AETNA VARIABLE PORTFOLIOS, INC.
151 FARMINGTON AVENUE
HARTFORD, CT 06156-8962
AETNA VARIABLE INDEX PLUS PORTFOLIO
PROSPECTUS DATED: September 12, 1996
Aetna Variable Portfolios, Inc. (the "Fund") is an open-end management
investment company authorized to issue multiple series of shares, each
representing a diversified portfolio of investments (collectively, the
"Variable Portfolios"). The Fund currently has four Portfolios authorized.
THIS PROSPECTUS CONTAINS INFORMATION PERTAINING ONLY TO THE AETNA VARIABLE
INDEX PLUS PORTFOLIO (the "Portfolio"). The Fund's shares are offered only to
insurance companies to fund benefits under their variable annuity contracts
(VA Contracts) and variable life insurance policies (VLI Policies).
This Prospectus sets forth concisely the information that a prospective
contract holder or policy holder should know before directing an investment to
the Portfolio and should be read and kept for future reference. A Statement of
Additional Information ("Statement") dated September 12, 1996 contains more
information about the Variable Portfolios. For a free copy of the Statement,
call 1-800-525-4225 or write to Aetna Variable Portfolios, Inc., at the
address listed above. The Statement has been filed with the Securities and
Exchange Commission ("SEC") and is incorporated into this Prospectus by
reference.
This Prospectus does not constitute an offer to sell, or a solicitation of an
offer to buy, the securities of the Fund in any jurisdiction in which such
sale, offer to sell, or solicitation may not be lawfully made.
INVESTMENTS IN THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK. SHARES OF THE FUND ARE NOT FEDERALLY INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER
GOVERNMENTAL AGENCY. AN INVESTMENT IN THE FUND IS SUBJECT TO RISK THAT MAY
CAUSE THE VALUE OF THE INVESTMENT TO FLUCTUATE, AND WHEN THE INVESTMENT IS
REDEEMED, THE VALUE MAY BE HIGHER OR LOWER THAN THE AMOUNT ORIGINALLY INVESTED
BY THE INVESTOR.
LIKE ALL MUTUAL FUNDS, THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED
BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION,
NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
PLEASE READ THIS PROSPECTUS CAREFULLY BEFORE INVESTING AND RETAIN FOR FUTURE
REFERENCE.
TABLE OF CONTENTS
PAGE
THE FUND
DESCRIPTION OF THE AETNA VARIABLE INDEX PLUS PORTFOLIO
INVESTMENT TECHNIQUES
RISK FACTORS AND OTHER CONSIDERATIONS
INVESTMENT RESTRICTIONS
MANAGEMENT OF THE PORTFOLIO
SALE AND REDEMPTION OF SHARES
NET ASSET VALUE
GENERAL INFORMATION
PERFORMANCE
TAX MATTERS
APPENDIX A
GLOSSARY OF INVESTMENT TERMS
APPENDIX B
DESCRIPTION OF CORPORATE BOND RATINGS
THE FUND
The Fund is an open-end, management investment company, consisting of multiple
Portfolios. It currently has authorized four Portfolios. This Prospectus
contains information pertaining only to the Aetna Variable Index Plus
Portfolio. The Fund may authorize additional Portfolios in the future. The
Fund is intended to serve as one of the funding vehicles for VA Contracts and
VLI Policies to be offered through the separate accounts of insurance
companies. The insurance companies and not Participants are shareholders of
the Fund. See "General information."
The Fund does not foresee any disadvantages to the Participants in funding
both VA Contracts and VLI Policies through the Variable Portfolios or in
offering the Variable Portfolios through more than one insurance company. The
Fund's Board of Directors has agreed to monitor the Portfolios' activities to
identify any potentially material, irreconcilable conflicts and to take
appropriate action if necessary to resolve any conflicts which may arise.
DESCRIPTION OF THE AETNA VARIABLE INDEX PLUS PORTFOLIO
The Portfolio has an investment objective which is a fundamental policy and
may not be changed without the vote of a majority of the holders of the
Portfolio's outstanding shares. There can be no assurance that the Portfolio
will meet its investment objective. The Portfolio is subject to investment
policies and restrictions described in this Prospectus and in the Statement,
some of which are fundamental. No fundamental investment policy or
restriction may be changed without the approval of a majority of the
outstanding shares of the Portfolio. A glossary describing various investment
terms relating to securities that may be held by the Portfolio is contained in
Appendix A.
INVESTMENT OBJECTIVE. The Portfolio will attempt to outperform the total
return performance of publicly traded common stocks represented by the S&P 500
Composite Stock Price Index ("S&P 500"), a stock market index composed of 500
common stocks selected by the Standard & Poor's Corporation.
INVESTMENT POLICY. The Portfolio will attempt to be fully invested in common
stocks. Under normal circumstances, the Portfolio will invest at least 90% of
its assets in common stocks represented in the S&P 500. Inclusion of a stock
in the S&P 500 in no way implies an opinion by Standard & Poor's Corporation
as to the stock's attractiveness as an investment. The Portfolio is neither
sponsored by nor affiliated with Standard & Poor's Corporation. AN INVESTMENT
IN THE PORTFOLIO INVOLVES RISKS SIMILAR TO THOSE OF INVESTING IN COMMON STOCKS
GENERALLY. As the Portfolio invests primarily in common stocks, the Portfolio
is subject to market risk - i.e. the possibility that common stock prices will
decline over short or even extended periods. The U.S. stock market tends to
be cyclical, with periods when stock prices generally rise and periods when
prices generally decline.
