As filed with the Securities and Exchange
Commission on April 17, 1998
Registration Nos. 333-32575
811-8319
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Post-Effective Amendment
No. 2 [X]
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Post-Effective Amendment
No. 2 [X]
PORTFOLIO PARTNERS, INC.
------------------------
(Exact name of registrant as specified in charter)
151 Farmington Avenue
Hartford, CT 06156-8962
(Address of Principal Executive Offices) (Zip Code)
(860) 273-1409
____________________________________________________________________
Amy R. Doberman, Esq.
Aetna Life Insurance and Annuity Company
151 Farmington Avenue, RE4A, Hartford, CT 06156-8962
(Name and Address of Agent For Service)
It is proposed that this filing will become effective:
[ ] immediately upon filing pursuant to paragraph (b)
[x] on May 1, 1998 pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[ ] on (date) pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2) of rule 485.
<PAGE>
PORTFOLIO PARTNERS, INC.
CROSS REFERENCE SHEET
PART A
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N-1A
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Item No. Location
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<S> <C> <C>
1. Cover Page Cover Page
2. Synopsis Not Applicable
3. Financial Highlights Financial Highlights
4. General Description of Registrant....... Cover Page; The Fund; Description of the Portfolios;
Investment Policies and Practices; Risk Factors and Other
Considerations; Investment Restrictions; General Information
5. Management of the Fund.................. Management of the Portfolios
6. Capital Stock and Other Securities...... Purchase and Redemption of Shares; Net Asset Value; Tax
Matters; General Information
7. Purchase of Securities Being Offered.... The Fund; Purchase and Redemption of Shares; Net Asset Value
8. Redemption or Repurchase................ Purchase and Redemption of Shares; Net Asset Value
9. Pending Legal Proceedings............... Not Applicable
PART B
10. Cover Page.............................. Cover Page
11. Table of Contents....................... Table of Contents
12. General Information and History......... General Information and History
13. Investment Objectives and Policies...... Additional Investment Restrictions and Policies of the
Portfolios; Description of Various Securities and Investment
Policies and Practices
14. Management of the Fund.................. Directors and Officers of the Fund
15. Control Persons and Principal Holders
of Securities........................ Control Persons and Principal Shareholders
<PAGE>
16. Investment Advisory and Other
Services.......................... The Investment Advisory Agreement; The Subadvisory
Agreements; The Administrative Services Agreement;
Custodian; Independent Auditors
17. Brokerage Allocation and Other
Practices............................. Brokerage Allocation and Trading Practices
18. Capital Stock and Other Securities...... Description of Shares
19. Purchase, Redemption and Pricing of
Securities Being Offered.............. Net Asset Value
20. Tax Status.............................. Tax Status
21. Underwriters............................ Principal Underwriter
22. Calculation of Performance Data......... Performance Information
23. Financial Statements.................... Financial Statements
</TABLE>
PART C
Information required to be included in Part C is set forth under the appropriate
Item, so numbered, in Part C of the Registration Statement.
<PAGE>
PORTFOLIO PARTNERS, INC.
151 FARMINGTON AVENUE
HARTFORD, CT 06156-8962
MFS EMERGING EQUITIES PORTFOLIO
MFS RESEARCH GROWTH PORTFOLIO
MFS VALUE EQUITY PORTFOLIO
SCUDDER INTERNATIONAL GROWTH PORTFOLIO
T. ROWE PRICE GROWTH EQUITY PORTFOLIO
Prospectus dated: May 1, 1998
Portfolio Partners, Inc. (the "Fund") is an open-end management investment
company authorized to issue multiple series of shares, each representing a
diversified portfolio of investments (individually, a "Portfolio," and
collectively, the "Portfolios"). Aetna Life Insurance and Annuity Company
serves as the Investment Adviser of each Portfolio, and each has a Subadviser.
The Fund's five Portfolios (and their Subadvisers) are:
MFS Emerging Equities Portfolio (Massachusetts Financial Services Company)
MFS Research Growth Portfolio (Massachusetts Financial Services Company)
MFS Value Equity Portfolio (Massachusetts Financial Services Company)
Scudder International Growth Portfolio (Scudder Kemper Investments, Inc.)
T. Rowe Price Growth Equity Portfolio (T. Rowe Price Associates, Inc.)
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
a Portfolio and should be read and kept for future reference. A Statement of
Additional Information ("Statement"), dated May 1, 1998, contains more
information about the Portfolios. For a free copy of the Statement, call
1-800-525-4225 or write to Portfolio Partners, Inc., at the address listed
above. The Statement has been filed with the Securities and Exchange Commission
("SEC") and is incorporated by reference into this Prospectus. The SEC maintains
a Web site (http://www.sec.gov) that contains the Statement, material
incorporated by reference, and other information.
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 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, NOR HAS THE SECURITIES AND EXCHANGE
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.
<PAGE>
THE FUND
The Fund is an open-end, management investment company, consisting of multiple
Portfolios. It currently has authorized five Portfolios: MFS Emerging Equities
Portfolio, MFS Research Growth Portfolio, MFS Value Equity Portfolio, Scudder
International Growth Portfolio and T. Rowe Price Growth Equity Portfolio. The
Fund may authorize additional Portfolios in the future. Aetna Life Insurance
and Annuity Company ("Aetna") serves as the Investment Adviser for each
Portfolio, and Aetna has appointed various Subadvisers that are responsible for
the day-to-day management of the Portfolios. The Portfolios are intended to
serve as funding vehicles for VA Contracts and VLI Policies to be offered
through the separate accounts of insurance companies. The insurance companies,
not the owners of the VA Contracts or VLI Policies or participants therein
("Participants"), are shareholders of the Fund. See "General Information."
FINANCIAL HIGHLIGHTS
The following information regarding the Portfolios, has been audited by KPMG
Peat Marwick LLP, independent auditors, whose report thereon appears in the
Portfolios' Annual Report ("Annual Report") dated December 31, 1997. The
information should be read in conjunction with the financial statements and
related notes also included in the Annual Report. Further information about the
performance of the Portfolios is contained in the Annual Report which is
incorporated by reference into the Statement and may be obtained by
shareholders without charge by calling 1-800-525-4225.
Portfolio Partners, Inc.
Financial Highlights
Selected data for a share outstanding for the period:
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MFS Emerging MFS Research
Equities Portfolio Growth Portfolio
Period from Period from
November 28, 1997 November 28, 1997
(commencement (commencement
of operations) to of operations) to
December 31, 1997 December 31, 1997
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Net asset value, beginning of period .............. $ 43.39 $ 9.89
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Income from investment operations:
Net investment income ............................ 0.09 --
Net realized and change in unrealized
gain (loss) on investments, futures,
foreign currency and forward foreign
currency exchange contracts ...................... (0.57) (0.18)
-------- -------
Total income from investment operations ......... (0.48) (0.18)
-------- -------
Net asset value, end of period .................... $ 42.91 $ 9.71
-------- -------
Total return(1) ................................... (1.13)% (1.82)%
Net assets, end of period (000's) ................. $768,108 $399,548
Ratio of total expenses to average
net assets(2) .................................... 0.81% 0.85%
Ratio of net investment income to
average net assets(2) ............................ 2.31% 0.22%
Portfolio turnover rate(1) ........................ 0.07% 57.88%
Average commission rate paid per share
on purchases of equity securities ................ $ 0.0601 $ 0.0635
</TABLE>
(1)Not annualized.
(2)Annualized.
2 Portfolio Partners, Inc.
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<TABLE>
<CAPTION>
MFS Value Scudder International T. Rowe Price Growth
Equity Portfolio Growth Portfolio Equity Portfolio
Period from Period from Period from
November 28, 1997 November 28, 1997 November 28, 1997
(commencement of (commencement of (commencement of
operations) to operations) to operations) to
December 31, 1997 December 31, 1997 December 31, 1997
------------------- ----------------------- ----------------------
<S> <C> <C> <C>
Net asset value, beginning of period .............. $ 29.49 $ 13.88 $ 42.74
------- ------- -------
Income from investment operations:
Net investment income ............................ 0.05 -- 0.06
Net realized and change in unrealized
gain (loss) on investments, futures,
foreign currency and forward foreign
currency exchange contracts ...................... 0.37 0.22 0.81
------- --------- -------
Total income from investment operations ......... 0.42 0.22 0.87
------- --------- -------
Net asset value, end of period .................... $ 29.91 $ 14.10 $ 43.61
------- --------- -------
Total return(1) ................................... 1.43% 1.58% 2.03%
Net assets, end of period (000's) ................. $134,508 $ 378,199 $371,194
Ratio of total expenses to average
net assets(2) .................................... 0.90% 1.00% 0.75%
Ratio of net investment income to
average net assets(2) ............................ 1.98% 0.12% 1.58%
Portfolio turnover rate(1) ........................ 12.06% 3.01% 2.94%
Average commission rate paid per share
on purchases of equity securities ................ $ 0.0482 $ 0.0185 $ 0.0408
</TABLE>
DESCRIPTION OF THE PORTFOLIOS
Each Portfolio has an investment objective, which is a fundamental policy. A
Portfolio's fundamental policies and restrictions may not be changed without
the vote of a majority of the holders of that Portfolio's outstanding shares
(see "Voting Rights," below). Investment in a Portfolio involves risk, and, as
with all mutual funds, there can be no assurance that a Portfolio will meet its
investment objective. Each Portfolio is subject to investment policies and
restrictions described in this Prospectus and in the Statement, some of which
are fundamental.
MFS EMERGING EQUITIES PORTFOLIO
Investment Objective. The MFS Emerging Equities Portfolio ("MFS Emerging
Equities") seeks to provide long-term growth of capital. Dividend and interest
income from portfolio securities, if any, is incidental to MFS Emerging
Equities' investment objective.
Investment Policies. Under normal market conditions, MFS Emerging Equities
invests primarily in common stocks issued by companies that its Subadviser
believes are early in their life cycle but which have the potential to become
major enterprises (emerging growth companies). The Subadviser generally expects
these companies, which may include domestic and foreign companies, to show
earnings growth over time that is well above the growth rate of the overall
economy and the rate of inflation. In addition, the Subadviser generally
expects these companies to have the products, technologies, management and
market and other opportunities that are usually necessary to become more widely
recognized as growth companies. Emerging growth companies can be of any size,
and MFS Emerging Equities may invest in larger or more established companies
whose rates of earnings growth are expected to accelerate because of special
factors, such as rejuvenated management, new products, changes in consumer
demand, or basic changes in the economic environment.
The nature of investing in emerging growth companies involves greater risk than
is customarily associated with investments in more established companies.
Emerging growth companies often have limited product lines, markets or other
financial resources, and they may be dependent on one-person management. In
addition, there may be less research available on many promising small- and
medium-sized emerging growth companies, making it more difficult to find and
analyze these companies. Securities issued by emerging growth companies may
have limited marketability and may be subject to more abrupt or erratic market
movements than securities of larger, more established growth companies or the
market averages in general. Shares of MFS Emerging Equities are therefore
subject to greater fluctuation in value than shares of a conservative equity
fund or of a growth fund that invests primarily in proven growth stocks.
Portfolio Partners, Inc. 3
<PAGE>
When the Subadviser determines that other investments appear attractive, MFS
Emerging Equities may, to a limited extent, invest in other types of
securities, including investment grade fixed-income securities and high-yield,
below investment grade fixed-income securities ("below investment grade
fixed-income securities"), or unrated fixed-income securities of comparable
quality; convertible securities and warrants. (For a description of bond
ratings, see the Statement, Appendix A.) MFS Emerging Equities may hold cash
equivalents or other forms of debt securities as a reserve for future purchases
of common stock or to meet liquidity needs.
MFS Emerging Equities may engage in strategic transactions, which may include
the use of derivatives. See "Investment Policies and Practices" and "Risk
Factors and Other Considerations."
Massachusetts Financial Services Company ("MFS") serves as the Subadviser of
MFS Emerging Equities and is responsible for its day-to-day management, subject
to the oversight of Aetna and the Fund's Board of Directors. See "Management of
the Portfolios."
MFS RESEARCH GROWTH PORTFOLIO
Investment Objective. The MFS Research Growth Portfolio ("MFS Research Growth")
seeks long-term growth of capital and future income.
Investment Policies. Under normal market conditions, MFS Research Growth
invests primarily in common stocks or securities convertible into common stocks
issued by companies that the Subadviser believes to possess better-than-average
prospects for long-term growth. MFS Research Growth may invest a smaller
proportion of its assets in fixed-income securities such as bonds and
short-term debt obligations, preferred stocks or common stocks whose principal
characteristic is income production rather than growth. In the case of both
growth stocks and income issues, the Subadviser emphasizes securities issued by
progressive, well-managed companies.
MFS Research Growth may invest in investment grade fixed-income securities and
in below investment grade fixed-income securities, or unrated fixed-income
securities of comparable quality. In making investment decisions, the
Subadviser does not rely exclusively on ratings on fixed-income securities
provided by established rating agencies, but rather supplements those ratings
with its own independent and ongoing review of credit quality. Therefore, the
ability of MFS Research Growth to achieve its investment objective may be more
dependent on its Subadviser's own credit analysis than a fund that invests
primarily in higher-quality bonds. The Subadviser allocates a proportion of
assets invested in growth stocks, income-producing securities or cash
(including foreign currency) and cash equivalents, depending on its view of the
relative attractiveness of each type of investment.
MFS serves as the Subadviser of MFS Research Growth and is responsible for its
day-to-day management, subject to the oversight of Aetna and the Fund's Board
of Directors. See "Management of the Portfolios."
MFS VALUE EQUITY PORTFOLIO
Investment Objective. The MFS Value Equity Portfolio ("MFS Value Equity") seeks
capital appreciation. Dividend income, if any, is a consideration incidental to
MFS Value Equity's objective of capital appreciation.
Investment Policies. Under normal market conditions, MFS Value Equity invests
primarily in common stocks (which may be issued by domestic or foreign
companies), and may seek appreciation by investing in other types of
securities, including fixed-income securities, convertible bonds, convertible
preferred stocks and warrants, when relative values make such purchases appear
attractive either as individual issues or as types of securities in certain
economic environments. MFS Value Equity may invest in investment grade
fixed-income securities and below investment grade fixed-income securities or
unrated securities of comparable quality. These may include zero coupon bonds,
deferred interest bonds and bonds on which the interest is payable in kind
("PIK bonds"). MFS Value Equity may hold cash equivalents or other forms of
debt securities as a reserve for future purchases of common stock or to meet
liquidity needs.
MFS Value Equity may engage in strategic transactions, which may include the
use of derivatives. See "Investment Policies and Practices" and "Risk Factors
and Other Considerations."
MFS serves as the Subadviser of MFS Value Equity and is responsible for its
day-to-day management, subject to the oversight of Aetna and the Fund's Board
of Directors. See "Management of the Portfolios."
SCUDDER INTERNATIONAL GROWTH PORTFOLIO
Investment Objective. The Scudder International Growth Portfolio ("Scudder
International Growth") seeks long-term growth of capital primarily through a
diversified portfolio of marketable foreign equity securities.
4 Portfolio Partners, Inc.
<PAGE>
Investment Policies. Under normal market conditions, Scudder International
Growth invests primarily in securities that, in the opinion of its Subadviser,
allow it to participate in non-U.S. companies and economies with prospects for
growth. Scudder International Growth invests in securities issued by companies,
wherever organized, that do business primarily outside the U.S., including
emerging market countries. Scudder International Growth intends to diversify
investments among several countries and to have represented, in substantial
proportions, business activities in not less than three countries.
