MFS. Total Return Series. MFS Variable Insurance Trust. SEMIANNUAL REPORT June 30, 2011 VTR-SEM

Transcription

1 MFS Total Return Series MFS Variable Insurance Trust SEMIANNUAL REPORT June 30, 2011 VTR-SEM

2 MFS TOTAL RETURN SERIES CONTENTS Letter from the CEO... 1 Portfolio composition... 2 Expense table... 4 Portfolio of investments... 5 Statement of assets and liabilities Statement of operations Statements of changes in net assets Financial highlights Notes to financial statements Board review of investment advisory agreement Proxy voting policies and information Quarterly portfolio disclosure Further information MFS privacy notice 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

3 LETTER FROM THE CEO Dear Contract Owners: After about a year of almost uninterrupted macroeconomic and financial market improvement following the global credit crisis, investors grew more cautious in the middle of 2010 as fears grew that some European countries would default on their debt and as economic data showed a weakening trend in the global economy. As a result asset prices fell significantly. Last September the U.S. Federal Reserve Board s promises to make lending conditions easier helped assuage market fears and drive asset prices off their recent lows. A combination of solid earnings and improving economic data gave an additional boost to investor sentiment. In the following months, the renewed positive market mood, coupled with indications of better global macroeconomic activity, pushed many asset valuations to post-crisis highs. At the same time, global sovereign bond yields initially rose as investors became concerned about inflationary pressures, driven by higher prices for oil as well as other commodities. However, by the end of the second quarter of 2011, a weakening macroeconomic backdrop and renewed concerns over debt problems in some eurozone countries pushed equities lower. For the remainder of 2011, we are cautiously optimistic that economic growth will continue to improve and that the global economies will recover from the shocks of the past few years. We expect the pace of recovery worldwide to be uneven and volatile and acknowledge the elevated uncertainty created by events in Japan, Europe, the Middle East, as well as that created by the U.S. debate over raising the debt ceiling and the downgrade by Standard & Poor s of the U.S. long-term credit rating. As always, we continue to be mindful of the many economic challenges faced at the local, national, and international levels. It is in times such as these that we want to remind investors of the merits of maintaining a long-term view, adhering to basic investing principles such as asset allocation and diversification, and working closely with their advisors to research and identify appropriate investment opportunities. Respectfully, Robert J. Manning Chairman and Chief Executive Officer MFS Investment Management August 16, 2011 The opinions expressed in this letter are subject to change, may not be relied upon for investment advice, and no forecasts can be guaranteed. 1

4 PORTFOLIO COMPOSITION Portfolio structure (i) Equities 60.2% Bonds 38.6% Cash & Other Net Assets 1.2% Top ten holdings (i) Fannie Mae, 5.5%, 30 Years 2.3% U.S. Treasury Notes, 3.75%, % JP Morgan Chase & Co. 2.1% Exxon Mobil Corp. 1.8% Philip Morris International Inc. 1.7% Lockhead Martin Corp. 1.6% United Technologies 1.5% U.S. Treasury Notes, 2.75%, % Johnson & Johnson 1.4% Goldman Sachs 1.3% Composition including fixed income credit quality (a)(i) AAA 2.2% AA 1.8% A 3.7% BBB 4.9% BB 0.2% B 0.1% CCC (o) 0.0% CC (o) 0.0% D (o) 0.0% U.S. Government 12.3% Federal Agencies 13.4% Not Rated (o) 0.0% Non-Fixed Income 60.2% Cash & Other 1.2% Equity sectors Financial Services 12.9% Energy 7.1% Consumer Staples 6.9% Health Care 6.8% Industrial Goods & Services 6.3% Utilities & Communications 4.7% Technology 3.8% Leisure 3.5% Basic Materials 2.8% Retailing 2.5% Autos & Housing 1.4% Special Products & Services 1.0% Transportation 0.5% Fixed income sectors (i) Mortgage-Backed Securities 12.5% U.S. Treasury Securities 12.3% High Grade Corporates 9.1% Commercial Mortgage-Backed Securities 2.0% U.S. Government Agencies 0.8% Non-U.S. Government Bonds 0.8% Emerging Markets Bonds 0.5% High Yield Corporates 0.2% Collateralized Debt Obligations 0.2% Asset-Backed Securities 0.2% (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). 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, which have not been rated by any rating agency. Non-Fixed Income includes equity securities (including convertible bonds and equity derivatives) and commodities. Cash & Other includes cash, other assets less liabilities, offsets to derivative positions, and short-term securities. The fund may not hold all of these instruments. The fund itself has not been rated. 2

5 Portfolio Composition continued (i) For purposes of this presentation, the components include the market value of securities, and reflect the impact of the equivalent exposure of derivative positions, if applicable. These amounts may be negative from time to time. The bond component will include any accrued interest amounts. 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 market value. Where the fund holds convertible bonds, these are treated as part of the equity portion of the portfolio. (o) Less than 0.1%. Percentages are based on net assets as of 6/30/11. The portfolio is actively managed and current holdings may be different. 3

6 EXPENSE TABLE Fund Expenses Borne by the Contract Holders During the Period, January 1, 2011 through June 30, 2011 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 January 1, 2011 through June 30, 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 Initial Class Service Class Annualized Expense Ratio Beginning Account Value 1/01/11 Ending Account Value 6/30/11 Expenses Paid During Period (p) 1/01/11-6/30/11 Actual 0.79% $1, $1, $4.00 Hypothetical (h) 0.79% $1, $1, $3.96 Actual 1.04% $1, $1, $5.26 Hypothetical (h) 1.04% $1, $1, $5.21 (h) 5% class return per year before expenses. (p) Expenses paid is equal to each class annualized expense ratio, as shown above, multiplied by the average account value over the period, multiplied by the number of days in the period, divided by the number of days in the year. Expense Changes Impacting the 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 would have been 0.76% and 1.01% for Initial Class and Service Class shares, respectively; the actual expenses paid during the period would have been approximately $3.85 and $5.11 for Initial Class and Service Class shares, respectively; and the hypothetical expenses paid during the period would have been approximately $3.81 and $5.06 for Initial Class and Service Class shares, 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. 4

