MFS CHARTER INCOME TRUST N-CSRS
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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 811-5822

 

 

 

MFS CHARTER INCOME TRUST

(Exact name of registrant as specified in charter)

 

500 Boylston Street, Boston, Massachusetts 02116

(Address of principal executive offices) (Zip code)

 

 

Susan S. Newton

Massachusetts Financial Services Company

500 Boylston Street

Boston, Massachusetts 02116

(Name and address of agents for service)

 

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

 

Date of fiscal year end: November 30

 

Date of reporting period: May 31, 2008


Table of Contents
ITEM 1. REPORTS TO STOCKHOLDERS.


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LOGO

LOGO

Semiannual report

MFS® Charter Income Trust

5/31/08

MCR-SEM


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MFS® Charter Income Trust

LETTER FROM THE CEO      1
PORTFOLIO COMPOSITION      2
PORTFOLIO MANAGERS’ PROFILES      3
PERFORMANCE SUMMARY      4
INVESTMENT OBJECTIVE, PRINCIPAL INVESTMENT STRATEGIES AND RISKS OF THE FUND      6
DIVIDEND REINVESTMENT AND CASH PURCHASE PLAN      8
PORTFOLIO OF INVESTMENTS      10
STATEMENT OF ASSETS AND LIABILITIES      27
STATEMENT OF OPERATIONS      28
STATEMENTS OF CHANGES IN NET ASSETS      29
FINANCIAL HIGHLIGHTS      30
NOTES TO FINANCIAL STATEMENTS      31
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
     41
BOARD REVIEW OF INVESTMENT
ADVISORY AGREEMENT
     42
PROXY VOTING POLICIES AND
INFORMATION
     42
QUARTERLY PORTFOLIO DISCLOSURE      42
CONTACT INFORMATION         BACK COVER

New York Stock Exchange Symbol:  MCR

 

NOT FDIC INSURED Ÿ MAY LOSE VALUE Ÿ

NO BANK OR CREDIT UNION GUARANTEE Ÿ NOT A DEPOSIT Ÿ

NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY OR

NCUA/NCUSIF


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LOGO

 

LETTER FROM THE CEO

Dear Shareholders:

Negative headlines tend to resonate during difficult markets, and we certainly have had more than our share of tough news recently. As a result consumer, and particularly investor, sentiment are at all-time lows. That said, I do think it is helpful to remember there are always silver linings in the storm clouds if you look hard enough.

Through all of the challenges we have faced, there are some positive underlying trends. In the United States, for example, institutional traders and credit market followers are just now showing increasing signs of confidence and are beginning to take on more risk. At the corporate level, earnings continue to be relatively strong as companies have reduced labor costs, controlled inventories, and relied less on debt to finance expansion. More broadly, low interest rates and strong demand for consumer goods and industrial equipment are good signs for the global economy.

While I do not mean to minimize the risks inherent in today’s markets, periods such as these allow the talented fund managers and research analysts we have at MFS® to test their convictions, reevaluate existing positions, and identify new investment ideas. Our investment process also includes a significant risk management component, with constant attention paid to monitoring market risk, so we can do our best to minimize any surprises to your portfolio.

For investors, this is a great time to check in with your advisor and make sure you have a sound investment plan in place — one that can keep your hard-earned money working over the long term through a strategy that involves asset allocation, diversification, and periodic portfolio rebalancing and reviews. A plan tailored to your distinct needs and goals continues to be the best approach to help you take advantage of the inevitable challenges — and opportunities — that present themselves over time.

Respectfully,

LOGO

Robert J. Manning

Chief Executive Officer and Chief Investment Officer

MFS Investment Management®

July 15, 2008

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

 

Fixed income sectors (i)  
Non U.S. Government Bonds   24.9%
High Yield Corporates   16.2%
High Grade Corporates   14.9%
Mortgage-Backed Securities   13.8%
Emerging Market Bonds   9.1%
U.S. Treasury Securities   9.0%
Commercial Mortgage-Backed Securities   3.7%
U.S. Government Agencies   1.4%
Asset-Backed Securities   1.3%
Floating Rate Loans   0.9%
Collateralized Debt Obligations   0.2%

 

Credit quality of bonds (r)  
AAA   49.2%
AA   1.7%
A   13.0%
BBB   13.9%
BB   10.6%
B   8.9%
CCC   1.7%
CC   0.1%
Not Rated   0.9%
Portfolio facts  
Average Duration (d)(i)   5.3
Average Life (i)(m)   8.0 yrs.
Average Maturity (i)(m)   12.2 yrs.
Average Credit Quality of Rated Securities (long-term) (a)   A
Average Credit Quality of Rated Securities (short-term) (a)   A-1
Country weightings (i)  
United States   62.6%
Japan   7.1%
Germany   5.3%
Netherlands   3.3%
France   3.2%
United Kingdom   2.0%
Canada   1.7%
Spain   1.7%
Russia   1.6%
Other Countries   11.5%

 

(a) The average credit quality of rated securities is based upon a market weighted average of portfolio holdings that are rated by public rating agencies.

 

(d) Duration is a measure of how much a bond’s price is likely to fluctuate with general changes in interest rates, e.g., if rates rise 1.00%, a bond with a 5-year duration is likely to lose about 5.00% of its value.

 

(i) For purposes of this presentation, the bond component includes accrued interest amounts and may be positively or negatively impacted by the equivalent exposure from any derivative holdings, if applicable.

 

(m) The average maturity shown is calculated using the final stated maturity on the portfolio’s holdings without taking into account any holdings which have been pre-refunded or pre-paid to an earlier date or which have a mandatory put date prior to the stated maturity. The average life shown takes into account these earlier dates.

 

(r) Each security is assigned a rating from Moody’s Investors Service. If not rated by Moody’s, the rating will be that assigned by Standard & Poor’s. Likewise, if not assigned a rating by Standard & Poor’s, it will be based on the rating assigned by Fitch, Inc. For those portfolios that hold a security which is not rated by any of the three agencies, the security is considered Not Rated. Holdings in U.S. Treasuries and government agency mortgage-backed securities, if any, are included in the “AAA”-rating category. Percentages are based on the total market value of investments as of 5/31/08.

Percentages are based on net assets as of 5/31/08, unless otherwise noted.

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

 

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PORTFOLIO MANAGERS’ PROFILES

 

Richard Hawkins     Investment Officer of MFS; employed in the investment area of MFS since 1988. Portfolio Manager of the fund since July 2004.
John Addeo     Investment Officer of MFS; employed in the investment area of MFS since 1998. Portfolio Manager of the fund since February 2005.
David Cole     Investment Officer of MFS; employed in the investment area of MFS since 2004. High Yield Analyst at Franklin Templeton Investment from 1999 to 2004. Portfolio Manager of the fund since October 2006.
Matthew Ryan     Investment Officer of MFS; employed in the investment area of MFS since 1997. Portfolio Manager of the fund since September 2004.

 

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PERFORMANCE SUMMARY THROUGH 5/31/08

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.

 

Price Summary

Six Months Ended 5/31/08

                    
             Date      Price        
    

Net Asset Value

       5/31/08      $9.32     
            11/30/07      $9.54     
    

New York Stock Exchange Price

       5/31/08      $8.42     
           

 1/29/08 (high) (t)

     $8.59     
           

 3/17/08 (low) (t)

     $8.06     
                11/30/07      $8.30       

Total Returns vs Benchmarks

Six Months Ended 5/31/08

       
  

New York Stock Exchange Price (r)

     4.44%     
  

Net Asset Value (r)

     0.57%     
  

Charter Income Trust Blended Index (f)(x)

     1.27%     
  

Citigroup World Government Bond Non-Dollar Hedged Index ex US (f)

     0.17%     
  

JPMorgan Emerging Markets Bond Index Global (f)

     2.41%     
   Lehman Brothers U.S. Credit Bond Index (f)      0.20%     
   Lehman Brothers U.S. Government/Mortgage Bond Index (f)      2.02%     
     Lehman Brothers U.S. High-Yield Corporate Bond Index (f)      1.83%       

 

(f) Source: FactSet Research Systems Inc.

 

(r) Includes reinvestment of dividends and capital gain distributions.

 

(t) For the period December 1, 2007 through May 31, 2008.

 

(x) Charter Income Trust Blended Index consists of 16.67% Lehman Brothers U.S. Credit Bond Index, 16.67% Lehman Brothers U.S. High-Yield Corporate Bond Index, 8% JPMorgan Emerging Markets Bond Index Global, 25.33% Citigroup World Government Bond Non-Dollar Hedged Index ex US and 33.33% Lehman Brothers U.S. Government/Mortgage Bond Index.

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Performance Summary – continued

 

Benchmark Definitions

Citigroup World Government Bond Non-Dollar Hedged Index ex US – a market capitalization-weighted index that is designed to represent the currency-hedged performance of the international developed government bond markets, excluding the United States.

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

Lehman Brothers U.S. Credit Bond Index – a market capitalization-weighted index that measures the performance of publicly issued, SEC-registered, U.S. corporate and specified foreign debentures and secured notes that meet specified maturity, liquidity, and quality requirements.

Lehman Brothers U.S. Government/Mortgage Bond Index – measures debt issued by the U.S. Government, and its agencies, as well as mortgage-backed pass-through securities of Ginnie Mae (GNMA), Fannie Mae (FNMA), and Freddie Mac (FHLMC).

Lehman Brothers U.S. High-Yield Corporate Bond Index – a market capitalization-weighted index that measures the performance of non-investment grade, fixed rate debt. Eurobonds and debt issues from countries designated as emerging markets (e.g., Argentina, Brazil, Venezuela, etc.) are excluded.

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. Distributions that are treated for federal income tax purposes as a return of capital will reduce each shareholders 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. Returns of shareholder capital have the effect of reducing the fund’s assets and increasing the fund’s expense ratio.

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 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/or foreign issuers, corporate bonds of U.S. and/or foreign issuers, and/or debt instruments of issuers located in emerging market countries. 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 lower quality debt instruments.

MFS may invest a relatively high percentage of the fund’s assets in a single country, a small number of countries, or a particular geographic region.

MFS may invest the fund’s assets in mortgage dollar rolls.

MFS may use derivatives for different purposes, including to earn income and enhance returns, to increase or decrease exposure to a particular market, to manage or adjust the risk profile of the fund, or as alternatives to direct investments.

MFS uses a bottom-up investment approach in buying and selling investments for the fund. Investments are selected primarily based on fundamental analysis of instruments and their issuers in light of current market, economic, political, and regulatory conditions. Factors considered 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. Quantitative analysis of the structure of the instrument and its features may also be considered.