Under normal circumstances, the Portfolio will generally include approximately
400 stocks included in the S&P 500. The Portfolio intends, under normal
circumstances, to exclude common stocks which are not part of the S&P 500 and
to exclude Aetna Inc. common stock.
The weightings of stocks in the S&P 500 are based on each stock's relative
total market capitalization, that is, its market price per share multiplied by
the number of common shares outstanding. The investment adviser will attempt
to outperform the investment results of the S&P 500 by creating a portfolio
that has similar market risk characteristics to the S&P 500, but will use a
disciplined analysis to identify those stocks having the greatest likelihood
of either outperforming or underperforming the market.
INVESTMENT TECHNIQUES
The Portfolio may use the following investment techniques (see Appendix A for
the definition of certain terms used below):
BORROWING. The Portfolio may borrow money from banks, but only for temporary
or emergency purposes in an amount up to 5% of the value of the Portfolio's
total assets (including the amount borrowed), valued at the lesser of cost or
market, less liabilities (not including the amount borrowed), at the time the
borrowing is made.
The Portfolio does not intend to borrow for leveraging purposes. It has the
authority to do so, but only if, after the borrowing, the value of the
Portfolio's net assets, including proceeds from the borrowings, is equal to at
least 300% of all outstanding borrowings. Leveraging can increase the
volatility of the Portfolio since it exaggerates the effects of changes in the
value of the securities purchased with the borrowed funds.
SECURITIES LENDING. The Portfolio may lend its portfolio securities; however,
the value of the loaned securities (together with all other assets that are
loaned, including those subject to repurchase agreements) may not exceed
one-third of the Portfolio's total assets. The Portfolio will not lend
portfolio securities to affiliates. Though fully collateralized, lending
portfolio securities involves certain risks, including the possibility that
the Portfolio may incur costs in liquidating the collateral or a loss if the
collateral declines in value. In the event of a disparity between the value
of the loaned security and the collateral, there is the additional risk that
the borrower may fail to return the securities or provide additional
collateral.
REPURCHASE AGREEMENTS. Under a repurchase agreement, the Portfolio may acquire
a debt instrument for a relatively short period subject to an obligation by
the seller to repurchase and by the Portfolio to resell the instrument at a
fixed price and time.
The Portfolio may enter into repurchase agreements with domestic banks and
broker-dealers. Such agreements, although fully collateralized, involve the
risk that the seller of the securities may fail to repurchase them. In that
event, the Portfolio may incur costs in liquidating the collateral or a loss
if the collateral declines in value. If the default on the part of the seller
is due to insolvency and the seller initiates bankruptcy proceedings, the
ability of the Portfolio to liquidate the collateral may be delayed or
limited.
The Board of Directors has established credit standards for repurchase
transactions entered into by the Portfolio.
ASSET-BACKED SECURITIES. The Portfolio may purchase securities collateralized
by a specified pool of assets, including, but not limited to, credit card
receivables, automobile loans, home equity loans, mobile home loans, or
recreational vehicle loans. These securities are subject to prepayment risk.
In periods of declining interest rates, reinvestment of prepayment proceeds
would be made at lower and less attractive interest rates.
ZERO COUPON AND PAY-IN-KIND BONDS. The Portfolio may invest in zero coupon
securities and pay-in-kind bonds. Zero coupon securities are debt securities
that pay no cash income but are sold at substantial discounts to their value
at maturity. Some zero coupon securities call for the commencement of regular
interest payments at a deferred date. Pay-in-kind bonds pay all or a portion
of their interest in the form of additional debt or equity securities. Zero
coupon securities and pay-in-kind bonds are subject to greater price
fluctuations in response to changes in interest rates than are ordinary
interest-paying instruments with similar maturities; the value of zero coupon
securities and pay-in-kind bonds appreciate more during periods of declining
interest rates and depreciate more during periods of rising interest rates.
BANK OBLIGATIONS. The Portfolio may invest in obligations (including banker's
acceptances, commercial paper, bank notes, time deposits and certificates of
deposit) issued by domestic or foreign banks, provided the issuing bank has a
minimum of $5 billion in assets and a primary capital ratio of at least 4.25%.
OPTIONS, FUTURES AND OTHER DERIVATIVE INSTRUMENTS. A derivative is a
financial instrument, the value of which is "derived" from the performance of
an underlying asset (such as a security or index of securities). In addition
to futures and options, derivatives include, but are not limited to, forward
contracts, swaps, structured notes, and collateralized mortgage obligations
("CMOs").
The Portfolio may engage in various strategies using derivatives including
managing its exposure to changing interest rates, securities prices and
currency exchange rates (collectively known as hedging strategies), or
increasing its investment return. For purposes other than hedging, the
Portfolio will invest no more than 5% of its total assets in derivatives which
at the time of purchase are considered by management to involve high risk to
the Portfolio. These would include inverse floaters, interest-only and
principal-only securities.
