capital shares redeemed | 278,461 | ||||
Payable for collateral received on loaned securities | 32,465,344 | ||||
Manager fees payable | 352,922 | ||||
Administration fees payable | 17,794 | ||||
Distribution fees payable | 110,916 | ||||
Custodian fees payable | 9,562 | ||||
Administrative and compliance services fees payable | 2,387 | ||||
Trustee fees payable | 18 | ||||
Other accrued liabilities | 36,667 | ||||
|
| ||||
Total Liabilities | 34,434,380 | ||||
|
| ||||
Net Assets | $ | 533,753,968 | |||
|
| ||||
Net Assets Consist of: | |||||
Capital | $ | 332,176,030 | |||
Accumulated net investment income/(loss) | (311 | ) | |||
Accumulated net realized gains/(losses) from investment transactions | 45,564,971 | ||||
Net unrealized appreciation/(depreciation) on investments | 156,013,278 | ||||
|
| ||||
Net Assets | $ | 533,753,968 | |||
|
| ||||
Shares of beneficial interest (unlimited number of shares authorized, no par value) | 28,886,734 | ||||
Net Asset Value (offering and redemption price per share) | $ | 18.48 | |||
|
|
* | Includes securities on loan of $32,368,253. |
For the Year Ended December 31, 2013
Investment Income: | |||||
Dividends | $ | 3,034,271 | |||
Interest | 827 | ||||
Income from securities lending | 780,930 | ||||
Foreign withholding tax | (144,544 | ) | |||
|
| ||||
Total Investment Income | 3,671,484 | ||||
|
| ||||
Expenses: | |||||
Manager fees | 3,766,620 | ||||
Administration fees | 144,694 | ||||
Distribution fees | 1,179,015 | ||||
Custodian fees | 36,223 | ||||
Administrative and compliance services fees | 9,480 | ||||
Trustee fees | 24,435 | ||||
Professional fees | 26,523 | ||||
Shareholder reports | 36,179 | ||||
Other expenses | 13,022 | ||||
|
| ||||
Total expenses before reductions | 5,236,191 | ||||
Less expenses paid indirectly | (35,010 | ) | |||
|
| ||||
Net expenses | 5,201,181 | ||||
|
| ||||
Net Investment Income/(Loss) | (1,529,697 | ) | |||
|
| ||||
Realized and Unrealized Gains/(Losses) on Investments: | |||||
Net realized gains/(losses) on securities transactions | 47,723,542 | ||||
Change in net unrealized appreciation/depreciation on investments | 108,417,382 | ||||
|
| ||||
Net Realized/Unrealized Gains/(Losses) on Investments | 156,140,924 | ||||
|
| ||||
Change in Net Assets Resulting From Operations | $ | 154,611,227 | |||
|
|
See accompanying notes to the financial statements.
7
Statements of Changes in Net Assets
AZL Morgan Stanley Mid Cap Growth Fund | ||||||||||
For the Year Ended December 31, 2013 | For the Year Ended December 31, 2012 | |||||||||
Change in Net Assets: | ||||||||||
Operations: | ||||||||||
Net investment income/(loss) | $ | (1,529,697 | ) | $ | 2,516,255 | |||||
Net realized gains/(losses) on investment transactions | 47,723,542 | 13,716,857 | ||||||||
Change in unrealized appreciation/depreciation on investments | 108,417,382 | 15,107,352 | ||||||||
|
|
|
| |||||||
Change in net assets resulting from operations | 154,611,227 | 31,340,464 | ||||||||
|
|
|
| |||||||
Dividends to Shareholders: | ||||||||||
From net investment income | (2,302,379 | ) | — | |||||||
From net realized gains | (12,984,446 | ) | (20,211,960 | ) | ||||||
|
|
|
| |||||||
Change in net assets resulting from dividends to shareholders | (15,286,825 | ) | (20,211,960 | ) | ||||||
|
|
|
| |||||||
Capital Transactions: | ||||||||||
Proceeds from shares issued | 36,881,920 | 42,372,592 | ||||||||
Proceeds from dividends reinvested | 15,286,825 | 20,211,960 | ||||||||
Value of shares redeemed | (71,515,789 | ) | (35,599,641 | ) | ||||||
|
|
|
| |||||||
Change in net assets resulting from capital transactions | (19,347,044 | ) | 26,984,911 | |||||||
|
|
|
| |||||||
Change in net assets | 119,977,358 | 38,113,415 | ||||||||
Net Assets: | ||||||||||
Beginning of period | 413,776,610 | 375,663,195 | ||||||||
|
|
|
| |||||||
End of period | $ | 533,753,968 | $ | 413,776,610 | ||||||
|
|
|
| |||||||
Accumulated net investment income/(loss) | $ | (311 | ) | $ | 2,332,053 | |||||
|
|
|
| |||||||
Share Transactions: | ||||||||||
Shares issued | 2,267,067 | 3,010,472 | ||||||||
Dividends reinvested | 912,102 | 1,490,558 | ||||||||
Shares redeemed | (4,434,151 | ) | (2,560,158 | ) | ||||||
|
|
|
| |||||||
Change in shares | (1,254,982 | ) | 1,940,872 | |||||||
|
|
|
|
See accompanying notes to the financial statements.
8
AZL Morgan Stanley Mid Cap Growth Fund
(Selected data for a share of beneficial interest outstanding throughout the periods indicated)
Year Ended December 31, | |||||||||||||||||||||||||
2013 | 2012 | 2011 | 2010 | 2009 | |||||||||||||||||||||
Net Asset Value, Beginning of Period | $ | 13.73 | $ | 13.32 | $ | 14.31 | $ | 10.80 | $ | 6.85 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Investment Activities: | |||||||||||||||||||||||||
Net Investment Income/(Loss) | (0.05 | ) | 0.08 | (0.04 | ) | 0.01 | (0.02 | ) | |||||||||||||||||
Net Realized and Unrealized Gains/(Losses) on Investments | 5.34 | 1.02 | (0.90 | ) | 3.50 | 3.97 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Total from Investment Activities | 5.29 | 1.10 | (0.94 | ) | 3.51 | 3.95 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Dividends to Shareholders From: | |||||||||||||||||||||||||
Net Investment Income | (0.08 | ) | — | (0.05 | ) | — | — | ||||||||||||||||||
Net Realized Gains | (0.46 | ) | (0.69 | ) | — | — | — | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Total Dividends | (0.54 | ) | (0.69 | ) | (0.05 | ) | — | — | |||||||||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Net Asset Value, End of Period | $ | 18.48 | $ | 13.73 | $ | 13.32 | $ | 14.31 | $ | 10.80 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Total Return(a) | 38.94 | % | 8.36 | % | (6.57 | )% | 32.50 | % | 57.66 | % | |||||||||||||||
Ratios to Average Net Assets/Supplemental Data: | |||||||||||||||||||||||||
Net Assets, End of Period (000’s) | $ | 533,754 | $ | 413,777 | $ | 375,663 | $ | 456,423 | $ | 354,846 | |||||||||||||||
Net Investment Income/(Loss) | (0.32 | )% | 0.62 | % | (0.20 | )% | 0.07 | % | (0.18 | )% | |||||||||||||||
Expenses Before Reductions(b) | 1.11 | % | 1.13 | % | 1.14 | % | 1.15 | % | 1.17 | % | |||||||||||||||
Expenses Net of Reductions | 1.10 | % | 1.12 | % | 1.12 | % | 1.09 | % | 1.11 | % | |||||||||||||||
Expenses Net of Reductions, Excluding Expenses Paid Indirectly(c) | 1.11 | % | 1.13 | % | 1.13 | % | 1.10 | % | 1.13 | % | |||||||||||||||
Portfolio Turnover Rate | 49 | % | 32 | % | 32 | % | 42 | % | 40 | % |
(a) | The returns include reinvested dividends and fund level expenses, but exclude insurance contract charges. If these charges were included, the returns would have been lower. |
(b) | Excludes fee reductions. If such fee reductions had not occurred, the ratios would have been as indicated. |
(c) | Expenses net of reductions excludes expenses paid indirectly, pursuant to a “commission recapture” program, under which brokers remit a portion of the brokerage commission which is used to pay certain Fund expenses. See note 2 in the Notes to the Financial Statements. |
See accompanying notes to the financial statements.
9
AZL Morgan Stanley Mid Cap Growth Fund
Notes to the Financial Statements
December 31, 2013
1. Organization
The Allianz Variable Insurance Products Trust (the “Trust”) was organized as a Delaware statutory trust on July 13, 1999. The Trust is a diversified open-end management investment company registered under the Investment Company Act of 1940. The Trust consists of 29 separate investment portfolios (collectively, the “Funds”), of which one is included in this report, the AZL Morgan Stanley Mid Cap Growth Fund (the “Fund”), and 28 are presented in separate reports.
The Trust is authorized to issue an unlimited number of shares of the Fund without par value. Shares of the Fund are available through the variable annuity contracts and variable life insurance policies offered through the separate accounts of participating insurance companies.
Under the Trust’s organizational documents, its officers and trustees are indemnified against certain liabilities arising out of the performance of their duties to the Fund. In addition, in the normal course of business, the Fund may enter into contracts with its vendors and others that provide for general indemnifications. The Fund’s maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Fund. However, based on experience, the Fund expects the risk of loss to be remote.
2. Significant Accounting Policies
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. The policies conform with U.S. generally accepted accounting principles (“U.S. GAAP”). The preparation of financial statements requires management to make certain 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 increases and decreases in net assets from operations during the reporting period. Actual results could differ from those estimates.
Security Valuation
The Fund records its investments at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between willing market participants at the measurement date. The valuation techniques used to determine fair value are further described in Note 4 below.
Investment Transactions and Investment Income
Investment transactions are recorded not later than on the business day following trade date. However, for financial reporting purposes, investment transactions are accounted for on trade date. Net realized gains and losses on investments sold and on foreign currency transactions are recorded on the basis of identified cost. Interest income is recorded on the accrual basis and includes, where applicable, the amortization of premiums or accretion of discounts. Dividend income is recorded on the ex-dividend date except in the case of foreign securities, in which case dividends are recorded as soon as such information becomes available.
Real Estate Investment Trusts
The Fund may own shares of real estate investment trusts (“REITs”) which report information on the source of their distributions annually. Certain distributions received from REITs during the year, which are known to be a return of capital, are recorded as a reduction to the cost of the individual REIT.
Foreign Currency Translation
The accounting records of the Fund are maintained in U.S. dollars. Foreign currency amounts are translated into U.S. dollars at the current rate of exchange to determine the fair value of investments, assets and liabilities. Purchases and sales of securities, and income and expenses are translated at the prevailing rate of exchange on the respective dates of such transactions. The Fund does not isolate that portion of the results of operations resulting from changes in foreign exchange rates on investments from fluctuations arising from changes in market prices of securities held. Such fluctuations are included in the net realized and unrealized gain or loss on investments and foreign currencies. Income received by the Fund from sources within foreign countries may be subject to withholding and other income or similar taxes imposed by such countries. The Funds accrue such taxes, as applicable, based on their current interpretation of tax rules in the foreign markets in which they invest.
Dividends to Shareholders
Dividends to shareholders are recorded on the ex-dividend date. The Fund distributes its dividends from net investment income and net realized capital gains, if any, on an annual basis. The amount of dividends from net investment income and from net realized gains is determined in accordance with federal income tax regulations, which may differ from U.S. GAAP. These “book/tax” differences are either temporary or permanent in nature. To the extent these differences are permanent in nature (e.g., return of capital, net operating loss, reclassification of certain market discounts, gain/loss, paydowns, and distributions), such amounts are reclassified within the composition of net assets based on their federal tax-basis treatment; temporary differences (e.g., wash sales and post October losses) do not require reclassification. Dividends to shareholders that exceed net investment income and net realized gains for tax purposes are reported as distributions of capital.
Expense Allocation
Expenses directly attributable to the Fund are charged directly to the Fund, while expenses attributable to more than one Fund are allocated among the respective Funds based upon relative net assets or some other reasonable method. Expenses which are attributable to more than one Trust are allocated across the Allianz Variable Insurance Products and Allianz Variable Insurance Products Fund of Funds Trusts based upon relative net assets or another reasonable basis. Allianz Investment Management LLC (the “Manager”), serves as the investment manager for the Trust and the Allianz Variable Insurance Products Fund of Funds Trust.
Securities Lending
To generate additional income, the Fund may lend up to 33 1/3% of its assets pursuant to agreements requiring that the loan be continuously secured by any combination of cash, U.S. government or U.S. government agency securities, equal initially to at least 102% of the fair value plus accrued interest on the securities loaned (105% for foreign securities). The borrower of securities is at all times required to post collateral to the Fund in an amount equal to 100% of the fair value of the securities loaned based on the
10
AZL Morgan Stanley Mid Cap Growth Fund
Notes to the Financial Statements
December 31, 2013
previous day’s fair value of the securities loaned, marked-to-market daily. Any collateral shortfalls are adjusted the next business day. The Fund bears all of the gains and losses on such investments. The Fund receives payments from borrowers equivalent to the dividends and interest that would have been earned on securities lent while simultaneously seeking to earn income on the investment of cash collateral received. In extremely low interest rate environments, the broker rebate fee may exceed the interest earned or the cash collateral which would result in a loss to the Fund. The investment of cash collateral deposited by the borrower is subject to inherent market risks such as interest rate risk, credit risk, liquidity risk, and other risks that are present in the market, and as such, the value of these investments may not be sufficient, when liquidated, to repay the borrower when the loaned security is returned. There may be risks of delay in recovery of the securities or even loss of rights in the collateral should the borrower of the securities fail financially. However, loans will be made only to borrowers, such as broker-dealers, banks or institutional borrowers of securities, deemed by the Manager to be of good standing and credit worthy and when in its judgment, the consideration which can be earned currently from such securities loans justifies the attendant risks. Loans are subject to termination by the Trust or the borrower at any time, and are, therefore, not considered to be illiquid investments. Securities on loan at December 31, 2013 are presented on the Fund’s Schedule of Portfolio Investments. The average outstanding amount of securities on loan was $53 million for the year ended December 31, 2013.
Cash collateral received in connection with securities lending is invested in the Allianz Variable Insurance Products Securities Lending Collateral Trust (the “Securities Lending Collateral Trust”) managed by The Dreyfus Corporation, an affiliate of the Custodian and Securities Lending Agent. The Securities Lending Collateral Trust invests in short-term investments that have a remaining maturity of 397 days or less as calculated in accordance with Rule 2a-7 under the 1940 Act. The Fund paid securities lending fees of $77,157 during the year ended December 31, 2013. These fees have been netted against “Income from securities lending” on the Statement of Operations.
Commission Recapture
Certain Funds of the Trust participate in a commission recapture program. The Fund will utilize the recaptured commissions to pay for, in whole or part, certain expenses of the Fund, excluding investment advisory fees. Any amounts received by the Fund, if applicable, are disclosed as “Expenses paid indirectly” on the Statement of Operations.
Effective January 6, 2014, the Manager, on behalf of the Trust, requested the Fund cease participation in the program until further notice.
3. Related Party Transactions
The Manager provides investment advisory and management services for the Fund. The Manager has retained an independent money management organization (the “Subadviser”), to make investment decisions on behalf of the Fund. Pursuant to a subadvisory agreement with Morgan Stanley Investment Management Inc. (“MSIM”), MSIM provides investment advisory services as the Subadviser for the Fund subject to the general supervision of the Trustees and the Manager. The Manager is entitled to a fee, computed daily and paid monthly, based on the average daily net assets of the Fund. Expenses incurred by the Fund for investment advisory and management services are reflected on the Statement of Operations as “Manager fees.” For its services, the Subadviser is entitled to a fee payable by the Manager. The Manager has contractually agreed to waive fees and reimburse the Fund to limit the annual expenses, excluding interest expense (e.g., cash overdraft fees), taxes, brokerage commissions, other expenditures that are capitalized in accordance with U.S. GAAP and other extraordinary expenses not incurred in the ordinary course of the Fund’s business, based on the daily net assets of the Fund, through April 30, 2015.
For the year ended December 31, 2013, the annual rate due to the Manager and the annual expense limit were as follows:
Annual Rate* | Annual Expense Limit | |||||||||
AZL Morgan Stanley Mid Cap Growth Fund | 0.85 | % | 1.30 | % |
* | The fees payable to the Manager are based on a tiered structure for various net assets levels as follows: the first $100 million at 0.85%, the next $150 million at 0.80%, the next $250 million at 0.775% and above $500 million at 0.75%. |
Any amounts contractually waived or reimbursed by the Manager in a particular fiscal year will be subject to repayment by the Fund to the Manager to the extent that from time to time through the next three fiscal years the repayment will not cause the Fund’s expenses to exceed the lesser of the stated limit at the time of the waiver or the current stated limit. Any amounts recouped by the Manager during the year are reflected on the Statement of Operations as “Recoupment of prior expenses reimbursed by the Manager.” At December 31, 2013, there were no remaining contractual reimbursements that are subject to repayment by the Fund in subsequent years.
In addition, the Manager may voluntarily waive or reimburse additional fees in order to maintain more competitive expense ratios. Any voluntary waivers or reimbursements are not subject to repayment in subsequent years. Information on the total amount waived/reimbursed by the Manager or repaid to the Manager by the Fund during the year can be found on the Statement of Operations. During the year ended December 31, 2013, there were no voluntary waivers.
Pursuant to separate agreements between the Funds and the Manager, the Manager provides a Chief Compliance Officer (“CCO”) and certain compliance oversight and regulatory filing services to the Trust. Under these agreements the Manager is entitled to an amount equal to a portion of the compensation and certain other expenses related to the individuals performing the CCO and compliance oversight services, as well as $75 per hour for time incurred in connection with the preparation and filing of certain documents with the Securities and Exchange Commission. The fees are paid to the Manager on a quarterly basis. The total expenses incurred by the Fund for these services are reflected on the Statement of Operations as “Administrative and compliance services fees.”
Citi Fund Services Ohio, Inc. (“Citi” or the “Administrator”), a wholly owned subsidiary of Citigroup, Inc., with which an officer of the Trust is affiliated, serves as the Trust’s administrator, transfer agent, and fund accountant, and assists the Trust in all aspects of its administration and operation. The Administrator is entitled to a Trust-wide asset-based fee, which is based on the following schedule: 0.05% of daily average net assets on the first $4 billion, 0.04% of daily average net assets on the next $2 billion, 0.02% of daily average net assets on the next $2 billion and 0.01% of daily average net assets over $8 billion. The overall Trust-wide fees are accrued daily and paid monthly and are subject to a minimum annual fee. In addition, the Administrator is entitled to annual account fees related to the transfer agency system, an annual fee for each additional class of shares of any Fund, certain annual fees in supporting fair value services, and a Trust-wide annual fee for providing infrastructure and support in implementing the written policies and procedures comprising the Fund’s compliance program. Fees payable to the Administrator are subject to certain reductions associated with services provided to new funds. The Administrator is also reimbursed for certain expenses incurred. The total expenses incurred by the Fund for these services are reflected on the Statement of Operations as “Administration fees.”
Allianz Life Financial Services, LLC (“ALFS”), an affiliate of the Manager, serves as distributor of the Fund and receives 12b-1 fees directly from the Fund, plus a Trust-wide annual fee of $42,500, paid by the Manager from its profits and not by the Trust, for recordkeeping and reporting services.
11
AZL Morgan Stanley Mid Cap Growth Fund
Notes to the Financial Statements
December 31, 2013
The Trust has adopted a distribution and service plan in conformance with Rule 12b-1 of the 1940 Act. Pursuant to this plan, the Fund is authorized to pay certain fees for the sale and distribution of its shares and services provided to its shareholders at an annual rate not to exceed 0.25% of the Fund’s average daily net assets. These fees are reflected on the Statement of Operations as “Distribution fees.”
In addition, certain legal fees and expenses are paid to a law firm, Dorsey & Whitney LLP, of which the Secretary of the Fund is a partner. During the year ended December 31, 2013, $5,904 was paid from the Fund relating to these fees and expenses.
Certain Officers and Trustees of the Trust are affiliated with the Manager or the Administrator. Such Officers (except for the Trust’s CCO as noted above) and Trustees receive no compensation from the Trust for serving in their respective roles. For their service to the Trust and to the Allianz Variable Insurance Products Fund of Funds Trust, each non-interested Trustee receives a $139,000 annual Board retainer. In addition, the Trustees are reimbursed for certain expenses associated with attending Board meetings. Compensation to the Trustees is allocated between the Trust and the Allianz Variable Insurance Products Fund of Funds Trust in proportion to the assets under management of each trust. During the year ended December 31, 2013, actual Trustee compensation was $973,000 in total for both trusts.
At a meeting of the Board of Trustees on December 4, 2013, the Trustees approved a fee increase to the Officers and Trustees who are paid a fee for their services to the Trust and to the Allianz Variable Insurance Products Fund of Funds Trust. Effective January 1, 2014, each non-interested Trustee will receive a $163,000 annual retainer.
4. Investment Valuation Summary
The valuation techniques employed by the Fund, as described below, maximize the use of observable inputs and minimize the use of unobservable inputs in determining fair value. The inputs used for valuing the Fund’s investments are summarized in the three broad levels listed below:
— | Level 1 — quoted prices in active markets for identical assets |
— | Level 2 — other significant observable inputs (including quoted prices for similar securities, interest rates, prepayments speeds, credit risk, etc.) |
— | Level 3 — significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of investments) |
Changes in valuation techniques may result in transfers in or out of an assigned level within the disclosure hierarchy. The Fund determines transfers between fair value hierarchy levels at the reporting period end. The inputs or methodology used for valuing investments is not necessarily an indication of the risk associated with investing in those investments.
Security prices are generally provided by an independent third party pricing service approved by the Trust’s Board of Trustees (“Trustees”) as of the close of the New York Stock Exchange (“NYSE”) (generally 4:00 pm Eastern Time). Equity securities are valued at the last quoted sale price or, if there is no sale, the last quoted bid price is used for long securities and the last quoted ask price is used for securities sold short. Securities listed on NASDAQ Stock Market, Inc. (“NASDAQ”) are valued at the official closing price as reported by NASDAQ. In each of these situations, valuations are typically categorized as a Level 1 in the fair value hierarchy. Investments in open-end investment companies are valued at their respective net asset value as reported by such companies and are typically categorized as Level 1 in the fair value hierarchy.
Debt and other fixed income securities are generally valued at an evaluated bid price provided by an independent pricing source approved by the Trustees. To value debt securities, pricing services may use various pricing techniques which take into account appropriate factors such as market activity, yield, quality, coupon rate, maturity, type of issue, trading characteristics, call features, credit ratings and other data, as well as broker quotes. Short term securities of sufficient credit quality with sixty days or less remaining until maturity may be valued at amortized cost, which approximates fair value. In each of these situations, valuations are typically categorized as Level 2 in the fair value hierarchy.
Other assets and securities for which market quotations are not readily available, or are deemed unreliable are valued at fair value as determined in good faith by the Trustees or persons acting on the behalf of the Trustees. Fair value pricing may be used for significant events such as securities whose trading has been suspended, whose price has become stale or for which there is no currently available price at the close of the NYSE. Depending on the source and relative significance of valuation inputs, these instruments may be classified as Level 2 or Level 3 in the fair value hierarchy. The Fund utilizes a pricing service to assist in determining the fair value of securities when certain significant events occur that may affect the value of foreign securities.
In accordance with procedures adopted by the Trustees, fair value pricing may be used if events materially affecting the value of foreign securities occur between the time when the exchange on which they are traded closes and the time when the Fund’s net asset value is calculated. Management identifies possible fluctuation in international securities by monitoring the increase or decrease in the value of a designated benchmark index. In the event of an increase or decrease greater than predetermined levels, the Fund may use a systematic valuation model provided by an independent third party to fair value its international equity securities which are then typically categorized as Level 2 in the fair value hierarchy.
The following is a summary of the valuation inputs used as of December 31, 2013 in valuing the Fund’s investments based upon the three levels defined above:
Investment Securities: | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||
Common Stocks | ||||||||||||||||||||
Commercial Services & Supplies | $ | 5,021,797 | $ | 15,560,230 | $ | — | $ | 20,582,027 | ||||||||||||
Internet Retail | — | 2,813,538 | — | 2,813,538 | ||||||||||||||||
Professional Services | 26,249,801 | 17,227,529 | — | 43,477,330 | ||||||||||||||||
Transportation Infrastructure | — | — | — | ^ | — | |||||||||||||||
All Other Common Stocks+ | 447,185,211 | — | — | 447,185,211 | ||||||||||||||||
Private Placements+ | — | — | 5,592,280 | 5,592,280 | ||||||||||||||||
Securities Held as Collateral for Securities on Loan | — | 32,465,344 | — | 32,465,344 | ||||||||||||||||
Unaffiliated Investment Company | 15,051,060 | — | — | 15,051,060 | ||||||||||||||||
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Total Investment Securities | $ | 493,507,869 | $ | 68,066,641 | $ | 5,592,280 | $ | 567,166,790 | ||||||||||||
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+ | For detailed industry descriptions, see the accompanying Schedule of Portfolio Investments. |
12
AZL Morgan Stanley Mid Cap Growth Fund
Notes to the Financial Statements
December 31, 2013
A reconciliation of assets in which level 3 inputs are used in determining fair value, along with additional quantitative disclosures, are presented when there are significant level 3 investments at the end of the period.
^ | Represents the interest in securities that were determined to have a value of zero at December 31, 2013. |
5. Security Purchases and Sales
For the year ended December 31, 2013, cost of purchases and proceeds from sales of securities (excluding securities maturing less than one year from acquisition) were as follows:
Purchases | Sales | |||||||||
AZL Morgan Stanley Mid Cap Growth Fund | $ | 223,935,599 | $ | 263,158,278 |
6. Restricted Securities
A restricted security is a security which has been purchased through a private offering and cannot be resold to the general public without prior registration under the Securities Act of 1933 (the “1933 Act”) or pursuant to the resale limitations provided by Rule 144A under the 1933 Act, or an exemption from the registration requirements of the 1933 Act. Whether a restricted security is illiquid is determined pursuant to guidelines established by the Board of Trustees. Not all restricted securities are considered illiquid. The illiquid restricted securities held as of December 31, 2013 are identified below.
Security | Acquisition Date(a) | Acquisition Cost | Shares | Fair Value | Percentage of Net Assets | ||||||||||||||||||||
Better Place LLC | 1/25/10 | $ | 2,046,081 | 818,433 | $ | — | — | % | |||||||||||||||||
Dropbox, Inc. | 5/1/12 | 2,222,513 | 245,606 | 3,374,627 | 0.63 | % | |||||||||||||||||||
Flipkart | 10/4/13 | 867,741 | 37,815 | 895,837 | 0.17 | % | |||||||||||||||||||
Palantir Technologies, Inc. | 7/19/12 | 702,919 | 229,712 | 806,289 | 0.15 | % | |||||||||||||||||||
Peixe Urbano, Inc. | 12/2/11 | 1,101,072 | 33,446 | 40,470 | 0.01 | % |
(a) | Acquisition date represents the initial purchase date of the security. |
7. Investment Risks
Foreign Securities and Currencies Risk: Investments in securities of foreign issuers carry certain risks not ordinarily associated with investments in securities of domestic issuers. Such risks include future political and economic developments, and the possible imposition of exchange controls or other foreign governmental laws and restrictions. In addition, with respect to certain countries, there is the possibility of expropriation of assets, confiscatory taxation, political or social instability or diplomatic developments which could adversely affect investments in those securities.
8. Federal Tax Information
It is the Fund’s policy to continue to comply with the requirements of the Internal Revenue Code under Subchapter M, applicable to regulated investment companies, and to distribute all of its taxable income, including any net realized gains on investments, to its shareholders. Therefore, no provision is made for federal income taxes.
Management of the Fund has reviewed tax positions taken in tax years that remain subject to examination by all major tax jurisdictions, including federal (i.e., the last four tax year ends and the interim tax period since then, as applicable). Management believes that there is no tax liability resulting from unrecognized tax benefits related to uncertain tax positions taken.
Cost for federal income tax purposes at December 31, 2013 is $411,155,637. The gross unrealized appreciation/ (depreciation) on a tax basis is as follows:
Unrealized appreciation | $ | 165,409,112 | |||
Unrealized depreciation | (9,397,959 | ) | |||
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Net unrealized appreciation/(depreciation) | $ | 156,011,153 | |||
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The tax character of dividends paid to shareholders during the year ended December 31, 2013 were as follows:
Ordinary Income | Net Long-Term | Total Distributions(a) | |||||||||||||
AZL Morgan Stanley Mid Cap Growth Fund | $ | 2,302,379 | $ | 12,984,446 | $ | 15,286,825 |
(a) | Total distributions paid may differ from the Statements of Changes in Net Assets because dividends are recognized when actually paid for tax purposes. |
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AZL Morgan Stanley Mid Cap Growth Fund
Notes to the Financial Statements
December 31, 2013
The tax character of dividends paid to shareholders during the year ended December 31, 2012 was as follows:
Ordinary Income | Net Long-Term Capital Gains | Total Distributions(a) | |||||||||||||
AZL Morgan Stanley Mid Cap Growth Fund | $ | — | $ | 20,211,960 | $ | 20,211,960 |
(a) | Total distributions paid may differ from the Statements of Changes in Net Assets because dividends are recognized when actually paid for tax purposes. |
As of December 31, 2013, the components of accumulated earnings on a tax basis were as follows:
Undistributed Ordinary Income | Undistributed Long-Term Capital Gains | Accumulated Capital and Other Losses | Unrealized Appreciation/ | Total Accumulated Earnings/ | |||||||||||||||||||||
AZL Morgan Stanley Mid Cap Growth Fund | $ | 7,558,615 | $ | 38,008,562 | $ | — | $ | 156,010,761 | $ | 201,577,938 |
(a) | The difference between book-basis and tax-basis unrealized appreciation/(depreciation) is attributable primarily to tax deferral of losses on wash sales. |
9. Subsequent Events
Management has evaluated events and transactions subsequent to period end through the date the financial statements were issued, for purposes of recognition or disclosure in these financial statements and there are no subsequent events to report.
14
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Shareholders and Board of Trustees of
Allianz Variable Insurance Products Trust:
We have audited the accompanying statement of assets and liabilities of AZL Morgan Stanley Mid Cap Growth Fund (the “Fund”) of the Allianz Variable Insurance Products Trust, including the schedule of portfolio investments, as of December 31, 2013, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the years in the two-year period then ended, and the financial highlights for each of the years in the five-year period then ended. These financial statements and financial highlights are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of December 31, 2013, by correspondence with the custodian and brokers or by other appropriate auditing procedures. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of the Fund as of December 31, 2013, the results of its operations for the year then ended, the changes in its net assets for each of the years in the two-year period then ended, and the financial highlights for each of the years in the five-year period then ended, in conformity with U.S. generally accepted accounting principles.
/s/ KPMG LLP
Columbus, Ohio
February 25, 2014
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Other Federal Income Tax Information (Unaudited)
For the year ended December 31, 2013, 100.00% of the total ordinary income dividends paid by the Fund qualify for the corporate dividends received deduction available to corporate shareholders.
During the year ended December 31, 2013, the Fund declared net long-term capital gain distributions of $12,984,446.
During the year ended December 31, 2013, the Fund declared net short-term capital gain distributions of $27.
16
A description of the policies and procedures that the Fund uses to determine how to vote proxies relating to portfolio securities is available, without charge, upon request, by visiting the Securities and Exchange Commission’s (“Commission”) website at www.sec.gov, or by calling 800-624-0197.
Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30th is available (i) without charge, upon request, by calling 800-624-0197; (ii) on the Allianz Variable Insurance Products Trust’s website at https://www.allianzlife.com; and (iii) on the Commission’s website at http://www.sec.gov.
The Fund files complete Schedules of Portfolio Holdings with the Commission for the first and third quarters of each fiscal year on Form N-Q. Schedules of Portfolio Holdings for the Fund in this report are available without charge on the Commission’s website at http://www.sec.gov, or may be reviewed and copied at the Commission’s Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 800-SEC-0330.
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Approval of Investment Advisory and Subadvisory Agreements (Unaudited)
The Allianz Variable Insurance Products Trust (the “Trust”) is a manager-of-managers fund. That means that the Trust’s Manager (“Allianz Investment Management LLC”) is responsible for monitoring the various Subadvisers that have day-to-day responsibility for the decisions made for each of the Trust’s investment portfolios. The Trust’s Manager is responsible for determining, in the first instance, which investment advisers to consider recommending for selection as a Subadviser.
In reviewing the services provided by the Manager and the terms of the investment management agreement, the Board receives and reviews information related to the Manager’s experience and expertise in the variable insurance marketplace. Currently, the Funds are offered only through variable annuities and variable life insurance policies, and not in the retail fund market. In addition, the Board receives information regarding the Manager’s expertise with regard to portfolio diversification and asset allocation requirements within variable insurance products issued by Allianz Life Insurance Company of North America and its subsidiary, Allianz Life Insurance Company of New York. Currently, the Funds are offered only through Allianz Life and Allianz of New York variable products.
The Trust’s Manager has adopted policies and procedures to assist it in the process of analyzing each potential Subadviser with expertise in particular asset classes for purposes of making the recommendation that a specific investment adviser be selected. The Trust’s Board reviews and considers the information provided by the Manager in deciding which investment advisers to select. After an investment adviser becomes a Subadviser, a similarly rigorous process is instituted by the Manager to monitor the investment performance and other responsibilities of the Subadviser. The Manager reports to the Trust’s Board on its analysis at the regular meetings of the Board, which are held at least quarterly. Where warranted, the Manager will add or remove a particular Subadviser from a “watch” list that it maintains. Watch list criteria include, for example: (a) Fund performance over various time periods; (b) Fund risk issues, such as changes in key personnel involved with Fund management, changes in investment philosophy or process, or “capacity” concerns; and (c) organizational risk issues, such as regulatory, compliance or legal concerns, or changes in the ownership of the Subadviser. The Manager may place a Fund on the watch list for other reasons, and if so, will explain its rationale to the Trustees. Funds which are on the watch list are subject to special scrutiny of the Manager and the Board of Trustees. Funds may be removed from such watch list, if for example, performance improves or regulatory matters are satisfactorily resolved. However, in some situations where Funds which have been on the watch list, the Manager has recommended the retention of a new Subadviser, and the Board of Trustees has subsequently approved new Subadvisory Agreements with such Subadvisers.
In assessing the Manager’s and Subadvisers’ (collectively, the “Advisory Organizations”), performance of their obligations, the Board considers whether there has occurred a circumstance or event that would constitute a reason for it to not renew an advisory contract. In this regard, the Board is mindful of the potential disruption of a Fund’s operations and various risks, uncertainties and other effects that could occur as a result of a decision to terminate or not renew a contract.
As required by the Investment Company Act of 1940 (“1940 Act”), the Trust’s Board has reviewed and approved the Trust’s Investment Management Agreement with the Manager (the “Advisory Agreement”) and portfolio management agreements (the “Subadvisory Agreements”) with the Subadvisers. The Board’s decision to approve these contracts reflects the exercise of its business judgment on whether to approve new arrangements and continue the existing arrangements. During its review of these contracts, the Board considers many factors, among the most material of which are: the Fund’s investment objectives and long term performance; the Advisory Organizations’ management philosophy, personnel, and processes, including their compliance history and the adequacy of their compliance processes; the preferences and expectations of Fund shareholders (and underlying contract owners) and their relative sophistication; the continuing state of competition in the mutual fund industry; and comparable fees in the mutual fund industry.
The Board also considers the compensation and benefits received by the Advisory Organizations. This includes fees received for services provided to the Fund by affiliated persons of the Advisory Organizations and research services received by the Advisory Organizations from brokers that execute Fund trades, as well as advisory fees. The Board considered the fact that: (1) the Manager and the Trust are parties to an Administrative Service Agreement, a Compliance Services Agreement, and a Chief Compliance Officer Agreement, under which the Manager is compensated by the Trust for performing certain administrative and compliance services including providing an employee of the Manager or one of its affiliates to act as the Trust’s Chief Compliance Officer; and (2) Allianz Life Financial Services, LLC, an affiliated person of the Manager, is a registered securities broker-dealer and receives (along with its affiliated persons) payments made by the Trust pursuant to Rule 12b-1.
The Board is aware that various courts have interpreted provisions of the 1940 Act and have indicated in their decisions that the following factors may be relevant to an adviser’s compensation: the nature and quality of the services provided by the adviser, including the performance of the fund; the adviser’s cost of providing the services; the extent to which the adviser may realize “economies of scale” as the fund grows larger; any indirect benefits that may accrue to the adviser and its affiliates as a result of the adviser’s relationship with the fund; performance and expenses of comparable funds; and the extent to which the independent Board members are fully informed about all facts bearing on the adviser’s service and fee. The Trust’s Board is aware of these factors and takes them into account in its review of the Trust’s advisory contracts.
The Board considered and weighed these circumstances in light of its experience in governing the Trust and working with the Advisory Organizations on matters relating to the Funds, and is assisted in its deliberations by the advice of legal counsel to the Independent Trustees. In this regard, the Board requests and receives a significant amount of information about the Funds and the Advisory Organizations. Some of this information is provided at each regular meeting of the Board; additional information is provided in connection with the particular meeting or meetings at which the Board’s formal review of an advisory contract occurs. In between regularly scheduled meetings, the Board may receive information on particular matters as the need arises. Thus, the Board’s evaluation of an advisory contract is informed by reports covering such matters as: an Advisory Organization’s investment philosophy, personnel, and processes; the Fund’s short- and long-term performance (in absolute terms as well as in relationship to its benchmark(s), certain competitor or “peer group” funds and similar funds managed by the particular Subadviser), and comments on the reasons for performance; the Fund’s expenses (including the advisory fee itself and the overall expense structure of the Fund, both in absolute terms and relative to similar and/or competing funds, with due regard for contractual or voluntary expense limitations); the use and allocation of brokerage commissions derived from trading the Fund’s portfolio securities; the nature and extent of the advisory and other services provided to the Fund by the Advisory Organizations and their affiliates; compliance and audit reports concerning the Funds and the companies that service them; and relevant developments in the mutual fund industry and how the Funds and/or Advisory Organizations are responding to them.
The Board also receives financial information about Advisory Organizations, including reports on the compensation and benefits the Advisory Organizations derive from their relationships with the Funds. These reports cover not only the fees under the advisory contracts, but also fees, if any, received for providing other services to the Funds. The reports also discuss any indirect or “fall out” benefits an Advisory Organization may derive from its relationship with the Funds.
The Advisory and Subadvisory Agreements (collectively, the “Agreements”) were most recently considered at Board of Trustees meetings held in the fall of 2013. Information relevant to the approval of such Agreements was considered at a telephonic Board of Trustees meeting on October 16, 2013, and at an “in person” Board of Trustees meeting held October 22, 2013. The Agreements were approved at the Board meeting of October 22, 2013. At such meeting the Board also approved an Expense Limitation Agreement between the Manager and the Trust for the period ending April 30, 2015. In connection with such meetings, the Trustees requested and evaluated extensive materials from the Manager, including performance and expense information for other investment companies with similar investment objectives derived from data compiled by an independent third party provider and other sources believed to be reliable by the Manager. Prior to voting, the Trustees reviewed the proposed approval/continuance of the Agreements with management and with experienced counsel who are independent of the Manager and received a memorandum from such counsel discussing the legal
18
standards for their consideration of the proposed approvals/continuances. The independent (“disinterested”) Trustees also discussed the proposed approvals/continuances in a private session with such counsel at which no representatives of the Manager were present. In reaching their determinations relating to the approval and/or continuance of the Agreements, in respect of each Fund, the Trustees considered all factors they believed relevant. The Board based its decision to approve the Agreements on the totality of the circumstances and relevant factors, and with a view to past and future long-term considerations. Not all of the factors and considerations discussed above and below are necessarily relevant to every Fund, and the Board did not assign relative weights to factors discussed herein or deem any one or group of them to be controlling in and of themselves.
An SEC Rule requires that shareholder reports include a discussion of certain factors relating to the selection of investment advisers and the approval of advisory fees. The “factors” enumerated by the SEC are set forth below in italics, as well as the Board’s conclusions regarding such factors:
(1) The nature, extent and quality of services provided by the Manager and Subadvisers. The Trustees noted that the Manager, subject to the control of the Board of Trustees, administers each Fund’s business and other affairs. Under the Advisory Agreement, the Manager holds the sole and exclusive responsibility to provide, or arrange for other to provide, the management of the Funds’ assets and the placement of orders for the purchase and sale of the securities of the Funds. As the Trust is a manager of managers fund, the Manager is authorized, under the Advisory Agreement, to retain one or more Subadvisers for each Fund to handle day-to-day management of the Funds’ investment portfolios; the Manager is responsible for determining, in the first instance, which investment advisers to recommend to the Board of Trustees for selection as a Subadviser. The Trustees were aware that, notwithstanding the retention of the Subadvisers to handle day-to-day portfolio management, the Manager remains responsible for substantial other matters, including continuously monitoring compliance by each Subadviser with the investment policies and restrictions of the respective Funds, with such other limitations or directions of the Board of Trustees, and with all legal requirements under federal or state law or regulation. The Manager also is responsible primarily to provide statistical information and other data to the Trustees regarding the Funds’ portfolio investments and to make available to the Funds’ administrator such information as is necessary for the conduct of its duties.
The Trustees also noted that the Manager provides the Trust and each Fund with such administrative and other services (exclusive of, and in addition to, any such services provided by any others retained by the Trust on behalf of the Funds) and executive and other personnel as are necessary for the operation of the Trust and the Funds. Except for the Trust’s Chief Compliance Officer, the Manager pays all of the compensation of Trustees and officers of the Trust who are employees of the Manager or its affiliates.
The Trustees considered the scope and quality of services provided by the Manager and the Subadvisers and noted that the scope of such services provided had expanded as a result of recent regulatory and other developments. The Trustees noted that, for example, the Manager and Subadvisers are responsible for maintaining and monitoring their own compliance programs, and these compliance programs are continuously refined and enhanced in light of new regulatory requirements. The Trustees considered the capabilities and resources which the Manager has dedicated to performing services on behalf of the Trust and its Funds. The quality of administrative and other services, including the Manager’s role in coordinating the activities of the Trust’s other service providers, also were considered. The Trustees concluded that, overall, they were satisfied with the nature, extent and quality of services provided (and expected to be provided) to the Trust and to each of the Funds under the Agreements.
(2) The investment performance of the Funds, the Manager and the Subadvisers. In connection with every in-person quarterly Board of Trustees meeting, Trustees receive extensive information on the performance results of each of the Funds. This includes, for example, performance information on all of the Funds for the previous quarter, and previous one, three and five-year periods, and since inception. (For Funds which have been in existence for less than five years, Trustees may receive performance information on comparable funds managed by the particular Subadviser for periods prior to the creation of a particular Fund.) Such performance information includes information on absolute total return, performance versus Subadvisers’ comparable fund(s), performance versus the appropriate benchmark(s), and performance versus peer groups. For example, in connection with the Board of Trustees meetings held September 10-11, 2013, the Manager reported that for the three year period ended June 30, 2013, 12 Funds were in the top 40%, eight were in the middle 20% and eight were in the bottom 40%, and for the one year period ended June 30, 2013, 8 Funds were in the top 40%, seven were in the middle 20%, and 14 were in the bottom 40%. The Manager also reported that for the five year period ended June 30, 2013, 10 Funds were in the top 40%, four were in the middle 20%, and six were in the bottom 40%. At the Board of Trustees meeting held October 22, 2013, the Trustees determined that the overall investment performance of the Funds was acceptable.
(3) The costs of services to be provided and profits to be realized by the Manager and the Subadvisers and their affiliates from their relationship with the Funds. The Manager has supplied information to the Board of Trustees pertaining to the level of investment advisory fees to which the Funds are subject. The Manager has agreed to temporarily “cap” Fund expenses at certain levels, and information is provided to Trustees setting forth “contractual” advisory fees and “actual” fees after taking expense caps into account. Based upon the information provided, the “actual” advisory fees payable by the Funds overall are generally comparable to the average level of fees paid by Fund peer groups. For the 30 Funds reviewed by the Board of Trustees in the fall of 2013, 27 Funds paid “actual” advisory fees in a percentage amount within the 65th percentile or lower for each Fund’s applicable category. The Trustees recognized that it is difficult to make comparisons of advisory fees because there are variations in the services that are included in the fees paid by other funds. The Board has concluded that the advisory fees to be paid to the Manager by the Funds are not unreasonable.
The Manager has also supplied information to the Board of Trustees pertaining to total Fund expenses (which includes advisory fees, the 25 basis point 12b-1 fee paid by the Funds, and other Fund expenses). As noted above, the Manager has agreed to “cap” Fund expenses at certain levels. Based upon the information provided, the overall total expense ratio ranking in 2013 for the 30 Funds was as follows: (1) 28 of the Funds had total expense rankings below the 65th percentile (with 20 Funds at or below the 50th percentile); (2) the AZL Russell 1000 Value Fund had a total expense ranking in the 66th percentile; the Manager reported that there is only a limited peer group for such Fund; and (3) the AZL Morgan Stanley Global Real Estate Fund had a total expense ranking in the 72nd percentile; it was reported by the Manager that there is only a limited peer group for such Fund, such Fund’s expense ratio has declined, and such Fund’s expense ratio is comparable to funds of similar size.
The Manager has committed to providing the Funds with a high quality of service and working to reduce Fund expenses over time, particularly as the Funds grow larger. The Trustees concluded therefore that the expense ratios of the Funds were not unreasonable.
The Manager provided information concerning the profitability of the Manager’s investment advisory activities for the period from 2011 through June 30, 2013. The Trustees recognized that it is difficult to make comparisons of profitability from investment company advisory agreements because comparative information is not generally publicly available and is affected by numerous factors, including the structure of the particular adviser, the types of funds it manages, its business mix, numerous assumptions regarding allocation of expenses and the adviser’s capital structure and cost of capital. In considering profitability information, the Trustees considered the possible effect of certain fall-out benefits to the Manager and its affiliates. The Trustees focused on profitability of the Manager’s relationships with the Funds before taxes and distribution expenses. The Trustees recognized that the Manager should, in the abstract, be entitled to earn a reasonable level of profits for the services it provides to each Fund and, based on their review, concluded that they were satisfied that the Manager’s level of profitability from its relationship with the Funds was not excessive.
The Manager, on behalf of the Board of Trustees, endeavored to obtain information on the profitability of each Subadviser in connection with its relationship with the Fund or Funds which it subadvises. The Manager was unable to obtain meaningful profitability information from some of the unaffiliated Subadvisers. The Manager assured the Board of Trustees that the Agreements with the Subadvisers which are not affiliated with it were negotiated on an “arm’s length” basis, so that arguably, such profitability information should be less relevant. The Trustees were also provided with certain information on the profitability for the Subadviser which is affiliated with the Manager. Trustees recognized the difficulty of allocating costs to multiple advisory accounts and products of a large advisory organization. Based upon the information provided, the Trustees determined that there was no evidence that the level of such profitability attributable to subadvising the Funds was excessive.
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(4) and (5) The extent to which economies of scale would be realized as the Funds grow, and whether fee levels reflect these economies of scale. The Trustees noted that most of the advisory fee schedules for the Funds do not contain breakpoints that reduce the fee rate on assets above specified levels, although certain Subadvisory Agreements have such “breakpoints.” The Trustees recognized that breakpoints may be an appropriate way for the Manager to share its economies of scale, if any, with Funds that have substantial assets. However, they also recognized that there may not be a direct relationship between any economies of scale realized by Funds and those realized by the Manager as assets increase. The Trustees do not believe there is a uniform methodology for establishing breakpoints that give effect to Fund-specific service provided by the Manager. The Trustees noted that in the fund industry as a whole, as well as among funds similar to the Funds, there is no uniformity or pattern in the fees and asset levels at which breakpoints (if any) apply. Depending on the age, size, and other characteristics of a particular fund and its manager’s cost structure, different conclusions can be drawn as to whether there are economies of scale to be realized at any particular level of assets, notwithstanding the intuitive conclusion that such economies exist, or will be realized at some level of total assets. Moreover, because different managers have different cost structures and service models, it is difficult to draw meaningful conclusions from the breakpoints that may have been adopted by other funds. The Trustees also noted that the advisory agreements for many funds do not have breakpoints at all, or if breakpoints exist, they may be at asset levels significantly greater than those of the individual Funds. The Trustees also noted that the total assets in all of the Funds as of June 30, 2013 were approximately $12.85 billion, and that no single non-money market Fund had assets in excess of $616 million.
The Trustees noted that the Manager has agreed to temporarily “cap” Fund expenses at certain levels, which has the effect of reducing expenses as would the implementation of advisory fee breakpoints. The Manager has committed to continue to consider the continuation of fee “caps” and/or advisory fee breakpoints as the Funds grow larger. The Board receives quarterly reports on the level of Fund assets. It expects to consider whether or not to approve the Agreements at a meeting to be held prior to December 31, 2014, and will at that time, or prior thereto, consider: (a) the extent to which economies of scale can be realized, and (b) whether the advisory fee should be modified to reflect such economies of scale, if any.
Having taken these factors into account, the Trustees concluded that the absence of breakpoints in certain of the Funds’ advisory fee rate schedules was acceptable under each Fund’s circumstances.
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Information about the Board of Trustees and Officers (Unaudited)
The Trust is managed by the Trustees in accordance with the laws of the state of Delaware governing business trusts. There are currently eight Trustees, two of whom are “interested persons” of the Trust within the meaning of that term under the 1940 Act. The Trustees and Officers of the Trust, their addresses, ages, their positions held with the Trust, their terms of office with the Trust and length of time served, their principal occupation(s) during the past five years, the number of portfolios in the Trust they oversee, and their other directorships held are as follows:
Non-Interested Trustees(1)
Name, Address, and Age | Positions Held with VIP Trust and FOF Trust | Term of Office(2)/Length of Time Served | Principal Occupation(s) During Past 5 Years | Number of Portfolios Overseen for VIP Trust and FOF Trust | Other Directorships Held Outside the AZL Fund Complex | |||||
Peter R. Burnim, Age 66 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/07 | Chairman, Argus Investment Strategies Fund Ltd., February 2013 to present; Managing Director, iQ Venture Advisors, LLC. 2005 to 2012; Chairman, Northstar Group Holdings Ltd. Bermuda, 2011 to present; Expert Witness, Massachusetts Department of Revenue, 2011 to 2012; Executive Vice President, Northstar Companies, 2002 to 2005; Senior Officer, Citibank and Citicorp for over 25 years | 41 | Argus Group Holdings; Northstar Group Holdings, NRIL, Sterling Centrecorp Inc.; Highland Financial Holdings; and Bank of Bermuda NY | |||||
Peggy L. Ettestad, Age 56 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/07 | Managing Director, Red Canoe Management Consulting LLC, 2008 to present; Senior Managing Director, Residential Capital LLC, 2003 to 2008; Chief Operations Officer, Transamerica Reinsurance 2002 to 2003 | 41 | Luther College | |||||
Roger Gelfenbien, Age 70 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 10/99 | Retired; Partner of Accenture 1983 to 1999 | 41 | Virtus Funds (8 Funds) | |||||
Claire R. Leonardi, Age 58 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/04 | Chief Executive Officer, Connecticut Innovations, Inc., 2012 to present; General Partner, Fairview Capital, L.P., 1994 to 2012 | 41 | The Natural History Museum of the Adirondacks | |||||
Dickson W. Lewis, Age 65 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/04 | Retired; Consultant to Lifetouch National School Studios; Vice President/General Manager, Yearbooks & Canada-Lifetouch National School Studios, 2006 to 2013; Vice President/General Manager of Jostens, Inc., 2002 to 2006; Senior Vice President of Fortis Group, 1997 to 2002 | 41 | None | |||||
Peter W. McClean, Age 69 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/04 | Retired; President and CEO of Measurisk, LLC, 2001 to 2003; Chief Risk Management Officer at Bank of Bermuda Ltd., 1996 to 2001 | 41 | PNMAC Opportunity Fund; Northeast Bank; and FHI | |||||
Arthur C. Reeds III, Age 69 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 10/99 | Retired; Senior Investment Officer, Hartford Foundation for Public Giving, 2000 to 2003; Chairman, Chief Executive and President of Conning Corp., 1999 to 2000; Investment Consultant, 1997 to 1999 | 41 | Connecticut Water Service, Inc. |
Interested Trustees(3)
Name, Address, and Age | Positions Held with VIP Trust and FOF Trust | Term of Office(2)/Length of Time Served | Principal Occupation(s) During Past 5 Years | Number of Portfolios Overseen for VIP Trust and FOF Trust | Other Directorships Held Outside the AZL Fund Complex | |||||
Robert DeChellis, Age 46 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 3/08 | President and CEO, Allianz Life Financial Services, LLC, 2007 to present | 41 | None | |||||
Brian Muench, Age 43 5701 Golden Hills Drive | Trustee | Since 6/11 | President, Allianz Investment Management LLC, November 2010 to present; Vice President, Allianz Life, April 2011 to present; Vice President, Advisory Management, Allianz Investment Management LLC from December 2005 to November 2010 | 41 | None |
21
Officers
Name, Address, and Age | Positions Held with VIP and VIP FOF Trust | Term of Office(2)/Length of Time Served | Principal Occupation(s) During Past 5 Years | |||
Brian Muench, Age 43 5701 Golden Hills Drive Minneapolis, MN 55416 | President | Since 11/10 | President, Allianz Investment Management LLC from November 2010, to present; Vice President, Allianz Life from April 2011 to present; Vice President, Allianz Investment Management LLC from December 2005 to November 2010. | |||
Michael Radmer, Age 68 Dorsey & Whitney LLP, Suite 1500 50 South Sixth Street Minneapolis, MN 55402-1498 | Secretary | Since 2/02 | Partner, Dorsey and Whitney LLP since 1976. | |||
Ty Edwards, Age 47 Citi Fund Services Ohio, Inc. 3435 Stelzer Road Columbus, OH 43219 | Treasurer, Principal Accounting Officer and Principal Financial Officer | Since 4/10 | Senior Vice President, Financial Administration, Citi Fund Services Ohio, Inc., December 2009 to present; Director, Product Management, Columbia Management, April 2007 to April 2009; Deputy Treasurer, Columbia Funds and Director, Fund Administration, Columbia Management, January 2006 to April 2007. | |||
Christopher R. Pheiffer, Age 45(4) 5701 Golden Hills Drive Minneapolis, MN 55416 | Chief Compliance Officer(5) and Anti-Money Laundering Compliance Officer | Since 2/14 (interim) | Deputy Chief Compliance Officer of the Trusts, 2007-2014 |
(1) | Member of the Audit Committee. |
(2) | Indefinite. |
(3) | Is an “interested person”, as defined by the 1940 Act, due to employment by Allianz. |
(4) | Stephen G. Simon, previously the Chief Compliance Officer of the Trusts, resigned all of his positions with Allianz effective February 21, 2014. Mr. Pheiffer, previously the Deputy Chief Compliance Officer of the Trusts, has been named Chief Compliance Officer of the Trusts on an interim basis while a search for a permanent replacement is conducted. |
(5) | The Manager and the Trust are parties to a Chief Compliance Officer Agreement under which the Manager is compensated by the Trust for providing an employee of the Manager or one of its affiliates to act as the Trust’s Chief Compliance Officer. The Chief Compliance Officer and Anti-Money Laundering Compliance Officer is not considered a corporate officer or executive employee of the Trust. |
22
The Allianz VIP Funds are distributed by Allianz Life Financial Services, LLC. These Funds are not FDIC Insured. | ANNRPT1213 2/14 |
AZL® NFJ International Value Fund
Annual Report
December 31, 2013
Table of Contents
Management Discussion and Analysis
Page 1
Expense Examples and Portfolio Composition
Page 3
Schedule of Portfolio Investments
Page 4
Statement of Assets and Liabilities
Page 6
Statement of Operations
Page 6
Statements of Changes in Net Assets
Page 7
Financial Highlights
Page 8
Notes to the Financial Statements
Page 9
Report of Independent Registered Public Accounting Firm
Page 14
Other Federal Income Tax Information
Page 15
Other Information
Page 16
Approval of Investment Advisory and Subadvisory Agreements
Page 17
Information about the Board of Trustees and Officers
Page 20
This report is submitted for the general information of the shareholder of the Fund. The report is not authorized for distribution to prospective investors in the Fund unless preceded or accompanied by an effective prospectus, which contains details concerning the sales charges and other pertinent information.
AZL® NFJ International Value Fund Review (unaudited)
Allianz Investment Management LLC serves as the Manager for the AZL® NFJ International Value Fund and NFJ Investment Group LLC serves as Subadviser to the Fund.
What factors affected the Fund’s performance during the year ended December 31, 2013?
For the year ended December 31, 2013 the AZL® NFJ International Value Fund returned 11.66%. That compared to a 23.29% total return for its benchmark the MSCI EAFE Index1.
International equity markets enjoyed generally strong returns for the year ended December 31, 2013. European stocks rose during the period as the eurozone economy gained strength. In Japan, investors were optimistic that a new government led by Prime Minister Shinzo Abe, as well as new leadership at the Bank of Japan, would put the country’s economy on more solid footing. Japan’s Nikkei Stock Average closed at record highs not seen since 2007 as continued weakness from the yen helped raise exporters’ shares. Emerging markets, however, did not enjoy the same gains as equity markets in developed markets during the period. The U.S. Federal Reserve announced midway through the period that it may begin tapering its long-running stimulus efforts, and that announcement led to a large correction among emerging markets equities.
The Fund benefited from the strong performance of international equities during the period. The Fund’s strategy allows up to 50% of the portfolio to be invested in emerging markets, and the Fund held an average weight of 21.6% in emerging markets during the period. Absolute performance was somewhat muted by the Fund’s allocation to emerging markets equities. The Fund’s investment process also requires that all holdings pay a cash dividend. That dragged on the Fund’s absolute performance, as dividend-paying securities lagged non-dividend payers by a wide margin during the period.*
Europe, excluding the United Kingdom, was the best-performing region during the period, with Greece up more than 51%, Finland and Ireland posting gains of more than 40%, and Germany and Spain each posting returns of 32%. The portfolio has no allocation to Europe’s periphery countries—including Portugal, Italy, Ireland, Greece and Spain—due to fundamental concerns. This underweight dampened absolute results for the period.
The Fund’s underperformance relative to the MSCI EAFE Index was largely due to strong market returns in the third quarter, as the Fund’s investment process tends to lag during periods of strong equity market performance.
Relative returns were impacted by negative stock selection in addition to regional and sector allocations, which also detracted during the period. Individual stock selection across the materials and financials sectors hampered relative performance, and overweight positions in the energy and materials sectors—which were the two weakest performing sectors during the period—also dampened gains for the year.
By region, an overweight in the off-benchmark emerging markets region was the largest detractor from results. The Fund’s underweight position and stock selection in Japan also dragged on relative returns. Individual stock selection was positive across Germany, the Netherlands and Sweden, but offset by negative results from the Fund’s Japan, Australia and Singapore-based holdings.
The Fund’s relative performance benefited from strong stock selection in the consumer discretionary and information technology sectors. An overweight position in the telecom sector—the strongest sector within the benchmark—and underweight position in consumer staples helped boost relative performance. The Fund’s underweight positions in the UK and Hong Kong also contributed to relative performance.*
Past performance does not guarantee future results.
* | The Fund’s portfolio composition is subject to change. There is no guarantee that any sectors mentioned will continue to perform well or that securities in such sectors will be held by the Fund in the future. The information contained in this commentary is for informational purposes only and should not be construed as a recommendation to purchase or sell securities in the sector mentioned. The Fund’s holdings and weightings are as of December 31, 2013. |
1 | The Morgan Stanley Capital International, Europe, Australasia and Far East (“MSCI EAFE”) Index is a free float-adjusted market capitalization-weighted index that is designed to measure the equity market performance of developed markets, excluding the U.S. & Canada. Investors cannot invest directly in an index. |
1
AZL® NFJ International Value Fund Review (unaudited)
Fund Objective
The Fund’s investment objective is long-term growth of capital and income. This objective may be changed by the Trustees of the Fund without shareholder approval. The Fund seeks to achieve its objective by investing at least 65% of its net assets, plus any borrowings for investment purposes, in equity securities of non-U.S. companies with market capitalizations greater than $1 billion.
Investment Concerns
Equity securities (stocks) are more volatile and carry more risk than other forms of investments, including investments in high-grade fixed income securities. The net asset value per share of this Fund will fluctuate as the value of the securities in the portfolio changes.
Value-based investments are subject to the risk that the broad market may not recognize their intrinsic value.
International investing may involve risk of capital loss from unfavorable fluctuations in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations.
Emerging market investing may be subject to additional economic, political, liquidity, and currency risks not associated with more developed countries.
For a complete description of these and other risks associated with investing in a mutual Fund, please refer to the Fund’s prospectus.
Growth of $10,000 Investment
The chart above represents a comparison of a hypothetical investment in the Fund versus a similar investment in the Fund’s benchmark, and represents the reinvestment of dividends and capital gains in the Fund.
Average Annual Total Returns as of December 31, 2013
Since | ||||||||||||
1 | 3 | Inception | ||||||||||
Year | Year | (5/1/09) | ||||||||||
AZL® NFJ International Value Fund | 11.66 | % | 6.24 | % | 13.44 | % | ||||||
MSCI EAFE Index (gross of withholding taxes) | 23.29 | % | 8.66 | % | 14.59 | % | ||||||
MSCI EAFE Index (net of withholding taxes) | 22.78 | % | 8.17 | % | 14.08 | % |
Past performance does not guarantee future results. The performance data quoted represents past performance and current returns may be lower or higher. The investment return and principal value will fluctuate so that an investor’s shares, when redeemed may be worth more or less than the original cost. To obtain performance information current to the most recent month end, please visit www.Allianzlife.com.
Expense Ratio | Gross | |||
AZL® NFJ International Value Fund | 1.25 | % |
The above expense ratio is based on the current Fund prospectus dated April 29, 2013. The Manager and the Fund have entered into a written contract limiting operating expenses, excluding certain expenses (such as interest expense), to 1.45% through April 30, 2015. Additional information pertaining to the December 31, 2013 expense ratios can be found in the financial highlights.
The total return of the Fund does not reflect the effect of any insurance charges, the annual maintenance fee or the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. Such charges, fees and tax payments would reduce the performance quoted.
The Fund’s performance is measured against the Morgan Stanley Capital International Europe, Australasia and Far East (“MSCI EAFE”) Index, which is an unmanaged free float-adjusted market capitalization-weighted index that is designed to measure the equity market performance of developed markets, excluding the U.S. & Canada. The Index noted as “gross of withholding taxes” do not reflect the deduction of fees associated with a mutual fund, such as investment management and fund accounting fees. The Index noted as “net of withholding taxes” reflect the reinvestment of dividends after the deduction of withholding taxes, using (for international indices) a tax rate applicable to non-resident institutional investors who do not benefit from double taxation treaties. The Fund’s performance reflects the deduction of fees for services provided to the Fund. Investors cannot invest directly in an index.
2
AZL NFJ International Value Fund
(Unaudited)
As a shareholder of the AZL NFJ International Value Fund (the “Fund”), you incur ongoing costs, including management fees, distribution fees, and other Fund expenses. These examples are intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. Please note that the expenses shown in each table do not reflect expenses that apply to the subaccount or the insurance contract. If the expenses that apply to the subaccount of the insurance contract were included, your costs would have been higher.
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the periods presented below.
The Actual Expense table below provides information about actual account values and actual expenses. You may use the information below, 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 table under the heading entitled “Expenses Paid During Period” to estimate the expenses you paid on your account during this period.
Beginning Account Value 7/1/13 | Ending Account Value 12/31/13 | Expenses Paid During Period 7/1/13 - 12/31/13* | Annualized Expense Ratio During Period 7/1/13 - 12/31/13 | |||||||||||||||||
AZL NFJ International Value Fund | $ | 1,000.00 | $ | 1,128.10 | $ | 6.54 | 1.22 | % |
The Hypothetical Expense table below provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.
Beginning Account Value 7/1/13 | Ending Account Value 12/31/13 | Expenses Paid During Period 7/1/13 - 12/31/13* | Annualized Expense Ratio During Period 7/1/13 - 12/31/13 | |||||||||||||||||
AZL NFJ International Value Fund | $ | 1,000.00 | $ | 1,019.06 | $ | 6.21 | 1.22 | % |
* | Expenses are equal to the average account value over the period, multiplied by the Fund’s annualized expense ratio, multiplied by 184/365 (to reflect the one half year period). |
Portfolio Composition
(Unaudited)
Investments | Percent of net assets | ||||
Financials | 27.5 | % | |||
Energy | 11.6 | ||||
Consumer Discretionary | 9.3 | ||||
Consumer Staples | 8.5 | ||||
Industrials | 8.4 | ||||
Materials | 8.3 | ||||
Health Care | 6.9 | ||||
Information Technology | 5.9 | ||||
Telecommunication Services | 4.6 | ||||
Utilities | 4.4 | ||||
|
| ||||
Total Common Stock | 95.4 | ||||
Securities Held as Collateral for Securities on Loan | 6.8 | ||||
Money Market | 4.8 | ||||
|
| ||||
Total Investment Securities | 107.0 | ||||
Net other assets (liabilities) | (7.0 | ) | |||
|
| ||||
Net Assets | 100.0 | % | |||
|
|
3
AZL NFJ International Value Fund
Schedule of Portfolio Investments
December 31, 2013
Shares | Fair Value | |||||||
| Common Stocks (92.9%): |
| ||||||
| Aerospace & Defense (2.2%): |
| ||||||
115,850 | BAE Systems plc, ADR^ | $ | 3,393,247 | |||||
|
| |||||||
| Auto Components (1.2%): |
| ||||||
22,900 | Magna International, Inc. | 1,879,174 | ||||||
|
| |||||||
| Automobiles (3.0%): |
| ||||||
470,900 | Isuzu Motors, Ltd. | 2,936,553 | ||||||
53,100 | Tata Motors, Ltd., ADR | 1,635,480 | ||||||
|
| |||||||
4,572,033 | ||||||||
|
| |||||||
| Beverages (3.2%): |
| ||||||
29,400 | Carlsberg A/S, Class B | 3,266,429 | ||||||
11,900 | Diageo plc, ADR | 1,575,798 | ||||||
|
| |||||||
4,842,227 | ||||||||
|
| |||||||
| Chemicals (2.1%): |
| ||||||
101,500 | Israel Chemicals, Ltd. | 846,538 | ||||||
107,900 | Nitto Denko Corp., ADR^ | 2,301,507 | ||||||
|
| |||||||
3,148,045 | ||||||||
|
| |||||||
| Commercial Banks (17.5%): |
| ||||||
97,900 | Australia & New Zealand Banking Group, Ltd., ADR^ | 2,824,415 | ||||||
175,870 | Banco Bradesco SA, ADR | 2,203,651 | ||||||
477,500 | Barclays plc | 2,160,182 | ||||||
918,600 | BOC Hong Kong Holdings, Ltd. | 2,954,643 | ||||||
3,884,000 | China Construction Bank | 2,949,636 | ||||||
282,600 | HSBC Holdings plc | 3,099,080 | ||||||
1,473,400 | Mizuho Financial Group, Inc. | 3,191,694 | ||||||
116,800 | Sberbank of Russia, ADR | 1,468,176 | ||||||
29,500 | Toronto-Dominion Bank (The) | 2,780,080 | ||||||
76,900 | United Overseas Bank, Ltd., ADR^ | 2,585,378 | ||||||
|
| |||||||
26,216,935 | ||||||||
|
| |||||||
| Commercial Services & Supplies (0.5%): |
| ||||||
94,500 | Serco Group plc | 780,852 | ||||||
|
| |||||||
| Diversified Financial Services (1.1%): |
| ||||||
20,100 | Deutsche Boerse AG | 1,668,952 | ||||||
|
| |||||||
| Diversified Telecommunication Services (2.1%): |
| ||||||
134,000 | Orange, ADR | 1,654,900 | ||||||
63,900 | Telenor ASA | 1,526,397 | ||||||
|
| |||||||
3,181,297 | ||||||||
|
| |||||||
| Electric Utilities (1.3%): |
| ||||||
148,700 | Companhia Paranaense de Energia, ADR^ | 1,953,918 | ||||||
|
| |||||||
| Electronic Equipment, Instruments & Components (2.3%): |
| ||||||
444,800 | Hitachi, Ltd. | 3,373,004 | ||||||
|
| |||||||
| Energy Equipment & Services (0.9%): |
| ||||||
24,300 | Ensco plc, Class A, ADR | 1,389,474 | ||||||
|
| |||||||
| Food & Staples Retailing (1.8%): |
| ||||||
504,200 | Tesco plc | 2,791,976 | ||||||
|
| |||||||
| Food Products (1.6%): |
| ||||||
5,425,500 | Golden Agri-Resources, Ltd. | 2,348,329 | ||||||
|
| |||||||
| Household Products (1.4%): |
| ||||||
69,200 | Svenska Cellulosa AB, ADR^ | 2,136,896 | ||||||
|
| |||||||
| Industrial Conglomerates (3.4%): |
| ||||||
60,260 | Koc Holding AS, ADR | 1,241,959 | ||||||
28,400 | Siemens AG, Registered Shares | 3,880,099 | ||||||
|
| |||||||
5,122,058 | ||||||||
|
|
Shares | Fair Value | |||||||
| Common Stocks, continued |
| ||||||
| Insurance (8.9%): |
| ||||||
68,500 | Axis Capital Holdings, Ltd. | $ | 3,258,546 | |||||
210,500 | Manulife Financial Corp. | 4,153,165 | ||||||
17,100 | RenaissanceRe Holdings, Ltd. | 1,664,514 | ||||||
151,700 | Zurich Insurance Group AG, ADR^ | 4,425,089 | ||||||
|
| |||||||
13,501,314 | ||||||||
|
| |||||||
| IT Services (1.4%): |
| ||||||
31,200 | Cap Gemini SA | 2,115,502 | ||||||
|
| |||||||
| Leisure Equipment & Products (1.0%): |
| ||||||
59,300 | Sega Sammy Holdings, Inc. | 1,512,613 | ||||||
|
| |||||||
| Machinery (0.7%): |
| ||||||
55,300 | Komatsu, Ltd. | 1,125,841 | ||||||
|
| |||||||
| Media (0.6%): |
| ||||||
43,800 | Reed Elsevier NV | 930,566 | ||||||
|
| |||||||
| Metals & Mining (4.8%): |
| ||||||
5,200 | POSCO, ADR | 405,600 | ||||||
50,500 | Rio Tinto plc, Registered Shares, ADR^ | 2,849,715 | ||||||
146,000 | Vale SA, ADR^ | 2,226,500 | ||||||
185,600 | Yamana Gold, Inc. | 1,599,872 | ||||||
|
| |||||||
7,081,687 | ||||||||
|
| |||||||
| Multiline Retail (1.0%): |
| ||||||
107,750 | Marks & Spencer Group plc, ADR | 1,544,489 | ||||||
|
| |||||||
| Multi-Utilities (0.9%): |
| ||||||
230,300 | Centrica plc | 1,326,118 | ||||||
|
| |||||||
| Oil, Gas & Consumable Fuels (10.7%): |
| ||||||
3,542,695 | China Petroleum & Chemical Corp. (Sinopec), H Shares | 2,913,878 | ||||||
37,500 | LUKOIL, ADR | 2,367,000 | ||||||
55,900 | Royal Dutch Shell plc, ADR | 3,983,993 | ||||||
85,400 | Sasol, Ltd., ADR^ | 4,223,030 | ||||||
110,900 | Statoil ASA, ADR | 2,676,017 | ||||||
|
| |||||||
16,163,918 | ||||||||
|
| |||||||
| Pharmaceuticals (6.9%): |
| ||||||
80,000 | AstraZeneca plc, ADR | 4,749,600 | ||||||
29,900 | Sanofi-Aventis SA | 3,182,484 | ||||||
65,600 | Teva Pharmaceutical Industries, Ltd., ADR | 2,629,248 | ||||||
|
| |||||||
10,561,332 | ||||||||
|
| |||||||
| Semiconductors & Semiconductor Equipment (1.1%): |
| ||||||
94,500 | Taiwan Semiconductor Manufacturing Co., Ltd., ADR | 1,648,080 | ||||||
|
| |||||||
| Software (1.1%): |
| ||||||
60,269 | Sage Group plc (The), ADR | 1,609,785 | ||||||
|
| |||||||
| Tobacco (1.9%): |
| ||||||
72,100 | Imperial Tobacco Group plc | 2,797,733 | ||||||
|
| |||||||
| Trading Companies & Distributors (1.6%): |
| ||||||
8,600 | Mitsui & Co., Ltd., ADR | 2,408,516 | ||||||
|
| |||||||
| Water Utilities (2.2%): |
| ||||||
302,200 | Companhia de Saneamento Basico do Estado de Sao Paulo, ADR | 3,426,948 | ||||||
|
| |||||||
| Wireless Telecommunication Services (2.5%): |
| ||||||
282,800 | China Mobile, Ltd. | 2,943,923 | ||||||
45,117 | Mobile TeleSystems, ADR | 975,881 | ||||||
|
| |||||||
3,919,804 | ||||||||
|
| |||||||
| Total Common Stocks (Cost $119,867,148) | 140,472,663 | ||||||
|
|
Continued
4
AZL NFJ International Value Fund
Schedule of Portfolio Investments
December 31, 2013
Shares | Fair Value | |||||||
| Preferred Stock (2.5%): |
| ||||||
| Automobiles (2.5%): |
| ||||||
13,200 | Volkswagen AG, Preferred Shares | $ | 3,708,262 | |||||
|
| |||||||
| Total Preferred Stock (Cost $2,672,580) | 3,708,262 | ||||||
|
| |||||||
Contracts, Shares, Notional Amount or Principal Amount | Fair Value | |||||||
| Securities Held as Collateral for Securities on Loan (6.8%): |
| ||||||
$ | 10,290,261 | Allianz Variable Insurance Products Securities Lending Collateral Trust(a) | 10,290,261 | |||||
|
| |||||||
| Total Securities Held as Collateral for Securities on Loan | 10,290,261 | ||||||
|
|
Contracts, Shares, Notional Amount or Principal Amount | Fair Value | |||||||
| Unaffiliated Investment Company (4.8%): |
| ||||||
$ | 7,231,281 | Dreyfus Treasury Prime Cash Management Fund, Institutional Shares, 0.00%(b) | $ | 7,231,281 | ||||
|
| |||||||
| Total Unaffiliated Investment Company (Cost $7,231,281) | 7,231,281 | ||||||
|
| |||||||
| Total Investment Securities |
| ||||||
| (Cost $140,061,270)(c) — 107.0% | 161,702,467 | ||||||
| Net other assets (liabilities) — (7.0)% | (10,605,977 | ) | |||||
|
| |||||||
| Net Assets — 100.0% | $ | 151,096,490 | |||||
|
|
Percentages indicated are based on net assets as of December 31, 2013.
ADR—American Depositary Receipt
^ | This security or a partial position of this security was on loan as of December 31, 2013. The total value of securities on loan as of December 31, 2013, was $10,094,853. |
(a) | Purchased with cash collateral held from securities lending. The value of the collateral could include collateral held for securities that were sold on or before December 31, 2013. |
(b) | The rate represents the effective yield at December 31, 2013. |
(c) | See Federal Tax Information listed in the Notes to the Financial Statements. |
The following represents the concentrations by country of risk (based on the domicile of the security issuer) relative to the total fair value of investments as of December 31, 2013:
Country | Percentage | |||
Australia | 1.7 | % | ||
Bermuda | 3.0 | % | ||
Brazil | 6.1 | % | ||
Canada | 6.4 | % | ||
China | 3.6 | % | ||
Denmark | 2.0 | % | ||
France | 4.3 | % | ||
Germany | 5.7 | % | ||
Hong Kong | 3.6 | % | ||
India | 1.0 | % | ||
Israel | 2.1 | % | ||
Japan | 10.4 | % | ||
Netherlands | 0.6 | % |
Country | Percentage | |||
Norway | 2.6 | % | ||
Republic of Korea (South) | 0.3 | % | ||
Russian Federation | 3.0 | % | ||
Singapore | 3.1 | % | ||
South Africa | 2.6 | % | ||
Sweden | 1.3 | % | ||
Switzerland | 2.7 | % | ||
Taiwan | 1.0 | % | ||
Turkey | 0.8 | % | ||
United Kingdom | 21.2 | % | ||
United States | 10.9 | % | ||
|
| |||
100.0 | % | |||
|
|
See accompanying notes to the financial statements.
5
AZL NFJ International Value Fund
Statement of Assets and Liabilities
December 31, 2013
Assets: | |||||
Investment securities, at cost | $ | 140,061,270 | |||
|
| ||||
Investment securities, at value* | $ | 161,702,467 | |||
Interest and dividends receivable | 121,021 | ||||
Foreign currency, at value (cost $2,651) | 2,651 | ||||
Receivable for investments sold | 767,194 | ||||
Reclaims receivable | 22,512 | ||||
|
| ||||
Total Assets | 162,615,845 | ||||
|
| ||||
Liabilities: | |||||
Payable for investments purchased | 1,065,030 | ||||
Payable for capital shares redeemed | 1,652 | ||||
Payable for collateral received on loaned securities | 10,290,261 | ||||
Manager fees payable | 113,200 | ||||
Administration fees payable | 6,794 | ||||
Distribution fees payable | 31,442 | ||||
Custodian fees payable | 6,105 | ||||
Administrative and compliance services fees payable | 609 | ||||
Trustee fees payable | 5 | ||||
Other accrued liabilities | 4,257 | ||||
|
| ||||
Total Liabilities | 11,519,355 | ||||
|
| ||||
Net Assets | $ | 151,096,490 | |||
|
| ||||
Net Assets Consist of: | |||||
Capital | $ | 120,730,156 | |||
Accumulated net investment income/(loss) | 2,963,987 | ||||
Accumulated net realized gains/(losses) from investment transactions | 5,761,410 | ||||
Net unrealized appreciation/(depreciation) on investments | 21,640,937 | ||||
|
| ||||
Net Assets | $ | 151,096,490 | |||
|
| ||||
Shares of beneficial interest (unlimited number of shares authorized, no par value) | 11,733,055 | ||||
Net Asset Value (offering and redemption price per share) | $ | 12.88 | |||
|
|
* | Includes securities on loan of $10,094,853. |
For the Year Ended December 31, 2013
Investment Income: | |||||
Dividends | $ | 4,737,440 | |||
Income from securities lending | 197,445 | ||||
Foreign withholding tax | (219,780 | ) | |||
|
| ||||
Total Investment Income | 4,715,105 | ||||
|
| ||||
Expenses: | |||||
Manager fees | 1,279,949 | ||||
Administration fees | 61,253 | ||||
Distribution fees | 355,541 | ||||
Custodian fees | 22,120 | ||||
Administrative and compliance services fees | 2,598 | ||||
Trustee fees | 6,726 | ||||
Professional fees | 9,665 | ||||
Shareholder reports | 2,306 | ||||
Other expenses | 3,890 | ||||
|
| ||||
Total expenses before reductions | 1,744,048 | ||||
Less expenses paid indirectly | (10,451 | ) | |||
|
| ||||
Net expenses | 1,733,597 | ||||
|
| ||||
Net Investment Income/(Loss) | 2,981,508 | ||||
|
| ||||
Realized and Unrealized Gains/(Losses) on Investments: | |||||
Net realized gains/(losses) on securities transactions | 6,282,759 | ||||
Change in net unrealized appreciation/depreciation on investments | 6,577,956 | ||||
|
| ||||
Net Realized/Unrealized Gains/(Losses) on Investments | 12,860,715 | ||||
|
| ||||
Change in Net Assets Resulting From Operations | $ | 15,842,223 | |||
|
|
See accompanying notes to the financial statements.
6
Statements of Changes in Net Assets
AZL NFJ International Value Fund | ||||||||||
For the Year Ended December 31, | For the Year Ended December 31, | |||||||||
Change in Net Assets: | ||||||||||
Operations: | ||||||||||
Net investment income/(loss) | $ | 2,981,508 | $ | 2,525,333 | ||||||
Net realized gains/(losses) on investment transactions | 6,282,759 | (477,162 | ) | |||||||
Change in unrealized appreciation/depreciation on investments | 6,577,956 | 18,306,602 | ||||||||
|
|
|
| |||||||
Change in net assets resulting from operations | 15,842,223 | 20,354,773 | ||||||||
|
|
|
| |||||||
Dividends to Shareholders: | ||||||||||
From net investment income | (2,500,966 | ) | (2,924,229 | ) | ||||||
From net realized gains | — | (19,719,611 | ) | |||||||
|
|
|
| |||||||
Change in net assets resulting from dividends to shareholders | (2,500,966 | ) | (22,643,840 | ) | ||||||
|
|
|
| |||||||
Capital Transactions: | ||||||||||
Proceeds from shares issued | 3,928,804 | 27,495,421 | ||||||||
Proceeds from dividends reinvested | 2,500,966 | 22,643,840 | ||||||||
Value of shares redeemed | (3,831,032 | ) | (4,884,980 | ) | ||||||
|
|
|
| |||||||
Change in net assets resulting from capital transactions | 2,598,738 | 45,254,281 | ||||||||
|
|
|
| |||||||
Change in net assets | 15,939,995 | 42,965,214 | ||||||||
Net Assets: | ||||||||||
Beginning of period | 135,156,495 | 92,191,281 | ||||||||
|
|
|
| |||||||
End of period | $ | 151,096,490 | $ | 135,156,495 | ||||||
|
|
|
| |||||||
Accumulated net investment income/(loss) | $ | 2,963,987 | $ | 2,500,962 | ||||||
|
|
|
| |||||||
Share Transactions: | ||||||||||
Shares issued | 326,579 | 2,279,092 | ||||||||
Dividends reinvested | 204,997 | 2,043,668 | ||||||||
Shares redeemed | (314,593 | ) | (402,669 | ) | ||||||
|
|
|
| |||||||
Change in shares | 216,983 | 3,920,091 | ||||||||
|
|
|
|
See accompanying notes to the financial statements.
7
AZL NFJ International Value Fund
(Selected data for a share of beneficial interest outstanding throughout the periods indicated)
Year Ended December 31, 2013 | Year Ended December 31, 2012 | Year Ended December 31, 2011 | Year Ended December 31, 2010 | May 1, 2009 to December 31, 2009(a) | |||||||||||||||||||||
Net Asset Value, Beginning of Period | $ | 11.74 | $ | 12.14 | $ | 14.65 | $ | 13.70 | $ | 10.00 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Investment Activities: | |||||||||||||||||||||||||
Net Investment Income/(Loss) | 0.25 | 0.19 | 0.53 | 0.15 | 0.16 | ||||||||||||||||||||
Net Realized and Unrealized Gains/(Losses) on Investments | 1.11 | 2.14 | (2.13 | ) | 1.15 | 3.54 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Total from Investment Activities | 1.36 | 2.33 | (1.60 | ) | 1.30 | 3.70 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Dividends to Shareholders From: | |||||||||||||||||||||||||
Net Investment Income | (0.22 | ) | (0.35 | ) | (0.36 | ) | (0.09 | ) | — | ||||||||||||||||
Net Realized Gains | — | (2.38 | ) | (0.55 | ) | (0.26 | ) | — | |||||||||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Total Dividends | (0.22 | ) | (2.73 | ) | (0.91 | ) | (0.35 | ) | — | ||||||||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Net Asset Value, End of Period | $ | 12.88 | $ | 11.74 | $ | 12.14 | $ | 14.65 | $ | 13.70 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Total Return(b) | 11.66 | % | 20.55 | % | (10.92 | )% | 9.67 | % | 37.00 | %(c) | |||||||||||||||
Ratios to Average Net Assets/Supplemental Data: | |||||||||||||||||||||||||
Net Assets, End of Period (000’s) | $ | 151,096 | $ | 135,156 | $ | 92,191 | $ | 167,175 | $ | 78,308 | |||||||||||||||
Net Investment Income/(Loss)(d) | 2.10 | % | 2.25 | % | 2.45 | % | 2.01 | % | 2.01 | % | |||||||||||||||
Expenses Before Reductions(d)(e) | 1.23 | % | 1.25 | % | 1.24 | % | 1.21 | % | 1.33 | % | |||||||||||||||
Expenses Net of Reductions(d) | 1.22 | % | 1.24 | % | 1.17 | % | 1.10 | % | 1.20 | % | |||||||||||||||
Expenses Net of Reductions, Excluding Expenses Paid Indirectly(d)(f) | 1.23 | % | 1.25 | % | 1.19 | % | 1.11 | % | 1.23 | % | |||||||||||||||
Portfolio Turnover Rate | 24 | % | 21 | % | 43 | % | 29 | % | 25 | %(c) |
(a) | Period from commencement of operations. |
(b) | The returns include reinvested dividends and fund level expenses, but exclude insurance contract charges. If these charges were included, the returns would have been lower. |
(c) | Not annualized. |
(d) | Annualized for periods less than one year. |
(e) | Excludes fee reductions. If such fee reductions had not occurred, the ratios would have been as indicated. |
(f) | Expenses net of reductions excludes expenses paid indirectly, pursuant to a “commission recapture” program, under which brokers remit a portion of the brokerage commission which is used to pay certain Fund expenses. See note 2 in the Notes to the Financial Statements. |
See accompanying notes to the financial statements.
8
AZL NFJ International Value Fund
Notes to the Financial Statements
December 31, 2013
1. Organization
The Allianz Variable Insurance Products Trust (the “Trust”) was organized as a Delaware statutory trust on July 13, 1999. The Trust is a diversified open-end management investment company registered under the Investment Company Act of 1940. The Trust consists of 29 separate investment portfolios (collectively, the “Funds”), of which one is included in this report, the AZL NFJ International Value Fund (the “Fund”), and 28 are presented in separate reports.
The Trust is authorized to issue an unlimited number of shares of the Fund without par value. Shares of the Fund are available through the variable annuity contracts and variable life insurance policies offered through the separate accounts of participating insurance companies.
Under the Trust’s organizational documents, its officers and trustees are indemnified against certain liabilities arising out of the performance of their duties to the Fund. In addition, in the normal course of business, the Fund may enter into contracts with its vendors and others that provide for general indemnifications. The Fund’s maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Fund. However, based on experience, the Fund expects the risk of loss to be remote.
2. Significant Accounting Policies
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. The policies conform with U.S. generally accepted accounting principles (“U.S. GAAP”). The preparation of financial statements requires management to make certain 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 increases and decreases in net assets from operations during the reporting period. Actual results could differ from those estimates.
Security Valuation
The Fund records its investments at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between willing market participants at the measurement date. The valuation techniques used to determine fair value are further described in Note 4 below.
Investment Transactions and Investment Income
Investment transactions are recorded not later than on the business day following trade date. However, for financial reporting purposes, investment transactions are accounted for on trade date. Net realized gains and losses on investments sold and on foreign currency transactions are recorded on the basis of identified cost. Interest income is recorded on the accrual basis and includes, where applicable, the amortization of premiums or accretion of discounts. Dividend income is recorded on the ex-dividend date except in the case of foreign securities, in which case dividends are recorded as soon as such information becomes available.
Real Estate Investment Trusts
The Fund may own shares of real estate investment trusts (“REITs”) which report information on the source of their distributions annually. Certain distributions received from REITs during the year, which are known to be a return of capital, are recorded as a reduction to the cost of the individual REIT.
Foreign Currency Translation
The accounting records of the Fund are maintained in U.S. dollars. Foreign currency amounts are translated into U.S. dollars at the current rate of exchange to determine the fair value of investments, assets and liabilities. Purchases and sales of securities, and income and expenses are translated at the prevailing rate of exchange on the respective dates of such transactions. The Fund does not isolate that portion of the results of operations resulting from changes in foreign exchange rates on investments from fluctuations arising from changes in market prices of securities held. Such fluctuations are included in the net realized and unrealized gain or loss on investments and foreign currencies. Income received by the Fund from sources within foreign countries may be subject to withholding and other income or similar taxes imposed by such countries. The Funds accrue such taxes, as applicable, based on their current interpretation of tax rules in the foreign markets in which they invest.
Dividends to Shareholders
Dividends to shareholders are recorded on the ex-dividend date. The Fund distributes its dividends from net investment income and net realized capital gains, if any, on an annual basis. The amount of dividends from net investment income and from net realized gains is determined in accordance with federal income tax regulations, which may differ from U.S. GAAP. These “book/tax” differences are either temporary or permanent in nature. To the extent these differences are permanent in nature (e.g., return of capital, net operating loss, reclassification of certain market discounts, gain/loss, paydowns, and distributions), such amounts are reclassified within the composition of net assets based on their federal tax-basis treatment; temporary differences (e.g., wash sales and post October losses) do not require reclassification. Dividends to shareholders that exceed net investment income and net realized gains for tax purposes are reported as distributions of capital.
Expense Allocation
Expenses directly attributable to the Fund are charged directly to the Fund, while expenses attributable to more than one Fund are allocated among the respective Funds based upon relative net assets or some other reasonable method. Expenses which are attributable to more than one Trust are allocated across the Allianz Variable Insurance Products and Allianz Variable Insurance Products Fund of Funds Trusts based upon relative net assets or another reasonable basis. Allianz Investment Management LLC (the “Manager”), serves as the investment manager for the Trust and the Allianz Variable Insurance Products Fund of Funds Trust.
Securities Lending
To generate additional income, the Fund may lend up to 33 1/3% of its assets pursuant to agreements requiring that the loan be continuously secured by any combination of cash, U.S. government or U.S. government agency securities, equal initially to at least 102% of the fair value plus accrued interest on the securities loaned (105% for foreign
9
AZL NFJ International Value Fund
Notes to the Financial Statements
December 31, 2013
securities). The borrower of securities is at all times required to post collateral to the Fund in an amount equal to 100% of the fair value of the securities loaned based on the previous day’s fair value of the securities loaned, marked-to-market daily. Any collateral shortfalls are adjusted the next business day. The Fund bears all of the gains and losses on such investments. The Fund receives payments from borrowers equivalent to the dividends and interest that would have been earned on securities lent while simultaneously seeking to earn income on the investment of cash collateral received. In extremely low interest rate environments, the broker rebate fee may exceed the interest earned or the cash collateral which would result in a loss to the Fund. The investment of cash collateral deposited by the borrower is subject to inherent market risks such as interest rate risk, credit risk, liquidity risk, and other risks that are present in the market, and as such, the value of these investments may not be sufficient, when liquidated, to repay the borrower when the loaned security is returned. There may be risks of delay in recovery of the securities or even loss of rights in the collateral should the borrower of the securities fail financially. However, loans will be made only to borrowers, such as broker-dealers, banks or institutional borrowers of securities, deemed by the Manager to be of good standing and credit worthy and when in its judgment, the consideration which can be earned currently from such securities loans justifies the attendant risks. Loans are subject to termination by the Trust or the borrower at any time, and are, therefore, not considered to be illiquid investments. Securities on loan at December 31, 2013 are presented on the Fund’s Schedule of Portfolio Investments. The average outstanding amount of securities on loan was $15.2 million for the year ended December 31, 2013.
Cash collateral received in connection with securities lending is invested in the Allianz Variable Insurance Products Securities Lending Collateral Trust (the “Securities Lending Collateral Trust”) managed by The Dreyfus Corporation, an affiliate of the Custodian and Securities Lending Agent. The Securities Lending Collateral Trust invests in short-term investments that have a remaining maturity of 397 days or less as calculated in accordance with Rule 2a-7 under the 1940 Act. The Fund paid securities lending fees of $19,532 during the year ended December 31, 2013. These fees have been netted against “Income from securities lending” on the Statement of Operations.
Commission Recapture
Certain Funds of the Trust participate in a commission recapture program. The Fund will utilize the recaptured commissions to pay for, in whole or part, certain expenses of the Fund, excluding investment advisory fees. Any amounts received by the Fund, if applicable, are disclosed as “Expenses paid indirectly” on the Statement of Operations.
Effective January 6, 2014, the Manager, on behalf of the Trust, requested the Fund cease participation in the program until further notice.
3. Related Party Transactions
The Manager provides investment advisory and management services for the Fund. The Manager has retained an affiliated money management organization (the “Subadviser”), to make investment decisions on behalf of the Fund. Pursuant to a subadvisory agreement with NFJ Investment Group LLC (“NFJ”), NFJ provides investment advisory services as the Subadviser for the Fund subject to the general supervision of the Trustees and the Manager. The Manager is entitled to a fee, computed daily and paid monthly, based on the average daily net assets of the Fund. Expenses incurred by the Fund for investment advisory and management services are reflected on the Statement of Operations as “Manager fees.” For its services, the Subadviser is entitled to a fee payable by the Manager. The Manager has contractually agreed to waive fees and reimburse the Fund to limit the annual expenses, excluding interest expense (e.g., cash overdraft fees), taxes, brokerage commissions, other expenditures that are capitalized in accordance with U.S. GAAP and other extraordinary expenses not incurred in the ordinary course of the Fund’s business, based on the daily net assets of the Fund, through April 30, 2015.
For the year ended December 31, 2013, the annual rate due to the Manager and the annual expense limit were as follows:
Annual Rate | Annual Expense Limit | |||||||||
AZL NFJ International Value Fund | 0.90 | % | 1.45 | % |
Any amounts contractually waived or reimbursed by the Manager in a particular fiscal year will be subject to repayment by the Fund to the Manager to the extent that from time to time through the next three fiscal years the repayment will not cause the Fund’s expenses to exceed the lesser of the stated limit at the time of the waiver or the current stated limit. Any amounts recouped by the Manager during the year are reflected on the Statement of Operations as “Recoupment of prior expenses reimbursed by the Manager.” At December 31, 2013, there were no remaining contractual reimbursements that are subject to repayment by the Fund in subsequent years.
In addition, the Manager may voluntarily waive or reimburse additional fees in order to maintain more competitive expense ratios. Any voluntary waivers or reimbursements are not subject to repayment in subsequent years. Information on the total amount waived/reimbursed by the Manager or repaid to the Manager by the Fund during the year can be found on the Statement of Operations. During the year ended December 31, 2013, there were no voluntary waivers.
Pursuant to separate agreements between the Funds and the Manager, the Manager provides a Chief Compliance Officer (“CCO”) and certain compliance oversight and regulatory filing services to the Trust. Under these agreements the Manager is entitled to an amount equal to a portion of the compensation and certain other expenses related to the individuals performing the CCO and compliance oversight services, as well as $75 per hour for time incurred in connection with the preparation and filing of certain documents with the Securities and Exchange Commission. The fees are paid to the Manager on a quarterly basis. The total expenses incurred by the Fund for these services are reflected on the Statement of Operations as “Administrative and compliance services fees.”
Citi Fund Services Ohio, Inc. (“Citi” or the “Administrator”), a wholly owned subsidiary of Citigroup, Inc., with which an officer of the Trust is affiliated, serves as the Trust’s administrator, transfer agent, and fund accountant, and assists the Trust in all aspects of its administration and operation. The Administrator is entitled to a Trust-wide asset-based fee, which is based on the following schedule: 0.05% of daily average net assets on the first $4 billion, 0.04% of daily average net assets on the next $2 billion, 0.02% of daily average net assets on the next $2 billion and 0.01% of daily average net assets over $8 billion. The overall Trust-wide fees are accrued daily and paid monthly and are subject to a minimum annual fee. In addition, the Administrator is entitled to annual account fees related to the transfer agency system, an annual fee for each additional class of shares of any Fund, certain annual fees in supporting fair value services, and a Trust-wide annual fee for providing infrastructure and support in implementing the written policies and procedures comprising the Fund’s compliance program. Fees payable to the Administrator are subject to certain reductions associated with services provided to new funds. The Administrator is also reimbursed for certain expenses incurred. The total expenses incurred by the Fund for these services are reflected on the Statement of Operations as “Administration fees.”
10
AZL NFJ International Value Fund
Notes to the Financial Statements
December 31, 2013
Allianz Life Financial Services, LLC (“ALFS”), an affiliate of the Manager, serves as distributor of the Fund and receives 12b-1 fees directly from the Fund, plus a Trust-wide annual fee of $42,500, paid by the Manager from its profits and not by the Trust, for recordkeeping and reporting services.
The Trust has adopted a distribution and service plan in conformance with Rule 12b-1 of the 1940 Act. Pursuant to this plan, the Fund is authorized to pay certain fees for the sale and distribution of its shares and services provided to its shareholders at an annual rate not to exceed 0.25% of the Fund’s average daily net assets. These fees are reflected on the Statement of Operations as “Distribution fees.”
In addition, certain legal fees and expenses are paid to a law firm, Dorsey & Whitney LLP, of which the Secretary of the Fund is a partner. During the year ended December 31, 2013, $1,814 was paid from the Fund relating to these fees and expenses.
Certain Officers and Trustees of the Trust are affiliated with the Manager or the Administrator. Such Officers (except for the Trust’s CCO as noted above) and Trustees receive no compensation from the Trust for serving in their respective roles. For their service to the Trust and to the Allianz Variable Insurance Products Fund of Funds Trust, each non-interested Trustee receives a $139,000 annual Board retainer. In addition, the Trustees are reimbursed for certain expenses associated with attending Board meetings. Compensation to the Trustees is allocated between the Trust and the Allianz Variable Insurance Products Fund of Funds Trust in proportion to the assets under management of each trust. During the year ended December 31, 2013, actual Trustee compensation was $973,000 in total for both trusts.
At a meeting of the Board of Trustees on December 4, 2013, the Trustees approved a fee increase to the Officers and Trustees who are paid a fee for their services to the Trust and to the Allianz Variable Insurance Products Fund of Funds Trust. Effective January 1, 2014, each non-interested Trustee will receive a $163,000 annual retainer.
4. Investment Valuation Summary
The valuation techniques employed by the Fund, as described below, maximize the use of observable inputs and minimize the use of unobservable inputs in determining fair value. The inputs used for valuing the Fund’s investments are summarized in the three broad levels listed below:
— | Level 1 — quoted prices in active markets for identical assets |
— | Level 2 — other significant observable inputs (including quoted prices for similar securities, interest rates, prepayments speeds, credit risk, etc.) |
— | Level 3 — significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of investments) |
Changes in valuation techniques may result in transfers in or out of an assigned level within the disclosure hierarchy. The Fund determines transfers between fair value hierarchy levels at the reporting period end. The inputs or methodology used for valuing investments is not necessarily an indication of the risk associated with investing in those investments.
Security prices are generally provided by an independent third party pricing service approved by the Trust’s Board of Trustees (“Trustees”) as of the close of the New York Stock Exchange (“NYSE”) (generally 4:00 pm Eastern Time). Equity securities are valued at the last quoted sale price or, if there is no sale, the last quoted bid price is used for long securities and the last quoted ask price is used for securities sold short. Securities listed on NASDAQ Stock Market, Inc. (“NASDAQ”) are valued at the official closing price as reported by NASDAQ. In each of these situations, valuations are typically categorized as a Level 1 in the fair value hierarchy. Investments in open-end investment companies are valued at their respective net asset value as reported by such companies and are typically categorized as Level 1 in the fair value hierarchy.
Debt and other fixed income securities are generally valued at an evaluated bid price provided by an independent pricing source approved by the Trustees. To value debt securities, pricing services may use various pricing techniques which take into account appropriate factors such as market activity, yield, quality, coupon rate, maturity, type of issue, trading characteristics, call features, credit ratings and other data, as well as broker quotes. Short term securities of sufficient credit quality with sixty days or less remaining until maturity may be valued at amortized cost, which approximates fair value. In each of these situations, valuations are typically categorized as Level 2 in the fair value hierarchy.
Other assets and securities for which market quotations are not readily available, or are deemed unreliable are valued at fair value as determined in good faith by the Trustees or persons acting on the behalf of the Trustees. Fair value pricing may be used for significant events such as securities whose trading has been suspended, whose price has become stale or for which there is no currently available price at the close of the NYSE. Depending on the source and relative significance of valuation inputs, these instruments may be classified as Level 2 or Level 3 in the fair value hierarchy. The Fund utilizes a pricing service to assist in determining the fair value of securities when certain significant events occur that may affect the value of foreign securities.
In accordance with procedures adopted by the Trustees, fair value pricing may be used if events materially affecting the value of foreign securities occur between the time when the exchange on which they are traded closes and the time when the Fund’s net asset value is calculated. Management identifies possible fluctuation in international securities by monitoring the increase or decrease in the value of a designated benchmark index. In the event of an increase or decrease greater than predetermined levels, the Fund may use a systematic valuation model provided by an independent third party to fair value its international equity securities which are then typically categorized as Level 2 in the fair value hierarchy. For the year ended December 31, 2013, there were no Level 3 investments for which significant unobservable inputs were used to determine fair value.
The following is a summary of the valuation inputs used as of December 31, 2013 in valuing the Fund’s investments based upon the three levels defined above:
Investment Securities: | Level 1 | Level 2 | Total | ||||||||||||
Common Stocks+ | |||||||||||||||
Automobiles | $ | 1,635,480 | $ | 2,936,553 | $ | 4,572,033 | |||||||||
Beverages | 1,575,798 | 3,266,429 | 4,842,227 | ||||||||||||
Chemicals | 2,301,507 | 846,538 | 3,148,045 | ||||||||||||
Commercial Banks | 11,861,700 | 14,355,235 | 26,216,935 | ||||||||||||
Commercial Services & Supplies | — | 780,852 | 780,852 | ||||||||||||
Diversified Financial Services | — | 1,668,952 | 1,668,952 |
11
AZL NFJ International Value Fund
Notes to the Financial Statements
December 31, 2013
Investment Securities: | Level 1 | Level 2 | Total | ||||||||||||
Diversified Telecommunication Services | $ | 1,654,900 | $ | 1,526,397 | $ | 3,181,297 | |||||||||
Electronic Equipment, Instruments & Components | — | 3,373,004 | 3,373,004 | ||||||||||||
Food & Staples Retailing | — | 2,791,976 | 2,791,976 | ||||||||||||
Food Products | — | 2,348,329 | 2,348,329 | ||||||||||||
Industrial Conglomerates | 1,241,959 | 3,880,099 | 5,122,058 | ||||||||||||
IT Services | — | 2,115,502 | 2,115,502 | ||||||||||||
Leisure Equipment & Products | — | 1,512,613 | 1,512,613 | ||||||||||||
Machinery | — | 1,125,841 | 1,125,841 | ||||||||||||
Media | — | 930,566 | 930,566 | ||||||||||||
Multi-Utilities | — | 1,326,118 | 1,326,118 | ||||||||||||
Oil, Gas & Consumable Fuels | 13,250,040 | 2,913,878 | 16,163,918 | ||||||||||||
Pharmaceuticals | 7,378,848 | 3,182,484 | 10,561,332 | ||||||||||||
Tobacco | — | 2,797,733 | 2,797,733 | ||||||||||||
Wireless Telecommunication Services | 975,881 | 2,943,923 | 3,919,804 | ||||||||||||
All Other Common Stocks+ | 41,973,528 | — | 41,973,528 | ||||||||||||
Preferred Stock+ | — | 3,708,262 | 3,708,262 | ||||||||||||
Securities Held as Collateral for Securities on Loan | — | 10,290,261 | 10,290,261 | ||||||||||||
Unaffiliated Investment Company | 7,231,281 | — | 7,231,281 | ||||||||||||
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| ||||||||||
Total Investment Securities | $ | 91,080,922 | $ | 70,621,545 | $ | 161,702,467 | |||||||||
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+ | For detailed industry descriptions, see the accompanying Schedule of Portfolio Investments. |
5. Security Purchases and Sales
For the year ended December 31, 2013, cost of purchases and proceeds from sales of securities (excluding securities maturing less than one year from acquisition) were as follows:
Purchases | Sales | |||||||||
AZL NFJ International Value Fund | $ | 33,298,981 | $ | 34,040,241 |
6. Investment Risks
Emerging Markets Risk: Emerging markets may have less developed trading markets and exchanges which may make it more difficult to sell securities at an acceptable price and their prices may be more volatile than securities of companies in more developed markets. Settlements of trades may be subject to greater delays so that the Fund may not receive the proceeds of a sale of a security on a timely basis. Emerging countries may also have less developed legal and accounting systems and investments may be subject to greater risks of government restrictions, nationalization, or confiscation.
Foreign Securities and Currencies Risk: Investments in securities of foreign issuers carry certain risks not ordinarily associated with investments in securities of domestic issuers. Such risks include future political and economic developments, and the possible imposition of exchange controls or other foreign governmental laws and restrictions. In addition, with respect to certain countries, there is the possibility of expropriation of assets, confiscatory taxation, political or social instability or diplomatic developments which could adversely affect investments in those securities.
7. Federal Tax Information
It is the Fund’s policy to continue to comply with the requirements of the Internal Revenue Code under Subchapter M, applicable to regulated investment companies, and to distribute all of its taxable income, including any net realized gains on investments, to its shareholders. Therefore, no provision is made for federal income taxes.
Management of the Fund has reviewed tax positions taken in tax years that remain subject to examination by all major tax jurisdictions, including federal (i.e., the last four tax year ends and the interim tax period since then, as applicable). Management believes that there is no tax liability resulting from unrecognized tax benefits related to uncertain tax positions taken.
Cost for federal income tax purposes at December 31, 2013 is $140,408,733. The gross unrealized appreciation/ (depreciation) on a tax basis is as follows:
Unrealized appreciation | $ | 26,489,027 | |||
Unrealized depreciation | (5,195,293 | ) | |||
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| ||||
Net unrealized appreciation/(depreciation) | $ | 21,293,734 | |||
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During the year ended December 31, 2013, the Fund utilized $249,922 in capital loss carry forwards to offset capital gains.
12
AZL NFJ International Value Fund
Notes to the Financial Statements
December 31, 2013
The tax character of dividends paid to shareholders during the year ended December 31, 2013 were as follows:
Ordinary Income | Net Long-Term Capital Gains | Total Distributions(a) | |||||||||||||
AZL NFJ International Value Fund | $ | 2,500,966 | $ | — | $ | 2,500,966 |
(a) | Total distributions paid may differ from the Statements of Changes in Net Assets because dividends are recognized when actually paid for tax purposes. |
The tax character of dividends paid to shareholders during the year ended December 31, 2012 was as follows:
Ordinary Income | Net Long-Term Capital Gains | Total Distributions(a) | |||||||||||||
AZL NFJ International Value Fund | $ | 4,545,092 | $ | 18,098,748 | $ | 22,643,840 |
(a) | Total distributions paid may differ from the Statements of Changes in Net Assets because dividends are recognized when actually paid for tax purposes. |
As of December 31, 2013, the components of accumulated earnings on a tax basis were as follows:
Undistributed Ordinary Income | Undistributed Long-Term Capital Gains | Accumulated Capital and Other Losses | Unrealized Appreciation/ (Depreciation)(a) | Total Accumulated Earnings/ | |||||||||||||||||||||
AZL NFJ International Value Fund | $ | 2,966,257 | $ | 6,108,872 | $ | — | $ | 21,291,205 | $ | 30,366,334 |
(a) | The difference between book-basis and tax-basis unrealized appreciation/(depreciation) is attributable primarily to tax deferral of losses on wash sales. |
8. Ownership and Principal Holders
The beneficial ownership, either directly or indirectly, of more than 25% of the voting securities of a fund creates presumptions of control of the fund, under section 2 (a)(9) of the 1940 Act. As of December 31, 2013, the Fund had an individual shareholder account which is affiliated with the Investment Adviser representing ownership in excess of 90% of the Fund.
9. Subsequent Events
Management has evaluated events and transactions subsequent to period end through the date the financial statements were issued, for purposes of recognition or disclosure in these financial statements and there are no subsequent events to report.
13
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Shareholders and Board of Trustees of
Allianz Variable Insurance Products Trust:
We have audited the accompanying statement of assets and liabilities of AZL NFJ International Value Fund (the “Fund”) of the Allianz Variable Insurance Products Trust, including the schedule of portfolio investments, as of December 31, 2013, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the years in the two-year period then ended, and the financial highlights for each of the periods in the five-year period then ended. These financial statements and financial highlights are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of December 31, 2013, by correspondence with the custodian and brokers or by other appropriate auditing procedures. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of the Fund as of December 31, 2013, the results of its operations for the year then ended, the changes in its net assets for each of the years in the two-year period then ended, and the financial highlights for each of the periods in the five-year period then ended, in conformity with U.S. generally accepted accounting principles.
/s/ KPMG LLP
Columbus, Ohio
February 25, 2014
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Other Federal Income Tax Information (Unaudited)
For the year ended December 31, 2013, 2.23% of the total ordinary income dividends paid by the Fund qualify for the corporate dividends received deduction available to corporate shareholders.
15
A description of the policies and procedures that the Fund uses to determine how to vote proxies relating to portfolio securities is available, without charge, upon request, by visiting the Securities and Exchange Commission’s (“Commission”) website at www.sec.gov, or by calling 800-624-0197.
Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30th is available (i) without charge, upon request, by calling 800-624-0197; (ii) on the Allianz Variable Insurance Products Trust’s website at https://www.allianzlife.com; and (iii) on the Commission’s website at http://www.sec.gov.
The Fund files complete Schedules of Portfolio Holdings with the Commission for the first and third quarters of each fiscal year on Form N-Q. Schedules of Portfolio Holdings for the Fund in this report are available without charge on the Commission’s website at http://www.sec.gov, or may be reviewed and copied at the Commission’s Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 800-SEC-0330.
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Approval of Investment Advisory and Subadvisory Agreements (Unaudited)
The Allianz Variable Insurance Products Trust (the “Trust”) is a manager-of-managers fund. That means that the Trust’s Manager (“Allianz Investment Management LLC”) is responsible for monitoring the various Subadvisers that have day-to-day responsibility for the decisions made for each of the Trust’s investment portfolios. The Trust’s Manager is responsible for determining, in the first instance, which investment advisers to consider recommending for selection as a Subadviser.
In reviewing the services provided by the Manager and the terms of the investment management agreement, the Board receives and reviews information related to the Manager’s experience and expertise in the variable insurance marketplace. Currently, the Funds are offered only through variable annuities and variable life insurance policies, and not in the retail fund market. In addition, the Board receives information regarding the Manager’s expertise with regard to portfolio diversification and asset allocation requirements within variable insurance products issued by Allianz Life Insurance Company of North America and its subsidiary, Allianz Life Insurance Company of New York. Currently, the Funds are offered only through Allianz Life and Allianz of New York variable products.
The Trust’s Manager has adopted policies and procedures to assist it in the process of analyzing each potential Subadviser with expertise in particular asset classes for purposes of making the recommendation that a specific investment adviser be selected. The Trust’s Board reviews and considers the information provided by the Manager in deciding which investment advisers to select. After an investment adviser becomes a Subadviser, a similarly rigorous process is instituted by the Manager to monitor the investment performance and other responsibilities of the Subadviser. The Manager reports to the Trust’s Board on its analysis at the regular meetings of the Board, which are held at least quarterly. Where warranted, the Manager will add or remove a particular Subadviser from a “watch” list that it maintains. Watch list criteria include, for example: (a) Fund performance over various time periods; (b) Fund risk issues, such as changes in key personnel involved with Fund management, changes in investment philosophy or process, or “capacity” concerns; and (c) organizational risk issues, such as regulatory, compliance or legal concerns, or changes in the ownership of the Subadviser. The Manager may place a Fund on the watch list for other reasons, and if so, will explain its rationale to the Trustees. Funds which are on the watch list are subject to special scrutiny of the Manager and the Board of Trustees. Funds may be removed from such watch list, if for example, performance improves or regulatory matters are satisfactorily resolved. However, in some situations where Funds which have been on the watch list, the Manager has recommended the retention of a new Subadviser, and the Board of Trustees has subsequently approved new Subadvisory Agreements with such Subadvisers.
In assessing the Manager’s and Subadvisers’ (collectively, the “Advisory Organizations”), performance of their obligations, the Board considers whether there has occurred a circumstance or event that would constitute a reason for it to not renew an advisory contract. In this regard, the Board is mindful of the potential disruption of a Fund’s operations and various risks, uncertainties and other effects that could occur as a result of a decision to terminate or not renew a contract.
As required by the Investment Company Act of 1940 (“1940 Act”), the Trust’s Board has reviewed and approved the Trust’s Investment Management Agreement with the Manager (the “Advisory Agreement”) and portfolio management agreements (the “Subadvisory Agreements”) with the Subadvisers. The Board’s decision to approve these contracts reflects the exercise of its business judgment on whether to approve new arrangements and continue the existing arrangements. During its review of these contracts, the Board considers many factors, among the most material of which are: the Fund’s investment objectives and long term performance; the Advisory Organizations’ management philosophy, personnel, and processes, including their compliance history and the adequacy of their compliance processes; the preferences and expectations of Fund shareholders (and underlying contract owners) and their relative sophistication; the continuing state of competition in the mutual fund industry; and comparable fees in the mutual fund industry.
The Board also considers the compensation and benefits received by the Advisory Organizations. This includes fees received for services provided to the Fund by affiliated persons of the Advisory Organizations and research services received by the Advisory Organizations from brokers that execute Fund trades, as well as advisory fees. The Board considered the fact that: (1) the Manager and the Trust are parties to an Administrative Service Agreement, a Compliance Services Agreement, and a Chief Compliance Officer Agreement, under which the Manager is compensated by the Trust for performing certain administrative and compliance services including providing an employee of the Manager or one of its affiliates to act as the Trust’s Chief Compliance Officer; and (2) Allianz Life Financial Services, LLC, an affiliated person of the Manager, is a registered securities broker-dealer and receives (along with its affiliated persons) payments made by the Trust pursuant to Rule 12b-1.
The Board is aware that various courts have interpreted provisions of the 1940 Act and have indicated in their decisions that the following factors may be relevant to an adviser’s compensation: the nature and quality of the services provided by the adviser, including the performance of the fund; the adviser’s cost of providing the services; the extent to which the adviser may realize “economies of scale” as the fund grows larger; any indirect benefits that may accrue to the adviser and its affiliates as a result of the adviser’s relationship with the fund; performance and expenses of comparable funds; and the extent to which the independent Board members are fully informed about all facts bearing on the adviser’s service and fee. The Trust’s Board is aware of these factors and takes them into account in its review of the Trust’s advisory contracts.
The Board considered and weighed these circumstances in light of its experience in governing the Trust and working with the Advisory Organizations on matters relating to the Funds, and is assisted in its deliberations by the advice of legal counsel to the Independent Trustees. In this regard, the Board requests and receives a significant amount of information about the Funds and the Advisory Organizations. Some of this information is provided at each regular meeting of the Board; additional information is provided in connection with the particular meeting or meetings at which the Board’s formal review of an advisory contract occurs. In between regularly scheduled meetings, the Board may receive information on particular matters as the need arises. Thus, the Board’s evaluation of an advisory contract is informed by reports covering such matters as: an Advisory Organization’s investment philosophy, personnel, and processes; the Fund’s short- and long-term performance (in absolute terms as well as in relationship to its benchmark(s), certain competitor or “peer group” funds and similar funds managed by the particular Subadviser), and comments on the reasons for performance; the Fund’s expenses (including the advisory fee itself and the overall expense structure of the Fund, both in absolute terms and relative to similar and/or competing funds, with due regard for contractual or voluntary expense limitations); the use and allocation of brokerage commissions derived from trading the Fund’s portfolio securities; the nature and extent of the advisory and other services provided to the Fund by the Advisory Organizations and their affiliates; compliance and audit reports concerning the Funds and the companies that service them; and relevant developments in the mutual fund industry and how the Funds and/or Advisory Organizations are responding to them.
The Board also receives financial information about Advisory Organizations, including reports on the compensation and benefits the Advisory Organizations derive from their relationships with the Funds. These reports cover not only the fees under the advisory contracts, but also fees, if any, received for providing other services to the Funds. The reports also discuss any indirect or “fall out” benefits an Advisory Organization may derive from its relationship with the Funds.
The Advisory and Subadvisory Agreements (collectively, the “Agreements”) were most recently considered at Board of Trustees meetings held in the fall of 2013. Information relevant to the approval of such Agreements was considered at a telephonic Board of Trustees meeting on October 16, 2013, and at an “in person” Board of Trustees meeting held October 22, 2013. The Agreements were approved at the Board meeting of October 22, 2013. At such meeting the Board also approved an Expense Limitation Agreement between the Manager and the Trust for the period ending April 30, 2015. In connection with such meetings, the Trustees requested and evaluated extensive materials from the Manager, including performance and expense information for other investment companies with similar investment objectives derived from data compiled by an independent third party provider and other sources believed to be reliable by the Manager. Prior to voting, the Trustees reviewed the proposed approval/continuance of the Agreements with management and with experienced counsel who are independent of the Manager and received a memorandum from such counsel discussing the legal
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standards for their consideration of the proposed approvals/continuances. The independent (“disinterested”) Trustees also discussed the proposed approvals/continuances in a private session with such counsel at which no representatives of the Manager were present. In reaching their determinations relating to the approval and/or continuance of the Agreements, in respect of each Fund, the Trustees considered all factors they believed relevant. The Board based its decision to approve the Agreements on the totality of the circumstances and relevant factors, and with a view to past and future long-term considerations. Not all of the factors and considerations discussed above and below are necessarily relevant to every Fund, and the Board did not assign relative weights to factors discussed herein or deem any one or group of them to be controlling in and of themselves.
An SEC Rule requires that shareholder reports include a discussion of certain factors relating to the selection of investment advisers and the approval of advisory fees. The “factors” enumerated by the SEC are set forth below in italics, as well as the Board’s conclusions regarding such factors:
(1) The nature, extent and quality of services provided by the Manager and Subadvisers. The Trustees noted that the Manager, subject to the control of the Board of Trustees, administers each Fund’s business and other affairs. Under the Advisory Agreement, the Manager holds the sole and exclusive responsibility to provide, or arrange for other to provide, the management of the Funds’ assets and the placement of orders for the purchase and sale of the securities of the Funds. As the Trust is a manager of managers fund, the Manager is authorized, under the Advisory Agreement, to retain one or more Subadvisers for each Fund to handle day-to-day management of the Funds’ investment portfolios; the Manager is responsible for determining, in the first instance, which investment advisers to recommend to the Board of Trustees for selection as a Subadviser. The Trustees were aware that, notwithstanding the retention of the Subadvisers to handle day-to-day portfolio management, the Manager remains responsible for substantial other matters, including continuously monitoring compliance by each Subadviser with the investment policies and restrictions of the respective Funds, with such other limitations or directions of the Board of Trustees, and with all legal requirements under federal or state law or regulation. The Manager also is responsible primarily to provide statistical information and other data to the Trustees regarding the Funds’ portfolio investments and to make available to the Funds’ administrator such information as is necessary for the conduct of its duties.
The Trustees also noted that the Manager provides the Trust and each Fund with such administrative and other services (exclusive of, and in addition to, any such services provided by any others retained by the Trust on behalf of the Funds) and executive and other personnel as are necessary for the operation of the Trust and the Funds. Except for the Trust’s Chief Compliance Officer, the Manager pays all of the compensation of Trustees and officers of the Trust who are employees of the Manager or its affiliates.
The Trustees considered the scope and quality of services provided by the Manager and the Subadvisers and noted that the scope of such services provided had expanded as a result of recent regulatory and other developments. The Trustees noted that, for example, the Manager and Subadvisers are responsible for maintaining and monitoring their own compliance programs, and these compliance programs are continuously refined and enhanced in light of new regulatory requirements. The Trustees considered the capabilities and resources which the Manager has dedicated to performing services on behalf of the Trust and its Funds. The quality of administrative and other services, including the Manager’s role in coordinating the activities of the Trust’s other service providers, also were considered. The Trustees concluded that, overall, they were satisfied with the nature, extent and quality of services provided (and expected to be provided) to the Trust and to each of the Funds under the Agreements.
(2) The investment performance of the Funds, the Manager and the Subadvisers. In connection with every in-person quarterly Board of Trustees meeting, Trustees receive extensive information on the performance results of each of the Funds. This includes, for example, performance information on all of the Funds for the previous quarter, and previous one, three and five-year periods, and since inception. (For Funds which have been in existence for less than five years, Trustees may receive performance information on comparable funds managed by the particular Subadviser for periods prior to the creation of a particular Fund.) Such performance information includes information on absolute total return, performance versus Subadvisers’ comparable fund(s), performance versus the appropriate benchmark(s), and performance versus peer groups. For example, in connection with the Board of Trustees meetings held September 10-11, 2013, the Manager reported that for the three year period ended June 30, 2013, 12 Funds were in the top 40%, eight were in the middle 20% and eight were in the bottom 40%, and for the one year period ended June 30, 2013, 8 Funds were in the top 40%, seven were in the middle 20%, and 14 were in the bottom 40%. The Manager also reported that for the five year period ended June 30, 2013, 10 Funds were in the top 40%, four were in the middle 20%, and six were in the bottom 40%. At the Board of Trustees meeting held October 22, 2013, the Trustees determined that the overall investment performance of the Funds was acceptable.
(3) The costs of services to be provided and profits to be realized by the Manager and the Subadvisers and their affiliates from their relationship with the Funds. The Manager has supplied information to the Board of Trustees pertaining to the level of investment advisory fees to which the Funds are subject. The Manager has agreed to temporarily “cap” Fund expenses at certain levels, and information is provided to Trustees setting forth “contractual” advisory fees and “actual” fees after taking expense caps into account. Based upon the information provided, the “actual” advisory fees payable by the Funds overall are generally comparable to the average level of fees paid by Fund peer groups. For the 30 Funds reviewed by the Board of Trustees in the fall of 2013, 27 Funds paid “actual” advisory fees in a percentage amount within the 65th percentile or lower for each Fund’s applicable category. The Trustees recognized that it is difficult to make comparisons of advisory fees because there are variations in the services that are included in the fees paid by other funds. The Board has concluded that the advisory fees to be paid to the Manager by the Funds are not unreasonable.
The Manager has also supplied information to the Board of Trustees pertaining to total Fund expenses (which includes advisory fees, the 25 basis point 12b-1 fee paid by the Funds, and other Fund expenses). As noted above, the Manager has agreed to “cap” Fund expenses at certain levels. Based upon the information provided, the overall total expense ratio ranking in 2013 for the 30 Funds was as follows: (1) 28 of the Funds had total expense rankings below the 65th percentile (with 20 Funds at or below the 50th percentile); (2) the AZL Russell 1000 Value Fund had a total expense ranking in the 66th percentile; the Manager reported that there is only a limited peer group for such Fund; and (3) the AZL Morgan Stanley Global Real Estate Fund had a total expense ranking in the 72nd percentile; it was reported by the Manager that there is only a limited peer group for such Fund, such Fund’s expense ratio has declined, and such Fund’s expense ratio is comparable to funds of similar size.
The Manager has committed to providing the Funds with a high quality of service and working to reduce Fund expenses over time, particularly as the Funds grow larger. The Trustees concluded therefore that the expense ratios of the Funds were not unreasonable.
The Manager provided information concerning the profitability of the Manager’s investment advisory activities for the period from 2011 through June 30, 2013. The Trustees recognized that it is difficult to make comparisons of profitability from investment company advisory agreements because comparative information is not generally publicly available and is affected by numerous factors, including the structure of the particular adviser, the types of funds it manages, its business mix, numerous assumptions regarding allocation of expenses and the adviser’s capital structure and cost of capital. In considering profitability information, the Trustees considered the possible effect of certain fall-out benefits to the Manager and its affiliates. The Trustees focused on profitability of the Manager’s relationships with the Funds before taxes and distribution expenses. The Trustees recognized that the Manager should, in the abstract, be entitled to earn a reasonable level of profits for the services it provides to each Fund and, based on their review, concluded that they were satisfied that the Manager’s level of profitability from its relationship with the Funds was not excessive.
The Manager, on behalf of the Board of Trustees, endeavored to obtain information on the profitability of each Subadviser in connection with its relationship with the Fund or Funds which it subadvises. The Manager was unable to obtain meaningful profitability information from some of the unaffiliated Subadvisers. The Manager assured the Board of Trustees that the Agreements with the Subadvisers which are not affiliated with it were negotiated on an “arm’s length” basis, so that arguably, such profitability information should be less relevant. The Trustees were also provided with certain information on the profitability for the Subadviser which is affiliated with the Manager. Trustees recognized the difficulty of allocating costs to multiple advisory accounts and products of a large advisory organization. Based upon the information provided, the Trustees determined that there was no evidence that the level of such profitability attributable to subadvising the Funds was excessive.
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(4) and (5) The extent to which economies of scale would be realized as the Funds grow, and whether fee levels reflect these economies of scale. The Trustees noted that most of the advisory fee schedules for the Funds do not contain breakpoints that reduce the fee rate on assets above specified levels, although certain Subadvisory Agreements have such “breakpoints.” The Trustees recognized that breakpoints may be an appropriate way for the Manager to share its economies of scale, if any, with Funds that have substantial assets. However, they also recognized that there may not be a direct relationship between any economies of scale realized by Funds and those realized by the Manager as assets increase. The Trustees do not believe there is a uniform methodology for establishing breakpoints that give effect to Fund-specific service provided by the Manager. The Trustees noted that in the fund industry as a whole, as well as among funds similar to the Funds, there is no uniformity or pattern in the fees and asset levels at which breakpoints (if any) apply. Depending on the age, size, and other characteristics of a particular fund and its manager’s cost structure, different conclusions can be drawn as to whether there are economies of scale to be realized at any particular level of assets, notwithstanding the intuitive conclusion that such economies exist, or will be realized at some level of total assets. Moreover, because different managers have different cost structures and service models, it is difficult to draw meaningful conclusions from the breakpoints that may have been adopted by other funds. The Trustees also noted that the advisory agreements for many funds do not have breakpoints at all, or if breakpoints exist, they may be at asset levels significantly greater than those of the individual Funds. The Trustees also noted that the total assets in all of the Funds as of June 30, 2013 were approximately $12.85 billion, and that no single non-money market Fund had assets in excess of $616 million.
The Trustees noted that the Manager has agreed to temporarily “cap” Fund expenses at certain levels, which has the effect of reducing expenses as would the implementation of advisory fee breakpoints. The Manager has committed to continue to consider the continuation of fee “caps” and/or advisory fee breakpoints as the Funds grow larger. The Board receives quarterly reports on the level of Fund assets. It expects to consider whether or not to approve the Agreements at a meeting to be held prior to December 31, 2014, and will at that time, or prior thereto, consider: (a) the extent to which economies of scale can be realized, and (b) whether the advisory fee should be modified to reflect such economies of scale, if any.
Having taken these factors into account, the Trustees concluded that the absence of breakpoints in certain of the Funds’ advisory fee rate schedules was acceptable under each Fund’s circumstances.