The fund may use leverage by borrowing up to 33 1 /3% of the fund’s assets, including borrowings for investment purposes, and investing the proceeds pursuant to its 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 portfolio’s yield and share prices change daily based on the credit quality of its investments and changes in interest rates. In general, the value of debt securities will decline when interest rates rise and will increase when interest rates fall. Debt securities with longer maturity dates will generally be subject to greater price fluctuations than those with shorter maturities. Mortgage securities are subject to prepayment risk which can offer less potential for gains in a declining interest rate environment and greater potential for loss in a rising interest rate environment. The fund may invest a significant portion of its assets in mortgage-backed securities. The value of mortgage-backed securities may depend, in part, on the issuer’s or borrower’s credit quality or ability to pay principal and interest when due and may fall if an issuer or borrower defaults on its obligation to pay principal or interest or if the instrument’s credit rating is downgraded by a credit rating agency. U.S. Government securities not supported as to the payment of principal or interest by the U.S. Treasury, such as those issued by Fannie Mae, Freddie Mac, and the Federal Home Loan Banks, are subject to greater credit risk than are U.S. Government securities supported by the U.S. Treasury, such as those issued by Ginnie Mae. Derivatives can be highly volatile and involve risks in addition to those of the underlying indicator’s in whose value the derivative is based. Gains or losses from derivatives can be substantially greater than the derivatives’ original cost. Lower quality debt securities involve substantially greater risk of default and their value can decline significantly over time. Foreign investments can be more volatile than U.S. investments. Changes in currency exchange rates can affect the U.S. dollar rate of foreign currency investments and investments denominated in foreign currency. Investing in emerging markets can involve risks in addition to those generally associated with investing in more developed foreign markets. To the extent that investments are purchased with the proceeds from the borrowings from a bank, the fund’s net asset value will increase or decrease at a greater rate than a comparable unleveraged fund. When you sell your shares, they may be worth more or less than the amount you paid for them. 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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DIVIDEND REINVESTMENT AND CASH PURCHASE PLAN

The fund offers a Dividend Reinvestment and Cash Purchase Plan (the “Plan”) that allows you to reinvest either all of the distributions paid by the fund or only the long-term capital gains. 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 discounted price of either the net asset value or 95% of the market price, whichever is greater. Twice each year you can also buy shares. Investments may be made in any amount of $100 or more in January and July on the 15th of the month or shortly thereafter.

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. 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.

To enroll in or withdraw from the Plan, or if you have any questions, contact the Plan Agent Computershare Trust Company, N.A. (the Transfer Agent for the fund) at www.computershare.com, by calling 1-800-637-2304 or by writing to P.O. Box 43078, Providence, RI 02940-3078 Please have available the name of the fund and your account and Social Security numbers. 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 two ways: a check for the value of the full and fractional shares, or a certificate for the full shares and a check for the fractional shares.

The following changes in the Plan will take effect on November 1, 2008:

 

Ÿ  

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.

Ÿ  

You can buy shares of the fund through the Plan Agent on a quarterly basis in January, April, July and October. Contact the Plan Agent for further information.

 

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Dividend Reinvestment and Cash Purchase Plan – continued

 

Ÿ  

If you withdraw from the Plan you will have three options with regard to shares held in the Plan:

  Ÿ  

Your full non-certificated shares will be held by the Plan Agent in your account in book-entry form and a check will be issued for the value of any fractional shares, less any applicable fees and brokerage charges.

  Ÿ  

The Plan Agent will sell all full and fractional shares and send the proceeds via check to your address of record. A service fee and a brokerage charge will be deducted from the proceeds.

  Ÿ  

If you opt to sell your shares through an investment professional, you may request your investment professional to transfer shares electronically from your Plan account to your brokerage firm account.

Ÿ  

The Plan may be amended or terminated on 30 days’ written notice to Plan participants.

 

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PORTFOLIO OF INVESTMENTS

5/31/08 (unaudited)

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

 

Bonds - 96.8%             
Issuer    Shares/Par   Value ($)
    
Aerospace - 0.3%             
Bombardier, Inc., 8%, 2014 (n)    $ 851,000   $ 893,550
Hawker Beechcraft Acquisition, 8.5%, 2015      400,000     411,000
TransDigm Group, Inc., 7.75%, 2014      245,000     250,513
        
           $ 1,555,063
Asset Backed & Securitized - 5.2%             
Asset Securitization Corp., FRN, 8.335%, 2029    $ 1,459,368   $ 1,577,846
Bayview Financial Acquisition Trust, FRN, 5.483%, 2041      404,000     380,913
Bayview Financial Revolving Mortgage Loan Trust, FRN,
3.182%, 2040 (z)
     1,160,000     876,821
Citigroup/Deutsche Bank Commercial Mortgage Trust, FRN,
5.366%, 2049
     1,605,000     1,443,713
Commercial Mortgage Pass-Through Certificates, FRN, 5.986%, 2046      230,000     219,347
Countrywide Asset-Backed Certificates, FRN, 5.147%, 2035      2,000,000     1,854,493
Credit Suisse Mortgage Capital Certificate, 5.343%, 2039      1,080,744     984,935
Crest Ltd., CDO, 7%, 2040      2,000,000     1,038,500
DLJ Commercial Mortgage Corp., 6.04%, 2031 (z)      2,000,000     1,984,124
First Union-Lehman Brothers Bank of America, FRN, 0.398%, 2035 (i)      25,753,429     428,547
First Union-Lehman Brothers Commercial Mortgage Trust,
7%, 2029 (n)
     662,151     696,440
JPMorgan Chase Commercial Mortgage Securities Corp.,
5.372%, 2047
     940,000     860,300
JPMorgan Chase Commercial Mortgage Securities Corp., FRN,
6.062%, 2051
     185,000     139,961
Merrill Lynch Mortgage Trust, FRN, 5.829%, 2050      185,000     138,167
Morgan Stanley Capital I, Inc., 5.168%, 2042      1,532,020     1,505,090
Mortgage Capital Funding, Inc., FRN, 0.456%, 2031 (i)      4,943,185     7,544
Nationslink Funding Corp., 5%, 2031 (z)      1,568,000     1,548,263
New Century Home Equity Loan Trust, FRN, 4.532%, 2035      2,500,000     2,449,915
PNC Mortgage Acceptance Corp., FRN, 7.1%, 2032 (z)      2,510,000     2,472,718
Spirit Master Funding LLC, 5.05%, 2023 (z)      1,742,710     1,334,724
Structured Asset Securities Corp., FRN, 4.67%, 2035      1,380,056     1,324,839
Wachovia Bank Commercial Mortgage Trust, FRN, 5.383%, 2043      2,640,000     2,374,074
Wachovia Bank Commercial Mortgage Trust, FRN, 5.691%, 2047      1,503,155     1,109,314
        
           $ 26,750,588

 

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Portfolio of Investments (unaudited) – continued

 

Issuer    Shares/Par   Value ($)
    
Bonds - continued             
Automotive - 0.3%             
Allison Transmission, Inc., 11%, 2015 (n)    $ 375,000   $ 353,437
DaimlerChrysler N.A. Holdings Corp., 8.5%, 2031      400,000     455,139
Ford Motor Credit Co. LLC, 12%, 2015      230,000     229,798
Ford Motor Credit Co. LLC, 8%, 2016      300,000     251,857
Ford Motor Credit Co. LLC, FRN, 4.283%, 2010      275,000     252,724
General Motors Acceptance Corp., 8.375%, 2033      404,000     276,740
        
           $ 1,819,695
Broadcasting - 1.9%             
Allbritton Communications Co., 7.75%, 2012    $ 855,000   $ 857,137
CBS Corp., 6.625%, 2011      1,036,000     1,063,408
Clear Channel Communications, Inc., 6.25%, 2011      1,240,000     1,054,000
DIRECTV Holdings LLC, 7.625%, 2016 (z)      435,000     433,369
Grupo Televisa S.A., 6%, 2018 (z)      654,000     639,302
Grupo Televisa S.A., 8.5%, 2032      962,000     1,108,407
Lamar Media Corp., 7.25%, 2013      675,000     664,875
Lamar Media Corp., 6.625%, 2015      205,000     193,213
Lamar Media Corp., “C”, 6.625%, 2015      245,000     230,913
LIN TV Corp., 6.5%, 2013      550,000     521,813
Local TV Finance LLC, 9.25%, 2015 (n)(p)      400,000     322,000
News America, Inc., 7.7%, 2025      1,140,000     1,207,725
News America, Inc., 6.2%, 2034      542,000     505,410
Nexstar Broadcasting Group, Inc., 7%, 2014      395,000     349,575
Univision Communications, Inc., 9.75%, 2015 (n)(p)      660,000     498,300
        
           $ 9,649,447
Brokerage & Asset Managers - 0.8%             
INVESCO PLC, 5.625%, 2012    $ 1,440,000   $ 1,369,992
Lehman Brothers Holdings, Inc., 6.5%, 2017      1,260,000     1,170,175
Morgan Stanley, 5.75%, 2016      662,000     625,744
Morgan Stanley Group, Inc., 6.625%, 2018      652,000     641,764
Nuveen Investments, Inc., 10.5%, 2015 (n)      330,000     310,200
        
           $ 4,117,875
Building - 0.1%             
Associated Materials, Inc., 9.75%, 2012    $ 275,000   $ 273,625
Building Materials Corp. of America, 7.75%, 2014      295,000     253,700
Nortek Holdings, Inc., 10%, 2013 (z)      200,000     198,750
Nortek Holdings, Inc., 8.5%, 2014      55,000     38,500
        
           $ 764,575

 

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Portfolio of Investments (unaudited) – continued

 

Issuer    Shares/Par   Value ($)
    
Bonds - continued             
Business Services - 0.1%             
SunGard Data Systems, Inc., 10.25%, 2015    $ 570,000   $ 592,800
Cable TV - 0.7%             
CCH II Holdings LLC, 10.25%, 2010    $ 700,000   $ 696,500
CCO Holdings LLC, 8.75%, 2013      1,255,000     1,192,250
CSC Holdings, Inc., 8.5%, 2015 (z)      230,000     230,000
Mediacom LLC, 9.5%, 2013      50,000     47,750
NTL Cable PLC, 9.125%, 2016      115,000     112,700
TCI Communications, Inc., 9.8%, 2012      1,169,000     1,280,616
        