The Portfolio may write (sell) covered call options and purchase put options
and may purchase call and write (sell) put options including options on
securities, indices and futures. There is no limit on the amount of the
Portfolio's total assets that may be subject to call options; however, writing
a put option requires the segregation of liquid assets to cover the contract.
The Portfolio will not write a put option if it will require more than 50% of
the Portfolio's net assets to be segregated to cover the put obligation nor
will it write a put option if after it is written more than 3% of the
Portfolio's assets would consist of put options.
As with all derivatives, the use of call options involves certain risks which
are described in detail under "Risk Factors and Other Considerations" and in
the Statement. In that there is no limit on the amount of the Portfolio's
total assets that may be subject to call options, these risks may be
heightened should the Portfolio choose to engage extensively in such
transactions.
Investments in futures contracts and related options with respect to foreign
currencies, fixed income securities and foreign stock indices may also be made
by the Portfolio. Although these investments are primarily made to hedge
against price fluctuations, in some cases, the Portfolio may buy a futures
contract for the purpose of increasing its exposure in a particular asset
class or market segment, which strategy may be considered speculative. This
strategy is typically used to better manage portfolio transaction costs. With
respect to futures contracts or related options that may be entered into for
speculative purposes, the aggregate initial margin for futures contracts and
premiums for options will not exceed 5% of the Portfolio's net assets, after
taking into account realized profits and unrealized losses on such futures
contracts.
The Portfolio may invest in forward contracts on foreign currency ("forward
exchange contracts"). These contracts may involve "cross-hedging," a
technique in which the Portfolio hedges with currencies which differ from the
currency in which the underlying asset is denominated.
The Portfolio may also invest in interest rate swap transactions. Interest
rate swaps are subject to credit risks (if the other party fails to meet its
obligations) and also interest rate risks, because the Portfolio could be
obligated to pay more under its swap agreements than it receives under them as
a result of interest rate changes.
U.S. GOVERNMENT DERIVATIVES. The Portfolio may purchase separately traded
principal and interest components of certain U.S. Government securities
("STRIPS"). In addition, the Portfolio may acquire custodial receipts that
represent ownership in a U.S. Government security's future interest or
principal payments. These securities are known by such exotic names as TIGRS
and CATS and may be issued at a discount to face value. They are generally
more volatile than normal fixed income securities because interest payments
are accrued rather than paid out in regular installments.
SUPRANATIONAL AGENCIES. The Portfolio may invest up to 10% of its net assets
in securities of supranational agencies such as: the International Bank for
Reconstruction and Development (commonly referred to as the "World Bank"),
which was chartered to finance development projects in developing member
countries; the European Community, which is a twelve-nation organization
engaged in cooperative economic activities; the European Coal and Steel
Community, which is an economic union of various European nations' steel and
coal industries; and the Asian Development Bank, which is an international
development bank established to lend funds, promote investment and provide
technical assistance to member nations in the Asian and Pacific regions.
Securities of supranational agencies are not considered government securities
and are not supported directly or indirectly by the U.S. Government.
ILLIQUID AND RESTRICTED SECURITIES. The Portfolio may invest, under normal
circumstances, up to 10% of its total assets in illiquid securities. Illiquid
securities are securities that are not readily marketable or cannot be
disposed of promptly within seven days and in the ordinary course of business
without taking a materially reduced price. In addition, the Portfolio may
invest in securities that are subject to legal or contractual restrictions on
resale, including securities purchased under Rule 144A and Section 4(2) of the
Securities Act of 1933.
Because of the absence of a trading market for illiquid and certain restricted
securities, it may take longer to liquidate these securities than it would
unrestricted, liquid securities. The Portfolio may realize less than the
amount originally paid by the Portfolio for the security. The Board of
Directors has established a policy to monitor the liquidity of such
securities.
CASH OR CASH EQUIVALENTS. The Portfolio reserves the right to depart from its
investment objective temporarily by investing up to 100% of its assets in cash
or cash equivalents for defense against potential market declines and to
accommodate cash flows from the purchase and sale of the Portfolio's shares.
OTHER INVESTMENTS. The Portfolio may use other investment techniques,
including "when-issued" and "delayed-delivery securities" and variable rate
instruments. These techniques are described in Appendix A and the Statement.
RISK FACTORS AND OTHER CONSIDERATIONS
GENERAL CONSIDERATIONS. The different types of securities purchased and
investment techniques used by the Portfolio involve varying amounts of risk.
For example, equity securities are subject to a decline in the stock market or
in the value of the issuer, and preferred stocks have price risk and some
interest rate and credit risk. The value of debt securities may be affected by
changes in general interest rates and in the creditworthiness of the issuer.
Debt securities with longer maturities (for example, over ten years) are
generally more affected by changes in interest rates and provide less price
stability than securities with short term maturities (for example, one to ten
years). Also, on each debt security, the risk of principal and interest
default is greater with higher-yielding, lower-grade securities. High risk,
high-yield securities may provide a higher return but with added risk. In
addition, foreign securities have currency risk. Some of the risks involved in
the securities acquired by the Portfolio are discussed in this section.
Additional discussion is contained above under "Investment Techniques" and in
the Statement.
