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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF
REGISTERED MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811-08326
MFS VARIABLE INSURANCE TRUST
(Exact name of registrant as specified in charter)
111 Huntington Avenue, Boston, Massachusetts 02199
(Address of principal executive offices) (Zip code)
Christopher R. Bohane
Massachusetts Financial Services Company
111 Huntington Avenue
Boston, Massachusetts 02199
(Name and address of agents for service)
Registrant’s telephone number, including area code: (617) 954-5000
Date of fiscal year end: December 31
Date of reporting period: December 31, 2016
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ITEM 1. | REPORTS TO STOCKHOLDERS. |
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ANNUAL REPORT
December 31, 2016
MFS® GLOBAL EQUITY SERIES
MFS® Variable Insurance Trust
VGE-ANN
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MFS® GLOBAL EQUITY SERIES
The report is prepared for the general information of contract owners. It is authorized for distribution to prospective investors only when preceded or accompanied by a current prospectus.
NOT FDIC INSURED • MAY LOSE VALUE • NO BANK OR CREDIT UNION GUARANTEE • NOT A DEPOSIT • NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY OR NCUA/NCUSIF
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MFS Global Equity Series
LETTER FROM THE EXECUTIVE CHAIRMAN
Dear Contract Owners:
Despite June’s unexpected vote by the United Kingdom to leave the European Union and the surprising result in November’s U.S. presidential election, most markets have proved resilient. U.S. share prices quickly reversed post-Brexit declines, and indices reached new highs following the November elections. U.S. bond yields rose after Donald Trump’s victory on hopes that his proposed policy mix of lower taxes, increased spending on infrastructure and a lower regulatory burden on businesses will lift both U.S. economic growth and inflation. However, interest rates in most developed markets remain very low, with major central banks maintaining extremely accommodative monetary policies to reinvigorate slow-growing economies against a backdrop of still-low inflation. Even after the rise in yields following the election, interest rates remain low by historical standards.
Globally, economic growth has shown signs of recovery of late, led by the United States and the eurozone. Despite better growth, there are few immediate signs of worrisome inflation. Emerging market economies are recovering at a somewhat slower pace amid fears that restrictive U.S. trade policies could further hamper the already slow pace of global trade growth.
At MFS®, we believe in a patient, long-term approach to investing. Viewing investments with a long lens makes it possible to filter out short-term market noise and focus on achieving solid risk-adjusted returns over a full market cycle.
In our view, such an approach, along with the professional guidance of a financial advisor, will help you reach your investment objectives.
Respectfully,
Robert J. Manning
Executive Chairman
MFS Investment Management
February 15, 2017
The opinions expressed in this letter are subject to change and may not be relied upon for investment advice. No forecasts can be guaranteed.
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MFS Global Equity Series
Portfolio structure
Top ten holdings | ||||
Thermo Fisher Scientific, Inc. | 2.7% | |||
Bayer AG | 2.6% | |||
Nestle S.A. | 2.6% | |||
Honeywell International, Inc. | 2.4% | |||
Time Warner, Inc. | 2.4% | |||
Accenture PLC, “A” | 2.3% | |||
Walt Disney Co. | 2.3% | |||
Reckitt Benckiser Group PLC | 2.1% | |||
Visa, Inc., “A” | 2.0% | |||
Stryker Corp. | 2.0% | |||
Equity sectors | ||||
Health Care | 18.6% | |||
Consumer Staples | 18.1% | |||
Financial Services | 13.7% | |||
Leisure | 10.1% | |||
Industrial Goods & Services | 8.3% | |||
Basic Materials | 6.3% | |||
Technology | 6.0% | |||
Special Products & Services | 5.9% | |||
Retailing | 5.4% | |||
Transportation | 4.4% | |||
Energy | 1.3% | |||
Autos & Housing | 1.2% |
Issuer country weightings (x) | ||||
United States | 56.2% | |||
United Kingdom | 9.2% | |||
Switzerland | 8.9% | |||
France | 7.8% | |||
Germany | 6.4% | |||
Netherlands | 1.9% | |||
Sweden | 1.8% | |||
Canada | 1.7% | |||
Japan | 1.2% | |||
Other Countries | 4.9% | |||
Currency exposure weightings (y) | ||||
United States Dollar | 58.9% | |||
Euro | 17.1% | |||
British Pound Sterling | 9.2% | |||
Swiss Franc | 8.9% | |||
Swedish Krona | 1.8% | |||
Japanese Yen | 1.2% | |||
Danish Krone | 0.8% | |||
South Korean Won | 0.7% | |||
Brazilian Real | 0.5% | |||
Other Currencies | 0.9% |
(x) | Represents the portfolio’s exposure to issuer countries as a percentage of a portfolio’s net assets. For purposes of this presentation, United States includes Cash & Cash Equivalents. |
(y) | Represents the portfolio’s exposure to a particular currency as a percentage of a portfolio’s net assets. For purposes of this presentation, United States Dollar includes Cash & Cash Equivalents. |
Cash & Cash Equivalents includes any cash, investments in money market funds, short-term securities, and other assets less liabilities. Please see the Statement of Assets and Liabilities for additional information related to the fund’s cash position and other assets and liabilities.
Percentages are based on net assets as of 12/31/16.
The portfolio is actively managed and current holdings may be different.
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MFS Global Equity Series
Summary of Results
For the twelve months ended December 31, 2016, Initial Class shares of the MFS Global Equity Series (“fund”) provided a total return of 7.35%, while Service Class shares of the fund provided a total return of 7.06%. These compare with a return of 8.15% over the same period for the fund’s benchmark, the MSCI World Index.
Market Environment
Sluggish global growth weighed on both developed and emerging market (“EM”) economies during much of the reporting period, though signs of improved growth became evident in late 2016. The US Federal Reserve increased interest rates by 25 basis points at the end of the period, the second hike of the cycle which began in December 2015. Globally, however, central bank policy remained highly accommodative, which forced many government, and even some corporate, bond yields into negative territory during the period. During the first half of the period, the United Kingdom voted to leave the European Union (“EU”), beginning a multi-year process of negotiation in order to achieve “Brexit.” While markets initially reacted to the vote with alarm, the spillover to European and EM economies was relatively short-lived, although risks of further hits to EU cohesiveness could re-emerge. Late in the period, the surprising US presidential election outcome prompted a significant rally in equities and a rise in bond yields in anticipation of a reflationary policy mix from the incoming Trump administration.
Headwinds from lower energy and commodity prices, which had spread beyond the energy, materials and industrial sectors early in the reporting period, abated later in the period as stabilizing oil prices helped push energy earnings higher relative to expectations. A sharp rise in the US dollar was a headwind for multinationals late in the period. The sharp rise in the US dollar also weighed on earnings. US consumer spending held up well during the second half of the period amid a modest increase in real wages and relatively low gasoline prices. Demand for autos reached near-record territory, while the housing market continued its recovery. Slow global trade continued to mirror slow global growth, particularly for many EM countries. That said, EM countries began to show signs of a modest upturn in activity along with adjustment in their external accounts. These improved conditions appeared to have reassured investors and contributed to record inflows into the asset class during July and August as negative yields for an increasing share of developed market bonds drove yield-hungry investors further out on the risk spectrum. Similar investor inflows were experienced in the investment grade and high yield corporate markets. Late in the reporting period, however, new challenges emerged for emerging markets debt (“EMD”) as a result of the US presidential election, which raised concerns about the potential for a protectionist turn in US trade policy which could negatively impact EM economies. These concerns, along with rising expectations for US growth, inflation and interest rates, have turned the tables on flows into EMD. Since the election, flows have reversed. As of the end of the period, the markets seemed to be in “wait-and-see” mode, looking for evidence to either confirm or refute the repricing of risk that has occurred since Election Day.
Detractors from Performance
A combination of security selection and an overweight position in the consumer staples sector detracted from performance relative to the MSCI World Index. Within this sector, overweight positions in cosmetics manufacturer Coty and household products manufacturer Reckitt Benckiser Group (United Kingdom) held back relative results. Shares of Reckitt Benckiser Group declined in the second half of the reporting period on weakness from the company’s Scholl brand.
An underweight allocation to the strong-performing energy sector and weak stock selection in the basic materials sector further dampened relative performance. However, there were no individual stocks within either sector that were among the fund’s largest relative detractors during the reporting period.
Securities in other sectors that diminished relative returns included overweight positions in pharmaceutical company Bayer (Germany), satellite television broadcaster Sky PLC (United Kingdom), investment management and banking firm UBS (Switzerland), medical device maker Medtronic, life sciences supply company Thermo Fisher Scientific, pharmaceutical and diagnostic company Roche Holding (Switzerland) and vehicle components manufacturer Delphi Automotive. Not holding shares of global financial services firm JPMorgan Chase also hurt.
During the reporting period, the fund’s relative currency exposure, resulting primarily from differences between the fund’s and the benchmark’s exposures to holdings of securities denominated in foreign currencies, was a detractor from relative performance. All of MFS’ investment decisions are driven by the fundamentals of each individual opportunity and as such, it is common for our funds to have different currency exposure than the benchmark.
Contributors to Performance
Strong security selection within the health care, retailing and transportation sectors lifted relative returns. Within the health care sector, the fund’s overweight positions in shares of strong-performing medical device makers, St. Jude Medical and Stryker, contributed positively to relative performance. An overweight position in French luxury goods company LVMH Moet Hennessy Louis Vuitton also supported relative returns in the retailing sector. Lastly, within the transportation sector, the fund’s overweight positions
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MFS Global Equity Series
Management Review – continued
in railroad company Canadian National Railway (Canada) and ground delivery service company United Parcel Service helped relative results. Shares of Canadian National Railway advanced throughout the reporting period, despite a challenging business environment, due to strong cost controls and solid operational execution.
Elsewhere, overweight positions in media firm Time Warner, financial services firm Goldman Sachs Group, custody bank State Street and semiconductor manufacturer Microchip Technology aided relative performance. Holding shares of microchip and electronics manufacturer Samsung Electronics (b) (South Korea) also helped relative returns.
Respectfully,
David Mannheim | Ryan McAllister | Roger Morley | ||
Portfolio Manager | Portfolio Manager | Portfolio Manager |
(b) | Security is not a benchmark constituent. |
Note to Shareholders: Effective September 30, 2016, Ryan McAllister is also a Portfolio Manager of the Fund.
The views expressed in this report are those of the portfolio managers only through the end of the period of the report as stated on the cover and do not necessarily reflect the views of MFS or any other person in the MFS organization. These views are subject to change at any time based on market or other conditions, and MFS disclaims any responsibility to update such views. These views may not be relied upon as investment advice or an indication of trading intent on behalf of any MFS portfolio. References to specific securities are not recommendations of such securities, and may not be representative of any MFS portfolio’s current or future investments.
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MFS Global Equity Series
PERFORMANCE SUMMARY THROUGH 12/31/16
The following chart illustrates the historical performance of the fund in comparison to its benchmark(s). Benchmarks are unmanaged and may not be invested in directly. Benchmark returns do not reflect any fees or expenses. The performance of other share classes will be greater than or less than that of the class depicted below. (See Notes to Performance Summary.)
Performance data shown represents past performance and is no guarantee of future results. Investment return and principal value fluctuate so your units, when sold, may be worth more or less than the original cost; current performance may be lower or higher than quoted. The performance shown does not reflect the deduction of taxes, if any, that a contract holder would pay on fund distributions or the redemption of contract units. The returns for the fund shown also do not reflect the deduction of expenses associated with variable products, such as mortality and expense risk charges, separate account charges, and sales charges imposed by the insurance company separate accounts. Such expenses would reduce the overall returns shown.
Growth of a Hypothetical $10,000 Investment
Total Returns through 12/31/16
Average annual total returns
Share Class | Class Inception Date | 1-yr | 5-yr | 10-yr | ||||||||
Initial Class | 5/03/99 | 7.35% | 11.62% | 5.92% | ||||||||
Service Class | 5/01/00 | 7.06% | 11.34% | 5.67% | ||||||||
Comparative benchmark | ||||||||||||
MSCI World Index (f) | 8.15% | 11.04% | 4.41% |
(f) | Source: FactSet Research Systems Inc. |
Benchmark Definition
MSCI World Index – a market capitalization-weighted index that is designed to measure equity market performance in the global developed markets.
It is not possible to invest directly in an index.
Notes to Performance Summary
Average annual total return represents the average annual change in value for each share class for the periods presented.
Performance results reflect any applicable expense subsidies and waivers in effect during the periods shown. Without such subsidies and waivers the fund’s performance results would be less favorable. Please see the prospectus and financial statements for complete details. All results are historical and assume the reinvestment of any dividends and capital gains distributions.
Performance results do not include adjustments made for financial reporting purposes in accordance with U.S. generally accepted accounting principles and may differ from amounts reported in the financial highlights.
From time to time the fund may receive proceeds from litigation settlements, without which performance would be lower.
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MFS Global Equity Series
Fund Expenses Borne by the Contract Holders during the Period,
July 1, 2016 through December 31, 2016
As a contract holder of the fund, you incur ongoing costs, including management fees; distribution and/or service (12b-1) fees; and other fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the fund and to compare these costs with the ongoing costs of investing in other mutual funds.
The example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period July 1, 2016 through December 31, 2016.
Actual Expenses
The first line for each share class in the following table provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled “Expenses Paid During Period” to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line for each share class in the following table provides information about hypothetical account values and hypothetical expenses based on the fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight the fund’s ongoing costs only and do not take into account the fees and expenses imposed under the variable contracts through which your investment in the fund is made. Therefore, the second line for each share class in the table is useful in comparing ongoing costs associated with an investment in vehicles (such as the fund) which fund benefits under variable annuity and variable life insurance contracts and to qualified pension and retirement plans only, and will not help you determine the relative total costs of investing in the fund through variable annuity and variable life insurance contracts. If the fees and expenses imposed under the variable contracts were included, your costs would have been higher.
Share Class | Annualized Expense Ratio | Beginning Account Value 7/01/16 | Ending Account Value | Expenses Paid During Period (p) 7/01/16-12/31/16 | ||||||||||||||
Initial Class | Actual | 0.98% | $1,000.00 | $1,045.05 | $5.04 | |||||||||||||
Hypothetical (h) | 0.98% | $1,000.00 | $1,020.21 | $4.98 | ||||||||||||||
Service Class | Actual | 1.23% | $1,000.00 | $1,043.82 | $6.32 | |||||||||||||
Hypothetical (h) | 1.23% | $1,000.00 | $1,018.95 | $6.24 |
(h) | 5% class return per year before expenses. |
(p) | “Expenses Paid During Period” are equal to each class’s annualized expense ratio, as shown above, multiplied by the average account value over the period, multiplied by 184/366 (to reflect the one-half year period). |
Notes to Expense Table
Changes to the fund’s fee arrangements occurred during the six month period. Had these fee changes been in effect throughout the entire six month period, the annualized expense ratios, the actual expenses paid during the period, and the hypothetical expenses paid during the period would have been approximately 0.97%, $4.99, and $4.93 for Initial Class and 1.22%, $6.27, and $6.19 for Service Class, respectively. For further information about the fund’s fee arrangements and changes to those fee arrangements, please see Note 3 in the Notes to Financial Statements.
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MFS Global Equity Series
PORTFOLIO OF INVESTMENTS – 12/31/16
The Portfolio of Investments is a complete list of all securities owned by your fund. It is categorized by broad-based asset classes.
Issuer | Shares/Par | Value ($) | ||||||
COMMON STOCKS – 99.3% | ||||||||
Aerospace – 4.4% | ||||||||
Honeywell International, Inc. | 10,930 | $ | 1,266,241 | |||||
MTU Aero Engines Holding AG | 3,662 | 422,487 | ||||||
United Technologies Corp. | 5,371 | 588,769 | ||||||
|
| |||||||
$ | 2,277,497 | |||||||
|
| |||||||
Airlines – 0.6% | ||||||||
Aena S.A. | 2,165 | $ | 295,471 | |||||
|
| |||||||
Alcoholic Beverages – 5.9% | ||||||||
AmBev S.A. | 54,768 | $ | 275,969 | |||||
Carlsberg A.S., “B” | 4,843 | 417,955 | ||||||
Diageo PLC | 39,302 | 1,016,786 | ||||||
Heineken N.V. | 6,077 | 455,187 | ||||||
Pernod Ricard S.A. | 8,285 | 897,848 | ||||||
|
| |||||||
$ | 3,063,745 | |||||||
|
| |||||||
Apparel Manufacturers – 3.3% | ||||||||
Burberry Group PLC | 15,699 | $ | 289,631 | |||||
Compagnie Financiere Richemont S.A. | 7,150 | 473,601 | ||||||
LVMH Moet Hennessy Louis Vuitton SE | 4,933 | 940,611 | ||||||
|
| |||||||
$ | 1,703,843 | |||||||
|
| |||||||
Automotive – 1.1% | ||||||||
Delphi Automotive PLC | 4,461 | $ | 300,448 | |||||
Harley-Davidson, Inc. | 5,059 | 295,142 | ||||||
|
| |||||||
$ | 595,590 | |||||||
|
| |||||||
Broadcasting – 7.3% | ||||||||
Omnicom Group, Inc. | 5,555 | $ | 472,786 | |||||
Time Warner, Inc. | 13,107 | 1,265,219 | ||||||
Walt Disney Co. | 11,386 | 1,186,649 | ||||||
WPP PLC | 38,078 | 852,200 | ||||||
|
| |||||||
$ | 3,776,854 | |||||||
|
| |||||||
Brokerage & Asset Managers – 1.5% | ||||||||
Deutsche Boerse AG (a) | 3,268 | $ | 266,238 | |||||
Franklin Resources, Inc. | 12,440 | 492,375 | ||||||
|
| |||||||
$ | 758,613 | |||||||
|
| |||||||
Business Services – 5.9% | ||||||||
Accenture PLC, “A” | 10,194 | $ | 1,194,023 | |||||
Adecco S.A. | 6,374 | 416,155 | ||||||
Brenntag AG | 3,342 | 185,194 | ||||||
Cognizant Technology Solutions Corp., “A” (a) | 6,214 | 348,170 | ||||||
Compass Group PLC | 32,718 | 603,069 | ||||||
NOW, Inc. (a) | 2,867 | 58,687 | ||||||
PayPal Holdings, Inc. (a) | 6,617 | 261,173 | ||||||
|
| |||||||
$ | 3,066,471 | |||||||
|
| |||||||
Cable TV – 1.5% | ||||||||
Sky PLC | 33,624 | $ | 409,075 | |||||
Charter Communications, Inc., “A” (a) | 1,257 | 361,915 | ||||||
|
| |||||||
$ | 770,990 | |||||||
|
|
Issuer | Shares/Par | Value ($) | ||||||
COMMON STOCKS – continued | ||||||||
Chemicals – 2.7% | ||||||||
3M Co. | 4,975 | $ | 888,386 | |||||
Monsanto Co. | 4,814 | 506,481 | ||||||
|
| |||||||
$ | 1,394,867 | |||||||
|
| |||||||
Computer Software – 2.6% | ||||||||
Check Point Software Technologies Ltd. (a) | 5,560 | $ | 469,598 | |||||
Oracle Corp. | 22,210 | 853,975 | ||||||
|
| |||||||
$ | 1,323,573 | |||||||
|
| |||||||
Consumer Products – 6.8% | ||||||||
Colgate-Palmolive Co. | 9,678 | $ | 633,328 | |||||
Coty, Inc., “A” | 36,310 | 664,836 | ||||||
International Flavors & Fragrances, Inc. | 1,320 | 155,536 | ||||||
Reckitt Benckiser Group PLC | 13,045 | 1,102,750 | ||||||
Svenska Cellulosa Aktiebolaget | 33,516 | 945,059 | ||||||
|
| |||||||
$ | 3,501,509 | |||||||
|
| |||||||
Electrical Equipment – 3.3% | ||||||||
Amphenol Corp., “A” | 5,052 | $ | 339,494 | |||||
Legrand S.A. | 7,352 | 416,361 | ||||||
Schneider Electric S.A. | 8,643 | 600,582 | ||||||
W.W. Grainger, Inc. | 1,513 | 351,394 | ||||||
|
| |||||||
$ | 1,707,831 | |||||||
|
| |||||||
Electronics – 2.0% | ||||||||
Hoya Corp. | 7,400 | $ | 310,147 | |||||
Microchip Technology, Inc. | 5,173 | 331,848 | ||||||
Samsung Electronics Co. Ltd. | 266 | 393,030 | ||||||
|
| |||||||
$ | 1,035,025 | |||||||
|
| |||||||
Food & Beverages – 5.4% | ||||||||
Danone S.A. | 12,383 | $ | 783,786 | |||||
Kellogg Co. | 9,634 | 710,122 | ||||||
Nestle S.A. | 18,497 | 1,326,923 | ||||||
|
| |||||||
$ | 2,820,831 | |||||||
|
| |||||||
Gaming & Lodging – 0.7% | ||||||||
Marriott International, Inc., “A” | 2,287 | $ | 189,089 | |||||
Sands China Ltd. | 24,000 | 103,219 | ||||||
Wynn Resorts Ltd. | 1,031 | 89,192 | ||||||
|
| |||||||
$ | 381,500 | |||||||
|
| |||||||
Insurance – 0.4% | ||||||||
Swiss Re Ltd. | 2,123 | $ | 201,188 | |||||
|
| |||||||
Internet – 0.8% | ||||||||
eBay, Inc. (a) | 13,657 | $ | 405,476 | |||||
|
| |||||||
Machinery & Tools – 0.6% | ||||||||
Kubota Corp. | 20,600 | $ | 293,256 | |||||
|
| |||||||
Major Banks – 5.3% | ||||||||
Bank of New York Mellon Corp. | 19,707 | $ | 933,718 | |||||
Goldman Sachs Group, Inc. | 2,678 | 641,247 |
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Portfolio of Investments – continued
Issuer | Shares/Par | Value ($) | ||||||
COMMON STOCKS – continued | ||||||||
Major Banks – continued | ||||||||
Standard Chartered PLC (a) | 18,278 | $ | 149,704 | |||||
State Street Corp. | 13,303 | 1,033,909 | ||||||
|
| |||||||
$ | 2,758,578 | |||||||
|
| |||||||
Medical Equipment – 13.0% | ||||||||
Cooper Cos., Inc. | 3,093 | $ | 541,058 | |||||
Dentsply Sirona, Inc. | 4,162 | 240,272 | ||||||
Medtronic PLC | 14,394 | 1,025,285 | ||||||
Sonova Holding AG | 2,168 | 262,308 | ||||||
St. Jude Medical, Inc. | 10,724 | 859,958 | ||||||
Stryker Corp. | 8,743 | 1,047,499 | ||||||
Thermo Fisher Scientific, Inc. | 9,758 | 1,376,854 | ||||||
Waters Corp. (a) | 3,182 | 427,629 | ||||||
Zimmer Biomet Holdings, Inc. | 9,432 | 973,382 | ||||||
|
| |||||||
$ | 6,754,245 | |||||||
|
| |||||||
Network & Telecom – 0.7% | ||||||||
Cisco Systems, Inc. | 12,202 | $ | 368,744 | |||||
|
| |||||||
Oil Services – 1.3% | ||||||||
National Oilwell Varco, Inc. | 4,827 | $ | 180,723 | |||||
Schlumberger Ltd. | 5,727 | 480,782 | ||||||
|
| |||||||
$ | 661,505 | |||||||
|
| |||||||
Other Banks & Diversified Financials – 6.5% | ||||||||
American Express Co. | 9,826 | $ | 727,910 | |||||
Erste Group Bank AG | 7,303 | 213,905 | ||||||
Grupo Financiero Banorte S.A. de C.V. | 33,178 | 163,732 | ||||||
Julius Baer Group Ltd. | 6,147 | 273,032 | ||||||
Kasikornbank Co. Ltd. | 22,800 | 112,633 | ||||||
Komercni Banka A.S. | 2,261 | 77,864 | ||||||
UBS AG | 47,858 | 749,617 | ||||||
Visa, Inc., “A” | 13,550 | 1,057,171 | ||||||
|
| |||||||
$ | 3,375,864 | |||||||
|
| |||||||
Pharmaceuticals – 5.6% | ||||||||
Bayer AG | 12,790 | $ | 1,334,627 | |||||
Johnson & Johnson | 1,927 | 222,010 | ||||||
Merck KGaA | 4,335 | 452,445 | ||||||
Roche Holding AG | 3,900 | 888,628 | ||||||
|
| |||||||
$ | 2,897,710 | |||||||
|
| |||||||
Railroad & Shipping – 2.2% | ||||||||
Canadian National Railway Co. | 13,175 | $ | 887,995 | |||||
Union Pacific Corp. | 2,487 | 257,852 | ||||||
|
| |||||||
$ | 1,145,847 | |||||||
|
|
Issuer | Shares/Par | Value ($) | ||||||
COMMON STOCKS – continued | ||||||||
Restaurants – 0.6% | ||||||||
Whitbread PLC | 6,836 | $ | 317,767 | |||||
|
| |||||||
Specialty Chemicals – 3.6% | ||||||||
Akzo Nobel N.V. | 8,813 | $ | 550,385 | |||||
L’Air Liquide S.A. | 2,608 | 289,522 | ||||||
Linde AG | 4,089 | 670,490 | ||||||
Praxair, Inc. | 3,163 | 370,672 | ||||||
|
| |||||||
$ | 1,881,069 | |||||||
|
| |||||||
Specialty Stores – 2.1% | ||||||||
AutoZone, Inc. (a) | 514 | $ | 405,952 | |||||
Hermes International | 253 | 103,865 | ||||||
Sally Beauty Holdings, Inc. (a) | 12,124 | 320,316 | ||||||
Urban Outfitters, Inc. (a) | 9,051 | 257,772 | ||||||
|
| |||||||
$ | 1,087,905 | |||||||
|
| |||||||
Trucking – 1.6% | ||||||||
United Parcel Service, Inc., “B” | 7,228 | $ | 828,618 | |||||
|
| |||||||
Total Common Stocks (Identified Cost, $33,295,339) | $ | 51,451,982 | ||||||
|
| |||||||
MONEY MARKET FUNDS – 0.7% | ||||||||
MFS Institutional Money Market Portfolio, 0.51% (v) (Identified Cost, $347,393) | 347,393 | $ | 347,393 | |||||
|
| |||||||
Total Investments (Identified Cost, $33,642,732) | $ | 51,799,375 | ||||||
|
| |||||||
OTHER ASSETS, LESS LIABILITIES – (0.0)% | (10,002 | ) | ||||||
|
| |||||||
NET ASSETS – 100.0% | $ | 51,789,373 | ||||||
|
|
(a) | Non-income producing security. |
(v) | Underlying affiliated fund that is available only to investment companies managed by MFS. The rate quoted for the MFS Institutional Money Market Portfolio is the annualized seven-day yield of the fund at period end. |
The following abbreviations are used in this report and are defined:
PLC | Public Limited Company |
See Notes to Financial Statements
8
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MFS Global Equity Series
FINANCIAL STATEMENTS | STATEMENT OF ASSETS AND LIABILITIES
This statement represents your fund’s balance sheet, which details the assets and liabilities comprising the total value of the fund.
At 12/31/16 | ||||||||
Assets | ||||||||
Investments | ||||||||
Non-affiliated issuers, at value (identified cost, $33,295,339) | $51,451,982 | |||||||
Underlying affiliated funds, at value (identified cost, $347,393) | 347,393 | |||||||
Total investments, at value (identified cost, $33,642,732) | $51,799,375 | |||||||
Foreign currency, at value (identified cost, $3,183) | 3,182 | |||||||
Receivables for | ||||||||
Fund shares sold | 38,614 | |||||||
Interest and dividends | 103,636 | |||||||
Total assets | $51,944,807 | |||||||
Liabilities | ||||||||
Payable for fund shares reacquired | $103,874 | |||||||
Payable to affiliates | ||||||||
Investment adviser | 796 | |||||||
Shareholder servicing costs | 141 | |||||||
Distribution and/or service fees | 143 | |||||||
Payable for independent Trustees’ compensation | 5 | |||||||
Deferred country tax expense payable | 934 | |||||||
Accrued expenses and other liabilities | 49,541 | |||||||
Total liabilities | $155,434 | |||||||
Net assets | $51,789,373 | |||||||
Net assets consist of | ||||||||
Paid-in capital | $31,327,857 | |||||||
Unrealized appreciation (depreciation) on investments and translation of assets and liabilities in foreign currencies | 18,150,586 | |||||||
Accumulated net realized gain (loss) on investments and foreign currency | 1,826,933 | |||||||
Undistributed net investment income | 483,997 | |||||||
Net assets | $51,789,373 | |||||||
Shares of beneficial interest outstanding | 2,787,285 |
Net assets | Shares outstanding | Net asset value per share | ||||||||||
Initial Class | $44,756,497 | 2,406,999 | $18.59 | |||||||||
Service Class | 7,032,876 | 380,286 | 18.49 |
See Notes to Financial Statements
9
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MFS Global Equity Series
FINANCIAL STATEMENTS | STATEMENT OF OPERATIONS
This statement describes how much your fund earned in investment income and accrued in expenses. It also describes any gains and/or losses generated by fund operations.
Year ended 12/31/16 | ||||||||
Net investment income | ||||||||
Income | ||||||||
Dividends | $1,067,996 | |||||||
Interest | 3,300 | |||||||
Dividends from underlying affiliated funds | 1,513 | |||||||
Foreign taxes withheld | (53,189 | ) | ||||||
Total investment income | $1,019,620 | |||||||
Expenses | ||||||||
Management fee | $493,910 | |||||||
Distribution and/or service fees | 17,492 | |||||||
Shareholder servicing costs | 11,597 | |||||||
Administrative services fee | 17,986 | |||||||
Independent Trustees’ compensation | 3,118 | |||||||
Custodian fee | 21,331 | |||||||
Shareholder communications | 9,762 | |||||||
Audit and tax fees | 55,567 | |||||||
Legal fees | 629 | |||||||
Miscellaneous | 14,754 | |||||||
Total expenses | $646,146 | |||||||
Reduction of expenses by investment adviser | (104,852 | ) | ||||||
Net expenses | $541,294 | |||||||
Net investment income | $478,326 | |||||||
Realized and unrealized gain (loss) on investments and foreign currency | ||||||||
Realized gain (loss) (identified cost basis) | ||||||||
Investments: | ||||||||
Non-affiliated issuers (net of $113 country tax) | $2,233,533 | |||||||
Underlying affiliated funds | (12 | ) | ||||||
Foreign currency | (6,497 | ) | ||||||
Net realized gain (loss) on investments and foreign currency | $2,227,024 | |||||||
Change in unrealized appreciation (depreciation) | ||||||||
Investments (net of $934 increase in deferred country tax) | $1,007,224 | |||||||
Translation of assets and liabilities in foreign currencies | (1,041 | ) | ||||||
Net unrealized gain (loss) on investments and foreign currency translation | $1,006,183 | |||||||
Net realized and unrealized gain (loss) on investments and foreign currency | $3,233,207 | |||||||
Change in net assets from operations | $3,711,533 |
See Notes to Financial Statements
10
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MFS Global Equity Series
FINANCIAL STATEMENTS | STATEMENTS OF CHANGES IN NET ASSETS
These statements describe the increases and/or decreases in net assets resulting from operations, any distributions, and any shareholder transactions.
For years ended 12/31 | 2016 | 2015 | ||||||
Change in net assets | ||||||||
From operations | ||||||||
Net investment income | $478,326 | $503,857 | ||||||
Net realized gain (loss) on investments and foreign currency | 2,227,024 | 2,791,157 | ||||||
Net unrealized gain (loss) on investments and foreign currency translation | 1,006,183 | (4,117,988 | ) | |||||
Change in net assets from operations | $3,711,533 | $(822,974 | ) | |||||
Distributions declared to shareholders | ||||||||
From net investment income | $(501,605 | ) | $(594,700 | ) | ||||
From net realized gain on investments | (2,801,224 | ) | (1,953,509 | ) | ||||
Total distributions declared to shareholders | $(3,302,829 | ) | $(2,548,209 | ) | ||||
Change in net assets from fund share transactions | $(1,457,933 | ) | $(1,958,038 | ) | ||||
Total change in net assets | $(1,049,229 | ) | $(5,329,221 | ) | ||||
Net assets | ||||||||
At beginning of period | 52,838,602 | 58,167,823 | ||||||
At end of period (including undistributed net investment income of $483,997 and | $51,789,373 | $52,838,602 |
See Notes to Financial Statements
11
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MFS Global Equity Series
FINANCIAL STATEMENTS | FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the fund’s financial performance for the past 5 years. Certain information reflects financial results for a single fund share. The total returns in the table represent the rate by which an investor would have earned (or lost) on an investment in the fund share class (assuming reinvestment of all distributions) held for the entire period.
Initial Class | Years ended 12/31 | |||||||||||||||||||
2016 | 2015 | 2014 | 2013 | 2012 | ||||||||||||||||
Net asset value, beginning of period | $18.39 | $19.59 | $19.18 | $15.14 | $12.71 | |||||||||||||||
Income (loss) from investment operations | ||||||||||||||||||||
Net investment income (d) | $0.17 | $0.18 | $0.20 | $0.14 | $0.16 | |||||||||||||||
Net realized and unrealized gain (loss) on investments | 1.20 | (0.49 | ) | 0.54 | 4.05 | 2.76 | ||||||||||||||
Total from investment operations | $1.37 | $(0.31 | ) | $0.74 | $4.19 | $2.92 | ||||||||||||||
Less distributions declared to shareholders | ||||||||||||||||||||
From net investment income | $(0.18 | ) | $(0.21 | ) | $(0.14 | ) | $(0.15 | ) | $(0.16 | ) | ||||||||||
From net realized gain on investments | (0.99 | ) | (0.68 | ) | (0.19 | ) | — | (0.33 | ) | |||||||||||
Total distributions declared to shareholders | $(1.17 | ) | $(0.89 | ) | $(0.33 | ) | $(0.15 | ) | $(0.49 | ) | ||||||||||
Net asset value, end of period (x) | $18.59 | $18.39 | $19.59 | $19.18 | $15.14 | |||||||||||||||
Total return (%) (k)(r)(s)(x) | 7.35 | (1.41 | ) | 3.87 | 27.81 | 23.34 | ||||||||||||||
Ratios (%) (to average net assets) and Supplemental data: | ||||||||||||||||||||
Expenses before expense reductions (f) | 1.19 | 1.26 | 1.28 | 1.31 | 1.30 | |||||||||||||||
Expenses after expense reductions (f) | 0.99 | 1.00 | 1.09 | 1.15 | 1.15 | |||||||||||||||
Net investment income | 0.93 | 0.91 | 1.06 | 0.82 | 1.15 | |||||||||||||||
Portfolio turnover | 13 | 12 | 15 | 25 | 21 | |||||||||||||||
Net assets at end of period (000 omitted) | $44,756 | $45,946 | $51,635 | $54,075 | $41,297 |
See Notes to Financial Statements
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MFS Global Equity Series
Financial Highlights – continued
Service Class | Years ended 12/31 | |||||||||||||||||||
2016 | 2015 | 2014 | 2013 | 2012 | ||||||||||||||||
Net asset value, beginning of period | $18.30 | $19.50 | $19.10 | $15.09 | $12.68 | |||||||||||||||
Income (loss) from investment operations | ||||||||||||||||||||
Net investment income (d) | $0.13 | $0.13 | $0.15 | $0.09 | $0.12 | |||||||||||||||
Net realized and unrealized gain (loss) on investments | 1.18 | (0.48 | ) | 0.54 | 4.05 | 2.75 | ||||||||||||||
Total from investment operations | $1.31 | $(0.35 | ) | $0.69 | $4.14 | $2.87 | ||||||||||||||
Less distributions declared to shareholders | ||||||||||||||||||||
From net investment income | $(0.13 | ) | $(0.17 | ) | $(0.10 | ) | $(0.13 | ) | $(0.13 | ) | ||||||||||
From net realized gain on investments | (0.99 | ) | (0.68 | ) | (0.19 | ) | — | (0.33 | ) | |||||||||||
Total distributions declared to shareholders | $(1.12 | ) | $(0.85 | ) | $(0.29 | ) | $(0.13 | ) | $(0.46 | ) | ||||||||||
Net asset value, end of period (x) | $18.49 | $18.30 | $19.50 | $19.10 | $15.09 | |||||||||||||||
Total return (%) (k)(r)(s)(x) | 7.06 | (1.67 | ) | 3.63 | 27.52 | 22.98 | ||||||||||||||
Ratios (%) (to average net assets) and Supplemental data: | ||||||||||||||||||||
Expenses before expense reductions (f) | 1.44 | 1.51 | 1.53 | 1.56 | 1.54 | |||||||||||||||
Expenses after expense reductions (f) | 1.24 | 1.25 | 1.34 | 1.40 | 1.40 | |||||||||||||||
Net investment income | 0.70 | 0.67 | 0.80 | 0.54 | 0.87 | |||||||||||||||
Portfolio turnover | 13 | 12 | 15 | 25 | 21 | |||||||||||||||
Net assets at end of period (000 omitted) | $7,033 | $6,893 | $6,533 | $7,018 | $4,127 |
(d) | Per share data is based on average shares outstanding. |
(f) | Ratios do not reflect reductions from fees paid indirectly, if applicable. |
(k) | The total return does not reflect expenses that apply to separate accounts. Inclusion of these charges would reduce the total return figures for all periods shown. |
(r) | Certain expenses have been reduced without which performance would have been lower. |
(s) | From time to time the fund may receive proceeds from litigation settlements, without which performance would be lower. |
(x) | The net asset values and total returns have been calculated on net assets which include adjustments made in accordance with U.S. generally accepted accounting principles required at period end for financial reporting purposes. |
See Notes to Financial Statements
13
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MFS Global Equity Series
(1) | Business and Organization |
MFS Global Equity Series (the fund) is a diversified series of MFS Variable Insurance Trust (the trust). The trust is organized as a Massachusetts business trust and is registered under the Investment Company Act of 1940, as amended, as an open-end management investment company. The shareholders of each series of the trust are separate accounts of insurance companies, which offer variable annuity and/or life insurance products, and qualified retirement and pension plans.
The fund is an investment company and accordingly follows the investment company accounting and reporting guidance of the Financial Accounting Standards Board (FASB) Accounting Standards Codification Topic 946 Financial Services – Investment Companies.
(2) | Significant Accounting Policies |
General – The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of increases and decreases in net assets from operations during the reporting period. Actual results could differ from those estimates. In the preparation of these financial statements, management has evaluated subsequent events occurring after the date of the fund’s Statement of Assets and Liabilities through the date that the financial statements were issued. The fund invests in foreign securities. Investments in foreign securities are vulnerable to the effects of changes in the relative values of the local currency and the U.S. dollar and to the effects of changes in each country’s legal, political, and economic environment.
In October 2016, the Securities and Exchange Commission (SEC) released its Final Rule on Investment Company Reporting Modernization (the “Rule”). The Rule, which introduces two new regulatory reporting forms for investment companies – Form N-PORT and Form N-CEN – also contains amendments to Regulation S-X which impact financial statement presentation, particularly the presentation of derivative investments. Although still evaluating the impacts of the Rule, management believes that many of the Regulation S-X amendments are consistent with the fund’s current financial statement presentation and expects that the fund will be able to comply with the Rule’s Regulation S-X amendments by the August 1, 2017 compliance date.
Balance Sheet Offsetting – The fund’s accounting policy with respect to balance sheet offsetting is that, absent an event of default by the counterparty or a termination of the agreement, the International Swaps and Derivatives Association (ISDA) Master Agreement does not result in an offset of reported amounts of financial assets and financial liabilities in the Statement of Assets and Liabilities across transactions between the fund and the applicable counterparty. The fund’s right to setoff may be restricted or prohibited by the bankruptcy or insolvency laws of the particular jurisdiction to which a specific master netting agreement counterparty is subject. Balance sheet offsetting disclosures, to the extent applicable to the fund, have been included in the fund’s Significant Accounting Policies note under the captions for each of the fund’s in-scope financial instruments and transactions.
Investment Valuations – Equity securities, including restricted equity securities, are generally valued at the last sale or official closing price on their primary market or exchange as provided by a third-party pricing service. Equity securities, for which there were no sales reported that day, are generally valued at the last quoted daily bid quotation on their primary market or exchange as provided by a third-party pricing service. Short-term instruments with a maturity at issuance of 60 days or less may be valued at amortized cost, which approximates market value. Open-end investment companies are generally valued at net asset value per share. Securities and other assets generally valued on the basis of information from a third-party pricing service may also be valued at a broker/dealer bid quotation. Values obtained from third-party pricing services can utilize both transaction data and market information such as yield, quality, coupon rate, maturity, type of issue, trading characteristics, and other market data. The values of foreign securities and other assets and liabilities expressed in foreign currencies are converted to U.S. dollars using the mean of bid and asked prices for rates provided by a third-party pricing service.
The Board of Trustees has delegated primary responsibility for determining or causing to be determined the value of the fund’s investments (including any fair valuation) to the adviser pursuant to valuation policies and procedures approved by the Board. If the adviser determines that reliable market quotations are not readily available, investments are valued at fair value as determined in good faith by the adviser in accordance with such procedures under the oversight of the Board of Trustees. Under the fund’s valuation policies and procedures, market quotations are not considered to be readily available for most types of debt instruments and floating rate loans and many types of derivatives. These investments are generally valued at fair value based on information from third-party pricing services. In addition, investments may be valued at fair value if the adviser determines that an investment’s value has been materially affected by events occurring after the close of the exchange or market on which the investment is principally traded (such as foreign exchange or market) and prior to the determination of the fund’s net asset value, or after the halting of trading of a specific security where trading does not resume prior to the close of the exchange or market on which the security is principally traded. Events that occur on a frequent basis after foreign markets close (such as developments in foreign markets and significant movements in the U.S. markets) and prior to the determination of the fund’s net asset value may be deemed to have a material effect on the value of securities traded in foreign markets. Accordingly, the fund’s foreign equity securities may often be
14
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MFS Global Equity Series
Notes to Financial Statements – continued
valued at fair value. The adviser generally relies on third-party pricing services or other information (such as the correlation with price movements of similar securities in the same or other markets; the type, cost and investment characteristics of the security; the business and financial condition of the issuer; and trading and other market data) to assist in determining whether to fair value and at what value to fair value an investment. The value of an investment for purposes of calculating the fund’s net asset value can differ depending on the source and method used to determine value. When fair valuation is used, the value of an investment used to determine the fund’s net asset value may differ from quoted or published prices for the same investment. There can be no assurance that the fund could obtain the fair value assigned to an investment if it were to sell the investment at the same time at which the fund determines its net asset value per share.
Various inputs are used in determining the value of the fund’s assets or liabilities. These inputs are categorized into three broad levels. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an investment’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The fund’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the investment. Level 1 includes unadjusted quoted prices in active markets for identical assets or liabilities. Level 2 includes other significant observable market-based inputs (including quoted prices for similar securities, interest rates, prepayment speed, and credit risk). Level 3 includes unobservable inputs, which may include the adviser’s own assumptions in determining the fair value of investments. The following is a summary of the levels used as of December 31, 2016 in valuing the fund’s assets or liabilities:
Investments at Value | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Equity Securities: | ||||||||||||||||
United States | $28,790,090 | $— | $— | $28,790,090 | ||||||||||||
United Kingdom | 1,141,831 | 3,599,150 | — | 4,740,981 | ||||||||||||
Switzerland | 3,024,361 | 1,567,090 | — | 4,591,451 | ||||||||||||
France | 1,001,713 | 3,030,863 | — | 4,032,576 | ||||||||||||
Germany | 1,787,072 | 1,544,408 | — | 3,331,480 | ||||||||||||
Netherlands | — | 1,005,572 | — | 1,005,572 | ||||||||||||
Sweden | — | 945,059 | — | 945,059 | ||||||||||||
Canada | 887,995 | — | — | 887,995 | ||||||||||||
Japan | — | 603,403 | — | 603,403 | ||||||||||||
Other Countries | 1,836,629 | 686,746 | — | 2,523,375 | ||||||||||||
Mutual Funds | 347,393 | — | — | 347,393 | ||||||||||||
Total Investments | $38,817,084 | $12,982,291 | $— | $51,799,375 |
For further information regarding security characteristics, see the Portfolio of Investments.
Of the level 2 investments presented above, equity investments amounting to $1,431,235 would have been considered level 1 investments at the beginning of the period. Of the level 1 investments presented above, equity investments amounting to $7,868,646 would have been considered level 2 investments at the beginning of the period. The primary reason for changes in the classifications between levels 1 and 2 occurs when foreign equity securities are fair valued using other observable market-based inputs in place of the closing exchange price due to events occurring after the close of the exchange or market on which the investment is principally traded. The fund’s foreign equity securities may often be valued at fair value. The fund’s policy is to recognize transfers between the levels as of the end of the period.
Foreign Currency Translation – Purchases and sales of foreign investments, income, and expenses are converted into U.S. dollars based upon currency exchange rates prevailing on the respective dates of such transactions or on the reporting date for foreign denominated receivables and payables. Gains and losses attributable to foreign currency exchange rates on sales of securities are recorded for financial statement purposes as net realized gains and losses on investments. Gains and losses attributable to foreign exchange rate movements on receivables, payables, income and expenses are recorded for financial statement purposes as foreign currency transaction gains and losses. That portion of both realized and unrealized gains and losses on investments that results from fluctuations in foreign currency exchange rates is not separately disclosed.
Security Loans – Under its Securities Lending Agency Agreement with the fund, State Street Bank and Trust Company (“State Street”), as lending agent, loans the securities of the fund to certain qualified institutions (the “Borrowers”) approved by the fund. Security loans can be terminated at the discretion of either the lending agent or the fund and the related securities must be returned within the earlier of the standard trade settlement period for such securities or within three business days. The loans are collateralized by cash and/or U.S. Treasury and federal agency obligations in an amount typically at least equal to the market value of the securities loaned. On loans collateralized by cash, the cash collateral is invested in a money market fund. The market value of the loaned securities is determined at the close of business of the fund and any additional required collateral is delivered to the fund on the next business day. State Street provides the fund with indemnification against Borrower default. In the event of Borrower
15
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MFS Global Equity Series
Notes to Financial Statements – continued
default, State Street will, for the benefit of the fund, either purchase securities identical to those loaned or, when such purchase is commercially impracticable, pay the fund the market value of the loaned securities. In return, State Street assumes the fund’s rights to the related collateral. If the collateral value is less than the cost to purchase identical securities, State Street is responsible for the shortfall, but only to the extent that such shortfall is not due to a decline in collateral value resulting from collateral reinvestment for which the fund bears the risk of loss. A portion of the income generated upon investment of the collateral is remitted to the Borrowers, and the remainder is allocated between the fund and the lending agent. On loans collateralized by U.S. Treasury and/or federal agency obligations, a fee is received from the Borrower, and is allocated between the fund and the lending agent. Income from securities lending is included in “Interest” income in the Statement of Operations. The dividend and interest income earned on the securities loaned is accounted for in the same manner as other dividend and interest income. At December 31, 2016, there were no securities on loan or collateral outstanding.
Indemnifications – Under the fund’s organizational documents, its officers and Trustees may be indemnified against certain liabilities and expenses arising out of the performance of their duties to the fund. Additionally, in the normal course of business, the fund enters into agreements with service providers that may contain indemnification clauses. The fund’s maximum exposure under these agreements is unknown as this would involve future claims that may be made against the fund that have not yet occurred.
Investment Transactions and Income – Investment transactions are recorded on the trade date. Interest income is recorded on the accrual basis. Dividends received in cash are recorded on the ex-dividend date. Certain dividends from foreign securities will be recorded when the fund is informed of the dividend if such information is obtained subsequent to the ex-dividend date. Dividend and interest payments received in additional securities are recorded on the ex-dividend or ex-interest date in an amount equal to the value of the security on such date.
The fund may receive proceeds from litigation settlements. Any proceeds received from litigation involving portfolio holdings are reflected in the Statement of Operations in realized gain/loss if the security has been disposed of by the fund or in unrealized gain/loss if the security is still held by the fund. Any other proceeds from litigation not related to portfolio holdings are reflected as other income in the Statement of Operations.
Tax Matters and Distributions – The fund intends to qualify as a regulated investment company, as defined under Subchapter M of the Internal Revenue Code, and to distribute all of its taxable income, including realized capital gains. As a result, no provision for federal income tax is required. The fund’s federal tax returns, when filed, will remain subject to examination by the Internal Revenue Service for a three year period. Management has analyzed the fund’s tax positions taken on federal and state tax returns for all open tax years and does not believe that there are any uncertain tax positions that require recognition of a tax liability. Foreign taxes, if any, have been accrued by the fund in the accompanying financial statements in accordance with the applicable foreign tax law. Foreign income taxes may be withheld by certain countries in which the fund invests. Additionally, capital gains realized by the fund on securities issued in or by certain foreign countries may be subject to capital gains tax imposed by those countries.
Distributions to shareholders are recorded on the ex-dividend date. Income and capital gain distributions are determined in accordance with income tax regulations, which may differ from U.S. generally accepted accounting principles. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences which arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary overdistributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes.
Book/tax differences primarily relate to wash sale loss deferrals.
The tax character of distributions declared to shareholders for the last two fiscal years is as follows:
12/31/16 | 12/31/15 | |||||||
Ordinary income (including any short-term capital gains) | $501,605 | $825,655 | ||||||
Long-term capital gains | 2,801,224 | 1,722,554 | ||||||
Total distributions | $3,302,829 | $2,548,209 |
16
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MFS Global Equity Series
Notes to Financial Statements – continued
The federal tax cost and the tax basis components of distributable earnings were as follows:
As of 12/31/16 | ||||
Cost of investments | $34,080,744 | |||
Gross appreciation | 18,652,470 | |||
Gross depreciation | (933,839 | ) | ||
Net unrealized appreciation (depreciation) | $17,718,631 | |||
Undistributed ordinary income | 578,848 | |||
Undistributed long-term capital gain | 2,170,094 | |||
Other temporary differences | (6,057 | ) |
Multiple Classes of Shares of Beneficial Interest – The fund offers multiple classes of shares, which differ in their respective distribution and/or service fees. The fund’s income, realized and unrealized gain (loss), and common expenses are allocated to shareholders based on the daily net assets of each class. Dividends are declared separately for each class. Differences in per share dividend rates are generally due to differences in separate class expenses. The fund’s distributions declared to shareholders as reported in the Statements of Changes in Net Assets are presented by class as follows:
From net investment income | From net realized gain on investments | |||||||||||||||
Year ended 12/31/16 | Year ended 12/31/15 | Year ended 12/31/16 | Year ended 12/31/15 | |||||||||||||
Initial Class | $451,831 | $532,654 | $2,435,962 | $1,699,129 | ||||||||||||
Service Class | 49,774 | 62,046 | 365,262 | 254,380 | ||||||||||||
Total | $501,605 | $594,700 | $2,801,224 | $1,953,509 |
(3) | Transactions with Affiliates |
Investment Adviser – The fund has an investment advisory agreement with MFS to provide overall investment management and related administrative services and facilities to the fund. For the period from January 1, 2016 through April 28, 2016, the management fee was computed daily and paid monthly at the following annual rates:
First $1 billion of average daily net assets | 1.00% | |||
Average daily net assets in excess of $1 billion | 0.90% |
The investment adviser had agreed in writing to reduce its management fee to 0.90% of average daily net assets. This written agreement terminated on April 28, 2016. For the period from January 1, 2016 through April 28, 2016, this management fee reduction amounted to $16,607, which is included in the reduction of total expenses in the Statement of Operations. Effective April 29, 2016, the management fee is computed daily and paid monthly at an annual rate of 0.90% of average daily net assets up to $1 billion, 0.75% of average daily net assets in excess of $1 billion up to $2.5 billion, and 0.65% of average daily net assets in excess of $2.5 billion. MFS has also agreed in writing to reduce its management fee by a specified amount if certain MFS mutual fund assets exceed thresholds agreed to by MFS and the fund’s Board of Trustees. For the year ended December 31, 2016, this management fee reduction amounted to $3,763, which is included in the reduction of total expenses in the Statement of Operations. The management fee incurred for the year ended December 31, 2016 was equivalent to an annual effective rate of 0.89% of the fund’s average daily net assets.
The investment adviser had agreed in writing to pay a portion of the fund’s total annual operating expenses, excluding interest, taxes, extraordinary expenses, brokerage and transaction costs, and investment-related expenses, such that total annual operating expenses did not exceed 1.00% of average daily net assets for the Initial Class shares and 1.25% of average daily net assets for the Service Class shares. This written agreement terminated on July 31, 2016. For the period from January 1, 2016 through July 31, 2016, this reduction amounted to $50,092, which is included in the reduction of total expenses in the Statement of Operations. Effective August 1, 2016, the investment adviser has agreed in writing to pay a portion of the fund’s total annual operating expenses, excluding interest, taxes, extraordinary expenses, brokerage and transaction costs, and investment-related expenses, such that total annual operating expenses do not exceed 0.97% of average daily net assets for the Initial Class shares and 1.22% of average daily net assets for the Service Class shares. This written agreement will continue until modified by the fund’s Board of Trustees, but such agreement will continue at least until April 30, 2018. For the period from August 1, 2016 through December 31, 2016, this reduction amounted to $34,390, which is included in the reduction of total expenses in the Statement of Operations.
Distributor – MFS Fund Distributors, Inc. (MFD), a wholly-owned subsidiary of MFS, is the distributor of shares of the fund. The Trustees have adopted a distribution plan for the Service Class shares pursuant to Rule 12b-1 under the Investment Company Act of 1940.
The fund’s distribution plan provides that the fund will pay MFD distribution and/or service fees equal to 0.25% per annum of its average daily net assets attributable to Service Class shares as partial consideration for services performed and expenses incurred by
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Notes to Financial Statements – continued
MFD and financial intermediaries (including participating insurance companies that invest in the fund to fund variable annuity and variable life insurance contracts, sponsors of qualified retirement and pension plans that invest in the fund, and affiliates of these participating insurance companies and plan sponsors) in connection with the sale and distribution of the Service Class shares. MFD may subsequently pay all, or a portion, of the distribution and/or service fees to financial intermediaries.
Shareholder Servicing Agent – MFS Service Center, Inc. (MFSC), a wholly-owned subsidiary of MFS, receives a fee from the fund for its services as shareholder servicing agent. For the year ended December 31, 2016, the fee was $11,295, which equated to 0.0213% annually of the fund’s average daily net assets. MFSC also receives payment from the fund for out-of-pocket expenses paid by MFSC on behalf of the fund. For the year ended December 31, 2016, these costs amounted to $302.
Administrator – MFS provides certain financial, legal, shareholder communications, compliance, and other administrative services to the fund. Under an administrative services agreement, the fund reimburses MFS the costs incurred to provide these services. The fund is charged an annual fixed amount of $17,500 plus a fee based on average daily net assets. The administrative services fee incurred for the year ended December 31, 2016 was equivalent to an annual effective rate of 0.0339% of the fund’s average daily net assets.
Trustees’ and Officers’ Compensation – The fund pays compensation to independent Trustees in the form of a retainer, attendance fees, and additional compensation to Board and Committee chairpersons. The fund does not pay compensation directly to Trustees or officers of the fund who are also officers of the investment adviser, all of whom receive remuneration for their services to the fund from MFS. Certain officers and Trustees of the fund are officers or directors of MFS, MFD, and MFSC.
Other – This fund and certain other funds managed by MFS (the funds) have entered into a service agreement (the ISO Agreement) which provides for payment of fees solely by the funds to Tarantino LLC in return for the provision of services of an Independent Senior Officer (ISO) for the funds. Frank L. Tarantino serves as the ISO and is an officer of the funds and the sole member of Tarantino LLC. The funds can terminate the ISO Agreement with Tarantino LLC at any time under the terms of the ISO Agreement. For the year ended December 31, 2016, the fee paid by the fund under this agreement was $107 and is included in “Miscellaneous” expense in the Statement of Operations. MFS has agreed to bear all expenses associated with office space, other administrative support, and supplies provided to the ISO.
The fund invests in the MFS Institutional Money Market Portfolio which is managed by MFS and seeks current income consistent with preservation of capital and liquidity. This money market fund does not pay a management fee to MFS.
The fund is permitted to engage in purchase and sale transactions (“cross-trades”) with funds and accounts for which MFS serves as investment adviser or sub-adviser pursuant to a policy adopted by the Board of Trustees. This policy has been designed to ensure that cross-trades conducted by the fund comply with Rule 17a-7 under the Investment Company Act of 1940. Under this policy, cross-trades are effected at current market prices with no remuneration paid in connection with the transaction. During the year ended December 31, 2016, the fund engaged in purchase and sale transactions pursuant to this policy, which amounted to $67,520 and $23,978, respectively. The sales transactions resulted in net realized gains (losses) of $4,460.
(4) | Portfolio Securities |
For the year ended December 31, 2016, purchases and sales of investments, other than short-term obligations, aggregated $7,071,027 and $11,280,148, respectively.
(5) | Shares of Beneficial Interest |
The fund’s Declaration of Trust permits the Trustees to issue an unlimited number of full and fractional shares of beneficial interest. Transactions in fund shares were as follows:
Year ended 12/31/16 | Year ended 12/31/15 | |||||||||||||||
Shares | Amount | Shares | Amount | |||||||||||||
Shares sold | ||||||||||||||||
Initial Class | 329,895 | $6,200,474 | 294,841 | $5,861,870 | ||||||||||||
Service Class | 97,780 | 1,790,424 | 165,914 | 3,259,672 | ||||||||||||
427,675 | $7,990,898 | 460,755 | $9,121,542 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | ||||||||||||||||
Initial Class | 152,632 | $2,887,793 | 126,018 | $2,231,783 | ||||||||||||
Service Class | 22,041 | 415,036 | 17,948 | 316,426 | ||||||||||||
174,673 | $3,302,829 | 143,966 | $2,548,209 | |||||||||||||
Shares reacquired | ||||||||||||||||
Initial Class | (573,782 | ) | $(10,611,983 | ) | (557,747 | ) | $(10,884,525 | ) | ||||||||
Service Class | (116,232 | ) | (2,139,677 | ) | (142,184 | ) | (2,743,264 | ) | ||||||||
(690,014 | ) | $(12,751,660 | ) | (699,931 | ) | $(13,627,789 | ) |
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Notes to Financial Statements – continued
Year ended 12/31/16 | Year ended 12/31/15 | |||||||||||||||
Shares | Amount | Shares | Amount | |||||||||||||
Net change | ||||||||||||||||
Initial Class | (91,255 | ) | $(1,523,716 | ) | (136,888 | ) | $(2,790,872 | ) | ||||||||
Service Class | 3,589 | 65,783 | 41,678 | 832,834 | ||||||||||||
(87,666 | ) | $(1,457,933 | ) | (95,210 | ) | $(1,958,038 | ) |
(6) | Line of Credit |
The fund and certain other funds managed by MFS participate in a $1.25 billion unsecured committed line of credit, subject to a $1 billion sublimit, provided by a syndication of banks under a credit agreement. Borrowings may be made for temporary financing needs. Interest is charged to each fund, based on its borrowings, generally at a rate equal to the higher of the Overnight Federal Reserve funds rate or daily one month LIBOR plus an agreed upon spread. A commitment fee, based on the average daily, unused portion of the committed line of credit, is allocated among the participating funds at the end of each calendar quarter. In addition, the fund and other funds managed by MFS have established unsecured uncommitted borrowing arrangements with certain banks for temporary financing needs. Interest is charged to each fund, based on its borrowings, at a rate equal to the Overnight Federal Reserve funds rate plus an agreed upon spread. For the year ended December 31, 2016, the fund’s commitment fee and interest expense were $332 and $0, respectively, and are included in “Miscellaneous” expense in the Statement of Operations.
(7) | Transactions in Underlying Affiliated Funds – Affiliated Issuers |
An affiliated issuer may be considered one in which the fund owns 5% or more of the outstanding voting securities, or a company which is under common control. For the purposes of this report, the fund assumes the following to be an affiliated issuer:
Underlying Affiliated Fund | Beginning Shares/Par Amount | Acquisitions Shares/Par Amount | Dispositions Shares/Par Amount | Ending Shares/Par Amount | ||||||||||||
MFS Institutional Money Market Portfolio | 284,710 | 10,074,189 | (10,011,506 | ) | 347,393 | |||||||||||
Underlying Affiliated Fund | Realized Gain (Loss) | Capital Gain Distributions | Dividend Income | Ending Value | ||||||||||||
MFS Institutional Money Market Portfolio | $(12 | ) | $— | $1,513 | $347,393 |
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Trustees of MFS Variable Insurance Trust and the Shareholders of MFS Global Equity Series:
We have audited the accompanying statement of assets and liabilities, including the portfolio of investments, of MFS Global Equity Series (one of the series of MFS Variable Insurance Trust) (the “Fund”) as of December 31, 2016, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended. These financial statements and financial highlights are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. The Fund is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of December 31, 2016, by correspondence with the custodian and brokers; when replies were not received from brokers, we performed other auditing procedures. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of MFS Global Equity Series as of December 31, 2016, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
February 15, 2017
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TRUSTEES AND OFFICERS – IDENTIFICATION AND BACKGROUND
The Trustees and Officers of the Trust, as of February 1, 2017, are listed below, together with their principal occupations during the past five years. (Their titles may have varied during that period.) The address of each Trustee and Officer is 111 Huntington Avenue, Boston, Massachusetts 02199-7618.
Name, Age | Position(s) with Fund | Trustee/Officer Since (h) | Principal Occupations During the Past Five Years | Other Directorships (j) | ||||
INTERESTED TRUSTEES | ||||||||
Robert J. Manning (k) (age 53) | Trustee | February 2004 | Massachusetts Financial Services Company, Executive Chairman (since January 2017) and Director; Chairman (until January 2017); Chief Executive Officer (until 2015); Co-Chief Executive Officer (2015-2016) | N/A | ||||
Robin A. Stelmach (k) (age 55) | Trustee | January 2014 | Massachusetts Financial Services Company, Vice Chair (since January 2017); Chief Operating Officer and Executive Vice President (until January 2017) | N/A | ||||
INDEPENDENT TRUSTEES | ||||||||
David H. Gunning (age 74) | Trustee and Chair of Trustees | January 2004 | Private investor | Lincoln Electric Holdings, Inc., Director; Development Alternatives, Inc., Director/Non-Executive Chairman | ||||
Steven E. Buller (age 65) | Trustee | February 2014 | Chairman, Financial Accounting Standards Advisory Council (until 2015); Standing Advisory Group, Public Company Accounting Oversight Board, Member (until 2014); BlackRock, Inc. (investment management), Managing Director (until 2014), BlackRock Finco UK (investment management), Director (until 2014) | N/A | ||||
Maureen R. Goldfarb (age 61) | Trustee | January 2009 | Private investor | N/A | ||||
Michael Hegarty (age 72) | Trustee | December 2004 | Private investor | Rouse Properties Inc., Director; Capmark Financial Group Inc., Director (until 2015) | ||||
John P. Kavanaugh (age 62) | Trustee and Vice Chair of Trustees | January 2009 | Private investor | N/A | ||||
Maryanne L. Roepke (age 60) | Trustee | May 2014 | American Century Investments (investment management), Senior Vice President and Chief Compliance Officer (until 2014) | N/A | ||||
Laurie J. Thomsen (age 59) | Trustee | March 2005 | Private investor | The Travelers Companies, Director; Dycom Industries, Inc., Director | ||||
OFFICERS | ||||||||
Christopher R. Bohane (k) (age 43) | Assistant Secretary and Assistant Clerk | July 2005 | Massachusetts Financial Services Company, Vice President and Assistant General Counsel | N/A | ||||
Kino Clark (k) (age 48) | Assistant Treasurer | January 2012 | Massachusetts Financial Services Company, Vice President | N/A | ||||
Thomas H. Connors (k) (age 57) | Assistant Secretary and Assistant Clerk | September 2012 | Massachusetts Financial Services Company, Vice President and Senior Counsel; Deutsche Investment Management Americas Inc. (financial service provider), Director and Senior Counsel (until 2012) | N/A | ||||
Ethan D. Corey (k) (age 53) | Assistant Secretary and Assistant Clerk | July 2005 | Massachusetts Financial Services Company, Senior Vice President and Associate General Counsel | N/A | ||||
David L. DiLorenzo (k) (age 48) | President | July 2005 | Massachusetts Financial Services Company, Senior Vice President | N/A | ||||
Brian E. Langenfeld (k) (age 43) | Assistant Secretary and Assistant Clerk | June 2006 | Massachusetts Financial Services Company, Vice President and Senior Counsel | N/A |
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Trustees and Officers – continued
Name, Age | Position(s) with Fund | Trustee/Officer Since (h) | Principal Occupations During the Past Five Years | Other Directorships (j) | ||||
Susan A. Pereira (k) (age 46) | Assistant Secretary and Assistant Clerk | July 2005 | Massachusetts Financial Services Company, Vice President and Senior Counsel | N/A | ||||
Kasey L. Phillips (k) (age 46) | Assistant Treasurer | September 2012 | Massachusetts Financial Services Company, Vice President; Wells Fargo Funds Management, LLC, Senior Vice President, Fund Treasurer (until 2012) | N/A | ||||
Mark N. Polebaum (k) (age 64) | Secretary and Clerk | January 2006 | Massachusetts Financial Services Company, Executive Vice President, General Counsel and Secretary | N/A | ||||
Matthew A. Stowe (k) (age 42) | Assistant Secretary and Assistant Clerk | October 2014 | Massachusetts Financial Services Company, Vice President and Assistant General Counsel | N/A | ||||
Frank L. Tarantino (age 72) | Independent Senior Officer | June 2004 | Tarantino LLC (provider of compliance services), Principal | N/A | ||||
Richard S. Weitzel (k) (age 46) | Assistant Secretary and Assistant Clerk | October 2007 | Massachusetts Financial Services Company, Senior Vice President and Associate General Counsel | N/A | ||||
Martin J. Wolin (k) (age 49) | Chief Compliance Officer | July 2015 | Massachusetts Financial Services Company, Senior Vice President and Chief Compliance Officer (since July 2015); Mercer (financial service provider), Chief Risk and Compliance Officer, North America and Latin America (until June 2015) | N/A | ||||
James O. Yost (k) (age 56) | Treasurer | September 1990 | Massachusetts Financial Services Company, Senior Vice President | N/A |
(h) | Date first appointed to serve as Trustee/officer of an MFS Fund. Each Trustee has served continuously since appointment unless indicated otherwise. For the period from December 15, 2004 until February 22, 2005, Mr. Manning served as Advisory Trustee. Prior to January 2012, Messrs. DiLorenzo and Yost served as Assistant Treasurers of the Funds. From January 2012 through December 2016, Messrs. DiLorenzo and Yost served as Treasurer and Deputy Treasurer of the Funds, respectively. |
(j) | Directorships or trusteeships of companies required to report to the Securities and Exchange Commission (i.e., “public companies”). |
(k) | “Interested person” of the Trust within the meaning of the Investment Company Act of 1940 (referred to as the 1940 Act), which is the principal federal law governing investment companies like the fund, as a result of a position with MFS. The address of MFS is 111 Huntington Avenue, Boston, Massachusetts 02199-7618. |
Each Trustee (except Ms. Stelmach, Mr. Buller and Ms. Roepke) has been elected by shareholders and each Trustee and officer holds office until his or her successor is chosen and qualified or until his or her earlier death, resignation, retirement or removal. The Trust does not hold annual meetings for the purpose of electing Trustees, and Trustees are not elected for fixed terms. Messrs. Buller and Kavanaugh and Ms. Roepke are members of the Trust’s Audit Committee.
Each of the Fund’s Trustees and officers holds comparable positions with certain other funds of which MFS or a subsidiary is the investment adviser or distributor, and, in the case of the officers, with certain affiliates of MFS. As of February 1, 2017, the Trustees served as board members of 137 funds within the MFS Family of Funds.
The Statement of Additional Information for a Fund includes further information about the Trustees and is available without charge upon request by calling 1-800-225-2606.
Investment Adviser Massachusetts Financial Services Company 111 Huntington Avenue Boston, MA 02199-7618 | Custodian State Street Bank and Trust Company 1 Lincoln Street Boston, MA 02111-2900 | |
Distributor MFS Fund Distributors, Inc. 111 Huntington Avenue Boston, MA 02199-7618 | Independent Registered Public Accounting Firm Deloitte & Touche LLP 200 Berkeley Street Boston, MA 02116 | |
Portfolio Managers David Mannheim Ryan McAllister Roger Morley |
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BOARD REVIEW OF INVESTMENT ADVISORY AGREEMENT
The Investment Company Act of 1940 requires that both the full Board of Trustees and a majority of the non-interested (“independent”) Trustees, voting separately, annually approve the continuation of the Fund’s investment advisory agreement with MFS. The Trustees consider matters bearing on the Fund and its advisory arrangements at their meetings throughout the year, including a review of performance data at each regular meeting. In addition, the independent Trustees met several times over the course of three months beginning in May and ending in July, 2016 (“contract review meetings”) for the specific purpose of considering whether to approve the continuation of the investment advisory agreement for the Fund and the other investment companies that the Board oversees (the “MFS Funds”). The independent Trustees were assisted in their evaluation of the Fund’s investment advisory agreement by independent legal counsel, from whom they received separate legal advice and with whom they met separately from MFS during various contract review meetings. The independent Trustees were also assisted in this process by the MFS Funds’ Independent Senior Officer, a senior officer appointed by and reporting to the independent Trustees.
In connection with their deliberations regarding the continuation of the investment advisory agreement, the Trustees, including the independent Trustees, considered such information and factors as they believed, in light of the legal advice furnished to them and their own business judgment, to be relevant. The investment advisory agreement for the Fund was considered separately, although the Trustees also took into account the common interests of all MFS Funds in their review. As described below, the Trustees considered the nature, quality, and extent of the various investment advisory, administrative, and shareholder services performed by MFS under the existing investment advisory agreement and other arrangements with the Fund.
In connection with their contract review meetings, the Trustees received and relied upon materials that included, among other items: (i) information provided by Broadridge Financial Solutions, Inc. (“Broadridge”), an independent third party, on the investment performance of the Fund for various time periods ended December 31, 2015 and the investment performance of a group of funds with substantially similar investment classifications/objectives (the “Lipper performance universe”), (ii) information provided by Broadridge on the Fund’s advisory fees and other expenses and the advisory fees and other expenses of comparable funds identified by Broadridge (the “Broadridge expense group”), (iii) information provided by MFS on the advisory fees of portfolios of other clients of MFS, including institutional separate accounts and other clients, (iv) information as to whether and to what extent applicable expense waivers, reimbursements or fee “breakpoints” are observed for the Fund, (v) information regarding MFS’ financial results and financial condition, including MFS’ and certain of its affiliates’ estimated profitability from services performed for the Fund and the MFS Funds as a whole, and compared to MFS’ institutional business, (vi) MFS��� views regarding the outlook for the mutual fund industry and the strategic business plans of MFS, (vii) descriptions of various functions performed by MFS for the Funds, such as compliance monitoring and portfolio trading practices, and (viii) information regarding the overall organization of MFS, including information about MFS’ senior management and other personnel providing investment advisory, administrative and other services to the Fund and the other MFS Funds. The comparative performance, fee and expense information prepared and provided by Broadridge was not independently verified and the independent Trustees did not independently verify any information provided to them by MFS.
The Trustees’ conclusion as to the continuation of the investment advisory agreement was based on a comprehensive consideration of all information provided to the Trustees and not the result of any single factor. Some of the factors that figured particularly in the Trustees’ deliberations are described below, although individual Trustees may have evaluated the information presented differently from one another, giving different weights to various factors. It is also important to recognize that the fee arrangements for the Fund and other MFS Funds are the result of years of review and discussion between the independent Trustees and MFS, that certain aspects of such arrangements may receive greater scrutiny in some years than in others, and that the Trustees’ conclusions may be based, in part, on their consideration of these same arrangements during the course of the year and in prior years.
Based on information provided by Broadridge and MFS, the Trustees reviewed the Fund’s total return investment performance as well as the performance of peer groups of funds over various time periods. The Trustees placed particular emphasis on the total return performance of the Fund’s Initial Class shares in comparison to the performance of funds in its Lipper performance universe over the three-year period ended December 31, 2015, which the Trustees believed was a long enough period to reflect differing market conditions. The total return performance of the Fund’s Initial Class shares was in the 3rd quintile relative to the other funds in the universe for this three-year period (the 1st quintile being the best performers and the 5th quintile being the worst performers). The total return performance of the Fund’s Initial Class shares was in the 4th quintile for the one-year period and 3rd quintile for the five-year period ended December 31, 2015 relative to the Lipper performance universe. Because of the passage of time, these performance results may differ from the performance results for more recent periods, including those shown elsewhere in this report.
In the course of their deliberations, the Trustees took into account information provided by MFS in connection with the contract review meetings, as well as during investment review meetings conducted with portfolio management personnel during the course of the year regarding the Fund’s performance. After reviewing these and related factors, the Trustees concluded, within the context of their overall conclusions regarding the investment advisory agreement, that they were satisfied with MFS’ responses and efforts relating to investment performance.
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Board Review of Investment Advisory Agreement – continued
In assessing the reasonableness of the Fund’s advisory fee, the Trustees considered, among other information, the Fund’s advisory fee and the total expense ratio of the Fund’s Initial Class shares as a percentage of average daily net assets and the advisory fee and total expense ratios of peer groups of funds based on information provided by Broadridge. The Trustees considered that MFS currently observes an expense limitation for the Fund, which may not be changed without the Trustees’ approval. The Trustees also considered that, according to the data provided by Broadridge (which takes into account any fee reductions or expense limitations that were in effect during the Fund’s last fiscal year), the Fund’s effective advisory fee rate was approximately at the Broadridge expense group median and the Fund’s total expense ratio was higher than the Broadridge expense group median. The Trustees also noted that MFS has agreed to further reduce the expense limitation for the Fund, which may not be changed without the Trustees’ approval.
The Trustees also considered the advisory fees charged by MFS to any institutional separate accounts advised by MFS (“separate accounts”) and unaffiliated investment companies for which MFS serves as subadviser (“subadvised funds”) that have comparable investment strategies to the Fund. In comparing these fees, the Trustees considered information provided by MFS as to the generally broader scope of services provided by MFS to the Fund, as well as the more extensive regulatory burdens imposed on MFS in managing the Fund, in comparison to separate accounts and subadvised funds. The Trustees also considered the higher demands placed on MFS’ investment personnel and trading infrastructure as a result of the daily cash in-flows and out-flows of the Fund in comparison to separate accounts.
The Trustees also considered whether the Fund may benefit from any economies of scale in the management of the Fund in the event of growth in assets of the Fund and/or growth in assets of the MFS Funds as a whole. They noted that MFS had amended its contractual advisory fee rate schedule effective April 29, 2016 and that such advisory fee rate schedule is subject to contractual breakpoints that reduce the Fund’s advisory fee rate on average daily net assets over $1 billion and $2.5 billion. The Trustees also noted that MFS has agreed in writing to waive a portion of the management fees of certain MFS Funds, including the Fund, if the total combined assets of certain funds within the MFS Funds’ complex increase above agreed upon thresholds (the “group fee waiver”), enabling the Fund’s shareholders to share in the benefits from any economies of scale at the complex level. The group fee waiver is reviewed and renewed annually between the Board and MFS. The Trustees concluded that the breakpoint and the group fee waiver were sufficient to allow the Fund to benefit from economies of scale as its assets and overall complex assets grow.
The Trustees also considered information prepared by MFS relating to MFS’ costs and profits with respect to the Fund, the MFS Funds considered as a group, and other investment companies and accounts advised by MFS, as well as MFS’ methodologies used to determine and allocate its costs to the MFS Funds, the Fund and other accounts and products for purposes of estimating profitability.
After reviewing these and other factors described herein, the Trustees concluded, within the context of their overall conclusions regarding the investment advisory agreement, that the advisory fees charged to the Fund represent reasonable compensation in light of the services being provided by MFS to the Fund.
In addition, the Trustees considered MFS’ resources and related efforts to continue to retain, attract and motivate capable personnel to serve the Fund. The Trustees also considered current and developing conditions in the financial services industry, including the presence of large and well-capitalized companies which are spending, and appear to be prepared to continue to spend, substantial sums to engage personnel and to provide services to competing investment companies. In this regard, the Trustees also considered the financial resources of MFS and its ultimate parent, Sun Life Financial Inc. The Trustees also considered the advantages and possible disadvantages to the Fund of having an adviser that also serves other investment companies as well as other accounts.
The Trustees also considered the nature, quality, cost, and extent of administrative, transfer agency, and distribution services provided to the Fund by MFS and its affiliates under agreements and plans other than the investment advisory agreement, including any 12b-1 fees the Fund pays to MFS Fund Distributors, Inc., an affiliate of MFS. The Trustees also considered the nature, extent and quality of certain other services MFS performs or arranges for on the Fund’s behalf, which may include securities lending programs, directed expense payment programs, class action recovery programs, and MFS’ interaction with third-party service providers, principally custodians and sub-custodians. The Trustees concluded that the various non-advisory services provided by MFS and its affiliates on behalf of the Fund were satisfactory.
The Trustees also considered benefits to MFS from the use of the Fund’s portfolio brokerage commissions, if applicable, to pay for investment research and various other factors. Additionally, the Trustees considered so-called “fall-out benefits” to MFS such as reputational value derived from serving as investment manager to the Fund.
Based on their evaluation of factors that they deemed to be material, including those factors described above, the Board of Trustees, including the independent Trustees, concluded that the Fund’s investment advisory agreement with MFS should be continued for an additional one-year period, commencing August 1, 2016.
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PROXY VOTING POLICIES AND INFORMATION
MFS votes proxies on behalf of the fund pursuant to proxy voting policies and procedures that are available without charge, upon request, by calling 1-800-225-2606, by visiting mfs.com (once you have selected “Individual Investor” as your role, click on “Individual Investor Home” in the top navigation and then select “Learn More About Proxy Voting” under the “I want to…” header on the left hand column of the page), or by visiting the SEC’s Web site at http://www.sec.gov.
Information regarding how the fund voted proxies relating to portfolio securities during the most recent twelve-month period ended June 30 is available by August 31 of each year without charge by visiting mfs.com (once you have selected “Individual Investor” as your role, click on “Individual Investor Home” in the top navigation and then select “Learn More About Proxy Voting” under the “I want to…” header on the left hand column of the page), or by visiting the SEC’s Web site at http://www.sec.gov.
QUARTERLY PORTFOLIO DISCLOSURE
The fund will file a complete schedule of portfolio holdings with the Securities and Exchange Commission (the Commission) for the first and third quarters of each fiscal year on Form N-Q. The fund’s Form N-Q is available on the EDGAR database on the Commission’s Internet Web site at http://www.sec.gov, and may be reviewed and copied at the:
Public Reference Room
Securities and Exchange Commission
100 F Street, NE, Room 1580
Washington, D.C. 20549
Information on the operation of the Public Reference Room may be obtained by calling the Commission at 1-800-SEC-0330. Copies of the fund’s Form N-Q also may be obtained, upon payment of a duplicating fee, by electronic request at the following e-mail address: publicinfo@sec.gov or by writing the Public Reference Section at the above address.
From time to time, MFS may post important information about the fund or the MFS funds on the MFS web site (mfs.com). This information is available on mfs.com by following these steps once you have selected “Individual Investor” as your role: (1) Click on the “Individual Investor Home” in the top navigation and then select the “Announcements” option within the “Market Outlooks” drop down, or (2) Click on “Products & Services” and “Variable Insurance Portfolios” and then select the fund’s name.
INFORMATION ABOUT FUND CONTRACTS AND LEGAL CLAIMS
The fund has entered into contractual arrangements with an investment adviser, administrator, distributor, shareholder servicing agent, 529 program manager (if applicable), and custodian who each provide services to the fund. Unless expressly stated otherwise, shareholders are not parties to, or intended beneficiaries of these contractual arrangements, and these contractual arrangements are not intended to create any shareholder right to enforce them against the service providers or to seek any remedy under them against the service providers, either directly or on behalf of the fund.
Under the Trust’s By-Laws and Declaration of Trust, any claims asserted against or on behalf of the MFS Funds, including claims against Trustees and Officers, must be brought in state and federal courts located within the Commonwealth of Massachusetts.
FEDERAL TAX INFORMATION (unaudited)
The following information is provided pursuant to provisions of the Internal Revenue Code.
The fund designates $3,082,000 as capital gain dividends paid during the fiscal year.
For corporate shareholders, 91.31% of the ordinary income dividends paid during the fiscal year qualify for the corporate dividends received deduction.
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rev. 3/16
FACTS | WHAT DOES MFS DO WITH YOUR PERSONAL INFORMATION? |
Why? | Financial companies choose how they share your personal information. Federal law gives consumers the right to limit some but not all sharing. Federal law also requires us to tell you how we collect, share, and protect your personal information. Please read this notice carefully to understand what we do. |
What? | The types of personal information we collect and share depend on the product or service you have with us. This information can include:
• Social Security number and account balances • Account transactions and transaction history • Checking account information and wire transfer instructions
When you are no longer our customer, we continue to share your information as described in this notice. |
How? | All financial companies need to share customers’ personal information to run their everyday business. In the section below, we list the reasons financial companies can share their customers’ personal information; the reasons MFS chooses to share; and whether you can limit this sharing. |
Reasons we can share your personal information | Does MFS share? | Can you limit this sharing? | ||
For our everyday business purposes – such as to process your transactions, maintain your account(s), respond to court orders and legal investigations, or report to credit bureaus | Yes | No | ||
For our marketing purposes – to offer our products and services to you | No | We don’t share | ||
For joint marketing with other financial companies | No | We don’t share | ||
For our affiliates’ everyday business purposes – information about your transactions and experiences | No | We don’t share | ||
For our affiliates’ everyday business purposes – information about your creditworthiness | No | We don’t share | ||
For nonaffiliates to market to you | No | We don’t share |
Questions? | Call 800-225-2606 or go to mfs.com. |
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Page 2 |
Who we are | ||
Who is providing this notice? | MFS Funds, MFS Investment Management, MFS Institutional Advisors, Inc., and MFS Heritage Trust Company. |
What we do | ||
How does MFS protect my personal information? | To protect your personal information from unauthorized access and use, we use security measures that comply with federal law. These measures include procedural, electronic, and physical safeguards for the protection of the personal information we collect about you. | |
How does MFS collect my personal information? | We collect your personal information, for example, when you
• open an account or provide account information • direct us to buy securities or direct us to sell your securities • make a wire transfer
We also collect your personal information from others, such as credit bureaus, affiliates, or other companies. | |
Why can’t I limit all sharing? | Federal law gives you the right to limit only
• sharing for affiliates’ everyday business purposes – information about your creditworthiness • affiliates from using your information to market to you • sharing for nonaffiliates to market to you
State laws and individual companies may give you additional rights to limit sharing. |
Definitions | ||
Affiliates | Companies related by common ownership or control. They can be financial and nonfinancial companies.
• MFS does not share personal information with affiliates, except for everyday business purposes as described on page one of this notice. | |
Nonaffiliates | Companies not related by common ownership or control. They can be financial and nonfinancial companies.
• MFS does not share with nonaffiliates so they can market to you. | |
Joint marketing | A formal agreement between nonaffiliated financial companies that together market financial products or services to you.
• MFS doesn’t jointly market. |
Other important information | ||
If you own an MFS product or receive an MFS service in the name of a third party such as a bank or broker-dealer, their privacy policy may apply to you instead of ours. |
27
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Table of Contents
ANNUAL REPORT
December 31, 2016
MFS® GROWTH SERIES
MFS® Variable Insurance Trust
VEG-ANN
Table of Contents
MFS® GROWTH SERIES
The report is prepared for the general information of contract owners. It is authorized for distribution to prospective investors only when preceded or accompanied by a current prospectus.
NOT FDIC INSURED • MAY LOSE VALUE • NO BANK OR CREDIT UNION GUARANTEE • NOT A DEPOSIT • NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY OR NCUA/NCUSIF
Table of Contents
MFS Growth Series
LETTER FROM THE EXECUTIVE CHAIRMAN
Dear Contract Owners:
Despite June’s unexpected vote by the United Kingdom to leave the European Union and the surprising result in November’s U.S. presidential election, most markets have proved resilient. U.S. share prices quickly reversed post-Brexit declines, and indices reached new highs following the November elections. U.S. bond yields rose after Donald Trump’s victory on hopes that his proposed policy mix of lower taxes, increased spending on infrastructure and a lower regulatory burden on businesses will lift both U.S. economic growth and inflation. However, interest rates in most developed markets remain very low, with major central banks maintaining extremely accommodative monetary policies to reinvigorate slow-growing economies against a backdrop of still-low inflation. Even after the rise in yields following the election, interest rates remain low by historical standards.
Globally, economic growth has shown signs of recovery of late, led by the United States and the eurozone. Despite better growth, there are few immediate signs of worrisome inflation. Emerging market economies are recovering at a somewhat slower pace amid fears that restrictive U.S. trade policies could further hamper the already slow pace of global trade growth.
At MFS®, we believe in a patient, long-term approach to investing. Viewing investments with a long lens makes it possible to filter out short-term market noise and focus on achieving solid risk-adjusted returns over a full market cycle.
In our view, such an approach, along with the professional guidance of a financial advisor, will help you reach your investment objectives.
Respectfully,
Robert J. Manning
Executive Chairman
MFS Investment Management
February 15, 2017
The opinions expressed in this letter are subject to change and may not be relied upon for investment advice. No forecasts can be guaranteed.
1
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MFS Growth Series
Portfolio structure
Top ten holdings | ||||
Facebook, Inc., “A” | 4.4% | |||
Amazon.com, Inc. | 4.2% | |||
Alphabet, Inc., “A” | 3.9% | |||
Visa, Inc., “A” | 3.7% | |||
Microsoft Corp. | 3.6% | |||
Alphabet, Inc., “C” | 2.7% | |||
MasterCard, Inc., “A” | 2.7% | |||
Adobe Systems, Inc. | 2.6% | |||
American Tower Corp., REIT | 2.5% | |||
Thermo Fisher Scientific, Inc. | 2.2% |
Equity sectors | ||||
Technology | 25.1% | |||
Health Care | 14.1% | |||
Retailing | 12.7% | |||
Financial Services | 11.1% | |||
Leisure | 8.2% | |||
Special Products & Services | 7.9% | |||
Consumer Staples | 5.2% | |||
Industrial Goods & Services | 4.5% | |||
Autos & Housing | 3.3% | |||
Utilities & Communications | 2.5% | |||
Transportation | 2.0% | |||
Energy | 1.3% | |||
Basic Materials | 1.2% |
Cash & Cash Equivalents includes any cash, investments in money market funds, short-term securities, and other assets less liabilities. Please see the Statement of Assets and Liabilities for additional information related to the fund’s cash position and other assets and liabilities.
Percentages are based on net assets as of 12/31/16.
The portfolio is actively managed and current holdings may be different.
2
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MFS Growth Series
Summary of Results
For the twelve months ended December 31, 2016, Initial Class shares of the MFS Growth Series (“fund”) provided a total return of 2.44%, while Service Class shares of the fund provided a total return of 2.18%. These compare with a return of 7.08% over the same period for the fund’s benchmark, the Russell 1000® Growth Index.
Market Environment
Sluggish global growth weighed on both developed and emerging market (“EM”) economies during much of the reporting period, though signs of improved growth became evident in late 2016. The US Federal Reserve increased interest rates by 25 basis points at the end of the period, the second hike of the cycle which began in December 2015. Globally, however, central bank policy remained highly accommodative, which forced many government, and even some corporate, bond yields into negative territory during the period. During the first half of the period, the United Kingdom voted to leave the European Union (“EU”), beginning a multi-year process of negotiation in order to achieve “Brexit.” While markets initially reacted to the vote with alarm, the spillover to European and EM economies was relatively short-lived, although risks of further hits to EU cohesiveness could re-emerge. Late in the period, the surprising US presidential election outcome prompted a significant rally in equities and a rise in bond yields in anticipation of a reflationary policy mix from the incoming Trump administration.
Headwinds from lower energy and commodity prices, which had spread beyond the energy, materials and industrial sectors early in the reporting period, abated later in the period as stabilizing oil prices helped push energy earnings higher relative to expectations. A sharp rise in the US dollar was a headwind for multinationals late in the period. The sharp rise in the US dollar also weighed on earnings. US consumer spending held up well during the second half of the period amid a modest increase in real wages and relatively low gasoline prices. Demand for autos reached near-record territory, while the housing market continued its recovery. Slow global trade continued to mirror slow global growth, particularly for many EM countries. That said, EM countries began to show signs of a modest upturn in activity along with adjustment in their external accounts. These improved conditions appeared to have reassured investors and contributed to record inflows into the asset class during July and August as negative yields for an increasing share of developed market bonds drove yield-hungry investors further out on the risk spectrum. Similar investor inflows were experienced in the investment grade and high yield corporate markets. Late in the reporting period, however, new challenges emerged for emerging markets debt (“EMD”) as a result of the US presidential election, which raised concerns about the potential for a protectionist turn in US trade policy which could negatively impact EM economies. These concerns, along with rising expectations for US growth, inflation and interest rates, have turned the tables on flows into EMD. Since the election, flows have reversed. As of the end of the period, the markets seemed to be in “wait-and-see” mode, looking for evidence to either confirm or refute the repricing of risk that has occurred since Election Day.
Detractors from Performance
Stock selection and an underweight position in the industrial goods & services sector detracted from performance relative to the Russell 1000® Growth Index. However, there were no stocks within this sector that were among the fund’s top relative detractors over the reporting period.
Security selection and, to a lesser extent, an overweight position in the technology sector hindered relative performance. The fund’s overweight positions in business-oriented social networking service LinkedIn (h) and relationship management software company Salesforce.com held back relative results. Additionally, underweight positions in software giant Microsoft and computer and personal electronics maker Apple also weighed on relative performance.
Stock selection and an overweight position in the health care sector further detracted from relative performance. Overweight positions in biopharmaceutical company Alexion Pharmaceuticals, eye care and skin care products company Allergan and biotechnology company Regeneron Pharmaceuticals held back relative returns. Shares of Alexion Pharmaceuticals depreciated during the period after earnings results fell short of market expectations, driven by weak sales from the company’s blood disorder drug, Soliris. Not holding a position in strong-performing health insurance and Medicare/Medicaid provider UnitedHealth Group and the fund’s position in medical device maker Medtronic (b) further hampered relative returns.
Security selection and, to a lesser extent, an underweight position in the consumer staples sector also detracted from relative performance. There were no stocks within this sector that were among the fund’s top relative detractors over the reporting period.
Elsewhere, not holding shares of telecommunications company Verizon Communications further detracted from relative results.
Contributors to Performance
Stock selection in the retailing sector contributed to relative performance. The fund’s overweight position in discount retailer Ross Stores, and an underweight position in drugstore retailer CVS Health Corp, benefited relative results. Shares of Ross Stores rose during the period after the company published results that were above market expectations driven by an improvement in the company’s gross margin and growth in comparable store sales.
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MFS Growth Series
Management Review – continued
Stock selection in the autos & housing sector also aided relative performance. An overweight position in strong-performing construction aggregates producer Vulcan Materials bolstered relative results.
Stocks in other sectors that contributed to relative performance included overweight positions in computer graphics company NVIDIA Corp, financial services firm Charles Schwab, industrial and consumer products and services company Danaher and analog semiconductor manufacturer Broadcom. Shares of computer graphics company NVIDIA Corp appreciated throughout the period after the company reported earnings results that beat consensus expectations driven by growth in all product segments, most notably in Deep Learning and Pascal based products. An underweight position in biotech firm Gilead Sciences (h), and not holding shares of biotechnology medicine company Amgen and pharmacy benefit management company Express Scripts, further contributed to relative results.
Respectfully,
Eric Fischman | Matthew Sabel | |
Portfolio Manager | Portfolio Manager |
(b) | Security is not a benchmark constituent. |
(h) | Security was not held in the portfolio at period end. |
The views expressed in this report are those of the portfolio managers only through the end of the period of the report as stated on the cover and do not necessarily reflect the views of MFS or any other person in the MFS organization. These views are subject to change at any time based on market or other conditions, and MFS disclaims any responsibility to update such views. These views may not be relied upon as investment advice or an indication of trading intent on behalf of any MFS portfolio. References to specific securities are not recommendations of such securities, and may not be representative of any MFS portfolio’s current or future investments.
4
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MFS Growth Series
PERFORMANCE SUMMARY THROUGH 12/31/16
The following chart illustrates the historical performance of the fund in comparison to its benchmark(s). Benchmarks are unmanaged and may not be invested in directly. Benchmark returns do not reflect any fees or expenses. The performance of other share classes will be greater than or less than that of the class depicted below. (See Notes to Performance Summary.)
Performance data shown represents past performance and is no guarantee of future results. Investment return and principal value fluctuate so your units, when sold, may be worth more or less than the original cost; current performance may be lower or higher than quoted. The performance shown does not reflect the deduction of taxes, if any, that a contract holder would pay on fund distributions or the redemption of contract units. The returns for the fund shown also do not reflect the deduction of expenses associated with variable products, such as mortality and expense risk charges, separate account charges, and sales charges imposed by the insurance company separate accounts. Such expenses would reduce the overall returns shown.
Growth of a Hypothetical $10,000 Investment
Total Returns through 12/31/16
Average annual total returns
Share Class | Class Inception Date | 1-yr | 5-yr | 10-yr | ||||||||
Initial Class | 7/24/95 | 2.44% | 14.04% | 8.75% | ||||||||
Service Class | 5/01/00 | 2.18% | 13.75% | 8.49% | ||||||||
Comparative benchmark | ||||||||||||
Russell 1000® Growth Index (f) | 7.08% | 14.50% | 8.33% |
(f) | Source: FactSet Research Systems Inc. |
Benchmark Definition
Russell 1000® Growth Index – constructed to provide a comprehensive barometer for growth securities in the large-cap segment of the U.S. equity universe. Companies in this index generally have higher price-to-book ratios and higher forecasted growth values. The Russell 1000® Growth Index is a trademark/service mark of the Frank Russell Company. Russell® is a trademark of the Frank Russell Company.
It is not possible to invest directly in an index.
Notes to Performance Summary
Average annual total return represents the average annual change in value for each share class for the periods presented.
Performance results reflect any applicable expense subsidies and waivers in effect during the periods shown. Without such subsidies and waivers the fund’s performance results would be less favorable. Please see the prospectus and financial statements for complete details. All results are historical and assume the reinvestment of any dividends and capital gains distributions.
Performance results do not include adjustments made for financial reporting purposes in accordance with U.S. generally accepted accounting principles and may differ from amounts reported in the financial highlights.
From time to time the fund may receive proceeds from litigation settlements, without which performance would be lower.
5
Table of Contents
MFS Growth Series
Fund Expenses Borne by the Contract Holders during the Period,
July 1, 2016 through December 31, 2016
As a contract holder of the fund, you incur ongoing costs, including management fees; distribution and/or service (12b-1) fees; and other fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the fund and to compare these costs with the ongoing costs of investing in other mutual funds.
The example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period July 1, 2016 through December 31, 2016.
Actual Expenses
The first line for each share class in the following table provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled “Expenses Paid During Period” to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line for each share class in the following table provides information about hypothetical account values and hypothetical expenses based on the fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight the fund’s ongoing costs only and do not take into account the fees and expenses imposed under the variable contracts through which your investment in the fund is made. Therefore, the second line for each share class in the table is useful in comparing ongoing costs associated with an investment in vehicles (such as the fund) which fund benefits under variable annuity and variable life insurance contracts and to qualified pension and retirement plans only, and will not help you determine the relative total costs of investing in the fund through variable annuity and variable life insurance contracts. If the fees and expenses imposed under the variable contracts were included, your costs would have been higher.
Share Class | Annualized Expense Ratio | Beginning Account Value 7/01/16 | Ending Account Value 12/31/16 | Expenses Paid During Period (p) 7/01/16-12/31/16 | ||||||||||||||
Initial Class | Actual | 0.73% | $1,000.00 | $1,023.66 | $3.71 | |||||||||||||
Hypothetical (h) | 0.73% | $1,000.00 | $1,021.47 | $3.71 | ||||||||||||||
Service Class | Actual | 0.97% | $1,000.00 | $1,022.31 | $4.93 | |||||||||||||
Hypothetical (h) | 0.97% | $1,000.00 | $1,020.26 | $4.93 |
(h) | 5% class return per year before expenses. |
(p) | “Expenses Paid During Period” are equal to each class’s annualized expense ratio, as shown above, multiplied by the average account value over the period, multiplied by 184/366 (to reflect the one-half year period). |
Notes to Expense Table
Expense ratios reflect a one-time Reimbursement of Expenses by Custodian of 0.03% (See Note 2 of the Notes to Financial Statements).
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MFS Growth Series
PORTFOLIO OF INVESTMENTS – 12/31/16
The Portfolio of Investments is a complete list of all securities owned by your fund. It is categorized by broad-based asset classes.
Issuer | Shares/Par | Value ($) | ||||||
COMMON STOCKS – 99.1% | ||||||||
Aerospace – 0.6% | ||||||||
Honeywell International, Inc. | 77,271 | $ | 8,951,845 | |||||
|
| |||||||
Alcoholic Beverages – 1.8% | �� | |||||||
Constellation Brands, Inc., “A” | 139,033 | $ | 21,315,149 | |||||
Pernod Ricard S.A. | 34,371 | 3,724,798 | ||||||
|
| |||||||
$ | 25,039,947 | |||||||
|
| |||||||
Apparel Manufacturers – 1.2% | ||||||||
NIKE, Inc., “B” | 295,232 | $ | 15,006,643 | |||||
VF Corp. | 26,114 | 1,393,182 | ||||||
|
| |||||||
$ | 16,399,825 | |||||||
|
| |||||||
Automotive – 0.5% | ||||||||
LKQ Corp. (a) | 229,848 | $ | 7,044,841 | |||||
|
| |||||||
Biotechnology – 2.7% | ||||||||
Alexion Pharmaceuticals, Inc. (a) | 29,510 | $ | 3,610,549 | |||||
Biomarin Pharmaceutical, Inc. (a) | 50,686 | 4,198,828 | ||||||
Celgene Corp. (a) | 199,425 | 23,083,444 | ||||||
Regeneron Pharmaceuticals, Inc. (a) | 20,157 | 7,399,433 | ||||||
|
| |||||||
$ | 38,292,254 | |||||||
|
| |||||||
Brokerage & Asset Managers – 3.3% | ||||||||
Blackstone Group LP | 49,284 | $ | 1,332,140 | |||||
Charles Schwab Corp. | 506,078 | 19,974,899 | ||||||
Intercontinental Exchange, Inc. | 456,030 | 25,729,213 | ||||||
|
| |||||||
$ | 47,036,252 | |||||||
|
| |||||||
Business Services – 6.2% | ||||||||
Cognizant Technology Solutions Corp., “A” (a) | 242,164 | $ | 13,568,449 | |||||
Equifax, Inc. | 98,595 | 11,656,887 | ||||||
Fidelity National Information Services, Inc. | 117,708 | 8,903,433 | ||||||
Fiserv, Inc. (a) | 211,026 | 22,427,843 | ||||||
FleetCor Technologies, Inc. (a) | 118,381 | 16,753,279 | ||||||
PayPal Holdings, Inc. (a) | 89,251 | 3,522,737 | ||||||
Verisk Analytics, Inc., “A” (a) | 141,101 | 11,453,168 | ||||||
|
| |||||||
$ | 88,285,796 | |||||||
|
| |||||||
Cable TV – 1.5% | ||||||||
Comcast Corp., “A” | 300,837 | $ | 20,772,795 | |||||
|
| |||||||
Chemicals – 0.7% | ||||||||
Monsanto Co. | 97,698 | $ | 10,278,807 | |||||
|
| |||||||
Computer Software – 9.4% | ||||||||
Adobe Systems, Inc. (a) | 354,428 | $ | 36,488,363 | |||||
Akamai Technologies, Inc. (a) | 26,556 | 1,770,754 | ||||||
Intuit, Inc. | 149,060 | 17,083,767 | ||||||
Microsoft Corp. | 821,089 | 51,022,470 | ||||||
Sabre Corp. | 222,191 | 5,543,665 | ||||||
Salesforce.com, Inc. (a) | 310,246 | 21,239,441 | ||||||
|
| |||||||
$ | 133,148,460 | |||||||
|
| |||||||
Computer Software – Systems – 1.7% | ||||||||
Apple, Inc. | 212,607 | $ | 24,624,143 | |||||
|
|
Issuer | Shares/Par | Value ($) | ||||||
COMMON STOCKS – continued | ||||||||
Construction – 2.8% | ||||||||
Sherwin-Williams Co. | 71,554 | $ | 19,229,422 | |||||
Vulcan Materials Co. | �� | 166,270 | 20,808,691 | |||||
|
| |||||||
$ | 40,038,113 | |||||||
|
| |||||||
Consumer Products – 1.5% | ||||||||
Colgate-Palmolive Co. | 196,574 | $ | 12,863,803 | |||||
Estee Lauder Cos., Inc., “A” | 99,844 | 7,637,068 | ||||||
|
| |||||||
$ | 20,500,871 | |||||||
|
| |||||||
Consumer Services – 1.6% | ||||||||
Priceline Group, Inc. (a) | 15,743 | $ | 23,080,183 | |||||
|
| |||||||
Electrical Equipment – 1.9% | ||||||||
AMETEK, Inc. | 178,735 | $ | 8,686,521 | |||||
Amphenol Corp., “A” | 158,395 | 10,644,144 | ||||||
Fortive Corp. | 146,446 | 7,853,899 | ||||||
|
| |||||||
$ | 27,184,564 | |||||||
|
| |||||||
Electronics – 2.9% | ||||||||
Broadcom Corp. | 132,327 | $ | 23,391,444 | |||||
NVIDIA Corp. | 170,411 | 18,189,670 | ||||||
|
| |||||||
$ | 41,581,114 | |||||||
|
| |||||||
Energy – Independent – 1.3% | ||||||||
Concho Resources, Inc. (a) | 60,022 | $ | 7,958,917 | |||||
Pioneer Natural Resources Co. | 57,924 | 10,430,375 | ||||||
|
| |||||||
$ | 18,389,292 | |||||||
|
| |||||||
Entertainment – 1.3% | ||||||||
Netflix, Inc. (a) | 146,769 | $ | 18,170,002 | |||||
|
| |||||||
Food & Beverages – 2.0% | ||||||||
Danone S.A. | 102,369 | $ | 6,479,482 | |||||
Mead Johnson Nutrition Co., “A” | 71,229 | 5,040,164 | ||||||
Mondelez International, Inc. | 164,132 | 7,275,972 | ||||||
Monster Beverage Corp. (a) | 199,288 | 8,836,430 | ||||||
|
| |||||||
$ | 27,632,048 | |||||||
|
| |||||||
Food & Drug Stores – 0.1% | ||||||||
CVS Health Corp. | 24,565 | $ | 1,938,424 | |||||
|
| |||||||
Gaming & Lodging – 0.8% | ||||||||
Marriott International, Inc., “A” | 128,913 | $ | 10,658,527 | |||||
|
| |||||||
General Merchandise – 2.5% | ||||||||
Costco Wholesale Corp. | 103,362 | $ | 16,549,290 | |||||
Dollar Tree, Inc. (a) | 252,349 | 19,476,296 | ||||||
|
| |||||||
$ | 36,025,586 | |||||||
|
| |||||||
Insurance – 0.8% | ||||||||
Aon PLC | 94,981 | $ | 10,593,231 | |||||
|
| |||||||
Internet – 11.0% | ||||||||
Alphabet, Inc., “A” (a) | 69,813 | $ | 55,323,312 | |||||
Alphabet, Inc., “C” (a) | 50,118 | 38,682,075 | ||||||
Facebook, Inc., “A” (a) | 540,517 | 62,186,481 | ||||||
|
| |||||||
$ | 156,191,868 | |||||||
|
|
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MFS Growth Series
Portfolio of Investments – continued
Issuer | Shares/Par | Value ($) | ||||||
COMMON STOCKS – continued | ||||||||
Leisure & Toys – 2.3% | ||||||||
Activision Blizzard, Inc. | 364,209 | $ | 13,151,587 | |||||
Electronic Arts, Inc. (a) | 243,291 | 19,161,599 | ||||||
|
| |||||||
$ | 32,313,186 | |||||||
|
| |||||||
Machinery & Tools – 2.0% | ||||||||
Flowserve Corp. | 154,650 | $ | 7,430,933 | |||||
Roper Technologies, Inc. | 82,691 | 15,139,068 | ||||||
Xylem, Inc. | 106,576 | 5,277,644 | ||||||
|
| |||||||
$ | 27,847,645 | |||||||
|
| |||||||
Major Banks – 0.6% | ||||||||
Goldman Sachs Group, Inc. | 29,588 | $ | 7,084,847 | |||||
Morgan Stanley | 33,472 | 1,414,192 | ||||||
|
| |||||||
$ | 8,499,039 | |||||||
|
| |||||||
Medical & Health Technology & Services – 0.2% | ||||||||
McKesson Corp. | 19,389 | $ | 2,723,185 | |||||
|
| |||||||
Medical Equipment – 8.0% | ||||||||
Abbott Laboratories | 166,763 | $ | 6,405,367 | |||||
C.R. Bard, Inc. | 39,972 | 8,980,110 | ||||||
Cooper Cos., Inc. | 8,576 | 1,500,200 | ||||||
Danaher Corp. | 359,034 | 27,947,207 | ||||||
Edwards Lifesciences Corp. (a) | 61,572 | 5,769,296 | ||||||
Medtronic PLC | 266,674 | 18,995,189 | ||||||
Stryker Corp. | 77,167 | 9,245,378 | ||||||
Thermo Fisher Scientific, Inc. | 222,103 | 31,338,733 | ||||||
VWR Corp. (a) | 145,144 | 3,632,954 | ||||||
|
| |||||||
$ | 113,814,434 | |||||||
|
| |||||||
Other Banks & Diversified Financials – 6.4% | ||||||||
Mastercard, Inc., “A” | 369,730 | $ | 38,174,623 | |||||
Visa, Inc., “A” | 679,470 | 53,012,249 | ||||||
|
| |||||||
$ | 91,186,872 | |||||||
|
| |||||||
Pharmaceuticals – 3.2% | ||||||||
Allergan PLC | 40,601 | $ | 8,526,616 | |||||
Bristol-Myers Squibb Co. | 215,817 | 12,612,345 | ||||||
Eli Lilly & Co. | 152,698 | 11,230,938 | ||||||
Zoetis, Inc. | 227,942 | 12,201,735 | ||||||
|
| |||||||
$ | 44,571,634 | |||||||
|
| |||||||
Railroad & Shipping – 2.0% | ||||||||
Canadian Pacific Railway Ltd. | 88,870 | $ | 12,687,970 | |||||
Union Pacific Corp. | 147,564 | 15,299,436 | ||||||
|
| |||||||
$ | 27,987,406 | |||||||
|
|
Issuer | Shares/Par | Value ($) | ||||||
COMMON STOCKS – continued | ||||||||
Restaurants – 2.4% | ||||||||
Aramark | 523,558 | $ | 18,701,492 | |||||
Starbucks Corp. | 284,653 | 15,803,935 | ||||||
|
| |||||||
$ | 34,505,427 | |||||||
|
| |||||||
Specialty Chemicals – 0.5% | ||||||||
Ecolab, Inc. | 50,254 | $ | 5,890,774 | |||||
Univar, Inc. (a) | 58,882 | 1,670,482 | ||||||
|
| |||||||
$ | 7,561,256 | |||||||
|
| |||||||
Specialty Stores – 8.9% | ||||||||
Amazon.com, Inc. (a) | 79,066 | $ | 59,289,221 | |||||
AutoZone, Inc. (a) | 15,162 | 11,974,796 | ||||||
Lululemon Athletica, Inc. (a) | 54,950 | 3,571,201 | ||||||
Ross Stores, Inc. | 385,661 | 25,299,362 | ||||||
TJX Cos., Inc. | 217,677 | 16,354,073 | ||||||
Tractor Supply Co. | 120,252 | 9,116,304 | ||||||
|
| |||||||
$ | 125,604,957 | |||||||
|
| |||||||
Telecommunications – Wireless – 2.5% | ||||||||
American Tower Corp., REIT | 334,324 | $ | 35,331,360 | |||||
|
| |||||||
Total Common Stocks (Identified Cost, $906,123,725) | $ | 1,403,805,189 | ||||||
|
| |||||||
MONEY MARKET FUNDS – 0.1% | ||||||||
MFS Institutional Money Market Portfolio, 0.51% (v) (Identifed Cost, $1,048,453) | 1,048,467 | $ | 1,048,467 | |||||
|
| |||||||
Total Investments (Identified Cost, $907,172,178) | $ | 1,404,853,656 | ||||||
|
| |||||||
OTHER ASSETS, LESS LIABILITIES – 0.8% | 10,837,179 | |||||||
|
| |||||||
NET ASSETS – 100.0% | $ | 1,415,690,835 | ||||||
|
|
(a) | Non-income producing security. |
(v) | Underlying affiliated fund that is available only to investment companies managed by MFS. The rate quoted for the MFS Institutional Money Market Portfolio is the annualized seven-day yield of the fund at period end. |
The following abbreviations are used in this report and are defined:
PLC | Public Limited Company |
REIT | Real Estate Investment Trust |
See Notes to Financial Statements
8
Table of Contents
MFS Growth Series
FINANCIAL STATEMENTS | STATEMENT OF ASSETS AND LIABILITIES
This statement represents your fund’s balance sheet, which details the assets and liabilities comprising the total value of the fund.
At 12/31/16 | ||||||||
Assets | ||||||||
Investments | ||||||||
Non-affiliated issuers, at value (identified cost, $906,123,725) | $1,403,805,189 | |||||||
Underlying affiliated funds, at value (identified cost, $1,048,453) | 1,048,467 | |||||||
Total investments, at value (identified cost, $907,172,178) | $1,404,853,656 | |||||||
Receivables for | ||||||||
Investments sold | 14,775,290 | |||||||
Fund shares sold | 305,697 | |||||||
Interest and dividends | 729,614 | |||||||
Total assets | $1,420,664,257 | |||||||
Liabilities | ||||||||
Payables for | ||||||||
Investments purchased | $2,361,354 | |||||||
Fund shares reacquired | 2,345,459 | |||||||
Payable to affiliates | ||||||||
Investment adviser | 85,309 | |||||||
Shareholder servicing costs | 1,470 | |||||||
Distribution and/or service fees | 4,875 | |||||||
Payable for independent Trustees’ compensation | 130 | |||||||
Accrued expenses and other liabilities | 174,825 | |||||||
Total liabilities | $4,973,422 | |||||||
Net assets | $1,415,690,835 | |||||||
Net assets consist of | ||||||||
Paid-in capital | $858,012,714 | |||||||
Unrealized appreciation (depreciation) on investments and translation of assets and liabilities in foreign currencies | 497,681,787 | |||||||
Accumulated net realized gain (loss) on investments and foreign currency | 58,647,558 | |||||||
Undistributed net investment income | 1,348,776 | |||||||
Net assets | $1,415,690,835 | |||||||
Shares of beneficial interest outstanding | 36,717,704 |
Net assets | Shares outstanding | Net asset value per share | ||||||||||
Initial Class | $1,179,822,062 | 30,439,548 | $38.76 | |||||||||
Service Class | 235,868,773 | 6,278,156 | 37.57 |
See Notes to Financial Statements
9
Table of Contents
MFS Growth Series
FINANCIAL STATEMENTS | STATEMENT OF OPERATIONS
This statement describes how much your fund earned in investment income and accrued in expenses. It also describes any gains and/or losses generated by fund operations.
Year ended 12/31/16 | ||||||||
Net investment income | ||||||||
Income | ||||||||
Dividends | $12,364,831 | |||||||
Interest | 31,823 | |||||||
Dividends from underlying affiliated funds | 55,573 | |||||||
Other | 23,454 | |||||||
Foreign taxes withheld | (64,889 | ) | ||||||
Total investment income | $12,410,792 | |||||||
Expenses | ||||||||
Management fee | $10,380,376 | |||||||
Distribution and/or service fees | 564,867 | |||||||
Shareholder servicing costs | 66,625 | |||||||
Administrative services fee | 234,390 | |||||||
Independent Trustees’ compensation | 29,784 | |||||||
Custodian fee | 106,932 | |||||||
Reimbursement of custodian expenses | (189,521 | ) | ||||||
Shareholder communications | 77,275 | |||||||
Audit and tax fees | 55,604 | |||||||
Legal fees | 14,164 | |||||||
Miscellaneous | 52,023 | |||||||
Total expenses | $11,392,519 | |||||||
Reduction of expenses by investment adviser | (102,472 | ) | ||||||
Net expenses | $11,290,047 | |||||||
Net investment income | $1,120,745 | |||||||
Realized and unrealized gain (loss) on investments and foreign currency | ||||||||
Realized gain (loss) (identified cost basis) | ||||||||
Investments: | ||||||||
Non-affiliated issuers | $59,897,713 | |||||||
Underlying affiliated funds | (69 | ) | ||||||
Foreign currency | (6,534 | ) | ||||||
Net realized gain (loss) on investments and foreign currency | $59,891,110 | |||||||
Change in unrealized appreciation (depreciation) | ||||||||
Investments | $(27,227,873 | ) | ||||||
Translation of assets and liabilities in foreign currencies | 300 | |||||||
Net unrealized gain (loss) on investments and foreign currency translation | $(27,227,573 | ) | ||||||
Net realized and unrealized gain (loss) on investments and foreign currency | $32,663,537 | |||||||
Change in net assets from operations | $33,784,282 |
See Notes to Financial Statements
10
Table of Contents
MFS Growth Series
FINANCIAL STATEMENTS | STATEMENTS OF CHANGES IN NET ASSETS
These statements describe the increases and/or decreases in net assets resulting from operations, any distributions, and any shareholder transactions.
For years ended 12/31 | 2016 | 2015 | ||||||
Change in net assets | ||||||||
From operations | ||||||||
Net investment income | $1,120,745 | $666,786 | ||||||
Net realized gain (loss) on investments and foreign currency | 59,891,110 | 88,419,457 | ||||||
Net unrealized gain (loss) on investments and foreign currency translation | (27,227,573 | ) | 22,003,421 | |||||
Change in net assets from operations | $33,784,282 | $111,089,664 | ||||||
Distributions declared to shareholders | ||||||||
From net investment income | $(536,744 | ) | $(1,996,599 | ) | ||||
From net realized gain on investments | (87,392,457 | ) | (84,334,297 | ) | ||||
Total distributions declared to shareholders | $(87,929,201 | ) | $(86,330,896 | ) | ||||
Change in net assets from fund share transactions | $(28,061,730 | ) | $(69,859,094 | ) | ||||
Total change in net assets | $(82,206,649 | ) | $(45,100,326 | ) | ||||
Net assets | ||||||||
At beginning of period | 1,497,897,484 | 1,542,997,810 | ||||||
At end of period (including undistributed net investment income of $1,348,776 and | $1,415,690,835 | $1,497,897,484 |
See Notes to Financial Statements
11
Table of Contents
MFS Growth Series
FINANCIAL STATEMENTS | FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the fund’s financial performance for the past 5 years. Certain information reflects financial results for a single fund share. The total returns in the table represent the rate by which an investor would have earned (or lost) on an investment in the fund share class (assuming reinvestment of all distributions) held for the entire period.
Initial Class | Years ended 12/31 | |||||||||||||||||||
2016 | 2015 | 2014 | 2013 | 2012 | ||||||||||||||||
Net asset value, beginning of period | $40.17 | $39.75 | $39.07 | $28.83 | $24.56 | |||||||||||||||
Income (loss) from investment operations | ||||||||||||||||||||
Net investment income (d) | $0.05 | (c) | $0.03 | $0.07 | $0.04 | $0.13 | ||||||||||||||
Net realized and unrealized gain (loss) on investments and | 1.01 | 2.73 | 3.33 | 10.53 | 4.14 | |||||||||||||||
Total from investment operations | $1.06 | $2.76 | $3.40 | $10.57 | $4.27 | |||||||||||||||
Less distributions declared to shareholders | ||||||||||||||||||||
From net investment income | $(0.02 | ) | $(0.07 | ) | $(0.04 | ) | $(0.08 | ) | $— | |||||||||||
From net realized gain on investments | (2.45 | ) | (2.27 | ) | (2.68 | ) | (0.25 | ) | — | |||||||||||
Total distributions declared to shareholders | $(2.47 | ) | $(2.34 | ) | $(2.72 | ) | $(0.33 | ) | $— | |||||||||||
Net asset value, end of period (x) | $38.76 | $40.17 | $39.75 | $39.07 | $28.83 | |||||||||||||||
Total return (%) (k)(r)(s)(x) | 2.44 | (c) | 7.56 | 8.94 | 36.85 | 17.39 | ||||||||||||||
Ratios (%) (to average net assets) and Supplemental data: | ||||||||||||||||||||
Expenses before expense reductions (f) | 0.75 | (c) | 0.76 | 0.76 | 0.77 | 0.82 | ||||||||||||||
Expenses after expense reductions (f) | 0.74 | (c) | 0.75 | 0.76 | 0.77 | 0.82 | ||||||||||||||
Net investment income | 0.12 | (c) | 0.08 | 0.18 | 0.13 | 0.45 | ||||||||||||||
Portfolio turnover | 24 | 31 | 36 | 43 | 52 | |||||||||||||||
Net assets at end of period (000 omitted) | $1,179,822 | $1,273,204 | $1,263,935 | $1,308,361 | $1,007,422 |
See Notes to Financial Statements
12
Table of Contents
MFS Growth Series
Financial Highlights – continued
Service Class | Years ended 12/31 | |||||||||||||||||||
2016 | 2015 | 2014 | 2013 | 2012 | ||||||||||||||||
Net asset value, beginning of period | $39.09 | $38.77 | $38.22 | $28.25 | $24.13 | |||||||||||||||
Income (loss) from investment operations | ||||||||||||||||||||
Net investment income (loss) (d) | $(0.05 | )(c) | $(0.07 | ) | $(0.02 | ) | $(0.04 | ) | $0.07 | |||||||||||
Net realized and unrealized gain (loss) on investments and | 0.98 | 2.66 | 3.25 | 10.30 | 4.05 | |||||||||||||||
Total from investment operations | $0.93 | $2.59 | $3.23 | $10.26 | $4.12 | |||||||||||||||
Less distributions declared to shareholders | ||||||||||||||||||||
From net investment income | $— | $— | $— | $(0.04 | ) | $— | ||||||||||||||
From net realized gain on investments | (2.45 | ) | (2.27 | ) | (2.68 | ) | (0.25 | ) | — | |||||||||||
Total distributions declared to shareholders | $(2.45 | ) | $(2.27 | ) | $(2.68 | ) | $(0.29 | ) | $— | |||||||||||
Net asset value, end of period (x) | $37.57 | $39.09 | $38.77 | $38.22 | $28.25 | |||||||||||||||
Total return (%) (k)(r)(s)(x) | 2.18 | (c) | 7.30 | 8.68 | 36.49 | 17.07 | ||||||||||||||
Ratios (%) (to average net assets) and Supplemental data: | ||||||||||||||||||||
Expenses before expense reductions (f) | 1.00 | (c) | 1.01 | 1.01 | 1.02 | 1.07 | ||||||||||||||
Expenses after expense reductions (f) | 0.99 | (c) | 1.00 | 1.01 | 1.02 | 1.07 | ||||||||||||||
Net investment income (loss) | (0.13 | )(c) | (0.16 | ) | (0.06 | ) | (0.12 | ) | 0.26 | |||||||||||
Portfolio turnover | 24 | 31 | 36 | 43 | 52 | |||||||||||||||
Net assets at end of period (000 omitted) | $235,869 | $224,694 | $279,063 | $242,216 | $134,247 |
(c) | Amount reflects a one-time reimbursement of expenses by the custodian (or former custodian) without which net investment income and performance would be lower and expenses would be higher. See Note 2 in the Notes to Financial Statements for additional information. |
(d) | Per share data is based on average shares outstanding. |
(f) | Ratios do not reflect reductions from fees paid indirectly, if applicable. |
(k) | The total return does not reflect expenses that apply to separate accounts. Inclusion of these charges would reduce the total return figures for all periods shown. |
(r) | Certain expenses have been reduced without which performance would have been lower. |
(s) | From time to time the fund may receive proceeds from litigation settlements, without which performance would be lower. |
(x) | The net asset values and total returns have been calculated on net assets which include adjustments made in accordance with U.S. generally accepted accounting principles required at period end for financial reporting purposes. |
See Notes to Financial Statements
13
Table of Contents
MFS Growth Series
(1) | Business and Organization |
MFS Growth Series (the fund) is a diversified series of MFS Variable Insurance Trust (the trust). The trust is organized as a Massachusetts business trust and is registered under the Investment Company Act of 1940, as amended, as an open-end management investment company. The shareholders of each series of the trust are separate accounts of insurance companies, which offer variable annuity and/or life insurance products, and qualified retirement and pension plans.
The fund is an investment company and accordingly follows the investment company accounting and reporting guidance of the Financial Accounting Standards Board (FASB) Accounting Standards Codification Topic 946 Financial Services – Investment Companies.
(2) | Significant Accounting Policies |
General – The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of increases and decreases in net assets from operations during the reporting period. Actual results could differ from those estimates. In the preparation of these financial statements, management has evaluated subsequent events occurring after the date of the fund’s Statement of Assets and Liabilities through the date that the financial statements were issued.
In October 2016, the Securities and Exchange Commission (SEC) released its Final Rule on Investment Company Reporting Modernization (the “Rule”). The Rule, which introduces two new regulatory reporting forms for investment companies – Form N-PORT and Form N-CEN – also contains amendments to Regulation S-X which impact financial statement presentation, particularly the presentation of derivative investments. Although still evaluating the impacts of the Rule, management believes that many of the Regulation S-X amendments are consistent with the fund’s current financial statement presentation and expects that the fund will be able to comply with the Rule’s Regulation S-X amendments by the August 1, 2017 compliance date.
Balance Sheet Offsetting – The fund’s accounting policy with respect to balance sheet offsetting is that, absent an event of default by the counterparty or a termination of the agreement, the International Swaps and Derivatives Association (ISDA) Master Agreement does not result in an offset of reported amounts of financial assets and financial liabilities in the Statement of Assets and Liabilities across transactions between the fund and the applicable counterparty. The fund’s right to setoff may be restricted or prohibited by the bankruptcy or insolvency laws of the particular jurisdiction to which a specific master netting agreement counterparty is subject. Balance sheet offsetting disclosures, to the extent applicable to the fund, have been included in the fund’s Significant Accounting Policies note under the captions for each of the fund’s in-scope financial instruments and transactions.