           $ 3,559,816
Chemicals - 1.0%             
Braskem S.A., 7.25%, 2018 (z)    $ 887,000   $ 887,000
Momentive Performance Materials, Inc., 11.5%, 2016      492,000     416,970
Mosaic Co., 7.875%, 2016 (n)      1,525,000     1,654,625
Nalco Co., 7.75%, 2011      415,000     423,300
Nalco Co., 8.875%, 2013      45,000     47,363
Yara International A.S.A., 5.25%, 2014 (n)      2,000,000     1,967,786
        
           $ 5,397,044
Computer Software - 0.5%             
First Data Corp., 9.875%, 2015 (n)    $ 665,000   $ 601,825
Seagate Technology HDD Holdings, 6.375%, 2011      1,950,000     1,920,750
        
           $ 2,522,575
Conglomerates - 0.4%             
Actuant Corp., 6.875%, 2017    $ 1,005,000   $ 1,007,512
Kennametal, Inc., 7.2%, 2012      1,140,000     1,204,971
        
           $ 2,212,483
Consumer Goods & Services - 0.4%             
Corrections Corp. of America, 6.25%, 2013    $ 215,000   $ 211,775
Fortune Brands, Inc., 5.125%, 2011      1,150,000     1,134,735
Jarden Corp., 7.5%, 2017      135,000     120,488
Service Corp. International, 7%, 2017      775,000     751,750
        
           $ 2,218,748
Containers - 0.5%             
Crown Americas LLC, 7.75%, 2015    $ 565,000   $ 593,250
Greif, Inc., 6.75%, 2017      855,000     850,725
Owens-Brockway Glass Container, Inc., 8.25%, 2013      940,000     972,900
        
           $ 2,416,875

 

12


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Portfolio of Investments (unaudited) – continued

 

Issuer    Shares/Par   Value ($)
    
Bonds - continued             
Defense Electronics - 0.8%             
BAE Systems Holdings, Inc., 4.75%, 2010 (n)    $ 790,000   $ 799,753
BAE Systems Holdings, Inc., 5.2%, 2015 (n)      750,000     711,213
L-3 Communications Corp., 5.875%, 2015      1,350,000     1,279,125
L-3 Communications Corp., 6.375%, 2015      1,500,000     1,445,625
        
           $ 4,235,716
Electronics - 0.1%             
Flextronics International Ltd., 6.25%, 2014    $ 370,000   $ 353,350
Emerging Market Quasi-Sovereign - 2.1%             
Codelco, Inc., 5.625%, 2035    $ 1,900,000   $ 1,693,732
Gazprom International S.A., 7.201%, 2020      946,853     965,790
Majapahit Holding B.V., 7.25%, 2017 (n)      1,478,000     1,359,760
National Development Co., 6.369%, 2018 (z)      1,050,000     1,078,875
National Power Corp., FRN, 6.888%, 2011      780,000     825,773
OAO Gazprom, 7.343%, 2013 (z)      176,000     187,220
OAO Gazprom, 8.146%, 2018 (z)      157,000     170,345
Pemex Project Funding Master Trust, 5.75%, 2018 (n)      2,006,000     1,995,970
Ras Laffan Liquefied Natural Gas Co. Ltd., 8.294%, 2014 (n)      2,490,000     2,750,138
        
           $ 11,027,603
Emerging Market Sovereign - 2.4%             
Federative Republic of Brazil, 6%, 2017    $ 4,176,000   $ 4,409,856
Gabonese Republic, 8.2%, 2017 (n)      998,000     1,052,890
Republic of Argentina, FRN, 3.092%, 2012      3,121,875     2,685,368
Republic of Colombia, 7.375%, 2017      1,393,000     1,575,483
Republic of Indonesia, 6.875%, 2017 (n)      171,000     169,931
Republic of Panama, 9.375%, 2029      553,000     745,721
Republic of Peru, 0%, 2009    PEN 1,000,000     340,240
Republic of Peru, 0%, 2009    PEN 3,100,000     1,029,869
Republic of Philippines, 9.375%, 2017    $ 449,000     556,760
        
           $ 12,566,118
Energy - Independent - 1.1%             
Chaparral Energy, Inc., 8.875%, 2017    $ 295,000   $ 261,812
Chesapeake Energy Corp., 6.875%, 2016      1,070,000     1,051,275
Forest Oil Corp., 7.25%, 2019      210,000     206,325
Hilcorp Energy I LP, 7.75%, 2015 (n)      500,000     488,750
Mariner Energy, Inc., 8%, 2017      510,000     493,425
Newfield Exploration Co., 6.625%, 2014      435,000     421,950
OPTI Canada, Inc., 8.25%, 2014      575,000     592,250
Plains Exploration & Production Co., 7%, 2017      685,000     659,313
Plains Exploration & Production Co., 7.625%, 2018      75,000     75,375

 

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Portfolio of Investments (unaudited) – continued

 

Issuer    Shares/Par   Value ($)
    
Bonds - continued             
Energy - Independent - continued             
Quicksilver Resources, Inc., 7.125%, 2016    $ 500,000   $ 487,500
Sandridge Energy, Inc., 8.625%, 2015 (z)(p)      165,000     169,538
Sandridge Energy, Inc., 8%, 2018 (z)      235,000     237,938
Southwestern Energy Co., 7.5%, 2018 (n)      330,000     333,400
        
           $ 5,478,851
Energy - Integrated - 0.1%             
Petroleum Co. of Trinidad & Tobago Ltd., 6%, 2022 (n)    $ 430,000   $ 417,616
TNK-BP Finance S.A., 7.5%, 2013 (n)      118,000     118,590
        
           $ 536,206
Entertainment - 0.4%             
Marquee Holdings, Inc., 12%, 2014    $ 205,000   $ 165,025
Turner Broadcasting System, Inc., 8.375%, 2013      1,784,000     1,924,667
        
           $ 2,089,692
Financial Institutions - 0.7%             
General Motors Acceptance Corp., 6.875%, 2011    $ 1,604,000   $ 1,352,318
ILFC E-Capital Trust I, 5.9% to 2010, FRN to 2065 (n)      2,500,000     2,121,740
Residential Capital LLC, 8.5%, 2012      497,000     248,500
        
           $ 3,722,558
Food & Beverages - 0.6%             
ARAMARK Corp., 8.5%, 2015    $ 610,000   $ 624,487
B&G Foods, Inc., 8%, 2011      170,000     169,150
Dean Foods Co., 7%, 2016      255,000     237,787
Del Monte Corp., 6.75%, 2015      125,000     120,938
General Mills, Inc., 5.65%, 2012      260,000     265,399
Tyson Foods, Inc., 6.85%, 2016      1,520,000     1,502,017
        
           $ 2,919,778
Forest & Paper Products - 0.8%             
Buckeye Technologies, Inc., 8.5%, 2013    $ 460,000   $ 462,300
Georgia-Pacific Corp., 7.125%, 2017 (z)      235,000     232,063
Georgia-Pacific Corp., 8%, 2024      140,000     135,100
International Paper Co., 7.4%, 2014      1,500,000     1,503,015
Norske Skog Canada Ltd., 7.375%, 2014      695,000     528,200
Smurfit-Stone Container Corp., 8%, 2017      130,000     112,125
Stora Enso Oyj, 6.404%, 2016 (n)      1,560,000     1,371,187
        
           $ 4,343,990

 

14


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Portfolio of Investments (unaudited) – continued

 

Issuer    Shares/Par   Value ($)
    
Bonds - continued             
Gaming & Lodging - 1.2%             
Firekeepers Development Authority, 13.875%, 2015 (z)    $ 270,000   $ 270,675
Harrah’s Operating Co., Inc., 5.375%, 2013      750,000     487,500
Harrah’s Operating Co., Inc., 10.75%, 2016 (n)      735,000     637,613
Harrah’s Operating Co., Inc., 10.75%, 2018 (n)(p)      470,000     371,300
Mandalay Resort Group, 9.375%, 2010      450,000     462,375
MGM Mirage, 8.375%, 2011      805,000     797,956
MGM Mirage, 6.75%, 2013      230,000     208,150
Pinnacle Entertainment, Inc., 7.5%, 2015 (n)      400,000     330,000
Scientific Games Corp., 6.25%, 2012      380,000     365,750
Station Casinos, Inc., 6%, 2012      365,000     306,600
Station Casinos, Inc., 6.5%, 2014      430,000     270,900
Station Casinos, Inc., 6.875%, 2016      980,000     596,575
Trump Entertainment Resorts Holdings, Inc., 8.5%, 2015      120,000     81,300
Wyndham Worldwide Corp., 6%, 2016      270,000     240,225
Wynn Las Vegas LLC, 6.625%, 2014      775,000     747,875
        
           $ 6,174,794
Industrial - 0.2%             
JohnsonDiversey, Inc., 9.625%, 2012    EUR 125,000   $ 190,561
JohnsonDiversey, Inc., “B”, 9.625%, 2012    $ 605,000     617,100
        
           $ 807,661
Insurance - 0.0%             
American International Group, Inc., 6.25%, 2037    $ 210,000   $ 167,915
Insurance - Property & Casualty - 1.1%             
AXIS Capital Holdings Ltd., 5.75%, 2014    $ 1,689,000   $ 1,597,399
Fund American Cos., Inc., 5.875%, 2013      1,351,000     1,302,667
USI Holdings Corp., FRN, 6.551%, 2014 (n)      1,005,000     809,025
ZFS Finance USA Trust V, 6.5% to 2017, FRN to 2037 (n)      2,490,000     2,192,851
        
           $ 5,901,942
International Market Quasi-Sovereign - 0.1%             
Canada Housing Trust, 4.6%, 2011    CAD 654,000   $ 677,271
International Market Sovereign - 23.4%             
Federal Republic of Germany, 5.25%, 2010    EUR 6,501,000   $ 10,303,986
Federal Republic of Germany, 3.75%, 2015    EUR 7,165,000     10,764,793
Federal Republic of Germany, 6.25%, 2030    EUR 2,593,000     4,766,990
Government of Canada, 4.5%, 2015    CAD 1,125,000     1,200,166
Government of Canada, 5.75%, 2033    CAD 396,000     497,164
Government of Japan, 0.8%, 2010    JPY 313,000,000     2,961,472

 

15


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Portfolio of Investments (unaudited) – continued

 

Issuer    Shares/Par   Value ($)
    
