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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 811-21714
MML Series Investment Fund II
(Exact name of registrant as specified in charter)
100 Bright Meadow Blvd., Enfield, CT 06082
(Address of principal executive offices) (Zip code)
Jeffrey M. Dube
100 Bright Meadow Blvd., Enfield, CT 06082
(Name and address of agent for service)
Registrant’s telephone number, including area code: (860) 562-1000
Date of fiscal year end: 12/31/2015
Date of reporting period: 12/31/2015
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Item 1. Reports to Stockholders.
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| Portfolio of Investments |
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This material must be preceded or accompanied by a current prospectus (or summary prospectus, if available) for the MML Series Investment Fund II. Investors should consider a Fund’s investment objective, risks, and charges and expenses carefully before investing. This and other information about the investment company is available in the prospectus (or summary prospectus, if available). Read it carefully before investing.
Table of Contents
MML Series Investment Fund II – President’s Letter to Shareholders (Unaudited)
| * | Systematic investing and asset allocation do not ensure a profit or protect against loss in a declining market. Systematic investing involves continuous investment in securities regardless of fluctuating price levels. Investors should consider their ability to continue investing through periods of low price levels. |
The information provided is the opinion of MassMutual Retirement Services Investments Services as of 1/1/16 and is subject to change without notice. It is not to be construed as tax, legal or investment advice. Of course, past performance does not guarantee future results.
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MML Series Investment Fund II – Economic and Market Overview (Unaudited)
December 31, 2015
Stocks mixed in a period of economic weakness abroad and low oil prices
Stock performance was mixed in the U.S. and around the world in a volatile market environment that challenged investors for much of the year ended December 31, 2015. High-quality U.S. bonds finished in positive territory, as many investors sought cover in the traditionally safer investments amid the market choppiness. Data pointing to weakness in certain measures confounded investors at different points during the year, but the U.S. economy continued to show overall progress, which stood in contrast to slowdowns in other large and emerging markets across the globe. Geopolitical wrangling centered around the Middle East, economic events and issues in China and Europe, dramatically lower oil prices, the strength of the U.S. dollar versus other benchmark currencies, and the latest announcements from the Federal Reserve (“Fed”) occupied the attention of investors and impacted markets throughout the year.
As 2015 kicked off, Fed watchers – fresh from witnessing the end of the central bank’s Quantitative Easing monthly bond purchase program in autumn 2014 – were speculating about when the central bank would see the U.S. economy as strong enough to begin increasing key short-term interest rates. Investors drove market volatility in reaction to economic data and statements by the Fed that possibly offered clues about when increases might start. The U.S. economy continued to show improvement in key measures, including in unemployment and some price categories; but the threat to U.S. growth represented by the nearly worldwide economic slowdown and unsettling news from China contributed to the Fed’s decision to delay increasing interest rates until its final meeting of the year in mid-December, when policymakers increased the federal funds rate by 0.25%, from 0.0% – 0.25% to 0.25% – 0.50% and made comparable increases in other relevant short-term rates. (The federal funds rate is the interest rate that banks and other financial institutions charge each other for borrowing funds overnight.)
Slowing economic growth and weak demand in foreign markets combined with an overabundant supply drove investor concerns about oil, which continued its dramatic decline into 2015 before finally hitting a low of $43.39 per barrel in mid-March. The closely watched commodity gushed as high as $61.36 in June, and dropped to $38.22 in the late-August market turmoil. Oil never got as high as $50 again in 2015 and finished the year at $37.13, its lowest price since the height of the 2008 financial crisis. U.S. retail gasoline prices started 2015 at their lowest levels since 2009 and drove uphill into mid-summer before rolling back down to near where they had started the year. Gold prices peaked in late January 2015 at $1,295.75 per ounce then lost luster for much of the rest of the year and finished at approximately $1,060.
Market performance
A strong fourth quarter for U.S. stocks, with the strongest gains coming in October, helped lift most broad-market indexes into positive territory, but small- and mid-cap stocks failed to keep pace and declined for the year. The full-year advances in the most widely followed U.S. indexes masked the volatile environment, as the strong U.S. dollar made American goods more expensive in foreign markets and the nearly worldwide economic slowdown reduced overall demand. For the year, the technology-focused NASDAQ Composite® Index rose 6.96%, the S&P 500® Index (S&P 500) of large-capitalization U.S. stocks gained 1.38%, and the blue-chip Dow Jones Industrial AverageSM (Dow) just made it into positive territory with a 0.21% advance. Conversely, the Russell 2000® Index of small-capitalization stocks declined 4.41%. In foreign markets, the MSCI EAFE® Index, a barometer for foreign stocks in developed markets, fell 0.81%, and the MSCI Emerging Markets Index, a measure of the performance of emerging stock markets throughout the world, dropped 14.92%.*
Bonds mainly advanced during the year, with the Barclays U.S. Aggregate Bond Index, a broad measure of the U.S. investment-grade bond markets, rising just 0.55% in the nearly unrelenting low interest rate environment. The Barclays U.S. 1-3 Year Government Bond Index, which measures the performance of short-term U.S. government bonds, returned 0.57%. Treasury bills, as measured by the Citigroup 3-Month Treasury Bill Index, gained only 0.03%. The impact of lower oil prices on energy companies during the year worked against high-yield bonds, as many issuers of such bonds are energy companies. In this environment, the Barclays U.S. Corporate High-Yield Index, a measure of the performance of fixed-rate, non-investment-grade debt from corporate sectors, dropped 4.47% for the year. The yield of the bellwether 10-year Treasury note increased from 2.17% at the beginning of 2015 to 2.27% at the close of business on the last day of the year, although that change masked considerable volatility along the way.*
| * | Indexes are unmanaged, do not incur fees or expenses and cannot be purchased directly for investment. |
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MML Series Investment Fund II – Economic and Market Overview (Unaudited) (Continued)
Q1 2015: Market momentum cools amid increasing talk of Fed rate hikes
In the first quarter of 2015, U.S. stocks declined in January and March, but produced strong gains in February. When the dust settled at the end of March, some key market benchmarks were not far from where they started the quarter. Much of the downside volatility in January was due to weakness in crude oil prices. A surging U.S. dollar also fueled concern about multinational companies that derive a significant portion of their profits from overseas, especially Europe.
February brought renewed optimism among stock investors amid some stabilization in oil’s price and favorable corporate earnings reports. However, stocks surrendered some of those gains in March, as a better-than-expected February employment report raised the possibility that the Fed might speed up its timetable for raising short-term interest rates. Other reports offered a mixed picture of the U.S. economy, however. According to data released in the first quarter, gross domestic product (GDP) expanded by a relatively modest 2.2% in the fourth quarter of 2014, which also included weak durable goods orders and retail sales.
The possibility of Greece defaulting on its debt following the January election of Prime Minister Alexis Tsipras (who had run a campaign against austerity), air strikes in Yemen by Saudi Arabia, more disappointing economic data from Europe and China, and concern about the upcoming second-quarter earnings season were other factors unsettling the market as the first quarter wound to a close.
Q2 2015: Greek debt crisis drives increased volatility
U.S. stocks were choppy in the second quarter of 2015, and most indexes made little headway in either direction. Investors sought clarity on a number of issues, including the debt problems of Greece, the sustainability of the U.S. economic recovery following a weak first quarter, when the Fed’s first interest-rate hike since mid-2006 could occur, and the near-term path of crude oil and the U.S. dollar.
Despite repeated efforts to forge an agreement with other countries in the European Union to reschedule its debt, Greece was unable to make a loan payment to the International Monetary Fund of €1.6 billion (euro), or roughly $1.8 billion, by a June 30 deadline. The default resulted in Greek banks and markets closing the week of June 29 through July 3. Global stock markets fell sharply in response on Monday, June 29, but stabilized on the final day of the quarter.
On the U.S. economic front, the news was somewhat encouraging – but still mixed. First-quarter GDP had originally been reported at -0.7% but underwent an upward revision to -0.2%. Nonfarm payrolls bounced back nicely in April and May after falling well short of estimates in March; however, industrial production remained weak amid challenges from lower oil prices and the stronger dollar.
The Fed’s Open Market Committee met in April and June, deciding both times to leave short-term interest rates unchanged. Crude oil, the focus of so much attention in prior quarters due to its steep decline, receded from the limelight in the second quarter when prices for the commodity rose.
Q3 2015: China’s economic slowdown sinks stocks worldwide; Fed leaves rates unchanged
U.S. stocks struggled in the third quarter of 2015, as concerns about China and fresh weakness in commodity prices prompted nervous investors to sell stocks and seek safer ground. A string of disappointing reports on China’s economy, coupled with that nation’s decision to devalue its currency on August 11 and another freefall in its share prices, contributed to the risk-sensitive environment.
The extreme volatility in Chinese stocks – partly a result of local investors buying on margin – had little effect on U.S. securities markets for much of 2015, but that changed in August, as the Shanghai Stock Exchange Composite Index plunged 43% following its mid-June peak. Most major U.S. stock benchmarks had their worst quarter since 2011 after U.S. stocks dropped roughly 10% in a decline that mostly occurred in just a handful of days in the second half of August. Crude oil prices had recovered somewhat starting in early spring, but again came under pressure during the August stock decline before regaining some ground by the end of the quarter. Following its mid-September meeting, the Fed provided few clues to investors about when the central bank would start increasing interest rates, and the lack of guidance roiled markets in the immediate aftermath.
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MML Series Investment Fund II – Economic and Market Overview (Unaudited) (Continued)
Despite the market jitters, most data indicated the U.S. economy was expanding at a reasonably healthy rate, even if the progress was subpar compared with most other post-World War II recoveries. Following a slow first quarter attributed to extreme weather, the final revised estimate for U.S. second-quarter growth came in at a fairly robust 3.9% annual rate, and overall expectations for 2015 were about in line with 2014’s annual growth of 2.4%. In August, the U.S. unemployment rate fell from 5.3% to 5.1%, the lowest level in seven years.
Q4 2015: Good quarter in a mediocre year; Fed increases rates
Stocks recovered strongly in October, with two of the most widely followed U.S. equity benchmarks, the Dow and the S&P 500, turning in their best monthly gains since October 2011. Fears about China and crude oil eased, and a weak September payroll number fueled hopes that the Fed might delay raising short-term interest rates; however, the October and November employment reports were considerably stronger, renewing talk of a rate increase, which ultimately occurred at the Fed’s December 16 meeting. Elsewhere, crude oil broke to another new low for the year in December and ended 2015 with an annual decline of 31% after falling almost 50% in 2014. These factors led to choppy market action over the final two months of the year.
Data from the Department of Commerce continued to support the view the U.S. economy is generally expanding at a reasonably healthy rate that, nevertheless, has been subdued compared with most other post-World War II recoveries. Following a weak 0.6% pace for real (inflation-adjusted) GDP in the first quarter, second-quarter growth rebounded strongly, putting GDP at 3.9%, but it settled back to 2.0% in the third quarter. As of late December, the Fed was forecasting further slowing and GDP at 1.3% for the fourth quarter.
With 2015 in the books, stocks worldwide kicked off 2016 by declining sharply in response to more bad news about the Chinese economy, and investors entered the new year wary of many of the same factors that drove markets in 2015, including the ongoing impact of economic malaise in China, Europe and emerging markets, the low price of oil, the timetable for Fed interest rate increases and the potential actions of other central banks around the world.
The information provided is the opinion of MassMutual Retirement Services Investment Services as of 1/1/16 and is subject to change without notice. It is not to be construed as tax, legal or investment advice. Of course, past performance does not guarantee future results.
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MML Blend Fund – Portfolio Manager Report (Unaudited)
What is the investment approach of MML Blend Fund, and who is the Fund’s subadviser?
The Fund seeks to achieve as high a level of total rate of return over an extended period of time as is considered consistent with prudent investment risk and the preservation of capital. The Fund invests across different asset classes (equity securities, fixed income securities, including bank loans and Rule 144A securities, and money market instruments), each represented by a different segment of the Fund’s portfolio. The subadviser typically adjusts the allocation among the three segments, based on its judgment about each segment’s potential for returns in comparison with those of other segments and corresponding risk. The Fund’s subadviser is Babson Capital Management LLC (Babson Capital).
How did the Fund perform during the 12 months ended December 31, 2015?
The Fund’s Initial Class shares returned 0.08%, trailing the 1.38% return of the S&P 500® Index (the “stock component’s benchmark”), a widely recognized, unmanaged index representative of common stocks of larger capitalized U.S. companies. The Fund also underperformed the 0.55% return of the Barclays U.S. Aggregate Bond Index (the “bond component’s benchmark”), an unmanaged index of fixed-rate investment-grade securities with at least one year to maturity, combining the Barclays U.S. Treasury Bond Index, the Barclays U.S. Government-Related Bond Index, the Barclays U.S. Corporate Bond Index, and the Barclays U.S. Securitized Bond Index. The Fund outperformed the -0.29% return of the Lipper Balanced Fund Index, an unmanaged, equally weighted index of the 30 largest mutual funds within the Lipper Balanced Category. Finally, the Fund underperformed the 1.28% return of the Custom Balanced Index (the “blend benchmark”), which comprises the stock component’s benchmark and the bond component’s benchmark. The weightings of each index are 60% and 40%, respectively.
For a discussion on the economic and market environment during the 12-month period ended December 31, 2015, please see the Economic and Market Review, beginning on page 2.
Subadviser discussion of factors that contributed to the Fund’s performance
With respect to the Fund’s stock versus bond allocation, the Fund benefited from an emphasis on U.S. equities during the year, as stocks outperformed fixed-income investments and most other alternatives.
With respect to the Fund’s stock investments, the slowdown in China and the decline in commodity prices worked against the oil services and basic materials sectors, which finished the year ended December 31, 2015, as the Fund’s largest detractors. Examples of underperforming stocks in which the Fund invested within those sectors include Archer Daniels Midland, an agricultural company, and National Oilwell Varco, an energy equipment company. Health services and technology were the best-performing market segments for the year, as investors perceived them to be more resilient in the environment of slowing global growth. Examples of strong Fund holdings within these industries included First Solar, the solar panel maker, and Edwards Lifesciences, the heart valve manufacturer.
The Fund’s bond investments trailed their benchmark for the year, and an overweight allocation, relative to the benchmark, to investment-grade corporate bonds and convertible securities were the primary detractors from the Fund’s fixed-income performance, primarily due to Fund holdings in the energy and metals and mining industries. Both sectors sold off in a market environment that featured investor anticipation of the Federal Reserve’s (the “Fed”) first interest rate hike in more than nine years, lower commodity prices, and slowing global economic growth. Fund holdings in asset managers and life insurance were the primary contributors to performance. At year-end, the Fund maintained its overweight stake in corporate bonds. During the year, fundamentals were mixed, as revenues (excluding energy companies) grew, and the supply of bonds increased, as corporations issued more debt during 2015’s low interest-rate environment.
The Fund uses derivative instruments on occasion to manage certain aspects of its strategy. These instruments detracted minimally from performance over the period. Derivatives are securities that derive their value from the performance of one or more other investments and take the form of a contract between two or more parties. Most derivatives are used for hedging, speculation, or both.
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MML Blend Fund – Portfolio Manager Report (Unaudited) (Continued)
Subadviser outlook
Global economic influences weighed heavily on financial markets during 2015, with a slowing China, falling commodity prices, and active U.S. monetary policy all playing a role. After alerting markets that a shift in U.S. monetary policy was imminent, the Fed increased interest rates for the first time since 2006 in December 2015. Post-meeting comments from Fed officials suggest the pace of further interest-rate hikes is likely to be slow and data dependent.
Large U.S. stocks have advanced substantially since the lows of 2009. We continue to believe equity investors may be rewarded with good returns again in 2016, but not necessarily without periods of market volatility. Our view is that equities are inexpensive relative to most fixed-income alternatives, and we believe corporate profits may have the potential to remain strong due to secular shifts in wage costs. As a result, we are likely going to maintain a bias toward equities in the Fund during 2016.
| MML Blend Fund Portfolio Characteristics (% of Net Assets) on 12/31/15 |
||||
| Common Stock |
68.3 | % | ||
| Corporate Debt |
14.9 | % | ||
| U.S. Government Agency Obligations and Instrumentalities |
8.5 | % | ||
| Non-U.S. Government Agency Obligations |
6.9 | % | ||
| Municipal Obligations |
0.5 | % | ||
| Sovereign Debt Obligations |
0.3 | % | ||
| U.S. Treasury Obligations |
0.2 | % | ||
| Preferred Stock |
0.1 | % | ||
| Purchased Options |
0.0 | % | ||
| Rights |
0.0 | % | ||
|
|
|
|||
| Total Long-Term Investments |
99.7 | % | ||
| Short-Term Investments and Other Assets and Liabilities |
0.3 | % | ||
|
|
|
|||
| Net Assets |
100.0 | % | ||
|
|
|
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MML Blend Fund – Portfolio Manager Report (Unaudited) (Continued)
* Benchmark
+ From 9/2/08.
Performance data quoted represents past performance; past performance is not predictive of future results. The investment return and principal value of shares of the Fund will fluctuate with market conditions so that shares of the Fund, when redeemed, may be worth more or less than their original cost. Current performance of the Fund may be lower or higher than the performance quoted. Performance data current to the most recent month end may be obtained by accessing the website at www.massmutual.com.
Investors should note that the Fund is a professionally managed mutual fund, while the S&P 500 Index, the Barclays U.S. Aggregate Bond Index, the Lipper Balanced Fund Index, and the Custom Balanced Index are unmanaged, do not incur expenses, and cannot be purchased directly by investors. Investors should read the Fund’s prospectus with regard to the Fund’s investment objective, risks, and charges and expenses in conjunction with these financial statements. The Fund’s return reflects changes in the net asset value per share without the deduction of any product charges (e.g., cost of insurance, mortality and expense risk charges, administrative fees, and CDSL). The inclusion of these charges would have reduced the performance shown here.
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MML Equity Fund – Portfolio Manager Report (Unaudited)
What is the investment approach of MML Equity Fund, and who are the Fund’s subadvisers?
The Fund’s primary objective is to achieve a superior total rate of return over an extended period of time from both capital appreciation and current income. Its secondary objective is the preservation of capital when business and economic conditions indicate that investing for defensive purposes is appropriate. The Fund invests primarily in common stocks of companies that the subadvisers believe are undervalued in the marketplace, with a focus on securities of larger size companies. Under normal circumstances, the Fund invests at least 80% of its net assets in common stocks, preferred stocks, securities convertible into common or preferred stocks, and other securities, such as warrants and stock rights, whose value is based on stock prices. The Fund’s two subadvisers are OppenheimerFunds, Inc. (OFI), which managed approximately 57% of the Fund’s portfolio; and Loomis, Sayles & Company, L.P. (Loomis Sayles), which was responsible for approximately 43% of the Fund’s portfolio, as of December 31, 2015.
How did the Fund perform during the 12 months ended December 31, 2015?
The Fund’s Initial Class shares returned -3.43%, outperforming the -3.83% return of the Russell 1000® Value Index (the “benchmark”), an unmanaged index consisting of those Russell 1000 securities (representing the 1,000 largest U.S. companies, based on market capitalization) with greater than average value orientation that tend to exhibit lower price-to-book ratios and lower forecasted growth rates than securities in the growth universe.
For a discussion on the economic and market environment during the 12-month period ended December 31, 2015, please see the Economic and Market Review, beginning on page 2.
Subadviser discussion of factors that contributed to the Fund’s performance
For the year ended December 31, 2015, the outperformance of the OFI component of the Fund was primarily due to strong relative stock selection in the consumer staples and health care sectors, and an underweight position in energy. OFI component holdings that contributed to performance included Broadcom, in the information technology sector; and Kraft Heinz, in consumer staples. Broadcom is a manufacturer of semiconductors with applications in broadband and wireless communications. During the year, the company agreed to be acquired by Avago Technologies for $37 billion. In March 2015, Kraft Foods announced a merger with H.J. Heinz. In response, Kraft Foods’ stock rallied more than 30%. The merger was finalized during the summer, and the combined company is now the third-largest North American food and beverage company. Conversely, top detractors from performance included OFI component holdings Anadarko Petroleum, in the energy sector; and Micron Technology, in information technology. Anadarko Petroleum, a U.S.-based independent exploration and production company, was negatively impacted by the decline in oil prices. Shares of Micron Technology, which manufactures semiconductor memory products, declined as the company reported disappointing earnings in late June – and indicated that future results would likely be below expectations as well.
With respect to the Loomis Sayles component of the Fund, outperformance was primarily attributable to stock selection in the materials, consumer staples, and health care sectors. The industrials, financials, and consumer discretionary sectors detracted the most. The top individual performers for the year were Loomis Sayles component holdings Microsoft and Vulcan Materials. Microsoft, a multinational technology company, performed well in 2015, primarily due to better-than-expected cloud revenue and continued, aggressive cost management. Vulcan Materials, a producer of construction aggregates, benefited from improving volumes and accelerating pricing gains in its core markets due to strengthening residential and non-residential construction in the U.S. Not surprisingly, the two most significant detractors in the Loomis Sayles component were holdings in Marathon Oil and National Oilwell, both in the energy sector. Shares of Marathon Oil, an independent exploration and production company, and National Oilwell, an oil and gas service company, fell as oil prices declined over the year due to robust global production and elevated inventory levels that contrasted with economic slowdowns across the world. Investor concerns that Marathon Oil and other oil-price-sensitive companies will face an increasingly challenging environment over the next few years have increased. While nearly all of National Oilwell’s products and services are sensitive to oil prices, the company is particularly exposed to the worsening deepwater production outlook.
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MML Equity Fund – Portfolio Manager Report (Unaudited) (Continued)
Subadviser outlook
While many investors focus on a short-term view when considering potential investments, OFI uses in-depth fundamental research to identify companies that may be poised for an unanticipated acceleration in return on invested capital over a multi-year time horizon, in our view. We believe this longer-term approach may provide a more comprehensive outlook of potential investments by focusing on all three financial statements – the income statement, balance sheet, and statement of cash flows – and helps us uncover companies whose generation and use of cash flow may be unlikely to be fully reflected in the current stock price.
Loomis Sayles often trims stocks that have reached solid valuations and adds to positions in stocks that are laggards in an effort to optimize risk/reward. We believe market pullbacks may allow longer-term investors to find potential opportunities, although we remain vigilant when funding new investments. Given the poor late-2015 equity performance, we believe the current risk-sensitive environment may continue for the first part of 2016. Our view is the long-term bull market remains intact, but as the economic cycle ages, double-digit returns may be behind us. We believe stocks may face challenges over the next few years, given potentially high valuations, tepid global growth, the upcoming U.S. elections, and geopolitical uncertainties. Importantly, we believe major fundamental positives remain intact, which include stable to improving developed-market growth, lower commodity prices, capped global inflation, and continuing low interest rates.
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MML Equity Fund – Portfolio Manager Report (Unaudited) (Continued)
Performance data quoted represents past performance; past performance is not predictive of future results. The investment return and principal value of shares of the Fund will fluctuate with market conditions so that shares of the Fund, when redeemed, may be worth more or less than their original cost. Current performance of the Fund may be lower or higher than the performance quoted. Performance data current to the most recent month end may be obtained by accessing the website at www.massmutual.com.
Investors should note that the Fund is a professionally managed mutual fund, while the Russell 1000 Value Index is unmanaged, does not incur expenses, and cannot be purchased directly by investors. Investors should read the Fund’s prospectus with regard to the Fund’s investment objective, risks, and charges and expenses in conjunction with these financial statements. The Fund’s return reflects changes in the net asset value per share without the deduction of any product charges (e.g., cost of insurance, mortality and expense risk charges, administrative fees, and CDSL). The inclusion of these charges would have reduced the performance shown here.
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MML Managed Bond Fund – Portfolio Manager Report (Unaudited)
What is the investment approach of MML Managed Bond Fund, and who is the Fund’s subadviser?
The Fund’s investment objective is to achieve as high a total rate of return on an annual basis as is considered consistent with the preservation of capital. Under normal circumstances, the Fund invests at least 80% of its net assets in investment grade fixed income securities (rated Baa or higher by Moody’s or BBB or higher by Standard & Poor’s or, if unrated, determined to be of comparable quality by the subadviser). The Fund’s subadviser is Babson Capital Management LLC (Babson Capital).
How did the Fund perform during the 12 months ended December 31, 2015?
The Fund’s Initial Class shares returned -0.75%, underperforming the 0.55% return of the Barclays U.S. Aggregate Bond Index (the “benchmark”), an unmanaged index of fixed-rate investment-grade securities with at least one year to maturity, combining the Barclays U.S. Treasury Bond Index, the Barclays U.S. Government-Related Bond Index, the Barclays U.S. Corporate Bond Index, and the Barclays U.S. Securitized Bond Index.
For a discussion on the economic and market environment during the 12-month period ended December 31, 2015, please see the Economic and Market Review, beginning on page 3.
Subadviser discussion of factors that contributed to the Fund’s performance
For the year ended December 31, 2015, an overweight position, relative to the benchmark, in investment-grade corporate bonds and convertible securities was the primary detractor from performance. Fund holdings in the energy and metals and mining industries were main the drivers of underperformance within the corporate and convertible bond sectors. Although the Fund was positioned in traditionally less-volatile shorter-maturity bonds, the exposure was detrimental, as both sectors sold off in anticipation of the Federal Reserve’s (the “Fed”) first interest rate hike in more than nine years, lower commodity prices, increased supply, and slowing global economic growth, particularly in emerging-market countries. Conversely, Fund holdings in bonds from asset managers and life insurance were the primary contributors to performance. At year-end, the Fund maintained its overweight stake in corporate bonds. During the year, fundamentals were mixed, as revenues (excluding energy companies) grew, and the supply of bonds increased as corporations issued more debt during 2015’s low interest-rate environment.
Asset-backed securities (ABS) were the primary detractors in the securitized sector, as Fund holdings in government-guaranteed student loans underperformed during the year. Agency mortgage-backed securities (MBS) were the primary contributors to performance during the year. (“Agency” refers to government-sponsored entities that issue bonds backed by mortgage loans, including Ginnie Mae, Fannie Mae, Freddie Mac, and the Federal Home Loan Banks.) Positioning in lower-coupon securities benefited Fund performance, as did a modest allocation to agency collateralized mortgage obligation (CMO) securities. Non-agency residential mortgage-backed securities (RMBS) and commercial mortgage-backed securities (CMBS) also modestly contributed to performance. (Non-agency securities are issued and/or guaranteed by entities other than government agencies.) Commercial real estate fundamentals continued to show signs of modest improvement across multiple regions, and the Fund held an overweight stake in CMBS.
The Fund uses derivative instruments on occasion to manage certain aspects of its strategy. In aggregate, these positions were a modest detractor from performance over the year. Derivatives are securities that derive their value from the performance of one or more other investments and take the form of a contract between two or more parties. Most derivatives are used for hedging, speculation, or both.
Subadviser outlook
Global economic influences weighed heavily on worldwide financial markets during 2015, with a slowing China, falling commodity prices, and active U.S. monetary policy all playing a role. After alerting markets that a shift in U.S. monetary policy was imminent, the Fed increased interest rates for the first time since 2006 in December 2015. Post-meeting comments from Fed officials suggest the pace of further interest-rate hikes is likely to be slow and data dependent.
Corporate bond prices have declined amid diverging economic growth trends as well as heightened risks, including merger and acquisition (M&A) activity or commodity sensitivity. Securitized bond sectors have been less affected by recent uncertainty,
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MML Managed Bond Fund – Portfolio Manager Report (Unaudited) (Continued)
which has provided a bit of a safe haven to investors. We believe this trend could continue, and see potential value in certain sectors that are less correlated to corporate America. In any event, we believe this environment could present targeted opportunities, which are likely to highlight the importance of sound credit selection skills.
| MML Managed Bond Fund Portfolio Characteristics (% of Net Assets) on 12/31/15 |
||||
| Corporate Debt |
48.0 | % | ||
| U.S. Government Agency Obligations and Instrumentalities |
25.8 | % | ||
| Non-U.S. Government Agency Obligations |
20.9 | % | ||
| U.S. Treasury Obligations |
1.3 | % | ||
| Municipal Obligations |
1.3 | % | ||
| Sovereign Debt Obligations |
0.8 | % | ||
| Preferred Stock |
0.2 | % | ||
| Purchased Options |
0.0 | % | ||
|
|
|
|||
| Total Long-Term Investments |
98.3 | % | ||
| Short-Term Investments and Other Assets and Liabilities |
1.7 | % | ||
|
|
|
|||
| Net Assets |
100.0 | % | ||
|
|
|
|||
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Table of Contents
MML Managed Bond Fund – Portfolio Manager Report (Unaudited) (Continued)
Performance data quoted represents past performance; past performance is not predictive of future results. The investment return and principal value of shares of the Fund will fluctuate with market conditions so that shares of the Fund, when redeemed, may be worth more or less than their original cost. Current performance of the Fund may be lower or higher than the performance quoted. Performance data current to the most recent month end may be obtained by accessing the website at www.massmutual.com.
Investors should note that the Fund is a professionally managed mutual fund, while the Barclays U.S. Aggregate Bond Index is unmanaged, does not incur expenses, and cannot be purchased directly by investors. Investors should read the Fund’s prospectus with regard to the Fund’s investment objective, risks, and charges and expenses in conjunction with these financial statements. The Fund’s return reflects changes in the net asset value per share without the deduction of any product charges (e.g., cost of insurance, mortality and expense risk charges, administrative fees, and CDSL). The inclusion of these charges would have reduced the performance shown here.
13
Table of Contents
MML Money Market Fund – Portfolio Manager Report (Unaudited)
What is the investment approach of MML Money Market Fund, and who is the Fund’s subadviser?
The Fund’s investment objectives are to achieve the preservation of capital, liquidity, and high current income. These objectives are of equal importance. The Fund invests in high quality U.S. dollar-denominated debt instruments of domestic and foreign issuers. It is important to note that this Fund seeks to maintain, but does not guarantee, a stable net asset value per share. An investment in the Fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although the Fund seeks to maintain a stable net asset value per share, it is possible to lose money by investing in the Fund. The Fund’s subadviser is Babson Capital Management LLC (Babson Capital).
How did the Fund perform during the 12 months ended December 31, 2015?
The Fund’s Initial Class shares returned 0.00%, modestly trailing the 0.03% return of the Citigroup 3-Month Treasury Bill Index (the “benchmark”), an unmanaged index representing the performance of 3-month U.S. Treasury bills that reflects reinvestment of all distributions and changes in market prices. During the period, the Fund waived certain fees to allow it to achieve the 0.00% return. The Fund’s Initial Class shares would have had a negative return if the waiver had not been in effect.
For a discussion on the economic and market environment during the 12-month period ended December 31, 2015, please see the Economic and Market Review, beginning on page 3.
Subadviser discussion of factors that contributed to the Fund’s performance
Short-term interest rates stayed at historically low levels due to the Federal Reserve’s (the “Fed”) accommodative monetary policy, which continued to produce low nominal yields for the Fund despite the central bank’s implementation of the first increase in interest rates since 2006.
The Fund took advantage of the seasonal increase in Treasury bill supply, which took place in the middle of the first quarter. The increase in Treasury bill supply in the months before tax day typically causes yields to rise – and prices to fall – due to increased supply. (Bond prices move in the opposite direction of interest rates (or yields); when yields rise, the prices of existing bonds fall – and vice versa.) Given the market environment, the Fund continued to focus on high-quality bond issuers in short maturity, non-financial commercial paper, which has allowed the Fund to earn additional yield over the benchmark. (Commercial paper is the commonly used name for short-term unsecured promissory notes sold by banks and corporations to meet short-term debt obligations.)
The Fund continued to avoid exposure to European banks – a strategy that has benefited the overall credit quality of the Fund, but limited the opportunity for higher yields. During the year, the Fund began to invest in certain repurchase agreements on a rolling overnight basis. Collateralized by U.S. Treasuries, these repurchase agreements added liquidity and flexibility and strengthened the Fund’s credit quality. Finally, the Fund had a higher allocation at year-end to U.S. agency discount notes relative to U.S. Treasury bills, which is a strategy designed to add incremental income. (U.S. agency discount notes are short-term debt securities issued at a discount to their face value by government-sponsored entities, including Ginnie Mae, Fannie Mae, Freddie Mac, and the Federal Home Loan Banks.)
Subadviser outlook
Global economic influences weighed heavily on worldwide financial markets during 2015, with a slowing China, falling commodity prices and active U.S. monetary policy all playing a role. After alerting markets that a shift in U.S. monetary policy was imminent, the Fed increased interest rates for the first time since 2006 in December 2015. Post-meeting comments from Fed officials suggest the pace of further interest-rate hikes is likely to be slow and data dependent.
In this environment of low interest rates, we continue to believe focusing on high-quality bond issuers in short maturities may be a sound strategy with the potential to allow us to quickly adjust to changing market conditions and maintain our commitment to preservation of principal and liquidity.
14
Table of Contents
MML Money Market Fund – Portfolio Manager Report (Unaudited) (Continued)
| MML Money Market Fund Portfolio Characteristics (% of Net Assets) on 12/31/2015 |
||||
| Commercial Paper |
56.2 | % | ||
| U.S. Government Obligations |
21.3 | % | ||
| Discount Notes |
13.9 | % | ||
| Corporate Debt |
4.2 | % | ||
| Repurchase Agreement |
4.2 | % | ||
| Time Deposits |
0.4 | % | ||
|
|
|
|||
| Total Short-Term Investments |
100.2 | % | ||
| Other Assets and Liabilities |
(0.2 | )% | ||
|
|
|
|||
| Net Assets |
100.0 | % | ||
|
|
|
|||
15
Table of Contents
MML Money Market Fund – Portfolio Manager Report (Unaudited) (Continued)
† Amount is less than 0.005%
Performance data quoted represents past performance; past performance is not predictive of future results. The investment return and principal value of shares of the Fund will fluctuate with market conditions so that shares of the Fund, when redeemed, may be worth more or less than their original cost. Current performance of the Fund may be lower or higher than the performance quoted. Performance data current to the most recent month end may be obtained by accessing the website at www.massmutual.com.
Investors should note that the Fund is a professionally managed mutual fund, while the Citigroup 3-Month Treasury Bill Index is unmanaged, does not incur expenses, and cannot be purchased directly by investors. Investors should read the Fund’s prospectus with regard to the Fund’s investment objective, risks, and charges and expenses in conjunction with these financial statements. The Fund’s return reflects changes in the net asset value per share without the deduction of any product charges (e.g., cost of insurance, mortality and expense risk charges, administrative fees, and CDSL). The inclusion of these charges would have reduced the performance shown here. An investment in the MML Money Market Fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although the Fund seeks to maintain a stable net asset value per share, it is possible to lose money by investing in the Fund.
16
Table of Contents
MML Blend Fund – Portfolio of Investments
December 31, 2015
The accompanying notes are an integral part of the financial statements.
17
Table of Contents
MML Blend Fund – Portfolio of Investments (Continued)
The accompanying notes are an integral part of the financial statements.
18
Table of Contents
MML Blend Fund – Portfolio of Investments (Continued)
The accompanying notes are an integral part of the financial statements.
19
Table of Contents
MML Blend Fund – Portfolio of Investments (Continued)
The accompanying notes are an integral part of the financial statements.
20
Table of Contents
MML Blend Fund – Portfolio of Investments (Continued)
The accompanying notes are an integral part of the financial statements.
21
Table of Contents
MML Blend Fund – Portfolio of Investments (Continued)
The accompanying notes are an integral part of the financial statements.
22
Table of Contents
MML Blend Fund – Portfolio of Investments (Continued)
The accompanying notes are an integral part of the financial statements.
23
Table of Contents
MML Blend Fund – Portfolio of Investments (Continued)
The accompanying notes are an integral part of the financial statements.
24
Table of Contents
MML Blend Fund – Portfolio of Investments (Continued)
The accompanying notes are an integral part of the financial statements.
25
Table of Contents
MML Blend Fund – Portfolio of Investments (Continued)
The accompanying notes are an integral part of the financial statements.
26
Table of Contents
MML Blend Fund – Portfolio of Investments (Continued)
The accompanying notes are an integral part of the financial statements.
27
Table of Contents
MML Blend Fund – Portfolio of Investments (Continued)
The accompanying notes are an integral part of the financial statements.
28
Table of Contents
MML Blend Fund – Portfolio of Investments (Continued)
The accompanying notes are an integral part of the financial statements.
29
Table of Contents
MML Blend Fund – Portfolio of Investments (Continued)
The accompanying notes are an integral part of the financial statements.
30
Table of Contents
MML Blend Fund – Portfolio of Investments (Continued)
The accompanying notes are an integral part of the financial statements.
31
Table of Contents
MML Blend Fund – Portfolio of Investments (Continued)
The accompanying notes are an integral part of the financial statements.
32
Table of Contents
MML Blend Fund – Portfolio of Investments (Continued)
The accompanying notes are an integral part of the financial statements.
33
Table of Contents
MML Blend Fund – Portfolio of Investments (Continued)
The accompanying notes are an integral part of the financial statements.
34
Table of Contents
MML Blend Fund – Portfolio of Investments (Continued)
The accompanying notes are an integral part of the financial statements.
35
Table of Contents
MML Blend Fund – Portfolio of Investments (Continued)
The accompanying notes are an integral part of the financial statements.
36
Table of Contents
MML Blend Fund – Portfolio of Investments (Continued)
The accompanying notes are an integral part of the financial statements.
37
Table of Contents
MML Blend Fund – Portfolio of Investments (Continued)
The accompanying notes are an integral part of the financial statements.
38
Table of Contents
MML Blend Fund – Portfolio of Investments (Continued)
The accompanying notes are an integral part of the financial statements.
39
Table of Contents
MML Blend Fund – Portfolio of Investments (Continued)
The accompanying notes are an integral part of the financial statements.
40
Table of Contents
MML Blend Fund – Portfolio of Investments (Continued)
The accompanying notes are an integral part of the financial statements.
41
Table of Contents
MML Blend Fund – Portfolio of Investments (Continued)
The accompanying notes are an integral part of the financial statements.
42
Table of Contents
MML Blend Fund – Portfolio of Investments (Continued)
The accompanying notes are an integral part of the financial statements.
43
Table of Contents
MML Equity Fund – Portfolio of Investments
December 31, 2015
The accompanying notes are an integral part of the financial statements.
44
Table of Contents
MML Equity Fund – Portfolio of Investments (Continued)
The accompanying notes are an integral part of the financial statements.
45
Table of Contents
MML Equity Fund – Portfolio of Investments (Continued)
The accompanying notes are an integral part of the financial statements.
46
Table of Contents
MML Equity Fund – Portfolio of Investments (Continued)
The accompanying notes are an integral part of the financial statements.
47
Table of Contents
MML Managed Bond Fund – Portfolio of Investments
December 31, 2015
The accompanying notes are an integral part of the financial statements.
48
Table of Contents
MML Managed Bond Fund – Portfolio of Investments (Continued)
The accompanying notes are an integral part of the financial statements.
49
Table of Contents
MML Managed Bond Fund – Portfolio of Investments (Continued)
The accompanying notes are an integral part of the financial statements.
50
Table of Contents
MML Managed Bond Fund – Portfolio of Investments (Continued)
The accompanying notes are an integral part of the financial statements.
51
Table of Contents
MML Managed Bond Fund – Portfolio of Investments (Continued)
The accompanying notes are an integral part of the financial statements.
52
Table of Contents
MML Managed Bond Fund – Portfolio of Investments (Continued)
The accompanying notes are an integral part of the financial statements.
53
Table of Contents
MML Managed Bond Fund – Portfolio of Investments (Continued)
The accompanying notes are an integral part of the financial statements.
54
Table of Contents
MML Managed Bond Fund – Portfolio of Investments (Continued)
The accompanying notes are an integral part of the financial statements.
55
Table of Contents
MML Managed Bond Fund – Portfolio of Investments (Continued)
The accompanying notes are an integral part of the financial statements.
56
Table of Contents
MML Managed Bond Fund – Portfolio of Investments (Continued)
The accompanying notes are an integral part of the financial statements.
57
Table of Contents
MML Managed Bond Fund – Portfolio of Investments (Continued)
The accompanying notes are an integral part of the financial statements.
58
Table of Contents
MML Managed Bond Fund – Portfolio of Investments (Continued)
The accompanying notes are an integral part of the financial statements.
59
Table of Contents
MML Managed Bond Fund – Portfolio of Investments (Continued)
The accompanying notes are an integral part of the financial statements.
60
Table of Contents
MML Managed Bond Fund – Portfolio of Investments (Continued)
The accompanying notes are an integral part of the financial statements.
61
Table of Contents
MML Managed Bond Fund – Portfolio of Investments (Continued)
The accompanying notes are an integral part of the financial statements.
62
Table of Contents
MML Managed Bond Fund – Portfolio of Investments (Continued)
The accompanying notes are an integral part of the financial statements.
63
Table of Contents
MML Managed Bond Fund – Portfolio of Investments (Continued)
The accompanying notes are an integral part of the financial statements.
64
Table of Contents
MML Managed Bond Fund – Portfolio of Investments (Continued)
The accompanying notes are an integral part of the financial statements.
65
Table of Contents
MML Managed Bond Fund – Portfolio of Investments (Continued)
The accompanying notes are an integral part of the financial statements.
66
Table of Contents
MML Managed Bond Fund – Portfolio of Investments (Continued)
The accompanying notes are an integral part of the financial statements.
67
Table of Contents
MML Managed Bond Fund – Portfolio of Investments (Continued)
The accompanying notes are an integral part of the financial statements.
68
Table of Contents
MML Managed Bond Fund – Portfolio of Investments (Continued)
The accompanying notes are an integral part of the financial statements.
69
Table of Contents
MML Managed Bond Fund – Portfolio of Investments (Continued)
The accompanying notes are an integral part of the financial statements.
70
Table of Contents
MML Managed Bond Fund – Portfolio of Investments (Continued)
The accompanying notes are an integral part of the financial statements.
71
Table of Contents
MML Money Market Fund – Portfolio of Investments
December 31, 2015
The accompanying notes are an integral part of the financial statements.
72
Table of Contents
MML Money Market Fund – Portfolio of Investments (Continued)
The accompanying notes are an integral part of the financial statements.
73
Table of Contents
MML Series Investment Fund II – Financial Statements
Statements of Assets and Liabilities
December 31, 2015
| MML Blend Fund |
MML Equity Fund |
MML Managed Bond Fund |
MML Money Market Fund |
|||||||||||||
| Assets: | ||||||||||||||||
| Investments, at value (Note 2) (a) |
$ | 631,484,675 | $ | 785,061,371 | $ | 1,201,944,866 | $ | - | ||||||||
| Short-term investments, at value (Note 2) (b) |
37,071,908 | 9,100,625 | 221,031,874 | 168,305,315 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total investments (c) |
668,556,583 | 794,161,996 | 1,422,976,740 | 168,305,315 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Receivables from: |
||||||||||||||||
| Investments sold |
395,384 | 4,531,642 | 2,274,060 | - | ||||||||||||
| Investment adviser (Note 3) |
- | - | - | 43,664 | ||||||||||||
| Fund shares sold |
95,606 | 517,262 | 6,442,432 | 364,786 | ||||||||||||
| Variation margin on open derivative instruments (Note 2) |
62,103 | - | 426,214 | - | ||||||||||||
| Interest and dividends |
1,994,139 | 981,938 | 8,398,774 | 41,999 | ||||||||||||
| Foreign taxes withheld |
- | 42,944 | - | - | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total assets |
671,103,815 | 800,235,782 | 1,440,518,220 | 168,755,764 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Liabilities: | ||||||||||||||||
| Payables for: |
||||||||||||||||
| Investments purchased |
478,081 | 4,008,947 | 9,124,595 | 420,467 | ||||||||||||
| Fund shares repurchased |
260,895 | 177,618 | 221,687 | 283,874 | ||||||||||||
| Investments purchased on a when-issued basis (Note 2) |
36,191,125 | - | 207,265,531 | - | ||||||||||||
| Securities on loan (Note 2) |
- | 17,009,458 | - | - | ||||||||||||
| Open swap agreements, at value (Note 2) |
15,715 | - | 100,577 | - | ||||||||||||
| Trustees’ fees and expenses (Note 3) |
192,764 | 243,502 | 202,949 | 50,585 | ||||||||||||
| Collateral held for open derivative contracts (Note 2) |
- | - | 680,000 | - | ||||||||||||
| Affiliates (Note 3): |
||||||||||||||||
| Investment advisory fees |
228,146 | 271,245 | 400,976 | 69,144 | ||||||||||||
| Service fees |
29,473 | 42,481 | 151,733 | - | ||||||||||||
| Due to custodian |
3,183 | - | 1,873 | - | ||||||||||||
| Accrued expense and other liabilities |
67,894 | 69,405 | 18,299 | 31,523 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total liabilities |
37,467,276 | 21,822,656 | 218,168,220 | 855,593 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Net assets |
$ | 633,636,539 | $ | 778,413,126 | $ | 1,222,350,000 | $ | 167,900,171 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Net assets consist of: | ||||||||||||||||
| Paid-in capital |
$ | 474,548,617 | $ | 605,174,656 | $ | 1,237,281,962 | $ | 167,944,844 | ||||||||
| Undistributed (accumulated) net investment income (loss) |
- | 13,534,450 | 1,745,901 | - | ||||||||||||
| Distributions in excess of net investment income |
(130,021 | ) | - | - | (46,326 | ) | ||||||||||
| Accumulated net realized gain (loss) on investments and foreign currency transactions |
55,113,422 | 44,528,836 | 428,292 | 1,653 | ||||||||||||
| Net unrealized appreciation (depreciation) on investments and foreign currency translations |
104,104,521 | 115,175,184 | (17,106,155 | ) | - | |||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Net assets |
$ | 633,636,539 | $ | 778,413,126 | $ | 1,222,350,000 | $ | 167,900,171 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| (a) Cost of investments: |
$ | 527,403,720 | $ | 669,886,187 | $ | 1,219,105,481 | $ | - | ||||||||
| (b) Cost of short-term investments: |
$ | 37,056,300 | $ | 9,100,625 | $ | 220,948,310 | $ | 168,305,315 | ||||||||
| (c) Securities on loan with market value of: |
$ | - | $ | 16,531,772 | $ | - | $ | - | ||||||||
The accompanying notes are an integral part of the financial statements.
74
Table of Contents
MML Series Investment Fund II – Financial Statements (Continued)
Statements of Assets and Liabilities
December 31, 2015
| MML Blend Fund |
MML Equity Fund |
MML Managed Bond Fund |
MML Money Market Fund |
|||||||||||||
| Initial Class shares: | ||||||||||||||||
| Net assets |
$ | 586,081,772 | $ | 709,314,987 | $ | 976,931,859 | $ | 167,900,171 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Shares outstanding (a) |
26,372,464 | 26,192,827 | 79,341,148 | 168,080,252 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Net asset value, offering price and redemption price per share |
$ | 22.22 | $ | 27.08 | $ | 12.31 | $ | 1.00 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Service Class shares: | ||||||||||||||||
| Net assets |
$ | 47,554,767 | $ | 69,098,139 | $ | 245,418,141 | $ | - | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Shares outstanding (a) |
2,143,569 | 2,576,940 | 19,967,671 | - | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Net asset value, offering price and redemption price per share |
$ | 22.18 | $ | 26.81 | $ | 12.29 | $ | - | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| (a) | Authorized unlimited number of shares with no par value. |
The accompanying notes are an integral part of the financial statements.
75
Table of Contents
MML Series Investment Fund II – Financial Statements (Continued)
For the Year Ended December 31, 2015
| MML Blend Fund |
MML Equity Fund |
MML Managed Bond Fund |
MML Money Market Fund |
|||||||||||||
| Investment income (Note 2): | ||||||||||||||||
| Dividends (a) |
$ | 10,009,424 | $ | 17,317,445 | $ | 353,073 | $ | - | ||||||||
| Interest |
6,694,963 | 1,259 | 39,543,611 | 287,997 | ||||||||||||
| Securities lending net income |
- | 187,617 | - | - | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total investment income |
16,704,387 | 17,506,321 | 39,896,684 | 287,997 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Expenses (Note 3): | ||||||||||||||||
| Investment advisory fees |
2,772,599 | 3,333,975 | 5,126,101 | 915,183 | ||||||||||||
| Custody fees |
88,038 | 82,588 | - | * | 24,307 | |||||||||||
| Audit fees |
34,957 | 34,231 | 35,962 | 29,892 | ||||||||||||
| Legal fees |
5,148 | 6,023 | - | * | 3,723 | |||||||||||
| Proxy fees |
1,033 | 1,032 | - | * | 1,033 | |||||||||||
| Shareholder reporting fees |
54,780 | 67,281 | - | * | 18,412 | |||||||||||
| Trustees’ fees |
36,870 | 45,931 | 55,408 | 10,804 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| 2,993,425 | 3,571,061 | 5,217,471 | 1,003,354 | |||||||||||||
| Distribution and Service fees: |
||||||||||||||||
| Service Class |
109,609 | 156,590 | 582,193 | - | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total expenses |
3,103,034 | 3,727,651 | 5,799,664 | 1,003,354 | ||||||||||||
| Expenses waived (Note 3): |
||||||||||||||||
| Initial Class fees reimbursed by adviser |
- | - | - | (715,357 | ) | |||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Net expenses |
3,103,034 | 3,727,651 | 5,799,664 | 287,997 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Net investment income (loss) |
13,601,353 | 13,778,670 | 34,097,020 | - | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Realized and unrealized gain (loss): | ||||||||||||||||
| Net realized gain (loss) on: |
||||||||||||||||
| Investment transactions |
60,730,840 | 48,324,429 | 11,742,611 | 2,061 | ||||||||||||
| Futures contracts |
389,984 | - | 3,084,342 | - | ||||||||||||
| Swap agreements |
(458,774 | ) | - | (2,821,640 | ) | - | ||||||||||
| Foreign currency transactions |
(6,277 | ) | (7,881 | ) | (37,213 | ) | - | |||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Net realized gain (loss) |
60,655,773 | 48,316,548 | 11,968,100 | 2,061 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Net change in unrealized appreciation (depreciation) on: |
||||||||||||||||
| Investment transactions |
(73,808,954 | ) | (90,001,596 | ) | (56,598,036 | ) | - | |||||||||
| Futures contracts |
(109,426 | ) | - | (316,211 | ) | - | ||||||||||
| Swap agreements |
245,696 | - | 1,511,632 | - | ||||||||||||
| Translation of assets and liabilities in foreign currencies |
2,250 | 30 | 13,347 | - | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Net change in unrealized appreciation (depreciation) |
(73,670,434 | ) | (90,001,566 | ) | (55,389,268 | ) | - | |||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Net realized gain (loss) and change in unrealized appreciation (depreciation) |
(13,014,661 | ) | (41,685,018 | ) | (43,421,168 | ) | 2,061 | |||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Net increase (decrease) in net assets resulting from operations |
$ | 586,692 | $ | (27,906,348 | ) | $ | (9,324,148 | ) | $ | 2,061 | ||||||
|
|
|
|
|
|
|
|
|
|||||||||
| (a) Net of foreign withholding tax of: |
$ | 173 | $ | 258,597 | $ | - | $ | - | ||||||||
| * | Paid by MassMutual pursuant to investment advisory agreement dated 12/15/11 for a period of at least three years. The agreement can only be amended or terminated after that period upon approval of a majority of the Independent Trustees. |
The accompanying notes are an integral part of the financial statements.
76
Table of Contents
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77
Table of Contents
MML Series Investment Fund II — Financial Statements (Continued)
Statements of Changes in Net Assets
| MML Blend Fund | ||||||||
| Year Ended December 31, 2015 |
Year Ended December 31, 2014 |
|||||||
| Increase (Decrease) in Net Assets: | ||||||||
| Operations: | ||||||||
| Net investment income (loss) |
$ | 13,601,353 | $ | 12,901,109 | ||||
| Net realized gain (loss) on investment transactions |
60,655,773 | 51,000,331 | ||||||
| Net change in unrealized appreciation (depreciation) on investments |
(73,670,434 | ) | 6,333,504 | |||||
|
|
|
|
|
|||||
| Net increase (decrease) in net assets resulting from operations |
586,692 | 70,234,944 | ||||||
|
|
|
|
|
|||||
| Distributions to shareholders (Note 2): | ||||||||
| From net investment income: |
||||||||
| Initial Class |
(13,201,262 | ) | (13,207,894 | ) | ||||
| Service Class |
(858,932 | ) | (651,465 | ) | ||||
|
|
|
|
|
|||||
| Total distributions from net investment income |
(14,060,194 | ) | (13,859,359 | ) | ||||
|
|
|
|
|
|||||
| From net realized gains: |
||||||||
| Initial Class |
(46,953,015 | ) | (6,458,277 | ) | ||||
| Service Class |
(3,152,201 | ) | (334,379 | ) | ||||
|
|
|
|
|
|||||
| Total distributions from net realized gains |
(50,105,216 | ) | (6,792,656 | ) | ||||
|
|
|
|
|
|||||
| Net fund share transactions (Note 5): | ||||||||
| Initial Class |
677,625 | (41,634,244 | ) | |||||
| Service Class |
11,324,049 | 6,796,017 | ||||||
|
|
|
|
|
|||||
| Increase (decrease) in net assets from fund share transactions |
12,001,674 | (34,838,227 | ) | |||||
|
|
|
|
|
|||||
| Total increase (decrease) in net assets |
(51,577,044 | ) | 14,744,702 | |||||
| Net assets | ||||||||
| Beginning of year |
685,213,583 | 670,468,881 | ||||||
|
|
|
|
|
|||||
| End of year |
$ | 633,636,539 | $ | 685,213,583 | ||||
|
|
|
|
|
|||||
| Undistributed (accumulated) net investment income (loss) included in net assets at end of year |
$ | - | $ | 116,669 | ||||
|
|
|
|
|
|||||
| Distributions in excess of net investment income included in net assets at end of year |
$ | (130,021 | ) | $ | - | |||
|
|
|
|
|
|||||
The accompanying notes are an integral part of the financial statements.
