MFS SPECIAL VALUE TRUST N-CSR
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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 811-5912

MFS SPECIAL VALUE TRUST

(Exact name of registrant as specified in charter)

111 Huntington Avenue, Boston, Massachusetts 02199

(Address of principal executive offices) (Zip code)

Susan S. Newton

Massachusetts Financial Services Company

111 Huntington Avenue

Boston, Massachusetts 02199

(Name and address of agents for service)

Registrant’s telephone number, including area code: (617) 954-5000

Date of fiscal year end: October 31

Date of reporting period: October 31, 2012


Table of Contents
ITEM 1. REPORTS TO STOCKHOLDERS.


Table of Contents

ANNUAL REPORT

October 31, 2012

 

LOGO

 

MFS® SPECIAL VALUE TRUST

 

LOGO

 

MFV-ANN

 


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Managed Distribution Policy Disclosure

The MFS Special Value Trust’s (the fund) Board of Trustees has adopted a managed distribution policy. The fund seeks to pay monthly distributions based on an annual rate of 10.00% of the fund’s average monthly net asset value. The fund’s total return in relation to changes in net asset value is presented in the Financial Highlights. You should not draw any conclusions about the fund’s investment performance from the amount of the current distribution or from the terms of the fund’s managed distribution policy. The Board may amend or terminate the managed distribution policy at any time without prior notice to fund shareholders; however, at this time, there are no reasonably foreseeable circumstances that might cause the termination of the managed distribution policy.

With each distribution, the fund will issue a notice to shareholders and an accompanying press release which will provide detailed information regarding the amount and composition of the distribution and other related information. In accordance with the amounts and sources of distributions reported in the Notice to Shareholders – the Sources of Distributions are only estimates and are not being provided for tax reporting purposes. The actual amounts and sources of the amounts for tax reporting purposes will depend upon the fund’s investment experience during the remainder of its fiscal year and may be subject to changes based on tax regulations. The fund will send you a Form 1099-DIV for the calendar year that will tell you how to report these distributions for federal income tax purposes.

Under a managed distribution policy the fund may at times distribute more than its net investment income and net realized capital gains; therefore, a portion of your distribution may result in a return of capital. A return of capital may occur, for example, when some or all of the money that you invested in the fund is paid back to you. A return of capital does not necessarily reflect the fund’s investment performance and should not be confused with ‘yield’ or ‘income’.


Table of Contents

MFS® SPECIAL VALUE TRUST

New York Stock Exchange Symbol: MFV

 

Letter from the Chairman and CEO     1   
Portfolio composition     2   
Management review     4   
Performance summary     7   
Investment objective, principal investment
strategies and risks of the fund
    9   
Portfolio managers’ profiles     11   
Dividend reinvestment and cash purchase plan     12   
Portfolio of investments     13   
Statement of assets and liabilities     30   
Statement of operations     31   
Statements of changes in net assets     32   
Financial highlights     33   
Notes to financial statements     34   
Report of independent registered public accounting firm     45   
Results of shareholder meeting     46   
Trustees and officers     47   
Board review of investment advisory agreement     52   
Proxy voting policies and information     56   
Quarterly portfolio disclosure     56   
Further information     56   
Federal tax information     56   
MFS® privacy notice     57   
Contact information    back cover   

 

NOT FDIC INSURED Ÿ MAY LOSE VALUE Ÿ NO BANK GUARANTEE


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LOGO

 

LETTER FROM THE CHAIRMAN AND CEO

 

Dear Shareholders:

As 2012 winds down, economic uncertainty continues to dominate world financial markets. In the United States, all eyes are riveted to the ongoing budget deal

negotiations and the specter of a “fiscal cliff.” Overseas, we see growth slowing in China and Japan, and the eurozone has entered its second recession in four years against a backdrop of double-digit unemployment and the continuing sovereign debt crisis.

Amidst the instability, there are silver linings — especially in the U.S. where the labor and housing markets have picked up, consumer confidence has risen and industrial output has increased. Additionally, a U.S. budgetary compromise could propel markets, unleashing pent-up spending and investments, which would help to revive both the U.S. and global economies.

As always, managing risk in the face of uncertainty remains a top priority for investors. At MFS®, an emphasis on global research and our disciplined risk management approach anchor our uniquely collaborative investment process. Our global team of more than 200 investment professionals shares ideas and evaluates opportunities across continents, investment disciplines, and asset classes — all with a goal of building better insights, and ultimately better results — for our clients.

We are mindful of the many economic challenges we face locally, nationally and globally. It is more important than ever to maintain a long-term view, employ time-tested principles, such as asset allocation and diversification, and work closely with investment advisors to identify and pursue the most suitable opportunities.

Respectfully,

 

LOGO

Robert J. Manning

Chairman and Chief Executive Officer

MFS Investment Management®

December 14, 2012

The opinions expressed in this letter are subject to change, may not be relied upon for investment advice, and no forecasts can be guaranteed.

 

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PORTFOLIO COMPOSITION

 

Portfolio structure (i)

 

LOGO

 

Top ten holdings (i)  
Ford Motor Credit Company LLC, 12%, 2015     1.2%   
Philip Morris International, Inc.     1.2%   
JPMorgan Chase & Co.     1.1%   
Travelers Cos, Inc.     1.0%   
Pfizer, Inc.     0.9%   
International Business Machines Corp.     0.9%   
Lockheed Martin     0.9%   
Accenture PLC     0.9%   
Occidental Petroleum Corp.     0.9%   
United Technologies Corp.     0.9%   
Equity sectors  
Financial Services     5.6%   
Industrial Goods & Services     3.8%   
Health Care     3.0%   
Consumer Staples     2.5%   
Technology     1.7%   
Energy     1.6%   
Utilities & Communications     1.5%   
Basic Materials     1.1%   
Leisure     1.0%   
Special Products & Services     0.9%   
Retailing     0.7%   
Autos & Housing     0.6%   
Fixed income sectors (i)  
High Yield Corporates     62.2%   
Emerging Markets Bonds     5.3%   
High Grade Corporates     4.6%   
Commercial Mortgage-Backed Securities     0.4%   
Non-U.S. Government Bonds     0.2%   
Floating Rate Loans     0.1%   
Collateralized Debt Obligations (o)     0.0%   
Composition including fixed income credit quality (a)(i)  
A     0.1%   
BBB     4.7%   
BB     17.9%   
B     35.4%   
CCC     14.2%   
CC     0.5%   
Not Rated     0.1%   
Non-Fixed Income     24.0%   
Cash & Other     3.1%   
 

 

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Portfolio Composition – continued

 

(a) For all securities other than those specifically described below, ratings are assigned to underlying securities utilizing ratings from Moody’s, Fitch, and Standard & Poor’s rating agencies and applying the following hierarchy: If all three agencies provide a rating, the middle rating (after dropping the highest and lowest ratings) is assigned; if two of the three agencies rate a security, the lower of the two is assigned. Ratings are shown in the S&P and Fitch scale (e.g., AAA). Securities rated BBB or higher are considered investment grade. All ratings are subject to change. Not Rated includes fixed income securities, including fixed income futures contracts, which have not been rated by any rating agency. Non-Fixed Income includes equity securities (including convertible bonds and equity derivatives) and commodities. Cash & Other includes cash, other assets less liabilities, offsets to derivative positions, and short-term securities. The fund may not hold all of these instruments. The fund is not rated by these agencies.
(i) For purposes of this presentation, the components include the market value of securities, and reflect the impact of the equivalent exposure of derivative positions, if any. These amounts may be negative from time to time. The bond component will include any accrued interest amounts. Equivalent exposure is a calculated amount that translates the derivative position into a reasonable approximation of the amount of the underlying asset that the portfolio would have to hold at a given point in time to have the same price sensitivity that results from the portfolio’s ownership of the derivative contract. When dealing with derivatives, equivalent exposure is a more representative measure of the potential impact of a position on portfolio performance than market value. Where the fund holds convertible bonds, these are treated as part of the equity portion of the portfolio.
(o) Less than 0.1%

Percentages are based on net assets as of 10/31/12.

The portfolio is actively managed and current holdings may be different.

 

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MANAGEMENT REVIEW

Summary of Results

MFS Special Value Trust (the “fund”) is a closed-end fund and maintains a portfolio that includes investments in fixed income and equity securities.

For the twelve months ended October 31, 2012, the MFS Special Value Trust provided a total return of 12.31%, at net asset value. This compares with a return of 13.58% for the fund’s benchmark, the Barclays U.S. High-Yield Corporate Bond 2% Issuer Capped Index (“Barclays Index”). The fund’s other benchmark, the MFS Special Value Trust Blended Index (“Blended Index”), generated a return of 15.01%. The Blended Index reflects the blended returns of various equity and fixed income market indices, with percentage allocations to each index designed to resemble the allocations of the fund. The market indices and related percentage allocations used to compile the Blended Index are set forth in the Performance Summary.

Market Environment

Just prior to the beginning of the reporting period, markets were roiled by several global concerns. These included the aftermath of the U.S. sovereign debt-ceiling debacle, the path of eurozone integration and the scope of its bailout facilities, and the likelihood of a Chinese hard landing. Amidst this turmoil, global equity markets had declined sharply and credit spreads widened. At the same time, global consumer and producer sentiment indicators had fallen precipitously, while highly-rated sovereign bond yields hit multi-decade lows.

During the first half of the period, however, additional liquidity from the U.S. Federal Reserve (Fed), in the form of “Operation Twist”, and the European Central Bank (ECB), in the form of 3-year, Long Term Refinancing Operations, or LTROs, coupled with healthier global macroeconomic conditions led by moderate but sustained U.S. growth, ushered in improved market dynamics.

During the latter part of the period, market trends were more mixed. Worsening conditions were driven by broadly weaker global macroeconomic indicators, as well as renewed concerns over the eurozone’s capacity and determination to address its ongoing crisis. However, broad market sentiment remained relatively resilient, as equity markets generally maintained gains and credit spreads did not indicate deterioration. A new round of monetary easing by the Fed (QE3) and the ECB (rate cut and a new bond purchase facility) towards the end of the period instilled additional confidence in risk markets. Nonetheless, towards the end of the period, weaker equity earnings reports and declining forward guidance caused market sentiment to soften.

Detractors from Performance

Within the equity portion of the fund, stock selection in the leisure sector hurt performance relative to the equity portion of the Blended Index. The fund’s holdings of publishing company American Media (b) and toy maker Hasbro (h) were among the fund’s top relative detractors during the reporting period.

Security selection in both the health care and financial services sectors also negatively impacted performance relative to the equity portion of the Blended Index. Within the health care sector, the timing of the fund’s ownership in shares of life sciences supply company Thermo Fisher Scientific (h) hindered relative results. Within the financial services sector, the fund’s position in money-transfer business Western Union (b) also weakened relative returns.

 

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Management Review – continued

 

Elsewhere, holdings of oil and gas exploration and production companies Occidental Petroleum and Apache (h), diversified energy company EQT (h), discount department store Kohl’s (h), and global food company General Mills were among the fund’s top relative detractors. Not holding shares of strong-performing diversified industrial conglomerate General Electric (h) also dampened relative results.

Within the fixed income portion of the fund, credit quality, particularly the fund’s lesser exposure to “BB  (r) rated securities, held back performance relative to the Barclays Index. The fund’s lesser exposure to the telecom sector also detracted from relative results. Top individual detractors over the reporting period included the fund’s debt holdings of global financial services firm JPMorgan Chase, Spanish-language entertainment company LBI Media Holdings, and energy firm ATP Oil & Gas Corp (h).

Contributors to Performance

Within the equity portion of the fund, stock selection in the technology sector boosted performance relative to the equity portion of the Blended Index. The fund’s avoidance of computer products and services provider Hewlett-Packard (h) and network equipment company Cisco Systems (h) benefited relative results as both stocks underperformed the benchmark. Shares of Hewlett-Packard performed poorly during the reporting period as the company continued to suffer from declines in almost every business segment, despite the strategic restructuring of the company’s business by CEO Meg Whitman.

Security selection in the basic materials sector was another significant factor that contributed positively to relative returns. Holding shares of decorative coatings manufacturer PPG Industries (b), as well as the timing of the fund’s ownership in shares of specialty gases distributor Airgas (b)(h), aided relative results. Shares of PPG Industries rose over the reporting period largely due to better-than-expected financial results driven by higher pricing and increasing demand in their commodity chemicals and fiber glass segments.

Elsewhere, the fund’s holdings of alcoholic beverages company Diageo  (b), global consulting and outsourcing company Accenture (b), and bank holding company Ally Financial (b) were among the fund’s top contributors to relative performance during the reporting period. Additionally, the fund’s overweight positions in tobacco company Philip Morris International, insurance company Travelers, and defense company Lockheed Martin supported relative results.

Within the fixed income portion of the fund, the return from yield, which was greater than that of the Barclays Index, was a key contributor to relative performance. A greater exposure to “BBB” rated securities also helped relative results as this credit quality segment performed well during the reporting period. Additionally, the fund’s greater exposure to the financial sector had a positive impact on relative results.

Respectfully,

 

William Adams   Nevin Chitkara   David Cole
Portfolio Manager   Portfolio Manager   Portfolio Manager

Note to Shareholders: Effective January 12, 2012, Nevin Chitkara replaced Brooks Taylor as a co-manager of the fund.

 

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Management Review – continued

 

(b) Security is not a benchmark constituent.
(h) Security was not held in the portfolio at period end.
(r) Bonds rated “BBB”, “Baa”, or higher are considered investment grade; bonds rated “BB”, “Ba”, or below are considered non-investment grade. The source for bond quality ratings is Moody’s Investors Service, Standard & Poor’s and Fitch, Inc. and are applied using the following hierarchy: If all three agencies provide a rating, the middle rating (after dropping the highest and lowest ratings) is assigned; if two of the three agencies rate a security, the lower of the two is assigned. Ratings are shown in the S&P and Fitch scale (e.g., AAA). For securities which are not rated by any of the three agencies, the security is considered Not Rated.

The views expressed in this report are those of the portfolio managers only through the end of the period of the report as stated on the cover and do not necessarily reflect the views of MFS or any other person in the MFS organization. These views are subject to change at any time based on market or other conditions, and MFS disclaims any responsibility to update such views. These views may not be relied upon as investment advice or an indication of trading intent on behalf of any MFS portfolio. References to specific securities are not recommendations of such securities, and may not be representative of any MFS portfolio’s current or future investments.

 

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PERFORMANCE SUMMARY THROUGH 10/31/12

The following chart represents the fund’s historical performance in comparison to its benchmark(s). Investment return and principal value will fluctuate, and shares, when sold, may be worth more or less than their original cost; current performance may be lower or higher than quoted. The performance shown does not reflect the deduction of taxes, if any, that a shareholder would pay on fund distributions or the sale of fund shares. Performance data shown represents past performance and is no guarantee of future results.

Price Summary for MFS Special Value Trust

Year Ended 10/31/12

              Date        Price     
   Net Asset Value        10/31/12         $6.85  
            10/31/11         $6.73  
   New York Stock Exchange Price        10/31/12         $7.46  
            10/12/12  (high) (t)       $7.84  
            12/19/11  (low) (t)       $6.42  
              10/31/11         $6.86    

Total Returns vs Benchmarks

Year Ended 10/31/12

       
     MFS Special Value Trust at       
  

New York Stock Exchange Price (r)

     19.99%  
  

Net Asset Value (r)

     12.31%  
   Barclays U.S. High-Yield Corporate Bond 2% Issuer Capped Index (f)      13.58%  
   MFS Special Value Trust Blended Index (f)(x)      15.01%  
   JPMorgan Emerging Markets Bond Index Global (f)      16.33%  
   Russel 1000 Value Index (f)      16.89%    
(f) Source: FactSet Research Systems Inc.
(r) Includes reinvestment of dividends and capital gain distributions.
(t) For the period November 1, 2011 through October 31, 2012.
(x) MFS Special Value Trust Blended Index is at a point in time and allocations during the period can change. As of October 31, 2012, the blended index was comprised of 57.50% Barclays U.S. High-Yield Corporate Bond 2% Issuer Capped Index, 35% Russell 1000 Value Index, and 7.50% JPMorgan Emerging Markets Bond Index Global.

 

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Performance Summary – continued

 

Benchmark Definitions

Barclays U.S. High-Yield Corporate Bond 2% Issuer Capped Index – a component of the Barclays Capital U.S. High-Yield Corporate Bond Index, which measures performance of non-investment grade, fixed rate debt. The index limits the maximum exposure to any one issuer to 2%.

JPMorgan Emerging Markets Bond Index Global – measures the performance of U.S.-dollar- denominated debt instruments issued by emerging market sovereign and quasi-sovereign entities: Brady bonds, loans, Eurobonds.

Russell 1000 Value Index – constructed to provide a comprehensive barometer for the value securities in the large-cap segment of the U.S. equity universe. Companies in this index generally have lower price-to-book ratios and lower forecasted growth values.

It is not possible to invest directly in an index.

Notes to Performance Summary

The fund’s shares may trade at a discount or premium to net asset value. Shareholders do not have the right to cause the fund to repurchase their shares at net asset value. When fund shares trade at a premium, buyers pay more than the net asset value underlying fund shares, and shares purchased at a premium would receive less than the amount paid for them in the event of the fund’s liquidation. As a result, the total return that is calculated based on the net asset value and New York Stock Exchange price can be different.

The fund’s monthly distributions may include a return of capital to shareholders to the extent that the fund’s net investment income and net capital gains are insufficient to meet the fund’s target annual distribution rate. Distributions that are treated for federal income tax purposes as a return of capital will reduce each shareholder’s basis in his or her shares and, to the extent the return of capital exceeds such basis, will be treated as gain to the shareholder from a sale of shares. It may also result in a recharacterization of what economically represents a return of capital to ordinary income in those situations where a fund has long term capital gains and a capital loss carryforward. Returns of shareholder capital have the effect of reducing the fund’s assets and increasing the fund’s expense ratio.

The fund’s target annual distribution rate is calculated based on an annual rate of 10.00% of the fund’s average monthly net asset value, not a fixed share price, and the fund’s dividend amount will fluctuate with changes in the fund’s average monthly net assets.

Performance results do not include adjustments made for financial reporting purposes in accordance with U.S. generally accepted accounting principles and may differ from amounts reported in the financial highlights.

From time to time the fund may receive proceeds from litigation settlements, without which performance would be lower.

 

In accordance with Section 23(c) of the Investment Company Act of 1940, the fund hereby gives notice that it may from time to time repurchase shares of the fund in the open market at the option of the Board of Trustees and on such terms as the Trustees shall determine.

 

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INVESTMENT OBJECTIVE, PRINCIPAL

INVESTMENT STRATEGIES AND RISKS

OF THE FUND

Investment Objective

The fund’s investment objective is to seek high current income, but may also consider capital appreciation. The fund’s objective may be changed without shareholder approval.

Principal Investment Strategies

MFS (Massachusetts Financial Services Company, the fund’s investment adviser) normally invests the fund’s assets primarily in debt instruments.

MFS normally invests the fund’s assets in U.S. Government securities, foreign government securities, mortgage-backed and other asset-backed securities of U.S. and foreign issuers, corporate bonds of U.S. and/or foreign issuers, debt instruments of issuers located in emerging market countries, and/or equity securities. MFS allocates the fund’s assets across these categories with a view toward broad diversification across and within these categories.

MFS may invest up to 100% of the fund’s assets in less than investment grade quality debt instruments (lower quality debt instruments).

The fund seeks to make a monthly distribution at an annual fixed rate of 10.00% of the fund’s average monthly net asset value.

While MFS may use derivatives for any investment purpose, to the extent MFS uses derivatives, MFS expects to use derivatives primarily to increase or decrease exposure to a particular market, segment of the market, or security, to increase or decrease interest rate or currency exposure, or as alternatives to direct investments.

MFS uses a bottom-up investment approach to buying and selling investments for the fund. Investments are selected primarily based on fundamental analysis of individual issuers and/or instruments in light of issuers’ financial condition and market, economic, political, and regulatory conditions. Factors considered for debt instruments may include the instrument’s credit quality, collateral characteristics and indenture provisions and the issuer’s management ability, capital structure, leverage, and ability to meet its current obligations. Factors considered for equity securities may include analysis of an issuer’s earnings, cash flows, competitive position, and management ability. Quantitative models that systematically evaluate the structure of a debt instrument and its features or the valuation, price and earnings momentum, earnings quality and other factors of the issuer of an equity security may also be considered.

If approved by the fund’s Board of Trustees, the fund may use leverage through the issuance of preferred shares, borrowing from banks, and/or other methods of creating leverage, and investing the proceeds pursuant to its investment strategies.

MFS may engage in active and frequent trading in pursuing the fund’s principal investment strategies.

In response to market, economic, political, or other conditions, MFS may depart from the fund’s principal investment strategies by temporarily investing for defensive purposes.

 

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Investment Objective, Principal Investment Strategies and Risks of the Fund – continued

 

Principal Risks

The fund may not achieve its objective and/or you could lose money on your investment in the fund.

Stock markets and investments in individual stocks are volatile and can decline significantly in response to issuer, market, economic, political, regulatory, geopolitical, and other conditions.

Investments in debt instruments may decline in value as the result of increases in interest rates, declines in the credit quality of the issuer, borrower, counterparty or underlying assets, or changes in economic, political, issuer-specific, or other conditions. Certain types of debt instruments can be more sensitive to these factors and therefore more volatile.

Investments in foreign markets can involve greater risk and volatility than U.S. investments because of adverse market, economic, political, regulatory, geopolitical, or other conditions.

Investments in derivatives can be used to take both long and short positions, be highly volatile, result in leverage (which can magnify losses), and involve risks in addition to the risks of the underlying indicator(s) on which the derivative is based, such as counterparty and liquidity risk.

Investments in lower-quality debt instruments can be more volatile and have greater risk of default than higher-quality debt instruments.

Mortgage-backed securities can be subject to prepayment and/or extension and therefore can offer less potential for gains and greater potential for loss.

The market price of common shares of the fund will be based on factors such as the supply and demand for common shares in the market and general market, economic, political or regulatory conditions. Whether shareholders will realize gains or losses upon the sale of common shares of the fund will depend on the market price of common shares at the time of the sale, not on the fund’s net asset value. The market price may be lower or higher than the fund’s net asset value. Shares of closed-end funds frequently trade at a discount or premium to their net asset value.

Leverage involves investment exposure in an amount exceeding the initial investment. Leverage can cause increased volatility by magnifying gains or losses.

Please see the fund’s registration statement for further information regarding these and other risk considerations. A copy of the fund’s registration statement on Form N-2 is available on the EDGAR database on the Securities and Exchange Commission’s Internet Web site at http://sec.gov.