Scudder International Growth generally invests in equity securities issued by
established companies listed on foreign exchanges that the Subadviser believes
have favorable characteristics. When the Subadviser believes that it is
appropriate in order to achieve long-term capital growth, Scudder International
Growth may invest in fixed-income securities of foreign governments,
supranational organizations and private issuers, including bonds denominated in
the European Currency Unit ("ECU"). The Subadviser will select fixed-income
securities on the basis of, among other things, yield, credit quality, and the
fundamental outlook for currency and interest rate trends in different parts of
the globe, taking into account the ability to hedge a degree of currency or
local bond price risk. Scudder International Growth may invest in investment
grade fixed-income securities and below investment grade fixed-income
securities, or unrated securities of comparable quality. Scudder International
Growth may hold cash equivalents or other forms of debt securities as a reserve
for future purchases of common stock or to meet liquidity needs.
When the Subadviser determines that exceptional conditions exist abroad,
Scudder International Growth may, for temporary defensive purposes, invest all
or a portion of its assets in Canadian or U.S. Government obligations or
currencies, or securities of companies incorporated in and having their
principal activities in Canada or the U.S. In addition, Scudder International
Growth may engage in strategic transactions, which may include the use of
derivatives. See "Investment Policies and Practices" and "Risk Factors and
Other Considerations."
Scudder Kemper Investments, Inc. ("Scudder Kemper") serves as the Subadviser of
Scudder International Growth and is responsible for its day-to-day management,
subject to the oversight of Aetna and the Fund's Board of Directors. See
"Management of the Portfolios."
T. ROWE PRICE GROWTH EQUITY PORTFOLIO
Investment Objective. The T. Rowe Price Growth Equity Portfolio ("T. Rowe Price
Growth Equity") seeks long-term growth of capital and, secondarily, to increase
dividend income by investing primarily in common stocks of well established
growth companies.
Investment Policies. Under normal market conditions, T. Rowe Price Growth
Equity invests primarily in common stocks issued by a diversified group of
growth companies. The companies in which T. Rowe Price Growth Equity invests
normally (but not always) pay dividends, which are generally expected to rise
in future years as earnings increase. Most of its assets will be invested in
U.S. common stocks. However, T. Rowe Price Growth Equity may invest in foreign
securities and convertible securities and warrants, when the Subadviser
considers such investments consistent with the Portfolio's investment objective
and policies.
T. Rowe Price Growth Equity generally seeks to invest in securities of
companies that satisfy one or more of several criteria established by the
Subadviser. For example, the Subadviser generally seeks companies with superior
growth in earnings and cash flow; the ability to sustain earnings momentum even
during economic slowdowns by operating in so-called "fertile fields" (areas
where earnings and dividends can outpace inflation and the overall economy);
and the capability to expand even during times of slow growth. The Subadviser
generally favors companies whose profits increase due to economic factors
rather than one-time events such as lower taxes.
T. Rowe Price Growth Equity may engage in strategic transactions, which may
include the use of derivatives. See "Investment Policies and Practices" and
"Risk Factors and Other Considerations."
T. Rowe Price Associates, Inc. ("T. Rowe Price") serves as the Subadviser of T.
Rowe Price Growth Equity and is responsible for its day-to-day management,
subject to the oversight of Aetna and the Fund's Board of Directors. See
"Management of the Portfolios."
INVESTMENT POLICIES AND PRACTICES
The Portfolios are managed in accordance with the following investment policies
and practices. See "Risk Considerations" and the Statement for a description of
the risks that these policies and practices may involve.
Investment Policies Generally: When a Portfolio invests "primarily" in
particular securities, it will invest at least 65% of its total assets in those
securities (80% in the case of MFS Emerging Equities).
Repurchase Agreements: Each Portfolio may enter into repurchase agreements in
order to earn income on available cash or as a temporary defensive measure.
Under a repurchase agreement, a Portfolio acquires securities subject to
Portfolio Partners, Inc. 5
<PAGE>
the seller's agreement to repurchase them at a specified time and price. If the
seller becomes subject to a proceeding under the bankruptcy laws or its assets
are otherwise subject to a stay order, a Portfolio's right to liquidate the
securities may be restricted (during which time the value of the securities
could decline). As discussed in the Statement, the Fund has adopted certain
procedures that are intended to minimize this risk.
Restricted Securities: Each Portfolio may also purchase securities that are not
registered under the Securities Act of 1933 (the "1933 Act") ("restricted
securities"), including those that can be offered and sold to "qualified
institutional buyers" under Rule 144A under the 1933 Act ("Rule 144A
securities"). Under a policy established by the Board of Directors, the
Subadvisers periodically review the trading markets for the specific Rule 144A
security and determine whether the security is liquid. Subject to each
Portfolio's respective limitation on investments in illiquid investments, a
Portfolio may also invest in restricted securities that may not be sold under
Rule 144A, which presents certain risks.
Limit: A Portfolio will not invest more than 15% of its net assets in
securities that are deemed to be illiquid.
When-Issued Securities: In order to help ensure the availability of suitable
securities, each Portfolio may purchase securities on a "when-issued" or on a
"forward delivery" basis, which means that the obligations will be delivered to
a Portfolio at a future date, usually beyond customary settlement time. It is
expected that, under normal circumstances, a Portfolio will take delivery of
such securities. In general, a Portfolio does not pay for the securities until
received and does not start earning interest on the obligations until the
contractual settlement date. For a further discussion, see the Statement.
Investments for Temporary Defensive Purposes: During periods of unusual market
conditions when a Subadviser believes that investing for temporary defensive
purposes is appropriate, or in order to meet anticipated redemption requests, a
Portfolio may invest up to 100% of its assets in cash or cash equivalents
including, but not limited to, obligations of banks with assets of $1 billion
or more (including certificates of deposit, bankers' acceptances and repurchase
agreements), commercial paper, short-term notes, obligations issued or
guaranteed by the U.S. Government or any of its agencies, authorities or
instrumentalities and related repurchase agreements. See the Statement for a
description of U.S. Government obligations and certain short-term investments.
Corporate Asset-Backed Securities: MFS Emerging Equities and Scudder
International Growth may invest in corporate asset-backed securities. These
securities, issued by trusts and special purpose corporations, are backed by a
pool of assets, such as credit card or automobile loan receivables,
representing the obligations of a number of different parties. Corporate
asset-backed securities present certain risks. For instance, in the case of
credit card receivables, these securities may not have the benefit of any
security interest in the related collateral. See the Statement for further
information about these securities.
Limit: Neither MFS Emerging Equities nor Scudder International Growth will
invest more than 20% of its total assets at the time of purchase in corporate
asset-backed securities.
Investment Grade Fixed-Income Securities: MFS Emerging Equities, MFS Value
Equity, MFS Research Growth and Scudder International Growth may invest in
"investment grade" fixed-income securities. Investment grade fixed-income
securities are rated Baa or better by Moody's Investors Service, Inc.
("Moody's") or BBB or better by Standard and Poor's Rating Services ("S&P") or
Fitch Investors Service, Inc. ("Fitch"), or, if unrated, are of comparable
quality. See "Risk Factors and Other Considerations."
High-Yield, Below Investment Grade Fixed-Income Securities: MFS Emerging
Equities, MFS Research Growth, MFS Value Equity and Scudder International
Growth may invest in below investment grade fixed-income securities. These
securities, rated lower than Baa by Moody's or BBB by S&P or Fitch, or, if
unrated, of comparable quality, are considered speculative.
Limit: The maximum percentage of its total assets that a Portfolio may invest
in below investment grade fixed-income securities, measured at the time of
purchase, is as follows: MFS Emerging Equities: 5%; MFS Value Equity: 25%; MFS
Research Growth: 10%; Scudder International Growth: 5%.
Foreign Securities: Each Portfolio may invest in securities issued by foreign
companies or governments, and in American Depository Receipts ("ADRs") and
similar securities.
Limit: The limits on Portfolio investment in foreign securities are as follows:
Scudder International Growth: 100% of assets may be invested in foreign
securities (including emerging market securities and Brady Bonds); MFS Value
Equity: 50% of net assets may be invested in foreign securities (including
emerging market securities and Brady Bonds), although it generally expects to
invest between 10% and 25% of net assets; MFS Emerging Equities: 25% of net
assets may be invested in foreign securities (including emerging market
securities and Brady Bonds), although it generally expects to invest up to 15%
of net assets; MFS Research Growth: 20% of net assets may be invested in
foreign securities (including emerging market securities); T. Rowe Price Growth
Equity: 30% of total assets (excluding reserves) may be invested in foreign
securities (including emerging market securities). ADRs are included within
these limits with respect to T. Rowe Price Growth Equity, but not for the other
Portfolios.
6 Portfolio Partners, Inc.
<PAGE>
Foreign Currencies: Each Portfolio may hold foreign currency received in
connection with investments in foreign securities when, in the judgment of its
Subadviser, it would be beneficial to convert such currency into U.S. dollars
at a later date, based on anticipated changes in the relevant exchange rate.
Each Portfolio may also hold foreign currency in anticipation of purchasing
foreign securities. See "Risk Factors and Other Considerations."
Brady Bonds: MFS Value Equity, MFS Emerging Equities and Scudder International
Growth may invest in Brady Bonds, which are securities created through the
exchange of existing commercial bank loans to public and private entities in
certain emerging markets for new bonds in connection with debt restructurings
under a debt restructuring plan introduced by former U.S. Secretary of the
Treasury Nicholas F. Brady (the "Brady Plan"). Brady Bonds have been issued
only recently, and for that reason do not have a long payment history. Brady
Bonds may be collateralized or uncollateralized, are issued in various
currencies (but primarily in the U.S. dollar), and are actively traded in
over-the-counter secondary markets. U.S. dollar-denominated, Brady Bonds, which
may be fixed-rate bonds or floating-rate bonds, are generally collateralized in
full as to principal by U.S. Treasury zero coupon bonds having the same
maturity as the bonds. Investments in Brady Bonds may be viewed as speculative.
Emerging Market Securities: Each Portfolio may invest in securities of issuers
whose principal activities are located in emerging market countries. Emerging
market countries include any country determined by a Subadviser to have an
emerging market economy, taking into account a number of factors, including
whether the country has a low- to middle-income economy according to the
International Bank for Reconstruction and Development, the country's foreign
currency debt rating, its political and economic stability and the development
of its financial and capital markets. See "Risk Factors and Other
Considerations."
American Depository Receipts: Each Portfolio may invest in ADRs, which are
certificates issued by a U.S. depository (usually a bank) and represent a
specified quantity of shares of an underlying non-U.S. stock on deposit with a
custodian bank as collateral. ADRs are subject to many of the risks of foreign
securities such as exchange rates and more limited information about foreign
issuers. See "Risk Factors and Other Considerations."
Strategic Transactions and Derivatives: Certain Portfolios may, but are not
required to, utilize various investment strategies involving the use of
"derivative instruments" described below. A Portfolio may utilize a strategic
transaction for one or more reasons, including:
[bullet] to hedge various market risks (such as interest rates, currency
exchange rates, and broad or specific equity or fixed-income market
movements);
[bullet] to manage the effective maturity or duration of fixed-income
securities;
[bullet] to establish a position in the derivatives market as a temporary
substitute for purchasing or selling a particular security or index;
or
[bullet] to enhance potential gain.
Derivatives are instruments whose value is derived from, or linked to, the
value of another source, typically a commodity, a security, an index, or some
other readily measurable economic variable. These strategies are generally
accepted as part of modern portfolio management and are utilized by many mutual
funds and portfolio managers.
A Portfolio may use any or all of these investment techniques at any time and
in any combination, and there is no particular strategy that dictates the use
of one technique rather than another, or none at all. The ability of a
Portfolio to utilize these transactions successfully will depend on the
Subadviser's ability to predict pertinent market movements, which cannot be
assured. Strategic transactions involve certain risks. See "Risk Factors and
Other Considerations." These strategic transactions are briefly described below
and are described in greater detail in the Statement.
Limit: Unless otherwise noted, a Portfolio may only commit up to 5% of its
total assets, measured at the time of purchase, for initial margin requirements
or premiums to engage in strategic transactions, although MFS Emerging
Equities, MFS Value Equity, Scudder International Growth and T. Rowe Price
Growth Equity are subject to this limit only when they engage in strategic
transactions for non-hedging purposes (that is, for speculation to increase its
income rather than to hedge against adverse price movements). To prevent
"leverage," a Portfolio will, consistent with applicable regulatory
requirements, either "cover" its strategic transaction or segregate liquid
assets equal in value to the exposure created by the transaction.
Options on Securities, Indices and Other Financial Instruments: MFS Emerging
Equities, MFS Value Equity, Scudder International Growth and T. Rowe Price
Growth Equity may purchase and sell exchange-listed and over-the-counter put
and call options on securities, equity and fixed-income indices and other
financial instruments, including foreign currencies. MFS Emerging Equities, MFS
Value Equity and Scudder International Growth may write (sell) calls on
securities only if such calls are covered. Scudder International Growth may
sell options on securities indices only to close out open positions. A
Portfolio may also sell combinations of put and call options on the same
security, known as
Portfolio Partners, Inc. 7
<PAGE>
"straddles." When a Portfolio buys an option, it pays a premium for the right,
not the obligation, to buy or sell a security or index within a certain time at
a certain price. The Portfolio's losses will be limited to the premium it pays
for the option. When a Portfolio sells a call option, it earns a premium and it
is obligated (if the option is exercised) to sell a security or index within a
certain time at a certain price, without regard to current market price. When a
Portfolio sells a put option, it earns a premium and it is obligated (if the
option is exercised) to buy the security or index within a certain time at a
certain price, without regard to current market price.
In certain instances, a Portfolio may enter into options on Treasury securities
which may be referred to as "reset" options or "adjustable strike" options.
These options provide for periodic adjustment of the strike price and may also
provide for the periodic adjustment of the premium during the term of the
option.
Limit: MFS Emerging Equities, MFS Value Equity and T. Rowe Price Growth Equity
will not purchase put and call options if as a result more than 5% of their
total assets would be invested in premiums for those options.
Futures Contracts and Options on Futures Contracts: MFS Emerging Equities, MFS
Value Equity, Scudder International Growth, and T. Rowe Price Growth Equity may
buy and sell futures contracts on indices and financial instruments. When a
Portfolio enters into a futures contract, it becomes obligated to buy or sell
an asset in the future at an agreed-upon price. The Portfolio will pay initial
margin deposits, which usually are small in relation to the size of the value
of the underlying assets. Each of these Portfolios may also buy and sell
options on futures contracts. Options on futures contracts are similar to
options on securities and indices, described above. These Portfolios may engage
in "cross hedges," that is, hedge a particular index or currency as a
substitute for another index or currency. For more information about futures
contracts and related options, see "Risk Factors and Other Considerations" and
the Statement.
Limit: MFS Emerging Equities and MFS Value Equity will not enter into a futures
contract if, immediately thereafter, the value of the securities and other
obligations underlying all futures contracts exceeds 50% of their total assets.
Scudder International Growth will invest in futures contracts only for hedging
purposes.
Swaps and Related Transactions: Scudder International Growth may, without
limit, enter into various interest rate transactions, including swaps, caps,
floors or collars, and may enter into currency swaps. Generally, swaps are
customized agreements between two parties to exchange or swap cash flows or
assets at specified intervals in the future.