Bonds - continued             
International Market Sovereign - continued             
Government of Japan, 1.5%, 2012    JPY 920,000,000   $ 8,807,398
Government of Japan, 1.3%, 2014    JPY 721,000,000     6,759,008
Government of Japan, 1.7%, 2017    JPY 876,000,000     8,332,454
Government of Japan, 2.2%, 2027    JPY 840,000,000     7,867,308
Kingdom of Denmark, 4%, 2015    DKK 6,915,000     1,384,366
Kingdom of Netherlands, 3.75%, 2009    EUR 8,727,000     13,477,265
Kingdom of Netherlands, 3.75%, 2014    EUR 1,787,000     2,683,534
Kingdom of Spain, 5.35%, 2011    EUR 4,570,000     7,302,101
Kingdom of Sweden, 4.5%, 2015    SEK 4,390,000     736,186
Republic of Austria, 4.65%, 2018    EUR 4,347,000     6,792,891
Republic of France, 4.75%, 2012    EUR 1,281,000     2,018,030
Republic of France, 5%, 2016    EUR 2,150,000     3,454,273
Republic of France, 6%, 2025    EUR 874,000     1,537,293
Republic of France, 4.75%, 2035    EUR 3,517,000     5,332,516
Republic of Ireland, 4.6%, 2016    EUR 3,420,000     5,337,121
United Kingdom Treasury, 8%, 2015    GBP 1,398,000     3,274,506
United Kingdom Treasury, 8%, 2021    GBP 980,000     2,466,721
United Kingdom Treasury, 4.25%, 2036    GBP 1,346,000     2,500,434
        
           $ 120,557,976
Machinery & Tools - 0.1%             
Case New Holland, Inc., 7.125%, 2014    $ 380,000   $ 383,800
Major Banks - 1.2%             
BNP Paribas, 5.186% to 2015, FRN to 2049 (n)    $ 1,667,000   $ 1,446,031
MUFG Capital Finance 1 Ltd., 6.346% to 2016, FRN to 2049      1,408,000     1,251,481
Natixis S.A., 10% to 2018, FRN to 2049 (z)      2,510,000     2,493,071
Royal Bank of Scotland Group PLC, 6.99% to 2017,
FRN to 2049 (n)
     170,000     157,312
Unicredito Luxembourg Finance S.A., 6%, 2017 (n)      830,000     792,825
        
           $ 6,140,720
Medical & Health Technology & Services - 1.8%             
Community Health Systems, Inc., 8.875%, 2015    $ 775,000   $ 799,219
Cooper Cos., Inc., 7.125%, 2015      655,000     627,162
Covidien Ltd., 6.55%, 2037 (n)      190,000     190,054
DaVita, Inc., 6.625%, 2013      49,000     47,653
DaVita, Inc., 7.25%, 2015      1,035,000     1,011,713
Fisher Scientific International, Inc., 6.125%, 2015      2,090,000     2,051,312
HCA, Inc., 8.75%, 2010      630,000     644,175
HCA, Inc., 6.375%, 2015      160,000     139,200
HCA, Inc., 9.25%, 2016      780,000     823,875

 

16


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Portfolio of Investments (unaudited) – continued

 

Issuer    Shares/Par   Value ($)
    
Bonds - continued             
Medical & Health Technology & Services - continued             
Hospira, Inc., 6.05%, 2017    $ 1,091,000   $ 1,079,891
LVB Acquisition Merger Sub, Inc., 10%, 2017 (n)      525,000     563,063
LVB Acquisition Merger Sub, Inc., 11.625%, 2017 (n)      235,000     249,100
Owens & Minor, Inc., 6.35%, 2016      970,000     945,913
Psychiatric Solutions, Inc., 7.75%, 2015      260,000     266,500
        
           $ 9,438,830
Metals & Mining - 1.5%             
Arch Western Finance LLC, 6.75%, 2013    $ 305,000   $ 301,187
FMG Finance Ltd., 10.625%, 2016 (n)      650,000     754,000
Foundation PA Coal Co., 7.25%, 2014      490,000     502,250
Freeport-McMoRan Copper & Gold, Inc., 8.375%, 2017      1,170,000     1,257,750
Freeport-McMoRan Copper & Gold, Inc., FRN, 5.882%, 2015      435,000     434,957
International Steel Group, Inc., 6.5%, 2014      1,300,000     1,312,134
Ispat Inland ULC, 9.75%, 2014      1,200,000     1,283,004
Peabody Energy Corp., 5.875%, 2016      425,000     403,750
Steel Dynamics, Inc., 7.375%, 2012 (n)      1,620,000     1,632,150
        
           $ 7,881,182
Mortgage Backed - 13.8%             
Fannie Mae, 3.81%, 2013    $ 552,280   $ 525,322
Fannie Mae, 4.1%, 2013      896,040     864,409
Fannie Mae, 4.19%, 2013      718,208     693,313
Fannie Mae, 4.845%, 2013      243,245     241,664
Fannie Mae, 4.556%, 2014      634,116     618,819
Fannie Mae, 4.6%, 2014      736,217     719,532
Fannie Mae, 4.621%, 2014      841,270     823,774
Fannie Mae, 4.77%, 2014      573,886     564,332
Fannie Mae, 4.56%, 2015      308,847     299,000
Fannie Mae, 4.665%, 2015      250,268     243,655
Fannie Mae, 4.7%, 2015      238,836     232,962
Fannie Mae, 4.74%, 2015      590,545     576,979
Fannie Mae, 4.78%, 2015      690,252     674,335
Fannie Mae, 4.815%, 2015      600,000     587,884
Fannie Mae, 4.87%, 2015      504,654     496,248
Fannie Mae, 4.89%, 2015      168,426     165,958
Fannie Mae, 4.925%, 2015      1,876,131     1,854,055
Fannie Mae, 6%, 2016-2037      9,521,789     9,709,218
Fannie Mae, 5.5%, 2019-2035      40,271,074     40,190,722
Fannie Mae, 4.88%, 2020      513,829     514,462
Fannie Mae, 6.5%, 2032-2033      2,277,529     2,367,420
Freddie Mac, 5%, 2024      236,005     238,938

 

17


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Portfolio of Investments (unaudited) – continued

 

Issuer    Shares/Par   Value ($)
    
Bonds - continued             
Mortgage Backed - continued             
Freddie Mac, 5.5%, 2034    $ 6,003,116   $ 5,984,920
Freddie Mac, 6%, 2034      1,651,763     1,685,469
        
           $ 70,873,390
Natural Gas - Distribution - 0.3%             
AmeriGas Partners LP, 7.25%, 2015    $ 470,000   $ 457,075
AmeriGas Partners LP, 7.125%, 2016      375,000     363,750
Inergy LP, 6.875%, 2014      585,000     564,525
        
           $ 1,385,350
Natural Gas - Pipeline - 1.6%             
Atlas Pipeline Partners LP, 8.125%, 2015    $ 1,080,000   $ 1,115,100
CenterPoint Energy, Inc., 7.875%, 2013      1,600,000     1,723,664
Deutsche Bank (El Paso Performance-Linked Trust, CLN),
7.75%, 2011 (n)
     810,000     833,231
El Paso Corp., 7.25%, 2018      250,000     250,938
El Paso Corp., 7.75%, 2032      201,000     202,125
Spectra Energy Capital LLC, 8%, 2019      1,350,000     1,487,498
TransCapitalInvest Ltd., 5.67%, 2014      1,144,000     1,108,364
Williams Cos., Inc., 8.75%, 2032      796,000     927,340
Williams Partners LP, 7.25%, 2017      370,000     378,325
        
           $ 8,026,585
Network & Telecom - 1.6%             
Citizens Communications Co., 9.25%, 2011    $ 815,000   $ 854,731
Citizens Communications Co., 9%, 2031      405,000     374,625
Nordic Telephone Co. Holdings, 8.875%, 2016 (n)      305,000     300,425
Qwest Corp., 7.875%, 2011      700,000     712,250
Qwest Corp., 8.875%, 2012      450,000     471,375
Telefonica Europe B.V., 7.75%, 2010      1,000,000     1,062,677
TELUS Corp., 8%, 2011      1,299,000     1,401,812
Verizon New York, Inc., 6.875%, 2012      2,542,000     2,669,491
Windstream Corp., 8.625%, 2016      495,000     511,706
        
           $ 8,359,092
Oil Services - 0.2%             
Basic Energy Services, Inc., 7.125%, 2016    $ 485,000   $ 477,725
GulfMark Offshore, Inc., 7.75%, 2014      435,000     443,700
        
           $ 921,425
Oils - 0.5%             
Premcor Refining Group, Inc., 7.5%, 2015    $ 2,300,000   $ 2,394,001

 

18


Table of Contents

Portfolio of Investments (unaudited) – continued

 

Issuer    Shares/Par   Value ($)
    
Bonds - continued             
Other Banks & Diversified Financials - 1.5%             
Alfa Diversified Payment Rights Finance Co. S.A., FRN, 4.7%, 2011 (n)    $ 1,080,000   $ 1,030,050
Banco Mercantil del Norte S.A., 5.875% to 2009, FRN to 2014 (n)      808,000     811,935
Bosphorus Financial Services Ltd., FRN, 4.865%, 2012 (z)      1,406,250     1,355,369
Citigroup, Inc., 8.4% to 2018, FRN to 2049      2,510,000     2,488,138
Resona Bank Ltd., 5.85% to 2016, FRN to 2049 (n)      655,000     563,757
RSHB Capital S.A., 7.125%, 2014 (z)      100,000     100,620
VTB Capital S.A., 6.875%, 2018 (z)      144,000     142,920
Woori Bank, 6.125% to 2011, FRN to 2016 (n)      1,490,000     1,461,405
        
           $ 7,954,194
Precious Metals & Minerals - 0.4%             
Alrosa Finance S.A., 8.875%, 2014    $ 2,016,000   $ 2,189,578
Printing & Publishing - 0.9%             
American Media Operations, Inc., 10.25%, 2009    $ 6,727   $ 5,651
American Media Operations, Inc., “B”, 10.25%, 2009      185,000     155,400
Dex Media West LLC, 9.875%, 2013      1,855,000     1,787,756
Idearc, Inc., 8%, 2016      1,656,000     1,184,040
Nielsen Finance LLC, 10%, 2014      405,000     417,656
R.H. Donnelley Corp., 8.875%, 2016      1,325,000     907,625
        
           $ 4,458,128
Railroad & Shipping - 0.4%             
TFM S.A. de C.V., 9.375%, 2012    $ 2,100,000   $ 2,194,500
Real Estate - 0.5%             
HRPT Properties Trust, REIT, 6.25%, 2016    $ 1,422,000   $ 1,331,653
Simon Property Group, Inc., REIT, 5.875%, 2017      1,260,000     1,219,356
        
           $ 2,551,009
Retailers - 0.5%             
Couche-Tard, Inc., 7.5%, 2013    $ 420,000   $ 425,250
Federated Retail Holdings, Inc., 5.35%, 2012      200,000     188,526
Gap, Inc., 10.05%, 2008      940,000     957,625
Home Depot, Inc., 5.25%, 2013      975,000     935,857
        
