Notes to Financial Statements
A. Organization and Significant Accounting Policies
DWS Mid Cap Value Fund (formerly DWS Dreman Mid Cap Value Fund) (the "Fund") is a diversified series of DWS Value Series, Inc. (the "Corporation"), 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 Maryland corporation.
The Fund offers multiple classes of shares which provide investors with different purchase options. Class A shares are offered to investors subject to an initial sales charge. Class B shares of the Fund are closed to new purchases, except exchanges or the reinvestment of dividends or other distributions. Class B shares were offered to investors without an initial sales charge and are subject to higher ongoing expenses than Class A shares and a contingent deferred sales charge payable upon certain redemptions. Class B shares automatically convert to Class A shares six years after issuance. Class C shares are offered to investors without an initial sales charge but are subject to higher ongoing expenses than Class A shares and a contingent deferred sales charge payable upon certain redemptions within one year of purchase. Class C shares do not automatically convert into another class. Class R shares are only available to participants in certain retirement plans and are offered to investors without an initial sales charge. Institutional Class shares are generally available only to qualified institutions, are not subject to initial or contingent deferred sales charges and generally have lower ongoing expenses than other classes. Class S shares are not subject to initial or contingent deferred sales charges and are only available to a limited group of investors.
Investment income, realized and unrealized gains and losses, and certain fund-level expenses and expense reductions, if any, are borne pro rata on the basis of relative net assets by the holders of all classes of shares, except that each class bears certain expenses unique to that class such as distribution and service fees, service to shareholders and certain other class-specific expenses. Differences in class-level expenses may result in payment of different per share dividends by class. All shares of the Fund have equal rights with respect to voting subject to class-specific arrangements.
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. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. 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).
Equity securities are valued at the most recent sale price or official closing price reported on the exchange (U.S. or foreign) or over-the-counter market on which they trade. Securities for which no sales are reported are valued at the calculated mean between the most recent bid and asked quotations on the relevant market or, if a mean cannot be determined, at the most recent bid quotation. Equity securities are categorized as Level 1.
Investments in open-end investment companies are valued at their net asset value each business day and are categorized as Level 1.
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.
Foreign Currency Translations.
The books and records of the Fund are maintained in U.S. dollars. Investment securities and other assets and liabilities denominated in a foreign currency are translated into U.S. dollars at the prevailing exchange rates at period end. Purchases and sales of investment securities, income and expenses are translated into U.S. dollars at the prevailing exchange rates on the respective dates of the transactions.
Net realized and unrealized gains and losses on foreign currency transactions represent net gains and losses between trade and settlement dates on securities transactions, the acquisition and disposition of foreign currencies, and the difference between the amount of net investment income accrued and the U.S. dollar amount actually received. 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 but is included with net realized and unrealized gain/appreciation and loss/depreciation on investments.
Securities Lending.
Brown Brothers Harriman & Co., as lending agent, lends securities of the Fund to certain financial institutions under the terms of the Security Lending Agreement. The Fund retains the benefits of owning the securities it has loaned and continues to receive interest and dividends generated by the securities and to participate in any changes in their market value. The Fund requires the borrowers of the securities to maintain collateral with the Fund consisting of either cash or liquid, unencumbered assets having a value at least equal to the value of the securities loaned. When the collateral falls below specified amounts, the lending agent will use its best effort to obtain additional collateral on the next business day to meet required amounts under the security lending agreement. The Fund may invest the cash collateral into a joint trading account in an affiliated money market fund pursuant to Exemptive Orders issued by the SEC. The Fund receives compensation for lending its securities either in the form of fees or by earning interest on invested cash collateral net of borrower rebates and fees paid to a lending agent. Either the Fund or the borrower may terminate the loan. There may be risks of delay and costs in recovery of securities or even loss of rights in the collateral should the borrower of the securities fail financially. If the Fund is not able to recover securities lent, the Fund may sell the collateral and purchase a replacement investment in the market, incurring the risk that the value of the replacement security is greater than the value of the collateral. The Fund is also subject to all investment risks associated with the reinvestment of any cash collateral received, including, but not limited to, interest rate, credit and liquidity risk associated with such investments. As of November 30, 2013, the Fund had no securities on loan.
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.
Under the Regulated Investment Company Modernization Act of 2010, net capital losses incurred post-enactment may be carried forward indefinitely, and their character is retained as short-term and/or long-term. 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.