 

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PORTFOLIO MANAGERS’ PROFILES

 

William Adams     Investment Officer of MFS; employed in the investment management area of MFS since 2009. Portfolio Manager of the Fund since May 2011.

Nevin Chitkara

   

Investment Officer of MFS; employed in the investment management area of MFS since 1997. Portfolio manager of the Fund since January 2012.

David Cole

   

Investment Officer of MFS; employed in the investment management area of MFS since 2004. Portfolio manager of the Fund since 2006.

Note to Shareholders: Effective January 12, 2012, Nevin Chitkara replaced Brooks Taylor as a co-manager of the fund.

Effective December 1, 2012, the following are also Portfolio Managers of the fund:

 

Ward Brown     Investment Officer of MFS; employed in the investment management area of MFS since 2008. Portfolio Manager of the fund since December 2012.

Matthew Ryan

   

Investment Officer of MFS; employed in the investment management area of MFS since 1997. Portfolio Manager of the fund since December 2012.

 

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DIVIDEND REINVESTMENT AND

CASH PURCHASE PLAN

The fund offers a Dividend Reinvestment and Cash Purchase Plan (the “Plan”) that allows common shareholders to reinvest either all of the distributions paid by the fund or only the long-term capital gains. Generally, purchases are made at the market price unless that price exceeds the net asset value (the shares are trading at a premium). If the shares are trading at a premium, purchases will be made at a price of either the net asset value or 95% of the market price, whichever is greater. You can also buy shares on a quarterly basis in any amount $100 and over. The Plan Agent will purchase shares under the Cash Purchase Plan on the 15th of January, April, July, and October or shortly thereafter.

If shares are registered in your own name, new shareholders will automatically participate in the Plan, unless you have indicated that you do not wish to participate. If your shares are in the name of a brokerage firm, bank, or other nominee, you can ask the firm or nominee to participate in the Plan on your behalf. If the nominee does not offer the Plan, you may wish to request that your shares be re-registered in your own name so that you can participate. There is no service charge to reinvest distributions, nor are there brokerage charges for shares issued directly by the fund. However, when shares are bought on the New York Stock Exchange or otherwise on the open market, each participant pays a pro rata share of the transaction expenses, including commissions. Dividends and capital gains distributions are taxable whether received in cash or reinvested in additional shares – the automatic reinvestment of distributions does not relieve you of any income tax that may be payable (or required to be withheld) on the distributions.

You may withdraw from the Plan at any time by going to the Plan Agent’s website at www.computershare.com, by calling 1-800-637-2304 any business day from 9 a.m. to 5 p.m. Eastern time or by writing to the Plan Agent at P.O. Box 43078, Providence, RI 02940-3078. Please have available the name of the fund and your account number. For certain types of registrations, such as corporate accounts, instructions must be submitted in writing. Please call for additional details. When you withdraw from the Plan, you can receive the value of the reinvested shares in one of three ways: your full shares will be held in your account, the Plan Agent will sell your shares and send the proceeds to you, or you may transfer your full shares to your investment professional who can hold or sell them. Additionally, the Plan Agent will sell your fractional shares and send the proceeds to you.

If you have any questions or for further information or a copy of the Plan, contact the Plan Agent Computershare Trust Company, N.A. (the Transfer Agent for the fund) at 1-800-637-2304, at the Plan Agent’s website at www.computershare.com, or by writing to the Plan Agent at P.O. Box 43078, Providence, RI 02940-3078.

 

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PORTFOLIO OF INVESTMENTS

10/31/12

The Portfolio of Investments is a complete list of all securities owned by your fund. It is categorized by broad-based asset classes.

 

Bonds - 71.3%                 
Issuer    Shares/Par     Value ($)  
Aerospace - 1.6%                 
Bombardier, Inc., 7.5%, 2018 (n)    $ 105,000      $ 120,094   
Bombardier, Inc., 7.75%, 2020 (n)      55,000        64,281   
CPI International, Inc., 8%, 2018      115,000        109,805   
Heckler & Koch GmbH, 9.5%, 2018 (z)    EUR 100,000        111,469   
Huntington Ingalls Industries, Inc., 7.125%, 2021    $ 170,000        182,750   
Kratos Defense & Security Solutions, Inc., 10%, 2017      175,000        189,000   
    

 

 

 
             $ 777,399   
Agricultural Products - 0.4%                 
Virgolino de Oliveira Finance Ltd., 10.5%, 2018    $ 200,000      $ 195,000   
Apparel Manufacturers - 0.5%                 
Hanesbrands, Inc., 8%, 2016    $ 50,000      $ 55,188   
Hanesbrands, Inc., 6.375%, 2020      60,000        65,475   
Jones Group, Inc., 6.875%, 2019      85,000        87,975   
Levi Strauss & Co., 6.875%, 2022      15,000        15,581   
    

 

 

 
             $ 224,219   
Asset-Backed & Securitized - 0.4%                 
Banc of America Commercial Mortgage, Inc., FRN, 6.248%, 2051 (z)    $ 328,951      $ 88,169   
Citigroup Commercial Mortgage Trust, FRN, 5.699%, 2049      220,000        45,476   
Falcon Franchise Loan LLC, FRN, 5.555%, 2025 (i)(z)      118,728        18,641   
JPMorgan Chase Commercial Mortgage Securities Corp., “C”, FRN, 6.043%, 2051      95,000        20,996   
Morgan Stanley Capital I, Inc., FRN, 1.38%, 2039 (i)(z)      210,502        4,000   
Preferred Term Securities XII Ltd., CDO, 0%, 2033 (a)(c)(z)      225,000        68   
Preferred Term Securities XVI Ltd., CDO, 0%, 2035 (a)(c)(z)      300,000        30   
Preferred Term Securities XVII Ltd., CDO, 0%, 2035 (a)(c)(z)      187,000        19   
    

 

 

 
             $ 177,399   
Automotive - 3.2%                 
Accuride Corp., 9.5%, 2018    $ 180,000      $ 177,525   
Allison Transmission, Inc., 7.125%, 2019 (n)      160,000        170,200   
Ford Motor Co., 7.45%, 2031      35,000        44,275   
Ford Motor Credit Co. LLC, 12%, 2015      445,000        548,463   
General Motors Financial Co., Inc., 4.75%, 2017 (n)      105,000        107,499   
General Motors Financial Co., Inc., 6.75%, 2018      20,000        22,173   
Goodyear Tire & Rubber Co., 8.25%, 2020      25,000        27,156   
Goodyear Tire & Rubber Co., 7%, 2022      40,000        41,950   
Jaguar Land Rover PLC, 8.125%, 2021 (n)      300,000        323,250   

 

13


Table of Contents

Portfolio of Investments – continued

 

Issuer    Shares/Par     Value ($)  
Bonds - continued                 
Automotive - continued                 
Lear Corp., 8.125%, 2020    $ 36,000      $ 40,005   
    

 

 

 
             $ 1,502,496   
Broadcasting - 4.3%                 
Allbritton Communications Co., 8%, 2018    $ 55,000      $ 59,675   
AMC Networks, Inc., 7.75%, 2021      71,000        80,408   
Clear Channel Communications, Inc., 9%, 2021      202,000        176,245   
Clear Channel Worldwide Holdings, Inc., 7.625%, 2020      55,000        52,388   
Clear Channel Worldwide Holdings, Inc., “A”, 7.625%, 2020      5,000        4,713   
Hughes Network Systems LLC, 7.625%, 2021      70,000        77,875   
Intelsat Bermuda Ltd., 11.25%, 2017      205,000        215,230   
Intelsat Bermuda Ltd., 11.5%, 2017 (p)      125,000        131,563   
Intelsat Jackson Holdings Ltd., 6.625%, 2022 (n)      85,000        84,363   
LBI Media Holdings, Inc., 11%, 2013      140,000        35,000   
LBI Media, Inc., 8.5%, 2017 (z)      90,000        21,825   
Liberty Media Corp., 8.5%, 2029      95,000        102,125   
Liberty Media Corp., 8.25%, 2030      50,000        53,500   
Local TV Finance LLC, 9.25%, 2015 (p)(z)      157,527        160,087   
Newport Television LLC, 13%, 2017 (n)(p)      114,372        122,950   
Nexstar Broadcasting Group, Inc., 8.875%, 2017      50,000        54,500   
Nexstar Broadcasting Group, Inc., 6.875%, 2020 (z)      10,000        10,025   
Sinclair Broadcast Group, Inc., 9.25%, 2017 (n)      55,000        60,913   
Sinclair Broadcast Group, Inc., 8.375%, 2018      15,000        16,725   
SIRIUS XM Radio, Inc., 8.75%, 2015 (n)      105,000        119,175   
SIRIUS XM Radio, Inc., 7.625%, 2018 (n)      75,000        82,875   
SIRIUS XM Radio, Inc., 5.25%, 2022 (n)      15,000        15,000   
Starz LLC/Starz Finance Corp., 5%, 2019 (n)      35,000        35,788   
Townsquare Radio LLC, 9%, 2019 (z)      40,000        43,200   
Univision Communications, Inc., 6.875%, 2019 (n)      25,000        25,563   
Univision Communications, Inc., 7.875%, 2020 (n)      80,000        84,800   
Univision Communications, Inc., 8.5%, 2021 (n)      130,000        130,650   
    

 

 

 
             $ 2,057,161   
Brokerage & Asset Managers - 0.8%                 
E*TRADE Financial Corp., 7.875%, 2015    $ 155,000      $ 157,131   
E*TRADE Financial Corp., 12.5%, 2017      220,000        249,150   
    

 

 

 
             $ 406,281   
Building - 1.6%                 
Boise Cascade LLC/Finance Corp., 6.375%, 2020 (z)    $ 15,000      $ 15,225   
Building Materials Holding Corp., 7%, 2020 (n)      45,000        48,825   
CEMEX S.A.B. de C.V., 9.25%, 2020      130,000        135,200   
HD Supply, Inc., 8.125%, 2019 (n)      45,000        49,500   
HD Supply, Inc., 11.5%, 2020 (z)      40,000        42,100   

 

14


Table of Contents

Portfolio of Investments – continued

 

Issuer    Shares/Par     Value ($)  
Bonds - continued                 
Building - continued                 
Masonite International Corp., 8.25%, 2021 (n)    $ 105,000      $ 111,300   
Nortek, Inc., 8.5%, 2021      150,000        161,250   
Roofing Supply Group LLC/Roofing Supply Finance, Inc., 10%, 2020 (n)      30,000        33,000   
USG Corp., 6.3%, 2016      95,000        96,663   
USG Corp., 7.875%, 2020 (n)      45,000        49,050   
    

 

 

 
             $ 742,113   
Business Services - 1.2%                 
Ceridian Corp., 12.25%, 2015 (p)    $ 70,000      $ 68,775   
Ceridian Corp., 8.875%, 2019 (n)      20,000        21,200   
Fidelity National Information Services, Inc., 5%, 2022      75,000        76,500   
iGATE Corp., 9%, 2016      165,000        180,263   
Iron Mountain, Inc., 8.375%, 2021      20,000        22,100   
Legend Acquisition Sub, Inc., 10.75%, 2020 (n)      90,000        87,750   
Lender Processing Services, Inc., 5.75%, 2023      55,000        58,163   
SunGard Data Systems, Inc., 7.375%, 2018      45,000        48,431   
    

 

 

 
             $ 563,182   
Cable TV - 1.8%                 
Bresnan Broadband Holdings LLC, 8%, 2018 (n)    $ 25,000      $ 26,875   
CCH II LLC, 13.5%, 2016      83,726        90,005   
CCO Holdings LLC, 7.875%, 2018      25,000        27,000   
CCO Holdings LLC, 8.125%, 2020      125,000        140,625   
Cequel Communications Holdings, 8.625%, 2017 (n)      60,000        64,200   
DISH DBS Corp., 6.75%, 2021      60,000        66,825   
Nara Cable Funding Ltd., 8.875%, 2018 (z)      200,000        189,000   
UPC Holding B.V., 9.875%, 2018 (n)      100,000        112,250   
Ziggo Bond Co. B.V., 8%, 2018 (n)    EUR 100,000        142,252   
    

 

 

 
             $ 859,032   
Chemicals - 1.4%                 
Celanese U.S. Holdings LLC, 6.625%, 2018    $ 65,000      $ 70,850   
Hexion U.S. Finance Corp./Hexion Nova Scotia Finance, 8.875%, 2018      120,000        121,200   
Hexion U.S. Finance Corp./Hexion Nova Scotia Finance, 9%, 2020      25,000        22,438   
Huntsman International LLC, 8.625%, 2021      120,000        136,500   
INEOS Group Holdings PLC, 8.5%, 2016 (n)      150,000        144,750   
Momentive Performance Materials, Inc., 12.5%, 2014      68,000        70,380   
Momentive Performance Materials, Inc., 11.5%, 2016      47,000        30,550   
Polypore International, Inc., 7.5%, 2017      50,000        54,000   
    

 

 

 
             $ 650,668   

 

15


Table of Contents

Portfolio of Investments – continued

 

Issuer    Shares/Par     Value ($)  
Bonds - continued                 
Computer Software - 1.2%                 
Infor U.S., Inc., 11.5%, 2018    $ 220,000      $ 254,650   
Infor U.S., Inc., 9.375%, 2019      20,000        22,100   
Nuance Communications, Inc., 5.375%, 2020 (n)      80,000        81,600   
Seagate HDD Cayman, 6.875%, 2020      25,000        26,063   
Syniverse Holdings, Inc., 9.125%, 2019      125,000        133,125   
TransUnion Holding Co., Inc., 9.625%, 2018      45,000        47,588   
TransUnion LLC/TransUnion Financing Corp., 11.375%, 2018      15,000        17,400   
    

 

 

 
             $ 582,526   
Computer Software - Systems - 0.7%                 
Audatex North America, Inc., 6.75%, 2018 (n)    $ 40,000      $ 42,900   
CDW LLC/CDW Finance Corp., 12.535%, 2017      80,000        85,700   
CDW LLC/CDW Finance Corp., 8.5%, 2019      110,000        117,425   
DuPont Fabros Technology, Inc., REIT, 8.5%, 2017      95,000        104,500   
    

 

 

 
             $ 350,525   
Conglomerates - 0.9%                 
Amsted Industries, Inc., 8.125%, 2018 (n)    $ 185,000      $ 198,875   
Dynacast International LLC, 9.25%, 2019      75,000        78,750   
Griffon Corp., 7.125%, 2018      150,000        158,250   
    

 

 

 
             $ 435,875   
Consumer Products - 0.5%                 
Easton-Bell Sports, Inc., 9.75%, 2016    $ 85,000      $ 91,588   
Elizabeth Arden, Inc., 7.375%, 2021      90,000        100,463   
FGI Operating Co./FGI Finance, Inc., 7.875%, 2020 (n)      5,000        5,425   
Libbey Glass, Inc., 6.875%, 2020 (n)      30,000        31,950   
Prestige Brands, Inc., 8.125%, 2020      10,000        11,238   
    

 

 

 
             $ 240,664   
Consumer Services - 0.3%                 
Service Corp. International, 7%, 2019    $ 145,000      $ 158,775   
Containers - 1.2%                 
Ardagh Packaging Finance PLC, 9.125%, 2020 (n)    $ 200,000      $ 208,000   
Reynolds Group, 7.125%, 2019      175,000        186,375   
Reynolds Group, 5.75%, 2020 (n)      50,000        50,500   
Reynolds Group, 8.25%, 2021      115,000        112,988   
    

 

 

 
             $ 557,863   
Defense Electronics - 0.4%                 
Ducommun, Inc., 9.75%, 2018    $ 98,000      $ 103,635   
MOOG, Inc., 7.25%, 2018      80,000        84,800   
    

 

 

 
             $ 188,435   

 

16


Table of Contents

Portfolio of Investments – continued

 

Issuer    Shares/Par     Value ($)  
Bonds - continued                 
Electrical Equipment - 0.2%                 
Avaya, Inc., 9.75%, 2015    $ 110,000      $ 97,900   
Avaya, Inc., 7%, 2019 (n)      25,000        22,813   
    

 

 

 
             $ 120,713   
Electronics - 0.8%                 
Freescale Semiconductor, Inc., 9.25%, 2018 (n)    $ 210,000      $ 224,700   
Nokia Corp., 5.375%, 2019      80,000        66,200   
Sensata Technologies B.V., 6.5%, 2019 (n)      105,000        110,775   
    

 

 

 
             $ 401,675   
Emerging Market Quasi-Sovereign - 0.7%                 
Banco de la Provincia de Buenos Aires, 11.75%, 2015 (n)    $ 124,000      $ 97,340   
OAO Gazprom, 9.625%, 2013      60,000        61,410   
Petroleos de Venezuela S.A., 5.25%, 2017      250,000        197,500   
    

 

 

 
             $ 356,250   
Emerging Market Sovereign - 0.9%                 
Republic of Argentina, 7%, 2015    $ 260,000      $ 214,798   
Republic of Venezuela, 12.75%, 2022      107,000        114,758   
Republic of Venezuela, 7%, 2038      160,000        114,400   
    

 

 

 
             $ 443,956   
Energy - Independent - 4.6%                 
BreitBurn Energy Partners LP, 8.625%, 2020    $ 50,000      $ 54,125   
BreitBurn Energy Partners LP, 7.875%, 2022 (n)      100,000        103,500   
Carrizo Oil & Gas, Inc., 8.625%, 2018      45,000        48,488   
Chaparral Energy, Inc., 7.625%, 2022 (n)      65,000        68,738   
Chesapeake Energy Corp., 6.875%, 2020      85,000        90,100   
Concho Resources, Inc., 8.625%, 2017      25,000        27,375   
Denbury Resources, Inc., 8.25%, 2020      135,000        152,888   
Energy XXI Gulf Coast, Inc., 9.25%, 2017      165,000        186,038   
Everest Acquisition LLC/Everest Acquisition Finance, Inc., 9.375%, 2020 (n)      245,000        270,725   
EXCO Resources, Inc., 7.5%, 2018      90,000        84,600   
Harvest Operations Corp., 6.875%, 2017      30,000        32,850   
Hilcorp Energy I/Hilcorp Finance Co., 8%, 2020 (n)      40,000        43,800   
Laredo Petroleum, Inc., 9.5%, 2019      65,000        73,775   
LINN Energy LLC, 8.625%, 2020      40,000        43,750   
LINN Energy LLC, 7.75%, 2021      20,000        21,350   
MEG Energy Corp., 6.5%, 2021 (n)      25,000        26,813   
Newfield Exploration Co., 6.875%, 2020      55,000        59,538   
OGX Petroleo e Gas Participacoes S.A., 8.5%, 2018 (n)      220,000        191,950   
Plains Exploration & Production Co., 8.625%, 2019      95,000        104,738   
Plains Exploration & Production Co., 6.5%, 2020      35,000        35,000   

 

17


Table of Contents

Portfolio of Investments – continued

 

Issuer    Shares/Par     Value ($)  
Bonds - continued                 
Energy - Independent - continued                 
Plains Exploration & Production Co., 6.75%, 2022    $ 50,000      $ 50,250   
QEP Resources, Inc., 6.875%, 2021      80,000        91,200   
Samson Investment Co., 9.75%, 2020 (n)      60,000        63,300   
SandRidge Energy, Inc., 8%, 2018 (n)      235,000        246,750   
Whiting Petroleum Corp., 6.5%, 2018      20,000        21,575   
    

 

 

 
             $ 2,193,216   
Energy - Integrated - 0.2%                 
Pacific Rubiales Energy Corp., 7.25%, 2021 (n)    $ 100,000      $ 118,500   
Engineering - Construction - 0.2%                 
BakerCorp International, Inc., 8.25%, 2019    $ 85,000      $ 85,000   
Entertainment - 0.9%                 
AMC Entertainment, Inc., 8.75%, 2019    $ 180,000      $ 198,900   
AMC Entertainment, Inc., 9.75%, 2020      105,000        117,863   
Cinemark USA, Inc., 8.625%, 2019      75,000        83,063   
NAI Entertainment Holdings LLC, 8.25%, 2017 (n)      40,000        44,500   
    

 

 

 
             $ 444,326   
Financial Institutions - 3.4%                 
Ally Financial, Inc., 5.5%, 2017    $ 120,000      $ 126,981   
CIT Group, Inc., 5.25%, 2018      40,000        42,500   
CIT Group, Inc., 6.625%, 2018 (n)      119,000        132,685   
CIT Group, Inc., 5.5%, 2019 (n)      118,000        125,818   
Credit Acceptance Corp., 9.125%, 2017      105,000        115,238   
GMAC, Inc., 8%, 2031      20,000        23,800   
Icahn Enterprises LP, 8%, 2018      96,000        103,200   
Icahn Enterprises LP, 8%, 2018 (n)      16,000        17,200   
International Lease Finance Corp., 7.125%, 2018 (n)      137,000        160,975   
Nationstar Mortgage LLC/Capital Corp., 10.875%, 2015      320,000        346,000   
Nationstar Mortgage LLC/Capital Corp., 7.875%, 2020 (n)      30,000        30,900   
PHH Corp., 9.25%, 2016      115,000        132,825   
PHH Corp., 7.375%, 2019      40,000        42,800   
SLM Corp., 8.45%, 2018      25,000        29,711   
SLM Corp., 8%, 2020      130,000        150,556   
SLM Corp., 7.25%, 2022      15,000        16,538   
    

 

 

 
             $ 1,597,727   
Food & Beverages - 1.0%                 
ARAMARK Corp., 8.5%, 2015    $ 105,000      $ 106,707   
B&G Foods, Inc., 7.625%, 2018      130,000        140,075   
Constellation Brands, Inc., 7.25%, 2016      55,000        63,525   
JBS USA LLC/JBS USA Finance, 8.25%, 2020 (n)      25,000        25,813   

 

18


Table of Contents

Portfolio of Investments – continued

 

Issuer    Shares/Par     Value ($)  
Bonds - continued                 
Food & Beverages - continued                 
Pinnacle Foods Finance LLC, 8.25%, 2017    $ 30,000      $ 32,250   
TreeHouse Foods, Inc., 7.75%, 2018      80,000        87,600   
    

 

 

 
             $ 455,970   
Forest & Paper Products - 0.8%                 
Boise, Inc., 8%, 2020    $ 105,000      $ 114,975   
Georgia-Pacific Corp., 8%, 2024      9,000        12,636   
Graphic Packaging Holding Co., 7.875%, 2018      65,000        71,825   
Millar Western Forest Products Ltd., 8.5%, 2021      25,000        21,313   
Smurfit Kappa Group PLC, 7.75%, 2019 (n)    EUR 50,000        71,288   
Tembec Industries, Inc., 11.25%, 2018    $ 55,000        58,163   
Xerium Technologies, Inc., 8.875%, 2018      50,000        42,250   
    