Investment Valuations – Equity securities, including restricted equity securities, are generally valued at the last sale or official closing price on their primary market or exchange as provided by a third-party pricing service. Equity securities, for which there were no sales reported that day, are generally valued at the last quoted daily bid quotation on their primary market or exchange as provided by a third-party pricing service. Short-term instruments with a maturity at issuance of 60 days or less may be valued at amortized cost, which approximates market value. Open-end investment companies are generally valued at net asset value per share. Securities and other assets generally valued on the basis of information from a third-party pricing service may also be valued at a broker/dealer bid quotation. Values obtained from third-party pricing services can utilize both transaction data and market information such as yield, quality, coupon rate, maturity, type of issue, trading characteristics, and other market data. The values of foreign securities and other assets and liabilities expressed in foreign currencies are converted to U.S. dollars using the mean of bid and asked prices for rates provided by a third-party pricing service.
The Board of Trustees has delegated primary responsibility for determining or causing to be determined the value of the fund’s investments (including any fair valuation) to the adviser pursuant to valuation policies and procedures approved by the Board. If the adviser determines that reliable market quotations are not readily available, investments are valued at fair value as determined in good faith by the adviser in accordance with such procedures under the oversight of the Board of Trustees. Under the fund’s valuation policies and procedures, market quotations are not considered to be readily available for most types of debt instruments and floating rate loans and many types of derivatives. These investments are generally valued at fair value based on information from third-party pricing services. In addition, investments may be valued at fair value if the adviser determines that an investment’s value has been materially affected by events occurring after the close of the exchange or market on which the investment is principally traded (such as foreign exchange or market) and prior to the determination of the fund’s net asset value, or after the halting of trading of a specific security where trading does not resume prior to the close of the exchange or market on which the security is principally traded. Events that occur on a frequent basis after foreign markets close (such as developments in foreign markets and significant movements in the U.S. markets) and prior to the determination of the fund’s net asset value may be deemed to have a material effect on the value of securities traded in foreign markets. Accordingly, the fund’s foreign equity securities may often be valued at fair value. The adviser generally relies on third-party pricing services or other information (such as the correlation with price movements of similar securities in the same or other markets; the type, cost and investment characteristics of the security; the
14
Table of Contents
MFS Growth Series
Notes to Financial Statements – continued
business and financial condition of the issuer; and trading and other market data) to assist in determining whether to fair value and at what value to fair value an investment. The value of an investment for purposes of calculating the fund’s net asset value can differ depending on the source and method used to determine value. When fair valuation is used, the value of an investment used to determine the fund’s net asset value may differ from quoted or published prices for the same investment. There can be no assurance that the fund could obtain the fair value assigned to an investment if it were to sell the investment at the same time at which the fund determines its net asset value per share.
Various inputs are used in determining the value of the fund’s assets or liabilities. These inputs are categorized into three broad levels. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an investment’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The fund’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the investment. Level 1 includes unadjusted quoted prices in active markets for identical assets or liabilities. Level 2 includes other significant observable market-based inputs (including quoted prices for similar securities, interest rates, prepayment speed, and credit risk). Level 3 includes unobservable inputs, which may include the adviser’s own assumptions in determining the fair value of investments. The following is a summary of the levels used as of December 31, 2016 in valuing the fund’s assets or liabilities:
Investments at Value | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Equity Securities: | ||||||||||||||||
United States | $1,380,912,939 | $— | $— | $1,380,912,939 | ||||||||||||
Canada | 12,687,970 | — | — | 12,687,970 | ||||||||||||
France | 3,724,798 | 6,479,482 | — | 10,204,280 | ||||||||||||
Mutual Funds | 1,048,467 | — | — | 1,048,467 | ||||||||||||
Total Investments | $1,398,374,174 | $6,479,482 | $— | $1,404,853,656 |
For further information regarding security characteristics, see the Portfolio of Investments.
Of the level 1 investments presented above, equity investments amounting to $3,724,798 would have been considered level 2 investments at the beginning of the period. The primary reason for changes in the classifications between levels 1 and 2 occurs when foreign equity securities are fair valued using other observable market-based inputs in place of the closing exchange price due to events occurring after the close of the exchange or market on which the investment is principally traded. The fund’s foreign equity securities may often be valued at fair value. The fund’s policy is to recognize transfers between the levels as of the end of the period.
Foreign Currency Translation – Purchases and sales of foreign investments, income, and expenses are converted into U.S. dollars based upon currency exchange rates prevailing on the respective dates of such transactions or on the reporting date for foreign denominated receivables and payables. Gains and losses attributable to foreign currency exchange rates on sales of securities are recorded for financial statement purposes as net realized gains and losses on investments. Gains and losses attributable to foreign exchange rate movements on receivables, payables, income and expenses are recorded for financial statement purposes as foreign currency transaction gains and losses. That portion of both realized and unrealized gains and losses on investments that results from fluctuations in foreign currency exchange rates is not separately disclosed.
Security Loans – Under its Securities Lending Agency Agreement with the fund, State Street Bank and Trust Company (“State Street”), as lending agent, loans the securities of the fund to certain qualified institutions (the “Borrowers”) approved by the fund. Security loans can be terminated at the discretion of either the lending agent or the fund and the related securities must be returned within the earlier of the standard trade settlement period for such securities or within three business days. The loans are collateralized by cash and/or U.S. Treasury and federal agency obligations in an amount typically at least equal to the market value of the securities loaned. On loans collateralized by cash, the cash collateral is invested in a money market fund. The market value of the loaned securities is determined at the close of business of the fund and any additional required collateral is delivered to the fund on the next business day. State Street provides the fund with indemnification against Borrower default. In the event of Borrower default, State Street will, for the benefit of the fund, either purchase securities identical to those loaned or, when such purchase is commercially impracticable, pay the fund the market value of the loaned securities. In return, State Street assumes the fund’s rights to the related collateral. If the collateral value is less than the cost to purchase identical securities, State Street is responsible for the shortfall, but only to the extent that such shortfall is not due to a decline in collateral value resulting from collateral reinvestment for which the fund bears the risk of loss. A portion of the income generated upon investment of the collateral is remitted to the Borrowers, and the remainder is allocated between the fund and the lending agent. On loans collateralized by U.S. Treasury and/or federal agency obligations, a fee is received from the Borrower, and is allocated between the fund and the lending agent. Income from securities lending is included in “Interest” income in the Statement of Operations. The dividend and interest income earned on the securities loaned is accounted for in the same manner as other dividend and interest income. At December 31, 2016 there were no securities on loan or collateral outstanding.
15
Table of Contents
MFS Growth Series
Notes to Financial Statements – continued
Indemnifications – Under the fund’s organizational documents, its officers and Trustees may be indemnified against certain liabilities and expenses arising out of the performance of their duties to the fund. Additionally, in the normal course of business, the fund enters into agreements with service providers that may contain indemnification clauses. The fund’s maximum exposure under these agreements is unknown as this would involve future claims that may be made against the fund that have not yet occurred.
Investment Transactions and Income – Investment transactions are recorded on the trade date. Interest income is recorded on the accrual basis. Dividends received in cash are recorded on the ex-dividend date. Certain dividends from foreign securities will be recorded when the fund is informed of the dividend if such information is obtained subsequent to the ex-dividend date. Dividend and interest payments received in additional securities are recorded on the ex-dividend or ex-interest date in an amount equal to the value of the security on such date.
The fund may receive proceeds from litigation settlements. Any proceeds received from litigation involving portfolio holdings are reflected in the Statement of Operations in realized gain/loss if the security has been disposed of by the fund or in unrealized gain/loss if the security is still held by the fund. Any other proceeds from litigation not related to portfolio holdings are reflected as other income in the Statement of Operations.
Reimbursement of Expenses by Custodian – In December 2015, the fund’s custodian (or former custodian), State Street Bank and Trust Company, announced that it intended to reimburse its asset servicing clients for expense amounts that it billed in error during the period 1998 through 2015. The amount of this one-time reimbursement attributable to the fund is reflected as “Reimbursement of custodian expenses” in the Statement of Operations.
Tax Matters and Distributions – The fund intends to qualify as a regulated investment company, as defined under Subchapter M of the Internal Revenue Code, and to distribute all of its taxable income, including realized capital gains. As a result, no provision for federal income tax is required. The fund’s federal tax returns, when filed, will remain subject to examination by the Internal Revenue Service for a three year period. Management has analyzed the fund’s tax positions taken on federal and state tax returns for all open tax years and does not believe that there are any uncertain tax positions that require recognition of a tax liability. Foreign taxes, if any, have been accrued by the fund in the accompanying financial statements in accordance with the applicable foreign tax law. Foreign income taxes may be withheld by certain countries in which the fund invests. Additionally, capital gains realized by the fund on securities issued in or by certain foreign countries may be subject to capital gains tax imposed by those countries.
Distributions to shareholders are recorded on the ex-dividend date. Income and capital gain distributions are determined in accordance with income tax regulations, which may differ from U.S. generally accepted accounting principles. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences which arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary overdistributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes.
Book/tax differences primarily relate to wash sale loss deferrals.
The tax character of distributions declared to shareholders for the last two fiscal years is as follows:
12/31/16 | 12/31/15 | |||||||
Ordinary income (including any short-term capital gains) | $536,744 | $3,791,361 | ||||||
Long-term capital gains | 87,392,457 | 82,539,535 | ||||||
Total distributions | $87,929,201 | $86,330,896 |
The federal tax cost and the tax basis components of distributable earnings were as follows:
As of 12/31/16 | ||||
Cost of investments | $909,113,744 | |||
Gross appreciation | 507,167,091 | |||
Gross depreciation | (11,427,179 | ) | ||
Net unrealized appreciation (depreciation) | $495,739,912 | |||
Undistributed ordinary income | 1,348,776 | |||
Undistributed long-term capital gain | 60,589,124 | |||
Other temporary differences | 309 |
Multiple Classes of Shares of Beneficial Interest – The fund offers multiple classes of shares, which differ in their respective distribution and/or service fees. The fund’s income, realized and unrealized gain (loss), and common expenses are allocated to shareholders based on the daily net assets of each class. Dividends are declared separately for each class. Differences in per share
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dividend rates are generally due to differences in separate class expenses. The fund’s distributions declared to shareholders as reported in the Statements of Changes in Net Assets are presented by class as follows:
From net investment income | From net realized gain on investments | |||||||||||||||
Year ended 12/31/16 | Year ended 12/31/15 | Year ended 12/31/16 | Year ended 12/31/15 | |||||||||||||
Initial Class | $536,744 | $1,996,599 | $73,219,360 | $69,480,678 | ||||||||||||
Service Class | — | — | 14,173,097 | 14,853,619 | ||||||||||||
Total | $536,744 | $1,996,599 | $87,392,457 | $84,334,297 |
(3) | Transactions with Affiliates |
Investment Adviser – The fund has an investment advisory agreement with MFS to provide overall investment management and related administrative services and facilities to the fund. The management fee is computed daily and paid monthly at the following annual rates:
First $1 billion of average daily net assets | 0.75% | |||
Average daily net assets in excess of $1 billion | 0.65% |
MFS has agreed in writing to reduce its management fee by a specified amount if certain MFS mutual fund assets exceed thresholds agreed to by MFS and the fund’s Board of Trustees. For the year ended December 31, 2016, this management fee reduction amounted to $102,472, which is included in the reduction of total expenses in the Statement of Operations. The management fee incurred for the year ended December 31, 2016 was equivalent to an annual effective rate of 0.71% of the fund’s average daily net assets.
Distributor – MFS Fund Distributors, Inc. (MFD), a wholly-owned subsidiary of MFS, is the distributor of shares of the fund. The Trustees have adopted a distribution plan for the Service Class shares pursuant to Rule 12b-1 under the Investment Company Act of 1940.
The fund’s distribution plan provides that the fund will pay MFD distribution and/or service fees equal to 0.25% per annum of its average daily net assets attributable to Service Class shares as partial consideration for services performed and expenses incurred by MFD and financial intermediaries (including participating insurance companies that invest in the fund to fund variable annuity and variable life insurance contracts, sponsors of qualified retirement and pension plans that invest in the fund, and affiliates of these participating insurance companies and plan sponsors) in connection with the sale and distribution of the Service Class shares. MFD may subsequently pay all, or a portion, of the distribution and/or service fees to financial intermediaries.
Shareholder Servicing Agent – MFS Service Center, Inc. (MFSC), a wholly-owned subsidiary of MFS, receives a fee from the fund for its services as shareholder servicing agent. For the year ended December 31, 2016, the fee was $60,627, which equated to 0.0042% annually of the fund’s average daily net assets. MFSC also receives payment from the fund for out-of-pocket expenses paid by MFSC on behalf of the fund. For the year ended December 31, 2016, these costs amounted to $5,998.
Administrator – MFS provides certain financial, legal, shareholder communications, compliance, and other administrative services to the fund. Under an administrative services agreement, the fund reimburses MFS the costs incurred to provide these services. The fund is charged an annual fixed amount of $17,500 plus a fee based on average daily net assets. The administrative services fee incurred for the year ended December 31, 2016 was equivalent to an annual effective rate of 0.0162% of the fund’s average daily net assets.
Trustees’ and Officers’ Compensation – The fund pays compensation to independent Trustees in the form of a retainer, attendance fees, and additional compensation to Board and Committee chairpersons. The fund does not pay compensation directly to Trustees or officers of the fund who are also officers of the investment adviser, all of whom receive remuneration for their services to the fund from MFS. Certain officers and Trustees of the fund are officers or directors of MFS, MFD, and MFSC.
Other – This fund and certain other funds managed by MFS (the funds) have entered into a service agreement (the ISO Agreement) which provides for payment of fees solely by the funds to Tarantino LLC in return for the provision of services of an Independent Senior Officer (ISO) for the funds. Frank L. Tarantino serves as the ISO and is an officer of the funds and the sole member of Tarantino LLC. The funds can terminate the ISO Agreement with Tarantino LLC at any time under the terms of the ISO Agreement. For the year ended December 31, 2016, the fee paid by the fund under this agreement was $2,865 and is included in “Miscellaneous” expense in the Statement of Operations. MFS has agreed to bear all expenses associated with office space, other administrative support, and supplies provided to the ISO.
The fund invests in the MFS Institutional Money Market Portfolio which is managed by MFS and seeks current income consistent with preservation of capital and liquidity. This money market fund does not pay a management fee to MFS.
The fund is permitted to engage in purchase and sale transactions (“cross-trades”) with funds and accounts for which MFS serves as investment adviser or sub-adviser pursuant to a policy adopted by the Board of Trustees. This policy has been designed to ensure that
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Notes to Financial Statements – continued
cross-trades conducted by the fund comply with Rule 17a-7 under the Investment Company Act of 1940. Under this policy, cross-trades are effected at current market prices with no remuneration paid in connection with the transaction. During the year ended December 31, 2016, the fund engaged in purchase and sale transactions pursuant to this policy, which amounted to $1,192,358 and $2,457,726, respectively. The sales transactions resulted in net realized gains of $503,278.
(4) | Portfolio Securities |
For the year ended December 31, 2016, purchases and sales of investments, other than short-term obligations, aggregated $339,701,092 and $455,067,091, respectively.
(5) | Shares of Beneficial Interest |
The fund’s Declaration of Trust permits the Trustees to issue an unlimited number of full and fractional shares of beneficial interest. Transactions in fund shares were as follows:
Year ended 12/31/16 | Year ended 12/31/15 | |||||||||||||||
Shares | Amount | Shares | Amount | |||||||||||||
Shares sold | ||||||||||||||||
Initial Class | 1,989,931 | $78,197,756 | 3,388,519 | $136,302,423 | ||||||||||||
Service Class | 1,439,886 | 54,565,058 | 1,353,238 | 53,496,981 | ||||||||||||
3,429,817 | $132,762,814 | 4,741,757 | $189,799,404 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | ||||||||||||||||
Initial Class | 1,821,123 | $72,808,498 | 1,948,915 | $70,687,159 | ||||||||||||
Service Class | 365,380 | 14,173,097 | 420,544 | 14,853,619 | ||||||||||||
2,186,503 | $86,981,595 | 2,369,459 | $85,540,778 | |||||||||||||
Shares reacquired | ||||||||||||||||
Initial Class | (5,065,894 | ) | $(199,678,497 | ) | (5,437,902 | ) | $(221,523,026 | ) | ||||||||
Service Class | (1,275,525 | ) | (48,127,642 | ) | (3,222,658 | ) | (123,676,250 | ) | ||||||||
(6,341,419 | ) | $(247,806,139 | ) | (8,660,560 | ) | $(345,199,276 | ) | |||||||||
Net change | ||||||||||||||||
Initial Class | (1,254,840 | ) | $(48,672,243 | ) | (100,468 | ) | $(14,533,444 | ) | ||||||||
Service Class | 529,741 | 20,610,513 | (1,448,876 | ) | (55,325,650 | ) | ||||||||||
(725,099 | ) | $(28,061,730 | ) | (1,549,344 | ) | $(69,859,094 | ) |
The fund is one of several mutual funds in which certain MFS funds may invest. The MFS funds do not invest in the underlying funds for the purpose of exercising management or control. At the end of the period, the MFS Moderate Allocation Portfolio, the MFS Growth Allocation Portfolio, and the MFS Conservative Allocation Portfolio were the owners of record of approximately 11%, 3%, and 3%, respectively, of the value of outstanding voting shares of the fund.
(6) | Line of Credit |
The fund and certain other funds managed by MFS participate in a $1.25 billion unsecured committed line of credit, subject to a $1 billion sublimit, provided by a syndication of banks under a credit agreement. Borrowings may be made for temporary financing needs. Interest is charged to each fund, based on its borrowings, generally at a rate equal to the higher of the Overnight Federal Reserve funds rate or daily one month LIBOR plus an agreed upon spread. A commitment fee, based on the average daily, unused portion of the committed line of credit, is allocated among the participating funds at the end of each calendar quarter. In addition, the fund and other funds managed by MFS have established unsecured uncommitted borrowing arrangements with certain banks for temporary financing needs. Interest is charged to each fund, based on its borrowings, at a rate equal to the Overnight Federal Reserve funds rate plus an agreed upon spread. For the year ended December 31, 2016, the fund’s commitment fee and interest expense were $9,024 and $0, respectively, and are included in “Miscellaneous” expense in the Statement of Operations.
(7) | Transactions in Underlying Affiliated Funds – Affiliated Issuers |
An affiliated issuer may be considered one in which the fund owns 5% or more of the outstanding voting securities, or a company which is under common control. For the purposes of this report, the fund assumes the following to be an affiliated issuer:
Underlying Affiliated Fund | Beginning Shares/Par Amount | Acquisitions Shares/Par Amount | Dispositions Shares/Par Amount | Ending Shares/Par Amount | ||||||||||||
MFS Institutional Money Market Portfolio | 13,301,115 | 202,163,790 | (214,416,438 | ) | 1,048,467 | |||||||||||
Underlying Affiliated Fund | Realized Gain (Loss) | Capital Gain Distributions | Dividend Income | Ending Value | ||||||||||||
MFS Institutional Money Market Portfolio | $(69 | ) | $— | $55,573 | $1,048,467 |
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MFS Growth Series
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Trustees of MFS Variable Insurance Trust and the Shareholders of MFS Growth Series:
We have audited the accompanying statement of assets and liabilities, including the portfolio of investments, of MFS Growth Series (one of the series of MFS Variable Insurance Trust) (the “Fund”) as of December 31, 2016, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended. These financial statements and financial highlights are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. The Fund is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of December 31, 2016, by correspondence with the custodian and brokers; when replies were not received from brokers, we performed other auditing procedures. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of MFS Growth Series as of December 31, 2016, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
February 15, 2017
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TRUSTEES AND OFFICERS – IDENTIFICATION AND BACKGROUND
The Trustees and Officers of the Trust, as of February 1, 2017, are listed below, together with their principal occupations during the past five years. (Their titles may have varied during that period.) The address of each Trustee and Officer is 111 Huntington Avenue, Boston, Massachusetts 02199-7618.
Name, Age | Position(s) with Fund | Trustee/Officer Since (h) | Principal Occupations During the Past Five Years | Other Directorships (j) | ||||
INTERESTED TRUSTEES | ||||||||
Robert J. Manning (k) (age 53) | Trustee | February 2004 | Massachusetts Financial Services Company, Executive Chairman (since January 2017) and Director; Chairman (until January 2017); Chief Executive Officer (until 2015); Co-Chief Executive Officer (2015-2016) | N/A | ||||
Robin A. Stelmach (k) (age 55) | Trustee | January 2014 | Massachusetts Financial Services Company, Vice Chair (since January 2017); Chief Operating Officer and Executive Vice President (until January 2017) | N/A | ||||
INDEPENDENT TRUSTEES | ||||||||
David H. Gunning (age 74) | Trustee and Chair of Trustees | January 2004 | Private investor | Lincoln Electric Holdings, Inc., Director; Development Alternatives, Inc., Director/Non-Executive Chairman | ||||
Steven E. Buller (age 65) | Trustee | February 2014 | Chairman, Financial Accounting Standards Advisory Council (until 2015); Standing Advisory Group, Public Company Accounting Oversight Board, Member (until 2014); BlackRock, Inc. (investment management), Managing Director (until 2014), BlackRock Finco UK (investment management), Director (until 2014) | N/A | ||||
Maureen R. Goldfarb (age 61) | Trustee | January 2009 | Private investor | N/A | ||||
Michael Hegarty (age 72) | Trustee | December 2004 | Private investor | Rouse Properties Inc., Director; Capmark Financial Group Inc., Director (until 2015) | ||||
John P. Kavanaugh (age 62) | Trustee and Vice Chair of Trustees | January 2009 | Private investor | N/A | ||||
Maryanne L. Roepke (age 60) | Trustee | May 2014 | American Century Investments (investment management), Senior Vice President and Chief Compliance Officer (until 2014) | N/A | ||||
Laurie J. Thomsen (age 59) | Trustee | March 2005 | Private investor | The Travelers Companies, Director; Dycom Industries, Inc., Director | ||||
OFFICERS | ||||||||
Christopher R. Bohane (k) (age 43) | Assistant Secretary and Assistant Clerk | July 2005 | Massachusetts Financial Services Company, Vice President and Assistant General Counsel | N/A | ||||
Kino Clark (k) (age 48) | Assistant Treasurer | January 2012 | Massachusetts Financial Services Company, Vice President | N/A | ||||
Thomas H. Connors (k) (age 57) | Assistant Secretary and Assistant Clerk | September 2012 | Massachusetts Financial Services Company, Vice President and Senior Counsel; Deutsche Investment Management Americas Inc. (financial service provider), Director and Senior Counsel (until 2012) | N/A | ||||
Ethan D. Corey (k) (age 53) | Assistant Secretary and Assistant Clerk | July 2005 | Massachusetts Financial Services Company, Senior Vice President and Associate General Counsel | N/A | ||||
David L. DiLorenzo (k) (age 48) | President | July 2005 | Massachusetts Financial Services Company, Senior Vice President | N/A | ||||
Brian E. Langenfeld (k) (age 43) | Assistant Secretary and Assistant Clerk | June 2006 | Massachusetts Financial Services Company, Vice President and Senior Counsel | N/A |
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Trustees and Officers – continued
Name, Age | Position(s) with Fund | Trustee/Officer Since (h) | Principal Occupations During the Past Five Years | Other Directorships (j) | ||||
Susan A. Pereira (k) (age 46) | Assistant Secretary and Assistant Clerk | July 2005 | Massachusetts Financial Services Company, Vice President and Senior Counsel | N/A | ||||
Kasey L. Phillips (k) (age 46) | Assistant Treasurer | September 2012 | Massachusetts Financial Services Company, Vice President; Wells Fargo Funds Management, LLC, Senior Vice President, Fund Treasurer (until 2012) | N/A | ||||
Mark N. Polebaum (k) (age 64) | Secretary and Clerk | January 2006 | Massachusetts Financial Services Company, Executive Vice President, General Counsel and Secretary | N/A | ||||
Matthew A. Stowe (k) (age 42) | Assistant Secretary and Assistant Clerk | October 2014 | Massachusetts Financial Services Company, Vice President and Assistant General Counsel | N/A | ||||
Frank L. Tarantino (age 72) | Independent Senior Officer | June 2004 | Tarantino LLC (provider of compliance services), Principal | N/A | ||||
Richard S. Weitzel (k) (age 46) | Assistant Secretary and Assistant Clerk | October 2007 | Massachusetts Financial Services Company, Senior Vice President and Associate General Counsel | N/A | ||||
Martin J. Wolin (k) (age 49) | Chief Compliance Officer | July 2015 | Massachusetts Financial Services Company, Senior Vice President and Chief Compliance Officer (since July 2015); Mercer (financial service provider), Chief Risk and Compliance Officer, North America and Latin America (until June 2015) | N/A | ||||
James O. Yost (k) (age 56) | Treasurer | September 1990 | Massachusetts Financial Services Company, Senior Vice President | N/A |
(h) | Date first appointed to serve as Trustee/officer of an MFS Fund. Each Trustee has served continuously since appointment unless indicated otherwise. For the period from December 15, 2004 until February 22, 2005, Mr. Manning served as Advisory Trustee. Prior to January 2012, Messrs. DiLorenzo and Yost served as Assistant Treasurers of the Funds. From January 2012 through December 2016, Messrs. DiLorenzo and Yost served as Treasurer and Deputy Treasurer of the Funds, respectively. |
(j) | Directorships or trusteeships of companies required to report to the Securities and Exchange Commission (i.e., “public companies”). |
(k) | “Interested person” of the Trust within the meaning of the Investment Company Act of 1940 (referred to as the 1940 Act), which is the principal federal law governing investment companies like the fund, as a result of a position with MFS. The address of MFS is 111 Huntington Avenue, Boston, Massachusetts 02199-7618. |
Each Trustee (except Ms. Stelmach, Mr. Buller and Ms. Roepke) has been elected by shareholders and each Trustee and officer holds office until his or her successor is chosen and qualified or until his or her earlier death, resignation, retirement or removal. The Trust does not hold annual meetings for the purpose of electing Trustees, and Trustees are not elected for fixed terms. Messrs. Buller and Kavanaugh and Ms. Roepke are members of the Trust’s Audit Committee.
Each of the Fund’s Trustees and officers holds comparable positions with certain other funds of which MFS or a subsidiary is the investment adviser or distributor, and, in the case of the officers, with certain affiliates of MFS. As of February 1, 2017, the Trustees served as board members of 137 funds within the MFS Family of Funds.
The Statement of Additional Information for a Fund includes further information about the Trustees and is available without charge upon request by calling 1-800-225-2606.
Investment Adviser Massachusetts Financial Services Company 111 Huntington Avenue Boston, MA 02199-7618 | Custodian State Street Bank and Trust Company 1 Lincoln Street Boston, MA 02111-2900 | |
Distributor MFS Fund Distributors, Inc. 111 Huntington Avenue Boston, MA 02199-7618 | Independent Registered Public Accounting Firm Deloitte & Touche LLP 200 Berkeley Street Boston, MA 02116 | |
Portfolio Managers Eric Fischman Matthew Sabel |
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BOARD REVIEW OF INVESTMENT ADVISORY AGREEMENT
The Investment Company Act of 1940 requires that both the full Board of Trustees and a majority of the non-interested (“independent”) Trustees, voting separately, annually approve the continuation of the Fund’s investment advisory agreement with MFS. The Trustees consider matters bearing on the Fund and its advisory arrangements at their meetings throughout the year, including a review of performance data at each regular meeting. In addition, the independent Trustees met several times over the course of three months beginning in May and ending in July, 2016 (“contract review meetings”) for the specific purpose of considering whether to approve the continuation of the investment advisory agreement for the Fund and the other investment companies that the Board oversees (the “MFS Funds”). The independent Trustees were assisted in their evaluation of the Fund’s investment advisory agreement by independent legal counsel, from whom they received separate legal advice and with whom they met separately from MFS during various contract review meetings. The independent Trustees were also assisted in this process by the MFS Funds’ Independent Senior Officer, a senior officer appointed by and reporting to the independent Trustees.
In connection with their deliberations regarding the continuation of the investment advisory agreement, the Trustees, including the independent Trustees, considered such information and factors as they believed, in light of the legal advice furnished to them and their own business judgment, to be relevant. The investment advisory agreement for the Fund was considered separately, although the Trustees also took into account the common interests of all MFS Funds in their review. As described below, the Trustees considered the nature, quality, and extent of the various investment advisory, administrative, and shareholder services performed by MFS under the existing investment advisory agreement and other arrangements with the Fund.
In connection with their contract review meetings, the Trustees received and relied upon materials that included, among other items: (i) information provided by Broadridge Financial Solutions, Inc. (“Broadridge”), an independent third party, on the investment performance of the Fund for various time periods ended December 31, 2015 and the investment performance of a group of funds with substantially similar investment classifications/objectives (the “Lipper performance universe”), (ii) information provided by Broadridge on the Fund’s advisory fees and other expenses and the advisory fees and other expenses of comparable funds identified by Broadridge (the “Broadridge expense group”), (iii) information provided by MFS on the advisory fees of portfolios of other clients of MFS, including institutional separate accounts and other clients, (iv) information as to whether and to what extent applicable expense waivers, reimbursements or fee “breakpoints” are observed for the Fund, (v) information regarding MFS’ financial results and financial condition, including MFS’ and certain of its affiliates’ estimated profitability from services performed for the Fund and the MFS Funds as a whole, and compared to MFS’ institutional business, (vi) MFS’ views regarding the outlook for the mutual fund industry and the strategic business plans of MFS, (vii) descriptions of various functions performed by MFS for the Funds, such as compliance monitoring and portfolio trading practices, and (viii) information regarding the overall organization of MFS, including information about MFS’ senior management and other personnel providing investment advisory, administrative and other services to the Fund and the other MFS Funds. The comparative performance, fee and expense information prepared and provided by Broadridge was not independently verified and the independent Trustees did not independently verify any information provided to them by MFS.
The Trustees’ conclusion as to the continuation of the investment advisory agreement was based on a comprehensive consideration of all information provided to the Trustees and not the result of any single factor. Some of the factors that figured particularly in the Trustees’ deliberations are described below, although individual Trustees may have evaluated the information presented differently from one another, giving different weights to various factors. It is also important to recognize that the fee arrangements for the Fund and other MFS Funds are the result of years of review and discussion between the independent Trustees and MFS, that certain aspects of such arrangements may receive greater scrutiny in some years than in others, and that the Trustees’ conclusions may be based, in part, on their consideration of these same arrangements during the course of the year and in prior years.
Based on information provided by Broadridge and MFS, the Trustees reviewed the Fund’s total return investment performance as well as the performance of peer groups of funds over various time periods. The Trustees placed particular emphasis on the total return performance of the Fund’s Initial Class shares in comparison to the performance of funds in its Lipper performance universe over the three-year period ended December 31, 2015, which the Trustees believed was a long enough period to reflect differing market conditions. The total return performance of the Fund’s Initial Class shares was in the 2nd quintile relative to the other funds in the universe for this three-year period (the 1st quintile being the best performers and the 5th quintile being the worst performers). The total return performance of the Fund’s Initial Class shares was in the 2nd quintile for each of the one-year and five-year periods ended December 31, 2015 relative to the Lipper performance universe. Because of the passage of time, these performance results may differ from the performance results for more recent periods, including those shown elsewhere in this report.
In the course of their deliberations, the Trustees took into account information provided by MFS in connection with the contract review meetings, as well as during investment review meetings conducted with portfolio management personnel during the course of the year regarding the Fund’s performance. After reviewing these and related factors, the Trustees concluded, within the context of their overall conclusions regarding the investment advisory agreement, that they were satisfied with MFS’ responses and efforts relating to investment performance.
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Board Review of Investment Advisory Agreement – continued
In assessing the reasonableness of the Fund’s advisory fee, the Trustees considered, among other information, the Fund’s advisory fee and the total expense ratio of the Fund’s Initial Class shares as a percentage of average daily net assets and the advisory fee and total expense ratios of peer groups of funds based on information provided by Broadridge. The Trustees considered that, according to the data provided by Broadridge (which takes into account any fee reductions or expense limitations that were in effect during the Fund’s last fiscal year), the Fund’s effective advisory fee rate and total expense ratio were each higher than the Broadridge expense group median.
The Trustees also considered the advisory fees charged by MFS to any institutional separate accounts advised by MFS (“separate accounts”) and unaffiliated investment companies for which MFS serves as subadviser (“subadvised funds”) that have comparable investment strategies to the Fund. In comparing these fees, the Trustees considered information provided by MFS as to the generally broader scope of services provided by MFS to the Fund, as well as the more extensive regulatory burdens imposed on MFS in managing the Fund, in comparison to separate accounts and subadvised funds. The Trustees also considered the higher demands placed on MFS’ investment personnel and trading infrastructure as a result of the daily cash in-flows and out-flows of the Fund in comparison to separate accounts.
The Trustees also considered whether the Fund may benefit from any economies of scale in the management of the Fund in the event of growth in assets of the Fund and/or growth in assets of the MFS Funds as a whole. They noted that the Fund’s advisory fee rate schedule is subject to a contractual breakpoint that reduces the Fund’s advisory fee rate on average daily net assets over $1 billion. The Trustees also noted that MFS has agreed in writing to waive a portion of the management fees of certain MFS Funds, including the Fund, if the total combined assets of certain funds within the MFS Funds’ complex increase above agreed upon thresholds (the “group fee waiver”), enabling the Fund’s shareholders to share in the benefits from any economies of scale at the complex level. The group fee waiver is reviewed and renewed annually between the Board and MFS. The Trustees concluded that the breakpoint and the group fee waiver were sufficient to allow the Fund to benefit from economies of scale as its assets and overall complex assets grow.
The Trustees also considered information prepared by MFS relating to MFS’ costs and profits with respect to the Fund, the MFS Funds considered as a group, and other investment companies and accounts advised by MFS, as well as MFS’ methodologies used to determine and allocate its costs to the MFS Funds, the Fund and other accounts and products for purposes of estimating profitability.
After reviewing these and other factors described herein, the Trustees concluded, within the context of their overall conclusions regarding the investment advisory agreement, that the advisory fees charged to the Fund represent reasonable compensation in light of the services being provided by MFS to the Fund.
In addition, the Trustees considered MFS’ resources and related efforts to continue to retain, attract and motivate capable personnel to serve the Fund. The Trustees also considered current and developing conditions in the financial services industry, including the presence of large and well-capitalized companies which are spending, and appear to be prepared to continue to spend, substantial sums to engage personnel and to provide services to competing investment companies. In this regard, the Trustees also considered the financial resources of MFS and its ultimate parent, Sun Life Financial Inc. The Trustees also considered the advantages and possible disadvantages to the Fund of having an adviser that also serves other investment companies as well as other accounts.
The Trustees also considered the nature, quality, cost, and extent of administrative, transfer agency, and distribution services provided to the Fund by MFS and its affiliates under agreements and plans other than the investment advisory agreement, including any 12b-1 fees the Fund pays to MFS Fund Distributors, Inc., an affiliate of MFS. The Trustees also considered the nature, extent and quality of certain other services MFS performs or arranges for on the Fund’s behalf, which may include securities lending programs, directed expense payment programs, class action recovery programs, and MFS’ interaction with third-party service providers, principally custodians and sub-custodians. The Trustees concluded that the various non-advisory services provided by MFS and its affiliates on behalf of the Fund were satisfactory.
The Trustees also considered benefits to MFS from the use of the Fund’s portfolio brokerage commissions, if applicable, to pay for investment research and various other factors. Additionally, the Trustees considered so-called “fall-out benefits” to MFS such as reputational value derived from serving as investment manager to the Fund.
Based on their evaluation of factors that they deemed to be material, including those factors described above, the Board of Trustees, including the independent Trustees, concluded that the Fund’s investment advisory agreement with MFS should be continued for an additional one-year period, commencing August 1, 2016.
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PROXY VOTING POLICIES AND INFORMATION
MFS votes proxies on behalf of the fund pursuant to proxy voting policies and procedures that are available without charge, upon request, by calling 1-800-225-2606, by visiting mfs.com (once you have selected “Individual Investor” as your role, click on “Individual Investor Home” in the top navigation and then select “Learn More About Proxy Voting” under the “I want to…” header on the left hand column of the page), or by visiting the SEC’s Web site at http://www.sec.gov.
Information regarding how the fund voted proxies relating to portfolio securities during the most recent twelve-month period ended June 30 is available by August 31 of each year without charge by visiting mfs.com (once you have selected “Individual Investor” as your role, click on “Individual Investor Home” in the top navigation and then select “Learn More About Proxy Voting” under the “I want to…” header on the left hand column of the page), or by visiting the SEC’s Web site at http://www.sec.gov.
QUARTERLY PORTFOLIO DISCLOSURE
The fund will file a complete schedule of portfolio holdings with the Securities and Exchange Commission (the Commission) for the first and third quarters of each fiscal year on Form N-Q. The fund’s Form N-Q is available on the EDGAR database on the Commission’s Internet Web site at http://www.sec.gov, and may be reviewed and copied at the:
Public Reference Room
Securities and Exchange Commission
100 F Street, NE, Room 1580
Washington, D.C. 20549
Information on the operation of the Public Reference Room may be obtained by calling the Commission at 1-800-SEC-0330. Copies of the fund’s Form N-Q also may be obtained, upon payment of a duplicating fee, by electronic request at the following e-mail address: publicinfo@sec.gov or by writing the Public Reference Section at the above address.
From time to time, MFS may post important information about the fund or the MFS funds on the MFS web site (mfs.com). This information is available on mfs.com by following these steps once you have selected “Individual Investor” as your role: (1) Click on the “Individual Investor Home” in the top navigation and then select the “Announcements” option within the “Market Outlooks” drop down, or (2) Click on “Products & Services” and “Variable Insurance Portfolios” and then select the fund’s name.
INFORMATION ABOUT FUND CONTRACTS AND LEGAL CLAIMS
The fund has entered into contractual arrangements with an investment adviser, administrator, distributor, shareholder servicing agent, 529 program manager (if applicable), and custodian who each provide services to the fund. Unless expressly stated otherwise, shareholders are not parties to, or intended beneficiaries of these contractual arrangements, and these contractual arrangements are not intended to create any shareholder right to enforce them against the service providers or to seek any remedy under them against the service providers, either directly or on behalf of the fund.
Under the Trust’s By-Laws and Declaration of Trust, any claims asserted against or on behalf of the MFS Funds, including claims against Trustees and Officers, must be brought in state and federal courts located within the Commonwealth of Massachusetts.
FEDERAL TAX INFORMATION (unaudited)
The following information is provided pursuant to provisions of the Internal Revenue Code.
The fund designates $96,132,000 as capital gain dividends paid during the fiscal year.
For corporate shareholders, 100% of the ordinary income dividends paid during the fiscal year qualify for the corporate dividends received deduction.
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rev. 3/16
FACTS | WHAT DOES MFS DO WITH YOUR PERSONAL INFORMATION? |
Why? | Financial companies choose how they share your personal information. Federal law gives consumers the right to limit some but not all sharing. Federal law also requires us to tell you how we collect, share, and protect your personal information. Please read this notice carefully to understand what we do. |
What? | The types of personal information we collect and share depend on the product or service you have with us. This information can include:
• Social Security number and account balances • Account transactions and transaction history • Checking account information and wire transfer instructions
When you are no longer our customer, we continue to share your information as described in this notice. |
How? | All financial companies need to share customers’ personal information to run their everyday business. In the section below, we list the reasons financial companies can share their customers’ personal information; the reasons MFS chooses to share; and whether you can limit this sharing. |
Reasons we can share your personal information | Does MFS share? | Can you limit this sharing? | ||
For our everyday business purposes – such as to process your transactions, maintain your account(s), respond to court orders and legal investigations, or report to credit bureaus | Yes | No | ||
For our marketing purposes – to offer our products and services to you | No | We don’t share | ||
For joint marketing with other financial companies | No | We don’t share | ||
For our affiliates’ everyday business purposes – information about your transactions and experiences | No | We don’t share | ||
For our affiliates’ everyday business purposes – information about your creditworthiness | No | We don’t share | ||
For nonaffiliates to market to you | No | We don’t share |
Questions? | Call 800-225-2606 or go to mfs.com. |
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Page 2 |
Who we are | ||
Who is providing this notice? | MFS Funds, MFS Investment Management, MFS Institutional Advisors, Inc., and MFS Heritage Trust Company. |
What we do | ||
How does MFS protect my personal information? | To protect your personal information from unauthorized access and use, we use security measures that comply with federal law. These measures include procedural, electronic, and physical safeguards for the protection of the personal information we collect about you. | |
How does MFS collect my personal information? | We collect your personal information, for example, when you
• open an account or provide account information • direct us to buy securities or direct us to sell your securities • make a wire transfer
We also collect your personal information from others, such as credit bureaus, affiliates, or other companies. | |
Why can’t I limit all sharing? | Federal law gives you the right to limit only
• sharing for affiliates’ everyday business purposes – information about your creditworthiness • affiliates from using your information to market to you • sharing for nonaffiliates to market to you
State laws and individual companies may give you additional rights to limit sharing. |
Definitions | ||
Affiliates | Companies related by common ownership or control. They can be financial and nonfinancial companies.
• MFS does not share personal information with affiliates, except for everyday business purposes as described on page one of this notice. | |
Nonaffiliates | Companies not related by common ownership or control. They can be financial and nonfinancial companies.
• MFS does not share with nonaffiliates so they can market to you. | |
Joint marketing | A formal agreement between nonaffiliated financial companies that together market financial products or services to you.
• MFS doesn’t jointly market. |
Other important information | ||
If you own an MFS product or receive an MFS service in the name of a third party such as a bank or broker-dealer, their privacy policy may apply to you instead of ours. |
26
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ANNUAL REPORT
December 31, 2016
MFS® INVESTORS TRUST SERIES
MFS® Variable Insurance Trust
VGI-ANN
Table of Contents
MFS® INVESTORS TRUST SERIES
The report is prepared for the general information of contract owners. It is authorized for distribution to prospective investors only when preceded or accompanied by a current prospectus.
NOT FDIC INSURED • MAY LOSE VALUE • NO BANK OR CREDIT UNION GUARANTEE • NOT A DEPOSIT • NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY OR NCUA/NCUSIF
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MFS Investors Trust Series
LETTER FROM THE EXECUTIVE CHAIRMAN
Dear Contract Owners:
Despite June’s unexpected vote by the United Kingdom to leave the European Union and the surprising result in November’s U.S. presidential election, most markets have proved resilient. U.S. share prices quickly reversed post-Brexit declines, and indices reached new highs following the November elections. U.S. bond yields rose after Donald Trump’s victory on hopes that his proposed policy mix of lower taxes, increased spending on infrastructure and a lower regulatory burden on businesses will lift both U.S. economic growth and inflation. However, interest rates in most developed markets remain very low, with major central banks maintaining extremely accommodative monetary policies to reinvigorate slow-growing economies against a backdrop of still-low inflation. Even after the rise in yields following the election, interest rates remain low by historical standards.
Globally, economic growth has shown signs of recovery of late, led by the United States and the eurozone. Despite better growth, there are few immediate signs of worrisome inflation. Emerging market economies are recovering at a somewhat slower pace amid fears that restrictive U.S. trade policies could further hamper the already slow pace of global trade growth.
At MFS®, we believe in a patient, long-term approach to investing. Viewing investments with a long lens makes it possible to filter out short-term market noise and focus on achieving solid risk-adjusted returns over a full market cycle.
In our view, such an approach, along with the professional guidance of a financial advisor, will help you reach your investment objectives.
Respectfully,
Robert J. Manning
Executive Chairman
MFS Investment Management
February 15, 2017
The opinions expressed in this letter are subject to change and may not be relied upon for investment advice. No forecasts can be guaranteed.
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Portfolio structure
Top ten holdings | ||||
JPMorgan Chase & Co. | 4.3% | |||
Bank of America Corp. | 3.6% | |||
Visa, Inc., “A” | 2.9% | |||
Alphabet, Inc., “A” | 2.6% | |||
Goldman Sachs Group, Inc. | 2.5% | |||
Thermo Fisher Scientific, Inc. | 2.4% | |||
American Tower Corp., REIT | 2.4% | |||
Schlumberger Ltd. | 2.3% | |||
Broadcom Corp. | 2.3% | |||
Comcast Corp., “A” | 2.1% |
Equity sectors | ||||
Financial Services | 23.7% | |||
Health Care | 15.2% | |||
Consumer Staples | 10.6% | |||
Technology | 10.5% | |||
Leisure | 7.4% | |||
Special Products & Services | 6.6% | |||
Retailing | 5.6% | |||
Industrial Goods & Services | 4.7% | |||
Energy | 4.1% | |||
Basic Materials | 4.0% | |||
Utilities & Communications | 3.9% | |||
Transportation | 1.9% | |||
Autos & Housing | 1.0% |
Cash & Cash Equivalents includes any cash, investments in money market funds, short-term securities, and other assets less liabilities. Please see the Statement of Assets and Liabilities for additional information related to the fund’s cash position and other assets and liabilities.
Percentages are based on net assets as of 12/31/16.
The portfolio is actively managed and current holdings may be different.
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MFS Investors Trust Series
Summary of Results
For the twelve months ended December 31, 2016, Initial Class shares of the MFS Investors Trust Series (“fund”) provided a total return of 8.59%, while Service Class shares of the fund provided a total return of 8.32%. These compare with a return of 11.96% over the same period for the fund’s benchmark, the Standard & Poor’s 500 Stock Index (“S&P 500 Index”).
Market Environment
Sluggish global growth weighed on both developed and emerging market (“EM”) economies during much of the reporting period, though signs of improved growth became evident in late 2016. The US Federal Reserve increased interest rates by 25 basis points at the end of the period, the second hike of the cycle which began in December 2015. Globally, however, central bank policy remained highly accommodative, which forced many government, and even some corporate, bond yields into negative territory during the period. During the first half of the period, the United Kingdom voted to leave the European Union (“EU”), beginning a multi-year process of negotiation in order to achieve “Brexit.” While markets initially reacted to the vote with alarm, the spillover to European and EM economies was relatively short-lived, although risks of further hits to EU cohesiveness could re-emerge. Late in the period, the surprising US presidential election outcome prompted a significant rally in equities and a rise in bond yields in anticipation of a reflationary policy mix from the incoming Trump administration.
Headwinds from lower energy and commodity prices, which had spread beyond the energy, materials and industrial sectors early in the reporting period, abated later in the period as stabilizing oil prices helped push energy earnings higher relative to expectations. A sharp rise in the US dollar was a headwind for multinationals late in the period. The sharp rise in the US dollar also weighed on earnings. US consumer spending held up well during the second half of the period amid a modest increase in real wages and relatively low gasoline prices. Demand for autos reached near-record territory, while the housing market continued its recovery. Slow global trade continued to mirror slow global growth, particularly for many EM countries. That said, EM countries began to show signs of a modest upturn in activity along with adjustment in their external accounts. These improved conditions appeared to have reassured investors and contributed to record inflows into the asset class during July and August as negative yields for an increasing share of developed market bonds drove yield-hungry investors further out on the risk spectrum. Similar investor inflows were experienced in the investment grade and high yield corporate markets. Late in the reporting period, however, new challenges emerged for emerging markets debt (“EMD”) as a result of the US presidential election, which raised concerns about the potential for a protectionist turn in US trade policy which could negatively impact EM economies. These concerns, along with rising expectations for US growth, inflation and interest rates, have turned the tables on flows into EMD. Since the election, flows have reversed. As of the end of the period, the markets seemed to be in “wait-and-see” mode, looking for evidence to either confirm or refute the repricing of risk that has occurred since Election Day.
Detractors from Performance
Stock selection within the health care sector detracted from the fund’s performance relative to the S&P 500 Index. The fund’s holdings of specialty pharmaceutical company Valeant Pharmaceuticals International (b)(h) (Canada) negatively impacted relative returns. Shares of Valeant Pharmaceuticals depreciated following the fallout from political pressure on the company’s drug price strategy and accusations of financial fraud through the company’s unusual and undisclosed arrangement with online pharmacy Philidor. The fund’s overweight positions in pharmaceutical company Endo International (h) (Ireland), specialty pharmaceutical company Allergan, health services and information technology company McKesson, life sciences supply company Thermo Fisher Scientific and pharmaceutical company Eli Lilly weakened relative results. Shares of Allergan fell after Pfizer terminated the proposed combination with Allergan following Treasury Department changes to inversion rules.
Stock selection in the consumer staples sector also held back relative returns. However, there were no individual securities within this sector that were among the fund’s top relative detractors during the reporting period.
Elsewhere, overweight positions in IT company Cognizant Technology and global payments technology company Visa, and not owning shares of integrated energy company Chevron, dampened relative performance.
The fund’s cash and/or cash equivalents position during the period was also a detractor from relative performance. Under normal market conditions, the fund strives to be fully invested and generally holds cash to buy new holdings and to provide liquidity. In a period when equity markets rose, as measured by the fund’s benchmark, holding cash hurt performance versus the benchmark, which has no cash position.
Contributors to Performance
An overweight allocation and stock selection in the financial services sector benefited relative performance. The fund’s overweight positions in financial services firms Bank of America, JPMorgan Chase, Goldman Sachs and Morgan Stanley contributed to relative returns. Shares of Bank of America were aided by strong results driven by higher-than-expected fee income, a lower-than-anticipated loan loss provision and solid expense management. In addition, shares of many US banks significantly outperformed the market following the US presidential election as investors appeared to have anticipated a more favorable environment with reduced regulation and higher interest rates going forward.
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MFS Investors Trust Series
Management Review – continued
In other sectors, the fund’s overweight positions in media firm Time Warner, energy exploration and production company EOG Resources, global provider of banking and payment technologies Fidelity National Information Services, broadband communications and networking services Broadcom and medical equipment manufacturer Stryker strengthened relative results. Shares of Time Warner rose following news of a proposed acquisition of the company by telecommunications services provider AT&T. The stock price was further buoyed after management reported earnings that were above consensus estimates, driven by strong results in the Turner cable networks and a favorable tax adjustment. Not owning shares of biotech firm Gilead Sciences further supported relative returns as the company underperformed the benchmark during the reporting period.
Respectfully,
Kevin Beatty | Ted Maloney | |
Portfolio Manager | Portfolio Manager |
(b) | Security is not a benchmark constituent. |
(h) | Security was not held in the portfolio at period end. |
The views expressed in this report are those of the portfolio managers only through the end of the period of the report as stated on the cover and do not necessarily reflect the views of MFS or any other person in the MFS organization. These views are subject to change at any time based on market or other conditions, and MFS disclaims any responsibility to update such views. These views may not be relied upon as investment advice or an indication of trading intent on behalf of any MFS portfolio. References to specific securities are not recommendations of such securities, and may not be representative of any MFS portfolio’s current or future investments.
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MFS Investors Trust Series
PERFORMANCE SUMMARY THROUGH 12/31/16
The following chart illustrates the historical performance of the fund in comparison to its benchmark(s). Benchmarks are unmanaged and may not be invested in directly. Benchmark returns do not reflect any fees or expenses. The performance of other share classes will be greater than or less than that of the class depicted below. (See Notes to Performance Summary.)
Performance data shown represents past performance and is no guarantee of future results. Investment return and principal value fluctuate so your units, when sold, may be worth more or less than the original cost; current performance may be lower or higher than quoted. The performance shown does not reflect the deduction of taxes, if any, that a contract holder would pay on fund distributions or the redemption of contract units. The returns for the fund shown also do not reflect the deduction of expenses associated with variable products, such as mortality and expense risk charges, separate account charges, and sales charges imposed by the insurance company separate accounts. Such expenses would reduce the overall returns shown.
Growth of a Hypothetical $10,000 Investment
Total Returns through 12/31/16
Average annual total returns
Share Class | Class Inception Date | 1-yr | 5-yr | 10-yr | ||||||||
Initial Class | 10/09/95 | 8.59% | 13.71% | 6.83% | ||||||||
Service Class | 5/01/00 | 8.32% | 13.41% | 6.56% | ||||||||
Comparative benchmark | ||||||||||||
Standard & Poor’s 500 Stock Index (f) | 11.96% | 14.66% | 6.95% |
(f) | Source: FactSet Research Systems Inc. |
Benchmark Definition
Standard & Poor’s 500 Stock Index – a market capitalization-weighted index of 500 widely held equity securities, designed to measure broad U.S. equity performance.
It is not possible to invest directly in an index.
Notes to Performance Summary
Average annual total return represents the average annual change in value for each share class for the periods presented.
Performance results reflect any applicable expense subsidies and waivers in effect during the periods shown. Without such subsidies and waivers the fund’s performance results would be less favorable. Please see the prospectus and financial statements for complete details. All results are historical and assume the reinvestment of any dividends and capital gains distributions.
Performance results do not include adjustments made for financial reporting purposes in accordance with U.S. generally accepted accounting principles and may differ from amounts reported in the financial highlights.
From time to time the fund may receive proceeds from litigation settlements, without which performance would be lower.
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MFS Investors Trust Series
Fund Expenses Borne by the Contract Holders during the Period,
July 1, 2016 through December 31, 2016
As a contract holder of the fund, you incur ongoing costs, including management fees; distribution and/or service (12b-1) fees; and other fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the fund and to compare these costs with the ongoing costs of investing in other mutual funds.
The example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period July 1, 2016 through December 31, 2016.
Actual Expenses
The first line for each share class in the following table provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled “Expenses Paid During Period” to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line for each share class in the following table provides information about hypothetical account values and hypothetical expenses based on the fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight the fund’s ongoing costs only and do not take into account the fees and expenses imposed under the variable contracts through which your investment in the fund is made. Therefore, the second line for each share class in the table is useful in comparing ongoing costs associated with an investment in vehicles (such as the fund) which fund benefits under variable annuity and variable life insurance contracts and to qualified pension and retirement plans only, and will not help you determine the relative total costs of investing in the fund through variable annuity and variable life insurance contracts. If the fees and expenses imposed under the variable contracts were included, your costs would have been higher.
Share Class | Annualized Expense Ratio | Beginning 7/01/16 | Ending 12/31/16 | Expenses Paid 7/01/16-12/31/16 | ||||||||||||||
Initial Class | Actual | 0.76% | $1,000.00 | $1,068.19 | $3.95 | |||||||||||||
Hypothetical (h) | 0.76% | $1,000.00 | $1,021.32 | $3.86 | ||||||||||||||
Service Class | Actual | 1.01% | $1,000.00 | $1,066.93 | $5.25 | |||||||||||||
Hypothetical (h) | 1.01% | $1,000.00 | $1,020.06 | $5.13 |
(h) | 5% class return per year before expenses. |
(p) | “Expenses Paid During Period” are equal to each class’s annualized expense ratio, as shown above, multiplied by the average account value over the period, multiplied by 184/366 (to reflect the one-half year period). |
Notes to Expense Table
Expense ratios reflect a one-time Reimbursement of Expenses by Custodian of 0.03% (See Note 2 of the Notes to Financial Statements) that are outside of the expense limitation arrangement (See Note 3 of the Notes to Financial Statements).
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MFS Investors Trust Series
PORTFOLIO OF INVESTMENTS – 12/31/16
The Portfolio of Investments is a complete list of all securities owned by your fund. It is categorized by broad-based asset classes.
Issuer | Shares/Par | Value ($) | ||||||
COMMON STOCKS – 99.2% | ||||||||
Aerospace – 2.6% | ||||||||
Honeywell International, Inc. | 74,803 | $ | 8,665,928 | |||||
United Technologies Corp. | 36,969 | 4,052,542 | ||||||
|
| |||||||
$ | 12,718,470 | |||||||
|
| |||||||
Alcoholic Beverages – 2.0% | ||||||||
Diageo PLC | 154,441 | $ | 3,995,558 | |||||
Pernod Ricard S.A. | 55,674 | 6,033,411 | ||||||
|
| |||||||
$ | 10,028,969 | |||||||
|
| |||||||
Apparel Manufacturers – 2.8% | ||||||||
LVMH Moet Hennessy Louis Vuitton S.A. | 37,402 | $ | 7,131,714 | |||||
NIKE, Inc., “B” | 55,047 | 2,798,039 | ||||||
VF Corp. | 70,614 | 3,767,257 | ||||||
|
| |||||||
$ | 13,697,010 | |||||||
|
| |||||||
Broadcasting – 3.9% | ||||||||
Interpublic Group of Companies, Inc. | 136,123 | $ | 3,186,639 | |||||
Time Warner, Inc. | 72,608 | 7,008,850 | ||||||
Twenty-First Century Fox, Inc. | 178,897 | 5,016,272 | ||||||
Walt Disney Co. | 40,780 | 4,250,092 | ||||||
|
| |||||||
$ | 19,461,853 | |||||||
|
| |||||||
Brokerage & Asset Managers – 3.4% | ||||||||
BlackRock, Inc. | 20,145 | $ | 7,665,978 | |||||
Blackstone Group LP | 144,192 | 3,897,510 | ||||||
NASDAQ, Inc. | 82,478 | 5,535,923 | ||||||
|
| |||||||
$ | 17,099,411 | |||||||
|
| |||||||
Business Services – 6.6% | ||||||||
Accenture PLC, “A” | 87,458 | $ | 10,243,956 | |||||
Cognizant Technology Solutions Corp., “A” (a) | 174,867 | 9,797,798 | ||||||
Fidelity National Information Services, Inc. | 119,878 | 9,067,572 | ||||||
Gartner, Inc. (a) | 38,053 | 3,846,017 | ||||||
|
| |||||||
$ | 32,955,343 | |||||||
|
| |||||||
Cable TV – 2.1% | ||||||||
Comcast Corp., “A” | 154,957 | $ | 10,699,781 | |||||
|
| |||||||
Chemicals – 2.6% | ||||||||
Monsanto Co. | 80,789 | $ | 8,499,811 | |||||
PPG Industries, Inc. | 44,997 | 4,263,916 | ||||||
|
| |||||||
$ | 12,763,727 | |||||||
|
| |||||||
Computer Software – 0.7% | ||||||||
Adobe Systems, Inc. (a) | 35,326 | $ | 3,636,812 | |||||
|
| |||||||
Computer Software – Systems – 1.9% | ||||||||
Apple, Inc. | 39,422 | $ | 4,565,856 | |||||
Hewlett Packard Enterprise | 220,430 | 5,100,750 | ||||||
|
| |||||||
$ | 9,666,606 | |||||||
|
| |||||||
Construction – 1.0% | ||||||||
Sherwin-Williams Co. | 18,876 | $ | 5,072,736 | |||||
|
| |||||||
Consumer Products – 4.7% | ||||||||
Colgate-Palmolive Co. | 77,292 | $ | 5,057,988 | |||||
Coty, Inc., “A” | 96,157 | 1,760,635 |
Issuer | Shares/Par | Value ($) | ||||||
COMMON STOCKS – continued | ||||||||
Consumer Products – continued | ||||||||
Estee Lauder Cos., Inc., “A” | 36,716 | $ | 2,808,407 | |||||
Kimberly-Clark Corp. | 22,634 | 2,582,992 | ||||||
Newell Brands, Inc. | 192,976 | 8,616,378 | ||||||
Procter & Gamble Co. | 33,181 | 2,789,858 | ||||||
|
| |||||||
$ | 23,616,258 | |||||||
|
| |||||||
Containers – 1.4% | ||||||||
Crown Holdings, Inc. (a) | 135,266 | $ | 7,110,934 | |||||
|
| |||||||
Electrical Equipment – 1.5% | ||||||||
AMETEK, Inc. | 70,022 | $ | 3,403,069 | |||||
W.W. Grainger, Inc. | 17,485 | 4,060,891 | ||||||
|
| |||||||
$ | 7,463,960 | |||||||
|
| |||||||
Electronics – 3.2% | ||||||||
Broadcom Corp. | 64,690 | $ | 11,435,251 | |||||
Texas Instruments, Inc. | 64,989 | 4,742,247 | ||||||
|
| |||||||
$ | 16,177,498 | |||||||
|
| |||||||
Energy – Independent – 1.8% | ||||||||
EOG Resources, Inc. | 86,992 | $ | 8,794,891 | |||||
|
| |||||||
Engineering – Construction – 0.7% | ||||||||
Fluor Corp. | 62,403 | $ | 3,277,406 | |||||
|
| |||||||
Food & Beverages – 3.8% | ||||||||
Danone S.A. | 94,399 | $ | 5,975,018 | |||||
Mead Johnson Nutrition Co., “A” | 51,331 | 3,632,182 | ||||||
Mondelez International, Inc. | 213,255 | 9,453,594 | ||||||
|
| |||||||
$ | 19,060,794 | |||||||
|
| |||||||
General Merchandise – 0.9% | ||||||||
Costco Wholesale Corp. | 27,690 | $ | 4,433,446 | |||||
|
| |||||||
Insurance – 1.2% | ||||||||
Chubb Ltd. | 46,260 | $ | 6,111,871 | |||||
|
| |||||||
Internet – 4.6% | ||||||||
Alphabet, Inc., “A” (a) | 16,388 | $ | 12,986,671 | |||||
Alphabet, Inc., “C” (a) | 13,156 | 10,154,064 | ||||||
|
| |||||||
$ | 23,140,735 | |||||||
|
| |||||||
Major Banks – 13.1% | ||||||||
Bank of America Corp. | 812,775 | $ | 17,962,328 | |||||
Goldman Sachs Group, Inc. | 52,618 | 12,599,380 | ||||||
JPMorgan Chase & Co. | 246,451 | 21,266,257 | ||||||
Morgan Stanley | 151,199 | 6,388,158 | ||||||
State Street Corp. | 40,326 | 3,134,137 | ||||||
Wells Fargo & Co. | 72,189 | 3,978,336 | ||||||
|
| |||||||
$ | 65,328,596 | |||||||
|
| |||||||
Medical & Health Technology & Services – 0.9% | ||||||||
McKesson Corp. | 32,809 | $ | 4,608,024 | |||||
|
| |||||||
Medical Equipment – 8.7% | ||||||||
Abbott Laboratories | 77,721 | $ | 2,985,264 | |||||
Danaher Corp. | 135,391 | 10,538,835 | ||||||
Medtronic PLC | 93,237 | 6,641,272 |
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Portfolio of Investments – continued
Issuer | Shares/Par | Value ($) | ||||||
COMMON STOCKS – continued | ||||||||
Medical Equipment – continued | ||||||||
St. Jude Medical, Inc. | 53,270 | $ | 4,271,721 | |||||
Stryker Corp. | 57,931 | 6,940,709 | ||||||
Thermo Fisher Scientific, Inc. | 86,588 | 12,217,567 | ||||||
|
| |||||||
$ | 43,595,368 | |||||||
|
| |||||||
Natural Gas – Pipeline – 0.9% | ||||||||
Enterprise Products Partners LP | 163,250 | $ | 4,414,280 | |||||
|
| |||||||
Oil Services – 2.3% | ||||||||
Schlumberger Ltd. | 136,726 | $ | 11,478,148 | |||||
|
| |||||||
Other Banks & Diversified Financials – 6.0% | ||||||||
Mastercard, Inc., “A” | 92,260 | $ | 9,525,845 | |||||
U.S. Bancorp | 121,133 | 6,222,602 | ||||||
Visa, Inc., “A” | 183,934 | 14,350,531 | ||||||
|
| |||||||
$ | 30,098,978 | |||||||
|
| |||||||
Pharmaceuticals – 5.6% | ||||||||
Allergan PLC (a) | 33,265 | $ | 6,985,983 | |||||
Eli Lilly & Co. | 95,261 | 7,006,447 | ||||||
Johnson & Johnson | 76,428 | 8,805,270 | ||||||
Zoetis, Inc. | 95,000 | 5,085,350 | ||||||
|
| |||||||
$ | 27,883,050 | |||||||
|
| |||||||
Railroad & Shipping – 1.9% | ||||||||
Canadian National Railway Co. | 138,808 | $ | 9,355,659 | |||||
|
| |||||||
Restaurants – 1.4% | ||||||||
Aramark | 91,433 | $ | 3,265,987 | |||||
Starbucks Corp. | 63,203 | 3,509,031 | ||||||
|
| |||||||
$ | 6,775,018 | |||||||
|
|
Issuer | Shares/Par | Value ($) | ||||||
COMMON STOCKS – continued | ||||||||
Specialty Stores – 2.0% | ||||||||
AutoZone, Inc. (a) | 5,514 | $ | 4,354,902 | |||||
Ross Stores, Inc. | 85,302 | 5,595,811 | ||||||
|
| |||||||
$ | 9,950,713 | |||||||
|
| |||||||
Telecommunications – Wireless – 2.5% | ||||||||
American Tower Corp., REIT | 115,487 | $ | 12,204,666 | |||||
|
| |||||||
Utilities – Electric Power – 0.5% | ||||||||
American Electric Power Co., Inc. | 41,907 | $ | 2,638,465 | |||||
|
| |||||||
Total Common Stocks (Identified Cost, $327,110,380) | $ | 495,319,476 | ||||||
|
| |||||||
MONEY MARKET FUNDS – 0.8% | ||||||||
MFS Institutional Money Market Portfolio, 0.51% (v) (Identified Cost, $4,003,442) | 4,003,442 | $ | 4,003,442 | |||||
|
| |||||||
Total Investments (Identified Cost, $331,113,822) | $ | 499,322,918 | ||||||
|
| |||||||
OTHER ASSETS, LESS LIABILITIES – 0.0% | 214,828 | |||||||
|
| |||||||
NET ASSETS – 100.0% | $ | 499,537,746 | ||||||
|
|
(a) | Non-income producing security. |
(v) | Underlying affiliated fund that is available only to investment companies managed by MFS. The rate quoted for the MFS Institutional Money Market Portfolio is the annualized seven-day yield of the fund at period end. |
The following abbreviations are used in this report and are defined:
PLC | Public Limited Company |
REIT | Real Estate Investment Trust |
See Notes to Financial Statements
8
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MFS Investors Trust Series
FINANCIAL STATEMENTS | STATEMENT OF ASSETS AND LIABILITIES
This statement represents your fund’s balance sheet, which details the assets and liabilities comprising the total value of the fund.
At 12/31/16 | ||||||||
Assets | ||||||||
Investments | ||||||||
Non-affiliated issuers, at value (identified cost, $327,110,380) | $495,319,476 | |||||||
Underlying affiliated funds, at value (identified cost, $4,003,442) | 4,003,442 | |||||||
Total investments, at value (identified cost, $331,113,822) | $499,322,918 | |||||||
Foreign currency, at value (identified cost, $27) | 27 | |||||||
Receivables for | ||||||||
Fund shares sold | 295,043 | |||||||
Interest and dividends | 543,323 | |||||||
Total assets | $500,161,311 | |||||||
Liabilities | ||||||||
Payable for fund shares reacquired | $490,582 | |||||||
Payable to affiliates | ||||||||
Investment adviser | 31,229 | |||||||
Shareholder servicing costs | 665 | |||||||
Distribution and/or service fees | 4,703 | |||||||
Payable for independent Trustees’ compensation | 77 | |||||||
Accrued expenses and other liabilities | 96,309 | |||||||
Total liabilities | $623,565 | |||||||
Net assets | $499,537,746 | |||||||
Net assets consist of | ||||||||
Paid-in capital | $306,722,391 | |||||||
Unrealized appreciation (depreciation) on investments and translation of assets and liabilities in foreign currencies | 168,208,650 | |||||||
Accumulated net realized gain (loss) on investments and foreign currency | 20,800,662 | |||||||
Undistributed net investment income | 3,806,043 | |||||||
Net assets | $499,537,746 | |||||||
Shares of beneficial interest outstanding | 19,640,600 |
Net assets | Shares outstanding | Net asset value per share | ||||||||||
Initial Class | $270,796,376 | 10,592,205 | $25.57 | |||||||||
Service Class | 228,741,370 | 9,048,395 | 25.28 |
See Notes to Financial Statements
9
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MFS Investors Trust Series
FINANCIAL STATEMENTS | STATEMENT OF OPERATIONS
This statement describes how much your fund earned in investment income and accrued in expenses. It also describes any gains and/or losses generated by fund operations.
Year ended 12/31/16 | ||||||||
Net investment income |
| |||||||
Income | ||||||||
Dividends | $8,085,121 | |||||||
Interest | 15,795 | |||||||
Dividends from underlying affiliated funds | 20,051 | |||||||
Other | 6,124 | |||||||
Foreign taxes withheld | (85,156 | ) | ||||||
Total investment income | $8,041,935 | |||||||
Expenses | ||||||||
Management fee | $3,591,918 | |||||||
Distribution and/or service fees | 512,960 | |||||||
Shareholder servicing costs | 44,454 | |||||||
Administrative services fee | 84,232 | |||||||
Independent Trustees’ compensation | 11,341 | |||||||
Custodian fee | 35,625 | |||||||
Reimbursement of custodian expenses | (67,598 | ) | ||||||
Shareholder communications | 29,848 | |||||||
Audit and tax fees | 53,403 | |||||||
Legal fees | 4,839 | |||||||
Miscellaneous | 22,263 | |||||||
Total expenses | $4,323,285 | |||||||
Reduction of expenses by investment adviser | (34,010 | ) | ||||||
Net expenses | $4,289,275 | |||||||
Net investment income | $3,752,660 | |||||||
Realized and unrealized gain (loss) on investments and foreign currency | ||||||||
Realized gain (loss) (identified cost basis) | ||||||||
Investments: | ||||||||
Non-affiliated issuers | $22,171,725 | |||||||
Underlying affiliated funds | (260 | ) | ||||||
Foreign currency | (4,872 | ) | ||||||
Net realized gain (loss) on investments and foreign currency | $22,166,593 | |||||||
Change in unrealized appreciation (depreciation) | ||||||||
Investments | $13,188,739 | |||||||
Translation of assets and liabilities in foreign currencies | (446 | ) | ||||||
Net unrealized gain (loss) on investments and foreign currency translation | $13,188,293 | |||||||
Net realized and unrealized gain (loss) on investments and foreign currency | $35,354,886 | |||||||
Change in net assets from operations | $39,107,546 |
See Notes to Financial Statements
10
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MFS Investors Trust Series
FINANCIAL STATEMENTS | STATEMENTS OF CHANGES IN NET ASSETS
These statements describe the increases and/or decreases in net assets resulting from operations, any distributions, and any shareholder transactions.
For years ended 12/31 | 2016 | 2015 | ||||||
Change in net assets | ||||||||
From operations | ||||||||
Net investment income | $3,752,660 | $3,535,967 | ||||||
Net realized gain (loss) on investments and foreign currency | 22,166,593 | 53,230,039 | ||||||
Net unrealized gain (loss) on investments and foreign currency translation | 13,188,293 | (58,301,338 | ) | |||||
Change in net assets from operations | $39,107,546 | $(1,535,332 | ) | |||||
Distributions declared to shareholders | ||||||||
From net investment income | $(3,519,160 | ) | $(4,730,839 | ) | ||||
From net realized gain on investments | (53,002,448 | ) | (62,960,208 | ) | ||||
Total distributions declared to shareholders | $(56,521,608 | ) | $(67,691,047 | ) | ||||
Change in net assets from fund share transactions | $30,632,344 | $(84,170,611 | ) | |||||
Total change in net assets | $13,218,282 | $(153,396,990 | ) | |||||
Net assets | ||||||||
At beginning of period | 486,319,464 | 639,716,454 | ||||||
At end of period (including undistributed net investment income of $3,806,043 and | $499,537,746 | $486,319,464 |
See Notes to Financial Statements
11
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MFS Investors Trust Series
FINANCIAL STATEMENTS | FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the fund’s financial performance for the past 5 years. Certain information reflects financial results for a single fund share. The total returns in the table represent the rate by which an investor would have earned (or lost) on an investment in the fund share class (assuming reinvestment of all distributions) held for the entire period.
Initial Class | Years ended 12/31 | |||||||||||||||||||
2016 | 2015 | 2014 | 2013 | 2012 | ||||||||||||||||
Net asset value, beginning of period | $26.58 | $30.41 | $29.95 | $22.93 | $19.41 | |||||||||||||||
Income (loss) from investment operations | ||||||||||||||||||||
Net investment income (d) | $0.23 | (c) | $0.21 | $0.26 | $0.24 | $0.25 | ||||||||||||||
Net realized and unrealized gain (loss) on investments | 2.01 | (0.42 | ) | 2.92 | 7.07 | 3.46 | ||||||||||||||
Total from investment operations | $2.24 | $(0.21 | ) | $3.18 | $7.31 | $3.71 | ||||||||||||||
Less distributions declared to shareholders | ||||||||||||||||||||
From net investment income | $(0.24 | ) | $(0.28 | ) | $(0.30 | ) | $(0.29 | ) | $(0.19 | ) | ||||||||||
From net realized gain on investments | (3.01 | ) | (3.34 | ) | (2.42 | ) | — | — | ||||||||||||
Total distributions declared to shareholders | $(3.25 | ) | $(3.62 | ) | $(2.72 | ) | $(0.29 | ) | $(0.19 | ) | ||||||||||
Net asset value, end of period (x) | $25.57 | $26.58 | $30.41 | $29.95 | $22.93 | |||||||||||||||
Total return (%) (k)(r)(s)(x) | 8.59 | (c) | 0.22 | 11.01 | 32.05 | 19.18 | ||||||||||||||
Ratios (%) (to average net assets) and Supplemental data: | ||||||||||||||||||||
Expenses before expense reductions (f) | 0.80 | (c) | 0.82 | 0.81 | 0.81 | 0.82 | ||||||||||||||
Expenses after expense reductions (f) | 0.79 | (c) | 0.81 | 0.81 | 0.81 | 0.82 | ||||||||||||||
Net investment income | 0.89 | (c) | 0.73 | 0.87 | 0.93 | 1.15 | ||||||||||||||
Portfolio turnover | 20 | 17 | 25 | 19 | 28 | |||||||||||||||
Net assets at end of period (000 omitted) | $270,796 | $293,203 | $356,389 | $405,682 | $455,295 |
See Notes to Financial Statements
12
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MFS Investors Trust Series
Financial Highlights – continued
Service Class | Years ended 12/31 | |||||||||||||||||||
2016 | 2015 | 2014 | 2013 | 2012 | ||||||||||||||||
Net asset value, beginning of period | $26.30 | $30.13 | $29.72 | $22.78 | $19.31 | |||||||||||||||
Income (loss) from investment operations | ||||||||||||||||||||
Net investment income (d) | $0.16 | (c) | $0.14 | $0.19 | $0.18 | $0.20 | ||||||||||||||
Net realized and unrealized gain (loss) on investments | 1.98 | (0.42 | ) | 2.88 | 7.02 | 3.43 | ||||||||||||||
Total from investment operations | $2.14 | $(0.28 | ) | $3.07 | $7.20 | $3.63 | ||||||||||||||
Less distributions declared to shareholders | ||||||||||||||||||||
From net investment income | $(0.15 | ) | $(0.21 | ) | $(0.24 | ) | $(0.26 | ) | $(0.16 | ) | ||||||||||
From net realized gain on investments | (3.01 | ) | (3.34 | ) | (2.42 | ) | — | — | ||||||||||||
Total distributions declared to shareholders | $(3.16 | ) | $(3.55 | ) | $(2.66 | ) | $(0.26 | ) | $(0.16 | ) | ||||||||||
Net asset value, end of period (x) | $25.28 | $26.30 | $30.13 | $29.72 | $22.78 | |||||||||||||||
Total return (%) (k)(r)(s)(x) | 8.32 | (c) | (0.05 | ) | 10.71 | 31.74 | 18.83 | |||||||||||||
Ratios (%) (to average net assets) and Supplemental data: | ||||||||||||||||||||
Expenses before expense reductions (f) | 1.04 | (c) | 1.07 | 1.06 | 1.06 | 1.07 | ||||||||||||||
Expenses after expense reductions (f) | 1.04 | (c) | 1.06 | 1.06 | 1.06 | 1.07 | ||||||||||||||
Net investment income | 0.64 | (c) | 0.47 | 0.63 | 0.67 | 0.93 | ||||||||||||||
Portfolio turnover | 20 | 17 | 25 | 19 | 28 | |||||||||||||||
Net assets at end of period (000 omitted) | $228,741 | $193,116 | $283,328 | $234,723 | $141,806 |
(c) | Amount reflects a one-time reimbursement of expenses by the custodian (or former custodian) without which net investment income and performance would be lower and expenses would be higher. See Note 2 in the Notes to Financial Statements for additional information. |
(d) | Per share data is based on average shares outstanding. |
(f) | Ratios do not reflect reductions from fees paid indirectly, if applicable. |
(k) | The total return does not reflect expenses that apply to separate accounts. Inclusion of these charges would reduce the total return figures for all periods shown. |
(r) | Certain expenses have been reduced without which performance would have been lower. |
(s) | From time to time the fund may receive proceeds from litigation settlements, without which performance would be lower. |
(x) | The net asset values and total returns have been calculated on net assets which include adjustments made in accordance with U.S. generally accepted accounting principles required at period end for financial reporting purposes. |
See Notes to Financial Statements
13
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MFS Investors Trust Series
(1) | Business and Organization |
MFS Investors Trust Series (the fund) is a diversified series of MFS Variable Insurance Trust (the trust). The trust is organized as a Massachusetts business trust and is registered under the Investment Company Act of 1940, as amended, as an open-end management investment company. The shareholders of each series of the trust are separate accounts of insurance companies, which offer variable annuity and/or life insurance products, and qualified retirement and pension plans.
The fund is an investment company and accordingly follows the investment company accounting and reporting guidance of the Financial Accounting Standards Board (FASB) Accounting Standards Codification Topic 946 Financial Services – Investment Companies.
(2) | Significant Accounting Policies |
General – The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of increases and decreases in net assets from operations during the reporting period. Actual results could differ from those estimates. In the preparation of these financial statements, management has evaluated subsequent events occurring after the date of the fund’s Statement of Assets and Liabilities through the date that the financial statements were issued.
In October 2016, the Securities and Exchange Commission (SEC) released its Final Rule on Investment Company Reporting Modernization (the “Rule”). The Rule, which introduces two new regulatory reporting forms for investment companies – Form N-PORT and Form N-CEN – also contains amendments to Regulation S-X which impact financial statement presentation, particularly the presentation of derivative investments. Although still evaluating the impacts of the Rule, management believes that many of the Regulation S-X amendments are consistent with the fund’s current financial statement presentation and expects that the fund will be able to comply with the Rule’s Regulation S-X amendments by the August 1, 2017 compliance date.
Balance Sheet Offsetting – The fund’s accounting policy with respect to balance sheet offsetting is that, absent an event of default by the counterparty or a termination of the agreement, the International Swaps and Derivatives Association (ISDA) Master Agreement does not result in an offset of reported amounts of financial assets and financial liabilities in the Statement of Assets and Liabilities across transactions between the fund and the applicable counterparty. The fund’s right to setoff may be restricted or prohibited by the bankruptcy or insolvency laws of the particular jurisdiction to which a specific master netting agreement counterparty is subject. Balance sheet offsetting disclosures, to the extent applicable to the fund, have been included in the fund’s Significant Accounting Policies note under the captions for each of the fund’s in-scope financial instruments and transactions.
Investment Valuations – Equity securities, including restricted equity securities, are generally valued at the last sale or official closing price on their primary market or exchange as provided by a third-party pricing service. Equity securities, for which there were no sales reported that day, are generally valued at the last quoted daily bid quotation on their primary market or exchange as provided by a third-party pricing service. Short-term instruments with a maturity at issuance of 60 days or less may be valued at amortized cost, which approximates market value. Open-end investment companies are generally valued at net asset value per share. Securities and other assets generally valued on the basis of information from a third-party pricing service may also be valued at a broker/dealer bid quotation. Values obtained from third-party pricing services can utilize both transaction data and market information such as yield, quality, coupon rate, maturity, type of issue, trading characteristics, and other market data. The values of foreign securities and other assets and liabilities expressed in foreign currencies are converted to U.S. dollars using the mean of bid and asked prices for rates provided by a third-party pricing service.
The Board of Trustees has delegated primary responsibility for determining or causing to be determined the value of the fund’s investments (including any fair valuation) to the adviser pursuant to valuation policies and procedures approved by the Board. If the adviser determines that reliable market quotations are not readily available, investments are valued at fair value as determined in good faith by the adviser in accordance with such procedures under the oversight of the Board of Trustees. Under the fund’s valuation policies and procedures, market quotations are not considered to be readily available for most types of debt instruments and floating rate loans and many types of derivatives. These investments are generally valued at fair value based on information from third-party pricing services. In addition, investments may be valued at fair value if the adviser determines that an investment’s value has been materially affected by events occurring after the close of the exchange or market on which the investment is principally traded (such as foreign exchange or market) and prior to the determination of the fund’s net asset value, or after the halting of trading of a specific security where trading does not resume prior to the close of the exchange or market on which the security is principally traded. Events that occur on a frequent basis after foreign markets close (such as developments in foreign markets and significant movements in the U.S. markets) and prior to the determination of the fund’s net asset value may be deemed to have a material effect on the value of securities traded in foreign markets. Accordingly, the fund’s foreign equity securities may often be valued at fair value. The adviser generally relies on third-party pricing services or other information (such as the correlation with price movements of similar securities in the same or other markets; the type, cost and investment characteristics of the security; the
14
Table of Contents
MFS Investors Trust Series
Notes to Financial Statements – continued
business and financial condition of the issuer; and trading and other market data) to assist in determining whether to fair value and at what value to fair value an investment. The value of an investment for purposes of calculating the fund’s net asset value can differ depending on the source and method used to determine value. When fair valuation is used, the value of an investment used to determine the fund’s net asset value may differ from quoted or published prices for the same investment. There can be no assurance that the fund could obtain the fair value assigned to an investment if it were to sell the investment at the same time at which the fund determines its net asset value per share.
Various inputs are used in determining the value of the fund’s assets or liabilities. These inputs are categorized into three broad levels. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an investment’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The fund’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the investment. Level 1 includes unadjusted quoted prices in active markets for identical assets or liabilities. Level 2 includes other significant observable market-based inputs (including quoted prices for similar securities, interest rates, prepayment speed, and credit risk). Level 3 includes unobservable inputs, which may include the adviser’s own assumptions in determining the fair value of investments. The following is a summary of the levels used as of December 31, 2016 in valuing the fund’s assets or liabilities:
Investments at Value | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Equity Securities: | ||||||||||||||||
United States | $462,828,116 | $— | $— | $462,828,116 | ||||||||||||
France | 6,033,411 | 13,106,732 | — | 19,140,143 | ||||||||||||
Canada | 9,355,659 | — | — | 9,355,659 | ||||||||||||
United Kingdom | — | 3,995,558 | — | 3,995,558 | ||||||||||||
Mutual Funds | 4,003,442 | — | — | 4,003,442 | ||||||||||||
Total Investments | $482,220,628 | $17,102,290 | $— | $499,322,918 |
For further information regarding security characteristics, see the Portfolio of Investments.
Of the level 1 investments presented above, equity investments amounting to $6,033,411 would have been considered level 2 investments at the beginning of the period. The primary reason for changes in the classifications between levels 1 and 2 occurs when foreign equity securities are fair valued using other observable market-based inputs in place of the closing exchange price due to events occurring after the close of the exchange or market on which the investment is principally traded. The fund’s foreign equity securities may often be valued at fair value. The fund’s policy is to recognize transfers between the levels as of the end of the period.
Foreign Currency Translation – Purchases and sales of foreign investments, income, and expenses are converted into U.S. dollars based upon currency exchange rates prevailing on the respective dates of such transactions or on the reporting date for foreign denominated receivables and payables. Gains and losses attributable to foreign currency exchange rates on sales of securities are recorded for financial statement purposes as net realized gains and losses on investments. Gains and losses attributable to foreign exchange rate movements on receivables, payables, income and expenses are recorded for financial statement purposes as foreign currency transaction gains and losses. That portion of both realized and unrealized gains and losses on investments that results from fluctuations in foreign currency exchange rates is not separately disclosed.
Security Loans – Under its Securities Lending Agency Agreement with the fund, State Street Bank and Trust Company (“State Street”), as lending agent, loans the securities of the fund to certain qualified institutions (the “Borrowers”) approved by the fund. Security loans can be terminated at the discretion of either the lending agent or the fund and the related securities must be returned within the earlier of the standard trade settlement period for such securities or within three business days. The loans are collateralized by cash and/or U.S. Treasury and federal agency obligations in an amount typically at least equal to the market value of the securities loaned. On loans collateralized by cash, the cash collateral is invested in a money market fund. The market value of the loaned securities is determined at the close of business of the fund and any additional required collateral is delivered to the fund on the next business day. State Street provides the fund with indemnification against Borrower default. In the event of Borrower default, State Street will, for the benefit of the fund, either purchase securities identical to those loaned or, when such purchase is commercially impracticable, pay the fund the market value of the loaned securities. In return, State Street assumes the fund’s rights to the related collateral. If the collateral value is less than the cost to purchase identical securities, State Street is responsible for the shortfall, but only to the extent that such shortfall is not due to a decline in collateral value resulting from collateral reinvestment for which the fund bears the risk of loss. A portion of the income generated upon investment of the collateral is remitted to the Borrowers, and the remainder is allocated between the fund and the lending agent. On loans collateralized by U.S. Treasury and/or federal agency obligations, a fee is received from the Borrower, and is allocated between the fund and the lending agent. Income from securities lending is included in “Interest” income, in the Statement of Operations. The dividend and interest income earned on the securities loaned is accounted for in the same manner as other dividend and interest income. At December 31, 2016, there were no securities on loan or collateral outstanding.
15
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MFS Investors Trust Series
Notes to Financial Statements – continued
Indemnifications – Under the fund’s organizational documents, its officers and Trustees may be indemnified against certain liabilities and expenses arising out of the performance of their duties to the fund. Additionally, in the normal course of business, the fund enters into agreements with service providers that may contain indemnification clauses. The fund’s maximum exposure under these agreements is unknown as this would involve future claims that may be made against the fund that have not yet occurred.
Investment Transactions and Income – Investment transactions are recorded on the trade date. Interest income is recorded on the accrual basis. Dividends received in cash are recorded on the ex-dividend date. Certain dividends from foreign securities will be recorded when the fund is informed of the dividend if such information is obtained subsequent to the ex-dividend date. Dividend payments received in additional securities are recorded on the ex-dividend date in an amount equal to the value of the security on such date.
The fund may receive proceeds from litigation settlements. Any proceeds received from litigation involving portfolio holdings are reflected in the Statement of Operations in realized gain/loss if the security has been disposed of by the fund or in unrealized gain/loss if the security is still held by the fund. Any other proceeds from litigation not related to portfolio holdings are reflected as other income in the Statement of Operations.
Reimbursement of Expenses by Custodian – In December 2015, the fund’s custodian (or former custodian), State Street Bank and Trust Company, announced that it intended to reimburse its asset servicing clients for expense amounts that it billed in error during the period 1998 through 2015. The amount of this one-time reimbursement attributable to the fund is reflected as “Reimbursement of custodian expenses” in the Statement of Operations.
Tax Matters and Distributions – The fund intends to qualify as a regulated investment company, as defined under Subchapter M of the Internal Revenue Code, and to distribute all of its taxable income, including realized capital gains. As a result, no provision for federal income tax is required. The fund’s federal tax returns, when filed, will remain subject to examination by the Internal Revenue Service for a three year period. Management has analyzed the fund’s tax positions taken on federal and state tax returns for all open tax years and does not believe that there are any uncertain tax positions that require recognition of a tax liability. Foreign taxes, if any, have been accrued by the fund in the accompanying financial statements in accordance with the applicable foreign tax law. Foreign income taxes may be withheld by certain countries in which the fund invests. Additionally, capital gains realized by the fund on securities issued in or by certain foreign countries may be subject to capital gains tax imposed by those countries.
Distributions to shareholders are recorded on the ex-dividend date. Income and capital gain distributions are determined in accordance with income tax regulations, which may differ from U.S. generally accepted accounting principles. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences which arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary overdistributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes.
Book/tax differences primarily relate to wash sale loss deferrals.
The tax character of distributions declared to shareholders for the last two fiscal years is as follows:
12/31/16 | 12/31/15 | |||||||
Ordinary income (including any short-term capital gains) | $4,818,041 | $10,112,585 | ||||||
Long-term capital gains | 51,703,567 | 57,578,462 | ||||||
Total distributions | $56,521,608 | $67,691,047 |
The federal tax cost and the tax basis components of distributable earnings were as follows:
As of 12/31/16 | ||||
Cost of investments | $332,124,986 | |||
Gross appreciation | 173,234,597 | |||
Gross depreciation | (6,036,665 | ) | ||
Net unrealized appreciation (depreciation) | $167,197,932 | |||
Undistributed ordinary income | 3,806,043 | |||
Undistributed long-term capital gain | 21,821,187 | |||
Other temporary differences | (9,807 | ) |
Multiple Classes of Shares of Beneficial Interest – The fund offers multiple classes of shares, which differ in their respective distribution and/or service fees. The fund’s income, realized and unrealized gain (loss), and common expenses are allocated to shareholders based on the daily net assets of each class. Dividends are declared separately for each class. Differences in per share
16
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MFS Investors Trust Series
Notes to Financial Statements – continued
dividend rates are generally due to differences in separate class expenses. The fund’s distributions declared to shareholders as reported in the Statements of Changes in Net Assets are presented by class as follows:
From net investment income | From net realized gain on investments | |||||||||||||||
Year ended 12/31/16 | Year ended 12/31/15 | Year ended 12/31/16 | Year ended 12/31/15 | |||||||||||||
Initial Class | $2,326,257 | $2,881,791 | $29,736,135 | $33,890,351 | ||||||||||||
Service Class | 1,192,903 | 1,849,048 | 23,266,313 | 29,069,857 | ||||||||||||
Total | $3,519,160 | $4,730,839 | $53,002,448 | $62,960,208 |
(3) | Transactions with Affiliates |
Investment Adviser – The fund has an investment advisory agreement with MFS to provide overall investment management and related administrative services and facilities to the fund. The management fee is computed daily and paid monthly at the following annual rates:
First $1 billion of average daily net assets | 0.75% | |||
Average daily net assets in excess of $1 billion | 0.65% |
The investment adviser has agreed in writing to reduce its management fee to 0.60% of the average daily net assets in excess of $2.5 billion. This written agreement will terminate on April 27, 2017. For the year ended December 31, 2016, the fund’s average daily net assets did not exceed $2.5 billion and therefore, the management fee was not reduced in accordance with this agreement. MFS has agreed in writing to reduce its management fee by a specified amount if certain MFS mutual fund assets exceed thresholds agreed to by MFS and the fund’s Board of Trustees. For the year ended December 31, 2016, this management fee reduction amounted to $34,010, which is included in the reduction of total expenses in the Statement of Operations. The management fee incurred for the year ended December 31, 2016 was equivalent to an annual effective rate of 0.74% of the fund’s average daily net assets.
Effective April 28, 2017, the management fee will be computed daily and paid monthly at the following annual rates:
First $1 billion of average daily net assets | 0.75% | |||
Next $1.5 billion of average daily net assets | 0.65% | |||
Average daily net assets in excess of $2.5 billion | 0.60% |
Effective August 1, 2016, the investment adviser has agreed in writing to pay a portion of the fund’s total annual operating expenses, excluding interest, taxes, extraordinary expenses, brokerage and transaction costs, and investment-related expenses, such that total annual operating expenses do not exceed 0.79% of average daily net assets for the Initial Class shares and 1.04% of average daily net assets for the Service Class shares. This written agreement will continue until modified by the fund’s Board of Trustees, but such agreement will continue at least until April 30, 2018. For the year ended December 31, 2016, the fund’s actual operating expenses did not exceed the limit and therefore, the investment adviser did not pay any portion of the fund’s expenses related to this agreement.
Distributor – MFS Fund Distributors, Inc. (MFD), a wholly-owned subsidiary of MFS, is the distributor of shares of the fund. The Trustees have adopted a distribution plan for the Service Class shares pursuant to Rule 12b-1 under the Investment Company Act of 1940.
The fund’s distribution plan provides that the fund will pay MFD distribution and/or service fees equal to 0.25% per annum of its average daily net assets attributable to Service Class shares as partial consideration for services performed and expenses incurred by MFD and financial intermediaries (including participating insurance companies that invest in the fund to fund variable annuity and variable life insurance contracts, sponsors of qualified retirement and pension plans that invest in the fund, and affiliates of these participating insurance companies and plan sponsors) in connection with the sale and distribution of the Service Class shares. MFD may subsequently pay all, or a portion, of the distribution and/or service fees to financial intermediaries.
Shareholder Servicing Agent – MFS Service Center, Inc. (MFSC), a wholly-owned subsidiary of MFS, receives a fee from the fund for its services as shareholder servicing agent. For the year ended December 31, 2016, the fee was $42,554, which equated to 0.0089% annually of the fund’s average daily net assets. MFSC also receives payment from the fund for out-of-pocket expenses paid by MFSC on behalf of the fund. For the year ended December 31, 2016, these costs amounted to $1,900.
Administrator – MFS provides certain financial, legal, shareholder communications, compliance, and other administrative services to the fund. Under an administrative services agreement, the fund reimburses MFS the costs incurred to provide these services. The fund is charged an annual fixed amount of $17,500 plus a fee based on average daily net assets. The administrative services fee incurred for the year ended December 31, 2016 was equivalent to an annual effective rate of 0.0176% of the fund’s average daily net assets.
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Notes to Financial Statements – continued
Trustees’ and Officers’ Compensation – The fund pays compensation to independent Trustees in the form of a retainer, attendance fees, and additional compensation to Board and Committee chairpersons. The fund does not pay compensation directly to Trustees or officers of the fund who are also officers of the investment adviser, all of whom receive remuneration for their services to the fund from MFS. Certain officers and Trustees of the fund are officers or directors of MFS, MFD, and MFSC.
Other – This fund and certain other funds managed by MFS (the funds) have entered into a service agreement (the ISO Agreement) which provides for payment of fees solely by the funds to Tarantino LLC in return for the provision of services of an Independent Senior Officer (ISO) for the funds. Frank L. Tarantino serves as the ISO and is an officer of the funds and the sole member of Tarantino LLC. The funds can terminate the ISO Agreement with Tarantino LLC at any time under the terms of the ISO Agreement. For the year ended December 31, 2016, the fee paid by the fund under this agreement was $945 and is included in “Miscellaneous” expense in the Statement of Operations. MFS has agreed to bear all expenses associated with office space, other administrative support, and supplies provided to the ISO.
The fund invests in the MFS Institutional Money Market Portfolio which is managed by MFS and seeks current income consistent with preservation of capital and liquidity. This money market fund does not pay a management fee to MFS.
The fund is permitted to engage in purchase and sale transactions (“cross-trades”) with funds and accounts for which MFS serves as investment adviser or sub-adviser pursuant to a policy adopted by the Board of Trustees. This policy has been designed to ensure that cross-trades conducted by the fund comply with Rule 17a-7 under the Investment Company Act of 1940. Under this policy, cross-trades are effected at current market prices with no remuneration paid in connection with the transaction. During the year ended December 31, 2016, the fund engaged in purchase and sale transactions pursuant to this policy, which amounted to $630,957 and $1,466,765, respectively. The sales transactions resulted in net realized gains (losses) of $451,557.
(4) | Portfolio Securities |
For the year ended December 31, 2016, purchases and sales of investments, other than short-term obligations, aggregated $94,824,691 and $115,556,173, respectively.
(5) | Shares of Beneficial Interest |
The fund’s Declaration of Trust permits the Trustees to issue an unlimited number of full and fractional shares of beneficial interest. Transactions in fund shares were as follows:
Year ended 12/31/16 | Year ended 12/31/15 | |||||||||||||||
Shares | Amount | Shares | Amount | |||||||||||||
Shares sold | ||||||||||||||||
Initial Class | 245,268 | $6,356,188 | 299,869 | $8,738,742 | ||||||||||||
Service Class | 1,897,837 | 48,438,271 | 1,948,065 | 56,638,016 | ||||||||||||
2,143,105 | $54,794,459 | 2,247,934 | $65,376,758 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | ||||||||||||||||
Initial Class | 1,272,318 | $32,062,392 | 1,486,344 | $36,772,142 | ||||||||||||
Service Class | 980,721 | 24,459,216 | 1,261,996 | 30,918,905 | ||||||||||||
2,253,039 | $56,521,608 | 2,748,340 | $67,691,047 | |||||||||||||
Shares reacquired | ||||||||||||||||
Initial Class | (1,957,487 | ) | $(50,705,350 | ) | (2,471,922 | ) | $(73,166,193 | ) | ||||||||
Service Class | (1,172,721 | ) | (29,978,373 | ) | (5,269,524 | ) | (144,072,223 | ) | ||||||||
(3,130,208 | ) | $(80,683,723 | ) | (7,741,446 | ) | $(217,238,416 | ) | |||||||||
Net change | ||||||||||||||||
Initial Class | (439,901 | ) | $(12,286,770 | ) | (685,709 | ) | $(27,655,309 | ) | ||||||||
Service Class | 1,705,837 | 42,919,114 | (2,059,463 | ) | (56,515,302 | ) | ||||||||||
1,265,936 | $30,632,344 | (2,745,172 | ) | $(84,170,611 | ) |
(6) | Line of Credit |
The fund and certain other funds managed by MFS participate in a $1.25 billion unsecured committed line of credit, subject to a $1 billion sublimit, provided by a syndication of banks under a credit agreement. Borrowings may be made for temporary financing needs. Interest is charged to each fund, based on its borrowings, generally at a rate equal to the higher of the Overnight Federal Reserve funds rate or daily one month LIBOR plus an agreed upon spread. A commitment fee, based on the average daily, unused portion of the committed line of credit, is allocated among the participating funds at the end of each calendar quarter. In addition, the fund and other funds managed by MFS have established unsecured uncommitted borrowing arrangements with certain banks for temporary financing needs. Interest is charged to each fund, based on its borrowings, at a rate equal to the Overnight Federal Reserve funds rate plus an agreed upon spread. For the year ended December 31, 2016, the fund’s commitment fee and interest expense were $2,912 and $0, respectively, and are included in “Miscellaneous” expense in the Statement of Operations.
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Notes to Financial Statements – continued
(7) | Transactions in Underlying Affiliated Funds – Affiliated Issuers |
An affiliated issuer may be considered one in which the fund owns 5% or more of the outstanding voting securities, or a company which is under common control. For the purposes of this report, the fund assumes the following to be an affiliated issuer:
Underlying Affiliated Fund | Beginning Shares/Par Amount | Acquisitions Shares/Par Amount | Dispositions Shares/Par Amount | Ending Shares/Par Amount | ||||||||||||
MFS Institutional Money Market Portfolio | 4,635,935 | 53,871,759 | (54,504,252 | ) | 4,003,442 | |||||||||||
Underlying Affiliated Fund | Realized Gain (Loss) | Capital Gain Distributions | Dividend Income | Ending Value | ||||||||||||
MFS Institutional Money Market Portfolio | $(260 | ) | $— | $20,051 | $4,003,442 |
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MFS Investors Trust Series
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Trustees of MFS Variable Insurance Trust and the Shareholders of MFS Investors Trust Series:
We have audited the accompanying statement of assets and liabilities, including the portfolio of investments, of MFS Investors Trust Series (one of the series of MFS Variable Insurance Trust) (the “Fund”) as of December 31, 2016, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended. These financial statements and financial highlights are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. The Fund is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of December 31, 2016, by correspondence with the custodian and brokers; when replies were not received from brokers, we performed other auditing procedures. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of MFS Investors Trust Series as of December 31, 2016, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
February 15, 2017
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MFS Investors Trust Series
TRUSTEES AND OFFICERS – IDENTIFICATION AND BACKGROUND
The Trustees and Officers of the Trust, as of February 1, 2017, are listed below, together with their principal occupations during the past five years. (Their titles may have varied during that period.) The address of each Trustee and Officer is 111 Huntington Avenue, Boston, Massachusetts 02199-7618.
Name, Age | Position(s) with Fund | Trustee/Officer Since (h) | Principal Occupations During the Past Five Years | Other Directorships (j) | ||||
INTERESTED TRUSTEES | ||||||||
Robert J. Manning (k) (age 53) | Trustee | February 2004 | Massachusetts Financial Services Company, Executive Chairman (since January 2017) and Director; Chairman (until January 2017); Chief Executive Officer (until 2015); Co-Chief Executive Officer (2015-2016) | N/A | ||||
Robin A. Stelmach (k) (age 55) | Trustee | January 2014 | Massachusetts Financial Services Company, Vice Chair (since January 2017); Chief Operating Officer and Executive Vice President (until January 2017) | N/A | ||||
INDEPENDENT TRUSTEES | ||||||||
David H. Gunning (age 74) | Trustee and Chair of Trustees | January 2004 | Private investor | Lincoln Electric Holdings, Inc., Director; Development Alternatives, Inc., Director/Non-Executive Chairman | ||||
Steven E. Buller (age 65) | Trustee | February 2014 | Chairman, Financial Accounting Standards Advisory Council (until 2015); Standing Advisory Group, Public Company Accounting Oversight Board, Member (until 2014); BlackRock, Inc. (investment management), Managing Director (until 2014), BlackRock Finco UK (investment management), Director (until 2014) | N/A | ||||
Maureen R. Goldfarb (age 61) | Trustee | January 2009 | Private investor | N/A | ||||
Michael Hegarty (age 72) | Trustee | December 2004 | Private investor | Rouse Properties Inc., Director; Capmark Financial Group Inc., Director (until 2015) | ||||
John P. Kavanaugh (age 62) | Trustee and Vice Chair of Trustees | January 2009 | Private investor | N/A | ||||
Maryanne L. Roepke (age 60) | Trustee | May 2014 | American Century Investments (investment management), Senior Vice President and Chief Compliance Officer (until 2014) | N/A | ||||
Laurie J. Thomsen (age 59) | Trustee | March 2005 | Private investor | The Travelers Companies, Director; Dycom Industries, Inc., Director | ||||
OFFICERS | ||||||||
Christopher R. Bohane (k) (age 43) | Assistant Secretary and Assistant Clerk | July 2005 | Massachusetts Financial Services Company, Vice President and Assistant General Counsel | N/A | ||||
Kino Clark (k) (age 48) | Assistant Treasurer | January 2012 | Massachusetts Financial Services Company, Vice President | N/A | ||||
Thomas H. Connors (k) (age 57) | Assistant Secretary and Assistant Clerk | September 2012 | Massachusetts Financial Services Company, Vice President and Senior Counsel; Deutsche Investment Management Americas Inc. (financial service provider), Director and Senior Counsel (until 2012) | N/A | ||||
Ethan D. Corey (k) (age 53) | Assistant Secretary and Assistant Clerk | July 2005 | Massachusetts Financial Services Company, Senior Vice President and Associate General Counsel | N/A | ||||
David L. DiLorenzo (k) (age 48) | President | July 2005 | Massachusetts Financial Services Company, Senior Vice President | N/A | ||||
Brian E. Langenfeld (k) (age 43) | Assistant Secretary and Assistant Clerk | June 2006 | Massachusetts Financial Services Company, Vice President and Senior Counsel | N/A |
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Trustees and Officers – continued
Name, Age | Position(s) with Fund | Trustee/Officer Since (h) | Principal Occupations During the Past Five Years | Other Directorships (j) | ||||
Susan A. Pereira (k) (age 46) | Assistant Secretary and Assistant Clerk | July 2005 | Massachusetts Financial Services Company, Vice President and Senior Counsel | N/A | ||||
Kasey L. Phillips (k) (age 46) | Assistant Treasurer | September 2012 | Massachusetts Financial Services Company, Vice President; Wells Fargo Funds Management, LLC, Senior Vice President, Fund Treasurer (until 2012) | N/A | ||||
Mark N. Polebaum (k) (age 64) | Secretary and Clerk | January 2006 | Massachusetts Financial Services Company, Executive Vice President, General Counsel and Secretary | N/A | ||||
Matthew A. Stowe (k) (age 42) | Assistant Secretary and Assistant Clerk | October 2014 | Massachusetts Financial Services Company, Vice President and Assistant General Counsel | N/A | ||||
Frank L. Tarantino (age 72) | Independent Senior Officer | June 2004 | Tarantino LLC (provider of compliance services), Principal | N/A | ||||
Richard S. Weitzel (k) (age 46) | Assistant Secretary and Assistant Clerk | October 2007 | Massachusetts Financial Services Company, Senior Vice President and Associate General Counsel | N/A | ||||
Martin J. Wolin (k) (age 49) | Chief Compliance Officer | July 2015 | Massachusetts Financial Services Company, Senior Vice President and Chief Compliance Officer (since July 2015); Mercer (financial service provider), Chief Risk and Compliance Officer, North America and Latin America (until June 2015) | N/A | ||||
James O. Yost (k) (age 56) | Treasurer | September 1990 | Massachusetts Financial Services Company, Senior Vice President | N/A |
(h) | Date first appointed to serve as Trustee/officer of an MFS Fund. Each Trustee has served continuously since appointment unless indicated otherwise. For the period from December 15, 2004 until February 22, 2005, Mr. Manning served as Advisory Trustee. Prior to January 2012, Messrs. DiLorenzo and Yost served as Assistant Treasurers of the Funds. From January 2012 through December 2016, Messrs. DiLorenzo and Yost served as Treasurer and Deputy Treasurer of the Funds, respectively. |
(j) | Directorships or trusteeships of companies required to report to the Securities and Exchange Commission (i.e., “public companies”). |
(k) | “Interested person” of the Trust within the meaning of the Investment Company Act of 1940 (referred to as the 1940 Act), which is the principal federal law governing investment companies like the fund, as a result of a position with MFS. The address of MFS is 111 Huntington Avenue, Boston, Massachusetts 02199-7618. |
Each Trustee (except Ms. Stelmach, Mr. Buller and Ms. Roepke) has been elected by shareholders and each Trustee and officer holds office until his or her successor is chosen and qualified or until his or her earlier death, resignation, retirement or removal. The Trust does not hold annual meetings for the purpose of electing Trustees, and Trustees are not elected for fixed terms. Messrs. Buller and Kavanaugh and Ms. Roepke are members of the Trust’s Audit Committee.
Each of the Fund’s Trustees and officers holds comparable positions with certain other funds of which MFS or a subsidiary is the investment adviser or distributor, and, in the case of the officers, with certain affiliates of MFS. As of February 1, 2017, the Trustees served as board members of 137 funds within the MFS Family of Funds.
The Statement of Additional Information for a Fund includes further information about the Trustees and is available without charge upon request by calling 1-800-225-2606.
Investment Adviser Massachusetts Financial Services Company 111 Huntington Avenue Boston, MA 02199-7618 | Custodian State Street Bank and Trust Company 1 Lincoln Street Boston, MA 02111-2900 | |
Distributor MFS Fund Distributors, Inc. 111 Huntington Avenue Boston, MA 02199-7618 | Independent Registered Public Accounting Firm Deloitte & Touche LLP 200 Berkeley Street Boston, MA 02116 | |
Portfolio Managers Kevin Beatty Ted Maloney |
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BOARD REVIEW OF INVESTMENT ADVISORY AGREEMENT
The Investment Company Act of 1940 requires that both the full Board of Trustees and a majority of the non-interested (“independent”) Trustees, voting separately, annually approve the continuation of the Fund’s investment advisory agreement with MFS. The Trustees consider matters bearing on the Fund and its advisory arrangements at their meetings throughout the year, including a review of performance data at each regular meeting. In addition, the independent Trustees met several times over the course of three months beginning in May and ending in July, 2016 (“contract review meetings”) for the specific purpose of considering whether to approve the continuation of the investment advisory agreement for the Fund and the other investment companies that the Board oversees (the “MFS Funds”). The independent Trustees were assisted in their evaluation of the Fund’s investment advisory agreement by independent legal counsel, from whom they received separate legal advice and with whom they met separately from MFS during various contract review meetings. The independent Trustees were also assisted in this process by the MFS Funds’ Independent Senior Officer, a senior officer appointed by and reporting to the independent Trustees.
In connection with their deliberations regarding the continuation of the investment advisory agreement, the Trustees, including the independent Trustees, considered such information and factors as they believed, in light of the legal advice furnished to them and their own business judgment, to be relevant. The investment advisory agreement for the Fund was considered separately, although the Trustees also took into account the common interests of all MFS Funds in their review. As described below, the Trustees considered the nature, quality, and extent of the various investment advisory, administrative, and shareholder services performed by MFS under the existing investment advisory agreement and other arrangements with the Fund.
In connection with their contract review meetings, the Trustees received and relied upon materials that included, among other items: (i) information provided by Broadridge Financial Solutions, Inc. (“Broadridge”), an independent third party, on the investment performance of the Fund for various time periods ended December 31, 2015 and the investment performance of a group of funds with substantially similar investment classifications/objectives (the “Lipper performance universe”), (ii) information provided by Broadridge on the Fund’s advisory fees and other expenses and the advisory fees and other expenses of comparable funds identified by Broadridge (the “Broadridge expense group”), (iii) information provided by MFS on the advisory fees of portfolios of other clients of MFS, including institutional separate accounts and other clients, (iv) information as to whether and to what extent applicable expense waivers, reimbursements or fee “breakpoints” are observed for the Fund, (v) information regarding MFS’ financial results and financial condition, including MFS’ and certain of its affiliates’ estimated profitability from services performed for the Fund and the MFS Funds as a whole, and compared to MFS’ institutional business, (vi) MFS’ views regarding the outlook for the mutual fund industry and the strategic business plans of MFS, (vii) descriptions of various functions performed by MFS for the Funds, such as compliance monitoring and portfolio trading practices, and (viii) information regarding the overall organization of MFS, including information about MFS’ senior management and other personnel providing investment advisory, administrative and other services to the Fund and the other MFS Funds. The comparative performance, fee and expense information prepared and provided by Broadridge was not independently verified and the independent Trustees did not independently verify any information provided to them by MFS.
The Trustees’ conclusion as to the continuation of the investment advisory agreement was based on a comprehensive consideration of all information provided to the Trustees and not the result of any single factor. Some of the factors that figured particularly in the Trustees’ deliberations are described below, although individual Trustees may have evaluated the information presented differently from one another, giving different weights to various factors. It is also important to recognize that the fee arrangements for the Fund and other MFS Funds are the result of years of review and discussion between the independent Trustees and MFS, that certain aspects of such arrangements may receive greater scrutiny in some years than in others, and that the Trustees’ conclusions may be based, in part, on their consideration of these same arrangements during the course of the year and in prior years.
Based on information provided by Broadridge and MFS, the Trustees reviewed the Fund’s total return investment performance as well as the performance of peer groups of funds over various time periods. The Trustees placed particular emphasis on the total return performance of the Fund’s Initial Class shares in comparison to the performance of funds in its Lipper performance universe over the three-year period ended December 31, 2015, which the Trustees believed was a long enough period to reflect differing market conditions. The total return performance of the Fund’s Initial Class shares was in the 4th quintile relative to the other funds in the universe for this three-year period (the 1st quintile being the best performers and the 5th quintile being the worst performers). The total return performance of the Fund’s Initial Class shares was in the 3rd quintile for each of the one- and five-year periods ended December 31, 2015 relative to the Lipper performance universe. Because of the passage of time, these performance results may differ from the performance results for more recent periods, including those shown elsewhere in this report.
In the course of their deliberations, the Trustees took into account information provided by MFS in connection with the contract review meetings, as well as during investment review meetings conducted with portfolio management personnel during the course of the year regarding the Fund’s performance. After reviewing these and related factors, the Trustees concluded, within the context of their overall conclusions regarding the investment advisory agreement, that they were satisfied with MFS’ responses and efforts relating to investment performance.
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Board Review of Investment Advisory Agreement – continued
In assessing the reasonableness of the Fund’s advisory fee, the Trustees considered, among other information, the Fund’s advisory fee and the total expense ratio of the Fund’s Initial Class shares as a percentage of average daily net assets and the advisory fee and total expense ratios of peer groups of funds based on information provided by Broadridge. The Trustees considered that MFS has agreed to implement an expense limitation for the Fund, which may not be changed without the Trustee’s approval. The Trustees also considered that, according to the Broadridge data (which takes into account any fee reductions or expense limitations that were in effect during the Fund’s last fiscal year), the Fund’s effective advisory fee rate and total expense ratio were each higher than the Broadridge expense group median.
The Trustees also considered the advisory fees charged by MFS to any institutional separate accounts advised by MFS (“separate accounts”) and unaffiliated investment companies for which MFS serves as subadviser (“subadvised funds”) that have comparable investment strategies to the Fund. In comparing these fees, the Trustees considered information provided by MFS as to the generally broader scope of services provided by MFS to the Fund, as well as the more extensive regulatory burdens imposed on MFS in managing the Fund, in comparison to separate accounts and subadvised funds. The Trustees also considered the higher demands placed on MFS’ investment personnel and trading infrastructure as a result of the daily cash in-flows and out-flows of the Fund in comparison to separate accounts.
The Trustees also considered whether the Fund may benefit from any economies of scale in the management of the Fund in the event of growth in assets of the Fund and/or growth in assets of the MFS Funds as a whole. They noted that the Fund’s advisory fee rate schedule is subject to a contractual breakpoint that reduces the Fund’s advisory fee rate on average daily net assets over $1 billion, and that MFS has agreed in writing to further reduce its advisory fee rate on the Fund’s average daily net assets over $2.5 billion, which may not be changed without the Trustees’ approval (the “management fee waiver rate”). They also noted that MFS has agreed to amend its contractual advisory fee rate schedule to reflect the existing management fee waiver rate effective April 28, 2017. The Trustees also noted that MFS has agreed in writing to waive a portion of the management fees of certain MFS Funds, including the Fund, if the total combined assets of certain funds within the MFS Funds’ complex increase above agreed upon thresholds (the “group fee waiver”), enabling the Fund’s shareholders to share in the benefits from any economies of scale at the complex level. The group fee waiver is reviewed and renewed annually between the Board and MFS. The Trustees concluded that the breakpoints and the group fee waiver were sufficient to allow the Fund to benefit from economies of scale as its assets and overall complex assets grow.
The Trustees also considered information prepared by MFS relating to MFS’ costs and profits with respect to the Fund, the MFS Funds considered as a group, and other investment companies and accounts advised by MFS, as well as MFS’ methodologies used to determine and allocate its costs to the MFS Funds, the Fund and other accounts and products for purposes of estimating profitability.
After reviewing these and other factors described herein, the Trustees concluded, within the context of their overall conclusions regarding the investment advisory agreement, that the advisory fees charged to the Fund represent reasonable compensation in light of the services being provided by MFS to the Fund.
In addition, the Trustees considered MFS’ resources and related efforts to continue to retain, attract and motivate capable personnel to serve the Fund. The Trustees also considered current and developing conditions in the financial services industry, including the presence of large and well-capitalized companies which are spending, and appear to be prepared to continue to spend, substantial sums to engage personnel and to provide services to competing investment companies. In this regard, the Trustees also considered the financial resources of MFS and its ultimate parent, Sun Life Financial Inc. The Trustees also considered the advantages and possible disadvantages to the Fund of having an adviser that also serves other investment companies as well as other accounts.
The Trustees also considered the nature, quality, cost, and extent of administrative, transfer agency, and distribution services provided to the Fund by MFS and its affiliates under agreements and plans other than the investment advisory agreement, including any 12b-1 fees the Fund pays to MFS Fund Distributors, Inc., an affiliate of MFS. The Trustees also considered the nature, extent and quality of certain other services MFS performs or arranges for on the Fund’s behalf, which may include securities lending programs, directed expense payment programs, class action recovery programs, and MFS’ interaction with third-party service providers, principally custodians and sub-custodians. The Trustees concluded that the various non-advisory services provided by MFS and its affiliates on behalf of the Fund were satisfactory.
The Trustees also considered benefits to MFS from the use of the Fund’s portfolio brokerage commissions, if applicable, to pay for investment research and various other factors. Additionally, the Trustees considered so-called “fall-out benefits” to MFS such as reputational value derived from serving as investment manager to the Fund.
Based on their evaluation of factors that they deemed to be material, including those factors described above, the Board of Trustees, including the independent Trustees, concluded that the Fund’s investment advisory agreement with MFS should be continued for an additional one-year period, commencing August 1, 2016.
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PROXY VOTING POLICIES AND INFORMATION
MFS votes proxies on behalf of the fund pursuant to proxy voting policies and procedures that are available without charge, upon request, by calling 1-800-225-2606, by visiting mfs.com (once you have selected “Individual Investor” as your role, click on “Individual Investor Home” in the top navigation and then select “Learn More About Proxy Voting” under the “I want to…” header on the left hand column of the page), or by visiting the SEC’s Web site at http://www.sec.gov.
Information regarding how the fund voted proxies relating to portfolio securities during the most recent twelve-month period ended June 30 is available by August 31 of each year without charge by visiting mfs.com (once you have selected “Individual Investor” as your role, click on “Individual Investor Home” in the top navigation and then select “Learn More About Proxy Voting” under the “I want to…” header on the left hand column of the page), or by visiting the SEC’s Web site at http://www.sec.gov.
QUARTERLY PORTFOLIO DISCLOSURE
The fund will file a complete schedule of portfolio holdings with the Securities and Exchange Commission (the Commission) for the first and third quarters of each fiscal year on Form N-Q. The fund’s Form N-Q is available on the EDGAR database on the Commission’s Internet Web site at http://www.sec.gov, and may be reviewed and copied at the:
Public Reference Room
Securities and Exchange Commission
100 F Street, NE, Room 1580
Washington, D.C. 20549
Information on the operation of the Public Reference Room may be obtained by calling the Commission at 1-800-SEC-0330. Copies of the fund’s Form N-Q also may be obtained, upon payment of a duplicating fee, by electronic request at the following e-mail address: publicinfo@sec.gov or by writing the Public Reference Section at the above address.
From time to time, MFS may post important information about the fund or the MFS funds on the MFS web site (mfs.com). This information is available on mfs.com by following these steps once you have selected “Individual Investor” as your role: (1) Click on the “Individual Investor Home” in the top navigation and then select the “Announcements” option within the “Market Outlooks” drop down, or (2) Click on “Products & Services” and “Variable Insurance Portfolios” and then select the fund’s name.
INFORMATION ABOUT FUND CONTRACTS AND LEGAL CLAIMS
The fund has entered into contractual arrangements with an investment adviser, administrator, distributor, shareholder servicing agent, 529 program manager (if applicable), and custodian who each provide services to the fund. Unless expressly stated otherwise, shareholders are not parties to, or intended beneficiaries of these contractual arrangements, and these contractual arrangements are not intended to create any shareholder right to enforce them against the service providers or to seek any remedy under them against the service providers, either directly or on behalf of the fund.
Under the Trust’s By-Laws and Declaration of Trust, any claims asserted against or on behalf of the MFS Funds, including claims against Trustees and Officers, must be brought in state and federal courts located within the Commonwealth of Massachusetts.
FEDERAL TAX INFORMATION (unaudited)
The following information is provided pursuant to provisions of the Internal Revenue Code.
The fund designates $56,874,000 as capital gain dividends paid during the fiscal year.
For corporate shareholders, 100% of the ordinary income dividends paid during the fiscal year qualify for the corporate dividends received deduction.
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rev. 3/16
FACTS | WHAT DOES MFS DO WITH YOUR PERSONAL INFORMATION? |
Why? | Financial companies choose how they share your personal information. Federal law gives consumers the right to limit some but not all sharing. Federal law also requires us to tell you how we collect, share, and protect your personal information. Please read this notice carefully to understand what we do. |
What? | The types of personal information we collect and share depend on the product or service you have with us. This information can include:
• Social Security number and account balances • Account transactions and transaction history • Checking account information and wire transfer instructions
When you are no longer our customer, we continue to share your information as described in this notice. |
How? | All financial companies need to share customers’ personal information to run their everyday business. In the section below, we list the reasons financial companies can share their customers’ personal information; the reasons MFS chooses to share; and whether you can limit this sharing. |
Reasons we can share your personal information | Does MFS share? | Can you limit this sharing? | ||
For our everyday business purposes – such as to process your transactions, maintain your account(s), respond to court orders and legal investigations, or report to credit bureaus | Yes | No | ||
For our marketing purposes – to offer our products and services to you | No | We don’t share | ||
For joint marketing with other financial companies | No | We don’t share | ||
For our affiliates’ everyday business purposes – information about your transactions and experiences | No | We don’t share | ||
For our affiliates’ everyday business purposes – information about your creditworthiness | No | We don’t share | ||
For nonaffiliates to market to you | No | We don’t share |
Questions? | Call 800-225-2606 or go to mfs.com. |
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Page 2 |
Who we are | ||
Who is providing this notice? | MFS Funds, MFS Investment Management, MFS Institutional Advisors, Inc., and MFS Heritage Trust Company. |
What we do | ||
How does MFS protect my personal information? | To protect your personal information from unauthorized access and use, we use security measures that comply with federal law. These measures include procedural, electronic, and physical safeguards for the protection of the personal information we collect about you. | |
How does MFS collect my personal information? | We collect your personal information, for example, when you
• open an account or provide account information • direct us to buy securities or direct us to sell your securities • make a wire transfer
We also collect your personal information from others, such as credit bureaus, affiliates, or other companies. | |
Why can’t I limit all sharing? | Federal law gives you the right to limit only
• sharing for affiliates’ everyday business purposes – information about your creditworthiness • affiliates from using your information to market to you • sharing for nonaffiliates to market to you
State laws and individual companies may give you additional rights to limit sharing. |
Definitions | ||
Affiliates | Companies related by common ownership or control. They can be financial and nonfinancial companies.
• MFS does not share personal information with affiliates, except for everyday business purposes as described on page one of this notice. | |
Nonaffiliates | Companies not related by common ownership or control. They can be financial and nonfinancial companies.
• MFS does not share with nonaffiliates so they can market to you. | |
Joint marketing | A formal agreement between nonaffiliated financial companies that together market financial products or services to you.
• MFS doesn’t jointly market. |
Other important information | ||
If you own an MFS product or receive an MFS service in the name of a third party such as a bank or broker-dealer, their privacy policy may apply to you instead of ours. |
27
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ANNUAL REPORT
December 31, 2016
MFS® MID CAP GROWTH SERIES
MFS® Variable Insurance Trust
VMG-ANN
Table of Contents
MFS® MID CAP GROWTH SERIES
The report is prepared for the general information of contract owners. It is authorized for distribution to prospective investors only when preceded or accompanied by a current prospectus.
NOT FDIC INSURED • MAY LOSE VALUE • NO BANK OR CREDIT UNION GUARANTEE • NOT A DEPOSIT • NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY OR NCUA/NCUSIF
Table of Contents
MFS Mid Cap Growth Series
LETTER FROM THE EXECUTIVE CHAIRMAN
Dear Contract Owners:
Despite June’s unexpected vote by the United Kingdom to leave the European Union and the surprising result in November’s U.S. presidential election, most markets have proved resilient. U.S. share prices quickly reversed post-Brexit declines, and indices reached new highs following the November elections. U.S. bond yields rose after Donald Trump’s victory on hopes that his proposed policy mix of lower taxes, increased spending on infrastructure and a lower regulatory burden on businesses will lift both U.S. economic growth and inflation. However, interest rates in most developed markets remain very low, with major central banks maintaining extremely accommodative monetary policies to reinvigorate slow-growing economies against a backdrop of still-low inflation. Even after the rise in yields following the election, interest rates remain low by historical standards.
