Statement of Assets and Liabilities
as of August 31, 2013
|
|
Assets
|
|
Investments in securities, at value (cost $54,066,471)
|
|
$
|
54,066,814
|
|
Cash
|
|
|
50,732
|
|
Interest receivable
|
|
|
11,833
|
|
Due from Advisor
|
|
|
10,623
|
|
Other assets
|
|
|
81
|
|
Total assets
|
|
|
54,140,083
|
|
Liabilities
|
|
Accrued Trustees' fees
|
|
|
617
|
|
Accrued expenses
|
|
|
42,899
|
|
Total liabilities
|
|
|
43,516
|
|
Net assets, at value
|
|
$
|
54,096,567
|
|
Net Assets Consist of
|
|
Undistributed net investment income
|
|
|
346
|
|
Net unrealized appreciation (depreciation) on investments
|
|
|
343
|
|
Paid-in capital
|
|
|
54,095,878
|
|
Net assets, at value
|
|
$
|
54,096,567
|
|
Net Asset Value
|
|
Net Asset Value
, offering and redemption price per share ($54,096,567 ÷ 5,409,148 outstanding shares of beneficial interest, no par value, unlimited number of shares authorized)
|
|
$
|
10.001
|
|
The accompanying notes are an integral part of the financial statements.
for the year ended August 31, 2013
|
|
Investment Income
|
|
Income:
Interest
|
|
$
|
68,281
|
|
Expenses:
Management fee
|
|
|
44,044
|
|
Administration fee
|
|
|
29,363
|
|
Services to shareholders
|
|
|
100,031
|
|
Audit fee
|
|
|
37,978
|
|
Legal fees
|
|
|
14,345
|
|
Reports to shareholders
|
|
|
12,247
|
|
Trustees' fees and expenses
|
|
|
2,435
|
|
Other
|
|
|
12,126
|
|
Total expenses before expense reductions
|
|
|
252,569
|
|
Expense reductions
|
|
|
(252,569
|
)
|
Total expenses after expense reductions
|
|
|
—
|
|
Net investment income
|
|
|
68,281
|
|
Realized and Unrealized Gain (Loss)
|
|
Change in net unrealized appreciation (depreciation) on investments
|
|
|
80
|
|
Net gain (loss)
|
|
|
80
|
|
Net increase (decrease) in net assets resulting from operations
|
|
$
|
68,361
|
|
The accompanying notes are an integral part of the financial statements.
Statement of Changes in Net Assets
|
|
Years Ended August 31,
|
|
Increase (Decrease) in Net Assets
|
|
2013
|
|
|
2012
|
|
Operations:
Net investment income
|
|
$
|
68,281
|
|
|
$
|
35,933
|
|
Net realized gain (loss)
|
|
|
—
|
|
|
|
326
|
|
Change in net unrealized appreciation (depreciation)
|
|
|
80
|
|
|
|
(58
|
)
|
Net increase (decrease) in net assets resulting from operations
|
|
|
68,361
|
|
|
|
36,201
|
|
Distribution to shareholders from:
Net investment income
|
|
|
(68,281
|
)
|
|
|
(35,933
|
)
|
Fund share transactions:
Proceeds from shares sold
|
|
|
43,487,301
|
|
|
|
5,687,565
|
|
Reinvestment of distributions
|
|
|
66,146
|
|
|
|
35,081
|
|
Payments for shares redeemed
|
|
|
(5,196,019
|
)
|
|
|
(10,000,000
|
)
|
Net increase (decrease) in net assets from Fund share transactions
|
|
|
38,357,428
|
|
|
|
(4,277,354
|
)
|
Increase (decrease) in net assets
|
|
|
38,357,508
|
|
|
|
(4,277,086
|
)
|
Net assets at beginning of period
|
|
|
15,739,059
|
|
|
|
20,016,145
|
|
Net assets at end of period (including undistributed net investment income of $346 and $346, respectively)
|
|
$
|
54,096,567
|
|
|
$
|
15,739,059
|
|
Other Information
|
|
Shares outstanding at beginning of period
|
|
|
1,573,788
|
|
|
|
2,001,581
|
|
Shares sold
|
|
|
4,348,296
|
|
|
|
568,699
|
|
Shares issued to shareholders in reinvestment of distributions
|
|
|
6,614
|
|
|
|
3,508
|
|
Shares redeemed
|
|
|
(519,550
|
)
|
|
|
(1,000,000
|
)
|
Net increase (decrease) in Fund shares
|
|
|
3,835,360
|
|
|
|
(427,793
|
)
|
Shares outstanding at end of period
|
|
|
5,409,148
|
|
|
|
1,573,788
|
|
The accompanying notes are an integral part of the financial statements.