7 PORTFOLIO OF INVESTMENTS 6/30/11 (unaudited) 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 60.0% Aerospace 4.5% Honeywell International, Inc. 332,560 $ 19,817,242 Huntington Ingalls Industries, Inc. (a) 25, ,171 Lockheed Martin Corp. 550,163 44,546,698 Northrop Grumman Corp. 155,657 10,794,813 Precision Castparts Corp. 31,660 5,212,819 United Technologies Corp. 444,210 39,317,027 $ 120,581,770 Alcoholic Beverages 0.9% Diageo PLC 944,006 $ 19,287,011 Heineken N.V. 78,292 4,708,301 $ 23,995,312 Apparel Manufacturers 0.2% NIKE, Inc., B 46,396 $ 4,174,712 Automotive 0.7% General Motors Co. (a) 133,620 $ 4,056,703 Johnson Controls, Inc. 330,240 13,757,798 $ 17,814,501 Broadcasting 2.1% Omnicom Group, Inc. 319,160 $ 15,370,746 Viacom, Inc., B 385,780 19,674,780 Walt Disney Co. 535,720 20,914,509 $ 55,960,035 Brokerage & Asset Managers 0.6% Blackrock, Inc. 32,163 $ 6,169,185 Charles Schwab Corp. 257,030 4,228,144 Franklin Resources, Inc. 54,125 7,106,071 $ 17,503,400 Business Services 1.0% Accenture PLC, A 295,770 $ 17,870,423 Dun & Bradstreet Corp. 57,960 4,378,298 Western Union Co. 245,540 4,918,166 $ 27,166,887 Cable TV 0.5% Comcast Corp., Special A 512,640 $ 12,421,267 Chemicals 2.0% 3M Co. 235,870 $ 22,372,270 Celanese Corp. 127,570 6,800,757 E.I. du Pont de Nemours & Co. 103,810 5,610,931 PPG Industries, Inc. 208,030 18,887,044 $ 53,671,002 Computer Software 1.3% Check Point Software Technologies Ltd. (a) 85,920 $ 4,884,552 Microsoft Corp. 145,730 3,788,980 Oracle Corp. 814,622 26,809,210 $ 35,482,742 Issuer Shares/Par Value ($) COMMON STOCKS continued Computer Software Systems 1.6% Hewlett-Packard Co. 373,111 $ 13,581,240 International Business Machines Corp. 165,520 28,394,956 $ 41,976,196 Construction 0.6% Pulte Homes, Inc. (a) 208,630 $ 1,598,106 Sherwin-Williams Co. 91,000 7,632,170 Stanley Black & Decker, Inc. 113,379 8,168,957 $ 17,399,233 Consumer Products 1.0% Avon Products, Inc. 214,090 $ 5,994,520 Procter & Gamble Co. 248,001 15,765,424 Reckitt Benckiser Group PLC 73,937 4,082,085 $ 25,842,029 Electrical Equipment 1.1% Danaher Corp. 510,680 $ 27,060,933 Tyco International Ltd. 77,220 3,816,985 $ 30,877,918 Electronics 0.5% ASML Holding N.V. 41,160 $ 1,521,274 Intel Corp. 378,508 8,387,737 Microchip Technology, Inc. 114,090 4,325,152 $ 14,234,163 Energy Independent 3.0% Anadarko Petroleum Corp. 76,170 $ 5,846,809 Apache Corp. 283,180 34,941,580 EOG Resources, Inc. 109,950 11,495,273 Noble Energy, Inc. 93,310 8,363,375 Occidental Petroleum Corp. 192,310 20,007,932 $ 80,654,969 Energy Integrated 3.8% Chevron Corp. 305,342 $ 31,401,371 EQT Corp. 101,720 5,342,334 Exxon Mobil Corp. 594,952 48,417,194 Hess Corp. 179,280 13,402,973 QEP Resources, Inc. 74,630 3,121,773 $ 101,685,645 Engineering Construction 0.3% Fluor Corp. 117,390 $ 7,590,437 Food & Beverages 2.7% General Mills, Inc. 319,080 $ 11,876,158 Groupe Danone 88,296 6,587,782 J.M. Smucker Co. 47,065 3,597,649 Kellogg Co. 115,077 6,366,060 Nestle S.A. 388,622 24,151,650 PepsiCo, Inc. 304,310 21,432,553 $ 74,011,852 5