 

 

 
             $ 392,450   
Gaming & Lodging - 3.1%                 
Caesars Operating Escrow LLC, 8.5%, 2020 (n)    $ 85,000      $ 83,513   
Choice Hotels International, Inc., 5.75%, 2022      15,000        16,425   
Fontainebleau Las Vegas Holdings LLC, 10.25%, 2015 (a)(d)(n)      290,000        181   
GWR Operating Partnership LLP, 10.875%, 2017      85,000        96,900   
Harrah’s Operating Co., Inc., 11.25%, 2017      155,000        167,788   
Host Hotels & Resorts, Inc., REIT 5.25%, 2022      55,000        60,775   
Isle of Capri Casinos, Inc., 8.875%, 2020 (n)      85,000        89,463   
MGM Mirage, 6.625%, 2015      40,000        42,500   
MGM Resorts International, 11.375%, 2018      235,000        276,125   
MGM Resorts International, 9%, 2020      45,000        50,175   
Penn National Gaming, Inc., 8.75%, 2019      160,000        178,800   
Pinnacle Entertainment, Inc., 8.75%, 2020      50,000        54,625   
Rivers Pittsburgh Borrower LP/Rivers Pittsburgh Finance Corp., 9.5%, 2019 (n)      15,000        16,200   
Seven Seas Cruises S. DE R.L., 9.125%, 2019      130,000        135,038   
Viking Cruises Ltd., 8.5%, 2022 (z)      55,000        56,788   
Wyndham Worldwide Corp., 7.375%, 2020      50,000        59,962   
Wynn Las Vegas LLC, 7.75%, 2020      95,000        106,638   
    

 

 

 
             $ 1,491,896   
Industrial - 0.8%                 
Altra Holdings, Inc., 8.125%, 2016    $ 63,000      $ 67,095   
Hyva Global B.V., 8.625%, 2016 (n)      200,000        186,500   
Mueller Water Products, Inc., 8.75%, 2020      74,000        84,915   
SPL Logistics Escrow LLC, 8.875%, 2020 (n)      45,000        47,813   
    

 

 

 
             $ 386,323   
Insurance - 1.0%                 
American International Group, Inc., 8.25%, 2018    $ 100,000      $ 129,905   

 

19


Table of Contents

Portfolio of Investments – continued

 

Issuer    Shares/Par     Value ($)  
Bonds - continued                 
Insurance - continued                 
American International Group, Inc., 8.175% to 2038, FRN to 2068    $ 265,000      $ 330,588   
    

 

 

 
             $ 460,493   
Insurance - Property & Casualty - 1.1%                 
Liberty Mutual Group, Inc., 10.75% to 2038, FRN to 2088 (n)    $ 235,000      $ 350,150   
XL Group PLC, 6.5% to 2017, FRN to 2049      175,000        162,313   
    

 

 

 
             $ 512,463   
International Market Quasi-Sovereign - 0.2%                 
Irish Life & Permanent PLC, 3.6%, 2013 (e)(n)    $ 100,000      $ 100,000   
Machinery & Tools - 1.2%                 
Case Corp., 7.25%, 2016    $ 50,000      $ 56,000   
Case New Holland, Inc., 7.875%, 2017      95,000        111,625   
H&E Equipment Services LLC, 7%, 2022 (n)      35,000        36,400   
NESCO LLC/NESCO Holdings Corp., 11.75%, 2017 (n)      90,000        94,950   
RSC Equipment Rental, Inc., 8.25%, 2021      140,000        154,700   
UR Financing Escrow Corp., 5.75%, 2018 (n)      45,000        48,375   
UR Financing Escrow Corp., 7.625%, 2022 (n)      48,000        52,560   
    

 

 

 
             $ 554,610   
Major Banks - 0.9%                 
Bank of America Corp., 5.65%, 2018    $ 50,000      $ 58,212   
RBS Capital Trust II, 6.425% to 2034, FRN to 2049      95,000        79,800   
Royal Bank of Scotland Group PLC, 6.99% to 2017, FRN to 2049 (n)      100,000        90,750   
Royal Bank of Scotland Group PLC, 7.648% to 2031, FRN to 2049      210,000        206,850   
    

 

 

 
             $ 435,612   
Medical & Health Technology & Services - 3.5%                 
Biomet, Inc., 6.5%, 2020 (n)    $ 80,000      $ 82,600   
Davita, Inc., 6.625%, 2020      265,000        282,888   
Fresenius Medical Care AG & Co. KGaA, 9%, 2015 (n)      120,000        137,700   
HCA, Inc., 8.5%, 2019      140,000        157,325   
HCA, Inc., 7.5%, 2022      150,000        167,625   
HCA, Inc., 5.875%, 2022      25,000        26,813   
HealthSouth Corp., 8.125%, 2020      175,000        192,938   
Hologic, Inc., 6.25%, 2020 (n)      15,000        15,900   
IASIS Healthcare LLC/IASIS Capital Corp., 8.375%, 2019      125,000        115,000   
Physio-Control International, Inc., 9.875%, 2019 (n)      65,000        71,175   
Select Medical Corp., 7.625%, 2015      15,000        15,150   
Teleflex, Inc., 6.875%, 2019      50,000        53,750   
Tenet Healthcare Corp., 9.25%, 2015      65,000        73,288   
Truven Health Analytics, Inc., 10.625%, 2020 (z)      45,000        48,263   
Universal Health Services, Inc., 7%, 2018      30,000        32,250   

 

20


Table of Contents

Portfolio of Investments – continued

 

Issuer    Shares/Par     Value ($)  
Bonds - continued                 
Medical & Health Technology & Services - continued                 
Universal Hospital Services, Inc., 7.625%, 2020 (n)    $ 80,000      $ 83,000   
Universal Hospital Services, Inc., FRN, 4.111%, 2015      35,000        34,519   
Vanguard Health Systems, Inc., 0%, 2016      2,000        1,400   
WP Rocket Merger Sub, Inc., 10.125%, 2019 (n)      100,000        93,250   
    

 

 

 
             $ 1,684,834   
Metals & Mining - 1.1%                 
Arch Coal, Inc., 7.25%, 2020    $ 75,000      $ 66,375   
Cloud Peak Energy, Inc., 8.25%, 2017      140,000        151,550   
Cloud Peak Energy, Inc., 8.5%, 2019      55,000        60,638   
Consol Energy, Inc., 8%, 2017      75,000        79,313   
Consol Energy, Inc., 8.25%, 2020      70,000        74,200   
Fortescue Metals Group Ltd., 8.25%, 2019 (n)      75,000        75,000   
    

 

 

 
             $ 507,076   
Natural Gas - Distribution - 0.3%                 
AmeriGas Finance LLC, 6.75%, 2020    $ 80,000      $ 86,000   
Ferrellgas LP/Ferrellgas Finance Corp., 6.5%, 2021      60,000        57,900   
    

 

 

 
             $ 143,900   
Natural Gas - Pipeline - 1.8%                 
Atlas Pipeline Partners LP, 8.75%, 2018    $ 160,000      $ 171,200   
Crosstex Energy, Inc., 8.875%, 2018      110,000        117,975   
El Paso Corp., 7%, 2017      105,000        119,966   
El Paso Corp., 7.75%, 2032      105,000        125,306   
Energy Transfer Equity LP, 7.5%, 2020      135,000        153,563   
Enterprise Products Partners LP, 7.034% to 2018, FRN to 2068      40,000        45,700   
MarkWest Energy Partners LP, 5.5%, 2023      65,000        68,250   
Rockies Express Pipeline LLC, 5.625%, 2020 (n)      51,000        48,578   
    

 

 

 
             $ 850,538   
Network & Telecom - 1.6%                 
Centurylink, Inc., 7.65%, 2042    $ 65,000      $ 66,501   
Cincinnati Bell, Inc., 8.25%, 2017      30,000        32,100   
Citizens Communications Co., 9%, 2031      65,000        69,388   
Eileme 2 AB, 11.625%, 2020 (n)      200,000        224,750   
Frontier Communications Corp., 8.125%, 2018      70,000        79,275   
Qwest Communications International, Inc., 7.125%, 2018 (n)      105,000        110,908   
TW Telecom Holdings, Inc., 5.375%, 2022 (n)      35,000        35,963   
Windstream Corp., 8.125%, 2018      20,000        21,650   
Windstream Corp., 7.75%, 2020      100,000        107,750   
    

 

 

 
             $ 748,285   

 

21


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Portfolio of Investments – continued

 

Issuer    Shares/Par     Value ($)  
Bonds - continued                 
Oil Services - 1.5%                 
Afren PLC, 11.5%, 2016 (n)    $ 200,000      $ 228,000   
Bristow Group, Inc., 6.25%, 2022      40,000        41,850   
Chesapeake Energy Corp., 6.625%, 2019 (n)      35,000        33,338   
Dresser-Rand Group, Inc., 6.5%, 2021      45,000        47,250   
Edgen Murray Corp., 8.75%, 2020 (z)      80,000        79,400   
Pioneer Energy Services Corp., 9.875%, 2018      95,000        102,838   
Shale-Inland Holdings LLC/Finance Co., 8.75%, 2019 (z)      60,000        59,850   
Unit Corp., 6.625%, 2021 (n)      100,000        102,000   
    

 

 

 
             $ 694,526   
Other Banks & Diversified Financials - 1.6%                 
Capital One Financial Corp., 10.25%, 2039    $ 105,000      $ 108,150   
Groupe BPCE S.A., 12.5% to 2019, FRN to 2049 (n)      100,000        114,318   
LBG Capital No. 1 PLC, 7.875%, 2020 (n)      200,000        205,500   
Santander UK PLC, 8.963% to 2030, FRN to 2049      299,000        329,648   
    

 

 

 
             $ 757,616   
Pharmaceuticals - 0.7%                 
Capsugel FinanceCo. SCA, 9.875%, 2019 (n)    EUR 100,000      $ 146,789   
Valeant Pharmaceuticals International, Inc., 7%, 2020 (n)    $ 100,000        107,625   
Valeant Pharmaceuticals International, Inc., 7.25%, 2022 (n)      55,000        59,538   
    

 

 

 
             $ 313,952   
Pollution Control - 0.2%                 
Heckmann Corp., 9.875%, 2018    $ 70,000      $ 70,175   
Rough Rider Escrow, Inc., 9.875%, 2018 (z)      25,000        25,125   
    

 

 

 
             $ 95,300   
Precious Metals & Minerals - 0.1%                 
IAMGOLD Corp., 6.75%, 2020 (n)    $ 70,000      $ 69,825   
Printing & Publishing - 0.2%                 
American Media, Inc., 13.5%, 2018 (z)    $ 23,764      $ 21,744   
Nielsen Finance LLC, 7.75%, 2018      45,000        50,625   
Nielsen Finance LLC, 4.5%, 2020 (n)      45,000        44,775   
    

 

 

 
             $ 117,144   
Real Estate - 1.0%                 
CB Richard Ellis Group, Inc., 11.625%, 2017    $ 120,000      $ 133,500   
CNL Lifestyle Properties, Inc., REIT, 7.25%, 2019      50,000        47,375   
Entertainment Properties Trust, REIT, 5.75%, 2022      65,000        68,124   
Kennedy Wilson, Inc., 8.75%, 2019      45,000        47,925   
MPT Operating Partnership LP, REIT, 6.375%, 2022      160,000        166,800   
    

 

 

 
             $ 463,724   

 

22


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Portfolio of Investments – continued

 

Issuer    Shares/Par     Value ($)  
Bonds - continued                 
Retailers - 1.8%                 
Academy Ltd., 9.25%, 2019 (n)    $ 55,000      $ 60,225   
Burlington Coat Factory Warehouse Corp., 10%, 2019      100,000        110,375   
J. Crew Group, Inc., 8.125%, 2019      85,000        88,294   
Limited Brands, Inc., 6.9%, 2017      75,000        86,156   
Limited Brands, Inc., 6.95%, 2033      40,000        40,450   
Pantry, Inc., 8.375%, 2020 (n)      40,000        41,600   
QVC, Inc., 7.375%, 2020 (n)      50,000        55,412   
Rite Aid Corp., 9.25%, 2020      65,000        66,463   
Sally Beauty Holdings, Inc., 6.875%, 2019      45,000        49,894   
Toys “R” Us Property Co. II LLC, 8.5%, 2017      60,000        64,425   
Toys “R” Us, Inc., 10.75%, 2017      140,000        151,375   
Yankee Acquisition Corp., 8.5%, 2015      2,000        2,018   
YCC Holdings LLC/Yankee Finance, Inc., 10.25%, 2016 (p)      50,000        51,688   
    

 

 

 
             $ 868,375   
Specialty Chemicals - 0.1%                 
Koppers, Inc., 7.875%, 2019    $ 40,000      $ 43,900   
Specialty Stores - 0.5%                 
Gymboree Corp., 9.125%, 2018    $ 40,000      $ 37,650   
Michaels Stores, Inc., 11.375%, 2016      125,000        130,469   
Michaels Stores, Inc., 7.75%, 2018      50,000        53,688   
    

 

 

 
             $ 221,807   
Supermarkets - 0.1%                 
SUPERVALU, Inc., 7.5%, 2014    $ 25,000      $ 24,094   
Telecommunications - Wireless - 3.2%                 
Clearwire Corp., 12%, 2015 (n)    $ 95,000      $ 101,175   
Cricket Communications, Inc., 7.75%, 2016      95,000        100,463   
Cricket Communications, Inc., 7.75%, 2020      85,000        87,656   
Crown Castle International Corp., 9%, 2015      80,000        85,600   
Crown Castle International Corp., 7.125%, 2019      50,000        54,875   
Digicel Group Ltd., 10.5%, 2018 (n)      265,000        292,825   
MetroPCS Wireless, Inc., 7.875%, 2018      75,000        82,125   
Sprint Capital Corp., 6.875%, 2028      105,000        107,363   
Sprint Nextel Corp., 6%, 2016      145,000        155,875   
Sprint Nextel Corp., 8.375%, 2017      140,000        162,400   
Sprint Nextel Corp., 9%, 2018 (n)      25,000        30,875   
Wind Acquisition Finance S.A., 11.75%, 2017 (n)      250,000        243,750   
    

 

 

 
             $ 1,504,982   

 

23


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Portfolio of Investments – continued

 

Issuer    Shares/Par     Value ($)  
Bonds - continued                 
Telephone Services - 0.5%                 
Cogent Communications Group, Inc., 8.375%, 2018 (n)    $ 45,000      $ 48,825   
Level 3 Financing, Inc., 9.375%, 2019      90,000        100,350   
Level 3 Financing, Inc., 7%, 2020 (n)      25,000        25,438   
Level 3 Financing, Inc., 8.625%, 2020      45,000        49,050   
    

 

 

 
             $ 223,663   
Transportation - 0.2%                 
Navios South American Logistics, Inc., 9.25%, 2019    $ 112,000      $ 106,120   
Transportation - Services - 2.8%                 
ACL I Corp., 10.625%, 2016 (p)    $ 153,610      $ 150,303   
Aguila American Resources Ltd., 7.875%, 2018 (n)      150,000        158,625   
Atlas Airlines, Inc. Pass-Through Certificates, “B”, 7.68%, 2015      43,849        41,875   
Avis Budget Car Rental LLC, 8.25%, 2019      65,000        70,931   
Avis Budget Car Rental LLC, 9.75%, 2020      40,000        45,550   
CEVA Group PLC, 8.375%, 2017 (n)      160,000        154,000   
Commercial Barge Line Co., 12.5%, 2017      205,000        227,550   
HDTFS, Inc., 5.875%, 2020 (z)      15,000        15,150   
Navios Maritime Acquisition Corp., 8.625%, 2017      165,000        155,513   
Navios Maritime Holdings, Inc., 8.875%, 2017      105,000        107,625   
Swift Services Holdings, Inc., 10%, 2018      180,000        193,050   
    

 

 

 
             $ 1,320,172   
Utilities - Electric Power - 4.1%                 
AES Corp., 8%, 2017    $ 175,000      $ 200,156   
Atlantic Power Corp., 9%, 2018      60,000        64,350   
Calpine Corp., 8%, 2016 (n)      125,000        133,438   
Calpine Corp., 7.875%, 2020 (n)      108,000        118,260   
Covanta Holding Corp., 7.25%, 2020      75,000        83,257   
Covanta Holding Corp., 6.375%, 2022      25,000        27,207   
DPL, Inc., 7.25%, 2021      80,000        90,200   
Edison Mission Energy, 7%, 2017      90,000        43,425   
EDP Finance B.V., 6%, 2018 (n)      145,000        148,118   
Energy Future Holdings Corp., 10%, 2020      180,000        191,250   
Energy Future Holdings Corp., 10%, 2020      250,000        273,125   
Energy Future Holdings Corp., 11.75%, 2022 (n)      85,000        83,088   
GenOn Energy, Inc., 9.875%, 2020      165,000        185,213   
NRG Energy, Inc., 8.25%, 2020      195,000        214,988   
Texas Competitive Electric Holdings Co. LLC, 11.5%, 2020 (n)      125,000        89,375   
    

 

 

 
             $ 1,945,450   
Total Bonds (Identified Cost, $32,984,249)            $ 33,926,076   

 

24


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Portfolio of Investments – continued

 

Common Stocks - 23.4%                 
Issuer    Shares/Par     Value ($)  
Aerospace - 1.7%                 
Lockheed Martin Corp.      4,540      $ 425,262   
United Technologies Corp.      5,200        406,432   
    

 

 

 
             $ 831,694   
Alcoholic Beverages - 0.5%                 
Diageo PLC, ADR      2,250      $ 257,040   
Automotive - 0.5%                 
Accuride Corp. (a)      2,414      $ 6,445   
Delphi Automotive PLC (a)      8,080        254,035   
    

 

 

 
             $ 260,480   
Broadcasting - 0.9%                 
New Young Broadcasting Holding Co., Inc. (a)      10      $ 33,000   
Viacom, Inc., “B”      7,430        380,936   
    

 

 

 
             $ 413,936   
Brokerage & Asset Managers - 0.8%                 
BlackRock, Inc.      1,914      $ 363,048   
Business Services - 0.9%                 
Accenture PLC, “A”      6,260      $ 421,987   
Chemicals - 1.1%                 
3M Co.      2,600      $ 227,760   
PPG Industries, Inc.      2,460        288,017   
    

 

 

 
             $ 515,777   
Computer Software - 0.6%                 
Oracle Corp.      9,210      $ 285,971   
Computer Software - Systems - 0.9%                 
International Business Machines Corp.      2,250      $ 437,693   
Electrical Equipment - 1.5%                 
Danaher Corp.      7,130      $ 368,835   
Tyco International Ltd.      13,010        349,579   
    

 

 

 
             $ 718,414   
Energy - Independent - 0.9%                 
Occidental Petroleum Corp.      5,210      $ 411,382   
Energy - Integrated - 0.7%                 
Exxon Mobil Corp.      3,890      $ 354,651   

 

25


Table of Contents

Portfolio of Investments – continued

 

Issuer    Shares/Par     Value ($)  
Common Stocks - continued                 
Food & Beverages - 0.8%                 
General Mills, Inc.      9,810      $ 393,185   
General Merchandise - 0.7%                 
Target Corp.      5,470      $ 348,713   
Insurance - 1.6%                 
MetLife, Inc.      8,130      $ 288,534   
Travelers Cos., Inc.      6,650        471,751   
    

 

 

 
             $ 760,285   
Machinery & Tools - 0.6%                 
Eaton Corp.      6,140      $ 289,931   
Major Banks - 2.5%                 
Bank of New York Mellon Corp.      12,760      $ 315,300   
Goldman Sachs Group, Inc.      2,600        318,214   
JPMorgan Chase & Co.      12,840        535,171   
    

 

 

 
             $ 1,168,685   
Medical Equipment - 0.6%                 
St. Jude Medical, Inc.      6,970      $ 266,672   
Natural Gas - Distribution - 0.1%                 
Dynegy, Inc. (a)      1,785      $ 33,380   
Other Banks & Diversified Financials - 0.4%                 
Western Union Co.      14,330      $ 181,991   
Pharmaceuticals - 2.4%                 
Abbott Laboratories      5,400      $ 353,808   
Johnson & Johnson      4,590        325,064   
Pfizer, Inc.      18,160        451,639   
    

 

 

 
             $ 1,130,511   
Printing & Publishing - 0.1%                 
American Media Operations, Inc. (a)      6,090      $ 32,216   
Telecommunications - Wireless - 0.6%                 
Vodafone Group PLC, ADR      11,260      $ 306,497   
Telephone Services - 0.8%                 
AT&T, Inc.      10,920      $ 377,723   

 

26


Table of Contents

Portfolio of Investments – continued

 

Issuer    Shares/Par     Value ($)  
Common Stocks - continued                 
Tobacco - 1.2%                 
Philip Morris International, Inc.      6,220      $ 550,843   
Total Common Stocks (Identified Cost, $10,373,728)            $ 11,112,705   
Preferred Stocks - 0.3%                 
Other Banks & Diversified Financials - 0.3%                 
Ally Financial, Inc., 7% (z)      60      $ 57,818   
GMAC Capital Trust I, 8.125%      3,325        86,916   
Total Preferred Stocks (Identified Cost, $140,693)            $ 144,734   
Convertible Bonds - 0.2%                 
Network & Telecom - 0.2%                 
Nortel Networks Corp., 2.125%, 2014 (Identified Cost, $104,088) (a)(d)    $ 105,000      $ 105,000   
Convertible Preferred Stocks - 0.1%                 
Automotive - 0.1%                 
General Motors Co., 4.75% (Identified Cost, $84,500)      1,690      $ 68,648   
Floating Rate Loans (g)(r) - 0.1%                 
Utilities - Electric Power - 0.1%                 
Dynegy Midwest Generation LLC, Term Loan, 9.25%, 2016    $ 13,271      $ 13,735   
Dynegy Power LLC, Term Loan, 9.25%, 2016      19,906        20,733   
Total Floating Rate Loans (Identified Cost, $32,672)            $ 34,468   
     Strike Price     First Exercise                
Warrants - 0.0%                                
Broadcasting - 0.0%                                

New Young Broadcasting Holding Co., Inc.
(1 share for 1 warrant) (a)

(Identified Cost, $11,624)

  $ 0.01        12/24/24        6      $ 19,800   
Money Market Funds - 3.3%                   
MFS Institutional Money Market Portfolio, 0.16%,
at Cost and Net Asset Value (v)
                1,578,168      $ 1,578,168   
Total Investments (Identified Cost, $45,309,722)              $ 46,989,599   
Other Assets, Less Liabilities - 1.3%                        605,975   
Net Assets - 100.0%                           $ 47,595,574   

 

(a) Non-income producing security.
(c) The rate shown represents a current effective yield, not a coupon rate.
(d) In default. Interest and/or scheduled principal payment(s) have been missed.