78
Table of Contents
| MML Equity Fund | MML Managed Bond Fund | MML Money Market Fund | ||||||||||||||||||||
| Year Ended December 31, 2015 |
Year Ended December 31, 2014 |
Year Ended December 31, 2015 |
Year Ended December 31, 2014 |
Year Ended December 31, 2015 |
Year Ended December 31, 2014 |
|||||||||||||||||
| $ | 13,778,670 | $ | 17,510,381 | $ | 34,097,020 | $ | 33,021,065 | $ | - | $ | - | |||||||||||
| 48,316,548 | 66,551,512 | 11,968,100 | 19,692,204 | 2,061 | 3,067 | |||||||||||||||||
| (90,001,566 | ) | 7,130,552 | (55,389,268 | ) | 30,915,154 | - | - | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| (27,906,348 | ) | 91,192,445 | (9,324,148 | ) | 83,628,423 | 2,061 | 3,067 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| (15,870,664 | ) | (12,166,595 | ) | (30,066,192 | ) | (37,555,588 | ) | (9,207 | ) | (7,668 | ) | |||||||||||
| (1,232,199 | ) | (705,046 | ) | (6,172,793 | ) | (5,910,650 | ) | - | - | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| (17,102,863 | ) | (12,871,641 | ) | (36,238,985 | ) | (43,466,238 | ) | (9,207 | ) | (7,668 | ) | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| (34,664,123 | ) | - | (5,019,665 | ) | - | (177 | ) | (1,789 | ) | |||||||||||||
| (2,957,887 | ) | - | (922,401 | ) | - | - | - | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| (37,622,010 | ) | - | (5,942,066 | ) | - | (177 | ) | (1,789 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| (13,792,049 | ) | (61,870,837 | ) | (199,761,615 | ) | 60,389,551 | (84,793,576 | ) | (19,693,194 | ) | ||||||||||||
| 18,928,564 | 10,417,990 | 37,617,830 | 33,556,721 | - | - | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| 5,136,515 | (51,452,847 | ) | (162,143,785 | ) | 93,946,272 | (84,793,576 | ) | (19,693,194 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| (77,494,706 | ) | 26,867,957 | (213,648,984 | ) | 134,108,457 | (84,800,899 | ) | (19,699,584 | ) | |||||||||||||
| 855,907,832 | 829,039,875 | 1,435,998,984 | 1,301,890,527 | 252,701,070 | 272,400,654 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| $ | 778,413,126 | $ | 855,907,832 | $ | 1,222,350,000 | $ | 1,435,998,984 | $ | 167,900,171 | $ | 252,701,070 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| $ |
13,534,450 |
|
$ | 17,298,659 | $ | 1,745,901 | $ | 140,475 | $ | - | $ | - | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| $ | - | $ | - | $ | - | $ | - | $ | (46,326 | ) | $ | (37,376 | ) | |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
79
Table of Contents
MML Series Investment Fund II – Financial Statements (Continued)
Financial Highlights (For a share outstanding throughout each period)
MML Blend Fund
| Income (loss) from investment operations |
Less distributions to shareholders | Ratios / Supplemental Data | ||||||||||||||||||||||||||||||||||||||||||||||
| Net asset value, beginning of the period |
Net investment income (loss)c |
Net realized and unrealized gain (loss) on investments |
Total income (loss) from investment operations |
From net investment income |
From net realized gains |
Total distributions |
Net asset value, end of the period |
Total returnm |
Net assets, end of the period (000’s) |
Ratio of expenses to average daily net assets |
Net investment income (loss) to average daily net assets |
|||||||||||||||||||||||||||||||||||||
| Initial Class | ||||||||||||||||||||||||||||||||||||||||||||||||
| 12/31/15 | $ | 24.51 | $ | 0.48 | $ | (0.45 | ) | $ | 0.03 | $ | (0.50 | ) | $ | (1.82 | ) | $ | (2.32 | ) | $ | 22.22 | 0.08% | $ | 586,082 | 0.45% | 2.07% | |||||||||||||||||||||||
| 12/31/14 | 22.78 | 0.45 | 2.01 | 2.46 | (0.49 | ) | (0.24 | ) | (0.73 | ) | 24.51 | 10.99% | 644,881 | 0.45% | 1.92% | |||||||||||||||||||||||||||||||||
| 12/31/13 | 19.33 | 0.41 | 3.48 | 3.89 | (0.44 | ) | - | (0.44 | ) | 22.78 | 20.31% | 639,537 | 0.46% | 1.94% | ||||||||||||||||||||||||||||||||||
| 12/31/12 | 17.52 | 0.39 | 1.82 | 2.21 | (0.40 | ) | - | (0.40 | ) | 19.33 | 12.65% | 584,660 | 0.46% | 2.09% | ||||||||||||||||||||||||||||||||||
| 12/31/11 | 17.08 | 0.36 | 0.45 | 0.81 | (0.37 | ) | - | (0.37 | ) | 17.52 | 4.78% | 552,072 | 0.49% | 2.05% | ||||||||||||||||||||||||||||||||||
| Service Class | ||||||||||||||||||||||||||||||||||||||||||||||||
| 12/31/15 | $ | 24.48 | $ | 0.42 | $ | (0.46 | ) | $ | (0.04 | ) | $ | (0.44 | ) | $ | (1.82 | ) | $ | (2.26 | ) | $ | 22.18 | (0.17% | ) | $ | 47,555 | 0.70% | 1.83% | |||||||||||||||||||||
| 12/31/14 | 22.75 | 0.39 | 2.01 | 2.40 | (0.43 | ) | (0.24 | ) | (0.67 | ) | 24.48 | 10.71% | 40,333 | 0.70% | 1.68% | |||||||||||||||||||||||||||||||||
| 12/31/13 | 19.30 | 0.36 | 3.47 | 3.83 | (0.38 | ) | - | (0.38 | ) | 22.75 | 20.01% | 30,932 | 0.71% | 1.70% | ||||||||||||||||||||||||||||||||||
| 12/31/12 | 17.50 | 0.35 | 1.80 | 2.15 | (0.35 | ) | - | (0.35 | ) | 19.30 | 12.36% | 22,114 | 0.71% | 1.85% | ||||||||||||||||||||||||||||||||||
| 12/31/11 | 17.06 | 0.32 | 0.44 | 0.76 | (0.32 | ) | - | (0.32 | ) | 17.50 | 4.52% | 12,331 | 0.74% | 1.82% | ||||||||||||||||||||||||||||||||||
| Year ended December 31 | ||||||||||||||||||||
| 2015 | 2014 | 2013 | 2012 | 2011 | ||||||||||||||||
| Portfolio turnover rate |
209 | % | 183 | % | 235 | % | 251 | % | 285 | % | ||||||||||
| c | Per share amount calculated on the average shares method. |
| m | Total return does not reflect expenses that apply at the separate account level or to related insurance products. Inclusion of these charges would reduce the total return figures for all periods shown. |
The accompanying notes are an integral part of the financial statements.
80
Table of Contents
MML Series Investment Fund II – Financial Statements (Continued)
Financial Highlights (For a share outstanding throughout each period)
MML Equity Fund
| Income (loss) from investment operations |
Less distributions to shareholders | Ratios / Supplemental Data: | ||||||||||||||||||||||||||||||||||||||||||||||
| Net asset value, beginning of the period |
Net investment income (loss)c |
Net realized and unrealized gain (loss) on investments |
Total income (loss) from investment operations |
From net investment income |
From net realized gains |
Total distributions |
Net asset value, end of the period |
Total returnm |
Net assets, end of the period (000’s) |
Ratio of expenses to average daily net assets |
Net investment income (loss) to average daily net assets |
|||||||||||||||||||||||||||||||||||||
| Initial Class |
|
|||||||||||||||||||||||||||||||||||||||||||||||
| 12/31/15 | $ | 30.28 | $ | 0.50 | $ | (1.67 | ) | $ | (1.17 | ) | $ | (0.64 | ) | $ | (1.39 | ) | $ | (2.03 | ) | $ | 27.08 | (3.43% | ) | $ | 709,315 | 0.43% | 1.69% | |||||||||||||||||||||
| 12/31/14 | 27.55 | 0.61 | 2.57 | 3.18 | (0.45 | ) | - | (0.45 | ) | 30.28 | 11.57% | 799,222 | 0.43% | 2.12% | ||||||||||||||||||||||||||||||||||
| 12/31/13 | 21.07 | 0.41 | 6.54 | 6.95 | (0.47 | ) | - | (0.47 | ) | 27.55 | 33.27% | 787,449 | 0.44% | 1.69% | ||||||||||||||||||||||||||||||||||
| 12/31/12 | 18.51 | 0.38 | 2.58 | 2.96 | (0.40 | ) | - | (0.40 | ) | 21.07 | 16.05% | 709,969 | 0.44% | 1.92% | ||||||||||||||||||||||||||||||||||
| 12/31/11 | 19.57 | 0.34 | (1.09 | ) | (0.75 | ) | (0.31 | ) | - | (0.31 | ) | 18.51 | (3.76% | ) | 778,897 | 0.44% | 1.72% | |||||||||||||||||||||||||||||||
| Service Class |
|
|||||||||||||||||||||||||||||||||||||||||||||||
| 12/31/15 | $ | 30.01 | $ | 0.42 | $ | (1.65 | ) | $ | (1.23 | ) | $ | (0.58 | ) | $ | (1.39 | ) | $ | (1.97 | ) | $ | 26.81 | (3.67% | ) | $ | 69,098 | 0.68% | 1.45% | |||||||||||||||||||||
| 12/31/14 | 27.34 | 0.52 | 2.56 | 3.08 | (0.41 | ) | - | (0.41 | ) | 30.01 | 11.29% | 56,685 | 0.68% | 1.82% | ||||||||||||||||||||||||||||||||||
| 12/31/13 | 20.93 | 0.35 | 6.49 | 6.84 | (0.43 | ) | - | (0.43 | ) | 27.34 | 32.94% | 41,591 | 0.69% | 1.44% | ||||||||||||||||||||||||||||||||||
| 12/31/12 | 18.41 | 0.34 | 2.54 | 2.88 | (0.36 | ) | - | (0.36 | ) | 20.93 | 15.76% | 26,073 | 0.69% | 1.69% | ||||||||||||||||||||||||||||||||||
| 12/31/11 | 19.48 | 0.30 | (1.09 | ) | (0.79 | ) | (0.28 | ) | - | (0.28 | ) | 18.41 | (4.00% | ) | 18,493 | 0.69% | 1.55% | |||||||||||||||||||||||||||||||
| Year ended December 31 | ||||||||||||||||||||
| 2015 | 2014 | 2013 | 2012 | 2011 | ||||||||||||||||
| Portfolio turnover rate |
39 | % | 38 | % | 100 | % | 65 | % | 65 | % | ||||||||||
| c | Per share amount calculated on the average shares method. |
| m | Total return does not reflect expenses that apply at the separate account level or to related insurance products. Inclusion of these charges would reduce the total return figures for all periods shown. |
The accompanying notes are an integral part of the financial statements.
81
Table of Contents
MML Series Investment Fund II – Financial Statements (Continued)
Financial Highlights (For a share outstanding throughout each period)
MML Managed Bond Fund
| Income (loss) from investment operations |
Less distributions to shareholders | Ratios / Supplemental Data | ||||||||||||||||||||||||||||||||||||||||||||||
| Net asset value, beginning of the period |
Net investment income (loss)c |
Net realized and unrealized gain (loss) on investments |
Total income (loss) from investment operations |
From net investment income |
From net realized gains |
Total distributions |
Net asset value, end of the period |
Total returnm |
Net assets, end of the period (000’s) |
Ratio of expenses to average daily net assets |
Net investment income (loss) to average daily net assets |
|||||||||||||||||||||||||||||||||||||
| Initial Class |
|
|||||||||||||||||||||||||||||||||||||||||||||||
| 12/31/15 | $ | 12.82 | $ | 0.33 | $ | (0.43 | ) | $ | (0.10 | ) | $ | (0.36 | ) | $ | (0.05 | ) | $ | (0.41 | ) | $ | 12.31 | (0.75% | ) | $ | 976,932 | 0.39% | 2.59% | |||||||||||||||||||||
| 12/31/14 | 12.44 | 0.32 | 0.47 | 0.79 | (0.41 | ) | - | (0.41 | ) | 12.82 | 6.46% | 1,218,504 | 0.39% | 2.47% | ||||||||||||||||||||||||||||||||||
| 12/31/13 | 13.20 | 0.31 | (0.52 | ) | (0.21 | ) | (0.40 | ) | (0.15 | ) | (0.55 | ) | 12.44 | (1.64% | ) | 1,123,545 | 0.39% | 2.46% | ||||||||||||||||||||||||||||||
| 12/31/12 | 12.99 | 0.35 | 0.38 | 0.73 | (0.38 | ) | (0.14 | ) | (0.52 | ) | 13.20 | 5.77% | 1,027,945 | 0.40% | 2.66% | |||||||||||||||||||||||||||||||||
| 12/31/11 | 12.80 | 0.47 | 0.44 | 0.91 | (0.48 | ) | (0.24 | ) | (0.72 | ) | 12.99 | 7.31% | 864,477 | 0.41% | 3.63% | |||||||||||||||||||||||||||||||||
| Service Class |
|
|||||||||||||||||||||||||||||||||||||||||||||||
| 12/31/15 | $ | 12.80 | $ | 0.30 | $ | (0.43 | ) | $ | (0.13 | ) | $ | (0.33 | ) | $ | (0.05 | ) | $ | (0.38 | ) | $ | 12.29 | (1.00% | ) | $ | 245,418 | 0.64% | 2.36% | |||||||||||||||||||||
| 12/31/14 | 12.42 | 0.28 | 0.48 | 0.76 | (0.38 | ) | - | (0.38 | ) | 12.80 | 6.19% | 217,495 | 0.64% | 2.22% | ||||||||||||||||||||||||||||||||||
| 12/31/13 | 13.18 | 0.28 | (0.52 | ) | (0.24 | ) | (0.37 | ) | (0.15 | ) | (0.52 | ) | 12.42 | (1.88% | ) | 178,346 | 0.64% | 2.21% | ||||||||||||||||||||||||||||||
| 12/31/12 | 12.97 | 0.32 | 0.38 | 0.70 | (0.35 | ) | (0.14 | ) | (0.49 | ) | 13.18 | 5.51% | 149,124 | 0.65% | 2.40% | |||||||||||||||||||||||||||||||||
| 12/31/11 | 12.79 | 0.43 | 0.44 | 0.87 | (0.45 | ) | (0.24 | ) | (0.69 | ) | 12.97 | 7.04% | 101,863 | 0.66% | 3.34% | |||||||||||||||||||||||||||||||||
| Year ended December 31 | ||||||||||||||||||||
| 2015 | 2014 | 2013 | 2012 | 2011 | ||||||||||||||||
| Portfolio turnover rate |
358 | % | 368 | % | 313 | % | 279 | % | 186 | % | ||||||||||
| c | Per share amount calculated on the average shares method. |
| m | Total return does not reflect expenses that apply at the separate account level or to related insurance products. Inclusion of these charges would reduce the total return figures for all periods shown. |
The accompanying notes are an integral part of the financial statements.
82
Table of Contents
MML Series Investment Fund II – Financial Statements (Continued)
Financial Highlights (For a share outstanding throughout each period)
MML Money Market Fund
| Income (loss) from investment operations |
Less distributions to shareholders | Ratios / Supplemental Data | ||||||||||||||||||||||||||||||||||||||||||||||
| Net asset value, beginning of the period |
Net investment income (loss)c,j |
Net realized and unrealized gain (loss) on investments |
Total income (loss) from investment operations |
From net investment income |
From net realized gains |
Total distributions |
Net asset value, end of the period |
Total returnm |
Net assets, end of the period (000’s) |
Ratio of expenses to average daily net assets before expense waivers |
Ratio of expenses to average daily net assets after expense waiversj |
|||||||||||||||||||||||||||||||||||||
| Initial Class |
|
|||||||||||||||||||||||||||||||||||||||||||||||
| 12/31/15 | $ | 1.00 | $ | - | $ | 0.00 | d | $ | 0.00 | d | $ | (0.00 | )d | $ | (0.00 | )d | $ | (0.00 | )d | $ | 1.00 | 0.00% | e | $ | 167.900 | 0.52% | 0.15% | |||||||||||||||||||||
| 12/31/14 | 1.00 | - | 0.00 | d | 0.00 | d | (0.00 | )d | (0.00 | )d | (0.00 | )d | 1.00 | 0.00% | e | 252,701 | 0.51% | 0.11% | ||||||||||||||||||||||||||||||
| 12/31/13 | 1.00 | - | 0.00 | d | 0.00 | d | (0.00 | )d | - | (0.00 | )d | 1.00 | 0.00% | e | 272,401 | 0.51% | 0.14% | |||||||||||||||||||||||||||||||
| 12/31/12 | 1.00 | - | 0.00 | d | 0.00 | d | (0.00 | )d | (0.00 | )d | (0.00 | )d | 1.00 | 0.00% | e | 299,944 | 0.52% | 0.16% | ||||||||||||||||||||||||||||||
| 12/31/11 | 1.00 | - | 0.00 | d | 0.00 | d | (0.00 | )d | (0.00 | )d | (0.00 | )d | 1.00 | 0.00% | e | 189,532 | 0.54% | 0.17% | ||||||||||||||||||||||||||||||
| c | Per share amount calculated on the average shares method. |
| d | Amount is less than $0.005 per share. |
| e | Amount is less than 0.005%. |
| j | Computed after giving effect to an agreement by MML Advisers and/or MassMutual to waive certain fees and expenses of the Fund. |
| m | Total return does not reflect expenses that apply at the separate account level or to related insurance products. Inclusion of these charges would reduce the total return figures for all periods shown. |
The accompanying notes are an integral part of the financial statements.
83
Table of Contents
| 1. | The Funds |
MML Series Investment Fund II (the “Trust”) is registered under the Investment Company Act of 1940, as amended (the “1940 Act”), as a no-load, open-end, management investment company. The Trust is organized under the laws of the Commonwealth of Massachusetts as a Massachusetts business trust pursuant to an Agreement and Declaration of Trust dated February 8, 2005, which was amended and restated as of February 28, 2005 and December 15, 2011, as it may be further amended from time to time. The following are four series of the Trust (each individually referred to as a “Fund” or collectively as the “Funds”):
MML Blend Fund (“Blend Fund”)
MML Equity Fund (“Equity Fund”)
MML Managed Bond Fund (“Managed Bond Fund”)
MML Money Market Fund (“Money Market Fund”)
The Trust makes shares of the Funds available for the investment of assets of various separate investment accounts established by Massachusetts Mutual Life Insurance Company (“MassMutual”) and by life insurance companies which are subsidiaries of MassMutual. Shares of the Trust are not offered to the general public. MassMutual, MML Bay State Life Insurance Company, C.M. Life Insurance Company, and the MML Allocation Funds, which are “funds of funds” series of MML Series Investment Fund, another open-end management investment company sponsored by MassMutual, are the record owners of all of the outstanding shares of the Funds.
Each share class of a Fund represents an interest in the same portfolio of assets. The principal difference among the classes is the level of shareholder and distribution service expenses borne by the classes. Because each class will have different fees and expenses, performance and share prices will vary between the classes. The classes of shares are offered to different types of investors, as outlined in the Funds’ Prospectus.
On July 23, 2014, the U.S. Securities and Exchange Commission adopted amendments to money market fund regulations, which structurally change the way that certain money market funds will be required to operate. These amendments are generally not effective until sometime in 2016, but when implemented may affect the Money Market Fund’s operations and return potential.
| 2. | Significant Accounting Policies |
The following is a summary of significant accounting policies followed consistently by each Fund in the preparation of the financial statements in conformity with accounting principles generally accepted in the United States of America (“generally accepted accounting principles”). The preparation of the financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates.
Investment Valuation
The net asset value of each Fund’s shares is determined once daily as of the close of regular trading on the New York Stock Exchange (“NYSE”), on each day the NYSE is open for trading (a “business day”). The NYSE normally closes at 4:00 p.m. Eastern Time, but may close earlier on some days.
Equity securities and derivative contracts that are actively traded on a national securities exchange or contract market are valued on the basis of information furnished by a pricing service, which provides the last reported sale price, or, in the case of futures contracts, the settlement price, for securities or derivatives listed on the exchange or contract market or the official closing price on the NASDAQ National Market System, or in the case of over-the-counter (“OTC”) securities for which an official closing price is unavailable or not reported on the NASDAQ System, the last reported bid price. Portfolio securities traded on more than one national securities exchange are valued at the last price at the close of the exchange representing the principal market for such securities. Debt securities (with the exception of debt securities held by the Money Market Fund) are valued on the basis of valuations furnished by a pricing service, which generally determines valuations taking into account factors such as institutional-size trading in similar securities, yield, quality, coupon rate, maturity, type of issue, trading characteristics, and other market data. Shares of other open-end mutual funds are valued at their closing net asset values as reported on each business day. The Money Market Fund’s debt securities are typically valued at amortized cost, but may be valued using a vendor quote if the Fund’s investment adviser determines it more closely approximates current market value, in accordance with Rule 2a-7 under the 1940 Act pursuant to which the Money Market Fund must adhere to certain conditions. It is the intention of the Money Market Fund to maintain a stable net asset value per share, although this cannot be assured.
84
Table of Contents
Notes to Financial Statements (Continued)
Investments for which market quotations are readily available are marked to market daily based on those quotations. Market quotations may be provided by third-party vendors or market makers, and may be determined on the basis of a variety of factors, such as broker quotations, financial modeling, and other market data, such as market indexes and yield curves, counterparty information, and foreign exchange rates. U.S. Government and agency securities may be valued on the basis of market quotations or using a model that may incorporate market observable data such as reported sales of similar securities, broker quotes, yields, bids, offers, quoted market prices, and reference data. The fair values of OTC derivative contracts, including forward, swap, and option contracts related to interest rates, foreign currencies, credit standing of reference entities, equity prices, or commodity prices, may be based on market quotations or may be modeled using a series of techniques, including simulation models, depending on the contract and the terms of the transaction. The fair values of asset-backed securities and mortgage-backed securities are estimated based on models that consider the estimated cash flows of each debt tranche of the issuer, established benchmark yield, and estimated tranche-specific spread to the benchmark yield based on the unique attributes of the tranche, including, but not limited to, prepayment speed assumptions and attributes of the collateral. Restricted securities are generally valued at a discount to similar publicly traded securities.
Investments for which market quotations are not available or for which a pricing service or vendor does not provide a value, or for which such market quotations or values are considered by the investment adviser or subadviser to be unreliable (including, for example, certain foreign securities, thinly-traded securities, certain restricted securities, certain initial public offerings, or securities whose values may have been affected by a significant event) are stated at fair valuations determined in good faith by the Funds’ Valuation Committee1 in accordance with procedures approved annually by the Board of Trustees (“Trustees”), and under the general oversight of the Trustees. The Funds’ Valuation Committee employs various methods to determine fair valuations including a regular review of significant inputs and assumptions and review of any related market activity. The Funds’ Valuation Committee reports to the Trustees at their regularly scheduled meetings. It is possible that fair value prices will be used by the Funds to a significant extent. The value determined for an investment using the Funds’ fair value procedures may differ from recent market prices for the investment and may be significantly different from the value realized upon the sale of such investment.
The Funds may invest in securities that are traded principally in foreign markets and that trade on weekends and other days when the Funds do not price their shares. As a result, the values of the Funds’ portfolio securities may change on days when the prices of the Funds’ shares are not calculated. The prices of the Funds’ shares will reflect any such changes when the prices of the Funds’ shares are next calculated, which is the next business day. The Funds may use fair value pricing more frequently for securities primarily traded in foreign markets because, among other things, most foreign markets close well before the Funds value their securities. The earlier close of these foreign markets gives rise to the possibility that significant events, including broad market moves, may have occurred in the interim. The Funds’ investments may be priced based on fair values provided by a third-party vendor, based on certain factors and methodologies applied by such vendor, in the event that there is movement in the U.S. market, between the close of the foreign market and the time the Funds calculate their net asset values. All assets and liabilities expressed in foreign currencies are converted into U.S. dollars at the mean between the buying and selling rates of such currencies against the U.S. dollar at the end of each business day.
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A three-tier hierarchy is utilized to maximize the use of observable market data inputs and minimize the use of unobservable inputs and to establish classification of fair value measurements for disclosure purposes. Inputs refer broadly to the assumptions that market participants would use in pricing the asset or liability, including assumptions about risk, for example, the risk inherent in a particular valuation technique used to measure fair value (such as a pricing model) and/or the risk inherent in the inputs to the valuation technique. Inputs may be observable or unobservable. Observable inputs are inputs that reflect the assumptions market participants would use in pricing the asset or liability and are developed based on market data obtained from sources independent of the reporting entity. Unobservable inputs are inputs that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability and are developed based on the best information available in the circumstances. The three-tier hierarchy of inputs is summarized in the three broad Levels listed below. The inputs or methodology used for valuing investments are not necessarily an indication of the risk associated with investing in those investments and the determination of the significance of a particular input to the fair value measurement in its entirety requires judgment and consideration of factors specific to each security.
| 1 | The Valuation Committee consists of the President, Treasurer, Assistant Treasurers, Vice Presidents (except for the CCO), Secretary, and Assistant Secretaries of the Trust, as well as such alternate members as the Trustees may from time to time designate. The Valuation Committee reviews and determines the fair valuation of portfolio securities and the Funds’ pricing procedures in general. |
85
Table of Contents
Notes to Financial Statements (Continued)
Level 1 – quoted prices (unadjusted) in active markets for identical investments that the Funds can access at the measurement date
The types of assets and liabilities categorized in Level 1 generally include actively traded domestic and certain foreign equity securities, derivatives actively traded on a national securities exchange (such as some warrants, rights, futures, and options), and shares of open-end mutual funds.
Level 2 – other significant observable inputs (including quoted prices for similar investments, interest rates, prepayment speeds, credit risk, etc.)
The types of assets and liabilities categorized in Level 2 generally include debt securities such as U.S. government and agency securities, mortgage-backed securities, asset-backed securities, municipal obligations, sovereign debt obligations, bank loans, corporate bonds, and those securities valued at amortized cost; OTC derivatives such as swaps, options, swaptions, and forward foreign currency exchange contracts; certain restricted securities; and non-exchange traded equity securities and certain foreign equity securities traded on particular foreign exchanges that close before the Funds determine their net asset values.
Level 3 – significant unobservable inputs (including the Funds’ own assumptions in determining the fair value of investments)
The types of assets and liabilities categorized in Level 3 generally include securities for which prices, spreads, or any of the other aforementioned significant inputs are unobservable. Generally, securities whose trading has been suspended or that have been de-listed from their current primary trading exchange; securities in default or bankruptcy proceedings for which there is no current market quotation; securities and certain derivatives valued by broker quotes which may include brokers’ assumptions; and any illiquid Rule 144A securities or restricted securities issued by non-public entities are categorized in Level 3.
The availability of observable inputs can vary from security to security and is affected by a wide variety of factors, including, for example, the type of security, whether the security is new and not yet established in the marketplace, the liquidity of markets, and other characteristics particular to the security. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised in determining fair value is greatest for instruments categorized in Level 3.
Changes in valuation techniques may result in transfers in or out of an investment’s assigned Level within the hierarchy. In addition, in periods of market dislocation, the observability of prices and inputs may be reduced for many instruments. This condition, as well as changes related to liquidity of investments, could cause a security to be reclassified between Level 1, Level 2, or Level 3.
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes the level in the fair value hierarchy within which the fair value measurement falls is determined based on the lowest level input that is significant to the overall fair value measurement.
The Money Market Fund characterized all investments at Level 2, as of December 31, 2015. For the Money Market Fund, the level classification by major category of investments is the same as the category presentation in the Portfolio of Investments.
86
Table of Contents
Notes to Financial Statements (Continued)
The following is the aggregate value by input level, as of December 31, 2015, for the remaining Funds’ investments:
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Blend Fund |
||||||||||||||||
| Asset Investments |
||||||||||||||||
| Common Stock |
$ | 432,670,331 | $ | - | $ | - | $ | 432,670,331 | ||||||||
| Preferred Stock |
581,912 | - | - | 581,912 | ||||||||||||
| Corporate Debt |
- | 94,071,619 | - | 94,071,619 | ||||||||||||
| Municipal Obligations |
- | 2,899,330 | - | 2,899,330 | ||||||||||||
| Non-U.S. Government Agency Obligations |
- | 43,626,282 | 83,266 | 43,709,548 | ||||||||||||
| Sovereign Debt Obligations |
- | 2,065,502 | - | 2,065,502 | ||||||||||||
| U.S. Government Agency Obligations and Instrumentalities |
- | 54,029,693 | - | 54,029,693 | ||||||||||||
| U.S. Treasury Obligations |
- | 1,370,418 | - | 1,370,418 | ||||||||||||
| Purchased Options |
- | 66,394 | - | 66,394 | ||||||||||||
| Rights |
- | - | 19,928 | 19,928 | ||||||||||||
| Short-Term Investments |
- | 37,071,908 | - | 37,071,908 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total Investments | $ | 433,252,243 | $ | 235,201,146 | $ | 103,194 | $ | 668,556,583 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Asset Derivatives |
||||||||||||||||
| Futures Contracts |
$ | 144,605 | $ | - | $ | - | $ | 144,605 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Liability Derivatives |
||||||||||||||||
| Futures Contracts |
$ | (120,623 | ) | $ | - | $ | - | $ | (120,623 | ) | ||||||
| Swap Agreements |
- | (15,715 | ) | - | (15,715 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total | $ | (120,623 | ) | $ | (15,715 | ) | $ | - | $ | (136,338 | ) | |||||
|
|
|
|
|
|
|
|
|
|||||||||
| Equity Fund |
||||||||||||||||
| Asset Investments |
||||||||||||||||
| Common Stock |
$ | 760,505,666 | $ | 7,546,247 | $ | - | $ | 768,051,913 | ||||||||
| Mutual Funds |
17,009,458 | - | - | 17,009,458 | ||||||||||||
| Short-Term Investments |
- | 9,100,625 | - | 9,100,625 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total Investments | $ | 777,515,124 | $ | 16,646,872 | $ | - | $ | 794,161,996 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Managed Bond Fund |
||||||||||||||||
| Asset Investments |
||||||||||||||||
| Preferred Stock |
$ | 2,919,673 | $ | - | $ | - | $ | 2,919,673 | ||||||||
| Corporate Debt |
- | 587,215,213 | - | 587,215,213 | ||||||||||||
| Municipal Obligations |
- | 15,551,847 | - | 15,551,847 | ||||||||||||
| Non-U.S. Government Agency Obligations |
- | 254,670,806 | 509,567 | 255,180,373 | ||||||||||||
| Sovereign Debt Obligations |
- | 9,873,769 | - | 9,873,769 | ||||||||||||
| U.S. Government Agency Obligations and Instrumentalities |
- | 314,792,281 | - | 314,792,281 | ||||||||||||
| U.S. Treasury Obligations |
- | 16,005,612 | - | 16,005,612 | ||||||||||||
| Purchased Options |
- | 406,098 | - | 406,098 | ||||||||||||
| Short-Term Investments |
- | 221,031,874 | - | 221,031,874 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total Investments | $ | 2,919,673 | $ | 1,419,547,500 | $ | 509,567 | $ | 1,422,976,740 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Asset Derivatives |
||||||||||||||||
| Futures Contracts |
$ | 764,501 | $ | - | $ | - | $ | 764,501 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Liability Derivatives |
||||||||||||||||
| Futures Contracts |
$ | (691,056 | ) | $ | - | $ | - | $ | (691,056 | ) | ||||||
| Swap Agreements |
- | (100,577 | ) | - | (100,577 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total | $ | (691,056 | ) | $ | (100,577 | ) | $ | - | $ | (791,633 | ) | |||||
|
|
|
|
|
|
|
|
|
|||||||||
87
Table of Contents
Notes to Financial Statements (Continued)
The following table shows Funds with certain assets and liabilities, which approximate fair value and would be categorized at Level 2 as of December 31, 2015.
| Statements of Asset and Liabilities location: |
Blend Fund |
Equity Fund |
Managed Bond Fund | |||
| Payables for: |
||||||
| Investments purchased on a when-issued basis |
X | X | ||||
| Securities on loan |
X | |||||
| Collateral held for open derivative contracts |
X | |||||
| Due to custodian |
X | X | ||||
The Funds had no transfers between Level 1 and Level 2 of the fair value hierarchy during the year ended December 31, 2015. The Funds recognize transfers between the Levels as of the beginning of the year.
Following is a reconciliation of investments for which significant unobservable inputs (Level 3) were used in determining value:
Asset Valuation Inputs
| Investments in Securities | ||||||||||||||||||||||||||||||||||||||||
| Balance as of 12/31/14 |
Accrued Discounts (Premiums) |
Realized Gain (Loss) |
Change in Unrealized Appreciation (Depreciation) |
Purchases | (Sales) | Transfers into Level 3* |
Transfers (out) of Level 3* |
Balance as of 12/31/15 |
Net Change in Unrealized Appreciation (Depreciation) from Investments Still Held as of 12/31/15 |
|||||||||||||||||||||||||||||||
| Blend Fund |
|
|||||||||||||||||||||||||||||||||||||||
| Non-U.S. Government Agency Obligations† |
$ | 165,398 | $ | - | $ | 367 | $ | 59 | $ | 249,531 | $ | (332,089 | ) | $ | - | $ | - | $ | 83,266 | $ | 59 | |||||||||||||||||||
| Rights |
- | - | - | - | 19,928 | - | - | - | 19,928 | - | ||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
| $ | 165,398 | $ | - | $ | 367 | $ | 59 | $ | 269,459 | $ | (332,089 | ) | $ | - | $ | - | $ | 103,194 | $ | 59 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
| Managed Bond Fund |
|
|||||||||||||||||||||||||||||||||||||||
| Non-U.S. Government Agency Obligations† |
$ | 926,227 | $ | - | $ | 2,350 | $ | 377 | $ | 1,597,000 | $ | (2,016,387 | ) | $ | - | $ | - | $ | 509,567 | $ | 377 | |||||||||||||||||||
| Non-U.S. Government Agency Obligations |
- | - | - | - | 1,199,990 | (117,831 | ) | - | (1,082,159 | )** | - | - | ||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
| $ | 926,227 | $ | - | $ | 2,350 | $ | 377 | $ | 2,796,990 | $ | (2,134,218 | ) | $ | - | $ | (1,082,159 | ) | $ | 509,567 | $ | 377 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
| * | The Fund(s) recognize transfers between the Levels as of the beginning of the year. |
| ** | Transfers occurred between Level 3 and Level 2 as inputs were more observable. |
| † | Represents (i) an illiquid 144A security valued by a broker quote or vendor price or (ii) a restricted security issued by a non-public entity valued by a broker quote or vendor price. |
None of the unobservable inputs, individually or collectively, had a material impact on the Fund(s).
Derivative Instruments
Derivatives are financial instruments whose values are based on the values of one or more indicators, such as a security, asset, currency, interest rate, or index. Derivative transactions can create investment leverage and may be highly volatile. Gains or losses from derivatives can be substantially greater than the derivatives original cost and can sometimes be unlimited. A Fund may not be able to close out a derivative transaction at a favorable time or price. For those Funds that held derivatives during the year
88
Table of Contents
Notes to Financial Statements (Continued)
ended December 31, 2015, the following table shows how the Fund used these types of derivatives during the period (marked with an “A”), as well as additional uses, if any, it may have for them in the future (marked with an “M”).
| Type of Derivatives and Objective for Use |
Blend Fund |
Managed Bond fund | ||
| Futures Contracts* |
||||
| Hedging/Risk Management |
A | A | ||
| Duration/Credit Quality Management |
A | A | ||
| Substitution for Direct Investment |
A | A | ||
| Intention to Create Investment Leverage in Portfolio |
M | M | ||
| Interest Rate Swaps** |
||||
| Hedging/Risk Management |
A | A | ||
| Duration Management |
M | M | ||
| Asset/Liability Management |
M | M | ||
| Substitution for Direct Investment |
M | M | ||
| Intention to Create Investment Leverage in Portfolio |
M | M | ||
| Credit Default Swaps (Protection Buyer) |
||||
| Hedging/Risk Management |
A | A | ||
| Duration/Credit Quality Management |
A | A | ||
| Income |
A | A | ||
| Substitution for Direct Investment |
A | A | ||
| Intention to Create Investment Leverage in Portfolio |
M | M | ||
| Credit Default Swaps (Protection Seller) |
||||
| Hedging/Risk Management |
A | A | ||
| Duration/Credit Quality Management |
A | A | ||
| Income |
A | A | ||
| Substitution for Direct Investment |
A | A | ||
| Intention to Create Investment Leverage in Portfolio |
M | M | ||
| Options (Purchased) |
||||
| Hedging/Risk Management |
A | A | ||
| Duration/Credit Quality Management |
A | A | ||
| Substitution for Direct Investment |
A | A | ||
| Directional Investment |
A | A | ||
| Intention to Create Investment Leverage in Portfolio |
M | M | ||
| Rights and Warrants |
||||
| Hedging/Risk Management |
M | |||
| Duration/Credit Quality Management |
M | |||
| Directional Investment |
M | |||
| Intention to Create Investment Leverage in Portfolio |
M | |||
| Result of a Corporate Action |
A | |||
| * | Includes any options purchased or written on futures contracts, if applicable. |
| ** | Includes any caps, floors, and collars, and related purchased or written options, if applicable. |
89
Table of Contents
Notes to Financial Statements (Continued)
At December 31, 2015, and during the year then ended, the Fund(s) had the following derivatives and transactions in derivatives, grouped into the indicated risk categories:
| Credit Risk |
Equity Risk |
Interest Rate Risk |
Total | |||||||||||||
| Blend Fund | ||||||||||||||||
| Asset Derivatives | ||||||||||||||||
| Purchased Options* |
$ | 66,394 | $ | - | $ | - | $ | 66,394 | ||||||||
| Futures Contracts^^ |
- | - | 144,605 | 144,605 | ||||||||||||
| Rights |
- | 19,928 | - | 19,928 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total Value |
$ | 66,394 | $ | 19,928 | $ | 144,605 | $ | 230,927 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Liability Derivatives | ||||||||||||||||
| Futures Contracts^^ |
$ | - | $ | - | $ | (120,623 | ) | $ | (120,623 | ) | ||||||
| Swap Agreements^ |
(15,715 | ) | - | - | (15,715 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total Value |
$ | (15,715 | ) | $ | - | $ | (120,623 | ) | $ | (136,338 | ) | |||||
|
|
|
|
|
|
|
|
|
|||||||||
| Realized Gain (Loss)# | ||||||||||||||||
| Purchased Options |
$ | - | $ | - | $ | 435,215 | $ | 435,215 | ||||||||
| Futures Contracts |
- | 187,626 | 202,358 | 389,984 | ||||||||||||
| Swap Agreements |
(28,260 | ) | - | (430,514 | ) | (458,774 | ) | |||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total Realized Gain (Loss) |
$ | (28,260 | ) | $ | 187,626 | $ | 207,059 | $ | 366,425 | |||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Change in Appreciation (Depreciation)## | ||||||||||||||||
| Purchased Options |
$ | (50,741 | ) | $ | - | $ | (159,336 | ) | $ | (210,077 | ) | |||||
| Futures Contracts |
- | - | (109,426 | ) | (109,426 | ) | ||||||||||
| Swap Agreements |
3,697 | - | 241,999 | 245,696 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total Change in Appreciation (Depreciation) |
$ | (47,044 | ) | $ | - | $ | (26,763 | ) | $ | (73,807 | ) | |||||
|
|
|
|
|
|
|
|
|
|||||||||
| Number of Contracts, Notional Amounts or Shares/Units† | ||||||||||||||||
| Purchased Options |
$ | 56,650,000 | $ | - | $ | 17,900,000 | $ | 74,550,000 | ||||||||
| Futures Contracts |
- | 158 | 585 | 743 | ||||||||||||
| Swap Agreements |
$ | 1,603,571 | $ | - | $ | 5,385,000 | $ | 6,988,571 | ||||||||
| Rights |
- | 37,600 | - | 37,600 | ||||||||||||
| Managed Bond Fund | ||||||||||||||||
| Asset Derivatives | ||||||||||||||||
| Purchased Options* |
$ | 406,098 | $ | - | $ | - | $ | 406,098 | ||||||||
| Futures Contracts^^ |
- | - | 764,501 | 764,501 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total Value |
$ | 406,098 | $ | - | $ | 764,501 | $ | 1,170,599 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Liability Derivatives | ||||||||||||||||
| Futures Contracts^^ |
$ | - | $ | - | $ | (691,056 | ) | $ | (691,056 | ) | ||||||
| Swap Agreements^ |
(100,577 | ) | - | - | (100,577 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total Value |
$ | (100,577 | ) | $ | - | $ | (691,056 | ) | $ | (791,633 | ) | |||||
|
|
|
|
|
|
|
|
|
|||||||||
| Realized Gain (Loss)# | ||||||||||||||||
| Purchased Options |
$ | - | $ | - | $ | 2,692,257 | $ | 2,692,257 | ||||||||
| Futures Contracts |
- | - | 3,084,342 | 3,084,342 | ||||||||||||
| Swap Agreements |
(164,182 | ) | - | (2,657,458 | ) | (2,821,640 | ) | |||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total Realized Gain (Loss) |
$ | (164,182 | ) | $ | - | $ | 3,119,141 | $ | 2,954,959 | |||||||
|
|
|
|
|
|
|
|
|
|||||||||
90
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| Credit Risk |
Equity Risk |
Interest Rate Risk |
Total | |||||||||||||
| Managed Bond Fund (Continued) | ||||||||||||||||
| Change in Appreciation (Depreciation)## | ||||||||||||||||
| Purchased Options |
$ | (310,362 | ) | $ | - | $ | (985,658 | ) | $ | (1,296,020 | ) | |||||
| Futures Contracts |
- | - | (316,211 | ) | (316,211 | ) | ||||||||||
| Swap Agreements |
14,249 | - | 1,497,383 | 1,511,632 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total Change in Appreciation (Depreciation) |
$ | (296,113 | ) | $ | - | $ | 195,514 | $ | (100,599 | ) | ||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Number of Contracts, Notional Amounts or Shares/Units† | ||||||||||||||||
| Purchased Options |
$ | 346,500,000 | $ | - | $ | 110,730,000 | $ | 457,230,000 | ||||||||
| Futures Contracts |
- | - | 2,833 | 2,833 | ||||||||||||
| Swap Agreements |
$ | 9,692,857 | $ | - | $ | 33,320,000 | $ | 43,012,857 | ||||||||
| * | Statements of Assets and Liabilities location: Investments, at value. |
| ^ | Statements of Assets and Liabilities location: Payables for: open swap agreements, at value. |
| ^^ | Cumulative appreciation (depreciation) on futures contracts is reported in “Futures Contracts” below. Only current day’s variation margin, if any, is reported within the Statements of Assets and Liabilities. |
| # | Statements of Operations location: Amounts are included in net realized gain (loss) on: investment transactions, futures contracts, or swap agreements, as applicable. |
| ## | Statements of Operations location: Amounts are included in net change in unrealized appreciation (depreciation) on: investment transactions, futures contracts, or swap agreements, as applicable. |
| † | Amount(s) disclosed represent average number of contracts for futures contracts, notional amounts for purchased options and swap agreements, or shares/units outstanding for rights, which is indicative of volume of this derivative type, for the months that the Fund held such derivatives during the year ended December 31, 2015. |
The Blend Fund had no change in appreciation (depreciation) on rights during the year ended December 31, 2015.
The following table presents derivative assets by counterparty net of amounts available for offset under a master netting agreement (“MNA”), or similar agreement, and net of the related collateral received by the Fund(s) as of December 31, 2015.
| Counterparty |
Derivative Assets Subject to a MNA by Counterparty† |
Financial Instruments Available for Offset |
Collateral Received*** |
Net Amount* |
||||||||||||
| Blend Fund | ||||||||||||||||
| JP Morgan Chase Bank |
$ | 66,394 | $ | - | $ | - | $ | 66,394 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Managed Bond Fund | ||||||||||||||||
| JP Morgan Chase Bank |
$ | 406,098 | $ | - | $ | (406,098 | ) | $ | - | |||||||
|
|
|
|
|
|
|
|
|
|||||||||
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The following table presents derivative liabilities by counterparty net of amounts available for offset under an MNA, or similar agreement, and net of the related collateral pledged by the Fund(s) as of December 31, 2015.
| Counterparty |
Derivative Liabilities Subject to a MNA by Counterparty† |
Financial Instruments Available for Offset |
Collateral Pledged*** |
Net Amount** |
||||||||||||
| Blend Fund | ||||||||||||||||
| Goldman Sachs International |
$ |
(15,715 |
) |
$ |
- |
|
$ |
- |
|
$ |
(15,715 |
) | ||||
|
|
|
|
|
|
|
|
|
|||||||||
| Managed Bond Fund | ||||||||||||||||
| Goldman Sachs International |
$ | (100,577 | ) | $ | - | $ | - | $ | (100,577 | ) | ||||||
|
|
|
|
|
|
|
|
|
|||||||||
| * | Represents the net amount receivable from the counterparty in the event of default. |
| ** | Represents the net amount payable to the counterparty in the event of default. |
| *** | The amount presented here may be less than the total amount of collateral received/pledged as the net amount of derivative assets and liabilities for a counterparty cannot be less than $0. |
| † | The amount presented here may be less than the total amount shown in the Statement of Assets and Liabilities as some derivatives held by the counterparty are not covered within the master netting agreements. |
Such agreements typically permit a single net payment in the event of default, including the bankruptcy or insolvency of the counterparty. Typically, the Fund(s) and counterparties are not permitted to sell, re-pledge, or use the collateral they receive.
Further details regarding the derivatives and other investments held by the Fund(s) during the year ended December 31, 2015, are discussed below.
Futures Contracts
A Fund may seek to manage a variety of different risks, such as interest rate risk, equity price risk, and currency risk, through the use of futures contracts. A Fund may use interest rate futures contracts to adjust the interest rate sensitivity (duration) of its portfolio or the credit exposure of the portfolio. Interest rate futures contracts obligate the long or short holder to take or make delivery of a specified quantity of a financial instrument, such as a specific fixed-income security, during a specified future period at a specified price. A Fund may use index futures to hedge against broad market risks to its portfolio or to gain broad market exposure when it holds uninvested cash or as an inexpensive substitute for cash investments directly in securities or other assets. Securities index futures contracts are contracts to buy or sell units of a securities index at a specified future date at a price agreed upon when the contract is made and are settled in cash. Positions in futures may be closed out only on an exchange or board of trade which provides a secondary market for such futures. Because futures contracts are exchange-traded, they typically have minimal exposure to counterparty risk.
Parties to a futures contract are not required to post the entire notional amount of the contract, but rather a small percentage of that amount (by way of margin), both at the time they enter into futures transactions, and then on a daily basis if their positions decline in value; as a result, futures contracts are highly leveraged. Such payments are known as variation margin and are recorded by the Funds as unrealized gains or losses. Because futures markets are highly leveraged, they can be extremely volatile, and there can be no assurance that the pricing of a futures contract will correlate precisely with the pricing of the asset or index underlying it or the asset or liability of the Fund that is the subject of the hedge. It may not always be possible for a Fund to enter into a closing transaction with respect to a futures contract it has entered into, at a favorable time or price. When a Fund enters into a futures transaction, it is subject to the risk that the value of the futures contract will move in a direction unfavorable to it. When a Fund uses futures contracts for hedging purposes, it is likely that the Fund will have an asset or liability that will offset any loss (or gain) on the transactions, at least in part.
When a futures contract is closed, the Fund records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. Futures contracts are valued at the settlement price established each day by the board of trade or exchange on which they are traded.
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The Fund(s) listed in the following table had open futures contracts at December 31, 2015:
| Expiration Date |
Number of Contracts |
Notional Amount |
Net Unrealized Appreciation/ (Depreciation) |
|||||||||||||
| Blend Fund |
||||||||||||||||
| Futures Contracts — Long |
||||||||||||||||
| U.S. Ultra Bond |
03/21/16 | 74 | $ | 11,742,875 | $ | 68,475 | ||||||||||
| U.S. Treasury Note 2 Year |
03/31/16 | 40 | 8,689,375 | (14,254 | ) | |||||||||||
| U.S. Treasury Note 5 Year |
03/31/16 | 318 | 37,625,860 | (99,830 | ) | |||||||||||
|
|
|
|||||||||||||||
| $ | (45,609 | ) | ||||||||||||||
|
|
|
|||||||||||||||
| Futures Contracts — Short |
||||||||||||||||
| U.S. Long Bond |
03/21/16 | 26 | $ | (3,997,500 | ) | $ | (6,539 | ) | ||||||||
| U.S. Treasury Note 10 Year |
03/21/16 | 150 | (18,885,938 | ) | 76,130 | |||||||||||
|
|
|
|||||||||||||||
| $ | 69,591 | |||||||||||||||
|
|
|
|||||||||||||||
| Managed Bond Fund |
||||||||||||||||
| Futures Contracts — Long |
||||||||||||||||
| U.S. Ultra Bond |
03/21/16 | 468 | $ | 74,265,750 | $ | 444,518 | ||||||||||
| U.S. Treasury Note 2 Year |
03/31/16 | 257 | 55,829,235 | (90,962 | ) | |||||||||||
| U.S. Treasury Note 5 Year |
03/31/16 | 1,627 | 192,507,149 | (514,795 | ) | |||||||||||
|
|
|
|||||||||||||||
| $ | (161,239 | ) | ||||||||||||||
|
|
|
|||||||||||||||
| Futures Contracts — Short |
||||||||||||||||
| U.S. Long Bond |
03/21/16 | 197 | $ | (30,288,750 | ) | $ | (85,299 | ) | ||||||||
| U.S. Treasury Note 10 Year |
03/21/16 | 597 | (75,166,031 | ) | 319,983 | |||||||||||
|
|
|
|||||||||||||||
| $ | 234,684 | |||||||||||||||
|
|
|
|||||||||||||||
Swap Agreements
Swap agreements are typically two-party contracts entered into primarily by institutional investors. In a standard “swap” transaction, two parties agree to exchange the returns (or differentials in rates of return) earned or realized on particular predetermined investments or instruments, which may be adjusted for an interest factor. The gross returns to be exchanged or “swapped” between the parties are generally calculated with respect to a “notional amount,” (i.e., the return on or increase in value of a particular dollar amount invested at a particular interest rate or in a “basket” of securities representing a particular index).
Interest Rate Swaps. When a Fund enters into an interest rate swap, it typically agrees to make payments to its counterparty based on a specified long- or short-term interest rate, and will receive payments from its counterparty based on another interest rate. Other forms of interest rate swap agreements include interest rate caps, under which, in return for a specified payment stream, one party agrees to make payments to the other to the extent that interest rates exceed a specified rate, or “cap”; interest rate floors, under which, in return for a specified payment stream, one party agrees to make payments to the other to the extent that interest rates fall below a specified rate, or “floor”; and interest rate collars, under which a party sells a cap and purchases a floor or vice versa in an attempt to protect itself against interest rate movements exceeding given minimum or maximum levels. A Fund may enter into an interest rate swap in order, for example, to hedge against the effect of interest rate changes on the value of specific securities in its portfolio, or to adjust the interest rate sensitivity (duration) or the credit exposure of its portfolio overall, or otherwise as a substitute for a direct investment in debt securities.
Credit Default Swaps. A Fund also may enter into credit default swap transactions, as a “buyer” or “seller” of credit protection. In a credit default swap, one party provides what is in effect insurance against a default or other adverse credit event affecting an issuer of debt securities (typically referred to as a “reference entity”). In general, the buyer of credit protection is obligated to pay the protection seller an upfront amount or a periodic stream of payments over the term of the swap. If a “credit event” occurs, the buyer has the right to deliver to the seller bonds or other obligations of the reference entity (with a value up to the full notional
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value of the swap), and to receive a payment equal to the par value of the bonds or other obligations. Credit events that would trigger a request that the seller make payment are specific to each credit default swap agreement, but generally include bankruptcy, failure to pay, restructuring, acceleration, default, or repudiation/moratorium. When a Fund buys protection, it may or may not own securities of the reference entity. If it does own securities of the reference entity, the swap serves as a hedge against a decline in the value of the securities due to the occurrence of a credit event involving the issuer of the securities. If the Fund does not own securities of the reference entity, the credit default swap may be seen to create a short position in the reference entity. If a Fund is a buyer and no credit event occurs, the Fund will typically recover nothing under the swap, but will have had to pay the required upfront payment or stream of continuing payments under the swap. When a Fund sells protection under a credit default swap, the position may have the effect of creating leverage in the Fund’s portfolio through the Fund’s indirect long exposure to the issuer or securities on which the swap is written. When a Fund sells protection, it may do so either to earn additional income or to create a “synthetic” long position.