Globally, economic growth has shown signs of recovery of late, led by the United States and the eurozone. Despite better growth, there are few immediate signs of worrisome inflation. Emerging market economies are recovering at a somewhat slower pace amid fears that restrictive U.S. trade policies could further hamper the already slow pace of global trade growth.
At MFS®, we believe in a patient, long-term approach to investing. Viewing investments with a long lens makes it possible to filter out short-term market noise and focus on achieving solid risk-adjusted returns over a full market cycle.
In our view, such an approach, along with the professional guidance of a financial advisor, will help you reach your investment objectives.
Respectfully,
Robert J. Manning
Executive Chairman
MFS Investment Management
February 15, 2017
The opinions expressed in this letter are subject to change and may not be relied upon for investment advice. No forecasts can be guaranteed.
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MFS Mid Cap Growth Series
Portfolio structure
Top ten holdings | ||||
NVIDIA Corp. | 2.7% | |||
Bright Horizons Family Solutions, Inc. | 2.7% | |||
Amphenol Corp., “A” | 2.2% | |||
Roper Technologies, Inc. | 2.2% | |||
Aramark | 2.1% | |||
Constellation Brands, Inc., “A” | 2.0% | |||
FleetCor Technologies, Inc. | 1.9% | |||
Ross Stores, Inc. | 1.8% | |||
Vulcan Materials Co. | 1.8% | |||
PerkinElmer, Inc. | 1.7% |
Equity sectors | ||||
Special Products & Services | 14.3% | |||
Industrial Goods & Services | 14.2% | |||
Technology | 13.4% | |||
Health Care | 11.5% | |||
Leisure | 9.0% | |||
Financial Services | 8.8% | |||
Retailing | 8.0% | |||
Autos & Housing | 7.6% | |||
Consumer Staples | 6.2% | |||
Basic Materials | 2.9% | |||
Utilities & Communications | 1.6% | |||
Energy | 1.1% | |||
Transportation | 0.9% |
Cash & Cash Equivalents includes any cash, investments in money market funds, short-term securities, and other assets less liabilities. Please see the Statement of Assets and Liabilities for additional information related to the fund’s cash position and other assets and liabilities.
Percentages are based on net assets as of 12/31/16.
The portfolio is actively managed and current holdings may be different.
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MFS Mid Cap Growth Series
Summary of Results
For the twelve months ended December 31, 2016, Initial Class shares of the MFS Mid Cap Growth Series (“fund”) provided a total return of 4.91%, while Service Class shares of the fund provided a total return of 4.62%. These compare with a return of 7.33% over the same period for the fund’s benchmark, the Russell Midcap® Growth Index.
Market Environment
Sluggish global growth weighed on both developed and emerging market (“EM”) economies during much of the reporting period, though signs of improved growth became evident in late 2016. The US Federal Reserve increased interest rates by 25 basis points at the end of the period, the second hike of the cycle which began in December 2015. Globally, however, central bank policy remained highly accommodative, which forced many government, and even some corporate, bond yields into negative territory during the period. During the first half of the period, the United Kingdom voted to leave the European Union (“EU”), beginning a multi-year process of negotiation in order to achieve “Brexit.” While markets initially reacted to the vote with alarm, the spillover to European and EM economies was relatively short-lived, although risks of further hits to EU cohesiveness could re-emerge. Late in the period, the surprising US presidential election outcome prompted a significant rally in equities and a rise in bond yields in anticipation of a reflationary policy mix from the incoming Trump administration.
Headwinds from lower energy and commodity prices, which had spread beyond the energy, materials and industrial sectors early in the reporting period, abated later in the period as stabilizing oil prices helped push energy earnings higher relative to expectations. A sharp rise in the US dollar was a headwind for multinationals late in the period. The sharp rise in the US dollar also weighed on earnings. US consumer spending held up well during the second half of the period amid a modest increase in real wages and relatively low gasoline prices. Demand for autos reached near-record territory, while the housing market continued its recovery. Slow global trade continued to mirror slow global growth, particularly for many EM countries. That said, EM countries began to show signs of a modest upturn in activity along with adjustment in their external accounts. These improved conditions appeared to have reassured investors and contributed to record inflows into the asset class during July and August as negative yields for an increasing share of developed market bonds drove yield-hungry investors further out on the risk spectrum. Similar investor inflows were experienced in the investment grade and high yield corporate markets. Late in the reporting period, however, new challenges emerged for emerging markets debt (“EMD”) as a result of the US presidential election, which raised concerns about the potential for a protectionist turn in US trade policy which could negatively impact EM economies. These concerns, along with rising expectations for US growth, inflation and interest rates, have turned the tables on flows into EMD. Since the election, flows have reversed. As of the end of the period, the markets seemed to be in “wait-and-see” mode, looking for evidence to either confirm or refute the repricing of risk that has occurred since Election Day.
Detractors from Performance
Weak security selection in the industrial goods & services, special products & services, and health care sectors detracted from returns relative to the Russell Midcap® Growth Index. Within the industrial goods & services sector, holding shares of global aerospace and defense systems company Orbital ATK (b)(h), and an overweight position in shares of engineering solutions provider Roper Technologies, weighed on relative performance. Shares of Orbital ATK lagged the benchmark over the reporting period as an accounting review led to an unexpected one-time charge related to a large contract with the Lake City Army ammunition plant. Within the special products & services sector, overweighting financial and professional services company Jones Lang Lasalle (h) hurt relative results. Within the health care sector, out-of-benchmark holdings in shares of Alexion Pharmaceuticals, Regeneron Pharmaceuticals and specialty pharmaceutical company Allergan (h) hindered relative returns as all three companies underperformed the benchmark.
Stocks in other sectors that weakened relative performance included overweighting shares of financial services software designer SS&C Technologies, global cruise line operator Norwegian Cruise Lines (h) and farm and ranch product retailer Tractor Supply Company.
The fund’s cash and/or cash equivalents position during the period was also a detractor from relative performance. Under normal market conditions, the fund strives to be fully invested and generally holds cash to buy new holdings and to provide liquidity. In a period when equity markets rose, as measured by the fund’s benchmark, holding cash hurt performance versus the benchmark, which has no cash position.
Contributors to Performance
Strong stock selection in both the retailing and autos & housing sectors positively impacted relative performance. Within the retailing sector, an overweight position in apparel retailer Burlington Stores (h), and not holding shares of specialty retailer Limited Brands, benefited relative returns. Shares of Limited Brands declined as a weak retail environment weighed on the company’s sales. Within
3
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MFS Mid Cap Growth Series
Management Review – continued
the autos & housing sector, the fund’s overweight positions in construction aggregates producer Vulcan Materials and pool supply retailer Pool Corporation, in addition to not holding shares of poor-performing vehicle components manufacturer Delphi Automotive, supported relative results.
Elsewhere, overweighting computer graphics processors maker NVIDIA, cable services provider Charter Communications, plant-based food and beverage producer Whitewave Foods (h) and electrical connector and sensor manufacturer Amphenol aided relative results. Shares of NVIDIA benefited from strong demand for the company’s graphical processing units, in both the gaming and deep learning data center segments, which helped drive record results. Holding shares of strong-performing industrial and specialty chemical distributer Univar (b) also helped.
Respectfully,
Eric Fischman | Paul Gordon | Matthew Sabel | ||
Portfolio Manager | Portfolio Manager | Portfolio Manager |
(b) | Security is not a benchmark constituent. |
(h) | Security was not held in the portfolio at period end. |
The views expressed in this report are those of the portfolio managers only through the end of the period of the report as stated on the cover and do not necessarily reflect the views of MFS or any other person in the MFS organization. These views are subject to change at any time based on market or other conditions, and MFS disclaims any responsibility to update such views. These views may not be relied upon as investment advice or an indication of trading intent on behalf of any MFS portfolio. References to specific securities are not recommendations of such securities, and may not be representative of any MFS portfolio’s current or future investments.
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MFS Mid Cap Growth Series
PERFORMANCE SUMMARY THROUGH 12/31/16
The following chart illustrates the historical performance of the fund in comparison to its benchmark(s). Benchmarks are unmanaged and may not be invested in directly. Benchmark returns do not reflect any fees or expenses. The performance of other share classes will be greater than or less than that of the class depicted below. (See Notes to Performance Summary.)
Performance data shown represents past performance and is no guarantee of future results. Investment return and principal value fluctuate so your units, when sold, may be worth more or less than the original cost; current performance may be lower or higher than quoted. The performance shown does not reflect the deduction of taxes, if any, that a contract holder would pay on fund distributions or the redemption of contract units. The returns for the fund shown also do not reflect the deduction of expenses associated with variable products, such as mortality and expense risk charges, separate account charges, and sales charges imposed by the insurance company separate accounts. Such expenses would reduce the overall returns shown.
Growth of a Hypothetical $10,000 Investment
Total Returns through 12/31/16
Average annual total returns
Share Class | Class Inception Date | 1-yr | 5-yr | 10-yr | ||||||||
Initial Class | 4/28/00 | 4.91% | 13.90% | 5.83% | ||||||||
Service Class | 5/01/00 | 4.62% | 13.63% | 5.57% | ||||||||
Comparative benchmark | ||||||||||||
Russell Midcap® Growth Index (f) | 7.33% | 13.51% | 7.83% |
(f) | Source: FactSet Research Systems Inc. |
Benchmark Definition
Russell Midcap® Growth Index – constructed to provide a comprehensive barometer for growth securities in the mid-cap segment of the U.S. equity universe. Companies in this index generally have higher price-to-book ratios and higher forecasted growth values. The Russell Midcap® Growth Index is a trademark/service mark of the Frank Russell Company. Russell® is a trademark of the Frank Russell Company.
It is not possible to invest directly in an index.
Notes to Performance Summary
Average annual total return represents the average annual change in value for each share class for the periods presented.
Performance results reflect any applicable expense subsidies and waivers in effect during the periods shown. Without such subsidies and waivers the fund’s performance results would be less favorable. Please see the prospectus and financial statements for complete details. All results are historical and assume the reinvestment of any dividends and capital gains distributions.
Performance results do not include adjustments made for financial reporting purposes in accordance with U.S. generally accepted accounting principles and may differ from amounts reported in the financial highlights.
From time to time the fund may receive proceeds from litigation settlements, without which performance would be lower.
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MFS Mid Cap Growth Series
Fund Expenses Borne by the Contract Holders during the Period,
July 1, 2016 through December 31, 2016
As a contract holder of the fund, you incur ongoing costs, including management fees; distribution and/or service (12b-1) fees; and other fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the fund and to compare these costs with the ongoing costs of investing in other mutual funds.
The example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period July 1, 2016 through December 31, 2016.
Actual Expenses
The first line for each share class in the following table provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled “Expenses Paid During Period” to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line for each share class in the following table provides information about hypothetical account values and hypothetical expenses based on the fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight the fund’s ongoing costs only and do not take into account the fees and expenses imposed under the variable contracts through which your investment in the fund is made. Therefore, the second line for each share class in the table is useful in comparing ongoing costs associated with an investment in vehicles (such as the fund) which fund benefits under variable annuity and variable life insurance contracts and to qualified pension and retirement plans only, and will not help you determine the relative total costs of investing in the fund through variable annuity and variable life insurance contracts. If the fees and expenses imposed under the variable contracts were included, your costs would have been higher.
Share Class | Annualized Expense Ratio | Beginning Account Value 7/01/16 | Ending Account Value 12/31/16 | Expenses Paid During Period (p) 7/01/16-12/31/16 | ||||||||||||||
Initial Class | Actual | 0.68% | $1,000.00 | $1,033.99 | $3.48 | |||||||||||||
Hypothetical (h) | �� | 0.68% | $1,000.00 | $1,021.72 | $3.46 | |||||||||||||
Service Class | Actual | 0.92% | $1,000.00 | $1,033.00 | $4.70 | |||||||||||||
Hypothetical (h) | 0.92% | $1,000.00 | $1,020.51 | $4.67 |
(h) | 5% class return per year before expenses. |
(p) | “Expenses Paid During Period” are equal to each class’s annualized expense ratio, as shown above, multiplied by the average account value over the period, multiplied by 184/366 (to reflect the one-half year period). |
Notes to Expense Table
Expense ratios reflect a one-time Reimbursement of Expenses by Custodian during the six month period. Had this one-time Reimbursement of Expenses by Custodian not occurred during the six month period, the annualized expense ratios, the actual expenses paid during the period, and the hypothetical expenses paid during the period would have been approximately 0.81%, $4.14 and $4.12 for Initial Class and 1.05%, $5.37, and $5.33 for Service Class, respectively. See Note 2 in the Notes to Financial Statements for additional information.
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MFS Mid Cap Growth Series
PORTFOLIO OF INVESTMENTS – 12/31/16
The Portfolio of Investments is a complete list of all securities owned by your fund. It is categorized by broad-based asset classes.
Issuer | Shares/Par | Value ($) | ||||||
COMMON STOCKS – 99.5% | ||||||||
Aerospace – 2.0% | ||||||||
Leidos Holdings, Inc. | 52,113 | $ | 2,665,059 | |||||
TransDigm Group, Inc. | 20,704 | 5,154,468 | ||||||
|
| |||||||
$ | 7,819,527 | |||||||
|
| |||||||
Alcoholic Beverages – 2.0% | ||||||||
Constellation Brands, Inc., “A” | 49,966 | $ | 7,660,287 | |||||
|
| |||||||
Apparel Manufacturers – 0.8% | ||||||||
Hanesbrands, Inc. | 63,608 | $ | 1,372,025 | |||||
PVH Corp. | 17,843 | 1,610,152 | ||||||
|
| |||||||
$ | 2,982,177 | |||||||
|
| |||||||
Automotive – 2.0% | ||||||||
LKQ Corp. (a) | 203,417 | $ | 6,234,731 | |||||
Mobileye N.V. (a) | 35,233 | 1,343,082 | ||||||
|
| |||||||
$ | 7,577,813 | |||||||
|
| |||||||
Biotechnology – 2.0% | ||||||||
Alexion Pharmaceuticals, Inc. (a) | 17,660 | $ | 2,160,701 | |||||
Biomarin Pharmaceutical, Inc. (a) | 34,986 | 2,898,240 | ||||||
Regeneron Pharmaceuticals, Inc. (a) | 6,879 | 2,525,212 | ||||||
|
| |||||||
$ | 7,584,153 | |||||||
|
| |||||||
Brokerage & Asset Managers – 2.9% | ||||||||
Blackstone Group LP | 83,466 | $ | 2,256,086 | |||||
Intercontinental Exchange, Inc. | 61,620 | 3,476,600 | ||||||
NASDAQ, Inc. | 81,071 | 5,441,486 | ||||||
|
| |||||||
$ | 11,174,172 | |||||||
|
| |||||||
Business Services – 12.5% | ||||||||
Bright Horizons Family Solutions, Inc. (a) | 144,847 | $ | 10,142,187 | |||||
CoStar Group, Inc. (a) | 5,040 | 949,990 | ||||||
Equifax, Inc. | 45,441 | 5,372,489 | ||||||
Fidelity National Information Services, Inc. | 39,061 | 2,954,574 | ||||||
Fiserv, Inc. (a) | 55,433 | 5,891,419 | ||||||
FleetCor Technologies, Inc. (a) | 50,990 | 7,216,105 | ||||||
Gartner, Inc. (a) | 58,159 | 5,878,130 | ||||||
Global Payments, Inc. | 67,538 | 4,687,813 | ||||||
Tyler Technologies, Inc. (a) | 8,279 | 1,181,993 | ||||||
Verisk Analytics, Inc., “A” (a) | 44,723 | 3,630,166 | ||||||
|
| |||||||
$ | 47,904,866 | |||||||
|
| |||||||
Cable TV – 1.2% | ||||||||
Charter Communications, Inc., “A” (a) | 15,764 | $ | 4,538,771 | |||||
|
| |||||||
Computer Software – 3.7% | ||||||||
Akamai Technologies, Inc. (a) | 29,385 | $ | 1,959,392 | |||||
Autodesk, Inc. (a) | 59,459 | 4,400,561 | ||||||
Cadence Design Systems, Inc. (a) | 175,943 | 4,437,282 | ||||||
Sabre Corp. | 135,609 | 3,383,445 | ||||||
|
| |||||||
$ | 14,180,680 | |||||||
|
| |||||||
Computer Software – Systems – 3.7% | ||||||||
Guidewire Software, Inc. (a) | 25,586 | $ | 1,262,157 | |||||
NICE Systems Ltd., ADR | 23,475 | 1,614,141 |
Issuer | Shares/Par | Value ($) | ||||||
COMMON STOCKS – continued | ||||||||
Computer Software – Systems – continued | ||||||||
ServiceNow, Inc. (a) | 25,014 | $ | 1,859,541 | |||||
SS&C Technologies Holdings, Inc. | 143,409 | 4,101,497 | ||||||
Vantiv, Inc., “A” (a) | 87,086 | 5,192,067 | ||||||
|
| |||||||
$ | 14,029,403 | |||||||
|
| |||||||
Construction – 5.6% | ||||||||
Armstrong World Industries, Inc. (a) | 36,086 | $ | 1,508,395 | |||||
Fortune Brands Home & Security, Inc. | 33,183 | 1,773,963 | ||||||
Lennox International, Inc. | 26,753 | 4,097,757 | ||||||
Masco Corp. | 44,910 | 1,420,054 | ||||||
Pool Corp. | 41,356 | 4,315,085 | ||||||
Siteone Landscape Supply, Inc. (a) | 42,820 | 1,487,139 | ||||||
Vulcan Materials Co. | 54,288 | 6,794,143 | ||||||
|
| |||||||
$ | 21,396,536 | |||||||
|
| |||||||
Consumer Products – 1.4% | ||||||||
Newell Brands, Inc. | 121,331 | $ | 5,417,429 | |||||
|
| |||||||
Consumer Services – 1.7% | ||||||||
Nord Anglia Education, Inc. (a)(l) | 121,386 | $ | 2,828,294 | |||||
Priceline Group, Inc. (a) | 1,663 | 2,438,058 | ||||||
ServiceMaster Global Holdings, Inc. (a) | 33,542 | 1,263,527 | ||||||
|
| |||||||
$ | 6,529,879 | |||||||
|
| |||||||
Containers – 1.3% | ||||||||
CCL Industries, Inc. | 14,141 | $ | 2,778,383 | |||||
Crown Holdings, Inc. (a) | 42,372 | 2,227,496 | ||||||
|
| |||||||
$ | 5,005,879 | |||||||
|
| |||||||
Electrical Equipment – 5.4% | ||||||||
Acuity Brands, Inc. | 3,814 | $ | 880,500 | |||||
AMETEK, Inc. | 122,037 | 5,930,998 | ||||||
Amphenol Corp., “A” | 127,131 | 8,543,203 | ||||||
Mettler-Toledo International, Inc. (a) | 10,652 | 4,458,501 | ||||||
MSC Industrial Direct Co., Inc., “A” | 8,624 | 796,771 | ||||||
|
| |||||||
$ | 20,609,973 | |||||||
|
| |||||||
Electronics – 4.8% | ||||||||
Inphi Corp. (a) | 24,731 | $ | 1,103,497 | |||||
Monolithic Power Systems, Inc. | 38,127 | 3,123,745 | ||||||
NVIDIA Corp. | 95,655 | 10,210,215 | ||||||
Silicon Laboratories, Inc. (a) | 60,674 | 3,943,810 | ||||||
|
| |||||||
$ | 18,381,267 | |||||||
|
| |||||||
Energy – Independent – 1.1% | ||||||||
Energen Corp. (a) | 37,292 | $ | 2,150,630 | |||||
Parsley Energy, Inc., “A” (a) | 60,505 | 2,132,196 | ||||||
|
| |||||||
$ | 4,282,826 | |||||||
|
| |||||||
Entertainment – 1.2% | ||||||||
Netflix, Inc. (a) | 37,586 | $ | 4,653,147 | |||||
|
| |||||||
Food & Beverages – 2.8% | ||||||||
Blue Buffalo Pet Products, Inc. (a) | 75,663 | $ | 1,818,939 | |||||
Chr. Hansen Holding A.S. | 27,571 | 1,526,799 |
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MFS Mid Cap Growth Series
Portfolio of Investments – continued
Issuer | Shares/Par | Value ($) | ||||||
COMMON STOCKS – continued | ||||||||
Food & Beverages – continued | ||||||||
J.M. Smucker Co. | 23,304 | $ | 2,984,310 | |||||
Mead Johnson Nutrition Co., “A” | 26,505 | 1,875,494 | ||||||
Monster Beverage Corp. (a) | 52,326 | 2,320,135 | ||||||
|
| |||||||
$ | 10,525,677 | |||||||
|
| |||||||
Gaming & Lodging – 1.2% | ||||||||
MGM Mirage (a) | 109,641 | $ | 3,160,950 | |||||
Paddy Power PLC | 12,547 | 1,356,871 | ||||||
|
| |||||||
$ | 4,517,821 | |||||||
|
| |||||||
General Merchandise – 2.0% | ||||||||
Dollar Tree, Inc. (a) | 63,578 | $ | 4,906,950 | |||||
Five Below, Inc. (a) | 68,195 | 2,725,072 | ||||||
|
| |||||||
$ | 7,632,022 | |||||||
|
| |||||||
Insurance – 1.4% | ||||||||
Aon PLC | 47,733 | $ | 5,323,661 | |||||
|
| |||||||
Internet – 0.8% | ||||||||
LogMeIn, Inc. | 31,590 | $ | 3,050,015 | |||||
|
| |||||||
Leisure & Toys – 1.4% | ||||||||
Electronic Arts, Inc. (a) | 70,206 | $ | 5,529,425 | |||||
|
| |||||||
Machinery & Tools – 6.1% | ||||||||
Colfax Corp. (a) | 59,295 | $ | 2,130,469 | |||||
Flowserve Corp. | 84,575 | 4,063,829 | ||||||
Roper Technologies, Inc. | 46,600 | 8,531,528 | ||||||
SPX FLOW, Inc. (a) | 31,055 | 995,623 | ||||||
WABCO Holdings, Inc. (a) | 48,525 | 5,150,929 | ||||||
Xylem, Inc. | 46,543 | 2,304,809 | ||||||
|
| |||||||
$ | 23,177,187 | |||||||
|
| |||||||
Medical & Health Technology & Services – 1.9% | ||||||||
Henry Schein, Inc. (a) | 32,489 | $ | 4,928,906 | |||||
VCA, Inc. (a) | 34,826 | 2,390,805 | ||||||
|
| |||||||
$ | 7,319,711 | |||||||
|
| |||||||
Medical Equipment – 7.6% | ||||||||
C.R. Bard, Inc. | 28,431 | $ | 6,387,308 | |||||
Cooper Cos., Inc. | 19,566 | 3,422,680 | ||||||
DexCom, Inc. (a) | 27,606 | 1,648,078 | ||||||
Edwards Lifesciences Corp. (a) | 23,751 | 2,225,469 | ||||||
Integra LifeSciences Holdings Corp. (a) | 23,825 | 2,043,947 | ||||||
PerkinElmer, Inc. | 123,315 | 6,430,877 | ||||||
Steris PLC | 48,011 | 3,235,461 | ||||||
VWR Corp. (a) | 142,023 | 3,554,836 | ||||||
|
| |||||||
$ | 28,948,656 | |||||||
|
| |||||||
Network & Telecom – 0.5% | ||||||||
Harris Corp. | 16,739 | $ | 1,715,245 | |||||
|
| |||||||
Other Banks & Diversified Financials – 3.4% | ||||||||
Element Fleet Management Corp. | 187,927 | $ | 1,743,992 | |||||
First Republic Bank | 52,784 | 4,863,518 | ||||||
Mastercard, Inc., “A” | 45,987 | 4,748,158 | ||||||
Zions Bancorporation | 35,172 | 1,513,803 | ||||||
|
| |||||||
$ | 12,869,471 | |||||||
|
|
Issuer | Shares/Par | Value ($) | ||||||
COMMON STOCKS – continued | ||||||||
Pollution Control – 0.7% | ||||||||
Clean Harbors, Inc. (a) | 45,548 | $ | 2,534,746 | |||||
|
| |||||||
Railroad & Shipping – 0.9% | ||||||||
Kansas City Southern Co. | 41,102 | $ | 3,487,505 | |||||
|
| |||||||
Real Estate – 1.1% | ||||||||
Extra Space Storage, Inc., REIT | 54,546 | $ | 4,213,133 | |||||
|
| |||||||
Restaurants – 3.9% | ||||||||
Aramark | 220,367 | $ | 7,871,509 | |||||
Domino’s Pizza, Inc. | 15,570 | 2,479,369 | ||||||
Domino’s Pizza Group PLC | 319,602 | 1,416,703 | ||||||
Dunkin Brands Group, Inc. | 63,053 | 3,306,499 | ||||||
|
| |||||||
$ | 15,074,080 | |||||||
|
| |||||||
Specialty Chemicals – 1.6% | ||||||||
Axalta Coating Systems Ltd. (a) | 109,335 | $ | 2,973,912 | |||||
Univar, Inc. (a) | 108,682 | 3,083,308 | ||||||
|
| |||||||
$ | 6,057,220 | |||||||
|
| |||||||
Specialty Stores – 5.3% | ||||||||
Lululemon Athletica, Inc. (a) | 29,479 | $ | 1,915,840 | |||||
O’Reilly Automotive, Inc. (a) | 23,091 | 6,428,765 | ||||||
Ross Stores, Inc. | 104,159 | 6,832,830 | ||||||
Tractor Supply Co. | 64,250 | 4,870,793 | ||||||
|
| |||||||
$ | 20,048,228 | |||||||
|
| |||||||
Telecommunications – Wireless – 1.6% | ||||||||
SBA Communications Corp. (a) | 60,355 | $ | 6,232,257 | |||||
|
| |||||||
Total Common Stocks (Identified Cost, $274,401,947) | $ | 379,984,845 | ||||||
|
| |||||||
MONEY MARKET FUNDS – 0.7% | ||||||||
MFS Institutional Money Market Portfolio, 0.51% (v) (Identified Cost, $2,584,519) | 2,584,523 | $ | 2,584,523 | |||||
|
| |||||||
COLLATERAL FOR SECURITIES LOANED – 0.0% | ||||||||
State Street Navigator Securities Lending Government Money Market Portfolio, 0.50% (j) (Identified Cost, $117,135) | 117,135 | $ | 117,135 | |||||
|
| |||||||
Total Investments (Identified Cost, $277,103,601) | $ | 382,686,503 | ||||||
|
| |||||||
OTHER ASSETS, LESS LIABILITIES – (0.2)% | (931,998 | ) | ||||||
|
| |||||||
NET ASSETS – 100.0% | $ | 381,754,505 | ||||||
|
|
(a) | Non-income producing security. |
(j) | The rate quoted is the annualized seven-day yield of the fund at period end. |
(l) | A portion of this security is on loan. |
(v) | Underlying affiliated fund that is available only to investment companies managed by MFS. The rate quoted for the MFS Institutional Money Market Portfolio is the annualized seven-day yield of the fund at period end. |
The following abbreviations are used in this report and are defined:
ADR | American Depositary Receipt |
PLC | Public Limited Company |
REIT | Real Estate Investment Trust |
See Notes to Financial Statements
8
Table of Contents
MFS Mid Cap Growth Series
FINANCIAL STATEMENTS | STATEMENT OF ASSETS AND LIABILITIES
This statement represents your fund’s balance sheet, which details the assets and liabilities comprising the total value of the fund.
At 12/31/16 | ||||||||
Assets | ||||||||
Investments | ||||||||
Non-affiliated issuers, at value (identified cost, $274,519,082) | $380,101,980 | |||||||
Underlying affiliated funds, at value (identified cost, $2,584,519) | 2,584,523 | |||||||
Total investments, at value, including $114,916 of securities on loan (identified cost, $277,103,601) | $382,686,503 | |||||||
Receivables for | ||||||||
Fund shares sold | 16,168 | |||||||
Interest and dividends | 109,954 | |||||||
Total assets | $382,812,625 | |||||||
Liabilities | ||||||||
Payable for fund shares reacquired | $836,557 | |||||||
Collateral for securities loaned, at value | 117,135 | |||||||
Payable to affiliates | ||||||||
Investment adviser | 23,941 | |||||||
Shareholder servicing costs | 552 | |||||||
Distribution and/or service fees | 1,807 | |||||||
Payable for independent Trustees’ compensation | 50 | |||||||
Accrued expenses and other liabilities | 78,078 | |||||||
Total liabilities | $1,058,120 | |||||||
Net assets | $381,754,505 | |||||||
Net assets consist of | ||||||||
Paid-in capital | $253,225,298 | |||||||
Unrealized appreciation (depreciation) on investments and translation of assets and liabilities in foreign currencies | 105,582,362 | |||||||
Accumulated net realized gain (loss) on investments and foreign currency | 22,544,755 | |||||||
Undistributed net investment income | 402,090 | |||||||
Net assets | $381,754,505 | |||||||
Shares of beneficial interest outstanding | 48,515,042 |
Net assets | Shares outstanding | Net asset value per share | ||||||||||
Initial Class | $294,225,888 | 36,942,480 | $7.96 | |||||||||
Service Class | 87,528,617 | 11,572,562 | 7.56 |
See Notes to Financial Statements
9
Table of Contents
MFS Mid Cap Growth Series
FINANCIAL STATEMENTS | STATEMENT OF OPERATIONS
This statement describes how much your fund earned in investment income and accrued in expenses. It also describes any gains and/or losses generated by fund operations.
Year ended 12/31/16 |
| |||||||
Net investment income |
| |||||||
Income | ||||||||
Dividends | $3,373,577 | |||||||
Interest | 87,528 | |||||||
Other | 26,246 | |||||||
Dividends from underlying affiliated funds | 23,303 | |||||||
Foreign taxes withheld | (8,945 | ) | ||||||
Total investment income | $3,501,709 | |||||||
Expenses | ||||||||
Management fee | $2,921,486 | |||||||
Distribution and/or service fees | 212,158 | |||||||
Shareholder servicing costs | 19,901 | |||||||
Administrative services fee | 70,388 | |||||||
Independent Trustees’ compensation | 11,046 | |||||||
Custodian fee | 35,968 | |||||||
Reimbursement of custodian expenses | (251,237 | ) | ||||||
Shareholder communications | 26,638 | |||||||
Audit and tax fees | 53,747 | |||||||
Legal fees | 3,895 | |||||||
Miscellaneous | 23,821 | |||||||
Total expenses | $3,127,811 | |||||||
Reduction of expenses by investment adviser | (27,672 | ) | ||||||
Net expenses | $3,100,139 | |||||||
Net investment income | $401,570 | |||||||
Realized and unrealized gain (loss) on investments and foreign currency |
| |||||||
Realized gain (loss) (identified cost basis) | ||||||||
Investments: | ||||||||
Non-affiliated issuers | $24,066,178 | |||||||
Underlying affiliated funds | 52 | |||||||
Foreign currency | 520 | |||||||
Net realized gain (loss) on investments and foreign currency | $24,066,750 | |||||||
Change in unrealized appreciation (depreciation) | ||||||||
Investments | $(6,121,822 | ) | ||||||
Translation of assets and liabilities in foreign currencies | (679 | ) | ||||||
Net unrealized gain (loss) on investments and foreign currency translation | $(6,122,501 | ) | ||||||
Net realized and unrealized gain (loss) on investments and foreign currency | $17,944,249 | |||||||
Change in net assets from operations | $18,345,819 |
See Notes to Financial Statements
10
Table of Contents
MFS Mid Cap Growth Series
FINANCIAL STATEMENTS | STATEMENTS OF CHANGES IN NET ASSETS
These statements describe the increases and/or decreases in net assets resulting from operations, any distributions, and any shareholder transactions.
For years ended 12/31 | 2016 | 2015 | ||||||
Change in net assets | ||||||||
From operations | ||||||||
Net investment income (loss) | $401,570 | $(1,658,477 | ) | |||||
Net realized gain (loss) on investments and foreign currency | 24,066,750 | 32,059,153 | ||||||
Net unrealized gain (loss) on investments and foreign currency translation | (6,122,501 | ) | (8,819,546 | ) | ||||
Change in net assets from operations | $18,345,819 | $21,581,130 | ||||||
Distributions declared to shareholders | ||||||||
From net realized gain on investments | $(30,751,813 | ) | $(42,235,087 | ) | ||||
Change in net assets from fund share transactions | $(17,601,424 | ) | $(20,270,732 | ) | ||||
Total change in net assets | $(30,007,418 | ) | $(40,924,689 | ) | ||||
Net assets | ||||||||
At beginning of period | 411,761,923 | 452,686,612 | ||||||
At end of period (including undistributed net investment income of $402,090 | $381,754,505 | $411,761,923 |
See Notes to Financial Statements
11
Table of Contents
MFS Mid Cap Growth Series
FINANCIAL STATEMENTS | FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the fund’s financial performance for the past 5 years. Certain information reflects financial results for a single fund share. The total returns in the table represent the rate by which an investor would have earned (or lost) on an investment in the fund share class (assuming reinvestment of all distributions) held for the entire period.
Initial Class | Years ended 12/31 | |||||||||||||||||||
2016 | 2015 | 2014 | 2013 | 2012 | ||||||||||||||||
Net asset value, beginning of period | $8.21 | $8.76 | $9.00 | $6.56 | $5.63 | |||||||||||||||
Income (loss) from investment operations | ||||||||||||||||||||
Net investment income (loss) (d) | $0.01 | (c) | $(0.03 | ) | $(0.03 | ) | $(0.02 | ) | $(0.01 | ) | ||||||||||
Net realized and unrealized gain (loss) on investments | 0.41 | 0.39 | 0.80 | 2.49 | 0.94 | |||||||||||||||
Total from investment operations | $0.42 | $0.36 | $0.77 | $2.47 | $0.93 | |||||||||||||||
Less distributions declared to shareholders | ||||||||||||||||||||
From net realized gain on investments | $(0.67 | ) | $(0.91 | ) | $(1.01 | ) | $(0.03 | ) | $— | |||||||||||
Net asset value, end of period (x) | $7.96 | $8.21 | $8.76 | $9.00 | $6.56 | |||||||||||||||
Total return (%) (k)(r)(s)(x) | 4.91 | (c) | 4.61 | 8.86 | 37.72 | 16.52 | ||||||||||||||
Ratios (%) (to average net assets) and Supplemental data: | ||||||||||||||||||||
Expenses before expense reductions (f) | 0.75 | (c) | 0.81 | 0.81 | 0.81 | 0.89 | ||||||||||||||
Expenses after expense reductions (f) | 0.74 | (c) | 0.80 | 0.80 | 0.81 | 0.89 | ||||||||||||||
Net investment income (loss) | 0.15 | (c) | (0.33 | ) | (0.34 | ) | (0.26 | ) | (0.10 | ) | ||||||||||
Portfolio turnover | 37 | 37 | 49 | 62 | 65 | |||||||||||||||
Net assets at end of period (000 omitted) | $294,226 | $324,754 | $363,788 | $393,212 | $359,488 |
See Notes to Financial Statements
12
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MFS Mid Cap Growth Series
Financial Highlights – continued
Service Class | Years ended 12/31 | |||||||||||||||||||
2016 | 2015 | 2014 | 2013 | 2012 | ||||||||||||||||
Net asset value, beginning of period | $7.85 | $8.43 | $8.72 | $6.38 | $5.48 | |||||||||||||||
Income (loss) from investment operations | ||||||||||||||||||||
Net investment loss (d) | $(0.01 | )(c) | $(0.05 | ) | $(0.05 | ) | $(0.04 | ) | $(0.02 | ) | ||||||||||
Net realized and unrealized gain (loss) on investments | 0.39 | 0.38 | 0.77 | 2.41 | 0.92 | |||||||||||||||
Total from investment operations | $0.38 | $0.33 | $0.72 | $2.37 | $0.90 | |||||||||||||||
Less distributions declared to shareholders | �� | |||||||||||||||||||
From net realized gain on investments | $(0.67 | ) | $(0.91 | ) | $(1.01 | ) | $(0.03 | ) | $— | |||||||||||
Net asset value, end of period (x) | $7.56 | $7.85 | $8.43 | $8.72 | $6.38 | |||||||||||||||
Total return (%) (k)(r)(s)(x) | 4.62 | (c) | 4.43 | 8.56 | 37.22 | 16.42 | ||||||||||||||
Ratios (%) (to average net assets) and Supplemental data: | ||||||||||||||||||||
Expenses before expense reductions (f) | 0.99 | (c) | 1.06 | 1.06 | 1.06 | 1.14 | ||||||||||||||
Expenses after expense reductions (f) | 0.99 | (c) | 1.05 | 1.05 | 1.06 | 1.14 | ||||||||||||||
Net investment loss | (0.08 | )(c) | (0.57 | ) | (0.59 | ) | (0.51 | ) | (0.35 | ) | ||||||||||
Portfolio turnover | 37 | 37 | 49 | 62 | 65 | |||||||||||||||
Net assets at end of period (000 omitted) | $87,529 | $87,008 | $88,899 | $90,854 | $76,779 |
(c) | Amount reflects a one-time reimbursement of expenses by the custodian (or former custodian) without which net investment income and performance would be lower and expenses would be higher. See Note 2 in the Notes to Financial Statements for additional information. |
(d) | Per share data is based on average shares outstanding. |
(f) | Ratios do not reflect reductions from fees paid indirectly, if applicable. |
(k) | The total return does not reflect expenses that apply to separate accounts. Inclusion of these charges would reduce the total return figures for all periods shown. |
(r) | Certain expenses have been reduced without which performance would have been lower. |
(s) | From time to time the fund may receive proceeds from litigation settlements, without which performance would be lower. |
(x) | The net asset values and total returns have been calculated on net assets which include adjustments made in accordance with U.S. generally accepted accounting principles required at period end for financial reporting purposes. |
See Notes to Financial Statements
13
Table of Contents
MFS Mid Cap Growth Series
(1) | Business and Organization |
MFS Mid Cap Growth Series (the fund) is a diversified series of MFS Variable Insurance Trust (the trust). The trust is organized as a Massachusetts business trust and is registered under the Investment Company Act of 1940, as amended, as an open-end management investment company. The shareholders of each series of the trust are separate accounts of insurance companies, which offer variable annuity and/or life insurance products, and qualified retirement and pension plans.
The fund is an investment company and accordingly follows the investment company accounting and reporting guidance of the Financial Accounting Standards Board (FASB) Accounting Standards Codification Topic 946 Financial Services – Investment Companies.
(2) | Significant Accounting Policies |
General – The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of increases and decreases in net assets from operations during the reporting period. Actual results could differ from those estimates. In the preparation of these financial statements, management has evaluated subsequent events occurring after the date of the fund’s Statement of Assets and Liabilities through the date that the financial statements were issued.
In October 2016, the Securities and Exchange Commission (SEC) released its Final Rule on Investment Company Reporting Modernization (the “Rule”). The Rule, which introduces two new regulatory reporting forms for investment companies – Form N-PORT and Form N-CEN – also contains amendments to Regulation S-X which impact financial statement presentation, particularly the presentation of derivative investments. Although still evaluating the impacts of the Rule, management believes that many of the Regulation S-X amendments are consistent with the fund’s current financial statement presentation and expects that the fund will be able to comply with the Rule’s Regulation S-X amendments by the August 1, 2017 compliance date.
Balance Sheet Offsetting – The fund’s accounting policy with respect to balance sheet offsetting is that, absent an event of default by the counterparty or a termination of the agreement, the International Swaps and Derivatives Association (ISDA) Master Agreement does not result in an offset of reported amounts of financial assets and financial liabilities in the Statement of Assets and Liabilities across transactions between the fund and the applicable counterparty. The fund’s right to setoff may be restricted or prohibited by the bankruptcy or insolvency laws of the particular jurisdiction to which a specific master netting agreement counterparty is subject. Balance sheet offsetting disclosures, to the extent applicable to the fund, have been included in the fund’s Significant Accounting Policies note under the captions for each of the fund’s in-scope financial instruments and transactions.
Investment Valuations – Equity securities, including restricted equity securities, are generally valued at the last sale or official closing price on their primary market or exchange as provided by a third-party pricing service. Equity securities, for which there were no sales reported that day, are generally valued at the last quoted daily bid quotation on their primary market or exchange as provided by a third-party pricing service. Short-term instruments with a maturity at issuance of 60 days or less may be valued at amortized cost, which approximates market value. Open-end investment companies are generally valued at net asset value per share. Securities and other assets generally valued on the basis of information from a third-party pricing service may also be valued at a broker/dealer bid quotation. Values obtained from third-party pricing services can utilize both transaction data and market information such as yield, quality, coupon rate, maturity, type of issue, trading characteristics, and other market data. The values of foreign securities and other assets and liabilities expressed in foreign currencies are converted to U.S. dollars using the mean of bid and asked prices for rates provided by a third-party pricing service.
The Board of Trustees has delegated primary responsibility for determining or causing to be determined the value of the fund’s investments (including any fair valuation) to the adviser pursuant to valuation policies and procedures approved by the Board. If the adviser determines that reliable market quotations are not readily available, investments are valued at fair value as determined in good faith by the adviser in accordance with such procedures under the oversight of the Board of Trustees. Under the fund’s valuation policies and procedures, market quotations are not considered to be readily available for most types of debt instruments and floating rate loans and many types of derivatives. These investments are generally valued at fair value based on information from third-party pricing services. In addition, investments may be valued at fair value if the adviser determines that an investment’s value has been materially affected by events occurring after the close of the exchange or market on which the investment is principally traded (such as foreign exchange or market) and prior to the determination of the fund’s net asset value, or after the halting of trading of a specific security where trading does not resume prior to the close of the exchange or market on which the security is principally traded. Events that occur on a frequent basis after foreign markets close (such as developments in foreign markets and significant movements in the U.S. markets) and prior to the determination of the fund’s net asset value may be deemed to have a material effect on the value of securities traded in foreign markets. Accordingly, the fund’s foreign equity securities may often be valued at fair value. The adviser generally relies on third-party pricing services or other information (such as the correlation with price movements of similar securities in the same or other markets; the type, cost and investment characteristics of the security; the business and financial condition of the issuer; and trading and other market data) to assist in determining whether to fair value and
14
Table of Contents
MFS Mid Cap Growth Series
Notes to Financial Statements – continued
at what value to fair value an investment. The value of an investment for purposes of calculating the fund’s net asset value can differ depending on the source and method used to determine value. When fair valuation is used, the value of an investment used to determine the fund’s net asset value may differ from quoted or published prices for the same investment. There can be no assurance that the fund could obtain the fair value assigned to an investment if it were to sell the investment at the same time at which the fund determines its net asset value per share.
Various inputs are used in determining the value of the fund’s assets or liabilities. These inputs are categorized into three broad levels. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an investment’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The fund’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the investment. Level 1 includes unadjusted quoted prices in active markets for identical assets or liabilities. Level 2 includes other significant observable market-based inputs (including quoted prices for similar securities, interest rates, prepayment speed, and credit risk). Level 3 includes unobservable inputs, which may include the adviser’s own assumptions in determining the fair value of investments. The following is a summary of the levels used as of December 31, 2016 in valuing the fund’s assets or liabilities:
Investments at Value | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Equity Securities: | ||||||||||||||||
United States | $365,376,581 | $— | $— | $365,376,581 | ||||||||||||
Canada | 4,522,374 | — | — | 4,522,374 | ||||||||||||
Israel | 2,957,223 | — | — | 2,957,223 | ||||||||||||
Hong Kong | 2,828,294 | — | — | 2,828,294 | ||||||||||||
Denmark | 1,526,799 | — | — | 1,526,799 | ||||||||||||
United Kingdom | — | 1,416,703 | — | 1,416,703 | ||||||||||||
Ireland | 1,356,871 | — | — | 1,356,871 | ||||||||||||
Mutual Funds | 2,701,658 | — | — | 2,701,658 | ||||||||||||
Total Investments | $381,269,800 | $1,416,703 | $— | $382,686,503 |
For further information regarding security characteristics, see the Portfolio of Investments.
Of the level 1 investments presented above, equity investments amounting to $1,526,799 would have been considered level 2 investments at the beginning of the period. The primary reason for changes in the classifications between levels 1 and 2 occurs when foreign equity securities are fair valued using other observable market-based inputs in place of the closing exchange price due to events occurring after the close of the exchange or market on which the investment is principally traded. The fund’s foreign equity securities may often be valued at fair value. The fund’s policy is to recognize transfers between the levels as of the end of the period.
Foreign Currency Translation – Purchases and sales of foreign investments, income, and expenses are converted into U.S. dollars based upon currency exchange rates prevailing on the respective dates of such transactions or on the reporting date for foreign denominated receivables and payables. Gains and losses attributable to foreign currency exchange rates on sales of securities are recorded for financial statement purposes as net realized gains and losses on investments. Gains and losses attributable to foreign exchange rate movements on receivables, payables, income and expenses are recorded for financial statement purposes as foreign currency transaction gains and losses. That portion of both realized and unrealized gains and losses on investments that results from fluctuations in foreign currency exchange rates is not separately disclosed.
Security Loans – Under its Securities Lending Agency Agreement with the fund, State Street Bank and Trust Company (“State Street”), as lending agent, loans the securities of the fund to certain qualified institutions (the “Borrowers”) approved by the fund. Security loans can be terminated at the discretion of either the lending agent or the fund and the related securities must be returned within the earlier of the standard trade settlement period for such securities or within three business days. The loans are collateralized by cash and/or U.S. Treasury and federal agency obligations in an amount typically at least equal to the market value of the securities loaned. On loans collateralized by cash, the cash collateral is invested in a money market fund. The market value of the loaned securities is determined at the close of business of the fund and any additional required collateral is delivered to the fund on the next business day. State Street provides the fund with indemnification against Borrower default. In the event of Borrower default, State Street will, for the benefit of the fund, either purchase securities identical to those loaned or, when such purchase is commercially impracticable, pay the fund the market value of the loaned securities. In return, State Street assumes the fund’s rights to the related collateral. If the collateral value is less than the cost to purchase identical securities, State Street is responsible for the shortfall, but only to the extent that such shortfall is not due to a decline in collateral value resulting from collateral reinvestment for which the fund bears the risk of loss. At period end, the fund had investment securities on loan, all of which were classified as equity securities in the fund’s Portfolio of Investments, with a fair value of $114,916. The fair value of the fund’s investment securities on loan and a related liability of $117,135 for cash collateral received on securities loaned are both presented gross in the Statement of Assets and Liabilities. The collateral received on securities loaned exceeded the value of securities on loan at period end. The liability
15
Table of Contents
MFS Mid Cap Growth Series
Notes to Financial Statements – continued
for cash collateral for securities loaned is carried at fair value, which is categorized as level 2 within the fair value hierarchy. A portion of the income generated upon investment of the collateral is remitted to the Borrowers, and the remainder is allocated between the fund and the lending agent. On loans collateralized by U.S. Treasury and/or federal agency obligations, a fee is received from the Borrower, and is allocated between the fund and the lending agent. Income from securities lending is included in “Interest” income in the Statement of Operations. The dividend and interest income earned on the securities loaned is accounted for in the same manner as other dividend and interest income.
Indemnifications – Under the fund’s organizational documents, its officers and Trustees may be indemnified against certain liabilities and expenses arising out of the performance of their duties to the fund. Additionally, in the normal course of business, the fund enters into agreements with service providers that may contain indemnification clauses. The fund’s maximum exposure under these agreements is unknown as this would involve future claims that may be made against the fund that have not yet occurred.
Investment Transactions and Income – Investment transactions are recorded on the trade date. Interest income is recorded on the accrual basis. Dividends received in cash are recorded on the ex-dividend date. Certain dividends from foreign securities will be recorded when the fund is informed of the dividend if such information is obtained subsequent to the ex-dividend date. Dividend and interest payments received in additional securities are recorded on the ex-dividend or ex-interest date in an amount equal to the value of the security on such date.
The fund may receive proceeds from litigation settlements. Any proceeds received from litigation involving portfolio holdings are reflected in the Statement of Operations in realized gain/loss if the security has been disposed of by the fund or in unrealized gain/loss if the security is still held by the fund. Any other proceeds from litigation not related to portfolio holdings are reflected as other income in the Statement of Operations.
Reimbursement of Expenses by Custodian – In December 2015, the fund’s custodian (or former custodian), State Street Bank and Trust Company, announced that it intended to reimburse its asset servicing clients for expense amounts that it billed in error during the period 1998 through 2015. The amount of this one-time reimbursement attributable to the fund is reflected as “Reimbursement of custodian expenses” in the Statement of Operations.
Tax Matters and Distributions – The fund intends to qualify as a regulated investment company, as defined under Subchapter M of the Internal Revenue Code, and to distribute all of its taxable income, including realized capital gains. As a result, no provision for federal income tax is required. The fund’s federal tax returns, when filed, will remain subject to examination by the Internal Revenue Service for a three year period. Management has analyzed the fund’s tax positions taken on federal and state tax returns for all open tax years and does not believe that there are any uncertain tax positions that require recognition of a tax liability. Foreign taxes, if any, have been accrued by the fund in the accompanying financial statements in accordance with the applicable foreign tax law. Foreign income taxes may be withheld by certain countries in which the fund invests. Additionally, capital gains realized by the fund on securities issued in or by certain foreign countries may be subject to capital gains tax imposed by those countries.
Distributions to shareholders are recorded on the ex-dividend date. Income and capital gain distributions are determined in accordance with income tax regulations, which may differ from U.S. generally accepted accounting principles. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences which arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary overdistributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes.
Book/tax differences primarily relate to wash sale loss deferrals.
The tax character of distributions declared to shareholders for the last two fiscal years is as follows:
12/31/16 | 12/31/15 | |||||||
Ordinary income (including any short-term capital gains) | $— | $11,579,972 | ||||||
Long-term capital gains | 30,751,813 | 30,655,115 | ||||||
Total distributions | $30,751,813 | $42,235,087 |
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Notes to Financial Statements – continued
The federal tax cost and the tax basis components of distributable earnings were as follows:
As of 12/31/16 | ||||
Cost of investments | $277,604,476 | |||
Gross appreciation | 108,806,101 | |||
Gross depreciation | (3,724,074 | ) | ||
Net unrealized appreciation (depreciation) | $105,082,027 | |||
Undistributed ordinary income | 402,090 | |||
Undistributed long-term capital gain | 23,045,630 | |||
Other temporary differences | (540 | ) |
Multiple Classes of Shares of Beneficial Interest – The fund offers multiple classes of shares, which differ in their respective distribution and/or service fees. The fund’s income, realized and unrealized gain (loss), and common expenses are allocated to shareholders based on the daily net assets of each class. Dividends are declared separately for each class. Differences in per share dividend rates are generally due to differences in separate class expenses. The fund’s distributions declared to shareholders as reported in the Statements of Changes in Net Assets are presented by class as follows:
From net realized gain on investments | ||||||||
Year ended 12/31/16 | Year ended 12/31/15 | |||||||
Initial Class | $23,710,487 | $33,110,175 | ||||||
Service Class | 7,041,326 | 9,124,912 | ||||||
Total | $30,751,813 | $42,235,087 |
(3) | Transactions with Affiliates |
Investment Adviser – The fund has an investment advisory agreement with MFS to provide overall investment management and related administrative services and facilities to the fund. The management fee is computed daily and paid monthly at the following annual rates:
First $1 billion of average daily net assets | 0.75% | |||
Average daily net assets in excess of $1 billion | 0.70% |
MFS has agreed in writing to reduce its management fee by a specified amount if certain MFS mutual fund assets exceed thresholds agreed to by MFS and the fund’s Board of Trustees. For the year ended December 31, 2016, this management fee reduction amounted to $27,672, which is included in the reduction of total expenses in the Statement of Operations. The management fee incurred for the year ended December 31, 2016 was equivalent to an annual effective rate of 0.74% of the fund’s average daily net assets.
Distributor – MFS Fund Distributors, Inc. (MFD), a wholly-owned subsidiary of MFS, is the distributor of shares of the fund. The Trustees have adopted a distribution plan for the Service Class shares pursuant to Rule 12b-1 under the Investment Company Act of 1940.
The fund’s distribution plan provides that the fund will pay MFD distribution and/or service fees equal to 0.25% per annum of its average daily net assets attributable to Service Class shares as partial consideration for services performed and expenses incurred by MFD and financial intermediaries (including participating insurance companies that invest in the fund to fund variable annuity and variable life insurance contracts, sponsors of qualified retirement and pension plans that invest in the fund, and affiliates of these participating insurance companies and plan sponsors) in connection with the sale and distribution of the Service Class shares. MFD may subsequently pay all, or a portion, of the distribution and/or service fees to financial intermediaries.
Shareholder Servicing Agent – MFS Service Center, Inc. (MFSC), a wholly-owned subsidiary of MFS, receives a fee from the fund for its services as shareholder servicing agent. For the year ended December 31, 2016, the fee was $17,154, which equated to 0.0044% annually of the fund’s average daily net assets. MFSC also receives payment from the fund for out-of-pocket expenses paid by MFSC on behalf of the fund. For the year ended December 31, 2016, these costs amounted to $2,747.
Administrator – MFS provides certain financial, legal, shareholder communications, compliance, and other administrative services to the fund. Under an administrative services agreement, the fund reimburses MFS the costs incurred to provide these services. The fund is charged an annual fixed amount of $17,500 plus a fee based on average daily net assets. The administrative services fee incurred for the year ended December 31, 2016 was equivalent to an annual effective rate of 0.0181% of the fund’s average daily net assets.
Trustees’ and Officers’ Compensation – The fund pays compensation to independent Trustees in the form of a retainer, attendance fees, and additional compensation to Board and Committee chairpersons. The fund does not pay compensation directly
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Notes to Financial Statements – continued
to Trustees or officers of the fund who are also officers of the investment adviser, all of whom receive remuneration for their services to the fund from MFS. Certain officers and Trustees of the fund are officers or directors of MFS, MFD, and MFSC.
Other – This fund and certain other funds managed by MFS (the funds) have entered into a service agreement (the ISO Agreement) which provides for payment of fees solely by the funds to Tarantino LLC in return for the provision of services of an Independent Senior Officer (ISO) for the funds. Frank L. Tarantino serves as the ISO and is an officer of the funds and the sole member of Tarantino LLC. The funds can terminate the ISO Agreement with Tarantino LLC at any time under the terms of the ISO Agreement. For the year ended December 31, 2016, the fee paid by the fund under this agreement was $772 and is included in “Miscellaneous” expense in the Statement of Operations. MFS has agreed to bear all expenses associated with office space, other administrative support, and supplies provided to the ISO.
The fund invests in the MFS Institutional Money Market Portfolio which is managed by MFS and seeks current income consistent with preservation of capital and liquidity. This money market fund does not pay a management fee to MFS.
The fund is permitted to engage in purchase and sale transactions (“cross-trades”) with funds and accounts for which MFS serves as investment adviser or sub-adviser pursuant to a policy adopted by the Board of Trustees. This policy has been designed to ensure that cross-trades conducted by the fund comply with Rule 17a-7 under the Investment Company Act of 1940. Under this policy, cross-trades are effected at current market prices with no remuneration paid in connection with the transaction. During the year ended December 31, 2016, the fund engaged in purchase and sale transactions pursuant to this policy, which amounted to $1,203,023 and $863,315, respectively. The sales transactions resulted in net realized gains (losses) of $262,985.
(4) | Portfolio Securities |
For the year ended December 31, 2016, purchases and sales of investments, other than short-term obligations, aggregated $144,194,295 and $186,189,054, respectively.
(5) | Shares of Beneficial Interest |
The fund’s Declaration of Trust permits the Trustees to issue an unlimited number of full and fractional shares of beneficial interest. Transactions in fund shares were as follows:
Year ended 12/31/16 | Year ended 12/31/15 | |||||||||||||||
Shares | Amount | Shares | Amount | |||||||||||||
Shares sold | ||||||||||||||||
Initial Class | 1,145,319 | $9,157,568 | 2,314,642 | $19,663,750 | ||||||||||||
Service Class | 2,367,351 | 18,135,281 | 1,902,483 | 16,016,393 | ||||||||||||
3,512,670 | $27,292,849 | 4,217,125 | $35,680,143 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | ||||||||||||||||
Initial Class | 2,909,262 | $23,710,487 | 4,234,038 | $33,110,175 | ||||||||||||
Service Class | 908,558 | 7,041,326 | 1,219,908 | 9,124,912 | ||||||||||||
3,817,820 | $30,751,813 | 5,453,946 | $42,235,087 | |||||||||||||
Shares reacquired | ||||||||||||||||
Initial Class | (6,654,934 | ) | $(54,279,464 | ) | (8,536,082 | ) | $(76,384,073 | ) | ||||||||
Service Class | (2,788,211 | ) | (21,366,622 | ) | (2,580,067 | ) | (21,801,889 | ) | ||||||||
(9,443,145 | ) | $(75,646,086 | ) | (11,116,149 | ) | $(98,185,962 | ) | |||||||||
Net change | ||||||||||||||||
Initial Class | (2,600,353 | ) | $(21,411,409 | ) | (1,987,402 | ) | $(23,610,148 | ) | ||||||||
Service Class | 487,698 | 3,809,985 | 542,324 | 3,339,416 | ||||||||||||
(2,112,655 | ) | $(17,601,424 | ) | (1,445,078 | ) | $(20,270,732 | ) |
The fund is one of several mutual funds in which certain MFS funds may invest. The MFS funds do not invest in the underlying funds for the purpose of exercising management or control. At the end of the period, the MFS Moderate Allocation Portfolio, the MFS Growth Allocation Portfolio, and the MFS Conservative Allocation Portfolio were the owners of record of approximately 32%, 10%, and 6%, respectively, of the value of outstanding voting shares of the fund.
(6) | Line of Credit |
The fund and certain other funds managed by MFS participate in a $1.25 billion unsecured committed line of credit, subject to a $1 billion sublimit, provided by a syndication of banks under a credit agreement. Borrowings may be made for temporary financing needs. Interest is charged to each fund, based on its borrowings, generally at a rate equal to the higher of the Overnight Federal Reserve funds rate or daily one month LIBOR plus an agreed upon spread. A commitment fee, based on the average daily, unused portion of the committed line of credit, is allocated among the participating funds at the end of each calendar quarter. In addition, the fund and other funds managed by MFS have established unsecured uncommitted borrowing arrangements with certain banks
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Notes to Financial Statements – continued
for temporary financing needs. Interest is charged to each fund, based on its borrowings, at a rate equal to the Overnight Federal Reserve funds rate plus an agreed upon spread. For the year ended December 31, 2016, the fund’s commitment fee and interest expense were $2,476 and $0, respectively, and are included in “Miscellaneous” expense in the Statement of Operations.
(7) | Transactions in Underlying Affiliated Funds – Affiliated Issuers |
An affiliated issuer may be considered one in which the fund owns 5% or more of the outstanding voting securities, or a company which is under common control. For the purposes of this report, the fund assumes the following to be an affiliated issuer:
Underlying Affiliated Fund | Beginning Shares/Par Amount | Acquisitions Shares/Par Amount | Dispositions Shares/Par Amount | Ending Shares/Par Amount | ||||||||||||
MFS Institutional Money Market Portfolio | 9,278,652 | 68,307,979 | (75,002,108 | ) | 2,584,523 | |||||||||||
Underlying Affiliated Fund | Realized Gain (Loss) | Capital Gain Distributions | Dividend Income | Ending Value | ||||||||||||
MFS Institutional Money Market Portfolio | $52 | $— | $23,303 | $2,584,523 |
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MFS Mid Cap Growth Series
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Trustees of MFS Variable Insurance Trust and the Shareholders of MFS Mid Cap Growth Series:
We have audited the accompanying statement of assets and liabilities, including the portfolio of investments, of MFS Mid Cap Growth Series (one of the series of MFS Variable Insurance Trust) (the “Fund”) as of December 31, 2016, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended. These financial statements and financial highlights are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. The Fund is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of December 31, 2016, by correspondence with the custodian and brokers; when replies were not received from brokers, we performed other auditing procedures. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of MFS Mid Cap Growth Series as of December 31, 2016, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
February 15, 2017
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TRUSTEES AND OFFICERS – IDENTIFICATION AND BACKGROUND
The Trustees and Officers of the Trust, as of February 1, 2017, are listed below, together with their principal occupations during the past five years. (Their titles may have varied during that period.) The address of each Trustee and Officer is 111 Huntington Avenue, Boston, Massachusetts 02199-7618.
Name, Age | Position(s) with Fund | Trustee/Officer Since (h) | Principal Occupations During the Past Five Years | Other Directorships (j) | ||||
INTERESTED TRUSTEES | ||||||||
Robert J. Manning (k) (age 53) | Trustee | February 2004 | Massachusetts Financial Services Company, Executive Chairman (since January 2017) and Director; Chairman (until January 2017); Chief Executive Officer (until 2015); Co-Chief Executive Officer (2015-2016) | N/A | ||||
Robin A. Stelmach (k) (age 55) | Trustee | January 2014 | Massachusetts Financial Services Company, Vice Chair (since January 2017); Chief Operating Officer and Executive Vice President (until January 2017) | N/A | ||||
INDEPENDENT TRUSTEES | ||||||||
David H. Gunning (age 74) | Trustee and Chair of Trustees | January 2004 | Private investor | Lincoln Electric Holdings, Inc., Director; Development Alternatives, Inc., Director/Non-Executive Chairman | ||||
Steven E. Buller (age 65) | Trustee | February 2014 | Chairman, Financial Accounting Standards Advisory Council (until 2015); Standing Advisory Group, Public Company Accounting Oversight Board, Member (until 2014); BlackRock, Inc. (investment management), Managing Director (until 2014), BlackRock Finco UK (investment management), Director (until 2014) | N/A | ||||
Maureen R. Goldfarb (age 61) | Trustee | January 2009 | Private investor | N/A | ||||
Michael Hegarty (age 72) | Trustee | December 2004 | Private investor | Rouse Properties Inc., Director; Capmark Financial Group Inc., Director (until 2015) | ||||
John P. Kavanaugh (age 62) | Trustee and Vice Chair of Trustees | January 2009 | Private investor | N/A | ||||
Maryanne L. Roepke (age 60) | Trustee | May 2014 | American Century Investments (investment management), Senior Vice President and Chief Compliance Officer (until 2014) | N/A | ||||
Laurie J. Thomsen (age 59) | Trustee | March 2005 | Private investor | The Travelers Companies, Director; Dycom Industries, Inc., Director | ||||
OFFICERS | ||||||||
Christopher R. Bohane (k) (age 43) | Assistant Secretary and Assistant Clerk | July 2005 | Massachusetts Financial Services Company, Vice President and Assistant General Counsel | N/A | ||||
Kino Clark (k) (age 48) | Assistant Treasurer | January 2012 | Massachusetts Financial Services Company, Vice President | N/A | ||||
Thomas H. Connors (k) (age 57) | Assistant Secretary and Assistant Clerk | September 2012 | Massachusetts Financial Services Company, Vice President and Senior Counsel; Deutsche Investment Management Americas Inc. (financial service provider), Director and Senior Counsel (until 2012) | N/A | ||||
Ethan D. Corey (k) (age 53) | Assistant Secretary and Assistant Clerk | July 2005 | Massachusetts Financial Services Company, Senior Vice President and Associate General Counsel | N/A | ||||
David L. DiLorenzo (k) (age 48) | President | July 2005 | Massachusetts Financial Services Company, Senior Vice President | N/A | ||||
Brian E. Langenfeld (k) (age 43) | Assistant Secretary and Assistant Clerk | June 2006 | Massachusetts Financial Services Company, Vice President and Senior Counsel | N/A |
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Trustees and Officers – continued
Name, Age | Position(s) with Fund | Trustee/Officer Since (h) | Principal Occupations During the Past Five Years | Other Directorships (j) | ||||
Susan A. Pereira (k) (age 46) | Assistant Secretary and Assistant Clerk | July 2005 | Massachusetts Financial Services Company, Vice President and Senior Counsel | N/A | ||||
Kasey L. Phillips (k) (age 46) | Assistant Treasurer | September 2012 | Massachusetts Financial Services Company, Vice President; Wells Fargo Funds Management, LLC, Senior Vice President, Fund Treasurer (until 2012) | N/A | ||||
Mark N. Polebaum (k) (age 64) | Secretary and Clerk | January 2006 | Massachusetts Financial Services Company, Executive Vice President, General Counsel and Secretary | N/A | ||||
Matthew A. Stowe (k) (age 42) | Assistant Secretary and Assistant Clerk | October 2014 | Massachusetts Financial Services Company, Vice President and Assistant General Counsel | N/A | ||||
Frank L. Tarantino (age 72) | Independent Senior Officer | June 2004 | Tarantino LLC (provider of compliance services), Principal | N/A | ||||
Richard S. Weitzel (k) (age 46) | Assistant Secretary and Assistant Clerk | October 2007 | Massachusetts Financial Services Company, Senior Vice President and Associate General Counsel | N/A | ||||
Martin J. Wolin (k) (age 49) | Chief Compliance Officer | July 2015 | Massachusetts Financial Services Company, Senior Vice President and Chief Compliance Officer (since July 2015); Mercer (financial service provider), Chief Risk and Compliance Officer, North America and Latin America (until June 2015) | N/A | ||||
James O. Yost (k) (age 56) | Treasurer | September 1990 | Massachusetts Financial Services Company, Senior Vice President | N/A |
(h) | Date first appointed to serve as Trustee/officer of an MFS Fund. Each Trustee has served continuously since appointment unless indicated otherwise. For the period from December 15, 2004 until February 22, 2005, Mr. Manning served as Advisory Trustee. Prior to January 2012, Messrs. DiLorenzo and Yost served as Assistant Treasurers of the Funds. From January 2012 through December 2016, Messrs. DiLorenzo and Yost served as Treasurer and Deputy Treasurer of the Funds, respectively. |
(j) | Directorships or trusteeships of companies required to report to the Securities and Exchange Commission (i.e., “public companies”). |
(k) | “Interested person” of the Trust within the meaning of the Investment Company Act of 1940 (referred to as the 1940 Act), which is the principal federal law governing investment companies like the fund, as a result of a position with MFS. The address of MFS is 111 Huntington Avenue, Boston, Massachusetts 02199-7618. |
Each Trustee (except Ms. Stelmach, Mr. Buller and Ms. Roepke) has been elected by shareholders and each Trustee and officer holds office until his or her successor is chosen and qualified or until his or her earlier death, resignation, retirement or removal. The Trust does not hold annual meetings for the purpose of electing Trustees, and Trustees are not elected for fixed terms. Messrs. Buller and Kavanaugh and Ms. Roepke are members of the Trust’s Audit Committee.
Each of the Fund’s Trustees and officers holds comparable positions with certain other funds of which MFS or a subsidiary is the investment adviser or distributor, and, in the case of the officers, with certain affiliates of MFS. As of February 1, 2017, the Trustees served as board members of 137 funds within the MFS Family of Funds.
The Statement of Additional Information for a Fund includes further information about the Trustees and is available without charge upon request by calling 1-800-225-2606.
Investment Adviser Massachusetts Financial Services Company 111 Huntington Avenue Boston, MA 02199-7618 | Custodian State Street Bank and Trust Company 1 Lincoln Street Boston, MA 02111-2900 | |
Distributor MFS Fund Distributors, Inc. 111 Huntington Avenue Boston, MA 02199-7618 | Independent Registered Public Accounting Firm Deloitte & Touche LLP 200 Berkeley Street Boston, MA 02116 | |
Portfolio Managers Eric Fischman Paul Gordon Matthew Sabel |
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BOARD REVIEW OF INVESTMENT ADVISORY AGREEMENT
The Investment Company Act of 1940 requires that both the full Board of Trustees and a majority of the non-interested (“independent”) Trustees, voting separately, annually approve the continuation of the Fund’s investment advisory agreement with MFS. The Trustees consider matters bearing on the Fund and its advisory arrangements at their meetings throughout the year, including a review of performance data at each regular meeting. In addition, the independent Trustees met several times over the course of three months beginning in May and ending in July, 2016 (“contract review meetings”) for the specific purpose of considering whether to approve the continuation of the investment advisory agreement for the Fund and the other investment companies that the Board oversees (the “MFS Funds”). The independent Trustees were assisted in their evaluation of the Fund’s investment advisory agreement by independent legal counsel, from whom they received separate legal advice and with whom they met separately from MFS during various contract review meetings. The independent Trustees were also assisted in this process by the MFS Funds’ Independent Senior Officer, a senior officer appointed by and reporting to the independent Trustees.
In connection with their deliberations regarding the continuation of the investment advisory agreement, the Trustees, including the independent Trustees, considered such information and factors as they believed, in light of the legal advice furnished to them and their own business judgment, to be relevant. The investment advisory agreement for the Fund was considered separately, although the Trustees also took into account the common interests of all MFS Funds in their review. As described below, the Trustees considered the nature, quality, and extent of the various investment advisory, administrative, and shareholder services performed by MFS under the existing investment advisory agreement and other arrangements with the Fund.
In connection with their contract review meetings, the Trustees received and relied upon materials that included, among other items: (i) information provided by Broadridge Financial Solutions, Inc. (“Broadridge”), an independent third party, on the investment performance of the Fund for various time periods ended December 31, 2015 and the investment performance of a group of funds with substantially similar investment classifications/objectives (the “Lipper performance universe”), (ii) information provided by Broadridge on the Fund’s advisory fees and other expenses and the advisory fees and other expenses of comparable funds identified by Broadridge (the “Broadridge expense group”), (iii) information provided by MFS on the advisory fees of portfolios of other clients of MFS, including institutional separate accounts and other clients, (iv) information as to whether and to what extent applicable expense waivers, reimbursements or fee “breakpoints” are observed for the Fund, (v) information regarding MFS’ financial results and financial condition, including MFS’ and certain of its affiliates’ estimated profitability from services performed for the Fund and the MFS Funds as a whole, and compared to MFS’ institutional business, (vi) MFS’ views regarding the outlook for the mutual fund industry and the strategic business plans of MFS, (vii) descriptions of various functions performed by MFS for the Funds, such as compliance monitoring and portfolio trading practices, and (viii) information regarding the overall organization of MFS, including information about MFS’ senior management and other personnel providing investment advisory, administrative and other services to the Fund and the other MFS Funds. The comparative performance, fee and expense information prepared and provided by Broadridge was not independently verified and the independent Trustees did not independently verify any information provided to them by MFS.
The Trustees’ conclusion as to the continuation of the investment advisory agreement was based on a comprehensive consideration of all information provided to the Trustees and not the result of any single factor. Some of the factors that figured particularly in the Trustees’ deliberations are described below, although individual Trustees may have evaluated the information presented differently from one another, giving different weights to various factors. It is also important to recognize that the fee arrangements for the Fund and other MFS Funds are the result of years of review and discussion between the independent Trustees and MFS, that certain aspects of such arrangements may receive greater scrutiny in some years than in others, and that the Trustees’ conclusions may be based, in part, on their consideration of these same arrangements during the course of the year and in prior years.
Based on information provided by Broadridge and MFS, the Trustees reviewed the Fund’s total return investment performance as well as the performance of peer groups of funds over various time periods. The Trustees placed particular emphasis on the total return performance of the Fund’s Initial Class shares in comparison to the performance of funds in its Lipper performance universe over the three-year period ended December 31, 2015, which the Trustees believed was a long enough period to reflect differing market conditions. The total return performance of the Fund’s Initial Class shares was in the 1st quintile relative to the other funds in the universe for this three-year period (the 1st quintile being the best performers and the 5th quintile being the worst performers). The total return performance of the Fund’s Initial Class shares was in the 1st quintile for the one-year period and the 2nd quintile for the five-year period ended December 31, 2015 relative to the Lipper performance universe. Because of the passage of time, these performance results may differ from the performance results for more recent periods, including those shown elsewhere in this report.
In the course of their deliberations, the Trustees took into account information provided by MFS in connection with the contract review meetings, as well as during investment review meetings conducted with portfolio management personnel during the course of the year regarding the Fund’s performance. After reviewing these and related factors, the Trustees concluded, within the context of their overall conclusions regarding the investment advisory agreement, that they were satisfied with MFS’ responses and efforts relating to investment performance.
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Board Review of Investment Advisory Agreement – continued
In assessing the reasonableness of the Fund’s advisory fee, the Trustees considered, among other information, the Fund’s advisory fee and the total expense ratio of the Fund’s Initial Class shares as a percentage of average daily net assets and the advisory fee and total expense ratios of peer groups of funds based on information provided by Broadridge. The Trustees considered that, according to the data provided by Broadridge (which takes into account any fee reductions or expense limitations that were in effect during the Fund’s last fiscal year), the Fund’s effective advisory fee rate and total expense ratio were each approximately at the Broadridge expense group median.
The Trustees also considered the advisory fees charged by MFS to any institutional separate accounts advised by MFS (“separate accounts”) and unaffiliated investment companies for which MFS serves as subadviser (“subadvised funds”) that have comparable investment strategies to the Fund. In comparing these fees, the Trustees considered information provided by MFS as to the generally broader scope of services provided by MFS to the Fund, as well as the more extensive regulatory burdens imposed on MFS in managing the Fund, in comparison to separate accounts and subadvised funds. The Trustees also considered the higher demands placed on MFS’ investment personnel and trading infrastructure as a result of the daily cash in-flows and out-flows of the Fund in comparison to separate accounts.
The Trustees also considered whether the Fund may benefit from any economies of scale in the management of the Fund in the event of growth in assets of the Fund and/or growth in assets of the MFS Funds as a whole. They noted that the Fund’s advisory fee rate schedule is subject to a contractual breakpoint that reduces the Fund’s advisory fee rate on average daily net assets over $1 billion. The Trustees also noted that MFS has agreed in writing to waive a portion of the management fees of certain MFS Funds, including the Fund, if the total combined assets of certain funds within the MFS Funds’ complex increase above agreed upon thresholds (the “group fee waiver”), enabling the Fund’s shareholders to share in the benefits from any economies of scale at the complex level. The group fee waiver is reviewed and renewed annually between the Board and MFS. The Trustees concluded that the breakpoint and the group fee waiver were sufficient to allow the Fund to benefit from economies of scale as its assets and overall complex assets grow.
The Trustees also considered information prepared by MFS relating to MFS’ costs and profits with respect to the Fund, the MFS Funds considered as a group, and other investment companies and accounts advised by MFS, as well as MFS’ methodologies used to determine and allocate its costs to the MFS Funds, the Fund and other accounts and products for purposes of estimating profitability.
After reviewing these and other factors described herein, the Trustees concluded, within the context of their overall conclusions regarding the investment advisory agreement, that the advisory fees charged to the Fund represent reasonable compensation in light of the services being provided by MFS to the Fund.
In addition, the Trustees considered MFS’ resources and related efforts to continue to retain, attract and motivate capable personnel to serve the Fund. The Trustees also considered current and developing conditions in the financial services industry, including the presence of large and well-capitalized companies which are spending, and appear to be prepared to continue to spend, substantial sums to engage personnel and to provide services to competing investment companies. In this regard, the Trustees also considered the financial resources of MFS and its ultimate parent, Sun Life Financial Inc. The Trustees also considered the advantages and possible disadvantages to the Fund of having an adviser that also serves other investment companies as well as other accounts.
The Trustees also considered the nature, quality, cost, and extent of administrative, transfer agency, and distribution services provided to the Fund by MFS and its affiliates under agreements and plans other than the investment advisory agreement, including any 12b-1 fees the Fund pays to MFS Fund Distributors, Inc., an affiliate of MFS. The Trustees also considered the nature, extent and quality of certain other services MFS performs or arranges for on the Fund’s behalf, which may include securities lending programs, directed expense payment programs, class action recovery programs, and MFS’ interaction with third-party service providers, principally custodians and sub-custodians. The Trustees concluded that the various non-advisory services provided by MFS and its affiliates on behalf of the Fund were satisfactory.
The Trustees also considered benefits to MFS from the use of the Fund’s portfolio brokerage commissions, if applicable, to pay for investment research and various other factors. Additionally, the Trustees considered so-called “fall-out benefits” to MFS such as reputational value derived from serving as investment manager to the Fund.
Based on their evaluation of factors that they deemed to be material, including those factors described above, the Board of Trustees, including the independent Trustees, concluded that the Fund’s investment advisory agreement with MFS should be continued for an additional one-year period, commencing August 1, 2016.
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MFS Mid Cap Growth Series
PROXY VOTING POLICIES AND INFORMATION
MFS votes proxies on behalf of the fund pursuant to proxy voting policies and procedures that are available without charge, upon request, by calling 1-800-225-2606, by visiting mfs.com (once you have selected “Individual Investor” as your role, click on “Individual Investor Home” in the top navigation and then select “Learn More About Proxy Voting” under the “I want to…” header on the left hand column of the page), or by visiting the SEC’s Web site at http://www.sec.gov.
Information regarding how the fund voted proxies relating to portfolio securities during the most recent twelve-month period ended June 30 is available by August 31 of each year without charge by visiting mfs.com (once you have selected “Individual Investor” as your role, click on “Individual Investor Home” in the top navigation and then select “Learn More About Proxy Voting” under the “I want to…” header on the left hand column of the page), or by visiting the SEC’s Web site at http://www.sec.gov.
QUARTERLY PORTFOLIO DISCLOSURE
The fund will file a complete schedule of portfolio holdings with the Securities and Exchange Commission (the Commission) for the first and third quarters of each fiscal year on Form N-Q. The fund’s Form N-Q is available on the EDGAR database on the Commission’s Internet Web site at http://www.sec.gov, and may be reviewed and copied at the:
Public Reference Room
Securities and Exchange Commission
100 F Street, NE, Room 1580
Washington, D.C. 20549
Information on the operation of the Public Reference Room may be obtained by calling the Commission at 1-800-SEC-0330. Copies of the fund’s Form N-Q also may be obtained, upon payment of a duplicating fee, by electronic request at the following e-mail address: publicinfo@sec.gov or by writing the Public Reference Section at the above address.
From time to time, MFS may post important information about the fund or the MFS funds on the MFS web site (mfs.com). This information is available on mfs.com by following these steps once you have selected “Individual Investor” as your role: (1) Click on the “Individual Investor Home” in the top navigation and then select the “Announcements” option within the “Market Outlooks” drop down, or (2) Click on “Products & Services” and “Variable Insurance Portfolios” and then select the fund’s name.
INFORMATION ABOUT FUND CONTRACTS AND LEGAL CLAIMS
The fund has entered into contractual arrangements with an investment adviser, administrator, distributor, shareholder servicing agent, 529 program manager (if applicable), and custodian who each provide services to the fund. Unless expressly stated otherwise, shareholders are not parties to, or intended beneficiaries of these contractual arrangements, and these contractual arrangements are not intended to create any shareholder right to enforce them against the service providers or to seek any remedy under them against the service providers, either directly or on behalf of the fund.
Under the Trust’s By-Laws and Declaration of Trust, any claims asserted against or on behalf of the MFS Funds, including claims against Trustees and Officers, must be brought in state and federal courts located within the Commonwealth of Massachusetts.
FEDERAL TAX INFORMATION (unaudited)
The following information is provided pursuant to provisions of the Internal Revenue Code.
The fund designates $33,827,000 as capital gain dividends paid during the fiscal year.
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rev. 3/16
FACTS | WHAT DOES MFS DO WITH YOUR PERSONAL INFORMATION? |
Why? | Financial companies choose how they share your personal information. Federal law gives consumers the right to limit some but not all sharing. Federal law also requires us to tell you how we collect, share, and protect your personal information. Please read this notice carefully to understand what we do. |
What? | The types of personal information we collect and share depend on the product or service you have with us. This information can include:
• Social Security number and account balances • Account transactions and transaction history • Checking account information and wire transfer instructions
When you are no longer our customer, we continue to share your information as described in this notice. |
How? | All financial companies need to share customers’ personal information to run their everyday business. In the section below, we list the reasons financial companies can share their customers’ personal information; the reasons MFS chooses to share; and whether you can limit this sharing. |
Reasons we can share your personal information | Does MFS share? | Can you limit this sharing? | ||
For our everyday business purposes – such as to process your transactions, maintain your account(s), respond to court orders and legal investigations, or report to credit bureaus | Yes | No | ||
For our marketing purposes – to offer our products and services to you | No | We don’t share | ||
For joint marketing with other financial companies | No | We don’t share | ||
For our affiliates’ everyday business purposes – information about your transactions and experiences | No | We don’t share | ||
For our affiliates’ everyday business purposes – information about your creditworthiness | No | We don’t share | ||
For nonaffiliates to market to you | No | We don’t share |
Questions? | Call 800-225-2606 or go to mfs.com. |
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Page 2 |
Who we are | ||
Who is providing this notice? | MFS Funds, MFS Investment Management, MFS Institutional Advisors, Inc., and MFS Heritage Trust Company. |
What we do | ||
How does MFS protect my personal information? | To protect your personal information from unauthorized access and use, we use security measures that comply with federal law. These measures include procedural, electronic, and physical safeguards for the protection of the personal information we collect about you. | |
How does MFS collect my personal information? | We collect your personal information, for example, when you
• open an account or provide account information • direct us to buy securities or direct us to sell your securities • make a wire transfer
We also collect your personal information from others, such as credit bureaus, affiliates, or other companies. | |
Why can’t I limit all sharing? | Federal law gives you the right to limit only
• sharing for affiliates’ everyday business purposes – information about your creditworthiness • affiliates from using your information to market to you • sharing for nonaffiliates to market to you
State laws and individual companies may give you additional rights to limit sharing. |
Definitions | ||
Affiliates | Companies related by common ownership or control. They can be financial and nonfinancial companies.
• MFS does not share personal information with affiliates, except for everyday business purposes as described on page one of this notice. | |
Nonaffiliates | Companies not related by common ownership or control. They can be financial and nonfinancial companies.
• MFS does not share with nonaffiliates so they can market to you. | |
Joint marketing | A formal agreement between nonaffiliated financial companies that together market financial products or services to you.
• MFS doesn’t jointly market. |
Other important information | ||
If you own an MFS product or receive an MFS service in the name of a third party such as a bank or broker-dealer, their privacy policy may apply to you instead of ours. |
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Table of Contents
ANNUAL REPORT
December 31, 2016
MFS® NEW DISCOVERY SERIES
MFS® Variable Insurance Trust
VND-ANN
Table of Contents
MFS® NEW DISCOVERY SERIES
The report is prepared for the general information of contract owners. It is authorized for distribution to prospective investors only when preceded or accompanied by a current prospectus.
NOT FDIC INSURED • MAY LOSE VALUE • NO BANK OR CREDIT UNION GUARANTEE • NOT A DEPOSIT • NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY OR NCUA/NCUSIF
Table of Contents
MFS New Discovery Series
LETTER FROM THE EXECUTIVE CHAIRMAN
Dear Contract Owners:
Despite June’s unexpected vote by the United Kingdom to leave the European Union and the surprising result in November’s U.S. presidential election, most markets have proved resilient. U.S. share prices quickly reversed post-Brexit declines, and indices reached new highs following the November elections. U.S. bond yields rose after Donald Trump’s victory on hopes that his proposed policy mix of lower taxes, increased spending on infrastructure and a lower regulatory burden on businesses will lift both U.S. economic growth and inflation. However, interest rates in most developed markets remain very low, with major central banks maintaining extremely accommodative monetary policies to reinvigorate slow-growing economies against a backdrop of still-low inflation. Even after the rise in yields following the election, interest rates remain low by historical standards.
Globally, economic growth has shown signs of recovery of late, led by the United States and the eurozone. Despite better growth, there are few immediate signs of worrisome inflation. Emerging market economies are recovering at a somewhat slower pace amid fears that restrictive U.S. trade policies could further hamper the already slow pace of global trade growth.
At MFS®, we believe in a patient, long-term approach to investing. Viewing investments with a long lens makes it possible to filter out short-term market noise and focus on achieving solid risk-adjusted returns over a full market cycle.
In our view, such an approach, along with the professional guidance of a financial advisor, will help you reach your investment objectives.
Respectfully,
Robert J. Manning
Executive Chairman
MFS Investment Management
February 15, 2017
The opinions expressed in this letter are subject to change and may not be relied upon for investment advice. No forecasts can be guaranteed.
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MFS New Discovery Series
Portfolio structure
Top ten holdings | ||||
Bright Horizons Family Solutions, Inc. | 3.2% | |||
Berry Plastics Group, Inc. | 2.0% | |||
Steris PLC | 1.6% | |||
Healthcare Services Group, Inc. | 1.6% | |||
Live Nation, Inc. | 1.6% | |||
SS&C Technologies Holdings, Inc. | 1.5% | |||
NICE Systems Ltd., ADR | 1.4% | |||
GMS, Inc. | 1.4% | |||
Sabre Corp. | 1.4% | |||
Axalta Coating Systems Ltd. | 1.4% |
Equity sectors | ||||
Health Care | 21.0% | |||
Technology | 16.6% | |||
Special Products & Services | 12.3% | |||
Basic Materials | 9.0% | |||
Financial Services | 8.0% | |||
Industrial Goods & Services | 7.8% | |||
Autos & Housing | 7.6% | |||
Leisure | 7.5% | |||
Retailing | 3.2% | |||
Consumer Staples | 2.9% | |||
Energy | 1.3% | |||
Transportation | 1.0% |
Cash & Cash Equivalents includes any cash, investments in money market funds, short-term securities, and other assets less liabilities. Please see the Statement of Assets and Liabilities for additional information related to the fund’s cash position and other assets and liabilities.
Percentages are based on net assets as of 12/31/16.
The portfolio is actively managed and current holdings may be different.
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MFS New Discovery Series
Summary of Results
For the twelve months ended December 31, 2016, Initial Class shares of the MFS New Discovery Series (“fund”) provided a total return of 9.05%, while Service Class shares of the fund provided a total return of 8.80%. These compare with a return of 11.32% over the same period for the fund’s benchmark, the Russell 2000® Growth Index.
Market Environment
Sluggish global growth weighed on both developed and emerging market (“EM”) economies during much of the reporting period, though signs of improved growth became evident in late 2016. The US Federal Reserve increased interest rates by 25 basis points at the end of the period, the second hike of the cycle which began in December 2015. Globally, however, central bank policy remained highly accommodative, which forced many government, and even some corporate, bond yields into negative territory during the period. During the first half of the period, the United Kingdom voted to leave the European Union (“EU”), beginning a multi-year process of negotiation in order to achieve “Brexit.” While markets initially reacted to the vote with alarm, the spillover to European and EM economies was relatively short-lived, although risks of further hits to EU cohesiveness could re-emerge. Late in the period, the surprising US presidential election outcome prompted a significant rally in equities and a rise in bond yields in anticipation of a reflationary policy mix from the incoming Trump administration.
Headwinds from lower energy and commodity prices, which had spread beyond the energy, materials and industrial sectors early in the reporting period, abated later in the period as stabilizing oil prices helped push energy earnings higher relative to expectations. A sharp rise in the US dollar was a headwind for multinationals late in the period. The sharp rise in the US dollar also weighed on earnings. US consumer spending held up well during the second half of the period amid a modest increase in real wages and relatively low gasoline prices. Demand for autos reached near-record territory, while the housing market continued its recovery. Slow global trade continued to mirror slow global growth, particularly for many EM countries. That said, EM countries began to show signs of a modest upturn in activity along with adjustment in their external accounts. These improved conditions appeared to have reassured investors and contributed to record inflows into the asset class during July and August as negative yields for an increasing share of developed market bonds drove yield-hungry investors further out on the risk spectrum. Similar investor inflows were experienced in the investment grade and high yield corporate markets. Late in the reporting period, however, new challenges emerged for emerging markets debt (“EMD”) as a result of the US presidential election, which raised concerns about the potential for a protectionist turn in US trade policy which could negatively impact EM economies. These concerns, along with rising expectations for US growth, inflation and interest rates, have turned the tables on flows into EMD. Since the election, flows have reversed. As of the end of the period, the markets seemed to be in “wait-and-see” mode, looking for evidence to either confirm or refute the repricing of risk that has occurred since Election Day.
Detractors from Performance
Stock selection and, to a lesser extent, an underweight position in the industrial goods & services sector detracted from performance relative to the Russell 2000® Growth Index. However, there were no stocks within this sector that were among the fund’s top relative detractors over the reporting period.
Stock selection in both the special products & services and technology sectors also hurt relative results. There were no stocks within the special products & services sector that were among the fund’s top relative detractors over the reporting period. Within the technology sector, the fund’s positions in financial services software designer SS&C Technologies (b) and technology solutions provider to the travel and tourism industry, Sabre (b), held back relative results. Shares of SS&C came under pressure during the year due to financial services industry headwinds as the number of hedge funds and other alternative asset managers who use SS&C’s products have been in decline recently. Additionally, not holding a position in global semiconductor company Advanced Micro Devices, and an overweight position in information security services provider SecureWorks, also hindered relative performance.
Other top relative detractors during the reporting period included the fund’s overweight positions in independent and freestanding emergency room provider Adeptus Health (h), recycling and resale automotive parts company Fenix Parts, women’s healthcare products company TherapeuticsMD and self-storage property operator Life Storage. Shares of Adeptus Health traded lower following disappointing earnings results due to volume weakness as a result of increased competitive pressures. In addition, the company reported a material weakness in their internal controls that led to concerns of possible insurance fraud. The fund’s position in pharmaceutical company Ionis Pharmaceuticals (b)(h) further dampened relative returns.
The fund’s cash and/or cash equivalents position during the period was another detractor from relative performance. Under normal market conditions, the fund strives to be fully invested and generally holds cash to buy new holdings and to provide liquidity. In a period when markets rose, as measured by the fund’s benchmark, holding cash hurt performance versus the benchmark, which has no cash position.
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MFS New Discovery Series
Management Review – continued
Contributors to Performance
Security selection and, to a lesser extent, an overweight position in the health care sector contributed to relative performance. The fund’s overweight position in medical technology company Masimo and biopharmaceutical firm Tesaro bolstered relative results. Shares of Masimo appreciated throughout the reporting period due to continued strong growth as a result of increased hospital utilization, new customer wins, and recent successful product launches.
Security selection and, to a lesser extent, an underweight position in the retailing sector also benefited relative performance. An overweight position in discount retailer Ollie’s Bargain Outlet contributed to relative results as the stock turned in strong performance relative to the benchmark.
Stock selection in the energy sector further contributed to relative returns. Here, the fund’s position in strong-performing oilfield products company Forum Energy Technologies (b) aided relative performance.
Stocks in other sectors that benefited relative results included overweight positions in enterprise-class cloud commerce solutions provider Demandware (h), transportation services company Swift Transportation and specialty chemical manufacturer Ingevity. Shares of Demandware rose after the company announced it was being acquired by cloud computing company Salesforce.com. The timing of the fund’s ownership in shares of consumer packaging manufacturer Berry Plastics, and the fund’s positions in defense company Leidos Holdings (b) and specialty chemical company Albemarle Corp (b)(h), further contributed to relative performance.
Respectfully,
Paul Gordon | Michael Grossman | |
Portfolio Manager | Portfolio Manager |
(b) | Security is not a benchmark constituent. |
(h) | Security was not held in the portfolio at period end. |
The views expressed in this report are those of the portfolio managers only through the end of the period of the report as stated on the cover and do not necessarily reflect the views of MFS or any other person in the MFS organization. These views are subject to change at any time based on market or other conditions, and MFS disclaims any responsibility to update such views. These views may not be relied upon as investment advice or an indication of trading intent on behalf of any MFS portfolio. References to specific securities are not recommendations of such securities, and may not be representative of any MFS portfolio’s current or future investments.
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MFS New Discovery Series
PERFORMANCE SUMMARY THROUGH 12/31/16
The following chart illustrates the historical performance of the fund in comparison to its benchmark(s). Benchmarks are unmanaged and may not be invested in directly. Benchmark returns do not reflect any fees or expenses. The performance of other share classes will be greater than or less than that of the class depicted below. (See Notes to Performance Summary.)
Performance data shown represents past performance and is no guarantee of future results. Investment return and principal value fluctuate so your units, when sold, may be worth more or less than the original cost; current performance may be lower or higher than quoted. The performance shown does not reflect the deduction of taxes, if any, that a contract holder would pay on fund distributions or the redemption of contract units. The returns for the fund shown also do not reflect the deduction of expenses associated with variable products, such as mortality and expense risk charges, separate account charges, and sales charges imposed by the insurance company separate accounts. Such expenses would reduce the overall returns shown.
Growth of a Hypothetical $10,000 Investment
Total Returns through 12/31/16
Average annual total returns
Share Class | Class Inception Date | 1-yr | 5-yr | 10-yr | ||||||||
Initial Class | 5/01/98 | 9.05% | 11.23% | 7.77% | ||||||||
Service Class | 5/01/00 | 8.80% | 10.95% | 7.50% | ||||||||
Comparative benchmark | ||||||||||||
Russell 2000® Growth Index (f) | 11.32% | 13.74% | 7.76% |
(f) | Source: FactSet Research Systems Inc. |
Benchmark Definition
Russell 2000® Growth Index – constructed to provide a comprehensive barometer for growth securities in the small-cap segment of the U.S. equity universe. Companies in this index generally have higher price-to-book ratios and higher forecasted growth values. The Russell 2000® Growth Index is a trademark/service mark of the Frank Russell Company. Russell® is a trademark of the Frank Russell Company.
It is not possible to invest directly in an index.
Notes to Performance Summary
Average annual total return represents the average annual change in value for each share class for the periods presented.
Performance results reflect any applicable expense subsidies and waivers in effect during the periods shown. Without such subsidies and waivers the fund’s performance results would be less favorable. Please see the prospectus and financial statements for complete details. All results are historical and assume the reinvestment of any dividends and capital gains distributions.
Performance results do not include adjustments made for financial reporting purposes in accordance with U.S. generally accepted accounting principles and may differ from amounts reported in the financial highlights.
From time to time the fund may receive proceeds from litigation settlements, without which performance would be lower.
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MFS New Discovery Series
Fund Expenses Borne by the Contract Holders during the Period,
July 1, 2016 through December 31, 2016
As a contract holder of the fund, you incur ongoing costs, including management fees; distribution and/or service (12b-1) fees; and other fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the fund and to compare these costs with the ongoing costs of investing in other mutual funds.
The example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period July 1, 2016 through December 31, 2016.
Actual Expenses
The first line for each share class in the following table provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled “Expenses Paid During Period” to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line for each share class in the following table provides information about hypothetical account values and hypothetical expenses based on the fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight the fund’s ongoing costs only and do not take into account the fees and expenses imposed under the variable contracts through which your investment in the fund is made. Therefore, the second line for each share class in the table is useful in comparing ongoing costs associated with an investment in vehicles (such as the fund) which fund benefits under variable annuity and variable life insurance contracts and to qualified pension and retirement plans only, and will not help you determine the relative total costs of investing in the fund through variable annuity and variable life insurance contracts. If the fees and expenses imposed under the variable contracts were included, your costs would have been higher.
Share Class | Annualized Expense Ratio | Beginning Account Value 7/01/16 | Ending Account Value | Expenses Paid During Period (p) 7/01/16-12/31/16 | ||||||||||||||
Initial Class | Actual | 0.90% | $1,000.00 | $1,081.44 | $4.71 | |||||||||||||
Hypothetical (h) | 0.90% | $1,000.00 | $1,020.61 | $4.57 | ||||||||||||||
Service Class | Actual | 1.15% | $1,000.00 | $1,079.77 | $6.01 | |||||||||||||
Hypothetical (h) | 1.15% | $1,000.00 | $1,019.36 | $5.84 |
(h) | 5% class return per year before expenses. |
(p) | “Expenses Paid During Period” are equal to each class’s annualized expense ratio, as shown above, multiplied by the average account value over the period, multiplied by 184/366 (to reflect the one-half year period). |
Notes to Expense Table
Expense ratios reflect a one-time Reimbursement of Expenses by Custodian of 0.04% (See Note 2 of the Notes to Financial Statements) that are outside of the expense limitation arrangement (See Note 3 of the Notes to Financial Statements).
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MFS New Discovery Series
PORTFOLIO OF INVESTMENTS – 12/31/16
The Portfolio of Investments is a complete list of all securities owned by your fund. It is categorized by broad-based asset classes.
Issuer | Shares/Par | Value ($) | ||||||
COMMON STOCKS – 98.2% | ||||||||
Aerospace – 1.9% | ||||||||
HEICO Corp. | 47,973 | $ | 3,701,117 | |||||
Leidos Holdings, Inc. | 170,886 | 8,739,110 | ||||||
|
| |||||||
$ | 12,440,227 | |||||||
|
| |||||||
Automotive – 2.4% | ||||||||
Fenix Parts, Inc. (a) | 787,064 | $ | 2,219,520 | |||||
Harman International Industries, Inc. | 56,575 | 6,288,877 | ||||||
Kar Auction Services, Inc. | 177,454 | 7,563,089 | ||||||
|
| |||||||
$ | 16,071,486 | |||||||
|
| |||||||
Biotechnology – 3.4% | ||||||||
ACADIA Pharmaceuticals, Inc. (a)(l) | 67,372 | $ | 1,943,008 | |||||
Alder Biopharmaceuticals, Inc. (a) | 55,357 | 1,151,426 | ||||||
Amicus Therapeutics, Inc. (a) | 374,620 | 1,861,861 | ||||||
Bio-Techne Corp. | 31,693 | 3,258,991 | ||||||
Exact Sciences Corp. (a) | 126,833 | 1,694,489 | ||||||
MiMedx Group, Inc. (a)(l) | 378,226 | 3,351,082 | ||||||
Neurocrine Biosciences, Inc. (a) | 46,323 | 1,792,700 | ||||||
Spark Therapeutics, Inc. (a) | 42,879 | 2,139,662 | ||||||
Tesaro, Inc. (a) | 34,897 | 4,692,949 | ||||||
VTV Therapeutics, Inc. (a) | 164,702 | 795,511 | ||||||
|
| |||||||
$ | 22,681,679 | |||||||
|
| |||||||
Brokerage & Asset Managers – 1.2% | ||||||||
NASDAQ, Inc. | 70,317 | $ | 4,719,677 | |||||
Raymond James Financial, Inc. | 47,186 | 3,268,574 | ||||||
|
| |||||||
$ | 7,988,251 | |||||||
|
| |||||||
Business Services – 9.8% | ||||||||
Bright Horizons Family Solutions, Inc. (a) | 304,070 | $ | 21,290,981 | |||||
CoStar Group, Inc. (a) | 23,691 | 4,465,517 | ||||||
Gartner, Inc. (a) | 62,360 | 6,302,725 | ||||||
Global Payments, Inc. | 85,102 | 5,906,930 | ||||||
NOW, Inc. (a) | 121,056 | 2,478,016 | ||||||
Travelport Worldwide Ltd. | 367,163 | 5,176,998 | ||||||
Tyler Technologies, Inc. (a) | 20,147 | 2,876,387 | ||||||
Ultimate Software Group, Inc. (a) | 31,222 | 5,693,332 | ||||||
WNS (Holdings) Ltd., ADR (a) | 210,441 | 5,797,650 | ||||||
Zendesk, Inc. (a) | 273,174 | 5,791,289 | ||||||
|
| |||||||
$ | 65,779,825 | |||||||
|
| |||||||
Chemicals – 1.8% | ||||||||
FMC Corp. | 72,557 | $ | 4,103,824 | |||||
Ingevity Corp. (a) | 141,259 | 7,749,469 | ||||||
|
| |||||||
$ | 11,853,293 | |||||||
|
| |||||||
Computer Software – 6.1% | ||||||||
2U, Inc. (a) | 172,148 | $ | 5,190,262 | |||||
Aspen Technology, Inc. (a) | 144,807 | 7,918,047 | ||||||
Cadence Design Systems, Inc. (a) | 305,371 | 7,701,457 | ||||||
Paylocity Holding Corp. (a) | 138,543 | 4,157,675 | ||||||
Sabre Corp. | 379,999 | 9,480,975 | ||||||
SecureWorks Corp. (a) | 318,912 | 3,377,278 |
Issuer | Shares/Par | Value ($) | ||||||
COMMON STOCKS – continued | ||||||||
Computer Software – continued | ||||||||
Twilio, Inc., “A” (a) | 102,303 | $ | 2,951,442 | |||||
|
| |||||||
$ | 40,777,136 | |||||||
|
| |||||||
Computer Software – Systems – 5.8% | ||||||||
Kinaxis, Inc. (a) | 69,428 | $ | 3,231,855 | |||||
Model N, Inc. (a) | 330,798 | 2,927,562 | ||||||
NICE Systems Ltd., ADR | 139,667 | 9,603,503 | ||||||
Proofpoint, Inc. (a) | 58,104 | 4,105,048 | ||||||
Q2 Holdings, Inc. (a) | 221,811 | 6,399,247 | ||||||
Rapid7, Inc. (a) | 235,422 | 2,865,086 | ||||||
SS&C Technologies Holdings, Inc. | 348,216 | 9,958,978 | ||||||
|
| |||||||
$ | 39,091,279 | |||||||
|
| |||||||
Construction – 5.3% | ||||||||
GMS, Inc. (a) | 327,812 | $ | 9,598,335 | |||||
Lennox International, Inc. | 34,416 | 5,271,499 | ||||||
Pool Corp. | 42,612 | 4,446,136 | ||||||
Siteone Landscape Supply, Inc. (a) | 236,833 | 8,225,210 | ||||||
Summit Materials, Inc., “A” (a) | 235,920 | 5,612,548 | ||||||
Techtronic Industries Co. Ltd. | 621,500 | 2,228,087 | ||||||
|
| |||||||
$ | 35,381,815 | |||||||
|
| |||||||
Consumer Products – 0.2% | ||||||||
E.L.F. Beauty, Inc. (a) | 37,014 | $ | 1,071,185 | |||||
|
| |||||||
Consumer Services – 1.3% | ||||||||
Carriage Services, Inc. | 133,836 | $ | 3,833,063 | |||||
Nord Anglia Education, Inc. (a)(l) | 218,679 | 5,095,221 | ||||||
|
| |||||||
$ | 8,928,284 | |||||||
|
| |||||||
Containers – 2.0% | ||||||||
Berry Plastics Group, Inc. (a) | 282,900 | $ | 13,785,717 | |||||
|
| |||||||
Electrical Equipment – 0.5% | ||||||||
WESCO International, Inc. (a) | 51,828 | $ | 3,449,153 | |||||
|
| |||||||
Electronics – 3.4% | ||||||||
Inphi Corp. (a) | 135,292 | $ | 6,036,729 | |||||
Mellanox Technologies Ltd. (a) | 42,259 | 1,728,393 | ||||||
Monolithic Power Systems, Inc. | 84,440 | 6,918,169 | ||||||
Silicon Laboratories, Inc. (a) | 122,332 | 7,951,580 | ||||||
|
| |||||||
$ | 22,634,871 | |||||||
|
| |||||||
Engineering – Construction – 0.7% | ||||||||
Team, Inc. (a) | 112,600 | $ | 4,419,550 | |||||
|
| |||||||
Entertainment – 1.6% | ||||||||
Live Nation, Inc. (a) | 411,712 | $ | 10,951,539 | |||||
|
| |||||||
Food & Beverages – 2.7% | ||||||||
Blue Buffalo Pet Products, Inc. (a) | 144,968 | $ | 3,485,031 | |||||
Cal-Maine Foods, Inc. | 104,930 | 4,635,283 | ||||||
Flex Pharma, Inc. (a) | 135,844 | 717,256 | ||||||
Greencore Group PLC | 1,452,981 | 4,413,961 | ||||||
Snyders-Lance, Inc. | 136,011 | 5,214,662 | ||||||
|
| |||||||
$ | 18,466,193 | |||||||
|
|
7
Table of Contents
MFS New Discovery Series
Portfolio of Investments – continued
Issuer | Shares/Par | Value ($) | ||||||
COMMON STOCKS – continued | ||||||||
General Merchandise – 1.5% | ||||||||
Five Below, Inc. (a) | 179,261 | $ | 7,163,270 | |||||
Ollie’s Bargain Outlet Holdings, Inc. (a) | 110,475 | 3,143,014 | ||||||
|
| |||||||
$ | 10,306,284 | |||||||
|
| |||||||
Internet – 1.3% | ||||||||
LogMeIn, Inc. | 92,050 | $ | 8,887,428 | |||||
|
| |||||||
Machinery & Tools – 3.5% | ||||||||
Allison Transmission Holdings, Inc. | 200,130 | $ | 6,742,380 | |||||
Ritchie Bros. Auctioneers, Inc. | 145,835 | 4,958,390 | ||||||
SPX FLOW, Inc. (a) | 200,806 | 6,437,840 | ||||||
WABCO Holdings, Inc. (a) | 50,002 | 5,307,712 | ||||||
|
| |||||||
$ | 23,446,322 | |||||||
|
| |||||||
Medical & Health Technology & Services – 6.1% | ||||||||
Capital Senior Living Corp. (a) | 255,886 | $ | 4,106,970 | |||||
Healthcare Services Group, Inc. | 281,348 | 11,020,401 | ||||||
INC Research Holdings, Inc., “A” (a) | 87,872 | 4,622,067 | ||||||
MEDNAX, Inc. (a) | 101,100 | 6,739,326 | ||||||
Medpace Holdings, Inc. (a) | 116,179 | 4,190,577 | ||||||
Teladoc, Inc. (a)(l) | 251,066 | 4,142,589 | ||||||
VCA, Inc. (a) | 89,244 | 6,126,601 | ||||||
|
| |||||||
$ | 40,948,531 | |||||||
|
| |||||||
Medical Equipment – 10.1% | ||||||||
DexCom, Inc. (a) | 47,663 | $ | 2,845,481 | |||||
ICU Medical, Inc. (a) | 37,929 | 5,588,838 | ||||||
Insulet Corp. (a) | 105,281 | 3,966,988 | ||||||
Integra LifeSciences Holdings Corp. (a) | 59,836 | 5,133,330 | ||||||
iRhythm Technologies, Inc. (a)(l) | 79,724 | 2,391,720 | ||||||
Masimo Corp. (a) | 116,098 | 7,825,005 | ||||||
Merit Medical Systems, Inc. (a) | 176,404 | 4,674,706 | ||||||
Nevro Corp. (a) | 35,907 | 2,609,003 | ||||||
NxStage Medical, Inc. (a) | 265,905 | 6,969,370 | ||||||
Obalon Therapeutics, Inc. (a) | 177,541 | 1,571,238 | ||||||
PerkinElmer, Inc. | 151,831 | 7,917,987 | ||||||
Steris PLC | 164,802 | 11,106,007 | ||||||
VWR Corp. (a) | 219,330 | 5,489,830 | ||||||
|
| |||||||
$ | 68,089,503 | |||||||
|
| |||||||
Oil Services – 1.3% | ||||||||
Forum Energy Technologies, Inc. (a) | 254,203 | $ | 5,592,466 | |||||
Patterson-UTI Energy, Inc. | 126,038 | 3,392,943 | ||||||
|
| |||||||
$ | 8,985,409 | |||||||
|
| |||||||
Other Banks & Diversified Financials – 4.7% | ||||||||
Bank of The Ozarks, Inc. | 119,612 | $ | 6,290,395 | |||||
Element Fleet Management Corp. | 552,076 | 5,123,351 | ||||||
First Republic Bank | 30,804 | 2,838,281 | ||||||
Texas Capital Bancshares, Inc. (a) | 64,745 | 5,076,008 | ||||||
Webster Financial Corp. | 117,061 | 6,354,071 | ||||||
Wintrust Financial Corp. | 86,262 | 6,260,033 | ||||||
|
| |||||||
$ | 31,942,139 | |||||||
|
| |||||||
Pharmaceuticals – 1.4% | ||||||||
Aratana Therapeutics, Inc. (a) | 370,498 | $ | 2,660,176 | |||||
Collegium Pharmaceutical, Inc. (a) | 170,163 | 2,649,438 |
Issuer | Shares/Par | Value ($) | ||||||
COMMON STOCKS – continued | ||||||||
Pharmaceuticals – continued | ||||||||
MediWound Ltd. (a) | 180,956 | $ | 823,350 | |||||
TherapeuticsMD, Inc. (a)(l) | 574,779 | 3,316,475 | ||||||
|
| |||||||
$ | 9,449,439 | |||||||
|
| |||||||
Pollution Control – 1.3% | ||||||||
Clean Harbors, Inc. (a) | 127,631 | $ | 7,102,665 | |||||
Stericycle, Inc. (a) | 24,920 | 1,919,837 | ||||||
|
| |||||||
$ | 9,022,502 | |||||||
|
| |||||||
Railroad & Shipping – 0.3% | ||||||||
StealthGas, Inc. (a) | 575,986 | $ | 1,946,833 | |||||
|
| |||||||
Real Estate – 2.1% | ||||||||
Big Yellow Group PLC, REIT | 279,066 | $ | 2,368,458 | |||||
Life Storage, Inc., REIT | 67,004 | 5,712,761 | ||||||
Tanger Factory Outlet Centers, Inc., REIT | 171,451 | 6,134,517 | ||||||
|
| |||||||
$ | 14,215,736 | |||||||
|
| |||||||
Restaurants – 5.8% | ||||||||
Dave & Buster’s, Inc. (a) | 115,245 | $ | 6,488,294 | |||||
Domino’s Pizza, Inc. | 20,023 | 3,188,463 | ||||||
Domino’s Pizza Group PLC | 959,280 | 4,252,210 | ||||||
Dunkin Brands Group, Inc. | 95,620 | 5,014,313 | ||||||
Performance Food Group Co. (a) | 173,417 | 4,162,008 | ||||||
U.S. Foods Holding Corp. (a) | 257,454 | 7,074,836 | ||||||
Wingstop, Inc. (l) | 136,685 | 4,044,509 | ||||||
Zoe’s Kitchen, Inc. (a)(l) | 208,364 | 4,998,652 | ||||||
|
| |||||||
$ | 39,223,285 | |||||||
|
| |||||||
Special Products & Services – 1.2% | ||||||||
Boyd Group Income Fund, IEU | 106,771 | $ | 6,803,952 | |||||
Nexeo Solutions Holdings LLC (a)(z) | 134,847 | 1,364,652 | ||||||
|
| |||||||
$ | 8,168,604 | |||||||
|
| |||||||
Specialty Chemicals – 5.1% | ||||||||
Axalta Coating Systems Ltd. (a) | 340,344 | $ | 9,257,357 | |||||
Ferroglobe PLC | 453,344 | 4,909,716 | ||||||
Ferroglobe R&W Trust (a) | 453,344 | 0 | ||||||
Nexeo Solutions, Inc., EU (a) | 331,219 | 3,351,936 | ||||||
PolyOne Corp. | 126,780 | 4,062,031 | ||||||
RPM International, Inc. | 139,699 | 7,519,997 | ||||||
Univar, Inc. (a) | 194,452 | 5,516,603 | ||||||
|
| |||||||
$ | 34,617,640 | |||||||
|
| |||||||
Specialty Stores – 1.7% | ||||||||
Citi Trends, Inc. | 266,824 | $ | 5,026,964 | |||||
Michaels Co., Inc. (a) | 157,373 | 3,218,278 | ||||||
Urban Outfitters, Inc. (a) | 111,585 | 3,177,941 | ||||||
|
| |||||||
$ | 11,423,183 | |||||||
|
| |||||||
Trucking – 0.7% | ||||||||
Swift Transportation Co. (a) | 188,820 | $ | 4,599,653 | |||||
|
| |||||||
Total Common Stocks (Identified Cost, $558,598,065) |
| $ | 661,043,974 | |||||
|
|
8
Table of Contents
MFS New Discovery Series
Portfolio of Investments – continued
Issuer | Shares/Par | Value ($) | ||||||
MONEY MARKET FUNDS – 2.0% | ||||||||
MFS Institutional Money Market Portfolio, 0.51% (v) (Identified Cost, $13,656,209) | 13,656,231 | $ | 13,656,231 | |||||
|
| |||||||
COLLATERAL FOR SECURITIES LOANED – 1.3% | ||||||||
State Street Navigator Securities Lending Government Money Market Portfolio, 0.50% (j) (Identified Cost, $8,908,269) | 8,908,269 | $ | 8,908,269 | |||||
|
| |||||||
Total Investments (Identified Cost, $581,162,543) | $ | 683,608,474 | ||||||
|
| |||||||
OTHER ASSETS, LESS LIABILITIES – (1.5)% | (10,356,603 | ) | ||||||
|
| |||||||
NET ASSETS – 100.0% | $ | 673,251,871 | ||||||
|
|
(a) | Non-income producing security. |
(j) | The rate quoted is the annualized seven-day yield of the fund at period end. |
(l) | A portion of this security is on loan. |
(v) | Underlying affiliated fund that is available only to investment companies managed by MFS. The rate quoted for the MFS Institutional Money Market Portfolio is the annualized seven-day yield of the fund at period end. |
(z) | Restricted securities are not registered under the Securities Act of 1933 and are subject to legal restrictions on resale. These securities generally may be resold in transactions exempt from registration or to the public if the securities are subsequently registered. Disposal of these securities may involve time-consuming negotiations and prompt sale at an acceptable price may be difficult. The fund holds the following restricted securities: |
Restricted Securities | Acquisition Date | Cost | Value | |||||||
Nexeo Solutions Holdings LLC | 5/06/16 | $1,348,470 | $1,364,652 | |||||||
% of Net assets | 0.2% |
The following abbreviations are used in this report and are defined:
ADR | American Depositary Receipt |
EU | Equity Unit |
IEU | International Equity Unit |
PLC | Public Limited Company |
REIT | Real Estate Investment Trust |
See Notes to Financial Statements
9
Table of Contents
MFS New Discovery Series
FINANCIAL STATEMENTS | STATEMENT OF ASSETS AND LIABILITIES
This statement represents your fund’s balance sheet, which details the assets and liabilities comprising the total value of the fund.
At 12/31/16 | ||||||||
Assets | ||||||||
Investments | ||||||||
Non-affiliated issuers, at value (identified cost, $567,506,334) | $669,952,243 | |||||||
Underlying affiliated funds, at value (identified cost, $13,656,209) | 13,656,231 | |||||||
Total investments, at value, including $9,900,808 of securities on loan (identified cost, $581,162,543) | $683,608,474 | |||||||
Receivables for | ||||||||
Fund shares sold | 8,324 | |||||||
Interest and dividends | 309,246 | |||||||
Total assets | $683,926,044 | |||||||
Liabilities | ||||||||
Payable for fund shares reacquired | $1,547,887 | |||||||
Collateral for securities loaned, at value (c) | 8,908,269 | |||||||
Payable to affiliates | ||||||||
Investment adviser | 52,471 | |||||||
Shareholder servicing costs | 1,348 | |||||||
Distribution and/or service fees | 7,843 | |||||||
Payable for independent Trustees’ compensation | 144 | |||||||
Accrued expenses and other liabilities | 156,211 | |||||||
Total liabilities | $10,674,173 | |||||||
Net assets | $673,251,871 | |||||||
Net assets consist of | ||||||||
Paid-in capital | $562,372,406 | |||||||
Unrealized appreciation (depreciation) on investments and translation of assets and liabilities in foreign currencies | 102,444,135 | |||||||
Accumulated net realized gain (loss) on investments and foreign currency | 8,435,330 | |||||||
Net assets | $673,251,871 | |||||||
Shares of beneficial interest outstanding | 43,443,946 |
Net assets | Shares outstanding | Net asset value per share | ||||||||||
Initial Class | $292,367,990 | 18,068,826 | $16.18 | |||||||||
Service Class | 380,883,881 | 25,375,120 | 15.01 |
(c) | Non-cash collateral is not included. |
See Notes to Financial Statements
10
Table of Contents
MFS New Discovery Series
FINANCIAL STATEMENTS | STATEMENT OF OPERATIONS
This statement describes how much your fund earned in investment income and accrued in expenses. It also describes any gains and/or losses generated by fund operations.
Year ended 12/31/16 | ||||||||
Net investment loss | ||||||||
Income | ||||||||
Dividends | $5,586,358 | |||||||
Income on securities loaned | 610,844 | |||||||
Dividends from underlying affiliated funds | 78,865 | |||||||
Other | 14,592 | |||||||
Foreign taxes withheld | (43,797 | ) | ||||||
Total investment income | $6,246,862 | |||||||
Expenses | ||||||||
Management fee | $5,973,338 | |||||||
Distribution and/or service fees | 932,346 | |||||||
Shareholder servicing costs | 51,702 | |||||||
Administrative services fee | 112,985 | |||||||
Independent Trustees’ compensation | 18,679 | |||||||
Custodian fee | 50,174 | |||||||
Reimbursement of custodian expenses | (131,626 | ) | ||||||
Shareholder communications | 101,425 | |||||||
Audit and tax fees | 55,337 | |||||||
Legal fees | 6,456 | |||||||
Miscellaneous | 31,355 | |||||||
Total expenses | $7,202,171 | |||||||
Reduction of expenses by investment adviser | (154,107 | ) | ||||||
Net expenses | $7,048,064 | |||||||
Net investment loss | $(801,202 | ) | ||||||
Realized and unrealized gain (loss) on investments and foreign currency | ||||||||
Realized gain (loss) (identified cost basis) | ||||||||
Investments: | ||||||||
Non-affiliated issuers | $15,035,077 | |||||||
Underlying affiliated funds | (131 | ) | ||||||
Foreign currency | (16,646 | ) | ||||||
Net realized gain (loss) on investments and foreign currency | $15,018,300 | |||||||
Change in unrealized appreciation (depreciation) | ||||||||
Investments | $42,662,938 | |||||||
Translation of assets and liabilities in foreign currencies | (1,806 | ) | ||||||
Net unrealized gain (loss) on investments and foreign currency translation | $42,661,132 | |||||||
Net realized and unrealized gain (loss) on investments and foreign currency | $57,679,432 | |||||||
Change in net assets from operations | $56,878,230 |
See Notes to Financial Statements
11
Table of Contents
MFS New Discovery Series
FINANCIAL STATEMENTS | STATEMENTS OF CHANGES IN NET ASSETS
These statements describe the increases and/or decreases in net assets resulting from operations, any distributions, and any shareholder transactions.
For years ended 12/31 | 2016 | 2015 | ||||||
Change in net assets | ||||||||
From operations | ||||||||
Net investment loss | $(801,202 | ) | $(5,088,364 | ) | ||||
Net realized gain (loss) on investments and foreign currency | 15,018,300 | 42,740,504 | ||||||
Net unrealized gain (loss) on investments and foreign currency translation | 42,661,132 | (47,368,882 | ) | |||||
Change in net assets from operations | $56,878,230 | $(9,716,742 | ) | |||||
Distributions declared to shareholders | ||||||||
From net realized gain on investments | $(30,806,227 | ) | $(25,964,753 | ) | ||||
Change in net assets from fund share transactions | $(53,937,710 | ) | $(123,920,193 | ) | ||||
Total change in net assets | $(27,865,707 | ) | $(159,601,688 | ) | ||||
Net assets | ||||||||
At beginning of period | 701,117,578 | 860,719,266 | ||||||
At end of period | $673,251,871 | $701,117,578 |
See Notes to Financial Statements
12
Table of Contents
MFS New Discovery Series
FINANCIAL STATEMENTS | FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the fund’s financial performance for the past 5 years. Certain information reflects financial results for a single fund share. The total returns in the table represent the rate by which an investor would have earned (or lost) on an investment in the fund share class (assuming reinvestment of all distributions) held for the entire period.
Initial Class | Years ended 12/31 | |||||||||||||||||||
2016 | 2015 | 2014 | 2013 | 2012 | ||||||||||||||||
Net asset value, beginning of period | $15.49 | $16.32 | $22.07 | $15.72 | $14.29 | |||||||||||||||
Income (loss) from investment operations | ||||||||||||||||||||
Net investment income (loss) (d) | $0.00 | (c)(w) | $(0.08 | ) | $(0.09 | ) | $(0.08 | ) | $(0.05 | ) | ||||||||||
Net realized and unrealized gain (loss) on investments | 1.40 | (0.22 | ) | (1.42 | ) | 6.59 | 3.00 | |||||||||||||
Total from investment operations | $1.40 | $(0.30 | ) | $(1.51 | ) | $6.51 | $2.95 | |||||||||||||
Less distributions declared to shareholders | ||||||||||||||||||||
From net realized gain on investments | $(0.71 | ) | $(0.53 | ) | $(4.24 | ) | $(0.16 | ) | $(1.52 | ) | ||||||||||
Net asset value, end of period (x) | $16.18 | $15.49 | $16.32 | $22.07 | $15.72 | |||||||||||||||
Total return (%) (k)(r)(s)(x) | 9.05 | (c) | (1.89 | ) | (7.26 | ) | 41.52 | 21.22 | ||||||||||||
Ratios (%) (to average net assets) and Supplemental data: | ||||||||||||||||||||
Expenses before expense reductions (f) | 0.94 | (c) | 0.96 | 0.96 | 0.96 | 0.97 | ||||||||||||||
Expenses after expense reductions (f) | 0.92 | (c) | 0.94 | 0.95 | 0.96 | 0.97 | ||||||||||||||
Net investment income (loss) | 0.02 | (c) | (0.48 | ) | (0.46 | ) | (0.44 | ) | (0.29 | ) | ||||||||||
Portfolio turnover | 63 | 60 | 96 | 104 | 122 | |||||||||||||||
Net assets at end of period (000 omitted) | $292,368 | $312,151 | $391,474 | $424,432 | $395,107 |
See Notes to Financial Statements
13
Table of Contents
MFS New Discovery Series
Financial Highlights – continued
Service Class | Years ended 12/31 | |||||||||||||||||||
2016 | 2015 | 2014 | 2013 | 2012 | ||||||||||||||||
Net asset value, beginning of period | $14.45 | $15.30 | $21.02 | $15.01 | $13.74 | |||||||||||||||
Income (loss) from investment operations | ||||||||||||||||||||
Net investment loss (d) | $(0.03 | )(c) | $(0.11 | ) | $(0.13 | ) | $(0.12 | ) | $(0.08 | ) | ||||||||||
Net realized and unrealized gain (loss) on investments | 1.30 | (0.21 | ) | (1.35 | ) | 6.29 | 2.87 | |||||||||||||
Total from investment operations | $1.27 | $(0.32 | ) | $(1.48 | ) | $6.17 | $2.79 | |||||||||||||
Less distributions declared to shareholders | ||||||||||||||||||||
From net realized gain on investments | $(0.71 | ) | $(0.53 | ) | $(4.24 | ) | $(0.16 | ) | $(1.52 | ) | ||||||||||
Net asset value, end of period (x) | $15.01 | $14.45 | $15.30 | $21.02 | $15.01 | |||||||||||||||
Total return (%) (k)(r)(s)(x) | 8.80 | (c) | (2.15 | ) | (7.49 | ) | 41.22 | 20.90 | ||||||||||||
Ratios (%) (to average net assets) and Supplemental data: | ||||||||||||||||||||
Expenses before expense reductions (f) | 1.19 | (c) | 1.21 | 1.21 | 1.21 | 1.22 | ||||||||||||||
Expenses after expense reductions (f) | 1.17 | (c) | 1.19 | 1.20 | 1.21 | 1.22 | ||||||||||||||
Net investment loss | (0.23 | )(c) | (0.73 | ) | (0.72 | ) | (0.69 | ) | (0.53 | ) | ||||||||||
Portfolio turnover | 63 | 60 | 96 | 104 | 122 | |||||||||||||||
Net assets at end of period (000 omitted) | $380,884 | $388,966 | $469,245 | $578,617 | $393,224 |
(c) | Amount reflects a one-time reimbursement of expenses by the custodian (or former custodian) without which net investment income and performance would be lower and expenses would be higher. See Note 2 in the Notes to Financial Statements for additional information. |
(d) | Per share data is based on average shares outstanding. |
(f) | Ratios do not reflect reductions from fees paid indirectly, if applicable. |
(k) | The total return does not reflect expenses that apply to separate accounts. Inclusion of these charges would reduce the total return figures for all periods shown. |
(r) | Certain expenses have been reduced without which performance would have been lower. |
(s) | From time to time the fund may receive proceeds from litigation settlements, without which performance would be lower. |
(w) | Per share amount was less than $0.01. |
(x) | The net asset values and total returns have been calculated on net assets which include adjustments made in accordance with U.S. generally accepted accounting principles required at period end for financial reporting purposes. |
See Notes to Financial Statements
14
Table of Contents
MFS New Discovery Series
(1) | Business and Organization |
MFS New Discovery Series (the fund) is a diversified series of MFS Variable Insurance Trust (the trust). The trust is organized as a Massachusetts business trust and is registered under the Investment Company Act of 1940, as amended, as an open-end management investment company. The shareholders of each series of the trust are separate accounts of insurance companies, which offer variable annuity and/or life insurance products, and qualified retirement and pension plans.