 

27


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Portfolio of Investments – continued

 

(e) Guaranteed by Minister for Finance of Ireland.
(g) The rate shown represents a weighted average coupon rate on settled positions at period end, unless otherwise indicated.
(i) Interest only security for which the fund receives interest on notional principal (Par amount). Par amount shown is the notional principal and does not reflect the cost of the security.
(n) Securities exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be sold in the ordinary course of business in transactions exempt from registration, normally to qualified institutional buyers. At period end, the aggregate value of these securities was $10,328,902, representing 21.7% of net assets.
(p) Payment-in-kind security.
(r) Remaining maturities of floating rate loans may be less than stated maturities shown as a result of contractual or optional prepayments by the borrower. Such prepayments cannot be predicted with certainty. These loans may be subject to restrictions on resale. Floating rate loans generally have rates of interest which are determined periodically by reference to a base lending rate plus a premium.
(v) Underlying affiliated fund that is available only to investment companies managed by MFS. The rate quoted for the MFS Institutional Money Market Portfolio is the annualized seven-day yield of the fund at period end.
(z) Restricted securities are not registered under the Securities Act of 1933 and are subject to legal restrictions on resale. These securities generally may be resold in transactions exempt from registration or to the public if the securities are subsequently registered. Disposal of these securities may involve time-consuming negotiations and prompt sale at an acceptable price may be difficult. The fund holds the following restricted securities:

 

Restricted Securities    Acquisition
Date
  
Cost
     Value  
Ally Financial, Inc., 7%    4/13/11-4/14/11      $56,250         $57,818   
American Media, Inc., 13.5%, 2018    12/22/10      24,081         21,744   
Banc of America Commercial Mortgage, Inc., FRN, 6.248%, 2051    6/19/08      241,102         88,169   
Boise Cascade LLC/Finance Corp., 6.375%, 2020    10/17/12      15,000         15,225   
Edgen Murray Corp., 8.75%, 2020    10/05/12      79,430         79,400   
Falcon Franchise Loan LLC, FRN, 5.555%, 2025    1/29/03      8,425         18,641   
HD Supply, Inc., 11.5%, 2020    10/09/12-10/11/12      40,610         42,100   
HDTFS, Inc., 5.875%, 2020    10/01/12      15,000         15,150   
Heckler & Koch GmbH, 9.5%, 2018    5/06/11      142,014         111,469   
LBI Media, Inc., 8.5%, 2017    7/18/07      89,139         21,825   
Local TV Finance LLC, 9.25%, 2015    11/14/07-2/16/11      155,273         160,087   
Morgan Stanley Capital I, Inc., FRN, 1.38%, 2039    7/20/04      6,789         4,000   
Nara Cable Funding Ltd., 8.875%, 2018    1/26/12      194,368         189,000   
Nexstar Broadcasting Group, Inc., 6.875%, 2020    10/24/12      10,000         10,025   
Preferred Term Securities XII Ltd., CDO, 0%, 2033    1/07/05      127,734         68   
Preferred Term Securities XVI Ltd., CDO,
0%, 2035
   12/08/04      187,576         30   
Preferred Term Securities XVII Ltd., CDO,
0%, 2035
   3/09/05      114,513         19   
Rough Rider Escrow, Inc., 9.875%, 2018    10/26/12      25,063         25,125   
Shale-Inland Holdings LLC/Finance Co.,
8.75%, 2019
   10/26/12      59,611         59,850   

 

28


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Portfolio of Investments – continued

 

Restricted Securities - continued    Acquisition
Date
  
Cost
     Value  
Townsquare Radio LLC, 9%, 2019    3/30/12      $39,624         $43,200   
Truven Health Analytics, Inc., 10.625%, 2020    5/24/12-6/15/12      45,784         48,263   
Viking Cruises Ltd., 8.5%, 2022    10/12/12-10/25/12      55,756         56,788   
Total Restricted Securities            $1,067,996   
% of Net assets            2.2%   

The following abbreviations are used in this report and are defined:

 

ADR   American Depositary Receipt
CDO   Collateralized Debt Obligation
FRN   Floating Rate Note. Interest rate resets periodically and may not be the rate reported at period end.
PLC   Public Limited Company
REIT   Real Estate Investment Trust

Abbreviations indicate amounts shown in currencies other than the U.S. dollar. All amounts are stated in U.S. dollars unless otherwise indicated. A list of abbreviations is shown below:

 

EUR   Euro

Derivative Contracts at 10/31/12

Forward Foreign Currency Exchange Contracts at 10/31/12

 

Type   Currency   Counterparty   Contracts
to
Deliver/
Receive
    Settlement
Date Range
    In
Exchange
For
    Contracts
at Value
    Net
Unrealized
Appreciation
(Depreciation)
 
Liability Derivatives                              
SELL   EUR   Deutsche Bank AG     174,240        1/11/13        $224,515        $226,005        $(1,490
SELL   EUR   UBS AG     174,240        1/11/13        224,568        226,005        (1,437
             

 

 

 
                $(2,927
             

 

 

 

See Notes to Financial Statements

 

29


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Financial Statements

 

STATEMENT OF ASSETS AND LIABILITIES

At 10/31/12

This statement represents your fund’s balance sheet, which details the assets and liabilities comprising the total value of the fund.

 

Assets         

Investments-

  

Non-affiliated issuers, at value (identified cost, $43,731,554)

     $45,411,431   

Underlying affiliated funds, at cost and value

     1,578,168   

Total investments, at value (identified cost, $45,309,722)

     $46,989,599   

Receivables for

  

Investments sold

     123,080   

Interest and dividends

     742,443   

Other assets

     3,959   

Total assets

     $47,859,081   
Liabilities         

Payable to custodian

     $7,354   

Payables for

  

Forward foreign currency exchange contracts

     2,927   

Investments purchased

     94,811   

Payable to affiliates

  

Investment adviser

     3,448   

Transfer agent and dividend disbursing costs

     773   

Payable for independent Trustees’ compensation

     67,677   

Accrued expenses and other liabilities

     86,517   

Total liabilities

     $263,507   

Net assets

     $47,595,574   
Net assets consist of         

Paid-in capital

     $62,065,032   

Unrealized appreciation (depreciation) on investments and translation of
assets and liabilities in foreign currencies

     1,677,353   

Accumulated net realized gain (loss) on investments and foreign currency

     (16,032,814

Accumulated distributions in excess of net investment income

     (113,997

Net assets

     $47,595,574   

Shares of beneficial interest outstanding

     6,954,041   

Net asset value per share (net assets of $47,595,574 / 6,954,041 shares of
beneficial interest outstanding)

     $6.84   

See Notes to Financial Statements

 

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Financial Statements

 

STATEMENT OF OPERATIONS

Year ended 10/31/12

This statement describes how much your fund earned in investment income and accrued in expenses. It also describes any gains and/or losses generated by fund operations.

 

Net investment income         

Income

  

Interest

     $3,034,682   

Dividends

     327,611   

Dividends from underlying affiliated funds

     1,676   

Foreign taxes withheld

     (789

Total investment income

     $3,363,180   

Expenses

  

Management fee

     $437,166   

Transfer agent and dividend disbursing costs

     19,531   

Administrative services fee

     17,507   

Independent Trustees’ compensation

     18,105   

Stock exchange fee

     23,763   

Custodian fee

     14,967   

Shareholder communications

     61,519   

Audit and tax fees

     66,148   

Legal fees

     1,160   

Miscellaneous

     36,640   

Total expenses

     $696,506   

Fees paid indirectly

     (26

Reduction of expenses by investment adviser

     (16,976

Net expenses

     $679,504   

Net investment income

     $2,683,676   
Realized and unrealized gain (loss) on investments and foreign currency   

Realized gain (loss) (identified cost basis)

  

Investments

     $(440,597

Foreign currency

     18,020   

Net realized gain (loss) on investments and foreign currency

     $(422,577

Change in unrealized appreciation (depreciation)

  

Investments

     $3,186,720   

Translation of assets and liabilities in foreign currencies

     8,023   

Net unrealized gain (loss) on investments and foreign currency translation

     $3,194,743   

Net realized and unrealized gain (loss) on investments and foreign currency

     $2,772,166   

Change in net assets from operations

     $5,455,842   

See Notes to Financial Statements

 

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Financial Statements

 

STATEMENTS OF CHANGES IN NET ASSETS

These statements describe the increases and/or decreases in net assets resulting from operations, any distributions, and any shareholder transactions.

 

     Years ended 10/31  
     2012      2011  
Change in net assets              
From operations                  

Net investment income

     $2,683,676         $2,776,798   

Net realized gain (loss) on investments and foreign currency

     (422,577      236,255   

Net unrealized gain (loss) on investments and foreign currency translation

     3,194,743         (1,516,778

Change in net assets from operations

     $5,455,842         $1,496,275   
Distributions declared to shareholders                  

From net investment income

     $(2,828,436      $(2,856,130

From tax return of capital

     (1,831,057      (2,097,352

Total distributions declared to shareholders

     $(4,659,493      $(4,953,482

Change in net assets from fund share transactions

     $361,678         $433,705   

Total change in net assets

     $1,158,027         $(3,023,502
Net assets                  

At beginning of period

     46,437,547         49,461,049   

At end of period (including accumulated distributions in excess of net investment income of $113,997 and $152,418, respectively)

     $47,595,574         $46,437,547   

See Notes to Financial Statements

 

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Financial Statements

 

FINANCIAL HIGHLIGHTS

The financial highlights table is intended to help you understand the fund’s financial performance for the past 5 years. Certain information reflects financial results for a single fund share. The total returns in the table represent the rate by which an investor would have earned (or lost) on an investment in the fund share class (assuming reinvestment of all distributions) held for the entire period.

 

     Years ended 10/31  
     2012     2011     2010     2009     2008  

Net asset value, beginning of period

     $6.73        $7.23        $6.71        $5.36        $9.08   
Income (loss) from investment operations                           

Net investment income (d)

     $0.39        $0.40        $0.44        $0.56        $0.61   

Net realized and unrealized gain (loss)
on investments and foreign currency

     0.39        (0.18     0.77        1.32        (3.52

Total from investment operations

     $0.78        $0.22        $1.21        $1.88        $(2.91
Less distributions declared to shareholders                           

From net investment income

     $(0.41     $(0.42     $(0.51     $(0.54     $(0.60

From tax return of capital

     (0.26     (0.30     (0.18            (0.21

Total distributions declared to shareholders

     $(0.67     $(0.72     $(0.69     $(0.54     $(0.81

Net increase from repurchase of capital shares

     $—        $—        $—        $0.01        $—   

Net asset value, end of period (x)

     $6.84        $6.73        $7.23        $6.71        $5.36   

Market value, end of period

     $7.46        $6.86        $7.95        $6.23        $4.75   

Total return at market value (%)

     19.99        (4.67     40.46        46.76        (36.80

Total return at net asset value (%) (j)(r)(s)(x)

     12.15        2.81        18.63        40.08        (33.71
Ratios (%) (to average net assets)
and Supplemental data:
                           

Expenses before expense reductions (f)

     1.49        1.42        1.53        1.64        1.47   

Expenses after expense reductions (f)

     1.45        1.39        1.47        1.64        1.47   

Net investment income

     5.73        5.65        6.36        10.17        7.85   

Portfolio turnover

     49        53        55        78        91   

Net assets at end of period (000 omitted)

     $47,596        $46,438        $49,461        $45,646        $36,948   

 

(d) Per share data is based on average shares outstanding.
(f) Ratios do not reflect reductions from fees paid indirectly, if applicable.
(j) Total return at net asset value is calculated using the net asset value of the fund, not the publicly traded price and therefore may be different than the total return at market value.
(r) Certain expenses have been reduced without which performance would have been lower.
(s) From time to time the fund may receive proceeds from litigation settlements, without which performance would be lower.
(x) The net asset values per share and total returns have been calculated on net assets which include adjustments made in accordance with U.S. generally accepted accounting principles required at period end for financial reporting purposes.

See Notes to Financial Statements

 

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NOTES TO FINANCIAL STATEMENTS

(1) Business and Organization

MFS Special Value Trust (the fund) is organized as a Massachusetts business trust and is registered under the Investment Company Act of 1940, as amended, as a closed-end management investment company.

(2) Significant Accounting Policies

General – The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. In the preparation of these financial statements, management has evaluated subsequent events occurring after the date of the fund’s Statement of Assets and Liabilities through the date that the financial statements were issued. The fund invests in high-yield securities rated below investment grade. Investments in high-yield securities involve greater degrees of credit and market risk than investments in higher-rated securities and tend to be more sensitive to economic conditions. The fund invests in foreign securities. Investments in foreign securities are vulnerable to the effects of changes in the relative values of the local currency and the U.S. dollar and to the effects of changes in each country’s legal, political, and economic environment.

In this reporting period the fund adopted FASB Accounting Standards Update 2011-04, Fair Value Measurement (Topic 820) – Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (“ASU 2011-04”). ASU 2011-04 seeks to improve the comparability of fair value measurements as presented and disclosed in financial statements prepared in accordance with U.S. GAAP and International Financial Reporting Standards (IFRS) by providing common requirements for fair value measurement and disclosure.

In December 2011, the Financial Accounting Standards Board issued Accounting Standards Update 2011-11, Balance Sheet (Topic 210) – Disclosures about Offsetting Assets and Liabilities (“ASU 2011-11”). Effective for annual reporting periods beginning on or after January 1, 2013 and interim periods within those annual periods, ASU 2011-11 is intended to enhance disclosure requirements on the offsetting of financial assets and liabilities. Although still evaluating the potential impacts of ASU 2011-11 to the fund, management expects that the impact of the fund’s adoption will be limited to additional financial statement disclosures.

Investment Valuations – Equity securities, including restricted equity securities, are generally valued at the last sale or official closing price as provided by a third-party pricing service on the market or exchange on which they are primarily traded. Equity securities, for which there were no sales reported that day, are generally valued at the last quoted daily bid quotation as provided by a third-party pricing service on the market or exchange on which such securities are primarily traded. Debt instruments and floating rate loans (other than short-term instruments), including restricted debt instruments, are generally valued at an evaluated or composite bid as provided by a

 

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Notes to Financial Statements – continued

 

third-party pricing service. Short-term instruments with a maturity at issuance of 60 days or less generally are valued at amortized cost, which approximates market value. Forward foreign currency exchange contracts are generally valued at the mean of bid and asked prices for the time period interpolated from rates provided by a third-party pricing service for proximate time periods. Open-end investment companies are generally valued at net asset value per share. Securities and other assets generally valued on the basis of information from a third-party pricing service may also be valued at a broker/dealer bid quotation. Values obtained from third-party pricing services can utilize both transaction data and market information such as yield, quality, coupon rate, maturity, type of issue, trading characteristics, and other market data. The values of foreign securities and other assets and liabilities expressed in foreign currencies are converted to U.S. dollars using the mean of bid and asked prices for rates provided by a third-party pricing service.

The Board of Trustees has delegated primary responsibility for determining or causing to be determined the value of the fund’s investments (including any fair valuation) to the adviser pursuant to valuation policies and procedures approved by the Board. If the adviser determines that reliable market quotations are not readily available, investments are valued at fair value as determined in good faith by the adviser in accordance with such procedures under the oversight of the Board of Trustees. Under the fund’s valuation policies and procedures, market quotations are not considered to be readily available for most types of debt instruments and floating rate loans and many types of derivatives. These investments are generally valued at fair value based on information from third-party pricing services. In addition, investments may be valued at fair value if the adviser determines that an investment’s value has been materially affected by events occurring after the close of the exchange or market on which the investment is principally traded (such as foreign exchange or market) and prior to the determination of the fund’s net asset value, or after the halting of trading of a specific security where trading does not resume prior to the close of the exchange or market on which the security is principally traded. Events that occur on a frequent basis after foreign markets close (such as developments in foreign markets and significant movements in the U.S. markets) and prior to the determination of the fund’s net asset value may be deemed to have a material effect on the value of securities traded in foreign markets. Accordingly, the fund’s foreign equity securities may often be valued at fair value. The adviser generally relies on third-party pricing services or other information (such as the correlation with price movements of similar securities in the same or other markets; the type, cost and investment characteristics of the security; the business and financial condition of the issuer; and trading and other market data) to assist in determining whether to fair value and at what value to fair value an investment. The value of an investment for purposes of calculating the fund’s net asset value can differ depending on the source and method used to determine value. When fair valuation is used, the value of an investment used to determine the fund’s net asset value may differ from quoted or published prices for the same investment. There can be no assurance that the fund could obtain the fair value assigned to an investment if it were to sell the investment at the same time at which the fund determines its net asset value per share.

Various inputs are used in determining the value of the fund’s assets or liabilities. These inputs are categorized into three broad levels. In certain cases, the inputs used to

 

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Notes to Financial Statements – continued

 

measure fair value may fall into different levels of the fair value hierarchy. In such cases, an investment’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The fund’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the investment. Level 1 includes unadjusted quoted prices in active markets for identical assets or liabilities. Level 2 includes other significant observable market-based inputs (including quoted prices for similar securities, interest rates, prepayment speed, and credit risk). Level 3 includes unobservable inputs, which may include the adviser’s own assumptions in determining the fair value of investments. Other financial instruments are derivative instruments not reflected in total investments, such as forward foreign currency exchange contracts. The following is a summary of the levels used as of October 31, 2012 in valuing the fund’s assets or liabilities:

 

Investments at Value    Level 1      Level 2      Level 3      Total  
Equity Securities            

United States

     $10,639,516         $110,618         $32,216         $10,782,350   

United Kingdom

     563,537                         563,537   
Non-U.S. Sovereign Debt              900,206                 900,206   
Corporate Bonds              26,845,225                 26,845,225   
Commercial Mortgage-Backed Securities              177,282                 177,282   
Asset-Backed Securities
(including CDOs)
             117                 117   
Foreign Bonds              6,108,246                 6,108,246   
Floating Rate Loans              34,468                 34,468   
Mutual Funds      1,578,168                         1,578,168   
Total Investments      $12,781,221         $34,176,162         $32,216         $46,989,599   
Other Financial Instruments                            
Forward Foreign Currency Exchange Contracts      $—         $(2,927      $—         $(2,927

For further information regarding security characteristics, see the Portfolio of Investments.

The following is a reconciliation of level 3 assets for which significant unobservable inputs were used to determine fair value. The fund’s policy is to recognize transfers between the levels as of the end of the period. The table presents the activity of level 3 securities held at the beginning and the end of the period.

 

     Equity Securities  
Balance as of 10/31/11      $79,962   

Change in unrealized appreciation (depreciation)

     (47,746

Realized gain (loss)

     0   

Disposition of worthless securities

     0   
Balance as of 10/31/12      $32,216   

The net change in unrealized appreciation (depreciation) from investments still held as level 3 at October 31, 2012 is $(47,746).

 

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Foreign Currency Translation – Purchases and sales of foreign investments, income, and expenses are converted into U.S. dollars based upon currency exchange rates prevailing on the respective dates of such transactions or on the reporting date for foreign denominated receivables and payables. Gains and losses attributable to foreign currency exchange rates on sales of securities are recorded for financial statement purposes as net realized gains and losses on investments. Gains and losses attributable to foreign exchange rate movements on receivables, payables, income and expenses are recorded for financial statement purposes as foreign currency transaction gains and losses. That portion of both realized and unrealized gains and losses on investments that results from fluctuations in foreign currency exchange rates is not separately disclosed.

Derivatives – The fund uses derivatives for different purposes, primarily to increase or decrease exposure to a particular market or segment of the market, or security, to increase or decrease interest rate or currency exposure, or as alternatives to direct investments. Derivatives are used for hedging or non-hedging purposes. While hedging can reduce or eliminate losses, it can also reduce or eliminate gains. When the fund uses derivatives as an investment to increase market exposure, or for hedging purposes, gains and losses from derivative instruments may be substantially greater than the derivative’s original cost.

The derivative instruments used by the fund were forward foreign currency exchange contracts. The fund’s period end derivatives, as presented in the Portfolio of Investments and the associated Derivative Contract tables, generally are indicative of the volume of its derivative activity during the period.

The following table presents, by major type of derivative contract, the fair value, on a gross basis, of the asset and liability components of derivatives held by the fund at October 31, 2012 as reported in the Statement of Assets and Liabilities:

 

        Fair Value  
Risk   Derivative Contracts   Liability Derivatives  
Foreign Exchange   Forward Foreign Currency Exchange     $(2,927

The following table presents, by major type of derivative contract, the realized gain (loss) on derivatives held by the fund for the year ended October 31, 2012 as reported in the Statement of Operations:

 

Risk    Foreign
Currency
 
Foreign Exchange      $19,619   

The following table presents, by major type of derivative contract, the change in unrealized appreciation (depreciation) on derivatives held by the fund for the year ended October 31, 2012 as reported in the Statement of Operations:

 

Risk   

Translation

of Assets
and

Liabilities in

Foreign
Currencies

 
Foreign Exchange      $7,349   

 

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Derivative counterparty credit risk is managed through formal evaluation of the creditworthiness of all potential counterparties. On certain over-the-counter derivatives, the fund attempts to reduce its exposure to counterparty credit risk whenever possible by entering into an International Swaps and Derivatives Association (ISDA) Master Agreement on a bilateral basis with each of the counterparties with whom it undertakes a significant volume of transactions. The ISDA Master Agreement gives each party to the agreement the right to terminate all transactions traded under such agreement if there is a certain deterioration in the credit quality of the other party. The ISDA Master Agreement gives the fund the right, upon an event of default by the applicable counterparty or a termination of the agreement, to close out all transactions traded under such agreement and to net amounts owed under each transaction to one net amount payable by one party to the other. This right to close out and net payments across all transactions traded under the ISDA Master Agreement could result in a reduction of the fund’s credit risk to such counterparty equal to any amounts payable by the fund under the applicable transactions, if any. However, absent an event of default by the counterparty or a termination of the agreement, the ISDA Master Agreement does not result in an offset of reported amounts of assets and liabilities in the Statement of Assets and Liabilities across transactions between the fund and the applicable counterparty.

Collateral requirements differ by type of derivative. Collateral or margin requirements are set by the broker or exchange clearing house for exchange traded derivatives (i.e., futures contracts and exchange-traded options) while collateral terms are contract specific for over-the-counter traded derivatives (i.e., forward foreign currency exchange contracts, swap agreements and over-the-counter options). For derivatives traded under an ISDA Master Agreement, the collateral requirements are netted across all transactions traded under such agreement and one amount is posted from one party to the other to collateralize such obligations. Cash collateral that has been pledged to cover obligations of the fund under derivative contracts, if any, will be reported separately in the Statement of Assets and Liabilities as restricted cash. Securities collateral pledged for the same purpose, if any, is noted in the Portfolio of Investments.