At November 30, 2013, the Fund had a net tax basis capital loss carryforward of approximately $4,743,000 of pre-enactment losses, which may be applied against any realized net taxable capital gains of each succeeding year until fully utilized, or until November 30, 2017, the expiration date, whichever occurs first.
In addition, from November 1, 2013 through November 30, 2013, the Fund elects to defer qualified late year losses of approximately $445,000 of net short-term realized capital losses and treat them as arising in the fiscal year ending November 30, 2014.
The Fund has reviewed the tax positions for the open tax years as of November 30, 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 three fiscal years remain open subject to examination by the Internal Revenue Service.
Distribution of Income and Gains.
Distributions from net investment income of the Fund, if any, are declared and distributed to shareholders annually. Net realized gains from investment transactions, in excess of available capital loss carryforwards, would be taxable to the Fund if not distributed, and, therefore, will be distributed to shareholders at least annually. The fund may also make additional distributions for tax purposes if necessary.
The timing and characterization of certain income and capital gain distributions are determined annually in accordance with federal tax regulations which may differ from accounting principles generally accepted in the United States of America. These differences primarily relate to securities sold at a loss and income received from Real Estate Investment Trusts. As a result, net investment income (loss) and net realized gain (loss) on investment transactions for a reporting period may differ significantly from distributions during such period. Accordingly, the Fund may periodically make reclassifications among certain of its capital accounts without impacting the net asset value of the Fund.
At November 30, 2013, the Fund's components of distributable earnings (accumulated losses) on a tax basis were as follows:
|
Undistributed ordinary income
*
|
|
$
|
1,610,461
|
|
|
Capital loss carryforwards
|
|
$
|
(4,743,000
|
)
|
|
Net unrealized appreciation (depreciation) on investments
|
|
$
|
24,479,620
|
|
In addition, the tax character of distributions paid to shareholders by the Fund is summarized as follows:
|
|
|
Years Ended November 30,
|
|
|
|
|
2013
|
|
|
2012
|
|
|
Distributions from ordinary income
*
|
|
$
|
2,400,104
|
|
|
$
|
1,700,537
|
|
* For tax purposes, short-term capital gain distributions are considered ordinary income distributions.
Expenses.
Expenses of the Corporation arising in connection with a specific fund are allocated to that fund. Other Corporation expenses which cannot be directly attributed to a fund are apportioned among the funds in the Corporation 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.
Real Estate Investment Trusts.
The Fund periodically recharacterizes distributions received from a Real Estate Investment Trust ("REIT") investment based on information provided by the REIT into the following categories: ordinary income, long-term and short-term capital gains, and return of capital. If information is not available timely from a REIT, the recharacterization will be estimated and a recharacterization will be made in the following year when such information becomes available. Distributions received from REITs in excess of income are recorded as either a reduction of cost of investments or realized gains. The Fund distinguishes between dividends received on a tax basis and a financial reporting basis and only distributions in excess of tax basis earnings and profits are reported in the financial statements as a tax return of capital.
Other.
Investment transactions are accounted for on a trade date plus one basis for daily net asset valuation calculations. However, for financial reporting purposes, investment transactions are reported on trade date. Interest income is recorded on the accrual basis. Dividend income is recorded on the ex-dividend date net of foreign withholding taxes. Certain dividends from foreign securities may be recorded subsequent to the ex-dividend date as soon as the Fund is informed of such dividends. Realized gains and losses from investment transactions are recorded on an identified cost basis. Proceeds from litigation payments, if any, are included in net realized gain (loss) from investments.
B. Purchases and Sales of Securities
During the year ended November 30, 2013, purchases and sales of investment securities (excluding short-term investments) aggregated $202,060,573 and $257,639,157, respectively.
C. Related Parties
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 or delegates such responsibility to the Fund's subadvisor. In addition to portfolio management services, the Advisor provides certain administrative services in accordance with the Investment Management Agreement.
Until September 2, 2013, Dreman Value Management, L.L.C. ("DVM") served as subadvisor with respect to the investment and reinvestment of assets of the Fund, and was paid by the Advisor for its services. Effective September 3, 2013, DVM no longer serves as subadvisor to the Fund, and day-to-day portfolio management of the Fund transitioned to DIMA.