The fund is an investment company and accordingly follows the investment company accounting and reporting guidance of the Financial Accounting Standards Board (FASB) Accounting Standards Codification Topic 946 Financial Services – Investment Companies.
(2) | Significant Accounting Policies |
General – The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of increases and decreases in net assets from operations during the reporting period. Actual results could differ from those estimates. In the preparation of these financial statements, management has evaluated subsequent events occurring after the date of the fund’s Statement of Assets and Liabilities through the date that the financial statements were issued.
In October 2016, the Securities and Exchange Commission (SEC) released its Final Rule on Investment Company Reporting Modernization (the “Rule”). The Rule, which introduces two new regulatory reporting forms for investment companies – Form N-PORT and Form N-CEN – also contains amendments to Regulation S-X which impact financial statement presentation, particularly the presentation of derivative investments. Although still evaluating the impacts of the Rule, management believes that many of the Regulation S-X amendments are consistent with the fund’s current financial statement presentation and expects that the fund will be able to comply with the Rule’s Regulation S-X amendments by the August 1, 2017 compliance date.
Balance Sheet Offsetting – The fund’s accounting policy with respect to balance sheet offsetting is that, absent an event of default by the counterparty or a termination of the agreement, the International Swaps and Derivatives Association (ISDA) Master Agreement does not result in an offset of reported amounts of financial assets and financial liabilities in the Statement of Assets and Liabilities across transactions between the fund and the applicable counterparty. The fund’s right to setoff may be restricted or prohibited by the bankruptcy or insolvency laws of the particular jurisdiction to which a specific master netting agreement counterparty is subject. Balance sheet offsetting disclosures, to the extent applicable to the fund, have been included in the fund’s Significant Accounting Policies note under the captions for each of the fund’s in-scope financial instruments and transactions.
Investment Valuations – Equity securities, including restricted equity securities, are generally valued at the last sale or official closing price on their primary market or exchange as provided by a third-party pricing service. Equity securities, for which there were no sales reported that day, are generally valued at the last quoted daily bid quotation on their primary market or exchange as provided by a third-party pricing service. Short-term instruments with a maturity at issuance of 60 days or less may be valued at amortized cost, which approximates market value. Open-end investment companies are generally valued at net asset value per share. Securities and other assets generally valued on the basis of information from a third-party pricing service may also be valued at a broker/dealer bid quotation. Values obtained from third-party pricing services can utilize both transaction data and market information such as yield, quality, coupon rate, maturity, type of issue, trading characteristics, and other market data. The values of foreign securities and other assets and liabilities expressed in foreign currencies are converted to U.S. dollars using the mean of bid and asked prices for rates provided by a third-party pricing service.
The Board of Trustees has delegated primary responsibility for determining or causing to be determined the value of the fund’s investments (including any fair valuation) to the adviser pursuant to valuation policies and procedures approved by the Board. If the adviser determines that reliable market quotations are not readily available, investments are valued at fair value as determined in good faith by the adviser in accordance with such procedures under the oversight of the Board of Trustees. Under the fund’s valuation policies and procedures, market quotations are not considered to be readily available for most types of debt instruments and floating rate loans and many types of derivatives. These investments are generally valued at fair value based on information from third-party pricing services. In addition, investments may be valued at fair value if the adviser determines that an investment’s value has been materially affected by events occurring after the close of the exchange or market on which the investment is principally traded (such as foreign exchange or market) and prior to the determination of the fund’s net asset value, or after the halting of trading of a specific security where trading does not resume prior to the close of the exchange or market on which the security is principally traded. Events that occur on a frequent basis after foreign markets close (such as developments in foreign markets and significant movements in the U.S. markets) and prior to the determination of the fund’s net asset value may be deemed to have a material effect on the value of securities traded in foreign markets. Accordingly, the fund’s foreign equity securities may often be valued at fair value. The adviser generally relies on third-party pricing services or other information (such as the correlation with price movements of similar securities in the same or other markets; the type, cost and investment characteristics of the security; the
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business and financial condition of the issuer; and trading and other market data) to assist in determining whether to fair value and at what value to fair value an investment. The value of an investment for purposes of calculating the fund’s net asset value can differ depending on the source and method used to determine value. When fair valuation is used, the value of an investment used to determine the fund’s net asset value may differ from quoted or published prices for the same investment. There can be no assurance that the fund could obtain the fair value assigned to an investment if it were to sell the investment at the same time at which the fund determines its net asset value per share.
Various inputs are used in determining the value of the fund’s assets or liabilities. These inputs are categorized into three broad levels. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an investment’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The fund’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the investment. Level 1 includes unadjusted quoted prices in active markets for identical assets or liabilities. Level 2 includes other significant observable market-based inputs (including quoted prices for similar securities, interest rates, prepayment speed, and credit risk). Level 3 includes unobservable inputs, which may include the adviser’s own assumptions in determining the fair value of investments. The following is a summary of the levels used as of December 31, 2016 in valuing the fund’s assets or liabilities:
Investments at Value | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Equity Securities: | ||||||||||||||||
United States | $604,397,153 | $— | $0 | $604,397,153 | ||||||||||||
Canada | 20,117,548 | — | — | 20,117,548 | ||||||||||||
United Kingdom | 4,413,961 | 6,620,668 | — | 11,034,629 | ||||||||||||
Israel | 10,426,853 | — | — | 10,426,853 | ||||||||||||
Hong Kong | 7,323,308 | — | — | 7,323,308 | ||||||||||||
India | 5,797,650 | — | — | 5,797,650 | ||||||||||||
Greece | 1,946,833 | — | — | 1,946,833 | ||||||||||||
Mutual Funds | 22,564,500 | — | — | 22,564,500 | ||||||||||||
Total Investments | $676,987,806 | $6,620,668 | $0 | $683,608,474 |
For further information regarding security characteristics, see the Portfolio of Investments.
The following is a reconciliation of level 3 assets for which significant unobservable inputs were used to determine fair value. The fund’s policy is to recognize transfers between the levels as of the end of the period. The table presents the activity of level 3 securities held at the beginning and the end of the period.
Equity Securities | ||||
Balance as of 12/31/15 | $— | |||
Received as part of corporate action | 0 | |||
Balance as of 12/31/16 | $0 |
The net change in unrealized appreciation (depreciation) from investments held as level 3 at December 31, 2016 is $0. At December 31, 2016, the fund held one level 3 security.
Foreign Currency Translation – Purchases and sales of foreign investments, income, and expenses are converted into U.S. dollars based upon currency exchange rates prevailing on the respective dates of such transactions or on the reporting date for foreign denominated receivables and payables. Gains and losses attributable to foreign currency exchange rates on sales of securities are recorded for financial statement purposes as net realized gains and losses on investments. Gains and losses attributable to foreign exchange rate movements on receivables, payables, income and expenses are recorded for financial statement purposes as foreign currency transaction gains and losses. That portion of both realized and unrealized gains and losses on investments that results from fluctuations in foreign currency exchange rates is not separately disclosed.
Security Loans – Under its Securities Lending Agency Agreement with the fund, State Street Bank and Trust Company (“State Street”), as lending agent, loans the securities of the fund to certain qualified institutions (the “Borrowers”) approved by the fund. Security loans can be terminated at the discretion of either the lending agent or the fund and the related securities must be returned within the earlier of the standard trade settlement period for such securities or within three business days. The loans are collateralized by cash and/or U.S. Treasury and federal agency obligations in an amount typically at least equal to the market value of the securities loaned. On loans collateralized by cash, the cash collateral is invested in a money market fund. The market value of the loaned securities is determined at the close of business of the fund and any additional required collateral is delivered to the fund on the next business day. State Street provides the fund with indemnification against Borrower default. In the event of Borrower default, State Street will, for the benefit of the fund, either purchase securities identical to those loaned or, when such purchase is commercially impracticable, pay the fund the market value of the loaned securities. In return, State Street assumes the fund’s rights to the related collateral. If the collateral value is less than the cost to purchase identical securities, State Street is responsible for the
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shortfall, but only to the extent that such shortfall is not due to a decline in collateral value resulting from collateral reinvestment for which the fund bears the risk of loss. At period end, the fund had investment securities on loan, all of which were classified as equity securities in the fund’s Portfolio of Investments, with a fair value of $9,900,808. The fair value of the fund’s investment securities on loan and a related liability of $8,908,269 for cash collateral received on securities loaned are both presented gross in the Statement of Assets and Liabilities. Additionally, these loans were collateralized by U.S. Treasury Obligations of $1,353,333. The collateral received on securities loaned exceeded the value of securities on loan at period end. The liability for cash collateral for securities loaned is carried at fair value, which is categorized as level 2 within the fair value hierarchy. A portion of the income generated upon investment of the collateral is remitted to the Borrowers, and the remainder is allocated between the fund and the lending agent. On loans collateralized by U.S. Treasury and/or federal agency obligations, a fee is received from the Borrower, and is allocated between the fund and the lending agent. Income from securities lending is separately reported in the Statement of Operations. The dividend and interest income earned on the securities loaned is accounted for in the same manner as other dividend and interest income.
Indemnifications – Under the fund’s organizational documents, its officers and Trustees may be indemnified against certain liabilities and expenses arising out of the performance of their duties to the fund. Additionally, in the normal course of business, the fund enters into agreements with service providers that may contain indemnification clauses. The fund’s maximum exposure under these agreements is unknown as this would involve future claims that may be made against the fund that have not yet occurred.
Investment Transactions and Income – Investment transactions are recorded on the trade date. Interest income is recorded on the accrual basis. Dividends received in cash are recorded on the ex-dividend date. Certain dividends from foreign securities will be recorded when the fund is informed of the dividend if such information is obtained subsequent to the ex-dividend date. Dividend and interest payments received in additional securities are recorded on the ex-dividend or ex-interest date in an amount equal to the value of the security on such date.
The fund may receive proceeds from litigation settlements. Any proceeds received from litigation involving portfolio holdings are reflected in the Statement of Operations in realized gain/loss if the security has been disposed of by the fund or in unrealized gain/loss if the security is still held by the fund. Any other proceeds from litigation not related to portfolio holdings are reflected as other income in the Statement of Operations.
Reimbursement of Expenses by Custodian – In December 2015, the fund’s custodian (or former custodian), State Street Bank and Trust Company, announced that it intended to reimburse its asset servicing clients for expense amounts that it billed in error during the period 1998 through 2015. The amount of this one-time reimbursement attributable to the fund is reflected as “Reimbursement of custodian expenses” in the Statement of Operations.
Tax Matters and Distributions – The fund intends to qualify as a regulated investment company, as defined under Subchapter M of the Internal Revenue Code, and to distribute all of its taxable income, including realized capital gains. As a result, no provision for federal income tax is required. The fund’s federal tax returns, when filed, will remain subject to examination by the Internal Revenue Service for a three year period. Management has analyzed the fund’s tax positions taken on federal and state tax returns for all open tax years and does not believe that there are any uncertain tax positions that require recognition of a tax liability. Foreign taxes, if any, have been accrued by the fund in the accompanying financial statements in accordance with the applicable foreign tax law. Foreign income taxes may be withheld by certain countries in which the fund invests. Additionally, capital gains realized by the fund on securities issued in or by certain foreign countries may be subject to capital gains tax imposed by those countries.
Distributions to shareholders are recorded on the ex-dividend date. Income and capital gain distributions are determined in accordance with income tax regulations, which may differ from U.S. generally accepted accounting principles. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences which arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary overdistributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes.
Book/tax differences primarily relate to net operating losses and wash sale loss deferrals.
The tax character of distributions declared to shareholders for the last two fiscal years is as follows:
12/31/16 | 12/31/15 | |||||||
Ordinary income (including any short-term capital gains) | $13,356,581 | $— | ||||||
Long-term capital gains | 17,449,646 | 25,964,753 | ||||||
Total distributions | $30,806,227 | $25,964,753 |
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The federal tax cost and the tax basis components of distributable earnings were as follows:
As of 12/31/16 | ||||
Cost of investments | $586,680,647 | |||
Gross appreciation | 131,197,630 | |||
Gross depreciation | (34,269,803 | ) | ||
Net unrealized appreciation (depreciation) | $96,927,827 | |||
Undistributed long-term capital gain | 13,953,434 | |||
Other temporary differences | (1,796 | ) |
Multiple Classes of Shares of Beneficial Interest – The fund offers multiple classes of shares, which differ in their respective distribution and/or service fees. The fund’s income, realized and unrealized gain (loss), and common expenses are allocated to shareholders based on the daily net assets of each class. Dividends are declared separately for each class. Differences in per share dividend rates are generally due to differences in separate class expenses. The fund’s distributions declared to shareholders as reported in the Statements of Changes in Net Assets are presented by class as follows:
From net realized gain on investments | ||||||||
Year ended 12/31/16 | Year ended 12/31/15 | |||||||
Initial Class | $12,970,432 | $10,547,386 | ||||||
Service Class | 17,835,795 | 15,417,367 | ||||||
Total | $30,806,227 | $25,964,753 |
(3) | Transactions with Affiliates |
Investment Adviser – The fund has an investment advisory agreement with MFS to provide overall investment management and related administrative services and facilities to the fund. The management fee is computed daily and paid monthly at the following annual rates:
First $1 billion of average daily net assets | 0.90% | |||
Average daily net assets in excess of $1 billion | 0.80% |
MFS has agreed in writing to reduce its management fee by a specified amount if certain MFS mutual fund assets exceed thresholds agreed to by MFS and the fund’s Board of Trustees. For the year ended December 31, 2016, this management fee reduction amounted to $47,096, which is included in the reduction of total expenses in the Statement of Operations. The management fee incurred for the year ended December 31, 2016 was equivalent to an annual effective rate of 0.89% of the fund’s average daily net assets.
The investment adviser agreed in writing to pay a portion of the fund’s total annual operating expenses, excluding interest, taxes, extraordinary expenses, brokerage and transaction costs, and investment related expenses, such that total annual operating expenses do not exceed 0.94% of average daily net assets for the Initial Class shares and 1.19% of average daily net assets for the Service Class shares. This written agreement will continue until modified by the fund’s Board of Trustees, but such agreement will continue at least until April 30, 2018. For the year ended December 31, 2016, this reduction amounted to $107,011 and is included in the reduction of total expenses in the Statement of Operations.
Distributor – MFS Fund Distributors, Inc. (MFD), a wholly-owned subsidiary of MFS, is the distributor of shares of the fund. The Trustees have adopted a distribution plan for the Service Class shares pursuant to Rule 12b-1 under the Investment Company Act of 1940.
The fund’s distribution plan provides that the fund will pay MFD distribution and/or service fees equal to 0.25% per annum of its average daily net assets attributable to Service Class shares as partial consideration for services performed and expenses incurred by MFD and financial intermediaries (including participating insurance companies that invest in the fund to fund variable annuity and variable life insurance contracts, sponsors of qualified retirement and pension plans that invest in the fund, and affiliates of these participating insurance companies and plan sponsors) in connection with the sale and distribution of the Service Class shares. MFD may subsequently pay all, or a portion, of the distribution and/or service fees to financial intermediaries.
Shareholder Servicing Agent – MFS Service Center, Inc. (MFSC), a wholly-owned subsidiary of MFS, receives a fee from the fund for its services as shareholder servicing agent. For the year ended December 31, 2016, the fee was $45,799, which equated to 0.0069% annually of the fund’s average daily net assets. MFSC also receives payment from the fund for out-of-pocket expenses paid by MFSC on behalf of the fund. For the year ended December 31, 2016, these costs amounted to $5,903.
Administrator – MFS provides certain financial, legal, shareholder communications, compliance, and other administrative services to the fund. Under an administrative services agreement, the fund reimburses MFS the costs incurred to provide these services. The
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fund is charged an annual fixed amount of $17,500 plus a fee based on average daily net assets. The administrative services fee incurred for the year ended December 31, 2016 was equivalent to an annual effective rate of 0.0170% of the fund’s average daily net assets.
Trustees’ and Officers’ Compensation – The fund pays compensation to independent Trustees in the form of a retainer, attendance fees, and additional compensation to Board and Committee chairpersons. The fund does not pay compensation directly to Trustees or officers of the fund who are also officers of the investment adviser, all of whom receive remuneration for their services to the fund from MFS. Certain officers and Trustees of the fund are officers or directors of MFS, MFD, and MFSC.
Other – This fund and certain other funds managed by MFS (the funds) have entered into a service agreement (the ISO Agreement) which provides for payment of fees solely by the funds to Tarantino LLC in return for the provision of services of an Independent Senior Officer (ISO) for the funds. Frank L. Tarantino serves as the ISO and is an officer of the funds and the sole member of Tarantino LLC. The funds can terminate the ISO Agreement with Tarantino LLC at any time under the terms of the ISO Agreement. For the year ended December 31, 2016, the fee paid by the fund under this agreement was $1,317 and is included in “Miscellaneous” expense in the Statement of Operations. MFS has agreed to bear all expenses associated with office space, other administrative support, and supplies provided to the ISO.
The fund invests in the MFS Institutional Money Market Portfolio which is managed by MFS and seeks current income consistent with preservation of capital and liquidity. This money market fund does not pay a management fee to MFS.
The fund is permitted to engage in purchase and sale transactions (“cross-trades”) with funds and accounts for which MFS serves as investment adviser or sub-adviser pursuant to a policy adopted by the Board of Trustees. This policy has been designed to ensure that cross-trades conducted by the fund comply with Rule 17a-7 under the Investment Company Act of 1940. Under this policy, cross-trades are effected at current market prices with no remuneration paid in connection with the transaction. During the year ended December 31, 2016, the fund engaged in purchase and sale transactions pursuant to this policy, which amounted to $3,296,883 and $2,450,017, respectively. The sales transactions resulted in net realized gains (losses) of $(115,573).
(4) | Portfolio Securities |
For the year ended December 31, 2016, purchases and sales of investments, other than short-term obligations, aggregated $411,033,099 and $487,359,350, respectively.
(5) | Shares of Beneficial Interest |
The fund’s Declaration of Trust permits the Trustees to issue an unlimited number of full and fractional shares of beneficial interest. Transactions in fund shares were as follows:
Year ended 12/31/16 | Year ended 12/31/15 | |||||||||||||||
Shares | Amount | Shares | Amount | |||||||||||||
Shares sold | ||||||||||||||||
Initial Class | 1,066,459 | $16,342,493 | 1,819,811 | $30,303,575 | ||||||||||||
Service Class | 2,850,524 | 39,420,051 | 7,789,496 | 120,920,972 | ||||||||||||
3,916,983 | $55,762,544 | 9,609,307 | $151,224,547 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | ||||||||||||||||
Initial Class | 806,118 | $12,970,432 | 677,417 | $10,547,386 | ||||||||||||
Service Class | 1,193,828 | 17,835,795 | 1,060,342 | 15,417,367 | ||||||||||||
1,999,946 | $30,806,227 | 1,737,759 | $25,964,753 | |||||||||||||
Shares reacquired | ||||||||||||||||
Initial Class | (3,952,877 | ) | $(60,803,571 | ) | (6,328,466 | ) | $(106,724,000 | ) | ||||||||
Service Class | (5,580,054 | ) | (79,702,910 | ) | (12,599,958 | ) | (194,385,493 | ) | ||||||||
(9,532,931 | ) | $(140,506,481 | ) | (18,928,424 | ) | $(301,109,493 | ) | |||||||||
Net change | ||||||||||||||||
Initial Class | (2,080,300 | ) | $(31,490,646 | ) | (3,831,238 | ) | $(65,873,039 | ) | ||||||||
Service Class | (1,535,702 | ) | (22,447,064 | ) | (3,750,120 | ) | (58,047,154 | ) | ||||||||
(3,616,002 | ) | $(53,937,710 | ) | (7,581,358 | ) | $(123,920,193 | ) |
The fund is one of several mutual funds in which certain MFS funds may invest. The MFS funds do not invest in the underlying funds for the purpose of exercising management or control. At the end of the period, the MFS Moderate Allocation Portfolio, the MFS Conservative Allocation Portfolio, and the MFS Growth Allocation Portfolio were the owners of record of approximately 4%, 1%, and 1%, respectively, of the value of outstanding voting shares of the fund.
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(6) | Line of Credit |
The fund and certain other funds managed by MFS participate in a $1.25 billion unsecured committed line of credit, subject to a $1 billion sublimit, provided by a syndication of banks under a credit agreement. Borrowings may be made for temporary financing needs. Interest is charged to each fund, based on its borrowings, generally at a rate equal to the higher of the Overnight Federal Reserve funds rate or daily one month LIBOR plus an agreed upon spread. A commitment fee, based on the average daily, unused portion of the committed line of credit, is allocated among the participating funds at the end of each calendar quarter. In addition, the fund and other funds managed by MFS have established unsecured uncommitted borrowing arrangements with certain banks for temporary financing needs. Interest is charged to each fund, based on its borrowings, at a rate equal to the Overnight Federal Reserve funds rate plus an agreed upon spread. For the year ended December 31, 2016, the fund’s commitment fee and interest expense were $4,048 and $0, respectively, and are included in “Miscellaneous” expense in the Statement of Operations.
(7) | Transactions in Underlying Affiliated Funds – Affiliated Issuers |
An affiliated issuer may be considered one in which the fund owns 5% or more of the outstanding voting securities, or a company which is under common control. For the purposes of this report, the fund assumes the following to be an affiliated issuer:
Underlying Affiliated Fund | Beginning Shares/Par Amount | Acquisitions Shares/Par Amount | Dispositions Shares/Par Amount | Ending Shares/Par Amount | ||||||||||||
MFS Institutional Money Market Portfolio | 23,019,974 | 223,824,362 | (233,188,105 | ) | 13,656,231 | |||||||||||
Underlying Affiliated Fund | Realized Gain (Loss) | Capital Gain Distributions | Dividend Income | Ending Value | ||||||||||||
MFS Institutional Money Market Portfolio | $(131 | ) | $— | $78,865 | $13,656,231 |
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Trustees of MFS Variable Insurance Trust and the Shareholders of MFS New Discovery Series:
We have audited the accompanying statement of assets and liabilities, including the portfolio of investments, of MFS New Discovery Series (one of the series of MFS Variable Insurance Trust) (the “Fund”) as of December 31, 2016, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended. These financial statements and financial highlights are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. The Fund is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of December 31, 2016, by correspondence with the custodian and brokers; when replies were not received from brokers, we performed other auditing procedures. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of MFS New Discovery Series as of December 31, 2016, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
February 15, 2017
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TRUSTEES AND OFFICERS – IDENTIFICATION AND BACKGROUND
The Trustees and Officers of the Trust, as of February 1, 2017, are listed below, together with their principal occupations during the past five years. (Their titles may have varied during that period.) The address of each Trustee and Officer is 111 Huntington Avenue, Boston, Massachusetts 02199-7618.
Name, Age | Position(s) with Fund | Trustee/Officer Since (h) | Principal Occupations During the Past Five Years | Other Directorships (j) | ||||
INTERESTED TRUSTEES | ||||||||
Robert J. Manning (k) (age 53) | Trustee | February 2004 | Massachusetts Financial Services Company, Executive Chairman (since January 2017) and Director; Chairman (until January 2017); Chief Executive Officer (until 2015); Co-Chief Executive Officer (2015-2016) | N/A | ||||
Robin A. Stelmach (k) (age 55) | Trustee | January 2014 | Massachusetts Financial Services Company, Vice Chair (since January 2017); Chief Operating Officer and Executive Vice President (until January 2017) | N/A | ||||
INDEPENDENT TRUSTEES | ||||||||
David H. Gunning (age 74) | Trustee and Chair of Trustees | January 2004 | Private investor | Lincoln Electric Holdings, Inc., Director; Development Alternatives, Inc., Director/Non-Executive Chairman | ||||
Steven E. Buller (age 65) | Trustee | February 2014 | Chairman, Financial Accounting Standards Advisory Council (until 2015); Standing Advisory Group, Public Company Accounting Oversight Board, Member (until 2014); BlackRock, Inc. (investment management), Managing Director (until 2014), BlackRock Finco UK (investment management), Director (until 2014) | N/A | ||||
Maureen R. Goldfarb (age 61) | Trustee | January 2009 | Private investor | N/A | ||||
Michael Hegarty (age 72) | Trustee | December 2004 | Private investor | Rouse Properties Inc., Director; Capmark Financial Group Inc., Director (until 2015) | ||||
John P. Kavanaugh (age 62) | Trustee and Vice Chair of Trustees | January 2009 | Private investor | N/A | ||||
Maryanne L. Roepke (age 60) | Trustee | May 2014 | American Century Investments (investment management), Senior Vice President and Chief Compliance Officer (until 2014) | N/A | ||||
Laurie J. Thomsen (age 59) | Trustee | March 2005 | Private investor | The Travelers Companies, Director; Dycom Industries, Inc., Director | ||||
OFFICERS | ||||||||
Christopher R. Bohane (k) (age 43) | Assistant Secretary and Assistant Clerk | July 2005 | Massachusetts Financial Services Company, Vice President and Assistant General Counsel | N/A | ||||
Kino Clark (k) (age 48) | Assistant Treasurer | January 2012 | Massachusetts Financial Services Company, Vice President | N/A | ||||
Thomas H. Connors (k) (age 57) | Assistant Secretary and Assistant Clerk | September 2012 | Massachusetts Financial Services Company, Vice President and Senior Counsel; Deutsche Investment Management Americas Inc. (financial service provider), Director and Senior Counsel (until 2012) | N/A | ||||
Ethan D. Corey (k) (age 53) | Assistant Secretary and Assistant Clerk | July 2005 | Massachusetts Financial Services Company, Senior Vice President and Associate General Counsel | N/A | ||||
David L. DiLorenzo (k) (age 48) | President | July 2005 | Massachusetts Financial Services Company, Senior Vice President | N/A | ||||
Brian E. Langenfeld (k) (age 43) | Assistant Secretary and Assistant Clerk | June 2006 | Massachusetts Financial Services Company, Vice President and Senior Counsel | N/A |
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Name, Age | Position(s) with Fund | Trustee/Officer Since (h) | Principal Occupations During the Past Five Years | Other Directorships (j) | ||||
Susan A. Pereira (k) (age 46) | Assistant Secretary and Assistant Clerk | July 2005 | Massachusetts Financial Services Company, Vice President and Senior Counsel | N/A | ||||
Kasey L. Phillips (k) (age 46) | Assistant Treasurer | September 2012 | Massachusetts Financial Services Company, Vice President; Wells Fargo Funds Management, LLC, Senior Vice President, Fund Treasurer (until 2012) | N/A | ||||
Mark N. Polebaum (k) (age 64) | Secretary and Clerk | January 2006 | Massachusetts Financial Services Company, Executive Vice President, General Counsel and Secretary | N/A | ||||
Matthew A. Stowe (k) (age 42) | Assistant Secretary and Assistant Clerk | October 2014 | Massachusetts Financial Services Company, Vice President and Assistant General Counsel | N/A | ||||
Frank L. Tarantino (age 72) | Independent Senior Officer | June 2004 | Tarantino LLC (provider of compliance services), Principal | N/A | ||||
Richard S. Weitzel (k) (age 46) | Assistant Secretary and Assistant Clerk | October 2007 | Massachusetts Financial Services Company, Senior Vice President and Associate General Counsel | N/A | ||||
Martin J. Wolin (k) (age 49) | Chief Compliance Officer | July 2015 | Massachusetts Financial Services Company, Senior Vice President and Chief Compliance Officer (since July 2015); Mercer (financial service provider), Chief Risk and Compliance Officer, North America and Latin America (until June 2015) | N/A | ||||
James O. Yost (k) (age 56) | Treasurer | September 1990 | Massachusetts Financial Services Company, Senior Vice President | N/A |
(h) | Date first appointed to serve as Trustee/officer of an MFS Fund. Each Trustee has served continuously since appointment unless indicated otherwise. For the period from December 15, 2004 until February 22, 2005, Mr. Manning served as Advisory Trustee. Prior to January 2012, Messrs. DiLorenzo and Yost served as Assistant Treasurers of the Funds. From January 2012 through December 2016, Messrs. DiLorenzo and Yost served as Treasurer and Deputy Treasurer of the Funds, respectively. |
(j) | Directorships or trusteeships of companies required to report to the Securities and Exchange Commission (i.e., “public companies”). |
(k) | “Interested person” of the Trust within the meaning of the Investment Company Act of 1940 (referred to as the 1940 Act), which is the principal federal law governing investment companies like the fund, as a result of a position with MFS. The address of MFS is 111 Huntington Avenue, Boston, Massachusetts 02199-7618. |
Each Trustee (except Ms. Stelmach, Mr. Buller and Ms. Roepke) has been elected by shareholders and each Trustee and officer holds office until his or her successor is chosen and qualified or until his or her earlier death, resignation, retirement or removal. The Trust does not hold annual meetings for the purpose of electing Trustees, and Trustees are not elected for fixed terms. Messrs. Buller and Kavanaugh and Ms. Roepke are members of the Trust’s Audit Committee.
Each of the Fund’s Trustees and officers holds comparable positions with certain other funds of which MFS or a subsidiary is the investment adviser or distributor, and, in the case of the officers, with certain affiliates of MFS. As of February 1, 2017, the Trustees served as board members of 137 funds within the MFS Family of Funds.
The Statement of Additional Information for a Fund includes further information about the Trustees and is available without charge upon request by calling 1-800-225-2606.
Investment Adviser Massachusetts Financial Services Company 111 Huntington Avenue Boston, MA 02199-7618 | Custodian State Street Bank and Trust Company 1 Lincoln Street Boston, MA 02111-2900 | |
Distributor MFS Fund Distributors, Inc. 111 Huntington Avenue Boston, MA 02199-7618 | Independent Registered Public Accounting Firm Deloitte & Touche LLP 200 Berkeley Street Boston, MA 02116 | |
Portfolio Managers Paul Gordon Michael Grossman |
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MFS New Discovery Series
BOARD REVIEW OF INVESTMENT ADVISORY AGREEMENT
The Investment Company Act of 1940 requires that both the full Board of Trustees and a majority of the non-interested (“independent”) Trustees, voting separately, annually approve the continuation of the Fund’s investment advisory agreement with MFS. The Trustees consider matters bearing on the Fund and its advisory arrangements at their meetings throughout the year, including a review of performance data at each regular meeting. In addition, the independent Trustees met several times over the course of three months beginning in May and ending in July, 2016 (“contract review meetings”) for the specific purpose of considering whether to approve the continuation of the investment advisory agreement for the Fund and the other investment companies that the Board oversees (the “MFS Funds”). The independent Trustees were assisted in their evaluation of the Fund’s investment advisory agreement by independent legal counsel, from whom they received separate legal advice and with whom they met separately from MFS during various contract review meetings. The independent Trustees were also assisted in this process by the MFS Funds’ Independent Senior Officer, a senior officer appointed by and reporting to the independent Trustees.
In connection with their deliberations regarding the continuation of the investment advisory agreement, the Trustees, including the independent Trustees, considered such information and factors as they believed, in light of the legal advice furnished to them and their own business judgment, to be relevant. The investment advisory agreement for the Fund was considered separately, although the Trustees also took into account the common interests of all MFS Funds in their review. As described below, the Trustees considered the nature, quality, and extent of the various investment advisory, administrative, and shareholder services performed by MFS under the existing investment advisory agreement and other arrangements with the Fund.
In connection with their contract review meetings, the Trustees received and relied upon materials that included, among other items: (i) information provided by Broadridge Financial Solutions, Inc. (“Broadridge”), an independent third party, on the investment performance of the Fund for various time periods ended December 31, 2015 and the investment performance of a group of funds with substantially similar investment classifications/objectives (the “Lipper performance universe”), (ii) information provided by Broadridge on the Fund’s advisory fees and other expenses and the advisory fees and other expenses of comparable funds identified by Broadridge (the “Broadridge expense group”), (iii) information provided by MFS on the advisory fees of portfolios of other clients of MFS, including institutional separate accounts and other clients, (iv) information as to whether and to what extent applicable expense waivers, reimbursements or fee “breakpoints” are observed for the Fund, (v) information regarding MFS’ financial results and financial condition, including MFS’ and certain of its affiliates’ estimated profitability from services performed for the Fund and the MFS Funds as a whole, and compared to MFS’ institutional business, (vi) MFS’ views regarding the outlook for the mutual fund industry and the strategic business plans of MFS, (vii) descriptions of various functions performed by MFS for the Funds, such as compliance monitoring and portfolio trading practices, and (viii) information regarding the overall organization of MFS, including information about MFS’ senior management and other personnel providing investment advisory, administrative and other services to the Fund and the other MFS Funds. The comparative performance, fee and expense information prepared and provided by Broadridge was not independently verified and the independent Trustees did not independently verify any information provided to them by MFS.
The Trustees’ conclusion as to the continuation of the investment advisory agreement was based on a comprehensive consideration of all information provided to the Trustees and not the result of any single factor. Some of the factors that figured particularly in the Trustees’ deliberations are described below, although individual Trustees may have evaluated the information presented differently from one another, giving different weights to various factors. It is also important to recognize that the fee arrangements for the Fund and other MFS Funds are the result of years of review and discussion between the independent Trustees and MFS, that certain aspects of such arrangements may receive greater scrutiny in some years than in others, and that the Trustees’ conclusions may be based, in part, on their consideration of these same arrangements during the course of the year and in prior years.
Based on information provided by Broadridge and MFS, the Trustees reviewed the Fund’s total return investment performance as well as the performance of peer groups of funds over various time periods. The Trustees placed particular emphasis on the total return performance of the Fund’s Initial Class shares in comparison to the performance of funds in its Lipper performance universe over the three-year period ended December 31, 2015, which the Trustees believed was a long enough period to reflect differing market conditions. The total return performance of the Fund’s Initial Class shares was in the 5th quintile relative to the other funds in the universe for this three-year period (the 1st quintile being the best performers and the 5th quintile being the worst performers). The total return performance of the Fund’s Initial Class shares was in the 3rd quintile for the one-year period and the 5th quintile for the five-year period ended December 31, 2015 relative to the Lipper performance universe. Because of the passage of time, these performance results may differ from the performance results for more recent periods, including those shown elsewhere in this report.
The Trustees expressed continued concern to MFS about the substandard investment performance of the Fund and its retail counterpart, MFS New Discovery Fund, which has substantially similar investment strategies and experienced substantially similar investment performance as the Fund. In the course of their deliberations, the Trustees took into account information provided by MFS in connection with the contract review meetings, as well as during investment review meetings conducted with portfolio management personnel during the course of the year as to MFS’ efforts to improve the performance of the Fund and the Fund’s
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MFS New Discovery Series
Board Review of Investment Advisory Agreement – continued
retail counterpart. In addition, the Trustees requested that they receive a separate update on the Fund’s retail counterpart at each of their regular meetings. After reviewing these and related factors, the Trustees concluded, within the context of their overall conclusions regarding the investment advisory agreement, that MFS’ responses and efforts and plans to improve investment performance were sufficient to support approval of the continuance of the investment advisory agreement for an additional one-year period, but that they would continue to closely monitor the performance of the Fund’s retail counterpart.
In assessing the reasonableness of the Fund’s advisory fee, the Trustees considered, among other information, the Fund’s advisory fee and the total expense ratio of the Fund’s Initial Class shares as a percentage of average daily net assets and the advisory fee and total expense ratios of peer groups of funds based on information provided by Broadridge. The Trustees considered that, MFS currently observes an expense limitation for the Fund, which may not be changed without the Trustees’ approval. The Trustees also considered that, according to the data provided by Broadridge (which takes into account any fee reductions or expense limitations that were in effect during the Fund’s last fiscal year), the Fund’s effective advisory fee rate and total expense ratio were each higher than the Broadridge expense group median.
The Trustees also considered the advisory fees charged by MFS to any institutional separate accounts advised by MFS (“separate accounts”) and unaffiliated investment companies for which MFS serves as subadviser (“subadvised funds”) that have comparable investment strategies to the Fund. In comparing these fees, the Trustees considered information provided by MFS as to the generally broader scope of services provided by MFS to the Fund, as well as the more extensive regulatory burdens imposed on MFS in managing the Fund, in comparison to separate accounts and subadvised funds. The Trustees also considered the higher demands placed on MFS’ investment personnel and trading infrastructure as a result of the daily cash in-flows and out-flows of the Fund in comparison to separate accounts.
The Trustees also considered whether the Fund may benefit from any economies of scale in the management of the Fund in the event of growth in assets of the Fund and/or growth in assets of the MFS Funds as a whole. They noted that the Fund’s advisory fee rate schedule is subject to a contractual breakpoint that reduces the Fund’s advisory fee rate on average daily net assets over $1 billion. The Trustees also noted that MFS has agreed in writing to waive a portion of the management fees of certain MFS Funds, including the Fund, if the total combined assets of certain funds within the MFS Funds’ complex increase above agreed upon thresholds (the “group fee waiver”), enabling the Fund’s shareholders to share in the benefits from any economies of scale at the complex level. The group fee waiver is reviewed and renewed annually between the Board and MFS. The Trustees concluded that the breakpoint and the group fee waiver were sufficient to allow the Fund to benefit from economies of scale as its assets and overall complex assets grow.
The Trustees also considered information prepared by MFS relating to MFS’ costs and profits with respect to the Fund, the MFS Funds considered as a group, and other investment companies and accounts advised by MFS, as well as MFS’ methodologies used to determine and allocate its costs to the MFS Funds, the Fund and other accounts and products for purposes of estimating profitability.
After reviewing these and other factors described herein, the Trustees concluded, within the context of their overall conclusions regarding the investment advisory agreement, that the advisory fees charged to the Fund represent reasonable compensation in light of the services being provided by MFS to the Fund.
In addition, the Trustees considered MFS’ resources and related efforts to continue to retain, attract and motivate capable personnel to serve the Fund. The Trustees also considered current and developing conditions in the financial services industry, including the presence of large and well-capitalized companies which are spending, and appear to be prepared to continue to spend, substantial sums to engage personnel and to provide services to competing investment companies. In this regard, the Trustees also considered the financial resources of MFS and its ultimate parent, Sun Life Financial Inc. The Trustees also considered the advantages and possible disadvantages to the Fund of having an adviser that also serves other investment companies as well as other accounts.
The Trustees also considered the nature, quality, cost, and extent of administrative, transfer agency, and distribution services provided to the Fund by MFS and its affiliates under agreements and plans other than the investment advisory agreement, including any 12b-1 fees the Fund pays to MFS Fund Distributors, Inc., an affiliate of MFS. The Trustees also considered the nature, extent and quality of certain other services MFS performs or arranges for on the Fund’s behalf, which may include securities lending programs, directed expense payment programs, class action recovery programs, and MFS’ interaction with third-party service providers, principally custodians and sub-custodians. The Trustees concluded that the various non-advisory services provided by MFS and its affiliates on behalf of the Fund were satisfactory.
The Trustees also considered benefits to MFS from the use of the Fund’s portfolio brokerage commissions, if applicable, to pay for investment research and various other factors. Additionally, the Trustees considered so-called “fall-out benefits” to MFS such as reputational value derived from serving as investment manager to the Fund.
Based on their evaluation of factors that they deemed to be material, including those factors described above, the Board of Trustees, including the independent Trustees, concluded that the Fund’s investment advisory agreement with MFS should be continued for an additional one-year period, commencing August 1, 2016.
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MFS New Discovery Series
PROXY VOTING POLICIES AND INFORMATION
MFS votes proxies on behalf of the fund pursuant to proxy voting policies and procedures that are available without charge, upon request, by calling 1-800-225-2606, by visiting mfs.com (once you have selected “Individual Investor” as your role, click on “Individual Investor Home” in the top navigation and then select “Learn More About Proxy Voting” under the “I want to…” header on the left hand column of the page), or by visiting the SEC’s Web site at http://www.sec.gov.
Information regarding how the fund voted proxies relating to portfolio securities during the most recent twelve-month period ended June 30 is available by August 31 of each year without charge by visiting mfs.com (once you have selected “Individual Investor” as your role, click on “Individual Investor Home” in the top navigation and then select “Learn More About Proxy Voting” under the “I want to…” header on the left hand column of the page), or by visiting the SEC’s Web site at http://www.sec.gov.
QUARTERLY PORTFOLIO DISCLOSURE
The fund will file a complete schedule of portfolio holdings with the Securities and Exchange Commission (the Commission) for the first and third quarters of each fiscal year on Form N-Q. The fund’s Form N-Q is available on the EDGAR database on the Commission’s Internet Web site at http://www.sec.gov, and may be reviewed and copied at the:
Public Reference Room
Securities and Exchange Commission
100 F Street, NE, Room 1580
Washington, D.C. 20549
Information on the operation of the Public Reference Room may be obtained by calling the Commission at 1-800-SEC-0330. Copies of the fund’s Form N-Q also may be obtained, upon payment of a duplicating fee, by electronic request at the following e-mail address: publicinfo@sec.gov or by writing the Public Reference Section at the above address.
From time to time, MFS may post important information about the fund or the MFS funds on the MFS web site (mfs.com). This information is available on mfs.com by following these steps once you have selected “Individual Investor” as your role: (1) Click on the “Individual Investor Home” in the top navigation and then select the “Announcements” option within the “Market Outlooks” drop down, or (2) Click on “Products & Services” and “Variable Insurance Portfolios” and then select the fund’s name.
INFORMATION ABOUT FUND CONTRACTS AND LEGAL CLAIMS
The fund has entered into contractual arrangements with an investment adviser, administrator, distributor, shareholder servicing agent, 529 program manager (if applicable), and custodian who each provide services to the fund. Unless expressly stated otherwise, shareholders are not parties to, or intended beneficiaries of these contractual arrangements, and these contractual arrangements are not intended to create any shareholder right to enforce them against the service providers or to seek any remedy under them against the service providers, either directly or on behalf of the fund.
Under the Trust’s By-Laws and Declaration of Trust, any claims asserted against or on behalf of the MFS Funds, including claims against Trustees and Officers, must be brought in state and federal courts located within the Commonwealth of Massachusetts.
FEDERAL TAX INFORMATION (unaudited)
The following information is provided pursuant to provisions of the Internal Revenue Code.
The fund designates $19,195,000 as capital gain dividends paid during the fiscal year.
For corporate shareholders, 20.51% of the ordinary income dividends paid during the fiscal year qualify for the corporate dividends received deduction.
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rev. 3/16
FACTS | WHAT DOES MFS DO WITH YOUR PERSONAL INFORMATION? |
Why? | Financial companies choose how they share your personal information. Federal law gives consumers the right to limit some but not all sharing. Federal law also requires us to tell you how we collect, share, and protect your personal information. Please read this notice carefully to understand what we do. |
What? | The types of personal information we collect and share depend on the product or service you have with us. This information can include:
• Social Security number and account balances • Account transactions and transaction history • Checking account information and wire transfer instructions
When you are no longer our customer, we continue to share your information as described in this notice. |
How? | All financial companies need to share customers’ personal information to run their everyday business. In the section below, we list the reasons financial companies can share their customers’ personal information; the reasons MFS chooses to share; and whether you can limit this sharing. |
Reasons we can share your personal information | Does MFS share? | Can you limit this sharing? | ||
For our everyday business purposes – such as to process your transactions, maintain your account(s), respond to court orders and legal investigations, or report to credit bureaus | Yes | No | ||
For our marketing purposes – to offer our products and services to you | No | We don’t share | ||
For joint marketing with other financial companies | No | We don’t share | ||
For our affiliates’ everyday business purposes – information about your transactions and experiences | No | We don’t share | ||
For our affiliates’ everyday business purposes – information about your creditworthiness | No | We don’t share | ||
For nonaffiliates to market to you | No | We don’t share |
Questions? | Call 800-225-2606 or go to mfs.com. |
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Page 2 |
Who we are | ||
Who is providing this notice? | MFS Funds, MFS Investment Management, MFS Institutional Advisors, Inc., and MFS Heritage Trust Company. |
What we do | ||
How does MFS protect my personal information? | To protect your personal information from unauthorized access and use, we use security measures that comply with federal law. These measures include procedural, electronic, and physical safeguards for the protection of the personal information we collect about you. | |
How does MFS collect my personal information? | We collect your personal information, for example, when you
• open an account or provide account information • direct us to buy securities or direct us to sell your securities • make a wire transfer
We also collect your personal information from others, such as credit bureaus, affiliates, or other companies. | |
Why can’t I limit all sharing? | Federal law gives you the right to limit only
• sharing for affiliates’ everyday business purposes – information about your creditworthiness • affiliates from using your information to market to you • sharing for nonaffiliates to market to you
State laws and individual companies may give you additional rights to limit sharing. |
Definitions | ||
Affiliates | Companies related by common ownership or control. They can be financial and nonfinancial companies.
• MFS does not share personal information with affiliates, except for everyday business purposes as described on page one of this notice. | |
Nonaffiliates | Companies not related by common ownership or control. They can be financial and nonfinancial companies.
• MFS does not share with nonaffiliates so they can market to you. | |
Joint marketing | A formal agreement between nonaffiliated financial companies that together market financial products or services to you.
• MFS doesn’t jointly market. |
Other important information | ||
If you own an MFS product or receive an MFS service in the name of a third party such as a bank or broker-dealer, their privacy policy may apply to you instead of ours. |
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ANNUAL REPORT
December 31, 2016
MFS® TOTAL RETURN BOND SERIES
MFS® Variable Insurance Trust
VFB-ANN
Table of Contents
MFS® TOTAL RETURN BOND SERIES
The report is prepared for the general information of contract owners. It is authorized for distribution to prospective investors only when preceded or accompanied by a current prospectus.
NOT FDIC INSURED • MAY LOSE VALUE • NO BANK OR CREDIT UNION GUARANTEE • NOT A DEPOSIT • NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY OR NCUA/NCUSIF
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MFS Total Return Bond Series
LETTER FROM THE EXECUTIVE CHAIRMAN
Dear Contract Owners:
Despite June’s unexpected vote by the United Kingdom to leave the European Union and the surprising result in November’s U.S. presidential election, most markets have proved resilient. U.S. share prices quickly reversed post-Brexit declines, and indices reached new highs following the November elections. U.S. bond yields rose after Donald Trump’s victory on hopes that his proposed policy mix of lower taxes, increased spending on infrastructure and a lower regulatory burden on businesses will lift both U.S. economic growth and inflation. However, interest rates in most developed markets remain very low, with major central banks maintaining extremely accommodative monetary policies to reinvigorate slow-growing economies against a backdrop of still-low inflation. Even after the rise in yields following the election, interest rates remain low by historical standards.
Globally, economic growth has shown signs of recovery of late, led by the United States and the eurozone. Despite better growth, there are few immediate signs of worrisome inflation. Emerging market economies are recovering at a somewhat slower pace amid fears that restrictive U.S. trade policies could further hamper the already slow pace of global trade growth.
At MFS®, we believe in a patient, long-term approach to investing. Viewing investments with a long lens makes it possible to filter out short-term market noise and focus on achieving solid risk-adjusted returns over a full market cycle.
In our view, such an approach, along with the professional guidance of a financial advisor, will help you reach your investment objectives.
Respectfully,
Robert J. Manning
Executive Chairman
MFS Investment Management
February 15, 2017
The opinions expressed in this letter are subject to change and may not be relied upon for investment advice. No forecasts can be guaranteed.
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MFS Total Return Bond Series
Portfolio structure (i)
Fixed income sectors (i) | ||||
Investment Grade Corporates | 36.4% | |||
Mortgage-Backed Securities | 22.2% | |||
U.S. Treasury Securities | 15.7% | |||
Commercial Mortgage-Backed Securities | 10.1% | |||
High Yield Corporates | 7.7% | |||
Collateralized Debt Obligations | 3.1% | |||
Asset-Backed Securities | 2.9% | |||
U.S. Government Agencies | 2.2% | |||
Municipal Bonds | 0.7% | |||
Emerging Markets Bonds | 0.2% | |||
Residential Mortgage-Backed Securities | 0.1% |
Composition including fixed income credit quality (a)(i) | ||||
AAA | 11.4% | |||
AA | 2.3% | |||
A | 12.5% | |||
BBB | 25.3% | |||
BB | 6.7% | |||
B | 2.5% | |||
CCC | 0.5% | |||
C (o) | 0.0% | |||
D (o) | 0.0% | |||
U.S. Government | 9.1% | |||
Federal Agencies | 24.4% | |||
Not Rated | 6.6% | |||
Non-Fixed Income | (0.1)% | |||
Cash & Cash Equivalents | 5.3% | |||
Other | (6.5 | ) | ||
Portfolio facts (i) | ||||
Average Duration (d) | 5.7 | |||
Average Effective Maturity (m) | 8.6 yrs. |
(a) | For all securities other than those specifically described below, ratings are assigned to underlying securities utilizing ratings from Moody’s, Fitch, and Standard & Poor’s rating agencies and applying the following hierarchy: If all three agencies provide a rating, the middle rating (after dropping the highest and lowest ratings) is assigned; if two of the three agencies rate a security, the lower of the two is assigned. Ratings are shown in the S&P and Fitch scale (e.g., AAA). Securities rated BBB or higher are considered investment grade. All ratings are subject to change. U.S. Government includes securities issued by the U.S. Department of the Treasury. Federal Agencies includes rated and unrated U.S. Agency fixed-income securities, U.S. Agency mortgage-backed securities, and collateralized mortgage obligations of U.S. Agency mortgage-backed securities. Not Rated includes fixed income securities, including fixed income futures contracts, which have not been rated by any rating agency. Non-Fixed Income includes equity securities (including convertible bonds and equity derivatives) and/or commodity-linked derivatives. The fund may or may not have held all of these instruments on this date. The fund is not rated by these agencies. |
(d) | Duration is a measure of how much a bond’s price is likely to fluctuate with general changes in interest rates, e.g., if rates rise 1.00%, a bond with a 5-year duration is likely to lose about 5.00% of its value due to the interest rate move. |
(i) | For purposes of this presentation, the components include the value of securities, and reflect the impact of the equivalent exposure of derivative positions, if any. These amounts may be negative from time to time. Equivalent exposure is a calculated amount that translates the derivative position into a reasonable approximation of the amount of the underlying asset that the portfolio would have to hold at a given point in time to have the same price sensitivity that results from the portfolio’s ownership of the derivative contract. When dealing with derivatives, equivalent exposure is a more representative measure of the potential impact of a position on portfolio performance than value. The bond component will include any accrued interest amounts. |
(m) | In determining an instrument’s effective maturity for purposes of calculating the fund’s dollar-weighted average effective maturity, MFS uses the instrument’s stated maturity or, if applicable, an earlier date on which MFS believes it is probable that a maturity-shortening device (such as a put, pre-refunding or prepayment) will cause the instrument to be repaid. Such an earlier date can be substantially shorter than the instrument’s stated maturity. |
(o) | Less than 0.1%. |
Where the fund holds convertible bonds, these are treated as part of the equity portion of the portfolio.
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MFS Total Return Bond Series
Portfolio Composition – continued
Cash & Cash Equivalents includes any cash, investments in money market funds, short-term securities, and other assets less liabilities. Please see the Statement of Assets and Liabilities for additional information related to the fund’s cash position and other assets and liabilities.
Other includes equivalent exposure from currency derivatives and/or any offsets to derivative positions and may be negative.
Percentages are based on net assets as of 12/31/16.
The portfolio is actively managed and current holdings may be different.
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MFS Total Return Bond Series
Summary of Results
For the twelve months ended December 31, 2016, Initial Class shares of the MFS Total Return Bond Series (“fund”) provided a total return of 4.23%, while Service Class shares of the fund provided a total return of 4.01%. These compare with a return of 2.65% over the same period for the fund’s benchmark, the Bloomberg Barclays U.S. Aggregate Bond Index (formerly “Barclays U.S. Aggregate Bond Index”).
Market Environment
Sluggish global growth weighed on both developed and emerging market (“EM”) economies during much of the reporting period, though signs of improved growth became evident in late 2016. The US Federal Reserve increased interest rates by 25 basis points at the end of the period, the second hike of the cycle which began in December 2015. Globally, however, central bank policy remained highly accommodative, which forced many government, and even some corporate, bond yields into negative territory during the period. During the first half of the period, the United Kingdom voted to leave the European Union (“EU”), beginning a multi-year process of negotiation in order to achieve “Brexit.” While markets initially reacted to the vote with alarm, the spillover to European and EM economies was relatively short-lived, although risks of further hits to EU cohesiveness could re-emerge. Late in the period, the surprising US presidential election outcome prompted a significant rally in equities and a rise in bond yields in anticipation of a reflationary policy mix from the incoming Trump administration.
Headwinds from lower energy and commodity prices, which had spread beyond the energy, materials and industrial sectors early in the reporting period, abated later in the period as stabilizing oil prices helped push energy earnings higher relative to expectations. A sharp rise in the US dollar was a headwind for multinationals late in the period. The sharp rise in the US dollar also weighed on earnings. US consumer spending held up well during the second half of the period amid a modest increase in real wages and relatively low gasoline prices. Demand for autos reached near-record territory, while the housing market continued its recovery. Slow global trade continued to mirror slow global growth, particularly for many EM countries. That said, EM countries began to show signs of a modest upturn in activity along with adjustment in their external accounts. These improved conditions appeared to have reassured investors and contributed to record inflows into the asset class during July and August as negative yields for an increasing share of developed market bonds drove yield-hungry investors further out on the risk spectrum. Similar investor inflows were experienced in the investment grade and high yield corporate markets. Late in the reporting period, however, new challenges emerged for emerging markets debt (“EMD”) as a result of the US presidential election, which raised concerns about the potential for a protectionist turn in US trade policy which could negatively impact EM economies. These concerns, along with rising expectations for US growth, inflation and interest rates, have turned the tables on flows into EMD. Since the election, flows have reversed. As of the end of the period, the markets seemed to be in “wait-and-see” mode, looking for evidence to either confirm or refute the repricing of risk that has occurred since Election Day.
Factors Affecting Performance
Relative to the Bloomberg Barclays U.S. Aggregate Bond Index, the fund’s overweight allocation to industrials and financial institutions positively impacted performance, as both sectors outperformed the benchmark during the reporting period. A relative underweight allocation to the treasury sector also contributed to relative returns. The fund’s out-of-benchmark allocation to “BB” and “CCC” rated (r) securities, and a greater exposure to “A” rated securities, strengthened relative results as these credit quality segments outperformed the benchmark. Security selection within both industrials and “BBB” rated securities was another positive factor for relative returns.
There were no material factors that negatively impacted relative performance during the reporting period.
Respectfully,
Joshua Marston | Robert Persons | |
Portfolio Manager | Portfolio Manager |
(r) | Bonds rated “BBB”, “Baa”, or higher are considered investment grade; bonds rated “BB”, “Ba”, or below are considered non-investment grade. The source for bond quality ratings is Moody’s Investors Service, Standard & Poor’s and Fitch, Inc. and are applied using the following hierarchy: If all three agencies provide a rating, the middle rating (after dropping the highest and lowest ratings) is assigned; if two of the three agencies rate a security, the lower of the two is assigned. Ratings are shown in the S&P and Fitch scale (e.g., AAA). For securities which are not rated by any of the three agencies, the security is considered Not Rated. |
The views expressed in this report are those of the portfolio managers only through the end of the period of the report as stated on the cover and do not necessarily reflect the views of MFS or any other person in the MFS organization. These views are subject to change at any time based on market or other conditions, and MFS disclaims any responsibility to update such views. These views may not be relied upon as investment advice or an indication of trading intent on behalf of any MFS portfolio. References to specific securities are not recommendations of such securities, and may not be representative of any MFS portfolio’s current or future investments.
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MFS Total Return Bond Series
PERFORMANCE SUMMARY THROUGH 12/31/16
The following chart illustrates the historical performance of the fund in comparison to its benchmark(s). Benchmarks are unmanaged and may not be invested in directly. Benchmark returns do not reflect any fees or expenses. The performance of other share classes will be greater than or less than that of the class depicted below. (See Notes to Performance Summary.)
Performance data shown represents past performance and is no guarantee of future results. Investment return and principal value fluctuate so your units, when sold, may be worth more or less than the original cost; current performance may be lower or higher than quoted. The performance shown does not reflect the deduction of taxes, if any, that a contract holder would pay on fund distributions or the redemption of contract units. The returns for the fund shown also do not reflect the deduction of expenses associated with variable products, such as mortality and expense risk charges, separate account charges, and sales charges imposed by the insurance company separate accounts. Such expenses would reduce the overall returns shown.
Growth of a Hypothetical $10,000 Investment
Total Returns through 12/31/16
Average annual total returns
Share Class | Class Inception Date | 1-yr | 5-yr | 10-yr | ||||||||
Initial Class | 10/24/95 | 4.23% | 3.16% | 4.71% | ||||||||
Service Class | 5/01/00 | 4.01% | 2.91% | 4.45% | ||||||||
Comparative benchmark | ||||||||||||
Bloomberg Barclays U.S. Aggregate Bond Index (f) | 2.65% | 2.23% | 4.34% |
(f) | Source: FactSet Research Systems Inc. |
Benchmark Definition
Bloomberg Barclays U.S. Aggregate Bond Index (formerly Barclays U.S. Aggregate Bond Index) – a market capitalization-weighted index that measures the performance of the U.S. investment-grade, fixed rate bond market, with index components for government and corporate securities, mortgage pass-through securities, and asset-backed securities with at least one year to final maturity.
It is not possible to invest directly in an index.
Notes to Performance Summary
Average annual total return represents the average annual change in value for each share class for the periods presented.
Performance results reflect any applicable expense subsidies and waivers in effect during the periods shown. Without such subsidies and waivers the fund’s performance results would be less favorable. Please see the prospectus and financial statements for complete details. All results are historical and assume the reinvestment of any dividends and capital gains distributions.
Performance results do not include adjustments made for financial reporting purposes in accordance with U.S. generally accepted accounting principles and may differ from amounts reported in the financial highlights.
From time to time the fund may receive proceeds from litigation settlements, without which performance would be lower.
5
Table of Contents
MFS Total Return Bond Series
Fund Expenses Borne by the Contract Holders during the Period,
July 1, 2016 through December 31, 2016
As a contract holder of the fund, you incur ongoing costs, including management fees; distribution and/or service (12b-1) fees; and other fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the fund and to compare these costs with the ongoing costs of investing in other mutual funds.
The example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period July 1, 2016 through December 31, 2016.
Actual Expenses
The first line for each share class in the following table provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled “Expenses Paid During Period” to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line for each share class in the following table provides information about hypothetical account values and hypothetical expenses based on the fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight the fund’s ongoing costs only and do not take into account the fees and expenses imposed under the variable contracts through which your investment in the fund is made. Therefore, the second line for each share class in the table is useful in comparing ongoing costs associated with an investment in vehicles (such as the fund) which fund benefits under variable annuity and variable life insurance contracts and to qualified pension and retirement plans only, and will not help you determine the relative total costs of investing in the fund through variable annuity and variable life insurance contracts. If the fees and expenses imposed under the variable contracts were included, your costs would have been higher.
Share Class | Annualized Expense Ratio | Beginning Account Value 7/01/16 | Ending Account Value 12/31/16 | Expenses Paid During Period (p) 7/01/16-12/31/16 | ||||||||||||||
Initial Class | Actual | 0.51% | $1,000.00 | $986.20 | $2.55 | |||||||||||||
Hypothetical (h) | 0.51% | $1,000.00 | $1,022.57 | $2.59 | ||||||||||||||
Service Class | Actual | 0.76% | $1,000.00 | $985.36 | $3.79 | |||||||||||||
Hypothetical (h) | 0.76% | $1,000.00 | $1,021.32 | $3.86 |
(h) | 5% class return per year before expenses. |
(p) | “Expenses Paid During Period” are equal to each class’s annualized expense ratio, as shown above, multiplied by the average account value over the period, multiplied by 184/366 (to reflect the one-half year period). |
Notes to Expense Table
Expense ratios reflect a one-time Reimbursement of Expenses by Custodian of 0.01% (See Note 2 of the Notes to Financial Statements).
6
Table of Contents
MFS Total Return Bond Series
PORTFOLIO OF INVESTMENTS – 12/31/16
The Portfolio of Investments is a complete list of all securities owned by your fund. It is categorized by broad-based asset classes.
Issuer | Shares/Par | Value ($) | ||||||
BONDS – 94.0% | ||||||||
Aerospace – 0.1% | ||||||||
TransDigm, Inc., 6.5%, 7/15/2024 | $ | 2,970,000 | $ | 3,107,363 | ||||
|
| |||||||
Asset-Backed & Securitized – 16.1% | ||||||||
ALM XIV Ltd., CLO, 2014-14A, “A1”, FRN, 2.32%, 7/28/2026 (n) | $ | 9,007,942 | $ | 9,016,434 | ||||
Ameriquest Mortgage Securities, Inc., “M1”, FRN, 1.226%, 10/25/2035 | 2,325,081 | 2,305,836 | ||||||
ARI Fleet Lease Trust, 2016-A, “A2”, 1.82%, 7/15/2024 (n) | 6,042,000 | 6,042,068 | ||||||
Babson Ltd., CLO, FRN, 1.981%, 4/20/2025 (n) | 9,870,445 | 9,864,255 | ||||||
Ballyrock Ltd., CLO, FRN, 2.091%, 5/20/2025 (z) | 3,269,000 | 3,264,672 | ||||||
Banc of America Commercial Mortgage, Inc., 5.337%, 12/15/2043 (n) | 2,580,361 | 2,579,167 | ||||||
Banc of America Commercial Mortgage, Inc., FRN, 5.632%, 4/24/2049 (n) | 360,852 | 360,372 | ||||||
Banc of America Large Loan, Inc., FRN, 5.325%, 2/24/2044 (n) | 6,833,145 | 6,825,796 | ||||||
Bayview Commercial Asset Trust, FRN, 0%, 4/25/2036 (i)(z) | 220,707 | 899 | ||||||
Bayview Commercial Asset Trust, FRN, 0%, 7/25/2036 (i)(z) | 159,448 | 0 | ||||||
Bayview Commercial Asset Trust, FRN, 0%, 10/25/2036 (i)(z) | 422,740 | 0 | ||||||
Bayview Commercial Asset Trust, FRN, 0%, 12/25/2036 (i)(z) | 207,363 | 0 | ||||||
Bayview Financial Revolving Mortgage Loan Trust, FRN, 2.134%, 12/28/2040 (z) | 113,972 | 86,943 | ||||||
Bear Stearns Commercial Mortgage Securities, Inc., “A4”, FRN, 5.471%, 1/12/2045 | 2,411,567 | 2,414,093 | ||||||
Bear Stearns Cos., Inc., “A2”, FRN, 1.042%, 12/25/2042 | 879,589 | 864,698 | ||||||
Carlyle Global Market Strategies, 2013-3A, “A1A”, FRN, 2%, 7/15/2025 (z) | 4,591,876 | 4,590,764 | ||||||
Cent CLO LP, 2014-16AR, “A1AR”, FRN, 2.135%, 8/01/2024 (n) | 5,508,418 | 5,498,129 | ||||||
Chesapeake Funding II LLC, 2016-1A, “A1”, 2.11%, 3/15/2028 (n) | 8,705,000 | 8,694,076 | ||||||
Chesapeake Funding LLC, “A”, FRN, 1.101%, 1/07/2025 (n) | 2,323,252 | 2,322,402 | ||||||
Citigroup Commercial Mortgage Trust, 2014-GC25, “A4”, 3.635%, 10/10/2047 | 3,128,793 | 3,235,187 | ||||||
Citigroup Commercial Mortgage Trust, 2015-GC27, “A5”, 3.137%, 2/10/2048 | 7,821,982 | 7,798,314 | ||||||
Citigroup/Deutsche Bank Commercial Mortgage Trust, FRN, 5.366%, 12/11/2049 | 10,410,000 | 10,420,459 | ||||||
Commercial Mortgage Asset Trust, FRN, 0.412%, 1/17/2032 (i)(z) | 443,579 | 313 | ||||||
Commercial Mortgage Pass-Through Certificates, “A4”, 3.183%, 2/10/2048 | 7,671,000 | 7,713,320 |
Issuer | Shares/Par | Value ($) | ||||||
BONDS – continued | ||||||||
Asset-Backed & Securitized – continued | ||||||||
Commercial Mortgage Trust, “A4”, 3.147%, 8/15/2045 | $ | 3,950,000 | $ | 4,069,607 | ||||
Commercial Mortgage Trust, 2014-CR19, “A5”, 3.796%, 8/10/2047 | 8,605,908 | 9,003,968 | ||||||
Commercial Mortgage Trust, 2014-UBS4, “A5”, 3.694%, 8/10/2047 | 8,091,000 | 8,360,812 | ||||||
Commercial Mortgage Trust, 2015-LC21, “A4”, 3.708%, 7/10/2048 | 10,000,000 | 10,366,706 | ||||||
Commercial Mortgage Trust, 2015-PC1, “A5”, 3.902%, 7/10/2050 | 2,888,848 | 3,014,271 | ||||||
Commercial Mortgage Trust, 2016-COR1, “A4”, 3.091%, 10/10/2049 | 10,566,977 | 10,379,470 | ||||||
Credit Suisse Commercial Mortgage Trust, “A4”, FRN, 5.934%, 9/15/2039 | 7,594,899 | 7,704,543 | ||||||
Credit Suisse Commercial Mortgage Trust, “AM”, FRN, 5.687%, 6/15/2039 | 13,668,432 | 13,797,119 | ||||||
Credit Suisse Commercial Mortgage Trust, “C4”, FRN, 5.934%, 9/15/2039 | 6,667,307 | 6,791,468 | ||||||
Credit-Based Asset Servicing & Securitization LLC, FRN, 3.986%, 12/25/2035 | 16,920 | 16,764 | ||||||
CSAIL Commercial Mortgage Trust, 2015-C2, “A4”, 3.504%, 6/15/2057 | 2,695,346 | 2,755,300 | ||||||
Cutwater Ltd., 2014-1A, “A1B”, FRN, 2.24%, 7/15/2026 (z) | 7,416,702 | 7,363,817 | ||||||
CWCapital Cobalt Ltd., “A4”, FRN, 5.761%, 5/15/2046 | 1,718,743 | 1,738,198 | ||||||
Figueroa CLO Ltd., 2013-2A, “A1”, FRN, 2.447%, 12/18/2025 (n) | 3,380,000 | 3,374,141 | ||||||
First Union National Bank Commercial Mortgage Trust, FRN, 2.187%, 1/12/2043 (i)(q)(z) | 37,985 | 186 | ||||||
Flatiron CLO Ltd., 2013-1A, “A1”, FRN, 2.28%, 1/17/2026 (n) | 8,321,193 | 8,316,088 | ||||||
Ford Credit Auto Owner Trust, 2014-1, “A”, 2.26%, 11/15/2025 (n) | 4,559,000 | 4,596,353 | ||||||
Ford Credit Auto Owner Trust, 2014-2, “A”, 2.31%, 4/15/2026 (n) | 10,726,000 | 10,810,346 | ||||||
Galaxy CLO Ltd., FRN, 3.511%, 11/16/2025 (z) | 5,290,000 | 5,200,617 | ||||||
GE Capital Commercial Mortgage Corp., “A”, 5.543%, 12/10/2049 | 462,459 | 463,080 | ||||||
Greenwich Capital Commercial Funding Corp., 5.475%, 3/10/2039 | 7,145,402 | 7,142,845 | ||||||
GS Mortgage Securities Trust, 2015-GC30, “A4”, 3.382%, 5/10/2050 | 7,904,407 | 8,007,441 | ||||||
Harley-Davidson Motorcycle Trust, “A2”, FRN, 1.003%, 1/15/2019 | 239,426 | 239,434 | ||||||
Hertz Fleet Lease Funding LP, 2013-3, “A”, FRN, 1.213%, 12/10/2027 (n) | 810,002 | 809,968 | ||||||
Hertz Fleet Lease Funding LP, 2014-1, FRN, 1.063%, 4/10/2028 (z) | 2,167,793 | 2,166,785 |
7
Table of Contents
MFS Total Return Bond Series
Portfolio of Investments – continued
Issuer | Shares/Par | Value ($) | ||||||
BONDS – continued | ||||||||
Asset-Backed & Securitized – continued | ||||||||
JPMBB Commercial Mortgage Securities Trust, 2014-C26, 3.494%, 1/15/2048 | $ | 9,314,291 | $ | 9,546,947 | ||||
JPMBB Commercial Mortgage Securities Trust, 2015-C28, “A4”, 3.227%, 10/15/2048 | 3,308,428 | 3,321,965 | ||||||
JPMorgan Chase Commercial Mortgage Securities Corp., “A3”, 4.171%, 8/15/2046 | 507,633 | 543,924 | ||||||
JPMorgan Chase Commercial Mortgage Securities Corp., “A4”, FRN, 5.753%, 6/15/2049 | 7,915,365 | 7,963,043 | ||||||
JPMorgan Chase Commercial Mortgage Securities Corp., FRN, 5.66%, 7/15/2042 (n)(q) | 67,344 | 17,305 | ||||||
JPMorgan Chase Commercial Mortgage Securities Corp., FRN, 5.712%, 2/12/2049 | 436,083 | 438,703 | ||||||
JPMorgan Chase Commercial Mortgage Trust, 2007-LD11, “AM”, FRN, 5.753%, 6/15/2049 | 15,944,203 | 16,078,037 | ||||||
JPMorgan Mortgage Trust, “A1”, FRN, 2.638%, 10/25/2033 | 253,990 | 247,692 | ||||||
Lehman Brothers Commercial Conduit Mortgage Trust, FRN, 1.086%, 2/18/2030 (i) | 14,269 | 0 | ||||||
Loomis, Sayles & Co., CLO, “A1”, FRN, 2.41%, 10/15/2027 (z) | 3,000,000 | 2,994,245 | ||||||
Merrill Lynch Mortgage Investors Inc., “A”, FRN, 2.688%, 5/25/2036 | 616,455 | 594,446 | ||||||
Merrill Lynch Mortgage Investors Inc., “A5”, FRN, 2.682%, 4/25/2035 | 431,175 | 408,248 | ||||||
Morgan Stanley Bank of America/Merrill Lynch Trust, “A4”, 3.176%, 8/15/2045 | 5,000,000 | 5,138,302 | ||||||
Morgan Stanley Capital I Trust, “AM”, FRN, 5.689%, 4/15/2049 | 14,764,000 | 14,465,874 | ||||||
Morgan Stanley Capital I, Inc., FRN, 1.023%, 11/15/2030 (i)(n) | 61,523 | 570 | ||||||
Morgan Stanley Re-REMIC Trust, FRN, 5.792%, 8/15/2045 (n) | 11,500,000 | 11,542,187 | ||||||
Motor PLC, 2015-1A, “A1”, FRN, 1.361%, 6/25/2022 (n) | 2,412,435 | 2,412,319 | ||||||
Nextgear Floorplan Master Owner Trust, 2015-1A, “A”, 1.8%, 7/15/2019 (n) | 6,772,000 | 6,772,702 | ||||||
Nextgear Floorplan Master Owner Trust, 2015-2A, “A”, 2.38%, 10/15/2020 (n) | 7,586,000 | 7,618,316 | ||||||
Nissan Master Owner Trust Receivables 2015, “A-2”, 1.44%, 1/15/2020 | 9,277,000 | 9,277,212 | ||||||
Preferred Term Securities XIX Ltd., CDO, FRN, 1.313%, 12/22/2035 (z) | 318,121 | 236,170 | ||||||
Race Point CLO Ltd., “A”, FRN, 2.161%, 2/20/2025 (n) | 7,740,000 | 7,736,254 | ||||||
Residential Funding Mortgage Securities, Inc., 5.32%, 12/25/2035 | 67,934 | 58,020 | ||||||
Volkswagen Credit Auto Master Trust, 2014-1A, “A1”, FRN, 0.911%, 7/22/2019 (n) | 6,106,000 | 6,100,676 |
Issuer | Shares/Par | Value ($) | ||||||
BONDS – continued | ||||||||
Asset-Backed & Securitized – continued | ||||||||
Wachovia Bank Commercial Mortgage Trust, “A4”, FRN, 5.969%, 2/15/2051 | $ | 4,345,224 | $ | 4,365,179 | ||||
Wachovia Bank Commercial Mortgage Trust, FRN, 5.707%, 6/15/2049 | 13,160,480 | 13,240,506 | ||||||
Wells Fargo Commercial Mortgage Trust, 2015-C28, “A4”, 3.54%, 5/15/2048 | 10,682,988 | 10,955,163 | ||||||
Wells Fargo Commercial Mortgage Trust, 2016-LC25, “A4”, 3.64%, 12/15/2059 | 13,071,416 | 13,325,801 | ||||||
West CLO Ltd., 2014-1A, “A2”, FRN, 2.981%, 7/18/2026 (z) | 7,560,000 | 7,524,889 | ||||||
|
| |||||||
$ | 393,312,219 | |||||||
|
| |||||||
Automotive – 0.6% | ||||||||
General Motors Co., 4.875%, 10/02/2023 | $ | 4,291,000 | $ | 4,493,424 | ||||
General Motors Co., 5.2%, 4/01/2045 | 4,005,000 | 3,853,543 | ||||||
General Motors Financial Co., Inc., 3.45%, 4/10/2022 | 2,500,000 | 2,469,815 | ||||||
Volkswagen Group America Finance LLC, 2.4%, 5/22/2020 (n) | 2,806,000 | 2,774,918 | ||||||
|
| |||||||
$ | 13,591,700 | |||||||
|
| |||||||
Biotechnology – 0.6% | ||||||||
Life Technologies Corp., 5%, 1/15/2021 | $ | 13,872,000 | $ | 14,826,796 | ||||
|
| |||||||
Broadcasting – 0.4% | ||||||||
Omnicom Group, Inc., 3.65%, 11/01/2024 | $ | 1,872,000 | $ | 1,880,611 | ||||
SES Global Americas Holdings GP, 5.3%, 3/25/2044 (n) | 2,857,000 | 2,442,729 | ||||||
SES S.A., 5.3%, 4/04/2043 (z) | 3,272,000 | 2,824,747 | ||||||
Time Warner, Inc., 3.8%, 2/15/2027 | 2,405,000 | 2,383,879 | ||||||
|
| |||||||
$ | 9,531,966 | |||||||
|
| |||||||
Brokerage & Asset Managers – 0.8% | ||||||||
CME Group, Inc., 3%, 3/15/2025 | $ | 2,197,000 | $ | 2,192,993 | ||||
Intercontinental Exchange, Inc., 2.75%, 12/01/2020 | 1,591,000 | 1,607,220 | ||||||
Intercontinental Exchange, Inc., 3.75%, 12/01/2025 | 6,058,000 | 6,182,268 | ||||||
NYSE Euronext, 2%, 10/05/2017 | 3,115,000 | 3,131,559 | ||||||
Raymond James Financial, 3.625%, 9/15/2026 | 1,278,000 | 1,244,497 | ||||||
TD Ameritrade Holding Corp., 5.6%, 12/01/2019 | 3,959,000 | 4,347,180 | ||||||
TD Ameritrade Holding Corp., 2.95%, 4/01/2022 | 1,773,000 | 1,793,272 | ||||||
|
| |||||||
$ | 20,498,989 | |||||||
|
| |||||||
Building – 0.7% | ||||||||
Martin Marietta Materials, Inc., 4.25%, 7/02/2024 | $ | 8,330,000 | $ | 8,453,800 | ||||
Masco Corp., 4.375%, 4/01/2026 | 6,170,000 | 6,275,322 |
8
Table of Contents
MFS Total Return Bond Series
Portfolio of Investments – continued
Issuer | Shares/Par | Value ($) | ||||||
BONDS – continued | ||||||||
Building – continued | ||||||||
Mohawk Industries, Inc., 3.85%, 2/01/2023 | $ | 2,668,000 | $ | 2,723,604 | ||||
|
| |||||||
$ | 17,452,726 | |||||||
|
| |||||||
Business Services – 0.6% | ||||||||
Equinix, Inc., 4.875%, 4/01/2020 | $ | 4,055,000 | $ | 4,176,650 | ||||
Fidelity National Information Services, Inc., 3.875%, 6/05/2024 | 258,000 | 262,906 | ||||||
Fidelity National Information Services, Inc., 3%, 8/15/2026 | 7,885,000 | 7,403,920 | ||||||
Fidelity National Information Services, Inc., 4.5%, 8/15/2046 | 2,575,000 | 2,459,419 | ||||||
|
| |||||||
$ | 14,302,895 | |||||||
|
| |||||||
Cable TV – 1.4% | ||||||||
CCO Holdings LLC/CCO Holdings Capital Corp., 5.75%, 1/15/2024 | $ | 3,865,000 | $ | 4,038,925 | ||||
Charter Communications Operating LLC/Charter Communications Operating Capital Corp., 4.908%, 7/23/2025 | 7,676,000 | 8,079,903 | ||||||
Comcast Corp., 2.75%, 3/01/2023 | 3,297,000 | 3,269,892 | ||||||
Sirius XM Radio, Inc., 5.375%, 7/15/2026 (n) | 5,700,000 | 5,571,750 | ||||||
Time Warner Cable, Inc., 4.5%, 9/15/2042 | 3,721,000 | 3,363,862 | ||||||
Time Warner Entertainment Co. LP, 8.375%, 7/15/2033 | 290,000 | 379,495 | ||||||
Videotron Ltd., 5%, 7/15/2022 | 8,605,000 | 8,820,125 | ||||||
|
| |||||||
$ | 33,523,952 | |||||||
|
| |||||||
Chemicals – 0.5% | ||||||||
LyondellBasell Industries N.V., 5.75%, 4/15/2024 | $ | 5,384,000 | $ | 6,132,150 | ||||
Tronox Finance LLC, 6.375%, 8/15/2020 | 7,078,000 | 6,617,930 | ||||||
|
| |||||||
$ | 12,750,080 | |||||||
|
| |||||||
Computer Software – 0.6% | ||||||||
Microsoft Corp., 2%, 8/08/2023 | $ | 8,215,000 | $ | 7,850,665 | ||||
VeriSign, Inc., 4.625%, 5/01/2023 | 6,600,000 | 6,699,000 | ||||||
|
| |||||||
$ | 14,549,665 | |||||||
|
| |||||||
Computer Software – Systems – 0.2% | ||||||||
Apple, Inc., 4.375%, 5/13/2045 | $ | 4,792,000 | $ | 4,912,960 | ||||
|
| |||||||
Conglomerates – 0.4% | ||||||||
General Electric Capital Corp., 7.5%, 8/21/2035 | $ | 4,000,000 | $ | 5,352,200 | ||||
Johnson Controls International PLC, 5.7%, 3/01/2041 | 2,075,000 | 2,348,321 | ||||||
Johnson Controls International PLC, 0% to 1/02/2017, 4.625% to 7/02/2044 | 2,272,000 | 2,251,125 | ||||||
|
| |||||||
$ | 9,951,646 | |||||||
|
| |||||||
Consumer Products – 0.5% | ||||||||
Mattel, Inc., 5.45%, 11/01/2041 | $ | 4,191,000 | $ | 4,199,214 | ||||
Newell Rubbermaid, Inc., 5.5%, 4/01/2046 | 1,514,000 | 1,734,809 |
Issuer | Shares/Par | Value ($) | ||||||
BONDS – continued | ||||||||
Consumer Products – continued | ||||||||
Reckitt Benckiser Treasury Services PLC, 3.625%, 9/21/2023 (n) | $ | 6,765,000 | $ | 6,891,140 | ||||
|
| |||||||
$ | 12,825,163 | |||||||
|
| |||||||
Consumer Services – 0.9% | ||||||||
ADT Corp., 6.25%, 10/15/2021 | $ | 7,105,000 | $ | 7,708,925 | ||||
Priceline Group, Inc., 3.65%, 3/15/2025 | 3,610,000 | 3,595,351 | ||||||
Visa, Inc., 2.8%, 12/14/2022 | 10,834,000 | 10,871,388 | ||||||
|
| |||||||
$ | 22,175,664 | |||||||
|
| |||||||
Containers – 0.7% | ||||||||
Ball Corp., 4%, 11/15/2023 | $ | 4,870,000 | $ | 4,772,600 | ||||
Ball Corp., 5%, 3/15/2022 | 1,385,000 | 1,450,788 | ||||||
Berry Plastics Corp., 5.125%, 7/15/2023 | 2,905,000 | 2,955,838 | ||||||
Sealed Air Corp., 5.125%, 12/01/2024 (n) | 6,910,000 | 7,100,025 | ||||||
|
| |||||||
$ | 16,279,251 | |||||||
|
| |||||||
Defense Electronics – 0.0% | ||||||||
BAE Systems Holdings, Inc., 6.375%, 6/01/2019 (n) | $ | 500,000 | $ | 545,246 | ||||
|
| |||||||
Energy – Independent – 0.2% | ||||||||
Anadarko Petroleum Corp., 5.55%, 3/15/2026 | $ | 3,511,000 | $ | 3,924,599 | ||||
|
| |||||||
Energy – Integrated – 0.1% | ||||||||
BP Capital Markets PLC, 2.237%, 5/10/2019 | $ | 2,771,000 | $ | 2,786,656 | ||||
|
| |||||||
Financial Institutions – 0.9% | ||||||||
International Lease Finance Corp., 7.125%, 9/01/2018 (n) | $ | 1,190,000 | $ | 1,282,225 | ||||
Nationstar Mortgage LLC/Capital Corp., 6.5%, 7/01/2021 | 8,810,000 | 8,920,125 | ||||||
Navient Corp., 8%, 3/25/2020 | 5,448,000 | 6,044,011 | ||||||
Navient Corp., 5%, 10/26/2020 | 6,643,000 | 6,775,860 | ||||||
|
| |||||||
$ | 23,022,221 | |||||||
|
| |||||||
Food & Beverages – 2.4% | ||||||||
Anheuser-Busch InBev Finance, Inc., 2.65%, 2/01/2021 | $ | 8,068,000 | $ | 8,105,016 | ||||
Anheuser-Busch InBev Finance, Inc., 4.9%, 2/01/2046 | 10,273,000 | 11,030,459 | ||||||
Anheuser-Busch InBev Worldwide, Inc., 3.7%, 2/01/2024 | 2,400,000 | 2,483,599 | ||||||
Anheuser-Busch InBev Worldwide, Inc., 3.75%, 1/15/2022 | 4,992,000 | 5,205,433 | ||||||
Constellation Brands, Inc., 4.25%, 5/01/2023 | 6,224,000 | 6,453,603 | ||||||
Constellation Brands, Inc., 4.75%, 12/01/2025 | 6,311,000 | 6,689,660 | ||||||
J.M. Smucker Co., 4.25%, 3/15/2035 | 1,413,000 | 1,424,301 | ||||||
Kraft Heinz Foods Co., 3%, 6/01/2026 | 2,783,000 | 2,608,937 | ||||||
Kraft Heinz Foods Co., 5.2%, 7/15/2045 | 3,178,000 | 3,320,594 | ||||||
Pernod Ricard S.A., 3.25%, 6/08/2026 (z) | 3,500,000 | 3,353,441 |
9
Table of Contents
MFS Total Return Bond Series
Portfolio of Investments – continued
Issuer | Shares/Par | Value ($) | ||||||
BONDS – continued | ||||||||
Food & Beverages – continued | ||||||||
Wm. Wrigley Jr. Co., 3.375%, 10/21/2020 (n) | $ | 7,334,000 | $ | 7,533,412 | ||||
|
| |||||||
$ | 58,208,455 | |||||||
|
| |||||||
Food & Drug Stores – 0.9% | ||||||||
CVS Health Corp., 3.5%, 7/20/2022 | $ | 5,913,000 | $ | 6,069,227 | ||||
CVS Health Corp., 5.125%, 7/20/2045 | 5,294,000 | 5,888,532 | ||||||
Walgreens Boots Alliance, Inc., 3.3%, 11/18/2021 | 3,548,000 | 3,611,247 | ||||||
Walgreens Boots Alliance, Inc., 3.8%, 11/18/2024 | 5,813,000 | 5,909,217 | ||||||
|
| |||||||
$ | 21,478,223 | |||||||
|
| |||||||
Forest & Paper Products – 0.1% | ||||||||
Packaging Corp. of America, 3.65%, 9/15/2024 | $ | 3,490,000 | $ | 3,500,184 | ||||
|
| |||||||
Gaming & Lodging – 0.2% | ||||||||
GLP Capital LP/GLP Financing II, Inc., 5.375%, 11/01/2023 | $ | 4,350,000 | $ | 4,654,500 | ||||
Wyndham Worldwide Corp., 5.1%, 10/01/2025 | 1,155,000 | 1,215,551 | ||||||
|
| |||||||
$ | 5,870,051 | |||||||
|
| |||||||
Insurance – 1.7% | ||||||||
American International Group, Inc., 3.75%, 7/10/2025 | $ | 12,804,000 | $ | 12,870,043 | ||||
American International Group, Inc., 3.9%, 4/01/2026 | 5,113,000 | 5,195,728 | ||||||
Five Corners Funding Trust, 4.419%, 11/15/2023 (n) | 4,734,000 | 4,999,180 | ||||||
Met Life Global Funding I, 3.45%, 12/18/2026 (n) | 5,297,000 | 5,337,617 | ||||||
Pacific Lifecorp, 5.125%, 1/30/2043 (n) | 1,342,000 | 1,369,245 | ||||||
Principal Financial Group, Inc., 3.4%, 5/15/2025 | 4,724,000 | 4,687,620 | ||||||
Unum Group, 4%, 3/15/2024 | 6,546,000 | 6,565,180 | ||||||
|
| |||||||
$ | 41,024,613 | |||||||
|
| |||||||
Insurance – Health – 0.4 % | ||||||||
Aetna, Inc. , 2.4%, 6/15/2021 | $ | 2,904,000 | $ | 2,888,257 | ||||
UnitedHealth Group, Inc., 3.35%, 7/15/2022 | 7,989,000 | 8,222,255 | ||||||
|
| |||||||
$ | 11,110,512 | |||||||
|
| |||||||
Insurance – Property & Casualty – 1.5% | ||||||||
Allied World Assurance, 5.5%, 11/15/2020 | $ | 2,640,000 | $ | 2,845,714 | ||||
Allied World Assurance Co. Holdings Ltd., 4.35%, 10/29/2025 | 6,835,000 | 6,807,940 | ||||||
CNA Financial Corp., 5.875%, 8/15/2020 | 3,280,000 | 3,620,844 | ||||||
Liberty Mutual Group, Inc., 4.25%, 6/15/2023 (n) | 10,306,000 | 10,779,035 | ||||||
Liberty Mutual Group, Inc., 4.85%, 8/01/2044 (n) | 3,359,000 | 3,317,614 | ||||||
Marsh & McLennan Cos., Inc., 4.8%, 7/15/2021 | 3,274,000 | 3,555,836 |
Issuer | Shares/Par | Value ($) | ||||||
BONDS – continued | ||||||||
Insurance – Property & Casualty – continued | ||||||||
Swiss Re Ltd., 4.25%, 12/06/2042 (n) | $ | 926,000 | $ | 902,556 | ||||
ZFS Finance USA Trust V, 6.5% to 5/09/2017, FRN to 5/09/2067 (n) | 4,852,000 | 4,864,858 | ||||||
|
| |||||||
$ | 36,694,397 | |||||||
|
| |||||||
Local Authorities – 0.6% | ||||||||
State of California (Build America Bonds), 7.625%, 3/01/2040 | $ | 860,000 | $ | 1,263,615 | ||||
State of California (Build America Bonds), 7.6%, 11/01/2040 | 7,175,000 | 10,797,371 | ||||||
University of California Limited Project Rev., “J”, 4.131%, 5/15/2045 | 2,260,000 | 2,228,337 | ||||||
|
| |||||||
$ | 14,289,323 | |||||||
|
| |||||||
Major Banks – 6.2% | ||||||||
ABN AMRO Bank N.V., 4.25%, 2/02/2017 (n) | $ | 5,664,000 | $ | 5,676,223 | ||||
ABN AMRO Bank N.V., 4.8%, 4/18/2026 (n) | 5,000,000 | 5,098,395 | ||||||
Bank of America Corp., 5.625%, 7/01/2020 | 8,555,000 | 9,400,260 | ||||||
Bank of America Corp., 5.875%, 1/05/2021 | 1,670,000 | 1,857,907 | ||||||
Bank of America Corp., 6.1%, 6/15/2017 | 1,725,000 | 1,760,042 | ||||||
Bank of America Corp., 4.125%, 1/22/2024 | 6,960,000 | 7,225,127 | ||||||
Bank of America Corp., 3.875%, 8/01/2025 | 7,955,000 | 8,078,175 | ||||||
Bank of America Corp., 4.45%, 3/03/2026 | 3,614,000 | 3,719,265 | ||||||
Bank of America Corp., FRN, 6.5%, 10/29/2049 | 4,004,000 | 4,184,180 | ||||||
Bank of America Corp., FRN, 6.1%, 12/29/2049 | 5,000,000 | 5,027,500 | ||||||
Credit Suisse Group AG, 6.5%, 8/08/2023 (n) | 1,899,000 | 2,017,213 | ||||||
Credit Suisse Group Fund Guernsey Ltd., 3.75%, 3/26/2025 | 3,355,000 | 3,299,783 | ||||||
DBS Bank Ltd., 3.625% to 9/21/2017, FRN to 9/21/2022 (n) | 4,108,000 | 4,143,579 | ||||||
Goldman Sachs Group, Inc., 2.375%, 1/22/2018 | 2,091,000 | 2,103,193 | ||||||
Goldman Sachs Group, Inc., 3.625%, 1/22/2023 | 11,855,000 | 12,096,889 | ||||||
Goldman Sachs Group, Inc., 5.15%, 5/22/2045 | 4,868,000 | 5,109,852 | ||||||
JPMorgan Chase & Co., 4.25%, 10/15/2020 | 1,385,000 | 1,464,561 | ||||||
JPMorgan Chase & Co., 4.5%, 1/24/2022 | 947,000 | 1,020,284 | ||||||
JPMorgan Chase & Co., 3.125%, 1/23/2025 | 374,000 | 365,135 | ||||||
Morgan Stanley, 5.5%, 7/24/2020 | 1,600,000 | 1,751,117 | ||||||
Morgan Stanley, 5.5%, 7/28/2021 | 14,214,000 | 15,737,357 | ||||||
Morgan Stanley, 5.95%, 12/28/2017 | 400,000 | 416,304 |
10
Table of Contents
MFS Total Return Bond Series
Portfolio of Investments – continued
Issuer | Shares/Par | Value ($) | ||||||
BONDS – continued | ||||||||
Major Banks – continued | ||||||||
Morgan Stanley, 3.75%, 2/25/2023 | $ | 8,585,000 | $ | 8,809,232 | ||||
Morgan Stanley, 3.7%, 10/23/2024 | 2,879,000 | 2,909,710 | ||||||
Morgan Stanley, 4.3%, 1/27/2045 | 1,528,000 | 1,519,701 | ||||||
Morgan Stanley, 3.125%, 7/27/2026 | 483,000 | 460,760 | ||||||
PNC Funding Corp., 5.625%, 2/01/2017 | 6,173,000 | 6,191,667 | ||||||
Royal Bank of Scotland Group PLC, 6%, 12/19/2023 | 7,121,000 | 7,388,963 | ||||||
Royal Bank of Scotland Group PLC, 7.5% to 8/10/2020, FRN to 12/29/2049 | 5,177,000 | 4,905,208 | ||||||
Royal Bank of Scotland Group PLC, 8% to 8/10/2025, FRN to 12/29/2049 | 1,662,000 | 1,591,365 | ||||||
Sumitomo Mitsui Financial Group, Inc., 2.442%, 10/19/2021 | 4,623,000 | 4,543,586 | ||||||
Sumitomo Mitsui Financial Group, Inc., 3.01%, 10/19/2026 | 9,000,000 | 8,599,464 | ||||||
Wachovia Corp., 6.605%, 10/01/2025 | 1,764,000 | 2,057,609 | ||||||
|
| |||||||
$ | 150,529,606 | |||||||
|
| |||||||
Medical & Health Technology & Services – 0.9% | ||||||||
Becton, Dickinson and Co., 4.685%, 12/15/2044 | $ | 4,733,000 | $ | 4,903,322 | ||||
Catholic Health Initiatives, 2.95%, 11/01/2022 | 6,666,000 | 6,478,145 | ||||||
HCA, Inc., 5.25%, 6/15/2026 | 5,271,000 | 5,448,896 | ||||||
Laboratory Corp. of America Holdings, 4.7%, 2/01/2045 | 2,518,000 | 2,482,380 | ||||||
Thermo Fisher Scientific, Inc., 3%, 4/15/2023 | 1,817,000 | 1,783,923 | ||||||
|
| |||||||
$ | 21,096,666 | |||||||
|
| |||||||
Medical Equipment – 0.7% | ||||||||
Abbott Laboratories, 3.4%, 11/30/2023 | $ | 3,834,000 | $ | 3,815,110 | ||||
Medtronic, Inc., 4.625%, 3/15/2045 | 7,021,000 | 7,577,428 | ||||||
Zimmer Holdings, Inc., 2.7%, 4/01/2020 | 5,792,000 | 5,789,104 | ||||||
|
| |||||||
$ | 17,181,642 | |||||||
|
| |||||||
Metals & Mining – 1.9% | ||||||||
Barrick Gold Corp., 4.1%, 5/01/2023 | $ | 11,152,000 | $ | 11,428,603 | ||||
Barrick North America Finance LLC, 5.7%, 5/30/2041 | 599,000 | 610,344 | ||||||
Freeport-McMoRan, Inc., 3.875%, 3/15/2023 | 4,000,000 | 3,670,000 | ||||||
Freeport-McMoRan, Inc., 6.875%, 2/15/2023 | 8,679,000 | 9,112,950 | ||||||
Freeport-McMoRan, Inc., 5.4%, 11/14/2034 | 4,000,000 | 3,360,000 | ||||||
Glencore Funding LLC, 4%, 4/16/2025 (z) | 2,578,000 | 2,526,440 | ||||||
Glencore Funding LLC, 4.125%, 5/30/2023 (z) | 3,992,000 | 4,017,309 | ||||||
Kinross Gold Corp., 5.95%, 3/15/2024 | 6,437,000 | 6,517,463 | ||||||
Steel Dynamics, Inc., 5.125%, 10/01/2021 | 5,864,000 | 6,115,800 | ||||||
|
| |||||||
$ | 47,358,909 | |||||||
|
|
Issuer | Shares/Par | Value ($) | ||||||
BONDS – continued | ||||||||
Midstream – 1.8% | ||||||||
Enbridge, Inc., 4.25%, 12/01/2026 | $ | 4,350,000 | $ | 4,447,514 | ||||
Enbridge, Inc., 6% to 1/15/2027, FRN to 1/15/2077 | 4,584,000 | 4,572,540 | ||||||
Kinder Morgan (Delaware), Inc., 7.75%, 1/15/2032 | 6,550,000 | 8,017,298 | ||||||
Kinder Morgan Energy Partners LP, 7.4%, 3/15/2031 | 103,000 | 121,662 | ||||||
Kinder Morgan Energy Partners LP, 6.375%, 3/01/2041 | 2,240,000 | 2,426,048 | ||||||
Kinder Morgan Energy Partners LP, 4.3%, 5/01/2024 | 5,995,000 | 6,127,310 | ||||||
Kinder Morgan Energy Partners LP, 5.4%, 9/01/2044 | 6,378,000 | 6,345,976 | ||||||
Kinder Morgan, Inc., 5.625%, 11/15/2023 (n) | 3,000,000 | 3,289,494 | ||||||
Sabine Pass Liquefaction LLC, 5.625%, 2/01/2021 | 8,270,000 | 8,848,900 | ||||||
Spectra Energy Capital LLC, 8%, 10/01/2019 | 613,000 | 696,913 | ||||||
|
| |||||||
$ | 44,893,655 | |||||||
|
| |||||||
Mortgage-Backed – 22.2% | ||||||||
Fannie Mae, 5.54%, 4/01/2017 | $ | 96,349 | $ | 96,400 | ||||
Fannie Mae, 5.388%, 6/01/2017 | 130,369 | 130,895 | ||||||
Fannie Mae, 5.65%, 6/01/2017 | 145,024 | 146,304 | ||||||
Fannie Mae, 2.71%, 11/01/2017 | 351,459 | 353,493 | ||||||
Fannie Mae, 5.5%, 11/01/2017 – 4/01/2040 | 16,875,225 | 18,859,264 | ||||||
Fannie Mae, 3.189%, 12/01/2017 | 643,726 | 648,322 | ||||||
Fannie Mae, 3.22%, 12/01/2017 | 476,853 | 481,256 | ||||||
Fannie Mae, 3.99%, 4/01/2018 | 600,000 | 612,866 | ||||||
Fannie Mae, 3.739%, 6/01/2018 | 2,331,358 | 2,376,309 | ||||||
Fannie Mae, 5.286%, 6/01/2018 | 330,159 | 342,187 | ||||||
Fannie Mae, 2.578%, 9/25/2018 | 3,853,028 | 3,893,799 | ||||||
Fannie Mae, 5.18%, 3/01/2019 | 119,570 | 125,538 | ||||||
Fannie Mae, 5.51%, 3/01/2019 | 179,715 | 190,925 | ||||||
Fannie Mae, 4.6%, 9/01/2019 | 707,679 | 751,612 | ||||||
Fannie Mae, 1.99%, 10/01/2019 | 2,587,801 | 2,598,966 | ||||||
Fannie Mae, 4.45%, 10/01/2019 | 494,387 | 525,009 | ||||||
Fannie Mae, 1.97%, 11/01/2019 | 1,015,907 | 1,018,280 | ||||||
Fannie Mae, 2.03%, 11/01/2019 | 1,268,036 | 1,273,054 | ||||||
Fannie Mae, 4.88%, 3/01/2020 | 14,987 | 15,713 | ||||||
Fannie Mae, 5%, 6/01/2020 – 3/01/2042 | 11,473,348 | 12,518,545 | ||||||
Fannie Mae, 5.19%, 9/01/2020 | 156,730 | 167,072 | ||||||
Fannie Mae, 3.416%, 10/01/2020 | 1,372,459 | 1,431,439 | ||||||
Fannie Mae, 2.14%, 5/01/2021 | 934,383 | 929,594 | ||||||
Fannie Mae, 3.89%, 7/01/2021 | 1,150,523 | 1,225,999 | ||||||
Fannie Mae, 2.56%, 10/01/2021 | 819,257 | 818,921 | ||||||
Fannie Mae, 2.64%, 11/01/2021 | 1,225,334 | 1,243,657 | ||||||
Fannie Mae, 2.75%, 3/01/2022 | 1,156,706 | 1,178,891 | ||||||
Fannie Mae, 6%, 8/01/2022 – 3/01/2039 | 3,739,916 | 4,248,989 | ||||||
Fannie Mae, 2.525%, 10/01/2022 | 1,848,173 | 1,853,987 | ||||||
Fannie Mae, 2.68%, 3/01/2023 | 1,774,412 | 1,781,378 | ||||||
Fannie Mae, 2.41%, 5/01/2023 | 2,066,895 | 2,046,438 |
11
Table of Contents
MFS Total Return Bond Series
Portfolio of Investments – continued
Issuer | Shares/Par | Value ($) | ||||||
BONDS – continued | ||||||||
Mortgage-Backed – continued | ||||||||
Fannie Mae, 2.55%, 5/01/2023 | $ | 1,060,576 | $ | 1,058,279 | ||||
Fannie Mae, 4.5%, 5/01/2024 – 6/01/2044 | 45,137,418 | 48,628,747 | ||||||
Fannie Mae, 4%, 3/01/2025 – 2/01/2045 | 83,779,537 | 88,318,023 | ||||||
Fannie Mae, 4.5%, 5/01/2025 | 109,943 | 116,851 | ||||||
Fannie Mae, 3.5%, 9/01/2025 – 5/01/2046 | 28,621,188 | 29,458,537 | ||||||
Fannie Mae, 3.95%, 1/01/2027 | 364,885 | 385,173 | ||||||
Fannie Mae, 3%, 3/01/2027 – 11/01/2046 | 34,998,661 | 35,188,973 | ||||||
Fannie Mae, 6.5%, 7/01/2032 – 1/01/2033 | 7,660 | 8,843 | ||||||
Federal Home Loan Bank, 5%, 7/01/2035 | 3,078,551 | 3,383,645 | ||||||
Freddie Mac, 3.154%, 2/25/2018 | 867,132 | 879,958 | ||||||
Freddie Mac, 5%, 7/01/2018 – 7/01/2041 | 4,481,264 | 4,947,576 | ||||||
Freddie Mac, 2.303%, 9/25/2018 | 8,971,000 | 9,072,736 | ||||||
Freddie Mac, 2.323%, 10/25/2018 | 1,191,622 | 1,206,547 | ||||||
Freddie Mac, 2.22%, 12/25/2018 | 1,200,000 | 1,212,973 | ||||||
Freddie Mac, 2.13%, 1/25/2019 | 6,140,666 | 6,194,854 | ||||||
Freddie Mac, 2.086%, 3/25/2019 | 7,200,000 | 7,253,701 | ||||||
Freddie Mac, 5.5%, 6/01/2019 – 1/01/2038 | 662,192 | 743,614 | ||||||
Freddie Mac, 4.186%, 8/25/2019 | 1,110,000 | 1,173,408 | ||||||
Freddie Mac, 1.869%, 11/25/2019 | 6,121,000 | 6,125,568 | ||||||
Freddie Mac, 4.251%, 1/25/2020 | 807,000 | 853,787 | ||||||
Freddie Mac, 3.034%, 10/25/2020 | 2,606,000 | 2,696,805 | ||||||
Freddie Mac, 2.856%, 1/25/2021 | 5,331,000 | 5,485,189 | ||||||
Freddie Mac, 2.791%, 1/25/2022 | 4,439,000 | 4,530,687 | ||||||
Freddie Mac, 2.716%, 6/25/2022 | 1,478,636 | 1,502,034 | ||||||
Freddie Mac, 2.682%, 10/25/2022 | 3,049,000 | 3,085,214 | ||||||
Freddie Mac, 3.32%, 2/25/2023 | 3,956,000 | 4,136,868 | ||||||
Freddie Mac, 3.3%, 4/25/2023 – 10/25/2026 | 9,057,972 | 9,413,463 | ||||||
Freddie Mac, 3.06%, 7/25/2023 | 4,230,000 | 4,360,074 | ||||||
Freddie Mac, 3.531%, 7/25/2023 | 2,401,000 | 2,540,146 | ||||||
Freddie Mac, 3.458%, 8/25/2023 | 7,000,000 | 7,367,604 | ||||||
Freddie Mac, 2.67%, 12/25/2024 | 2,784,000 | 2,763,324 | ||||||
Freddie Mac, 2.811%, 1/25/2025 | 4,169,000 | 4,173,720 | ||||||
Freddie Mac, 3.329%, 5/25/2025 | 6,457,000 | 6,682,672 | ||||||
Freddie Mac, 4%, 7/01/2025 – 9/01/2044 | 42,012,856 | 44,116,669 | ||||||
Freddie Mac, 4.5%, 7/01/2025 – 5/01/2042 | 9,497,072 | 10,211,872 | ||||||
Freddie Mac, 2.745%, 1/25/2026 | 3,620,000 | 3,568,447 | ||||||
Freddie Mac, 2.673%, 3/25/2026 | 4,000,000 | 3,916,076 | ||||||
Freddie Mac, 3.5%, 8/01/2026 – 4/01/2046 | 33,782,341 | 34,691,923 | ||||||
Freddie Mac, 6%, 8/01/2034 – 7/01/2038 | 176,201 | 202,204 | ||||||
Freddie Mac, 3%, 10/01/2042 – 10/01/2046 | 24,699,665 | 24,576,020 |
Issuer | Shares/Par | Value ($) | ||||||
BONDS – continued | ||||||||
Mortgage-Backed – continued | ||||||||
Ginnie Mae, 5.5%, 5/15/2033 – 1/20/2042 | $ | 3,252,418 | $ | 3,651,562 | ||||
Ginnie Mae, 6%, 1/20/2036 – 1/15/2039 | 405,078 | 461,105 | ||||||
Ginnie Mae, 4.5%, 4/15/2039 – 9/20/2041 | 16,181,035 | 17,495,264 | ||||||
Ginnie Mae, 4%, 10/20/2040 – 10/20/2042 | 4,229,519 | 4,520,625 | ||||||
Ginnie Mae, 3.5%, 11/15/2040 – 5/20/2046 | 24,531,939 | 25,547,932 | ||||||
|
| |||||||
$ | 541,794,394 | |||||||
|
| |||||||
Municipals – 0.8% | ||||||||
State of California, 5%, 8/01/2027 | $ | 11,870,000 | $ | 14,278,779 | ||||
State of Illinois, AGM, 5.65%, 12/01/2038 | 3,275,000 | 3,387,103 | ||||||
State of Illinois, “B”, AGM, 5.75%, 1/01/2037 | 795,000 | 823,692 | ||||||
|
| |||||||
$ | 18,489,574 | |||||||
|
| |||||||
Natural Gas – Distribution – 0.3% | ||||||||
KeySpan Gas East Corp., 2.742%, 8/15/2026 (z) | $ | 8,200,000 | $ | 7,772,723 | ||||
|
| |||||||
Network & Telecom – 1.0% | ||||||||
AT&T, Inc., 4.75%, 5/15/2046 | $ | 4,317,000 | $ | 4,082,216 | ||||
AT&T, Inc., 4.5%, 5/15/2035 | 8,154,000 | 7,866,123 | ||||||
Frontier Communications Corp., 11%, 9/15/2025 | 2,970,000 | 3,066,525 | ||||||
Verizon Communications, Inc., 6.55%, 9/15/2043 | 6,804,000 | 8,483,295 | ||||||
|
| |||||||
$ | 23,498,159 | |||||||
|
| |||||||
Oil Services – 0.3% | ||||||||
Odebrecht Offshore Drilling Finance Ltd., 6.75%, 10/01/2022 (n) | $ | 5,536,778 | $ | 1,453,404 | ||||
Schlumberger Norge A.S., 1.25%, 8/01/2017 (n) | 5,189,000 | 5,182,701 | ||||||
|
| |||||||
$ | 6,636,105 | |||||||
|
| |||||||
Oils – 0.4% | ||||||||
Marathon Petroleum Corp., 5.85%, 12/15/2045 | $ | 2,683,000 | $ | 2,662,314 | ||||
Marathon Petroleum Corp., 4.75%, 9/15/2044 | 7,350,000 | 6,504,103 | ||||||
|
| |||||||
$ | 9,166,417 | |||||||
|
| |||||||
Other Banks & Diversified Financials – 2.6% | ||||||||
Bank of Tokyo-Mitsubishi UFJ Ltd., 2.7%, 9/09/2018 (n) | $ | 5,269,000 | $ | 5,321,527 | ||||
BBVA Bancomer S.A. de C.V., 6.75%, 9/30/2022 (n) | 2,570,000 | 2,801,300 | ||||||
BPCE S.A., 4.5%, 3/15/2025 (n) | 5,771,000 | 5,615,581 | ||||||
Citigroup, Inc., 4.4%, 6/10/2025 | 4,533,000 | 4,631,552 | ||||||
Citizens Bank N.A., 2.55%, 5/13/2021 | 1,575,000 | 1,563,961 | ||||||
Citizens Financial Group, Inc., 4.3%, 12/03/2025 | 1,860,000 | 1,886,903 |
12
Table of Contents
MFS Total Return Bond Series
Portfolio of Investments – continued
Issuer | Shares/Par | Value ($) | ||||||
BONDS – continued | ||||||||
Other Banks & Diversified Financials – continued | ||||||||
Discover Bank, 7%, 4/15/2020 | $ | 7,009,000 | $ | 7,777,719 | ||||
Discover Bank, 3.45%, 7/27/2026 | 1,415,000 | 1,364,335 | ||||||
Discover Financial Services, 3.75%, 3/04/2025 | 670,000 | 654,202 | ||||||
Groupe BPCE S.A., 12.5% to 9/30/2019, FRN to 8/29/2049 (n) | 7,880,000 | 9,619,746 | ||||||
Intesa Sanpaolo S.p.A., 5.71%, 1/15/2026 (n) | 1,777,000 | 1,693,618 | ||||||
Macquarie Group Ltd., 3%, 12/03/2018 (n) | 350,000 | 355,138 | ||||||
Rabobank Nederland N.V., 3.95%, 11/09/2022 | 4,408,000 | 4,529,551 | ||||||
Santander UK PLC, 3.05%, 8/23/2018 | 2,885,000 | 2,930,035 | ||||||
Suntrust Banks, Inc., 2.7%, 1/27/2022 | 6,147,000 | 6,143,423 | ||||||
U.S. Bank NA Cincinnati, 2.8%, 1/27/2025 | 2,136,000 | 2,081,720 | ||||||
UBS Group Funding (Jersey) Ltd., 4.125%, 9/24/2025 (n) | 4,836,000 | 4,922,622 | ||||||
|
| |||||||
$ | 63,892,933 | |||||||
|
| |||||||
Pharmaceuticals – 2.9% | ||||||||
Actavis Funding SCS, 4.55%, 3/15/2035 | $ | 2,232,000 | $ | 2,205,859 | ||||
Actavis Funding SCS, 3%, 3/12/2020 | 4,494,000 | 4,554,071 | ||||||
Actavis Funding SCS, 3.8%, 3/15/2025 | 4,505,000 | 4,504,554 | ||||||
Bayer U.S. Finance LLC, 3.375%, 10/08/2024 (n) | 2,779,000 | 2,761,662 | ||||||
Biogen, Inc., 5.2%, 9/15/2045 | 4,888,000 | 5,238,929 | ||||||
Celgene Corp., 2.875%, 8/15/2020 | 10,192,000 | 10,301,217 | ||||||
Endo Finance LLC/Endo Finco, Inc., 6%, 7/15/2023 (n) | 2,970,000 | 2,606,175 | ||||||
Forest Laboratories, Inc., 4.875%, 2/15/2021 (n) | 18,926,000 | 20,315,679 | ||||||
Gilead Sciences, Inc., 4.8%, 4/01/2044 | 6,643,000 | 6,884,858 | ||||||
Gilead Sciences, Inc., 2.35%, 2/01/2020 | 817,000 | 820,813 | ||||||
Gilead Sciences, Inc., 4.75%, 3/01/2046 | 3,545,000 | 3,660,723 | ||||||
Shire Acquisitions Investments Ireland Designated Activity Co., 2.875%, 9/23/2023 | 7,944,000 | 7,541,613 | ||||||
|
| |||||||
$ | 71,396,153 | |||||||
|
| |||||||
Precious Metals & Minerals – 0.0% | ||||||||
Teck Resources Ltd., 6%, 8/15/2040 | $ | 826,000 | $ | 784,700 | ||||
|
| |||||||
Real Estate – Apartment – 0.1% | ||||||||
Mid-America Apartment Communities, Inc., REIT, 4.3%, 10/15/2023 | $ | 2,417,000 | $ | 2,518,618 | ||||
|
| |||||||
Real Estate – Healthcare – 0.3% | ||||||||
HCP, Inc., REIT, 3.875%, 8/15/2024 | $ | 5,515,000 | $ | 5,505,669 | ||||
HCP, Inc., REIT, 5.375%, 2/01/2021 | 1,134,000 | 1,237,865 | ||||||
|
| |||||||
$ | 6,743,534 | |||||||
|
| |||||||
Real Estate – Office – 0.1% | ||||||||
Boston Properties LP, REIT, 3.7%, 11/15/2018 | $ | 2,937,000 | $ | 3,024,702 | ||||
|
|
Issuer | Shares/Par | Value ($) | ||||||
BONDS – continued | ||||||||
Real Estate – Retail – 0.8% | ||||||||
Brixmor Operating Partnership LP, REIT, 3.875%, 8/15/2022 | $ | 4,811,000 | $ | 4,899,431 | ||||
DDR Corp., REIT, 4.625%, 7/15/2022 | 2,365,000 | 2,501,475 | ||||||
DDR Corp., REIT, 3.375%, 5/15/2023 | 6,575,000 | 6,384,844 | ||||||
Kimco Realty Corp., REIT, 2.8%, 10/01/2026 | 3,404,000 | 3,163,191 | ||||||
Realty Income Corp., REIT, 3%, 1/15/2027 | 2,215,000 | 2,082,167 | ||||||
|
| |||||||
$ | 19,031,108 | |||||||
|
| |||||||
Retailers – 0.6% | ||||||||
Bed Bath & Beyond, Inc., 5.165%, 8/01/2044 | $ | 7,156,000 | $ | 6,501,269 | ||||
Best Buy Co., Inc., 5.5%, 3/15/2021 | 7,906,000 | 8,668,771 | ||||||
|
| |||||||
$ | 15,170,040 | |||||||
|
| |||||||
Telecommunications – Wireless – 0.7% | ||||||||
American Tower Corp., REIT, 5%, 2/15/2024 | $ | 3,420,000 | $ | 3,678,155 | ||||
Crown Castle International Corp., 3.7%, 6/15/2026 | 2,419,000 | 2,370,908 | ||||||
Crown Castle International Corp., 2.25%, 9/01/2021 | 2,264,000 | 2,188,251 | ||||||
Crown Castle Towers LLC, 4.883%, 8/15/2020 (n) | 952,000 | 1,013,757 | ||||||
SBA Tower Trust, 2.898%, 10/15/2044 (n) | 4,229,000 | 4,259,006 | ||||||
SFR Group S.A., 6%, 5/15/2022 (n) | 2,970,000 | 3,047,963 | ||||||
|
| |||||||
$ | 16,558,040 | |||||||
|
| |||||||
Tobacco – 0.7% | ||||||||
Imperial Tobacco Finance PLC, 3.75%, 7/21/2022 (n) | $ | 7,775,000 | $ | 7,973,309 | ||||
Reynolds American, Inc., 4%, 6/12/2022 | 2,232,000 | 2,332,063 | ||||||
Reynolds American, Inc., 4.45%, 6/12/2025 | 3,252,000 | 3,429,195 | ||||||
Reynolds American, Inc., 8.125%, 6/23/2019 | 3,344,000 | 3,813,411 | ||||||
|
| |||||||
$ | 17,547,978 | |||||||
|
| |||||||
Transportation – Services – 0.4% | ||||||||
ERAC USA Finance LLC, 7%, 10/15/2037 (n) | $ | 2,690,000 | $ | 3,403,297 | ||||
ERAC USA Finance LLC, 3.85%, 11/15/2024 (n) | 1,612,000 | 1,636,249 | ||||||
Navios Maritime Holding, Inc., 7.375%, 1/15/2022 (n) | 7,405,000 | 4,443,000 | ||||||
|
| |||||||
$ | 9,482,546 | |||||||
|
| |||||||
U.S. Government Agencies and Equivalents – 2.2% | ||||||||
Small Business Administration, 4.93%, 1/01/2024 | $ | 17,464 | $ | 18,462 | ||||
Small Business Administration, 4.34%, 3/01/2024 | 30,291 | 31,444 | ||||||
Small Business Administration, 4.99%, 9/01/2024 | 20,553 | 21,852 |
13
Table of Contents
MFS Total Return Bond Series
Portfolio of Investments – continued
Issuer | Shares/Par | Value ($) | ||||||
BONDS – continued | ||||||||
U.S. Government Agencies and Equivalents – continued | ||||||||
Small Business Administration, 4.86%, 1/01/2025 | $ | 48,081 | $ | 50,551 | ||||
Small Business Administration, 4.625%, 2/01/2025 | 52,059 | 54,856 | ||||||
Small Business Administration, 5.11%, 4/01/2025 | 31,711 | 33,931 | ||||||
Small Business Administration, 4.43%, 5/01/2029 | 537,257 | 571,342 | ||||||
Small Business Administration, 3.25%, 11/01/2030 | 522,978 | 538,299 | ||||||
Small Business Administration, 2.85%, 9/01/2031 | 1,106,160 | 1,112,769 | ||||||
Small Business Administration, 2.37%, 8/01/2032 | 981,193 | 968,090 | ||||||
Small Business Administration, 3.21%, 9/01/2030 | 5,160,865 | 5,305,811 | ||||||
Small Business Administration, 2.13%, 1/01/2033 | 3,719,044 | 3,605,376 | ||||||
Small Business Administration, 2.21%, 2/01/2033 | 926,503 | 904,445 | ||||||
Small Business Administration, 2.22%, 3/01/2033 | 3,312,356 | 3,236,440 | ||||||
Small Business Administration, 2.08%, 4/01/2033 | 4,992,700 | 4,834,006 | ||||||
Small Business Administration, 2.45%, 6/01/2033 | 5,792,548 | 5,715,412 | ||||||
Small Business Administration, 3.15%, 7/01/2033 | 8,481,435 | 8,671,605 | ||||||
Small Business Administration, 3.16%, 8/01/2033 | 8,782,516 | 8,985,856 | ||||||
Small Business Administration, 3.62%, 9/01/2033 | 7,915,957 | 8,309,657 | ||||||
|
| |||||||
$ | 52,970,204 | |||||||
|
| |||||||
U.S. Treasury Obligations – 9.1% | ||||||||
U.S. Treasury Bonds, 4.75%, 2/15/2037 | $ | 1,576,000 | $ | 2,047,643 | ||||
U.S. Treasury Bonds, 4.375%, 2/15/2038 | 19,006,000 | 23,576,259 | ||||||
U.S. Treasury Bonds, 4.5%, 8/15/2039 | 4,597,600 | 5,763,298 | ||||||
U.S. Treasury Bonds, 3.125%, 11/15/2041 | 500,000 | 506,422 | ||||||
U.S. Treasury Bonds, 3.125%, 2/15/2042 | 1,300,000 | 1,316,472 | ||||||
U.S. Treasury Bonds, 2.875%, 5/15/2043 | 44,925,200 | 43,299,986 | ||||||
U.S. Treasury Bonds, 2.5%, 2/15/2045 | 7,827,000 | 6,955,409 | ||||||
U.S. Treasury Notes, 2.875%, 3/31/2018 | 2,000,000 | 2,046,782 | ||||||
U.S. Treasury Notes, 1.625%, 6/30/2019 (f) | 115,650,000 | 116,470,884 | ||||||
U.S. Treasury Notes, 1%, 8/31/2019 | 5,600,000 | 5,544,980 | ||||||
U.S. Treasury Notes, 3.375%, 11/15/2019 | 1,800,000 | 1,898,172 | ||||||
U.S. Treasury Notes, 3.625%, 2/15/2020 | 4,200,000 | 4,466,780 | ||||||
U.S. Treasury Notes, 3%, 11/15/2045 | 7,735,000 | 7,611,387 | ||||||
|
| |||||||
$ | 221,504,474 | |||||||
|
|
Issuer | Shares/Par | Value ($) | ||||||
BONDS – continued | ||||||||
Utilities – Electric Power – 2.9% | ||||||||
AEP Transmission Co. LLC, 3.1%, 12/01/2026 (z) | $ | 1,300,000 | $ | 1,278,375 | ||||
Berkshire Hathaway Energy Co., 5.15%, 11/15/2043 | 6,436,000 | 7,212,729 | ||||||
CMS Energy Corp., 6.25%, 2/01/2020 | 1,925,000 | 2,128,053 | ||||||
CMS Energy Corp., 5.05%, 3/15/2022 | 5,272,000 | 5,769,935 | ||||||
Constellation Energy Group, Inc., 5.15%, 12/01/2020 | 2,487,000 | 2,686,689 | ||||||
Dominion Resources, Inc., 3.625%, 12/01/2024 | 6,901,000 | 6,935,767 | ||||||
Dominion Resources, Inc., 3.9%, 10/01/2025 | 2,048,000 | 2,088,145 | ||||||
EDP Finance B.V., 5.25%, 1/14/2021 (n) | 7,774,000 | 8,217,895 | ||||||
EDP Finance B.V., 4.9%, 10/01/2019 (n) | 2,531,000 | 2,652,194 | ||||||
Exelon Corp., 4.45%, 4/15/2046 | 2,510,000 | 2,452,190 | ||||||
Exelon Generation Co. LLC, 4.25%, 6/15/2022 | 6,123,000 | 6,331,378 | ||||||
PPL Capital Funding, Inc., 5%, 3/15/2044 | 3,429,000 | 3,619,460 | ||||||
PPL Corp., 3.5%, 12/01/2022 | 1,050,000 | 1,072,651 | ||||||
PPL WEM Holdings PLC, 5.375%, 5/01/2021 (n) | 8,842,000 | 9,533,188 | ||||||
Southern Co., 2.35%, 7/01/2021 | 7,039,000 | 6,911,615 | ||||||
Southern Co., 4.4%, 7/01/2046 | 2,328,000 | 2,297,992 | ||||||
Waterford 3 Funding Corp., 8.09%, 1/02/2017 | 31,771 | 31,771 | ||||||
|
| |||||||
$ | 71,220,027 | |||||||
|
| |||||||
Total Bonds (Identified Cost, $2,301,018,682) | $ | 2,296,310,422 | ||||||
|
| |||||||
PUT OPTIONS PURCHASED – 0.0% | ||||||||
iShares iBoxx $ High Yield Corporate Bond ETF – January 2017 @ $81 | 2,927 | $ | 11,708 | |||||
iShares iBoxx $ High Yield Corporate Bond ETF – January 2017 @ $83 | 2,926 | 17,556 | ||||||
|
| |||||||
Total Put Options Purchased – 0.0% (Premiums Paid, $651,122) | $ | 29,264 | ||||||
|
| |||||||
MONEY MARKET FUNDS – 5.4% | ||||||||
MFS Institutional Money Market Portfolio, 0.51% (v) (Identified Cost, $132,642,755) | 132,647,161 | $ | 132,647,161 | |||||
|
| |||||||
Total Investments (Identified Cost, $2,434,312,559) | $ | 2,428,986,847 | ||||||
|
| |||||||
OTHER ASSETS, LESS LIABILITIES – 0.6% | 15,008,602 | |||||||
|
| |||||||
NET ASSETS – 100.0% | $ | 2,443,995,449 | ||||||
|
|
14
Table of Contents
MFS Total Return Bond Series
Portfolio of Investments – continued
(f) | All or a portion of the security has been segregated as collateral for open futures contracts. |
(i) | Interest only security for which the fund receives interest on notional principal (Par amount). Par amount shown is the notional principal and does not reflect the cost of the security. |
(n) | Securities exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be sold in the ordinary course of business in transactions exempt from registration, normally to qualified institutional buyers. At period end, the aggregate value of these securities was $316,075,389 representing 12.9% of net assets. |
(q) | Interest received was less than stated coupon rate. |
(v) | Underlying affiliated fund that is available only to investment companies managed by MFS. The rate quoted for the MFS Institutional Money Market Portfolio is the annualized seven-day yield of the fund at period end. |
(z) | Restricted securities are not registered under the Securities Act of 1933 and are subject to legal restrictions on resale. These securities generally may be resold in transactions exempt from registration or to the public if the securities are subsequently registered. Disposal of these securities may involve time-consuming negotiations and prompt sale at an acceptable price may be difficult. The fund holds the following restricted securities: |
Restricted Securities | Acquisition Date | Cost | Value | |||||||
AEP Transmission Co. LLC, 3.1%, 12/01/2026 | 11/16/16 | $1,297,464 | $1,278,375 | |||||||
Ballyrock Ltd., CLO, FRN, 2.091%, 5/20/2025 | 5/10/16 | 3,244,610 | 3,264,672 | |||||||
Bayview Commercial Asset Trust, FRN, 0%, 4/25/2036 | 2/28/06 | 19,001 | 899 | |||||||
Bayview Commercial Asset Trust, FRN, 0%, 7/25/2036 | 5/16/06 | 12,023 | 0 | |||||||
Bayview Commercial Asset Trust, FRN, 0%, 10/25/2036 | 9/11/06 | 40,112 | 0 | |||||||
Bayview Commercial Asset Trust, FRN, 0%, 12/25/2036 | 10/25/06 | 106,562 | 0 | |||||||
Bayview Financial Revolving Mortgage Loan Trust, FRN, 2.134%, 12/28/2040 | 3/01/06 | 113,972 | 86,943 | |||||||
Carlyle Global Market Strategies, 2013-3A, “A1A”, FRN, 2%, 7/15/2025 | 11/02/16 | 4,587,361 | 4,590,764 | |||||||
Commercial Mortgage Asset Trust, FRN, 0.412%, 1/17/2032 | 4/09/12 | 874 | 313 | |||||||
Cutwater Ltd., 2014-1A, “A1B”, FRN, 2.24%, 7/15/2026 | 9/08/16 | 7,362,689 | 7,363,817 | |||||||
First Union National Bank Commercial Mortgage Trust, FRN, 2.187%, 1/12/2043 | 4/09/12 | 2 | 186 | |||||||
Galaxy CLO Ltd., FRN, 3.511%, 11/16/2025 | 6/22/16 | 5,126,688 | 5,200,617 | |||||||
Glencore Funding LLC, 4.125%, 5/30/2023 | 12/01/16-12/19/16 | 3,987,760 | 4,017,309 | |||||||
Glencore Funding LLC, 4%, 4/16/2025 | 12/01/16-12/16/16 | 2,535,062 | 2,526,440 | |||||||
Hertz Fleet Lease Funding LP, 2014-1, FRN, 1.063%, 4/10/2028 | 3/25/14 | 2,167,793 | 2,166,785 | |||||||
KeySpan Gas East Corp., 2.742%, 8/15/2026 | 8/02/16 | 8,200,000 | 7,772,723 | |||||||
Loomis, Sayles & Co., CLO, “A1”, FRN, 2.41%, 10/15/2027 | 7/27/16 | 2,985,528 | 2,994,245 | |||||||
Pernod Ricard S.A., 3.25%, 6/08/2026 | 6/01/16 | 3,481,413 | 3,353,441 | |||||||
Preferred Term Securities XIX Ltd., CDO, FRN, 1.313%, 12/22/2035 | 3/28/11 | 222,851 | 236,170 | |||||||
SES S.A., 5.3%, 4/04/2043 | 1/08/14 | 3,181,793 | 2,824,747 | |||||||
West CLO Ltd., 2014-1A, “A2”, FRN, 2.981%, 7/18/2026 | 7/21/16 | 7,469,322 | 7,524,889 | |||||||
Total Restricted Securities | $55,203,335 | |||||||||
% of Net assets | 2.3% |
The following abbreviations are used in this report and are defined:
CDO | Collateralized Debt Obligation |
CLO | Collateralized Loan Obligation |
FRN | Floating Rate Note. Interest rate resets periodically and the current rate may not be the rate reported at period end. |
PLC | Public Limited Company |
REIT | Real Estate Investment Trust |
15
Table of Contents
MFS Total Return Bond Series
Portfolio of Investments – continued
Derivative Contracts at 12/31/16
Futures Contracts at 12/31/16
Description | Currency | Contracts | Value | Expiration Date | Unrealized Appreciation (Depreciation) | |||||||||||||
Asset Derivatives | ||||||||||||||||||
Interest Rate Futures | ||||||||||||||||||
U.S. Treasury Bond 30 yr (Long) | USD | 360 | $54,236,250 | March - 2017 | $330,281 | |||||||||||||
U.S. Treasury Note 10 yr (Short) | USD | 225 | 27,963,281 | March - 2017 | 118,715 | |||||||||||||
Ultra U.S. Treasury Bond (Short) | USD | 90 | 14,422,500 | March - 2017 | 112,867 | |||||||||||||
|
| |||||||||||||||||
$561,863 | ||||||||||||||||||
|
| |||||||||||||||||
Liability Derivatives | ||||||||||||||||||
Interest Rate Futures | ||||||||||||||||||
U.S. Treasury Note 2 yr (Long) | USD | 600 | $130,012,500 | March - 2017 | $(63,055 | ) | ||||||||||||
U.S. Treasury Note 5 yr (Long) | USD | 50 | 5,883,203 | March - 2017 | (2,911 | ) | ||||||||||||
Ultra U.S. Treasury Note 10 yr (Long) | USD | 100 | 13,406,250 | March - 2017 | (69,306 | ) | ||||||||||||
|
| |||||||||||||||||
$(135,272 | ) | |||||||||||||||||
|
|
At December 31, 2016, the fund had liquid securities with an aggregate value of $1,773,503 to cover any commitments for certain derivative contracts.