PORTFOLIO TURNOVER. Portfolio turnover refers to the frequency of portfolio
transactions and the percentage of portfolio assets being bought and sold in
the aggregate during the year. Although the Portfolio does not purchase
securities with the intention of profiting from short-term trading, the
Portfolio may buy and sell securities when the investment adviser or
subadviser believes such action is advisable. It is anticipated that the
average annual turnover rate of the Portfolio may exceed 125%. Turnover rates
in excess of 125% may result in higher transaction costs (which are borne
directly by the Portfolio) and a possible increase in short-term capital gains
(or losses). See "Tax Status" in the Statement.
FOREIGN SECURITIES. Investments in securities of foreign issuers or
securities denominated in foreign currencies involve risks not present in
domestic markets. Such risks include: currency fluctuations and related
currency conversion costs; less liquidity; price or income volatility; less
government supervision and regulation of foreign stock exchanges, brokers and
listed companies; possible difficulty in obtaining and enforcing judgments
against foreign entities; adverse foreign political and economic developments;
different accounting procedures and auditing standards; the possible
imposition of withholding taxes on interest income payable on securities; the
possible seizure or nationalization of foreign assets; the possible
establishment of exchange controls or other foreign laws or restrictions which
might adversely affect the payment and transferability of principal, interest
and dividends on securities; higher transaction costs; possible settlement
delays; and less publicly available information about foreign issuers.
DEPOSITARY RECEIPTS. The Portfolio can invest in both sponsored and
unsponsored depositary receipts. Unsponsored depositary receipts, which are
typically traded in the over-the-counter market, may be less liquid than
sponsored depositary receipts and therefore may involve more risk. In
addition, there may be less information available about issuers of unsponsored
depositary receipts.
The Portfolio will generally acquire American Depositary Receipts ("ADRs")
which are dollar denominated, although their market price is subject to
fluctuations of the foreign currency in which the underlying securities are
denominated. All depositary receipts will be considered foreign securities
for purposes of the Portfolio's investment limitation concerning investment in
foreign securities. See Appendix A and the Statement for more information.
HIGH RISK, HIGH-YIELD SECURITIES. The Portfolio may invest in high risk,
high-yield securities, often called "junk bonds". These securities tend to
offer higher yields than investment-grade bonds because of the additional
risks associated with them. These risks include: a lack of liquidity; an
unpredictable secondary market; a greater likelihood of default; increased
sensitivity to difficult economic and corporate developments; call provisions
which may adversely affect investment returns; and loss of the entire
principal and interest. Although junk bonds are high risk investments, the
investment adviser may purchase these securities if they are thought to offer
good value. This may happen if, for example, the rating agencies have, in the
investment adviser's opinion, misclassified the bonds or overlooked the
potential for the issuer's enhanced creditworthiness.
DERIVATIVES. The Portfolio may use derivative instruments as described above
under "Investment Techniques - Options, Futures and Other Derivative
Instruments." Derivatives can be volatile investments and involve certain
risks. The Portfolio may be unable to limit its losses by closing a position
due to lack of a liquid market or similar factors. Losses may also occur if
there is not a perfect correlation between the value of futures or forward
contracts and the related securities. The use of futures may involve a high
degree of leverage because of low margin requirements. As a result, small
price movements in futures contracts may result in immediate and potentially
unlimited gains or losses to the Portfolio. Leverage may exaggerate losses of
principal. The amount of gains or losses on investments in futures contracts
depends on the investment adviser's ability to predict correctly the direction
of stock prices, interest rates and other economic factors.
The use of forward exchange contracts may reduce the gain that would otherwise
result from a change in the relationship between the U.S. dollar and a foreign
currency. In an attempt to limit its risk in forward exchange contracts, the
Portfolio limits its exposure to the amount of its assets denominated in the
foreign currency being cross-hedged. Cross-hedging entails a risk of loss on
both the value of the security that is the basis of the hedge and the currency
contract that was used in the hedge. These risks are described in greater
detail in the Statement.
VARIABLE RATE INSTRUMENTS, WHEN-ISSUED AND DELAYED-DELIVERY TRANSACTIONS.
When-issued, delayed-delivery and variable rate instruments may be subject to
liquidity risks and risks of loss of principal due to market fluctuations.
Liquid assets in an amount at least equal to the Portfolio's commitments to
purchase securities on a when-issued or delayed-delivery basis will be
segregated at the Portfolio's custodian. For more information about these
securities, see Appendix A and the Statement.
SMALL CAPITALIZATION COMPANIES. The Portfolio may invest in small
capitalization companies. These companies may be in an early developmental
stage or older companies entering a new stage of growth due to management
changes, new technology, products or markets. The securities of small
capitalization companies may also be undervalued due to poor economic
conditions, market decline or actual or anticipated unfavorable developments
affecting the issuer of the security or its industry.
Securities of small capitalization companies tend to offer greater potential
for growth than securities of larger, more established issuers but there are
additional risks associated with them. These risks include: limited
marketability; more abrupt or erratic market movements than securities of
larger capitalization companies; and less publicly available information about
the issuer. In addition, these companies may be dependent on relatively few
products or services, have limited financial resources and lack of management
depth, and may have less of a track record or historical pattern of
performance.