Financial Highlights
|
|
Years Ended August 31,
|
|
|
|
|
|
|
2013
|
|
|
2012
|
|
|
Period Ended 8/31/11
a
|
|
Selected Per Share Data
|
|
Net asset value, beginning of period
|
|
$
|
10.001
|
|
|
$
|
10.000
|
|
|
$
|
10.000
|
|
Income (loss) from investment operations:
Net investment income
|
|
|
.024
|
|
|
|
.025
|
|
|
|
.008
|
|
Net realized and unrealized gain (loss)
|
|
|
.000
|
***
|
|
|
.001
|
|
|
|
.000
|
***
|
Total from investment operations
|
|
|
.024
|
|
|
|
.026
|
|
|
|
.008
|
|
Less distributions from:
Net investment income
|
|
|
(.024
|
)
|
|
|
(.025
|
)
|
|
|
(.008
|
)
|
Net asset value, end of period
|
|
$
|
10.001
|
|
|
$
|
10.001
|
|
|
$
|
10.000
|
|
Total Return (%)
b
|
|
|
.24
|
|
|
|
.26
|
|
|
|
.08
|
**
|
Ratios to Average Net Assets and Supplemental Data
|
|
Net assets, end of period ($ millions)
|
|
|
54
|
|
|
|
16
|
|
|
|
20
|
|
Ratio of expenses before expense reductions (%)
|
|
|
.86
|
|
|
|
1.64
|
|
|
|
1.92
|
*
|
Ratio of expenses after expense reductions (%)
|
|
|
.00
|
|
|
|
.00
|
|
|
|
.00
|
|
Ratio of net investment income (%)
|
|
|
.23
|
|
|
|
.24
|
|
|
|
.21
|
*
|
a
For the period from April 18, 2011 (commencement of operations) to August 31, 2011.
b
Total return would have been lower had certain expenses not been reduced.
*
Annualized
**
Not annualized
***
Amount is less than $.0005.
|
|
Notes to Financial Statements
A. Organization and Significant Accounting Policies
DWS Variable NAV Money Fund (the "Fund") is a diversified series of Investors Cash Trust (the "Trust"), which is registered under the Investment Company Act of 1940, as amended (the "1940 Act"), as an open-end management investment company organized as a Massachusetts business trust.
The Fund's financial statements are prepared in accordance with accounting principles generally accepted in the United States of America which require the use of management estimates. Actual results could differ from those estimates. The policies described below are followed consistently by the Fund in the preparation of its financial statements.
Security Valuation.
Investments are stated at value determined as of the close of regular trading on the New York Stock Exchange on each day the exchange is open for trading.
Various inputs are used in determining the value of the Fund's investments. These inputs are summarized in three broad levels. Level 1 includes quoted prices in active markets for identical securities. Level 2 includes other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speeds, and credit risk). Level 3 includes significant unobservable inputs (including the Fund's own assumptions in determining the fair value of investments). The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.
Debt securities are valued at prices supplied by independent pricing services approved by the Fund's Board. If the pricing services are unable to provide valuations, municipal debt securities are valued at the mean of the most recent bid and asked quotations or evaluated prices, as applicable, obtained from one or more broker-dealers, and other debt securities are valued at the most recent bid quotation or evaluated price, as applicable, obtained from one or more broker-dealers. Such services may use various pricing techniques which take into account appropriate factors such as yield, quality, coupon rate, maturity, type of issue, trading characteristics and other data, as well as broker quotes. These securities are generally categorized as Level 2.