See Notes to Financial Statements
16
Table of Contents
MFS Total Return Bond Series
FINANCIAL STATEMENTS | STATEMENT OF ASSETS AND LIABILITIES
This statement represents your fund’s balance sheet, which details the assets and liabilities comprising the total value of the fund.
At 12/31/16 | ||||||||
Assets | ||||||||
Investments | ||||||||
Non-affiliated issuers, at value (identified cost, $2,301,669,804) | $2,296,339,686 | |||||||
Underlying affiliated funds, at value (identified cost, $132,642,755) | 132,647,161 | |||||||
Total investments, at value (identified cost, $2,434,312,559) | $2,428,986,847 | |||||||
Receivables for | ||||||||
Daily variation margin on open futures contracts | 208,985 | |||||||
Investments sold | 7,602,552 | |||||||
TBA sale commitments | 7,366,503 | |||||||
Fund shares sold | 286,248 | |||||||
Interest | 18,787,838 | |||||||
Total assets | $2,463,238,973 | |||||||
Liabilities | ||||||||
Payables for | ||||||||
Investments purchased | $7,655,320 | |||||||
TBA purchase commitments | 7,496,113 | |||||||
Fund shares reacquired | 3,723,447 | |||||||
Payable to affiliates | ||||||||
Investment adviser | 101,667 | |||||||
Shareholder servicing costs | 934 | |||||||
Distribution and/or service fees | 29,816 | |||||||
Payable for independent Trustees’ compensation | 289 | |||||||
Accrued expenses and other liabilities | 235,938 | |||||||
Total liabilities | $19,243,524 | |||||||
Net assets | $2,443,995,449 | |||||||
Net assets consist of | ||||||||
Paid-in capital | $2,400,959,947 | |||||||
Unrealized appreciation (depreciation) on investments | (4,899,121 | ) | ||||||
Accumulated net realized gain (loss) on investments | (30,658,775 | ) | ||||||
Undistributed net investment income | 78,593,398 | |||||||
Net assets | $2,443,995,449 | |||||||
Shares of beneficial interest outstanding | 188,612,965 |
Net assets | Shares outstanding | Net asset value per share | ||||||||||
Initial Class | $986,877,179 | 75,381,995 | $13.09 | |||||||||
Service Class | 1,457,118,270 | 113,230,970 | 12.87 |
See Notes to Financial Statements
17
Table of Contents
MFS Total Return Bond Series
FINANCIAL STATEMENTS | STATEMENT OF OPERATIONS
This statement describes how much your fund earned in investment income and accrued in expenses. It also describes any gains and/or losses generated by fund operations.
Year ended 12/31/16 | ||||||||
Net investment income | ||||||||
Income | ||||||||
Interest | $88,072,884 | |||||||
Dividends from underlying affiliated funds | 166,190 | |||||||
Other | 6,503 | |||||||
Foreign taxes withheld | (7,676 | ) | ||||||
Total investment income | $88,237,901 | |||||||
Expenses | ||||||||
Management fee | $12,599,031 | |||||||
Distribution and/or service fees | 3,774,045 | |||||||
Shareholder servicing costs | 64,299 | |||||||
Administrative services fee | 402,099 | |||||||
Independent Trustees’ compensation | 50,417 | |||||||
Custodian fee | 125,245 | |||||||
Reimbursement of custodian expenses | (187,496 | ) | ||||||
Shareholder communications | 113,299 | |||||||
Audit and tax fees | 73,022 | |||||||
Legal fees | 24,501 | |||||||
Miscellaneous | 75,261 | |||||||
Total expenses | $17,113,723 | |||||||
Reduction of expenses by investment adviser | (194,144 | ) | ||||||
Net expenses | $16,919,579 | |||||||
Net investment income | $71,318,322 | |||||||
Realized and unrealized gain (loss) on investments | ||||||||
Realized gain (loss) (identified cost basis) | ||||||||
Investments: | ||||||||
Non-affiliated issuers | $(3,025,543 | ) | ||||||
Underlying affiliated funds | 897 | |||||||
Futures contracts | 2,509,097 | |||||||
Net realized gain (loss) on investments | $(515,549 | ) | ||||||
Change in unrealized appreciation (depreciation) | ||||||||
Investments | $32,091,404 | |||||||
Futures contracts | 226,264 | |||||||
Net unrealized gain (loss) on investments | $32,317,668 | |||||||
Net realized and unrealized gain (loss) on investments | $31,802,119 | |||||||
Change in net assets from operations | $103,120,441 |
See Notes to Financial Statements
18
Table of Contents
MFS Total Return Bond Series
FINANCIAL STATEMENTS | STATEMENTS OF CHANGES IN NET ASSETS
These statements describe the increases and/or decreases in net assets resulting from operations, any distributions, and any shareholder transactions.
For years ended 12/31 | 2016 | 2015 | ||||||
Change in net assets | ||||||||
From operations | ||||||||
Net investment income | $71,318,322 | $75,603,283 | ||||||
Net realized gain (loss) on investments | (515,549 | ) | 12,384,525 | |||||
Net unrealized gain (loss) on investments | 32,317,668 | (97,154,043 | ) | |||||
Change in net assets from operations | $103,120,441 | $(9,166,235 | ) | |||||
Distributions declared to shareholders | ||||||||
From net investment income | $(83,143,405 | ) | $(91,851,876 | ) | ||||
Change in net assets from fund share transactions | $(145,738,645 | ) | $(353,129,539 | ) | ||||
Total change in net assets | $(125,761,609 | ) | $(454,147,650 | ) | ||||
Net assets | ||||||||
At beginning of period | 2,569,757,058 | 3,023,904,708 | ||||||
At end of period (including undistributed net investment income of $78,593,398 and | $2,443,995,449 | $2,569,757,058 |
See Notes to Financial Statements
19
Table of Contents
MFS Total Return Bond Series
FINANCIAL STATEMENTS | FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the fund’s financial performance for the past 5 years. Certain information reflects financial results for a single fund share. The total returns in the table represent the rate by which an investor would have earned (or lost) on an investment in the fund share class (assuming reinvestment of all distributions) held for the entire period.
Initial Class | Years ended 12/31 | |||||||||||||||||||
2016 | 2015 | 2014 | 2013 | 2012 | ||||||||||||||||
Net asset value, beginning of period | $13.00 | $13.50 | $13.13 | $13.49 | $13.01 | |||||||||||||||
Income (loss) from investment operations | ||||||||||||||||||||
Net investment income (d) | $0.40 | (c) | $0.38 | $0.37 | $0.35 | $0.37 | ||||||||||||||
Net realized and unrealized gain (loss) on investments | 0.16 | (0.42 | ) | 0.40 | (0.49 | ) | 0.57 | |||||||||||||
Total from investment operations | $0.56 | $(0.04 | ) | $0.77 | $(0.14 | ) | $0.94 | |||||||||||||
Less distributions declared to shareholders | ||||||||||||||||||||
From net investment income | $(0.47 | ) | $(0.46 | ) | $(0.40 | ) | $(0.16 | ) | $(0.37 | ) | ||||||||||
From net realized gain on investments | — | — | — | (0.06 | ) | (0.09 | ) | |||||||||||||
Total distributions declared to shareholders | $(0.47 | ) | $(0.46 | ) | $(0.40 | ) | $(0.22 | ) | $(0.46 | ) | ||||||||||
Net asset value, end of period (x) | $13.09 | $13.00 | $13.50 | $13.13 | $13.49 | |||||||||||||||
Total return (%) (k)(r)(s)(x) | 4.23 | (c) | (0.30 | ) | 5.85 | (1.03 | ) | 7.35 | ||||||||||||
Ratios (%) (to average net assets) and Supplemental data: | ||||||||||||||||||||
Expenses before expense reductions (f) | 0.53 | (c) | 0.54 | 0.53 | 0.54 | 0.56 | ||||||||||||||
Expenses after expense reductions (f) | 0.52 | (c) | 0.53 | 0.52 | 0.53 | 0.56 | ||||||||||||||
Net investment income | 2.98 | (c) | 2.83 | 2.74 | 2.65 | 2.76 | ||||||||||||||
Portfolio turnover | 37 | 62 | 58 | 68 | 114 | |||||||||||||||
Net assets at end of period (000 omitted) | $986,877 | $1,030,563 | $1,172,957 | $1,208,132 | $850,417 |
See Notes to Financial Statements
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MFS Total Return Bond Series
Financial Highlights – continued
Service Class | Years ended 12/31 | |||||||||||||||||||
2016 | 2015 | 2014 | 2013 | 2012 | ||||||||||||||||
Net asset value, beginning of period | $12.78 | $13.28 | $12.92 | $13.30 | $12.85 | |||||||||||||||
Income (loss) from investment operations | ||||||||||||||||||||
Net investment income (d) | $0.36 | (c) | $0.34 | $0.33 | $0.31 | $0.33 | ||||||||||||||
Net realized and unrealized gain (loss) on investments | 0.16 | (0.41 | ) | 0.39 | (0.48 | ) | 0.57 | |||||||||||||
Total from investment operations | $0.52 | $(0.07 | ) | $0.72 | $(0.17 | ) | $0.90 | |||||||||||||
Less distributions declared to shareholders | ||||||||||||||||||||
From net investment income | $(0.43 | ) | $(0.43 | ) | $(0.36 | ) | $(0.15 | ) | $(0.36 | ) | ||||||||||
From net realized gain on investments | — | — | — | (0.06 | ) | (0.09 | ) | |||||||||||||
Total distributions declared to shareholders | $(0.43 | ) | $(0.43 | ) | $(0.36 | ) | $(0.21 | ) | $(0.45 | ) | ||||||||||
Net asset value, end of period (x) | $12.87 | $12.78 | $13.28 | $12.92 | $13.30 | |||||||||||||||
Total return (%) (k)(r)(s)(x) | 4.01 | (c) | (0.58 | ) | 5.62 | (1.29 | ) | 7.06 | ||||||||||||
Ratios (%) (to average net assets) and Supplemental data: | ||||||||||||||||||||
Expenses before expense reductions (f) | 0.78 | (c) | 0.79 | 0.78 | 0.79 | 0.81 | ||||||||||||||
Expenses after expense reductions (f) | 0.77 | (c) | 0.78 | 0.77 | 0.78 | 0.81 | ||||||||||||||
Net investment income | 2.73 | (c) | 2.58 | 2.48 | 2.39 | 2.48 | ||||||||||||||
Portfolio turnover | 37 | 62 | 58 | 68 | 114 | |||||||||||||||
Net assets at end of period (000 omitted) | $1,457,118 | $1,539,194 | $1,850,948 | $1,836,589 | $1,646,291 |
(c) | Amount reflects a one-time reimbursement of expenses by the custodian (or former custodian) without which net investment income and performance would be lower and expenses would be higher. See Note 2 in the Notes to Financial Statements for additional information. |
(d) | Per share data is based on average shares outstanding. |
(f) | Ratios do not reflect reductions from fees paid indirectly, if applicable. |
(k) | The total return does not reflect expenses that apply to separate accounts. Inclusion of these charges would reduce the total return figures for all periods shown. |
(r) | Certain expenses have been reduced without which performance would have been lower. |
(s) | From time to time the fund may receive proceeds from litigation settlements, without which performance would be lower. |
(x) | The net asset values and total returns have been calculated on net assets which include adjustments made in accordance with U.S. generally accepted accounting principles required at period end for financial reporting purposes. |
See Notes to Financial Statements
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MFS Total Return Bond Series
(1) | Business and Organization |
MFS Total Return Bond Series (the fund) is a diversified series of MFS Variable Insurance Trust (the trust). The trust is organized as a Massachusetts business trust and is registered under the Investment Company Act of 1940, as amended, as an open-end management investment company. The shareholders of each series of the trust are separate accounts of insurance companies, which offer variable annuity and/or life insurance products, and qualified retirement and pension plans.
The fund is an investment company and accordingly follows the investment company accounting and reporting guidance of the Financial Accounting Standards Board (FASB) Accounting Standards Codification Topic 946 Financial Services – Investment Companies.
(2) | Significant Accounting Policies |
General – The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of increases and decreases in net assets from operations during the reporting period. Actual results could differ from those estimates. In the preparation of these financial statements, management has evaluated subsequent events occurring after the date of the fund’s Statement of Assets and Liabilities through the date that the financial statements were issued. The fund invests in high-yield securities rated below investment grade. Investments in high-yield securities involve greater degrees of credit and market risk than investments in higher-rated securities and tend to be more sensitive to economic conditions.
In October 2016, the Securities and Exchange Commission (SEC) released its Final Rule on Investment Company Reporting Modernization (the “Rule”). The Rule, which introduces two new regulatory reporting forms for investment companies – Form N-PORT and Form N-CEN – also contains amendments to Regulation S-X which impact financial statement presentation, particularly the presentation of derivative investments. Although still evaluating the impacts of the Rule, management believes that many of the Regulation S-X amendments are consistent with the fund’s current financial statement presentation and expects that the fund will be able to comply with the Rule’s Regulation S-X amendments by the August 1, 2017 compliance date.
Balance Sheet Offsetting – The fund’s accounting policy with respect to balance sheet offsetting is that, absent an event of default by the counterparty or a termination of the agreement, the International Swaps and Derivatives Association (ISDA) Master Agreement does not result in an offset of reported amounts of financial assets and financial liabilities in the Statement of Assets and Liabilities across transactions between the fund and the applicable counterparty. The fund’s right to setoff may be restricted or prohibited by the bankruptcy or insolvency laws of the particular jurisdiction to which a specific master netting agreement counterparty is subject. Balance sheet offsetting disclosures, to the extent applicable to the fund, have been included in the fund’s Significant Accounting Policies note under the captions for each of the fund’s in-scope financial instruments and transactions.
Investment Valuations – Debt instruments and floating rate loans, including restricted debt instruments, are generally valued at an evaluated or composite bid as provided by a third-party pricing service. Short-term instruments with a maturity at issuance of 60 days or less may be valued at amortized cost, which approximates market value. Exchange-traded options are generally valued at the last sale or official closing price on their primary exchange as provided by a third-party pricing service. Exchange-traded options for which there were no sales reported that day are generally valued at the last daily bid quotation on their primary exchange as provided by a third-party pricing service. Options not traded on an exchange are generally valued at a broker/dealer bid quotation. Foreign currency options are generally valued at valuations provided by a third-party pricing service. Futures contracts are generally valued at last posted settlement price on their primary exchange as provided by a third-party pricing service. Futures contracts for which there were no trades that day for a particular position are generally valued at the closing bid quotation on their primary exchange as provided by a third-party pricing service. Open-end investment companies are generally valued at net asset value per share. Securities and other assets generally valued on the basis of information from a third-party pricing service may also be valued at a broker/dealer bid quotation. Values obtained from third-party pricing services can utilize both transaction data and market information such as yield, quality, coupon rate, maturity, type of issue, trading characteristics, and other market data. The values of foreign securities and other assets and liabilities expressed in foreign currencies are converted to U.S. dollars using the mean of bid and asked prices for rates provided by a third-party pricing service.
The Board of Trustees has delegated primary responsibility for determining or causing to be determined the value of the fund’s investments (including any fair valuation) to the adviser pursuant to valuation policies and procedures approved by the Board. If the adviser determines that reliable market quotations are not readily available, investments are valued at fair value as determined in good faith by the adviser in accordance with such procedures under the oversight of the Board of Trustees. Under the fund’s valuation policies and procedures, market quotations are not considered to be readily available for most types of debt instruments and floating rate loans and many types of derivatives. These investments are generally valued at fair value based on information from third-party pricing services. In addition, investments may be valued at fair value if the adviser determines that an investment’s value has been materially affected by events occurring after the close of the exchange or market on which the investment is principally
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Notes to Financial Statements – continued
traded (such as foreign exchange or market) and prior to the determination of the fund’s net asset value, or after the halting of trading of a specific security where trading does not resume prior to the close of the exchange or market on which the security is principally traded. The adviser generally relies on third-party pricing services or other information (such as the correlation with price movements of similar securities in the same or other markets; the type, cost and investment characteristics of the security; the business and financial condition of the issuer; and trading and other market data) to assist in determining whether to fair value and at what value to fair value an investment. The value of an investment for purposes of calculating the fund’s net asset value can differ depending on the source and method used to determine value. When fair valuation is used, the value of an investment used to determine the fund’s net asset value may differ from quoted or published prices for the same investment. There can be no assurance that the fund could obtain the fair value assigned to an investment if it were to sell the investment at the same time at which the fund determines its net asset value per share.
Various inputs are used in determining the value of the fund’s assets or liabilities. These inputs are categorized into three broad levels. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an investment’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The fund’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the investment. Level 1 includes unadjusted quoted prices in active markets for identical assets or liabilities. Level 2 includes other significant observable market-based inputs (including quoted prices for similar securities, interest rates, prepayment speed, and credit risk). Level 3 includes unobservable inputs, which may include the adviser’s own assumptions in determining the fair value of investments. Other financial instruments are derivative instruments not reflected in total investments, such as futures contracts. The following is a summary of the levels used as of December 31, 2016 in valuing the fund’s assets or liabilities:
Investments at Value | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Equity Securities | $17,556 | $11,708 | $— | $29,264 | ||||||||||||
U.S. Treasury Bonds & U.S. Government Agency & Equivalents | — | 274,474,677 | — | 274,474,677 | ||||||||||||
Municipal Bonds | — | 18,489,574 | — | 18,489,574 | ||||||||||||
U.S. Corporate Bonds | — | 879,979,467 | — | 879,979,467 | ||||||||||||
Residential Mortgage-Backed Securities | — | 546,290,103 | — | 546,290,103 | ||||||||||||
Commercial Mortgage-Backed Securities | — | 245,886,439 | — | 245,886,439 | ||||||||||||
Asset-Backed Securities (including CDOs) | — | 142,930,072 | — | 142,930,072 | ||||||||||||
Foreign Bonds | — | 188,260,090 | — | 188,260,090 | ||||||||||||
Mutual Funds | 132,647,161 | — | — | 132,647,161 | ||||||||||||
Total Investments | $132,664,717 | $2,296,322,130 | $— | $2,428,986,847 | ||||||||||||
Other Financial Instruments | ||||||||||||||||
Futures Contracts – Assets | $561,863 | $— | $— | $561,863 | ||||||||||||
Futures Contracts – Liabilities | (135,272 | ) | — | — | (135,272 | ) |
For further information regarding security characteristics, see the Portfolio of Investments.
Inflation-Adjusted Debt Securities – The fund invests in inflation-adjusted debt securities issued by the U.S. Treasury. The principal value of these debt securities is adjusted through income according to changes in the Consumer Price Index. These debt securities typically pay a fixed rate of interest, but this fixed rate is applied to the inflation-adjusted principal amount. The principal paid at maturity of the debt security is typically equal to the inflation-adjusted principal amount, or the security’s original par value, whichever is greater. Other types of inflation-adjusted securities may use other methods to adjust for other measures of inflation.
Derivatives – The fund uses derivatives for different purposes, primarily to increase or decrease exposure to a particular market or segment of the market, or security, to increase or decrease interest rate or currency exposure, or as alternatives to direct investments. Derivatives are used for hedging or non-hedging purposes. While hedging can reduce or eliminate losses, it can also reduce or eliminate gains. When the fund uses derivatives as an investment to increase market exposure, or for hedging purposes, gains and losses from derivative instruments may be substantially greater than the derivative’s original cost.
The derivative instruments used by the fund were purchased options and futures contracts. The fund’s period end derivatives, as presented in the Portfolio of Investments and the associated Derivative Contract tables, generally are indicative of the volume of its derivative activity during the period.
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MFS Total Return Bond Series
Notes to Financial Statements – continued
The following table presents, by major type of derivative contract, the fair value, on a gross basis, of the asset and liability components of derivatives held by the fund at December 31, 2016 as reported in the Statement of Assets and Liabilities:
Fair Value (a) | ||||||||||
Risk | Derivative Contracts | Asset Derivatives | Liability Derivatives | |||||||
Interest Rate | Interest Rate Futures | $561,863 | $(135,272 | ) | ||||||
Equity | Purchased Equity Options | 29,264 | — | |||||||
Total | $591,127 | $(135,272 | ) |
(a) | The value of purchased options outstanding is included in total investments, at value, within the fund’s Statement of Assets and Liabilities. The value of futures contracts includes cumulative appreciation (depreciation) as reported in the fund’s Portfolio of Investments. Only the current day net variation margin for futures contracts is separately reported within the fund’s Statement of Assets and Liabilities. |
The following table presents, by major type of derivative contract, the realized gain (loss) on derivatives held by the fund for the year ended December 31, 2016 as reported in the Statement of Operations:
Risk | Futures Contracts | Investments (Purchased Options) | ||||||
Interest Rate | $2,509,097 | $— | ||||||
Equity | — | 14,626 | ||||||
Total | $2,509,097 | $14,626 |
The following table presents, by major type of derivative contract, the change in unrealized appreciation (depreciation) on derivatives held by the fund for the year ended December 31, 2016 as reported in the Statement of Operations:
Risk | Futures Contracts | Investments (Purchased Options) | ||||||
Interest Rate | $226,264 | $— | ||||||
Equity | — | (621,858 | ) | |||||
Total | $226,264 | $(621,858 | ) |
Derivative counterparty credit risk is managed through formal evaluation of the creditworthiness of all potential counterparties. On certain, but not all, uncleared derivatives, the fund attempts to reduce its exposure to counterparty credit risk whenever possible by entering into an ISDA Master Agreement on a bilateral basis. The ISDA Master Agreement gives each party to the agreement the right to terminate all transactions traded under such agreement if there is a certain deterioration in the credit quality of the other party. Upon an event of default or a termination of the ISDA Master Agreement, the non-defaulting party has the right to close out all transactions traded under such agreement and to net amounts owed under each agreement to one net amount payable by one party to the other. This right to close out and net payments across all transactions traded under the ISDA Master Agreement could result in a reduction of the fund’s credit risk to such counterparty equal to any amounts payable by the fund under the applicable transactions, if any.
Collateral and margin requirements differ by type of derivative. Margin requirements are set by the clearing broker and the clearing house for cleared derivatives (e.g., futures contracts, cleared swaps, and exchange-traded options) while collateral terms are contract specific for uncleared derivatives (e.g., forward foreign currency exchange contracts, uncleared swap agreements, and uncleared options). For derivatives traded under an ISDA Master Agreement, which contains a collateral support annex, the collateral requirements are netted across all transactions traded under such agreement and one amount is posted from one party to the other to collateralize such obligations. Cash that has been segregated to cover the fund’s collateral or margin obligations under derivative contracts, if any, will be reported separately in the Statement of Assets and Liabilities as “Restricted cash” or “Deposits with brokers.” Securities pledged as collateral or margin for the same purpose, if any, are noted in the Portfolio of Investments. The fund may be required to make payments of interest on uncovered collateral or margin obligations with the broker. Any such payments are included in “Miscellaneous” expense in the Statement of Operations.
Purchased Options – The fund purchased put options for a premium. Purchased put options entitle the holder to sell a specified number of shares or units of a particular security, currency or index at a specified price at a specified date or within a specified period of time. Purchasing put options may hedge against an anticipated decline in the value of portfolio securities or currency or decrease the fund’s exposure to an underlying instrument.
The premium paid is initially recorded as an investment in the Statement of Assets and Liabilities. That investment is subsequently marked-to-market daily with the difference between the premium paid and the market value of the purchased option being recorded as unrealized appreciation or depreciation. Premiums paid for purchased put options which have expired are treated as realized losses on investments in the Statement of Operations. Upon the exercise or closing of a purchased put option, the premium paid is offset against the proceeds on the sale of the underlying security or financial instrument in order to determine the realized gain or loss on investments.
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MFS Total Return Bond Series
Notes to Financial Statements – continued
Whether or not the option is exercised, the fund’s maximum risk of loss from purchasing an option is the amount of premium paid. All option contracts involve credit risk if the counterparty to the option contract fails to perform. For uncleared options, this risk is mitigated in cases where there is an ISDA Master Agreement between the fund and the counterparty providing for netting as described above and, where applicable, by the posting of collateral by the counterparty to the fund to cover the fund’s exposure to the counterparty under such ISDA Master Agreement.
Futures Contracts – The fund entered into futures contracts which may be used to hedge against or obtain broad market exposure, interest rate exposure, currency exposure, or to manage duration. A futures contract represents a commitment for the future purchase or sale of an asset at a specified price on a specified date.
Upon entering into a futures contract, the fund is required to deposit with the broker, either in cash or securities, an initial margin in an amount equal to a certain percentage of the notional amount of the contract. Subsequent payments (variation margin) are made or received by the fund each day, depending on the daily fluctuations in the value of the contract, and are recorded for financial statement purposes as unrealized gain or loss by the fund until the contract is closed or expires at which point the gain or loss on futures contracts is realized.
The fund bears the risk of interest rates, exchange rates or securities prices moving unexpectedly, in which case, the fund may not achieve the anticipated benefits of the futures contracts and may realize a loss. While futures contracts may present less counterparty risk to the fund since the contracts are exchange traded and the exchange’s clearinghouse guarantees payments to the broker, there is still counterparty credit risk due to the insolvency of the broker. The fund’s maximum risk of loss due to counterparty credit risk is equal to the margin posted by the fund to the broker plus any gains or minus any losses on the outstanding futures contracts.
Dollar Roll Transactions – The fund enters into dollar roll transactions, with respect to mortgage-backed securities issued by Ginnie Mae, Fannie Mae, and Freddie Mac, in which the fund sells mortgage-backed securities to financial institutions and simultaneously agrees to purchase similar (same issuer, type and coupon) securities at a later date at an agreed-upon price. During the period between the sale and repurchase in a dollar roll transaction the fund will not be entitled to receive interest and principal payments on the securities sold but is compensated by interest earned on the proceeds of the initial sale and by a lower purchase price on the securities to be repurchased which enhances the fund’s total return. The fund accounts for dollar roll transactions as purchases and sales and realizes gains and losses on these transactions.
Indemnifications – Under the fund’s organizational documents, its officers and Trustees may be indemnified against certain liabilities and expenses arising out of the performance of their duties to the fund. Additionally, in the normal course of business, the fund enters into agreements with service providers that may contain indemnification clauses. The fund’s maximum exposure under these agreements is unknown as this would involve future claims that may be made against the fund that have not yet occurred.
Investment Transactions and Income – Investment transactions are recorded on the trade date. Interest income is recorded on the accrual basis. All premium and discount is amortized or accreted for financial statement purposes in accordance with U.S. generally accepted accounting principles. Inflation-indexed bonds are fixed-income securities whose principal value is periodically adjusted upward or downward based on the rate of inflation. Interest is accrued based on the principal value, which is adjusted for inflation. Any increase or decrease in the principal amount of an inflation-indexed bond is generally recorded as an increase or decrease in interest income, respectively, even though the adjusted principal is not received until maturity. Interest payments received in additional securities are recorded on the ex-interest date in an amount equal to the value of the security on such date.
The fund may receive proceeds from litigation settlements. Any proceeds received from litigation involving portfolio holdings are reflected in the Statement of Operations in realized gain/loss if the security has been disposed of by the fund or in unrealized gain/loss if the security is still held by the fund. Any other proceeds from litigation not related to portfolio holdings are reflected as other income in the Statement of Operations.
The fund invests a significant portion of its assets in asset-backed and/or mortgage-backed securities. The value of these securities may depend, in part, on the issuer’s or borrower’s credit quality or ability to pay principal and interest when due and that value may fall if an issuer or borrower defaults on its obligation to pay principal or interest or if the instrument’s credit rating is downgraded by a credit rating agency. U.S. Government securities not supported as to the payment of principal or interest by the U.S. Treasury, such as those issued by Fannie Mae, Freddie Mac, and the Federal Home Loan Banks, are subject to greater credit risk than are U.S. Government securities supported by the U.S. Treasury, such as those issued by Ginnie Mae.
The fund purchased or sold debt securities on a when-issued or delayed delivery basis, or in a “To Be Announced” (TBA) or “forward commitment” transaction with delivery or payment to occur at a later date beyond the normal settlement period. At the time a fund enters into a commitment to purchase or sell a security, the transaction is recorded and the value of the security acquired is reflected in the fund’s net asset value. The price of such security and the date that the security will be delivered and paid for are fixed at the time the transaction is negotiated. The value of the security may vary with market fluctuations. No interest accrues to the fund until payment takes place. At the time that a fund enters into this type of transaction, the fund is required to have sufficient cash and/or
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MFS Total Return Bond Series
Notes to Financial Statements – continued
liquid securities to cover its commitments. Losses may arise due to changes in the value of the underlying securities or if the counterparty does not perform under the contract’s terms, or if the issuer does not issue the securities due to political, economic or other factors. Additionally, losses may arise due to declines in the value of the securities prior to settlement date.
To mitigate this risk of loss on TBA securities and other types of forward settling mortgage-backed securities, the fund whenever possible enters into a Master Securities Forward Transaction Agreement (“MSFTA”) on a bilateral basis with each of the counterparties with whom it undertakes a significant volume of transactions. The MSFTA gives each party to the agreement the right to terminate all transactions traded under such agreement if there is a certain deterioration in the credit quality of the other party. Upon an event of default or a termination of the MSFTA, the non-defaulting party has the right to close out all transactions traded under such agreement and to net amounts owed under each transaction to one net amount payable by one party to the other. This right to close out and net payments across all transactions traded under the MSFTA could result in a reduction of the fund’s credit risk to such counterparty equal to any amounts payable by the fund under the applicable transactions, if any.
For mortgage-backed securities traded under a MSFTA, the collateral and margining requirements are contract specific. Collateral amounts across all transactions traded under such agreement are netted and one amount is posted from one party to the other to collateralize such obligations. Cash that has been pledged to cover the fund’s collateral or margin obligations under a MSFTA, if any, will be reported separately on the Statement of Assets and Liabilities as restricted cash. Securities pledged as collateral or margin for the same purpose, if any, are noted in the Portfolio of Investments.
Reimbursement of Expenses by Custodian – In December 2015, the fund’s custodian (or former custodian), State Street Bank and Trust Company, announced that it intended to reimburse its asset servicing clients for expense amounts that it billed in error during the period 1998 through 2015. The amount of this one-time reimbursement attributable to the fund is reflected as “Reimbursement of custodian expenses” in the Statement of Operations.
Tax Matters and Distributions – The fund intends to qualify as a regulated investment company, as defined under Subchapter M of the Internal Revenue Code, and to distribute all of its taxable income, including realized capital gains. As a result, no provision for federal income tax is required. The fund’s federal tax returns, when filed, will remain subject to examination by the Internal Revenue Service for a three year period. Management has analyzed the fund’s tax positions taken on federal and state tax returns for all open tax years and does not believe that there are any uncertain tax positions that require recognition of a tax liability. Foreign taxes, if any, have been accrued by the fund in the accompanying financial statements in accordance with the applicable foreign tax law. Foreign income taxes may be withheld by certain countries in which the fund invests. Additionally, capital gains realized by the fund on securities issued in or by certain foreign countries may be subject to capital gains tax imposed by those countries.
Distributions to shareholders are recorded on the ex-dividend date. Income and capital gain distributions are determined in accordance with income tax regulations, which may differ from U.S. generally accepted accounting principles. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences which arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary overdistributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes.
Book/tax differences primarily relate amortization and accretion of debt securities.
The tax character of distributions declared to shareholders for the last two fiscal years is as follows:
12/31/16 | 12/31/15 | |||||||
Ordinary income (including any short-term capital gains) | $83,143,405 | $91,851,876 |
The federal tax cost and the tax basis components of distributable earnings were as follows:
As of 12/31/16 | ||||
Cost of investments | $2,447,918,720 | |||
Gross appreciation | 30,321,246 | |||
Gross depreciation | (49,253,119 | ) | ||
Net unrealized appreciation (depreciation) | $(18,931,873 | ) | ||
Undistributed ordinary income | 78,599,532 | |||
Capital loss carryforwards | (16,154,893 | ) | ||
Other temporary differences | (477,264 | ) |
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MFS Total Return Bond Series
Notes to Financial Statements – continued
As of December 31, 2016, the fund had capital loss carryforwards available to offset future realized gains. These net capital losses may be carried forward indefinitely and their character is retained as short-term and/or long-term losses. Such losses are characterized as follows:
Short-Term | $(6,794,103 | ) | ||
Long-Term | (9,360,790 | ) | ||
Total | $(16,154,893 | ) |
Multiple Classes of Shares of Beneficial Interest – The fund offers multiple classes of shares, which differ in their respective distribution and/or service fees. The fund’s income, realized and unrealized gain (loss), and common expenses are allocated to shareholders based on the daily net assets of each class. Dividends are declared separately for each class. Differences in per share dividend rates are generally due to differences in separate class expenses. The fund’s distributions declared to shareholders as reported in the Statements of Changes in Net Assets are presented by class as follows:
From net investment income | ||||||||
Year ended 12/31/16 | Year ended 12/31/15 | |||||||
Initial Class | $34,643,113 | $36,954,369 | ||||||
Service Class | 48,500,292 | 54,897,507 | ||||||
Total | $83,143,405 | $91,851,876 |
(3) | Transactions with Affiliates |
Investment Adviser – The fund has an investment advisory agreement with MFS to provide overall investment management and related administrative services and facilities to the fund. The management fee is computed daily and paid monthly at an annual rate of 0.50% of the fund’s average daily net assets.
The investment adviser has agreed in writing to reduce its management fee to 0.45% of average daily net assets in excess of $2.5 billion to $5 billion and 0.40% of average daily net assets in excess of $5 billion. This written agreement will terminate on April 27, 2017. For the year ended December 31, 2016, this management fee reduction amounted to $15,117, which is included in the reduction of total expenses in the Statement of Operations. MFS has also agreed in writing to reduce its management fee by a specified amount if certain MFS mutual fund assets exceed thresholds agreed to by MFS and the fund’s Board of Trustees. For the year ended December 31, 2016, this management fee reduction amounted to $179,027, which is included in the reduction of total expenses in the Statement of Operations. The management fee incurred for the year ended December 31, 2016 was equivalent to an annual effective rate of 0.49% of the fund’s average daily net assets.
Effective April 28, 2017, the management fee will be computed daily and paid monthly at the following annual rates:
First $2.5 billion of average daily net assets | 0.50% | |||
Next $2.5 billion of average daily net assets | 0.45% | |||
Average daily net assets in excess of $5 billion | 0.40% |
Distributor – MFS Fund Distributors, Inc. (MFD), a wholly-owned subsidiary of MFS, is the distributor of shares of the fund. The Trustees have adopted a distribution plan for the Service Class shares pursuant to Rule 12b-1 under the Investment Company Act of 1940.
The fund’s distribution plan provides that the fund will pay MFD distribution and/or service fees equal to 0.25% per annum of its average daily net assets attributable to Service Class shares as partial consideration for services performed and expenses incurred by MFD and financial intermediaries (including participating insurance companies that invest in the fund to fund variable annuity and variable life insurance contracts, sponsors of qualified retirement and pension plans that invest in the fund, and affiliates of these participating insurance companies and plan sponsors) in connection with the sale and distribution of the Service Class shares. MFD may subsequently pay all, or a portion, of the distribution and/or service fees to financial intermediaries.
Shareholder Servicing Agent – MFS Service Center, Inc. (MFSC), a wholly-owned subsidiary of MFS, receives a fee from the fund for its services as shareholder servicing agent. For the year ended December 31, 2016, the fee was $61,129, which equated to 0.0024% annually of the fund’s average daily net assets. MFSC also receives payment from the fund for out-of-pocket expenses paid by MFSC on behalf of the fund. For the year ended December 31, 2016, these costs amounted to $3,170.
Administrator – MFS provides certain financial, legal, shareholder communications, compliance, and other administrative services to the fund. Under an administrative services agreement, the fund reimburses MFS the costs incurred to provide these services. The fund is charged an annual fixed amount of $17,500 plus a fee based on average daily net assets. The administrative services fee incurred for the year ended December 31, 2016 was equivalent to an annual effective rate of 0.0160% of the fund’s average daily net assets.
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Trustees’ and Officers’ Compensation – The fund pays compensation to independent Trustees in the form of a retainer, attendance fees, and additional compensation to Board and Committee chairpersons. The fund does not pay compensation directly to Trustees or officers of the fund who are also officers of the investment adviser, all of whom receive remuneration for their services to the fund from MFS. Certain officers and Trustees of the fund are officers or directors of MFS, MFD, and MFSC.
Other – This fund and certain other funds managed by MFS (the funds) have entered into a service agreement (the ISO Agreement) which provides for payment of fees solely by the funds to Tarantino LLC in return for the provision of services of an Independent Senior Officer (ISO) for the funds. Frank L. Tarantino serves as the ISO and is an officer of the funds and the sole member of Tarantino LLC. The funds can terminate the ISO Agreement with Tarantino LLC at any time under the terms of the ISO Agreement. For the year ended December 31, 2016, the fee paid by the fund under this agreement was $4,963 and is included in “Miscellaneous” expense in the Statement of Operations. MFS has agreed to bear all expenses associated with office space, other administrative support, and supplies provided to the ISO.
The fund invests in the MFS Institutional Money Market Portfolio which is managed by MFS and seeks current income consistent with preservation of capital and liquidity. This money market fund does not pay a management fee to MFS.
The fund is permitted to engage in purchase and sale transactions (“cross-trades”) with funds and accounts for which MFS serves as investment adviser or sub-adviser pursuant to a policy adopted by the Board of Trustees. This policy has been designed to ensure that cross-trades conducted by the fund comply with Rule 17a-7 under the Investment Company Act of 1940. Under this policy, cross-trades are effected at current market prices with no remuneration paid in connection with the transaction. During the year ended December 31, 2016, the fund engaged in purchase transactions pursuant to this policy, which amounted to $2,383,275.
(4) | Portfolio Securities |
For the year ended December 31, 2016, purchases and sales of investments, other than short-term obligations, were as follows:
Purchases | Sales | |||||||
U.S. Government securities | $496,837,644 | $618,435,645 | ||||||
Investments (non-U.S. Government securities) | $411,591,768 | $532,386,682 |
(5) | Shares of Beneficial Interest |
The fund’s Declaration of Trust permits the Trustees to issue an unlimited number of full and fractional shares of beneficial interest. Transactions in fund shares were as follows:
Year ended 12/31/16 | Year ended 12/31/15 | |||||||||||||||
Shares | Amount | Shares | Amount | |||||||||||||
Shares sold | ||||||||||||||||
Initial Class | 6,414,218 | $85,432,592 | 5,588,697 | $74,620,310 | ||||||||||||
Service Class | 8,175,261 | 107,465,158 | 7,064,169 | 93,720,716 | ||||||||||||
14,589,479 | $192,897,750 | 12,652,866 | $168,341,026 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | ||||||||||||||||
Initial Class | 2,516,578 | $33,797,646 | 2,774,684 | $36,237,371 | ||||||||||||
Service Class | 3,668,706 | 48,500,292 | 4,272,180 | 54,897,507 | ||||||||||||
6,185,284 | $82,297,938 | 7,046,864 | $91,134,878 | |||||||||||||
Shares reacquired | ||||||||||||||||
Initial Class | (12,811,239 | ) | $(171,229,874 | ) | (15,970,027 | ) | $(214,101,491 | ) | ||||||||
Service Class | (19,020,186 | ) | (249,704,459 | ) | (30,309,856 | ) | (398,503,952 | ) | ||||||||
(31,831,425 | ) | $(420,934,333 | ) | (46,279,883 | ) | $(612,605,443 | ) | |||||||||
Net change | ||||||||||||||||
Initial Class | (3,880,443 | ) | $(51,999,636 | ) | (7,606,646 | ) | $(103,243,810 | ) | ||||||||
Service Class | (7,176,219 | ) | (93,739,009 | ) | (18,973,507 | ) | (249,885,729 | ) | ||||||||
(11,056,662 | ) | $(145,738,645 | ) | (26,580,153 | ) | $(353,129,539 | ) |
The fund is one of several mutual funds in which certain MFS funds may invest. The MFS funds do not invest in the underlying funds for the purpose of exercising management or control. At the end of the period, the MFS Moderate Allocation Portfolio and the MFS Conservative Allocation Portfolio were the owners of record of approximately 8% and 4%, respectively, of the value of outstanding voting shares of the fund. In addition, the MFS Growth Allocation Portfolio was the owner of record of less than 1% of the value of the outstanding voting shares of the fund.
(6) | Line of Credit |
The fund and certain other funds managed by MFS participate in a $1.25 billion unsecured committed line of credit, subject to a $1 billion sublimit, provided by a syndication of banks under a credit agreement. Borrowings may be made for temporary financing needs. Interest is charged to each fund, based on its borrowings, generally at a rate equal to the higher of the Overnight Federal
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Notes to Financial Statements – continued
Reserve funds rate or daily one month LIBOR plus an agreed upon spread. A commitment fee, based on the average daily, unused portion of the committed line of credit, is allocated among the participating funds at the end of each calendar quarter. In addition, the fund and other funds managed by MFS have established unsecured uncommitted borrowing arrangements with certain banks for temporary financing needs. Interest is charged to each fund, based on its borrowings, at a rate equal to the Overnight Federal Reserve funds rate plus an agreed upon spread. For the year ended December 31, 2016, the fund’s commitment fee and interest expense were $15,677 and $0, respectively, and are included in “Miscellaneous” expense in the Statement of Operations.
(7) | Transactions in Underlying Affiliated Funds – Affiliated Issuers |
An affiliated issuer may be considered one in which the fund owns 5% or more of the outstanding voting securities, or a company which is under common control. For the purposes of this report, the fund assumes the following to be an affiliated issuer:
Underlying Affiliated Fund | Beginning Shares/Par Amount | Acquisitions Shares/Par Amount | Dispositions Shares/Par Amount | Ending Shares/Par Amount | ||||||||||||
MFS Institutional Money Market Portfolio | 86,235,675 | 675,160,643 | (628,749,157 | ) | 132,647,161 | |||||||||||
Underlying Affiliated Fund | Realized Gain (Loss) | Capital Gain Distributions | Dividend Income | Ending Value | ||||||||||||
MFS Institutional Money Market Portfolio | $897 | $— | $166,190 | $132,647,161 |
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Trustees of MFS Variable Insurance Trust and the Shareholders of MFS Total Return Bond Series:
We have audited the accompanying statement of assets and liabilities, including the portfolio of investments, of MFS Total Return Bond Series (one of the series of MFS Variable Insurance Trust) (the “Fund”) as of December 31, 2016, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended. These financial statements and financial highlights are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. The Fund is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of December 31, 2016, by correspondence with the custodian and brokers; when replies were not received from brokers, we performed other auditing procedures. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of MFS Total Return Bond Series as of December 31, 2016, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
February 15, 2017
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TRUSTEES AND OFFICERS – IDENTIFICATION AND BACKGROUND
The Trustees and Officers of the Trust, as of February 1, 2017, are listed below, together with their principal occupations during the past five years. (Their titles may have varied during that period.) The address of each Trustee and Officer is 111 Huntington Avenue, Boston, Massachusetts 02199-7618.
Name, Age | Position(s) with Fund | Trustee/Officer Since (h) | Principal Occupations During the Past Five Years | Other Directorships (j) | ||||
INTERESTED TRUSTEES | ||||||||
Robert J. Manning (k) (age 53) | Trustee | February 2004 | Massachusetts Financial Services Company, Executive Chairman (since January 2017) and Director; Chairman (until January 2017); Chief Executive Officer (until 2015); Co-Chief Executive Officer (2015-2016) | N/A | ||||
Robin A. Stelmach (k) (age 55) | Trustee | January 2014 | Massachusetts Financial Services Company, Vice Chair (since January 2017); Chief Operating Officer and Executive Vice President (until January 2017) | N/A | ||||
INDEPENDENT TRUSTEES | ||||||||
David H. Gunning (age 74) | Trustee and Chair of Trustees | January 2004 | Private investor | Lincoln Electric Holdings, Inc., Director; Development Alternatives, Inc., Director/Non-Executive Chairman | ||||
Steven E. Buller (age 65) | Trustee | February 2014 | Chairman, Financial Accounting Standards Advisory Council (until 2015); Standing Advisory Group, Public Company Accounting Oversight Board, Member (until 2014); BlackRock, Inc. (investment management), Managing Director (until 2014), BlackRock Finco UK (investment management), Director (until 2014) | N/A | ||||
Maureen R. Goldfarb (age 61) | Trustee | January 2009 | Private investor | N/A | ||||
Michael Hegarty (age 72) | Trustee | December 2004 | Private investor | Rouse Properties Inc., Director; Capmark Financial Group Inc., Director (until 2015) | ||||
John P. Kavanaugh (age 62) | Trustee and Vice Chair of Trustees | January 2009 | Private investor | N/A | ||||
Maryanne L. Roepke (age 60) | Trustee | May 2014 | American Century Investments (investment management), Senior Vice President and Chief Compliance Officer (until 2014) | N/A | ||||
Laurie J. Thomsen (age 59) | Trustee | March 2005 | Private investor | The Travelers Companies, Director; Dycom Industries, Inc., Director | ||||
OFFICERS | ||||||||
Christopher R. Bohane (k) (age 43) | Assistant Secretary and Assistant Clerk | July 2005 | Massachusetts Financial Services Company, Vice President and Assistant General Counsel | N/A | ||||
Kino Clark (k) (age 48) | Assistant Treasurer | January 2012 | Massachusetts Financial Services Company, Vice President | N/A | ||||
Thomas H. Connors (k) (age 57) | Assistant Secretary and Assistant Clerk | September 2012 | Massachusetts Financial Services Company, Vice President and Senior Counsel; Deutsche Investment Management Americas Inc. (financial service provider), Director and Senior Counsel (until 2012) | N/A | ||||
Ethan D. Corey (k) (age 53) | Assistant Secretary and Assistant Clerk | July 2005 | Massachusetts Financial Services Company, Senior Vice President and Associate General Counsel | N/A | ||||
David L. DiLorenzo (k) (age 48) | President | July 2005 | Massachusetts Financial Services Company, Senior Vice President | N/A | ||||
Brian E. Langenfeld (k) (age 43) | Assistant Secretary and Assistant Clerk | June 2006 | Massachusetts Financial Services Company, Vice President and Senior Counsel | N/A |
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Trustees and Officers – continued
Name, Age | Position(s) with Fund | Trustee/Officer Since (h) | Principal Occupations During the Past Five Years | Other Directorships (j) | ||||
Susan A. Pereira (k) (age 46) | Assistant Secretary and Assistant Clerk | July 2005 | Massachusetts Financial Services Company, Vice President and Senior Counsel | N/A | ||||
Kasey L. Phillips (k) (age 46) | Assistant Treasurer | September 2012 | Massachusetts Financial Services Company, Vice President; Wells Fargo Funds Management, LLC, Senior Vice President, Fund Treasurer (until 2012) | N/A | ||||
Mark N. Polebaum (k) (age 64) | Secretary and Clerk | January 2006 | Massachusetts Financial Services Company, Executive Vice President, General Counsel and Secretary | N/A | ||||
Matthew A. Stowe (k) (age 42) | Assistant Secretary and Assistant Clerk | October 2014 | Massachusetts Financial Services Company, Vice President and Assistant General Counsel | N/A | ||||
Frank L. Tarantino (age 72) | Independent Senior Officer | June 2004 | Tarantino LLC (provider of compliance services), Principal | N/A | ||||
Richard S. Weitzel (k) (age 46) | Assistant Secretary and Assistant Clerk | October 2007 | Massachusetts Financial Services Company, Senior Vice President and Associate General Counsel | N/A | ||||
Martin J. Wolin (k) (age 49) | Chief Compliance Officer | July 2015 | Massachusetts Financial Services Company, Senior Vice President and Chief Compliance Officer (since July 2015); Mercer (financial service provider), Chief Risk and Compliance Officer, North America and Latin America (until June 2015) | N/A | ||||
James O. Yost (k) (age 56) | Treasurer | September 1990 | Massachusetts Financial Services Company, Senior Vice President | N/A |
(h) | Date first appointed to serve as Trustee/officer of an MFS Fund. Each Trustee has served continuously since appointment unless indicated otherwise. For the period from December 15, 2004 until February 22, 2005, Mr. Manning served as Advisory Trustee. Prior to January 2012, Messrs. DiLorenzo and Yost served as Assistant Treasurers of the Funds. From January 2012 through December 2016, Messrs. DiLorenzo and Yost served as Treasurer and Deputy Treasurer of the Funds, respectively. |
(j) | Directorships or trusteeships of companies required to report to the Securities and Exchange Commission (i.e., “public companies”). |
(k) | “Interested person” of the Trust within the meaning of the Investment Company Act of 1940 (referred to as the 1940 Act), which is the principal federal law governing investment companies like the fund, as a result of a position with MFS. The address of MFS is 111 Huntington Avenue, Boston, Massachusetts 02199-7618. |
Each Trustee (except Ms. Stelmach, Mr. Buller and Ms. Roepke) has been elected by shareholders and each Trustee and officer holds office until his or her successor is chosen and qualified or until his or her earlier death, resignation, retirement or removal. The Trust does not hold annual meetings for the purpose of electing Trustees, and Trustees are not elected for fixed terms. Messrs. Buller and Kavanaugh and Ms. Roepke are members of the Trust’s Audit Committee.
Each of the Fund’s Trustees and officers holds comparable positions with certain other funds of which MFS or a subsidiary is the investment adviser or distributor, and, in the case of the officers, with certain affiliates of MFS. As of February 1, 2017, the Trustees served as board members of 137 funds within the MFS Family of Funds.
The Statement of Additional Information for a Fund includes further information about the Trustees and is available without charge upon request by calling 1-800-225-2606.
Investment Adviser Massachusetts Financial Services Company 111 Huntington Avenue Boston, MA 02199-7618 | Custodian State Street Bank and Trust Company 1 Lincoln Street Boston, MA 02111-2900 | |
Distributor MFS Fund Distributors, Inc. 111 Huntington Avenue Boston, MA 02199-7618 | Independent Registered Public Accounting Firm Deloitte & Touche LLP 200 Berkeley Street Boston, MA 02116 | |
Portfolio Managers Joshua Marston Robert Persons |
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BOARD REVIEW OF INVESTMENT ADVISORY AGREEMENT
The Investment Company Act of 1940 requires that both the full Board of Trustees and a majority of the non-interested (“independent”) Trustees, voting separately, annually approve the continuation of the Fund’s investment advisory agreement with MFS. The Trustees consider matters bearing on the Fund and its advisory arrangements at their meetings throughout the year, including a review of performance data at each regular meeting. In addition, the independent Trustees met several times over the course of three months beginning in May and ending in July, 2016 (“contract review meetings”) for the specific purpose of considering whether to approve the continuation of the investment advisory agreement for the Fund and the other investment companies that the Board oversees (the “MFS Funds”). The independent Trustees were assisted in their evaluation of the Fund’s investment advisory agreement by independent legal counsel, from whom they received separate legal advice and with whom they met separately from MFS during various contract review meetings. The independent Trustees were also assisted in this process by the MFS Funds’ Independent Senior Officer, a senior officer appointed by and reporting to the independent Trustees.
In connection with their deliberations regarding the continuation of the investment advisory agreement, the Trustees, including the independent Trustees, considered such information and factors as they believed, in light of the legal advice furnished to them and their own business judgment, to be relevant. The investment advisory agreement for the Fund was considered separately, although the Trustees also took into account the common interests of all MFS Funds in their review. As described below, the Trustees considered the nature, quality, and extent of the various investment advisory, administrative, and shareholder services performed by MFS under the existing investment advisory agreement and other arrangements with the Fund.
In connection with their contract review meetings, the Trustees received and relied upon materials that included, among other items: (i) information provided by Broadridge Financial Solutions, Inc. (“Broadridge”), an independent third party, on the investment performance of the Fund for various time periods ended December 31, 2015 and the investment performance of a group of funds with substantially similar investment classifications/objectives (the “Lipper performance universe”), (ii) information provided by Broadridge on the Fund’s advisory fees and other expenses and the advisory fees and other expenses of comparable funds identified by Broadridge (the “Broadridge expense group”), (iii) information provided by MFS on the advisory fees of portfolios of other clients of MFS, including institutional separate accounts and other clients, (iv) information as to whether and to what extent applicable expense waivers, reimbursements or fee “breakpoints” are observed for the Fund, (v) information regarding MFS’ financial results and financial condition, including MFS’ and certain of its affiliates’ estimated profitability from services performed for the Fund and the MFS Funds as a whole, and compared to MFS’ institutional business, (vi) MFS’ views regarding the outlook for the mutual fund industry and the strategic business plans of MFS, (vii) descriptions of various functions performed by MFS for the Funds, such as compliance monitoring and portfolio trading practices, and (viii) information regarding the overall organization of MFS, including information about MFS’ senior management and other personnel providing investment advisory, administrative and other services to the Fund and the other MFS Funds. The comparative performance, fee and expense information prepared and provided by Broadridge was not independently verified and the independent Trustees did not independently verify any information provided to them by MFS.
The Trustees’ conclusion as to the continuation of the investment advisory agreement was based on a comprehensive consideration of all information provided to the Trustees and not the result of any single factor. Some of the factors that figured particularly in the Trustees’ deliberations are described below, although individual Trustees may have evaluated the information presented differently from one another, giving different weights to various factors. It is also important to recognize that the fee arrangements for the Fund and other MFS Funds are the result of years of review and discussion between the independent Trustees and MFS, that certain aspects of such arrangements may receive greater scrutiny in some years than in others, and that the Trustees’ conclusions may be based, in part, on their consideration of these same arrangements during the course of the year and in prior years.
Based on information provided by Broadridge and MFS, the Trustees reviewed the Fund’s total return investment performance as well as the performance of peer groups of funds over various time periods. The Trustees placed particular emphasis on the total return performance of the Fund’s Initial Class shares in comparison to the performance of funds in its Lipper performance universe over the three-year period ended December 31, 2015, which the Trustees believed was a long enough period to reflect differing market conditions. The total return performance of the Fund’s Initial Class shares was in the 1st quintile relative to the other funds in the universe for this three-year period (the 1st quintile being the best performers and the 5th quintile being the worst performers). The total return performance of the Fund’s Initial Class shares was in the 4th quintile for the one-year period and the 1st quintile for the five-year period ended December 31, 2015 relative to the Lipper performance universe. Because of the passage of time, these performance results may differ from the performance results for more recent periods, including those shown elsewhere in this report.
In the course of their deliberations, the Trustees took into account information provided by MFS in connection with the contract review meetings, as well as during investment review meetings conducted with portfolio management personnel during the course of the year regarding the Fund’s performance. After reviewing these and related factors, the Trustees concluded, within the context of their overall conclusions regarding the investment advisory agreement, that they were satisfied with MFS’ responses and efforts relating to investment performance.
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Board Review of Investment Advisory Agreement – continued
In assessing the reasonableness of the Fund’s advisory fee, the Trustees considered, among other information, the Fund’s advisory fee and the total expense ratio of the Fund’s Initial Class shares as a percentage of average daily net assets and the advisory fee and total expense ratios of peer groups of funds based on information provided by Broadridge. The Trustees considered that, according to the data provided by Broadridge (which takes into account any fee reductions or expense limitations that were in effect during the Fund’s last fiscal year), the Fund’s effective advisory fee rate and total expense ratio were each approximately at the Broadridge expense group median.
The Trustees also considered the advisory fees charged by MFS to any institutional separate accounts advised by MFS (“separate accounts”) and unaffiliated investment companies for which MFS serves as subadviser (“subadvised funds”) that have comparable investment strategies to the Fund. In comparing these fees, the Trustees considered information provided by MFS as to the generally broader scope of services provided by MFS to the Fund, as well as the more extensive regulatory burdens imposed on MFS in managing the Fund, in comparison to separate accounts and subadvised funds. The Trustees also considered the higher demands placed on MFS’ investment personnel and trading infrastructure as a result of the daily cash in-flows and out-flows of the Fund in comparison to separate accounts.
The Trustees also considered whether the Fund may benefit from any economies of scale in the management of the Fund in the event of growth in assets of the Fund and/or growth in assets of the MFS Funds as a whole. They noted that MFS has agreed in writing to reduce its advisory fee rate on the Fund’s average daily net assets over $2.5 billion and $5 billion, which may not be changed without the Trustees’ approval (the “management fee waiver rates”). They also noted that MFS has agreed to amend its contractual advisory fee rate schedule to reflect the existing management fee waiver rates effective as of April 28, 2017. The Trustees also noted that MFS has agreed in writing to waive a portion of the management fees of certain MFS Funds, including the Fund, if the total combined assets of certain funds within the MFS Funds’ complex increase above agreed upon thresholds (the “group fee waiver”), enabling the Fund’s shareholders to share in the benefits from any economies of scale at the complex level. The group fee waiver is reviewed and renewed annually between the Board and MFS. The Trustees concluded that the breakpoints and the group fee waiver were sufficient to allow the Fund to benefit from economies of scale as its assets and overall complex assets grow.
The Trustees also considered information prepared by MFS relating to MFS’ costs and profits with respect to the Fund, the MFS Funds considered as a group, and other investment companies and accounts advised by MFS, as well as MFS’ methodologies used to determine and allocate its costs to the MFS Funds, the Fund and other accounts and products for purposes of estimating profitability.
After reviewing these and other factors described herein, the Trustees concluded, within the context of their overall conclusions regarding the investment advisory agreement, that the advisory fees charged to the Fund represent reasonable compensation in light of the services being provided by MFS to the Fund.
In addition, the Trustees considered MFS’ resources and related efforts to continue to retain, attract and motivate capable personnel to serve the Fund. The Trustees also considered current and developing conditions in the financial services industry, including the presence of large and well-capitalized companies which are spending, and appear to be prepared to continue to spend, substantial sums to engage personnel and to provide services to competing investment companies. In this regard, the Trustees also considered the financial resources of MFS and its ultimate parent, Sun Life Financial Inc. The Trustees also considered the advantages and possible disadvantages to the Fund of having an adviser that also serves other investment companies as well as other accounts.
The Trustees also considered the nature, quality, cost, and extent of administrative, transfer agency, and distribution services provided to the Fund by MFS and its affiliates under agreements and plans other than the investment advisory agreement, including any 12b-1 fees the Fund pays to MFS Fund Distributors, Inc., an affiliate of MFS. The Trustees also considered the nature, extent and quality of certain other services MFS performs or arranges for on the Fund’s behalf, which may include securities lending programs, directed expense payment programs, class action recovery programs, and MFS’ interaction with third-party service providers, principally custodians and sub-custodians. The Trustees concluded that the various non-advisory services provided by MFS and its affiliates on behalf of the Fund were satisfactory.
The Trustees also considered benefits to MFS from the use of the Fund’s portfolio brokerage commissions, if applicable, to pay for investment research and various other factors. Additionally, the Trustees considered so-called “fall-out benefits” to MFS such as reputational value derived from serving as investment manager to the Fund.
Based on their evaluation of factors that they deemed to be material, including those factors described above, the Board of Trustees, including the independent Trustees, concluded that the Fund’s investment advisory agreement with MFS should be continued for an additional one-year period, commencing August 1, 2016.
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PROXY VOTING POLICIES AND INFORMATION
MFS votes proxies on behalf of the fund pursuant to proxy voting policies and procedures that are available without charge, upon request, by calling 1-800-225-2606, by visiting mfs.com (once you have selected “Individual Investor” as your role, click on “Individual Investor Home” in the top navigation and then select “Learn More About Proxy Voting” under the “I want to…” header on the left hand column of the page), or by visiting the SEC’s Web site at http://www.sec.gov.
Information regarding how the fund voted proxies relating to portfolio securities during the most recent twelve-month period ended June 30 is available by August 31 of each year without charge by visiting mfs.com (once you have selected “Individual Investor” as your role, click on “Individual Investor Home” in the top navigation and then select “Learn More About Proxy Voting” under the “I want to…” header on the left hand column of the page), or by visiting the SEC’s Web site at http://www.sec.gov.
QUARTERLY PORTFOLIO DISCLOSURE
The fund will file a complete schedule of portfolio holdings with the Securities and Exchange Commission (the Commission) for the first and third quarters of each fiscal year on Form N-Q. The fund’s Form N-Q is available on the EDGAR database on the Commission’s Internet Web site at http://www.sec.gov, and may be reviewed and copied at the:
Public Reference Room
Securities and Exchange Commission
100 F Street, NE, Room 1580
Washington, D.C. 20549
Information on the operation of the Public Reference Room may be obtained by calling the Commission at 1-800-SEC-0330. Copies of the fund’s Form N-Q also may be obtained, upon payment of a duplicating fee, by electronic request at the following e-mail address: publicinfo@sec.gov or by writing the Public Reference Section at the above address.
From time to time, MFS may post important information about the fund or the MFS funds on the MFS web site (mfs.com). This information is available on mfs.com by following these steps once you have selected “Individual Investor” as your role: (1) Click on the “Individual Investor Home” in the top navigation and then select the “Announcements” option within the “Market Outlooks” drop down, or (2) Click on “Products & Services” and “Variable Insurance Portfolios” and then select the fund’s name.
INFORMATION ABOUT FUND CONTRACTS AND LEGAL CLAIMS
The fund has entered into contractual arrangements with an investment adviser, administrator, distributor, shareholder servicing agent, 529 program manager (if applicable), and custodian who each provide services to the fund. Unless expressly stated otherwise, shareholders are not parties to, or intended beneficiaries of these contractual arrangements, and these contractual arrangements are not intended to create any shareholder right to enforce them against the service providers or to seek any remedy under them against the service providers, either directly or on behalf of the fund.
Under the Trust’s By-Laws and Declaration of Trust, any claims asserted against or on behalf of the MFS Funds, including claims against Trustees and Officers, must be brought in state and federal courts located within the Commonwealth of Massachusetts.
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FACTS | WHAT DOES MFS DO WITH YOUR PERSONAL INFORMATION? |
Why? | Financial companies choose how they share your personal information. Federal law gives consumers the right to limit some but not all sharing. Federal law also requires us to tell you how we collect, share, and protect your personal information. Please read this notice carefully to understand what we do. |
What? | The types of personal information we collect and share depend on the product or service you have with us. This information can include:
• Social Security number and account balances • Account transactions and transaction history • Checking account information and wire transfer instructions
When you are no longer our customer, we continue to share your information as described in this notice. |
How? | All financial companies need to share customers’ personal information to run their everyday business. In the section below, we list the reasons financial companies can share their customers’ personal information; the reasons MFS chooses to share; and whether you can limit this sharing. |
Reasons we can share your personal information | Does MFS share? | Can you limit this sharing? | ||
For our everyday business purposes – such as to process your transactions, maintain your account(s), respond to court orders and legal investigations, or report to credit bureaus | Yes | No | ||
For our marketing purposes – to offer our products and services to you | No | We don’t share | ||
For joint marketing with other financial companies | No | We don’t share | ||
For our affiliates’ everyday business purposes – information about your transactions and experiences | No | We don’t share | ||
For our affiliates’ everyday business purposes – information about your creditworthiness | No | We don’t share | ||
For nonaffiliates to market to you | No | We don’t share |
Questions? | Call 800-225-2606 or go to mfs.com. |
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Page 2 |
Who we are | ||
Who is providing this notice? | MFS Funds, MFS Investment Management, MFS Institutional Advisors, Inc., and MFS Heritage Trust Company. |
What we do | ||
How does MFS protect my personal information? | To protect your personal information from unauthorized access and use, we use security measures that comply with federal law. These measures include procedural, electronic, and physical safeguards for the protection of the personal information we collect about you. | |
How does MFS collect my personal information? | We collect your personal information, for example, when you
• open an account or provide account information • direct us to buy securities or direct us to sell your securities • make a wire transfer
We also collect your personal information from others, such as credit bureaus, affiliates, or other companies. | |
Why can’t I limit all sharing? | Federal law gives you the right to limit only
• sharing for affiliates’ everyday business purposes – information about your creditworthiness • affiliates from using your information to market to you • sharing for nonaffiliates to market to you
State laws and individual companies may give you additional rights to limit sharing. |
Definitions | ||
Affiliates | Companies related by common ownership or control. They can be financial and nonfinancial companies.
• MFS does not share personal information with affiliates, except for everyday business purposes as described on page one of this notice. | |
Nonaffiliates | Companies not related by common ownership or control. They can be financial and nonfinancial companies.
• MFS does not share with nonaffiliates so they can market to you. | |
Joint marketing | A formal agreement between nonaffiliated financial companies that together market financial products or services to you.
• MFS doesn’t jointly market. |
Other important information | ||
If you own an MFS product or receive an MFS service in the name of a third party such as a bank or broker-dealer, their privacy policy may apply to you instead of ours. |
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ANNUAL REPORT
December 31, 2016
MFS® RESEARCH SERIES
MFS® Variable Insurance Trust
VFR-ANN
Table of Contents
MFS® RESEARCH SERIES
The report is prepared for the general information of contract owners. It is authorized for distribution to prospective investors only when preceded or accompanied by a current prospectus.
NOT FDIC INSURED • MAY LOSE VALUE • NO BANK OR CREDIT UNION GUARANTEE • NOT A DEPOSIT • NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY OR NCUA/NCUSIF
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MFS Research Series
LETTER FROM THE EXECUTIVE CHAIRMAN
Dear Contract Owners:
Despite June’s unexpected vote by the United Kingdom to leave the European Union and the surprising result in November’s U.S. presidential election, most markets have proved resilient. U.S. share prices quickly reversed post-Brexit declines, and indices reached new highs following the November elections. U.S. bond yields rose after Donald Trump’s victory on hopes that his proposed policy mix of lower taxes, increased spending on infrastructure and a lower regulatory burden on businesses will lift both U.S. economic growth and inflation. However, interest rates in most developed markets remain very low, with major central banks maintaining extremely accommodative monetary policies to reinvigorate slow-growing economies against a backdrop of still-low inflation. Even after the rise in yields following the election, interest rates remain low by historical standards.
Globally, economic growth has shown signs of recovery of late, led by the United States and the eurozone. Despite better growth, there are few immediate signs of worrisome inflation. Emerging market economies are recovering at a somewhat slower pace amid fears that restrictive U.S. trade policies could further hamper the already slow pace of global trade growth.
At MFS®, we believe in a patient, long-term approach to investing. Viewing investments with a long lens makes it possible to filter out short-term market noise and focus on achieving solid risk-adjusted returns over a full market cycle.
In our view, such an approach, along with the professional guidance of a financial advisor, will help you reach your investment objectives.
Respectfully,
Robert J. Manning
Executive Chairman
MFS Investment Management
February 15, 2017
The opinions expressed in this letter are subject to change and may not be relied upon for investment advice. No forecasts can be guaranteed.
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MFS Research Series
Portfolio structure
Top ten holdings | ||||
Citigroup, Inc. | 2.7% | |||
Alphabet, Inc., “A” | 2.4% | |||
Visa, Inc., “A” | 2.3% | |||
Amazon.com, Inc. | 2.0% | |||
Facebook, Inc., “A “ | 2.0% | |||
Apple, Inc. | 1.8% | |||
U.S. Bancorp | 1.7% | |||
Honeywell International, Inc. | 1.6% | |||
Merck & Co., Inc. | 1.6% | |||
EOG Resources, Inc. | 1.5% |
Global equity sectors | ||||
Technology | 18.9% | |||
Financial Services | 17.9% | |||
Health Care | 13.8% | |||
Capital Goods | 13.7% | |||
Consumer Cyclicals | 13.0% | |||
Energy | 10.4% | |||
Consumer Staples | 7.8% | |||
Telecommunications/Cable Television (s) | 4.1% |
(s) | Includes securities sold short. |
Cash & Cash Equivalents includes any cash, investments in money market funds, short-term securities, and other assets less liabilities. Please see the Statement of Assets and Liabilities for additional information related to the fund’s cash position and other assets and liabilities.
Percentages are based on net assets as of 12/31/16.
The portfolio is actively managed and current holdings may be different.
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MFS Research Series
Summary of Results
For the twelve months ended December 31, 2016, Initial Class shares of the MFS Research Series (“fund”) provided a total return of 8.74%, while Service Class shares of the fund provided a total return of 8.49%. These compare with a return of 11.96% over the same period for the fund’s benchmark, the Standard & Poor’s 500 Stock Index (S&P 500 Index).
Market Environment
Sluggish global growth weighed on both developed and emerging market (“EM”) economies during much of the reporting period, though signs of improved growth became evident in late 2016. The US Federal Reserve increased interest rates by 25 basis points at the end of the period, the second hike of the cycle which began in December 2015. Globally, however, central bank policy remained highly accommodative, which forced many government, and even some corporate, bond yields into negative territory during the period. During the first half of the period, the United Kingdom voted to leave the European Union (“EU”), beginning a multi-year process of negotiation in order to achieve “Brexit.” While markets initially reacted to the vote with alarm, the spillover to European and EM economies was relatively short-lived, although risks of further hits to EU cohesiveness could re-emerge. Late in the period, the surprising US presidential election outcome prompted a significant rally in equities and a rise in bond yields in anticipation of a reflationary policy mix from the incoming Trump administration.
Headwinds from lower energy and commodity prices, which had spread beyond the energy, materials and industrial sectors early in the reporting period, abated later in the period as stabilizing oil prices helped push energy earnings higher relative to expectations. A sharp rise in the US dollar was a headwind for multinationals late in the period. The sharp rise in the US dollar also weighed on earnings. US consumer spending held up well during the second half of the period amid a modest increase in real wages and relatively low gasoline prices. Demand for autos reached near-record territory, while the housing market continued its recovery. Slow global trade continued to mirror slow global growth, particularly for many EM countries. That said, EM countries began to show signs of a modest upturn in activity along with adjustment in their external accounts. These improved conditions appeared to have reassured investors and contributed to record inflows into the asset class during July and August as negative yields for an increasing share of developed market bonds drove yield-hungry investors further out on the risk spectrum. Similar investor inflows were experienced in the investment grade and high yield corporate markets. Late in the reporting period, however, new challenges emerged for emerging markets debt (“EMD”) as a result of the US presidential election, which raised concerns about the potential for a protectionist turn in US trade policy which could negatively impact EM economies. These concerns, along with rising expectations for US growth, inflation and interest rates, have turned the tables on flows into EMD. Since the election, flows have reversed. As of the end of the period, the markets seemed to be in “wait-and-see” mode, looking for evidence to either confirm or refute the repricing of risk that has occurred since Election Day.
Detractors from Performance
Stock selection in the technology sector was a primary detractor from performance relative to the S&P 500 Index. However, there were no individual securities within this sector that were among the fund’s top relative detractors during the reporting period.
Stock selection in both the energy and health care sectors further weighed on relative performance. Within the energy sector, not holding shares of integrated energy company Chevron hurt relative results. Shares of Chevron rose as the company delivered earnings results ahead of market estimates driven by better performance from its downstream operations. The fund’s overweight position in Valero Energy (h) further dampened relative performance. Within the health care sector, holdings of specialty pharmaceutical company Valeant Pharmaceuticals International (b)(h) (Canada) detracted from relative returns. Shares of Valeant Pharmaceuticals depreciated following the fallout from political pressure on the company’s drug price strategy and accusations of financial fraud through the company’s unusual and undisclosed arrangement with online pharmacy Philidor. The fund’s overweight positions in specialty pharmaceutical company Allergan, biopharmaceutical company Alexion Pharmaceuticals, pharmaceutical company Eli Lilly and health services and information technology company McKesson also weighed on relative performance. Shares of Allergan fell after Pfizer terminated the proposed combination with Allergan following Treasury Department changes to inversion rules.
In other sectors, the timing of the fund’s ownership in shares of global financial services firm JPMorgan Chase (h) and financial services company American Express (h) hindered relative returns. The fund’s overweight position in athletic shoes and apparel manufacturer NIKE further weakened relative results.
Contributors to Performance
Stock selection in the consumer cyclicals sector was a primary factor that contributed to relative performance. However, there were no individual securities within this sector that were among the fund’s top relative contributors during the reporting period.
Elsewhere, the fund’s overweight positions in financial services firms Citigroup, U.S. Bancorp and Charles Schwab (h) all benefited relative results. Shares of Citigroup outpaced the benchmark as the company posted favorable results driven by
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MFS Research Series
Management Review – continued
stronger-than-expected fixed income, currency and commodity trading and Costco credit card metrics. In addition, after the US presidential election, banks outperformed the broader markets on prospects of higher rates, stronger growth and regulatory relief. Not owning shares of biotech firm Gilead Sciences added to relative performance as the stock underperformed the benchmark during the period. The fund’s overweight positions in energy exploration and production company EOG Resources, enterprise information technology provider Hewlett Packard Enterprise and oilfield services provider Halliburton also contributed to relative results. The fund’s holdings of strong-performing cable services provider Charter Communications, which was not a constituent of the S&P 500 Index until late in the reporting period, financial services firm Wintrust Financial (b) and engineering services firm Leidos Holdings (b), further strengthened relative performance. Shares of Charter Communications rose as the company reported results that were ahead of estimates as revenues grew, driven by residential growth. In addition, management announced share buybacks earlier than expected, which helped boost the stock’s performance.
Respectfully,
Joseph MacDougall
Portfolio Manager
(b) | Security is not a benchmark constituent. |
(h) | Security was not held in the fund at period end. |
The views expressed in this report are those of the portfolio manager only through the end of the period of the report as stated on the cover and do not necessarily reflect the views of MFS or any other person in the MFS organization. These views are subject to change at any time based on market or other conditions, and MFS disclaims any responsibility to update such views. These views may not be relied upon as investment advice or an indication of trading intent on behalf of any MFS portfolio. References to specific securities are not recommendations of such securities, and may not be representative of any MFS portfolio’s current or future investments.
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MFS Research Series
PERFORMANCE SUMMARY THROUGH 12/31/16
The following chart illustrates the historical performance of the fund in comparison to its benchmark(s). Benchmarks are unmanaged and may not be invested in directly. Benchmark returns do not reflect any fees or expenses. The performance of other share classes will be greater than or less than that of the class depicted below. (See Notes to Performance Summary.)
Performance data shown represents past performance and is no guarantee of future results. Investment return and principal value fluctuate so your units, when sold, may be worth more or less than the original cost; current performance may be lower or higher than quoted. The performance shown does not reflect the deduction of taxes, if any, that a contract holder would pay on fund distributions or the redemption of contract units. The returns for the fund shown also do not reflect the deduction of expenses associated with variable products, such as mortality and expense risk charges, separate account charges, and sales charges imposed by the insurance company separate accounts. Such expenses would reduce the overall returns shown.
Growth of a Hypothetical $10,000 Investment
Total Returns through 12/31/16
Average annual total returns
Share Class | Class Inception Date | 1-yr | 5-yr | 10-yr | ||||||||
Initial Class | 7/26/95 | 8.74% | 13.38% | 7.40% | ||||||||
Service Class | 5/01/00 | 8.49% | 13.10% | 7.13% | ||||||||
Comparative benchmark | ||||||||||||
Standard & Poor’s 500 Stock Index (f) | 11.96% | 14.66% | 6.95% |
(f) | Source: FactSet Research Systems Inc. |
Benchmark Definition
Standard & Poor’s 500 Stock Index – a market capitalization-weighted index of 500 widely held equity securities, designed to measure broad U.S. equity performance.
It is not possible to invest directly in an index.
Notes to Performance Summary
Average annual total return represents the average annual change in value for each share class for the periods presented.
Performance results reflect any applicable expense subsidies and waivers in effect during the periods shown. Without such subsidies and waivers the fund’s performance results would be less favorable. Please see the prospectus and financial statements for complete details. All results are historical and assume the reinvestment of any dividends and capital gains distributions.
Performance results do not include adjustments made for financial reporting purposes in accordance with U.S. generally accepted accounting principles and may differ from amounts reported in the financial highlights.
From time to time the fund may receive proceeds from litigation settlements, without which performance would be lower.
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MFS Research Series
Fund Expenses Borne by the Contract Holders during the Period,
July 1, 2016 through December 31, 2016
As a contract holder of the fund, you incur ongoing costs, including management fees; distribution and/or service (12b-1) fees; and other fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the fund and to compare these costs with the ongoing costs of investing in other mutual funds.
The example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period July 1, 2016 through December 31, 2016.
Actual Expenses
The first line for each share class in the following table provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled “Expenses Paid During Period” to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line for each share class in the following table provides information about hypothetical account values and hypothetical expenses based on the fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight the fund’s ongoing costs only and do not take into account the fees and expenses imposed under the variable contracts through which your investment in the fund is made. Therefore, the second line for each share class in the table is useful in comparing ongoing costs associated with an investment in vehicles (such as the fund) which fund benefits under variable annuity and variable life insurance contracts and to qualified pension and retirement plans only, and will not help you determine the relative total costs of investing in the fund through variable annuity and variable life insurance contracts. If the fees and expenses imposed under the variable contracts were included, your costs would have been higher.
Share Class | Annualized Expense Ratio | Beginning Account Value 7/01/16 | Ending Account Value 12/31/16 | Expenses Paid During Period (p) 7/01/16-12/31/16 | ||||||||||||||
Initial Class | Actual | 0.77% | $1,000.00 | $1,048.45 | $3.96 | |||||||||||||
Hypothetical (h) | 0.77% | $1,000.00 | $1,021.27 | $3.91 | ||||||||||||||
Service Class | Actual | 1.02% | $1,000.00 | $1,047.24 | $5.25 | |||||||||||||
Hypothetical (h) | 1.02% | $1,000.00 | $1,020.01 | $5.18 |
(h) | 5% class return per year before expenses. |
(p) | “Expenses Paid During Period” are equal to each class’s annualized expense ratio, as shown above, multiplied by the average account value over the period, multiplied by 184/366 (to reflect the one-half year period). |
Notes to Expense Table
Expense ratios include 0.01% of investment related expenses from short sales (See Note 2 of the Notes to Financial Statements) that are outside of the expense limitation arrangement (See Note 3 of the Notes to Financial Statements).
Expense ratios reflect a one-time Reimbursement of Expenses by Custodian of 0.03% (See Note 2 of the Notes to Financial Statements) that are outside of the expense limitation arrangement (See Note 3 of the Notes to Financial Statements).
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MFS Research Series
PORTFOLIO OF INVESTMENTS – 12/31/16
The Portfolio of Investments is a complete list of all securities owned by your fund. It is categorized by broad-based asset classes.
Issuer | Shares/Par | Value ($) | ||||||
COMMON STOCKS – 99.5% | ||||||||
Aerospace – 4.0% | ||||||||
Honeywell International, Inc. | 86,018 | $ | 9,965,184 | |||||
Leidos Holdings, Inc. | 69,502 | 3,554,331 | ||||||
Northrop Grumman Corp. | 23,334 | 5,427,022 | ||||||
United Technologies Corp. | 49,722 | 5,450,526 | ||||||
|
| |||||||
$ | 24,397,063 | |||||||
|
| |||||||
Alcoholic Beverages – 1.3% | ||||||||
Constellation Brands, Inc., “A” | 25,779 | $ | 3,952,178 | |||||
Molson Coors Brewing Co. | 39,492 | 3,842,967 | ||||||
|
| |||||||
$ | 7,795,145 | |||||||
|
| |||||||
Apparel Manufacturers – 1.9% | ||||||||
Hanesbrands, Inc. | 126,280 | $ | 2,723,860 | |||||
NIKE, Inc., “B” | 125,889 | 6,398,938 | ||||||
PVH Corp. | 27,370 | 2,469,869 | ||||||
|
| |||||||
$ | 11,592,667 | |||||||
|
| |||||||
Biotechnology – 1.5% | ||||||||
Alexion Pharmaceuticals, Inc. (a) | 8,971 | $ | 1,097,602 | |||||
Celgene Corp. (a) | 70,501 | 8,160,491 | ||||||
|
| |||||||
$ | 9,258,093 | |||||||
|
| |||||||
Broadcasting – 1.6% | ||||||||
Time Warner, Inc. | 64,879 | $ | 6,262,770 | |||||
Twenty-First Century Fox, Inc. | 126,051 | 3,534,470 | ||||||
|
| |||||||
$ | 9,797,240 | |||||||
|
| |||||||
Brokerage & Asset Managers – 1.5% | ||||||||
Blackstone Group LP | 134,043 | $ | 3,623,182 | |||||
NASDAQ, Inc. | 85,145 | 5,714,932 | ||||||
|
| |||||||
$ | 9,338,114 | |||||||
|
| |||||||
Business Services – 4.7% | ||||||||
Accenture PLC, “A” | 39,649 | $ | 4,644,087 | |||||
Cognizant Technology Solutions Corp., “A” (a) | 87,299 | 4,891,363 | ||||||
Equifax, Inc. | 27,926 | 3,301,691 | ||||||
Fidelity National Information Services, Inc. | 66,143 | 5,003,057 | ||||||
Fiserv, Inc. (a) | 32,896 | 3,496,187 | ||||||
Gartner, Inc. (a) | 24,916 | 2,518,260 | ||||||
Global Payments, Inc. | 64,441 | 4,472,850 | ||||||
|
| |||||||
$ | 28,327,495 | |||||||
|
| |||||||
Cable TV – 1.6% | ||||||||
Charter Communications, Inc., “A” (a) | 28,773 | $ | 8,284,322 | |||||
Comcast Corp., “A” | 22,888 | 1,580,416 | ||||||
|
| |||||||
$ | 9,864,738 | |||||||
|
| |||||||
Chemicals – 2.7% | ||||||||
E.I. du Pont de Nemours & Co. | 64,418 | $ | 4,728,281 | |||||
Monsanto Co. | 44,997 | 4,734,134 | ||||||
PPG Industries, Inc. | 73,037 | 6,920,986 | ||||||
|
| |||||||
$ | 16,383,401 | |||||||
|
|
Issuer | Shares/Par | Value ($) | ||||||
COMMON STOCKS – continued | ||||||||
Computer Software – 2.3% | ||||||||
Adobe Systems, Inc. (a) | 44,758 | $ | 4,607,836 | |||||
Sabre Corp. | 109,731 | 2,737,788 | ||||||
Salesforce.com, Inc. (a) | 93,120 | 6,374,995 | ||||||
|
| |||||||
$ | 13,720,619 | |||||||
|
| |||||||
Computer Software – Systems – 3.6% | ||||||||
Apple, Inc. (s) | 92,245 | $ | 10,683,816 | |||||
Constellation Software, Inc. | 5,773 | 2,623,337 | ||||||
Hewlett Packard Enterprise | 272,303 | 6,301,091 | ||||||
SS&C Technologies Holdings, Inc. | 87,219 | 2,494,463 | ||||||
|
| |||||||
$ | 22,102,707 | |||||||
|
| |||||||
Construction – 1.3% | ||||||||
Sherwin-Williams Co. | 19,931 | $ | 5,356,257 | |||||
Toll Brothers, Inc. (a) | 90,675 | 2,810,925 | ||||||
|
| |||||||
$ | 8,167,182 | |||||||
|
| |||||||
Consumer Products – 1.0% | ||||||||
Coty, Inc., “A” | 139,954 | $ | 2,562,558 | |||||
Newell Brands, Inc. | 83,838 | 3,743,367 | ||||||
|
| |||||||
$ | 6,305,925 | |||||||
|
| |||||||
Consumer Services – 1.0% | ||||||||
Priceline Group, Inc. (a) | 3,970 | $ | 5,820,258 | |||||
|
| |||||||
Containers – 0.6% | ||||||||
Berry Plastics Group, Inc. (a) | 71,805 | $ | 3,499,058 | |||||
|
| |||||||
Electrical Equipment – 1.7% | ||||||||
Johnson Controls International PLC | 148,325 | $ | 6,109,507 | |||||
W.W. Grainger, Inc. | 17,330 | 4,024,893 | ||||||
|
| |||||||
$ | 10,134,400 | |||||||
|
| |||||||
Electronics – 1.2% | ||||||||
Broadcom Corp. | 41,552 | $ | 7,345,147 | |||||
|
| |||||||
Energy – Independent – 4.0% | ||||||||
Energen Corp. (a) | 42,313 | $ | 2,440,191 | |||||
EOG Resources, Inc. | 87,964 | 8,893,160 | ||||||
EQT Corp. | 67,186 | 4,393,964 | ||||||
Noble Energy, Inc. | 87,342 | 3,324,237 | ||||||
Pioneer Natural Resources Co. | 27,427 | 4,938,780 | ||||||
|
| |||||||
$ | 23,990,332 | |||||||
|
| |||||||
Energy – Integrated – 1.2% | ||||||||
Exxon Mobil Corp. | 82,400 | $ | 7,437,424 | |||||
|
| |||||||
Food & Beverages – 3.5% | ||||||||
J.M. Smucker Co. | 23,888 | $ | 3,059,097 | |||||
Mead Johnson Nutrition Co., “A” | 39,750 | 2,812,710 | ||||||
Mondelez International, Inc. | 114,820 | 5,089,971 | ||||||
PepsiCo, Inc. | 81,540 | 8,531,530 | ||||||
TreeHouse Foods, Inc. (a) | 26,896 | 1,941,622 | ||||||
|
| |||||||
$ | 21,434,930 | |||||||
|
| |||||||
Food & Drug Stores – 0.9% | ||||||||
CVS Health Corp. | 68,007 | $ | 5,366,432 | |||||
|
|
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Portfolio of Investments – continued
Issuer | Shares/Par | Value ($) | ||||||
COMMON STOCKS – continued | ||||||||
General Merchandise – 1.8% | ||||||||
Costco Wholesale Corp. | 41,889 | $ | 6,706,848 | |||||
Dollar Tree, Inc. (a) | 51,867 | 4,003,095 | ||||||
|
| |||||||
$ | 10,709,943 | |||||||
|
| |||||||
Health Maintenance Organizations – 1.6% | ||||||||
Cigna Corp. | 18,232 | $ | 2,431,966 | |||||
UnitedHealth Group, Inc. | 44,697 | 7,153,308 | ||||||
|
| |||||||
$ | 9,585,274 | |||||||
|
| |||||||
Insurance – 3.0% | ||||||||
American International Group, Inc. | 80,493 | $ | 5,256,998 | |||||
Aon PLC | 73,071 | 8,149,609 | ||||||
Chubb Ltd. | 35,420 | 4,679,690 | ||||||
|
| |||||||
$ | 18,086,297 | |||||||
|
| |||||||
Internet – 5.7% | ||||||||
Alibaba Group Holding Ltd., ADR (a) | 26,880 | $ | 2,360,333 | |||||
Alphabet, Inc., “A” (a) | 18,085 | 14,331,458 | ||||||
Alphabet, Inc., “C” (a) | 7,741 | 5,974,659 | ||||||
Facebook, Inc., “A” (a) | 102,896 | 11,838,185 | ||||||
|
| |||||||
$ | 34,504,635 | |||||||
|
| |||||||
Machinery & Tools – 1.8% | ||||||||
Roper Technologies, Inc. | 40,921 | $ | 7,491,817 | |||||
SPX FLOW, Inc. (a) | 100,709 | 3,228,731 | ||||||
|
| |||||||
$ | 10,720,548 | |||||||
|
| |||||||
Major Banks – 3.4% | ||||||||
Goldman Sachs Group, Inc. | 24,513 | $ | 5,869,638 | |||||
Morgan Stanley | 144,581 | 6,108,547 | ||||||
PNC Financial Services Group, Inc. | 75,871 | 8,873,872 | ||||||
|
| |||||||
$ | 20,852,057 | |||||||
|
| |||||||
Medical & Health Technology & Services – 1.0% | ||||||||
McKesson Corp. | 20,011 | $ | 2,810,545 | |||||
VCA, Inc. (a) | 51,306 | 3,522,157 | ||||||
|
| |||||||
$ | 6,332,702 | |||||||
|
| |||||||
Medical Equipment – 4.8% | ||||||||
Danaher Corp. | 72,246 | $ | 5,623,629 | |||||
Medtronic PLC | 114,580 | 8,161,533 | ||||||
PerkinElmer, Inc. | 88,975 | 4,640,046 | ||||||
Steris PLC | 28,438 | 1,916,437 | ||||||
Stryker Corp. | 45,033 | 5,395,404 | ||||||
Zimmer Biomet Holdings, Inc. | 33,349 | 3,441,617 | ||||||
|
| |||||||
$ | 29,178,666 | |||||||
|
| |||||||
Natural Gas – Distribution – 0.6% | ||||||||
Sempra Energy | 39,149 | $ | 3,939,955 | |||||
|
| |||||||
Natural Gas – Pipeline – 0.5% | ||||||||
Enterprise Products Partners LP | 108,227 | $ | 2,926,458 | |||||
|
| |||||||
Network & Telecom – 1.4% | ||||||||
Cisco Systems, Inc. | 281,380 | $ | 8,503,304 | |||||
|
| |||||||
Oil Services – 1.4% | ||||||||
Halliburton Co. | 108,898 | $ | 5,890,293 | |||||
Schlumberger Ltd. | 31,410 | 2,636,870 | ||||||
|
| |||||||
$ | 8,527,163 | |||||||
|
|
Issuer | Shares/Par | Value ($) | ||||||
COMMON STOCKS – continued | ||||||||
Other Banks & Diversified Financials – 8.1% | ||||||||
Citigroup, Inc. (s) | 273,277 | $ | 16,240,852 | |||||
Discover Financial Services | 64,386 | 4,641,587 | ||||||
U.S. Bancorp | 204,736 | 10,517,288 | ||||||
Visa, Inc., “A” (s) | 175,736 | 13,710,923 | ||||||
Wintrust Financial Corp. | 53,667 | 3,894,614 | ||||||
|
| |||||||
$ | 49,005,264 | |||||||
|
| |||||||
Pharmaceuticals – 4.9% | ||||||||
Allergan PLC (a) | 33,222 | $ | 6,976,952 | |||||
Eli Lilly & Co. | 98,385 | 7,236,217 | ||||||
Merck & Co., Inc. | 168,033 | 9,892,103 | ||||||
Zoetis, Inc. | 100,294 | 5,368,738 | ||||||
|
| |||||||
$ | 29,474,010 | |||||||
|
| |||||||
Railroad & Shipping – 1.7% | ||||||||
Canadian Pacific Railway Ltd. | 21,947 | $ | 3,133,373 | |||||
Union Pacific Corp. | 66,710 | 6,916,493 | ||||||
|
| |||||||
$ | 10,049,866 | |||||||
|
| |||||||
Real Estate – 1.8% | ||||||||
Store Capital Corp., REIT | 285,122 | $ | 7,045,365 | |||||
Tanger Factory Outlet Centers, Inc., REIT | 115,747 | 4,141,428 | ||||||
|
| |||||||
$ | 11,186,793 | |||||||
|
| |||||||
Restaurants – 1.9% | ||||||||
Aramark | 135,430 | $ | 4,837,560 | |||||
Starbucks Corp. | 118,366 | 6,571,680 | ||||||
|
| |||||||
$ | 11,409,240 | |||||||
|
| |||||||
Specialty Stores – 4.0% | ||||||||
Amazon.com, Inc. (a) | 16,022 | $ | 12,014,417 | |||||
Lululemon Athletica, Inc. (a) | 27,302 | 1,774,357 | ||||||
Ross Stores, Inc. | 66,686 | 4,374,602 | ||||||
Tractor Supply Co. | 39,618 | 3,003,441 | ||||||
Urban Outfitters, Inc. (a) | 101,930 | 2,902,966 | ||||||
|
| |||||||
$ | 24,069,783 | |||||||
|
| |||||||
Telecommunications – Wireless – 1.4% | ||||||||
American Tower Corp., REIT | 34,204 | $ | 3,614,679 | |||||
SBA Communications Corp. (a) | 48,717 | 5,030,517 | ||||||
|
| |||||||
$ | 8,645,196 | |||||||
|
| |||||||
Telephone Services – 1.1% | ||||||||
Verizon Communications, Inc. | 120,990 | $ | 6,458,446 | |||||
|
| |||||||
Tobacco – 1.9% | ||||||||
Philip Morris International, Inc. | 68,773 | $ | 6,292,042 | |||||
Reynolds American, Inc. | 93,834 | 5,258,457 | ||||||
|
| |||||||
$ | 11,550,499 | |||||||
|
| |||||||
Utilities – Electric Power – 2.6% | ||||||||
American Electric Power Co., Inc. | 40,214 | $ | 2,531,873 | |||||
CMS Energy Corp. | 115,085 | 4,789,838 | ||||||
NextEra Energy, Inc. | 42,773 | 5,109,663 | ||||||
Xcel Energy, Inc. | 88,269 | 3,592,548 | ||||||
|
| |||||||
$ | 16,023,922 | |||||||
|
| |||||||
Total Common Stocks (Identified Cost, $473,062,391) | $ | 603,818,391 | ||||||
|
|
8
Table of Contents
MFS Research Series
Portfolio of Investments – continued
Issuer | Shares/Par | Value ($) | ||||||
CONVERTIBLE PREFERRED STOCKS – 0.3% | ||||||||
Telephone Services – 0.3% | ||||||||
Frontier Communications Corp., 11.13% (Identified Cost, $2,205,665) | 23,254 | $ | 1,652,894 | |||||
|
| |||||||
MONEY MARKET FUNDS – 0.5% | ||||||||
MFS Institutional Money Market Portfolio, 0.51% (v) (Identified Cost, $2,866,472) | 2,866,758 | $ | 2,866,758 | |||||
|
| |||||||
Total Investments (Identified Cost, $478,134,528) | $ | 608,338,043 | ||||||
|
| |||||||
SECURITIES SOLD SHORT – (0.2)% | ||||||||
Telecommunications – Wireless – (0.2)% | ||||||||
Crown Castle International Corp., REIT (Proceeds Received, $1,375,557) | (16,616 | ) | $ | (1,441,770 | ) | |||
|
| |||||||
OTHER ASSETS, LESS LIABILITIES – (0.1)% | (299,181 | ) | ||||||
|
| |||||||
NET ASSETS – 100.0% | $ | 606,597,092 | ||||||
|
|
(a) | Non-income producing security. |
(s) | Security or a portion of the security was pledged to cover collateral requirements for securities sold short. |
(v) | Underlying affiliated fund that is available only to investment companies managed by MFS. The rate quoted for the MFS Institutional Money Market Portfolio is the annualized seven-day yield of the fund at period end. |
At December 31, 2016, the fund had cash collateral of $24,933 and other liquid securities with an aggregate value of $2,754,522 to cover any commitments for securities sold short. Cash collateral is comprised of “Deposits with brokers” in the Statement of Assets and Liabilities.
The following abbreviations are used in this report and are defined:
ADR | American Depositary Receipt |
PLC | Public Limited Company |
REIT | Real Estate Investment Trust |
See Notes to Financial Statements
9
Table of Contents
MFS Research Series
FINANCIAL STATEMENTS | STATEMENT OF ASSETS AND LIABILITIES
This statement represents your fund’s balance sheet, which details the assets and liabilities comprising the total value of the fund.
At 12/31/16 | ||||||||
Assets | ||||||||
Investments | ||||||||
Non-affiliated issuers, at value (identified cost, $475,268,056) | $605,471,285 | |||||||
Underlying affiliated funds, at value (identified cost, $2,866,472) | 2,866,758 | |||||||
Total investments, at value (identified cost, $478,134,528) | $608,338,043 | |||||||
Deposits with brokers | 24,933 | |||||||
Receivables for | ||||||||
Investments sold | 920,124 | |||||||
Fund shares sold | 75,698 | |||||||
Interest and dividends | 773,982 | |||||||
Total assets | $610,132,780 | |||||||
Liabilities | ||||||||
Payables for | ||||||||
Securities sold short, at value (proceeds received, $1,375,557) | $1,441,770 | |||||||
Investments purchased | 926,649 | |||||||
Fund shares reacquired | 1,016,590 | |||||||
Payable to affiliates | ||||||||
Investment adviser | 45,491 | |||||||
Shareholder servicing costs | 856 | |||||||
Distribution and/or service fees | 4,538 | |||||||
Payable for independent Trustees’ compensation | 75 | |||||||
Accrued expenses and other liabilities | 99,719 | |||||||
Total liabilities | $3,535,688 | |||||||
Net assets | $606,597,092 | |||||||
Net assets consist of | ||||||||
Paid-in capital | $429,067,666 | |||||||
Unrealized appreciation (depreciation) on investments and translation of assets and liabilities in foreign currencies | 130,137,322 | |||||||
Accumulated net realized gain (loss) on investments and foreign currency | 39,401,830 | |||||||
Undistributed net investment income | 7,990,274 | |||||||
Net assets | $606,597,092 | |||||||
Shares of beneficial interest outstanding | 23,418,261 |
Net assets | Shares outstanding | Net asset value per share | ||||||||||
Initial Class | $386,256,075 | 14,854,794 | $26.00 | |||||||||
Service Class | 220,341,017 | 8,563,467 | 25.73 |
See Notes to Financial Statements
10
Table of Contents
MFS Research Series
FINANCIAL STATEMENTS | STATEMENT OF OPERATIONS
This statement describes how much your fund earned in investment income and accrued in expenses. It also describes any gains and/or losses generated by fund operations.
Year ended 12/31/16 | ||||||||
Net investment income | ||||||||
Income | ||||||||
Dividends | $13,296,651 | |||||||
Interest | 28,862 | |||||||
Dividends from underlying affiliated funds | 14,118 | |||||||
Other | 7,838 | |||||||
Foreign taxes withheld | (7,178 | ) | ||||||
Total investment income | $13,340,291 | |||||||
Expenses | ||||||||
Management fee | $4,641,149 | |||||||
Distribution and/or service fees | 556,178 | |||||||
Shareholder servicing costs | 40,550 | |||||||
Administrative services fee | 106,049 | |||||||
Independent Trustees’ compensation | 18,477 | |||||||
Custodian fee | 49,500 | |||||||
Reimbursement of custodian expenses | (89,041 | ) | ||||||
Shareholder communications | 29,900 | |||||||
Audit and tax fees | 54,735 | |||||||
Legal fees | 6,321 | |||||||
Dividend and interest expense on securities sold short | 63,242 | |||||||
Miscellaneous | 34,157 | |||||||
Total expenses | $5,511,217 | |||||||
Reduction of expenses by investment adviser | (44,442 | ) | ||||||
Net expenses | $5,466,775 | |||||||
Net investment income | $7,873,516 | |||||||
Realized and unrealized gain (loss) on investments and foreign currency | ||||||||
Realized gain (loss) (identified cost basis) | ||||||||
Investments: | ||||||||
Non-affiliated issuers | $40,672,987 | |||||||
Underlying affiliated funds | 51 | |||||||
Foreign currency | (522 | ) | ||||||
Net realized gain (loss) on investments and foreign currency | $40,672,516 | |||||||
Change in unrealized appreciation (depreciation) | ||||||||
Investments | $2,960,375 | |||||||
Securities sold short | (9,973 | ) | ||||||
Translation of assets and liabilities in foreign currencies | 15 | |||||||
Net unrealized gain (loss) on investments and foreign currency translation | $2,950,417 | |||||||
Net realized and unrealized gain (loss) on investments and foreign currency | $43,622,933 | |||||||
Change in net assets from operations | $51,496,449 |
See Notes to Financial Statements
11
Table of Contents
MFS Research Series
FINANCIAL STATEMENTS | STATEMENTS OF CHANGES IN NET ASSETS
These statements describe the increases and/or decreases in net assets resulting from operations, any distributions, and any shareholder transactions.
For years ended 12/31 | 2016 | 2015 | ||||||
Change in net assets | ||||||||
From operations | ||||||||
Net investment income | $7,873,516 | $4,379,370 | ||||||
Net realized gain (loss) on investments and foreign currency | 40,672,516 | 61,605,974 | ||||||
Net unrealized gain (loss) on investments and foreign currency translation | 2,950,417 | (59,348,655 | ) | |||||
Change in net assets from operations | $51,496,449 | $6,636,689 | ||||||
Distributions declared to shareholders | ||||||||
From net investment income | $(4,225,841 | ) | $(4,312,083 | ) | ||||
From net realized gain on investments | (62,130,911 | ) | (51,371,520 | ) | ||||
Total distributions declared to shareholders | $(66,356,752 | ) | $(55,683,603 | ) | ||||
Change in net assets from fund share transactions | $(15,425,163 | ) | $(42,383,780 | ) | ||||
Total change in net assets | $(30,285,466 | ) | $(91,430,694 | ) | ||||
Net assets | ||||||||
At beginning of period | 636,882,558 | 728,313,252 | ||||||
At end of period (including undistributed net investment income of $7,990,274 and | $606,597,092 | $636,882,558 |
See Notes to Financial Statements
12
Table of Contents
MFS Research Series
FINANCIAL STATEMENTS | FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the fund’s financial performance for the past 5 years. Certain information reflects financial results for a single fund share. The total returns in the table represent the rate by which an investor would have earned (or lost) on an investment in the fund share class (assuming reinvestment of all distributions) held for the entire period.
Initial Class | Years ended 12/31 | |||||||||||||||||||
2016 | 2015 | 2014 | 2013 | 2012 | ||||||||||||||||
Net asset value, beginning of period | $26.68 | $29.11 | $28.74 | $21.84 | $18.78 | |||||||||||||||
Income (loss) from investment operations | ||||||||||||||||||||
Net investment income (d) | $0.36 | (c) | $0.21 | $0.19 | $0.20 | $0.22 | ||||||||||||||
Net realized and unrealized gain (loss) on investments | 1.98 | (0.17 | )(g) | 2.68 | 6.84 | 3.01 | ||||||||||||||
Total from investment operations | $2.34 | $0.04 | $2.87 | $7.04 | $3.23 | |||||||||||||||
Less distributions declared to shareholders | ||||||||||||||||||||
From net investment income | $(0.22 | ) | $(0.22 | ) | $(0.25 | ) | $(0.08 | ) | $(0.17 | ) | ||||||||||
From net realized gain on investments | (2.80 | ) | (2.25 | ) | (2.25 | ) | (0.06 | ) | — | |||||||||||
Total distributions declared to shareholders | $(3.02 | ) | $(2.47 | ) | $(2.50 | ) | $(0.14 | ) | $(0.17 | ) | ||||||||||
Net asset value, end of period (x) | $26.00 | $26.68 | $29.11 | $28.74 | $21.84 | |||||||||||||||
Total return (%) (k)(r)(s)(x) | 8.74 | (c) | 0.80 | 10.20 | 32.35 | 17.22 | ||||||||||||||
Ratios (%) (to average net assets) and Supplemental data: | ||||||||||||||||||||
Expenses before expense reductions (f) | 0.80 | (c) | 0.82 | 0.80 | 0.81 | 0.88 | ||||||||||||||
Expenses after expense reductions (f) | 0.79 | (c) | 0.81 | 0.80 | 0.81 | 0.88 | ||||||||||||||
Net investment income | 1.36 | (c) | 0.72 | 0.67 | 0.80 | 1.06 | ||||||||||||||
Portfolio turnover | 45 | 43 | 34 | 43 | 83 | |||||||||||||||
Net assets at end of period (000 omitted) | $386,256 | $410,178 | $468,286 | $496,857 | $460,834 | |||||||||||||||
Supplemental Ratios (%): | ||||||||||||||||||||
Ratio of expenses to average net assets after expense reductions excluding short sale expenses (f) | 0.78 | (c) | 0.80 | N/A | 0.80 | 0.87 |
See Notes to Financial Statements
13
Table of Contents
MFS Research Series
Financial Highlights – continued
Service Class | Years ended 12/31 | |||||||||||||||||||
2016 | 2015 | 2014 | 2013 | 2012 | ||||||||||||||||
Net asset value, beginning of period | $26.42 | $28.84 | $28.49 | $21.70 | $18.67 | |||||||||||||||
Income (loss) from investment operations | ||||||||||||||||||||
Net investment income (d) | $0.29 | (c) | $0.13 | $0.12 | $0.14 | $0.18 | ||||||||||||||
Net realized and unrealized gain (loss) on investments | 1.96 | (0.16 | )(g) | 2.65 | 6.78 | 2.97 | ||||||||||||||
Total from investment operations | $2.25 | $(0.03 | ) | $2.77 | $6.92 | $3.15 | ||||||||||||||
Less distributions declared to shareholders | ||||||||||||||||||||
From net investment income | $(0.14 | ) | $(0.14 | ) | $(0.17 | ) | $(0.07 | ) | $(0.12 | ) | ||||||||||
From net realized gain on investments | (2.80 | ) | (2.25 | ) | (2.25 | ) | (0.06 | ) | — | |||||||||||
Total distributions declared to shareholders | $(2.94 | ) | $(2.39 | ) | $(2.42 | ) | $(0.13 | ) | $(0.12 | ) | ||||||||||
Net asset value, end of period (x) | $25.73 | $26.42 | $28.84 | $28.49 | $21.70 | |||||||||||||||
Total return (%) (k)(r)(s)(x) | 8.49 | (c) | 0.53 | 9.94 | 32.00 | 16.90 | ||||||||||||||
Ratios (%) (to average net assets) and Supplemental data: | ||||||||||||||||||||
Expenses before expense reductions (f) | 1.05 | (c) | 1.07 | 1.05 | 1.06 | 1.11 | ||||||||||||||
Expenses after expense reductions (f) | 1.04 | (c) | 1.06 | 1.05 | 1.05 | 1.11 | ||||||||||||||
Net investment income | 1.11 | (c) | 0.47 | 0.42 | 0.56 | 0.82 | ||||||||||||||
Portfolio turnover | 45 | 43 | 34 | 43 | 83 | |||||||||||||||
Net assets at end of period (000 omitted) | $220,341 | $226,704 | $260,028 | $279,054 | $266,040 | |||||||||||||||
Supplemental Ratios (%): | ||||||||||||||||||||
Ratio of expenses to average net assets after expense reductions excluding short sale expenses (f) | 1.03 | (c) | 1.05 | N/A | 1.05 | 1.11 |
(c) | Amount reflects a one-time reimbursement of expenses by the custodian (or former custodian) without which net investment income and performance would be lower and expenses would be higher. See Note 2 in the Notes to Financial Statements for additional information. |
(d) | Per share data is based on average shares outstanding. |
(f) | Ratios do not reflect reductions from fees paid indirectly, if applicable. |
(g) | The per share amount varies from the net realized and unrealized gain/loss for the period because of the timing of sales of fund shares and the per share amount of realized and unrealized gains and losses at such time. |
(k) | The total return does not reflect expenses that apply to separate accounts. Inclusion of these charges would reduce the total return figures for all periods shown. |
(r) | Certain expenses have been reduced without which performance would have been lower. |
(s) | From time to time the fund may receive proceeds from litigation settlements, without which performance would be lower. |
(x) | The net asset values and total returns have been calculated on net assets which include adjustments made in accordance with U.S. generally accepted accounting principles required at period end for financial reporting purposes. |
See Notes to Financial Statements
14
Table of Contents
MFS Research Series
(1) | Business and Organization |
MFS Research Series (the fund) is a diversified series of MFS Variable Insurance Trust (the trust). The trust is organized as a Massachusetts business trust and is registered under the Investment Company Act of 1940, as amended, as an open-end management investment company. The shareholders of each series of the trust are separate accounts of insurance companies, which offer variable annuity and/or life insurance products, and qualified retirement and pension plans.
The fund is an investment company and accordingly follows the investment company accounting and reporting guidance of the Financial Accounting Standards Board (FASB) Accounting Standards Codification Topic 946 Financial Services – Investment Companies.
(2) | Significant Accounting Policies |
General – The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of increases and decreases in net assets from operations during the reporting period. Actual results could differ from those estimates. In the preparation of these financial statements, management has evaluated subsequent events occurring after the date of the fund’s Statement of Assets and Liabilities through the date that the financial statements were issued.
In October 2016, the Securities and Exchange Commission (SEC) released its Final Rule on Investment Company Reporting Modernization (the “Rule”). The Rule, which introduces two new regulatory reporting forms for investment companies – Form N-PORT and Form N-CEN – also contains amendments to Regulation S-X which impact financial statement presentation, particularly the presentation of derivative investments. Although still evaluating the impacts of the Rule, management believes that many of the Regulation S-X amendments are consistent with the fund’s current financial statement presentation and expects that the fund will be able to comply with the Rule’s Regulation S-X amendments by the August 1, 2017 compliance date.
Balance Sheet Offsetting – The fund’s accounting policy with respect to balance sheet offsetting is that, absent an event of default by the counterparty or a termination of the agreement, the International Swaps and Derivatives Association (ISDA) Master Agreement does not result in an offset of reported amounts of financial assets and financial liabilities in the Statement of Assets and Liabilities across transactions between the fund and the applicable counterparty. The fund’s right to setoff may be restricted or prohibited by the bankruptcy or insolvency laws of the particular jurisdiction to which a specific master netting agreement counterparty is subject. Balance sheet offsetting disclosures, to the extent applicable to the fund, have been included in the fund’s Significant Accounting Policies note under the captions for each of the fund’s in-scope financial instruments and transactions.
Investment Valuations – Equity securities, including restricted equity securities, are generally valued at the last sale or official closing price on their primary market or exchange as provided by a third-party pricing service. Equity securities, for which there were no sales reported that day, are generally valued at the last quoted daily bid quotation on their primary market or exchange as provided by a third-party pricing service. Equity securities held short, for which there were no sales reported for that day, are generally valued at the last quoted daily ask quotation on their primary market or exchange as provided by a third-party pricing service. Short-term instruments with a maturity at issuance of 60 days or less may be valued at amortized cost, which approximates market value. Open-end investment companies are generally valued at net asset value per share. Securities and other assets generally valued on the basis of information from a third-party pricing service may also be valued at a broker/dealer bid quotation. Values obtained from third-party pricing services can utilize both transaction data and market information such as yield, quality, coupon rate, maturity, type of issue, trading characteristics, and other market data. The values of foreign securities and other assets and liabilities expressed in foreign currencies are converted to U.S. dollars using the mean of bid and asked prices for rates provided by a third-party pricing service.
The Board of Trustees has delegated primary responsibility for determining or causing to be determined the value of the fund’s investments (including any fair valuation) to the adviser pursuant to valuation policies and procedures approved by the Board. If the adviser determines that reliable market quotations are not readily available, investments are valued at fair value as determined in good faith by the adviser in accordance with such procedures under the oversight of the Board of Trustees. Under the fund’s valuation policies and procedures, market quotations are not considered to be readily available for most types of debt instruments and floating rate loans and many types of derivatives. These investments are generally valued at fair value based on information from third-party pricing services. In addition, investments may be valued at fair value if the adviser determines that an investment’s value has been materially affected by events occurring after the close of the exchange or market on which the investment is principally traded (such as foreign exchange or market) and prior to the determination of the fund’s net asset value, or after the halting of trading of a specific security where trading does not resume prior to the close of the exchange or market on which the security is principally traded. Events that occur on a frequent basis after foreign markets close (such as developments in foreign markets and significant movements in the U.S. markets) and prior to the determination of the fund’s net asset value may be deemed to have a material effect on the value of securities traded in foreign markets. Accordingly, the fund’s foreign equity securities may often be
15
Table of Contents
MFS Research Series
Notes to Financial Statements – continued
valued at fair value. The adviser generally relies on third-party pricing services or other information (such as the correlation with price movements of similar securities in the same or other markets; the type, cost and investment characteristics of the security; the business and financial condition of the issuer; and trading and other market data) to assist in determining whether to fair value and at what value to fair value an investment. The value of an investment for purposes of calculating the fund’s net asset value can differ depending on the source and method used to determine value. When fair valuation is used, the value of an investment used to determine the fund’s net asset value may differ from quoted or published prices for the same investment. There can be no assurance that the fund could obtain the fair value assigned to an investment if it were to sell the investment at the same time at which the fund determines its net asset value per share.
Various inputs are used in determining the value of the fund’s assets or liabilities. These inputs are categorized into three broad levels. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an investment’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The fund’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the investment. Level 1 includes unadjusted quoted prices in active markets for identical assets or liabilities. Level 2 includes other significant observable market-based inputs (including quoted prices for similar securities, interest rates, prepayment speed, and credit risk). Level 3 includes unobservable inputs, which may include the adviser’s own assumptions in determining the fair value of investments. The following is a summary of the levels used as of December 31, 2016 in valuing the fund’s assets or liabilities:
Investments at Value | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Equity Securities | $605,471,285 | $— | $— | $605,471,285 | ||||||||||||
Mutual Funds | 2,866,758 | — | — | 2,866,758 | ||||||||||||
Total Investments | $608,338,043 | $— | $— | $608,338,043 | ||||||||||||
Short Sales | $(1,441,770 | ) | $— | $— | $(1,441,770 | ) |
For further information regarding security characteristics, see the Portfolio of Investments.
Foreign Currency Translation – Purchases and sales of foreign investments, income, and expenses are converted into U.S. dollars based upon currency exchange rates prevailing on the respective dates of such transactions or on the reporting date for foreign denominated receivables and payables. Gains and losses attributable to foreign currency exchange rates on sales of securities are recorded for financial statement purposes as net realized gains and losses on investments. Gains and losses attributable to foreign exchange rate movements on receivables, payables, income and expenses are recorded for financial statement purposes as foreign currency transaction gains and losses. That portion of both realized and unrealized gains and losses on investments that results from fluctuations in foreign currency exchange rates is not separately disclosed.
Short Sales – The fund entered into short sales whereby it sells a security it does not own in anticipation of a decline in the value of that security. The fund will realize a gain if the security price decreases and a loss if the security price increases between the date of the short sale and the date on which the fund replaces the borrowed security. Losses from short sales can exceed the proceeds of the security sold; and they can also exceed the potential loss from an ordinary buy and sell transaction. The amount of any premium, dividends, or interest the fund may be required to pay in connection with a short sale will be recognized as a fund expense. During the year ended December 31, 2016, this expense amounted to $63,242. The fund segregates cash or marketable securities in an amount that, when combined with the amount of proceeds from the short sale deposited with the broker, at least equals the current market value of the security sold short.
Security Loans – Under its Securities Lending Agency Agreement with the fund, State Street Bank and Trust Company (“State Street”), as lending agent, loans the securities of the fund to certain qualified institutions (the “Borrowers”) approved by the fund. Security loans can be terminated at the discretion of either the lending agent or the fund and the related securities must be returned within the earlier of the standard trade settlement period for such securities or within three business days. The loans are collateralized by cash and/or U.S. Treasury and federal agency obligations in an amount typically at least equal to the market value of the securities loaned. On loans collateralized by cash, the cash collateral is invested in a money market fund. The market value of the loaned securities is determined at the close of business of the fund and any additional required collateral is delivered to the fund on the next business day. State Street provides the fund with indemnification against Borrower default. In the event of Borrower default, State Street will, for the benefit of the fund, either purchase securities identical to those loaned or, when such purchase is commercially impracticable, pay the fund the market value of the loaned securities. In return, State Street assumes the fund’s rights to the related collateral. If the collateral value is less than the cost to purchase identical securities, State Street is responsible for the shortfall, but only to the extent that such shortfall is not due to a decline in collateral value resulting from collateral reinvestment for which the fund bears the risk of loss. A portion of the income generated upon investment of the collateral is remitted to the Borrowers, and the remainder is allocated between the fund and the lending agent. On loans collateralized by U.S. Treasury and/or federal agency obligations, a fee is received from the Borrower, and is allocated between the fund and the lending agent. Income
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from securities lending is included in “Interest” income in the Statement of Operations. The dividend and interest income earned on the securities loaned is accounted for in the same manner as other dividend and interest income. At December 31, 2016, there were no securities on loan or collateral outstanding.
Indemnifications – Under the fund’s organizational documents, its officers and Trustees may be indemnified against certain liabilities and expenses arising out of the performance of their duties to the fund. Additionally, in the normal course of business, the fund enters into agreements with service providers that may contain indemnification clauses. The fund’s maximum exposure under these agreements is unknown as this would involve future claims that may be made against the fund that have not yet occurred.
Investment Transactions and Income – Investment transactions are recorded on the trade date. Interest income is recorded on the accrual basis. Dividends received in cash are recorded on the ex-dividend date. Certain dividends from foreign securities will be recorded when the fund is informed of the dividend if such information is obtained subsequent to the ex-dividend date. Dividend and interest payments received in additional securities are recorded on the ex-dividend or ex-interest date in an amount equal to the value of the security on such date.
The fund may receive proceeds from litigation settlements. Any proceeds received from litigation involving portfolio holdings are reflected in the Statement of Operations in realized gain/loss if the security has been disposed of by the fund or in unrealized gain/loss if the security is still held by the fund. Any other proceeds from litigation not related to portfolio holdings are reflected as other income in the Statement of Operations.
Reimbursement of Expenses by Custodian – In December 2015, the fund’s custodian (or former custodian), State Street Bank and Trust Company, announced that it intended to reimburse its asset servicing clients for expense amounts that it billed in error during the period 1998 through 2015. The amount of this one-time reimbursement attributable to the fund is reflected as “Reimbursement of custodian expenses” in the Statement of Operations.