Under 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 $250 million of the Fund's average daily net assets
|
|
|
.750
|
%
|
|
Next $250 million of such net assets
|
|
|
.720
|
%
|
|
Next $2.0 billion of such net assets
|
|
|
.700
|
%
|
|
Next $1.5 billion of such net assets
|
|
|
.680
|
%
|
|
Over $4.0 billion of such assets
|
|
|
.660
|
%
|
Accordingly, for the year ended November 30, 2013, the fee pursuant to the Investment Management Agreement was equivalent to an annual effective rate of 0.75% of the Fund's average daily net assets.
For the period from December 1, 2012 through September 30, 2013, the Advisor had contractually agreed to waive its fees and/or reimburse certain operating expenses of the Fund to the extent necessary to maintain the operating expenses (excluding certain expenses such as extraordinary expenses, taxes, brokerage and interest) of each class as follows:
|
Class A
|
1.21%
|
|
Class B
|
1.96%
|
|
Class C
|
1.96%
|
|
Class R
|
1.46%
|
|
Class S
|
.96%
|
|
Institutional Class
|
.96%
|
Effective October 1, 2013 through September 30, 2014, the Advisor has contractually agreed to waive its fees and/or reimburse certain operating expenses of the Fund to the extent necessary to maintain the operating expenses (excluding certain expenses such as extraordinary expenses, taxes, brokerage and interest) of each class as follows:
|
Class A
|
1.24%
|
|
Class B
|
1.99%
|
|
Class C
|
1.99%
|
|
Class R
|
1.49%
|
|
Class S
|
.99%
|
|
Institutional Class
|
.99%
|
Service Provider Fees.
DWS Investments Service Company ("DISC"), an affiliate of the Advisor, is the transfer agent, dividend-paying agent and shareholder service agent of 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 November 30, 2013, the amounts charged to the Fund by DISC were as follows:
|
Services to Shareholders
|
|
Total Aggregated
|
|
|
Waived
|
|
|
Unpaid at November 30, 2013
|
|
|
Class A
|
|
$
|
48,455
|
|
|
$
|
40,534
|
|
|
$
|
1,902
|
|
|
Class B
|
|
|
2,284
|
|
|
|
1,902
|
|
|
|
51
|
|
|
Class C
|
|
|
9,602
|
|
|
|
9,602
|
|
|
|
—
|
|
|
Class R
|
|
|
516
|
|
|
|
516
|
|
|
|
—
|
|
|
Class S
|
|
|
167,059
|
|
|
|
159,359
|
|
|
|
—
|
|
|
Institutional Class
|
|
|
2,122
|
|
|
|
2,122
|
|
|
|
—
|
|
|
|
|
$
|
230,038
|
|
|
$
|
214,035
|
|
|
$
|
1,953
|
|
In addition, for the year ended November 30, 2013, the Advisor reimbursed $521 of sub-recordkeeping fees for Institutional Class shares.
Pursuant to a fund accounting agreement, DIMA is responsible for computing the daily net asset value per share and maintaining the portfolio and general accounting records of the Fund. DIMA has delegated certain fund accounting and record-keeping services to State Street Bank and Trust Company. The costs and expenses of such delegation are paid by DIMA. For the year ended November 30, 2013, the amount charged to the Fund for accounting services under the fund accounting agreement aggregated $31,898, of which $2,560 is unpaid.
Distribution and Service Fees.
Under the Fund's Class B, C and R 12b-1 Plans, DWS Investments Distributors, Inc. ("DIDI"), an affiliate of the Advisor, receives a fee ("Distribution Fee") of 0.75% of average daily net assets of each of Class B and C shares, and 0.25% of the average daily net assets of Class R shares. In accordance with the Fund's Underwriting and Distribution Services Agreement, DIDI enters into related selling group agreements with various firms at various rates for sales of Class B and C shares, respectively. For the year ended November 30, 2013, the Distribution Fee was as follows:
|
Distribution Fee
|
|
Total Aggregated
|
|
|
Unpaid at November 30, 2013
|
|
|
Class B
|
|
$
|
7,241
|
|
|
$
|
412
|
|
|
Class C
|
|
|
113,541
|
|
|
|
10,546
|
|
|
Class R
|
|
|
1,338
|
|
|
|
203
|
|
|
|
|
$
|
122,120
|
|
|
$
|
11,161
|
|
In addition, DIDI provides information and administrative services for a fee ("Service Fee") to Class A, B, C and R shareholders at an annual rate of up to 0.25% of average daily net assets for each such class. DIDI in turn has various agreements with financial services firms that provide these services and pays these fees based upon the assets of shareholder accounts the firms service. For the year ended November 30, 2013, the Service Fee was as follows:
|
Service Fee
|
|
Total Aggregated
|
|
|
Waived
|
|
|
Unpaid at November 30, 2013
|
|
|
Annual Effective Rate
|
|
|
Class A
|
|
$
|
108,723
|
|
|
$
|
—
|
|
|
$
|
30,669
|
|
|
|
.24
|
%
|
|
Class B
|
|
|
2,387
|
|
|
|
—
|
|
|
|
429
|
|
|
|
.25
|
%
|
|
Class C
|
|
|
37,635
|
|
|
|
3,927
|
|
|
|
9,927
|
|
|
|
.22
|
%
|
|
Class R
|
|
|
1,335
|
|
|
|
234
|
|
|
|
466
|
|
|
|
.21
|
%
|
|
|
|
$
|
150,080
|
|
|
$
|
4,161
|
|
|
$
|
41,491
|
|
|
|
|
|
Underwriting and Contingent Deferred Sales Charge.