Whenever a Fund enters into a swap agreement, it takes on counterparty risk — the risk that its counterparty will be unable or unwilling to meet its obligations under the swap agreement. The Fund also takes the risk that the market will move against its position in the swap agreement. In the case of an interest rate swap, the value of the swap may increase or decrease depending on changes in interest rates. In the case of a credit default swap, the swap will become more or less valuable depending on the credit of the issuer of the underlying security, and, if a credit event occurs under a swap where the Fund is the seller of credit protection, the Fund could be required to purchase the security at par value, resulting in a significant loss to the Fund. When the Fund enters into any type of swap for hedging purposes, it is likely that the Fund will have an asset or liability that will offset any loss (or gain) on the swap, at least in part. Swap agreements may be non-transferable or otherwise highly illiquid, and a Fund may not be able to terminate or transfer a swap agreement at any particular time or at an acceptable price.
Swaptions. A Fund may also enter into options on swap agreements (“swaptions”). A swaption is a contract that gives a counterparty the right (but not the obligation) to enter into a new swap agreement or to shorten, extend, cancel, or otherwise modify an existing swap agreement, at some designated future time on specified terms. A Fund may write (sell) and purchase put and call swaptions. Depending on the terms of the particular option agreement, a Fund will generally incur a greater degree of risk when it writes a swaption than it will incur when it purchases a swaption. When a Fund purchases a swaption, it risks losing only the amount of the premium it has paid should it decide to let the option expire unexercised. However, when a Fund writes a swaption, upon exercise of the option the Fund will become obligated according to the terms of the underlying agreement. A Fund may enter into swaptions for the same purposes as swaps. For information regarding the accounting treatment of options, see “Options, Rights, and Warrants” below.
Centrally Cleared Swaps. Certain clearinghouses currently offer clearing for limited types of derivatives transactions, principally certain interest rate swaps, certain index swaps, and credit derivatives. In a cleared derivative transaction, a Fund typically enters into the transaction with a financial institution counterparty, and performance of the transaction is effectively guaranteed by a central clearinghouse, thereby reducing or eliminating the Fund’s exposure to the credit risk of its original counterparty. The Fund will be required to post amounts (“initial margin”) with the clearinghouse or at the instruction of the clearinghouse. The initial margin required by a clearinghouse may be greater than the initial margin the Fund would be required to post in an uncleared transaction. If cash is deposited as the initial margin, it is shown as collateral on a Fund’s Statement of Assets and Liabilities. Swap agreements are marked-to-market daily and subsequent payments (“variation margin”) are made or received by a Fund depending on whether unrealized gains or losses are incurred. These amounts are reflected as receivables or payables on a Fund’s Statement of Assets and Liabilities (“Variation margin on open derivative instruments”) and as a component of net change in unrealized appreciation (depreciation) on a Fund’s Statement of Operations. Only a limited number of transaction types are currently eligible for clearing.
During the term of a swap transaction, changes in the value of the swap are recognized as unrealized gains or losses by marking to market to reflect the market value of the swap. When the swap is terminated, a Fund will record a realized gain or loss equal to the difference, if any, between the proceeds from (or cost of) the closing transaction and a Fund’s basis in the agreement. Upfront swap premium payments paid or received by a Fund, if any, are recorded within the value of the open swap agreement on the Fund’s Statement of Assets and Liabilities and represent payments paid or received upon entering into the swap agreement to compensate for differences between stated terms of the swap agreement and prevailing market conditions (credit spreads, currency exchange rates, and other relevant factors). These upfront payments are recorded as realized gain or loss on the Fund’s Statement of Operations upon termination or maturity of the swap agreement.
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During the term of a swap transaction, the periodic net payments can be made for a set period of time or may be triggered by a predetermined credit event. The net periodic payments may be based on a fixed or variable interest rate, the change in market value of a specified security, basket of securities or index, or the return generated by a security. These periodic payments received or made by the Funds are recorded in the accompanying Statements of Operations as realized gains and losses, respectively.
The Fund(s) listed in the following table had open swap transactions at December 31, 2015. A Fund’s current exposure to a counterparty is the fair value of the transaction.
| Counterparty |
Currency |
Notional Amount |
Expiration Date |
Receive (Pay) |
Deliverable on Default |
Unrealized Appreciation (Depreciation) |
Premium (Received) Paid |
Value | ||||||||||||||||||
| Blend Fund |
|
|||||||||||||||||||||||||
| Credit Default Swaps — Sell Protection† |
|
|||||||||||||||||||||||||
| OTC Swaps |
|
|||||||||||||||||||||||||
| Goldman Sachs International | USD | 500,000 | 11/17/45 | 3.000% | CMBX.NA.BBB-.6†† (Rating: BBB-) |
$ | (16,023 | ) | $ | 308 | $ | (15,715 | ) | |||||||||||||
|
|
|
|
|
|
|
|||||||||||||||||||||
| Managed Bond Fund |
|
|||||||||||||||||||||||||
| Credit Default Swaps — Sell Protection† |
|
|||||||||||||||||||||||||
| OTC Swaps |
||||||||||||||||||||||||||
| Goldman Sachs International | USD | 3,200,000 | 11/17/45 | 3.000% | CMBX.NA.BBB-.6†† (Rating: BBB-) |
$ | (102,549 | ) | $ | 1,972 | $ | (100,577 | ) | |||||||||||||
|
|
|
|
|
|
|
|||||||||||||||||||||
| USD | U.S. Dollar |
| † | For each credit derivative with sold protection, the credit ratings of the entities referenced, as rated by any rating organization, are included in the equivalent Standard & Poor’s Ratings Group rating category. The reference entity rating represents the likelihood of a potential payment by the Fund if the referenced entity experiences a credit event as of period end. Notional amounts represent the maximum potential amount of future payments. |
| †† | Payment is based on a percentage of the index. Reference entities are a number of individual issuers comprising the index. |
Options, Rights, and Warrants
A Fund may purchase and sell put and call options on securities or an index of securities to enhance investment performance or to protect against changes in market prices. A Fund that invests in debt securities may also purchase and sell put and call options to adjust the interest rate sensitivity of its portfolio or the credit exposure of the portfolio.
Call Options. A call option gives the holder the right to purchase, and obligates the writer to sell, a security at the strike price at any time before the expiration date.
Put Options. A put option gives the holder the right to sell, and obligates the writer to buy, a security at the exercise price at any time before the expiration date.
Purchasing put and call options. A Fund may purchase put options to protect portfolio holdings against a decline in market value of a security or securities held by it. A Fund may also purchase a put option hoping to profit from an anticipated decline in the value of the underlying security. If the Fund holds the security underlying the option, the option premium and any transaction costs will reduce any profit the Fund might have realized had it sold the underlying security instead of buying the put option. A Fund may purchase call options to hedge against an increase in the price of securities that the Fund wants ultimately to buy. A Fund may also purchase a call option as a long directional investment hoping to profit from an anticipated increase in the value of the underlying security. In order for a call option to be profitable, the market price of the underlying security must rise sufficiently above the exercise price to cover the premium and transaction costs. These costs will reduce any profit the Fund might have realized had it bought the underlying security at the time it purchased the call option.
When a Fund purchases an option, it runs the risk that it will lose its entire investment in the option in a relatively short period of time, unless the Fund exercises the option or enters into a closing sale transaction before the option’s expiration. If the price of the underlying security does not rise (in the case of a call) or fall (in the case of a put) to an extent sufficient to cover the option
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premium and transaction costs, the Fund will lose part or all of its investment in the option. This contrasts with an investment by a Fund in the underlying security, since the Fund will not realize a loss if the security’s price does not change. Premiums paid for purchasing options that expire are treated as realized losses.
OTC Options. OTC options purchased or sold by a Fund are not traded on securities or options exchanges or backed by clearinghouses. Rather, they are entered into directly between a Fund and the counterparty to the option. In the case of an OTC option purchased by the Fund, the value of the option to the Fund will depend on the willingness and ability of the option writer to perform its obligations to the Fund. In addition, OTC options may not be transferable and there may be little or no secondary market for them, so they may be considered illiquid. It may not be possible to enter into closing transactions with respect to OTC options or otherwise to terminate such options, and as a result a Fund may be required to remain obligated on an unfavorable OTC option until its expiration. OTC options are valued using prices supplied by a primary pricing source, selected pursuant to procedures approved by the Trustees.
Rights and Warrants. A Fund may purchase or hold warrants or rights in order to gain exposure to the underlying security without owning the security, including, for example, cases where the Fund hopes to lock in the price today of a security it may wish to purchase in the future. Warrants generally give the holder the right, but not the obligation, to buy a security at a stated price. In order for a warrant to be profitable, the market price of the underlying security must rise sufficiently above the exercise price to cover any premium and transaction costs. Rights may similarly confer on the holder the right to purchase or acquire securities, including through participation in a so-called rights offering. Bonds may be issued with warrants or other rights attached to purchase or acquire equity or other debt securities, typically of the bond issuer. The market prices of bonds with warrants or rights attached to purchase equity securities or bonds may, to some degree, reflect changes in the values of the underlying securities.
When a Fund purchases or otherwise acquires warrants or other rights, it runs the risk that it will lose its entire investment in the warrants or rights, unless the Fund exercises the warrant or right, acquires the underlying securities, or enters into a closing transaction before expiration. If the price of the underlying security does not rise to an extent sufficient to cover any premium and transaction costs, the Fund will lose part or all of its investment. Any premiums or purchase price paid for warrants or other rights that expire are treated as realized losses. Warrants and similar rights differ from options in that they are typically written by the issuer of the security underlying the warrant or right. Although some warrants and rights may be non-transferable, others may be traded over-the-counter or on an exchange.
Inflation-Indexed Bonds
The Funds may invest in inflation-indexed bonds, which are fixed income securities whose principal value or coupon is periodically adjusted according to the rate of inflation, as measured by the Consumer Price Index for All Urban Consumers (“CPI-U”) (for U.S. Treasury inflation-indexed bonds) or, generally, by a comparable inflation index calculated by the foreign government issuing the inflation-indexed bonds.
If the periodic adjustment rate measuring inflation falls, the principal value of inflation-indexed bonds will be adjusted downward, and consequently the interest payable on these securities (calculated with respect to a smaller principal amount) will be reduced. Repayment of the original bond principal upon maturity (as adjusted for inflation) is guaranteed in the case of U.S. Treasury inflation-indexed bonds, even during a period of deflation. However, the current market value of the bonds is not guaranteed, and will fluctuate. The Funds may also invest in other inflation related bonds which may or may not provide a similar guarantee. If a guarantee of principal is not provided, the adjusted principal value of the bond repaid at maturity may be less than the original principal. Any adjustments to the principal amount of an inflation-indexed bond due to inflation will be reflected as increases or decreases to interest income. Such adjustments may have a significant impact on the Fund’s distributions.
The value of inflation-indexed bonds is generally based on changes in real interest rates, which in turn are tied to the relationship between nominal interest rates and the rate of inflation. Therefore, if nominal interest rates increased at a faster rate than inflation, real interest rates might rise, leading to a decrease in value of inflation-indexed bonds. While the values of these securities are expected to be protected from long-term inflationary trends, short-term increases in inflation may lead to a decline in value. There can be no assurance that the CPI-U or any foreign inflation index will accurately measure the real rate of inflation, or that the rate of inflation in a foreign country will correlate to the rate of inflation in the United States. Additionally, if interest rates rise due to reasons other than inflation, investors in these securities may not be protected to the extent that the increase is not reflected in the bond’s inflation measure.
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Repurchase Agreements
Each Fund may enter into repurchase agreements with certain banks and broker-dealers whereby a Fund acquires a security for cash and obtains a simultaneous commitment from the seller to repurchase the security at an agreed upon price and date. A Fund, through its custodian, takes possession of the securities collateralizing the repurchase agreement in a segregated account. Repurchase agreements must be fully collateralized at all times, but involve some risk to a Fund if the other party should default on its obligation and the Fund is delayed or prevented from recovering the collateral, or if the Fund is required to return collateral to a borrower at a time when it may realize a loss on the investment of that collateral. Collateral for certain tri-party repurchase agreements is held at the Fund’s custodian or sub-custodian in a segregated account for the benefit of the Fund and the counterparty.
When-Issued, Delayed-Delivery, Forward Commitment, and To-Be-Announced Transactions
A Fund may enter into when-issued, delayed-delivery, forward commitment, or to-be-announced (“TBA”) transactions (collectively, the “Forward Transactions”) in order to lock in the purchase price of the underlying security, or in order to adjust the interest rate exposure of the Fund’s existing portfolio. In Forward Transactions, a Fund commits to purchase or sell particular securities, with payment and delivery to take place at a future date. In the case of TBA purchase commitments, the unit price and the estimated principal amount are established when the Fund enters into a commitment, with the actual principal amount being within a specified range of the estimate. Although a Fund does not typically pay for the securities in these types of transactions until they are delivered, it immediately assumes the risks of ownership, including the risk of price fluctuation. As a result, each of these types of transactions may create investment leverage in a Fund’s portfolio and increase the volatility of the Fund. If a Fund’s counterparty fails to deliver a security purchased in a Forward Transaction, there may be a loss, and the Fund may have missed an opportunity to make an alternative investment.
These securities are valued on the basis of valuations furnished by a pricing service, selected pursuant to procedures approved by the Trustees, which determines valuations taking into account appropriate factors such as institutional-size trading in similar groups of securities, yield, quality, coupon rate, maturity, type of issue, trading characteristics, and other market data. Securities for which no market quotation is available are valued at fair value in accordance with procedures approved by the Trustees. The Funds record on a daily basis the unrealized appreciation (depreciation) based upon changes in the values of these securities. When a Forward Transaction is closed, the Funds record a realized gain or loss equal to the difference between the value of the transaction at the time it was opened and the value of the transaction at the time it was closed.
Dollar Roll Transactions
A Fund may enter into dollar roll transactions, in which the Fund sells mortgage-backed securities for delivery in the current month and simultaneously contracts to purchase substantially similar securities on a specified future date from the same party. A Fund may invest in dollar rolls in order to benefit from anticipated changes in pricing for the mortgage-backed securities during the term of the transaction, or for the purpose of creating investment leverage. In a dollar roll, the securities that are to be purchased will be of the same type as the securities sold, but will be supported by different pools of mortgages.
Dollar rolls involve the risk that the Fund’s counterparty will be unable to deliver the mortgage-backed securities underlying the dollar roll at the fixed time. If the counterparty files for bankruptcy or becomes insolvent, a Fund’s use of the transaction proceeds may be restricted pending a determination by the counterparty or its representative, whether to enforce the Fund’s obligation to repurchase the securities. A Fund can incur a loss on a dollar roll transaction (either because its counterparty fails to perform or because the value of the mortgages subject to the transaction declines) and on the investments made by the Fund with the proceeds of the dollar roll transaction.
A Fund accounts for a dollar roll transaction as a purchase and sale whereby the difference in the sales price and purchase price of the security sold is recorded as a realized gain (loss). If certain criteria are met, these dollar roll transactions may be considered financing transactions, whereby the difference in the sales price and the future purchase price is recorded as an adjustment to interest income. Dollar roll transactions generally have the effect of creating leverage in a Fund’s portfolio.
Securities Lending
The Blend Fund, Equity Fund, and Managed Bond Fund may lend their securities; however, lending cannot exceed 10% of the total assets of the Managed Bond Fund taken at current value, and 33% of the total assets of the Blend Fund and Equity Fund, respectively, taken at current value. The Funds’ securities lending activities are governed by a Securities Lending Agency Agreement (“Lending Agreement”) between each Fund and the lending agent (“agent”). The Lending Agreement authorizes the agent to lend qualifying U.S. and foreign securities held by a Fund to approved borrowers (each a “Borrower”).
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Notes to Financial Statements (Continued)
Each Fund expects that in connection with any securities on loan, the loan will be secured continuously by collateral consisting of cash or securities adjusted daily to have market value at least equal to the current market value of the securities loaned. The market value of the loaned securities is determined at the close of business of a Fund and any additional collateral is delivered to the Fund the next business day. As with other extensions of credit, the Funds may bear the risk of delay in recovery or even loss of rights in the collateral should the Borrower of the securities fail financially. The Funds receive compensation for lending their securities in the form of a securities loan fee paid by the Borrower, as well as a share of the income earned on investment of the cash collateral received for the loaned securities. At December 31, 2015, the Funds’ collateral was equal to or greater than 100% of the market value of securities on loan.
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. For all Funds, all securities on loan are classified as common stock in the Fund’s Portfolio of Investments at December 31, 2015.
The Funds employ the agent to implement their securities lending program and the agent receives a fee from the Funds for its services. In addition, the Funds may be required to pay a rebate to the Borrower. Accordingly, a Fund’s compensation for lending its securities is reduced by any such fees or rebate paid to the securities lending agent or Borrower, respectively. For the year ended December 31, 2015, the Fund(s) earned securities lending net income as follows:
| Securities Lending Gross Income |
Securities Lending Fees and Expenses |
Securities Lending Net Income |
||||||||||
| Equity Fund |
$ | 236,870 | $ | 49,253 | $ | 187,617 | ||||||
Accounting for Investment Transactions
Investment transactions are accounted for on the trade date. Realized gains and losses on sales of investments and unrealized appreciation and depreciation of investments are computed by the specific identification cost method. Proceeds received from litigation, if any, are included in realized gains on investment transactions for any investments that are no longer held in the portfolio and as a reduction in cost for investments that continue to be held in the portfolio. Interest income, adjusted for amortization of discounts and premiums on debt securities, is earned from the settlement date and is recorded on the accrual basis. Dividend income is recorded on the ex-dividend date. Withholding taxes on foreign interest, dividends, and capital gains have been provided for in accordance with the applicable country’s tax rules and rates. Foreign dividend income is recorded on the ex-dividend date or as soon as practicable after the Fund determines the existence of a dividend declaration after exercising reasonable due diligence. Distributions received on securities that represent a return of capital or capital gain are recorded as a reduction of cost of investments and/or as a realized gain. The Funds determine the classification of distributions received as return of capital distributions or capital gains distributions.
Foreign Currency Translation
The books and records of the Funds are maintained in U.S. dollars. The market values of foreign currencies, foreign securities, and other assets and liabilities denominated in foreign currencies are translated into U.S. dollars at the mean of the buying and selling rates of such currencies against the U.S. dollar at the end of each business day. Purchases and sales of foreign securities and income and expense items are translated at the rates of exchange prevailing on the respective dates of such transactions. The Funds do not isolate that portion of the results of operations arising from changes in the exchange rates from that portion arising from changes in the market prices of securities. Net realized foreign currency gains and losses resulting from changes in exchange rates include foreign currency gains and losses between trade date and settlement date on investment securities transactions, foreign currency transactions, and the difference between the amounts of dividends or interest recorded on the books of the Funds and the amount actually received.
Allocation of Operating Activity
In maintaining the records for the Funds, the income and expense accounts are allocated daily to each class of shares. Investment income and loss, and unrealized and realized gains or losses are prorated among the classes of shares based on the relative net assets of each. Expenses are allocated to each class of shares depending on the nature of the expenditures. Expenses of a Fund not directly attributable to the operations of any specific class of shares of the Fund are prorated among classes to which the expense relates based on relative net assets.
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Notes to Financial Statements (Continued)
Foreign Securities
The Funds may invest in foreign securities. Foreign securities, including American Depositary Receipts, are subject to additional risks compared to securities of U.S. issuers, including international trade, currency, political, regulatory, and diplomatic risks. In addition, fluctuations in currency exchange rates may adversely affect the values of foreign securities and the price of a Fund’s shares. Emerging markets securities are subject to greater risks than securities issued in developed foreign markets, including less liquidity, greater price volatility, higher relative rates of inflation, greater political, economic, and social instability, greater custody and operational risks, and greater volatility in currency exchange rates.
Federal Income Tax
It is each Fund’s intent to continue to comply with the provisions of subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”), applicable to a regulated investment company. Under such provisions, the Funds would not be subject to federal income taxes on their ordinary income and net realized capital gains to the extent they are distributed or deemed to have been distributed to their shareholders. Therefore, the Funds have not made any provision for federal income tax.
Dividends and Distributions to Shareholders
Dividends from net investment income are declared and paid quarterly for the Blend Fund and Managed Bond Fund and annually for the Equity Fund and at other times as may be required to satisfy tax or regulatory requirements. Dividends from net investment income are declared daily and paid monthly for the Money Market Fund. Distributions of any net realized capital gains of each Fund are declared and paid annually and at other times as may be required to satisfy tax or regulatory requirements.
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 generally accepted accounting principles. As a result, net investment income and net realized capital gains on investment transactions for a reporting period may differ significantly from distributions during such period.
| 3. | Advisory Fees and Other Transactions |
Investment Advisory Fees and Investment Subadvisers
MML Investment Advisers, LLC (“MML Advisers”), a wholly-owned subsidiary of MassMutual, serves as investment adviser to each Fund. Under investment advisory agreements between MML Advisers and the Trust on behalf of each Fund, MML Advisers is responsible for providing investment management services for each Fund. In return for these services, MML Advisers receives advisory fees, based upon each Fund’s average daily net assets, at the following annual rates:
| 0.50% on the first $100 million; |
| 0.45% on the next $200 million; |
| 0.40% on the next $200 million; and |
| 0.35% on any excess over $500 million |
MML Advisers has entered into investment subadvisory agreements with Babson Capital Management LLC (“Babson Capital”), a wholly-owned subsidiary of MM Asset Management Holding LLC, itself a wholly-owned subsidiary of MassMutual Holding LLC, a controlled subsidiary of MassMutual, on behalf of certain Funds. These agreements provide that Babson Capital manage the investment and reinvestment of assets of these Funds. Babson Capital receives a subadvisory fee from MML Advisers, based upon each Fund’s average daily net assets at the following annual rates:
| Blend Fund |
0.13% (Equity Segment) 0.09% (Money Market and Bond Segments) | |
| Managed Bond Fund |
0.10% | |
| Money Market Fund |
0.05% |
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Notes to Financial Statements (Continued)
In addition, Cornerstone Real Estate Advisers LLC (“Cornerstone”) serves as sub-subadviser for the Blend Fund and Managed Bond Fund and is primarily responsible for managing each Fund’s commercial mortgage-backed securities. Cornerstone is a wholly-owned subsidiary of Babson Capital. The appointment of Cornerstone as a sub-subadviser to each Fund does not relieve Babson Capital of any obligation or liability to any of the Funds that it would otherwise have pursuant to investment subadvisory agreements between MML Advisers and Babson Capital with respect to each Fund, and any and all acts and omissions of Cornerstone in respect of any Fund shall be considered the acts and omissions of Babson Capital.
MML Advisers has entered into an investment subadvisory agreement with OppenheimerFunds, Inc. (“OFI”), a wholly-owned subsidiary of Oppenheimer Acquisition Corp., itself an indirect majority-owned subsidiary of MassMutual Holding LLC, pursuant to which OFI serves as one of the subadvisers to the Equity Fund. This agreement provides that OFI manage the investment and reinvestment of a portion of the assets of the Fund. OFI receives a subadvisory fee from MML Advisers, based upon the average daily net assets of the portion of the Fund that OFI manages, at the following annual rate:
| Equity Fund |
0.23% |
MML Advisers has entered into an investment subadvisory agreement with the unaffiliated investment subadviser, Loomis, Sayles & Company, L.P. (“Loomis Sayles”), pursuant to which Loomis Sayles serves as one of the subadvisers to the Equity Fund. This agreement provides that Loomis Sayles manage the investment and reinvestment of a portion of the assets of the Fund. Loomis Sayles receives a subadvisory fee from MassMutual based upon the average daily net assets of the portion of the Fund that Loomis Sayles manages.
The Funds’ subadvisory fees are paid by MML Advisers out of the advisory fees previously disclosed above.
Distribution and Service Fees
MML Distributors, LLC (the “Distributor”) acts as distributor to the Funds. Pursuant to a Distribution and Services Plan adopted by the Funds pursuant to Rule 12b-1 under the 1940 Act, Service Class shares of the Funds pay an annual fee of 0.25% of the average daily net asset value of Service Class shares. This fee, or a portion thereof, is paid to: (i) the Distributor for services provided and expenses incurred by it in connection with the distribution of Service Class shares, if available, of each Fund; and/or (ii) MassMutual for services provided and expenses incurred by it for purposes of maintaining or providing personal services to Service Class shareholders. The Distributor is a wholly-owned subsidiary of MassMutual.
Expense Caps and Waivers
For the Money Market Fund, MML Advisers has agreed to voluntarily waive some or all of its advisory fees and, if necessary, reimburse some or all of the Fund’s other expenses, in an attempt to allow the Initial Class shares of the Fund to maintain a 1-day yield of at least approximately 0.00%. MML Advisers may amend or discontinue this waiver at any time without advance notice.
Expense caps and waiver amounts are reflected as a reduction of expenses on the Statement of Operations.
Deferred Compensation
Trustees of the Funds who are not officers or employees of MassMutual may elect to defer receipt of their annual fees in accordance with terms of a Non-Qualified Deferred Compensation Plan. Amounts deferred shall accrue interest or earnings and shall be recorded on the Funds’ books as other liabilities. Deferred compensation is included within Trustees’ fees and expenses in the Statements of Assets and Liabilities.
Other
Certain officers and trustees of the Funds are also employees of MassMutual. The compensation of each trustee who is not an employee of MassMutual is borne by the Funds.
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| 4. | Purchases and Sales of Investments |
Cost of purchases and proceeds from sales of investment securities (excluding short-term investments) for the year ended December 31, 2015, were as follows:
| Purchases | Sales | |||||||||||||||
| Long-Term
U.S. Government Securities |
Other Long-Term Securities |
Long-Term
U.S. Government Securities |
Other Long-Term Securities |
|||||||||||||
| Blend Fund |
$ | 679,177,064 | $ | 685,720,490 | $ | 694,710,443 | $ | 702,181,914 | ||||||||
| Equity Fund |
- | 311,432,571 | - | 338,243,299 | ||||||||||||
| Managed Bond Fund |
4,215,199,887 | 512,622,028 | 4,380,203,823 | 512,899,206 | ||||||||||||
| 5. | Capital Share Transactions |
Changes in shares outstanding for each Fund were as follows:
| Year Ended December 31, 2015 | Year Ended December 31, 2014 | |||||||||||||||
| Shares | Amount | Shares | Amount | |||||||||||||
| Blend Fund Initial Class |
||||||||||||||||
| Sold |
558,566 | $ | 12,967,545 | 646,358 | $ | 15,277,002 | ||||||||||
| Issued as reinvestment of dividends |
2,657,363 | 60,154,277 | 839,814 | 19,666,171 | ||||||||||||
| Redeemed |
(3,149,277 | ) | (72,444,197 | ) | (3,253,753 | ) | (76,577,417 | ) | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Net increase (decrease) |
66,652 | $ | 677,625 | (1,767,581 | ) | $ | (41,634,244 | ) | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Blend Fund Service Class |
||||||||||||||||
| Sold |
498,005 | $ | 11,397,767 | 372,316 | $ | 8,795,548 | ||||||||||
| Issued as reinvestment of dividends |
177,510 | 4,011,133 | 42,149 | 985,844 | ||||||||||||
| Redeemed |
(179,731 | ) | (4,084,851 | ) | (126,416 | ) | (2,985,375 | ) | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Net increase (decrease) |
495,784 | $ | 11,324,049 | 288,049 | $ | 6,796,017 | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Equity Fund Initial Class |
||||||||||||||||
| Sold |
1,164,275 | $ | 33,102,215 | 522,167 | $ | 14,978,313 | ||||||||||
| Issued as reinvestment of dividends |
1,986,810 | 50,534,787 | 410,767 | 12,166,595 | ||||||||||||
| Redeemed |
(3,354,740 | ) | (97,429,051 | ) | (3,114,178 | ) | (89,015,745 | ) | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Net increase (decrease) |
(203,655 | ) | $ | (13,792,049 | ) | (2,181,244 | ) | $ | (61,870,837 | ) | ||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Equity Fund Service Class |
||||||||||||||||
| Sold |
611,431 | $ | 17,362,110 | 468,038 | $ | 13,279,986 | ||||||||||
| Issued as reinvestment of dividends |
166,229 | 4,190,086 | 23,994 | 705,046 | ||||||||||||
| Redeemed |
(89,521 | ) | (2,623,632 | ) | (124,520 | ) | (3,567,042 | ) | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Net increase (decrease) |
688,139 | $ | 18,928,564 | 367,512 | $ | 10,417,990 | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Managed Bond Fund Initial Class |
||||||||||||||||
| Sold |
10,863,933 | $ | 138,277,347 | 14,167,319 | $ | 180,775,482 | ||||||||||
| Issued as reinvestment of dividends |
2,774,468 | 35,085,857 | 2,963,553 | 37,555,588 | ||||||||||||
| Redeemed |
(29,355,584 | ) | (373,124,819 | ) | (12,398,257 | ) | (157,941,519 | ) | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Net increase (decrease) |
(15,717,183 | ) | $ | (199,761,615 | ) | 4,732,615 | $ | 60,389,551 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Managed Bond Fund Service Class |
||||||||||||||||
| Sold |
3,475,099 | $ | 43,993,043 | 3,056,751 | $ | 38,924,947 | ||||||||||
| Issued as reinvestment of dividends |
563,251 | 7,095,194 | 467,135 | 5,910,650 | ||||||||||||
| Redeemed |
(1,067,298 | ) | (13,470,407 | ) | (888,381 | ) | (11,278,876 | ) | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Net increase (decrease) |
2,971,052 | $ | 37,617,830 | 2,635,505 | $ | 33,556,721 | ||||||||||
|
|
|
|
|
|
|
|
|
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Notes to Financial Statements (Continued)
|
|
|
|
|
| Year Ended December 31, 2015 | Year Ended December 31, 2014 | |||||||||||||||
| Shares | Amount | Shares | Amount | |||||||||||||
| Money Market Fund Initial Class |
||||||||||||||||
| Sold |
51,118,737 | $ | 51,065,731 | 74,499,780 | $ | 74,424,512 | ||||||||||
| Issued as reinvestment of dividends |
9,394 | 9,384 | 9,467 | 9,457 | ||||||||||||
| Redeemed |
(136,009,378 | ) | (135,868,691 | ) | (94,222,104 | ) | (94,127,163 | ) | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Net increase (decrease) |
(84,881,247 | ) | $ | (84,793,576 | ) | (19,712,857 | ) | $ | (19,693,194 | ) | ||||||
|
|
|
|
|
|
|
|
|
|||||||||
| 6. | Federal Income Tax Information |
At December 31, 2015, the cost of securities and the unrealized appreciation (depreciation) in the value of investments owned by the Fund(s), as computed on a federal income tax basis, were as follows:
| Federal Income Tax Cost |
Tax Basis Unrealized Appreciation |
Tax Basis Unrealized (Depreciation) |
Net Unrealized Appreciation (Depreciation) |
|||||||||||||
| Blend Fund |
$ | 569,182,989 | $ | 112,344,737 | $ | (12,971,143 | ) | $ | 99,373,594 | |||||||
| Equity Fund |
682,769,162 | 157,155,641 | (45,762,807 | ) | 111,392,834 | |||||||||||
| Managed Bond Fund |
1,445,472,317 | 22,712,486 | (45,208,063 | ) | (22,495,577 | ) | ||||||||||
Note: The aggregate cost for investments for the Money Market Fund at December 31, 2015, is the same for financial reporting and federal income tax purposes.
Net capital loss carryforwards may be applied against any net realized taxable gains in succeeding years, subject to the carryforward period limitations, where applicable. On December 22, 2010, the Regulated Investment Company Modernization Act of 2010 (the “Modernization Act”) was signed by the President. The Modernization Act changed the capital loss carryforward rules as they relate to regulated investment companies. Capital losses generated in tax years beginning after the date of enactment may now be carried forward indefinitely, and retain the character of the original loss. Under pre-enactment law, capital losses could be carried forward for up to eight tax years as short-term capital losses. The provisions affecting the utilization of capital loss carryforwards under the Modernization Act also require the utilization of post-enactment losses prior to the utilization of pre-enactment losses.
At December 31, 2015, for federal income tax purposes, there were no unused capital losses.
Generally accepted accounting principles in the United States of America require that only distributions in excess of tax basis earnings and profits be reported in the financial statements as a return of capital.
The tax character of distributions (including capital gain dividends, if any, designated pursuant to Section 852 of the Code) paid during the year ended December 31, 2015, was as follows:
| Ordinary Income |
Long Term Capital Gain |
Return of Capital |
||||||||||
| Blend Fund |
$ | 33,620,457 | $ | 30,544,953 | $ | - | ||||||
| Equity Fund |
17,102,863 | 37,622,010 | - | |||||||||
| Managed Bond Fund |
42,181,051 | - | - | |||||||||
| Money Market Fund |
9,384 | - | - | |||||||||
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Notes to Financial Statements (Continued)
The tax character of distributions (including capital gain dividends, if any, designated pursuant to Section 852 of the Code) paid during the year ended December 31, 2014, was as follows:
| Ordinary Income |
Long Term Capital Gain |
Return of Capital |
||||||||||
| Blend Fund |
$ | 13,859,359 | $ | 6,792,656 | $ | - | ||||||
| Equity Fund |
12,871,641 | - | - | |||||||||
| Managed Bond Fund |
43,466,238 | - | - | |||||||||
| Money Market Fund |
9,457 | - | - | |||||||||
Capital accounts within the financial statements are periodically adjusted for permanent differences between book and tax accounting. These adjustments have no impact on net assets or the results of operations. Temporary book and tax accounting differences will reverse in subsequent periods. At December 31, 2015, temporary book and tax accounting differences were primarily attributable to investments in futures contracts, swap agreements, premium amortization accruals, the deferral of wash sale losses, non-taxable dividends, defaulted bond income accruals, and deferred Trustee compensation.
At December 31, 2015, the components of distributable earnings on a tax basis were as follows:
| Undistributed Ordinary Income |
Undistributed Long Term Capital Gain (Capital Loss Carryover) |
Other Temporary Differences |
Unrealized Appreciation (Depreciation) |
|||||||||||||
| Blend Fund |
$ | 61,949 | $ | 59,843,551 | $ | (189,165 | ) | $ | 99,371,587 | |||||||
| Equity Fund |
13,773,477 | 48,311,187 | (239,028 | ) | 111,392,834 | |||||||||||
| Managed Bond Fund |
4,354,005 | 3,415,956 | (195,964 | ) | (22,505,959 | ) | ||||||||||
| Money Market Fund |
4,828 | - | (49,501 | ) | - | |||||||||||
During the year ended December 31, 2015, the following amounts were reclassified due to permanent differences between book and tax accounting:
| Paid-in Capital |
Accumulated Net Realized Gain (Loss) on Investments |
Undistributed Net Investment Income (Loss) |
||||||||||
| Blend Fund |
$ | 171 | $ | (212,322 | ) | $ | 212,151 | |||||
| Equity Fund |
215 | 439,801 | (440,016 | ) | ||||||||
| Managed Bond Fund |
212 | (3,747,603 | ) | 3,747,391 | ||||||||
| Money Market Fund |
51 | (308 | ) | 257 | ||||||||
The Funds did not have any unrecognized tax benefits at December 31, 2015, nor were there any increases or decreases in unrecognized tax benefits for the year then ended. The Funds recognize interest and penalties, if any, related to unrecognized tax benefits as an income tax expense in the Statements of Operations. During the year ended December 31, 2015, the Funds did not incur any such interest or penalties. The Funds are subject to examination by U.S. federal and state tax authorities for returns filed for the prior three fiscal years. Foreign taxes are provided for based on the Funds’ understanding of the tax rules and rates that exist in the foreign markets in which they invest.
| 7. | Indemnifications |
Under the Funds’ organizational documents, current and former Trustees and Officers are provided with specified rights to indemnification against liabilities arising in connection with the performance of their duties to the Funds, and shareholders are indemnified against personal liability for obligations of the Funds. In the normal course of business, the Funds may also enter into
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Notes to Financial Statements (Continued)
contracts that provide general indemnifications. The Funds’ maximum exposure under these arrangements is unknown as this would be dependent on future claims that may be made against the Funds. The risk of material loss from such claims is considered remote.
| 8. | Legal Proceedings |
On December 7, 2010, the Trust was named as a defendant and putative member of the proposed defendant class of shareholders named in an adversary proceeding brought by The Official Committee of Unsecured Creditors of Tribune Company (the “Official Committee”) in the U.S. Bankruptcy Court for the District of Delaware, in connection with Tribune Company’s Chapter 11 bankruptcy proceeding (In re Tribune Company). The proceeding relates to a leveraged buyout (“LBO”) transaction by which Tribune Company converted to a privately-held company in 2007, and the putative defendant class is comprised of beneficial owners of shares of Tribune Company who received proceeds (the “Proceeds”) of the LBO. The Official Committee seeks to recover payments of those Proceeds.
The potential amount sought to be recovered from the Blend Fund plus interest and the Official Committee’s court costs, is approximately $207,400.
In addition, on June 2, 2011, the Blend Fund was named as a defendant in a closely related, parallel adversary proceeding brought in connection with the Tribune Company’s LBO by Deutsche Bank Trust Company Americas, in its capacity as successor indenture trustee for a certain series of Senior Notes, Law Debenture Trust Company of New York, in its capacity as successor indenture trustee for a certain series of Senior Notes, and Wilmington Trust Company, in its capacity as successor indenture trustee for the PHONES Notes (together, the “Plaintiffs”), in the United States District Court for the District of Massachusetts. The Plaintiffs also seek to recover payments of the Proceeds.
The Fund cannot predict the outcome of these proceedings. Accordingly, the Fund has not accrued any amounts related to these proceedings. If the proceedings were to be decided in a manner adverse to the Fund, or if the Fund was to enter into a settlement agreement with the Official Committee or the Plaintiffs, as applicable, the payment of such judgment or settlement could potentially have a material adverse effect on the Fund’s net asset value depending on the net assets of the Fund at the time of such judgment or settlement.
| 9. | Subsequent Events |
In preparation of these financial statements, management has evaluated the events and transactions subsequent to December 31, 2015, through the date when the financial statements were issued, and determined that there are no subsequent events or transactions that would require adjustments to or disclosures in the Funds’ financial statements.
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Report of Independent Registered Public Accounting Firm
To the Board of Trustees of MML Series Investment Fund II and Shareholders of MML Blend Fund, MML Equity Fund, MML Managed Bond Fund, and MML Money Market Fund (collectively, the “Funds”):
We have audited the accompanying statements of assets and liabilities, including the portfolios of investments, of the Funds as of December 31, 2015, and the related statements of operations for the year then ended, the statements of changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the periods presented. These financial statements and financial highlights are the responsibility of the Funds’ management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. The Funds are not required to have, nor were we engaged to perform, an audit of their internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Funds’ internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of December 31, 2015, 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, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of each of the Funds as of December 31, 2015, the results of their operations for the year ended, the changes in their net assets for each of the two years in the period then ended, and the financial highlights for each of the periods presented, in conformity with accounting principles generally accepted in the United States of America.
Deloitte & Touche LLP
Boston, Massachusetts
February 22, 2016
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Trustees and Officers (Unaudited)
The following table lists the Trust’s Trustees and Officers; their address and age; their position with the Trust; the length of time holding that position with the Trust; their principal occupation(s) during the past five years; the number of portfolios in the fund complex they oversee; and other directorships they hold in companies subject to registration or reporting requirements of the Securities Exchange Act of 1934 (generally called “public companies”) or in registered investment companies. The Trust’s Statement of Additional Information includes additional information about the Trust’s Trustees and is available, without charge, upon request by calling 1-888-309-3539 or by writing MML Series Investment Fund II, c/o Massachusetts Mutual Life Insurance Company, 100 Bright Meadow Blvd., Enfield, Connecticut 06082-1981, Attention: Retirement Services Marketing.
Disinterested Trustees
| Name, Address*, and Age |
Position(s) |
Term of |
Principal Occupation(s) |
Number of Portfolios in Fund Complex Overseen by Trustee |
Other Directorships Held by Trustee | |||||
| Allan W. Blair Age: 67 |
Trustee | Since 2012 |
Retired; President and Chief Executive Officer (1996-2014), Economic Development Council of Western Massachusetts (non-profit development company); President and Chief Executive Officer (1984-2014), Westover Metropolitan Development Corporation (quasi-public development company). | 93 | Trustee (since 2003), MassMutual Select Funds (open-end investment company); Trustee (since 2003), MML Series Investment Fund (open-end investment company); Trustee (since 2012), MassMutual Premier Funds (open-end investment company). | |||||
| Nabil N. El-Hage Age: 57 |
Trustee
Chairman |
Since 2005
(2006-2012) |
Chairman (since 2011), Academy of Executive Education, LLC; Consultant (2010-2011); Senior Associate Dean for External Relations (2009-2010), Thomas Henry Carroll Ford Foundation Adjunct Professor of Business Administration (2009-2010), Harvard Business School. | 93 | Director (2011-2015), Argo Group International Holdings, Ltd. (underwriter of specialty insurance and reinsurance products); Director (2007-2010), Virtual Radiologic Corporation (telemedicine company); Trustee (since 2012), MassMutual Select Funds (open-end investment company); Trustee (since 2012), MML Series Investment Fund (open-end investment company); Trustee (since 2003), Chairman (2006-2012), MassMutual Premier Funds (open-end investment company). | |||||
| Maria D. Furman Age: 62 |
Trustee | Since 2005 |
Retired. | 93 | Trustee (since 2011), GMO Series Trust (open-end investment company); Trustee (since 2012), MassMutual Select Funds (open-end investment company); Trustee (since 2012), MML Series Investment Fund (open-end investment company); Trustee (since 2004), MassMutual Premier Funds (open-end investment company). | |||||
| R. Alan Hunter, Jr. Age: 69 |
Chairperson Trustee |
Since 2016 Since 2012 |
Retired. | 93 | Director (since 2007), Actuant Corporation (diversified industrial company); Chairperson (since 2016), Trustee (since 2003), MassMutual Select Funds (open-end investment company); Chairperson (since 2016), Trustee (since 2003), MML Series Investment Fund (open-end investment company); Chairperson (since 2016), Trustee (since 2012), MassMutual Premier Funds (open-end investment company). | |||||
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Trustees and Officers (Unaudited) (Continued)
| Name, Address*, and Age |
Position(s) |
Term of |
Principal Occupation(s) |
Number of Portfolios in Fund Complex Overseen by Trustee |
Other Directorships Held by Trustee | |||||
| C. Ann Merrifield Age: 64 |
Trustee | Since 2005 |
Retired; President and Chief Executive Officer (2012-2014), PathoGenetix (genomics company); Senior Vice President, Genzyme Business Excellence Initiative (2009-2011), Genzyme Corporation (biotechnology company). | 93 | Director (since 2015), Juniper Pharmaceuticals Inc. (specialty pharmaceutical company); Director (since 2014), Flexion Therapeutics (specialty pharmaceutical company); Director (since 2014), InVivo Therapeutics (research and clinical-stage biomaterials and biotechnology company); Trustee (since 2012), MassMutual Select Funds (open-end investment company); Trustee (since 2012), MML Series Investment Fund (open-end investment company); Trustee (since 2004), MassMutual Premier Funds (open-end investment company). | |||||
| Susan B. Sweeney Age: 63 |
Trustee | Since 2012 |
Retired; Senior Vice President and Chief Investment Officer (2010-2014), Selective Insurance Group (property and casualty company); Senior Managing Director (2008-2010), Ironwood Capital (private equity firm). | 95^ | Trustee (since 2012), Babson Capital Corporate Investors (closed-end investment company); Trustee (since 2012), Babson Capital Participation Investors (closed-end investment company); Trustee (since 2009), MassMutual Select Funds (open-end investment company); Trustee (since 2009), MML Series Investment Fund (open-end investment company); Trustee (since 2012), MassMutual Premier Funds (open-end investment company). | |||||
Interested Trustees
| Name, Address*, and |
Position(s) Held |
Term of |
Principal Occupation(s) |
Number of Portfolios in Fund Complex Overseen by Trustee |
Other Directorships Held by Trustee | |||||
| Robert E. Joyal^^ Age: 71 |
Trustee | Since 2012 |
Retired. | 95^ | Director (since 2013), Leucadia National Corporation (holding company); Director (since 2012), Ormat Technologies, Inc. (provider of alternative and renewable energy technology); Director (2006-2014), Jefferies Group LLC (investment bank); Director (2007-2011), Scottish Re Group Ltd. (holding company); Trustee (since 2003), Babson Capital Corporate Investors (closed-end investment company); Trustee (since 2003), Babson Capital Participation Investors (closed-end investment company); Trustee (since 2003), MassMutual Select Funds (open-end investment company); Trustee (since 2003), MML Series Investment Fund (open-end investment company); Trustee (since 2012), MassMutual Premier Funds (open-end investment company). |
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Trustees and Officers (Unaudited) (Continued)
| Name, Address*, and |
Position(s) Held |
Term of |
Principal Occupation(s) |
Number of Portfolios in Fund Complex Overseen by Trustee |
Other Directorships Held by Trustee | |||||
| Elaine A. Sarsynski^^^ Age: 60 |
Trustee Vice Chairperson |
Since 2011 (2011- 2012) |
Executive Vice President (since 2008), MassMutual Retirement Services Division, MassMutual; Chairman (since 2013), President, Chairman & CEO (2012-2013), Chairman & CEO (2008-2012), President & CEO (2006-2008), MassMutual International LLC. | 93 | Director (since 2012), Horizon Technology Finance Management LLC (specialty finance company); Director (since 2013), MML Advisers; Trustee (since 2008), MassMutual Select Funds (open-end investment company); Trustee (since 2008), MML Series Investment Fund (open-end investment company); Vice Chairperson (2011-2012), Trustee (since 2011), MassMutual Premier Funds (open-end investment company). |
Principal Officers who are Not Trustees
| Name, Address*, and Age |
Position(s) |
Term of Office# and Length of Time Served |
Principal Occupation(s) During Past 5 Years |
Number of Portfolios in Fund Complex Overseen by Officer | ||||
| Jeffrey M. Dube Age: 47 |
President | Since 2014 |
Vice President (since 2012), Assistant Vice President (2011-2012), Managing Director (2009-2011), MassMutual; President (since 2014), MML Series Investment Fund (open-end investment company). | 40 | ||||
| Michael C. Eldredge Age: 51 |
Vice President | Since 2009 |
Head of Investments and portfolio manager (since 2014), MML Advisers; Vice President (since 2008), MassMutual; Vice President (since 2009), MassMutual Select Funds (open-end investment company); Vice President (since 2009), MML Series Investment Fund (open-end investment company); Vice President (since 2009), MassMutual Premier Funds (open-end investment company). | 93 | ||||
| Andrew M. Goldberg Age: 49 |
Vice President, Secretary, and Chief Legal Officer Assistant Clerk |
Since 2008 (2005- |
Assistant Vice President and Counsel (since 2004), MassMutual; Secretary (since 2015), Assistant Secretary (2013-2015), MML Advisers; Vice President, Secretary, and Chief Legal Officer (since 2008), Assistant Secretary (2001-2008), MassMutual Select Funds (open-end investment company); Vice President, Secretary, and Chief Legal Officer (since 2008), Assistant Secretary (2001-2008), MML Series Investment Fund (open-end investment company); Vice President, Secretary, (formerly known as “Clerk”), and Chief Legal Officer (since 2008), Assistant Clerk (2004-2008), MassMutual Premier Funds (open-end investment company). | 93 | ||||
| Brian K. Haendiges Age: 55 |
Vice President | Since 2014 |
Vice President (since 2014) MML Advisers; Senior Vice President (since 2014), Vice President (2010-2014), MassMutual; Vice President (since 2014), MassMutual Select Funds (open-end investment company); Vice President (since 2014), MML Series Investment Fund (open-end investment company); Vice President (since 2014), MassMutual Premier Funds (open-end investment company). | 93 | ||||
| Nicholas H. Palmerino Age: 50 |
Chief Financial Officer and Treasurer | Since 2006 |
Vice President (since 2014), Assistant Vice President (2006-2014), MassMutual; Chief Financial Officer and Treasurer (since 2006), MassMutual Select Funds (open-end investment company); Chief Financial Officer and Treasurer (since 2006), MML Series Investment Fund (open-end investment company); Chief Financial Officer and Treasurer (since 2006), MassMutual Premier Funds (open-end investment company). | 93 | ||||
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Trustees and Officers (Unaudited) (Continued)
| Name, Address*, and Age |
Position(s) |
Term of Office# and Length of Time Served |
Principal Occupation(s) During Past 5 Years |
Number of Portfolios in Fund Complex Overseen by Officer | ||||
| Philip S. Wellman Age: 51 |
Vice President and Chief Compliance Officer | Since 2007 |
Vice President and Chief Compliance Officer (since 2013), MML Advisers; Vice President, Associate General Counsel, and Chief Compliance Officer (Mutual Funds) (since 2014), Vice President, Associate General Counsel, and Chief Compliance Officer (Mutual Funds and Investment Advisory) (2008-2014), MassMutual; Vice President and Chief Compliance Officer (since 2007), MassMutual Select Funds (open-end investment company); Vice President and Chief Compliance Officer (since 2007), MML Series Investment Fund (open-end investment company); Vice President and Chief Compliance Officer (since 2007), MassMutual Premier Funds (open-end investment company). | 93 | ||||
| Eric H. Wietsma Age: 49 |
Vice President | Since 2006 |
Director and President (since 2013), MML Advisers; Senior Vice President (since 2010), Corporate Vice President (2007-2010), MassMutual; President (since 2008), Vice President (2006-2008), MassMutual Select Funds (open-end investment company); Vice President (since 2006), MML Series Investment Fund (open-end investment company); President (since 2008), Vice President (2006-2008), MassMutual Premier Funds (open-end investment company). | 93 | ||||
| * | The address of each Trustee and Principal Officer is the same as that for the Trust; 100 Bright Meadow Blvd., Enfield, CT 06082-1981. |
| ** | Each Trustee of the Trust serves until the next meeting of shareholders called for the purpose of electing Trustees and until the election and qualification of his or her successor or until he or she dies, resigns, or is removed. Notwithstanding the foregoing, unless the Trustees determine that it is desirable and in the best interest of the Trust that an exception to the retirement policy of the Trust be made, a Trustee shall retire and cease to serve as a Trustee upon the conclusion of the calendar year in which such Trustee attains the age of seventy-two years. |
| The Chairperson is elected to hold such office for a term of three years or until their successor is elected and qualified to carry out the duties and responsibilities of their office, or until he or she retires, dies, resigns, is removed, or becomes disqualified. The Chairperson shall hold office at the pleasure of the Trustees. |
| ^ | Babson Capital Participation Investors and Babson Capital Corporate Investors are deemed to be a part of the Fund Complex, because they are managed by Babson Capital Management LLC, an affiliate of MML Advisers. |
| ^^ | Mr. Joyal is an “Interested Person,” as that term is defined in the 1940 Act, through his position as a director of Leucadia National Corporation, which controls Jefferies Group LLC, a broker-dealer that may execute portfolio transactions and/or engage in principal transactions with the Funds, other investment companies advised by MML Advisers or holding themselves out to investors as related companies for purposes of investment or investor services, or any other advisory accounts over which MML Advisers has brokerage placement discretion. |
| ^^^ | Ms. Sarsynski is an Interested Person as a director of MML Advisers. |
| # | The President, Treasurer, and Secretary and such other officers as the Trustees may in their discretion from time to time elect are elected to hold such office until their successor is elected and qualified to carry out the duties and responsibilities of their office, or until he or she dies, resigns, is removed, or becomes disqualified. Each officer shall hold office at the pleasure of the Trustees. |
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Federal Tax Information (Unaudited)
For corporate shareholders, a portion of the ordinary dividends paid during the Fund(s)’ year ended December 31, 2015, qualified for the dividends received deduction, as follows:
| Dividends Received Deductions |
||||
| Blend Fund |
42.51 | % | ||
| Equity Fund |
75.00 | % | ||
| Managed Bond Fund |
0.63 | % | ||
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Other Information (Unaudited)
A description of the policies and procedures that each Fund’s investment adviser and subadvisers use to vote proxies relating to the Fund’s portfolio securities is available, without charge, upon request, by calling 1-888-309-3539, and on the Securities and Exchange Commission’s (“SEC”) EDGAR database on its website at http://www.sec.gov.
Information regarding how the Funds voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available, without charge, upon request, on the MassMutual website at http://www.massmutual.com/funds and on the SEC’s EDGAR database on its website at http://www.sec.gov.
The Funds file their complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. The Funds’ Forms N-Q are available on the SEC’s EDGAR database on its website at http://www.sec.gov and may be reviewed and copied at the SEC’s Public Reference Room in Washington D.C. Information on the operation of the SEC’s Public Reference Room may be obtained by calling 1-800-SEC-0330.
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Other Information (Unaudited) (Continued)
Fund Expenses December 31, 2015
Expense Examples:
The following information is in regards to expenses for the six months ended December 31, 2015:
As a shareholder of the Funds, you incur ongoing costs, including advisory fees, distribution and/or service (12b-1) fees, and other Fund expenses. These examples are intended to help you understand your ongoing costs (in dollars) of investing in the Funds and to compare these costs with the ongoing costs of investing in other mutual funds. These examples are based on an investment of $1,000 invested for the six months ended December 31, 2015.