Tax Matters and Distributions – The fund intends to qualify as a regulated investment company, as defined under Subchapter M of the Internal Revenue Code, and to distribute all of its taxable income, including realized capital gains. As a result, no provision for federal income tax is required. The fund’s federal tax returns, when filed, will remain subject to examination by the Internal Revenue Service for a three year period. Management has analyzed the fund’s tax positions taken on federal and state tax returns for all open tax years and does not believe that there are any uncertain tax positions that require recognition of a tax liability. Foreign taxes, if any, have been accrued by the fund in the accompanying financial statements in accordance with the applicable foreign tax law. Foreign income taxes may be withheld by certain countries in which the fund invests. Additionally, capital gains realized by the fund on securities issued in or by certain foreign countries may be subject to capital gains tax imposed by those countries.
Distributions to shareholders are recorded on the ex-dividend date. Income and capital gain distributions are determined in accordance with income tax regulations, which may differ from U.S. generally accepted accounting principles. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences which arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary overdistributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes.
Book/tax differences primarily relate to wash sale loss deferrals.
The tax character of distributions declared to shareholders for the last two fiscal years is as follows:
12/31/16 | 12/31/15 | |||||||
Ordinary income (including any short-term capital gains) | $10,217,166 | $10,616,411 | ||||||
Long-term capital gains | 56,139,586 | 45,067,192 | ||||||
Total distributions | $66,356,752 | $55,683,603 |
The federal tax cost and the tax basis components of distributable earnings were as follows:
As of 12/31/16 | ||||
Cost of investments | $479,853,916 | |||
Gross appreciation | 138,396,554 | |||
Gross depreciation | (9,912,427 | ) | ||
Net unrealized appreciation (depreciation) | $128,484,127 | |||
Undistributed ordinary income | 9,202,663 | |||
Undistributed long-term capital gain | 39,871,671 | |||
Other temporary differences | (29,035 | ) |
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Multiple Classes of Shares of Beneficial Interest – The fund offers multiple classes of shares, which differ in their respective distribution and/or service fees. The fund’s income, realized and unrealized gain (loss), and common expenses are allocated to shareholders based on the daily net assets of each class. Dividends are declared separately for each class. Differences in per share dividend rates are generally due to differences in separate class expenses. The fund’s distributions declared to shareholders as reported in the Statements of Changes in Net Assets are presented by class as follows:
From net investment income | From net realized gain on investments | |||||||||||||||
Year ended 12/31/16 | Year ended 12/31/15 | Year ended 12/31/16 | Year ended 12/31/15 | |||||||||||||
Initial Class | $3,069,680 | $3,188,529 | $39,398,623 | $32,895,928 | ||||||||||||
Service Class | 1,156,161 | 1,123,554 | 22,732,288 | 18,475,592 | ||||||||||||
Total | $4,225,841 | $4,312,083 | $62,130,911 | $51,371,520 |
(3) | Transactions with Affiliates |
Investment Adviser – The fund has an investment advisory agreement with MFS to provide overall investment management and related administrative services and facilities to the fund. The management fee is computed daily and paid monthly at the following annual rates:
First $1 billion of average daily net assets | 0.75% | |||
Average daily net assets in excess of $1 billion | 0.65% |
MFS has agreed in writing to reduce its management fee by a specified amount if certain MFS mutual fund assets exceed thresholds agreed to by MFS and the fund’s Board of Trustees. For the year ended December 31, 2016, this management fee reduction amounted to $43,934, which is included in the reduction of total expenses in the Statement of Operations. The management fee incurred for the year ended December 31, 2016 was equivalent to an annual effective rate of 0.74% of the fund’s average daily net assets.
Effective August 1, 2016, the investment adviser has agreed in writing to pay a portion of the fund’s total annual operating expenses, excluding interest, taxes, extraordinary expenses, brokerage and transaction costs, and investment-related expenses (such as short sale dividend and interest expenses incurred in connection with the fund’s investment activity), such that total annual operating expenses do not exceed 0.79% of average daily net assets for the Initial Class shares and 1.04% of average daily net assets for the Service Class shares. This written agreement will continue until modified by the fund’s Board of Trustees, but such agreement will continue at least until April 30, 2018. For the period from August 1, 2016 through December 31, 2016, this reduction amounted to $508, which is included in the reduction of total expenses in the Statement of Operations.
Distributor – MFS Fund Distributors, Inc. (MFD), a wholly-owned subsidiary of MFS, is the distributor of shares of the fund. The Trustees have adopted a distribution plan for the Service Class shares pursuant to Rule 12b-1 under the Investment Company Act of 1940.
The fund’s distribution plan provides that the fund will pay MFD distribution and/or service fees equal to 0.25% per annum of its average daily net assets attributable to Service Class shares as partial consideration for services performed and expenses incurred by MFD and financial intermediaries (including participating insurance companies that invest in the fund to fund variable annuity and variable life insurance contracts, sponsors of qualified retirement and pension plans that invest in the fund, and affiliates of these participating insurance companies and plan sponsors) in connection with the sale and distribution of the Service Class shares. MFD may subsequently pay all, or a portion, of the distribution and/or service fees to financial intermediaries.
Shareholder Servicing Agent – MFS Service Center, Inc. (MFSC), a wholly-owned subsidiary of MFS, receives a fee from the fund for its services as shareholder servicing agent. For the year ended December 31, 2016, the fee was $37,141, which equated to 0.0060% annually of the fund’s average daily net assets. MFSC also receives payment from the fund for out-of-pocket expenses paid by MFSC on behalf of the fund. For the year ended December 31, 2016, these costs amounted to $3,409.
Administrator – MFS provides certain financial, legal, shareholder communications, compliance, and other administrative services to the fund. Under an administrative services agreement, the fund reimburses MFS the costs incurred to provide these services. The fund is charged an annual fixed amount of $17,500 plus a fee based on average daily net assets. The administrative services fee incurred for the year ended December 31, 2016 was equivalent to an annual effective rate of 0.0171% of the fund’s average daily net assets.
Trustees’ and Officers’ Compensation – The fund pays compensation to independent Trustees in the form of a retainer, attendance fees, and additional compensation to Board and Committee chairpersons. The fund does not pay compensation directly to Trustees or officers of the fund who are also officers of the investment adviser, all of whom receive remuneration for their services to the fund from MFS. Certain officers and Trustees of the fund are officers or directors of MFS, MFD, and MFSC.
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Other – This fund and certain other funds managed by MFS (the funds) have entered into a service agreement (the ISO Agreement) which provides for payment of fees solely by the funds to Tarantino LLC in return for the provision of services of an Independent Senior Officer (ISO) for the funds. Frank L. Tarantino serves as the ISO and is an officer of the funds and the sole member of Tarantino LLC. The funds can terminate the ISO Agreement with Tarantino LLC at any time under the terms of the ISO Agreement. For the year ended December 31, 2016, the fee paid by the fund under this agreement was $1,224 and is included in “Miscellaneous” expense in the Statement of Operations. MFS has agreed to bear all expenses associated with office space, other administrative support, and supplies provided to the ISO.
The fund invests in the MFS Institutional Money Market Portfolio which is managed by MFS and seeks current income consistent with preservation of capital and liquidity. This money market fund does not pay a management fee to MFS.
The fund is permitted to engage in purchase and sale transactions (“cross-trades”) with funds and accounts for which MFS serves as investment adviser or sub-adviser pursuant to a policy adopted by the Board of Trustees. This policy has been designed to ensure that cross-trades conducted by the fund comply with Rule 17a-7 under the Investment Company Act of 1940. Under this policy, cross-trades are effected at current market prices with no remuneration paid in connection with the transaction. During the year ended December 31, 2016, the fund engaged in purchase and sale transactions pursuant to this policy, which amounted to $1,423,325 and $230,608, respectively. The sales transactions resulted in net realized gains (losses) of $(3,305).
(4) | Portfolio Securities |
For the year ended December 31, 2016, purchases and sales of investments, other than short sales and short-term obligations, aggregated $279,194,256 and $350,451,066, respectively.
(5) | Shares of Beneficial Interest |
The fund’s Declaration of Trust permits the Trustees to issue an unlimited number of full and fractional shares of beneficial interest. Transactions in fund shares were as follows:
Year ended 12/31/16 | Year ended 12/31/15 | |||||||||||||||
Shares | Amount | Shares | Amount | |||||||||||||
Shares sold | ||||||||||||||||
Initial Class | 317,881 | $8,429,363 | 440,653 | $12,346,887 | ||||||||||||
Service Class | 785,388 | 20,743,069 | 437,031 | 12,245,344 | ||||||||||||
1,103,269 | $29,172,432 | 877,684 | $24,592,231 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | ||||||||||||||||
Initial Class | 1,631,514 | $42,468,303 | 1,461,501 | $36,084,457 | ||||||||||||
Service Class | 926,627 | 23,888,449 | 800,619 | 19,599,146 | ||||||||||||
2,558,141 | $66,356,752 | 2,262,120 | $55,683,603 | |||||||||||||
Shares reacquired | ||||||||||||||||
Initial Class | (2,468,940 | ) | $(65,822,688 | ) | (2,615,436 | ) | $(75,387,067 | ) | ||||||||
Service Class | (1,728,143 | ) | (45,131,659 | ) | (1,675,253 | ) | (47,272,547 | ) | ||||||||
(4,197,083 | ) | $(110,954,347 | ) | (4,290,689 | ) | $(122,659,614 | ) | |||||||||
Net change | ||||||||||||||||
Initial Class | (519,545 | ) | $(14,925,022 | ) | (713,282 | ) | $(26,955,723 | ) | ||||||||
Service Class | (16,128 | ) | (500,141 | ) | (437,603 | ) | (15,428,057 | ) | ||||||||
(535,673 | ) | $(15,425,163 | ) | (1,150,885 | ) | $(42,383,780 | ) |
The fund is one of several mutual funds in which certain MFS funds may invest. The MFS funds do not invest in the underlying funds for the purpose of exercising management or control. At the end of the period, the MFS Moderate Allocation Portfolio, the MFS Growth Allocation Portfolio, and the MFS Conservative Allocation Portfolio were the owners of record of approximately 23%, 7%, and 6%, respectively, of the value of outstanding voting shares of the fund.
(6) | Line of Credit |
The fund and certain other funds managed by MFS participate in a $1.25 billion unsecured committed line of credit, subject to a $1 billion sublimit, provided by a syndication of banks under a credit agreement. Borrowings may be made for temporary financing needs. Interest is charged to each fund, based on its borrowings, generally at a rate equal to the higher of the Overnight Federal Reserve funds rate or daily one month LIBOR plus an agreed upon spread. A commitment fee, based on the average daily, unused portion of the committed line of credit, is allocated among the participating funds at the end of each calendar quarter. In addition, the fund and other funds managed by MFS have established unsecured uncommitted borrowing arrangements with certain banks for temporary financing needs. Interest is charged to each fund, based on its borrowings, at a rate equal to the Overnight Federal Reserve funds rate plus an agreed upon spread. For the year ended December 31, 2016, the fund’s commitment fee and interest expense were $3,908 and $0, respectively, and are included in “Miscellaneous” expense in the Statement of Operations.
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(7) | Transactions in Underlying Affiliated Funds – Affiliated Issuers |
An affiliated issuer may be considered one in which the fund owns 5% or more of the outstanding voting securities, or a company which is under common control. For the purposes of this report, the fund assumes the following to be an affiliated issuer:
Underlying Affiliated Fund | Beginning Shares/Par Amount | Acquisitions Shares/Par Amount | Dispositions Shares/Par Amount | Ending Shares/Par Amount | ||||||||||||
MFS Institutional Money Market Portfolio | 378,735 | 109,257,841 | (106,769,818 | ) | 2,866,758 | |||||||||||
Underlying Affiliated Fund | Realized Gain (Loss) | Capital Gain Distributions | Dividend Income | Ending Value | ||||||||||||
MFS Institutional Money Market Portfolio | $51 | $— | $14,118 | $2,866,758 |
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Trustees of MFS Variable Insurance Trust and the Shareholders of MFS Research Series:
We have audited the accompanying statement of assets and liabilities, including the portfolio of investments, of MFS Research Series (one of the series of MFS Variable Insurance Trust) (the “Fund”) as of December 31, 2016, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended. These financial statements and financial highlights are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. The Fund is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of December 31, 2016, by correspondence with the custodian and brokers; when replies were not received from brokers, we performed other auditing procedures. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of MFS Research Series as of December 31, 2016, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
February 15, 2017
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TRUSTEES AND OFFICERS – IDENTIFICATION AND BACKGROUND
The Trustees and Officers of the Trust, as of February 1, 2017, are listed below, together with their principal occupations during the past five years. (Their titles may have varied during that period.) The address of each Trustee and Officer is 111 Huntington Avenue, Boston, Massachusetts 02199-7618.
Name, Age | Position(s) with Fund | Trustee/Officer Since (h) | Principal Occupations During the Past Five Years | Other Directorships (j) | ||||
INTERESTED TRUSTEES | ||||||||
Robert J. Manning (k) (age 53) | Trustee | February 2004 | Massachusetts Financial Services Company, Executive Chairman (since January 2017) and Director; Chairman (until January 2017); Chief Executive Officer (until 2015); Co-Chief Executive Officer (2015-2016) | N/A | ||||
Robin A. Stelmach (k) (age 55) | Trustee | January 2014 | Massachusetts Financial Services Company, Vice Chair (since January 2017); Chief Operating Officer and Executive Vice President (until January 2017) | N/A | ||||
INDEPENDENT TRUSTEES | ||||||||
David H. Gunning (age 74) | Trustee and Chair of Trustees | January 2004 | Private investor | Lincoln Electric Holdings, Inc., Director; Development Alternatives, Inc., Director/Non-Executive Chairman | ||||
Steven E. Buller (age 65) | Trustee | February 2014 | Chairman, Financial Accounting Standards Advisory Council (until 2015); Standing Advisory Group, Public Company Accounting Oversight Board, Member (until 2014); BlackRock, Inc. (investment management), Managing Director (until 2014), BlackRock Finco UK (investment management), Director (until 2014) | N/A | ||||
Maureen R. Goldfarb (age 61) | Trustee | January 2009 | Private investor | N/A | ||||
Michael Hegarty (age 72) | Trustee | December 2004 | Private investor | Rouse Properties Inc., Director; Capmark Financial Group Inc., Director (until 2015) | ||||
John P. Kavanaugh (age 62) | Trustee and Vice Chair of Trustees | January 2009 | Private investor | N/A | ||||
Maryanne L. Roepke (age 60) | Trustee | May 2014 | American Century Investments (investment management), Senior Vice President and Chief Compliance Officer (until 2014) | N/A | ||||
Laurie J. Thomsen (age 59) | Trustee | March 2005 | Private investor | The Travelers Companies, Director; Dycom Industries, Inc., Director | ||||
OFFICERS | ||||||||
Christopher R. Bohane (k) (age 43) | Assistant Secretary and Assistant Clerk | July 2005 | Massachusetts Financial Services Company, Vice President and Assistant General Counsel | N/A | ||||
Kino Clark (k) (age 48) | Assistant Treasurer | January 2012 | Massachusetts Financial Services Company, Vice President | N/A | ||||
Thomas H. Connors (k) (age 57) | Assistant Secretary and Assistant Clerk | September 2012 | Massachusetts Financial Services Company, Vice President and Senior Counsel; Deutsche Investment Management Americas Inc. (financial service provider), Director and Senior Counsel (until 2012) | N/A | ||||
Ethan D. Corey (k) (age 53) | Assistant Secretary and Assistant Clerk | July 2005 | Massachusetts Financial Services Company, Senior Vice President and Associate General Counsel | N/A | ||||
David L. DiLorenzo (k) (age 48) | President | July 2005 | Massachusetts Financial Services Company, Senior Vice President | N/A | ||||
Brian E. Langenfeld (k) (age 43) | Assistant Secretary and Assistant Clerk | June 2006 | Massachusetts Financial Services Company, Vice President and Senior Counsel | N/A |
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Trustees and Officers – continued
Name, Age | Position(s) with Fund | Trustee/Officer Since (h) | Principal Occupations During the Past Five Years | Other Directorships (j) | ||||
Susan A. Pereira (k) (age 46) | Assistant Secretary and Assistant Clerk | July 2005 | Massachusetts Financial Services Company, Vice President and Senior Counsel | N/A | ||||
Kasey L. Phillips (k) (age 46) | Assistant Treasurer | September 2012 | Massachusetts Financial Services Company, Vice President; Wells Fargo Funds Management, LLC, Senior Vice President, Fund Treasurer (until 2012) | N/A | ||||
Mark N. Polebaum (k) (age 64) | Secretary and Clerk | January 2006 | Massachusetts Financial Services Company, Executive Vice President, General Counsel and Secretary | N/A | ||||
Matthew A. Stowe (k) (age 42) | Assistant Secretary and Assistant Clerk | October 2014 | Massachusetts Financial Services Company, Vice President and Assistant General Counsel | N/A | ||||
Frank L. Tarantino (age 72) | Independent Senior Officer | June 2004 | Tarantino LLC (provider of compliance services), Principal | N/A | ||||
Richard S. Weitzel (k) (age 46) | Assistant Secretary and Assistant Clerk | October 2007 | Massachusetts Financial Services Company, Senior Vice President and Associate General Counsel | N/A | ||||
Martin J. Wolin (k) (age 49) | Chief Compliance Officer | July 2015 | Massachusetts Financial Services Company, Senior Vice President and Chief Compliance Officer (since July 2015); Mercer (financial service provider), Chief Risk and Compliance Officer, North America and Latin America (until June 2015) | N/A | ||||
James O. Yost (k) (age 56) | Treasurer | September 1990 | Massachusetts Financial Services Company, Senior Vice President | N/A |
(h) | Date first appointed to serve as Trustee/officer of an MFS Fund. Each Trustee has served continuously since appointment unless indicated otherwise. For the period from December 15, 2004 until February 22, 2005, Mr. Manning served as Advisory Trustee. Prior to January 2012, Messrs. DiLorenzo and Yost served as Assistant Treasurers of the Funds. From January 2012 through December 2016, Messrs. DiLorenzo and Yost served as Treasurer and Deputy Treasurer of the Funds, respectively. |
(j) | Directorships or trusteeships of companies required to report to the Securities and Exchange Commission (i.e., “public companies”). |
(k) | “Interested person” of the Trust within the meaning of the Investment Company Act of 1940 (referred to as the 1940 Act), which is the principal federal law governing investment companies like the fund, as a result of a position with MFS. The address of MFS is 111 Huntington Avenue, Boston, Massachusetts 02199-7618. |
Each Trustee (except Ms. Stelmach, Mr. Buller and Ms. Roepke) has been elected by shareholders and each Trustee and officer holds office until his or her successor is chosen and qualified or until his or her earlier death, resignation, retirement or removal. The Trust does not hold annual meetings for the purpose of electing Trustees, and Trustees are not elected for fixed terms. Messrs. Buller and Kavanaugh and Ms. Roepke are members of the Trust’s Audit Committee.
Each of the Fund’s Trustees and officers holds comparable positions with certain other funds of which MFS or a subsidiary is the investment adviser or distributor, and, in the case of the officers, with certain affiliates of MFS. As of February 1, 2017, the Trustees served as board members of 137 funds within the MFS Family of Funds.
The Statement of Additional Information for a Fund includes further information about the Trustees and is available without charge upon request by calling 1-800-225-2606.
Investment Adviser Massachusetts Financial Services Company 111 Huntington Avenue Boston, MA 02199-7618 | Custodian State Street Bank and Trust Company 1 Lincoln Street Boston, MA 02111-2900 | |
Distributor MFS Fund Distributors, Inc. 111 Huntington Avenue Boston, MA 02199-7618 | Independent Registered Public Accounting Firm Deloitte & Touche LLP 200 Berkeley Street Boston, MA 02116 | |
Portfolio Manager Joseph MacDougall |
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BOARD REVIEW OF INVESTMENT ADVISORY AGREEMENT
The Investment Company Act of 1940 requires that both the full Board of Trustees and a majority of the non-interested (“independent”) Trustees, voting separately, annually approve the continuation of the Fund’s investment advisory agreement with MFS. The Trustees consider matters bearing on the Fund and its advisory arrangements at their meetings throughout the year, including a review of performance data at each regular meeting. In addition, the independent Trustees met several times over the course of three months beginning in May and ending in July, 2016 (“contract review meetings”) for the specific purpose of considering whether to approve the continuation of the investment advisory agreement for the Fund and the other investment companies that the Board oversees (the “MFS Funds”). The independent Trustees were assisted in their evaluation of the Fund’s investment advisory agreement by independent legal counsel, from whom they received separate legal advice and with whom they met separately from MFS during various contract review meetings. The independent Trustees were also assisted in this process by the MFS Funds’ Independent Senior Officer, senior officer appointed by and reporting to the independent Trustees.
In connection with their deliberations regarding the continuation of the investment advisory agreement, the Trustees, including the independent Trustees, considered such information and factors as they believed, in light of the legal advice furnished to them and their own business judgment, to be relevant. The investment advisory agreement for the Fund was considered separately, although the Trustees also took into account the common interests of all MFS Funds in their review. As described below, the Trustees considered the nature, quality, and extent of the various investment advisory, administrative, and shareholder services performed by MFS under the existing investment advisory agreement and other arrangements with the Fund.
In connection with their contract review meetings, the Trustees received and relied upon materials that included, among other items: (i) information provided by Broadridge Financial Solutions, Inc. (“Broadridge”), an independent third party, on the investment performance of the Fund for various time periods ended December 31, 2015 and the investment performance of a group of funds with substantially similar investment classifications/objectives (the “Lipper performance universe”), (ii) information provided by Broadridge on the Fund’s advisory fees and other expenses and the advisory fees and other expenses of comparable funds identified by Broadridge (the “Broadridge expense group”), (iii) information provided by MFS on the advisory fees of portfolios of other clients of MFS, including institutional separate accounts and other clients, (iv) information as to whether and to what extent applicable expense waivers, reimbursements or fee “breakpoints” are observed for the Fund, (v) information regarding MFS’ financial results and financial condition, including MFS’ and certain of its affiliates’ estimated profitability from services performed for the Fund and the MFS Funds as a whole, and compared to MFS’ institutional business, (vi) MFS’ views regarding the outlook for the mutual fund industry and the strategic business plans of MFS, (vii) descriptions of various functions performed by MFS for the Funds, such as compliance monitoring and portfolio trading practices, and (viii) information regarding the overall organization of MFS, including information about MFS’ senior management and other personnel providing investment advisory, administrative and other services to the Fund and the other MFS Funds. The comparative performance, fee and expense information prepared and provided by Broadridge was not independently verified and the independent Trustees did not independently verify any information provided to them by MFS.
The Trustees’ conclusion as to the continuation of the investment advisory agreement was based on a comprehensive consideration of all information provided to the Trustees and not the result of any single factor. Some of the factors that figured particularly in the Trustees’ deliberations are described below, although individual Trustees may have evaluated the information presented differently from one another, giving different weights to various factors. It is also important to recognize that the fee arrangements for the Fund and other MFS Funds are the result of years of review and discussion between the independent Trustees and MFS, that certain aspects of such arrangements may receive greater scrutiny in some years than in others, and that the Trustees’ conclusions may be based, in part, on their consideration of these same arrangements during the course of the year and in prior years.
Based on information provided by Broadridge and MFS, the Trustees reviewed the Fund’s total return investment performance as well as the performance of peer groups of funds over various time periods. The Trustees placed particular emphasis on the total return performance of the Fund’s Initial Class shares in comparison to the performance of funds in its Lipper performance universe over the three-year period ended December 31, 2015, which the Trustees believed was a long enough period to reflect differing market conditions. The total return performance of the Fund’s Initial Class shares was in the 4th quintile relative to the other funds in the universe for this three-year period (the 1st quintile being the best performers and the 5th quintile being the worst performers). The total return performance of the Fund’s Initial Class shares was in the 2nd quintile for the one-year period and the 3rd quintile for the five-year period ended December 31, 2015 relative to the Lipper performance universe. Because of the passage of time, these performance results may differ from the performance results for more recent periods, including those shown elsewhere in this report.
In the course of their deliberations, the Trustees took into account information provided by MFS in connection with the contract review meetings, as well as during investment review meetings conducted with portfolio management personnel during the course of the year regarding the Fund’s performance. After reviewing these and related factors, the Trustees concluded, within the context of their overall conclusions regarding the investment advisory agreement, that they were satisfied with MFS’ responses and efforts relating to investment performance.
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Board Review of Investment Advisory Agreement – continued
In assessing the reasonableness of the Fund’s advisory fee, the Trustees considered, among other information, the Fund’s advisory fee and the total expense ratio of the Fund’s Initial Class shares as a percentage of average daily net assets and the advisory fee and total expense ratios of peer groups of funds based on information provided by Broadridge. The Trustees considered that, according to the data provided by Broadridge (which takes into account any fee reductions or expense limitations that were in effect during the Fund’s last fiscal year), the Fund’s effective advisory fee rate and total expense ratio were each higher than the Broadridge expense group median. The Trustees also noted that MFS has agreed to implement an expense limitation for the Fund, which may not be changed without the Trustees’ approval.
The Trustees also considered the advisory fees charged by MFS to any institutional separate accounts advised by MFS (“separate accounts”) and unaffiliated investment companies for which MFS serves as subadviser (“subadvised funds”) that have comparable investment strategies to the Fund. In comparing these fees, the Trustees considered information provided by MFS as to the generally broader scope of services provided by MFS to the Fund, as well as the more extensive regulatory burdens imposed on MFS in managing the Fund, in comparison to separate accounts and subadvised funds. The Trustees also considered the higher demands placed on MFS’ investment personnel and trading infrastructure as a result of the daily cash in-flows and out-flows of the Fund in comparison to separate accounts.
The Trustees also considered whether the Fund may benefit from any economies of scale in the management of the Fund in the event of growth in assets of the Fund and/or growth in assets of the MFS Funds as a whole. They noted that the Fund’s advisory fee rate schedule is subject to a contractual breakpoint that reduces the Fund’s advisory fee rate on average daily net assets over $1 billion. The Trustees also noted that MFS has agreed in writing to waive a portion of the management fees of certain MFS Funds, including the Fund, if the total combined assets of certain funds within the MFS Funds’ complex increase above agreed upon thresholds (the “group fee waiver”), enabling the Fund’s shareholders to share in the benefits from any economies of scale at the complex level. The group fee waiver is reviewed and renewed annually between the Board and MFS. The Trustees concluded that the breakpoint and the group fee waiver were sufficient to allow the Fund to benefit from economies of scale as its assets and overall complex assets grow.
The Trustees also considered information prepared by MFS relating to MFS’ costs and profits with respect to the Fund, the MFS Funds considered as a group, and other investment companies and accounts advised by MFS, as well as MFS’ methodologies used to determine and allocate its costs to the MFS Funds, the Fund and other accounts and products for purposes of estimating profitability.
After reviewing these and other factors described herein, the Trustees concluded, within the context of their overall conclusions regarding the investment advisory agreement, that the advisory fees charged to the Fund represent reasonable compensation in light of the services being provided by MFS to the Fund.
In addition, the Trustees considered MFS’ resources and related efforts to continue to retain, attract and motivate capable personnel to serve the Fund. The Trustees also considered current and developing conditions in the financial services industry, including the presence of large and well-capitalized companies which are spending, and appear to be prepared to continue to spend, substantial sums to engage personnel and to provide services to competing investment companies. In this regard, the Trustees also considered the financial resources of MFS and its ultimate parent, Sun Life Financial Inc. The Trustees also considered the advantages and possible disadvantages to the Fund of having an adviser that also serves other investment companies as well as other accounts.
The Trustees also considered the nature, quality, cost, and extent of administrative, transfer agency, and distribution services provided to the Fund by MFS and its affiliates under agreements and plans other than the investment advisory agreement, including any 12b-1 fees the Fund pays to MFS Fund Distributors, Inc., an affiliate of MFS. The Trustees also considered the nature, extent and quality of certain other services MFS performs or arranges for on the Fund’s behalf, which may include securities lending programs, directed expense payment programs, class action recovery programs, and MFS’ interaction with third-party service providers, principally custodians and sub-custodians. The Trustees concluded that the various non-advisory services provided by MFS and its affiliates on behalf of the Fund were satisfactory.
The Trustees also considered benefits to MFS from the use of the Fund’s portfolio brokerage commissions, if applicable, to pay for investment research and various other factors. Additionally, the Trustees considered so-called “fall-out benefits” to MFS such as reputational value derived from serving as investment manager to the Fund.
Based on their evaluation of factors that they deemed to be material, including those factors described above, the Board of Trustees, including the independent Trustees, concluded that the Fund’s investment advisory agreement with MFS should be continued for an additional one-year period, commencing August 1, 2016.
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MFS Research Series
PROXY VOTING POLICIES AND INFORMATION
MFS votes proxies on behalf of the fund pursuant to proxy voting policies and procedures that are available without charge, upon request, by calling 1-800-225-2606, by visiting mfs.com (once you have selected “Individual Investor” as your role, click on “Individual Investor Home” in the top navigation and then select “Learn More About Proxy Voting” under the “I want to…” header on the left hand column of the page), or by visiting the SEC’s Web site at http://www.sec.gov.
Information regarding how the fund voted proxies relating to portfolio securities during the most recent twelve-month period ended June 30 is available by August 31 of each year without charge by visiting mfs.com (once you have selected “Individual Investor” as your role, click on “Individual Investor Home” in the top navigation and then select “Learn More About Proxy Voting” under the “I want to…” header on the left hand column of the page), or by visiting the SEC’s Web site at http://www.sec.gov.
QUARTERLY PORTFOLIO DISCLOSURE
The fund will file a complete schedule of portfolio holdings with the Securities and Exchange Commission (the Commission) for the first and third quarters of each fiscal year on Form N-Q. The fund’s Form N-Q is available on the EDGAR database on the Commission’s Internet Web site at http://www.sec.gov, and may be reviewed and copied at the:
Public Reference Room
Securities and Exchange Commission
100 F Street, NE, Room 1580
Washington, D.C. 20549
Information on the operation of the Public Reference Room may be obtained by calling the Commission at 1-800-SEC-0330. Copies of the fund’s Form N-Q also may be obtained, upon payment of a duplicating fee, by electronic request at the following e-mail address: publicinfo@sec.gov or by writing the Public Reference Section at the above address.
From time to time, MFS may post important information about the fund or the MFS funds on the MFS web site (mfs.com). This information is available on mfs.com by following these steps once you have selected “Individual Investor” as your role: (1) Click on the “Individual Investor Home” in the top navigation and then select the “Announcements” option within the “Market Outlooks” drop down, or (2) Click on “Products & Services” and “Variable Insurance Portfolios” and then select the fund’s name.
INFORMATION ABOUT FUND CONTRACTS AND LEGAL CLAIMS
The fund has entered into contractual arrangements with an investment adviser, administrator, distributor, shareholder servicing agent, 529 program manager (if applicable), and custodian who each provide services to the fund. Unless expressly stated otherwise, shareholders are not parties to, or intended beneficiaries of these contractual arrangements, and these contractual arrangements are not intended to create any shareholder right to enforce them against the service providers or to seek any remedy under them against the service providers, either directly or on behalf of the fund.
Under the Trust’s By-Laws and Declaration of Trust, any claims asserted against or on behalf of the MFS Funds, including claims against Trustees and Officers, must be brought in state and federal courts located within the Commonwealth of Massachusetts.
FEDERAL TAX INFORMATION (unaudited)
The following information is provided pursuant to provisions of the Internal Revenue Code.
The fund designates $61,754,000 as capital gain dividends paid during the fiscal year.
For corporate shareholders, 94.56% of the ordinary income dividends paid during the fiscal year qualify for the corporate dividends received deduction.
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rev. 3/16
FACTS | WHAT DOES MFS DO WITH YOUR PERSONAL INFORMATION? |
Why? | Financial companies choose how they share your personal information. Federal law gives consumers the right to limit some but not all sharing. Federal law also requires us to tell you how we collect, share, and protect your personal information. Please read this notice carefully to understand what we do. |
What? | The types of personal information we collect and share depend on the product or service you have with us. This information can include:
• Social Security number and account balances • Account transactions and transaction history • Checking account information and wire transfer instructions
When you are no longer our customer, we continue to share your information as described in this notice. |
How? | All financial companies need to share customers’ personal information to run their everyday business. In the section below, we list the reasons financial companies can share their customers’ personal information; the reasons MFS chooses to share; and whether you can limit this sharing. |
Reasons we can share your personal information | Does MFS share? | Can you limit this sharing? | ||
For our everyday business purposes – such as to process your transactions, maintain your account(s), respond to court orders and legal investigations, or report to credit bureaus | Yes | No | ||
For our marketing purposes – to offer our products and services to you | No | We don’t share | ||
For joint marketing with other financial companies | No | We don’t share | ||
For our affiliates’ everyday business purposes – information about your transactions and experiences | No | We don’t share | ||
For our affiliates’ everyday business purposes – information about your creditworthiness | No | We don’t share | ||
For nonaffiliates to market to you | No | We don’t share |
Questions? | Call 800-225-2606 or go to mfs.com. |
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Page 2 |
Who we are | ||
Who is providing this notice? | MFS Funds, MFS Investment Management, MFS Institutional Advisors, Inc., and MFS Heritage Trust Company. |
What we do | ||
How does MFS protect my personal information? | To protect your personal information from unauthorized access and use, we use security measures that comply with federal law. These measures include procedural, electronic, and physical safeguards for the protection of the personal information we collect about you. | |
How does MFS collect my personal information? | We collect your personal information, for example, when you
• open an account or provide account information • direct us to buy securities or direct us to sell your securities • make a wire transfer
We also collect your personal information from others, such as credit bureaus, affiliates, or other companies. | |
Why can’t I limit all sharing? | Federal law gives you the right to limit only
• sharing for affiliates’ everyday business purposes – information about your creditworthiness • affiliates from using your information to market to you • sharing for nonaffiliates to market to you
State laws and individual companies may give you additional rights to limit sharing. |
Definitions | ||
Affiliates | Companies related by common ownership or control. They can be financial and nonfinancial companies.
• MFS does not share personal information with affiliates, except for everyday business purposes as described on page one of this notice. | |
Nonaffiliates | Companies not related by common ownership or control. They can be financial and nonfinancial companies.
• MFS does not share with nonaffiliates so they can market to you. | |
Joint marketing | A formal agreement between nonaffiliated financial companies that together market financial products or services to you.
• MFS doesn’t jointly market. |
Other important information | ||
If you own an MFS product or receive an MFS service in the name of a third party such as a bank or broker-dealer, their privacy policy may apply to you instead of ours. |
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ANNUAL REPORT
December 31, 2016
MFS® TOTAL RETURN SERIES
MFS® Variable Insurance Trust
VTR-ANN
Table of Contents
MFS® TOTAL RETURN SERIES
The report is prepared for the general information of contract owners. It is authorized for distribution to prospective investors only when preceded or accompanied by a current prospectus.
NOT FDIC INSURED • MAY LOSE VALUE • NO BANK OR CREDIT UNION GUARANTEE • NOT A DEPOSIT • NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY OR NCUA/NCUSIF
Table of Contents
MFS Total Return Series
LETTER FROM THE EXECUTIVE CHAIRMAN
Dear Contract Owners:
Despite June’s unexpected vote by the United Kingdom to leave the European Union and the surprising result in November’s U.S. presidential election, most markets have proved resilient. U.S. share prices quickly reversed post-Brexit declines, and indices reached new highs following the November elections. U.S. bond yields rose after Donald Trump’s victory on hopes that his proposed policy mix of lower taxes, increased spending on infrastructure and a lower regulatory burden on businesses will lift both U.S. economic growth and inflation. However, interest rates in most developed markets remain very low, with major central banks maintaining extremely accommodative monetary policies to reinvigorate slow-growing economies against a backdrop of still-low inflation. Even after the rise in yields following the election, interest rates remain low by historical standards.
Globally, economic growth has shown signs of recovery of late, led by the United States and the eurozone. Despite better growth, there are few immediate signs of worrisome inflation. Emerging market economies are recovering at a somewhat slower pace amid fears that restrictive U.S. trade policies could further hamper the already slow pace of global trade growth.
At MFS®, we believe in a patient, long-term approach to investing. Viewing investments with a long lens makes it possible to filter out short-term market noise and focus on achieving solid risk-adjusted returns over a full market cycle.
In our view, such an approach, along with the professional guidance of a financial advisor, will help you reach your investment objectives.
Respectfully,
Robert J. Manning
Executive Chairman
MFS Investment Management
February 15, 2017
The opinions expressed in this letter are subject to change and may not be relied upon for investment advice. No forecasts can be guaranteed.
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MFS Total Return Series
Portfolio structure (i)
Top ten holdings (i) | ||||
JPMorgan Chase & Co. | 2.4% | |||
U.S. Treasury Notes, 1.625%, 6/30/2019 | 2.0% | |||
U.S. Treasury Bonds, 2.875%, 5/15/2043 | 1.9% | |||
U.S. Treasury Notes, 2.75%, 2/15/2019 | 1.7% | |||
Fannie Mae, 3.5%, 11/01/2041 – 5/01/2046 | 1.6% | |||
Philip Morris International, Inc. | 1.6% | |||
U.S. Treasury Notes, 3.125%, 5/15/2019 | 1.3% | |||
Fannie Mae, 4%, 1/01/2043 – 1/01/2044 | 1.3% | |||
U.S. Treasury Notes, 2.5%, 8/15/2023 | 1.2% | |||
Johnson & Johnson | 1.1% | |||
Composition including fixed income credit quality (a)(i) | ||||
AAA | 2.2% | |||
AA | 1.3% | |||
A | 4.1% | |||
BBB | 6.8% | |||
BB | 0.3% | |||
B (o) | 0.0% | |||
CCC (o) | 0.0% | |||
C | 0.1% | |||
U.S. Government | 12.8% | |||
Federal Agencies | 12.0% | |||
Not Rated (o) | 0.0% | |||
Non-Fixed Income | 58.7% | |||
Cash & Cash Equivalents | 1.7% |
Equity sectors | ||||
Financial Services | 15.1% | |||
Health Care | 7.7% | |||
Consumer Staples | 6.1% | |||
Industrial Goods & Services | 5.0% | |||
Technology | 4.8% | |||
Energy | 3.6% | |||
Utilities & Communications | 3.6% | |||
Leisure | 3.5% | |||
Basic Materials | 2.6% | |||
Retailing | 2.4% | |||
Autos & Housing | 1.6% | |||
Special Products & Services | 1.5% | |||
Transportation | 1.2% | |||
Fixed income sectors (i) | ||||
U.S. Treasury Securities | 12.8% | |||
Mortgage-Backed Securities | 11.8% | |||
Investment Grade Corporates | 10.9% | |||
Commercial Mortgage-Backed Securities | 1.4% | |||
Emerging Markets Bonds | 0.7% | |||
Non-U.S. Government Bonds | 0.5% | |||
Collateralized Debt Obligations | 0.4% | |||
Asset-Backed Securities | 0.4% | |||
High Yield Corporates | 0.3% | |||
Municipal Bonds | 0.2% | |||
U.S. Government Agencies | 0.2% | |||
Residential Mortgage-Backed Securities (o) | 0.0% |
(a) | For all securities other than those specifically described below, ratings are assigned to underlying securities utilizing ratings from Moody’s, Fitch, and Standard & Poor’s rating agencies and applying the following hierarchy: If all three agencies provide a rating, the middle rating (after dropping the highest and lowest ratings) is assigned; if two of the three agencies rate a security, the lower of the two is assigned. Ratings are shown in the S&P and Fitch scale (e.g., AAA). Securities rated BBB or higher are considered investment grade. All ratings are subject to change. U.S. Government includes securities issued by the U.S. Department of the Treasury. Federal Agencies includes rated and unrated U.S. Agency fixed-income securities, U.S. Agency mortgage-backed securities, and collateralized mortgage obligations of U.S. Agency mortgage-backed securities. Not Rated includes fixed income securities, including fixed income futures contracts, which have not been rated by any rating agency. Non-Fixed Income includes any equity securities (including convertible bonds and equity derivatives) and/or commodity-linked derivatives. The fund may or may not have held all of these instruments on this date. The fund is not rated by these agencies. |
(i) | For purposes of this presentation, the components include the value of securities, and reflect the impact of the equivalent exposure of derivative positions, if any. These amounts may be negative from time to time. Equivalent exposure is a calculated amount that translates the derivative position into a reasonable approximation of the amount of the underlying asset that the portfolio would have to hold at a given point in time to have the same price sensitivity that results from the portfolio’s ownership of the derivative contract. When dealing with derivatives, equivalent exposure is a more representative measure of the potential impact of a position on portfolio performance than value. The bond component will include any accrued interest amounts. |
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MFS Total Return Series
Portfolio Composition – continued
(o) | Less than 0.1%. |
Where the fund holds convertible bonds, these are treated as part of the equity portion of the portfolio.
Cash & Cash Equivalents includes any cash, investments in money market funds, short-term securities, and other assets less liabilities. Please see the Statement of Assets and Liabilities for additional information related to the fund’s cash position and other assets and liabilities.
Percentages are based on net assets as of 12/31/16.
The portfolio is actively managed and current holdings may be different.
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MFS Total Return Series
Summary of Results
For the twelve months ended December 31, 2016, Initial Class shares of the MFS Total Return Series (“fund”) provided a total return of 9.09%, while Service Class shares of the fund provided a total return of 8.81%. These compare with returns of 11.96% and 2.65% over the same period for the fund’s benchmarks, the Standard & Poor’s 500 Stock Index (“S&P 500 Index”) and the Bloomberg Barclays U.S. Aggregate Bond Index (formerly “Barclays U.S. Aggregate Bond Index”), respectively. The fund’s other benchmark, the MFS Total Return Blended Index (“Blended Index”), generated a return of 8.31%. The Blended Index reflects the blended returns of the equity and fixed income market indices, with percentage allocations to each index designed to resemble the equity and fixed income allocations of the fund. The market indices and related percentage allocations used to compile the Blended Index are set forth in the Performance Summary.
Market Environment
Sluggish global growth weighed on both developed and emerging market (“EM”) economies during much of the reporting period, though signs of improved growth became evident in late 2016. The US Federal Reserve increased interest rates by 25 basis points at the end of the period, the second hike of the cycle which began in December 2015. Globally, however, central bank policy remained highly accommodative, which forced many government, and even some corporate, bond yields into negative territory during the period. During the first half of the period, the United Kingdom voted to leave the European Union (“EU”), beginning a multi-year process of negotiation in order to achieve “Brexit.” While markets initially reacted to the vote with alarm, the spillover to European and EM economies was relatively short-lived, although risks of further hits to EU cohesiveness could re-emerge. Late in the period, the surprising US presidential election outcome prompted a significant rally in equities and a rise in bond yields in anticipation of a reflationary policy mix from the incoming Trump administration.
Headwinds from lower energy and commodity prices, which had spread beyond the energy, materials and industrial sectors early in the reporting period, abated later in the period as stabilizing oil prices helped push energy earnings higher relative to expectations. A sharp rise in the US dollar was a headwind for multinationals late in the period. The sharp rise in the US dollar also weighed on earnings. US consumer spending held up well during the second half of the period amid a modest increase in real wages and relatively low gasoline prices. Demand for autos reached near-record territory, while the housing market continued its recovery. Slow global trade continued to mirror slow global growth, particularly for many EM countries. That said, EM countries began to show signs of a modest upturn in activity along with adjustment in their external accounts. These improved conditions appeared to have reassured investors and contributed to record inflows into the asset class during July and August as negative yields for an increasing share of developed market bonds drove yield-hungry investors further out on the risk spectrum. Similar investor inflows were experienced in the investment grade and high yield corporate markets. Late in the reporting period, however, new challenges emerged for emerging markets debt (“EMD”) as a result of the US presidential election, which raised concerns about the potential for a protectionist turn in US trade policy which could negatively impact EM economies. These concerns, along with rising expectations for US growth, inflation and interest rates, have turned the tables on flows into EMD. Since the election, flows have reversed. As of the end of the period, the markets seemed to be in “wait-and-see” mode, looking for evidence to either confirm or refute the repricing of risk that has occurred since Election Day.
Detractors from Performance
Within the equity portion of the fund, the combination of weak stock selection and an overweight position in the autos & housing sector was a primary detractor from performance relative to the S&P 500 Index. The fund’s position in shares of motor vehicle manufacturer Kia Motors (b) (South Korea) hindered relative results. Shares of Kia Motors declined as the company reported operating profits that fell short of expectations due to disappointing sales in the domestic market, ongoing labor strikes and foreign exchange headwinds.
Elsewhere, the fund’s overweight holdings of drugstore retailer CVS, diversified financial services firm Wells-Fargo, pharmaceutical company Eli Lilly, chemical company PPG Industries and pharmaceutical and medical products maker Abbott Laboratories hampered relative performance. Shares of CVS traded lower during the period as investors appeared to have reacted negatively to news that the company was lowering full year 2016 and 2017 estimates. CVS indicated that the retail portion of its business faced more significant headwinds than expected from network losses heading into 2017, pressuring its results moving forward. Not holding shares of computer graphics processors maker NVIDIA, health insurance provider UnitedHealth Group and insurance and investment firm Berkshire Hathaway further hurt relative results. Shares of NVIDIA outperformed as strong demand for the company’s graphical processing units used in the gaming and deep learning data center segments helped drive record results. The fund’s underweight position in strong-performing telecommunications company AT&T further weakened relative performance.
During the reporting period, the fund’s relative currency exposure in the equity portion of the fund, resulting primarily from differences between the fund’s and the benchmark’s exposures to holdings of securities denominated in foreign currencies, detracted from relative performance. All of MFS’ investment decisions are driven by the fundamentals of each individual opportunity and, as such, it is common for our portfolios to have different currency exposure than the benchmark.
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MFS Total Return Series
Management Review – continued
Within the fixed income portion of the fund, yield curve (y) positioning, particularly the fund’s greater exposure to shifts in the middle portion (centered around maturities of 5-10 years) of the yield curve, detracted from performance relative to the Bloomberg Barclays U.S. Aggregate Bond Index. Security selection within “BBB” rated (r) issues was another negative factor for relative returns.
Contributors to Performance
Within the equity portion of the fund, strong stock selection and an overweight position in the financial services sector were positive factors for performance relative to the S&P 500 Index. Most notably, the fund’s overweight positions in financial services firms JPMorgan Chase, Goldman Sachs Group and insurance company Prudential Financial aided relative returns. Shares of all three companies outpaced the benchmark during the reporting period as the financial services sector as a whole benefited from the US presidential election of Donald Trump and prospects for a less stringent regulatory environment and higher interest rates. The timing of the fund’s ownership in shares of Bank of America, which outperformed the benchmark, was another positive factor for relative performance.
Stock selection in the leisure sector boosted relative performance led by the fund’s overweight positions in media firm Time Warner and strong-performing cable services provider Charter Communications, which was not a constituent of the S&P 500 Index until late in the reporting period. Shares of Time Warner benefited from news of a proposed acquisition by telecommunication services provider AT&T. The stock price was further aided after management reported earnings that were above consensus estimates, driven by strong results in the Turner cable networks and a favorable tax adjustment.
In other sectors, underweight positions in technology holdings company Alphabet and biotech firm Gilead Sciences contributed to relative performance as both stocks underperformed the benchmark during the reporting period. Avoiding poor-performing athletic shoes and apparel manufacturer NIKE and biotechnology firm Amgen further strengthened relative returns.
Within the fixed income portion of the fund, a lesser exposure to the treasury sector, and a greater exposure to the industrials, financial institutions, asset-backed securities (ABS), utilities and commercial mortgage-backed securities (CMBS) sectors, were primary contributors to performance relative to the Bloomberg Barclays U.S. Aggregate Bond Index. Positive security selection within the mortgage-backed securities (MBS) agency fixed rate sector was another area of relative strength.
Respectfully,
Nevin Chitkara | William Douglas | Steven Gorham | Richard Hawkins | |||
Portfolio Manager | Portfolio Manager | Portfolio Manager | Portfolio Manager | |||
Joshua Marston | Jonathan Sage | Brooks Taylor | ||||
Portfolio Manager | Portfolio Manager | Portfolio Manager |
(b) | Security is not a benchmark constituent. |
(r) | Bonds rated “BBB”, “Baa”, or higher are considered investment grade; bonds rated “BB”, “Ba”, or below are considered non-investment grade. The source for bond quality ratings is Moody’s Investors Service, Standard & Poor’s and Fitch, Inc. and are applied using the following hierarchy: If all three agencies provide a rating, the middle rating (after dropping the highest and lowest ratings) is assigned; if two of the three agencies rate a security, the lower of the two is assigned. Ratings are shown in the S&P and Fitch scale (e.g., AAA). For securities which are not rated by any of the three agencies, the security is considered Not Rated. |
(y) | A yield curve graphically depicts the yields of different maturity bonds of the same credit quality and type; a normal yield curve is upward sloping, with short-term rates lower than long-term rates. |
The views expressed in this report are those of the portfolio managers only through the end of the period of the report as stated on the cover and do not necessarily reflect the views of MFS or any other person in the MFS organization. These views are subject to change at any time based on market or other conditions, and MFS disclaims any responsibility to update such views. These views may not be relied upon as investment advice or an indication of trading intent on behalf of any MFS portfolio. References to specific securities are not recommendations of such securities, and may not be representative of any MFS portfolio’s current or future investments.
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MFS Total Return Series
PERFORMANCE SUMMARY THROUGH 12/31/16
The following chart illustrates the historical performance of the fund in comparison to its benchmark(s). Benchmarks are unmanaged and may not be invested in directly. Benchmark returns do not reflect any fees or expenses. The performance of other share classes will be greater than or less than that of the class depicted below. (See Notes to Performance Summary.)
Performance data shown represents past performance and is no guarantee of future results. Investment return and principal value fluctuate so your units, when sold, may be worth more or less than the original cost; current performance may be lower or higher than quoted. The performance shown does not reflect the deduction of taxes, if any, that a contract holder would pay on fund distributions or the redemption of contract units. The returns for the fund shown also do not reflect the deduction of expenses associated with variable products, such as mortality and expense risk charges, separate account charges, and sales charges imposed by the insurance company separate accounts. Such expenses would reduce the overall returns shown.
Growth of a Hypothetical $10,000 Investment
Total Returns through 12/31/16
Average annual total returns
Share Class | Class Inception Date | 1-yr | 5-yr | 10-yr | ||||||||
Initial Class | 1/03/95 | 9.09% | 9.33% | 5.28% | ||||||||
Service Class | 5/01/00 | 8.81% | 9.05% | 5.02% | ||||||||
Comparative benchmarks | ||||||||||||
Standard & Poor’s 500 Stock Index (f) | 11.96% | 14.66% | 6.95% | |||||||||
Bloomberg Barclays U.S. Aggregate Bond Index (f) | 2.65% | 2.23% | 4.34% | |||||||||
MFS Total Return Blended Index (f)(w) | 8.31% | 9.69% | 6.21% |
(f) | Source: FactSet Research Systems Inc. |
(w) | As of December 31, 2016, the MFS Total Return Blended Index was comprised of 60% Standard & Poor’s 500 Stock Index and 40% Bloomberg Barclays U.S. Aggregate Bond Index. |
Benchmark Definitions
Bloomberg Barclays U.S. Aggregate Bond Index (formerly Barclays U.S. Aggregate Bond Index) – a market capitalization-weighted index that measures the performance of the U.S. investment-grade, fixed rate bond market, with index components for government and corporate securities, mortgage pass-through securities, and asset-backed securities with at least one year to final maturity.
Standard & Poor’s 500 Stock Index – a market capitalization-weighted index of 500 widely held equity securities, designed to measure broad U.S. equity performance.
It is not possible to invest directly in an index.
Notes to Performance Summary
Average annual total return represents the average annual change in value for each share class for the periods presented.
Performance results reflect any applicable expense subsidies and waivers in effect during the periods shown. Without such subsidies and waivers the fund’s performance results would be less favorable. Please see the prospectus and financial statements for complete details. All results are historical and assume the reinvestment of any dividends and capital gains distributions.
6
Table of Contents
MFS Total Return Series
Performance Summary – continued
Performance results do not include adjustments made for financial reporting purposes in accordance with U.S. generally accepted accounting principles and may differ from amounts reported in the financial highlights.
From time to time the fund may receive proceeds from litigation settlements, without which performance would be lower.
7
Table of Contents
MFS Total Return Series
Fund Expenses Borne by the Contract Holders during the Period,
July 1, 2016 through December 31, 2016
As a contract holder of the fund, you incur ongoing costs, including management fees; distribution and/or service (12b-1) fees; and other fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the fund and to compare these costs with the ongoing costs of investing in other mutual funds.
The example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period July 1, 2016 through December 31, 2016.
Actual Expenses
The first line for each share class in the following table provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled “Expenses Paid During Period” to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line for each share class in the following table provides information about hypothetical account values and hypothetical expenses based on the fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight the fund’s ongoing costs only and do not take into account the fees and expenses imposed under the variable contracts through which your investment in the fund is made. Therefore, the second line for each share class in the table is useful in comparing ongoing costs associated with an investment in vehicles (such as the fund) which fund benefits under variable annuity and variable life insurance contracts and to qualified pension and retirement plans only, and will not help you determine the relative total costs of investing in the fund through variable annuity and variable life insurance contracts. If the fees and expenses imposed under the variable contracts were included, your costs would have been higher.
Share Class | Annualized Expense Ratio | Beginning Account Value 7/01/16 | Ending Account Value | Expenses Paid During Period (p) 7/01/16-12/31/16 | ||||||||||||||
Initial Class | Actual | 0.60% | $1,000.00 | $1,033.77 | $3.07 | |||||||||||||
Hypothetical (h) | 0.60% | $1,000.00 | $1,022.12 | $3.05 | ||||||||||||||
Service Class | Actual | 0.84% | $1,000.00 | $1,032.93 | $4.29 | |||||||||||||
Hypothetical (h) | 0.84% | $1,000.00 | $1,020.91 | $4.27 |
(h) | 5% class return per year before expenses. |
(p) | “Expenses Paid During Period” are equal to each class’s annualized expense ratio, as shown above, multiplied by the average account value over the period, multiplied by 184/366 (to reflect the one-half year period). |
Notes to Expense Table
Expense ratios reflect a one-time Reimbursement of Expenses by Custodian of 0.03% (See Note 2 of the Notes to Financial Statements) that are outside of the expense limitation arrangement (See Note 3 of the Notes to Financial Statements).
8
Table of Contents
MFS Total Return Series
PORTFOLIO OF INVESTMENTS – 12/31/16
The Portfolio of Investments is a complete list of all securities owned by your fund. It is categorized by broad-based asset classes.
Issuer | Shares/Par | Value ($) | ||||||
COMMON STOCKS – 58.2% | ||||||||
Aerospace – 2.8% | ||||||||
Honeywell International, Inc. | 171,761 | $ | 19,898,500 | |||||
L3 Technologies, Inc. | 25,611 | 3,895,689 | ||||||
Lockheed Martin Corp. | 50,239 | 12,556,736 | ||||||
Northrop Grumman Corp. | 74,301 | 17,280,927 | ||||||
Orbital ATK, Inc. | 18,281 | 1,603,792 | ||||||
United Technologies Corp. | 181,172 | 19,860,075 | ||||||
|
| |||||||
$ | 75,095,719 | |||||||
|
| |||||||
Airlines – 0.4% | ||||||||
Copa Holdings S.A., “A” | 68,231 | $ | 6,197,422 | |||||
Delta Air Lines, Inc. | 78,852 | 3,878,730 | ||||||
|
| |||||||
$ | 10,076,152 | |||||||
|
| |||||||
Alcoholic Beverages – 0.3% | ||||||||
Diageo PLC | 315,222 | $ | 8,155,138 | |||||
|
| |||||||
Apparel Manufacturers – 0.1% | ||||||||
Hanesbrands, Inc. | 84,051 | $ | 1,812,980 | |||||
|
| |||||||
Automotive – 0.9% | ||||||||
Delphi Automotive PLC | 111,027 | $ | 7,477,668 | |||||
General Motors Co. | 118,681 | 4,134,846 | ||||||
Harley-Davidson, Inc. | 45,423 | 2,649,978 | ||||||
Hyundai Motor Co. Ltd. | 25,287 | 3,038,055 | ||||||
Kia Motors Corp. (a) | 124,442 | 4,037,817 | ||||||
LKQ Corp. (a) | 98,499 | 3,018,994 | ||||||
|
| |||||||
$ | 24,357,358 | |||||||
|
| |||||||
Biotechnology – 0.2% | ||||||||
Celgene Corp. (a) | 19,504 | $ | 2,257,588 | |||||
Gilead Sciences, Inc. | 33,502 | 2,399,078 | ||||||
|
| |||||||
$ | 4,656,666 | |||||||
|
| |||||||
Broadcasting – 1.1% | ||||||||
Interpublic Group of Companies, Inc. | 85,426 | $ | 1,999,823 | |||||
Omnicom Group, Inc. | 126,233 | 10,743,691 | ||||||
Time Warner, Inc. | 136,518 | 13,178,083 | ||||||
Twenty-First Century Fox, Inc. | 106,084 | 2,974,595 | ||||||
Walt Disney Co. | 12,275 | 1,279,301 | ||||||
|
| |||||||
$ | 30,175,493 | |||||||
|
| |||||||
Brokerage & Asset Managers – 1.0% | ||||||||
BlackRock, Inc. | 23,784 | $ | 9,050,763 | |||||
Blackstone Group LP | 103,957 | 2,809,958 | ||||||
Charles Schwab Corp. | 69,021 | 2,724,259 | ||||||
Franklin Resources, Inc. | 137,036 | 5,423,885 | ||||||
NASDAQ, Inc. | 85,908 | 5,766,145 | ||||||
|
| |||||||
$ | 25,775,010 | |||||||
|
| |||||||
Business Services – 1.5% | ||||||||
Accenture PLC, “A” | 185,299 | $ | 21,704,072 | |||||
Amdocs Ltd. | 22,900 | 1,333,925 | ||||||
Cognizant Technology Solutions Corp., “A” (a) | 34,522 | 1,934,268 | ||||||
Equifax, Inc. | 40,181 | 4,750,600 |
Issuer | Shares/Par | Value ($) | ||||||
COMMON STOCKS – continued | ||||||||
Business Services – continued | ||||||||
Fidelity National Information Services, Inc. | 61,079 | $ | 4,620,016 | |||||
Fiserv, Inc. (a) | 21,839 | 2,321,049 | ||||||
Global Payments, Inc. | 38,931 | 2,702,201 | ||||||
|
| |||||||
$ | 39,366,131 | |||||||
|
| |||||||
Cable TV – 1.5% | ||||||||
Charter Communications, Inc., “A” (a) | 44,337 | $ | 12,765,509 | |||||
Comcast Corp., “A” | 402,719 | 27,807,747 | ||||||
|
| |||||||
$ | 40,573,256 | |||||||
�� |
|
| ||||||
Chemicals – 2.2% | ||||||||
3M Co. | 103,976 | $ | 18,566,994 | |||||
Celanese Corp. | 48,709 | 3,835,347 | ||||||
E.I. du Pont de Nemours & Co. | 85,295 | 6,260,653 | ||||||
LyondellBasell Industries N.V., “A” | 62,790 | 5,386,126 | ||||||
Monsanto Co. | 51,634 | 5,432,413 | ||||||
PPG Industries, Inc. | 181,388 | 17,188,327 | ||||||
|
| |||||||
$ | 56,669,860 | |||||||
|
| |||||||
Computer Software – 1.2% | ||||||||
CA, Inc. | 42,170 | $ | 1,339,741 | |||||
Check Point Software Technologies Ltd. (a) | 93,032 | 7,857,483 | ||||||
Intuit, Inc. | 15,994 | 1,833,072 | ||||||
Microsoft Corp. | 166,035 | 10,317,415 | ||||||
Oracle Corp. | 187,633 | 7,214,489 | ||||||
Sabre Corp. | 153,692 | 3,834,615 | ||||||
|
| |||||||
$ | 32,396,815 | |||||||
|
| |||||||
Computer Software – Systems – 1.1% | ||||||||
Apple, Inc. | 33,842 | $ | 3,919,580 | |||||
Hewlett Packard Enterprise | 440,442 | 10,191,828 | ||||||
International Business Machines Corp. | 85,908 | 14,259,869 | ||||||
Seagate Technology PLC | 48,482 | 1,850,558 | ||||||
|
| |||||||
$ | 30,221,835 | |||||||
|
| |||||||
Construction – 0.7% | ||||||||
Owens Corning | 199,398 | $ | 10,280,961 | |||||
Sherwin-Williams Co. | 10,847 | 2,915,023 | ||||||
Stanley Black & Decker, Inc. | 43,998 | 5,046,131 | ||||||
|
| |||||||
$ | 18,242,115 | |||||||
|
| |||||||
Consumer Products – 0.8% | ||||||||
Coty, Inc., “A” | 265,939 | $ | 4,869,343 | |||||
Kimberly-Clark Corp. | 29,330 | 3,347,140 | ||||||
Newell Brands, Inc. | 18,943 | 845,805 | ||||||
Procter & Gamble Co. | 116,060 | 9,758,325 | ||||||
Reckitt Benckiser Group PLC | 31,572 | 2,668,917 | ||||||
|
| |||||||
$ | 21,489,530 | |||||||
|
| |||||||
Containers – 0.1% | ||||||||
Crown Holdings, Inc. (a) | 45,693 | $ | 2,402,081 | |||||
|
|
9
Table of Contents
MFS Total Return Series
Portfolio of Investments – continued
Issuer | Shares/Par | Value ($) | ||||||
COMMON STOCKS – continued | ||||||||
Electrical Equipment – 0.9% | ||||||||
Fortive Corp. | 51,406 | $ | 2,756,904 | |||||
Johnson Controls International PLC | 416,668 | 17,162,555 | ||||||
MSC Industrial Direct Co., Inc., “A” | 16,970 | 1,567,858 | ||||||
Pentair PLC | 36,768 | 2,061,582 | ||||||
|
| |||||||
$ | 23,548,899 | |||||||
|
| |||||||
Electronics – 1.2% | ||||||||
Broadcom Corp. | 16,083 | $ | 2,842,992 | |||||
Intel Corp. | 119,629 | 4,338,944 | ||||||
Maxim Integrated Products, Inc. | 80,684 | 3,111,982 | ||||||
Taiwan Semiconductor Manufacturing Co. Ltd., ADR | 281,834 | 8,102,728 | ||||||
Texas Instruments, Inc. | 169,418 | 12,362,431 | ||||||
|
| |||||||
$ | 30,759,077 | |||||||
|
| |||||||
Energy – Independent – 2.0% | ||||||||
Anadarko Petroleum Corp. | 77,339 | $ | 5,392,848 | |||||
Canadian Natural Resources Ltd. | 59,946 | 1,911,078 | ||||||
EOG Resources, Inc. | 99,797 | 10,089,477 | ||||||
EQT Corp. | 54,619 | 3,572,083 | ||||||
Galp Energia SGPS S.A., “B” | 180,536 | 2,683,683 | ||||||
Hess Corp. | 67,218 | 4,187,009 | ||||||
Noble Energy, Inc. | 102,417 | 3,897,991 | ||||||
Occidental Petroleum Corp. | 127,890 | 9,109,605 | ||||||
Rice Energy, Inc. (a) | 120,155 | 2,565,309 | ||||||
Valero Energy Corp. | 139,176 | 9,508,504 | ||||||
|
| |||||||
$ | 52,917,587 | |||||||
|
| |||||||
Energy – Integrated – 1.2% | ||||||||
BP PLC | 1,350,562 | $ | 8,391,708 | |||||
Chevron Corp. | 93,844 | 11,045,439 | ||||||
Exxon Mobil Corp. | 149,007 | 13,449,372 | ||||||
|
| |||||||
$ | 32,886,519 | |||||||
|
| |||||||
Food & Beverages – 2.5% | ||||||||
Archer Daniels Midland Co. | 250,109 | $ | 11,417,476 | |||||
Bunge Ltd. | 38,750 | 2,799,300 | ||||||
Coca-Cola Co. | 68,420 | 2,836,693 | ||||||
Coca-Cola European Partners PLC | 68,995 | 2,166,443 | ||||||
Danone S.A. | 72,327 | 4,577,963 | ||||||
General Mills, Inc. | 142,650 | 8,811,491 | ||||||
J.M. Smucker Co. | 21,176 | 2,711,799 | ||||||
Kellogg Co. | 44,759 | 3,299,186 | ||||||
Marine Harvest | 290,338 | 5,234,950 | ||||||
Mead Johnson Nutrition Co., “A” | 58,744 | 4,156,725 | ||||||
Mondelez International, Inc. | 75,409 | 3,342,881 | ||||||
Nestle S.A. | 167,735 | 12,032,841 | ||||||
PepsiCo, Inc. | 23,463 | 2,454,934 | ||||||
|
| |||||||
$ | 65,842,682 | |||||||
|
| |||||||
Food & Drug Stores – 0.9% | ||||||||
CVS Health Corp. | 268,235 | $ | 21,166,424 | |||||
Kroger Co. | 79,396 | 2,739,956 | ||||||
|
| |||||||
$ | 23,906,380 | |||||||
|
| |||||||
Gaming & Lodging – 0.1% | ||||||||
Marriott International, Inc., “A” | 37,213 | $ | 3,076,771 | |||||
|
|
Issuer | Shares/Par | Value ($) | ||||||
COMMON STOCKS – continued | ||||||||
General Merchandise – 0.7% | ||||||||
Kohl’s Corp. | 64,120 | $ | 3,166,246 | |||||
Target Corp. | 168,676 | 12,183,467 | ||||||
Wal-Mart Stores, Inc. | 34,856 | 2,409,247 | ||||||
|
| |||||||
$ | 17,758,960 | |||||||
|
| |||||||
Health Maintenance Organizations – 0.2% | ||||||||
Cigna Corp. | 40,616 | $ | 5,417,768 | |||||
|
| |||||||
Insurance – 3.7% | ||||||||
Aon PLC | 117,747 | $ | 13,132,323 | |||||
Chubb Ltd. | 152,186 | 20,106,814 | ||||||
MetLife, Inc. | 467,769 | 25,208,071 | ||||||
Prudential Financial, Inc. | 152,639 | 15,883,614 | ||||||
Travelers Cos., Inc. | 124,566 | 15,249,370 | ||||||
Validus Holdings Ltd. | 37,393 | 2,056,989 | ||||||
Zurich Insurance Group AG | 25,050 | 6,880,270 | ||||||
|
| |||||||
$ | 98,517,451 | |||||||
|
| |||||||
Internet – 0.6% | ||||||||
Alphabet, Inc., “A” (a) | 4,197 | $ | 3,325,913 | |||||
Facebook, Inc., “A” (a) | 108,806 | 12,518,130 | ||||||
|
| |||||||
$ | 15,844,043 | |||||||
|
| |||||||
Machinery & Tools – 1.3% | ||||||||
Allison Transmission Holdings, Inc. | 209,374 | $ | 7,053,810 | |||||
Cummins, Inc. | 7,457 | 1,019,148 | ||||||
Deere & Co. | 30,493 | 3,141,999 | ||||||
Eaton Corp. PLC | 117,072 | 7,854,360 | ||||||
Illinois Tool Works, Inc. | 90,231 | 11,049,688 | ||||||
Ingersoll-Rand Co. Ltd., “A” | 37,256 | 2,795,690 | ||||||
|
| |||||||
$ | 32,914,695 | |||||||
|
| |||||||
Major Banks – 7.2% | ||||||||
Bank of America Corp. | 978,093 | $ | 21,615,855 | |||||
Bank of New York Mellon Corp. | 309,337 | 14,656,387 | ||||||
BNP Paribas | 34,289 | 2,185,512 | ||||||
Goldman Sachs Group, Inc. | 92,718 | 22,201,325 | ||||||
JPMorgan Chase & Co. | 735,379 | 63,455,854 | ||||||
Morgan Stanley | 294,886 | 12,458,934 | ||||||
PNC Financial Services Group, Inc. | 112,350 | 13,140,456 | ||||||
Royal Bank of Canada | 110,559 | 7,482,588 | ||||||
State Street Corp. | 131,774 | 10,241,475 | ||||||
Sumitomo Mitsui Financial Group, Inc. | 125,500 | 4,757,712 | ||||||
Wells Fargo & Co. | 332,975 | 18,350,252 | ||||||
|
| |||||||
$ | 190,546,350 | |||||||
|
| |||||||
Medical & Health Technology & Services – 0.4% | ||||||||
Express Scripts Holding Co. (a) | 43,510 | $ | 2,993,053 | |||||
HCA Holdings, Inc. (a) | 16,731 | 1,238,429 | ||||||
McKesson Corp. | 52,373 | 7,355,788 | ||||||
|
| |||||||
$ | 11,587,270 | |||||||
|
| |||||||
Medical Equipment – 2.8% | ||||||||
Abbott Laboratories | 368,360 | $ | 14,148,708 | |||||
Danaher Corp. | 200,184 | 15,582,323 | ||||||
Medtronic PLC | 243,128 | 17,318,007 | ||||||
St. Jude Medical, Inc. | 87,340 | 7,003,795 |
10
Table of Contents
MFS Total Return Series
Portfolio of Investments – continued
Issuer | Shares/Par | Value ($) | ||||||
COMMON STOCKS – continued | ||||||||
Medical Equipment – continued | ||||||||
Thermo Fisher Scientific, Inc. | 105,563 | $ | 14,894,939 | |||||
Zimmer Biomet Holdings, Inc. | 40,866 | 4,217,371 | ||||||
|
| |||||||
$ | 73,165,143 | |||||||
|
| |||||||
Metals & Mining – 0.2% | ||||||||
Rio Tinto Ltd. | 122,340 | $ | 4,658,784 | |||||
|
| |||||||
Natural Gas – Distribution – 0.1% | ||||||||
Engie | 202,830 | $ | 2,583,991 | |||||
|
| |||||||
Natural Gas – Pipeline – 0.4% | ||||||||
Enterprise Products Partners LP | 188,624 | $ | 5,100,393 | |||||
Plains All American Pipeline LP | 57,934 | 1,870,689 | ||||||
Western Gas Equity Partners LP | 40,595 | 2,385,362 | ||||||
|
| |||||||
$ | 9,356,444 | |||||||
|
| |||||||
Network & Telecom – 0.7% | ||||||||
Cisco Systems, Inc. | 483,368 | $ | 14,607,381 | |||||
Motorola Solutions, Inc. | 31,267 | 2,591,722 | ||||||
|
| |||||||
$ | 17,199,103 | |||||||
|
| |||||||
Oil Services – 0.3% | ||||||||
Schlumberger Ltd. | 99,668 | $ | 8,367,129 | |||||
|
| |||||||
Other Banks & Diversified Financials – 2.2% | ||||||||
American Express Co. | 64,591 | $ | 4,784,901 | |||||
BB&T Corp. | 104,311 | 4,904,703 | ||||||
Citigroup, Inc. | 206,790 | 12,289,530 | ||||||
Discover Financial Services | 98,381 | 7,092,286 | ||||||
SunTrust Banks, Inc. | 52,935 | 2,903,485 | ||||||
U.S. Bancorp | 380,887 | 19,566,165 | ||||||
UBS AG | 276,191 | 4,326,079 | ||||||
Visa, Inc., “A” | 34,318 | 2,677,490 | ||||||
|
| |||||||
$ | 58,544,639 | |||||||
|
| |||||||
Pharmaceuticals – 4.0% | ||||||||
Allergan PLC (a) | 14,194 | $ | 2,980,882 | |||||
Bayer AG | 97,625 | 10,187,094 | ||||||
Bristol-Myers Squibb Co. | 54,330 | 3,175,045 | ||||||
Eli Lilly & Co. | 202,238 | 14,874,605 | ||||||
Johnson & Johnson | 258,759 | 29,811,624 | ||||||
Merck & Co., Inc. | 465,933 | 27,429,476 | ||||||
Novartis AG | 16,018 | 1,165,603 | ||||||
Pfizer, Inc. | 462,478 | 15,021,285 | ||||||
Roche Holding AG | 4,597 | 1,047,441 | ||||||
|
| |||||||
$ | 105,693,055 | |||||||
|
| |||||||
Printing & Publishing – 0.2% | ||||||||
Moody’s Corp. | 31,998 | $ | 3,016,451 | |||||
S&P Global, Inc. | 9,113 | 980,012 | ||||||
Transcontinental, Inc., “A” | 153,758 | 2,541,161 | ||||||
|
| |||||||
$ | 6,537,624 | |||||||
|
| |||||||
Railroad & Shipping – 0.4% | ||||||||
Canadian National Railway Co. | 41,275 | $ | 2,781,935 | |||||
Union Pacific Corp. | 81,405 | 8,440,070 | ||||||
|
| |||||||
$ | 11,222,005 | |||||||
|
|
Issuer | Shares/Par | Value ($) | ||||||
COMMON STOCKS – continued | ||||||||
Real Estate – 0.9% | ||||||||
Annaly Mortgage Management, Inc., REIT | 250,640 | $ | 2,498,881 | |||||
Medical Properties Trust, Inc., REIT | 765,343 | 9,413,719 | ||||||
Starwood Property Trust, Inc., REIT | 175,492 | 3,852,049 | ||||||
Store Capital Corp., REIT | 166,981 | 4,126,101 | ||||||
Washington Prime Group, Inc., REIT | 375,597 | 3,909,965 | ||||||
|
| |||||||
$ | 23,800,715 | |||||||
|
| |||||||
Restaurants – 0.5% | ||||||||
Aramark | 101,013 | $ | 3,608,184 | |||||
Brinker International, Inc. | 78,783 | 3,902,122 | ||||||
Starbucks Corp. | 32,976 | 1,830,828 | ||||||
YUM! Brands, Inc. | 61,801 | 3,913,857 | ||||||
|
| |||||||
$ | 13,254,991 | |||||||
|
| |||||||
Specialty Chemicals – 0.2% | ||||||||
Axalta Coating Systems Ltd. (a) | 147,718 | $ | 4,017,930 | |||||
|
| |||||||
Specialty Stores – 0.7% | ||||||||
Advance Auto Parts, Inc. | 7,472 | $ | 1,263,665 | |||||
Amazon.com, Inc. (a) | 3,183 | 2,386,836 | ||||||
Best Buy Co., Inc. | 119,072 | 5,080,802 | ||||||
Gap, Inc. | 461,371 | 10,353,165 | ||||||
|
| |||||||
$ | 19,084,468 | |||||||
|
| |||||||
Telephone Services – 1.3% | ||||||||
AT&T, Inc. | 69,409 | $ | 2,951,965 | |||||
Frontier Communications Corp. (l) | 449,786 | 1,520,277 | ||||||
TDC A.S. (a) | 385,984 | 1,981,703 | ||||||
Telefonica Brasil S.A., ADR | 147,273 | 1,970,513 | ||||||
Verizon Communications, Inc. | 464,202 | 24,779,103 | ||||||
|
| |||||||
$ | 33,203,561 | |||||||
|
| |||||||
Tobacco – 2.4% | ||||||||
Altria Group, Inc. | 294,097 | $ | 19,886,839 | |||||
Japan Tobacco, Inc. | 46,200 | 1,519,511 | ||||||
Philip Morris International, Inc. | 447,152 | 40,909,936 | ||||||
|
| |||||||
$ | 62,316,286 | |||||||
|
| |||||||
Trucking – 0.5% | ||||||||
United Parcel Service, Inc., “B” | 103,590 | $ | 11,875,558 | |||||
|
| |||||||
Utilities – Electric Power – 1.6% | ||||||||
American Electric Power Co., Inc. | 78,336 | $ | 4,932,035 | |||||
Duke Energy Corp. | 83,016 | 6,443,702 | ||||||
Exelon Corp. | 284,596 | 10,100,312 | ||||||
FirstEnergy Corp. | 66,988 | 2,074,618 | ||||||
PPL Corp. | 272,929 | 9,293,232 | ||||||
Public Service Enterprise Group, Inc. | 67,177 | 2,947,727 | ||||||
SSE PLC | 114,793 | 2,194,415 | ||||||
WEC Energy Group, Inc. | 46,213 | 2,710,392 | ||||||
Xcel Energy, Inc. | 38,136 | 1,552,135 | ||||||
|
| |||||||
$ | 42,248,568 | |||||||
|
| |||||||
Total Common Stocks (Identified Cost, $1,117,869,259) | $ | 1,534,120,585 | ||||||
|
|
11
Table of Contents
MFS Total Return Series
Portfolio of Investments – continued
Issuer | Shares/Par | Value ($) | ||||||
BONDS – 39.4% | ||||||||
Agency – Other – 0.1% | ||||||||
Financing Corp., 9.65%, 11/02/2018 | $ | 1,275,000 | $ | 1,466,838 | ||||
|
| |||||||
Asset-Backed & Securitized – 2.2% | ||||||||
Bayview Financial Revolving Mortgage Loan Trust, FRN, 2.134%, 12/28/2040 (z) | $ | 2,329,123 | $ | 1,776,757 | ||||
BlackRock Capital Finance LP, 7.75%, 9/25/2026 (z) | 32,751 | 3,206 | ||||||
Cent LP, 2013-17A, “A1”, CLO, FRN, 2.187%, 1/30/2025 (n) | 2,547,000 | 2,545,525 | ||||||
Chesapeake Funding II LLC, 2016-2A, “A2”, FRN, 1.703%, 6/15/2028 (z) | 3,425,000 | 3,442,813 | ||||||
Citigroup Commercial Mortgage Trust, FRN, 5.711%, 12/10/2049 | 3,050,000 | 3,076,427 | ||||||
Commercial Mortgage Trust, 2015-LC21, “A4”, 3.708%, 7/10/2048 | 3,980,975 | 4,126,960 | ||||||
Credit Suisse Mortgage Capital Certificate, 5.695%, 9/15/2040 | 3,862,320 | 3,917,432 | ||||||
CSAIL Commercial Mortgage Trust, 2015-C2, “A4”, 3.504%, 6/15/2057 | 2,316,427 | 2,367,952 | ||||||
Dryden Senior Loan Fund, 2013-26A, “A”, CLO, FRN, 1.98%, 7/15/2025 (n) | 3,273,000 | 3,260,494 | ||||||
Ford Credit Auto Owner Trust, 2014-1, “A”, 2.26%, 11/15/2025 (n) | 1,735,000 | 1,749,215 | ||||||
Ford Credit Auto Owner Trust, 2014-2, “A”, 2.31%, 4/15/2026 (n) | 1,465,000 | 1,476,520 | ||||||
Fortress Credit BSL Ltd., 2013-1A, “A”, FRN, 2.057%, 1/19/2025 (n) | 2,158,179 | 2,153,947 | ||||||
GMAC Mortgage Corp. Loan Trust, 5.805%, 10/25/2036 | 730,393 | 704,001 | ||||||
Greenwich Capital Commercial Funding Corp., 5.475%, 3/10/2039 | 3,838,232 | 3,836,858 | ||||||
GS Mortgage Securities Trust, 2015-GC30, “A4”, 3.382%, 5/10/2050 | 4,243,101 | 4,298,410 | ||||||
ING Investment Management Ltd., 2013-2A, “A1”, CLO, FRN, 2.031%, 4/25/2025 (n) | 2,971,000 | 2,968,216 | ||||||
JPMBB Commercial Mortgage Securities Trust, 2014-C26, 3.494%, 1/15/2048 | 4,880,000 | 5,001,895 | ||||||
JPMorgan Chase Commercial Mortgage Securities Corp., “A4”, FRN, 5.753%, 6/15/2049 | 635,972 | 639,803 | ||||||
Morgan Stanley Capital I, Inc., FRN, 1.023%, 11/15/2030 (i)(n) | 2,841,686 | 26,319 | ||||||
Residential Funding Mortgage Securities, Inc., 5.32%, 12/25/2035 | 1,443,792 | 1,233,095 | ||||||
Wachovia Bank Commercial Mortgage Trust, “A4”, FRN, 5.969%, 2/15/2051 | 471,715 | 473,881 | ||||||
Wachovia Bank Commercial Mortgage Trust, FRN, 5.707%, 6/15/2049 | 3,913,646 | 3,937,444 | ||||||
Wells Fargo Commercial Mortgage Trust, 2015-C28, “A4”, 3.54%, 5/15/2048 | 4,315,766 | 4,425,721 | ||||||
|
| |||||||
$ | 57,442,891 | |||||||
|
| |||||||
Automotive – 0.4% | ||||||||
General Motors Financial Co., Inc., 3.2%, 7/06/2021 | $ | 2,353,000 | $ | 2,331,294 |
Issuer | Shares/Par | Value ($) | ||||||
BONDS – continued | ||||||||
Automotive – continued | ||||||||
General Motors Financial Co., Inc., 5.25%, 3/01/2026 | $ | 1,168,000 | $ | 1,228,376 | ||||
Toyota Motor Credit Corp., 3.4%, 9/15/2021 | 3,170,000 | 3,294,150 | ||||||
Volkswagen International Finance N.V., 2.375%, 3/22/2017 (n) | 3,032,000 | 3,038,822 | ||||||
|
| |||||||
$ | 9,892,642 | |||||||
|
| |||||||
Broadcasting – 0.1% | ||||||||
21st Century Fox America, Inc., 8.5%, 2/23/2025 | $ | 2,839,000 | $ | 3,730,131 | ||||
|
| |||||||
Brokerage & Asset Managers – 0.1% | ||||||||
Intercontinental Exchange, Inc., 2.75%, 12/01/2020 | $ | 903,000 | $ | 912,206 | ||||
Intercontinental Exchange, Inc., 4%, 10/15/2023 | 2,519,000 | 2,631,468 | ||||||
|
| |||||||
$ | 3,543,674 | |||||||
|
| |||||||
Cable TV – 0.1% | ||||||||
Time Warner Entertainment Co. LP, 8.375%, 7/15/2033 | $ | 2,855,000 | $ | 3,736,059 | ||||
|
| |||||||
Computer Software – Systems – 0.2% | ||||||||
Apple, Inc., 2.85%, 2/23/2023 | $ | 3,502,000 | $ | 3,520,137 | ||||
Apple, Inc., 3.85%, 5/04/2043 | 1,303,000 | 1,243,483 | ||||||
|
| |||||||
$ | 4,763,620 | |||||||
|
| |||||||
Conglomerates – 0.1% | ||||||||
General Electric Capital Corp., FRN, 1.496%, 1/09/2020 | $ | 1,939,000 | $ | 1,953,979 | ||||
|
| |||||||
Consumer Products – 0.2% | ||||||||
Newell Rubbermaid, Inc., 3.85%, 4/01/2023 | $ | 2,769,000 | $ | 2,869,324 | ||||
Reckitt Benckiser Treasury Services PLC, 3.625%, 9/21/2023 (n) | 3,463,000 | 3,527,571 | ||||||
|
| |||||||
$ | 6,396,895 | |||||||
|
| |||||||
Consumer Services – 0.1% | ||||||||
Visa, Inc., 3.15%, 12/14/2025 | $ | 3,594,000 | $ | 3,604,786 | ||||
|
| |||||||
Emerging Market Quasi-Sovereign – 0.3% | ||||||||
CNOOC Finance (2012) Ltd., 3.875%, 5/02/2022 (n) | $ | 3,630,000 | $ | 3,710,622 | ||||
Petroleos Mexicanos, 3.125%, 1/23/2019 | 1,277,000 | 1,266,146 | ||||||
State Grid Overseas Investment (2014) Ltd., 2.75%, 5/07/2019 (z) | 2,591,000 | 2,624,116 | ||||||
|
| |||||||
$ | 7,600,884 | |||||||
|
| |||||||
Emerging Market Sovereign – 0.1% | ||||||||
United Mexican States, 4.75%, 3/08/2044 | $ | 2,089,000 | $ | 1,898,901 | ||||
|
| |||||||
Energy – Integrated – 0.7% | ||||||||
BP Capital Markets PLC, 4.5%, 10/01/2020 | $ | 1,054,000 | $ | 1,130,176 | ||||
BP Capital Markets PLC, 4.742%, 3/11/2021 | 3,027,000 | 3,299,230 | ||||||
Chevron Corp., 1.075%, 11/15/2017 | 5,248,000 | 5,248,735 |
12
Table of Contents
MFS Total Return Series
Portfolio of Investments – continued
Issuer | Shares/Par | Value ($) | ||||||
BONDS – continued | ||||||||
Energy – Integrated – continued | ||||||||
Petro-Canada, 6.05%, 5/15/2018 | $ | 1,942,000 | $ | 2,052,016 | ||||
Shell International Finance B.V., 3.75%, 9/12/2046 | 1,199,000 | 1,100,893 | ||||||
Total Capital International S.A., 1.55%, 6/28/2017 | 1,746,000 | 1,748,815 | ||||||
Total Capital International S.A., 3.75%, 4/10/2024 | 3,360,000 | 3,513,864 | ||||||
|
| |||||||
$ | 18,093,729 | |||||||
|
| |||||||
Financial Institutions – 0.0% | ||||||||
GE Capital International Funding Co., 3.373%, 11/15/2025 | $ | 1,258,000 | $ | 1,277,073 | ||||
|
| |||||||
Food & Beverages – 0.6% | ||||||||
Anheuser-Busch InBev Finance, Inc., 3.65%, 2/01/2026 | $ | 2,789,000 | $ | 2,827,011 | ||||
Anheuser-Busch InBev S.A., 8%, 11/15/2039 | 3,600,000 | 5,286,002 | ||||||
Danone S.A., 2.947%, 11/02/2026 (n) | 3,438,000 | 3,269,390 | ||||||
Diageo Capital PLC, 2.625%, 4/29/2023 | 1,270,000 | 1,254,204 | ||||||
J.M. Smucker Co., 3.5%, 3/15/2025 | 1,794,000 | 1,806,624 | ||||||
Kraft Foods Group, Inc., 3.5%, 6/06/2022 | 1,463,000 | 1,486,954 | ||||||
Wm. Wrigley Jr. Co., 2.4%, 10/21/2018 (n) | 756,000 | 762,623 | ||||||
|
| |||||||
$ | 16,692,808 | |||||||
|
| |||||||
Food & Drug Stores – 0.3% | ||||||||
CVS Health Corp., 3.875%, 7/20/2025 | $ | 3,328,000 | $ | 3,428,735 | ||||
Walgreens Boots Alliance, Inc., 3.3%, 11/18/2021 | 2,550,000 | 2,595,456 | ||||||
Walgreens Boots Alliance, Inc., 4.5%, 11/18/2034 | 1,318,000 | 1,324,267 | ||||||
|
| |||||||
$ | 7,348,458 | |||||||
|
| |||||||
Insurance – 0.3% | ||||||||
American International Group, Inc., 4.875%, 6/01/2022 | $ | 5,088,000 | $ | 5,554,361 | ||||
American International Group, Inc., 4.125%, 2/15/2024 | 2,620,000 | 2,722,995 | ||||||
|
| |||||||
$ | 8,277,356 | |||||||
|
| |||||||
Insurance – Health – 0.4% | ||||||||
Aetna, Inc., 3.2%, 6/15/2026 | $ | 3,416,000 | $ | 3,374,359 | ||||
Anthem, Inc., 3.3%, 1/15/2023 | 2,122,000 | 2,116,213 | ||||||
UnitedHealth Group, Inc., 3.75%, 7/15/2025 | 3,987,000 | 4,121,996 | ||||||
|
| |||||||
$ | 9,612,568 | |||||||
|
| |||||||
Insurance – Property & Casualty – 0.4% | ||||||||
Berkshire Hathaway, Inc., 3.125%, 3/15/2026 | $ | 1,162,000 | $ | 1,152,782 | ||||
Liberty Mutual Group, Inc., 4.25%, 6/15/2023 (n) | 1,699,000 | 1,776,982 | ||||||
Liberty Mutual Group, Inc., 4.85%, 8/01/2044 (n) | 1,469,000 | 1,450,900 | ||||||
Marsh & McLennan Cos., Inc., 4.8%, 7/15/2021 | 3,270,000 | 3,551,491 |
Issuer | Shares/Par | Value ($) | ||||||
BONDS – continued | ||||||||
Insurance – Property & Casualty – continued | ||||||||
ZFS Finance USA Trust V, 6.5% to 5/09/2017, FRN to 5/09/2067 (n) | $ | 1,514,000 | $ | 1,518,012 | ||||
|
| |||||||
$ | 9,450,167 | |||||||
|
| |||||||
International Market Quasi-Sovereign – 0.4% | ||||||||
KFW International Finance, Inc., 4.875%, 6/17/2019 | $ | 4,560,000 | $ | 4,913,742 | ||||
Temasek Financial I Ltd., 2.375%, 1/23/2023 (n) | 6,400,000 | 6,235,014 | ||||||
|
| |||||||
$ | 11,148,756 | |||||||
|
| |||||||
Internet – 0.2% | ||||||||
Baidu, Inc., 3.5%, 11/28/2022 | $ | 3,950,000 | $ | 3,942,191 | ||||
|
| |||||||
Local Authorities – 0.2% | ||||||||
New Jersey Turnpike Authority Rev. (Build America Bonds), “F”, 7.414%, 1/01/2040 | $ | 3,685,000 | $ | 5,308,353 | ||||
|
| |||||||
Major Banks – 1.9% | ||||||||
ABN AMRO Bank N.V., 4.8%, 4/18/2026 (n) | $ | 2,400,000 | $ | 2,447,230 | ||||
Bank of America Corp., 5.49%, 3/15/2019 | 2,989,000 | 3,169,694 | ||||||
Bank of America Corp., 4.1%, 7/24/2023 | 3,870,000 | 4,038,368 | ||||||
Bank of America Corp., 4.125%, 1/22/2024 | 5,102,000 | 5,296,350 | ||||||
Bank of America Corp., 4.183%, 11/25/2027 | 2,500,000 | 2,497,773 | ||||||
BNP Paribas, 7.195% to 6/25/2037, FRN to 6/29/2049 (n) | 1,842,000 | 2,007,780 | ||||||
Credit Suisse Group AG, 6.5%, 8/08/2023 (n) | 1,300,000 | 1,380,925 | ||||||
ING Bank N.V., 5.8%, 9/25/2023 (n) | 3,438,000 | 3,773,772 | ||||||
JPMorgan Chase & Co., 6.3%, 4/23/2019 | 3,410,000 | 3,724,798 | ||||||
Mitsubishi UFJ Financial Group, Inc., 3.85%, 3/01/2026 | 2,336,000 | 2,396,276 | ||||||
Morgan Stanley, 3.875%, 4/29/2024 | 3,188,000 | 3,265,730 | ||||||
Morgan Stanley, 6.625%, 4/01/2018 | 4,287,000 | 4,533,022 | ||||||
Morgan Stanley, 4%, 7/23/2025 | 1,206,000 | 1,234,542 | ||||||
PNC Funding Corp., 5.625%, 2/01/2017 | 3,348,000 | 3,358,124 | ||||||
Royal Bank of Scotland Group PLC, 3.875%, 9/12/2023 | 3,418,000 | 3,278,498 | ||||||
Sumitomo Mitsui Financial Group, Inc., 3.01%, 10/19/2026 | 3,425,000 | 3,272,574 | ||||||
Swedbank AB, 2.125%, 9/29/2017 (n) | 821,000 | 824,897 | ||||||
|
| |||||||
$ | 50,500,353 | |||||||
|
| |||||||
Medical & Health Technology & Services – 0.3% | ||||||||
Becton, Dickinson and Co., 2.675%, 12/15/2019 | $ | 1,605,000 | $ | 1,627,631 | ||||
Laboratory Corp. of America Holdings, 3.2%, 2/01/2022 | 2,640,000 | 2,659,280 | ||||||
Thermo Fisher Scientific, Inc., 2.95%, 9/19/2026 | 2,583,000 | 2,432,455 | ||||||
|
| |||||||
$ | 6,719,366 | |||||||
|
| |||||||
Medical Equipment – 0.3% | ||||||||
Medtronic, Inc., 4.375%, 3/15/2035 | $ | 2,886,000 | $ | 3,048,387 |
13
Table of Contents
MFS Total Return Series
Portfolio of Investments – continued
Issuer | Shares/Par | Value ($) | ||||||
BONDS – continued | ||||||||
Medical Equipment – continued | ||||||||
Zimmer Holdings, Inc., 3.55%, 4/01/2025 | $ | 3,762,000 | $ | 3,659,418 | ||||
|
| |||||||
$ | 6,707,805 | |||||||
|
| |||||||
Metals & Mining – 0.1% | ||||||||
Freeport-McMoRan, Inc., 3.875%, 3/15/2023 | $ | 3,570,000 | $ | 3,275,475 | ||||
|
| |||||||
Midstream – 0.6% | ||||||||
APT Pipelines Ltd., 4.2%, 3/23/2025 (n) | $ | 3,780,000 | $ | 3,763,674 | ||||
Enterprise Products Operating LP, 6.5%, 1/31/2019 | 2,995,000 | 3,263,663 | ||||||
Kinder Morgan Energy Partners LP, 4.15%, 2/01/2024 | 1,369,000 | 1,391,599 | ||||||
Kinder Morgan Energy Partners LP, 7.4%, 3/15/2031 | 1,023,000 | 1,208,356 | ||||||
Kinder Morgan Energy Partners LP, 7.75%, 3/15/2032 | 1,661,000 | 2,036,567 | ||||||
Spectra Energy Capital LLC, 8%, 10/01/2019 | 2,734,000 | 3,108,255 | ||||||
|
| |||||||
$ | 14,772,114 | |||||||
|
| |||||||
Mortgage-Backed – 11.8% | ||||||||
Fannie Mae, 6%, 1/01/2017 – 7/01/2037 | $ | 8,977,633 | $ | 10,250,716 | ||||
Fannie Mae, 5.5%, 11/01/2017 – 4/01/2040 | 16,907,727 | 18,866,906 | ||||||
Fannie Mae, 3.8%, 2/01/2018 | 306,460 | 311,284 | ||||||
Fannie Mae, 5%, 2/01/2018 – 3/01/2041 | 7,194,228 | 7,819,693 | ||||||
Fannie Mae, 4.5%, 4/01/2018 – 6/01/2044 | 16,917,020 | 18,244,637 | ||||||
Fannie Mae, 2.578%, 9/25/2018 | 2,044,673 | 2,066,309 | ||||||
Fannie Mae, 4.6%, 9/01/2019 | 473,673 | 503,079 | ||||||
Fannie Mae, 2.59%, 5/01/2023 | 472,284 | 472,246 | ||||||
Fannie Mae, 2.7%, 7/01/2025 | 367,000 | 360,732 | ||||||
Fannie Mae, 3.43%, 6/01/2026 | 595,726 | 611,646 | ||||||
Fannie Mae, 3%, 3/01/2027 – 11/01/2046 | 23,080,294 | 23,396,537 | ||||||
Fannie Mae, 6.5%, 6/01/2031 – 7/01/2037 | 2,827,897 | 3,236,203 | ||||||
Fannie Mae, 4%, 9/01/2040 – 11/01/2044 | 30,475,931 | 32,123,688 | ||||||
Fannie Mae, 3.5%, 11/01/2041 – 5/01/2046 | 35,952,771 | 36,960,594 | ||||||
Fannie Mae, 4%, 1/01/2043 – 1/01/2044 | 811,583 | 858,877 | ||||||
Fannie Mae, TBA, 3.5%, 1/18/2047 | 4,232,000 | 4,334,838 | ||||||
Freddie Mac, 6%, 4/01/2017 – 6/01/2037 | 3,873,114 | 4,391,901 | ||||||
Freddie Mac, 5%, 12/01/2017 – 7/01/2039 | 4,126,987 | 4,484,356 | ||||||
Freddie Mac, 3.154%, 2/25/2018 | 398,788 | 404,686 | ||||||
Freddie Mac, 4.5%, 5/01/2018 – 5/01/2042 | 4,193,828 | 4,472,454 | ||||||
Freddie Mac, 2.412%, 8/25/2018 | 1,793,776 | 1,815,937 | ||||||
Freddie Mac, 5.5%, 1/01/2019 – 2/01/2037 | 3,510,371 | 3,914,710 | ||||||
Freddie Mac, 5.085%, 3/25/2019 | 4,316,000 | 4,579,159 |
Issuer | Shares/Par | Value ($) | ||||||
BONDS – continued | ||||||||
Mortgage-Backed – continued | ||||||||
Freddie Mac, 2.456%, 8/25/2019 | $ | 500,000 | $ | 507,350 | ||||
Freddie Mac, 1.869%, 11/25/2019 | 1,266,000 | 1,266,945 | ||||||
Freddie Mac, 2.791%, 1/25/2022 | 1,485,000 | 1,515,673 | ||||||
Freddie Mac, 2.716%, 6/25/2022 | 1,059,508 | 1,076,274 | ||||||
Freddie Mac, 2.51%, 11/25/2022 | 1,272,000 | 1,275,195 | ||||||
Freddie Mac, 3.111%, 2/25/2023 | 2,136,000 | 2,209,941 | ||||||
Freddie Mac, 3.32%, 2/25/2023 | 618,000 | 646,255 | ||||||
Freddie Mac, 3.25%, 4/25/2023 | 2,474,000 | 2,577,813 | ||||||
Freddie Mac, 3.458%, 8/25/2023 | 2,553,000 | 2,687,070 | ||||||
Freddie Mac, 3.171%, 10/25/2024 | 1,304,000 | 1,340,228 | ||||||
Freddie Mac, 2.67%, 12/25/2024 | 1,561,000 | 1,549,407 | ||||||
Freddie Mac, 3.329%, 5/25/2025 | 2,660,000 | 2,752,967 | ||||||
Freddie Mac, 2.673%, 3/25/2026 | 2,597,000 | 2,542,512 | ||||||
Freddie Mac, 3.3%, 10/25/2026 | 957,000 | 983,022 | ||||||
Freddie Mac, 6.5%, 5/01/2034 – 9/01/2037 | 1,679,814 | 1,913,665 | ||||||
Freddie Mac, 4%, 11/01/2040 – 9/01/2044 | 17,321,373 | 18,220,841 | ||||||
Freddie Mac, 3.5%, 2/01/2042 – 4/01/2046 | 22,793,848 | 23,413,192 | ||||||
Freddie Mac, 3%, 3/01/2043 – 12/01/2046 | 27,775,868 | 27,652,010 | ||||||
Ginnie Mae, 6%, 9/15/2032 – 1/15/2038 | 3,351,894 | 3,883,966 | ||||||
Ginnie Mae, 5.5%, 5/15/2033 – 10/15/2035 | 2,112,983 | 2,380,201 | ||||||
Ginnie Mae, 4.5%, 7/20/2033 – 1/20/2041 | 5,332,119 | 5,809,627 | ||||||
Ginnie Mae, 5%, 7/20/2033 – 12/15/2034 | 691,884 | 765,162 | ||||||
Ginnie Mae, 4%, 1/20/2041 – 2/20/2042 | 5,757,170 | 6,163,540 | ||||||
Ginnie Mae, 3.5%, 12/15/2041 – 5/20/2046 | 8,568,642 | 8,944,472 | ||||||
Ginnie Mae, 3%, 2/15/2043 – 7/20/2043 | 4,879,050 | 4,954,429 | ||||||
|
| |||||||
$ | 311,512,945 | |||||||
|
| |||||||
Municipals – 0.2% | ||||||||
State of California, 5%, 8/01/2027 | $ | 4,595,000 | $ | 5,527,463 | ||||
|
| |||||||
Network & Telecom – 0.4% | ||||||||
AT&T, Inc., 3%, 6/30/2022 | $ | 2,565,000 | $ | 2,515,131 | ||||
AT&T, Inc., 3.4%, 5/15/2025 | 2,565,000 | 2,468,964 | ||||||
Verizon Communications, Inc., 6.4%, 9/15/2033 | 1,031,000 | 1,242,244 | ||||||
Verizon Communications, Inc., 5.05%, 3/15/2034 | 3,101,000 | 3,260,819 | ||||||
|
| |||||||
$ | 9,487,158 | |||||||
|
| |||||||
Oils – 0.2% | ||||||||
Valero Energy Corp., 3.4%, 9/15/2026 | $ | 5,276,000 | $ | 5,046,969 | ||||
|
| |||||||
Other Banks & Diversified Financials – 0.6% | ||||||||
Banco de Credito del Peru, 5.375%, 9/16/2020 | $ | 2,967,000 | $ | 3,196,943 | ||||
BBVA Bancomer S.A. de C.V., 6.75%, 9/30/2022 (n) | 2,890,000 | 3,150,100 |
14
Table of Contents
MFS Total Return Series
Portfolio of Investments – continued
Issuer | Shares/Par | Value ($) | ||||||
BONDS – continued | ||||||||
Other Banks & Diversified Financials – continued | ||||||||
Citigroup, Inc., 2.5%, 9/26/2018 | $ | 2,450,000 | $ | 2,472,976 | ||||
Groupe BPCE S.A., 12.5% to 9/30/2019, FRN to 8/29/2049 (n) | 3,106,000 | 3,791,743 | ||||||
UBS Group Funding (Jersey) Ltd., 4.125%, 4/15/2026 (z) | 2,536,000 | 2,589,997 | ||||||
|
| |||||||
$ | 15,201,759 | |||||||
|
| |||||||
Pharmaceuticals – 0.6% | ||||||||
Actavis Funding SCS, 3.8%, 3/15/2025 | $ | 1,429,000 | $ | 1,428,859 | ||||
Actavis Funding SCS, 4.85%, 6/15/2044 | 1,653,000 | 1,635,891 | ||||||
Celgene Corp., 2.875%, 8/15/2020 | 1,545,000 | 1,561,556 | ||||||
Gilead Sciences, Inc., 3.7%, 4/01/2024 | 915,000 | 938,128 | ||||||
Gilead Sciences, Inc., 3.5%, 2/01/2025 | 5,767,000 | 5,823,540 | ||||||
Shire Acquisitions Investments Ireland Designated Activity Co., 3.2%, 9/23/2026 | 4,529,000 | 4,226,368 | ||||||
Teva Pharmaceutical Finance IV LLC, 3.65%, 11/10/2021 | 1,416,000 | 1,432,835 | ||||||
|
| |||||||
$ | 17,047,177 | |||||||
|
| |||||||
Real Estate – Healthcare – 0.1% | ||||||||
HCP, Inc., REIT, 5.375%, 2/01/2021 | $ | 2,622,000 | $ | 2,862,154 | ||||
|
| |||||||
Real Estate – Retail – 0.0% | ||||||||
Realty Income Corp., REIT, 3%, 1/15/2027 | $ | 921,000 | $ | 865,768 | ||||
|
| |||||||
Retailers – 0.0% | ||||||||
Home Depot, Inc., 5.95%, 4/01/2041 | $ | 989,000 | $ | 1,255,110 | ||||
|
| |||||||
Supranational – 0.1% | ||||||||
Asian Development Bank, 1.125%, 3/15/2017 | $ | 2,069,000 | $ | 2,069,298 | ||||
|
| |||||||
Telecommunications – Wireless – 0.5% | ||||||||
American Tower Trust I, REIT, 3.07%, 3/15/2023 (n) | $ | 3,560,000 | $ | 3,523,967 | ||||
Crown Castle Towers LLC, 6.113%, 1/15/2020 (n) | 2,493,000 | 2,701,068 | ||||||
Crown Castle Towers LLC, 4.883%, 8/15/2020 (n) | 1,270,000 | 1,352,386 | ||||||
Rogers Communications, Inc., 6.8%, 8/15/2018 | 5,026,000 | 5,418,350 | ||||||
|
| |||||||
$ | 12,995,771 | |||||||
|
| |||||||
Tobacco – 0.3% | ||||||||
Imperial Tobacco Finance PLC, 2.95%, 7/21/2020 (z) | $ | 2,518,000 | $ | 2,531,590 | ||||
Reynolds American, Inc., 4.45%, 6/12/2025 | 4,382,000 | 4,620,766 | ||||||
|
| |||||||
$ | 7,152,356 | |||||||
|
| |||||||
Transportation – Services – 0.1% | ||||||||
ERAC USA Finance LLC, 7%, 10/15/2037 (n) | $ | 2,696,000 | $ | 3,410,888 | ||||
|
| |||||||
U.S. Government Agencies and Equivalents – 0.1% | ||||||||
Small Business Administration, 4.35%, 7/01/2023 | $ | 4,851 | $ | 5,049 | ||||
Small Business Administration, 4.77%, 4/01/2024 | 277,992 | 292,464 |
Issuer | Shares/Par | Value ($) | ||||||
BONDS – continued | ||||||||
U.S. Government Agencies and Equivalents – continued | ||||||||
Small Business Administration, 5.18%, 5/01/2024 | $ | 401,661 | $ | 427,029 | ||||
Small Business Administration, 5.52%, 6/01/2024 | 21,666 | 23,126 | ||||||
Small Business Administration, 4.99%, 9/01/2024 | 435,847 | 463,390 | ||||||
Small Business Administration, 4.95%, 3/01/2025 | 14,533 | 15,417 | ||||||
Small Business Administration, 5.11%, 8/01/2025 | 1,424,842 | 1,519,897 | ||||||
|
| |||||||
$ | 2,746,372 | |||||||
|
| |||||||
U.S. Treasury Obligations – 12.7% | ||||||||
U.S. Treasury Bonds, 8%, 11/15/2021 | $ | 723,000 | $ | 925,176 | ||||
U.S. Treasury Bonds, 6%, 2/15/2026 | 777,000 | 1,003,377 | ||||||
U.S. Treasury Bonds, 6.75%, 8/15/2026 | 2,569,000 | 3,513,185 | ||||||
U.S. Treasury Bonds, 5.375%, 2/15/2031 | 574,000 | 763,175 | ||||||
U.S. Treasury Bonds, 4.5%, 2/15/2036 | 1,203,000 | 1,519,490 | ||||||
U.S. Treasury Bonds, 5%, 5/15/2037 | 1,609,000 | 2,156,683 | ||||||
U.S. Treasury Bonds, 4.5%, 8/15/2039 | 17,014,600 | 21,328,567 | ||||||
U.S. Treasury Bonds, 2.875%, 5/15/2043 | 52,350,300 | 50,456,476 | ||||||
U.S. Treasury Bonds, 2.5%, 2/15/2045 | 19,673,000 | 17,482,274 | ||||||
U.S. Treasury Notes, 1.75%, 11/30/2021 | 10,534,000 | 10,444,946 | ||||||
U.S. Treasury Notes, 1.375%, 2/29/2020 | 2,412,000 | 2,399,130 | ||||||
U.S. Treasury Notes, 3.75%, 11/15/2018 | 7,568,000 | 7,927,419 | ||||||
U.S. Treasury Notes, 2.75%, 2/15/2019 | 41,829,000 | 43,131,722 | ||||||
U.S. Treasury Notes, 3.125%, 5/15/2019 | 33,754,000 | 35,181,288 | ||||||
U.S. Treasury Notes, 1%, 6/30/2019 | 5,900,000 | 5,851,785 | ||||||
U.S. Treasury Notes, 1.625%, 6/30/2019 | 51,423,000 | 51,788,000 | ||||||
U.S. Treasury Notes, 3.5%, 5/15/2020 | 25,260,000 | 26,833,067 | ||||||
U.S. Treasury Notes, 3.125%, 5/15/2021 | 17,180,000 | 18,088,272 | ||||||
U.S. Treasury Notes, 2.5%, 8/15/2023 | 31,120,000 | 31,634,258 | ||||||
U.S. Treasury Notes, 3%, 11/15/2045 | 3,638,000 | 3,579,861 | ||||||
|
| |||||||
$ | 336,008,151 | |||||||
|
| |||||||
Utilities – Electric Power – 1.0% | ||||||||
Berkshire Hathaway Energy Co., 3.75%, 11/15/2023 | $ | 1,930,000 | $ | 2,016,055 | ||||
Duke Energy Corp., 2.65%, 9/01/2026 | 397,000 | 369,964 | ||||||
Exelon Corp., 3.4%, 4/15/2026 | 3,438,000 | 3,368,439 | ||||||
MidAmerican Funding LLC, 6.927%, 3/01/2029 | 903,000 | 1,196,265 | ||||||
Oncor Electric Delivery Co., 7%, 9/01/2022 | 2,810,000 | 3,426,278 | ||||||
Pacific Gas & Electric Co., 4.6%, 6/15/2043 | 2,940,000 | 3,095,223 | ||||||
PPL Capital Funding, Inc., 5%, 3/15/2044 | 870,000 | 918,323 | ||||||
PPL Corp., 3.4%, 6/01/2023 | 2,940,000 | 2,956,899 | ||||||
Progress Energy, Inc., 3.15%, 4/01/2022 | 3,893,000 | 3,924,335 | ||||||
Southern Co., 3.25%, 7/01/2026 | 3,913,000 | 3,802,642 | ||||||
Waterford 3 Funding Corp., 8.09%, 1/02/2017 | 891,821 | 891,821 | ||||||
|
| |||||||
$ | 25,966,244 | |||||||
|
| |||||||
Total Bonds (Identified Cost, $1,018,202,694) | $ | 1,038,313,455 | ||||||
|
|
15
Table of Contents
MFS Total Return Series
Portfolio of Investments – continued
Issuer | Shares/Par | Value ($) | ||||||
CONVERTIBLE PREFERRED STOCKS – 0.5% | ||||||||
Food & Beverages – 0.1% | ||||||||
Tyson Foods, Inc., 4.75% | 54,050 | $ | 3,656,483 | |||||
|
| |||||||
Pharmaceuticals – 0.1% | ||||||||
Allergan PLC, 5.5% | 3,881 | $ | 2,959,107 | |||||
|
| |||||||
Telephone Services – 0.1% | ||||||||
Frontier Communications Corp., 11.125% | 17,033 | $ | 1,210,706 | |||||
|
| |||||||
Utilities – Electric Power – 0.2% | ||||||||
Exelon Corp., 6.5% | 108,821 | $ | 5,268,025 | |||||
|
| |||||||
Total Convertible Preferred Stocks (Identified Cost, $12,588,863) | $ | 13,094,321 | ||||||
|
| |||||||
MONEY MARKET FUNDS – 1.9% | ||||||||
MFS Institutional Money Market Portfolio, 0.51% (v) (Identified Cost, $51,630,802) | 51,630,973 | $ | 51,630,973 | |||||
|
|
Issuer | Shares/Par | Value ($) | ||||||
COLLATERAL FOR SECURITIES LOANED – 0.1% | ||||||||
State Street Navigator Securities Lending Government Money Market Portfolio, 0.50% (j) (Identified Cost, $1,385,339) | 1,385,339 | $ | 1,385,339 | |||||
|
| |||||||
Total Investments (Identified Cost, $2,201,676,957) | $ | 2,638,544,673 | ||||||
|
| |||||||
OTHER ASSETS, LESS LIABILITIES – (0.1)% | (1,998,441 | ) | ||||||
|
| |||||||
NET ASSETS – 100.0% | $ | 2,636,546,232 | ||||||
|
|
(a) | Non-income producing security. |
(i) | Interest only security for which the fund receives interest on notional principal (Par amount). Par amount shown is the notional principal and does not reflect the cost of the security. |
(j) | The rate quoted is the annualized seven-day yield of the fund at period end. |
(l) | A portion of this security is on loan. |
(n) | Securities exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be sold in the ordinary course of business in transactions exempt from registration, normally to qualified institutional buyers. At period end, the aggregate value of these securities was $71,598,602 representing 2.7% of net assets. |
(v) | Underlying affiliated fund that is available only to investment companies managed by MFS. The rate quoted for the MFS Institutional Money Market Portfolio is the annualized seven-day yield of the fund at period end. |
(z) | Restricted securities are not registered under the Securities Act of 1933 and are subject to legal restrictions on resale. These securities generally may be resold in transactions exempt from registration or to the public if the securities are subsequently registered. Disposal of these securities may involve time-consuming negotiations and prompt sale at an acceptable price may be difficult. The fund holds the following restricted securities: |
Restricted Securities | Acquisition Date | Cost | Value | |||||||
Bayview Financial Revolving Mortgage Loan Trust, FRN, 2.134%, 12/28/2040 | 3/01/06 | $2,329,123 | $1,776,757 | |||||||
BlackRock Capital Finance LP, 7.75%, 9/25/2026 | 8/16/13 | 31,432 | 3,206 | |||||||
Chesapeake Funding II LLC, 2016-2A, “A2”, FRN, 1.703%, 6/15/2028 | 6/14/16 | 3,425,000 | 3,442,813 | |||||||
Imperial Tobacco Finance PLC, 2.95%, 7/21/2020 | 7/15/15 | 2,498,179 | 2,531,590 | |||||||
State Grid Overseas Investment (2014) Ltd., 2.75%, 5/07/2019 | 4/28/14 | 2,579,336 | 2,624,116 | |||||||
UBS Group Funding (Jersey) Ltd., 4.125%, 4/15/2026 | 3/29/16 | 2,530,736 | 2,589,997 | |||||||
Total Restricted Securities | $12,968,479 | |||||||||
% of Net assets | 0.5% |
The following abbreviations are used in this report and are defined:
ADR | American Depositary Receipt |
CLO | Collateralized Loan Obligation |
FRN | Floating Rate Note. Interest rate resets periodically and the current rate may not be the rate reported at period end. |
PLC | Public Limited Company |
REIT | Real Estate Investment Trust |
TBA | To Be Announced |
See Notes to Financial Statements
16
Table of Contents
MFS Total Return Series
FINANCIAL STATEMENTS | STATEMENT OF ASSETS AND LIABILITIES
This statement represents your fund’s balance sheet, which details the assets and liabilities comprising the total value of the fund.
At 12/31/16 | ||||||||
Assets | ||||||||
Investments | ||||||||
Non-affiliated issuers, at value (identified cost, $2,150,046,155) | $2,586,913,700 | |||||||
Underlying affiliated funds, at value (identified cost, $51,630,802) | 51,630,973 | |||||||
Total investments, at value, including $1,337,841 of securities on loan (identified cost, $2,201,676,957) | $2,638,544,673 | |||||||
Foreign currency, at value (identified cost, $15) | 15 | |||||||
Receivables for | ||||||||
Investments sold | 2,754,594 | |||||||
TBA sale commitments | 5,283,057 | |||||||
Fund shares sold | 802,164 | |||||||
Interest and dividends | 10,349,668 | |||||||
Receivable from investment adviser | 3,835 | |||||||
Total assets | $2,657,738,006 | |||||||
Liabilities | ||||||||
Payable to custodian | $314 | |||||||
Payables for | ||||||||
Investments purchased | 8,319,812 | |||||||
TBA purchase commitments | 9,660,625 | |||||||
Fund shares reacquired | 1,527,086 | |||||||
Collateral for securities loaned, at value | 1,385,339 | |||||||
Payable to affiliates | ||||||||
Shareholder servicing costs | 1,542 | |||||||
Distribution and/or service fees | 26,175 | |||||||
Payable for independent Trustees’ compensation | 249 | |||||||
Accrued expenses and other liabilities | 270,632 | |||||||
Total liabilities | $21,191,774 | |||||||
Net assets | $2,636,546,232 | |||||||
Net assets consist of | ||||||||
Paid-in capital | $2,083,228,251 | |||||||
Unrealized appreciation (depreciation) on investments and translation of assets and liabilities in foreign currencies | 436,833,703 | |||||||
Accumulated net realized gain (loss) on investments and foreign currency | 54,855,681 | |||||||
Undistributed net investment income | 61,628,597 | |||||||
Net assets | $2,636,546,232 | |||||||
Shares of beneficial interest outstanding | 114,626,524 |
Net assets | Shares outstanding | Net asset value per share | ||||||||||
Initial Class | $1,359,943,424 | 58,658,525 | $23.18 | |||||||||
Service Class | 1,276,602,808 | 55,967,999 | 22.81 |
See Notes to Financial Statements
17
Table of Contents
MFS Total Return Series
FINANCIAL STATEMENTS | STATEMENT OF OPERATIONS
This statement describes how much your fund earned in investment income and accrued in expenses. It also describes any gains and/or losses generated by fund operations.
Year ended 12/31/16 |
| |||||||
Net investment income |
| |||||||
Income | ||||||||
Dividends | $44,229,906 | |||||||
Interest | 33,148,241 | |||||||
Dividends from underlying affiliated funds | 163,570 | |||||||
Other | 29,374 | |||||||
Foreign taxes withheld | (363,793 | ) | ||||||
Total investment income | $77,207,298 | |||||||
Expenses | ||||||||
Management fee | $18,119,065 | |||||||
Distribution and/or service fees | 3,065,734 | |||||||
Shareholder servicing costs | 87,662 | |||||||
Administrative services fee | 416,553 | |||||||
Independent Trustees’ compensation | 50,638 | |||||||
Custodian fee | 145,658 | |||||||
Reimbursement of custodian expenses | (454,868 | ) | ||||||
Shareholder communications | 127,624 | |||||||
Audit and tax fees | 72,414 | |||||||
Legal fees | 25,093 | |||||||
Miscellaneous | 72,613 | |||||||
Total expenses | $21,728,186 | |||||||
Reduction of expenses by investment adviser | (2,390,910 | ) | ||||||
Net expenses | $19,337,276 | |||||||
Net investment income | $57,870,022 | |||||||
Realized and unrealized gain (loss) on investments and foreign currency | ||||||||
Realized gain (loss) (identified cost basis) | ||||||||
Investments: | ||||||||
Non-affiliated issuers | $77,847,414 | |||||||
Underlying affiliated funds | 269 | |||||||
Foreign currency | (28,824 | ) | ||||||
Net realized gain (loss) on investments and foreign currency | $77,818,859 | |||||||
Change in unrealized appreciation (depreciation) | ||||||||
Investments | $87,824,298 | |||||||
Translation of assets and liabilities in foreign currencies | (3,290 | ) | ||||||
Net unrealized gain (loss) on investments and foreign currency translation | $87,821,008 | |||||||
Net realized and unrealized gain (loss) on investments and foreign currency | $165,639,867 | |||||||
Change in net assets from operations | $223,509,889 |
See Notes to Financial Statements
18
Table of Contents
MFS Total Return Series
FINANCIAL STATEMENTS | STATEMENTS OF CHANGES IN NET ASSETS
These statements describe the increases and/or decreases in net assets resulting from operations, any distributions, and any shareholder transactions.
For years ended 12/31 | 2016 | 2015 | ||||||
Change in net assets | ||||||||
From operations | ||||||||
Net investment income | $57,870,022 | $70,198,536 | ||||||
Net realized gain (loss) on investments and foreign currency | 77,818,859 | 85,865,410 | ||||||
Net unrealized gain (loss) on investments and foreign currency translation | 87,821,008 | (165,414,115 | ) | |||||
Change in net assets from operations | $223,509,889 | $(9,350,169 | ) | |||||
Distributions declared to shareholders | ||||||||
From net investment income | $(73,082,831 | ) | $(70,334,733 | ) | ||||
From net realized gain on investments | (85,822,677 | ) | (104,926,629 | ) | ||||
Total distributions declared to shareholders | $(158,905,508 | ) | $(175,261,362 | ) | ||||
Change in net assets from fund share transactions | $(42,925,554 | ) | $(233,477,805 | ) | ||||
Total change in net assets | $21,678,827 | $(418,089,336 | ) | |||||
Net assets | ||||||||
At beginning of period | 2,614,867,405 | 3,032,956,741 | ||||||
At end of period (including undistributed net investment income of $61,628,597 and | $2,636,546,232 | $2,614,867,405 |
See Notes to Financial Statements
19
Table of Contents
MFS Total Return Series
FINANCIAL STATEMENTS | FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the fund’s financial performance for the past 5 years. Certain information reflects financial results for a single fund share. The total returns in the table represent the rate by which an investor would have earned (or lost) on an investment in the fund share class (assuming reinvestment of all distributions) held for the entire period.
Initial Class | Years ended 12/31 | |||||||||||||||||||
2016 | 2015 | 2014 | 2013 | 2012 | ||||||||||||||||
Net asset value, beginning of period | $22.60 | $24.31 | $23.44 | $20.05 | $18.53 | |||||||||||||||
Income (loss) from investment operations | ||||||||||||||||||||
Net investment income (d) | $0.54 | (c) | $0.62 | $0.54 | $0.45 | $0.44 | ||||||||||||||
Net realized and unrealized gain (loss) on investments | 1.51 | (0.77 | ) | 1.43 | 3.34 | 1.63 | ||||||||||||||
Total from investment operations | $2.05 | $(0.15 | ) | $1.97 | $3.79 | $2.07 | ||||||||||||||
Less distributions declared to shareholders | ||||||||||||||||||||
From net investment income | $(0.69 | ) | $(0.64 | ) | $(0.46 | ) | $(0.40 | ) | $(0.55 | ) | ||||||||||
From net realized gain on investments | (0.78 | ) | (0.92 | ) | (0.64 | ) | — | — | ||||||||||||
Total distributions declared to shareholders | $(1.47 | ) | $(1.56 | ) | $(1.10 | ) | $(0.40 | ) | $(0.55 | ) | ||||||||||
Net asset value, end of period (x) | $23.18 | $22.60 | $24.31 | $23.44 | $20.05 | |||||||||||||||
Total return (%) (k)(r)(s)(x) | 9.09 | (c) | (0.37 | ) | 8.50 | 19.05 | 11.26 | |||||||||||||
Ratios (%) (to average net assets) and Supplemental data: | ||||||||||||||||||||
Expenses before expense reductions (f) | 0.71 | (c) | 0.79 | 0.78 | 0.79 | 0.80 | ||||||||||||||
Expenses after expense reductions (f) | 0.62 | (c) | 0.65 | 0.67 | 0.73 | 0.77 | ||||||||||||||
Net investment income | 2.33 | (c) | 2.57 | 2.24 | 2.05 | 2.26 | ||||||||||||||
Portfolio turnover | 35 | 41 | 32 | 53 | 22 | |||||||||||||||
Net assets at end of period (000 omitted) | $1,359,943 | $1,423,284 | $1,662,709 | $1,826,378 | $1,440,525 |
See Notes to Financial Statements
20
Table of Contents
MFS Total Return Series
Financial Highlights – continued
Service Class | Years ended 12/31 | |||||||||||||||||||
2016 | 2015 | 2014 | 2013 | 2012 | ||||||||||||||||
Net asset value, beginning of period | $22.26 | $23.95 | $23.12 | $19.80 | $18.31 | |||||||||||||||
Income (loss) from investment operations | ||||||||||||||||||||
Net investment income (d) | $0.47 | (c) | $0.55 | $0.47 | $0.39 | $0.39 | ||||||||||||||
Net realized and unrealized gain (loss) on investments | 1.49 | (0.74 | ) | 1.41 | 3.29 | 1.60 | ||||||||||||||
Total from investment operations | $1.96 | $(0.19 | ) | $1.88 | $3.68 | $1.99 | ||||||||||||||
Less distributions declared to shareholders | ||||||||||||||||||||
From net investment income | $(0.63 | ) | $(0.58 | ) | $(0.41 | ) | $(0.36 | ) | $(0.50 | ) | ||||||||||
From net realized gain on investments | (0.78 | ) | (0.92 | ) | (0.64 | ) | — | — | ||||||||||||
Total distributions declared to shareholders | $(1.41 | ) | $(1.50 | ) | $(1.05 | ) | $(0.36 | ) | $(0.50 | ) | ||||||||||
Net asset value, end of period (x) | $22.81 | $22.26 | $23.95 | $23.12 | $19.80 | |||||||||||||||
Total return (%) (k)(r)(s)(x) | 8.81 | (c) | (0.58 | ) | 8.24 | 18.74 | 10.93 | |||||||||||||
Ratios (%) (to average net assets) and Supplemental data: | ||||||||||||||||||||
Expenses before expense reductions (f) | 0.96 | (c) | 1.04 | 1.03 | 1.04 | 1.05 | ||||||||||||||
Expenses after expense reductions (f) | 0.87 | (c) | 0.90 | 0.92 | 0.98 | 1.02 | ||||||||||||||
Net investment income | 2.08 | (c) | 2.32 | 1.98 | 1.80 | 2.02 | ||||||||||||||
Portfolio turnover | 35 | 41 | 32 | 53 | 22 | |||||||||||||||
Net assets at end of period (000 omitted) | $1,276,603 | $1,191,583 | $1,370,248 | $1,392,627 | $872,739 |
(c) | Amount reflects a one-time reimbursement of expenses by the custodian (or former custodian) without which net investment income and performance would be lower and expenses would be higher. See Note 2 in the Notes to Financial Statements for additional information. |
(d) | Per share data is based on average shares outstanding. |
(f) | Ratios do not reflect reductions from fees paid indirectly, if applicable. |
(k) | The total return does not reflect expenses that apply to separate accounts. Inclusion of these charges would reduce the total return figures for all periods shown. |
(r) | Certain expenses have been reduced without which performance would have been lower. |
(s) | From time to time the fund may receive proceeds from litigation settlements, without which performance would be lower. |
(x) | The net asset values and total returns have been calculated on net assets which include adjustments made in accordance with U.S. generally accepted accounting principles required at period end for financial reporting purposes. |
See Notes to Financial Statements
21
Table of Contents
MFS Total Return Series
(1) | Business and Organization |
MFS Total Return Series (the fund) is a diversified series of MFS Variable Insurance Trust (the trust). The trust is organized as a Massachusetts business trust and is registered under the Investment Company Act of 1940, as amended, as an open-end management investment company. The shareholders of each series of the trust are separate accounts of insurance companies, which offer variable annuity and/or life insurance products, and qualified retirement and pension plans.