Hybrid Instruments: T. Rowe Price Growth Equity and MFS Value Equity may enter
into transactions involving hybrid instruments. Hybrid instruments are
derivative instruments whose value is derived from, or linked to, the value of
another source, typically a commodity, a futures contract, an index, or some
other readily measurable economic variable. Issued by banks, brokerage firms,
insurance companies, financial institutions or producers of commodities, hybrid
instruments typically are short- to intermediate-term fixed income securities
that bear interest at below-market or nominal rates. The instrument's value at
maturity, or the interest payable by the issuer, may rise or fall according to
the change in the value of the underlying instrument or index. See "Risk
Factors and Other Considerations."
Limit: Neither T. Rowe Price Growth Equity nor MFS Value Equity will invest
more than 10% of its total assets, measured at the time of purchase, in hybrid
instruments.
RISK FACTORS AND OTHER CONSIDERATIONS
General Considerations: Shares of a Portfolio represent an investment in
securities with fluctuating market prices. Thus, the value of those shares will
vary over time as the aggregate value of the securities held by a Portfolio
increases or decreases. Moreover, any dividends a Portfolio pays will increase
or decrease in relation to the income received from its investments.
The different types of securities purchased and investment techniques used by a
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). Some of the risks
involved in the securities acquired by the Portfolios 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 Portfolios do not purchase
securities with the intention of profiting from short-term trading, each
Portfolio may buy and sell securities when the Adviser or Subadviser believes
such action is advisable. For the period November 28, 1997 (commencement of
operations) to December 31, 1997, the portfolio turnover rate (unannualized)
for each Portfolio was as follows: MFS Emerging Equities: 0.07%; MFS Research
Growth: 57.88%; MFS Value Equity: 12.06%; Scudder International Growth: 3.01%;
and
8 Portfolio Partners, Inc.
<PAGE>
T. Rowe Price Growth Equity: 2.94%. It is anticipated that the average annual
turnover rate of each of the Portfolios may exceed 125%. Such turnover rates
may result in higher transaction costs (which are borne directly by the
respective Portfolio). See "Tax Status" in the Statement.
Hybrid Instruments: These derivative instruments, which can combine the
characteristics of securities, futures, and options, may be particularly
volatile. Under certain conditions, the redemption value of such an investment
could be zero. Some hybrid instruments in which T. Rowe Price Growth Equity or
MFS Value Equity may invest involve economic leverage, which would increase the
Portfolio's exposure to a commodity, futures contract or index. Some hybrid
instruments have principal protection, while others may have partial principal
protection or none at all. An instrument with full principal protection will
pay the stated principal amount upon maturity. Partially protected instruments
may lose a portion of their principal upon maturity if the underlying
commodity, index or contract to which it is linked declines in value, and a
hybrid instrument without principal protection may lose all its value upon
maturity.
Fixed-Income Securities: The net asset value ("NAV") of the shares of an
open-end investment company which may invest to a limited extent in fixed
income securities changes as the general level of interest rates fluctuate.
When interest rates decline, the value of a fixed income portfolio can be
expected to rise. Conversely, when interest rates rise, the value of a fixed
income portfolio can be expected to decline.
High-Yield, Below Investment Grade Fixed-Income Securities: Investments in
below investment grade fixed-income securities, while generally providing
greater income and opportunity for gain than investments in higher-rated
securities, usually entail greater risks. These risks include lack of
liquidity; an unpredictable secondary market; a greater likelihood of default;
increased sensitivity to adverse economic or corporate developments and thus
greater price fluctuation; call provisions that may adversely affect returns;
and loss of principal and interest. Because yields may vary over time, no
specified level of income can ever be assured. Below investment grade
fixed-income securities, which are usually rated lower than Baa by Moody's or
BBB by S&P or by Fitch, or, if unrated, of comparable quality, are considered
speculative. For a description of these and other rating categories, see the
Statement.
Options, Futures Contracts and Forward Contracts: Transactions in futures
contracts, options on futures contracts, forward contracts and options involve
certain risks. For example, a lack of correlation between the index or
instrument underlying an option, futures contract or forward contract and the
assets being hedged, or unexpected adverse price movements, could render a
Portfolio's hedging strategy unsuccessful and could result in losses. "Cross
hedging" transactions may involve greater correlation risks. In addition, there
can be no assurance that a liquid secondary market will exist for any contract
purchased or sold, and the Portfolio may be required to maintain a position
until exercise or expiration, which could result in losses. For more
information about these risks, see the Statement.
Foreign Securities: Investing in securities of foreign issuers generally
involves risks not ordinarily associated with investing in securities of
domestic issuers. These include changes in currency rates, exchange control
regulations, governmental administration or economic or monetary policy (in the
United States or abroad) or circumstances in dealings between nations. Costs
may be incurred in connection with conversions between various currencies.
Special considerations may also include more limited information about foreign
issuers, higher brokerage and custodial costs, different accounting standards
and thinner trading markets. Foreign securities markets may also be less
liquid, more volatile and less subject to government supervision than those in
the United States. Investments in foreign countries could be affected by other
factors including expropriation, confiscatory taxation and potential
difficulties in enforcing contractual obligations and could be subject to
extended settlement periods. For more information about the risks involved in
foreign securities, see the Statement.
Emerging Market Securities: The risks of investing in foreign securities may be
intensified in the case of investments in emerging markets. Securities of many
issuers in emerging markets may be less liquid and more volatile than
securities of comparable domestic issuers. Emerging markets also have different
clearance and settlement procedures, and in certain markets there have been
times when settlements have been unable to keep pace with the volume of
securities transactions, making it difficult to conduct such transactions.
Investment in certain foreign emerging market debt obligations may be
restricted or controlled to varying degrees. These restrictions or controls may
at times preclude investment in certain foreign emerging market debt
obligations or increase the expenses of a Portfolio.
INVESTMENT RESTRICTIONS
In addition to the restrictions discussed under "Investment Policies and
Practices," each Portfolio has adopted other investment restrictions and
limitations, which are described in the Statement. Some of these restrictions
are fundamental, which means that they cannot be changed without shareholder
approval. For example, each Portfolio may not invest more than 25% of its
assets in securities of companies engaged in the same industry (other than U.S.
Government securities). Each Portfolio may borrow money, but not for leverage
purposes. As a matter of non-fundamental policy, no Portfolio may invest more
than 15% of its net assets in securities that are not readily marketable and in
repurchase agreements that mature in more than seven days.
Portfolio Partners, Inc. 9
<PAGE>
In addition, each Portfolio is "diversified." Generally, this means that with
respect to 75% of its total assets, a Portfolio may not purchase the securities
of any single issuer (other than securities issued or guaranteed by the U.S.
government or any of its agencies or instrumentalities) if, as a result, (a)
more than 5% of the Portfolio's total assets would be invested in the
securities of that issuer, or (b) the Portfolio would hold more than 10% of the
outstanding voting securities of that issuer.
MANAGEMENT OF THE PORTFOLIOS
Directors. The operations of each Portfolio are managed under the direction of
the Board of Directors ("Directors"). The Directors set broad policies for the
Fund and each Portfolio. Information about the Directors is found in the
Statement.
Investment Adviser. Aetna serves as the investment adviser for each of the
Portfolios. Aetna 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 December 31, 1997,
Aetna managed over $46.8 billion in assets. Aetna 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, dated August 25, 1997,
between the Fund and Aetna with respect to each of the Portfolios, Aetna,
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 each
Portfolio.
The Investment Advisory Agreement gives Aetna broad latitude in selecting
securities for each Portfolio subject to the Directors' oversight. Under the
Investment Advisory Agreement, Aetna may delegate to a subadviser the
responsibility for day-to-day management of the investments of each Portfolio,
subject to Aetna's oversight. Aetna receives a monthly fee from each Portfolio
at an annual rate based on the average daily net assets of each Portfolio as
follows:
<TABLE>
<CAPTION>
Portfolio Fee
- ----------------------------------------- -------------------------------------------------------------
<S> <C>
MFS Emerging Equities ................. 0.70% on the first $500 million of average daily net assets;
0.65% on assets over $500 million
MFS Research Growth ................... 0.70% on the first $500 million of average daily net assets;
0.65% on assets over $500 million
MFS Value Equity ...................... 0.65% of average daily net assets
Scudder International Growth .......... 0.80% of average daily net assets
T. Rowe Price Growth Equity ........... 0.60% of average daily net assets
</TABLE>
Under the Investment Advisory Agreement, Aetna is responsible for all of its
own costs, including costs of Aetna's personnel, required to carry out its
investment advisory duties.
Subadvisers. MFS Emerging Equities, MFS Research Growth and MFS Value Equity.
Aetna has engaged Massachusetts Financial Services Company ("MFS"), 500
Boylston Street, Boston, Massachusetts 02116, as Subadviser to MFS Emerging
Equities, MFS Research Growth and MFS Value Equity. MFS is a subsidiary of Sun
Life of Canada (U.S.), which is a subsidiary of Sun Life of Canada (U.S.)
Holdings, Inc., which in turn is a wholly owned subsidiary of Sun Life
Assurance Company of Canada. Net assets under management of the MFS
Organization were approximately $70.2 billion as of December 31, 1997. John W.
Ballen, a Senior Vice President of MFS, is portfolio manager of MFS Emerging
Equities. Mr. Ballen has been employed as a portfolio manager by MFS since
1984. Portfolio securities of MFS Research Growth are selected by a committee
of investment research analysts. This committee includes investment analysts
employed not only by MFS but also by MFS International (U.K.) Limited, a wholly
owned subsidiary of MFS. MFS Research Growth's assets are allocated among
industries by the analysts acting together as a group. Individual analysts are
then responsible for selecting what they view as the securities best suited to
meet MFS Research Growth's investment objective within their assigned industry
responsibility. John F. Brennan, Jr., a Vice President of MFS, is portfolio
manager of MFS Value Equity. Mr. Brennan has been employed by MFS as a
portfolio manager since 1985.
Scudder International Growth. Aetna has engaged Scudder Kemper a Delaware
corporation, 345 Park Avenue, New York, New York 10154 as Subadviser to Scudder
International Growth. On June 26, 1997, Scudder, Stevens & Clark ("Scudder")
entered into a Transaction Agreement with Zurich Insurance Company. Under the
terms of the Agreement, Zurich acquired a majority interest in Scudder, and
Zurich Kemper Investments, Inc., a Zurich subsidiary, became part of Scudder.
Scudder's name changed to Scudder Kemper. Scudder Kemper managed in excess of
$200 billion as of December 31, 1997.
10 Portfolio Partners, Inc.
<PAGE>
Scudder International Growth is managed by a team of Scudder professionals,
each of whom plays an important role. Co-lead Portfolio Managers Irene T. Cheng
and Carol L. Franklin joined Scudder in 1993 and 1981, respectively. Nicholas
Bratt, portfolio manager and Director of Scudder's Global Equity Group, directs
Scudder's overall global equity investment strategies and has been with Scudder
since 1976. Sheridan Reilly joined Scudder in 1995 as an international
portfolio manager with an active role in institutional and mutual fund
portfolio management. Mr. Reilly has over ten years of industry experience
focusing on strategies for global portfolios, currency hedging, and foreign
equity markets. Deborah Chaplin joined Scudder in 1996 and was a portfolio
manager with our Growth & Income investment team before joining the
International Investment Team as a co-manager of institutional portfolios.
Stephen Dexter joined Kemper as an equity analyst in 1986 and spent several
years in Kemper's London office where he specialized in international
investments. Returning to the U.S. in 1994, he continued as a member of
Kemper's international portfolio management team. Joan Gregory, portfolio
manager, focuses on stock selection, a role she has played since she joined
Scudder in 1992. Ms. Gregory, who joined the team in 1994, has been involved
with investment in global and international stocks.
T. Rowe Price Growth Equity. Aetna has engaged T. Rowe Price Associates, Inc.
("T. Rowe Price"), 100 East Pratt Street, Baltimore, Maryland 21202 as
Subadviser to T. Rowe Price Growth Equity. T. Rowe Price and its affiliates
managed over $126 billion as of December 31, 1997. T. Rowe Price Growth Equity
is managed by a committee. The committee chairman, Robert W. Smith, has
day-to-day responsibility for managing T. Rowe Price Growth Equity and works
with the committee in developing and executing its investment program. Mr.
Smith joined T. Rowe Price in 1992 and has been managing investments since
1988.
Under separate subadvisory agreements, each Subadviser, subject to the
supervision of Aetna and the Directors, is responsible for managing the assets
of its respective Portfolio(s) in accordance with the Portfolio's investment
objective and policies. Each Subadviser pays the salaries and other related
costs of personnel engaged in providing investment advice, including office
space, facilities and equipment.
Aetna has overall responsibility for monitoring the investment program
maintained by each Subadviser for compliance with applicable laws and
regulations and the respective Portfolio's investment objective.
Each Subadvisory Agreement gives each Subadviser broad latitude in selecting
securities for each Portfolio subject to Aetna's oversight.
Each Subadvisory Agreement provides that Aetna will pay the Subadviser a fee at
an annual rate based on the average daily NAV of each Portfolio as described
below. Aetna pays the subadvisory fee out of its advisory fee.
<TABLE>
<S> <C>
MFS Emerging Equities .425% on the first $150 million of aggregate average daily net
MFS Research Growth assets under management
MFS Value Equity ..................... .40% on the next $150 million
.375% on the next $450 million
.35% on the next $550 million
.30% on the next $200 million
.25% on assets over $1.5 billion
Scudder International Growth ......... .75% on the first $20 million of average daily net assets
.65% on the next $15 million
.50% on the next $65 million
.40% on the next $200 million
.30% on assets over $300 million
T. Rowe Price Growth Equity .......... .40% on the first $500 million of average daily net assets
.375% on assets over $500 million
</TABLE>
Brokerage Allocation. The Investment Advisory Agreement and each Subadvisory
Agreement allow Aetna or the Subadviser, as the case may be, 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
provided to the Adviser/Subadviser, in setting the amount of commissions paid
to a broker. The use of research and expense reimbursements in determining and
paying commissions are referred to as "soft dollar" practices. Aetna and the
Subadviser will engage in soft dollar practices only to the extent authorized
by applicable law. For the period November 28, 1997 (commencement of
operations) to December 31, 1997, the aggregate amount of brokerage commissions
paid by the Portfolios was as follows: MFS Emerging Equities: $453,702; MFS
Research Growth: $433,626; MFS Value Equity: $214,636; Scudder International
Growth: $66,716; and T. Rowe Price Growth Equity: $380,629.
Expenses and Portfolio Administration. Under an Administrative Services
Agreement, dated August 25, 1997, with the Fund, Aetna provides all
administrative services necessary for the Fund's operations and is responsible
for the supervision of the Fund's other service providers. Aetna also assumes
all ordinary recurring direct costs of the Fund,
Portfolio Partners, Inc. 11
<PAGE>
such as custodian fees, directors fees, transfer agency costs and accounting
expenses. As compensation for these services, Aetna receives a monthly fee from
each Portfolio at an annual rate based on the average daily net assets of each
Portfolio as follows:
<TABLE>
<CAPTION>
Portfolio Fee
- ----------------------------------------- ----------
<S> <C>
MFS Emerging Equities ................. 0.13%
MFS Research Growth ................... 0.15%
MFS Value Equity ...................... 0.25%
Scudder International Growth .......... 0.20%
T. Rowe Price Growth Equity ........... 0.15%
</TABLE>
Each Portfolio's aggregate expenses are contractually limited to the advisory
and administrative fees disclosed above. Aetna will not seek an increase in its
advisory or administrative fee at any time prior to May 1, 1999.