           $ 2,507,258
Specialty Stores - 0.1%             
GSC Holdings Corp., 8%, 2012    $ 220,000   $ 232,100
Payless ShoeSource, Inc., 8.25%, 2013      170,000     152,150
        
           $ 384,250

 

19


Table of Contents

Portfolio of Investments (unaudited) – continued

 

Issuer    Shares/Par   Value ($)
    
Bonds - continued             
Steel - 0.3%             
Evraz Group S.A., 8.875%, 2013 (z)    $ 1,282,000   $ 1,307,640
Supermarkets - 0.3%             
Delhaize America, Inc., 9%, 2031    $ 980,000   $ 1,176,227
Stater Brothers Holdings, Inc., 7.75%, 2015      220,000     221,100
        
           $ 1,397,327
Supranational - 1.2%             
Central American Bank, 4.875%, 2012 (n)    $ 1,426,000   $ 1,416,242
European Investment Bank, 5.125%, 2017      4,322,000     4,546,973
        
           $ 5,963,215
Telecommunications - Wireless - 1.6%             
Alltel Corp., 7%, 2012    $ 361,000   $ 315,875
AT&T Wireless Services, Inc., 8.75%, 2031      1,500,000     1,791,042
Cingular Wireless LLC, 6.5%, 2011      1,700,000     1,775,808
MetroPCS Wireless, Inc., 9.25%, 2014      460,000     442,175
Nextel Communications, Inc., 5.95%, 2014      1,295,000     1,000,388
Rogers Cable, Inc., 5.5%, 2014      1,025,000     995,942
Rogers Wireless, Inc., 7.5%, 2015      450,000     480,717
Vimpel-Communications, 8.375%, 2013 (z)      904,000     920,964
Vodafone Group PLC, 5.625%, 2017      279,000     274,971
Wind Acquisition Finance S.A., 10.75%, 2015 (n)      408,000     436,560
        
           $ 8,434,442
Telephone Services - 0.3%             
Embarq Corp., 7.082%, 2016    $ 1,740,000   $ 1,692,080
Tobacco - 0.6%             
Reynolds American, Inc., 6.75%, 2017    $ 2,984,000   $ 2,964,646
Transportation - 0.0%             
Peru Enhanced Pass-Through Trust, 0%, 2018 (n)    $ 246,100   $ 166,118
Transportation - Services - 0.1%             
Hertz Corp., 8.875%, 2014    $ 135,000   $ 134,325
Westinghouse Air Brake Technologies Corp., 6.875%, 2013      370,000     366,300
        
           $ 500,625
U.S. Government Agencies - 1.1%             
Freddie Mac, 5.5%, 2017    $ 5,100,000   $ 5,437,217

 

20


Table of Contents

Portfolio of Investments (unaudited) – continued

 

Issuer    Shares/Par   Value ($)
    
Bonds - continued             
U.S. Treasury Obligations - 12.4%             
U.S. Treasury Bonds, 10.625%, 2015    $ 3,350,000   $ 4,780,293
U.S. Treasury Bonds, 7.5%, 2016      5,750,000     7,160,096
U.S. Treasury Bonds, 8.75%, 2017      10,250,000     13,771,039
U.S. Treasury Bonds, 6.25%, 2023 (f)      8,000,000     9,403,128
U.S. Treasury Bonds, 5.375%, 2031      477,000     520,117
U.S. Treasury Bonds, 4.5%, 2036      158,000     152,877
U.S. Treasury Bonds, 4.75%, 2037      4,977,000     5,011,993
U.S. Treasury Notes, 12%, 2013      10,564,000     10,762,899
U.S. Treasury Notes, 9.875%, 2015      5,025,000     6,983,574
U.S. Treasury Notes, 4.875%, 2016      2,200,000     2,340,078
U.S. Treasury Notes, 6.375%, 2027      2,350,000     2,833,219
        
           $ 63,719,313
Utilities - Electric Power - 4.7%             
AES Corp., 9.375%, 2010    $ 840,000   $ 890,400
Allegheny Energy Supply Co. LLC, 8.25%, 2012 (n)      370,000     390,350
Bruce Mansfield Unit, 6.85%, 2034      1,560,000     1,545,875
CenterPoint Energy, Inc., 6.5%, 2018      400,000     391,502
Dynegy Holdings, Inc., 7.5%, 2015      215,000     203,175
Edison Mission Energy, 7%, 2017      1,330,000     1,300,075
EDP Finance B.V., 6%, 2018 (n)      1,330,000     1,331,125
EEB International Ltd., 8.75%, 2014 (n)      569,000     607,408
Enersis S.A., 7.375%, 2014      1,273,000     1,347,390
Exelon Generation Co. LLC, 6.95%, 2011      2,486,000     2,578,086
FirstEnergy Corp., 6.45%, 2011      1,699,000     1,751,514
HQI Transelec Chile S.A., 7.875%, 2011      1,500,000     1,584,810
ISA Capital do Brasil S.A., 7.875%, 2012 (n)      461,000     479,440
Israel Electric Corp. Ltd., 7.25%, 2019 (z)      1,415,000     1,425,556
Mirant Americas Generation LLC, 8.3%, 2011      100,000     103,750
Mirant North America LLC, 7.375%, 2013      710,000     715,325
NiSource Finance Corp., 7.875%, 2010      1,145,000     1,190,375
NorthWestern Corp., 5.875%, 2014      1,435,000     1,403,371
NRG Energy, Inc., 7.375%, 2016      1,690,000     1,647,750
Reliant Energy, Inc., 7.875%, 2017      610,000     613,050
Sierra Pacific Resources, 8.625%, 2014      205,000     214,450
System Energy Resources, Inc., 5.129%, 2014 (n)      1,771,229     1,721,830
Texas Competitive Electric Holdings LLC, 10.25%, 2015 (n)      585,000     597,431
        
           $ 24,034,038
Total Bonds (Identified Cost, $498,672,143)          $ 498,798,958

 

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Portfolio of Investments (unaudited) – continued

 

Floating Rate Loans - 0.9% (g)(r)             
Issuer    Shares/Par   Value ($)
    
Aerospace - 0.1%             
Hawker Beechcraft Acquisition Co., Letter of Credit, 4.7%, 2014    $ 23,544   $ 22,039
Hawker Beechcraft Acquisition Co., Term Loan, 4.7%, 2014      534,096     499,964
        
           $ 522,003
Automotive - 0.3%             
Allison Transmission, Inc., Term Loan B, 5.53%, 2014    $ 253,343   $ 232,007
Federal-Mogul Corp., Term Loan B, 4.49%, 2015      334,429     285,937
Ford Motor Co., Term Loan B, 5.8%, 2013      555,239     478,315
Goodyear Tire & Rubber Co., Second Lien Term Loan, 4.54%, 2014      480,501     448,908
        
           $ 1,445,167
Cable TV - 0.1%             
CSC Holdings, Inc., Incremental Term Loan, 4.34%, 2013    $ 333,564   $ 316,430
Computer Software - 0.1%             
First Data Corp., Term Loan B-1, 5.17%, 2014    $ 425,919   $ 394,798
Forest & Paper Products - 0.0%             
Abitibi-Consolidated, Inc., Term Loan, 11.5%, 2009    $ 119,955   $ 119,055
Gaming & Lodging - 0.0%             
Harrah’s Entertainment, Inc., Term Loan B-2, 5.92%, 2015    $ 206,433   $ 192,725
Medical & Health Technology & Services - 0.1%             
Community Health Systems, Inc., Delayed Draw Term Loan, 2014 (q)    $ 3,168   $ 2,986
Community Health Systems, Inc., Term Loan B, 4.83%, 2014      61,935     58,386
HCA, Inc., Term Loan B, 4.95%, 2012      450,439     423,586
        
           $ 484,958
Printing & Publishing - 0.0%             
Idearc, Inc., Term Loan B, 2014 (o)    $ 41,481   $ 34,460
Specialty Stores - 0.1%             
Michaels Stores, Inc., Term Loan B, 5.04%, 2013    $ 470,885   $ 409,199
Telecommunications - Wireless - 0.0%             
ALLTEL Communications, Inc., Term Loan B-2, 2015 (o)    $ 225,387   $ 208,921

 

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Portfolio of Investments (unaudited) – continued

 

Issuer    Shares/Par   Value ($)
    
Floating Rate Loans - continued             
Utilities - Electric Power - 0.1%             
Calpine Corp., DIP Term Loan, 5.58%, 2009    $ 362,042   $ 350,163
Texas Competitive Electric Holdings LLC, Term Loan B-3,
6.26%, 2014
     471,520     443,111
        
           $ 793,274
Total Floating Rate Loans (Identified Cost, $5,032,342)          $ 4,920,990
Common Stocks - 0.0%             
Printing & Publishing - 0.0%             
Golden Books Family Entertainment, Inc. (Identified Cost, $0) (a)      3,683   $ 0
Short-Term Obligations - 1.1%             
General Electric Capital Corp., 2.35%, due 6/02/08, at Amortized Cost and Value (y)    $ 5,532,000   $ 5,531,639
Total Investments (Identified Cost, $509,236,743)          $ 509,251,587
Other Assets, Less Liabilities - 1.2%            5,966,813
Net Assets - 100.0%          $ 515,218,400

 

(a) Non-income producing security.
(f) All or a portion of the security has been segregated as collateral for an open futures contract.
(g) The rate shown represents a weighted average coupon rate on settled positions at period end.
(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 $43,264,364, representing 8.4% of net assets.
(o) All or a portion of this position has not settled. Upon settlement date, interest rates will be determined.
(p) Payment-in-kind security.
(q) All or a portion of this position represents an unfunded loan commitment. The rate shown represents a weighted average coupon rate on the full position, including the unfunded loan commitment which has no current coupon rate.
(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.
(y) The rate shown represents an annualized yield at time of purchase.
(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:

 

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Portfolio of Investments (unaudited) – continued

 