Actual Expenses:
The first four columns of the table below provide information about actual account values and actual expenses. You may use this information, 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 under the heading entitled “Operating Expenses Incurred” to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes:
The last two columns of the table below provide 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 your ongoing costs only and do not reflect any transactional costs. Therefore, the last two columns of the table are useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
| Beginning Value |
Annualized Expense Ratio |
Ending Value (Based on Actual Returns and Expenses) |
Operating Expenses Incurred* |
Ending Value (Based on Hypothetical Returns and Expenses) |
Operating Expenses Incurred* |
|||||||||||||||||||
| Blend Fund | ||||||||||||||||||||||||
| Initial Class |
$ | 1,000 | 0.45 | % | $ | 996.80 | $ | 2.26 | $ | 1,022.90 | $ | 2.29 | ||||||||||||
| Service Class |
1,000 | 0.70 | % | 995.50 | 3.52 | 1,021.70 | 3.57 | |||||||||||||||||
| Equity Fund | ||||||||||||||||||||||||
| Initial Class |
1,000 | 0.43 | % | 956.30 | 2.12 | 1,023.00 | 2.19 | |||||||||||||||||
| Service Class |
1,000 | 0.68 | % | 955.10 | 3.35 | 1,021.80 | 3.47 | |||||||||||||||||
| Managed Bond Fund | ||||||||||||||||||||||||
| Initial Class |
1,000 | 0.39 | % | 991.10 | 1.96 | 1,023.20 | 1.99 | |||||||||||||||||
| Service Class |
1,000 | 0.64 | % | 989.80 | 3.21 | 1,022.00 | 3.26 | |||||||||||||||||
| Money Market Fund | ||||||||||||||||||||||||
| Initial Class |
1,000 | 0.17 | % | 1,000.00 | 0.86 | 1,024.30 | 0.87 | |||||||||||||||||
| * | Expenses are calculated using the annualized expense ratio for the six months ended December 31, 2015, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year, unless stated otherwise. The annualized expense ratio does not reflect expenses deducted under the variable life insurance or variable annuity contract through which the Funds are invested in. Inclusion of these expenses would increase the annualized expense ratios shown. |
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Underwriter:
MML Distributors, LLC
100 Bright Meadow Blvd.
Enfield, CT 06082-1981
| © 2016 Massachusetts Mutual Life Insurance Company, Springfield, MA 01111-0001. All rights reserved. www.massmutual.com. MassMutual Financial Group is a marketing name for Massachusetts Mutual Life Insurance Company (MassMutual) and its affiliated companies and sales representatives. Investment Adviser: MML Investment Advisers, LLC | RS-38754-00 |
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This material must be preceded or accompanied by a current prospectus (or summary prospectus, if available) for the MML Series Investment Fund II. Investors should consider a Fund’s investment objective, risks, and charges and expenses carefully before investing. This and other information about the investment company is available in the prospectus (or summary prospectus, if available). Read it carefully before investing.
Table of Contents
MML Series Investment Fund II – President’s Letter to Shareholders (Unaudited)
| * | Systematic investing and asset allocation do not ensure a profit or protect against loss in a declining market. Systematic investing involves continuous investment in securities regardless of fluctuating price levels. Investors should consider their ability to continue investing through periods of low price levels. |
The information provided is the opinion of MassMutual Retirement Services Investments Services as of 1/1/16 and is subject to change without notice. It is not to be construed as tax, legal or investment advice. Of course, past performance does not guarantee future results.
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MML Series Investment Fund II – Economic and Market Overview (Unaudited)
December 31, 2015
Stocks mixed in a period of economic weakness abroad and low oil prices
Stock performance was mixed in the U.S. and around the world in a volatile market environment that challenged investors for much of the year ended December 31, 2015. High-quality U.S. bonds finished in positive territory, as many investors sought cover in the traditionally safer investments amid the market choppiness. Data pointing to weakness in certain measures confounded investors at different points during the year, but the U.S. economy continued to show overall progress, which stood in contrast to slowdowns in other large and emerging markets across the globe. Geopolitical wrangling centered around the Middle East, economic events and issues in China and Europe, dramatically lower oil prices, the strength of the U.S. dollar versus other benchmark currencies, and the latest announcements from the Federal Reserve (“Fed”) occupied the attention of investors and impacted markets throughout the year.
As 2015 kicked off, Fed watchers – fresh from witnessing the end of the central bank’s Quantitative Easing monthly bond purchase program in autumn 2014 – were speculating about when the central bank would see the U.S. economy as strong enough to begin increasing key short-term interest rates. Investors drove market volatility in reaction to economic data and statements by the Fed that possibly offered clues about when increases might start. The U.S. economy continued to show improvement in key measures, including in unemployment and some price categories; but the threat to U.S. growth represented by the nearly worldwide economic slowdown and unsettling news from China contributed to the Fed’s decision to delay increasing interest rates until its final meeting of the year in mid-December, when policymakers increased the federal funds rate by 0.25%, from 0.0% – 0.25% to 0.25% – 0.50% and made comparable increases in other relevant short-term rates. (The federal funds rate is the interest rate that banks and other financial institutions charge each other for borrowing funds overnight.)
Slowing economic growth and weak demand in foreign markets combined with an overabundant supply drove investor concerns about oil, which continued its dramatic decline into 2015 before finally hitting a low of $43.39 per barrel in mid-March. The closely watched commodity gushed as high as $61.36 in June, and dropped to $38.22 in the late-August market turmoil. Oil never got as high as $50 again in 2015 and finished the year at $37.13, its lowest price since the height of the 2008 financial crisis. U.S. retail gasoline prices started 2015 at their lowest levels since 2009 and drove uphill into mid-summer before rolling back down to near where they had started the year. Gold prices peaked in late January 2015 at $1,295.75 per ounce then lost luster for much of the rest of the year and finished at approximately $1,060.
Market performance
A strong fourth quarter for U.S. stocks, with the strongest gains coming in October, helped lift most broad-market indexes into positive territory, but small- and mid-cap stocks failed to keep pace and declined for the year. The full-year advances in the most widely followed U.S. indexes masked the volatile environment, as the strong U.S. dollar made American goods more expensive in foreign markets and the nearly worldwide economic slowdown reduced overall demand. For the year, the technology-focused NASDAQ Composite® Index rose 6.96%, the S&P 500® Index (S&P 500) of large-capitalization U.S. stocks gained 1.38%, and the blue-chip Dow Jones Industrial AverageSM (Dow) just made it into positive territory with a 0.21% advance. Conversely, the Russell 2000® Index of small-capitalization stocks declined 4.41%. In foreign markets, the MSCI EAFE® Index, a barometer for foreign stocks in developed markets, fell 0.81%, and the MSCI Emerging Markets Index, a measure of the performance of emerging stock markets throughout the world, dropped 14.92%.*
Bonds mainly advanced during the year, with the Barclays U.S. Aggregate Bond Index, a broad measure of the U.S. investment-grade bond markets, rising just 0.55% in the nearly unrelenting low interest rate environment. The Barclays U.S. 1-3 Year Government Bond Index, which measures the performance of short-term U.S. government bonds, returned 0.57%. Treasury bills, as measured by the Citigroup 3-Month Treasury Bill Index, gained only 0.03%. The impact of lower oil prices on energy companies during the year worked against high-yield bonds, as many issuers of such bonds are energy companies. In this environment, the Barclays U.S. Corporate High-Yield Index, a measure of the performance of fixed-rate, non-investment-grade debt from corporate sectors, dropped 4.47% for the year. The yield of the bellwether 10-year Treasury note increased from 2.17% at the beginning of 2015 to 2.27% at the close of business on the last day of the year, although that change masked considerable volatility along the way.*
2
| * | Indexes are unmanaged, do not incur fees or expenses and cannot be purchased directly for investment. |
Table of Contents
MML Series Investment Fund II – Economic and Market Overview (Unaudited) (Continued)
Q1 2015: Market momentum cools amid increasing talk of Fed rate hikes
In the first quarter of 2015, U.S. stocks declined in January and March, but produced strong gains in February. When the dust settled at the end of March, some key market benchmarks were not far from where they started the quarter. Much of the downside volatility in January was due to weakness in crude oil prices. A surging U.S. dollar also fueled concern about multinational companies that derive a significant portion of their profits from overseas, especially Europe.
February brought renewed optimism among stock investors amid some stabilization in oil’s price and favorable corporate earnings reports. However, stocks surrendered some of those gains in March, as a better-than-expected February employment report raised the possibility that the Fed might speed up its timetable for raising short-term interest rates. Other reports offered a mixed picture of the U.S. economy, however. According to data released in the first quarter, gross domestic product (GDP) expanded by a relatively modest 2.2% in the fourth quarter of 2014, which also included weak durable goods orders and retail sales.
The possibility of Greece defaulting on its debt following the January election of Prime Minister Alexis Tsipras (who had run a campaign against austerity), air strikes in Yemen by Saudi Arabia, more disappointing economic data from Europe and China, and concern about the upcoming second-quarter earnings season were other factors unsettling the market as the first quarter wound to a close.
Q2 2015: Greek debt crisis drives increased volatility
U.S. stocks were choppy in the second quarter of 2015, and most indexes made little headway in either direction. Investors sought clarity on a number of issues, including the debt problems of Greece, the sustainability of the U.S. economic recovery following a weak first quarter, when the Fed’s first interest-rate hike since mid-2006 could occur, and the near-term path of crude oil and the U.S. dollar.
Despite repeated efforts to forge an agreement with other countries in the European Union to reschedule its debt, Greece was unable to make a loan payment to the International Monetary Fund of €1.6 billion (euro), or roughly $1.8 billion, by a June 30 deadline. The default resulted in Greek banks and markets closing the week of June 29 through July 3. Global stock markets fell sharply in response on Monday, June 29, but stabilized on the final day of the quarter.
On the U.S. economic front, the news was somewhat encouraging – but still mixed. First-quarter GDP had originally been reported at -0.7% but underwent an upward revision to -0.2%. Nonfarm payrolls bounced back nicely in April and May after falling well short of estimates in March; however, industrial production remained weak amid challenges from lower oil prices and the stronger dollar.
The Fed’s Open Market Committee met in April and June, deciding both times to leave short-term interest rates unchanged. Crude oil, the focus of so much attention in prior quarters due to its steep decline, receded from the limelight in the second quarter when prices for the commodity rose.
Q3 2015: China’s economic slowdown sinks stocks worldwide; Fed leaves rates unchanged
U.S. stocks struggled in the third quarter of 2015, as concerns about China and fresh weakness in commodity prices prompted nervous investors to sell stocks and seek safer ground. A string of disappointing reports on China’s economy, coupled with that nation’s decision to devalue its currency on August 11 and another freefall in its share prices, contributed to the risk-sensitive environment.
The extreme volatility in Chinese stocks – partly a result of local investors buying on margin – had little effect on U.S. securities markets for much of 2015, but that changed in August, as the Shanghai Stock Exchange Composite Index plunged 43% following its mid-June peak. Most major U.S. stock benchmarks had their worst quarter since 2011 after U.S. stocks dropped roughly 10% in a decline that mostly occurred in just a handful of days in the second half of August. Crude oil prices had recovered somewhat starting in early spring, but again came under pressure during the August stock decline before regaining some ground by the end of the quarter. Following its mid-September meeting, the Fed provided few clues to investors about when the central bank would start increasing interest rates, and the lack of guidance roiled markets in the immediate aftermath.
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Table of Contents
MML Series Investment Fund II – Economic and Market Overview (Unaudited) (Continued)
Despite the market jitters, most data indicated the U.S. economy was expanding at a reasonably healthy rate, even if the progress was subpar compared with most other post-World War II recoveries. Following a slow first quarter attributed to extreme weather, the final revised estimate for U.S. second-quarter growth came in at a fairly robust 3.9% annual rate, and overall expectations for 2015 were about in line with 2014’s annual growth of 2.4%. In August, the U.S. unemployment rate fell from 5.3% to 5.1%, the lowest level in seven years.
Q4 2015: Good quarter in a mediocre year; Fed increases rates
Stocks recovered strongly in October, with two of the most widely followed U.S. equity benchmarks, the Dow and the S&P 500, turning in their best monthly gains since October 2011. Fears about China and crude oil eased, and a weak September payroll number fueled hopes that the Fed might delay raising short-term interest rates; however, the October and November employment reports were considerably stronger, renewing talk of a rate increase, which ultimately occurred at the Fed’s December 16 meeting. Elsewhere, crude oil broke to another new low for the year in December and ended 2015 with an annual decline of 31% after falling almost 50% in 2014. These factors led to choppy market action over the final two months of the year.
Data from the Department of Commerce continued to support the view the U.S. economy is generally expanding at a reasonably healthy rate that, nevertheless, has been subdued compared with most other post-World War II recoveries. Following a weak 0.6% pace for real (inflation-adjusted) GDP in the first quarter, second-quarter growth rebounded strongly, putting GDP at 3.9%, but it settled back to 2.0% in the third quarter. As of late December, the Fed was forecasting further slowing and GDP at 1.3% for the fourth quarter.
With 2015 in the books, stocks worldwide kicked off 2016 by declining sharply in response to more bad news about the Chinese economy, and investors entered the new year wary of many of the same factors that drove markets in 2015, including the ongoing impact of economic malaise in China, Europe and emerging markets, the low price of oil, the timetable for Fed interest rate increases and the potential actions of other central banks around the world.
The information provided is the opinion of MassMutual Retirement Services Investment Services as of 1/1/16 and is subject to change without notice. It is not to be construed as tax, legal or investment advice. Of course, past performance does not guarantee future results.
4
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MML Asset Momentum Fund – Portfolio Manager Report (Unaudited)
What is the investment approach of MML Asset Momentum Fund, and who is the Fund’s subadviser?
The Fund seeks growth of capital over the long-term by investing in asset classes the Fund’s subadviser considers to exhibit “bull market” characteristics. These “bull market” characteristics may include, for example, upward trending prices and relatively low volatility. The Fund expects that it will allocate its investment among the following asset classes: equity investments, debt investments, property investments, alternative investments, currency, and cash on deposit, excluding short term instruments. The Fund may invest in securities of issuers anywhere in the world, including emerging market countries. The Fund’s subadviser is Babson Capital Management LLC (Babson Capital).
How did the Fund perform since its inception on May 15, 2015?
The Fund’s Class II shares returned -5.62%, lagging the -2.32% return of the S&P 500® Index (the “benchmark”), a widely recognized, unmanaged index representative of common stocks of larger capitalized U.S. companies.
For a discussion on the economic and market environment during the 12-month period ended December 31, 2015, please see the Economic and Market Review, beginning on page 2.
Subadviser discussion of factors that contributed to the Fund’s performance
At inception, the Fund was positioned to hold global equities based on our belief that stocks were in a secular bull market. The Fund began the reporting period with a 15% weight in emerging-market equities, 20% in developed country equities (ex-U.S.), 57% in U.S equities, and 8% in cash.
Attractive price momentum and valuation were key considerations during the period and helped drive stock selection in the Fund, although in 2015 one factor won out, as stocks with strong price momentum generally outperformed stocks with solid earnings and sales growth.
In the U.S. market, the largest detractors from performance were Fund holdings in the manufacturing sector, which underperformed due to the global economic slowdown. Westinghouse Air Brake Technologies, a technology products and services company for the rail industry and a large position in the Fund, declined substantially in the second half of the year. The biggest contribution to returns came from Fund holdings in the consumer discretionary sector, as a strong labor market, low interest rates, and low energy prices helped keep consumer spending high. NVR, a homebuilder and the Fund’s largest position, rose solidly on strong housing demand.
During the reporting period, the Fund’s allocation to developed country equities (ex-U.S.) was largely consistent. The Fund started to reduce exposure to emerging markets starting in May and eliminated the entire position by August. International equities had an overall negative effect on Fund performance during the reporting period. The contribution from the Fund’s cash position was close to flat.
The Fund utilizes a variety of derivative instruments in managing Fund assets, which detracted from Fund performance during the reporting period. Derivatives are securities that derive their value from the performance of one or more other investments and take the form of a contract between two or more parties. Most derivatives are used for hedging, speculation, or both.
Subadviser outlook
We continue to favor equities over bonds and cash for the Fund. In the U.S., the market has been in a trading range in recent quarters, as earnings for companies in the benchmark have contracted, but some analysts have forecasted that earnings could rebound in 2016. If that comes to pass, our view is the market may break out of its trading range.
Surging U.S. oil production drove down prices for the commodity in 2015. Unlike the demand-driven price drop in 2009, we believe the current supply-driven downturn may last longer. Our view is that emerging-market countries could be vulnerable to a prolonged weakness in commodities prices, rising U.S. interest rates, and a stronger dollar. Weak commodity prices have done substantial damage to emerging-market economies, and these cycles can last for several years. For developed countries, our opinion is that European equities have the potential to perform relatively well due to the massive monetary stimulus in place.
5
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MML Asset Momentum Fund – Portfolio Manager Report (Unaudited) (Continued)
| MML Asset Momentum Fund Portfolio Characteristics (% of Net Assets) on 12/31/15 |
||||
| Common Stock |
62.0 | % | ||
| U.S. Treasury Obligations |
5.3 | % | ||
| Mutual Funds |
2.5 | % | ||
| Purchased Options |
0.1 | % | ||
|
|
|
|||
| Total Long-Term Investments |
69.9 | % | ||
| Short-Term Investments and Other Assets and Liabilities |
30.1 | % | ||
|
|
|
|||
| Net Assets |
100.0 | % | ||
|
|
|
|||
6
Table of Contents
MML Asset Momentum Fund – Portfolio Manager Report (Unaudited) (Continued)
Performance data quoted represents past performance; past performance is not predictive of future results. The investment return and principal value of shares of the Fund will fluctuate with market conditions so that shares of the Fund, when redeemed, may be worth more or less than their original cost. Current performance of the Fund may be lower or higher than the performance quoted. Performance data current to the most recent month end may be obtained by accessing the website at www.massmutual.com.
Investors should note that the Fund is a professionally managed mutual fund, while the S&P 500 Index is unmanaged, does not incur expenses, and cannot be purchased directly by investors. Investors should read the Fund’s prospectus with regard to the Fund’s investment objective, risks, and charges and expenses in conjunction with these financial statements. The Fund’s return reflects changes in the net asset value per share without the deduction of any product charges (e.g., cost of insurance, mortality and expense risk charges, administrative fees, and CDSL). The inclusion of these charges would have reduced the performance shown here.
7
Table of Contents
MML Dynamic Bond Fund – Portfolio Manager Report (Unaudited)
What is the investment approach of MML Dynamic Bond Fund, and who is the Fund’s subadviser?
The Fund seeks to maximize current income and total return by investing, under normal circumstances, at least 80% of its net assets in bonds, which may include securities issued or guaranteed by the U.S. Government, its agencies, instrumentalities, or sponsored corporations; corporate obligations (including foreign hybrid securities); mortgage-backed securities; asset-backed securities; foreign securities (corporate and government); emerging market securities (corporate and government); bank loans and assignments; and other securities bearing fixed or variable interest rates of any maturity. The Fund may invest a portion of its net assets in inverse floaters and interest-only and principal-only securities, which may experience high volatility in response to changes in interest rates. The Fund may invest in other investment companies, including other open-end or closed-end investment companies, exchange-traded funds (“ETFs”), and domestic or foreign private investment vehicles, including investment companies sponsored or managed by the Fund’s subadviser and its affiliates. The Fund’s subadviser is DoubleLine Capital LP (DoubleLine).
How did the Fund perform since its inception on May 15, 2015?
The Fund’s Class II shares returned -1.34%, lagging the 0.12% return of the Barclays U.S. Aggregate Bond Index (the “benchmark”), an unmanaged index of fixed-rate investment-grade securities with at least one year to maturity, combining the Barclays U.S. Treasury Bond Index, the Barclays U.S. Government-Related Bond Index, the Barclays U.S. Corporate Bond Index, and the Barclays U.S. Securitized Bond Index.
For a discussion on the economic and market environment during the 12-month period ended December 31, 2015, please see the Economic and Market Review, beginning on page 2.
Subadviser discussion of factors that contributed to the Fund’s performance
During the reporting period (May 15 – December 31, 2015), the unprecedented decline of oil and gas, the difficulties that plagued the commodities complex, and global economic concerns that cropped up over the summer caused emerging-market and high-yield corporate bonds to struggle during the latter half of the year. Ultimately, emerging-market and high-yield bonds were the worst-performing sectors within the Fund, and investment-grade corporate bonds also declined over the period.
Intermediate-term U.S. interest rates rose meaningfully, with the yields of 2-year, 5-year, and 10-year U.S. Treasury securities rising 0.51%, 0.30%, and 0.13%, respectively, and reflecting declining prices for bonds in those groups. In this environment, short-term bonds generally outperformed their longer-term counterparts. The Fund’s strategy with regard to interest-rate movements was more conservative than the benchmark and provided a mild boost to relative performance as interest rates rose.
The Fund’s holdings in U.S. state municipal bonds and large position in residential mortgage-backed securities (RMBS) were positive contributors during the period. Both the government/agency RMBS and the non-agency RMBS sectors posted healthy returns. (“Agency” refers to government-sponsored entities that issue bonds backed by mortgage loans, including Ginnie Mae, Fannie Mae, Freddie Mac, and the Federal Home Loan Banks. Non-agency mortgage-backed securities are issued by private institutions that are not backed by government-sponsored entities.) Finally, the Fund’s position in commercial mortgage-backed securities (CMBS) benefited performance, relative to the benchmark.
Subadviser outlook
We believe broad market volatility has the potential to persist into the new year, given current macro-economic conditions relating to China, declining bond prices in developed and emerging markets, and continuing weakness in commodity prices. With those themes, we believe emerging-market and high-yield corporate bonds and other credit-sensitive sectors could have a challenging year in 2016. We are likely to take opportunities to allocate to those sectors in the Fund only if their outlook improves; otherwise, we do not anticipate increasing the Fund’s exposure there much. Within the securitized products segment, however, government/agency RMBS may continue to benefit from the U.S. Federal Reserve’s (the “Fed”) reinvestment of mortgage-backed security paydowns and may result in more RMBS issues. If the Fed raises interest rates in 2016, the action may also increase opportunistic trading in certain segments of the RMBS market, in our view.
8
Table of Contents
MML Dynamic Bond Fund – Portfolio Manager Report (Unaudited) (Continued)
| MML Dynamic Bond Fund Portfolio Characteristics (% of Net Assets) on 12/31/15 |
||||
| Non-U.S. Government Agency Obligations |
29.2 | % | ||
| Corporate Debt |
26.5 | % | ||
| U.S. Treasury Obligations |
24.2 | % | ||
| U.S. Government Agency Obligations and Instrumentalities |
15.2 | % | ||
| Mutual Funds |
2.1 | % | ||
| Sovereign Debt Obligations |
1.2 | % | ||
| Municipal Obligations |
0.4 | % | ||
|
|
|
|||
| Total Long-Term Investments |
98.8 | % | ||
| Short-Term Investments and Other Assets and Liabilities |
1.2 | % | ||
|
|
|
|||
| Net Assets |
100.0 | % | ||
|
|
|
|||
9
Table of Contents
MML Dynamic Bond Fund – Portfolio Manager Report (Unaudited) (Continued)
Performance data quoted represents past performance; past performance is not predictive of future results. The investment return and principal value of shares of the Fund will fluctuate with market conditions so that shares of the Fund, when redeemed, may be worth more or less than their original cost. Current performance of the Fund may be lower or higher than the performance quoted. Performance data current to the most recent month end may be obtained by accessing the website at www.massmutual.com.
Investors should note that the Fund is a professionally managed mutual fund, while the Barclays U.S. Aggregate Bond Index is unmanaged, does not incur expenses, and cannot be purchased directly by investors. Investors should read the Fund’s prospectus with regard to the Fund’s investment objective, risks, and charges and expenses in conjunction with these financial statements. The Fund’s return reflects changes in the net asset value per share without the deduction of any product charges (e.g., cost of insurance, mortality and expense risk charges, administrative fees, and CDSL). The inclusion of these charges would have reduced the performance shown here.
10
Table of Contents
MML Equity Rotation Fund – Portfolio Manager Report (Unaudited)
What is the investment approach of MML Equity Rotation Fund, and who is the Fund’s subadviser?
The Fund seeks growth of capital over the long-term by investing primarily in common stocks of large- and medium-capitalization U.S. companies. The Fund’s subadviser does not typically invest in companies with market capitalizations, at the time of purchase, of less than $1 billion. Under normal circumstances, the Fund invests at least 80% of its net assets in equity securities. The Fund’s subadviser is Babson Capital Management LLC (Babson Capital).
How did the Fund perform since its inception on May 15, 2015?
The Fund’s Class II shares returned -2.18%, outpacing the -2.32% return of the S&P 500® Index (the “benchmark”), a widely recognized, unmanaged index representative of common stocks of larger capitalized U.S. companies.
For a discussion on the economic and market environment during the 12-month period ended December 31, 2015, please see the Economic and Market Review, beginning on page 2.
Subadviser discussion of factors that contributed to the Fund’s performance
Although the U.S. large-cap equity market barely advanced in 2015, there was a notable disparity in returns among the Fund’s target stock groups during the reporting period (May 15–December 31, 2015). High-growth (i.e., momentum) stocks significantly outperformed, as investors looked for companies that were still growing, even as global economic activity slowed. On the other hand, stocks that had value characteristics underperformed. Many value stocks produce goods for the global economy, so the global slowdown disproportionally hurt these shares. Stocks categorized as low volatility performed nearly in line with the broad market.
A common theme among many of the Fund’s stronger holdings in 2015 was strong earnings growth in an environment that had little growth. For example, the Fund benefited from owning Internet security company Verisign, a network infrastructure operator, which substantially outperformed the benchmark. Conversely, the Fund’s relative performance suffered because it did not own Netflix, the video streaming service, which displayed strong earnings growth and was one of the strongest performers in the benchmark in 2015.
During the reporting period, the Fund’s overweight allocation, relative to the benchmark, in consumer durables stocks, such as cars, housing, and home appliances, helped drive performance, as these companies were the beneficiaries of the increasing income of U.S. consumers. The Fund’s underweight stake in the poorly performing energy sector, which was impacted by declining commodity prices throughout the period, also contributed to returns. Similarly, the Fund’s relative performance got a lift from not owning any mining companies, as that sector declined more than 30%.
On the downside, the Fund’s underweight position in strong-performer Amazon, the online retailing giant, hindered relative returns along with the Fund’s overweight stake in the health services sector, which lost 1% for the year. Health services is made up of HMOs, hospitals, and diagnostic companies. Changes in investors’ perception about how Medicare and the Affordable Care Act could impact profitability of companies in this industry hurt these stocks during the reporting period.
Subadviser outlook
Given the Fund’s ability to allocate among growth/momentum, value, and low-volatility stocks, the Fund would normally rotate more towards high-growth (i.e., momentum) stocks in the later part of the cycle when economic growth becomes less steady. However, the disparity in valuation between high-growth stocks and their value counterparts has become so large that, in our view, value stocks may be stronger performers over the coming quarters. At year-end, the Fund was positioned more towards momentum/growth than value, but less so than at the Fund’s inception. Going forward, we believe the Fund’s allocation is likely to include stocks with high-growth characteristics, or solid value profiles, as well as those displaying low volatility. We have found that these characteristics may produce better than market returns over time. Despite a relatively flat return for larger U.S. equities overall in 2015, we believe equity investors may be rewarded with favorable returns in 2016, but not necessarily without periods of market volatility. Our view is the key to performance may be to invest in fundamentally sound companies in this market – rather than trading in response to short-term price movements.
11
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MML Equity Rotation Fund – Portfolio Manager Report (Unaudited) (Continued)
12
Table of Contents
MML Equity Rotation Fund – Portfolio Manager Report (Unaudited) (Continued)
Performance data quoted represents past performance; past performance is not predictive of future results. The investment return and principal value of shares of the Fund will fluctuate with market conditions so that shares of the Fund, when redeemed, may be worth more or less than their original cost. Current performance of the Fund may be lower or higher than the performance quoted. Performance data current to the most recent month end may be obtained by accessing the website at www.massmutual.com.
Investors should note that the Fund is a professionally managed mutual fund, while the S&P 500 Index is unmanaged, does not incur expenses, and cannot be purchased directly by investors. Investors should read the Fund’s prospectus with regard to the Fund’s investment objective, risks, and charges and expenses in conjunction with these financial statements. The Fund’s return reflects changes in the net asset value per share without the deduction of any product charges (e.g., cost of insurance, mortality and expense risk charges, administrative fees, and CDSL). The inclusion of these charges would have reduced the performance shown here.
13
Table of Contents
MML High Yield Fund – Portfolio Manager Report (Unaudited)
What is the investment approach of MML High Yield Fund, and who is the Fund’s subadviser?
The Fund seeks to achieve a high level of total return, with an emphasis on current income, by investing primarily in high yield debt and related securities. The Fund invests primarily in lower rated U.S. debt securities (“junk” or “high yield” bonds), including securities in default. Under normal circumstances, the Fund invests at least 80% of its net assets in lower rated fixed income securities (rated below Baa3 by Moody’s or BBB- by Standard & Poor’s (using the lower rating) or, if unrated, determined by the Fund’s subadviser to be of comparable quality). The Fund’s subadviser is Babson Capital Management LLC (Babson Capital).
How did the Fund perform during the 12 months ended December 31, 2015?
The Fund’s Class II shares returned -1.13%, outperforming the -4.47% return of the Barclays U.S. Corporate High-Yield Bond Index (the “benchmark”), which covers the universe of fixed rate, non-investment-grade debt from corporate sectors.
For a discussion on the economic and market environment during the 12-month period ended December 31, 2015, please see the Economic and Market Review, beginning on page 2.
Subadviser discussion of factors that contributed to the Fund’s performance
For the year ended December 31, 2015, strong security selection and prudent risk allocation contributed to the Fund’s outperformance, with security selection being the main driver. Throughout the year, the Fund held overweight allocations, relative to the benchmark, to bonds in the B and CCC ratings categories and an underweight stake in BB bonds. Over the course of the year, we selectively reduced the Fund’s exposure to bonds rated CCC and B, shifting some of the overweight position in those categories to bonds rated BB and cash.
In terms of industry weightings, we significantly decreased the Fund’s position in the energy sector during the year. The Fund’s key overweight positions by sector included capital goods, transportation, consumer cyclicals, and consumer products – with key underweight positions being in the communications, consumer non-cyclicals, finance, electric, banking, and technology sectors.
The top three Fund holdings for the year were Multi Packaging Solutions, General Communication (“GCI”), and Audatex. Multi Packaging Solutions, a specialty printing and packaging company, was the Fund’s largest position and its most significant contributor to returns. The company filed for an initial public offering (IPO) in June and announced its intention to use the proceeds to pay down debt. GCI, the largest provider of advanced communications services in Alaska, was the Fund’s second-largest contributor to full-year returns. The company performed well and maintains a modest leverage profile, along with strong positioning from a competitive standpoint. Audatex, a global automotive claims solutions provider, announced in September that it had reached an agreement to be acquired by Solera Holdings, which drove its share price higher.
Even with the Fund’s significant reduction in its energy exposure, the top five detractors from performance were energy-related Fund holdings – reflecting the significance of the downturn that began in that sector in the fourth quarter of 2014. While holdings in the refinery and midstream bond groups have generally remained fairly resilient relative to the energy sector as a whole, exploration and production and oilfield services bonds were materially impacted by the pullback in commodity prices, resulting in dramatic price pressure that dragged down returns. The Fund benefited from underweight stakes in other commodities, however, particularly in metals and mining.
Subadviser outlook
Although the Federal Reserve’s (the “Fed”) December implementation of the first interest rate hike since 2006 marked the end of one of the biggest question marks for the market, uncertainty remains around the potential consequences movements in interest rates may have on currencies, Treasury yields, and risk assets going forward. Although interest rates will remain a point of concern for investors in 2016, we do not believe the Fed’s actions are likely to have a material impact on the fundamental performance of high-yield issuers, or the market, in the near term. While we believe the extensive volatility we have seen in the commodities-related sectors could persist, general corporate fundamentals may remain intact, which could continue to support high-yield valuations in the near term and help default rates stay below their historical averages, in our view. Despite recent declines, our opinion is that any further pullback in prices could provide opportunities to add to positions in compelling issues offering attractive relative value.
14
Table of Contents
MML High Yield Fund – Portfolio Manager Report (Unaudited) (Continued)
| MML High Yield Fund Portfolio Characteristics (% of Net Assets) on 12/31/15 |
||||
| Corporate Debt |
91.3 | % | ||
| Bank Loans |
2.5 | % | ||
|
|
|
|||
| Total Long-Term Investments |
93.8 | % | ||
| Short-Term Investments and Other Assets and Liabilities |
6.2 | % | ||
|
|
|
|||
| Net Assets |
100.0 | % | ||
|
|
|
|||
15
Table of Contents
MML High Yield Fund – Portfolio Manager Report (Unaudited) (Continued)
Performance data quoted represents past performance; past performance is not predictive of future results. The investment return and principal value of shares of the Fund will fluctuate with market conditions so that shares of the Fund, when redeemed, may be worth more or less than their original cost. Current performance of the Fund may be lower or higher than the performance quoted. Performance data current to the most recent month end may be obtained by accessing the website at www.massmutual.com.
Investors should note that the Fund is a professionally managed mutual fund, while the Barclays U.S. Corporate High-Yield Bond Index is unmanaged, does not incur expenses, and cannot be purchased directly by investors. Investors should read the Fund’s prospectus with regard to the Fund’s investment objective, risks, and charges and expenses in conjunction with these financial statements. The Fund’s return reflects changes in the net asset value per share without the deduction of any product charges (e.g., cost of insurance, mortality and expense risk charges, administrative fees, and CDSL). The inclusion of these charges would have reduced the performance shown here.
16
Table of Contents
MML Inflation-Protected and Income Fund – Portfolio Manager Report (Unaudited)
What is the investment approach of MML Inflation-Protected and Income Fund, and who is the Fund’s subadviser?
The Fund seeks to achieve as high a total rate of real return on an annual basis as is considered consistent with prudent investment risk and the preservation of capital. Under normal circumstances, the Fund invests at least 80% of its net assets in inflation-indexed bonds and other income-producing securities. The Fund’s subadviser is Babson Capital Management LLC (Babson Capital).
How did the Fund perform during the 12 months ended December 31, 2015?
The Fund’s Initial Class shares returned -1.51%, modestly underperforming the -1.44% return of the Barclays U.S. Treasury Inflation Protected Securities (TIPS) Index (Series-L) (the “benchmark”), an unmanaged index that measures the broad performance of U.S. Treasury inflation-indexed bonds.
How do inflation-indexed bonds protect against inflation?
Like many other fixed-income securities, inflation-indexed bonds pay income twice a year, based on a stated coupon rate. However, both the principal and the interest payment are adjusted for the level of inflation. The inflation rate – as measured by the Consumer Price Index for All Urban Consumers (“CPI-U”) – results in an adjustment to the principal amount of an inflation-protected security. The coupon rate is then applied to the adjusted principal amount to determine the interest payment. For example, assuming an inflation rate of 3%, a security with a par value of $1,000 and an annual coupon rate of 1.75%, the adjusted principal amount after one year would be $1,030 ($1,000 increased by 3%). The semi-annual interest payment would be calculated by multiplying $1,030 by 1.75% and dividing by 2 instead of using the original $1,000 par value to calculate the amount of interest.
For a discussion on the economic and market environment during the 12-month period ended December 31, 2015, please see the Economic and Market Review, beginning on page 2.
Subadviser discussion of factors that contributed to the Fund’s performance
Consumer prices, as measured by the U.S. Bureau of Labor Statistics, were down year-over-year, as unadjusted Headline Consumer Price Index (“CPI”) came in at 0.5%, down from 0.8% at the start of the year. (CPI measures changes in the price of a market basket of consumer goods and services.) Primary drivers for the decline included weaker energy and commodity prices. Core CPI, which excludes energy and food prices, increased to 2.0%, up from 1.6% at the start of the year.
Our tactical approach to trading in inflation-indexed bonds was beneficial to Fund performance in 2015, with timely shifts in exposure to TIPS making an aggregate contribution. Specifically, in the fourth quarter, we neutralized the Fund’s underweight positioning, relative to the benchmark, in shorter-maturity inflation securities, which benefited overall performance. Nonetheless, the primary detractor during the second half of the year resulted from a modest overweight exposure in 30-year TIPS.
In addition to TIPS, the Fund also invested in high-quality income-producing securities, including asset-backed and money market securities, and the income from these bonds contributed positively to Fund performance. Asset-backed securities (ABS) were the main drivers of performance. Security selection in auto loans and student loans within the ABS sector were the primary contributors. An allocation to high-quality commercial paper – the commonly used name for short-term unsecured promissory notes sold by banks and corporations to meet short-term debt obligations – also helped drive the Fund’s performance for the year.
The Fund may use derivative instruments to implement certain aspects of it strategy. Derivatives are securities that derive their value from the performance of one or more other investments and take the form of a contract between two or more parties. Most derivatives are used for hedging, speculation, or both. The Fund’s use of derivatives made an overall contribution to performance during the year.
Subadviser outlook
Residual challenges associated with global deflation threats across core economies suggest to us that the risks associated with deflation remain amid waning commodity prices and weak global economic developments in China.
17
Table of Contents
MML Inflation-Protected and Income Fund – Portfolio Manager Report (Unaudited) (Continued)
In the December Federal Open Market Committee (FOMC) statement, the Federal Reserve (the “Fed”) raised the target range for the federal funds rate by 0.25%, to 0.25% – 0.50%. (The federal funds rate is the interest rate that banks and financial institutions charge each other for borrowing funds overnight.) The Fed’s monetary policy remains accommodative, and our view is that the pace of rate hikes is likely to be gradual and driven primarily by domestic labor market conditions, wage growth, and inflation as well as global economic developments. We believe there may continue to be sustained volatility and dislocations in the near-term environment, so we will proceed with caution. Nonetheless, we will continue to seek opportunities in the TIPS market.
|
MML Inflation-Protected Portfolio Characteristics |
||||
| U.S. Treasury Obligations |
94.6 | % | ||
| Non-U.S. Government Agency Obligations |
44.6 | % | ||
| Corporate Debt |
9.7 | % | ||
| U.S. Government Agency Obligations and Instrumentalities |
0.4 | % | ||
| Municipal Obligations |
0.2 | % | ||
| Purchased Options |
0.1 | % | ||
|
|
|
|||
| Total Long-Term Investments |
149.6 | % | ||
| Short-Term Investments and Other Assets and Liabilities |
(49.6 | )% | ||
|
|
|
|||
| Net Assets |
100.0 | % | ||
|
|
|
|||
18
Table of Contents
MML Inflation-Protected and Income Fund – Portfolio Manager Report (Unaudited) (Continued)
Performance data quoted represents past performance; past performance is not predictive of future results. The investment return and principal value of shares of the Fund will fluctuate with market conditions so that shares of the Fund, when redeemed, may be worth more or less than their original cost. Current performance of the Fund may be lower or higher than the performance quoted. Performance data current to the most recent month end may be obtained by accessing the website at www.massmutual.com.
Investors should note that the Fund is a professionally managed mutual fund, while the Barclays U.S. Treasury Inflation Protected Securities (TIPS) Index (Series-L) is unmanaged, does not incur expenses, and cannot be purchased directly by investors. Investors should read the Fund’s prospectus with regard to the Fund’s investment objective, risks, and charges and expenses in conjunction with these financial statements. The Fund’s return reflects changes in the net asset value per share without the deduction of any product charges (e.g., cost of insurance, mortality and expense risk charges, administrative fees, and CDSL). The inclusion of these charges would have reduced the performance shown here.
19
Table of Contents
MML Short-Duration Bond Fund – Portfolio Manager Report (Unaudited)
What is the investment approach of MML Short-Duration Bond Fund, and who is the Fund’s subadviser?
The Fund seeks to achieve a high total rate of return primarily from current income while minimizing fluctuations in capital values by investing primarily in a diversified portfolio of short-term investment grade fixed income securities. Under normal circumstances, the Fund invests at least 80% of its net assets in investment grade fixed income securities (rated Baa or higher by Moody’s or BBB or higher by Standard & Poor’s or, if unrated, determined to be of comparable quality by the subadviser). The Fund’s subadviser is Babson Capital Management LLC (Babson Capital).
How did the Fund perform during the 12 months ended December 31, 2015?
The Fund’s Class II shares returned 0.93%, outperforming the 0.57% return of the Barclays U.S. 1-3 Year Government Bond Index (the “benchmark”), an unmanaged index of U.S. government bonds with one to three years remaining to the scheduled payment of principal.
For a discussion on the economic and market environment during the 12-month period ended December 31, 2015, please see the Economic and Market Review, beginning on page 2.
Subadviser discussion of factors that contributed to the Fund’s performance
For the year ended December 31, 2015, the Fund’s allocation to Treasuries was the primary contributor to performance. As yields on shorter-term bonds steepened earlier in the year, we increased the Fund’s Treasury allocation, which ultimately benefited performance, as market volatility picked up and investors’ increased demand for Treasury securities drove up their prices.
An overweight position in corporate bonds also benefited the Fund, as investment-grade and cross-over securities rated BBB/BB contributed. (Cross-over bonds are those securities rated BBB by one rating agency and BB by another.) Asset managers, banking, and real estate investment trusts (REITs) were the industries that did best within the corporate bond sector. Conversely, bonds from metals and mining and gas pipelines detracted the most. The Fund’s allocation to convertible securities also hurt performance during the period as energy and technology holdings sold off.
Asset-backed securities (ABS) were the primary contributors to performance within the securitized bond sector. (Bond issuers create securitized bonds by pooling various types of contractual debt – such as mortgages, auto loans, or credit card debt.) Residential mortgage-backed securities (RMBS) and commercial mortgage-backed securities (CMBS) also helped performance. Fundamentals in both residential and commercial real estate continue to improve, and we selectively added to those sectors in an effort to take advantage of opportunities to enhance the income of the Fund. Agency collateralized mortgage obligation (CMO) securities modestly contributed to the Fund’s benchmark-relative performance. The Fund’s strategy with regard to the movement of interest rates and positioning in bonds of differing maturities also contributed to performance.
The Fund uses derivative instruments on occasion to implement certain aspects of its strategy. Derivatives are securities that derive their value from the performance of one or more other investments and take the form of a contract between two or more parties. Most derivatives are used for hedging, speculation, or both. Derivatives were a modest contributor to Fund performance for the year.
Subadviser outlook
Global economic influences weighed heavily on worldwide financial markets during 2015, with a slowing China, falling commodity prices, and active U.S. monetary policy all playing a role. After alerting markets that a shift in U.S. monetary policy was imminent, the Federal Reserve (the “Fed”) increased interest rates for the first time since 2006 in December 2015. Post-meeting comments from Fed officials suggest the pace of further interest-rate hikes is likely to be slow and data dependent.
Corporate bond prices have declined amid diverging economic growth trends as well as heightened risks, including merger and acquisition (M&A) activity or commodity sensitivity. Securitized sectors have been less affected by recent uncertainty, which has provided a bit of a safe haven to investors. We believe this trend could continue, and see potential value in certain sectors that are less correlated to corporate America. In any event, we believe this environment could present targeted opportunities, which are likely to highlight the importance of sound credit selection skills.
20
Table of Contents
MML Short-Duration Bond Fund – Portfolio Manager Report (Unaudited) (Continued)
| MML Short-Duration Bond Fund Portfolio Characteristics (% of Net Assets) on 12/31/15 |
||||
| Corporate Debt |
39.2 | % | ||
| Non-U.S. Government Agency Obligations |
30.6 | % | ||
| U.S. Treasury Obligations |
21.6 | % | ||
| U.S. Government Agency Obligations and Instrumentalities |
6.7 | % | ||
| Municipal Obligations |
0.5 | % | ||
| Preferred Stock |
0.0 | % | ||
| Purchased Options |
0.0 | % | ||
|
|
|
|||
| Total Long-Term Investments |
98.6 | % | ||
| Short-Term Investments and Other Assets and Liabilities |
1.4 | % | ||
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|
|
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| Net Assets |
100.0 | % | ||
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MML Short-Duration Bond Fund – Portfolio Manager Report (Unaudited) (Continued)
Performance data quoted represents past performance; past performance is not predictive of future results. The investment return and principal value of shares of the Fund will fluctuate with market conditions so that shares of the Fund, when redeemed, may be worth more or less than their original cost. Current performance of the Fund may be lower or higher than the performance quoted. Performance data current to the most recent month end may be obtained by accessing the website at www.massmutual.com.
Investors should note that the Fund is a professionally managed mutual fund, while the Barclays U.S. 1-3 Year Government Bond Index is unmanaged, does not incur expenses, and cannot be purchased directly by investors. Investors should read the Fund’s prospectus with regard to the Fund’s investment objective, risks, and charges and expenses in conjunction with these financial statements. The Fund’s return reflects changes in the net asset value per share without the deduction of any product charges (e.g., cost of insurance, mortality and expense risk charges, administrative fees, and CDSL). The inclusion of these charges would have reduced the performance shown here.
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MML Small Cap Equity Fund – Portfolio Manager Report (Unaudited)
What is the investment approach of MML Small Cap Equity Fund, and who is the Fund’s subadviser?
The Fund seeks capital appreciation by investing primarily in common stocks of small-capitalization U.S. companies that the Fund’s subadviser believes have favorable business trends or prospects based on fundamental analysis. Under normal circumstances, the Fund invests at least 80% of its net assets in securities of companies whose market capitalizations at the time of purchase are within the market capitalization range of companies included in the Russell 2000® Index. The Fund’s subadviser is OppenheimerFunds, Inc. (OFI).
How did the Fund perform during the 12 months ended December 31, 2015?
The Fund’s Initial Class shares returned -5.63%, trailing the -4.41% return of the Russell 2000 Index (the “benchmark), a widely recognized, unmanaged index representative of common stocks of smaller capitalized U.S. companies.
For a discussion on the economic and market environment during the 12-month period ended December 31, 2015, please see the Economic and Market Review, beginning on page 2.
Subadviser discussion of factors that contributed to the Fund’s performance
For the year ended December 31, 2015, the Fund underperformed the benchmark primarily due to weak relative stock selection in the health care, consumer discretionary, and materials sectors. The Fund outperformed the benchmark within the information technology, financials, and energy sectors due largely to strong relative stock selection.
Top detractors from performance included Spectranetics, in the health care sector; Dana Holding, in consumer discretionary; Century Aluminum, in materials; CONE Midstream Partners, in energy; and Saia, in industrials. Spectranetics develops single-use medical devices used in minimally invasive cardiovascular procedures. The company revised its earnings estimates downward based on lower-than-expected U.S. peripheral atherectomy (i.e., a procedure to remove plaque from blood vessels) growth. Dana Holding – a supplier of driveline, sealing, and thermal-management technologies – experienced volatility during the reporting period. The stock of aluminum producer Century Aluminum suffered from weakening prices on the London Metals Exchange (LME), as commodities declined in the midst of anemic global growth during the year. CONE Midstream Partners is a recent initial public offering (IPO) focused on natural gas infrastructure that was negatively impacted by the substantial decline in oil prices. Trucking company Saia reported third-quarter earnings results in October 2015 that were challenged by declining tonnage trends and increased expenses associated with self-insurance claims.
Conversely, Fund holdings that contributed to performance included Prestige Brands Holdings, in the health care sector; information technology stocks Paylocity Holding, J2 Global, and Imperva; and Cytec Industries, in the materials sector. Sales at Prestige Brands Holdings, a distributor of over-the-counter health care and household products, improved as destocking by retailers, which had hurt prior-quarter results for Prestige Brands, came to an end. Consequently, the company’s revenues topped expectations, propelling the stock higher. Paylocity, a cloud-based payroll and human resource management software provider, reported strong results during the year, suggesting that the secular opportunity for small and medium businesses to automate and/or modernize their payroll and HR systems likely remains strong. J2 Global provides Internet services through two segments: business cloud services and digital media. The company announced strong financial results and increased its quarterly dividend throughout the reporting period. Imperva develops protection software and services for databases and business applications. During the year, the company reported strong results, demonstrating that the new management team’s sales and marketing overhaul is bearing fruit. Cytec Industries is a global specialty materials and chemicals company that was acquired by Brussels-based Solvay during the year.
Subadviser outlook
During periods of economic uncertainty and heightened market volatility, stocks of companies with greater consistency and stability of both revenue and earnings have traditionally tended to perform relatively better – generally outperforming the broader indexes. The Fund seeks companies with sustainable competitive advantages, skilled management with a proven track record of executing effectively, and financial resources to generate improving profitability, gain market share, and/or return significant cash to shareholders. During times of economic volatility, such companies have frequently widened their lead over weaker competitors. The Fund invests in companies that we believe are characterized by these qualities and seeks stocks selling, in our view, at compelling valuations in an effort to generate superior long-term performance.
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MML Small Cap Equity Fund – Portfolio Manager Report (Unaudited) (Continued)
24
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MML Small Cap Equity Fund – Portfolio Manager Report (Unaudited) (Continued)
Performance data quoted represents past performance; past performance is not predictive of future results. The investment return and principal value of shares of the Fund will fluctuate with market conditions so that shares of the Fund, when redeemed, may be worth more or less than their original cost. Current performance of the Fund may be lower or higher than the performance quoted. Performance data current to the most recent month end may be obtained by accessing the website at www.massmutual.com.
Investors should note that the Fund is a professionally managed mutual fund, while the Russell 2000 Index is unmanaged, does not incur expenses, and cannot be purchased directly by investors. Investors should read the Fund’s prospectus with regard to the Fund’s investment objective, risks, and charges and expenses in conjunction with these financial statements. The Fund’s return reflects changes in the net asset value per share without the deduction of any product charges (e.g., cost of insurance, mortality and expense risk charges, administrative fees, and CDSL). The inclusion of these charges would have reduced the performance shown here.
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MML Special Situations Fund – Portfolio Manager Report (Unaudited)
What is the investment approach of MML Special Situations Fund, and who is the Fund’s subadviser?
The Fund seeks growth of capital over the long-term by investing primarily in common stocks of U.S. companies that are involved in “special situations.” A special situation might include, for example, a recently announced spin-off or divestiture, a change in dividend policy, involvement in a merger or acquisition transaction, a change in management, a significant change in ownership, or changes due to bankruptcy or insolvency process. The Fund’s subadviser expects that the Fund’s portfolio will initially emphasize “large capitalization” issuers, although the Fund’s holdings of securities of different market capitalizations will vary over time, depending on market conditions generally and on the companies involved at the time (or that the subadviser expects to be involved) in special situations. The Fund will typically invest primarily in common stocks, however, when the subadviser determines that there are an insufficient number of companies involved (or likely to be involved) in special situations, it may invest in any equity securities it considers to be consistent with the Fund’s objective of growth of capital over the long term or exchange-traded funds providing broad equity exposures or in derivatives, including swaps, futures contracts, and options, to gain broad exposures to equity markets. The Fund’s subadviser is Babson Capital Management LLC (Babson Capital).
How did the Fund perform since its inception on May 15, 2015?
The Fund’s Class II shares returned -15.67%, lagging, by a wide margin, the -2.32% return of the S&P 500® Index (the “benchmark”), a widely recognized, unmanaged index representative of common stocks of larger capitalized U.S. companies.
For a discussion on the economic and market environment during the 12-month period ended December 31, 2015, please see the Economic and Market Review, beginning on page 2.
Subadviser discussion of factors that contributed to the Fund’s performance
Special situation stocks are frequently owned by investors with relatively short-term investment horizons. That generally means things can happen more quickly with these stocks. If a stock has value, the market is more likely to recognize that value quickly. Similarly, if the market is going to sell off, it is likely that the special situation stocks will sell off more quickly, and possibly, recover at a similar speed. Unfortunately, special situations stocks sold off hard during the reporting period (May 15 – December 31, 2015), and did not recover by year-end.
During the reporting period, spinoff stocks were down 17% and stocks held by activist investors were down 14%, resulting in a challenging period for special situation-based strategies. (A spinoff stock is a stock that is created through the sale or distribution of new shares of an existing business or division of a parent company.) Although the market may have punished many company share prices that are part of the broader “special situations” category, we view each investment on its individual merits. For example, the Fund’s largest holding in 2015 was Zoetis, a maker of animal medicines and vaccines. Zoetis was down more than 3% during the reporting period and was spun off from drug manufacturing giant Pfizer. Zoetis is a unique business and it has been targeted by several shareholder activists. Despite its earnings rise of approximately 7% in 2015, sales slowed. Zoetis garners most of its revenue outside the U.S., so as the dollar strengthened, investors inferred that company sales would slow, since goods produced by Zoetis are more expensive to foreign buyers when the dollar is stronger. We believe Zoetis may be able to manage through the currency challenges, however.
Turning to the positive, the best-performing Fund holding was Mack-Cali Realty, a commercial real estate management company that had a new CEO take the helm in May. We believe a new CEO may have the potential to unlock value in a company if the shares are selling at a compelling price and the market supports the CEO’s vision for the future. That was the case with Mack-Cali in 2015. Another positive contributor to Fund performance was CSW Industrial, a manufacturer of paints and industrial lubricants that was spun off to investors of a venture capital fund. During the reporting period, the company benefited from lower input cost in their manufacturing process.
Subadviser outlook
As we entered 2016, we continued to see opportunities created by spinoffs, corporate management changes, share buybacks, increased dividend policies, and other special situations (catalysts) – all of which we believe may have the potential to drive select stock prices higher. The Fund must contend with overall market dynamics, but we believe careful research to identify companies poised to increase their efficiencies resulting from changes to their structure or business models may bring opportunities for favorable returns.
26
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MML Special Situations Fund – Portfolio Manager Report (Unaudited) (Continued)
Despite a relatively flat return for the benchmark in 2015, we believe equity investors may be rewarded with solid returns again in 2016, but not necessarily without periods of market volatility. Our view is that equities are inexpensive relative to most fixed-income alternatives and we believe corporate profits may have the potential to remain strong due to secular shifts in wage costs. In our view, the key to performance may be to invest in fundamentally sound companies in this market and avoid trading on short-term price movements.