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Information about the Board of Trustees and Officers (Unaudited)
The Trust is managed by the Trustees in accordance with the laws of the state of Delaware governing business trusts. There are currently eight Trustees, two of whom are “interested persons” of the Trust within the meaning of that term under the 1940 Act. The Trustees and Officers of the Trust, their addresses, ages, their positions held with the Trust, their terms of office with the Trust and length of time served, their principal occupation(s) during the past five years, the number of portfolios in the Trust they oversee, and their other directorships held are as follows:
Non-Interested Trustees(1)
Name, Address, and Age | Positions Held with VIP Trust FOF Trust | Term of Office(2)/Length of Time Served | Principal Occupation(s) During Past 5 Years | Number of Portfolios Overseen for VIP Trust FOF Trust | Other Directorships Held Outside the AZL Fund Complex | |||||
Peter R. Burnim, Age 66 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/07 | Chairman, Argus Investment Strategies Fund Ltd., Feburary 2013 to present; Managing Director, iQ Venture Advisors, LLC. 2005 to 2012; Chairman, Northstar Group Holdings Ltd. Bermuda, 2011 to present; Expert Witness, Massachusetts Department of Revenue, 2011 to 2012; Executive Vice President, Northstar Companies, 2002 to 2005; Senior Officer, Citibank and Citicorp for over 25 years | 41 | Argus Group Holdings; Northstar Group Holdings, NRIL, Sterling Centrecorp Inc.; Highland Financial Holdings; and Bank of Bermuda NY | |||||
Peggy L. Ettestad, Age 56 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/07 | Managing Director, Red Canoe Management Consulting LLC, 2008 to present; Senior Managing Director, Residential Capital LLC, 2003 to 2008; Chief Operations Officer, Transamerica Reinsurance 2002 to 2003 | 41 | Luther College | |||||
Roger Gelfenbien, Age 70 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 10/99 | Retired; Partner of Accenture 1983 to 1999 | 41 | Virtus Funds (8 Funds) | |||||
Claire R. Leonardi, Age 58 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/04 | Chief Executive Officer, Connecticut Innovations, Inc., 2012 to present; General Partner, Fairview Capital, L.P., 1994 to 2012 | 41 | The Natural History Museum of the Adirondacks | |||||
Dickson W. Lewis, Age 65 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/04 | Retired; Consultant to Lifetouch National School Studios; Vice President/General Manager, Yearbooks & Canada-Lifetouch National School Studios, 2006 to 2013; Vice President/General Manager of Jostens, Inc., 2002 to 2006; Senior Vice President of Fortis Group, 1997 to 2002 | 41 | None | |||||
Peter W. McClean, Age 69 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/04 | Retired; President and CEO of Measurisk, LLC, 2001 to 2003; Chief Risk Management Officer at Bank of Bermuda Ltd., 1996 to 2001 | 41 | PNMAC Opportunity Fund; Northeast Bank; and FHI | |||||
Arthur C. Reeds III, Age 69 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 10/99 | Retired; Senior Investment Officer, Hartford Foundation for Public Giving, 2000 to 2003; Chairman, Chief Executive and President of Conning Corp., 1999 to 2000; Investment Consultant, 1997 to 1999 | 41 | Connecticut Water Service, Inc. |
Interested Trustees(3)
Name, Address, and Age | Positions Held with VIP Trust FOF Trust | Term of Office(2)/Length of Time Served | Principal Occupation(s) During Past 5 Years | Number of Portfolios Overseen for VIP Trust FOF Trust | Other Directorships Held Outside the AZL Fund Complex | |||||
Robert DeChellis, Age 46 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 3/08 | President and CEO, Allianz Life Financial Services, LLC, 2007 to present | 41 | None | |||||
Brian Muench, Age 43 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 6/11 | President, Allianz Investment Management LLC, November 2010 to present; Vice President, Allianz Life, April 2011 to present; Vice President, Advisory Management, Allianz Investment Management LLC from December 2005 to November 2010 | 41 | None |
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Officers
Name, Address, and Age | Positions Held with VIP and VIP FOF Trust | Term of Office(2)/Length of Time Served | Principal Occupation(s) During Past 5 Years | |||
Brian Muench, Age 43 5701 Golden Hills Drive Minneapolis, MN 55416 | President | Since 11/10 | President, Allianz Investment Management LLC from November 2010, to present; Vice President, Allianz Life from April 2011 to present; Vice President, Allianz Investment Management LLC from December 2005 to November 2010. | |||
Michael Radmer, Age 68 Dorsey & Whitney LLP, Suite 1500 50 South Sixth Street Minneapolis, MN 55402-1498 | Secretary | Since 2/02 | Partner, Dorsey and Whitney LLP since 1976. | |||
Ty Edwards, Age 47 Citi Fund Services Ohio, Inc. 3435 Stelzer Road Columbus, OH 43219 | Treasurer, Principal Accounting Officer and Principal Financial Officer | Since 4/10 | Senior Vice President, Financial Administration, Citi Fund Services Ohio, Inc., December 2009 to present; Director, Product Management, Columbia Management, April 2007 to April 2009; Deputy Treasurer, Columbia Funds and Director, Fund Administration, Columbia Management, January 2006 to April 2007. | |||
Christopher R. Pheiffer, Age 45(4) 5701 Golden Hills Drive Minneapolis, MN 55416 | Chief Compliance Officer(5) and Anti-Money Laundering Compliance Officer | Since 2/14 (interim) | Deputy Chief Compliance Officer of the Trusts, 2007-2014 |
(1) | Member of the Audit Committee. |
(2) | Indefinite. |
(3) | Is an “interested person”, as defined by the 1940 Act, due to employment by Allianz. |
(4) | Stephen G. Simon, previously the Chief Compliance Officer of the Trusts, resigned all of his positions with Allianz effective February 21, 2014. Mr. Pheiffer, previously the Deputy Chief Compliance Officer of the Trusts, has been named Chief Compliance Officer of the Trusts on an interim basis while a search for a permanent replacement is conducted. |
(5) | The Manager and the Trust are parties to a Chief Compliance Officer Agreement under which the Manager is compensated by the Trust for providing an employee of the Manager or one of its affiliates to act as the Trust’s Chief Compliance Officer. The Chief Compliance Officer and Anti-Money Laundering Compliance Officer is not considered a corporate officer or executive employee of the Trust. |
21
The Allianz VIP Funds are distributed by Allianz Life Financial Services, LLC. These Funds are not FDIC Insured. | ANNRPT1213 2/14 |
AZL® Oppenheimer Discovery Fund
Annual Report
December 31, 2013
Table of Contents
Management Discussion and Analysis
Page 1
Expense Examples and Portfolio Composition
Page 3
Schedule of Portfolio Investments
Page 4
Statement of Assets and Liabilities
Page 6
Statement of Operations
Page 6
Statements of Changes in Net Assets
Page 7
Financial Highlights
Page 8
Notes to the Financial Statements
Page 9
Report of Independent Registered Public Accounting Firm
Page 14
Other Federal Income Tax Information
Page 15
Other Information
Page 16
Approval of Investment Advisory and Subadvisory Agreements
Page 17
Information about the Board of Trustees and Officers
Page 20
This report is submitted for the general information of the shareholder of the Fund. The report is not authorized for distribution to prospective investors in the Fund unless preceded or accompanied by an effective prospectus, which contains details concerning the sales charges and other pertinent information.
AZL® Oppenheimer Discovery Fund Review (unaudited)
Allianz Investment Management LLC serves as the Manager for the AZL® Oppenheimer Discovery Fund and Oppenheimer Funds Inc. serves as Subadviser to the Fund.
What factors affected the Fund’s performance during the year ended December 31, 2013?
For the year ended December 31, 2013, the AZL® Oppenheimer Discovery Fund returned 45.52%1. That compared to a 43.30% total return for its benchmark, the Russell 2000® Growth Index2.
Equities in the U.S. delivered strong performance in 2013 due to continuing signs of economic recovery, including rising home prices around the country. The Federal Reserve Bank’s accommodative monetary policies were also instrumental in the stock market’s performance. The Fed’s mid-year announcement that it would taper its quantitative easing policy led to a significant sell-off of stocks and bonds. However, the markets then rebounded after the Fed clarified the tapering program’s timeline.
The Fund’s positive absolute return benefited from effective stock selection, which included an emphasis on high quality, high-growth companies and an avoidance of companies mired in controversy. The reasonable valuations of the Fund’s small-cap growth selections as well as the Fund’s low exposure to Europe’s economic problems also boosted the Fund’s absolute return.*
The Fund’s performance relative to its benchmark was driven by strong stock selection in the industrials, information technology and consumer discretionary sectors. The Fund’s relative return also benefited from a focus on
companies that were able to generate organic growth in an economic environment characterized by modest expansion, slow growth of corporate profits and low interest rates.*
The Fund underperformed the benchmark in the health care and consumer staples sectors primarily because of weaker relative stock selection.*
Past performance does not guarantee future results.
* | The Fund’s portfolio composition is subject to change. There is no guarantee that any sectors mentioned will continue to perform well or that securities in such sectors will be held by the Fund in the future. The information contained in this commentary is for informational purposes only and should not be construed as a recommendation to purchase or sell securities in the sector mentioned. The Fund’s holdings and weightings are as of December 31, 2013. |
1 | The recent growth rate in the stock market has helped to produce short-term returns that are not typical and may not continue in the future. Because of ongoing market volatility, Fund performance may be subject to substantial short-term changes. |
2 | The Russell 2000® Growth Index measures the performance of the small-cap growth segment of the U.S. equity universe. It includes those Russell 2000 companies with higher price-to-book ratios and higher forecasted growth values. Investors cannot invest directly in an index. |
1
AZL® Oppenheimer Discovery Fund Review (unaudited)
Fund Objective
The Fund’s investment objective is to seek capital appreciation. This objective may be changed by the Trustees of the Fund without shareholder approval. The Fund seeks to achieve its objective by investing at least 80% of its net assets, plus any borrowings for investment purposes, investments in common stocks and other equity securities of U.S. small capitalization companies.
Investment Concerns
Equity securities (stocks) are more volatile and carry more risk than other forms of investments, including investments in high-grade fixed income securities. The net asset value per share of this Fund will fluctuate as the value of the securities in the portfolio changes.
Small- to mid-capitalization companies typically have a higher risk of failure and historically have experienced a greater degree of volatility.
Growth based investments can perform differently from the market as a whole and can be more volatile that other types of securities.
For a complete description of these and other risks associated with investing in a mutual Fund, please refer to the Fund’s prospectus.
Growth of $10,000 Investment
The chart above represents a comparison of a hypothetical investment in the Fund versus a similar investment in the Fund’s benchmark, and represents the reinvestment of dividends and capital gains in the Fund.
Average Annual Total Returns as of December 31, 2013
Since | ||||||||||||||||
1 | 3 | 5 | Inception | |||||||||||||
Year | Year | Year | (4/29/05) | |||||||||||||
AZL® Oppenheimer Discovery Fund | 45.52 | %1 | 17.10 | % | 22.14 | % | 8.58 | % | ||||||||
Russell 2000® Growth Index | 43.30 | % | 16.82 | % | 22.58 | % | 10.95 | % |
Past performance does not guarantee future results. The performance data quoted represents past performance and current returns may be lower or higher. The investment return and principal value will fluctuate so that an investor’s shares, when redeemed may be worth more or less than the original cost. To obtain performance information current to the most recent month end, please visit www.Allianzlife.com.
Expense Ratio | Gross | |||
AZL® Oppenheimer Discovery Fund | 1.18 | % |
The above expense ratio is based on the current Fund prospectus dated April 29, 2013. The Manager and the Fund have entered into a written contract limiting operating expenses, excluding certain expenses (such as interest expense), to 1.35% through April 30, 2015. Additional information pertaining to the December 31, 2013 expense ratios can be found in the financial highlights.
1 | The recent growth rate in the stock market has helped to produce short-term returns that are not typical and may not continue in the future. Because of ongoing market volatility, Fund performance may be subject to substantial short-term changes. |
The total return of the Fund does not reflect the effect of any insurance charges, the annual maintenance fee or the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. Such charges, fees and tax payments would reduce the performance quoted. |
The Fund’s performance is measured against the Russell 2000® Growth Index, an unmanaged index that measures the performance of the small-cap growth segment of the U.S. equity universe. It includes those Russell 2000 companies with higher price-to-book ratios and higher forecasted growth values. The index does not reflect the deduction of fees associated with a mutual fund, such as investment management and fund accounting fees. The Fund’s performance reflects the deduction of fees for services provided to the Fund. Investors cannot invest directly in an index. |
2
AZL Oppenheimer Discovery Fund
(Unaudited)
As a shareholder of the AZL Oppenheimer Discovery Fund (the “Fund”), you incur ongoing costs, including management fees, distribution fees, and other Fund expenses. These examples are intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. Please note that the expenses shown in each table do not reflect expenses that apply to the subaccount or the insurance contract. If the expenses that apply to the subaccount of the insurance contract were included, your costs would have been higher.
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the periods presented below.
The Actual Expense table below provides information about actual account values and actual expenses. You may use the information below, 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 table under the heading entitled “Expenses Paid During Period” to estimate the expenses you paid on your account during this period.
Beginning Account Value 7/1/13 | Ending Account Value 12/31/13 | Expenses Paid During Period 7/1/13 - 12/31/13* | Annualized Expense Ratio During Period 7/1/13 - 12/31/13 | |||||||||||||||||
AZL Oppenheimer Discovery Fund | $ | 1,000.00 | $ | 1,255.50 | $ | 6.54 | 1.15 | % |
The Hypothetical Expense table below provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.
Beginning Account Value 7/1/13 | Ending Account Value 12/31/13 | Expenses Paid During Period 7/1/13 - 12/31/13* | Annualized Expense Ratio During Period 7/1/13 - 12/31/13 | |||||||||||||||||
AZL Oppenheimer Discovery Fund | $ | 1,000.00 | $ | 1,019.41 | $ | 5.85 | 1.15 | % |
* | Expenses are equal to the average account value over the period, multiplied by the Fund’s annualized expense ratio, multiplied by 184/365 (to reflect the one half year period). |
Portfolio Composition
(Unaudited)
Investments | Percent of net assets | ||||
Information Technology | 29.4 | % | |||
Industrials | 18.7 | ||||
Health Care | 15.6 | ||||
Consumer Discretionary | 13.5 | ||||
Financials | 9.1 | ||||
Energy | 4.6 | ||||
Materials | 3.7 | ||||
Consumer Staples | 3.4 | ||||
Services | 0.3 | ||||
Technology | 0.2 | ||||
|
| ||||
Total Common Stock | 98.5 | ||||
Securities Held as Collateral for Securities on Loan | 1.8 | ||||
Money Market | 1.5 | ||||
|
| ||||
Total Investment Securities | 101.8 | ||||
Net other assets (liabilities) | (1.8 | ) | |||
|
| ||||
Net Assets | 100.0 | % | |||
|
|
3
AZL Oppenheimer Discovery Fund
Schedule of Portfolio Investments
December 31, 2013
Shares | Fair Value | |||||||
| Common Stocks (98.5%): |
| ||||||
| Advertising (0.3%): |
| ||||||
45,420 | MDC Partners, Inc. | $ | 1,158,664 | |||||
|
| |||||||
| Aerospace & Defense (2.7%): |
| ||||||
14,150 | Curtiss-Wright Corp. | 880,555 | ||||||
47,697 | HEICO Corp. | 2,764,041 | ||||||
128,350 | Hexcel Corp.* | 5,735,961 | ||||||
|
| |||||||
9,380,557 | ||||||||
|
| |||||||
| Biotechnology (1.9%): |
| ||||||
25,610 | Aegerion Pharmaceuticals, Inc.* | 1,817,286 | ||||||
41,530 | Cubist Pharmaceuticals, Inc.* | 2,860,171 | ||||||
70,980 | NPS Pharmaceuticals, Inc.* | 2,154,953 | ||||||
|
| |||||||
6,832,410 | ||||||||
|
| |||||||
| Broadcasting (0.8%): |
| ||||||
47,690 | Nexstar Broadcasting Group, Inc. | 2,657,764 | ||||||
|
| |||||||
| Building Products (1.8%): |
| ||||||
114,860 | A.O. Smith Corp. | 6,195,548 | ||||||
|
| |||||||
| Capital Markets (3.3%): |
| ||||||
45,530 | Artisan Partners Asset Management, Inc. | 2,968,101 | ||||||
36,990 | Evercore Partners, Inc., Class A | 2,211,262 | ||||||
61,990 | Financial Engines, Inc. | 4,307,065 | ||||||
9,830 | Virtus Investment Partners, Inc.* | 1,966,492 | ||||||
|
| |||||||
11,452,920 | ||||||||
|
| |||||||
| Chemicals (0.9%): |
| ||||||
84,630 | PolyOne Corp. | 2,991,670 | ||||||
|
| |||||||
| Commercial Banks (4.2%): |
| ||||||
35,780 | First Financial Holdings, Inc. | 2,379,728 | ||||||
75,530 | Home Bancshares, Inc. | 2,821,046 | ||||||
45,490 | Signature Bank* | 4,886,535 | ||||||
181,290 | Western Alliance BanCorp* | 4,325,579 | ||||||
|
| |||||||
14,412,888 | ||||||||
|
| |||||||
| Commercial Services & Supplies (1.6%): |
| ||||||
137,530 | Mobile Mini, Inc.* | 5,663,485 | ||||||
|
| |||||||
| Computers & Peripherals (1.8%): |
| ||||||
45,810 | Stratasys, Ltd.* | 6,170,607 | ||||||
|
| |||||||
| Construction Materials (1.4%): |
| ||||||
41,260 | CaesarStone Sdot-Yam, Ltd. | 2,049,384 | ||||||
37,610 | Eagle Materials, Inc. | 2,912,142 | ||||||
|
| |||||||
4,961,526 | ||||||||
|
| |||||||
| Consumer Finance (0.3%): |
| ||||||
9,100 | Credit Acceptance Corp.* | 1,182,909 | ||||||
|
| |||||||
| Diversified Financial Services (0.5%): |
| ||||||
27,870 | MarketAxess Holdings, Inc. | 1,863,667 | ||||||
|
| |||||||
| Electrical Equipment (1.1%): |
| ||||||
65,470 | Generac Holdings, Inc. | 3,708,221 | ||||||
|
| |||||||
| Electronic Equipment, Instruments & Components (1.6%): |
| ||||||
73,270 | Cognex Corp.* | 2,797,449 | ||||||
85,040 | Methode Electronics, Inc. | 2,907,517 | ||||||
|
| |||||||
5,704,966 | ||||||||
|
| |||||||
| Electronics (0.2%): |
| ||||||
16,140 | Fluidigm Corp.* | 618,485 | ||||||
|
| |||||||
| Energy Equipment & Services (1.5%): |
| ||||||
22,880 | Bristow Group, Inc. | 1,717,373 | ||||||
31,740 | Dril-Quip, Inc.* | 3,489,178 | ||||||
|
| |||||||
5,206,551 | ||||||||
|
|
Shares | Fair Value | |||||||
| Common Stocks, continued |
| ||||||
| Food & Staples Retailing (0.3%): |
| ||||||
30,630 | Sprouts Farmers Market, Inc.* | $ | 1,177,111 | |||||
|
| |||||||
| Food Products (1.1%): |
| ||||||
38,600 | Annie’s, Inc.*^ | 1,661,344 | ||||||
154,960 | Boulder Brands, Inc.* | 2,457,665 | ||||||
|
| |||||||
4,119,009 | ||||||||
|
| |||||||
| Health Care Equipment & Supplies (4.3%): |
| ||||||
16,050 | Cardiovascular Systems, Inc.* | 550,355 | ||||||
31,210 | Cyberonics, Inc.* | 2,044,567 | ||||||
99,848 | Dexcom, Inc.* | 3,535,618 | ||||||
103,890 | Insulet Corp.* | 3,854,319 | ||||||
105,330 | Spectranetics Corp. (The)* | 2,633,250 | ||||||
44,440 | West Pharmaceutical Services, Inc. | 2,180,226 | ||||||
|
| |||||||
14,798,335 | ||||||||
|
| |||||||
| Health Care Providers & Services (5.3%): |
| ||||||
80,820 | Acadia Healthcare Co., Inc.* | 3,825,211 | ||||||
60,420 | Centene Corp.* | 3,561,759 | ||||||
18,820 | MWI Veterinary Supply, Inc.* | 3,210,504 | ||||||
121,400 | Team Health Holdings, Inc.* | 5,529,769 | ||||||
37,990 | WellCare Health Plans, Inc.* | 2,675,256 | ||||||
|
| |||||||
18,802,499 | ||||||||
|
| |||||||
| Health Care Services (0.8%): |
| ||||||
94,730 | ExamWorks Group, Inc.* | 2,829,585 | ||||||
|
| |||||||
| Health Care Technology (1.4%): |
| ||||||
55,880 | HealthStream, Inc.* | 1,831,188 | ||||||
48,100 | Medidata Solutions, Inc.* | 2,913,417 | ||||||
|
| |||||||
4,744,605 | ||||||||
|
| |||||||
| Hotels, Restaurants & Leisure (4.4%): |
| ||||||
35,960 | Buffalo Wild Wings, Inc.* | 5,293,312 | ||||||
59,020 | Chuy’s Holdings, Inc.* | 2,125,900 | ||||||
75,920 | Fiesta Restaurant Group, Inc.* | 3,966,060 | ||||||
69,870 | Multimedia Games, Inc.* | 2,191,123 | ||||||
28,730 | Red Robin Gourmet Burgers* | 2,112,804 | ||||||
|
| |||||||
15,689,199 | ||||||||
|
| |||||||
| Household Durables (0.7%): |
| ||||||
81,190 | La-Z-Boy, Inc. | 2,516,890 | ||||||
|
| |||||||
| Human Resource & Employment Services (0.8%): |
| ||||||
47,750 | Wageworks, Inc.* | 2,838,260 | ||||||
|
| |||||||
| Industrial Machinery (0.9%): |
| ||||||
44,480 | Proto Labs, Inc.* | 3,166,086 | ||||||
|
| |||||||
| Internet & Catalog Retail (0.4%): |
| ||||||
23,720 | RetailMeNot, Inc.* | 682,899 | ||||||
16,360 | zulily, Inc., Class A*^ | 677,795 | ||||||
|
| |||||||
1,360,694 | ||||||||
|
| |||||||
| Internet Software & Services (7.0%): |
| ||||||
11,330 | Benefitfocus, Inc.*^ | 654,194 | ||||||
54,230 | Channeladvisor Corp.* | 2,261,933 | ||||||
132,820 | Cornerstone OnDemand, Inc.* | 7,084,619 | ||||||
8,130 | Criteo SA, ADR* | 278,046 | ||||||
52,200 | Shutterstock, Inc.* | 4,365,486 | ||||||
49,690 | Sps Commerce, Inc.* | 3,244,757 | ||||||
151,720 | Web.com Group, Inc.* | 4,823,179 | ||||||
32,580 | Yelp, Inc.* | 2,246,391 | ||||||
|
| |||||||
24,958,605 | ||||||||
|
|
Continued
4
AZL Oppenheimer Discovery Fund
Schedule of Portfolio Investments
December 31, 2013
Shares | Fair Value | |||||||
| Common Stocks, continued |
| ||||||
| IT Services (2.1%): |
| ||||||
48,470 | Acxiom Corp.* | $ | 1,792,421 | |||||
76,970 | iGATE Corp.* | 3,091,115 | ||||||
59,660 | Maximus, Inc. | 2,624,443 | ||||||
|
| |||||||
7,507,979 | ||||||||
|
| |||||||
| Life Sciences Tools & Services (1.0%): |
| ||||||
85,830 | ICON plc* | 3,468,390 | ||||||
|
| |||||||
| Machinery (2.9%): |
| ||||||
24,330 | Middleby Corp. (The)* | 5,838,470 | ||||||
56,090 | Wabtec Corp. | 4,165,804 | ||||||
|
| |||||||
10,004,274 | ||||||||
|
| |||||||
| Media (2.5%): |
| ||||||
134,220 | Lions Gate Entertainment Corp.^ | 4,249,405 | ||||||
94,770 | Pandora Media, Inc.* | 2,520,882 | ||||||
50,900 | Sinclair Broadcast Group, Inc. | 1,818,657 | ||||||
|
| |||||||
8,588,944 | ||||||||
|
| |||||||
| Metals & Mining (0.6%): |
| ||||||
36,560 | Carpenter Technology Corp. | 2,274,032 | ||||||
|
| |||||||
| Oil & Gas Exploration & Production (1.5%): |
| ||||||
49,760 | Bonanza Creek Energy, Inc.* | 2,163,067 | ||||||
60,570 | Diamondback Energy, Inc.* | 3,201,730 | ||||||
|
| |||||||
5,364,797 | ||||||||
|
| |||||||
| Oil, Gas & Consumable Fuels (1.6%): |
| ||||||
29,600 | Athlon Energy, Inc.* | 895,400 | ||||||
97,010 | Oasis Petroleum, Inc.* | 4,556,560 | ||||||
|
| |||||||
5,451,960 | ||||||||
|
| |||||||
| Paper & Forest Products (0.8%): |
| ||||||
48,660 | KapStone Paper & Packaging Corp.* | 2,718,148 | ||||||
|
| |||||||
| Pharmaceuticals (2.0%): |
| ||||||
108,030 | Akorn, Inc.* | 2,660,779 | ||||||
19,750 | Jazz Pharmaceuticals plc* | 2,499,560 | ||||||
51,440 | Medicines Co. (The)* | 1,986,613 | ||||||
|
| |||||||
7,146,952 | ||||||||
|
| |||||||
| Professional Services (4.8%): |
| ||||||
42,020 | Advisory Board Co. (The)* | 2,675,413 | ||||||
36,360 | CoStar Group, Inc.* | 6,711,330 | ||||||
27,700 | Huron Consulting Group, Inc.* | 1,737,344 | ||||||
174,630 | On Assignment, Inc.* | 6,098,080 | ||||||
|
| |||||||
17,222,167 | ||||||||
|
| |||||||
| Road & Rail (1.2%): |
| ||||||
44,440 | Genesee & Wyoming, Inc., Class A* | 4,268,462 | ||||||
|
| |||||||
| Semiconductors & Semiconductor Equipment (1.6%): |
| ||||||
163,250 | Monolithic Power Systems, Inc.* | 5,658,245 | ||||||
|
|
Shares | Fair Value | |||||||
| Common Stocks, continued |
| ||||||
| Software (15.4%): |
| ||||||
156,360 | Aspen Technology, Inc.* | $ | 6,535,848 | |||||
65,180 | CommVault Systems, Inc.* | 4,880,678 | ||||||
45,260 | Envestnet, Inc.* | 1,823,978 | ||||||
4,570 | FireEye, Inc.*^ | 199,298 | ||||||
80,480 | Fleetmatics Group plc*^ | 3,480,760 | ||||||
127,350 | Guidewire Software, Inc.* | 6,249,065 | ||||||
67,270 | Imperva, Inc.* | 3,237,705 | ||||||
119,900 | Infoblox, Inc.* | 3,959,098 | ||||||
54,730 | Interactive Intelligence Group* | 3,686,613 | ||||||
57,800 | ServiceNow, Inc.* | 3,237,378 | ||||||
44,700 | Splunk, Inc.* | 3,069,549 | ||||||
35,550 | Tableau Software, Inc., Class A* | 2,450,462 | ||||||
33,680 | Tyler Technologies, Inc.* | 3,439,738 | ||||||
46,500 | Ultimate Software Group, Inc. (The)* | 7,124,731 | ||||||
|
| |||||||
53,374,901 | ||||||||
|
| |||||||
| Specialty Retail (4.6%): |
| ||||||
31,430 | Asbury Automotive Group, Inc.* | 1,689,048 | ||||||
70,860 | Conn’s, Inc.*^ | 5,583,059 | ||||||
43,160 | Five Below, Inc.*^ | 1,864,512 | ||||||
50,430 | Lithia Motors, Inc., Class A | 3,500,851 | ||||||
34,300 | Lumber Liquidators Holdings, Inc.* | 3,529,127 | ||||||
|
| |||||||
16,166,597 | ||||||||
|
| |||||||
| Textiles, Apparel & Luxury Goods (0.8%): |
| ||||||
79,645 | Steven Madden, Ltd.* | 2,914,211 | ||||||
|
| |||||||
| Trading Companies & Distributors (1.8%): |
| ||||||
208,390 | H&E Equipment Services, Inc.* | 6,174,596 | ||||||
|
| |||||||
| Total Common Stocks (Cost $248,266,099) | 345,468,371 | ||||||
|
| |||||||
Contracts, Shares, Notional Amount or Principal Amount | Fair Value | |||||||
| Securities Held as Collateral for Securities on Loan (1.8%): |
| ||||||
$ | 6,282,347 | Allianz Variable Insurance Products Securities Lending Collateral Trust(a) | 6,282,347 | |||||
|
| |||||||
| Total Securities Held as Collateral for Securities on Loan | 6,282,347 | ||||||
|
| |||||||
| Unaffiliated Investment Company (1.5%): |
| ||||||
5,124,905 | Dreyfus Treasury Prime Cash Management Fund, Institutional Shares, 0.00%(b) | 5,124,905 | ||||||
|
| |||||||
| Total Unaffiliated Investment Company (Cost $5,124,905) | 5,124,905 | ||||||
|
| |||||||
| Total Investment Securities (Cost $259,673,351)(c) — 101.8% | 356,875,623 | ||||||
| Net other assets (liabilities) — (1.8)% | (6,320,511 | ) | |||||
|
| |||||||
| Net Assets — 100.0% | $ | 350,555,112 | |||||
|
|
Percentages indicated are based on net assets as of December 31, 2013.
ADR—American Depositary Receipt
* | Non-income producing security. |
^ | This security or a partial position of this security was on loan as of December 31, 2013. The total value of securities on loan as of December 31, 2013, was $6,154,894. |
(a) | Purchased with cash collateral held from securities lending. The value of the collateral could include collateral held for securities that were sold on or before December 31, 2013. |
(b) | The rate represents the effective yield at December 31, 2013. |
(c) | See Federal Tax Information listed in the Notes to the Financial Statements. |
See accompanying notes to the financial statements.
5
AZL Oppenheimer Discovery Fund
Statement of Assets and Liabilities
December 31, 2013
Assets: | |||||
Investment securities, at cost | $ | 259,673,351 | |||
|
| ||||
Investment securities, at value* | $ | 356,875,623 | |||
Interest and dividends receivable | 40,185 | ||||
Receivable for investments sold | 654,248 | ||||
|
| ||||
Total Assets | 357,570,056 | ||||
|
| ||||
Liabilities: | |||||
Payable for investments purchased | 188,703 | ||||
Payable for capital shares redeemed | 187,031 | ||||
Payable for collateral received on loaned securities | 6,282,347 | ||||
Manager fees payable | 245,238 | ||||
Administration fees payable | 12,153 | ||||
Distribution fees payable | 72,128 | ||||
Custodian fees payable | 7,134 | ||||
Administrative and compliance services fees payable | 1,349 | ||||
Trustee fees payable | 10 | ||||
Other accrued liabilities | 18,851 | ||||
|
| ||||
Total Liabilities | 7,014,944 | ||||
|
| ||||
Net Assets | $ | 350,555,112 | |||
|
| ||||
Net Assets Consist of: | |||||
Capital | $ | 233,096,874 | |||
Accumulated net investment income/(loss) | 667 | ||||
Accumulated net realized gains/(losses) from investment transactions | 20,255,299 | ||||
Net unrealized appreciation/(depreciation) on investments | 97,202,272 | ||||
|
| ||||
Net Assets | $ | 350,555,112 | |||
|
| ||||
Shares of beneficial interest (unlimited number of shares authorized, no par value) | 22,209,772 | ||||
Net Asset Value (offering and redemption price per share) | $ | 15.78 | |||
|
|
* | Includes securities on loan of $6,154,894. |
For the Year Ended December 31, 2013
Investment Income: | |||||
Dividends | $ | 722,274 | |||
Income from securities lending | 70,938 | ||||
Foreign withholding tax | (3,411 | ) | |||
|
| ||||
Total Investment Income | 789,801 | ||||
|
| ||||
Expenses: | |||||
Manager fees | 2,235,902 | ||||
Administration fees | 81,554 | ||||
Distribution fees | 657,616 | ||||
Custodian fees | 24,691 | ||||
Administrative and compliance services fees | 4,689 | ||||
Trustee fees | 11,786 | ||||
Professional fees | 14,134 | ||||
Shareholder reports | 19,678 | ||||
Other expenses | 5,145 | ||||
|
| ||||
Total expenses | 3,055,195 | ||||
|
| ||||
Net Investment Income/(Loss) | (2,265,394 | ) | |||
|
| ||||
Realized and Unrealized Gains/(Losses) on Investments: | |||||
Net realized gains/(losses) on securities transactions | 33,072,781 | ||||
Change in net unrealized appreciation/depreciation on investments | 72,878,181 | ||||
|
| ||||
Net Realized/Unrealized Gains/(Losses) on Investments | 105,950,962 | ||||
|
| ||||
Change in Net Assets Resulting From Operations | $ | 103,685,568 | |||
|
|
See accompanying notes to the financial statements.
6
Statements of Changes in Net Assets
AZL Oppenheimer Discovery Fund | ||||||||||
For the Year Ended December 31, 2013 | For the Year Ended December 31, | |||||||||
Change in Net Assets: | ||||||||||
Operations: | ||||||||||
Net investment income/(loss) | $ | (2,265,394 | ) | $ | (76,054 | ) | ||||
Net realized gains/(losses) on investment transactions | 33,072,781 | 8,002,085 | ||||||||
Change in unrealized appreciation/depreciation on investments | 72,878,181 | 4,425,245 | ||||||||
|
|
|
| |||||||
Change in net assets resulting from operations | 103,685,568 | 12,351,276 | ||||||||
|
|
|
| |||||||
Dividends to Shareholders: | ||||||||||
From net investment income | — | — | ||||||||
From net realized gains | (2,889,357 | ) | — | |||||||
|
|
|
| |||||||
Change in net assets resulting from dividends to shareholders | (2,889,357 | ) | — | |||||||
|
|
|
| |||||||
Capital Transactions: | ||||||||||
Proceeds from shares issued | 22,741,540 | 42,911,414 | ||||||||
Proceeds from shares issued in merger | 153,408,602 | — | ||||||||
Proceeds from dividends reinvested | 2,889,357 | — | ||||||||
Value of shares redeemed | (53,030,368 | ) | (11,281,347 | ) | ||||||
|
|
|
| |||||||
Change in net assets resulting from capital transactions | 126,009,131 | 31,630,067 | ||||||||
|
|
|
| |||||||
Change in net assets | 226,805,342 | 43,981,343 | ||||||||
Net Assets: | ||||||||||
Beginning of period | 123,749,770 | 79,768,427 | ||||||||
|
|
|
| |||||||
End of period | $ | 350,555,112 | $ | 123,749,770 | ||||||
|
|
|
| |||||||
Accumulated net investment income/(loss) | $ | 667 | $ | 5,800 | ||||||
|
|
|
| |||||||
Share Transactions: | ||||||||||
Shares issued | 1,760,070 | 3,874,537 | ||||||||
Shares issued in merger | 12,864,661 | — | ||||||||
Dividends reinvested | 200,929 | — | ||||||||
Shares redeemed | (3,930,532 | ) | (1,066,908 | ) | ||||||
|
|
|
| |||||||
Change in shares | 10,895,128 | 2,807,629 | ||||||||
|
|
|
|
See accompanying notes to the financial statements.
7
AZL Oppenheimer Discovery Fund
(Selected data for a share of beneficial interest outstanding throughout the periods indicated)
Year Ended December 31, | |||||||||||||||||||||||||
2013 | 2012 | 2011 | 2010 | 2009 | |||||||||||||||||||||
Net Asset Value, Beginning of Period | $ | 10.94 | $ | 9.38 | $ | 9.92 | $ | 7.70 | $ | 5.86 | |||||||||||||||
|
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|
|
|
|
|
|
|
| ||||||||||||||||
Investment Activities: | |||||||||||||||||||||||||
Net Investment Income/(Loss) | (0.10 | ) | (0.01 | ) | (0.04 | ) | 0.01 | (0.02 | ) | ||||||||||||||||
Net Realized and Unrealized Gains/(Losses) on Investments | 5.07 | 1.57 | (0.50 | ) | 2.21 | 1.86 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Total from Investment Activities | 4.97 | 1.56 | (0.54 | ) | 2.22 | 1.84 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Dividends to Shareholders From: | |||||||||||||||||||||||||
Net Realized Gains | (0.13 | ) | — | — | (a) | — | — | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Total Dividends | (0.13 | ) | — | — | (a) | — | — | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Net Asset Value, End of Period | $ | 15.78 | $ | 10.94 | $ | 9.38 | $ | 9.92 | $ | 7.70 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Total Return(b) | 45.52 | % | 16.63 | % | (5.39 | )% | 28.83 | % | 31.40 | % | |||||||||||||||
Ratios to Average Net Assets/Supplemental Data: | |||||||||||||||||||||||||
Net Assets, End of Period (000’s) | $ | 350,555 | $ | 123,750 | $ | 79,768 | $ | 91,473 | $ | 47,457 | |||||||||||||||
Net Investment Income/(Loss) | (0.86 | )% | (0.07 | )% | (0.40 | )% | 0.11 | % | (0.23 | )% | |||||||||||||||
Expenses Before Reductions(c) | 1.16 | % | 1.18 | % | 1.19 | % | 1.22 | % | 1.24 | % | |||||||||||||||
Expenses Net of Reductions | 1.16 | % | 1.18 | % | 1.19 | % | 1.22 | % | 1.24 | % | |||||||||||||||
Expenses Net of Reductions, Excluding Expenses Paid Indirectly(d) | 1.16 | % | 1.18 | % | 1.19 | % | 1.22 | % | 1.24 | % | |||||||||||||||
Portfolio Turnover Rate | 79 | %(e) | 161 | % | 145 | %(f) | 97 | % | 173 | % |
(a) | Represents less than $0.005. |
(b) | The returns include reinvested dividends and fund level expenses, but exclude insurance contract charges. If these charges were included, the returns would have been lower. |
(c) | Excludes fee reductions. If such fee reductions had not occurred, the ratios would have been as indicated. |
(d) | Expenses net of reductions excludes expenses paid indirectly, pursuant to a “commission recapture” program, under which brokers remit a portion of the brokerage commission which is used to pay certain Fund expenses. See note 2 in the Notes to the Financial Statements. |
(e) | Cost of purchases and proceeds from sales of portfolio securities incurred to realign the Fund’s portfolio after the fund merger are excluded from the portfolio turnover rate. If such amounts had not been excluded, the portfolio turnover rate would have been 128%. |
(f) | The portfolio turnover rate for the year ended December 31, 2011 was higher than the prior year primarily due to the amount and timing of sales and purchases of fund shares during the period. |
See accompanying notes to the financial statements.
8
AZL Oppenheimer Discovery Fund
Notes to the Financial Statements
December 31, 2013
1. Organization
The Allianz Variable Insurance Products Trust (the “Trust”) was organized as a Delaware statutory trust on July 13, 1999. The Trust is a diversified open-end management investment company registered under the Investment Company Act of 1940. The Trust consists of 29 separate investment portfolios (collectively, the “Funds”), of which one is included in this report, the AZL Oppenheimer Discovery Fund (the “Fund”), and 28 are presented in separate reports.
The Trust is authorized to issue an unlimited number of shares of the Fund without par value. Shares of the Fund are available through the variable annuity contracts and variable life insurance policies offered through the separate accounts of participating insurance companies.
Under the Trust’s organizational documents, its officers and trustees are indemnified against certain liabilities arising out of the performance of their duties to the Fund. In addition, in the normal course of business, the Fund may enter into contracts with its vendors and others that provide for general indemnifications. The Fund’s maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Fund. However, based on experience, the Fund expects the risk of loss to be remote.
2. Significant Accounting Policies
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. The policies conform with U.S. generally accepted accounting principles (“U.S. GAAP”). The preparation of financial statements requires management to make certain 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 increases and decreases in net assets from operations during the reporting period. Actual results could differ from those estimates.
Security Valuation
The Fund records its investments at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between willing market participants at the measurement date. The valuation techniques used to determine fair value are further described in Note 4 below.
Investment Transactions and Investment Income
Investment transactions are recorded not later than on the business day following trade date. However, for financial reporting purposes, investment transactions are accounted for on trade date. Net realized gains and losses on investments sold and on foreign currency transactions are recorded on the basis of identified cost. Interest income is recorded on the accrual basis and includes, where applicable, the amortization of premiums or accretion of discounts. Dividend income is recorded on the ex-dividend date except in the case of foreign securities, in which case dividends are recorded as soon as such information becomes available.
Real Estate Investment Trusts
The Fund may own shares of real estate investment trusts (“REITs”) which report information on the source of their distributions annually. Certain distributions received from REITs during the year, which are known to be a return of capital, are recorded as a reduction to the cost of the individual REIT.
Foreign Currency Translation
The accounting records of the Fund are maintained in U.S. dollars. Foreign currency amounts are translated into U.S. dollars at the current rate of exchange to determine the fair value of investments, assets and liabilities. Purchases and sales of securities, and income and expenses are translated at the prevailing rate of exchange on the respective dates of such transactions. The Fund does not isolate that portion of the results of operations resulting from changes in foreign exchange rates on investments from fluctuations arising from changes in market prices of securities held. Such fluctuations are included in the net realized and unrealized gain or loss on investments and foreign currencies. Income received by the Fund from sources within foreign countries may be subject to withholding and other income or similar taxes imposed by such countries. The Funds accrue such taxes, as applicable, based on their current interpretation of tax rules in the foreign markets in which they invest.
Dividends to Shareholders
Dividends to shareholders are recorded on the ex-dividend date. The Fund distributes its dividends from net investment income and net realized capital gains, if any, on an annual basis. The amount of dividends from net investment income and from net realized gains is determined in accordance with federal income tax regulations, which may differ from U.S. GAAP. These “book/tax” differences are either temporary or permanent in nature. To the extent these differences are permanent in nature (e.g., return of capital, net operating loss, reclassification of certain market discounts, gain/loss, paydowns, and distributions), such amounts are reclassified within the composition of net assets based on their federal tax-basis treatment; temporary differences (e.g., wash sales and post October losses) do not require reclassification. Dividends to shareholders that exceed net investment income and net realized gains for tax purposes are reported as distributions of capital.
Expense Allocation
Expenses directly attributable to the Fund are charged directly to the Fund, while expenses attributable to more than one Fund are allocated among the respective Funds based upon relative net assets or some other reasonable method. Expenses which are attributable to more than one Trust are allocated across the Allianz Variable Insurance Products and Allianz Variable Insurance Products Fund of Funds Trusts based upon relative net assets or another reasonable basis. Allianz Investment Management LLC (the “Manager”), serves as the investment manager for the Trust and the Allianz Variable Insurance Products Fund of Funds Trust.
Securities Lending
To generate additional income, the Fund may lend up to 33 1/3% of its assets pursuant to agreements requiring that the loan be continuously secured by any combination of cash, U.S. government or U.S. government agency securities, equal initially to at least 102% of the fair value plus accrued interest on the securities loaned (105% for foreign
9
AZL Oppenheimer Discovery Fund
Notes to the Financial Statements
December 31, 2013
securities). The borrower of securities is at all times required to post collateral to the Fund in an amount equal to 100% of the fair value of the securities loaned based on the previous day’s fair value of the securities loaned, marked-to-market daily. Any collateral shortfalls are adjusted the next business day. The Fund bears all of the gains and losses on such investments. The Fund receives payments from borrowers equivalent to the dividends and interest that would have been earned on securities lent while simultaneously seeking to earn income on the investment of cash collateral received. In extremely low interest rate environments, the broker rebate fee may exceed the interest earned or the cash collateral which would result in a loss to the Fund. The investment of cash collateral deposited by the borrower is subject to inherent market risks such as interest rate risk, credit risk, liquidity risk, and other risks that are present in the market, and as such, the value of these investments may not be sufficient, when liquidated, to repay the borrower when the loaned security is returned. There may be risks of delay in recovery of the securities or even loss of rights in the collateral should the borrower of the securities fail financially. However, loans will be made only to borrowers, such as broker-dealers, banks or institutional borrowers of securities, deemed by the Manager to be of good standing and credit worthy and when in its judgment, the consideration which can be earned currently from such securities loans justifies the attendant risks. Loans are subject to termination by the Trust or the borrower at any time, and are, therefore, not considered to be illiquid investments. Securities on loan at December 31, 2013 are presented on the Fund’s Schedule of Portfolio Investments. The average outstanding amount of securities on loan was $14.8 million for the year ended December 31, 2013.
Cash collateral received in connection with securities lending is invested in the Allianz Variable Insurance Products Securities Lending Collateral Trust (the “Securities Lending Collateral Trust”) managed by The Dreyfus Corporation, an affiliate of the Custodian and Securities Lending Agent. The Securities Lending Collateral Trust invests in short-term investments that have a remaining maturity of 397 days or less as calculated in accordance with Rule 2a-7 under the 1940 Act. The Fund paid securities lending fees of $7,005 during the year ended December 31, 2013. These fees have been netted against “Income from securities lending” on the Statement of Operations.
Commission Recapture
Certain Funds of the Trust participate in a commission recapture program. The Fund will utilize the recaptured commissions to pay for, in whole or part, certain expenses of the Fund, excluding investment advisory fees. Any amounts received by the Fund, if applicable, are disclosed as “Expenses paid indirectly” on the Statement of Operations.
Effective January 6, 2014, the Manager, on behalf of the Trust, requested the Fund cease participation in the program until further notice.
3. Related Party Transactions
The Manager provides investment advisory and management services for the Fund. The Manager has retained an independent money management organization (the “Subadviser”), to make investment decisions on behalf of the Fund. Pursuant to a subadvisory agreement with Oppenheimer Funds, Inc. (“Oppenheimer”), Oppenheimer provides investment advisory services as the Subadviser for the Fund subject to the general supervision of the Trustees and the Manager. The Manager is entitled to a fee, computed daily and paid monthly, based on the average daily net assets of the Fund. Expenses incurred by the Fund for investment advisory and management services are reflected on the Statement of Operations as “Manager fees.” For its services, the Subadviser is entitled to a fee payable by the Manager. The Manager has contractually agreed to waive fees and reimburse the Fund to limit the annual expenses, excluding interest expense (e.g., cash overdraft fees), taxes, brokerage commissions, other expenditures that are capitalized in accordance with U.S. GAAP and other extraordinary expenses not incurred in the ordinary course of the Fund’s business, based on the daily net assets of the Fund, through April 30, 2015.
For the year ended December 31, 2013, the annual rate due to the Manager and the annual expense limit were as follows:
Annual Rate | Annual Expense Limit | |||||||||
AZL Oppenheimer Discovery Fund | 0.85 | % | 1.35 | % |
Any amounts contractually waived or reimbursed by the Manager in a particular fiscal year will be subject to repayment by the Fund to the Manager to the extent that from time to time through the next three fiscal years the repayment will not cause the Fund’s expenses to exceed the lesser of the stated limit at the time of the waiver or the current stated limit. Any amounts recouped by the Manager during the year are reflected on the Statement of Operations as “Recoupment of prior expenses reimbursed by the Manager.” At December 31, 2013, there were no remaining contractual reimbursements that are subject to repayment by the Fund in subsequent years.
In addition, the Manager may voluntarily waive or reimburse additional fees in order to maintain more competitive expense ratios. Any voluntary waivers or reimbursements are not subject to repayment in subsequent years. Information on the total amount waived/reimbursed by the Manager or repaid to the Manager by the Fund during the year can be found on the Statement of Operations. During the year ended December 31, 2013, there were no voluntary waivers.
Pursuant to separate agreements between the Funds and the Manager, the Manager provides a Chief Compliance Officer (“CCO”) and certain compliance oversight and regulatory filing services to the Trust. Under these agreements the Manager is entitled to an amount equal to a portion of the compensation and certain other expenses related to the individuals performing the CCO and compliance oversight services, as well as $75 per hour for time incurred in connection with the preparation and filing of certain documents with the Securities and Exchange Commission. The fees are paid to the Manager on a quarterly basis. The total expenses incurred by the Fund for these services are reflected on the Statement of Operations as “Administrative and compliance services fees.”
Citi Fund Services Ohio, Inc. (“Citi” or the “Administrator”), a wholly owned subsidiary of Citigroup, Inc., with which an officer of the Trust is affiliated, serves as the Trust’s administrator, transfer agent, and fund accountant, and assists the Trust in all aspects of its administration and operation. The Administrator is entitled to a Trust-wide asset-based fee, which is based on the following schedule: 0.05% of daily average net assets on the first $4 billion, 0.04% of daily average net assets on the next $2 billion, 0.02% of daily average net assets on the next $2 billion and 0.01% of daily average net assets over $8 billion. The overall Trust-wide fees are accrued daily and paid monthly and are subject to a minimum annual fee. In addition, the Administrator is entitled to annual account fees related to the transfer agency system, an annual fee for each additional class of shares of any Fund, certain annual fees in supporting fair value services, and a Trust-wide annual fee for providing infrastructure and support in implementing the written policies and procedures comprising the Fund’s compliance program. Fees payable to the Administrator are subject to certain reductions associated with services provided to new funds. The Administrator is also reimbursed for certain expenses incurred. The total expenses incurred by the Fund for these services are reflected on the Statement of Operations as “Administration fees.”
Allianz Life Financial Services, LLC (“ALFS”), an affiliate of the Manager, serves as distributor of the Fund and receives 12b-1 fees directly from the Fund, plus a Trust-wide annual fee of $42,500, paid by the Manager from its profits and not by the Trust, for recordkeeping and reporting services.
10
AZL Oppenheimer Discovery Fund
Notes to the Financial Statements
December 31, 2013
The Trust has adopted a distribution and service plan in conformance with Rule 12b-1 of the 1940 Act. Pursuant to this plan, the Fund is authorized to pay certain fees for the sale and distribution of its shares and services provided to its shareholders at an annual rate not to exceed 0.25% of the Fund’s average daily net assets. These fees are reflected on the Statement of Operations as “Distribution fees.”
In addition, certain legal fees and expenses are paid to a law firm, Dorsey & Whitney LLP, of which the Secretary of the Fund is a partner. During the year ended December 31, 2013, $3,601 was paid from the Fund relating to these fees and expenses.
Certain Officers and Trustees of the Trust are affiliated with the Manager or the Administrator. Such Officers (except for the Trust’s CCO as noted above) and Trustees receive no compensation from the Trust for serving in their respective roles. For their service to the Trust and to the Allianz Variable Insurance Products Fund of Funds Trust, each non-interested Trustee receives a $139,000 annual Board retainer. In addition, the Trustees are reimbursed for certain expenses associated with attending Board meetings. Compensation to the Trustees is allocated between the Trust and the Allianz Variable Insurance Products Fund of Funds Trust in proportion to the assets under management of each trust. During the year ended December 31, 2013, actual Trustee compensation was $973,000 in total for both trusts.
At a meeting of the Board of Trustees on December 4, 2013, the Trustees approved a fee increase to the Officers and Trustees who are paid a fee for their services to the Trust and to the Allianz Variable Insurance Products Fund of Funds Trust. Effective January 1, 2014, each non-interested Trustee will receive a $163,000 annual retainer.
During the year ended December 31, 2013, the Fund paid approximately $6,048 to affiliated broker/dealers of the Subadvisor on the execution of purchases and sales of the Fund’s portfolio investments.
4. Investment Valuation Summary
The valuation techniques employed by the Fund, as described below, maximize the use of observable inputs and minimize the use of unobservable inputs in determining fair value. The inputs used for valuing the Fund’s investments are summarized in the three broad levels listed below:
— | Level 1 — quoted prices in active markets for identical assets |
— | Level 2 — other significant observable inputs (including quoted prices for similar securities, interest rates, prepayments speeds, credit risk, etc.) |
— | Level 3 — significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of investments) |
Changes in valuation techniques may result in transfers in or out of an assigned level within the disclosure hierarchy. The Fund determines transfers between fair value hierarchy levels at the reporting period end. The inputs or methodology used for valuing investments is not necessarily an indication of the risk associated with investing in those investments.
Security prices are generally provided by an independent third party pricing service approved by the Trust’s Board of Trustees (“Trustees”) as of the close of the New York Stock Exchange (“NYSE”) (generally 4:00 pm Eastern Time). Equity securities are valued at the last quoted sale price or, if there is no sale, the last quoted bid price is used for long securities and the last quoted ask price is used for securities sold short. Securities listed on NASDAQ Stock Market, Inc. (“NASDAQ”) are valued at the official closing price as reported by NASDAQ. In each of these situations, valuations are typically categorized as a Level 1 in the fair value hierarchy. Investments in open-end investment companies are valued at their respective net asset value as reported by such companies and are typically categorized as Level 1 in the fair value hierarchy.
Debt and other fixed income securities are generally valued at an evaluated bid price provided by an independent pricing source approved by the Trustees. To value debt securities, pricing services may use various pricing techniques which take into account appropriate factors such as market activity, yield, quality, coupon rate, maturity, type of issue, trading characteristics, call features, credit ratings and other data, as well as broker quotes. Short term securities of sufficient credit quality with sixty days or less remaining until maturity may be valued at amortized cost, which approximates fair value. In each of these situations, valuations are typically categorized as Level 2 in the fair value hierarchy.
Other assets and securities for which market quotations are not readily available, or are deemed unreliable are valued at fair value as determined in good faith by the Trustees or persons acting on the behalf of the Trustees. Fair value pricing may be used for significant events such as securities whose trading has been suspended, whose price has become stale or for which there is no currently available price at the close of the NYSE. Depending on the source and relative significance of valuation inputs, these instruments may be classified as Level 2 or Level 3 in the fair value hierarchy. The Fund utilizes a pricing service to assist in determining the fair value of securities when certain significant events occur that may affect the value of foreign securities.
In accordance with procedures adopted by the Trustees, fair value pricing may be used if events materially affecting the value of foreign securities occur between the time when the exchange on which they are traded closes and the time when the Fund’s net asset value is calculated. Management identifies possible fluctuation in international securities by monitoring the increase or decrease in the value of a designated benchmark index. In the event of an increase or decrease greater than predetermined levels, the Fund may use a systematic valuation model provided by an independent third party to fair value its international equity securities which are then typically categorized as Level 2 in the fair value hierarchy.
For the year ended December 31, 2013, there were no Level 3 investments for which significant unobservable inputs were used to determine fair value.
The following is a summary of the valuation inputs used as of December 31, 2013 in valuing the Fund’s investments based upon the three levels defined above:
Investment Securities: | Level 1 | Level 2 | Total | ||||||||||||
Common Stocks+ | $ | 345,468,371 | $ | — | $ | 345,468,371 | |||||||||
Securities Held as Collateral for Securities on Loan | — | 6,282,347 | 6,282,347 | ||||||||||||
Unaffiliated Investment Company | 5,124,905 | — | 5,124,905 | ||||||||||||
|
|
|
|
|
| ||||||||||
Total Investment Securities | $ | 350,593,276 | $ | 6,282,347 | $ | 356,875,623 | |||||||||
|
|
|
|
|
|
+ | For detailed industry descriptions, see the accompanying Schedule of Portfolio Investments. |
11
AZL Oppenheimer Discovery Fund
Notes to the Financial Statements
December 31, 2013
5. Security Purchases and Sales
For the year ended December 31, 2013, cost of purchases and proceeds from sales of securities (excluding securities maturing less than one year from acquisition) were as follows:
Purchases | Sales | |||||||||
AZL Oppenheimer Discovery Fund | $ | 204,733,312 | * | $ | 233,409,686 | * |
* | Costs of purchases and proceeds from sales of portfolio securities incurred to realign the Fund’s portfolio after a fund merger are excluded from these amounts. The costs of purchases and proceeds from sales amounts excluded were $334,456,923 and $361,007,740, respectively. |
6. Federal Tax Information
It is the Fund’s policy to continue to comply with the requirements of the Internal Revenue Code under Subchapter M, applicable to regulated investment companies, and to distribute all of its taxable income, including any net realized gains on investments, to its shareholders. Therefore, no provision is made for federal income taxes.
Management of the Fund has reviewed tax positions taken in tax years that remain subject to examination by all major tax jurisdictions, including federal (i.e., the last four tax year ends and the interim tax period since then, as applicable). Management believes that there is no tax liability resulting from unrecognized tax benefits related to uncertain tax positions taken.
Cost for federal income tax purposes at December 31, 2013 is $259,941,426. The gross unrealized appreciation/ (depreciation) on a tax basis is as follows:
Unrealized appreciation | $ | 97,475,991 | |||
Unrealized depreciation | (541,794 | ) | |||
|
| ||||
Net unrealized appreciation/(depreciation) | $ | 96,934,197 | |||
|
|
During the year ended December 31, 2013, the Fund utilized $585,012 in CLCFs to offset capital gains.
The tax character of dividends paid to shareholders during the year ended December 31, 2013 was as follows:
Ordinary Income | Net Long-Term Capital Gains | Total Distributions(a) | |||||||||||||
AZL Oppenheimer Discovery Fund | $ | — | $ | 2,889,357 | $ | 2,889,357 |
(a) | Total distributions paid may differ from the Statements of Changes in Net Assets because dividends are recognized when actually paid for tax purposes. |
During the year ended December 31, 2012 there were no dividends paid to shareholders.
As of December 31, 2013, the components of accumulated earnings on a tax basis were as follows:
Undistributed Ordinary Income | Undistributed Long-Term Capital Gains | Accumulated Capital and Other Losses | Unrealized Appreciation/ | Total Accumulated Earnings/ (Deficit) | |||||||||||||||||||||
AZL Oppenheimer Discovery Fund | $ | 1,775,810 | $ | 18,748,231 | $ | — | $ | 96,934,197 | $ | 117,458,238 |
(a) | The difference between book-basis and tax-basis unrealized appreciation/(depreciation) is attributable primarily to tax deferral of losses on wash sales. |
7. Acquisition of Funds
On April 26, 2013, the Fund acquired all of the net assets of the AZL Allianz AGIC Opportunity Fund, an open-end investment company, pursuant to a plan of reorganization approved by AZL Allianz AGIC Opportunity Fund shareholders on April 24, 2013. The purpose of the transaction was to combine two funds managed by the Manager with comparable investment objectives and strategies. The acquisition was accomplished by a tax-free exchange of 12,864,661 shares of the Fund, valued at $153,408,602, for 11,687,440 shares of the AZL Allianz AGIC Opportunity Fund outstanding on April 26, 2013.
The investment portfolio of the AZL Allianz AGIC Opportunity Fund, with a fair value of $153,524,247 and identified cost of $138,025,821 at April 26, 2013, was the principal asset acquired by the Fund. For financial reporting purposes, assets received and shares issued by the Fund were recorded at fair value; however, the cost basis of the investments received from the AZL Allianz AGIC Opportunity Fund was carried forward to align ongoing reporting of the Fund’s realized and unrealized gains and losses with amounts distributable to shareholders for tax purposes. Immediately prior to the merger, the net assets of the Fund were $142,046,883. All fees and expenses incurred by the AZL Allianz AGIC Opportunity Fund and the Fund directly in connection with the plan of reorganization were borne by the Manager.
Assuming the acquisition had been completed on January 1, 2013, the beginning of the annual reporting period of the Fund, the Fund’s pro forma results of operations for the period ended June 30, 2013, are as follows:
Net investment income/(loss) | $ | (2,485,120 | ) | ||
Net realized/unrealized gains/losses) | 115,576,074 | ||||
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| ||||
Change in net assets resulting from operations | $ | 113,090,954 | |||
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12
AZL Oppenheimer Discovery Fund
Notes to the Financial Statements
December 31, 2013
Because the combined investment portfolios have been managed as a single integrated portfolio since the acquisition was completed, it is not practicable to separate the amounts of revenue and earnings of the AZL Allianz AGIC Opportunity Fund that have been included in the Fund’s statement of operations since April 26, 2013.
8. Subsequent Events
Management has evaluated events and transactions subsequent to period end through the date the financial statements were issued, for purposes of recognition or disclosure in these financial statements and there are no subsequent events to report.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Shareholders and Board of Trustees of
Allianz Variable Insurance Products Trust:
We have audited the accompanying statement of assets and liabilities of AZL Oppenheimer Discovery Fund (the “Fund”) of the Allianz Variable Insurance Products Trust, including the schedule of portfolio investments, as of December 31, 2013, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the years in the two-year period then ended, and the financial highlights for each of the years in the five-year period then ended. These financial statements and financial highlights are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of December 31, 2013, by correspondence with the custodian and brokers or by other appropriate auditing procedures. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of the Fund as of December 31, 2013, the results of its operations for the year then ended, the changes in its net assets for each of the years in the two-year period then ended, and the financial highlights for each of the years in the five-year period then ended, in conformity with U.S. generally accepted accounting principles.
/s/ KPMG LLP
Columbus, Ohio
February 25, 2014
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Other Federal Income Tax Information (Unaudited)
During the year ended December 31, 2013, the Fund declared net long-term capital gain distributions of $2,889,357.
15
A description of the policies and procedures that the Fund uses to determine how to vote proxies relating to portfolio securities is available, without charge, upon request, by visiting the Securities and Exchange Commission’s (“Commission”) website at www.sec.gov, or by calling 800-624-0197.
Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30th is available (i) without charge, upon request, by calling 800-624-0197; (ii) on the Allianz Variable Insurance Products Trust’s website at https://www.allianzlife.com; and (iii) on the Commission’s website at http://www.sec.gov.
The Fund files complete Schedules of Portfolio Holdings with the Commission for the first and third quarters of each fiscal year on Form N-Q. Schedules of Portfolio Holdings for the Fund in this report are available without charge on the Commission’s website at http://www.sec.gov, or may be reviewed and copied at the Commission’s Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 800-SEC-0330.
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Approval of Investment Advisory and Subadvisory Agreements (Unaudited)
The Allianz Variable Insurance Products Trust (the “Trust”) is a manager-of-managers fund. That means that the Trust’s Manager (“Allianz Investment Management LLC”) is responsible for monitoring the various Subadvisers that have day-to-day responsibility for the decisions made for each of the Trust’s investment portfolios. The Trust’s Manager is responsible for determining, in the first instance, which investment advisers to consider recommending for selection as a Subadviser.
In reviewing the services provided by the Manager and the terms of the investment management agreement, the Board receives and reviews information related to the Manager’s experience and expertise in the variable insurance marketplace. Currently, the Funds are offered only through variable annuities and variable life insurance policies, and not in the retail fund market. In addition, the Board receives information regarding the Manager’s expertise with regard to portfolio diversification and asset allocation requirements within variable insurance products issued by Allianz Life Insurance Company of North America and its subsidiary, Allianz Life Insurance Company of New York. Currently, the Funds are offered only through Allianz Life and Allianz of New York variable products.
The Trust’s Manager has adopted policies and procedures to assist it in the process of analyzing each potential Subadviser with expertise in particular asset classes for purposes of making the recommendation that a specific investment adviser be selected. The Trust’s Board reviews and considers the information provided by the Manager in deciding which investment advisers to select. After an investment adviser becomes a Subadviser, a similarly rigorous process is instituted by the Manager to monitor the investment performance and other responsibilities of the Subadviser. The Manager reports to the Trust’s Board on its analysis at the regular meetings of the Board, which are held at least quarterly. Where warranted, the Manager will add or remove a particular Subadviser from a “watch” list that it maintains. Watch list criteria include, for example: (a) Fund performance over various time periods; (b) Fund risk issues, such as changes in key personnel involved with Fund management, changes in investment philosophy or process, or “capacity” concerns; and (c) organizational risk issues, such as regulatory, compliance or legal concerns, or changes in the ownership of the Subadviser. The Manager may place a Fund on the watch list for other reasons, and if so, will explain its rationale to the Trustees. Funds which are on the watch list are subject to special scrutiny of the Manager and the Board of Trustees. Funds may be removed from such watch list, if for example, performance improves or regulatory matters are satisfactorily resolved. However, in some situations where Funds which have been on the watch list, the Manager has recommended the retention of a new Subadviser, and the Board of Trustees has subsequently approved new Subadvisory Agreements with such Subadvisers.
In assessing the Manager’s and Subadvisers’ (collectively, the “Advisory Organizations”), performance of their obligations, the Board considers whether there has occurred a circumstance or event that would constitute a reason for it to not renew an advisory contract. In this regard, the Board is mindful of the potential disruption of a Fund’s operations and various risks, uncertainties and other effects that could occur as a result of a decision to terminate or not renew a contract.
As required by the Investment Company Act of 1940 (“1940 Act”), the Trust’s Board has reviewed and approved the Trust’s Investment Management Agreement with the Manager (the “Advisory Agreement”) and portfolio management agreements (the “Subadvisory Agreements”) with the Subadvisers. The Board’s decision to approve these contracts reflects the exercise of its business judgment on whether to approve new arrangements and continue the existing arrangements. During its review of these contracts, the Board considers many factors, among the most material of which are: the Fund’s investment objectives and long term performance; the Advisory Organizations’ management philosophy, personnel, and processes, including their compliance history and the adequacy of their compliance processes; the preferences and expectations of Fund shareholders (and underlying contract owners) and their relative sophistication; the continuing state of competition in the mutual fund industry; and comparable fees in the mutual fund industry.
The Board also considers the compensation and benefits received by the Advisory Organizations. This includes fees received for services provided to the Fund by affiliated persons of the Advisory Organizations and research services received by the Advisory Organizations from brokers that execute Fund trades, as well as advisory fees. The Board considered the fact that: (1) the Manager and the Trust are parties to an Administrative Service Agreement, a Compliance Services Agreement, and a Chief Compliance Officer Agreement, under which the Manager is compensated by the Trust for performing certain administrative and compliance services including providing an employee of the Manager or one of its affiliates to act as the Trust’s Chief Compliance Officer; and (2) Allianz Life Financial Services, LLC, an affiliated person of the Manager, is a registered securities broker-dealer and receives (along with its affiliated persons) payments made by the Trust pursuant to Rule 12b-1.
The Board is aware that various courts have interpreted provisions of the 1940 Act and have indicated in their decisions that the following factors may be relevant to an adviser’s compensation: the nature and quality of the services provided by the adviser, including the performance of the fund; the adviser’s cost of providing the services; the extent to which the adviser may realize “economies of scale” as the fund grows larger; any indirect benefits that may accrue to the adviser and its affiliates as a result of the adviser’s relationship with the fund; performance and expenses of comparable funds; and the extent to which the independent Board members are fully informed about all facts bearing on the adviser’s service and fee. The Trust’s Board is aware of these factors and takes them into account in its review of the Trust’s advisory contracts.
The Board considered and weighed these circumstances in light of its experience in governing the Trust and working with the Advisory Organizations on matters relating to the Funds, and is assisted in its deliberations by the advice of legal counsel to the Independent Trustees. In this regard, the Board requests and receives a significant amount of information about the Funds and the Advisory Organizations. Some of this information is provided at each regular meeting of the Board; additional information is provided in connection with the particular meeting or meetings at which the Board’s formal review of an advisory contract occurs. In between regularly scheduled meetings, the Board may receive information on particular matters as the need arises. Thus, the Board’s evaluation of an advisory contract is informed by reports covering such matters as: an Advisory Organization’s investment philosophy, personnel, and processes; the Fund’s short- and long-term performance (in absolute terms as well as in relationship to its benchmark(s), certain competitor or “peer group” funds and similar funds managed by the particular Subadviser), and comments on the reasons for performance; the Fund’s expenses (including the advisory fee itself and the overall expense structure of the Fund, both in absolute terms and relative to similar and/or competing funds, with due regard for contractual or voluntary expense limitations); the use and allocation of brokerage commissions derived from trading the Fund’s portfolio securities; the nature and extent of the advisory and other services provided to the Fund by the Advisory Organizations and their affiliates; compliance and audit reports concerning the Funds and the companies that service them; and relevant developments in the mutual fund industry and how the Funds and/or Advisory Organizations are responding to them.
The Board also receives financial information about Advisory Organizations, including reports on the compensation and benefits the Advisory Organizations derive from their relationships with the Funds. These reports cover not only the fees under the advisory contracts, but also fees, if any, received for providing other services to the Funds. The reports also discuss any indirect or “fall out” benefits an Advisory Organization may derive from its relationship with the Funds.
The Advisory and Subadvisory Agreements (collectively, the “Agreements”) were most recently considered at Board of Trustees meetings held in the fall of 2013. Information relevant to the approval of such Agreements was considered at a telephonic Board of Trustees meeting on October 16, 2013, and at an “in person” Board of Trustees meeting held October 22, 2013. The Agreements were approved at the Board meeting of October 22, 2013. At such meeting the Board also approved an Expense Limitation Agreement between the Manager and the Trust for the period ending April 30, 2015. In connection with such meetings, the Trustees requested and evaluated extensive materials from the Manager, including performance and expense information for other investment companies with similar investment objectives derived from data compiled by an independent third party provider and other sources believed to be reliable by the Manager. Prior to voting, the Trustees reviewed the proposed approval/continuance of the Agreements with management and with experienced counsel who are independent of the Manager and received a memorandum from such counsel discussing the legal
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standards for their consideration of the proposed approvals/continuances. The independent (“disinterested”) Trustees also discussed the proposed approvals/continuances in a private session with such counsel at which no representatives of the Manager were present. In reaching their determinations relating to the approval and/or continuance of the Agreements, in respect of each Fund, the Trustees considered all factors they believed relevant. The Board based its decision to approve the Agreements on the totality of the circumstances and relevant factors, and with a view to past and future long-term considerations. Not all of the factors and considerations discussed above and below are necessarily relevant to every Fund, and the Board did not assign relative weights to factors discussed herein or deem any one or group of them to be controlling in and of themselves.
An SEC Rule requires that shareholder reports include a discussion of certain factors relating to the selection of investment advisers and the approval of advisory fees. The “factors” enumerated by the SEC are set forth below in italics, as well as the Board’s conclusions regarding such factors:
(1) The nature, extent and quality of services provided by the Manager and Subadvisers. The Trustees noted that the Manager, subject to the control of the Board of Trustees, administers each Fund’s business and other affairs. Under the Advisory Agreement, the Manager holds the sole and exclusive responsibility to provide, or arrange for other to provide, the management of the Funds’ assets and the placement of orders for the purchase and sale of the securities of the Funds. As the Trust is a manager of managers fund, the Manager is authorized, under the Advisory Agreement, to retain one or more Subadvisers for each Fund to handle day-to-day management of the Funds’ investment portfolios; the Manager is responsible for determining, in the first instance, which investment advisers to recommend to the Board of Trustees for selection as a Subadviser. The Trustees were aware that, notwithstanding the retention of the Subadvisers to handle day-to-day portfolio management, the Manager remains responsible for substantial other matters, including continuously monitoring compliance by each Subadviser with the investment policies and restrictions of the respective Funds, with such other limitations or directions of the Board of Trustees, and with all legal requirements under federal or state law or regulation. The Manager also is responsible primarily to provide statistical information and other data to the Trustees regarding the Funds’ portfolio investments and to make available to the Funds’ administrator such information as is necessary for the conduct of its duties.
The Trustees also noted that the Manager provides the Trust and each Fund with such administrative and other services (exclusive of, and in addition to, any such services provided by any others retained by the Trust on behalf of the Funds) and executive and other personnel as are necessary for the operation of the Trust and the Funds. Except for the Trust’s Chief Compliance Officer, the Manager pays all of the compensation of Trustees and officers of the Trust who are employees of the Manager or its affiliates.
The Trustees considered the scope and quality of services provided by the Manager and the Subadvisers and noted that the scope of such services provided had expanded as a result of recent regulatory and other developments. The Trustees noted that, for example, the Manager and Subadvisers are responsible for maintaining and monitoring their own compliance programs, and these compliance programs are continuously refined and enhanced in light of new regulatory requirements. The Trustees considered the capabilities and resources which the Manager has dedicated to performing services on behalf of the Trust and its Funds. The quality of administrative and other services, including the Manager’s role in coordinating the activities of the Trust’s other service providers, also were considered. The Trustees concluded that, overall, they were satisfied with the nature, extent and quality of services provided (and expected to be provided) to the Trust and to each of the Funds under the Agreements.
(2) The investment performance of the Funds, the Manager and the Subadvisers. In connection with every in-person quarterly Board of Trustees meeting, Trustees receive extensive information on the performance results of each of the Funds. This includes, for example, performance information on all of the Funds for the previous quarter, and previous one, three and five-year periods, and since inception. (For Funds which have been in existence for less than five years, Trustees may receive performance information on comparable funds managed by the particular Subadviser for periods prior to the creation of a particular Fund.) Such performance information includes information on absolute total return, performance versus Subadvisers’ comparable fund(s), performance versus the appropriate benchmark(s), and performance versus peer groups. For example, in connection with the Board of Trustees meetings held September 10-11, 2013, the Manager reported that for the three year period ended June 30, 2013, 12 Funds were in the top 40%, eight were in the middle 20% and eight were in the bottom 40%, and for the one year period ended June 30, 2013, 8 Funds were in the top 40%, seven were in the middle 20%, and 14 were in the bottom 40%. The Manager also reported that for the five year period ended June 30, 2013, 10 Funds were in the top 40%, four were in the middle 20%, and six were in the bottom 40%. At the Board of Trustees meeting held October 22, 2013, the Trustees determined that the overall investment performance of the Funds was acceptable.
(3) The costs of services to be provided and profits to be realized by the Manager and the Subadvisers and their affiliates from their relationship with the Funds. The Manager has supplied information to the Board of Trustees pertaining to the level of investment advisory fees to which the Funds are subject. The Manager has agreed to temporarily “cap” Fund expenses at certain levels, and information is provided to Trustees setting forth “contractual” advisory fees and “actual” fees after taking expense caps into account. Based upon the information provided, the “actual” advisory fees payable by the Funds overall are generally comparable to the average level of fees paid by Fund peer groups. For the 30 Funds reviewed by the Board of Trustees in the fall of 2013, 27 Funds paid “actual” advisory fees in a percentage amount within the 65th percentile or lower for each Fund’s applicable category. The Trustees recognized that it is difficult to make comparisons of advisory fees because there are variations in the services that are included in the fees paid by other funds. The Board has concluded that the advisory fees to be paid to the Manager by the Funds are not unreasonable.
The Manager has also supplied information to the Board of Trustees pertaining to total Fund expenses (which includes advisory fees, the 25 basis point 12b-1 fee paid by the Funds, and other Fund expenses). As noted above, the Manager has agreed to “cap” Fund expenses at certain levels. Based upon the information provided, the overall total expense ratio ranking in 2013 for the 30 Funds was as follows: (1) 28 of the Funds had total expense rankings below the 65th percentile (with 20 Funds at or below the 50th percentile); (2) the AZL Russell 1000 Value Fund had a total expense ranking in the 66th percentile; the Manager reported that there is only a limited peer group for such Fund; and (3) the AZL Morgan Stanley Global Real Estate Fund had a total expense ranking in the 72nd percentile; it was reported by the Manager that there is only a limited peer group for such Fund, such Fund’s expense ratio has declined, and such Fund’s expense ratio is comparable to funds of similar size.
The Manager has committed to providing the Funds with a high quality of service and working to reduce Fund expenses over time, particularly as the Funds grow larger. The Trustees concluded therefore that the expense ratios of the Funds were not unreasonable.
The Manager provided information concerning the profitability of the Manager’s investment advisory activities for the period from 2011 through June 30, 2013. The Trustees recognized that it is difficult to make comparisons of profitability from investment company advisory agreements because comparative information is not generally publicly available and is affected by numerous factors, including the structure of the particular adviser, the types of funds it manages, its business mix, numerous assumptions regarding allocation of expenses and the adviser’s capital structure and cost of capital. In considering profitability information, the Trustees considered the possible effect of certain fall-out benefits to the Manager and its affiliates. The Trustees focused on profitability of the Manager’s relationships with the Funds before taxes and distribution expenses. The Trustees recognized that the Manager should, in the abstract, be entitled to earn a reasonable level of profits for the services it provides to each Fund and, based on their review, concluded that they were satisfied that the Manager’s level of profitability from its relationship with the Funds was not excessive.
The Manager, on behalf of the Board of Trustees, endeavored to obtain information on the profitability of each Subadviser in connection with its relationship with the Fund or Funds which it subadvises. The Manager was unable to obtain meaningful profitability information from some of the unaffiliated Subadvisers. The Manager assured the Board of Trustees that the Agreements with the Subadvisers which are not affiliated with it were negotiated on an “arm’s length” basis, so that arguably, such profitability information should be less relevant. The Trustees were also provided with certain information on the profitability for the Subadviser which is affiliated with the Manager. Trustees recognized the difficulty of allocating costs to multiple advisory accounts and products of a large advisory organization. Based upon the information provided, the Trustees determined that there was no evidence that the level of such profitability attributable to subadvising the Funds was excessive.
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(4) and (5) The extent to which economies of scale would be realized as the Funds grow, and whether fee levels reflect these economies of scale. The Trustees noted that most of the advisory fee schedules for the Funds do not contain breakpoints that reduce the fee rate on assets above specified levels, although certain Subadvisory Agreements have such “breakpoints.” The Trustees recognized that breakpoints may be an appropriate way for the Manager to share its economies of scale, if any, with Funds that have substantial assets. However, they also recognized that there may not be a direct relationship between any economies of scale realized by Funds and those realized by the Manager as assets increase. The Trustees do not believe there is a uniform methodology for establishing breakpoints that give effect to Fund-specific service provided by the Manager. The Trustees noted that in the fund industry as a whole, as well as among funds similar to the Funds, there is no uniformity or pattern in the fees and asset levels at which breakpoints (if any) apply. Depending on the age, size, and other characteristics of a particular fund and its manager’s cost structure, different conclusions can be drawn as to whether there are economies of scale to be realized at any particular level of assets, notwithstanding the intuitive conclusion that such economies exist, or will be realized at some level of total assets. Moreover, because different managers have different cost structures and service models, it is difficult to draw meaningful conclusions from the breakpoints that may have been adopted by other funds. The Trustees also noted that the advisory agreements for many funds do not have breakpoints at all, or if breakpoints exist, they may be at asset levels significantly greater than those of the individual Funds. The Trustees also noted that the total assets in all of the Funds as of June 30, 2013 were approximately $12.85 billion, and that no single non-money market Fund had assets in excess of $616 million.
The Trustees noted that the Manager has agreed to temporarily “cap” Fund expenses at certain levels, which has the effect of reducing expenses as would the implementation of advisory fee breakpoints. The Manager has committed to continue to consider the continuation of fee “caps” and/or advisory fee breakpoints as the Funds grow larger. The Board receives quarterly reports on the level of Fund assets. It expects to consider whether or not to approve the Agreements at a meeting to be held prior to December 31, 2014, and will at that time, or prior thereto, consider: (a) the extent to which economies of scale can be realized, and (b) whether the advisory fee should be modified to reflect such economies of scale, if any.
Having taken these factors into account, the Trustees concluded that the absence of breakpoints in certain of the Funds’ advisory fee rate schedules was acceptable under each Fund’s circumstances.
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Information about the Board of Trustees and Officers (Unaudited)
The Trust is managed by the Trustees in accordance with the laws of the state of Delaware governing business trusts. There are currently eight Trustees, two of whom are “interested persons” of the Trust within the meaning of that term under the 1940 Act. The Trustees and Officers of the Trust, their addresses, ages, their positions held with the Trust, their terms of office with the Trust and length of time served, their principal occupation(s) during the past five years, the number of portfolios in the Trust they oversee, and their other directorships held are as follows:
Non-Interested Trustees(1)
Name, Address, and Age | Positions Held with VIP Trust FOF Trust | Term of Office(2)/Length of Time Served | Principal Occupation(s) During Past 5 Years | Number of Portfolios Overseen for VIP Trust FOF Trust | Other Directorships Held Outside the AZL Fund Complex | |||||
Peter R. Burnim, Age 66 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/07 | Chairman, Argus Investment Strategies Fund Ltd., Feburary 2013 to present; Managing Director, iQ Venture Advisors, LLC. 2005 to 2012; Chairman, Northstar Group Holdings Ltd. Bermuda, 2011 to present; Expert Witness, Massachusetts Department of Revenue, 2011 to 2012; Executive Vice President, Northstar Companies, 2002 to 2005; Senior Officer, Citibank and Citicorp for over 25 years | 41 | Argus Group Holdings; Northstar Group Holdings, NRIL, Sterling Centrecorp Inc.; Highland Financial Holdings; and Bank of Bermuda NY | |||||
Peggy L. Ettestad, Age 56 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/07 | Managing Director, Red Canoe Management Consulting LLC, 2008 to present; Senior Managing Director, Residential Capital LLC, 2003 to 2008; Chief Operations Officer, Transamerica Reinsurance 2002 to 2003 | 41 | Luther College | |||||
Roger Gelfenbien, Age 70 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 10/99 | Retired; Partner of Accenture 1983 to 1999 | 41 | Virtus Funds (8 Funds) | |||||
Claire R. Leonardi, Age 58 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/04 | Chief Executive Officer, Connecticut Innovations, Inc., 2012 to present; General Partner, Fairview Capital, L.P., 1994 to 2012 | 41 | The Natural History Museum of the Adirondacks | |||||
Dickson W. Lewis, Age 65 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/04 | Retired; Consultant to Lifetouch National School Studios; Vice President/General Manager, Yearbooks & Canada-Lifetouch National School Studios, 2006 to 2013; Vice President/General Manager of Jostens, Inc., 2002 to 2006; Senior Vice President of Fortis Group, 1997 to 2002 | 41 | None | |||||
Peter W. McClean, Age 69 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/04 | Retired; President and CEO of Measurisk, LLC, 2001 to 2003; Chief Risk Management Officer at Bank of Bermuda Ltd., 1996 to 2001 | 41 | PNMAC Opportunity Fund; Northeast Bank; and FHI | |||||
Arthur C. Reeds III, Age 69 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 10/99 | Retired; Senior Investment Officer, Hartford Foundation for Public Giving, 2000 to 2003; Chairman, Chief Executive and President of Conning Corp., 1999 to 2000; Investment Consultant, 1997 to 1999 | 41 | Connecticut Water Service, Inc. |
Interested Trustees(3)
Name, Address, and Age | Positions Held with VIP Trust FOF Trust | Term of Office(2)/Length of Time Served | Principal Occupation(s) During Past 5 Years | Number of Portfolios Overseen for VIP Trust FOF Trust | Other Directorships Held Outside the AZL Fund Complex | |||||
Robert DeChellis, Age 46 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 3/08 | President and CEO, Allianz Life Financial Services, LLC, 2007 to present | 41 | None | |||||
Brian Muench, Age 43 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 6/11 | President, Allianz Investment Management LLC, November 2010 to present; Vice President, Allianz Life, April 2011 to present; Vice President, Advisory Management, Allianz Investment Management LLC from December 2005 to November 2010 | 41 | None |
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Officers
Name, Address, and Age | Positions Held with VIP and VIP FOF Trust | Term of Office(2)/Length of Time Served | Principal Occupation(s) During Past 5 Years | |||
Brian Muench, Age 43 5701 Golden Hills Drive Minneapolis, MN 55416 | President | Since 11/10 | President, Allianz Investment Management LLC from November 2010, to present; Vice President, Allianz Life from April 2011 to present; Vice President, Allianz Investment Management LLC from December 2005 to November 2010. | |||
Michael Radmer, Age 68 Dorsey & Whitney LLP, Suite 1500 50 South Sixth Street Minneapolis, MN 55402-1498 | Secretary | Since 2/02 | Partner, Dorsey and Whitney LLP since 1976. | |||
Ty Edwards, Age 47 Citi Fund Services Ohio, Inc. 3435 Stelzer Road Columbus, OH 43219 | Treasurer, Principal Accounting Officer and Principal Financial Officer | Since 4/10 | Senior Vice President, Financial Administration, Citi Fund Services Ohio, Inc., December 2009 to present; Director, Product Management, Columbia Management, April 2007 to April 2009; Deputy Treasurer, Columbia Funds and Director, Fund Administration, Columbia Management, January 2006 to April 2007. | |||
Christopher R. Pheiffer, Age 45(4) 5701 Golden Hills Drive Minneapolis, MN 55416 | Chief Compliance Officer(5) and Anti-Money Laundering Compliance Officer | Since 2/14 (interim) | Deputy Chief Compliance Officer of the Trusts, 2007-2014 |
(1) | Member of the Audit Committee. |
(2) | Indefinite. |
(3) | Is an “interested person”, as defined by the 1940 Act, due to employment by Allianz. |
(4) | Stephen G. Simon, previously the Chief Compliance Officer of the Trusts, resigned all of his positions with Allianz effective February 21, 2014. Mr. Pheiffer, previously the Deputy Chief Compliance Officer of the Trusts, has been named Chief Compliance Officer of the Trusts on an interim basis while a search for a permanent replacement is conducted. |
(5) | The Manager and the Trust are parties to a Chief Compliance Officer Agreement under which the Manager is compensated by the Trust for providing an employee of the Manager or one of its affiliates to act as the Trust’s Chief Compliance Officer. The Chief Compliance Officer and Anti-Money Laundering Compliance Officer is not considered a corporate officer or executive employee of the Trust. |
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The Allianz VIP Funds are distributed by Allianz Life Financial Services, LLC. These Funds are not FDIC Insured. | ANNRPT1213 2/14 |
AZL® Pyramis Core Bond Fund
Annual Report
December 31, 2013
Table of Contents
Management Discussion and Analysis
Page 1
Expense Examples and Portfolio Composition
Page 3
Schedule of Portfolio Investments
Page 4
Statement of Assets and Liabilities
Page 12
Statement of Operations
Page 12
Statements of Changes in Net Assets
Page 13
Financial Highlights
Page 14
Notes to the Financial Statements
Page 15
Report of Independent Registered Public Accounting Firm
Page 20
Other Federal Income Tax Information
Page 21
Other Information
Page 22
Approval of Investment Advisory Agreement
Page 23
Information about the Board of Trustees and Officers
Page 26
This report is submitted for the general information of the shareholder of the Fund. The report is not authorized for distribution to prospective investors in the Fund unless preceded or accompanied by an effective prospectus, which contains details concerning the sales charges and other pertinent information.
AZL® Pyramis Core Bond Fund Review (unaudited)
Allianz Investment Management LLC serves as the Manager for the AZL® Pyramis Core Bond Fund and Pyramis Global Advisors, LLC serves as Subadviser to the Fund.
What factors affected the Fund’s performance during the year ended December 31, 2013?
For the period ended December 31, 2013, the AZL® Pyramis Core Bond Fund returned -2.20%. That compared to a -2.02% total return for its benchmark, the Barclays U.S. Aggregate Bond Index1.
The Fund faced a challenging environment in the fixed-income market during the period, which began with considerable fiscal uncertainty. In the U.S., legislators and the White House negotiated a plan to avoid the so-called “fiscal cliff.” Questions still remained about a range of fiscal issues, including Europe’s recovery from its ongoing debt crisis and the severity of China’s slowing economy.*
Although, as the period progressed, the financial markets responded to improved economic data around the world. A strengthening U.S. economy led the chairman of the Federal Reserve, Ben Bernanke, to remark in May that the Fed may begin winding down some of the programs it had used to help stimulate economic growth. That caused volatility in the fixed-income markets in May and June. Rates moved dramatically higher, pushing down bond prices, and spreads between most fixed income sectors and Treasury bonds widened.
The Fund faced challenging headwinds in that environment, and relative to its benchmark, the Fund slightly underperformed for the 12-month period. The largest detractor from relative performance was the Fund’s underweight position in agency mortgage-backed securities. In the second half of the period, these securities performed well and the Fund’s underweight position dragged on relative performance.*
While the fixed income environment was challenging during the period, we were well positioned to take advantage of the volatility to add bonds that we liked at prices that are more favorable. This helped performance in the subsequent period when interest rates stabilized and spreads in most sectors recovered much of what they lost.*
Over the 12-month period, the Fund’s relative performance was helped by both sector selection and security selection. The largest contributors were an overweight position in corporate bonds—particularly among securities in the financial sector—commercial mortgage backed securities, and taxable municipal bonds. Additionally, the Fund’s relative performance benefited from exposure to a major debt offering by a blue chip telecommunications firm.*
Past performance does not guarantee future results.
* | The Fund’s portfolio composition is subject to change. There is no guarantee that any sectors mentioned will continue to perform well or that securities in such sectors will be held by the Fund in the future. The information contained in this commentary is for informational purposes only and should not be construed as a recommendation to purchase or sell securities in the sector mentioned. The Fund’s holdings and weightings are as of December 31, 2013. |
1 | The Barclays U.S. Aggregate Bond Index is a market value-weighted performance benchmark for investment-grade fixed-rate debt issues, including government, corporate, asset-backed, and mortgage-backed securities, with maturities of at least one year. Investors cannot invest directly in an index. |
1
AZL® Pyramis Core Bond Fund Review (unaudited)
Fund Objective
The Fund’s investment objective is to seek a high level of current income. This objective may be changed by the Trustees of the Fund without shareholder approval. The Fund seeks to achieve its objective by investing at least 80% of its net assets in investment-grade debt securities (those of medium and high quality) of all types and repurchase agreements for those securities.
Investment Concerns
International investing may involve risk of capital loss from unfavorable fluctuations in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations.
Bonds offer a relatively stable level of income, although bond prices will fluctuate, providing the potential for principal gain or loss. Intermediate-term, higher-quality bonds generally offer less risk than longer-term bonds and a lower rate of return.
Mortgage-backed investments involve risk of loss due to prepayments and, like any bond, due to default. Because of the sensitivity of mortgage-related securities to changes in interest rates, the Fund’s performance may be more volatile than if it did not hold these securities.
Investing in derivatives instruments involves risks that may be different from or greater than the risk associated with investing directly in securities or other traditional instruments.
For a complete description of these and other risks associated with investing in a mutual Fund, please refer to the Fund’s prospectus.
Growth of $10,000 Investment
The chart above represents a comparison of a hypothetical investment in the Fund versus a similar investment in the Fund’s benchmark, and represents the reinvestment of dividends and capital gains in the Fund.
Average Annual Total Returns as of December 31, 2013
Since | ||||||||
1 | Inception | |||||||
Year | (9/5/12) | |||||||
AZL® Pyramis Core Bond Fund | -2.20 | % | -1.22 | % | ||||
Barclays U.S. Aggregate Bond Index | -2.02 | % | -1.23 | % |
Past performance does not guarantee future results. The performance data quoted represents past performance and current returns may be lower or higher. The investment return and principal value will fluctuate so that an investor’s shares, when redeemed may be worth more or less than the original cost. To obtain performance information current to the most recent month end, please visit www.Allianzlife.com.
Expense Ratio1 | Gross | |||
AZL® Pyramis Core Bond Fund | 0.82 | % |
The above expense ratio is based on the current Fund prospectus dated April 29, 2013. The Manager and the Fund have entered into a written contract limiting operating expenses, excluding certain expenses (such as interest expense and Acquired Fund fees and expenses), to 0.95% through April 30, 2015. Additional information pertaining to the December 31, 2013 expense ratios can be found in the financial highlights.
The total return of the Fund does not reflect the effect of any insurance charges, the annual maintenance fee or the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. Such charges, fees and tax payments would reduce the performance quoted.
1 | Acquired Fund Fees and Expenses are incurred indirectly by the Fund through the valuation of the Fund’s investments in the other investment companies. Accordingly, Acquired Fees and Expenses affect the Fund’s total returns. Because these fees and expenses are not included in the Fund’s financial highlights, the Fund’s total annual fund operating expenses do not correlate to the ratios of expenses to average net assets shown in the financial highlights table. Without Acquired Fund Fees and expenses the Fund’s gross ratio would be 0.80%. |
The Fund’s performance is measured against the Barclays U.S. Aggregate Bond Index, which is an unmanaged market value-weighted performance benchmark for investment-grade fixed-rate debt issues, including government, corporate, asset-backed, and mortgage-backed securities, with maturities of at least one year. The index does not reflect the deduction of fees associated with a mutual fund, such as investment management and fund accounting fees. The Fund’s performance reflects the deduction of fees for services provided to the Fund. Investors cannot invest directly in an index. |
2
AZL Pyramis Core Bond Fund
(Unaudited)
As a shareholder of the AZL Pyramis Core Bond Fund (the “Fund”), you incur ongoing costs, including management fees, distribution fees, and other Fund expenses. These examples are intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. Please note that the expenses shown in each table do not reflect expenses that apply to the subaccount or the insurance contract. If the expenses that apply to the subaccount of the insurance contract were included, your costs would have been higher.
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the periods presented below.
The Actual Expense table below provides information about actual account values and actual expenses. You may use the information below, 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 table under the heading entitled “Expenses Paid During Period” to estimate the expenses you paid on your account during this period.
Beginning Account Value 7/1/13 | Ending Account Value 12/31/13 | Expenses Paid During Period 7/1/13 - 12/31/13* | Annualized Expense Ratio During Period 7/1/13 - 12/31/13 | |||||||||||||||||
AZL Pyramis Core Bond Fund | $ | 1,000.00 | $ | 1,008.10 | $ | 4.10 | 0.81 | % |
The Hypothetical Expense table below provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.
Beginning Account Value 7/1/13 | Ending Account Value 12/31/13 | Expenses Paid During Period 7/1/13 - 12/31/13* | Annualized Expense Ratio During Period 7/1/13 - 12/31/13 | |||||||||||||||||
AZL Pyramis Core Bond Fund | $ | 1,000.00 | $ | 1,021.12 | $ | 4.13 | 0.81 | % |
* | Expenses are equal to the average account value over the period, multiplied by the Fund’s annualized expense ratio, multiplied by 184/365 (to reflect the one half year period). |
Portfolio Composition
(Unaudited)
Investments | Percent of net assets | ||||
Corporate Bonds | 28.4 | % | |||
U.S. Treasury Obligations | 24.3 | ||||
U.S. Government Agency Mortgages | 23.9 | ||||
Collateralized Mortgage Obligations | 11.0 | ||||
Yankee Dollars | 6.8 | ||||
Money Market | 4.8 | ||||
Municipal Bonds | 4.0 | ||||
Asset Backed Securities | 2.8 | ||||
Securities Held as Collateral for Securities on Loan | 0.5 | ||||
|
| ||||
Total Investment Securities | 106.5 | ||||
Net other assets (liabilities) | (6.5 | ) | |||
|
| ||||
Net Assets | 100.0 | % | |||
|
|
3
AZL Pyramis Core Bond Fund
Schedule of Portfolio Investments
December 31, 2013
Principal Amount | Fair Value | |||||||
| Asset Backed Securities (2.8%): |
| ||||||
$ | 1,750,000 | AmeriCredit Automobile Receivables Trust, Class C, Series 2013-4, 2.72%, 9/9/19 | $ | 1,772,753 | ||||
1,750,000 | AmeriCredit Automobile Receivables Trust, Class D, Series 2013-4, 3.31%, 10/8/19 | 1,774,546 | ||||||
64,678 | CFC LLC, Class A, Series 2013-1A, 1.65%, 7/17/17(a) | 64,638 | ||||||
4,220,000 | CFC LLC, Class B, Series 2013-1A, 2.75%, 11/15/18(a) | 4,179,352 | ||||||
135,396 | Countrywide Asset-Backed Certificates, Class AF5, Series 2004-7, 5.37%, 1/25/35(b) | 142,828 | ||||||
1,130,000 | �� | Ford Credit Floorplan Master Owner Trust, Class C, Series 2013-3, 1.29%, 6/15/17 | 1,130,366 | |||||
1,130,000 | Ford Credit Floorplan Master Owner Trust, Class D, Series 2013-3, 1.74%, 6/15/17 | 1,128,817 | ||||||
|
| |||||||
| Total Asset Backed Securities (Cost $10,194,095) | 10,193,300 | ||||||
|
| |||||||
| Collateralized Mortgage Obligations (11.0%): |
| ||||||
39,777 | Banc of America Commercial Mortgage Trust, Class A4, Series 2006-3, 5.89%, 7/10/44(b) | 43,272 | ||||||
110,000 | Bank of America Commercial Mortgage Trust, Class A4, Series 2007-1, 5.45%, 1/15/49 | 119,056 | ||||||
232,783 | Citigroup Mortgage Loan Trust, Inc., Class A, Series 2012-A, 2.50%, 6/25/51(a) | 218,534 | ||||||
200,000 | Citigroup/Deutsche Bank Commercial Mortgage Trust, Class A4, Series 2007-CD4, 5.32%, 12/11/49^ | 219,022 | ||||||
400,000 | Commercial Mortgage Trust, Class A5, Series 2004-LB4A, 4.84%, 10/15/37 | 405,399 | ||||||
320,000 | Extended Stay America Trust, Class BFL, Series 2013-ESFL, 1.27%, 12/5/31(a)(b) | 320,216 | ||||||
230,000 | Extended Stay America Trust, Class CFL, Series 2013-ESFL, 1.67%, 12/5/31(a)(b) | 229,937 | ||||||
2,716,000 | GE Capital Commercial Mortgage Corp., Class A4, Series 2007-C1, 5.54%, 12/10/49 | 2,941,903 | ||||||
333,598 | Granite Master Issuer plc, Class A1, Series 2006-1A, 0.24%, 12/20/54(a)(b) | 329,984 | ||||||
3,700,000 | Granite Master Issuer plc, Class M2, Series 2006-1A, 0.75%, 12/20/54(a)(b) | 3,475,299 | ||||||
94,507 | Granite Master Issuer plc, Class A4, Series 2006-2, 0.25%, 12/20/54(b) | 93,483 | ||||||
44,849 | Granite Master Issuer plc, Class A3, Series 2006-3, 0.25%, 12/20/54(b) | 44,257 | ||||||
52,047 | Granite Master Issuer plc, Class A7, Series 2006-3, 0.37%, 12/20/54(b) | 51,483 | ||||||
3,750,000 | Granite Master Issuer plc, Class M2, Series 2006-3, 0.73%, 12/20/54(b) | 3,522,263 | ||||||
2,099,403 | Granite Master Issuer plc, Class A4, Series 2006-4, 0.27%, 12/20/54(b) | 2,071,901 | ||||||
119,811 | Granite Master Issuer plc, Class 2A1, Series 2007-1, 0.31%, 12/20/54(b) | 118,513 | ||||||
1,371,000 | Granite Master Issuer plc, Class 1B1, Series 2007-1, 0.31%, 12/20/54(b) | 1,300,173 | ||||||
25,766 | Granite Master Issuer plc, Class 3A1, Series 2007-2, 0.34%, 12/17/54(b) | 25,487 | ||||||
257,000 | Granite Master Issuer plc, Class 1B1, Series 2007-2, 0.32%, 12/17/54(b) | 243,724 | ||||||
900,000 | Greenwich Capital Commercial Funding Corp. Commercial Mortgage Trust, Class A4, Series 2007-GG9, 5.44%, 3/10/39 | 988,600 |
Principal Amount | Fair Value | |||||||
| Collateralized Mortgage Obligations, continued |
| ||||||
$ | 9,100,000 | GS Mortgage Securities Trust, Class XB1, Series 2013-KY0, 3.25%, 11/8/29(b)(c) | $ | 419,621 | ||||
3,700,000 | Hilton USA Trust, Class DFX, Series 2013-HLT, 4.41%, 11/5/30(a) | 3,703,019 | ||||||
220,000 | JPMorgan Chase Commercial Mortgage Securities Corp., Class A4, Series 2006-LDP7, 5.86%, 4/15/45(b) | 240,161 | ||||||
329,069 | JPMorgan Chase Commercial Mortgage Securities Corp., Class A1A, Series 2006-LDP8, 5.40%, 5/15/45 | 359,197 | ||||||
475,000 | JPMorgan Chase Commercial Mortgage Securities Corp., Class A4, Series 2007-CB18, 5.44%, 6/12/47 | 522,011 | ||||||
5,157,000 | JPMorgan Chase Commercial Mortgage Securities Corp., Class A4, Series 2007-LD11, 5.81%, 6/15/49(b) | 5,736,224 | ||||||
3,944,578 | LB-UBS Commercial Mortgage Trust, Class A3, Series 2007-C7, 5.87%, 9/15/45(b) | 4,374,766 | ||||||
2,030,000 | Merrill Lynch Floating Trust, Class A2, Series 2008-LAQA, 0.71%, 7/9/21(a)(b) | 2,009,978 | ||||||
1,390,000 | Merrill Lynch/Countrywide Commercial Mortgage Trust, Class A4, Series 2007-6, 5.48%, 3/12/51(b) | 1,528,969 | ||||||
484,000 | Merrill Lynch/Countrywide Commercial Mortgage Trust, Class A4, Series 2007-5, 5.38%, 8/12/48 | 527,075 | ||||||
1,970,000 | Morgan Stanley Capital I, Class A4, Series 2007-IQ14, 5.69%, 4/15/49(b) | 2,181,742 | ||||||
326,101 | Wachovia Bank Commercial Mortgage Trust, Class A1A, Series 2006-C26, 6.01%, 6/15/45(b) | 357,003 | ||||||
440,000 | Wachovia Bank Commercial Mortgage Trust, Class A4, Series 2007-C33, 5.92%, 7/15/17(b) | 479,876 | ||||||
1,420,000 | Wachovia Bank Commercial Mortgage Trust, Class A4, Series 2007-C31, 5.51%, 4/15/47 | 1,549,839 | ||||||
|
| |||||||
| Total Collateralized Mortgage Obligations (Cost $41,390,356) | 40,751,987 | ||||||
|
| |||||||
| Corporate Bonds (28.4%): |
| ||||||
| Airlines (0.4%): |
| ||||||
1,000,000 | American Airlines Pass-Through Trust, Class A, Series 2013-2, 4.95%, 1/15/23(a) | 1,030,625 | ||||||
296,187 | Continental Airlines 1998-1, Class A, Series 981, 6.65%, 9/15/17 | 311,352 | ||||||
|
| |||||||
1,341,977 | ||||||||
|
| |||||||
| Asset Management & Custody Banks (0.0%): |
| ||||||
68,000 | Retail Opportunity Investments Corp., 5.00%, 12/15/23, Callable 9/15/23 @ 100 | 67,703 | ||||||
|
| |||||||
| Auto Components (0.2%): |
| ||||||
673,000 | Delphi Corp., 5.00%, 2/15/23, Callable 2/15/18 @ 102.5 | 692,349 | ||||||
|
| |||||||
| Automobiles (0.3%): |
| ||||||
588,000 | Ford Motor Co., 7.45%, 7/16/31 | 720,105 | ||||||
500,000 | Ford Motor Co., 4.75%, 1/15/43 | 450,937 | ||||||
|
| |||||||
1,171,042 | ||||||||
|
| |||||||
| Biotechnology (0.3%): |
| ||||||
1,000,000 | Amgen, Inc., 5.15%, 11/15/41, Callable 5/15/41 @ 100 | 996,286 | ||||||
|
| |||||||
| Cable & Satellite (0.0%): |
| ||||||
101,000 | Time Warner Cable, Inc., 5.85%, 5/1/17 | 110,161 | ||||||
|
|
Continued
4
AZL Pyramis Core Bond Fund
Schedule of Portfolio Investments
December 31, 2013
Principal Amount | Fair Value | |||||||
| Corporate Bonds, continued |
| ||||||
| Capital Markets (1.9%): |
| ||||||
$ | 1,000,000 | General Electric Capital Corp., 1.00%, 1/8/16 | $ | 1,002,500 | ||||
1,000,000 | Goldman Sachs Group, Inc. (The), 6.15%, 4/1/18 | 1,146,677 | ||||||
642,000 | Goldman Sachs Group, Inc. (The), 2.90%, 7/19/18 | 653,347 | ||||||
375,000 | Merrill Lynch & Co., 7.75%, 5/14/38 | 484,149 | ||||||
1,480,000 | Morgan Stanley, 5.38%, 10/15/15 | 1,591,846 | ||||||
1,300,000 | Morgan Stanley, Series F, 6.63%, 4/1/18, MTN | 1,521,122 | ||||||
180,000 | Morgan Stanley, 2.13%, 4/25/18 | 178,448 | ||||||
362,000 | Morgan Stanley, 4.88%, 11/1/22 | 370,565 | ||||||
63,000 | Morgan Stanley, 5.00%, 11/24/25 | 63,188 | ||||||
|
| |||||||
7,011,842 | ||||||||
|
| |||||||
| Chemicals (0.1%): |
| ||||||
192,000 | Ecolab, Inc., 1.45%, 12/8/17 | 187,626 | ||||||
|
| |||||||
| Commercial Banks (1.6%): |
| ||||||
250,000 | Discover Bank, 7.00%, 4/15/20 | 290,747 | ||||||
263,000 | Discover Bank, 4.20%, 8/8/23 | 259,400 | ||||||
184,000 | HSBC USA, Inc., 2.63%, 9/24/18 | 187,105 | ||||||
250,000 | Huntington National Bank (The), Series BKNT, 1.30%, 11/20/16, Callable 10/20/16 @ 100 | 250,021 | ||||||
800,000 | KeyCorp, 3.75%, 8/13/15 | 836,594 | ||||||
28,000 | M&I Marshall & Ilsley Bank, Series BKNT, 5.00%, 1/17/17 | 30,210 | ||||||
1,028,000 | Regions Bank, Series BKNT, 7.50%, 5/15/18, MTN | 1,216,418 | ||||||
500,000 | Regions Bank, 6.45%, 6/26/37 | 528,250 | ||||||
500,000 | Regions Financial Corp., 5.75%, 6/15/15 | 532,762 | ||||||
88,000 | Regions Financial Corp., 2.00%, 5/15/18, Callable 4/15/18 @ 100 | 85,211 | ||||||
32,000 | SunTrust Banks, Inc., Series BKNT, 3.50%, 1/20/17, Callable 12/20/16 @ 100 | 33,649 | ||||||
181,000 | SunTrust Banks, Inc., 2.35%, 11/1/18, Callable 10/1/18 @ 100 | 180,041 | ||||||
1,200,000 | Wachovia Bank NA, Series BKNT, 6.00%, 11/15/17 | 1,384,680 | ||||||
144,000 | Wells Fargo & Co., 3.68%, 6/15/16 | 153,323 | ||||||
|
| |||||||
5,968,411 | ||||||||
|
| |||||||
| Consumer Finance (1.5%): |
| ||||||
352,000 | American Express Credit Corp., 1.30%, 7/29/16 | 354,724 | ||||||
1,000,000 | �� | Ford Motor Credit Co. LLC, 2.50%, 1/15/16 | 1,025,943 | |||||
240,000 | Ford Motor Credit Co. LLC, 1.50%, 1/17/17 | 239,892 | ||||||
324,000 | Ford Motor Credit Co. LLC, 3.00%, 6/12/17 | 336,739 | ||||||
902,000 | Ford Motor Credit Co. LLC, 4.38%, 8/6/23^ | 906,834 | ||||||
186,000 | Lazard Group LLC, 4.25%, 11/14/20 | 185,596 | ||||||
1,600,000 | NiSource Finance Corp., 4.45%, 12/1/21, Callable 9/1/21 @ 100 | 1,621,195 | ||||||
605,000 | NiSource Finance Corp., 5.25%, 2/15/43, Callable 8/15/42 @ 100 | 587,963 | ||||||
400,000 | PNC Bank NA, Series BKNT, 1.15%, 11/1/16, Callable 10/2/16 @ 100 | 400,490 | ||||||
|
| |||||||
5,659,376 | ||||||||
|
| |||||||
| Diversified Financial Services (3.1%): |
| ||||||
320,000 | Bank of America Corp., Series L, 1.35%, 11/21/16 | 319,868 | ||||||
2,890,000 | Bank of America Corp., 2.60%, 1/15/19 | 2,902,757 | ||||||
550,000 | Bank of America Corp., 5.70%, 1/24/22 | 622,520 | ||||||
700,000 | Bank of America NA, 1.13%, 11/14/16 | 700,795 | ||||||
270,000 | Bank of America NA, Series BKNT, 5.30%, 3/15/17 | 297,600 | ||||||
2,568,000 | Citigroup, Inc., 1.25%, 1/15/16 | 2,576,524 | ||||||
500,000 | Citigroup, Inc., 1.70%, 7/25/16 | 504,711 |
Principal Amount | Fair Value | |||||||
| Corporate Bonds, continued |
| ||||||
| Diversified Financial Services, continued |
| ||||||
$ | 570,000 | Citigroup, Inc., 1.30%, 11/15/16^ | $ | 568,011 | ||||
142,000 | Citigroup, Inc., 5.50%, 9/13/25 | 149,560 | ||||||
228,000 | Daimler Finance NA LLC, 1.45%, 8/1/16(a) | 229,358 | ||||||
1,000,000 | Discover Financial Services, 5.20%, 4/27/22 | 1,040,605 | ||||||
112,000 | Hyundai Capital America, Inc., 1.63%, 10/2/15(a) | 112,561 | ||||||
91,000 | Hyundai Capital America, Inc., 1.88%, 8/9/16(a) | 91,330 | ||||||
124,000 | Hyundai Capital America, Inc., 2.13%, 10/2/17(a) | 123,152 | ||||||
161,000 | Hyundai Capital America, Inc., 2.88%, 8/9/18(a) | 161,611 | ||||||
928,000 | JPMorgan Chase & Co., 1.13%, 2/26/16 | 929,579 | ||||||
444,000 | JPMorgan Chase Bank NA, Series BKNT, 6.00%, 10/1/17 | 507,989 | ||||||
161,000 | Tanger Properties LP, 3.88%, 12/1/23, Callable 9/1/23 @ 100 | 155,194 | ||||||
|
| |||||||
11,993,725 | ||||||||
|
| |||||||
| Diversified Telecommunication Services (2.6%): |
| ||||||
820,000 | CenturyLink, Inc., Series N, 6.00%, 4/1/17 | 904,050 | ||||||
28,000 | CenturyLink, Inc., Series R, 5.15%, 6/15/17 | 30,030 | ||||||
62,000 | CenturyLink, Inc., Series Q, 6.15%, 9/15/19 | 65,410 | ||||||
1,128,000 | Verizon Communications, Inc., 2.50%, 9/15/16 | 1,166,393 | ||||||
1,708,000 | Verizon Communications, Inc., 3.65%, 9/14/18 | 1,808,027 | ||||||
1,400,000 | Verizon Communications, Inc., 2.45%, 11/1/22, Callable 8/1/22 @ 100 | 1,239,343 | ||||||
346,000 | Verizon Communications, Inc., 6.40%, 9/15/33 | 397,942 | ||||||
500,000 | Verizon Communications, Inc., 6.25%, 4/1/37 | 554,082 | ||||||
2,973,000 | Verizon Communications, Inc., 6.55%, 9/15/43 | 3,478,287 | ||||||
|
| |||||||
9,643,564 | ||||||||
|
| |||||||
| Electric Utilities (1.5%): |
| ||||||
146,000 | American Electric Power Co., Inc., 1.65%, 12/15/17, Callable 11/15/17 @ 100 | 143,053 | ||||||
138,000 | American Electric Power Co., Inc., Series F, 2.95%, 12/15/22, Callable 9/15/22 @ 100 | 127,622 | ||||||
302,000 | FirstEnergy Corp., Series A, 2.75%, 3/15/18, Callable 2/15/18 @ 100 | 296,736 | ||||||
474,000 | FirstEnergy Corp., Series B, 4.25%, 3/15/23, Callable 12/15/22 @ 100 | 441,841 | ||||||
1,429,000 | FirstEnergy Corp., Series C, 7.38%, 11/15/31 | 1,552,729 | ||||||
340,000 | Indiana Michigan Power Co., Series J, 3.20%, 3/15/23, Callable 12/15/22 @ 100 | 317,830 | ||||||
133,000 | Monongahela Power Co., 4.10%, 4/15/24, Callable 1/15/24 @ 100(a) | 132,937 | ||||||
202,000 | Monongahela Power Co., 5.40%, 12/15/43, Callable 1/15/24 @ 100(a) | 209,810 | ||||||
91,000 | Northeast Utilities, 1.45%, 5/1/18, Callable 4/1/18 @ 100 | 88,137 | ||||||
411,000 | Northeast Utilities, 2.80%, 5/1/23, Callable 2/1/23 @ 100 | 375,744 | ||||||
600,000 | Progress Energy, Inc., 4.40%, 1/15/21, Callable 10/15/20 @ 100 | 633,182 | ||||||
1,000,000 | West Penn Power Co., 5.95%, 12/15/17(a) | 1,123,525 | ||||||
|
| |||||||
5,443,146 | ||||||||
|
| |||||||
| Food & Staples Retailing (0.1%): |
| ||||||
136,000 | CVS Caremark Corp., 1.20%, 12/5/16 | 136,138 | ||||||
286,000 | CVS Caremark Corp., 2.25%, 12/5/18, Callable 11/5/18 @ 100 | 285,917 | ||||||
|
| |||||||
422,055 | ||||||||
|
|
Continued
5
AZL Pyramis Core Bond Fund
Schedule of Portfolio Investments
December 31, 2013
Principal Amount | Fair Value | |||||||
| Corporate Bonds, continued |
| ||||||
| Food & Staples Retailing (0.1%): |
| ||||||
$ | 370,000 | Kroger Co. (The), 3.30%, 1/15/21, Callable 12/15/20 @ 100 | $ | 367,561 | ||||
|
| |||||||
| Food Products (0.5%): |
| ||||||
1,038,000 | ConAgra Foods, Inc., 1.30%, 1/25/16 | 1,039,799 | ||||||
130,000 | ConAgra Foods, Inc., 1.90%, 1/25/18 | 127,616 | ||||||
151,000 | ConAgra Foods, Inc., 3.20%, 1/25/23, Callable 10/25/22 @ 100 | 140,193 | ||||||
82,000 | ConAgra Foods, Inc., 4.65%, 1/25/43, Callable 7/25/42 @ 100 | 75,334 | ||||||
216,000 | WM Wrigley Jr Co., 1.40%, 10/21/16(a) | 216,327 | ||||||
309,000 | WM Wrigley Jr Co., 2.00%, 10/20/17(a) | 308,142 | ||||||
|
| |||||||
1,907,411 | ||||||||
|
| |||||||
| Health Care Providers & Services (0.9%): |
| ||||||
177,000 | Aetna, Inc., 2.75%, 11/15/22, Callable 8/15/15 @ 100 | 163,044 | ||||||
500,000 | Express Scripts Holding Co., 4.75%, 11/15/21 | 528,332 | ||||||
1,600,000 | Express Scripts Holding Co., 3.90%, 2/15/22 | 1,601,520 | ||||||
1,108,000 | Fifth Third Bank, Series BNKT, 1.15%, 11/18/16, Callable 10/18/16 @ 100 | 1,106,056 | ||||||
|
| |||||||
3,398,952 | ||||||||
|
| |||||||
| Independent Power Producers & Energy Traders (0.6%): |
| ||||||
1,196,000 | Dominion Resources, Inc., Series 06-B, 2.55%, 9/30/66, Callable 2/6/14 @ 100(b) | 1,114,398 | ||||||
525,000 | MidAmerican Energy Holdings Co., 1.10%, 5/15/17(a) | 522,160 | ||||||
404,000 | MidAmerican Energy Holdings Co., 2.00%, 11/15/18, Callable 10/15/18 @ 100(a) | 397,782 | ||||||
198,000 | PPL Capital Funding, Inc., 3.40%, 6/1/23, Callable 3/1/23 @ 100 | 184,237 | ||||||
|
| |||||||
2,218,577 | ||||||||
|
| |||||||
| Industrial Conglomerates (0.4%): |
| ||||||
1,200,000 | General Electric Capital Corp., Series A, 5.63%, 9/15/17 | 1,365,116 | ||||||
|
| |||||||
| Insurance (2.6%): |
| ||||||
307,000 | American International Group, Inc., Series G, 5.60%, 10/18/16, MTN | 342,044 | ||||||
1,565,000 | American International Group, Inc., 3.80%, 3/22/17 | 1,671,261 | ||||||
103,000 | American International Group, Inc., 4.88%, 6/1/22 | 110,707 | ||||||
600,000 | Aon plc, 5.00%, 9/30/20 | 659,051 | ||||||
1,100,000 | Five Corners Funding Trust, 4.42%, 11/15/23(a) | 1,067,372 | ||||||
59,000 | Hartford Financial Services Group, Inc. (The), 5.13%, 4/15/22 | 64,263 | ||||||
700,000 | Liberty Mutual Group, Inc., 5.00%, 6/1/21(a) | 734,152 | ||||||
180,000 | Liberty Mutual Group, Inc., 4.25%, 6/15/23(a) | 173,796 | ||||||
978,000 | Marsh & McLennan Cos., Inc., 4.80%, 7/15/21, Callable 4/15/21 @ 100 | 1,042,579 | ||||||
291,000 | MetLife Global Funding, Inc., 1.88%, 6/22/18(a) | 283,703 | ||||||
300,000 | Northwestern Mutual Life Insurance Co. (The), 6.06%, 3/30/40(a) | 337,053 | ||||||
1,077,000 | Pacific Life Corp., 6.00%, 2/10/20(a) | 1,201,469 | ||||||
500,000 | Pacific Life Corp., 9.25%, 6/15/39(a) | 694,356 | ||||||
436,000 | Pacific Life Corp., 5.13%, 1/30/43(a) | 400,876 | ||||||
50,000 | Prudential Financial, Inc., 2.30%, 8/15/18 | 49,704 | ||||||
65,000 | Symetra FINL Corp., 6.13%, 4/1/16(a) | 69,192 |
Principal Amount | Fair Value | |||||||
| Corporate Bonds, continued |
| ||||||
| Insurance, continued |
| ||||||
$ | 854,000 | Unum Group, 5.75%, 8/15/42 | $ | 872,735 | ||||
|
| |||||||
9,774,313 | ||||||||
|
| |||||||
| Life Sciences Tools & Services (0.1%): |
| ||||||
104,000 | Thermo Fisher Scientific, Inc., 1.30%, 2/1/17 | 103,548 | ||||||
66,000 | Thermo Fisher Scientific, Inc., 2.40%, 2/1/19 | 65,386 | ||||||
101,000 | Thermo Fisher Scientific, Inc., 4.15%, 2/1/24, Callable 11/1/23 @ 100 | 100,040 | ||||||
42,000 | Thermo Fisher Scientific, Inc., 5.30%, 2/1/44, Callable 8/1/43 @ 100 | 42,469 | ||||||
|
| |||||||
311,443 | ||||||||
|
| |||||||
| Media (1.5%): |
| ||||||
700,000 | Comcast Corp., 6.95%, 8/15/37 | 860,510 | ||||||
1,000,000 | Comcast Corp., 4.50%, 1/15/43 | 903,319 | ||||||
134,000 | COX Communications, Inc., 3.25%, 12/15/22(a) | 121,254 | ||||||
395,000 | News America, Inc., 7.75%, 12/1/45 | 499,123 | ||||||
491,000 | Time Warner Cable, Inc., 4.00%, 9/1/21, Callable 6/1/21 @ 100 | 456,018 | ||||||
153,000 | Time Warner Cable, Inc., 5.88%, 11/15/40, Callable 5/15/40 @ 100 | 132,352 | ||||||
163,000 | Time Warner Cable, Inc., 5.50%, 9/1/41, Callable 3/1/41 @ 100 | 135,064 | ||||||
1,826,000 | Time Warner Cable, Inc., 4.50%, 9/15/42, Callable 3/15/42 @ 100 | 1,383,314 | ||||||
900,000 | Time Warner, Inc., 6.20%, 3/15/40 | 991,494 | ||||||
46,000 | Viacom, Inc., 2.50%, 9/1/18 | 46,371 | ||||||
|
| |||||||
5,528,819 | ||||||||
|
| |||||||
| Multi-Utilities (0.2%): |
| ||||||
305,000 | FirstEnergy Solutions Co., 6.05%, 8/15/21 | 325,940 | ||||||
500,000 | Sempra Energy, 2.88%, 10/1/22, Callable 7/1/22 @ 100 | 460,363 | ||||||
|
| |||||||
786,303 | ||||||||
|
| |||||||
| Office Electronics (0.3%): |
| ||||||
500,000 | Xerox Corp., 1.06%, 5/16/14(b) | 500,413 | ||||||
300,000 | Xerox Corp., 4.25%, 2/15/15 | 311,228 | ||||||
354,000 | Xerox Corp., 2.95%, 3/15/17 | 363,413 | ||||||
|
| |||||||
1,175,054 | ||||||||
|
| |||||||
| Oil, Gas & Consumable Fuels (2.1%): |
| ||||||
1,900,000 | Anadarko Petroleum Corp., 6.38%, 9/15/17 | 2,181,332 | ||||||
272,000 | Anadarko Petroleum Corp., 6.45%, 9/15/36 | 305,438 | ||||||
166,000 | DCP Midstream Operating LLC, 2.50%, 12/1/17, Callable 11/1/17 @ 100 | 165,286 | ||||||
1,300,000 | DCP Midstream Operating LLC, 4.75%, 9/30/21(a) | 1,299,429 | ||||||
106,000 | DCP Midstream Operating LLC, 3.88%, 3/15/23, Callable 12/15/22 @ 100 | 97,612 | ||||||
1,000,000 | El Paso Pipeline Partners LP, 5.00%, 10/1/21, Callable 7/1/21 @ 100 | 1,047,313 | ||||||
157,000 | Kinder Morgan Energy Partners LP, 2.65%, 2/1/19 | 155,259 | ||||||
600,000 | Marathon Petroleum Corp., 5.13%, 3/1/21 | 649,960 | ||||||
1,300,000 | Phillips 66, 4.30%, 4/1/22 | 1,321,081 | ||||||
600,000 | Western Gas Partners LP, 5.38%, 6/1/21, Callable 3/1/21 @ 100 | 642,779 | ||||||
|
| |||||||
7,865,489 | ||||||||
|
|
Continued
6
AZL Pyramis Core Bond Fund
Schedule of Portfolio Investments
December 31, 2013
Principal Amount | Fair Value | |||||||
| Corporate Bonds, continued |
| ||||||
| Pharmaceuticals (0.2%): |
| ||||||
$ | 355,000 | AbbVie, Inc., 1.75%, 11/6/17 | $ | 354,391 | ||||
121,000 | Mylan, Inc., 1.35%, 11/29/16 | 120,778 | ||||||
117,000 | Watson Pharmaceuticals, Inc., 1.88%, 10/1/17 | 115,780 | ||||||
57,000 | Zoetis, Inc., 1.88%, 2/1/18 | 56,532 | ||||||
138,000 | Zoetis, Inc., 3.25%, 2/1/23, Callable 11/1/22 @ 100 | 129,123 | ||||||
|
| |||||||
776,604 | ||||||||
|
| |||||||
| Real Estate Investment Trusts (REITs) (3.0%): |
| ||||||
102,000 | American Campus Communities, Inc., 3.75%, 4/15/23, Callable 1/15/23 @ 100 | 94,657 | ||||||
161,000 | AvalonBay Communities, Inc., 3.63%, 10/1/20, Callable 7/1/20 @ 100 | 162,754 | ||||||
1,000,000 | BioMed Realty LP, 3.85%, 4/15/16, Callable 3/15/16 @ 100 | 1,044,161 | ||||||
500,000 | BioMed Realty LP, 4.25%, 7/15/22, Callable 4/15/22 @ 100 | 480,050 | ||||||
305,000 | Boston Properties LP, 3.85%, 2/1/23, Callable 11/1/22 @ 100 | 298,000 | ||||||
44,000 | Brandywine Operating Partners LP, 7.50%, 5/15/15 | 47,787 | ||||||
151,000 | Brandywine Operating Partners LP, 6.00%, 4/1/16 | 164,659 | ||||||
196,000 | Brandywine Operating Partners LP, 4.95%, 4/15/18, Callable 3/15/18 @ 100 | 210,788 | ||||||
357,000 | Brandywine Operating Partners LP, 3.95%, 2/15/23, Callable 11/15/22 @ 100 | 334,646 | ||||||
62,000 | BRE Properties, Inc., 5.50%, 3/15/17 | 68,012 | ||||||
134,000 | Camden Property Trust, 2.95%, 12/15/22 | 121,088 | ||||||
307,000 | Camden Property Trust, 4.25%, 1/15/24 | 303,579 | ||||||
107,000 | DDR Corp., 9.63%, 3/15/16 | 125,448 | ||||||
1,114,000 | DDR Corp., 4.63%, 7/15/22, Callable 4/15/22 @ 100 | 1,136,255 | ||||||
700,000 | Duke Realty Corp., 4.38%, 6/15/22, Callable 3/15/22 @ 100 | 693,797 | ||||||
256,000 | Duke Realty Corp., 3.88%, 10/15/22, Callable 7/15/22 @ 100 | 243,308 | ||||||
183,000 | Duke Realty Corp., 3.63%, 4/15/23, Callable 1/15/23 @ 100 | 168,903 | ||||||
500,000 | Equity One, Inc., 3.75%, 11/15/22, Callable 8/15/22 @ 100 | 469,119 | ||||||
202,000 | HCP, Inc., 3.75%, 2/1/16 | 212,263 | ||||||
500,000 | HCP, Inc., 3.15%, 8/1/22, Callable 5/1/22 @ 100 | 458,908 | ||||||
255,000 | HCP, Inc., 4.25%, 11/15/23, Callable 8/15/23 @ 100 | 249,440 | ||||||
48,000 | Health Care REIT, Inc., 4.70%, 9/15/17 | 52,176 | ||||||
143,000 | Health Care REIT, Inc., 2.25%, 3/15/18 | 141,377 | ||||||
500,000 | Health Care REIT, Inc., 4.13%, 4/1/19, Callable 1/1/19 @ 100 | 526,480 | ||||||
1,000,000 | Liberty Property LP, 4.13%, 6/15/22, Callable 3/15/22 @ 100 | 984,250 | ||||||
184,000 | Liberty Property LP, 3.38%, 6/15/23, Callable 3/15/23 @ 100 | 167,464 | ||||||
250,000 | Mack-Cali Realty LP, 2.50%, 12/15/17 | 247,340 | ||||||
500,000 | Mack-Cali Realty LP, 4.50%, 4/18/22, Callable 1/18/22 @ 100 | 491,296 | ||||||
401,000 | Mack-Cali Realty LP, 3.15%, 5/15/23, Callable 2/15/23 @ 100 | 348,068 |
Principal Amount | Fair Value | |||||||
| Corporate Bonds, continued |
| ||||||
| Real Estate Investment Trusts (REITs), continued |
| ||||||
$ | 73,000 | Mid-America Apartment Communities, Inc., 4.30%, 10/15/23, Callable 7/15/23 @ 100 | $ | 70,973 | ||||
70,000 | Post Apartment Homes LP, 3.38%, 12/1/22, Callable 9/1/22 @ 100 | 64,484 | ||||||
80,000 | PPF Funding, Inc., 5.70%, 4/15/17(a) | 86,608 | ||||||
116,000 | Reckson Operating Partnership LP, 6.00%, 3/31/16 | 125,696 | ||||||
425,000 | Regency Centers LP, 5.25%, 8/1/15 | 451,240 | ||||||
63,000 | Ventas Realty LP/Capital Corp., 1.55%, 9/26/16 | 63,447 | ||||||
225,000 | Ventas Realty LP/Capital Corp., 2.00%, 2/15/18, Callable 1/15/18 @ 100 | 221,176 | ||||||
111,000 | Ventas Realty LP/Capital Corp., 4.00%, 4/30/19, Callable 1/30/19 @ 100 | 116,637 | ||||||
67,000 | Weingarten Realty Investors, 3.38%, 10/15/22, Callable 7/15/22 @ 100 | 61,553 | ||||||
|
| |||||||
11,307,887 | ||||||||
|
| |||||||
| Road & Rail (0.5%): |
| ||||||
1,000,000 | Burlington Northern Santa Fe LLC, 4.40%, 3/15/42, Callable 9/15/41 @ 100 | 891,074 | ||||||
500,000 | Burlington Northern Santa Fe LLC, 5.15%, 9/1/43, Callable 3/1/43 @ 100 | 507,942 | ||||||
369,000 | Norfolk Southern Corp., 3.85%, 1/15/24, Callable 10/15/23 @ 100 | 362,454 | ||||||
|
| |||||||
1,761,470 | ||||||||
|
| |||||||
| Thrifts & Mortgage Finance (0.1%): |
| ||||||
258,000 | Capital One Bank USA NA, Series BKNT, 1.15%, 11/21/16, Callable 10/21/16 @ 100 | 257,250 | ||||||
|
| |||||||
| Tobacco (0.9%): |
| ||||||
1,100,000 | Altria Group, Inc., 2.85%, 8/9/22 | 1,012,794 | ||||||
212,000 | Altria Group, Inc., 4.00%, 1/31/24 | 207,212 | ||||||
364,000 | Altria Group, Inc., 5.38%, 1/31/44 | 365,507 | ||||||
475,000 | Philip Morris International, Inc., 1.88%, 1/15/19 | 464,195 | ||||||
186,000 | Reynolds American, Inc., 3.25%, 11/1/22 | 171,439 | ||||||
600,000 | Reynolds American, Inc., 7.25%, 6/15/37 | 702,583 | ||||||
288,000 | Reynolds American, Inc., 4.75%, 11/1/42 | 255,980 | ||||||
143,000 | Reynolds American, Inc., 6.15%, 9/15/43 | 154,419 | ||||||
|
| |||||||
3,334,129 | ||||||||
|
| |||||||
| Wireless Telecommunication Services (0.8%): |
| ||||||
500,000 | AT&T, Inc., 2.38%, 11/27/18^ | 500,429 | ||||||
100,000 | AT&T, Inc., 5.55%, 8/15/41 | 101,486 | ||||||
529,000 | AT&T, Inc., 4.35%, 6/15/45 | 447,847 | ||||||
233,000 | Embarq Corp., 7.08%, 6/1/16 | 260,354 | ||||||
1,550,000 | Embarq Corp., 8.00%, 6/1/36 | 1,569,282 | ||||||
|
| |||||||
2,879,398 | ||||||||
|
| |||||||
| Total Corporate Bonds (Cost $107,945,422) | 105,725,039 | ||||||
|
| |||||||
| Yankee Dollars (6.8%): |
| ||||||
| Automobiles (0.3%): |
| ||||||
1,098,000 | Volkswagen International Finance NV, 1.13%, 11/18/16(a) | 1,095,229 | ||||||
|
| |||||||
| Beverages (0.1%): |
| ||||||
179,000 | Heineken NV, 1.40%, 10/1/17(a) | 175,612 | ||||||
187,000 | Heineken NV, 2.75%, 4/1/23(a) | 167,520 | ||||||
|
| |||||||
343,132 | ||||||||
|
|
Continued
7
AZL Pyramis Core Bond Fund
Schedule of Portfolio Investments
December 31, 2013
Principal Amount | Fair Value | |||||||
| Yankee Dollars, continued |
| ||||||
| Commercial Banks (1.4%): |
| ||||||
$ | 365,000 | Banco Nacional de Desenvolvimento Economico, 3.38%, 9/26/16(a) | $ | 368,650 | ||||
334,000 | Banco Nacional de Desenvolvimento Economico, 5.75%, 9/26/23(a) | 330,243 | ||||||
42,000 | Credit Suisse, NY, 6.00%, 2/15/18 | 48,631 | ||||||
1,161,000 | Intesa Sanpaolo SpA, 3.13%, 1/15/16 | 1,183,131 | ||||||
2,550,000 | Royal Bank of Scotland Group plc, 6.13%, 12/15/22 | 2,606,102 | ||||||
452,000 | Royal Bank of Scotland Group plc, 6.10%, 6/10/23 | 455,659 | ||||||
498,000 | Royal Bank of Scotland Group plc, 6.00%, 12/19/23 | 501,546 | ||||||
|
| |||||||
5,493,962 | ||||||||
|
| |||||||
| Containers & Packaging (0.6%): |
| ||||||
2,000,000 | Tyco Electronics Group SA, 1.60%, 2/3/15 | 2,019,680 | ||||||
75,000 | Tyco Electronics Group SA, 2.38%, 12/17/18, Callable 11/17/18 @ 100 | 73,957 | ||||||
|
| |||||||
2,093,637 | ||||||||
|
| |||||||
| Diversified Financial Services (0.2%): |
| ||||||
900,000 | BP Capital Markets plc, 4.74%, 3/11/21 | 984,477 | ||||||
|
| |||||||
| Electrical Equipment (0.1%): |
| ||||||
34,000 | Ingersoll-Rand Global Holding Co., Ltd., 2.88%, 1/15/19(a) | 33,792 | ||||||
240,000 | Ingersoll-Rand Global Holding Co., Ltd., 4.25%, 6/15/23(a) | 237,504 | ||||||
173,000 | Ingersoll-Rand Global Holding Co., Ltd., 5.75%, 6/15/43(a) | 178,471 | ||||||
|
| |||||||
449,767 | ||||||||
|
| |||||||
| Metals & Mining (0.4%): |
| ||||||
400,000 | Codelco, Inc., 4.50%, 8/13/23(a) | 397,200 | ||||||
1,000,000 | Vale Overseas, Ltd., 6.25%, 1/11/16 | 1,088,750 | ||||||
|
| |||||||
1,485,950 | ||||||||
|
| |||||||
| Oil, Gas & Consumable Fuels (2.4%): |
| ||||||
1,731,000 | Petrobras Global Finance BV, 3.00%, 1/15/19 | 1,619,924 | ||||||
234,000 | Petrobras Global Finance BV, 4.38%, 5/20/23 | 208,469 | ||||||
1,000,000 | Petrobras International Finance Co., 3.50%, 2/6/17 | 1,009,151 | ||||||
122,000 | Petrobras International Finance Co., 5.75%, 1/20/20 | 125,531 | ||||||
263,000 | Petrobras International Finance Co., 5.38%, 1/27/21 | 260,998 | ||||||
450,000 | Petroleos Mexicanos, 3.50%, 7/18/18 | 461,812 | ||||||
285,000 | Petroleos Mexicanos, 3.50%, 1/30/23 | 261,131 | ||||||
196,000 | Petroleos Mexicanos, 6.50%, 6/2/41 | 204,820 | ||||||
1,761,000 | Petroleos Mexicanos, 5.50%, 6/27/44 | 1,606,912 | ||||||
1,787,000 | Trans-Canada Pipelines, Ltd., 0.75%, 1/15/16 | 1,782,526 | ||||||
1,000,000 | Transocean, Inc., 5.05%, 12/15/16 | 1,104,670 | ||||||
|
| |||||||
8,645,944 | ||||||||
|
| |||||||
| Pharmaceuticals (0.1%): |
| ||||||
200,000 | Perrigo Co. plc, 2.30%, 11/8/18(a) | 197,406 | ||||||
|
| |||||||
| Software (0.0%): |
| ||||||
123,000 | Thomson Reuters Corp., 1.30%, 2/23/17 | 122,457 | ||||||
|
|
Principal Amount | Fair Value | |||||||
| Yankee Dollars, continued |
| ||||||
| Sovereign Bonds (1.1%): |
| ||||||
$ | 730,000 | Federal Republic of Brazil, 4.25%, 1/7/25 | $ | 695,325 | ||||
400,000 | Federal Republic of Brazil, 5.63%, 1/7/41 | 388,000 | ||||||
424,000 | Italy Government International Bond, 4.50%, 1/21/15 | 439,988 | ||||||
564,000 | Italy Government International Bond, 3.13%, 1/26/15 | 577,293 | ||||||
419,000 | Italy Government International Bond, 4.75%, 1/25/16 | 445,858 | ||||||
255,000 | Italy Government International Bond, 5.38%, 6/12/17^ | 277,950 | ||||||
812,000 | United Mexican States, 4.00%, 10/2/23 | 803,880 | ||||||
350,000 | United Mexican States, 4.75%, 3/8/44, MTN | 315,438 | ||||||
|
| |||||||
3,943,732 | ||||||||
|
| |||||||
| Thrifts & Mortgage Finance (0.1%): |
| ||||||
200,000 | RBS Citizens Financial Group, Inc., 4.15%, 9/28/22(a) | 193,493 | ||||||
|
| |||||||
| Total Yankee Dollars (Cost $25,420,851) | 25,049,186 | ||||||
|
| |||||||
| Municipal Bonds (4.0%): |
| ||||||
| California (1.5%): |
| ||||||
10,000 | California State, Build America Bonds, GO, 7.35%, 11/1/39 | 12,628 | ||||||
15,000 | California State, Build America Bonds, GO, 7.63%, 3/1/40 | 19,618 | ||||||
1,325,000 | California State, Build America Bonds, GO, 7.60%, 11/1/40 | 1,745,595 | ||||||
1,600,000 | California State, Build America Bonds, GO, 7.50%, 4/1/34 | 2,041,392 | ||||||
475,000 | California State, Build America Bonds, GO, 7.55%, 4/1/39 | 614,398 | ||||||
460,000 | California State, Build America Bonds, GO, 7.30%, 10/1/39 | 578,266 | ||||||
|
| |||||||
5,011,897 | ||||||||
|
| |||||||
| Illinois (2.5%): |
| ||||||
2,275,000 | Illinois State, GO, 5.10%, 6/1/33 | 2,113,339 | ||||||
1,865,000 | Illinois State, Build America Bonds, GO, 7.35%, 7/1/35 | 2,053,234 | ||||||
315,000 | Illinois State, Build America Bonds, GO, Series 3, 6.73%, 4/1/35 | 331,119 | ||||||
455,000 | Illinois State, Taxable Project, GO, 1.28%, 12/1/15 | 454,227 | ||||||
700,000 | Illinois State, GO, 5.88%, 3/1/19 | 764,414 | ||||||
465,000 | Illinois State, GO, 5.67%, 3/1/18 | 506,376 | ||||||
105,000 | Chicago Illinois, Taxable Project, GO, Series B, 5.43%, 1/1/42 | 87,324 | ||||||
395,000 | Chicago Illinois, Taxable Project, GO, Series C1, 7.78%, 1/1/35 | 435,697 | ||||||
80,000 | Chicago Illinois, GO, Series B, 5.63%, 1/1/22 | 81,847 | ||||||
250,000 | Illinois State, Build America Bonds, GO, 6.63%, 2/1/35 | 260,415 | ||||||
2,500,000 | Illinois State Finance Authority Revenue, Series A, 4.55%, 10/1/18 | 2,480,050 | ||||||
420,000 | Illinois State ,Taxable Project, GO, 4.00%, 12/1/20 | 411,856 | ||||||
|
| |||||||
9,979,898 | ||||||||
|
| |||||||
| Total Municipal Bonds (Cost $15,562,912) | 14,991,795 | ||||||
|
|
Continued
8
AZL Pyramis Core Bond Fund
Schedule of Portfolio Investments
December 31, 2013
Principal Amount | Fair Value | |||||||
| U.S. Government Agency Mortgages (23.9%): |
| ||||||
| Federal Home Loan Mortgage Corporation (2.2%) |
| ||||||
$ | 614,422 | 3.50%, 1/1/26, Callable 5/15/14 @100, Pool #G14312 | $ | 643,732 | ||||
406,930 | 2.50%, 4/1/28, Pool #J23234 | 404,088 | ||||||
473,876 | 2.50%, 6/1/28, Pool #J24504 | 470,032 | ||||||
342,862 | 3.50%, 6/1/42, Pool #U90448 | 336,863 | ||||||
173,845 | 3.50%, 9/1/42, Pool #U90206 | 170,794 | ||||||
104,513 | 3.50%, 4/1/43, Pool #U91319 | 102,675 | ||||||
169,921 | 3.50%, 5/1/43, Pool #U91441 | 166,939 | ||||||
110,671 | 3.50%, 5/1/43, Pool #U91367 | 108,722 | ||||||
445,770 | 3.50%, 6/1/43, Pool #U91609 | 437,925 | ||||||
482,110 | 3.50%, 6/1/43, Pool #U91669 | 473,628 | ||||||
110,954 | 3.50%, 7/1/43, Pool #U91708 | 109,006 | ||||||
156,205 | 3.50%, 7/1/43, Pool #U91694 | 153,452 | ||||||
344,410 | 3.50%, 7/1/43, Pool #U91654 | 338,365 | ||||||
94,258 | 3.50%, 7/1/43, Pool #U91781 | 92,600 | ||||||
179,640 | 3.50%, 7/1/43, Pool #U91740 | 176,477 | ||||||
239,288 | 3.50%, 7/1/43, Pool #U91712 | 235,075 | ||||||
129,827 | 3.50%, 8/1/43, Pool #U91759 | 127,542 | ||||||
335,438 | 3.50%, 8/1/43, Pool #U91752 | 329,528 | ||||||
381,678 | 3.50%, 8/1/43, Pool #U91812 | 374,953 | ||||||
130,838 | 3.50%, 8/1/43, Pool #U91858 | 128,533 | ||||||
735,902 | 3.50%, 8/1/43, Pool #U91853 | 722,934 | ||||||
127,852 | 3.50%, 8/1/43, Pool #U91871 | 125,598 | ||||||
228,431 | 3.50%, 8/1/43, Pool #U91813 | 224,408 | ||||||
114,750 | 3.50%, 8/1/43, Pool #U91779 | 112,727 | ||||||
254,414 | 3.50%, 9/1/43, Pool #U91991 | 249,931 | ||||||
691,205 | 3.50%, 9/1/43, Pool #U91987 | 679,028 | ||||||
112,195 | 3.50%, 9/1/43, Pool #U95147 | 110,217 | ||||||
96,323 | 3.50%, 9/1/43, Pool #U91910 | 94,626 | ||||||
175,783 | 3.50%, 10/1/43, Pool #U92116 | 172,682 | ||||||
199,816 | 3.50%, 10/1/43, Pool #U92089 | 196,293 | ||||||
|
| |||||||
8,069,373 | ||||||||
|
| |||||||
| Federal National Mortgage Association (18.8%) |
| ||||||
131,229 | 4.00%, 4/1/24, Pool #930902 | 139,141 | ||||||
29,610 | 4.00%, 3/1/26, Pool #AH4680 | 31,386 | ||||||
291,155 | 4.00%, 7/1/26, Pool #AI7831 | 308,696 | ||||||
23,734 | 4.00%, 8/1/26, Pool #AH7925 | 25,162 | ||||||
867,273 | 4.00%, 9/1/26, Pool #AL2088 | 919,315 | ||||||
321,619 | 4.00%, 1/1/27, Pool #AK1770 | 341,103 | ||||||
189,875 | 2.50%, 4/1/28, Pool #AB9159 | 188,136 | ||||||
357,128 | 2.50%, 7/1/28, Pool #AT1602 | 353,856 | ||||||
2,223,666 | 2.50%, 7/1/28, Pool #AT8943 | 2,203,297 | ||||||
421,879 | 2.50%, 8/1/28, Pool #AT9320 | 418,014 | ||||||
981,680 | 5.50%, 5/1/33, Pool #555424 | 1,081,860 | ||||||
1,095,861 | 5.50%, 6/1/33, Pool #555531 | 1,214,191 | ||||||
163,028 | 5.50%, 7/1/33, Pool #190338 | 179,745 | ||||||
70,148 | 5.50%, 11/1/33, Pool #555967 | 77,324 | ||||||
176,704 | 5.50%, 9/1/34, Pool #725773 | 194,437 | ||||||
96,106 | 6.00%, 10/1/34, Pool #AL2130 | 108,142 | ||||||
735,251 | 5.00%, 6/1/35, Pool #735580 | 798,635 | ||||||
34,990 | 5.50%, 12/1/35, Pool #AE0115 | 38,591 | ||||||
430,324 | 5.50%, 7/1/36, Pool #995112 | 473,358 | ||||||
1,338,635 | 6.00%, 1/1/37, Pool #932030 | 1,487,121 | ||||||
297,891 | 6.00%, 3/1/37, Pool #889506 | 331,306 | ||||||
341,550 | 6.00%, 1/1/38, Pool #889371 | 384,123 |
Principal Amount | Fair Value | |||||||
| U.S. Government Agency Mortgages, continued |
| ||||||
| Federal National Mortgage Association, continued |
| ||||||
$ | 121,327 | 6.00%, 3/1/38, Pool #889219 | $ | 136,284 | ||||
69,267 | 6.00%, 7/1/38, Pool #889733 | 77,730 | ||||||
453,678 | 6.00%, 5/1/40, Pool #AL2129 | 510,074 | ||||||
1,849,421 | 4.50%, 8/1/40, Pool #AE0217 | 1,959,185 | ||||||
120,441 | 4.00%, 9/1/40, Pool #AC9250 | 124,032 | ||||||
38,733 | 4.00%, 11/1/40, Pool #AH1089 | 40,117 | ||||||
258,513 | 4.00%, 12/1/40, Pool #932865 | 266,262 | ||||||
98,176 | 4.00%, 1/1/41, Pool #AH1440 | 101,144 | ||||||
37,720 | 4.00%, 1/1/41, Pool #AH2380 | 38,850 | ||||||
32,175 | 4.00%, 2/1/41, Pool #AE0949 | 33,139 | ||||||
322,490 | 4.00%, 2/1/41, Pool #AL2120 | 332,160 | ||||||
294,869 | 4.50%, 3/1/41, Pool #AB2483 | 313,023 | ||||||
301,997 | 4.50%, 4/1/41, Pool #AH8419 | 320,157 | ||||||
89,223 | 4.00%, 4/1/41, Pool #AH9936 | 91,890 | ||||||
100,201 | 4.00%, 4/1/41, Pool #AH6290 | 103,178 | ||||||
329,612 | 4.00%, 9/1/41, Pool #AJ1708 | 339,533 | ||||||
2,273,664 | 4.00%, 9/1/41, Pool #AL2513 | 2,345,071 | ||||||
2,487,744 | 4.00%, 9/1/41, Pool #AL2514 | 2,565,874 | ||||||
1,873,976 | 4.00%, 10/1/41, Pool #AL2512 | 1,932,830 | ||||||
458,461 | 4.50%, 10/1/41, Pool #AH7962 | 487,040 | ||||||
404,435 | 4.50%, 10/1/41, Pool #AJ2075 | 428,666 | ||||||
97,209 | 4.00%, 11/1/41, Pool #AI0847 | 100,267 | ||||||
97,241 | 4.00%, 12/1/41, Pool #AJ9247 | 100,312 | ||||||
95,845 | 4.00%, 12/1/41, Pool #AJ3638 | 98,857 | ||||||
107,492 | 4.00%, 1/1/42, Pool #AL1456 | 110,723 | ||||||
44,357 | 6.00%, 1/1/42, Pool #AL2128 | 49,983 | ||||||
10,000,000 | 3.50%, 1/25/42 | 9,933,594 | ||||||
10,500,000 | 3.00%, 1/25/42 | 9,967,617 | ||||||
97,406 | 4.00%, 2/1/42, Pool #AK3446 | 100,486 | ||||||
161,519 | 4.00%, 2/1/42, Pool #AK3436 | 166,393 | ||||||
98,997 | 4.00%, 3/1/42, Pool #AK6488 | 102,120 | ||||||
483,435 | 4.00%, 3/1/42, Pool #AK9442 | 498,752 | ||||||
486,977 | 4.00%, 5/1/42, Pool #AO3350 | 502,344 | ||||||
1,522,028 | 4.00%, 5/1/42, Pool #AO2983 | 1,570,319 | ||||||
97,936 | 4.00%, 6/1/42, Pool #AJ9977 | 100,994 | ||||||
280,965 | 4.00%, 7/1/42, Pool #AO8233 | 289,795 | ||||||
91,771 | 4.00%, 7/1/42, Pool #AO2672 | 94,575 | ||||||
64,419 | 3.50%, 8/1/42, Pool #AP2471 | 63,219 | ||||||
955,982 | 3.50%, 9/1/42, Pool #AP3356 | 938,187 | ||||||
969,503 | 3.50%, 9/1/42, Pool #AP7510 | 951,439 | ||||||
5,348,876 | 3.50%, 9/1/42, Pool #MA1177 | 5,249,232 | ||||||
93,571 | 3.50%, 11/1/42, Pool #MA1251 | 91,828 | ||||||
188,548 | 3.50%, 12/1/42, Pool #AB7131 | 185,035 | ||||||
984,420 | 3.50%, 1/1/43, Pool #AR1341 | 966,091 | ||||||
99,649 | 3.50%, 1/1/43, Pool #AR1820 | 97,794 | ||||||
3,800,000 | 4.50%, 1/25/43 | 4,026,367 | ||||||
249,084 | 3.50%, 2/1/43, Pool #AR3327 | 244,445 | ||||||
300,237 | 3.50%, 3/1/43, Pool #AB8527 | 294,648 | ||||||
1,404,897 | 3.50%, 3/1/43, Pool #MA1373 | 1,378,746 | ||||||
196,376 | 3.50%, 4/1/43, Pool #AR8235 | 192,719 | ||||||
565,282 | 3.50%, 4/1/43, Pool #MA1404 | 554,756 | ||||||
320,794 | 3.50%, 4/1/43, Pool #AT2032 | 314,815 | ||||||
202,215 | 3.50%, 4/1/43, Pool #AT2388 | 198,447 | ||||||
97,502 | 3.50%, 4/1/43, Pool #AT3018 | 95,686 | ||||||
83,082 | 3.50%, 5/1/43, Pool #AT5978 | 81,548 | ||||||
255,696 | 3.50%, 5/1/43, Pool #MA1437 | 250,933 |
Continued
9
AZL Pyramis Core Bond Fund
Schedule of Portfolio Investments
December 31, 2013
Principal Amount | Fair Value | |||||||
| U.S. Government Agency Mortgages, continued |
| ||||||
| Federal National Mortgage Association, continued |
| ||||||
$ | 1,880,897 | 3.50%, 6/1/43, Pool #MA1463 | $ | 1,846,126 | ||||
431,314 | 4.00%, 6/1/43, Pool #AT8380 | 444,919 | ||||||
164,118 | 4.00%, 6/1/43, Pool #AL3837 | 169,274 | ||||||
74,230 | 3.50%, 6/1/43, Pool #AT4264 | 72,854 | ||||||
320,647 | 3.50%, 6/1/43, Pool #AT5914 | 314,699 | ||||||
173,330 | 3.50%, 6/1/43, Pool #AT9582 | 170,115 | ||||||
468,603 | 3.50%, 6/1/43, Pool #AB9703 | 459,859 | ||||||
469,674 | 3.50%, 7/1/43, Pool #MA1508 | 461,015 | ||||||
99,660 | 3.50%, 9/1/43, Pool #AT8534 | 97,806 | ||||||
99,687 | 3.50%, 10/1/43, Pool #AU6940 | 97,831 | ||||||
99,658 | 3.50%, 10/1/43, Pool #AU9313 | 97,802 | ||||||
300,000 | 5.50%, 1/25/44 | 329,988 | ||||||
99,585 | 3.50%, 12/31/49, Pool #MA1667 | 97,749 | ||||||
1,437,008 | 3.50%, 12/31/49, Pool #MA1546 | 1,410,513 | ||||||
|
| |||||||
69,876,794 | ||||||||
|
| |||||||
| Government National Mortgage Association (2.9%) |
| ||||||
34,893 | 5.00%, 6/15/34, Pool #629493 | 38,182 | ||||||
631,713 | 5.50%, 6/15/35, Pool #783800 | 693,969 | ||||||
34,085 | 5.00%, 3/15/38, Pool #676766 | 36,997 | ||||||
22,746 | 5.00%, 4/15/38, Pool #672672 | 24,687 | ||||||
76,696 | 5.00%, 8/15/38, Pool #687818 | 83,134 | ||||||
808,363 | 5.00%, 1/15/39, Pool #705997 | 876,975 | ||||||
768,970 | 5.00%, 3/15/39, Pool #646746 | 833,040 | ||||||
6,716 | 5.00%, 3/15/39, Pool #697946 | 7,283 | ||||||
16,907 | 5.00%, 11/20/39, Pool #4578 | 18,523 | ||||||
25,352 | 5.00%, 2/20/40, Pool #4637 | 27,778 | ||||||
54,168 | 5.00%, 3/20/40, Pool #4658 | 59,348 | ||||||
145,635 | 5.00%, 6/20/40, Pool #783069 | 158,122 | ||||||
90,016 | 5.00%, 6/20/40, Pool #4715 | 98,583 | ||||||
21,239 | 5.00%, 7/20/40, Pool #783050 | 23,193 | ||||||
73,688 | 5.00%, 7/20/40, Pool #4747 | 80,704 |
Principal Amount | Fair Value | |||||||
| U.S. Government Agency Mortgages, continued |
| ||||||
| Government National Mortgage Association, continued |
| ||||||
$ | 153,119 | 5.00%, 9/20/40, Pool #4802 | $ | 167,691 | ||||
870,574 | 4.00%, 10/15/40, Pool #783143 | 907,621 | ||||||
56,408 | 5.00%, 10/20/40, Pool #783232 | 61,348 | ||||||
1,055,939 | 5.00%, 2/20/41, Pool #783278 | 1,154,000 | ||||||
2,060,288 | 4.50%, 3/20/41, Pool #4978 | 2,211,856 | ||||||
2,004,236 | 4.00%, 5/20/41, Pool #5054 | 2,087,467 | ||||||
917,658 | 5.00%, 7/20/41, Pool #783366 | 997,874 | ||||||
200,000 | 4.00%, 1/20/44 | 207,945 | ||||||
|
| |||||||
10,856,320 | ||||||||
|
| |||||||
| Total U.S. Government Agency Mortgages (Cost $90,173,902) | 88,802,487 | ||||||
|
| |||||||
| U.S. Treasury Obligations (24.3%): |
| ||||||
| U.S. Treasury Bonds (2.8%) |
| ||||||
4,160,000 | 3.63%, 8/15/43 | 3,928,600 | ||||||
6,401,000 | 3.75%, 11/15/43 | 6,186,963 | ||||||
|
| |||||||
10,115,563 | ||||||||
|
| |||||||
| U.S. Treasury Notes (21.5%) |
| ||||||
13,989,000 | 0.63%, 12/15/16 | 13,932,177 | ||||||
23,847,000 | 0.88%, 4/30/17 | 23,776,198 | ||||||
31,893,000 | 0.63%, 5/31/17 | 31,476,892 | ||||||
10,992,000 | 0.63%, 8/31/17 | 10,786,043 | ||||||
|
| |||||||
79,971,310 | ||||||||
|
| |||||||
| Total U.S. Treasury Obligations (Cost $90,352,903) | 90,086,873 | ||||||
|
| |||||||
| Securities Held as Collateral for Securities on Loan (0.5%): |
| ||||||
$ | 1,612,923 | Allianz Variable Insurance Products Securities Lending Collateral Trust(d) | 1,612,923 | |||||
|
| |||||||
| Total Securities Held as Collateral for Securities on Loan | 1,612,923 | ||||||
|
| |||||||
| Unaffiliated Investment Company (4.8%): |
| ||||||
17,618,901 | Dreyfus Treasury Prime Cash Management Fund, Institutional Shares, 0.00%(e) | 17,618,901 | ||||||
|
| |||||||
| Total Unaffiliated Investment Company (Cost $17,618,901) | 17,618,901 | ||||||
|
| |||||||
| Total Investment Securities (Cost $400,272,265)(f) — 106.5% | 394,832,491 | ||||||
| Net other assets (liabilities) — (6.5)% | (24,209,287 | ) | |||||
|
| |||||||
| Net Assets — 100.0% | $ | 370,623,204 | |||||
|
|
Percentages indicated are based on net assets as of December 31, 2013.