Principal Underwriter. Aetna, 151 Farmington Avenue, Hartford, Connecticut
06156, serves as the Fund's principal underwriter.
Transfer Agent. Investors Bank & Trust Company, 200 Clarendon Street, Boston,
Massachusetts 02116, serves as the Fund's Transfer Agent.
Custodian. Investors Bank & Trust Company also serves as the Fund's custodian.
PURCHASE 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 a Portfolio and any fees that may apply.
Orders received by the insurance company before the earlier of 4:00 p.m. or the
close of regular trading on the New York Stock Exchange ("NYSE") will be priced
at the NAV calculated that day, as described below. The Portfolios reserve the
right to suspend the offering of shares, or to reject any specific purchase
order. The Portfolios may suspend redemptions or postpone payments when the
NYSE is closed or when trading is restricted for any reason or under emergency
circumstances as determined by the SEC.
NET ASSET VALUE
The NAV of each Portfolio is determined as of the later of 15 minutes following
the close of the NYSE or 4:15 p.m. on each day that the NYSE is open for
trading. Each Portfolio's NAV is computed by taking the total value of a
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.
PERFORMANCE
PERFORMANCE OF PORTFOLIOS
From time to time advertisements and other sales materials for the Fund may
include information concerning each Portfolio's historical performance. These
advertisements will also describe the performance of the relevant insurance
company separate accounts. Advertising information will include the average
annual total return of the Portfolio 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.
A Portfolio 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 Portfolio 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.
12 Portfolio Partners, Inc.
<PAGE>
PERFORMANCE OF SIMILARLY MANAGED MUTUAL FUNDS
Each Portfolio is recently organized and has only a short-term performance
record. Each Portfolio, however, has substantially the same investment
objective, policies and strategies as one or more existing mutual funds
("Comparable Funds") that are either sold directly to the public or through
variable products, advised by MFS, Scudder Kemper or T. Rowe Price, as the case
may be.
The historical performance of the Comparable Funds is presented below.
Investors should not consider the performance of the Comparable Funds as an
indication of the future performance of a Portfolio. The performance figures
shown below reflect the deduction of the historical fees and expenses paid by
each Comparable Fund, and not those to be paid by the Portfolio. The figures do
not reflect the deduction of any insurance fees or charges that are imposed by
the insurance company in connection with its sale of the 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 separate account fees will have
a detrimental effect on the performance of the Portfolios. The results shown
below reflect the reinvestment of dividends and distributions, and were
calculated in the same manner that will be used by each Portfolio to calculate
its own performance.
The following table shows average annual total returns of the Comparable Funds
for the stated periods ending March 31, 1998, as well as a comparison with the
performance of the applicable benchmark.(1)
<TABLE>
<CAPTION>
One Year Three Years Five Years Ten Years
---------- ------------- ------------ ----------
<S> <C> <C> <C> <C>
MFS Emerging Growth Fund (Class I)(2) ................................ 52.36% 29.05% 26.13% 22.42%
(Model for MFS Emerging Equities)(3)
Russell 2000 ......................................................... 42.02 24.42 17.67 14.86
S&P 500 .............................................................. 48.00 32.81 22.40 18.94
MFS Research Fund (Class I)(2) ....................................... 44.05 30.90 23.18 18.20
(Model for MFS Research Growth)(3)
S&P 500 .............................................................. 48.00 32.81 22.40 18.94
MFS Capital Opportunities Fund (formerly MFS Value Fund) (Class I)(2) 50.70 32.10 23.71 18.16
(Model for MFS Value Equity)(3)
S&P 500 .............................................................. 48.00 32.81 22.40 18.94
Scudder VLIF International Portfolio ................................. 21.51 17.45 14.58 12.32
(Model for Scudder International Growth)
MSCI EAFE ............................................................ 18.61 10.57 11.93 6.20
Scudder International Fund ........................................... 21.57 17.09 14.05 11.10
(Model for Scudder International Growth)
MSCI EAFE ............................................................ 18.61 10.57 11.93 6.20
T. Rowe Price Growth Stock Fund ...................................... 47.02 29.24 21.44 17.05
(Model for T. Rowe Price Growth Equity)
S&P 500 .............................................................. 48.00 32.81 22.40 18.94
</TABLE>
- ----------
(1)The S&P 500 (Standard & Poor's 500) Index is a value-weighted, unmanaged
index of 500 widely held stocks considered to be representative of the stock
market in general. The Russell 2000 Index is a value-weighted, unmanaged
index of small capitalization stocks. The Morgan Stanley Capital
International-Europe, Australia, Far East (MSCI EAFE) Index is an unmanaged,
market value-weighted average of the performance of more than 900 securities
listed on the stock exchanges of countries in Europe, Australia and the Far
East. All indices assume reinvestment of all dividends.
(2)MFS Emerging Growth Fund and MFS Research Fund commenced offering Class I
shares on January 2, 1997; MFS Capital Opportunities Fund commenced offering
Class I shares on January 3, 1997. For periods preceding those dates, Class I
performance was calculated by using the performance of the oldest class of
shares for each Comparable Fund (Class B for MFS Emerging Growth Fund and
Class A for MFS Research and MFS Capital Opportunities Fund), adjusted to
reflect that Class I shares have no front-end load or contingent deferred
sales charge. No adjustment was made for differences in the internal expenses
among classes.
(3)MFS also manages three series of the MFS Variable Insurance Trust (VIT) with
substantially similar investment objectives, policies and strategies as the
comparable Portfolio Partners Portfolios. The performance of these funds was
not included in the chart because each has a relatively short track record.
The one-year and since inception performance (as of March 31, 1998) of these
funds is as follows: VIT--Emerging Growth Series: 57.22% and 29.94%,
respectively (inception July 24, 1995); VIT--Research Series: 42.30% and
26.69%, respectively (inception July 26, 1995); and VIT-- Value Series:
50.16% and 33.94%, respectively (inception August 14, 1996).
Portfolio Partners, Inc. 13
<PAGE>
TAX MATTERS
Each Portfolio intends to qualify as a regulated investment company for federal
income tax purposes 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, a Portfolio generally will not be
subject to tax on its ordinary income and net realized capital gains. Each
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 a
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.
YEAR 2000
Aetna Inc. (referred to collectively with its subsidiaries and affiliates as
"Aetna Inc.") has developed and is currently executing a plan to make its
computer systems and applications accommodate date-sensitive information
relating to the Year 2000. The plan covers four stages including (i) inventory,
(ii) assessment, (iii) remediation and (iv) testing and certification. Aetna
Inc. is currently in the assessment or remediation stages of its plan for the
systems and applications related to the Fund, including those relating to Aetna
Life Insurance and Annuity Company. Testing and certification of these systems
is targeted for completion by mid-1999. The costs of these efforts will not
affect the Fund.
Aetna Life Insurance and Annuity Company and the Fund also have relationships
with broker dealers, transfer agents, custodians and other securities industry
participants and service providers that are not affiliated with Aetna Inc.
Aetna Inc. is currently examining its relationships with third parties as part
of its Year 2000 plan. While Aetna Life Insurance and Annuity Company believes
that United States securities industry participants generally are preparing
their computer systems and applications to accommodate Year 2000 date-sensitive
information, preparation by third parties is outside Aetna Inc.'s, Aetna Life
Insurance and Annuity Company's and the Fund's control. There can be no
assurance that failure of third parties to complete adequate preparations in a
timely manner, and any resulting systems interruptions or other consequences,
would not have an adverse effect, directly or indirectly, on the Fund,
including, without limitation, its operation or the valuation of its assets.
GENERAL INFORMATION
Incorporation. The Fund was incorporated under the laws of Maryland on May 7,
1997.
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 and replacement 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 a
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.
Control Persons. Aetna and its subsidiary, Aetna Insurance Company of America,
Inc. are control persons in that they own, through certain of their separate
accounts, 100% of the shares of each Portfolio.
14 Portfolio Partners, Inc.
<PAGE>
Statement of Additional Information dated: May 1, 1998
PORTFOLIO PARTNERS, INC
151 Farmington Avenue
Hartford, Connecticut 06156-8962
This Statement of Additional Information is not a prospectus but should be read
in conjunction with the current prospectus for Portfolio Partners, Inc. dated
May 1, 1998 (the "Prospectus"). This Statement of Additional Information
("Statement") is incorporated by reference in its entirety into the Prospectus.
A free Prospectus is available upon request by writing to Portfolio Partners,
Inc. at the address listed above or calling 1-800-525-4225.
Read the Prospectus before you invest.
TABLE OF CONTENTS
PAGE
----
General Information and History ............................................ 2
Additional Investment Restrictions and Policies of the Portfolios .......... 2
Description of Various Securities and Investment Policies and Practices .... 4
Futures Contracts and Options on Futures Contracts .........................15
Risks Associated with Investing in Options, Futures and Forward Contracts ..19
Directors and Officers of the Fund .........................................23
Control Persons and Principal Shareholders .................................25
The Investment Advisory Agreement ..........................................25
The Subadvisory Agreements .................................................26
The Administrative Services Agreement ......................................27
Custodian ..................................................................27
Independent Auditors .......................................................27
Principal Underwriter ......................................................27
Brokerage Allocation and Trading Policies ..................................28
Description of Shares ......................................................29
Net Asset Value ............................................................29
Performance Information ....................................................29
Tax Status .................................................................30
Voting Rights ..............................................................34
Financial Statements .......................................................35
Appendix A .................................................................36
<PAGE>
GENERAL INFORMATION AND HISTORY
Portfolio Partners, Inc. (the "Fund") was incorporated in 1997 in Maryland. The
Fund is an open-end management investment company. The Fund is authorized to
issue multiple series of shares, each representing a diversified portfolio of
investments with different investment objectives, policies and restrictions
(individually, a "Portfolio" and collectively, the "Portfolios"). The Fund
currently has authorized five Portfolios: MFS Emerging Equities Portfolio ("MFS
Emerging Equities"); MFS Research Growth Portfolio ("MFS Research Growth"); MFS
Value Equity Portfolio ("MFS Value Equity"); Scudder International Growth
Portfolio ("Scudder International Growth"); and T. Rowe Price Growth Equity
Portfolio ("T. Rowe Price Growth Equity"). Much of the information contained in
this Statement expands on subjects discussed in the Prospectus. Capitalized
terms not defined herein are used as defined in the Prospectus.
The investment objective and general investment policies of each Portfolio are
described in the Prospectus.
ADDITIONAL INVESTMENT RESTRICTIONS AND
POLICIES OF THE PORTFOLIOS
The investment policies and restrictions of the Portfolios, set forth below,
are matters of fundamental policy for purposes of the Investment Company Act of
1940 (the "1940 Act"), and therefore cannot be changed, with regard to a
particular Portfolio, without the approval of a majority of the outstanding
voting securities of that Portfolio as defined by the 1940 Act. This means the
lesser of: (i) 67% of the shares of a Portfolio present at a shareholders'
meeting if the holders of more than 50% of the shares of that Portfolio then
outstanding are present in person or by proxy; or (ii) more than 50% of the
outstanding voting securities of a Portfolio.
As a matter of fundamental policy, no Portfolio will:
1. Purchase or sell physical commodities unless acquired as a result of
ownership of securities or other instruments (but this shall not prevent a
Portfolio from purchasing or selling options and futures contracts or from
investing in securities or other instruments backed by physical
commodities).
2. Purchase or sell real estate unless acquired as a result of ownership of
securities or other instruments (but this shall not prevent a Portfolio
from investing in securities or other instruments backed by real estate or
securities of companies engaged in the real estate business).
3. Issue any senior security (as defined in the 1940 Act), except that (a) a
Portfolio may engage in transactions that may result in the issuance of
senior securities to the extent permitted under applicable regulations and
interpretations of the 1940 Act or an exemptive order; (b) a Portfolio may
acquire other securities, the acquisition of which may result in the
issuance of a senior security, to the extent permitted under applicable
regulations or interpretations of the 1940 Act; and (c) subject to the
restrictions set forth below, a Portfolio may borrow money as authorized by
the 1940 Act.
4. Borrow money, except that (a) a Portfolio may enter into commitments to
purchase securities in accordance with its investment program, including
when-issued securities and reverse repurchase agreements, provided that the
total amount of any such borrowing does not exceed 33-1/3% of the
Portfolio's total assets; and (b) a Portfolio may borrow money in an amount
not to exceed 33-1/3% of the value of its total assets at the time the loan
is made.
5. Lend any security or make any other loan if, as a result, more than 33-1/3%
of its total assets would be lent to other parties, but this limitation
does not apply to purchases of publicly issued debt securities or to
repurchase agreements.
6. Underwrite securities issued by others, except to the extent that a
Portfolio may be considered an underwriter within the meaning of the
Securities Act of 1933 (the "1933 Act") in the disposition of restricted
securities.
2 Portfolio Partners, Inc.
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7. Purchase the securities of an issuer if, as a result, more than 25% of its
total assets would be invested in the securities of companies whose
principal business activities are in the same industry. This limitation
does not apply to securities issued or guaranteed by the U.S. government or
any of its agencies or instrumentalities.
With respect to MFS Emerging Equities, MFS Research Growth and MFS Value Equity
only:
8. No Portfolio will purchase securities on margin except for short-term
credits necessary for clearance of portfolio transactions, provided that
this restriction will not be applied to limit the use of options, futures
contracts and related options, in the manner otherwise permitted by the
investment restrictions, policies and investment program of the Portfolio.
9. With respect to 100% of its total assets, purchase the securities of any
issuer (other than securities issued or guaranteed by the U.S. Government
or any of its agencies or instrumentalities) if, as a result, (a) more than
5% of the Portfolio's total assets would be invested in the securities of
that issuer, or (b) the Portfolio would hold more than 10% of the
outstanding voting securities of that issuer.
With respect to Scudder International Growth and T. Rowe Price Growth Equity
only:
10. With respect to 75% of its total assets, purchase the securities of any
issuer (other than securities issued or guaranteed by the U.S. Government
or any of its agencies or instrumentalities) if, as a result, (a) more than
5% of the Portfolio's total assets would be invested in the securities of
that issuer, or (b) the Portfolio would hold more than 10% of the
outstanding voting securities of that issuer.
The following restrictions are not fundamental and may be changed without
shareholder approval:
a. No Portfolio will invest more than 15% of its net 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 usual course of business at approximately the price at which a
Portfolio has valued them. Such securities include, but are not limited
to, time deposits and repurchase agreements with maturities longer than
seven days. Securities that may be resold under Rule 144A, securities
offered pursuant to Section 4(2) of, or securities otherwise subject to
restrictions on resale under, the 1933 Act ("Restricted Securities"),
shall not be deemed illiquid solely by reason of being unregistered. A
Subadviser determines whether a particular security is deemed to be
liquid based on the trading markets for the specific security and other
factors.
b. No Portfolio will borrow for leverage purposes.
c. No Portfolio will make short sales of securities, other than short
sales "against the box." This restriction does not apply to
transactions involving options, futures contracts and related options,
and other strategic transactions.
d. No Portfolio will lend portfolio securities.
With respect to Scudder International Growth and T. Rowe Price Growth Equity
only:
e. No Portfolio will purchase securities on margin except for short-term
credits necessary for clearance of portfolio transactions, provided
that this restriction will not be applied to limit the use of options,
futures contracts and related options, in the manner otherwise
permitted by the investment restrictions, policies and investment
program of the Portfolio.