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MML Special Situations Fund – Portfolio Manager Report (Unaudited) (Continued)
Performance data quoted represents past performance; past performance is not predictive of future results. The investment return and principal value of shares of the Fund will fluctuate with market conditions so that shares of the Fund, when redeemed, may be worth more or less than their original cost. Current performance of the Fund may be lower or higher than the performance quoted. Performance data current to the most recent month end may be obtained by accessing the website at www.massmutual.com.
Investors should note that the Fund is a professionally managed mutual fund, while the S&P 500 Index is unmanaged, does not incur expenses, and cannot be purchased directly by investors. Investors should read the Fund’s prospectus with regard to the Fund’s investment objective, risks, and charges and expenses in conjunction with these financial statements. The Fund’s return reflects changes in the net asset value per share without the deduction of any product charges (e.g., cost of insurance, mortality and expense risk charges, administrative fees, and CDSL). The inclusion of these charges would have reduced the performance shown here.
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MML Strategic Emerging Markets Fund – Portfolio Manager Report (Unaudited)
What is the investment approach of MML Strategic Emerging Markets Fund, and who is the Fund’s subadviser?
The Fund seeks long-term capital growth by investing mainly in common stocks of issuers in developing and emerging markets throughout the world and at times, up to 100% of its total assets in foreign securities. Under normal market conditions, the Fund will invest at least 80% of its net assets in equity securities of issuers whose principal activities are in a developing (or emerging) market, i.e., are in a developing market or are economically tied to a developing market country. The Fund will invest in at least three developing markets. In general, countries may be considered developing or emerging markets if they are included in any one of the MSCI emerging markets indexes, classified as a developing or emerging market, or classified under a similar or corresponding classification, by organizations such as the World Bank and the International Monetary Fund, or have economies, industries, and stock markets with similar characteristics. The Fund’s subadviser is OppenheimerFunds, Inc. (OFI).
How did the Fund perform during the 12 months ended December 31, 2015?
The Fund’s Class II Shares returned -14.23%, ahead of the -14.92% return of the MSCI Emerging Markets (EM) Index (the “benchmark”), an unmanaged market capitalization-weighted index of equity securities of companies domiciled in various countries. The index is designed to represent the performance of emerging stock markets throughout the world and excludes certain market segments unavailable to U.S.-based investors.
For a discussion on the economic and market environment during the 12-month period ended December 31, 2015, please see the Economic and Market Review, beginning on page 2.
Subadviser discussion of factors that contributed to the Fund’s performance
For the year ended December 31, 2015, stock selection in the financials, health care, and industrials sectors was the primary driver of the Fund’s benchmark-relative outperformance. Conversely, the Fund’s stock selection within the consumer staples, materials, and telecommunication services sectors worked against relative returns. On a country basis, the Fund outperformed the benchmark in China and India due primarily to stock selection – and in South Africa as a result of an underweight position, relative to the benchmark. Detractors from relative performance included underweight stakes in South Korea and Taiwan and an overweight position in Colombia.
Top-performing Fund holdings for the year included four Chinese stocks: Tencent Holdings, in the information technology sector; New Oriental Education & Technology Group, JD.com, and Ctrip.com International, all in consumer discretionary; and one Indian-based holding, Housing Development Finance (“HDF”), in financials. Tencent Holdings is an Internet gaming company that has grown into a leading messaging service provider. The company, which has begun to provide other services over the Internet, opened one of the few licensed online banks in China in January 2015, which helped propel the company’s share price upward. New Oriental Education & Technology Group, the largest provider of private educational services in China, rallied over the fourth quarter of 2015, due in part to strong earnings results that occurred despite the deceleration in China’s economy. JD.com is an online direct-sales company that performed positively over the first half of the year. The company has been benefiting from the growth of the online retail market in China. Ctrip.com, an online travel agent in China’s rapidly growing and highly fragmented travel market, acquired two of its principal competitors. One was Qunar, which was acquired from Baidu, a Chinese search engine company, in a share exchange that resulted in Baidu owning 25% of Ctrip. The deal was well received by the market, and shares of both Ctrip and Baidu rallied after the announcement. Finally, HDF is the leading provider of housing loans in India. The Reserve Bank of India eased monetary conditions significantly early in the year, which proved beneficial to the share prices of many lenders, including HDF.
Conversely, Fund holdings that were top detractors from performance included Prada, in consumer discretionary (Hong Kong); Companhia Brasileira de Distribuicao, in consumer staples, and Kroton Educacional, in consumer discretionary (both in Brazil); Glencore, in materials (U.K.); and MediaTek, in information technology (Taiwan). Prada has suffered along with the rest of the luxury goods industry in a difficult consumption environment, particularly in non-Japan Asia. Companhia Brasileira de Distribuicao and Kroton Educacional both experienced declines in a difficult environment for Brazilian stocks. Glencore is a natural resource company that was negatively impacted by declining commodity prices, which reduced the company’s profitability and put pressure on its balance sheet. Finally, MediaTek is a semiconductor chip designer and integrated circuit maker whose products are used in smartphones – particularly less-expensive versions manufactured in China. Sluggish smartphone demand and intensified competition have hurt pricing and margins. The company faces long-term challenges, and the Fund exited the position during the year.
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MML Strategic Emerging Markets Fund – Portfolio Manager Report (Unaudited) (Continued)
Subadviser outlook
Our view is that emerging market equity returns in 2015 were almost entirely driven by macro-economic factors. But despite the weakness in some of the factors at work in emerging markets – concerns over China, commodities, credit and currency – we have not seen signs of a pandemic macro-economic crisis. We believe growth may be slowing, but still may have the potential to outpace that of the developed world for some time to come.
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MML Strategic Emerging Markets Fund – Portfolio Manager Report (Unaudited) (Continued)
Performance data quoted represents past performance; past performance is not predictive of future results. The investment return and principal value of shares of the Fund will fluctuate with market conditions so that shares of the Fund, when redeemed, may be worth more or less than their original cost. Current performance of the Fund may be lower or higher than the performance quoted. Performance data current to the most recent month end may be obtained by accessing the website at www.massmutual.com.
Investors should note that the Fund is a professionally managed mutual fund, while the MSCI EM Index is unmanaged, does not incur expenses, and cannot be purchased directly by investors. Investors should read the Fund’s prospectus with regard to the Fund’s investment objective, risks, and charges and expenses in conjunction with these financial statements. The Fund’s return reflects changes in the net asset value per share without the deduction of any product charges (e.g., cost of insurance, mortality and expense risk charges, administrative fees, and CDSL). The inclusion of these charges would have reduced the performance shown here.
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MML Asset Momentum Fund – Portfolio of Investments
December 31, 2015
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MML Asset Momentum Fund – Portfolio of Investments (Continued)
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MML Dynamic Bond Fund – Portfolio of Investments
December 31, 2015
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MML Dynamic Bond Fund – Portfolio of Investments (Continued)
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MML Dynamic Bond Fund – Portfolio of Investments (Continued)
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MML Dynamic Bond Fund – Portfolio of Investments (Continued)
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MML Dynamic Bond Fund – Portfolio of Investments (Continued)
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MML Dynamic Bond Fund – Portfolio of Investments (Continued)
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MML Dynamic Bond Fund – Portfolio of Investments (Continued)
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MML Dynamic Bond Fund – Portfolio of Investments (Continued)
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MML Dynamic Bond Fund – Portfolio of Investments (Continued)
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MML Dynamic Bond Fund – Portfolio of Investments (Continued)
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MML Dynamic Bond Fund – Portfolio of Investments (Continued)
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MML Dynamic Bond Fund – Portfolio of Investments (Continued)
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MML Equity Rotation Fund – Portfolio of Investments
December 31, 2015
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MML Equity Rotation Fund – Portfolio of Investments (Continued)
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MML Equity Rotation Fund – Portfolio of Investments (Continued)
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MML High Yield Fund – Portfolio of Investments
December 31, 2015
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MML High Yield Fund – Portfolio of Investments (Continued)
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MML High Yield Fund – Portfolio of Investments (Continued)
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MML High Yield Fund – Portfolio of Investments (Continued)
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MML High Yield Fund – Portfolio of Investments (Continued)
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MML Inflation-Protected and Income Fund – Portfolio of Investments
December 31, 2015
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MML Inflation-Protected and Income Fund – Portfolio of Investments (Continued)
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MML Inflation-Protected and Income Fund – Portfolio of Investments (Continued)
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MML Inflation-Protected and Income Fund – Portfolio of Investments (Continued)
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MML Inflation-Protected and Income Fund – Portfolio of Investments (Continued)
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MML Inflation-Protected and Income Fund – Portfolio of Investments (Continued)
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MML Inflation-Protected and Income Fund – Portfolio of Investments (Continued)
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MML Inflation-Protected and Income Fund – Portfolio of Investments (Continued)
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MML Inflation-Protected and Income Fund – Portfolio of Investments (Continued)
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MML Inflation-Protected and Income Fund – Portfolio of Investments (Continued)
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MML Inflation-Protected and Income Fund – Portfolio of Investments (Continued)
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MML Inflation-Protected and Income Fund – Portfolio of Investments (Continued)
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MML Short-Duration Bond Fund – Portfolio of Investments
December 31, 2015
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MML Short-Duration Bond Fund – Portfolio of Investments (Continued)
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MML Short-Duration Bond Fund – Portfolio of Investments (Continued)
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MML Short-Duration Bond Fund – Portfolio of Investments (Continued)
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MML Short-Duration Bond Fund – Portfolio of Investments (Continued)
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MML Short-Duration Bond Fund – Portfolio of Investments (Continued)
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MML Short-Duration Bond Fund – Portfolio of Investments (Continued)
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MML Short-Duration Bond Fund – Portfolio of Investments (Continued)
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MML Short-Duration Bond Fund – Portfolio of Investments (Continued)
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MML Short-Duration Bond Fund – Portfolio of Investments (Continued)
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MML Short-Duration Bond Fund – Portfolio of Investments (Continued)
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MML Short-Duration Bond Fund – Portfolio of Investments (Continued)
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MML Short-Duration Bond Fund – Portfolio of Investments (Continued)
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MML Short-Duration Bond Fund – Portfolio of Investments (Continued)
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MML Short-Duration Bond Fund – Portfolio of Investments (Continued)
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MML Small Cap Equity Fund – Portfolio of Investments
December 31, 2015
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MML Small Cap Equity Fund – Portfolio of Investments (Continued)
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MML Small Cap Equity Fund – Portfolio of Investments (Continued)
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MML Special Situations Fund – Portfolio of Investments
December 31, 2015
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MML Special Situations Fund – Portfolio of Investments (Continued)
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MML Strategic Emerging Markets Fund – Portfolio of Investments
December 31, 2015
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MML Strategic Emerging Markets Fund – Portfolio of Investments (Continued)
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MML Strategic Emerging Markets Fund – Portfolio of Investments (Continued)
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MML Series Investment Fund II – Financial Statements
Statements of Assets and Liabilities
December 31, 2015
| MML Asset Momentum Fund |
MML Dynamic Bond Fund |
|||||||
| Assets: | ||||||||
| Investments, at value (Note 2) (a) |
$ | 13,283,198 | $ | 396,112,404 | ||||
| Repurchase agreements, at value (b) |
5,764,423 | 2,704,350 | ||||||
| Other short-term investments, at value (Note 2) (c) |
- | 29,022 | ||||||
|
|
|
|
|
|||||
| Total investments (d) |
19,047,621 | 398,845,776 | ||||||
|
|
|
|
|
|||||
| Foreign currency, at value (e) |
- | - | ||||||
| Receivables from: |
||||||||
| Investments sold |
206,006 | 12,478,192 | ||||||
| Collateral pledged for reverse repurchase agreements (Note 2) |
- | - | ||||||
| Investment adviser (Note 3) |
10,126 | - | ||||||
| Fund shares sold |
43,000 | - | ||||||
| Variation margin on open derivative instruments (Note 2) |
120 | - | ||||||
| Interest and dividends |
7,017 | 2,442,551 | ||||||
| Interest tax reclaim receivable |
- | 260 | ||||||
| Foreign taxes withheld |
590 | - | ||||||
| Open swap agreements, at value (Note 2) |
- | - | ||||||
|
|
|
|
|
|||||
| Total assets |
19,314,480 | 413,766,779 | ||||||
|
|
|
|
|
|||||
| Liabilities: | ||||||||
| Payables for: |
||||||||
| Investments purchased |
216,441 | 12,725,106 | ||||||
| Reverse repurchase agreements (Note 2) |
- | - | ||||||
| Interest for reverse repurchase agreements (Note 2) |
- | - | ||||||
| Fund shares repurchased |
2 | 8 | ||||||
| Securities on loan (Note 2) |
- | - | ||||||
| Open swap agreements, at value (Note 2) |
- | - | ||||||
| Trustees’ fees and expenses (Note 3) |
385 | 7,772 | ||||||
| Variation margin on open derivative instruments (Note 2) |
60,480 | - | ||||||
| Collateral held for open derivative contracts (Note 2) |
- | - | ||||||
| Affiliates (Note 3): |
||||||||
| Investment advisory fees |
9,700 | 144,779 | ||||||
| Administration fees |
2,425 | 51,180 | ||||||
| Service fees |
70 | 93 | ||||||
| Due to custodian |
- | 29,022 | ||||||
| Accrued expense and other liabilities |
20,390 | 42,105 | ||||||
|
|
|
|
|
|||||
| Total liabilities |
309,893 | 13,000,065 | ||||||
|
|
|
|
|
|||||
| Net assets |
$ | 19,004,587 | $ | 400,766,714 | ||||
|
|
|
|
|
|||||
| Net assets consist of: | ||||||||
| Paid-in capital |
$ | 20,140,056 | $ | 412,379,304 | ||||
| Undistributed (accumulated) net investment income (loss) |
- | 1,202,691 | ||||||
| Distributions in excess of net investment income |
(292 | ) | - | |||||
| Accumulated net realized gain (loss) on investments and foreign currency transactions |
(1,342,178 | ) | (2,480,016 | ) | ||||
| Net unrealized appreciation (depreciation) on investments and foreign currency translations |
207,001 | (10,335,265 | ) | |||||
|
|
|
|
|
|||||
| Net assets |
$ | 19,004,587 | $ | 400,766,714 | ||||
|
|
|
|
|
|||||
| (a) Cost of investments: |
$ | 13,079,949 | $ | 406,447,669 | ||||
| (b) Cost of repurchase agreements: |
$ | 5,764,423 | $ | 2,704,350 | ||||
| (c) Cost of other short-term investments: |
$ | - | $ | 29,022 | ||||
| (d) Securities on loan with market value of: |
$ | - | $ | - | ||||
| (e) Cost of foreign currency: |
$ | - | $ | - | ||||
The accompanying notes are an integral part of the financial statements.
90
Table of Contents
| MML Equity Rotation Fund |
MML High Yield Fund |
MML Inflation- Protected and Income Fund |
MML Short- Duration Bond Fund |
MML Small Cap Equity Fund |
MML Special Situations Fund |
MML Strategic Emerging Markets Fund |
||||||||||||||||||||
| $18,964,703 | $ | 131,592,732 | $ | 640,382,095 | $ | 176,763,820 | $ | 105,368,801 | $ | 16,261,641 | $ | 95,563,208 | ||||||||||||||
| 567,862 | - | 751,354 | - | 1,772,303 | 715,024 | 5,586,554 | ||||||||||||||||||||
| - | 6,252,362 | 126,380,145 | 1,724,702 | - | - | - | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| 19,532,565 | 137,845,094 | 767,513,594 | 178,488,522 | 107,141,104 | 16,976,665 | 101,149,762 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| - | - | - | - | - | - | 326,618 | ||||||||||||||||||||
| 76,496 | 21,365 | - | - | 114,527 | - | 108,552 | ||||||||||||||||||||
| - | - | 5,747,099 | - | - | - | - | ||||||||||||||||||||
| 5,600 | 11,968 | - | - | - | 6,041 | 17,787 | ||||||||||||||||||||
| - | 1,909 | 4,977,565 | 7,497 | 83,396 | - | 133,364 | ||||||||||||||||||||
| - | - | - | 31,980 | - | - | - | ||||||||||||||||||||
| 8,787 | 2,582,280 | 1,955,025 | 1,029,674 | 139,530 | 10,777 | 26,833 | ||||||||||||||||||||
| - | - | - | - | - | - | - | ||||||||||||||||||||
| - | - | - | - | - | - | 12,127 | ||||||||||||||||||||
| - | - | 46,262 | - | - | - | - | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| 19,623,448 | 140,462,616 | 780,239,545 | 179,557,673 | 107,478,557 | 16,993,483 | 101,775,043 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| - | - | - | - | - | - | 1,662,657 | ||||||||||||||||||||
| - | - | 351,048,927 | - | - | - | - | ||||||||||||||||||||
| - | - | 376,152 | - | - | - | - | ||||||||||||||||||||
| 1 | 4,393 | 49,438 | 68,898 | 5,388 | 3 | 24,674 | ||||||||||||||||||||
| - | - | - | - | 6,639,473 | - | 6,877,617 | ||||||||||||||||||||
| - | - | 71,975 | 12,887 | - | - | - | ||||||||||||||||||||
| 385 | 14,881 | 72,285 | 25,473 | 29,675 | 383 | 8,200 | ||||||||||||||||||||
| - | - | 17,910 | - | - | - | - | ||||||||||||||||||||
| - | - | 280,000 | - | - | - | - | ||||||||||||||||||||
| 7,522 | 71,810 | 197,560 | 55,650 | 56,203 | 8,697 | 83,060 | ||||||||||||||||||||
| 2,507 | 17,952 | - | 23,051 | - | 2,174 | 11,866 | ||||||||||||||||||||
| 65 | 16,801 | 30,664 | 15,647 | 6,957 | 66 | 5,314 | ||||||||||||||||||||
| - | - | - | 8,844 | 456 | - | - | ||||||||||||||||||||
| 24,163 | 40,647 | 55,902 | 35,849 | 28,758 | 23,004 | 337,121 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| 34,643 | 166,484 | 352,200,813 | 246,299 | 6,766,910 | 34,327 | 9,010,509 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| $19,588,805 | $ | 140,296,132 | $ | 428,038,732 | $ | 179,311,374 | $ | 100,711,647 | $ | 16,959,156 | $ | 92,764,534 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| $20,162,050 | $ | 156,232,581 | $ | 444,547,806 | $ | 184,341,188 | $ | 86,156,040 | $ | 20,091,030 | $ | 113,690,785 | ||||||||||||||
| - | - | 335,687 | 203,481 | 1,146,604 | (288 | ) | - | |||||||||||||||||||
| (295 | ) | (14,037 | ) | - | - | - | - | (414,032 | ) | |||||||||||||||||
| (230,384 | ) | (4,620,325 | ) | (9,692,314 | ) | (3,039,630 | ) | 310,704 | (1,755,248 | ) | (10,406,728 | ) | ||||||||||||||
| (342,566 | ) | (11,302,087 | ) | (7,152,447 | ) | (2,193,665 | ) | 13,098,299 | (1,376,338 | ) | (10,105,491 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| $19,588,805 | $ | 140,296,132 | $ | 428,038,732 | $ | 179,311,374 | $ | 100,711,647 | $ | 16,959,156 | $ | 92,764,534 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| $19,307,269 | $ | 142,895,145 | $ | 647,549,912 | $ | 178,781,267 | $ | 92,270,506 | $ | 17,637,979 | $ | 105,427,969 | ||||||||||||||
| $ | 567,862 | $ | - | $ | 751,354 | $ | - | $ | 1,772,303 | $ | 715,024 | $ | 5,586,554 | |||||||||||||
| $ | - | $ | 6,252,036 | $ | 126,328,004 | $ | 1,724,667 | $ | - | $ | - | $ | - | |||||||||||||
| $ | - | $ | - | $ | - | $ | - | $ | 6,477,803 | $ | - | $ | 6,694,525 | |||||||||||||
| $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | $ | 327,098 | |||||||||||||
91
Table of Contents
MML Series Investment Fund II – Financial Statements (Continued)
Statements of Assets and Liabilities
December 31, 2015
| MML Asset Momentum Fund |
MML Dynamic Bond Fund |
|||||||
| Initial Class shares: | ||||||||
| Net assets |
$ | - | $ | - | ||||
|
|
|
|
|
|||||
| Shares outstanding (a) |
- | - | ||||||
|
|
|
|
|
|||||
| Net asset value, offering price and redemption price per share |
$ | - | $ | - | ||||
|
|
|
|
|
|||||
| Class II shares: | ||||||||
| Net assets |
$ | 18,772,762 | $ | 400,384,635 | ||||
|
|
|
|
|
|||||
| Shares outstanding (a) |
1,991,674 | 41,219,332 | ||||||
|
|
|
|
|
|||||
| Net asset value, offering price and redemption price per share |
$ | 9.43 | $ | 9.71 | ||||
|
|
|
|
|
|||||
| Service Class shares: | ||||||||
| Net assets |
$ | - | $ | - | ||||
|
|
|
|
|
|||||
| Shares outstanding (a) |
- | - | ||||||
|
|
|
|
|
|||||
| Net asset value, offering price and redemption price per share |
$ | - | $ | - | ||||
|
|
|
|
|
|||||
| Service Class I shares: | ||||||||
| Net assets |
$ | 231,825 | $ | 382,079 | ||||
|
|
|
|
|
|||||
| Shares outstanding (a) |
24,616 | 39,350 | ||||||
|
|
|
|
|
|||||
| Net asset value, offering price and redemption price per share |
$ | 9.42 | $ | 9.71 | ||||
|
|
|
|
|
|||||
| (a) | Authorized unlimited number of shares with no par value. |
The accompanying notes are an integral part of the financial statements.
92
Table of Contents
| MML Equity Rotation Fund |
MML High Yield Fund |
MML Inflation- Protected and Income Fund |
MML Short- Duration Bond Fund |
MML Small Cap Equity Fund |
MML Special Situations Fund |
MML Strategic Emerging Markets Fund |
||||||||||||||||||||
| $ |
- |
|
$ | - | $ | 380,221,050 | $ | - | $ | 89,556,538 | $ | - | $ | - | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| - | - | 38,345,958 | - | 10,835,421 | - | - | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| $ | - | $ | - | $ | 9.92 | $ | - | $ | 8.27 | $ | - | $ | - | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| |
$19,461,608 |
|
$ | 113,880,048 | $ | - | $ | 155,209,882 | $ | - | $ | 16,776,046 | $ | 84,355,509 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| 2,004,798 | 12,419,954 | - | 16,005,927 | - | 1,990,591 | 10,352,499 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| $ | 9.71 | $ | 9.17 | $ | - | $ | 9.70 | $ | - | $ | 8.43 | $ | 8.15 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| $ |
- |
|
$ | - | $ | 47,817,682 | $ | - | $ | 11,155,109 | $ | - | $ | - | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| - | - | 4,844,443 | - | 1,369,179 | - | - | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| $ | - | $ | - | $ | 9.87 | $ | - | $ | 8.15 | $ | - | $ | - | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| $ |
127,197 |
|
$ | 26,416,084 | $ | - | $ | 24,101,492 | $ | - | $ | 183,110 | $ | 8,409,025 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| 13,105 | 2,888,651 | - | 2,487,740 | - | 21,748 | 1,028,772 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| $ | 9.71 | $ | 9.14 | $ | - | $ | 9.69 | $ | - | $ | 8.42 | $ | 8.17 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
93
Table of Contents
MML Series Investment Fund II – Financial Statements (Continued)
For the Year Ended December 31, 2015
| MML Asset Momentum Fund+ |
MML Dynamic Bond Fund+ |
|||||||
| Investment income (Note 2): | ||||||||
| Dividends (a) |
$ | 91,178 | $ | 248,418 | ||||
| Interest (b) |
8,155 | 8,332,696 | ||||||
| Securities lending net income |
- | - | ||||||
|
|
|
|
|
|||||
| Total investment income |
99,333 | 8,581,114 | ||||||
|
|
|
|
|
|||||
| Expenses (Note 3): | ||||||||
| Investment advisory fees |
73,509 | 1,016,538 | ||||||
| Custody fees |
7,811 | 27,545 | ||||||
| Interest expense |
- | - | ||||||
| Audit fees |
30,000 | 45,000 | ||||||
| Legal fees |
17,085 | 16,047 | ||||||
| Proxy fees |
- | - | ||||||
| Shareholder reporting fees |
5,408 | 45,595 | ||||||
| Trustees’ fees |
878 | 17,765 | ||||||
|
|
|
|
|
|||||
| 134,691 | 1,168,490 | |||||||
| Administration fees: |
||||||||
| Class II |
18,280 | 381,089 | ||||||
| Service Class I |
97 | 113 | ||||||
| Service fees: |
||||||||
| Service Class |
- | - | ||||||
| Service Class I |
162 | 188 | ||||||
|
|
|
|
|
|||||
| Total expenses |
153,230 | 1,549,880 | ||||||
| Expenses waived (Note 3): |
||||||||
| Class II fees reimbursed by adviser |
(54,763 | ) | (24,876 | ) | ||||
| Service Class I fees reimbursed by adviser |
(293 | ) | (7 | ) | ||||
| Class II advisory fees waived |
- | - | ||||||
| Service Class I advisory fees waived |
- | - | ||||||
|
|
|
|
|
|||||
| Net expenses |
98,174 | 1,524,997 | ||||||
|
|
|
|
|
|||||
| Net investment income (loss) |
1,159 | 7,056,117 | ||||||
|
|
|
|
|
|||||
| Realized and unrealized gain (loss): | ||||||||
| Net realized gain (loss) on: |
||||||||
| Investment transactions |
(1,189,905 | ) | (1,959,485 | ) | ||||
| Futures contracts |
(152,273 | ) | - | |||||
| Swap agreements |
- | - | ||||||
| Foreign currency transactions |
(334 | ) | - | |||||
|
|
|
|
|
|||||
| Net realized gain (loss) |
(1,342,512 | ) | (1,959,485 | ) | ||||
|
|
|
|
|
|||||
| Net change in unrealized appreciation (depreciation) on: |
||||||||
| Investment transactions |
203,249 | (10,335,265 | ) | |||||
| Futures contracts |
3,756 | - | ||||||
| Swap agreements |
- | - | ||||||
| Translation of assets and liabilities in foreign currencies |
(4 | ) | - | |||||
|
|
|
|
|
|||||
| Net change in unrealized appreciation (depreciation) |
207,001 | (10,335,265 | ) | |||||
|
|
|
|
|
|||||
| Net realized gain (loss) and change in unrealized appreciation (depreciation) |
(1,135,511 | ) | (12,294,750 | ) | ||||
|
|
|
|
|
|||||
| Net increase (decrease) in net assets resulting from operations |
$ | (1,134,352 | ) | $ | (5,238,633 | ) | ||
|
|
|
|
|
|||||
| (a) Net of foreign withholding tax of: |
$ | 2,215 | $ | - | ||||
| (b) Net of foreign withholding tax of: |
$ | - | $ | 183 | ||||
| + | Fund commenced operations on May 15, 2015. |
| * | Net decrease in accrued foreign capital gains tax of $(239,283). |
The accompanying notes are an integral part of the financial statements.
94
Table of Contents
| MML Equity Rotation Fund+ |
MML High Yield Fund |
MML Inflation- Protected and Income Fund |
MML Short- Duration Bond Fund |
MML Small Cap Equity Fund |
MML Special Situations Fund+ |
MML Strategic Emerging Markets Fund |
||||||||||||||||||||
| $ | 213,236 | $ | - | $ | - | $ | 30,282 | $ | 1,594,678 | $ | 85,154 | $ | 1,695,182 | |||||||||||||
| 52 | 10,550,459 | 6,423,898 | 4,207,802 | 177 | 70 | 608 | ||||||||||||||||||||
| - | - | - | - | 170,487 | - | 32,592 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| 213,288 | 10,550,459 | 6,423,898 | 4,238,084 | 1,765,342 | 85,224 | 1,728,382 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| 56,092 | 870,128 | 2,466,294 | 681,083 | 711,231 | 70,392 | 1,044,040 | ||||||||||||||||||||
| 2,187 | 58,002 | 90,316 | 35,878 | 16,775 | 2,768 | 257,607 | ||||||||||||||||||||
| - | - | 1,141,290 | 2 | - | - | - | ||||||||||||||||||||
| 35,752 | 35,370 | 36,862 | 35,906 | 34,638 | 34,222 | 80,934 | ||||||||||||||||||||
| 820 | 1,021 | 3,521 | 1,365 | 818 | 1,223 | 756 | ||||||||||||||||||||
| - | 1,033 | 1,033 | 1,033 | 1,033 | - | 1,033 | ||||||||||||||||||||
| 5,301 | 11,878 | 28,551 | 13,399 | 9,618 | 5,586 | 13,095 | ||||||||||||||||||||
| 886 | 8,041 | 25,221 | 10,256 | 6,182 | 878 | 5,578 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| 101,038 | 985,473 | 3,793,088 | 778,922 | 780,295 | 115,069 | 1,403,043 | ||||||||||||||||||||
| 18,603 | 178,263 | - | 214,866 | - | 17,503 | 166,537 | ||||||||||||||||||||
| 95 | 39,269 | - | 32,458 | - | 95 | 16,512 | ||||||||||||||||||||
| - | - | 126,602 | - | 27,211 | - | - | ||||||||||||||||||||
| 159 | 65,448 | - | 60,670 | - | 158 | 22,380 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| 119,895 | 1,268,453 | 3,919,690 | 1,086,916 | 807,506 | 132,825 | 1,608,472 | ||||||||||||||||||||
| (38,516 | ) | (17,515 | ) | - | (4,328 | ) | - | (38,599 | ) | (176,536 | ) | |||||||||||||||
| (198 | ) | (3,790 | ) | - | (669 | ) | - | (211 | ) | (17,502 | ) | |||||||||||||||
| - | (118,840 | ) | - | - | - | - | - | |||||||||||||||||||
| - | (26,181 | ) | - | - | - | - | - | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| 81,181 | 1,102,127 | 3,919,690 | 1,081,919 | 807,506 | 94,015 | 1,414,434 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| 132,107 | 9,448,332 | 2,504,208 | 3,156,165 | 957,836 | (8,791 | ) | 313,948 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| (230,384 | ) | (4,291,500 | ) | 1,712,675 | 424,071 | 4,235,471 | (1,755,248 | ) | (9,010,204 | ) | ||||||||||||||||
| - | - | (973,829 | ) | 704,402 | - | - | - | |||||||||||||||||||
| - | - | (384,777 | ) | (456,311 | ) | - | - | - | ||||||||||||||||||
| - | - | (8,628 | ) | (5,405 | ) | (8,294 | ) | - | (98,542 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| (230,384 | ) | (4,291,500 | ) | 345,441 | 666,757 | 4,227,177 | (1,755,248 | ) | (9,108,746 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| (342,566 | ) | (6,827,441 | ) | (9,800,365 | ) | (2,344,495 | ) | (11,239,641 | ) | (1,376,338 | ) | (6,329,935 | )* | |||||||||||||
| - | - | 361,886 | (79,832 | ) | - | - | - | |||||||||||||||||||
| - | - | 205,722 | 246,476 | - | - | - | ||||||||||||||||||||
| - | - | 3,095 | 1,938 | 4 | - | 235,941 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| (342,566 | ) | (6,827,441 | ) | (9,229,662 | ) | (2,175,913 | ) | (11,239,637 | ) | (1,376,338 | ) | (6,093,994 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| (572,950 | ) | (11,118,941 | ) | (8,884,221 | ) | (1,509,156 | ) | (7,012,460 | ) | (3,131,586 | ) | (15,202,740 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| $ | (440,843 | ) | $ | (1,670,609 | ) | $ | (6,380,013 | ) | $ | 1,647,009 | $ | (6,054,624 | ) | $ | (3,140,377 | ) | $ | (14,888,792 | ) | |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| $ | 915 | $ | - | $ | - | $ | - | $ | 917 | $ | - | $ | 141,130 | |||||||||||||
| $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | |||||||||||||
95
Table of Contents
MML Series Investment Fund II – Financial Statements (Continued)
Statements of Changes in Net Assets
| MML Asset Momentum Fund |
||||
| Period Ended December 31, 2015+ |
||||
| Increase (Decrease) in Net Assets: | ||||
| Operations: | ||||
| Net investment income (loss) |
$ | 1,159 | ||
| Net realized gain (loss) on investment transactions |
(1,342,512 | ) | ||
| Net change in unrealized appreciation (depreciation) on investments |
207,001 | |||
|
|
|
|||
| Net increase (decrease) in net assets resulting from operations |
(1,134,352 | ) | ||
|
|
|
|||
| Distributions to shareholders (Note 2): | ||||
| From net investment income: |
||||
| Class II |
(1,117 | ) | ||
| Service Class I |
- | |||
|
|
|
|||
| Total distributions from net investment income |
(1,117 | ) | ||
|
|
|
|||
| Tax return of capital: |
||||
| Class II |
(14,648 | ) | ||
| Service Class I |
- | |||
|
|
|
|||
| Total tax return of capital |
(14,648 | ) | ||
|
|
|
|||
| Net fund share transactions (Note 5): | ||||
| Class II |
19,915,765 | |||
| Service Class I |
238,939 | |||
|
|
|
|||
| Increase (decrease) in net assets from fund share transactions |
20,154,704 | |||
|
|
|
|||
| Total increase (decrease) in net assets |
19,004,587 | |||
| Net assets | ||||
| Beginning of year |
- | |||
|
|
|
|||
| End of year |
$ | 19,004,587 | ||
|
|
|
|||
| Undistributed (accumulated) net investment income (loss) included in net assets at end of year |
$ | - | ||
|
|
|
|||
| Distributions in excess of net investment income included in net assets at end of year |
$ | (292 | ) | |
|
|
|
|||
| + | Fund commenced operations on May 15, 2015. |
The accompanying notes are an integral part of the financial statements.
96
Table of Contents
| MML Dynamic Bond Fund |
MML Equity Rotation Fund |
|||||
| Period Ended December 31, 2015+ |
Period Ended December 31, 2015+ |
|||||
| $ | 7,056,117 | $ | 132,107 | |||
| (1,959,485 | ) | (230,384 | ) | |||
| (10,335,265 | ) | (342,566 | ) | |||
|
|
|
|
|
|||
| (5,238,633 | ) | (440,843 | ) | |||
|
|
|
|
|
|||
| (6,371,746 | ) | (131,849 | ) | |||
| (2,208 | ) | (553 | ) | |||
|
|
|
|
|
|||
| (6,373,954 | ) | (132,402 | ) | |||
|
|
|
|
|
|||
| - | (11,546 | ) | ||||
| - | (48 | ) | ||||
|
|
|
|
|
|||
| - | (11,594 | ) | ||||
|
|
|
|
|
|||
| 411,992,570 | 20,043,395 | |||||
| 386,731 | 130,249 | |||||
|
|
|
|
|
|||
| 412,379,301 | 20,173,644 | |||||
|
|
|
|
|
|||
| 400,766,714 | 19,588,805 | |||||
| - | - | |||||
|
|
|
|
|
|||
| $ | 400,766,714 | $ | 19,588,805 | |||
|
|
|
|
|
|||
| $ | 1,202,691 | $ | - | |||
|
|
|
|
|
|||
| $ | - | $ | (295 | ) | ||
|
|
|
|
|
|||
97
Table of Contents
MML Series Investment Fund II – Financial Statements (Continued)
Statements of Changes in Net Assets
| MML High Yield Fund | ||||||||
| Year Ended December 31, 2015 |
Year Ended December 31, 2014 |
|||||||
| Increase (Decrease) in Net Assets: | ||||||||
| Operations: | ||||||||
| Net investment income (loss) |
$ | 9,448,332 | $ | 10,260,481 | ||||
| Net realized gain (loss) on investment transactions |
(4,291,500 | ) | 628,613 | |||||
| Net change in unrealized appreciation (depreciation) on investments |
(6,827,441 | ) | (8,859,880 | ) | ||||
|
|
|
|
|
|||||
| Net increase (decrease) in net assets resulting from operations |
(1,670,609 | ) | 2,029,214 | |||||
|
|
|
|
|
|||||
| Distributions to shareholders (Note 2): | ||||||||
| From net investment income: |
||||||||
| Initial Class |
- | - | ||||||
| Class II |
(7,859,288 | ) | (8,714,003 | ) | ||||
| Service Class |
- | - | ||||||
| Service Class I |
(1,692,539 | ) | (1,714,887 | ) | ||||
|
|
|
|
|
|||||
| Total distributions from net investment income |
(9,551,827 | ) | (10,428,890 | ) | ||||
|
|
|
|
|
|||||
| From net realized gains: |
||||||||
| Initial Class |
- | - | ||||||
| Class II |
(666,362 | ) | (5,338,556 | ) | ||||
| Service Class |
- | - | ||||||
| Service Class I |
(143,984 | ) | (993,785 | ) | ||||
|
|
|
|
|
|||||
| Total distributions from net realized gains |
(810,346 | ) | (6,332,341 | ) | ||||
|
|
|
|
|
|||||
| Tax return of capital: |
||||||||
| Class II |
(21,491 | ) | - | |||||
| Service Class I |
(4,628 | ) | - | |||||
|
|
|
|
|
|||||
| Total tax return of capital |
(26,119 | ) | - | |||||
|
|
|
|
|
|||||
| Net fund share transactions (Note 5): | ||||||||
| Initial Class |
- | - | ||||||
| Class II |
7,410,299 | (854,480 | ) | |||||
| Service Class |
- | - | ||||||
| Service Class I |
3,413,102 | 5,726,142 | ||||||
|
|
|
|
|
|||||
| Increase (decrease) in net assets from fund share transactions |
10,823,401 | 4,871,662 | ||||||
|
|
|
|
|
|||||
| Total increase (decrease) in net assets |
(1,235,500 | ) | (9,860,355 | ) | ||||
| Net assets | ||||||||
| Beginning of year |
141,531,632 | 151,391,987 | ||||||
|
|
|
|
|
|||||
| End of year |
$ | 140,296,132 | $ | 141,531,632 | ||||
|
|
|
|
|
|||||
| Undistributed (accumulated) net investment income (loss) included in net assets at end of year |
$ | - | $ | - | ||||
|
|
|
|
|
|||||
| Distributions in excess of net investment income included in net assets at end of year |
$ | (14,037 | ) | $ | (11,845 | ) | ||
|
|
|
|
|
|||||
The accompanying notes are an integral part of the financial statements.
98
Table of Contents
| MML Inflation-Protected and Income Fund |
MML Short-Duration Bond Fund | |||||||||||||
| Year Ended December 31, 2015 |
Year Ended December 31, 2014 |
Year Ended December 31, 2015 |
Year Ended December 31, 2014 |
|||||||||||
| $ | 2,504,208 | $ | 7,290,390 | $ | 3,156,165 | $ | 2,992,768 | |||||||
| 345,441 | 2,144,851 | 666,757 | 1,248,480 | |||||||||||
| (9,229,662 | ) | 1,521,314 | (2,175,913 | ) | (1,311,728 | ) | ||||||||
|
|
|
|
|
|
|
|
|
|||||||
| (6,380,013 | ) | 10,956,555 | 1,647,009 | 2,929,520 | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||
| (4,521,221 | ) | (9,093,862 | ) | - | - | |||||||||
| - | - | (3,766,756 | ) | (4,343,604 | ) | |||||||||
| (512,261 | ) | (1,368,171 | ) | - | - | |||||||||
| - | - | (508,301 | ) | (499,898 | ) | |||||||||
|
|
|
|
|
|
|
|
|
|||||||
| (5,033,482 | ) | (10,462,033 | ) | (4,275,057 | ) | (4,843,502 | ) | |||||||
|
|
|
|
|
|
|
|
|
|||||||
| - | (7,105,127 | ) | - | - | ||||||||||
| - | - | - | (24,648 | ) | ||||||||||
| - | (1,153,841 | ) | - | - | ||||||||||
| - | - | - | (2,860 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||
| - | (8,258,968 | ) | - | (27,508 | ) | |||||||||
|
|
|
|
|
|
|
|
|
|||||||
| - | - | - | - | |||||||||||
| - | - | - | - | |||||||||||
|
|
|
|
|
|
|
|
|
|||||||
| - | - | - | - | |||||||||||
|
|
|
|
|
|
|
|
|
|||||||
| (22,569,481 | ) | 93,431,108 | - | - | ||||||||||
| - | - | (8,961,900 | ) | (27,145,769 | ) | |||||||||
| (2,846,921 | ) | (1,080,029 | ) | - | - | |||||||||
| - | - | 175,349 | 2,836,801 | |||||||||||
|
|
|
|
|
|
|
|
|
|||||||
| (25,416,402 | ) | 92,351,079 | (8,786,551 | ) | (24,308,968 | ) | ||||||||
|
|
|
|
|
|
|
|
|
|||||||
| (36,829,897 | ) | 84,586,633 | (11,414,599 | ) | (26,250,458 | ) | ||||||||
| 464,868,629 | 380,281,996 | 190,725,973 | 216,976,431 | |||||||||||
|
|
|
|
|
|
|
|
|
|||||||
| $ | 428,038,732 | $ | 464,868,629 | $ | 179,311,374 | $ | 190,725,973 | |||||||
|
|
|
|
|
|
|
|
|
|||||||
| $ | 335,687 | $ | - | $ | 203,481 | $ | 57,932 | |||||||
|
|
|
|
|
|
|
|
|
|||||||
| $ | - | $ | (187,457 | ) | $ | - | $ | - | ||||||
|
|
|
|
|
|
|
|
|
|||||||
99
Table of Contents
MML Series Investment Fund II – Financial Statements (Continued)
Statements of Changes in Net Assets
| MML Small Cap Equity Fund | ||||||||
| Year Ended December 31, 2015 |
Year Ended December 31, 2014 |
|||||||
| Increase (Decrease) in Net Assets: | ||||||||
| Operations: | ||||||||
| Net investment income (loss) |
$ | 957,836 | $ | 1,299,752 | ||||
| Net realized gain (loss) on investment transactions |
4,227,177 | 18,722,682 | ||||||
| Net change in unrealized appreciation (depreciation) on investments |
(11,239,637 | ) | (7,281,974 | ) | ||||
|
|
|
|
|
|||||
| Net increase (decrease) in net assets resulting from operations |
(6,054,624 | ) | 12,740,460 | |||||
|
|
|
|
|
|||||
| Distributions to shareholders (Note 2): | ||||||||
| From net investment income: |
||||||||
| Initial Class |
(831,938 | ) | (985,388 | ) | ||||
| Class II |
- | - | ||||||
| Service Class |
(74,514 | ) | (72,332 | ) | ||||
| Service Class I |
- | - | ||||||
|
|
|
|
|
|||||
| Total distributions from net investment income |
(906,452 | ) | (1,057,720 | ) | ||||
|
|
|
|
|
|||||
| From net realized gains: |
||||||||
| Initial Class |
(15,107,079 | ) | (13,001,220 | ) | ||||
| Service Class |
(1,752,680 | ) | (1,160,019 | ) | ||||
|
|
|
|
|
|||||
| Total distributions from net realized gains |
(16,859,759 | ) | (14,161,239 | ) | ||||
|
|
|
|
|
|||||
| Tax return of capital: |
||||||||
| Class II |
- | - | ||||||
|
|
|
|
|
|||||
| Total tax return of capital |
- | - | ||||||
|
|
|
|
|
|||||
| Net fund share transactions (Note 5): | ||||||||
| Initial Class |
6,125,603 | 2,864,770 | ||||||
| Class II |
- | - | ||||||
| Service Class |
3,745,895 | 2,453,908 | ||||||
| Service Class I |
- | - | ||||||
|
|
|
|
|
|||||
| Increase (decrease) in net assets from fund share transactions |
9,871,498 | 5,318,678 | ||||||
|
|
|
|
|
|||||
| Total increase (decrease) in net assets |
(13,949,337 | ) | 2,840,179 | |||||
| Net assets | ||||||||
| Beginning of year |
114,660,984 | 111,820,805 | ||||||
|
|
|
|
|
|||||
| End of year |
$ | 100,711,647 | $ | 114,660,984 | ||||
|
|
|
|
|
|||||
| Undistributed (accumulated) net investment income (loss) included in net assets at end of year |
$ | 1,146,604 | $ | 1,107,846 | ||||
|
|
|
|
|
|||||
| Distributions in excess of net investment income included in net assets at end of year |
$ | - | $ | - | ||||
|
|
|
|
|
|||||
| + | Fund commenced operations on May 15, 2015. |
The accompanying notes are an integral part of the financial statements.
100
Table of Contents
| MML Special Situations Fund | MML Strategic Emerging Markets Fund | |||||||||
| Period Ended December 31, 2015+ |
Year Ended December 31, 2015 |
Year Ended December 31, 2014 |
||||||||
| $ | (8,791 | ) | $ | 313,948 | $ | 400,512 | ||||
| (1,755,248 | ) | (9,108,746 | ) | 1,088,084 | ||||||
| (1,376,338 | ) | (6,093,994 | ) | (5,836,850 | ) | |||||
|
|
|
|
|
|
|
|||||
| (3,140,377 | ) | (14,888,792 | ) | (4,348,254 | ) | |||||
|
|
|
|
|
|
|
|||||
| - | - | - | ||||||||
| - | (1,066,654 | ) | (286,757 | ) | ||||||
| - | - | - | ||||||||
| - | (78,067 | ) | (4,290 | ) | ||||||
|
|
|
|
|
|
|
|||||
| - | (1,144,721 | ) | (291,047 | ) | ||||||
|
|
|
|
|
|
|
|||||
| - | - | - | ||||||||
| - | - | - | ||||||||
|
|
|
|
|
|
|
|||||
| - | - | - | ||||||||
|
|
|
|
|
|
|
|||||
| (4,967 | ) | - | - | |||||||
|
|
|
|
|
|
|
|||||
| (4,967 | ) | - | - | |||||||
|
|
|
|
|
|
|
|||||
| - | - | - | ||||||||
| 19,904,967 | 13,116,397 | (1,726,527 | ) | |||||||
| - | - | - | ||||||||
| 199,533 | 728,273 | 545,947 | ||||||||
|
|
|
|
|
|
|
|||||
| 20,104,500 | 13,844,670 | (1,180,580 | ) | |||||||
|
|
|
|
|
|
|
|||||
| 16,959,156 | (2,188,843 | ) | (5,819,881 | ) | ||||||
| - | 94,953,377 | 100,773,258 | ||||||||
|
|
|
|
|
|
|
|||||
| $ | 16,959,156 | $ | 92,764,534 | $ | 94,953,377 | |||||
|
|
|
|
|
|
|
|||||
| $ | (288 | ) | $ | - | $ | 475,214 | ||||
|
|
|
|
|
|
|
|||||
| $ | - | $ | (414,032 | ) | $ | - | ||||
|
|
|
|
|
|
|
|||||
101
Table of Contents
MML Series Investment Fund II – Financial Statements (Continued)
For the Year Ended December 31, 2015
| MML Inflation- Protected and Income Fund |
||||
| Cash flows from operating activities: | ||||
| Net increase (decrease) in net assets resulting from operations |
$ | (6,380,013 | ) | |
| Adjustments to reconcile net increase in net assets resulting from operations to net cash provided by (used in) operating activities: |
||||
| Investments purchased |
(329,014,192 | ) | ||
| Investments sold |
333,727,548 | |||
| (Increase) Decrease to the principal amount of inflation-indexed bonds |
(529,538 | ) | ||
| (Purchase) Sale of short-term investments, net |
72,001,281 | |||
| Amortization (accretion) of discount and premium, net |
2,731,881 | |||
| (Increase) Decrease in receivable from interest and dividends |
84,945 | |||
| (Increase) Decrease in receivable for open swap agreements |
(46,262 | ) | ||
| Increase (Decrease) in payable for Trustees' fees and expenses |
8,046 | |||
| Increase (Decrease) in payable for investment advisory fees |
(29,977 | ) | ||
| Increase (Decrease) in payable for service fees |
(2,100 | ) | ||
| Increase (Decrease) in payable for open swap agreements |
71,975 | |||
| Increase (Decrease) in payable for collateral held for open derivative contracts |
280,000 | |||
| Increase (Decrease) in variation margin on open derivative instruments |
(33,549 | ) | ||
| Increase (Decrease) in payable for accrued expenses and other liabilities |
(9,674 | ) | ||
| Net change in unrealized (appreciation) depreciation on investments |
9,800,365 | |||
| Net realized (gain) loss from investments |
(1,712,675 | ) | ||
|
|
|
|||
| Net cash from (used in) operating activities |
80,948,061 | |||
|
|
|
|||
| Cash flows from (used in) financing activities: | ||||
| Increase (Decrease) in due to custodian |
(24 | ) | ||
| Proceeds from shares sold |
38,292,789 | |||
| Payment on shares redeemed |
(68,834,238 | ) | ||
| Proceeds from reverse repurchase agreements |
(102,857,136 | ) | ||
| Repayment of reverse repurchase agreements |
54,658,945 | |||
| Increase (Decrease) in collateral pledged for reverse repurchase agreements |
(2,439,069 | ) | ||
| Increase (Decrease) in payable for interest for reverse repurchase agreements |
230,672 | |||
|
|
|
|||
| Net cash from (used in) financing activities |
(80,948,061 | ) | ||
|
|
|
|||
| Net increase (decrease) in cash |
- | |||
| Cash at beginning of year |
- | |||
|
|
|
|||
| Cash at end of year |
$ | - | ||
|
|
|
|||
| Non cash financing activities not included herein consist of: |
||||
| Reinvestment of all distributions |
$ | 5,033,482 | ||
| Cash paid out for interest on reverse repurchase agreements |
$ | 910,618 | ||
The accompanying notes are an integral part of the financial statements.
102
Table of Contents
MML Series Investment Fund II – Financial Statements (Continued)
Financial Highlights (For a share outstanding throughout each period)
MML Asset Momentum Fund
| Income (loss) from investment operations |
Less distributions to shareholders |
Ratios / Supplemental Data | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Net asset value, beginning of the period |
Net investment income (loss)c,j |
Net realized and unrealized gain (loss) on investments |
Total income (loss) from investment operations |
From net investment income |
Tax return of capital |
Total distributions |
Net asset value, end of the period |
Total returnm |
Net assets, end of the period (000’s) |
Ratio of expenses to average daily net assets before expense waivers |
Ratio of expenses to average daily net assets after expense waiversj |
Net investment income (loss) to average daily net assets |
||||||||||||||||||||||||||||||||||||||||
| Class II |
|
|||||||||||||||||||||||||||||||||||||||||||||||||||
| 12/31/15g | $ | 10.00 | $ | 0.00 | d | $ | (0.56 | ) | $ | (0.56 | ) | $ | (0.00 | )d | $ | (0.01 | ) | $ | (0.01 | ) | $ | 9.43 | (5.62% | )b | $ | 18,773 | 1.25% | a | 0.80% | a | 0.01% | a | ||||||||||||||||||||
| Service Class I |
|
|||||||||||||||||||||||||||||||||||||||||||||||||||
| 12/31/15g | $ | 10.00 | $ | (0.02 | ) | $ | (0.56 | ) | $ | (0.58 | ) | $ | - | $ | - | $ | - | $ | 9.42 | (5.80% | )b | $ | 232 | 1.50% | a | 1.05% | a | (0.25% | )a | |||||||||||||||||||||||
| Period ended December 31, 2015b |
||||
| Portfolio turnover rate |
141 | % | ||
| a | Annualized. |
| b | Percentage represents the results for the period and is not annualized. |
| c | Per share amount calculated on the average shares method. |
| d | Amount is less than $0.005 per share. |
| g | For the period May 15, 2015 (commencement of operations) through December 31, 2015. |
| j | Computed after giving effect to an agreement by MML Advisers to waive certain fees and expenses of the Fund. |
| m | Total return does not reflect expenses that apply at the separate account level or to related insurance products. Inclusion of these charges would reduce the total return figures for all periods shown. |
The accompanying notes are an integral part of the financial statements.
103
Table of Contents
MML Series Investment Fund II – Financial Statements (Continued)
Financial Highlights (For a share outstanding throughout each period)
MML Dynamic Bond Fund
| Income (loss) from investment operations |
Less distributions to shareholders |
Ratios / Supplemental Data | ||||||||||||||||||||||||||||||||||||||||||||||
| Net asset value, beginning of the period |
Net investment income (loss)c,j |
Net realized and unrealized gain (loss) on investments |
Total income (loss) from investment operations |
From net investment income |
Total distributions |
Net asset value, end of the period |
Total returnm |
Net assets, end of the period (000’s) |
Ratio of expenses to average daily net assets before expense waivers |
Ratio of expenses to average daily net assets after expense waiversj |
Net investment income (loss) to average daily net assets |
|||||||||||||||||||||||||||||||||||||
| Class II |
|
|||||||||||||||||||||||||||||||||||||||||||||||
| 12/31/15g | $ | 10.00 | $ | 0.17 | $ | (0.30 | ) | $ | (0.13 | ) | $ | (0.16 | ) | $ | (0.16 | ) | $ | 9.71 | (1.34% | )b | $ | 400,385 | 0.61% | a | 0.60% | a | 2.78% | a | ||||||||||||||||||||
| Service Class I |
|
|||||||||||||||||||||||||||||||||||||||||||||||
| 12/31/15g | $ | 10.00 | $ | 0.15 | $ | (0.29 | ) | $ | (0.14 | ) | $ | (0.15 | ) | $ | (0.15 | ) | $ | 9.71 | (1.45% | )b | $ | 382 | 0.86% | a | 0.85% | a | 2.39% | a | ||||||||||||||||||||
| Period ended December 31, 2015b |
||||
| Portfolio turnover rate |
106 | % | ||
| a | Annualized. |
| b | Percentage represents the results for the period and is not annualized. |
| c | Per share amount calculated on the average shares method. |
| g | For the period May 15, 2015 (commencement of operations) through December 31, 2015. |
| j | Computed after giving effect to an agreement by MML Advisers to waive certain fees and expenses of the Fund. |
| m | Total return does not reflect expenses that apply at the separate account level or to related insurance products. Inclusion of these charges would reduce the total return figures for all periods shown. |
The accompanying notes are an integral part of the financial statements.