GO—General Obligation
MTN—Medium Term Note
^ | This security or partial position of this security was on loan as of December 31, 2013. The total value of the securities on loan as of December 31, 2013 was $1,569,868. |
(a) | Rule 144A, Section 4(2) or other security which is restricted to resale to institutional investors. The sub-adviser has deemed these securities to be liquid based on procedures approved by the Board of Trustees. |
(b) | Variable rate security. The rate presented represents the rate in effect at December 31, 2013. The date presented represents the final maturity date. |
(c) | Rule 144A, Section 4(2) or other security which is restricted to resale to institutional investors. The sub-adviser has deemed these securities to be illiquid based on procedures approved by the Board of Trustees. As of December 31, 2013, these securities represent 0.11% of the net assets of the fund. |
(d) | Purchased with Cash collateral held from securities lending. The value of the collateral could include collateral held for securities that were sold on or before December 31, 2013. |
(e) | The rate represents the effective yield at December 31, 2013. |
(f) | See Federal Tax Information listed in the Notes to the Financial Statements. |
Continued
10
AZL Pyramis Core Bond Fund
Schedule of Portfolio Investments
December 31, 2013
Securities Sold Short (-1.8%):
Security Description | Coupon Rate | Maturity Date | Par Amount | Proceeds Received | Fair Value | Unrealized Appreciation/ Deprecation | ||||||||||||||
Federal National Mortgage Association – January TBA | 4.00% | 1/25/43 | $ | (6,500,000 | ) | $ | (6,690,176 | ) | $ | (6,690,938 | ) | $ | (762 | ) | ||||||
Federal National Mortgage Association – January TBA | 5.00% | 1/25/43 | (200,000 | ) | (217,234 | ) | (217,203 | ) | 31 | |||||||||||
|
|
|
|
|
| |||||||||||||||
$ | (6,907,410 | ) | $ | (6,908,141 | ) | $ | (731 | ) | ||||||||||||
|
|
|
|
|
|
See accompanying notes to the financial statements.
11
AZL Pyramis Core Bond Fund
Statement of Assets and Liabilities
December 31, 2013
Assets: | |||||
Investment securities, at cost | $ | 400,272,265 | |||
|
| ||||
Investment securities, at value* | $ | 394,832,491 | |||
Interest and dividends receivable | 2,130,344 | ||||
Receivable for capital shares issued | 156,792 | ||||
Receivable for investments sold | 32,101,460 | ||||
|
| ||||
Total Assets | 429,221,087 | ||||
|
| ||||
Liabilities: | |||||
Payable for investments purchased | 49,799,038 | ||||
Payable for collateral received on loaned Securities | 1,612,923 | ||||
Securities sold short (Proceeds received $6,907,410) | 6,908,141 | ||||
Interest payable on securities sold short | 9,000 | ||||
Manager fees payable | 157,417 | ||||
Administration fees payable | 16,003 | ||||
Distribution fees payable | 78,708 | ||||
Custodian fees payable | 4,645 | ||||
Administrative and compliance services fees payable | 1,488 | ||||
Trustee fees payable | 11 | ||||
Other accrued liabilities | 10,509 | ||||
|
| ||||
Total Liabilities | 58,597,883 | ||||
|
| ||||
Net Assets | $ | 370,623,204 | |||
|
| ||||
Net Assets Consist of: | |||||
Capital | $ | 376,567,940 | |||
Accumulated net investment income/(loss) | 6,270,698 | ||||
Accumulated net realized gains/(losses) from investment transactions | (6,774,929 | ) | |||
Net unrealized appreciation/(depreciation) on investments | (5,440,505 | ) | |||
|
| ||||
Net Assets | $ | 370,623,204 | |||
|
| ||||
Shares of beneficial interest (unlimited number of shares authorized, no par value) | 37,885,036 | ||||
Net Asset Value (offering and redemption price per share) | $ | 9.78 | |||
|
|
* | Includes securities on loan of $1,569,868. |
For the Year Ended December 31, 2013
Investment Income: | |||||
Interest | $ | 7,268,311 | |||
Income from securities lending | 1,900 | ||||
|
| ||||
Total Investment Income | 7,270,211 | ||||
|
| ||||
Expenses: | |||||
Manager fees | 1,779,153 | ||||
Administration fees | 130,253 | ||||
Distribution fees | 889,576 | ||||
Custodian fees | 17,456 | ||||
Administrative and compliance services fees | 6,790 | ||||
Trustee fees | 17,739 | ||||
Professional fees | 17,519 | ||||
Shareholder reports | 6,020 | ||||
Other expenses | 9,830 | ||||
|
| ||||
Total expenses | 2,874,336 | ||||
|
| ||||
Net Investment Income/(Loss) | 4,395,875 | ||||
|
| ||||
Realized and Unrealized Gains/(Losses) on Investments: | |||||
Net realized gains/(losses) on securities transactions | (4,746,346 | ) | |||
Change in net unrealized appreciation/depreciation on investments | (6,959,487 | ) | |||
|
| ||||
Net Realized/Unrealized Gains/(Losses) on Investments | (11,705,833 | ) | |||
|
| ||||
Change in Net Assets Resulting From Operations | $ | (7,309,958 | ) | ||
|
|
See accompanying notes to the financial statements.
12
Statements of Changes in Net Assets
AZL Pyramis Core Bond Fund | ||||||||||
For the Year Ended | September 5, 2012 to December 31, 2012(a) | |||||||||
Change In Net Assets: | ||||||||||
Operations: | ||||||||||
Net investment income/(loss) | $ | 4,395,875 | $ | 849,632 | ||||||
Net realized gains/(losses) on investment transactions | (4,746,346 | ) | 941,037 | |||||||
Change in unrealized appreciation/depreciation on investments | (6,959,487 | ) | 1,518,982 | |||||||
|
|
|
| |||||||
Change in net assets resulting from operations | (7,309,958 | ) | 3,309,651 | |||||||
|
|
|
| |||||||
Dividends to Shareholders: | ||||||||||
From net investment income | (1,418,029 | ) | — | |||||||
From net realized gains | (669,238 | ) | — | |||||||
|
|
|
| |||||||
Change in net assets resulting from dividends to shareholders | (2,087,267 | ) | — | |||||||
|
|
|
| |||||||
Capital Transactions: | ||||||||||
Proceeds from shares issued | 60,581,406 | 360,117,788 | ||||||||
Proceeds from dividends reinvested | 2,087,267 | — | ||||||||
Value of shares redeemed | (40,347,726 | ) | (5,727,957 | ) | ||||||
|
|
|
| |||||||
Change in net assets resulting from capital transactions | 22,320,947 | 354,389,831 | ||||||||
|
|
|
| |||||||
Change in net assets | 12,923,722 | 357,699,482 | ||||||||
Net Assets: | ||||||||||
Beginning of period | 357,699,482 | — | ||||||||
|
|
|
| |||||||
End of period | $ | 370,623,204 | $ | 357,699,482 | ||||||
|
|
|
| |||||||
Accumulated net investment income/(loss) | $ | 6,270,698 | $ | 1,418,008 | ||||||
|
|
|
| |||||||
Share Transactions: | ||||||||||
Shares issued | 6,134,245 | 36,110,063 | ||||||||
Dividends reinvested | 216,746 | — | ||||||||
Shares redeemed | (4,006,423 | ) | (569,595 | ) | ||||||
|
|
|
| |||||||
Change in shares | 2,344,568 | 35,540,468 | ||||||||
|
|
|
|
(a) | Period from commencement of operations. |
See accompanying notes to the financial statements.
13
AZL Pyramis Core Bond Fund
(Selected data for a share of beneficial interest outstanding throughout the periods indicated)
Year Ended December 31, 2013 | September 5, 2012 to December 31, 2012(a) | |||||||||
Net Asset Value, Beginning of Period | $ | 10.06 | $ | 10.00 | ||||||
|
|
|
| |||||||
Investment Activities: | ||||||||||
Net Investment Income/(Loss) | 0.12 | 0.02 | ||||||||
Net Realized and Unrealized Gains/(Losses) on Investments | (0.34 | ) | 0.04 | |||||||
|
|
|
| |||||||
Total from Investment Activities | (0.22 | ) | 0.06 | |||||||
|
|
|
| |||||||
Dividends to Shareholders From: | ||||||||||
Net Investment Income | (0.04 | ) | — | |||||||
Net Realized Gains | (0.02 | ) | — | |||||||
|
|
|
| |||||||
Total Dividends | (0.06 | ) | — | |||||||
|
|
|
| |||||||
Net Asset Value, End of Period | $ | 9.78 | $ | 10.06 | ||||||
|
|
|
| |||||||
Total Return(b) | (2.20 | )% | 0.60 | %(c) | ||||||
Ratios to Average Net Assets/Supplemental Data: | ||||||||||
Net Assets, End of Period (000’s) | $ | 370,623 | $ | 357,699 | ||||||
Net Investment Income/(Loss)(d) | 1.24 | % | 0.78 | % | ||||||
Expenses Before Reductions(d)(e) | 0.81 | % | 0.80 | % | ||||||
Expenses Net of Reductions(d) | 0.81 | % | 0.80 | % | ||||||
Portfolio Turnover Rate(f) | 488 | % | 303 | %(c) |
(a) | Period from commencement of operations. |
(b) | The returns include reinvested dividends and fund level expenses, but exclude insurance contract charges. If these charges were included, the returns would have been lower. |
(c) | Not annualized. |
(d) | Annualized for periods less than one year. |
(e) | Excludes fee reductions. If such fee reductions had not occurred, the ratios would have been as indicated. |
(f) | The portfolio turnover rate can be volatile due to the amount and timing of purchases and sales of fund shares during the period. |
See accompanying notes to the financial statements.
14
AZL Pyramis Core Bond Fund
Notes to the Financial Statements
December 31, 2013
1. Organization
The Allianz Variable Insurance Products Trust (the “Trust”) was organized as a Delaware statutory trust on July 13, 1999. The Trust is a diversified open-end management investment company registered under the Investment Company Act of 1940. The Trust consists of 29 separate investment portfolios (collectively, the “Funds”), of which one is included in this report, the AZL Pyramis Core Bond Fund (the “Fund”), and 28 are presented in separate reports.
The Trust is authorized to issue an unlimited number of shares of the Fund without par value. Shares of the Fund are available through the variable annuity contracts and variable life insurance policies offered through the separate accounts of participating insurance companies.
Under the Trust’s organizational documents, its officers and trustees are indemnified against certain liabilities arising out of the performance of their duties to the Fund. In addition, in the normal course of business, the Fund may enter into contracts with its vendors and others that provide for general indemnifications. The Fund’s maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Fund. However, based on experience, the Fund expects the risk of loss to be remote.
2. Significant Accounting Policies
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. The policies conform with U.S. generally accepted accounting principles (“U.S. GAAP”). The preparation of financial statements requires management to make certain 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 increases and decreases in net assets from operations during the reporting period. Actual results could differ from those estimates.
Security Valuation
The Fund records its investments at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between willing market participants at the measurement date. The valuation techniques used to determine fair value are further described in Note 4 below.
Investment Transactions and Investment Income
Investment transactions are recorded not later than on the business day following trade date. However, for financial reporting purposes, investment transactions are accounted for on trade date. Net realized gains and losses on investments sold and on foreign currency transactions are recorded on the basis of identified cost. Interest income is recorded on the accrual basis and includes, where applicable, the amortization of premiums or accretion of discounts. Dividend income is recorded on the ex-dividend date except in the case of foreign securities, in which case dividends are recorded as soon as such information becomes available.
Real Estate Investment Trusts
The Fund may own shares of real estate investment trusts (“REITs”) which report information on the source of their distributions annually. Certain distributions received from REITs during the year, which are known to be a return of capital, are recorded as a reduction to the cost of the individual REIT.
Foreign Currency Translation
The accounting records of the Fund are maintained in U.S. dollars. Foreign currency amounts are translated into U.S. dollars at the current rate of exchange to determine the fair value of investments, assets and liabilities. Purchases and sales of securities, and income and expenses are translated at the prevailing rate of exchange on the respective dates of such transactions. The Fund does not isolate that portion of the results of operations resulting from changes in foreign exchange rates on investments from fluctuations arising from changes in market prices of securities held. Such fluctuations are included in the net realized and unrealized gain or loss on investments and foreign currencies. Income received by the Fund from sources within foreign countries may be subject to withholding and other income or similar taxes imposed by such countries. The Funds accrue such taxes, as applicable, based on their current interpretation of tax rules in the foreign markets in which they invest.
Securities Purchased on a When-Issued Basis
The Fund may purchase securities on a when-issued basis. When-issued securities are securities purchased for delivery beyond the normal settlement date at a stated price and yield and thereby involve risk that the yield obtained in the transaction will be less than that available in the market when the delivery takes place. A Fund will not pay for such securities or start earning interest on them until they are received. When a Fund agrees to purchase securities on a when-issued basis, the Fund will segregate or designate cash or liquid assets equal to the amount of the commitment. Securities purchased on a when-issued basis are recorded as an asset and are subject to changes in the value based upon changes in the general level of interest rates. A Fund may sell when-issued securities before they are delivered, which may result in a capital gain or loss.
Short Sales
The Fund may engage in short sales against the box (i.e., where the Fund owns or has an unconditional right to acquire at no additional cost a security substantially similar to the security sold short) for hedging purposes to limit exposure to a possible market decline in the value of its portfolio securities. In a short sale, the Fund sells a borrowed security and has a corresponding obligation to the lender to return the identical security. The Fund may also incur an interest expense if a security that has been sold short has an interest payment. When a Fund engages in a short sale, the Fund records a liability for securities sold short and records an asset equal to the proceeds received. The amount of the liability is subsequently marked to market to reflect the fair value of the securities sold short. To borrow the security, a Fund also may be required to pay a premium, which would increase the cost of the security sold.
15
AZL Pyramis Core Bond Fund
Notes to the Financial Statements
December 31, 2013
Dividends to Shareholders
Dividends to shareholders are recorded on the ex-dividend date. The Fund distributes its dividends from net investment income and net realized capital gains, if any, on an annual basis. The amount of dividends from net investment income and from net realized gains is determined in accordance with federal income tax regulations, which may differ from U.S. GAAP. These “book/tax” differences are either temporary or permanent in nature. To the extent these differences are permanent in nature (e.g., return of capital, net operating loss, reclassification of certain market discounts, gain/loss, paydowns, and distributions), such amounts are reclassified within the composition of net assets based on their federal tax-basis treatment; temporary differences (e.g., wash sales and post October losses) do not require reclassification. Dividends to shareholders that exceed net investment income and net realized gains for tax purposes are reported as distributions of capital.
Expense Allocation
Expenses directly attributable to the Fund are charged directly to the Fund, while expenses attributable to more than one Fund are allocated among the respective Funds based upon relative net assets or some other reasonable method. Expenses which are attributable to more than one Trust are allocated across the Allianz Variable Insurance Products and Allianz Variable Insurance Products Fund of Funds Trusts based upon relative net assets or another reasonable basis. Allianz Investment Management LLC (the “Manager”), serves as the investment manager for the Trust and the Allianz Variable Insurance Products Fund of Funds Trust.
Securities Lending
To generate additional income, the Fund may lend up to 33 1/3% of its assets pursuant to agreements requiring that the loan be continuously secured by any combination of cash, U.S. government or U.S. government agency securities, equal initially to at least 102% of the fair value plus accrued interest on the securities loaned (105% for foreign securities). The borrower of securities is at all times required to post collateral to the Fund in an amount equal to 100% of the fair value of the securities loaned based on the previous day’s fair value of the securities loaned, marked-to-market daily. Any collateral shortfalls are adjusted the next business day. The Fund bears all of the gains and losses on such investments. The Fund receives payments from borrowers equivalent to the dividends and interest that would have been earned on securities lent while simultaneously seeking to earn income on the investment of cash collateral received. In extremely low interest rate environments, the broker rebate fee may exceed the interest earned or the cash collateral which would result in a loss to the Fund. The investment of cash collateral deposited by the borrower is subject to inherent market risks such as interest rate risk, credit risk, liquidity risk, and other risks that are present in the market, and as such, the value of these investments may not be sufficient, when liquidated, to repay the borrower when the loaned security is returned. There may be risks of delay in recovery of the securities or even loss of rights in the collateral should the borrower of the securities fail financially. However, loans will be made only to borrowers, such as broker-dealers, banks or institutional borrowers of securities, deemed by the Manager to be of good standing and credit worthy and when in its judgment, the consideration which can be earned currently from such securities loans justifies the attendant risks. Loans are subject to termination by the Trust or the borrower at any time, and are, therefore, not considered to be illiquid investments. Securities on loan at December 31, 2013 are presented on the Fund’s Schedule of Portfolio Investments. The average outstanding amount of securities on loan was $0.7 million for the year ended December 31, 2013.
Cash collateral received in connection with securities lending is invested in the Allianz Variable Insurance Products Securities Lending Collateral Trust (the “Securities Lending Collateral Trust”) managed by The Dreyfus Corporation, an affiliate of the Custodian and Securities Lending Agent. The Securities Lending Collateral Trust invests in short-term investments that have a remaining maturity of 397 days or less as calculated in accordance with Rule 2a-7 under the 1940 Act. The Fund paid securities lending fees of $189 during the year ended December 31, 2013. These fees have been netted against “Income from securities lending” on the Statement of Operations.
3. Related Party Transactions
The Manager provides investment advisory and management services for the Fund. The Manager has retained an independent money management organization (the “Subadviser”), to make investment decisions on behalf of the Fund. Pursuant to a subadvisory agreement with Pyramis Global Advisors, LLC (“Pyramis”), Pyramis provides investment advisory services as the Subadviser for the Fund subject to the general supervision of the Trustees and the Manager. The Manager is entitled to a fee, computed daily and paid monthly, based on the average daily net assets of the Fund. Expenses incurred by the Fund for investment advisory and management services are reflected on the Statement of Operations as “Manager fees.” For its services, the Subadviser is entitled to a fee payable by the Manager. The Manager has contractually agreed to waive fees and reimburse the Fund to limit the annual expenses, excluding interest expense (e.g., cash overdraft fees), taxes, brokerage commissions, other expenditures that are capitalized in accordance with U.S. GAAP and other extraordinary expenses not incurred in the ordinary course of the Fund’s business, based on the daily net assets of the Fund, through April 30, 2015.
For the year ended December 31, 2013, the annual rate due to the Manager and the annual expense limit were as follows:
Annual Rate | Annual Expense Limit | |||||||||
AZL Pyramis Core Bond Fund | 0.50 | % | 0.95 | % |
Any amounts contractually waived or reimbursed by the Manager in a particular fiscal year will be subject to repayment by the Fund to the Manager to the extent that from time to time through the next three fiscal years the repayment will not cause the Fund’s expenses to exceed the lesser of the stated limit at the time of the waiver or the current stated limit. Any amounts recouped by the Manager during the year are reflected on the Statement of Operations as “Recoupment of prior expenses reimbursed by the Manager.” At December 31, 2013, there were no remaining contractual reimbursements that are subject to repayment by the Fund in subsequent years.
In addition, the Manager may voluntarily waive or reimburse additional fees in order to maintain more competitive expense ratios. Any voluntary waivers or reimbursements are not subject to repayment in subsequent years. Information on the total amount waived/reimbursed by the Manager or repaid to the Manager by the Fund during the year can be found on the Statement of Operations. During the year ended December 31, 2013, there were no voluntary waivers.
Pursuant to separate agreements between the Funds and the Manager, the Manager provides a Chief Compliance Officer (“CCO”) and certain compliance oversight and regulatory filing services to the Trust. Under these agreements the Manager is entitled to an amount equal to a portion of the compensation and certain other expenses related to the individuals performing the CCO and compliance oversight services, as well as $75 per hour for time incurred in connection with the preparation and filing of certain documents with the Securities and Exchange Commission. The fees are paid to the Manager on a quarterly basis. The total expenses incurred by the Fund for these services are reflected on the Statement of Operations as “Administrative and compliance services fees.”
16
AZL Pyramis Core Bond Fund
Notes to the Financial Statements
December 31, 2013
Citi Fund Services Ohio, Inc. (“Citi” or the “Administrator”), a wholly owned subsidiary of Citigroup, Inc., with which an officer of the Trust is affiliated, serves as the Trust’s administrator, transfer agent, and fund accountant, and assists the Trust in all aspects of its administration and operation. The Administrator is entitled to a Trust-wide asset-based fee, which is based on the following schedule: 0.05% of daily average net assets on the first $4 billion, 0.04% of daily average net assets on the next $2 billion, 0.02% of daily average net assets on the next $2 billion and 0.01% of daily average net assets over $8 billion. The overall Trust-wide fees are accrued daily and paid monthly and are subject to a minimum annual fee. In addition, the Administrator is entitled to annual account fees related to the transfer agency system, an annual fee for each additional class of shares of any Fund, certain annual fees in supporting fair value services, and a Trust-wide annual fee for providing infrastructure and support in implementing the written policies and procedures comprising the Fund’s compliance program. Fees payable to the Administrator are subject to certain reductions associated with services provided to new funds. The Administrator is also reimbursed for certain expenses incurred. The total expenses incurred by the Fund for these services are reflected on the Statement of Operations as “Administration fees.”
Allianz Life Financial Services, LLC (“ALFS”), an affiliate of the Manager, serves as distributor of the Fund and receives 12b-1 fees directly from the Fund, plus a Trust-wide annual fee of $42,500, paid by the Manager from its profits and not by the Trust, for recordkeeping and reporting services.
The Trust has adopted a distribution and service plan in conformance with Rule 12b-1 of the 1940 Act. Pursuant to this plan, the Fund is authorized to pay certain fees for the sale and distribution of its shares and services provided to its shareholders at an annual rate not to exceed 0.25% of the Fund’s average daily net assets. These fees are reflected on the Statement of Operations as “Distribution fees.”
In addition, certain legal fees and expenses are paid to a law firm, Dorsey & Whitney LLP, of which the Secretary of the Fund is a partner. During the year ended December 31, 2013, $4,607 was paid from the Fund relating to these fees and expenses.
Certain Officers and Trustees of the Trust are affiliated with the Manager or the Administrator. Such Officers (except for the Trust’s CCO as noted above) and Trustees receive no compensation from the Trust for serving in their respective roles. For their service to the Trust and to the Allianz Variable Insurance Products Fund of Funds Trust, each non-interested Trustee receives a $139,000 annual Board retainer. In addition, the Trustees are reimbursed for certain expenses associated with attending Board meetings. Compensation to the Trustees is allocated between the Trust and the Allianz Variable Insurance Products Fund of Funds Trust in proportion to the assets under management of each trust. During the year ended December 31, 2013, actual Trustee compensation was $973,000 in total for both trusts.
At a meeting of the Board of Trustees on December 4, 2013, the Trustees approved a fee increase to the Officers and Trustees who are paid a fee for their services to the Trust and to the Allianz Variable Insurance Products Fund of Funds Trust. Effective January 1, 2014, each non-interested Trustee will receive a $163,000 annual retainer.
4. Investment Valuation Summary
The valuation techniques employed by the Fund, as described below, maximize the use of observable inputs and minimize the use of unobservable inputs in determining fair value. The inputs used for valuing the Fund’s investments are summarized in the three broad levels listed below:
— | Level 1 — quoted prices in active markets for identical assets |
— | Level 2 — other significant observable inputs (including quoted prices for similar securities, interest rates, prepayments speeds, credit risk, etc.) |
— | Level 3 — significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of investments) |
Changes in valuation techniques may result in transfers in or out of an assigned level within the disclosure hierarchy. The Fund determines transfers between fair value hierarchy levels at the reporting period end. The inputs or methodology used for valuing investments is not necessarily an indication of the risk associated with investing in those investments.
Security prices are generally provided by an independent third party pricing service approved by the Trust’s Board of Trustees (“Trustees”) as of the close of the New York Stock Exchange (“NYSE”) (generally 4:00 pm Eastern Time). Equity securities are valued at the last quoted sale price or, if there is no sale, the last quoted bid price is used for long securities and the last quoted ask price is used for securities sold short.
Securities listed on NASDAQ Stock Market, Inc. (“NASDAQ”) are valued at the official closing price as reported by NASDAQ. In each of these situations, valuations are typically categorized as a Level 1 in the fair value hierarchy. Investments in open-end investment companies are valued at their respective net asset value as reported by such companies and are typically categorized as Level 1 in the fair value hierarchy.
Debt and other fixed income securities are generally valued at an evaluated bid price provided by an independent pricing source approved by the Trustees. To value debt securities, pricing services may use various pricing techniques which take into account appropriate factors such as market activity, yield, quality, coupon rate, maturity, type of issue, trading characteristics, call features, credit ratings and other data, as well as broker quotes. Short term securities of sufficient credit quality with sixty days or less remaining until maturity may be valued at amortized cost, which approximates fair value. In each of these situations, valuations are typically categorized as Level 2 in the fair value hierarchy.
Other assets and securities for which market quotations are not readily available, or are deemed unreliable are valued at fair value as determined in good faith by the Trustees or persons acting on the behalf of the Trustees. Fair value pricing may be used for significant events such as securities whose trading has been suspended, whose price has become stale or for which there is no currently available price at the close of the NYSE. Depending on the source and relative significance of valuation inputs, these instruments may be classified as Level 2 or Level 3 in the fair value hierarchy. The Fund utilizes a pricing service to assist in determining the fair value of securities when certain significant events occur that may affect the value of foreign securities.
In accordance with procedures adopted by the Trustees, fair value pricing may be used if events materially affecting the value of foreign securities occur between the time when the exchange on which they are traded closes and the time when the Fund’s net asset value is calculated. Management identifies possible fluctuation in international securities by monitoring the increase or decrease in the value of a designated benchmark index. In the event of an increase or decrease greater than predetermined levels, the Fund may use a systematic valuation model provided by an independent third party to fair value its international equity securities which are then typically categorized as Level 2 in the fair value hierarchy.
For the year ended December 31, 2013, there were no Level 3 investments for which significant unobservable inputs were used to determine fair value.
17
AZL Pyramis Core Bond Fund
Notes to the Financial Statements
December 31, 2013
The following is a summary of the valuation inputs used as of December 31, 2013 in valuing the Fund’s investments based upon the three levels defined above:
Investment Securities: | Level 1 | Level 2 | Total | ||||||||||||
Asset Backed Securities | $ | — | $ | 10,193,300 | $ | 10,193,300 | |||||||||
Collateralized Mortgage Obligations | — | 40,751,987 | 40,751,987 | ||||||||||||
Corporate Bonds+ | — | 105,725,039 | 105,725,039 | ||||||||||||
Yankee Dollars+ | — | 25,049,186 | 25,049,186 | ||||||||||||
Municipal Bonds | — | 14,991,795 | 14,991,795 | ||||||||||||
U.S. Government Agency Mortgages | — | 88,802,487 | 88,802,487 | ||||||||||||
U.S. Treasury Obligations | — | 90,086,873 | 90,086,873 | ||||||||||||
Securities Held as Collateral for Securities on Loan | — | 1,612,923 | 1,612,923 | ||||||||||||
Unaffiliated Investment Company | 17,618,901 | — | 17,618,901 | ||||||||||||
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Total Investment Securities | $ | 17,618,901 | $ | 377,213,590 | $ | 394,832,491 | |||||||||
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Securities Sold Short | — | (6,908,141 | ) | (6,908,141 | ) | ||||||||||
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Total Investments | $ | 17,618,901 | $ | 370,305,449 | $ | 387,924,350 | |||||||||
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+ | For detailed industry descriptions, see the accompanying Schedule of Portfolio Investments. |
5. Security Purchases and Sales
For the year ended December 31, 2013, cost of purchases and proceeds from sales of securities (excluding securities maturing less than one year from acquisition) were as follows:
Purchases | Sales | |||||||||
AZL Pyramis Core Bond Fund | $ | 1,605,837,902 | $ | 1,557,152,236 |
For the year ended December 31, 2013, purchases and sales on long-term U.S. government securities were as follows:
Purchases | Sales | |||||||||
AZL Pyramis Core Bond Fund | $ | 1,463,845,317 | $ | 1,463,352,085 |
6. Restricted Securities
A restricted security is a security which has been purchased through a private offering and cannot be resold to the general public without prior registration under the Securities Act of 1933 (the “1933 Act”) or pursuant to the resale limitations provided by Rule 144A under the 1933 Act, or an exemption from the registration requirements of the 1933 Act. Whether a restricted security is illiquid is determined pursuant to guidelines established by the Board of Trustees. Not all restricted securities are considered illiquid. The illiquid restricted securities held as of December 31, 2013 are identified below.
Security | Acquisition Date(a) | Acquisition Cost | Principal Amount | Fair Value | Percentage of Net Assets | ||||||||||||||||||||
GS Mortgage Securities Trust, Series 2013-KY0, Class XB1, 3.25%, 11/8/29 | 2/15/13 | $ | 477,262 | $ | 9,100,000 | $ | 419,621 | 0.11 | % |
(a) | Acquisition date represents the initial purchase date of the security. |
7.Investment Risks
Foreign Securities and Currencies Risk: Investments in securities of foreign issuers carry certain risks not ordinarily associated with investments in securities of domestic issuers. Such risks include future political and economic developments, and the possible imposition of exchange controls or other foreign governmental laws and restrictions. In addition, with respect to certain countries, there is the possibility of expropriation of assets, confiscatory taxation, political or social instability or diplomatic developments which could adversely affect investments in those securities.
8.Federal Tax Information
It is the Fund’s policy to continue to comply with the requirements of the Internal Revenue Code under Subchapter M, applicable to regulated investment companies, and to distribute all of its taxable income, including any net realized gains on investments, to its shareholders. Therefore, no provision is made for federal income taxes.
Management of the Fund has reviewed tax positions taken in tax years that remain subject to examination by all major tax jurisdictions, including federal (i.e., the last four tax year ends and the interim tax period since then, as applicable). Management believes that there is no tax liability resulting from unrecognized tax benefits related to uncertain tax positions taken.
Cost for federal income tax purposes at December 31, 2013 is $400,502,534. The gross unrealized appreciation/ (depreciation) on a tax basis is as follows:
Unrealized appreciation | $ | 1,491,525 | |||
Unrealized depreciation | (7,161,568 | ) | |||
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Net unrealized appreciation/(depreciation) | $ | (5,670,043 | ) | ||
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18
AZL Pyramis Core Bond Fund
Notes to the Financial Statements
December 31, 2013
As of the end of its tax year ended December 31, 2013, the Fund has capital loss carry forwards (“CLCFs”) as summarized in the tables below. CLCFs subject to expiration are applied as short-term capital loss regardless of whether the originating capital loss was short-term or long-term. CLCFs that are not subject to expiration must be utilized before those that are subject to expiration. The Board does not intend to authorize a distribution of any realized gain for the Fund until any applicable CLCF has been offset or expires.
CLCFs not subject to expiration:
Short Term Amount | Long Term Amount | Total Amount | |||||||||||||
AZL Pyramis Core Bond Fund | $ | 6,375,411 | $ | 189,912 | $ | 6,565,323 |
The tax character of dividends paid to shareholders during the year ended December 31, 2013 was as follows:
Ordinary Income | Net Long-Term Capital Gains | Total Distributions(a) | |||||||||||||
AZL Pyramis Core Bond Fund | $ | 2,087,267 | $ | — | $ | 2,087,267 |
(a) | Total distributions paid may differ from the Statements of Changes in Net Assets because dividends are recognized when actually paid for tax purposes. |
During the year ended December 31, 2012 there were no dividends paid to shareholders.
As of December 31, 2013, the components of accumulated earnings on a tax basis were as follows:
Undistributed Ordinary Income | Undistributed Long-Term Capital Gains | Accumulated Capitaland Other Losses | Unrealized Appreciation/ (Depreciation)(a) | Total Accumulated Earnings/ (Deficit) | |||||||||||||||||||||
AZL Pyramis Core Bond Fund | $ | 6,291,392 | $ | — | $ | (6,565,323 | ) | $ | (5,670,805 | ) | $ | (5,944,736 | ) |
(a) | The difference between book-basis and tax-basis unrealized appreciation/(depreciation) is attributable primarily to tax deferral of losses on wash sales. |
9. Ownership and Principal Holders
The beneficial ownership, either directly of indirectly, of more than 25% of the voting securities of a fund creates presumptions of control of the fund, under section 2(a)(9) of the 1940 Act. As of December 31, 2013, the Fund had an individual shareholder account which is affiliated with the Investment Adviser representing ownership in excess of 50% of the Fund.
10. Subsequent Events
Management has evaluated events and transactions subsequent to period end through the date the financial statements were issued, for purposes of recognition or disclosure in these financial statements and there are no subsequent events to report.
19
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Shareholders and Board of Trustees of
Allianz Variable Insurance Products Trust:
We have audited the accompanying statement of assets and liabilities of AZL Pyramis Core Bond Fund (the “Fund”) of the Allianz Variable Insurance Products Trust, including the schedule of portfolio investments, as of December 31, 2013, and the related statement of operations for the year then ended, and the statements of changes in net assets and the financial highlights for each of the periods in the two-year period then ended. These financial statements and financial highlights are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of December 31, 2013, by correspondence with the custodian and brokers or by other appropriate auditing procedures. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of the Fund as of December 31, 2013, the results of its operations for the year then ended, and the changes in its net assets and the financial highlights for each of the periods in the two-year period then ended, in conformity with U.S. generally accepted accounting principles.
/s/ KPMG LLP
Columbus, Ohio
February 25, 2014
20
Other Federal Income Tax Information (Unaudited)
During the year ended December 31, 2013, the Fund declared net short-term capital gain distributions of $669,229.
21
A description of the policies and procedures that the Fund uses to determine how to vote proxies relating to portfolio securities is available, without charge, upon request, by visiting the Securities and Exchange Commission’s (“Commission”) website at www.sec.gov, or by calling 800-624-0197.
Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30th is available (i) without charge, upon request, by calling 800-624-0197; (ii) on the Allianz Variable Insurance Products Trust’s website at https://www.allianzlife.com; and (iii) on the Commission’s website at http://www.sec.gov.
The Fund files complete Schedules of Portfolio Holdings with the Commission for the first and third quarters of each fiscal year on Form N-Q. Schedules of Portfolio Holdings for the Fund in this report are available without charge on the Commission’s website at http://www.sec.gov, or may be reviewed and copied at the Commission’s Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 800-SEC-0330.
22
Approval of Investment Advisory and Subadvisory Agreements (Unaudited)
The Allianz Variable Insurance Products Trust (the “Trust”) is a manager-of-managers fund. That means that the Trust’s Manager (“Allianz Investment Management LLC”) is responsible for monitoring the various Subadvisers that have day-to-day responsibility for the decisions made for each of the Trust’s investment portfolios. The Trust’s Manager is responsible for determining, in the first instance, which investment advisers to consider recommending for selection as a Subadviser.
In reviewing the services provided by the Manager and the terms of the investment management agreement, the Board receives and reviews information related to the Manager’s experience and expertise in the variable insurance marketplace. Currently, the Funds are offered only through variable annuities and variable life insurance policies, and not in the retail fund market. In addition, the Board receives information regarding the Manager’s expertise with regard to portfolio diversification and asset allocation requirements within variable insurance products issued by Allianz Life Insurance Company of North America and its subsidiary, Allianz Life Insurance Company of New York. Currently, the Funds are offered only through Allianz Life and Allianz of New York variable products.
The Trust’s Manager has adopted policies and procedures to assist it in the process of analyzing each potential Subadviser with expertise in particular asset classes for purposes of making the recommendation that a specific investment adviser be selected. The Trust’s Board reviews and considers the information provided by the Manager in deciding which investment advisers to select. After an investment adviser becomes a Subadviser, a similarly rigorous process is instituted by the Manager to monitor the investment performance and other responsibilities of the Subadviser. The Manager reports to the Trust’s Board on its analysis at the regular meetings of the Board, which are held at least quarterly. Where warranted, the Manager will add or remove a particular Subadviser from a “watch” list that it maintains. Watch list criteria include, for example: (a) Fund performance over various time periods; (b) Fund risk issues, such as changes in key personnel involved with Fund management, changes in investment philosophy or process, or “capacity” concerns; and (c) organizational risk issues, such as regulatory, compliance or legal concerns, or changes in the ownership of the Subadviser. The Manager may place a Fund on the watch list for other reasons, and if so, will explain its rationale to the Trustees. Funds which are on the watch list are subject to special scrutiny of the Manager and the Board of Trustees. Funds may be removed from such watch list, if for example, performance improves or regulatory matters are satisfactorily resolved. However, in some situations where Funds which have been on the watch list, the Manager has recommended the retention of a new Subadviser, and the Board of Trustees has subsequently approved new Subadvisory Agreements with such Subadvisers.
In assessing the Manager’s and Subadvisers’ (collectively, the “Advisory Organizations”), performance of their obligations, the Board considers whether there has occurred a circumstance or event that would constitute a reason for it to not renew an advisory contract. In this regard, the Board is mindful of the potential disruption of a Fund’s operations and various risks, uncertainties and other effects that could occur as a result of a decision to terminate or not renew a contract.
As required by the Investment Company Act of 1940 (“1940 Act”), the Trust’s Board has reviewed and approved the Trust’s Investment Management Agreement with the Manager (the “Advisory Agreement”) and portfolio management agreements (the “Subadvisory Agreements”) with the Subadvisers. The Board’s decision to approve these contracts reflects the exercise of its business judgment on whether to approve new arrangements and continue the existing arrangements. During its review of these contracts, the Board considers many factors, among the most material of which are: the Fund’s investment objectives and long term performance; the Advisory Organizations’ management philosophy, personnel, and processes, including their compliance history and the adequacy of their compliance processes; the preferences and expectations of Fund shareholders (and underlying contract owners) and their relative sophistication; the continuing state of competition in the mutual fund industry; and comparable fees in the mutual fund industry.
The Board also considers the compensation and benefits received by the Advisory Organizations. This includes fees received for services provided to the Fund by affiliated persons of the Advisory Organizations and research services received by the Advisory Organizations from brokers that execute Fund trades, as well as advisory fees. The Board considered the fact that: (1) the Manager and the Trust are parties to an Administrative Service Agreement, a Compliance Services Agreement, and a Chief Compliance Officer Agreement, under which the Manager is compensated by the Trust for performing certain administrative and compliance services including providing an employee of the Manager or one of its affiliates to act as the Trust’s Chief Compliance Officer; and (2) Allianz Life Financial Services, LLC, an affiliated person of the Manager, is a registered securities broker-dealer and receives (along with its affiliated persons) payments made by the Trust pursuant to Rule 12b-1.
The Board is aware that various courts have interpreted provisions of the 1940 Act and have indicated in their decisions that the following factors may be relevant to an adviser’s compensation: the nature and quality of the services provided by the adviser, including the performance of the fund; the adviser’s cost of providing the services; the extent to which the adviser may realize “economies of scale” as the fund grows larger; any indirect benefits that may accrue to the adviser and its affiliates as a result of the adviser’s relationship with the fund; performance and expenses of comparable funds; and the extent to which the independent Board members are fully informed about all facts bearing on the adviser’s service and fee. The Trust’s Board is aware of these factors and takes them into account in its review of the Trust’s advisory contracts.
The Board considered and weighed these circumstances in light of its experience in governing the Trust and working with the Advisory Organizations on matters relating to the Funds, and is assisted in its deliberations by the advice of legal counsel to the Independent Trustees. In this regard, the Board requests and receives a significant amount of information about the Funds and the Advisory Organizations. Some of this information is provided at each regular meeting of the Board; additional information is provided in connection with the particular meeting or meetings at which the Board’s formal review of an advisory contract occurs. In between regularly scheduled meetings, the Board may receive information on particular matters as the need arises. Thus, the Board’s evaluation of an advisory contract is informed by reports covering such matters as: an Advisory Organization’s investment philosophy, personnel, and processes; the Fund’s short- and long-term performance (in absolute terms as well as in relationship to its benchmark(s), certain competitor or “peer group” funds and similar funds managed by the particular Subadviser), and comments on the reasons for performance; the Fund’s expenses (including the advisory fee itself and the overall expense structure of the Fund, both in absolute terms and relative to similar and/or competing funds, with due regard for contractual or voluntary expense limitations); the use and allocation of brokerage commissions derived from trading the Fund’s portfolio securities; the nature and extent of the advisory and other services provided to the Fund by the Advisory Organizations and their affiliates; compliance and audit reports concerning the Funds and the companies that service them; and relevant developments in the mutual fund industry and how the Funds and/or Advisory Organizations are responding to them.
The Board also receives financial information about Advisory Organizations, including reports on the compensation and benefits the Advisory Organizations derive from their relationships with the Funds. These reports cover not only the fees under the advisory contracts, but also fees, if any, received for providing other services to the Funds. The reports also discuss any indirect or “fall out” benefits an Advisory Organization may derive from its relationship with the Funds.
The Advisory and Subadvisory Agreements (collectively, the “Agreements”) were most recently considered at Board of Trustees meetings held in the fall of 2013. Information relevant to the approval of such Agreements was considered at a telephonic Board of Trustees meeting on October 16, 2013, and at an “in person” Board of Trustees meeting held October 22, 2013. The Agreements were approved at the Board meeting of October 22, 2013. At such meeting the Board also approved an Expense Limitation Agreement between the Manager and the Trust for the period ending April 30, 2015. In connection with such meetings, the Trustees requested and evaluated extensive materials from the Manager, including performance and expense information for other investment companies with similar investment objectives derived from data compiled by an independent third party provider and other sources believed to be reliable by the Manager. Prior to voting, the Trustees reviewed the proposed approval/continuance of the Agreements with management and with experienced counsel who are independent of the Manager and received a memorandum from such counsel discussing the legal standards for their consideration of the proposed approvals/continuances. The independent (“disinterested”) Trustees also discussed the proposed approvals/continuances in a private session with such counsel at which no representatives of the Manager were present. In reaching their determinations relating to the approval and/or continuance of
23
the Agreements, in respect of each Fund, the Trustees considered all factors they believed relevant. The Board based its decision to approve the Agreements on the totality of the circumstances and relevant factors, and with a view to past and future long-term considerations. Not all of the factors and considerations discussed above and below are necessarily relevant to every Fund, and the Board did not assign relative weights to factors discussed herein or deem any one or group of them to be controlling in and of themselves.
An SEC Rule requires that shareholder reports include a discussion of certain factors relating to the selection of investment advisers and the approval of advisory fees. The “factors” enumerated by the SEC are set forth below in italics, as well as the Board’s conclusions regarding such factors:
(1) The nature, extent and quality of services provided by the Manager and Subadvisers. The Trustees noted that the Manager, subject to the control of the Board of Trustees, administers each Fund’s business and other affairs. Under the Advisory Agreement, the Manager holds the sole and exclusive responsibility to provide, or arrange for other to provide, the management of the Funds’ assets and the placement of orders for the purchase and sale of the securities of the Funds. As the Trust is a manager of managers fund, the Manager is authorized, under the Advisory Agreement, to retain one or more Subadvisers for each Fund to handle day-to-day management of the Funds’ investment portfolios; the Manager is responsible for determining, in the first instance, which investment advisers to recommend to the Board of Trustees for selection as a Subadviser. The Trustees were aware that, notwithstanding the retention of the Subadvisers to handle day-to-day portfolio management, the Manager remains responsible for substantial other matters, including continuously monitoring compliance by each Subadviser with the investment policies and restrictions of the respective Funds, with such other limitations or directions of the Board of Trustees, and with all legal requirements under federal or state law or regulation. The Manager also is responsible primarily to provide statistical information and other data to the Trustees regarding the Funds’ portfolio investments and to make available to the Funds’ administrator such information as is necessary for the conduct of its duties.
The Trustees also noted that the Manager provides the Trust and each Fund with such administrative and other services (exclusive of, and in addition to, any such services provided by any others retained by the Trust on behalf of the Funds) and executive and other personnel as are necessary for the operation of the Trust and the Funds. Except for the Trust’s Chief Compliance Officer, the Manager pays all of the compensation of Trustees and officers of the Trust who are employees of the Manager or its affiliates.
The Trustees considered the scope and quality of services provided by the Manager and the Subadvisers and noted that the scope of such services provided had expanded as a result of recent regulatory and other developments. The Trustees noted that, for example, the Manager and Subadvisers are responsible for maintaining and monitoring their own compliance programs, and these compliance programs are continuously refined and enhanced in light of new regulatory requirements. The Trustees considered the capabilities and resources which the Manager has dedicated to performing services on behalf of the Trust and its Funds. The quality of administrative and other services, including the Manager’s role in coordinating the activities of the Trust’s other service providers, also were considered. The Trustees concluded that, overall, they were satisfied with the nature, extent and quality of services provided (and expected to be provided) to the Trust and to each of the Funds under the Agreements.
(2) The investment performance of the Funds, the Manager and the Subadvisers. In connection with every in-person quarterly Board of Trustees meeting, Trustees receive extensive information on the performance results of each of the Funds. This includes, for example, performance information on all of the Funds for the previous quarter, and previous one, three and five-year periods, and since inception. (For Funds which have been in existence for less than five years, Trustees may receive performance information on comparable funds managed by the particular Subadviser for periods prior to the creation of a particular Fund.) Such performance information includes information on absolute total return, performance versus Subadvisers’ comparable fund(s), performance versus the appropriate benchmark(s), and performance versus peer groups. For example, in connection with the Board of Trustees meetings held September 10-11, 2013, the Manager reported that for the three year period ended June 30, 2013, 12 Funds were in the top 40%, eight were in the middle 20% and eight were in the bottom 40%, and for the one year period ended June 30, 2013, 8 Funds were in the top 40%, seven were in the middle 20%, and 14 were in the bottom 40%. The Manager also reported that for the five year period ended June 30, 2013, 10 Funds were in the top 40%, four were in the middle 20%, and six were in the bottom 40%. At the Board of Trustees meeting held October 22, 2013, the Trustees determined that the overall investment performance of the Funds was acceptable.
(3) The costs of services to be provided and profits to be realized by the Manager and the Subadvisers and their affiliates from their relationship with the Funds. The Manager has supplied information to the Board of Trustees pertaining to the level of investment advisory fees to which the Funds are subject. The Manager has agreed to temporarily “cap” Fund expenses at certain levels, and information is provided to Trustees setting forth “contractual” advisory fees and “actual” fees after taking expense caps into account. Based upon the information provided, the “actual” advisory fees payable by the Funds overall are generally comparable to the average level of fees paid by Fund peer groups. For the 30 Funds reviewed by the Board of Trustees in the fall of 2013, 27 Funds paid “actual” advisory fees in a percentage amount within the 65th percentile or lower for each Fund’s applicable category. The Trustees recognized that it is difficult to make comparisons of advisory fees because there are variations in the services that are included in the fees paid by other funds. The Board has concluded that the advisory fees to be paid to the Manager by the Funds are not unreasonable.
The Manager has also supplied information to the Board of Trustees pertaining to total Fund expenses (which includes advisory fees, the 25 basis point 12b-1 fee paid by the Funds, and other Fund expenses). As noted above, the Manager has agreed to “cap” Fund expenses at certain levels. Based upon the information provided, the overall total expense ratio ranking in 2013 for the 30 Funds was as follows: (1) 28 of the Funds had total expense rankings below the 65th percentile (with 20 Funds at or below the 50th percentile); (2) the AZL Russell 1000 Value Fund had a total expense ranking in the 66th percentile; the Manager reported that there is only a limited peer group for such Fund; and (3) the AZL Morgan Stanley Global Real Estate Fund had a total expense ranking in the 72nd percentile; it was reported by the Manager that there is only a limited peer group for such Fund, such Fund’s expense ratio has declined, and such Fund’s expense ratio is comparable to funds of similar size.
The Manager has committed to providing the Funds with a high quality of service and working to reduce Fund expenses over time, particularly as the Funds grow larger. The Trustees concluded therefore that the expense ratios of the Funds were not unreasonable.
The Manager provided information concerning the profitability of the Manager’s investment advisory activities for the period from 2011 through June 30, 2013. The Trustees recognized that it is difficult to make comparisons of profitability from investment company advisory agreements because comparative information is not generally publicly available and is affected by numerous factors, including the structure of the particular adviser, the types of funds it manages, its business mix, numerous assumptions regarding allocation of expenses and the adviser’s capital structure and cost of capital. In considering profitability information, the Trustees considered the possible effect of certain fall-out benefits to the Manager and its affiliates. The Trustees focused on profitability of the Manager’s relationships with the Funds before taxes and distribution expenses. The Trustees recognized that the Manager should, in the abstract, be entitled to earn a reasonable level of profits for the services it provides to each Fund and, based on their review, concluded that they were satisfied that the Manager’s level of profitability from its relationship with the Funds was not excessive.
The Manager, on behalf of the Board of Trustees, endeavored to obtain information on the profitability of each Subadviser in connection with its relationship with the Fund or Funds which it subadvises. The Manager was unable to obtain meaningful profitability information from some of the unaffiliated Subadvisers. The Manager assured the Board of Trustees that the Agreements with the Subadvisers which are not affiliated with it were negotiated on an “arm’s length” basis, so that arguably, such profitability information should be less relevant. The Trustees were also provided with certain information on the profitability for the Subadviser which is affiliated with the Manager. Trustees recognized the difficulty of allocating costs to multiple advisory accounts and products of a large advisory organization. Based upon the information provided, the Trustees determined that there was no evidence that the level of such profitability attributable to subadvising the Funds was excessive.
24
(4) and (5) The extent to which economies of scale would be realized as the Funds grow, and whether fee levels reflect these economies of scale. The Trustees noted that most of the advisory fee schedules for the Funds do not contain breakpoints that reduce the fee rate on assets above specified levels, although certain Subadvisory Agreements have such “breakpoints.” The Trustees recognized that breakpoints may be an appropriate way for the Manager to share its economies of scale, if any, with Funds that have substantial assets. However, they also recognized that there may not be a direct relationship between any economies of scale realized by Funds and those realized by the Manager as assets increase. The Trustees do not believe there is a uniform methodology for establishing breakpoints that give effect to Fund-specific service provided by the Manager. The Trustees noted that in the fund industry as a whole, as well as among funds similar to the Funds, there is no uniformity or pattern in the fees and asset levels at which breakpoints (if any) apply. Depending on the age, size, and other characteristics of a particular fund and its manager’s cost structure, different conclusions can be drawn as to whether there are economies of scale to be realized at any particular level of assets, notwithstanding the intuitive conclusion that such economies exist, or will be realized at some level of total assets. Moreover, because different managers have different cost structures and service models, it is difficult to draw meaningful conclusions from the breakpoints that may have been adopted by other funds. The Trustees also noted that the advisory agreements for many funds do not have breakpoints at all, or if breakpoints exist, they may be at asset levels significantly greater than those of the individual Funds. The Trustees also noted that the total assets in all of the Funds as of June 30, 2013 were approximately $12.85 billion, and that no single non-money market Fund had assets in excess of $616 million.
The Trustees noted that the Manager has agreed to temporarily “cap” Fund expenses at certain levels, which has the effect of reducing expenses as would the implementation of advisory fee breakpoints. The Manager has committed to continue to consider the continuation of fee “caps” and/or advisory fee breakpoints as the Funds grow larger. The Board receives quarterly reports on the level of Fund assets. It expects to consider whether or not to approve the Agreements at a meeting to be held prior to December 31, 2014, and will at that time, or prior thereto, consider: (a) the extent to which economies of scale can be realized, and (b) whether the advisory fee should be modified to reflect such economies of scale, if any.
Having taken these factors into account, the Trustees concluded that the absence of breakpoints in certain of the Funds’ advisory fee rate schedules was acceptable under each Fund’s circumstances.
25
Information about the Board of Trustees and Officers (Unaudited)
The Trust is managed by the Trustees in accordance with the laws of the state of Delaware governing business trusts. There are currently eight Trustees, two of whom are “interested persons” of the Trust within the meaning of that term under the 1940 Act. The Trustees and Officers of the Trust, their addresses, ages, their positions held with the Trust, their terms of office with the Trust and length of time served, their principal occupation(s) during the past five years, the number of portfolios in the Trust they oversee, and their other directorships held are as follows:
Non-Interested Trustees(1)
Name, Address, and Age | Positions Held with VIP Trust FOF Trust | Term of Office(2)/Length of Time Served | Principal Occupation(s) During Past 5 Years | Number of Portfolios Overseen for VIP Trust FOF Trust | Other Directorships Held Outside the AZL Fund Complex | |||||
Peter R. Burnim, Age 66 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/07 | Chairman, Argus Investment Strategies Fund Ltd., Feburary 2013 to present; Managing Director, iQ Venture Advisors, LLC. 2005 to 2012; Chairman, Northstar Group Holdings Ltd. Bermuda, 2011 to present; Expert Witness, Massachusetts Department of Revenue, 2011 to 2012; Executive Vice President, Northstar Companies, 2002 to 2005; Senior Officer, Citibank and Citicorp for over 25 years | 41 | Argus Group Holdings; Northstar Group Holdings, NRIL, Sterling Centrecorp Inc.; Highland Financial Holdings; and Bank of Bermuda NY | |||||
Peggy L. Ettestad, Age 56 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/07 | Managing Director, Red Canoe Management Consulting LLC, 2008 to present; Senior Managing Director, Residential Capital LLC, 2003 to 2008; Chief Operations Officer, Transamerica Reinsurance 2002 to 2003 | 41 | Luther College | |||||
Roger Gelfenbien, Age 70 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 10/99 | Retired; Partner of Accenture 1983 to 1999 | 41 | Virtus Funds (8 Funds) | |||||
Claire R. Leonardi, Age 58 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/04 | Chief Executive Officer, Connecticut Innovations, Inc., 2012 to present; General Partner, Fairview Capital, L.P., 1994 to 2012 | 41 | The Natural History Museum of the Adirondacks | |||||
Dickson W. Lewis, Age 65 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/04 | Retired; Consultant to Lifetouch National School Studios; Vice President/General Manager, Yearbooks & Canada-Lifetouch National School Studios, 2006 to 2013; Vice President/General Manager of Jostens, Inc., 2002 to 2006; Senior Vice President of Fortis Group, 1997 to 2002 | 41 | None | |||||
Peter W. McClean, Age 69 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/04 | Retired; President and CEO of Measurisk, LLC, 2001 to 2003; Chief Risk Management Officer at Bank of Bermuda Ltd., 1996 to 2001 | 41 | PNMAC Opportunity Fund; Northeast Bank; and FHI | |||||
Arthur C. Reeds III, Age 69 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 10/99 | Retired; Senior Investment Officer, Hartford Foundation for Public Giving, 2000 to 2003; Chairman, Chief Executive and President of Conning Corp., 1999 to 2000; Investment Consultant, 1997 to 1999 | 41 | Connecticut Water Service, Inc. |
Interested Trustees(3)
Name, Address, and Age | Positions Held with VIP Trust FOF Trust | Term of Office(2)/Length of Time Served | Principal Occupation(s) During Past 5 Years | Number of Portfolios Overseen for VIP Trust FOF Trust | Other Directorships Held Outside the AZL Fund Complex | |||||
Robert DeChellis, Age 46 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 3/08 | President and CEO, Allianz Life Financial Services, LLC, 2007 to present | 41 | None | |||||
Brian Muench, Age 43 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 6/11 | President, Allianz Investment Management LLC, November 2010 to present; Vice President, Allianz Life, April 2011 to present; Vice President, Advisory Management, Allianz Investment Management LLC from December 2005 to November 2010 | 41 | None |
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Officers
Name, Address, and Age | Positions Held with VIP and VIP FOF Trust | Term of Office(2)/Length of Time Served | Principal Occupation(s) During Past 5 Years | |||
Brian Muench, Age 43 5701 Golden Hills Drive Minneapolis, MN 55416 | President | Since 11/10 | President, Allianz Investment Management LLC from November 2010, to present; Vice President, Allianz Life from April 2011 to present; Vice President, Allianz Investment Management LLC from December 2005 to November 2010. | |||
Michael Radmer, Age 68 Dorsey & Whitney LLP, Suite 1500 50 South Sixth Street Minneapolis, MN 55402-1498 | Secretary | Since 2/02 | Partner, Dorsey and Whitney LLP since 1976. | |||
Ty Edwards, Age 47 Citi Fund Services Ohio, Inc. 3435 Stelzer Road Columbus, OH 43219 | Treasurer, Principal Accounting Officer and Principal Financial Officer | Since 4/10 | Senior Vice President, Financial Administration, Citi Fund Services Ohio, Inc., December 2009 to present; Director, Product Management, Columbia Management, April 2007 to April 2009; Deputy Treasurer, Columbia Funds and Director, Fund Administration, Columbia Management, January 2006 to April 2007. | |||
Christopher R. Pheiffer, Age 45(4) 5701 Golden Hills Drive Minneapolis, MN 55416 | Chief Compliance Officer(5) and Anti-Money Laundering Compliance Officer | Since 2/14 (interim) | Deputy Chief Compliance Officer of the Trusts, 2007-2014 |
(1) | Member of the Audit Committee. |
(2) | Indefinite. |
(3) | Is an “interested person”, as defined by the 1940 Act, due to employment by Allianz. |
(4) | Stephen G. Simon, previously the Chief Compliance Officer of the Trusts, resigned all of his positions with Allianz effective February 21, 2014. Mr. Pheiffer, previously the Deputy Chief Compliance Officer of the Trusts, has been named Chief Compliance Officer of the Trusts on an interim basis while a search for a permanent replacement is conducted. |
(5) | The Manager and the Trust are parties to a Chief Compliance Officer Agreement under which the Manager is compensated by the Trust for providing an employee of the Manager or one of its affiliates to act as the Trust’s Chief Compliance Officer. The Chief Compliance Officer and Anti-Money Laundering Compliance Officer is not considered a corporate officer or executive employee of the Trust. |
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The Allianz VIP Funds are distributed by Allianz Life Financial Services, LLC. These Funds are not FDIC Insured. | SARRPT1212 02/13 |
AZL® Russell 1000 Growth Index Fund
Annual Report
December 31, 2013
Table of Contents
Management Discussion and Analysis
Page 1
Expense Examples and Portfolio Composition
Page 3
Schedule of Portfolio Investments
Page 4
Statement of Assets and Liabilities
Page 12
Statement of Operations
Page 12
Statements of Changes in Net Assets
Page 13
Financial Highlights
Page 14
Notes to the Financial Statements
Page 15
Report of Independent Registered Public Accounting Firm
Page 20
Other Federal Income Tax Information
Page 21
Other Information
Page 22
Approval of Investment Advisory and Subadvisory Agreements
Page 23
Information about the Board of Trustees and Officers
Page 26
This report is submitted for the general information of the shareholder of the Fund. The report is not authorized for distribution to prospective investors in the Fund unless preceded or accompanied by an effective prospectus, which contains details concerning the sales charges and other pertinent information.
AZL® Russell 1000 Growth Index Fund Review (unaudited)
Allianz Investment Management LLC serves as the Manager for the AZL® Russell 1000 Growth Index Fund and BlackRock Investment Management, LLC serves as Subadviser to the Fund.
What factors affected the Fund’s performance during the year ended December 31, 2013?
For the year ended December 31, 2013, the AZL® Russell 1000 Growth Index Fund returned 32.48%1. That compared to a 33.48% total return for its benchmark, the Russell 1000® Growth Index2.
Equities began the period with a powerful rally after the United States averted the worst of its potential fiscal crisis with a last-minute tax deal. The rally softened as political and financial instability in Europe—including a stalemate in Italian presidential elections and a banking crisis in Cyprus—gave investors pause later in the first half of the period. However, equities soon regained their momentum as low interest rates and increased global liquidity spurred stock prices higher.
In May, stocks responded negatively to news that the Federal Reserve might begin gradually reducing (or tapering) its monetary stimulus efforts before the end of the year. Although stocks rebounded once it became clear that the Fed remained undecided about the timing of the taper. Meanwhile, the modest pace of economic growth boded well for corporate profit margins as the economic recovery was strong enough to support revenues but not so strong as to boost wage growth.
September brought another sharp rally in stock prices, as the Fed decided to delay the taper, despite market expectations to the contrary. The rally was interrupted as budget and debt ceiling negotiations led to a partial government shutdown and fears of a potential technical default in the national debt. Stocks regained their momentum in the fourth quarter once the government reopened and economic indicators improved. The Fed’s announcement in mid-December that it would begin tapering in 2014, but maintain short-term interest rates at their low levels, alleviated the market’s anxiety over the interest rate uncertainty. Investors responded positively, pushing stocks higher to close out the period.
Sectors that are traditionally areas of cyclical growth, such as consumer discretionary, information technology and health care, were the strongest performers for the period. Consumer discretionary stocks benefited from low interest rates and recovering housing prices, while the information technology and health care sectors benefited from strong corporate earnings. Health care stocks posed a strong showing across multiple sub-sectors, including biotech, drug manufacturers and health care providers. Modest gains came from materials, telecommunication services and utilities as well.*
The underperformance of the Fund compared to the benchmark was the result of Fund expenses that are not incurred by the benchmark.
Past performance does not guarantee future results.
* | The Fund’s portfolio composition is subject to change. There is no guarantee that any sectors mentioned will continue to perform well or that securities in such sectors will be held by the Fund in the future. The information contained in this commentary is for informational purposes only and should not be construed as a recommendation to purchase or sell securities in the sector mentioned. The Fund’s holdings and weightings are as of December 31, 2013. |
1 | The recent growth rate in the stock market has helped to produce short-term returns that are not typical and may not continue in the future. Because of ongoing market volatility, Fund performance may be subject to substantial short-term changes. |
2 | The Russell 1000® Growth Index measures the performance of the large-cap growth segment of the U.S. equity universe. It includes those Russell 1000 companies with higher price-to-book ratios and higher forecasted growth values. Investors cannot invest directly in an index. |
1
AZL® Russell 1000 Growth Index Fund Review (unaudited)
Fund Objective
The Fund’s investment objective is to match the total return of the Russell 1000® Growth Index. This objective may be changed by the Trustees of the Fund without shareholder approval. The Fund seeks to achieve its objective by investing in all stocks in the Index in proportion to their weighting in the Index.
Investment Concerns
Equity securities (stocks) are more volatile and carry more risk than other forms of investments, including investments in high-grade fixed income securities. The net asset value per share of this Fund will fluctuate as the value of the securities in the portfolio changes.
Returns on growth stocks may not move in tandem with returns on other categories of stocks or the market as a whole. Growth stocks may be susceptible to rapid price savings or to adverse developments in certain sectors of the market.
The Fund does not attempt to manage market volatility or reduce the effects of poor stock performance. In addition, factors such as Fund expenses, selection of a representative portfolio, changes in the composition of the Index, or the timing of purchases or redemptions of Fund shares may affect the correlation between the performance of the Index and the Fund’s performance.
The performance of the Fund is expected to be lower than that of the Index because of Fund fees and expenses. Securities in which the Fund will invest may involve substantial risk and may be subject to sudden severe price declines.
Investing in derivatives instruments involves risks that may be different from or greater than the risk associated with investing directly in securities or other traditional instruments.
For a complete description of these and other risks associated with investing in a mutual Fund, please refer to the Fund’s prospectus.
Growth of $10,000 Investment
The chart above represents a comparison of a hypothetical investment in the Fund versus a similar investment in the Fund’s benchmark, and represents the reinvestment of dividends and capital gains in the Fund.
Average Annual Total Returns as of December 31, 2013
Since | ||||||||||||
1 | 3 | Inception | ||||||||||
Year | Year | (4/30/10) | ||||||||||
AZL® Russell 1000 Growth Index Fund | 32.48 | %1 | 15.60 | % | 15.38 | % | ||||||
Russell 1000® Growth Index | 33.48 | % | 16.45 | % | 16.34 | % |
Past performance does not guarantee future results. The performance data quoted represents past performance and current returns may be lower or higher. The investment return and principal value will fluctuate so that an investor’s shares, when redeemed may be worth more or less than the original cost. To obtain performance information current to the most recent month end, please visit www.Allianzlife.com.
Expense Ratio | Gross | |||
AZL® Russell 1000 Growth Index Fund | 0.80 | % |
The above expense ratio is based on the current Fund prospectus dated April 29, 2013. The Manager and the Fund have entered into a written contract limiting operating expenses, excluding certain expenses (such as interest expense), to 0.84% through April 30, 2015. Additional information pertaining to the December 31, 2013 expense ratios can be found in the financial highlights.
1 | The recent growth rate in the stock market has helped to produce short-term returns that are not typical and may not continue in the future. Because of ongoing market volatility, Fund performance may be subject to substantial short-term changes. |
The total return of the Fund does not reflect the effect of any insurance charges, the annual maintenance fee or the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. Such charges, fees and tax payments would reduce the performance quoted. |
The Fund’s performance is measured against the Russell 1000® Growth Index, an unmanaged index that measures the performance of the large-cap growth segment of the U.S. equity universe. It includes those Russell 1000 companies with higher price-to-book ratios and higher forecasted growth values. The index does not reflect the deduction of fees associated with a mutual fund, such as investment fees for services provided to the Fund. Investors cannot invest directly in an index. |
2
AZL Russell 1000 Growth Index Fund
(Unaudited)
As a shareholder of the AZL Russell 1000 Growth Index Fund (the “Fund”), you incur ongoing costs, including management fees, distribution fees, and other Fund expenses. These examples are intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. Please note that the expenses shown in each table do not reflect expenses that apply to the subaccount or the insurance contract. If the expenses that apply to the subaccount of the insurance contract were included, your costs would have been higher.
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the periods presented below.
The Actual Expense table below provides information about actual account values and actual expenses. You may use the information below, 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 table under the heading entitled “Expenses Paid During Period” to estimate the expenses you paid on your account during this period.
Beginning Account Value 7/1/13 | Ending Account Value 12/31/13 | Expenses Paid During Period 7/1/13 - 12/31/13* | Annualized Expense Ratio During Period 7/1/13 - 12/31/13 | |||||||||||||||||
AZL Russell 1000 Growth Index Fund | $ | 1,000.00 | $ | 1,189.20 | $ | 4.30 | 0.78 | % |
The Hypothetical Expense table below provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.
Beginning Account Value 7/1/13 | Ending Account Value 12/31/13 | Expenses Paid During Period 7/1/13 - 12/31/13* | Annualized Expense Ratio During Period 7/1/13 - 12/31/13 | |||||||||||||||||
AZL Russell 1000 Growth Index Fund | $ | 1,000.00 | $ | 1,021.27 | $ | 3.97 | 0.78 | % |
* | Expenses are equal to the average account value over the period, multiplied by the Fund’s annualized expense ratio, multiplied by 184/365 (to reflect the one half year period). |
Portfolio Composition
(Unaudited)
Investments | Percent of net assets | ||||
Information Technology | 26.6 | % | |||
Consumer Discretionary | 19.7 | ||||
Health Care | 12.2 | ||||
Industrials | 11.9 | ||||
Consumer Staples | 11.5 | ||||
Financials | 5.1 | ||||
Energy | 4.4 | ||||
Materials | 4.4 | ||||
Telecommunication Services | 1.9 | ||||
Utilities | 0.2 | ||||
Machinery | 0.1 | ||||
|
| ||||
Total Common Stock | 98.0 | ||||
Money Market | 1.8 | ||||
Securities Held as Collateral for Securities on Loan | 1.3 | ||||
|
| ||||
Total Investment Securities | 101.1 | ||||
Net other assets (liabilities) | (1.1 | ) | |||
|
| ||||
Net Assets | 100.0 | % | |||
|
|
3
AZL Russell 1000 Growth Index Fund
Schedule of Portfolio Investments
December 31, 2013
Shares | Fair Value | |||||||
| Common Stocks (98.0%): |
| ||||||
| Aerospace & Defense (3.9%): |
| ||||||
1,332 | BE Aerospace, Inc.* | $ | 115,924 | |||||
11,069 | Boeing Co. (The) | 1,510,808 | ||||||
1,458 | Hexcel Corp.* | 65,158 | ||||||
11,479 | Honeywell International, Inc. | 1,048,836 | ||||||
727 | Huntington Ingalls Industries, Inc. | 65,437 | ||||||
3,787 | Lockheed Martin Corp. | 562,975 | ||||||
2,135 | Precision Castparts Corp. | 574,956 | ||||||
1,759 | Rockwell Collins, Inc. | 130,025 | ||||||
235 | Spirit AeroSystems Holdings, Inc., Class A* | 8,009 | ||||||
774 | TransDigm Group, Inc. | 124,629 | ||||||
158 | Triumph Group, Inc. | 12,019 | ||||||
12,567 | United Technologies Corp. | 1,430,125 | ||||||
|
| |||||||
5,648,901 | ||||||||
|
| |||||||
| Air Freight & Logistics (1.0%): |
| ||||||
2,212 | C.H. Robinson Worldwide, Inc.^ | 129,048 | ||||||
3,007 | Expeditors International of Washington, Inc. | 133,060 | ||||||
10,568 | United Parcel Service, Inc., Class B | 1,110,485 | ||||||
|
| |||||||
1,372,593 | ||||||||
|
| |||||||
| Airlines (0.4%): |
| ||||||
947 | Alaska Air Group, Inc. | 69,481 | ||||||
1,700 | American Airlines Group, Inc.*^ | 42,925 | ||||||
484 | Copa Holdings SA, Class A | 77,493 | ||||||
5,722 | Delta Air Lines, Inc. | 157,183 | ||||||
1,202 | Southwest Airlines Co. | 22,646 | ||||||
5,192 | United Continental Holdings, Inc.* | 196,414 | ||||||
|
| |||||||
566,142 | ||||||||
|
| |||||||
| Auto Components (0.6%): |
| ||||||
71 | Allison Transmission Holdings, Inc. | 1,960 | ||||||
3,372 | BorgWarner, Inc. | 188,528 | ||||||
4,561 | Delphi Automotive plc | 274,253 | ||||||
1,240 | Gentex Corp. | 40,908 | ||||||
3,594 | Goodyear Tire & Rubber Co. | 85,717 | ||||||
121 | Lear Corp. | 9,797 | ||||||
1,220 | Tesla Motors, Inc.*^ | 183,464 | ||||||
721 | Visteon Corp.* | 59,043 | ||||||
|
| |||||||
843,670 | ||||||||
|
| |||||||
| Automobiles (0.4%): |
| ||||||
19,767 | Ford Motor Co. | 305,004 | ||||||
3,270 | Harley-Davidson, Inc. | 226,415 | ||||||
669 | Thor Industries, Inc. | 36,949 | ||||||
|
| |||||||
568,368 | ||||||||
|
| |||||||
| Beverages (3.4%): |
| ||||||
2,206 | Brown-Forman Corp., Class B | 166,707 | ||||||
55,865 | Coca-Cola Co. (The) | 2,307,784 | ||||||
3,788 | Coca-Cola Enterprises, Inc. | 167,164 | ||||||
2,108 | Constellation Brands, Inc., Class A* | 148,361 | ||||||
2,977 | Dr Pepper Snapple Group, Inc. | 145,039 | ||||||
1,948 | Monster Beverage Corp.* | 132,016 | ||||||
22,561 | PepsiCo, Inc. | 1,871,210 | ||||||
|
| |||||||
4,938,281 | ||||||||
|
| |||||||
| Biotechnology (4.6%): |
| ||||||
2,847 | Alexion Pharmaceuticals, Inc.* | 378,822 | ||||||
1,844 | Alkermes plc* | 74,977 | ||||||
10,942 | Amgen, Inc. | 1,249,139 |
Shares | Fair Value | |||||||
| Common Stocks, continued |
| ||||||
| Biotechnology, continued |
| ||||||
2,700 | ARIAD Pharmaceuticals, Inc.*^ | $ | 18,414 | |||||
3,464 | Biogen Idec, Inc.* | 969,054 | ||||||
2,027 | BioMarin Pharmaceutical, Inc.* | 142,437 | ||||||
6,085 | Celgene Corp.* | 1,028,122 | ||||||
947 | Cubist Pharmaceuticals, Inc.* | 65,220 | ||||||
22,254 | Gilead Sciences, Inc.* | 1,672,387 | ||||||
1,521 | Incyte Corp.* | 77,008 | ||||||
1,106 | Medivation, Inc.*^ | 70,585 | ||||||
1,087 | Myriad Genetics, Inc.*^ | 22,805 | ||||||
1,169 | Regeneron Pharmaceuticals, Inc.* | 321,756 | ||||||
1,461 | Seattle Genetics, Inc.* | 58,279 | ||||||
1,175 | Theravance, Inc.*^ | 41,889 | ||||||
676 | United Therapeutics Corp.* | 76,442 | ||||||
3,396 | Vertex Pharmaceuticals, Inc.* | 252,323 | ||||||
|
| |||||||
6,519,659 | ||||||||
|
| |||||||
| Building Products (0.2%): |
| ||||||
501 | A.O. Smith Corp. | 27,024 | ||||||
1,053 | Allegion plc* | 46,532 | ||||||
374 | Armstrong World Industries, Inc.* | 21,546 | ||||||
2,128 | Fortune Brands Home & Security, Inc. | 97,250 | ||||||
732 | Lennox International, Inc. | 62,264 | ||||||
5,268 | Masco Corp. | 119,952 | ||||||
|
| |||||||
374,568 | ||||||||
|
| |||||||
| Capital Markets (1.1%): |
| ||||||
770 | Affiliated Managers Group, Inc.* | 166,998 | ||||||
943 | Ameriprise Financial, Inc. | 108,492 | ||||||
80 | Artisan Partners Asset Management, Inc. | 5,215 | ||||||
673 | BlackRock, Inc., Class A+ | 212,984 | ||||||
2,159 | Charles Schwab Corp. (The) | 56,134 | ||||||
1,769 | Eaton Vance Corp. | 75,696 | ||||||
945 | Federated Investors, Inc., Class B^ | 27,216 | ||||||
5,993 | Franklin Resources, Inc. | 345,976 | ||||||
1,868 | Lazard, Ltd., Class A | 84,658 | ||||||
1,989 | SEI Investments Co. | 69,078 | ||||||
3,783 | T. Rowe Price Group, Inc. | 316,902 | ||||||
1,253 | Waddell & Reed Financial, Inc., Class A | 81,595 | ||||||
|
| |||||||
1,550,944 | ||||||||
|
| |||||||
| Chemicals (3.6%): |
| ||||||
967 | Airgas, Inc. | 108,159 | ||||||
459 | Albemarle Corp. | 29,096 | ||||||
2,321 | Celanese Corp., Series A | 128,375 | ||||||
2,332 | Dow Chemical Co. (The) | 103,541 | ||||||
13,429 | E.I. du Pont de Nemours & Co. | 872,481 | ||||||
2,259 | Eastman Chemical Co. | 182,301 | ||||||
3,825 | Ecolab, Inc. | 398,833 | ||||||
1,986 | FMC Corp. | 149,864 | ||||||
1,172 | International Flavor & Fragrances, Inc. | 100,769 | ||||||
5,922 | LyondellBasell Industries NV, Class A | 475,418 | ||||||
7,788 | Monsanto Co. | 907,690 | ||||||
141 | NewMarket Corp.^ | 47,115 | ||||||
1,894 | PPG Industries, Inc. | 359,216 | ||||||
4,315 | Praxair, Inc. | 561,079 | ||||||
774 | Rockwood Holdings, Inc. | 55,666 | ||||||
1,809 | RPM International, Inc. | 75,092 | ||||||
649 | Scotts Miracle-Gro Co. (The) | 40,381 |
Continued
4
AZL Russell 1000 Growth Index Fund
Schedule of Portfolio Investments
December 31, 2013
Shares | Fair Value | |||||||
| Common Stocks, continued |
| ||||||
| Chemicals, continued |
| ||||||
1,293 | Sherwin Williams Co. | $ | 237,266 | |||||
1,657 | Sigma Aldrich Corp. | 155,775 | ||||||
1,308 | Valspar Corp. (The) | 93,247 | ||||||
969 | W.R. Grace & Co.* | 95,805 | ||||||
243 | Westlake Chemical Corp. | 29,663 | ||||||
|
| |||||||
5,206,832 | ||||||||
|
| |||||||
| Commercial Banks (0.0%): | |||||||
69 | Signature Bank* | 7,412 | ||||||
|
| |||||||
| Commercial Services & Supplies (0.4%): | |||||||
438 | Cintas Corp. | 26,100 | ||||||
870 | Clean Harbors, Inc.* | 52,165 | ||||||
1,629 | Copart, Inc.* | 59,703 | ||||||
1,108 | Corrections Corp. of America | 35,534 | ||||||
2,233 | Iron Mountain, Inc. | 67,772 | ||||||
429 | KAR Auction Services, Inc. | 12,677 | ||||||
1,323 | Pitney Bowes, Inc. | 30,826 | ||||||
1,488 | R.R. Donnelley & Sons Co. | 30,177 | ||||||
918 | Rollins, Inc. | 27,806 | ||||||
1,259 | Stericycle, Inc.* | 146,257 | ||||||
1,704 | Waste Connections, Inc. | 74,345 | ||||||
565 | Waste Management, Inc. | 25,352 | ||||||
|
| |||||||
588,714 | ||||||||
|
| |||||||
| Communications Equipment (1.6%): | |||||||
361 | CommScope Holding, Inc.* | 6,830 | ||||||
1,133 | F5 Networks, Inc.* | 102,944 | ||||||
289 | Harris Corp. | 20,175 | ||||||
2,494 | JDS Uniphase Corp.* | 32,372 | ||||||
1,299 | Juniper Networks, Inc.* | 29,318 | ||||||
3,341 | Motorola Solutions, Inc. | 225,518 | ||||||
504 | Palo Alto Networks, Inc.* | 28,965 | ||||||
25,208 | QUALCOMM, Inc. | 1,871,694 | ||||||
2,336 | Riverbed Technology, Inc.* | 42,235 | ||||||
|
| |||||||
2,360,051 | ||||||||
|
| |||||||
| Computers & Peripherals (4.7%): | |||||||
1,474 | 3D Systems Corp.*^ | 136,979 | ||||||
10,373 | Apple, Inc. | 5,820,394 | ||||||
15,324 | EMC Corp. | 385,399 | ||||||
2,439 | NCR Corp.* | 83,072 | ||||||
4,961 | NetApp, Inc. | 204,096 | ||||||
1,510 | SanDisk Corp. | 106,515 | ||||||
286 | Stratasys, Ltd.* | 38,524 | ||||||
|
| |||||||
6,774,979 | ||||||||
|
| |||||||
| Construction & Engineering (0.2%): | |||||||
149 | Aecom Technology Corp.* | 4,385 | ||||||
1,481 | Chicago Bridge & Iron Co. NV | 123,130 | ||||||
1,437 | Fluor Corp. | 115,377 | ||||||
664 | Quanta Services, Inc.* | 20,956 | ||||||
|
| |||||||
263,848 | ||||||||
|
| |||||||
| Construction Materials (0.1%): | |||||||
715 | Eagle Materials, Inc. | 55,362 | ||||||
670 | Martin Marietta Materials, Inc. | 66,960 | ||||||
|
| |||||||
122,322 | ||||||||
|
| |||||||
| Consumer Finance (0.9%): | |||||||
13,823 | American Express Co. | 1,254,161 | ||||||
|
|
Shares | Fair Value | |||||||
| Common Stocks, continued |
| ||||||
| Containers & Packaging (0.4%): | |||||||
669 | AptarGroup, Inc. | $ | 45,365 | |||||
478 | Avery Dennison Corp. | 23,991 | ||||||
2,194 | Ball Corp. | 113,342 | ||||||
684 | Bemis Co., Inc. | 28,017 | ||||||
1,799 | Crown Holdings, Inc.* | 80,181 | ||||||
95 | Greif, Inc., Class A | 4,978 | ||||||
1,389 | Owens-Illinois, Inc.* | 49,698 | ||||||
1,436 | Packaging Corp. of America | 90,870 | ||||||
761 | Rock-Tenn Co., Class A | 79,913 | ||||||
2,875 | Sealed Air Corp. | 97,894 | ||||||
614 | Silgan Holdings, Inc. | 29,484 | ||||||
|
| |||||||
643,733 | ||||||||
|
| |||||||
| Distributors (0.2%): | |||||||
2,136 | Genuine Parts Co. | 177,694 | ||||||
4,356 | LKQ Corp.* | 143,312 | ||||||
|
| |||||||
321,006 | ||||||||
|
| |||||||
| Diversified Consumer Services (0.1%): | |||||||
3,945 | H&R Block, Inc. | 114,564 | ||||||
2,365 | Service Corp. International | 42,877 | ||||||
222 | Weight Watchers International, Inc.^ | 7,310 | ||||||
|
| |||||||
164,751 | ||||||||
|
| |||||||
| Diversified Financial Services (0.4%): | |||||||
1,272 | CBOE Holdings, Inc. | 66,093 | ||||||
1,061 | IntercontinentalExchange Group, Inc. | 238,641 | ||||||
604 | Leucadia National Corp. | 17,117 | ||||||
629 | LPL Financial Holdings, Inc. | 29,582 | ||||||
2,837 | Moody’s Corp. | 222,619 | ||||||
707 | MSCI, Inc., Class A* | 30,910 | ||||||
|
| |||||||
604,962 | ||||||||
|
| |||||||
| Diversified Telecommunication Services (1.5%): | |||||||
21 | Intelsat SA* | 473 | ||||||
823 | Level 3 Communications, Inc.* | 27,299 | ||||||
2,188 | TW Telecom, Inc.* | 66,668 | ||||||
41,792 | Verizon Communications, Inc. | 2,053,659 | ||||||
8,166 | Windstream Holdings, Inc.^ | 65,165 | ||||||
|
| |||||||
2,213,264 | ||||||||
|
| |||||||
| Electric Utilities (0.1%): | |||||||
762 | ITC Holdings Corp.^ | 73,015 | ||||||
|
| |||||||
| Electrical Equipment (0.9%): | |||||||
3,553 | AMETEK, Inc. | 187,137 | ||||||
1,170 | Babcock & Wilcox Co. (The) | 40,002 | ||||||
7,845 | Emerson Electric Co. | 550,562 | ||||||
627 | Hubbell, Inc., Class B | 68,280 | ||||||
2,037 | Rockwell Automation, Inc. | 240,692 | ||||||
1,444 | Roper Industries, Inc. | 200,254 | ||||||
354 | Solarcity Corp.* | 20,114 | ||||||
|
| |||||||
1,307,041 | ||||||||
|
| |||||||
| Electronic Equipment, Instruments & Components (0.3%): | |||||||
2,331 | Amphenol Corp., Class A | 207,879 | ||||||
141 | Cdw Corp. of Delaware^ | 3,294 | ||||||
272 | Dolby Laboratories, Inc., Class A*^ | 10,488 | ||||||
1,410 | FLIR Systems, Inc. | 42,441 | ||||||
492 | IPG Photonics Corp.*^ | 38,184 | ||||||
1,385 | National Instruments Corp. | 44,348 |
Continued
5
AZL Russell 1000 Growth Index Fund
Schedule of Portfolio Investments
December 31, 2013
Shares | Fair Value | |||||||
| Common Stocks, continued |
| ||||||
| Electronic Equipment, Instruments & Components, continued |
| ||||||
3,772 | Trimble Navigation, Ltd.* | $ | 130,888 | |||||
|
| |||||||
477,522 | ||||||||
|
| |||||||
| Energy Equipment & Services (2.3%): | |||||||
161 | Atwood Oceanics, Inc.* | 8,596 | ||||||
421 | Baker Hughes, Inc. | 23,264 | ||||||
2,275 | Cameron International Corp.* | 135,431 | ||||||
1,111 | Dresser-Rand Group, Inc.* | 66,249 | ||||||
590 | Dril-Quip, Inc.* | 64,859 | ||||||
3,460 | FMC Technologies, Inc.* | 180,647 | ||||||
228 | Frank’s International NV | 6,156 | ||||||
12,380 | Halliburton Co. | 628,284 | ||||||
1,572 | Oceaneering International, Inc. | 123,999 | ||||||
809 | RPC, Inc.^ | 14,441 | ||||||
19,396 | Schlumberger, Ltd. | 1,747,774 | ||||||
5,155 | Seadrill, Ltd.^ | 211,767 | ||||||
|
| |||||||
3,211,467 | ||||||||
|
| |||||||
| Food & Staples Retailing (2.4%): | |||||||
6,366 | Costco Wholesale Corp. | 757,618 | ||||||
2,051 | CVS Caremark Corp. | 146,790 | ||||||
621 | Fresh Market, Inc. (The)* | 25,151 | ||||||
7,587 | Kroger Co. (The) | 299,914 | ||||||
284 | Safeway, Inc. | 9,250 | ||||||
213 | Sprouts Farmers Market, Inc.* | 8,186 | ||||||
3,031 | Sysco Corp. | 109,419 | ||||||
10,409 | Walgreen Co. | 597,893 | ||||||
15,576 | Wal-Mart Stores, Inc. | 1,225,674 | ||||||
5,411 | Whole Foods Market, Inc. | 312,918 | ||||||
|
| |||||||
3,492,813 | ||||||||
|
| |||||||
| Food Products (1.7%): | |||||||
700 | Archer-Daniels-Midland Co. | 30,380 | ||||||
1,692 | Campbell Soup Co. | 73,230 | ||||||
5,624 | ConAgra Foods, Inc. | 189,529 | ||||||
2,541 | Flowers Foods, Inc. | 54,555 | ||||||
9,405 | General Mills, Inc. | 469,403 | ||||||
2,176 | Green Mountain Coffee Roasters, Inc.* | 164,462 | ||||||
2,188 | Hershey Co. | 212,739 | ||||||
1,786 | Hillshire Brands Co. | 59,724 | ||||||
1,969 | Hormel Foods Corp. | 88,940 | ||||||
143 | Ingredion, Inc. | 9,790 | ||||||
213 | J.M. Smucker Co. (The) | 22,071 | ||||||
3,494 | Kellogg Co. | 213,379 | ||||||
8,673 | Kraft Foods Group, Inc., Class A | 467,648 | ||||||
1,922 | McCormick & Co. | 132,464 | ||||||
2,954 | Mead Johnson Nutrition Co. | 247,427 | ||||||
291 | Pinnacle Foods, Inc. | 7,991 | ||||||
1,990 | WhiteWave Foods Co., Class A* | 45,651 | ||||||
|
| |||||||
2,489,383 | ||||||||
|
| |||||||
| Gas Utilities (0.1%): | |||||||
2,826 | ONEOK, Inc. | 175,720 | ||||||
342 | Questar Corp.+ | 7,863 | ||||||
|
| |||||||
183,583 | ||||||||
|
| |||||||
| Health Care Equipment & Supplies (1.5%): | |||||||
7,907 | Baxter International, Inc. | 549,932 | ||||||
2,834 | Becton, Dickinson & Co. | 313,129 | ||||||
1,174 | C.R. Bard, Inc. | 157,246 |
Shares | Fair Value | |||||||
| Common Stocks, continued |
| ||||||
| Health Care Equipment & Supplies, continued | |||||||
522 | Cooper Cos., Inc. (The) | $ | 64,644 | |||||
553 | DENTSPLY International, Inc. | 26,809 | ||||||
1,634 | Edwards Lifesciences Corp.* | 107,452 | ||||||
1,194 | Hologic, Inc.* | 26,686 | ||||||
792 | IDEXX Laboratories, Inc.* | 84,245 | ||||||
556 | Intuitive Surgical, Inc.* | 213,548 | ||||||
2,049 | ResMed, Inc.^ | 96,467 | ||||||
794 | Sirona Dental Systems, Inc.* | 55,739 | ||||||
2,629 | St. Jude Medical, Inc. | 162,867 | ||||||
2,818 | Stryker Corp. | 211,745 | ||||||
1,573 | Varian Medical Systems, Inc.* | 122,206 | ||||||
143 | Zimmer Holdings, Inc. | 13,326 | ||||||
|
| |||||||
2,206,041 | ||||||||
|
| |||||||
| Health Care Providers & Services (1.8%): | |||||||
1,483 | Aetna, Inc. | 101,719 | ||||||
3,369 | AmerisourceBergen Corp. | 236,874 | ||||||
1,414 | Brookdale Senior Living, Inc.* | 38,433 | ||||||
3,001 | Catamaran Corp.* | 142,487 | ||||||
250 | CIGNA Corp. | 21,870 | ||||||
111 | Community Health Systems, Inc.* | 4,359 | ||||||
2,687 | DaVita, Inc.* | 170,275 | ||||||
463 | Envision Healthcare Holdings, Inc.* | 16,446 | ||||||
10,424 | Express Scripts Holding Co.* | 732,183 | ||||||
296 | HCA Holdings, Inc.* | 14,122 | ||||||
3,734 | Health Management Associates, Inc., Class A* | 48,915 | ||||||
1,271 | Henry Schein, Inc.* | 145,224 | ||||||
1,275 | Laboratory Corp. of America Holdings* | 116,497 | ||||||
3,306 | McKesson, Inc. | 533,589 | ||||||
940 | MEDNAX, Inc.* | 50,177 | ||||||
1,125 | Patterson Cos., Inc. | 46,350 | ||||||
311 | Premier, Inc., Class A* | 11,432 | ||||||
158 | Quest Diagnostics, Inc. | 8,459 | ||||||
185 | Quintiles Transnational Holdings, Inc.* | 8,573 | ||||||
1,508 | Tenet Healthcare Corp.* | 63,517 | ||||||
891 | Universal Health Services, Inc., Class B | 72,403 | ||||||
|
| |||||||
2,583,904 | ||||||||
|
| |||||||
| Health Care Technology (0.2%): | |||||||
4,326 | Cerner Corp.* | 241,131 | ||||||
|
| |||||||
| Hotels, Restaurants & Leisure (3.2%): | |||||||
551 | Bally Technologies, Inc.* | 43,226 | ||||||
983 | Brinker International, Inc. | 45,552 | ||||||
1,403 | Burger King Worldwide, Inc. | 32,073 | ||||||
451 | Chipotle Mexican Grill, Inc.* | 240,284 | ||||||
37 | Choice Hotels International, Inc.^ | 1,817 | ||||||
1,234 | Darden Restaurants, Inc. | 67,093 | ||||||
815 | Domino’s Pizza, Inc. | 56,765 | ||||||
1,555 | Dunkin’ Brands Group, Inc. | 74,951 | ||||||
3,809 | International Game Technology | 69,171 | ||||||
5,703 | Las Vegas Sands Corp. | 449,796 | ||||||
2,996 | Marriott International, Inc., Class A | 147,883 | ||||||
14,626 | McDonald’s Corp. | 1,419,160 | ||||||
383 | Norwegian Cruise Line Holdings, Ltd.* | 13,585 | ||||||
410 | Panera Bread Co., Class A* | 72,443 | ||||||
461 | SeaWorld Entertainment, Inc. | 13,263 | ||||||
10,923 | Starbucks Corp. | 856,254 | ||||||
1,212 | Starwood Hotels & Resorts Worldwide, Inc. | 96,293 |
Continued
6
AZL Russell 1000 Growth Index Fund
Schedule of Portfolio Investments
December 31, 2013
Shares | Fair Value | |||||||
| Common Stocks, continued |
| ||||||
| Hotels, Restaurants & Leisure, continued | |||||||
1,979 | Wyndham Worldwide Corp. | $ | 145,833 | |||||
1,177 | Wynn Resorts, Ltd. | 228,585 | ||||||
6,563 | Yum! Brands, Inc. | 496,228 | ||||||
|
| |||||||
4,570,255 | ||||||||
|
| |||||||
| Household Durables (0.4%): | |||||||
1,843 | Jarden Corp.* | 113,068 | ||||||
2,436 | Newell Rubbermaid, Inc. | 78,951 | ||||||
59 | NVR, Inc.* | 60,535 | ||||||
5,703 | PulteGroup, Inc. | 116,169 | ||||||
422 | Taylor Morrison Home Corp., Class A* | 9,474 | ||||||
885 | Tempur-Pedic International, Inc.* | 47,755 | ||||||
770 | Tupperware Brands Corp. | 72,788 | ||||||
84 | Whirlpool Corp. | 13,176 | ||||||
|
| |||||||
511,916 | ||||||||
|
| |||||||
| Household Products (1.1%): | |||||||
2,011 | Church & Dwight Co., Inc. | 133,289 | ||||||
1,606 | Clorox Co. (The)^ | 148,973 | ||||||
13,608 | Colgate-Palmolive Co. | 887,377 | ||||||
4,691 | Kimberly-Clark Corp. | 490,022 | ||||||
|
| |||||||
1,659,661 | ||||||||
|
| |||||||
| Independent Power Producers & Energy Traders (0.0%): |
| ||||||
686 | Calpine Corp.* | 13,384 | ||||||
|
| |||||||
| Industrial Conglomerates (0.9%): | |||||||
8,519 | 3M Co. | 1,194,790 | ||||||
49 | Carlisle Cos., Inc. | 3,891 | ||||||
1,767 | Danaher Corp. | 136,412 | ||||||
|
| |||||||
1,335,093 | ||||||||
|
| |||||||
| Insurance (0.9%): | |||||||
173 | Allied World Assurance Co. Holdings AG | 19,516 | ||||||
160 | American Financial Group, Inc. | 9,235 | ||||||
3,477 | Aon plc | 291,686 | ||||||
127 | Arch Capital Group, Ltd.* | 7,581 | ||||||
1,828 | Arthur J. Gallagher & Co. | 85,788 | ||||||
460 | Axis Capital Holdings, Ltd. | 21,882 | ||||||
817 | Brown & Brown, Inc. | 25,646 | ||||||
534 | Chubb Corp. (The) | 51,600 | ||||||
222 | Endurance Specialty Holdings, Ltd. | 13,025 | ||||||
376 | Erie Indemnity Co., Class A | 27,493 | ||||||
190 | Hanover Insurance Group, Inc. (The) | 11,345 | ||||||
372 | Loews Corp. | 17,945 | ||||||
5,372 | Marsh & McLennan Cos., Inc. | 259,791 | ||||||
7,074 | Progressive Corp. (The) | 192,908 | ||||||
2,599 | Prudential Financial, Inc. | 239,680 | ||||||
1,478 | Travelers Cos., Inc. (The) | 133,818 | ||||||
136 | Validus Holdings, Ltd. | 5,479 | ||||||
|
| |||||||
1,414,418 | ||||||||
|
| |||||||
| Internet & Catalog Retail (2.6%): | |||||||
5,365 | Amazon.com, Inc.* | 2,139,508 | ||||||
1,559 | Expedia, Inc. | 108,600 | ||||||
6,108 | Groupon, Inc.* | 71,891 | ||||||
891 | HomeAway, Inc.* | 36,424 | ||||||
649 | Liberty Media Corp. — Interactive, Class A* | 19,048 | ||||||
535 | Liberty Ventures, Inc., Series A* | 65,586 | ||||||
733 | Netflix, Inc.* | 269,869 |
Shares | Fair Value | |||||||
| Common Stocks, continued |
| ||||||
| Internet & Catalog Retail, continued | |||||||
753 | Priceline.com, Inc.* | $ | 875,287 | |||||
1,632 | TripAdvisor, Inc.* | 135,179 | ||||||
119 | zulily, Inc., Class A* | 4,930 | ||||||
|
| |||||||
3,726,322 | ||||||||
|
| |||||||
| Internet Software & Services (5.3%): | |||||||
2,579 | Akamai Technologies, Inc.* | 121,677 | ||||||
18,934 | eBay, Inc.* | 1,039,287 | ||||||
718 | Equinix, Inc.* | 127,409 | ||||||
24,856 | Facebook, Inc., Class A* | 1,358,629 | ||||||
3,938 | Google, Inc., Class A* | 4,413,356 | ||||||
1,087 | IAC/InterActiveCorp | 74,666 | ||||||
1,413 | LinkedIn Corp., Class A* | 306,381 | ||||||
1,610 | Rackspace Hosting, Inc.* | 62,999 | ||||||
878 | Twitter, Inc.*^ | 55,885 | ||||||
1,891 | VeriSign, Inc.* | 113,044 | ||||||
|
| |||||||
7,673,333 | ||||||||
|
| |||||||
| IT Services (6.5%): | |||||||
9,376 | Accenture plc, Class A | 770,895 | ||||||
718 | Alliance Data Systems Corp.* | 188,784 | ||||||
7,079 | Automatic Data Processing, Inc. | 572,054 | ||||||
438 | Booz Allen Hamilton Holding Corp. | 8,388 | ||||||
1,768 | Broadridge Financial Solutions, Inc. | 69,871 | ||||||
4,400 | Cognizant Technology Solutions Corp., Class A* | 444,312 | ||||||
419 | DST Systems, Inc. | 38,020 | ||||||
439 | Fidelity National Information Services, Inc. | 23,566 | ||||||
3,886 | Fiserv, Inc.* | 229,468 | ||||||
1,002 | FleetCor Technologies, Inc.* | 117,404 | ||||||
1,375 | Gartner, Inc.* | 97,694 | ||||||
2,407 | Genpact, Ltd.* | 44,217 | ||||||
1,112 | Global Payments, Inc. | 72,269 | ||||||
15,202 | International Business Machines Corp. | 2,851,439 | ||||||
1,253 | Jack Henry & Associates, Inc. | 74,190 | ||||||
1,109 | Lender Processing Services, Inc. | 41,454 | ||||||
1,705 | MasterCard, Inc., Class A | 1,424,459 | ||||||
944 | NeuStar, Inc., Class A* | 47,068 | ||||||
4,271 | Paychex, Inc. | 194,459 | ||||||
2,366 | Teradata Corp.* | 107,629 | ||||||
1,838 | Total System Services, Inc. | 61,169 | ||||||
1,325 | Vantive, Inc., Class A* | 43,208 | ||||||
7,623 | Visa, Inc., Class A | 1,697,490 | ||||||
8,125 | Western Union Co. | 140,156 | ||||||
|
| |||||||
9,359,663 | ||||||||
|
| |||||||
| Leisure Equipment & Products (0.3%): | |||||||
1,423 | Hasbro, Inc. | 78,279 | ||||||
5,039 | Mattel, Inc. | 239,756 | ||||||
956 | Polaris Industries, Inc. | 139,232 | ||||||
|
| |||||||
457,267 | ||||||||
|
| |||||||
| Leisure Facilities (0.0%): | |||||||
1,002 | Six Flags Entertainment Corp. | 36,894 | ||||||
|
| |||||||
| Life Sciences Tools & Services (0.5%): | |||||||
613 | Agilent Technologies, Inc. | 35,057 | ||||||
1,526 | Bruker Corp.* | 30,169 | ||||||
335 | Charles River Laboratories International, Inc.* | 17,768 | ||||||
815 | Covance, Inc.* | 71,769 | ||||||
1,814 | Illumina, Inc.* | 200,665 |
Continued
7
AZL Russell 1000 Growth Index Fund
Schedule of Portfolio Investments
December 31, 2013
Shares | Fair Value | |||||||
| Common Stocks, continued |
| ||||||
| Life Sciences Tools & Services, continued | |||||||
1,628 | Life Technologies Corp.* | $ | 123,402 | |||||
434 | Mettler-Toledo International, Inc.* | 105,284 | ||||||
259 | Techne Corp. | 24,520 | ||||||
1,245 | Waters Corp.* | 124,500 | ||||||
|
| |||||||
733,134 | ||||||||
|
| |||||||
| Machinery (1.9%): | |||||||
1,737 | Caterpillar, Inc. | 157,737 | ||||||
1,248 | Colfax Corp.* | 79,485 | ||||||
639 | Crane Co. | 42,973 | ||||||
2,270 | Cummins, Inc. | 320,002 | ||||||
5,661 | Deere & Co. | 517,020 | ||||||
1,978 | Donaldson Co., Inc. | 85,964 | ||||||
1,842 | Dover Corp. | 177,827 | ||||||
2,086 | Flowserve Corp. | 164,439 | ||||||
889 | Graco, Inc. | 69,449 | ||||||
112 | Harsco Corp. | 3,139 | ||||||
1,117 | IDEX Corp. | 82,490 | ||||||
2,050 | Illinois Tool Works, Inc. | 172,364 | ||||||
3,104 | Ingersoll-Rand plc | 191,206 | ||||||
1,300 | ITT Corp. | 56,446 | ||||||
1,218 | Lincoln Electric Holdings, Inc. | 86,892 | ||||||
2,015 | Manitowoc Co., Inc. (The) | 46,990 | ||||||
111 | Navistar International Corp.*^ | 4,239 | ||||||
947 | Nordson Corp. | 70,362 | ||||||
691 | PACCAR, Inc. | 40,886 | ||||||
1,618 | Pall Corp. | 138,096 | ||||||
100 | Snap-On, Inc. | 10,952 | ||||||
216 | Stanley Black & Decker, Inc. | 17,429 | ||||||
834 | Toro Co. | 53,042 | ||||||
387 | Valmont Industries, Inc. | 57,709 | ||||||
851 | WABCO Holdings, Inc.* | 79,492 | ||||||
1,413 | Wabtec Corp. | 104,944 | ||||||
171 | Xylem, Inc. | 5,917 | ||||||
|
| |||||||
2,837,491 | ||||||||
|
| |||||||
| Marine (0.0%): | |||||||
481 | Kirby Corp.* | 47,739 | ||||||
|
| |||||||
| Media (5.2%): | |||||||
871 | AMC Networks, Inc., Class A* | 59,324 | ||||||
2,797 | Cablevision Systems Corp., Class A | 50,150 | ||||||
8,200 | CBS Corp., Class B | 522,668 | ||||||
962 | Charter Communications, Inc., Class A* | 131,563 | ||||||
1,662 | Cinemark Holdings, Inc. | 55,394 | ||||||
712 | Clear Channel Outdoor Holdings, Inc., Class A | 7,220 | ||||||
35,372 | Comcast Corp., Class A | 1,838,106 | ||||||
7,168 | DIRECTV, Inc., Class A* | 495,237 | ||||||
3,570 | Discovery Communications, Inc., Class A* | 322,799 | ||||||
3,042 | DISH Network Corp., Class A* | 176,193 | ||||||
2,803 | Interpublic Group of Cos., Inc. (The) | 49,613 | ||||||
1,143 | Lamar Advertising Co.* | 59,722 | ||||||
4,858 | Liberty Global plc, Class A* | 432,313 | ||||||
1,221 | Lions Gate Entertainment Corp.^ | 38,657 | ||||||
881 | Madison Square Garden, Inc., Class A* | 50,728 | ||||||
1,882 | McGraw-Hill Cos., Inc. (The) | 147,172 | ||||||
313 | Morningstar, Inc. | 24,442 | ||||||
5,383 | News Corp., Class A* | 97,002 | ||||||
3,772 | Omnicom Group, Inc. | 280,524 |
Shares | Fair Value | |||||||
| Common Stocks, continued |
| ||||||
| Media, continued | |||||||
2,106 | Pandora Media, Inc.* | $ | 56,020 | |||||
273 | Regal Entertainment Group, Class A^ | 5,310 | ||||||
1,592 | Scripps Networks Interactive, Class A | 137,565 | ||||||
21,341 | Sirius XM Holdings, Inc.* | 74,480 | ||||||
1,376 | Starz – Liberty Capital* | 40,234 | ||||||
4,245 | Time Warner Cable, Inc. | 575,198 | ||||||
21,367 | Twenty-First Century Fox, Inc. | 751,691 | ||||||
6,509 | Viacom, Inc., Class B | 568,496 | ||||||
5,833 | Walt Disney Co. (The) | 445,641 | ||||||
|
| |||||||
7,493,462 | ||||||||
|
| |||||||
| Metals & Mining (0.1%): | |||||||
499 | Compass Minerals International, Inc. | 39,945 | ||||||
247 | Royal Gold, Inc. | 11,379 | ||||||
2,298 | Southern Copper Corp. | 65,976 | ||||||
128 | Tahoe Resources, Inc.* | 2,130 | ||||||
|
| |||||||
119,430 | ||||||||
|
| |||||||
| Multiline Retail (1.0%): | |||||||
233 | Big Lots, Inc.* | 7,524 | ||||||
275 | Dillard’s, Inc., Class A | 26,733 | ||||||
4,774 | Dollar General Corp.* | 287,968 | ||||||
3,036 | Dollar Tree, Inc.* | 171,291 | ||||||
1,421 | Family Dollar Stores, Inc. | 92,322 | ||||||
4,338 | Macy’s, Inc. | 231,649 | ||||||
2,110 | Nordstrom, Inc. | 130,398 | ||||||
7,340 | Target Corp. | 464,401 | ||||||
|
| |||||||
1,412,286 | ||||||||
|
| |||||||
| Office Electronics (0.0%): | |||||||
47 | Zebra Technologies Corp., Class A* | 2,542 | ||||||
|
| |||||||
| Oil, Gas & Consumable Fuels (2.1%): | |||||||
419 | Anadarko Petroleum Corp. | 33,235 | ||||||
254 | Antero Resources Corp.* | 16,114 | ||||||
6,149 | Cabot Oil & Gas Corp. | 238,335 | ||||||
3,505 | Cheniere Energy, Inc.* | 151,136 | ||||||
3,719 | Cobalt International Energy, Inc.* | 61,178 | ||||||
1,528 | Concho Resources, Inc.* | 165,024 | ||||||
618 | Continental Resources, Inc.*^ | 69,537 | ||||||
236 | CVR Energy, Inc. | 10,249 | ||||||
3,715 | EOG Resources, Inc. | 623,527 | ||||||
2,008 | EQT Corp. | 180,278 | ||||||
1,016 | Gulfport Energy Corp.* | 64,160 | ||||||
8,850 | Kinder Morgan, Inc. | 318,600 | ||||||
1,529 | Kosmos Energy LLC* | 17,094 | ||||||
520 | Laredo Petroleum Holdings, Inc.* | 14,399 | ||||||
653 | Noble Energy, Inc. | 44,476 | ||||||
1,475 | Oasis Petroleum, Inc.* | 69,281 | ||||||
1,471 | Pioneer Natural Resources Co. | 270,767 | ||||||
274 | QEP Resources, Inc. | 8,398 | ||||||
2,379 | Range Resources Corp. | 200,573 | ||||||
966 | SM Energy Co. | 80,284 | ||||||
5,128 | Southwestern Energy Co.* | 201,684 | ||||||
143 | Whiting Petroleum Corp.* | 8,847 | ||||||
5,468 | Williams Cos., Inc. (The) | 210,901 | ||||||
208 | World Fuel Services Corp. | 8,977 | ||||||
|
| |||||||
3,067,054 | ||||||||
|
|
Continued
8
AZL Russell 1000 Growth Index Fund
Schedule of Portfolio Investments
December 31, 2013
Shares | Fair Value | |||||||
| Common Stocks, continued |
| ||||||
| Paper & Forest Products (0.2%): | |||||||
5,581 | International Paper Co. | $ | 273,636 | |||||
|
| |||||||
| Personal Products (0.4%): | |||||||
6,289 | Avon Products, Inc. | 108,297 | ||||||
562 | Coty, Inc., Class A | 8,571 | ||||||
3,379 | Estee Lauder Co., Inc. (The), Class A | 254,506 | ||||||
1,250 | Herbalife, Ltd.^ | 98,375 | ||||||
847 | Nu Skin Enterprises, Inc., Class A | 117,072 | ||||||
|
| |||||||
586,821 | ||||||||
|
| |||||||
| Pharmaceuticals (3.6%): | |||||||
23,106 | Abbvie, Inc. | 1,220,229 | ||||||
2,529 | Actavis, Inc. plc* | 424,872 | ||||||
4,324 | Allergan, Inc. | 480,310 | ||||||
20,633 | Bristol-Myers Squibb Co. | 1,096,644 | ||||||
3,167 | Eli Lilly & Co. | 161,517 | ||||||
1,638 | Endo Health Solutions, Inc.* | 110,499 | ||||||
756 | Jazz Pharmaceuticals plc* | 95,679 | ||||||
5,286 | Johnson & Johnson Co. | 484,145 | ||||||
5,559 | Mylan, Inc.* | 241,261 | ||||||
1,838 | Perrigo Co. plc | 282,060 | ||||||
862 | Pharmacyclics, Inc.* | 91,182 | ||||||
894 | Salix Pharmaceuticals, Ltd.* | 80,406 | ||||||
7,293 | Zoetis, Inc. | 238,408 | ||||||
|
| |||||||
5,007,212 | ||||||||
|
| |||||||
| Professional Services (0.4%): | |||||||
538 | Dun & Bradstreet Corp. | 66,040 | ||||||
1,782 | Equifax, Inc. | 123,118 | ||||||
971 | IHS, Inc., Class A* | 116,229 | ||||||
486 | Nielsen Holdings NV | 22,303 | ||||||
2,042 | Robert Half International, Inc. | 85,744 | ||||||
2,208 | Verisk Analytics, Inc., Class A* | 145,109 | ||||||
|
| |||||||
558,543 | ||||||||
|
| |||||||
| Real Estate Investment Trusts (REITs) (1.6%): | |||||||
145 | American Homes 4 Rent, Class A | 2,349 | ||||||
5,770 | American Tower Corp. | 460,561 | ||||||
1,117 | Apartment Investment & Management Co., Class A | 28,941 | ||||||
218 | Boston Properties, Inc. | 21,881 | ||||||
143 | Brixmor Property Group, Inc.* | 2,907 | ||||||
807 | CBL & Associates Properties, Inc. | 14,494 | ||||||
1,483 | Digital Realty Trust, Inc.^ | 72,845 | ||||||
842 | Equity Lifestyle Properties, Inc. | 30,506 | ||||||
134 | Extra Space Storage, Inc. | 5,645 | ||||||
624 | Federal Realty Investment Trust | 63,280 | ||||||
1,769 | OMEGA Healthcare Investors, Inc. | 52,716 | ||||||
2,587 | Plum Creek Timber Co., Inc. | 120,321 | ||||||
1,947 | Public Storage, Inc. | 293,062 | ||||||
1,862 | Rayonier, Inc. | 78,390 | ||||||
581 | Regency Centers Corp. | 26,900 | ||||||
207 | Senior Housing Properties Trust | 4,602 | ||||||
3,379 | Simon Property Group, Inc. | 514,149 | ||||||
1,081 | Spirit Realty Capital, Inc. | 10,626 | ||||||
1,399 | Tanger Factory Outlet Centers, Inc. | 44,796 | ||||||
177 | Taubman Centers, Inc. | 11,314 | ||||||
1,917 | Ventas, Inc. | 109,806 | ||||||
521 | Vornado Realty Trust | 46,260 |
Shares | Fair Value | |||||||
| Common Stocks, continued |
| ||||||
| Real Estate Investment Trusts (REITs), continued | |||||||
8,494 | Weyerhaeuser Co. | $ | 268,156 | |||||
|
| |||||||
2,284,507 | ||||||||
|
| |||||||
| Real Estate Management & Development (0.1%): | |||||||
4,109 | CBRE Group, Inc.* | 108,067 | ||||||
1,562 | Realogy Holdings Corp.* | 77,272 | ||||||
44 | St. Joe Co. (The)*^ | 844 | ||||||
|
| |||||||
186,183 | ||||||||
|
| |||||||
| Road & Rail (1.4%): | |||||||
60 | AMERCO, Inc.* | 14,270 | ||||||
1,563 | Avis Budget Group, Inc.* | 63,176 | ||||||
312 | Con-way, Inc. | 12,390 | ||||||
7,439 | CSX Corp. | 214,020 | ||||||
287 | Genesee & Wyoming, Inc., Class A* | 27,566 | ||||||
5,037 | Hertz Global Holdings, Inc.* | 144,159 | ||||||
1,316 | J.B. Hunt Transport Services, Inc. | 101,727 | ||||||
1,607 | Kansas City Southern Industries, Inc. | 198,995 | ||||||
693 | Landstar System, Inc. | 39,813 | ||||||
832 | Norfolk Southern Corp. | 77,235 | ||||||
1,023 | Old Dominion Freight Line, Inc.* | 54,239 | ||||||
6,810 | Union Pacific Corp. | 1,144,080 | ||||||
|
| |||||||
2,091,670 | ||||||||
|
| |||||||
| Semiconductors & Semiconductor Equipment (1.7%): | |||||||
9,185 | Advanced Micro Devices, Inc.*^ | 35,546 | ||||||
1,592 | Altera Corp. | 51,788 | ||||||
1,960 | Analog Devices, Inc. | 99,823 | ||||||
11,587 | Applied Materials, Inc. | 204,973 | ||||||
6,153 | Atmel Corp.* | 48,178 | ||||||
3,288 | Avago Technologies, Ltd. | 173,902 | ||||||
3,591 | Broadcom Corp., Class A | 106,473 | ||||||
1,739 | Cree, Inc.* | 108,809 | ||||||
383 | Freescale Semiconductor Holdings I, Ltd.* | 6,147 | ||||||
4,677 | Intel Corp. | 121,415 | ||||||
528 | Lam Research Corp.* | 28,750 | ||||||
3,403 | Linear Technology Corp. | 155,007 | ||||||
964 | LSI Corp. | 10,623 | ||||||
4,227 | Maxim Integrated Products, Inc. | 117,976 | ||||||
2,861 | Microchip Technology, Inc.^ | 128,030 | ||||||
6,147 | ON Semiconductor Corp.* | 50,651 | ||||||
557 | Silicon Laboratories, Inc.* | 24,124 | ||||||
2,316 | Skyworks Solutions, Inc.* | 66,145 | ||||||
16,182 | Texas Instruments, Inc. | 710,551 | ||||||
3,849 | Xilinx, Inc. | 176,746 | ||||||
|
| |||||||
2,425,657 | ||||||||
|
| |||||||
| Software (6.5%): | |||||||
2,856 | Adobe Systems, Inc.* | 171,017 | ||||||
1,352 | Ansys, Inc.* | 117,894 | ||||||
2,626 | Autodesk, Inc.* | 132,167 | ||||||
4,167 | Cadence Design Systems, Inc.* | 58,421 | ||||||
2,730 | Citrix Systems, Inc.* | 172,673 | ||||||
694 | Concur Technologies, Inc.*^ | 71,607 | ||||||
3,424 | Electronic Arts, Inc.* | 78,547 | ||||||
641 | FactSet Research Systems, Inc. | 69,600 | ||||||
196 | FireEye, Inc.*^ | 8,548 | ||||||
1,932 | Fortinet, Inc.* | 36,959 | ||||||
1,572 | Informatica Corp.* | 65,238 |
Continued
9
AZL Russell 1000 Growth Index Fund
Schedule of Portfolio Investments
December 31, 2013
Shares | Fair Value | |||||||
| Common Stocks, continued |
| ||||||
| Software, continued | |||||||
4,332 | Intuit, Inc. | $ | 330,618 | |||||
177 | Micros Systems, Inc.* | 10,154 | ||||||
121,909 | Microsoft Corp. | 4,563,055 | ||||||
504 | NetSuite, Inc.* | 51,922 | ||||||
51,798 | Oracle Corp. | 1,981,791 | ||||||
2,762 | Red Hat, Inc.* | 154,782 | ||||||
183 | Rovi Corp.* | 3,603 | ||||||
8,606 | �� | Salesforce.com, Inc.* | 474,965 | |||||
1,145 | ServiceNow, Inc.* | 64,131 | ||||||
978 | Solarwinds, Inc.* | 36,998 | ||||||
1,005 | Solera Holdings, Inc. | 71,114 | ||||||
1,507 | Splunk, Inc.* | 103,486 | ||||||
7,398 | Symantec Corp. | 174,445 | ||||||
143 | Tableau Software, Inc., Class A* | 9,857 | ||||||
2,380 | TIBCO Software, Inc.* | 53,502 | ||||||
148 | Veeva Systems, Inc., Class A* | 4,751 | ||||||
1,265 | VMware, Inc., Class A* | 113,483 | ||||||
529 | Workday, Inc., Class A* | 43,992 | ||||||
|
| |||||||
9,229,320 | ||||||||
|
| |||||||
| Specialty Retail (4.1%): | |||||||
173 | Aaron’s, Inc. | 5,086 | ||||||
138 | Abercrombie & Fitch Co., Class A | 4,542 | ||||||
1,073 | Advance Auto Parts, Inc. | 118,760 | ||||||
1,878 | American Eagle Outfitters, Inc. | 27,043 | ||||||
278 | Ascena Retail Group, Inc.* | 5,882 | ||||||
768 | AutoNation, Inc.* | 38,162 | ||||||
518 | AutoZone, Inc.* | 247,573 | ||||||
3,189 | Bed Bath & Beyond, Inc.* | 256,077 | ||||||
1,042 | Best Buy Co., Inc. | 41,555 | ||||||
679 | Cabela’s, Inc., Class A*^ | 45,262 | ||||||
3,276 | CarMax, Inc.* | 154,038 | ||||||
2,162 | Chico’s FAS, Inc. | 40,732 | ||||||
1,434 | Dick’s Sporting Goods, Inc. | 83,315 | ||||||
925 | DSW, Inc., Class A | 39,525 | ||||||
268 | Foot Locker, Inc. | 11,106 | ||||||
4,073 | Gap, Inc. (The) | 159,173 | ||||||
1,438 | GNC Holdings, Inc., Class A | 84,051 | ||||||
21,312 | Home Depot, Inc. (The) | 1,754,829 | ||||||
3,501 | L Brands, Inc. | 216,537 | ||||||
15,880 | Lowe’s Cos., Inc. | 786,854 | ||||||
1,612 | O’Reilly Automotive, Inc.* | 207,481 | ||||||
1,528 | PetSmart, Inc. | 111,162 | ||||||
3,207 | Ross Stores, Inc. | 240,301 | ||||||
2,474 | Sally Beauty Holdings, Inc.* | 74,789 | ||||||
106 | Signet Jewelers, Ltd. | 8,342 | ||||||
1,630 | Tiffany & Co. | 151,231 | ||||||
10,501 | TJX Cos., Inc. (The) | 669,229 | ||||||
2,036 | Tractor Supply Co. | 157,953 | ||||||
938 | Ulta Salon, Cosmetics & Fragrance, Inc.* | 90,536 | ||||||
1,554 | Urban Outfitters, Inc.* | 57,653 | ||||||
1,434 | Williams-Sonoma, Inc. | 83,574 | ||||||
|
| |||||||
5,972,353 | ||||||||
|
| |||||||
| Textiles, Apparel & Luxury Goods (1.6%): | |||||||
795 | Carter’s, Inc. | 57,073 | ||||||
4,099 | Coach, Inc. | 230,077 | ||||||
229 | Deckers Outdoor Corp.* | 19,341 |
Shares | Fair Value | |||||||
| Common Stocks, continued |
| ||||||
| Textiles, Apparel & Luxury Goods, continued | |||||||
706 | Fossil Group, Inc.* | $ | 84,678 | |||||
1,449 | Hanesbrands, Inc. | 101,821 | ||||||
2,940 | Michael Kors Holdings, Ltd.* | 238,699 | ||||||
10,334 | Nike, Inc., Class B | 812,666 | ||||||
1,047 | PVH Corp. | 142,413 | ||||||
876 | Ralph Lauren Corp. | 154,675 | ||||||
1,212 | Under Armour, Inc., Class A* | 105,808 | ||||||
5,112 | V.F. Corp. | 318,682 | ||||||
|
| |||||||
2,265,933 | ||||||||
|
| |||||||
| Thrifts & Mortgage Finance (0.1%): | |||||||
324 | Nationstar Mortgage Holdings, Inc.*^ | 11,975 | ||||||
1,519 | Ocwen Financial Corp.* | 84,229 | ||||||
|
| |||||||
96,204 | ||||||||
|
| |||||||
| Tobacco (2.5%): | |||||||
29,305 | Altria Group, Inc. | 1,125,019 | ||||||
5,511 | Lorillard, Inc. | 279,297 | ||||||
23,891 | Philip Morris International, Inc. | 2,081,623 | ||||||
3,480 | Reynolds American, Inc. | 173,965 | ||||||
|
| |||||||
3,659,904 | ||||||||
|
| |||||||
| Trading Companies & Distributors (0.4%): | |||||||
4,328 | Fastenal Co. | 205,623 | ||||||
575 | HD Supply Holdings, Inc.* | 13,806 | ||||||
539 | MRC Global, Inc.* | 17,388 | ||||||
691 | MSC Industrial Direct Co., Inc., Class A | 55,881 | ||||||
1,381 | United Rentals, Inc.* | 107,649 | ||||||
861 | W.W. Grainger, Inc. | 219,917 | ||||||
|
| |||||||
620,264 | ||||||||
|
| |||||||
| Water Utilities (0.0%): | |||||||
2,224 | Aqua America, Inc. | 52,464 | ||||||
|
| |||||||
| Wireless Telecommunication Services (0.4%): | |||||||
4,874 | Crown Castle International Corp.* | 357,898 | ||||||
1,861 | SBA Communications Corp., Class A* | 167,192 | ||||||
2,282 | Sprint Corp.* | 24,532 | ||||||
|
| |||||||
549,622 | ||||||||
|
| |||||||
| Total Common Stocks (Cost $87,270,701) | 141,506,698 | ||||||
|
| |||||||
Contracts, Shares, Notional Amount or Principal Amount | Fair Value | |||||||
| Securities Held as Collateral for Securities on Loan (1.3%): |
| ||||||
$ | 1,848,894 | Allianz Variable Insurance Products Securities Lending Collateral Trust(a) | 1,848,894 | |||||
|
| |||||||
| Total Securities Held as Collateral for Securities on Loan (Cost | 1,848,894 | ||||||
|
| |||||||
| Unaffiliated Investment Company (1.8%): | |||||||
2,638,590 | Dreyfus Treasury Prime Cash Management Fund, Institutional Shares, 0.00%(b) | 2,638,590 | ||||||
|
| |||||||
| Total Unaffiliated Investment Company (Cost $2,638,590) | 2,638,590 | ||||||
|
| |||||||
| Total Investment Securities | 145,994,182 | ||||||
| Net other assets (liabilities) — (1.1)% | (1,659,553 | ) | |||||
|
| |||||||
| Net Assets — 100.0% | $ | 144,334,629 | |||||
|
|
Continued
10
AZL Russell 1000 Growth Index Fund
Schedule of Portfolio Investments
December 31, 2013
Percentages indicated are based on net assets as of December 31, 2013.