Securities and other assets for which market quotations are not readily available or for which the above valuation procedures are deemed not to reflect fair value are valued in a manner that is intended to reflect their fair value as determined in accordance with procedures approved by the Board and are generally categorized as Level 3. In accordance with the Fund's valuation procedures, factors used in determining value may include, but are not limited to, the type of the security; the size of the holding; the initial cost of the security; the existence of any contractual restrictions on the security's disposition; the price and extent of public trading in similar securities of the issuer or of comparable companies; quotations or evaluated prices from broker-dealers and/or pricing services; information obtained from the issuer, analysts, and/or the appropriate stock exchange (for exchange-traded securities); an analysis of the company's or issuer's financial statements; an evaluation of the forces that influence the issuer and the market(s) in which the security is purchased and sold; and with respect to debt securities, the maturity, coupon, creditworthiness, currency denomination and the movement of the market in which the security is normally traded. The value determined under these procedures may differ from published values for the same securities.
Disclosure about the classification of fair value measurements is included in a table following the Fund's Investment Portfolio.
Repurchase Agreements.
The Fund may enter into repurchase agreements, under the terms of a Master Repurchase Agreement, with certain banks and broker/dealers whereby the Fund, through its custodian or a sub-custodian bank, receives delivery of the underlying securities, the amount of which at the time of purchase and each subsequent business day is required to be maintained at such a level that the value is equal to at least the principal amount of the repurchase price plus accrued interest. The custodial bank or another designated subcustodian holds the collateral in a separate account until the agreement matures. If the value of the securities falls below the principal amount of the repurchase agreement plus accrued interest, the financial institution deposits additional collateral by the following business day. If the financial institution either fails to deposit the required additional collateral or fails to repurchase the securities as agreed, the Fund has the right to sell the securities and recover any resulting loss from the financial institution. If the financial institution enters into bankruptcy, the Fund's claims on the collateral may be subject to legal proceedings. The Fund had no repurchase agreements at August 31, 2013.
Federal Income Taxes.
The Fund's policy is to comply with the requirements of the Internal Revenue Code, as amended, which are applicable to regulated investment companies, and to distribute all of its taxable income to its shareholders.
The Fund has reviewed the tax positions for the open tax years as of August 31, 2013 and has determined that no provision for income tax is required in the Fund's financial statements. The Fund's federal tax returns for the prior two fiscal years remain open subject to examination by the Internal Revenue Service.
Distributions of Income and Gains.
Net investment income of the Fund is declared as a daily dividend and is distributed to shareholders monthly. The Fund may take into account capital gains and losses in its daily dividend declarations. The Fund may also make additional distributions for tax purposes if necessary.
Permanent book and tax basis differences relating to shareholder distributions will result in reclassifications to paid-in capital. Temporary book and tax basis differences will reverse in a subsequent period. There were no significant book-to-tax differences for the Fund.
At August 31, 2013, the Fund's components of distributable earnings (accumulated losses) on a tax basis are as follows:
Undistributed ordinary income*
|
|
$
|
346
|
|
Net unrealized appreciation (depreciation) on investments
|
|
$
|
343
|
|
In addition, the tax character of distributions paid to shareholders by the Fund is summarized as follows:
|
|
Years Ended August 31,
|
|
|
|
2013
|
|
|
2012
|
|
Distributions from ordinary income*
|
|
$
|
68,281
|
|
|
$
|
35,933
|
|
* For tax purposes, short-term capital gain distributions are considered ordinary income distributions.
Expenses.
Expenses of the Trust arising in connection with a specific fund are allocated to that Fund. Other Trust expenses which cannot be directly attributed to a fund are apportioned among the funds in the Trust based upon the relative net assets or other appropriate measures.
Contingencies.
In the normal course of business, the Fund may enter into contracts with service providers that contain general indemnification clauses. The Fund's maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Fund that have not yet been made. However, based on experience, the Fund expects the risk of loss to be remote.
Other.
Investment transactions are accounted for on trade date. Interest income is recorded on the accrual basis. Realized gains and losses from investment transactions are recorded on an identified cost basis. All discounts and premiums are accreted/amortized for both tax and financial reporting purposes.