Forward Foreign Currency Exchange Contracts – The fund entered into forward foreign currency exchange contracts for the purchase or sale of a specific foreign currency at a fixed price on a future date. These contracts may be used to hedge the fund’s currency risk or for non-hedging purposes. For hedging purposes, the fund may enter into contracts to deliver or receive foreign currency that the fund will receive from or use in its normal investment activities. The fund may also use contracts to hedge against declines in the value of foreign currency denominated securities due to unfavorable exchange rate movements. For non-hedging purposes, the fund may enter into contracts with the intent of changing the relative exposure of the fund’s portfolio of securities to different currencies to take advantage of anticipated exchange rate changes.

Forward foreign currency exchange contracts are adjusted by the daily exchange rate of the underlying currency and any unrealized gains or losses are recorded as a receivable or payable for forward foreign currency exchange contracts until the contract settlement date. On contract settlement date, any gain or loss on the contract is recorded as realized gains or losses on foreign currency.

 

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Risks may arise upon entering into these contracts from unanticipated movements in the value of the contract and from the potential inability of counterparties to meet the terms of their contracts. Generally, the fund’s maximum risk due to counterparty credit risk is the unrealized gain on the contract due to the use of Continuous Linked Settlement, an industry accepted settlement system. This risk is mitigated in cases where there is an ISDA Master Agreement between the fund and the counterparty providing for netting as described above and for posting of collateral by the counterparty to the fund to cover the fund’s exposure to the counterparty under such ISDA Master Agreement.

Loans and Other Direct Debt Instruments – The fund invests in loans and loan participations or other receivables. These investments may include standby financing commitments, including revolving credit facilities, which obligate the fund to supply additional cash to the borrower on demand. Loan participations involve a risk of insolvency of the lending bank or other financial intermediary.

Indemnifications – Under the fund’s organizational documents, its officers and Trustees may be indemnified against certain liabilities and expenses arising out of the performance of their duties to the fund. Additionally, in the normal course of business, the fund enters into agreements with service providers that may contain indemnification clauses. The fund’s maximum exposure under these agreements is unknown as this would involve future claims that may be made against the fund that have not yet occurred.

Investment Transactions and Income – Investment transactions are recorded on the trade date. Interest income is recorded on the accrual basis. All premium and discount is amortized or accreted for financial statement purposes in accordance with U.S. generally accepted accounting principles. The fund earns certain fees in connection with its floating rate loan purchasing activities. These fees are in addition to interest payments earned and may include amendment fees, commitment fees, facility fees, consent fees, and prepayment fees. Commitment fees are recorded on an accrual basis as income in the accompanying financial statements. Dividends received in cash are recorded on the ex-dividend date. Certain dividends from foreign securities will be recorded when the fund is informed of the dividend if such information is obtained subsequent to the ex-dividend date. Dividend and interest payments received in additional securities are recorded on the ex-dividend or ex-interest date in an amount equal to the value of the security on such date. Debt obligations may be placed on non-accrual status or set to accrue at a rate of interest less than the contractual coupon when the collection of all or a portion of interest has become doubtful. Interest income for those debt obligations may be further reduced by the write-off of the related interest receivables when deemed uncollectible.

The fund may receive proceeds from litigation settlements. Any proceeds received from litigation involving portfolio holdings are reflected in the Statement of Operations in realized gain/loss if the security has been disposed of by the fund or in unrealized gain/loss if the security is still held by the fund. Any other proceeds from litigation not related to portfolio holdings are reflected as other income in the Statement of Operations.

 

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Fees Paid Indirectly – The fund’s custody fee may be reduced according to an arrangement that measures the value of cash deposited with the custodian by the fund. This amount, for the year ended October 31, 2012, is shown as a reduction of total expenses in the Statement of Operations.

Tax Matters and Distributions – The fund intends to qualify as a regulated investment company, as defined under Subchapter M of the Internal Revenue Code, and to distribute all of its taxable income, including realized capital gains. As a result, no provision for federal income tax is required. The fund’s federal tax returns, when filed, will remain subject to examination by the Internal Revenue Service for a three year period. Foreign taxes have been accrued by the fund in the accompanying financial statements.

Distributions to shareholders are recorded on the ex-dividend date. The fund seeks to pay monthly distributions based on an annual rate of 10% of the fund’s average monthly net asset value. As a result, distributions may exceed actual earnings which may result in a tax return of capital or, to the extent the fund has long-term gains, distributions of current year long-term gains may be recharacterized as ordinary income. Income and capital gain distributions are determined in accordance with income tax regulations, which may differ from U.S. generally accepted accounting principles. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences which arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions from other sources, in excess of net investment income or net realized gains are temporary overdistributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes.

Book/tax differences primarily relate to amortization and accretion of debt securities and deferred trustee compensation.

The tax character of distributions declared to shareholders for the last two fiscal years is as follows:

 

     10/31/12      10/31/11  
Ordinary income (including any short-term capital gains) (a)      $2,828,436         $2,856,130   
Tax return of capital (b)      1,831,057         2,097,352   
Total distributions      $4,659,493         $4,953,482   

 

(a) Included in the fund’s distributions from ordinary income for the year ended October 31, 2011 is $51,250 in excess of investment company taxable income which, in accordance with applicable U.S. tax law, is taxable to shareholders as ordinary income distributions.

 

(b) Distributions in excess of tax basis earnings and profits are reported in the financial statements as a tax return of capital.

 

40


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The federal tax cost and the tax basis components of distributable earnings were as follows:

 

As of 10/31/12       
Cost of investments      $45,720,063   
Gross appreciation      3,611,578   
Gross depreciation      (2,342,042
Net unrealized appreciation (depreciation)      $1,269,536   
Capital loss carryforwards      (15,622,473
Other temporary differences      (116,521

Under the Regulated Investment Company Modernization Act of 2010 (the “Act”), net capital losses recognized after October 31, 2011 may be carried forward indefinitely, and their character is retained as short-term and/or long-term losses. Previously, net capital losses were carried forward for eight years and treated as short-term losses. As a transition rule, the Act requires that post-enactment net capital losses be used before pre-enactment net capital losses.

As of October 31, 2012, the fund had capital loss carryforwards available to offset future realized gains. Such losses expire as follows:

 

Pre-enactment losses:       
10/31/16      $(9,724,945
10/31/17      (4,711,246
10/31/18      (89,992
Total      $(14,526,183
Post-enactment losses:       
Long-Term      $(1,096,290

(3) Transactions with Affiliates

Investment Adviser – The fund has an investment advisory agreement with MFS to provide overall investment management and related administrative services and facilities to the fund.

The management fee is computed daily and paid monthly at an annual rate of 0.68% of the fund’s average daily net assets and 3.40% of gross income. Gross income is calculated based on tax elections that generally include the accretion of discount and exclude the amortization of premium, which may differ from investment income reported in the Statement of Operations. MFS has agreed to reduce its management fee to the lesser of the contractual management fee as set forth above or 0.90% of the fund’s average daily net assets. This written agreement will continue until modified by the fund’s Board of Trustees, but such an agreement will continue at least until October 31, 2013. This management fee reduction amounted to $16,809, which is shown as a reduction of total expenses in the Statement of Operations. The management fee, from net assets and gross income, incurred for the year ended October 31, 2012 was equivalent to an annual effective rate of 0.90% of the fund’s average daily net assets.

Transfer Agent – The fund engages Computershare Trust Company, N.A. (“Computershare”) as the sole transfer agent for the fund. MFS Service Center, Inc.

 

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(MFSC) monitors and supervises the activities of Computershare for an agreed upon fee approved by the Board of Trustees. For the year ended October 31, 2012, these fees paid to MFSC amounted to $4,639.

Administrator – MFS provides certain financial, legal, shareholder communications, compliance, and other administrative services to the fund. Under an administrative services agreement, the fund partially reimburses MFS the costs incurred to provide these services. The fund is charged an annual fixed amount of $17,500 plus a fee based on average daily net assets. The administrative services fee incurred for the year ended October 31, 2012 was equivalent to an annual effective rate of 0.0374% of the fund’s average daily net assets.

Trustees’ and Officers’ Compensation – The fund pays compensation to independent Trustees in the form of a retainer, attendance fees, and additional compensation to Board and Committee chairpersons. The fund does not pay compensation directly to Trustees or officers of the fund who are also officers of the investment adviser, all of whom receive remuneration for their services to the fund from MFS. Certain officers and Trustees of the fund are officers or directors of MFS and MFSC.

Prior to December 31, 2001, the fund had an unfunded defined benefit plan (“DB plan”) for independent Trustees. As of December 31, 2001, the Board took action to terminate the DB plan with respect to then-current and any future independent Trustees, such that the DB plan covers only certain of those former independent Trustees who retired on or before December 31, 2001. Effective January 1, 2002, accrued benefits under the DB plan for then-current independent Trustees who continued were credited to an unfunded retirement deferral plan (the “Retirement Deferral plan”), which was established for and exists solely with respect to these credited amounts, and is not available for other deferrals by these or other independent Trustees. Although the Retirement Deferral plan is unfunded, amounts deferred under the plan are periodically adjusted for investment experience as if they had been invested in shares of the fund. The DB plan resulted in a pension expense of $1,333 and the Retirement Deferral plan resulted in an expense of $6,532. Both amounts are included in independent Trustees’ compensation for the year ended October 31, 2012. The liability for deferred retirement benefits payable to certain independent Trustees under both plans amounted to $67,615 at October 31, 2012, and is included in “Payable for independent Trustees’ compensation” in the Statement of Assets and Liabilities.

Other – This fund and certain other funds managed by MFS (the funds) have entered into services agreements (the Agreements) which provide for payment of fees by the funds to Tarantino LLC and Griffin Compliance LLC in return for the provision of services of an Independent Chief Compliance Officer (ICCO) and Assistant ICCO, respectively, for the funds. The ICCO and Assistant ICCO are officers of the funds and the sole members of Tarantino LLC and Griffin Compliance LLC, respectively. The funds can terminate the Agreements with Tarantino LLC and Griffin Compliance LLC at any time under the terms of the Agreements. For the year ended October 31, 2012, the aggregate fees paid by the fund to Tarantino LLC and Griffin Compliance LLC were $410 and are included in “Miscellaneous” expense in the Statement of Operations. MFS has agreed to reimburse the fund for a portion of the payments made by the fund

 

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Notes to Financial Statements – continued

 

in the amount of $167, which is shown as a reduction of total expenses in the Statement of Operations. Additionally, MFS has agreed to bear all expenses associated with office space, other administrative support, and supplies provided to the ICCO and Assistant ICCO.

The fund invests in the MFS Institutional Money Market Portfolio which is managed by MFS and seeks a high level of current income consistent with preservation of capital and liquidity. Income earned on this investment is included in “Dividends from underlying affiliated funds” in the Statement of Operations. This money market fund does not pay a management fee to MFS.

(4) Portfolio Securities

Purchases and sales of investments, other than short-term obligations, aggregated $22,255,704 and $25,074,032, respectively.

(5) Shares of Beneficial Interest

The fund’s Declaration of Trust permits the Trustees to issue an unlimited number of full and fractional shares of beneficial interest. The Trustees have authorized the repurchase by the fund of up to 10% annually of its own shares of beneficial interest. During the years ended October 31, 2012 and October 31, 2011, the fund did not repurchase any shares. Transactions in fund shares were as follows:

 

     Year ended
10/31/12
     Year ended
10/31/11
 
     Shares      Amount      Shares      Amount  

Shares issued to shareholders in

reinvestment of distributions

     52,911         $361,678         60,068         $433,705   

(6) Line of Credit

The fund and certain other funds managed by MFS participate in a $1.1 billion unsecured committed line of credit, subject to a $1 billion sublimit, provided by a syndication of banks under a credit agreement. Borrowings may be made for temporary financing needs. Interest is charged to each fund, based on its borrowings, generally at a rate equal to the higher of the Federal Reserve funds rate or one month LIBOR plus an agreed upon spread. A commitment fee, based on the average daily, unused portion of the committed line of credit, is allocated among the participating funds at the end of each calendar quarter. In addition, the fund and other funds managed by MFS have established unsecured uncommitted borrowing arrangements with certain banks for temporary financing needs. Interest is charged to each fund, based on its borrowings, at a rate equal to the Federal Reserve funds rate plus an agreed upon spread. For the year ended October 31, 2012, the fund’s commitment fee and interest expense were $296 and $0, respectively, and are included in “Miscellaneous” expense in the Statement of Operations.

 

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Notes to Financial Statements – continued

 

(7) Transactions in Underlying Affiliated Funds-Affiliated Issuers

An affiliated issuer may be considered one in which the fund owns 5% or more of the outstanding voting securities, or a company which is under common control. For the purposes of this report, the fund assumes the following to be an affiliated issuer:

 

Underlying Affiliated Fund    Beginning
Shares/Par
Amount
     Acquisitions
Shares/Par
Amount
     Dispositions
Shares/Par
Amount
     Ending
Shares/Par
Amount
 
MFS Institutional Money Market Portfolio      547,157         12,669,663         (11,638,652      1,578,168   
Underlying Affiliated Fund    Realized
Gain (Loss)
     Capital Gain
Distributions
     Dividend
Income
     Ending
Value
 
MFS Institutional Money Market Portfolio      $—         $—         $1,676         $1,578,168   

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Trustees and Shareholders of MFS Special Value Trust:

We have audited the accompanying statement of assets and liabilities of MFS Special Value Trust (the Fund), including the portfolio of investments, as of October 31, 2012, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended. These financial statements and financial highlights are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. We were not engaged to perform an audit of the Fund’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and financial highlights, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of October 31, 2012, by correspondence with the custodian and brokers or by other appropriate auditing procedures where replies from brokers were not received. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of MFS Special Value Trust at October 31, 2012, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and its financial highlights for each of the five years in the period then ended, in conformity with U.S. generally accepted accounting principles.

 

LOGO

Boston, Massachusetts

December 14, 2012

 

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RESULTS OF SHAREHOLDER MEETING

(unaudited)

At the annual meeting of shareholders of MFS Special Value Trust, which was held on October 31, 2012, the following action was taken:

Item 1: To elect the following individuals as Trustees:

 

     Number of Shares  

Nominee

   For     

Withheld Authority

 
David H. Gunning      5,705,236.126         372,503.423   
Robert E. Butler      5,735,943.126         341,796.423   
J. Dale Sherratt      5,753,186.126         324,553.423   

 

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TRUSTEES AND OFFICERS — IDENTIFICATION AND BACKGROUND

The Trustees and officers of the Trust, as of December 1, 2012, are listed below, together with their principal occupations during the past five years. (Their titles may have varied during that period.) The address of each Trustee and officer is 111 Huntington Avenue, Boston, Massachusetts 02199-7618.

 

Name, Age

 

Position(s)
Held

with Fund

 

Trustee/Officer

Since (h)

 

Term

Expiring

 

Principal
Occupations During

the Past Five Years

 

Other

Directorships (j)

INTERESTED TRUSTEES
Robert J. Manning (k)
(age 49)
  Trustee   February 2004   2013   Massachusetts Financial Services Company, Chairman, Chief Executive Officer and Director; President (until December 2009); Chief Investment Officer (until July 2010)   N/A
INDEPENDENT TRUSTEES    
David H. Gunning
(age 70)
  Trustee and Chair of Trustees   January 2004   2012   Retired; Cleveland-Cliffs Inc. (mining products and service provider), Vice Chairman/Director (until 2007)   Lincoln Electric Holdings, Inc. (welding equipment manufacturer), Director; Development Alternatives, Inc. (consulting), Director/Non-Executive Chairman; Portman Limited (mining), Director (until 2008)
Robert E. Butler
(age 71)
  Trustee   January 2006   2012   Consultant – investment company industry regulatory and compliance matters   N/A

Maureen R. Goldfarb

(age 57)

  Trustee   January 2009   2013   Private investor   N/A
William R. Gutow
(age 71)
  Trustee   December 1993   2014   Private investor and real estate consultant; Capitol Entertainment Management Company (video franchise), Vice Chairman   Atlantic Coast Tan (tanning salons), Vice Chairman (until 2007); Texas Donuts (donut franchise), Vice Chairman (until 2010)

 

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Trustees and Officers – continued

 

Name, Age

 

Position(s)
Held

with Fund

 

Trustee/Officer

Since (h)

 

Term

Expiring

 

Principal
Occupations During

the Past Five Years

 

Other

Directorships (j)

Michael Hegarty
(age 67)
  Trustee   December 2004   2014   Private investor; Rouse Properties Inc. (real estate), Director   N/A

John P. Kavanaugh

(age 58)

  Trustee   January 2009   2014   Private investor   N/A
J. Dale Sherratt
(age 74)
  Trustee   June 1989   2012   Insight Resources, Inc. (acquisition planning specialists), President; Wellfleet Investments (investor in health care companies), Managing General Partner   N/A
Laurie J. Thomsen
(age 55)
  Trustee   March 2005   2013   Private investor; New Profit, Inc. (venture philanthropy), Executive Partner (until 2010)   The Travelers Companies (insurance), Director
Robert W. Uek
(age 71)
  Trustee   January 2006   2014   Consultant to investment company industry   N/A
OFFICERS

John M. Corcoran (k)

(age 47)

  President   October 2008   N/A   Massachusetts Financial Services Company, Senior Vice President (since October 2008); State Street Bank and Trust (financial services provider), Senior Vice President, (until September 2008)   N/A
Christopher R. Bohane (k)
(age 38)
  Assistant Secretary and Assistant Clerk   July 2005   N/A   Massachusetts Financial Services Company, Vice President and Senior Counsel   N/A

Kino Clark (k)

(age 44)

 

Assistant

Treasurer

  January 2012   N/A  

Massachusetts Financial

Services Company,

Vice President

  N/A

 

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Trustees and Officers – continued

 

Name, Age

 

Position(s)
Held

with Fund

 

Trustee/Officer

Since (h)

 

Term

Expiring

 

Principal
Occupations During

the Past Five Years

 

Other

Directorships (j)

Thomas H. Connors (k)

(age 53)

 

Assistant

Secretary and Assistant Clerk

  September 2012   N/A  

Massachusetts Financial Services Company,

Vice President and Senior Counsel; Deutsche Asset Management, Director and Senior Counsel (until 2012)

  N/A
Ethan D. Corey (k)
(age 49)
  Assistant Secretary and Assistant Clerk   July 2005   N/A   Massachusetts Financial Services Company, Senior Vice President and Associate General Counsel   N/A
David L. DiLorenzo (k)
(age 44)
  Treasurer   July 2005   N/A   Massachusetts Financial Services Company, Senior Vice President   N/A
Robyn L. Griffin
(age 37)
  Assistant Independent Chief Compliance Officer   August 2008   N/A   Griffin Compliance LLC (provider of compliance services), Principal (since August 2008); State Street Corporation (financial services provider), Mutual Fund Administration Assistant Vice President (October 2006 – July 2008);   N/A

Brian E. Langenfeld (k)

(age 39)

  Assistant Secretary and Assistant Clerk   June 2006   N/A   Massachusetts Financial Services Company, Vice President and Senior Counsel   N/A

Susan S. Newton (k)

(age 62)

  Assistant Secretary and Assistant Clerk   May 2005   N/A   Massachusetts Financial Services Company, Senior Vice President and Associate General Counsel   N/A
Susan A. Pereira (k)
(age 42)
  Assistant Secretary and Assistant Clerk   July 2005   N/A   Massachusetts Financial Services Company, Vice President and Senior Counsel   N/A

 

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Trustees and Officers – continued

 

Name, Age

 

Position(s)
Held

with Fund

 

Trustee/Officer

Since (h)

 

Term

Expiring

 

Principal
Occupations During

the Past Five Years

 

Other

Directorships (j)

Kasey L. Phillips (k)

(age 41)

  Assistant Treasurer   September 2012   N/A   Massachusetts Financial Services Company, Vice President; Wells Fargo Funds Management, LLC, Senior Vice President, Fund Treasurer (until 2012)   N/A
Mark N. Polebaum (k)
(age 60)
  Secretary and Clerk   January 2006   N/A   Massachusetts Financial Services Company, Executive Vice President, General Counsel and Secretary   N/A
Frank L. Tarantino
(age 68)
  Independent Chief Compliance Officer   June 2004   N/A   Tarantino LLC (provider of compliance services), Principal   N/A
Richard S. Weitzel (k)
(age 42)
  Assistant Secretary and Assistant Clerk   October 2007   N/A   Massachusetts Financial Services Company, Senior Vice President and Associate General Counsel   N/A
James O. Yost (k)
(age 52)
  Deputy Treasurer   September 1990   N/A   Massachusetts Financial Services Company, Senior Vice President   N/A

 

(h) Date first appointed to serve as Trustee/officer of an MFS fund. Each Trustee has served continuously since appointment unless indicated otherwise. For the period from December 15, 2004 until February 22, 2005, Mr. Manning served as Advisory Trustee. For the period October 2008, until January 2012, Mr. Corcoran served as Treasurer of the Funds. Prior to January 2012, Messrs. DiLorenzo and Yost served as Assistant Treasurers of the Funds.
(j) Directorships or trusteeships of companies required to report to the Securities and Exchange Commission (i.e., “public companies”).
(k) “Interested person” of the Trust within the meaning of the Investment Company Act of 1940 (referred to as the 1940 Act), which is the principal federal law governing investment companies like the fund, as a result of position with MFS. The address of MFS is 111 Huntington Avenue, Boston, Massachusetts 02199-7618.

The Trust holds annual shareholder meetings for the purpose of electing Trustees, and Trustees are elected for fixed terms. The Board of Trustees is currently divided into three classes, each having a term of three years which term expires on the date of the third annual meeting following the election to office of the Trustee’s class. Each year the term of one class expires. Each Trustee and officer will serve until next elected or his or her earlier death, resignation, retirement or removal.

 

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Messrs. Butler, Kavanaugh, and Uek and Ms. Thomsen are members of the Fund’s Audit Committee.

Each of the Fund’s Trustees and officers holds comparable positions with certain other funds of which MFS or a subsidiary is the investment adviser or distributor, and, in the case of the officers, with certain affiliates of MFS. As of January 1, 2012, the Trustees served as board members of 131 funds within the MFS Family of Funds.

The Statement of Additional Information for the Fund includes further information about the Trustees and is available without charge upon request by calling 1-800-225-2606.