* | Non-income producing security. |
^ | This security or a partial position of this security was on loan as of December 31, 2013. The total value of securities on loan as of December 31, 2013, was $1,815,973. |
+ | Affiliated Securities |
(a) | Purchased with cash collateral held from securities lending. The value of the collateral could include collateral held for securities that were sold on or before December 31, 2013. |
(b) | The rate represents the effective yield at December 31, 2013. |
(c) | See Federal Tax Information listed in the Notes to the Financial Statements. |
Futures Contracts
Cash of $153,000 has been segregated to cover margin requirements for the following open contracts as of December 31, 2013:
Description | Type | Expiration Date | Number of Contracts | Notional Value | Unrealized Appreciation/ (Depreciation) | |||||||||||||||
NASDAQ Index 100 E-Mini March Futures | Long | 3/21/14 | 10 | $ | 716,750 | $ | 22,796 | |||||||||||||
S&P 500 Index E-Mini March Futures | Long | 3/21/14 | 24 | 2,209,320 | 73,268 | |||||||||||||||
|
| |||||||||||||||||||
Total | $ | 96,064 | ||||||||||||||||||
|
|
See accompanying notes to the financial statements.
11
AZL Russell 1000 Growth Index Fund
Statement of Assets and Liabilities
December 31, 2013
Assets: | |||||
Investments in non-affiliates, at cost | $ | 91,634,514 | |||
Investments in affiliates, at cost | 123,671 | ||||
|
| ||||
Total Investment securities, at cost | $ | 91,758,185 | |||
|
| ||||
Investments in non-affiliates, at value* | $ | 145,773,335 | |||
Investments in affiliates, at value | 220,847 | ||||
|
| ||||
Total Investment securities, at value | 145,994,182 | ||||
Cash | 827 | ||||
Segregated cash for collateral | 153,000 | ||||
Interest and dividends receivable | 148,165 | ||||
Receivable for variation margin on futures contracts | 10,987 | ||||
|
| ||||
Total Assets | 146,307,161 | ||||
|
| ||||
Liabilities: | |||||
Payable for capital shares redeemed | 9,282 | ||||
Payable for collateral received on loaned securities | 1,848,894 | ||||
Manager fees payable | 52,741 | ||||
Administration fees payable | 5,636 | ||||
Distribution fees payable | 29,965 | ||||
Custodian fees payable | 7,404 | ||||
Administrative and compliance services fees payable | 759 | ||||
Trustee fees payable | 6 | ||||
Other accrued liabilities | 17,845 | ||||
|
| ||||
Total Liabilities | 1,972,532 | ||||
|
| ||||
Net Assets | $ | 144,334,629 | |||
|
| ||||
Net Assets Consist of: | |||||
Capital | $ | 80,184,022 | |||
Accumulated net investment income/(loss) | 1,254,496 | ||||
Accumulated net realized gains/(losses) from investment transactions | 8,564,050 | ||||
Net unrealized appreciation/(depreciation) on investments | 54,332,061 | ||||
|
| ||||
Net Assets | $ | 144,334,629 | |||
|
| ||||
Shares of beneficial interest (unlimited number of shares authorized, no par value) | 8,723,080 | ||||
Net Asset Value (offering and redemption price per share) | $ | 16.55 | |||
|
|
* | Includes securities on loan of $1,815,973. |
For the Year Ended December 31, 2013
Investment Income: | |||||
Dividends | $ | 2,317,818 | |||
Dividends from affiliates | 6,757 | ||||
Income from securities lending | 21,960 | ||||
Foreign withholding tax | (151 | ) | |||
|
| ||||
Total Investment Income | 2,346,384 | ||||
|
| ||||
Expenses: | |||||
Manager fees | 616,114 | ||||
Administration fees | 51,702 | ||||
Distribution fees | 350,064 | ||||
Custodian fees | 15,940 | ||||
Administrative and compliance services fees | 2,918 | ||||
Trustee fees | 7,557 | ||||
Professional fees | 7,463 | ||||
Shareholder reports | 2,553 | ||||
Other expenses | 41,082 | ||||
|
| ||||
Total expenses | 1,095,393 | ||||
|
| ||||
Net Investment Income/(Loss) | 1,250,991 | ||||
|
| ||||
Realized and Unrealized Gains/(Losses) on Investments: | |||||
Net realized gains/(losses) on securities transactions | 10,014,161 | ||||
Net realized gains distributions from affiliated underlying funds | 47,551 | ||||
Net realized gains/(losses) on futures contracts | 707,766 | ||||
Change in net unrealized appreciation/depreciation on investments | 26,959,930 | ||||
|
| ||||
Net Realized/Unrealized Gains/(Losses) on Investments | 37,729,408 | ||||
|
| ||||
Change in Net Assets Resulting From Operations | $ | 38,980,399 | |||
|
|
See accompanying notes to the financial statements.
12
Statements of Changes in Net Assets
AZL Russell 1000 Growth Index Fund | ||||||||||
For the Year Ended December 31, 2013 | For the Year Ended December 31, 2012 | |||||||||
Change in Net Assets: | ||||||||||
Operations: | ||||||||||
Net investment income/(loss) | $ | 1,250,991 | $ | 1,465,857 | ||||||
Net realized gains/(losses) on investment transactions | 10,769,478 | (59,625 | ) | |||||||
Change in unrealized appreciation/depreciation on investments | 26,959,930 | 15,076,932 | ||||||||
|
|
|
| |||||||
Change in net assets resulting from operations | 38,980,399 | 16,483,164 | ||||||||
|
|
|
| |||||||
Dividends to Shareholders: | ||||||||||
From net investment income | (1,445,971 | ) | (754,649 | ) | ||||||
|
|
|
| |||||||
Change in net assets resulting from dividends to shareholders | (1,445,971 | ) | (754,649 | ) | ||||||
|
|
|
| |||||||
Capital Transactions: | ||||||||||
Proceeds from shares issued | 4,620,558 | 28,438,516 | ||||||||
Proceeds from dividends reinvested | 1,445,971 | 754,649 | ||||||||
Value of shares redeemed | (45,131,629 | ) | (10,942,949 | ) | ||||||
|
|
|
| |||||||
Change in net assets resulting from capital transactions | (39,065,100 | ) | 18,250,216 | |||||||
|
|
|
| |||||||
Change in net assets | (1,530,672 | ) | 33,978,731 | |||||||
Net Assets: | ||||||||||
Beginning of period | 145,865,301 | 111,886,570 | ||||||||
|
|
|
| |||||||
End of period | $ | 144,334,629 | $ | 145,865,301 | ||||||
|
|
|
| |||||||
Accumulated net investment income/(loss) | $ | 1,254,496 | $ | 1,467,963 | ||||||
|
|
|
| |||||||
Share Transactions: | ||||||||||
Shares issued | 333,477 | 2,299,012 | ||||||||
Dividends reinvested | 96,980 | 59,142 | ||||||||
Shares redeemed | (3,256,480 | ) | (889,112 | ) | ||||||
|
|
|
| |||||||
Change in shares | (2,826,023 | ) | 1,469,042 | |||||||
|
|
|
|
See accompanying notes to the financial statements.
13
AZL Russell 1000 Growth Index Fund
(Selected data for a share of beneficial interest outstanding throughout the periods indicated)
Year Ended 2013 | Year Ended 2012 | Year Ended 2011 | April 30, 2010 to December 31, 2010(a) | |||||||||||||||||
Net Asset Value, Beginning of Period | $ | 12.63 | $ | 11.10 | $ | 10.95 | $ | 10.00 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||||||
Investment Activities: | ||||||||||||||||||||
Net Investment Income/(Loss) | 0.18 | 0.12 | 0.08 | 0.05 | ||||||||||||||||
Net Realized and Unrealized Gains/(Losses) on Investments | 3.90 | 1.48 | 0.13 | 0.90 | ||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||
Total from Investment Activities | 4.08 | 1.60 | 0.21 | 0.95 | ||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||
Dividends to Shareholders From: | ||||||||||||||||||||
Net Investment Income | (0.16 | ) | (0.07 | ) | (0.06 | ) | — | |||||||||||||
|
|
|
|
|
|
|
| |||||||||||||
Total Dividends | (0.16 | ) | (0.07 | ) | (0.06 | ) | — | |||||||||||||
|
|
|
|
|
|
|
| |||||||||||||
Net Asset Value, End of Period | $ | 16.55 | $ | 12.63 | $ | 11.10 | $ | 10.95 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||||||
Total Return(b) | 32.48 | % | 14.40 | % | 1.92 | % | 9.50 | %(c) | ||||||||||||
Ratios to Average Net Assets/Supplemental Data: | ||||||||||||||||||||
Net Assets, End of Period (000’s) | $ | 144,335 | $ | 145,865 | $ | 111,887 | $ | 105,577 | ||||||||||||
Net Investment Income/(Loss)(d) | 0.89 | % | 1.09 | % | 0.72 | % | 0.87 | % | ||||||||||||
Expenses Before Reductions(d)(e) | 0.78 | % | 0.80 | % | 0.84 | % | 0.87 | % | ||||||||||||
Expenses Net of Reductions(d) | 0.78 | % | 0.80 | % | 0.84 | % | 0.84 | % | ||||||||||||
Portfolio Turnover Rate | 13 | % | 16 | % | 24 | % | 29 | %(c) |
(a) | Period from commencement of operations. |
(b) | The returns include reinvested dividends and fund level expenses, but exclude insurance contract charges. If these charges were included, the returns would have been lower. |
(c) | Not annualized. |
(d) | Annualized for periods less than one year. |
(e) | Excludes fee reductions. If such fee reductions had not occurred, the ratios would have been as indicated. |
See accompanying notes to the financial statements.
14
AZL Russell 1000 Growth Index Fund
Notes to the Financial Statements
December 31, 2013
1. Organization
The Allianz Variable Insurance Products Trust (the “Trust”) was organized as a Delaware statutory trust on July 13, 1999. The Trust is a diversified open-end management investment company registered under the Investment Company Act of 1940. The Trust consists of 29 separate investment portfolios (collectively, the “Funds”), of which one is included in this report, the AZL Russell 1000 Growth Index Fund (the “Fund”), and 28 are presented in separate reports.
The Trust is authorized to issue an unlimited number of shares of the Fund without par value. Shares of the Fund are available through the variable annuity contracts and variable life insurance policies offered through the separate accounts of participating insurance companies.
Under the Trust’s organizational documents, its officers and trustees are indemnified against certain liabilities arising out of the performance of their duties to the Fund. In addition, in the normal course of business, the Fund may enter into contracts with its vendors and others that provide for general indemnifications. The Fund’s maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Fund. However, based on experience, the Fund expects the risk of loss to be remote.
2. Significant Accounting Policies
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. The policies conform with U.S. generally accepted accounting principles (“U.S. GAAP”). The preparation of financial statements requires management to make certain 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 increases and decreases in net assets from operations during the reporting period. Actual results could differ from those estimates.
Security Valuation
The Fund records its investments at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between willing market participants at the measurement date. The valuation techniques used to determine fair value are further described in Note 4 below.
Investment Transactions and Investment Income
Investment transactions are recorded not later than on the business day following trade date. However, for financial reporting purposes, investment transactions are accounted for on trade date. Net realized gains and losses on investments sold and on foreign currency transactions are recorded on the basis of identified cost. Interest income is recorded on the accrual basis and includes, where applicable, the amortization of premiums or accretion of discounts. Dividend income is recorded on the ex-dividend date except in the case of foreign securities, in which case dividends are recorded as soon as such information becomes available.
Real Estate Investment Trusts
The Fund may own shares of real estate investment trusts (“REITs”) which report information on the source of their distributions annually. Certain distributions received from REITs during the year, which are known to be a return of capital, are recorded as a reduction to the cost of the individual REIT.
Foreign Currency Translation
The accounting records of the Fund are maintained in U.S. dollars. Foreign currency amounts are translated into U.S. dollars at the current rate of exchange to determine the fair value of investments, assets and liabilities. Purchases and sales of securities, and income and expenses are translated at the prevailing rate of exchange on the respective dates of such transactions. The Fund does not isolate that portion of the results of operations resulting from changes in foreign exchange rates on investments from fluctuations arising from changes in market prices of securities held. Such fluctuations are included in the net realized and unrealized gain or loss on investments and foreign currencies. Income received by the Fund from sources within foreign countries may be subject to withholding and other income or similar taxes imposed by such countries. The Funds accrue such taxes, as applicable, based on their current interpretation of tax rules in the foreign markets in which they invest.
Dividends to Shareholders
Dividends to shareholders are recorded on the ex-dividend date. The Fund distributes its dividends from net investment income and net realized capital gains, if any, on an annual basis. The amount of dividends from net investment income and from net realized gains is determined in accordance with federal income tax regulations, which may differ from U.S. GAAP. These “book/tax” differences are either temporary or permanent in nature. To the extent these differences are permanent in nature (e.g., return of capital, net operating loss, reclassification of certain market discounts, gain/loss, paydowns, and distributions), such amounts are reclassified within the composition of net assets based on their federal tax-basis treatment; temporary differences (e.g., wash sales and post October losses) do not require reclassification. Dividends to shareholders that exceed net investment income and net realized gains for tax purposes are reported as distributions of capital.
Expense Allocation
Expenses directly attributable to the Fund are charged directly to the Fund, while expenses attributable to more than one Fund are allocated among the respective Funds based upon relative net assets or some other reasonable method. Expenses which are attributable to more than one Trust are allocated across the Allianz Variable Insurance Products and Allianz Variable Insurance Products Fund of Funds Trusts based upon relative net assets or another reasonable basis. Allianz Investment Management LLC (the “Manager”), serves as the investment manager for the Trust and the Allianz Variable Insurance Products Fund of Funds Trust.
Securities Lending
To generate additional income, the Fund may lend up to 33 1/3% of its assets pursuant to agreements requiring that the loan be continuously secured by any combination of cash, U.S. government or U.S. government agency securities, equal initially to at least 102% of the fair value plus accrued interest on the securities loaned (105% for foreign
15
AZL Russell 1000 Growth Index Fund
Notes to the Financial Statements
December 31, 2013
securities). The borrower of securities is at all times required to post collateral to the Fund in an amount equal to 100% of the fair value of the securities loaned based on the previous day’s fair value of the securities loaned, marked-to-market daily. Any collateral shortfalls are adjusted the next business day. The Fund bears all of the gains and losses on such investments. The Fund receives payments from borrowers equivalent to the dividends and interest that would have been earned on securities lent while simultaneously seeking to earn income on the investment of cash collateral received. In extremely low interest rate environments, the broker rebate fee may exceed the interest earned or the cash collateral which would result in a loss to the Fund. The investment of cash collateral deposited by the borrower is subject to inherent market risks such as interest rate risk, credit risk, liquidity risk, and other risks that are present in the market, and as such, the value of these investments may not be sufficient, when liquidated, to repay the borrower when the loaned security is returned. There may be risks of delay in recovery of the securities or even loss of rights in the collateral should the borrower of the securities fail financially. However, loans will be made only to borrowers, such as broker-dealers, banks or institutional borrowers of securities, deemed by the Manager to be of good standing and credit worthy and when in its judgment, the consideration which can be earned currently from such securities loans justifies the attendant risks. Loans are subject to termination by the Trust or the borrower at any time, and are, therefore, not considered to be illiquid investments. Securities on loan at December 31, 2013 are presented on the Fund’s Schedule of Portfolio Investments. The average outstanding amount of securities on loan was $2 million for the year ended December 31, 2013.
Cash collateral received in connection with securities lending is invested in the Allianz Variable Insurance Products Securities Lending Collateral Trust (the “Securities Lending Collateral Trust”) managed by The Dreyfus Corporation, an affiliate of the Custodian and Securities Lending Agent. The Securities Lending Collateral Trust invests in short-term investments that have a remaining maturity of 397 days or less as calculated in accordance with Rule 2a-7 under the 1940 Act. The Fund paid securities lending fees of $2,162 during the year ended December 31, 2013. These fees have been netted against “Income from securities lending” on the Statement of Operations.
Commission Recapture
Certain Funds of the Trust participate in a commission recapture program. The Fund will utilize the recaptured commissions to pay for, in whole or part, certain expenses of the Fund, excluding investment advisory fees. Any amounts received by the Fund, if applicable, are disclosed as “Expenses paid indirectly” on the Statement of Operations.
Effective January 6, 2014, the Manager, on behalf of the Trust, requested the Fund cease participation in the program until further notice.
Derivative Instruments
All open derivative positions at period end are reflected on the Fund’s Schedule of Portfolio Investments. The following is a description of the derivative instruments utilized by the Fund, including the primary underlying risk exposures related to each instrument type.
Futures Contracts
During the year ended December 31, 2013, the Fund used futures contracts to provide equity exposure on the Fund’s cash balances. Futures contracts are valued based upon their quoted daily settlement prices. Upon entering into a futures contract, the Fund is required to segregate liquid assets in accordance with the initial margin requirements of the broker or exchange. Futures contracts are marked to market daily and a payable or receivable for the change in value (“variation margin”) is recorded by the Fund. Gains or losses are recognized but not considered realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, elements of market risk (generally equity price risk related to stock futures, interest rate risk related to bond futures, and foreign currency risk related to currency futures) and exposure to loss in excess of the variation margin disclosed in the Statement of Assets and Liabilities. The primary risks associated with the use of futures contracts are the imperfect correlation between the change in fair value of the underlying securities and the prices of futures contracts, the possibility of an illiquid market, and the inability of the counterparty to meet the terms of the contract. The notional amount of futures contracts outstanding was $2.9 million as of December 31, 2013. The monthly average notional amount for these contracts was $2.8 million for the year ended December 31, 2013. Realized gains and losses are reported as “Net realized gains/(losses) on futures contracts” on the Statement of Operations.
Summary of Derivative Instruments
The following is a summary of the fair values of derivative instruments on the Fund’s Statement of Assets and Liabilities, categorized by risk exposure, as of December 31, 2013:
Asset Derivatives | Liability Derivatives | |||||||||||
Primary Risk Exposure | Statement of Assets and Liabilities Location | Total Fair Value* | Statement of Assets and Liabilities Location | Total Fair Value* | ||||||||
Equity Contracts | Receivable for variation margin on futures contracts | $ | 96,064 | Payable for variation margin on futures contracts | $ | — |
* | For futures contracts, the amounts represent the cumulative appreciation/(depreciation) of these futures contracts as reported in the Schedule of Portfolio Investments. Only current day’s variation margin is reported within the Statement of Assets and Liabilities as Variation Margin on Futures Contracts. |
The following is a summary of the effect of derivative instruments on the Statement of Operations, categorized by risk exposure, for the year ended December 31, 2013:
Primary Risk Exposure | Location of Gains/(Losses) on Derivatives Recognized in Income | Realized Gains/(Losses) on Derivatives Recognized in Income | Change in Unrealized Appreciation/ Depreciation on Derivatives Recognized in Income | |||||||
Equity Contracts | Net realized gains/(losses) on futures contracts/ change in unrealized appreciation/ depreciation on investments | $ | 707,766 | $ | 109,899 |
16
AZL Russell 1000 Growth Index Fund
Notes to the Financial Statements
December 31, 2013
3. Related Party Transactions
The Manager provides investment advisory and management services for the Fund. The Manager has retained an independent money management organization (the “Subadviser”), to make investment decisions on behalf of the Fund. Pursuant to a subadvisory agreement with BlackRock Investment Management, LLC (“BlackRock Investment”), BlackRock Investment provides investment advisory services as the Subadviser for the Fund subject to the general supervision of the Trustees and the Manager. The Manager is entitled to a fee, computed daily and paid monthly, based on the average daily net assets of the Fund. Expenses incurred by the Fund for investment advisory and management services are reflected on the Statement of Operations as “Manager fees.” For its services, the Subadviser is entitled to a fee payable by the Manager. The Manager has contractually agreed to waive fees and reimburse the Fund to limit the annual expenses, excluding interest expense (e.g., cash overdraft fees), taxes, brokerage commissions, other expenditures that are capitalized in accordance with U.S. GAAP and other extraordinary expenses not incurred in the ordinary course of the Fund’s business, based on the daily net assets of the Fund, through April 30, 2015.
For the year ended December 31, 2013, the annual rate due to the Manager and the annual expense limit were as follows:
Annual Rate | Annual Expense Limit | |||||||||
AZL Russell 1000 Growth Index Fund | 0.44 | % | 0.84 | % |
Any amounts contractually waived or reimbursed by the Manager in a particular fiscal year will be subject to repayment by the Fund to the Manager to the extent that from time to time through the next three fiscal years the repayment will not cause the Fund’s expenses to exceed the lesser of the stated limit at the time of the waiver or the current stated limit. Any amounts recouped by the Manager during the year are reflected on the Statement of Operations as “Recoupment of prior expenses reimbursed by the Manager.” At December 31, 2013, there were no remaining contractual reimbursements that are subject to repayment by the Fund in subsequent years.
In addition, the Manager may voluntarily waive or reimburse additional fees in order to maintain more competitive expense ratios. Any voluntary waivers or reimbursements are not subject to repayment in subsequent years. Information on the total amount waived/reimbursed by the Manager or repaid to the Manager by the Fund during the year can be found on the Statement of Operations. During the year ended December 31, 2013, there were no voluntary waivers.
Pursuant to separate agreements between the Funds and the Manager, the Manager provides a Chief Compliance Officer (“CCO”) and certain compliance oversight and regulatory filing services to the Trust. Under these agreements the Manager is entitled to an amount equal to a portion of the compensation and certain other expenses related to the individuals performing the CCO and compliance oversight services, as well as $75 per hour for time incurred in connection with the preparation and filing of certain documents with the Securities and Exchange Commission. The fees are paid to the Manager on a quarterly basis. The total expenses incurred by the Fund for these services are reflected on the Statement of Operations as “Administrative and compliance services fees.”
Citi Fund Services Ohio, Inc. (“Citi” or the “Administrator”), a wholly owned subsidiary of Citigroup, Inc., with which an officer of the Trust is affiliated, serves as the Trust’s administrator, transfer agent, and fund accountant, and assists the Trust in all aspects of its administration and operation. The Administrator is entitled to a Trust-wide asset-based fee, which is based on the following schedule: 0.05% of daily average net assets on the first $4 billion, 0.04% of daily average net assets on the next $2 billion, 0.02% of daily average net assets on the next $2 billion and 0.01% of daily average net assets over $8 billion. The overall Trust-wide fees are accrued daily and paid monthly and are subject to a minimum annual fee. In addition, the Administrator is entitled to annual account fees related to the transfer agency system, an annual fee for each additional class of shares of any Fund, certain annual fees in supporting fair value services, and a Trust-wide annual fee for providing infrastructure and support in implementing the written policies and procedures comprising the Fund’s compliance program. Fees payable to the Administrator are subject to certain reductions associated with services provided to new funds. The Administrator is also reimbursed for certain expenses incurred. The total expenses incurred by the Fund for these services are reflected on the Statement of Operations as “Administration fees.”
Allianz Life Financial Services, LLC (“ALFS”), an affiliate of the Manager, serves as distributor of the Fund and receives 12b-1 fees directly from the Fund, plus a Trust-wide annual fee of $42,500, paid by the Manager from its profits and not by the Trust, for recordkeeping and reporting services.
The Trust has adopted a distribution and service plan in conformance with Rule 12b-1 of the 1940 Act. Pursuant to this plan, the Fund is authorized to pay certain fees for the sale and distribution of its shares and services provided to its shareholders at an annual rate not to exceed 0.25% of the Fund’s average daily net assets. These fees are reflected on the Statement of Operations as “Distribution fees.”
In addition, certain legal fees and expenses are paid to a law firm, Dorsey & Whitney LLP, of which the Secretary of the Fund is a partner. During the year ended December 31, 2013, $1,836 was paid from the Fund relating to these fees and expenses.
Certain Officers and Trustees of the Trust are affiliated with the Manager or the Administrator. Such Officers (except for the Trust’s CCO as noted above) and Trustees receive no compensation from the Trust for serving in their respective roles. For their service to the Trust and to the Allianz Variable Insurance Products Fund of Funds Trust, each non-interested Trustee receives a $139,000 annual Board retainer. In addition, the Trustees are reimbursed for certain expenses associated with attending Board meetings. Compensation to the Trustees is allocated between the Trust and the Allianz Variable Insurance Products Fund of Funds Trust in proportion to the assets under management of each trust. During the year ended December 31, 2013, actual Trustee compensation was $973,000 in total for both trusts.
At a meeting of the Board of Trustees on December 4, 2013, the Trustees approved a fee increase to the Officers and Trustees who are paid a fee for their services to the Trust and to the Allianz Variable Insurance Products Fund of Funds Trust. Effective January 1, 2014, each non-interested Trustee will receive a $163,000 annual retainer.
4. Investment Valuation Summary
The valuation techniques employed by the Fund, as described below, maximize the use of observable inputs and minimize the use of unobservable inputs in determining fair value. The inputs used for valuing the Fund’s investments are summarized in the three broad levels listed below:
— | Level 1 — quoted prices in active markets for identical assets |
— | Level 2 — other significant observable inputs (including quoted prices for similar securities, interest rates, prepayments speeds, credit risk, etc.) |
— | Level 3 — significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of investments) |
17
AZL Russell 1000 Growth Index Fund
Notes to the Financial Statements
December 31, 2013
Changes in valuation techniques may result in transfers in or out of an assigned level within the disclosure hierarchy. The Fund determines transfers between fair value hierarchy levels at the reporting period end. The inputs or methodology used for valuing investments is not necessarily an indication of the risk associated with investing in those investments.
Security prices are generally provided by an independent third party pricing service approved by the Trust’s Board of Trustees (“Trustees”) as of the close of the New York Stock Exchange (“NYSE”) (generally 4:00 pm Eastern Time). Equity securities are valued at the last quoted sale price or, if there is no sale, the last quoted bid price is used for long securities and the last quoted ask price is used for securities sold short. Securities listed on NASDAQ Stock Market, Inc. (“NASDAQ”) are valued at the official closing price as reported by NASDAQ. In each of these situations, valuations are typically categorized as a Level 1 in the fair value hierarchy. Investments in open-end investment companies are valued at their respective net asset value as reported by such companies and are typically categorized as Level 1 in the fair value hierarchy.
Debt and other fixed income securities are generally valued at an evaluated bid price provided by an independent pricing source approved by the Trustees. To value debt securities, pricing services may use various pricing techniques which take into account appropriate factors such as market activity, yield, quality, coupon rate, maturity, type of issue, trading characteristics, call features, credit ratings and other data, as well as broker quotes. Short term securities of sufficient credit quality with sixty days or less remaining until maturity may be valued at amortized cost, which approximates fair value. In each of these situations, valuations are typically categorized as Level 2 in the fair value hierarchy.
Futures contracts are valued at the last sales price as of the close of the primary exchange and are typically categorized as Level 1 in the fair value hierarchy.
Other assets and securities for which market quotations are not readily available, or are deemed unreliable are valued at fair value as determined in good faith by the Trustees or persons acting on the behalf of the Trustees. Fair value pricing may be used for significant events such as securities whose trading has been suspended, whose price has become stale or for which there is no currently available price at the close of the NYSE. Depending on the source and relative significance of valuation inputs, these instruments may be classified as Level 2 or Level 3 in the fair value hierarchy. The Fund utilizes a pricing service to assist in determining the fair value of securities when certain significant events occur that may affect the value of foreign securities.
In accordance with procedures adopted by the Trustees, fair value pricing may be used if events materially affecting the value of foreign securities occur between the time when the exchange on which they are traded closes and the time when the Fund’s net asset value is calculated. Management identifies possible fluctuation in international securities by monitoring the increase or decrease in the value of a designated benchmark index. In the event of an increase or decrease greater than predetermined levels, the Fund may use a systematic valuation model provided by an independent third party to fair value its international equity securities which are then typically categorized as Level 2 in the fair value hierarchy. For the year ended December 31, 2013, there were no Level 3 investments for which significant unobservable inputs were used to determine fair value.
The following is a summary of the valuation inputs used as of December 31, 2013 in valuing the Fund’s investments based upon the three levels defined above:
Investment Securities: | Level 1 | Level 2 | Total | ||||||||||||
Common Stocks+ | $ | 141,506,698 | $ | — | $ | 141,506,698 | |||||||||
Securities Held as Collateral for Securities on Loan | — | 1,848,894 | 1,848,894 | ||||||||||||
Unaffiliated Investment Company | 2,638,590 | — | 2,638,590 | ||||||||||||
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Total Investment Securities | 144,145,288 | 1,848,894 | 145,994,182 | ||||||||||||
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Other Financial Instruments*: | |||||||||||||||
Futures Contracts | 96,064 | — | 96,064 | ||||||||||||
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Total Investments | $ | 144,241,352 | $ | 1,848,894 | $ | 146,090,246 | |||||||||
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+ | For detailed industry descriptions, see the accompanying Schedule of Portfolio Investments. |
* | Other Financial Instruments would include any derivative instruments, such as futures contracts. These investments are generally recorded in the financial statements at the unrealized gain or loss on the investment. |
5. Security Purchases and Sales
For the year ended December 31, 2013, cost of purchases and proceeds from sales of securities (excluding securities maturing less than one year from acquisition) were as follows:
Purchases | Sales | |||||||||
AZL Russell 1000 Growth Index Fund | $ | 17,391,246 | $ | 54,763,468 |
6. Investment Risks
Derivatives Risk: The Fund may invest in derivatives as a principal strategy. A derivative is a financial contract whose value depends on, or is derived from, the value of an underlying asset, reference rate, or risk. Use of derivative instruments involves risks different from, or possibly greater than, the risks associated with investing directly in securities and other traditional investments. Derivatives are subject to a number of other risks, such as liquidity risk, interest rate risk, market risk, credit risk, and selection risk. Derivatives also involve the risk of mispricing or improper valuation and the risk that changes in the value may not correlate perfectly with the underlying asset, rate, or index. Using derivatives may result in losses, possibly in excess of the principal amount invested. Also, suitable derivative transactions may not be available in all circumstances. The counterparty to a derivatives contract could default. As required by applicable law, a Fund that invests in derivatives segregates cash or liquid securities, or both, to the extent that its obligations under the instrument are not covered through ownership of the underlying security, financial instrument, or currency.
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AZL Russell 1000 Growth Index Fund
Notes to the Financial Statements
December 31, 2013
7. Federal Tax Information
It is the Fund’s policy to continue to comply with the requirements of the Internal Revenue Code under Subchapter M, applicable to regulated investment companies, and to distribute all of its taxable income, including any net realized gains on investments, to its shareholders. Therefore, no provision is made for federal income taxes.
Management of the Fund has reviewed tax positions taken in tax years that remain subject to examination by all major tax jurisdictions, including federal (i.e., the last four tax year ends and the interim tax period since then, as applicable). Management believes that there is no tax liability resulting from unrecognized tax benefits related to uncertain tax positions taken.
Cost for federal income tax purposes at December 31, 2013 is $91,942,874. The gross unrealized appreciation/ (depreciation) on a tax basis is as follows:
Unrealized appreciation | $ | 54,641,092 | |||
Unrealized depreciation | (589,784 | ) | |||
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Net unrealized appreciation/(depreciation) | $ | 54,051,308 | |||
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During the year ended December 31, 2013, the Fund utilized $1,248,758 in capital loss carry forwards to offset capital gains.
The tax character of dividends paid to shareholders during the year ended December 31, 2013 were as follows:
Ordinary Income | Net Long-Term Capital Gains | Total Distributions(a) | |||||||||||||
AZL Russell 1000 Growth Index Fund | $ | 1,445,971 | $ | — | $ | 1,445,971 |
(a) | Total distributions paid may differ from the Statements of Changes in Net Assets because dividends are recognized when actually paid for tax purposes. |
The tax character of dividends paid to shareholders during the year ended December 31, 2012 was as follows:
Ordinary Income | Net Long-Term Capital Gains | Total Distributions(a) | |||||||||||||
AZL Russell 1000 Growth Index Fund | $ | 754,649 | $ | — | $ | 754,649 |
(a) | Total distributions paid may differ from the Statements of Changes in Net Assets because dividends are recognized when actually paid for tax purposes. |
As of December 31, 2013, the components of accumulated earnings on a tax basis were as follows:
Undistributed Income | Undistributed Long-Term Capital Gains | Accumulated Other Losses | Unrealized Appreciation/ | Total Accumulated Earnings/ (Deficit) | |||||||||||||||||||||
AZL Russell 1000 Growth Index Fund | $ | 1,253,837 | $ | 8,845,462 | $ | — | $ | 54,051,308 | $ | 64,150,607 |
(a) | The difference between book-basis and tax-basis unrealized appreciation/(depreciation) is attributable primarily to tax deferral of losses on wash sales. |
8. Ownership and Principal Holders
The beneficial ownership, either directly or indirectly, of more than 25% of the voting securities of a fund creates presumptions of control of the fund, under section 2(a)(9) of the 1940 Act. As of December 31, 2013, the Fund had an individual shareholder account which is affiliated with the Investment Adviser representing ownership in excess of 50% of the Fund.
9. Subsequent Events
Management has evaluated events and transactions subsequent to period end through the date the financial statements were issued, for purposes of recognition or disclosure in these financial statements and there are no subsequent events to report.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Shareholders and Board of Trustees of
Allianz Variable Insurance Products Trust:
We have audited the accompanying statement of assets and liabilities of AZL Russell 1000 Growth Index Fund (the “Fund”) of the Allianz Variable Insurance Products Trust, including the schedule of portfolio investments, as of December 31, 2013, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the years in the two-year period then ended, and the financial highlights for each of the periods in the four-year period then ended. These financial statements and financial highlights are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of December 31, 2013, by correspondence with the custodian and brokers. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of the Fund as of December 31, 2013, the results of its operations for the year then ended, the changes in its net assets for each of the years in the two-year period then ended, and the financial highlights for each of the periods in the four-year period then ended, in conformity with U.S. generally accepted accounting principles.
/s/KPMG LLP
Columbus, Ohio
February 25, 2014
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Other Federal Income Tax Information (Unaudited)
For the year ended December 31, 2013, 100.00% of the total ordinary income dividends paid by the Fund qualify for the corporate dividends received deduction available to corporate shareholders.
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A description of the policies and procedures that the Fund uses to determine how to vote proxies relating to portfolio securities is available, without charge, upon request, by visiting the Securities and Exchange Commission’s (“Commission”) website at www.sec.gov, or by calling 800-624-0197.
Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30th is available (i) without charge, upon request, by calling 800-624-0197; (ii) on the Allianz Variable Insurance Products Trust’s website at https://www.allianzlife.com; and (iii) on the Commission’s website at http://www.sec.gov.
The Fund files complete Schedules of Portfolio Holdings with the Commission for the first and third quarters of each fiscal year on Form N-Q. Schedules of Portfolio Holdings for the Fund in this report are available without charge on the Commission’s website at http://www.sec.gov, or may be reviewed and copied at the Commission’s Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 800-SEC-0330.
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Approval of Investment Advisory and Subadvisory Agreements (Unaudited)
The Allianz Variable Insurance Products Trust (the “Trust”) is a manager-of-managers fund. That means that the Trust’s Manager (“Allianz Investment Management LLC”) is responsible for monitoring the various Subadvisers that have day-to-day responsibility for the decisions made for each of the Trust’s investment portfolios. The Trust’s Manager is responsible for determining, in the first instance, which investment advisers to consider recommending for selection as a Subadviser.
In reviewing the services provided by the Manager and the terms of the investment management agreement, the Board receives and reviews information related to the Manager’s experience and expertise in the variable insurance marketplace. Currently, the Funds are offered only through variable annuities and variable life insurance policies, and not in the retail fund market. In addition, the Board receives information regarding the Manager’s expertise with regard to portfolio diversification and asset allocation requirements within variable insurance products issued by Allianz Life Insurance Company of North America and its subsidiary, Allianz Life Insurance Company of New York. Currently, the Funds are offered only through Allianz Life and Allianz of New York variable products.
The Trust’s Manager has adopted policies and procedures to assist it in the process of analyzing each potential Subadviser with expertise in particular asset classes for purposes of making the recommendation that a specific investment adviser be selected. The Trust’s Board reviews and considers the information provided by the Manager in deciding which investment advisers to select. After an investment adviser becomes a Subadviser, a similarly rigorous process is instituted by the Manager to monitor the investment performance and other responsibilities of the Subadviser. The Manager reports to the Trust’s Board on its analysis at the regular meetings of the Board, which are held at least quarterly. Where warranted, the Manager will add or remove a particular Subadviser from a “watch” list that it maintains. Watch list criteria include, for example: (a) Fund performance over various time periods; (b) Fund risk issues, such as changes in key personnel involved with Fund management, changes in investment philosophy or process, or “capacity” concerns; and (c) organizational risk issues, such as regulatory, compliance or legal concerns, or changes in the ownership of the Subadviser. The Manager may place a Fund on the watch list for other reasons, and if so, will explain its rationale to the Trustees. Funds which are on the watch list are subject to special scrutiny of the Manager and the Board of Trustees. Funds may be removed from such watch list, if for example, performance improves or regulatory matters are satisfactorily resolved. However, in some situations where Funds which have been on the watch list, the Manager has recommended the retention of a new Subadviser, and the Board of Trustees has subsequently approved new Subadvisory Agreements with such Subadvisers.
In assessing the Manager’s and Subadvisers’ (collectively, the “Advisory Organizations”), performance of their obligations, the Board considers whether there has occurred a circumstance or event that would constitute a reason for it to not renew an advisory contract. In this regard, the Board is mindful of the potential disruption of a Fund’s operations and various risks, uncertainties and other effects that could occur as a result of a decision to terminate or not renew a contract.
As required by the Investment Company Act of 1940 (“1940 Act”), the Trust’s Board has reviewed and approved the Trust’s Investment Management Agreement with the Manager (the “Advisory Agreement”) and portfolio management agreements (the “Subadvisory Agreements”) with the Subadvisers. The Board’s decision to approve these contracts reflects the exercise of its business judgment on whether to approve new arrangements and continue the existing arrangements. During its review of these contracts, the Board considers many factors, among the most material of which are: the Fund’s investment objectives and long term performance; the Advisory Organizations’ management philosophy, personnel, and processes, including their compliance history and the adequacy of their compliance processes; the preferences and expectations of Fund shareholders (and underlying contract owners) and their relative sophistication; the continuing state of competition in the mutual fund industry; and comparable fees in the mutual fund industry.
The Board also considers the compensation and benefits received by the Advisory Organizations. This includes fees received for services provided to the Fund by affiliated persons of the Advisory Organizations and research services received by the Advisory Organizations from brokers that execute Fund trades, as well as advisory fees. The Board considered the fact that: (1) the Manager and the Trust are parties to an Administrative Service Agreement, a Compliance Services Agreement, and a Chief Compliance Officer Agreement, under which the Manager is compensated by the Trust for performing certain administrative and compliance services including providing an employee of the Manager or one of its affiliates to act as the Trust’s Chief Compliance Officer; and (2) Allianz Life Financial Services, LLC, an affiliated person of the Manager, is a registered securities broker-dealer and receives (along with its affiliated persons) payments made by the Trust pursuant to Rule 12b-1.
The Board is aware that various courts have interpreted provisions of the 1940 Act and have indicated in their decisions that the following factors may be relevant to an adviser’s compensation: the nature and quality of the services provided by the adviser, including the performance of the fund; the adviser’s cost of providing the services; the extent to which the adviser may realize “economies of scale” as the fund grows larger; any indirect benefits that may accrue to the adviser and its affiliates as a result of the adviser’s relationship with the fund; performance and expenses of comparable funds; and the extent to which the independent Board members are fully informed about all facts bearing on the adviser’s service and fee. The Trust’s Board is aware of these factors and takes them into account in its review of the Trust’s advisory contracts.
The Board considered and weighed these circumstances in light of its experience in governing the Trust and working with the Advisory Organizations on matters relating to the Funds, and is assisted in its deliberations by the advice of legal counsel to the Independent Trustees. In this regard, the Board requests and receives a significant amount of information about the Funds and the Advisory Organizations. Some of this information is provided at each regular meeting of the Board; additional information is provided in connection with the particular meeting or meetings at which the Board’s formal review of an advisory contract occurs. In between regularly scheduled meetings, the Board may receive information on particular matters as the need arises. Thus, the Board’s evaluation of an advisory contract is informed by reports covering such matters as: an Advisory Organization’s investment philosophy, personnel, and processes; the Fund’s short- and long-term performance (in absolute terms as well as in relationship to its benchmark(s), certain competitor or “peer group” funds and similar funds managed by the particular Subadviser), and comments on the reasons for performance; the Fund’s expenses (including the advisory fee itself and the overall expense structure of the Fund, both in absolute terms and relative to similar and/or competing funds, with due regard for contractual or voluntary expense limitations); the use and allocation of brokerage commissions derived from trading the Fund’s portfolio securities; the nature and extent of the advisory and other services provided to the Fund by the Advisory Organizations and their affiliates; compliance and audit reports concerning the Funds and the companies that service them; and relevant developments in the mutual fund industry and how the Funds and/or Advisory Organizations are responding to them.
The Board also receives financial information about Advisory Organizations, including reports on the compensation and benefits the Advisory Organizations derive from their relationships with the Funds. These reports cover not only the fees under the advisory contracts, but also fees, if any, received for providing other services to the Funds. The reports also discuss any indirect or “fall out” benefits an Advisory Organization may derive from its relationship with the Funds.
The Advisory and Subadvisory Agreements (collectively, the “Agreements”) were most recently considered at Board of Trustees meetings held in the fall of 2013. Information relevant to the approval of such Agreements was considered at a telephonic Board of Trustees meeting on October 16, 2013, and at an “in person” Board of Trustees meeting held October 22, 2013. The Agreements were approved at the Board meeting of October 22, 2013. At such meeting the Board also approved an Expense Limitation Agreement between the Manager and the Trust for the period ending April 30, 2015. In connection with such meetings, the Trustees requested and evaluated extensive materials from the Manager, including performance and expense information for other investment companies with similar investment objectives derived from data compiled by an independent third party provider and other sources believed to be reliable by the Manager. Prior to voting, the Trustees reviewed the proposed approval/continuance of the Agreements with management and with experienced counsel who are independent of the Manager and received a memorandum from such counsel discussing the legal
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standards for their consideration of the proposed approvals/continuances. The independent (“disinterested”) Trustees also discussed the proposed approvals/continuances in a private session with such counsel at which no representatives of the Manager were present. In reaching their determinations relating to the approval and/or continuance of the Agreements, in respect of each Fund, the Trustees considered all factors they believed relevant. The Board based its decision to approve the Agreements on the totality of the circumstances and relevant factors, and with a view to past and future long-term considerations. Not all of the factors and considerations discussed above and below are necessarily relevant to every Fund, and the Board did not assign relative weights to factors discussed herein or deem any one or group of them to be controlling in and of themselves.
An SEC Rule requires that shareholder reports include a discussion of certain factors relating to the selection of investment advisers and the approval of advisory fees. The “factors” enumerated by the SEC are set forth below in italics, as well as the Board’s conclusions regarding such factors:
(1) The nature, extent and quality of services provided by the Manager and Subadvisers. The Trustees noted that the Manager, subject to the control of the Board of Trustees, administers each Fund’s business and other affairs. Under the Advisory Agreement, the Manager holds the sole and exclusive responsibility to provide, or arrange for other to provide, the management of the Funds’ assets and the placement of orders for the purchase and sale of the securities of the Funds. As the Trust is a manager of managers fund, the Manager is authorized, under the Advisory Agreement, to retain one or more Subadvisers for each Fund to handle day-to-day management of the Funds’ investment portfolios; the Manager is responsible for determining, in the first instance, which investment advisers to recommend to the Board of Trustees for selection as a Subadviser. The Trustees were aware that, notwithstanding the retention of the Subadvisers to handle day-to-day portfolio management, the Manager remains responsible for substantial other matters, including continuously monitoring compliance by each Subadviser with the investment policies and restrictions of the respective Funds, with such other limitations or directions of the Board of Trustees, and with all legal requirements under federal or state law or regulation. The Manager also is responsible primarily to provide statistical information and other data to the Trustees regarding the Funds’ portfolio investments and to make available to the Funds’ administrator such information as is necessary for the conduct of its duties.
The Trustees also noted that the Manager provides the Trust and each Fund with such administrative and other services (exclusive of, and in addition to, any such services provided by any others retained by the Trust on behalf of the Funds) and executive and other personnel as are necessary for the operation of the Trust and the Funds. Except for the Trust’s Chief Compliance Officer, the Manager pays all of the compensation of Trustees and officers of the Trust who are employees of the Manager or its affiliates.
The Trustees considered the scope and quality of services provided by the Manager and the Subadvisers and noted that the scope of such services provided had expanded as a result of recent regulatory and other developments. The Trustees noted that, for example, the Manager and Subadvisers are responsible for maintaining and monitoring their own compliance programs, and these compliance programs are continuously refined and enhanced in light of new regulatory requirements. The Trustees considered the capabilities and resources which the Manager has dedicated to performing services on behalf of the Trust and its Funds. The quality of administrative and other services, including the Manager’s role in coordinating the activities of the Trust’s other service providers, also were considered. The Trustees concluded that, overall, they were satisfied with the nature, extent and quality of services provided (and expected to be provided) to the Trust and to each of the Funds under the Agreements.
(2) The investment performance of the Funds, the Manager and the Subadvisers. In connection with every in-person quarterly Board of Trustees meeting, Trustees receive extensive information on the performance results of each of the Funds. This includes, for example, performance information on all of the Funds for the previous quarter, and previous one, three and five-year periods, and since inception. (For Funds which have been in existence for less than five years, Trustees may receive performance information on comparable funds managed by the particular Subadviser for periods prior to the creation of a particular Fund.) Such performance information includes information on absolute total return, performance versus Subadvisers’ comparable fund(s), performance versus the appropriate benchmark(s), and performance versus peer groups. For example, in connection with the Board of Trustees meetings held September 10-11, 2013, the Manager reported that for the three year period ended June 30, 2013, 12 Funds were in the top 40%, eight were in the middle 20% and eight were in the bottom 40%, and for the one year period ended June 30, 2013, 8 Funds were in the top 40%, seven were in the middle 20%, and 14 were in the bottom 40%. The Manager also reported that for the five year period ended June 30, 2013, 10 Funds were in the top 40%, four were in the middle 20%, and six were in the bottom 40%. At the Board of Trustees meeting held October 22, 2013, the Trustees determined that the overall investment performance of the Funds was acceptable.
(3) The costs of services to be provided and profits to be realized by the Manager and the Subadvisers and their affiliates from their relationship with the Funds. The Manager has supplied information to the Board of Trustees pertaining to the level of investment advisory fees to which the Funds are subject. The Manager has agreed to temporarily “cap” Fund expenses at certain levels, and information is provided to Trustees setting forth “contractual” advisory fees and “actual” fees after taking expense caps into account. Based upon the information provided, the “actual” advisory fees payable by the Funds overall are generally comparable to the average level of fees paid by Fund peer groups. For the 30 Funds reviewed by the Board of Trustees in the fall of 2013, 27 Funds paid “actual” advisory fees in a percentage amount within the 65th percentile or lower for each Fund’s applicable category. The Trustees recognized that it is difficult to make comparisons of advisory fees because there are variations in the services that are included in the fees paid by other funds. The Board has concluded that the advisory fees to be paid to the Manager by the Funds are not unreasonable.
The Manager has also supplied information to the Board of Trustees pertaining to total Fund expenses (which includes advisory fees, the 25 basis point 12b-1 fee paid by the Funds, and other Fund expenses). As noted above, the Manager has agreed to “cap” Fund expenses at certain levels. Based upon the information provided, the overall total expense ratio ranking in 2013 for the 30 Funds was as follows: (1) 28 of the Funds had total expense rankings below the 65th percentile (with 20 Funds at or below the 50th percentile); (2) the AZL Russell 1000 Value Fund had a total expense ranking in the 66th percentile; the Manager reported that there is only a limited peer group for such Fund; and (3) the AZL Morgan Stanley Global Real Estate Fund had a total expense ranking in the 72nd percentile; it was reported by the Manager that there is only a limited peer group for such Fund, such Fund’s expense ratio has declined, and such Fund’s expense ratio is comparable to funds of similar size.
The Manager has committed to providing the Funds with a high quality of service and working to reduce Fund expenses over time, particularly as the Funds grow larger. The Trustees concluded therefore that the expense ratios of the Funds were not unreasonable.
The Manager provided information concerning the profitability of the Manager’s investment advisory activities for the period from 2011 through June 30, 2013. The Trustees recognized that it is difficult to make comparisons of profitability from investment company advisory agreements because comparative information is not generally publicly available and is affected by numerous factors, including the structure of the particular adviser, the types of funds it manages, its business mix, numerous assumptions regarding allocation of expenses and the adviser’s capital structure and cost of capital. In considering profitability information, the Trustees considered the possible effect of certain fall-out benefits to the Manager and its affiliates. The Trustees focused on profitability of the Manager’s relationships with the Funds before taxes and distribution expenses. The Trustees recognized that the Manager should, in the abstract, be entitled to earn a reasonable level of profits for the services it provides to each Fund and, based on their review, concluded that they were satisfied that the Manager’s level of profitability from its relationship with the Funds was not excessive.
The Manager, on behalf of the Board of Trustees, endeavored to obtain information on the profitability of each Subadviser in connection with its relationship with the Fund or Funds which it subadvises. The Manager was unable to obtain meaningful profitability information from some of the unaffiliated Subadvisers. The Manager assured the Board of Trustees that the Agreements with the Subadvisers which are not affiliated with it were negotiated on an “arm’s length” basis, so that arguably, such profitability information should be less relevant. The Trustees were also provided with certain information on the profitability for the Subadviser which is affiliated with the Manager. Trustees recognized the difficulty of allocating costs to multiple advisory accounts and products of a large advisory organization. Based upon the information provided, the Trustees determined that there was no evidence that the level of such profitability attributable to subadvising the Funds was excessive.
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(4) and (5) The extent to which economies of scale would be realized as the Funds grow, and whether fee levels reflect these economies of scale. The Trustees noted that most of the advisory fee schedules for the Funds do not contain breakpoints that reduce the fee rate on assets above specified levels, although certain Subadvisory Agreements have such “breakpoints.” The Trustees recognized that breakpoints may be an appropriate way for the Manager to share its economies of scale, if any, with Funds that have substantial assets. However, they also recognized that there may not be a direct relationship between any economies of scale realized by Funds and those realized by the Manager as assets increase. The Trustees do not believe there is a uniform methodology for establishing breakpoints that give effect to Fund-specific service provided by the Manager. The Trustees noted that in the fund industry as a whole, as well as among funds similar to the Funds, there is no uniformity or pattern in the fees and asset levels at which breakpoints (if any) apply. Depending on the age, size, and other characteristics of a particular fund and its manager’s cost structure, different conclusions can be drawn as to whether there are economies of scale to be realized at any particular level of assets, notwithstanding the intuitive conclusion that such economies exist, or will be realized at some level of total assets. Moreover, because different managers have different cost structures and service models, it is difficult to draw meaningful conclusions from the breakpoints that may have been adopted by other funds. The Trustees also noted that the advisory agreements for many funds do not have breakpoints at all, or if breakpoints exist, they may be at asset levels significantly greater than those of the individual Funds. The Trustees also noted that the total assets in all of the Funds as of June 30, 2013 were approximately $12.85 billion, and that no single non-money market Fund had assets in excess of $616 million.
The Trustees noted that the Manager has agreed to temporarily “cap” Fund expenses at certain levels, which has the effect of reducing expenses as would the implementation of advisory fee breakpoints. The Manager has committed to continue to consider the continuation of fee “caps” and/or advisory fee breakpoints as the Funds grow larger. The Board receives quarterly reports on the level of Fund assets. It expects to consider whether or not to approve the Agreements at a meeting to be held prior to December 31, 2014, and will at that time, or prior thereto, consider: (a) the extent to which economies of scale can be realized, and (b) whether the advisory fee should be modified to reflect such economies of scale, if any.
Having taken these factors into account, the Trustees concluded that the absence of breakpoints in certain of the Funds’ advisory fee rate schedules was acceptable under each Fund’s circumstances.
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Information about the Board of Trustees and Officers (Unaudited)
The Trust is managed by the Trustees in accordance with the laws of the state of Delaware governing business trusts. There are currently eight Trustees, two of whom are “interested persons” of the Trust within the meaning of that term under the 1940 Act. The Trustees and Officers of the Trust, their addresses, ages, their positions held with the Trust, their terms of office with the Trust and length of time served, their principal occupation(s) during the past five years, the number of portfolios in the Trust they oversee, and their other directorships held are as follows:
Non-Interested Trustees(1)
Name, Address, and Age | Positions Held with VIP Trust and | Term of Office(2)/Length | Principal Occupation(s) During Past 5 Years | Number of FOF Trust | Other Directorships Held Outside the AZL Fund Complex | |||||
Peter R. Burnim, Age 66 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/07 | Chairman, Argus Investment Strategies Fund Ltd., Feburary 2013 to present; Managing Director, iQ Venture Advisors, LLC. 2005 to 2012; Chairman, Northstar Group Holdings Ltd. Bermuda, 2011 to present; Expert Witness, Massachusetts Department of Revenue, 2011 to 2012; Executive Vice President, Northstar Companies, 2002 to 2005; Senior Officer, Citibank and Citicorp for over 25 years | 41 | Argus Group Holdings; Northstar Group Holdings, NRIL, Sterling Centrecorp Inc.; Highland Financial Holdings; and Bank of Bermuda NY | |||||
Peggy L. Ettestad, Age 56 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/07 | Managing Director, Red Canoe Management Consulting LLC, 2008 to present; Senior Managing Director, Residential Capital LLC, 2003 to 2008; Chief Operations Officer, Transamerica Reinsurance 2002 to 2003 | 41 | Luther College | |||||
Roger Gelfenbien, Age 70 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 10/99 | Retired; Partner of Accenture 1983 to 1999 | 41 | Virtus Funds (8 Funds) | |||||
Claire R. Leonardi, Age 58 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/04 | Chief Executive Officer, Connecticut Innovations, Inc., 2012 to present; General Partner, Fairview Capital, L.P., 1994 to 2012 | 41 | The Natural History Museum of the Adirondacks | |||||
Dickson W. Lewis, Age 65 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/04 | Retired; Consultant to Lifetouch National School Studios; Vice President/General Manager, Yearbooks & Canada-Lifetouch National School Studios, 2006 to 2013; Vice President/General Manager of Jostens, Inc., 2002 to 2006; Senior Vice President of Fortis Group, 1997 to 2002 | 41 | None | |||||
Peter W. McClean, Age 69 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/04 | Retired; President and CEO of Measurisk, LLC, 2001 to 2003; Chief Risk Management Officer at Bank of Bermuda Ltd., 1996 to 2001 | 41 | PNMAC Opportunity Fund; Northeast Bank; and FHI | |||||
Arthur C. Reeds III, Age 69 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 10/99 | Retired; Senior Investment Officer, Hartford Foundation for Public Giving, 2000 to 2003; Chairman, Chief Executive and President of Conning Corp., 1999 to 2000; Investment Consultant, 1997 to 1999 | 41 | Connecticut Water Service, Inc. |
Interested Trustees(3)
Name, Address, and Age | Positions Held with VIP Trust and | Term of Office(2)/Length | Principal Occupation(s) During Past 5 Years | Number of and FOF Trust | Other Directorships Held Outside the AZL Fund Complex | |||||
Robert DeChellis, Age 46 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 3/08 | President and CEO, Allianz Life Financial Services, LLC, 2007 to present | 41 | None | |||||
Brian Muench, Age 43 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 6/11 | President, Allianz Investment Management LLC, November 2010 to present; Vice President, Allianz Life, April 2011 to present; Vice President, Advisory Management, Allianz Investment Management LLC from December 2005 to November 2010 | 41 | None |
26
Officers
Name, Address, and Age | Positions Held with VIP and VIP FOF Trust | Term of Office(2)/Length of Time Served | Principal Occupation(s) During Past 5 Years | |||
Brian Muench, Age 43 5701 Golden Hills Drive Minneapolis, MN 55416 | President | Since 11/10 | President, Allianz Investment Management LLC from November 2010, to present; Vice President, Allianz Life from April 2011 to present; Vice President, Allianz Investment Management LLC from December 2005 to November 2010. | |||
Michael Radmer, Age 68 Dorsey & Whitney LLP, Suite 1500 50 South Sixth Street Minneapolis, MN 55402-1498 | Secretary | Since 2/02 | Partner, Dorsey and Whitney LLP since 1976. | |||
Ty Edwards, Age 47 Citi Fund Services Ohio, Inc. 3435 Stelzer Road Columbus, OH 43219 | Treasurer, Principal Accounting Officer and Principal Financial Officer | Since 4/10 | Senior Vice President, Financial Administration, Citi Fund Services Ohio, Inc., December 2009 to present; Director, Product Management, Columbia Management, April 2007 to April 2009; Deputy Treasurer, Columbia Funds and Director, Fund Administration, Columbia Management, January 2006 to April 2007. | |||
Christopher R. Pheiffer, Age 45(4) 5701 Golden Hills Drive Minneapolis, MN 55416 | Chief Compliance Officer(5) and Anti-Money Laundering Compliance Officer | Since 2/14 (interim) | Deputy Chief Compliance Officer of the Trusts, 2007-2014 |
(1) | Member of the Audit Committee. |
(2) | Indefinite. |
(3) | Is an “interested person”, as defined by the 1940 Act, due to employment by Allianz. |
(4) | Stephen G. Simon, previously the Chief Compliance Officer of the Trusts, resigned all of his positions with Allianz effective February 21, 2014. Mr. Pheiffer, previously the Deputy Chief Compliance Officer of the Trusts, has been named Chief Compliance Officer of the Trusts on an interim basis while a search for a permanent replacement is conducted. |
(5) | The Manager and the Trust are parties to a Chief Compliance Officer Agreement under which the Manager is compensated by the Trust for providing an employee of the Manager or one of its affiliates to act as the Trust’s Chief Compliance Officer. The Chief Compliance Officer and Anti-Money Laundering Compliance Officer is not considered a corporate officer or executive employee of the Trust. |
27
The Allianz VIP Funds are distributed by Allianz Life Financial Services, LLC. These Funds are not FDIC Insured. | ANNRPT1213 2/14 |
AZL® Russell 1000 Value Index Fund
Annual Report
December 31, 2013
Table of Contents
Management Discussion and Analysis
Page 1
Expense Examples and Portfolio Composition
Page 3
Schedule of Portfolio Investments
Page 4
Statement of Assets and Liabilities
Page 13
Statement of Operations
Page 13
Statements of Changes in Net Assets
Page 14
Financial Highlights
Page 15
Notes to the Financial Statements
Page 16
Report of Independent Registered Public Accounting Firm
Page 21
Other Federal Income Tax Information
Page 22
Other Information
Page 23
Approval of Investment Advisory and Subadvisory Agreements
Page 24
Information about the Board of Trustees and Officers
Page 27
This report is submitted for the general information of the shareholder of the Fund. The report is not authorized for distribution to prospective investors in the Fund unless preceded or accompanied by an effective prospectus, which contains details concerning the sales charges and other pertinent information.
AZL® Russell 1000 Value Index Fund Review (unaudited)
Allianz Investment Management LLC serves as the Manager for the AZL® Russell 1000 Value Index Fund and BlackRock Investment Management, LLC serves as Subadviser to the Fund.
What factors affected the Fund’s performance during the year ended December 31, 2013?
For the year ended December 31, 2013, the AZL® Russell 1000 Value Index Fund returned 31.52%1. That compared to a 32.53% total return for its benchmark, the Russell 1000® Value Index2.
The Fund attempts to replicate the performance of the Russell 1000 index of large-cap value U.S. stocks. Equities began the period with a powerful rally after the United States averted the worst of its potential fiscal crisis with a last-minute tax deal. The rally softened as political and financial instability in Europe—including a stalemate in Italian presidential elections and a banking crisis in Cyprus—gave investors pause later in the first half of the period. However, equities soon regained their momentum as low interest rates and increased global liquidity spurred stock prices higher.
In May, stocks responded negatively to news that the Federal Reserve might begin gradually reducing (or tapering) its monetary stimulus efforts before the end of the year. Although stocks rebounded once it became clear that the Fed remained undecided about the timing of the taper. Meanwhile, the modest pace of economic growth boded well for corporate profit margins as the economic recovery was strong enough to support revenues but not so strong as to boost wage growth.
September brought another sharp rally in stock prices, as the Fed decided to delay the taper, despite market expectations to the contrary. The rally was interrupted as budget and debt ceiling negotiations led to a partial government shutdown and fears of a potential technical default in the national debt. Stocks regained their momentum in the fourth quarter once the government reopened and economic indicators improved. The Fed’s announcement in mid-December that it would begin
tapering in 2014 but maintain short-term interest rates at their low levels, alleviated the market’s anxiety over the interest rate uncertainty. Investors responded positively, pushing stocks higher to close out the period.
From a sector perspective, financials were the best performing sector. Stocks in that sector were buoyed by low interest rates and an improving housing market. Additionally, the Fund saw modest gains from holdings in the utilities, materials and telecommunication services sector.*
The underperformance of the Fund compared to the benchmark was the result of Fund expenses that are not incurred by the benchmark.
Past performance does not guarantee future results.
* | The Fund’s portfolio composition is subject to change. There is no guarantee that any sectors mentioned will continue to perform well or that securities in such sectors will be held by the Fund in the future. The information contained in this commentary is for informational purposes only and should not be construed as a recommendation to purchase or sell securities in the sector mentioned. The Fund’s holdings and weightings are as of December 31, 2013. |
1 | The recent growth rate in the stock market has helped to produce short-term returns that are not typical and may not continue in the future. Because of ongoing market volatility, Fund performance may be subject to substantial short-term changes. |
2 | The Russell 1000® Value Index measures the performance of the large-cap value segment of the U.S. equity universe. It includes those Russell 1000 companies with lower price-to-book ratios and lower expected growth values. Investors cannot invest directly in an index. |
1
AZL® Russell 1000 Value Index Fund Review (unaudited)
Fund Objective
The Fund’s investment objective is to match the total return of the Russell 1000® Value Index. This objective may be changed by the Trustees of the Fund without shareholder approval. The Fund seeks to achieve its objective by investing in all stocks in the Index in proportion to their weighting in the Index.
Investment Concerns
Equity securities (stocks) are more volatile and carry more risk than other forms of investments, including investments in high-grade fixed income securities. The net asset value per share of this Fund will fluctuate as the value of the securities in the portfolio changes.
Value-based investments are subject to the risk that the broad market may not recognize their intrinsic value.
The Fund does not attempt to manage market volatility or reduce the effects of poor stock performance. In addition, factors such as Fund expenses, selection of a representative portfolio, changes in the composition of the Index, or the timing of purchases or redemptions of Fund shares may affect the correlation between the performance of the Index and the Fund’s performance.
The performance of the Fund is expected to be lower than that of the Index because of Fund fees and expenses. Securities in which the Fund will invest may involve substantial risk and may be subject to sudden severe price declines.
Investing in derivatives instruments involves risks that may be different from or greater than the risk associated with investing directly in securities or other traditional instruments.
For a complete description of these and other risks associated with investing in a mutual Fund, please refer to the Fund’s prospectus.
Growth of $10,000 Investment
The chart above represents a comparison of a hypothetical investment in the Fund versus a similar investment in the Fund’s benchmark, and represents the reinvestment of dividends and capital gains in the Fund.
Average Annual Total Returns as of December 31, 2013
Since | ||||||||||||
1 | 3 | Inception | ||||||||||
Year | Year | (4/30/10) | ||||||||||
AZL® Russell 1000 Value Index Fund | 31.52 | %1 | 15.23 | % | 13.74 | % | ||||||
Russell 1000® Value Index | 32.53 | % | 16.06 | % | 14.60 | % |
Past performance does not guarantee future results. The performance data quoted represents past performance and current returns may be lower or higher. The investment return and principal value will fluctuate so that an investor’s shares, when redeemed may be worth more or less than the original cost. To obtain performance information current to the most recent month end, please visit www.Allianzlife.com.
Expense Ratio2 | Gross | |||
AZL® Russell 1000 Value Index Fund | 0.79 | % |
The above expense ratio is based on the current Fund prospectus dated April 29, 2013. The Manager and the Fund have entered into a written contract limiting operating expenses, excluding certain expenses (such as interest expense and Acquired Fund fees and expenses), to 0.84% through April 30, 2015. Additional information pertaining to the December 31, 2013 expense ratios can be found in the financial highlights.
1 | The recent growth rate in the stock market has helped to produce short-term returns that are not typical and may not continue in the future. Because of ongoing market volatility, Fund performance may be subject to substantial short-term changes. |
2 | Acquired Fund Fees and Expenses are incurred indirectly by the Fund through the valuation of the Fund’s investments in the other investment companies. Accordingly, Acquired Fees and Expenses affect the Fund’s total returns. Because these fees and expenses are not included in the Fund’s financial highlights, the Fund’s total annual fund operating expenses do not correlate to the ratios of expenses to average net assets shown in the financial highlights table. Without Acquired Fund Fees and expenses the Fund’s gross ratio would be 0.78%. |
The total return of the Fund does not reflect the effect of any insurance charges, the annual maintenance fee or the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. Such charges, fees and tax payments would reduce the performance quoted. |
The Fund’s performance is measured against the Russell 1000® Value Index, an unmanaged index that measures the performance of the large-cap value segment of the U.S. equity universe. It includes those Russell 1000 companies with lower price-to-book ratios and lower expected growth values. The index does not reflect the deduction of fees associated with a mutual fund, such as investment management and fund accounting fees. The Fund’s performance reflects the deduction of fees for services provided to the Fund. Investors cannot invest directly in an index. |
2
AZL Russell 1000 Value Index Fund
(Unaudited)
As a shareholder of the AZL Russell 1000 Value Index Fund (the “Fund”), you incur ongoing costs, including management fees, distribution fees, and other Fund expenses. These examples are intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. Please note that the expenses shown in each table do not reflect expenses that apply to the subaccount or the insurance contract. If the expenses that apply to the subaccount of the insurance contract were included, your costs would have been higher.
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the periods presented below.
The Actual Expense table below provides information about actual account values and actual expenses. You may use the information below, 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 table under the heading entitled “Expenses Paid During Period” to estimate the expenses you paid on your account during this period.
Beginning Account Value 7/1/13 | Ending Account Value | Expenses Paid During Period 7/1/13 - 12/31/13* | Annualized During Period 7/1/13 - 12/31/13 | |||||||||||||||||
AZL Russell 1000 Value Index Fund | $ | 1,000.00 | $ | 1,139.10 | $ | 4.15 | 0.77 | % |
The Hypothetical Expense table below provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.
Beginning Account Value 7/1/13 | Ending Account Value 12/31/13 | Expenses Paid During Period 7/1/13 - 12/31/13* | Annualized Expense Ratio During Period 7/1/13 - 12/31/13 | |||||||||||||||||
AZL Russell 1000 Value Index Fund | $ | 1,000.00 | $ | 1,021.32 | $ | 3.92 | 0.77 | % |
* | Expenses are equal to the average account value over the period, multiplied by the Fund’s annualized expense ratio, multiplied by 184/365 (to reflect the one half year period). |
Portfolio Composition
(Unaudited)
Investments | Percent of net assets | ||||
Financials | 27.9 | % | |||
Energy | 14.8 | ||||
Health Care | 12.6 | ||||
Industrials | 10.2 | ||||
Information Technology | 8.7 | ||||
Consumer Discretionary | 6.7 | ||||
Consumer Staples | 5.7 | ||||
Utilities | 5.7 | ||||
Materials | 2.9 | ||||
Telecommunication Services | 2.5 | ||||
Machinery | 0.1 | ||||
Technology | 0.0 | ||||
|
| ||||
Total Common Stock | 97.8 | ||||
Money Market | 1.9 | ||||
Securities Held as Collateral for Securities on Loan | 1.2 | ||||
|
| ||||
Total Investment Securities | 100.9 | ||||
Net other assets (liabilities) | (0.9 | ) | |||
|
| ||||
Net Assets | 100.0 | % | |||
|
|
3
AZL Russell 1000 Value Index Fund
Schedule of Portfolio Investments
Shares | Fair Value | |||||||
| Common Stocks (97.8%): | |||||||
| Aerospace & Defense (1.3%): | |||||||
684 | Alliant Techsystems, Inc. | $ | 83,229 | |||||
138 | BE Aerospace, Inc.* | 12,010 | ||||||
4,079 | Exelis, Inc. | 77,746 | ||||||
6,470 | General Dynamics Corp. | 618,209 | ||||||
1,950 | L-3 Communications Holdings, Inc. | 208,377 | ||||||
4,809 | Northrop Grumman Corp. | 551,159 | ||||||
7,029 | Raytheon Co. | 637,531 | ||||||
321 | Rockwell Collins, Inc. | 23,728 | ||||||
2,253 | Spirit AeroSystems Holdings, Inc., Class A* | 76,782 | ||||||
6,021 | Textron, Inc. | 221,332 | ||||||
891 | Triumph Group, Inc. | 67,778 | ||||||
1,255 | United Technologies Corp. | 142,819 | ||||||
|
| |||||||
2,720,700 | ||||||||
|
| |||||||
| Air Freight & Logistics (0.5%): | |||||||
6,865 | FedEx Corp. | 986,981 | ||||||
|
| |||||||
| Airlines (0.3%): | |||||||
118 | Alaska Air Group, Inc. | 8,658 | ||||||
1,786 | American Airlines Group, Inc.*^ | 45,097 | ||||||
10,058 | Delta Air Lines, Inc. | 276,293 | ||||||
13,929 | Southwest Airlines Co. | 262,422 | ||||||
|
| |||||||
592,470 | ||||||||
|
| |||||||
| Auto Components (0.5%): | |||||||
642 | Allison Transmission Holdings, Inc. | 17,726 | ||||||
1,324 | Gentex Corp. | 43,679 | ||||||
14,840 | Johnson Controls, Inc. | 761,291 | ||||||
1,549 | Lear Corp. | 125,423 | ||||||
2,332 | TRW Automotive Holdings Corp.* | 173,477 | ||||||
|
| |||||||
1,121,596 | ||||||||
|
| |||||||
| Automobiles (0.8%): | |||||||
54,269 | Ford Motor Co. | 837,370 | ||||||
18,040 | General Motors Co. | 737,295 | ||||||
|
| |||||||
1,574,665 | ||||||||
|
| |||||||
| Beverages (0.2%): | |||||||
3,486 | Beam, Inc. | 237,258 | ||||||
196 | Constellation Brands, Inc., Class A* | 13,794 | ||||||
3,027 | Molson Coors Brewing Co., Class B | 169,966 | ||||||
|
| |||||||
421,018 | ||||||||
|
| |||||||
| Building Products (0.1%): | |||||||
960 | A.O. Smith Corp. | 51,782 | ||||||
622 | Allegion plc* | 27,486 | ||||||
432 | Fortune Brands Home & Security, Inc. | 19,742 | ||||||
2,568 | Owens Corning, Inc.* | 104,570 | ||||||
|
| |||||||
203,580 | ||||||||
|
| |||||||
| Capital Markets (3.5%): | |||||||
6,116 | American Capital, Ltd.* | 95,654 | ||||||
2,973 | Ameriprise Financial, Inc. | 342,044 | ||||||
6,376 | Ares Capital Corp. | 113,302 | ||||||
161 | Artisan Partners Asset Management, Inc. | 10,496 | ||||||
25,124 | Bank of New York Mellon Corp. (The) | 877,833 | ||||||
1,830 | BlackRock, Inc., Class A+ | 579,140 | ||||||
20,547 | Charles Schwab Corp. (The) | 534,222 | ||||||
6,217 | E*TRADE Financial Corp.* | 122,102 | ||||||
530 | Federated Investors, Inc., Class B^ | 15,264 | ||||||
9,933 | Goldman Sachs Group, Inc. (The) | 1,760,723 |
Shares | Fair Value | |||||||
| Common Stocks, continued |
| ||||||
| Capital Markets, continued |
| ||||||
9,634 | Invesco, Ltd. | $ | 350,678 | |||||
2,407 | Legg Mason, Inc.^ | 104,656 | ||||||
32,987 | Morgan Stanley | 1,034,472 | ||||||
5,183 | Northern Trust Corp. | 320,776 | ||||||
2,642 | Raymond James Financial, Inc. | 137,886 | ||||||
170 | SEI Investments Co. | 5,904 | ||||||
9,880 | State Street Corp. | 725,093 | ||||||
5,046 | TD Ameritrade Holding Corp. | 154,609 | ||||||
|
| |||||||
7,284,854 | ||||||||
|
| |||||||
| Chemicals (1.3%): |
| ||||||
4,513 | Air Products & Chemicals, Inc. | 504,464 | ||||||
1,092 | Albemarle Corp. | 69,222 | ||||||
1,712 | Ashland, Inc. | 166,132 | ||||||
1,384 | Cabot Corp. | 71,138 | ||||||
1,285 | CF Industries Holdings, Inc. | 299,456 | ||||||
790 | Cytec Industries, Inc. | 73,596 | ||||||
22,769 | Dow Chemical Co. (The) | 1,010,945 | ||||||
4,189 | Huntsman Corp. | 103,049 | ||||||
405 | Kronos Worldwide, Inc. | 7,715 | ||||||
6,501 | Mosaic Co. (The) | 307,303 | ||||||
279 | PPG Industries, Inc. | 52,915 | ||||||
434 | Rockwood Holdings, Inc. | 31,213 | ||||||
183 | RPM International, Inc. | 7,596 | ||||||
147 | Sigma Aldrich Corp. | 13,819 | ||||||
213 | W.R. Grace & Co.* | 21,059 | ||||||
61 | Westlake Chemical Corp. | 7,446 | ||||||
|
| |||||||
2,747,068 | ||||||||
|
| |||||||
| Commercial Banks (5.6%): |
| ||||||
3,579 | Associated Banc-Corp. | 62,275 | ||||||
971 | Bank of Hawaii Corp. | 57,425 | ||||||
15,202 | BB&T Corp. | 567,339 | ||||||
561 | BOK Financial Corp. | 37,206 | ||||||
4,200 | CapitalSource, Inc. | 60,354 | ||||||
4,361 | CIT Group, Inc. | 227,339 | ||||||
1,014 | City National Corp. | 80,329 | ||||||
4,044 | Comerica, Inc. | 192,252 | ||||||
1,728 | Commerce Bancshares, Inc. | 77,618 | ||||||
1,115 | Cullen/Frost Bankers, Inc. | 82,989 | ||||||
2,935 | East West Bancorp, Inc. | 102,637 | ||||||
18,945 | Fifth Third Bancorp | 398,413 | ||||||
164 | First Citizens BancShares, Inc., Class A | 36,511 | ||||||
5,216 | First Horizon National Corp. | 60,766 | ||||||
7,672 | First Niagara Financial Group, Inc. | 81,477 | ||||||
2,523 | First Republic Bank | 132,079 | ||||||
4,225 | Fulton Financial Corp. | 55,263 | ||||||
17,997 | Huntington Bancshares, Inc. | 173,671 | ||||||
19,861 | KeyCorp | 266,535 | ||||||
2,795 | M&T Bank Corp. | 325,394 | ||||||
11,469 | PNC Financial Services Group, Inc. | 889,765 | ||||||
2,238 | Popular, Inc.* | 64,298 | ||||||
30,622 | Regions Financial Corp. | 302,852 | ||||||
925 | Signature Bank* | 99,364 | ||||||
11,703 | SunTrust Banks, Inc. | 430,787 | ||||||
977 | SVB Financial Group* | 102,448 | ||||||
21,063 | Synovus Financial Corp. | 75,827 |
Continued
4
AZL Russell 1000 Value Index Fund
Schedule of Portfolio Investments
December 31, 2013
Shares | Fair Value | |||||||
| Common Stocks, continued |
| ||||||
| Commercial Banks, continued |
| ||||||
3,553 | TCF Financial Corp. | $ | 57,736 | |||||
40,075 | U.S. Bancorp | 1,619,030 | ||||||
4,283 | Valley National Bancorp^ | 43,344 | ||||||
104,539 | Wells Fargo & Co. | 4,746,070 | ||||||
3,898 | Zions Bancorp | 116,784 | ||||||
|
| |||||||
11,626,177 | ||||||||
|
| |||||||
| Commercial Services & Supplies (0.5%): |
| ||||||
4,369 | ADT Corp. (The)^ | 176,813 | ||||||
1,606 | Cintas Corp. | 95,702 | ||||||
915 | Corrections Corp. of America | 29,344 | ||||||
2,351 | Covanta Holding Corp. | 41,730 | ||||||
371 | Iron Mountain, Inc. | 11,260 | ||||||
1,032 | KAR Auction Services, Inc. | 30,496 | ||||||
2,473 | Pitney Bowes, Inc. | 57,621 | ||||||
1,799 | R.R. Donnelley & Sons Co. | 36,484 | ||||||
5,856 | Republic Services, Inc. | 194,419 | ||||||
149 | Waste Connections, Inc. | 6,501 | ||||||
9,307 | Waste Management, Inc. | 417,605 | ||||||
|
| |||||||
1,097,975 | ||||||||
|
| |||||||
| Communications Equipment (1.5%): |
| ||||||
9,428 | Brocade Communications Systems, Inc.* | 83,626 | ||||||
115,719 | Cisco Systems, Inc. | 2,597,892 | ||||||
359 | CommScope Holding, Inc.* | 6,792 | ||||||
880 | EchoStar Corp., Class A* | 43,754 | ||||||
1,962 | Harris Corp. | 136,967 | ||||||
1,177 | JDS Uniphase Corp.* | 15,277 | ||||||
8,936 | Juniper Networks, Inc.* | 201,686 | ||||||
284 | Motorola Solutions, Inc. | 19,170 | ||||||
3,736 | Polycom, Inc.* | 41,955 | ||||||
198 | Riverbed Technology, Inc.* | 3,580 | ||||||
|
| |||||||
3,150,699 | ||||||||
|
| |||||||
| Computers & Peripherals (2.5%): |
| ||||||
4,939 | Apple, Inc. | 2,771,323 | ||||||
1,380 | Diebold, Inc. | 45,554 | ||||||
22,756 | EMC Corp. | 572,313 | ||||||
42,114 | Hewlett-Packard Co. | 1,178,350 | ||||||
1,364 | Lexmark International, Inc., Class A | 48,449 | ||||||
2,671 | SanDisk Corp. | 188,412 | ||||||
339 | Stratasys, Ltd.* | 45,663 | ||||||
4,577 | Western Digital Corp. | 384,010 | ||||||
|
| |||||||
5,234,074 | ||||||||
|
| |||||||
| Construction & Engineering (0.3%): |
| ||||||
2,018 | Aecom Technology Corp.* | 59,390 | ||||||
1,416 | Fluor Corp. | 113,690 | ||||||
2,834 | Jacobs Engineering Group, Inc.* | 178,513 | ||||||
3,224 | KBR, Inc. | 102,813 | ||||||
3,576 | Quanta Services, Inc.* | 112,859 | ||||||
1,648 | URS Corp. | 87,328 | ||||||
|
| |||||||
654,593 | ||||||||
|
| |||||||
| Construction Materials (0.1%): | |||||||
2,816 | Vulcan Materials Co. | 167,327 | ||||||
|
| |||||||
| Consumer Finance (0.9%): | |||||||
12,655 | Capital One Financial Corp. | 969,499 | ||||||
10,625 | Discover Financial Services | 594,469 |
Shares | Fair Value | |||||||
| Common Stocks, continued |
| ||||||
| Consumer Finance, continued | |||||||
9,622 | SLM Corp. | $ | 252,866 | |||||
|
| |||||||
1,816,834 | ||||||||
|
| |||||||
| Containers & Packaging (0.3%): | |||||||
431 | AptarGroup, Inc. | 29,226 | ||||||
1,473 | Avery Dennison Corp. | 73,930 | ||||||
1,250 | Bemis Co., Inc. | 51,200 | ||||||
457 | Crown Holdings, Inc.* | 20,368 | ||||||
546 | Greif, Inc., Class A | 28,610 | ||||||
3,835 | MeadWestvaco Corp. | 141,627 | ||||||
1,470 | Owens-Illinois, Inc.* | 52,597 | ||||||
436 | Rock-Tenn Co., Class A | 45,784 | ||||||
2,194 | Sonoco Products Co. | 91,534 | ||||||
|
| |||||||
534,876 | ||||||||
|
| |||||||
| Distributors (0.0%): | |||||||
185 | Genuine Parts Co. | 15,390 | ||||||
|
| |||||||
| Diversified Consumer Services (0.1%): | |||||||
2,114 | Apollo Group, Inc., Class A* | 57,755 | ||||||
1,322 | DeVry, Inc.^ | 46,931 | ||||||
95 | Graham Holdings Co., Class B* | 63,015 | ||||||
1,002 | Service Corp. International | 18,166 | ||||||
267 | Weight Watchers International, Inc.^ | 8,792 | ||||||
|
| |||||||
194,659 | ||||||||
|
| |||||||
| Diversified Financial Services (8.6%): | |||||||
233,424 | Bank of America Corp. | 3,634,412 | ||||||
38,967 | Berkshire Hathaway, Inc., Class B* | 4,619,927 | ||||||
65,887 | Citigroup, Inc. | 3,433,372 | ||||||
6,865 | CME Group, Inc. | 538,628 | ||||||
1,626 | ING U.S., Inc. | 57,154 | ||||||
1,054 | Interactive Brokers Group, Inc., Class A | 25,654 | ||||||
901 | IntercontinentalExchange Group, Inc. | 202,653 | ||||||
81,840 | JPMorgan Chase & Co. | 4,786,002 | ||||||
5,528 | Leucadia National Corp. | 156,664 | ||||||
265 | LPL Financial Holdings, Inc. | 12,463 | ||||||
1,521 | MSCI, Inc., Class A* | 66,498 | ||||||
2,413 | NASDAQ OMX Group, Inc. (The) | 96,037 | ||||||
|
| |||||||
17,629,464 | ||||||||
|
| |||||||
| Diversified Telecommunication Services (2.3%): | |||||||
116,492 | AT&T, Inc. | 4,095,858 | ||||||
13,187 | CenturyLink, Inc. | 420,006 | ||||||
21,672 | Frontier Communications Corp.^ | 100,775 | ||||||
458 | Intelsat SA* | 10,323 | ||||||
2,340 | Level 3 Communications, Inc.* | 77,618 | ||||||
702 | Windstream Holdings, Inc.^ | 5,602 | ||||||
|
| |||||||
4,710,182 | ||||||||
|
| |||||||
| Electric Utilities (2.8%): | |||||||
10,530 | American Electric Power Co., Inc. | 492,172 | ||||||
15,289 | Duke Energy Corp. | 1,055,095 | ||||||
7,059 | Edison International | 326,832 | ||||||
3,861 | Entergy Corp. | 244,285 | ||||||
18,541 | Exelon Corp. | 507,838 | ||||||
9,061 | FirstEnergy Corp. | 298,832 | ||||||
3,332 | Great Plains Energy, Inc. | 80,768 | ||||||
2,136 | Hawaiian Electric Industries, Inc.^ | 55,664 | ||||||
9,199 | NextEra Energy, Inc. | 787,618 |
Continued
5
AZL Russell 1000 Value Index Fund
Schedule of Portfolio Investments
December 31, 2013
Shares | Fair Value | |||||||
| Common Stocks, continued |
| ||||||
| Electric Utilities, continued | |||||||
6,817 | Northeast Utilities | $ | 288,973 | |||||
4,296 | OGE Energy Corp. | 145,634 | ||||||
5,387 | Pepco Holdings, Inc. | 103,053 | ||||||
2,383 | Pinnacle West Capital Corp. | 126,108 | ||||||
13,665 | PPL Corp. | 411,180 | ||||||
18,856 | Southern Co. (The) | 775,170 | ||||||
2,753 | Westar Energy, Inc. | 88,564 | ||||||
|
| |||||||
5,787,786 | ||||||||
|
| |||||||
| Electrical Equipment (0.6%): |
| ||||||
755 | Babcock & Wilcox Co. (The) | 25,813 | ||||||
10,249 | Eaton Corp. plc | 780,154 | ||||||
3,925 | Emerson Electric Co. | 275,457 | ||||||
354 | Hubbell, Inc., Class B | 38,551 | ||||||
975 | Regal-Beloit Corp. | 71,877 | ||||||
|
| |||||||
1,191,852 | ||||||||
|
| |||||||
| Electronic Equipment, Instruments & Components (0.5%): |
| ||||||
2,230 | Arrow Electronics, Inc.* | 120,978 | ||||||
2,991 | Avnet, Inc. | 131,933 | ||||||
1,040 | AVX Corp. | 14,487 | ||||||
373 | Cdw Corp. of Delaware^ | 8,713 | ||||||
31,885 | Corning, Inc. | 568,192 | ||||||
588 | Dolby Laboratories, Inc., Class A*^ | 22,673 | ||||||
933 | FLIR Systems, Inc. | 28,083 | ||||||
3,307 | Ingram Micro, Inc., Class A* | 77,582 | ||||||
4,392 | Jabil Circuit, Inc. | 76,596 | ||||||
823 | Tech Data Corp.* | 42,467 | ||||||
2,873 | Vishay Intertechnology, Inc.* | 38,096 | ||||||
|
| |||||||
1,129,800 | ||||||||
|
| |||||||
| Energy Equipment & Services (1.2%): |
| ||||||
1,011 | Atwood Oceanics, Inc.* | 53,977 | ||||||
8,967 | Baker Hughes, Inc. | 495,516 | ||||||
1,989 | Cameron International Corp.* | 118,405 | ||||||
1,496 | Diamond Offshore Drilling, Inc. | 85,152 | ||||||
414 | Frank’s International NV | 11,178 | ||||||
2,056 | Helmerich & Payne, Inc. | 172,868 | ||||||
5,114 | McDermott International, Inc.* | 46,844 | ||||||
6,385 | Nabors Industries, Ltd. | 108,481 | ||||||
9,257 | National-Oilwell Varco, Inc. | 736,210 | ||||||
1,191 | Oil States International, Inc.* | 121,149 | ||||||
3,185 | Patterson-UTI Energy, Inc. | 80,644 | ||||||
2,696 | Rowan Cos. plc, Class A* | 95,331 | ||||||
293 | RPC, Inc.^ | 5,230 | ||||||
3,458 | Superior Energy Services, Inc.* | 92,017 | ||||||
1,062 | Tidewater, Inc. | 62,945 | ||||||
1,056 | Unit Corp.* | 54,511 | ||||||
|
| |||||||
2,340,458 | ||||||||
|
| |||||||
| Food & Staples Retailing (1.6%): |
| ||||||
23,474 | CVS Caremark Corp. | 1,680,034 | ||||||
4,815 | Safeway, Inc. | 156,825 | ||||||
130 | Sprouts Farmers Market, Inc.* | 4,996 | ||||||
8,409 | Sysco Corp. | 303,565 | ||||||
5,069 | Walgreen Co. | 291,163 | ||||||
11,756 | Wal-Mart Stores, Inc. | 925,080 | ||||||
|
| |||||||
3,361,663 | ||||||||
|
|
Shares | Fair Value | |||||||
| Common Stocks, continued |
| ||||||
| Food Products (1.4%): |
| ||||||
13,190 | Archer-Daniels-Midland Co. | $ | 572,446 | |||||
3,187 | Bunge, Ltd. | 261,685 | ||||||
1,297 | Campbell Soup Co. | 56,134 | ||||||
676 | ConAgra Foods, Inc. | 22,781 | ||||||
2,023 | Dean Foods Co.* | 34,775 | ||||||
1,474 | Ingredion, Inc. | 100,910 | ||||||
2,019 | J.M. Smucker Co. (The) | 209,209 | ||||||
440 | Kellogg Co. | 26,871 | ||||||
38,657 | Mondelez International, Inc., Class A | 1,364,593 | ||||||
309 | Pinnacle Foods, Inc. | 8,485 | ||||||
6,066 | Tyson Foods, Inc., Class A | 202,968 | ||||||
|
| |||||||
2,860,857 | ||||||||
|
| |||||||
| Gas Utilities (0.3%): |
| ||||||
2,561 | AGL Resources, Inc. | 120,957 | ||||||
1,963 | Atmos Energy Corp. | 89,159 | ||||||
1,595 | National Fuel Gas Co. | 113,883 | ||||||
269 | ONEOK, Inc. | 16,726 | ||||||
3,303 | Questar Corp.+ | 75,936 | ||||||
2,467 | UGI Corp. | 102,282 | ||||||
|
| |||||||
518,943 | ||||||||
|
| |||||||
| Health Care Equipment & Supplies (2.3%): |
| ||||||
33,770 | Abbott Laboratories | 1,294,404 | ||||||
1,747 | Alere, Inc.* | 63,241 | ||||||
29,229 | Boston Scientific Corp.* | 351,333 | ||||||
4,763 | CareFusion Corp.* | 189,663 | ||||||
271 | Cooper Cos., Inc. (The) | 33,561 | ||||||
10,192 | Covidien plc | 694,075 | ||||||
2,239 | DENTSPLY International, Inc. | 108,547 | ||||||
1,259 | Hill-Rom Holdings, Inc. | 52,047 | ||||||
4,123 | Hologic, Inc.* | 92,149 | ||||||
22,010 | Medtronic, Inc. | 1,263,154 | ||||||
2,235 | St. Jude Medical, Inc. | 138,458 | ||||||
3,006 | Stryker Corp. | 225,871 | ||||||
891 | Teleflex, Inc. | 83,629 | ||||||
3,444 | Zimmer Holdings, Inc. | 320,946 | ||||||
|
| |||||||
4,911,078 | ||||||||
|
| |||||||
| Health Care Providers & Services (2.5%): |
| ||||||
6,014 | Aetna, Inc. | 412,500 | ||||||
7,406 | Cardinal Health, Inc. | 494,795 | ||||||
5,822 | CIGNA Corp. | 509,309 | ||||||
1,849 | Community Health Systems, Inc.* | 72,610 | ||||||
370 | Envision Healthcare Holdings, Inc.* | 13,142 | ||||||
2,232 | Express Scripts Holding Co.* | 156,776 | ||||||
5,375 | HCA Holdings, Inc.* | 256,441 | ||||||
1,711 | Health Net, Inc.* | 50,765 | ||||||
3,411 | Humana, Inc. | 352,083 | ||||||
998 | LifePoint Hospitals, Inc.* | 52,734 | ||||||
766 | MEDNAX, Inc.* | 40,889 | ||||||
2,282 | Omnicare, Inc. | 137,742 | ||||||
200 | Patterson Cos., Inc. | 8,240 | ||||||
237 | Premier, Inc., Class A*^ | 8,712 | ||||||
2,941 | Quest Diagnostics, Inc.^ | 157,461 | ||||||
326 | Quintiles Transnational Holdings, Inc.* | 15,107 | ||||||
22,096 | UnitedHealth Group, Inc. | 1,663,830 | ||||||
642 | Universal Health Services, Inc., Class B | 52,169 |
Continued
6
AZL Russell 1000 Value Index Fund
Schedule of Portfolio Investments
December 31, 2013
Shares | Fair Value | |||||||
| Common Stocks, continued |
| ||||||
| Health Care Providers & Services, continued |
| ||||||
1,900 | VCA Antech, Inc.* | $ | 59,584 | |||||
6,507 | WellPoint, Inc. | 601,182 | ||||||
|
| |||||||
5,116,071 | ||||||||
|
| |||||||
| Health Care Technology (0.0%): |
| ||||||
3,856 | Allscripts Healthcare Solutions, Inc.* | 59,614 | ||||||
|
| |||||||
| Hotels, Restaurants & Leisure (0.6%): |
| ||||||
9,050 | Carnival Corp. | 363,539 | ||||||
568 | Choice Hotels International, Inc.^ | 27,894 | ||||||
977 | Darden Restaurants, Inc. | 53,119 | ||||||
983 | Hyatt Hotels Corp., Class A* | 48,619 | ||||||
591 | Marriott International, Inc., Class A | 29,172 | ||||||
8,050 | MGM Resorts International* | 189,336 | ||||||
36 | Norwegian Cruise Line Holdings, Ltd.* | 1,277 | ||||||
1,473 | Penn National Gaming, Inc.* | 21,108 | ||||||
3,540 | Royal Caribbean Cruises, Ltd. | 167,867 | ||||||
2,424 | Starwood Hotels & Resorts Worldwide, Inc. | 192,588 | ||||||
6,082 | Wendy’s Co. (The) | 53,035 | ||||||
|
| |||||||
1,147,554 | ||||||||
|
| |||||||
| Household Durables (0.7%): |
| ||||||
6,111 | D.R. Horton, Inc. | 136,398 | ||||||
2,658 | Garmin, Ltd.^ | 122,853 | ||||||
1,473 | Harman International Industries, Inc. | 120,565 | ||||||
3,097 | Leggett & Platt, Inc. | 95,821 | ||||||
3,583 | Lennar Corp. | 141,743 | ||||||
1,314 | Mohawk Industries, Inc.* | 195,655 | ||||||
2,630 | Newell Rubbermaid, Inc. | 85,238 | ||||||
18 | NVR, Inc.* | 18,468 | ||||||
124 | Taylor Morrison Home Corp., Class A* | 2,784 | ||||||
3,666 | Toll Brothers, Inc.* | 135,642 | ||||||
1,595 | Whirlpool Corp. | 250,192 | ||||||
|
| |||||||
1,305,359 | ||||||||
|
| |||||||
| Household Products (2.5%): |
| ||||||
467 | Clorox Co. (The)^ | 43,319 | ||||||
1,350 | Energizer Holdings, Inc. | 146,124 | ||||||
1,367 | Kimberly-Clark Corp. | 142,797 | ||||||
59,345 | Procter & Gamble Co. (The) | 4,831,276 | ||||||
|
| |||||||
5,163,516 | ||||||||
|
| |||||||
| Independent Power Producers & Energy Traders (0.3%): |
| ||||||
13,418 | AES Corp. (The) | 194,695 | ||||||
7,564 | Calpine Corp.* | 147,574 | ||||||
6,988 | NRG Energy, Inc. | 200,695 | ||||||
|
| |||||||
542,964 | ||||||||
|
| |||||||
| Industrial Conglomerates (3.6%): |
| ||||||
2,303 | 3M Co. | 322,996 | ||||||
1,308 | Carlisle Cos., Inc. | 103,855 | ||||||
10,336 | Danaher Corp. | 797,939 | ||||||
223,892 | General Electric Co. | 6,275,693 | ||||||
|
| |||||||
7,500,483 | ||||||||
|
| |||||||
| Insurance (5.3%): |
| ||||||
7,369 | ACE, Ltd. | 762,912 | ||||||
10,100 | AFLAC, Inc. | 674,680 | ||||||
361 | Alleghany Corp.* | 144,386 | ||||||
389 | Allied World Assurance Co. Holdings AG | 43,883 | ||||||
113 | Allied World Assurance Co. Holdings AG | 12,748 |
Shares | Fair Value | |||||||
| Common Stocks, continued |
| ||||||
| Insurance, continued |
| ||||||
10,151 | Allstate Corp. (The) | $ | 553,636 | |||||
1,454 | American Financial Group, Inc. | 83,925 | ||||||
31,982 | American International Group, Inc. | 1,632,680 | ||||||
159 | American National Insurance Co. | 18,212 | ||||||
1,533 | Aon plc | 128,604 | ||||||
2,702 | Arch Capital Group, Ltd.* | 161,282 | ||||||
1,422 | Aspen Insurance Holdings, Ltd. | 58,743 | ||||||
1,575 | Assurant, Inc. | 104,533 | ||||||
3,584 | Assured Guaranty, Ltd. | 84,547 | ||||||
1,923 | Axis Capital Holdings, Ltd. | 91,477 | ||||||
1,383 | Brown & Brown, Inc. | 43,412 | ||||||
4,812 | Chubb Corp. (The) | 464,984 | ||||||
3,541 | Cincinnati Financial Corp. | 185,442 | ||||||
576 | CNA Financial Corp. | 24,705 | ||||||
614 | Endurance Specialty Holdings, Ltd. | 36,023 | ||||||
1,083 | Everest Re Group, Ltd. | 168,806 | ||||||
5,394 | Fidelity National Financial, Inc., Class A | 175,035 | ||||||
10,686 | Genworth Financial, Inc., Class A* | 165,954 | ||||||
682 | Hanover Insurance Group, Inc. (The) | 40,722 | ||||||
9,877 | Hartford Financial Services Group, Inc. (The) | 357,844 | ||||||
2,174 | HCC Insurance Holdings, Inc. | 100,308 | ||||||
1,031 | Kemper Corp. | 42,147 | ||||||
5,817 | Lincoln National Corp. | 300,274 | ||||||
6,120 | Loews Corp. | 295,229 | ||||||
299 | Markel Corp.* | 173,525 | ||||||
3,966 | Marsh & McLennan Cos., Inc. | 191,796 | ||||||
3,073 | MBIA, Inc.* | 36,692 | ||||||
579 | Mercury General Corp. | 28,782 | ||||||
19,368 | MetLife, Inc. | 1,044,322 | ||||||
5,632 | Old Republic International Corp. | 97,265 | ||||||
1,172 | PartnerRe, Ltd. | 123,564 | ||||||
6,345 | Principal Financial Group, Inc. | 312,872 | ||||||
1,340 | ProAssurance Corp. | 64,963 | ||||||
2,560 | Progressive Corp. (The) | 69,811 | ||||||
1,679 | Protective Life Corp. | 85,058 | ||||||
6,191 | Prudential Financial, Inc. | 570,934 | ||||||
1,556 | Reinsurance Group of America, Inc. | 120,450 | ||||||
967 | RenaissanceRe Holdings, Ltd. | 94,128 | ||||||
964 | StanCorp Financial Group, Inc. | 63,865 | ||||||
1,988 | Torchmark Corp. | 155,362 | ||||||
5,952 | Travelers Cos., Inc. (The) | 538,894 | ||||||
5,784 | UnumProvident Corp. | 202,903 | ||||||
2,067 | Validus Holdings, Ltd. | 83,279 | ||||||
2,339 | W.R. Berkley Corp. | 101,489 | ||||||
134 | White Mountains Insurance Group, Ltd. | 80,813 | ||||||
6,324 | XL Group plc, Class B | 201,356 | ||||||
|
| |||||||
11,399,256 | ||||||||
|
| |||||||
| Internet & Catalog Retail (0.2%): |
| ||||||
10,547 | Liberty Media Corp. — Interactive, Class A* | 309,555 | ||||||
108 | zulily, Inc., Class A*^ | 4,474 | ||||||
|
| |||||||
314,029 | ||||||||
|
| |||||||
| Internet Software & Services (0.4%): |
| ||||||
1,679 | AOL, Inc.* | 78,275 | ||||||
434 | Twitter, Inc.*^ | 27,624 | ||||||
19,370 | Yahoo!, Inc.* | 783,323 | ||||||
|
| |||||||
889,222 | ||||||||
|
|
Continued
7
AZL Russell 1000 Value Index Fund
Schedule of Portfolio Investments
December 31, 2013
Shares | Fair Value | |||||||
| Common Stocks, continued |
| ||||||
| IT Services (0.5%): |
| ||||||
3,486 | Amdocs, Ltd. | $ | 143,763 | |||||
37 | Booz Allen Hamilton Holding Corp. | 709 | ||||||
3,235 | Computer Sciences Corp. | 180,772 | ||||||
2,068 | CoreLogic, Inc.* | 73,476 | ||||||
132 | DST Systems, Inc. | 11,978 | ||||||
5,722 | Fidelity National Information Services, Inc. | 307,156 | ||||||
1,583 | Leidos Holdings, Inc.^ | 73,594 | ||||||
297 | Lender Processing Services, Inc. | 11,102 | ||||||
706 | Paychex, Inc. | 32,144 | ||||||
904 | Science Applications International Corp. | 29,895 | ||||||
795 | Total System Services, Inc. | 26,458 | ||||||
2,356 | VeriFone Systems, Inc.* | 63,188 | ||||||
|
| |||||||
954,235 | ||||||||
|
| |||||||
| Leisure Equipment & Products (0.0%): |
| ||||||
371 | Hasbro, Inc. | 20,409 | ||||||
|
| |||||||
| Life Sciences Tools & Services (0.9%): |
| ||||||
6,641 | Agilent Technologies, Inc. | 379,799 | ||||||
444 | Bio-Rad Laboratories, Inc., Class A* | 54,883 | ||||||
584 | Charles River Laboratories International, Inc.* | 30,975 | ||||||
1,300 | Life Technologies Corp.* | 98,540 | ||||||
2,382 | PerkinElmer, Inc. | 98,210 | ||||||
5,067 | QIAGEN NV* | 120,645 | ||||||
428 | Techne Corp. | 40,519 | ||||||
7,770 | Thermo Fisher Scientific, Inc. | 865,189 | ||||||
|
| |||||||
1,688,760 | ||||||||
|
| |||||||
| Machinery (2.2%): |
| ||||||
2,112 | AGCO Corp. | 125,009 | ||||||
11,669 | Caterpillar, Inc. | 1,059,662 | ||||||
80 | Crane Co. | 5,380 | ||||||
740 | Cummins, Inc. | 104,318 | ||||||
249 | Donaldson Co., Inc. | 10,822 | ||||||
971 | Dover Corp. | 93,740 | ||||||
1,615 | Harsco Corp. | 45,268 | ||||||
121 | IDEX Corp. | 8,936 | ||||||
5,139 | Illinois Tool Works, Inc. | 432,087 | ||||||
1,866 | Ingersoll-Rand plc | 114,946 | ||||||
2,303 | Joy Global, Inc. | 134,702 | ||||||
1,705 | Kennametal, Inc. | 88,779 | ||||||
1,049 | Navistar International Corp.*^ | 40,061 | ||||||
1,908 | Oshkosh Corp. | 96,125 | ||||||
6,675 | PACCAR, Inc. | 394,960 | ||||||
3,234 | Parker Hannifin Corp. | 416,022 | ||||||
4,424 | Pentair, Ltd., Registered Shares | 343,612 | ||||||
1,120 | Snap-On, Inc. | 122,662 | ||||||
1,014 | SPX Corp. | 101,005 | ||||||
3,198 | Stanley Black & Decker, Inc. | 258,047 | ||||||
2,411 | Terex Corp. | 101,238 | ||||||
1,871 | Timken Co. | 103,036 | ||||||
1,715 | Trinity Industries, Inc. | 93,502 | ||||||
3,771 | Xylem, Inc. | 130,477 | ||||||
|
| |||||||
4,424,396 | ||||||||
|
| |||||||
| Marine (0.0%): |
| ||||||
503 | Kirby Corp.* | 49,923 | ||||||
|
|
Shares | Fair Value | |||||||
| Common Stocks, continued |
| ||||||
| Media (2.9%): |
| ||||||
1,116 | CBS Corp., Class B | $ | 71,134 | |||||
4,319 | Comcast Corp., Class A | 224,437 | ||||||
1,600 | DreamWorks Animation SKG, Inc., Class A* | 56,800 | ||||||
4,962 | Gannett Co., Inc. | 146,776 | ||||||
5,056 | Interpublic Group of Cos., Inc. (The) | 89,491 | ||||||
987 | John Wiley & Sons, Inc., Class A | 54,482 | ||||||
1,207 | Liberty Global plc, Series C* | 101,774 | ||||||
61 | Liberty Global plc, Class A* | 5,428 | ||||||
2,072 | Liberty Media Corp.* | 303,444 | ||||||
3,136 | McGraw-Hill Cos., Inc. (The) | 245,235 | ||||||
2,830 | News Corp., Class A* | 50,997 | ||||||
1,390 | Regal Entertainment Group, Class A^ | 27,036 | ||||||
35,293 | Sirius XM Holdings, Inc.* | 123,173 | ||||||
285 | Starz – Liberty Capital* | 8,333 | ||||||
8,089 | Thomson Reuters Corp. | 305,926 | ||||||
20,192 | Time Warner, Inc. | 1,407,786 | ||||||
11,321 | Twenty-First Century Fox, Inc. | 398,273 | ||||||
30,352 | Walt Disney Co. (The) | 2,318,893 | ||||||
|
| |||||||
5,939,418 | ||||||||
|
| |||||||
| Metals & Mining (1.1%): |
| ||||||
23,172 | Alcoa, Inc. | 246,318 | ||||||
2,340 | Allegheny Technologies, Inc. | 83,374 | ||||||
1,004 | Carpenter Technology Corp. | 62,449 | ||||||
3,275 | Cliffs Natural Resources, Inc.^ | 85,838 | ||||||
22,407 | Freeport-McMoRan Copper & Gold, Inc. | 845,641 | ||||||
10,666 | Newmont Mining Corp. | 245,638 | ||||||
6,885 | Nucor Corp. | 367,521 | ||||||
1,662 | Reliance Steel & Aluminum Co. | 126,046 | ||||||
1,039 | Royal Gold, Inc. | 47,867 | ||||||
4,778 | Steel Dynamics, Inc. | 93,362 | ||||||
1,616 | Tahoe Resources, Inc.* | 26,890 | ||||||
3,128 | United States Steel Corp.^ | 92,276 | ||||||
|
| |||||||
2,323,220 | ||||||||
|
| |||||||
| Multiline Retail (0.3%): |
| ||||||
929 | Big Lots, Inc.* | 29,997 | ||||||
191 | Dillard’s, Inc., Class A | 18,567 | ||||||
5,135 | J.C. Penney Co., Inc.*^ | 46,985 | ||||||
4,810 | Kohl’s Corp. | 272,967 | ||||||
1,870 | Macy’s, Inc. | 99,858 | ||||||
940 | Sears Holdings Corp.*^ | 46,098 | ||||||
3,002 | Target Corp. | 189,937 | ||||||
|
| |||||||
704,409 | ||||||||
|
| |||||||
| Multi-Utilities (2.2%): |
| ||||||
2,404 | Alliant Energy Corp. | 124,046 | ||||||
5,257 | Ameren Corp. | 190,093 | ||||||
9,285 | CenterPoint Energy, Inc. | 215,226 | ||||||
5,782 | CMS Energy Corp. | 154,784 | ||||||
6,346 | Consolidated Edison, Inc. | 350,807 | ||||||
12,515 | Dominion Resources, Inc. | 809,596 | ||||||
3,769 | DTE Energy Co. | 250,224 | ||||||
1,715 | Integrys Energy Group, Inc. | 93,313 | ||||||
4,100 | MDU Resources Group, Inc. | 125,255 | ||||||
6,761 | NiSource, Inc. | 222,302 | ||||||
9,579 | PG&E Corp. | 385,842 | ||||||
10,962 | Public Service Enterprise Group, Inc. | 351,222 |
Continued
8
AZL Russell 1000 Value Index Fund
Schedule of Portfolio Investments
December 31, 2013
Shares | Fair Value | |||||||
| Common Stocks, continued |
| ||||||
| Multi-Utilities, continued |
| ||||||
3,023 | SCANA Corp. | $ | 141,869 | |||||
5,277 | Sempra Energy | 473,664 | ||||||
4,716 | TECO Energy, Inc.^ | 81,304 | ||||||
1,784 | Vectren Corp. | 63,332 | ||||||
4,956 | Wisconsin Energy Corp. | 204,881 | ||||||
10,773 | Xcel Energy, Inc. | 300,998 | ||||||
|
| |||||||
4,538,758 | ||||||||
|
| |||||||
| Office Electronics (0.2%): |
| ||||||
26,563 | Xerox Corp. | 323,271 | ||||||
1,020 | Zebra Technologies Corp., Class A* | 55,162 | ||||||
|
| |||||||
378,433 | ||||||||
|
| |||||||
| Oil, Gas & Consumable Fuels (13.6%): |
| ||||||
10,265 | Anadarko Petroleum Corp. | 814,220 | ||||||
438 | Antero Resources Corp.* | 27,787 | ||||||
8,489 | Apache Corp. | 729,545 | ||||||
12,549 | Chesapeake Energy Corp. | 340,580 | ||||||
41,974 | Chevron Corp. | 5,242,971 | ||||||
1,873 | Cimarex Energy Co. | 196,496 | ||||||
497 | Cobalt International Energy, Inc.* | 8,176 | ||||||
26,485 | ConocoPhillips | 1,871,164 | ||||||
4,954 | CONSOL Energy, Inc. | 188,450 | ||||||
8,082 | Denbury Resources, Inc.* | 132,787 | ||||||
8,796 | Devon Energy Corp. | 544,209 | ||||||
1,570 | Energen Corp. | 111,078 | ||||||
378 | EOG Resources, Inc. | 63,444 | ||||||
277 | EQT Corp. | 24,869 | ||||||
96,276 | Exxon Mobil Corp. | 9,743,130 | ||||||
949 | Golar LNG, Ltd.^ | 34,439 | ||||||
311 | Gulfport Energy Corp.* | 19,640 | ||||||
6,647 | Hess Corp. | 551,701 | ||||||
4,398 | HollyFrontier Corp. | 218,537 | ||||||
1,206 | Kinder Morgan, Inc. | 43,416 | ||||||
45 | Laredo Petroleum Holdings, Inc.* | 1,246 | ||||||
15,356 | Marathon Oil Corp. | 542,067 | ||||||
6,518 | Marathon Petroleum Corp. | 597,896 | ||||||
4,135 | Murphy Oil Corp. | 268,279 | ||||||
2,936 | Newfield Exploration Co.* | 72,314 | ||||||
6,783 | Noble Energy, Inc. | 461,990 | ||||||
17,453 | Occidental Petroleum Corp. | 1,659,780 | ||||||
513 | PBF Energy, Inc.^ | 16,139 | ||||||
5,838 | Peabody Energy Corp. | 114,016 | ||||||
13,415 | Phillips 66 | 1,034,699 | ||||||
776 | Pioneer Natural Resources Co. | 142,838 | ||||||
3,490 | QEP Resources, Inc. | 106,969 | ||||||
10,718 | SandRidge Energy, Inc.*^ | 65,058 | ||||||
14,498 | Spectra Energy Corp. | 516,419 | ||||||
791 | Teekay Shipping Corp. | 37,976 | ||||||
2,935 | Tesoro Corp. | 171,698 | ||||||
3,326 | Ultra Petroleum Corp.*^ | 72,008 | ||||||
11,815 | Valero Energy Corp. | 595,476 | ||||||
2,349 | Whiting Petroleum Corp.* | 145,333 | ||||||
6,671 | Williams Cos., Inc. (The) | 257,300 | ||||||
1,277 | World Fuel Services Corp. | 55,115 | ||||||
4,340 | WPX Energy, Inc.* | 88,449 | ||||||
|
| |||||||
27,929,704 | ||||||||
|
|
Shares | Fair Value | |||||||
| Common Stocks, continued |
| ||||||
| Paper & Forest Products (0.1%): |
| ||||||
701 | Domtar Corp. | $ | 66,133 | |||||
1,348 | International Paper Co. | 66,092 | ||||||
|
| |||||||
132,225 | ||||||||
|
| |||||||
| Personal Products (0.0%): |
| ||||||
417 | Coty, Inc., Class A | 6,359 | ||||||
|
| |||||||
| Pharmaceuticals (6.9%): |
| ||||||
4,947 | Bristol-Myers Squibb Co. | 262,933 | ||||||
16,771 | Eli Lilly & Co. | 855,321 | ||||||
5,778 | Forest Laboratories, Inc.* | 346,853 | ||||||
3,586 | Hospira, Inc.* | 148,030 | ||||||
52,974 | Johnson & Johnson Co. | 4,851,889 | ||||||
1,274 | Mallinckrodt plc* | 66,579 | ||||||
65,383 | Merck & Co., Inc. | 3,272,419 | ||||||
144,816 | Pfizer, Inc. | 4,435,714 | ||||||
|
| |||||||
14,239,738 | ||||||||
|
| |||||||
| Professional Services (0.3%): |
| ||||||
64 | Dun & Bradstreet Corp. | 7,856 | ||||||
1,670 | Manpower, Inc. | 143,386 | ||||||
4,052 | Nielsen Holdings NV | 185,947 | ||||||
1,413 | Towers Watson & Co., Class A | 180,313 | ||||||
|
| |||||||
517,502 | ||||||||
|
| |||||||
| Real Estate Investment Trusts (REITs) (3.7%): |
| ||||||
1,548 | Alexandria Real Estate Equities, Inc. | 98,484 | ||||||
2,271 | American Campus Communities, Inc. | 73,149 | ||||||
8,590 | American Capital Agency Corp. | 165,701 | ||||||
886 | American Homes 4 Rent, Class A | 14,353 | ||||||
20,603 | Annaly Capital Management, Inc. | 205,412 | ||||||
1,427 | Apartment Investment & Management Co., Class A | 36,974 | ||||||
2,804 | AvalonBay Communities, Inc. | 331,517 | ||||||
4,038 | BioMed Realty Trust, Inc. | 73,169 | ||||||
2,975 | Boston Properties, Inc. | 298,601 | ||||||
3,395 | Brandywine Realty Trust | 47,836 | ||||||
1,670 | BRE Properties, Inc. | 91,366 | ||||||
809 | Brixmor Property Group, Inc.* | 16,447 | ||||||
1,838 | Camden Property Trust | 104,545 | ||||||
2,376 | CBL & Associates Properties, Inc. | 42,673 | ||||||
22,324 | Chimera Investment Corp. | 69,204 | ||||||
2,572 | CommonWealth REIT | 59,953 | ||||||
1,853 | Corporate Office Properties Trust | 43,898 | ||||||
6,334 | DDR Corp. | 97,354 | ||||||
596 | Digital Realty Trust, Inc.^ | 29,276 | ||||||
3,090 | Douglas Emmett, Inc. | 71,966 | ||||||
6,973 | Duke Realty Corp. | 104,874 | ||||||
502 | Equity Lifestyle Properties, Inc. | 18,187 | ||||||
7,803 | Equity Residential Property Trust | 404,741 | ||||||
824 | Essex Property Trust, Inc. | 118,252 | ||||||
2,213 | Extra Space Storage, Inc. | 93,234 | ||||||
485 | Federal Realty Investment Trust | 49,184 | ||||||
1,658 | Gaming & Leisure Properties, Inc.* | 84,243 | ||||||
12,132 | General Growth Properties, Inc. | 243,489 | ||||||
2,143 | Hatteras Financial Corp. | 35,017 | ||||||
9,846 | HCP, Inc. | 357,607 | ||||||
6,165 | Health Care REIT, Inc. | 330,259 | ||||||
2,418 | Healthcare Trust of America, Inc. | 23,793 |
Continued
9
AZL Russell 1000 Value Index Fund
Schedule of Portfolio Investments
December 31, 2013
Shares | Fair Value | |||||||
| Common Stocks, continued |
| ||||||
| Real Estate Investment Trusts (REITs), continued |
| ||||||
1,224 | Home Properties, Inc. | $ | 65,631 | |||||
3,224 | Hospitality Properties Trust | 87,145 | ||||||
16,135 | Host Hotels & Resorts, Inc. | 313,664 | ||||||
1,763 | Kilroy Realty Corp. | 88,467 | ||||||
8,857 | Kimco Realty Corp. | 174,926 | ||||||
2,793 | Liberty Property Trust | 94,599 | ||||||
2,979 | Macerich Co. (The) | 175,433 | ||||||
1,907 | Mack-Cali Realty Corp. | 40,962 | ||||||
7,832 | MFA Financial, Inc.^ | 55,294 | ||||||
1,616 | Mid-America Apartment Communities, Inc. | 98,156 | ||||||
2,565 | National Retail Properties, Inc.^ | 77,796 | ||||||
3,588 | Piedmont Office Realty Trust, Inc., Class A^ | 59,274 | ||||||
1,183 | Post Properties, Inc. | 53,507 | ||||||
10,794 | ProLogis, Inc. | 398,838 | ||||||
212 | Public Storage, Inc. | 31,910 | ||||||
4,251 | Realty Income Corp.^ | 158,690 | ||||||
1,154 | Regency Centers Corp. | 53,430 | ||||||
2,904 | Retail Properties of America, Inc., Class A | 36,939 | ||||||
3,776 | Senior Housing Properties Trust | 83,940 | ||||||
1,699 | Simon Property Group, Inc. | 258,520 | ||||||
1,878 | SL Green Realty Corp. | 173,490 | ||||||
6,468 | Spirit Realty Capital, Inc. | 63,580 | ||||||
4,223 | Starwood Property Trust, Inc. | 116,977 | ||||||
1,122 | Taubman Centers, Inc. | 71,718 | ||||||
7,912 | Two Harbors Investment Corp. | 73,423 | ||||||
5,412 | UDR, Inc. | 126,370 | ||||||
3,486 | Ventas, Inc. | 199,678 | ||||||
3,263 | Vornado Realty Trust | 289,722 | ||||||
2,640 | Weingarten Realty Investors^ | 72,389 | ||||||
1,245 | WP Carey, Inc.^ | 76,381 | ||||||
|
| |||||||
7,505,607 | ||||||||
|
| |||||||
| Real Estate Management & Development (0.1%): |
| ||||||
3,423 | Forest City Enterprises, Inc., Class A* | 65,379 | ||||||
856 | Howard Hughes Corp. (The)* | 102,805 | ||||||
956 | Jones Lang LaSalle, Inc. | 97,885 | ||||||
280 | Realogy Holdings Corp.* | 13,852 | ||||||
1,251 | St. Joe Co. (The)*^ | 24,007 | ||||||
|
| |||||||
303,928 | ||||||||
|
| |||||||
| Road & Rail (0.5%): |
| ||||||
73 | AMERCO, Inc.* | 17,362 | ||||||
775 | Con-way, Inc. | 30,775 | ||||||
11,093 | CSX Corp. | 319,146 | ||||||
528 | Genesee & Wyoming, Inc., Class A* | 50,714 | ||||||
5,590 | Norfolk Southern Corp. | 518,921 | ||||||
1,126 | Ryder System, Inc. | 83,076 | ||||||
|
| |||||||
1,019,994 | ||||||||
|
| |||||||
| Semiconductors & Semiconductor Equipment (2.4%): |
| ||||||
4,544 | Altera Corp. | 147,816 | ||||||
3,791 | Analog Devices, Inc. | 193,076 | ||||||
8,822 | Applied Materials, Inc. | 156,061 | ||||||
449 | Avago Technologies, Ltd. | 23,748 | ||||||
6,965 | Broadcom Corp., Class A | 206,512 | ||||||
2,763 | Fairchild Semiconductor International, Inc.* | 36,886 | ||||||
1,461 | First Solar, Inc.* | 79,829 | ||||||
84 | Freescale Semiconductor Holdings I, Ltd.* | 1,348 |
Shares | Fair Value | |||||||
| Common Stocks, continued |
| ||||||
| Semiconductors & Semiconductor Equipment, continued |
| ||||||
593 | Freescale Semiconductor, Ltd.* | $ | 9,518 | |||||
100,639 | Intel Corp. | 2,612,589 | ||||||
3,594 | KLA-Tencor Corp. | 231,669 | ||||||
2,701 | Lam Research Corp.* | 147,069 | ||||||
10,530 | LSI Corp. | 116,041 | ||||||
8,589 | Marvell Technology Group, Ltd. | 123,510 | ||||||
22,318 | Micron Technology, Inc.* | 485,641 | ||||||
12,522 | NVIDIA Corp. | 200,602 | ||||||
484 | ON Semiconductor Corp.* | 3,988 | ||||||
123 | Silicon Laboratories, Inc.* | 5,327 | ||||||
702 | Skyworks Solutions, Inc.* | 20,049 | ||||||
4,132 | Teradyne, Inc.*^ | 72,806 | ||||||
|
| |||||||
4,874,085 | ||||||||
|
| |||||||
| Software (0.7%): |
| ||||||
5,767 | Activision Blizzard, Inc. | 102,826 | ||||||
6,634 | Adobe Systems, Inc.* | 397,244 | ||||||
1,003 | Autodesk, Inc.* | 50,481 | ||||||
7,051 | CA, Inc. | 237,266 | ||||||
4,621 | Compuware Corp. | 51,801 | ||||||
1,520 | Electronic Arts, Inc.* | 34,869 | ||||||
86 | FireEye, Inc.*^ | 3,750 | ||||||
1,451 | Micros Systems, Inc.* | 83,244 | ||||||
5,665 | Nuance Communications, Inc.* | 86,108 | ||||||
1,980 | Rovi Corp.* | 38,986 | ||||||
4,103 | Symantec Corp. | 96,749 | ||||||
3,332 | Synopsys, Inc.* | 135,179 | ||||||
103 | Veeva Systems, Inc., Class A*^ | 3,306 | ||||||
12,652 | Zynga, Inc.* | 48,078 | ||||||
|
| |||||||
1,369,887 | ||||||||
|
| |||||||
| Specialty Retail (0.6%): |
| ||||||
1,396 | Aaron’s, Inc. | 41,042 | ||||||
1,497 | Abercrombie & Fitch Co., Class A | 49,266 | ||||||
1,488 | American Eagle Outfitters, Inc. | 21,427 | ||||||
2,369 | Ascena Retail Group, Inc.* | 50,128 | ||||||
4,335 | Best Buy Co., Inc. | 172,880 | ||||||
223 | Chico’s FAS, Inc. | 4,201 | ||||||
1,334 | CST Brands, Inc. | 48,984 | ||||||
138 | DSW, Inc., Class A | 5,897 | ||||||
2,870 | Foot Locker, Inc. | 118,933 | ||||||
2,576 | GameStop Corp., Class A | 126,894 | ||||||
1,237 | Guess?, Inc. | 38,434 | ||||||
1,038 | Murphy USA, Inc.* | 43,139 | ||||||
1,599 | Signet Jewelers, Ltd. | 125,841 | ||||||
14,375 | Staples, Inc. | 228,419 | ||||||
|
| |||||||
1,075,485 | ||||||||
|
| |||||||
| Textiles, Apparel & Luxury Goods (0.0%): |
| ||||||
420 | Deckers Outdoor Corp. * | 35,473 | ||||||
201 | PVH Corp. | 27,340 | ||||||
|
| |||||||
62,813 | ||||||||
|
| |||||||
| Thrifts & Mortgage Finance (0.2%): |
| ||||||
1,396 | BankUnited, Inc. | 45,956 | ||||||
11,463 | Hudson City Bancorp, Inc. | 108,096 | ||||||
9,553 | New York Community Bancorp, Inc. | 160,968 | ||||||
6,705 | People’s United Financial, Inc. | 101,380 |
Continued
10
AZL Russell 1000 Value Index Fund
Schedule of Portfolio Investments
December 31, 2013
Shares | Fair Value | |||||||
| Common Stocks, continued |
| ||||||
| Thrifts & Mortgage Finance, continued |
| ||||||
1,747 | TFS Financial Corp.* | $ | 21,165 | |||||
2,256 | Washington Federal, Inc. | 52,542 | ||||||
|
| |||||||
490,107 | ||||||||
|
| |||||||
| Tobacco (0.0%): |
| ||||||
1,658 | Reynolds American, Inc. | 82,883 | ||||||
|
| |||||||
| Trading Companies & Distributors (0.1%): |
| ||||||
1,464 | Air Lease Corp. | 45,501 | ||||||
1,018 | GATX Corp. | 53,109 | ||||||
492 | HD Supply Holdings, Inc.* | 11,813 | ||||||
1,029 | MRC Global, Inc.* | 33,196 | ||||||
956 | WESCO International, Inc.*^ | 87,063 | ||||||
|
| |||||||
230,682 | ||||||||
|
| |||||||
| Water Utilities (0.1%): |
| ||||||
3,851 | American Water Works Co., Inc. | 162,743 | ||||||
471 | Aqua America, Inc. | 11,111 | ||||||
|
| |||||||
173,854 | ||||||||
|
| |||||||
| Wireless Telecommunication Services (0.2%): |
| ||||||
15,025 | Sprint Corp.* | 161,519 | ||||||
2,063 | Telephone & Data Systems, Inc. | 53,184 | ||||||
4,106 | T-Mobile US, Inc.* | 138,126 |
Shares | Fair Value | |||||||
| Common Stocks, continued |
| ||||||
| Wireless Telecommunication Services, continued |
| ||||||
299 | United States Cellular Corp. | $ | 12,504 | |||||
|
| |||||||
365,333 | ||||||||
|
| |||||||
| Total Common Stocks (Cost $143,345,613) | 201,427,834 | ||||||
|
| |||||||
Contracts, Shares, Notional Amount or Principal Amount | Fair Value | |||||||
| Securities Held as Collateral for Securities on Loan (1.2%): | |||||||
$ | 2,384,715 | Allianz Variable Insurance Products Securities Lending Collateral Trust(a) | 2,384,715 | |||||
|
| |||||||
| Total Securities Held as Collateral for Securities on Loan | 2,384,715 | ||||||
|
| |||||||
| Unaffiliated Investment Company (1.9%): | |||||||
3,947,247 | Dreyfus Treasury Prime Cash Management Fund, Institutional Shares, 0.00%(b) | 3,947,247 | ||||||
|
| |||||||
| Total Unaffiliated Investment Company (Cost $3,947,247) | 3,947,247 | ||||||
|
| |||||||
| Total Investment Securities (Cost $149,677,575)(c) — 100.9% | 207,759,796 | ||||||
| Net other assets (liabilities) — (0.9)% | (1,953,060 | ) | |||||
|
| |||||||
| Net Assets — 100.0% | $ | 205,806,736 | |||||
|
|
Percentages indicated are based on net assets as of December 31, 2013.