B. Fees and Transactions with Affiliates
Management Agreement.
Under the Investment Management Agreement with Deutsche Investment Management Americas Inc. ("DIMA" or the "Advisor"), an indirect, wholly owned subsidiary of Deutsche Bank AG, the Advisor directs the investments of the Fund in accordance with its investment objectives, policies and restrictions. The Advisor determines the securities, instruments and other contracts relating to investments to be purchased, sold or entered into by the Fund.
Pursuant to the Investment Management Agreement with the Advisor, the Fund pays a monthly management fee based on the Fund's average daily net assets, computed and accrued daily and payable monthly, at the following annual rates:
First $1 billion of the Fund's average daily net assets
|
|
|
.1500
|
%
|
Next $3 billion of such net assets
|
|
|
.1325
|
%
|
Over $4 billion of such net assets
|
|
|
.1200
|
%
|
For the period from September 1, 2012 through November 30, 2013, the Advisor has contractually agreed to waive its fees and/or reimburse certain operating expenses of the Fund shares to the extent necessary to maintain the operating expenses (excluding certain expenses such as extraordinary expenses, taxes, brokerage and interest) at 0.15% of the Fund's average daily net assets.
For the period from September 1, 2012 through August 31, 2013, the Advisor has voluntarily agreed to waive its fees and/or reimburse certain operating expenses to the extent necessary to maintain the operating expenses (excluding certain expenses such as extraordinary expenses, taxes, brokerage and interest) at 0.00%. This voluntary waiver or reimbursement may be terminated at any time at the option of the Advisor.
Accordingly, for the year ended August 31, 2013, the fee pursuant to the Investment Management Agreement aggregated $44,044, all of which was waived, resulting in an annual effective rate of 0.00% of the Fund's average daily net assets.
In addition, for the year ended August 31, 2013, the Advisor reimbursed $79,162 of other expenses.
Administration Fee.
Pursuant to the Administrative Services Agreement, DIMA provides most administrative services to the Fund. For all services provided under the Administrative Services Agreement, the Fund pays the Advisor an annual fee ("Administration Fee") of 0.10% of the Fund's average daily net assets, computed and accrued daily and payable monthly. For the year ended August 31, 2013, the Administration Fee was $29,363, all of which was waived.
Service Provider Fees.
DWS Investments Service Company ("DISC"), an affiliate of the Advisor, is the transfer agent, dividend-paying agent and shareholder service agent for the Fund. Pursuant to a sub-transfer agency agreement between DISC and DST Systems, Inc. ("DST"), DISC has delegated certain transfer agent, dividend-paying agent and shareholder service agent functions to DST. DISC compensates DST out of the shareholder servicing fee it receives from the Fund. For the year ended August 31, 2013, the amount charged to the Fund by DISC aggregated $100,000, all of which was waived.
Typesetting and Filing Service Fees.
Under an agreement with DIMA, DIMA is compensated for providing typesetting and certain regulatory filing services to the Fund. For the year ended August 31, 2013, the amount charged to the Fund by DIMA included in the Statement of Operations under "reports to shareholders" aggregated $11,672, of which $4,257 was unpaid.
Trustees' Fees and Expenses.
The Fund paid retainer fees to each Trustee not affiliated with the Advisor, plus specified amounts to the Board Chairperson and Vice Chairperson and to each committee Chairperson.
C. Ownership of the Fund
From time to time, the Fund may have a concentration of several shareholder accounts holding a significant percentage of shares outstanding. Investment activities of these shareholders could have a material impact on the Fund.
At August 31, 2013, three affiliated shareholder accounts were the owner of record of 10% or more of the total outstanding shares of the Fund, owning approximately 19%, 19% and 10%.
D. Line of Credit
The Fund and other affiliated funds (the "Participants") shared in a $375 million revolving credit facility provided by a syndication of banks. The Fund may borrow for temporary or emergency purposes, including the meeting of redemption requests that otherwise might require the untimely disposition of securities. The Participants are charged an annual commitment fee which is allocated based on net assets, among each of the Participants. Interest is calculated at a rate per annum equal to the sum of the Federal Funds Rate plus 1.25 percent plus if LIBOR exceeds the Federal Funds Rate the amount of such excess. The Fund may borrow up to a maximum of 33 percent of its net assets under the agreement. The Fund had no outstanding loans at August 31, 2013.