General. The limitations listed above supplement those set forth in the
Prospectus. Unless otherwise noted, whenever an investment policy or limitation
states a maximum percentage of a Portfolio's assets that may be invested in any
security or other asset, or sets forth a policy regarding quality standards,
such standard or percentage limitation will be determined immediately after and
as a result of the Portfolio's acquisition of such security or other asset
except in the case of borrowing (or other activities that
Portfolio Partners, Inc. 3
<PAGE>
may be deemed to result in the issuance of a "senior security" under the 1940
Act). Accordingly, any subsequent change in values, net assets or other
circumstances will not be considered when determining whether the investment
complies with the Portfolio's investment policies and limitations. If the value
of a Portfolio's holdings of illiquid securities at any time exceeds the
percentage limitation applicable at the time of acquisition due to subsequent
fluctuations in value or other reasons, the Directors will consider what
actions, if any, are appropriate to maintain adequate liquidity. With respect
to fundamental policy number 7, industry classifications of domestic issuers
for Scudder International Growth and T. Rowe Price Growth Equity are determined
in accordance with the current Directory of Companies Filing Annual Reports
with the Securities and Exchange Commission. Industry classifications of
foreign issuers for these Portfolios are based on data provided by Bloomberg
L.P. and other industry data sources. All industry classifications for MFS
Emerging Equities, MFS Research Growth and MFS Value Equity have been selected
by Massachusetts Financial Services Company ("MFS"), the subadviser for those
Portfolios. MFS believes the industry characteristics it has selected are
reasonable and not so broad that the primary economic characteristics of the
companies in a single class are materially different. The industry
classifications selected by MFS may be changed from time to time to reflect
changes in the marketplace.
DESCRIPTION OF VARIOUS SECURITIES AND INVESTMENT POLICIES
AND PRACTICES
"When-Issued" Securities--Each Portfolio may purchase securities on a
"when-issued" or on a "forward delivery" basis. It is expected that, under
normal circumstances, a Portfolio will take delivery of such securities. When a
Portfolio commits to purchase a security on a "when-issued" or on a "forward
delivery" basis, it will set up procedures consistent with the applicable
interpretations of the Securities and Exchange Commission (the "SEC")
concerning such purchases. Since that policy currently recommends that an
amount of a Portfolio's assets equal to the amount of the purchase be held
aside or segregated to be used to pay for the commitment, a Portfolio will
always have cash, short-term money market instruments or other liquid
securities sufficient to fulfill any commitments or to limit any potential
risk. However, although such purchases will not be made for speculative
purposes and SEC policies will be adhered to, purchases of securities on such
bases may involve more risk than other types of purchases. For example, a
Portfolio may have to sell assets which have been set aside in order to meet
redemptions. Also, if a Portfolio determines it is necessary to sell the
"when-issued" or "forward delivery" securities before delivery, it may incur a
loss because of market fluctuations since the time the commitment to purchase
such securities was made. When the time comes to pay for "when-issued" or
"forward delivery" securities, a Portfolio will meet its obligations from the
then-available cash flow on the sale of securities, or, although it would not
normally expect to do so, from the sale of the "when-issued" or "forward
delivery" securities themselves (which may have a value greater or less than
the Portfolio's payment obligation).
Corporate Assset-Backed Securities--As described in the Prospectus, MFS
Emerging Equities and Scudder International Growth may invest in corporate
asset-backed securities. These securities, issued by trusts and special purpose
corporations, are backed by a pool of assets, such as credit card and
automobile loan receivables, representing the obligations of a number of
different parties.
Corporate asset-backed securities present certain risks. For instance, in the
case of credit card receivables, these securities may not have the benefit of
any security interest in the related collateral. Credit card receivables are
generally unsecured and the debtors are entitled to the protection of a number
of state and federal consumer credit laws, many of which give such debtors the
right to set off certain amounts owed on the credit cards, thereby reducing the
balance due. Most issuers of automobile receivables permit the servicers to
retain possession of the underlying obligations. If the servicer were to sell
these obligations to another party, there is a risk that the purchaser would
acquire an interest superior to that of the holders of the related automobile
receivables. In addition, because of the large number of vehicles involved in a
typical issuance and technical requirements under state laws, the trustee for
the holders of the automobile receivables may not have a proper security
interest in all of the obligations backing such receivables. Therefore, there
is the possibility that recoveries on repossessed collateral may
4 Portfolio Partners, Inc.
<PAGE>
not, in some cases, be available to support payments on these securities. The
underlying assets (e.g., loans) are also subject to prepayments which shorten
the securities' weighted average life and may lower their return.
Corporate asset-backed securities are often backed by a pool of assets
representing the obligations of a number of different parties. To lessen the
effect of failures by obligors on underlying assets to make payments, the
securities may contain elements of credit support which fall into two
categories: (i) liquidity protection and (ii) protection against losses
resulting from ultimate default by an obligor on the underlying assets.
Liquidity protection refers to the provision of advances, generally by the
entity administering the pool of assets, to ensure that the receipt of payments
on the underlying pool occurs in a timely fashion. Protection against losses
resulting from ultimate default ensures payment through insurance policies or
letters of credit obtained by the issuer or sponsor from third parties. The
Portfolio will not pay any additional or separate fees for credit support. The
degree of credit support provided for each issue is generally based on
historical information respecting the level of credit risk associated with the
underlying assets. Delinquency or loss in excess of that anticipated or failure
of the credit support could adversely affect the return on an investment in
such a security.
Repurchase Agreements--As described in the Prospectus, each of the Portfolios
may enter into repurchase agreements with sellers that are member firms (or
subsidiaries thereof) of the New York Stock Exchange, members of the Federal
Reserve System, recognized primary U.S. Government securities dealers or
institutions which the Subadviser has determined to be of comparable
creditworthiness. The securities that a Portfolio purchases and holds through
its agent are U.S. Government securities, the values, including accrued
interest, of which are equal to or greater than the repurchase price agreed to
be paid by the seller. The repurchase price may be higher than the purchase
price, the difference being income to a Portfolio, or the purchase and
repurchase prices may be same, with interest at a standard rate due to the
Portfolio together with the repurchase price on repurchase. In either case, the
income to a Portfolio is unrelated to the interest rate on the U.S. Government
securities.
The repurchase agreement provides that in the event the seller fails to pay the
price agreed upon on the agreed upon delivery date or upon demand, as the case
may be, a Portfolio will have the right to liquidate the securities. If, at the
time a Portfolio is contractually entitled to exercise its right to liquidate
the securities, the seller is subject to a proceeding under the bankruptcy laws
or its assets are otherwise subject to a stay order, the Portfolio's exercise
of its right to liquidate the securities may be delayed and result in certain
losses and costs to the Portfolio. The Fund has adopted and follows procedures
which are intended to minimize the risks of repurchase agreements. For example,
a Portfolio only enters into repurchase agreements after its Subadviser has
determined that the seller is creditworthy, and the Subadviser monitors the
seller's creditworthiness on an ongoing basis. Moreover, under such agreements,
the value, including accrued interest, of the securities (which are marked to
market every business day) is required to be greater than the repurchase price,
and the Portfolio has the right to make margin calls at any time if the value
of the securities falls below the agreed upon margin.
Loan Participations and Other Direct Indebtedness--MFS Emerging Equities and
MFS Value Equity may each invest up to 5% of their total assets in loans and
other direct indebtedness. The highly leveraged nature of many such loans and
other direct indebtedness may make such loans especially vulnerable to adverse
changes in economic or market conditions. Loans and other direct indebtedness
may not be in the form of securities or may be subject to restrictions on
transfer, and only limited opportunities may exist to resell such instruments.
As a result, a Portfolio may be unable to sell such investments at an opportune
time or may have to resell them at less than fair market value.
In purchasing a loan, a Portfolio acquires some or all of the interest of a
bank or other lending institution in a loan to a corporate borrower. Many such
loans are secured, although some may be unsecured. Such loans may be in default
at the time of purchase. Loans and other direct indebtedness that are fully
secured offer a Portfolio more protection than an unsecured loan in the event
of non-payment of scheduled interest or principal. However, there is no
assurance that the liquidation of collateral from a secured loan or other
Portfolio Partners, Inc. 5
<PAGE>
direct indebtedness would satisfy the corporate borrower's obligation, or that
the collateral can be liquidated.
These loans and other direct indebtedness are made generally to finance
internal growth, mergers, acquisitions, stock repurchases, leveraged buyouts
and other corporate activities. Such loans and other direct indebtedness loans
are typically made by a syndicate of lending institutions, represented by an
agent lending institution which has negotiated and structured the loan and is
responsible for collecting interest, principal and other amounts due on its own
behalf and on behalf of the others in the syndicate, and for enforcing its and
their other rights against the borrower. Alternatively, such loans and other
direct indebtedness may be structured as a novation, pursuant to which a
Portfolio would assume all of the rights of the lending institution in a loan,
or as an assignment, pursuant to which the Portfolio would purchase an
assignment of a portion of a lender's interest in a loan or other direct
indebtedness either directly from the lender or through an intermediary. A
Portfolio may also purchase trade or other claims against companies, which
generally represent money owed by the company to a supplier of goods or
services. These claims may also be purchased at a time when the company is in
default.
Certain of the loans and other direct indebtedness acquired by a Portfolio may
involve revolving credit facilities or other standby financing commitments
which obligate the Portfolio to pay additional cash on a certain date or on
demand. These commitments may have the effect of requiring a Portfolio to
increase its investment in a company at a time when the Portfolio might not
otherwise decide to do so (including at a time when the company's financial
condition makes it unlikely that such amounts will be repaid). To the extent
that a Portfolio is committed to advance additional funds, it will at all times
hold and maintain in a segregated account cash or other liquid securities in an
amount sufficient to meet such commitments.
A Portfolio's ability to receive payment of principal, interest and other
amounts due in connection with these investments will depend primarily on the
financial condition of the borrower. In selecting the loans and other direct
indebtedness which a Portfolio will purchase, the Subadviser will rely upon its
own (and not the original lending institution's) credit analysis of the
borrower. As a Portfolio may be required to rely upon another lending
institution to collect and pass on to the Portfolio amounts payable with
respect to the loan and to enforce the Portfolio's rights under the loan and
other direct indebtedness, an insolvency, bankruptcy or reorganization of the
lending institution may delay or prevent the Portfolio from receiving such
amounts. In such cases, a Portfolio will evaluate as well the creditworthiness
of the lending institution and will treat both the borrower and the lending
institution as an "issuer" of the loan for purposes of certain investment
restrictions pertaining to the diversification of the Portfolio's portfolio
investments. The highly leveraged nature of many such loans and other direct
indebtedness may make such loans and other direct indebtedness especially
vulnerable to adverse changes in economic or market conditions. Investments in
such loans and other direct indebtedness may involve additional risk to the
Portfolio. For example, if a loan or other direct indebtedness is foreclosed,
the Portfolio could become part owner of any collateral, and would bear the
costs and liabilities associated with owning and disposing of the collateral.
In addition, it is conceivable that under emerging legal theories of lender
liability, the Portfolio could be held liable. It is unclear whether loans and
other forms of direct indebtedness offer securities law protections against
fraud and misrepresentation. In the absence of definitive regulatory guidance,
the Portfolio relies on the Subadviser's research in an attempt to avoid
situations where fraud and misrepresentation could adversely affect the
Portfolio. In addition, loans and other direct investments may not be in the
form of securities or may be subject to restrictions on transfer, and only
limited opportunities may exist to resell such instruments. As a result, the
Portfolio may be unable to sell such investments at an opportune time or may
have to resell them at less than fair market value. To the extent that the
Subadviser determines that any such investments are illiquid, the Portfolio
will include them in the investment limitations described below.
Foreign Securities--The Portfolios may invest in foreign securities (and
foreign currencies) to the extent described in the Prospectus. Investing in
foreign securities generally presents a greater degree of risk than investing
in domestic securities. As a result of its investments in foreign securities, a
Portfolio may receive interest or dividend payments, or the proceeds of the
sale or redemption of such securities, in
6 Portfolio Partners, Inc.
<PAGE>
the foreign currencies in which such securities are denominated. Under certain
circumstances, such as where a Subadviser believes that the applicable exchange
rate is unfavorable at the time the currencies are received or the Subadviser
anticipates, for any other reason, that the exchange rate will improve, a
Portfolio may hold such currencies for an indefinite period of time. A
Portfolio may also hold foreign currency in anticipation of purchasing foreign
securities. While the holding of currencies will permit the Portfolio to take
advantage of favorable movements in the applicable exchange rate, such strategy
also exposes the Portfolio to risk of loss if exchange rates move in a
direction adverse to the Portfolio's position. Such losses could reduce any
profits or increase any losses sustained by a Portfolio from the sale or
redemption of securities and could reduce the dollar value of interest or
dividend payments received.
American Depositary Receipts--Each Portfolio may invest in ADRs, which are
certificates issued by a U.S. depository (usually a bank) that represent a
specified quantity of shares of an underlying non-U.S. stock on deposit with a
custodian bank as collateral. ADRs may be sponsored or unsponsored. A sponsored
ADR is issued by a depository which has an exclusive relationship with the
issuer of the underlying security. An unsponsored ADR may be issued by any
number of U.S. depositories. Under the terms of most sponsored arrangements,
depositories agree to distribute notices of shareholder meetings and voting
instructions, and to provide shareholder communications and other information
to the ADR holders at the request of the issuer of the deposited securities.
The depository of an unsponsored ADR, on the other hand, is under no obligation
to distribute shareholder communications received from the issuer of the
deposited securities or to pass through voting rights to ADR holders in respect
of the deposited securities. A Portfolio may invest in either type of ADR.
Although the U.S. investor holds a substitute receipt of ownership rather than
direct stock certificates, the use of the depository receipts in the United
States can reduce costs and delays as well as potential currency exchange and
other difficulties. A Portfolio may purchase securities in local markets and
direct delivery of these ordinary shares to the local depository of an ADR
agent bank in the foreign country. Simultaneously, the ADR agents create a
certificate that settles at the Portfolio's custodian in five days. A Portfolio
may also execute trades on the U.S. markets using existing ADRs. A foreign
issuer of the security underlying an ADR is generally not subject to the same
reporting requirements in the United States as a domestic issuer. Accordingly
the information available to a U.S. investor will be limited to the information
the foreign issuer is required to disclose in its own country and the market
value of an ADR may not reflect undisclosed material information concerning the
issuer of the underlying security. ADRs may also be subject to exchange rate
risks if the underlying foreign securities are traded in foreign currency.
Zero Coupon, Deferred Interest and PIK Bonds--Fixed income securities that MFS
Value Equity may invest in include zero coupon bonds, deferred interest bonds
and bonds on which the interest is payable in kind ("PIK bonds"). Zero coupon
and deferred interest bonds are debt obligations which are issued at a
significant discount from face value. The discount approximates the total
amount of interest the bonds will accrue and compound over the period until
maturity or the first interest payment date at a rate of interest reflecting
the market rate of the security at the time of issuance. While zero coupon
bonds do not require the periodic payment of interest, deferred interest bonds
provide for a period of delay before the regular payment of interest begins.
PIK bonds are debt obligations which provide that the issuer thereof may, at
its option, pay interest on such bonds in cash or in the form of additional
debt obligations. Such investments benefit the issuer by mitigating its need
for cash to meet debt service, but also require a higher rate of return to
attract investors who are willing to defer receipt of such cash. Such
investments may experience greater volatility in market value than debt
obligations that make regular payments of interest. The Portfolio will accrue
income on such investments for tax and accounting purposes, as required, which
is distributable to shareholders and which, because no cash is received at the
time of accrual, may require the liquidation of other portfolio securities to
satisfy the Portfolio's distribution obligations.