INVESTMENT RESTRICTIONS
In addition to the restrictions discussed under "Investment Techniques," the
Portfolio will not invest more than 25% of its total assets in securities
issued by companies principally engaged in any one industry. For purposes of
this restrictions, finance companies will be classified as separate industries
according to the end users of their services, such as automobile finance,
computer finance and consumer finance. The 25% limitation does not apply to
securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities.
Additionally, the Portfolio will not invest more than 5% of its total assets
in the securities of any one issuer (excluding securities issued or guaranteed
by the U.S. Government, its agencies or instrumentalities) or purchase more
than 10% of the outstanding voting securities of any one issuer. These latter
restrictions apply only to 75% of the Portfolio's total assets. See the
Statement for additional investment restrictions.
MANAGEMENT OF THE PORTFOLIO
DIRECTORS. The operations of the Portfolio are managed under the direction of
the Board of Directors ("Directors"). The Directors set broad policies for the
Fund and the Portfolio. Information about the Directors is found in the
Statement.
INVESTMENT ADVISER. Aetna Life Insurance and Annuity Company ("ALIAC"), serves
as the investment adviser for the Portfolio. ALIAC is a Connecticut insurance
corporation with its principal offices at 151 Farmington Avenue, Hartford,
Connecticut 06156, and is registered with the SEC as an investment adviser. As
of June 30, 1996, ALIAC managed over $22 billion in assets. ALIAC is an
indirect wholly-owned subsidiary of Aetna Retirement Services, Inc., which is
in turn an indirect wholly-owned subsidiary of Aetna Inc.
Under the terms of the Investment Advisory Agreement between the Fund and
ALIAC with respect to the Portfolio, ALIAC, subject to the supervision of the
Directors, is obligated to manage and oversee the Fund's day-to-day operations
and to manage the investments of the Portfolio.
The Investment Advisory Agreement gives ALIAC broad latitude in selecting
securities for the Portfolio subject to the Directors' oversight. Under the
Investment Advisory Agreement, ALIAC may delegate to a subadviser its
functions in managing the investments of the Portfolio, subject to ALIAC's
oversight. The Investment Advisory Agreement allows ALIAC to place trades
through brokers of its choosing and to take into consideration the quality of
the brokers' services and execution, as well as services such as research,
providing equipment to the Fund, or paying Fund expenses, in setting the
amount of commissions paid to a broker. ALIAC will only use these commissions
for services and expenses to the extent authorized by applicable law and by
the rules and regulations of the SEC. ALIAC receives a monthly fee from the
Portfolio at an annual rate based on the average daily net assets of the
Portfolio as follows:
Portfolio Fee
_________ ___
Index Plus Portfolio 0.350%
Under the Investment Advisory Agreement, ALIAC has agreed to reduce its fee or
reimburse the Portfolio if the expenses borne by the Portfolio would exceed
the expense limitations of any jurisdiction in which the Portfolio's shares
are qualified for sale. ALIAC is not obligated to reimburse the Portfolio for
any expenses which exceed the amount of its advisory fee for that year. The
Investment Advisory Agreement also provides that ALIAC is responsible for all
of its own costs including costs of ALIAC's personnel required to carry out
its investment advisory duties.
SUBADVISER. ALIAC has engaged Aeltus Investment Management, Inc. ("Aeltus"),
organized in 1972 under the name Aetna Capital Management, Inc., as a
subadviser to the Portfolio. Aeltus is a Connecticut corporation located at
242 Trumbull Street, Hartford, Connecticut 06103-1205. Aeltus is registered
as an investment adviser with the SEC. As of June 30, 1996, Aeltus managed
over $11 billion in assets. Aeltus is a part of the Aetna organization, and is
an indirect wholly-owned subsidiary of Aetna Retirement Services, Inc., which
is in turn an indirect wholly-owned subsidiary of Aetna Inc. John Y. Kim
currently serves as the President, Chief Executive Officer and Chief
Investment Officer of Aeltus. Under a Subadvisory Agreement with ALIAC,
Aeltus, subject to the supervision of ALIAC and the Directors, is responsible
for managing the assets of the Portfolio in accordance with its investment
objective and policies. Aeltus pays the salaries and other related costs of
personnel engaged in providing investment advice including office space,
facilities and equipment.
ALIAC has overall responsibility for monitoring the investment program
maintained by Aeltus for compliance with applicable laws and regulations and
the Portfolio's investment objective.
The Subadvisory Agreement gives Aeltus broad latitude in selecting securities
for the Portfolio subject to ALIAC's oversight. The Subadvisory Agreement also
allows Aeltus to place trades through brokers of its choosing and to take into
consideration the quality of the brokers' services and execution, as well as
services such as research and providing equipment or paying Fund expenses, in
setting the amount of commissions paid to a broker. The use of research and
expense reimbursements in determining and paying commissions is referred to as
"soft dollar" practices. Aeltus will only use soft dollars for services and
expenses to the extent authorized under the Investment Advisory Agreement, but
only as authorized by applicable law and the rules and regulations of the SEC.
The Subadvisory Agreement provides that ALIAC will pay Aeltus a fee at an
annual rate up to 0.25% of the average daily net assets of the Portfolio. This
fee is not charged back to, or paid by, the Portfolio; it is paid by ALIAC out
of its own resources, including fees and charges it receives from or in
connection with the Portfolio.