Report of Independent Registered Public Accounting Firm
To the Board of Trustees of Investors Cash Trust and the Shareholders of DWS Variable NAV Money Fund:
We have audited the accompanying statement of assets and liabilities, including the investment portfolio, of DWS Variable NAV Money Fund (a series of Investors Cash Trust) (the "Fund"), as of August 31, 2013, and the related statement of operations for the year then ended, the statement of changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the periods indicated therein. 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 August 31, 2013, by correspondence with the custodian and brokers. 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 DWS Variable NAV Money Fund at August 31, 2013, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of periods indicated therein, in conformity with U.S. generally accepted accounting principles.
|
|
|
Boston, Massachusetts
October 24, 2013
|
|
|
Information About Your Fund's Expenses
As an investor of the Fund, you incur two types of costs: ongoing expenses and transaction costs. Ongoing expenses include management fees and other Fund expenses. Examples of transaction costs include account maintenance fees, which are not shown in this section. The following tables are intended to help you understand your ongoing expenses (in dollars) of investing in the Fund and to help you compare these expenses with the ongoing expenses of investing in other mutual funds. In the most recent six-month period, the Fund limited these expenses; had it not done so, expenses would have been higher. The example in the table is based on an investment of $1,000 invested at the beginning of the six-month period and held for the entire period (March 1, 2012 to August 31, 2013).
The tables illustrate your Fund's expenses in two ways:
•
Actual Fund Return.
This helps you estimate the actual dollar amount of ongoing expenses (but not transaction costs) paid on a $1,000 investment in the Fund using the Fund's actual return during the period. To estimate the expenses you paid over the period, simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the "Expenses Paid per $1,000" line under the share class you hold.
•
Hypothetical 5% Fund Return.
This helps you to compare your Fund's ongoing expenses (but not transaction costs) with those of other mutual funds using the Fund's actual expense ratio and a hypothetical rate of return of 5% per year before expenses. Examples using a 5% hypothetical fund return may be found in the shareholder reports of other mutual funds. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period.
Please note that the expenses shown in these tables are meant to highlight your ongoing expenses only and do not reflect any transaction costs. The "Expenses Paid per $1,000" line of the tables is useful in comparing ongoing expenses only and will not help you determine the relative total expense of owning different funds. If these transaction costs had been included, your costs would have been higher.
Expenses and Value of a $1,000 Investment
for the six months ended August 31, 2013 (Unaudited)
|
|
Actual Fund Return
|
|
|
|
Beginning Account Value 3/1/13
|
|
$
|
1,000.00
|
|
Ending Account Value 8/31/13
|
|
$
|
1,001.12
|
|
Expenses Paid per $1,000*
|
|
$
|
.00
|
|
Hypothetical 5% Fund Return
|
|
|
|
|
Beginning Account Value 3/1/13
|
|
$
|
1,000.00
|
|
Ending Account Value 8/31/13
|
|
$
|
1,025.21
|
|
Expenses Paid per $1,000*
|
|
$
|
.00
|
|
*
Expenses are equal to the Fund's annualized expense ratio, multiplied by the average account value over the period, multiplied by 184 (the number of days in the most recent six-month period), then divided by 365.
Annualized Expense Ratio
|
|
DWS Variable NAV Money Fund
|
.00%
|
For more information, please refer to the Fund's prospectus.
For an analysis of the fees associated with an investment in the Fund or similar funds, please refer to http://apps.finra.org/fundanalyzer/1/fa.aspx.
Tax Information
(Unaudited)
A total of 1% of the dividends distributed during the fiscal year was derived from interest on U.S. government securities, which is generally exempt from state income tax.
Please consult a tax advisor if you have questions about federal or state income tax laws, or on how to prepare your tax returns. If you have specific questions about your account, please call (800) 728-3337.