Restricted Securities    Acquisition
Date
   Cost    Current
Market
Value
Bayview Financial Revolving Mortgage Loan Trust, FRN, 3.182%, 2040    3/01/06    $1,160,000    $876,821
Bosphorus Financial Services Ltd.,
FRN, 4.865%, 2012
   3/08/05    1,406,250    1,355,369
Braskem S.A., 7.25%, 2018    5/29/08    879,256    887,000
CSC Holdings, Inc., 8.5%, 2015    5/28/08    230,000    230,000
DIRECTV Holdings LLC, 7.625%, 2016    5/07/08    435,000    433,369
DLJ Commercial Mortgage Corp., 6.04%, 2031    7/23/04    1,969,453    1,984,124
Evraz Group S.A., 8.875%, 2013    4/17/08-4/21/08    1,300,492    1,307,640
Firekeepers Development Authority, 13.875%, 2015    4/22/08    262,247    270,675
Georgia-Pacific Corp., 7.125%, 2017    4/22/08-4/23/08    235,325    232,063
Grupo Televisa S.A., 6%, 2018    5/06/08    649,291    639,302
Israel Electric Corp. Ltd., 7.25%, 2019    5/01/08    1,412,609    1,425,556
National Development Co., 6.369%, 2018    5/28/08    1,053,488    1,078,875
Nationslink Funding Corp., 5%, 2031    5/07/08    1,524,880    1,548,263
Natixis S.A., 10% to 2018, FRN to 2049    4/24/08    2,510,000    2,493,071
Nortek Holdings, Inc., 10%, 2013    5/13/08    197,914    198,750
OAO Gazprom, 7.343%, 2013    4/02/08    176,000    187,220
OAO Gazprom, 8.146%, 2018    4/02/08    157,000    170,345
PNC Mortgage Acceptance Corp., FRN, 7.1%, 2032    3/25/08    2,510,000    2,472,718
RSHB Capital S.A., 7.125%, 2014    5/21/08    100,000    100,620
Sandridge Energy, Inc., 8.625%, 2015    5/07/08    171,600    169,538
Sandridge Energy, Inc., 8%, 2018    5/15/08    235,000    237,938
Spirit Master Funding LLC, 5.05%, 2023    7/15/05    1,742,197    1,334,724
VTB Capital S.A., 6.875%, 2018    5/19/08    144,000    142,920
Vimpel-Communications, 8.375%, 2013    4/24/08    904,000    920,964
Total Restricted Securities          $20,697,865
% of Net Assets          4.0%

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

 

CDO   Collateralized Debt Obligation

 

CLN   Credit-Linked Note

 

DIP   Debtor-in-Possession

 

FRN   Floating Rate Note. Interest rate resets periodically and may not be the rate reported at period end.

 

REIT   Real Estate Investment Trust

See Notes to Financial Statements

 

24


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Portfolio of Investments (unaudited) – continued

 

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:

 

AUD   Australian Dollar

 

BRL   Brazilian Real

 

CAD   Canadian Dollar

 

CNY   Chinese Yuan Renminbi

 

DKK   Danish Krone

 

EUR   Euro

 

GBP   British Pound

 

JPY   Japanese Yen

 

MYR   Malaysian Ringgit

 

PEN   Peruvian Nuevo Sol

 

SEK   Swedish Krona

 

SGD   Singapore Dollar

Derivative Contracts at 5/31/08

Forward Foreign Currency Exchange Contracts at 5/31/08

 

Type    Currency    Contracts to
Deliver/Receive
   Settlement
Date Range
   In Exchange
For
   Contracts
at Value
   Net
Unrealized
Appreciation
(Depreciation)
 
Appreciation                                
BUY    BRL    4,508,400    6/02/08-
7/01/08
   $ 2,655,878    $ 2,756,058    $ 100,180  
BUY    CNY    17,868,813    8/21/08      2,585,000      2,598,692      13,692  
SELL    DKK    6,950,047    6/16/08      1,469,759      1,448,244      21,515  
BUY    EUR    1,900,185    6/30/08      2,929,283      2,951,803      22,520  
SELL    JPY    3,759,615,347    6/30/08      37,054,302      35,710,005      1,344,297  
SELL    MYR    4,164,136    6/27/08      1,294,215      1,284,636      9,579  
SELL    PEN    1,000,000    6/16/08      364,432      352,071      12,361  
SELL    SEK    4,619,544    6/30/08      773,243      768,803      4,440  
                       
                  $ 1,528,584  
                       
Depreciation                                
BUY    AUD    1,353,140    6/20/08    $ 1,299,551    $ 1,290,720    $ (8,831 )
SELL    AUD    1,353,140    6/20/08      1,282,912      1,290,720      (7,808 )
SELL    BRL    2,254,200    6/02/08      1,349,820      1,383,150      (33,330 )
SELL    CAD    2,369,271    6/24/08      2,322,530      2,380,725      (58,195 )
BUY    EUR    1,687,921    6/30/08-
7/31/08
     2,649,334      2,620,815      (28,519 )
SELL    EUR    51,472,100    6/30/08      79,212,824      79,958,276      (745,452 )
SELL    GBP    5,026,996    6/30/08      9,857,683      9,933,801      (76,118 )
BUY    JPY    80,686,025    6/27/08      775,000      766,259      (8,741 )
BUY    MYR    4,164,136    6/27/08      1,295,422      1,284,636      (10,786 )
BUY    SGD    1,763,385    6/27/08      1,300,000      1,296,593      (3,407 )
                       
                  $ (981,187 )
                       

See Notes to Financial Statements

 

25


Table of Contents

Portfolio of Investments (unaudited) – continued

 

Futures contracts outstanding at 5/31/08

 

Description    Contracts    Value      Expiration
Date
   Unrealized
Appreciation/
(Depreciation)
 
U.S. Treasury Note 10 yr (Short)    260    (29,225,625 )    Sep-08    $36,509  
U.S. Treasury Bond (Long)    97    11,009,500      Sep-08    (29,894 )
            $6,615  
               

Swap Agreements at 5/31/08

Credit Default Swaps

 

Expiration   Notional
Amount
  Counterparty   Cash Flows
to Receive
  Cash Flows
to Pay
  Value  
6/20/09   USD   200,000   JPMorgan Chase Bank   4.10% (fixed rate)   (1)   $ (47,299 )
9/20/12   USD   1,500,000   JPMorgan Chase Bank   0.33% (fixed rate)   (2)     (5,737 )
6/20/13   USD   660,000   JPMorgan Chase Bank   (3)   1.12% (fixed rate)     (6,296 )
6/20/13   USD   470,000   JPMorgan Chase Bank   (3)   1.10% (fixed rate)     (4,483 )
6/20/13   USD   1,120,000   Morgan Stanley Capital
Services, Inc.
  (4)   1.48% (fixed rate)     3,700  
          $ (60,115 )
               

 

(1) Fund to pay notional amount upon a defined credit event by Abitibi – Consolidated, Inc., 8.375%, 4/01/15.

 

(2) Fund to pay notional amount upon a defined credit event by FNMA, 5.5%, 6/09/33.

 

(3) Fund to receive notional amount upon a defined credit event by Universal Health Services, 7.125%, 6/30/16.

 

(4) Fund to receive notional amount upon a defined credit event by Weyerhaeuser Co., 7.125%, 7/15/23.

At May 31, 2008, the series had sufficient cash and/or other liquid securities to cover any commitments under these derivative contracts.

See Notes to Financial Statements

 

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Financial Statements

 

STATEMENT OF ASSETS AND LIABILITIES

At 5/31/08 (unaudited)

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

 

Assets            
Investments, at value (identified cost, $509,236,743)    $509,251,587     
Cash    149,312     
Foreign currency, at value (identified cost, $987)    960     
Receivable for forward foreign currency exchange contracts    1,528,584     
Receivable for investments sold    3,728,752     
Interest receivable    7,570,312     
Swaps, at value    3,700     
Other assets    42,498       
Total assets           $522,275,705
Liabilities            
Distributions payable    $143,652     
Payable for forward foreign currency exchange contracts    981,187     
Payable for daily variation margin on open futures contracts    14,984     
Payable for investments purchased    5,556,656     
Swaps, at value    63,815     
Payable to affiliates      

Management fee

   22,767     

Transfer agent and dividend disbursing costs

   5,772     

Administrative services fee

   605     
Payable for independent trustees’ compensation    162,726     
Accrued expenses and other liabilities    105,141       
Total liabilities           $7,057,305
Net assets           $515,218,400
Net assets consist of            
Paid-in capital    $584,982,156     
Unrealized appreciation (depreciation) on investments and translation of assets and liabilities in foreign currencies    588,505     
Accumulated net realized gain (loss) on investments and foreign currency transactions    (61,800,232 )   
Accumulated distributions in excess of net investment income    (8,552,029 )     
Net assets           $515,218,400
Shares of beneficial interest outstanding       55,264,540
Net asset value per share (net assets of
$515,218,400/55,264,540 shares of beneficial interest outstanding)
          $9.32

See Notes to Financial Statements

 

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Financial Statements

 

STATEMENT OF OPERATIONS

Six months ended 5/31/08 (unaudited)

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

   $14,293,802     

Foreign taxes withheld

   (359 )       
Total investment income           $14,293,443  
Expenses      

Management fee

   $1,540,409     

Transfer agent and dividend disbursing costs

   49,310     

Administrative services fee

   37,732     

Independent trustees’ compensation

   39,660     

Custodian fee

   70,594     

Shareholder communications

   41,501     

Auditing fees

   31,997     

Legal fees

   13,541     

Miscellaneous

   41,554         
Total expenses           $1,866,298  

Fees paid indirectly

   (8,324 )   

Reduction of expenses by investment adviser

   (1,288 )       
Net expenses           $1,856,686  
Net investment income           $12,436,757  
Realized and unrealized gain (loss) on investments              
Realized gain (loss) (identified cost basis)      

Investment transactions

   $3,749,425     

Futures contracts

   (685,129 )   

Swap transactions

   (34,067 )   

Foreign currency transactions

   (6,478,744 )       
Net realized gain (loss) on investments
and foreign currency transactions
          $(3,448,515 )
Change in unrealized appreciation (depreciation)      

Investments

   $(8,279,405 )   

Futures contracts

   (28,846 )   

Swap transactions

   (10,595 )   

Translation of assets and liabilities in foreign currencies

   813,829         
Net unrealized gain (loss) on investments
and foreign currency translation
          $(7,505,017 )
Net realized and unrealized gain (loss) on investments
and foreign currency
          $(10,953,532 )
Change in net assets from operations           $1,483,225  

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.

 

    

Six months ended

5/31/08

(unaudited)

    

Year ended
11/30/07

 
Change in net assets              
From operations              
Net investment income    $12,436,757      $25,682,476  
Net realized gain (loss) on investments and foreign
currency transactions
   (3,448,515 )    (10,688,357 )
Net unrealized gain (loss) on investments and foreign currency translation    (7,505,017 )    5,979,398  
Change in net assets from operations    $1,483,225      $20,973,517  
Distributions declared to shareholders              
From net investment income    $(13,539,815 )    $(26,527,027 )
Change in net assets from fund share transactions    $5,603      $—  
Total change in net assets    $(12,050,987 )    $(5,553,510 )
Net assets              
At beginning of period    527,269,387      532,822,897  
At end of period (including accumulated distributions in excess of net investment income of $8,552,029 and $7,448,971, respectively)    $515,218,400      $527,269,387  

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 semiannual period and the past 5 fiscal years (or life of a particular share class, if shorter). 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.