 

 

 

Investment Adviser   Custodian
Massachusetts Financial Services Company   State Street Bank and Trust
111 Huntington Avenue   1 Lincoln Street
Boston, MA 02199-7618   Boston, MA 02111-2900
Portfolio Managers   Independent Registered Public Accounting Firm
William Adams   Ernst & Young LLP
Nevin Chitkara   200 Clarendon Street
David Cole   Boston, MA 02116
Effective December 1, 2012, the following are also Portfolio Managers of the fund:  
Ward Brown  
Matthew Ryan  

 

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BOARD REVIEW OF INVESTMENT ADVISORY AGREEMENT

The Investment Company Act of 1940 requires that both the full Board of Trustees and a majority of the non-interested (“independent”) Trustees, voting separately, annually approve the continuation of the Fund’s investment advisory agreement with MFS. The Trustees consider matters bearing on the Fund and its advisory arrangements at their meetings throughout the year, including a review of performance data at each regular meeting. In addition, the independent Trustees met several times over the course of three months beginning in May and ending in July, 2012 (“contract review meetings”) for the specific purpose of considering whether to approve the continuation of the investment advisory agreement for the Fund and the other investment companies that the Board oversees (the “MFS Funds”). The independent Trustees were assisted in their evaluation of the Fund’s investment advisory agreement by independent legal counsel, from whom they received separate legal advice and with whom they met separately from MFS during various contract review meetings. The independent Trustees were also assisted in this process by the MFS Funds’ Independent Chief Compliance Officer, a full-time senior officer appointed by and reporting to the independent Trustees.

In connection with their deliberations regarding the continuation of the investment advisory agreement, the Trustees, including the independent Trustees, considered such information and factors as they believed, in light of the legal advice furnished to them and their own business judgment, to be relevant. The investment advisory agreement for the Fund was considered separately, although the Trustees also took into account the common interests of all MFS Funds in their review. As described below, the Trustees considered the nature, quality, and extent of the various investment advisory, administrative, and shareholder services performed by MFS under the existing investment advisory agreement and other arrangements with the Fund.

In connection with their contract review meetings, the Trustees received and relied upon materials that included, among other items: (i) information provided by Lipper Inc., an independent third party, on the investment performance (based on net asset value) of the Fund for various time periods ended December 31, 2011 and the investment performance (based on net asset value) of a group of funds with substantially similar investment classifications/objectives (the “Lipper performance universe”), (ii) information provided by Lipper Inc. on the Fund’s advisory fees and other expenses and the advisory fees and other expenses of comparable funds identified by Lipper Inc. (the “Lipper expense group”), (iii) information provided by MFS on the advisory fees of comparable portfolios of other clients of MFS, including institutional separate accounts and other clients, (iv) information as to whether and to what extent applicable expense waivers, reimbursements or fee “breakpoints” are observed for the Fund, (v) information regarding MFS’ financial results and financial condition, including MFS’ and certain of its affiliates’ estimated profitability from services performed for the Fund and the MFS Funds as a whole, and compared to MFS’ institutional business, (vi) MFS’ views regarding the outlook for the mutual fund industry and the strategic business plans of MFS, (vii) descriptions of various functions performed by MFS for the Funds, such as compliance monitoring and portfolio trading practices, and (viii) information regarding the overall organization of MFS, including information about MFS’ senior management and other personnel providing investment

 

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Board Review of Investment Advisory Agreement – continued

 

advisory, administrative and other services to the Fund and the other MFS Funds. The comparative performance, fee and expense information prepared and provided by Lipper Inc. was not independently verified and the independent Trustees did not independently verify any information provided to them by MFS.

The Trustees’ conclusion as to the continuation of the investment advisory agreement was based on a comprehensive consideration of all information provided to the Trustees and not the result of any single factor. Some of the factors that figured particularly in the Trustees’ deliberations are described below, although individual Trustees may have evaluated the information presented differently from one another, giving different weights to various factors. It is also important to recognize that the fee arrangements for the Fund and other MFS Funds are the result of years of review and discussion between the independent Trustees and MFS, that certain aspects of such arrangements may receive greater scrutiny in some years than in others, and that the Trustees’ conclusions may be based, in part, on their consideration of these same arrangements during the course of the year and in prior years.

Based on information provided by Lipper Inc. and MFS, the Trustees reviewed the Fund’s total return investment performance as well as the performance of peer groups of funds over various time periods. The Trustees placed particular emphasis on the total return performance of the Fund’s common shares in comparison to the performance of funds in its Lipper performance universe over the three-year period ended December 31, 2011, which the Trustees believed was a long enough period to reflect differing market conditions. The total return performance of the Fund’s common shares ranked 5th out of a total of 5 funds in the Lipper performance universe for this three-year period (a ranking of first place out of the total number of funds in the performance universe indicating the best performer and a ranking of last place out of the total number of funds in the performance universe indicating the worst performer). The total return performance of the Fund’s common shares ranked 5th out of a total of 7 funds for the one-year period and 5th out of a total of 5 funds for the five-year period ended December 31, 2011. Given the size of the Lipper performance universe and information previously provided by MFS regarding differences between the Fund and other funds in its Lipper performance universe, the Trustees also reviewed the Fund’s performance in comparison to a custom benchmark developed by MFS. The Fund under-performed its custom benchmark for each of the one- and five-year periods ended December 31, 2011 (one-year: 0.4% total return for the Fund versus 3.7% total return for the benchmark; five-year: 2.4% total return for the Fund versus 4.3% total return for the benchmark) and out-performed its custom benchmark for the three-year period ended December 31, 2011 (22.3% total return for the Fund versus 19.4% total return for the benchmark). Because of the passage of time, these performance results may differ from the performance results for more recent periods, including those shown elsewhere in this report.

In addition to considering the performance information provided in connection with the contract review meetings, the independent Trustees noted that, in light of the Fund’s substandard relative performance at the time of their contract review meetings in 2011, they had met at each of their regular meetings since then with MFS’ senior investment management personnel to discuss the Fund’s performance and MFS’ efforts to improve the Fund’s performance. The independent Trustees further noted that the

 

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Fund’s three-year performance as compared to its benchmark improved for the period ended December 31, 2011, as compared to the prior year. Taking this information into account, the Trustees concluded, within the context of their overall conclusions regarding the investment advisory agreement, that they were satisfied with MFS’ responses and efforts relating to investment performance.

In assessing the reasonableness of the Fund’s advisory fee, the Trustees considered, among other information, the Fund’s advisory fee and the total expense ratio of the Fund’s common shares as a percentage of average daily net assets and the advisory fee and total expense ratios of peer groups of funds based on information provided by Lipper Inc. The Trustees considered that MFS has agreed in writing to reduce its advisory fee, which may not be changed without the Trustees’ approval. The Trustees also considered that, according to the Lipper data (which takes into account any fee reductions or expense limitations that were in effect during the Fund’s last fiscal year), the Fund’s effective advisory fee rate and total expense ratio were each higher than the Lipper expense group median.

The Trustees also considered the advisory fees charged by MFS to institutional accounts, if any. In comparing these fees, the Trustees considered information provided by MFS as to the generally broader scope of services provided by MFS to the Fund in comparison to institutional accounts and the impact on MFS and expenses associated with the more extensive regulatory regime to which the Fund is subject in comparison to institutional accounts.

The Trustees considered that, as a closed-end fund, the Fund is unlikely to experience meaningful asset growth. As a result, the Trustees did not view the potential for realization of economies of scale as the Fund’s assets grow to be a material factor in their deliberations. The Trustees noted that they would consider economies of scale in the future in the event the Fund experiences significant asset growth, such as through an offering of preferred shares (which is not currently contemplated) or a material increase in the market value of the Fund’s portfolio securities.

The Trustees also considered information prepared by MFS relating to MFS’ costs and profits with respect to the Fund, the MFS Funds considered as a group, and other investment companies and accounts advised by MFS, as well as MFS’ methodologies used to determine and allocate its costs to the MFS Funds, the Fund and other accounts and products for purposes of estimating profitability.

After reviewing these and other factors described herein, the Trustees concluded, within the context of their overall conclusions regarding the investment advisory agreement, that the advisory fees charged to the Fund represent reasonable compensation in light of the services being provided by MFS to the Fund.

In addition, the Trustees considered MFS’ resources and related efforts to continue to retain, attract and motivate capable personnel to serve the Fund. The Trustees also considered current and developing conditions in the financial services industry, including the presence of large and well-capitalized companies which are spending, and appear to be prepared to continue to spend, substantial sums to engage personnel and to provide services to competing investment companies. In this regard, the Trustees also considered the financial resources of MFS and its ultimate parent, Sun Life

 

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Financial Inc. The Trustees also considered the advantages and possible disadvantages to the Fund of having an adviser that also serves other investment companies as well as other accounts.

The Trustees also considered the nature, quality, cost, and extent of administrative services provided to the Fund by MFS under agreements other than the investment advisory agreement. The Trustees also considered the nature, extent and quality of certain other services MFS performs or arranges for on the Fund’s behalf, which may include securities lending programs, directed expense payment programs, class action recovery programs, and MFS’ interaction with third-party service providers, principally custodians and sub-custodians. The Trustees concluded that the various non-advisory services provided by MFS and its affiliates on behalf of the Fund were satisfactory.

The Trustees also considered benefits to MFS from the use of the Fund’s portfolio brokerage commissions, if applicable, to pay for investment research and various other factors. Additionally, the Trustees considered so-called “fall-out benefits” to MFS such as reputational value derived from serving as investment manager to the Fund.

Based on their evaluation of factors that they deemed to be material, including those factors described above, the Board of Trustees, including the independent Trustees, concluded that the Fund’s investment advisory agreement with MFS should be continued for an additional one-year period, commencing August 1, 2012.

A discussion regarding the Board’s most recent review and renewal of the fund’s Investment Advisory Agreement with MFS is available by clicking on the fund’s name under “Closed End Funds” in the “Products” section of the MFS Web site (mfs.com).

 

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PROXY VOTING POLICIES AND INFORMATION

A general description of the MFS funds’ proxy voting policies and procedures is available without charge, upon request, by calling
1-800-225-2606, by visiting the Proxy Voting section of mfs.com or by visiting the SEC’s Web site at http://www.sec.gov.

Information regarding how the fund voted proxies relating to portfolio securities during the most recent twelve-month period ended June 30 is available without charge by visiting the Proxy Voting section of mfs.com or by visiting the SEC’s Web site at http://www.sec.gov.

QUARTERLY PORTFOLIO DISCLOSURE

The fund will file a complete schedule of portfolio holdings with the Securities and Exchange Commission (the Commission) for the first and third quarters of each fiscal year on Form N-Q. A shareholder can obtain the quarterly portfolio holdings report at mfs.com. The fund’s Form N-Q is also available on the EDGAR database on the Commission’s Internet Web site at http://www.sec.gov, and may be reviewed and copied at the:

Public Reference Room

Securities and Exchange Commission

100 F Street, NE, Room 1580

Washington, D.C. 20549

Information on the operation of the Public Reference Room may be obtained by calling the Commission at 1-800-SEC-0330. Copies of the Fund’s Form N-Q also may be obtained, upon payment of a duplicating fee, by electronic request at the following e-mail address: publicinfo@sec.gov or by writing the Public Reference Section at the above address.

FURTHER INFORMATION

From time to time, MFS may post important information about the fund or the MFS funds on the MFS web site (mfs.com). This information is available by visiting the “News & Commentary” section of mfs.com or by clicking on the fund’s name under “Closed End Funds” in the “Products” section of mfs.com.

FEDERAL TAX INFORMATION (unaudited)

The fund will notify shareholders of amounts for use in preparing 2012 income tax forms in January 2013. The following information is provided pursuant to provisions of the Internal Revenue Code.

The fund designates the maximum amount allowable as qualified dividend income eligible for the 15% tax rate.

For corporate shareholders, 9.74% of the ordinary income dividends paid during the fiscal year qualify for the corporate dividends received deduction.

 

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rev. 3/11

 

 

FACTS

 

  WHAT DOES MFS DO WITH YOUR PERSONAL INFORMATION?   LOGO

 

Why?   Financial companies choose how they share your personal information. Federal law gives consumers the right to limit some but not all sharing. Federal law also requires us to tell you how we collect, share, and protect your personal information. Please read this notice carefully to understand what we do.

 

What?  

The types of personal information we collect and share depend on the product or service you have with us. This information can include:

 

Social Security number and account balances

Account transactions and transaction history

Checking account information and wire transfer instructions

 

When you are no longer our customer, we continue to share your information as described in this notice.

 

How?   All financial companies need to share customers’ personal information to run their everyday business. In the section below, we list the reasons financial companies can share their customers’ personal information; the reasons MFS chooses to share; and whether you can limit this sharing.

 

Reasons we can share your
personal information
  Does MFS
share?
  Can you limit
this sharing?

For our everyday business purposes –

such as to process your transactions, maintain your account(s), respond to court orders and legal investigations, or report to credit bureaus

  Yes   No

For our marketing purposes –

to offer our products and services to you

  No   We don’t share
For joint marketing with other financial companies   No   We don’t share

For our affiliates’ everyday business purposes –

information about your transactions and experiences

  No   We don’t share

For our affiliates’ everyday business purposes –

information about your creditworthiness

  No   We don’t share
For nonaffiliates to market to you   No   We don’t share

 

Questions?   Call 800-225-2606 or go to mfs.com.

 

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Page 2  

 

 

Who we are
Who is providing this notice?   MFS Funds, MFS Investment Management, MFS Institutional Advisors, Inc., MFS Fund Distributors, Inc., MFS Heritage Trust Company, and MFS Service Center, Inc.

 

What we do
How does MFS protect my personal information?   To protect your personal information from unauthorized access and use, we use security measures that comply with federal law. These measures include procedural, electronic, and physical safeguards for the protection of the personal information we collect about you.
How does MFS collect my personal information?  

We collect your personal information, for example, when you

 

open an account or provide account information

direct us to buy securities or direct us to sell your securities

make a wire transfer

 

We also collect your personal information from others, such as credit bureaus, affiliates and other companies.

Why can’t I limit all sharing?  

Federal law gives you the right to limit only

 

sharing for affiliates’ everyday business purposes – information about your creditworthiness

affiliates from using your information to market to you

sharing for nonaffiliates to market to you

 

State laws and individual companies may give you additional rights to limit sharing.

 

Definitions
Affiliates  

Companies related by common ownership or control. They can be financial and nonfinancial companies.

 

MFS does not share personal information with affiliates, except for everyday business purposes as described on page one of this notice.

Nonaffiliates  

Companies not related by common ownership or control. They can be financial and nonfinancial companies.

 

MFS does not share with nonaffiliates so they can market to you.

Joint Marketing  

A formal agreement between nonaffiliated financial companies that together market financial products or services to you.

 

MFS doesnt jointly market.

 

 

Other important information
If you own an MFS product or receive an MFS service in the name of a third party such as a bank or broker-dealer, their privacy policy may apply to you instead of ours.

 

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LOGO

 

CONTACT US

TRANSFER AGENT, REGISTRAR, AND

DIVIDEND DISBURSING AGENT

CALL

1-800-637-2304

9 a.m. to 5 p.m. Eastern time

WRITE

Computershare Trust Company, N.A.

P.O. Box 43078

Providence, RI 02940-3078

 

New York Stock Exchange Symbol: MFV


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ITEM 2. CODE OF ETHICS.

The Registrant has adopted a Code of Ethics pursuant to Section 406 of the Sarbanes-Oxley Act and as defined in Form N-CSR that applies to the Registrant’s principal executive officer and principal financial and accounting officer. During the period covered by this report, the Registrant has not amended any provision in its Code of Ethics (the “Code”) that relates to an element of the Code’s definitions enumerated in paragraph (b) of Item 2 of this Form N-CSR. During the period covered by this report, the Registrant did not grant a waiver, including an implicit waiver, from any provision of the Code.

 

ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.

Messrs. Robert E. Butler, John P. Kavanaugh and Robert W. Uek and Ms. Laurie J. Thomsen, members of the Audit Committee, have been determined by the Board of Trustees in their reasonable business judgment to meet the definition of “audit committee financial expert” as such term is defined in Form N-CSR. In addition, Messrs. Butler, Kavanaugh and Uek and Ms. Thomsen are “independent” members of the Audit Committee (as such term has been defined by the Securities and Exchange Commission in regulations implementing Section 407 of the Sarbanes-Oxley Act of 2002). The Securities and Exchange Commission has stated that the designation of a person as an audit committee financial expert pursuant to this Item 3 on the Form N-CSR does not impose on such a person any duties, obligations or liability that are greater than the duties, obligations or liability imposed on such person as a member of the Audit Committee and the Board of Trustees in the absence of such designation or identification.

 

ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.

Items 4(a) through 4(d) and 4(g):

The Board of Trustees has appointed Ernst & Young LLP (“E&Y”) to serve as independent accountants to the Registrant (hereinafter the “Registrant” or the “Fund”). The tables below set forth the audit fees billed to the Fund as well as fees for non-audit services provided to the Fund and/or to the Fund’s investment adviser, Massachusetts Financial Services Company (“MFS”) and to various entities either controlling, controlled by, or under common control with MFS that provide ongoing services to the Fund (“MFS Related Entities”).

For the fiscal years ended October 31, 2012 and 2011, audit fees billed to the Fund by E&Y were as follows:

 

     Audit Fees  
Fees billed by E&Y:    2012      2011  

MFS Special Value Trust

     44,879         43,224   


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For the fiscal years ended October 31, 2012 and 2011, fees billed by E&Y for audit-related, tax and other services provided to the Fund and for audit-related, tax and other services provided to MFS and MFS Related Entities were as follows:

 

     Audit-Related  Fees1      Tax Fees2      All Other  Fees3  
Fees billed by E&Y:    2012      2011      2012      2011      2012      2011  

To MFS Special Value Trust

     10,504         10,110         9,170         8,704         0         0   
     Audit-Related Fees1      Tax Fees2      All Other  Fees3  
Fees billed by E&Y:    2012      2011      2012      2011      2012      2011  

To MFS and MFS Related Entities of MFS Special Value Trust*

     0         0         0         0         0         0   

 

Aggregate fees for non-audit services:    2012      20114  

To MFS Special Value Trust, MFS and MFS Related Entities#

     59,674         128,814   

 

* 

This amount reflects the fees billed to MFS and MFS Related Entities for non-audit services relating directly to the operations and financial reporting of the Fund (portions of which services also related to the operations and financial reporting of other funds within the MFS Funds complex).

# This amount reflects the aggregate fees billed by E&Y for non-audit services rendered to the Fund and for non-audit services rendered to MFS and the MFS Related Entities.
1 

The fees included under “Audit-Related Fees” are fees related to assurance and related services that are reasonably related to the performance of the audit or review of financial statements, but not reported under “Audit Fees,” including accounting consultations, agreed-upon procedure reports, attestation reports, comfort letters and internal control reviews.

2 

The fees included under “Tax Fees” are fees associated with tax compliance, tax advice and tax planning, including services relating to the filing or amendment of federal, state or local income tax returns, regulated investment company qualification reviews and tax distribution and analysis.

3 

The fees under “All Other Fees” are fees for products and services provided by E&Y other than those reported under “Audit Fees,” “Audit-Related Fees” and “Tax Fees”.

4 

E&Y fees reported in 2011 have been restated in this filing from those reported in the Registrant’s filing for the reporting period ended October 31, 2011.


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Item 4(e)(1):

Set forth below are the policies and procedures established by the Audit Committee of the Board of Trustees relating to the pre-approval of audit and non-audit related services:

To the extent required by applicable law, pre-approval by the Audit Committee of the Board is needed for all audit and permissible non-audit services rendered to the Fund and all permissible non-audit services rendered to MFS or MFS Related Entities if the services relate directly to the operations and financial reporting of the Registrant. Pre-approval is currently on an engagement-by-engagement basis. In the event pre-approval of such services is necessary between regular meetings of the Audit Committee and it is not practical to wait to seek pre-approval at the next regular meeting of the Audit Committee, pre-approval of such services may be referred to the Chair of the Audit Committee for approval; provided that the Chair may not pre-approve any individual engagement for such services exceeding $50,000 or multiple engagements for such services in the aggregate exceeding $100,000 between such regular meetings of the Audit Committee. Any engagement pre-approved by the Chair between regular meetings of the Audit Committee shall be presented for ratification by the entire Audit Committee at its next regularly scheduled meeting.

Item 4(e)(2):

None, or 0%, of the services relating to the Audit-Related Fees, Tax Fees and All Other Fees paid by the Fund and MFS and MFS Related Entities relating directly to the operations and financial reporting of the Registrant disclosed above were approved by the audit committee pursuant to paragraphs (c)(7)(i)(C) of Rule 2-01 of Regulation S-X (which permits audit committee approval after the start of the engagement with respect to services other than audit, review or attest services, if certain conditions are satisfied).

Item 4(f): Not applicable.

Item 4(h): The Registrant’s Audit Committee has considered whether the provision by a Registrant’s independent registered public accounting firm of non-audit services to MFS and MFS Related Entities that were not pre-approved by the Committee (because such services were provided prior to the effectiveness of SEC rules requiring pre-approval or because such services did not relate directly to the operations and financial reporting of the Registrant) was compatible with maintaining the independence of the independent registered public accounting firm as the Registrant’s principal auditors

 

ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.

The Registrant has an Audit Committee established in accordance with Section 3(a)(58)(A) of the Securities Exchange Act of 1934. The members of the Audit Committee are Messrs. Robert E. Butler, John P. Kavanaugh, and Robert W. Uek and Ms. Laurie J. Thomsen.

 

ITEM 6. SCHEDULE OF INVESTMENTS

A schedule of investments of the Registrant is included as part of the report to shareholders of the Registrant under Item 1 of this Form N-CSR.


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ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END MANAGEMENT INVESTMENT COMPANIES.

MASSACHUSETTS FINANCIAL SERVICES COMPANY

PROXY VOTING POLICIES AND PROCEDURES

March 1, 2012

Massachusetts Financial Services Company, MFS Institutional Advisors, Inc., MFS International (UK) Limited, MFS Heritage Trust Company, McLean Budden Limited and MFS’ other subsidiaries that perform discretionary investment management activities (collectively, “MFS”) have adopted proxy voting policies and procedures, as set forth below (“MFS Proxy Voting Policies and Procedures”), with respect to securities owned by the clients for which MFS serves as investment adviser and has the power to vote proxies, including the pooled investment vehicles sponsored by MFS (the “MFS Funds”). References to “clients” in these policies and procedures include the MFS Funds and other clients of MFS, such as funds organized offshore, sub-advised funds and separate account clients, to the extent these clients have delegated to MFS the responsibility to vote proxies on their behalf under the MFS Proxy Voting Policies and Procedures.