Risk of Investing in Lower Rated Fixed-Income Securities--Certain of the
Portfolios may invest in lower rated fixed-income securities rated Baa by
Moody's Investors Service, Inc. ("Moody's") or BBB by Standard & Poor's Ratings
Service ("S&P") or by Fitch Investors Service, Inc. ("Fitch") and comparable
Portfolio Partners, Inc. 7
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unrated securities. These securities, while normally exhibiting adequate
protection parameters, have speculative characteristics and changes in economic
conditions or other circumstances are more likely to lead to a weakened
capacity to make principal and interest payments than in the case of higher
grade fixed income securities.
A Portfolio may also invest in high-yield, below investment grade fixed-income
securities, which are rated Ba or lower by Moody's or BB or lower by S&P or by
Fitch, or, if unrated, of comparable quality, to the extent described in the
Prospectus. No minimum rating standard is required by the Portfolios. These
securities are considered speculative and, while generally providing greater
income than investments in higher rated securities, will involve greater risk
of principal and income (including the possibility of default or bankruptcy of
the issuers of such securities) and may involve greater volatility of price
(especially during periods of economic uncertainty or change) than securities
in the higher rating categories and because yields vary over time, no specific
level of income can ever be assured. High-yield, below investment grade
fixed-income securities generally tend to reflect economic changes (and the
outlook for economic growth), short-term corporate and industry developments
and the market's perception of their credit quality (especially during times of
adverse publicity) to a greater extent than higher rated securities which react
primarily to fluctuations in the general level of interest rates (although
these lower rated fixed income securities are also affected by changes in
interest rates). In the past, economic downturns or an increase in interest
rates have, under certain circumstances, caused a higher incidence of default
by the issuers of these securities and may do so in the future, especially in
the case of highly leveraged issuers. The prices for these securities may be
affected by legislative and regulatory developments. The market for these lower
rated fixed income securities may be less liquid than the market for investment
grade fixed income securities. Furthermore, the liquidity of these lower rated
securities may be affected by the market's perception of their credit quality.
Therefore, the Subadviser's judgment may at times play a greater role in
valuing these securities than in the case of investment grade fixed income
securities, and it also may be more difficult during times of certain adverse
market conditions to sell these lower rated securities to meet redemption
requests or to respond to changes in the market. For a description of the
rating categories described above, see Appendix A.
While a Subadviser may refer to ratings issued by established credit rating
agencies, it is not the Portfolios' policy to rely exclusively on ratings
issued by these rating agencies, but rather to supplement such ratings with the
Subadviser's own independent and ongoing review of credit quality. To the
extent a Portfolio invests in these lower rated securities, the achievement of
its investment objective may be more dependent on the Subadviser's own credit
analysis than in the case of a fund investing in higher quality fixed income
securities. These lower rated securities may also include zero coupon bonds,
deferred interest bonds and PIK bonds which are described above.
Hybrid Instruments--T. Rowe Price Growth Equity and MFS Value Equity may invest
in hybrid instruments. Hybrid instruments (a type of potentially high-risk
derivative) combine the elements of futures contracts or options with those of
debt, preferred equity or a depository instrument (hereinafter "Hybrid
Instruments"). Generally, a Hybrid Instrument will be a debt security,
preferred stock, depository share, trust certificate, certificate of deposit or
other evidence of indebtedness on which a portion of or all interest payments,
and/or the principal or stated amount payable at maturity, redemption or
retirement, is determined by reference to prices, changes in prices, or
differences between prices, of securities, currencies, intangibles, goods,
articles or commodities (collectively "Underlying Assets") or by another
objective index, economic factor or other measure, such as interest rates,
currency exchange rates, commodity indices, and securities indices
(collectively "Benchmarks"). Thus, Hybrid Instruments may take a variety of
forms, including, but not limited to, debt instruments with interest or
principal payments or redemption terms determined by reference to the value of
a currency or commodity or securities index at a future point in time,
preferred stock with dividend rates determined by reference to the value of a
currency, or convertible securities with the conversion terms related to a
particular commodity.
Hybrid Instruments can be an efficient means of creating exposure to a
particular market, or segment of a market, with the objective of enhancing
total return. For example, the Portfolio may wish to take
8 Portfolio Partners, Inc.
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advantage of expected declines in interest rates in several European countries,
but avoid the transaction costs associated with buying and currency-hedging the
foreign bond positions. One solution would be to purchase a U.S.
dollar-denominated Hybrid Instrument whose redemption price is linked to the
average three year interest rate in a designated group of countries. The
redemption price formula would provide for payoffs of greater than par if the
average interest rate was lower than a specified level, and payoffs of less
than par if rates were above the specified level. Furthermore, the Portfolio
could limit the downside risk of the security by establishing a minimum
redemption price so that the principal paid at maturity could not be below a
predetermined minimum level if interest rates were to rise significantly. The
purpose of this arrangement, known as a structured security with an embedded
put option, would be to give the Portfolio the desired European bond exposure
while avoiding currency risk, limiting downside market risk, and lowering
transactions costs. Of course, there is no guarantee that the strategy would be
successful and the Portfolio could lose money if, for example, interest rates
do not move as anticipated or credit problems develop with the issuer of the
Hybrid Instrument.
The risks of investing in Hybrid Instruments reflect a combination of the risks
of investing in securities, options, futures and currencies. Thus, an
investment in a Hybrid Instrument may entail significant risks that are not
associated with a similar investment in a traditional debt instrument that has
a fixed principal amount, is denominated in U.S. dollars or bears interest
either at a fixed rate or a floating rate determined by reference to a common,
nationally published Benchmark. The risks of a particular Hybrid Instrument
will, of course, depend upon the terms of the instrument, but may include,
without limitation, the possibility of significant changes in the Benchmarks or
the prices of Underlying Assets to which the instrument is linked. Such risks
generally depend upon factors which are unrelated to the operations or credit
quality of the issuer of the Hybrid Instrument and which may not be readily
foreseen by the purchaser, such as economic and political events, the supply
and demand for the Underlying Assets and interest rate movements. In recent
years, various Benchmarks and prices for Underlying Assets have been highly
volatile, and such volatility may be expected in the future. Reference is also
made to the discussion of futures, options, and forward contracts herein for a
discussion of the risks associated with such investments.
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 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 or Underlying Asset may not move in the same direction or at
the same time.
Hybrid Instruments may bear interest or pay preferred dividends at below market
(or even relatively nominal) rates. Alternatively, Hybrid Instruments may bear
interest at above market rates but bear an increased risk of principal loss (or
gain). The latter scenario may result if "leverage" is used to structure the
Hybrid Instrument. Leverage risk occurs when the Hybrid Instrument is
structured so that a given change in a Benchmark or Underlying Asset is
multiplied to produce a greater value change in the Hybrid Instrument, thereby
magnifying the risk of loss as well as the potential for gain.
Hybrid Instruments may also carry liquidity risk since the instruments are
often "customized" to meet the portfolio needs of a particular investor, and
therefore, the number of investors that are willing and able to buy such
instruments in the secondary market may be smaller than that for more
traditional debt securities. In addition, because the purchase and sale of
Hybrid Instruments could take place in an over-the-counter market without the
guarantee of a central clearing organization or in a transaction between the
Portfolio and the issuer of the Hybrid Instrument, the creditworthiness of the
counterparty or issuer of the Hybrid Instrument would be an additional risk
factor which the Portfolio would have to consider and monitor. Hybrid
Instruments also may not be subject to regulation of the CFTC, which generally
regulates the trading of commodity futures by U.S. persons, the SEC, which
regulates the offer and sale of securities by and to U.S. persons, or any other
governmental regulatory authority.
The various risks discussed above, particularly the market risk of such
instruments, may in turn cause significant fluctuations in the net asset value
of the Portfolio. Accordingly, each Portfolio will limit its invest-
Portfolio Partners, Inc. 9
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ments in Hybrid Instruments to 10% of net assets. However, because of their
volatility, it is possible that the Portfolio's investment in Hybrid
Instruments will account for more than 10% of its return (positive or
negative).
The performance of indexed securities depends to a great extent on the
performance of the security, currency, or other instrument to which they are
indexed, and may also be influenced by interest rate changes in the U.S. and
abroad. At the same time, indexed securities are subject to the credit risks
associated with the issuer of the security, and their values may decline
substantially if the issuer's creditworthiness deteriorates. Recent issuers of
indexed securities have included banks, corporations, and certain U.S.
government agencies.
Swaps, Caps, Floors and Collars-- Among the transactions into which Scudder
International Growth may enter are interest rate, currency and index swaps and
the purchase or sale of related caps, floors and collars. The Portfolio expects
to enter into these transactions primarily to preserve a return or spread on a
particular investment or portion of its portfolio, to protect against currency
fluctuations, as a duration management technique or to protect against any
increase in the price of securities the Portfolio anticipates purchasing at a
later date. The Portfolio intends to use these transactions as hedges and not
as speculative investments and will not sell interest rate caps or floors where
it does not own securities or other instruments providing the income stream it
may be obligated to pay. Interest rate swaps involve the exchange by the
Portfolio with another party of their respective commitments to pay or receive
interest, e.g., an exchange of floating rate payments for fixed rate payments
with respect to a notional amount of principal. A currency swap is an agreement
to exchange cash flows on a notional amount of two or more currencies based on
the relative value differential among them and an index swap is an agreement to
swap cash flows on a notional amount based on changes in the values of the
reference indices. The purchase of a cap entitles the purchaser to receive
payments on a notional principal amount from the party selling such cap to the
extent that a specified index exceeds a predetermined interest rate or amount.
The purchase of a floor entitles the purchaser to receive payments on a
notional principal amount from the party selling such floor to the extent that
a specified index falls below a predetermined interest rate or amount. A collar
is a combination of a cap and a floor that preserves a certain return within a
predetermined range of interest rates or values.
The Portfolio will usually enter into swaps on a net basis, i.e., the two
payment streams are netted out in a cash settlement on the payment date or
dates specified in the instrument, with the Portfolio receiving or paying, as
the case may be, only the net amount of the two payments. Inasmuch as these
swaps, caps, floors and collars are entered into for good faith hedging
purposes, the Subadviser and the Portfolio believe such obligations do not
constitute senior securities under the 1940 Act, and, accordingly, will not
treat them as being subject to its borrowing restrictions. The Portfolio will
not enter into any swap, cap, floor or collar transaction unless, at the time
of entering into such transaction, the unsecured long-term debt of the
counterparty, combined with any credit enhancements, is rated at least A by S&P
or Moody's or has an equivalent rating from a NRSRO or is determined to be of
equivalent credit quality by the Subadviser. If there is a default by the
counterparty, the Portfolio may have contractual remedies pursuant to the
agreements related to the transaction. The swap market has grown substantially
in recent years with a large number of banks and investment banking firms
acting both as principals and as agents utilizing standardized swap
documentation. As a result, the swap market has become relatively liquid. Caps,
floors and collars are more recent innovations for which standardized
documentation has not yet been fully developed and, accordingly, they are less
liquid than swaps.
Eurodollar Instruments--Scudder International Growth and MFS Value Equity may
make investments in Eurodollar instruments. Eurodollar instruments are U.S.
dollar-denominated futures contracts or options thereon which are linked to the
London Interbank Offered Rate ("LIBOR"), although foreign currency-denominated
instruments are available from time to time. Eurodollar futures contracts
enable purchasers to obtain a fixed rate for the lending of funds and sellers
to obtain a fixed rate for borrowings. Scudder International Growth might use
Eurodollar futures contracts and options thereon to hedge against changes in
LIBOR, to which many interest rate swaps and fixed income instruments are
linked.
10 Portfolio Partners, Inc.
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Options on Securities--As noted in the Prospectus, MFS Emerging Equities, MFS
Value Equity, Scudder International Growth and T. Rowe Price Growth Equity may
purchase and write (sell) call and put options on securities. A Portfolio may
sell options on securities for the purpose of increasing its return on such
securities and/or to protect the value of its Portfolio. MFS Emerging Equities,
MFS Value Equity and Scudder International Growth may only sell calls on
securities if such calls are "covered," as explained below. A Portfolio may
also write combinations of put and call options on the same security, known as
"straddles." Such transactions can generate additional premium income but also
present increased risk.
A Portfolio may also purchase put or call options in anticipation of market
fluctuations which may adversely affect the value of its portfolio or the
prices of securities that the Portfolio wants to purchase at a later date. A
Portfolio may sell call and put options only if it takes certain steps to cover
such options or segregates assets, in accordance with regulatory requirements,
as described below.
A call option sold by a Portfolio is "covered" if the Portfolio owns the
security underlying the call or has an absolute and immediate right to acquire
that security without additional cash consideration (or for additional cash
consideration held in a segregated account by its custodian) upon conversion or
exchange of other securities held in its portfolio. A call option is considered
offset, and thus held in accordance with regulatory requirements, if a
Portfolio holds a call on the same security and in the same principal amount as
the call sold when the exercise price of the call held (a) is equal to or less
than the exercise price of the call sold or (b) is greater than the exercise
price of the call sold if the difference is maintained by the Portfolio in
liquid securities in a segregated account with its custodian. If a put option
is sold by a Portfolio, the Portfolio will maintain liquid securities with a
value equal to the exercise price in a segregated account with its custodian,
or else will hold a put on the same security and in the same principal amount
as the put sold where the exercise price of the put held is equal to or greater
than the exercise price of the put sold or where the exercise price of the put
held is less than the exercise price of the put sold if the Portfolio maintains
in a segregated account with the custodian, liquid securities with an aggregate
value equal to the difference.
Effecting a closing transaction in the case of a sold call option will permit a
Portfolio to sell another call option on the underlying security with either a
different exercise price or expiration date or both, or in the case of a sold
put option will permit the Portfolio to sell another put option to the extent
that the exercise price thereof is secured by liquid securities in a segregated
account. Such transactions permit a Portfolio to generate additional premium
income, which will partially offset declines in the value of portfolio
securities or increases in the cost of securities to be acquired. Also,
effecting a closing transaction will permit the cash or proceeds from the
concurrent sale of any subject to the option to be used for other investments
of a Portfolio, provided that another option on such security is not sold. If
the Portfolio desires to sell a particular security from its portfolio on which
it has sold a call option, it will effect a closing transaction in connection
with the option prior to or concurrent with the sale of the security.
A Portfolio will realize a profit from a closing transaction if the premium
paid in connection with the closing of an option sold by the Portfolio is less
than the premium received from selling the option, or if the premium received
in connection with the closing of an option by the Portfolio is more than the
premium paid for the original purchase. Conversely, a Portfolio will suffer a
loss if the premium paid or received in connection with a closing transaction
is more or less, respectively, than the premium received or paid in
establishing the option position. Because increases in the market price of a
call option will generally reflect increases in the market price of the
underlying security, any loss resulting from the repurchase of a call option
previously sold by the Portfolio is likely to be offset in whole or in part by
appreciation of the underlying security owned by the Portfolio.
A Portfolio may sell options in connection with buy-and-write transactions;
that is, the Portfolio may purchase a security and then sell a call option
against that security. The exercise price of the call a Portfolio determines to
sell will depend upon the expected price movement of the underlying security.