104
Table of Contents
MML Series Investment Fund II – Financial Statements (Continued)
Financial Highlights (For a share outstanding throughout each period)
MML Equity Rotation Fund
| Income (loss) from investment operations |
Less distributions to shareholders |
Ratios / Supplemental Data | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Net asset value, beginning of the period |
Net investment income (loss)c,j |
Net realized and unrealized gain (loss) on investments |
Total income (loss) from investment operations |
From net investment income |
Tax return of capital |
Total distributions |
Net asset value, end of the period |
Total returnm |
Net assets, end of the period (000’s) |
Ratio of expenses to average daily net assets before expense waivers |
Ratio of expenses to average daily net assets after expense waiversj |
Net investment income (loss) to average daily net assets |
||||||||||||||||||||||||||||||||||||||||
| Class II |
| |||||||||||||||||||||||||||||||||||||||||||||||||||
| 12/31/15g | $ | 10.00 | $ | 0.07 | $ | (0.29 | ) | $ | (0.22 | ) | $ | (0.06 | ) | $ | (0.01 | ) | $ | (0.07 | ) | $ | 9.71 | (2.18% | )b | $ | 19,462 | 0.96% | a | 0.65% | a | 1.06% | a | |||||||||||||||||||||
| Service Class I |
| |||||||||||||||||||||||||||||||||||||||||||||||||||
| 12/31/15g | $ | 10.00 | $ | 0.05 | $ | (0.28 | ) | $ | (0.23 | ) | $ | (0.06 | ) | $ | (0.00 | )d | $ | (0.06 | ) | $ | 9.71 | (2.32% | )b | $ | 127 | 1.21% | a | 0.90% | a | 0.80% | a | |||||||||||||||||||||
| Period ended December 31, 2015b |
||||
| Portfolio turnover rate |
39 | % | ||
| a | Annualized. |
| b | Percentage represents the results for the period and is not annualized. |
| c | Per share amount calculated on the average shares method. |
| d | Amount is less than $0.005 per share. |
| g | For the period May 15, 2015 (commencement of operations) through December 31, 2015. |
| j | Computed after giving effect to an agreement by MML Advisers to waive certain fees and expenses of the Fund. |
| m | Total return does not reflect expenses that apply at the separate account level or to related insurance products. Inclusion of these charges would reduce the total return figures for all periods shown. |
The accompanying notes are an integral part of the financial statements.
105
Table of Contents
MML Series Investment Fund II – Financial Statements (Continued)
Financial Highlights (For a share outstanding throughout each period)
MML High Yield Fund
| Income (loss) from investment operations |
Less distributions to shareholders | Ratios / Supplemental Data | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net asset value, beginning of the period |
Net investment income (loss)c,j |
Net realized and unrealized gain (loss) on investments |
Total income (loss) from investment operations |
From net investment income |
From net realized gains |
Tax return of capital |
Total distributions |
Net asset value, end of the period |
Total returnm |
Net assets, end of the period (000’s) |
Ratio of expenses to average daily net assets before expense waivers |
Ratio
of expenses to average daily net assets after expense waiversj |
Net investment income (loss) to average daily net assets |
|||||||||||||||||||||||||||||||||||||||||||
| Class II |
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 12/31/15 | $ | 9.98 | $ | 0.65 | $ | (0.74 | ) | $ | (0.09 | ) | $ | (0.66 | ) | $ | (0.06 | ) | $ | (0.00 | )d | $ | (0.72 | ) | $ | 9.17 | (1.13% | ) | $ | 113,880 | 0.83% | 0.71% | 6.56% | |||||||||||||||||||||||||
| 12/31/14 | 11.03 | 0.72 | (0.57 | ) | 0.15 | (0.74 | ) | (0.46 | ) | - | (1.20 | ) | 9.98 | 1.05% | 116,277 | 0.83% | 0.69% | 6.62% | ||||||||||||||||||||||||||||||||||||||
| 12/31/13 | 10.93 | 0.76 | 0.38 | 1.14 | (0.74 | ) | (0.30 | ) | - | (1.04 | ) | 11.03 | 10.84% | 129,251 | 0.84% | 0.69% | 6.88% | |||||||||||||||||||||||||||||||||||||||
| 12/31/12 | 10.03 | 0.74 | 0.89 | 1.63 | (0.67 | ) | (0.06 | ) | - | (0.73 | ) | 10.93 | 16.76% | 122,192 | 0.86% | 0.69% | 7.01% | |||||||||||||||||||||||||||||||||||||||
| 12/31/11 | 10.18 | 0.75 | (0.15 | ) | 0.60 | (0.75 | ) | - | - | (0.75 | ) | 10.03 | 6.07% | 70,558 | 0.84% | 0.69% | 7.28% | |||||||||||||||||||||||||||||||||||||||
| Service Class I |
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 12/31/15 | $ | 9.95 | $ | 0.62 | $ | (0.73 | ) | $ | (0.11 | ) | $ | (0.64 | ) | $ | (0.06 | ) | $ | (0.00 | )d | $ | (0.70 | ) | $ | 9.14 | (1.39% | ) | $ | 26,416 | 1.08% | 0.97% | 6.31% | |||||||||||||||||||||||||
| 12/31/14 | 11.01 | 0.69 | (0.58 | ) | 0.11 | (0.71 | ) | (0.46 | ) | - | (1.17 | ) | 9.95 | 0.71% | 25,255 | 1.08% | 0.94% | 6.38% | ||||||||||||||||||||||||||||||||||||||
| 12/31/13 | 10.91 | 0.73 | 0.38 | 1.11 | (0.71 | ) | (0.30 | ) | - | (1.01 | ) | 11.01 | 10.59% | 22,141 | 1.09% | 0.94% | 6.63% | |||||||||||||||||||||||||||||||||||||||
| 12/31/12 | 10.01 | 0.72 | 0.89 | 1.61 | (0.65 | ) | (0.06 | ) | - | (0.71 | ) | 10.91 | 16.53% | 16,699 | 1.11% | 0.94% | 6.77% | |||||||||||||||||||||||||||||||||||||||
| 12/31/11 | 10.17 | 0.72 | (0.15 | ) | 0.57 | (0.73 | ) | - | - | (0.73 | ) | 10.01 | 5.77% | 7,353 | 1.09% | 0.94% | 7.06% | |||||||||||||||||||||||||||||||||||||||
| Year ended December 31 | ||||||||||||||||||||
| 2015 | 2014 | 2013 | 2012 | 2011 | ||||||||||||||||
| Portfolio turnover rate |
70 | % | 79 | % | 113 | % | 95 | % | 69 | % | ||||||||||
| c | Per share amount calculated on the average shares method. |
| d | Amount is less than $0.005 per share. |
| j | Computed after giving effect to an agreement by MML Advisers and/or MassMutual to waive certain fees and expenses of the Fund. |
| m | Total return does not reflect expenses that apply at the separate account level or to related insurance products. Inclusion of these charges would reduce the total return figures for all periods shown. |
The accompanying notes are an integral part of the financial statements.
106
Table of Contents
MML Series Investment Fund II – Financial Statements (Continued)
Financial Highlights (For a share outstanding throughout each period)
MML Inflation-Protected and Income Fund
| Income (loss) from investment operations |
Less distributions to shareholders | Ratios / Supplemental Data | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Net asset value, beginning of the period |
Net investment income (loss)c |
Net realized and unrealized gain (loss) on investments |
Total income (loss) from investment operations |
From net investment income |
From net realized gains |
Total distributions |
Net asset value, end of the period |
Total returnm |
Net assets, end of the period (000’s) |
Ratio of expenses to average daily net assetsn |
Interest expenses to average daily net assetsp |
Net investment income (loss) to average daily net assetsn |
||||||||||||||||||||||||||||||||||||||||
| Initial Class |
|
|||||||||||||||||||||||||||||||||||||||||||||||||||
| 12/31/15 | $ | 10.18 | $ | 0.06 | $ | (0.20 | ) | $ | (0.14 | ) | $ | (0.12 | ) | $ | - | $ | (0.12 | ) | $ | 9.92 | (1.41% | )* | $ | 380,221 | 0.84% | 0.25% | 0.58% | |||||||||||||||||||||||||
| 12/31/14 | 10.35 | 0.19 | 0.16 | 0.35 | (0.29 | ) | (0.23 | ) | (0.52 | ) | 10.18 | 3.45% | 412,861 | 0.73% | 0.13% | 1.85% | ||||||||||||||||||||||||||||||||||||
| 12/31/13 | 11.86 | 0.16 | (1.16 | ) | (1.00 | ) | (0.21 | ) | (0.30 | ) | (0.51 | ) | 10.35 | (8.68% | ) | 326,380 | 0.77% | 0.17% | 1.45% | |||||||||||||||||||||||||||||||||
| 12/31/12 | 11.56 | 0.32 | 0.47 | 0.79 | (0.38 | ) | (0.11 | ) | (0.49 | ) | 11.86 | 6.89% | 365,094 | 0.81% | 0.21% | 2.70% | ||||||||||||||||||||||||||||||||||||
| 12/31/11 | 10.71 | 0.51 | 0.90 | 1.41 | (0.56 | ) | - | (0.56 | ) | 11.56 | 13.49% | 357,595 | 0.76% | 0.16% | 4.55% | |||||||||||||||||||||||||||||||||||||
| Service Class |
|
|||||||||||||||||||||||||||||||||||||||||||||||||||
| 12/31/15 | $ | 10.14 | $ | 0.03 | $ | (0.20 | ) | $ | (0.17 | ) | $ | (0.10 | ) | $ | - | $ | (0.10 | ) | $ | 9.87 | (1.65% | ) | $ | 47,818 | 1.09% | 0.25% | 0.33% | |||||||||||||||||||||||||
| 12/31/14 | 10.32 | 0.18 | 0.14 | 0.32 | (0.27 | ) | (0.23 | ) | (0.50 | ) | 10.14 | 3.16% | 52,008 | 0.98% | 0.13% | 1.75% | ||||||||||||||||||||||||||||||||||||
| 12/31/13 | 11.83 | 0.13 | (1.16 | ) | (1.03 | ) | (0.18 | ) | (0.30 | ) | (0.48 | ) | 10.32 | (8.95% | ) | 53,902 | 1.02% | 0.17% | 1.20% | |||||||||||||||||||||||||||||||||
| 12/31/12 | 11.53 | 0.29 | 0.47 | 0.76 | (0.35 | ) | (0.11 | ) | (0.46 | ) | 11.83 | 6.65% | 65,419 | 1.06% | 0.21% | 2.44% | ||||||||||||||||||||||||||||||||||||
| 12/31/11 | 10.69 | 0.45 | 0.92 | 1.37 | (0.53 | ) | - | (0.53 | ) | 11.53 | 13.15% | 47,034 | 1.01% | 0.16% | 4.04% | |||||||||||||||||||||||||||||||||||||
| Year ended December 31 | ||||||||||||||||||||
| 2015 | 2014 | 2013 | 2012 | 2011 | ||||||||||||||||
| Portfolio turnover rate |
50 | % | 67 | % | 57 | % | 31 | % | 35 | % | ||||||||||
| c | Per share amount calculated on the average shares method. |
| m | Total return does not reflect expenses that apply at the separate account level or to related insurance products. Inclusion of these charges would reduce the total return figures for all periods shown. |
| n | Includes interest expense. |
| p | Interest expense incurred as a result of entering into reverse repurchase agreements is included in the Fund’s net expenses in the Statements of Operations. Income earned on investing proceeds from reverse repurchase agreements is included in interest income in the Statements of Operations. |
| * | Generally accepted accounting principles may require adjustment to be made to the net assets of the Fund at period end for financial reporting purposes, and as such, the net asset values for shareholder transactions and the returns based on those net asset values may differ from the returns reported in the portfolio manager commentary section of this report. |
The accompanying notes are an integral part of the financial statements.
107
Table of Contents
MML Series Investment Fund II – Financial Statements (Continued)
Financial Highlights (For a share outstanding throughout each period)
MML Short-Duration Bond Fund
| Income (loss) from investment operations |
Less distributions to shareholders | Ratios / Supplemental Data | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Net asset value, beginning of the period |
Net investment income (loss)c,j |
Net realized and unrealized gain (loss) on investments |
Total income (loss) from investment operations |
From net investment income |
From net realized gains |
Total distributions |
Net asset value, end of the period |
Total returnm |
Net assets, end of the period (000’s) |
Ratio of expenses to average daily net assets before expense waivers |
Ratio of expenses to average daily net assets after expense waiversj |
Net investment income (loss) to average daily net assets |
||||||||||||||||||||||||||||||||||||||||
| Class II |
|
|||||||||||||||||||||||||||||||||||||||||||||||||||
| 12/31/15 | $ | 9.84 | $ | 0.17 | $ | (0.08 | ) | $ | 0.09 | $ | (0.23 | ) | $ | - | $ | (0.23 | ) | $ | 9.70 | 0.93% | $ | 155,210 | 0.55% | 0.55% | k | 1.73% | ||||||||||||||||||||||||||
| 12/31/14 | 9.94 | 0.15 | (0.01 | ) | 0.14 | (0.24 | ) | (0.00 | )d | (0.24 | ) | 9.84 | 1.46% | 166,438 | 0.55% | 0.55% | k | 1.50% | ||||||||||||||||||||||||||||||||||
| 12/31/13 | 10.10 | 0.14 | (0.05 | ) | 0.09 | (0.20 | ) | (0.05 | ) | (0.25 | ) | 9.94 | 0.89% | 195,279 | 0.55% | 0.55% | k | 1.38% | ||||||||||||||||||||||||||||||||||
| 12/31/12 | 10.25 | 0.16 | 0.14 | 0.30 | (0.20 | ) | (0.25 | ) | (0.45 | ) | 10.10 | 3.00% | 166,054 | 0.58% | 0.55% | 1.58% | ||||||||||||||||||||||||||||||||||||
| 12/31/11 | 10.13 | 0.15 | 0.22 | 0.37 | (0.17 | ) | (0.08 | ) | (0.25 | ) | 10.25 | 3.65% | 204,222 | 0.55% | 0.55% | 1.49% | ||||||||||||||||||||||||||||||||||||
| Service Class I |
|
|||||||||||||||||||||||||||||||||||||||||||||||||||
| 12/31/15 | $ | 9.83 | $ | 0.15 | $ | (0.08 | ) | $ | 0.07 | $ | (0.21 | ) | $ | - | $ | (0.21 | ) | $ | 9.69 | 0.68% | $ | 24,101 | 0.80% | 0.80% | k | 1.48% | ||||||||||||||||||||||||||
| 12/31/14 | 9.94 | 0.12 | (0.01 | ) | 0.11 | (0.22 | ) | (0.00 | )d | (0.22 | ) | 9.83 | 1.11% | 24,288 | 0.80% | 0.80% | k | 1.26% | ||||||||||||||||||||||||||||||||||
| 12/31/13 | 10.09 | 0.11 | (0.03 | ) | 0.08 | (0.18 | ) | (0.05 | ) | (0.23 | ) | 9.94 | 0.74% | 21,697 | 0.80% | 0.80% | k | 1.13% | ||||||||||||||||||||||||||||||||||
| 12/31/12 | 10.24 | 0.14 | 0.14 | 0.28 | (0.18 | ) | (0.25 | ) | (0.43 | ) | 10.09 | 2.77% | 20,825 | 0.83% | 0.80% | 1.35% | ||||||||||||||||||||||||||||||||||||
| 12/31/11 | 10.13 | 0.13 | 0.21 | 0.34 | (0.15 | ) | (0.08 | ) | (0.23 | ) | 10.24 | 3.32% | 13,085 | 0.80% | 0.80% | 1.26% | ||||||||||||||||||||||||||||||||||||
| Year ended December 31 | ||||||||||||||||||||
| 2015 | 2014 | 2013 | 2012 | 2011 | ||||||||||||||||
| Portfolio turnover rate |
51 | % | 86 | % | 114 | % | 322 | % | 317 | % | ||||||||||
| c | Per share amount calculated on the average shares method. |
| d | Amount is less than $0.005 per share. |
| j | Computed after giving effect to an agreement by MML Advisers and/or MassMutual to waive certain fees and expenses of the Fund. |
| k | Amount waived had no impact on the ratio of expenses to average daily net assets. |
| m | Total return does not reflect expenses that apply at the separate account level or to related insurance products. Inclusion of these charges would reduce the total return figures for all periods shown. |
The accompanying notes are an integral part of the financial statements.
108
Table of Contents
MML Series Investment Fund II – Financial Statements (Continued)
Financial Highlights (For a share outstanding throughout each period)
MML Small Cap Equity Fund
| Income (loss) from investment operations |
Less distributions to shareholders | Ratios / Supplemental Data | ||||||||||||||||||||||||||||||||||||||||||||||
| Net asset value, beginning of the period |
Net investment income (loss)c |
Net realized and unrealized gain (loss) on investments |
Total income (loss) from investment operations |
From net investment income |
From net realized gains |
Total distributions |
Net asset value, end of the period |
Total returnm |
Net assets, end of the period (000’s) |
Ratio of expenses to average daily net assets |
Net investment income (loss) to average daily net assets |
|||||||||||||||||||||||||||||||||||||
| Initial Class |
| |||||||||||||||||||||||||||||||||||||||||||||||
| 12/31/15 | $ | 10.64 | $ | 0.09 | $ | (0.73 | ) | $ | (0.64 | ) | $ | (0.09 | ) | $ | (1.64 | ) | $ | (1.73 | ) | $ | 8.27 | (5.63 | %) | $ | 89,557 | 0.71 | % | 0.89 | % | |||||||||||||||||||
| 12/31/14 | 10.97 | 0.13 | 1.11 | 1.24 | (0.11 | ) | (1.46 | ) | (1.57 | ) | 10.64 | 12.16 | % | 104,745 | 0.70 | % | 1.19 | % | ||||||||||||||||||||||||||||||
| 12/31/13 | 8.82 | 0.09 | 3.39 | 3.48 | (0.11 | ) | (1.22 | ) | (1.33 | ) | 10.97 | 41.02 | % | 104,147 | 0.72 | % | 0.86 | % | ||||||||||||||||||||||||||||||
| 12/31/12 | 7.57 | 0.09 | 1.29 | 1.38 | - | (0.13 | ) | (0.13 | ) | 8.82 | 18.39 | % | 82,675 | 0.82 | % | 1.09 | % | |||||||||||||||||||||||||||||||
| 12/31/11 | 9.27 | 0.05 | (0.32 | ) | (0.27 | ) | (0.09 | ) | (1.34 | ) | (1.43 | ) | 7.57 | (2.17 | %) | 93,881 | 0.77 | % | 0.59 | % | ||||||||||||||||||||||||||||
| Service Class |
| |||||||||||||||||||||||||||||||||||||||||||||||
| 12/31/15 | $ | 10.52 | $ | 0.06 | $ | (0.72 | ) | $ | (0.66 | ) | $ | (0.07 | ) | $ | (1.64 | ) | $ | (1.71 | ) | $ | 8.15 | (5.87 | %) | $ | 11,155 | 0.96 | % | 0.67 | % | |||||||||||||||||||
| 12/31/14 | 10.87 | 0.10 | 1.10 | 1.20 | (0.09 | ) | (1.46 | ) | (1.55 | ) | 10.52 | 11.88 | % | 9,916 | 0.95 | % | 0.94 | % | ||||||||||||||||||||||||||||||
| 12/31/13 | 8.76 | 0.06 | 3.36 | 3.42 | (0.09 | ) | (1.22 | ) | (1.31 | ) | 10.87 | 40.67 | % | 7,674 | 0.97 | % | 0.63 | % | ||||||||||||||||||||||||||||||
| 12/31/12 | 7.53 | 0.08 | 1.28 | 1.36 | - | (0.13 | ) | (0.13 | ) | 8.76 | 18.09 | % | 4,545 | 1.07 | % | 0.96 | % | |||||||||||||||||||||||||||||||
| 12/31/11 | 9.23 | 0.03 | (0.32 | ) | (0.29 | ) | (0.07 | ) | (1.34 | ) | (1.41 | ) | 7.53 | (2.41 | %) | 3,090 | 1.02 | % | 0.37 | % | ||||||||||||||||||||||||||||
| Year ended December 31 | ||||||||||||||||||||
| 2015 | 2014 | 2013 | 2012 | 2011 | ||||||||||||||||
| Portfolio turnover rate |
40 | % | 65 | % | 65 | % | 92 | % | 103 | % | ||||||||||
| c | Per share amount calculated on the average shares method. |
| m | Total return does not reflect expenses that apply at the separate account level or to related insurance products. Inclusion of these charges would reduce the total return figures for all periods shown. |
The accompanying notes are an integral part of the financial statements.
109
Table of Contents
MML Series Investment Fund II – Financial Statements (Continued)
Financial Highlights (For a share outstanding throughout each period)
MML Special Situations Fund
| Income (loss) from investment operations |
Less distributions to shareholders |
Ratios / Supplemental Data | ||||||||||||||||||||||||||||||||||||||||||||||
| Net asset value, beginning of the period |
Net investment income (loss)c,j |
Net realized and unrealized gain (loss) on investments |
Total income (loss) from investment operations |
Tax return of capital |
Total distributions |
Net asset value, end of the period |
Total returnm |
Net assets, end of the period (000’s) |
Ratio of expenses to average daily net assets before expense waivers |
Ratio of expenses to average daily net assets after expense waiversj |
Net investment income (loss) to average daily net assets |
|||||||||||||||||||||||||||||||||||||
| Class II |
|
|||||||||||||||||||||||||||||||||||||||||||||||
| 12/31/15g | $ | 10.00 | $ | (0.00 | )d | $ | (1.57 | ) | $ | (1.57 | ) | $ | (0.00 | )d | $ | (0.00 | )d | $ | 8.43 | (15.67% | )b | $ | 16,776 | 1.13% | a | 0.80% | a | (0.07% | )a | |||||||||||||||||||
| Service Class I |
|
|||||||||||||||||||||||||||||||||||||||||||||||
| 12/31/15g | $ | 10.00 | $ | (0.02 | ) | $ | (1.56 | ) | $ | (1.58 | ) | $ | - | $ | - | $ | 8.42 | (15.80% | )b | $ | 183 | 1.38% | a | 1.05% | a | (0.30% | )a | |||||||||||||||||||||
| Period ended December 31, 2015b |
||||
| Portfolio turnover rate |
87 | % | ||
| a | Annualized. |
| b | Percentage represents the results for the period and is not annualized. |
| c | Per share amount calculated on the average shares method. |
| d | Amount is less than $0.005 per share. |
| g | For the period May 15, 2015 (commencement of operations) through December 31, 2015. |
| j | Computed after giving effect to an agreement by MML Advisers to waive certain fees and expenses of the Fund. |
| m | Total return does not reflect expenses that apply at the separate account level or to related insurance products. Inclusion of these charges would reduce the total return figures for all periods shown. |
The accompanying notes are an integral part of the financial statements.
110
Table of Contents
MML Series Investment Fund II – Financial Statements (Continued)
Financial Highlights (For a share outstanding throughout each period)
MML Strategic Emerging Markets Fund
| Income (loss) from investment operations |
Less distributions to shareholders | Ratios / Supplemental Data | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Net asset value, beginning of the period |
Net investment income (loss)c,j |
Net realized and unrealized gain (loss) on investments |
Total income (loss) from investment operations |
From net investment income |
From net realized gains |
Total distributions |
Net asset value, end of the period |
Total returnm |
Net assets, end of the period (000’s) |
Ratio of expenses to average daily net assets before expense waivers |
Ratio of expenses to average daily net assets after expense waiversj |
Net investment income (loss) to average daily net assets |
||||||||||||||||||||||||||||||||||||||||
| Class II |
|
|||||||||||||||||||||||||||||||||||||||||||||||||||
| 12/31/15 | $ | 9.63 | $ | 0.03 | $ | (1.41 | ) | $ | (1.38 | ) | $ | (0.10 | ) | $ | - | $ | (0.10 | ) | $ | 8.15 | (14.23% | ) | $ | 84,356 | 1.60% | 1.40% | 0.34% | |||||||||||||||||||||||||
| 12/31/14 | 10.21 | 0.04 | (0.59 | ) | (0.55 | ) | (0.03 | ) | - | (0.03 | ) | 9.63 | (5.41% | ) | 85,833 | 1.70% | 1.40% | 0.42% | ||||||||||||||||||||||||||||||||||
| 12/31/13 | 10.91 | 0.08 | (0.78 | ) | (0.70 | ) | - | - | - | 10.21 | (6.42% | ) | 91,651 | 1.56% | 1.40% | 0.82% | ||||||||||||||||||||||||||||||||||||
| 12/31/12 | 9.43 | 0.06 | 1.47 | 1.53 | (0.05 | ) | - | (0.05 | ) | 10.91 | 16.20% | 46,830 | 1.63% | 1.40% | 0.56% | |||||||||||||||||||||||||||||||||||||
| 12/31/11 | 13.31 | 0.03 | (2.96 | ) | (2.93 | ) | (0.07 | ) | (0.88 | ) | (0.95 | ) | 9.43 | (22.26% | ) | 17,992 | 1.70% | 1.40% | 0.28% | |||||||||||||||||||||||||||||||||
| Service Class I |
|
|||||||||||||||||||||||||||||||||||||||||||||||||||
| 12/31/15 | $ | 9.65 | $ | 0.01 | $ | (1.41 | ) | $ | (1.40 | ) | $ | (0.08 | ) | $ | - | $ | (0.08 | ) | $ | 8.17 | (14.46% | )* | $ | 8,409 | 1.85% | 1.65% | 0.09% | |||||||||||||||||||||||||
| 12/31/14 | 10.23 | 0.01 | (0.59 | ) | (0.58 | ) | (0.00 | )d | - | (0.00 | )d | 9.65 | (5.63% | ) | 9,120 | 1.95% | 1.65% | 0.14% | ||||||||||||||||||||||||||||||||||
| 12/31/13 | 10.97 | 0.08 | (0.82 | ) | (0.74 | ) | - | - | - | 10.23 | (6.75% | ) | 9,122 | 1.81% | 1.65% | 0.76% | ||||||||||||||||||||||||||||||||||||
| 12/31/12 | 9.48 | 0.03 | 1.48 | 1.51 | (0.02 | ) | - | (0.02 | ) | 10.97 | 15.91% | 8,851 | 1.88% | 1.65% | 0.26% | |||||||||||||||||||||||||||||||||||||
| 12/31/11 | 13.32 | 0.11 | (3.07 | ) | (2.96 | ) | (0.00 | )d | (0.88 | ) | (0.88 | ) | 9.48 | (22.44% | ) | 7,183 | 1.95% | 1.65% | 0.84% | |||||||||||||||||||||||||||||||||
| Year ended December 31 | ||||||||||||||||||||
| 2015 | 2014 | 2013 | 2012 | 2011 | ||||||||||||||||
| Portfolio turnover rate |
39 | % | 44 | % | 145 | % | 62 | % | 75 | % | ||||||||||
| c | Per share amount calculated on the average shares method. |
| d | Amount is less than $0.005 per share. |
| j | Computed after giving effect to an agreement by MML Advisers and/or MassMutual to waive certain fees and expenses of the Fund. |
| m | Total return does not reflect expenses that apply at the separate account level or to related insurance products. Inclusion of these charges would reduce the total return figures for all periods shown. |
| * | Generally accepted accounting principles may require adjustment to be made to the net assets of the Fund at period end for financial reporting purposes, and as such, the net asset values for shareholder transactions and the returns based on those net asset values may differ from the returns reported in the portfolio manager commentary section of this report. |
The accompanying notes are an integral part of the financial statements.
111
Table of Contents
| 1. | The Funds |
MML Series Investment Fund II (the “Trust”) is registered under the Investment Company Act of 1940, as amended (the “1940 Act”), as a no-load, open-end, management investment company. The Trust is organized under the laws of the Commonwealth of Massachusetts as a Massachusetts business trust pursuant to an Agreement and Declaration of Trust dated February 8, 2005, which was amended and restated as of February 28, 2005 and December 15, 2011, as it may be further amended from time to time. The following are nine series of the Trust (each individually referred to as a “Fund” or collectively as the “Funds”):
MML Asset Momentum Fund (“Asset Momentum Fund”)
MML Dynamic Bond Fund (“Dynamic Bond Fund”)
MML Equity Rotation Fund (“Equity Rotation Fund”)
MML High Yield Fund (“High Yield Fund”)
MML Inflation-Protected and Income Fund (“Inflation-Protected and Income Fund”)
MML Short-Duration Bond Fund (“Short-Duration Bond Fund”)
MML Small Cap Equity Fund (“Small Cap Equity Fund”)
MML Special Situations Fund (“Special Situations Fund”)
MML Strategic Emerging Markets Fund (“Strategic Emerging Markets Fund”)
The Trust makes shares of the Funds available for the investment of assets of various separate investment accounts established by Massachusetts Mutual Life Insurance Company (“MassMutual”) and by life insurance companies which are subsidiaries of MassMutual. Shares of the Trust are not offered to the general public. MassMutual, MML Bay State Life Insurance Company, C.M. Life Insurance Company, and the MML Allocation Funds, which are “funds of funds” series of the MML Series Investment Fund, another open-end management investment company sponsored by MassMutual, are the record owners of all of the outstanding shares of the Funds.
Each share class of a Fund represents an interest in the same portfolio of assets. The principal difference among the classes is the level of service and administration fees, and shareholder and distribution service expenses borne by the classes. Because each class will have different fees and expenses, performance and share prices will vary between the classes. The classes of shares are offered to different types of investors, as outlined in the Funds’ Prospectus.
| 2. | Significant Accounting Policies |
The following is a summary of significant accounting policies followed consistently by each Fund in the preparation of the financial statements in conformity with accounting principles generally accepted in the United States of America (“generally accepted accounting principles”). The preparation of the financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates.
Investment Valuation
The net asset value of each Fund’s shares is determined once daily as of the close of regular trading on the New York Stock Exchange (“NYSE”), on each day the NYSE is open for trading (a “business day”). The NYSE normally closes at 4:00 p.m. Eastern Time, but may close earlier on some days.
Equity securities and derivative contracts that are actively traded on a national securities exchange or contract market are valued on the basis of information furnished by a pricing service, which provides the last reported sale price, or, in the case of futures contracts, the settlement price, for securities or derivatives listed on the exchange or contract market or the official closing price on the NASDAQ National Market System, or in the case of over-the-counter (“OTC”) securities for which an official closing price is unavailable or not reported on the NASDAQ System, the last reported bid price. Portfolio securities traded on more than one national securities exchange are valued at the last price at the close of the exchange representing the principal market for such securities. Debt securities are valued on the basis of valuations furnished by a pricing service, which generally determines valuations taking into account factors such as institutional-size trading in similar securities, yield, quality, coupon rate, maturity, type of issue, trading characteristics, and other market data. Shares of other open-end mutual funds are valued at their closing net asset values as reported on each business day.
112
Table of Contents
Notes to Financial Statements (Continued)
Investments for which market quotations are readily available are marked to market daily based on those quotations. Market quotations may be provided by third-party vendors or market makers, and may be determined on the basis of a variety of factors, such as broker quotations, financial modeling, and other market data, such as market indexes and yield curves, counterparty information, and foreign exchange rates. U.S. Government and agency securities may be valued on the basis of market quotations or using a model that may incorporate market observable data such as reported sales of similar securities, broker quotes, yields, bids, offers, quoted market prices, and reference data. The fair values of OTC derivative contracts, including forward, swap, and option contracts related to interest rates, foreign currencies, credit standing of reference entities, equity prices, or commodity prices, may be based on market quotations or may be modeled using a series of techniques, including simulation models, depending on the contract and the terms of the transaction. The fair values of asset-backed securities and mortgage-backed securities are estimated based on models that consider the estimated cash flows of each debt tranche of the issuer, established benchmark yield, and estimated tranche-specific spread to the benchmark yield based on the unique attributes of the tranche, including, but not limited to, prepayment speed assumptions and attributes of the collateral. Restricted securities are generally valued at a discount to similar publicly traded securities.
Investments for which market quotations are not available or for which a pricing service or vendor does not provide a value, or for which such market quotations or values are considered by the investment adviser or subadviser to be unreliable (including, for example, certain foreign securities, thinly-traded securities, certain restricted securities, certain initial public offerings, or securities whose values may have been affected by a significant event) are stated at fair valuations determined in good faith by the Funds’ Valuation Committee1 in accordance with procedures approved annually by the Board of Trustees (“Trustees”), and under the general oversight of the Trustees. The Funds’ Valuation Committee employs various methods to determine fair valuations including a regular review of significant inputs and assumptions and review of any related market activity. The Funds’ Valuation Committee reports to the Trustees at their regularly scheduled meetings. It is possible that fair value prices will be used by the Funds to a significant extent. The value determined for an investment using the Funds’ fair value procedures may differ from recent market prices for the investment and may be significantly different from the value realized upon the sale of such investment.
The Funds may invest in securities that are traded principally in foreign markets and that trade on weekends and other days when the Funds do not price their shares. As a result, the values of the Funds’ portfolio securities may change on days when the prices of the Funds’ shares are not calculated. The prices of the Funds’ shares will reflect any such changes when the prices of the Funds’ shares are next calculated, which is the next business day. The Funds may use fair value pricing more frequently for securities primarily traded in foreign markets because, among other things, most foreign markets close well before the Funds value their securities. The earlier close of these foreign markets gives rise to the possibility that significant events, including broad market moves, may have occurred in the interim. The Funds’ investments may be priced based on fair values provided by a third-party vendor, based on certain factors and methodologies applied by such vendor, in the event that there is movement in the U.S. market, between the close of the foreign market and the time the Funds calculate their net asset values. All assets and liabilities expressed in foreign currencies are converted into U.S. dollars at the mean between the buying and selling rates of such currencies against the U.S. dollar at the end of each business day.
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A three-tier hierarchy is utilized to maximize the use of observable market data inputs and minimize the use of unobservable inputs and to establish classification of fair value measurements for disclosure purposes. Inputs refer broadly to the assumptions that market participants would use in pricing the asset or liability, including assumptions about risk, for example, the risk inherent in a particular valuation technique used to measure fair value (such as a pricing model) and/or the risk inherent in the inputs to the valuation technique. Inputs may be observable or unobservable. Observable inputs are inputs that reflect the assumptions market participants would use in pricing the asset or liability and are developed based on market data obtained from sources independent of the reporting entity. Unobservable inputs are inputs that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability and are developed based on the best information available in the circumstances. The three-tier hierarchy of inputs is summarized in the three broad Levels listed below. The inputs or methodology used for valuing investments are not necessarily an indication of
| 1 | The Valuation Committee consists of the President, Treasurer, Assistant Treasurers, Vice Presidents (except for the CCO), Secretary, and Assistant Secretaries of the Trust, as well as such alternate members as the Trustees may from time to time designate. The Valuation Committee reviews and determines the fair valuation of portfolio securities and the Funds’ pricing procedures in general. |
113
Table of Contents
Notes to Financial Statements (Continued)
the risk associated with investing in those investments and the determination of the significance of a particular input to the fair value measurement in its entirety requires judgment and consideration of factors specific to each security.
Level 1 – quoted prices (unadjusted) in active markets for identical investments that the Funds can access at the measurement date
The types of assets and liabilities categorized in Level 1 generally include actively traded domestic and certain foreign equity securities, derivatives actively traded on a national securities exchange (such as some warrants, rights, futures, and options), and shares of open-end mutual funds.
Level 2 – other significant observable inputs (including quoted prices for similar investments, interest rates, prepayment speeds, credit risk, etc.)
The types of assets and liabilities categorized in Level 2 generally include debt securities such as U.S. government and agency securities, mortgage-backed securities, asset-backed securities, municipal obligations, sovereign debt obligations, bank loans, corporate bonds, and those securities valued at amortized cost; OTC derivatives such as swaps, options, swaptions, and forward foreign currency exchange contracts; certain restricted securities; and non-exchange traded equity securities and certain foreign equity securities traded on particular foreign exchanges that close before the Funds determine their net asset values.
Level 3 – significant unobservable inputs (including the Funds’ own assumptions in determining the fair value of investments)
The types of assets and liabilities categorized in Level 3 generally include securities for which prices, spreads, or any of the other aforementioned significant inputs are unobservable. Generally, securities whose trading has been suspended or that have been de-listed from their current primary trading exchange; securities in default or bankruptcy proceedings for which there is no current market quotation; securities and certain derivatives valued by broker quotes which may include brokers’ assumptions; and any illiquid Rule 144A securities or restricted securities issued by non-public entities are categorized in Level 3.
The availability of observable inputs can vary from security to security and is affected by a wide variety of factors, including, for example, the type of security, whether the security is new and not yet established in the marketplace, the liquidity of markets, and other characteristics particular to the security. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised in determining fair value is greatest for instruments categorized in Level 3.
Changes in valuation techniques may result in transfers in or out of an investment’s assigned Level within the hierarchy. In addition, in periods of market dislocation, the observability of prices and inputs may be reduced for many instruments. This condition, as well as changes related to liquidity of investments, could cause a security to be reclassified between Level 1, Level 2, or Level 3.
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes the level in the fair value hierarchy within which the fair value measurement falls is determined based on the lowest level input that is significant to the overall fair value measurement.
The Equity Rotation Fund and Special Situations Fund characterized all long-term investments at Level 1, and all short-term investments at Level 2, as of December 31, 2015. The High Yield Fund characterized all investments at Level 2, as of December 31, 2015. For each Fund noted in the preceding sentences, the level classification by major category of investments is the same as the category presentation in the Portfolio of Investments.
114
Table of Contents
Notes to Financial Statements (Continued)
The following is the aggregate value by input level, as of December 31, 2015, for the remaining Funds’ investments:
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Asset Momentum Fund |
||||||||||||||||
| Asset Investments |
||||||||||||||||
| Common Stock |
$ | 9,357,829 | $ | 2,428,186 | * | $ | - | $ | 11,786,015 | |||||||
| U.S. Treasury Obligations |
- | 999,351 | - | 999,351 | ||||||||||||
| Mutual Funds |
473,832 | - | - | 473,832 | ||||||||||||
| Purchased Options |
24,000 | - | - | 24,000 | ||||||||||||
| Short-Term Investments |
- | 5,764,423 | - | 5,764,423 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total Investments | $ | 9,855,661 | $ | 9,191,960 | $ | - | $ | 19,047,621 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Asset Derivatives |
||||||||||||||||
| Futures Contracts |
$ | 5,150 | $ | - | $ | - | $ | 5,150 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Liability Derivatives |
||||||||||||||||
| Futures Contracts |
$ | (1,394 | ) | $ | - | $ | - | $ | (1,394 | ) | ||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Dynamic Bond Fund |
||||||||||||||||
| Asset Investments |
||||||||||||||||
| Corporate Debt |
$ | - | $ | 106,220,805 | $ | - | $ | 106,220,805 | ||||||||
| Municipal Obligations |
- | 1,526,364 | - | 1,526,364 | ||||||||||||
| Non-U.S. Government Agency Obligations |
- | 117,056,881 | - | 117,056,881 | ||||||||||||
| Sovereign Debt Obligations |
- | 4,673,900 | - | 4,673,900 | ||||||||||||
| U.S. Government Agency Obligations and Instrumentalities |
- | 60,939,457 | - | 60,939,457 | ||||||||||||
| U.S. Treasury Obligations |
- | 97,053,590 | - | 97,053,590 | ||||||||||||
| Mutual Funds |
8,641,407 | - | - | 8,641,407 | ||||||||||||
| Short-Term Investments |
- | 2,733,372 | - | 2,733,372 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total Investments | $ | 8,641,407 | $ | 390,204,369 | $ | - | $ | 398,845,776 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Inflation-Protected and Income Fund |
||||||||||||||||
| Asset Investments |
||||||||||||||||
| Corporate Debt |
$ | - | $ | 41,360,715 | $ | - | $ | 41,360,715 | ||||||||
| Municipal Obligations |
- | 999,428 | - | 999,428 | ||||||||||||
| Non-U.S. Government Agency Obligations |
- | 190,872,262 | 163,521 | 191,035,783 | ||||||||||||
| U.S. Government Agency Obligations and Instrumentalities |
- | 1,498,474 | - | 1,498,474 | ||||||||||||
| U.S. Treasury Obligations |
- | 404,861,942 | - | 404,861,942 | ||||||||||||
| Purchased Options |
- | 625,753 | - | 625,753 | ||||||||||||
| Short-Term Investments |
- | 127,131,499 | - | 127,131,499 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total Investments | $ | - | $ | 767,350,073 | $ | 163,521 | $ | 767,513,594 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Asset Derivatives |
||||||||||||||||
| Futures Contracts |
$ | 3,351 | $ | - | $ | - | $ | 3,351 | ||||||||
| Swap Agreements |
- | 46,262 | - | 46,262 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total | $ | 3,351 | $ | 46,262 | $ | - | $ | 49,613 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Liability Derivatives |
||||||||||||||||
| Futures Contracts |
$ | (12,573 | ) | $ | - | $ | - | $ | (12,573 | ) | ||||||
| Swap Agreements |
- | (71,975 | ) | - | (71,975 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total | $ | (12,573 | ) | $ | (71,975 | ) | $ | - | $ | (84,548 | ) | |||||
|
|
|
|
|
|
|
|
|
|||||||||
115
Table of Contents
Notes to Financial Statements (Continued)
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Short-Duration Bond Fund |
||||||||||||||||
| Asset Investments |
||||||||||||||||
| Preferred Stock |
$ | 76,055 | $ | - | $ | - | $ | 76,055 | ||||||||
| Corporate Debt |
- | 70,320,440 | - | 70,320,440 | ||||||||||||
| Municipal Obligations |
- | 825,255 | - | 825,255 | ||||||||||||
| Non-U.S. Government Agency Obligations |
- | 54,729,097 | 83,266 | 54,812,363 | ||||||||||||
| U.S. Government Agency Obligations and Instrumentalities |
- | 11,989,642 | - | 11,989,642 | ||||||||||||
| U.S. Treasury Obligations |
- | 38,697,346 | - | 38,697,346 | ||||||||||||
| Purchased Options |
- | 42,719 | - | 42,719 | ||||||||||||
| Short-Term Investments |
- | 1,724,702 | - | 1,724,702 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total Investments | $ | 76,055 | $ | 178,329,201 | $ | 83,266 | $ | 178,488,522 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Asset Derivatives |
||||||||||||||||
| Futures Contracts |
$ | 13,958 | $ | - | $ | - | $ | 13,958 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Liability Derivatives |
||||||||||||||||
| Futures Contracts |
$ | (177,072 | ) | $ | - | $ | - | $ | (177,072 | ) | ||||||
| Swap Agreements |
- | (12,887 | ) | - | (12,887 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total | $ | (177,072 | ) | $ | (12,887 | ) | $ | - | $ | (189,959 | ) | |||||
|
|
|
|
|
|
|
|
|
|||||||||
| Small Cap Equity Fund |
||||||||||||||||
| Asset Investments |
||||||||||||||||
| Common Stock |
$ | 98,426,983 | $ | 302,345 | * | $ | - | $ | 98,729,328 | |||||||
| Mutual Funds |
6,639,473 | - | - | 6,639,473 | ||||||||||||
| Short-Term Investments |
- | 1,772,303 | - | 1,772,303 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total Investments | $ | 105,066,456 | $ | 2,074,648 | $ | - | $ | 107,141,104 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Strategic Emerging Markets Fund |
||||||||||||||||
| Asset Investments |
||||||||||||||||
| Common Stock* | ||||||||||||||||
| Bermuda |
$ | - | $ | 1,044,887 | $ | - | $ | 1,044,887 | ||||||||
| Brazil |
1,217,048 | 2,937,344 | - | 4,154,392 | ||||||||||||
| Cayman Islands |
14,876,958 | 5,641,007 | - | 20,517,965 | ||||||||||||
| China |
- | 4,517,304 | - | 4,517,304 | ||||||||||||
| Colombia |
860,293 | 848,465 | - | 1,708,758 | ||||||||||||
| Egypt |
- | 565,575 | - | 565,575 | ||||||||||||
| France |
- | 2,069,528 | - | 2,069,528 | ||||||||||||
| Hong Kong |
- | 4,388,706 | - | 4,388,706 | ||||||||||||
| India |
747,765 | 14,476,947 | - | 15,224,712 | ||||||||||||
| Indonesia |
- | 1,747,401 | - | 1,747,401 | ||||||||||||
| Italy |
- | 1,259,537 | - | 1,259,537 | ||||||||||||
| Malaysia |
- | 1,619,321 | - | 1,619,321 | ||||||||||||
| Mexico |
6,423,280 | - | - | 6,423,280 | ||||||||||||
| Nigeria |
- | 773,779 | - | 773,779 | ||||||||||||
| Philippines |
- | 2,780,329 | - | 2,780,329 | ||||||||||||
| Poland |
- | 94,879 | - | 94,879 | ||||||||||||
| Republic of Korea |
- | 1,205,708 | - | 1,205,708 | ||||||||||||
| Russia |
- | 6,419,289 | - | 6,419,289 | ||||||||||||
| Singapore |
- | 548,067 | - | 548,067 | ||||||||||||
| Taiwan |
- | 2,127,333 | - | 2,127,333 | ||||||||||||
| Thailand |
- | 818,373 | - | 818,373 | ||||||||||||
116
Table of Contents
Notes to Financial Statements (Continued)
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Strategic Emerging Markets Fund (Continued) |
||||||||||||||||
| Asset Investments (Continued) |
||||||||||||||||
| Common Stock (Continued)* | ||||||||||||||||
| Turkey |
$ | - | $ | 1,021,144 | $ | - | $ | 1,021,144 | ||||||||
| United Arab Emirates |
- | 1,326,957 | - | 1,326,957 | ||||||||||||
| United Kingdom |
- | 2,544,811 | - | 2,544,811 | ||||||||||||
| United States |
1,478,086 | - | - | 1,478,086 | ||||||||||||
| Preferred Stock* | ||||||||||||||||
| Brazil |
- | 1,938,268 | - | 1,938,268 | ||||||||||||
| Colombia |
- | 282,524 | - | 282,524 | ||||||||||||
| India |
- | 68,543 | - | 68,543 | ||||||||||||
| Mutual Funds | 6,877,617 | - | - | 6,877,617 | ||||||||||||
| Warrants | - | 16,135 | - | 16,135 | ||||||||||||
| Short-Term Investments | - | 5,586,554 | - | 5,586,554 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total Investments | $ | 32,481,047 | $ | 68,668,715 | $ | - | $ | 101,149,762 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| * | Includes foreign equity securities whose values were adjusted to reflect market trading of comparable securities or other correlated instruments after the close of trading in their applicable foreign markets. |
The following table shows Funds with certain assets and liabilities, which approximate fair value and would be categorized at Level 2 as of December 31, 2015.
| Statements of Assets and Liabilities location: |
Dynamic |
Inflation- |
Short- |
Small |
Strategic | |||||
| Receivables from: |
||||||||||
| Collateral pledged for reverse repurchase agreements |
X | |||||||||
| Payables for: |
||||||||||
| Reverse repurchase agreements |
X | |||||||||
| Securities on loan |
X | X | ||||||||
| Collateral held for open derivative contracts |
X | |||||||||
| Due to custodian |
X | X | X | |||||||
The following table shows transfers between Level 1 and Level 2 of the fair value hierarchy:
| Transfers In* | Transfers Out* | |||||||||||||||
| Level 1 — Quoted Prices |
Level 2 — Other Significant Observable Inputs |
Level 1 — Quoted Prices |
Level 2 — Other Significant Observable Inputs |
|||||||||||||
| Strategic Emerging Markets Fund |
$ | - | $ | 90,111 | $ | (90,111 | ) | $ | - | |||||||
| * | The Fund(s) recognize transfers between the Levels as of the beginning of the year. Transfers occurred between Level 1 and Level 2 as inputs were less observable. |
117
Table of Contents
Notes to Financial Statements (Continued)
Following is a reconciliation of investments for which significant unobservable inputs (Level 3) were used in determining value:
Asset Valuation Inputs
| Investments in Securities | ||||||||||||||||||||||||||||||||||||||||
| Balance as of 12/31/14 |
Accrued Discounts (Premiums) |
Realized Gain (Loss) |
Change in Unrealized Appreciation (Depreciation) |
Purchases | (Sales) | Transfers into Level 3* |
Transfers (out) of Level 3* |
Balance as of 12/31/15 |
Net Change in Unrealized Appreciation (Depreciation) from Investments Still Held as of 12/31/15 |
|||||||||||||||||||||||||||||||
| Inflation-Protected and Income Fund |
||||||||||||||||||||||||||||||||||||||||
| Non-U.S. Government Agency Obligations† |
$ | 264,636 | $ | - | $ | 793 | $ | 128 | $ | 538,988 | $ | (641,024 | ) | $ | - | $ | - | $ | 163,521 | $ | 128 | |||||||||||||||||||
| Non-U.S. Government Agency Obligations |
- | - | - | - | 399,997 | (39,277 | ) | - | (360,720 | )** | - | - | ||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
| $ | 264,636 | $ | - | $ | 793 | $ | 128 | $ | 938,985 | $ | (680,301 | ) | $ | - | $ | (360,720 | ) | $ | 163,521 | $ | 128 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
| Short-Duration Bond Fund |
||||||||||||||||||||||||||||||||||||||||
| Non-U.S. Government Agency Obligations† |
$ | 165,398 | $ | - | $ | 367 | $ | 59 | $ | 249,531 | $ | (332,089 | ) | $ | - | $ | - | $ | 83,266 | $ | 59 | |||||||||||||||||||
| Non-U.S. Government Agency Obligations |
- | - | - | - | 159,999 | (15,711 | ) | - | (144,288 | )** | - | - | ||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
| $ | 165,398 | $ | - | $ | 367 | $ | 59 | $ | 409,530 | $ | (347,800 | ) | $ | - | $ | (144,288 | ) | $ | 83,266 | $ | 59 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
| * | The Fund(s) recognize transfers between the Levels as of the beginning of the year. |
| ** | Transfers occurred between Level 3 and Level 2 as inputs were more observable. |
| † | Represents (i) an illiquid 144A security valued by a broker quote or vendor price or (ii) a restricted security issued by a non-public entity valued by a broker quote or vendor price. |
None of the unobservable inputs, individually or collectively, had a material impact on the Fund(s).