DIDI is the principal underwriter for the Fund. Underwriting commissions paid in connection with the distribution of Class A shares for the year ended November 30, 2013 aggregated $7,449.
In addition, DIDI receives any contingent deferred sales charge ("CDSC") from Class B share redemptions occurring within six years of purchase and Class C share redemptions occurring within one year of purchase. There is no such charge upon redemption of any share appreciation or reinvested dividends. The CDSC is based on declining rates, ranging from 4% to 1% for Class B and 1% for Class C, of the value of the shares redeemed. For the year ended November 30, 2013, the CDSC for Class B and C shares aggregated $488 and $944, respectively. A deferred sales charge of up to 1% is assessed on certain redemptions of Class A shares.
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 November 30, 2013, the amount charged to the Fund by DIMA included in the Statement of Operations under "reports to shareholders" aggregated $16,866, of which $7,148 is unpaid.
Directors' Fees and Expenses.
The Fund paid retainer fees to each Director not affiliated with the Advisor, plus specified amounts to the Board Chairperson and Vice Chairperson and to each committee Chairperson.
Affiliated Cash Management Vehicles.
The Fund may invest uninvested cash balances in Central Cash Management Fund and DWS Variable NAV Money Fund, affiliated money market funds which are managed by the Advisor. Each affiliated money market fund seeks to provide a high level of current income consistent with liquidity and the preservation of capital. Each affiliated money market fund is managed in accordance with Rule 2a-7 under the Investment Company Act of 1940, which governs the quality, maturity, diversity and liquidity of instruments in which a money market fund may invest. Central Cash Management Fund seeks to maintain a stable net asset value, and DWS Variable NAV Money Fund maintains a floating net asset value. The Fund indirectly bears its proportionate share of the expenses of each affiliated money market fund in which it invests. Central Cash Management Fund does not pay the Advisor an investment management fee. To the extent that DWS Variable NAV Money Fund pays an investment management fee to the Advisor, the Advisor will waive an amount of the investment management fee payable to the Advisor by the Fund equal to the amount of the investment management fee payable on the Fund's assets invested in DWS Variable NAV Money Fund.
D. Line of Credit
The Fund and other affiliated funds (the "Participants") share 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 November 30, 2013.