* | Non-income producing security. |
^ | This security or a partial position of this security was on loan as of December 31, 2013. The total value of securities on loan as of December 31, 2013, was $2,318,024. |
+ | Affiliated Securities |
(a) | Purchased with cash collateral held from securities lending. The value of the collateral could include collateral held for securities that were sold on or before December 31, 2013. |
(b) | The rate represents the effective yield at December 31, 2013. |
(c) | See Federal Tax Information listed in the Notes to the Financial Statements. |
Continued
11
AZL Russell 1000 Value Index Fund
Schedule of Portfolio Investments
December 31, 2013
Futures Contracts
Cash of $240,000 has been segregated to cover margin requirements for the following open contracts as of December 31, 2013:
Description | Type | Expiration Date | Number of Contracts | Notional Value | Unrealized Appreciation/ | |||||||||||||||
S&P 500 Index E-Mini March Futures | Long | 3/21/14 | 49 | $ | 4,510,695 | $ | 107,733 |
See accompanying notes to the financial statements.
12
AZL Russell 1000 Value Index Fund
Statement of Assets and Liabilities
December 31, 2013
Assets: | |||||
Investments in non-affiliates, at cost | $ | 149,306,026 | |||
Investments in affiliates, at cost | 371,549 | ||||
|
| ||||
Total Investment securities, at cost | $ | 149,677,575 | |||
|
| ||||
Investments in non-affiliates, at value* | $ | 207,180,656 | |||
Investments in affiliates, at value | 579,140 | ||||
|
| ||||
Total Investment securities, at value | 207,759,796 | ||||
Cash | 3,806 | ||||
Segregated cash for collateral | 240,000 | ||||
Interest and dividends receivable | 331,901 | ||||
Reclaims receivable | 177 | ||||
Receivable for variation margin on futures contracts | 15,275 | ||||
|
| ||||
Total Assets | 208,350,955 | ||||
|
| ||||
Liabilities: | |||||
Payable for capital shares redeemed | 9,556 | ||||
Payable for collateral received on loaned securities | 2,384,715 | ||||
Manager fees payable | 75,284 | ||||
Administration fees payable | 7,530 | ||||
Distribution fees payable | 42,775 | ||||
Custodian fees payable | 6,573 | ||||
Administrative and compliance services fees payable | 869 | ||||
Trustee fees payable | 7 | ||||
Other accrued liabilities | 16,910 | ||||
|
| ||||
Total Liabilities | 2,544,219 | ||||
|
| ||||
Net Assets | $ | 205,806,736 | |||
|
| ||||
Net Assets Consist of: | |||||
Capital | $ | 125,354,203 | |||
Accumulated net investment income/(loss) | 3,206,969 | ||||
Accumulated net realized gains/(losses) from investment transactions | 19,055,610 | ||||
Net unrealized appreciation/(depreciation) on investments | 58,189,954 | ||||
|
| ||||
Net Assets | $ | 205,806,736 | |||
|
| ||||
Shares of beneficial interest (unlimited number of shares authorized, no par value) | 13,998,495 | ||||
Net Asset Value (offering and redemption price per share) | $ | 14.70 | |||
|
|
* | Includes securities on loan of $2,318,024. |
For the Year Ended December 31, 2013
Investment Income: | |||||
Dividends | $ | 4,775,908 | |||
Dividends from affiliates | 13,658 | ||||
Income from securities lending | 23,151 | ||||
Foreign withholding tax | (3,107 | ) | |||
|
| ||||
Total Investment Income | 4,809,610 | ||||
|
| ||||
Expenses: | |||||
Manager fees | 913,864 | ||||
Administration fees | 72,106 | ||||
Distribution fees | 519,240 | ||||
Custodian fees | 18,937 | ||||
Administrative and compliance services fees | 4,122 | ||||
Trustee fees | 10,641 | ||||
Professional fees | 10,497 | ||||
Shareholder reports | 3,395 | ||||
Other expenses | 47,907 | ||||
|
| ||||
Total expenses | 1,600,709 | ||||
|
| ||||
Net Investment Income/(Loss) | 3,208,901 | ||||
|
| ||||
Realized and Unrealized Gains/(Losses) on Investments: | |||||
Net realized gains/(losses) on securities transactions | 18,187,951 | ||||
Net realized gains distributions from affiliated underlying funds | 28,901 | ||||
Net realized gains/(losses) on futures contracts | 1,218,041 | ||||
Change in net unrealized appreciation/depreciation on investments | 34,687,233 | ||||
|
| ||||
Net Realized/Unrealized Gains/(Losses) on Investments | 54,122,126 | ||||
|
| ||||
Change in Net Assets Resulting From Operations | $ | 57,331,027 | |||
|
|
See accompanying notes to the financial statements.
13
Statements of Changes in Net Assets
AZL Russell 1000 Value Index Fund | ||||||||||
For the Year Ended December 31, 2013 | For the Year Ended December 31, 2012 | |||||||||
Change in Net Assets: | ||||||||||
Operations: | ||||||||||
Net investment income/(loss) | $ | 3,208,901 | $ | 3,910,447 | ||||||
Net realized gains/(losses) on investment transactions | 19,434,893 | 6,762,469 | ||||||||
Change in unrealized appreciation/depreciation on investments | 34,687,233 | 20,975,699 | ||||||||
|
|
|
| |||||||
Change in net assets resulting from operations | 57,331,027 | 31,648,615 | ||||||||
|
|
|
| |||||||
Dividends to Shareholders: | ||||||||||
From net investment income | (3,878,001 | ) | (2,772,256 | ) | ||||||
From net realized gains | (6,783,630 | ) | (1,698,237 | ) | ||||||
|
|
|
| |||||||
Change in net assets resulting from dividends to shareholders | (10,661,631 | ) | (4,470,493 | ) | ||||||
|
|
|
| |||||||
Capital Transactions: | ||||||||||
Proceeds from shares issued | 6,359,982 | 34,366,963 | ||||||||
Proceeds from dividends reinvested | 10,661,631 | 4,470,493 | ||||||||
Value of shares redeemed | (82,266,180 | ) | (24,148,316 | ) | ||||||
|
|
|
| |||||||
Change in net assets resulting from capital transactions | (65,244,567 | ) | 14,689,140 | |||||||
|
|
|
| |||||||
Change in net assets | (18,575,171 | ) | 41,867,262 | |||||||
Net Assets: | ||||||||||
Beginning of period | 224,381,907 | 182,514,645 | ||||||||
|
|
|
| |||||||
End of period | $ | 205,806,736 | $ | 224,381,907 | ||||||
|
|
|
| |||||||
Accumulated net investment income/(loss) | $ | 3,206,969 | $ | 3,878,996 | ||||||
|
|
|
| |||||||
Share Transactions: | ||||||||||
Shares issued | 479,565 | 3,059,186 | ||||||||
Dividends reinvested | 792,686 | 384,063 | ||||||||
Shares redeemed | (6,227,133 | ) | (2,105,940 | ) | ||||||
|
|
|
| |||||||
Change in shares | �� | (4,954,882 | ) | 1,337,309 | ||||||
|
|
|
|
See accompanying notes to the financial statements.
14
AZL Russell 1000 Value Index Fund
(Selected data for a share of beneficial interest outstanding throughout the periods indicated)
Year Ended December 31, 2013 | Year Ended December 31, 2012 | Year Ended December 31, 2011 | April 30, 2010 to December 31, 2010 (a) | |||||||||||||||||
Net Asset Value, Beginning of Period | $ | 11.84 | $ | 10.36 | $ | 10.49 | $ | 10.00 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||||||
Investment Activities: | ||||||||||||||||||||
Net Investment Income/(Loss) | 0.31 | 0.20 | 0.16 | 0.10 | ||||||||||||||||
Net Realized and Unrealized Gains/(Losses) on Investments | 3.35 | 1.52 | (0.19 | ) | 0.39 | |||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||
Total from Investment Activities | 3.66 | 1.72 | (0.03 | ) | 0.49 | |||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||
Dividends to Shareholders From: | ||||||||||||||||||||
Net Investment Income | (0.29 | ) | (0.15 | ) | (0.10 | ) | — | |||||||||||||
Net Realized Gains | (0.51 | ) | (0.09 | ) | — | — | ||||||||||||||
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Total Dividends | (0.80 | ) | (0.24 | ) | (0.10 | ) | — | |||||||||||||
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Net Asset Value, End of Period | $ | 14.70 | $ | 11.84 | $ | 10.36 | $ | 10.49 | ||||||||||||
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Total Return(b) | 31.52 | % | 16.63 | % | (0.25 | )% | 4.90 | %(c) | ||||||||||||
Ratios to Average Net Assets/Supplemental Data: | ||||||||||||||||||||
Net Assets, End of Period (000’s) | $ | 205,807 | $ | 224,382 | $ | 182,515 | $ | 169,075 | ||||||||||||
Net Investment Income/(Loss)(d) | 1.54 | % | 1.85 | % | 1.59 | % | 1.68 | % | ||||||||||||
Expenses Before Reductions(d)(e) | 0.77 | % | 0.78 | % | 0.79 | % | 0.84 | % | ||||||||||||
Expenses Net of Reductions(d) | 0.77 | % | 0.78 | % | 0.79 | % | 0.84 | % | ||||||||||||
Portfolio Turnover Rate | 11 | % | 18 | % | 20 | % | 25 | %(c) |
(a) | Period from commencement of operations. |
(b) | The returns include reinvested dividends and fund level expenses, but exclude insurance contract charges. If these charges were included, the returns would have been lower. |
(c) | Not annualized. |
(d) | Annualized for periods less than one year. |
(e) | Excludes fee reductions. If such fee reductions had not occurred, the ratios would have been as indicated. |
See accompanying notes to the financial statements.
15
AZL Russell 1000 Value Index Fund
Notes to the Financial Statements
December 31, 2013
1. Organization
The Allianz Variable Insurance Products Trust (the “Trust”) was organized as a Delaware statutory trust on July 13, 1999. The Trust is a diversified open-end management investment company registered under the Investment Company Act of 1940. The Trust consists of 29 separate investment portfolios (collectively, the “Funds”), of which one is included in this report, the AZL Russell 1000 Value Index Fund (the “Fund”), and 28 are presented in separate reports.
The Trust is authorized to issue an unlimited number of shares of the Fund without par value. Shares of the Fund are available through the variable annuity contracts and variable life insurance policies offered through the separate accounts of participating insurance companies.
Under the Trust’s organizational documents, its officers and trustees are indemnified against certain liabilities arising out of the performance of their duties to the Fund. In addition, in the normal course of business, the Fund may enter into contracts with its vendors and others that provide for general indemnifications. The Fund’s maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Fund. However, based on experience, the Fund expects the risk of loss to be remote.
2. Significant Accounting Policies
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. The policies conform with U.S. generally accepted accounting principles (“U.S. GAAP”). The preparation of financial statements requires management to make certain 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 increases and decreases in net assets from operations during the reporting period. Actual results could differ from those estimates.
Security Valuation
The Fund records its investments at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between willing market participants at the measurement date. The valuation techniques used to determine fair value are further described in Note 4 below.
Investment Transactions and Investment Income
Investment transactions are recorded not later than on the business day following trade date. However, for financial reporting purposes, investment transactions are accounted for on trade date. Net realized gains and losses on investments sold and on foreign currency transactions are recorded on the basis of identified cost. Interest income is recorded on the accrual basis and includes, where applicable, the amortization of premiums or accretion of discounts. Dividend income is recorded on the ex-dividend date except in the case of foreign securities, in which case dividends are recorded as soon as such information becomes available.
Real Estate Investment Trusts
The Fund may own shares of real estate investment trusts (“REITs”) which report information on the source of their distributions annually. Certain distributions received from REITs during the year, which are known to be a return of capital, are recorded as a reduction to the cost of the individual REIT.
Foreign Currency Translation
The accounting records of the Fund are maintained in U.S. dollars. Foreign currency amounts are translated into U.S. dollars at the current rate of exchange to determine the fair value of investments, assets and liabilities. Purchases and sales of securities, and income and expenses are translated at the prevailing rate of exchange on the respective dates of such transactions. The Fund does not isolate that portion of the results of operations resulting from changes in foreign exchange rates on investments from fluctuations arising from changes in market prices of securities held. Such fluctuations are included in the net realized and unrealized gain or loss on investments and foreign currencies. Income received by the Fund from sources within foreign countries may be subject to withholding and other income or similar taxes imposed by such countries. The Funds accrue such taxes, as applicable, based on their current interpretation of tax rules in the foreign markets in which they invest.
Dividends to Shareholders
Dividends to shareholders are recorded on the ex-dividend date. The Fund distributes its dividends from net investment income and net realized capital gains, if any, on an annual basis. The amount of dividends from net investment income and from net realized gains is determined in accordance with federal income tax regulations, which may differ from U.S. GAAP. These “book/tax” differences are either temporary or permanent in nature. To the extent these differences are permanent in nature (e.g., return of capital, net operating loss, reclassification of certain market discounts, gain/loss, paydowns, and distributions), such amounts are reclassified within the composition of net assets based on their federal tax-basis treatment; temporary differences (e.g., wash sales and post October losses) do not require reclassification. Dividends to shareholders that exceed net investment income and net realized gains for tax purposes are reported as distributions of capital.
Expense Allocation
Expenses directly attributable to the Fund are charged directly to the Fund, while expenses attributable to more than one Fund are allocated among the respective Funds based upon relative net assets or some other reasonable method. Expenses which are attributable to more than one Trust are allocated across the Allianz Variable Insurance Products and Allianz Variable Insurance Products Fund of Funds Trusts based upon relative net assets or another reasonable basis. Allianz Investment Management LLC (the “Manager”), serves as the investment manager for the Trust and the Allianz Variable Insurance Products Fund of Funds Trust.
16
AZL Russell 1000 Value Index Fund
Notes to the Financial Statements
December 31, 2013
Securities Lending
To generate additional income, the Fund may lend up to 33 1/3% of its assets pursuant to agreements requiring that the loan be continuously secured by any combination of cash, U.S. government or U.S. government agency securities, equal initially to at least 102% of the fair value plus accrued interest on the securities loaned (105% for foreign securities). The borrower of securities is at all times required to post collateral to the Fund in an amount equal to 100% of the fair value of the securities loaned based on the previous day’s fair value of the securities loaned, marked-to-market daily. Any collateral shortfalls are adjusted the next business day. The Fund bears all of the gains and losses on such investments. The Fund receives payments from borrowers equivalent to the dividends and interest that would have been earned on securities lent while simultaneously seeking to earn income on the investment of cash collateral received. In extremely low interest rate environments, the broker rebate fee may exceed the interest earned or the cash collateral which would result in a loss to the Fund. The investment of cash collateral deposited by the borrower is subject to inherent market risks such as interest rate risk, credit risk, liquidity risk, and other risks that are present in the market, and as such, the value of these investments may not be sufficient, when liquidated, to repay the borrower when the loaned security is returned. There may be risks of delay in recovery of the securities or even loss of rights in the collateral should the borrower of the securities fail financially. However, loans will be made only to borrowers, such as broker-dealers, banks or institutional borrowers of securities, deemed by the Manager to be of good standing and credit worthy and when in its judgment, the consideration which can be earned currently from such securities loans justifies the attendant risks. Loans are subject to termination by the Trust or the borrower at any time, and are, therefore, not considered to be illiquid investments. Securities on loan at December 31, 2013 are presented on the Fund’s Schedule of Portfolio Investments. The average outstanding amount of securities on loan was $2.9 million for the year ended December 31, 2013.
Cash collateral received in connection with securities lending is invested in the Allianz Variable Insurance Products Securities Lending Collateral Trust (the “Securities Lending Collateral Trust”) managed by The Dreyfus Corporation, an affiliate of the Custodian and Securities Lending Agent. The Securities Lending Collateral Trust invests in short-term investments that have a remaining maturity of 397 days or less as calculated in accordance with Rule 2a-7 under the 1940 Act. The Fund paid securities lending fees of $2,272 during the year ended December 31, 2013. These fees have been netted against “Income from securities lending” on the Statement of Operations.
Commission Recapture
Certain Funds of the Trust participate in a commission recapture program. The Fund will utilize the recaptured commissions to pay for, in whole or part, certain expenses of the Fund, excluding investment advisory fees. Any amounts received by the Fund, if applicable, are disclosed as “Expenses paid indirectly” on the Statement of Operations.
Effective January 6, 2014, the Manager, on behalf of the Trust, requested the Fund cease participation in the program until further notice.
Derivative Instruments
All open derivative positions at period end are reflected on the Fund’s Schedule of Portfolio Investments. The following is a description of the derivative instruments utilized by the Fund, including the primary underlying risk exposures related to each instrument type.
Futures Contracts
During the year ended December 31, 2013, the Fund used futures contracts to provide equity exposure on the Fund’s cash balances. Futures contracts are valued based upon their quoted daily settlement prices. Upon entering into a futures contract, the Fund is required to segregate liquid assets in accordance with the initial margin requirements of the broker or exchange. Futures contracts are marked to market daily and a payable or receivable for the change in value (“variation margin”) is recorded by the Fund. Gains or losses are recognized but not considered realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, elements of market risk (generally equity price risk related to stock futures, interest rate risk related to bond futures, and foreign currency risk related to currency futures) and exposure to loss in excess of the variation margin disclosed in the Statement of Assets and Liabilities. The primary risks associated with the use of futures contracts are the imperfect correlation between the change in fair value of the underlying securities and the prices of futures contracts, the possibility of an illiquid market, and the inability of the counterparty to meet the terms of the contract. The notional amount of futures contracts outstanding was $4.5 million as of December 31, 2013. The monthly average notional amount for these contracts was $4.5 million for the year ended December 31, 2013. Realized gains and losses are reported as “Net realized gains/(losses) on futures contracts” on the Statement of Operations.
Summary of Derivative Instruments
The following is a summary of the fair values of derivative instruments on the Fund’s Statement of Assets and Liabilities, categorized by risk exposure, as of December 31, 2013:
Asset Derivatives | Liability Derivatives | |||||||||||
Primary Risk Exposure | Statement of Assets and Liabilities Location | Total Fair Value* | Statement of Assets and Liabilities Location | Total Fair Value* | ||||||||
Equity Contracts | Receivable for variation margin on futures contracts | $ | 107,733 | Payable for variation margin on futures contracts | $ | — |
* For futures contracts, the amounts represent the cumulative appreciation/(depreciation) of these futures contracts as reported in the Schedule of Portfolio Investments. Only current day’s variation margin is reported within the Statement of Assets and Liabilities as Variation Margin on Futures Contracts. |
The following is a summary of the effect of derivative instruments on the Statement of Operations, categorized by risk exposure, for the year ended December 31, 2013:
Primary Risk Exposure | Location of Gains/(Losses) on Derivatives Recognized in Income | Realized Gains/(Losses) Recognized in Income | Change in Unrealized Appreciation/ Depreciation on Derivatives Recognized | |||||||
Equity Contracts | Net realized gains/(losses) on futures contracts/ change in unrealized appreciation/ depreciation on investments | $ | 1,218,041 | $ | 113,814 |
17
AZL Russell 1000 Value Index Fund
Notes to the Financial Statements
December 31, 2013
3. Related Party Transactions
The Manager provides investment advisory and management services for the Fund. The Manager has retained an independent money management organization (the “Subadviser”), to make investment decisions on behalf of the Fund. Pursuant to a subadvisory agreement with BlackRock Investment Management, LLC (“BlackRock Investment”), BlackRock Investment provides investment advisory services as the Subadviser for the Fund subject to the general supervision of the Trustees and the Manager. The Manager is entitled to a fee, computed daily and paid monthly, based on the average daily net assets of the Fund. Expenses incurred by the Fund for investment advisory and management services are reflected on the Statement of Operations as “Manager fees.” For its services, the Subadviser is entitled to a fee payable by the Manager. The Manager has contractually agreed to waive fees and reimburse the Fund to limit the annual expenses, excluding interest expense (e.g., cash overdraft fees), taxes, brokerage commissions, other expenditures that are capitalized in accordance with U.S. GAAP and other extraordinary expenses not incurred in the ordinary course of the Fund’s business, based on the daily net assets of the Fund, through April 30, 2015.
For the year ended December 31, 2013, the annual rate due to the Manager and the annual expense limit were as follows:
Annual Rate | Annual Expense Limit | |||||||||
AZL Russell 1000 Value Index Fund | 0.44 | % | 0.84 | % |
Any amounts contractually waived or reimbursed by the Manager in a particular fiscal year will be subject to repayment by the Fund to the Manager to the extent that from time to time through the next three fiscal years the repayment will not cause the Fund’s expenses to exceed the lesser of the stated limit at the time of the waiver or the current stated limit. Any amounts recouped by the Manager during the year are reflected on the Statement of Operations as “Recoupment of prior expenses reimbursed by the Manager.” At December 31, 2013, there were no remaining contractual reimbursements that are subject to repayment by the Fund in subsequent years.
In addition, the Manager may voluntarily waive or reimburse additional fees in order to maintain more competitive expense ratios. Any voluntary waivers or reimbursements are not subject to repayment in subsequent years. Information on the total amount waived/reimbursed by the Manager or repaid to the Manager by the Fund during the year can be found on the Statement of Operations. During the year ended December 31, 2013, there were no voluntary waivers.
Pursuant to separate agreements between the Funds and the Manager, the Manager provides a Chief Compliance Officer (“CCO”) and certain compliance oversight and regulatory filing services to the Trust. Under these agreements the Manager is entitled to an amount equal to a portion of the compensation and certain other expenses related to the individuals performing the CCO and compliance oversight services, as well as $75 per hour for time incurred in connection with the preparation and filing of certain documents with the Securities and Exchange Commission. The fees are paid to the Manager on a quarterly basis. The total expenses incurred by the Fund for these services are reflected on the Statement of Operations as “Administrative and compliance services fees.”
Citi Fund Services Ohio, Inc. (“Citi” or the “Administrator”), a wholly owned subsidiary of Citigroup, Inc., with which an officer of the Trust is affiliated, serves as the Trust’s administrator, transfer agent, and fund accountant, and assists the Trust in all aspects of its administration and operation. The Administrator is entitled to a Trust-wide asset-based fee, which is based on the following schedule: 0.05% of daily average net assets on the first $4 billion, 0.04% of daily average net assets on the next $2 billion, 0.02% of daily average net assets on the next $2 billion and 0.01% of daily average net assets over $8 billion. The overall Trust-wide fees are accrued daily and paid monthly and are subject to a minimum annual fee. In addition, the Administrator is entitled to annual account fees related to the transfer agency system, an annual fee for each additional class of shares of any Fund, certain annual fees in supporting fair value services, and a Trust-wide annual fee for providing infrastructure and support in implementing the written policies and procedures comprising the Fund’s compliance program. Fees payable to the Administrator are subject to certain reductions associated with services provided to new funds. The Administrator is also reimbursed for certain expenses incurred. The total expenses incurred by the Fund for these services are reflected on the Statement of Operations as “Administration fees.”
Allianz Life Financial Services, LLC (“ALFS”), an affiliate of the Manager, serves as distributor of the Fund and receives 12b-1 fees directly from the Fund, plus a Trust-wide annual fee of $42,500, paid by the Manager from its profits and not by the Trust, for recordkeeping and reporting services.
The Trust has adopted a distribution and service plan in conformance with Rule 12b-1 of the 1940 Act. Pursuant to this plan, the Fund is authorized to pay certain fees for the sale and distribution of its shares and services provided to its shareholders at an annual rate not to exceed 0.25% of the Fund’s average daily net assets. These fees are reflected on the Statement of Operations as “Distribution fees.”
In addition, certain legal fees and expenses are paid to a law firm, Dorsey & Whitney LLP, of which the Secretary of the Fund is a partner. During the year ended December 31, 2013, $2,753 was paid from the Fund relating to these fees and expenses.
Certain Officers and Trustees of the Trust are affiliated with the Manager or the Administrator. Such Officers (except for the Trust’s CCO as noted above) and Trustees receive no compensation from the Trust for serving in their respective roles. For their service to the Trust and to the Allianz Variable Insurance Products Fund of Funds Trust, each non-interested Trustee receives a $139,000 annual Board retainer. In addition, the Trustees are reimbursed for certain expenses associated with attending Board meetings. Compensation to the Trustees is allocated between the Trust and the Allianz Variable Insurance Products Fund of Funds Trust in proportion to the assets under management of each trust. During the year ended December 31, 2013, actual Trustee compensation was $973,000 in total for both trusts.
At a meeting of the Board of Trustees on December 4, 2013, the Trustees approved a fee increase to the Officers and Trustees who are paid a fee for their services to the Trust and to the Allianz Variable Insurance Products Fund of Funds Trust. Effective January 1, 2014, each non-interested Trustee will receive a $163,000 annual retainer.
4. Investment Valuation Summary
The valuation techniques employed by the Fund, as described below, maximize the use of observable inputs and minimize the use of unobservable inputs in determining fair value. The inputs used for valuing the Fund’s investments are summarized in the three broad levels listed below:
— | Level 1 — quoted prices in active markets for identical assets |
— | Level 2 — other significant observable inputs (including quoted prices for similar securities, interest rates, prepayments speeds, credit risk, etc.) |
— | Level 3 — significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of investments) |
18
AZL Russell 1000 Value Index Fund
Notes to the Financial Statements
December 31, 2013
Changes in valuation techniques may result in transfers in or out of an assigned level within the disclosure hierarchy. The Fund determines transfers between fair value hierarchy levels at the reporting period end. The inputs or methodology used for valuing investments is not necessarily an indication of the risk associated with investing in those investments.
Security prices are generally provided by an independent third party pricing service approved by the Trust’s Board of Trustees (“Trustees”) as of the close of the New York Stock Exchange (“NYSE”) (generally 4:00 pm Eastern Time). Equity securities are valued at the last quoted sale price or, if there is no sale, the last quoted bid price is used for long securities and the last quoted ask price is used for securities sold short. Securities listed on NASDAQ Stock Market, Inc. (“NASDAQ”) are valued at the official closing price as reported by NASDAQ. In each of these situations, valuations are typically categorized as a Level 1 in the fair value hierarchy. Investments in open-end investment companies are valued at their respective net asset value as reported by such companies and are typically categorized as Level 1 in the fair value hierarchy.
Debt and other fixed income securities are generally valued at an evaluated bid price provided by an independent pricing source approved by the Trustees. To value debt securities, pricing services may use various pricing techniques which take into account appropriate factors such as market activity, yield, quality, coupon rate, maturity, type of issue, trading characteristics, call features, credit ratings and other data, as well as broker quotes. Short term securities of sufficient credit quality with sixty days or less remaining until maturity may be valued at amortized cost, which approximates fair value. In each of these situations, valuations are typically categorized as Level 2 in the fair value hierarchy.
Futures contracts are valued at the last sales price as of the close of the primary exchange and are typically categorized as Level 1 in the fair value hierarchy.
Other assets and securities for which market quotations are not readily available, or are deemed unreliable are valued at fair value as determined in good faith by the Trustees or persons acting on the behalf of the Trustees. Fair value pricing may be used for significant events such as securities whose trading has been suspended, whose price has become stale or for which there is no currently available price at the close of the NYSE. Depending on the source and relative significance of valuation inputs, these instruments may be classified as Level 2 or Level 3 in the fair value hierarchy. The Fund utilizes a pricing service to assist in determining the fair value of securities when certain significant events occur that may affect the value of foreign securities.
In accordance with procedures adopted by the Trustees, fair value pricing may be used if events materially affecting the value of foreign securities occur between the time when the exchange on which they are traded closes and the time when the Fund’s net asset value is calculated. Management identifies possible fluctuation in international securities by monitoring the increase or decrease in the value of a designated benchmark index. In the event of an increase or decrease greater than predetermined levels, the Fund may use a systematic valuation model provided by an independent third party to fair value its international equity securities which are then typically categorized as Level 2 in the fair value hierarchy.
For the year ended December 31, 2013, there were no Level 3 investments for which significant unobservable inputs were used to determine fair value.
The following is a summary of the valuation inputs used as of December 31, 2013 in valuing the Fund’s investments based upon the three levels defined above:
Investment Securities: | Level 1 | Level 2 | Total | ||||||||||||
Common Stocks+ | $ | 201,427,834 | $ | — | $ | 201,427,834 | |||||||||
Securities Held as Collateral for Securities on Loan | — | 2,384,715 | 2,384,715 | ||||||||||||
Unaffiliated Investment Company | 3,947,247 | — | 3,947,247 | ||||||||||||
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Total Investment Securities | 205,375,081 | 2,384,715 | 207,759,796 | ||||||||||||
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Other Financial Instruments* | |||||||||||||||
Futures Contracts | 107,733 | — | 107,733 | ||||||||||||
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Total Investments | $ | 205,482,814 | $ | 2,384,715 | $ | 207,867,529 | |||||||||
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+ | For detailed industry descriptions, see the accompanying Schedule of Portfolio Investments. |
* | Other Financial Instruments would include any derivative instruments, such as futures contracts. These investments are generally recorded in the financial statements at the unrealized gain or loss on the investment. |
5. Security Purchases and Sales
For the year ended December 31, 2013, cost of purchases and proceeds from sales of securities (excluding securities maturing less than one year from acquisition) were as follows:
Purchases | Sales | |||||||||
AZL Russell 1000 Value Index Fund | $ | 22,448,843 | $ | 93,167,455 |
6. Investment Risks
Derivatives Risk: The Fund may invest in derivatives as a principal strategy. A derivative is a financial contract whose value depends on, or is derived from, the value of an underlying asset, reference rate, or risk. Use of derivative instruments involves risks different from, or possibly greater than, the risks associated with investing directly in securities and other traditional investments. Derivatives are subject to a number of other risks, such as liquidity risk, interest rate risk, market risk, credit risk, and selection risk. Derivatives also involve the risk of mispricing or improper valuation and the risk that changes in the value may not correlate perfectly with the underlying asset, rate, or index. Using derivatives may result in losses, possibly in excess of the principal amount invested. Also, suitable derivative transactions may not be available in all circumstances. The counterparty to a derivatives contract could default. As required by applicable law, a Fund that invests in derivatives segregates cash or liquid securities, or both, to the extent that its obligations under the instrument are not covered through ownership of the underlying security, financial instrument, or currency.
19
AZL Russell 1000 Value Index Fund
Notes to the Financial Statements
December 31, 2013
7. Federal Tax Information
It is the Fund’s policy to continue to comply with the requirements of the Internal Revenue Code under Subchapter M, applicable to regulated investment companies, and to distribute all of its taxable income, including any net realized gains on investments, to its shareholders. Therefore, no provision is made for federal income taxes.
Management of the Fund has reviewed tax positions taken in tax years that remain subject to examination by all major tax jurisdictions, including federal (i.e., the last four tax year ends and the interim tax period since then, as applicable). Management believes that there is no tax liability resulting from unrecognized tax benefits related to uncertain tax positions taken.
Cost for federal income tax purposes at December 31, 2013 is $150,224,269. The gross unrealized appreciation/ (depreciation) on a tax basis is as follows:
Unrealized appreciation | $ | 59,915,320 | |||
Unrealized depreciation | (2,379,793 | ) | |||
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| ||||
Net unrealized appreciation/(depreciation) | $ | 57,535,527 | |||
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The tax character of dividends paid to shareholders during the year ended December 31, 2013 were as follows:
Ordinary Income | Net Long-Term Capital Gains | Total Distributions(a) | |||||||||||||
AZL Russell 1000 Value Index Fund | $ | 5,586,078 | $ | 5,075,553 | $ | 10,661,631 |
(a) | Total distributions paid may differ from the Statements of Changes in Net Assets because dividends are recognized when actually paid for tax purposes. |
The tax character of dividends paid to shareholders during the year ended December 31, 2012 was as follows:
Ordinary Income | Net Long-Term | Total Distributions(a) | |||||||||||||
AZL Russell 1000 Value Index Fund | $ | 2,772,256 | $ | 1,698,237 | $ | 4,470,493 |
(a) | Total distributions paid may differ from the Statements of Changes in Net Assets because dividends are recognized when actually paid for tax purposes. |
As of December 31, 2013, the components of accumulated earnings on a tax basis were as follows:
Undistributed Ordinary Income | Undistributed Long-Term Capital Gains | Accumulated Capital and Other Losses | Unrealized Appreciation/ (Depreciation)(a) | Total Accumulated Earnings/ (Deficit) | |||||||||||||||||||||
AZL Russell 1000 Value Index Fund | $ | 4,600,621 | $ | 18,316,385 | $ | — | $ | 57,535,527 | $ | 80,452,533 |
(a) | The difference between book-basis and tax-basis unrealized appreciation/(depreciation) is attributable primarily to tax deferral of losses on wash sales. |
8. Subsequent Events
Management has evaluated events and transactions subsequent to period end through the date the financial statements were issued, for purposes of recognition or disclosure in these financial statements and there are no subsequent events to report.
20
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Shareholders and Board of Trustees of
Allianz Variable Insurance Products Trust:
We have audited the accompanying statement of assets and liabilities of AZL Russell 1000 Value Index Fund (the “Fund”) of the Allianz Variable Insurance Products Trust, including the schedule of portfolio investments, as of December 31, 2013, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the years in the two-year period then ended, and the financial highlights for each of the periods in the four-year period then ended. These financial statements and financial highlights are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of December 31, 2013, by correspondence with the custodian and brokers. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of the Fund as of December 31, 2013, the results of its operations for the year then ended, the changes in its net assets for each of the years in the two-year period then ended, and the financial highlights for each of the periods in the four-year period then ended, in conformity with U.S. generally accepted accounting principles.
/s/KPMG LLP
Columbus, Ohio
February 25, 2014
21
Other Federal Income Tax Information (Unaudited)
For the year ended December 31, 2013, 100.00% of the total ordinary income dividends paid by the Fund qualify for the corporate dividends received deduction available to corporate shareholders.
During the year ended December 31, 2013, the Fund declared net long-term capital gain distributions of $5,075,553.
During the year ended December 31, 2013, the Fund declared net short-term capital gain distributions of $1,708,076.
22
A description of the policies and procedures that the Fund uses to determine how to vote proxies relating to portfolio securities is available, without charge, upon request, by visiting the Securities and Exchange Commission’s (“Commission”) website at www.sec.gov, or by calling 800-624-0197.
Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30th is available (i) without charge, upon request, by calling 800-624-0197; (ii) on the Allianz Variable Insurance Products Trust’s website at https://www.allianzlife.com; and (iii) on the Commission’s website at http://www.sec.gov.
The Fund files complete Schedules of Portfolio Holdings with the Commission for the first and third quarters of each fiscal year on Form N-Q. Schedules of Portfolio Holdings for the Fund in this report are available without charge on the Commission’s website at http://www.sec.gov, or may be reviewed and copied at the Commission’s Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 800-SEC-0330.
23
Approval of Investment Advisory and Subadvisory Agreements (Unaudited)
The Allianz Variable Insurance Products Trust (the “Trust”) is a manager-of-managers fund. That means that the Trust’s Manager (“Allianz Investment Management LLC”) is responsible for monitoring the various Subadvisers that have day-to-day responsibility for the decisions made for each of the Trust’s investment portfolios. The Trust’s Manager is responsible for determining, in the first instance, which investment advisers to consider recommending for selection as a Subadviser.
In reviewing the services provided by the Manager and the terms of the investment management agreement, the Board receives and reviews information related to the Manager’s experience and expertise in the variable insurance marketplace. Currently, the Funds are offered only through variable annuities and variable life insurance policies, and not in the retail fund market. In addition, the Board receives information regarding the Manager’s expertise with regard to portfolio diversification and asset allocation requirements within variable insurance products issued by Allianz Life Insurance Company of North America and its subsidiary, Allianz Life Insurance Company of New York. Currently, the Funds are offered only through Allianz Life and Allianz of New York variable products.
The Trust’s Manager has adopted policies and procedures to assist it in the process of analyzing each potential Subadviser with expertise in particular asset classes for purposes of making the recommendation that a specific investment adviser be selected. The Trust’s Board reviews and considers the information provided by the Manager in deciding which investment advisers to select. After an investment adviser becomes a Subadviser, a similarly rigorous process is instituted by the Manager to monitor the investment performance and other responsibilities of the Subadviser. The Manager reports to the Trust’s Board on its analysis at the regular meetings of the Board, which are held at least quarterly. Where warranted, the Manager will add or remove a particular Subadviser from a “watch” list that it maintains. Watch list criteria include, for example: (a) Fund performance over various time periods; (b) Fund risk issues, such as changes in key personnel involved with Fund management, changes in investment philosophy or process, or “capacity” concerns; and (c) organizational risk issues, such as regulatory, compliance or legal concerns, or changes in the ownership of the Subadviser. The Manager may place a Fund on the watch list for other reasons, and if so, will explain its rationale to the Trustees. Funds which are on the watch list are subject to special scrutiny of the Manager and the Board of Trustees. Funds may be removed from such watch list, if for example, performance improves or regulatory matters are satisfactorily resolved. However, in some situations where Funds which have been on the watch list, the Manager has recommended the retention of a new Subadviser, and the Board of Trustees has subsequently approved new Subadvisory Agreements with such Subadvisers.
In assessing the Manager’s and Subadvisers’ (collectively, the “Advisory Organizations”), performance of their obligations, the Board considers whether there has occurred a circumstance or event that would constitute a reason for it to not renew an advisory contract. In this regard, the Board is mindful of the potential disruption of a Fund’s operations and various risks, uncertainties and other effects that could occur as a result of a decision to terminate or not renew a contract.
As required by the Investment Company Act of 1940 (“1940 Act”), the Trust’s Board has reviewed and approved the Trust’s Investment Management Agreement with the Manager (the “Advisory Agreement”) and portfolio management agreements (the “Subadvisory Agreements”) with the Subadvisers. The Board’s decision to approve these contracts reflects the exercise of its business judgment on whether to approve new arrangements and continue the existing arrangements. During its review of these contracts, the Board considers many factors, among the most material of which are: the Fund’s investment objectives and long term performance; the Advisory Organizations’ management philosophy, personnel, and processes, including their compliance history and the adequacy of their compliance processes; the preferences and expectations of Fund shareholders (and underlying contract owners) and their relative sophistication; the continuing state of competition in the mutual fund industry; and comparable fees in the mutual fund industry.
The Board also considers the compensation and benefits received by the Advisory Organizations. This includes fees received for services provided to the Fund by affiliated persons of the Advisory Organizations and research services received by the Advisory Organizations from brokers that execute Fund trades, as well as advisory fees. The Board considered the fact that: (1) the Manager and the Trust are parties to an Administrative Service Agreement, a Compliance Services Agreement, and a Chief Compliance Officer Agreement, under which the Manager is compensated by the Trust for performing certain administrative and compliance services including providing an employee of the Manager or one of its affiliates to act as the Trust’s Chief Compliance Officer; and (2) Allianz Life Financial Services, LLC, an affiliated person of the Manager, is a registered securities broker-dealer and receives (along with its affiliated persons) payments made by the Trust pursuant to Rule 12b-1.
The Board is aware that various courts have interpreted provisions of the 1940 Act and have indicated in their decisions that the following factors may be relevant to an adviser’s compensation: the nature and quality of the services provided by the adviser, including the performance of the fund; the adviser’s cost of providing the services; the extent to which the adviser may realize “economies of scale” as the fund grows larger; any indirect benefits that may accrue to the adviser and its affiliates as a result of the adviser’s relationship with the fund; performance and expenses of comparable funds; and the extent to which the independent Board members are fully informed about all facts bearing on the adviser’s service and fee. The Trust’s Board is aware of these factors and takes them into account in its review of the Trust’s advisory contracts.
The Board considered and weighed these circumstances in light of its experience in governing the Trust and working with the Advisory Organizations on matters relating to the Funds, and is assisted in its deliberations by the advice of legal counsel to the Independent Trustees. In this regard, the Board requests and receives a significant amount of information about the Funds and the Advisory Organizations. Some of this information is provided at each regular meeting of the Board; additional information is provided in connection with the particular meeting or meetings at which the Board’s formal review of an advisory contract occurs. In between regularly scheduled meetings, the Board may receive information on particular matters as the need arises. Thus, the Board’s evaluation of an advisory contract is informed by reports covering such matters as: an Advisory Organization’s investment philosophy, personnel, and processes; the Fund’s short- and long-term performance (in absolute terms as well as in relationship to its benchmark(s), certain competitor or “peer group” funds and similar funds managed by the particular Subadviser), and comments on the reasons for performance; the Fund’s expenses (including the advisory fee itself and the overall expense structure of the Fund, both in absolute terms and relative to similar and/or competing funds, with due regard for contractual or voluntary expense limitations); the use and allocation of brokerage commissions derived from trading the Fund’s portfolio securities; the nature and extent of the advisory and other services provided to the Fund by the Advisory Organizations and their affiliates; compliance and audit reports concerning the Funds and the companies that service them; and relevant developments in the mutual fund industry and how the Funds and/or Advisory Organizations are responding to them.
The Board also receives financial information about Advisory Organizations, including reports on the compensation and benefits the Advisory Organizations derive from their relationships with the Funds. These reports cover not only the fees under the advisory contracts, but also fees, if any, received for providing other services to the Funds. The reports also discuss any indirect or “fall out” benefits an Advisory Organization may derive from its relationship with the Funds.
The Advisory and Subadvisory Agreements (collectively, the “Agreements”) were most recently considered at Board of Trustees meetings held in the fall of 2013. Information relevant to the approval of such Agreements was considered at a telephonic Board of Trustees meeting on October 16, 2013, and at an “in person” Board of Trustees meeting held October 22, 2013. The Agreements were approved at the Board meeting of October 22, 2013. At such meeting the Board also approved an Expense Limitation Agreement between the Manager and the Trust for the period ending April 30, 2015. In connection with such meetings, the Trustees requested and evaluated extensive materials from the Manager, including performance and expense information for other investment companies with similar investment objectives derived from data compiled by an independent third party provider and other sources believed to be reliable by the Manager. Prior to voting, the Trustees reviewed the proposed approval/continuance of the Agreements with management and with experienced counsel who are independent of the Manager and received a memorandum from such counsel discussing the legal
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standards for their consideration of the proposed approvals/continuances. The independent (“disinterested”) Trustees also discussed the proposed approvals/continuances in a private session with such counsel at which no representatives of the Manager were present. In reaching their determinations relating to the approval and/or continuance of the Agreements, in respect of each Fund, the Trustees considered all factors they believed relevant. The Board based its decision to approve the Agreements on the totality of the circumstances and relevant factors, and with a view to past and future long-term considerations. Not all of the factors and considerations discussed above and below are necessarily relevant to every Fund, and the Board did not assign relative weights to factors discussed herein or deem any one or group of them to be controlling in and of themselves.
An SEC Rule requires that shareholder reports include a discussion of certain factors relating to the selection of investment advisers and the approval of advisory fees. The “factors” enumerated by the SEC are set forth below in italics, as well as the Board’s conclusions regarding such factors:
(1) The nature, extent and quality of services provided by the Manager and Subadvisers. The Trustees noted that the Manager, subject to the control of the Board of Trustees, administers each Fund’s business and other affairs. Under the Advisory Agreement, the Manager holds the sole and exclusive responsibility to provide, or arrange for other to provide, the management of the Funds’ assets and the placement of orders for the purchase and sale of the securities of the Funds. As the Trust is a manager of managers fund, the Manager is authorized, under the Advisory Agreement, to retain one or more Subadvisers for each Fund to handle day-to-day management of the Funds’ investment portfolios; the Manager is responsible for determining, in the first instance, which investment advisers to recommend to the Board of Trustees for selection as a Subadviser. The Trustees were aware that, notwithstanding the retention of the Subadvisers to handle day-to-day portfolio management, the Manager remains responsible for substantial other matters, including continuously monitoring compliance by each Subadviser with the investment policies and restrictions of the respective Funds, with such other limitations or directions of the Board of Trustees, and with all legal requirements under federal or state law or regulation. The Manager also is responsible primarily to provide statistical information and other data to the Trustees regarding the Funds’ portfolio investments and to make available to the Funds’ administrator such information as is necessary for the conduct of its duties.
The Trustees also noted that the Manager provides the Trust and each Fund with such administrative and other services (exclusive of, and in addition to, any such services provided by any others retained by the Trust on behalf of the Funds) and executive and other personnel as are necessary for the operation of the Trust and the Funds. Except for the Trust’s Chief Compliance Officer, the Manager pays all of the compensation of Trustees and officers of the Trust who are employees of the Manager or its affiliates.
The Trustees considered the scope and quality of services provided by the Manager and the Subadvisers and noted that the scope of such services provided had expanded as a result of recent regulatory and other developments. The Trustees noted that, for example, the Manager and Subadvisers are responsible for maintaining and monitoring their own compliance programs, and these compliance programs are continuously refined and enhanced in light of new regulatory requirements. The Trustees considered the capabilities and resources which the Manager has dedicated to performing services on behalf of the Trust and its Funds. The quality of administrative and other services, including the Manager’s role in coordinating the activities of the Trust’s other service providers, also were considered. The Trustees concluded that, overall, they were satisfied with the nature, extent and quality of services provided (and expected to be provided) to the Trust and to each of the Funds under the Agreements.
(2) The investment performance of the Funds, the Manager and the Subadvisers. In connection with every in-person quarterly Board of Trustees meeting, Trustees receive extensive information on the performance results of each of the Funds. This includes, for example, performance information on all of the Funds for the previous quarter, and previous one, three and five-year periods, and since inception. (For Funds which have been in existence for less than five years, Trustees may receive performance information on comparable funds managed by the particular Subadviser for periods prior to the creation of a particular Fund.) Such performance information includes information on absolute total return, performance versus Subadvisers’ comparable fund(s), performance versus the appropriate benchmark(s), and performance versus peer groups. For example, in connection with the Board of Trustees meetings held September 10-11, 2013, the Manager reported that for the three year period ended June 30, 2013, 12 Funds were in the top 40%, eight were in the middle 20% and eight were in the bottom 40%, and for the one year period ended June 30, 2013, 8 Funds were in the top 40%, seven were in the middle 20%, and 14 were in the bottom 40%. The Manager also reported that for the five year period ended June 30, 2013, 10 Funds were in the top 40%, four were in the middle 20%, and six were in the bottom 40%. At the Board of Trustees meeting held October 22, 2013, the Trustees determined that the overall investment performance of the Funds was acceptable.
(3) The costs of services to be provided and profits to be realized by the Manager and the Subadvisers and their affiliates from their relationship with the Funds. The Manager has supplied information to the Board of Trustees pertaining to the level of investment advisory fees to which the Funds are subject. The Manager has agreed to temporarily “cap” Fund expenses at certain levels, and information is provided to Trustees setting forth “contractual” advisory fees and “actual” fees after taking expense caps into account. Based upon the information provided, the “actual” advisory fees payable by the Funds overall are generally comparable to the average level of fees paid by Fund peer groups. For the 30 Funds reviewed by the Board of Trustees in the fall of 2013, 27 Funds paid “actual” advisory fees in a percentage amount within the 65th percentile or lower for each Fund’s applicable category. The Trustees recognized that it is difficult to make comparisons of advisory fees because there are variations in the services that are included in the fees paid by other funds. The Board has concluded that the advisory fees to be paid to the Manager by the Funds are not unreasonable.
The Manager has also supplied information to the Board of Trustees pertaining to total Fund expenses (which includes advisory fees, the 25 basis point 12b-1 fee paid by the Funds, and other Fund expenses). As noted above, the Manager has agreed to “cap” Fund expenses at certain levels. Based upon the information provided, the overall total expense ratio ranking in 2013 for the 30 Funds was as follows: (1) 28 of the Funds had total expense rankings below the 65th percentile (with 20 Funds at or below the 50th percentile); (2) the AZL Russell 1000 Value Fund had a total expense ranking in the 66th percentile; the Manager reported that there is only a limited peer group for such Fund; and (3) the AZL Morgan Stanley Global Real Estate Fund had a total expense ranking in the 72nd percentile; it was reported by the Manager that there is only a limited peer group for such Fund, such Fund’s expense ratio has declined, and such Fund’s expense ratio is comparable to funds of similar size.
The Manager has committed to providing the Funds with a high quality of service and working to reduce Fund expenses over time, particularly as the Funds grow larger. The Trustees concluded therefore that the expense ratios of the Funds were not unreasonable.
The Manager provided information concerning the profitability of the Manager’s investment advisory activities for the period from 2011 through June 30, 2013. The Trustees recognized that it is difficult to make comparisons of profitability from investment company advisory agreements because comparative information is not generally publicly available and is affected by numerous factors, including the structure of the particular adviser, the types of funds it manages, its business mix, numerous assumptions regarding allocation of expenses and the adviser’s capital structure and cost of capital. In considering profitability information, the Trustees considered the possible effect of certain fall-out benefits to the Manager and its affiliates. The Trustees focused on profitability of the Manager’s relationships with the Funds before taxes and distribution expenses. The Trustees recognized that the Manager should, in the abstract, be entitled to earn a reasonable level of profits for the services it provides to each Fund and, based on their review, concluded that they were satisfied that the Manager’s level of profitability from its relationship with the Funds was not excessive.
The Manager, on behalf of the Board of Trustees, endeavored to obtain information on the profitability of each Subadviser in connection with its relationship with the Fund or Funds which it subadvises. The Manager was unable to obtain meaningful profitability information from some of the unaffiliated Subadvisers. The Manager assured the Board of Trustees that the Agreements with the Subadvisers which are not affiliated with it were negotiated on an “arm’s length” basis, so that arguably, such profitability information should be less relevant. The Trustees were also provided with certain information on the profitability for the Subadviser which is affiliated with the Manager. Trustees recognized the difficulty of allocating costs to multiple advisory accounts and products of a large advisory organization. Based upon the information provided, the Trustees determined that there was no evidence that the level of such profitability attributable to subadvising the Funds was excessive.
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(4) and (5) The extent to which economies of scale would be realized as the Funds grow, and whether fee levels reflect these economies of scale. The Trustees noted that most of the advisory fee schedules for the Funds do not contain breakpoints that reduce the fee rate on assets above specified levels, although certain Subadvisory Agreements have such “breakpoints.” The Trustees recognized that breakpoints may be an appropriate way for the Manager to share its economies of scale, if any, with Funds that have substantial assets. However, they also recognized that there may not be a direct relationship between any economies of scale realized by Funds and those realized by the Manager as assets increase. The Trustees do not believe there is a uniform methodology for establishing breakpoints that give effect to Fund-specific service provided by the Manager. The Trustees noted that in the fund industry as a whole, as well as among funds similar to the Funds, there is no uniformity or pattern in the fees and asset levels at which breakpoints (if any) apply. Depending on the age, size, and other characteristics of a particular fund and its manager’s cost structure, different conclusions can be drawn as to whether there are economies of scale to be realized at any particular level of assets, notwithstanding the intuitive conclusion that such economies exist, or will be realized at some level of total assets. Moreover, because different managers have different cost structures and service models, it is difficult to draw meaningful conclusions from the breakpoints that may have been adopted by other funds. The Trustees also noted that the advisory agreements for many funds do not have breakpoints at all, or if breakpoints exist, they may be at asset levels significantly greater than those of the individual Funds. The Trustees also noted that the total assets in all of the Funds as of June 30, 2013 were approximately $12.85 billion, and that no single non-money market Fund had assets in excess of $616 million.
The Trustees noted that the Manager has agreed to temporarily “cap” Fund expenses at certain levels, which has the effect of reducing expenses as would the implementation of advisory fee breakpoints. The Manager has committed to continue to consider the continuation of fee “caps” and/or advisory fee breakpoints as the Funds grow larger. The Board receives quarterly reports on the level of Fund assets. It expects to consider whether or not to approve the Agreements at a meeting to be held prior to December 31, 2014, and will at that time, or prior thereto, consider: (a) the extent to which economies of scale can be realized, and (b) whether the advisory fee should be modified to reflect such economies of scale, if any.
Having taken these factors into account, the Trustees concluded that the absence of breakpoints in certain of the Funds’ advisory fee rate schedules was acceptable under each Fund’s circumstances.
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Information about the Board of Trustees and Officers (Unaudited)
The Trust is managed by the Trustees in accordance with the laws of the state of Delaware governing business trusts. There are currently eight Trustees, two of whom are “interested persons” of the Trust within the meaning of that term under the 1940 Act. The Trustees and Officers of the Trust, their addresses, ages, their positions held with the Trust, their terms of office with the Trust and length of time served, their principal occupation(s) during the past five years, the number of portfolios in the Trust they oversee, and their other directorships held are as follows:
Non-Interested Trustees(1)
Name, Address, and Age | Positions Held with VIP Trust and FOF Trust | Term of Office(2)/ Length of Time Served | Principal Occupation(s) During Past 5 Years | Number of Portfolios Overseen for VIP Trust FOF Trust | Other Directorships Held Outside the AZL Fund Complex | |||||
Peter R. Burnim, Age 66 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/07 | Chairman, Argus Investment Strategies Fund Ltd., Feburary 2013 to present; Managing Director, iQ Venture Advisors, LLC. 2005 to 2012; Chairman, Northstar Group Holdings Ltd. Bermuda, 2011 to present; Expert Witness, Massachusetts Department of Revenue, 2011 to 2012; Executive Vice President, Northstar Companies, 2002 to 2005; Senior Officer, Citibank and Citicorp for over 25 years | 41 | Argus Group Holdings; Northstar Group Holdings, NRIL, Sterling Centrecorp Inc.; Highland Financial Holdings; and Bank of Bermuda NY | |||||
Peggy L. Ettestad, Age 56 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/07 | Managing Director, Red Canoe Management Consulting LLC, 2008 to present; Senior Managing Director, Residential Capital LLC, 2003 to 2008; Chief Operations Officer, Transamerica Reinsurance 2002 to 2003 | 41 | Luther College | |||||
Roger Gelfenbien, Age 70 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 10/99 | Retired; Partner of Accenture 1983 to 1999 | 41 | Virtus Funds (8 Funds) | |||||
Claire R. Leonardi, Age 58 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/04 | Chief Executive Officer, Connecticut Innovations, Inc., 2012 to present; General Partner, Fairview Capital, L.P., 1994 to 2012 | 41 | The Natural History Museum of the Adirondacks | |||||
Dickson W. Lewis, Age 65 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/04 | Retired; Consultant to Lifetouch National School Studios; Vice President/General Manager, Yearbooks & Canada-Lifetouch National School Studios, 2006 to 2013; Vice President/General Manager of Jostens, Inc., 2002 to 2006; Senior Vice President of Fortis Group, 1997 to 2002 | 41 | None | |||||
Peter W. McClean, Age 69 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/04 | Retired; President and CEO of Measurisk, LLC, 2001 to 2003; Chief Risk Management Officer at Bank of Bermuda Ltd., 1996 to 2001 | 41 | PNMAC Opportunity Fund; Northeast Bank; and FHI | |||||
Arthur C. Reeds III, Age 69 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 10/99 | Retired; Senior Investment Officer, Hartford Foundation for Public Giving, 2000 to 2003; Chairman, Chief Executive and President of Conning Corp., 1999 to 2000; Investment Consultant, 1997 to 1999 | 41 | Connecticut Water Service, Inc. |
Interested Trustees(3)
Name, Address, and Age | Positions Held with VIP Trust FOF Trust | Term of Office(2)/ Length of Time Served | Principal Occupation(s) During Past 5 Years | Number of Portfolios Overseen for VIP Trust FOF Trust | Other Directorships Held Outside the AZL Fund Complex | |||||
Robert DeChellis, Age 46 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 3/08 | President and CEO, Allianz Life Financial Services, LLC, 2007 to present | 41 | None | |||||
Brian Muench, Age 43 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 6/11 | President, Allianz Investment Management LLC, November 2010 to present; Vice President, Allianz Life, April 2011 to present; Vice President, Advisory Management, Allianz Investment Management LLC from December 2005 to November 2010 | 41 | None |
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Officers
Name, Address, and Age | Positions Held with VIP and VIP FOF Trust | Term of Office(2)/Length of Time Served | Principal Occupation(s) During Past 5 Years | |||
Brian Muench, Age 43 5701 Golden Hills Drive Minneapolis, MN 55416 | President | Since 11/10 | President, Allianz Investment Management LLC from November 2010, to present; Vice President, Allianz Life from April 2011 to present; Vice President, Allianz Investment Management LLC from December 2005 to November 2010. | |||
Michael Radmer, Age 68 Dorsey & Whitney LLP, Suite 1500 50 South Sixth Street Minneapolis, MN 55402-1498 | Secretary | Since 2/02 | Partner, Dorsey and Whitney LLP since 1976. | |||
Ty Edwards, Age 47 Citi Fund Services Ohio, Inc. 3435 Stelzer Road Columbus, OH 43219 | Treasurer, Principal Accounting Officer and Principal Financial Officer | Since 4/10 | Senior Vice President, Financial Administration, Citi Fund Services Ohio, Inc., December 2009 to present; Director, Product Management, Columbia Management, April 2007 to April 2009; Deputy Treasurer, Columbia Funds and Director, Fund Administration, Columbia Management, January 2006 to April 2007. | |||
Christopher R. Pheiffer, Age 45(4) 5701 Golden Hills Drive Minneapolis, MN 55416 | Chief Compliance Officer(5) and Anti-Money Laundering Compliance Officer | Since 2/14 (interim) | Deputy Chief Compliance Officer of the Trusts, 2007-2014 |
(1) | Member of the Audit Committee. |
(2) | Indefinite. |
(3) | Is an “interested person”, as defined by the 1940 Act, due to employment by Allianz. |
(4) | Stephen G. Simon, previously the Chief Compliance Officer of the Trusts, resigned all of his positions with Allianz effective February 21, 2014. Mr. Pheiffer, previously the Deputy Chief Compliance Officer of the Trusts, has been named Chief Compliance Officer of the Trusts on an interim basis while a search for a permanent replacement is conducted. |
(5) | The Manager and the Trust are parties to a Chief Compliance Officer Agreement under which the Manager is compensated by the Trust for providing an employee of the Manager or one of its affiliates to act as the Trust’s Chief Compliance Officer. The Chief Compliance Officer and Anti-Money Laundering Compliance Officer is not considered a corporate officer or executive employee of the Trust. |
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The Allianz VIP Funds are distributed by Allianz Life Financial Services, LLC. | ||
These Funds are not FDIC Insured. | ANNRPT1213 2/14 |
AZL® S&P 500 Index Fund
Annual Report
December 31, 2013
Table of Contents
Management Discussion and Analysis
Page 1
Expense Examples and Portfolio Composition
Page 3
Schedule of Portfolio Investments
Page 4
Statement of Assets and Liabilities
Page 11
Statement of Operations
Page 11
Statements of Changes in Net Assets
Page 12
Financial Highlights
Page 13
Notes to the Financial Statements
Page 14
Report of Independent Registered Public Accounting Firm
Page 19
Other Federal Income Tax Information
Page 20
Other Information
Page 21
Approval of Investment Advisory and Subadvisory Agreements
Page 22
Information about the Board of Trustees and Officers
Page 25
This report is submitted for the general information of the shareholder of the Fund. The report is not authorized for distribution to prospective investors in the Fund unless preceded or accompanied by an effective prospectus, which contains details concerning the sales charges and other pertinent information.
AZL® S&P 500 Index Fund Review (unaudited)
Allianz Investment Management LLC serves as the Manager for the AZL® S&P 500 Index Fund and BlackRock Investment Management, LLC serves as Subadviser to the Fund.
What factors affected the Fund’s performance during the year ended December 31, 2013?
For the year ended December 31, 2013, the AZL® S&P 500 Index Fund (Class 2 Shares) returned 31.66%1. That compared to a 32.39% total return for its benchmark, the S&P 500® Index2.
The Fund attempts to replicate the performance of the S&P 500® Index of large-cap U.S. stocks.
Equities began the period with a powerful rally after the United States averted the worst of its potential fiscal crisis with a last-minute tax deal. The rally softened as political and financial instability in Europe—including a stalemate in Italian presidential elections and a banking crisis in Cyprus—gave investors pause later in the first half of the period. However, equities soon regained their momentum as low interest rates and increased global liquidity spurred stock prices higher.
In May, stocks responded negatively to news that the Federal Reserve might begin gradually reducing (or tapering) its monetary stimulus efforts before the end of the year, although stocks rebounded once it became clear that the Fed remained undecided about the timing of the taper. Meanwhile, the modest pace of economic growth boded well for corporate profit margins as the economic recovery was strong enough to support revenues but not so strong as to boost wage growth.
September brought another sharp rally in stock prices, as the Fed decided to delay the taper, despite market expectations to the contrary. The rally was interrupted as budget and debt ceiling negotiations led to a partial government shutdown and fears of a potential technical default in the national debt. Stocks regained their momentum in the fourth quarter once the government reopened and economic indicators improved. The Fed’s announcement in mid-December that it would begin
tapering in 2014, but maintain short-term interest rates at their low levels, alleviated the market’s anxiety over the interest rate uncertainty. Investors responded positively, pushing stocks higher to close out the period.
Among sectors in the benchmark, the consumer-driven areas were the strongest performers for the period, fueled by low interest rates, buoyant equity markets and rising home prices. In particular, the consumer discretionary sector performed exceptionally well, as did the health care and industrial sectors. The information technology and consumer staples sectors were also strong performers for the year despite lagging the benchmark index.
The underperformance of the Fund compared to the benchmark was the result of Fund expenses that are not incurred by the benchmark.
Past performance does not guarantee future results.
* | The Fund’s portfolio composition is subject to change. There is no guarantee that any sectors mentioned will continue to perform well or that securities in such sectors will be held by the Fund in the future. The information contained in this commentary is for informational purposes only and should not be construed as a recommendation to purchase or sell securities in the sector mentioned. The Fund’s holdings and weightings are as of December 31, 2013. |
1 | The recent growth rate in the stock market has helped to produce short-term returns that are not typical and may not continue in the future. Because of ongoing market volatility, Fund performance may be subject to substantial short-term changes. |
2 | The Standard & Poor’s 500® Index (“S&P 500®”) is representative of 500 selected common stocks, most of which are listed on the New York Stock Exchange, and is a measure of the U.S. Stock market as a whole. Investors cannot invest directly in an index. |
1
AZL® S&P 500 Index Fund Review (unaudited)
Fund Objective
The Fund’s investment objective is to seek to match the total return of the Standard & Poor’s 500® Index. This objective may be changed by the Trustees of the Fund without shareholder approval. The Fund seeks to achieve its objective by investing in all 500 stocks in the Index in proportion to their weighting in the Index.
Investment Concerns
Equity securities (stocks) are more volatile and carry more risk than other forms of investments, including investments in high-grade fixed income securities. The net asset value per share of this Fund will fluctuate as the value of the securities in the portfolio changes.
The Fund does not attempt to manage market volatility or reduce the effects of poor stock performance. In addition, factors such as Fund expenses, selection of a representative portfolio, changes in the composition of the Index, or the timing of purchases or redemptions of Fund shares may affect the correlation between the performance of the Index and the Fund’s performance.
The performance of the Fund is expected to be lower than that of the Index because of Fund fees and expenses. Securities in which the Fund will invest may involve substantial risk and may be subject to sudden severe price declines.
Investing in derivatives instruments involves risks that may be different from or greater than the risk associated with investing directly in securities or other traditional instruments.
For a complete description of these and other risks associated with investing in a mutual Fund, please refer to the Fund’s prospectus.
Growth of $10,000 Investment
The chart above represents a comparison of a hypothetical investment in the Fund versus a similar investment in the Fund’s benchmark, and represents the reinvestment of dividends and capital gains in the Fund.
Average Annual Total Returns as of December 31, 2013
Inception | 1 | 3 | 5 | Since | ||||||||||||||
Date | Year | Year | Year | Inception | ||||||||||||||
AZL® S&P 500 Index Fund (Class 1 Shares) | 5/14/07 | 32.02 | %1 | 15.87 | % | 17.54 | % | 5.01 | % | |||||||||
AZL® S&P 500 Index Fund (Class 2 Shares) | 5/1/07 | 31.66 | %1 | 15.56 | % | 17.25 | % | 4.94 | % | |||||||||
S&P 500® Index | 5/1/07 | 32.39 | % | 16.18 | % | 17.94 | % | 5.61 | % |
Past performance does not guarantee future results. The performance data quoted represents past performance and current returns may be lower or higher. The investment return and principal value will fluctuate so that an investor’s shares, when redeemed may be worth more or less than the original cost. To obtain performance information current to the most recent month end, please visit www.Allianzlife.com.
Expense Ratio | Gross | |||
AZL® S&P 500 Index Fund (Class 1 Shares) | 0.26 | % | ||
AZL® S&P 500 Index Fund (Class 2 Shares) | 0.51 | % |
Expense Ratios are based on the current Fund prospectus dated April 29, 2013. The Manager and the Fund have entered into a written contract limiting operating expenses, excluding certain expenses (such as interest expense), to 0.46% for Class 1 Shares and 0.71% for Class 2 Shares through April 30, 2015. Additional information pertaining to the December 31, 2013 expense ratios can be found in the financial highlights.
1 | The recent growth rate in the stock market has helped to produce short-term returns that are not typical and may not continue in the future. Because of ongoing market volatility, Fund performance may be subject to substantial short-term changes. |
The total return of the Fund does not reflect the effect of any insurance charges, the annual maintenance fee or the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. Such charges, fees and tax payments would reduce the performance quoted.
The Fund’s performance is measured against the Standard & Poor’s 500® Index (“S&P 500®”), which is an unmanaged index that is representative of 500 selected common stocks, most of which are listed on the New York Stock Exchange, and is a measure of the U.S. Stock market as a whole. The index does not reflect the deduction of fees associated with a mutual fund, such as investment management and fund accounting fees. The Fund’s performance reflects the deduction of fees for services provided to the Fund. Investors cannot invest directly in an index.
2 |
AZL S&P 500 Index Fund
(Unaudited)
As a shareholder of the AZL S&P 500 Index Fund (the “Fund”), you incur ongoing costs, including management fees, distribution fees, and other Fund expenses. These examples are intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. Please note that the expenses shown in each table do not reflect expenses that apply to the subaccount or the insurance contract. If the expenses that apply to the subaccount of the insurance contract were included, your costs would have been higher.
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the periods presented below.
The Actual Expense table below provides information about actual account values and actual expenses. You may use the information below, 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 table under the heading entitled “Expenses Paid During Period” to estimate the expenses you paid on your account during this period.
Beginning Account Value 7/1/13 | Ending Account Value 12/31/13 | Expenses Paid During Period 7/1/13 - 12/31/13* | Annualized Expense Ratio During Period 7/1/13 - 12/31/13 | |||||||||||||||||
AZL S&P 500 Index Fund, Class 1 | $ | 1,000.00 | $ | 1,161.50 | $ | 1.31 | 0.24 | % | ||||||||||||
AZL S&P 500 Index Fund, Class 2 | $ | 1,000.00 | $ | 1,159.60 | $ | 2.67 | 0.49 | % |
The Hypothetical Expense table below provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.
Beginning Account Value 7/1/13 | Ending Account Value 12/31/13 | Expenses Paid During Period 7/1/13 - 12/31/13* | Annualized Expense Ratio During Period 7/1/13 - 12/31/13 | |||||||||||||||||
AZL S&P 500 Index Fund, Class 1 | $ | 1,000.00 | $ | 1,024.00 | $ | 1.22 | 0.24 | % | ||||||||||||
AZL S&P 500 Index Fund, Class 2 | $ | 1,000.00 | $ | 1,022.74 | $ | 2.50 | 0.49 | % |
* | Expenses are equal to the average account value over the period, multiplied by the Fund’s annualized expense ratio, multiplied by 184/365 (to reflect the one half year period). |
Portfolio Composition
(Unaudited)
Investments | Percent of net assets | ||||
Information Technology | 17.7 | % | |||
Financials | 15.3 | ||||
Health Care | 12.4 | ||||
Consumer Discretionary | 12.1 | ||||
Industrials | 10.4 | ||||
Energy | 9.8 | ||||
Consumer Staples | 9.3 | ||||
Materials | 3.3 | ||||
Utilities | 2.8 | ||||
Telecommunication Services | 2.2 | ||||
Machinery | 0.1 | ||||
|
| ||||
Total Common Stock | 95.4 | ||||
Money Market | 4.4 | ||||
Securities Held as Collateral for Securities on Loan | 0.3 | ||||
|
| ||||
Total Investment Securities | 100.1 | ||||
Net other assets (liabilities) | (0.1 | ) | |||
|
| ||||
Net Assets | 100.0 | % | |||
|
|
3
AZL S&P 500 Index Fund
Schedule of Portfolio Investments
December 31, 2013
Shares | Fair Value | |||||||
| Common Stocks (95.4%): |
| ||||||
| Aerospace & Defense (2.7%): |
| ||||||
62,690 | Boeing Co. (The) | $ | 8,556,558 | |||||
30,317 | General Dynamics Corp. | 2,896,789 | ||||||
71,154 | Honeywell International, Inc. | 6,501,341 | ||||||
8,036 | L-3 Communications Holdings, Inc. | 858,727 | ||||||
24,398 | Lockheed Martin Corp. | 3,627,007 | ||||||
20,130 | Northrop Grumman Corp. | 2,307,099 | ||||||
13,172 | Precision Castparts Corp. | 3,547,220 | ||||||
28,970 | Raytheon Co. | 2,627,579 | ||||||
12,272 | Rockwell Collins, Inc. | 907,146 | ||||||
25,497 | Textron, Inc. | 937,270 | ||||||
76,549 | United Technologies Corp. | 8,711,276 | ||||||
|
| |||||||
41,478,012 | ||||||||
|
| |||||||
| Air Freight & Logistics (0.8%): |
| ||||||
13,750 | C.H. Robinson Worldwide, Inc. | 802,175 | ||||||
18,642 | Expeditors International of Washington, Inc. | 824,909 | ||||||
26,990 | FedEx Corp. | 3,880,352 | ||||||
64,820 | United Parcel Service, Inc., Class B | 6,811,285 | ||||||
|
| |||||||
12,318,721 | ||||||||
|
| |||||||
| Airlines (0.2%): |
| ||||||
77,580 | Delta Air Lines, Inc. | 2,131,122 | ||||||
63,178 | Southwest Airlines Co. | 1,190,274 | ||||||
|
| |||||||
3,321,396 | ||||||||
|
| |||||||
| Auto Components (0.4%): |
| ||||||
20,635 | BorgWarner, Inc. | 1,153,703 | ||||||
25,392 | Delphi Automotive plc | 1,526,821 | ||||||
22,357 | Goodyear Tire & Rubber Co. | 533,214 | ||||||
62,115 | Johnson Controls, Inc. | 3,186,500 | ||||||
|
| |||||||
6,400,238 | ||||||||
|
| |||||||
| Automobiles (0.7%): |
| ||||||
357,679 | Ford Motor Co. | 5,518,987 | ||||||
103,229 | General Motors Co. | 4,218,969 | ||||||
20,050 | Harley-Davidson, Inc. | 1,388,262 | ||||||
|
| |||||||
11,126,218 | ||||||||
|
| |||||||
| Beverages (2.1%): |
| ||||||
14,764 | Beam, Inc. | 1,004,838 | ||||||
14,693 | Brown-Forman Corp., Class B | 1,110,350 | ||||||
344,372 | Coca-Cola Co. (The) | 14,226,007 | ||||||
21,896 | Coca-Cola Enterprises, Inc. | 966,270 | ||||||
15,075 | Constellation Brands, Inc., Class A* | 1,060,979 | ||||||
18,194 | Dr Pepper Snapple Group, Inc. | 886,412 | ||||||
14,340 | Molson Coors Brewing Co., Class B | 805,191 | ||||||
12,326 | Monster Beverage Corp.* | 835,333 | ||||||
139,066 | PepsiCo, Inc. | 11,534,134 | ||||||
|
| |||||||
32,429,514 | ||||||||
|
| |||||||
| Biotechnology (2.3%): |
| ||||||
17,775 | Alexion Pharmaceuticals, Inc.* | 2,365,142 | ||||||
68,384 | Amgen, Inc. | 7,806,717 | ||||||
21,420 | Biogen Idec, Inc.* | 5,992,245 | ||||||
37,366 | Celgene Corp.* | 6,313,359 | ||||||
139,043 | Gilead Sciences, Inc.* | 10,449,082 | ||||||
7,114 | Regeneron Pharmaceuticals, Inc.* | 1,958,057 | ||||||
21,162 | Vertex Pharmaceuticals, Inc.* | 1,572,337 | ||||||
|
| |||||||
36,456,939 | ||||||||
|
|
Shares | Fair Value | |||||||
| Common Stocks, continued |
| ||||||
| Building Products (0.0%): |
| ||||||
8,098 | Allegion plc* | $ | 357,851 | |||||
32,444 | Masco Corp. | 738,750 | ||||||
|
| |||||||
1,096,601 | ||||||||
|
| |||||||
| Capital Markets (2.1%): |
| ||||||
17,641 | Ameriprise Financial, Inc. | 2,029,597 | ||||||
104,147 | Bank of New York Mellon Corp. (The) | 3,638,896 | ||||||
11,448 | BlackRock, Inc., Class A+ | 3,622,949 | ||||||
105,119 | Charles Schwab Corp. (The) | 2,733,094 | ||||||
26,093 | E*TRADE Financial Corp.* | 512,467 | ||||||
36,610 | Franklin Resources, Inc. | 2,113,495 | ||||||
38,210 | Goldman Sachs Group, Inc. (The) | 6,773,105 | ||||||
40,252 | Invesco, Ltd. | 1,465,173 | ||||||
9,626 | Legg Mason, Inc. | 418,538 | ||||||
125,632 | Morgan Stanley | 3,939,820 | ||||||
20,371 | Northern Trust Corp. | 1,260,761 | ||||||
39,808 | State Street Corp. | 2,921,509 | ||||||
23,646 | T. Rowe Price Group, Inc. | 1,980,825 | ||||||
|
| |||||||
33,410,229 | ||||||||
|
| |||||||
| Chemicals (2.5%): |
| ||||||
19,139 | Air Products & Chemicals, Inc. | 2,139,357 | ||||||
6,013 | Airgas, Inc. | 672,554 | ||||||
5,207 | CF Industries Holdings, Inc. | 1,213,439 | ||||||
109,982 | Dow Chemical Co. (The) | 4,883,201 | ||||||
83,941 | E.I. du Pont de Nemours & Co. | 5,453,647 | ||||||
13,957 | Eastman Chemical Co. | 1,126,330 | ||||||
24,589 | Ecolab, Inc. | 2,563,895 | ||||||
12,085 | FMC Corp. | 911,934 | ||||||
7,430 | International Flavor & Fragrances, Inc. | 638,831 | ||||||
39,613 | LyondellBasell Industries NV, Class A | 3,180,132 | ||||||
47,683 | Monsanto Co. | 5,557,453 | ||||||
30,965 | Mosaic Co. (The) | 1,463,716 | ||||||
12,879 | PPG Industries, Inc. | 2,442,631 | ||||||
26,693 | Praxair, Inc. | 3,470,891 | ||||||
7,810 | Sherwin Williams Co. | 1,433,135 | ||||||
10,851 | Sigma Aldrich Corp. | 1,020,103 | ||||||
|
| |||||||
38,171,249 | ||||||||
|
| |||||||
| Commercial Banks (2.7%): |
| ||||||
63,981 | BB&T Corp. | 2,387,771 | ||||||
16,586 | Comerica, Inc. | 788,498 | ||||||
80,055 | Fifth Third Bancorp | 1,683,557 | ||||||
75,423 | Huntington Bancshares, Inc. | 727,832 | ||||||
81,310 | KeyCorp | 1,091,180 | ||||||
11,820 | M&T Bank Corp. | 1,376,084 | ||||||
48,251 | PNC Financial Services Group, Inc. | 3,743,313 | ||||||
124,916 | Regions Financial Corp. | 1,235,419 | ||||||
48,538 | SunTrust Banks, Inc. | 1,786,684 | ||||||
165,608 | U.S. Bancorp | 6,690,563 | ||||||
434,673 | Wells Fargo & Co. | 19,734,155 | ||||||
16,773 | Zions Bancorp | 502,519 | ||||||
|
| |||||||
41,747,575 | ||||||||
|
| |||||||
| Commercial Services & Supplies (0.5%): |
| ||||||
18,180 | ADT Corp. (The) | 735,745 | ||||||
9,132 | Cintas Corp. | 544,176 | ||||||
15,460 | Iron Mountain, Inc. | 469,211 | ||||||
18,343 | Pitney Bowes, Inc. | 427,392 |
Continued
4
AZL S&P 500 Index Fund
Schedule of Portfolio Investments
December 31, 2013
Shares | Fair Value | |||||||
| Common Stocks, continued | |||||||
| Commercial Services & Supplies, continued | |||||||
24,490 | Republic Services, Inc. | $ | 813,068 | |||||
7,772 | Stericycle, Inc.* | 902,873 | ||||||
42,137 | Tyco International, Ltd. | 1,729,302 | ||||||
39,567 | Waste Management, Inc. | 1,775,371 | ||||||
|
| |||||||
7,397,138 | ||||||||
|
| |||||||
| Communications Equipment (1.7%): | |||||||
484,828 | Cisco Systems, Inc. | 10,884,389 | ||||||
7,038 | F5 Networks, Inc.* | 639,473 | ||||||
9,721 | Harris Corp. | 678,623 | ||||||
45,793 | Juniper Networks, Inc.* | 1,033,548 | ||||||
20,879 | Motorola Solutions, Inc. | 1,409,333 | ||||||
112 | Nortel Networks Corp.* | 1 | ||||||
153,197 | QUALCOMM, Inc. | 11,374,876 | ||||||
|
| |||||||
26,020,243 | ||||||||
|
| |||||||
| Computers & Peripherals (3.8%): | |||||||
81,588 | Apple, Inc. | 45,779,843 | ||||||
186,604 | EMC Corp. | 4,693,091 | ||||||
174,270 | Hewlett-Packard Co. | 4,876,075 | ||||||
30,915 | NetApp, Inc. | 1,271,843 | ||||||
20,484 | SanDisk Corp. | 1,444,941 | ||||||
29,534 | Seagate Technology plc | 1,658,629 | ||||||
19,089 | Western Digital Corp. | 1,601,567 | ||||||
|
| |||||||
61,325,989 | ||||||||
|
| |||||||
| Construction & Engineering (0.2%): | |||||||
14,820 | Fluor Corp. | 1,189,898 | ||||||
11,950 | Jacobs Engineering Group, Inc.* | 752,731 | ||||||
19,533 | Quanta Services, Inc.* | 616,461 | ||||||
|
| |||||||
2,559,090 | ||||||||
|
| |||||||
| Construction Materials (0.0%): | |||||||
11,813 | Vulcan Materials Co. | 701,928 | ||||||
|
| |||||||
| Consumer Finance (1.0%): |
| ||||||
83,542 | American Express Co. | 7,579,766 | ||||||
52,282 | Capital One Financial Corp. | 4,005,324 | ||||||
43,435 | Discover Financial Services | 2,430,188 | ||||||
39,651 | SLM Corp. | 1,042,028 | ||||||
|
| |||||||
15,057,306 | ||||||||
|
| |||||||
| Containers & Packaging (0.2%): | |||||||
8,761 | Avery Dennison Corp. | 439,715 | ||||||
13,115 | Ball Corp. | 677,522 | ||||||
9,354 | Bemis Co., Inc. | 383,140 | ||||||
16,138 | MeadWestvaco Corp. | 595,976 | ||||||
14,940 | Owens-Illinois, Inc.* | 534,553 | ||||||
17,806 | Sealed Air Corp. | 606,294 | ||||||
|
| |||||||
3,237,200 | ||||||||
|
| |||||||
| Distributors (0.1%): | |||||||
13,997 | Genuine Parts Co. | 1,164,410 | ||||||
|
| |||||||
| Diversified Consumer Services (0.0%): | |||||||
398 | Graham Holdings Co., Class B* | 264,001 | ||||||
24,893 | H&R Block, Inc. | 722,893 | ||||||
|
| |||||||
986,894 | ||||||||
|
| |||||||
| Diversified Financial Services (4.7%): | |||||||
967,198 | Bank of America Corp. | 15,059,273 | ||||||
163,225 | Berkshire Hathaway, Inc., Class B* | 19,351,956 |
Shares | Fair Value | |||||||
| Common Stocks, continued | |||||||
| Diversified Financial Services, continued | |||||||
275,030 | Citigroup, Inc. | $ | 14,331,813 | |||||
28,564 | CME Group, Inc. | 2,241,131 | ||||||
10,422 | IntercontinentalExchange Group, Inc. | 2,344,116 | ||||||
340,881 | JPMorgan Chase & Co. | 19,934,720 | ||||||
28,488 | Leucadia National Corp. | 807,350 | ||||||
17,165 | Moody’s Corp. | 1,346,938 | ||||||
10,496 | NASDAQ OMX Group, Inc. (The) | 417,741 | ||||||
|
| |||||||
75,835,038 | ||||||||
|
| |||||||
| Diversified Telecommunication Services (2.1%): | |||||||
477,699 | AT&T, Inc. | 16,795,897 | ||||||
53,598 | CenturyLink, Inc. | 1,707,096 | ||||||
90,865 | Frontier Communications Corp.^ | 422,522 | ||||||
259,502 | Verizon Communications, Inc. | 12,751,928 | ||||||
53,885 | Windstream Holdings, Inc.^ | 430,002 | ||||||
|
| |||||||
32,107,445 | ||||||||
|
| |||||||
| Electric Utilities (1.5%): | |||||||
44,187 | American Electric Power Co., Inc. | 2,065,300 | ||||||
64,019 | Duke Energy Corp. | 4,417,952 | ||||||
29,544 | Edison International | 1,367,887 | ||||||
16,205 | Entergy Corp. | 1,025,290 | ||||||
77,703 | Exelon Corp. | 2,128,285 | ||||||
38,014 | FirstEnergy Corp. | 1,253,702 | ||||||
39,028 | NextEra Energy, Inc. | 3,341,577 | ||||||
28,609 | Northeast Utilities | 1,212,736 | ||||||
22,641 | Pepco Holdings, Inc. | 433,122 | ||||||
9,997 | Pinnacle West Capital Corp. | 529,041 | ||||||
57,151 | PPL Corp. | 1,719,674 | ||||||
79,903 | Southern Co. (The) | 3,284,812 | ||||||
|
| |||||||
22,779,378 | ||||||||
|
| |||||||
| Electrical Equipment (0.7%): | |||||||
22,200 | AMETEK, Inc. | 1,169,274 | ||||||
43,027 | Eaton Corp. plc | 3,275,215 | ||||||
63,835 | Emerson Electric Co. | 4,479,941 | ||||||
12,574 | Rockwell Automation, Inc. | 1,485,744 | ||||||
9,015 | Roper Industries, Inc. | 1,250,200 | ||||||
|
| |||||||
11,660,374 | ||||||||
|
| |||||||
| Electronic Equipment, Instruments & Components (0.4%): |
| ||||||
14,353 | Amphenol Corp., Class A | 1,280,001 | ||||||
131,231 | Corning, Inc. | 2,338,537 | ||||||
12,913 | FLIR Systems, Inc. | 388,681 | ||||||
16,762 | Jabil Circuit, Inc. | 292,329 | ||||||
37,212 | TE Connectivity, Ltd. | 2,050,753 | ||||||
|
| |||||||
6,350,301 | ||||||||
|
| |||||||
| Energy Equipment & Services (1.8%): | |||||||
40,191 | Baker Hughes, Inc. | 2,220,955 | ||||||
21,570 | Cameron International Corp.* | 1,284,062 | ||||||
6,318 | Diamond Offshore Drilling, Inc. | 359,621 | ||||||
21,232 | Ensco plc, Class A, ADR | 1,214,046 | ||||||
21,454 | FMC Technologies, Inc.* | 1,120,113 | ||||||
76,865 | Halliburton Co. | 3,900,899 | ||||||
9,679 | Helmerich & Payne, Inc. | 813,810 | ||||||
23,603 | Nabors Industries, Ltd. | 401,015 | ||||||
38,820 | National-Oilwell Varco, Inc. | 3,087,355 | ||||||
23,029 | Noble Corp. plc | 862,897 |
Continued
5
AZL S&P 500 Index Fund
Schedule of Portfolio Investments
December 31, 2013
Shares | Fair Value | |||||||
| Common Stocks, continued | |||||||
| Energy Equipment & Services, continued | |||||||
11,291 | Rowan Cos. plc, Class A* | $ | 399,250 | |||||
119,421 | Schlumberger, Ltd. | 10,761,025 | ||||||
30,736 | Transocean, Ltd. | 1,518,973 | ||||||
|
| |||||||
27,944,021 | ||||||||
|
| |||||||
| Food & Staples Retailing (2.1%): | |||||||
39,620 | Costco Wholesale Corp. | 4,715,176 | ||||||
107,931 | CVS Caremark Corp. | 7,724,622 | ||||||
47,110 | Kroger Co. (The) | 1,862,258 | ||||||
22,314 | Safeway, Inc. | 726,767 | ||||||
52,737 | Sysco Corp. | 1,903,806 | ||||||
78,970 | Walgreen Co. | 4,536,037 | ||||||
146,709 | Wal-Mart Stores, Inc. | 11,544,531 | ||||||
33,745 | Whole Foods Market, Inc. | 1,951,473 | ||||||
|
| |||||||
34,964,670 | ||||||||
|
| |||||||
| Food Products (1.5%): | |||||||
59,664 | Archer-Daniels-Midland Co. | 2,589,418 | ||||||
16,224 | Campbell Soup Co. | 702,175 | ||||||
38,256 | ConAgra Foods, Inc. | 1,289,227 | ||||||
57,515 | General Mills, Inc. | 2,870,574 | ||||||
13,593 | Hershey Co. | 1,321,647 | ||||||
12,237 | Hormel Foods Corp. | 552,745 | ||||||
9,556 | J.M. Smucker Co. (The) | 990,193 | ||||||
23,319 | Kellogg Co. | 1,424,091 | ||||||
54,033 | Kraft Foods Group, Inc., Class A | 2,913,459 | ||||||
11,996 | McCormick & Co. | 826,764 | ||||||
18,316 | Mead Johnson Nutrition Co. | 1,534,148 | ||||||
159,032 | Mondelez International, Inc., Class A | 5,613,830 | ||||||
24,630 | Tyson Foods, Inc., Class A | 824,120 | ||||||
|
| |||||||
23,452,391 | ||||||||
|
| |||||||
| Gas Utilities (0.1%): | |||||||
10,781 | AGL Resources, Inc. | 509,187 | ||||||
18,742 | ONEOK, Inc. | 1,165,377 | ||||||
|
| |||||||
1,674,564 | ||||||||
|
| |||||||
| Health Care Equipment & Supplies (1.9%): | |||||||
140,207 | Abbott Laboratories | 5,374,135 | ||||||
49,211 | Baxter International, Inc. | 3,422,625 | ||||||
17,600 | Becton, Dickinson & Co. | 1,944,624 | ||||||
121,077 | Boston Scientific Corp.* | 1,455,346 | ||||||
7,063 | C.R. Bard, Inc. | 946,018 | ||||||
19,164 | CareFusion Corp.* | 763,110 | ||||||
41,712 | Covidien plc | 2,840,587 | ||||||
12,934 | DENTSPLY International, Inc. | 627,040 | ||||||
9,921 | Edwards Lifesciences Corp.* | 652,405 | ||||||
3,452 | Intuitive Surgical, Inc.* | 1,325,844 | ||||||
90,530 | Medtronic, Inc. | 5,195,517 | ||||||
26,426 | St. Jude Medical, Inc. | 1,637,091 | ||||||
26,766 | Stryker Corp. | 2,011,197 | ||||||
9,587 | Varian Medical Systems, Inc.* | 744,814 | ||||||
15,481 | Zimmer Holdings, Inc. | 1,442,674 | ||||||
|
| |||||||
30,383,027 | ||||||||
|
| |||||||
| Health Care Providers & Services (1.9%): | |||||||
33,325 | Aetna, Inc. | 2,285,762 | ||||||
20,859 | AmerisourceBergen Corp. | 1,466,596 | ||||||
30,932 | Cardinal Health, Inc. | 2,066,567 |
Shares | Fair Value | |||||||
| Common Stocks, continued | |||||||
| Health Care Providers & Services, continued | |||||||
25,065 | CIGNA Corp. | $ | 2,192,686 | |||||
16,040 | DaVita, Inc.* | 1,016,455 | ||||||
73,069 | Express Scripts Holding Co.* | 5,132,367 | ||||||
14,138 | Humana, Inc. | 1,459,324 | ||||||
7,925 | Laboratory Corp. of America Holdings* | 724,107 | ||||||
20,817 | McKesson, Inc. | 3,359,864 | ||||||
7,562 | Patterson Cos., Inc. | 311,554 | ||||||
13,187 | Quest Diagnostics, Inc. | 706,032 | ||||||
8,998 | Tenet Healthcare Corp.* | 378,996 | ||||||
91,292 | UnitedHealth Group, Inc. | 6,874,288 | ||||||
26,788 | WellPoint, Inc. | 2,474,943 | ||||||
|
| |||||||
30,449,541 | ||||||||
|
| |||||||
| Health Care Technology (0.1%): | |||||||
26,769 | Cerner Corp.* | 1,492,104 | ||||||
|
| |||||||
| Hotels, Restaurants & Leisure (1.7%): | |||||||
39,793 | Carnival Corp. | 1,598,485 | ||||||
2,805 | Chipotle Mexican Grill, Inc.* | 1,494,448 | ||||||
11,844 | Darden Restaurants, Inc. | 643,958 | ||||||
22,570 | International Game Technology | 409,871 | ||||||
20,371 | Marriott International, Inc., Class A | 1,005,513 | ||||||
90,229 | McDonald’s Corp. | 8,754,920 | ||||||
68,303 | Starbucks Corp. | 5,354,272 | ||||||
17,366 | Starwood Hotels & Resorts Worldwide, Inc. | 1,379,729 | ||||||
11,816 | Wyndham Worldwide Corp. | 870,721 | ||||||
7,324 | Wynn Resorts, Ltd. | 1,422,394 | ||||||
40,382 | Yum! Brands, Inc. | 3,053,283 | ||||||
|
| |||||||
25,987,594 | ||||||||
|
| |||||||
| Household Durables (0.4%): | |||||||
25,824 | D.R. Horton, Inc. | 576,392 | ||||||
11,185 | Garmin, Ltd.^ | 516,971 | ||||||
6,125 | Harman International Industries, Inc. | 501,331 | ||||||
12,912 | Leggett & Platt, Inc. | 399,497 | ||||||
15,090 | Lennar Corp.^ | 596,960 | ||||||
5,517 | Mohawk Industries, Inc.* | 821,481 | ||||||
26,043 | Newell Rubbermaid, Inc. | 844,054 | ||||||
31,262 | PulteGroup, Inc. | 636,807 | ||||||
7,118 | Whirlpool Corp. | 1,116,530 | ||||||
|
| |||||||
6,010,023 | ||||||||
|
| |||||||
| Household Products (1.9%): | |||||||
11,702 | Clorox Co. (The)^ | 1,085,478 | ||||||
79,702 | Colgate-Palmolive Co. | 5,197,367 | ||||||
34,607 | Kimberly-Clark Corp. | 3,615,047 | ||||||
246,487 | Procter & Gamble Co. (The) | 20,066,507 | ||||||
|
| |||||||
29,964,399 | ||||||||
|
| |||||||
| Independent Power Producers & Energy Traders (0.1%): |
| ||||||
59,389 | AES Corp. (The) | 861,734 | ||||||
29,351 | NRG Energy, Inc. | 842,961 | ||||||
|
| |||||||
1,704,695 | ||||||||
|
| |||||||
| Industrial Conglomerates (2.4%): | |||||||
57,999 | 3M Co. | 8,134,360 | ||||||
54,376 | Danaher Corp. | 4,197,827 | ||||||
917,436 | General Electric Co. | 25,715,731 | ||||||
|
| |||||||
38,047,918 | ||||||||
|
|
Continued
6
AZL S&P 500 Index Fund
Schedule of Portfolio Investments
December 31, 2013
Shares | Fair Value | |||||||
| Common Stocks, continued | |||||||
| Insurance (2.8%): | |||||||
30,837 | ACE, Ltd. | $ | 3,192,555 | |||||
42,276 | AFLAC, Inc. | 2,824,037 | ||||||
41,245 | Allstate Corp. (The) | 2,249,502 | ||||||
133,511 | American International Group, Inc. | 6,815,737 | ||||||
27,299 | Aon plc | 2,290,113 | ||||||
6,594 | Assurant, Inc. | 437,644 | ||||||
22,829 | Chubb Corp. (The) | 2,205,966 | ||||||
13,387 | Cincinnati Financial Corp. | 701,077 | ||||||
44,876 | Genworth Financial, Inc., Class A* | 696,924 | ||||||
40,541 | Hartford Financial Services Group, Inc. (The) | 1,468,800 | ||||||
23,789 | Lincoln National Corp. | 1,227,988 | ||||||
27,735 | Loews Corp. | 1,337,936 | ||||||
49,763 | Marsh & McLennan Cos., Inc. | 2,406,539 | ||||||
101,657 | MetLife, Inc. | 5,481,345 | ||||||
24,884 | Principal Financial Group, Inc. | 1,227,030 | ||||||
50,055 | Progressive Corp. (The) | 1,365,000 | ||||||
41,985 | Prudential Financial, Inc. | 3,871,857 | ||||||
8,199 | Torchmark Corp. | 640,752 | ||||||
33,013 | Travelers Cos., Inc. (The) | 2,988,997 | ||||||
23,682 | UnumProvident Corp. | 830,765 | ||||||
25,645 | XL Group plc, Class B | 816,537 | ||||||
|
| |||||||
45,077,101 | ||||||||
|
| |||||||
| Internet & Catalog Retail (1.4%): | |||||||
33,621 | Amazon.com, Inc.* | 13,407,718 | ||||||
9,338 | Expedia, Inc. | 650,485 | ||||||
5,368 | Netflix, Inc.* | 1,976,337 | ||||||
4,663 | Priceline.com, Inc.* | 5,420,271 | ||||||
10,048 | TripAdvisor, Inc.* | 832,276 | ||||||
|
| |||||||
22,287,087 | ||||||||
|
| |||||||
| Internet Software & Services (3.0%): | |||||||
16,195 | Akamai Technologies, Inc.* | 764,080 | ||||||
105,654 | eBay, Inc.* | 5,799,348 | ||||||
149,105 | Facebook, Inc., Class A* | 8,150,079 | ||||||
25,446 | Google, Inc., Class A* | 28,517,587 | ||||||
11,682 | VeriSign, Inc.* | 698,350 | ||||||
85,550 | Yahoo!, Inc.* | 3,459,642 | ||||||
|
| |||||||
47,389,086 | ||||||||
|
| |||||||
| IT Services (3.5%): | |||||||
57,648 | Accenture plc, Class A | 4,739,819 | ||||||
4,409 | Alliance Data Systems Corp.* | 1,159,258 | ||||||
43,655 | Automatic Data Processing, Inc. | 3,527,761 | ||||||
27,394 | Cognizant Technology Solutions Corp., Class A* | 2,766,246 | ||||||
13,349 | Computer Sciences Corp. | 745,942 | ||||||
26,400 | Fidelity National Information Services, Inc. | 1,417,152 | ||||||
23,390 | Fiserv, Inc.* | 1,381,180 | ||||||
92,557 | International Business Machines Corp. | 17,360,917 | ||||||
9,388 | MasterCard, Inc., Class A | 7,843,298 | ||||||
29,473 | Paychex, Inc. | 1,341,906 | ||||||
14,826 | Teradata Corp.* | 674,435 | ||||||
15,151 | Total System Services, Inc. | 504,225 | ||||||
46,177 | Visa, Inc., Class A | 10,282,694 | ||||||
50,173 | Western Union Co. | 865,484 | ||||||
|
| |||||||
54,610,317 | ||||||||
|
|
Shares | Fair Value | |||||||
| Common Stocks, continued | |||||||
| Leisure Equipment & Products (0.1%): | |||||||
10,493 | Hasbro, Inc. | $ | 577,220 | |||||
30,689 | Mattel, Inc. | 1,460,183 | ||||||
|
| |||||||
2,037,403 | ||||||||
|
| |||||||
| Life Sciences Tools & Services (0.5%): | |||||||
29,996 | Agilent Technologies, Inc. | 1,715,471 | ||||||
15,694 | Life Technologies Corp.* | 1,189,605 | ||||||
10,182 | PerkinElmer, Inc. | 419,804 | ||||||
32,770 | Thermo Fisher Scientific, Inc. | 3,648,940 | ||||||
7,746 | Waters Corp.* | 774,600 | ||||||
|
| |||||||
7,748,420 | ||||||||
|
| |||||||
| Machinery (1.7%): | |||||||
57,704 | Caterpillar, Inc. | 5,240,101 | ||||||
15,801 | Cummins, Inc. | 2,227,467 | ||||||
34,716 | Deere & Co. | 3,170,613 | ||||||
15,449 | Dover Corp. | 1,491,446 | ||||||
12,647 | Flowserve Corp. | 996,963 | ||||||
37,027 | Illinois Tool Works, Inc. | 3,113,230 | ||||||
24,295 | Ingersoll-Rand plc | 1,496,572 | ||||||
9,660 | Joy Global, Inc. | 565,013 | ||||||
32,109 | PACCAR, Inc. | 1,899,890 | ||||||
10,046 | Pall Corp. | 857,426 | ||||||
13,533 | Parker Hannifin Corp. | 1,740,885 | ||||||
18,103 | Pentair, Ltd., Registered Shares | 1,406,060 | ||||||
5,287 | Snap-On, Inc. | 579,032 | ||||||
14,075 | Stanley Black & Decker, Inc. | 1,135,712 | ||||||
16,729 | Xylem, Inc. | 578,823 | ||||||
|
| |||||||
26,499,233 | ||||||||
|
| |||||||
| Media (3.7%): | |||||||
19,446 | Cablevision Systems Corp., Class A | 348,667 | ||||||
50,606 | CBS Corp., Class B | 3,225,626 | ||||||
236,309 | Comcast Corp., Class A | 12,279,796 | ||||||
44,311 | DIRECTV, Inc., Class A* | 3,061,447 | ||||||
20,464 | Discovery Communications, Inc., Class A* | 1,850,355 | ||||||
20,665 | Gannett Co., Inc. | 611,271 | ||||||
37,745 | Interpublic Group of Cos., Inc. (The) | 668,087 | ||||||
24,556 | McGraw-Hill Cos., Inc. (The) | 1,920,279 | ||||||
45,262 | News Corp., Class A* | 815,621 | ||||||
23,337 | Omnicom Group, Inc. | 1,735,573 | ||||||
9,945 | Scripps Networks Interactive, Class A | 859,347 | ||||||
25,562 | Time Warner Cable, Inc. | 3,463,651 | ||||||
82,040 | Time Warner, Inc. | 5,719,829 | ||||||
177,945 | Twenty-First Century Fox, Inc. | 6,260,105 | ||||||
36,802 | Viacom, Inc., Class B | 3,214,287 | ||||||
148,195 | Walt Disney Co. (The) | 11,322,098 | ||||||
|
| |||||||
57,356,039 | ||||||||
|
| |||||||
| Metals & Mining (0.5%): | |||||||
97,218 | Alcoa, Inc.^ | 1,033,427 | ||||||
9,813 | Allegheny Technologies, Inc. | 349,637 | ||||||
13,919 | Cliffs Natural Resources, Inc.^ | 364,817 | ||||||
94,139 | Freeport-McMoRan Copper & Gold, Inc. | 3,552,806 | ||||||
45,238 | Newmont Mining Corp. | 1,041,831 | ||||||
28,855 | Nucor Corp. | 1,540,280 | ||||||
13,148 | United States Steel Corp.^ | 387,866 | ||||||
|
| |||||||
8,270,664 | ||||||||
|
|
Continued
7
AZL S&P 500 Index Fund
Schedule of Portfolio Investments
December 31, 2013
Shares | Fair Value | |||||||
| Common Stocks, continued | |||||||
| Multiline Retail (0.7%): | |||||||
26,717 | Dollar General Corp.* | $ | 1,611,569 | |||||
18,870 | Dollar Tree, Inc.* | 1,064,645 | ||||||
8,780 | Family Dollar Stores, Inc. | 570,437 | ||||||
18,253 | Kohl’s Corp. | 1,035,858 | ||||||
33,414 | Macy’s, Inc. | 1,784,308 | ||||||
12,975 | Nordstrom, Inc. | 801,855 | ||||||
57,317 | Target Corp. | 3,626,446 | ||||||
|
| |||||||
10,495,118 | ||||||||
|
| |||||||
| Multi-Utilities (1.1%): | |||||||
22,054 | Ameren Corp. | 797,473 | ||||||
38,959 | CenterPoint Energy, Inc. | 903,070 | ||||||
24,166 | CMS Energy Corp. | 646,924 | ||||||
26,559 | Consolidated Edison, Inc. | 1,468,182 | ||||||
52,633 | Dominion Resources, Inc. | 3,404,828 | ||||||
15,999 | DTE Energy Co. | 1,062,174 | ||||||
7,234 | Integrys Energy Group, Inc. | 393,602 | ||||||
28,415 | NiSource, Inc. | 934,285 | ||||||
40,689 | PG&E Corp. | 1,638,953 | ||||||
45,871 | Public Service Enterprise Group, Inc. | 1,469,707 | ||||||
12,724 | SCANA Corp. | 597,137 | ||||||
20,611 | Sempra Energy | 1,850,043 | ||||||
18,569 | TECO Energy, Inc.^ | 320,130 | ||||||
20,541 | Wisconsin Energy Corp. | 849,165 | ||||||
45,126 | Xcel Energy, Inc. | 1,260,820 | ||||||
|
| |||||||
17,596,493 | ||||||||
|
| |||||||
| Office Electronics (0.1%): | |||||||
104,938 | Xerox Corp. | 1,277,095 | ||||||
|
| |||||||
| Oil, Gas & Consumable Fuels (8.1%): | |||||||
45,636 | Anadarko Petroleum Corp. | 3,619,848 | ||||||
36,202 | Apache Corp. | 3,111,200 | ||||||
38,245 | Cabot Oil & Gas Corp. | 1,482,376 | ||||||
45,836 | Chesapeake Energy Corp. | 1,243,989 | ||||||
174,392 | Chevron Corp. | 21,783,305 | ||||||
111,091 | ConocoPhillips | 7,848,579 | ||||||
20,800 | CONSOL Energy, Inc. | 791,232 | ||||||
33,251 | Denbury Resources, Inc.* | 546,314 | ||||||
34,607 | Devon Energy Corp. | 2,141,135 | ||||||
24,762 | EOG Resources, Inc. | 4,156,054 | ||||||
13,689 | EQT Corp. | 1,228,998 | ||||||
396,134 | Exxon Mobil Corp. | 40,088,760 | ||||||
25,793 | Hess Corp. | 2,140,819 | ||||||
61,055 | Kinder Morgan, Inc. | 2,197,980 | ||||||
63,170 | Marathon Oil Corp. | 2,229,901 | ||||||
27,297 | Marathon Petroleum Corp. | 2,503,954 | ||||||
15,971 | Murphy Oil Corp. | 1,036,198 | ||||||
12,331 | Newfield Exploration Co.* | 303,713 | ||||||
32,579 | Noble Energy, Inc. | 2,218,956 | ||||||
73,093 | Occidental Petroleum Corp. | 6,951,144 | ||||||
24,527 | Peabody Energy Corp. | 479,012 | ||||||
54,366 | Phillips 66 | 4,193,250 | ||||||
12,921 | Pioneer Natural Resources Co. | 2,378,368 | ||||||
16,297 | QEP Resources, Inc. | 499,503 | ||||||
14,852 | Range Resources Corp. | 1,252,172 | ||||||
31,801 | Southwestern Energy Co.* | 1,250,733 | ||||||
60,759 | Spectra Energy Corp. | 2,164,236 | ||||||
12,045 | Tesoro Corp. | 704,633 |
Shares | Fair Value | |||||||
| Common Stocks, continued | |||||||
| Oil, Gas & Consumable Fuels, continued | |||||||
48,927 | Valero Energy Corp. | $ | 2,465,921 | |||||
61,973 | Williams Cos., Inc. (The) | 2,390,299 | ||||||
18,231 | WPX Energy, Inc.* | 371,548 | ||||||
|
| |||||||
125,774,130 | ||||||||
|
| |||||||
| Paper & Forest Products (0.1%): | |||||||
40,227 | International Paper Co. | 1,972,330 | ||||||
|
| |||||||
| Personal Products (0.2%): | |||||||
39,416 | Avon Products, Inc. | 678,744 | ||||||
23,241 | Estee Lauder Co., Inc. (The), Class A | 1,750,512 | ||||||
|
| |||||||
2,429,256 | ||||||||
|
| |||||||
| Pharmaceuticals (5.7%): | |||||||
144,219 | Abbvie, Inc. | 7,616,205 | ||||||
15,775 | Actavis, Inc. plc* | 2,650,200 | ||||||
26,946 | Allergan, Inc. | 2,993,162 | ||||||
149,307 | Bristol-Myers Squibb Co. | 7,935,667 | ||||||
89,904 | Eli Lilly & Co. | 4,585,104 | ||||||
21,473 | Forest Laboratories, Inc.* | 1,289,024 | ||||||
15,056 | Hospira, Inc.* | 621,512 | ||||||
255,846 | Johnson & Johnson Co. | 23,432,935 | ||||||
264,959 | Merck & Co., Inc. | 13,261,198 | ||||||
34,706 | Mylan, Inc.* | 1,506,240 | ||||||
12,089 | Perrigo Co. plc | 1,855,178 | ||||||
587,699 | Pfizer, Inc. | 18,001,220 | ||||||
45,340 | Zoetis, Inc. | 1,482,165 | ||||||
|
| |||||||
87,229,810 | ||||||||
|
| |||||||
| Professional Services (0.2%): | |||||||
3,460 | Dun & Bradstreet Corp. | 424,715 | ||||||
11,024 | Equifax, Inc. | 761,648 | ||||||
22,899 | Nielsen Holdings NV | 1,050,835 | ||||||
12,623 | Robert Half International, Inc. | 530,040 | ||||||
|
| |||||||
2,767,238 | ||||||||
|
| |||||||
| Real Estate Investment Trusts (REITs) (1.8%): | |||||||
35,786 | American Tower Corp. | 2,856,440 | ||||||
13,263 | Apartment Investment & Management Co., Class A | 343,644 | ||||||
11,031 | AvalonBay Communities, Inc. | 1,304,195 | ||||||
13,852 | Boston Properties, Inc. | 1,390,325 | ||||||
30,394 | Equity Residential Property Trust | 1,576,537 | ||||||
48,749 | General Growth Properties, Inc. | 978,392 | ||||||
41,369 | HCP, Inc. | 1,502,522 | ||||||
26,137 | Health Care REIT, Inc. | 1,400,159 | ||||||
68,463 | Host Hotels & Resorts, Inc. | 1,330,921 | ||||||
37,236 | Kimco Realty Corp. | 735,411 | ||||||
12,774 | Macerich Co. (The) | 752,261 | ||||||
15,995 | Plum Creek Timber Co., Inc. | 743,927 | ||||||
45,224 | ProLogis, Inc. | 1,671,027 | ||||||
13,106 | Public Storage, Inc. | 1,972,715 | ||||||
28,140 | Simon Property Group, Inc. | 4,281,783 | ||||||
26,655 | Ventas, Inc. | 1,526,798 | ||||||
15,774 | Vornado Realty Trust | 1,400,573 | ||||||
52,844 | Weyerhaeuser Co. | 1,668,285 | ||||||
|
| |||||||
27,435,915 | ||||||||
|
| |||||||
| Real Estate Management & Development (0.0%): | |||||||
25,205 | CBRE Group, Inc.* | 662,892 | ||||||
|
|
Continued
8
AZL S&P 500 Index Fund
Schedule of Portfolio Investments
December 31, 2013
Shares | Fair Value | |||||||
| Common Stocks, continued | |||||||
| Road & Rail (0.9%): | |||||||
91,919 | CSX Corp. | $ | 2,644,510 | |||||
10,018 | Kansas City Southern Industries, Inc. | 1,240,529 | ||||||
28,012 | Norfolk Southern Corp. | 2,600,354 | ||||||
4,757 | Ryder System, Inc. | 350,971 | ||||||
41,764 | Union Pacific Corp. | 7,016,352 | ||||||
|
| |||||||
13,852,716 | ||||||||
|
| |||||||
| Semiconductors & Semiconductor Equipment (1.9%): |
| ||||||
29,041 | Altera Corp. | 944,704 | ||||||
28,242 | Analog Devices, Inc. | 1,438,365 | ||||||
109,336 | Applied Materials, Inc. | 1,934,154 | ||||||
48,931 | Broadcom Corp., Class A | 1,450,804 | ||||||
6,364 | First Solar, Inc.* | 347,729 | ||||||
450,767 | Intel Corp. | 11,701,912 | ||||||
15,064 | KLA-Tencor Corp. | 971,025 | ||||||
14,726 | Lam Research Corp.* | 801,831 | ||||||
21,197 | Linear Technology Corp. | 965,523 | ||||||
49,414 | LSI Corp. | 544,542 | ||||||
17,934 | Microchip Technology, Inc.^ | 802,547 | ||||||
95,288 | Micron Technology, Inc.* | 2,073,467 | ||||||
52,589 | NVIDIA Corp. | 842,476 | ||||||
99,254 | Texas Instruments, Inc. | 4,358,243 | ||||||
24,282 | Xilinx, Inc. | 1,115,029 | ||||||
|
| |||||||
30,292,351 | ||||||||
|
| |||||||
| Software (3.3%): | |||||||
42,156 | Adobe Systems, Inc.* | 2,524,301 | ||||||
20,412 | Autodesk, Inc.* | 1,027,336 | ||||||
29,463 | CA, Inc. | 991,430 | ||||||
16,902 | Citrix Systems, Inc.* | 1,069,052 | ||||||
27,871 | Electronic Arts, Inc.* | 639,361 | ||||||
25,830 | Intuit, Inc. | 1,971,346 | ||||||
688,859 | Microsoft Corp. | 25,783,993 | ||||||
318,216 | Oracle Corp. | 12,174,944 | ||||||
17,208 | Red Hat, Inc.* | 964,336 | ||||||
50,265 | Salesforce.com, Inc.* | 2,774,125 | ||||||
63,116 | Symantec Corp. | 1,488,275 | ||||||
|
| |||||||
51,408,499 | ||||||||
|
| |||||||
| Specialty Retail (2.1%): | |||||||
5,844 | AutoNation, Inc.* | 290,388 | ||||||
3,086 | AutoZone, Inc.* | 1,474,923 | ||||||
19,473 | Bed Bath & Beyond, Inc.* | 1,563,682 | ||||||
24,735 | Best Buy Co., Inc. | 986,432 | ||||||
20,253 | CarMax, Inc.* | 952,296 | ||||||
10,627 | GameStop Corp., Class A | 523,486 | ||||||
24,021 | Gap, Inc. (The) | 938,741 | ||||||
127,697 | Home Depot, Inc. (The) | 10,514,572 | ||||||
22,137 | L Brands, Inc. | 1,369,173 | ||||||
94,835 | Lowe’s Cos., Inc. | 4,699,074 | ||||||
9,732 | O’Reilly Automotive, Inc.* | 1,252,606 | ||||||
9,444 | PetSmart, Inc. | 687,051 | ||||||
19,649 | Ross Stores, Inc. | 1,472,300 | ||||||
60,041 | Staples, Inc. | 954,051 | ||||||
10,002 | Tiffany & Co. | 927,986 |
Shares | Fair Value | |||||||
| Common Stocks, continued |
| ||||||
| Specialty Retail, continued | |||||||
64,491 | TJX Cos., Inc. (The) | $ | 4,110,011 | |||||
9,914 | Urban Outfitters, Inc.* | 367,809 | ||||||
|
| |||||||
33,084,581 | ||||||||
|
| |||||||
| Textiles, Apparel & Luxury Goods (0.8%): |
| ||||||
25,432 | Coach, Inc. | 1,427,498 | ||||||
4,455 | Fossil Group, Inc.* | 534,333 | ||||||
16,230 | Michael Kors Holdings, Ltd.* | 1,317,714 | ||||||
67,758 | Nike, Inc., Class B | 5,328,489 | ||||||
7,414 | PVH Corp. | 1,008,452 | ||||||
5,407 | Ralph Lauren Corp. | 954,714 | ||||||
31,972 | V.F. Corp. | 1,993,134 | ||||||
|
| |||||||
12,564,334 | ||||||||
|
| |||||||
| Thrifts & Mortgage Finance (0.1%): |
| ||||||
43,210 | Hudson City Bancorp, Inc. | 407,470 | ||||||
28,818 | People’s United Financial, Inc. | 435,728 | ||||||
|
| |||||||
843,198 | ||||||||
|
| |||||||
| Tobacco (1.5%): |
| ||||||
181,360 | Altria Group, Inc. | 6,962,410 | ||||||
33,403 | Lorillard, Inc. | 1,692,864 | ||||||
145,283 | Philip Morris International, Inc. | 12,658,508 | ||||||
28,425 | Reynolds American, Inc. | 1,420,966 | ||||||
|
| |||||||
22,734,748 | ||||||||
|
| |||||||
| Trading Companies & Distributors (0.2%): | |||||||
24,756 | Fastenal Co. | 1,176,158 | ||||||
5,602 | W.W. Grainger, Inc. | 1,430,862 | ||||||
|
| |||||||
2,607,020 | ||||||||
|
| |||||||
| Wireless Telecommunication Services (0.1%): |
| ||||||
30,264 | Crown Castle International Corp.* | 2,222,286 | ||||||
|
| |||||||
| Total Common Stocks (Cost $954,028,476) | 1,495,739,733 | ||||||
|
| |||||||
Contracts, Shares, Notional Amount or Principal Amount | Fair Value | |||||||
| Securities Held as Collateral for Securities on Loan (0.3%): |
| ||||||
$ | 4,028,027 | Allianz Variable Insurance Products Securities Lending Collateral Trust (a) | 4,028,027 | |||||
|
| |||||||
| Total Securities Held as Collateral for Securities on Loan | 4,028,027 | ||||||
|
| |||||||
| Unaffiliated Investment Company (4.4%): | |||||||
69,534,413 | Dreyfus Treasury Prime Cash Management Fund, Institutional Shares, 0.00% (b) | 69,534,413 | ||||||
|
| |||||||
| Total Unaffiliated Investment Company (Cost $69,534,413) | 69,534,413 | ||||||
|
| |||||||
| Total Investment Securities | 1,569,302,173 | ||||||
| Net other assets (liabilities) — (0.1)% | (2,279,721 | ) | |||||
|
| |||||||
| Net Assets — 100.0% | $ | 1,567,022,452 | |||||
|
|
Continued
9
AZL S&P 500 Index Fund
Schedule of Portfolio Investments
December 31, 2013
Percentages indicated are based on net assets as of December 31, 2013.
ADR—American Depositary Receipt
* | Non-income producing security. |
^ | This security or a partial position of this security was on loan as of December 31, 2013. The total value of securities on loan as of December 31, 2013, was $3,892,457. |
+ | Affiliated Securities |
(a) | Purchased with cash collateral held from securities lending. The value of the collateral could include collateral held for securities that were sold on or before December 31, 2013. |
(b) | The rate represents the effective yield at December 31, 2013. |
(c) | See Federal Tax Information listed in the Notes to the Financial Statements. |
Futures Contracts
Description | Type | Expiration Date | Number of Contracts | Notional Value | Unrealized Appreciation/ (Depreciation) | |||||||||||||||
S&P 500 Index E-Mini March Futures | Long | 3/21/14 | 774 | $ | 71,250,570 | $ | 1,751,610 |
See accompanying notes to the financial statements.
10
AZL S&P 500 Index Fund
Statement of Assets and Liabilities
December 31, 2013
Assets: | |||||
Investment securities, at cost | $ | 1,027,590,916 | |||
|
| ||||
Investment securities, at value* | $ | 1,569,302,173 | |||
Cash | 5,033 | ||||
Interest and dividends receivable | 2,016,954 | ||||
Receivable for capital shares issued | 1,203,322 | ||||
Reclaims receivable | 729 | ||||
Receivable for variation margin on futures contracts | 243,583 | ||||
|
| ||||
Total Assets | 1,572,771,794 | ||||
|
| ||||
Liabilities: | |||||
Payable for capital shares redeemed | 902,878 | ||||
Payable for collateral received on loaned securities | 4,028,027 | ||||
Manager fees payable | 225,730 | ||||
Administration fees payable | 51,296 | ||||
Distribution fees payable | 320,510 | ||||
Custodian fees payable | 13,545 | ||||
Administrative and compliance services fees payable | 6,098 | ||||
Trustee fees payable | 46 | ||||
Other accrued liabilities | 201,212 | ||||
|
| ||||
Total Liabilities | 5,749,342 | ||||
|
| ||||
Net Assets | $ | 1,567,022,452 | |||
|
| ||||
Net Assets Consist of: | |||||
Capital | $ | 1,091,288,590 | |||
Accumulated net investment income/(loss) | 20,133,607 | ||||
Accumulated net realized gains/(losses) from investment transactions | (87,862,612 | ) | |||
Net unrealized appreciation/(depreciation) on investments | 543,462,867 | ||||
|
| ||||
Net Assets | $ | 1,567,022,452 | |||
|
| ||||
Class 1 | |||||
Net Assets | $ | 19,333,837 | |||
Shares of beneficial interest (unlimited number of shares authorized, no par value) | 1,491,833 | ||||
Net Asset Value (offering and redemption price per share) | $ | 12.96 | |||
|
| ||||
Class 2 | |||||
Net Assets | $ | 1,547,688,615 | |||
Shares of beneficial interest (unlimited number of shares authorized, no par value) | 120,152,542 | ||||
Net Asset Value (offering and redemption price per share) | $ | 12.88 | |||
|
|
* | Includes securities on loan of $3,892,457. |
For the Year Ended December 31, 2013
Investment Income: | |||||
Dividends | $ | 26,539,084 | |||
Income from securities lending | 50,355 | ||||
Foreign withholding tax | (3,912 | ) | |||
|
| ||||
Total Investment Income | 26,585,527 | ||||
|
| ||||
Expenses: | |||||
Manager fees | 2,198,562 | ||||
Administration fees | 392,633 | ||||
Distribution fees — Class 2 | 3,190,464 | ||||
Custodian fees | 47,650 | ||||
Administrative and compliance services fees | 25,093 | ||||
Trustee fees | 63,996 | ||||
Professional fees | 68,216 | ||||
Shareholder reports | 49,399 | ||||
Recoupment of prior expenses reimbursed by the manager | 19,565 | ||||
Other expenses | 296,607 | ||||
|
| ||||
Total expenses | 6,352,185 | ||||
|
| ||||
Net Investment Income/(Loss) | 20,233,342 | ||||
|
| ||||
Realized and Unrealized Gains/(Losses) on Investments: | |||||
Net realized gains/(losses) on securities transactions | 6,876,371 | ||||
Net realized gains/(losses) on futures contracts | 9,939,410 | ||||
Change in net unrealized appreciation/depreciation on investments | 315,124,535 | ||||
|
| ||||
Net Realized/Unrealized Gains/(Losses) on Investments | 331,940,316 | ||||
|
| ||||
Change in Net Assets Resulting From Operations | $ | 352,173,658 | |||
|
|
See accompanying notes to the financial statements.