Derivative Instruments
Derivatives are financial instruments whose values are based on the values of one or more indicators, such as a security, asset, currency, interest rate, or index. Derivative transactions can create investment leverage and may be highly volatile. Gains or losses from derivatives can be substantially greater than the derivatives original cost and can sometimes be unlimited. A Fund may not be able to close out a derivative transaction at a favorable time or price. For those Funds that held derivatives during the year ended December 31, 2015, the following table shows how the Fund used these types of derivatives during the period (marked with an “A”), as well as additional uses, if any, it may have for them in the future (marked with an “M”).
| Type of Derivative and Objective for Use |
Asset |
Inflation- |
Short- |
Strategic | ||||
| Futures Contracts* |
||||||||
| Hedging/Risk Management |
A |
A |
A |
|||||
| Duration/Credit Quality Management |
M |
A |
A |
|||||
| Substitution for Direct Investment |
A |
A |
A |
|||||
| Intention to Create Investment Leverage in Portfolio |
M |
M |
M |
118
Table of Contents
Notes to Financial Statements (Continued)
| Type of Derivative and Objective for Use |
Asset |
Inflation- |
Short- |
Strategic | ||||
| Interest Rate Swaps** |
||||||||
| Hedging/Risk Management |
A |
A |
||||||
| Duration Management |
M |
M |
||||||
| Asset/Liability Management |
M |
M |
||||||
| Substitution for Direct Investment |
M |
M |
||||||
| Intention to Create Investment Leverage in Portfolio |
M |
M |
||||||
| Credit Default Swaps (Protection Buyer) |
||||||||
| Hedging/Risk Management |
A |
A |
||||||
|
Duration/Credit Quality Management |
A |
A |
||||||
|
Income |
A |
A |
||||||
| Substitution for Direct Investment |
A |
M |
||||||
| Intention to Create Investment Leverage in Portfolio |
M |
M |
||||||
| Credit Default Swaps (Protection Seller) |
||||||||
| Hedging/Risk Management |
A |
A |
||||||
|
Duration/Credit Quality Management |
A |
A |
||||||
|
Income |
A |
A |
||||||
| Substitution for Direct Investment |
A |
A |
||||||
| Intention to Create Investment Leverage in Portfolio |
M |
M |
||||||
| Options (Purchased) |
||||||||
| Hedging/Risk Management |
A |
A |
A |
|||||
| Duration/Credit Quality Management |
M |
A |
A |
|||||
| Substitution for Direct Investment |
A |
A |
A |
|||||
| Directional Investment |
M |
A |
A |
|||||
| Intention to Create Investment Leverage in Portfolio |
M |
M |
M |
|||||
| Rights and Warrants |
||||||||
| Result of a Corporate Action |
A | |||||||
| * | Includes any options purchased or written on futures contracts, if applicable. |
| ** | Includes any caps, floors, and collars, and related purchased or written options, if applicable. |
At December 31, 2015, and during the year then ended, the Fund(s) had the following derivatives and transactions in derivatives, grouped into the indicated risk categories:
| Credit Risk |
Equity Risk |
Foreign Exchange Risk |
Interest Rate Risk |
Commodity Risk |
Total | |||||||||||||||||||
| Asset Momentum Fund | ||||||||||||||||||||||||
| Asset Derivatives | ||||||||||||||||||||||||
| Purchased Options* |
$ | - | $ | 24,000 | $ | - | $ | - | $ | - | $ | 24,000 | ||||||||||||
| Futures Contracts^^ |
- | 5,150 | - | - | - | 5,150 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total Value |
$ | - | $ | 29,150 | $ | - | $ | - | $ | - | $ | 29,150 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Liability Derivatives | ||||||||||||||||||||||||
| Futures Contracts^^ |
$ | - | $ | - | $ | - | $ | - | $ | (1,394 | ) | $ | (1,394 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
119
Table of Contents
Notes to Financial Statements (Continued)
| Credit Risk |
Equity Risk |
Foreign Exchange Risk |
Interest Rate Risk |
Commodity Risk |
Total | |||||||||||||||||||
| Asset Momentum Fund (Continued) | ||||||||||||||||||||||||
| Realized Gain (Loss)# | ||||||||||||||||||||||||
| Purchased Options |
$ | - | $ | (28,308 | ) | $ | - | $ | - | $ | - | $ | (28,308 | ) | ||||||||||
| Futures Contracts |
- | (78,160 | ) | (24,077 | ) | - | (50,036 | ) | (152,273 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total Realized Gain (Loss) |
$ | - | $ | (106,468 | ) | $ | (24,077 | ) | $ | - | $ | (50,036 | ) | $ | (180,581 | ) | ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Change in Appreciation (Depreciation)## | ||||||||||||||||||||||||
| Purchased Options |
$ | - | $ | 11,400 | $ | - | $ | - | $ | - | $ | 11,400 | ||||||||||||
| Futures Contracts |
- | 5,150 | - | - | (1,394 | ) | 3,756 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total Change in Appreciation (Depreciation) |
$ | - | $ | 16,550 | $ | - | $ | - | $ | (1,394 | ) | $ | 15,156 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Number of Contracts, Notional Amounts or Shares/Units† | ||||||||||||||||||||||||
| Purchased Options |
- | 438 | - | - | - | 438 | ||||||||||||||||||
| Futures Contracts |
- | 59 | 11 | - | 6 | 76 | ||||||||||||||||||
| Inflation-Protected and Income Fund | ||||||||||||||||||||||||
| Asset Derivatives | ||||||||||||||||||||||||
| Purchased Options* |
$ | 70,320 | $ | - | $ | 555,433 | $ | - | $ | - | $ | 625,753 | ||||||||||||
| Futures Contracts^^ |
- | - | - | 3,351 | - | 3,351 | ||||||||||||||||||
| Swap Agreements* |
- | - | - | 46,262 | - | 46,262 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total Value |
$ | 70,320 | $ | - | $ | 555,433 | $ | 49,613 | $ | - | $ | 675,366 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Liability Derivatives | ||||||||||||||||||||||||
| Futures Contracts^^ |
$ | - | $ | - | $ | - | $ | (12,573 | ) | $ | - | $ | (12,573 | ) | ||||||||||
| Swap Agreements^ |
(71,975 | ) | - | - | - | - | (71,975 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total Value |
$ | (71,975 | ) | $ | - | $ | - | $ | (12,573 | ) | $ | - | $ | (84,548 | ) | |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Realized Gain (Loss)# | ||||||||||||||||||||||||
| Purchased Options |
$ | - | $ | - | $ | 62,314 | $ | 375,282 | $ | - | $ | 437,596 | ||||||||||||
| Futures Contracts |
- | - | - | (973,829 | ) | - | (973,829 | ) | ||||||||||||||||
| Swap Agreements |
(12,836 | ) | - | - | (371,941 | ) | - | (384,777 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total Realized Gain (Loss) |
$ | (12,836 | ) | $ | - | $ | 62,314 | $ | (970,488 | ) | $ | - | $ | (921,010 | ) | |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Change in Appreciation (Depreciation)## | ||||||||||||||||||||||||
| Purchased Options |
$ | (53,745 | ) | $ | - | $ | 288,882 | $ | (137,394 | ) | $ | - | $ | 97,743 | ||||||||||
| Futures Contracts |
- | - | - | 361,886 | - | 361,886 | ||||||||||||||||||
| Swap Agreements |
(49,284 | ) | - | - | 255,006 | - | 205,722 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total Change in Appreciation (Depreciation) |
$ | (103,029 | ) | $ | - | $ | 288,882 | $ | 479,498 | $ | - | $ | 665,351 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Number of Contracts Notional Amounts or Shares/Units† | ||||||||||||||||||||||||
| Purchased Options |
$ | 60,000,000 | $ | - | $ | 19,475,000 | $ | 15,435,000 | $ | - | $ | 94,910,000 | ||||||||||||
| Futures Contracts |
- | - | - | 210 | - | 210 | ||||||||||||||||||
| Swap Agreements |
$ | 5,327,143 | $ | - | $ | - | $ | 10,239,167 | $ | - | $ | 15,566,310 | ||||||||||||
| Short-Duration Bond Fund | ||||||||||||||||||||||||
| Asset Derivatives | ||||||||||||||||||||||||
| Purchased Options* |
$ | 42,719 | $ | - | $ | - | $ | - | $ | - | $ | 42,719 | ||||||||||||
| Futures Contracts^^ |
- | - | - | 13,958 | - | 13,958 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total Value |
$ | 42,719 | $ | - | $ | - | $ | 13,958 | $ | - | $ | 56,677 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
120
Table of Contents
Notes to Financial Statements (Continued)
| Credit Risk |
Equity Risk |
Foreign Exchange Risk |
Interest Rate Risk |
Commodity Risk |
Total | |||||||||||||||||||
| Short-Duration Bond Fund (Continued) | ||||||||||||||||||||||||
| Liability Derivatives | ||||||||||||||||||||||||
| Futures Contracts^^ |
$ | - | $ | - | $ | - | $ | (177,072 | ) | $ | - | $ | (177,072 | ) | ||||||||||
| Swap Agreements^ |
(12,887 | ) | - | - | - | - | (12,887 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total Value |
$ | (12,887 | ) | $ | - | $ | - | $ | (177,072 | ) | $ | - | $ | (189,959 | ) | |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Realized Gain (Loss)# | ||||||||||||||||||||||||
| Purchased Options |
$ | - | $ | - | $ | - | $ | 436,309 | $ | - | $ | 436,309 | ||||||||||||
| Futures Contracts |
- | - | - | 704,402 | - | 704,402 | ||||||||||||||||||
| Swap Agreements |
(24,616 | ) | - | - | (431,695 | ) | - | (456,311 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total Realized Gain (Loss) |
$ | (24,616 | ) | $ | - | $ | - | $ | 709,016 | $ | - | $ | 684,400 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Change in Appreciation (Depreciation)## | ||||||||||||||||||||||||
| Purchased Options |
$ | (32,641 | ) | $ | - | $ | - | $ | (159,736 | ) | $ | - | $ | (192,377 | ) | |||||||||
| Futures Contracts |
- | - | - | (79,832 | ) | - | (79,832 | ) | ||||||||||||||||
| Swap Agreements |
3,803 | - | - | 242,673 | - | 246,476 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total Change in Appreciation (Depreciation) |
$ | (28,838 | ) | $ | - | $ | - | $ | 3,105 | $ | - | $ | (25,733 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Number of Contracts, Notional Amounts or Shares/Units† | ||||||||||||||||||||||||
| Purchased Options |
$ | 36,450,000 | $ | - | $ | - | $ | 17,945,000 | $ | - | $ | 54,395,000 | ||||||||||||
| Futures Contracts |
- | - | - | 599 | - | 599 | ||||||||||||||||||
| Swap Agreements |
$ | 1,358,571 | $ | - | $ | - | $ | 5,400,000 | $ | - | $ | 6,758,571 | ||||||||||||
| Strategic Emerging Markets Fund | ||||||||||||||||||||||||
| Asset Derivatives | ||||||||||||||||||||||||
| Warrants* |
$ | - | $ | 16,135 | $ | - | $ | - | $ | - | $ | 16,135 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Realized Gain (Loss)# | ||||||||||||||||||||||||
| Rights |
$ | - | $ | 16 | $ | - | $ | - | $ | - | $ | 16 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Change in Appreciation (Depreciation)## | ||||||||||||||||||||||||
| Warrants |
$ | - | $ | (48,897 | ) | $ | - | $ | - | $ | - | $ | (48,897 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Number of Contracts Notional Amounts or Shares/Units† | ||||||||||||||||||||||||
| Warrants |
- | 81,500 | - | - | 81,500 | |||||||||||||||||||
| Rights |
- | - | †† | - | - | - | ||||||||||||||||||
| * | Statements of Assets and Liabilities location: Investments, at value, Receivables from: open swap agreements, at value. |
| ^ | Statements of Assets and Liabilities location: Payables for: open swap agreements, at value. |
| ^^ | Cumulative appreciation (depreciation) on futures contracts is reported in “Futures Contracts” below. Only current day’s variation margin, if any, is reported within the Statements of Assets and Liabilities. |
| # | Statements of Operations location: Amounts are included in net realized gain (loss) on: investment transactions, futures contracts, or swap agreements, as applicable. |
| ## | Statements of Operations location: Amounts are included in net change in unrealized appreciation (depreciation) on: investment transactions, futures contracts, or swap agreements, as applicable. |
| † | Amount(s) disclosed represent average number of contracts for futures contracts, notional amounts for purchased options, and swap agreements, or shares/units outstanding for rights, warrants and purchased options, which is indicative of volume of this derivative type, for the months that the Fund held such derivatives during the year ended December 31, 2015. |
| †† | Amount is less than 0.5 shares. |
121
Table of Contents
Notes to Financial Statements (Continued)
The following table presents derivative assets by counterparty net of amounts available for offset under a master netting agreement (“MNA”), or similar agreement, and net of the related collateral received by the Fund(s) as of December 31, 2015.
| Counterparty |
Derivative Assets Subject to a MNA by Counterparty† |
Financial Instruments Available for Offset |
Collateral Received*** | Net Amount* | ||||||||||||
| Inflation-Protected and Income Fund |
||||||||||||||||
| Bank of America |
$ | 18,722 | $ | - | $ | - | $ | 18,722 | ||||||||
| Goldman Sachs International |
27,540 | (27,540 | ) | - | - | |||||||||||
| HSBC Bank PLC |
360,822 | - | (305,115 | ) | 55,707 | |||||||||||
| JP Morgan Chase Bank |
264,931 | (21,687 | ) | (243,244 | ) | - | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| $ | 672,015 | $ | (49,227 | ) | $ | (548,359 | ) | $ | 74,429 | |||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Short-Duration Bond Fund |
||||||||||||||||
| JP Morgan Chase Bank |
$ | 42,719 | $ | - | $ | - | $ | 42,719 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
The following table presents derivative liabilities by counterparty net of amounts available for offset under an MNA, or similar agreement, and net of the related collateral pledged by the Fund(s) as of December 31, 2015.
| Counterparty |
Derivative Liabilities Subject to a MNA by Counterparty† |
Financial Instruments Available for Offset |
Collateral Pledged*** | Net Amount** | ||||||||||||
| Inflation-Protected and Income Fund |
||||||||||||||||
| Goldman Sachs International |
$ | (50,288 | ) | $ | 27,540 | $ | - | $ | (22,748 | ) | ||||||
| JP Morgan Chase Bank |
(21,687 | ) | 21,687 | - | - | |||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| $ | (71,975 | ) | $ | 49,227 | $ | - | $ | (22,748 | ) | |||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Short-Duration Bond Fund |
||||||||||||||||
| Goldman Sachs International |
$ | (12,887 | ) | $ | - | $ | - | $ | (12,887 | ) | ||||||
|
|
|
|
|
|
|
|
|
|||||||||
| * | Represents the net amount receivable from the counterparty in the event of default. |
| ** | Represents the net amount payable to the counterparty in the event of default. |
| *** | The amount presented here may be less than the total amount of collateral received/pledged as the net amount of derivative assets and liabilities for a counterparty cannot be less than $0. |
| † | The amount presented here may be less than the total amount shown in the Statement of Assets and Liabilities as some derivatives held by the counterparty are not covered within the master netting agreements. |
Such agreements typically permit a single net payment in the event of default, including the bankruptcy or insolvency of the counterparty. Typically, the Fund(s) and counterparties are not permitted to sell, re-pledge, or use the collateral they receive.
Further details regarding the derivatives and other investments held by the Fund(s) during the year ended December 31, 2015, are discussed below.
Futures Contracts
A Fund may seek to manage a variety of different risks, such as interest rate risk, equity price risk, and currency risk, through the use of futures contracts. A Fund may use interest rate futures contracts to adjust the interest rate sensitivity (duration) of its portfolio or the credit exposure of the portfolio. Interest rate futures contracts obligate the long or short holder to take or make delivery of a specified quantity of a financial instrument, such as a specific fixed-income security, during a specified future period at a specified price. A Fund may use index futures to hedge against broad market risks to its portfolio or to gain broad market exposure when it holds uninvested cash or as an inexpensive substitute for cash investments directly in securities or other assets. Securities index futures contracts are contracts to buy or sell units of a securities index at a specified future date at a price agreed upon when the contract is made and are settled in cash. Positions in futures may be closed out only on an exchange or board of trade which provides a secondary market for such futures. Because futures contracts are exchange-traded, they typically have minimal exposure to counterparty risk.
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Parties to a futures contract are not required to post the entire notional amount of the contract, but rather a small percentage of that amount (by way of margin), both at the time they enter into futures transactions, and then on a daily basis if their positions decline in value; as a result, futures contracts are highly leveraged. Such payments are known as variation margin and are recorded by the Funds as unrealized gains or losses. Because futures markets are highly leveraged, they can be extremely volatile, and there can be no assurance that the pricing of a futures contract will correlate precisely with the pricing of the asset or index underlying it or the asset or liability of the Fund that is the subject of the hedge. It may not always be possible for a Fund to enter into a closing transaction with respect to a futures contract it has entered into, at a favorable time or price. When a Fund enters into a futures transaction, it is subject to the risk that the value of the futures contract will move in a direction unfavorable to it. When a Fund uses futures contracts for hedging purposes, it is likely that the Fund will have an asset or liability that will offset any loss (or gain) on the transactions, at least in part.
When a futures contract is closed, the Fund records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. Futures contracts are valued at the settlement price established each day by the board of trade or exchange on which they are traded.
The Fund(s) listed in the following table had open futures contracts at December 31, 2015:
| Expiration Date |
Number of Contracts |
Notional Amount |
Net Unrealized Appreciation/ (Depreciation) |
|||||||||||||
| Asset Momentum Fund |
||||||||||||||||
| Futures Contracts — Long |
||||||||||||||||
| Gold 100 OZ |
02/25/16 | 3 | $ | 318,060 | $ | (1,394 | ) | |||||||||
| S&P 500 E Mini Index |
03/18/16 | 63 | 6,411,510 | 5,150 | ||||||||||||
|
|
|
|||||||||||||||
| $ | 3,756 | |||||||||||||||
|
|
|
|||||||||||||||
| Inflation-Protected and Income Fund |
||||||||||||||||
| Futures Contracts — Short |
||||||||||||||||
| U.S. Long Bond |
03/21/16 | 4 | $ | (615,000 | ) | $ | (1,011 | ) | ||||||||
| U.S. Treasury Note 10 Year |
03/21/16 | 13 | (1,636,781 | ) | (1,661 | ) | ||||||||||
| U.S. Ultra Bond |
03/21/16 | 12 | (1,904,250 | ) | (9,901 | ) | ||||||||||
| U.S. Treasury Note 5 Year |
03/31/16 | 14 | (1,656,485 | ) | 3,351 | |||||||||||
|
|
|
|||||||||||||||
| $ | (9,222 | ) | ||||||||||||||
|
|
|
|||||||||||||||
| Short-Duration Bond Fund |
||||||||||||||||
| Futures Contracts — Long |
||||||||||||||||
| U.S. Treasury Note 2 Year |
03/31/16 | 303 | $ | 65,822,016 | $ | (124,784 | ) | |||||||||
| U.S. Treasury Note 5 Year |
03/31/16 | 213 | 25,202,227 | (52,288 | ) | |||||||||||
|
|
|
|||||||||||||||
| $ | (177,072 | ) | ||||||||||||||
|
|
|
|||||||||||||||
| Futures Contracts — Short |
||||||||||||||||
| U.S. Treasury Note 10 Year |
03/21/16 | 41 | $ | (5,162,156 | ) | $ | 13,958 | |||||||||
|
|
|
|||||||||||||||
Swap Agreements
Swap agreements are typically two-party contracts entered into primarily by institutional investors. In a standard “swap” transaction, two parties agree to exchange the returns (or differentials in rates of return) earned or realized on particular predetermined investments or instruments, which may be adjusted for an interest factor. The gross returns to be exchanged or “swapped” between the parties are generally calculated with respect to a “notional amount,” (i.e., the return on or increase in value of a particular dollar amount invested at a particular interest rate or in a “basket” of securities representing a particular index).
Interest Rate Swaps. When a Fund enters into an interest rate swap, it typically agrees to make payments to its counterparty based on a specified long- or short-term interest rate, and will receive payments from its counterparty based on another interest rate. Other forms of interest rate swap agreements include interest rate caps, under which, in return for a specified payment stream, one
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party agrees to make payments to the other to the extent that interest rates exceed a specified rate, or “cap”; interest rate floors, under which, in return for a specified payment stream, one party agrees to make payments to the other to the extent that interest rates fall below a specified rate, or “floor”; and interest rate collars, under which a party sells a cap and purchases a floor or vice versa in an attempt to protect itself against interest rate movements exceeding given minimum or maximum levels. A Fund may enter into an interest rate swap in order, for example, to hedge against the effect of interest rate changes on the value of specific securities in its portfolio, or to adjust the interest rate sensitivity (duration) or the credit exposure of its portfolio overall, or otherwise as a substitute for a direct investment in debt securities.
Credit Default Swaps. A Fund also may enter into credit default swap transactions, as a “buyer” or “seller” of credit protection. In a credit default swap, one party provides what is in effect insurance against a default or other adverse credit event affecting an issuer of debt securities (typically referred to as a “reference entity”). In general, the buyer of credit protection is obligated to pay the protection seller an upfront amount or a periodic stream of payments over the term of the swap. If a “credit event” occurs, the buyer has the right to deliver to the seller bonds or other obligations of the reference entity (with a value up to the full notional value of the swap), and to receive a payment equal to the par value of the bonds or other obligations. Credit events that would trigger a request that the seller make payment are specific to each credit default swap agreement, but generally include bankruptcy, failure to pay, restructuring, acceleration, default, or repudiation/moratorium. When a Fund buys protection, it may or may not own securities of the reference entity. If it does own securities of the reference entity, the swap serves as a hedge against a decline in the value of the securities due to the occurrence of a credit event involving the issuer of the securities. If the Fund does not own securities of the reference entity, the credit default swap may be seen to create a short position in the reference entity. If a Fund is a buyer and no credit event occurs, the Fund will typically recover nothing under the swap, but will have had to pay the required upfront payment or stream of continuing payments under the swap. When a Fund sells protection under a credit default swap, the position may have the effect of creating leverage in the Fund’s portfolio through the Fund’s indirect long exposure to the issuer or securities on which the swap is written. When a Fund sells protection, it may do so either to earn additional income or to create a “synthetic” long position.
Whenever a Fund enters into a swap agreement, it takes on counterparty risk — the risk that its counterparty will be unable or unwilling to meet its obligations under the swap agreement. The Fund also takes the risk that the market will move against its position in the swap agreement. In the case of an interest rate swap, the value of the swap may increase or decrease depending on changes in interest rates. In the case of a credit default swap, the swap will become more or less valuable depending on the credit of the issuer of the underlying security, and, if a credit event occurs under a swap where the Fund is the seller of credit protection, the Fund could be required to purchase the security at par value, resulting in a significant loss to the Fund. When the Fund enters into any type of swap for hedging purposes, it is likely that the Fund will have an asset or liability that will offset any loss (or gain) on the swap, at least in part. Swap agreements may be non-transferable or otherwise highly illiquid, and a Fund may not be able to terminate or transfer a swap agreement at any particular time or at an acceptable price.
Swaptions. A Fund may also enter into options on swap agreements (“swaptions”). A swaption is a contract that gives a counterparty the right (but not the obligation) to enter into a new swap agreement or to shorten, extend, cancel, or otherwise modify an existing swap agreement, at some designated future time on specified terms. A Fund may write (sell) and purchase put and call swaptions. Depending on the terms of the particular option agreement, a Fund will generally incur a greater degree of risk when it writes a swaption than it will incur when it purchases a swaption. When a Fund purchases a swaption, it risks losing only the amount of the premium it has paid should it decide to let the option expire unexercised. However, when a Fund writes a swaption, upon exercise of the option the Fund will become obligated according to the terms of the underlying agreement. A Fund may enter into swaptions for the same purposes as swaps. For information regarding the accounting treatment of options, see “Options, Rights, and Warrants” below.
Centrally Cleared Swaps. Certain clearinghouses currently offer clearing for limited types of derivatives transactions, principally certain interest rate swaps, certain index swaps, and credit derivatives. In a cleared derivative transaction, a Fund typically enters into the transaction with a financial institution counterparty, and performance of the transaction is effectively guaranteed by a central clearinghouse, thereby reducing or eliminating the Fund’s exposure to the credit risk of its original counterparty. The Fund will be required to post amounts (“initial margin”) with the clearinghouse or at the instruction of the clearinghouse. The initial margin required by a clearinghouse may be greater than the initial margin the Fund would be required to post in an uncleared transaction. If cash is deposited as the initial margin, it is shown as collateral on a Fund’s Statement of Assets and Liabilities. Swap agreements are marked-to-market daily and subsequent payments (“variation margin”) are made or received by a Fund depending on whether unrealized gains or losses are incurred. These amounts are reflected as receivables or payables on a Fund’s Statement of Assets and Liabilities (“Variation margin on open derivative instruments”) and as a component of net change in unrealized appreciation (depreciation) on a Fund’s Statement of Operations. Only a limited number of transaction types are currently eligible for clearing.
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During the term of a swap transaction, changes in the value of the swap are recognized as unrealized gains or losses by marking to market to reflect the market value of the swap. When the swap is terminated, a Fund will record a realized gain or loss equal to the difference, if any, between the proceeds from (or cost of) the closing transaction and a Fund’s basis in the agreement. Upfront swap premium payments paid or received by a Fund, if any, are recorded within the value of the open swap agreement on the Fund’s Statement of Assets and Liabilities and represent payments paid or received upon entering into the swap agreement to compensate for differences between stated terms of the swap agreement and prevailing market conditions (credit spreads, currency exchange rates, and other relevant factors). These upfront payments are recorded as realized gain or loss on the Fund’s Statement of Operations upon termination or maturity of the swap agreement.
During the term of a swap transaction, the periodic net payments can be made for a set period of time or may be triggered by a predetermined credit event. The net periodic payments may be based on a fixed or variable interest rate, the change in market value of a specified security, basket of securities or index, or the return generated by a security. These periodic payments received or made by the Funds are recorded in the accompanying Statements of Operations as realized gains and losses, respectively.
The Fund(s) listed in the following table had open swap transactions at December 31, 2015. A Fund’s current exposure to a counterparty is the fair value of the transaction.
| Counterparty |
Currency |
Notional Amount |
Expiration Date |
Receive |
Deliverable on Default |
Unrealized Appreciation (Depreciation) |
Premium (Received) Paid |
Value | ||||||||||||||||||
| Inflation-Protected and Income Fund* |
||||||||||||||||||||||||||
| Credit Default Swaps - Sell Protection† |
||||||||||||||||||||||||||
| OTC Swaps |
||||||||||||||||||||||||||
| Goldman Sachs International | USD | 1,600,000 | 11/17/45 | 3.000% | CMBX.NA.BBB-.6†† (Rating: BBB-) |
$ | (51,274 | ) | $ | 986 | $ | (50,288 | ) | |||||||||||||
| JP Morgan Chase Bank | USD | 690,000 | 11/17/45 | 3.000% | CMBX.NA.BBB-.6†† (Rating: BBB-) |
(22,537 | ) | 850 | (21,687 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|||||||||||||||||||||
| (73,811 | ) | 1,836 | (71,975 | ) | ||||||||||||||||||||||
|
|
|
|
|
|
|
|||||||||||||||||||||
| Counterparty |
Currency |
Notional Amount |
Expiration Date |
Payments |
Payments Received by Fund |
Unrealized Appreciation (Depreciation) |
Premium (Received) Paid |
Value | ||||||||||||||||||
| Interest Rate Swaps |
||||||||||||||||||||||||||
| OTC Swaps |
||||||||||||||||||||||||||
| Bank of America | USD | 11,000,000 | 11/06/17 | 1.275% | USA-CPI-U |
$ | 18,722 | $ | - | $ | 18,722 | |||||||||||||||
| Goldman Sachs International | USD | 8,500,000 | 10/13/17 | 1.125% | USA-CPI-U |
27,540 | - | 27,540 | ||||||||||||||||||
|
|
|
|
|
|
|
|||||||||||||||||||||
| 46,262 | - | 46,262 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|||||||||||||||||||||
| Counterparty |
Currency |
Notional Amount |
Expiration Date |
Receive |
Deliverable on Default |
Unrealized Appreciation (Depreciation) |
Premium (Received) Paid |
Value | ||||||||||||||||||
| Short-Duration Bond Fund |
|
|||||||||||||||||||||||||
| Credit Default Swaps - Sell Protection† |
|
|||||||||||||||||||||||||
| OTC Swaps |
|
|||||||||||||||||||||||||
| Goldman Sachs International | USD | 410,000 | 11/17/45 | 3.000% | CMBX.NA.BBB-.6†† (Rating: BBB-) |
$ | (13,139 | ) | $ | 252 | $ | (12,887 | ) | |||||||||||||
|
|
|
|
|
|
|
|||||||||||||||||||||
| USD | U.S. Dollar |
| * | A portion of the cash collateral received from JP Morgan Chase Bank in the amount of $280,000 was related to swap agreements at December 31, 2015. |
| † | For each credit derivative with sold protection, the credit ratings of the entities referenced, as rated by any rating organization, are included in the equivalent Standard & Poor’s Ratings Group rating category. The reference entity rating represents the likelihood of a potential payment by the Fund if the referenced entity experiences a credit event as of period end. Notional amounts represent the maximum potential amount of future payments. |
| †† | Payment is based on a percentage of the index. Reference entities are a number of individual issuers comprising the index. |
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Options, Rights, and Warrants
A Fund may purchase and sell put and call options on securities or an index of securities to enhance investment performance or to protect against changes in market prices. A Fund that invests in debt securities may also purchase and sell put and call options to adjust the interest rate sensitivity of its portfolio or the credit exposure of the portfolio.
Call Options. A call option gives the holder the right to purchase, and obligates the writer to sell, a security at the strike price at any time before the expiration date.
Put Options. A put option gives the holder the right to sell, and obligates the writer to buy, a security at the exercise price at any time before the expiration date.
Purchasing put and call options. A Fund may purchase put options to protect portfolio holdings against a decline in market value of a security or securities held by it. A Fund may also purchase a put option hoping to profit from an anticipated decline in the value of the underlying security. If the Fund holds the security underlying the option, the option premium and any transaction costs will reduce any profit the Fund might have realized had it sold the underlying security instead of buying the put option. A Fund may purchase call options to hedge against an increase in the price of securities that the Fund wants ultimately to buy. A Fund may also purchase a call option as a long directional investment hoping to profit from an anticipated increase in the value of the underlying security. In order for a call option to be profitable, the market price of the underlying security must rise sufficiently above the exercise price to cover the premium and transaction costs. These costs will reduce any profit the Fund might have realized had it bought the underlying security at the time it purchased the call option.
When a Fund purchases an option, it runs the risk that it will lose its entire investment in the option in a relatively short period of time, unless the Fund exercises the option or enters into a closing sale transaction before the option’s expiration. If the price of the underlying security does not rise (in the case of a call) or fall (in the case of a put) to an extent sufficient to cover the option premium and transaction costs, the Fund will lose part or all of its investment in the option. This contrasts with an investment by a Fund in the underlying security, since the Fund will not realize a loss if the security’s price does not change. Premiums paid for purchasing options that expire are treated as realized losses.
Exchange Traded Options. Exchange traded options purchased or sold by a Fund may be traded on a securities or options exchange or market. Such options typically have minimal exposure to counterparty risk. However, an exchange or market may at times find it necessary to impose restrictions on particular types of options transactions, such as opening transactions. If an underlying security ceases to meet qualifications imposed by the market or the Options Clearing Corporation, new series of options on that security will no longer be opened to replace expiring series, and opening transactions in existing series may be prohibited. Exchange traded options are valued at the last sale price, or if no sales are reported, the last bid price.
OTC Options. OTC options purchased or sold by a Fund are not traded on securities or options exchanges or backed by clearinghouses. Rather, they are entered into directly between a Fund and the counterparty to the option. In the case of an OTC option purchased by the Fund, the value of the option to the Fund will depend on the willingness and ability of the option writer to perform its obligations to the Fund. In addition, OTC options may not be transferable and there may be little or no secondary market for them, so they may be considered illiquid. It may not be possible to enter into closing transactions with respect to OTC options or otherwise to terminate such options, and as a result a Fund may be required to remain obligated on an unfavorable OTC option until its expiration. OTC options are valued using prices supplied by a primary pricing source, selected pursuant to procedures approved by the Trustees.
Rights and Warrants. A Fund may purchase or hold warrants or rights in order to gain exposure to the underlying security without owning the security, including, for example, cases where the Fund hopes to lock in the price today of a security it may wish to purchase in the future. Warrants generally give the holder the right, but not the obligation, to buy a security at a stated price. In order for a warrant to be profitable, the market price of the underlying security must rise sufficiently above the exercise price to cover any premium and transaction costs. Rights may similarly confer on the holder the right to purchase or acquire securities, including through participation in a so-called rights offering. Bonds may be issued with warrants or other rights attached to purchase or acquire equity or other debt securities, typically of the bond issuer. The market prices of bonds with warrants or rights attached to purchase equity securities or bonds may, to some degree, reflect changes in the values of the underlying securities.
126
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When a Fund purchases or otherwise acquires warrants or other rights, it runs the risk that it will lose its entire investment in the warrants or rights, unless the Fund exercises the warrant or right, acquires the underlying securities, or enters into a closing transaction before expiration. If the price of the underlying security does not rise to an extent sufficient to cover any premium and transaction costs, the Fund will lose part or all of its investment. Any premiums or purchase price paid for warrants or other rights that expire are treated as realized losses. Warrants and similar rights differ from options in that they are typically written by the issuer of the security underlying the warrant or right. Although some warrants and rights may be non-transferable, others may be traded over-the-counter or on an exchange.
Inflation-Indexed Bonds
The Funds may invest in inflation-indexed bonds, which are fixed income securities whose principal value or coupon is periodically adjusted according to the rate of inflation, as measured by the Consumer Price Index for All Urban Consumers (“CPI-U”) (for U.S. Treasury inflation-indexed bonds) or, generally, by a comparable inflation index calculated by the foreign government issuing the inflation-indexed bonds.
If the periodic adjustment rate measuring inflation falls, the principal value of inflation-indexed bonds will be adjusted downward, and consequently the interest payable on these securities (calculated with respect to a smaller principal amount) will be reduced. Repayment of the original bond principal upon maturity (as adjusted for inflation) is guaranteed in the case of U.S. Treasury inflation-indexed bonds, even during a period of deflation. However, the current market value of the bonds is not guaranteed, and will fluctuate. The Funds may also invest in other inflation related bonds which may or may not provide a similar guarantee. If a guarantee of principal is not provided, the adjusted principal value of the bond repaid at maturity may be less than the original principal. Any adjustments to the principal amount of an inflation-indexed bond due to inflation will be reflected as increases or decreases to interest income. Such adjustments may have a significant impact on the Fund’s distributions.
The value of inflation-indexed bonds is generally based on changes in real interest rates, which in turn are tied to the relationship between nominal interest rates and the rate of inflation. Therefore, if nominal interest rates increased at a faster rate than inflation, real interest rates might rise, leading to a decrease in value of inflation-indexed bonds. While the values of these securities are expected to be protected from long-term inflationary trends, short-term increases in inflation may lead to a decline in value. There can be no assurance that the CPI-U or any foreign inflation index will accurately measure the real rate of inflation, or that the rate of inflation in a foreign country will correlate to the rate of inflation in the United States. Additionally, if interest rates rise due to reasons other than inflation, investors in these securities may not be protected to the extent that the increase is not reflected in the bond’s inflation measure.
Bank Loans
Certain of the Funds may invest in bank loans including, for example, corporate loans, loan participations, direct debt, bank debt, and bridge debt. A Fund may invest in a loan by lending money to a borrower directly as part of a syndicate of lenders. In a syndicated loan, the agent that originated and structured the loan typically administers and enforces the loan on behalf of the syndicate. Failure by the agent to fulfill its obligations may delay or adversely affect receipt of payment by a Fund. A Fund may also invest in loans through novations, assignments, and participation interests. In a novation, a Fund typically assumes all of the rights of a lending institution in a loan, including the right to receive payments of principal and interest and other amounts directly from the borrower and to enforce its rights as a lender directly against the borrower. When a Fund takes an assignment of a loan, the Fund acquires some or all of the interest of another lender (or assignee) in the loan. In such cases, the Fund may be required generally to rely upon the assignor to demand payment and enforce rights under the loan. If a Fund acquires a participation in the loan, the Fund purchases an indirect interest in a loan held by a third party and the Fund typically will have a contractual relationship only with the third party loan investor, not with the borrower. As a result, a Fund may have the right to receive payments of principal, interest, and any fees to which it is entitled only from the loan investor selling the participation and only upon receipt by such loan investor of such payments from the borrower. In such cases, a Fund assumes the credit risk of both the borrower and the loan investor selling the participation, and the Fund may be unable to realize some or all of the value of its interest in the loan in the event of the insolvency of the third party.
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Notes to Financial Statements (Continued)
Changes in the financial condition of the borrower or economic conditions or other circumstances may reduce the capacity of the borrower to make principal and interest payments on such instruments and may lead to defaults. The value of any collateral securing a bank loan may decline after the Fund invests, and there is a risk that the value of the collateral may not be sufficient to cover the amount owed to the Fund.
At December 31, 2015, the Funds had no unfunded loan commitments.
Repurchase Agreements
Each Fund may enter into repurchase agreements with certain banks and broker-dealers whereby a Fund acquires a security for cash and obtains a simultaneous commitment from the seller to repurchase the security at an agreed upon price and date. A Fund, through its custodian, takes possession of the securities collateralizing the repurchase agreement in a segregated account. Repurchase agreements must be fully collateralized at all times, but involve some risk to a Fund if the other party should default on its obligation and the Fund is delayed or prevented from recovering the collateral, or if the Fund is required to return collateral to a borrower at a time when it may realize a loss on the investment of that collateral.
Reverse Repurchase Agreements
Each Fund may enter into reverse repurchase agreements with banks and broker-dealers to enhance return. Reverse repurchase agreements involve sales by a Fund of portfolio securities concurrently with an agreement by the Fund to repurchase the same securities at a later date at a fixed price (typically equal to the original sale price plus interest). During the reverse repurchase agreement period, the Fund continues to receive principal and interest payments on the securities and also has the opportunity to earn a return on the purchase price received by it from the counterparty.
Certain agreements have no stated maturity and can be terminated by either party at any time. Interest on the value of the reverse repurchase agreements issued and outstanding is based upon competitive market rates determined at the time of issuance. A Fund may utilize reverse repurchase agreements when it is anticipated that the interest income to be earned from the investment of the proceeds of the transaction is greater than the interest expense of the transaction. Reverse repurchase agreements generally create investment leverage and involve the risk that the market value of the security that a Fund is obligated to repurchase under the agreement may decline below the repurchase price. For financial reporting purposes, cash received in exchange for securities delivered plus accrued interest payments to be made to the counterparty is recorded as a liability in the Statements of Assets and Liabilities at face value including accrued interest. Due to the short term nature of reverse repurchase agreements, face value approximates fair value. Interest payments made by a Fund to the counterparties are recorded as a component of interest expense in the Statements of Operations. In periods of increased demand for a security, a Fund may receive a fee for use of the security by the counterparty, which may result in interest income to the Fund.
Reverse repurchase transactions are entered into by a Fund under a Master Repurchase Agreement (“MRA”), which permits the Fund, under certain circumstances, including an event of default (such as bankruptcy or insolvency), to offset payables and/or receivables under the MRA with collateral held and/or posted to the counterparty and creates one single net payment due to or from the Fund. With reverse repurchase transactions, typically a Fund and the counterparties are permitted to sell, re-pledge, or use the collateral associated with the transaction. However, bankruptcy or insolvency laws of a particular jurisdiction may impose restrictions on or prohibitions against such a right of offset in the event of an MRA counterparty’s bankruptcy or insolvency. Pursuant to the terms of the MRA, a Fund receives or posts securities as collateral with a market value in excess of the repurchase price to be paid or received by the Fund upon the maturity of the transaction. Upon a bankruptcy or insolvency of the MRA counterparty, the Fund is considered an unsecured creditor with respect to excess collateral and, as such, the return of excess collateral may be delayed.
In the event the buyer of securities under an MRA files for bankruptcy or becomes insolvent, a Fund’s use of the proceeds from the sale of its securities may be restricted or forfeited, and the counterparty may fail to return/resell the securities in question to the Fund.
128
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Notes to Financial Statements (Continued)
The following table is a summary of the Fund(s) open reverse repurchase transactions which are subject to an MRA on a net basis at December 31, 2015:
| Counterparty |
Reverse Repurchase Agreements |
Fair Value of Non-Cash Collateral* |
Cash Collateral Pledged |
Net Amount |
||||||||||||
| Inflation-Protected and Income Fund | ||||||||||||||||
| Banque Paribas |
$ | (93,780,000 | ) | $ | 92,093,000 | $ | 1,687,000 | $ | - | |||||||
| Daiwa Securities |
(52,459,550 | ) | 52,281,725 | 177,825 | - | |||||||||||
| Goldman Sachs & Co. |
(86,479,192 | ) | 84,182,192 | 2,297,000 | - | |||||||||||
| HSBC Finance Corp. |
(98,520,710 | ) | 96,935,436 | 1,585,274 | - | |||||||||||
| Morgan Stanley |
(19,809,475 | ) | 19,809,475 | - | - | |||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| $ | (351,048,927 | ) | $ | 345,301,828 | $ | 5,747,099 | $ | - | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| * | Collateral with a value of $351,416,254 has been pledged in connection with open reverse repurchase transactions. Excess collateral pledged to the individual counterparty is not shown for financial reporting purposes. |
The Fund(s) listed in the following table had open reverse repurchase transactions during the year ended December 31, 2015:
| Description |
Value | |||
| Inflation-Protected and Income Fund | ||||
| Agreement with Banque Paribas, dated 9/02/15, 0.490%, to be repurchased on demand until 1/05/16 at value plus accrued interest. |
$ | 93,780,000 | ||
| Agreement with Daiwa Securities, dated 10/07/15, 0.380%, to be repurchased on demand until 1/07/16 at value plus accrued interest. |
45,494,550 | |||
| Agreement with Daiwa Securities, dated 10/28/15, 0.450%, to be repurchased on demand until 1/07/16 at value plus accrued interest. |
6,965,000 | |||
| Agreement with Goldman Sachs & Co., dated 10/09/15, 0.380%, to be repurchased on demand until 1/08/16 at value plus accrued interest. |
86,479,192 | |||
| Agreement with HSBC Finance Corp., dated 10/06/15, 0.380%, to be repurchased on demand until 1/05/16 at value plus accrued interest. |
67,830,002 | |||
| Agreement with HSBC Finance Corp., dated 11/04/15, 0.400%, to be repurchased on demand until 1/07/16 at value plus accrued interest. |
30,690,708 | |||
| Agreement with Morgan Stanley & Co., dated 11/05/15, 0.510%, to be repurchased on demand until 2/02/16 at value plus accrued interest. |
19,809,475 | |||
|
|
|
|||
| $ | 351,048,927 | |||
|
|
|
|||
| Average balance outstanding |
$ | 369,605,237 | ||
| Maximum balance outstanding |
$ | 403,766,578 | ||
| Average interest rate |
0.31 | % | ||
| Weighted average maturity |
63 days | |||
Average balance outstanding was calculated based on daily balances outstanding during the period that the Fund had entered into reverse repurchase transactions.
The type of underlying collateral and the remaining maturity of open reverse repurchase transactions in relation to the reverse repurchase agreements on the Statements of Assets and Liabilities is as follows:
| Remaining Contractual Maturity of the Agreements | ||||||||||||||||||||
| Overnight and Continuous |
Up to 30 days | 31-90 days | Greater Than 90 days |
Total | ||||||||||||||||
| Inflation-Protected and Income Fund | ||||||||||||||||||||
| Reverse Repurchase Transactions | ||||||||||||||||||||
| U.S. Treasury Obligations |
$ | $ | 331,239,452 | $ | 19,809,475 | $ | - | $ | 351,048,927 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Total Borrowings |
$ | - | $ | 331,239,452 | $ | 19,809,475 | $ | - | $ | 351,048,927 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
129
Table of Contents
Notes to Financial Statements (Continued)
When-Issued, Delayed-Delivery, Forward Commitment, and To-Be-Announced Transactions
A Fund may enter into when-issued, delayed-delivery, forward commitment, or to-be-announced (“TBA”) transactions (collectively, the “Forward Transactions”) in order to lock in the purchase price of the underlying security, or in order to adjust the interest rate exposure of the Fund’s existing portfolio. In Forward Transactions, a Fund commits to purchase or sell particular securities, with payment and delivery to take place at a future date. In the case of TBA purchase commitments, the unit price and the estimated principal amount are established when the Fund enters into a commitment, with the actual principal amount being within a specified range of the estimate. Although a Fund does not typically pay for the securities in these types of transactions until they are delivered, it immediately assumes the risks of ownership, including the risk of price fluctuation. As a result, each of these types of transactions may create investment leverage in a Fund’s portfolio and increase the volatility of the Fund. If a Fund’s counterparty fails to deliver a security purchased in a Forward Transaction, there may be a loss, and the Fund may have missed an opportunity to make an alternative investment.
These securities are valued on the basis of valuations furnished by a pricing service, selected pursuant to procedures approved by the Trustees, which determines valuations taking into account appropriate factors such as institutional-size trading in similar groups of securities, yield, quality, coupon rate, maturity, type of issue, trading characteristics, and other market data. Securities for which no market quotation is available are valued at fair value in accordance with procedures approved by the Trustees. The Funds record on a daily basis the unrealized appreciation (depreciation) based upon changes in the values of these securities. When a Forward Transaction is closed, the Funds record a realized gain or loss equal to the difference between the value of the transaction at the time it was opened and the value of the transaction at the time it was closed.
Securities Lending
Each Fund may lend its securities; however, lending cannot exceed 33% of the total assets of the Fund taken at current value. The Funds’ securities lending activities are governed by a Securities Lending Agency Agreement (“Lending Agreement”) between each Fund and the lending agent (“agent”). The Lending Agreement authorizes the agent to lend qualifying U.S. and foreign securities held by a Fund to approved borrowers (each, a “Borrower”).
Each Fund expects that in connection with any securities on loan, the loan will be secured continuously by collateral consisting of cash or securities adjusted daily to have market value at least equal to the current market value of the securities loaned. The market value of the loaned securities is determined at the close of business of a Fund and any additional collateral is delivered to the Fund the next business day. As with other extensions of credit, the Funds may bear the risk of delay in recovery or even loss of rights in the collateral should the Borrower of the securities fail financially. The Funds receive compensation for lending their securities in the form of a securities loan fee paid by the Borrower, as well as a share of the income earned on investment of the cash collateral received for the loaned securities. At December 31, 2015, the Funds’ collateral was equal to or greater than 100% of the market value of securities on loan.
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. For all Funds, all securities on loan are classified as common stock in the Fund’s Portfolio of Investments at December 31, 2015.
The Funds employ the agent to implement their securities lending program and the agent receives a fee from the Funds for its services. In addition, the Funds may be required to pay a rebate to the Borrower. Accordingly, a Fund’s compensation for lending its securities is reduced by any such fees or rebate paid to the securities lending agent or Borrower, respectively. For the year ended December 31, 2015, the Fund(s) earned securities lending net income as follows:
| Securities Lending Gross Income |
Securities Lending Fees and Expenses |
Securities Lending Net Income |
||||||||||
| Small Cap Equity Fund |
$ | 213,093 | $ | 42,606 | $ | 170,487 | ||||||
| Strategic Emerging Markets Fund |
40,733 | 8,141 | 32,592 | |||||||||
130
Table of Contents
Notes to Financial Statements (Continued)
Accounting for Investment Transactions
Investment transactions are accounted for on the trade date. Realized gains and losses on sales of investments and unrealized appreciation and depreciation of investments are computed by the specific identification cost method. Proceeds received from litigation, if any, are included in realized gains on investment transactions for any investments that are no longer held in the portfolio and as a reduction in cost for investments that continue to be held in the portfolio. Interest income, adjusted for amortization of discounts and premiums on debt securities, is earned from the settlement date and is recorded on the accrual basis. Dividend income is recorded on the ex-dividend date. Withholding taxes on foreign interest, dividends, and capital gains have been provided for in accordance with the applicable country’s tax rules and rates. Foreign dividend income is recorded on the ex-dividend date or as soon as practicable after the Fund determines the existence of a dividend declaration after exercising reasonable due diligence. Distributions received on securities that represent a return of capital or capital gain are recorded as a reduction of cost of investments and/or as a realized gain. The Funds determine the classification of distributions received as return of capital distributions or capital gain distributions.
Foreign Currency Translation
The books and records of the Funds are maintained in U.S. dollars. The market values of foreign currencies, foreign securities, and other assets and liabilities denominated in foreign currencies are translated into U.S. dollars at the mean of the buying and selling rates of such currencies against the U.S. dollar at the end of each business day. Purchases and sales of foreign securities and income and expense items are translated at the rates of exchange prevailing on the respective dates of such transactions. The Funds do not isolate that portion of the results of operations arising from changes in the exchange rates from that portion arising from changes in the market prices of securities. Net realized foreign currency gains and losses resulting from changes in exchange rates include foreign currency gains and losses between trade date and settlement date on investment securities transactions, foreign currency transactions, and the difference between the amounts of dividends or interest recorded on the books of the Funds and the amount actually received.
Allocation of Operating Activity
In maintaining the records for the Funds, the income and expense accounts are allocated daily to each class of shares. Investment income and loss, and unrealized and realized gains or losses are prorated among the classes of shares based on the relative net assets of each. Expenses are allocated to each class of shares depending on the nature of the expenditures. Administration and service fees, if any, which are directly attributable to a class of shares, are charged to that class’s operations. Expenses of a Fund not directly attributable to the operations of any specific class of shares of the Fund are prorated among the classes to which the expense relates based on relative net assets.
Foreign Securities
The Strategic Emerging Markets Fund invests substantially all of its assets in foreign securities. The other Funds may also invest in foreign securities. Foreign securities, including American Depositary Receipts, are subject to additional risks compared to securities of U.S. issuers, including international trade, currency, political, regulatory, and diplomatic risks. In addition, fluctuations in currency exchange rates may adversely affect the values of foreign securities and the price of a Fund’s shares. Emerging markets securities are subject to greater risks than securities issued in developed foreign markets, including less liquidity, greater price volatility, higher relative rates of inflation, greater political, economic, and social instability, greater custody and operational risks, and greater volatility in currency exchange rates.
Federal Income Tax
It is each Fund’s intent to continue to comply with the provisions of subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”), applicable to a regulated investment company. Under such provisions, the Funds would not be subject to federal income taxes on their ordinary income and net realized capital gains to the extent they are distributed or deemed to have been distributed to their shareholders. Therefore, the Funds have not made any provision for federal income tax.
131
Table of Contents
Notes to Financial Statements (Continued)
Dividends and Distributions to Shareholders
Dividends from net investment income are declared and paid quarterly for the Dynamic Bond Fund, High Yield Fund, Inflation-Protected and Income Fund, and Short-Duration Bond Fund and annually for the Asset Momentum Fund, Equity Rotation Fund, Small Cap Equity Fund, Special Situations Fund, and Strategic Emerging Markets Fund and at other times as may be required to satisfy tax or regulatory requirements. Distributions of any net realized capital gains of each Fund are declared and paid annually and at other times as may be required to satisfy tax or regulatory requirements.
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 generally accepted accounting principles. As a result, net investment income and net realized capital gains on investment transactions for a reporting period may differ significantly from distributions during such period.
| 3. | Advisory Fees and Other Transactions |
Investment Advisory Fees and Investment Subadvisers
MML Investment Advisers, LLC (“MML Advisers”), a wholly-owned subsidiary of MassMutual, serves as investment adviser to each Fund. Under the investment advisory agreements between MML Advisers and the Trust on behalf of each Fund, MML Advisers is responsible for providing investment management services for each Fund. In return for these services, MML Advisers receives advisory fees, based upon each Fund’s average daily net assets, at the following annual rates:
| Asset Momentum Fund |
0.60% on the first $500 million; and | |
| 0.55% on any excess over $500 million | ||
| Dynamic Bond Fund |
0.40% on the first $1 billion; and | |
| 0.35% on any excess over $1 billion | ||
| Equity Rotation Fund |
0.45% on the first $500 million; and | |
| 0.40% on any excess over $500 million | ||
| High Yield Fund |
0.60% on the first $300 million; and | |
| 0.575% on any excess over $300 million | ||
| Inflation-Protected and Income Fund |
0.60% on the first $100 million; | |
| 0.55% on the next $200 million; | ||
| 0.50% on the next $200 million; and | ||
| 0.45% on any excess over $500 million | ||
| Short-Duration Bond Fund* |
0.35% on the first $300 million; and | |
| 0.30% on any excess over $300 million | ||
| Small Cap Equity Fund |
0.65% on the first $100 million; | |
| 0.60% on the next $100 million; | ||
| 0.55% on the next $300 million; and | ||
| 0.50% on any excess over $500 million | ||
| Special Situations Fund |
0.60% on the first $500 million; and | |
| 0.55% on any excess over $500 million | ||
| Strategic Emerging Markets Fund |
1.05% on the first $500 million; and | |
| 1.00% on any excess over $500 million |
| * | Prior to May 1, 2015, the investment advisory fees were as follows: |
| Short-Duration Bond Fund |
0.40% on the first $300 million; and | |
| 0.35% on any excess over $300 million |
132
Table of Contents
Notes to Financial Statements (Continued)
MML Advisers has entered into investment subadvisory agreements with Babson Capital Management LLC (“Babson Capital”), a wholly-owned subsidiary of MM Asset Management Holding LLC, itself a wholly-owned subsidiary of MassMutual Holding LLC, a controlled subsidiary of MassMutual, on behalf of certain Funds. These agreements provide that Babson Capital manage the investment and reinvestment of assets of these Funds. Babson Capital receives a subadvisory fee from MML Advisers based upon each Fund’s average daily net assets, at the following annual rates:
| Asset Momentum Fund |
0.475% | |||
| Equity Rotation Fund |
0.30% | |||
| High Yield Fund |
0.20% | |||
| Inflation-Protected and Income Fund |
0.08% | |||
| Short-Duration Bond Fund |
0.08% | |||
| Special Situations Fund |
0.45% |
In addition, Cornerstone Real Estate Advisers LLC (“Cornerstone”) serves as sub-subadviser for the High Yield Fund, Inflation-Protected and Income Fund, and Short-Duration Bond Fund and is primarily responsible for managing each Fund’s commercial mortgage-backed securities. Cornerstone is a wholly-owned subsidiary of Babson Capital. The appointment of Cornerstone as a sub-subadviser to each Fund does not relieve Babson Capital of any obligation or liability to any of the Funds that it would otherwise have pursuant to investment subadvisory agreements between MML Advisers and Babson Capital with respect to each Fund, and any and all acts and omissions of Cornerstone in respect to any Fund shall be considered the acts and omissions of Babson Capital.
MML Advisers has entered into investment subadvisory agreements with OppenheimerFunds, Inc. (“OFI”), a wholly-owned subsidiary of Oppenheimer Acquisition Corp., itself an indirect majority-owned subsidiary of MassMutual Holding LLC, on behalf of the Small Cap Equity Fund and the Strategic Emerging Markets Fund. These agreements provide that OFI manage the investment and reinvestment of the assets of the Funds. OFI receives a subadvisory fee from MML Advisers, based upon each Fund’s average daily net assets, at the following annual rates:
| Small Cap Equity Fund |
0.25% | |
| Strategic Emerging Markets Fund |
0.70% |
MML Advisers has entered into an investment subadvisory agreement with the unaffiliated investment subadviser, DoubleLine Capital, LP (“DoubleLine”), pursuant to which DoubleLine serves as the subadviser to the Dynamic Bond Fund. This agreement provides that DoubleLine manage the investment and reinvestment of the assets of the Fund. DoubleLine receives a subadvisory fee from MassMutual based upon the average daily net assets of the Fund.