 

   

Six months
ended
5/31/08

    Years ended 11/30  
    2007     2006     2005     2004     2003  
    (unaudited)                                
Net asset value, beginning of period   $9.54     $9.64     $9.58     $9.71     $9.58     $9.09  
Income (loss) from investment operations                                

Net investment income (d)

  $0.23     $0.46     $0.44     $0.45     $0.49     $0.49  

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

  (0.20 )   (0.08 )   0.09     (0.09 )   0.17     0.51  
Total from investment operations   $0.03     $0.38     $0.53     $0.36     $0.66     $1.00  
Less distributions declared to shareholders                                

From net investment income

  $(0.25 )   $(0.48 )   $(0.49 )   $(0.51 )   $(0.55 )   $(0.53 )
Net increase from repurchase of capital shares   $ —     $—     $0.02     $0.02     $0.02     $0.02  
Net asset value, end of period   $9.32     $9.54     $9.64     $9.58     $9.71     $9.58  
Per share market value, end
of period
  $8.42     $8.30     $8.51     $8.43     $8.71     $8.78  
Total return at market value (%)   4.44 (n)   3.20     6.98     2.57     5.52     13.02  
Total return at net asset value (%)   0.57 (n)   4.71     6.64     4.56     7.81     12.06  
Ratios (%) (to average net assets)
and Supplemental data:
                                
Expenses before expense reductions (f)   0.71 (a)   0.73     0.76     0.79     0.80     0.83  
Expenses after expense reductions (f)   0.71 (a)   0.73     0.76     0.79     0.80     N/A  
Net investment income   4.76 (a)   4.89     4.62     4.64     5.11     5.21  
Portfolio turnover   23     58     57     73     70     129  
Net assets at end of period
(000 Omitted)
  $515,218     $527,269     $532,823     $539,491     $558,440     $561,900  

 

(a) Annualized.
(d) Per share data is based on average shares outstanding.
(f) Ratios do not reflect reductions from fees paid indirectly, if applicable.
(n) Not annualized.

See Notes to Financial Statements

 

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Table of Contents

 

NOTES TO FINANCIAL STATEMENTS

(unaudited)

 

(1)   Business and Organization

MFS Charter Income 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.

The fund can invest in foreign securities, including securities of emerging market issuers. 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. The markets of emerging markets countries are generally more volatile than the markets of developed countries with more mature economies. All of the risks of investing in foreign securities previously described are heightened when investing in emerging markets countries.

Investment Valuations – 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 reported by an independent pricing service. Equity securities, including restricted equity securities, are generally valued at the last sale or official closing price as reported by an independent pricing service on the market or exchange on which they are primarily traded. For securities for which there were no sales reported that day, equity securities are generally valued at the last quoted daily bid quotation as reported by an independent pricing service on the market or exchange on which they are primarily traded. For securities held short for which there were no sales reported for the day, the position is generally valued at the last quoted daily ask quotation as reported by an independent pricing service on the market or exchange on which such securities are primarily traded. Short-term instruments with a maturity at issuance of 60 days or less may be valued at amortized cost, which approximates market value. Futures contracts are generally valued at last posted settlement price as reported by an independent pricing service on the market on which they are primarily traded. Futures contracts for which there were no trades that day for a particular position are generally valued at the closing bid quotation as reported by an independent pricing service on the market on which such futures contracts are primarily

 

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Notes to Financial Statements (unaudited) – continued

 

traded. Forward foreign currency contracts are generally valued at the mean of bid and asked prices for the time period interpolated from rates reported by an independent pricing service for proximate time periods. Swaps are generally valued at an evaluated bid as reported by an independent pricing service. Securities and other assets generally valued on the basis of information from an independent pricing service may also be valued at a broker-dealer bid quotation. Values obtained from pricing services can utilize both dealer-supplied valuations and electronic data processing techniques, which take into account factors such as institutional-size trading in similar groups of securities, yield, quality, coupon rate, maturity, type of issue, trading characteristics, and other market data. 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 reported by an independent 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 independent 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 affect 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 may rely on independent 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

 

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Notes to Financial Statements (unaudited) – continued

 

net asset value can differ depending on the source and method used to determine value. When fair valuation is used, the value of investments used to determine the fund’s net asset value may differ from quoted or published prices for the same investments.

The fund adopted FASB Statement No. 157, Fair Value Measurements (the “Statement”) in this reporting period. This Statement provides a single definition of fair value, a hierarchy for measuring fair value and expanded disclosures about fair value measurements.

Various inputs are used in determining the value of the fund’s assets or liabilities carried at market value. These inputs are categorized into three broad levels. Level 1 includes 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 futures, forwards, swap contracts and written options, which are valued at the unrealized appreciation/depreciation on the instrument. The following is a summary of the levels used as of May 31, 2008 in valuing the fund’s assets or liabilities carried at market value:

 

     Level 1    Level 2    Level 3    Total
Investments in Securities    $—    $509,251,587    $—    $509,251,587
Other Financial Instruments    $6,615    $487,282    $—    $493,897

Repurchase Agreements – The fund may enter into repurchase agreements with institutions that the fund’s investment adviser has determined are creditworthy. Each repurchase agreement is recorded at cost. The fund requires that the securities collateral in a repurchase transaction be transferred to a custodian in a manner sufficient to enable the fund to obtain those securities in the event of a default under the repurchase agreement. The fund monitors, on a daily basis, the value of the collateral to ensure that its value, including accrued interest, is greater than amounts owed to the fund under each such repurchase agreement. The fund and other funds managed by Massachusetts Financial Services Company (MFS), may utilize a joint trading account for the purpose of entering into one or more repurchase agreements.

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. 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 income and expenses are recorded for financial statement

 

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Notes to Financial Statements (unaudited) – continued

 

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.

Derivative Risk – The fund may invest in derivatives 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 gain market exposure, or for hedging purposes, gains and losses from derivative instruments may be substantially greater than the derivative’s original cost. Cash that has been segregated on behalf of certain derivative contracts will be reported separately on the Statement of Assets and Liabilities as restricted cash. Derivative instruments include futures contracts, forward foreign currency exchange contracts and swap agreements.

Futures Contracts – The fund may enter into futures contracts for the delayed delivery of securities or currency, or contracts based on financial indices at a fixed price on a future date. In entering such contracts, the fund is required to deposit with the broker either in cash or securities an amount equal to a certain percentage of the contract amount. Subsequent payments are made or received by the fund each day, depending on the daily fluctuations in the value of the contract, and are recorded for financial statement purposes as unrealized gains or losses by the fund. Upon entering into such contracts, the fund bears the risk of interest or exchange rates or securities prices moving unexpectedly, in which case, the fund may not achieve the anticipated benefits of the futures contracts and may realize a loss.

Forward Foreign Currency Exchange Contracts – The fund may enter into forward foreign currency exchange contracts for the purchase or sale of a specific foreign currency at a fixed price on a future date. Risks may arise upon entering into these contracts from the potential inability of counterparties to meet the terms of their contracts and from unanticipated movements in the value of the contract. The fund may enter into forward foreign currency exchange contracts for hedging purposes as well as for non-hedging purposes. For hedging purposes, the fund may enter into contracts to deliver or receive foreign currency it will receive from or require for its normal investment activities. The fund may also use contracts in a manner intended to protect foreign currency denominated securities from declines in value 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 changes. The forward foreign currency exchange contracts are adjusted by the daily exchange rate of the underlying currency and any gains or losses are recorded as unrealized until the contract settlement date. On contract settlement date, the gains or losses are recorded as realized gains or losses on foreign currency transactions.

 

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Notes to Financial Statements (unaudited) – continued

 

Swap Agreements – The fund may enter into swap agreements. A swap is an exchange of cash payments between the fund and another party. Net cash payments are exchanged at specified intervals and are recorded as a realized gain or loss in the Statement of Operations. The value of the swap is adjusted daily and the change in value, including accruals of periodic amounts of interest to be paid or received, is recorded as unrealized appreciation or depreciation in the Statement of Operations. Amounts paid or received at the inception of the swap are reflected as premiums paid or received on the Statement of Assets and Liabilities and are amortized using the effective interest method over the term of the agreement. A liquidation payment received or made upon early termination is recorded as a realized gain or loss in the Statement of Operations. Collateral, in the form of cash or securities, may be required to be held in segregated accounts with the fund’s custodian in connection with these agreements. Risk of loss may exceed amounts recognized on the Statement of Assets and Liabilities. These risks include the possible lack of a liquid market, failure of the counterparty to perform under the terms of the agreements, and unfavorable market and interest rate movements of the underlying instrument. All swap agreements entered into by the fund with the same counterparty are generally governed by a single master agreement, which provides for the netting of all amounts owed by the parties under the agreement upon the occurrence of an event of default, thereby reducing the credit risk to which such party is exposed.

The fund holds credit default swaps in which one party makes a stream of payments based on a fixed percentage applied to the notional amount to another party in exchange for the right to receive a specified return in the event of a default by a third party, such as a corporate issuer or foreign issuer, on its obligation. The fund may enter into credit default swaps to limit or to reduce its risk exposure to defaults of corporate and sovereign issuers or to create direct or synthetic short or long exposure to corporate debt securities or certain sovereign debt securities to which it is not otherwise exposed.

In March 2008, FASB Statement No. 161, Disclosures about Derivative Instruments and Hedging Activities (the “Standard”) was issued, and is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. This Standard provides enhanced disclosures about the fund’s use of and accounting for derivative instruments and the effect of derivative instruments on the fund’s results of operations and financial position. Management is evaluating the application of the Standard to the fund, and has not at this time determined the impact, if any, resulting from the adoption of this Standard on the fund’s financial statements.

Hybrid Instruments – The fund may invest in indexed or hybrid securities on which any combination of interest payments, the principal or stated amount

 

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Notes to Financial Statements (unaudited) – continued

 

payable at maturity is determined by reference to prices of other securities, currencies, indexes, economic factors or other measures, including interest rates, currency exchange rates, or securities indices. The risks of investing in hybrid instruments reflect a combination of the risks of investing in securities, swaps, options, futures and currencies. Hybrid instruments are potentially more volatile and carry greater market risks than traditional debt instruments. Depending on the structure of the particular hybrid instrument, changes in a benchmark, underlying assets or economic indicator may be magnified by the terms of the hybrid instrument and have an even more dramatic and substantial effect upon the value of the hybrid instrument. Also, the prices of the hybrid instrument and the benchmark, underlying asset or economic indicator may not move in the same direction or at the same time.