11
Statements of Changes in Net Assets
AZL S&P 500 Index Fund | ||||||||||
For the Year Ended December 31, 2013 | For the Year Ended December 31, 2012 | |||||||||
Change in Net Assets: | ||||||||||
Operations: | ||||||||||
Net investment income/(loss) | $ | 20,233,342 | $ | 16,296,225 | ||||||
Net realized gains/(losses) on investment transactions | 16,815,781 | 4,618,768 | ||||||||
Change in unrealized appreciation/depreciation on investments | 315,124,535 | 102,810,844 | ||||||||
|
|
|
| |||||||
Change in net assets resulting from operations | 352,173,658 | 123,725,837 | ||||||||
|
|
|
| |||||||
Dividends to Shareholders: | ||||||||||
From net investment income: | ||||||||||
Class 1 | (231,746 | ) | (187,650 | ) | ||||||
Class 2 | (15,948,931 | ) | (10,467,318 | ) | ||||||
|
|
|
| |||||||
Change in net assets resulting from dividends to shareholders | (16,180,677 | ) | (10,654,968 | ) | ||||||
|
|
|
| |||||||
Capital Transactions: | ||||||||||
Class 1 | ||||||||||
Proceeds from shares issued | 2,374,133 | 1,630,983 | ||||||||
Proceeds from dividends reinvested | 231,746 | 187,650 | ||||||||
Value of shares redeemed | (2,576,769 | ) | (2,366,566 | ) | ||||||
|
|
|
| |||||||
Total Class 1 | 29,110 | (547,933 | ) | |||||||
|
|
|
| |||||||
Class 2 | ||||||||||
Proceeds from shares issued | 267,637,519 | 217,127,383 | ||||||||
Proceeds from dividends reinvested | 15,948,931 | 10,467,318 | ||||||||
Value of shares redeemed | (87,266,590 | ) | (51,817,713 | ) | ||||||
|
|
|
| |||||||
Total Class 2 | 196,319,860 | 175,776,988 | ||||||||
|
|
|
| |||||||
Change in net assets resulting from capital transactions | 196,348,970 | 175,229,055 | ||||||||
|
|
|
| |||||||
Change in net assets | 532,341,951 | 288,299,924 | ||||||||
Net Assets: | ||||||||||
Beginning of period | 1,034,680,501 | 746,380,577 | ||||||||
|
|
|
| |||||||
End of period | $ | 1,567,022,452 | $ | 1,034,680,501 | ||||||
|
|
|
| |||||||
Accumulated net investment income/(loss) | $ | 20,133,607 | $ | 16,363,497 | ||||||
|
|
|
| |||||||
Share Transactions: | ||||||||||
Class 1 | ||||||||||
Shares issued | 208,259 | 168,979 | ||||||||
Dividends reinvested | 19,740 | 18,878 | ||||||||
Shares redeemed | (226,450 | ) | (246,733 | ) | ||||||
|
|
|
| |||||||
Total Class 1 Shares | 1,549 | (58,876 | ) | |||||||
|
|
|
| |||||||
Class 2 | ||||||||||
Shares issued | 23,358,224 | 22,883,498 | ||||||||
Dividends reinvested | 1,365,490 | 1,058,374 | ||||||||
Shares redeemed | (7,610,457 | ) | (5,447,314 | ) | ||||||
|
|
|
| |||||||
Total Class 2 Shares | 17,113,257 | 18,494,558 | ||||||||
|
|
|
| |||||||
Change in shares | 17,114,806 | 18,435,682 | ||||||||
|
|
|
|
See accompanying notes to the financial statements.
12
AZL S&P 500 Index Fund
(Selected data for a share of beneficial interest outstanding throughout the periods indicated)
Year Ended December 31, | |||||||||||||||||||||||||
2013 | 2012 | 2011 | 2010 | 2009 | |||||||||||||||||||||
Class 1 | |||||||||||||||||||||||||
Net Asset Value, Beginning of Period | $ | 9.95 | $ | 8.71 | $ | 8.68 | $ | 7.71 | $ | 6.16 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Investment Activities: | |||||||||||||||||||||||||
Net Investment Income/(Loss) | 0.21 | (a) | 0.19 | (a) | 0.16 | (a) | 0.14 | (a) | 0.13 | (a) | |||||||||||||||
Net Realized and Unrealized Gains/(Losses) on Investments | 2.96 | 1.17 | — | (b) | 0.98 | 1.45 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Total from Investment Activities | 3.17 | 1.36 | 0.16 | 1.12 | 1.58 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Dividends to Shareholders From: | |||||||||||||||||||||||||
Net Investment Income | (0.16 | ) | (0.12 | ) | (0.13 | ) | (0.13 | ) | (0.03 | ) | |||||||||||||||
Net Realized Gains | — | — | — | (0.02 | ) | — | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Total Dividends | (0.16 | ) | (0.12 | ) | (0.13 | ) | (0.15 | ) | (0.03 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Net Asset Value, End of Period | $ | 12.96 | $ | 9.95 | $ | 8.71 | $ | 8.68 | $ | 7.71 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Total Return(c) | 32.02 | % | 15.66 | % | 1.88 | % | 14.75 | % | 25.69 | % | |||||||||||||||
Ratios to Average Net Assets/Supplemental Data: | |||||||||||||||||||||||||
Net Assets, End of Period (000’s) | $ | 19,334 | $ | 14,828 | $ | 13,488 | $ | 15,506 | $ | 14,462 | |||||||||||||||
Net Investment Income/(Loss) | 1.81 | % | 2.00 | % | 1.79 | % | 1.79 | % | 2.06 | % | |||||||||||||||
Expenses Before Reductions(d) | 0.24 | % | 0.26 | % | 0.27 | % | 0.29 | % | 0.30 | % | |||||||||||||||
Expenses Net of Reductions | 0.24 | % | 0.26 | % | 0.26 | % | 0.24 | % | 0.24 | % | |||||||||||||||
Portfolio Turnover Rate(e) | 4 | % | 3 | % | 2 | % | 14 | % | 16 | %(f) | |||||||||||||||
Class 2 | |||||||||||||||||||||||||
Net Asset Value, Beginning of Period | $ | 9.90 | $ | 8.67 | $ | 8.65 | $ | 7.68 | $ | 6.15 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Investment Activities: | |||||||||||||||||||||||||
Net Investment Income/(Loss) | 0.18 | (a) | 0.17 | (a) | 0.14 | (a) | 0.12 | (a) | 0.12 | (a) | |||||||||||||||
Net Realized and Unrealized Gains/(Losses) on Investments | 2.94 | 1.17 | (0.01 | ) | 0.98 | 1.44 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Total from Investment Activities | 3.12 | 1.34 | 0.13 | 1.10 | 1.56 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Dividends to Shareholders From: | |||||||||||||||||||||||||
Net Investment Income | (0.14 | ) | (0.11 | ) | (0.11 | ) | (0.11 | ) | (0.03 | ) | |||||||||||||||
Net Realized Gains | — | — | — | (0.02 | ) | — | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Total Dividends | (0.14 | ) | (0.11 | ) | (0.11 | ) | (0.13 | ) | (0.03 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Net Asset Value, End of Period | $ | 12.88 | $ | 9.90 | $ | 8.67 | $ | 8.65 | $ | 7.68 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Total Return(c) | 31.66 | % | 15.42 | % | 1.55 | % | 14.57 | % | 25.36 | % | |||||||||||||||
Ratios to Average Net Assets/Supplemental Data: | |||||||||||||||||||||||||
Net Assets, End of Period (000’s) | $ | 1,547,689 | $ | 1,019,853 | $ | 732,892 | $ | 594,350 | $ | 707,448 | |||||||||||||||
Net Investment Income/(Loss) | 1.56 | % | 1.77 | % | 1.56 | % | 1.51 | % | 1.78 | % | |||||||||||||||
Expenses Before Reductions(d) | 0.49 | % | 0.51 | % | 0.52 | % | 0.54 | % | 0.54 | % | |||||||||||||||
Expenses Net of Reductions | 0.49 | % | 0.51 | % | 0.51 | % | 0.49 | % | 0.49 | % | |||||||||||||||
Portfolio Turnover Rate(e) | 4 | % | 3 | % | 2 | % | 14 | % | 16 | %(f) |
(a) | Average shares method used in calculation. |
(b) | Represents less than $0.005. |
(c) | The returns include reinvested dividends and fund level expenses, but exclude insurance contract charges. If these charges were included, the returns would have been lower. |
(d) | Excludes fee reductions. If such fee reductions had not occurred, the ratios would have been as indicated. |
(e) | Portfolio turnover rate is calculated on the basis of the Fund as a whole without distinguishing between classes of shares issued. |
(f) | Cost of purchases and proceeds from sales of portfolio securities incurred to realign the Fund’s portfolio after a fund merger are excluded from the portfolio turnover rate. If such amounts had not been excluded, the portfolio turnover rate would have been 37%. |
See accompanying notes to the financial statements.
13
AZL S&P 500 Index Fund
Notes to the Financial Statements
December 31, 2013
1. Organization
The Allianz Variable Insurance Products Trust (the “Trust”) was organized as a Delaware statutory trust on July 13, 1999. The Trust is a diversified open-end management investment company registered under the Investment Company Act of 1940. The Trust consists of 29 separate investment portfolios (collectively, the “Funds”), of which one is included in this report, the AZL S&P 500 Index Fund (the “Fund”), and 28 are presented in separate reports.
The Trust is authorized to issue an unlimited number of shares of the Fund without par value. Shares of the Fund are available through the variable annuity contracts and variable life insurance policies offered through the separate accounts of participating insurance companies.
Under the Trust’s organizational documents, its officers and trustees are indemnified against certain liabilities arising out of the performance of their duties to the Fund. In addition, in the normal course of business, the Fund may enter into contracts with its vendors and others that provide for general indemnifications. The Fund’s maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Fund. However, based on experience, the Fund expects the risk of loss to be remote.
2. Significant Accounting Policies
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. The policies conform with U.S. generally accepted accounting principles (“U.S. GAAP”). The preparation of financial statements requires management to make certain 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 increases and decreases in net assets from operations during the reporting period. Actual results could differ from those estimates.
Security Valuation
The Fund records its investments at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between willing market participants at the measurement date. The valuation techniques used to determine fair value are further described in Note 4 below.
Investment Transactions and Investment Income
Investment transactions are recorded not later than on the business day following trade date. However, for financial reporting purposes, investment transactions are accounted for on trade date. Net realized gains and losses on investments sold and on foreign currency transactions are recorded on the basis of identified cost. Interest income is recorded on the accrual basis and includes, where applicable, the amortization of premiums or accretion of discounts. Dividend income is recorded on the ex-dividend date except in the case of foreign securities, in which case dividends are recorded as soon as such information becomes available. In addition, income and realized and unrealized gains and losses are allocated to each class of shares based on its relative net assets on a daily basis.
Real Estate Investment Trusts
The Fund may own shares of real estate investment trusts (“REITs”) which report information on the source of their distributions annually. Certain distributions received from REITs during the year, which are known to be a return of capital, are recorded as a reduction to the cost of the individual REIT.
Foreign Currency Translation
The accounting records of the Fund are maintained in U.S. dollars. Foreign currency amounts are translated into U.S. dollars at the current rate of exchange to determine the fair value of investments, assets and liabilities. Purchases and sales of securities, and income and expenses are translated at the prevailing rate of exchange on the respective dates of such transactions. The Fund does not isolate that portion of the results of operations resulting from changes in foreign exchange rates on investments from fluctuations arising from changes in market prices of securities held. Such fluctuations are included in the net realized and unrealized gain or loss on investments and foreign currencies. Income received by the Fund from sources within foreign countries may be subject to withholding and other income or similar taxes imposed by such countries. The Funds accrue such taxes, as applicable, based on their current interpretation of tax rules in the foreign markets in which they invest.
Dividends to Shareholders
Dividends to shareholders are recorded on the ex-dividend date. The Fund distributes its dividends from net investment income and net realized capital gains, if any, on an annual basis. The amount of dividends from net investment income and from net realized gains is determined in accordance with federal income tax regulations, which may differ from U.S. GAAP. These “book/tax” differences are either temporary or permanent in nature. To the extent these differences are permanent in nature (e.g., return of capital, net operating loss, reclassification of certain market discounts, gain/loss, paydowns, and distributions), such amounts are reclassified within the composition of net assets based on their federal tax-basis treatment; temporary differences (e.g., wash sales and post October losses) do not require reclassification. Dividends to shareholders that exceed net investment income and net realized gains for tax purposes are reported as distributions of capital.
Expense Allocation
Expenses directly attributable to the Fund are charged directly to the Fund, while expenses attributable to more than one Fund are allocated among the respective Funds based upon relative net assets or some other reasonable method. Each class of shares bears its pro-rata portion of expenses attributable to its series, except that each class separately bears expenses related specifically to that class, such as distribution fees. Expenses which are attributable to more than one Trust are allocated across the Allianz Variable Insurance Products and Allianz Variable Insurance Products Fund of Funds Trusts based upon relative net assets or another reasonable basis. Allianz Investment Management LLC (the “Manager”), serves as the investment manager for the Trust and the Allianz Variable Insurance Products Fund of Funds Trust.
14
AZL S&P 500 Index Fund
Notes to the Financial Statements
December 31, 2013
Securities Lending
To generate additional income, the Fund may lend up to 33 1/3% of its assets pursuant to agreements requiring that the loan be continuously secured by any combination of cash, U.S. government or U.S. government agency securities, equal initially to at least 102% of the fair value plus accrued interest on the securities loaned (105% for foreign securities). The borrower of securities is at all times required to post collateral to the Fund in an amount equal to 100% of the fair value of the securities loaned based on the previous day’s fair value of the securities loaned, marked-to-market daily. Any collateral shortfalls are adjusted the next business day. The Fund bears all of the gains and losses on such investments. The Fund receives payments from borrowers equivalent to the dividends and interest that would have been earned on securities lent while simultaneously seeking to earn income on the investment of cash collateral received. In extremely low interest rate environments, the broker rebate fee may exceed the interest earned or the cash collateral which would result in a loss to the Fund. The investment of cash collateral deposited by the borrower is subject to inherent market risks such as interest rate risk, credit risk, liquidity risk, and other risks that are present in the market, and as such, the value of these investments may not be sufficient, when liquidated, to repay the borrower when the loaned security is returned. There may be risks of delay in recovery of the securities or even loss of rights in the collateral should the borrower of the securities fail financially. However, loans will be made only to borrowers, such as broker-dealers, banks or institutional borrowers of securities, deemed by the Manager to be of good standing and credit worthy and when in its judgment, the consideration which can be earned currently from such securities loans justifies the attendant risks. Loans are subject to termination by the Trust or the borrower at any time, and are, therefore, not considered to be illiquid investments. Securities on loan at December 31, 2013 are presented on the Fund’s Schedule of Portfolio Investments. The average outstanding amount of securities on loan was $6 million for the year ended December 31, 2013.
Cash collateral received in connection with securities lending is invested in the Allianz Variable Insurance Products Securities Lending Collateral Trust (the “Securities Lending Collateral Trust”) managed by The Dreyfus Corporation, an affiliate of the Custodian and Securities Lending Agent. The Securities Lending Collateral Trust invests in short-term investments that have a remaining maturity of 397 days or less as calculated in accordance with Rule 2a-7 under the 1940 Act. The Fund paid securities lending fees of $4,960 during the year ended December 31, 2013. These fees have been netted against “Income from securities lending” on the Statement of Operations.
Commission Recapture
Certain Funds of the Trust participate in a commission recapture program. The Fund will utilize the recaptured commissions to pay for, in whole or part, certain expenses of the Fund, excluding investment advisory fees. Any amounts received by the Fund, if applicable, are disclosed as “Expenses paid indirectly” on the Statement of Operations.
Effective January 6, 2014, the Manager, on behalf of the Trust, requested the Fund cease participation in the program until further notice.
Derivative Instruments
All open derivative positions at period end are reflected on the Fund’s Schedule of Portfolio Investments. The following is a description of the derivative instruments utilized by the Fund, including the primary underlying risk exposures related to each instrument type.
Futures Contracts
During the year ended December 31, 2013, the Fund used futures contracts to provide equity exposure on the Fund’s cash balances. Futures contracts are valued based upon their quoted daily settlement prices. Upon entering into a futures contract, the Fund is required to segregate liquid assets in accordance with the initial margin requirements of the broker or exchange. Futures contracts are marked to market daily and a payable or receivable for the change in value (“variation margin”) is recorded by the Fund. Gains or losses are recognized but not considered realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, elements of market risk (generally equity price risk related to stock futures, interest rate risk related to bond futures, and foreign currency risk related to currency futures) and exposure to loss in excess of the variation margin disclosed in the Statement of Assets and Liabilities. The primary risks associated with the use of futures contracts are the imperfect correlation between the change in fair value of the underlying securities and the prices of futures contracts, the possibility of an illiquid market, and the inability of the counterparty to meet the terms of the contract. The notional amount of futures contracts outstanding was $71.3 million as of December 31, 2013. The monthly average notional amount for these contracts was $50.7 million for the year ended December 31, 2013. Realized gains and losses are reported as “Net realized gains/(losses) on futures contracts” on the Statement of Operations.
Summary of Derivative Instruments
The following is a summary of the fair values of derivative instruments on the Fund’s Statement of Assets and Liabilities, categorized by risk exposure, as of December 31, 2013:
Asset Derivatives | Liability Derivatives | |||||||||||
Primary Risk Exposure | Statement of Assets and Liabilities Location | Total Fair Value* | Statement of Assets and Liabilities Location | Total Fair Value* | ||||||||
Equity Contracts | Receivable for variation margin on futures contracts | $ | 1,751,610 | Payable for variation margin on futures contracts | $ | — |
* | For futures contracts, the amounts represent the cumulative appreciation/(depreciation) of these futures contracts as reported in the Schedule of Portfolio Investments. Only current day’s variation margin is reported within the Statement of Assets and Liabilities as Variation Margin on Futures Contracts. |
The following is a summary of the effect of derivative instruments on the Statement of Operations, categorized by risk exposure, for the year ended December 31, 2013:
Primary Risk Exposure | Location of Gains/(Losses) on Derivatives Recognized in Income | Realized Gains/(Losses) on Derivatives Recognized in Income | Change in Unrealized Appreciation/ Depreciation on Derivatives Recognized in Income | |||||||
Equity Contracts | Net realized gains/(losses) on futures contracts/ change in unrealized appreciation/ depreciation on investments | $ | 9,939,410 | $ | 1,828,932 |
15
AZL S&P 500 Index Fund
Notes to the Financial Statements
December 31, 2013
3. Related Party Transactions
The Manager provides investment advisory and management services for the Fund. The Manager has retained an independent money management organization (the “Subadviser”), to make investment decisions on behalf of the Fund. Pursuant to a subadvisory agreement with BlackRock Investment Management, LLC (“BlackRock Investment”), BlackRock Investment provides investment advisory services as the Subadviser for the Fund subject to the general supervision of the Trustees and the Manager. The Manager is entitled to a fee, computed daily and paid monthly, based on the average daily net assets of the Fund. Expenses incurred by the Fund for investment advisory and management services are reflected on the Statement of Operations as “Manager fees.” For its services, the Subadviser is entitled to a fee payable by the Manager. The Manager has contractually agreed to waive fees and reimburse the Fund to limit the annual expenses, excluding interest expense (e.g., cash overdraft fees), taxes, brokerage commissions, other expenditures that are capitalized in accordance with U.S. GAAP and other extraordinary expenses not incurred in the ordinary course of the Fund’s business, based on the daily net assets of the Fund, through April 30, 2015.
For the year ended December 31, 2013, the annual rate due to the Manager and the annual expense limit were as follows:
Annual Rate | Annual Expense Limit | |||||||||
AZL S&P 500 Index Fund Class 1 | 0.17 | % | 0.46 | % | ||||||
AZL S&P 500 Index Fund Class 2 | 0.17 | % | 0.71 | % |
Any amounts contractually waived or reimbursed by the Manager in a particular fiscal year will be subject to repayment by the Fund to the Manager to the extent that from time to time through the next three fiscal years the repayment will not cause the Fund’s expenses to exceed the lesser of the stated limit at the time of the waiver or the current stated limit. Any amounts recouped by the Manager during the year are reflected on the Statement of Operations as “Recoupment of prior expenses reimbursed by the Manager.”
At December 31, 2013, the contractual reimbursements that are subject to repayment by the Fund in subsequent years were as follows:
Expires 12/31/2014 | Total | |||||||||
AZL S&P 500 Index Fund | $ | 53,390 | | $ | 53,390 |
In addition, the Manager may voluntarily waive or reimburse additional fees in order to maintain more competitive expense ratios. Any voluntary waivers or reimbursements are not subject to repayment in subsequent years. Information on the total amount waived/reimbursed by the Manager or repaid to the Manager by the Fund during the year can be found on the Statement of Operations. During the year ended December 31, 2013, there were no voluntary waivers.
Pursuant to separate agreements between the Funds and the Manager, the Manager provides a Chief Compliance Officer (“CCO”) and certain compliance oversight and regulatory filing services to the Trust. Under these agreements the Manager is entitled to an amount equal to a portion of the compensation and certain other expenses related to the individuals performing the CCO and compliance oversight services, as well as $75 per hour for time incurred in connection with the preparation and filing of certain documents with the Securities and Exchange Commission. The fees are paid to the Manager on a quarterly basis. The total expenses incurred by the Fund for these services are reflected on the Statement of Operations as “Administrative and compliance services fees.”
Citi Fund Services Ohio, Inc. (“Citi” or the “Administrator”), a wholly owned subsidiary of Citigroup, Inc., with which an officer of the Trust is affiliated, serves as the Trust’s administrator, transfer agent, and fund accountant, and assists the Trust in all aspects of its administration and operation. The Administrator is entitled to a Trust-wide asset-based fee, which is based on the following schedule: 0.05% of daily average net assets on the first $4 billion, 0.04% of daily average net assets on the next $2 billion, 0.02% of daily average net assets on the next $2 billion and 0.01% of daily average net assets over $8 billion. The overall Trust-wide fees are accrued daily and paid monthly and are subject to a minimum annual fee. In addition, the Administrator is entitled to annual account fees related to the transfer agency system, an annual fee for each additional class of shares of any Fund, certain annual fees in supporting fair value services, and a Trust-wide annual fee for providing infrastructure and support in implementing the written policies and procedures comprising the Fund’s compliance program. Fees payable to the Administrator are subject to certain reductions associated with services provided to new funds. The Administrator is also reimbursed for certain expenses incurred. The total expenses incurred by the Fund for these services are reflected on the Statement of Operations as “Administration fees.”
Allianz Life Financial Services, LLC (“ALFS”), an affiliate of the Manager, serves as distributor of the Fund and receives 12b-1 fees directly from the Fund, plus a Trust-wide annual fee of $42,500, paid by the Manager from its profits and not by the Trust, for recordkeeping and reporting services.
The Trust has adopted a distribution and service plan in conformance with Rule 12b-1 of the 1940 Act. Pursuant to this plan, the Fund is authorized to pay certain fees for the sale and distribution of its shares and services provided to its shareholders at an annual rate not to exceed 0.25% of the Fund’s average daily net assets. These fees are reflected on the Statement of Operations as “Distribution fees.”
In addition, certain legal fees and expenses are paid to a law firm, Dorsey & Whitney LLP, of which the Secretary of the Fund is a partner. During the year ended December 31, 2013, $15,834 was paid from the Fund relating to these fees and expenses.
Certain Officers and Trustees of the Trust are affiliated with the Manager or the Administrator. Such Officers (except for the Trust’s CCO as noted above) and Trustees receive no compensation from the Trust for serving in their respective roles. For their service to the Trust and to the Allianz Variable Insurance Products Fund of Funds Trust, each non-interested Trustee receives a $139,000 annual Board retainer. In addition, the Trustees are reimbursed for certain expenses associated with attending Board meetings. Compensation to the Trustees is allocated between the Trust and the Allianz Variable Insurance Products Fund of Funds Trust in proportion to the assets under management of each trust. During the year ended December 31, 2013, actual Trustee compensation was $973,000 in total for both trusts.
At a meeting of the Board of Trustees on December 4, 2013, the Trustees approved a fee increase to the Officers and Trustees who are paid a fee for their services to the Trust and to the Allianz Variable Insurance Products Fund of Funds Trust. Effective January 1, 2014, each non-interested Trustee will receive a $163,000 annual retainer.
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AZL S&P 500 Index Fund
Notes to the Financial Statements
December 31, 2013
4. Investment Valuation Summary
The valuation techniques employed by the Fund, as described below, maximize the use of observable inputs and minimize the use of unobservable inputs in determining fair value. The inputs used for valuing the Fund’s investments are summarized in the three broad levels listed below:
— | Level 1 — quoted prices in active markets for identical assets |
— | Level 2 — other significant observable inputs (including quoted prices for similar securities, interest rates, prepayments speeds, credit risk, etc.) |
— | Level 3 — significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of investments) |
Changes in valuation techniques may result in transfers in or out of an assigned level within the disclosure hierarchy. The Fund determines transfers between fair value hierarchy levels at the reporting period end. The inputs or methodology used for valuing investments is not necessarily an indication of the risk associated with investing in those investments.
Security prices are generally provided by an independent third party pricing service approved by the Trust’s Board of Trustees (“Trustees”) as of the close of the New York Stock Exchange (“NYSE”) (generally 4:00 pm Eastern Time). Equity securities are valued at the last quoted sale price or, if there is no sale, the last quoted bid price is used for long securities and the last quoted ask price is used for securities sold short. Securities listed on NASDAQ Stock Market, Inc. (“NASDAQ”) are valued at the official closing price as reported by NASDAQ. In each of these situations, valuations are typically categorized as a Level 1 in the fair value hierarchy. Investments in open-end investment companies are valued at their respective net asset value as reported by such companies and are typically categorized as Level 1 in the fair value hierarchy.
Debt and other fixed income securities are generally valued at an evaluated bid price provided by an independent pricing source approved by the Trustees. To value debt securities, pricing services may use various pricing techniques which take into account appropriate factors such as market activity, yield, quality, coupon rate, maturity, type of issue, trading characteristics, call features, credit ratings and other data, as well as broker quotes. Short term securities of sufficient credit quality with sixty days or less remaining until maturity may be valued at amortized cost, which approximates fair value. In each of these situations, valuations are typically categorized as Level 2 in the fair value hierarchy.
Futures contracts are valued at the last sales price as of the close of the primary exchange and are typically categorized as Level 1 in the fair value hierarchy.
Other assets and securities for which market quotations are not readily available, or are deemed unreliable are valued at fair value as determined in good faith by the Trustees or persons acting on the behalf of the Trustees. Fair value pricing may be used for significant events such as securities whose trading has been suspended, whose price has become stale or for which there is no currently available price at the close of the NYSE. Depending on the source and relative significance of valuation inputs, these instruments may be classified as Level 2 or Level 3 in the fair value hierarchy. The Fund utilizes a pricing service to assist in determining the fair value of securities when certain significant events occur that may affect the value of foreign securities.
In accordance with procedures adopted by the Trustees, fair value pricing may be used if events materially affecting the value of foreign securities occur between the time when the exchange on which they are traded closes and the time when the Fund’s net asset value is calculated. Management identifies possible fluctuation in international securities by monitoring the increase or decrease in the value of a designated benchmark index. In the event of an increase or decrease greater than predetermined levels, the Fund may use a systematic valuation model provided by an independent third party to fair value its international equity securities which are then typically categorized as Level 2 in the fair value hierarchy.
For the year ended December 31, 2013, there were no Level 3 investments for which significant unobservable inputs were used to determine fair value.
The following is a summary of the valuation inputs used as of December 31, 2013 in valuing the Fund’s investments based upon the three levels defined above:
Investment Securities: | Level 1 | Level 2 | Total | ||||||||||||
Common Stocks+ | $ | 1,495,739,733 | $ | — | $ | 1,495,739,733 | |||||||||
Securities Held as Collateral for Securities on Loan | — | 4,028,027 | 4,028,027 | ||||||||||||
Unaffiliated Investment Company | 69,534,413 | — | 69,534,413 | ||||||||||||
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Total Investment Securities | 1,565,274,146 | 4,028,027 | 1,569,302,173 | ||||||||||||
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Other Financial Instruments* | |||||||||||||||
Futures Contracts | 1,751,610 | — | 1,751,610 | ||||||||||||
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Total Investments | $ | 1,567,025,756 | $ | 4,028,027 | $ | 1,571,053,783 | |||||||||
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+ | For detailed industry descriptions, see the accompanying Schedule of Portfolio Investments. |
* | Other Financial Instruments would include any derivative instruments, such as futures contracts. These investments are generally recorded in the financial statements at the unrealized gain or loss on the investment. |
5. Security Purchases and Sales
For the year ended December 31, 2013, cost of purchases and proceeds from sales of securities (excluding securities maturing less than one year from acquisition) were as follows:
Purchases | Sales | |||||||||
AZL S&P 500 Index Fund | $ | 234,248,252 | $ | 44,144,870 |
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AZL S&P 500 Index Fund
Notes to the Financial Statements
December 31, 2013
6. Investment Risks
Derivatives Risk: The Fund may invest in derivatives as a principal strategy. A derivative is a financial contract whose value depends on, or is derived from, the value of an underlying asset, reference rate, or risk. Use of derivative instruments involves risks different from, or possibly greater than, the risks associated with investing directly in securities and other traditional investments. Derivatives are subject to a number of other risks, such as liquidity risk, interest rate risk, market risk, credit risk, and selection risk. Derivatives also involve the risk of mispricing or improper valuation and the risk that changes in the value may not correlate perfectly with the underlying asset, rate, or index. Using derivatives may result in losses, possibly in excess of the principal amount invested. Also, suitable derivative transactions may not be available in all circumstances. The counterparty to a derivatives contract could default. As required by applicable law, a Fund that invests in derivatives segregates cash or liquid securities, or both, to the extent that its obligations under the instrument are not covered through ownership of the underlying security, financial instrument, or currency.
7. Federal Tax Information
It is the Fund’s policy to continue to comply with the requirements of the Internal Revenue Code under Subchapter M, applicable to regulated investment companies, and to distribute all of its taxable income, including any net realized gains on investments, to its shareholders. Therefore, no provision is made for federal income taxes.
Management of the Fund has reviewed tax positions taken in tax years that remain subject to examination by all major tax jurisdictions, including federal (i.e., the last four tax year ends and the interim tax period since then, as applicable). Management believes that there is no tax liability resulting from unrecognized tax benefits related to uncertain tax positions taken.
Cost for federal income tax purposes at December 31, 2013 is $1,040,856,867. The gross unrealized appreciation/ (depreciation) on a tax basis is as follows:
Unrealized appreciation | $ | 549,117,698 | |||
Unrealized depreciation | (20,672,392 | ) | |||
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Net unrealized appreciation/(depreciation) | $ | 528,445,306 | |||
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As of the end of its tax year ended December 31, 2013, the Fund has capital loss carry forwards (“CLCFs”) as summarized in the tables below. CLCFs subject to expiration are applied as short-term capital loss regardless of whether the originating capital loss was short-term or long-term. CLCFs that are not subject to expiration must be utilized before those that are subject to expiration. The Board does not intend to authorize a distribution of any realized gain for the Fund until any applicable CLCF has been offset or expires.
CLCFs subject to expiration:
Expires 12/31/2016 | |||||
AZL S&P 500 Index Fund | $ | 72,823,092 |
During the year ended December 31, 2013, the Fund utilized $19,707,155 in CLCFs to offset capital gains.
The tax character of dividends paid to shareholders during the year ended December 31, 2013 were as follows:
Ordinary Income | Net Long-Term Capital Gains | Total Distributions(a) | |||||||||||||
AZL S&P 500 Index Fund | $ | 16,180,677 | $ | — | $ | 16,180,677 |
(a) | Total distributions paid may differ from the Statements of Changes in Net Assets because dividends are recognized when actually paid for tax purposes. |
The tax character of dividends paid to shareholders during the year ended December 31, 2012 was as follows:
Ordinary Income | Net Long-Term Capital Gains | Total Distributions(a) | |||||||||||||
AZL S&P 500 Index Fund | $ | 10,654,968 | $ | — | $ | 10,654,968 |
(a) | Total distributions paid may differ from the Statements of Changes in Net Assets because dividends are recognized when actually paid for tax purposes. |
As of December 31, 2013, the components of accumulated earnings on a tax basis were as follows:
Undistributed Ordinary Income | Undistributed Long-Term Capital Gains | Accumulated Capital and Other Losses | Unrealized Appreciation/ | Total Earnings/ | |||||||||||||||||||||
AZL S&P 500 Index Fund | $ | 20,111,648 | $ | — | $ | (72,823,092 | ) | $ | 528,445,306 | $ | 475,733,862 |
(a) | The difference between book-basis and tax-basis unrealized appreciation/(depreciation) is attributable primarily to tax deferral of losses on wash sales. |
8. Subsequent Events
Management has evaluated events and transactions subsequent to period end through the date the financial statements were issued, for purposes of recognition or disclosure in these financial statements and there are no subsequent events to report.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Shareholders and Board of Trustees of
Allianz Variable Insurance Products Trust:
We have audited the accompanying statement of assets and liabilities of AZL S&P 500 Index Fund (the “Fund”) of the Allianz Variable Insurance Products Trust, including the schedule of portfolio investments, as of December 31, 2013, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the years in the two-year period then ended, and the financial highlights for each of the years in the five-year period then ended. These financial statements and financial highlights are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of December 31, 2013, by correspondence with the custodian and brokers. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of the Fund as of December 31, 2013, the results of its operations for the year then ended, the changes in its net assets for each of the years in the two-year period then ended, and the financial highlights for each of the years in the five-year period then ended, in conformity with U.S. generally accepted accounting principles.
/s/ KPMG LLP
Columbus, Ohio
February 25, 2014
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Other Federal Income Tax Information (Unaudited)
For the year ended December 31, 2013, 100.00% of the total ordinary income dividends paid by the Fund qualify for the corporate dividends received deduction available to corporate shareholders.
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A description of the policies and procedures that the Fund uses to determine how to vote proxies relating to portfolio securities is available, without charge, upon request, by visiting the Securities and Exchange Commission’s (“Commission”) website at www.sec.gov, or by calling 800-624-0197.
Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30th is available (i) without charge, upon request, by calling 800-624-0197; (ii) on the Allianz Variable Insurance Products Trust’s website at https://www.allianzlife.com; and (iii) on the Commission’s website at http://www.sec.gov.
The Fund files complete Schedules of Portfolio Holdings with the Commission for the first and third quarters of each fiscal year on Form N-Q. Schedules of Portfolio Holdings for the Fund in this report are available without charge on the Commission’s website at http://www.sec.gov, or may be reviewed and copied at the Commission’s Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 800-SEC-0330.
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Approval of Investment Advisory and Subadvisory Agreements (Unaudited)
The Allianz Variable Insurance Products Trust (the “Trust”) is a manager-of-managers fund. That means that the Trust’s Manager (“Allianz Investment Management LLC”) is responsible for monitoring the various Subadvisers that have day-to-day responsibility for the decisions made for each of the Trust’s investment portfolios. The Trust’s Manager is responsible for determining, in the first instance, which investment advisers to consider recommending for selection as a Subadviser.
In reviewing the services provided by the Manager and the terms of the investment management agreement, the Board receives and reviews information related to the Manager’s experience and expertise in the variable insurance marketplace. Currently, the Funds are offered only through variable annuities and variable life insurance policies, and not in the retail fund market. In addition, the Board receives information regarding the Manager’s expertise with regard to portfolio diversification and asset allocation requirements within variable insurance products issued by Allianz Life Insurance Company of North America and its subsidiary, Allianz Life Insurance Company of New York. Currently, the Funds are offered only through Allianz Life and Allianz of New York variable products.
The Trust’s Manager has adopted policies and procedures to assist it in the process of analyzing each potential Subadviser with expertise in particular asset classes for purposes of making the recommendation that a specific investment adviser be selected. The Trust’s Board reviews and considers the information provided by the Manager in deciding which investment advisers to select. After an investment adviser becomes a Subadviser, a similarly rigorous process is instituted by the Manager to monitor the investment performance and other responsibilities of the Subadviser. The Manager reports to the Trust’s Board on its analysis at the regular meetings of the Board, which are held at least quarterly. Where warranted, the Manager will add or remove a particular Subadviser from a “watch” list that it maintains. Watch list criteria include, for example: (a) Fund performance over various time periods; (b) Fund risk issues, such as changes in key personnel involved with Fund management, changes in investment philosophy or process, or “capacity” concerns; and (c) organizational risk issues, such as regulatory, compliance or legal concerns, or changes in the ownership of the Subadviser. The Manager may place a Fund on the watch list for other reasons, and if so, will explain its rationale to the Trustees. Funds which are on the watch list are subject to special scrutiny of the Manager and the Board of Trustees. Funds may be removed from such watch list, if for example, performance improves or regulatory matters are satisfactorily resolved. However, in some situations where Funds which have been on the watch list, the Manager has recommended the retention of a new Subadviser, and the Board of Trustees has subsequently approved new Subadvisory Agreements with such Subadvisers.
In assessing the Manager’s and Subadvisers’ (collectively, the “Advisory Organizations”), performance of their obligations, the Board considers whether there has occurred a circumstance or event that would constitute a reason for it to not renew an advisory contract. In this regard, the Board is mindful of the potential disruption of a Fund’s operations and various risks, uncertainties and other effects that could occur as a result of a decision to terminate or not renew a contract.
As required by the Investment Company Act of 1940 (“1940 Act”), the Trust’s Board has reviewed and approved the Trust’s Investment Management Agreement with the Manager (the “Advisory Agreement”) and portfolio management agreements (the “Subadvisory Agreements”) with the Subadvisers. The Board’s decision to approve these contracts reflects the exercise of its business judgment on whether to approve new arrangements and continue the existing arrangements. During its review of these contracts, the Board considers many factors, among the most material of which are: the Fund’s investment objectives and long term performance; the Advisory Organizations’ management philosophy, personnel, and processes, including their compliance history and the adequacy of their compliance processes; the preferences and expectations of Fund shareholders (and underlying contract owners) and their relative sophistication; the continuing state of competition in the mutual fund industry; and comparable fees in the mutual fund industry.
The Board also considers the compensation and benefits received by the Advisory Organizations. This includes fees received for services provided to the Fund by affiliated persons of the Advisory Organizations and research services received by the Advisory Organizations from brokers that execute Fund trades, as well as advisory fees. The Board considered the fact that: (1) the Manager and the Trust are parties to an Administrative Service Agreement, a Compliance Services Agreement, and a Chief Compliance Officer Agreement, under which the Manager is compensated by the Trust for performing certain administrative and compliance services including providing an employee of the Manager or one of its affiliates to act as the Trust’s Chief Compliance Officer; and (2) Allianz Life Financial Services, LLC, an affiliated person of the Manager, is a registered securities broker-dealer and receives (along with its affiliated persons) payments made by the Trust pursuant to Rule 12b-1.
The Board is aware that various courts have interpreted provisions of the 1940 Act and have indicated in their decisions that the following factors may be relevant to an adviser’s compensation: the nature and quality of the services provided by the adviser, including the performance of the fund; the adviser’s cost of providing the services; the extent to which the adviser may realize “economies of scale” as the fund grows larger; any indirect benefits that may accrue to the adviser and its affiliates as a result of the adviser’s relationship with the fund; performance and expenses of comparable funds; and the extent to which the independent Board members are fully informed about all facts bearing on the adviser’s service and fee. The Trust’s Board is aware of these factors and takes them into account in its review of the Trust’s advisory contracts.
The Board considered and weighed these circumstances in light of its experience in governing the Trust and working with the Advisory Organizations on matters relating to the Funds, and is assisted in its deliberations by the advice of legal counsel to the Independent Trustees. In this regard, the Board requests and receives a significant amount of information about the Funds and the Advisory Organizations. Some of this information is provided at each regular meeting of the Board; additional information is provided in connection with the particular meeting or meetings at which the Board’s formal review of an advisory contract occurs. In between regularly scheduled meetings, the Board may receive information on particular matters as the need arises. Thus, the Board’s evaluation of an advisory contract is informed by reports covering such matters as: an Advisory Organization’s investment philosophy, personnel, and processes; the Fund’s short- and long-term performance (in absolute terms as well as in relationship to its benchmark(s), certain competitor or “peer group” funds and similar funds managed by the particular Subadviser), and comments on the reasons for performance; the Fund’s expenses (including the advisory fee itself and the overall expense structure of the Fund, both in absolute terms and relative to similar and/or competing funds, with due regard for contractual or voluntary expense limitations); the use and allocation of brokerage commissions derived from trading the Fund’s portfolio securities; the nature and extent of the advisory and other services provided to the Fund by the Advisory Organizations and their affiliates; compliance and audit reports concerning the Funds and the companies that service them; and relevant developments in the mutual fund industry and how the Funds and/or Advisory Organizations are responding to them.
The Board also receives financial information about Advisory Organizations, including reports on the compensation and benefits the Advisory Organizations derive from their relationships with the Funds. These reports cover not only the fees under the advisory contracts, but also fees, if any, received for providing other services to the Funds. The reports also discuss any indirect or “fall out” benefits an Advisory Organization may derive from its relationship with the Funds.
The Advisory and Subadvisory Agreements (collectively, the “Agreements”) were most recently considered at Board of Trustees meetings held in the fall of 2013. Information relevant to the approval of such Agreements was considered at a telephonic Board of Trustees meeting on October 16, 2013, and at an “in person” Board of Trustees meeting held October 22, 2013. The Agreements were approved at the Board meeting of October 22, 2013. At such meeting the Board also approved an Expense Limitation Agreement between the Manager and the Trust for the period ending April 30, 2015. In connection with such meetings, the Trustees requested and evaluated extensive materials from the Manager, including performance and expense information for other investment companies with similar investment objectives derived from data compiled by an independent third party provider and other sources believed to be reliable by the Manager. Prior to voting, the Trustees reviewed the proposed approval/continuance of the Agreements with management and with experienced counsel who are independent of the Manager and received a memorandum from such counsel discussing the legal
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standards for their consideration of the proposed approvals/continuances. The independent (“disinterested”) Trustees also discussed the proposed approvals/continuances in a private session with such counsel at which no representatives of the Manager were present. In reaching their determinations relating to the approval and/or continuance of the Agreements, in respect of each Fund, the Trustees considered all factors they believed relevant. The Board based its decision to approve the Agreements on the totality of the circumstances and relevant factors, and with a view to past and future long-term considerations. Not all of the factors and considerations discussed above and below are necessarily relevant to every Fund, and the Board did not assign relative weights to factors discussed herein or deem any one or group of them to be controlling in and of themselves.
An SEC Rule requires that shareholder reports include a discussion of certain factors relating to the selection of investment advisers and the approval of advisory fees. The “factors” enumerated by the SEC are set forth below in italics, as well as the Board’s conclusions regarding such factors:
(1) The nature, extent and quality of services provided by the Manager and Subadvisers. The Trustees noted that the Manager, subject to the control of the Board of Trustees, administers each Fund’s business and other affairs. Under the Advisory Agreement, the Manager holds the sole and exclusive responsibility to provide, or arrange for other to provide, the management of the Funds’ assets and the placement of orders for the purchase and sale of the securities of the Funds. As the Trust is a manager of managers fund, the Manager is authorized, under the Advisory Agreement, to retain one or more Subadvisers for each Fund to handle day-to-day management of the Funds’ investment portfolios; the Manager is responsible for determining, in the first instance, which investment advisers to recommend to the Board of Trustees for selection as a Subadviser. The Trustees were aware that, notwithstanding the retention of the Subadvisers to handle day-to-day portfolio management, the Manager remains responsible for substantial other matters, including continuously monitoring compliance by each Subadviser with the investment policies and restrictions of the respective Funds, with such other limitations or directions of the Board of Trustees, and with all legal requirements under federal or state law or regulation. The Manager also is responsible primarily to provide statistical information and other data to the Trustees regarding the Funds’ portfolio investments and to make available to the Funds’ administrator such information as is necessary for the conduct of its duties.
The Trustees also noted that the Manager provides the Trust and each Fund with such administrative and other services (exclusive of, and in addition to, any such services provided by any others retained by the Trust on behalf of the Funds) and executive and other personnel as are necessary for the operation of the Trust and the Funds. Except for the Trust’s Chief Compliance Officer, the Manager pays all of the compensation of Trustees and officers of the Trust who are employees of the Manager or its affiliates.
The Trustees considered the scope and quality of services provided by the Manager and the Subadvisers and noted that the scope of such services provided had expanded as a result of recent regulatory and other developments. The Trustees noted that, for example, the Manager and Subadvisers are responsible for maintaining and monitoring their own compliance programs, and these compliance programs are continuously refined and enhanced in light of new regulatory requirements. The Trustees considered the capabilities and resources which the Manager has dedicated to performing services on behalf of the Trust and its Funds. The quality of administrative and other services, including the Manager’s role in coordinating the activities of the Trust’s other service providers, also were considered. The Trustees concluded that, overall, they were satisfied with the nature, extent and quality of services provided (and expected to be provided) to the Trust and to each of the Funds under the Agreements.
(2) The investment performance of the Funds, the Manager and the Subadvisers. In connection with every in-person quarterly Board of Trustees meeting, Trustees receive extensive information on the performance results of each of the Funds. This includes, for example, performance information on all of the Funds for the previous quarter, and previous one, three and five-year periods, and since inception. (For Funds which have been in existence for less than five years, Trustees may receive performance information on comparable funds managed by the particular Subadviser for periods prior to the creation of a particular Fund.) Such performance information includes information on absolute total return, performance versus Subadvisers’ comparable fund(s), performance versus the appropriate benchmark(s), and performance versus peer groups. For example, in connection with the Board of Trustees meetings held September 10-11, 2013, the Manager reported that for the three year period ended June 30, 2013, 12 Funds were in the top 40%, eight were in the middle 20% and eight were in the bottom 40%, and for the one year period ended June 30, 2013, 8 Funds were in the top 40%, seven were in the middle 20%, and 14 were in the bottom 40%. The Manager also reported that for the five year period ended June 30, 2013, 10 Funds were in the top 40%, four were in the middle 20%, and six were in the bottom 40%. At the Board of Trustees meeting held October 22, 2013, the Trustees determined that the overall investment performance of the Funds was acceptable.
(3) The costs of services to be provided and profits to be realized by the Manager and the Subadvisers and their affiliates from their relationship with the Funds. The Manager has supplied information to the Board of Trustees pertaining to the level of investment advisory fees to which the Funds are subject. The Manager has agreed to temporarily “cap” Fund expenses at certain levels, and information is provided to Trustees setting forth “contractual” advisory fees and “actual” fees after taking expense caps into account. Based upon the information provided, the “actual” advisory fees payable by the Funds overall are generally comparable to the average level of fees paid by Fund peer groups. For the 30 Funds reviewed by the Board of Trustees in the fall of 2013, 27 Funds paid “actual” advisory fees in a percentage amount within the 65th percentile or lower for each Fund’s applicable category. The Trustees recognized that it is difficult to make comparisons of advisory fees because there are variations in the services that are included in the fees paid by other funds. The Board has concluded that the advisory fees to be paid to the Manager by the Funds are not unreasonable.
The Manager has also supplied information to the Board of Trustees pertaining to total Fund expenses (which includes advisory fees, the 25 basis point 12b-1 fee paid by the Funds, and other Fund expenses). As noted above, the Manager has agreed to “cap” Fund expenses at certain levels. Based upon the information provided, the overall total expense ratio ranking in 2013 for the 30 Funds was as follows: (1) 28 of the Funds had total expense rankings below the 65th percentile (with 20 Funds at or below the 50th percentile); (2) the AZL Russell 1000 Value Fund had a total expense ranking in the 66th percentile; the Manager reported that there is only a limited peer group for such Fund; and (3) the AZL Morgan Stanley Global Real Estate Fund had a total expense ranking in the 72nd percentile; it was reported by the Manager that there is only a limited peer group for such Fund, such Fund’s expense ratio has declined, and such Fund’s expense ratio is comparable to funds of similar size.
The Manager has committed to providing the Funds with a high quality of service and working to reduce Fund expenses over time, particularly as the Funds grow larger. The Trustees concluded therefore that the expense ratios of the Funds were not unreasonable.
The Manager provided information concerning the profitability of the Manager’s investment advisory activities for the period from 2011 through June 30, 2013. The Trustees recognized that it is difficult to make comparisons of profitability from investment company advisory agreements because comparative information is not generally publicly available and is affected by numerous factors, including the structure of the particular adviser, the types of funds it manages, its business mix, numerous assumptions regarding allocation of expenses and the adviser’s capital structure and cost of capital. In considering profitability information, the Trustees considered the possible effect of certain fall-out benefits to the Manager and its affiliates. The Trustees focused on profitability of the Manager’s relationships with the Funds before taxes and distribution expenses. The Trustees recognized that the Manager should, in the abstract, be entitled to earn a reasonable level of profits for the services it provides to each Fund and, based on their review, concluded that they were satisfied that the Manager’s level of profitability from its relationship with the Funds was not excessive.
The Manager, on behalf of the Board of Trustees, endeavored to obtain information on the profitability of each Subadviser in connection with its relationship with the Fund or Funds which it subadvises. The Manager was unable to obtain meaningful profitability information from some of the unaffiliated Subadvisers. The Manager assured the Board of Trustees that the Agreements with the Subadvisers which are not affiliated with it were negotiated on an “arm’s length” basis, so that arguably, such profitability information should be less relevant. The Trustees were also provided with certain information on the profitability for the Subadviser which is affiliated with the Manager. Trustees recognized the difficulty of allocating costs to multiple advisory accounts and products of a large advisory organization. Based upon the information provided, the Trustees determined that there was no evidence that the level of such profitability attributable to subadvising the Funds was excessive.
23
(4) and (5) The extent to which economies of scale would be realized as the Funds grow, and whether fee levels reflect these economies of scale. The Trustees noted that most of the advisory fee schedules for the Funds do not contain breakpoints that reduce the fee rate on assets above specified levels, although certain Subadvisory Agreements have such “breakpoints.” The Trustees recognized that breakpoints may be an appropriate way for the Manager to share its economies of scale, if any, with Funds that have substantial assets. However, they also recognized that there may not be a direct relationship between any economies of scale realized by Funds and those realized by the Manager as assets increase. The Trustees do not believe there is a uniform methodology for establishing breakpoints that give effect to Fund-specific service provided by the Manager. The Trustees noted that in the fund industry as a whole, as well as among funds similar to the Funds, there is no uniformity or pattern in the fees and asset levels at which breakpoints (if any) apply. Depending on the age, size, and other characteristics of a particular fund and its manager’s cost structure, different conclusions can be drawn as to whether there are economies of scale to be realized at any particular level of assets, notwithstanding the intuitive conclusion that such economies exist, or will be realized at some level of total assets. Moreover, because different managers have different cost structures and service models, it is difficult to draw meaningful conclusions from the breakpoints that may have been adopted by other funds. The Trustees also noted that the advisory agreements for many funds do not have breakpoints at all, or if breakpoints exist, they may be at asset levels significantly greater than those of the individual Funds. The Trustees also noted that the total assets in all of the Funds as of June 30, 2013 were approximately $12.85 billion, and that no single non-money market Fund had assets in excess of $616 million.
The Trustees noted that the Manager has agreed to temporarily “cap” Fund expenses at certain levels, which has the effect of reducing expenses as would the implementation of advisory fee breakpoints. The Manager has committed to continue to consider the continuation of fee “caps” and/or advisory fee breakpoints as the Funds grow larger. The Board receives quarterly reports on the level of Fund assets. It expects to consider whether or not to approve the Agreements at a meeting to be held prior to December 31, 2014, and will at that time, or prior thereto, consider: (a) the extent to which economies of scale can be realized, and (b) whether the advisory fee should be modified to reflect such economies of scale, if any.
Having taken these factors into account, the Trustees concluded that the absence of breakpoints in certain of the Funds’ advisory fee rate schedules was acceptable under each Fund’s circumstances.
24
Information about the Board of Trustees and Officers (Unaudited)
The Trust is managed by the Trustees in accordance with the laws of the state of Delaware governing business trusts. There are currently eight Trustees, two of whom are “interested persons” of the Trust within the meaning of that term under the 1940 Act. The Trustees and Officers of the Trust, their addresses, ages, their positions held with the Trust, their terms of office with the Trust and length of time served, their principal occupation(s) during the past five years, the number of portfolios in the Trust they oversee, and their other directorships held are as follows:
Non-Interested Trustees(1)
Name, Address, and Age | Positions Held with VIP Trust | Term of Office(2)/Length | Principal Occupation(s) During Past 5 Years | Number of FOF Trust | Other Directorships Held Outside the AZL Fund Complex | |||||
Peter R. Burnim, Age 66 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/07 | Chairman, Argus Investment Strategies Fund Ltd., Feburary 2013 to present; Managing Director, iQ Venture Advisors, LLC. 2005 to 2012; Chairman, Northstar Group Holdings Ltd. Bermuda, 2011 to present; Expert Witness, Massachusetts Department of Revenue, 2011 to 2012; Executive Vice President, Northstar Companies, 2002 to 2005; Senior Officer, Citibank and Citicorp for over 25 years | 41 | Argus Group Holdings; Northstar Group Holdings, NRIL, Sterling Centrecorp Inc.; Highland Financial Holdings; and Bank of Bermuda NY | |||||
Peggy L. Ettestad, Age 56 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/07 | Managing Director, Red Canoe Management Consulting LLC, 2008 to present; Senior Managing Director, Residential Capital LLC, 2003 to 2008; Chief Operations Officer, Transamerica Reinsurance 2002 to 2003 | 41 | Luther College | |||||
Roger Gelfenbien, Age 70 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 10/99 | Retired; Partner of Accenture 1983 to 1999 | 41 | Virtus Funds (8 Funds) | |||||
Claire R. Leonardi, Age 58 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/04 | Chief Executive Officer, Connecticut Innovations, Inc., 2012 to present; General Partner, Fairview Capital, L.P., 1994 to 2012 | 41 | The Natural History Museum of the Adirondacks | |||||
Dickson W. Lewis, Age 65 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/04 | Retired; Consultant to Lifetouch National School Studios; Vice President/General Manager, Yearbooks & Canada-Lifetouch National School Studios, 2006 to 2013; Vice President/General Manager of Jostens, Inc., 2002 to 2006; Senior Vice President of Fortis Group, 1997 to 2002 | 41 | None | |||||
Peter W. McClean, Age 69 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/04 | Retired; President and CEO of Measurisk, LLC, 2001 to 2003; Chief Risk Management Officer at Bank of Bermuda Ltd., 1996 to 2001 | 41 | PNMAC Opportunity Fund; Northeast Bank; and FHI | |||||
Arthur C. Reeds III, Age 69 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 10/99 | Retired; Senior Investment Officer, Hartford Foundation for Public Giving, 2000 to 2003; Chairman, Chief Executive and President of Conning Corp., 1999 to 2000; Investment Consultant, 1997 to 1999 | 41 | Connecticut Water Service, Inc. |
Interested Trustees(3)
Name, Address, and Age | Positions Held with VIP Trust | Term of Office(2)/ Length | Principal Occupation(s) During Past 5 Years | Number of FOF Trust | Other Directorships Held Outside the AZL Fund Complex | |||||
Robert DeChellis, Age 46 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 3/08 | President and CEO, Allianz Life Financial Services, LLC, 2007 to present | 41 | None | |||||
Brian Muench, Age 43 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 6/11 | President, Allianz Investment Management LLC, November 2010 to present; Vice President, Allianz Life, April 2011 to present; Vice President, Advisory Management, Allianz Investment Management LLC from December 2005 to November 2010 | 41 | None |
25
Officers
Name, Address, and Age | Positions Held with VIP and VIP FOF Trust | Term of Office(2)/Length of Time Served | Principal Occupation(s) During Past 5 Years | |||
Brian Muench, Age 43 5701 Golden Hills Drive Minneapolis, MN 55416 | President | Since 11/10 | President, Allianz Investment Management LLC from November 2010, to present; Vice President, Allianz Life from April 2011 to present; Vice President, Allianz Investment Management LLC from December 2005 to November 2010. | |||
Michael Radmer, Age 68 Dorsey & Whitney LLP, Suite 1500 50 South Sixth Street Minneapolis, MN 55402-1498 | Secretary | Since 2/02 | Partner, Dorsey and Whitney LLP since 1976. | |||
Ty Edwards, Age 47 Citi Fund Services Ohio, Inc. 3435 Stelzer Road Columbus, OH 43219 | Treasurer, Principal Accounting Officer and Principal Financial Officer | Since 4/10 | Senior Vice President, Financial Administration, Citi Fund Services Ohio, Inc., December 2009 to present; Director, Product Management, Columbia Management, April 2007 to April 2009; Deputy Treasurer, Columbia Funds and Director, Fund Administration, Columbia Management, January 2006 to April 2007. | |||
Christopher R. Pheiffer, Age 45(4) 5701 Golden Hills Drive Minneapolis, MN 55416 | Chief Compliance Officer(5) and Anti-Money Laundering Compliance Officer | Since 2/14 (interim) | Deputy Chief Compliance Officer of the Trusts, 2007-2014 |
(1) | Member of the Audit Committee. |
(2) | Indefinite. |
(3) | Is an “interested person”, as defined by the 1940 Act, due to employment by Allianz. |
(4) | Stephen G. Simon, previously the Chief Compliance Officer of the Trusts, resigned all of his positions with Allianz effective February 21, 2014. Mr. Pheiffer, previously the Deputy Chief Compliance Officer of the Trusts, has been named Chief Compliance Officer of the Trusts on an interim basis while a search for a permanent replacement is conducted. |
(5) | The Manager and the Trust are parties to a Chief Compliance Officer Agreement under which the Manager is compensated by the Trust for providing an employee of the Manager or one of its affiliates to act as the Trust’s Chief Compliance Officer. The Chief Compliance Officer and Anti-Money Laundering Compliance Officer is not considered a corporate officer or executive employee of the Trust. |
26
The Allianz VIP Funds are distributed by Allianz Life Financial Services, LLC. | ||
These Funds are not FDIC Insured. | ANNRPT1213 2/14 |
AZL® Schroder Emerging Markets
Equity Fund
Annual Report
December 31, 2013
Table of Contents
Management Discussion and Analysis
Page 1
Expense Examples and Portfolio Composition
Page 3
Schedule of Portfolio Investments
Page 4
Statement of Assets and Liabilities
Page 7
Statement of Operations
Page 7
Statements of Changes in Net Assets
Page 8
Financial Highlights
Page 9
Notes to the Financial Statements
Page 10
Report of Independent Registered Public Accounting Firm
Page 15
Other Federal Income Tax Information
Page 16
Other Information
Page 17
Approval of Investment Advisory and Subadvisory Agreements
Page 18
Information about the Board of Trustees and Officers
Page 21
This report is submitted for the general information of the shareholder of the Fund. The report is not authorized for distribution to prospective investors in the Fund unless preceded or accompanied by an effective prospectus, which contains details concerning the sales charges and other pertinent information.
AZL® Schroder Emerging Markets Equity Fund Review (unaudited)
Allianz Investment Management LLC serves as the Manager for the AZL® Schroder Emerging Markets Equity Fund and Schroder Investment Management North America Inc. serves as Subadviser to the Fund.
What factors affected the Fund’s performance during the year ended December 31, 2013?
For the year ended December 31, 2013, the AZL® Schroder Emerging Markets Equity Fund (Class 2 Shares) returned -2.10% compared to a -2.27% total return for its benchmark, the MSCI Emerging Markets Index1.
Emerging markets equities struggled during the period, underperforming developed markets equities by a wide margin. The large gap in performance relates to investor expectations in the wake of the financial crisis. Developed markets have done better than expected, due in part to a steady recovery in the U.S. economy. While absolute growth in the emerging markets has been stronger than in the developed economies, it has not met expectations despite low debt levels and strong demographic and consumer trends. Performance varied within emerging markets during the period, however. In May, news that the U.S. Federal Reserve was planning to taper its quantitative easing efforts sparked liquidity concerns in some emerging market countries with large current account deficits, such as Indonesia, Turkey, India, South Africa and Brazil. Countries with large current account surpluses, such as China, Russia, South Korea and Taiwan, fared much better in that environment.
The Fund’s absolute return suffered from the poor performance of emerging markets. Nevertheless the Fund outperformed its benchmark primarily due to a combination of stock selection and country allocations. In general, the Fund’s strategy of choosing non-state-owned enterprises in Russia and China helped boost its relative return. Specifically, positions in two Chinese Internet companies and an Asian insurer contributed positively to the Fund’s performance, as did positions in two Internet companies in Russia. In addition, the Fund benefited from holding no exposure to a benchmark-held potash mining company in Russia that suffered from falling potash prices.*
The overweight allocation to China afforded the Fund additional benefits, because despite the slowing Chinese economy, Chinese stocks performed well due to the country’s current account surplus and positive sentiment
following economic reform announcements. Additionally, we positioned the Fund with no exposure to Chile due to that country’s continuing struggles with weakening commodity prices and expensive valuations. That strategy benefited performance as Chilean stocks performed relatively poorly during the period. Similarly, the Fund benefited from its lack of exposure to Indonesia, as that country was hurt by such factors as a slowdown in Chinese demand for coal—a major Indonesian export—as well as concerns about Fed tapering and a tightening of policy.*
Individual stock selection in South Korea and Brazil detracted from the Fund’s relative performance. Those individual holdings included a South Korean electronics company, which suffered as investors began to question margins on smartphones, and two Brazilian companies that were negatively impacted by rising interest rates. The Fund’s relative performance also suffered from an underweight allocation to Taiwan, which performed well during the period, as it is a perceived beneficiary of improving global growth. Furthermore, an overweight position in Thailand was a detractor due to slowing growth and the political unrest that negatively affected its equity market toward the end of the year.*
Past performance does not guarantee future results.
* | The Fund’s portfolio composition is subject to change. There is no guarantee that any sectors mentioned will continue to perform well or that securities in such sectors will be held by the Fund in the future. The information contained in this commentary is for informational purposes only and should not be construed as a recommendation to purchase or sell securities in the sector mentioned. The Fund’s holdings and weightings are as of December 31, 2013. |
1 | The Morgan Stanley Capital International (“MSCI”) Emerging Markets Index (net of withholding tax) is a free float-adjusted market capitalization index that is designed to measure equity performance of emerging markets. Investors cannot invest directly in an index. |
1 |
AZL® Schroder Emerging Markets Equity Fund Review (unaudited)
Fund Objective
The Fund’s investment objective is to seek capital appreciation. This objective may be changed by the Trustees of the Fund without shareholder approval. The Fund seeks to achieve its objective by investing at least 80% of its net assets, plus any borrowings for investment purposes, in equity securities of companies the Fund’s subadviser believes to be “emerging market” issuers.
Investment Concerns
Equity securities (stocks) are more volatile and carry more risk than other forms of investments, including investments in high-grade fixed income securities. The net asset value per share of this Fund will fluctuate as the value of the securities in the portfolio changes.
International investing may involve risk of capital loss from unfavorable fluctuations in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations.
Emerging market investing may be subject to additional economic, political, liquidity, and currency risks not associated with more developed countries.
For a complete description of these and other risks associated with investing in a mutual Fund, please refer to the Fund’s prospectus.
Growth of $10,000 Investment
The chart above represents a comparison of a hypothetical investment in the Fund versus a similar investment in the Fund’s benchmark, and represents the reinvestment of dividends and capital gains in the Fund.
Average Annual Total Returns as of December 31, 2013
Inception | 1 | 3 | 5 | Since | ||||||||||||||
Date | Year | Year | Year | Inception | ||||||||||||||
AZL® Schroder Emerging Markets Equity Fund (Class 1 Shares) | 5/6/07 | -1.96 | % | -0.41 | % | 13.91 | % | 1.47 | % | |||||||||
AZL® Schroder Emerging Markets Equity Fund (Class 2 Shares) | 5/1/06 | -2.10 | % | -0.66 | % | 13.61 | % | 3.00 | % | |||||||||
MSCI Emerging Markets Index (gross of withholding taxes) | 5/1/06 | -2.27 | % | -1.74 | % | 15.15 | % | 5.02 | % | |||||||||
MSCI Emerging Markets Index (net of withholding taxes) | 5/1/06 | -2.60 | % | -2.06 | % | 14.79 | % | 4.70 | % |
Past performance does not guarantee future results. The performance data quoted represents past performance and current returns may be lower or higher. The investment return and principal value will fluctuate so that an investor’s shares, when redeemed may be worth more or less than the original cost. To obtain performance information current to the most recent month end, please visit www.Allianzlife.com.
Expense Ratio | Gross | |||
AZL® Schroder Emerging Markets Equity Fund (Class 1 Shares) | 1.40 | % | ||
AZL® Schroder Emerging Markets Equity Fund (Class 2 Shares) | 1.65 | % |
Expense Ratios are based on the current Fund prospectus dated April 29, 2013. The Manager voluntarily reduced the management fee to 1.08%. The Manager and the Fund have entered into a written contract limiting operating expenses, excluding certain expenses (such as interest expense), to 1.40% for Class 1 Shares and 1.65% for Class 2 Shares through April 30, 2015. Additional information pertaining to the December 31, 2013 expense ratios can be found in the financial highlights.
The total return of the Fund does not reflect the effect of any insurance charges, the annual maintenance fee or the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. Such charges, fees and tax payments would reduce the performance quoted.
The Fund’s performance is measured against the Morgan Stanley Capital International (“MSCI”) Emerging Markets Index, an unmanaged free float-adjusted market capitalization index that is designed to measure equity performance of emerging markets. The Index noted as “gross of withholding taxes” does not reflect the deduction of fees associated with a mutual fund, such as investment management and fund accounting fees. The Index noted as “net of withholding taxes” reflects the reinvestment of dividends after the deduction of withholding taxes, using (for international indices) a tax rate applicable to non-resident institutional investors who do not benefit from double taxation treaties. The Fund’s performance reflects the deduction of fees for services provided to the Fund. Investors cannot invest directly in an index.
2 |
AZL Schroder Emerging Markets Equity Fund
(Unaudited)
As a shareholder of the AZL Schroder Emerging Markets Equity Fund (the “Fund”), you incur ongoing costs, including management fees, distribution fees, and other Fund expenses. These examples are intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. Please note that the expenses shown in each table do not reflect expenses that apply to the subaccount or the insurance contract. If the expenses that apply to the subaccount of the insurance contract were included, your costs would have been higher.
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the periods presented below.
The Actual Expense table below provides information about actual account values and actual expenses. You may use the information below, 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 table under the heading entitled “Expenses Paid During Period” to estimate the expenses you paid on your account during this period.
Beginning Account Value 7/1/13 | Ending Account Value 12/31/13 | Expenses Paid During Period 7/1/13 - 12/31/13* | Annualized Expense Ratio During Period 7/1/13 - 12/31/13 | |||||||||||||||||
AZL Schroder Emerging Markets Equity Fund, Class 1 | $ | 1,000.00 | $ | 1,096.10 | $ | 6.92 | 1.31 | % | ||||||||||||
AZL Schroder Emerging Markets Equity Fund, Class 2 | $ | 1,000.00 | $ | 1,094.90 | $ | 8.24 | 1.56 | % |
The Hypothetical Expense table below provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.
Beginning Account Value 7/1/13 | Ending Account Value 12/31/13 | Expenses Paid During Period 7/1/13 - 12/31/13* | Annualized Expense Ratio During Period 7/1/13 - 12/31/13 | |||||||||||||||||
AZL Schroder Emerging Markets Equity Fund, Class 1 | $ | 1,000.00 | $ | 1,018.60 | $ | 6.67 | 1.31 | % | ||||||||||||
AZL Schroder Emerging Markets Equity Fund, Class 2 | $ | 1,000.00 | $ | 1,017.34 | $ | 7.93 | 1.56 | % |
* | Expenses are equal to the average account value over the period, multiplied by the Fund’s annualized expense ratio, multiplied by 184/365 (to reflect the one half year period). |
Portfolio Composition
(Unaudited)
Investments | Percent of net assets | ||||
Financials | 31.0 | % | |||
Information Technology | 21.7 | ||||
Energy | 12.3 | ||||
Consumer Discretionary | 9.5 | ||||
Consumer Staples | 7.5 | ||||
Materials | 7.1 | ||||
Telecommunication Services | 5.5 | ||||
Industrials | 2.4 | ||||
Health Care | 2.0 | ||||
Services | 0.5 | ||||
|
| ||||
Total Common Stock and Preferred Stock | 99.5 | ||||
Securities Held as Collateral for Securities on Loan | 1.5 | ||||
Money Market | 0.5 | ||||
|
| ||||
Total Investment Securities | 101.5 | ||||
Net other assets (liabilities) | (1.5 | ) | |||
|
| ||||
Net Assets | 100.0 | % | |||
|
|
3
AZL Schroder Emerging Markets Equity Fund
Schedule of Portfolio Investments
December 31, 2013
Shares | Fair Value | |||||||
| Common Stocks (99.2%): |
| ||||||
| Airlines (0.3%): |
| ||||||
272,985 | Turk Hava Yollari Anonim Ortakligi | $ | 824,266 | |||||
|
| |||||||
| Auto Components (0.7%): |
| ||||||
38,400 | Hankook Tire Co., Ltd.* | 2,213,457 | ||||||
|
| |||||||
| Automobiles (4.7%): |
| ||||||
1,790,000 | Brilliance China Automotive Holdings, Ltd. | 2,924,786 | ||||||
37,859 | Hyundai Motor Co.* | 8,578,401 | ||||||
385,838 | Tata Motors, Ltd. | 2,351,606 | ||||||
|
| |||||||
13,854,793 | ||||||||
|
| |||||||
| Beverages (1.8%): |
| ||||||
476,365 | Ambev SA, ADR | 3,501,283 | ||||||
11,948 | Fomento Economico Mexicano SAB de C.V., ADR | 1,169,351 | ||||||
84,000 | Tsingtao Brewery Co., Ltd., Class H | 713,988 | ||||||
|
| |||||||
5,384,622 | ||||||||
|
| |||||||
| Chemicals (4.3%): |
| ||||||
480,440 | Alfa SAB de C.V., Class A | 1,348,539 | ||||||
688,560 | Formosa Plastic Corp. | 1,861,799 | ||||||
18,340 | LG Chem, Ltd.* | 5,258,010 | ||||||
68,870 | Mexichem SAB de C.V. | 283,789 | ||||||
571,660 | Nan Ya Plastics Corp. | 1,323,354 | ||||||
1,064,200 | PTT Global Chemical pcl | 2,559,199 | ||||||
|
| |||||||
12,634,690 | ||||||||
|
| |||||||
| Commercial Banks (21.8%): |
| ||||||
276,945 | Akbank T.A.S. | 870,101 | ||||||
60,177 | Axis Bank, Ltd. | 1,270,028 | ||||||
73,443 | Banco Bradesco SA, ADR | 920,240 | ||||||
616,000 | Bangkok Bank Public Co., Ltd. | 3,337,829 | ||||||
9,965,832 | China Construction Bank | 7,568,377 | ||||||
4,908,190 | Chinatrust Financial Holding Co., Ltd. | 3,354,134 | ||||||
1,051,785 | CIMB Group Holdings Berhad | 2,451,890 | ||||||
141,126 | Commercial International Bank Egypt SAE | 661,709 | ||||||
86,290 | DGB Financial Group, Inc.* | 1,352,038 | ||||||
367,869 | Grupo Financiero Banorte SA de C.V. | 2,576,056 | ||||||
107,750 | Hana Financial Holdings | 4,487,757 | ||||||
406,455 | HDFC Bank, Ltd. | 4,407,445 | ||||||
5,852,385 | Industrial & Commercial Bank of China | 3,979,245 | ||||||
344,487 | Itau Unibanco Banco Multiplo SA, ADR | 4,674,688 | ||||||
806,300 | Kasikornbank Public Co., Ltd. | 3,829,112 | ||||||
3,349 | Komercni Banka AS | 748,205 | ||||||
219,470 | OTP Bank Nyrt | 4,186,176 | ||||||
237,992 | Powszechna Kasa Oszczednosci Bank Polski SA | 3,119,061 | ||||||
416,200 | Public Bank Berhad | 2,468,933 | ||||||
1,775,873 | Sberbank of Russia | 5,572,517 | ||||||
48,900 | Shinhan Financial Group Co., Ltd.* | 2,222,349 | ||||||
84,003 | Turkiye Halk Bankasi AS | 477,651 | ||||||
|
| |||||||
64,535,541 | ||||||||
|
| |||||||
| Commercial Service (0.3%): |
| ||||||
426,224 | The Moscow Exchange | 818,563 | ||||||
|
| |||||||
| Communications Equipment (0.6%): |
| ||||||
365,500 | AAC Technologies Holdings, Inc. | 1,778,199 | ||||||
|
| |||||||
| Construction & Engineering (0.7%): |
| ||||||
34,943 | Hyundai Engineering & Construction Co., Ltd.* | 2,015,507 | ||||||
|
| |||||||
| Construction Materials (1.0%): |
| ||||||
121,000 | Cemex Sab de CV, ADR* | 1,431,430 |
Shares | Fair Value | |||||||
| Common Stocks, continued |
| ||||||
| Construction Materials, continued |
| ||||||
1,051,427 | Taiwan Cement Corp. | $ | 1,632,867 | |||||
|
| |||||||
3,064,297 | ||||||||
|
| |||||||
| Department Stores (0.3%): |
| ||||||
106,411 | Woolworths Holdings Limited | 762,260 | ||||||
|
| |||||||
| Diversified Banks (0.7%): |
| ||||||
1,534,129 | Mega Financial Holdings Co., Ltd. | 1,292,412 | ||||||
16,675 | Sberbank of Russia, ADR | 210,592 | ||||||
345,542 | Turkiye Vakiflar Bankasi T.A.O., Class D | 617,119 | ||||||
|
| |||||||
2,120,123 | ||||||||
|
| |||||||
| Electronic Equipment, Instruments & Components (1.9%): |
| ||||||
2,148,215 | Hon Hai Precision Industry Co., Ltd. | 5,782,838 | ||||||
|
| |||||||
| Food & Staples Retailing (1.6%): |
| ||||||
64,469 | Jeronimo Martins SGPS SA | 1,261,345 | ||||||
11,065 | Magnit(d) | 3,020,816 | ||||||
318,480 | Robinsons Retail Holdings, Inc.* | 396,216 | ||||||
19,776 | Shoprite Holdings, Ltd. | 312,438 | ||||||
|
| |||||||
4,990,815 | ||||||||
|
| |||||||
| Food Distributors (0.1%): |
| ||||||
274,900 | Alliance Global Group, Inc. | 160,389 | ||||||
|
| |||||||
| Food Products (0.9%): |
| ||||||
28,490 | BRF-Brasil Foods SA | 595,336 | ||||||
90,929 | BRF-Brasil Foods SA, ADR | 1,897,688 | ||||||
41,803 | Gruma S.A.B de C.V., Class B* | 316,506 | ||||||
|
| |||||||
2,809,530 | ||||||||
|
| |||||||
| Health Care Equipment & Supplies (0.7%): |
| ||||||
53,400 | Mindray Medical International, Ltd., ADR^ | 1,941,624 | ||||||
|
| |||||||
| Hotels, Restaurants & Leisure (1.2%): |
| ||||||
578,600 | Genting Berhard | 1,816,473 | ||||||
21,640 | Yum! Brands, Inc. | 1,636,200 | ||||||
|
| |||||||
3,452,673 | ||||||||
|
| |||||||
| Household Products (1.2%): |
| ||||||
7,041 | LG Household & Health Care, Ltd.* | 3,666,901 | ||||||
|
| |||||||
| Industrial Conglomerates (0.5%): |
| ||||||
318,800 | Sime Darby Berhad | 927,816 | ||||||
37,050 | SM Investments Corp. | 595,445 | ||||||
|
| |||||||
1,523,261 | ||||||||
|
| |||||||
| Insurance (5.0%): |
| ||||||
817,800 | AIA Group, Ltd. | 4,122,962 | ||||||
2,598,649 | Cathay Financial Holding Co., Ltd. | 4,209,446 | ||||||
700,000 | China Life Insurance Co., Ltd. | 2,207,661 | ||||||
1,156,000 | China Pacific Insurance Group Co., Ltd., Class H | 4,582,670 | ||||||
|
| |||||||
15,122,739 | ||||||||
|
| |||||||
| Internet Software & Services (5.6%): |
| ||||||
10,253 | Baidu, Inc., ADR* | 1,823,803 | ||||||
3,743 | Baidu, Inc., ADR* | 665,805 | ||||||
4,097 | Mail.ru Group, Ltd., Registered Shares, GDR | 182,903 | ||||||
29,690 | Mail.ru Group, Ltd., GDR | 1,325,454 | ||||||
2,705 | NHN Corp.* | 1,864,437 | ||||||
150,400 | Tencent Holdings, Ltd. | 9,663,532 | ||||||
11,450 | Yandex NV, Class A* | 494,068 | ||||||
23,704 | Yandex NV* | 1,022,827 | ||||||
|
| |||||||
17,042,829 | ||||||||
|
|
Continued
4
AZL Schroder Emerging Markets Equity Fund
Schedule of Portfolio Investments
December 31, 2013
Shares | Fair Value | |||||||
| Common Stocks, continued |
| ||||||
| IT Services (2.1%): |
| ||||||
52,600 | Cielo SA | $ | 1,464,733 | |||||
9,934 | Infosys, Ltd. | 560,454 | ||||||
116,337 | Tata Consultancy Services, Ltd. | 4,093,174 | ||||||
|
| |||||||
6,118,361 | ||||||||
|
| |||||||
| Machinery (1.2%): |
| ||||||
105,578 | Iochpe-Maxion SA | 1,173,483 | ||||||
20,970 | Samsung Heavy Industries Co., Ltd.* | 758,271 | ||||||
373,799 | Weichai Power Co., Ltd., Class H | 1,521,476 | ||||||
|
| |||||||
3,453,230 | ||||||||
|
| |||||||
| Media (2.1%): |
| ||||||
67,610 | Cheil Worldwide, Inc.* | 1,764,176 | ||||||
131,769 | Cyfrowy Polsat SA* | 864,908 | ||||||
34,760 | Naspers, Ltd. | 3,648,392 | ||||||
|
| |||||||
6,277,476 | ||||||||
|
| |||||||
| Metals & Mining (1.5%): |
| ||||||
125,600 | Gerdau SA, ADR | 984,704 | ||||||
402,433 | Grupo Mexico SAB de C.V., Series B | 1,333,475 | ||||||
153,300 | Vale SA, ADR ^ | 2,337,825 | ||||||
6,300 | Vale SA, ADR | 88,263 | ||||||
|
| |||||||
4,744,267 | ||||||||
|
| |||||||
| Multiline Retail (1.2%): |
| ||||||
9,328 | Almacenes Exito SA | 145,070 | ||||||
19,146 | Hyundai Department Store Co., Ltd.* | 2,923,596 | ||||||
26,300 | Lojas Renner SA | 683,218 | ||||||
|
| |||||||
3,751,884 | ||||||||
|
| |||||||
| Oil, Gas & Consumable Fuels (12.3%): |
| ||||||
7,734,400 | China Petroleum & Chemical Corp. (Sinopec), H Shares | 6,361,569 | ||||||
2,860,000 | CNOOC, Ltd. | 5,350,059 | ||||||
115,260 | LUKOIL, ADR | 7,275,211 | ||||||
3,450 | LUKOIL, ADR | 215,636 | ||||||
2,522 | Novatek OAO, GDR | 345,402 | ||||||
6,428 | NovaTek OAO, Registered Shares, GDR | 880,351 | ||||||
364,332 | OAO Gazprom, GDR | 3,151,472 | ||||||
19,401 | Petroleo Brasileiro SA, ADR | 267,346 | ||||||
125,804 | Petroleo Brasileiro SA, ADR | 1,848,061 | ||||||
294,400 | PTT pcl | 2,563,030 | ||||||
187,262 | Reliance Industries, Ltd. | 2,717,223 | ||||||
46,717 | Sasol, Ltd. | 2,300,631 | ||||||
5,802 | SK Energy Co., Ltd.* | 784,135 | ||||||
13,300 | Ultrapar Participacoes SA, ADR^ | 314,545 | ||||||
93,742 | Ultrapar Participacoes SA | 2,219,579 | ||||||
|
| |||||||
36,594,250 | ||||||||
|
| |||||||
| Personal Products (1.1%): |
| ||||||
284,500 | Hengan International Group Co., Ltd. | 3,373,321 | ||||||
|
| |||||||
| Pharmaceuticals (1.3%): |
| ||||||
126,915 | Lupin, Ltd. | 1,864,652 | ||||||
105,193 | Richter Gedeon Nyrt. | 2,146,004 | ||||||
|
| |||||||
4,010,656 | ||||||||
|
| |||||||
| Real Estate Management & Development (1.9%): |
| ||||||
2,384,000 | Ayala Land, Inc. | 1,334,129 | ||||||
158,500 | BR Malls Participacoes SA | 1,151,225 | ||||||
968,000 | China Overseas Land & Investment, Ltd. | 2,734,233 |
Shares | Fair Value | |||||||
| Common Stocks, continued |
| ||||||
| Real Estate Management & Development, continued |
| ||||||
2,202,100 | Land & Houses Public Co., Ltd. | $ | 599,996 | |||||
|
| |||||||
5,819,583 | ||||||||
|
| |||||||
| Real Estate Operating Companies (0.6%): |
| ||||||
898,905 | Emaar Properties Pjsc | 1,873,877 | ||||||
|
| |||||||
| Retail (0.2%): |
| ||||||
395,500 | Sun Art Retail Group, Ltd. | 558,558 | ||||||
|
| |||||||
| Semiconductors & Semiconductor Equipment (11.7%): |
| ||||||
275,000 | MediaTek, Inc. | 4,098,087 | ||||||
12,763 | Samsung Electronics Co., Ltd. | 16,683,553 | ||||||
98,350 | SK Hynix, Inc.* | 3,435,524 | ||||||
3,015,110 | Taiwan Semiconductor Manufacturing Co., Ltd. | 10,625,102 | ||||||
|
| |||||||
34,842,266 | ||||||||
|
| |||||||
| Telecommunications (0.4%): |
| ||||||
467,355 | Idea Cellular, Ltd. | 1,262,679 | ||||||
|
| |||||||
| Tobacco (0.2%): |
| ||||||
87,807 | ITC, Ltd. | 459,195 | ||||||
|
| |||||||
| Transportation Infrastructure (0.7%): |
| ||||||
296,356 | Companhia de Concessoes Rodoviarias | 2,236,879 | ||||||
|
| |||||||
| Wireless Telecommunication Services (4.8%): |
| ||||||
146,500 | Advanced Info Service pcl | 892,526 | ||||||
79,795 | America Movil SAB de C.V., Series L, ADR | 1,864,809 | ||||||
1,313,300 | Axiata Group Berhad | 2,767,363 | ||||||
333,500 | China Mobile, Ltd. | 3,471,706 | ||||||
28,700 | Mobile TeleSystems, ADR | 620,781 | ||||||
252,288 | Mobile TeleSystems OJSC(d) | 2,447,119 | ||||||
240,000 | Taiwan Mobile Co., Ltd. | 775,935 | ||||||
331,035 | Turkcell Iletisim Hizmetleri AS* | 1,755,180 | ||||||
|
| |||||||
14,595,419 | ||||||||
|
| |||||||
| Total Common Stocks (Cost $234,922,907) | 296,471,818 | ||||||
|
| |||||||
| Preferred Stock (0.3%): |
| ||||||
| Metals & Mining (0.3%): |
| ||||||
76,600 | Vale SA, Preferred Shares, ADR | 1,073,166 | ||||||
|
| |||||||
| Total Preferred Stock (Cost $700,890) | 1,073,166 | ||||||
|
| |||||||
Shares or Principal Amount | Fair Value | |||||||
| Securities Held as Collateral for Securities on Loan (1.5%): |
| ||||||
$ | 4,344,961 | Allianz Variable Insurance Products Securities Lending Collateral Trust(a) | 4,344,961 | |||||
|
| |||||||
| Total Securities Held as Collateral for Securities on Loan | 4,344,961 | ||||||
|
| |||||||
Shares | Fair Value | |||||||
| Unaffiliated Investment Company (0.5%): |
| ||||||
1,349,573 | Dreyfus Treasury Prime Cash Management Fund, Institutional Shares, 0.00%(b) | 1,349,573 | ||||||
|
| |||||||
| Total Unaffiliated Investment Company (Cost $1,349,573) | 1,349,573 | ||||||
|
| |||||||
| Total Investment Securities | 303,239,518 | ||||||
| Net other assets (liabilities) — (1.5)% | (4,577,858 | ) | |||||
|
| |||||||
| Net Assets — 100.0% | $ | 298,661,660 | |||||
|
|
Continued
5
AZL Schroder Emerging Markets Equity Fund
Schedule of Portfolio Investments
December 31, 2013
Percentages indicated are based on net assets as of December 31, 2013.
ADR—American Depositary Receipt
GDR—Global Depositary Receipt
* | Non-income producing security. |
^ | This security or a partial position of this security was on loan as of December 31, 2013. The total value of securities on loan as of December 31, 2013, was $4,225,543. |
(a) | Purchased with cash collateral held from securities lending. The value of the collateral could include collateral held for securities that were sold on or before December 31, 2013. |
(b) | The rate represents the effective yield at December 31, 2013. |
(c) | See Federal Tax Information listed in the Notes to the Financial Statements. |
(d) | Security was valued in good faith pursuant to procedures approved by the Board of Trustees as of December 31, 2013. The total of all such securities represent 1.83% of the net assets of the fund. |
The following represents the concentrations by country of risk (based on the domicile of the security issuer) relative to the total fair value of investments as of December 31, 2013:
Country | Percentage | |||
Brazil | 9.0 | % | ||
British Virgin Islands | 0.5 | % | ||
Cayman Islands | 3.2 | % | ||
China | 5.7 | % | ||
Colombia | — | %NM | ||
Czech Republic | 0.2 | % | ||
Egypt | 0.2 | % | ||
Hong Kong | 11.2 | % | ||
Hungary | 2.1 | % | ||
India | 6.3 | % | ||
Korea, Republic Of | 0.3 | % | ||
Malaysia | 3.4 | % | ||
Mexico | 3.4 | % | ||
Netherlands | 0.5 | % | ||
Philippines | 0.8 | % | ||
Poland | 1.3 | % | ||
Portugal | 0.4 | % | ||
Republic of Korea (South) | 19.0 | % | ||
Russian Federation | 8.1 | % | ||
South Africa | 2.3 | % | ||
Switzerland | 1.5 | % | ||
Taiwan | 11.6 | % | ||
Thailand | 4.5 | % | ||
Turkey | 1.5 | % | ||
United Arab Emirates | 0.6 | % | ||
United States | 2.4 | % | ||
|
| |||
100.0 | % | |||
|
|
NM | Not meaningful, amount is less than 0.05%. |
See accompanying notes to the financial statements.
6
AZL Schroder Emerging Markets Equity Fund
Statement of Assets and Liabilities
December 31, 2013
Assets: | |||||
Investment securities, at cost | $ | 241,318,331 | |||
|
| ||||
Investment securities, at value* | $ | 303,239,518 | |||
Interest and dividends receivable | 109,153 | ||||
Foreign currency, at value (cost $766,141) | 738,092 | ||||
Receivable for capital shares issued | 1,955 | ||||
Receivable for investments sold | 937,587 | ||||
Reclaims receivable | 34,792 | ||||
|
| ||||
Total Assets | 305,061,097 | ||||
|
| ||||
Liabilities: | |||||
Payable for investments purchased | 1,254,123 | ||||
Payable for capital shares redeemed | 296,424 | ||||
Payable for collateral received on loaned securities | 4,344,961 | ||||
Manager fees payable | 273,730 | ||||
Administration fees payable | 13,667 | ||||
Distribution fees payable | 56,650 | ||||
Custodian fees payable | 125,282 | ||||
Administrative and compliance services fees payable | 1,508 | ||||
Trustee fees payable | 11 | ||||
Other accrued liabilities | 33,081 | ||||
|
| ||||
Total Liabilities | 6,399,437 | ||||
|
| ||||
Net Assets | $ | 298,661,660 | |||
|
| ||||
Net Assets Consist of: | |||||
Capital | $ | 236,611,088 | |||
Accumulated net investment income/(loss) | 1,730,383 | ||||
Accumulated net realized gains/(losses) from investment transactions | (1,600,373 | ) | |||
Net unrealized appreciation/(depreciation) on investments | 61,920,562 | ||||
|
| ||||
Net Assets | $ | 298,661,660 | |||
|
| ||||
Class 1 | |||||
Net Assets | $ | 31,710,548 | |||
Shares of beneficial interest (unlimited number of shares authorized, no par value) | 4,059,971 | ||||
Net Asset Value (offering and redemption price per share) | $ | 7.81 | |||
|
| ||||
Class 2 | |||||
Net Assets | $ | 266,951,112 | |||
Shares of beneficial interest (unlimited number of shares authorized, no par value) | 34,226,355 | ||||
Net Asset Value (offering and redemption price per share) | $ | 7.80 | |||
|
|
* | Includes securities on loan of $4,225,543. |
For the Year Ended December 31, 2013
Investment Income: | |||||
Dividends | $ | 7,974,862 | |||
Interest | 31 | ||||
Income from securities lending | 29,912 | ||||
Foreign withholding tax | (735,466 | ) | |||
|
| ||||
Total Investment Income | 7,269,339 | ||||
|
| ||||
Expenses: | |||||
Manager fees | 3,822,571 | ||||
Administration fees | 125,052 | ||||
Distribution fees — Class 2 | 693,629 | ||||
Custodian fees | 469,226 | ||||
Administrative and compliance services fees | 6,720 | ||||
Trustee fees | 17,506 | ||||
Professional fees | 19,662 | ||||
Shareholder reports | 34,404 | ||||
Other expenses | 10,864 | ||||
|
| ||||
Total expenses before reductions | 5,199,634 | ||||
Less expenses voluntarily waived/reimbursed by the Manager | (466,169 | ) | |||
Less expenses paid indirectly | (240 | ) | |||
|
| ||||
Net expenses | 4,733,225 | ||||
|
| ||||
Net Investment Income/(Loss) | 2,536,114 | ||||
|
| ||||
Realized and Unrealized Gains/(Losses) on Investments: | |||||
Net realized gains/(losses) on securities transactions | 4,555,338 | ||||
Change in net unrealized appreciation/depreciation on investments | (14,705,734 | ) | |||
|
| ||||
Net Realized/Unrealized Gains/(Losses) on Investments | (10,150,396 | ) | |||
|
| ||||
Change in Net Assets Resulting From Operations | $ | (7,614,282 | ) | ||
|
|
See accompanying notes to the financial statements.
7
Statements of Changes in Net Assets
AZL Schroder Emerging Markets Equity Fund | ||||||||||
For the Year Ended December 31, 2013 | For the Year Ended December 31, 2012 | |||||||||
Change In Net Assets: | ||||||||||
Operations: | ||||||||||
Net investment income/(loss) | $ | 2,536,114 | $ | 2,498,797 | ||||||
Net realized gains/(losses) on investment transactions | 4,555,338 | (1,336,865 | ) | |||||||
Change in unrealized appreciation/depreciation on investments | (14,705,734 | ) | 60,159,191 | |||||||
|
|
|
| |||||||
Change in net assets resulting from operations | (7,614,282 | ) | 61,321,123 | |||||||
|
|
|
| |||||||
Dividends to Shareholders: | ||||||||||
From net investment income: | ||||||||||
Class 1 | (333,101 | ) | (372,725 | ) | ||||||
Class 2 | (2,124,595 | ) | (2,215,049 | ) | ||||||
From net realized gains: | ||||||||||
Class 1 | — | (1,900,382 | ) | |||||||
Class 2 | — | (15,446,612 | ) | |||||||
|
|
|
| |||||||
Change in net assets resulting from dividends to shareholders | (2,457,696 | ) | (19,934,768 | ) | ||||||
|
|
|
| |||||||
Capital Transactions: | ||||||||||
Class 1 | ||||||||||
Proceeds from shares issued | 354,171 | 601,535 | ||||||||
Proceeds from dividends reinvested | 333,101 | 2,273,107 | ||||||||
Value of shares redeemed | (4,799,713 | ) | (4,573,382 | ) | ||||||
|
|
|
| |||||||
Total Class 1 | (4,112,441 | ) | (1,698,740 | ) | ||||||
|
|
|
| |||||||
Class 2 | ||||||||||
Proceeds from shares issued | 16,234,949 | 23,787,747 | ||||||||
Proceeds from dividends reinvested | 2,124,596 | 17,661,661 | ||||||||
Value of shares redeemed | (41,378,164 | ) | (45,423,879 | ) | ||||||
|
|
|
| |||||||
Total Class 2 | (23,018,619 | ) | (3,974,471 | ) | ||||||
|
|
|
| |||||||
Change in net assets resulting from capital transactions | (27,131,060 | ) | (5,673,211 | ) | ||||||
|
|
|
| |||||||
Change in net assets | (37,203,038 | ) | 35,713,144 | |||||||
Net Assets: | ||||||||||
Beginning of period | 335,864,698 | 300,151,554 | ||||||||
|
|
|
| |||||||
End of period | $ | 298,661,660 | $ | 335,864,698 | ||||||
|
|
|
| |||||||
Accumulated net investment income/(loss) | $ | 1,730,383 | $ | 2,207,462 | ||||||
|
|
|
| |||||||
Share Transactions: | ||||||||||
Class 1 | ||||||||||
Shares issued | 45,222 | 75,488 | ||||||||
Dividends reinvested | 43,714 | 308,427 | ||||||||
Shares redeemed | (623,478 | ) | (595,141 | ) | ||||||
|
|
|
| |||||||
Total Class 1 Shares | (534,542 | ) | (211,226 | ) | ||||||
|
|
|
| |||||||
Class 2 | ||||||||||
Shares issued | 2,123,012 | 3,122,831 | ||||||||
Dividends reinvested | 278,818 | 2,396,426 | ||||||||
Shares redeemed | (5,379,241 | ) | (5,949,153 | ) | ||||||
|
|
|
| |||||||
Total Class 2 Shares | (2,977,411 | ) | (429,896 | ) | ||||||
|
|
|
| |||||||
Change in shares | (3,511,953 | ) | (641,122 | ) | ||||||
|
|
|
|
See accompanying notes to the financial statements.
8
AZL Schroder Emerging Markets Equity Fund
(Selected data for a share of beneficial interest outstanding throughout the periods indicated)
Year Ended December 31 | |||||||||||||||||||||||||
2013 | 2012 | 2011 | 2010 | 2009 | |||||||||||||||||||||
Class 1 | |||||||||||||||||||||||||
Net Asset Value, Beginning of Period | $ | 8.05 | $ | 7.08 | $ | 8.76 | $ | 7.84 | $ | 4.56 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Investment Activities: | |||||||||||||||||||||||||
Net Investment Income/(Loss) | 0.09 | 0.08 | 0.12 | 0.10 | (a) | 0.06 | (a) | ||||||||||||||||||
Net Realized and Unrealized Gains/(Losses) on Investments | (0.25 | ) | 1.39 | (1.61 | ) | 0.88 | 3.24 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Total from Investment Activities | (0.16 | ) | 1.47 | (1.49 | ) | 0.98 | 3.30 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Dividends to Shareholders From: | |||||||||||||||||||||||||
Net Investment Income | (0.08 | ) | (0.08 | ) | (0.08 | ) | (0.06 | ) | (0.02 | ) | |||||||||||||||
Net Realized Gains | — | (0.42 | ) | (0.11 | ) | — | — | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Total Dividends | (0.08 | ) | (0.50 | ) | (0.19 | ) | (0.06 | ) | (0.02 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Net Asset Value, End of Period | $ | 7.81 | $ | 8.05 | $ | 7.08 | $ | 8.76 | $ | 7.84 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Total Return(b) | (1.96 | )% | 21.52 | % | (17.09 | )% | 12.61 | % | 72.46 | % | |||||||||||||||
Ratios to Average Net Assets/Supplemental Data: | |||||||||||||||||||||||||
Net Assets, End of Period (000’s) | $ | 31,711 | $ | 36,970 | $ | 34,046 | $ | 47,962 | $ | 49,392 | |||||||||||||||
Net Investment Income/(Loss) | 1.04 | % | 0.99 | % | 1.28 | % | 1.19 | % | 0.99 | % | |||||||||||||||
Expenses Before Reductions(c) | 1.45 | % | 1.43 | % | 1.45 | % | 1.45 | % | 1.54 | % | |||||||||||||||
Expenses Net of Reductions | 1.30 | % | 1.28 | % | 1.25 | % | 1.17 | % | 1.26 | % | |||||||||||||||
Expenses Net of Reductions, Excluding Expenses Paid Indirectly(d) | 1.30 | % | 1.28 | % | 1.25 | % | 1.17 | % | 1.26 | % | |||||||||||||||
Portfolio Turnover Rate(e) | 49 | % | 51 | % | 66 | % | 101 | % | 100 | % | |||||||||||||||
Class 2 | |||||||||||||||||||||||||
Net Asset Value, Beginning of Period | $ | 8.03 | $ | 7.07 | $ | 8.74 | $ | 7.82 | $ | 4.56 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Investment Activities: | |||||||||||||||||||||||||
Net Investment Income/(Loss) | 0.07 | 0.05 | 0.09 | 0.08 | (a) | 0.04 | (a) | ||||||||||||||||||
Net Realized and Unrealized Gains/(Losses) on Investments | (0.24 | ) | 1.39 | (1.59 | ) | 0.89 | 3.23 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Total from Investment Activities | (0.17 | ) | 1.44 | (1.50 | ) | 0.97 | 3.27 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Dividends to Shareholders From: | |||||||||||||||||||||||||
Net Investment Income | (0.06 | ) | (0.06 | ) | (0.06 | ) | (0.05 | ) | (0.01 | ) | |||||||||||||||
Net Realized Gains | — | (0.42 | ) | (0.11 | ) | — | — | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Total Dividends | (0.06 | ) | (0.48 | ) | (0.17 | ) | (0.05 | ) | (0.01 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Net Asset Value, End of Period | $ | 7.80 | $ | 8.03 | $ | 7.07 | $ | 8.74 | $ | 7.82 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Total Return(b) | (2.10 | )% | 21.04 | % | (17.27 | )% | 12.40 | % | 71.78 | % | |||||||||||||||
Ratios to Average Net Assets/Supplemental Data: | |||||||||||||||||||||||||
Net Assets, End of Period (000’s) | $ | 266,951 | $ | 298,895 | $ | 266,106 | $ | 376,825 | $ | 373,541 | |||||||||||||||
Net Investment Income/(Loss) | 0.79 | % | 0.74 | % | 1.03 | % | 0.91 | % | 0.68 | % | |||||||||||||||
Expenses Before Reductions(c) | 1.70 | % | 1.68 | % | 1.70 | % | 1.70 | % | 1.79 | % | |||||||||||||||
Expenses Net of Reductions | 1.55 | % | 1.53 | % | 1.50 | % | 1.42 | % | 1.51 | % | |||||||||||||||
Expenses Net of Reductions, Excluding Expenses Paid Indirectly(d) | 1.55 | % | 1.53 | % | 1.50 | % | 1.42 | % | 1.51 | % | |||||||||||||||
Portfolio Turnover Rate(e) | 49 | % | 51 | % | 66 | % | 101 | % | 100 | % |
(a) | Average shares method used in calculation. |
(b) | The returns include reinvested dividends and fund level expenses, but exclude insurance contract charges. If these charges were included, the returns would have been lower. |
(c) | Excludes fee reductions. If such fee reductions had not occurred, the ratios would have been as indicated. |
(d) | Expenses net of reductions excludes expenses paid indirectly, pursuant to a “commission recapture” program, under which brokers remit a portion of the brokerage commission which is used to pay certain Fund expenses. See note 2 in the Notes to the Financial Statements. |
(e) | Portfolio turnover rate is calculated on the basis of the Fund as a whole without distinguishing between classes of shares issued. |
See accompanying notes to the financial statements.
9
AZL Schroder Emerging Markets Equity Fund
Notes to the Financial Statements
December 31, 2013
1. Organization
The Allianz Variable Insurance Products Trust (the “Trust”) was organized as a Delaware statutory trust on July 13, 1999. The Trust is a diversified open-end management investment company registered under the Investment Company Act of 1940. The Trust consists of 29 separate investment portfolios (collectively, the “Funds”), of which one is included in this report, the AZL Schroder Emerging Markets Equity Fund (the “Fund”), and 28 are presented in separate reports.
The Trust is authorized to issue an unlimited number of shares of the Fund without par value. Shares of the Fund are available through the variable annuity contracts and variable life insurance policies offered through the separate accounts of participating insurance companies.
Under the Trust’s organizational documents, its officers and trustees are indemnified against certain liabilities arising out of the performance of their duties to the Fund. In addition, in the normal course of business, the Fund may enter into contracts with its vendors and others that provide for general indemnifications. The Fund’s maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Fund. However, based on experience, the Fund expects the risk of loss to be remote.
2. Significant Accounting Policies
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. The policies conform with U.S. generally accepted accounting principles (“U.S. GAAP”). The preparation of financial statements requires management to make certain 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 increases and decreases in net assets from operations during the reporting period. Actual results could differ from those estimates.
Security Valuation
The Fund records its investments at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between willing market participants at the measurement date. The valuation techniques used to determine fair value are further described in Note 4 below.
Investment Transactions and Investment Income
Investment transactions are recorded not later than on the business day following trade date. However, for financial reporting purposes, investment transactions are accounted for on trade date. Net realized gains and losses on investments sold and on foreign currency transactions are recorded on the basis of identified cost. Interest income is recorded on the accrual basis and includes, where applicable, the amortization of premiums or accretion of discounts. Dividend income is recorded on the ex-dividend date except in the case of foreign securities, in which case dividends are recorded as soon as such information becomes available. In addition, income and realized and unrealized gains and losses are allocated to each class of shares based on its relative net assets on a daily basis.
Foreign Currency Translation
The accounting records of the Fund are maintained in U.S. dollars. Foreign currency amounts are translated into U.S. dollars at the current rate of exchange to determine the fair value of investments, assets and liabilities. Purchases and sales of securities, and income and expenses are translated at the prevailing rate of exchange on the respective dates of such transactions. The Fund does not isolate that portion of the results of operations resulting from changes in foreign exchange rates on investments from fluctuations arising from changes in market prices of securities held. Such fluctuations are included in the net realized and unrealized gain or loss on investments and foreign currencies. Income received by the Fund from sources within foreign countries may be subject to withholding and other income or similar taxes imposed by such countries. The Funds accrue such taxes, as applicable, based on their current interpretation of tax rules in the foreign markets in which they invest.
Dividends to Shareholders
Dividends to shareholders are recorded on the ex-dividend date. The Fund distributes its dividends from net investment income and net realized capital gains, if any, on an annual basis. The amount of dividends from net investment income and from net realized gains is determined in accordance with federal income tax regulations, which may differ from U.S. GAAP. These “book/tax” differences are either temporary or permanent in nature. To the extent these differences are permanent in nature (e.g., return of capital, net operating loss, reclassification of certain market discounts, gain/loss, paydowns, and distributions), such amounts are reclassified within the composition of net assets based on their federal tax-basis treatment; temporary differences (e.g., wash sales and post October losses) do not require reclassification. Dividends to shareholders that exceed net investment income and net realized gains for tax purposes are reported as distributions of capital.
Expense Allocation
Expenses directly attributable to the Fund are charged directly to the Fund, while expenses attributable to more than one Fund are allocated among the respective Funds based upon relative net assets or some other reasonable method. Each class of shares bears its pro-rata portion of expenses attributable to its series, except that each class separately bears expenses related specifically to that class, such as distribution fees. Expenses which are attributable to more than one Trust are allocated across the Allianz Variable Insurance Products and Allianz Variable Insurance Products Fund of Funds Trusts based upon relative net assets or another reasonable basis. Allianz Investment Management LLC (the “Manager”), serves as the investment manager for the Trust and the Allianz Variable Insurance Products Fund of Funds Trust.
Securities Lending
To generate additional income, the Fund may lend up to 33 1/3% of its assets pursuant to agreements requiring that the loan be continuously secured by any combination of cash, U.S. government or U.S. government agency securities, equal initially to at least 102% of the fair value plus accrued interest on the securities loaned (105% for foreign securities). The borrower of securities is at all times required to post collateral to the Fund in an amount equal to 100% of the fair value of the securities loaned based on the previous day’s fair value of the securities loaned, marked-to-market daily. Any collateral shortfalls are adjusted the next business day. The Fund bears all of the gains
10
AZL Schroder Emerging Markets Equity Fund
Notes to the Financial Statements
December 31, 2013
and losses on such investments. The Fund receives payments from borrowers equivalent to the dividends and interest that would have been earned on securities lent while simultaneously seeking to earn income on the investment of cash collateral received. In extremely low interest rate environments, the broker rebate fee may exceed the interest earned or the cash collateral which would result in a loss to the Fund. The investment of cash collateral deposited by the borrower is subject to inherent market risks such as interest rate risk, credit risk, liquidity risk, and other risks that are present in the market, and as such, the value of these investments may not be sufficient, when liquidated, to repay the borrower when the loaned security is returned. There may be risks of delay in recovery of the securities or even loss of rights in the collateral should the borrower of the securities fail financially. However, loans will be made only to borrowers, such as broker-dealers, banks or institutional borrowers of securities, deemed by the Manager to be of good standing and credit worthy and when in its judgment, the consideration which can be earned currently from such securities loans justifies the attendant risks. Loans are subject to termination by the Trust or the borrower at any time, and are, therefore, not considered to be illiquid investments. Securities on loan at December 31, 2013 are presented on the Fund’s Schedule of Portfolio Investments. The average outstanding amount of securities on loan was $5.8 million for the year ended December 31, 2013.
Cash collateral received in connection with securities lending is invested in the Allianz Variable Insurance Products Securities Lending Collateral Trust (the “Securities Lending Collateral Trust”) managed by The Dreyfus Corporation, an affiliate of the Custodian and Securities Lending Agent. The Securities Lending Collateral Trust invests in short-term investments that have a remaining maturity of 397 days or less as calculated in accordance with Rule 2a-7 under the 1940 Act. The Fund paid securities lending fees of $3,007 during the year ended December 31, 2013. These fees have been netted against “Income from securities lending” on the Statement of Operations.
Commission Recapture
Certain Funds of the Trust participate in a commission recapture program. The Fund will utilize the recaptured commissions to pay for, in whole or part, certain expenses of the Fund, excluding investment advisory fees. Any amounts received by the Fund, if applicable, are disclosed as “Expenses paid indirectly” on the Statement of Operations.
Effective January 6, 2014, the Manager, on behalf of the Trust, requested the Fund cease participation in the program until further notice.
3. Related Party Transactions
The Manager provides investment advisory and management services for the Fund. The Manager has retained an independent money management organization (the “Subadviser”), to make investment decisions on behalf of the Fund. Pursuant to a subadvisory agreement with Schroder Investment Management North America Inc. (“Schroder”), Schroder provides investment advisory services as the Subadviser for the Fund subject to the general supervision of the Trustees and the Manager. The Manager is entitled to a fee, computed daily and paid monthly, based on the average daily net assets of the Fund. Expenses incurred by the Fund for investment advisory and management services are reflected on the Statement of Operations as “Manager fees.” For its services, the Subadviser is entitled to a fee payable by the Manager. The Manager has contractually agreed to waive fees and reimburse the Fund to limit the annual expenses, excluding interest expense (e.g., cash overdraft fees), taxes, brokerage commissions, other expenditures that are capitalized in accordance with U.S. GAAP and other extraordinary expenses not incurred in the ordinary course of the Fund’s business, based on the daily net assets of the Fund, through April 30, 2015.
For the year ended December 31, 2013, the annual rate due to the Manager and the annual expense limit were as follows:
Annual Rate* | Annual Expense Limit | |||||||||
AZL Schroder Emerging Markets Equity Fund Class 1 | 1.23 | % | 1.40 | % | ||||||
AZL Schroder Emerging Markets Equity Fund Class 2 | 1.23 | % | 1.65 | % |
* | The Manager voluntarily reduced the management fee to 1.08% on all assets. The Manager reserves the right to increase the management fee to the amount shown in the table above at any time. |
Any amounts contractually waived or reimbursed by the Manager in a particular fiscal year will be subject to repayment by the Fund to the Manager to the extent that from time to time through the next three fiscal years the repayment will not cause the Fund’s expenses to exceed the lesser of the stated limit at the time of the waiver or the current stated limit. Any amounts recouped by the Manager during the year are reflected on the Statement of Operations as “Recoupment of prior expenses reimbursed by the Manager.” At December 31, 2013, there were no remaining contractual reimbursements that are subject to repayment by the Fund in subsequent years.
In addition, the Manager may voluntarily waive or reimburse additional fees in order to maintain more competitive expense ratios. Any voluntary waivers or reimbursements are not subject to repayment in subsequent years. Information on the total amount waived/reimbursed by the Manager or repaid to the Manager by the Fund during the year can be found on the Statement of Operations.
Pursuant to separate agreements between the Funds and the Manager, the Manager provides a Chief Compliance Officer (“CCO”) and certain compliance oversight and regulatory filing services to the Trust. Under these agreements the Manager is entitled to an amount equal to a portion of the compensation and certain other expenses related to the individuals performing the CCO and compliance oversight services, as well as $75 per hour for time incurred in connection with the preparation and filing of certain documents with the Securities and Exchange Commission. The fees are paid to the Manager on a quarterly basis. The total expenses incurred by the Fund for these services are reflected on the Statement of Operations as “Administrative and compliance services fees.”
Citi Fund Services Ohio, Inc. (“Citi” or the “Administrator”), a wholly owned subsidiary of Citigroup, Inc., with which an officer of the Trust is affiliated, serves as the Trust’s administrator, transfer agent, and fund accountant, and assists the Trust in all aspects of its administration and operation. The Administrator is entitled to a Trust-wide asset-based fee, which is based on the following schedule: 0.05% of daily average net assets on the first $4 billion, 0.04% of daily average net assets on the next $2 billion, 0.02% of daily average net assets on the next $2 billion and 0.01% of daily average net assets over $8 billion. The overall Trust-wide fees are accrued daily and paid monthly and are subject to a minimum annual fee. In addition, the Administrator is entitled to annual account fees related to the transfer agency system, an annual fee for each additional class of shares of any Fund, certain annual fees in supporting fair value services, and a Trust-wide annual fee for providing infrastructure and support in implementing the written policies and procedures comprising the Fund’s compliance program. Fees payable to the Administrator are subject to certain reductions associated with services provided to new funds. The Administrator is also reimbursed for certain expenses incurred. The total expenses incurred by the Fund for these services are reflected on the Statement of Operations as “Administration fees.”
Allianz Life Financial Services, LLC (“ALFS”), an affiliate of the Manager, serves as distributor of the Fund and receives 12b-1 fees directly from the Fund, plus a Trust-wide annual fee of $42,500, paid by the Manager from its profits and not by the Trust, for recordkeeping and reporting services.
11
AZL Schroder Emerging Markets Equity Fund
Notes to the Financial Statements
December 31, 2013
The Trust has adopted a distribution and service plan in conformance with Rule 12b-1 of the 1940 Act. Pursuant to this plan, the Fund is authorized to pay certain fees for the sale and distribution of its shares and services provided to its shareholders at an annual rate not to exceed 0.25% of the Fund’s average daily net assets. These fees are reflected on the Statement of Operations as “Distribution fees.”
In addition, certain legal fees and expenses are paid to a law firm, Dorsey & Whitney LLP, of which the Secretary of the Fund is a partner. During the year ended December 31, 2013, $4,095 was paid from the Fund relating to these fees and expenses.
Certain Officers and Trustees of the Trust are affiliated with the Manager or the Administrator. Such Officers (except for the Trust’s CCO as noted above) and Trustees receive no compensation from the Trust for serving in their respective roles. For their service to the Trust and to the Allianz Variable Insurance Products Fund of Funds Trust, each non-interested Trustee receives a $139,000 annual Board retainer. In addition, the Trustees are reimbursed for certain expenses associated with attending Board meetings. Compensation to the Trustees is allocated between the Trust and the Allianz Variable Insurance Products Fund of Funds Trust in proportion to the assets under management of each trust. During the year ended December 31, 2013, actual Trustee compensation was $973,000 in total for both trusts.
At a meeting of the Board of Trustees on December 4, 2013, the Trustees approved a fee increase to the Officers and Trustees who are paid a fee for their services to the Trust and to the Allianz Variable Insurance Products Fund of Funds Trust. Effective January 1, 2014, each non-interested Trustee will receive a $163,000 annual retainer.
4. Investment Valuation Summary
The valuation techniques employed by the Fund, as described below, maximize the use of observable inputs and minimize the use of unobservable inputs in determining fair value. The inputs used for valuing the Fund’s investments are summarized in the three broad levels listed below:
— | Level 1 — quoted prices in active markets for identical assets |
— | Level 2 — other significant observable inputs (including quoted prices for similar securities, interest rates, prepayments speeds, credit risk, etc.) |
— | Level 3 — significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of investments) |
Changes in valuation techniques may result in transfers in or out of an assigned level within the disclosure hierarchy. The Fund determines transfers between fair value hierarchy levels at the reporting period end. The inputs or methodology used for valuing investments is not necessarily an indication of the risk associated with investing in those investments.
Security prices are generally provided by an independent third party pricing service approved by the Trust’s Board of Trustees (“Trustees”) as of the close of the New York Stock Exchange (“NYSE”) (generally 4:00 pm Eastern Time). Equity securities are valued at the last quoted sale price or, if there is no sale, the last quoted bid price is used for long securities and the last quoted ask price is used for securities sold short. Securities listed on NASDAQ Stock Market, Inc. (“NASDAQ”) are valued at the official closing price as reported by NASDAQ. In each of these situations, valuations are typically categorized as a Level 1 in the fair value hierarchy. Investments in open-end investment companies are valued at their respective net asset value as reported by such companies and are typically categorized as Level 1 in the fair value hierarchy.
Debt and other fixed income securities are generally valued at an evaluated bid price provided by an independent pricing source approved by the Trustees. To value debt securities, pricing services may use various pricing techniques which take into account appropriate factors such as market activity, yield, quality, coupon rate, maturity, type of issue, trading characteristics, call features, credit ratings and other data, as well as broker quotes. Short term securities of sufficient credit quality with sixty days or less remaining until maturity may be valued at amortized cost, which approximates fair value. In each of these situations, valuations are typically categorized as Level 2 in the fair value hierarchy.
Other assets and securities for which market quotations are not readily available, or are deemed unreliable are valued at fair value as determined in good faith by the Trustees or persons acting on the behalf of the Trustees. Fair value pricing may be used for significant events such as securities whose trading has been suspended, whose price has become stale or for which there is no currently available price at the close of the NYSE. Depending on the source and relative significance of valuation inputs, these instruments may be classified as Level 2 or Level 3 in the fair value hierarchy. The Fund utilizes a pricing service to assist in determining the fair value of securities when certain significant events occur that may affect the value of foreign securities.
In accordance with procedures adopted by the Trustees, fair value pricing may be used if events materially affecting the value of foreign securities occur between the time when the exchange on which they are traded closes and the time when the Fund’s net asset value is calculated. Management identifies possible fluctuation in international securities by monitoring the increase or decrease in the value of a designated benchmark index. In the event of an increase or decrease greater than predetermined levels, the Fund may use a systematic valuation model provided by an independent third party to fair value its international equity securities which are then typically categorized as Level 2 in the fair value hierarchy.
The following is a summary of the valuation inputs used as of December 31, 2013 in valuing the Fund’s investments based upon the three levels defined above:
Investment Securities: | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||
Common Stocks | ||||||||||||||||||||
Beverages | $ | 4,670,634 | $ | 713,988 | $ | — | $ | 5,384,622 | ||||||||||||
Chemicals | 1,632,328 | 11,002,362 | — | 12,634,690 | ||||||||||||||||
Commercial Banks | 8,832,693 | 55,702,848 | — | 64,535,541 | ||||||||||||||||
Commercial Service | — | — | 818,563 | 818,563 | ||||||||||||||||
Construction Materials | 1,431,430 | 1,632,867 | — | 3,064,297 | ||||||||||||||||
Food & Staples Retailing | 396,216 | 4,594,599 | — | 4,990,815 | ||||||||||||||||
Food Products | 2,214,194 | 595,336 | — | 2,809,530 | ||||||||||||||||
Hotels, Restaurants & Leisure | 1,636,200 | 1,816,473 | — | 3,452,673 | ||||||||||||||||
Internet Software & Services | 4,006,503 | 13,036,326 | — | 17,042,829 | ||||||||||||||||
Oil, Gas & Consumable Fuels | 12,856,635 | 23,737,615 | — | 36,594,250 | ||||||||||||||||
Wireless Telecommunication Services | 2,485,590 | 12,109,829 | — | 14,595,419 | ||||||||||||||||
All Other Common Stocks+ | 6,685,891 | 123,862,698 | — | 130,548,589 |
12
AZL Schroder Emerging Markets Equity Fund
Notes to the Financial Statements
December 31, 2013
Investment Securities: | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||
Preferred Stock+ | $ | 1,073,166 | $ | — | $ | — | $ | 1,073,166 | ||||||||||||
Securities Held as Collateral for Securities on Loan | — | 4,344,961 | — | 4,344,961 | ||||||||||||||||
Unaffiliated Investment Company | 1,349,573 | — | — | 1,349,573 | ||||||||||||||||
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Total Investment Securities | $ | 49,271,053 | $ | 253,149,902 | $ | 818,563 | $ | 303,239,518 | ||||||||||||
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+ | For detailed industry descriptions, see the accompanying Schedule of Portfolio Investments. |
A reconciliation of assets in which level 3 inputs are used in determining fair value, along with additional quantitative disclosures, are presented when there are significant level 3 investments at the end of the period.
5. Security Purchases and Sales
For the year ended December 31, 2013, cost of purchases and proceeds from sales of securities (excluding securities maturing less than one year from acquisition) were as follows:
Purchases | Sales | |||||||||
AZL Schroder Emerging Markets Equity Fund | $ | 151,230,429 | $ | 178,262,243 |
6. Investment Risks
Emerging Markets Risk: Emerging markets may have less developed trading markets and exchanges which may make it more difficult to sell securities at an acceptable price and their prices may be more volatile than securities of companies in more developed markets. Settlements of trades may be subject to greater delays so that the Fund may not receive the proceeds of a sale of a security on a timely basis. Emerging countries may also have less developed legal and accounting systems and investments may be subject to greater risks of government restrictions, nationalization, or confiscation.
Foreign Securities and Currencies Risk: Investments in securities of foreign issuers carry certain risks not ordinarily associated with investments in securities of domestic issuers. Such risks include future political and economic developments, and the possible imposition of exchange controls or other foreign governmental laws and restrictions. In addition, with respect to certain countries, there is the possibility of expropriation of assets, confiscatory taxation, political or social instability or diplomatic developments which could adversely affect investments in those securities.
7. Federal Tax Information
It is the Fund’s policy to continue to comply with the requirements of the Internal Revenue Code under Subchapter M, applicable to regulated investment companies, and to distribute all of its taxable income, including any net realized gains on investments, to its shareholders. Therefore, no provision is made for federal income taxes.
Management of the Fund has reviewed tax positions taken in tax years that remain subject to examination by all major tax jurisdictions, including federal (i.e., the last four tax year ends and the interim tax period since then, as applicable). Management believes that there is no tax liability resulting from unrecognized tax benefits related to uncertain tax positions taken.
Cost for federal income tax purposes at December 31, 2013 is $243,343,636. The gross unrealized appreciation/ (depreciation) on a tax basis is as follows:
Unrealized appreciation | $ | 66,613,552 | |||
Unrealized depreciation | (6,717,670 | ) | |||
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Net unrealized appreciation/(depreciation) | $ | 59,895,882 | |||
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The tax character of dividends paid to shareholders during the year ended December 31, 2013 were as follows:
Ordinary Income | Net Long-Term Capital Gains | Total Distributions(a) | |||||||||||||
AZL Schroder Emerging Markets Equity Fund | $ | 2,457,696 | $ | — | $ | 2,457,696 |
(a) | Total distributions paid may differ from the Statements of Changes in Net Assets because dividends are recognized when actually paid for tax purposes. |
The tax character of dividends paid to shareholders during the year ended December 31, 2012 was as follows:
Ordinary Income | Net Long-Term Capital Gains | Total Distributions(a) | |||||||||||||
AZL Schroder Emerging Markets Equity Fund | $ | 2,587,811 | $ | 17,346,957 | $ | 19,934,768 |
(a) | Total distributions paid may differ from the Statements of Changes in Net Assets because dividends are recognized when actually paid for tax purposes. |
13
AZL Schroder Emerging Markets Equity Fund
Notes to the Financial Statements
December 31, 2013
As of December 31, 2013, the components of accumulated earnings on a tax basis were as follows:
Undistributed Ordinary Income | Undistributed Long-Term Capital Gains | Accumulated Capital and Other Losses | Unrealized Appreciation/ | Total Earnings/ | |||||||||||||||||||||
AZL Schroder Emerging Markets Equity Fund | $ | 1,731,895 | $ | 424,932 | $ | — | $ | 59,893,745 | $ | 62,050,572 |
(a) | The difference between book-basis and tax-basis unrealized appreciation/(depreciation) is attributable primarily to tax deferral of losses on wash sales. |
8. Subsequent Events
Management has evaluated events and transactions subsequent to period end through the date the financial statements were issued, for purposes of recognition or disclosure in these financial statements and there are no subsequent events to report.
14
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Shareholders and Board of Trustees of
Allianz Variable Insurance Products Trust:
We have audited the accompanying statement of assets and liabilities of AZL Schroder Emerging Markets Equity Fund (the “Fund”) of the Allianz Variable Insurance Products Trust, including the schedule of portfolio investments, as of December 31, 2013, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the years in the two-year period then ended, and the financial highlights for each of the years in the five-year period then ended. These financial statements and financial highlights are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of December 31, 2013, by correspondence with the custodian and brokers or by other appropriate auditing procedures. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of the Fund as of December 31, 2013, the results of its operations for the year then ended, the changes in its net assets for each of the years in the two-year period then ended, and the financial highlights for each of the years in the five-year period then ended, in conformity with U.S. generally accepted accounting principles.
/s/KPMG LLP
Columbus, Ohio
February 25, 2014
15
Other Federal Income Tax Information (Unaudited)
For the year ended December 31, 2013, 1.44% of the total ordinary income dividends paid by the Fund qualify for the corporate dividends received deduction available to corporate shareholders.
16
A description of the policies and procedures that the Fund uses to determine how to vote proxies relating to portfolio securities is available, without charge, upon request, by visiting the Securities and Exchange Commission’s (“Commission”) website at www.sec.gov, or by calling 800-624-0197.
Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30th is available (i) without charge, upon request, by calling 800-624-0197; (ii) on the Allianz Variable Insurance Products Trust’s website at https://www.allianzlife.com; and (iii) on the Commission’s website at http://www.sec.gov.
The Fund files complete Schedules of Portfolio Holdings with the Commission for the first and third quarters of each fiscal year on Form N-Q. Schedules of Portfolio Holdings for the Fund in this report are available without charge on the Commission’s website at http://www.sec.gov, or may be reviewed and copied at the Commission’s Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 800-SEC-0330.
17
Approval of Investment Advisory and Subadvisory Agreements (Unaudited)
The Allianz Variable Insurance Products Trust (the “Trust”) is a manager-of-managers fund. That means that the Trust’s Manager (“Allianz Investment Management LLC”) is responsible for monitoring the various Subadvisers that have day-to-day responsibility for the decisions made for each of the Trust’s investment portfolios. The Trust’s Manager is responsible for determining, in the first instance, which investment advisers to consider recommending for selection as a Subadviser.
In reviewing the services provided by the Manager and the terms of the investment management agreement, the Board receives and reviews information related to the Manager’s experience and expertise in the variable insurance marketplace. Currently, the Funds are offered only through variable annuities and variable life insurance policies, and not in the retail fund market. In addition, the Board receives information regarding the Manager’s expertise with regard to portfolio diversification and asset allocation requirements within variable insurance products issued by Allianz Life Insurance Company of North America and its subsidiary, Allianz Life Insurance Company of New York. Currently, the Funds are offered only through Allianz Life and Allianz of New York variable products.
The Trust’s Manager has adopted policies and procedures to assist it in the process of analyzing each potential Subadviser with expertise in particular asset classes for purposes of making the recommendation that a specific investment adviser be selected. The Trust’s Board reviews and considers the information provided by the Manager in deciding which investment advisers to select. After an investment adviser becomes a Subadviser, a similarly rigorous process is instituted by the Manager to monitor the investment performance and other responsibilities of the Subadviser. The Manager reports to the Trust’s Board on its analysis at the regular meetings of the Board, which are held at least quarterly. Where warranted, the Manager will add or remove a particular Subadviser from a “watch” list that it maintains. Watch list criteria include, for example: (a) Fund performance over various time periods; (b) Fund risk issues, such as changes in key personnel involved with Fund management, changes in investment philosophy or process, or “capacity” concerns; and (c) organizational risk issues, such as regulatory, compliance or legal concerns, or changes in the ownership of the Subadviser. The Manager may place a Fund on the watch list for other reasons, and if so, will explain its rationale to the Trustees. Funds which are on the watch list are subject to special scrutiny of the Manager and the Board of Trustees. Funds may be removed from such watch list, if for example, performance improves or regulatory matters are satisfactorily resolved. However, in some situations where Funds which have been on the watch list, the Manager has recommended the retention of a new Subadviser, and the Board of Trustees has subsequently approved new Subadvisory Agreements with such Subadvisers.
In assessing the Manager’s and Subadvisers’ (collectively, the “Advisory Organizations”), performance of their obligations, the Board considers whether there has occurred a circumstance or event that would constitute a reason for it to not renew an advisory contract. In this regard, the Board is mindful of the potential disruption of a Fund’s operations and various risks, uncertainties and other effects that could occur as a result of a decision to terminate or not renew a contract.
As required by the Investment Company Act of 1940 (“1940 Act”), the Trust’s Board has reviewed and approved the Trust’s Investment Management Agreement with the Manager (the “Advisory Agreement”) and portfolio management agreements (the “Subadvisory Agreements”) with the Subadvisers. The Board’s decision to approve these contracts reflects the exercise of its business judgment on whether to approve new arrangements and continue the existing arrangements. During its review of these contracts, the Board considers many factors, among the most material of which are: the Fund’s investment objectives and long term performance; the Advisory Organizations’ management philosophy, personnel, and processes, including their compliance history and the adequacy of their compliance processes; the preferences and expectations of Fund shareholders (and underlying contract owners) and their relative sophistication; the continuing state of competition in the mutual fund industry; and comparable fees in the mutual fund industry.
The Board also considers the compensation and benefits received by the Advisory Organizations. This includes fees received for services provided to the Fund by affiliated persons of the Advisory Organizations and research services received by the Advisory Organizations from brokers that execute Fund trades, as well as advisory fees. The Board considered the fact that: (1) the Manager and the Trust are parties to an Administrative Service Agreement, a Compliance Services Agreement, and a Chief Compliance Officer Agreement, under which the Manager is compensated by the Trust for performing certain administrative and compliance services including providing an employee of the Manager or one of its affiliates to act as the Trust’s Chief Compliance Officer; and (2) Allianz Life Financial Services, LLC, an affiliated person of the Manager, is a registered securities broker-dealer and receives (along with its affiliated persons) payments made by the Trust pursuant to Rule 12b-1.
The Board is aware that various courts have interpreted provisions of the 1940 Act and have indicated in their decisions that the following factors may be relevant to an adviser’s compensation: the nature and quality of the services provided by the adviser, including the performance of the fund; the adviser’s cost of providing the services; the extent to which the adviser may realize “economies of scale” as the fund grows larger; any indirect benefits that may accrue to the adviser and its affiliates as a result of the adviser’s relationship with the fund; performance and expenses of comparable funds; and the extent to which the independent Board members are fully informed about all facts bearing on the adviser’s service and fee. The Trust’s Board is aware of these factors and takes them into account in its review of the Trust’s advisory contracts.
The Board considered and weighed these circumstances in light of its experience in governing the Trust and working with the Advisory Organizations on matters relating to the Funds, and is assisted in its deliberations by the advice of legal counsel to the Independent Trustees. In this regard, the Board requests and receives a significant amount of information about the Funds and the Advisory Organizations. Some of this information is provided at each regular meeting of the Board; additional information is provided in connection with the particular meeting or meetings at which the Board’s formal review of an advisory contract occurs. In between regularly scheduled meetings, the Board may receive information on particular matters as the need arises. Thus, the Board’s evaluation of an advisory contract is informed by reports covering such matters as: an Advisory Organization’s investment philosophy, personnel, and processes; the Fund’s short- and long-term performance (in absolute terms as well as in relationship to its benchmark(s), certain competitor or “peer group” funds and similar funds managed by the particular Subadviser), and comments on the reasons for performance; the Fund’s expenses (including the advisory fee itself and the overall expense structure of the Fund, both in absolute terms and relative to similar and/or competing funds, with due regard for contractual or voluntary expense limitations); the use and allocation of brokerage commissions derived from trading the Fund’s portfolio securities; the nature and extent of the advisory and other services provided to the Fund by the Advisory Organizations and their affiliates; compliance and audit reports concerning the Funds and the companies that service them; and relevant developments in the mutual fund industry and how the Funds and/or Advisory Organizations are responding to them.