The Funds’ subadvisory fees are paid by MML Advisers out of the advisory fees previously disclosed above.
Administration Fees
For the Asset Momentum Fund, Dynamic Bond Fund, Equity Rotation Fund, High Yield Fund, Short-Duration Bond Fund, Special Situations Fund, and Strategic Emerging Markets Fund, under a separate Administrative and Shareholder Services Agreement between the Funds and MML Advisers, MML Advisers is obligated to provide all necessary administrative and shareholder services and bear some of the Fund specific administrative expenses. In return for these services, MML Advisers receives an administrative services fee, based upon the average daily net assets of the applicable class of shares of the Funds, at the following annual rates:
| Class II | Service Class I | |||||||
| Asset Momentum Fund |
0.15% | 0.15% | ||||||
| Dynamic Bond Fund |
0.15% | 0.15% | ||||||
| Equity Rotation Fund |
0.15% | 0.15% | ||||||
| High Yield Fund |
0.15% | 0.15% | ||||||
133
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Notes to Financial Statements (Continued)
| Class II | Service Class I | |||||||
| Short-Duration Bond Fund* |
0.15% | 0.15% | ||||||
| Special Situations Fund |
0.15% | 0.15% | ||||||
| Strategic Emerging Markets Fund* |
0.15% | 0.15% | ||||||
| * | Prior to May 1, 2015, the administrative services fees were as follows: |
| Class II | Service Class I | |||||||
| Short-Duration Bond Fund |
0.10% | 0.10% | ||||||
| Strategic Emerging Markets Fund |
0.25% | 0.25% | ||||||
Distribution and Service Fees
MML Distributors, LLC (the “Distributor”) acts as distributor to the Funds. Pursuant to a Distribution and Services Plan adopted by the Funds pursuant to Rule 12b-1 under the 1940 Act, Service Class shares and Service Class I shares of the Funds pay an annual fee of 0.25% of the average daily net asset value of Service Class shares and Service Class I shares. This fee, or a portion thereof, is paid to: (i) the Distributor for services provided and expenses incurred by it in connection with the distribution of Service Class shares or Service Class I shares, as applicable, of each Fund; and/or (ii) MassMutual for services provided and expenses incurred by it for purposes of maintaining or providing personal services to Service Class and Service Class I shareholders. The Distributor is a wholly-owned subsidiary of MassMutual.
Expense Caps and Waivers
MML Advisers agreed to cap the fees and expenses of the Funds noted below (other than extraordinary litigation and legal expenses, Acquired Fund Fees and Expenses#, interest expense, short sale dividend and loan expense, or other non-recurring or unusual expenses such as organizational expenses and shareholder meeting expenses) based upon the average daily net assets of the applicable class of shares of the Fund, as follows:
| Class II | Service Class I | |||||||
| Asset Momentum Fund** |
0.80% | 1.05% | ||||||
| Dynamic Bond Fund** |
0.60% | 0.85% | ||||||
| Equity Rotation Fund** |
0.65% | 0.90% | ||||||
| Short-Duration Bond Fund* |
0.55% | 0.80% | ||||||
| Special Situations Fund** |
0.80% | 1.05% | ||||||
| Strategic Emerging Markets Fund* |
1.40% | 1.65% | ||||||
| # | Acquired Fund Fees and Expenses are expenses borne indirectly by a Fund through investments in other pooled investment vehicles. |
| * | Expense caps in effect through April 30, 2016. |
| ** | Expense caps in effect through April 30, 2017. |
Prior to May 1, 2015, MML Advisers agreed to cap the fees and expenses of the Fund noted below (other than extraordinary litigation and legal expenses, Acquired Fund Fees and Expenses#, interest expense, short sale dividend and loan expense, or other non-recurring or unusual expenses such as organizational expenses and shareholder meeting expenses) based upon the average daily net assets of the applicable class of shares of the Fund, as follows:
| Class II | Service Class I | |||||||
| High Yield Fund* |
0.69% | 0.94% | ||||||
| # | Acquired Fund Fees and Expenses are expenses borne indirectly by a Fund through investments in other pooled investment vehicles. |
| * | Expense caps in effect through April 30, 2015. |
134
Table of Contents
Notes to Financial Statements (Continued)
MML Advisers has agreed to waive, through April 30, 2016, 0.10% of the advisory fee for the High Yield Fund.
Expense caps and waiver amounts are reflected as a reduction of expenses on the Statements of Operations.
Deferred Compensation
Trustees of the Funds who are not officers or employees of MassMutual may elect to defer receipt of their annual fees in accordance with terms of a Non-Qualified Deferred Compensation Plan. Amounts deferred shall accrue interest or earnings and shall be recorded on the Funds’ books as other liabilities. Deferred compensation is included within Trustees’ fees and expenses in the Statements of Assets and Liabilities.
Other
Certain officers and trustees of the Funds are also employees of MassMutual. The compensation of each trustee who is not an employee of MassMutual is borne by the Funds.
4. Purchases and Sales of Investments
Cost of purchases and proceeds from sales of investment securities (excluding short-term investments) for the year ended December 31, 2015, were as follows:
| Purchases | Sales | |||||||||||||||
| Long-Term U.S. Government Securities |
Other Long-Term Securities |
Long-Term U.S. Government Securities |
Other Long-Term Securities |
|||||||||||||
| Asset Momentum Fund |
$ | 3,999,219 | $ | 30,042,900 | $ | 2,998,047 | $ | 16,742,433 | ||||||||
| Dynamic Bond Fund |
426,248,093 | 331,131,066 | 291,361,451 | 81,131,394 | ||||||||||||
| Equity Rotation Fund |
- | 27,062,979 | - | 7,525,325 | ||||||||||||
| High Yield Fund |
- | 105,677,855 | - | 96,524,528 | ||||||||||||
| Inflation-Protected and Income Fund |
115,964,232 | 213,049,960 | 153,136,783 | 172,219,572 | ||||||||||||
| Short-Duration Bond Fund |
23,087,769 | 70,398,300 | 35,191,041 | 65,347,517 | ||||||||||||
| Small Cap Equity Fund |
- | 43,609,996 | - | 51,967,658 | ||||||||||||
| Special Situations Fund |
- | 35,073,839 | - | 15,680,252 | ||||||||||||
| Strategic Emerging Markets Fund |
- | 50,652,695 | - | 36,223,148 | ||||||||||||
| 5. | Capital Share Transactions |
Changes in shares outstanding for each Fund were as follows:
| Year Ended December 31, 2015 | Year Ended December 31, 2014 | |||||||||||
| Shares | Amount | Shares | Amount | |||||||||
| Asset Momentum Fund Class II* |
||||||||||||
| Sold |
1,990,000 | $ | 19,900,000 | |||||||||
| Issued as reinvestment of dividends |
1,674 | 15,765 | ||||||||||
| Redeemed |
- | - | ||||||||||
|
|
|
|
|
|||||||||
| Net increase (decrease) |
1,991,674 | $ | 19,915,765 | |||||||||
|
|
|
|
|
|||||||||
| Asset Momentum Fund Service Class I* |
||||||||||||
| Sold |
24,620 | $ | 238,982 | |||||||||
| Issued as reinvestment of dividends |
- | - | ||||||||||
| Redeemed |
(4 | ) | (43 | ) | ||||||||
|
|
|
|
|
|||||||||
| Net increase (decrease) |
24,616 | $ | 238,939 | |||||||||
|
|
|
|
|
|||||||||
135
Table of Contents
Notes to Financial Statements (Continued)
| Year Ended December 31, 2015 | Year Ended December 31, 2014 | |||||||||||||||
| Shares | Amount | Shares | Amount | |||||||||||||
| Dynamic Bond Fund Class II* |
||||||||||||||||
| Sold |
80,863,897 | $ | 804,944,229 | |||||||||||||
| Issued as reinvestment of dividends |
649,870 | 6,371,746 | ||||||||||||||
| Redeemed |
(40,294,435 | ) | (399,323,405 | ) | ||||||||||||
|
|
|
|
|
|||||||||||||
| Net increase (decrease) |
41,219,332 | $ | 411,992,570 | |||||||||||||
|
|
|
|
|
|||||||||||||
| Dynamic Bond Fund Service Class I* |
||||||||||||||||
| Sold |
39,135 | $ | 384,626 | |||||||||||||
| Issued as reinvestment of dividends |
226 | 2,208 | ||||||||||||||
| Redeemed |
(11 | ) | (103 | ) | ||||||||||||
|
|
|
|
|
|||||||||||||
| Net increase (decrease) |
39,350 | $ | 386,731 | |||||||||||||
|
|
|
|
|
|||||||||||||
| Equity Rotation Fund Class II* |
||||||||||||||||
| Sold |
1,990,000 | $ | 19,900,000 | |||||||||||||
| Issued as reinvestment of dividends |
14,798 | 143,395 | ||||||||||||||
| Redeemed |
- | - | ||||||||||||||
|
|
|
|
|
|||||||||||||
| Net increase (decrease) |
2,004,798 | $ | 20,043,395 | |||||||||||||
|
|
|
|
|
|||||||||||||
| Equity Rotation Fund Service Class I* |
||||||||||||||||
| Sold |
13,407 | $ | 133,279 | |||||||||||||
| Issued as reinvestment of dividends |
62 | 601 | ||||||||||||||
| Redeemed |
(364 | ) | (3,631 | ) | ||||||||||||
|
|
|
|
|
|||||||||||||
| Net increase (decrease) |
13,105 | $ | 130,249 | |||||||||||||
|
|
|
|
|
|||||||||||||
| High Yield Fund Class II |
||||||||||||||||
| Sold |
120,724 | $ | 1,229,963 | 2,056,883 | $ | 22,487,090 | ||||||||||
| Issued as reinvestment of dividends |
882,358 | 8,547,141 | 1,325,082 | 14,052,559 | ||||||||||||
| Redeemed |
(236,042 | ) | (2,366,805 | ) | (3,445,222 | ) | (37,394,129 | ) | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Net increase (decrease) |
767,040 | $ | 7,410,299 | (63,257 | ) | $ | (854,480 | ) | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| High Yield Fund Service Class I |
||||||||||||||||
| Sold |
585,686 | $ | 5,772,998 | 861,593 | $ | 9,367,450 | ||||||||||
| Issued as reinvestment of dividends |
190,803 | 1,841,151 | 256,448 | 2,708,672 | ||||||||||||
| Redeemed |
(424,963 | ) | (4,201,047 | ) | (592,221 | ) | (6,349,980 | ) | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Net increase (decrease) |
351,526 | $ | 3,413,102 | 525,820 | $ | 5,726,142 | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Inflation-Protected and Income Fund Initial Class |
||||||||||||||||
| Sold |
3,406,567 | $ | 34,665,245 | 13,372,272 | $ | 139,115,234 | ||||||||||
| Issued as reinvestment of dividends |
450,242 | 4,521,221 | 1,570,956 | 16,198,989 | ||||||||||||
| Redeemed |
(6,070,810 | ) | (61,755,947 | ) | (5,925,753 | ) | (61,883,115 | ) | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Net increase (decrease) |
(2,214,001 | ) | $ | (22,569,481 | ) | 9,017,475 | $ | 93,431,108 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Inflation-Protected and Income Fund Service Class |
||||||||||||||||
| Sold |
363,650 | $ | 3,693,995 | 408,141 | $ | 4,220,012 | ||||||||||
| Issued as reinvestment of dividends |
51,277 | 512,261 | 245,133 | 2,522,012 | ||||||||||||
| Redeemed |
(697,048 | ) | (7,053,177 | ) | (749,721 | ) | (7,822,053 | ) | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Net increase (decrease) |
(282,121 | ) | $ | (2,846,921 | ) | (96,447 | ) | $ | (1,080,029 | ) | ||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Short-Duration Bond Fund Class II |
||||||||||||||||
| Sold |
1,582,820 | $ | 15,630,609 | 3,060,083 | $ | 30,410,522 | ||||||||||
| Issued as reinvestment of dividends |
383,289 | 3,766,756 | 441,859 | 4,368,252 | ||||||||||||
| Redeemed |
(2,871,135 | ) | (28,359,265 | ) | (6,230,052 | ) | (61,924,543 | ) | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Net increase (decrease) |
(905,026 | ) | $ | (8,961,900 | ) | (2,728,110 | ) | $ | (27,145,769 | ) | ||||||
|
|
|
|
|
|
|
|
|
|||||||||
136
Table of Contents
Notes to Financial Statements (Continued)
| Year Ended December 31, 2015 | Year Ended December 31, 2014 | |||||||||||||||
| Shares | Amount | Shares | Amount | |||||||||||||
| Short-Duration Bond Fund Service Class I |
||||||||||||||||
| Sold |
651,692 | $ | 6,426,885 | 1,027,500 | $ | 10,194,157 | ||||||||||
| Issued as reinvestment of dividends |
51,783 | 508,301 | 50,890 | 502,758 | ||||||||||||
| Redeemed |
(685,724 | ) | (6,759,837 | ) | (792,308 | ) | (7,860,114 | ) | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Net increase (decrease) |
17,751 | $ | 175,349 | 286,082 | $ | 2,836,801 | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Small Cap Equity Fund Initial Class |
||||||||||||||||
| Sold |
294,879 | $ | 2,871,917 | 376,596 | $ | 4,057,996 | ||||||||||
| Issued as reinvestment of dividends |
1,978,626 | 15,939,017 | 1,385,754 | 13,986,608 | ||||||||||||
| Redeemed |
(1,279,524 | ) | (12,685,331 | ) | (1,415,515 | ) | (15,179,834 | ) | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Net increase (decrease) |
993,981 | $ | 6,125,603 | 346,835 | $ | 2,864,770 | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Small Cap Equity Fund Service Class |
||||||||||||||||
| Sold |
288,567 | $ | 2,825,692 | 253,013 | $ | 2,723,427 | ||||||||||
| Issued as reinvestment of dividends |
229,904 | 1,827,194 | 123,415 | 1,232,351 | ||||||||||||
| Redeemed |
(91,788 | ) | (906,991 | ) | (140,077 | ) | (1,501,870 | ) | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Net increase (decrease) |
426,683 | $ | 3,745,895 | 236,351 | $ | 2,453,908 | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Special Situations Fund Class II* |
||||||||||||||||
| Sold |
1,990,000 | $ | 19,900,000 | |||||||||||||
| Issued as reinvestment of dividends |
591 | 4,967 | ||||||||||||||
| Redeemed |
- | - | ||||||||||||||
|
|
|
|
|
|||||||||||||
| Net increase (decrease) |
1,990,591 | $ | 19,904,967 | |||||||||||||
|
|
|
|
|
|||||||||||||
| Special Situations Fund Service Class I* |
||||||||||||||||
| Sold |
21,754 | $ | 199,585 | |||||||||||||
| Issued as reinvestment of dividends |
- | - | ||||||||||||||
| Redeemed |
(6 | ) | (52 | ) | ||||||||||||
|
|
|
|
|
|||||||||||||
| Net increase (decrease) |
21,748 | $ | 199,533 | |||||||||||||
|
|
|
|
|
|||||||||||||
| Strategic Emerging Markets Fund Class II |
||||||||||||||||
| Sold |
2,410,308 | $ | 22,158,133 | 1,843,003 | $ | 18,572,889 | ||||||||||
| Issued as reinvestment of dividends |
137,633 | 1,066,654 | 26,022 | 286,757 | ||||||||||||
| Redeemed |
(1,111,667 | ) | (10,108,390 | ) | (1,931,572 | ) | (20,586,173 | ) | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Net increase (decrease) |
1,436,274 | $ | 13,116,397 | (62,547 | ) | $ | (1,726,527 | ) | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Strategic Emerging Markets Fund Service Class I |
||||||||||||||||
| Sold |
241,272 | $ | 2,171,162 | 224,378 | $ | 2,287,717 | ||||||||||
| Issued as reinvestment of dividends |
10,034 | 78,067 | 387 | 4,290 | ||||||||||||
| Redeemed |
(167,482 | ) | (1,520,956 | ) | (171,174 | ) | (1,746,060 | ) | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Net increase (decrease) |
83,824 | $ | 728,273 | 53,591 | $ | 545,947 | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| * | Fund commenced operations on May 15, 2015. |
137
Table of Contents
Notes to Financial Statements (Continued)
| 6. | Federal Income Tax Information |
At December 31, 2015, the cost of securities and the unrealized appreciation (depreciation) in the value of investments owned by the Fund(s), as computed on a federal income tax basis, were as follows:
| Federal Income Tax Cost |
Tax Basis Unrealized Appreciation |
Tax Basis Unrealized (Depreciation) |
Net Unrealized Appreciation (Depreciation) |
|||||||||||||
| Asset Momentum Fund |
$ | 18,857,782 | $ | 535,487 | $ | (345,648 | ) | $ | 189,839 | |||||||
| Dynamic Bond Fund |
409,518,641 | 756,614 | (11,429,479 | ) | (10,672,865 | ) | ||||||||||
| Equity Rotation Fund |
19,876,858 | 736,450 | (1,080,743 | ) | (344,293 | ) | ||||||||||
| High Yield Fund |
149,335,367 | 1,498,461 | (12,988,734 | ) | (11,490,273 | ) | ||||||||||
| Inflation-Protected and Income Fund |
781,404,475 | 7,880,865 | (21,771,746 | ) | (13,890,881 | ) | ||||||||||
| Short-Duration Bond Fund |
182,302,363 | 1,870,368 | (5,684,209 | ) | (3,813,841 | ) | ||||||||||
| Small Cap Equity Fund |
94,253,841 | 18,317,103 | (5,429,840 | ) | 12,887,263 | |||||||||||
| Special Situations Fund |
18,463,999 | 407,954 | (1,895,288 | ) | (1,487,334 | ) | ||||||||||
| Strategic Emerging Markets Fund |
112,441,053 | 6,399,947 | (17,691,238 | ) | (11,291,291 | ) | ||||||||||
Net capital loss carryforwards may be applied against any net realized taxable gains in succeeding years, subject to the carryforward period limitations, where applicable. On December 22, 2010, the Regulated Investment Company Modernization Act of 2010 (the “Modernization Act”) was signed by the President. The Modernization Act changed the capital loss carryforward rules as they relate to regulated investment companies. Capital losses generated in tax years beginning after the date of enactment may now be carried forward indefinitely, and retain the character of the original loss. Under pre-enactment law, capital losses could be carried forward for up to eight tax years as short-term capital losses. The provisions affecting the utilization of capital loss carryforwards under the Modernization Act also require the utilization of post-enactment losses prior to the utilization of pre-enactment losses.
At December 31, 2015 the following Fund(s) had available, for federal income tax purposes, pre-enactment unused capital losses:
| Expiring 2016 |
||||
| Small Cap Equity Fund |
$ | 1,780,565 | ||
At December 31, 2015, the following Fund(s) had post-enactment accumulated capital loss carryforwards:
| Short Term Capital Loss Carryforward |
Long term Capital Loss Carryforward |
|||||||
| Asset Momentum Fund |
$ | 1,235,901 | $ | 89,111 | ||||
| Dynamic Bond Fund |
2,151,197 | - | ||||||
| Equity Rotation Fund |
228,657 | - | ||||||
| High Yield Fund |
1,644,023 | 2,788,116 | ||||||
| Inflation-Protected and Income Fund |
841,013 | 2,108,574 | ||||||
| Short-Duration Bond Fund |
- | 1,461,125 | ||||||
| Special Situations Fund |
1,644,252 | - | ||||||
| Strategic Emerging Markets Fund |
3,165,202 | 6,645,402 | ||||||
Net capital loss carryforwards for the Fund(s) shown in the above table are from post-enactment years and are, therefore, not subject to the eight-year carryforward period and possible expiration.
138
Table of Contents
Notes to Financial Statements (Continued)
Generally accepted accounting principles in the United States of America require that only distributions in excess of tax basis earnings and profits be reported in the financial statements as a return of capital.
The tax character of distributions (including capital gain dividends, if any, designated pursuant to Section 852 of the Code) paid during the year ended December 31, 2015, was as follows:
| Ordinary Income |
Long Term Capital Gain |
Return of Capital |
||||||||||
| Asset Momentum Fund |
$ | 1,117 | $ | - | $ | 14,648 | ||||||
| Dynamic Bond Fund |
6,373,954 | - | - | |||||||||
| Equity Rotation Fund |
132,402 | - | 11,594 | |||||||||
| High Yield Fund |
10,031,031 | 331,142 | 26,119 | |||||||||
| Inflation-Protected and Income Fund |
5,033,482 | - | - | |||||||||
| Short-Duration Bond Fund |
4,275,057 | - | - | |||||||||
| Small Cap Equity Fund |
906,452 | 16,859,759 | - | |||||||||
| Special Situations Fund |
- | - | 4,967 | |||||||||
| Strategic Emerging Markets Fund |
1,144,721 | - | - | |||||||||
The tax character of distributions (including capital gain dividends, if any, designated pursuant to Section 852 of the Code) paid during the year ended December 31, 2014, was as follows:
| Ordinary Income |
Long Term Capital Gain |
Return of Capital |
||||||||||
| High Yield Fund |
$ | 13,566,477 | $ | 3,194,754 | $ | - | ||||||
| Inflation-Protected and Income Fund |
10,462,032 | 8,258,969 | - | |||||||||
| Short-Duration Bond Fund |
4,843,503 | 27,507 | - | |||||||||
| Small Cap Equity Fund |
6,030,432 | 9,188,527 | - | |||||||||
| Strategic Emerging Markets Fund |
291,047 | - | - | |||||||||
The following Fund(s) have elected to pass through the foreign tax credit for the year ended December 31, 2015:
| Amount | ||||
| Strategic Emerging Markets Fund |
$ | 123,921 | ||
Capital accounts within the financial statements are periodically adjusted for permanent differences between book and tax accounting. These adjustments have no impact on net assets or the results of operations. Temporary book and tax accounting differences will reverse in subsequent periods. At December 31, 2015, temporary book and tax accounting differences were primarily attributable to investments in futures contracts, options contracts, swap agreements, premium amortization accruals, passive foreign investment companies, the deferral of wash sale losses, and deferred Trustee compensation.
139
Table of Contents
Notes to Financial Statements (Continued)
At December 31, 2015, the components of distributable earnings on a tax basis were as follows:
| Undistributed Ordinary Income |
Undistributed Long Term Capital Gain (Capital Loss Carryover) |
Other Temporary Differences |
Unrealized Appreciation (Depreciation) |
|||||||||||||
| Asset Momentum Fund |
$ | - | $ | (1,325,012 | ) | $ | (292 | ) | $ | 189,835 | ||||||
| Dynamic Bond Fund |
1,217,461 | (2,151,197 | ) | (5,989 | ) | (10,672,865 | ) | |||||||||
| Equity Rotation Fund |
- | (228,657 | ) | (295 | ) | (344,293 | ) | |||||||||
| High Yield Fund |
- | (4,432,139 | ) | (14,037 | ) | (11,490,273 | ) | |||||||||
| Inflation-Protected and Income Fund |
355,272 | (2,949,587 | ) | (70,020 | ) | (13,844,739 | ) | |||||||||
| Short-Duration Bond Fund |
271,422 | (1,461,125 | ) | (24,431 | ) | (3,815,680 | ) | |||||||||
| Small Cap Equity Fund |
1,175,469 | 521,941 | (29,070 | ) | 12,887,267 | |||||||||||
| Special Situations Fund |
- | (1,644,252 | ) | (288 | ) | (1,487,334 | ) | |||||||||
| Strategic Emerging Markets Fund |
424,351 | (9,810,604 | ) | (7,626 | ) | (11,532,372 | ) | |||||||||
During the year ended December 31, 2015, the following amounts were reclassified due to permanent differences between book and tax accounting:
| Paid-in Capital |
Accumulated Net Realized Gain (Loss) on Investments |
Undistributed Net Investment Income (Loss) |
||||||||||
| Asset Momentum Fund |
$ | (14,648 | ) | $ | 334 | $ | 14,314 | |||||
| Dynamic Bond Fund |
3 | (520,531 | ) | 520,528 | ||||||||
| Equity Rotation Fund |
(11,594 | ) | - | 11,594 | ||||||||
| High Yield Fund |
(26,101 | ) | (101,321 | ) | 127,422 | |||||||
| Inflation-Protected and Income Fund |
73 | (3,052,491 | ) | 3,052,418 | ||||||||
| Short-Duration Bond Fund |
29 | (1,264,470 | ) | 1,264,441 | ||||||||
| Small Cap Equity Fund |
25 | 12,601 | (12,626 | ) | ||||||||
| Special Situations Fund |
(13,470 | ) | - | 13,470 | ||||||||
| Strategic Emerging Markets Fund |
10 | 58,463 | (58,473 | ) | ||||||||
The Funds did not have any unrecognized tax benefits at December 31, 2015, nor were there any increases or decreases in unrecognized tax benefits for the year then ended. The Funds recognize interest and penalties, if any, related to unrecognized tax benefits as an income tax expense in the Statements of Operations. During the year ended December 31, 2015, the Funds did not incur any such interest or penalties. The Funds are subject to examination by U.S. federal and state tax authorities for returns filed for the prior three fiscal years, or the returns filed to date for Funds in existence less than three years. Foreign taxes are provided for based on the Funds’ understanding of the tax rules and rates that exist in the foreign markets in which they invest.
7. Indemnifications
Under the Funds’ organizational documents, current and former Trustees and Officers are provided with specified rights to indemnification against liabilities arising in connection with the performance of their duties to the Funds, and shareholders are indemnified against personal liability for obligations of the Funds. In the normal course of business, the Funds may also enter into contracts that provide general indemnifications. The Funds’ maximum exposure under these arrangements is unknown as this would be dependent on future claims that may be made against the Funds. The risk of material loss from such claims is considered remote.
140
Table of Contents
Notes to Financial Statements (Continued)
8. Legal Proceedings
On December 7, 2010, the Trust was named as a defendant and putative member of the proposed defendant class of shareholders named in an adversary proceeding brought by The Official Committee of Unsecured Creditors of Tribune Company (the “Official Committee”) in the U.S. Bankruptcy Court for the District of Delaware, in connection with Tribune Company’s Chapter 11 bankruptcy proceeding (In re Tribune Company). The proceeding relates to a leveraged buyout (“LBO”) transaction by which Tribune Company converted to a privately-held company in 2007, and the putative defendant class is comprised of beneficial owners of shares of Tribune Company who received proceeds (the “Proceeds”) of the LBO. The Official Committee seeks to recover payments of those Proceeds.
The potential amount sought to be recovered from the Small Cap Equity Fund, plus interest and the Official Committee’s court costs, is approximately $93,500.
The Fund cannot predict the outcome of this proceeding. Accordingly, the Fund has not accrued any amounts related to this proceeding. If the proceeding were to be decided in a manner adverse to the Fund, or if the Fund was to enter into a settlement agreement with the Official Committee, the payment of such judgment or settlement could potentially have a material adverse effect on the Fund’s net asset value depending on the net assets of the Fund at the time of such judgment or settlement.
9. Subsequent Events
In preparation of these financial statements, management has evaluated the events and transactions subsequent to December 31, 2015, through the date when the financial statements were issued, and determined that there are no subsequent events or transactions that would require adjustments to or disclosures in the Funds’ financial statements.
141
Table of Contents
Report of Independent Registered Public Accounting Firm
To the Board of Trustees of MML Series Investment Fund II and Shareholders of MML Asset Momentum Fund, MML Dynamic Bond Fund, MML Equity Rotation Fund, MML High Yield Fund, MML Inflation-Protected and Income Fund, MML Short-Duration Bond Fund, MML Small Cap Equity Fund, MML Special Situations Fund, and MML Strategic Emerging Markets Fund (collectively, the “Funds”):
We have audited the accompanying statements of assets and liabilities, including the portfolios of investments, of the Funds as of December 31, 2015, and the related statements of operations for the period then ended, the statement of cash flows for the MML Inflation-Protected and Income Fund for the year then ended, and the statements of changes in net assets for each and the financial highlights for each of the periods presented. These financial statements and financial highlights are the responsibility of the Funds’ management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. The Funds are not required to have, nor were we engaged to perform, an audit of their internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Funds’ internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of December 31, 2015, 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, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of each of the Funds as of December 31, 2015, the results of their operations for the period then ended, the cash flows of the MML Inflation-Protected and Income Fund for the year then ended, and the changes in their net assets and the financial highlights for each of the periods presented, in conformity with accounting principles generally accepted in the United States of America.
Deloitte & Touche LLP
Boston, Massachusetts
February 22, 2016
142
Table of Contents
Trustees and Officers (Unaudited)
The following table lists the Trust’s Trustees and Officers; their address and age; their position with the Trust; the length of time holding that position with the Trust; their principal occupation(s) during the past five years; the number of portfolios in the fund complex they oversee; and other directorships they hold in companies subject to registration or reporting requirements of the Securities Exchange Act of 1934 (generally called “public companies”) or in registered investment companies. The Trust’s Statement of Additional Information includes additional information about the Trust’s Trustees and is available, without charge, upon request by calling 1-888-309-3539 or by writing MML Series Investment Fund II, c/o Massachusetts Mutual Life Insurance Company, 100 Bright Meadow Blvd., Enfield, Connecticut 06082-1981, Attention: Retirement Services Marketing.
Disinterested Trustees
| Name, Address*, and Age |
Position(s) |
Term of |
Principal Occupation(s) |
Number of Portfolios in Fund Complex Overseen by Trustee |
Other Directorships Held by Trustee | |||||
| Allan W. Blair Age: 67 |
Trustee | Since 2012 |
Retired; President and Chief Executive Officer (1996-2014), Economic Development Council of Western Massachusetts (non-profit development company); President and Chief Executive Officer (1984-2014), Westover Metropolitan Development Corporation (quasi-public development company). | 93 | Trustee (since 2003), MassMutual Select Funds (open-end investment company); Trustee (since 2003), MML Series Investment Fund (open-end investment company); Trustee (since 2012), MassMutual Premier Funds (open-end investment company). | |||||
| Nabil N. El-Hage Age: 57 |
Trustee
Chairman |
Since 2005
(2006-2012) |
Chairman (since 2011), Academy of Executive Education, LLC; Consultant (2010-2011); Senior Associate Dean for External Relations (2009-2010), Thomas Henry Carroll Ford Foundation Adjunct Professor of Business Administration (2009-2010), Harvard Business School. | 93 | Director (2011-2015), Argo Group International Holdings, Ltd. (underwriter of specialty insurance and reinsurance products); Director (2007-2010), Virtual Radiologic Corporation (telemedicine company); Trustee (since 2012), MassMutual Select Funds (open-end investment company); Trustee (since 2012), MML Series Investment Fund (open-end investment company); Trustee (since 2003), Chairman (2006-2012), MassMutual Premier Funds (open-end investment company). | |||||
| Maria D. Furman Age: 62 |
Trustee | Since 2005 |
Retired. | 93 | Trustee (since 2011), GMO Series Trust (open-end investment company); Trustee (since 2012), MassMutual Select Funds (open-end investment company); Trustee (since 2012), MML Series Investment Fund (open-end investment company); Trustee (since 2004), MassMutual Premier Funds (open-end investment company). | |||||
| R. Alan Hunter, Jr. Age: 69 |
Chairperson
Trustee |
Since 2016
Since 2012 |
Retired. | 93 | Director (since 2007), Actuant Corporation (diversified industrial company); Chairperson (since 2016), Trustee (since 2003), MassMutual Select Funds (open-end investment company); Chairperson (since 2016), Trustee (since 2003), MML Series Investment Fund (open-end investment company); Chairperson (since 2016), Trustee (since 2012), MassMutual Premier Funds (open-end investment company). | |||||
143
Table of Contents
Trustees and Officers (Unaudited) (Continued)
| Name, Address*, and Age |
Position(s) |
Term of |
Principal Occupation(s) |
Number of Portfolios in Fund Complex Overseen by Trustee |
Other Directorships Held by Trustee | |||||
| C. Ann Merrifield Age: 64 |
Trustee | Since 2005 |
Retired; President and Chief Executive Officer (2012-2014), PathoGenetix (genomics company); Senior Vice President, Genzyme Business Excellence Initiative (2009-2011), Genzyme Corporation (biotechnology company). | 93 | Director (since 2015), Juniper Pharmaceuticals Inc. (specialty pharmaceutical company); Director (since 2014), Flexion Therapeutics (specialty pharmaceutical company); Director (since 2014), InVivo Therapeutics (research and clinical-stage biomaterials and biotechnology company); Trustee (since 2012), MassMutual Select Funds (open-end investment company); Trustee (since 2012), MML Series Investment Fund (open-end investment company); Trustee (since 2004), MassMutual Premier Funds (open-end investment company). | |||||
| Susan B. Sweeney Age: 63 |
Trustee | Since 2012 |
Retired; Senior Vice President and Chief Investment Officer (2010-2014), Selective Insurance Group (property and casualty company); Senior Managing Director (2008-2010), Ironwood Capital (private equity firm). | 95^ | Trustee (since 2012), Babson Capital Corporate Investors (closed-end investment company); Trustee (since 2012), Babson Capital Participation Investors (closed-end investment company); Trustee (since 2009), MassMutual Select Funds (open-end investment company); Trustee (since 2009), MML Series Investment Fund (open-end investment company); Trustee (since 2012), MassMutual Premier Funds (open-end investment company). | |||||
Interested Trustees
| Name, Address*, and |
Position(s) Held |
Term of |
Principal Occupation(s) |
Number of Portfolios in Fund Complex Overseen by Trustee |
Other Directorships Held by Trustee | |||||
| Robert E. Joyal^^ Age: 71 |
Trustee | Since 2012 |
Retired. | 95^ | Director (since 2013), Leucadia National Corporation (holding company); Director (since 2012), Ormat Technologies, Inc. (provider of alternative and renewable energy technology); Director (2006-2014), Jefferies Group LLC (investment bank); Director (2007-2011), Scottish Re Group Ltd. (holding company); Trustee (since 2003), Babson Capital Corporate Investors (closed-end investment company); Trustee (since 2003), Babson Capital Participation Investors (closed-end investment company); Trustee (since 2003), MassMutual Select Funds (open-end investment company); Trustee (since 2003), MML Series Investment Fund (open-end investment company); Trustee (since 2012), MassMutual Premier Funds (open-end investment company). |
144
Table of Contents
Trustees and Officers (Unaudited) (Continued)
| Name, Address*, and |
Position(s) Held |
Term of |
Principal Occupation(s) |
Number of Portfolios in Fund Complex Overseen by Trustee |
Other Directorships Held by Trustee | |||||
| Elaine A. Sarsynski^^^ Age: 60 |
Trustee Vice Chairperson |
Since 2011 (2011- 2012) |
Executive Vice President (since 2008), MassMutual Retirement Services Division, MassMutual; Chairman (since 2013), President, Chairman & CEO (2012-2013), Chairman & CEO (2008-2012), President & CEO (2006-2008), MassMutual International LLC. | 93 | Director (since 2012), Horizon Technology Finance Management LLC (specialty finance company); Director (since 2013), MML Advisers; Trustee (since 2008), MassMutual Select Funds (open-end investment company); Trustee (since 2008), MML Series Investment Fund (open-end investment company); Vice Chairperson (2011-2012), Trustee (since 2011), MassMutual Premier Funds (open-end investment company). |
Principal Officers who are Not Trustees
| Name, Address*, and Age |
Position(s) |
Term of Office# and Length of Time Served |
Principal Occupation(s) During Past 5 Years |
Number of Portfolios in Fund Complex Overseen by Officer | ||||
| Jeffrey M. Dube Age: 47 |
President | Since 2014 |
Vice President (since 2012), Assistant Vice President (2011-2012), Managing Director (2009-2011), MassMutual; President (since 2014), MML Series Investment Fund (open-end investment company). | 40 | ||||
| Michael C. Eldredge Age: 51 |
Vice President | Since 2009 |
Head of Investments and portfolio manager (since 2014), MML Advisers; Vice President (since 2008), MassMutual; Vice President (since 2009), MassMutual Select Funds (open-end investment company); Vice President (since 2009), MML Series Investment Fund (open-end investment company); Vice President (since 2009), MassMutual Premier Funds (open-end investment company). | 93 | ||||
| Andrew M. Goldberg Age: 49 |
Vice President, Secretary, and Chief Legal Officer Assistant Clerk |
Since 2008 (2005- |
Assistant Vice President and Counsel (since 2004), MassMutual; Secretary (since 2015), Assistant Secretary (2013-2015), MML Advisers; Vice President, Secretary, and Chief Legal Officer (since 2008), Assistant Secretary (2001-2008), MassMutual Select Funds (open-end investment company); Vice President, Secretary, and Chief Legal Officer (since 2008), Assistant Secretary (2001-2008), MML Series Investment Fund (open-end investment company); Vice President, Secretary, (formerly known as “Clerk”), and Chief Legal Officer (since 2008), Assistant Clerk (2004-2008), MassMutual Premier Funds (open-end investment company). | 93 | ||||
| Brian K. Haendiges Age: 55 |
Vice President | Since 2014 |
Vice President (since 2014) MML Advisers; Senior Vice President (since 2014), Vice President (2010-2014), MassMutual; Vice President (since 2014), MassMutual Select Funds (open-end investment company); Vice President (since 2014), MML Series Investment Fund (open-end investment company); Vice President (since 2014), MassMutual Premier Funds (open-end investment company). | 93 | ||||
| Nicholas H. Palmerino Age: 50 |
Chief Financial Officer and Treasurer | Since 2006 |
Vice President (since 2014), Assistant Vice President (2006-2014), MassMutual; Chief Financial Officer and Treasurer (since 2006), MassMutual Select Funds (open-end investment company); Chief Financial Officer and Treasurer (since 2006), MML Series Investment Fund (open-end investment company); Chief Financial Officer and Treasurer (since 2006), MassMutual Premier Funds (open-end investment company). | 93 | ||||
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Trustees and Officers (Unaudited) (Continued)
| Name, Address*, and Age |
Position(s) |
Term of Office# and Length of Time Served |
Principal Occupation(s) During Past 5 Years |
Number of Portfolios in Fund Complex Overseen by Officer | ||||
| Philip S. Wellman Age: 51 |
Vice President and Chief Compliance Officer | Since 2007 |
Vice President and Chief Compliance Officer (since 2013), MML Advisers; Vice President, Associate General Counsel, and Chief Compliance Officer (Mutual Funds) (since 2014), Vice President, Associate General Counsel, and Chief Compliance Officer (Mutual Funds and Investment Advisory) (2008-2014), MassMutual; Vice President and Chief Compliance Officer (since 2007), MassMutual Select Funds (open-end investment company); Vice President and Chief Compliance Officer (since 2007), MML Series Investment Fund (open-end investment company); Vice President and Chief Compliance Officer (since 2007), MassMutual Premier Funds (open-end investment company). | 93 | ||||
| Eric H. Wietsma Age: 49 |
Vice President | Since 2006 |
Director and President (since 2013), MML Advisers; Senior Vice President (since 2010), Corporate Vice President (2007-2010), MassMutual; President (since 2008), Vice President (2006-2008), MassMutual Select Funds (open-end investment company); Vice President (since 2006), MML Series Investment Fund (open-end investment company); President (since 2008), Vice President (2006-2008), MassMutual Premier Funds (open-end investment company). | 93 | ||||
| * | The address of each Trustee and Principal Officer is the same as that for the Trust; 100 Bright Meadow Blvd., Enfield, CT 06082-1981. |
| ** | Each Trustee of the Trust serves until the next meeting of shareholders called for the purpose of electing Trustees and until the election and qualification of his or her successor or until he or she dies, resigns, or is removed. Notwithstanding the foregoing, unless the Trustees determine that it is desirable and in the best interest of the Trust that an exception to the retirement policy of the Trust be made, a Trustee shall retire and cease to serve as a Trustee upon the conclusion of the calendar year in which such Trustee attains the age of seventy-two years. |
| The Chairperson is elected to hold such office for a term of three years or until their successor is elected and qualified to carry out the duties and responsibilities of their office, or until he or she retires, dies, resigns, is removed, or becomes disqualified. The Chairperson shall hold office at the pleasure of the Trustees. |
| ^ | Babson Capital Participation Investors and Babson Capital Corporate Investors are deemed to be a part of the Fund Complex, because they are managed by Babson Capital Management LLC, an affiliate of MML Advisers. |
| ^^ | Mr. Joyal is an “Interested Person,” as that term is defined in the 1940 Act, through his position as a director of Leucadia National Corporation, which controls Jefferies Group LLC, a broker-dealer that may execute portfolio transactions and/or engage in principal transactions with the Funds, other investment companies advised by MML Advisers or holding themselves out to investors as related companies for purposes of investment or investor services, or any other advisory accounts over which MML Advisers has brokerage placement discretion. |
| ^^^ | Ms. Sarsynski is an Interested Person as a director of MML Advisers. |
| # | The President, Treasurer, and Secretary and such other officers as the Trustees may in their discretion from time to time elect are elected to hold such office until their successor is elected and qualified to carry out the duties and responsibilities of their office, or until he or she dies, resigns, is removed, or becomes disqualified. Each officer shall hold office at the pleasure of the Trustees. |
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Federal Tax Information (Unaudited)
For corporate shareholders, a portion of the ordinary dividends paid during the Fund(s)’ year ended December 31, 2015, qualified for the dividends received deduction, as follows:
| Dividends Received Deductions |
||||
| Equity Rotation Fund | 100.00% | |||
| Short-Duration Bond Fund | 0.45% | |||
| Small Cap Equity Fund | 83.47% | |||
| Strategic Emerging Markets Fund | 0.62% | |||
For the year ended December 31, 2015, the following Fund(s) earned the following foreign sources of income:
| Amount | ||||
| Strategic Emerging Markets Fund | $ | 1,649,055 | ||
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A description of the policies and procedures that each Fund’s investment adviser and subadvisers use to vote proxies relating to the Fund’s portfolio securities is available, without charge, upon request, by calling 1-888-309-3539, and on the Securities and Exchange Commission’s (“SEC”) EDGAR database on its website at http://www.sec.gov.
Information regarding how the Funds voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available, without charge, upon request, on the MassMutual website at http://www.massmutual.com/funds and on the SEC’s EDGAR database on its website at http://www.sec.gov.
The Funds file their complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. The Funds’ Forms N-Q are available on the SEC’s EDGAR database on its website at http://www.sec.gov and may be reviewed and copied at the SEC’s Public Reference Room in Washington D.C. Information on the operation of the SEC’s Public Reference Room may be obtained by calling 1-800-SEC-0330.
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Other Information (Unaudited) (Continued)
Fund Expenses December 31, 2015
Expense Examples:
The following information is in regards to expenses for the six months ended December 31, 2015:
As a shareholder of the Funds, you incur ongoing costs, including advisory fees, distribution and/or service (12b-1) fees, and other Fund expenses. These examples are intended to help you understand your ongoing costs (in dollars) of investing in the Funds and to compare these costs with the ongoing costs of investing in other mutual funds. These examples are based on an investment of $1,000 invested for the six months ended December 31, 2015.
Actual Expenses:
The first four columns of the table below provide information about actual account values and actual expenses. You may use this information, 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 under the heading entitled “Operating Expenses Incurred” to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes:
The last two columns of the table below provide 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 your ongoing costs only and do not reflect any transactional costs. Therefore, the last two columns of the table are useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
| Beginning Value |
Annualized Expense Ratio |
Ending Value (Based on Actual Returns and Expenses) |
Operating Expenses Incurred* |
Ending Value (Based on Hypothetical Returns and Expenses) |
Operating Expenses Incurred* |
|||||||||||||||||||
| Asset Momentum Fund | ||||||||||||||||||||||||
| Class II |
$ | 1,000 | 0.80 | % | $ | 961.10 | $ | 3.95 | $ | 1,021.20 | $ | 4.08 | ||||||||||||
| Service Class I |
1,000 | 1.05 | % | 960.20 | 5.19 | 1,019.90 | 5.35 | |||||||||||||||||
| Dynamic Bond Fund | ||||||||||||||||||||||||
| Class II |
1,000 | 0.60 | % | 996.50 | 3.02 | 1,022.20 | 3.06 | |||||||||||||||||
| Service Class I |
1,000 | 0.85 | % | 996.50 | 4.28 | 1,020.90 | 4.33 | |||||||||||||||||
| Equity Rotation Fund | ||||||||||||||||||||||||
| Class II |
1,000 | 0.65 | % | 987.10 | 3.26 | 1,021.90 | 3.31 | |||||||||||||||||
| Service Class I |
1,000 | 0.90 | % | 985.60 | 4.50 | 1,020.70 | 4.58 | |||||||||||||||||
| High Yield Fund | ||||||||||||||||||||||||
| Class II |
1,000 | 0.73 | % | 949.00 | 3.59 | 1,021.50 | 3.72 | |||||||||||||||||
| Service Class I |
1,000 | 0.98 | % | 948.00 | 4.81 | 1,020.30 | 4.99 | |||||||||||||||||
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Other Information (Unaudited) (Continued)
| Beginning Value |
Annualized Expense Ratio |
Ending Value (Based on Actual Returns and Expenses) |
Operating Expenses Incurred* |
Ending Value (Based on Hypothetical Returns and Expenses) |
Operating Expenses Incurred* |
|||||||||||||||||||
| Inflation-Protected and Income Fund | ||||||||||||||||||||||||
| Initial Class |
$ | 1,000 | 0.59 | % | $ | 980.00 | $ | 2.94 | $ | 1,022.20 | $ | 3.01 | ||||||||||||
| Service Class |
1,000 | 0.84 | % | 979.70 | 4.19 | 1,021.00 | 4.28 | |||||||||||||||||
| Short-Duration Bond Fund | ||||||||||||||||||||||||
| Class II |
1,000 | 0.55 | % | 994.00 | 2.76 | 1,022.40 | 2.80 | |||||||||||||||||
| Service Class I |
1,000 | 0.80 | % | 993.10 | 4.02 | 1,021.20 | 4.08 | |||||||||||||||||
| Small Cap Equity Fund | ||||||||||||||||||||||||
| Initial Class |
1,000 | 0.71 | % | 910.10 | 3.42 | 1,021.60 | 3.62 | |||||||||||||||||
| Service Class |
1,000 | 0.96 | % | 909.00 | 4.62 | 1,020.40 | 4.89 | |||||||||||||||||
| Special Situations Fund | ||||||||||||||||||||||||
| Class II |
1,000 | 0.80 | % | 853.50 | 3.74 | 1,021.20 | 4.08 | |||||||||||||||||
| Service Class I |
1,000 | 1.05 | % | 852.20 | 4.90 | 1,019.90 | 5.35 | |||||||||||||||||
| Strategic Emerging Markets Fund | ||||||||||||||||||||||||
| Class II |
1,000 | 1.40 | % | 864.90 | 6.58 | 1,018.10 | 7.12 | |||||||||||||||||
| Service Class I |
1,000 | 1.65 | % | 864.50 | 7.75 | 1,016.90 | 8.39 | |||||||||||||||||
| * | Expenses are calculated using the annualized expense ratio for the six months ended December 31, 2015, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year, unless stated otherwise. The annualized expense ratio does not reflect expenses deducted under the variable life insurance or variable annuity contract through which the Funds are invested in. Inclusion of these expenses would increase the annualized expense ratios shown. |
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Underwriter:
MML Distributors, LLC
100 Bright Meadow Blvd.
Enfield, CT 06082-1981
| © 2016 Massachusetts Mutual Life Insurance Company, Springfield, MA 01111-0001. All rights reserved. www.massmutual.com. MassMutual Financial Group is a marketing name for Massachusetts Mutual Life Insurance Company (MassMutual) and its affiliated companies and sales representatives. Investment Adviser: MML Investment Advisers, LLC | RS-38755-000 |
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Item 2. Code of Ethics.
As of December 31, 2015, the Registrant adopted a Code of Ethics that applies to the Principal Executive Officer and Principal Financial Officer pursuant to the Sarbanes-Oxley Act of 2002. For the year ended December 31, 2015, there were no reportable amendments to a provision of the Code of Ethics. A copy of its Code of Ethics is filed with this Form N-CSR under Item 12(a)(1).
Item 3. Audit Committee Financial Expert.
The Registrant’s Board of Trustees has determined that Susan B. Sweeney and Nabil N. El-Hage, both members of the Audit Committee, are audit committee financial experts as defined by the Securities and Exchange Commission (the “SEC”). Ms. Sweeney and Mr. El-Hage are both “independent” as defined by the SEC for purposes of audit committee financial expert determinations.
Item 4. Principal Accountant Fees and Services.
References below to Deloitte & Touche LLP include its affiliates where applicable.
| (a) | AUDIT FEES: The aggregate fees billed to the Registrant for professional services rendered by its independent auditors, Deloitte & Touche LLP, for the audit of the Registrant’s annual financial statements for the fiscal years ended 2015 and 2014 were $405,930 and $291,712, respectively. |
| (b) | AUDIT RELATED FEES: No such fees were billed to the Registrant by Deloitte & Touche LLP for the fiscal years ended 2015 and 2014. No such fees were billed to the Registrant’s adviser and any entity controlling, controlled by, or under common control with the adviser that provides ongoing services to the Registrant by Deloitte & Touche LLP* for the fiscal years ended 2015 and 2014. |
| (c) | TAX FEES: The aggregate fees billed to the Registrant for professional services rendered by Deloitte & Touche LLP for the review of Form 1120-RIC, Form 8613, excise distribution projections, distribution calculation and reasonable out of pocket expenses for the fiscal years ended 2015 and 2014 were $85,057 and $82,163, respectively. No such fees were billed to the Registrant’s adviser and any entity controlling, controlled by, or under common control with the adviser that provides ongoing services to the Registrant by Deloitte & Touche LLP* for the fiscal years ended 2015 and 2014. |
| (d) | ALL OTHER FEES: No such fees were billed to the Registrant by Deloitte & Touche LLP for the fiscal years ended 2015 and 2014. No such fees were billed to the Registrant’s adviser and any entity controlling, controlled by, or under common control with the adviser that provides ongoing services to the Registrant by Deloitte & Touche LLP* for the fiscal years ended 2015 and 2014. |
| (e) | (1) AUDIT COMMITTEE PRE-APPOVAL POLICY: All services to be performed for the Registrant by Deloitte & Touche LLP must be pre-approved by the audit committee. All services performed during the fiscal years ended 2015 and 2014 were pre-approved by the committee. |
(2) Not applicable.
| (f) | Not applicable. |
| (g) | The aggregate non-audit fees billed by Deloitte & Touche LLP for services rendered to the Registrant, the Registrant’s adviser and any entity controlling, controlled by, or under common control with the adviser that provides ongoing services to the Registrant, for the fiscal years ended 2015 and 2014 were $698,822 and $1,923,158, respectively. |
| (h) | The audit committee considers whether the provision of non-audit services by Deloitte & Touche LLP to the Registrant’s adviser and any entity controlling, controlled by, or under common control with the adviser that provides ongoing services to the Registrant that were not pre-approved pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X is compatible with maintaining Deloitte & Touche LLP’s independence. |
| * | Refers to fees that were required to be approved by the audit committee for services that relate directly to the operations and financial reporting of the Registrant. |
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Item 5. Audit Committee of Listed Registrants.
Not applicable to this filing.
Item 6. Investments.
Please see portfolio of investments contained in the Reports to Stockholders included 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 this filing.
Item 8. Portfolio Managers of Closed-End Management Investment Companies.
Not applicable to this filing.
Item 9. Purchases of Equity Securities by Closed-End Management Investment Company and Affiliated Purchasers.
Not applicable to this filing.
Item 10. Submission of Matters to a Vote of Security Holders.
Not applicable to this filing.
Item 11. Controls and Procedures.
(a) The Registrant’s Principal Executive Officer and Principal Financial Officer have concluded that the Registrant’s disclosure
controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940, as amended (the “1940 Act”) (17 CFR 270.30a-3(c))) are effective, as of a date within 90 days of the filing date of this
Form N-CSR, to provide reasonable assurance that the information required to be disclosed by the Registrant on Form N-CSR is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and
forms, based on their evaluation of these disclosure controls and procedures required by Rule 30a-3(b) under the 1940 Act (17 CFR 270.30a-3(b)) and Rules 13a-15(b) or
15d-15(b) under the Securities Exchange Act of 1934
(17 CFR 240.13a-15(b) or 240.15d-15(b)).
(b) There were no changes in the Registrant’s internal control over financial reporting (as defined in Rule 30a-3(d) under the 1940 Act (17 CFR 270.30a-3(d))) that occurred during the Registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting.
Item 12. Exhibits.
(a)(1) Code of Ethics (Item 2) is attached.
(a)(2) Certifications of the Principal Executive Officer and Principal Financial Officer of the Registrant as required by Rule 30a-2(a) under the 1940 Act (17 CFR 270.30a-2(a)) are attached hereto as Exhibit 99CERT.
(a)(3) Not applicable to this filing.
(b) Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 as required by Rule 30a-2(b), under the 1940 Act (17 CFR 270.30a-2(b)), Rule 15d-14(b) under the Securities Exchange Act of 1934 (17 CFR 240.15d-14(b)) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. 1350) are attached hereto as Exhibit 99.906CERT.
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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) MML Series Investment Fund II
| By (Signature and Title) | /s/ Jeffrey M. Dube |
|||
| Jeffrey M. Dube, President and Principal Executive Officer |
Date 2/23/16
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| By (Signature and Title) | /s/ Jeffrey M. Dube |
|||
| Jeffrey M. Dube, President and Principal Executive Officer |
Date 2/23/16
| By (Signature and Title) | /s/ Nicholas H. Palmerino |
|||
| Nicholas H. Palmerino, Treasurer and Principal Financial Officer |
Date 2/23/16