8 Portfolio of Investments (unaudited) continued Issuer Shares/Par Value ($) COMMON STOCKS continued Food & Drug Stores 0.8% CVS Caremark Corp. 344,730 $ 12,954,953 Kroger Co. 172,320 4,273,536 Walgreen Co. 94,540 4,014,168 $ 21,242,657 General Merchandise 1.1% Kohl s Corp. 206,310 $ 10,317,563 Target Corp. 399,560 18,743,360 $ 29,060,923 Health Maintenance Organizations 0.1% WellPoint, Inc. 29,980 $ 2,361,525 Insurance 4.2% ACE Ltd. 283,900 $ 18,686,298 Aon Corp. 268,020 13,749,426 Chubb Corp. 89,790 5,621,752 MetLife, Inc. 737,550 32,356,319 Prudential Financial, Inc. 394,930 25,113,599 Travelers Cos., Inc. 300,230 17,527,427 $ 113,054,821 Leisure & Toys 0.4% Hasbro, Inc. 199,070 $ 8,745,145 Mattel, Inc. 123,630 3,398,589 $ 12,143,734 Machinery & Tools 0.4% Eaton Corp. 225,630 $ 11,608,664 Major Banks 7.3% Bank of America Corp. 1,959,030 $ 21,470,969 Bank of New York Mellon Corp. 1,139,522 29,194,554 Goldman Sachs Group, Inc. 272,100 36,213,789 JPMorgan Chase & Co. 1,357,074 55,558,610 PNC Financial Services Group, Inc. 175,830 10,481,226 State Street Corp. 352,630 15,900,087 SunTrust Banks, Inc. 91,690 2,365,602 Wells Fargo & Co. 940,820 26,399,409 $ 197,584,246 Medical & Health Technology & Services 0.3% AmerisourceBergen Corp. 112,970 $ 4,676,958 Quest Diagnostics, Inc. 79,070 4,673,037 $ 9,349,995 Medical Equipment 2.3% Becton, Dickinson & Co. 168,510 $ 14,520,507 Covidien PLC 138,770 7,386,727 Medtronic, Inc. 424,400 16,352,132 St. Jude Medical, Inc. 251,330 11,983,414 Thermo Fisher Scientific, Inc. (a) 188,610 12,144,598 $ 62,387,378 Metals & Mining 0.1% Cliffs Natural Resources, Inc. 39,870 $ 3,685,982 Issuer Shares/Par Value ($) COMMON STOCKS continued Natural Gas Pipeline 0.4% Kinder Morgan, Inc. 77,400 $ 2,223,702 Williams Cos., Inc. 259,898 7,861,915 $ 10,085,617 Network & Telecom 0.4% Cisco Systems, Inc. 644,950 $ 10,067,670 Oil Services 0.3% Schlumberger Ltd. 48,190 $ 4,163,616 Transocean, Inc. 79,970 5,162,863 $ 9,326,479 Other Banks & Diversified Financials 0.8% MasterCard, Inc., A 28,010 $ 8,440,533 TCF Financial Corp. 202,840 2,799,192 Visa, Inc., A 81,520 6,868,875 Zions Bancorporation 180,710 4,338,847 $ 22,447,447 Pharmaceuticals 4.1% Abbott Laboratories 524,420 $ 27,594,980 Bayer AG 50,625 4,070,063 GlaxoSmithKline PLC 160,927 3,445,454 Johnson & Johnson 555,620 36,959,842 Merck & Co., Inc. 95,000 3,352,550 Pfizer, Inc. 1,512,356 31,154,534 Roche Holding AG 25,088 4,198,491 $ 110,775,914 Railroad & Shipping 0.3% Canadian National Railway Co. 57,790 $ 4,617,421 CSX Corp. 132,380 3,471,004 $ 8,088,425 Restaurants 0.5% McDonald s Corp. 144,280 $ 12,165,690 Specialty Chemicals 0.7% Air Products & Chemicals, Inc. 185,110 $ 17,692,814 Airgas, Inc. 25,380 1,777,615 $ 19,470,429 Specialty Stores 0.4% Advance Auto Parts, Inc. 74,660 $ 4,366,863 Staples, Inc. 388,970 6,145,726 $ 10,512,589 Telecommunications Wireless 0.7% Vodafone Group PLC 7,295,687 $ 19,355,340 Telephone Services 1.5% AT&T, Inc. 1,149,204 $ 36,096,498 CenturyLink, Inc. 111,831 4,521,327 $ 40,617,825 Tobacco 2.3% Altria Group, Inc. 203,323 $ 5,369,760 Philip Morris International, Inc. 695,110 46,412,495 Reynolds American, Inc. 243,780 9,032,049 $ 60,814,304 6