The Subadvisory Agreement requires Aeltus to reduce its fee if ALIAC is
required to reduce its fee under the Investment Advisory Agreement. ALIAC has
agreed to reduce its fee or reimburse the Portfolio if the expenses borne by
the Portfolio would exceed the expense limitations of any jurisdiction in
which the Portfolio's shares are qualified for sale. ALIAC would not be
obligated to reimburse the Portfolio for any expenses which exceed the amount
of its advisory fee for that year. The Subadvisory Agreement obligates Aeltus
to reduce its fee by approximately 60% of the amount of ALIAC's fee reduction.
PORTFOLIO MANAGEMENT. Geoffrey A. Brod, a Vice President of Aeltus, is
primarily responsible for the day-to-day management of the Portfolio. Mr. Brod
has over 30 years of experience in quantitative applications and has over 9
years of experience in equity investments. Mr. Brod has been with the Aetna
organization since 1966.
EXPENSES AND FUND ADMINISTRATION. Under an Administrative Services Agreement
with the Fund, ALIAC provides all administrative services necessary for the
Fund's operations and is responsible for the supervision of the Fund's other
service providers. ALIAC also assumes all ordinary recurring direct costs of
the Fund, such as custodian fees, directors fees, transfer agency costs and
accounting expenses. For the services provided under the Administrative
Services Agreement, ALIAC receives an annual fee, payable monthly, at a rate
of 0.15% of the average daily net assets of the Fund.
SALE AND REDEMPTION OF SHARES
Purchases and redemptions of shares may be made only by insurance companies
for their separate accounts at the direction of Participants. Please refer to
the prospectus for your contract or policy for information on how to direct
investments in or redemptions from the Portfolio and any fees that may apply.
Generally, insurance companies aggregate orders received from Participants
during the day and place an order to purchase or redeem the net number of
shares during the night. Orders are generally executed at the net asset value
per share ("NAV") determined at the end of the previous business day. The
Portfolio reserves the right to suspend the offering of shares, or to reject
any specific purchase order. The Portfolio may suspend redemptions or
postpone payments when the New York Stock Exchange is closed or when trading
is restricted for any reason (other than weekends or holidays) or under
emergency circumstances as determined by the SEC.
NET ASSET VALUE
The NAV of the Portfolio is determined as of 4:15 p.m. New York time on each
day that the New York Stock Exchange is open for trading. The Portfolio's NAV
is computed by taking the total value of the Portfolio's securities, plus any
cash or other assets (including dividends and interest accrued but not
collected) and subtracting all liabilities (including accrued expenses), and
dividing the total by the number of shares outstanding. Portfolio securities
are valued primarily by independent pricing services, based on market
quotations. Short-term debt instruments maturing in less than 60 days are
valued at amortized cost. Securities for which market quotations are not
readily available are valued at their fair value in such manner as may be
determined, from time to time, in good faith, by or under the authority of,
the Directors.
GENERAL INFORMATION
INCORPORATION. The Fund was incorporated under the laws of Maryland on June
4, 1996.
CAPITAL STOCK. The Fund is authorized to issue one billion shares of capital
stock, par value $0.001 per share. All shares are nonassessable, transferable
and redeemable. There are no preemptive rights.
SHAREHOLDER MEETINGS. The Fund is not required and does not intend to hold
annual shareholder meetings. The Fund's Articles of Incorporation provide for
meetings of shareholders to elect Directors at such times as may be determined
by the Directors or as required by the 1940 Act. If requested by the holders
of at least 10% of the Fund's outstanding shares, the Fund will hold a
shareholder meeting for the purpose of voting on the removal of one or more
Directors and will assist with communication concerning that shareholder
meeting.
VOTING RIGHTS. Each share of the Fund is entitled to one vote for each full
share and fractional votes for fractional shares. Separate votes are taken by
Portfolio only if the matter affects or requires the vote of only that
Portfolio. The insurance companies holding the shares in their separate
accounts will generally request voting instructions from the Participants and
generally must vote the shares in proportion to the voting instructions
received. Voting rights for VA Contracts and VLI Policies are discussed in
the prospectus for the applicable contract or policy.
PERFORMANCE
From time to time advertisements and other sales materials for the Fund may
include information concerning the historical performance of the Fund. Such
advertisements will also describe the performance of the relevant insurance
company separate accounts. Any such information will include the average
annual total return of the Fund calculated on a compounded basis for specified
periods of time. Total return information will be calculated pursuant to
rules established by the SEC. In lieu of or in addition to total return
calculations, such information may include performance rankings and similar
information from independent organizations such as Lipper Analytical Services,
Inc., Morningstar, Business Week, Forbes or other industry publications.
The Fund calculates average annual total return by determining the redemption
value at the end of specified periods (assuming reinvestment of all dividends
and distributions) of a $1,000 investment in the Fund at the beginning of the
period, deducting the initial $1,000 investment, annualizing the increase or
decrease over the specified period and expressing the result as a percentage.
Total return figures utilized by the Fund are based on historical performance
and are not intended to indicate future performance. Total return and net
asset value per share can be expected to fluctuate over time, and accordingly,
upon redemption, shares may be worth more or less than their original cost.
PRIVATE ACCOUNT PERFORMANCE
The Index Plus Portfolio is newly organized and does not yet have its own
performance record. However, the Portfolio has an investment objective,
policies and strategies which are substantially similar to those employed by
Aeltus with respect to certain Private Accounts.