E. Share Transactions
The following table summarizes share and dollar activity in the Fund:
|
|
|
Year Ended November 30, 2013
|
|
|
Year Ended November 30, 2012
|
|
|
|
|
Shares
|
|
|
Dollars
|
|
|
Shares
|
|
|
Dollars
|
|
|
Shares sold
|
|
|
Class A
|
|
|
856,653
|
|
|
$
|
12,021,507
|
|
|
|
663,652
|
|
|
$
|
7,408,041
|
|
|
Class B
|
|
|
5,421
|
|
|
|
72,054
|
|
|
|
943
|
|
|
|
10,191
|
|
|
Class C
|
|
|
328,921
|
|
|
|
4,650,958
|
|
|
|
175,908
|
|
|
|
1,976,786
|
|
|
Class R
|
|
|
51,730
|
|
|
|
742,974
|
|
|
|
20,227
|
|
|
|
227,789
|
|
|
Class S
|
|
|
2,691,526
|
|
|
|
37,471,872
|
|
|
|
2,498,727
|
|
|
|
28,012,806
|
|
|
Institutional Class
|
|
|
220,791
|
|
|
|
3,197,708
|
|
|
|
294,665
|
|
|
|
3,287,315
|
|
|
|
|
|
|
|
|
$
|
58,157,073
|
|
|
|
|
|
|
$
|
40,922,928
|
|
|
Shares issued to shareholders in reinvestment of distributions
|
|
|
Class A
|
|
|
33,634
|
|
|
$
|
404,619
|
|
|
|
30,480
|
|
|
$
|
300,231
|
|
|
Class B
|
|
|
224
|
|
|
|
2,695
|
|
|
|
53
|
|
|
|
527
|
|
|
Class C
|
|
|
3,271
|
|
|
|
39,323
|
|
|
|
1,195
|
|
|
|
11,757
|
|
|
Class R
|
|
|
176
|
|
|
|
2,118
|
|
|
|
1
|
|
|
|
6
|
|
|
Class S
|
|
|
128,155
|
|
|
|
1,539,144
|
|
|
|
102,380
|
|
|
|
1,006,391
|
|
|
Institutional Class
|
|
|
19,629
|
|
|
|
235,740
|
|
|
|
21,395
|
|
|
|
210,530
|
|
|
|
|
|
|
|
|
$
|
2,223,639
|
|
|
|
|
|
|
$
|
1,529,442
|
|
|
Shares redeemed
|
|
|
Class A
|
|
|
(973,442
|
)
|
|
$
|
(13,556,253
|
)
|
|
|
(1,225,363
|
)
|
|
$
|
(13,779,227
|
)
|
|
Class B
|
|
|
(69,055
|
)
|
|
|
(956,462
|
)
|
|
|
(82,281
|
)
|
|
|
(918,093
|
)
|
|
Class C
|
|
|
(372,209
|
)
|
|
|
(5,104,042
|
)
|
|
|
(530,801
|
)
|
|
|
(5,968,532
|
)
|
|
Class R
|
|
|
(5,262
|
)
|
|
|
(75,601
|
)
|
|
|
(1,089
|
)
|
|
|
(12,456
|
)
|
|
Class S
|
|
|
(4,402,152
|
)
|
|
|
(61,974,927
|
)
|
|
|
(2,197,305
|
)
|
|
|
(24,923,141
|
)
|
|
Institutional Class
|
|
|
(2,040,739
|
)
|
|
|
(27,075,237
|
)
|
|
|
(424,605
|
)
|
|
|
(4,807,572
|
)
|
|
|
|
|
|
|
|
$
|
(108,742,522
|
)
|
|
|
|
|
|
$
|
(50,409,021
|
)
|
|
Net increase (decrease)
|
|
|
Class A
|
|
|
(83,155
|
)
|
|
$
|
(1,130,127
|
)
|
|
|
(531,231
|
)
|
|
$
|
(6,070,955
|
)
|
|
Class B
|
|
|
(63,410
|
)
|
|
|
(881,713
|
)
|
|
|
(81,285
|
)
|
|
|
(907,375
|
)
|
|
Class C
|
|
|
(40,017
|
)
|
|
|
(413,761
|
)
|
|
|
(353,698
|
)
|
|
|
(3,979,989
|
)
|
|
Class R
|
|
|
46,644
|
|
|
|
669,491
|
|
|
|
19,139
|
|
|
|
215,339
|
|
|
Class S
|
|
|
(1,582,471
|
)
|
|
|
(22,963,911
|
)
|
|
|
403,802
|
|
|
|
4,096,056
|
|
|
Institutional Class
|
|
|
(1,800,319
|
)
|
|
|
(23,641,789
|
)
|
|
|
(108,545
|
)
|
|
|
(1,309,727
|
)
|
|
|
|
|
|
|
|
$
|
(48,361,810
|
)
|
|
|
|
|
|
$
|
(7,956,651
|
)
|
Report of Independent Registered Public Accounting Firm
To the Board of Directors of DWS Value Series, Inc. and Shareholders of DWS Mid Cap Value Fund:
We have audited the accompanying statement of assets and liabilities, including the investment portfolio, of DWS Mid Cap Value Fund (formerly DWS Dreman Mid Cap Value Fund) (one of the series constituting DWS Value Series, Inc. (the "Fund")) as of November 30, 2013, 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 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 November 30, 2013, 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 DWS Mid Cap Value Fund at November 30, 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 the periods indicated therein, in conformity with U.S. generally accepted accounting principles.