9 Portfolio of Investments (unaudited) continued Issuer Shares/Par Value ($) COMMON STOCKS continued Trucking 0.2% United Parcel Service, Inc., B 80,710 $ 5,886,180 Utilities Electric Power 2.0% American Electric Power Co., Inc. 152,510 $ 5,746,577 Dominion Resources, Inc. 42,600 2,056,302 Entergy Corp. 88,130 6,017,516 NextEra Energy, Inc. 76,714 4,407,986 NRG Energy, Inc. (a) 187,320 4,604,326 PG&E Corp. 243,750 10,244,813 PPL Corp. 341,270 9,497,544 Public Service Enterprise Group, Inc. 380,030 12,404,179 $ 54,979,243 Total Common Stocks (Identified Cost, $1,456,922,403) $1,620,117,147 BONDS 38.3% Agency Other 0.0% Financing Corp., 9.65%, 2018 $ 740,000 $ 1,063,128 Asset-Backed & Securitized 2.3% Anthracite Ltd., A, CDO, FRN, 0.635%, 2017 (z) $3,052,679 $ 2,961,099 Bayview Financial Revolving Mortgage Loan Trust, FRN, 1.785%, 2040 (z) 2,171,604 1,214,605 Capital Trust Realty Ltd., CDO, 5.16%, 2035 (z) 2,292,200 2,304,807 Citigroup Commercial Mortgage Trust, FRN, 5.886%, ,000,000 5,459,031 Citigroup/Deutsche Bank Commercial Mortgage Trust, 5.322%, ,624,280 7,028,644 Credit Suisse Mortgage Capital Certificate, FRN, 5.695%, ,818,128 4,047,401 GMAC Mortgage Corp. Loan Trust, FRN, 5.805%, ,535,446 1,009,745 Greenwich Capital Commercial Funding Corp., 5.475%, ,978,000 5,789,737 JPMorgan Chase Commercial Mortgage Securities Corp., 4.78%, ,485,000 2,558,590 JPMorgan Chase Commercial Mortgage Securities Corp., 5.552%, ,551,006 1,689,072 JPMorgan Chase Commercial Mortgage Securities Corp., FRN, 4.948%, ,548,000 2,568,149 JPMorgan Chase Commercial Mortgage Securities Corp., FRN, 5.388%, ,550,000 2,738,030 JPMorgan Chase Commercial Mortgage Securities Corp., FRN, 5.475%, ,339,145 4,726,710 JPMorgan Chase Commercial Mortgage Securities Corp., FRN, 6.067%, ,332,626 4,808,573 JPMorgan Chase Commercial Mortgage Securities Corp., FRN, 6.186%, ,259,422 5,595,247 Merrill Lynch Mortgage Trust, FRN, A3, 6.019%, , ,584 Merrill Lynch/Countrywide Commercial Mortgage Trust, FRN, 5.81%, ,818,128 4,086,309 Morgan Stanley Capital I, Inc., FRN, 1.185%, 2030 (i)(z) 3,377,188 85,105 Issuer Shares/Par Value ($) BONDS continued Asset-Backed & Securitized continued Residential Asset Mortgage Products, Inc., FRN, 4.97%, 2034 $ 655,557 $ 661,187 Residential Funding Mortgage Securities, Inc., FRN, 5.32%, ,164, ,901 Spirit Master Funding LLC, 5.05%, 2023 (z) 1,932,451 1,716,519 Structured Asset Securities Corp., FRN, 4.67%, ,237 79,087 $ 62,915,132 Automotive 0.1% Toyota Motor Credit Corp., 3.2%, 2015 $ 1,430,000 $ 1,486,215 Broadcasting 0.1% Hearst-Argyle Television, Inc., 7.5%, 2027 $ 1,871,000 $ 1,423,754 News America, Inc., 8.5%, ,586,000 2,006,412 $ 3,430,166 Cable TV 0.4% Cox Communications, Inc., 4.625%, 2013 $ 2,949,000 $ 3,131,360 DIRECTV Holdings LLC, 4.6%, ,930,000 2,943,891 Time Warner Entertainment Co. LP, 8.375%, ,421,000 4,372,411 $ 10,447,662 Conglomerates 0.1% Kennametal, Inc., 7.2%, 2012 $ 2,140,000 $ 2,257,015 Consumer Services 0.1% Western Union Co., 5.4%, 2011 $ 3,514,000 $ 3,577,350 Defense Electronics 0.1% BAE Systems Holdings, Inc., 5.2%, 2015 (n) $ 2,440,000 $ 2,649,113 Electronics 0.1% Tyco Electronics Group S.A., 6.55%, 2017 $ 2,931,000 $ 3,453,445 Emerging Market Quasi-Sovereign 0.2% Corporacion Nacional del Cobre de Chile, 3.75%, 2020 (n) $ 746,000 $ 708,754 Petrobras International Finance Co., 6.75%, , ,752 Petroleos Mexicanos, 8%, ,753,000 2,161,449 Ras Laffan Liquefied Natural Gas Co. Ltd., 5.832%, 2016 (n) 2,281,958 2,487,334 $ 6,037,289 Emerging Market Sovereign 0.2% Republic of Peru, 7.35%, 2025 $ 184,000 $ 224,756 Russian Federation, 3.625%, 2015 (z) 5,000,000 5,137,500 $ 5,362,256 Energy Independent 0.1% Anadarko Petroleum Corp., 6.45%, 2036 $ 3,000,000 $ 3,130,338 Energy Integrated 0.5% BP Capital Markets PLC, 4.5%, 2020 $ 683,000 $ 696,519 BP Capital Markets PLC, 4.742%, ,950,000 3,043,226 Hess Corp., 8.125%, , ,707 7