The fund is an investment company and accordingly follows the investment company accounting and reporting guidance of the Financial Accounting Standards Board (FASB) Accounting Standards Codification Topic 946 Financial Services – Investment Companies.
(2) | Significant Accounting Policies |
General – The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of increases and decreases in net assets from operations during the reporting period. Actual results could differ from those estimates. In the preparation of these financial statements, management has evaluated subsequent events occurring after the date of the fund’s Statement of Assets and Liabilities through the date that the financial statements were issued.
In October 2016, the Securities and Exchange Commission (SEC) released its Final Rule on Investment Company Reporting Modernization (the “Rule”). The Rule, which introduces two new regulatory reporting forms for investment companies – Form N-PORT and Form N-CEN – also contains amendments to Regulation S-X which impact financial statement presentation, particularly the presentation of derivative investments. Although still evaluating the impacts of the Rule, management believes that many of the Regulation S-X amendments are consistent with the fund’s current financial statement presentation and expects that the fund will be able to comply with the Rule’s Regulation S-X amendments by the August 1, 2017 compliance date.
Balance Sheet Offsetting – The fund’s accounting policy with respect to balance sheet offsetting is that, absent an event of default by the counterparty or a termination of the agreement, the International Swaps and Derivatives Association (ISDA) Master Agreement does not result in an offset of reported amounts of financial assets and financial liabilities in the Statement of Assets and Liabilities across transactions between the fund and the applicable counterparty. The fund’s right to setoff may be restricted or prohibited by the bankruptcy or insolvency laws of the particular jurisdiction to which a specific master netting agreement counterparty is subject. Balance sheet offsetting disclosures, to the extent applicable to the fund, have been included in the fund’s Significant Accounting Policies note under the captions for each of the fund’s in-scope financial instruments and transactions.
Investment Valuations – Equity securities, including restricted equity securities, are generally valued at the last sale or official closing price on their primary market or exchange as provided by a third-party pricing service. Equity securities, for which there were no sales reported that day, are generally valued at the last quoted daily bid quotation on their primary market or exchange as provided by a third-party pricing service. Debt instruments and floating rate loans, including restricted debt instruments, are generally valued at an evaluated or composite bid as provided by a third-party pricing service. Short-term instruments with a maturity at issuance of 60 days or less may be valued at amortized cost, which approximates market value. Open-end investment companies are generally valued at net asset value per share. Securities and other assets generally valued on the basis of information from a third-party pricing service may also be valued at a broker/dealer bid quotation. Values obtained from third-party pricing services can utilize both transaction data and market information such as yield, quality, coupon rate, maturity, type of issue, trading characteristics, and other market data. The values of foreign securities and other assets and liabilities expressed in foreign currencies are converted to U.S. dollars using the mean of bid and asked prices for rates provided by a third-party pricing service.
The Board of Trustees has delegated primary responsibility for determining or causing to be determined the value of the fund’s investments (including any fair valuation) to the adviser pursuant to valuation policies and procedures approved by the Board. If the adviser determines that reliable market quotations are not readily available, investments are valued at fair value as determined in good faith by the adviser in accordance with such procedures under the oversight of the Board of Trustees. Under the fund’s valuation policies and procedures, market quotations are not considered to be readily available for most types of debt instruments and floating rate loans and many types of derivatives. These investments are generally valued at fair value based on information from third-party pricing services. In addition, investments may be valued at fair value if the adviser determines that an investment’s value has been materially affected by events occurring after the close of the exchange or market on which the investment is principally traded (such as foreign exchange or market) and prior to the determination of the fund’s net asset value, or after the halting of trading of a specific security where trading does not resume prior to the close of the exchange or market on which the security is principally traded. Events that occur on a frequent basis after foreign markets close (such as developments in foreign markets and significant movements in the U.S. markets) and prior to the determination of the fund’s net asset value may be deemed to have a material effect on the value of securities traded in foreign markets. Accordingly, the fund’s foreign equity securities may often be valued at fair value. The adviser generally relies on third-party pricing services or other information (such as the correlation with price movements of similar securities in the same or other markets; the type, cost and investment characteristics of the security; the
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business and financial condition of the issuer; and trading and other market data) to assist in determining whether to fair value and at what value to fair value an investment. The value of an investment for purposes of calculating the fund’s net asset value can differ depending on the source and method used to determine value. When fair valuation is used, the value of an investment used to determine the fund’s net asset value may differ from quoted or published prices for the same investment. There can be no assurance that the fund could obtain the fair value assigned to an investment if it were to sell the investment at the same time at which the fund determines its net asset value per share.
Various inputs are used in determining the value of the fund’s assets or liabilities. These inputs are categorized into three broad levels. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an investment’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The fund’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the investment. Level 1 includes unadjusted quoted prices in active markets for identical assets or liabilities. Level 2 includes other significant observable market-based inputs (including quoted prices for similar securities, interest rates, prepayment speed, and credit risk). Level 3 includes unobservable inputs, which may include the adviser’s own assumptions in determining the fair value of investments. The following is a summary of the levels used as of December 31, 2016 in valuing the fund’s assets or liabilities:
Investments at Value | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Equity Securities: | ||||||||||||||||
United States | $1,411,894,368 | $— | $— | $1,411,894,368 | ||||||||||||
United Kingdom | 2,166,443 | 26,068,962 | — | 28,235,405 | ||||||||||||
Switzerland | 17,524,523 | 7,927,711 | — | 25,452,234 | ||||||||||||
Canada | 14,716,762 | — | — | 14,716,762 | ||||||||||||
Germany | 10,187,094 | — | — | 10,187,094 | ||||||||||||
France | 2,185,512 | 7,161,954 | — | 9,347,466 | ||||||||||||
Taiwan | 8,102,728 | — | — | 8,102,728 | ||||||||||||
Israel | 7,857,483 | — | — | 7,857,483 | ||||||||||||
South Korea | — | 7,075,872 | — | 7,075,872 | ||||||||||||
Other Countries | 16,904,099 | 7,441,395 | — | 24,345,494 | ||||||||||||
U.S. Treasury Bonds & U.S. Government Agency & Equivalents | — | 340,221,361 | — | 340,221,361 | ||||||||||||
Non-U.S. Sovereign Debt | — | 22,717,839 | — | 22,717,839 | ||||||||||||
Municipal Bonds | — | 5,527,463 | — | 5,527,463 | ||||||||||||
U.S. Corporate Bonds | — | 222,944,435 | — | 222,944,435 | ||||||||||||
Residential Mortgage-Backed Securities | — | 313,453,246 | — | 313,453,246 | ||||||||||||
Commercial Mortgage-Backed Securities | — | 36,129,102 | — | 36,129,102 | ||||||||||||
Asset-Backed Securities (including CDOs) | — | 19,373,488 | — | 19,373,488 | ||||||||||||
Foreign Bonds | — | 77,946,521 | — | 77,946,521 | ||||||||||||
Mutual Funds | 53,016,312 | — | — | 53,016,312 | ||||||||||||
Total Investments | $1,544,555,324 | $1,093,989,349 | $— | $2,638,544,673 |
For further information regarding security characteristics, see the Portfolio of Investments.
Of the level 2 investments presented above, equity investments amounting to $4,658,784 would have been considered level 1 investments at the beginning of the period. Of the level 1 investments presented above, equity investments amounting to $36,447,781 would have been considered level 2 investments at the beginning of the period. The primary reason for changes in the classifications between levels 1 and 2 occurs when foreign equity securities are fair valued using other observable market-based inputs in place of the closing exchange price due to events occurring after the close of the exchange or market on which the investment is principally traded. The fund’s foreign equity securities may often be valued at fair value. The fund’s policy is to recognize transfers between the levels as of the end of the period.
Foreign Currency Translation – Purchases and sales of foreign investments, income, and expenses are converted into U.S. dollars based upon currency exchange rates prevailing on the respective dates of such transactions or on the reporting date for foreign denominated receivables and payables. Gains and losses attributable to foreign currency exchange rates on sales of securities are recorded for financial statement purposes as net realized gains and losses on investments. Gains and losses attributable to foreign exchange rate movements on receivables, payables, income and expenses are recorded for financial statement purposes as foreign currency transaction gains and losses. That portion of both realized and unrealized gains and losses on investments that results from fluctuations in foreign currency exchange rates is not separately disclosed.
Security Loans – Under its Securities Lending Agency Agreement with the fund, State Street Bank and Trust Company (“State Street”), as lending agent, loans the securities of the fund to certain qualified institutions (the “Borrowers”) approved by the fund.
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Security loans can be terminated at the discretion of either the lending agent or the fund and the related securities must be returned within the earlier of the standard trade settlement period for such securities or within three business days. The loans are collateralized by cash and/or U.S. Treasury and federal agency obligations in an amount typically at least equal to the market value of the securities loaned. On loans collateralized by cash, the cash collateral is invested in a money market fund. The market value of the loaned securities is determined at the close of business of the fund and any additional required collateral is delivered to the fund on the next business day. State Street provides the fund with indemnification against Borrower default. In the event of Borrower default, State Street will, for the benefit of the fund, either purchase securities identical to those loaned or, when such purchase is commercially impracticable, pay the fund the market value of the loaned securities. In return, State Street assumes the fund’s rights to the related collateral. If the collateral value is less than the cost to purchase identical securities, State Street is responsible for the shortfall, but only to the extent that such shortfall is not due to a decline in collateral value resulting from collateral reinvestment for which the fund bears the risk of loss. At period end, the fund had investment securities on loan, all of which were classified as equity securities in the fund’s Portfolio of Investments, with a fair value of $1,337,841. The fair value of the fund’s investment securities on loan and a related liability of $1,385,339 for cash collateral received on securities loaned are both presented gross in the Statement of Assets and Liabilities. The collateral received on securities loaned exceeded the value of securities on loan at period end. The liability for cash collateral for securities loaned is carried at fair value, which is categorized as level 2 within the fair value hierarchy. A portion of the income generated upon investment of the collateral is remitted to the Borrowers, and the remainder is allocated between the fund and the lending agent. On loans collateralized by U.S. Treasury and/or federal agency obligations, a fee is received from the Borrower, and is allocated between the fund and the lending agent. Income from securities lending is included in “Interest” income, in the Statement of Operations. The dividend and interest income earned on the securities loaned is accounted for in the same manner as other dividend and interest income.
Dollar Roll Transactions – The fund enters into dollar roll transactions, with respect to mortgage-backed securities issued by Ginnie Mae, Fannie Mae, and Freddie Mac, in which the fund sells mortgage-backed securities to financial institutions and simultaneously agrees to purchase similar (same issuer, type and coupon) securities at a later date at an agreed-upon price. During the period between the sale and repurchase in a dollar roll transaction the fund will not be entitled to receive interest and principal payments on the securities sold but is compensated by interest earned on the proceeds of the initial sale and by a lower purchase price on the securities to be repurchased which enhances the fund’s total return. The fund accounts for dollar roll transactions as purchases and sales and realizes gains and losses on these transactions.
Indemnifications – Under the fund’s organizational documents, its officers and Trustees may be indemnified against certain liabilities and expenses arising out of the performance of their duties to the fund. Additionally, in the normal course of business, the fund enters into agreements with service providers that may contain indemnification clauses. The fund’s maximum exposure under these agreements is unknown as this would involve future claims that may be made against the fund that have not yet occurred.
Investment Transactions and Income – Investment transactions are recorded on the trade date. Interest income is recorded on the accrual basis. All premium and discount is amortized or accreted for financial statement purposes in accordance with U.S. generally accepted accounting principles. Dividends received in cash are recorded on the ex-dividend date. Certain dividends from foreign securities will be recorded when the fund is informed of the dividend if such information is obtained subsequent to the ex-dividend date. Dividend and interest payments received in additional securities are recorded on the ex-dividend or ex-interest date in an amount equal to the value of the security on such date.
The fund may receive proceeds from litigation settlements. Any proceeds received from litigation involving portfolio holdings are reflected in the Statement of Operations in realized gain/loss if the security has been disposed of by the fund or in unrealized gain/loss if the security is still held by the fund. Any other proceeds from litigation not related to portfolio holdings are reflected as other income in the Statement of Operations.
The fund invests a significant portion of its assets in asset-backed and/or mortgage-backed securities. The value of these securities may depend, in part, on the issuer’s or borrower’s credit quality or ability to pay principal and interest when due and that value may fall if an issuer or borrower defaults on its obligation to pay principal or interest or if the instrument’s credit rating is downgraded by a credit rating agency. U.S. Government securities not supported as to the payment of principal or interest by the U.S. Treasury, such as those issued by Fannie Mae, Freddie Mac, and the Federal Home Loan Banks, are subject to greater credit risk than are U.S. Government securities supported by the U.S. Treasury, such as those issued by Ginnie Mae.
The fund purchased or sold debt securities on a when-issued or delayed delivery basis, or in a “To Be Announced” (TBA) or “forward commitment” transaction with delivery or payment to occur at a later date beyond the normal settlement period. At the time a fund enters into a commitment to purchase or sell a security, the transaction is recorded and the value of the security acquired is reflected in the fund’s net asset value. The price of such security and the date that the security will be delivered and paid for are fixed at the time the transaction is negotiated. The value of the security may vary with market fluctuations. TBA securities resulting from these transactions are included in the Portfolio of Investments. TBA purchase (sale) commitments are held at carrying amount, which approximates fair value and are categorized as level 2 within the fair value hierarchy. No interest accrues to the fund until payment
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takes place. At the time that a fund enters into this type of transaction, the fund is required to have sufficient cash and/or liquid securities to cover its commitments. Losses may arise due to changes in the value of the underlying securities or if the counterparty does not perform under the contract’s terms, or if the issuer does not issue the securities due to political, economic or other factors. Additionally, losses may arise due to declines in the value of the securities prior to settlement date.
To mitigate this risk of loss on TBA securities and other types of forward settling mortgage-backed securities, the fund whenever possible enters into a Master Securities Forward Transaction Agreement (“MSFTA”) on a bilateral basis with each of the counterparties with whom it undertakes a significant volume of transactions. The MSFTA gives each party to the agreement the right to terminate all transactions traded under such agreement if there is a certain deterioration in the credit quality of the other party. Upon an event of default or a termination of the MSFTA, the non-defaulting party has the right to close out all transactions traded under such agreement and to net amounts owed under each transaction to one net amount payable by one party to the other. This right to close out and net payments across all transactions traded under the MSFTA could result in a reduction of the fund’s credit risk to such counterparty equal to any amounts payable by the fund under the applicable transactions, if any.
For mortgage-backed securities traded under a MSFTA, the collateral and margining requirements are contract specific. Collateral amounts across all transactions traded under such agreement are netted and one amount is posted from one party to the other to collateralize such obligations. Cash that has been pledged to cover the fund’s collateral or margin obligations under a MSFTA, if any, will be reported separately on the Statement of Assets and Liabilities as restricted cash. Securities pledged as collateral or margin for the same purpose, if any, are noted in the Portfolio of Investments.
Reimbursement of Expenses by Custodian – In December 2015, the fund’s custodian (or former custodian), State Street Bank and Trust Company, announced that it intended to reimburse its asset servicing clients for expense amounts that it billed in error during the period 1998 through 2015. The amount of this one-time reimbursement attributable to the fund is reflected as “Reimbursement of custodian expenses” in the Statement of Operations.
Tax Matters and Distributions – The fund intends to qualify as a regulated investment company, as defined under Subchapter M of the Internal Revenue Code, and to distribute all of its taxable income, including realized capital gains. As a result, no provision for federal income tax is required. The fund’s federal tax returns, when filed, will remain subject to examination by the Internal Revenue Service for a three year period. Management has analyzed the fund’s tax positions taken on federal and state tax returns for all open tax years and does not believe that there are any uncertain tax positions that require recognition of a tax liability. Foreign taxes, if any, have been accrued by the fund in the accompanying financial statements in accordance with the applicable foreign tax law. Foreign income taxes may be withheld by certain countries in which the fund invests. Additionally, capital gains realized by the fund on securities issued in or by certain foreign countries may be subject to capital gains tax imposed by those countries.
Distributions to shareholders are recorded on the ex-dividend date. Income and capital gain distributions are determined in accordance with income tax regulations, which may differ from U.S. generally accepted accounting principles. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences which arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary overdistributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes.
Book/tax differences primarily relate to amortization and accretion of debt securities and wash sale loss deferrals.
The tax character of distributions declared to shareholders for the last two fiscal years is as follows:
12/31/16 | 12/31/15 | |||||||
Ordinary income (including any short-term capital gains) | $73,082,831 | $91,290,015 | ||||||
Long-term capital gains | 85,822,677 | 83,971,347 | ||||||
Total distributions | $158,905,508 | $175,261,362 |
The federal tax cost and the tax basis components of distributable earnings were as follows:
As of 12/31/16 | ||||
Cost of investments | $2,221,358,705 | |||
Gross appreciation | 453,580,000 | |||
Gross depreciation | (36,394,032 | ) | ||
Net unrealized appreciation (depreciation) | $417,185,968 | |||
Undistributed ordinary income | 68,326,993 | |||
Undistributed long-term capital gain | 67,839,033 | |||
Other temporary differences | (34,013 | ) |
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Multiple Classes of Shares of Beneficial Interest – The fund offers multiple classes of shares, which differ in their respective distribution and/or service fees. The fund’s income, realized and unrealized gain (loss), and common expenses are allocated to shareholders based on the daily net assets of each class. Dividends are declared separately for each class. Differences in per share dividend rates are generally due to differences in separate class expenses. The fund’s distributions declared to shareholders as reported in the Statements of Changes in Net Assets are presented by class as follows:
From net investment income | From net realized gain on investments | |||||||||||||||
Year ended 12/31/16 | Year ended 12/31/15 | Year ended 12/31/16 | Year ended 12/31/15 | |||||||||||||
Initial Class | $39,895,869 | $39,788,464 | $44,853,063 | $56,600,918 | ||||||||||||
Service Class | 33,186,962 | 30,546,269 | 40,969,614 | 48,325,711 | ||||||||||||
Total | $73,082,831 | $70,334,733 | $85,822,677 | $104,926,629 |
(3) | Transactions with Affiliates |
Investment Adviser – The fund has an investment advisory agreement with MFS to provide overall investment management and related administrative services and facilities to the fund. For the period from January 1, 2016 through April 28, 2016, the management fee was computed daily and paid monthly at the following annual rates:
First $3 billion of average daily net assets | 0.75% | |||
Next $2 billion of average daily net assets | 0.65% | |||
Average daily net assets in excess of $5 billion | 0.50% |
The investment adviser had agreed in writing to reduce its management fee to 0.70% of average daily net assets for the first $1 billion, 0.65% of average daily net assets in excess of $1 billion up to $2.5 billion, and 0.60% of average daily net assets in excess of $2.5 billion up to $5 billion. This written agreement terminated on April 28, 2016. For the period from January 1, 2016 through April 28, 2016, this management fee reduction amounted to $679,991, which is included in the reduction of total expenses in the Statement of Operations. Effective April 29, 2016, the management fee is computed daily and paid monthly at the following annual rates:
First $1 billion of average daily net assets | 0.70% | |||
Next $1.5 billion of average daily net assets | 0.65% | |||
Next $2.5 billion of average daily net assets | 0.60% | |||
Average daily net assets in excess of $5 billion | 0.50% |
MFS has also agreed in writing to reduce its management fee by a specified amount if certain MFS mutual fund assets exceed thresholds agreed to by MFS and the fund’s Board of Trustees. For the year ended December 31, 2016, this management fee reduction amounted to $185,612, which is included in the reduction of total expenses in the Statement of Operations. The management fee incurred for the year ended December 31, 2016 was equivalent to an annual effective rate of 0.66% of the fund’s average daily net assets.
The investment adviser had agreed in writing to pay a portion of the fund’s total annual operating expenses, excluding interest, taxes, extraordinary expenses, brokerage and transaction costs, and investment-related expenses, such that total annual operating expenses did not exceed 0.65% of average daily net assets for the Initial Class shares and 0.90% of average daily net assets for the Service Class shares. This written agreement terminated on July 31, 2016. For the period from January 1, 2016 through July 31, 2016, this reduction amounted to $775,547 which is included in the reduction of total expenses in the Statement of Operations. Effective August 1, 2016, the investment adviser has agreed in writing to pay a portion of the fund’s total annual operating expenses, excluding interest, taxes, extraordinary expenses, brokerage and transaction costs, and investment-related expenses, such that total annual operating expenses do not exceed 0.625% of average daily net assets for the Initial Class shares and 0.875% of average daily net assets for the Service Class shares. This written agreement will continue until modified by the fund’s Board of Trustees, but such agreement will continue at least until April 30, 2018. For the period from August 1, 2016 through December 31, 2016, this reduction amounted to $749,760 which is included in the reduction of total expenses in the Statement of Operations.
Distributor – MFS Fund Distributors, Inc. (MFD), a wholly-owned subsidiary of MFS, is the distributor of shares of the fund. The Trustees have adopted a distribution plan for the Service Class shares pursuant to Rule 12b-1 under the Investment Company Act of 1940.
The fund’s distribution plan provides that the fund will pay MFD distribution and/or service fees equal to 0.25% per annum of its average daily net assets attributable to Service Class shares as partial consideration for services performed and expenses incurred by MFD and financial intermediaries (including participating insurance companies that invest in the fund to fund variable annuity and variable life insurance contracts, sponsors of qualified retirement and pension plans that invest in the fund, and affiliates of these participating insurance companies and plan sponsors) in connection with the sale and distribution of the Service Class shares. MFD may subsequently pay all, or a portion, of the distribution and/or service fees to financial intermediaries.
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Shareholder Servicing Agent – MFS Service Center, Inc. (MFSC), a wholly-owned subsidiary of MFS, receives a fee from the fund for its services as shareholder servicing agent. For the year ended December 31, 2016, the fee was $82,306, which equated to 0.0031% annually of the fund’s average daily net assets. MFSC also receives payment from the fund for out-of-pocket expenses paid by MFSC on behalf of the fund. For the year ended December 31, 2016, these costs amounted to $5,356.
Administrator – MFS provides certain financial, legal, shareholder communications, compliance, and other administrative services to the fund. Under an administrative services agreement, the fund reimburses MFS the costs incurred to provide these services. The fund is charged an annual fixed amount of $17,500 plus a fee based on average daily net assets. The administrative services fee incurred for the year ended December 31, 2016 was equivalent to an annual effective rate of 0.0159% of the fund’s average daily net assets.
Trustees’ and Officers’ Compensation – The fund pays compensation to independent Trustees in the form of a retainer, attendance fees, and additional compensation to Board and Committee chairpersons. The fund does not pay compensation directly to Trustees or officers of the fund who are also officers of the investment adviser, all of whom receive remuneration for their services to the fund from MFS. Certain officers and Trustees of the fund are officers or directors of MFS, MFD, and MFSC.
Other – This fund and certain other funds managed by MFS (the funds) have entered into a service agreement (the ISO Agreement) which provides for payment of fees solely by the funds to Tarantino LLC in return for the provision of services of an Independent Senior Officer (ISO) for the funds. Frank L. Tarantino serves as the ISO and is an officer of the funds and the sole member of Tarantino LLC. The funds can terminate the ISO Agreement with Tarantino LLC at any time under the terms of the ISO Agreement. For the year ended December 31, 2016, the fee paid by the fund under this agreement was $5,155 and is included in “Miscellaneous” expense in the Statement of Operations. MFS has agreed to bear all expenses associated with office space, other administrative support, and supplies provided to the ISO.
The fund invests in the MFS Institutional Money Market Portfolio which is managed by MFS and seeks current income consistent with preservation of capital and liquidity. This money market fund does not pay a management fee to MFS.
The fund is permitted to engage in purchase and sale transactions (“cross-trades”) with funds and accounts for which MFS serves as investment adviser or sub-adviser pursuant to a policy adopted by the Board of Trustees. This policy has been designed to ensure that cross-trades conducted by the fund comply with Rule 17a-7 under the Investment Company Act of 1940. Under this policy, cross-trades are effected at current market prices with no remuneration paid in connection with the transaction. During the year ended December 31, 2016, the fund engaged in purchase and sale transactions pursuant to this policy, which amounted to $973,327 and $1,043,898, respectively. The sales transactions resulted in net realized gains (losses) of ($210,133).
(4) | Portfolio Securities |
For the year ended December 31, 2016, purchases and sales of investments, other than short-term obligations, were as follows:
Purchases | Sales | |||||||
U.S. Government securities | $355,047,895 | $339,818,530 | ||||||
Investments (non-U.S. Government securities) | $553,326,006 | $710,737,662 |
(5) | Shares of Beneficial Interest |
The fund’s Declaration of Trust permits the Trustees to issue an unlimited number of full and fractional shares of beneficial interest. Transactions in fund shares were as follows:
Year ended 12/31/16 | Year ended 12/31/15 | |||||||||||||||
Shares | Amount | Shares | Amount | |||||||||||||
Shares sold | ||||||||||||||||
Initial Class | 1,919,426 | $44,541,690 | 1,367,391 | $32,496,281 | ||||||||||||
Service Class | 8,039,223 | 183,220,550 | 4,224,400 | 99,533,229 | ||||||||||||
9,958,649 | $227,762,240 | 5,591,791 | $132,029,510 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | ||||||||||||||||
Initial Class | 3,681,535 | $84,748,932 | 4,433,734 | $96,389,382 | ||||||||||||
Service Class | 3,271,133 | 74,156,576 | 3,680,447 | 78,871,980 | ||||||||||||
6,952,668 | $158,905,508 | 8,114,181 | $175,261,362 | |||||||||||||
Shares reacquired | ||||||||||||||||
Initial Class | (9,906,610 | ) | $(228,366,952 | ) | (11,241,013 | ) | $(269,093,072 | ) | ||||||||
Service Class | (8,875,969 | ) | (201,226,350 | ) | (11,583,364 | ) | (271,675,605 | ) | ||||||||
(18,782,579 | ) | $(429,593,302 | ) | (22,824,377 | ) | $(540,768,677 | ) | |||||||||
Net change | ||||||||||||||||
Initial Class | (4,305,649 | ) | $(99,076,330 | ) | (5,439,888 | ) | $(140,207,409 | ) | ||||||||
Service Class | 2,434,387 | 56,150,776 | (3,678,517 | ) | (93,270,396 | ) | ||||||||||
(1,871,262 | ) | $(42,925,554 | ) | (9,118,405 | ) | $(233,477,805 | ) |
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(6) | Line of Credit |
The fund and certain other funds managed by MFS participate in a $1.25 billion unsecured committed line of credit, subject to a $1 billion sublimit, provided by a syndication of banks under a credit agreement. Borrowings may be made for temporary financing needs. Interest is charged to each fund, based on its borrowings, generally at a rate equal to the higher of the Overnight Federal Reserve funds rate or daily one month LIBOR plus an agreed upon spread. A commitment fee, based on the average daily, unused portion of the committed line of credit, is allocated among the participating funds at the end of each calendar quarter. In addition, the fund and other funds managed by MFS have established unsecured uncommitted borrowing arrangements with certain banks for temporary financing needs. Interest is charged to each fund, based on its borrowings, at a rate equal to the Overnight Federal Reserve funds rate plus an agreed upon spread. For the year ended December 31, 2016, the fund’s commitment fee and interest expense were $16,380 and $0, respectively, and are included in “Miscellaneous” expense in the Statement of Operations
(7) | Transactions in Underlying Affiliated Funds – Affiliated Issuers |
An affiliated issuer may be considered one in which the fund owns 5% or more of the outstanding voting securities, or a company which is under common control. For the purposes of this report, the fund assumes the following to be an affiliated issuer:
Underlying Affiliated Fund | Beginning Shares/Par Amount | Acquisitions Shares/Par Amount | Dispositions Shares/Par Amount | Ending Shares/Par Amount | ||||||||||||
MFS Institutional Money Market Portfolio | 42,384,515 | 439,284,281 | (430,037,823 | ) | 51,630,973 | |||||||||||
Underlying Affiliated Fund | Realized Gain (Loss) | Capital Gain Distributions | Dividend Income | Ending Value | ||||||||||||
MFS Institutional Money Market Portfolio | $269 | $— | $163,570 | $51,630,973 |
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MFS Total Return Series
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Trustees of MFS Variable Insurance Trust and the Shareholders of MFS Total Return Series:
We have audited the accompanying statement of assets and liabilities, including the portfolio of investments, of MFS Total Return Series (one of the series of MFS Variable Insurance Trust) (the “Fund”) as of December 31, 2016, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended. These financial statements and financial highlights are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. The Fund is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of December 31, 2016, by correspondence with the custodian and brokers; when replies were not received from brokers, we performed other auditing procedures. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of MFS Total Return Series as of December 31, 2016, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
February 15, 2017
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TRUSTEES AND OFFICERS – IDENTIFICATION AND BACKGROUND
The Trustees and Officers of the Trust, as of February 1, 2017, are listed below, together with their principal occupations during the past five years. (Their titles may have varied during that period.) The address of each Trustee and Officer is 111 Huntington Avenue, Boston, Massachusetts 02199-7618.
Name, Age | Position(s) with Fund | Trustee/Officer Since (h) | Principal Occupations During the Past Five Years | Other Directorships (j) | ||||
INTERESTED TRUSTEES | ||||||||
Robert J. Manning (k) (age 53) | Trustee | February 2004 | Massachusetts Financial Services Company, Executive Chairman (since January 2017) and Director; Chairman (until January 2017); Chief Executive Officer (until 2015); Co-Chief Executive Officer (2015-2016) | N/A | ||||
Robin A. Stelmach (k) (age 55) | Trustee | January 2014 | Massachusetts Financial Services Company, Vice Chair (since January 2017); Chief Operating Officer and Executive Vice President (until January 2017) | N/A | ||||
INDEPENDENT TRUSTEES | ||||||||
David H. Gunning (age 74) | Trustee and Chair of Trustees | January 2004 | Private investor | Lincoln Electric Holdings, Inc., Director; Development Alternatives, Inc., Director/Non-Executive Chairman | ||||
Steven E. Buller (age 65) | Trustee | February 2014 | Chairman, Financial Accounting Standards Advisory Council (until 2015); Standing Advisory Group, Public Company Accounting Oversight Board, Member (until 2014); BlackRock, Inc. (investment management), Managing Director (until 2014), BlackRock Finco UK (investment management), Director (until 2014) | N/A | ||||
Maureen R. Goldfarb (age 61) | Trustee | January 2009 | Private investor | N/A | ||||
Michael Hegarty (age 72) | Trustee | December 2004 | Private investor | Rouse Properties Inc., Director; Capmark Financial Group Inc., Director (until 2015) | ||||
John P. Kavanaugh (age 62) | Trustee and Vice Chair of Trustees | January 2009 | Private investor | N/A | ||||
Maryanne L. Roepke (age 60) | Trustee | May 2014 | American Century Investments (investment management), Senior Vice President and Chief Compliance Officer (until 2014) | N/A | ||||
Laurie J. Thomsen (age 59) | Trustee | March 2005 | Private investor | The Travelers Companies, Director; Dycom Industries, Inc., Director | ||||
OFFICERS | ||||||||
Christopher R. Bohane (k) (age 43) | Assistant Secretary and Assistant Clerk | July 2005 | Massachusetts Financial Services Company, Vice President and Assistant General Counsel | N/A | ||||
Kino Clark (k) (age 48) | Assistant Treasurer | January 2012 | Massachusetts Financial Services Company, Vice President | N/A | ||||
Thomas H. Connors (k) (age 57) | Assistant Secretary and Assistant Clerk | September 2012 | Massachusetts Financial Services Company, Vice President and Senior Counsel; Deutsche Investment Management Americas Inc. (financial service provider), Director and Senior Counsel (until 2012) | N/A | ||||
Ethan D. Corey (k) (age 53) | Assistant Secretary and Assistant Clerk | July 2005 | Massachusetts Financial Services Company, Senior Vice President and Associate General Counsel | N/A | ||||
David L. DiLorenzo (k) (age 48) | President | July 2005 | Massachusetts Financial Services Company, Senior Vice President | N/A | ||||
Brian E. Langenfeld (k) (age 43) | Assistant Secretary and Assistant Clerk | June 2006 | Massachusetts Financial Services Company, Vice President and Senior Counsel | N/A |
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Trustees and Officers – continued
Name, Age | Position(s) with Fund | Trustee/Officer Since (h) | Principal Occupations During the Past Five Years | Other Directorships (j) | ||||
Susan A. Pereira (k) (age 46) | Assistant Secretary and Assistant Clerk | July 2005 | Massachusetts Financial Services Company, Vice President and Senior Counsel | N/A | ||||
Kasey L. Phillips (k) (age 46) | Assistant Treasurer | September 2012 | Massachusetts Financial Services Company, Vice President; Wells Fargo Funds Management, LLC, Senior Vice President, Fund Treasurer (until 2012) | N/A | ||||
Mark N. Polebaum (k) (age 64) | Secretary and Clerk | January 2006 | Massachusetts Financial Services Company, Executive Vice President, General Counsel and Secretary | N/A | ||||
Matthew A. Stowe (k) (age 42) | Assistant Secretary and Assistant Clerk | October 2014 | Massachusetts Financial Services Company, Vice President and Assistant General Counsel | N/A | ||||
Frank L. Tarantino (age 72) | Independent Senior Officer | June 2004 | Tarantino LLC (provider of compliance services), Principal | N/A | ||||
Richard S. Weitzel (k) (age 46) | Assistant Secretary and Assistant Clerk | October 2007 | Massachusetts Financial Services Company, Senior Vice President and Associate General Counsel | N/A | ||||
Martin J. Wolin (k) (age 49) | Chief Compliance Officer | July 2015 | Massachusetts Financial Services Company, Senior Vice President and Chief Compliance Officer (since July 2015); Mercer (financial service provider), Chief Risk and Compliance Officer, North America and Latin America (until June 2015) | N/A | ||||
James O. Yost (k) (age 56) | Treasurer | September 1990 | Massachusetts Financial Services Company, Senior Vice President | N/A |
(h) | Date first appointed to serve as Trustee/officer of an MFS Fund. Each Trustee has served continuously since appointment unless indicated otherwise. For the period from December 15, 2004 until February 22, 2005, Mr. Manning served as Advisory Trustee. Prior to January 2012, Messrs. DiLorenzo and Yost served as Assistant Treasurers of the Funds. From January 2012 through December 2016, Messrs. DiLorenzo and Yost served as Treasurer and Deputy Treasurer of the Funds, respectively. |
(j) | Directorships or trusteeships of companies required to report to the Securities and Exchange Commission (i.e., “public companies”). |
(k) | “Interested person” of the Trust within the meaning of the Investment Company Act of 1940 (referred to as the 1940 Act), which is the principal federal law governing investment companies like the fund, as a result of a position with MFS. The address of MFS is 111 Huntington Avenue, Boston, Massachusetts 02199-7618. |
Each Trustee (except Ms. Stelmach, Mr. Buller and Ms. Roepke) has been elected by shareholders and each Trustee and officer holds office until his or her successor is chosen and qualified or until his or her earlier death, resignation, retirement or removal. The Trust does not hold annual meetings for the purpose of electing Trustees, and Trustees are not elected for fixed terms. Messrs. Buller and Kavanaugh and Ms. Roepke are members of the Trust’s Audit Committee.
Each of the Fund’s Trustees and officers holds comparable positions with certain other funds of which MFS or a subsidiary is the investment adviser or distributor, and, in the case of the officers, with certain affiliates of MFS. As of February 1, 2017, the Trustees served as board members of 137 funds within the MFS Family of Funds.
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MFS Total Return Series
Trustees and Officers – continued
The Statement of Additional Information for a Fund includes further information about the Trustees and is available without charge upon request by calling 1-800-225-2606.
Investment Adviser Massachusetts Financial Services Company 111 Huntington Avenue Boston, MA 02199-7618 | Custodian State Street Bank and Trust Company 1 Lincoln Street Boston, MA 02111-2900 | |
Distributor MFS Fund Distributors, Inc. 111 Huntington Avenue Boston, MA 02199-7618 | Independent Registered Public Accounting Firm Deloitte & Touche LLP 200 Berkeley Street Boston, MA 02116 | |
Portfolio Managers Nevin Chtikara William Douglas Steven Gorham Richard Hawkins Joshua Marston Jonathan Sage Brooks Taylor |
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BOARD REVIEW OF INVESTMENT ADVISORY AGREEMENT
The Investment Company Act of 1940 requires that both the full Board of Trustees and a majority of the non-interested (“independent”) Trustees, voting separately, annually approve the continuation of the Fund’s investment advisory agreement with MFS. The Trustees consider matters bearing on the Fund and its advisory arrangements at their meetings throughout the year, including a review of performance data at each regular meeting. In addition, the independent Trustees met several times over the course of three months beginning in May and ending in July, 2016 (“contract review meetings”) for the specific purpose of considering whether to approve the continuation of the investment advisory agreement for the Fund and the other investment companies that the Board oversees (the “MFS Funds”). The independent Trustees were assisted in their evaluation of the Fund’s investment advisory agreement by independent legal counsel, from whom they received separate legal advice and with whom they met separately from MFS during various contract review meetings. The independent Trustees were also assisted in this process by the MFS Funds’ Independent Senior Officer, a senior officer appointed by and reporting to the independent Trustees.
In connection with their deliberations regarding the continuation of the investment advisory agreement, the Trustees, including the independent Trustees, considered such information and factors as they believed, in light of the legal advice furnished to them and their own business judgment, to be relevant. The investment advisory agreement for the Fund was considered separately, although the Trustees also took into account the common interests of all MFS Funds in their review. As described below, the Trustees considered the nature, quality, and extent of the various investment advisory, administrative, and shareholder services performed by MFS under the existing investment advisory agreement and other arrangements with the Fund.
In connection with their contract review meetings, the Trustees received and relied upon materials that included, among other items: (i) information provided by Broadridge Financial Solutions, Inc. (“Broadridge”), an independent third party, on the investment performance of the Fund for various time periods ended December 31, 2015 and the investment performance of a group of funds with substantially similar investment classifications/objectives (the “Lipper performance universe”), (ii) information provided by Broadridge on the Fund’s advisory fees and other expenses and the advisory fees and other expenses of comparable funds identified by Broadridge (the “Broadridge expense group”), (iii) information provided by MFS on the advisory fees of portfolios of other clients of MFS, including institutional separate accounts and other clients, (iv) information as to whether and to what extent applicable expense waivers, reimbursements or fee “breakpoints” are observed for the Fund, (v) information regarding MFS’ financial results and financial condition, including MFS’ and certain of its affiliates’ estimated profitability from services performed for the Fund and the MFS Funds as a whole, and compared to MFS’ institutional business, (vi) MFS’ views regarding the outlook for the mutual fund industry and the strategic business plans of MFS, (vii) descriptions of various functions performed by MFS for the Funds, such as compliance monitoring and portfolio trading practices, and (viii) information regarding the overall organization of MFS, including information about MFS’ senior management and other personnel providing investment advisory, administrative and other services to the Fund and the other MFS Funds. The comparative performance, fee and expense information prepared and provided by Broadridge was not independently verified and the independent Trustees did not independently verify any information provided to them by MFS.
The Trustees’ conclusion as to the continuation of the investment advisory agreement was based on a comprehensive consideration of all information provided to the Trustees and not the result of any single factor. Some of the factors that figured particularly in the Trustees’ deliberations are described below, although individual Trustees may have evaluated the information presented differently from one another, giving different weights to various factors. It is also important to recognize that the fee arrangements for the Fund and other MFS Funds are the result of years of review and discussion between the independent Trustees and MFS, that certain aspects of such arrangements may receive greater scrutiny in some years than in others, and that the Trustees’ conclusions may be based, in part, on their consideration of these same arrangements during the course of the year and in prior years.
Based on information provided by Broadridge and MFS, the Trustees reviewed the Fund’s total return investment performance as well as the performance of peer groups of funds over various time periods. The Trustees placed particular emphasis on the total return performance of the Fund’s Initial Class shares in comparison to the performance of funds in its Lipper performance universe over the three-year period ended December 31, 2015, which the Trustees believed was a long enough period to reflect differing market conditions. The total return performance of the Fund’s Initial Class shares was in the 1st quintile relative to the other funds in the universe for this three-year period (the 1st quintile being the best performers and the 5th quintile being the worst performers). The total return performance of the Fund’s Initial Class shares was in the 2nd quintile for the one-year period and the 1st quintile for the five-year period ended December 31, 2015 relative to the Lipper performance universe. Because of the passage of time, these performance results may differ from the performance results for more recent periods, including those shown elsewhere in this report.
In the course of their deliberations, the Trustees took into account information provided by MFS in connection with the contract review meetings, as well as during investment review meetings conducted with portfolio management personnel during the course of the year regarding the Fund’s performance. After reviewing these and related factors, the Trustees concluded, within the context of their overall conclusions regarding the investment advisory agreement, that they were satisfied with MFS’ responses and efforts relating to investment performance.
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Board Review of Investment Advisory Agreement – continued
In assessing the reasonableness of the Fund’s advisory fee, the Trustees considered, among other information, the Fund’s advisory fee and the total expense ratio of the Fund’s Initial Class shares as a percentage of average daily net assets and the advisory fee and total expense ratios of peer groups of funds based on information provided by Broadridge. The Trustees considered that MFS currently observes an expense limitation for the Fund, which may not be changed without the Trustees’ approval. The Trustees also considered that, according to the data provided by Broadridge (which takes into account any fee reductions or expense limitations that were in effect during the Fund’s last fiscal year), the Fund’s effective advisory fee rate and total expense ratio were each higher than the Broadridge expense group median. The Trustees also noted that MFS has agreed to further reduce the expense limitation for the Fund, which may not be changed without the Trustees’ approval.
The Trustees also considered the advisory fees charged by MFS to any institutional separate accounts advised by MFS (“separate accounts”) and unaffiliated investment companies for which MFS serves as subadviser (“subadvised funds”) that have comparable investment strategies to the Fund. In comparing these fees, the Trustees considered information provided by MFS as to the generally broader scope of services provided by MFS to the Fund, as well as the more extensive regulatory burdens imposed on MFS in managing the Fund, in comparison to separate accounts and subadvised funds. The Trustees also considered the higher demands placed on MFS’ investment personnel and trading infrastructure as a result of the daily cash in-flows and out-flows of the Fund in comparison to separate accounts.
The Trustees also considered whether the Fund may benefit from any economies of scale in the management of the Fund in the event of growth in assets of the Fund and/or growth in assets of the MFS Funds as a whole. They noted that MFS had amended its contractual advisory fee rate schedule effective April 29, 2016 and that such advisory fee rate schedule is subject to contractual breakpoints that reduce the Fund’s advisory fee rate on the Fund’s average daily net assets over $1 billion, $2.5 billion, and $5 billion. The Trustees also noted that MFS has agreed in writing to waive a portion of the management fees of certain MFS Funds, including the Fund, if the total combined assets of certain funds within the MFS Funds’ complex increase above agreed upon thresholds (the “group fee waiver”), enabling the Fund’s shareholders to share in the benefits from any economies of scale at the complex level. The group fee waiver is reviewed and renewed annually between the Board and MFS. The Trustees concluded that the breakpoints and the group fee waiver were sufficient to allow the Fund to benefit from economies of scale as its assets and overall complex assets grow.
The Trustees also considered information prepared by MFS relating to MFS’ costs and profits with respect to the Fund, the MFS Funds considered as a group, and other investment companies and accounts advised by MFS, as well as MFS’ methodologies used to determine and allocate its costs to the MFS Funds, the Fund and other accounts and products for purposes of estimating profitability.
After reviewing these and other factors described herein, the Trustees concluded, within the context of their overall conclusions regarding the investment advisory agreement, that the advisory fees charged to the Fund represent reasonable compensation in light of the services being provided by MFS to the Fund.
In addition, the Trustees considered MFS’ resources and related efforts to continue to retain, attract and motivate capable personnel to serve the Fund. The Trustees also considered current and developing conditions in the financial services industry, including the presence of large and well-capitalized companies which are spending, and appear to be prepared to continue to spend, substantial sums to engage personnel and to provide services to competing investment companies. In this regard, the Trustees also considered the financial resources of MFS and its ultimate parent, Sun Life Financial Inc. The Trustees also considered the advantages and possible disadvantages to the Fund of having an adviser that also serves other investment companies as well as other accounts.
The Trustees also considered the nature, quality, cost, and extent of administrative, transfer agency, and distribution services provided to the Fund by MFS and its affiliates under agreements and plans other than the investment advisory agreement, including any 12b-1 fees the Fund pays to MFS Fund Distributors, Inc., an affiliate of MFS. The Trustees also considered the nature, extent and quality of certain other services MFS performs or arranges for on the Fund’s behalf, which may include securities lending programs, directed expense payment programs, class action recovery programs, and MFS’ interaction with third-party service providers, principally custodians and sub-custodians. The Trustees concluded that the various non-advisory services provided by MFS and its affiliates on behalf of the Fund were satisfactory.
The Trustees also considered benefits to MFS from the use of the Fund’s portfolio brokerage commissions, if applicable, to pay for investment research and various other factors. Additionally, the Trustees considered so-called “fall-out benefits” to MFS such as reputational value derived from serving as investment manager to the Fund.
Based on their evaluation of factors that they deemed to be material, including those factors described above, the Board of Trustees, including the independent Trustees, concluded that the Fund’s investment advisory agreement with MFS should be continued for an additional one-year period, commencing August 1, 2016.
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PROXY VOTING POLICIES AND INFORMATION
MFS votes proxies on behalf of the fund pursuant to proxy voting policies and procedures that are available without charge, upon request, by calling 1-800-225-2606, by visiting mfs.com (once you have selected “Individual Investor” as your role, click on “Individual Investor Home” in the top navigation and then select “Learn More About Proxy Voting” under the “I want to…” header on the left hand column of the page), or by visiting the SEC’s Web site at http://www.sec.gov.
Information regarding how the fund voted proxies relating to portfolio securities during the most recent twelve-month period ended June 30 is available by August 31 of each year without charge by visiting mfs.com (once you have selected “Individual Investor” as your role, click on “Individual Investor Home” in the top navigation and then select “Learn More About Proxy Voting” under the “I want to…” header on the left hand column of the page), or by visiting the SEC’s Web site at http://www.sec.gov.
QUARTERLY PORTFOLIO DISCLOSURE
The fund will file a complete schedule of portfolio holdings with the Securities and Exchange Commission (the Commission) for the first and third quarters of each fiscal year on Form N-Q. The fund’s Form N-Q is available on the EDGAR database on the Commission’s Internet Web site at http://www.sec.gov, and may be reviewed and copied at the:
Public Reference Room
Securities and Exchange Commission
100 F Street, NE, Room 1580
Washington, D.C. 20549
Information on the operation of the Public Reference Room may be obtained by calling the Commission at 1-800-SEC-0330. Copies of the fund’s Form N-Q also may be obtained, upon payment of a duplicating fee, by electronic request at the following e-mail address: publicinfo@sec.gov or by writing the Public Reference Section at the above address.
From time to time, MFS may post important information about the fund or the MFS funds on the MFS web site (mfs.com). This information is available on mfs.com by following these steps once you have selected “Individual Investor” as your role: (1) Click on the “Individual Investor Home” in the top navigation and then select the “Announcements” option within the “Market Outlooks” drop down, or (2) Click on “Products & Services” and “Variable Insurance Portfolios” and then select the fund’s name.
INFORMATION ABOUT FUND CONTRACTS AND LEGAL CLAIMS
The fund has entered into contractual arrangements with an investment adviser, administrator, distributor, shareholder servicing agent, 529 program manager (if applicable), and custodian who each provide services to the fund. Unless expressly stated otherwise, shareholders are not parties to, or intended beneficiaries of these contractual arrangements, and these contractual arrangements are not intended to create any shareholder right to enforce them against the service providers or to seek any remedy under them against the service providers, either directly or on behalf of the fund.
Under the Trust’s By-Laws and Declaration of Trust, any claims asserted against or on behalf of the MFS Funds, including claims against Trustees and Officers, must be brought in state and federal courts located within the Commonwealth of Massachusetts.
FEDERAL TAX INFORMATION (unaudited)
The following information is provided pursuant to provisions of the Internal Revenue Code.
The fund designates $94,405,000 as capital gain dividends paid during the fiscal year.
For corporate shareholders, 45.90% of the ordinary income dividends paid during the fiscal year qualify for the corporate dividends received deduction.
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FACTS | WHAT DOES MFS DO WITH YOUR PERSONAL INFORMATION? |
Why? | Financial companies choose how they share your personal information. Federal law gives consumers the right to limit some but not all sharing. Federal law also requires us to tell you how we collect, share, and protect your personal information. Please read this notice carefully to understand what we do. |
What? | The types of personal information we collect and share depend on the product or service you have with us. This information can include:
• Social Security number and account balances • Account transactions and transaction history • Checking account information and wire transfer instructions
When you are no longer our customer, we continue to share your information as described in this notice. |
How? | All financial companies need to share customers’ personal information to run their everyday business. In the section below, we list the reasons financial companies can share their customers’ personal information; the reasons MFS chooses to share; and whether you can limit this sharing. |
Reasons we can share your personal information | Does MFS share? | Can you limit this sharing? | ||
For our everyday business purposes – such as to process your transactions, maintain your account(s), respond to court orders and legal investigations, or report to credit bureaus | Yes | No | ||
For our marketing purposes – to offer our products and services to you | No | We don’t share | ||
For joint marketing with other financial companies | No | We don’t share | ||
For our affiliates’ everyday business purposes – information about your transactions and experiences | No | We don’t share | ||
For our affiliates’ everyday business purposes – information about your creditworthiness | No | We don’t share | ||
For nonaffiliates to market to you | No | We don’t share |
Questions? | Call 800-225-2606 or go to mfs.com. |
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Page 2 |
Who we are | ||
Who is providing this notice? | MFS Funds, MFS Investment Management, MFS Institutional Advisors, Inc., and MFS Heritage Trust Company. |
What we do | ||
How does MFS protect my personal information? | To protect your personal information from unauthorized access and use, we use security measures that comply with federal law. These measures include procedural, electronic, and physical safeguards for the protection of the personal information we collect about you. | |
How does MFS collect my personal information? | We collect your personal information, for example, when you
• open an account or provide account information • direct us to buy securities or direct us to sell your securities • make a wire transfer
We also collect your personal information from others, such as credit bureaus, affiliates, or other companies. | |
Why can’t I limit all sharing? | Federal law gives you the right to limit only
• sharing for affiliates’ everyday business purposes – information about your creditworthiness • affiliates from using your information to market to you • sharing for nonaffiliates to market to you
State laws and individual companies may give you additional rights to limit sharing. |
Definitions | ||
Affiliates | Companies related by common ownership or control. They can be financial and nonfinancial companies.
• MFS does not share personal information with affiliates, except for everyday business purposes as described on page one of this notice. | |
Nonaffiliates | Companies not related by common ownership or control. They can be financial and nonfinancial companies.
• MFS does not share with nonaffiliates so they can market to you. | |
Joint marketing | A formal agreement between nonaffiliated financial companies that together market financial products or services to you.
• MFS doesn’t jointly market. |
Other important information | ||
If you own an MFS product or receive an MFS service in the name of a third party such as a bank or broker-dealer, their privacy policy may apply to you instead of ours. |
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ANNUAL REPORT
December 31, 2016
MFS® UTILITIES SERIES
MFS® Variable Insurance Trust
VUF-ANN
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MFS® UTILITIES SERIES
The report is prepared for the general information of contract owners. It is authorized for distribution to prospective investors only when preceded or accompanied by a current prospectus.
NOT FDIC INSURED • MAY LOSE VALUE • NO BANK OR CREDIT UNION GUARANTEE • NOT A DEPOSIT • NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY OR NCUA/NCUSIF
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MFS Utilities Series
LETTER FROM THE EXECUTIVE CHAIRMAN
Dear Contract Owners:
Despite June’s unexpected vote by the United Kingdom to leave the European Union and the surprising result in November’s U.S. presidential election, most markets have proved resilient. U.S. share prices quickly reversed post-Brexit declines, and indices reached new highs following the November elections. U.S. bond yields rose after Donald Trump’s victory on hopes that his proposed policy mix of lower taxes, increased spending on infrastructure and a lower regulatory burden on businesses will lift both U.S. economic growth and inflation. However, interest rates in most developed markets remain very low, with major central banks maintaining extremely accommodative monetary policies to reinvigorate slow-growing economies against a backdrop of still-low inflation. Even after the rise in yields following the election, interest rates remain low by historical standards.
Globally, economic growth has shown signs of recovery of late, led by the United States and the eurozone. Despite better growth, there are few immediate signs of worrisome inflation. Emerging market economies are recovering at a somewhat slower pace amid fears that restrictive U.S. trade policies could further hamper the already slow pace of global trade growth.
At MFS®, we believe in a patient, long-term approach to investing. Viewing investments with a long lens makes it possible to filter out short-term market noise and focus on achieving solid risk-adjusted returns over a full market cycle.
In our view, such an approach, along with the professional guidance of a financial advisor, will help you reach your investment objectives.
Respectfully,
Robert J. Manning
Executive Chairman
MFS Investment Management
February 15, 2017
The opinions expressed in this letter are subject to change and may not be relied upon for investment advice. No forecasts can be guaranteed.
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MFS Utilities Series
Portfolio structure (i)
Top ten holdings (i) | ||||
NextEra Energy, Inc. | 4.7% | |||
Exelon Corp. | 3.9% | |||
PPL Corp. | 3.6% | |||
Sempra Energy | 3.6% | |||
PG&E Corp. | 3.1% | |||
EDP Renovaveis S.A. | 3.0% | |||
Enel S.p.A. | 2.7% | |||
Charter Communications, Inc., “A” | 2.7% | |||
Exelon Corp. | 2.6% | |||
Enterprise Products Partners LP | 2.3% |
Top five industries (i) | ||||
Utilities-Electric Power | 53.1% | |||
Natural Gas-Pipeline | 15.5% | |||
Telephone Services | 7.3% | |||
Natural Gas-Distribution | 5.7% | |||
Cable TV | 5.4% | |||
Issuer country weightings (i)(x) | ||||
United States | 71.9% | |||
Portugal | 5.7% | |||
Italy | 2.7% | |||
Canada | 2.7% | |||
United Kingdom | 2.6% | |||
France | 2.1% | |||
Sweden | 1.9% | |||
China | 1.7% | |||
Spain | 1.3% | |||
Other Countries | 7.4% |
(i) | For purposes of this presentation, the components include the value of securities, and reflect the impact of the equivalent exposure of derivative positions, if any. These amounts may be negative from time to time. Equivalent exposure is a calculated amount that translates the derivative position into a reasonable approximation of the amount of the underlying asset that the portfolio would have to hold at a given point in time to have the same price sensitivity that results from the portfolio’s ownership of the derivative contract. When dealing with derivatives, equivalent exposure is a more representative measure of the potential impact of a position on portfolio performance than value. The bond component will include any accrued interest amounts. |
(x) | Represents the portfolio’s exposure to issuer countries as a percentage of a portfolio’s net assets. For purposes of this presentation, United States includes Cash & Cash Equivalents and Other. |
Where the fund holds convertible bonds, these are treated as part of the equity portion of the portfolio.
Cash & Cash Equivalents includes any cash, investments in money market funds, short-term securities, and other assets less liabilities. Please see the Statement of Assets and Liabilities for additional information related to the fund’s cash position and other assets and liabilities.
Other includes equivalent exposure from currency derivatives and/or any offsets to derivative positions.
Percentages are based on net assets as of 12/31/16.
The portfolio is actively managed and current holdings may be different.
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Summary of Results
For the twelve months ended December 31, 2016, Initial Class shares of the MFS Utilities Series (“fund”) provided a total return of 11.47%, while Service Class shares of the fund provided a total return of 11.24%. These compare with a return of 11.96% over the same period for the fund’s benchmark, the Standard & Poor’s 500 Stock Index, and a return of 16.29% for the fund’s other benchmark, the Standard & Poor’s 500 Utilities Index (“S&P Utilities Index”).
Market Environment
Sluggish global growth weighed on both developed and emerging market (“EM”) economies during much of the reporting period, though signs of improved growth became evident in late 2016. The US Federal Reserve increased interest rates by 25 basis points at the end of the period, the second hike of the cycle which began in December 2015. Globally, however, central bank policy remained highly accommodative, which forced many government, and even some corporate, bond yields into negative territory during the period. During the first half of the period, the United Kingdom voted to leave the European Union (“EU”), beginning a multi-year process of negotiation in order to achieve “Brexit.” While markets initially reacted to the vote with alarm, the spillover to European and EM economies was relatively short-lived, although risks of further hits to EU cohesiveness could re-emerge. Late in the period, the surprising US presidential election outcome prompted a significant rally in equities and a rise in bond yields in anticipation of a reflationary policy mix from the incoming Trump administration.
Headwinds from lower energy and commodity prices, which had spread beyond the energy, materials and industrial sectors early in the reporting period, abated later in the period as stabilizing oil prices helped push energy earnings higher relative to expectations. A sharp rise in the US dollar was a headwind for multinationals late in the period. The sharp rise in the US dollar also weighed on earnings. US consumer spending held up well during the second half of the period amid a modest increase in real wages and relatively low gasoline prices. Demand for autos reached near-record territory, while the housing market continued its recovery. Slow global trade continued to mirror slow global growth, particularly for many EM countries. That said, EM countries began to show signs of a modest upturn in activity along with adjustment in their external accounts. These improved conditions appeared to have reassured investors and contributed to record inflows into the asset class during July and August as negative yields for an increasing share of developed market bonds drove yield-hungry investors further out on the risk spectrum. Similar investor inflows were experienced in the investment grade and high yield corporate markets. Late in the reporting period, however, new challenges emerged for emerging markets debt (“EMD”) as a result of the US presidential election, which raised concerns about the potential for a protectionist turn in US trade policy which could negatively impact EM economies. These concerns, along with rising expectations for US growth, inflation and interest rates, have turned the tables on flows into EMD. Since the election, flows have reversed. As of the end of the period, the markets seemed to be in “wait-and-see” mode, looking for evidence to either confirm or refute the repricing of risk that has occurred since Election Day.
Detractors from Performance
Stock selection in the electric power industry was a primary detractor from performance relative to the S&P Utilities Index. Here, notable detractors from relative performance included holdings of electric energy provider Dynegy (b), renewable energy company EDP Renovaveis (b) (Italy), power producer and marketer Calpine (b) and integrated utility company EDP Energias de Portugal (b) (Portugal), and an underweight position in integrated gas and electricity company Dominion Resources. Shares of Dynegy fell after 2017 forward guidance for operating earnings and free cash flow came in below expectations. This appeared to have been a cause for concern for market participants as it may be more difficult for the company to deleverage at the anticipated pace over the next two years. Not holding shares of electric power generation company Centerpoint Energy further weighed on relative returns.
The fund’s exposure to the non-benchmark telephone services sector also dampened relative returns. Holdings of global telecommunications services company BT Group (b) (United Kingdom) hurt relative performance.
In other sectors, the fund’s holdings of natural gas distributor ENGIE (b) (France) and telecommunications company Vodafone (b) (United Kingdom) further dampened relative performance. Shares of ENGIE declined during the reporting period after the company’s results were at the low end of guidance. Lower-than-expected energy prices and adverse impacts from foreign currency more than offset improved volumes and cost cutting efforts.
The fund’s cash and/or cash equivalents position during the period was also a detractor from relative performance. Under normal market conditions, the fund strives to be fully invested and generally holds cash to buy new holdings and to provide liquidity. In a period when equity markets rose, as measured by the fund’s benchmark, holding cash held back performance versus the benchmark, which has no cash position.
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MFS Utilities Series
Management Review – continued
Contributors to Performance
The fund’s positions in both the natural gas pipeline and cable TV industries were primary contributors to relative performance. Within the natural gas pipeline industry, holdings of natural gas holding company Williams Partners (b), natural gas pipelines operator Kinder Morgan (b), natural gas transmission and distributor Enbridge (b) (Canada), natural gas holding company Williams Cos (b) and natural gas transportation company Tallgrass Energy (b) contributed to relative results. Within the cable TV industry, holdings of cable services provider Charter Communications (b) aided relative returns. Shares of Charter Communications outperformed the benchmark during the reporting period. Solid financial results, better guidance for cost synergies and reduced capital spending after its merger with Time Warner Cable closed mid-year, and a sooner-than-anticipated share buyback program, positively affected its share price.
In other industries, the fund’s underweight position in retail electric services provider Southern Company (h) contributed to relative returns. Shares of Southern Company underperformed the benchmark as delays and cost overruns in its clean coal project persisted throughout the period. In addition, investor concern regarding the potential for construction delays and/or budget risk with its significant new nuclear build appeared to have further pressured its share price. Furthermore, the fund’s holdings of electricity distribution company CPFL Energia (b)(h) (Brazil), an underweight position in power provider FirstEnergy (b), and not holding shares of natural gas distributor AGL Resources, also strengthened relative performance.
Respectfully,
Claud Davis | Maura Shaughnessy | |
Portfolio Manager | Portfolio Manager |
(b) | Security is not a benchmark constituent. |
(h) | Security was not held in the portfolio at period end. |
The views expressed in this report are those of the portfolio managers only through the end of the period of the report as stated on the cover and do not necessarily reflect the views of MFS or any other person in the MFS organization. These views are subject to change at any time based on market or other conditions, and MFS disclaims any responsibility to update such views. These views may not be relied upon as investment advice or an indication of trading intent on behalf of any MFS portfolio. References to specific securities are not recommendations of such securities, and may not be representative of any MFS portfolio’s current or future investments.
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MFS Utilities Series
PERFORMANCE SUMMARY THROUGH 12/31/16
The following chart illustrates the historical performance of the fund in comparison to its benchmark(s). Benchmarks are unmanaged and may not be invested in directly. Benchmark returns do not reflect any fees or expenses. The performance of other share classes will be greater than or less than that of the class depicted below. (See Notes to Performance Summary.)
Performance data shown represents past performance and is no guarantee of future results. Investment return and principal value fluctuate so your units, when sold, may be worth more or less than the original cost; current performance may be lower or higher than quoted. The performance shown does not reflect the deduction of taxes, if any, that a contract holder would pay on fund distributions or the redemption of contract units. The returns for the fund shown also do not reflect the deduction of expenses associated with variable products, such as mortality and expense risk charges, separate account charges, and sales charges imposed by the insurance company separate accounts. Such expenses would reduce the overall returns shown.
Growth of a Hypothetical $10,000 Investment
Total Returns through 12/31/16
Average annual total returns
Share Class | Class Inception Date | 1-yr | 5-yr | 10-yr | ||||||||
Initial Class | 1/03/95 | 11.47% | 8.00% | 6.61% | ||||||||
Service Class | 5/01/00 | 11.24% | 7.73% | 6.34% | ||||||||
Comparative benchmarks | ||||||||||||
Standard & Poor’s 500 Stock Index (f) | 11.96% | 14.66% | 6.95% | |||||||||
Standard & Poor’s 500 Utilities Index (f) | 16.29% | 10.35% | 6.98% |
(f) | Source: FactSet Research Systems Inc. |
Benchmark Definitions
Standard & Poor’s 500 Stock Index – a market capitalization-weighted index of 500 widely held equity securities, designed to measure broad U.S. equity performance.
Standard & Poor’s 500 Utilities Index – a market capitalization-weighted index designed to measure the utilities sector, including those companies considered electric, gas or water utilities, or companies that operate as independent producers and/or distributors of power.
It is not possible to invest directly in an index.
Notes to Performance Summary
Average annual total return represents the average annual change in value for each share class for the periods presented.
Performance results reflect any applicable expense subsidies and waivers in effect during the periods shown. Without such subsidies and waivers the fund’s performance results would be less favorable. Please see the prospectus and financial statements for complete details. All results are historical and assume the reinvestment of any dividends and capital gains distributions.
Performance results do not include adjustments made for financial reporting purposes in accordance with U.S. generally accepted accounting principles and may differ from amounts reported in the financial highlights.
From time to time the fund may receive proceeds from litigation settlements, without which performance would be lower.
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Fund Expenses Borne by the Contract Holders during the Period,
July 1, 2016 through December 31, 2016
As a contract holder of the fund, you incur ongoing costs, including management fees; distribution and/or service (12b-1) fees; and other fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the fund and to compare these costs with the ongoing costs of investing in other mutual funds.
The example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period July 1, 2016 through December 31, 2016.
Actual Expenses
The first line for each share class in the following table provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled “Expenses Paid During Period” to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line for each share class in the following table provides information about hypothetical account values and hypothetical expenses based on the fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight the fund’s ongoing costs only and do not take into account the fees and expenses imposed under the variable contracts through which your investment in the fund is made. Therefore, the second line for each share class in the table is useful in comparing ongoing costs associated with an investment in vehicles (such as the fund) which fund benefits under variable annuity and variable life insurance contracts and to qualified pension and retirement plans only, and will not help you determine the relative total costs of investing in the fund through variable annuity and variable life insurance contracts. If the fees and expenses imposed under the variable contracts were included, your costs would have been higher.
Share Class | Annualized Expense Ratio | Beginning Account Value 7/01/16 | Ending Account Value | Expenses Paid 7/01/16-12/31/16 | ||||||||||||||
Initial Class | Actual | 0.75% | $1,000.00 | $967.47 | $3.71 | |||||||||||||
Hypothetical (h) | 0.75% | $1,000.00 | $1,021.37 | $3.81 | ||||||||||||||
Service Class | Actual | 1.00% | $1,000.00 | $966.34 | $4.94 | |||||||||||||
Hypothetical (h) | 1.00% | $1,000.00 | $1,020.11 | $5.08 |
(h) | 5% class return per year before expenses. |
(p) | “Expenses Paid During Period” are equal to each class’s annualized expense ratio, as shown above, multiplied by the average account value over the period, multiplied by 184/366 (to reflect the one-half year period). |
Notes to Expense Table
Expense ratios reflect a one-time Reimbursement of Expenses by Custodian of 0.02% (See Note 2 of the Notes to Financial Statements).
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PORTFOLIO OF INVESTMENTS – 12/31/16
The Portfolio of Investments is a complete list of all securities owned by your fund. It is categorized by broad-based asset classes.
Issuer | Shares/Par | Value ($) | ||||||
COMMON STOCKS – 86.1% | ||||||||
Cable TV – 5.4% | ||||||||
Charter Communications, Inc., “A” (a) | 146,811 | $ | 42,269,822 | |||||
Comcast Corp., “A” | 413,472 | 28,550,281 | ||||||
Liberty Global PLC, “C” (a) | 122,738 | 3,645,319 | ||||||
NOS, SGPS, S.A. | 1,735,143 | 10,297,801 | ||||||
|
| |||||||
$ | 84,763,223 | |||||||
|
| |||||||
Energy – Independent – 1.3% | ||||||||
Enable Midstream Partners LP | 528,963 | $ | 8,320,588 | |||||
Western Gas Equity Partners LP | 262,712 | 11,125,853 | ||||||
|
| |||||||
$ | 19,446,441 | |||||||
|
| |||||||
Natural Gas – Distribution – 5.7% | ||||||||
China Resources Gas Group Ltd. | 5,986,000 | $ | 16,776,790 | |||||
Engie | 993,495 | 12,656,816 | ||||||
Infraestructura Energetica Nova, S.A. de C.V. | 748,359 | 3,260,994 | ||||||
Sempra Energy | 560,263 | 56,384,868 | ||||||
|
| |||||||
$ | 89,079,468 | |||||||
|
| |||||||
Natural Gas – Pipeline – 15.3% | ||||||||
Cheniere Energy, Inc. (a) | 276,143 | $ | 11,440,604 | |||||
Enbridge, Inc. | 618,626 | 26,032,376 | ||||||
Energy Transfer Partners LP | 785,942 | 28,144,583 | ||||||
Enterprise Products Partners LP | 1,341,827 | 36,283,002 | ||||||
EQT GP Holdings LP | 200,175 | 5,046,412 | ||||||
EQT Midstream Partners LP | 278,220 | 21,333,910 | ||||||
JP Energy Partners LP | 183,374 | 1,855,745 | ||||||
Kinder Morgan, Inc. | 369,383 | 7,649,922 | ||||||
Plains All American Pipeline LP | 143,571 | 4,635,908 | ||||||
Plains GP Holdings LP | 347,346 | 12,045,959 | ||||||
SemGroup Corp., “A” | 176,972 | 7,388,581 | ||||||
Shell Midstream Partners, LP | 289,541 | 8,422,748 | ||||||
Sunoco Logistics Partners LP | 578,383 | 13,892,760 | ||||||
Tallgrass Energy GP LP | 391,397 | 10,489,440 | ||||||
TransCanada Corp. | 337,947 | 15,238,008 | ||||||
Williams Cos., Inc. | 474,381 | 14,772,224 | ||||||
Williams Partners LP | 367,726 | 13,984,581 | ||||||
|
| |||||||
$ | 238,656,763 | |||||||
|
| |||||||
Telecommunications – Wireless – 4.8% | ||||||||
Advanced Info Service PLC | 1,752,800 | $ | 7,195,141 | |||||
American Tower Corp., REIT | 218,240 | 23,063,603 | ||||||
Cellnex Telecom S.A.U. | 159,870 | 2,296,034 | ||||||
KDDI Corp. | 406,100 | 10,253,176 | ||||||
Mobile TeleSystems PJSC, ADR | 1,102,622 | 10,044,886 | ||||||
SBA Communications Corp. (a) | 115,906 | 11,968,454 | ||||||
Vodafone Group PLC | 3,702,504 | 9,106,218 | ||||||
|
| |||||||
$ | 73,927,512 | |||||||
|
| |||||||
Telephone Services – 6.5% | ||||||||
Bezeq – The Israel Telecommunication Corp. Ltd. | 4,909,619 | $ | 9,329,684 | |||||
BT Group PLC | 2,366,188 | 10,714,915 |
Issuer | Shares/Par | Value ($) | ||||||
COMMON STOCKS – continued | ||||||||
Telephone Services – continued | ||||||||
Com Hem Holding AB | 3,075,035 | $ | 29,330,729 | |||||
France Telecom S.A. | 782,799 | 11,879,591 | ||||||
Hellenic Telecommunications Organization S.A. | 1,203,342 | 11,311,617 | ||||||
PT XL Axiata Tbk (a) | 30,933,500 | 5,303,870 | ||||||
Royal KPN N.V. | 3,792,883 | 11,235,120 | ||||||
TDC A.S. (a) | 1,889,828 | 9,702,678 | ||||||
Telefonica Brasil S.A., ADR | 180,493 | 2,414,996 | ||||||
|
| |||||||
$ | 101,223,200 | |||||||
|
| |||||||
Utilities – Electric Power – 46.6% | ||||||||
AES Corp. | 2,226,647 | $ | 25,873,638 | |||||
Ameren Corp. | 298,514 | 15,660,044 | ||||||
American Electric Power Co., Inc. | 543,427 | 34,214,164 | ||||||
Avangrid, Inc. | 386,755 | 14,650,279 | ||||||
Calpine Corp. (a) | 2,978,594 | 34,045,329 | ||||||
China Longyuan Power Group | 11,962,000 | 9,255,612 | ||||||
Covanta Holding Corp. | 645,639 | 10,071,968 | ||||||
Dominion Resources, Inc. | 136,252 | 10,435,541 | ||||||
DTE Energy Co. | 188,775 | 18,596,225 | ||||||
Dynegy, Inc. (a) | 2,068,545 | 17,499,892 | ||||||
Edison International | 238,195 | 17,147,658 | ||||||
EDP Renovaveis S.A. | 7,464,185 | 47,425,923 | ||||||
Enel Chile S.A., ADR | 309,789 | 1,409,540 | ||||||
Enel S.p.A. | 9,610,302 | 42,291,306 | ||||||
Energias de Portugal S.A. | 10,140,546 | 30,891,858 | ||||||
Engie Brasil Energia S.A. | 677,000 | 7,280,241 | ||||||
Exelon Corp. | 1,708,011 | 60,617,310 | ||||||
Great Plains Energy, Inc. | 248,165 | 6,787,313 | ||||||
Iberdrola S.A. | 2,844,472 | 18,666,059 | ||||||
Innogy SE (a) | 273,424 | 9,500,934 | ||||||
NextEra Energy Partners LP | 573,354 | 14,643,461 | ||||||
NextEra Energy, Inc. | 610,674 | 72,951,116 | ||||||
NorthWestern Corp. | 94,708 | 5,386,044 | ||||||
NRG Energy, Inc. | 1,916,514 | 23,496,462 | ||||||
NRG Yield, Inc., “A” | 677,784 | 10,410,762 | ||||||
NRG Yield, Inc., “C” | 597,644 | 9,442,775 | ||||||
NTPC Ltd. | 858,843 | 2,080,274 | ||||||
PG&E Corp. | 791,407 | 48,093,803 | ||||||
PPL Corp. | 1,660,640 | 56,544,792 | ||||||
Public Service Enterprise Group, Inc. | 309,458 | 13,579,017 | ||||||
RWE AG (a) | 720,206 | 8,957,249 | ||||||
SSE PLC | 1,094,201 | 20,917,051 | ||||||
Terna Participacoes S.A., IEU | 410,160 | 2,613,672 | ||||||
WEC Energy Group, Inc. | 26,850 | 1,574,753 | ||||||
Xcel Energy, Inc. | 38,145 | 1,552,502 | ||||||
|
| |||||||
$ | 724,564,567 | |||||||
|
| |||||||
Utilities – Water – 0.5% | ||||||||
SUEZ Environnement | 554,720 | $ | 8,183,726 | |||||
|
| |||||||
Total Common Stocks (Identified Cost, $1,300,212,966) | $ | 1,339,844,900 | ||||||
|
|
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MFS Utilities Series
Portfolio of Investments – continued
Issuer | Shares/Par | Value ($) | ||||||
CONVERTIBLE PREFERRED STOCKS – 8.6% | ||||||||
Energy – Independent – 0.8% | ||||||||
Anadarko Petroleum Corp. (l), 7.5% | 302,003 | $ | 12,487,824 | |||||
|
| |||||||
Natural Gas – Pipeline – 0.1% | ||||||||
Kinder Morgan, Inc., 1.544% (l) | 46,543 | $ | 2,264,317 | |||||
|
| |||||||
Telecommunications – Wireless – 0.5% | ||||||||
American Tower Corp., 5.5% | 75,674 | $ | 7,907,933 | |||||
|
| |||||||
Telephone Services – 0.8% | ||||||||
Frontier Communications Corp., 11.125% | 167,505 | $ | 11,906,255 | |||||
|
| |||||||
Utilities – Electric Power – 6.4% | ||||||||
Dominion Resources, Inc., 6.75% | 164,905 | $ | 8,344,193 | |||||
Dominion Resources, Inc., 6.375% | 239,893 | 12,009,044 | ||||||
Dynegy, Inc., 7% | 63,042 | 3,917,430 | ||||||
Dynegy, Inc., 5.375% | 214,037 | 6,915,535 | ||||||
Exelon Corp., 6.5% | 831,338 | 40,245,073 | ||||||
Great Plains Energy, Inc., 7% (a) | 105,393 | 5,332,886 | ||||||
NextEra Energy, Inc., 6.123% | 271,280 | 13,287,294 | ||||||
NextEra Energy, Inc., 6.371% | 151,093 | 8,650,074 | ||||||
|
| |||||||
$ | 98,701,529 | |||||||
|
| |||||||
Total Convertible Preferred Stocks (Identified Cost, $148,847,707) | $ | 133,267,858 | ||||||
|
|
Issuer | Shares/Par | Value ($) | ||||||
PREFERRED STOCKS – 0.2% | ||||||||
Utilities – Electric Power – 0.2% | ||||||||
Companhia Paranaense de Energia (Identified Cost, $4,474,406) | 397,100 | $ | 3,338,144 | |||||
|
| |||||||
MONEY MARKET FUNDS – 4.8% | ||||||||
MFS Institutional Money Market Portfolio, 0.51% (v) (Identified Cost, $73,959,218) | 73,959,910 | $ | 73,959,910 | |||||
|
| |||||||
COLLATERAL FOR SECURITIES LOANED – 0.2% | ||||||||
State Street Navigator Securities Lending Government Money Market Portfolio, 0.50% (j) (Identified Cost, $3,193,916) | 3,193,916 | $ | 3,193,916 | |||||
|
| |||||||
Total Investments (Identified Cost, $1,530,688,213) | $ | 1,553,604,728 | ||||||
|
| |||||||
OTHER ASSETS, LESS LIABILITIES – 0.1% | 1,838,152 | |||||||
|
| |||||||
NET ASSETS – 100.0% | $ | 1,555,442,880 | ||||||
|
|
(a) | Non-income producing security. |
(j) | The rate quoted is the annualized seven-day yield of the fund at period end. |
(l) | A portion of this security is on loan. |
(v) | Underlying affiliated fund that is available only to investment companies managed by MFS. The rate quoted for the MFS Institutional Money Market Portfolio is the annualized seven-day yield of the fund at period end. |
The following abbreviations are used in this report and are defined:
ADR | American Depositary Receipt |
IEU | International Equity Unit |
PJSC | Public Joint Stock Company |
PLC | Public Limited Company |
REIT | Real Estate Investment Trust |
Abbreviations indicate amounts shown in currencies other than the U.S. dollar. All amounts are stated in U.S. dollars unless otherwise indicated. A list of abbreviations is shown below:
CAD | Canadian Dollar |
EUR | Euro |
GBP | British Pound |
Derivative Contracts at 12/31/16
Forward Foreign Currency Exchange Contracts at 12/31/16
Type | Currency | Counterparty | Contracts to Deliver/Receive | Settlement Date Range | In Exchange For | Contracts at Value | Unrealized (Depreciation) | |||||||||||||||
Asset Derivatives | ||||||||||||||||||||||
SELL | CAD | BNP Paribas S.A. | 793,027 | 3/10/17 | $ | 595,569 | $ | 591,109 | $ | 4,460 | ||||||||||||
SELL | CAD | HSBC Bank | 876,995 | 3/10/17 | 661,713 | 653,697 | 8,016 | |||||||||||||||
SELL | CAD | JPMorgan Chase Bank N.A. | 595,052 | 3/10/17 | 444,373 | 443,542 | 831 | |||||||||||||||
SELL | CAD | Merrill Lynch International | 31,738,046 | 3/10/17 | 23,951,705 | 23,656,992 | 294,713 | |||||||||||||||
BUY | EUR | Barclays Bank PLC | 205,640 | 3/10/17 | 216,189 | 217,155 | 966 | |||||||||||||||
BUY | EUR | Goldman Sachs International | 888,068 | 3/10/17 | 928,704 | 937,796 | 9,092 | |||||||||||||||
SELL | EUR | BNP Paribas S.A. | 1,973,736 | 3/10/17 | 2,098,209 | 2,084,258 | 13,951 | |||||||||||||||
SELL | EUR | Citibank N.A. | 57,208,683 | 3/10/17 | 61,593,957 | 60,412,174 | 1,181,783 |
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MFS Utilities Series
Portfolio of Investments – continued
Forward Foreign Currency Exchange Contracts at 12/31/16 - continued
Type | Currency | Counterparty | Contracts to Deliver/Receive | Settlement Date Range | In Exchange For | Contracts at Value | Unrealized (Depreciation) | |||||||||||||||
Asset Derivatives – continued | ||||||||||||||||||||||
SELL | EUR | Goldman Sachs International | 14,607,064 | 3/10/17 | $ | 15,812,585 | $ | 15,425,010 | $ | 387,575 | ||||||||||||
SELL | EUR | HSBC Bank | 2,576,333 | 3/10/17 | 2,789,341 | 2,720,599 | 68,742 | |||||||||||||||
SELL | EUR | JPMorgan Chase Bank N.A. | 54,632,059 | 1/17/17-3/10/17 | 58,303,594 | 57,556,357 | 747,237 | |||||||||||||||
BUY | GBP | JPMorgan Chase Bank N.A. | 293,851 | 3/10/17 | 362,269 | 362,716 | 447 | |||||||||||||||
SELL | GBP | Merrill Lynch International | 20,988,303 | 3/10/17 | 26,660,392 | 25,906,978 | 753,414 | |||||||||||||||
|
| |||||||||||||||||||||
$ | 3,471,227 | |||||||||||||||||||||
|
| |||||||||||||||||||||
Liability Derivatives | ||||||||||||||||||||||
BUY | EUR | Morgan Stanley Capital Services, Inc. | 143,968 | 3/10/17 | $ | 154,936 | $ | 152,029 | $ | (2,907 | ) | |||||||||||
SELL | EUR | BNP Paribas S.A. | 354,688 | 3/10/17 | 371,945 | 374,549 | (2,604 | ) | ||||||||||||||
SELL | EUR | Citibank N.A. | 432,069 | 3/10/17 | 454,606 | 456,264 | (1,658 | ) | ||||||||||||||
SELL | EUR | Morgan Stanley Capital Services, Inc. | 906,460 | 3/10/17 | 949,340 | 957,218 | (7,878 | ) | ||||||||||||||
SELL | GBP | Morgan Stanley Capital Services, Inc. | 44,325 | 3/10/17 | 54,248 | 54,713 | (465 | ) | ||||||||||||||
|
| |||||||||||||||||||||
$ | (15,512 | ) | ||||||||||||||||||||
|
|
See Notes to Financial Statements
9
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MFS Utilities Series
FINANCIAL STATEMENTS | STATEMENT OF ASSETS AND LIABILITIES
This statement represents your fund’s balance sheet, which details the assets and liabilities comprising the total value of the fund.
At 12/31/16 | ||||||||
Assets | ||||||||
Investments | ||||||||
Non-affiliated issuers, at value (identified cost, $1,456,728,995) | $1,479,644,818 | |||||||
Underlying affiliated funds, at value (identified cost, $73,959,218) | 73,959,910 | |||||||
Total investments, at value, including $3,074,361 of securities on loan (identified cost, $1,530,688,213) | $1,553,604,728 | |||||||
Cash | 470,708 | |||||||
Foreign currency, at value (identified cost, $801,106) | 805,646 | |||||||
Receivables for | ||||||||
Forward foreign currency exchange contracts | 3,471,227 | |||||||
Investments sold | 6,487,013 | |||||||
Fund shares sold | 1,491,268 | |||||||
Interest and dividends | 3,637,711 | |||||||
Total assets | $1,569,968,301 | |||||||
Liabilities | ||||||||
Payables for | ||||||||
Forward foreign currency exchange contracts | $15,512 | |||||||
Investments purchased | 9,816,588 | |||||||
Fund shares reacquired | 1,078,140 | |||||||
Collateral for securities loaned, at value | 3,193,916 | |||||||
Payable to affiliates | ||||||||
Investment adviser | 94,327 | |||||||
Shareholder servicing costs | 1,460 | |||||||
Distribution and/or service fees | 20,437 | |||||||
Payable for independent Trustees’ compensation | 293 | |||||||
Accrued expenses and other liabilities | 304,748 | |||||||
Total liabilities | $14,525,421 | |||||||
Net assets | $1,555,442,880 | |||||||
Net assets consist of | ||||||||
Paid-in capital | $1,501,541,933 | |||||||
Unrealized appreciation (depreciation) on investments and translation of assets and liabilities in foreign currencies | 26,332,317 | |||||||
Accumulated distributions in excess of net realized gain on investments and foreign currency | (40,075,634 | ) | ||||||
Undistributed net investment income | 67,644,264 | |||||||
Net assets | $1,555,442,880 | |||||||
Shares of beneficial interest outstanding | 58,637,321 |
Net assets | Shares outstanding | Net asset value per share | ||||||||||
Initial Class | $556,607,135 | 20,757,347 | $26.81 | |||||||||
Service Class | 998,835,745 | 37,879,974 | 26.37 |
See Notes to Financial Statements
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MFS Utilities Series
FINANCIAL STATEMENTS | STATEMENT OF OPERATIONS
This statement describes how much your fund earned in investment income and accrued in expenses. It also describes any gains and/or losses generated by fund operations.
Year ended 12/31/16 | ||||||||
Net investment income | ||||||||
Income | ||||||||
Dividends | $75,151,966 | |||||||
Interest | 426,213 | |||||||
Dividends from underlying affiliated funds | 238,237 | |||||||
Other | 16,588 | |||||||
Foreign taxes withheld | (1,557,118 | ) | ||||||
Total investment income | $74,275,886 | |||||||
Expenses | ||||||||
Management fee | $11,672,025 | |||||||
Distribution and/or service fees | 2,544,404 | |||||||
Shareholder servicing costs | 77,649 | |||||||
Administrative services fee | 258,137 | |||||||
Independent Trustees’ compensation | 39,174 | |||||||
Custodian fee | 227,803 | |||||||
Reimbursement of custodian expenses | (183,623 | ) | ||||||
Shareholder communications | 112,055 | |||||||
Audit and tax fees | 59,340 | |||||||
Legal fees | 15,402 | |||||||
Miscellaneous | 51,734 | |||||||
Total expenses | $14,874,100 | |||||||
Reduction of expenses by investment adviser | (113,116 | ) | ||||||
Net expenses | $14,760,984 | |||||||
Net investment income | $59,514,902 | |||||||
Realized and unrealized gain (loss) on investments and foreign currency | ||||||||
Realized gain (loss) (identified cost basis) | ||||||||
Investments: | ||||||||
Non-affiliated issuers | $(30,777,654 | ) | ||||||
Underlying affiliated funds | 24 | |||||||
Foreign currency | 13,252,301 | |||||||
Net realized gain (loss) on investments and foreign currency | $(17,525,329 | ) | ||||||
Change in unrealized appreciation (depreciation) | ||||||||
Investments | $129,870,750 | |||||||
Translation of assets and liabilities in foreign currencies | (2,205,913 | ) | ||||||
Net unrealized gain (loss) on investments and foreign currency translation | $127,664,837 | |||||||
Net realized and unrealized gain (loss) on investments and foreign currency | $110,139,508 | |||||||
Change in net assets from operations | $169,654,410 |
See Notes to Financial Statements
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FINANCIAL STATEMENTS | STATEMENTS OF CHANGES IN NET ASSETS
These statements describe the increases and/or decreases in net assets resulting from operations, any distributions, and any shareholder transactions.
For years ended 12/31 | 2016 | 2015 | ||||||
Change in net assets | ||||||||
From operations | ||||||||
Net investment income | $59,514,902 | $44,335,843 | ||||||
Net realized gain (loss) on investments and foreign currency | (17,525,329 | ) | 55,525,687 | |||||
Net unrealized gain (loss) on investments and foreign currency translation | 127,664,837 | (368,257,019 | ) | |||||
Change in net assets from operations | $169,654,410 | $(268,395,489 | ) | |||||
Distributions declared to shareholders | ||||||||
From net investment income | $(59,729,803 | ) | $(73,039,306 | ) | ||||
From net realized gain on investments | (36,926,325 | ) | (125,288,396 | ) | ||||
Total distributions declared to shareholders | $(96,656,128 | ) | $(198,327,702 | ) | ||||
Change in net assets from fund share transactions | $(46,897,011 | ) | $(11,189,054 | ) | ||||
Total change in net assets | $26,101,271 | $(477,912,245 | ) | |||||
Net assets | ||||||||
At beginning of period | 1,529,341,609 | 2,007,253,854 | ||||||
At end of period (including undistributed net investment income of $67,644,264 and | $1,555,442,880 | $1,529,341,609 |
See Notes to Financial Statements
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MFS Utilities Series
FINANCIAL STATEMENTS | FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the fund’s financial performance for the past 5 years. Certain information reflects financial results for a single fund share. The total returns in the table represent the rate by which an investor would have earned (or lost) on an investment in the fund share class (assuming reinvestment of all distributions) held for the entire period.
Initial Class | Years ended 12/31 | |||||||||||||||||||
2016 | 2015 | 2014 | 2013 | 2012 | ||||||||||||||||
Net asset value, beginning of period | $25.56 | $33.97 | $31.88 | $27.61 | $26.08 | |||||||||||||||
Income (loss) from investment operations | ||||||||||||||||||||
Net investment income (d) | $1.06 | (c) | $0.81 | $0.99 | $0.94 | $0.84 | ||||||||||||||
Net realized and unrealized gain (loss) on investments | 1.91 | (5.56 | ) | 3.13 | 4.64 | 2.57 | ||||||||||||||
Total from investment operations | $2.97 | $(4.75 | ) | $4.12 | $5.58 | $3.41 | ||||||||||||||
Less distributions declared to shareholders | ||||||||||||||||||||
From net investment income | $(1.08 | ) | $(1.38 | ) | $(0.74 | ) | $(0.73 | ) | $(1.88 | ) | ||||||||||
From net realized gain on investments | (0.64 | ) | (2.28 | ) | (1.29 | ) | (0.58 | ) | — | |||||||||||
Total distributions declared to shareholders | $(1.72 | ) | $(3.66 | ) | $(2.03 | ) | $(1.31 | ) | $(1.88 | ) | ||||||||||
Net asset value, end of period (x) | $26.81 | $25.56 | $33.97 | $31.88 | $27.61 | |||||||||||||||
Total return (%) (k)(r)(s)(x) | 11.47 | (c) | (14.54 | ) | 12.77 | 20.60 | 13.40 | |||||||||||||
Ratios (%) (to average net assets) and Supplemental data: | ||||||||||||||||||||
Expenses before expense reductions (f) | 0.77 | (c) | 0.79 | 0.79 | 0.80 | 0.82 | ||||||||||||||
Expenses after expense reductions (f) | 0.77 | (c) | 0.78 | 0.78 | 0.80 | 0.82 | ||||||||||||||
Net investment income | 3.89 | (c) | 2.59 | 2.87 | 3.07 | 3.11 | ||||||||||||||
Portfolio turnover | 33 | 42 | 53 | 50 | 51 | |||||||||||||||
Net assets at end of period (000 omitted) | $556,607 | $561,517 | $754,927 | $525,386 | $476,685 |
See Notes to Financial Statements
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MFS Utilities Series
Financial Highlights – continued
Service Class | Years ended 12/31 | |||||||||||||||||||
2016 | 2015 | 2014 | 2013 | 2012 | ||||||||||||||||
Net asset value, beginning of period | $25.15 | $33.48 | $31.47 | $27.27 | $25.73 | |||||||||||||||
Income (loss) from investment operations | ||||||||||||||||||||
Net investment income (d) | $0.97 | (c) | $0.72 | $0.92 | $0.85 | $0.71 | ||||||||||||||
Net realized and unrealized gain (loss) on investments | 1.90 | (5.47 | ) | 3.05 | 4.58 | 2.59 | ||||||||||||||
Total from investment operations | $2.87 | $(4.75 | ) | $3.97 | $5.43 | $3.30 | ||||||||||||||
Less distributions declared to shareholders | ||||||||||||||||||||
From net investment income | $(1.01 | ) | $(1.30 | ) | $(0.67 | ) | $(0.65 | ) | $(1.76 | ) | ||||||||||
From net realized gain on investments | (0.64 | ) | (2.28 | ) | (1.29 | ) | (0.58 | ) | — | |||||||||||
Total distributions declared to shareholders | $(1.65 | ) | $(3.58 | ) | $(1.96 | ) | $(1.23 | ) | $(1.76 | ) | ||||||||||
Net asset value, end of period (x) | $26.37 | $25.15 | $33.48 | $31.47 | $27.27 | |||||||||||||||
Total return (%) (k)(r)(s)(x) | 11.24 | (c) | (14.76 | ) | 12.47 | 20.30 | 13.13 | |||||||||||||
Ratios (%) (to average net assets) and Supplemental data: | ||||||||||||||||||||
Expenses before expense reductions (f) | 1.02 | (c) | 1.04 | 1.04 | 1.05 | 1.07 | ||||||||||||||
Expenses after expense reductions (f) | 1.02 | (c) | 1.03 | 1.03 | 1.05 | 1.07 | ||||||||||||||
Net investment income | 3.64 | (c) | 2.34 | 2.71 | 2.82 | 2.66 | ||||||||||||||
Portfolio turnover | 33 | 42 | 53 | 50 | 51 | |||||||||||||||
Net assets at end of period (000 omitted) | $998,836 | $967,824 | $1,252,327 | $978,732 | $837,196 |
(c) | Amount reflects a one-time reimbursement of expenses by the custodian (or former custodian) without which net investment income and performance would be lower and expenses would be higher. See Note 2 in the Notes to Financial Statements for additional information. |
(d) | Per share data is based on average shares outstanding. |
(f) | Ratios do not reflect reductions from fees paid indirectly, if applicable. |
(k) | The total return does not reflect expenses that apply to separate accounts. Inclusion of these charges would reduce the total return figures for all periods shown. |
(r) | Certain expenses have been reduced without which performance would have been lower. |
(s) | From time to time the fund may receive proceeds from litigation settlements, without which performance would be lower. |
(x) | The net asset values and total returns have been calculated on net assets which include adjustments made in accordance with U.S. generally accepted accounting principles required at period end for financial reporting purposes. |
See Notes to Financial Statements
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MFS Utilities Series
(1) | Business and Organization |
MFS Utilities Series (the fund) is a diversified series of MFS Variable Insurance Trust (the trust). The trust is organized as a Massachusetts business trust and is registered under the Investment Company Act of 1940, as amended, as an open-end management investment company. The shareholders of each series of the trust are separate accounts of insurance companies, which offer variable annuity and/or life insurance products, and qualified retirement and pension plans.
The fund is an investment company and accordingly follows the investment company accounting and reporting guidance of the Financial Accounting Standards Board (FASB) Accounting Standards Codification Topic 946 Financial Services – Investment Companies.
(2) | Significant Accounting Policies |
General – The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of increases and decreases in net assets from operations during the reporting period. Actual results could differ from those estimates. In the preparation of these financial statements, management has evaluated subsequent events occurring after the date of the fund’s Statement of Assets and Liabilities through the date that the financial statements were issued. The fund invests primarily in securities of issuers in the utility industry. Issuers in a single industry can react similarly to market, economic, political and regulatory conditions and developments. The fund invests in foreign securities. Investments in foreign securities are vulnerable to the effects of changes in the relative values of the local currency and the U.S. dollar and to the effects of changes in each country’s legal, political, and economic environment.
In October 2016, the Securities and Exchange Commission (SEC) released its Final Rule on Investment Company Reporting Modernization (the “Rule”). The Rule, which introduces two new regulatory reporting forms for investment companies – Form N-PORT and Form N-CEN – also contains amendments to Regulation S-X which impact financial statement presentation, particularly the presentation of derivative investments. Although still evaluating the impacts of the Rule, management believes that many of the Regulation S-X amendments are consistent with the fund’s current financial statement presentation and expects that the fund will be able to comply with the Rule’s Regulation S-X amendments by the August 1, 2017 compliance date.
Balance Sheet Offsetting – The fund’s accounting policy with respect to balance sheet offsetting is that, absent an event of default by the counterparty or a termination of the agreement, the International Swaps and Derivatives Association (ISDA) Master Agreement does not result in an offset of reported amounts of financial assets and financial liabilities in the Statement of Assets and Liabilities across transactions between the fund and the applicable counterparty. The fund’s right to setoff may be restricted or prohibited by the bankruptcy or insolvency laws of the particular jurisdiction to which a specific master netting agreement counterparty is subject. Balance sheet offsetting disclosures, to the extent applicable to the fund, have been included in the fund’s Significant Accounting Policies note under the captions for each of the fund’s in-scope financial instruments and transactions.
Investment Valuations – Equity securities, including restricted equity securities, are generally valued at the last sale or official closing price on their primary market or exchange as provided by a third-party pricing service. Equity securities, for which there were no sales reported that day, are generally valued at the last quoted daily bid quotation on their primary market or exchange as provided by a third-party pricing service. Debt instruments and floating rate loans, including restricted debt instruments, are generally valued at an evaluated or composite bid as provided by a third-party pricing service. Short-term instruments with a maturity at issuance of 60 days or less may be valued at amortized cost, which approximates market value. Forward foreign currency exchange contracts are generally valued at the mean of bid and asked prices for the time period interpolated from rates provided by a third-party pricing service for proximate time periods. Open-end investment companies are generally valued at net asset value per share. Securities and other assets generally valued on the basis of information from a third-party pricing service may also be valued at a broker/dealer bid quotation. Values obtained from third-party pricing services can utilize both transaction data and market information such as yield, quality, coupon rate, maturity, type of issue, trading characteristics, and other market data. The values of foreign securities and other assets and liabilities expressed in foreign currencies are converted to U.S. dollars using the mean of bid and asked prices for rates provided by a third-party pricing service.
The Board of Trustees has delegated primary responsibility for determining or causing to be determined the value of the fund’s investments (including any fair valuation) to the adviser pursuant to valuation policies and procedures approved by the Board. If the adviser determines that reliable market quotations are not readily available, investments are valued at fair value as determined in good faith by the adviser in accordance with such procedures under the oversight of the Board of Trustees. Under the fund’s valuation policies and procedures, market quotations are not considered to be readily available for most types of debt instruments and floating rate loans and many types of derivatives. These investments are generally valued at fair value based on information from third-party pricing services. In addition, investments may be valued at fair value if the adviser determines that an investment’s value has been materially affected by events occurring after the close of the exchange or market on which the investment is principally traded (such as foreign exchange or market) and prior to the determination of the fund’s net asset value, or after the halting of
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MFS Utilities Series
Notes to Financial Statements – continued
trading of a specific security where trading does not resume prior to the close of the exchange or market on which the security is principally traded. Events that occur on a frequent basis after foreign markets close (such as developments in foreign markets and significant movements in the U.S. markets) and prior to the determination of the fund’s net asset value may be deemed to have a material effect on the value of securities traded in foreign markets. Accordingly, the fund’s foreign equity securities may often be valued at fair value. The adviser generally relies on third-party pricing services or other information (such as the correlation with price movements of similar securities in the same or other markets; the type, cost and investment characteristics of the security; the business and financial condition of the issuer; and trading and other market data) to assist in determining whether to fair value and at what value to fair value an investment. The value of an investment for purposes of calculating the fund’s net asset value can differ depending on the source and method used to determine value. When fair valuation is used, the value of an investment used to determine the fund’s net asset value may differ from quoted or published prices for the same investment. There can be no assurance that the fund could obtain the fair value assigned to an investment if it were to sell the investment at the same time at which the fund determines its net asset value per share.
Various inputs are used in determining the value of the fund’s assets or liabilities. These inputs are categorized into three broad levels. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an investment’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The fund’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the investment. Level 1 includes unadjusted quoted prices in active markets for identical assets or liabilities. Level 2 includes other significant observable market-based inputs (including quoted prices for similar securities, interest rates, prepayment speed, and credit risk). Level 3 includes unobservable inputs, which may include the adviser’s own assumptions in determining the fair value of investments. Other financial instruments are derivative instruments not reflected in total investments, such as forward foreign currency exchange contracts. The following is a summary of the levels used as of December 31, 2016 in valuing the fund’s assets or liabilities:
Investments at Value | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Equity Securities: | ||||||||||||||||
United States | $1,039,257,873 | $— | $— | $1,039,257,873 | ||||||||||||
Portugal | 88,615,583 | — | — | 88,615,583 | ||||||||||||
Italy | — | 42,291,306 | — | 42,291,306 | ||||||||||||
Canada | 41,270,383 | — | — | 41,270,383 | ||||||||||||
United Kingdom | — | 40,738,184 | — | 40,738,184 | ||||||||||||
France | 8,183,726 | 24,536,407 | — | 32,720,133 | ||||||||||||
Sweden | 29,330,729 | — | — | 29,330,729 | ||||||||||||
China | — | 26,032,402 | — | 26,032,402 | ||||||||||||
Spain | 18,666,059 | 2,296,034 | — | 20,962,093 | ||||||||||||
Other Countries | 95,703,625 | 19,528,591 | — | 115,232,216 | ||||||||||||
Mutual Funds | 77,153,826 | — | — | 77,153,826 | ||||||||||||
Total Investments | $1,398,181,804 | $155,422,924 | $— | $1,553,604,728 | ||||||||||||
Other Financial Instruments | ||||||||||||||||
Forward Foreign Currency Exchange Contracts-Assets | $— | $3,471,227 | $— | $3,471,227 | ||||||||||||
Forward Foreign Currency Exchange Contracts-Liabilities | — | (15,512 | ) | — | (15,512 | ) |
For further information regarding security characteristics, see the Portfolio of Investments.
Of the level 1 investments presented above, equity investments amounting to $155,970,878 would have been considered level 2 investments at the beginning of the period. The primary reason for changes in the classifications between levels 1 and 2 occurs when foreign equity securities are fair valued using other observable market-based inputs in place of the closing exchange price due to events occurring after the close of the exchange or market on which the investment is principally traded. The fund’s foreign equity securities may often be valued at fair value. The fund’s policy is to recognize transfers between the levels as of the end of the period.
Foreign Currency Translation – Purchases and sales of foreign investments, income, and expenses are converted into U.S. dollars based upon currency exchange rates prevailing on the respective dates of such transactions or on the reporting date for foreign denominated receivables and payables. Gains and losses attributable to foreign currency exchange rates on sales of securities are recorded for financial statement purposes as net realized gains and losses on investments. Gains and losses attributable to foreign exchange rate movements on receivables, payables, income and expenses are recorded for financial statement purposes as foreign currency transaction gains and losses. That portion of both realized and unrealized gains and losses on investments that results from fluctuations in foreign currency exchange rates is not separately disclosed.
16
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MFS Utilities Series
Notes to Financial Statements – continued
Derivatives – The fund uses derivatives for different purposes, primarily to increase or decrease exposure to a particular market or segment of the market, or security, to increase or decrease interest rate or currency exposure, or as alternatives to direct investments. Derivatives are used for hedging or non-hedging purposes. While hedging can reduce or eliminate losses, it can also reduce or eliminate gains. When the fund uses derivatives as an investment to increase market exposure, or for hedging purposes, gains and losses from derivative instruments may be substantially greater than the derivative’s original cost.
The derivative instruments used by the fund were forward foreign currency exchange contracts. The fund’s period end derivatives, as presented in the Portfolio of Investments and the associated Derivative Contract tables, generally are indicative of the volume of its derivative activity during the period.
The following table presents, by major type of derivative contract, the fair value, on a gross basis, of the asset and liability components of derivatives held by the fund at December 31, 2016 as reported in the Statement of Assets and Liabilities:
Fair Value | ||||||||||
Risk | Derivative Contracts | Asset Derivatives | Liability Derivatives | |||||||
Foreign Exchange | Forward Foreign Currency Exchange | $3,471,227 | $(15,512 | ) |
The following table presents, by major type of derivative contract, the realized gain (loss) on derivatives held by the fund for the year ended December 31, 2016 as reported in the Statement of Operations:
Risk | Foreign Currency | |||
Foreign Exchange | $13,358,001 |
The following table presents, by major type of derivative contract, the change in unrealized appreciation (depreciation) on derivatives held by the fund for the year ended December 31, 2016 as reported in the Statement of Operations:
Risk | Translation of Liabilities in Foreign Currencies | |||
Foreign Exchange | $(2,226,275 | ) |
Derivative counterparty credit risk is managed through formal evaluation of the creditworthiness of all potential counterparties. On certain, but not all, uncleared derivatives, the fund attempts to reduce its exposure to counterparty credit risk whenever possible by entering into an ISDA Master Agreement on a bilateral basis. The ISDA Master Agreement gives each party to the agreement the right to terminate all transactions traded under such agreement if there is a certain deterioration in the credit quality of the other party. Upon an event of default or a termination of the ISDA Master Agreement, the non-defaulting party has the right to close out all transactions traded under such agreement and to net amounts owed under each agreement to one net amount payable by one party to the other. This right to close out and net payments across all transactions traded under the ISDA Master Agreement could result in a reduction of the fund’s credit risk to such counterparty equal to any amounts payable by the fund under the applicable transactions, if any.
Collateral and margin requirements differ by type of derivative. Margin requirements are set by the clearing broker and the clearing house for cleared derivatives (e.g., futures contracts, cleared swaps, and exchange-traded options) while collateral terms are contract specific for uncleared derivatives (e.g., forward foreign currency exchange contracts, uncleared swap agreements, and uncleared options). For derivatives traded under an ISDA Master Agreement, which contains a collateral support annex, the collateral requirements are netted across all transactions traded under such agreement and one amount is posted from one party to the other to collateralize such obligations. Cash that has been segregated to cover the fund’s collateral or margin obligations under derivative contracts, if any, will be reported separately in the Statement of Assets and Liabilities as “Restricted cash” or “Deposits with brokers.” Securities pledged as collateral or margin for the same purpose, if any, are noted in the Portfolio of Investments.
Forward Foreign Currency Exchange Contracts – The fund entered into forward foreign currency exchange contracts for the purchase or sale of a specific foreign currency at a fixed price on a future date. These contracts may be used to hedge the fund’s currency risk or for non-hedging purposes. For hedging purposes, the fund may enter into contracts to deliver or receive foreign currency that the fund will receive from or use in its normal investment activities. The fund may also use contracts to hedge against declines in the value of foreign currency denominated securities due to unfavorable exchange rate movements. For non-hedging purposes, the fund may enter into contracts with the intent of changing the relative exposure of the fund’s portfolio of securities to different currencies to take advantage of anticipated exchange rate changes.
Forward foreign currency exchange contracts are adjusted by the daily exchange rate of the underlying currency and any unrealized gains or losses are recorded as a receivable or payable for forward foreign currency exchange contracts until the contract settlement date. On contract settlement date, any gain or loss on the contract is recorded as realized gains or losses on foreign currency.
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MFS Utilities Series
Notes to Financial Statements – continued
Risks may arise upon entering into these contracts from unanticipated movements in the value of the contract and from the potential inability of counterparties to meet the terms of their contracts. Generally, the fund’s maximum risk due to counterparty credit risk is the unrealized gain on the contract due to the use of Continuous Linked Settlement, a multicurrency cash settlement system for the centralized settlement of foreign transactions. This risk is mitigated in cases where there is an ISDA Master Agreement between the fund and the counterparty providing for netting as described above and, where applicable, by the posting of collateral by the counterparty to the fund to cover the fund’s exposure to the counterparty under such ISDA Master Agreement.
Security Loans – Under its Securities Lending Agency Agreement with the fund, State Street Bank and Trust Company (“State Street”), as lending agent, loans the securities of the fund to certain qualified institutions (the “Borrowers”) approved by the fund. Security loans can be terminated at the discretion of either the lending agent or the fund and the related securities must be returned within the earlier of the standard trade settlement period for such securities or within three business days. The loans are collateralized by cash and/or U.S. Treasury and federal agency obligations in an amount typically at least equal to the market value of the securities loaned. On loans collateralized by cash, the cash collateral is invested in a money market fund. The market value of the loaned securities is determined at the close of business of the fund and any additional required collateral is delivered to the fund on the next business day. State Street provides the fund with indemnification against Borrower default. In the event of Borrower default, State Street will, for the benefit of the fund, either purchase securities identical to those loaned or, when such purchase is commercially impracticable, pay the fund the market value of the loaned securities. In return, State Street assumes the fund’s rights to the related collateral. If the collateral value is less than the cost to purchase identical securities, State Street is responsible for the shortfall, but only to the extent that such shortfall is not due to a decline in collateral value resulting from collateral reinvestment for which the fund bears the risk of loss. At period end, the fund had investment securities on loan, all of which were classified as equity securities in the fund’s Portfolio of Investments, with a fair value of $3,074,361. The fair value of the fund’s investment securities on loan and a related liability of $3,193,916 for cash collateral received on securities loaned are both presented gross in the Statement of Assets and Liabilities. The collateral received on securities loaned exceeded the value of securities on loan at period end. The liability for cash collateral for securities loaned is carried at fair value, which is categorized as level 2 within the fair value hierarchy. A portion of the income generated upon investment of the collateral is remitted to the Borrowers, and the remainder is allocated between the fund and the lending agent. On loans collateralized by U.S. Treasury and/or federal agency obligations, a fee is received from the Borrower, and is allocated between the fund and the lending agent. Income from securities lending is included in “Interest” income in the Statement of Operations. The dividend and interest income earned on the securities loaned is accounted for in the same manner as other dividend and interest income.
Indemnifications – Under the fund’s organizational documents, its officers and Trustees may be indemnified against certain liabilities and expenses arising out of the performance of their duties to the fund. Additionally, in the normal course of business, the fund enters into agreements with service providers that may contain indemnification clauses. The fund’s maximum exposure under these agreements is unknown as this would involve future claims that may be made against the fund that have not yet occurred.
Investment Transactions and Income – Investment transactions are recorded on the trade date. Interest income is recorded on the accrual basis. All premium and discount is amortized or accreted for financial statement purposes in accordance with U.S. generally accepted accounting principles. Dividends received in cash are recorded on the ex-dividend date. Certain dividends from foreign securities will be recorded when the fund is informed of the dividend if such information is obtained subsequent to the ex-dividend date. Dividend and interest payments received in additional securities are recorded on the ex-dividend or ex-interest date in an amount equal to the value of the security on such date.
The fund may receive proceeds from litigation settlements. Any proceeds received from litigation involving portfolio holdings are reflected in the Statement of Operations in realized gain/loss if the security has been disposed of by the fund or in unrealized gain/loss if the security is still held by the fund. Any other proceeds from litigation not related to portfolio holdings are reflected as other income in the Statement of Operations.
Reimbursement of Expenses by Custodian – In December 2015, the fund’s custodian (or former custodian), State Street Bank and Trust Company, announced that it intended to reimburse its asset servicing clients for expense amounts that it billed in error during the period 1998 through 2015. The amount of this one-time reimbursement attributable to the fund is reflected as “Reimbursement of custodian expenses” in the Statement of Operations.
Tax Matters and Distributions – The fund intends to qualify as a regulated investment company, as defined under Subchapter M of the Internal Revenue Code, and to distribute all of its taxable income, including realized capital gains. As a result, no provision for federal income tax is required. The fund’s federal tax returns, when filed, will remain subject to examination by the Internal Revenue Service for a three year period. Management has analyzed the fund’s tax positions taken on federal and state tax returns for all open tax years and does not believe that there are any uncertain tax positions that require recognition of a tax liability. Foreign taxes, if any, have been accrued by the fund in the accompanying financial statements in accordance with the applicable foreign tax law. Foreign income taxes may be withheld by certain countries in which the fund invests. Additionally, capital gains realized by the fund on securities issued in or by certain foreign countries may be subject to capital gains tax imposed by those countries.
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Notes to Financial Statements – continued
Distributions to shareholders are recorded on the ex-dividend date. Income and capital gain distributions are determined in accordance with income tax regulations, which may differ from U.S. generally accepted accounting principles. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences which arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary overdistributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes.
Book/tax differences primarily relate to wash sale loss deferrals, derivative transactions, and partnership adjustments.
The tax character of distributions declared to shareholders for the last two fiscal years is as follows:
12/31/16 | 12/31/15 | |||||||
Ordinary income (including any short-term capital gains) | $59,729,879 | $102,302,415 | ||||||
Long-term capital gains | 36,926,249 | 96,025,287 | ||||||
Total distributions | $96,656,128 | $198,327,702 |
The federal tax cost and the tax basis components of distributable earnings were as follows:
As of 12/31/16 | ||||
Cost of investments | $1,538,962,307 | |||
Gross appreciation | 174,740,978 | |||
Gross depreciation | (160,098,557 | ) | ||
Net unrealized appreciation (depreciation) | $14,642,421 | |||
Undistributed ordinary income | 71,583,133 | |||
Capital loss carryforwards | (31,801,540 | ) | ||
Other temporary differences | (523,067 | ) |
As of December 31, 2016, the fund had capital loss carryforwards available to offset future realized gains. These net capital losses may be carried forward indefinitely and their character is retained as short-term and/or long-term losses. Such losses are characterized as follows:
Long-Term | $(31,801,540 | ) |
Multiple Classes of Shares of Beneficial Interest – The fund offers multiple classes of shares, which differ in their respective distribution and/or service fees. The fund’s income, realized and unrealized gain (loss), and common expenses are allocated to shareholders based on the daily net assets of each class. Dividends are declared separately for each class. Differences in per share dividend rates are generally due to differences in separate class expenses. The fund’s distributions declared to shareholders as reported in the Statements of Changes in Net Assets are presented by class as follows:
From net investment income | From net realized gain on investments | |||||||||||||||
Year ended 12/31/16 | Year ended 12/31/15 | Year ended 12/31/16 | Year ended 12/31/15 | |||||||||||||
Initial Class | $22,376,960 | $28,015,638 | $13,202,553 | $46,266,869 | ||||||||||||
Service Class | 37,352,843 | 45,023,668 | 23,723,772 | 79,021,527 | ||||||||||||
Total | $59,729,803 | $73,039,306 | $36,926,325 | $125,288,396 |
(3) | Transactions with Affiliates |
Investment Adviser – The fund has an investment advisory agreement with MFS to provide overall investment management and related administrative services and facilities to the fund. Effective commencement of period, the management fee is computed daily and paid monthly at the following annual rates:
First $1 billion of average daily net assets | 0.75% | |||
Average daily net assets in excess of $1 billion | 0.70% |
Effective August 1, 2016, the management fee is computed daily and paid monthly at the following annual rates:
First $1 billion of average daily net assets | 0.75% | |||
Next $2 billion of average daily net assets | 0.70% | |||
Average daily net assets in excess of $3 billion | 0.65% |
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Notes to Financial Statements – continued
MFS has agreed in writing to reduce its management fee by a specified amount if certain MFS mutual fund assets exceed thresholds agreed to by MFS and the fund’s Board of Trustees. For the year ended December 31, 2016, this management fee reduction amounted to $113,116, which is included in the reduction of total expenses in the Statement of Operations. The management fee incurred for the year ended December 31, 2016 was equivalent to an annual effective rate of 0.72% of the fund’s average daily net assets.
Distributor – MFS Fund Distributors, Inc. (MFD), a wholly-owned subsidiary of MFS, is the distributor of shares of the fund. The Trustees have adopted a distribution plan for the Service Class shares pursuant to Rule 12b-1 under the Investment Company Act of 1940.
The fund’s distribution plan provides that the fund will pay MFD distribution and/or service fees equal to 0.25% per annum of its average daily net assets attributable to Service Class shares as partial consideration for services performed and expenses incurred by MFD and financial intermediaries (including participating insurance companies that invest in the fund to fund variable annuity and variable life insurance contracts, sponsors of qualified retirement and pension plans that invest in the fund, and affiliates of these participating insurance companies and plan sponsors) in connection with the sale and distribution of the Service Class shares. MFD may subsequently pay all, or a portion, of the distribution and/or service fees to financial intermediaries.
Shareholder Servicing Agent – MFS Service Center, Inc. (MFSC), a wholly-owned subsidiary of MFS, receives a fee from the fund for its services as shareholder servicing agent. For the year ended December 31, 2016, the fee was $71,956, which equated to 0.0045% annually of the fund’s average daily net assets. MFSC also receives payment from the fund for out-of-pocket expenses paid by MFSC on behalf of the fund. For the year ended December 31, 2016, these costs amounted to $5,693.
Administrator – MFS provides certain financial, legal, shareholder communications, compliance, and other administrative services to the fund. Under an administrative services agreement, the fund reimburses MFS the costs incurred to provide these services. The fund is charged an annual fixed amount of $17,500 plus a fee based on average daily net assets. The administrative services fee incurred for the year ended December 31, 2016 was equivalent to an annual effective rate of 0.0162% of the fund’s average daily net assets.
Trustees’ and Officers’ Compensation – The fund pays compensation to independent Trustees in the form of a retainer, attendance fees, and additional compensation to Board and Committee chairpersons. The fund does not pay compensation directly to Trustees or officers of the fund who are also officers of the investment adviser, all of whom receive remuneration for their services to the fund from MFS. Certain officers and Trustees of the fund are officers or directors of MFS, MFD, and MFSC.
Other – This fund and certain other funds managed by MFS (the funds) have entered into a service agreement (the ISO Agreement) which provides for payment of fees solely by the funds to Tarantino LLC in return for the provision of services of an Independent Senior Officer (ISO) for the funds. Frank L. Tarantino serves as the ISO and is an officer of the funds and the sole member of Tarantino LLC. The funds can terminate the ISO Agreement with Tarantino LLC at any time under the terms of the ISO Agreement. For the year ended December 31, 2016, the fee paid by the fund under this agreement was $3,143 and is included in “Miscellaneous” expense in the Statement of Operations. MFS has agreed to bear all expenses associated with office space, other administrative support, and supplies provided to the ISO.
The fund invests in the MFS Institutional Money Market Portfolio which is managed by MFS and seeks current income consistent with preservation of capital and liquidity. This money market fund does not pay a management fee to MFS.
The fund is permitted to engage in purchase and sale transactions (“cross-trades”) with funds and accounts for which MFS serves as investment adviser or sub-adviser pursuant to a policy adopted by the Board of Trustees. This policy has been designed to ensure that cross-trades conducted by the fund comply with Rule 17a-7 under the Investment Company Act of 1940. Under this policy, cross-trades are effected at current market prices with no remuneration paid in connection with the transaction. During the year ended December 31, 2016, the fund engaged in purchase and sale transactions pursuant to this policy, which amounted to $1,618,108 and $301,225, respectively. The sales transactions resulted in net realized gains (losses) of $(113,147).
(4) | Portfolio Securities |
For the year ended December 31, 2016, purchases and sales of investments, other than short-term obligations, aggregated $512,617,891 and $627,177,740, respectively.
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Notes to Financial Statements – continued
(5) | Shares of Beneficial Interest |
The fund’s Declaration of Trust permits the Trustees to issue an unlimited number of full and fractional shares of beneficial interest. Transactions in fund shares were as follows:
Year ended 12/31/16 | Year ended 12/31/15 | |||||||||||||||
Shares | Amount | Shares | Amount | |||||||||||||
Shares sold | ||||||||||||||||
Initial Class | 906,725 | $24,878,423 | 661,936 | $20,487,219 | ||||||||||||
Service Class | 4,514,067 | 119,819,942 | 5,092,320 | 157,180,531 | ||||||||||||
5,420,792 | $144,698,365 | 5,754,256 | $177,667,750 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | ||||||||||||||||
Initial Class | 1,294,742 | $35,579,513 | 2,750,185 | $74,282,507 | ||||||||||||
Service Class | 2,257,916 | 61,076,615 | 4,663,353 | 124,045,195 | ||||||||||||
3,552,658 | $96,656,128 | 7,413,538 | $198,327,702 | |||||||||||||
Shares reacquired | ||||||||||||||||
Initial Class | (3,412,304 | ) | $(91,825,699 | ) | (3,669,815 | ) | $(115,152,159 | ) | ||||||||
Service Class | (7,368,351 | ) | (196,425,805 | ) | (8,683,815 | ) | (272,032,347 | ) | ||||||||
(10,780,655 | ) | $(288,251,504 | ) | (12,353,630 | ) | $(387,184,506 | ) | |||||||||
Net change | ||||||||||||||||
Initial Class | (1,210,837 | ) | $(31,367,763 | ) | (257,694 | ) | $(20,382,433 | ) | ||||||||
Service Class | (596,368 | ) | (15,529,248 | ) | 1,071,858 | 9,193,379 | ||||||||||
(1,807,205 | ) | $(46,897,011 | ) | 814,164 | $(11,189,054 | ) |
(6) | Line of Credit |
The fund and certain other funds managed by MFS participate in a $1.25 billion unsecured committed line of credit, subject to a $1 billion sublimit, provided by a syndication of banks under a credit agreement. Borrowings may be made for temporary financing needs. Interest is charged to each fund, based on its borrowings, generally at a rate equal to the higher of the Overnight Federal Reserve funds rate or daily one month LIBOR plus an agreed upon spread. A commitment fee, based on the average daily, unused portion of the committed line of credit, is allocated among the participating funds at the end of each calendar quarter. In addition, the fund and other funds managed by MFS have established unsecured uncommitted borrowing arrangements with certain banks for temporary financing needs. Interest is charged to each fund, based on its borrowings, at a rate equal to the Overnight Federal Reserve funds rate plus an agreed upon spread. For the year ended December 31, 2016, the fund’s commitment fee and interest expense were $10,058 and $0, respectively, and are included in “Miscellaneous” expense in the Statement of Operations.