|
|
|
|
Boston, Massachusetts
January 23, 2014
|
|
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, distribution and service (12b-1) fees and other Fund expenses. Examples of transaction costs include sales charges (loads) and 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 (June 1, 2013 to November 30, 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. Subject to certain exceptions, an account maintenance fee of $20.00 assessed once per calendar year for Classes A, B, C and S shares may apply for accounts with balances less than $10,000. This fee is not included in these tables. If it was, the estimate of expenses paid for Classes A, B, C and S shares during the period would be higher, and account value during the period would be lower, by this amount.
|
Expenses and Value of a $1,000 Investment
for the six months ended November 30, 2013 (Unaudited)
|
|
|
Actual Fund Return
|
|
Class A
|
|
|
Class B
|
|
|
Class C
|
|
|
Class R
|
|
|
Class S
|
|
|
Institutional Class
|
|
|
Beginning Account Value 6/1/13
|
|
$
|
1,000.00
|
|
|
$
|
1,000.00
|
|
|
$
|
1,000.00
|
|
|
$
|
1,000.00
|
|
|
$
|
1,000.00
|
|
|
$
|
1,000.00
|
|
|
Ending Account Value 11/30/13
|
|
$
|
1,114.20
|
|
|
$
|
1,110.40
|
|
|
$
|
1,109.80
|
|
|
$
|
1,112.50
|
|
|
$
|
1,115.70
|
|
|
$
|
1,115.70
|
|
|
Expenses paid per $1,000*
|
|
$
|
6.47
|
|
|
$
|
10.42
|
|
|
$
|
10.42
|
|
|
$
|
7.78
|
|
|
$
|
5.14
|
|
|
$
|
5.14
|
|
|
Hypothetical 5% Fund Return
|
|
Class A
|
|
|
Class B
|
|
|
Class C
|
|
|
Class R
|
|
|
Class S
|
|
|
Institutional Class
|
|
|
Beginning Account Value 6/1/13
|
|
$
|
1,000.00
|
|
|
$
|
1,000.00
|
|
|
$
|
1,000.00
|
|
|
$
|
1,000.00
|
|
|
$
|
1,000.00
|
|
|
$
|
1,000.00
|
|
|
Ending Account Value 11/30/13
|
|
$
|
1,018.95
|
|
|
$
|
1,015.19
|
|
|
$
|
1,015.19
|
|
|
$
|
1,017.70
|
|
|
$
|
1,020.21
|
|
|
$
|
1,020.21
|
|
|
Expenses Paid per $1,000*
|
|
$
|
6.17
|
|
|
$
|
9.95
|
|
|
$
|
9.95
|
|
|
$
|
7.44
|
|
|
$
|
4.91
|
|
|
$
|
4.91
|
|
* Expenses are equal to the Fund's annualized expense ratio for each share class, multiplied by the average account value over the period, multiplied by 183 (the number of days in the most recent six-month period), then divided by 365.
|
Annualized Expense Ratios
|
Class A
|
Class B
|
Class C
|
Class R
|
Class S
|
Institutional Class
|
|
DWS Mid Cap Value Fund
|
1.22%
|
1.97%
|
1.97%
|
1.47%
|
.97%
|
.97%
|
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)
For corporate shareholders, 100% of the income dividends paid during the Fund's fiscal year ended November 30, 2013, qualified for the dividends received deduction.
For federal income tax purposes, the Fund designates approximately $4,625,000, or the maximum amount allowable under law, as qualified dividends income.
Please contact 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.
Advisory Agreement Board Considerations and Fee Evaluation
The Board of Directors approved the renewal of DWS Mid Cap Value Fund's investment management agreement (the "Agreement") with Deutsche Investment Management Americas Inc. ("DIMA") in September 2013.
In terms of the process that the Board followed prior to approving the Agreement, shareholders should know that:
—
In September 2013, all but one of the Fund's Directors were independent of DIMA and its affiliates.
—
The Directors met frequently during the past year to discuss fund matters and dedicated a substantial amount of time to contract review matters. Over the course of several months, the Board's Contract Committee, in coordination with the Board's Equity Oversight Committee, reviewed comprehensive materials received from DIMA, independent third parties and independent counsel. These materials included an analysis of the Fund's performance, fees and expenses, and profitability compiled by a fee consultant retained by the Fund's Independent Directors (the "Fee Consultant"). The Board also received extensive information throughout the year regarding performance of the Fund.
—
The Independent Directors regularly meet privately with their independent counsel to discuss contract review and other matters. In addition, the Independent Directors were also advised by the Fee Consultant in the course of their review of the Fund's contractual arrangements and considered a comprehensive report prepared by the Fee Consultant in connection with their deliberations.