10 Portfolio of Investments (unaudited) continued Issuer Shares/Par Value ($) BONDS continued Energy Integrated continued Husky Energy, Inc., 5.9%, 2014 $ 1,758,000 $ 1,956,631 Husky Energy, Inc., 7.25%, ,793,000 2,148,898 Petro-Canada, 6.05%, ,647,000 4,129,199 $ 12,860,180 Financial Institutions 0.1% General Electric Capital Corp., 5.45%, 2013 $ 1,963,000 $ 2,089,152 General Electric Capital Corp., 4.625%, ,520,000 1,528,947 $ 3,618,099 Food & Beverages 0.4% Anheuser-Busch InBev Worldwide, Inc., 8%, 2039 $ 2,880,000 $ 3,892,694 Miller Brewing Co., 5.5%, 2013 (n) 5,763,000 6,242,332 $ 10,135,026 Food & Drug Stores 0.1% CVS Caremark Corp., 6.125%, 2016 $ 2,078,000 $ 2,382,219 Gaming & Lodging 0.1% Wyndham Worldwide Corp., 6%, 2016 $ 1,997,000 $ 2,120,772 Insurance 0.2% ING Groep N.V., 5.775% to 2015, FRN to 2049 $ 2,021,000 $ 1,859,320 MetLife, Inc., 4.75%, , ,367 Metropolitan Life Global Funding, 5.125%, 2013 (n) 1,200,000 1,276,834 Metropolitan Life Global Funding, 5.125%, 2014 (n) 1,060,000 1,158,114 Prudential Financial, Inc., 6.625%, ,000 1,058,080 $ 6,106,715 Insurance Property & Casualty 0.2% Chubb Corp., 6.375% to 2017, FRN to 2067 $ 5,036,000 $ 5,212,260 ZFS Finance USA Trust IV, 5.875% to 2012, FRN to 2062 (n) 243, ,299 ZFS Finance USA Trust V, 6.5% to 2017, FRN to 2067 (n) 990, ,050 $ 6,442,609 International Market Quasi-Sovereign 0.7% Achmea Hypotheekbank N.V., 3.2%, 2014 (n) $ 2,020,000 $ 2,120,196 ING Bank N.V., 3.9%, 2014 (n) 2,900,000 3,102,785 Irish Life & Permanent PLC, 3.6%, 2013 (e)(n) 3,600,000 3,026,552 KFW International Finance, Inc., 4.875%, ,980,000 3,370,395 Royal Bank of Scotland Group PLC, 2.625%, 2012 (n) 5,190,000 5,288,008 Societe Financement de l Economie Francaise, 3.375%, 2014 (n) 1,664,000 1,764,887 $ 18,672,823 Issuer Shares/Par Value ($) BONDS continued Local Authorities 0.1% New Jersey Turnpike Authority Rev. (Build America Bonds), F, 7.414%, 2040 $ 2,405,000 $ 2,902,931 Machinery & Tools 0.1% Atlas Copco AB, 5.6%, 2017 (n) $ 3,117,000 $ 3,467,669 Major Banks 1.9% ABN Amro Bank N.V., FRN, 2.042%, 2014 (n) $ 4,710,000 $ 4,807,780 Bank of America Corp., 7.375%, ,160,000 1,304,067 Bank of America Corp., 5.49%, ,160,000 2,164,106 Bank of America Corp., 7.625%, ,640,000 1,899,763 BNP Paribas, 7.195% to 2037, FRN to 2049 (n) 1,042,000 1,005,530 Commonwealth Bank of Australia, 5%, 2019 (n) 1,620,000 1,685,788 Credit Suisse New York, 5.5%, ,360,000 3,690,439 Goldman Sachs Group, Inc., 5.625%, ,680,000 2,837,150 HSBC USA, Inc., 4.875%, ,700,000 1,673,708 JPMorgan Chase & Co., 6.3%, ,760,000 3,110,895 JPMorgan Chase Capital XXII, 6.45%, ,295,000 1,304,811 JPMorgan Chase Capital XXVII, 7%, , ,580 Merrill Lynch & Co., Inc., 6.15%, ,480,000 2,662,860 Morgan Stanley, 5.75%, ,536,000 2,693,557 Morgan Stanley, 6.625%, ,980,000 2,181,154 PNC Funding Corp., 5.625%, ,078,000 2,288,102 Royal Bank of Scotland PLC, 6.125%, ,780,000 2,849,817 UniCredito Luxembourg Finance S.A., 6%, 2017 (n) 3,820,000 3,670,959 Wachovia Corp., 5.25%, ,433,000 7,967,173 $ 50,136,239 Medical & Health Technology & Services 0.2% CareFusion Corp., 6.375%, 2019 $ 2,550,000 $ 2,878,170 Hospira, Inc., 6.05%, ,927,000 2,187,141 $ 5,065,311 Metals & Mining 0.2% ArcelorMittal, 9.85%, 2019 $ 1,278,000 $ 1,620,160 ArcelorMittal, 5.25%, ,440,000 2,412,509 Vale Overseas Ltd., 4.625%, , ,346 Vale Overseas Ltd., 6.875%, , ,560 $ 5,268,575 Mortgage-Backed 12.5% Fannie Mae, 6.33%, 2011 $ 54,656 $ 54,629 Fannie Mae, 4.775%, ,462,002 1,502,821 Fannie Mae, 4.01%, , ,817 Fannie Mae, 4.02%, ,020,817 1,066,964 Fannie Mae, 4.767%, , ,942 Fannie Mae, 4.845%, , ,195 Fannie Mae, 5.37%, ,512,241 2,704,762 Fannie Mae, 4.562%, ,003,817 1,069,765 Fannie Mae, 4.841%, ,716,074 1,836,681 Fannie Mae, 4.872%, , ,778 Fannie Mae, 4.94%, , ,111 8