The exercise price of a call option may be below ("in-the-money"), equal to
("at-the-money") or above ("out-of-the-money") the current value of the
underlying security at the time the option is sold. Buy-and-write
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transactions using in-the-money call options may be used when it is expected
that the price of the underlying security will decline moderately during the
option period. Buy-and-write transactions using out-of-the-money call options
may be used when it is expected that the premiums received from selling the
call option plus the appreciation in the market price of the underlying
security up to the exercise price will be greater than the appreciation in the
price of the underlying security alone. If the call options are exercised in
such transactions, a Portfolio's maximum gain will be the premium received by
it for selling the option, adjusted upwards or downwards by the difference
between the Portfolio's purchase price of the security and the exercise price,
less related transaction costs. If the options are not exercised and the price
of the underlying security declines, the amount of such decline will be offset
in part, or entirely, by the premium received.
The selling of put options is similar in terms of risk/return characteristics
to buy-and-write transactions. If the market price of the underlying security
rises or otherwise is above the exercise price, the put option will expire
worthless and the Portfolio's gain will be limited to the premium received. If
the market price of the underlying security declines or otherwise is below the
exercise price, a Portfolio may elect to close the position or retain the
option until it is exercised, at which time the Portfolio will be required to
take delivery of the security at the exercise price; the Portfolio's return
will be the premium received from the put option minus the amount by which the
market price of the security is below the exercise price, which could result in
a loss. Out-of-the-money, at-the-money and in-the-money put options may be used
by a Portfolio in the same market environments that call options are used in
equivalent buy-and-write transactions.
A Portfolio may also sell combinations of put and call options on the same
security, known as "straddles," with the same exercise price and expiration
date. By entering into a straddle, a Portfolio undertakes a simultaneous
obligation to sell and purchase the same security in the event that one of the
options is exercised. If the price of the security subsequently rises
sufficiently above the exercise price to cover the amount of the premium and
transaction costs, the call will likely be exercised and the Portfolio will be
required to sell the underlying security at a below market price. This loss may
be offset, however, in whole or in part, by the premiums received on the
writing of the call options. Conversely, if the price of the security declines
by a sufficient amount, the put will likely be exercised. Straddles will likely
be effective, therefore, only where the price of the security remains stable
and neither the call nor the put is exercised. In those instances where one of
the options is exercised, the loss on the purchase or sale of the underlying
security may exceed the amount of the premiums received.
By selling a call option, a Portfolio limits its opportunity to profit from any
increase in the market value of the underlying security above the exercise
price of the option. By selling a put option, a Portfolio assumes the risk that
it may be required to purchase the underlying security for an exercise price
above its then current market value, resulting in a capital loss unless the
security subsequently appreciates in value. The selling of options on
securities will not be undertaken by a Portfolio solely for hedging purposes,
and could involve certain risks which are not present in the case of hedging
transactions. Moreover, even where options are sold for hedging purposes, such
transactions constitute only a partial hedge against declines in the value of
portfolio securities or against increases in the value of securities to be
acquired, up to the amount of the premium.
A Portfolio may purchase options for hedging purposes or to increase its
return. Put options may be purchased to hedge against a decline in the value of
portfolio securities. If such decline occurs, the put options will permit a
Portfolio to sell the securities at the exercise price, or to close out the
options at a profit. By using put options in this way, the Portfolio will
reduce any profit it might otherwise have realized in the underlying security
by the amount of the premium paid for the put option and by transaction costs.
A Portfolio may purchase call options to hedge against an increase in the price
of securities that the Portfolio anticipates purchasing in the future. If such
increase occurs, the call option will permit the Portfolio to purchase the
securities at the exercise price, or to close out the options at a profit. The
premium paid for the call option plus any transaction costs will reduce the
benefit, if any, realized by the Portfolio upon
12 Portfolio Partners, Inc.
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exercise of the option, and, unless the price of the underlying security rises
sufficiently, the option may expire worthless to the Portfolio.
In certain instances, a Portfolio may enter into options on U.S. Treasury
securities which provide for periodic adjustment of the strike price and may
also provide for the periodic adjustment of the premium during the term of each
such option. Like other types of options, these transactions, which may be
referred to as "reset" options or "adjustable strike" options, grant the
purchaser the right to purchase (in the case of a "call"), or sell (in the case
of a "put"), a specified type and series of U.S. Treasury security at any time
up to a stated expiration date (or, in certain instances, on such date). In
contrast to other types of options, however, the price at which the underlying
security may be purchased or sold under a "reset" option is determined at
various intervals during the term of the option, and such price fluctuates from
interval to interval based on changes in the market value of the underlying
security. As a result, the strike price of a "reset" option, at the time of
exercise, may be less advantageous to the Portfolio than if the strike price
had been fixed at the initiation of the option. In addition, the premium paid
for the purchase of the option may be determined at the termination, rather
than the initiation, of the option. If the premium is paid at termination, the
Portfolio assumes the risk that (i) the premium may be less than the premium
which would otherwise have been received at the initiation of the option
because of such factors as the volatility in yield of the underlying Treasury
security over the term of the option and adjustments made to the strike price
of the option, and (ii) the option purchaser may default on its obligation to
pay the premium at the termination of the option.
Options on Stock Indices--As noted in the Prospectus, MFS Emerging Equities,
MFS Value Equity, Scudder International Growth and T. Rowe Price Growth Equity
may purchase and sell call and put options on stock indices. A portfolio
generally may sell options on stock indices for the purpose of increasing gross
income and to protect the portfolio against declines in the value of securities
they own or increases in the value of securities to be acquired, although a
Portfolio may also purchase put or call options on stock indices in order,
respectively, to hedge its investments against a decline in value or to attempt
to reduce the risk of missing a market or industry segment advance. A
Portfolio's possible loss in either case will be limited to the premium paid
for the option, plus related transaction costs, although Scudder International
Growth may sell options on securities indices only to close out open positions.
In contrast to an option on a security, an option on a stock index provides the
holder with the right but not the obligation to make or receive a cash
settlement upon exercise of the option, rather than the right to purchase or
sell a security. The amount of this settlement is equal to (i) the amount, if
any, by which the fixed exercise price of the option exceeds (in the case of a
call) or is below (in the case of a put) the closing value of the underlying
index on the date of exercise, multiplied by (ii) a fixed "index multiplier."
A Portfolio may sell call options on stock indices if it owns securities whose
price changes, in the opinion of the Subadviser, are expected to be similar to
those of the underlying index, or if it has an absolute and immediate right to
acquire such securities without additional cash consideration (or for
additional cash consideration held in a segregated account by its custodian)
upon conversion or exchange of other securities in its Portfolio. When a
Portfolio covers a call option on a stock index it has sold by holding
securities, such securities may not match the composition of the index and, in
that event, the Portfolio will not be fully covered and could be subject to
risk of loss in the event of adverse changes in the value of the index. A
Portfolio may also sell call options on stock indices if it holds a call on the
same index and in the same principal amount as the call sold when the exercise
price of the call held (a) is equal to or less than the exercise price of the
call sold or (b) is greater than the exercise price of the call sold if the
difference is maintained by the Portfolio in liquid securities in a segregated
account with its custodian. A Portfolio may sell put options on stock indices
if it maintains liquid securities with a value equal to the exercise price in a
segregated account with its custodian, or by holding a put on the same stock
index and in the same principal amount as the put sold when the exercise price
of the put is equal to or greater than the exercise price of the put sold if
the difference is maintained by the Portfolio in liquid securities in a
segregated account with its custodian. Put and call options on stock indices
may also be covered in such other manner as may be in accordance with the rules
of the exchange on which, or the counterparty with which, the option is traded
and applicable laws and regulations.
Portfolio Partners, Inc. 13
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A Portfolio will receive a premium from selling a put or call option, which
increases the Portfolio's gross income in the event the option expires
unexercised or is closed out at a profit. If the value of an index on which a
Portfolio has sold a call option falls or remains the same, the Portfolio will
realize a profit in the form of the premium received (less transaction costs)
that could offset all or a portion of any decline in the value of the
securities it owns. If the value of the index rises, however, the Portfolio
will realize a loss in its call option position, which will reduce the benefit
of any unrealized appreciation in the Portfolio's stock investments. By selling
a put option, the Portfolio assumes the risk of a decline in the index. To the
extent that the price changes of securities owned by the Portfolio correlate
with changes in the value of the index, selling covered put options on indices
will increase the Portfolio's losses in the event of a market decline, although
such losses will be offset in part by the premium received for selling the
option.
A Portfolio may also purchase put options on stock indices to hedge its
investments against a decline in value. By purchasing a put option on a stock
index, the Portfolio will seek to offset a decline in the value of securities
it owns through appreciation of the put option. If the value of the Portfolio's
investments does not decline as anticipated, or if the value of the option does
not increase, the Portfolio's loss will be limited to the premium paid for the
option plus related transaction costs. The success of this strategy will
largely depend on the accuracy of the correlation between the changes in value
of the index and the changes in value of the Portfolio's security holdings.
The purchase of call options on stock indices may be used by a Portfolio to
attempt to reduce the risk of missing a broad market advance, or an advance in
an industry or market segment at a time when the Portfolio holds uninvested
cash or short-term debt securities awaiting investment. When purchasing call
options for this purpose, the Portfolio will also bear the risk of losing all
or a portion of the premium paid if the value of the index does not rise. The
purchase of call options on stock indices when the Portfolio is substantially
fully invested is a form of leverage, up to the amount of the premium and
related transaction costs, and involves risks of loss and of increased
volatility similar to those involved in purchasing calls on securities the
Portfolio owns.
The index underlying a stock index option may be a "broad-based" index, such as
the Standard & Poor's 500 Index or the New York Stock Exchange Composite Index,
the changes in value of which ordinarily will reflect movements in the stock
market in general. In contrast, certain options may be based on narrower market
indices, such as the Standard & Poor's 100 Index, or on indices of securities
of particular industry groups, such as those of oil and gas or technology
companies. A stock index assigns relative values to the stocks included in the
index and the index fluctuates with changes in the market values of the stocks
so included. The composition of the index is changed periodically.
Yield Curve Options--MFS Value Equity may also enter into options on the
"spread," or yield differential, between two fixed income securities, in
transactions referred to as "yield curve" options. In contrast to other types
of options, a yield curve option is based on the difference between the yields
of designated securities, rather than the prices of the individual securities,
and is settled through cash payments. Accordingly, a yield curve option is
profitable to the holder if this differential widens (in the case of a call) or
narrows (in the case of a put), regardless of whether the yields of the
underlying securities increase or decrease.
Yield curve options may be used for the same purposes as other options on
securities. Specifically, the Portfolio may purchase or sell such options for
hedging purposes. For example, the Portfolio may purchase a call option on the
yield spread between two securities, if it owns one of the securities and
anticipates purchasing the other security and wants to hedge against an adverse
change in the yield spread between the two securities. The Portfolio may also
purchase or sell yield curve options for other than hedging purposes (i.e., in
an effort to increase its current income) if, in the judgment of the
Subadviser, the Portfolio will be able to profit from movements in the spread
between the yields of the underlying securities. The trading of yield curve
options is subject to all of the risks associated with the trading of other
types of options. In addition, however, such options present risk of loss even
if the yield of one of the underlying securities remains constant, if the
spread moves in a direction or to an extent which was not
14 Portfolio Partners, Inc.
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anticipated. Yield curve options will be sold by the Portfolio only if the
Portfolio holds another call (or put) option on the spread between the same two
securities and maintains in a segregated account with its custodian liquid
securities sufficient to cover the Portfolio's net liability under the two
options. Therefore, the Portfolio's liability for such a covered option is
generally limited to the difference between the amount of the Portfolio's
liability under the option sold by the Portfolio less the value of the option
held by the Portfolio. Yield curve options may also be covered in such other
manner as may be in accordance with the requirements of the counterparty with
which the option is traded and applicable laws and regulations. Yield curve
options are traded over-the-counter and because they have been recently
introduced, established trading markets for these securities have not yet
developed.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
MFS Emerging Equities, MFS Value Equity, Scudder International Growth and T.
Rowe Price Growth Equity may engage in the following types of transactions:
Futures Contracts--As noted in the Prospectus, the Portfolios may enter into
stock index futures contracts, including futures contracts related to stock
indices and interest rates among others. Such investment strategies will be
used for hedging purposes and for non-hedging purposes, subject to applicable
law. Purchases or sales of stock index futures contracts for hedging purposes
may be used to attempt to protect a Portfolio's current or intended stock
investments from broad fluctuations in stock prices, to act as a substitute for
an underlying investment, or to enhance yield ("speculation").
A futures contract is a bilateral agreement providing for the purchase and sale
of a specified type and amount of a financial instrument or for the making and
acceptance of a cash settlement, at a stated time in the future for a fixed
price. By its terms, a futures contract provides for a specified settlement
date on which, in the case of stock index futures contracts, the difference
between the price at which the contract was entered into and the contract's
closing value is settled between the purchaser and seller in cash. Futures
contracts differ from options in that they are bilateral agreements, with both
the purchaser and the seller equally obligated to complete the transaction.
Futures contracts call for settlement only on the date and cannot be
"exercised" at any other time during their term.
The purchase or sale of a futures contract differs from the purchase or sale of
a security or the purchase of an option in that no purchase price is paid or
received. Instead, an amount of cash or cash equivalents, which varies but may
be as low as 5% or less of the value of the contract, must be deposited with
the broker as "initial margin." Subsequent payments to and from the broker,
referred to as "variation margin," are made on a daily basis as the value of
the index or instrument underlying the futures contract fluctuates, making
positions in the futures contract more or less valuable--a process known as
"marking to the market."
Purchases or sales of stock index futures contracts are used to attempt to
protect the Portfolio's current or intended stock investments from broad
fluctuations in stock prices. For example, a Portfolio may sell stock index
futures contracts in anticipation of or during a market decline to attempt to
offset the decrease in market value of the Portfolio's portfolio securities
that might otherwise result if such decline occurs, because the loss in value
of portfolio securities may be offset, in whole or part, by gains on the
futures position. When a Portfolio is not fully invested in the securities
market and anticipates a significant market advance, it may purchase stock
index futures contracts in order to gain rapid market exposure that may, in
part or entirely, offset increases in the cost of securities that the Portfolio
intends to purchase. As such purchases are made, the corresponding position in
stock index futures contracts will be closed out. In a substantial majority of
these transactions, the Portfolio will purchase such securities upon
termination of the futures position, but under usual market conditions, a long
futures position may be terminated without a related purchase of securities.
When a Portfolio buys or sells a futures contract, unless it already owns an
offsetting position, it will maintain in a segregated account held by the
custodian, liquid securities having an aggregate value at least
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equal to the full "notional" value of the futures contract, thereby insuring
that the leveraging effect of such futures contract is minimized, in accordance
with regulatory requirements.
Options on Futures Contracts--As noted in the Prospectus, the Portfolios may
purchase and sell options to buy or sell futures contracts in which they may
invest ("options on futures contracts"). Such investment strategies will be
used for hedging purposes and for non-hedging purposes, subject to applicable
law, except that Scudder International Growth may utilize such strategies only
for hedging purposes. Put and call options on futures contracts may be traded
by a Portfolio in order to protect against declines in the values of portfolio
securities or against increases in the cost of securities to be acquired, to
act as a substitute for an underlying investment, or to enhance yield.