The Board also receives financial information about Advisory Organizations, including reports on the compensation and benefits the Advisory Organizations derive from their relationships with the Funds. These reports cover not only the fees under the advisory contracts, but also fees, if any, received for providing other services to the Funds. The reports also discuss any indirect or “fall out” benefits an Advisory Organization may derive from its relationship with the Funds.
The Advisory and Subadvisory Agreements (collectively, the “Agreements”) were most recently considered at Board of Trustees meetings held in the fall of 2013. Information relevant to the approval of such Agreements was considered at a telephonic Board of Trustees meeting on October 16, 2013, and at an “in person” Board of Trustees meeting held October 22, 2013. The Agreements were approved at the Board meeting of October 22, 2013. At such meeting the Board also approved an Expense Limitation Agreement between the Manager and the Trust for the period ending April 30, 2015. In connection with such meetings, the Trustees requested and evaluated extensive materials from the Manager, including performance and expense information for other investment companies with similar investment objectives derived from data compiled by an independent third party provider and other sources believed to be reliable by the Manager. Prior to voting, the Trustees reviewed the proposed approval/continuance of the Agreements with management and with experienced counsel who are independent of the Manager and received a memorandum from such counsel discussing the legal
18
standards for their consideration of the proposed approvals/continuances. The independent (“disinterested”) Trustees also discussed the proposed approvals/continuances in a private session with such counsel at which no representatives of the Manager were present. In reaching their determinations relating to the approval and/or continuance of the Agreements, in respect of each Fund, the Trustees considered all factors they believed relevant. The Board based its decision to approve the Agreements on the totality of the circumstances and relevant factors, and with a view to past and future long-term considerations. Not all of the factors and considerations discussed above and below are necessarily relevant to every Fund, and the Board did not assign relative weights to factors discussed herein or deem any one or group of them to be controlling in and of themselves.
An SEC Rule requires that shareholder reports include a discussion of certain factors relating to the selection of investment advisers and the approval of advisory fees. The “factors” enumerated by the SEC are set forth below in italics, as well as the Board’s conclusions regarding such factors:
(1) The nature, extent and quality of services provided by the Manager and Subadvisers. The Trustees noted that the Manager, subject to the control of the Board of Trustees, administers each Fund’s business and other affairs. Under the Advisory Agreement, the Manager holds the sole and exclusive responsibility to provide, or arrange for other to provide, the management of the Funds’ assets and the placement of orders for the purchase and sale of the securities of the Funds. As the Trust is a manager of managers fund, the Manager is authorized, under the Advisory Agreement, to retain one or more Subadvisers for each Fund to handle day-to-day management of the Funds’ investment portfolios; the Manager is responsible for determining, in the first instance, which investment advisers to recommend to the Board of Trustees for selection as a Subadviser. The Trustees were aware that, notwithstanding the retention of the Subadvisers to handle day-to-day portfolio management, the Manager remains responsible for substantial other matters, including continuously monitoring compliance by each Subadviser with the investment policies and restrictions of the respective Funds, with such other limitations or directions of the Board of Trustees, and with all legal requirements under federal or state law or regulation. The Manager also is responsible primarily to provide statistical information and other data to the Trustees regarding the Funds’ portfolio investments and to make available to the Funds’ administrator such information as is necessary for the conduct of its duties.
The Trustees also noted that the Manager provides the Trust and each Fund with such administrative and other services (exclusive of, and in addition to, any such services provided by any others retained by the Trust on behalf of the Funds) and executive and other personnel as are necessary for the operation of the Trust and the Funds. Except for the Trust’s Chief Compliance Officer, the Manager pays all of the compensation of Trustees and officers of the Trust who are employees of the Manager or its affiliates.
The Trustees considered the scope and quality of services provided by the Manager and the Subadvisers and noted that the scope of such services provided had expanded as a result of recent regulatory and other developments. The Trustees noted that, for example, the Manager and Subadvisers are responsible for maintaining and monitoring their own compliance programs, and these compliance programs are continuously refined and enhanced in light of new regulatory requirements. The Trustees considered the capabilities and resources which the Manager has dedicated to performing services on behalf of the Trust and its Funds. The quality of administrative and other services, including the Manager’s role in coordinating the activities of the Trust’s other service providers, also were considered. The Trustees concluded that, overall, they were satisfied with the nature, extent and quality of services provided (and expected to be provided) to the Trust and to each of the Funds under the Agreements.
(2) The investment performance of the Funds, the Manager and the Subadvisers. In connection with every in-person quarterly Board of Trustees meeting, Trustees receive extensive information on the performance results of each of the Funds. This includes, for example, performance information on all of the Funds for the previous quarter, and previous one, three and five-year periods, and since inception. (For Funds which have been in existence for less than five years, Trustees may receive performance information on comparable funds managed by the particular Subadviser for periods prior to the creation of a particular Fund.) Such performance information includes information on absolute total return, performance versus Subadvisers’ comparable fund(s), performance versus the appropriate benchmark(s), and performance versus peer groups. For example, in connection with the Board of Trustees meetings held September 10-11, 2013, the Manager reported that for the three year period ended June 30, 2013, 12 Funds were in the top 40%, eight were in the middle 20% and eight were in the bottom 40%, and for the one year period ended June 30, 2013, 8 Funds were in the top 40%, seven were in the middle 20%, and 14 were in the bottom 40%. The Manager also reported that for the five year period ended June 30, 2013, 10 Funds were in the top 40%, four were in the middle 20%, and six were in the bottom 40%. At the Board of Trustees meeting held October 22, 2013, the Trustees determined that the overall investment performance of the Funds was acceptable.
(3) The costs of services to be provided and profits to be realized by the Manager and the Subadvisers and their affiliates from their relationship with the Funds. The Manager has supplied information to the Board of Trustees pertaining to the level of investment advisory fees to which the Funds are subject. The Manager has agreed to temporarily “cap” Fund expenses at certain levels, and information is provided to Trustees setting forth “contractual” advisory fees and “actual” fees after taking expense caps into account. Based upon the information provided, the “actual” advisory fees payable by the Funds overall are generally comparable to the average level of fees paid by Fund peer groups. For the 30 Funds reviewed by the Board of Trustees in the fall of 2013, 27 Funds paid “actual” advisory fees in a percentage amount within the 65th percentile or lower for each Fund’s applicable category. The Trustees recognized that it is difficult to make comparisons of advisory fees because there are variations in the services that are included in the fees paid by other funds. The Board has concluded that the advisory fees to be paid to the Manager by the Funds are not unreasonable.
The Manager has also supplied information to the Board of Trustees pertaining to total Fund expenses (which includes advisory fees, the 25 basis point 12b-1 fee paid by the Funds, and other Fund expenses). As noted above, the Manager has agreed to “cap” Fund expenses at certain levels. Based upon the information provided, the overall total expense ratio ranking in 2013 for the 30 Funds was as follows: (1) 28 of the Funds had total expense rankings below the 65th percentile (with 20 Funds at or below the 50th percentile); (2) the AZL Russell 1000 Value Fund had a total expense ranking in the 66th percentile; the Manager reported that there is only a limited peer group for such Fund; and (3) the AZL Morgan Stanley Global Real Estate Fund had a total expense ranking in the 72nd percentile; it was reported by the Manager that there is only a limited peer group for such Fund, such Fund’s expense ratio has declined, and such Fund’s expense ratio is comparable to funds of similar size.
The Manager has committed to providing the Funds with a high quality of service and working to reduce Fund expenses over time, particularly as the Funds grow larger. The Trustees concluded therefore that the expense ratios of the Funds were not unreasonable.
The Manager provided information concerning the profitability of the Manager’s investment advisory activities for the period from 2011 through June 30, 2013. The Trustees recognized that it is difficult to make comparisons of profitability from investment company advisory agreements because comparative information is not generally publicly available and is affected by numerous factors, including the structure of the particular adviser, the types of funds it manages, its business mix, numerous assumptions regarding allocation of expenses and the adviser’s capital structure and cost of capital. In considering profitability information, the Trustees considered the possible effect of certain fall-out benefits to the Manager and its affiliates. The Trustees focused on profitability of the Manager’s relationships with the Funds before taxes and distribution expenses. The Trustees recognized that the Manager should, in the abstract, be entitled to earn a reasonable level of profits for the services it provides to each Fund and, based on their review, concluded that they were satisfied that the Manager’s level of profitability from its relationship with the Funds was not excessive.
The Manager, on behalf of the Board of Trustees, endeavored to obtain information on the profitability of each Subadviser in connection with its relationship with the Fund or Funds which it subadvises. The Manager was unable to obtain meaningful profitability information from some of the unaffiliated Subadvisers. The Manager assured the Board of Trustees that the Agreements with the Subadvisers which are not affiliated with it were negotiated on an “arm’s length” basis, so that arguably, such profitability information should be less relevant. The Trustees were also provided with certain information on the profitability for the Subadviser which is affiliated with the Manager. Trustees recognized the difficulty of allocating costs to multiple advisory accounts and products of a large advisory organization. Based upon the information provided, the Trustees determined that there was no evidence that the level of such profitability attributable to subadvising the Funds was excessive.
19
(4) and (5) The extent to which economies of scale would be realized as the Funds grow, and whether fee levels reflect these economies of scale. The Trustees noted that most of the advisory fee schedules for the Funds do not contain breakpoints that reduce the fee rate on assets above specified levels, although certain Subadvisory Agreements have such “breakpoints.” The Trustees recognized that breakpoints may be an appropriate way for the Manager to share its economies of scale, if any, with Funds that have substantial assets. However, they also recognized that there may not be a direct relationship between any economies of scale realized by Funds and those realized by the Manager as assets increase. The Trustees do not believe there is a uniform methodology for establishing breakpoints that give effect to Fund-specific service provided by the Manager. The Trustees noted that in the fund industry as a whole, as well as among funds similar to the Funds, there is no uniformity or pattern in the fees and asset levels at which breakpoints (if any) apply. Depending on the age, size, and other characteristics of a particular fund and its manager’s cost structure, different conclusions can be drawn as to whether there are economies of scale to be realized at any particular level of assets, notwithstanding the intuitive conclusion that such economies exist, or will be realized at some level of total assets. Moreover, because different managers have different cost structures and service models, it is difficult to draw meaningful conclusions from the breakpoints that may have been adopted by other funds. The Trustees also noted that the advisory agreements for many funds do not have breakpoints at all, or if breakpoints exist, they may be at asset levels significantly greater than those of the individual Funds. The Trustees also noted that the total assets in all of the Funds as of June 30, 2013 were approximately $12.85 billion, and that no single non-money market Fund had assets in excess of $616 million.
The Trustees noted that the Manager has agreed to temporarily “cap” Fund expenses at certain levels, which has the effect of reducing expenses as would the implementation of advisory fee breakpoints. The Manager has committed to continue to consider the continuation of fee “caps” and/or advisory fee breakpoints as the Funds grow larger. The Board receives quarterly reports on the level of Fund assets. It expects to consider whether or not to approve the Agreements at a meeting to be held prior to December 31, 2014, and will at that time, or prior thereto, consider: (a) the extent to which economies of scale can be realized, and (b) whether the advisory fee should be modified to reflect such economies of scale, if any.
Having taken these factors into account, the Trustees concluded that the absence of breakpoints in certain of the Funds’ advisory fee rate schedules was acceptable under each Fund’s circumstances.
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Information about the Board of Trustees and Officers (Unaudited)
The Trust is managed by the Trustees in accordance with the laws of the state of Delaware governing business trusts. There are currently eight Trustees, two of whom are “interested persons” of the Trust within the meaning of that term under the 1940 Act. The Trustees and Officers of the Trust, their addresses, ages, their positions held with the Trust, their terms of office with the Trust and length of time served, their principal occupation(s) during the past five years, the number of portfolios in the Trust they oversee, and their other directorships held are as follows:
Non-Interested Trustees(1)
Name, Address, and Age | Positions Held with VIP Trust and FOF Trust | Term of Office(2)/ Length of Time Served | Principal Occupation(s) During Past 5 Years | Number of Portfolios Overseen for VIP Trust and FOF Trust | Other Directorships Held Outside the AZL Fund Complex | |||||
Peter R. Burnim, Age 66 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/07 | Chairman, Argus Investment Strategies Fund Ltd., Feburary 2013 to present; Managing Director, iQ Venture Advisors, LLC. 2005 to 2012; Chairman, Northstar Group Holdings Ltd. Bermuda, 2011 to present; Expert Witness, Massachusetts Department of Revenue, 2011 to 2012; Executive Vice President, Northstar Companies, 2002 to 2005; Senior Officer, Citibank and Citicorp for over 25 years | 41 | Argus Group Holdings; Northstar Group Holdings, NRIL, Sterling Centrecorp Inc.; Highland Financial Holdings; and Bank of Bermuda NY | |||||
Peggy L. Ettestad, Age 56 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/07 | Managing Director, Red Canoe Management Consulting LLC, 2008 to present; Senior Managing Director, Residential Capital LLC, 2003 to 2008; Chief Operations Officer, Transamerica Reinsurance 2002 to 2003 | 41 | Luther College | |||||
Roger Gelfenbien, Age 70 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 10/99 | Retired; Partner of Accenture 1983 to 1999 | 41 | Virtus Funds (8 Funds) | |||||
Claire R. Leonardi, Age 58 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/04 | Chief Executive Officer, Connecticut Innovations, Inc., 2012 to present; General Partner, Fairview Capital, L.P., 1994 to 2012 | 41 | The Natural History Museum of the Adirondacks | |||||
Dickson W. Lewis, Age 65 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/04 | Retired; Consultant to Lifetouch National School Studios; Vice President/General Manager, Yearbooks & Canada-Lifetouch National School Studios, 2006 to 2013; Vice President/General Manager of Jostens, Inc., 2002 to 2006; Senior Vice President of Fortis Group, 1997 to 2002 | 41 | None | |||||
Peter W. McClean, Age 69 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/04 | Retired; President and CEO of Measurisk, LLC, 2001 to 2003; Chief Risk Management Officer at Bank of Bermuda Ltd., 1996 to 2001 | 41 | PNMAC Opportunity Fund; Northeast Bank; and FHI | |||||
Arthur C. Reeds III, Age 69 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 10/99 | Retired; Senior Investment Officer, Hartford Foundation for Public Giving, 2000 to 2003; Chairman, Chief Executive and President of Conning Corp., 1999 to 2000; Investment Consultant, 1997 to 1999 | 41 | Connecticut Water Service, Inc. |
Interested Trustees(3)
Name, Address, and Age | Positions Held with VIP Trust and FOF Trust | Term of Office(2)/ Length of Time Served | Principal Occupation(s) During Past 5 Years | Number of VIP Trust FOF Trust | Other AZL Fund Complex | |||||
Robert DeChellis, Age 46 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 3/08 | President and CEO, Allianz Life Financial Services, LLC, 2007 to present | 41 | None | |||||
Brian Muench, Age 43 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 6/11 | President, Allianz Investment Management LLC, November 2010 to present; Vice President, Allianz Life, April 2011 to present; Vice President, Advisory Management, Allianz Investment Management LLC from December 2005 to November 2010 | 41 | None |
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Officers
Name, Address, and Age | Positions Held with VIP and VIP FOF Trust | Term of Office(2)/Length of Time Served | Principal Occupation(s) During Past 5 Years | |||
Brian Muench, Age 43 5701 Golden Hills Drive Minneapolis, MN 55416 | President | Since 11/10 | President, Allianz Investment Management LLC from November 2010, to present; Vice President, Allianz Life from April 2011 to present; Vice President, Allianz Investment Management LLC from December 2005 to November 2010. | |||
Michael Radmer, Age 68 Dorsey & Whitney LLP, Suite 1500 50 South Sixth Street Minneapolis, MN 55402-1498 | Secretary | Since 2/02 | Partner, Dorsey and Whitney LLP since 1976. | |||
Ty Edwards, Age 47 Citi Fund Services Ohio, Inc. 3435 Stelzer Road Columbus, OH 43219 | Treasurer, Principal Accounting Officer and Principal Financial Officer | Since 4/10 | Senior Vice President, Financial Administration, Citi Fund Services Ohio, Inc., December 2009 to present; Director, Product Management, Columbia Management, April 2007 to April 2009; Deputy Treasurer, Columbia Funds and Director, Fund Administration, Columbia Management, January 2006 to April 2007. | |||
Christopher R. Pheiffer, Age 45(4) 5701 Golden Hills Drive Minneapolis, MN 55416 | Chief Compliance Officer(5) and Anti-Money Laundering Compliance Officer | Since 2/14 (interim) | Deputy Chief Compliance Officer of the Trusts, 2007-2014 |
(1) | Member of the Audit Committee. |
(2) | Indefinite. |
(3) | Is an “interested person”, as defined by the 1940 Act, due to employment by Allianz. |
(4) | Stephen G. Simon, previously the Chief Compliance Officer of the Trusts, resigned all of his positions with Allianz effective February 21, 2014. Mr. Pheiffer, previously the Deputy Chief Compliance Officer of the Trusts, has been named Chief Compliance Officer of the Trusts on an interim basis while a search for a permanent replacement is conducted. |
(5) | The Manager and the Trust are parties to a Chief Compliance Officer Agreement under which the Manager is compensated by the Trust for providing an employee of the Manager or one of its affiliates to act as the Trust’s Chief Compliance Officer. The Chief Compliance Officer and Anti-Money Laundering Compliance Officer is not considered a corporate officer or executive employee of the Trust. |
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The Allianz VIP Funds are distributed by Allianz Life Financial Services, LLC. | ||
These Funds are not FDIC Insured. | ANNRPT1213 2/14 |
AZL® Small Cap Stock Index
Fund Annual Report
December 31, 2013
Table of Contents
Management Discussion and Analysis
Page 1
Expense Examples and Portfolio Composition
Page 3
Schedule of Portfolio Investments
Page 4
Statement of Assets and Liabilities
Page 12
Statement of Operations
Page 12
Statements of Changes in Net Assets
Page 13
Financial Highlights
Page 14
Notes to the Financial Statements
Page 15
Report of Independent Registered Public Accounting Firm
Page 20
Other Federal Income Tax Information
Page 21
Other Information
Page 22
Approval of Investment Advisory and Subadvisory Agreements
Page 23
Information about the Board of Trustees and Officers
Page 26
This report is submitted for the general information of the shareholder of the Fund. The report is not authorized for distribution to prospective investors in the Fund unless preceded or accompanied by an effective prospectus, which contains details concerning the sales charges and other pertinent information.
AZL® Small Cap Stock Index Fund Review (unaudited) |
Allianz Investment Management LLC serves as the Manager for the AZL® Small Cap Stock Index Fund and BlackRock Investment Management, LLC serves as Subadviser to the Fund.
What factors affected the Fund’s performance during the year ended December 31, 2013?
For the year ended December 31, 2013, the AZL® Small Cap Stock Index Fund returned 40.62%1. That compared to a 41.31% total return for its benchmark, the S&P SmallCap 600 Index2.
The Fund attempts to replicate the performance of the S&P SmallCap 600 Index of small-cap U.S. stocks. Equities began the period with a powerful rally after the United States averted the worst of its potential fiscal crisis with a last-minute tax deal. The rally softened as political and financial instability in Europe—including a stalemate in Italian presidential elections and a banking crisis in Cyprus—gave investors pause later in the first half of the period. However, equities soon regained their momentum as low interest rates and increased global liquidity spurred stock prices higher.*
In May, stocks responded negatively to news that the Federal Reserve might begin gradually reducing (or tapering) its monetary stimulus efforts before the end of the year, although stocks rebounded once it became clear that the Fed remained undecided about the timing of the taper. Meanwhile, the modest pace of economic growth boded well for corporate profit margins as the economic recovery was strong enough to support revenues but not so strong as to boost wage growth.
September brought another sharp rally in stock prices, as the Fed decided to delay the taper, despite market expectations to the contrary. The rally was interrupted as budget and debt ceiling negotiations led to a partial government shutdown and fears of a potential technical default in the national debt. Stocks regained their momentum in the fourth quarter once the government reopened and economic indicators improved. The Fed’s announcement in mid-December that it would begin tapering in 2014, but maintain short-term interest rates at their low levels, alleviated the market’s anxiety over the interest rate uncertainty. Investors responded positively, pushing stocks higher to close out the period.
Among sectors in the benchmark, consumer-driven areas were the strongest performers due to low interest rates and rising home prices. The health care sector in particular posted very strong returns, as did the consumer discretionary and industrial sectors. Significant gains also came from the information technology, materials and energy sectors, despite the fact that these sectors lagged the benchmark index.
The underperformance of the Fund compared to its benchmark was the result of Fund expenses that are not incurred by the benchmark.*
Past performance does not guarantee future results.
* | The Fund’s portfolio composition is subject to change. There is no guarantee that any sectors mentioned will continue to perform well or that securities in such sectors will be held by the Fund in the future. The information contained in this commentary is for informational purposes only and should not be construed as a recommendation to purchase or sell securities in the sector mentioned. The Fund’s holdings and weightings are as of December 31, 2013. |
1 | The recent growth rate in the stock market has helped to produce short-term returns that are not typical and may not continue in the future. Because of ongoing market volatility, Fund performance may be subject to substantial short-term changes. |
2 | The Standard & Poor’s SmallCap 600 Index (“S&P 600”) covers approximately 3% of the domestic equities market. Measuring the small-cap segment of the market that is typically renowned for poor trading liquidity and financial instability, the index is designed to be an efficient portfolio of companies that meet specific inclusion criteria to ensure that they are investable and financially viable. Investors cannot invest directly in an index. |
1 |
AZL® Small Cap Stock Index Fund Review (unaudited)
Fund Objective
The Fund’s investment objective is to seek to match the performance of the Standard & Poor’s SmallCap 600® Index (the “S&P 600”). This objective may be changed by the Trustees of the Fund without shareholder approval. The Fund seeks to achieve its objective by investing in a representative sample of stocks included in the Index and in futures whose performance is related to the index, rather than attempting to replicate the Index.
Investment Concerns
Equity securities (stocks) are more volatile and carry more risk than other forms of investments, including investments in high-grade fixed income securities. The net asset value per share of this Fund will fluctuate as the value of the securities in the portfolio changes.
Small- to mid-capitalization companies typically have a higher risk of failure and historically have experienced a greater degree of volatility.
Investing in derivatives instruments involves risks that may be different from or greater than the risk associated with investing directly in securities or other traditional instruments.
The Fund does not attempt to manage market volatility or reduce the effects of poor stock performance. In addition, factors such as Fund expenses, selection of a representative portfolio, changes in the composition of the Index, or the timing of purchases or redemptions of Fund shares may affect the correlation between the performance of the Index and the Fund’s performance.
The performance of the Fund is expected to be lower than that of the Index because of Fund fees and expenses. Securities in which the Fund will invest may involve substantial risk and may be subject to sudden severe price declines.
For a complete description of these and other risks associated with investing in a mutual Fund, please refer to the Fund’s prospectus.
Growth of $10,000 Investment
The chart above represents a comparison of a hypothetical investment in the Fund versus a similar investment in the Fund’s benchmark, and represents the reinvestment of dividends and capital gains in the Fund.
Average Annual Total Returns as of December 31, 2013
Since | ||||||||||||||||
1 | 3 | 5 | Inception | |||||||||||||
Year | Year | Year | (5/1/07) | |||||||||||||
AZL® Small Cap Stock Index Fund | 40.62 | %1 | 17.77 | % | 20.67 | % | 7.93 | % | ||||||||
S&P SmallCap 600 Index | 41.31 | % | 18.42 | % | 21.37 | % | 8.35 | % |
Past performance does not guarantee future results. The performance data quoted represents past performance and current returns may be lower or higher. The investment return and principal value will fluctuate so that an investor’s shares, when redeemed may be worth more or less than the original cost. To obtain performance information current to the most recent month end, please visit www.Allianzlife.com.
Expense Ratio2 | Gross | |||
AZL® Small Cap Stock Index Fund | 0.65 | % |
The above expense ratio is based on the current Fund prospectus dated April 29, 2013. The Manager and the Fund have entered into a written contract limiting operating expenses, excluding certain expenses (such as interest expense and Acquired Fund fees and expenses), to 0.71% through April 30, 2015. Additional information pertaining to the December 31, 2013 expense ratios can be found in the financial highlights.
1 | The recent growth rate in the stock market has helped to produce short-term returns that are not typical and may not continue in the future. Because of ongoing market volatility, Fund performance may be subject to substantial short-term changes. |
2 | Acquired Fund Fees and Expenses are incurred indirectly by the Fund through the valuation of the Fund’s investments in the other investment companies. Accordingly, Acquired Fees and Expenses affect the Fund’s total returns. Because these fees and expenses are not included in the Fund’s financial highlights, the Fund’s total annual fund operating expenses do not correlate to the ratios of expenses to average net assets shown in the financial highlights table. Without Acquired Fund Fees and expenses the Fund’s gross ratio would be 0.61%. |
The total return of the Fund does not reflect the effect of any insurance charges, the annual maintenance fee or the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. Such charges, fees and tax payments would reduce the performance quoted. |
The Fund’s performance is measured against the Standard & Poor’s SmallCap 600 Index (“S&P 600”), an unmanaged index which covers approximately 3% of the domestic equities market. Measuring the small-cap segment of the market that is typically renowned for poor trading liquidity and financial instability, the index is designed to be an efficient portfolio of companies that meet specific inclusion criteria to ensure that they are investable and financially viable. The index does not reflect the deduction of fees associated with a mutual fund, such as investment management and fund accounting fees. The Fund’s performance reflects the deduction of fees for services provided to the Fund. Investors cannot invest directly in an index. |
2
AZL Small Cap Stock Index Fund
(Unaudited)
As a shareholder of the AZL Small Cap Stock Index Fund (the “Fund”), you incur ongoing costs, including management fees, distribution fees, and other Fund expenses. These examples are intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. Please note that the expenses shown in each table do not reflect expenses that apply to the subaccount or the insurance contract. If the expenses that apply to the subaccount of the insurance contract were included, your costs would have been higher.
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the periods presented below.
The Actual Expense table below provides information about actual account values and actual expenses. You may use the information below, 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 table under the heading entitled “Expenses Paid During Period” to estimate the expenses you paid on your account during this period.
Beginning Account Value 7/1/13 | Ending Account Value 12/31/13 | Expenses Paid During Period 7/1/13 - 12/31/13* | Annualized Expense Ratio During Period 7/1/13 - 12/31/13 | |||||||||||||||||
AZL Small Cap Stock Index Fund | $ | 1,000.00 | $ | 1,212.40 | $ | 3.29 | 0.59 | % |
The Hypothetical Expense table below provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.
Beginning Account Value 7/1/13 | Ending Account Value 12/31/13 | Expenses Paid During Period 7/1/13 - 12/31/13* | Annualized Expense Ratio During Period 7/1/13 - 12/31/13 | |||||||||||||||||
AZL Small Cap Stock Index Fund | $ | 1,000.00 | $ | 1,022.23 | $ | 3.01 | 0.59 | % |
* | Expenses are equal to the average account value over the period, multiplied by the Fund’s annualized expense ratio, multiplied by 184/365 (to reflect the one half year period). |
Portfolio Composition
(Unaudited)
Investments | Percent of net assets | ||||
Financials | 20.4 | % | |||
Information Technology | 17.6 | ||||
Consumer Discretionary | 15.7 | ||||
Industrials | 15.6 | ||||
Health Care | 11.2 | ||||
Materials | 5.9 | ||||
Energy | 4.1 | ||||
Consumer Staples | 3.8 | ||||
Utilities | 3.4 | ||||
Telecommunication Services | 0.4 | ||||
|
| ||||
Total Common Stock | 98.1 | ||||
Securities Held as Collateral for Securities on Loan | 5.1 | ||||
Money Market | 1.9 | ||||
|
| ||||
Total Investment Securities | 105.1 | ||||
Net other assets (liabilities) | (5.1 | ) | |||
|
| ||||
Net Assets | 100.0 | % | |||
|
|
3
AZL Small Cap Stock Index Fund
Schedule of Portfolio Investments
December 31, 2013
Shares | Fair Value | |||||||
| Common Stocks (98.1%): |
| ||||||
| Aerospace & Defense (2.3%): |
| ||||||
21,437 | AAR Corp. | $ | 600,450 | |||||
10,734 | Aerovironment, Inc.* | 312,681 | ||||||
4,254 | American Science & Engineering, Inc. | 305,905 | ||||||
11,315 | Cubic Corp. | 595,848 | ||||||
25,649 | Curtiss-Wright Corp. | 1,596,137 | ||||||
9,337 | Engility Holdings, Inc.* | 311,856 | ||||||
33,093 | Gencorp, Inc.*^ | 596,336 | ||||||
24,564 | Moog, Inc., Class A* | 1,668,878 | ||||||
2,648 | National Presto Industries, Inc.* | 213,164 | ||||||
32,740 | Orbital Sciences Corp.* | 762,842 | ||||||
20,316 | Teledyne Technologies, Inc.* | 1,866,229 | ||||||
|
| |||||||
8,830,326 | ||||||||
|
| |||||||
| Air Freight & Logistics (0.5%): |
| ||||||
13,602 | Atlas Air Worldwide Holdings* | 559,722 | ||||||
16,581 | Forward Air Corp. | 728,072 | ||||||
18,959 | Hub Group, Inc., Class A* | 756,085 | ||||||
|
| |||||||
2,043,879 | ||||||||
|
| |||||||
| Airlines (0.3%): |
| ||||||
7,946 | Allegiant Travel Co. | 837,826 | ||||||
28,047 | SkyWest, Inc. | 415,937 | ||||||
|
| |||||||
1,253,763 | ||||||||
|
| |||||||
| Application Software (0.1%): |
| ||||||
18,442 | Tangoe, Inc.*^ | 332,140 | ||||||
|
| |||||||
| Auto Components (0.6%): |
| ||||||
16,384 | Dorman Products, Inc.* | 918,650 | ||||||
11,830 | Drew Industries, Inc. | 605,696 | ||||||
18,348 | Spartan Motors, Inc. | 122,932 | ||||||
11,265 | Standard Motor Products, Inc. | 414,552 | ||||||
12,720 | Superior Industries International, Inc. | 262,414 | ||||||
|
| |||||||
2,324,244 | ||||||||
|
| |||||||
| Automobiles (0.1%): |
| ||||||
15,131 | Winnebago Industries, Inc.* | 415,346 | ||||||
|
| |||||||
| Banks (0.1%): |
| ||||||
42,699 | Sterling BanCorp/de | 570,886 | ||||||
|
| |||||||
| Beverages (0.3%): |
| ||||||
4,724 | Boston Beer Co., Inc. (The), Class A* | 1,142,216 | ||||||
|
| |||||||
| Biotechnology (0.7%): |
| ||||||
22,354 | Acorda Therapeutics, Inc.* | 652,737 | ||||||
29,811 | ArQule, Inc.* | 64,094 | ||||||
15,571 | Emergent Biosolutions, Inc.* | 357,977 | ||||||
11,054 | Ligand Pharmaceuticals, Inc., Class B*^ | 581,440 | ||||||
24,949 | Momenta Pharmaceuticals, Inc.* | 441,098 | ||||||
29,079 | Spectrum Pharmaceuticals, Inc.*^ | 257,349 | ||||||
|
| |||||||
2,354,695 | ||||||||
|
| |||||||
| Building Products (1.0%): |
| ||||||
15,134 | AAON, Inc. | 483,531 | ||||||
6,507 | American Woodmark Corp.* | 257,222 | ||||||
15,592 | Apogee Enterprises, Inc. | 559,909 | ||||||
15,580 | Gibraltar Industries, Inc.* | 289,632 | ||||||
24,141 | Griffon Corp. | 318,903 | ||||||
20,134 | Quanex Building Products Corp. | 401,069 | ||||||
22,044 | Simpson Manufacturing Co., Inc. | 809,676 | ||||||
10,779 | Universal Forest Products, Inc. | 562,017 | ||||||
|
| |||||||
3,681,959 | ||||||||
|
|
Shares | Fair Value | |||||||
| Common Stocks, continued |
| ||||||
| Capital Markets (2.2%): |
| ||||||
10,268 | Calamos Asset Management, Inc., Class A | $ | 121,573 | |||||
17,769 | Evercore Partners, Inc., Class A | 1,062,231 | ||||||
27,295 | Financial Engines, Inc. | 1,896,456 | ||||||
17,969 | HFF, Inc., Class A* | 482,468 | ||||||
19,733 | Investment Technology Group, Inc.* | 405,710 | ||||||
8,707 | Piper Jaffray Cos., Inc.* | 344,362 | ||||||
153,881 | Prospect Capital Corp. | 1,726,545 | ||||||
31,927 | Stifel Financial Corp.* | 1,529,942 | ||||||
15,843 | SWS Group, Inc.* | 96,325 | ||||||
3,796 | Virtus Investment Partners, Inc.* | 759,390 | ||||||
|
| |||||||
8,425,002 | ||||||||
|
| |||||||
| Chemicals (2.8%): |
| ||||||
15,922 | A. Schulman, Inc. | 561,410 | ||||||
13,542 | American Vanguard Corp. | 328,935 | ||||||
16,323 | Balchem Corp. | 958,160 | ||||||
29,575 | Calgon Carbon Corp.* | 608,358 | ||||||
24,617 | Flotek Industries, Inc.* | 494,063 | ||||||
27,218 | H.B. Fuller Co. | 1,416,424 | ||||||
5,100 | Hawkins, Inc. | 189,669 | ||||||
11,906 | Innophos Holdings, Inc. | 578,632 | ||||||
11,173 | Koppers Holdings, Inc. | 511,165 | ||||||
17,652 | Kraton Performance Polymers, Inc.* | 406,879 | ||||||
10,370 | LSB Industries, Inc.* | 425,377 | ||||||
17,321 | OM Group, Inc.* | 630,658 | ||||||
52,183 | PolyOne Corp. | 1,844,668 | ||||||
7,142 | Quaker Chemical Corp. | 550,434 | ||||||
10,274 | Stepan Co. | 674,283 | ||||||
13,672 | Tredegar Corp. | 393,890 | ||||||
12,387 | Zep, Inc. | 224,948 | ||||||
|
| |||||||
10,797,953 | ||||||||
|
| |||||||
| Commercial Banks (7.1%): |
| ||||||
17,490 | Bank of the Ozarks, Inc. | 989,759 | ||||||
10,578 | Banner Corp. | 474,106 | ||||||
42,930 | BBCN Bancorp, Inc. | 712,209 | ||||||
43,244 | Boston Private Financial Holdings, Inc. | 545,739 | ||||||
16,336 | Cardinal Financial Corp. | 294,048 | ||||||
8,521 | City Holding Co. | 394,778 | ||||||
27,766 | Columbia Banking System, Inc. | 763,843 | ||||||
21,855 | Community Bank System, Inc. | 867,206 | ||||||
50,723 | CVB Financial Corp. | 865,842 | ||||||
86,029 | F.N.B. Corp. | 1,085,686 | ||||||
54,068 | First Bancorp* | 334,681 | ||||||
51,985 | First Commonwealth Financial Corp. | 458,508 | ||||||
31,253 | First Financial Bancorp | 544,740 | ||||||
16,451 | First Financial Bankshares, Inc.^ | 1,091,030 | ||||||
40,657 | First Midwest Bancorp, Inc. | 712,717 | ||||||
40,246 | Glacier Bancorp, Inc. | 1,198,928 | ||||||
17,202 | Hanmi Financial Corp. | 376,552 | ||||||
25,712 | Home Bancshares, Inc. | 960,343 | ||||||
12,443 | Independent Bank Corp. | 487,641 | ||||||
29,764 | MB Financial, Inc. | 955,127 | ||||||
63,143 | National Penn Bancshares, Inc. | 715,410 | ||||||
23,485 | NBT Bancorp, Inc. | 608,262 | ||||||
54,530 | Old National Bancorp | 838,126 | ||||||
20,874 | PacWest Bancorp | 881,300 | ||||||
17,918 | Pinnacle Financial Partners, Inc. | 582,873 |
Continued
4
AZL Small Cap Stock Index Fund
Schedule of Portfolio Investments
December 31, 2013
Shares | Fair Value | |||||||
| Common Stocks, continued |
| ||||||
| Commercial Banks, continued |
| ||||||
35,340 | PrivateBancorp, Inc. | $ | 1,022,386 | |||||
16,139 | S & T Bancorp, Inc. | 408,478 | ||||||
8,765 | Simmons First National Corp., Class A | 325,620 | ||||||
101,389 | Susquehanna Bancshares, Inc. | 1,301,835 | ||||||
8,239 | Taylor Capital Group, Inc.* | 218,993 | ||||||
22,191 | Texas Capital Bancshares, Inc.* | 1,380,279 | ||||||
6,375 | Tompkins Financial Corp. | 327,611 | ||||||
20,294 | UMB Financial Corp. | 1,304,498 | ||||||
60,610 | Umpqua Holdings Corp.^ | 1,160,075 | ||||||
15,971 | United Bankshares, Inc.^ | 502,288 | ||||||
20,827 | United Community Banks, Inc.* | 369,679 | ||||||
36,758 | Wilshire Bancorp, Inc. | 401,765 | ||||||
21,625 | Wintrust Financial Corp. | 997,345 | ||||||
|
| |||||||
27,460,306 | ||||||||
|
| |||||||
| Commercial Services & Supplies (3.0%): |
| ||||||
27,768 | ABM Industries, Inc. | 793,887 | ||||||
4,340 | Consolidated Graphics, Inc.* | 292,690 | ||||||
12,667 | Encore Capital Group, Inc.* | 636,643 | ||||||
10,728 | G & K Services, Inc., Class A | 667,603 | ||||||
38,718 | Geo Group, Inc. (The) | 1,247,494 | ||||||
37,801 | Healthcare Services Group, Inc. | 1,072,414 | ||||||
17,636 | Higher One Holdings, Inc.*^ | 172,127 | ||||||
31,592 | Interface, Inc. | 693,760 | ||||||
22,059 | Mobile Mini, Inc.* | 908,390 | ||||||
26,934 | Portfolio Recovery Associates, Inc.* | 1,423,194 | ||||||
21,258 | Sykes Enterprises, Inc.* | 463,637 | ||||||
34,728 | Tetra Tech, Inc.* | 971,689 | ||||||
8,234 | UniFirst Corp. | 881,038 | ||||||
21,619 | United Stationers, Inc. | 992,096 | ||||||
11,058 | Viad Corp. | 307,191 | ||||||
|
| |||||||
11,523,853 | ||||||||
|
| |||||||
| Communications Equipment (1.6%): |
| ||||||
62,159 | Arris Group, Inc.* | 1,514,504 | ||||||
5,354 | Bel Fuse, Inc., Class B | 114,094 | ||||||
8,676 | Black Box Corp. | 258,545 | ||||||
18,055 | Calamp Corp.* | 504,998 | ||||||
8,855 | Comtech Telecommunications Corp. | 279,110 | ||||||
13,952 | Digi International, Inc.* | 169,098 | ||||||
54,523 | Harmonic, Inc.* | 402,380 | ||||||
30,529 | Ixia* | 406,341 | ||||||
20,992 | NETGEAR, Inc.* | 691,476 | ||||||
9,744 | Oplink Communications, Inc.* | 181,238 | ||||||
9,536 | PC-Tel, Inc. | 91,260 | ||||||
11,144 | Procera Networks, Inc.* | 167,383 | ||||||
22,708 | ViaSat, Inc.* | 1,422,656 | ||||||
|
| |||||||
6,203,083 | ||||||||
|
| |||||||
| Computers & Peripherals (0.8%): |
| ||||||
16,877 | Avid Technology, Inc.* | 137,548 | ||||||
25,474 | Electronics for Imaging, Inc.* | 986,607 | ||||||
13,019 | Intevac, Inc.* | 96,731 | ||||||
47,244 | QLogic Corp.* | 558,897 | ||||||
17,676 | Super Micro Computer, Inc.* | 303,320 | ||||||
18,013 | Synaptics, Inc.* | 933,254 | ||||||
|
| |||||||
3,016,357 | ||||||||
|
|
Shares | Fair Value | |||||||
| Common Stocks, continued |
| ||||||
| Construction & Engineering (0.8%): |
| ||||||
20,853 | Aegion Corp.* | $ | 456,472 | |||||
20,261 | Comfort Systems USA, Inc. | 392,861 | ||||||
18,283 | Dycom Industries, Inc.* | 508,085 | ||||||
36,351 | Emcor Group, Inc. | 1,542,736 | ||||||
14,770 | Orion Marine Group, Inc.* | 177,683 | ||||||
|
| |||||||
3,077,837 | ||||||||
|
| |||||||
| Construction Materials (0.3%): |
| ||||||
39,706 | Headwaters, Inc.* | 388,722 | ||||||
11,622 | Texas Industries, Inc.* | 799,361 | ||||||
|
| |||||||
1,188,083 | ||||||||
|
| |||||||
| Consumer Finance (0.6%): |
| ||||||
15,240 | Cash America International, Inc. | 583,692 | ||||||
29,454 | EZCORP, Inc., Class A* | 344,317 | ||||||
15,652 | First Cash Financial Services, Inc.* | 967,920 | ||||||
5,937 | World Acceptance Corp.*^ | 519,666 | ||||||
|
| |||||||
2,415,595 | ||||||||
|
| |||||||
| Containers & Packaging (0.1%): |
| ||||||
14,497 | Myers Industries, Inc. | 306,177 | ||||||
|
| |||||||
| Distributors (0.4%): |
| ||||||
24,870 | Pool Corp. | 1,445,942 | ||||||
10,662 | VOXX International Corp.* | 178,055 | ||||||
|
| |||||||
1,623,997 | ||||||||
|
| |||||||
| Diversified Consumer Services (1.0%): |
| ||||||
9,519 | American Public Education, Inc.* | 413,791 | ||||||
5,988 | Capella Education Co. | 397,843 | ||||||
31,207 | Career Education Corp.* | 177,880 | ||||||
34,020 | Hillenbrand, Inc. | 1,000,869 | ||||||
9,906 | ITT Educational Services, Inc.*^ | 332,643 | ||||||
15,108 | Outerwall, Inc.*^ | 1,016,315 | ||||||
23,632 | Regis Corp. | 342,900 | ||||||
5,872 | Strayer Education, Inc.* | 202,408 | ||||||
11,419 | Universal Technical Institute, Inc. | 158,838 | ||||||
|
| |||||||
4,043,487 | ||||||||
|
| |||||||
| Diversified Finaincial Services (0.1%): |
| ||||||
11,740 | Green Dot Corp., Class A* | 295,261 | ||||||
|
| |||||||
| Diversified Financial Services (0.8%): |
| ||||||
19,578 | Fxcm, Inc. | 349,272 | ||||||
27,064 | Interactive Brokers Group, Inc., Class A | 658,738 | ||||||
20,374 | MarketAxess Holdings, Inc. | 1,362,409 | ||||||
19,476 | ViewPoint Financial Group | 534,616 | ||||||
|
| |||||||
2,905,035 | ||||||||
|
| |||||||
| Diversified Real Estate Investment Trusts (0.1%): |
| ||||||
18,272 | American Assets Trust, Inc. | 574,289 | ||||||
|
| |||||||
| Diversified Telecommunication Services (0.3%): |
| ||||||
5,396 | Atlantic Tele-Network, Inc. | 305,252 | ||||||
15,748 | Cbeyond, Inc.* | 108,661 | ||||||
112,940 | Cincinnati Bell, Inc.* | 402,066 | ||||||
16,737 | General Communication, Inc., Class A* | 186,618 | ||||||
9,700 | Lumos Networks Corp. | 203,700 | ||||||
|
| |||||||
1,206,297 | ||||||||
|
| |||||||
| Electric Utilities (1.1%): |
| ||||||
20,074 | ALLETE, Inc. | 1,001,291 | ||||||
21,867 | El Paso Electric Co. | 767,750 |
Continued
5
AZL Small Cap Stock Index Fund
Schedule of Portfolio Investments
December 31, 2013
Shares | Fair Value | |||||||
| Common Stocks, continued |
| ||||||
| Electric Utilities, continued |
| ||||||
30,575 | UIL Holdings Corp. | $ | 1,184,781 | |||||
22,492 | UNS Energy Corp. | 1,346,147 | ||||||
|
| |||||||
4,299,969 | ||||||||
|
| |||||||
| Electrical Equipment (1.9%): |
| ||||||
13,810 | AZZ, Inc. | 674,757 | ||||||
23,529 | Belden CDT, Inc. | 1,657,618 | ||||||
25,418 | Brady Corp., Class A | 786,179 | ||||||
10,086 | Encore Wire Corp. | 546,661 | ||||||
25,666 | EnerSys | 1,798,930 | ||||||
21,157 | Franklin Electric Co., Inc. | 944,448 | ||||||
29,477 | II-VI, Inc.* | 518,795 | ||||||
5,005 | Powell Industries, Inc. | 335,285 | ||||||
9,954 | Vicor Corp.* | 133,583 | ||||||
|
| |||||||
7,396,256 | ||||||||
|
| |||||||
| Electronic Equipment, Instruments & Components (4.9%): |
| ||||||
7,756 | Agilysys, Inc.* | 107,964 | ||||||
14,449 | Anixter International, Inc. | 1,298,097 | ||||||
7,795 | Badger Meter, Inc. | 424,828 | ||||||
29,398 | Benchmark Electronics, Inc.* | 678,506 | ||||||
22,449 | Checkpoint Systems, Inc.* | 354,021 | ||||||
44,898 | Cognex Corp.* | 1,714,205 | ||||||
13,438 | Coherent, Inc.* | 999,653 | ||||||
18,316 | CTS Corp. | 364,672 | ||||||
20,704 | Daktronics, Inc. | 324,639 | ||||||
9,865 | DTS, Inc.* | 236,563 | ||||||
13,800 | Electro Scientific Industries, Inc. | 144,348 | ||||||
9,270 | FARO Technologies, Inc.* | 540,441 | ||||||
22,609 | FEI Co. | 2,020,339 | ||||||
22,931 | Insight Enterprises, Inc.* | 520,763 | ||||||
12,131 | Littlelfuse, Inc. | 1,127,334 | ||||||
8,164 | Measurement Specialties, Inc.* | 495,473 | ||||||
18,044 | Mercury Computer Systems, Inc.* | 197,582 | ||||||
19,233 | Methode Electronics, Inc. | 657,576 | ||||||
8,410 | MTS Systems Corp. | 599,213 | ||||||
21,243 | Newport Corp.* | 383,861 | ||||||
10,210 | OSI Systems, Inc.* | 542,253 | ||||||
11,329 | Park Electrochemical Corp. | 325,369 | ||||||
18,303 | Plexus Corp.* | 792,337 | ||||||
15,209 | Rofin-Sinar Technologies, Inc.* | 410,947 | ||||||
9,597 | Rogers Corp.* | 590,216 | ||||||
45,612 | Sanmina Corp.* | 761,720 | ||||||
15,239 | ScanSource, Inc.* | 646,591 | ||||||
14,258 | SYNNEX Corp.* | 960,989 | ||||||
29,443 | TTM Technologies, Inc.* | 252,621 | ||||||
|
| |||||||
18,473,121 | ||||||||
|
| |||||||
| Energy Equipment & Services (2.0%): |
| ||||||
14,370 | Basic Energy Services, Inc.* | 226,759 | ||||||
19,831 | Bristow Group, Inc. | 1,488,516 | ||||||
10,206 | Era Group, Inc.* | 314,957 | ||||||
31,750 | Exterran Holdings, Inc.* | 1,085,850 | ||||||
7,013 | Geospace Technologies Corp.* | 665,043 | ||||||
6,647 | Gulf Island Fabrication, Inc. | 154,343 | ||||||
17,571 | Hornbeck Offshore Services, Inc.* | 865,020 | ||||||
66,101 | ION Geophysical Corp.* | 218,133 | ||||||
14,205 | Matrix Service Co.* | 347,596 |
Shares | Fair Value | |||||||
| Common Stocks, continued |
| ||||||
| Energy Equipment & Services, continued |
| ||||||
47,351 | Newpark Resources, Inc.* | $ | 581,944 | |||||
10,240 | SEACOR Holdings, Inc.* | 933,888 | ||||||
16,989 | Tesco Corp.* | 336,042 | ||||||
42,706 | TETRA Technologies, Inc.* | 527,846 | ||||||
|
| |||||||
7,745,937 | ||||||||
|
| |||||||
| Food & Staples Retailing (0.7%): |
| ||||||
9,519 | Andersons, Inc. (The) | 848,809 | ||||||
20,836 | Casey’s General Stores, Inc. | 1,463,729 | ||||||
19,806 | Spartan Stores, Inc. | 480,890 | ||||||
|
| |||||||
2,793,428 | ||||||||
|
| |||||||
| Food Products (2.1%): |
| ||||||
9,161 | Annie’s, Inc.* | 394,289 | ||||||
28,942 | B&G Foods, Inc. | 981,423 | ||||||
6,992 | Calavo Growers, Inc.^ | 211,578 | ||||||
8,102 | Cal-Maine Foods, Inc. | 487,983 | ||||||
85,658 | Darling International, Inc.* | 1,788,539 | ||||||
11,203 | Diamond Foods, Inc.*^ | 289,486 | ||||||
7,886 | J & J Snack Foods Corp. | 698,621 | ||||||
10,968 | Sanderson Farms, Inc. | 793,315 | ||||||
3,892 | Seneca Foods Corp., Class A* | 124,116 | ||||||
26,489 | Snyders-Lance, Inc. | 760,764 | ||||||
19,718 | TreeHouse Foods, Inc.* | 1,358,965 | ||||||
|
| |||||||
7,889,079 | ||||||||
|
| |||||||
| Forest Products&Paper (0.1%): |
| ||||||
12,172 | Futurefuel Corp. | 192,318 | ||||||
|
| |||||||
| Gas Utilities (1.6%): |
| ||||||
16,475 | Laclede Group, Inc. (The) | 750,272 | ||||||
22,758 | New Jersey Resources Corp. | 1,052,330 | ||||||
14,619 | Northwest Natural Gas Co. | 625,986 | ||||||
41,115 | Piedmont Natural Gas Co., Inc. | 1,363,373 | ||||||
17,441 | South Jersey Industries, Inc. | 975,998 | ||||||
25,099 | Southwest Gas Corp. | 1,403,284 | ||||||
|
| |||||||
6,171,243 | ||||||||
|
| |||||||
| Health Care Equipment & Supplies (3.7%): |
| ||||||
11,312 | Abaxis, Inc.* | 452,706 | ||||||
19,019 | ABIOMED, Inc.* | 508,568 | ||||||
38,270 | Align Technology, Inc.* | 2,187,130 | ||||||
6,728 | Analogic Corp. | 595,832 | ||||||
18,047 | Cantel Medical Corp. | 611,974 | ||||||
14,956 | CONMED Corp. | 635,630 | ||||||
13,468 | CryoLife, Inc. | 149,360 | ||||||
13,325 | Cyberonics, Inc.* | 872,921 | ||||||
10,582 | Cynosure, Inc., Class A* | 282,328 | ||||||
13,073 | Greatbatch, Inc.* | 578,350 | ||||||
27,902 | Haemonetics Corp.* | 1,175,511 | ||||||
7,104 | ICU Medical, Inc.* | 452,596 | ||||||
12,707 | Integra LifeSciences Holdings* | 606,251 | ||||||
15,654 | Invacare Corp. | 363,329 | ||||||
22,487 | Meridian Bioscience, Inc. | 596,580 | ||||||
22,001 | Merit Medical Systems, Inc.* | 346,296 | ||||||
15,098 | Natus Medical, Inc.* | 339,705 | ||||||
19,739 | Neogen Corp.* | 902,072 | ||||||
24,164 | NuVasive, Inc.* | 781,222 | ||||||
7,717 | Surmodics, Inc.* | 188,218 | ||||||
20,188 | Symmetry Medical, Inc.* | 203,495 |
Continued
6
AZL Small Cap Stock Index Fund
Schedule of Portfolio Investments
December 31, 2013
Shares | Fair Value | |||||||
| Common Stocks, continued |
| ||||||
| Health Care Equipment & Supplies, continued |
| ||||||
37,813 | West Pharmaceutical Services, Inc. | $ | 1,855,106 | |||||
|
| |||||||
14,685,180 | ||||||||
|
| |||||||
| Health Care Providers & Services (3.2%): |
| ||||||
19,027 | Air Methods Corp.* | 1,109,845 | ||||||
4,563 | Almost Family, Inc.* | 147,522 | ||||||
17,589 | Amedisys, Inc.* | 257,327 | ||||||
24,972 | AMN Healthcare Services, Inc.* | 367,088 | ||||||
17,458 | AmSurg Corp.* | 801,671 | ||||||
13,370 | Bio-Reference Laboratories, Inc.*^ | 341,470 | ||||||
29,656 | Centene Corp.* | 1,748,220 | ||||||
9,551 | Chemed Corp.^ | 731,798 | ||||||
6,175 | CorVel Corp.* | 288,373 | ||||||
14,612 | Cross Country Healthcare, Inc.* | 145,828 | ||||||
10,608 | Ensign Group, Inc. (The) | 469,616 | ||||||
15,700 | Gentiva Health Services, Inc.* | 194,837 | ||||||
18,829 | Hanger Orthopedic Group, Inc.* | 740,733 | ||||||
18,998 | Healthways, Inc.* | 291,619 | ||||||
9,168 | IPC The Hospitalist Co.* | 544,488 | ||||||
29,349 | Kindred Healthcare, Inc. | 579,349 | ||||||
5,143 | Landauer, Inc. | 270,573 | ||||||
6,590 | LHC Group, Inc.* | 158,424 | ||||||
14,659 | Magellan Health Services, Inc.* | 878,221 | ||||||
15,367 | Molina Healthcare, Inc.* | 534,003 | ||||||
6,959 | MWI Veterinary Supply, Inc.* | 1,187,136 | ||||||
16,079 | PharMerica Corp.* | 345,699 | ||||||
|
| |||||||
12,133,840 | ||||||||
|
| |||||||
| Health Care Supplies (0.1%): |
| ||||||
6,159 | Anika Therapeutics, Inc.* | 235,027 | ||||||
|
| |||||||
| Health Care Technology (0.9%): |
| ||||||
5,683 | Computer Programs & Systems, Inc. | 351,266 | ||||||
11,075 | HealthStream, Inc.* | 362,928 | ||||||
27,238 | Medidata Solutions, Inc.* | 1,649,806 | ||||||
19,291 | Omnicell, Inc.* | 492,499 | ||||||
23,774 | Quality Systems, Inc. | 500,680 | ||||||
|
| |||||||
3,357,179 | ||||||||
|
| |||||||
| Hotels, Restaurants & Leisure (3.3%): |
| ||||||
795 | Biglari Holdings, Inc.* | 402,779 | ||||||
13,466 | BJ’s Restaurants, Inc.* | 418,254 | ||||||
40,897 | Boyd Gaming Corp.* | 460,500 | ||||||
10,170 | Buffalo Wild Wings, Inc.* | 1,497,024 | ||||||
8,952 | CEC Entertainment, Inc. | 396,395 | ||||||
12,894 | Cracker Barrel Old Country Store, Inc. | 1,419,243 | ||||||
8,766 | DineEquity, Inc. | 732,399 | ||||||
21,435 | Interval Leisure Group, Inc. | 662,342 | ||||||
23,067 | Jack in the Box, Inc.* | 1,153,811 | ||||||
9,855 | Marcus Corp. | 132,451 | ||||||
16,499 | Marriott Vacations Worldwide Corp.* | 870,487 | ||||||
5,248 | Monarch Casino & Resort, Inc.* | 105,380 | ||||||
16,028 | Multimedia Games, Inc.* | 502,638 | ||||||
17,328 | Papa John’s International, Inc. | 786,691 | ||||||
30,649 | Pinnacle Entertainment, Inc.* | 796,568 | ||||||
7,072 | Red Robin Gourmet Burgers* | 520,075 | ||||||
31,126 | Ruby Tuesday, Inc.* | 215,703 | ||||||
19,256 | Ruth’s Hospitality Group, Inc. | 273,628 | ||||||
28,316 | Sonic Corp.* | 571,700 |
Shares | Fair Value | |||||||
| Common Stocks, continued |
| ||||||
| Hotels, Restaurants & Leisure, continued |
| ||||||
32,468 | Texas Roadhouse, Inc. | $ | 902,610 | |||||
|
| |||||||
12,820,678 | ||||||||
|
| |||||||
| Household Durables (1.6%): |
| ||||||
4,664 | Blyth, Inc.^ | 50,744 | ||||||
14,118 | Ethan Allen Interiors, Inc. | 429,470 | ||||||
16,313 | Helen of Troy, Ltd.* | 807,657 | ||||||
15,634 | iRobot Corp.* | 543,594 | ||||||
28,394 | La-Z-Boy, Inc. | 880,214 | ||||||
13,148 | M/I Homes, Inc.* | 334,617 | ||||||
18,449 | Meritage Corp.* | 885,367 | ||||||
25,022 | Ryland Group, Inc. (The) | 1,086,204 | ||||||
81,052 | Standard Pacific Corp.* | 733,521 | ||||||
8,426 | Universal Electronics, Inc.* | 321,115 | ||||||
|
| |||||||
6,072,503 | ||||||||
|
| |||||||
| Household Products (0.2%): |
| ||||||
22,625 | Central Garden & Pet Co., Class A* | 152,719 | ||||||
7,757 | WD-40 Co. | 579,293 | ||||||
|
| |||||||
732,012 | ||||||||
|
| |||||||
| Human Resource & Employment Services (0.2%): |
| ||||||
16,111 | Wageworks, Inc.* | 957,638 | ||||||
|
| |||||||
| Industrial Conglomerates (0.1%): |
| ||||||
6,917 | Standex International Corp. | 434,941 | ||||||
|
| |||||||
| Insurance (2.1%): |
| ||||||
10,024 | Amerisafe, Inc. | 423,414 | ||||||
10,087 | eHealth, Inc.* | 468,945 | ||||||
16,905 | Employers Holdings, Inc. | 535,043 | ||||||
5,484 | Hci Group, Inc.^ | 293,394 | ||||||
21,840 | Horace Mann Educators Corp. | 688,834 | ||||||
6,222 | Infinity Property & Casualty Corp. | 446,429 | ||||||
25,096 | Meadowbrook Insurance Group, Inc. | 174,668 | ||||||
5,761 | Navigators Group, Inc.* | 363,865 | ||||||
33,395 | ProAssurance Corp. | 1,618,989 | ||||||
9,292 | RLI Corp. | 904,854 | ||||||
6,935 | Safety Insurance Group, Inc. | 390,441 | ||||||
30,196 | Selective Insurance Group, Inc. | 817,104 | ||||||
11,339 | Stewart Information Services Corp. | 365,910 | ||||||
21,496 | Tower Group International, Ltd.^ | 72,656 | ||||||
11,702 | United Fire Group, Inc. | 335,379 | ||||||
|
| |||||||
7,899,925 | ||||||||
|
| |||||||
| Internet (0.1%): |
| ||||||
10,069 | Ftd Companies, Inc.* | 328,048 | ||||||
|
| |||||||
| Internet & Catalog Retail (0.2%): |
| ||||||
6,937 | Blue Nile, Inc.* | 326,663 | ||||||
15,495 | Nutri/System, Inc. | 254,738 | ||||||
10,879 | PetMed Express, Inc.^ | 180,918 | ||||||
|
| |||||||
762,319 | ||||||||
|
| |||||||
| Internet Software & Services (2.2%): |
| ||||||
22,311 | Blucora, Inc.* | 650,589 | ||||||
17,979 | comScore, Inc.* | 514,379 | ||||||
23,771 | DealerTrack Holdings, Inc.* | 1,142,910 | ||||||
21,722 | Dice Holdings, Inc.* | 157,485 | ||||||
15,712 | Digital River, Inc.* | 290,672 | ||||||
23,735 | j2 Global, Inc.^ | 1,186,987 | ||||||
13,984 | Liquidity Services, Inc.*^ | 316,877 |
Continued
7
AZL Small Cap Stock Index Fund
Schedule of Portfolio Investments
December 31, 2013
Shares | Fair Value | |||||||
| Common Stocks, continued |
| ||||||
| Internet Software & Services, continued |
| ||||||
26,753 | LivePerson, Inc.* | $ | 396,479 | |||||
12,300 | LogMeIn, Inc.* | 412,665 | ||||||
56,815 | Monster Worldwide, Inc.* | 405,091 | ||||||
32,382 | NIC, Inc. | 805,340 | ||||||
12,602 | OpenTable, Inc.* | 1,000,221 | ||||||
17,847 | Perficient, Inc.* | 417,977 | ||||||
15,529 | QuinStreet, Inc.* | 134,947 | ||||||
7,937 | Stamps.com, Inc.* | 334,148 | ||||||
13,538 | XO Group, Inc.* | 201,175 | ||||||
|
| |||||||
8,367,942 | ||||||||
|
| |||||||
| IT Services (1.9%): |
| ||||||
12,686 | CACI International, Inc., Class A* | 928,869 | ||||||
24,371 | Cardtronics, Inc.* | 1,058,920 | ||||||
36,472 | CIBER, Inc.* | 150,994 | ||||||
18,330 | CSG Systems International, Inc. | 538,902 | ||||||
16,770 | Exlservice Holdings, Inc.* | 463,187 | ||||||
6,979 | Forrester Research, Inc. | 267,017 | ||||||
19,969 | Heartland Payment Systems, Inc.^ | 995,255 | ||||||
15,791 | iGATE Corp.* | 634,167 | ||||||
37,112 | Maximus, Inc. | 1,632,556 | ||||||
10,430 | TeleTech Holdings, Inc.* | 249,694 | ||||||
12,763 | Virtusa Corp.* | 486,143 | ||||||
|
| |||||||
7,405,704 | ||||||||
|
| |||||||
| Leisure Equipment & Products (0.4%): |
| ||||||
7,302 | Arctic Cat, Inc. | 416,068 | ||||||
40,379 | Callaway Golf Co. | 340,395 | ||||||
9,429 | JAKKS Pacific, Inc.^ | 63,457 | ||||||
10,478 | Sturm, Ruger & Co., Inc.^ | 765,837 | ||||||
|
| |||||||
1,585,757 | ||||||||
|
| |||||||
| Life Sciences Tools & Services (0.6%): |
| ||||||
38,963 | Affymetrix, Inc.* | 333,913 | ||||||
16,428 | Cambrex Corp.* | 292,911 | ||||||
20,186 | Luminex Corp.* | 391,608 | ||||||
30,597 | PAREXEL International Corp.* | 1,382,373 | ||||||
|
| |||||||
2,400,805 | ||||||||
|
| |||||||
| Machinery (3.4%): |
| ||||||
39,551 | Actuant Corp., Class A | 1,449,149 | ||||||
15,281 | Albany International Corp., Class A | 549,046 | ||||||
10,175 | Astec Industries, Inc. | 393,060 | ||||||
24,853 | Barnes Group, Inc. | 952,118 | ||||||
25,792 | Briggs & Stratton Corp. | 561,234 | ||||||
9,527 | CIRCOR International, Inc. | 769,591 | ||||||
11,347 | EnPro Industries, Inc.* | 654,155 | ||||||
14,348 | ESCO Technologies, Inc. | 491,562 | ||||||
33,948 | Federal Signal Corp.* | 497,338 | ||||||
14,765 | John Bean Technologies Corp. | 433,057 | ||||||
6,972 | Lindsay Corp.^ | 576,933 | ||||||
9,064 | Lydall, Inc.* | 159,708 | ||||||
15,311 | Mueller Industries, Inc. | 964,746 | ||||||
10,004 | Tennant Co. | 678,371 | ||||||
29,010 | Titan International, Inc. | 521,600 | ||||||
30,948 | Toro Co. | 1,968,293 | ||||||
15,484 | Watts Water Technologies, Inc., Class A | 957,995 | ||||||
|
| |||||||
12,577,956 | ||||||||
|
|
Shares | Fair Value | |||||||
| Common Stocks, continued |
| ||||||
| Media (0.7%): |
| ||||||
11,505 | Digital Generation, Inc.* | $ | 146,689 | |||||
16,630 | E.W. Scripps Co. (The), Class A* | 361,204 | ||||||
23,676 | Harte-Hanks, Inc. | 185,146 | ||||||
76,618 | Live Nation, Inc.* | 1,513,971 | ||||||
13,993 | Scholastic Corp. | 475,902 | ||||||
|
| |||||||
2,682,912 | ||||||||
|
| |||||||
| Metals & Mining (1.5%): |
| ||||||
9,233 | A.M. Castle & Co.* | 136,371 | ||||||
73,935 | AK Steel Holding Corp.*^ | 606,267 | ||||||
13,533 | AMCOL International Corp. | 459,851 | ||||||
27,749 | Century Aluminum Co.* | 290,255 | ||||||
35,078 | Globe Specialty Metals, Inc. | 631,755 | ||||||
6,700 | Haynes International, Inc. | 370,108 | ||||||
10,161 | Kaiser Aluminum Corp. | 713,709 | ||||||
11,197 | Materion Corp. | 345,427 | ||||||
4,924 | Olympic Steel, Inc. | 142,698 | ||||||
16,550 | RTI International Metals, Inc.* | 566,176 | ||||||
64,620 | Stillwater Mining Co.* | 797,411 | ||||||
37,700 | SunCoke Energy, Inc.* | 859,936 | ||||||
|
| |||||||
5,919,964 | ||||||||
|
| |||||||
| Multiline Retail (0.2%): |
| ||||||
18,582 | Fred’s, Inc. | 344,139 | ||||||
20,076 | Tuesday Morning Corp.* | 320,413 | ||||||
|
| |||||||
664,552 | ||||||||
|
| |||||||
| Multi-Utilities (0.5%): |
| ||||||
32,512 | Avista Corp. | 916,514 | ||||||
20,829 | NorthWestern Corp. | 902,312 | ||||||
|
| |||||||
1,818,826 | ||||||||
|
| |||||||
| Oil, Gas & Consumable Fuels (2.1%): |
| ||||||
19,051 | Approach Resources, Inc.*^ | 367,494 | ||||||
114,984 | Arch Coal, Inc.^ | 511,679 | ||||||
24,530 | C&J Energy Services, Inc.*^ | 566,643 | ||||||
22,383 | Carrizo Oil & Gas, Inc.* | 1,002,087 | ||||||
32,983 | Cloud Peak Energy, Inc.* | 593,694 | ||||||
24,223 | Comstock Resources, Inc. | 443,039 | ||||||
8,283 | Contango Oil & Gas Co.* | 391,455 | ||||||
64,800 | Forest Oil Corp.* | 233,928 | ||||||
12,932 | Green Plains Renewable Energy, Inc. | 250,751 | ||||||
30,784 | Northern Oil & Gas, Inc.* | 463,915 | ||||||
19,307 | PDC Energy, Inc.* | 1,027,518 | ||||||
28,543 | Penn Virginia Corp.* | 269,160 | ||||||
30,742 | PetroQuest Energy, Inc.* | 132,805 | ||||||
33,690 | Pioneer Energy Services Corp.* | 269,857 | ||||||
27,074 | Stone Energy Corp.* | 936,490 | ||||||
23,602 | Swift Energy Co.*^ | 318,627 | ||||||
|
| |||||||
7,779,142 | ||||||||
|
| |||||||
| Paper & Forest Products (1.2%): |
| ||||||
11,402 | Clearwater Paper Corp.* | 598,605 | ||||||
6,034 | Deltic Timber Corp. | 409,950 | ||||||
21,716 | KapStone Paper & Packaging Corp.* | 1,213,055 | ||||||
8,776 | Neenah Paper, Inc. | 375,350 | ||||||
23,437 | P.H. Glatfelter Co. | 647,799 | ||||||
17,004 | Schweitzer-Mauduit International, Inc. | 875,196 | ||||||
26,872 | Wausau Paper Corp. | 340,737 | ||||||
|
| |||||||
4,460,692 | ||||||||
|
|
Continued
8
AZL Small Cap Stock Index Fund
Schedule of Portfolio Investments
December 31, 2013
Shares | Fair Value | |||||||
| Common Stocks, continued |
| ||||||
| Personal Products (0.4%): |
| ||||||
9,211 | Inter Parfums, Inc. | $ | 329,846 | |||||
6,900 | Medifast, Inc.* | 180,297 | ||||||
28,004 | Prestige Brands Holdings, Inc.* | 1,002,543 | ||||||
|
| |||||||
1,512,686 | ||||||||
|
| |||||||
| Pharmaceuticals (2.1%): |
| ||||||
38,613 | Akorn, Inc.* | 951,038 | ||||||
5,954 | Hi-Tech Pharmacal Co., Inc.* | 258,344 | ||||||
35,032 | Impax Laboratories, Inc.* | 880,704 | ||||||
34,613 | Medicines Co. (The)* | 1,336,754 | ||||||
30,272 | Questcor Pharmaceuticals, Inc.^ | 1,648,310 | ||||||
33,065 | Santarus, Inc.* | 1,056,757 | ||||||
35,270 | ViroPharma, Inc.* | 1,758,211 | ||||||
|
| |||||||
7,890,118 | ||||||||
|
| |||||||
| Professional Services (1.2%): |
| ||||||
7,880 | CDI Corp. | 146,016 | ||||||
7,111 | Exponent, Inc. | 550,676 | ||||||
8,718 | Heidrick & Struggles International, Inc. | 175,581 | ||||||
12,363 | Insperity, Inc. | 446,675 | ||||||
14,819 | Kelly Services, Inc., Class A | 369,586 | ||||||
26,794 | Korn/Ferry International* | 699,859 | ||||||
26,926 | Navigant Consulting, Inc.* | 516,979 | ||||||
25,075 | On Assignment, Inc.* | 875,620 | ||||||
21,524 | Resources Connection, Inc. | 308,439 | ||||||
22,235 | Trueblue, Inc.* | 573,218 | ||||||
|
| |||||||
4,662,649 | ||||||||
|
| |||||||
| Real Estate Investment Trusts (REITs) (6.0%): |
| ||||||
30,083 | Acadia Realty Trust | 746,961 | ||||||
8,096 | Agree Realty Corp. | 234,946 | ||||||
31,146 | Associated Estates Realty Corp.^ | 499,893 | ||||||
50,297 | Capstead Mortgage Corp.^ | 607,588 | ||||||
33,602 | Cedar Shopping Centers, Inc. | 210,349 | ||||||
11,542 | Coresite Realty Corp. | 371,537 | ||||||
95,518 | Cousins Properties, Inc. | 983,835 | ||||||
105,848 | DiamondRock Hospitality, Co. | 1,222,544 | ||||||
16,584 | EastGroup Properties, Inc. | 960,711 | ||||||
27,969 | EPR Properties | 1,374,956 | ||||||
47,209 | Franklin Street Properties Corp. | 564,148 | ||||||
14,421 | Getty Realty Corp.^ | 264,914 | ||||||
28,587 | Government Properties Income Trust | 710,387 | ||||||
51,916 | Healthcare Realty Trust, Inc. | 1,106,330 | ||||||
45,359 | Inland Real Estate Corp. | 477,177 | ||||||
70,773 | Kite Realty Group Trust | 464,979 | ||||||
56,285 | LaSalle Hotel Properties | 1,736,955 | ||||||
96,997 | Lexington Realty Trust^ | 990,339 | ||||||
18,821 | LTC Properties, Inc. | 666,075 | ||||||
87,493 | Medical Properties Trust, Inc. | 1,069,164 | ||||||
32,804 | Parkway Properties, Inc.^ | 632,789 | ||||||
36,936 | Pennsylvania Real Estate Investment Trust | 701,045 | ||||||
29,395 | Post Properties, Inc. | 1,329,536 | ||||||
10,824 | PS Business Parks, Inc. | 827,170 | ||||||
20,518 | Sabra Health Care REIT, Inc. | 536,341 | ||||||
6,886 | Saul Centers, Inc. | 328,669 | ||||||
17,336 | Sovran Self Storage, Inc. | 1,129,787 | ||||||
51,158 | Tanger Factory Outlet Centers, Inc. | 1,638,079 | ||||||
6,520 | Universal Health Realty Income Trust | 261,191 |
Shares | Fair Value | |||||||
| Common Stocks, continued |
| ||||||
| Real Estate Investment Trusts (REITs), continued |
| ||||||
13,353 | Urstadt Biddle Properties, Inc., Class A | $ | 246,363 | |||||
|
| |||||||
22,894,758 | ||||||||
|
| |||||||
| Real Estate Management & Development (0.1%): |
| ||||||
18,876 | Forestar Group, Inc.* | 401,493 | ||||||
|
| |||||||
| Road & Rail (0.5%): |
| ||||||
13,120 | Arkansas Best Corp. | 441,882 | ||||||
26,215 | Heartland Express, Inc. | 514,338 | ||||||
32,530 | Knight Transportation, Inc. | 596,600 | ||||||
13,231 | Saia, Inc.* | 424,054 | ||||||
|
| |||||||
1,976,874 | ||||||||
|
| |||||||
| Semiconductors & Semiconductor Equipment (3.6%): |
| ||||||
19,926 | Advanced Energy Industries, Inc.* | 455,508 | ||||||
17,279 | ATMI, Inc.* | 521,999 | ||||||
36,093 | Brooks Automation, Inc. | 378,616 | ||||||
12,774 | Cabot Microelectronics Corp.* | 583,772 | ||||||
11,932 | CEVA, Inc.* | 181,605 | ||||||
34,389 | Cirrus Logic, Inc.*^ | 702,567 | ||||||
12,619 | Cohu, Inc. | 132,500 | ||||||
19,714 | Diodes, Inc.* | 464,462 | ||||||
12,402 | DSP Group, Inc.* | 120,423 | ||||||
49,722 | Entropic Communications, Inc.* | 234,191 | ||||||
25,830 | Exar Corp.* | 304,536 | ||||||
71,751 | GT Advanced Technologies, Inc.*^ | 625,669 | ||||||
17,070 | Hittite Microwave Corp.* | 1,053,731 | ||||||
33,631 | Kopin Corp.* | 141,923 | ||||||
41,148 | Kulicke & Soffa Industries, Inc.* | 547,268 | ||||||
24,989 | Micrel, Inc. | 246,641 | ||||||
50,883 | Microsemi Corp.* | 1,269,531 | ||||||
28,825 | MKS Instruments, Inc. | 863,021 | ||||||
18,831 | Monolithic Power Systems, Inc.* | 652,682 | ||||||
12,070 | Nanometrics, Inc.* | 229,934 | ||||||
11,418 | Pericom Semiconductor Corp.* | 101,163 | ||||||
16,207 | Power Integrations, Inc. | 904,675 | ||||||
9,736 | Rubicon Technology, Inc.*^ | 96,873 | ||||||
17,753 | Rudolph Technologies, Inc.* | 208,420 | ||||||
16,756 | Sigma Designs, Inc.* | 79,088 | ||||||
5,644 | Supertex, Inc.* | 141,382 | ||||||
26,486 | Tessera Technologies, Inc. | 522,039 | ||||||
86,979 | TriQuint Semiconductor, Inc.* | 725,405 | ||||||
15,075 | Ultratech, Inc.* | 437,175 | ||||||
21,254 | Veeco Instruments, Inc.* | 699,469 | ||||||
|
| |||||||
13,626,268 | ||||||||
|
| |||||||
| Software (2.5%): |
| ||||||
24,795 | Blackbaud, Inc. | 933,532 | ||||||
19,926 | Bottomline Technologies, Inc.* | 720,524 | ||||||
17,232 | Ebix, Inc.^ | 253,655 | ||||||
16,373 | EPIQ Systems, Inc. | 265,406 | ||||||
8,544 | Interactive Intelligence Group* | 575,524 | ||||||
10,397 | Manhattan Associates, Inc.* | 1,221,440 | ||||||
4,897 | MicroStrategy, Inc., Class A* | 608,403 | ||||||
21,132 | Monotype Imaging Holdings, Inc. | 673,266 | ||||||
20,245 | NetScout Systems, Inc.* | 599,050 | ||||||
28,108 | Progress Software Corp.* | 726,030 | ||||||
16,464 | Synchronoss Technologies, Inc.* | 511,536 | ||||||
49,955 | Take-Two Interactive Software, Inc.* | 867,718 |
Continued
9
AZL Small Cap Stock Index Fund
Schedule of Portfolio Investments
December 31, 2013
Shares | Fair Value | |||||||
| Common Stocks, continued |
| ||||||
| Software, continued |
| ||||||
15,365 | Tyler Technologies, Inc.* | $ | 1,569,227 | |||||
15,684 | VASCO Data Security International, Inc.* | 121,237 | ||||||
|
| |||||||
9,646,548 | ||||||||
|
| |||||||
| Specialty Retail (4.5%): |
| ||||||
42,521 | Aeropostale, Inc.*^ | 386,516 | ||||||
20,202 | Barnes & Noble, Inc.* | 302,020 | ||||||
9,611 | Big 5 Sporting Goods Corp. | 190,490 | ||||||
22,225 | Brown Shoe Co., Inc. | 625,412 | ||||||
15,179 | Buckle, Inc. (The)^ | 797,808 | ||||||
14,590 | Cato Corp. | 463,962 | ||||||
12,065 | Children’s Place Retail Stores, Inc. (The)* | 687,343 | ||||||
19,827 | Christopher & Banks Corp.* | 169,323 | ||||||
26,604 | Finish Line, Inc. (The), Class A | 749,435 | ||||||
22,745 | Francesca’s Holdings Corp.* | 418,735 | ||||||
12,985 | Genesco, Inc.* | 948,684 | ||||||
11,482 | Group 1 Automotive, Inc. | 815,452 | ||||||
10,888 | Haverty Furniture Co., Inc. | 340,794 | ||||||
14,071 | Hibbett Sports, Inc.*^ | 945,712 | ||||||
15,157 | Jos. A. Bank Clothiers, Inc.* | 829,543 | ||||||
8,139 | Kirkland’s, Inc.* | 192,650 | ||||||
12,197 | Lithia Motors, Inc., Class A | 846,716 | ||||||
14,943 | Lumber Liquidators Holdings, Inc.* | 1,537,484 | ||||||
13,311 | MarineMax, Inc.* | 214,041 | ||||||
24,587 | Men’s Wearhouse, Inc. (The) | 1,255,904 | ||||||
16,157 | Monro Muffler Brake, Inc.^ | 910,609 | ||||||
28,835 | Pep Boys – Manny, Moe & Jack* | 350,057 | ||||||
29,960 | Select Comfort Corp.* | 631,856 | ||||||
18,502 | Sonic Automotive, Inc., Class A | 452,929 | ||||||
17,255 | Stage Store, Inc. | 383,406 | ||||||
15,260 | Stein Mart, Inc. | 205,247 | ||||||
16,469 | Vitamin Shoppe, Inc.* | 856,553 | ||||||
17,800 | Zale Corp.* | 280,706 | ||||||
12,012 | Zumiez, Inc.* | 312,312 | ||||||
|
| |||||||
17,101,699 | ||||||||
|
| |||||||
| Textiles, Apparel & Luxury Goods (2.7%): |
| ||||||
47,897 | Crocs, Inc.* | 762,520 | ||||||
66,460 | Fifth & Pacific Cos., Inc.* | 2,131,371 | ||||||
8,923 | G-III Apparel Group, Ltd.* | 658,428 | ||||||
27,923 | Iconix Brand Group, Inc.* | 1,108,543 | ||||||
9,746 | Movado Group, Inc. | 428,921 | ||||||
7,819 | Oxford Industries, Inc. | 630,759 | ||||||
6,802 | Perry Ellis International, Inc.* | 107,404 | ||||||
69,244 | Quiksilver Resources, Inc.* | 607,270 | ||||||
21,436 | Skechers U.S.A., Inc., Class A* | 710,175 | ||||||
31,923 | Steven Madden, Ltd.* | 1,168,063 | ||||||
54,462 | Wolverine World Wide, Inc. | 1,849,530 | ||||||
|
| |||||||
10,162,984 | ||||||||
|
|
Shares | Fair Value | |||||||
| Common Stocks, continued |
| ||||||
| Thrifts & Mortgage Finance (0.8%): |
| ||||||
23,411 | Bank Mutual Corp. | $ | 164,111 | |||||
6,528 | Bofi Holding, Inc.* | 511,991 | ||||||
38,079 | Brookline Bancorp, Inc. | 364,416 | ||||||
15,900 | Dime Community Bancshares | 269,028 | ||||||
51,011 | Northwest Bancshares, Inc. | 753,943 | ||||||
21,283 | Oritani Financial Corp. | 341,592 | ||||||
28,872 | Provident Financial Services, Inc. | 557,807 | ||||||
51,240 | TrustCo Bank Corp. | 367,903 | ||||||
|
| |||||||
3,330,791 | ||||||||
|
| |||||||
| Tobacco (0.0%): |
| ||||||
44,316 | Alliance One International, Inc.* | 135,164 | ||||||
|
| |||||||
| Trading Companies & Distributors (0.6%): |
| ||||||
22,833 | Applied Industrial Technologies, Inc. | 1,120,872 | ||||||
5,624 | Dxp Enterprises, Inc.* | 647,885 | ||||||
14,688 | Kaman Corp., Class A | 583,554 | ||||||
|
| |||||||
2,352,311 | ||||||||
|
| |||||||
| Water Utilities (0.2%): |
| ||||||
20,970 | American States Water Co. | 602,468 | ||||||
|
| |||||||
| Wireless Telecommunication Services (0.1%): |
| ||||||
8,251 | NTELOS Holdings Corp. | 166,918 | ||||||
11,706 | USA Mobility, Inc. | 167,161 | ||||||
|
| |||||||
334,079 | ||||||||
|
| |||||||
| Total Common Stocks (Cost $239,446,279) | 375,687,849 | ||||||
|
| |||||||
Contracts, Shares, Notional Amount or Principal Amount | Fair Value | |||||||
| Securities Held as Collateral for Securities on Loan (5.1%): |
| ||||||
$ | 19,562,951 | Allianz Variable Insurance Products Securities Lending Collateral Trust(a) | 19,562,951 | |||||
|
| |||||||
| Total Securities Held as Collateral for Securities on Loan | 19,562,951 | ||||||
|
| |||||||
| Unaffiliated Investment Company (1.9%): |
| ||||||
7,359,945 | Dreyfus Treasury Prime Cash Management Fund, Institutional Shares, 0.00%(b) | 7,359,945 | ||||||
|
| |||||||
| Total Unaffiliated Investment Company (Cost $7,359,945) | 7,359,945 | ||||||
|
| |||||||
| Total Investment Securities (Cost $266,369,175)(c) — 105.1% | 402,610,745 | ||||||
| Net other assets (liabilities) — (5.1)% | (19,458,545 | ) | |||||
|
| |||||||
| Net Assets — 100.0% | $ | 383,152,200 | |||||
|
|
Percentages indicated are based on net assets as of December 31, 2013.
* | Non-income producing security. |
^ | This security or a partial position of this security was on loan as of December 31, 2013. The total value of securities on loan as of December 31, 2013, was $19,009,149. |
(a) | Purchased with cash collateral held from securities lending. The value of the collateral could include collateral held for securities that were sold on or before December 31, 2013. |
(b) | The rate represents the effective yield at December 31, 2013. |
(c) | See Federal Tax Information listed in the Notes to the Financial Statements. |
Continued
10
AZL Small Cap Stock Index Fund
Schedule of Portfolio Investments
December 31, 2013
Futures Contracts
Cash of $313,000 has been segregated to cover margin requirements for the following open contracts as of December 31, 2013:
Description | Type | Expiration Date | Number of Contracts | Notional Value | Unrealized Appreciation/ (Depreciation) | |||||||||||||||
Russell 2000 Mini Index March Future | Long | 3/21/14 | 73 | $ | 8,478,220 | $ | 288,141 |
See accompanying notes to the financial statements.
11
AZL Small Cap Stock Index Fund
Statement of Assets and Liabilities
December 31, 2013
Assets: | |||||
Investment securities, at cost | $ | 266,369,175 | |||
|
| ||||
Investment securities, at value* | $ | 402,610,745 | |||
Segregated cash for collateral | 313,000 | ||||
Interest and dividends receivable | 488,474 | ||||
Receivable for capital shares issued | 230,601 | ||||
Receivable for variation margin on futures contracts | 33,310 | ||||
|
| ||||
Total Assets | 403,676,130 | ||||
|
| ||||
Liabilities: | |||||
Cash overdraft | 10,000 | ||||
Payable for investments purchased | 658,337 | ||||
Payable for capital shares redeemed | 57,187 | ||||
Payable for collateral received on loaned securities | 19,562,951 | ||||
Manager fees payable | 82,652 | ||||
Administration fees payable | 13,685 | ||||
Distribution fees payable | 79,473 | ||||
Custodian fees payable | 5,799 | ||||
Administrative and compliance services fees payable | 1,502 | ||||
Trustee fees payable | 11 | ||||
Other accrued liabilities | 52,333 | ||||
|
| ||||
Total Liabilities | 20,523,930 | ||||
|
| ||||
Net Assets | $ | 383,152,200 | |||
|
| ||||
Net Assets Consist of: | |||||
Capital | $ | 232,052,458 | |||
Accumulated net investment income/(loss) | 2,300,035 | ||||
Accumulated net realized gains/(losses) from investment transactions | 12,269,996 | ||||
Net unrealized appreciation/(depreciation) on investments | 136,529,711 | ||||
|
| ||||
Net Assets | $ | 383,152,200 | |||
|
| ||||
Shares of beneficial interest (unlimited number of shares authorized, no par value) | 24,479,081 | ||||
Net Asset Value (offering and redemption price per share) | $ | 15.65 | |||
|
|
* | Includes securities on loan of $19,009,149. |
For the Year Ended December 31, 2013
Investment Income: | |||||
Dividends | $ | 3,837,179 | |||
Income from securities lending | 384,700 | ||||
|
| ||||
Total Investment Income | 4,221,879 | ||||
|
| ||||
Expenses: | |||||
Manager fees | 843,978 | ||||
Administration fees | 105,939 | ||||
Distribution fees | 811,515 | ||||
Custodian fees | 24,745 | ||||
Administrative and compliance services fees | 6,185 | ||||
Trustee fees | 15,750 | ||||
Professional fees | 16,406 | ||||
Shareholder reports | 24,967 | ||||
Other expenses | 72,357 | ||||
|
| ||||
Total expenses | 1,921,842 | ||||
|
| ||||
Net Investment Income/(Loss) | 2,300,037 | ||||
|
| ||||
Realized and Unrealized Gains/(Losses) on Investments: | |||||
Net realized gains/(losses) on securities transactions | 19,935,211 | ||||
Net realized gains/(losses) on futures contracts | 1,585,417 | ||||
Change in net unrealized appreciation/depreciation on investments | 85,642,048 | ||||
|
| ||||
Net Realized/Unrealized Gains/(Losses) on Investments | 107,162,676 | ||||
|
| ||||
Change in Net Assets Resulting From Operations | $ | 109,462,713 | |||
|
|
See accompanying notes to the financial statements.
12
Statements of Changes in Net Assets
AZL Small Cap Stock Index Fund | ||||||||||
For the Year Ended December 31, 2013 | For the Year Ended December 31, 2012 | |||||||||
Change in Net Assets: | ||||||||||
Operations: | ||||||||||
Net investment income/(loss) | $ | 2,300,037 | $ | 3,209,231 | ||||||
Net realized gains/(losses) on investment transactions | 21,520,628 | 6,600,664 | ||||||||
Change in unrealized appreciation/depreciation on investments | 85,642,048 | 24,399,020 | ||||||||
|
|
|
| |||||||
Change in net assets resulting from operations | 109,462,713 | 34,208,915 | ||||||||
|
|
|
| |||||||
Dividends to Shareholders: | ||||||||||
From net investment income | (3,162,887 | ) | (945,400 | ) | ||||||
From net realized gains | (4,536,872 | ) | — | |||||||
|
|
|
| |||||||
Change in net assets resulting from dividends to shareholders | (7,699,759 | ) | (945,400 | ) | ||||||
|
|
|
| |||||||
Capital Transactions: | ||||||||||
Proceeds from shares issued | 47,168,227 | 46,777,765 | ||||||||
Proceeds from dividends reinvested | 7,699,759 | 945,400 | ||||||||
Value of shares redeemed | (40,531,433 | ) | (17,828,878 | ) | ||||||
|
|
|
| |||||||
Change in net assets resulting from capital transactions | 14,336,553 | 29,894,287 | ||||||||
|
|
|
| |||||||
Change in net assets | 116,099,507 | 63,157,802 | ||||||||
Net Assets: | ||||||||||
Beginning of period | 267,052,693 | 203,894,891 | ||||||||
|
|
|
| |||||||
End of period | $ | 383,152,200 | $ | 267,052,693 | ||||||
|
|
|
| |||||||
Accumulated net investment income/(loss) | $ | 2,300,035 | $ | 3,174,061 | ||||||
|
|
|
| |||||||
Share Transactions: | ||||||||||
Shares issued | 3,497,435 | 4,374,605 | ||||||||
Dividends reinvested | 554,338 | 83,664 | ||||||||
Shares redeemed | (3,016,965 | ) | (1,670,421 | ) | ||||||
|
|
|
| |||||||
Change in shares | 1,034,808 | 2,787,848 | ||||||||
|
|
|
|
See accompanying notes to the financial statements.
13
AZL Small Cap Stock Index Fund
(Selected data for a share of beneficial interest outstanding throughout the periods indicated)
Year Ended December 31, | |||||||||||||||||||||||||
2013 | 2012 | 2011 | 2010 | 2009 | |||||||||||||||||||||
Net Asset Value, Beginning of Period | $ | 11.39 | $ | 9.87 | $ | 9.90 | $ | 7.94 | $ | 6.36 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Investment Activities: | |||||||||||||||||||||||||
Net Investment Income/(Loss) | 0.09 | 0.13 | 0.05 | 0.07 | 0.04 | ||||||||||||||||||||
Net Realized and Unrealized Gains/(Losses) on Investments | 4.50 | 1.43 | (0.03 | ) | 1.94 | 1.54 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Total from Investment Activities | 4.59 | 1.56 | 0.02 | 2.01 | 1.58 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Dividends to Shareholders From: | |||||||||||||||||||||||||
Net Investment Income | (0.14 | ) | (0.04 | ) | (0.05 | ) | (0.05 | ) | — | ||||||||||||||||
Net Realized Gains | (0.19 | ) | — | — | — | — | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Total Dividends | (0.33 | ) | (0.04 | ) | (0.05 | ) | (0.05 | ) | — | ||||||||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Net Asset Value, End of Period | $ | 15.65 | $ | 11.39 | $ | 9.87 | $ | 9.90 | $ | 7.94 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Total Return(a) | 40.62 | % | 15.82 | % | 0.29 | % | 25.49 | % | 24.84 | % | |||||||||||||||
Ratios to Average Net Assets/Supplemental Data: | |||||||||||||||||||||||||
Net Assets, End of Period (000’s) | $ | 383,152 | $ | 267,053 | $ | 203,895 | $ | 199,967 | $ | 193,665 | |||||||||||||||
Net Investment Income/(Loss) | 0.71 | % | 1.33 | % | 0.46 | % | 0.62 | % | 0.68 | % | |||||||||||||||
Expenses Before Reductions(b) | 0.59 | % | 0.61 | % | 0.63 | % | 0.65 | % | 0.67 | % | |||||||||||||||
Expenses Net of Reductions | 0.59 | % | 0.61 | % | 0.62 | % | 0.58 | % | 0.58 | % | |||||||||||||||
Portfolio Turnover Rate | 17 | % | 10 | % | 21 | % | 24 | % | 25 | % |
(a) | The returns include reinvested dividends and fund level expenses, but exclude insurance contract charges. If these charges were included, the returns would have been lower. |
(b) | Excludes fee reductions. If such fee reductions had not occurred, the ratios would have been as indicated. |
See accompanying notes to the financial statements.
14
AZL Small Cap Stock Index Fund
Notes to the Financial Statements
December 31, 2013
1. Organization
The Allianz Variable Insurance Products Trust (the “Trust”) was organized as a Delaware statutory trust on July 13, 1999. The Trust is a diversified open-end management investment company registered under the Investment Company Act of 1940. The Trust consists of 29 separate investment portfolios (collectively, the “Funds”), of which one is included in this report, the AZL Small Cap Stock Index Fund (the “Fund”), and 28 are presented in separate reports.
The Trust is authorized to issue an unlimited number of shares of the Fund without par value. Shares of the Fund are available through the variable annuity contracts and variable life insurance policies offered through the separate accounts of participating insurance companies.
Under the Trust’s organizational documents, its officers and trustees are indemnified against certain liabilities arising out of the performance of their duties to the Fund. In addition, in the normal course of business, the Fund may enter into contracts with its vendors and others that provide for general indemnifications. The Fund’s maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Fund. However, based on experience, the Fund expects the risk of loss to be remote.
2. Significant Accounting Policies
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. The policies conform with U.S. generally accepted accounting principles (“U.S. GAAP”). The preparation of financial statements requires management to make certain 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 increases and decreases in net assets from operations during the reporting period. Actual results could differ from those estimates.
Security Valuation
The Fund records its investments at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between willing market participants at the measurement date. The valuation techniques used to determine fair value are further described in Note 4 below.
Investment Transactions and Investment Income
Investment transactions are recorded not later than on the business day following trade date. However, for financial reporting purposes, investment transactions are accounted for on trade date. Net realized gains and losses on investments sold and on foreign currency transactions are recorded on the basis of identified cost. Interest income is recorded on the accrual basis and includes, where applicable, the amortization of premiums or accretion of discounts. Dividend income is recorded on the ex-dividend date except in the case of foreign securities, in which case dividends are recorded as soon as such information becomes available.
Real Estate Investment Trusts
The Fund may own shares of real estate investment trusts (“REITs”) which report information on the source of their distributions annually. Certain distributions received from REITs during the year, which are known to be a return of capital, are recorded as a reduction to the cost of the individual REIT.
Foreign Currency Translation
The accounting records of the Fund are maintained in U.S. dollars. Foreign currency amounts are translated into U.S. dollars at the current rate of exchange to determine the fair value of investments, assets and liabilities. Purchases and sales of securities, and income and expenses are translated at the prevailing rate of exchange on the respective dates of such transactions. The Fund does not isolate that portion of the results of operations resulting from changes in foreign exchange rates on investments from fluctuations arising from changes in market prices of securities held. Such fluctuations are included in the net realized and unrealized gain or loss on investments and foreign currencies. Income received by the Fund from sources within foreign countries may be subject to withholding and other income or similar taxes imposed by such countries. The Funds accrue such taxes, as applicable, based on their current interpretation of tax rules in the foreign markets in which they invest.
Dividends to Shareholders
Dividends to shareholders are recorded on the ex-dividend date. The Fund distributes its dividends from net investment income and net realized capital gains, if any, on an annual basis. The amount of dividends from net investment income and from net realized gains is determined in accordance with federal income tax regulations, which may differ from U.S. GAAP. These “book/tax” differences are either temporary or permanent in nature. To the extent these differences are permanent in nature (e.g., return of capital, net operating loss, reclassification of certain market discounts, gain/loss, paydowns, and distributions), such amounts are reclassified within the composition of net assets based on their federal tax-basis treatment; temporary differences (e.g., wash sales and post October losses) do not require reclassification. Dividends to shareholders that exceed net investment income and net realized gains for tax purposes are reported as distributions of capital.
Expense Allocation
Expenses directly attributable to the Fund are charged directly to the Fund, while expenses attributable to more than one Fund are allocated among the respective Funds based upon relative net assets or some other reasonable method. Expenses which are attributable to more than one Trust are allocated across the Allianz Variable Insurance Products and Allianz Variable Insurance Products Fund of Funds Trusts based upon relative net assets or another reasonable basis. Allianz Investment Management LLC (the “Manager”), serves as the investment manager for the Trust and the Allianz Variable Insurance Products Fund of Funds Trust.
Securities Lending
To generate additional income, the Fund may lend up to 33 1/3% of its assets pursuant to agreements requiring that the loan be continuously secured by any combination of cash, U.S. government or U.S. government agency securities, equal initially to at least 102% of the fair value plus accrued interest on the securities loaned (105% for foreign
15
AZL Small Cap Stock Index Fund
Notes to the Financial Statements
December 31, 2013
securities). The borrower of securities is at all times required to post collateral to the Fund in an amount equal to 100% of the fair value of the securities loaned based on the previous day’s fair value of the securities loaned, marked-to-market daily. Any collateral shortfalls are adjusted the next business day. The Fund bears all of the gains and losses on such investments. The Fund receives payments from borrowers equivalent to the dividends and interest that would have been earned on securities lent while simultaneously seeking to earn income on the investment of cash collateral received. In extremely low interest rate environments, the broker rebate fee may exceed the interest earned or the cash collateral which would result in a loss to the Fund. The investment of cash collateral deposited by the borrower is subject to inherent market risks such as interest rate risk, credit risk, liquidity risk, and other risks that are present in the market, and as such, the value of these investments may not be sufficient, when liquidated, to repay the borrower when the loaned security is returned. There may be risks of delay in recovery of the securities or even loss of rights in the collateral should the borrower of the securities fail financially. However, loans will be made only to borrowers, such as broker-dealers, banks or institutional borrowers of securities, deemed by the Manager to be of good standing and credit worthy and when in its judgment, the consideration which can be earned currently from such securities loans justifies the attendant risks. Loans are subject to termination by the Trust or the borrower at any time, and are, therefore, not considered to be illiquid investments. Securities on loan at December 31, 2013 are presented on the Fund’s Schedule of Portfolio Investments. The average outstanding amount of securities on loan was $21.6 million for the year ended December 31, 2013.
Cash collateral received in connection with securities lending is invested in the Allianz Variable Insurance Products Securities Lending Collateral Trust (the “Securities Lending Collateral Trust”) managed by The Dreyfus Corporation, an affiliate of the Custodian and Securities Lending Agent. The Securities Lending Collateral Trust invests in short-term investments that have a remaining maturity of 397 days or less as calculated in accordance with Rule 2a-7 under the 1940 Act. The Fund paid securities lending fees of $37,992 during the year ended December 31, 2013. These fees have been netted against “Income from securities lending” on the Statement of Operations.
Derivative Instruments
All open derivative positions at period end are reflected on the Fund’s Schedule of Portfolio Investments. The following is a description of the derivative instruments utilized by the Fund, including the primary underlying risk exposures related to each instrument type.
Futures Contracts
During the year ended December 31, 2013, the Fund used futures contracts to provide equity exposure on the Fund’s cash balances. Futures contracts are valued based upon their quoted daily settlement prices. Upon entering into a futures contract, the Fund is required to segregate liquid assets in accordance with the initial margin requirements of the broker or exchange. Futures contracts are marked to market daily and a payable or receivable for the change in value (“variation margin”) is recorded by the Fund. Gains or losses are recognized but not considered realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, elements of market risk (generally equity price risk related to stock futures, interest rate risk related to bond futures, and foreign currency risk related to currency futures) and exposure to loss in excess of the variation margin disclosed in the Statement of Assets and Liabilities. The primary risks associated with the use of futures contracts are the imperfect correlation between the change in fair value of the underlying securities and the prices of futures contracts, the possibility of an illiquid market, and the inability of the counterparty to meet the terms of the contract. The notional amount of futures contracts outstanding was $8.5 million as of December 31, 2013. The monthly average notional amount for these contracts was $6.6 million for the year ended December 31, 2013. Realized gains and losses are reported as “Net realized gains/(losses) on futures contracts” on the Statement of Operations.
Summary of Derivative Instruments
The following is a summary of the fair values of derivative instruments on the Fund’s Statement of Assets and Liabilities, categorized by risk exposure, as of December 31, 2013:
Asset Derivatives | Liability Derivatives | |||||||||||
Primary Risk Exposure | Statement of Assets and Liabilities Location | Total Fair Value* | Statement of Assets and Liabilities Location | Total Fair Value* | ||||||||
Equity Contracts | Receivable for variation margin on futures contracts | $ | 288,141 | Payable for variation margin on futures contracts | $ | — |
* | For futures contracts, the amounts represent the cumulative appreciation/(depreciation) of these futures contracts as reported in the Schedule of Portfolio Investments. Only current day’s variation margin is reported within the Statement of Assets and Liabilities as Variation Margin on Futures Contracts. |
The following is a summary of the effect of derivative instruments on the Statement of Operations, categorized by risk exposure, for the year ended December 31, 2013:
Primary Risk Exposure | Location of Gains/(Losses) on Derivatives Recognized in Income | Realized Gains/(Losses) on Derivatives Recognized in Income | Change in Unrealized Appreciation/ Depreciation on Derivatives Recognized in Income | |||||||
Equity Contracts | Net realized gains/(losses) on futures contracts/ change in unrealized appreciation/ depreciation on investments | $ | 1,585,417 | $ | 165,603 |
3. Related Party Transactions
The Manager provides investment advisory and management services for the Fund. The Manager has retained an independent money management organization (the “Subadviser”), to make investment decisions on behalf of the Fund. Pursuant to a subadvisory agreement with BlackRock Investment Management, LLC (“BlackRock Investment”), BlackRock Investment provides investment advisory services as the Subadviser for the Fund subject to the general supervision of the Trustees and the Manager.
16
AZL Small Cap Stock Index Fund
Notes to the Financial Statements
December 31, 2013
The Manager is entitled to a fee, computed daily and paid monthly, based on the average daily net assets of the Fund. Expenses incurred by the Fund for investment advisory and management services are reflected on the Statement of Operations as “Manager fees.” For its services, the Subadviser is entitled to a fee payable by the Manager. The Manager has contractually agreed to waive fees and reimburse the Fund to limit the annual expenses, excluding interest expense (e.g., cash overdraft fees), taxes, brokerage commissions, other expenditures that are capitalized in accordance with U.S. GAAP and other extraordinary expenses not incurred in the ordinary course of the Fund’s business, based on the daily net assets of the Fund, through April 30, 2015.
For the year ended December 31, 2013, the annual rate due to the Manager and the annual expense limit were as follows:
Annual Rate | Annual Expense Limit | |||||||||
AZL Small Cap Stock Index Fund | 0.26 | % | 0.71 | % |
Any amounts contractually waived or reimbursed by the Manager in a particular fiscal year will be subject to repayment by the Fund to the Manager to the extent that from time to time through the next three fiscal years the repayment will not cause the Fund’s expenses to exceed the lesser of the stated limit at the time of the waiver or the current stated limit. Any amounts recouped by the Manager during the year are reflected on the Statement of Operations as “Recoupment of prior expenses reimbursed by the Manager.”
At December 31, 2013, the contractual reimbursements that are subject to repayment by the Fund in subsequent years were as follows:
Expires 12/31/2014 | Total | |||||||||
AZL Small Cap Stock Index Fund | $ | 30,975 | $ | 30,975 |
In addition, the Manager may voluntarily waive or reimburse additional fees in order to maintain more competitive expense ratios. Any voluntary waivers or reimbursements are not subject to repayment in subsequent years. Information on the total amount waived/reimbursed by the Manager or repaid to the Manager by the Fund during the year can be found on the Statement of Operations. During the year ended December 31, 2013, there were no voluntary waivers.
Pursuant to separate agreements between the Funds and the Manager, the Manager provides a Chief Compliance Officer (“CCO”) and certain compliance oversight and regulatory filing services to the Trust. Under these agreements the Manager is entitled to an amount equal to a portion of the compensation and certain other expenses related to the individuals performing the CCO and compliance oversight services, as well as $75 per hour for time incurred in connection with the preparation and filing of certain documents with the Securities and Exchange Commission. The fees are paid to the Manager on a quarterly basis. The total expenses incurred by the Fund for these services are reflected on the Statement of Operations as “Administrative and compliance services fees.”
Citi Fund Services Ohio, Inc. (“Citi” or the “Administrator”), a wholly owned subsidiary of Citigroup, Inc., with which an officer of the Trust is affiliated, serves as the Trust’s administrator, transfer agent, and fund accountant, and assists the Trust in all aspects of its administration and operation. The Administrator is entitled to a Trust-wide asset-based fee, which is based on the following schedule: 0.05% of daily average net assets on the first $4 billion, 0.04% of daily average net assets on the next $2 billion, 0.02% of daily average net assets on the next $2 billion and 0.01% of daily average net assets over $8 billion. The overall Trust-wide fees are accrued daily and paid monthly and are subject to a minimum annual fee. In addition, the Administrator is entitled to annual account fees related to the transfer agency system, an annual fee for each additional class of shares of any Fund, certain annual fees in supporting fair value services, and a Trust-wide annual fee for providing infrastructure and support in implementing the written policies and procedures comprising the Fund’s compliance program. Fees payable to the Administrator are subject to certain reductions associated with services provided to new funds. The Administrator is also reimbursed for certain expenses incurred. The total expenses incurred by the Fund for these services are reflected on the Statement of Operations as “Administration fees.”
Allianz Life Financial Services, LLC (“ALFS”), an affiliate of the Manager, serves as distributor of the Fund and receives 12b-1 fees directly from the Fund, plus a Trust-wide annual fee of $42,500, paid by the Manager from its profits and not by the Trust, for recordkeeping and reporting services.
The Trust has adopted a distribution and service plan in conformance with Rule 12b-1 of the 1940 Act. Pursuant to this plan, the Fund is authorized to pay certain fees for the sale and distribution of its shares and services provided to its shareholders at an annual rate not to exceed 0.25% of the Fund’s average daily net assets. These fees are reflected on the Statement of Operations as “Distribution fees.”
In addition, certain legal fees and expenses are paid to a law firm, Dorsey & Whitney LLP, of which the Secretary of the Fund is a partner. During the year ended December 31, 2013, $3,992 was paid from the Fund relating to these fees and expenses.
Certain Officers and Trustees of the Trust are affiliated with the Manager or the Administrator. Such Officers (except for the Trust’s CCO as noted above) and Trustees receive no compensation from the Trust for serving in their respective roles. For their service to the Trust and to the Allianz Variable Insurance Products Fund of Funds Trust, each non-interested Trustee receives a $139,000 annual Board retainer. In addition, the Trustees are reimbursed for certain expenses associated with attending Board meetings. Compensation to the Trustees is allocated between the Trust and the Allianz Variable Insurance Products Fund of Funds Trust in proportion to the assets under management of each trust. During the year ended December 31, 2013, actual Trustee compensation was $973,000 in total for both trusts.
At a meeting of the Board of Trustees on December 4, 2013, the Trustees approved a fee increase to the Officers and Trustees who are paid a fee for their services to the Trust and to the Allianz Variable Insurance Products Fund of Funds Trust. Effective January 1, 2014, each non-interested Trustee will receive a $163,000 annual retainer.
4. Investment Valuation Summary
The valuation techniques employed by the Fund, as described below, maximize the use of observable inputs and minimize the use of unobservable inputs in determining fair value. The inputs used for valuing the Fund’s investments are summarized in the three broad levels listed below:
— | Level 1 — quoted prices in active markets for identical assets |
— | Level 2 — other significant observable inputs (including quoted prices for similar securities, interest rates, prepayments speeds, credit risk, etc.) |
— | Level 3 — significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of investments) |
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AZL Small Cap Stock Index Fund
Notes to the Financial Statements
December 31, 2013
Changes in valuation techniques may result in transfers in or out of an assigned level within the disclosure hierarchy. The Fund determines transfers between fair value hierarchy levels at the reporting period end. The inputs or methodology used for valuing investments is not necessarily an indication of the risk associated with investing in those investments.
Security prices are generally provided by an independent third party pricing service approved by the Trust’s Board of Trustees (“Trustees”) as of the close of the New York Stock Exchange (“NYSE”) (generally 4:00 pm Eastern Time). Equity securities are valued at the last quoted sale price or, if there is no sale, the last quoted bid price is used for long securities and the last quoted ask price is used for securities sold short. Securities listed on NASDAQ Stock Market, Inc. (“NASDAQ”) are valued at the official closing price as reported by NASDAQ. In each of these situations, valuations are typically categorized as a Level 1 in the fair value hierarchy. Investments in open-end investment companies are valued at their respective net asset value as reported by such companies and are typically categorized as Level 1 in the fair value hierarchy.
Debt and other fixed income securities are generally valued at an evaluated bid price provided by an independent pricing source approved by the Trustees. To value debt securities, pricing services may use various pricing techniques which take into account appropriate factors such as market activity, yield, quality, coupon rate, maturity, type of issue, trading characteristics, call features, credit ratings and other data, as well as broker quotes. Short term securities of sufficient credit quality with sixty days or less remaining until maturity may be valued at amortized cost, which approximates fair value. In each of these situations, valuations are typically categorized as Level 2 in the fair value hierarchy.
Futures contracts are valued at the last sales price as of the close of the primary exchange and are typically categorized as Level 1 in the fair value hierarchy.
Other assets and securities for which market quotations are not readily available, or are deemed unreliable are valued at fair value as determined in good faith by the Trustees or persons acting on the behalf of the Trustees. Fair value pricing may be used for significant events such as securities whose trading has been suspended, whose price has become stale or for which there is no currently available price at the close of the NYSE. Depending on the source and relative significance of valuation inputs, these instruments may be classified as Level 2 or Level 3 in the fair value hierarchy. The Fund utilizes a pricing service to assist in determining the fair value of securities when certain significant events occur that may affect the value of foreign securities.
In accordance with procedures adopted by the Trustees, fair value pricing may be used if events materially affecting the value of foreign securities occur between the time when the exchange on which they are traded closes and the time when the Fund’s net asset value is calculated. Management identifies possible fluctuation in international securities by monitoring the increase or decrease in the value of a designated benchmark index. In the event of an increase or decrease greater than predetermined levels, the Fund may use a systematic valuation model provided by an independent third party to fair value its international equity securities which are then typically categorized as Level 2 in the fair value hierarchy. For the year ended December 31, 2013, there were no Level 3 investments for which significant unobservable inputs were used to determine fair value.
The following is a summary of the valuation inputs used as of December 31, 2013 in valuing the Fund’s investments based upon the three levels defined above:
Investment Securities: | Level 1 | Level 2 | Total | ||||||||||||
Common Stocks+ | $ | 375,687,849 | $ | — | $ | 375,687,849 | |||||||||
Securities Held as Collateral for Securities on Loan | — | 19,562,951 | 19,562,951 | ||||||||||||
Unaffiliated Investment Company | 7,359,945 | — | 7,359,945 | ||||||||||||
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Total Investment Securities | 383,047,794 | 19,562,951 | 402,610,745 | ||||||||||||
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Other Financial Instruments* | |||||||||||||||
Futures Contracts | 288,141 | — | 288,141 | ||||||||||||
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Total Investments | $ | 383,335,935 | $ | 19,562,951 | $ | 402,898,886 | |||||||||
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+ | For detailed industry descriptions, see the accompanying Schedule of Portfolio Investments. |
* | Other Financial Instruments would include any derivative instruments, such as futures contracts. These investments are generally recorded in the financial statements at the unrealized gain or loss on the investment. |
5. Security Purchases and Sales
For the year ended December 31, 2013, cost of purchases and proceeds from sales of securities (excluding securities maturing less than one year from acquisition) were as follows:
Purchases | Sales | |||||||||
AZL Small Cap Stock Index Fund | $ | 62,593,346 | $ | 53,873,182 |
6. Investment Risks
Derivatives Risk: The Fund may invest in derivatives as a principal strategy. A derivative is a financial contract whose value depends on, or is derived from, the value of an underlying asset, reference rate, or risk. Use of derivative instruments involves risks different from, or possibly greater than, the risks associated with investing directly in securities and other traditional investments. Derivatives are subject to a number of other risks, such as liquidity risk, interest rate risk, market risk, credit risk, and selection risk. Derivatives also involve the risk of mispricing or improper valuation and the risk that changes in the value may not correlate perfectly with the underlying asset, rate, or index. Using derivatives may result in losses, possibly in excess of the principal amount invested. Also, suitable derivative transactions may not be available in all circumstances. The counterparty to a derivatives contract could default. As required by applicable law, a Fund that invests in derivatives segregates cash or liquid securities, or both, to the extent that its obligations under the instrument are not covered through ownership of the underlying security, financial instrument, or currency.
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AZL Small Cap Stock Index Fund
Notes to the Financial Statements
December 31, 2013
7. Federal Tax Information
It is the Fund’s policy to continue to comply with the requirements of the Internal Revenue Code under Subchapter M, applicable to regulated investment companies, and to distribute all of its taxable income, including any net realized gains on investments, to its shareholders. Therefore, no provision is made for federal income taxes.
Management of the Fund has reviewed tax positions taken in tax years that remain subject to examination by all major tax jurisdictions, including federal (i.e., the last four tax year ends and the interim tax period since then, as applicable). Management believes that there is no tax liability resulting from unrecognized tax benefits related to uncertain tax positions taken.
Cost for federal income tax purposes at December 31, 2013 is $275,158,621. The gross unrealized appreciation/ (depreciation) on a tax basis is as follows:
Unrealized appreciation | $ | 141,852,564 | |||
Unrealized depreciation | (14,400,440 | ) | |||
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Net unrealized appreciation/(depreciation) | $ | 127,452,124 | |||
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The tax character of dividends paid to shareholders during the year ended December 31, 2013 were as follows:
Ordinary Income | Net Long-Term Capital Gains | Total Distributions(a) | |||||||||||||
AZL Small Cap Stock Index Fund | $ | 3,162,887 | $ | 4,536,872 | $ | 7,699,759 |
(a) | Total distributions paid may differ from the Statements of Changes in Net Assets because dividends are recognized when actually paid for tax purposes. |
The tax character of dividends paid to shareholders during the year ended December 31, 2012 was as follows:
Ordinary Income | Net Long-Term Capital Gains | Total Distributions(a) | |||||||||||||
AZL Small Cap Stock Index Fund | $ | 945,400 | $ | — | $ | 945,400 |
(a) | Total distributions paid may differ from the Statements of Changes in Net Assets because dividends are recognized when actually paid for tax purposes. |
As of December 31, 2013, the components of accumulated earnings on a tax basis were as follows:
Undistributed Ordinary Income | Undistributed Long-Term Capital Gains | Accumulated Capital and Other Losses | Unrealized Appreciation/ | Total Earnings/ | |||||||||||||||||||||
AZL Small Cap Stock Index Fund | $ | 4,434,556 | $ | 19,213,062 | $ | — | $ | 127,452,124 | $ | 151,099,742 |
(a) | The difference between book-basis and tax-basis unrealized appreciation/(depreciation) is attributable primarily to tax deferral of losses on wash sales. |
8. Subsequent Events
Management has evaluated events and transactions subsequent to period end through the date the financial statements were issued, for purposes of recognition or disclosure in these financial statements and there are no subsequent events to report.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Shareholders and Board of Trustees of
Allianz Variable Insurance Products Trust:
We have audited the accompanying statement of assets and liabilities of AZL Small Cap Stock Index Fund (the “Fund”) of the Allianz Variable Insurance Products Trust, including the schedule of portfolio investments, as of December 31, 2013, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the years in the two-year period then ended, and the financial highlights for each of the years in the five-year period then ended. These financial statements and financial highlights are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of December 31, 2013, by correspondence with the custodian and brokers or by other appropriate auditing procedures. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of the Fund as of December 31, 2013, the results of its operations for the year then ended, the changes in its net assets for each of the years in the two-year period then ended, and the financial highlights for each of the years in the five-year period then ended, in conformity with U.S. generally accepted accounting principles.
/s/KPMG LLP
Columbus, Ohio
February 25, 2014
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Other Federal Income Tax Information (Unaudited)
For the year ended December 31, 2013, 89.73% of the total ordinary income dividends paid by the Fund qualify for the corporate dividends received deduction available to corporate shareholders.
During the year ended December 31, 2013, the Fund declared net long-term capital gain distributions of $4,536,872.
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A description of the policies and procedures that the Fund uses to determine how to vote proxies relating to portfolio securities is available, without charge, upon request, by visiting the Securities and Exchange Commission’s (“Commission”) website at www.sec.gov, or by calling 800-624-0197.
Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30th is available (i) without charge, upon request, by calling 800-624-0197; (ii) on the Allianz Variable Insurance Products Trust’s website at https://www.allianzlife.com; and (iii) on the Commission’s website at http://www.sec.gov.
The Fund files complete Schedules of Portfolio Holdings with the Commission for the first and third quarters of each fiscal year on Form N-Q. Schedules of Portfolio Holdings for the Fund in this report are available without charge on the Commission’s website at http://www.sec.gov, or may be reviewed and copied at the Commission’s Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 800-SEC-0330.
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Approval of Investment Advisory and Subadvisory Agreements (Unaudited)
The Allianz Variable Insurance Products Trust (the “Trust”) is a manager-of-managers fund. That means that the Trust’s Manager (“Allianz Investment Management LLC”) is responsible for monitoring the various Subadvisers that have day-to-day responsibility for the decisions made for each of the Trust’s investment portfolios. The Trust’s Manager is responsible for determining, in the first instance, which investment advisers to consider recommending for selection as a Subadviser.
In reviewing the services provided by the Manager and the terms of the investment management agreement, the Board receives and reviews information related to the Manager’s experience and expertise in the variable insurance marketplace. Currently, the Funds are offered only through variable annuities and variable life insurance policies, and not in the retail fund market. In addition, the Board receives information regarding the Manager’s expertise with regard to portfolio diversification and asset allocation requirements within variable insurance products issued by Allianz Life Insurance Company of North America and its subsidiary, Allianz Life Insurance Company of New York. Currently, the Funds are offered only through Allianz Life and Allianz of New York variable products.
The Trust’s Manager has adopted policies and procedures to assist it in the process of analyzing each potential Subadviser with expertise in particular asset classes for purposes of making the recommendation that a specific investment adviser be selected. The Trust’s Board reviews and considers the information provided by the Manager in deciding which investment advisers to select. After an investment adviser becomes a Subadviser, a similarly rigorous process is instituted by the Manager to monitor the investment performance and other responsibilities of the Subadviser. The Manager reports to the Trust’s Board on its analysis at the regular meetings of the Board, which are held at least quarterly. Where warranted, the Manager will add or remove a particular Subadviser from a “watch” list that it maintains. Watch list criteria include, for example: (a) Fund performance over various time periods; (b) Fund risk issues, such as changes in key personnel involved with Fund management, changes in investment philosophy or process, or “capacity” concerns; and (c) organizational risk issues, such as regulatory, compliance or legal concerns, or changes in the ownership of the Subadviser. The Manager may place a Fund on the watch list for other reasons, and if so, will explain its rationale to the Trustees. Funds which are on the watch list are subject to special scrutiny of the Manager and the Board of Trustees. Funds may be removed from such watch list, if for example, performance improves or regulatory matters are satisfactorily resolved. However, in some situations where Funds which have been on the watch list, the Manager has recommended the retention of a new Subadviser, and the Board of Trustees has subsequently approved new Subadvisory Agreements with such Subadvisers.
In assessing the Manager’s and Subadvisers’ (collectively, the “Advisory Organizations”), performance of their obligations, the Board considers whether there has occurred a circumstance or event that would constitute a reason for it to not renew an advisory contract. In this regard, the Board is mindful of the potential disruption of a Fund’s operations and various risks, uncertainties and other effects that could occur as a result of a decision to terminate or not renew a contract.
As required by the Investment Company Act of 1940 (“1940 Act”), the Trust’s Board has reviewed and approved the Trust’s Investment Management Agreement with the Manager (the “Advisory Agreement”) and portfolio management agreements (the “Subadvisory Agreements”) with the Subadvisers. The Board’s decision to approve these contracts reflects the exercise of its business judgment on whether to approve new arrangements and continue the existing arrangements. During its review of these contracts, the Board considers many factors, among the most material of which are: the Fund’s investment objectives and long term performance; the Advisory Organizations’ management philosophy, personnel, and processes, including their compliance history and the adequacy of their compliance processes; the preferences and expectations of Fund shareholders (and underlying contract owners) and their relative sophistication; the continuing state of competition in the mutual fund industry; and comparable fees in the mutual fund industry.
The Board also considers the compensation and benefits received by the Advisory Organizations. This includes fees received for services provided to the Fund by affiliated persons of the Advisory Organizations and research services received by the Advisory Organizations from brokers that execute Fund trades, as well as advisory fees. The Board considered the fact that: (1) the Manager and the Trust are parties to an Administrative Service Agreement, a Compliance Services Agreement, and a Chief Compliance Officer Agreement, under which the Manager is compensated by the Trust for performing certain administrative and compliance services including providing an employee of the Manager or one of its affiliates to act as the Trust’s Chief Compliance Officer; and (2) Allianz Life Financial Services, LLC, an affiliated person of the Manager, is a registered securities broker-dealer and receives (along with its affiliated persons) payments made by the Trust pursuant to Rule 12b-1.
The Board is aware that various courts have interpreted provisions of the 1940 Act and have indicated in their decisions that the following factors may be relevant to an adviser’s compensation: the nature and quality of the services provided by the adviser, including the performance of the fund; the adviser’s cost of providing the services; the extent to which the adviser may realize “economies of scale” as the fund grows larger; any indirect benefits that may accrue to the adviser and its affiliates as a result of the adviser’s relationship with the fund; performance and expenses of comparable funds; and the extent to which the independent Board members are fully informed about all facts bearing on the adviser’s service and fee. The Trust’s Board is aware of these factors and takes them into account in its review of the Trust’s advisory contracts.
The Board considered and weighed these circumstances in light of its experience in governing the Trust and working with the Advisory Organizations on matters relating to the Funds, and is assisted in its deliberations by the advice of legal counsel to the Independent Trustees. In this regard, the Board requests and receives a significant amount of information about the Funds and the Advisory Organizations. Some of this information is provided at each regular meeting of the Board; additional information is provided in connection with the particular meeting or meetings at which the Board’s formal review of an advisory contract occurs. In between regularly scheduled meetings, the Board may receive information on particular matters as the need arises. Thus, the Board’s evaluation of an advisory contract is informed by reports covering such matters as: an Advisory Organization’s investment philosophy, personnel, and processes; the Fund’s short- and long-term performance (in absolute terms as well as in relationship to its benchmark(s), certain competitor or “peer group” funds and similar funds managed by the particular Subadviser), and comments on the reasons for performance; the Fund’s expenses (including the advisory fee itself and the overall expense structure of the Fund, both in absolute terms and relative to similar and/or competing funds, with due regard for contractual or voluntary expense limitations); the use and allocation of brokerage commissions derived from trading the Fund’s portfolio securities; the nature and extent of the advisory and other services provided to the Fund by the Advisory Organizations and their affiliates; compliance and audit reports concerning the Funds and the companies that service them; and relevant developments in the mutual fund industry and how the Funds and/or Advisory Organizations are responding to them.
The Board also receives financial information about Advisory Organizations, including reports on the compensation and benefits the Advisory Organizations derive from their relationships with the Funds. These reports cover not only the fees under the advisory contracts, but also fees, if any, received for providing other services to the Funds. The reports also discuss any indirect or “fall out” benefits an Advisory Organization may derive from its relationship with the Funds.
The Advisory and Subadvisory Agreements (collectively, the “Agreements”) were most recently considered at Board of Trustees meetings held in the fall of 2013. Information relevant to the approval of such Agreements was considered at a telephonic Board of Trustees meeting on October 16, 2013, and at an “in person” Board of Trustees meeting held October 22, 2013. The Agreements were approved at the Board meeting of October 22, 2013. At such meeting the Board also approved an Expense Limitation Agreement between the Manager and the Trust for the period ending April 30, 2015. In connection with such meetings, the Trustees requested and evaluated extensive materials from the Manager, including performance and expense information for other investment companies with similar investment objectives derived from data compiled by an independent third party provider and other sources believed to be reliable by the Manager. Prior to voting, the Trustees reviewed the proposed approval/continuance of the Agreements with management and with experienced counsel who are independent of the Manager and received a memorandum from such counsel discussing the legal
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standards for their consideration of the proposed approvals/continuances. The independent (“disinterested”) Trustees also discussed the proposed approvals/continuances in a private session with such counsel at which no representatives of the Manager were present. In reaching their determinations relating to the approval and/or continuance of the Agreements, in respect of each Fund, the Trustees considered all factors they believed relevant. The Board based its decision to approve the Agreements on the totality of the circumstances and relevant factors, and with a view to past and future long-term considerations. Not all of the factors and considerations discussed above and below are necessarily relevant to every Fund, and the Board did not assign relative weights to factors discussed herein or deem any one or group of them to be controlling in and of themselves.
An SEC Rule requires that shareholder reports include a discussion of certain factors relating to the selection of investment advisers and the approval of advisory fees. The “factors” enumerated by the SEC are set forth below in italics, as well as the Board’s conclusions regarding such factors:
(1) The nature, extent and quality of services provided by the Manager and Subadvisers. The Trustees noted that the Manager, subject to the control of the Board of Trustees, administers each Fund’s business and other affairs. Under the Advisory Agreement, the Manager holds the sole and exclusive responsibility to provide, or arrange for other to provide, the management of the Funds’ assets and the placement of orders for the purchase and sale of the securities of the Funds. As the Trust is a manager of managers fund, the Manager is authorized, under the Advisory Agreement, to retain one or more Subadvisers for each Fund to handle day-to-day management of the Funds’ investment portfolios; the Manager is responsible for determining, in the first instance, which investment advisers to recommend to the Board of Trustees for selection as a Subadviser. The Trustees were aware that, notwithstanding the retention of the Subadvisers to handle day-to-day portfolio management, the Manager remains responsible for substantial other matters, including continuously monitoring compliance by each Subadviser with the investment policies and restrictions of the respective Funds, with such other limitations or directions of the Board of Trustees, and with all legal requirements under federal or state law or regulation. The Manager also is responsible primarily to provide statistical information and other data to the Trustees regarding the Funds’ portfolio investments and to make available to the Funds’ administrator such information as is necessary for the conduct of its duties.
The Trustees also noted that the Manager provides the Trust and each Fund with such administrative and other services (exclusive of, and in addition to, any such services provided by any others retained by the Trust on behalf of the Funds) and executive and other personnel as are necessary for the operation of the Trust and the Funds. Except for the Trust’s Chief Compliance Officer, the Manager pays all of the compensation of Trustees and officers of the Trust who are employees of the Manager or its affiliates.
The Trustees considered the scope and quality of services provided by the Manager and the Subadvisers and noted that the scope of such services provided had expanded as a result of recent regulatory and other developments. The Trustees noted that, for example, the Manager and Subadvisers are responsible for maintaining and monitoring their own compliance programs, and these compliance programs are continuously refined and enhanced in light of new regulatory requirements. The Trustees considered the capabilities and resources which the Manager has dedicated to performing services on behalf of the Trust and its Funds. The quality of administrative and other services, including the Manager’s role in coordinating the activities of the Trust’s other service providers, also were considered. The Trustees concluded that, overall, they were satisfied with the nature, extent and quality of services provided (and expected to be provided) to the Trust and to each of the Funds under the Agreements.
(2) The investment performance of the Funds, the Manager and the Subadvisers. In connection with every in-person quarterly Board of Trustees meeting, Trustees receive extensive information on the performance results of each of the Funds. This includes, for example, performance information on all of the Funds for the previous quarter, and previous one, three and five-year periods, and since inception. (For Funds which have been in existence for less than five years, Trustees may receive performance information on comparable funds managed by the particular Subadviser for periods prior to the creation of a particular Fund.) Such performance information includes information on absolute total return, performance versus Subadvisers’ comparable fund(s), performance versus the appropriate benchmark(s), and performance versus peer groups. For example, in connection with the Board of Trustees meetings held September 10-11, 2013, the Manager reported that for the three year period ended June 30, 2013, 12 Funds were in the top 40%, eight were in the middle 20% and eight were in the bottom 40%, and for the one year period ended June 30, 2013, 8 Funds were in the top 40%, seven were in the middle 20%, and 14 were in the bottom 40%. The Manager also reported that for the five year period ended June 30, 2013, 10 Funds were in the top 40%, four were in the middle 20%, and six were in the bottom 40%. At the Board of Trustees meeting held October 22, 2013, the Trustees determined that the overall investment performance of the Funds was acceptable.
(3) The costs of services to be provided and profits to be realized by the Manager and the Subadvisers and their affiliates from their relationship with the Funds. The Manager has supplied information to the Board of Trustees pertaining to the level of investment advisory fees to which the Funds are subject. The Manager has agreed to temporarily “cap” Fund expenses at certain levels, and information is provided to Trustees setting forth “contractual” advisory fees and “actual” fees after taking expense caps into account. Based upon the information provided, the “actual” advisory fees payable by the Funds overall are generally comparable to the average level of fees paid by Fund peer groups. For the 30 Funds reviewed by the Board of Trustees in the fall of 2013, 27 Funds paid “actual” advisory fees in a percentage amount within the 65th percentile or lower for each Fund’s applicable category. The Trustees recognized that it is difficult to make comparisons of advisory fees because there are variations in the services that are included in the fees paid by other funds. The Board has concluded that the advisory fees to be paid to the Manager by the Funds are not unreasonable.