11 Portfolio of Investments (unaudited) continued Issuer Shares/Par Value ($) BONDS continued Mortgage-Backed continued Fannie Mae, 5.19%, 2015 $ 414,031 $ 454,541 Fannie Mae, 5.27%, ,118,046 1,218,957 Fannie Mae, 5.662%, , ,018 Fannie Mae, 5.724%, , ,968 Fannie Mae, 5.45%, , ,729 Fannie Mae, 5.5%, ,233,153 67,694,664 Fannie Mae, 6%, ,992,005 35,390,108 Fannie Mae, 3.8%, , ,481 Fannie Mae, 3.91%, , ,732 Fannie Mae, 4.5%, ,201,902 13,841,904 Fannie Mae, 5%, ,915,364 35,206,519 Fannie Mae, 4.88%, ,508 1,038,177 Fannie Mae, 7.5%, , ,117 Fannie Mae, 6.5%, ,756,042 9,943,219 Freddie Mac, 6%, ,506,204 18,239,217 Freddie Mac, 5%, ,996,339 25,673,861 Freddie Mac, 3.154%, , ,164 Freddie Mac, 4.5%, ,785,346 19,714,766 Freddie Mac, 5.085%, ,793,000 2,984,513 Freddie Mac, 5.5%, ,830,185 11,777,776 Freddie Mac, 3.808%, ,402,000 2,412,539 Freddie Mac, 4%, ,992,528 5,212,015 Freddie Mac, 6.5%, ,481,800 6,198,318 Freddie Mac, 4%, ,495,700 15,505,229 Freddie Mac, FRN, 3.882%, , ,994 Ginnie Mae, 6%, ,155,019 6,879,471 Ginnie Mae, 4.5%, ,903,217 12,628,671 Ginnie Mae, 5.5%, ,176,649 7,943,236 Ginnie Mae, 5%, ,305,170 14,447,530 Ginnie Mae, 4%, ,903,799 8,042,527 $ 337,122,426 Natural Gas Pipeline 0.2% Enterprise Products Operating LLC, 6.5%, 2019 $ 1,953,000 $ 2,237,140 Kinder Morgan Energy Partners LP, 7.4%, , ,462 Kinder Morgan Energy Partners LP, 7.75%, ,000,000 1,187,184 Spectra Energy Capital LLC, 8%, ,694,000 2,072,208 $ 5,745,994 Network & Telecom 0.5% AT&T, Inc., 6.55%, 2039 $ 2,940,000 $ 3,224,680 BellSouth Corp., 6.55%, ,642,000 2,842,694 Telecom Italia Capital, 5.25%, ,176,000 2,284,306 Verizon New York, Inc., 6.875%, ,030,000 5,253,941 $ 13,605,621 Other Banks & Diversified Financials 1.1% American Express Co., 5.5%, 2016 $ 2,287,000 $ 2,549,358 Banco Bradesco S.A., 6.75%, 2019 (n) 1,391,000 1,495,325 Banco Santander U.S. Debt S.A.U., 3.781%, 2015 (n) 1,100,000 1,060,682 Capital One Financial Corp., 6.15%, ,872,000 3,168,448 Citigroup, Inc., 5%, ,679,000 2,807,479 Issuer Shares/Par Value ($) BONDS continued Other Banks & Diversified Financials continued Groupe BPCE S.A., 12.5% to 2019, FRN to 2049 (n) $ 3,021,000 $ 3,457,112 HSBC Holdings PLC, 5.1%, ,568,000 1,606,861 Lloyds TSB Bank PLC, 4.875%, ,560,000 2,618,294 Nordea Bank AB, 4.875%, 2021 (z) 1,880,000 1,900,971 Nordea Bank AB, 5.424% to 2015, FRN to 2049 (n) 862, ,900 Svenska Handelsbanken AB, 4.875%, 2014 (n) 3,040,000 3,283,689 UBS Preferred Funding Trust V, 6.243% to 2016, FRN to ,738,000 4,643,240 $ 29,410,359 Pharmaceuticals 0.2% Pfizer, Inc., 7.2%, 2039 $ 1,240,000 $ 1,556,785 Roche Holdings, Inc., 6%, 2019 (n) 4,080,000 4,700,817 $ 6,257,602 Real Estate 0.6% Boston Properties, Inc., REIT, 5%, 2015 $ 1,871,000 $ 2,028,113 HCP, Inc., REIT, 5.375%, ,703,000 1,756,520 HRPT Properties Trust, REIT, 6.25%, ,320,000 3,635,164 HRPT Properties Trust, REIT, 6.65%, ,620,000 1,800,844 Kimco Realty Corp., REIT, 6%, , ,381 Simon Property Group, Inc., REIT, 5.875%, ,880,000 2,129,034 WEA Finance LLC, REIT, 6.75%, 2019 (n) 837, ,152 WEA Finance LLC, REIT, 4.625%, 2021 (z) 2,300,000 2,232,051 $ 15,521,259 Retailers 0.3% Home Depot, Inc., 5.95%, 2041 $ 2,623,000 $ 2,701,234 Limited Brands, Inc., 5.25%, , ,055 Wal-Mart Stores, Inc., 5.25%, ,106,000 5,106,327 $ 8,621,616 Supermarkets 0.0% Kroger Co., 5%, 2013 $ 1,045,000 $ 1,113,812 Supranational 0.1% Asian Development Bank, 2.75%, 2014 $ 2,220,000 $ 2,324,011 Telecommunications Wireless 0.3% Crown Castle Towers LLC, 6.113%, 2020 (n) $ 1,605,000 $ 1,751,246 Crown Castle Towers LLC, 4.883%, 2020 (n) 830, ,586 Rogers Communications, Inc., 6.8%, ,340,000 3,941,100 $ 6,526,932 Transportation Services 0.1% Erac USA Finance Co., 7%, 2037 (n) $ 2,572,000 $ 2,830,041 U.S. Government Agencies and Equivalents 0.8% Freddie Mac, 4.625%, 2012 $13,500,000 $ 14,258,309 Small Business Administration, 4.77%, , ,336 9

12 Portfolio of Investments (unaudited) continued Issuer Shares/Par Value ($) BONDS continued U.S. Government Agencies and Equivalents continued Small Business Administration, 5.18%, 2024 $ 1,042,812 $ 1,117,607 Small Business Administration, 4.99%, ,023,078 1,096,826 Small Business Administration, 5.11%, ,106,891 4,423,762 $ 21,556,840 U.S. Treasury Obligations 12.2% U.S. Treasury Bonds, 2%, 2013 $ 4,762,000 $ 4,920,484 U.S. Treasury Bonds, 8.5%, ,816,000 6,919,990 U.S. Treasury Bonds, 8%, ,560,000 3,645,199 U.S. Treasury Bonds, 6%, , ,023 U.S. Treasury Bonds, 6.75%, ,129,000 2,841,217 U.S. Treasury Bonds, 5.25%, ,300,000 8,423,514 U.S. Treasury Bonds, 5.375%, ,423,000 9,872,017 U.S. Treasury Bonds, 4.5%, ,417,000 3,531,258 U.S. Treasury Bonds, 5%, ,508,000 7,228,963 U.S. Treasury Bonds, 4.5%, ,619,400 34,375,837 U.S. Treasury Notes, 1.375%, ,232,400 14,341,918 U.S. Treasury Notes, 1.375%, ,751,000 13,940,076 U.S. Treasury Notes, 1.375%, ,539,000 15,779,373 U.S. Treasury Notes, 1.375%, ,897,000 24,289,150 U.S. Treasury Notes, 3.5%, ,400,000 8,886,612 U.S. Treasury Notes, 3.125%, ,178,000 17,113,283 U.S. Treasury Notes, 2.75%, ,007,000 37,807,350 U.S. Treasury Notes, 1.5%, ,564,000 6,705,021 U.S. Treasury Notes, 1.875%, ,365,000 1,407,656 U.S. Treasury Notes, 4.125%, ,910,000 7,667,398 U.S. Treasury Notes, 9.875%, ,793,000 3,793,243 U.S. Treasury Notes, 2.625%, ,737,000 1,817,878 U.S. Treasury Notes, 4.875%, ,300,000 7,262,716 U.S. Treasury Notes, 3.75%, ,528,000 57,985,865 U.S. Treasury Notes, 2.75%, ,001,500 6,059,168 U.S. Treasury Notes, TIPS, 1.25%, ,295,932 22,527,092 $ 329,488,301 Issuer Shares/Par Value ($) BONDS continued Utilities Electric Power 0.8% Bruce Mansfield Unit, 6.85%, 2034 $ 4,837,832 $ 5,186,480 EDP Finance B.V., 6%, 2018 (n) 2,259,000 2,090,153 Enel Finance International S.A., 6.25%, 2017 (n) 2,306,000 2,545,753 MidAmerican Funding LLC, 6.927%, , ,442 Oncor Electric Delivery Co., 7%, ,162,000 3,769,781 PSEG Power LLC, 6.95%, ,745,000 3,948,391 PSEG Power LLC, 5.32%, ,603,000 1,766,952 System Energy Resources, Inc., 5.129%, 2014 (z) 423, ,081 Waterford 3 Funding Corp., 8.09%, , ,680 $ 20,332,713 Total Bonds (Identified Cost, $986,502,502) $1,035,445,804 CONVERTIBLE PREFERRED STOCKS 0.2% Automotive 0.1% General Motors Co., 4.75% 86,200 $ 4,201,388 Utilities Electric Power 0.1% PPL Corp., 9.5% 25,670 $ 1,434,953 Total Convertible Preferred Stocks (Identified Cost, $5,593,500) $ 5,636,341 MONEY MARKET FUNDS (v) 1.2% MFS Institutional Money Market Portfolio, 0.1%, at Cost and Net Asset Value 31,946,919 $ 31,946,919 Total Investments (Identified Cost, $2,480,965,324) $2,693,146,211 OTHER ASSETS, LESS LIABILITIES 0.3% 8,384,025 Net Assets 100.0% $2,701,530,236 (a) (e) (i) (n) (v) (z) Non-income producing security. Guaranteed by Minister for Finance of Ireland. 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. Securities exempt from registration under Rule 144A of the Securities Act of 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 $71,510,440, representing 2.7% of net assets. Underlying affiliated fund that is available only to investment companies managed by MFS. The rate quoted is the annualized seven-day yield of the fund at period end. 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 Anthracite Ltd., A, CDO, FRN, 0.635%, /19/10 $2,861,836 $2,961,099 Bayview Financial Revolving Mortgage Loan Trust, FRN, 1.785%, /01/06 2,171,604 1,214,605 Capital Trust Realty Ltd., CDO, 5.16%, /14/10 2,293,598 2,304,807 10