Money Market Fund Reform
In June 2013, the SEC proposed money market fund reform intended to address perceived systemic risks associated with money market funds and to improve transparency for money market fund investors. The Financial Stability Oversight Council (FSOC), a board of U.S. regulators established by the Dodd-Frank Act, had also previously proposed similar recommendations for money market fund reform. If one or more of the SEC or FSOC proposals for money market fund reform were to be adopted in the future, such regulatory action may affect the fund's operations and/or return potential.
Summary of Management Fee Evaluation by Independent Fee Consultant
September 17, 2012
Pursuant to an Order entered into by Deutsche Investment Management Americas and affiliates (collectively, "DeAM") with the Attorney General of New York, I, Thomas H. Mack, have been appointed the Independent Fee Consultant for the DWS Funds (formerly the DWS Scudder Funds). My duties include preparing an annual written evaluation of the management fees DeAM charges the Funds, considering among other factors the management fees charged by other mutual fund companies for like services, management fees DeAM charges other clients for like services, DeAM's costs of supplying services under the management agreements and related profit margins, possible economies of scale if a Fund grows larger, and the nature and quality of DeAM's services, including fund performance. This report summarizes my evaluation for 2012, including my qualifications, the evaluation process for each of the DWS Funds, consideration of certain complex-level factors, and my conclusions. I served in substantially the same capacity in 2007, 2008, 2009, 2010 and 2011.
Qualifications
For more than 35 years I have served in various professional capacities within the investment management business. I have held investment analysis and advisory positions, including securities analyst, portfolio strategist and director of investment policy with a large investment firm. I have also performed business management functions, including business development, financial management and marketing research and analysis.
Since 1991, I have been an independent consultant within the asset management industry. I have provided services to over 125 client organizations, including investment managers, mutual fund boards, product distributors and related organizations. Over the past ten years I have completed a number of assignments for mutual fund boards, specifically including assisting boards with management contract renewal.
I hold a Master of Business Administration degree, with highest honors, from Harvard University and Master of Science and Bachelor of Science (highest honors) degrees from the University of California at Berkeley. I am an independent director and audit committee financial expert for two closed-end mutual funds and have served in various leadership and financial oversight capacities with non-profit organizations.
Evaluation of Fees for each DWS Fund
My work focused primarily on evaluating, fund-by-fund, the fees charged to each of the 103 mutual fund portfolios in the DWS Fund family. For each Fund, I considered each of the key factors mentioned above, as well as any other relevant information. In doing so I worked closely with the Funds' Independent Directors in their annual contract renewal process, as well as in their approval of contracts for several new funds (documented separately).
In evaluating each Fund's fees, I reviewed comprehensive materials provided by or on behalf of DeAM, including expense information prepared by Lipper Analytical, comparative performance information, profitability data, manager histories, and other materials. I also accessed certain additional information from the Lipper and Morningstar databases and drew on my industry knowledge and experience.
To facilitate evaluating this considerable body of information, I prepared for each Fund a document summarizing the key data elements in each area as well as additional analytics discussed below. This made it possible to consider each key data element in the context of the others.
In the course of contract renewal, DeAM agreed to implement a number of fee and expense adjustments requested by the Independent Directors which will favorably impact future fees and expenses, and my evaluation includes the effects of these changes.
Fees and Expenses Compared with Other Funds
The competitive fee and expense evaluation for each fund focused on two primary comparisons:
The Fund's contractual management fee (the advisory fee plus the administration fee where applicable) compared with those of a group of typically 12-15 funds in the same Lipper investment category (e.g. Large Capitalization Growth) having similar distribution arrangements and being of similar size.
The Fund's total expenses compared with a broader universe of funds from the same Lipper investment category and having similar distribution arrangements.
These two comparisons provide a view of not only the level of the fee compared with funds of similar scale but also the total expense the Fund bears for all the services it receives, in comparison with the investment choices available in the Fund's investment category and distribution channel. The principal figure-of-merit used in these comparisons was the subject Fund's percentile ranking against peers.