—
In connection with reviewing the Agreement, the Board also reviewed the terms of the Fund's Rule 12b-1 plan, distribution agreement, transfer agency agreement and other material service agreements.
—
Based on its evaluation of the information provided, the Contract Committee presented its findings and recommendations to the Board. The Board then reviewed the Contract Committee's findings and recommendations.
In connection with the contract review process, the Contract Committee and the Board considered the factors discussed below, among others. The Board also considered that DIMA and its predecessors have managed the Fund since its inception, and the Board believes that a long-term relationship with a capable, conscientious advisor is in the best interests of the Fund. The Board considered, generally, that shareholders chose to invest or remain invested in the Fund knowing that DIMA managed the Fund. DIMA is part of Deutsche Bank AG, a major global banking institution that is engaged in a wide range of financial services. The Board believes that there are advantages to being part of a global asset management business that offers a wide range of investing expertise and resources, including hundreds of portfolio managers and analysts with research capabilities in many countries throughout the world.
As part of the contract review process, the Board carefully considered the fees and expenses of each DWS fund overseen by the Board in light of the fund's performance. In many cases, this led to a negotiation with DIMA of lower expense caps as part of the 2012 and 2013 contract review processes than had previously been in place. As part of these negotiations, the Board indicated that it would consider relaxing these new lower caps in future years following sustained improvements in performance, among other considerations.
In June 2012, Deutsche Bank AG ("DB"), DIMA's parent company, announced that DB would combine its Asset Management (of which DIMA was a part) and Wealth Management divisions. DB has advised the Independent Directors that the U.S. asset management business is a critical and integral part of DB, and that it has, and will continue to, reinvest a significant portion of the substantial savings it expects to realize by combining its Asset Management and Wealth Management divisions into the new Asset and Wealth Management ("AWM") division, including ongoing enhancements to its investment capabilities. DB also has confirmed its commitment to maintaining strong legal and compliance groups within the AWM division.
While shareholders may focus primarily on fund performance and fees, the Fund's Board considers these and many other factors, including the quality and integrity of DIMA's personnel and such other issues as back-office operations, fund valuations, and compliance policies and procedures.
Nature, Quality and Extent of Services.
The Board considered the terms of the Agreement, including the scope of advisory services provided under the Agreement. The Board noted that, under the Agreement, DIMA provides portfolio management and administrative services to the Fund. The Board considered the experience and skills of senior management and investment personnel, the resources made available to such personnel, the ability of DIMA to attract and retain high-quality personnel, and the organizational depth and stability of DIMA. The Board reviewed the Fund's performance over short-term and long-term periods and compared those returns to various agreed-upon performance measures, including market indices and a peer universe compiled by the Fee Consultant using information supplied by Morningstar Direct ("Morningstar"), an independent fund data service. The Board also noted that it has put into place a process of identifying "Focus Funds" (e.g., funds performing poorly relative to their benchmark or a peer universe compiled by an independent fund data service), and receives more frequent reporting and information from DIMA regarding such funds, along with DIMA's remedial plans to address underperformance. The Board believes this process is an effective manner of identifying and addressing underperforming funds. Based on the information provided, the Board noted that for the one-, three- and five-year periods ended December 31, 2012, the Fund's performance (Class A shares) was in the 2nd quartile, 4th quartile and 3rd quartile, respectively, of the applicable Morningstar universe (the 1st quartile being the best performers and the 4th quartile being the worst performers). The Board also observed that the Fund has underperformed its benchmark in the one-, three- and five-year periods ended December 31, 2012. The Board noted the disappointing investment performance of the Fund in recent periods and continued to discuss with senior management of DIMA the factors contributing to such underperformance and actions being taken to improve performance. The Board recognized that DIMA has made changes to its investment personnel and processes in recent years in an effort to enhance its investment platform and improve long-term performance across the DWS fund complex.
Fees and Expenses.