13 Portfolio of Investments (unaudited) continued Restricted Securities - continued Acquisition Date Cost Value Morgan Stanley Capital I, Inc., FRN, 1.185%, /04/02 $116,350 $85,105 Nordea Bank AB, 4.875%, /11/11 1,871,359 1,900,971 Russian Federation, 3.625%, /22/10 4,979,480 5,137,500 Spirit Master Funding LLC, 5.05%, /04/05 1,914,579 1,716,519 System Energy Resources, Inc., 5.129%, /16/04-11/22/04 424, ,081 WEA Finance LLC, REIT, 4.625%, /23/09-5/03/11 2,282,034 2,232,051 Total Restricted Securities $17,987,738 % of Net Assets 0.7% The following abbreviations are used in this report and are defined: CDO Collateralized Debt Obligation FRN Floating Rate Note. Interest rate resets periodically and may not be the rate reported at period end. PLC Public Limited Company REIT Real Estate Investment Trust TIPS Treasury Inflation Protected Security See Notes to Financial Statements 11

14 FINANCIAL STATEMENTS STATEMENT OF ASSETS AND LIABILITIES (unaudited) This statement represents your fund s balance sheet, which details the assets and liabilities comprising the total value of the fund. At 6/30/11 Assets Investments Non-affiliated issuers, at value (identified cost, $2,449,018,405) $2,661,199,292 Underlying affiliated funds, at cost and value 31,946,919 Total investments, at value (identified cost, $2,480,965,324) $2,693,146,211 Cash 16,592 Receivables for Investments sold 2,621,389 Fund shares sold 167,320 Interest and dividends 11,282,983 Other assets 11,651 Total assets $2,707,246,146 Liabilities Payables for Investments purchased $2,324,872 Fund shares reacquired 3,006,649 Payable to affiliates Investment adviser 107,302 Shareholder servicing costs 1,890 Distribution and/or service fees 12,622 Payable for independent Trustees compensation 8,054 Accrued expenses and other liabilities 254,521 Total liabilities $5,715,910 Net assets $2,701,530,236 Net assets consist of Paid-in capital $2,735,452,099 Unrealized appreciation (depreciation) on investments and translation of assets and liabilities in foreign currencies 212,230,366 Accumulated net realized gain (loss) on investments and foreign currency transactions (341,604,667) Undistributed net investment income 95,452,438 Net assets $2,701,530,236 Shares of beneficial interest outstanding 139,247,988 Net assets Shares outstanding Net asset value per share Initial Class $1,773,198,158 90,981,769 $19.49 Service Class 928,332,078 48,266, See Notes to Financial Statements 12

15 FINANCIAL STATEMENTS STATEMENT OF OPERATIONS (unaudited) Thisstatementdescribeshowmuchyourfundearnedininvestmentincomeandaccrued in expenses. It also describes any gains and/or losses generated by fund operations. Six months ended 6/30/11 Net investment income Income Interest $22,943,116 Dividends 19,507,985 Dividends from underlying affiliated funds 16,866 Foreign taxes withheld (228,160) Total investment income $42,239,807 Expenses Management fee $10,322,373 Distribution and/or service fees 1,162,282 Shareholder servicing costs 154,631 Administrative services fee 203,298 Independent Trustees compensation 27,940 Custodian fee 93,566 Shareholder communications 144,746 Auditing fees 30,328 Legal fees 24,897 Miscellaneous 51,597 Total expenses $12,215,658 Fees paid indirectly (191) Reduction of expenses by investment adviser (172,611) Net expenses $12,042,856 Net investment income $30,196,951 Realized and unrealized gain (loss) on investments and foreign currency transactions Realized gain (loss) (identified cost basis) Investment transactions $53,794,054 Foreign currency transactions 2,181 Net realized gain (loss) on investments and foreign currency transactions $53,796,235 Change in unrealized appreciation (depreciation) Investments $29,672,342 Translation of assets and liabilities in foreign currencies 31,943 Net unrealized gain (loss) on investments and foreign currency translation $29,704,285 Net realized and unrealized gain (loss) on investments and foreign currency $83,500,520 Change in net assets from operations $113,697,471 See Notes to Financial Statements 13