The Manager has also supplied information to the Board of Trustees pertaining to total Fund expenses (which includes advisory fees, the 25 basis point 12b-1 fee paid by the Funds, and other Fund expenses). As noted above, the Manager has agreed to “cap” Fund expenses at certain levels. Based upon the information provided, the overall total expense ratio ranking in 2013 for the 30 Funds was as follows: (1) 28 of the Funds had total expense rankings below the 65th percentile (with 20 Funds at or below the 50th percentile); (2) the AZL Russell 1000 Value Fund had a total expense ranking in the 66th percentile; the Manager reported that there is only a limited peer group for such Fund; and (3) the AZL Morgan Stanley Global Real Estate Fund had a total expense ranking in the 72nd percentile; it was reported by the Manager that there is only a limited peer group for such Fund, such Fund’s expense ratio has declined, and such Fund’s expense ratio is comparable to funds of similar size.
The Manager has committed to providing the Funds with a high quality of service and working to reduce Fund expenses over time, particularly as the Funds grow larger. The Trustees concluded therefore that the expense ratios of the Funds were not unreasonable.
The Manager provided information concerning the profitability of the Manager’s investment advisory activities for the period from 2011 through June 30, 2013. The Trustees recognized that it is difficult to make comparisons of profitability from investment company advisory agreements because comparative information is not generally publicly available and is affected by numerous factors, including the structure of the particular adviser, the types of funds it manages, its business mix, numerous assumptions regarding allocation of expenses and the adviser’s capital structure and cost of capital. In considering profitability information, the Trustees considered the possible effect of certain fall-out benefits to the Manager and its affiliates. The Trustees focused on profitability of the Manager’s relationships with the Funds before taxes and distribution expenses. The Trustees recognized that the Manager should, in the abstract, be entitled to earn a reasonable level of profits for the services it provides to each Fund and, based on their review, concluded that they were satisfied that the Manager’s level of profitability from its relationship with the Funds was not excessive.
The Manager, on behalf of the Board of Trustees, endeavored to obtain information on the profitability of each Subadviser in connection with its relationship with the Fund or Funds which it subadvises. The Manager was unable to obtain meaningful profitability information from some of the unaffiliated Subadvisers. The Manager assured the Board of Trustees that the Agreements with the Subadvisers which are not affiliated with it were negotiated on an “arm’s length” basis, so that arguably, such profitability information should be less relevant. The Trustees were also provided with certain information on the profitability for the Subadviser which is affiliated with the Manager. Trustees recognized the difficulty of allocating costs to multiple advisory accounts and products of a large advisory organization. Based upon the information provided, the Trustees determined that there was no evidence that the level of such profitability attributable to subadvising the Funds was excessive.
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25
(4) and (5) The extent to which economies of scale would be realized as the Funds grow, and whether fee levels reflect these economies of scale. The Trustees noted that most of the advisory fee schedules for the Funds do not contain breakpoints that reduce the fee rate on assets above specified levels, although certain Subadvisory Agreements have such “breakpoints.” The Trustees recognized that breakpoints may be an appropriate way for the Manager to share its economies of scale, if any, with Funds that have substantial assets. However, they also recognized that there may not be a direct relationship between any economies of scale realized by Funds and those realized by the Manager as assets increase. The Trustees do not believe there is a uniform methodology for establishing breakpoints that give effect to Fund-specific service provided by the Manager. The Trustees noted that in the fund industry as a whole, as well as among funds similar to the Funds, there is no uniformity or pattern in the fees and asset levels at which breakpoints (if any) apply. Depending on the age, size, and other characteristics of a particular fund and its manager’s cost structure, different conclusions can be drawn as to whether there are economies of scale to be realized at any particular level of assets, notwithstanding the intuitive conclusion that such economies exist, or will be realized at some level of total assets. Moreover, because different managers have different cost structures and service models, it is difficult to draw meaningful conclusions from the breakpoints that may have been adopted by other funds. The Trustees also noted that the advisory agreements for many funds do not have breakpoints at all, or if breakpoints exist, they may be at asset levels significantly greater than those of the individual Funds. The Trustees also noted that the total assets in all of the Funds as of June 30, 2013 were approximately $12.85 billion, and that no single non-money market Fund had assets in excess of $616 million.
The Trustees noted that the Manager has agreed to temporarily “cap” Fund expenses at certain levels, which has the effect of reducing expenses as would the implementation of advisory fee breakpoints. The Manager has committed to continue to consider the continuation of fee “caps” and/or advisory fee breakpoints as the Funds grow larger. The Board receives quarterly reports on the level of Fund assets. It expects to consider whether or not to approve the Agreements at a meeting to be held prior to December 31, 2014, and will at that time, or prior thereto, consider: (a) the extent to which economies of scale can be realized, and (b) whether the advisory fee should be modified to reflect such economies of scale, if any.
Having taken these factors into account, the Trustees concluded that the absence of breakpoints in certain of the Funds’ advisory fee rate schedules was acceptable under each Fund’s circumstances.
Information about the Board of Trustees and Officers (Unaudited)
The Trust is managed by the Trustees in accordance with the laws of the state of Delaware governing business trusts. There are currently eight Trustees, two of whom are “interested persons” of the Trust within the meaning of that term under the 1940 Act. The Trustees and Officers of the Trust, their addresses, ages, their positions held with the Trust, their terms of office with the Trust and length of time served, their principal occupation(s) during the past five years, the number of portfolios in the Trust they oversee, and their other directorships held are as follows:
Non-Interested Trustees(1)
Name, Address, and Age | Positions Held with VIP Trust and FOF Trust | Term of Office(2)/ Length of Time Served | Principal Occupation(s) During Past 5 Years | Number of Portfolios Overseen for VIP Trust and FOF Trust | Other Directorships Held Outside the AZL Fund Complex | |||||
Peter R. Burnim, Age 66 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/07 | Chairman, Argus Investment Strategies Fund Ltd., Feburary 2013 to present; Managing Director, iQ Venture Advisors, LLC. 2005 to 2012; Chairman, Northstar Group Holdings Ltd. Bermuda, 2011 to present; Expert Witness, Massachusetts Department of Revenue, 2011 to 2012; Executive Vice President, Northstar Companies, 2002 to 2005; Senior Officer, Citibank and Citicorp for over 25 years | 41 | Argus Group Holdings; Northstar Group Holdings, NRIL, Sterling Centrecorp Inc.; Highland Financial Holdings; and Bank of Bermuda NY | |||||
Peggy L. Ettestad, Age 56 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/07 | Managing Director, Red Canoe Management Consulting LLC, 2008 to present; Senior Managing Director, Residential Capital LLC, 2003 to 2008; Chief Operations Officer, Transamerica Reinsurance 2002 to 2003 | 41 | Luther College | |||||
Roger Gelfenbien, Age 70 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 10/99 | Retired; Partner of Accenture 1983 to 1999 | 41 | Virtus Funds (8 Funds) | |||||
Claire R. Leonardi, Age 58 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/04 | Chief Executive Officer, Connecticut Innovations, Inc., 2012 to present; General Partner, Fairview Capital, L.P., 1994 to 2012 | 41 | The Natural History Museum of the Adirondacks | |||||
Dickson W. Lewis, Age 65 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/04 | Retired; Consultant to Lifetouch National School Studios; Vice President/General Manager, Yearbooks & Canada-Lifetouch National School Studios, 2006 to 2013; Vice President/General Manager of Jostens, Inc., 2002 to 2006; Senior Vice President of Fortis Group, 1997 to 2002 | 41 | None | |||||
Peter W. McClean, Age 69 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/04 | Retired; President and CEO of Measurisk, LLC, 2001 to 2003; Chief Risk Management Officer at Bank of Bermuda Ltd., 1996 to 2001 | 41 | PNMAC Opportunity Fund; Northeast Bank; and FHI | |||||
Arthur C. Reeds III, Age 69 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 10/99 | Retired; Senior Investment Officer, Hartford Foundation for Public Giving, 2000 to 2003; Chairman, Chief Executive and President of Conning Corp., 1999 to 2000; Investment Consultant, 1997 to 1999 | 41 | Connecticut Water Service, Inc. |
Interested Trustees(3)
Name, Address, and Age | Positions Held with VIP Trust and FOF Trust | Term of Office(2)/ Length of Time Served | Principal Occupation(s) During Past 5 Years | Number of VIP Trust FOF Trust | Other AZL Fund Complex | |||||
Robert DeChellis, Age 46 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 3/08 | President and CEO, Allianz Life Financial Services, LLC, 2007 to present | 41 | None | |||||
Brian Muench, Age 43 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 6/11 | President, Allianz Investment Management LLC, November 2010 to present; Vice President, Allianz Life, April 2011 to present; Vice President, Advisory Management, Allianz Investment Management LLC from December 2005 to November 2010 | 41 | None |
26
Officers
Name, Address, and Age | Positions Held with VIP and VIP FOF Trust | Term of Office(2)/Length of Time Served | Principal Occupation(s) During Past 5 Years | |||
Brian Muench, Age 43 5701 Golden Hills Drive Minneapolis, MN 55416 | President | Since 11/10 | President, Allianz Investment Management LLC from November 2010, to present; Vice President, Allianz Life from April 2011 to present; Vice President, Allianz Investment Management LLC from December 2005 to November 2010. | |||
Michael Radmer, Age 68 Dorsey & Whitney LLP, Suite 1500 50 South Sixth Street Minneapolis, MN 55402-1498 | Secretary | Since 2/02 | Partner, Dorsey and Whitney LLP since 1976. | |||
Ty Edwards, Age 47 Citi Fund Services Ohio, Inc. 3435 Stelzer Road Columbus, OH 43219 | Treasurer, Principal Accounting Officer and Principal Financial Officer | Since 4/10 | Senior Vice President, Financial Administration, Citi Fund Services Ohio, Inc., December 2009 to present; Director, Product Management, Columbia Management, April 2007 to April 2009; Deputy Treasurer, Columbia Funds and Director, Fund Administration, Columbia Management, January 2006 to April 2007. | |||
Christopher R. Pheiffer, Age 45(4) 5701 Golden Hills Drive Minneapolis, MN 55416 | Chief Compliance Officer(5) and Anti-Money Laundering Compliance Officer | Since 2/14 (interim) | Deputy Chief Compliance Officer of the Trusts, 2007-2014 |
(1) | Member of the Audit Committee. |
(2) | Indefinite. |
(3) | Is an “interested person”, as defined by the 1940 Act, due to employment by Allianz. |
(4) | Stephen G. Simon, previously the Chief Compliance Officer of the Trusts, resigned all of his positions with Allianz effective February 21, 2014. Mr. Pheiffer, previously the Deputy Chief Compliance Officer of the Trusts, has been named Chief Compliance Officer of the Trusts on an interim basis while a search for a permanent replacement is conducted. |
(5) | The Manager and the Trust are parties to a Chief Compliance Officer Agreement under which the Manager is compensated by the Trust for providing an employee of the Manager or one of its affiliates to act as the Trust’s Chief Compliance Officer. The Chief Compliance Officer and Anti-Money Laundering Compliance Officer is not considered a corporate officer or executive employee of the Trust. |
27
The Allianz VIP Funds are distributed by Allianz Life Financial Services, LLC. | ||
These Funds are not FDIC Insured. | ANNRPT1213 2/14 |
AZL® T. Rowe Price Capital Appreciation Fund
(formerly AZL® Davis New York Venture Fund)
Annual Report
December 31, 2013
Table of Contents
Management Discussion and Analysis
Page 1
Expense Examples and Portfolio Composition
Page 3
Schedule of Portfolio Investments
Page 4
Statement of Assets and Liabilities
Page 9
Statement of Operations
Page 9
Statements of Changes in Net Assets
Page 10
Financial Highlights
Page 11
Notes to the Financial Statements
Page 12
Report of Independent Registered Public Accounting Firm
Page 19
Other Federal Income Tax Information
Page 20
Other Information
Page 21
Approval of New Subadvisory Agreement
Page 22
Approval of Investment Advisory and Subadvisory Agreements—
Page 23
Information about the Board of Trustees and Officers
Page 26
This report is submitted for the general information of the shareholder of the Fund. The report is not authorized for distribution to prospective investors in the Fund unless preceded or accompanied by an effective prospectus, which contains details concerning the sales charges and other pertinent information.
AZL® T. Rowe Price Capital Appreciation Fund (unaudited)
(formerly AZL® Davis New York Venture Fund)
Allianz Investment Management LLC serves as the Manager for the AZL® T. Rowe Price Capital Appreciation Fund and T. Rowe Price Associates, Inc. serves as Subadviser to the Fund.
What factors affected the Fund’s performance during the year ended December 31, 2013?
For the year ended December 31, 2013, the AZL® T. Rowe Price Capital Appreciation Fund returned 29.94%1. That compared to a 32.53% and 32.39% total return for its benchmarks, the Russell 1000® Value Index2 and the S&P 500 Index3, respectively.
The Fund underwent a change in subadvisors on November 16, 2013. On that date the Fund, which previously was named the AZL Davis New York Venture Fund, became known as the AZL T. Rowe Price Capital Appreciation Fund and changed subadvisors to T. Rowe Price. The Fund’s change of subadvisors also led to a change in benchmarks from the Russell 1000® Value Index to the S&P 500 Index.
The U.S. equity market made strong gains during the period as economic data strengthened and unemployment fell to its lowest level since 2008. Corporate fundamentals remained relatively strong, and investors were optimistic about the economy despite uncertainty about fiscal and monetary policies. Markets took the federal government shutdown and debt ceiling brinksmanship of October in stride, and reacted positively to the Federal Reserve’s announcement late in the period that it would begin curtailing its monetary stimulus in January 2014. U.S. bond returns were mixed as longer-term interest rates increased.
Under the previous subadvisor, the Fund measured its performance against the Russell 1000® Value Index. The Fund’s relative returns during this period were hurt by its stock selection in the industrial sector. The Fund’s industrial holdings underperformed the corresponding sector within the benchmark, and an underweight position in the industrial sector also dragged on relative performance as that sector performed well during the period. The Fund’s exposure to shares of certain health care companies also dragged on relative performance under the previous subadvisor. The Fund’s health care holdings underperformed the corresponding sector within the index. An underweight position in the strong-performing health care sector also hurt relative performance.*
Under the previous subadvisor, the Fund benefited from strong stock selection in the financials and consumer discretionary sectors. Overweight positions in these sectors also helped performance compared to the Russell 1000® Value Index.*
Following the November name change and a shift to a new subadvisor, the Fund began measuring its performance against the S&P 500 Index. The Fund’s relative performance through the end of the period was hurt by holdings in the energy sector, due in part to poor performance from companies involved in oil exploration and production. The Fund was also positioned with a reduced cash position in order to allocate a larger share of the Fund’s portfolio to equities and fixed income. The Fund’s overall allocation to fixed income remained unchanged, but the subadvisor shifted assets into U.S. Treasuries and high-yield bonds due to rising Treasury yields.*
The Fund’s investments in health care and information technology stocks benefited relative performance for the period following the subadvisor change through the end of the period. Exposure to industrials, business services, financials and consumer discretionary also contributed to the Fund’s gains during this period.*
Past performance does not guarantee future results.
* | The Fund’s portfolio composition is subject to change. There is no guarantee that any sectors mentioned will continue to perform well or that securities in such sectors will be held by the Fund in the future. The information contained in this commentary is for informational purposes only and should not be construed as a recommendation to purchase or sell securities in the sector mentioned. The Fund’s holdings and weightings are as of December 31, 2013. |
1 | The recent growth rate in the stock market has helped to produce short-term returns that are not typical and may not continue in the future. Because of ongoing market volatility, Fund performance may be subject to substantial short-term changes. |
2 | The Russell 1000® Value Index measures the performance of the large-cap value segment of the U.S. equity universe. It includes those Russell 1000 companies with lower price-to-book ratios and lower expected growth values. Investors cannot invest directly in an index. |
3 | The S&P 500 is representative of 500 selected common stocks, most of which are listed on the New York Stock Exchange, and is a measure of the U.S. Stock market as a whole. |
1
AZL® T. Rowe Price Capital Appreciation Fund (unaudited)
Fund Objective
The Fund’s investment objective is to seek long-term capital appreciation with preservation of capital as an important intermediate-term objective. This objective may be changed by the Trustees of the Fund without shareholder approval. The Fund seeks to achieve its objective by investing at least 50% of its net assets in the common stock of established U.S. Companies that have above-average potential for capital growth. The remaining assets are generally invested in convertible securities, corporate and government debt, bank loans, and foreign securities.
Investment Concerns
Equity securities (stocks) are more volatile and carry more risk than other forms of investments, including investments in high-grade fixed income securities. The net asset value per share of this Fund will fluctuate as the value of the securities in the portfolio changes.
International investing may involve risk of capital loss from unfavorable fluctuations in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations.
Value-based investments are subject to the risk that the broad market may not recognize their intrinsic value.
Investing in a single industry or sector, or concentrating investments in a limited number of industries or sectors, tends to increase the risk that economic, political, or regulatory developments affecting certain industries or sectors will have a large impact on the value of the portfolio.
The Fund is subject to the risk that principal values reacts in opposition to the movement of interest rates and that a rising interest rate environment increases the risk of loss of principal.
For a complete description of these and other risks associated with investing in a mutual Fund, please refer to the Fund’s prospectus.
Growth of $10,000 Investment
The chart above represents a comparison of a hypothetical investment in the Fund versus a similar investment in the Fund’s benchmark, and represents the reinvestment of dividends and capital gains in the Fund.
Average Annual Total Returns as of December 31, 2013
1 | 3 | 5 | 10 | |||||||||||||
Year | Year | Year | Year | |||||||||||||
AZL® T. Rowe Price Capital Appreciation Fund | 29.94 | %1 | 11.82 | % | 15.61 | % | 5.86 | % | ||||||||
Russell 1000® Value Index | 32.53 | % | 16.06 | % | 16.67 | % | 7.58 | % | ||||||||
S&P 500® Index | 32.39 | % | 16.18 | % | 17.94 | % | 7.41 | % |
Past performance does not guarantee future results. The performance data quoted represents past performance and current returns may be lower or higher. The investment return and principal value will fluctuate so that an investor’s shares, when redeemed may be worth more or less than the original cost. To obtain performance information current to the most recent month end, please visit www.Allianzlife.com.
Expense Ratio2 | Gross | |||
AZL® T. Rowe Price Capital Appreciation Fund | 1.08 | % |
The above expense ratio is based on the current Fund prospectus dated April 29, 2013. The Manager voluntarily reduced the management fee to 0.70%. The Manager and the Fund have entered into a written contract limiting operating expenses, excluding certain expenses (such as interest expense and Acquired Fund fees and expenses), to 1.20% through April 30, 2015. Additional information pertaining to the December 31, 2013 expense ratios can be found in the financial highlights.
1 | The recent growth rate in the stock market has helped to produce short-term returns that are not typical and may not continue in the future. Because of ongoing market volatility, Fund performance may be subject to substantial short-term changes. |
2 | Acquired Fund Fees and Expenses are incurred indirectly by the Fund through the valuation of the Fund’s investments in the other investment companies. Accordingly, Acquired Fees and Expenses affect the Fund’s total returns. Because these fees and expenses are not included in the Fund’s financial highlights, the Fund’s total annual fund operating expenses do not correlate to the ratios of expenses to average net assets shown in the financial highlights table. Without Acquired Fund Fees and expenses the Fund’s gross ratio would be 1.07%. |
The total return of the Fund does not reflect the effect of any insurance charges, the annual maintenance fee or the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. Such charges, fees and tax payments would reduce the performance quoted.
The Fund’s performance is measured against the Russell 1000® Value Index and the S&P 500 Index. The Russell 1000® Value Index is an unmanaged index that measures the performance of the large-cap value segment of the U.S. equity universe. It includes those Russell 1000 companies with lower price-to-book ratios and lower expected growth values. The S&P 500 is representative of 500 selected common stocks, most of which are listed on the New York Stock Exchange, and is a measure of the U.S. Stock market as a whole. The index does not reflect the deduction of fees associated with a mutual fund, such as investment management and fund accounting fees. The Fund’s performance reflects the deduction of fees for services provided by the Fund. Investors cannot invest directly in an index.
2
AZL T. Rowe Price Capital Appreciation Fund
(Unaudited)
As a shareholder of the AZL T. Rowe Price Capital Appreciation Fund (the “Fund”), you incur ongoing costs, including management fees, distribution fees, and other Fund expenses. These examples are intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. Please note that the expenses shown in each table do not reflect expenses that apply to the subaccount or the insurance contract. If the expenses that apply to the subaccount of the insurance contract were included, your costs would have been higher.
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the periods presented below.
The Actual Expense table below provides information about actual account values and actual expenses. You may use the information below, 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 table under the heading entitled “Expenses Paid During Period” to estimate the expenses you paid on your account during this period.
Beginning Account Value 7/1/13 | Ending Account Value 12/31/13 | Expenses Paid During Period 7/1/13 - 12/31/13* | Annualized Expense Ratio During Period 7/1/13 - 12/31/13 | |||||||||||||||||
AZL T. Rowe Price Capital Appreciation Fund | $ | 1,000.00 | $ | 1,129.40 | $ | 5.37 | 1.00 | % |
The Hypothetical Expense table below provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.
Beginning Account Value 7/1/13 | Ending Account Value 12/31/13 | Expenses Paid During Period 7/1/13 - 12/31/13* | Annualized Expense Ratio During Period 7/1/13 - 12/31/13 | |||||||||||||||||
AZL T. Rowe Price Capital Appreciation Fund | $ | 1,000.00 | $ | 1,020.16 | $ | 5.09 | 1.00 | % |
* | Expenses are equal to the average account value over the period, multiplied by the Fund’s annualized expense ratio, multiplied by 184/365 (to reflect the one half year period). |
Portfolio Composition
(Unaudited)
Investments | Percent of net assets | ||||
Financials | 12.3 | % | |||
Health Care | 11.8 | ||||
Industrials | 9.8 | ||||
Information Technology | 7.9 | ||||
Consumer Discretionary | 7.6 | ||||
Consumer Staples | 6.6 | ||||
Utilities | 5.5 | ||||
Energy | 2.0 | ||||
Telecommunication Services | 1.8 | ||||
Corporate Bonds | 0.1 | ||||
Materials | — | ^ | |||
|
| ||||
Total Common Stock, Preferred Stock and Private Placements | 65.4 | ||||
Money Market | 10.5 | ||||
|
| ||||
Total Investment Securities | 75.9 | ||||
Net other assets (liabilities) | 24.1 | ||||
|
| ||||
Net Assets | 100.0 | % | |||
|
|
^ | Represents less than 0.05%. |
3
AZL T. Rowe Price Capital Appreciation Fund
Schedule of Portfolio Investments
December 31, 2013
Shares | Fair Value | |||||||
| Common Stocks (65.2%): |
| ||||||
| Aerospace & Defense (3.7%): |
| ||||||
29,500 | Boeing Co. (The) | $ | 4,026,455 | |||||
135,100 | United Technologies Corp. | 15,374,380 | ||||||
|
| |||||||
19,400,835 | ||||||||
|
| |||||||
| Auto Components (2.1%): |
| ||||||
85,500 | Delphi Automotive plc | 5,141,115 | ||||||
24,000 | Johnson Controls, Inc. | 1,231,200 | ||||||
58,300 | TRW Automotive Holdings Corp.* | 4,336,937 | ||||||
|
| |||||||
10,709,252 | ||||||||
|
| |||||||
| Automobiles (0.0%): |
| ||||||
2,700 | General Motors Co. | 110,349 | ||||||
|
| |||||||
| Beverages (0.5%): |
| ||||||
32,000 | PepsiCo, Inc. | 2,654,080 | ||||||
|
| |||||||
| Capital Markets (4.9%): |
| ||||||
123,400 | Invesco, Ltd. | 4,491,760 | ||||||
140,000 | State Street Corp. | 10,274,600 | ||||||
338,700 | TD Ameritrade Holding Corp. | 10,377,769 | ||||||
|
| |||||||
25,144,129 | ||||||||
|
| |||||||
| Commercial Banks (1.3%): |
| ||||||
20,600 | PNC Financial Services Group, Inc. | 1,598,148 | ||||||
128,700 | U.S. Bancorp | 5,199,480 | ||||||
|
| |||||||
6,797,628 | ||||||||
|
| |||||||
| Commercial Services & Supplies (1.6%): |
| ||||||
113,300 | Iron Mountain, Inc. | 3,438,655 | ||||||
109,000 | Tyco International, Ltd. | 4,473,360 | ||||||
|
| |||||||
7,912,015 | ||||||||
|
| |||||||
| Diversified Financial Services (1.0%): |
| ||||||
89,800 | JPMorgan Chase & Co. | 5,251,504 | ||||||
|
| |||||||
| Electric Utilities (1.3%): |
| ||||||
37,700 | Edison International | 1,745,510 | ||||||
82,400 | Entergy Corp. | 5,213,448 | ||||||
|
| |||||||
6,958,958 | ||||||||
|
| |||||||
| Electrical Equipment (0.4%): |
| ||||||
13,500 | Roper Industries, Inc. | 1,872,180 | ||||||
|
| |||||||
| Electronic Equipment, Instruments & Components (0.9%): |
| ||||||
85,400 | TE Connectivity, Ltd. | 4,706,394 | ||||||
|
| |||||||
| Food Products (3.8%): |
| ||||||
137,600 | General Mills, Inc. | 6,867,616 | ||||||
139,500 | Mondelez International, Inc., Class A | 4,924,350 | ||||||
109,495 | Nestle SA, Registered Shares | 8,040,056 | ||||||
|
| |||||||
19,832,022 | ||||||||
|
| |||||||
| Health Care Equipment & Supplies (1.0%): |
| ||||||
110,500 | DENTSPLY International, Inc. | 5,357,040 | ||||||
|
| |||||||
| Health Care Providers & Services (3.4%): |
| ||||||
20,000 | DaVita, Inc.* | 1,267,400 | ||||||
19,600 | Henry Schein, Inc.* | 2,239,496 | ||||||
16,800 | Humana, Inc. | 1,734,096 | ||||||
164,100 | UnitedHealth Group, Inc. | 12,356,730 | ||||||
|
| |||||||
17,597,722 | ||||||||
|
|
Shares | Fair Value | |||||||
| Common Stocks, continued |
| ||||||
| Household Products (1.1%): |
| ||||||
69,400 | Procter & Gamble Co. (The) | $ | 5,649,854 | |||||
|
| |||||||
| Independent Power Producers & Energy Traders (0.3%): |
| ||||||
49,100 | NRG Energy, Inc. | 1,410,152 | ||||||
|
| |||||||
| Industrial Conglomerates (4.0%): |
| ||||||
263,600 | Danaher Corp. | 20,349,920 | ||||||
|
| |||||||
| Insurance (3.4%): |
| ||||||
267,300 | Marsh & McLennan Cos., Inc. | 12,926,628 | ||||||
157,336 | XL Group plc, Class B | 5,009,578 | ||||||
|
| |||||||
17,936,206 | ||||||||
|
| |||||||
| Internet Software & Services (1.2%): |
| ||||||
5,500 | Google, Inc., Class A* | 6,163,905 | ||||||
|
| |||||||
| IT Services (3.7%): |
| ||||||
15,800 | Accenture plc, Class A | 1,299,076 | ||||||
237,000 | Fiserv, Inc.* | 13,994,850 | ||||||
20,500 | International Business Machines Corp. | 3,845,185 | ||||||
|
| |||||||
19,139,111 | ||||||||
|
| |||||||
| Life Sciences Tools & Services (3.5%): |
| ||||||
165,200 | Thermo Fisher Scientific, Inc. | 18,395,020 | ||||||
|
| |||||||
| Machinery (0.1%): |
| ||||||
18,800 | Actuant Corp., Class A | 688,832 | ||||||
|
| |||||||
| Media (0.3%): |
| ||||||
22,000 | Walt Disney Co. (The) | 1,680,800 | ||||||
|
| |||||||
| Multiline Retail (1.1%): |
| ||||||
30,100 | Dollar General Corp.* | 1,815,632 | ||||||
69,900 | Dollar Tree, Inc.* | 3,943,758 | ||||||
1,900 | Kohl’s Corp. | 107,825 | ||||||
|
| |||||||
5,867,215 | ||||||||
|
| |||||||
| Multi-Utilities (3.9%): |
| ||||||
18,600 | Consolidated Edison, Inc. | 1,028,208 | ||||||
254,200 | PG&E Corp. | 10,239,176 | ||||||
300,000 | Xcel Energy, Inc. | 8,382,000 | ||||||
|
| |||||||
19,649,384 | ||||||||
|
| |||||||
| Oil, Gas & Consumable Fuels (2.0%): |
| ||||||
17,400 | Anadarko Petroleum Corp. | 1,380,168 | ||||||
50,800 | Apache Corp. | 4,365,752 | ||||||
13,400 | Imperial Oil, Ltd. | 592,682 | ||||||
8,500 | Pioneer Natural Resources Co. | 1,564,595 | ||||||
30,732 | Range Resources Corp. | 2,591,015 | ||||||
|
| |||||||
10,494,212 | ||||||||
|
| |||||||
| Paper & Forest Products (0.0%): |
| ||||||
488,000 | Sino-Forest Corp.* | — | ||||||
|
| |||||||
| Personal Products (0.2%): |
| ||||||
59,100 | Avon Products, Inc. | 1,017,702 | ||||||
|
| |||||||
| Pharmaceuticals (3.9%): |
| ||||||
69,300 | Allergan, Inc. | 7,697,844 | ||||||
10,400 | Perrigo Co. plc | 1,595,984 | ||||||
279,000 | Pfizer, Inc. | 8,545,770 | ||||||
79,300 | Zoetis, Inc. | 2,592,317 | ||||||
|
| |||||||
20,431,915 | ||||||||
|
|
Continued
4
AZL T. Rowe Price Capital Appreciation Fund
Schedule of Portfolio Investments
December 31, 2013
Shares | Fair Value | |||||||
| Common Stocks, continued |
| ||||||
| Real Estate Investment Trusts (REITs) (1.6%): |
| ||||||
86,600 | American Tower Corp. | $ | 6,912,412 | |||||
10,100 | Simon Property Group, Inc. | 1,536,816 | ||||||
|
| |||||||
8,449,228 | ||||||||
|
| |||||||
| Semiconductors & Semiconductor Equipment (2.1%): |
| ||||||
103,400 | Nxp Semiconductors NV* | 4,749,162 | ||||||
147,800 | �� | Texas Instruments, Inc. | 6,489,898 | |||||
|
| |||||||
11,239,060 | ||||||||
|
| |||||||
| Specialty Retail (4.1%): |
| ||||||
23,400 | AutoZone, Inc.* | 11,183,796 | ||||||
17,400 | L Brands, Inc. | 1,076,190 | ||||||
74,500 | Lowe’s Cos., Inc. | 3,691,475 | ||||||
37,700 | O’Reilly Automotive, Inc.* | 4,852,367 | ||||||
|
| |||||||
20,803,828 | ||||||||
|
| |||||||
| Tobacco (1.0%): | |||||||
62,300 | Philip Morris International, Inc. | 5,428,199 | ||||||
|
| |||||||
| Wireless Telecommunication Services (1.8%): |
| ||||||
90,800 | Crown Castle International Corp.* | 6,667,444 | ||||||
28,100 | SBA Communications Corp., Class A* | 2,524,504 | ||||||
|
| |||||||
9,191,948 | ||||||||
|
| |||||||
| Total Common Stocks (Cost $315,290,008) | 338,290,599 | ||||||
|
| |||||||
| Preferred Stock (0.2%): |
| ||||||
| Commercial Banks (0.1%): |
| ||||||
9,874 | U.S. Bancorp, Series F, Preferred Shares | 259,686 | ||||||
|
| |||||||
| Electric Utilities (0.1%): |
| ||||||
15,000 | SCE Trust I, 1.12% | 301,500 | ||||||
|
| |||||||
| Total Preferred Stock (Cost $576,426) | 561,186 | ||||||
|
| |||||||
| Private Placements (0.7%): |
| ||||||
| Auto Components (0.0%): |
| ||||||
250,000 | TRW Automotive, Inc.(c) | 252,500 | ||||||
|
| |||||||
| Beverages (0.3%): |
| ||||||
750,000 | SABMiller Holdings, Inc.(c) | 753,714 | ||||||
650,000 | SABMiller Holdings, Inc.(c) | 648,980 | ||||||
|
| |||||||
1,402,694 | ||||||||
|
| |||||||
| Media (0.3%): |
| ||||||
1,150,000 | Univision Communications, Inc.(b) | 1,259,249 | ||||||
225,000 | Univision Communications, Inc.(c) | 240,469 | ||||||
|
| |||||||
1,499,718 | ||||||||
|
| |||||||
| Oil, Gas & Consumable Fuels (0.1%): |
| ||||||
750,000 | Targa Resources Partners (b) | 671,250 | ||||||
|
| |||||||
| Total Private Placements (Cost $3,867,539) | 3,826,162 | ||||||
|
| |||||||
Contracts, Shares, Notional Amount or Principal Amount | Fair Value | |||||||
| Convertible Bond (0.3%): |
| ||||||
| Airlines (0.3%): |
| ||||||
$ | 885,000 | United Airlines, Inc., 4.50%, 1/15/15 | 1,808,719 | |||||
|
| |||||||
| Total Convertible Bond (Cost $1,866,444) | 1,808,719 | ||||||
|
|
Contracts, Shares, Notional Amount or Principal Amount | Fair Value | |||||||
| Corporate Bonds (15.8%): |
| ||||||
| Airlines (0.1%): |
| ||||||
$ | 628,953 | U.S. Airways 2010-1A PTT, Series A, 6.25%, 4/22/23 | $ | 687,131 | ||||
|
| |||||||
| Auto Components (0.4%): |
| ||||||
2,000,000 | Delphi Corp., 5.00%, 2/15/23, Callable 2/15/18 @ 102.5 | 2,057,500 | ||||||
|
| |||||||
| Capital Markets (1.0%): |
| ||||||
1,250,000 | E*TRADE Financial Corp., 6.75%, 6/1/16 | 1,356,249 | ||||||
900,000 | E*TRADE Financial Corp., 6.00%, 11/15/17, Callable 11/15/14 @ 103 | 956,250 | ||||||
1,050,000 | E*TRADE Financial Corp., 6.38%, 11/15/19, Callable 11/15/15 @ 104.78 | 1,127,438 | ||||||
250,000 | Ford Motor Credit Co. LLC, 4.25%, 2/3/17 | 268,942 | ||||||
500,000 | Ford Motor Credit Co. LLC, 6.63%, 8/15/17 | 579,217 | ||||||
900,000 | Legg Mason, Inc., 5.50%, 5/21/19 | 984,531 | ||||||
|
| |||||||
5,272,627 | ||||||||
|
| |||||||
| Chemicals (0.1%): |
| ||||||
500,000 | Kronos, Inc., 10/30/19(a) | 504,065 | ||||||
|
| |||||||
| Commercial Banks (0.2%): |
| ||||||
750,000 | Pinnacle Foods Finance LLC, 3.25%, 4/29/20(a) | 748,598 | ||||||
500,000 | Pinnacle Foods Finance LLC, 3.25%, 4/29/20(a) | 499,030 | ||||||
|
| |||||||
1,247,628 | ||||||||
|
| |||||||
| Commercial Services & Supplies (0.1%): |
| ||||||
500,000 | International Lease Finance Corp., 2.19%, 6/15/16(a) | 502,500 | ||||||
|
| |||||||
| Diversified Consumer Services (0.1%): |
| ||||||
250,000 | Ford Motor Credit Co. LLC, 5.00%, 5/15/18 | 278,477 | ||||||
|
| |||||||
| Diversified Financial Services (1.0%): |
| ||||||
5,000,000 | UPC Financing Partnership, 6/30/21(a) | 4,990,000 | ||||||
|
| |||||||
| Diversified Telecommunication Services (0.4%): |
| ||||||
2,000,000 | Telesat Canada, 3/28/19 | 2,004,160 | ||||||
|
| |||||||
| Food Products (2.1%): |
| ||||||
250,000 | B&G Foods, Inc., 4.63%, 6/1/21, Callable 6/1/16 @ 103.47 | 240,000 | ||||||
10,750,000 | H.J. Heinz Co., 0.00%, 6/5/20(a) | 10,824,820 | ||||||
|
| |||||||
11,064,820 | ||||||||
|
| |||||||
| Gas Utilities (0.1%): |
| ||||||
350,000 | EQT Corp., 8.13%, 6/1/19 | 424,611 | ||||||
|
| |||||||
| Hotels, Restaurants & Leisure (2.3%): |
| ||||||
700,000 | Cedar Fair, LP, 9.13%, 8/1/18, Callable 8/1/14 @ 104.56 | 759,500 | ||||||
9,000,000 | Dunkin’ Brands, Inc., 5.00%, 2/14/20(a) | 9,023,400 | ||||||
1,041,667 | Hilton Worldwide Finance LLC , 10/25/20(a) | 1,049,479 | ||||||
1,000,000 | Wendy’s International, Inc., 3.25%, 5/15/19(a) | 1,000,360 | ||||||
|
| |||||||
11,832,739 | ||||||||
|
| |||||||
| Household Products (0.4%): |
| ||||||
1,975,000 | Procter & Gamble Co. (The), 3.10%, 8/15/23 | 1,899,055 | ||||||
|
|
Continued
5
AZL T. Rowe Price Capital Appreciation Fund
Schedule of Portfolio Investments
December 31, 2013
Contracts, Shares, Notional Amount or Principal Amount | Fair Value | |||||||
| Corporate Bonds, continued |
| ||||||
| Machinery (0.4%): |
| ||||||
$ | 1,425,000 | CNH Capital LLC, 6.25%, 11/1/16 | $ | 1,572,844 | ||||
250,000 | Xylem, Inc., 3.55%, 9/20/16 | 262,589 | ||||||
|
| |||||||
1,835,433 | ||||||||
|
| |||||||
| Media (0.2%): |
| ||||||
250,000 | Lamar Media Corp., 5.88%, 2/1/22, Callable 2/1/17 @ 102.94 | 256,250 | ||||||
270,000 | Lamar Media Corp., 5.00%, 5/1/23, Callable 5/1/18 @ 102.5 | 256,500 | ||||||
750,000 | Univision Communications, Inc., 5.13%, 5/15/23, Callable 5/15/18 @ 102.56 (b) | 749,063 | ||||||
|
| |||||||
1,261,813 | ||||||||
|
| |||||||
| Multiline Retail (0.1%): |
| ||||||
75,000 | Amerigas Finance Corp. LLC, 6.75%, 5/20/20, Callable 5/20/20 @ 103.38 | 81,938 | ||||||
525,000 | Amerigas Finance Corp. LLC, 7.00%, 5/20/22, Callable 5/20/17 @ 103.5 | 569,625 | ||||||
|
| |||||||
651,563 | ||||||||
|
| |||||||
| Oil, Gas & Consumable Fuels (2.6%): |
| ||||||
500,000 | Antero Resources Finance Corp., 6.00%, 12/1/20, Callable 12/1/15 @ 104.03 | 525,000 | ||||||
1,000,000 | Concho Resources, Inc., 7.00%, 1/15/21, Callable 1/15/16 @ 103.5 | 1,100,000 | ||||||
225,000 | Concho Resources, Inc., 6.50%, 1/15/22, Callable 1/15/17 @ 103.25 | 243,563 | ||||||
100,000 | Concho Resources, Inc., 5.50%, 4/1/23, Callable 10/1/17 @ 102.75 | 103,000 | ||||||
500,000 | Energy Transfer Partners LP, 4.15%, 10/1/20, Callable 8/1/20 @ 100 | 507,291 | ||||||
550,000 | Energy Transfer Partners LP, 4.90%, 2/1/24, Callable 11/1/23 @ 100 | 558,346 | ||||||
1,450,000 | EQT Corp., 4.88%, 11/15/21 | 1,486,990 | ||||||
125,000 | Markwest Energy Partners LP, 6.50%, 8/15/21, Callable 2/15/16 @ 103.25 | 134,375 | ||||||
1,425,000 | Markwest Energy Partners LP, 6.25%, 6/15/22, Callable 12/15/16 @ 103.12 | 1,506,937 | ||||||
875,000 | Markwest Energy Partners LP, 5.50%, 2/15/23, Callable 8/15/17 @ 102.75 | 881,563 | ||||||
1,250,000 | Markwest Energy Partners LP, 4.50%, 7/15/23, Callable 4/15/23 @ 100 | 1,171,875 | ||||||
50,000 | Range Resources Corp., 6.75%, 8/1/20, Callable 8/1/15 @ 103.38 | 54,125 | ||||||
2,100,000 | Range Resources Corp., 5.75%, 6/1/21, Callable 6/1/16 @ 102.88 | 2,225,999 | ||||||
2,450,000 | Range Resources Corp., 5.00%, 3/15/23, Callable 3/15/18 @ 102.5 | 2,394,874 | ||||||
500,000 | Spectra Energy Partners, 4.75%, 3/15/24, Callable 12/15/23 @ 100 | 509,702 | ||||||
|
| |||||||
13,403,640 | ||||||||
|
| |||||||
| Pharmaceuticals (0.1%): |
| ||||||
570,000 | Pfizer, Inc., 0.90%, 1/15/17 | 567,180 | ||||||
|
|
Contracts, Shares, Notional Amount or Principal Amount | Fair Value | |||||||
| Corporate Bonds, continued |
| ||||||
| Real Estate Investment Trusts (REITs) (0.1%): |
| ||||||
$ | 300,000 | American Tower Corp., 5.00%, 2/15/24 | $ | 302,218 | ||||
|
| |||||||
| Real Estate Management & Development (0.1%): |
| ||||||
750,000 | CBRE Services, Inc., 5.00%, 3/15/23, Callable 3/15/18 @ 102.5 | 720,938 | ||||||
|
| |||||||
| Road & Rail (0.3%): |
| ||||||
1,375,000 | Burlington North Santa Fe, 3.85%, 9/1/23, Callable 6/1/23 @ 100 | 1,352,505 | ||||||
|
| |||||||
| Specialty Retail (0.3%): |
| ||||||
350,000 | L Brands, Inc., 6.90%, 7/15/17 | 402,500 | ||||||
250,000 | L Brands, Inc., 8.50%, 6/15/19 | 300,000 | ||||||
250,000 | L Brands, Inc., 7.00%, 5/1/20 | 280,625 | ||||||
500,000 | L Brands, Inc., 6.63%, 4/1/21 | 548,750 | ||||||
250,000 | L Brands, Inc., 5.63%, 2/15/22 | 255,625 | ||||||
|
| |||||||
1,787,500 | ||||||||
|
| |||||||
| Wireless Telecommunication Services (3.3%): |
| ||||||
850,000 | Crown Castle International Corp., 5.25%, 1/31/19(a) | 850,799 | ||||||
675,000 | Crown Castle International Corp., 7.13%, 11/1/19, Callable 11/1/14 @ 103.56 | 727,313 | ||||||
250,000 | Crown Castle International Corp., 5.25%, 1/15/23 | 245,000 | ||||||
5,250,000 | Crown Castle Operating Co., 1/31/19(a) | 5,254,935 | ||||||
8,000,000 | Intelsat Jackson Holding SA, 6/30/19(a) | 8,053,759 | ||||||
225,000 | SBA Communications Corp., 5.63%, 10/1/19, Callable 10/1/16 @ 102.81 | 231,750 | ||||||
500,000 | SBA Telecommunications, 5.75%, 7/15/20, Callable 7/15/16 @ 102.88 | 520,000 | ||||||
1,500,000 | Sprint Nextel Corp., 9.00%, 11/15/18(a)(b) | 1,807,499 | ||||||
|
| |||||||
17,691,055 | ||||||||
|
| |||||||
| Total Corporate Bonds (Cost $82,677,541) | 82,339,158 | ||||||
|
| |||||||
| Foreign Bond (0.2%): |
| ||||||
| Containers & Packaging (0.2%): |
| ||||||
750,000 | Rexam plc, 6.75%, 6/29/67, Callable 6/29/17 @ 100+ | 1,109,071 | ||||||
|
| |||||||
| Total Foreign Bond (Cost $1,086,363) | 1,109,071 | ||||||
|
| |||||||
| Yankee Dollars (2.2%): |
| ||||||
| Commercial Banks (0.3%): |
| ||||||
1,225,000 | KFW, Series G, 0.50%, 4/19/16 | 1,210,750 | ||||||
|
| |||||||
| Diversified Financial Services (0.1%): |
| ||||||
500,000 | Schaeffler Finance BV, 8.50%, 2/15/19, Callable 2/15/15 @ 106.38(b) | 562,500 | ||||||
|
| |||||||
| Diversified Telecommunication Services (0.1%): |
| ||||||
530,000 | Telesat Canada, 6.00%, 5/15/17, Callable 5/15/14 @ 103(c) | 551,200 | ||||||
|
| |||||||
| Media (0.0%): |
| ||||||
225,000 | Unitymedia Hessen, 7.50%, 3/15/19, Callable 3/15/15 @ 103.75(c) | 244,688 | ||||||
|
|
Continued
6
AZL T. Rowe Price Capital Appreciation Fund
Schedule of Portfolio Investments
December 31, 2013
Contracts, Shares, Notional Amount or Principal Amount | Fair Value | |||||||
| Yankee Dollars, continued |
| ||||||
| Semiconductors & Semiconductor Equipment (0.3%): |
| ||||||
$ | 500,000 | NXP Funding BV/NXP Funding LLC, 3.75%, 6/1/18(c) | $ | 503,750 | ||||
1,000,000 | NXP Funding BV/NXP Funding LLC, 5.75%, 3/15/23, Callable 3/15/18 @ 102.88(b) | 1,017,500 | ||||||
|
| |||||||
1,521,250 | ||||||||
|
| |||||||
| Wireless Telecommunication Services (1.4%): |
| ||||||
475,000 | Intelsat Jackson Holding SA, 8.50%, 11/1/19, Callable 11/1/14 @ 104.25 | 518,344 | ||||||
1,035,000 | Intelsat Jackson Holding SA, 7.25%, 10/15/20, Callable 10/15/15 @ 103.63 | 1,132,031 | ||||||
1,715,000 | Intelsat Jackson Holding SA, 5.50%, 8/1/23, Callable 8/1/18 @ 102.75(b) | 1,631,394 | ||||||
480,000 | UPCB Finance III, Ltd., 6.63%, 7/1/20, Callable 7/1/15 @ 103.31(b) | 510,000 | ||||||
1,525,000 | UPCB Finance V, Ltd., 7.25%, 11/15/21, Callable 11/15/16 @ 103.63(b) | 1,654,625 | ||||||
1,750,000 | UPCB Finance VI, Ltd., 6.88%, 1/15/22, Callable 1/15/17 @ 103.44(b) | 1,859,375 | ||||||
|
| |||||||
7,305,769 | ||||||||
|
| |||||||
| Total Yankee Dollars (Cost $11,479,333) | 11,396,157 | ||||||
|
|
Contracts, Shares, Notional Amount or Principal Amount | Fair Value | |||||||
| U.S. Treasury Obligations (8.7%): |
| ||||||
| U.S. Treasury Notes (8.7%) |
| ||||||
$ | 10,000,000 | 0.25%, 10/31/15 | $ | 9,985,940 | ||||
7,600,000 | 0.63%, 11/15/16 | 7,576,843 | ||||||
10,525,000 | 2.50%, 8/15/23 | 10,107,284 | ||||||
17,750,000 | 2.75%, 11/15/23 | 17,364,487 | ||||||
|
| |||||||
45,034,554 | ||||||||
|
| |||||||
| Total U.S. Treasury Obligations (Cost $45,419,984) | 45,034,554 | ||||||
|
| |||||||
| Unaffiliated Investment Company (10.5%): |
| ||||||
54,495,463 | Dreyfus Treasury Prime Cash Management Fund, Institutional Shares, 0.00%(d) | 54,495,463 | ||||||
|
| |||||||
| Total Unaffiliated Investment Company (Cost $54,495,463) | 54,495,463 | ||||||
|
| |||||||
| Total Investment Securities | 538,861,069 | ||||||
| Net other assets (liabilities) — (3.8)% | (19,613,318 | ) | |||||
|
| |||||||
| Net Assets — 100.0% | $ | 519,247,751 | |||||
|
|
Percentages indicated are based on net assets as of December 31, 2013.
* | Non-income producing security. |
+ | The principal amount is disclosed in local currency and the fair value is disclosed in U.S. Dollars. |
(a) | Variable rate security. The rate presented represents the rate in effect at December 31, 2013. The date presented represents the final maturity date. |
(b) | Rule 144A, Section 4(2) or other security which is restricted to resale to institutional investor. The sub-adviser has deemed these securities to be liquid based on procedures approved by the Board of Trustees. |
(c) | Rule 144A, Section 4(2) or other security which is restricted to resale to institutional investors. The sub-adviser has deemed these securities to be illiquid based on procedures approved by the Board of Trustees. As of December 31, 2013, these securities represent 0.62% of the net assets of the fund. |
(d) | The rate represents the effective yield at December 31, 2013. |
(e) | See Federal Tax Information listed in the Notes to the Financial Statements. |
Continued
7
AZL T. Rowe Price Capital Appreciation Fund
Schedule of Portfolio Investments
December 31, 2013
Options Contracts
At December 31, 2013, the Fund’s open written exchange-traded options contracts were as follows:
Number of Contracts | Description | Fair Value | ||||||
| Call Options: |
| ||||||
79 | On Accenture plc, Strike @ 80 EXP 1/17/15 | $ | (60,435 | ) | ||||
79 | On Accenture plc, Strike @ 85 EXP 1/17/15 | (41,080 | ) | |||||
56 | On Apache Corp., Strike @ 100 EXP 1/16/15 | (18,900 | ) | |||||
26 | On Apache Corp., Strike @ 105 EXP 1/16/15 | (6,110 | ) | |||||
26 | On Apache Corp., Strike @ 97.5 EXP 1/16/15 | (10,465 | ) | |||||
103 | On IBM Corp., Strike @ 185 EXP 1/16/15 | (153,470 | ) | |||||
102 | On IBM Corp., Strike @ 190 EXP 1/16/15 | (127,245 | ) | |||||
42 | On Philip Morris International, Inc., Strike @ 95 EXP 1/17/15 | (7,203 | ) | |||||
114 | On Philip Morris International, Inc., Strike @ 97.5 EXP 1/17/15 | (13,908 | ) | |||||
252 | On Procter & Gamble Co. (The), Strike @ 85 EXP 1/17/15 | (82,530 | ) | |||||
100 | On United Technologies Corp., Strike @ 105 EXP 1/18/14 | (88,500 | ) | |||||
|
| |||||||
| Total Call Options (Premiums Received $538,931) | $ | (609,846 | ) | ||||
|
|
At December 31, 2013, the Fund’s open written over-the counter options contracts were as follows:
Number of Contracts | Description | Fair Value | ||||||
| Call Options: |
| ||||||
46 | On Apache Corp., Strike @ 90 EXP 1/17/14, with JPMorgan Chase | $ | (1,079 | ) | ||||
23 | On Apache Corp., Strike @ 95 EXP 1/16/15, with Morgan Stanley | (11,135 | ) | |||||
220 | On Lowe’s Cos., Inc., Strike @ 45 EXP 1/17/14, with JPMorgan Chase | (99,741 | ) | |||||
55 | On Lowe’s Cos., Inc., Strike @ 46 EXP 1/17/14, with JPMorgan Chase | (24,935 | ) | |||||
153 | On Lowe’s Cos., Inc., Strike @ 55 EXP 1/16/15, with JPMorgan Chase | (38,862 | ) | |||||
155 | On Procter & Gamble Co. (The), Strike @ 90 EXP 1/16/15, with JPMorgan Chase | (20,351 | ) | |||||
21 | On Simon Property Group, Inc., Strike @ 165 EXP 1/16/15, with JPMorgan Chase | (11,069 | ) | |||||
38 | On Simon Property Group, Inc., Strike @ 170 EXP 1/16/15, with JPMorgan Chase | (15,090 | ) | |||||
21 | On Simon Property Group, Inc., Strike @ 175 EXP 1/16/15, with JPMorgan Chase | (6,224 | ) | |||||
21 | On Simon Property Group, Inc., Strike @ 180 EXP 1/16/15, with JPMorgan Chase | (4,602 | ) | |||||
206 | On Walt Disney Co. (The), Strike @ 70 EXP 1/17/14, with JPMorgan Chase | (130,313 | ) | |||||
|
| |||||||
| Total Call Options (Premiums Received $287,655) | $ | (363,401 | ) | ||||
|
|
See accompanying notes to the financial statements.
8
AZL T. Rowe Price Capital Appreciation Fund
Statement of Assets and Liabilities
December 31, 2013
Assets: | |||||
Investment securities, at cost | $ | 516,759,101 | |||
|
| ||||
Investment securities, at value | $ | 538,861,069 | |||
Interest and dividends receivable | 1,421,161 | ||||
Foreign currency, at value (cost $19,617) | 19,614 | ||||
Receivable for investments sold | 1,297,978 | ||||
Reclaims receivable | 63,207 | ||||
|
| ||||
Total Assets | 541,663,029 | ||||
|
| ||||
Liabilities: | |||||
Payable for investments purchased | 20,614,526 | ||||
Payable for capital shares redeemed | 343,977 | ||||
Written Options (Proceeds received $826,586) | 973,247 | ||||
Manager fees payable | 305,676 | ||||
Administration fees payable | 19,904 | ||||
Distribution fees payable | 109,170 | ||||
Custodian fees payable | 8,256 | ||||
Administrative and compliance services fees payable | 2,105 | ||||
Trustee fees payable | 16 | ||||
Other accrued liabilities | 38,401 | ||||
|
| ||||
Total Liabilities | 22,415,278 | ||||
|
| ||||
Net Assets | $ | 519,247,751 | |||
|
| ||||
Net Assets Consist of: | |||||
Capital | $ | 428,681,182 | |||
Accumulated net investment income/(loss) | 2,093,377 | ||||
Accumulated net realized gains/(losses) from investment transactions | 66,510,219 | ||||
Net unrealized appreciation/(depreciation) on investments | 21,962,973 | ||||
|
| ||||
Net Assets | $ | 519,247,751 | |||
|
| ||||
Shares of beneficial interest (unlimited number of shares authorized, no par value) | 32,789,428 | ||||
Net Asset Value (offering and redemption price per share) | $ | 15.84 | |||
|
|
For the Year Ended December 31, 2013
Investment Income: | |||||
Dividends | $ | 6,944,584 | |||
Interest | 247,030 | ||||
Income from securities lending | 26,888 | ||||
Foreign withholding tax | (125,602 | ) | |||
|
| ||||
Total Investment Income | 7,092,900 | ||||
|
| ||||
Expenses: | |||||
Manager fees | 3,665,064 | ||||
Administration fees | 159,101 | ||||
Distribution fees | 1,221,688 | ||||
Custodian fees | 27,063 | ||||
Administrative and compliance services fees | 8,848 | ||||
Trustee fees | 22,868 | ||||
Professional fees | 23,515 | ||||
Shareholder reports | 38,072 | ||||
Other expenses | 14,674 | ||||
|
| ||||
Total expenses before reductions | 5,180,893 | ||||
Less expenses voluntarily waived/reimbursed by the Manager | (244,345 | ) | |||
Less expenses paid indirectly | (12,209 | ) | |||
|
| ||||
Net expenses | 4,924,339 | ||||
|
| ||||
Net Investment Income/(Loss) | 2,168,561 | ||||
|
| ||||
Realized and Unrealized Gains/(Losses) on Investments: | |||||
Net realized gains/(losses) on securities transactions | 209,333,841 | ||||
Change in net unrealized appreciation/depreciation on investments | (86,896,119 | ) | |||
|
| ||||
Net Realized/Unrealized Gains/(Losses) on Investments | 122,437,722 | ||||
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| ||||
Change in Net Assets Resulting From Operations | $ | 124,606,283 | |||
|
|
See accompanying notes to the financial statements.
9
Statements of Changes in Net Assets
AZL T. Rowe Price Capital Appreciation Fund | ||||||||||
For the Year Ended December 31, 2013 | For the Year Ended December 31, 2012 | |||||||||
Change in Net Assets: | ||||||||||
Operations: | ||||||||||
Net investment income/(loss) | $ | 2,168,561 | $ | 4,582,220 | ||||||
Net realized gains/(losses) on investment transactions | 209,333,841 | 28,087,137 | ||||||||
Change in unrealized appreciation/depreciation on investments | (86,896,119 | ) | 12,117,176 | |||||||
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|
| |||||||
Change in net assets resulting from operations | 124,606,283 | 44,786,533 | ||||||||
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| |||||||
Dividends to Shareholders: | ||||||||||
From net investment income | (4,077,861 | ) | (1,461,106 | ) | ||||||
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| |||||||
Change in net assets resulting from dividends to shareholders | (4,077,861 | ) | (1,461,106 | ) | ||||||
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|
| |||||||
Capital Transactions: | ||||||||||
Proceeds from shares issued | 44,380,761 | 46,062,456 | ||||||||
Proceeds from dividends reinvested | 4,077,861 | 1,461,106 | ||||||||
Value of shares redeemed | (70,733,204 | ) | (34,497,076 | ) | ||||||
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|
|
| |||||||
Change in net assets resulting from capital transactions | (22,274,582 | ) | 13,026,486 | |||||||
|
|
|
| |||||||
Change in net assets | 98,253,840 | 56,351,913 | ||||||||
Net Assets: | ||||||||||
Beginning of period | 420,993,911 | 364,641,998 | ||||||||
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| |||||||
End of period | $ | 519,247,751 | $ | 420,993,911 | ||||||
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| |||||||
Accumulated net investment income/(loss) | $ | 2,093,377 | $ | 4,077,842 | ||||||
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| |||||||
Share Transactions: | ||||||||||
Shares issued | 3,126,962 | 3,892,925 | ||||||||
Dividends reinvested | 276,465 | 120,454 | ||||||||
Shares redeemed | (4,879,004 | ) | (2,961,396 | ) | ||||||
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|
| |||||||
Change in shares | (1,475,577 | ) | 1,051,983 | |||||||
|
|
|
|
See accompanying notes to the financial statements.
10
AZL T. Rowe Price Capital Appreciation Fund
(Selected data for a share of beneficial interest outstanding throughout the periods indicated)
Year Ended December 31, | |||||||||||||||||||||||||
2013 | 2012 | 2011 | 2010 | 2009 | |||||||||||||||||||||
Net Asset Value, Beginning of Period | $ | 12.29 | $ | 10.98 | $ | 11.57 | $ | 10.59 | $ | 8.09 | |||||||||||||||
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|
| ||||||||||||||||
Investment Activities: | |||||||||||||||||||||||||
Net Investment Income/(Loss) | 0.07 | 0.13 | 0.09 | 0.14 | 0.16 | ||||||||||||||||||||
Net Realized and Unrealized Gains/(Losses) on Investments | 3.60 | 1.22 | (0.58 | ) | 1.10 | 2.41 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Total from Investment Activities | 3.67 | 1.35 | (0.49 | ) | 1.24 | 2.57 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Dividends to Shareholders From: | |||||||||||||||||||||||||
Net Investment Income | (0.12 | ) | (0.04 | ) | (0.10 | ) | (0.26 | ) | (0.07 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Total Dividends | (0.12 | ) | (0.04 | ) | (0.10 | ) | (0.26 | ) | (0.07 | ) | |||||||||||||||
|
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|
|
|
|
|
|
|
| ||||||||||||||||
Net Asset Value, End of Period | $ | 15.84 | $ | 12.29 | $ | 10.98 | $ | 11.57 | $ | 10.59 | |||||||||||||||
|
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|
|
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|
|
|
|
| ||||||||||||||||
Total Return(a) | 29.94 | %(d) | 12.32 | % | (4.20 | )% | 12.05 | % | 31.83 | % | |||||||||||||||
Ratios to Average Net Assets/Supplemental Data: | |||||||||||||||||||||||||
Net Assets, End of Period (000’s) | $ | 519,248 | $ | 420,994 | $ | 364,642 | $ | 425,305 | $ | 573,305 | |||||||||||||||
Net Investment Income/(Loss) | 0.44 | % | 1.14 | % | 0.71 | % | 0.55 | % | 1.72 | % | |||||||||||||||
Expenses Before Reductions(b) | 1.06 | % | 1.07 | % | 1.10 | % | 1.08 | % | 1.11 | % | |||||||||||||||
Expenses Net of Reductions | 1.01 | % | 1.02 | % | 1.06 | % | 1.03 | % | 1.06 | % | |||||||||||||||
Expenses Net of Reductions, Excluding Expenses Paid Indirectly(c) | 1.01 | % | 1.03 | % | 1.06 | % | 1.03 | % | 1.06 | % | |||||||||||||||
Portfolio Turnover Rate | 122 | %(e) | 24 | % | 11 | % | 14 | % | 23 | % |
(a) | The returns include reinvested dividends and fund level expenses, but exclude insurance contract charges. If these charges were included, the returns would have been lower. |
(b) | Excludes fee reductions. If such fee reductions had not occurred, the ratios would have been as indicated. |
(c) | Expenses net of reductions excludes expenses paid indirectly, pursuant to a “commission recapture” program, under which brokers remit a portion of the brokerage commission which is used to pay certain Fund expenses. See note 2 in the Notes to the Financial Statements. |
(d) | During the year ended December 31, 2013, the Fund received monies related to certain nonrecurring litigation settlements. The corresponding impact to the total return was 0.10%. |
(e) | Effective November 15, 2012, the Subadviser changed from Davis Selected Advisors, LP to T. Rowe Price Associates, Inc. Costs of purchase and proceeds from sales of portfolio securities associated with the change in the Subadviser contributed to a higher portfolio turnover rate for the year ended December 31, 2013 as compared to prior years. |
See accompanying notes to the financial statements.
11
AZL T. Rowe Price Capital Appreciation Fund
Notes to the Financial Statements
December 31, 2013
1. Organization
The Allianz Variable Insurance Products Trust (the “Trust”) was organized as a Delaware statutory trust on July 13, 1999. The Trust is a diversified open-end management investment company registered under the Investment Company Act of 1940. The Trust consists of 29 separate investment portfolios (collectively, the “Funds”), of which one is included in this report, the AZL T. Rowe Price Capital Appreciation Fund (formerly the AZL Davis New York Venture Fund) (the “Fund”), and 28 are presented in separate reports.
The Trust is authorized to issue an unlimited number of shares of the Fund without par value. Shares of the Fund are available through the variable annuity contracts and variable life insurance policies offered through the separate accounts of participating insurance companies.
Under the Trust’s organizational documents, its officers and trustees are indemnified against certain liabilities arising out of the performance of their duties to the Fund. In addition, in the normal course of business, the Fund may enter into contracts with its vendors and others that provide for general indemnifications. The Fund’s maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Fund. However, based on experience, the Fund expects the risk of loss to be remote.
2. Significant Accounting Policies
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. The policies conform with U.S. generally accepted accounting principles (“U.S. GAAP”). The preparation of financial statements requires management to make certain 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 increases and decreases in net assets from operations during the reporting period. Actual results could differ from those estimates.
Security Valuation
The Fund records its investments at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between willing market participants at the measurement date. The valuation techniques used to determine fair value are further described in Note 4 below.
Investment Transactions and Investment Income
Investment transactions are recorded not later than on the business day following trade date. However, for financial reporting purposes, investment transactions are accounted for on trade date. Net realized gains and losses on investments sold and on foreign currency transactions are recorded on the basis of identified cost. Interest income is recorded on the accrual basis and includes, where applicable, the amortization of premiums or accretion of discounts. Dividend income is recorded on the ex-dividend date except in the case of foreign securities, in which case dividends are recorded as soon as such information becomes available.
Real Estate Investment Trusts
The Fund may own shares of real estate investment trusts (“REITs”) which report information on the source of their distributions annually. Certain distributions received from REITs during the year, which are known to be a return of capital, are recorded as a reduction to the cost of the individual REIT.
Foreign Currency Translation
The accounting records of the Fund are maintained in U.S. dollars. Foreign currency amounts are translated into U.S. dollars at the current rate of exchange to determine the fair value of investments, assets and liabilities. Purchases and sales of securities, and income and expenses are translated at the prevailing rate of exchange on the respective dates of such transactions. The Fund does not isolate that portion of the results of operations resulting from changes in foreign exchange rates on investments from fluctuations arising from changes in market prices of securities held. Such fluctuations are included in the net realized and unrealized gain or loss on investments and foreign currencies. Income received by the Fund from sources within foreign countries may be subject to withholding and other income or similar taxes imposed by such countries. The Funds accrue such taxes, as applicable, based on their current interpretation of tax rules in the foreign markets in which they invest.
Dividends to Shareholders
Dividends to shareholders are recorded on the ex-dividend date. The Fund distributes its dividends from net investment income and net realized capital gains, if any, on an annual basis. The amount of dividends from net investment income and from net realized gains is determined in accordance with federal income tax regulations, which may differ from U.S. GAAP. These “book/tax” differences are either temporary or permanent in nature. To the extent these differences are permanent in nature (e.g., return of capital, net operating loss, reclassification of certain market discounts, gain/loss, paydowns, and distributions), such amounts are reclassified within the composition of net assets based on their federal tax-basis treatment; temporary differences (e.g., wash sales and post October losses) do not require reclassification. Dividends to shareholders that exceed net investment income and net realized gains for tax purposes are reported as distributions of capital.
Expense Allocation
Expenses directly attributable to the Fund are charged directly to the Fund, while expenses attributable to more than one Fund are allocated among the respective Funds based upon relative net assets or some other reasonable method. Expenses which are attributable to more than one Trust are allocated across the Allianz Variable Insurance Products and Allianz Variable Insurance Products Fund of Funds Trusts based upon relative net assets or another reasonable basis. Allianz Investment Management LLC (the “Manager”), serves as the investment manager for the Trust and the Allianz Variable Insurance Products Fund of Funds Trust.
12
AZL T. Rowe Price Capital Appreciation Fund
Notes to the Financial Statements
December 31, 2013
Securities Lending
To generate additional income, the Fund may lend up to 33 1/3% of its assets pursuant to agreements requiring that the loan be continuously secured by any combination of cash, U.S. government or U.S. government agency securities, equal initially to at least 102% of the fair value plus accrued interest on the securities loaned (105% for foreign securities). The borrower of securities is at all times required to post collateral to the Fund in an amount equal to 100% of the fair value of the securities loaned based on the previous day’s fair value of the securities loaned, marked-to-market daily. Any collateral shortfalls are adjusted the next business day. The Fund bears all of the gains and losses on such investments. The Fund receives payments from borrowers equivalent to the dividends and interest that would have been earned on securities lent while simultaneously seeking to earn income on the investment of cash collateral received. In extremely low interest rate environments, the broker rebate fee may exceed the interest earned or the cash collateral which would result in a loss to the Fund. The investment of cash collateral deposited by the borrower is subject to inherent market risks such as interest rate risk, credit risk, liquidity risk, and other risks that are present in the market, and as such, the value of these investments may not be sufficient, when liquidated, to repay the borrower when the loaned security is returned. There may be risks of delay in recovery of the securities or even loss of rights in the collateral should the borrower of the securities fail financially. However, loans will be made only to borrowers, such as broker-dealers, banks or institutional borrowers of securities, deemed by the Manager to be of good standing and credit worthy and when in its judgment, the consideration which can be earned currently from such securities loans justifies the attendant risks. Loans are subject to termination by the Trust or the borrower at any time, and are, therefore, not considered to be illiquid investments. Securities on loan at December 31, 2013 are presented on the Fund’s Schedule of Portfolio Investments. The average outstanding amount of securities on loan was $4.8 million for the year ended December 31, 2013. At December 31, 2013, there were no securities on loan.
Cash collateral received in connection with securities lending is invested in the Allianz Variable Insurance Products Securities Lending Collateral Trust (the “Securities Lending Collateral Trust”) managed by The Dreyfus Corporation, an affiliate of the Custodian and Securities Lending Agent. The Securities Lending Collateral Trust invests in short-term investments that have a remaining maturity of 397 days or less as calculated in accordance with Rule 2a-7 under the 1940 Act. The Fund paid securities lending fees of $2,655 during the year ended December 31, 2013. These fees have been netted against “Income from securities lending” on the Statement of Operations.
Commission Recapture
Certain Funds of the Trust participate in a commission recapture program. The Fund will utilize the recaptured commissions to pay for, in whole or part, certain expenses of the Fund, excluding investment advisory fees. Any amounts received by the Fund, if applicable, are disclosed as “Expenses paid indirectly” on the Statement of Operations.
Effective January 6, 2014, the Manager, on behalf of the Trust, requested the Fund cease participation in the program until further notice.
Derivative Instruments
All open derivative positions at period end are reflected on the Fund’s Schedule of Portfolio Investments. The following is a description of the derivative instruments utilized by the Fund, including the primary underlying risk exposures related to each instrument type.
Options Contracts
The Fund may purchase or write put and call options on a security or an index of securities. During the year ended December 31, 2013, the Fund purchased and wrote call and put options to increase or decrease its exposure to underlying instruments (including equity risk, interest rate risk and/or foreign currency exchange rate risk) and/or, in the case of options written, to generate gains from options premiums.
Purchased Options Contracts — The Fund pays a premium which is included in “Investments, at value” on the Statement of Assets and Liabilities and marked to market to reflect the current value of the option. Premiums paid for purchasing put options that expire are treated as realized losses. When a put option is exercised or closed, premiums paid for purchasing put options are offset against proceeds to determine the realized gain/loss on the transaction. The Fund bears the risk of loss of the premium and change in value should the counterparty not perform under the contract.
Written Options Contracts — The Fund receives a premium which is recorded as a liability and is subsequently adjusted to the current value of the options written. Premiums received from writing options that expire are treated as realized gains. Premiums received from writing options that are either exercised or closed are offset against the proceeds received or the amount paid on the transaction to determine realized gains or losses. The risk associated with writing an option is that the Fund bears the market risk of an unfavorable change in the price of an underlying asset and is required to buy or sell an underlying asset under the contractual terms of the option at a price different from the current value.
Realized gains and losses, if any, are reported as “Net realized gains/(losses) on options contracts” on the Statement of Operations.
The Fund had the following transactions in written call and put options during the year ended December 31, 2013:
| Number of Contracts |
| Premiums Received | |||||||||||||||||||
Options outstanding at December 31, 2012 | — | $ | — | |||||||||||||||||||
Options written | (1,938 | ) | (826,586 | ) | ||||||||||||||||||
Options exercised | ||||||||||||||||||||||
Options expired | — | - | ||||||||||||||||||||
Options closed | — | - | ||||||||||||||||||||
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|
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| |||||||||||||||||
Options outstanding at December 31, 2013 | (1,938 | ) | $ | (826,586 | ) | |||||||||||||||||
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13
AZL T. Rowe Price Capital Appreciation Fund
Notes to the Financial Statements
December 31, 2013
Summary of Derivative Instruments
The following is a summary of the fair values of derivative instruments on the Fund’s Statement of Assets and Liabilities, categorized by risk exposure, as of December 31, 2013:
Asset Derivatives | Liability Derivatives | |||||||||||
Primary Risk Exposure | Statement of Assets and Liabilities Location | Total Fair Value | Statement of Assets and Liabilities Location | Total Fair Value | ||||||||
Equity Contracts | Investment securities, at value (purchased options) | $ | — | Written options | $ | 973,247 |
The following is a summary of the effect of derivative instruments on the Statement of Operations, categorized by risk exposure, for the year ended December 31, 2013:
Primary Risk Exposure | Location of Gains/(Losses) on Derivatives Recognized in Income | Realized Gains/(Losses) on Derivatives Recognized in Income | Change in Unrealized Appreciation/ Depreciation on Derivatives Recognized in Income | |||||||
Equity Contracts | Net realized gains/(losses) on options contracts / change in unrealized appreciation/depreciation on investments | $ | — | $ | (146,661 | ) |
Effective January 1, 2013, the Fund adopted Financial Accounting Standards Board Accounting Standards Update (“ASU”) No. 2013-01 “Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities” (“ASU 2013-01”) which amended Accounting Standards Codification Subtopic 210-20, Balance Sheet Offsetting. ASU 2013-01 clarified the scope of ASU No. 2011-11 “Disclosures about Offsetting Assets and Liabilities” (“ASU 2011-11”). ASU 2011-11 requires an entity to disclose information about offsetting and related arrangements to enable users of that entity’s financial statements to understand the effect of those arrangements on its financial position. The objective of this disclosure is to facilitate comparison between those entities that prepare their financial statements on the basis of U.S. GAAP and those entities that prepare their financial statements on the basis of International Financial Reporting Standards. ASU 2013-01 clarifies the scope of ASU 2011-11 as applying to derivatives accounted for in accordance with Topic 815, Derivatives and Hedging, including bifurcated embedded derivatives, repurchase agreements and reverse repurchase agreements, and securities borrowing and securities lending transactions that are offset either in accordance with other requirements of U.S. GAAP or subject to an enforceable master netting arrangement or similar agreement.
The Fund is generally subject to master netting agreements that allow for amounts owed between the Fund and the counterparty to be netted. The party that has the larger payable pays the excess of the larger amount over the smaller amount to the other party. The master netting agreements do not apply to amounts owed to/from different counterparties. The amounts shown in the Statement of Assets and Liabilities do not take into consideration the effects of legally enforceable master netting agreements. The table below presents the gross and net amounts of these assets and liabilities with any offsets to reflect the Fund’s ability to reflect the master netting agreements at December 31, 2013. For financial reporting purposes, the Fund does not offset derivative assets and derivative liabilities that are subject to master netting arrangements in the Statement of Assets and Liabilities. This table also summarizes the fair values of derivative instruments on the Fund’s Statement of Assets and Liabilities, categorized by risk exposure, as of December 31, 2013.
As of December 31, 2013, the Fund’s derivative assets and liabilities by type are as follows:
Assets | Liabilities | |||||||||
Derivative Financial Instruments: | ||||||||||
Option contracts | $ | — | $ | 973,247 | ||||||
|
|
|
| |||||||
Total derivative assets and liabilities in the Statement of Assets and Liabilities | — | 973,247 | ||||||||
Derivatives not subject to a master netting agreement or similar agreement (“MNA”) | — | (620,981 | ) | |||||||
|
|
|
| |||||||
Total assets and liabilities subject to a MNA | $ | — | $ | 352,266 | ||||||
|
|
|
|
The following table presents the Fund’s derivative liabilities by counterparty net of amounts available for offset under a MNA and net of the related collateral pledged by the Fund as of December 31, 2013:
Counterparty | Derivative Liabilities Subject to a MNA by Counterparty | Derivatives Available for Offset | Non-cash Collateral Pledged* | Cash Collateral Pledged* | Net Amount of Derivative Liabilities | ||||||||||||||||||||
JPMorgan Chase | $ | 352,266 | $ | — | $ | — | $ | — | $ | 352,266 | |||||||||||||||
|
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|
|
|
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|
|
| ||||||||||||||||
Total | $ | 352,266 | $ | — | $ | — | $ | — | $ | 352,266 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
* | The actual collateral received or pledged may be in excess of the amounts shown in the table. The table only reflects collateral amounts up to the amount of the financial instrument disclosed on the Statement of Assets and Liabilities. |
3. Related Party Transactions
The Manager provides investment advisory and management services for the Fund. The Manager has retained an independent money management organization (the “Subadviser”), to make investment decisions on behalf of the Fund. Pursuant to a subadvisory agreement effective November 15, 2013 with T. Rowe Price Associates, Inc. (“T. Rowe Price”), T. Rowe Price provides investment advisory services as the Subadviser for the Fund subject to the general supervision of the Trustees and the Manager. Prior to November 15, 2013, the Fund was subadvised by Davis Selected Advisors, L.P. The Manager is entitled to a fee, computed daily and paid monthly, based on the average daily net assets of the Fund. Expenses incurred by the Fund for investment advisory and management services are reflected on the Statement of Operations as “Manager fees.” For its services, the Subadviser is entitled to a fee payable by the Manager. The Manager has contractually agreed to waive fees and reimburse the Fund to limit the annual
14
AZL T. Rowe Price Capital Appreciation Fund
Notes to the Financial Statements
December 31, 2013
expenses, excluding interest expense (e.g., cash overdraft fees), taxes, brokerage commissions, other expenditures that are capitalized in accordance with U.S. GAAP and other extraordinary expenses not incurred in the ordinary course of the Fund’s business, based on the daily net assets of the Fund, through April 30, 2015.
For the year ended December 31, 2013, the annual rate due to the Manager and the annual expense limit were as follows:
Annual Rate* | Annual Expense Limit | |||||||||
AZL T. Rowe Price Capital Appreciation Fund | 0.75 | % | 1.20 | % |
* | The Manager voluntarily reduced the management fee to 0.70% on all assets. The manager reserves the right to increase the management fee to the amount shown in the table at any time. |
Any amounts contractually waived or reimbursed by the Manager in a particular fiscal year will be subject to repayment by the Fund to the Manager to the extent that from time to time through the next three fiscal years the repayment will not cause the Fund’s expenses to exceed the lesser of the stated limit at the time of the waiver or the current stated limit. Any amounts recouped by the Manager during the year are reflected on the Statement of Operations as “Recoupment of prior expenses reimbursed by the Manager.” At December 31, 2013, there were no remaining contractual reimbursements that are subject to repayment by the Fund in subsequent years.
In addition, the Manager may voluntarily waive or reimburse additional fees in order to maintain more competitive expense ratios. Any voluntary waivers or reimbursements are not subject to repayment in subsequent years. Information on the total amount waived/reimbursed by the Manager or repaid to the Manager by the Fund during the year can be found on the Statement of Operations.
Pursuant to separate agreements between the Funds and the Manager, the Manager provides a Chief Compliance Officer (“CCO”) and certain compliance oversight and regulatory filing services to the Trust. Under these agreements the Manager is entitled to an amount equal to a portion of the compensation and certain other expenses related to the individuals performing the CCO and compliance oversight services, as well as $75 per hour for time incurred in connection with the preparation and filing of certain documents with the Securities and Exchange Commission. The fees are paid to the Manager on a quarterly basis. The total expenses incurred by the Fund for these services are reflected on the Statement of Operations as “Administrative and compliance services fees.”
Citi Fund Services Ohio, Inc. (“Citi” or the “Administrator”), a wholly owned subsidiary of Citigroup, Inc., with which an officer of the Trust is affiliated, serves as the Trust’s administrator, transfer agent, and fund accountant, and assists the Trust in all aspects of its administration and operation. The Administrator is entitled to a Trust-wide asset-based fee, which is based on the following schedule: 0.05% of daily average net assets on the first $4 billion, 0.04% of daily average net assets on the next $2 billion, 0.02% of daily average net assets on the next $2 billion and 0.01% of daily average net assets over $8 billion. The overall Trust-wide fees are accrued daily and paid monthly and are subject to a minimum annual fee. In addition, the Administrator is entitled to annual account fees related to the transfer agency system, an annual fee for each additional class of shares of any Fund, certain annual fees in supporting fair value services, and a Trust-wide annual fee for providing infrastructure and support in implementing the written policies and procedures comprising the Fund’s compliance program. Fees payable to the Administrator are subject to certain reductions associated with services provided to new funds. The Administrator is also reimbursed for certain expenses incurred. The total expenses incurred by the Fund for these services are reflected on the Statement of Operations as “Administration fees.”
Allianz Life Financial Services, LLC (“ALFS”), an affiliate of the Manager, serves as distributor of the Fund and receives 12b-1 fees directly from the Fund, plus a Trust-wide annual fee of $42,500, paid by the Manager from its profits and not by the Trust, for recordkeeping and reporting services.
The Trust has adopted a distribution and service plan in conformance with Rule 12b-1 of the 1940 Act. Pursuant to this plan, the Fund is authorized to pay certain fees for the sale and distribution of its shares and services provided to its shareholders at an annual rate not to exceed 0.25% of the Fund’s average daily net assets. These fees are reflected on the Statement of Operations as “Distribution fees.”
In addition, certain legal fees and expenses are paid to a law firm, Dorsey & Whitney LLP, of which the Secretary of the Fund is a partner. During the year ended December 31, 2013, $6,101 was paid from the Fund relating to these fees and expenses.
Certain Officers and Trustees of the Trust are affiliated with the Manager or the Administrator. Such Officers (except for the Trust’s CCO as noted above) and Trustees receive no compensation from the Trust for serving in their respective roles. For their service to the Trust and to the Allianz Variable Insurance Products Fund of Funds Trust, each non-interested Trustee receives a $139,000 annual Board retainer. In addition, the Trustees are reimbursed for certain expenses associated with attending Board meetings. Compensation to the Trustees is allocated between the Trust and the Allianz Variable Insurance Products Fund of Funds Trust in proportion to the assets under management of each trust. During the year ended December 31, 2013, actual Trustee compensation was $973,000 in total for both trusts.
At a meeting of the Board of Trustees on December 4, 2013, the Trustees approved a fee increase to the Officers and Trustees who are paid a fee for their services to the Trust and to the Allianz Variable Insurance Products Fund of Funds Trust. Effective January 1, 2014, each non-interested Trustee will receive a $163,000 annual retainer.
4. Investment Valuation Summary
The valuation techniques employed by the Fund, as described below, maximize the use of observable inputs and minimize the use of unobservable inputs in determining fair value. The inputs used for valuing the Fund’s investments are summarized in the three broad levels listed below:
— | Level 1 — quoted prices in active markets for identical assets |
— | Level 2 — other significant observable inputs (including quoted prices for similar securities, interest rates, prepayments speeds, credit risk, etc.) |
— | Level 3 — significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of investments) |
Changes in valuation techniques may result in transfers in or out of an assigned level within the disclosure hierarchy. The Fund determines transfers between fair value hierarchy levels at the reporting period end. The inputs or methodology used for valuing investments is not necessarily an indication of the risk associated with investing in those investments.
15
AZL T. Rowe Price Capital Appreciation Fund
Notes to the Financial Statements
December 31, 2013
Security prices are generally provided by an independent third party pricing service approved by the Trust’s Board of Trustees (“Trustees”) as of the close of the New York Stock Exchange (“NYSE”) (generally 4:00 pm Eastern Time). Equity securities are valued at the last quoted sale price or, if there is no sale, the last quoted bid price is used for long securities and the last quoted ask price is used for securities sold short. Securities listed on NASDAQ Stock Market, Inc. (“NASDAQ”) are valued at the official closing price as reported by NASDAQ. In each of these situations, valuations are typically categorized as a Level 1 in the fair value hierarchy. Investments in open-end investment companies are valued at their respective net asset value as reported by such companies and are typically categorized as Level 1 in the fair value hierarchy.
Debt and other fixed income securities are generally valued at an evaluated bid price provided by an independent pricing source approved by the Trustees. To value debt securities, pricing services may use various pricing techniques which take into account appropriate factors such as market activity, yield, quality, coupon rate, maturity, type of issue, trading characteristics, call features, credit ratings and other data, as well as broker quotes. Short term securities of sufficient credit quality with sixty days or less remaining until maturity may be valued at amortized cost, which approximates fair value. In each of these situations, valuations are typically categorized as Level 2 in the fair value hierarchy.
Options are generally valued at the average of the closing bid and ask quotations on the principal exchange on which the option is traded, which are then typically categorized as Level 1 in the fair value hierarchy. Non exchange-traded derivatives, such as swaps and certain options, are generally valued by approved independent pricing services utilizing techniques which take into account factors such as yields, quality, maturity, type of issue, trading characteristics, call features, credit ratings and other data, as well as broker quotes and are typically categorized as Level 2 in the fair value hierarchy.
Other assets and securities for which market quotations are not readily available, or are deemed unreliable are valued at fair value as determined in good faith by the Trustees or persons acting on the behalf of the Trustees. Fair value pricing may be used for significant events such as securities whose trading has been suspended, whose price has become stale or for which there is no currently available price at the close of the NYSE. Depending on the source and relative significance of valuation inputs, these instruments may be classified as Level 2 or Level 3 in the fair value hierarchy. The Fund utilizes a pricing service to assist in determining the fair value of securities when certain significant events occur that may affect the value of foreign securities.
In accordance with procedures adopted by the Trustees, fair value pricing may be used if events materially affecting the value of foreign securities occur between the time when the exchange on which they are traded closes and the time when the Fund’s net asset value is calculated. Management identifies possible fluctuation in international securities by monitoring the increase or decrease in the value of a designated benchmark index. In the event of an increase or decrease greater than predetermined levels, the Fund may use a systematic valuation model provided by an independent third party to fair value its international equity securities which are then typically categorized as Level 2 in the fair value hierarchy.
For the year ended December 31, 2013, there were no Level 3 investments for which significant unobservable inputs were used to determine fair value.
The following is a summary of the valuation inputs used as of December 31, 2013 in valuing the Fund’s investments based upon the three levels defined above:
Investment Securities: | Level 1 | Level 2 | Total | ||||||||||||
Common Stocks | |||||||||||||||
Food Products | $ | 11,791,966 | $ | 8,040,056 | $ | 19,832,022 | |||||||||
All Other Common Stocks+ | 318,458,577 | — | 318,458,577 | ||||||||||||
Preferred Stock+ | 561,186 | — | 561,186 | ||||||||||||
Private Placements+ | — | 3,826,162 | 3,826,162 | ||||||||||||
Convertible Bond+ | — | 1,808,719 | 1,808,719 | ||||||||||||
Corporate Bonds+ | — | 82,339,158 | 82,339,158 | ||||||||||||
Foreign Bond+ | — | 1,109,071 | 1,109,071 | ||||||||||||
Yankee Dollars+ | — | 11,396,157 | 11,396,157 | ||||||||||||
U.S. Treasury Obligations | — | 45,034,554 | 45,034,554 | ||||||||||||
Unaffiliated Investment Company | 54,495,463 | — | 54,495,463 | ||||||||||||
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Total Investment Securities | $ | 385,307,192 | $ | 153,553,877 | $ | 538,861,069 | |||||||||
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Written Call Options | — | (146,661 | ) | (146,661 | ) | ||||||||||
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Total Investments | $ | 385,307,192 | $ | 153,407,216 | $ | 538,714,408 | |||||||||
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+ | For detailed industry descriptions, see the accompanying Schedule of Portfolio Investments. |
* | Other Financial Instruments would include any derivative instruments, such as written options. These investments are generally recorded in the financial statements at the unrealized gain or loss on the investment. |
5. Security Purchases and Sales
For the year ended December 31, 2013, cost of purchases and proceeds from sales of securities (excluding securities maturing less than one year from acquisition) were as follows:
Purchases | Sales | |||||||||
AZL T. Rowe Price Capital Appreciation Fund | $ | 553,670,756 | $ | 617,345,992 |
For the year ended December 31, 2013, purchases and sales on long-term U.S. government securities were as follows:
Purchases | Sales | |||||||||
AZL T. Rowe Price Capital Appreciation Fund | $ | 100,512,387 | $ | 54,868,109 |
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AZL T. Rowe Price Capital Appreciation Fund
Notes to the Financial Statements
December 31, 2013
6. Restricted Securities
A restricted security is a security which has been purchased through a private offering and cannot be resold to the general public without prior registration under the Securities Act of 1933 (the “1933 Act”) or pursuant to the resale limitations provided by Rule 144A under the 1933 Act, or an exemption from the registration requirements of the 1933 Act. Whether a restricted security is illiquid is determined pursuant to guidelines established by the Board of Trustees. Not all restricted securities are considered illiquid. The illiquid restricted securities held as of December 31, 2013 are identified below.
Security | Acquisition Date(a) | Acquisition Cost | Principal Amount | Fair Value | Percentage of Net Assets | ||||||||||||||||||||
NXP Funding BV/NXP Funding LLC, 3.75%, | 12/2/13 | $ | 505,000 | $ | 500,000 | $ | 503,750 | 0.10 | % | ||||||||||||||||
SABMiller Holdings, Inc., 2.20%, | 12/2/13 | 653,809 | 650,000 | 648,980 | 0.12 | % | |||||||||||||||||||
SABMiller Holdings, Inc., 0.93%, | 12/19/13 | 756,908 | 750,000 | 753,714 | 0.15 | % | |||||||||||||||||||
Telesat Canada, 6.00%, | 12/6/13 | 553,544 | 530,000 | 551,200 | 0.11 | % | |||||||||||||||||||
TRW Automotive, Inc., 4.50%, | 12/2/13 | 258,953 | 250,000 | 252,500 | 0.05 | % | |||||||||||||||||||
Unitymedia Hessen, 7.50%, | 12/12/13 | 245,813 | 225,000 | 244,688 | 0.05 | % | |||||||||||||||||||
Univision Communications, Inc., 6.88%, | 12/11/13 | 242,438 | 225,000 | 240,469 | 0.05 | % |
(a) | Acquisition date represents the initial purchase date of the security. |
7. Investment Risks
Derivatives Risk: The Fund may invest in derivatives as a principal strategy. A derivative is a financial contract whose value depends on, or is derived from, the value of an underlying asset, reference rate, or risk. Use of derivative instruments involves risks different from, or possibly greater than, the risks associated with investing directly in securities and other traditional investments. Derivatives are subject to a number of other risks, such as liquidity risk, interest rate risk, market risk, credit risk, and selection risk. Derivatives also involve the risk of mispricing or improper valuation and the risk that changes in the value may not correlate perfectly with the underlying asset, rate, or index. Using derivatives may result in losses, possibly in excess of the principal amount invested. Also, suitable derivative transactions may not be available in all circumstances. The counterparty to a derivatives contract could default. As required by applicable law, a Fund that invests in derivatives segregates cash or liquid securities, or both, to the extent that its obligations under the instrument are not covered through ownership of the underlying security, financial instrument, or currency.
Foreign Securities and Currencies Risk: Investments in securities of foreign issuers carry certain risks not ordinarily associated with investments in securities of domestic issuers. Such risks include future political and economic developments, and the possible imposition of exchange controls or other foreign governmental laws and restrictions. In addition, with respect to certain countries, there is the possibility of expropriation of assets, confiscatory taxation, political or social instability or diplomatic developments which could adversely affect investments in those securities.
8. Federal Tax Information
It is the Fund’s policy to continue to comply with the requirements of the Internal Revenue Code under Subchapter M, applicable to regulated investment companies, and to distribute all of its taxable income, including any net realized gains on investments, to its shareholders. Therefore, no provision is made for federal income taxes.
Management of the Fund has reviewed tax positions taken in tax years that remain subject to examination by all major tax jurisdictions, including federal (i.e., the last four tax year ends and the interim tax period since then, as applicable). Management believes that there is no tax liability resulting from unrecognized tax benefits related to uncertain tax positions taken.
Cost for federal income tax purposes at December 31, 2013 is $516,844,829. The gross unrealized appreciation/ (depreciation) on a tax basis is as follows:
Unrealized appreciation | $ | 25,547,012 | |||
Unrealized depreciation | (3,530,772 | ) | |||
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Net unrealized appreciation/(depreciation) | $ | 22,016,240 | |||
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During the year ended December 31, 2013, the Fund utilized $139,138,286 in capital loss carry forwards to offset capital gains.
The tax character of dividends paid to shareholders during the year ended December 31, 2013 were as follows:
Ordinary Income | Net Long-Term Capital Gains | Total Distributions(a) | |||||||||||||
AZL T. Rowe Price Capital Appreciation Fund | $ | 4,077,861 | $ | — | $ | 4,077,861 |
(a) | Total distributions paid may differ from the Statements of Changes in Net Assets because dividends are recognized when actually paid for tax purposes. |
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AZL T. Rowe Price Capital Appreciation Fund
Notes to the Financial Statements
December 31, 2013
The tax character of dividends paid to shareholders during the year ended December 31, 2012 was as follows:
Ordinary Income | Net Long-Term Capital Gains | Total Distributions(a) | |||||||||||||
AZL T. Rowe Price Capital Appreciation Fund | $ | 1,461,106 | $ | — | $ | 1,461,106 |
(a) | Total distributions paid may differ from the Statements of Changes in Net Assets because dividends are recognized when actually paid for tax purposes. |
As of December 31, 2013, the components of accumulated earnings on a tax basis were as follows:
Undistributed Ordinary Income | Undistributed Long-Term Capital Gains | Accumulated Other Losses | Unrealized Appreciation/ | Total Accumulated Earnings/ (Deficit) | |||||||||||||||||||||
AZL T. Rowe Price Capital Appreciation Fund | $ | 68,689,324 | $ | — | $ | — | $ | 21,877,245 | $ | 90,566,569 |
(a) | The difference between book-basis and tax-basis unrealized appreciation/(depreciation) is attributable primarily to tax deferral of losses on wash sales. |
9. Subsequent Events
Management has evaluated events and transactions subsequent to period end through the date the financial statements were issued, for purposes of recognition or disclosure in these financial statements and there are no subsequent events to report.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Shareholders and Board of Trustees of
Allianz Variable Insurance Products Trust:
We have audited the accompanying statement of assets and liabilities of AZL T. Rowe Price Capital Appreciation Fund (formerly AZL Davis New York Venture Fund) (the “Fund”) of the Allianz Variable Insurance Products Trust, including the schedule of portfolio investments, as of December 31, 2013, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the years in the two-year period then ended, and the financial highlights for each of the years in the five-year period then ended. These financial statements and financial highlights are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of December 31, 2013, by correspondence with the custodian and brokers or by other appropriate auditing procedures. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of the Fund as of December 31, 2013, the results of its operations for the year then ended, the changes in its net assets for each of the years in the two-year period then ended, and the financial highlights for each of the years in the five-year period then ended, in conformity with U.S. generally accepted accounting principles.
/s/ KPMG LLP
Columbus, Ohio
February 25, 2014
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Other Federal Income Tax Information (Unaudited)
For the year ended December 31, 2013, 100.00% of the total ordinary income dividends paid by the Fund qualify for the corporate dividends received deduction available to corporate shareholders.
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A description of the policies and procedures that the Fund uses to determine how to vote proxies relating to portfolio securities is available, without charge, upon request, by visiting the Securities and Exchange Commission’s (“Commission”) website at www.sec.gov, or by calling 800-624-0197.
Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30th is available (i) without charge, upon request, by calling 800-624-0197; (ii) on the Allianz Variable Insurance Products Trust’s website at https://www.allianzlife.com; and (iii) on the Commission’s website at http://www.sec.gov.
The Fund files complete Schedules of Portfolio Holdings with the Commission for the first and third quarters of each fiscal year on Form N-Q. Schedules of Portfolio Holdings for the Fund in this report are available without charge on the Commission’s website at http://www.sec.gov, or may be reviewed and copied at the Commission’s Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 800-SEC-0330.
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Approval of New Subadvisory Agreement — September 11, 2013 (Unaudited)
At an in person meeting of the Board of Trustees (the “Board” or the “Trustees”) of Allianz Variable Insurance Products Trust (the “Trust”) held on September 11, 2013 the Board considered a recommendation by Allianz Investment Management LLC (the “Manager”), the investment manager to the AZL Davis New York Venture Fund (the “Fund”), to (a) approve a subadvisory agreement (the “T. Rowe Price Agreement”) between the Manager and T. Rowe Price Associates, Inc. (“T. Rowe Price”), pursuant to which T. Rowe Price would replace Davis Selected Advisers, L.P. (“Davis”) as subadviser to the Fund, and to terminate the subadvisory agreement (the “Davis Agreement”) between the Manager and Davis, and (b) change the name of the Fund to “AZL T. Rowe Price Capital Appreciation Fund.” At the September 11 meeting, the Board voted unanimously to approve the T. Rowe Price Agreement, which became effective as to the Fund on November 15, 2013. At the meeting, the Board reviewed materials furnished by the Manager pertaining to T. Rowe Price and the T. Rowe Price Agreement.
The Manager, as investment manager of all of the outstanding series of the Trust, is charged with researching and recommending subadvisers for the Trust. The Manager has adopted policies and procedures to assist it in analyzing each subadviser with expertise in a particular asset class for purposes of making the recommendation that a specific subadviser be selected. The Board reviews and considers the information provided by the Manager in deciding which investment advisers to approve. After an investment adviser becomes a subadviser, a similarly rigorous process is instituted by the Manager to monitor and evaluate the investment performance and other responsibilities of the subadviser. As part of its ongoing obligation to monitor and evaluate the performance of the Fund’s subadviser, the Manager reviewed and evaluated Davis’s management of the Fund, with a focus on the Fund’s investment performance in relation to its benchmark.
The Board, including a majority of the independent Trustees, with the assistance of independent counsel to the independent Trustees, considered whether to approve the T. Rowe Price Agreement for the Fund in light of its experience in governing the Trust and working with the Manager and the subadvisers on matters relating to the mutual funds that are outstanding series of the Trust. The independent Trustees are those Trustees who are not “interested persons” of the Trust within the meaning of the 1940 Act, and are not employees of or affiliated with the Fund, the Manager, Davis or T. Rowe Price. At least annually, the Board receives from experienced counsel who are independent of the Manager a memorandum discussing the legal standards for the Board’s consideration of proposed investment advisory or subadvisory agreements. In its deliberations, the Board considered all factors that the Trustees believed were relevant. The Board based its decision to approve the T. Rowe Price Agreement on the totality of the circumstances and relevant factors, and with a view to past and future long-term considerations. The Board approved the termination of the Davis Agreement and determined that the T. Rowe Price Agreement was reasonable and in the best interests of the Fund, and approved T. Rowe Price as the Fund’s new subadviser. The Board’s decision to approve the T. Rowe Price Agreement reflects the exercise of its business judgment on whether to approve new arrangements and continue existing arrangements. In reaching this decision, the Board did not assign relative weights to factors discussed herein, or deem any one or group of them to be controlling in and of themselves.
A rule adopted by the SEC under the 1940 Act requires a discussion of certain factors relating to the selection of investment managers and subadvisers and the approval of advisory and subadvisory fees. The factors enumerated by the SEC in the rule are set forth below in italics followed by the Board’s conclusions regarding each factor.
(1) The nature, extent, and quality of services provided by the Subadviser. In deciding to approve T. Rowe Price, the Board considered the reputation, financial strength and resources of T. Rowe Price, and the experience and reputation of its portfolio management team to be involved with the Fund. The Board also considered T. Rowe Price’s investment philosophy and process, particularly in the balanced funds area. The Board also considered the fact that Davis had managed the Fund as a large-cap value fund, whereas T. Rowe Price will manage the Fund as a balanced fund, with investments divided between equity, fixed income and other securities. In connection with the subadviser change, the investment objective of the Fund will change from “seeks long-term growth of capital,” to “seeks long-term capital appreciation with preservation of capital as an important intermediate-term objective.” The Board determined that, based upon the Manager’s report, the proposed change to T. Rowe Price as the subadviser likely would benefit the Fund and its shareholders.
In reviewing various other matters, the Board concluded that T. Rowe Price was a recognized firm capable of competently managing the Fund; that the nature, extent and quality of services that T. Rowe Price could provide were at a level at least equal to the services provided by Davis; that the services contemplated by the T. Rowe Price Agreement are substantially the same as those provided under the Davis Agreement; that the T. Rowe Price Agreement contains provisions generally comparable to those of other subadvisory agreements for other mutual funds; that T. Rowe Price is staffed with qualified personnel and has significant research capabilities; and that the investment performance of T. Rowe Price in managing a similar fund, as discussed below, is at least satisfactory.
(2) The investment performance of T. Rowe Price. The Board received information about the performance of T. Rowe Price in managing a balanced fund that is generally comparable to the Fund. The performance information, which covered the ten years ending June 30, 2013, included returns, risk, tracking error, performance versus a benchmark (a 60%/40% composite of the S&P 500 and Barclay’s Aggregate Index) and performance rankings relative to a peer group of comparable funds. The Board noted, for example, that, while past performance is not a guarantee of future results, the T. Rowe Price-managed fund (which has been managed by personnel and pursuant to the process which will be used for the Fund) significantly outperformed the Fund and the benchmark over the two-, three-, five-, seven- and ten-year periods ended June 30, 2013.
(3) The costs of services to be provided and profits to be realized by T. Rowe Price from its relationship with the Fund. The Board compared the fee schedule in the T. Rowe Price Agreement to the fee schedule in the Davis Agreement. The Board noted that the fee schedules in both agreements require that the Manager pay the subadviser an annual fee on average daily net assets. The Board noted that the fee schedule in the T. Rowe Price Agreement was the result of arm’s-length negotiation between the Manager and T. Rowe Price. The Manager also reported that the Fund’s total expense ratio (which includes management fees and operating expenses) was in the 63rd percentile in the category of balanced funds. Based upon its review, the Board concluded that the fees proposed to be paid to T. Rowe Price were reasonable. As of September 11, 2013, T. Rowe Price had not begun to act as subadviser to the Fund, and therefore no estimated profitability information for acting as subadviser to the Fund was received.
(4) and (5) The extent to which economies of scale would be realized as the Fund grows, and whether fee levels reflect these economies of scale. The Board noted that the fee schedule in the T. Rowe Price Agreement contains breakpoints that reduce the fee rate on assets above $250 million. The Board also noted that the Fund had approximately $421 million in net assets at December 31, 2012. The Board considered the possibility that T. Rowe Price, or the Manager, may realize certain economies of scale as the Fund grows larger. The Board noted that in the fund industry as a whole, as well as among funds similar to the Fund, there is no uniformity or pattern in the fees and asset levels at which breakpoints, if any, apply. Depending on the age, size, and other characteristics of a particular fund and its manager’s cost structure, different conclusions can be drawn as to whether there are economies of scale to be realized at any particular level of assets, notwithstanding the intuitive conclusion that such economies exist, or will be realized at some level of total assets. Moreover, because different managers have different cost structures and models, it is difficult to draw meaningful conclusions from the breakpoints that may have been adopted by other funds. The Board also noted that the advisory agreements for many funds do not have breakpoints at all.
The Trustees also noted that the fee schedule for the Fund in the Management Agreement with the Manager does not contain breakpoints, and that Manager has agreed to reduce its Management Fee on a temporary basis to 0.70% of average daily net assets. Manager also has agreed to “cap” the Fund’s expenses at certain levels, which could
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have the effect of reducing expenses as does the advisory/subadvisory fee breakpoints. The Manager has committed to continue to consider the continuation of fee “caps” and/or additional advisory/subadvisory fee breakpoints as the Fund grows larger. The Board receives quarterly reports on the level of Fund assets. The Board expects to consider whether or not to reapprove the T. Rowe Price Agreement at a meeting to be held prior to December 31, 2014, and will at that time, or prior thereto, consider: (a) the extent to which economies of scale can be realized, and (b) whether the subadvisory fee schedule should be modified to reflect such economies of scale, if any.
Having taken these factors into account, the Trustees concluded that the fee schedule in the T. Rowe Price Agreement was acceptable.
Approval of Investment Advisory and Subadvisory Agreements — October 22, 2013 (Unaudited)
The Allianz Variable Insurance Products Trust (the “Trust”) is a manager-of-managers fund. That means that the Trust’s Manager (“Allianz Investment Management LLC”) is responsible for monitoring the various Subadvisers that have day-to-day responsibility for the decisions made for each of the Trust’s investment portfolios. The Trust’s Manager is responsible for determining, in the first instance, which investment advisers to consider recommending for selection as a Subadviser.
In reviewing the services provided by the Manager and the terms of the investment management agreement, the Board receives and reviews information related to the Manager’s experience and expertise in the variable insurance marketplace. Currently, the Funds are offered only through variable annuities and variable life insurance policies, and not in the retail fund market. In addition, the Board receives information regarding the Manager’s expertise with regard to portfolio diversification and asset allocation requirements within variable insurance products issued by Allianz Life Insurance Company of North America and its subsidiary, Allianz Life Insurance Company of New York. Currently, the Funds are offered only through Allianz Life and Allianz of New York variable products.
The Trust’s Manager has adopted policies and procedures to assist it in the process of analyzing each potential Subadviser with expertise in particular asset classes for purposes of making the recommendation that a specific investment adviser be selected. The Trust’s Board reviews and considers the information provided by the Manager in deciding which investment advisers to select. After an investment adviser becomes a Subadviser, a similarly rigorous process is instituted by the Manager to monitor the investment performance and other responsibilities of the Subadviser. The Manager reports to the Trust’s Board on its analysis at the regular meetings of the Board, which are held at least quarterly. Where warranted, the Manager will add or remove a particular Subadviser from a “watch” list that it maintains. Watch list criteria include, for example: (a) Fund performance over various time periods; (b) Fund risk issues, such as changes in key personnel involved with Fund management, changes in investment philosophy or process, or “capacity” concerns; and (c) organizational risk issues, such as regulatory, compliance or legal concerns, or changes in the ownership of the Subadviser. The Manager may place a Fund on the watch list for other reasons, and if so, will explain its rationale to the Trustees. Funds which are on the watch list are subject to special scrutiny of the Manager and the Board of Trustees. Funds may be removed from such watch list, if for example, performance improves or regulatory matters are satisfactorily resolved. However, in some situations where Funds which have been on the watch list, the Manager has recommended the retention of a new Subadviser, and the Board of Trustees has subsequently approved new Subadvisory Agreements with such Subadvisers.
In assessing the Manager’s and Subadvisers’ (collectively, the “Advisory Organizations”), performance of their obligations, the Board considers whether there has occurred a circumstance or event that would constitute a reason for it to not renew an advisory contract. In this regard, the Board is mindful of the potential disruption of a Fund’s operations and various risks, uncertainties and other effects that could occur as a result of a decision to terminate or not renew a contract.
As required by the Investment Company Act of 1940 (“1940 Act”), the Trust’s Board has reviewed and approved the Trust’s Investment Management Agreement with the Manager (the “Advisory Agreement”) and portfolio management agreements (the “Subadvisory Agreements”) with the Subadvisers. The Board’s decision to approve these contracts reflects the exercise of its business judgment on whether to approve new arrangements and continue the existing arrangements. During its review of these contracts, the Board considers many factors, among the most material of which are: the Fund’s investment objectives and long term performance; the Advisory Organizations’ management philosophy, personnel, and processes, including their compliance history and the adequacy of their compliance processes; the preferences and expectations of Fund shareholders (and underlying contract owners) and their relative sophistication; the continuing state of competition in the mutual fund industry; and comparable fees in the mutual fund industry.
The Board also considers the compensation and benefits received by the Advisory Organizations. This includes fees received for services provided to the Fund by affiliated persons of the Advisory Organizations and research services received by the Advisory Organizations from brokers that execute Fund trades, as well as advisory fees. The Board considered the fact that: (1) the Manager and the Trust are parties to an Administrative Service Agreement, a Compliance Services Agreement, and a Chief Compliance Officer Agreement, under which the Manager is compensated by the Trust for performing certain administrative and compliance services including providing an employee of the Manager or one of its affiliates to act as the Trust’s Chief Compliance Officer; and (2) Allianz Life Financial Services, LLC, an affiliated person of the Manager, is a registered securities broker-dealer and receives (along with its affiliated persons) payments made by the Trust pursuant to Rule 12b-1.
The Board is aware that various courts have interpreted provisions of the 1940 Act and have indicated in their decisions that the following factors may be relevant to an adviser’s compensation: the nature and quality of the services provided by the adviser, including the performance of the fund; the adviser’s cost of providing the services; the extent to which the adviser may realize “economies of scale” as the fund grows larger; any indirect benefits that may accrue to the adviser and its affiliates as a result of the adviser’s relationship with the fund; performance and expenses of comparable funds; and the extent to which the independent Board members are fully informed about all facts bearing on the adviser’s service and fee. The Trust’s Board is aware of these factors and takes them into account in its review of the Trust’s advisory contracts.
The Board considered and weighed these circumstances in light of its experience in governing the Trust and working with the Advisory Organizations on matters relating to the Funds, and is assisted in its deliberations by the advice of legal counsel to the Independent Trustees. In this regard, the Board requests and receives a significant amount of information about the Funds and the Advisory Organizations. Some of this information is provided at each regular meeting of the Board; additional information is provided in connection with the particular meeting or meetings at which the Board’s formal review of an advisory contract occurs. In between regularly scheduled meetings, the Board may receive information on particular matters as the need arises. Thus, the Board’s evaluation of an advisory contract is informed by reports covering such matters as: an Advisory Organization’s investment philosophy, personnel, and processes; the Fund’s short- and long-term performance (in absolute terms as well as in relationship to its benchmark(s), certain competitor or “peer group” funds and similar funds managed by the particular Subadviser), and comments on the reasons for performance; the Fund’s expenses (including the advisory fee itself and the overall expense structure of the Fund, both in absolute terms and relative to similar and/or competing funds, with due regard for contractual or voluntary expense limitations); the use and allocation of brokerage commissions derived from trading the Fund’s portfolio securities; the nature and extent of the advisory and other services provided to the Fund by the Advisory Organizations and their affiliates; compliance and audit reports concerning the Funds and the companies that service them; and relevant developments in the mutual fund industry and how the Funds and/or Advisory Organizations are responding to them.
The Board also receives financial information about Advisory Organizations, including reports on the compensation and benefits the Advisory Organizations derive from their relationships with the Funds. These reports cover not only the fees under the advisory contracts, but also fees, if any, received for providing other services to the Funds. The reports also discuss any indirect or “fall out” benefits an Advisory Organization may derive from its relationship with the Funds.
The Advisory and Subadvisory Agreements (collectively, the “Agreements”) were most recently considered at Board of Trustees meetings held in the fall of 2013. Information relevant to the approval of such Agreements was considered at a telephonic Board of Trustees meeting on October 16, 2013, and at an “in person” Board of Trustees meeting
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held October 22, 2013. The Agreements were approved at the Board meeting of October 22, 2013. At such meeting the Board also approved an Expense Limitation Agreement between the Manager and the Trust for the period ending April 30, 2015. In connection with such meetings, the Trustees requested and evaluated extensive materials from the Manager, including performance and expense information for other investment companies with similar investment objectives derived from data compiled by an independent third party provider and other sources believed to be reliable by the Manager. Prior to voting, the Trustees reviewed the proposed approval/continuance of the Agreements with management and with experienced counsel who are independent of the Manager and received a memorandum from such counsel discussing the legal standards for their consideration of the proposed approvals/continuances. The independent (“disinterested”) Trustees also discussed the proposed approvals/continuances in a private session with such counsel at which no representatives of the Manager were present. In reaching their determinations relating to the approval and/or continuance of the Agreements, in respect of each Fund, the Trustees considered all factors they believed relevant. The Board based its decision to approve the Agreements on the totality of the circumstances and relevant factors, and with a view to past and future long-term considerations. Not all of the factors and considerations discussed above and below are necessarily relevant to every Fund, and the Board did not assign relative weights to factors discussed herein or deem any one or group of them to be controlling in and of themselves.
An SEC Rule requires that shareholder reports include a discussion of certain factors relating to the selection of investment advisers and the approval of advisory fees. The “factors” enumerated by the SEC are set forth below in italics, as well as the Board’s conclusions regarding such factors:
(1) The nature, extent and quality of services provided by the Manager and Subadvisers. The Trustees noted that the Manager, subject to the control of the Board of Trustees, administers each Fund’s business and other affairs. Under the Advisory Agreement, the Manager holds the sole and exclusive responsibility to provide, or arrange for other to provide, the management of the Funds’ assets and the placement of orders for the purchase and sale of the securities of the Funds. As the Trust is a manager of managers fund, the Manager is authorized, under the Advisory Agreement, to retain one or more Subadvisers for each Fund to handle day-to-day management of the Funds’ investment portfolios; the Manager is responsible for determining, in the first instance, which investment advisers to recommend to the Board of Trustees for selection as a Subadviser. The Trustees were aware that, notwithstanding the retention of the Subadvisers to handle day-to-day portfolio management, the Manager remains responsible for substantial other matters, including continuously monitoring compliance by each Subadviser with the investment policies and restrictions of the respective Funds, with such other limitations or directions of the Board of Trustees, and with all legal requirements under federal or state law or regulation. The Manager also is responsible primarily to provide statistical information and other data to the Trustees regarding the Funds’ portfolio investments and to make available to the Funds’ administrator such information as is necessary for the conduct of its duties.
The Trustees also noted that the Manager provides the Trust and each Fund with such administrative and other services (exclusive of, and in addition to, any such services provided by any others retained by the Trust on behalf of the Funds) and executive and other personnel as are necessary for the operation of the Trust and the Funds. Except for the Trust’s Chief Compliance Officer, the Manager pays all of the compensation of Trustees and officers of the Trust who are employees of the Manager or its affiliates.
The Trustees considered the scope and quality of services provided by the Manager and the Subadvisers and noted that the scope of such services provided had expanded as a result of recent regulatory and other developments. The Trustees noted that, for example, the Manager and Subadvisers are responsible for maintaining and monitoring their own compliance programs, and these compliance programs are continuously refined and enhanced in light of new regulatory requirements. The Trustees considered the capabilities and resources which the Manager has dedicated to performing services on behalf of the Trust and its Funds. The quality of administrative and other services, including the Manager’s role in coordinating the activities of the Trust’s other service providers, also were considered. The Trustees concluded that, overall, they were satisfied with the nature, extent and quality of services provided (and expected to be provided) to the Trust and to each of the Funds under the Agreements.
(2) The investment performance of the Funds, the Manager and the Subadvisers. In connection with every in-person quarterly Board of Trustees meeting, Trustees receive extensive information on the performance results of each of the Funds. This includes, for example, performance information on all of the Funds for the previous quarter, and previous one, three and five-year periods, and since inception. (For Funds which have been in existence for less than five years, Trustees may receive performance information on comparable funds managed by the particular Subadviser for periods prior to the creation of a particular Fund.) Such performance information includes information on absolute total return, performance versus Subadvisers’ comparable fund(s), performance versus the appropriate benchmark(s), and performance versus peer groups. For example, in connection with the Board of Trustees meetings held September 10-11, 2013, the Manager reported that for the three year period ended June 30, 2013, 12 Funds were in the top 40%, eight were in the middle 20% and eight were in the bottom 40%, and for the one year period ended June 30, 2013, 8 Funds were in the top 40%, seven were in the middle 20%, and 14 were in the bottom 40%. The Manager also reported that for the five year period ended June 30, 2013, 10 Funds were in the top 40%, four were in the middle 20%, and six were in the bottom 40%. At the Board of Trustees meeting held October 22, 2013, the Trustees determined that the overall investment performance of the Funds was acceptable.
(3) The costs of services to be provided and profits to be realized by the Manager and the Subadvisers and their affiliates from their relationship with the Funds. The Manager has supplied information to the Board of Trustees pertaining to the level of investment advisory fees to which the Funds are subject. The Manager has agreed to temporarily “cap” Fund expenses at certain levels, and information is provided to Trustees setting forth “contractual” advisory fees and “actual” fees after taking expense caps into account. Based upon the information provided, the “actual” advisory fees payable by the Funds overall are generally comparable to the average level of fees paid by Fund peer groups. For the 30 Funds reviewed by the Board of Trustees in the fall of 2013, 27 Funds paid “actual” advisory fees in a percentage amount within the 65th percentile or lower for each Fund’s applicable category. The Trustees recognized that it is difficult to make comparisons of advisory fees because there are variations in the services that are included in the fees paid by other funds. The Board has concluded that the advisory fees to be paid to the Manager by the Funds are not unreasonable.
The Manager has also supplied information to the Board of Trustees pertaining to total Fund expenses (which includes advisory fees, the 25 basis point 12b-1 fee paid by the Funds, and other Fund expenses). As noted above, the Manager has agreed to “cap” Fund expenses at certain levels. Based upon the information provided, the overall total expense ratio ranking in 2013 for the 30 Funds was as follows: (1) 28 of the Funds had total expense rankings below the 65th percentile (with 20 Funds at or below the 50th percentile); (2) the AZL Russell 1000 Value Fund had a total expense ranking in the 66th percentile; the Manager reported that there is only a limited peer group for such Fund; and (3) the AZL Morgan Stanley Global Real Estate Fund had a total expense ranking in the 72nd percentile; it was reported by the Manager that there is only a limited peer group for such Fund, such Fund’s expense ratio has declined, and such Fund’s expense ratio is comparable to funds of similar size.
The Manager has committed to providing the Funds with a high quality of service and working to reduce Fund expenses over time, particularly as the Funds grow larger. The Trustees concluded therefore that the expense ratios of the Funds were not unreasonable.
The Manager provided information concerning the profitability of the Manager’s investment advisory activities for the period from 2011 through June 30, 2013. The Trustees recognized that it is difficult to make comparisons of profitability from investment company advisory agreements because comparative information is not generally publicly available and is affected by numerous factors, including the structure of the particular adviser, the types of funds it manages, its business mix, numerous assumptions regarding allocation of expenses and the adviser’s capital structure and cost of capital. In considering profitability information, the Trustees considered the possible effect of certain fall-out benefits to the Manager and its affiliates. The Trustees focused on profitability of the Manager’s relationships with the Funds before taxes and distribution expenses. The Trustees recognized that the Manager should, in the abstract, be entitled to earn a reasonable level of profits for the services it provides to each Fund and, based on their review, concluded that they were satisfied that the Manager’s level of profitability from its relationship with the Funds was not excessive.
24
The Manager, on behalf of the Board of Trustees, endeavored to obtain information on the profitability of each Subadviser in connection with its relationship with the Fund or Funds which it subadvises. The Manager was unable to obtain meaningful profitability information from some of the unaffiliated Subadvisers. The Manager assured the Board of Trustees that the Agreements with the Subadvisers which are not affiliated with it were negotiated on an “arm’s length” basis, so that arguably, such profitability information should be less relevant. The Trustees were also provided with certain information on the profitability for the Subadviser which is affiliated with the Manager. Trustees recognized the difficulty of allocating costs to multiple advisory accounts and products of a large advisory organization. Based upon the information provided, the Trustees determined that there was no evidence that the level of such profitability attributable to subadvising the Funds was excessive.
(4) and (5) The extent to which economies of scale would be realized as the Funds grow, and whether fee levels reflect these economies of scale. The Trustees noted that most of the advisory fee schedules for the Funds do not contain breakpoints that reduce the fee rate on assets above specified levels, although certain Subadvisory Agreements have such “breakpoints.” The Trustees recognized that breakpoints may be an appropriate way for the Manager to share its economies of scale, if any, with Funds that have substantial assets. However, they also recognized that there may not be a direct relationship between any economies of scale realized by Funds and those realized by the Manager as assets increase. The Trustees do not believe there is a uniform methodology for establishing breakpoints that give effect to Fund-specific service provided by the Manager. The Trustees noted that in the fund industry as a whole, as well as among funds similar to the Funds, there is no uniformity or pattern in the fees and asset levels at which breakpoints (if any) apply. Depending on the age, size, and other characteristics of a particular fund and its manager’s cost structure, different conclusions can be drawn as to whether there are economies of scale to be realized at any particular level of assets, notwithstanding the intuitive conclusion that such economies exist, or will be realized at some level of total assets. Moreover, because different managers have different cost structures and service models, it is difficult to draw meaningful conclusions from the breakpoints that may have been adopted by other funds. The Trustees also noted that the advisory agreements for many funds do not have breakpoints at all, or if breakpoints exist, they may be at asset levels significantly greater than those of the individual Funds. The Trustees also noted that the total assets in all of the Funds as of June 30, 2013 were approximately $12.85 billion, and that no single non-money market Fund had assets in excess of $616 million.
The Trustees noted that the Manager has agreed to temporarily “cap” Fund expenses at certain levels, which has the effect of reducing expenses as would the implementation of advisory fee breakpoints. The Manager has committed to continue to consider the continuation of fee “caps” and/or advisory fee breakpoints as the Funds grow larger. The Board receives quarterly reports on the level of Fund assets. It expects to consider whether or not to approve the Agreements at a meeting to be held prior to December 31, 2014, and will at that time, or prior thereto, consider: (a) the extent to which economies of scale can be realized, and (b) whether the advisory fee should be modified to reflect such economies of scale, if any.
Having taken these factors into account, the Trustees concluded that the absence of breakpoints in certain of the Funds’ advisory fee rate schedules was acceptable under each Fund’s circumstances.
25
Information about the Board of Trustees and Officers (Unaudited)
The Trust is managed by the Trustees in accordance with the laws of the state of Delaware governing business trusts. There are currently eight Trustees, two of whom are “interested persons” of the Trust within the meaning of that term under the 1940 Act. The Trustees and Officers of the Trust, their addresses, ages, their positions held with the Trust, their terms of office with the Trust and length of time served, their principal occupation(s) during the past five years, the number of portfolios in the Trust they oversee, and their other directorships held are as follows:
Non-Interested Trustees(1)
Name, Address, and Age | Positions Held with VIP Trust and FOF Trust | Term of Office(2)/Length of Time Served | Principal Occupation(s) During Past 5 Years | Number of Portfolios Overseen for VIP Trust and FOF Trust | Other Directorships Held Outside the AZL Fund Complex | |||||
Peter R. Burnim, Age 66 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/07 | Chairman, Argus Investment Strategies Fund Ltd., February 2013 to present; Managing Director, iQ Venture Advisors, LLC. 2005 to 2012; Chairman, Northstar Group Holdings Ltd. Bermuda, 2011 to present; Expert Witness, Massachusetts Department of Revenue, 2011 to 2012; Executive Vice President, Northstar Companies, 2002 to 2005; Senior Officer, Citibank and Citicorp for over 25 years | 41 | Argus Group Holdings; Northstar Group Holdings, NRIL, Sterling Centrecorp Inc.; Highland Financial Holdings; and Bank of Bermuda NY | |||||
Peggy L. Ettestad, Age 56 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/07 | Managing Director, Red Canoe Management Consulting LLC, 2008 to present; Senior Managing Director, Residential Capital LLC, 2003 to 2008; Chief Operations Officer, Transamerica Reinsurance 2002 to 2003 | 41 | Luther College | |||||
Roger Gelfenbien, Age 70 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 10/99 | Retired; Partner of Accenture 1983 to 1999 | 41 | Virtus Funds (8 Funds) | |||||
Claire R. Leonardi, Age 58 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/04 | Chief Executive Officer, Connecticut Innovations, Inc., 2012 to present; General Partner, Fairview Capital, L.P., 1994 to 2012 | 41 | The Natural History Museum of the Adirondacks | |||||
Dickson W. Lewis, Age 65 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/04 | Retired; Consultant to Lifetouch National School Studios; Vice President/General Manager, Yearbooks & Canada-Lifetouch National School Studios, 2006 to 2013; Vice President/General Manager of Jostens, Inc., 2002 to 2006; Senior Vice President of Fortis Group, 1997 to 2002 | 41 | None | |||||
Peter W. McClean, Age 69 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/04 | Retired; President and CEO of Measurisk, LLC, 2001 to 2003; Chief Risk Management Officer at Bank of Bermuda Ltd., 1996 to 2001 | 41 | PNMAC Opportunity Fund; Northeast Bank; and FHI | |||||
Arthur C. Reeds III, Age 69 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 10/99 | Retired; Senior Investment Officer, Hartford Foundation for Public Giving, 2000 to 2003; Chairman, Chief Executive and President of Conning Corp., 1999 to 2000; Investment Consultant, 1997 to 1999 | 41 | Connecticut Water Service, Inc. |
Interested Trustees(3)
Name, Address, and Age | Positions Held with VIP Trust and FOF Trust | Term of Office(2)/Length of Time Served | Principal Occupation(s) During Past 5 Years | Number of Portfolios Overseen for VIP Trust and FOF Trust | Other Directorships Held Outside the AZL Fund Complex | |||||
Robert DeChellis, Age 46 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 3/08 | President and CEO, Allianz Life Financial Services, LLC, 2007 to present | 41 | None | |||||
Brian Muench, Age 43 5701 Golden Hills Drive | Trustee | Since 6/11 | President, Allianz Investment Management LLC, November 2010 to present; Vice President, Allianz Life, April 2011 to present; Vice President, Advisory Management, Allianz Investment Management LLC from December 2005 to November 2010 | 41 | None |
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Officers
Name, Address, and Age | Positions Held with VIP and VIP FOF Trust | Term of Office(2)/Length of Time Served | Principal Occupation(s) During Past 5 Years | |||
Brian Muench, Age 43 5701 Golden Hills Drive Minneapolis, MN 55416 | President | Since 11/10 | President, Allianz Investment Management LLC from November 2010, to present; Vice President, Allianz Life from April 2011 to present; Vice President, Allianz Investment Management LLC from December 2005 to November 2010. | |||
Michael Radmer, Age 68 Dorsey & Whitney LLP, Suite 1500 50 South Sixth Street Minneapolis, MN 55402-1498 | Secretary | Since 2/02 | Partner, Dorsey and Whitney LLP since 1976. | |||
Ty Edwards, Age 47 Citi Fund Services Ohio, Inc. 3435 Stelzer Road Columbus, OH 43219 | Treasurer, Principal Accounting Officer and Principal Financial Officer | Since 4/10 | Senior Vice President, Financial Administration, Citi Fund Services Ohio, Inc., December 2009 to present; Director, Product Management, Columbia Management, April 2007 to April 2009; Deputy Treasurer, Columbia Funds and Director, Fund Administration, Columbia Management, January 2006 to April 2007. | |||
Christopher R. Pheiffer, Age 45(4) 5701 Golden Hills Drive Minneapolis, MN 55416 | Chief Compliance Officer(5) and Anti-Money Laundering Compliance Officer | Since 2/14 (interim) | Deputy Chief Compliance Officer of the Trusts, 2007-2014. |
(1) | Member of the Audit Committee. |
(2) | Indefinite. |
(3) | Is an “interested person”, as defined by the 1940 Act, due to employment by Allianz. |
(4) | Stephen G. Simon, previously the Chief Compliance Officer of the Trusts, resigned all of his positions with Allianz effective February 21, 2014. Mr. Pheiffer, previously the Deputy Chief Compliance Officer of the Trusts, has been named Chief Compliance Officer of the Trusts on an interim basis while a search for a permanent replacement is conducted. |
(5) | The Manager and the Trust are parties to a Chief Compliance Officer Agreement under which the Manager is compensated by the Trust for providing an employee of the Manager or one of its affiliates to act as the Trust’s Chief Compliance Officer. The Chief Compliance Officer and Anti-Money Laundering Compliance Officer is not considered a corporate officer or executive employee of the Trust. |
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The Allianz VIP Funds are distributed by Allianz Life Financial Services, LLC. | ||
These Funds are not FDIC Insured. | ANNRPT1213 2/14 |
Item 2. Code of Ethics.
(a) The registrant has adopted a code of ethics that applies to the registrant’s principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. This code of ethics is included as an Exhibit.
(b) During the period covered by the report, with respect to the registrant’s code of ethics that applies to its principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions; there have been no amendments to, nor any waivers granted from, a provision that relates to any element of the code of ethics definition enumerated in paragraph (b) of this Item 2.
Item 3. Audit Committee Financial Expert.
3(a)(1) The registrant’s board of directors has determined that the registrant has at least one audit committee financial expert serving on its audit committee.
3(a)(2) The audit committee financial expert is Arthur C. Reeds III, who is “independent” for purposes of this Item 3 of Form N-CSR.
Item 4. Principal Accountant Fees and Services.
2013 | 2012 | |||||||
(a) Audit Fees | $ | 370,000 | $ | 387,500 | ||||
(b) Audit-Related Fees | $ | 11,500 | $ | 5,500 |
Audit-related fees for both years relate to the consent issuance in two Form N-14 filings and the review of the annual registration statement filed with the Securities and Exchange Commission (“SEC”).
2013 | 2012 | |||||||
(c) Tax Fees | $ | 68,975 | $ | 76,418 |
Tax fees for both years relate to the preparation of the Funds’ federal and state income tax returns, federal excise tax return review and review of capital gain and income distribution calculations.
2013 | 2012 | |||||||
(d) All Other Fees | $ | 0 | $ | 0 |
4(e)(1)
The Audit Committee (“Committee”) of the Registrant is responsible for pre-approving all audit and non-audit services performed by the independent auditor in order to assure that the provision of such services does not impair the auditor’s independence. Before the Registrant engages the independent auditor to render a service, the engagement must be either specifically approved by the Committee or entered into pursuant to the pre-approval policy. The Committee may delegate preapproval authority to one or more of its members. The member or members to whom such authority is delegated shall report any pre-approval decisions to the Committee at its next scheduled meeting. The Committee may not delegate to management the Committee’s responsibilities to pre-approve services performed by the independent auditor. The Committee has delegated pre-approval authority to its Chairman for any services not exceeding $10,000.
4(e)(2)
During the previous two fiscal years, the Registrant did not receive any non-audit services pursuant to a waiver from the audit committee approval or pre-approval requirement under paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X.
4(f)
Not applicable
4(g)
2013 | 2012 | |||||
$80,475 | $ | 81,915 |
4(h)
Not applicable
Item 5. Audit Committee of Listed Registrants.
Not applicable.
Item 6. Investments.
(a) The Schedule of Investments as of the close of the reporting period are included as part of the report to shareholders filed under Item 1 of the Form N-CSR.
(b) Not applicable.
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.
Not applicable.
Item 11. Controls and Procedures.
(a)The registrant’s principal executive officer and principal financial officer have concluded, based on their evaluation of the registrant’s disclosure controls and procedures as conducted within 90 days of the filing date of this report, that these disclosure controls and procedures are adequately designed and are operating effectively to ensure that information required to be disclosed by the registrant on Form N-CSR is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.
(b)There were no changes in the registrant’s internal control over financial reporting (as defined in Rule 30a-3(d) under the Act (17 CFR 270.30a-3(d)) that occurred during the second fiscal quarter of the period covered by this report 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 that is the subject of the disclosure required by Item 2 is attached hereto.
(a)(2) Certifications pursuant to Rule 30a-2(a) are attached hereto.
(a)(3) Not applicable.
(b) Certifications pursuant to Rule 30a-2(b) are furnished 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) | Allianz Variable Insurance Products Trust | |||||||
By (Signature and Title) | /s/ Brian Muench | |||||||
Brian Muench, President |
Date | February 27, 2014 |
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/ Brian Muench | |||||||
Brian Muench, President |
Date | February 27, 2014 |
By (Signature and Title)* | /s/ Ty Edwards | |||||||
Ty Edwards, Treasurer |
Date | February 27, 2014 |