The Board considered the Fund's investment management fee schedule, operating expenses and total expense ratios, and comparative information provided by Lipper Inc. ("Lipper") and the Fee Consultant regarding investment management fee rates paid to other investment advisors by similar funds (1st quartile being the most favorable and 4th quartile being the least favorable). With respect to management fees paid to other investment advisors by similar funds, the Board noted that the contractual fee rates paid by the Fund were lower than the median (1st quartile) of the applicable Lipper peer group (based on Lipper data provided as of December 31, 2012). The Board noted that the Fund's Class A shares total (net) operating expenses (excluding 12b-1 fees) were expected to be lower than the median (2nd quartile) of the applicable Lipper expense universe (based on Lipper data provided as of December 31, 2012, and analyzing Lipper expense universe Class A (net) expenses less any applicable 12b-1 fees) ("Lipper Universe Expenses"). The Board also reviewed data comparing each share class's total (net) operating expenses to the applicable Lipper Universe Expenses. The Board considered the Fund's management fee rate as compared to fees charged by DIMA to a comparable fund and considered differences between the Fund and the comparable fund. The Board also considered how the Fund's total (net) operating expenses compared to the total (net) operating expenses of a more customized peer group selected by Lipper (based on such factors as asset size). The Board also noted that the expense limitations agreed to by DIMA helped to ensure that the Fund's total (net) operating expenses would remain competitive.
The information considered by the Board as part of its review of management fees included information regarding fees charged by DIMA and its affiliates to similar institutional accounts and to similar funds offered primarily to European investors ("DWS Europe funds"), in each case as applicable. The Board observed that advisory fee rates for institutional accounts generally were lower than the management fees charged by similarly managed DWS U.S. mutual funds ("DWS Funds"), but also took note of the differences in services provided to DWS Funds as compared to institutional accounts. In the case of DWS Europe funds, the Board observed that fee rates for DWS Europe funds generally were higher than for similarly managed DWS Funds, but noted that differences in the types of services provided to DWS Funds relative to DWS Europe funds made it difficult to compare such fees.
On the basis of the information provided, the Board concluded that management fees were reasonable and appropriate in light of the nature, quality and extent of services provided by DIMA.
Profitability.
The Board reviewed detailed information regarding revenues received by DIMA under the Agreement. The Board considered the estimated costs and pre-tax profits realized by DIMA from advising the DWS Funds, as well as estimates of the pre-tax profits attributable to managing the Fund in particular. The Board also received information regarding the estimated enterprise-wide profitability of DWS and its affiliates with respect to all fund services in totality and by fund. The Board and the Fee Consultant reviewed DIMA's methodology in allocating its costs to the management of the Fund. Based on the information provided, the Board concluded that the pre-tax profits realized by DIMA in connection with the management of the Fund were not unreasonable. The Board also reviewed information regarding the profitability of certain similar investment management firms. The Board noted that while information regarding the profitability of such firms is limited (and in some cases is not necessarily prepared on a comparable basis), DIMA and its affiliates' overall profitability with respect to the DWS fund complex (after taking into account distribution and other services provided to the funds by DIMA and its affiliates) was lower than the overall profitability levels of many comparable firms for which such data was available.
Economies of Scale.
The Board considered whether there are economies of scale with respect to the management of the Fund and whether the Fund benefits from any economies of scale. The Board noted that the Fund's management fee schedule includes fee breakpoints. The Board concluded that the Fund's fee schedule represents an appropriate sharing between the Fund and DIMA of such economies of scale as may exist in the management of the Fund at current asset levels.
Other Benefits to DIMA and Its Affiliates.
The Board also considered the character and amount of other incidental benefits received by DIMA and its affiliates, including any fees received by an affiliate of DIMA for distribution services. The Board also considered benefits to DIMA related to brokerage and soft-dollar allocations, including allocating brokerage to pay for research generated by parties other than the executing broker dealers, which pertain primarily to funds investing in equity securities, along with the incidental public relations benefits to DIMA related to DWS Funds advertising and cross-selling opportunities among DIMA products and services. The Board concluded that management fees were reasonable in light of these fallout benefits.
Compliance.
The Board considered the significant attention and resources dedicated by DIMA to documenting and enhancing its compliance processes in recent years. The Board noted in particular (i) the experience and seniority of both DIMA's chief compliance officer and the Fund's chief compliance officer; (ii) the large number of DIMA compliance personnel; and (iii) the substantial commitment of resources by DIMA and its affiliates to compliance matters.
Based on all of the information considered and the conclusions reached, the Board unanimously determined that the continuation of the Agreement is in the best interests of the Fund. In making this determination, the Board did not give particular weight to any single factor identified above. The Board considered these factors over the course of numerous meetings, certain of which were in executive session with only the Independent Directors and their independent counsel present. It is possible that individual Directors may have weighed these factors differently in reaching their individual decisions to approve the continuation of the Agreement.