16 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. Six months ended 6/30/11 (unaudited) Year ended 12/31/10 Change in net assets From operations Net investment income $30,196,951 $61,744,159 Net realized gain (loss) on investments and foreign currency transactions 53,796,235 95,935,731 Net unrealized gain (loss) on investments and foreign currency translation 29,704, ,356,225 Change in net assets from operations $113,697,471 $258,036,115 Distributions declared to shareholders From net investment income $ $(75,285,859) Change in net assets from fund share transactions $(197,427,205) $(237,181,394) Total change in net assets $(83,729,734) $(54,431,138) Net assets At beginning of period 2,785,259,970 2,839,691,108 At end of period (including undistributed net investment income of $95,452,438 and $65,255,487, respectively) $2,701,530,236 $2,785,259,970 See Notes to Financial Statements 14

17 FINANCIAL STATEMENTS FINANCIAL HIGHLIGHTS The financial highlights table is intended to help you understand the fund s financial performance for the semiannual period and the past 5 fiscal 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 Six months ended Years ended 12/31 6/30/ (unaudited) Net asset value, beginning of period $18.71 $17.48 $15.42 $21.68 $21.90 $20.69 Income (loss) from investment operations Net investment income (d) $0.22 $0.41 $0.44 $0.52 $0.56 $0.56 Net realized and unrealized gain (loss) on investments and foreign currency (4.97) Total from investment operations $0.78 $1.72 $2.64 $(4.45) $0.90 $2.37 Less distributions declared to shareholders From net investment income $ $(0.49) $(0.58) $(0.61) $(0.57) $(0.50) From net realized gain on investments (1.20) (0.55) (0.66) Total distributions declared to shareholders $ $(0.49) $(0.58) $(1.81) $(1.12) $(1.16) Net asset value, end of period $19.49 $18.71 $17.48 $15.42 $21.68 $21.90 Total return (%) (k)(r)(s) 4.17(n) (22.13) Ratios (%) (to average net assets) and Supplemental data: Expenses before expense reductions (f) 0.80(a) Expenses after expense reductions (f) 0.79(a) Net investment income 2.28(a) Portfolio turnover Net assets at end of period (000 omitted) $1,773,198 $1,860,233 $1,967,226 $1,901,307 $2,887,256 $2,859,830 See Notes to Financial Statements 15

18 Financial Highlights continued Service Class Six months ended Years ended 12/31 6/30/ (unaudited) Net asset value, beginning of period $18.48 $17.28 $15.24 $21.44 $21.67 $20.50 Income (loss) from investment operations Net investment income (d) $0.19 $0.36 $0.39 $0.46 $0.50 $0.50 Net realized and unrealized gain (loss) on investments and foreign currency (4.91) Total from investment operations $0.75 $1.65 $2.57 $(4.45) $0.84 $2.28 Less distributions declared to shareholders From net investment income $ $(0.45) $(0.53) $(0.55) $(0.52) $(0.45) From net realized gain on investments (1.20) (0.55) (0.66) Total distributions declared to shareholders $ $(0.45) $(0.53) $(1.75) $(1.07) $(1.11) Net asset value, end of period $19.23 $18.48 $17.28 $15.24 $21.44 $21.67 Total return (%) (k)(r)(s) 4.06(n) (22.32) Ratios (%) (to average net assets) and Supplemental data: Expenses before expense reductions (f) 1.05(a) Expenses after expense reductions (f) 1.04(a) Net investment income 2.03(a) Portfolio turnover Net assets at end of period (000 omitted) $928,332 $925,027 $872,466 $804,493 $1,113,209 $1,070,518 (a) Annualized. (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 periodsshown. (n) Not annualized. (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. See Notes to Financial Statements 16

19 NOTES TO FINANCIAL STATEMENTS (unaudited) (1) Business and Organization MFS Total Return Series (the fund) is a 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. (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 revenues and expenses 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 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 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. Investment Valuations Equity securities, including restricted equity securities, are generally valued at the last sale or official closing price as provided by a third-party pricing service on the market or exchange on which they are primarily traded. Equity securities, for which there were no sales reported that day, are generally valued at the last quoted daily bid quotation as provided by a third-party pricing service on the market or exchange on which such securities are primarily traded. Equity securities held short, for which there were no sales reported for that day, are generally valued at the last quoted daily ask quotation as provided by a third-party pricing service on the market or exchange on which such securities are primarily traded. Debt instruments and floating rate loans (other than short-term instruments), 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 generally are 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 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 17

20 Notes to Financial Statements (unaudited) continued 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 June 30, 2011 in valuing the fund s assets or liabilities: Investments at Value Level 1 Level 2 Level 3 Total Equity Securities $1,625,753,488 $ $ $1,625,753,488 U.S. Treasury Bonds & U.S. Government Agency & Equivalents 352,108, ,108,269 Non-U.S. Sovereign Debt 32,396,379 32,396,379 Corporate Bonds 171,380, ,380,005 Residential Mortgage-Backed Securities 339,794, ,794,346 Commercial Mortgage-Backed Securities 53,762,701 53,762,701 Asset-Backed Securities (including CDOs) 6,480,511 6,480,511 Foreign Bonds 79,523,593 79,523,593 Mutual Funds 31,946,919 31,946,919 Total Investments $1,657,700,407 $1,035,445,804 $ $2,693,146,211 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 fund may also invest in inflation-adjusted debt securities issued by U.S. Government agencies and instrumentalities other than the U.S. Treasury and by other entities such as U.S. and foreign corporations and foreign governments. The principal value of these debt securities is adjusted through income according to changes in the Consumer Price Index or another general price or wage 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. 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 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. 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. 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. The fund bears the risk of loss with respect to the investment of cash collateral. On loans collateralized by cash, the cash collateral is invested in a money market fund or short-term securities. 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 on 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. 18