Thus, the performance information derived from these Private Accounts is
deemed relevant to the investor. The performance of the Portfolio may vary
from the Private Account composite information because the Portfolio will be
actively managed and its investments will vary from time to time and will not
be identical to the past portfolio investments of the Private Accounts.
Moreover, the Private Accounts are not registered under the Investment Company
Act of 1940 ("1940 Act") and therefore are not subject to certain investment
restrictions that are imposed by the 1940 Act, which, if imposed, could have
adversely affected the Private Accounts' performances.
The chart below shows hypothetical performance information derived from
historical composite performance of the Private Accounts included in the Index
Plus Composite. The hypothetical performance figures for the Portfolio
represent the actual performance results of the composites of comparable
Private Accounts, adjusted to reflect the deduction of the fees and expenses
anticipated to be paid by the Portfolio. The actual Private Account composite
performance figures are time-weighted rates of return which include all income
and accrued income and realized and unrealized gains or losses, but do not
reflect the deduction of investment advisory fees actually charged to the
Private Accounts.
Investors should not consider the performance data of these Private Accounts
as an indication of the future performance of the Portfolio. The figures also
do not reflect the deduction of any insurance fees or charges which are
imposed by the insurance company in connection with its sale of VA Contracts
and VLI Policies. Investors should refer to the separate account prospectuses
describing the VA Contracts and VLI Policies for information pertaining to
these insurance fees and charges. The insurance fees and charges will have a
detrimental effect on the performance of the Portfolio.
The following tables show hypothetical performance information derived from
private account composite performance reduced by anticipated Portfolio fees
and expenses, as well as comparisons with the S&P 500, an unmanaged index
generally considered to be representative of the stock market.
HYPOTHETICAL INVESTMENT PORTFOLIO PERFORMANCE
<TABLE>
<CAPTION>
<S> <C> <C>
INDEX PLUS PORTFOLIO
1 YEAR SINCE INCEPTION
------ ---------------
Index Plus Composite* 26.84% 15.58%
S&P 500 Stock Index 26.13% 15.36%
<FN>
* The Composite reflects the Aeltus "Quantitative Equity" Composite.
</TABLE>
Results shown are through the period ended June 30, 1996. The inception date
is October 1, 1991 for the Index Plus Composite.
TAX MATTERS
The Portfolio intends to qualify as a regulated investment company by
satisfying the requirements under Subchapter M of the Internal Revenue Code of
1986, as amended (the "Code"), including requirements with respect to
diversification of assets, distribution of income and sources of income. As a
regulated investment company, the Portfolio generally will not be subject to
tax on its ordinary income and net realized capital gains.
The Portfolio also intends to comply with the diversification requirements of
Section 817(h) of the Code for variable annuity contracts and variable life
insurance policies so that the VA Contract owners and VLI Policy owners should
not be subject to federal tax on distributions of dividends and income from
the Portfolio to the insurance company separate accounts. Contract owners and
policy owners should review the prospectus for their VA Contract or VLI Policy
for information regarding the tax consequences to them of purchasing a
contract or policy.
APPENDIX A
GLOSSARY OF INVESTMENT TERMS
BANKER'S ACCEPTANCE. A time draft drawn on and accepted by a bank,
customarily used by corporations as a means of financing payment for traded
goods. When a draft is accepted by a bank, the bank guarantees to pay the
face value of the debt at maturity.
CALL OPTION. The right to buy a security, currency or stock index at a stated
price, or strike price, within a fixed period. A call option will be
exercised if the market price rises above the strike price; if not, the option
expires worthless.
CERTIFICATES OF DEPOSIT. For large deposits not withdrawable on demand, banks
issue certificates of deposit ("CDS") as evidence of ownership. CDS are
usually negotiable and traded among investors such as mutual funds and banks.
COLLATERALIZED MORTGAGE OBLIGATIONS (CMOS). Mortgage-backed bonds that
separate mortgage pools into various classes or tranches in a predetermined,
specified order such as short-, medium-, and long-term portions.
COMMERCIAL PAPER. Unsecured short-term debt instruments issued by banks,
corporations or other borrowers with a maturity ranging from two to 270 days.
CONVERTIBLE SECURITIES. Corporate securities (usually bonds or preferred
stock) that can be exchanged for a set number of shares of another security,
usually common stock.
COVERED CALL OPTIONS. A call option backed by the securities underlying the
option. The owner of a security will normally sell covered call options to
collect premium income or to reduce price fluctuations of the security. A
covered call option limits the capital appreciation of the underlying
security.
EURODOLLARS. Eurodollars are U.S. dollars held in banks outside the United
States, mainly in Europe but also in other countries, and are commonly used
for the settlement of international transactions. There are many types of
Eurodollar securities including Eurodollar CDS and bonds; these securities are
not registered with the SEC. Certain Eurodollar deposits are not FDIC insured
and may be subject to future political and economic developments and
governmental restrictions.
DEPOSITARY RECEIPTS. Negotiable certificates evidencing ownership of shares
of a non-U.S. corporation, government, or foreign subsidiary of a U.S.
corporation. A U.S. bank typically issues depositary receipts, which are
backed by ordinary shares that remain on deposit with a custodian bank in the
issuer's home market. A depositary receipt can either be "sponsored" by the
issuing company or established without the involvement of the company, which
is referred to as "unsponsored."