The MFS Proxy Voting Policies and Procedures include:

 

  A. Voting Guidelines;

 

  B. Administrative Procedures;

 

  C. Records Retention; and

 

  D. Reports.

 

A. VOTING GUIDELINES

 

1. General Policy; Potential Conflicts of Interest

MFS’ policy is that proxy voting decisions are made in what MFS believes to be the best long-term economic interests of MFS’ clients, and not in the interests of any other party or in MFS’ corporate interests, including interests such as the distribution of MFS Fund shares and institutional client relationships.


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In developing these proxy voting guidelines, MFS reviews corporate governance issues and proxy voting matters that are presented for shareholder vote by either management or shareholders of public companies. Based on the overall principle that all votes cast by MFS on behalf of its clients must be in what MFS believes to be the best long-term economic interests of such clients, MFS has adopted proxy voting guidelines, set forth below, that govern how MFS generally will vote on specific matters presented for shareholder vote.

As a general matter, MFS votes consistently on similar proxy proposals across all shareholder meetings. However, some proxy proposals, such as certain excessive executive compensation, environmental, social and governance matters, are analyzed on a case-by-case basis in light of all the relevant facts and circumstances of the proposal. Therefore, MFS may vote similar proposals differently at different shareholder meetings based on the specific facts and circumstances of the issuer or the terms of the proposal. In addition, MFS also reserves the right to override the guidelines with respect to a particular proxy proposal when such an override is, in MFS’ best judgment, consistent with the overall principle of voting proxies in the best long-term economic interests of MFS’ clients.

MFS also generally votes consistently on the same matter when securities of an issuer are held by multiple client accounts, unless MFS has received explicit voting instructions to vote differently from a client for its own account. From time to time, MFS may also receive comments on the MFS Proxy Voting Policies and Procedures from its clients. These comments are carefully considered by MFS when it reviews these guidelines and revises them as appropriate.

These policies and procedures are intended to address any potential material conflicts of interest on the part of MFS or its subsidiaries that are likely to arise in connection with the voting of proxies on behalf of MFS’ clients. If such potential material conflicts of interest do arise, MFS will analyze, document and report on such potential material conflicts of interest (see Sections B.2 and D below), and shall ultimately vote the relevant proxies in what MFS believes to be the best long-term economic interests of its clients. The MFS Proxy Voting Committee is responsible for monitoring and reporting with respect to such potential material conflicts of interest.

MFS is also a signatory to the United Nations Principles for Responsible Investment. In developing these guidelines, MFS considered environmental, social and corporate governance issues in light of MFS’ fiduciary obligation to vote proxies in the best long-term economic interest of its clients.


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2. MFS’ Policy on Specific Issues

Election of Directors

MFS believes that good governance should be based on a board with at least a simple majority of directors who are “independent” of management, and whose key committees (e.g., compensation, nominating, and audit committees) are comprised entirely of “independent” directors. While MFS generally supports the board’s nominees in uncontested or non-contentious elections, we will not support a nominee to a board of a U.S. issuer (or issuer listed on a U.S. exchange) if, as a result of such nominee being elected to the board, the board would be comprised of a simple majority of members who are not “independent” or, alternatively, the compensation, nominating (including instances in which the full board serves as the compensation or nominating committee) or audit committees would include members who are not “independent.”

MFS will also not support a nominee to a board if we can determine that he or she attended less than 75% of the board and/or relevant committee meetings in the previous year without a valid reason stated in the proxy materials or other company communications. In addition, MFS may not support all nominees standing for re-election to a board if we can determine: (1) the board or its compensation committee has re-priced or exchanged underwater stock options since the last annual meeting of shareholders and without shareholder approval; (2) the board or relevant committee has not taken adequately responsive action to an issue that received majority support or opposition from shareholders, including MFS; (3) the board has implemented a poison pill without shareholder approval since the last annual meeting and such poison pill is not on the subsequent shareholder meeting’s agenda, (including those related to net-operating loss carryforwards); or (4) there are severe governance concerns at the issuer.

MFS may not support certain board nominees of U.S. issuers under certain circumstances where MFS deems compensation to be egregious due to pay-for-performance issues and/or poor pay practices. Please see the section below titled “MFS’ Policy on Specific Issues—Advisory Votes on Executive Compensation” for further details.

MFS evaluates a contested or contentious election of directors on a case-by-case basis considering the long-term financial performance of the company relative to its industry, management’s track record, the qualifications of all nominees, and an evaluation of what each side is offering shareholders.

Majority Voting and Director Elections

MFS votes for reasonably crafted proposals calling for directors to be elected with an affirmative majority of votes cast and/or the elimination of the plurality standard for electing directors (including binding resolutions requesting that the board amend the company’s bylaws), provided the proposal includes a carve-out for a plurality voting standard when there are more director nominees than board seats (e.g., contested elections) (“Majority Vote Proposals”).


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Classified Boards

MFS generally supports proposals to declassify a board (e.g. a board in which only one-third of board members is elected each year) for all issuers other than for certain closed-end investment companies. MFS generally opposes proposals to classify a board for issuers other than for certain closed-end investment companies.

Proxy Access

MFS analyzes proposals seeking the ability of qualifying shareholders to nominate a certain number of directors on the company’s proxy statement (“Proxy Access”) on a case-by-case basis. In its analysis, MFS will consider the proposed ownership criteria for qualifying shareholders (such as ownership threshold and holding period) as well as the proponent’s rationale for seeking Proxy Access.

Stock Plans

MFS opposes stock option programs and restricted stock plans that provide unduly generous compensation for officers, directors or employees, or that could result in excessive dilution to other shareholders. As a general guideline, MFS votes against restricted stock, stock option, non-employee director, omnibus stock plans and any other stock plan if all such plans for a particular company involve potential dilution, in the aggregate, of more than 15%. However, MFS will also vote against stock plans that involve potential dilution, in aggregate, of more than 10% at U.S. issuers that are listed in the Standard and Poor’s 100 index as of December 31 of the previous year.


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MFS also opposes stock option programs that allow the board or the compensation committee to re-price underwater options or to automatically replenish shares without shareholder approval. MFS also votes against stock option programs for officers, employees or non-employee directors that do not require an investment by the optionee, that give “free rides” on the stock price, or that permit grants of stock options with an exercise price below fair market value on the date the options are granted. MFS will consider proposals to exchange existing options for newly issued options, restricted stock or cash on a case-by-case basis, taking into account certain factors, including, but not limited to, whether there is a reasonable value-for-value exchange and whether senior executives are excluded from participating in the exchange.

MFS supports the use of a broad-based employee stock purchase plans to increase company stock ownership by employees, provided that shares purchased under the plan are acquired for no less than 85% of their market value and do not result in excessive dilution.

Shareholder Proposals on Executive Compensation

MFS believes that competitive compensation packages are necessary to attract, motivate and retain executives. However, MFS also recognizes that certain executive compensation practices can be “excessive” and not in the best, long-term economic interest of a company’s shareholders. We believe that the election of an issuer’s board of directors (as outlined above), votes on stock plans (as outlined above) and advisory votes on pay (as outlined below) are typically the most effective mechanisms to express our view on a company’s compensation practices.

MFS generally opposes shareholder proposals that seek to set rigid restrictions on executive compensation as MFS believes that compensation committees should retain some flexibility to determine the appropriate pay package for executives. Although we support linking executive stock option grants to a company’s performance, MFS also opposes shareholder proposals that mandate a link of performance-based pay to a specific metric. MFS generally supports reasonably crafted shareholder proposals that (i) require the issuer to adopt a policy to recover the portion of performance-based bonuses and awards paid to senior executives that were not earned based upon a significant negative restatement of earnings unless the company already has adopted a satisfactory policy on the matter, or (ii) expressly prohibit the backdating of stock options.


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Advisory Votes on Executive Compensation

MFS will analyze advisory votes on executive compensation on a case-by-case basis. MFS will vote against an advisory vote on executive compensation if MFS determines that the issuer has adopted excessive executive compensation practices and will vote in favor of an advisory vote on executive compensation if MFS has not determined that the issuer has adopted excessive executive compensation practices. Examples of excessive executive compensation practices may include, but are not limited to, a pay-for-performance disconnect, employment contract terms such as guaranteed bonus provisions, unwarranted pension payouts, backdated stock options, overly generous hiring bonuses for chief executive officers, unnecessary perquisites, or the potential reimbursement of excise taxes to an executive in regards to a severance package. In cases where MFS (i) votes against consecutive advisory pay votes, or (ii) determines that a particularly egregious excessive executive compensation practice has occurred, then MFS may also vote against certain or all board nominees. MFS may also vote against certain or all board nominees if an advisory pay vote for a U.S. issuer is not on the agenda, or the company has not implemented the advisory vote frequency supported by a plurality/ majority of shareholders.

MFS generally supports proposals to include an advisory shareholder vote on an issuer’s executive compensation practices on an annual basis.

“Golden Parachutes”

From time to time, MFS may evaluate a separate, advisory vote on severance packages or “golden parachutes” to certain executives at the same time as a vote on a proposed merger or acquisition. MFS will support an advisory vote on a severance package on a on a case-by-case basis, and MFS may vote against the severance package regardless of whether MFS supports the proposed merger or acquisition.

Shareholders of companies may also submit proxy proposals that would require shareholder approval of severance packages for executive officers that exceed certain predetermined thresholds. MFS votes in favor of such shareholder proposals when they would require shareholder approval of any severance package for an executive officer that exceeds a certain multiple of such officer’s annual compensation that is not determined in MFS’ judgment to be excessive.

Anti-Takeover Measures

In general, MFS votes against any measure that inhibits capital appreciation in a stock, including proposals that protect management from action by shareholders. These types of proposals take many forms, ranging from “poison pills” and “shark repellents” to super-majority requirements.


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MFS generally votes for proposals to rescind existing “poison pills” and proposals that would require shareholder approval to adopt prospective “poison pills,” unless the company already has adopted a clearly satisfactory policy on the matter. MFS may consider the adoption of a prospective “poison pill” or the continuation of an existing “poison pill” if we can determine that the following two conditions are met: (1) the “poison pill” allows MFS clients to hold an aggregate position of up to 15% of a company’s total voting securities (and of any class of voting securities); and (2) either (a) the “poison pill” has a term of not longer than five years, provided that MFS will consider voting in favor of the “poison pill” if the term does not exceed seven years and the “poison pill” is linked to a business strategy or purpose that MFS believes is likely to result in greater value for shareholders; or (b) the terms of the “poison pill” allow MFS clients the opportunity to accept a fairly structured and attractively priced tender offer (e.g. a “chewable poison pill” that automatically dissolves in the event of an all cash, all shares tender offer at a premium price). MFS will also consider on a case-by-case basis proposals designed to prevent tenders which are disadvantageous to shareholders such as tenders at below market prices and tenders for substantially less than all shares of an issuer.

MFS will consider any poison pills designed to protect a company’s net-operating loss carryforwards on a case-by-case basis, weighing the accounting and tax benefits of such a pill against the risk of deterring future acquisition candidates.

Reincorporation and Reorganization Proposals

When presented with a proposal to reincorporate a company under the laws of a different state, or to effect some other type of corporate reorganization, MFS considers the underlying purpose and ultimate effect of such a proposal in determining whether or not to support such a measure. MFS generally votes with management in regards to these types of proposals, however, if MFS believes the proposal is in the best long-term economic interests of its clients, then MFS may vote against management (e.g. the intent or effect would be to create additional inappropriate impediments to possible acquisitions or takeovers).

Issuance of Stock

There are many legitimate reasons for the issuance of stock. Nevertheless, as noted above under “Stock Plans,” when a stock option plan (either individually or when aggregated with other plans of the same company) would substantially dilute the existing equity (e.g. by approximately 10-15% as described above), MFS generally votes against the plan. In addition, MFS typically votes against proposals where management is asking for authorization to issue common or preferred stock with no reason stated (a “blank check”) because the unexplained authorization could work as a potential anti-takeover device. MFS may also vote against the authorization or issuance of common or preferred stock if MFS determines that the requested authorization is excessive or not warranted.


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Repurchase Programs

MFS supports proposals to institute share repurchase plans in which all shareholders have the opportunity to participate on an equal basis. Such plans may include a company acquiring its own shares on the open market, or a company making a tender offer to its own shareholders.

Cumulative Voting

MFS opposes proposals that seek to introduce cumulative voting and for proposals that seek to eliminate cumulative voting. In either case, MFS will consider whether cumulative voting is likely to enhance the interests of MFS’ clients as minority shareholders. In our view, shareholders should provide names of qualified candidates to a company’s nominating committee, which, in our view, should be comprised solely of “independent” directors.

Written Consent and Special Meetings

The right to call a special meeting or act by written consent can be a powerful tool for shareholders. As such, MFS supports proposals requesting the right for shareholders who hold at least 10% of the issuer’s outstanding stock to call a special meeting. MFS also supports proposals requesting the right for shareholders to act by written consent.

Independent Auditors

MFS believes that the appointment of auditors for U.S. issuers is best left to the board of directors of the company and therefore supports the ratification of the board’s selection of an auditor for the company. Some shareholder groups have submitted proposals to limit the non-audit activities of a company’s audit firm or prohibit any non-audit services by a company’s auditors to that company. MFS opposes proposals recommending the prohibition or limitation of the performance of non-audit services by an auditor, and proposals recommending the removal of a company’s auditor due to the performance of non-audit work for the company by its auditor. MFS believes that the board, or its audit committee, should have the discretion to hire the company’s auditor for specific pieces of non-audit work in the limited situations permitted under current law.

Other Business

MFS generally votes against “other business” proposals as the content of any such matter is not known at the time of our vote.


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Adjourn Shareholder Meeting

MFS generally supports proposals to adjourn a shareholder meeting if we support the other ballot items on the meeting’s agenda. MFS generally votes against proposals to adjourn a meeting if we do not support the other ballot items on the meeting’s agenda.

Environmental, Social and Governance (“ESG”) Issues

MFS believes that a company’s ESG practices may have an impact on the company’s long-term economic financial performance and will generally support proposals relating to ESG issues that MFS believes are in the best long-term economic interest of the company’s shareholders. For those ESG proposals for which a specific policy has not been adopted, MFS considers such ESG proposals on a case-by-case basis. As a result, it may vote similar proposals differently at various shareholder meetings based on the specific facts and circumstances of such proposal.

MFS generally supports proposals that seek to remove governance structures that insulate management from shareholders (i.e., anti-takeover measures) or that seek to enhance shareholder rights. Many of these governance-related issues, including compensation issues, are outlined within the context of the above guidelines. In addition, MFS typically supports proposals that require an issuer to reimburse successful dissident shareholders (who are not seeking control of the company) for reasonable expenses that such dissident incurred in soliciting an alternative slate of director candidates. MFS also generally supports reasonably crafted shareholder proposals requesting increased disclosure around the company’s use of collateral in derivatives trading. MFS typically does not support proposals to separate the chairman and CEO positions as we believe that the most beneficial leadership structure of a company should be determined by the company’s board of directors. For any governance-related proposal for which an explicit guideline is not provided above, MFS will consider such proposals on a case-by-case basis and will support such proposals if MFS believes that it is in the best long-term economic interest of the company’s shareholders.

MFS generally supports proposals that request disclosure on the impact of environmental issues on the company’s operations, sales, and capital investments. However, MFS may not support such proposals based on the facts and circumstances surrounding a specific proposal, including, but not limited to, whether (i) the proposal is unduly costly, restrictive, or burdensome, (ii) the company already provides publicly-available information that is sufficient to enable shareholders to evaluate the potential opportunities and risks that environmental matters pose to the company’s operations, sales and capital investments, or (iii) the proposal seeks a level of disclosure that exceeds that provided by the company’s industry peers. MFS will analyze all other environmental proposals on a case-by-case basis and will support such proposals if MFS believes such proposal is in the best long-term economic interest of the company’s shareholders.


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MFS will analyze social proposals on a case-by-case basis. MFS will support such proposals if MFS believes that such proposal is in the best long-term economic interest of the company’s shareholders. Generally, MFS will support shareholder proposals that (i) seek to amend a company’s equal employment opportunity policy to prohibit discrimination based on sexual orientation and gender identity; and (ii) request additional disclosure regarding a company’s political contributions (including trade organizations and lobbying activity) (unless the company already provides publicly-available information that is sufficient to enable shareholders to evaluate the potential opportunities and risks that such contributions pose to the company’s operations, sales and capital investments).

The laws of various states or countries may regulate how the interests of certain clients subject to those laws (e.g. state pension plans) are voted with respect to social issues. Thus, it may be necessary to cast ballots differently for certain clients than MFS might normally do for other clients.

Foreign Issuers

MFS generally supports the election of a director nominee standing for re-election in uncontested or non-contentious elections unless it can be determined that (1) he or she failed to attend at least 75% of the board and/or relevant committee meetings in the previous year without a valid reason given in the proxy materials; (2) since the last annual meeting of shareholders and without shareholder approval, the board or its compensation committee has re-priced underwater stock options; or (3) since the last annual meeting, the board has either implemented a poison pill without shareholder approval or has not taken responsive action to a majority shareholder approved resolution recommending that the “poison pill” be rescinded. Also, certain markets outside of the U.S. have adopted best practice guidelines relating to corporate governance matters (e.g. the United Kingdom’s Corporate Governance Code). Many of these guidelines operate on a “comply or explain” basis. As such, MFS will evaluate any explanations by companies relating to their compliance with a particular corporate governance guideline on a case-by-case basis and may vote against the board nominees or other relevant ballot item if such explanation is not satisfactory.

MFS generally supports the election of auditors, but may determine to vote against the election of a statutory auditor in certain markets if MFS reasonably believes that the statutory auditor is not truly independent.

Some international markets have also adopted mandatory requirements for all companies to hold shareholder votes on executive compensation. MFS will not support such proposals if MFS determines that a company’s executive compensation practices are excessive, considering such factors as the specific market’s best practices that seek to maintain appropriate pay-for-performance alignment and to create long-term shareholder value.


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Many other items on foreign proxies involve repetitive, non-controversial matters that are mandated by local law. Accordingly, the items that are generally deemed routine and which do not require the exercise of judgment under these guidelines (and therefore voted with management) for foreign issuers include, but are not limited to, the following: (i) receiving financial statements or other reports from the board; (ii) approval of declarations of dividends; (iii) appointment of shareholders to sign board meeting minutes; (iv) discharge of management and supervisory boards; and (v) approval of share repurchase programs (absent any anti-takeover or other concerns). MFS will evaluate all other items on proxies for foreign companies in the context of the guidelines described above, but will generally vote against an item if there is not sufficient information disclosed in order to make an informed voting decision.

In accordance with local law or business practices, some foreign companies or custodians prevent the sales of shares that have been voted for a certain period beginning prior to the shareholder meeting and ending on the day following the meeting (“share blocking”). Depending on the country in which a company is domiciled, the blocking period may begin a stated number of days prior or subsequent to the meeting (e.g. one, three or five days) or on a date established by the company. While practices vary, in many countries the block period can be continued for a longer period if the shareholder meeting is adjourned and postponed to a later date. Similarly, practices vary widely as to the ability of a shareholder to have the “block” restriction lifted early (e.g. in some countries shares generally can be “unblocked” up to two days prior to the meeting whereas in other countries the removal of the block appears to be discretionary with the issuer’s transfer agent). Due to these restrictions, MFS must balance the benefits to its clients of voting proxies against the potentially serious portfolio management consequences of a reduced flexibility to sell the underlying shares at the most advantageous time. For companies in countries with share blocking periods or in markets where some custodians may block shares, the disadvantage of being unable to sell the stock regardless of changing conditions generally outweighs the advantages of voting at the shareholder meeting for routine items. Accordingly, MFS will not vote those proxies in the absence of an unusual, significant vote that outweighs the disadvantage of being unable to sell the stock.

In limited circumstances, other market specific impediments to voting shares may limit our ability to cast votes, including, but not limited to, late delivery of proxy materials, power of attorney and share re-registration requirements, or any other unusual voting requirements. In these limited instances, MFS votes securities on a best efforts basis in the context of the guidelines described above.


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B. ADMINISTRATIVE PROCEDURES

 

  1. MFS Proxy Voting Committee

The administration of these MFS Proxy Voting Policies and Procedures is overseen by the MFS Proxy Voting Committee, which includes senior personnel from the MFS Legal and Global Investment Support Departments. The Proxy Voting Committee does not include individuals whose primary duties relate to client relationship management, marketing, or sales. The MFS Proxy Voting Committee:

 

  a. Reviews these MFS Proxy Voting Policies and Procedures at least annually and recommends any amendments considered to be necessary or advisable;

 

  b. Determines whether any potential material conflict of interest exists with respect to instances in which MFS (i) seeks to override these MFS Proxy Voting Policies and Procedures; (ii) votes on ballot items not governed by these MFS Proxy Voting Policies and Procedures; (iii) evaluates an excessive executive compensation issue in relation to the election of directors; or (iv) requests a vote recommendation from an MFS portfolio manager or investment analyst (e.g. mergers and acquisitions); and

 

  c. Considers special proxy issues as they may arise from time to time.

 

  2. Potential Conflicts of Interest

The MFS Proxy Voting Committee is responsible for monitoring potential material conflicts of interest on the part of MFS or its subsidiaries that could arise in connection with the voting of proxies on behalf of MFS’ clients. Due to the client focus of our investment management business, we believe that the potential for actual material conflict of interest issues is small. Nonetheless, we have developed precautions to assure that all proxy votes are cast in the best long-term economic interest of shareholders.1 Other MFS internal policies require all MFS employees to avoid actual and potential conflicts of interests between personal activities and MFS’ client activities. If an employee identifies an actual or potential conflict of interest with respect to any voting decision, then that employee must recuse himself/herself from participating in the voting process. Additionally, with respect to decisions concerning all Non-Standard Votes, as defined below, MFS will review the securities holdings reported by investment professionals that participate in such decisions to determine whether such person has a direct economic interest in the decision, in which case such person shall not further participate in making the decision. Any significant attempt by an employee of MFS or its subsidiaries to unduly influence MFS’ voting on a particular proxy matter should also be reported to the MFS Proxy Voting Committee.

 

1 

For clarification purposes, note that MFS votes in what we believe to be the best, long-term economic interest of our clients entitled to vote at the shareholder meeting, regardless of whether other MFS clients hold “short” positions in the same issuer.