(7) | Transactions in Underlying Affiliated Funds – Affiliated Issuers |
An affiliated issuer may be considered one in which the fund owns 5% or more of the outstanding voting securities, or a company which is under common control. For the purposes of this report, the fund assumes the following to be an affiliated issuer:
Underlying Affiliated Fund | Beginning Shares/Par Amount | Acquisitions Shares/Par Amount | Dispositions Shares/Par Amount | Ending Shares/Par Amount | ||||||||||||
MFS Institutional Money Market Portfolio | 31,228,978 | 338,472,248 | (295,741,316 | ) | 73,959,910 | |||||||||||
Underlying Affiliated Fund | Realized Gain (Loss) | Capital Gain Distributions | Dividend Income | Ending Value | ||||||||||||
MFS Institutional Money Market Portfolio | $24 | $— | $238,237 | $73,959,910 |
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MFS Utilities Series
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Trustees of MFS Variable Insurance Trust and the Shareholders of MFS Utilities Series:
We have audited the accompanying statement of assets and liabilities, including the portfolio of investments, of MFS Utilities Series (one of the series of MFS Variable Insurance Trust) (the “Fund”) as of December 31, 2016, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended. These financial statements and financial highlights are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. The Fund is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of December 31, 2016, by correspondence with the custodian and brokers; when replies were not received from brokers, we performed other auditing procedures. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of MFS Utilities Series as of December 31, 2016, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
February 15, 2017
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TRUSTEES AND OFFICERS – IDENTIFICATION AND BACKGROUND
The Trustees and Officers of the Trust, as of February 1, 2017, are listed below, together with their principal occupations during the past five years. (Their titles may have varied during that period.) The address of each Trustee and Officer is 111 Huntington Avenue, Boston, Massachusetts 02199-7618.
Name, Age | Position(s) with Fund | Trustee/Officer Since (h) | Principal Occupations During the Past Five Years | Other Directorships (j) | ||||
INTERESTED TRUSTEES | ||||||||
Robert J. Manning (k) (age 53) | Trustee | February 2004 | Massachusetts Financial Services Company, Executive Chairman (since January 2017) and Director; Chairman (until January 2017); Chief Executive Officer (until 2015); Co-Chief Executive Officer (2015-2016) | N/A | ||||
Robin A. Stelmach (k) (age 55) | Trustee | January 2014 | Massachusetts Financial Services Company, Vice Chair (since January 2017); Chief Operating Officer and Executive Vice President (until January 2017) | N/A | ||||
INDEPENDENT TRUSTEES | ||||||||
David H. Gunning (age 74) | Trustee and Chair of Trustees | January 2004 | Private investor | Lincoln Electric Holdings, Inc., Director; Development Alternatives, Inc., Director/Non-Executive Chairman | ||||
Steven E. Buller (age 65) | Trustee | February 2014 | Chairman, Financial Accounting Standards Advisory Council (until 2015); Standing Advisory Group, Public Company Accounting Oversight Board, Member (until 2014); BlackRock, Inc. (investment management), Managing Director (until 2014), BlackRock Finco UK (investment management), Director (until 2014) | N/A | ||||
Maureen R. Goldfarb (age 61) | Trustee | January 2009 | Private investor | N/A | ||||
Michael Hegarty (age 72) | Trustee | December 2004 | Private investor | Rouse Properties Inc., Director; Capmark Financial Group Inc., Director (until 2015) | ||||
John P. Kavanaugh (age 62) | Trustee and Vice Chair of Trustees | January 2009 | Private investor | N/A | ||||
Maryanne L. Roepke (age 60) | Trustee | May 2014 | American Century Investments (investment management), Senior Vice President and Chief Compliance Officer (until 2014) | N/A | ||||
Laurie J. Thomsen (age 59) | Trustee | March 2005 | Private investor | The Travelers Companies, Director; Dycom Industries, Inc., Director | ||||
OFFICERS | ||||||||
Christopher R. Bohane (k) (age 43) | Assistant Secretary and Assistant Clerk | July 2005 | Massachusetts Financial Services Company, Vice President and Assistant General Counsel | N/A | ||||
Kino Clark (k) (age 48) | Assistant Treasurer | January 2012 | Massachusetts Financial Services Company, Vice President | N/A | ||||
Thomas H. Connors (k) (age 57) | Assistant Secretary and Assistant Clerk | September 2012 | Massachusetts Financial Services Company, Vice President and Senior Counsel; Deutsche Investment Management Americas Inc. (financial service provider), Director and Senior Counsel (until 2012) | N/A | ||||
Ethan D. Corey (k) (age 53) | Assistant Secretary and Assistant Clerk | July 2005 | Massachusetts Financial Services Company, Senior Vice President and Associate General Counsel | N/A | ||||
David L. DiLorenzo (k) (age 48) | President | July 2005 | Massachusetts Financial Services Company, Senior Vice President | N/A | ||||
Brian E. Langenfeld (k) (age 43) | Assistant Secretary and Assistant Clerk | June 2006 | Massachusetts Financial Services Company, Vice President and Senior Counsel | N/A |
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Trustees and Officers – continued
Name, Age | Position(s) with Fund | Trustee/Officer Since (h) | Principal Occupations During the Past Five Years | Other Directorships (j) | ||||
Susan A. Pereira (k) (age 46) | Assistant Secretary and Assistant Clerk | July 2005 | Massachusetts Financial Services Company, Vice President and Senior Counsel | N/A | ||||
Kasey L. Phillips (k) (age 46) | Assistant Treasurer | September 2012 | Massachusetts Financial Services Company, Vice President; Wells Fargo Funds Management, LLC, Senior Vice President, Fund Treasurer (until 2012) | N/A | ||||
Mark N. Polebaum (k) (age 64) | Secretary and Clerk | January 2006 | Massachusetts Financial Services Company, Executive Vice President, General Counsel and Secretary | N/A | ||||
Matthew A. Stowe (k) (age 42) | Assistant Secretary and Assistant Clerk | October 2014 | Massachusetts Financial Services Company, Vice President and Assistant General Counsel | N/A | ||||
Frank L. Tarantino (age 72) | Independent Senior Officer | June 2004 | Tarantino LLC (provider of compliance services), Principal | N/A | ||||
Richard S. Weitzel (k) (age 46) | Assistant Secretary and Assistant Clerk | October 2007 | Massachusetts Financial Services Company, Senior Vice President and Associate General Counsel | N/A | ||||
Martin J. Wolin (k) (age 49) | Chief Compliance Officer | July 2015 | Massachusetts Financial Services Company, Senior Vice President and Chief Compliance Officer (since July 2015); Mercer (financial service provider), Chief Risk and Compliance Officer, North America and Latin America (until June 2015) | N/A | ||||
James O. Yost (k) (age 56) | Treasurer | September 1990 | Massachusetts Financial Services Company, Senior Vice President | N/A |
(h) | Date first appointed to serve as Trustee/officer of an MFS Fund. Each Trustee has served continuously since appointment unless indicated otherwise. For the period from December 15, 2004 until February 22, 2005, Mr. Manning served as Advisory Trustee. Prior to January 2012, Messrs. DiLorenzo and Yost served as Assistant Treasurers of the Funds. From January 2012 through December 2016, Messrs. DiLorenzo and Yost served as Treasurer and Deputy Treasurer of the Funds, respectively. |
(j) | Directorships or trusteeships of companies required to report to the Securities and Exchange Commission (i.e., “public companies”). |
(k) | “Interested person” of the Trust within the meaning of the Investment Company Act of 1940 (referred to as the 1940 Act), which is the principal federal law governing investment companies like the fund, as a result of a position with MFS. The address of MFS is 111 Huntington Avenue, Boston, Massachusetts 02199-7618. |
Each Trustee (except Ms. Stelmach, Mr. Buller and Ms. Roepke) has been elected by shareholders and each Trustee and officer holds office until his or her successor is chosen and qualified or until his or her earlier death, resignation, retirement or removal. The Trust does not hold annual meetings for the purpose of electing Trustees, and Trustees are not elected for fixed terms. Messrs. Buller and Kavanaugh and Ms. Roepke are members of the Trust’s Audit Committee.
Each of the Fund’s Trustees and officers holds comparable positions with certain other funds of which MFS or a subsidiary is the investment adviser or distributor, and, in the case of the officers, with certain affiliates of MFS. As of February 1, 2017, the Trustees served as board members of 137 funds within the MFS Family of Funds.
The Statement of Additional Information for a Fund includes further information about the Trustees and is available without charge upon request by calling 1-800-225-2606.
Investment Adviser Massachusetts Financial Services Company 111 Huntington Avenue Boston, MA 02199-7618 | Custodian State Street Bank and Trust Company 1 Lincoln Street Boston, MA 02111-2900 | |
Distributor MFS Fund Distributors, Inc. 111 Huntington Avenue Boston, MA 02199-7618 | Independent Registered Public Accounting Firm Deloitte & Touche LLP 200 Berkeley Street Boston, MA 02116 | |
Portfolio Managers Claud Davis Maura Shaughnessy |
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BOARD REVIEW OF INVESTMENT ADVISORY AGREEMENT
The Investment Company Act of 1940 requires that both the full Board of Trustees and a majority of the non-interested (“independent”) Trustees, voting separately, annually approve the continuation of the Fund’s investment advisory agreement with MFS. The Trustees consider matters bearing on the Fund and its advisory arrangements at their meetings throughout the year, including a review of performance data at each regular meeting. In addition, the independent Trustees met several times over the course of three months beginning in May and ending in July, 2016 (“contract review meetings”) for the specific purpose of considering whether to approve the continuation of the investment advisory agreement for the Fund and the other investment companies that the Board oversees (the “MFS Funds”). The independent Trustees were assisted in their evaluation of the Fund’s investment advisory agreement by independent legal counsel, from whom they received separate legal advice and with whom they met separately from MFS during various contract review meetings. The independent Trustees were also assisted in this process by the MFS Funds’ Independent Senior Officer, a senior officer appointed by and reporting to the independent Trustees.
In connection with their deliberations regarding the continuation of the investment advisory agreement, the Trustees, including the independent Trustees, considered such information and factors as they believed, in light of the legal advice furnished to them and their own business judgment, to be relevant. The investment advisory agreement for the Fund was considered separately, although the Trustees also took into account the common interests of all MFS Funds in their review. As described below, the Trustees considered the nature, quality, and extent of the various investment advisory, administrative, and shareholder services performed by MFS under the existing investment advisory agreement and other arrangements with the Fund.
In connection with their contract review meetings, the Trustees received and relied upon materials that included, among other items: (i) information provided by Broadridge Financial Solutions, Inc. (“Broadridge”), an independent third party, on the investment performance of the Fund for various time periods ended December 31, 2015 and the investment performance of a group of funds with substantially similar investment classifications/objectives (the “Lipper performance universe”), (ii) information provided by Broadridge on the Fund’s advisory fees and other expenses and the advisory fees and other expenses of comparable funds identified by Broadridge (the “Broadridge expense group”), (iii) information provided by MFS on the advisory fees of portfolios of other clients of MFS, including institutional separate accounts and other clients, (iv) information as to whether and to what extent applicable expense waivers, reimbursements or fee “breakpoints” are observed for the Fund, (v) information regarding MFS’ financial results and financial condition, including MFS’ and certain of its affiliates’ estimated profitability from services performed for the Fund and the MFS Funds as a whole, and compared to MFS’ institutional business, (vi) MFS’ views regarding the outlook for the mutual fund industry and the strategic business plans of MFS, (vii) descriptions of various functions performed by MFS for the Funds, such as compliance monitoring and portfolio trading practices, and (viii) information regarding the overall organization of MFS, including information about MFS’ senior management and other personnel providing investment advisory, administrative and other services to the Fund and the other MFS Funds. The comparative performance, fee and expense information prepared and provided by Broadridge was not independently verified and the independent Trustees did not independently verify any information provided to them by MFS.
The Trustees’ conclusion as to the continuation of the investment advisory agreement was based on a comprehensive consideration of all information provided to the Trustees and not the result of any single factor. Some of the factors that figured particularly in the Trustees’ deliberations are described below, although individual Trustees may have evaluated the information presented differently from one another, giving different weights to various factors. It is also important to recognize that the fee arrangements for the Fund and other MFS Funds are the result of years of review and discussion between the independent Trustees and MFS, that certain aspects of such arrangements may receive greater scrutiny in some years than in others, and that the Trustees’ conclusions may be based, in part, on their consideration of these same arrangements during the course of the year and in prior years.
Based on information provided by Broadridge and MFS, the Trustees reviewed the Fund’s total return investment performance as well as the performance of peer groups of funds over various time periods. The Trustees placed particular emphasis on the total return performance of the Fund’s Initial Class shares in comparison to the performance of funds in its Lipper performance universe over the three-year period ended December 31, 2015, which the Trustees believed was a long enough period to reflect differing market conditions. The total return performance of the Fund’s Initial Class shares was in the 3rd quintile relative to the other funds in the universe for this three-year period (the 1st quintile being the best performers and the 5th quintile being the worst performers). The total return performance of the Fund’s Initial Class shares was in the 4th quintile for the one-year period and the 3rd quintile for the five-year period ended December 31, 2015 relative to the Lipper performance universe. Because of the passage of time, these performance results may differ from the performance results for more recent periods, including those shown elsewhere in this report.
In the course of their deliberations, the Trustees took into account information provided by MFS in connection with the contract review meetings, as well as during investment review meetings conducted with portfolio management personnel during the course of the year regarding the Fund’s performance. After reviewing these and related factors, the Trustees concluded, within the context of their overall conclusions regarding the investment advisory agreement, that they were satisfied with MFS’ responses and efforts relating to investment performance.
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Board Review of Investment Advisory Agreement – continued
In assessing the reasonableness of the Fund’s advisory fee, the Trustees considered, among other information, the Fund’s advisory fee and the total expense ratio of the Fund’s Initial Class shares as a percentage of average daily net assets and the advisory fee and total expense ratios of peer groups of funds based on information provided by Broadridge. The Trustees considered that, according to the data provided by Broadridge (which takes into account any fee reductions or expense limitations that were in effect during the Fund’s last fiscal year), the Fund’s effective advisory fee rate and total expense ratio were each approximately at the Broadridge expense group median.
The Trustees also considered the advisory fees charged by MFS to any institutional separate accounts advised by MFS (“separate accounts”) and unaffiliated investment companies for which MFS serves as subadviser (“subadvised funds”) that have comparable investment strategies to the Fund. In comparing these fees, the Trustees considered information provided by MFS as to the generally broader scope of services provided by MFS to the Fund, as well as the more extensive regulatory burdens imposed on MFS in managing the Fund, in comparison to separate accounts and subadvised funds. The Trustees also considered the higher demands placed on MFS’ investment personnel and trading infrastructure as a result of the daily cash in-flows and out-flows of the Fund in comparison to separate accounts.
The Trustees also considered whether the Fund may benefit from any economies of scale in the management of the Fund in the event of growth in assets of the Fund and/or growth in assets of the MFS Funds as a whole. They noted that the Fund’s advisory fee rate schedule is subject to a contractual breakpoint that reduces the Fund’s advisory fee rate on average daily net assets over $1 billion, and that MFS has agreed in writing to implement an additional contractual breakpoint that reduces its advisory fee rate on the Fund’s daily net assets over $3 billion. The Trustees also noted that MFS has agreed in writing to waive a portion of the management fees of certain MFS Funds, including the Fund, if the total combined assets of certain funds within the MFS Funds’ complex increase above agreed upon thresholds (the “group fee waiver”), enabling the Fund’s shareholders to share in the benefits from any economies of scale at the complex level. The group fee waiver is reviewed and renewed annually between the Board and MFS. The Trustees concluded that the breakpoints and the group fee waiver were sufficient to allow the Fund to benefit from economies of scale as its assets and overall complex assets grow.
The Trustees also considered information prepared by MFS relating to MFS’ costs and profits with respect to the Fund, the MFS Funds considered as a group, and other investment companies and accounts advised by MFS, as well as MFS’ methodologies used to determine and allocate its costs to the MFS Funds, the Fund and other accounts and products for purposes of estimating profitability.
After reviewing these and other factors described herein, the Trustees concluded, within the context of their overall conclusions regarding the investment advisory agreement, that the advisory fees charged to the Fund represent reasonable compensation in light of the services being provided by MFS to the Fund.
In addition, the Trustees considered MFS’ resources and related efforts to continue to retain, attract and motivate capable personnel to serve the Fund. The Trustees also considered current and developing conditions in the financial services industry, including the presence of large and well-capitalized companies which are spending, and appear to be prepared to continue to spend, substantial sums to engage personnel and to provide services to competing investment companies. In this regard, the Trustees also considered the financial resources of MFS and its ultimate parent, Sun Life Financial Inc. The Trustees also considered the advantages and possible disadvantages to the Fund of having an adviser that also serves other investment companies as well as other accounts.
The Trustees also considered the nature, quality, cost, and extent of administrative, transfer agency, and distribution services provided to the Fund by MFS and its affiliates under agreements and plans other than the investment advisory agreement, including any 12b-1 fees the Fund pays to MFS Fund Distributors, Inc., an affiliate of MFS. The Trustees also considered the nature, extent and quality of certain other services MFS performs or arranges for on the Fund’s behalf, which may include securities lending programs, directed expense payment programs, class action recovery programs, and MFS’ interaction with third-party service providers, principally custodians and sub-custodians. The Trustees concluded that the various non-advisory services provided by MFS and its affiliates on behalf of the Fund were satisfactory.
The Trustees also considered benefits to MFS from the use of the Fund’s portfolio brokerage commissions, if applicable, to pay for investment research and various other factors. Additionally, the Trustees considered so-called “fall-out benefits” to MFS such as reputational value derived from serving as investment manager to the Fund.
Based on their evaluation of factors that they deemed to be material, including those factors described above, the Board of Trustees, including the independent Trustees, concluded that the Fund’s investment advisory agreement with MFS should be continued for an additional one-year period, commencing August 1, 2016.
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MFS Utilities Series
PROXY VOTING POLICIES AND INFORMATION
MFS votes proxies on behalf of the fund pursuant to proxy voting policies and procedures that are available without charge, upon request, by calling 1-800-225-2606, by visiting mfs.com (once you have selected “Individual Investor” as your role, click on “Individual Investor Home” in the top navigation and then select “Learn More About Proxy Voting” under the “I want to…” header on the left hand column of the page), or by visiting the SEC’s Web site at http://www.sec.gov.
Information regarding how the fund voted proxies relating to portfolio securities during the most recent twelve-month period ended June 30 is available by August 31 of each year without charge by visiting mfs.com (once you have selected “Individual Investor” as your role, click on “Individual Investor Home” in the top navigation and then select “Learn More About Proxy Voting” under the “I want to…” header on the left hand column of the page), or by visiting the SEC’s Web site at http://www.sec.gov.
QUARTERLY PORTFOLIO DISCLOSURE
The fund will file a complete schedule of portfolio holdings with the Securities and Exchange Commission (the Commission) for the first and third quarters of each fiscal year on Form N-Q. The fund’s Form N-Q is available on the EDGAR database on the Commission’s Internet Web site at http://www.sec.gov, and may be reviewed and copied at the:
Public Reference Room
Securities and Exchange Commission
100 F Street, NE, Room 1580
Washington, D.C. 20549
Information on the operation of the Public Reference Room may be obtained by calling the Commission at 1-800-SEC-0330. Copies of the fund’s Form N-Q also may be obtained, upon payment of a duplicating fee, by electronic request at the following e-mail address: publicinfo@sec.gov or by writing the Public Reference Section at the above address.
From time to time, MFS may post important information about the fund or the MFS funds on the MFS web site (mfs.com). This information is available on mfs.com by following these steps once you have selected “Individual Investor” as your role: (1) Click on the “Individual Investor Home” in the top navigation and then select the “Announcements” option within the “Market Outlooks” drop down, or (2) Click on “Products & Services” and “Variable Insurance Portfolios” and then select the fund’s name.
INFORMATION ABOUT FUND CONTRACTS AND LEGAL CLAIMS
The fund has entered into contractual arrangements with an investment adviser, administrator, distributor, shareholder servicing agent, 529 program manager (if applicable), and custodian who each provide services to the fund. Unless expressly stated otherwise, shareholders are not parties to, or intended beneficiaries of these contractual arrangements, and these contractual arrangements are not intended to create any shareholder right to enforce them against the service providers or to seek any remedy under them against the service providers, either directly or on behalf of the fund.
Under the Trust’s By-Laws and Declaration of Trust, any claims asserted against or on behalf of the MFS Funds, including claims against Trustees and Officers, must be brought in state and federal courts located within the Commonwealth of Massachusetts.
FEDERAL TAX INFORMATION (unaudited)
The following information is provided pursuant to provisions of the Internal Revenue Code.
The fund designates $40,619,000 as capital gain dividends paid during the fiscal year.
For corporate shareholders, 56.65 % of the ordinary income dividends paid during the fiscal year qualify for the corporate dividends received deduction.
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rev. 3/16
FACTS | WHAT DOES MFS DO WITH YOUR PERSONAL INFORMATION? |
Why? | Financial companies choose how they share your personal information. Federal law gives consumers the right to limit some but not all sharing. Federal law also requires us to tell you how we collect, share, and protect your personal information. Please read this notice carefully to understand what we do. |
What? | The types of personal information we collect and share depend on the product or service you have with us. This information can include:
• Social Security number and account balances • Account transactions and transaction history • Checking account information and wire transfer instructions
When you are no longer our customer, we continue to share your information as described in this notice. |
How? | All financial companies need to share customers’ personal information to run their everyday business. In the section below, we list the reasons financial companies can share their customers’ personal information; the reasons MFS chooses to share; and whether you can limit this sharing. |
Reasons we can share your personal information | Does MFS share? | Can you limit this sharing? | ||
For our everyday business purposes – such as to process your transactions, maintain your account(s), respond to court orders and legal investigations, or report to credit bureaus | Yes | No | ||
For our marketing purposes – to offer our products and services to you | No | We don’t share | ||
For joint marketing with other financial companies | No | We don’t share | ||
For our affiliates’ everyday business purposes – information about your transactions and experiences | No | We don’t share | ||
For our affiliates’ everyday business purposes – information about your creditworthiness | No | We don’t share | ||
For nonaffiliates to market to you | No | We don’t share |
Questions? | Call 800-225-2606 or go to mfs.com. |
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Page 2 |
Who we are | ||
Who is providing this notice? | MFS Funds, MFS Investment Management, MFS Institutional Advisors, Inc., and MFS Heritage Trust Company. |
What we do | ||
How does MFS protect my personal information? | To protect your personal information from unauthorized access and use, we use security measures that comply with federal law. These measures include procedural, electronic, and physical safeguards for the protection of the personal information we collect about you. | |
How does MFS collect my personal information? | We collect your personal information, for example, when you
• open an account or provide account information • direct us to buy securities or direct us to sell your securities • make a wire transfer
We also collect your personal information from others, such as credit bureaus, affiliates, or other companies. | |
Why can’t I limit all sharing? | Federal law gives you the right to limit only
• sharing for affiliates’ everyday business purposes – information about your creditworthiness • affiliates from using your information to market to you • sharing for nonaffiliates to market to you
State laws and individual companies may give you additional rights to limit sharing. |
Definitions | ||
Affiliates | Companies related by common ownership or control. They can be financial and nonfinancial companies.
• MFS does not share personal information with affiliates, except for everyday business purposes as described on page one of this notice. | |
Nonaffiliates | Companies not related by common ownership or control. They can be financial and nonfinancial companies.
• MFS does not share with nonaffiliates so they can market to you. | |
Joint marketing | A formal agreement between nonaffiliated financial companies that together market financial products or services to you.
• MFS doesn’t jointly market. |
Other important information | ||
If you own an MFS product or receive an MFS service in the name of a third party such as a bank or broker-dealer, their privacy policy may apply to you instead of ours. |
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Table of Contents
ANNUAL REPORT
December 31, 2016
MFS® VALUE SERIES
MFS® Variable Insurance Trust
VLU-ANN
Table of Contents
MFS® VALUE SERIES
The report is prepared for the general information of contract owners. It is authorized for distribution to prospective investors only when preceded or accompanied by a current prospectus.
NOT FDIC INSURED • MAY LOSE VALUE • NO BANK OR CREDIT UNION GUARANTEE • NOT A DEPOSIT • NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY OR NCUA/NCUSIF
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MFS Value Series
LETTER FROM THE EXECUTIVE CHAIRMAN
Dear Contract Owners:
Despite June’s unexpected vote by the United Kingdom to leave the European Union and the surprising result in November’s U.S. presidential election, most markets have proved resilient. U.S. share prices quickly reversed post-Brexit declines, and indices reached new highs following the November elections. U.S. bond yields rose after Donald Trump’s victory on hopes that his proposed policy mix of lower taxes, increased spending on infrastructure and a lower regulatory burden on businesses will lift both U.S. economic growth and inflation. However, interest rates in most developed markets remain very low, with major central banks maintaining extremely accommodative monetary policies to reinvigorate slow-growing economies against a backdrop of still-low inflation. Even after the rise in yields following the election, interest rates remain low by historical standards.
Globally, economic growth has shown signs of recovery of late, led by the United States and the eurozone. Despite better growth, there are few immediate signs of worrisome inflation. Emerging market economies are recovering at a somewhat slower pace amid fears that restrictive U.S. trade policies could further hamper the already slow pace of global trade growth.
At MFS®, we believe in a patient, long-term approach to investing. Viewing investments with a long lens makes it possible to filter out short-term market noise and focus on achieving solid risk-adjusted returns over a full market cycle.
In our view, such an approach, along with the professional guidance of a financial advisor, will help you reach your investment objectives.
Respectfully,
Robert J. Manning
Executive Chairman
MFS Investment Management
February 15, 2017
The opinions expressed in this letter are subject to change and may not be relied upon for investment advice. No forecasts can be guaranteed.
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MFS Value Series
Portfolio structure
Top ten holdings | ||||
JPMorgan Chase & Co. | 4.8% | |||
Wells Fargo & Co. | 3.5% | |||
Johnson & Johnson | 3.4% | |||
Philip Morris International, Inc. | 3.3% | |||
Accenture PLC, “A” | 2.6% | |||
Goldman Sachs Group, Inc | 2.5% | |||
U.S. Bancorp | 2.4% | |||
Medtronic PLC | 2.2% | |||
Travelers Cos., Inc. | 2.0% | |||
Pfizer, Inc. | 2.0% |
Equity sectors | ||||
Financial Services | 29.8% | |||
Health Care | 15.3% | |||
Consumer Staples | 10.9% | |||
Industrial Goods & Services | 9.7% | |||
Basic Materials | 5.5% | |||
Energy | 5.2% | |||
Leisure | 5.0% | |||
Special Products & Services | 4.9% | |||
Technology | 2.9% | |||
Transportation | 2.8% | |||
Retailing | 2.8% | |||
Utilities & Communications | 2.5% | |||
Autos & Housing | 2.4% |
Cash & Cash Equivalents includes any cash, investments in money market funds, short-term securities, and other assets less liabilities. Please see the Statement of Assets and Liabilities for additional information related to the fund’s cash position and other assets and liabilities.
Percentages are based on net assets as of 12/31/16.
The portfolio is actively managed and current holdings may be different.
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MFS Value Series
Summary of Results
For the twelve months ended December 31, 2016, Initial Class shares of the MFS Value Series (“fund”) provided a total return of 14.09%, while Service Class shares of the fund provided a total return of 13.78%. These compare with a return of 17.34% for the fund’s benchmark, the Russell 1000® Value Index.
Market Environment
Sluggish global growth weighed on both developed and emerging market (“EM”) economies during much of the reporting period, though signs of improved growth became evident in late 2016. The US Federal Reserve increased interest rates by 25 basis points at the end of the period, the second hike of the cycle which began in December 2015. Globally, however, central bank policy remained highly accommodative, which forced many government, and even some corporate, bond yields into negative territory during the period. During the first half of the period, the United Kingdom voted to leave the European Union (“EU”), beginning a multi-year process of negotiation in order to achieve “Brexit.” While markets initially reacted to the vote with alarm, the spillover to European and EM economies was relatively short-lived, although risks of further hits to EU cohesiveness could re-emerge. Late in the period, the surprising US presidential election outcome prompted a significant rally in equities and a rise in bond yields in anticipation of a reflationary policy mix from the incoming Trump administration.
Headwinds from lower energy and commodity prices, which had spread beyond the energy, materials and industrial sectors early in the reporting period, abated later in the period as stabilizing oil prices helped push energy earnings higher relative to expectations. A sharp rise in the US dollar was a headwind for multinationals late in the period. The sharp rise in the US dollar also weighed on earnings. US consumer spending held up well during the second half of the period amid a modest increase in real wages and relatively low gasoline prices. Demand for autos reached near-record territory, while the housing market continued its recovery. Slow global trade continued to mirror slow global growth, particularly for many EM countries. That said, EM countries began to show signs of a modest upturn in activity along with adjustment in their external accounts. These improved conditions appeared to have reassured investors and contributed to record inflows into the asset class during July and August as negative yields for an increasing share of developed market bonds drove yield-hungry investors further out on the risk spectrum. Similar investor inflows were experienced in the investment grade and high yield corporate markets. Late in the reporting period, however, new challenges emerged for emerging markets debt (“EMD”) as a result of the US presidential election, which raised concerns about the potential for a protectionist turn in US trade policy which could negatively impact EM economies. These concerns, along with rising expectations for US growth, inflation and interest rates, have turned the tables on flows into EMD. Since the election, flows have reversed. As of the end of the period, the markets seemed to be in “wait-and-see” mode, looking for evidence to either confirm or refute the repricing of risk that has occurred since Election Day.
Detractors from Performance
The combination of an overweight allocation and weak stock selection in the health care sector detracted from performance relative to the Russell 1000® Value Index. Here, overweight positions in healthcare services company Express Scripts and medical device maker Medtronic, and holdings of health services and information technology company McKesson (b), held back relative results. The share price of Express Scripts was pressured early in the period after news that the company was being sued by health insurer Anthem to resolve their ongoing contract dispute.
Stock selection in both the basic materials and retailing sectors also hurt relative returns. Within the basic materials sector, the fund’s holdings of chemical company PPG Industries (b) dampened relative performance. Shares of PPG Industries fell, in the latter part of the reporting period, on the back of lower-than-expected net income, driven by weakness across its European segments. Foreign currency exposure also served as a headwind to total company earnings. Within the retailing sector, an overweight position in drugstore retailer CVS Health weakened relative returns as shares came under pressure due to softer-than-anticipated sales. Management also indicated that the retail portion of its business was subject to more significant challenges owing to network losses which further pressured the stock.
An underweight allocation to the energy sector held back relative results. However, there were no individual stocks within this sector that were among the fund’s largest relative detractors during the reporting period.
An overweight allocation to the consumer staples sector further dampened relative performance led by the fund’s holdings of global food company Nestle (b) (Switzerland) and international manufacturer and distributor of premium drinks Diageo (b) (United Kingdom). The share price of Nestle slid during the end of the reporting period as the company posted disappointing earnings results. A combination of deceleration in organic sales growth, deflationary pressures in Europe and rising raw material costs in emerging markets negatively impacted earnings. Management also reported softer-than-expected guidance which further weighed on the stock.
Other top relative detractors during the period included holdings of automotive components manufacturer Delphi Automotive (b) and not owning shares of strong-performing financial services firm Bank of America.
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MFS Value Series
Management Review – continued
The fund’s cash and/or cash equivalents position during the period detracted from relative performance. Under normal market conditions, the fund strives to be fully invested and generally holds cash to buy new holdings and to provide liquidity. In a period when markets rose, as measured by the fund’s benchmark, holding cash hurt performance versus the benchmark, which has no cash position.
Contributors to Performance
Stock selection in both the industrial goods & services and financial services sectors bolstered relative performance. Within the industrial goods & services sector, not owning shares of diversified industrial conglomerate General Electric aided relative results. Within the financial services sector, the fund’s overweight positions in financial services firms JPMorgan Chase and Goldman Sachs Group, and an underweight position in diversified financial services firm Citigroup, further supported relative returns. Shares of JPMorgan Chase outpaced the benchmark as the company benefited from a rally in the financial sector after President-elect Donald Trump won the U.S. election. Additionally, the firm delivered strong results driven by higher trading and investment banking revenue.
Stock selection in the leisure sector was an additional positive factor for relative results. The fund’s overweight position in media firm Time Warner helped relative returns.
Strong stock selection in the technology sector also contributed to relative performance. Here, not owning software giant Microsoft, and the fund’s position in semiconductor company Texas Instruments (b), supported relative results. Shares of Microsoft fell after the company reported weaker-than-expected growth in its Server/Cloud and Office segments, which appeared to have fueled investor concerns about prospects for the company’s faster growing divisions. Moreover, the company reached an agreement to acquire LinkedIn which came as a surprise and pressured the stock price further.
Stocks in other sectors that benefited relative results included an underweight position in eye care and skin care products company Allergan (h) and an overweight position in telecommunications services provider Verizon Communications. Additionally, not owning shares of global auto maker Ford Motor Co also helped relative performance.
Respectfully,
Nevin Chitkara | Steven Gorham | |
Portfolio Manager | Portfolio Manager |
(b) | Security is not a benchmark constituent. |
(h) | Security was not held in the fund at period end. |
The views expressed in this report are those of the portfolio managers only through the end of the period of the report as stated on the cover and do not necessarily reflect the views of MFS or any other person in the MFS organization. These views are subject to change at any time based on market or other conditions, and MFS disclaims any responsibility to update such views. These views may not be relied upon as investment advice or an indication of trading intent on behalf of any MFS portfolio. References to specific securities are not recommendations of such securities, and may not be representative of any MFS portfolio’s current or future investments.
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MFS Value Series
PERFORMANCE SUMMARY THROUGH 12/31/16
The following chart illustrates the historical performance of the fund in comparison to its benchmark(s). Benchmarks are unmanaged and may not be invested in directly. Benchmark returns do not reflect any fees or expenses. The performance of other share classes will be greater than or less than that of the class depicted below. (See Notes to Performance Summary.)
Performance data shown represents past performance and is no guarantee of future results. Investment return and principal value fluctuate so your units, when sold, may be worth more or less than the original cost; current performance may be lower or higher than quoted. The performance shown does not reflect the deduction of taxes, if any, that a contract holder would pay on fund distributions or the redemption of contract units. The returns for the fund shown also do not reflect the deduction of expenses associated with variable products, such as mortality and expense risk charges, separate account charges, and sales charges imposed by the insurance company separate accounts. Such expenses would reduce the overall returns shown.
Growth of a Hypothetical $10,000 Investment
Total Returns through 12/31/16
Average annual total returns
Share Class | Class Inception Date | 1-yr | 5-yr | 10-yr | ||||||||
Initial Class | 1/02/02 | 14.09% | 14.61% | 6.98% | ||||||||
Service Class | 1/02/02 | 13.78% | 14.31% | 6.71% | ||||||||
Comparative benchmark | ||||||||||||
Russell 1000® Value Index (f) | 17.34% | 14.80% | 5.72% |
(f) | Source: FactSet Research Systems Inc. |
Benchmark Definition
Russell 1000® Value Index – constructed to provide a comprehensive barometer for the value securities in the large-cap segment of the U.S. equity universe. Companies in this index generally have lower price-to-book ratios and lower forecasted growth values. The Russell 1000® Value Index is a trademark/service mark of the Frank Russell Company. Russell® is a trademark of the Frank Russell Company.
It is not possible to invest directly in an index.
Notes to Performance Summary
Average annual total return represents the average annual change in value for each share class for the periods presented.
Performance results reflect any applicable expense subsidies and waivers in effect during the periods shown. Without such subsidies and waivers the fund’s performance results would be less favorable. Please see the prospectus and financial statements for complete details. All results are historical and assume the reinvestment of any dividends and capital gains distributions.
Performance results do not include adjustments made for financial reporting purposes in accordance with U.S. generally accepted accounting principles and may differ from amounts reported in the financial highlights.
From time to time the fund may receive proceeds from litigation settlements, without which performance would be lower.
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MFS Value Series
Fund Expenses Borne by the Contract Holders during the Period,
July 1, 2016 through December 31, 2016
As a contract holder of the fund, you incur ongoing costs, including management fees; distribution and/or service (12b-1) fees; and other fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the fund and to compare these costs with the ongoing costs of investing in other mutual funds.
The example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period July 1, 2016 through December 31, 2016.
Actual Expenses
The first line for each share class in the following table provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled “Expenses Paid During Period” to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line for each share class in the following table provides information about hypothetical account values and hypothetical expenses based on the fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight the fund’s ongoing costs only and do not take into account the fees and expenses imposed under the variable contracts through which your investment in the fund is made. Therefore, the second line for each share class in the table is useful in comparing ongoing costs associated with an investment in vehicles (such as the fund) which fund benefits under variable annuity and variable life insurance contracts and to qualified pension and retirement plans only, and will not help you determine the relative total costs of investing in the fund through variable annuity and variable life insurance contracts. If the fees and expenses imposed under the variable contracts were included, your costs would have been higher.
Share Class | Annualized Expense Ratio | Beginning Account Value 7/01/16 | Ending Account Value | Expenses Paid During Period (p) 7/01/16-12/31/16 | ||||||||||||||
Initial Class | Actual | 0.71% | $1,000.00 | $1,068.82 | $3.69 | |||||||||||||
Hypothetical (h) | 0.71% | $1,000.00 | $1,021.57 | $3.61 | ||||||||||||||
Service Class | Actual | 0.96% | $1,000.00 | $1,067.64 | $4.99 | |||||||||||||
Hypothetical (h) | 0.96% | $1,000.00 | $1,020.31 | $4.88 |
(h) | 5% class return per year before expenses. |
(p) | “Expenses Paid During Period” are equal to each class’s annualized expense ratio, as shown above, multiplied by the average account value over the period, multiplied by 184/366 (to reflect the one-half year period). |
Notes to Expense Table
Expense ratios reflect a one-time Reimbursement of Expenses by Custodian of 0.02% (See Note 2 of the Notes to Financial Statements) that are outside of the expense limitation arrangement (See Note 3 of the Notes to Financial Statements).
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MFS Value Series
PORTFOLIO OF INVESTMENTS – 12/31/16
The Portfolio of Investments is a complete list of all securities owned by your fund. It is categorized by broad-based asset classes.
Issuer | Shares/Par | Value ($) | ||||||
COMMON STOCKS – 99.7% | ||||||||
Aerospace – 5.1% | ||||||||
Honeywell International, Inc. | 359,119 | $ | 41,603,930 | |||||
Lockheed Martin Corp. | 108,303 | 27,069,252 | ||||||
Northrop Grumman Corp. | 88,686 | 20,626,590 | ||||||
United Technologies Corp. | 240,494 | 26,362,952 | ||||||
|
| |||||||
$ | 115,662,724 | |||||||
|
| |||||||
Alcoholic Beverages – 1.0% | ||||||||
Diageo PLC | 857,802 | $ | 22,192,277 | |||||
|
| |||||||
Apparel Manufacturers – 0.4% | ||||||||
Hanesbrands, Inc. | 367,259 | $ | 7,921,777 | |||||
|
| |||||||
Automotive – 1.4% | ||||||||
Delphi Automotive PLC | 293,206 | $ | 19,747,424 | |||||
Harley-Davidson, Inc. | 196,862 | 11,484,929 | ||||||
|
| |||||||
$ | 31,232,353 | |||||||
|
| |||||||
Broadcasting – 3.0% | ||||||||
Interpublic Group of Companies, Inc. | 376,705 | $ | 8,818,664 | |||||
Omnicom Group, Inc. | 390,741 | 33,255,967 | ||||||
Time Warner, Inc. | 209,637 | 20,236,260 | ||||||
Walt Disney Co. | 53,618 | 5,588,068 | ||||||
|
| |||||||
$ | 67,898,959 | |||||||
|
| |||||||
Brokerage & Asset Managers – 2.5% | ||||||||
BlackRock, Inc. | 56,675 | $ | 21,567,105 | |||||
Franklin Resources, Inc. | 297,462 | 11,773,546 | ||||||
NASDAQ, Inc. | 361,991 | 24,296,836 | ||||||
|
| |||||||
$ | 57,637,487 | |||||||
|
| |||||||
Business Services – 4.9% | ||||||||
Accenture PLC, “A” | 502,675 | $ | 58,878,323 | |||||
Amdocs Ltd. | 95,977 | 5,590,660 | ||||||
Cognizant Technology Solutions Corp., “A” (a) | 151,472 | 8,486,976 | ||||||
Equifax, Inc. | 70,942 | 8,387,473 | ||||||
Fidelity National Information Services, Inc. | 268,589 | 20,316,072 | ||||||
Fiserv, Inc. (a) | 96,683 | 10,275,469 | ||||||
|
| |||||||
$ | 111,934,973 | |||||||
|
| |||||||
Cable TV – 1.3% | ||||||||
Comcast Corp., “A��� | 417,540 | $ | 28,831,137 | |||||
|
| |||||||
Chemicals – 5.0% | ||||||||
3M Co. | 257,511 | $ | 45,983,739 | |||||
E.I. du Pont de Nemours & Co. | 230,630 | 16,928,242 | ||||||
Monsanto Co. | 81,893 | 8,615,963 | ||||||
PPG Industries, Inc. | 437,262 | 41,434,947 | ||||||
|
| |||||||
$ | 112,962,891 | |||||||
|
| |||||||
Computer Software – 0.6% | ||||||||
Oracle Corp. | 358,188 | $ | 13,772,329 | |||||
|
| |||||||
Computer Software – Systems – 0.7% | ||||||||
International Business Machines Corp. | 97,786 | $ | 16,231,498 | |||||
|
|
Issuer | Shares/Par | Value ($) | ||||||
COMMON STOCKS – continued | ||||||||
Construction – 1.1% | ||||||||
Sherwin-Williams Co. | 47,576 | $ | 12,785,574 | |||||
Stanley Black & Decker, Inc. | 99,241 | 11,381,950 | ||||||
|
| |||||||
$ | 24,167,524 | |||||||
|
| |||||||
Consumer Products – 1.0% | ||||||||
Coty, Inc., “A” | 526,535 | $ | 9,640,856 | |||||
Newell Brands, Inc. | 83,397 | 3,723,676 | ||||||
Procter & Gamble Co. | 106,063 | 8,917,777 | ||||||
|
| |||||||
$ | 22,282,309 | |||||||
|
| |||||||
Containers – 0.5% | ||||||||
Crown Holdings, Inc. (a) | 202,347 | $ | 10,637,382 | |||||
|
| |||||||
Electrical Equipment – 2.2% | ||||||||
Johnson Controls International PLC | 1,009,940 | $ | 41,599,429 | |||||
Pentair PLC | 161,766 | 9,070,220 | ||||||
|
| |||||||
$ | 50,669,649 | |||||||
|
| |||||||
Electronics – 1.6% | ||||||||
Texas Instruments, Inc. | 480,738 | $ | 35,079,452 | |||||
|
| |||||||
Energy – Independent – 1.9% | ||||||||
EOG Resources, Inc. | 233,907 | $ | 23,647,998 | |||||
Occidental Petroleum Corp. | 275,110 | 19,596,085 | ||||||
|
| |||||||
$ | 43,244,083 | |||||||
|
| |||||||
Energy – Integrated – 2.1% | ||||||||
Chevron Corp. | 191,875 | $ | 22,583,688 | |||||
Exxon Mobil Corp. | 277,483 | 25,045,616 | ||||||
|
| |||||||
$ | 47,629,304 | |||||||
|
| |||||||
Food & Beverages – 5.1% | ||||||||
Archer Daniels Midland Co. | 417,766 | $ | 19,071,018 | |||||
Danone S.A. | 147,629 | 9,344,229 | ||||||
General Mills, Inc. | 362,128 | 22,368,647 | ||||||
J.M. Smucker Co. | 93,181 | 11,932,759 | ||||||
Mead Johnson Nutrition Co., “A” | 81,433 | 5,762,199 | ||||||
Nestle S.A. | 494,877 | 35,501,095 | ||||||
PepsiCo, Inc. | 103,308 | 10,809,116 | ||||||
|
| |||||||
$ | 114,789,063 | |||||||
|
| |||||||
Food & Drug Stores – 1.7% | ||||||||
CVS Health Corp. | 485,802 | $ | 38,334,636 | |||||
|
| |||||||
General Merchandise – 0.5% | ||||||||
Target Corp. | 157,109 | $ | 11,347,983 | |||||
|
| |||||||
Health Maintenance Organizations – 0.5% | ||||||||
Cigna Corp. | 84,861 | $ | 11,319,609 | |||||
|
| |||||||
Insurance – 7.9% | ||||||||
Aon PLC | 313,701 | $ | 34,987,073 | |||||
Chubb Ltd. | 330,429 | 43,656,279 | ||||||
MetLife, Inc. | 644,049 | 34,707,801 | ||||||
Prudential Financial, Inc. | 196,837 | 20,482,858 | ||||||
Travelers Cos., Inc. | 378,379 | 46,321,157 | ||||||
|
| |||||||
$ | 180,155,168 | |||||||
|
|
7
Table of Contents
MFS Value Series
Portfolio of Investments – continued
Issuer | Shares/Par | Value ($) | ||||||
COMMON STOCKS – continued | ||||||||
Machinery & Tools – 2.3% | ||||||||
Eaton Corp. PLC | 292,291 | $ | 19,609,803 | |||||
Illinois Tool Works, Inc. | 169,199 | 20,720,110 | ||||||
Ingersoll-Rand Co. Ltd., “A” | 163,204 | 12,246,828 | ||||||
|
| |||||||
$ | 52,576,741 | |||||||
|
| |||||||
Major Banks – 14.1% | ||||||||
Bank of New York Mellon Corp. | 549,457 | $ | 26,033,273 | |||||
Goldman Sachs Group, Inc. | 233,977 | 56,025,793 | ||||||
JPMorgan Chase & Co. | 1,274,813 | 110,003,614 | ||||||
PNC Financial Services Group, Inc. | 252,485 | 29,530,646 | ||||||
State Street Corp. | 251,163 | 19,520,388 | ||||||
Wells Fargo & Co. | 1,451,330 | 79,982,796 | ||||||
|
| |||||||
$ | 321,096,510 | |||||||
|
| |||||||
Medical & Health Technology & Services – 1.2% | ||||||||
Express Scripts Holding Co. (a) | 190,616 | $ | 13,112,475 | |||||
McKesson Corp. | 107,536 | 15,103,431 | ||||||
|
| |||||||
$ | 28,215,906 | |||||||
|
| |||||||
Medical Equipment – 6.2% | ||||||||
Abbott Laboratories | 623,299 | $ | 23,940,915 | |||||
Danaher Corp. | 314,413 | 24,473,908 | ||||||
Medtronic PLC | 708,287 | 50,451,283 | ||||||
St. Jude Medical, Inc. | 213,950 | 17,156,651 | ||||||
Thermo Fisher Scientific, Inc. | 174,854 | 24,671,899 | ||||||
|
| |||||||
$ | 140,694,656 | |||||||
|
| |||||||
Oil Services – 1.2% | ||||||||
Schlumberger Ltd. | 335,152 | $ | 28,136,010 | |||||
|
| |||||||
Other Banks & Diversified Financials – 5.1% | ||||||||
American Express Co. | 286,250 | $ | 21,205,400 | |||||
Citigroup, Inc. | 696,760 | 41,408,447 | ||||||
U.S. Bancorp | 1,047,916 | 53,831,445 | ||||||
|
| |||||||
$ | 116,445,292 | |||||||
|
| |||||||
Pharmaceuticals – 7.3% | ||||||||
Johnson & Johnson | 671,691 | $ | 77,385,520 | |||||
Merck & Co., Inc. | 545,689 | 32,124,711 | ||||||
Novartis AG | 74,159 | 5,396,427 | ||||||
Pfizer, Inc. | 1,420,185 | 46,127,609 | ||||||
Roche Holding AG | 21,080 | 4,803,146 | ||||||
|
| |||||||
$ | 165,837,413 | |||||||
|
| |||||||
Printing & Publishing – 0.8% | ||||||||
Moody’s Corp. | 139,377 | $ | 13,139,070 | |||||
S&P Global, Inc. | 38,831 | 4,175,886 | ||||||
|
| |||||||
$ | 17,314,956 | |||||||
|
| |||||||
Railroad & Shipping – 1.3% | ||||||||
Canadian National Railway Co. | 179,678 | $ | 12,110,297 | |||||
Union Pacific Corp. | 165,603 | 17,169,719 | ||||||
|
| |||||||
$ | 29,280,016 | |||||||
|
| |||||||
Specialty Stores – 0.3% | ||||||||
Advance Auto Parts, Inc. | 32,773 | $ | 5,542,570 | |||||
|
|
Issuer | Shares/Par | Value ($) | ||||||
COMMON STOCKS – continued | ||||||||
Telephone Services – 1.4% | ||||||||
Verizon Communications, Inc. | 594,530 | $ | 31,736,011 | |||||
|
| |||||||
Tobacco – 3.9% | ||||||||
Altria Group, Inc. | 221,832 | $ | 15,000,280 | |||||
Philip Morris International, Inc. | 810,118 | 74,117,696 | ||||||
|
| |||||||
$ | 89,117,976 | |||||||
|
| |||||||
Trucking – 1.5% | ||||||||
United Parcel Service, Inc., “B” | 301,827 | $ | 34,601,447 | |||||
|
| |||||||
Utilities – Electric Power – 1.1% | ||||||||
Duke Energy Corp. | 244,254 | $ | 18,958,995 | |||||
Xcel Energy, Inc. | 168,518 | 6,858,683 | ||||||
|
| |||||||
$ | 25,817,678 | |||||||
|
| |||||||
Total Common Stocks (Identified Cost, $1,412,794,584) | $ | 2,262,347,749 | ||||||
|
| |||||||
MONEY MARKET FUNDS – 0.4% | ||||||||
MFS Institutional Money Market Portfolio, 0.51% (v) (Identified Cost, $9,388,614) | 9,388,614 | $ | 9,388,614 | |||||
|
| |||||||
Total Investments (Identified Cost, $1,422,183,198) | $ | 2,271,736,363 | ||||||
|
| |||||||
OTHER ASSETS, LESS LIABILITIES – (0.1)% | (1,351,130 | ) | ||||||
|
| |||||||
NET ASSETS – 100.0% | $ | 2,270,385,233 | ||||||
|
|
(a) | Non-income producing security. |
(v) | Underlying affiliated fund that is available only to investment companies managed by MFS. The rate quoted for the MFS Institutional Money Market Portfolio is the annualized seven-day yield of the fund at period end. |
The following abbreviations are used in this report and are defined:
PLC | Public Limited Company |
See Notes to Financial Statements
8
Table of Contents
MFS Value Series
FINANCIAL STATEMENTS | STATEMENT OF ASSETS AND LIABILITIES
This statement represents your fund’s balance sheet, which details the assets and liabilities comprising the total value of the fund.
At 12/31/16 | ||||||||
Assets | ||||||||
Investments | ||||||||
Non-affiliated issuers, at value (identified cost, $1,412,794,584) | $2,262,347,749 | |||||||
Underlying affiliated funds, at value (identified cost, $9,388,614) | 9,388,614 | |||||||
Total investments, at value (identified cost, $1,422,183,198) | $2,271,736,363 | |||||||
Cash | 22,266 | |||||||
Foreign currency, at value (identified cost, $30) | 29 | |||||||
Receivables for | ||||||||
Fund shares sold | 474,232 | |||||||
Interest and dividends | 4,589,105 | |||||||
Total assets | $2,276,821,995 | |||||||
Liabilities | ||||||||
Payables for | ||||||||
Investments purchased | $755,624 | |||||||
Fund shares reacquired | 5,308,368 | |||||||
Payable to affiliates | ||||||||
Investment adviser | 131,059 | |||||||
Shareholder servicing costs | 1,313 | |||||||
Distribution and/or service fees | 26,758 | |||||||
Payable for independent Trustees’ compensation | 197 | |||||||
Accrued expenses and other liabilities | 213,443 | |||||||
Total liabilities | $6,436,762 | |||||||
Net assets | $2,270,385,233 | |||||||
Net assets consist of | ||||||||
Paid-in capital | $1,297,032,494 | |||||||
Unrealized appreciation (depreciation) on investments and translation of assets and liabilities in foreign currencies | 849,465,167 | |||||||
Accumulated net realized gain (loss) on investments and foreign currency | 81,978,157 | |||||||
Undistributed net investment income | 41,909,415 | |||||||
Net assets | $2,270,385,233 | |||||||
Shares of beneficial interest outstanding | 121,272,902 |
Net assets | Shares outstanding | Net asset value per share | ||||||||||
Initial Class | $968,078,020 | 51,214,926 | $18.90 | |||||||||
Service Class | 1,302,307,213 | 70,057,976 | 18.59 |
See Notes to Financial Statements
9
Table of Contents
MFS Value Series
FINANCIAL STATEMENTS | STATEMENT OF OPERATIONS
This statement describes how much your fund earned in investment income and accrued in expenses. It also describes any gains and/or losses generated by fund operations.
Year ended 12/31/16 | ||||||||
Net investment income |
| |||||||
Income | ||||||||
Dividends | $60,348,414 | |||||||
Interest | 83,836 | |||||||
Dividends from underlying affiliated funds | 79,836 | |||||||
Other | 15,198 | |||||||
Foreign taxes withheld | (319,200 | ) | ||||||
Total investment income | $60,208,084 | |||||||
Expenses | ||||||||
Management fee | $15,256,543 | |||||||
Distribution and/or service fees | 3,075,364 | |||||||
Shareholder servicing costs | 66,687 | |||||||
Administrative services fee | 351,069 | |||||||
Independent Trustees’ compensation | 49,297 | |||||||
Custodian fee | 130,644 | |||||||
Reimbursement of custodian expenses | (175,487 | ) | ||||||
Shareholder communications | 121,877 | |||||||
Audit and tax fees | 55,219 | |||||||
Legal fees | 20,965 | |||||||
Miscellaneous | 53,345 | |||||||
Total expenses | $19,005,523 | |||||||
Reduction of expenses by investment adviser | (155,714 | ) | ||||||
Net expenses | $18,849,809 | |||||||
Net investment income | $41,358,275 | |||||||
Realized and unrealized gain (loss) on investments and foreign currency | ||||||||
Realized gain (loss) (identified cost basis) | ||||||||
Investments: | ||||||||
Non-affiliated issuers | $91,678,273 | |||||||
Underlying affiliated funds | (488 | ) | ||||||
Foreign currency | (49,572 | ) | ||||||
Net realized gain (loss) on investments and foreign currency | $91,628,213 | |||||||
Change in unrealized appreciation (depreciation) | ||||||||
Investments | $157,378,274 | |||||||
Translation of assets and liabilities in foreign currencies | (5,170 | ) | ||||||
Net unrealized gain (loss) on investments and foreign currency translation | $157,373,104 | |||||||
Net realized and unrealized gain (loss) on investments and foreign currency | $249,001,317 | |||||||
Change in net assets from operations | $290,359,592 |
See Notes to Financial Statements
10
Table of Contents
MFS Value Series
FINANCIAL STATEMENTS | STATEMENTS OF CHANGES IN NET ASSETS
These statements describe the increases and/or decreases in net assets resulting from operations, any distributions, and any shareholder transactions.
For years ended 12/31 | 2016 | 2015 | ||||||
Change in net assets | ||||||||
From operations | ||||||||
Net investment income | $41,358,275 | $44,302,262 | ||||||
Net realized gain (loss) on investments and foreign currency | 91,628,213 | 180,180,190 | ||||||
Net unrealized gain (loss) on investments and foreign currency translation | 157,373,104 | (248,421,434 | ) | |||||
Change in net assets from operations | $290,359,592 | $(23,938,982 | ) | |||||
Distributions declared to shareholders | ||||||||
From net investment income | $(43,606,764 | ) | $(51,498,261 | ) | ||||
From net realized gain on investments | (181,308,219 | ) | (137,834,650 | ) | ||||
Total distributions declared to shareholders | $(224,914,983 | ) | $(189,332,911 | ) | ||||
Change in net assets from fund share transactions | $72,375,793 | $(254,692,255 | ) | |||||
Total change in net assets | $137,820,402 | $(467,964,148 | ) | |||||
Net assets | ||||||||
At beginning of period | 2,132,564,831 | 2,600,528,979 | ||||||
At end of period (including undistributed net investment income of $41,909,415 and | $2,270,385,233 | $2,132,564,831 |
See Notes to Financial Statements
11
Table of Contents
MFS Value Series
FINANCIAL STATEMENTS | FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the fund’s financial performance for the past 5 years. Certain information reflects financial results for a single fund share. The total returns in the table represent the rate by which an investor would have earned (or lost) on an investment in the fund share class (assuming reinvestment of all distributions) held for the entire period.
Initial Class | Years ended 12/31 | |||||||||||||||||||
2016 | 2015 | 2014 | 2013 | 2012 | ||||||||||||||||
Net asset value, beginning of period | $18.39 | $20.34 | $19.28 | $14.40 | $12.68 | |||||||||||||||
Income (loss) from investment operations | ||||||||||||||||||||
Net investment income (d) | $0.38 | (c) | $0.40 | $0.44 | $0.30 | $0.28 | ||||||||||||||
Net realized and unrealized gain (loss) on investments and | 2.16 | (0.67 | ) | 1.55 | 4.83 | 1.77 | ||||||||||||||
Total from investment operations | $2.54 | $(0.27 | ) | $1.99 | $5.13 | $2.05 | ||||||||||||||
Less distributions declared to shareholders | ||||||||||||||||||||
From net investment income | $(0.42 | ) | $(0.48 | ) | $(0.31 | ) | $(0.20 | ) | $(0.23 | ) | ||||||||||
From net realized gain on investments | (1.61 | ) | (1.20 | ) | (0.62 | ) | (0.05 | ) | (0.10 | ) | ||||||||||
Total distributions declared to shareholders | $(2.03 | ) | $(1.68 | ) | $(0.93 | ) | $(0.25 | ) | $(0.33 | ) | ||||||||||
Net asset value, end of period (x) | $18.90 | $18.39 | $20.34 | $19.28 | $14.40 | |||||||||||||||
Total return (%) (k)(r)(s)(x) | 14.09 | (c) | (0.74 | ) | 10.51 | 35.89 | 16.26 | |||||||||||||
Ratios (%) (to average net assets) and Supplemental data: | ||||||||||||||||||||
Expenses before expense reductions (f) | 0.73 | (c) | 0.73 | 0.73 | 0.73 | 0.78 | ||||||||||||||
Expenses after expense reductions (f) | 0.72 | (c) | 0.73 | 0.72 | 0.73 | 0.78 | ||||||||||||||
Net investment income | 2.02 | (c) | 2.00 | 2.23 | 1.74 | 2.02 | ||||||||||||||
Portfolio turnover | 15 | 13 | 13 | 15 | 16 | |||||||||||||||
Net assets at end of period (000 omitted) | $968,078 | $964,811 | $1,118,647 | $1,090,381 | $988,594 |
See Notes to Financial Statements
12
Table of Contents
MFS Value Series
Financial Highlights – continued
Service Class | Years ended 12/31 | |||||||||||||||||||
2016 | 2015 | 2014 | 2013 | 2012 | ||||||||||||||||
Net asset value, beginning of period | $18.12 | $20.05 | $19.03 | $14.22 | $12.54 | |||||||||||||||
Income (loss) from investment operations | ||||||||||||||||||||
Net investment income (d) | $0.33 | (c) | $0.34 | $0.38 | $0.25 | $0.24 | ||||||||||||||
Net realized and unrealized gain (loss) on investments and foreign currency | 2.11 | (0.65 | ) | 1.52 | 4.78 | 1.74 | ||||||||||||||
Total from investment operations | $2.44 | $(0.31 | ) | $1.90 | $5.03 | $1.98 | ||||||||||||||
Less distributions declared to shareholders | ||||||||||||||||||||
From net investment income | $(0.36 | ) | $(0.42 | ) | $(0.26 | ) | $(0.17 | ) | $(0.20 | ) | ||||||||||
From net realized gain on investments | (1.61 | ) | (1.20 | ) | (0.62 | ) | (0.05 | ) | (0.10 | ) | ||||||||||
Total distributions declared to shareholders | $(1.97 | ) | $(1.62 | ) | $(0.88 | ) | $(0.22 | ) | $(0.30 | ) | ||||||||||
Net asset value, end of period (x) | $18.59 | $18.12 | $20.05 | $19.03 | $14.22 | |||||||||||||||
Total return (%) (k)(r)(s)(x) | 13.78 | (c) | (0.93 | ) | 10.20 | 35.59 | 15.88 | |||||||||||||
Ratios (%) (to average net assets) and Supplemental data: | ||||||||||||||||||||
Expenses before expense reductions (f) | 0.98 | (c) | 0.98 | 0.98 | 0.98 | 1.03 | ||||||||||||||
Expenses after expense reductions (f) | 0.97 | (c) | 0.98 | 0.97 | 0.98 | 1.03 | ||||||||||||||
Net investment income | 1.78 | (c) | 1.76 | 1.99 | 1.49 | 1.76 | ||||||||||||||
Portfolio turnover | 15 | 13 | 13 | 15 | 16 | |||||||||||||||
Net assets at end of period (000 omitted) | $1,302,307 | $1,167,754 | $1,481,882 | $1,404,019 | $1,022,722 |
(c) | Amount reflects a one-time reimbursement of expenses by the custodian (or former custodian) without which net investment income and performance would be lower and expenses would be higher. See Note 2 in the Notes to Financial Statements for additional information. |
(d) | Per share data is based on average shares outstanding. |
(f) | Ratios do not reflect reductions from fees paid indirectly, if applicable. |
(k) | The total return does not reflect expenses that apply to separate accounts. Inclusion of these charges would reduce the total return figures for all periods shown. |
(r) | Certain expenses have been reduced without which performance would have been lower. |
(s) | From time to time the fund may receive proceeds from litigation settlements, without which performance would be lower. |
(x) | The net asset values and total returns have been calculated on net assets which include adjustments made in accordance with U.S. generally accepted accounting principles required at period end for financial reporting purposes. |
See Notes to Financial Statements
13
Table of Contents
MFS Value Series
(1) | Business and Organization |
MFS Value Series (the fund) is a diversified series of MFS Variable Insurance Trust (the trust). The trust is organized as a Massachusetts business trust and is registered under the Investment Company Act of 1940, as amended, as an open-end management investment company. The shareholders of each series of the trust are separate accounts of insurance companies, which offer variable annuity and/or life insurance products, and qualified retirement and pension plans.
The fund is an investment company and accordingly follows the investment company accounting and reporting guidance of the Financial Accounting Standards Board (FASB) Accounting Standards Codification Topic 946 Financial Services – Investment Companies.
(2) | Significant Accounting Policies |
General – The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of increases and decreases in net assets from operations during the reporting period. Actual results could differ from those estimates. In the preparation of these financial statements, management has evaluated subsequent events occurring after the date of the fund’s Statement of Assets and Liabilities through the date that the financial statements were issued.
In October 2016, the Securities and Exchange Commission (SEC) released its Final Rule on Investment Company Reporting Modernization (the “Rule”). The Rule, which introduces two new regulatory reporting forms for investment companies – Form N-PORT and Form N-CEN – also contains amendments to Regulation S-X which impact financial statement presentation, particularly the presentation of derivative investments. Although still evaluating the impacts of the Rule, management believes that many of the Regulation S-X amendments are consistent with the fund’s current financial statement presentation and expects that the fund will be able to comply with the Rule’s Regulation S-X amendments by the August 1, 2017 compliance date.
Balance Sheet Offsetting – The fund’s accounting policy with respect to balance sheet offsetting is that, absent an event of default by the counterparty or a termination of the agreement, the International Swaps and Derivatives Association (ISDA) Master Agreement does not result in an offset of reported amounts of financial assets and financial liabilities in the Statement of Assets and Liabilities across transactions between the fund and the applicable counterparty. The fund’s right to setoff may be restricted or prohibited by the bankruptcy or insolvency laws of the particular jurisdiction to which a specific master netting agreement counterparty is subject. Balance sheet offsetting disclosures, to the extent applicable to the fund, have been included in the fund’s Significant Accounting Policies note under the captions for each of the fund’s in-scope financial instruments and transactions.
Investment Valuations – Equity securities, including restricted equity securities, are generally valued at the last sale or official closing price on their primary market or exchange as provided by a third-party pricing service. Equity securities, for which there were no sales reported that day, are generally valued at the last quoted daily bid quotation on their primary market or exchange as provided by a third-party pricing service. Short-term instruments with a maturity at issuance of 60 days or less may be valued at amortized cost, which approximates market value. Open-end investment companies are generally valued at net asset value per share. Securities and other assets generally valued on the basis of information from a third-party pricing service may also be valued at a broker/dealer bid quotation. Values obtained from third-party pricing services can utilize both transaction data and market information such as yield, quality, coupon rate, maturity, type of issue, trading characteristics, and other market data. The values of foreign securities and other assets and liabilities expressed in foreign currencies are converted to U.S. dollars using the mean of bid and asked prices for rates provided by a third-party pricing service.
The Board of Trustees has delegated primary responsibility for determining or causing to be determined the value of the fund’s investments (including any fair valuation) to the adviser pursuant to valuation policies and procedures approved by the Board. If the adviser determines that reliable market quotations are not readily available, investments are valued at fair value as determined in good faith by the adviser in accordance with such procedures under the oversight of the Board of Trustees. Under the fund’s valuation policies and procedures, market quotations are not considered to be readily available for most types of debt instruments and floating rate loans and many types of derivatives. These investments are generally valued at fair value based on information from third-party pricing services. In addition, investments may be valued at fair value if the adviser determines that an investment’s value has been materially affected by events occurring after the close of the exchange or market on which the investment is principally traded (such as foreign exchange or market) and prior to the determination of the fund’s net asset value, or after the halting of trading of a specific security where trading does not resume prior to the close of the exchange or market on which the security is principally traded. Events that occur on a frequent basis after foreign markets close (such as developments in foreign markets and significant movements in the U.S. markets) and prior to the determination of the fund’s net asset value may be deemed to have a material effect on the value of securities traded in foreign markets. Accordingly, the fund’s foreign equity securities may often be valued at fair value. The adviser generally relies on third-party pricing services or other information (such as the correlation with price movements of similar securities in the same or other markets; the type, cost and investment characteristics of the security; the business and financial condition of the issuer; and trading and other market data) to assist in determining whether to fair value and
14
Table of Contents
MFS Value Series
Notes to Financial Statements – continued
at what value to fair value an investment. The value of an investment for purposes of calculating the fund’s net asset value can differ depending on the source and method used to determine value. When fair valuation is used, the value of an investment used to determine the fund’s net asset value may differ from quoted or published prices for the same investment. There can be no assurance that the fund could obtain the fair value assigned to an investment if it were to sell the investment at the same time at which the fund determines its net asset value per share.
Various inputs are used in determining the value of the fund’s assets or liabilities. These inputs are categorized into three broad levels. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an investment’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The fund’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the investment. Level 1 includes unadjusted quoted prices in active markets for identical assets or liabilities. Level 2 includes other significant observable market-based inputs (including quoted prices for similar securities, interest rates, prepayment speed, and credit risk). Level 3 includes unobservable inputs, which may include the adviser’s own assumptions in determining the fair value of investments. The following is a summary of the levels used as of December 31, 2016 in valuing the fund’s assets or liabilities:
Investments at Value | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Equity Securities: | ||||||||||||||||
United States | $2,173,000,278 | $— | $— | $2,173,000,278 | ||||||||||||
Switzerland | 40,897,522 | 4,803,146 | — | 45,700,668 | ||||||||||||
United Kingdom | — | 22,192,277 | — | 22,192,277 | ||||||||||||
Canada | 12,110,297 | — | — | 12,110,297 | ||||||||||||
France | — | 9,344,229 | — | 9,344,229 | ||||||||||||
Mutual Funds | 9,388,614 | — | — | 9,388,614 | ||||||||||||
Total Investments | $2,235,396,711 | $36,339,652 | $— | $2,271,736,363 |
For further information regarding security characteristics, see the Portfolio of Investments.
Of the level 1 investments presented above, equity investments amounting to $40,897,522 would have been considered level 2 investments at the beginning of the period. The primary reason for changes in the classifications between levels 1 and 2 occurs when foreign equity securities are fair valued using other observable market-based inputs in place of the closing exchange price due to events occurring after the close of the exchange or market on which the investment is principally traded. The fund’s foreign equity securities may often be valued at fair value. The fund’s policy is to recognize transfers between the levels as of the end of the period.
Foreign Currency Translation – Purchases and sales of foreign investments, income, and expenses are converted into U.S. dollars based upon currency exchange rates prevailing on the respective dates of such transactions or on the reporting date for foreign denominated receivables and payables. Gains and losses attributable to foreign currency exchange rates on sales of securities are recorded for financial statement purposes as net realized gains and losses on investments. Gains and losses attributable to foreign exchange rate movements on receivables, payables, income and expenses are recorded for financial statement purposes as foreign currency transaction gains and losses. That portion of both realized and unrealized gains and losses on investments that results from fluctuations in foreign currency exchange rates is not separately disclosed.
Security Loans – Under its Securities Lending Agency Agreement with the fund, State Street Bank and Trust Company (“State Street”), as lending agent, loans the securities of the fund to certain qualified institutions (the “Borrowers”) approved by the fund. Security loans can be terminated at the discretion of either the lending agent or the fund and the related securities must be returned within the earlier of the standard trade settlement period for such securities or within three business days. The loans are collateralized by cash and/or U.S. Treasury and federal agency obligations in an amount typically at least equal to the market value of the securities loaned. On loans collateralized by cash, the cash collateral is invested in a money market fund. The market value of the loaned securities is determined at the close of business of the fund and any additional required collateral is delivered to the fund on the next business day. State Street provides the fund with indemnification against Borrower default. In the event of Borrower default, State Street will, for the benefit of the fund, either purchase securities identical to those loaned or, when such purchase is commercially impracticable, pay the fund the market value of the loaned securities. In return, State Street assumes the fund’s rights to the related collateral. If the collateral value is less than the cost to purchase identical securities, State Street is responsible for the shortfall, but only to the extent that such shortfall is not due to a decline in collateral value resulting from collateral reinvestment for which the fund bears the risk of loss. A portion of the income generated upon investment of the collateral is remitted to the Borrowers, and the remainder is allocated between the fund and the lending agent. On loans collateralized by U.S. Treasury and/or federal agency obligations, a fee is received from the Borrower, and is allocated between the fund and the lending agent. Income from securities lending is included in “Interest” income” in the Statement of Operations. The dividend and interest income earned on the securities loaned is accounted for in the same manner as other dividend and interest income. At December 31, 2016, there were no securities on loan or collateral outstanding.
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Indemnifications – Under the fund’s organizational documents, its officers and Trustees may be indemnified against certain liabilities and expenses arising out of the performance of their duties to the fund. Additionally, in the normal course of business, the fund enters into agreements with service providers that may contain indemnification clauses. The fund’s maximum exposure under these agreements is unknown as this would involve future claims that may be made against the fund that have not yet occurred.
Investment Transactions and Income – Investment transactions are recorded on the trade date. Interest income is recorded on the accrual basis. Dividends received in cash are recorded on the ex-dividend date. Certain dividends from foreign securities will be recorded when the fund is informed of the dividend if such information is obtained subsequent to the ex-dividend date. Dividend payments received in additional securities are recorded on the ex-dividend date in an amount equal to the value of the security on such date.
The fund may receive proceeds from litigation settlements. Any proceeds received from litigation involving portfolio holdings are reflected in the Statement of Operations in realized gain/loss if the security has been disposed of by the fund or in unrealized gain/loss if the security is still held by the fund. Any other proceeds from litigation not related to portfolio holdings are reflected as other income in the Statement of Operations.
Reimbursement of Expenses by Custodian – In December 2015, the fund’s custodian (or former custodian), State Street Bank and Trust Company, announced that it intended to reimburse its asset servicing clients for expense amounts that it billed in error during the period 1998 through 2015. The amount of this one-time reimbursement attributable to the fund is reflected as “Reimbursement of custodian expenses” in the Statement of Operations.
Tax Matters and Distributions – The fund intends to qualify as a regulated investment company, as defined under Subchapter M of the Internal Revenue Code, and to distribute all of its taxable income, including realized capital gains. As a result, no provision for federal income tax is required. The fund’s federal tax returns, when filed, will remain subject to examination by the Internal Revenue Service for a three year period. Management has analyzed the fund’s tax positions taken on federal and state tax returns for all open tax years and does not believe that there are any uncertain tax positions that require recognition of a tax liability. Foreign taxes, if any, have been accrued by the fund in the accompanying financial statements in accordance with the applicable foreign tax law. Foreign income taxes may be withheld by certain countries in which the fund invests. Additionally, capital gains realized by the fund on securities issued in or by certain foreign countries may be subject to capital gains tax imposed by those countries.
Distributions to shareholders are recorded on the ex-dividend date. Income and capital gain distributions are determined in accordance with income tax regulations, which may differ from U.S. generally accepted accounting principles. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences which arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary overdistributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes.
Book/tax differences primarily relate to wash sale loss deferrals.
The tax character of distributions declared to shareholders for the last two fiscal years is as follows:
12/31/16 | 12/31/15 | |||||||
Ordinary income (including any short-term capital gains) | $45,729,481 | $57,140,588 | ||||||
Long-term capital gains | 179,185,502 | 132,192,323 | ||||||
Total distributions | $224,914,983 | $189,332,911 |
The federal tax cost and the tax basis components of distributable earnings were as follows:
As of 12/31/16 | ||||
Cost of investments | $1,432,252,765 | |||
Gross appreciation | 851,942,739 | |||
Gross depreciation | (12,459,141 | ) | ||
Net unrealized appreciation (depreciation) | $839,483,598 | |||
Undistributed ordinary income | 43,631,255 | |||
Undistributed long-term capital gain | 90,325,884 | |||
Other temporary differences | (87,998 | ) |
Multiple Classes of Shares of Beneficial Interest – The fund offers multiple classes of shares, which differ in their respective distribution and/or service fees. The fund’s income, realized and unrealized gain (loss), and common expenses are allocated to
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shareholders based on the daily net assets of each class. Dividends are declared separately for each class. Differences in per share dividend rates are generally due to differences in separate class expenses. The fund’s distributions declared to shareholders as reported in the Statements of Changes in Net Assets are presented by class as follows:
From net investment income | From net realized gain on investments | |||||||||||||||
Year ended 12/31/16 | Year ended 12/31/15 | Year ended 12/31/16 | Year ended 12/31/15 | |||||||||||||
Initial Class | $20,323,713 | $23,725,000 | $78,502,858 | $59,539,845 | ||||||||||||
Service Class | 23,283,051 | 27,773,261 | 102,805,361 | 78,294,805 | ||||||||||||
Total | $43,606,764 | $51,498,261 | $181,308,219 | $137,834,650 |
(3) | Transactions with Affiliates |
Investment Adviser – The fund has an investment advisory agreement with MFS to provide overall investment management and related administrative services and facilities to the fund. The management fee is computed daily and paid monthly at the following annual rates:
First $1 billion of average daily net assets | 0.75% | |||
Average daily net assets in excess of $1 billion | 0.65% |
The investment adviser has agreed in writing to reduce its management fee to 0.60% of average daily net assets in excess of $2.5 billion. This written agreement will terminate on April 27, 2017. For the year ended December 31, 2016, the fund’s average daily net assets did not exceed $2.5 billion and therefore, the management fee was not reduced in accordance with this agreement. MFS has agreed in writing to reduce its management fee by a specified amount if certain MFS mutual fund assets exceed thresholds agreed to by MFS and the fund’s Board of Trustees. For the year ended December 31, 2016, this management fee reduction amounted to $155,714, which is included in the reduction of total expenses in the Statement of Operations. The management fee incurred for the year ended December 31, 2016 was equivalent to an annual effective rate of 0.69% of the fund’s average daily net assets.
Effective April 28, 2017, the management fee will be computed daily and paid monthly at the following annual rates:
First $1 billion of average daily net assets | 0.75% | |||
Next $1.5 billion of average daily net assets | 0.65% | |||
Average daily net assets in excess of $2.5 billion | 0.60% |
The investment adviser has agreed in writing to pay a portion of the fund’s total annual operating expenses, excluding interest, taxes, extraordinary expenses, brokerage and transaction costs, and investment-related expenses, such that total annual operating expenses do not exceed 0.90% of average daily net assets for the Initial Class shares and 1.15% of average daily net assets for the Service Class shares. This written agreement will continue until modified by the fund’s Board of Trustees, but such agreement will continue at least until April 30, 2018. For the year ended December 31, 2016, the fund’s actual operating expenses did not exceed the limit and therefore, the investment adviser did not pay any portion of the fund’s expenses related to this agreement.
Distributor – MFS Fund Distributors, Inc. (MFD), a wholly-owned subsidiary of MFS, is the distributor of shares of the fund. The Trustees have adopted a distribution plan for the Service Class shares pursuant to Rule 12b-1 under the Investment Company Act of 1940.
The fund’s distribution plan provides that the fund will pay MFD distribution and/or service fees equal to 0.25% per annum of its average daily net assets attributable to Service Class shares as partial consideration for services performed and expenses incurred by MFD and financial intermediaries (including participating insurance companies that invest in the fund to fund variable annuity and variable life insurance contracts, sponsors of qualified retirement and pension plans that invest in the fund, and affiliates of these participating insurance companies and plan sponsors) in connection with the sale and distribution of the Service Class shares. MFD may subsequently pay all, or a portion, of the distribution and/or service fees to financial intermediaries.
Shareholder Servicing Agent – MFS Service Center, Inc. (MFSC), a wholly-owned subsidiary of MFS, receives a fee from the fund for its services as shareholder servicing agent. For the year ended December 31, 2016, the fee was $61,418, which equated to 0.0028% annually of the fund’s average daily net assets. MFSC also receives payment from the fund for out-of-pocket expenses paid by MFSC on behalf of the fund. For the year ended December 31, 2016, these costs amounted to $5,269.
Administrator – MFS provides certain financial, legal, shareholder communications, compliance, and other administrative services to the fund. Under an administrative services agreement, the fund reimburses MFS the costs incurred to provide these services. The fund is charged an annual fixed amount of $17,500 plus a fee based on average daily net assets. The administrative services fee incurred for the year ended December 31, 2016 was equivalent to an annual effective rate of 0.0160% of the fund’s average daily net assets.
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Trustees’ and Officers’ Compensation – The fund pays compensation to independent Trustees in the form of a retainer, attendance fees, and additional compensation to Board and Committee chairpersons. The fund does not pay compensation directly to Trustees or officers of the fund who are also officers of the investment adviser, all of whom receive remuneration for their services to the fund from MFS. Certain officers and Trustees of the fund are officers or directors of MFS, MFD, and MFSC.
Other – This fund and certain other funds managed by MFS (the funds) have entered into a service agreement (the ISO Agreement) which provides for payment of fees solely by the funds to Tarantino LLC in return for the provision of services of an Independent Senior Officer (ISO) for the funds. Frank L. Tarantino serves as the ISO and is an officer of the funds and the sole member of Tarantino LLC. The funds can terminate the ISO Agreement with Tarantino LLC at any time under the terms of the ISO Agreement. For the year ended December 31, 2016, the fee paid by the fund under this agreement was $4,287 and is included in “Miscellaneous” expense in the Statement of Operations. MFS has agreed to bear all expenses associated with office space, other administrative support, and supplies provided to the ISO.
The fund invests in the MFS Institutional Money Market Portfolio which is managed by MFS and seeks current income consistent with preservation of capital and liquidity. This money market fund does not pay a management fee to MFS.
The fund is permitted to engage in purchase and sale transactions (“cross-trades”) with funds and accounts for which MFS serves as investment adviser or sub-adviser pursuant to a policy adopted by the Board of Trustees. This policy has been designed to ensure that cross-trades conducted by the fund comply with Rule 17a-7 under the Investment Company Act of 1940. Under this policy, cross-trades are effected at current market prices with no remuneration paid in connection with the transaction. During the year ended December 31, 2016, the fund engaged in purchase and sale transactions pursuant to this policy, which amounted to $3,108,468 and $3,001,019, respectively. The sales transactions resulted in net realized gains (losses) of $636,404.
(4) | Portfolio Securities |
For the year ended December 31, 2016, purchases and sales of investments, other than short-term obligations, aggregated $322,028,872 and $415,644,591, respectively.
(5) | Shares of Beneficial Interest |
The fund’s Declaration of Trust permits the Trustees to issue an unlimited number of full and fractional shares of beneficial interest. Transactions in fund shares were as follows:
Year ended 12/31/16 | Year ended 12/31/15 | |||||||||||||||
Shares | Amount | Shares | Amount | |||||||||||||
Shares sold | ||||||||||||||||
Initial Class | 4,025,968 | $74,915,419 | 2,231,454 | $42,370,134 | ||||||||||||
Service Class | 9,184,966 | 167,110,176 | 7,197,931 | 136,498,386 | ||||||||||||
13,210,934 | $242,025,595 | 9,429,385 | $178,868,520 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | ||||||||||||||||
Initial Class | 5,382,711 | $98,826,571 | 4,874,991 | $83,264,845 | ||||||||||||
Service Class | 6,977,776 | 126,088,412 | 6,298,579 | 106,068,066 | ||||||||||||
12,360,487 | $224,914,983 | 11,173,570 | $189,332,911 | |||||||||||||
Shares reacquired | ||||||||||||||||
Initial Class | (10,647,169 | ) | $(199,696,185 | ) | (9,654,481 | ) | $(191,553,797 | ) | ||||||||
Service Class | (10,564,944 | ) | (194,868,600 | ) | (22,944,915 | ) | (431,339,889 | ) | ||||||||
(21,212,113 | ) | $(394,564,785 | ) | (32,599,396 | ) | $(622,893,686 | ) | |||||||||
Net change | ||||||||||||||||
Initial Class | (1,238,490 | ) | $(25,954,195 | ) | (2,548,036 | ) | $(65,918,818 | ) | ||||||||
Service Class | 5,597,798 | 98,329,988 | (9,448,405 | ) | (188,773,437 | ) | ||||||||||
4,359,308 | $72,375,793 | (11,996,441 | ) | $(254,692,255 | ) |
The fund is one of several mutual funds in which certain MFS funds may invest. The MFS funds do not invest in the underlying funds for the purpose of exercising management or control. At the end of the period, the MFS Moderate Allocation Portfolio, the MFS Growth Allocation Portfolio, and the MFS Conservative Allocation Portfolio were the owners of record of approximately 7%, 2%, and 2%, respectively, of the value of outstanding voting shares of the fund.
(6) | Line of Credit |
The fund and certain other funds managed by MFS participate in a $1.25 billion unsecured committed line of credit, subject to a $1 billion sublimit, provided by a syndication of banks under a credit agreement. Borrowings may be made for temporary financing needs. Interest is charged to each fund, based on its borrowings, generally at a rate equal to the higher of the Overnight Federal Reserve funds rate or daily one month LIBOR plus an agreed upon spread. A commitment fee, based on the average daily, unused portion of the committed line of credit, is allocated among the participating funds at the end of each calendar quarter. In addition,
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the fund and other funds managed by MFS have established unsecured uncommitted borrowing arrangements with certain banks for temporary financing needs. Interest is charged to each fund, based on its borrowings, at a rate equal to the Overnight Federal Reserve funds rate plus an agreed upon spread. For the year ended December 31, 2016, the fund’s commitment fee and interest expense were $13,629 and $0, respectively, and are included in “Miscellaneous” expense in the Statement of Operations.
(7) | Transactions in Underlying Affiliated Funds – Affiliated Issuers |
An affiliated issuer may be considered one in which the fund owns 5% or more of the outstanding voting securities, or a company which is under common control. For the purposes of this report, the fund assumes the following to be an affiliated issuer:
Underlying Affiliated Fund | Beginning Shares/Par | Acquisitions Shares/Par Amount | Dispositions Shares/Par Amount | Ending Shares/Par Amount | ||||||||||||
MFS Institutional Money Market Portfolio | 16,597,492 | 308,649,915 | (315,858,793 | ) | 9,388,614 | |||||||||||
Underlying Affiliated Fund | Realized Gain (Loss) | Capital Gain Distributions | Dividend Income | Ending Value | ||||||||||||
MFS Institutional Money Market Portfolio | $(488 | ) | $— | $79,836 | $9,388,614 |
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Trustees of MFS Variable Insurance Trust and the Shareholders of
MFS Value Series:
We have audited the accompanying statement of assets and liabilities, including the portfolio of investments, of MFS Value Series (one of the series of MFS Variable Insurance Trust) (the “Fund”) as of December 31, 2016, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended. These financial statements and financial highlights are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. The Fund is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of December 31, 2016, by correspondence with the custodian and brokers; when replies were not received from brokers, we performed other auditing procedures. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of MFS Value Series as of December 31, 2016, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
February 15, 2017
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TRUSTEES AND OFFICERS – IDENTIFICATION AND BACKGROUND
The Trustees and Officers of the Trust, as of February 1, 2017, are listed below, together with their principal occupations during the past five years. (Their titles may have varied during that period.) The address of each Trustee and Officer is 111 Huntington Avenue, Boston, Massachusetts 02199-7618.
Name, Age | Position(s) with Fund | Trustee/Officer Since (h) | Principal Occupations During the Past Five Years | Other Directorships (j) | ||||
INTERESTED TRUSTEES | ||||||||
Robert J. Manning (k) (age 53) | Trustee | February 2004 | Massachusetts Financial Services Company, Executive Chairman (since January 2017) and Director; Chairman (until January 2017); Chief Executive Officer (until 2015); Co-Chief Executive Officer (2015-2016) | N/A | ||||
Robin A. Stelmach (k) (age 55) | Trustee | January 2014 | Massachusetts Financial Services Company, Vice Chair (since January 2017); Chief Operating Officer and Executive Vice President (until January 2017) | N/A | ||||
INDEPENDENT TRUSTEES | ||||||||
David H. Gunning (age 74) | Trustee and Chair of Trustees | January 2004 | Private investor | Lincoln Electric Holdings, Inc., Director; Development Alternatives, Inc., Director/Non-Executive Chairman | ||||
Steven E. Buller (age 65) | Trustee | February 2014 | Chairman, Financial Accounting Standards Advisory Council (until 2015); Standing Advisory Group, Public Company Accounting Oversight Board, Member (until 2014); BlackRock, Inc. (investment management), Managing Director (until 2014), BlackRock Finco UK (investment management), Director (until 2014) | N/A | ||||
Maureen R. Goldfarb (age 61) | Trustee | January 2009 | Private investor | N/A | ||||
Michael Hegarty (age 72) | Trustee | December 2004 | Private investor | Rouse Properties Inc., Director; Capmark Financial Group Inc., Director (until 2015) | ||||
John P. Kavanaugh (age 62) | Trustee and Vice Chair of Trustees | January 2009 | Private investor | N/A | ||||
Maryanne L. Roepke (age 60) | Trustee | May 2014 | American Century Investments (investment management), Senior Vice President and Chief Compliance Officer (until 2014) | N/A | ||||
Laurie J. Thomsen (age 59) | Trustee | March 2005 | Private investor | The Travelers Companies, Director; Dycom Industries, Inc., Director | ||||
OFFICERS | ||||||||
Christopher R. Bohane (k) (age 43) | Assistant Secretary and Assistant Clerk | July 2005 | Massachusetts Financial Services Company, Vice President and Assistant General Counsel | N/A | ||||
Kino Clark (k) (age 48) | Assistant Treasurer | January 2012 | Massachusetts Financial Services Company, Vice President | N/A | ||||
Thomas H. Connors (k) (age 57) | Assistant Secretary and Assistant Clerk | September 2012 | Massachusetts Financial Services Company, Vice President and Senior Counsel; Deutsche Investment Management Americas Inc. (financial service provider), Director and Senior Counsel (until 2012) | N/A | ||||
Ethan D. Corey (k) (age 53) | Assistant Secretary and Assistant Clerk | July 2005 | Massachusetts Financial Services Company, Senior Vice President and Associate General Counsel | N/A | ||||
David L. DiLorenzo (k) (age 48) | President | July 2005 | Massachusetts Financial Services Company, Senior Vice President | N/A | ||||
Brian E. Langenfeld (k) (age 43) | Assistant Secretary and Assistant Clerk | June 2006 | Massachusetts Financial Services Company, Vice President and Senior Counsel | N/A |
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Trustees and Officers – continued
Name, Age | Position(s) with Fund | Trustee/Officer Since (h) | Principal Occupations During the Past Five Years | Other Directorships (j) | ||||
Susan A. Pereira (k) (age 46) | Assistant Secretary and Assistant Clerk | July 2005 | Massachusetts Financial Services Company, Vice President and Senior Counsel | N/A | ||||
Kasey L. Phillips (k) (age 46) | Assistant Treasurer | September 2012 | Massachusetts Financial Services Company, Vice President; Wells Fargo Funds Management, LLC, Senior Vice President, Fund Treasurer (until 2012) | N/A | ||||
Mark N. Polebaum (k) (age 64) | Secretary and Clerk | January 2006 | Massachusetts Financial Services Company, Executive Vice President, General Counsel and Secretary | N/A | ||||
Matthew A. Stowe (k) (age 42) | Assistant Secretary and Assistant Clerk | October 2014 | Massachusetts Financial Services Company, Vice President and Assistant General Counsel | N/A | ||||
Frank L. Tarantino (age 72) | Independent Senior Officer | June 2004 | Tarantino LLC (provider of compliance services), Principal | N/A | ||||
Richard S. Weitzel (k) (age 46) | Assistant Secretary and Assistant Clerk | October 2007 | Massachusetts Financial Services Company, Senior Vice President and Associate General Counsel | N/A | ||||
Martin J. Wolin (k) (age 49) | Chief Compliance Officer | July 2015 | Massachusetts Financial Services Company, Senior Vice President and Chief Compliance Officer (since July 2015); Mercer (financial service provider), Chief Risk and Compliance Officer, North America and Latin America (until June 2015) | N/A | ||||
James O. Yost (k) (age 56) | Treasurer | September 1990 | Massachusetts Financial Services Company, Senior Vice President | N/A |
(h) | Date first appointed to serve as Trustee/officer of an MFS Fund. Each Trustee has served continuously since appointment unless indicated otherwise. For the period from December 15, 2004 until February 22, 2005, Mr. Manning served as Advisory Trustee. Prior to January 2012, Messrs. DiLorenzo and Yost served as Assistant Treasurers of the Funds. From January 2012 through December 2016, Messrs. DiLorenzo and Yost served as Treasurer and Deputy Treasurer of the Funds, respectively. |
(j) | Directorships or trusteeships of companies required to report to the Securities and Exchange Commission (i.e., “public companies”). |
(k) | “Interested person” of the Trust within the meaning of the Investment Company Act of 1940 (referred to as the 1940 Act), which is the principal federal law governing investment companies like the fund, as a result of a position with MFS. The address of MFS is 111 Huntington Avenue, Boston, Massachusetts 02199-7618. |
Each Trustee (except Ms. Stelmach, Mr. Buller and Ms. Roepke) has been elected by shareholders and each Trustee and officer holds office until his or her successor is chosen and qualified or until his or her earlier death, resignation, retirement or removal. The Trust does not hold annual meetings for the purpose of electing Trustees, and Trustees are not elected for fixed terms. Messrs. Buller and Kavanaugh and Ms. Roepke are members of the Trust’s Audit Committee.
Each of the Fund’s Trustees and officers holds comparable positions with certain other funds of which MFS or a subsidiary is the investment adviser or distributor, and, in the case of the officers, with certain affiliates of MFS. As of February 1, 2017, the Trustees served as board members of 137 funds within the MFS Family of Funds.
The Statement of Additional Information for a Fund includes further information about the Trustees and is available without charge upon request by calling 1-800-225-2606.
Investment Adviser Massachusetts Financial Services Company 111 Huntington Avenue Boston, MA 02199-7618 | Custodian State Street Bank and Trust Company 1 Lincoln Street Boston, MA 02111-2900 | |
Distributor MFS Fund Distributors, Inc. 111 Huntington Avenue Boston, MA 02199-7618 | Independent Registered Public Accounting Firm Deloitte & Touche LLP 200 Berkeley Street Boston, MA 02116 | |
Portfolio Managers Nevin Chitkara Steven Gorham |
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BOARD REVIEW OF INVESTMENT ADVISORY AGREEMENT
The Investment Company Act of 1940 requires that both the full Board of Trustees and a majority of the non-interested (“independent”) Trustees, voting separately, annually approve the continuation of the Fund’s investment advisory agreement with MFS. The Trustees consider matters bearing on the Fund and its advisory arrangements at their meetings throughout the year, including a review of performance data at each regular meeting. In addition, the independent Trustees met several times over the course of three months beginning in May and ending in July, 2016 (“contract review meetings”) for the specific purpose of considering whether to approve the continuation of the investment advisory agreement for the Fund and the other investment companies that the Board oversees (the “MFS Funds”). The independent Trustees were assisted in their evaluation of the Fund’s investment advisory agreement by independent legal counsel, from whom they received separate legal advice and with whom they met separately from MFS during various contract review meetings. The independent Trustees were also assisted in this process by the MFS Funds’ Independent Senior Officer, a senior officer appointed by and reporting to the independent Trustees.
In connection with their deliberations regarding the continuation of the investment advisory agreement, the Trustees, including the independent Trustees, considered such information and factors as they believed, in light of the legal advice furnished to them and their own business judgment, to be relevant. The investment advisory agreement for the Fund was considered separately, although the Trustees also took into account the common interests of all MFS Funds in their review. As described below, the Trustees considered the nature, quality, and extent of the various investment advisory, administrative, and shareholder services performed by MFS under the existing investment advisory agreement and other arrangements with the Fund.
In connection with their contract review meetings, the Trustees received and relied upon materials that included, among other items: (i) information provided by Broadridge Financial Solutions, Inc. (“Broadridge”), an independent third party, on the investment performance of the Fund for various time periods ended December 31, 2015 and the investment performance of a group of funds with substantially similar investment classifications/objectives (the “Lipper performance universe”), (ii) information provided by Broadridge on the Fund’s advisory fees and other expenses and the advisory fees and other expenses of comparable funds identified by Broadridge (the “Broadridge expense group”), (iii) information provided by MFS on the advisory fees of portfolios of other clients of MFS, including institutional separate accounts and other clients, (iv) information as to whether and to what extent applicable expense waivers, reimbursements or fee “breakpoints” are observed for the Fund, (v) information regarding MFS’ financial results and financial condition, including MFS’ and certain of its affiliates’ estimated profitability from services performed for the Fund and the MFS Funds as a whole, and compared to MFS’ institutional business, (vi) MFS’ views regarding the outlook for the mutual fund industry and the strategic business plans of MFS, (vii) descriptions of various functions performed by MFS for the Funds, such as compliance monitoring and portfolio trading practices, and (viii) information regarding the overall organization of MFS, including information about MFS’ senior management and other personnel providing investment advisory, administrative and other services to the Fund and the other MFS Funds. The comparative performance, fee and expense information prepared and provided by Broadridge was not independently verified and the independent Trustees did not independently verify any information provided to them by MFS.
The Trustees’ conclusion as to the continuation of the investment advisory agreement was based on a comprehensive consideration of all information provided to the Trustees and not the result of any single factor. Some of the factors that figured particularly in the Trustees’ deliberations are described below, although individual Trustees may have evaluated the information presented differently from one another, giving different weights to various factors. It is also important to recognize that the fee arrangements for the Fund and other MFS Funds are the result of years of review and discussion between the independent Trustees and MFS, that certain aspects of such arrangements may receive greater scrutiny in some years than in others, and that the Trustees’ conclusions may be based, in part, on their consideration of these same arrangements during the course of the year and in prior years.
Based on information provided by Broadridge and MFS, the Trustees reviewed the Fund’s total return investment performance as well as the performance of peer groups of funds over various time periods. The Trustees placed particular emphasis on the total return performance of the Fund’s Initial Class shares in comparison to the performance of funds in its Lipper performance universe over the three-year period ended December 31, 2015, which the Trustees believed was a long enough period to reflect differing market conditions. The total return performance of the Fund’s Initial Class shares was in the 1st quintile relative to the other funds in the universe for this three-year period (the 1st quintile being the best performers and the 5th quintile being the worst performers). The total return performance of the Fund’s Initial Class shares was in the 1st quintile for each of the one- and five-year periods ended December 31, 2015 relative to the Lipper performance universe. Because of the passage of time, these performance results may differ from the performance results for more recent periods, including those shown elsewhere in this report.
In the course of their deliberations, the Trustees took into account information provided by MFS in connection with the contract review meetings, as well as during investment review meetings conducted with portfolio management personnel during the course of the year regarding the Fund’s performance. After reviewing these and related factors, the Trustees concluded, within the context of their overall conclusions regarding the investment advisory agreement, that they were satisfied with MFS’ responses and efforts relating to investment performance.
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MFS Value Series
Board Review of Investment Advisory Agreement – continued
In assessing the reasonableness of the Fund’s advisory fee, the Trustees considered, among other information, the Fund’s advisory fee and the total expense ratio of the Fund’s Initial Class shares as a percentage of average daily net assets and the advisory fee and total expense ratios of peer groups of funds based on information provided by Broadridge. The Trustees considered that MFS currently observes an expense limitation for the Fund, which may not be changed without the Trustees’ approval. The Trustees also considered that, according to the data provided by Broadridge (which takes into account any fee reductions or expense limitations that were in effect during the Fund’s last fiscal year), the Fund’s effective advisory fee rate and total expense ratio were each approximately at the Broadridge expense group median.
The Trustees also considered the advisory fees charged by MFS to any institutional separate accounts advised by MFS (“separate accounts”) and unaffiliated investment companies for which MFS serves as subadviser (“subadvised funds”) that have comparable investment strategies to the Fund. In comparing these fees, the Trustees considered information provided by MFS as to the generally broader scope of services provided by MFS to the Fund, as well as the more extensive regulatory burdens imposed on MFS in managing the Fund, in comparison to separate accounts and subadvised funds. The Trustees also considered the higher demands placed on MFS’ investment personnel and trading infrastructure as a result of the daily cash in-flows and out-flows of the Fund in comparison to separate accounts.
The Trustees also considered whether the Fund may benefit from any economies of scale in the management of the Fund in the event of growth in assets of the Fund and/or growth in assets of the MFS Funds as a whole. They noted that the Fund’s advisory fee rate schedule is subject to a contractual breakpoint that reduces the Fund’s advisory fee rate on average daily net assets over $1 billion, and that MFS has agreed in writing to further reduce its advisory fee rate on the Fund’s average daily net assets over $2.5 billion, which may not be changed without the Trustees’ approval (the “management fee waiver rate”). They also noted that the MFS has agreed to amend its contractual advisory fee rate schedule to reflect the existing management fee waiver rate effective as of April 28, 2017. The Trustees also noted that MFS has agreed in writing to waive a portion of the management fees of certain MFS Funds, including the Fund, if the total combined assets of certain funds within the MFS Funds’ complex increase above agreed upon thresholds (the “group fee waiver”), enabling the Fund’s shareholders to share in the benefits from any economies of scale at the complex level. The group fee waiver is reviewed and renewed annually between the Board and MFS. The Trustees concluded that the breakpoints and the group fee waiver were sufficient to allow the Fund to benefit from economies of scale as its assets and overall complex assets grow.
The Trustees also considered information prepared by MFS relating to MFS’ costs and profits with respect to the Fund, the MFS Funds considered as a group, and other investment companies and accounts advised by MFS, as well as MFS’ methodologies used to determine and allocate its costs to the MFS Funds, the Fund and other accounts and products for purposes of estimating profitability.
After reviewing these and other factors described herein, the Trustees concluded, within the context of their overall conclusions regarding the investment advisory agreement, that the advisory fees charged to the Fund represent reasonable compensation in light of the services being provided by MFS to the Fund.
In addition, the Trustees considered MFS’ resources and related efforts to continue to retain, attract and motivate capable personnel to serve the Fund. The Trustees also considered current and developing conditions in the financial services industry, including the presence of large and well-capitalized companies which are spending, and appear to be prepared to continue to spend, substantial sums to engage personnel and to provide services to competing investment companies. In this regard, the Trustees also considered the financial resources of MFS and its ultimate parent, Sun Life Financial Inc. The Trustees also considered the advantages and possible disadvantages to the Fund of having an adviser that also serves other investment companies as well as other accounts.
The Trustees also considered the nature, quality, cost, and extent of administrative, transfer agency, and distribution services provided to the Fund by MFS and its affiliates under agreements and plans other than the investment advisory agreement, including any 12b-1 fees the Fund pays to MFS Fund Distributors, Inc., an affiliate of MFS. The Trustees also considered the nature, extent and quality of certain other services MFS performs or arranges for on the Fund’s behalf, which may include securities lending programs, directed expense payment programs, class action recovery programs, and MFS’ interaction with third-party service providers, principally custodians and sub-custodians. The Trustees concluded that the various non-advisory services provided by MFS and its affiliates on behalf of the Fund were satisfactory.
The Trustees also considered benefits to MFS from the use of the Fund’s portfolio brokerage commissions, if applicable, to pay for investment research and various other factors. Additionally, the Trustees considered so-called “fall-out benefits” to MFS such as reputational value derived from serving as investment manager to the Fund.
Based on their evaluation of factors that they deemed to be material, including those factors described above, the Board of Trustees, including the independent Trustees, concluded that the Fund’s investment advisory agreement with MFS should be continued for an additional one-year period, commencing August 1, 2016.
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MFS Value Series
PROXY VOTING POLICIES AND INFORMATION
MFS votes proxies on behalf of the fund pursuant to proxy voting policies and procedures that are available without charge, upon request, by calling 1-800-225-2606, by visiting mfs.com (once you have selected “Individual Investor” as your role, click on “Individual Investor Home” in the top navigation and then select “Learn More About Proxy Voting” under the “I want to…” header on the left hand column of the page), or by visiting the SEC’s Web site at http://www.sec.gov.
Information regarding how the fund voted proxies relating to portfolio securities during the most recent twelve-month period ended June 30 is available by August 31 of each year without charge by visiting mfs.com (once you have selected “Individual Investor” as your role, click on “Individual Investor Home” in the top navigation and then select “Learn More About Proxy Voting” under the “I want to…” header on the left hand column of the page), or by visiting the SEC’s Web site at http://www.sec.gov.
QUARTERLY PORTFOLIO DISCLOSURE
The fund will file a complete schedule of portfolio holdings with the Securities and Exchange Commission (the Commission) for the first and third quarters of each fiscal year on Form N-Q. The fund’s Form N-Q is available on the EDGAR database on the Commission’s Internet Web site at http://www.sec.gov, and may be reviewed and copied at the:
Public Reference Room
Securities and Exchange Commission
100 F Street, NE, Room 1580
Washington, D.C. 20549
Information on the operation of the Public Reference Room may be obtained by calling the Commission at 1-800-SEC-0330. Copies of the fund’s Form N-Q also may be obtained, upon payment of a duplicating fee, by electronic request at the following e-mail address: publicinfo@sec.gov or by writing the Public Reference Section at the above address.
From time to time, MFS may post important information about the fund or the MFS funds on the MFS web site (mfs.com). This information is available on mfs.com by following these steps once you have selected “Individual Investor” as your role: (1) Click on the “Individual Investor Home” in the top navigation and then select the “Announcements” option within the “Market Outlooks” drop down, or (2) Click on “Products & Services” and “Variable Insurance Portfolios” and then select the fund’s name.
INFORMATION ABOUT FUND CONTRACTS AND LEGAL CLAIMS
The fund has entered into contractual arrangements with an investment adviser, administrator, distributor, shareholder servicing agent, 529 program manager (if applicable), and custodian who each provide services to the fund. Unless expressly stated otherwise, shareholders are not parties to, or intended beneficiaries of these contractual arrangements, and these contractual arrangements are not intended to create any shareholder right to enforce them against the service providers or to seek any remedy under them against the service providers, either directly or on behalf of the fund.
Under the Trust’s By-Laws and Declaration of Trust, any claims asserted against or on behalf of the MFS Funds, including claims against Trustees and Officers, must be brought in state and federal courts located within the Commonwealth of Massachusetts.
FEDERAL TAX INFORMATION (unaudited)
The following information is provided pursuant to provisions of the Internal Revenue Code.
The fund designates $197,105,000 as capital gain dividends paid during the fiscal year.
For corporate shareholders, 100% of the ordinary income dividends paid during the fiscal year qualify for the corporate dividends received deduction.
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rev. 3/16
FACTS | WHAT DOES MFS DO WITH YOUR PERSONAL INFORMATION? |
Why? | Financial companies choose how they share your personal information. Federal law gives consumers the right to limit some but not all sharing. Federal law also requires us to tell you how we collect, share, and protect your personal information. Please read this notice carefully to understand what we do. |
What? | The types of personal information we collect and share depend on the product or service you have with us. This information can include:
• Social Security number and account balances • Account transactions and transaction history • Checking account information and wire transfer instructions
When you are no longer our customer, we continue to share your information as described in this notice. |
How? | All financial companies need to share customers’ personal information to run their everyday business. In the section below, we list the reasons financial companies can share their customers’ personal information; the reasons MFS chooses to share; and whether you can limit this sharing. |
Reasons we can share your personal information | Does MFS share? | Can you limit this sharing? | ||
For our everyday business purposes – such as to process your transactions, maintain your account(s), respond to court orders and legal investigations, or report to credit bureaus | Yes | No | ||
For our marketing purposes – to offer our products and services to you | No | We don’t share | ||
For joint marketing with other financial companies | No | We don’t share | ||
For our affiliates’ everyday business purposes – information about your transactions and experiences | No | We don’t share | ||
For our affiliates’ everyday business purposes – information about your creditworthiness | No | We don’t share | ||
For nonaffiliates to market to you | No | We don’t share |
Questions? | Call 800-225-2606 or go to mfs.com. |
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Page 2 |
Who we are | ||
Who is providing this notice? | MFS Funds, MFS Investment Management, MFS Institutional Advisors, Inc., and MFS Heritage Trust Company. |
What we do | ||
How does MFS protect my personal information? | To protect your personal information from unauthorized access and use, we use security measures that comply with federal law. These measures include procedural, electronic, and physical safeguards for the protection of the personal information we collect about you. | |
How does MFS collect my personal information? | We collect your personal information, for example, when you
• open an account or provide account information • direct us to buy securities or direct us to sell your securities • make a wire transfer
We also collect your personal information from others, such as credit bureaus, affiliates, or other companies. | |
Why can’t I limit all sharing? | Federal law gives you the right to limit only
• sharing for affiliates’ everyday business purposes – information about your creditworthiness • affiliates from using your information to market to you • sharing for nonaffiliates to market to you
State laws and individual companies may give you additional rights to limit sharing. |
Definitions | ||
Affiliates | Companies related by common ownership or control. They can be financial and nonfinancial companies.
• MFS does not share personal information with affiliates, except for everyday business purposes as described on page one of this notice. | |
Nonaffiliates | Companies not related by common ownership or control. They can be financial and nonfinancial companies.
• MFS does not share with nonaffiliates so they can market to you. | |
Joint marketing | A formal agreement between nonaffiliated financial companies that together market financial products or services to you.
• MFS doesn’t jointly market. |
Other important information | ||
If you own an MFS product or receive an MFS service in the name of a third party such as a bank or broker-dealer, their privacy policy may apply to you instead of ours. |
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ITEM 2. | CODE OF ETHICS. |
The Registrant has adopted a Code of Ethics pursuant to Section 406 of the Sarbanes-Oxley Act and as defined in Form N-CSR that applies to the Registrant’s principal executive officer and principal financial and accounting officer. During the period covered by this report, the Registrant has not amended any provision in its Code of Ethics (the “Code”) that relates to an element of the Code’s definition enumerated in paragraph (b) of Item 2 of this Form N-CSR. However, effective January 1, 2017, the Code was amended to (i) clarify that the term “for profit” company as used in Section II.B of the Code excludes the investment adviser and its subsidiaries and pooled investment vehicles sponsored by the investment adviser or its subsidiaries, (ii) align the Code’s provisions regarding receipt of gifts and entertainment in Section II.B of the Code with the gifts and entertainment policy of the Funds’ investment adviser, and (iii) make other administrative changes. During the period covered by this report, the Registrant did not grant a waiver, including an implicit waiver, from any provision of the Code.
A copy of the Code of Ethics amended effective as of January 1, 2017 is filed as an exhibit to this Form N-CSR.
ITEM 3. | AUDIT COMMITTEE FINANCIAL EXPERT. |
Messrs. Steven E. Buller and John P. Kavanaugh and Ms. Maryanne L. Roepke, members of the Audit Committee, have been determined by the Board of Trustees in their reasonable business judgment to meet the definition of “audit committee financial expert” as such term is defined in Form N-CSR. In addition, Messrs. Buller and Kavanaugh and Ms. Roepke are “independent” members of the Audit Committee (as such term has been defined by the Securities and Exchange Commission in regulations implementing Section 407 of the Sarbanes-Oxley Act of 2002). The Securities and Exchange Commission has stated that the designation of a person as an audit committee financial expert pursuant to this Item 3 on the Form N-CSR does not impose on such a person any duties, obligations or liability that are greater than the duties, obligations or liability imposed on such person as a member of the Audit Committee and the Board of Trustees in the absence of such designation or identification.
ITEM 4. | PRINCIPAL ACCOUNTANT FEES AND SERVICES. |
Items 4(a) through 4(d) and 4(g):
The Board of Trustees has appointed Deloitte & Touche LLP (“Deloitte”) to serve as independent accountants to each series of the Registrant (each a “Fund” and collectively the “Funds”). The tables below set forth the audit fees billed to the Funds as well as fees for non-audit services provided to the Funds and/or to the Funds’ investment adviser, Massachusetts Financial Services Company (“MFS”) and to various entities either controlling, controlled by, or under common control with MFS that provide ongoing services to the Funds (“MFS Related Entities”).
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For the fiscal years ended December 31, 2016 and 2015, audit fees billed to each Fund by Deloitte were as follows:
Audit Fees | ||||||||
2016 | 2015 | |||||||
Fees billed by Deloitte: | ||||||||
MFS Core Equity Series+ | N/A | 0 | ||||||
MFS Global Equity Series | 44,069 | 44,069 | ||||||
MFS Growth Series | 44,860 | 44,860 | ||||||
MFS Investors Growth Stock Series+ | N/A | 0 | ||||||
MFS Investors Trust Series | 44,069 | 44,069 | ||||||
MFS Mid Cap Growth Series | 44,069 | 44,069 | ||||||
MFS New Discovery Series | 44,069 | 44,069 | ||||||
MFS Research International Series+ | N/A | 0 | ||||||
MFS Research Series | 44,960 | 44,960 | ||||||
MFS Total Return Bond Series | 63,126 | 63,126 | ||||||
MFS Total Return Series | 62,179 | 62,179 | ||||||
MFS Utilities Series | 44,169 | 44,169 | ||||||
MFS Value Series | 44,860 | 44,860 | ||||||
Total | 480,430 | 480,430 |
For the fiscal years ended December 31, 2016 and 2015, fees billed by Deloitte for audit-related, tax and other services provided to each Fund and for audit-related, tax and other services provided to MFS and MFS Related Entities were as follows:
Audit-Related Fees1 | Tax Fees2 | All Other Fees3 | ||||||||||||||||||||||
2016 | 2015 | 2016 | 2015 | 2016 | 2015 | |||||||||||||||||||
Fees billed by Deloitte: | ||||||||||||||||||||||||
To MFS Core Equity Series+ | N/A | 0 | N/A | 7,743 | N/A | 13 | ||||||||||||||||||
To MFS Growth Series | 2,400 | 2,400 | 5,143 | 5,143 | 0 | 294 | ||||||||||||||||||
To MFS Global Equity Series | 2,400 | 2,400 | 5,143 | 5,143 | 0 | 12 | ||||||||||||||||||
To MFS Investors Growth Stock Series+ | N/A | 0 | N/A | 7,743 | N/A | 76 | ||||||||||||||||||
To MFS Investors Trust Series | 2,400 | 2,400 | 5,143 | 5,143 | 0 | 119 | ||||||||||||||||||
To MFS Mid Cap Growth Series | 2,400 | 2,400 | 5,143 | 5,143 | 0 | 90 | ||||||||||||||||||
To MFS New Discovery Series | 2,400 | 2,400 | 5,143 | 5,143 | 0 | 169 | ||||||||||||||||||
To MFS Research International Series+ | N/A | 0 | N/A | 7,743 | N/A | 27 | ||||||||||||||||||
To MFS Research Series | 2,400 | 2,400 | 5,143 | 5,143 | 0 | 144 | ||||||||||||||||||
To MFS Total Return Bond Series | 2,400 | 2,400 | 5,143 | 5,143 | 0 | 583 | ||||||||||||||||||
To MFS Total Return Series | 2,400 | 2,400 | 5,143 | 5,143 | 0 | 598 | ||||||||||||||||||
To MFS Utilities Series | 2,400 | 2,400 | 5,143 | 5,143 | 0 | 342 | ||||||||||||||||||
To MFS Value Series | 2,400 | 2,400 | 5,143 | 5,143 | 0 | 472 | ||||||||||||||||||
Total fees billed by Deloitte To above Funds: | 24,000 | 24,000 | 51,430 | 74,659 | 0 | 2,939 |
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Audit-Related Fees1 | Tax Fees2 | All Other Fees3 | ||||||||||||||||||||||
2016 | 2015 | 2016 | 2015 | 2016 | 2015 | |||||||||||||||||||
To MFS and MFS Related Entities of MFS Core Equity Series*+ | N/A | 186,019 | N/A | 0 | N/A | 5,000 | ||||||||||||||||||
To MFS and MFS Related Entities of MFS Growth Series* | 0 | 186,019 | 0 | 0 | 5,000 | 5,000 | ||||||||||||||||||
To MFS and MFS Related Entities of MFS Global Equity Series* | 0 | 186,019 | 0 | 0 | 5,000 | 5,000 | ||||||||||||||||||
To MFS and MFS Related Entities of MFS Investors Growth Stock Series*+ | N/A | 186,019 | N/A | 0 | N/A | 5,000 | ||||||||||||||||||
To MFS and MFS Related Entities of MFS Investors Trust Series* | 0 | 186,019 | 0 | 0 | 5,000 | 5,000 | ||||||||||||||||||
To MFS and MFS Related Entities of MFS Mid Cap Growth Series* | 0 | 186,019 | 0 | 0 | 5,000 | 5,000 | ||||||||||||||||||
To MFS and MFS Related Entities of MFS New Discovery Series* | 0 | 186,019 | 0 | 0 | 5,000 | 5,000 | ||||||||||||||||||
To MFS and MFS Related Entities of MFS Research International Series*+ | N/A | 186,019 | N/A | 0 | N/A | 5,000 | ||||||||||||||||||
To MFS and MFS Related Entities of MFS Research Series* | 0 | 186,019 | 0 | 0 | 5,000 | 5,000 | ||||||||||||||||||
To MFS and MFS Related Entities of MFS Total Return Bond Series* | 0 | 186,019 | 0 | 0 | 5,000 | 5,000 | ||||||||||||||||||
To MFS and MFS Related Entities of MFS Total Return Series* | 0 | 186,019 | 0 | 0 | 5,000 | 5,000 | ||||||||||||||||||
To MFS and MFS Related Entities of MFS Utilities Series* | 0 | 186,019 | 0 | 0 | 5,000 | 5,000 | ||||||||||||||||||
To MFS and MFS Related Entities of MFS Value Series* | 0 | 186,019 | 0 | 0 | 5,000 | 5,000 |
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Aggregate fees for non-audit services: | ||||||||
2016 | 2015 | |||||||
Fees billed by Deloitte: | ||||||||
To MFS Core Equity Series, MFS and MFS Related Entities#+ | N/A | 198,775 | ||||||
To MFS Growth Series, MFS and MFS Related Entities# | 118,055 | 198,856 | ||||||
To MFS Global Equity Series, MFS and MFS Related Entities# | 118,055 | 198,574 | ||||||
To MFS Investors Growth Stock Series, MFS and MFS Related Entities#+ | N/A | 198,838 | ||||||
To MFS Investors Trust Series, MFS and MFS Related Entities# | 118,055 | 198,681 | ||||||
To MFS Mid Cap Growth Series, MFS and MFS Related Entities# | 118,055 | 198,652 | ||||||
To MFS New Discovery Series, MFS and MFS Related Entities# | 118,055 | 198,731 | ||||||
To MFS Research International Series, MFS and MFS Related Entities#+ | N/A | 198,789 | ||||||
To MFS Research Series, MFS and MFS Related Entities# | 118,055 | 198,706 | ||||||
To MFS Total Return Bond Series, MFS and MFS Related Entities# | 118,055 | 199,145 | ||||||
To MFS Total Return Series, MFS and MFS Related Entities# | 118,055 | 199,160 | ||||||
To MFS Utilities Series, MFS and MFS Related Entities# | 118,055 | 198,904 | ||||||
To MFS Value Series, MFS and MFS Related Entities# | 118,055 | 199,034 |
+ | The MFS Core Equity Series, MFS Investors Growth Stock Series, and MFS Research International Series were reorganized into the MFS Core Equity Portfolio, MFS Massachusetts Investors Growth Stock Portfolio, and MFS Research International Portfolio, respectively, all are a series of the MFS Variable Insurance Trust II, as of March 27, 2015. |
* | This amount reflects the fees billed to MFS and MFS Related Entities for non-audit services relating directly to the operations and financial reporting of the Funds (portions of which services also related to the operations and financial reporting of other funds within the MFS Funds complex). |
# | This amount reflects the aggregate fees billed by Deloitte for non-audit services rendered to the Funds and for non-audit services rendered to MFS and the MFS Related Entities. |
1 | The fees included under “Audit-Related Fees” are fees related to assurance and related services that are reasonably related to the performance of the audit or review of financial statements, but not reported under ‘‘Audit Fees,’’ including accounting consultations, agreed-upon procedure reports, attestation reports, comfort letters and internal control reviews. |
2 | The fees included under “Tax Fees” are fees associated with tax compliance, tax advice and tax planning, including services relating to the filing or amendment of federal, state or local income tax returns, regulated investment company qualification reviews and tax distribution and analysis. |
3 | The fees included under “All Other Fees” are fees for products and services provided by Deloitte other than those reported under “Audit Fees,” “Audit-Related Fees” and “Tax Fees,” including fees for services related to review of internal controls and review of Rule 38a-1 compliance program. |
Item 4(e)(1):
Set forth below are the policies and procedures established by the Audit Committee of the Board of Trustees relating to the pre-approval of audit and non-audit related services:
To the extent required by applicable law, pre-approval by the Audit Committee of the Board is needed for all audit and permissible non-audit services rendered to the Funds and all permissible non-audit services rendered to MFS or MFS Related Entities if the services relate directly to the operations and financial reporting of the Registrant. Pre-approval is
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currently on an engagement-by-engagement basis. In the event pre-approval of such services is necessary between regular meetings of the Audit Committee and it is not practical to wait to seek pre-approval at the next regular meeting of the Audit Committee, pre-approval of such services may be referred to the Chair of the Audit Committee for approval; provided that the Chair may not pre-approve any individual engagement for such services exceeding $50,000 or multiple engagements for such services in the aggregate exceeding $100,000 in each period between regular meetings of the Audit Committee. Any engagement pre-approved by the Chair between regular meetings of the Audit Committee shall be presented for ratification by the entire Audit Committee at its next regularly scheduled meeting.
Item 4(e)(2):
None, or 0%, of the services relating to the Audit-Related Fees, Tax Fees and All Other Fees paid by the Fund and MFS and MFS Related Entities relating directly to the operations and financial reporting of the Registrant disclosed above were approved by the audit committee pursuant to paragraphs (c)(7)(i)(C) of Rule 2-01 of Regulation S-X (which permits audit committee approval after the start of the engagement with respect to services other than audit, review or attest services, if certain conditions are satisfied).
Item 4(f): Not applicable.
Item 4(h): The Registrant’s Audit Committee has considered whether the provision by a Registrant’s independent registered public accounting firm of non-audit services to MFS and MFS Related Entities that were not pre-approved by the Committee (because such services did not relate directly to the operations and financial reporting of the Registrant) was compatible with maintaining the independence of the independent registered public accounting firm as the Registrant’s principal auditors.
ITEM 5. | AUDIT COMMITTEE OF LISTED REGISTRANTS. |
Not applicable to the Registrant.
ITEM 6. | INVESTMENTS |
A schedule of investments of the Registrant is included as part of the report to shareholders of such series under Item 1 of this Form N-CSR.
ITEM 7. | DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END MANAGEMENT INVESTMENT COMPANIES. |
Not applicable to the Registrant.
ITEM 8. | PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES. |
Not applicable to the Registrant.
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ITEM 9. | PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT COMPANY AND AFFILIATED PURCHASERS. |
Not applicable to the Registrant.
ITEM 10. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. |
There were no material changes to the procedures by which shareholders may send recommendations to the Board for nominees to the Registrant’s Board since the Registrant last provided disclosure as to such procedures in response to the requirements of Item 407 (c)(2)(iv) of Regulation S-K or this Item.
ITEM 11. | CONTROLS AND PROCEDURES. |
(a) | Based upon their evaluation of the effectiveness of the registrant’s disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940 (the “Act”)) as conducted within 90 days of the filing date of this report on Form N-CSR, the registrant’s principal financial officer and principal executive officer have concluded that those disclosure controls and procedures provide reasonable assurance that the material information required to be disclosed by the registrant on this report is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. |
(b) | There were no changes in the registrant’s internal controls over financial reporting (as defined in Rule 30a-3(d) under the Act) that occurred during the second fiscal quarter of the period covered by the report that have materially affected, or are reasonably likely to materially affect, the registrant’s internal control over financial reporting. |
ITEM 12. | EXHIBITS. |
(a) | File the exhibits listed below as part of this form. Letter or number the exhibits in the sequence indicated. |
(1) | Any code of ethics, or amendment thereto, that is the subject of the disclosure required by Item 2, to the extent that the registrant intends to satisfy the Item 2 requirements through filing of an exhibit: Code of Ethics attached hereto. |
(2) | A separate certification for each principal executive officer and principal financial officer of the registrant as required by Rule 30a-2(a) under the Act (17 CFR 270.30a-2): Attached hereto. |
(b) | If the report is filed under Section 13(a) or 15(d) of the Exchange Act, provide the certifications required by Rule 30a-2(b) under the Act (17 CFR 270.30a-2(b)), Rule 13a-14(b) or Rule 15d-14(b) under the Exchange Act (17 CFR 240.13a-14(b) or 240.15d-14(b)) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. 1350) as an exhibit. A certification furnished pursuant to this paragraph will not be deemed “filed” for the purposes of Section 18 of the Exchange Act (15 U.S.C. 78r), or otherwise subject to the liability of that section. Such certification will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference: Attached hereto. |
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Notice
A copy of the Amended and Restated Declaration of Trust, as amended, of the Registrant is on file with the Secretary of State of The Commonwealth of Massachusetts and notice is hereby given that this instrument is executed on behalf of the Registrant by an officer of the Registrant as an officer and not individually and the obligations of or arising out of this instrument are not binding upon any of the Trustees or shareholders individually, but are binding only upon the assets and property of the respective constituent series of the Registrant.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
(Registrant) MFS VARIABLE INSURANCE TRUST
By (Signature and Title)* | DAVID L. DILORENZO | |
David L. DiLorenzo, President |
Date: February 15, 2017
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)* | DAVID L. DILORENZO | |
David L. DiLorenzo, President (Principal Executive Officer) |
Date: February 15, 2017
By (Signature and Title)* | JAMES O. YOST | |
James O. Yost, Treasurer (Principal Financial Officer and Accounting Officer) |
Date: February 15, 2017
* | Print name and title of each signing officer under his or her signature. |