FORWARD CONTRACTS. A purchase or sale of a specific quantity of a government
security, foreign currency, or other financial instrument at the current
price, with delivery and settlement at a specified future date.
FUTURES CONTRACTS. An agreement to buy or sell a specific amount of a
financial instrument at a particular price on a stipulated future date. A
futures contract obligates the buyer to purchase and the seller to sell,
unlike an option where one party can choose whether or not to exercise the
option.
HIGH RISK, HIGH-YIELD SECURITIES. Debt instruments rated BB or below by
Standard & Poor's Corporation or Ba or below by Moody's Investors Services
Inc., or securities of comparable ratings by other agencies or, if unrated,
considered by ALIAC to be of comparable quality. These securities are often
called "junk bonds" because of the greater possibility of default.
PREFERRED STOCK. Stock which has a preference over common stock, whether as
to payment of dividends or to assets on liquidation. It ordinarily pays a
fixed dividend.
PRIMARY CAPITAL RATIO. The ratio used to evaluate the creditworthiness of
foreign banks which is based on the ratio of total assets to the common and
preferred stock, loan loss reserves, minority interests and mandatory
convertibles.
PUT OPTION. The right to sell a security, currency or stock index at a stated
price, or strike price, within a fixed period. A put option will be exercised
if the market price falls below the strike price; if not, the option expires
worthless.
SWAP. An exchange of one security for another. A swap may be executed to
change the maturities of a bond portfolio or the quality of the issues in a
stock or bond portfolio.
U.S. GOVERNMENT SECURITIES. Securities issued by the U.S. Government and its
agencies.
Direct Obligations of the U.S. Government are:
TREASURY BILLS - issued with short maturities (one year or less) and
priced at a discount to face value. The income for investors is the
difference between the purchase price and the face value.
TREASURY NOTES - intermediate-term securities with maturities of between
one to ten years. Income to investors is paid in semiannual interest
payments.
TREASURY BONDS - long-term securities with maturities from ten years to up
to thirty years. Income is paid to investors on a semiannual basis.
In addition, U.S. Government Agencies issue debt securities to finance
activities for the U.S. Government. These agencies include among others the
Federal Home Loan Bank, Federal National Mortgage Association ("FNMA" or
"Fannie Mae"), Government National Mortgage Association ("GNMA" or "Ginnie
Mae"), Export-Import Bank and the Tennessee Valley Authority.
Not all agencies are backed by the full faith and credit of the United States;
for example the FNMA may borrow money from the U.S. Treasury only under
certain circumstances. There is no guarantee that the government will support
these types of securities and they therefore involve more risk than direct
government obligations.
VARIABLE RATE INSTRUMENTS. An instrument the terms of which provide for the
adjustment of its interest rate on set dates and which can reasonably be
expected to have a market value close to par value.
WARRANTS. A security, normally offered with bonds or preferred stock, that
entitles the holder to buy shares of stock at a prescribed price within a
named or stated period, or to perpetuity. The time period is usually longer
than that of a call option.
WHEN-ISSUED AND DELAYED-DELIVERY TRANSACTIONS. When-issued is a transaction
that is made as of a current date, but conditioned on the actual issuance of a
security that is authorized but not yet issued. A delayed-delivery
transaction is one where both parties agree that the security will be
delivered and the transaction completed at a future date.
YANKEE BONDS. A dollar denominated bond issued in the United States by
foreign corporations and banks. Similarly, Yankee CDS are issued in the U.S.
by branches and agencies of foreign banks.
APPENDIX B
DESCRIPTION OF CORPORATE BOND RATINGS
MOODY'S INVESTORS SERVICE, INC.
Aaa -- Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred
to as "gilt-edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong position of such issues.
Aa -- Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long term risks appear somewhat larger than in Aaa
securities.
A -- Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Baa -- Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present, but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics as
well.
Ba -- Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B -- Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
The modifier 1 indicates that the bond ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the
modifier 3 indicates the issuer ranks in the lower end of its rating category.
STANDARD & POOR'S CORPORATION
AAA -- Bonds rated AAA have the highest rating assigned by Standard &
Poor's to a debt obligation. Capacity to pay interest and repay principal is
extremely strong.
AA -- Bonds rated AA have a very strong capacity to pay interest and repay
principal and differ from the highest rated issues only in small degree.
A -- Bonds rated A have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than bonds in higher rated
categories.
BBB -- Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate
protection parameters, adverse economic conditions or changing circumstances
are more likely to lead to a weakened capacity to pay interest and repay
principal for bonds in this category than for bonds in higher rated
categories.
BB -- Bonds rated BB have less near-term vulnerability to default than
other speculative issues. However, the bonds face major uncertainties or
exposure to adverse business, financial, or economic conditions which could
lead to inadequate capacity to meet timely interest and principal payments.
B -- Bonds rated B have a greater vulnerability to default but currently
have the capacity to meet interest payments and principal repayments. Adverse
business, financial, or economic conditions will likely impair capacity or
willingness to pay interest and repay principal.
The ratings from "AA" to "B" may be modified by the addition of a plus (+) or
minus (-) sign to show relative standing within the major rating categories.