Loans and Other Direct Debt Instruments – The fund may invest 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. At May 31, 2008, the portfolio had unfunded loan commitments of $3,168, which could be extended at the option of the borrower and which are covered by sufficient cash and/or liquid securities held by the fund. The market value and obligation of the fund on these unfunded loan commitments is included in Investments, at value and Payable for investments purchased, respectively, on the Statement of Assets and LiabilitiesLoan 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. 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

 

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Notes to Financial Statements (unaudited) – continued

 

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.

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 six months ended May 31, 2008, is shown as a reduction of total expenses on 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 adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“the Interpretation”) on the first day of the fund’s fiscal year. The Interpretation prescribes a minimum threshold for financial statement recognition of the benefit of a tax position taken or expected to be taken in a tax return. There was no impact resulting from the adoption of this Interpretation on the fund’s financial statements. Each of the fund’s federal tax returns for the prior three fiscal years remains subject to examination by the Internal Revenue Service. It is the fund’s policy to record interest and penalty charges on underpaid taxes associated with its tax positions as interest expense and miscellaneous expense, respectively. No such charges were recorded in the current financial statements. Foreign taxes, if any, have been accrued by the fund in the accompanying financial statements.

Distributions to shareholders are recorded on the ex-dividend date. Income and capital gain distributions are determined in accordance with income tax regulations, which may differ from 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 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, wash sale loss deferrals, straddle loss deferrals, foreign currency transactions, and derivative transactions.

 

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Notes to Financial Statements (unaudited) – continued

 

The tax character of distributions made during the current period will be determined at fiscal year end. The tax character of distributions declared to shareholders is as follows:

 

     11/30/07
Ordinary income (including any short-term capital gains)    $26,527,027

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

 

As of 5/31/08       
Cost of investments    $514,814,192  
Gross appreciation    12,052,511  
Gross depreciation    (17,615,116 )
Net unrealized appreciation (depreciation)    $(5,562,605 )
As of 11/30/07       
Undistributed ordinary income    $1,955,595  
Capital loss carryforwards    (53,253,558 )
Other temporary differences    (9,842,045 )
Net unrealized appreciation (depreciation)    $3,432,842  

The aggregate cost above includes prior fiscal year end tax adjustments.

As of November 30, 2007, the fund had capital loss carryforwards available to offset future realized gains. Such losses expire as follows:

 

11/30/09    $(21,374,410 )
11/30/10    (23,905,212 )
11/30/14    (5,504,781 )
11/30/15    (2,469,155 )
   $(53,253,558 )

 

(3)   Transactions with Affiliates

Investment Adviser – The fund has an investment advisory agreement with Massachusetts Financial Services Company (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 0.32% of the fund’s average daily net assets and 4.57% 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. The management fee, from net assets and gross income, incurred for the six months ended May 31, 2008 was equivalent to an annual effective rate of 0.59% of the fund’s average daily net assets.

 

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Notes to Financial Statements (unaudited) – continued

 

Transfer Agent – The fund engages Computershare Trust Company, N.A. (“Computershare”) as the sole transfer agent for the fund. MFS Service Center, Inc. (MFSC) monitors and supervises the activities of Computershare for an agreed upon fee approved by the Board of Trustees. For the six months ended May 31, 2008, these fees paid to MFSC amounted to $18,028. MFSC also receives payment from the fund for out-of-pocket expenses paid by MFSC on behalf of the fund. For the six months ended May 31, 2008, the fund did not incur any of these costs.

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 a fixed amount plus a fee based on average daily net assets. The fund’s annual fixed amount is $17,500.

The administrative services fee incurred for the six months ended May 31, 2008 was equivalent to an annual effective rate of 0.0144% 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 to 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.

The fund has an unfunded, defined benefit plan for certain retired independent trustees which resulted in a pension expense of $2,315. The fund also has an unfunded retirement benefit deferral plan for certain independent trustees which resulted in an expense of $1,442. Both amounts are included in independent trustees’ compensation for the six months ended May 31, 2008. The liability for deferred retirement benefits payable to certain independent trustees under both plans amounted to $149,764 at May 31, 2008, and is included in payable for independent trustees’ compensation.

Deferred Trustee Compensation – Under a Deferred Compensation Plan (the Plan) independent trustees previously were allowed to elect to defer receipt of all or a portion of their annual compensation. Trustees are no longer allowed to defer compensation under the Plan. Amounts previously deferred are treated as though equivalent dollar amounts had been invested in shares of certain MFS funds selected by the trustee. Deferred amounts represent an unsecured obligation of the fund until distributed in accordance with the Plan. Included in other assets and payable for independent trustees’ compensation is $12,184 of deferred trustees’ compensation.

 

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Notes to Financial Statements (unaudited) – continued

 

Other – This fund and certain other MFS funds (the funds) have entered into a services agreement (the Agreement) which provides for payment of fees by the funds to Tarantino LLC in return for the provision of services of an Independent Chief Compliance Officer (ICCO) for the funds. The ICCO is an officer of the funds and the sole member of Tarantino LLC. The funds can terminate the Agreement with Tarantino LLC at any time under the terms of the Agreement. For the six months ended May 31, 2008, the fee paid by the fund to Tarantino LLC was $2,229 and is included in miscellaneous expense on the Statement of Operations. MFS has agreed to reimburse the fund for a portion of the payments made by the fund to Tarantino LLC in the amount of $1,288, 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.

 

(4)   Portfolio Securities

Purchases and sales of investments, other than purchased option transactions and short-term obligations, were as follows:

 

     Purchases    Sales
U.S. Government securities    $14,288,613    $25,552,633
Investments (non-U.S. Government securities)    $103,259,933    $91,404,463

 

(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 six months ended May 31, 2008, and the year ended November 30, 2007, the fund did not repurchase any shares.

 

(6)   Line of Credit

The fund and other funds managed by MFS participate in a $1 billion unsecured committed line of credit provided by a syndication of banks under a credit agreement. In addition, the fund and other funds managed by MFS have established uncommitted borrowing arrangements with certain banks. 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 Federal Reserve funds rate plus 0.30%. In addition, 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. For the six months ended May 31, 2008, the fund’s commitment fee and interest expense were $1,274 and $0, respectively, and are included in miscellaneous expense on the Statement of Operations.

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Trustees and Shareholders of the MFS Charter Income Trust

We have reviewed the accompanying statement of assets and liabilities of the MFS Charter Income Trust (the Fund), including the portfolio of investments, as of May 31, 2008, and the related statements of operations, changes in net assets, and financial highlights for the six-month period ended May 31, 2008. These interim financial statements are the responsibility of the Fund’s management.

We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to the accompanying interim financial statements for them to be in conformity with U.S. generally accepted accounting principles.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the statement of changes in net assets for the year ended November 30, 2007, and financial highlights for each of the five years in the period ended November 30, 2007, and in our report dated January 16, 2008, we expressed an unqualified opinion on such statement of changes in net assets and financial highlights.

LOGO

Boston, Massachusetts

July 17, 2008

 

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BOARD REVIEW OF INVESTMENT ADVISORY AGREEMENT

A discussion regarding the Board’s most recent review and renewal of the fund’s investment advisory agreement is available by clicking on the fund’s name under “Products and Performance” and then “Closed-End Funds” on the MFS Web site (mfs.com).

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 twelve-month period ended June 30, 2007 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. The fund’s Form N-Q 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. The fund’s Form N-Q is available on the EDGAR database on the Commission’s Internet Web site at http://www.sec.gov, and copies of this information 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.

A shareholder can also obtain the quarterly portfolio holdings report at mfs.com.

 

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CONTACT INFORMATION AND NUMBER OF SHAREHOLDERS

Investor Information

Transfer Agent, Registrar and Dividend Disbursing Agent

 

Call    1-800-637-2304 any business day from 9 a.m. to 5 p.m. Eastern time
Write to:   

Computershare Trust Company, N.A.

P.O. Box 43078

Providence, RI 02940-3078

Number of Shareholders

As of May 31, 2008, our records indicate that there are 3,095 registered shareholders and approximately 29,225 shareholders owning trust shares in “street” name, such as through brokers, banks, and other financial intermediaries.

If you are a “street” name shareholder and wish to directly receive our reports, which contain important information about the trust, please write or call:

Computershare Trust Company, N.A.

P.O. Box 43078

Providence, RI 02940-3078

1-800-637-2304

LOGO

500 Boylston Street, Boston, MA 02116


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ITEM 2. CODE OF ETHICS.

The Registrant has not amended any provision in its Code of Ethics (the “Code”) that relates to any element of the Code’s definition enumerated in paragraph (b) of Item 2 of this Form N-CSR.

 

ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.

Not applicable for semi-annual reports.

 

ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.

Not applicable for semi-annual reports.

 

ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.

Not applicable for semi-annual reports.

 

ITEM 6. SCHEDULE OF INVESTMENTS

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

 

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

Not applicable for semi-annual reports.

 

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

There were no changes during this period.


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

MFS Charter Income 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

12/1/07 – 12/31/07

   0    N/A    0    5,526,454

1/1/08 – 1/31/08

   0    N/A    0    5,526,454

2/1/08 – 2/29/08

   0    N/A    0    5,526,454

3/1/08 – 3/31/08

   0    N/A    0    5,526,454

4/1/08 – 4/30/08

   0    N/A    0    5,526,454

5/1/08 – 5/31/08

   0    N/A    0    5,526,454
                 

Total

   0    N/A    0   
                 

Note: The Board of Trustees approves procedures to repurchase Fund shares annually. The notification to shareholders of the program is included in 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 Fund shares that may be repurchased 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 Fund shares available for repurchase for the March 1, 2008 plan year is 5,526,454.

 

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 effectiveness 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 report on 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.

 

(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 of the period covered by the report that have materially affected, or are reasonably likely to materially affect, the registrant’s internal control over financial reporting.


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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.

 

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

 

(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, as amended, 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 CHARTER INCOME TRUST

By (Signature and Title)*   ROBERT J. MANNING
  Robert J. Manning, President

Date: July 18, 2008

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)*   ROBERT J. MANNING
  Robert J. Manning, President (Principal Executive Officer)

Date: July 18, 2008

 

By (Signature and Title)*   MARIA F. DWYER
  Maria F. Dwyer, Treasurer
(Principal Financial Officer and Accounting Officer)

 

Date: July 18, 2008

 

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