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In cases where proxies are voted in accordance with these MFS Proxy Voting Policies and Procedures, no material conflict of interest will be deemed to exist. In cases where (i) MFS is considering overriding these MFS Proxy Voting Policies and Procedures, (ii) matters presented for vote are not governed by these MFS Proxy Voting Policies and Procedures, (iii) MFS evaluates a potentially excessive executive compensation issue in relation to the election of directors or advisory pay or severance package vote, or (iv) a vote recommendation is requested from an MFS portfolio manager or investment analyst (e.g. mergers and acquisitions) (collectively, “Non-Standard Votes”); the MFS Proxy Voting Committee will follow these procedures:

 

  a. Compare the name of the issuer of such proxy against a list of significant current (i) distributors of MFS Fund shares, and (ii) MFS institutional clients (the “MFS Significant Client List”);

 

  b. If the name of the issuer does not appear on the MFS Significant Client List, then no material conflict of interest will be deemed to exist, and the proxy will be voted as otherwise determined by the MFS Proxy Voting Committee;

 

  c. If the name of the issuer appears on the MFS Significant Client List, then the MFS Proxy Voting Committee will be apprised of that fact and each member of the MFS Proxy Voting Committee will carefully evaluate the proposed vote in order to ensure that the proxy ultimately is voted in what MFS believes to be the best long-term economic interests of MFS’ clients, and not in MFS’ corporate interests; and

 

  d. For all potential material conflicts of interest identified under clause (c) above, the MFS Proxy Voting Committee will document: the name of the issuer, the issuer’s relationship to MFS, the analysis of the matters submitted for proxy vote, the votes as to be cast and the reasons why the MFS Proxy Voting Committee determined that the votes were cast in the best long-term economic interests of MFS’ clients, and not in MFS’ corporate interests. A copy of the foregoing documentation will be provided to MFS’ Conflicts Officer.

The members of the MFS Proxy Voting Committee are responsible for creating and maintaining the MFS Significant Client List, in consultation with MFS’ distribution and institutional business units. The MFS Significant Client List will be reviewed and updated periodically, as appropriate.

If an MFS client has the right to vote on a matter submitted to shareholders by Sun Life Financial, Inc. or any of its affiliates (collectively “Sun Life”), MFS will cast a vote on behalf of such MFS client pursuant to the recommendations of Institutional Shareholder Services, Inc.’s (“ISS”) benchmark policy, or as required by law.


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Except as described in the MFS Fund’s prospectus, from time to time, certain MFS Funds (the “top tier fund”) may own shares of other MFS Funds (the “underlying fund”). If an underlying fund submits a matter to a shareholder vote, the top tier fund will generally vote its shares in the same proportion as the other shareholders of the underlying fund. If there are no other shareholders in the underlying fund, the top tier fund will vote in what MFS believes to be in the top tier fund’s best long-term economic interest. If an MFS client has the right to vote on a matter submitted to shareholders by a pooled investment vehicle advised by MFS, MFS will cast a vote on behalf of such MFS client in the same proportion as the other shareholders of the pooled investment vehicle.

 

  3. Gathering Proxies

Most proxies received by MFS and its clients originate at Broadridge Financial Solutions, Inc. (“Broadridge”). Broadridge and other service providers, on behalf of custodians, send proxy related material to the record holders of the shares beneficially owned by MFS’ clients, usually to the client’s proxy voting administrator or, less commonly, to the client itself. This material will include proxy ballots reflecting the shareholdings of Funds and of clients on the record dates for such shareholder meetings, as well as proxy materials with the issuer’s explanation of the items to be voted upon.

MFS, on behalf of itself and certain of its clients (including the MFS Funds) has entered into an agreement with an independent proxy administration firm pursuant to which the proxy administration firm performs various proxy vote related administrative services such as vote processing and recordkeeping functions. Except as noted below, the proxy administration firm for MFS and its clients, including the MFS Funds, is ISS. The proxy administration firm for MFS Development Funds, LLC is Glass, Lewis & Co., Inc. (“Glass Lewis”; Glass Lewis and ISS are each hereinafter referred to as the “Proxy Administrator”).

The Proxy Administrator receives proxy statements and proxy ballots directly or indirectly from various custodians, logs these materials into its database and matches upcoming meetings with MFS Fund and client portfolio holdings, which are input into the Proxy Administrator’s system by an MFS holdings data-feed. Through the use of the Proxy Administrator system, ballots and proxy material summaries for all upcoming shareholders’ meetings are available on-line to certain MFS employees and members of the MFS Proxy Voting Committee.

It is the responsibility of the Proxy Administrator and MFS to monitor the receipt of ballots. When proxy ballots and materials for clients are received by the Proxy Administrator, they are input into the Proxy Administrator’s on-line system.


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The Proxy Administrator then reconciles a list of all MFS accounts that hold shares of a company’s stock and the number of shares held on the record date by these accounts with the Proxy Administrator’s list of any upcoming shareholder’s meeting of that company. If a proxy ballot has not been received, the Proxy Administrator contacts the custodian requesting the reason as to why a ballot has not been received.

 

  4. Analyzing Proxies

Proxies are voted in accordance with these MFS Proxy Voting Policies and Procedures. The Proxy Administrator, at the prior direction of MFS, automatically votes all proxy matters that do not require the particular exercise of discretion or judgment with respect to these MFS Proxy Voting Policies and Procedures as determined by MFS. With respect to proxy matters that require the particular exercise of discretion or judgment, the MFS Proxy Voting Committee considers and votes on those proxy matters. MFS also receives research and recommendations from the Proxy Administrator which it may take into account in deciding how to vote. MFS uses the research of ISS to identify (i) circumstances in which a board may have approved excessive executive compensation, (ii) environmental and social proposals that warrant consideration or (iii) circumstances in which a non-U.S. company is not in compliance with local governance or compensation best practices. In those situations where the only MFS fund that is eligible to vote at a shareholder meeting has Glass Lewis as its Proxy Administrator, then we will rely on research from Glass Lewis to identify such issues. Representatives of the MFS Proxy Voting Committee review, as appropriate, votes cast to ensure conformity with these MFS Proxy Voting Policies and Procedures.

As a general matter, portfolio managers and investment analysts have little or no involvement in most votes taken by MFS. This is designed to promote consistency in the application of MFS’ voting guidelines, to promote consistency in voting on the same or similar issues (for the same or for multiple issuers) across all client accounts, and to minimize the potential that proxy solicitors, issuers, or third parties might attempt to exert inappropriate influence on the vote. In limited types of votes (e.g. mergers and acquisitions, capitalization matters, potentially excessive executive compensation issues, or shareholder proposals relating to environmental and social issues), a representative of MFS Proxy Voting Committee may consult with or seek recommendations from MFS portfolio managers or investment analysts.2 However, the MFS Proxy Voting Committee would ultimately determine the manner in which all proxies are voted.

 

2 

From time to time, due to travel schedules and other commitments, an appropriate portfolio manager or research analyst may not be available to provide a vote recommendation. If such a recommendation cannot be obtained within a reasonable time prior to the cut-off date of the shareholder meeting, the MFS Proxy Voting Committee may determine to abstain from voting.


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As noted above, MFS reserves the right to override the guidelines when such an override is, in MFS’ best judgment, consistent with the overall principle of voting proxies in the best long-term economic interests of MFS’ clients. Any such override of the guidelines shall be analyzed, documented and reported in accordance with the procedures set forth in these policies.

 

  5. Voting Proxies

In accordance with its contract with MFS, the Proxy Administrator also generates a variety of reports for the MFS Proxy Voting Committee, and makes available on-line various other types of information so that the MFS Proxy Voting Committee may review and monitor the votes cast by the Proxy Administrator on behalf of MFS’ clients.

 

  6. Securities Lending

From time to time, the MFS Funds or other pooled investment vehicles sponsored by MFS may participate in a securities lending program. In the event MFS or its agent receives timely notice of a shareholder meeting for a U.S. security, MFS and its agent will attempt to recall any securities on loan before the meeting’s record date so that MFS will be entitled to vote these shares. However, there may be instances in which MFS is unable to timely recall securities on loan for a U.S. security, in which cases MFS will not be able to vote these shares. MFS will report to the appropriate board of the MFS Funds those instances in which MFS is not able to timely recall the loaned securities. MFS generally does not recall non-U.S. securities on loan because there may be insufficient advance notice of proxy materials, record dates, or vote cut-off dates to allow MFS to timely recall the shares in certain markets. As a result, non-U.S. securities that are on loan will not generally be voted. If MFS receives timely notice of what MFS determines to be an unusual, significant vote for a non-U.S. security whereas MFS shares are on loan, and determines that voting is in the best long-term economic interest of shareholders, then MFS will attempt to timely recall the loaned shares.

 

  7. Engagement

The MFS Proxy Voting Policies and Procedures are available on www.mfs.com and may be accessed by both MFS’ clients and the companies in which MFS’ clients invest. From time to time, MFS may determine that it is appropriate and beneficial for representatives from the MFS Proxy Voting Committee to engage in a dialogue or written communication with a company or other shareholders regarding certain matters on the company’s proxy statement that are of concern to shareholders, including environmental, social and governance matters. A company or shareholder may also seek to engage with representatives of the MFS Proxy Voting Committee in advance of the company’s formal proxy solicitation to review issues more generally or gauge support for certain contemplated proposals.


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C. RECORDS RETENTION

MFS will retain copies of these MFS Proxy Voting Policies and Procedures in effect from time to time and will retain all proxy voting reports submitted to the Board of Trustees and Board of Managers of the MFS Funds for the period required by applicable law. Proxy solicitation materials, including electronic versions of the proxy ballots completed by representatives of the MFS Proxy Voting Committee, together with their respective notes and comments, are maintained in an electronic format by the Proxy Administrator and are accessible on-line by the MFS Proxy Voting Committee. All proxy voting materials and supporting documentation, including records generated by the Proxy Administrator’s system as to proxies processed, including the dates when proxy ballots were received and submitted, and the votes on each company’s proxy issues, are retained as required by applicable law.

D. REPORTS

MFS Funds

MFS publicly discloses the proxy voting records of the MFS Funds on an annual basis, as required by law. MFS will also report the results of its voting to the Board of Trustees and Board of Managers of the MFS Funds. These reports will include: (i) a summary of how votes were cast (including advisory votes on pay and “golden parachutes”) ; (ii) a summary of votes against management’s recommendation; (iii) a review of situations where MFS did not vote in accordance with the guidelines and the rationale therefore; (iv) a review of the procedures used by MFS to identify material conflicts of interest and any matters identified as a material conflict of interest; (v) a review of these policies and the guidelines; (vi) a review of our proxy engagement activity; (vii) a report and impact assessment of instances in which the recall of loaned securities of a U.S. issuer was unsuccessful; and (viii) as necessary or appropriate, any proposed modifications thereto to reflect new developments in corporate governance and other issues. Based on these reviews, the Trustees and Managers of the MFS Funds will consider possible modifications to these policies to the extent necessary or advisable.

All MFS Advisory Clients

MFS may publicly disclose the proxy voting records of certain clients or the votes it casts with respect to certain matters as required by law. At any time, a report can also be printed by MFS for each client who has requested that MFS furnish a record of votes cast. The report specifies the proxy issues which have been voted for the client during the year and the position taken with respect to each issue and, upon request, may identify situations where MFS did not vote in accordance with the MFS Proxy Voting Policies and Procedures.


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Except as described above, MFS generally will not divulge actual voting practices to any party other than the client or its representatives because we consider that information to be confidential and proprietary to the client. However, as noted above, MFS may determine that it is appropriate and beneficial to engage in a dialogue with a company regarding certain matters. During such dialogue with the company, MFS may disclose the vote it intends to cast in order to potentially effect positive change at a company in regards to environmental, social or governance issues.

 

ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.

General. Information regarding the portfolio manager(s) of the MFS Special Value Trust (the “Fund”) is set forth below.

 

Portfolio Manager

  

Primary Role

  

Since

  

Title and Five Year
History

William J. Adams   

High Yield

Corporate Debt

Securities Portfolio

Manager

   2011    Investment Officer of MFS; employed in the investment area of MFS since 2009, Credit Analyst at MFS from 1997 to 2005.
Ward Brown   

Debt Portfolio

Manager

   December 2012    Investment Officer of MFS; employed in the investment area of MFS since 2005.
Nevin Chitkara    Portfolio Manager    2012    Investment Officer of MFS; employed in the investment area of MFS since 1997.
David P. Cole   

Debt Portfolio

Manager

   2006    Investment Officer of MFS; employed in the investment area of MFS since 2004.
Matthew W. Ryan   

Debt Portfolio

Manager

   December 2012    Investment Officer of MFS; employed in the investment area of MFS since 1997.


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Compensation. Portfolio manager compensation is reviewed annually. As of December 31, 2011, portfolio manager total cash compensation is a combination of base salary and performance bonus:

Base Salary – Base salary represents a smaller percentage of portfolio manager total cash compensation than performance bonus.

Performance Bonus – Generally, the performance bonus represents more than a majority of portfolio manager total cash compensation.

The performance bonus is based on a combination of quantitative and qualitative factors, generally with more weight given to the former and less weight given to the latter.

The quantitative portion is based on the pre-tax performance of assets managed by the portfolio manager over one-, three-, and five-year periods relative to peer group universes and/or indices (“benchmarks”). As of December 31, 2011, the following benchmarks were used:

 

Portfolio Manager      Benchmark(s)
William J. Adams      Barclays U.S. High-Yield Corporate Bond Index
     JPMorgan Emerging Market Bond Index Global
     Russell 1000 Value Index
Ward Brown      JP Morgan EMBI Global Index
Nevin Chitkara      Russell 1000 Value Index
David P. Cole      Barclays U.S. High-Yield Corporate Bond Index
     JPMorgan Emerging Market Bond Index Global
     Russell 1000 Value Index
Matthew W. Ryan      JP Morgan EMBI Global Index

Additional or different benchmarks, including versions of indices, custom indices, and linked indices that include performance of different indices for different portions of the time period, may also be used. Primary weight is given to portfolio performance over a three-year time period with lesser consideration given to portfolio performance over one-year and five-year periods (adjusted as appropriate if the portfolio manager has served for less than five years).

The qualitative portion is based on the results of an annual internal peer review process (conducted by other portfolio managers, analysts, and traders) and management’s assessment of overall portfolio manager contributions to investor relations and the investment process (distinct from fund and other account performance). This performance bonus may be in the form of cash and/or a deferred cash award, at the discretion of management. A deferred cash award is issued for a cash value and becomes payable over a three-year vesting period if the portfolio manager remains in the continuous employ of MFS or its affiliates. During the vesting period, the value of the unfunded deferred cash award will fluctuate as though the portfolio manager had invested the cash value of the award in an MFS Fund(s) selected by the portfolio manager. A selected fund may be, but is not required to be, a fund that is managed by the portfolio manager.


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Portfolio managers also typically benefit from the opportunity to participate in the MFS Equity Plan. Equity interests and/or options to acquire equity interests in MFS or its parent company are awarded by management, on a discretionary basis, taking into account tenure at MFS, contribution to the investment process, and other factors.

Finally, portfolio managers also participate in benefit plans (including a defined contribution plan and health and other insurance plans) and programs available generally to other employees of MFS. The percentage such benefits represent of any portfolio manager’s compensation depends upon the length of the individual’s tenure at MFS and salary level, as well as other factors.

Ownership of Fund Shares. The following table shows the dollar range of equity securities of the Fund beneficially owned by the Fund’s portfolio manager(s) as of the fund’s fiscal year ended October 31, 2012. The following dollar ranges apply:

N.   None

A.   $1 - $10,000

B.   $10,001 - $50,000

C.   $50,001 - $100,000

D.   $100,001 - $500,000

E.   $500,001 - $1,000,000

F.   Over $1,000,000

 

Name of Portfolio Manager

  

Dollar Range of Equity Securities in Fund

William J. Adams    N
Ward Brown    N
Nevin Chitkara    N
David P. Cole    N
Matthew W. Ryan    N

Other Accounts. In addition to the Fund, the Fund’s portfolio manager is named as a portfolio manager of certain other accounts managed or subadvised by MFS or an affiliate, the number and assets of which, as of fiscal year ended October 31, 2012 were as follows:

 

     Registered
Investment Companies
   Other Pooled
Investment Vehicles
   Other Accounts

Name

   Number of
Accounts*
     Total Assets*    Number of
Accounts
     Total Assets    Number of
Accounts
     Total Assets

William J. Adams

     13       $5.4 billion      4       $1.7 billion      0       N/A

Ward Brown

     4       $6.8 billion      8       $4.9 billion      7       $5.6 billion

Nevin Chitkara

     20       $44.0 billion      6       $2.9 billion      37       $12.3 billion

David P. Cole

     13       $5.4 billion      2       $1.1 billion      0       N/A

Matthew W. Ryan

     12       $10.3 billion      8       $4.9 billion      7       $5.6 billion

 

* Includes the Fund.


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Advisory fees are not based upon performance of any of the accounts identified in the table above.

Potential Conflicts of Interest.

The Adviser seeks to identify potential conflicts of interest resulting from a portfolio manager’s management of both the Fund and other accounts, and has adopted policies and procedures designed to address such potential conflicts.

The management of multiple funds and accounts (including proprietary accounts) gives rise to potential conflicts of interest if the funds and accounts have different objectives and strategies, benchmarks, time horizons and fees as a portfolio manager must allocate his or her time and investment ideas across multiple funds and accounts. In certain instances there are securities which are suitable for the Fund’s portfolio as well as for accounts of the Adviser or its subsidiaries with similar investment objectives. The Fund’s trade allocation policies may give rise to conflicts of interest if the Fund’s orders do not get fully executed or are delayed in getting executed due to being aggregated with those of other accounts of the Adviser or its subsidiaries. A portfolio manager may execute transactions for another fund or account that may adversely affect the value of the Fund’s investments. Investments selected for funds or accounts other than the Fund may outperform investments selected for the Fund.

When two or more clients are simultaneously engaged in the purchase or sale of the same security, the securities are allocated among clients in a manner believed by the Adviser to be fair and equitable to each. It is recognized that in some cases this system could have a detrimental effect on the price or volume of the security as far as the Fund is concerned. In most cases, however, the Adviser believes that the Fund’s ability to participate in volume transactions will produce better executions for the Fund.

The Adviser and/or a portfolio manager may have a financial incentive to allocate favorable or limited opportunity investments or structure the timing of investments to favor accounts other than the Fund, for instance, those that pay a higher advisory fee and/or have a performance adjustment, and/or include an investment by the portfolio manager.


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ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT COMPANY AND AFFILIATED PURCHASERS.

 

MFS Special Value Trust

Period

  

(a) Total number

of Shares

Purchased

  

(b)

Average

Price

Paid per

Share

  

(c) Total

Number of

Shares

Purchased as

Part of Publicly

Announced

Plans or

Programs

  

(d) Maximum

Number (or

Approximate

Dollar Value) of

Shares that May

Yet Be Purchased

under the Plans

or Programs

11/01/11-11/30/11

   0    N/A    0    685,573

12/01/11-12/31/11

   0    N/A    0    685,573

1/01/12-1/31/12

   0    N/A    0    685,573

2/01/12-2/28/12

   0    N/A    0    685,573

3/01/12-3/31/12

   0    N/A    0    691,094

4/01/12-4/30/12

   0    N/A    0    691,094

5/01/12-5/31/12

   0    N/A    0    691,094

6/01/12-6/30/12

   0    N/A    0    691,094

7/01/12-7/31/12

   0    N/A    0    691,094

8/01/12-8/31/12

   0    N/A    0    691,094

9/01/12-9/30/12

   0    N/A    0    691,094

10/01/12-10/31/12

   0    N/A    0    691,094

Total

  

0

     

0

  

Note: The Board of Trustees approves procedures to repurchase shares annually. The notification to shareholders of the program is part of the semi-annual and annual reports sent to shareholders. These annual programs begin on March 1st of each year. The programs conform to the conditions of Rule 10b-18 of the securities Exchange Act of 1934 and limit the aggregate number of shares that may be purchased in each annual period (March 1 through the following February 28) to 10% of the Registrant’s outstanding shares as of the first day of the plan year (March 1). The aggregate number of shares available for purchase for the March 1, 2012 plan year is 691,094.

 

ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

There were no material changes to the procedures by which shareholders may send recommendations to the Board for nominees to the Registrant’s Board since the Registrant last provided disclosure as to such procedures in response to the requirements of Item 407 (c)(2)(iv) of Regulation S-K or this Item.

 

ITEM 11. CONTROLS AND PROCEDURES.

 

(a) Based upon their evaluation of the registrant’s disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940 (the “Act”)) as conducted within 90 days of the filing date of this Form N-CSR, the registrant’s principal financial officer and principal executive officer have concluded that those disclosure controls and procedures provide reasonable assurance that the material information required to be disclosed by the registrant on this report is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.


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(b) There were no changes in the registrant’s internal controls over financial reporting (as defined in Rule 30a-3(d) under the Act) that occurred during the second fiscal quarter covered by the report that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.

 

ITEM 12. EXHIBITS.

 

(a) File the exhibits listed below as part of this form. Letter or number the exhibits in the sequence indicated.

 

  (1) Any code of ethics, or amendment thereto, that is the subject of the disclosure required by Item 2, to the extent that the registrant intends to satisfy the Item 2 requirements through filing of an exhibit: Code of Ethics attached hereto.

 

  (2) A separate certification for each principal executive officer and principal financial officer of the registrant as required by Rule 30a-2(a) under the Act (17 CFR 270.30a-2): Attached hereto.

 

  (3) Notices to Trust’s common shareholders in accordance with Investment Company Act Section 19(a) and Rule 19a-1.

 

(b) If the report is filed under Section 13(a) or 15(d) of the Exchange Act, provide the certifications required by Rule 30a-2(b) under the Act (17 CFR 270.30a-2(b)), Rule 13a-14(b) or Rule 15d-14(b) under the Exchange Act (17 CFR 240.13a-14(b) or 240.15d-14(b)) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. 1350) as an exhibit. A certification furnished pursuant to this paragraph will not be deemed “filed” for the purposes of Section 18 of the Exchange Act (15 U.S.C. 78r), or otherwise subject to the liability of that section. Such certification will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference: Attached hereto.


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Notice

A copy of the Amended and Restated Declaration of Trust of the Registrant is on file with the Secretary of State of the Commonwealth of Massachusetts and notice is hereby given that this instrument is executed on behalf of the Registrant by an officer of the Registrant as an officer and not individually and the obligations of or arising out of this instrument are not binding upon any of the Trustees or shareholders individually, but are binding only upon the assets and property of the respective constituent series of the Registrant.


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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Registrant MFS SPECIAL VALUE TRUST

 

By (Signature and Title)*    JOHN M. CORCORAN
  John M. Corcoran, President

Date: December 14, 2012

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)*    JOHN M. CORCORAN
 

John M. Corcoran, President

(Principal Executive Officer)

Date: December 14, 2012

 

By (Signature and Title)*    DAVID L. DILORENZO
 

David L. DiLorenzo, Treasurer

(Principal Financial Officer and Accounting Officer)

Date: December 14, 2012

 

* Print name and title of each signing officer under his or her signature.