DeAM's Fees for Similar Services to Others
DeAM provided management fee schedules for all of its US domiciled fund and non-fund investment management accounts in any of the investment categories where there is a DWS Fund. These similar products included the other DWS Funds, non-fund pooled accounts, institutional accounts and sub-advisory accounts. Using this information, I calculated for each Fund the fee that would be charged to each similar product, at the subject Fund's asset level.
Evaluating information regarding non-fund products is difficult because there are varying levels of services required for different types of accounts, with mutual funds generally requiring considerably more regulatory and administrative types of service as well as having more frequent cash flows than other types of accounts. Also, while mutual fund fees for similar fund products can be expected to be similar, there will be some differences due to different pricing conditions in different distribution channels (e.g. retail funds versus those used in variable insurance products), differences in underlying investment processes and other factors.
Costs and Profit Margins
DeAM provided a detailed profitability analysis for each Fund. After making some adjustments so that the presentation would be more comparable to the available industry figures, I reviewed profit margins from investment management alone, from investment management plus other fund services (excluding distribution) provided to the Funds by DeAM (principally shareholder services), and DeAM profits from all sources, including distribution. A later section comments on overall profitability.
Economies of Scale
Economies of scale — an expected decline in management cost per dollar of fund assets as fund assets grow — are very rarely quantified and documented because of inherent difficulties in collecting and analyzing relevant data. However, in virtually every investment category that I reviewed, larger funds tend to have lower fees and lower total expenses than smaller funds. To see how each DWS Fund compares with this industry observation, I reviewed:
The trend in Fund assets over the last five years and the accompanying trend in total expenses. This shows if the Fund has grown and, if so, whether total expense (management fees as well as other expenses) have declined as a percent of assets.
Whether the Fund has break-points in its management fee schedule, the extent of the fee reduction built into the schedule and the asset levels where the breaks take effect, and in the case of a sub-advised Fund how the Fund's break-points compare with those of the sub-advisory fee schedule.
How the Fund's contractual fee schedule compares with trends in the industry data. To accomplish this, I constructed a chart showing how actual latest-fiscal-year contractual fees of the Fund and of other similar funds relate to average fund assets, with the subject Fund's contractual fee schedule superimposed.
Quality of Service — Performance
The quality-of-service evaluation focused on investment performance, which is the principal result of the investment management service. Each Fund's performance was reviewed over the past 1, 3, 5 and 10 years, as applicable, and compared with that of other funds in the same investment category and with a suitable market index.
In addition, I calculated and reviewed risk-adjusted returns relative to an index of similar mutual funds' returns and a suitable market index. The risk-adjusted returns analysis provides a way of determining the extent to which the Fund's return comparisons are mainly the product of investment value-added (or lack thereof) or alternatively taking considerably more or less risk than is typical in its investment category.
I also received and considered the history of portfolio manager changes for each Fund, as this provided an important context for evaluating the performance results.
Complex-Level Considerations
While this evaluation was conducted mainly at the individual fund level, there are some issues relating to the reasonableness of fees that can alternatively be considered across the whole fund complex:
I reviewed DeAM's profitability analysis for all DWS Funds, with a view toward determining if the allocation procedures used were reasonable and how profit levels compared with public data for other investment managers.
I considered whether DeAM and affiliates receive any significant ancillary or "fallout" benefits that should be considered in interpreting the direct profitability results. These would be situations where serving as the investment manager of the Funds is beneficial to another part of the Deutsche Bank organization.
I considered how aggregated DWS Fund expenses had varied over the years, by asset class and in the context of trends in asset levels.
I considered how aggregated DWS Fund performance measures relative to appropriate peers had varied by asset class and over time.
I reviewed the structure of the DeAM organization, trends in staffing levels, and information on compensation of investment management and other professionals compared with industry data.
Findings
Based on the process and analysis discussed above, which included reviewing a wide range of information from management and external data sources and considering among other factors the fees DeAM charges other clients, the fees charged by other fund managers, DeAM's costs and profits associated with managing the Funds, economies of scale, possible fall-out benefits, and the nature and quality of services provided, in my opinion the management fees charged the DWS Funds are reasonable.
Thomas H. Mack
President, Thomas H. Mack & Co., Inc.