An option on a futures contract provides the holder with the right to enter
into a "long" position in the underlying futures contract, in the case of a
call option, or a "short" position in the underlying futures contract, in the
case of a put option, at a fixed exercise price up to a stated expiration date
or, in the case of certain options, on such date. Upon exercise of the option
by the holder, the contract market clearinghouse establishes a corresponding
short position for the writer of the option, in the case of a call option, or a
corresponding long position in the case of a put option. In the event that an
option is exercised, the parties will be subject to all the risks associated
with the trading of futures contracts. In addition, the seller of an option on
a futures contract, unlike the holder, is subject to initial and variation
margin requirements on the option position.
A position in an option on a futures contract may be terminated by the
purchaser or seller prior to expiration by effecting a closing purchase or sale
transaction, subject to the availability of a liquid secondary market, which is
the purchase or sale of an option of the same series (i.e., the same exercise
price and expiration date) as the option previously purchased or sold. The
difference between the premiums paid and received represents the trader's
profit or loss on the transaction.
Options on futures contracts that are sold or purchased by a Portfolio on U.S.
exchanges are traded on the same contract market as the underlying futures
contract, and, like futures contracts, are subject to regulation by the
Commodities Futures Trading Commission ("CFTC") and the performance guarantee
of the exchange clearinghouse. In addition, options on futures contracts may be
traded on foreign exchanges.
A Portfolio may sell call options on futures contracts only if it also (a)
purchases the underlying futures contract, (b) owns the instrument, or
instruments included in the index, underlying the futures contract, or (c)
holds a call on the same futures contract and in the same principal amount as
the call sold when the exercise price of the call held (i) is equal to or less
than the exercise price of the call sold or (ii) is greater than the exercise
price of the call sold if the difference is maintained by the Portfolio in
liquid securities in a segregated account with its custodian. A Portfolio may
sell put options on futures contracts only if it also (A) sells the underlying
futures contract, (B) segregates liquid securities in an amount equal to the
value of the security or index underlying the futures contract, or (C) holds a
put on the same futures contract and in the same principal amount as the put
sold when the exercise price of the put held is equal to or greater than the
exercise price of the put written or when the exercise price of the put held is
less than the exercise price of the put sold if the difference is maintained by
the Portfolio in liquid securities in a segregated account with it its
custodian. Upon the exercise of a call option on a futures contract sold by a
Portfolio, the Portfolio will be required to sell the underlying futures
contract which, if the Portfolio has covered its obligation through the
purchase of such contract, will serve to liquidate its futures position.
Similarly, where a put option on a futures contract sold by the Portfolio is
exercised, the Portfolio will be required to purchase the underlying futures
contract which, if the Portfolio has covered its obligation through the sale of
such contract, will close out its futures position.
The selling of a call option on a futures contract for hedging purposes
constitutes a partial hedge against declining prices of the securities or other
instruments required to be delivered under the terms of the futures contract.
If the futures price at expiration of the option is below the exercise price,
the Portfolio will retain the full amount of the option premium, less related
transaction costs, which provides a partial
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hedge against any decline that may have occurred in the Portfolio's holdings.
The selling of a put option on a futures contract constitutes a partial hedge
against increasing prices of the securities or other instruments required to be
delivered under the terms of the futures contract. If the futures price at
expiration of the option is higher than the exercise price, the Portfolio will
retain the full amount of the option premium, which provides a partial hedge
against any increase in the price of securities the Portfolio intends to
purchase. If a put or call option the Portfolio has sold is exercised, the
Portfolio will incur a loss which will be reduced by the amount of the premium
it receives. Depending on the degree of correlation between changes in the
value of its portfolio securities and the changes in the value of its futures
positions, the Portfolio's losses from existing options on futures contracts
may to some extent be reduced or increased by changes in the value of portfolio
securities.
A Portfolio may purchase options on futures contracts for hedging purposes
instead of purchasing or selling the underlying futures contracts. For example,
where a decrease in the value of portfolio securities is anticipated as a
result of a projected market-wide decline or changes in interest or exchange
rates, the Portfolio could, in lieu of selling futures contracts, purchase put
options thereon. In the event that such decrease occurs, it may be offset, in
whole or in part, by a profit on the option. Conversely, where it is projected
that the value of securities to be acquired by the Portfolio will increase
prior to acquisition, due to a market advance or changes in interest or
exchange rates, the Portfolio could purchase call options on futures contracts,
rather than purchasing the underlying futures contracts.
Forward Contracts on Foreign Currency--As noted in the Prospectus, the
Portfolios may enter into forward foreign currency exchange contracts for
hedging and non-hedging purposes. Forward contracts may be used for hedging to
attempt to minimize the risk to a Portfolio from adverse changes in the
relationship between the U.S. dollar and foreign currencies. Each Portfolio
intends to enter into forward contracts for hedging purposes. In particular, a
forward contract to sell a currency may be entered into where the Portfolio
seeks to protect against an anticipated increase in the rate for a specific
currency which could reduce the dollar value of portfolio securities
denominated in such currency. Conversely, a Portfolio may enter into a forward
contract to purchase a given currency to protect against a projected increase
in the dollar value of securities denominated in such currency which the
Portfolio intends to acquire. The Portfolio also may enter into a forward
contract in order to assure itself of a predetermined exchange rate in
connection with a security denominated in a foreign currency. In addition, the
Portfolio may enter into forward contracts for "cross hedging" purposes; e.g.,
the purchase or sale of a forward contract on one type of currency as a hedge
against adverse fluctuations in the value of a second type of currency.
If a hedging transaction in forward contracts is successful, the decline in the
value of portfolio securities or other assets or the increase in the cost of
securities or other assets to be acquired may be offset, at least in part, by
profits on the forward contract. Nevertheless, by entering into such forward
contracts, a Portfolio may be required to forgo all or a portion of the
benefits which otherwise could have been obtained from favorable movements in
exchange rates. The Portfolio will usually seek to close out positions in such
contracts by entering into offsetting transactions, which will serve to fix the
Portfolio's profit or loss based upon the value of the contracts at the time
the offsetting transaction is executed.
A Portfolio will also enter into transactions in forward contracts for other
than hedging purposes, which present greater profit potential but also involve
increased risk. For example, a Portfolio may purchase a given foreign currency
through a forward contract if, in the judgment of the Subadviser, the value of
such currency is expected to rise relative to the U.S. dollar. Conversely, the
Portfolio may sell the currency through a forward contract if the Subadviser
believes that its value will decline relative to the dollar.
A Portfolio will profit if the anticipated movements in foreign currency
exchange rates occur which will increase its gross income. Where exchange rates
do not move in the direction or to the extent anticipated, however, the
Portfolio may sustain losses which will reduce its gross income. Such
transactions, therefore, could be considered speculative and could involve
significant risk of loss.
Each Portfolio has established procedures consistent with statements by the SEC
and its staff regarding the use of forward contracts by registered investment
companies, which require the use of segregated
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assets or "cover" in connection with the purchase and sale of such contracts.
In those instances in which the Portfolio satisfies this requirement through
segregation of assets, it will maintain, in a segregated account cash, cash
equivalents or other liquid securities, which will be marked to market on a
daily basis, in an amount equal to the value of its commitments under forward
contracts. While these contracts are not presently regulated by the CFTC, the
CFTC may in the future assert authority to regulate forward contracts. In such
event the Portfolio's ability to utilize forward contracts in the manner set
forth above may be restricted.
A Portfolio may hold foreign currency received in connection with investments
in foreign securities when, in the judgment of the Subadviser, it would be
beneficial to convert such currency into U.S. dollars at a later date, based on
anticipated changes in the relevant exchange rate. A Portfolio may also hold
foreign currency in anticipation of purchasing foreign securities.
Options on Foreign Currencies--As noted in the Prospectus, the Portfolios may
purchase and sell options on foreign currencies for hedging purposes in a
manner similar to that in which forward contracts will be utilized. For
example, a decline in the dollar value of a foreign currency in which portfolio
securities are denominated will reduce the dollar value of such securities,
even if their value in the foreign currency remains constant. In order to
protect against such diminutions in the value of portfolio securities, the
Portfolio may purchase put options on the foreign currency. If the value of the
currency does decline, the Portfolio will have the right to sell such currency
for a fixed amount in dollars and will thereby offset, in whole or in part, the
adverse effect on its portfolio which otherwise would have resulted.
Conversely, where a rise in the dollar value of a currency in which securities
to be acquired are denominated is projected, thereby increasing the cost of
such securities, the Portfolio may purchase call options thereon. The purchase
of such options could offset, at least partially, the effects of the adverse
movements in exchange rates. As in the case of other types of options, however,
the benefit to the Portfolio deriving from purchases of foreign currency
options will be reduced by the amount of the premium and related transaction
costs. In addition, where currency exchange rates do not move in the direction
or to the extent anticipated, the Portfolio could sustain losses on
transactions in foreign currency options which would require it to forgo a
portion or all of the benefits of advantageous changes in such rates.
A Portfolio may sell options on foreign currencies for the same types of
hedging purposes. For example, where the Portfolio anticipates a decline in the
dollar value of foreign-denominated securities due to adverse fluctuations in
exchange rates it could, instead of purchasing a put option, sell a call option
on the relevant currency. If the expected decline occurs, the option will most
likely not be exercised, and the diminution in value of portfolio securities
will be offset by the amount of the premium received.
As in the case of other types of options, however, the selling of an option on
foreign currency will constitute only a partial hedge, up to the amount of the
premium received, and the Portfolio could be required to purchase or sell
foreign currencies at disadvantageous exchange rates, thereby incurring losses.
The purchase of an option on foreign currency may constitute an effective hedge
against fluctuations in exchange rates although, in the event of rate movements
adverse to the Portfolio's position, it may forfeit the entire amount of the
premium plus related transaction costs. As in the case of forward contracts,
certain options on foreign currencies are traded over-the-counter and involve
risks which may not be present in the case of exchange-traded instruments.
Similarly, instead of purchasing a call option to hedge against an anticipated
increase in the dollar cost of securities to be acquired, the Portfolio could
sell a put option on the relevant currency which, if rates move in the manner
projected, will expire unexercised and allow the Portfolio to hedge such
increased cost up to the amount of the premium. Foreign currency options sold
by the Portfolio will generally be covered in a manner similar to the covering
of other types of options. As in the case of other types of options, however,
the selling of a foreign currency option will constitute only a partial hedge
up to the amount of the premium, and only if rates move in the expected
direction. If this does not occur, the option may be exercised and the
Portfolio would be required to purchase or sell the underlying currency at a
loss which may not be offset by the amount of the premium. Through the selling
of options on foreign
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currencies, the Portfolio also may be required to forgo all or a portion of the
benefits which might otherwise have been obtained from favorable movements in
exchange rates.
RISKS ASSOCIATED WITH INVESTING IN OPTIONS, FUTURES AND FORWARD TRANSACTIONS
Risk of Imperfect Correlation of Hedging Instruments with a Portfolio's
Securities-- A Portfolio's abilities effectively to hedge all or a portion of
its portfolio through transactions in options, futures contracts, options on
futures contracts, forward contracts and options on foreign currencies depend
on the degree to which price movements in the underlying index or instrument
correlate with price movements in the relevant portion of the Portfolio's
securities. In the case of futures and options based on an index, the Portfolio
will not duplicate the components of the index, and in the case of futures and
options on fixed income securities, the portfolio securities that are being
hedged may not be the same type of obligation underlying such contract. The use
of forward contracts for cross-hedging purposes may involve greater correlation
risks. As a result, the correlation probably will not be exact. Consequently,
the Portfolio bears the risk that the price of the portfolio securities being
hedged will not move in the same amount or direction as the underlying index or
obligation.
For example, if a Portfolio purchases a put option on an index and the index
decreases less than the value of the hedged securities, the Portfolio would
experience a loss that is not completely offset by the put option. It is also
possible that there may be a negative correlation between the index or
obligation underlying an option or futures contract in which the Portfolio has
a position and the portfolio securities the Portfolio is attempting to hedge,
which could result in a loss on both the portfolio and the hedging instrument.
In addition, a Portfolio may enter into transactions in forward contracts or
options on foreign currencies in order to hedge against exposure arising from
the currencies underlying such forwards. In such instances, the Portfolio will
be subject to the additional risk of imperfect correlation between changes in
the value of the currencies underlying such forwards or options and changes in
the value of the currencies being hedged.
It should be noted that stock index futures contracts or options based upon a
narrower index of securities, such as those of a particular industry group, may
present greater risk than options or futures based on a broad market index.
This is due to the fact that a narrower index is more susceptible to rapid and
extreme fluctuations as a result of changes in the value of a small number of
securities. Nevertheless, where a Portfolio enters into transactions in options
or futures on narrow-based indices for hedging purposes, movements in the value
of the index should, if the hedge is successful, correlate closely with the
portion of the Portfolio's portfolio or the intended acquisitions being hedged.
The trading of futures contracts, options and forward contracts for hedging
purposes entails the additional risk of imperfect correlation between movements
in the futures or option price and the price of the underlying index or
obligation. The anticipated spread between the prices may be distorted due to
the differences in the nature of the markets, such as differences in margin
requirements, the liquidity of such markets and the participation of
speculators in the options, futures and forward markets. In this regard,
trading by speculators in options, futures and forward contracts has in the
past occasionally resulted in market distortions, which may be difficult or
impossible to predict, particularly near the expiration of contracts.
The trading of options on futures contracts also entails the risk that changes
in the value of the underlying futures contract will not be fully reflected in
the value of the option. The risk of imperfect correlation, however, generally
tends to diminish as the maturity date of the futures contract or expiration
date of the option approaches.
Further, with respect to options on securities, options on stock indices,
options on currencies and options on futures contracts, the Portfolio is
subject to the risk of market movements between the time that the option is
exercised and the time of performance thereunder. This could increase the
extent of any loss suffered by the Portfolio in connection with such
transactions.
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In selling a covered call option on a security, index or futures contract, a
Portfolio also incurs the risk that changes in the value of the instruments
used to cover the position will not correlate closely with changes in the value
of the option or underlying index or instrument. For example, where the
Portfolio sells a call option on a stock index and segregates securities, such
securities may not match the composition of the index, and the Portfolio may
not be fully covered. As a result, the Portfolio could be subject to risk of
loss in the event of adverse market movements.
The selling of options on securities, options on stock indices or options on
futures contracts constitutes only a partial hedge against fluctuations in
value of a Portfolio's portfolio. When a Portfolio sells an option, it will
receive premium income in return for the holder's purchase of the right to
acquire or dispose of the underlying obligation. In the event that the price of
such obligation does not rise sufficiently above the exercise price of the
option, in the case of a call, or fall below the exercise price, in the case of
a put, the option will not be exercised and the Portfolio will retain the
amount of the premium, less related transaction costs, which will constitute a
partial hedge against any decline that may have occurred in the Portfolio's
portfolio holdings or any increase in the cost of the instruments to be
acquired.
When the price of the underlying obligation moves sufficiently in favor of the
holder to warrant exercise of the option, however, and the option is exercised,
the Portfolio will incur a loss which may only be partially offset by the
amount of the premium it received. Moreover, by selling an option, the
Portfolio may be required to forgo the benefits which might otherwise have been
obtained from an increase in the value of portfolio securities or other assets
or a decline in the value of securities or assets to be acquired.
In the event of the occurrence of any of the foregoing adverse market events,
the Portfolio's overall return may be lower than if it had not engaged in the
hedging transactions.
It should also be noted that a Portfolio may enter into transactions in options
(except for options on foreign currencies), futures contracts, options on
futures contracts and forward contracts not only for hedging purposes, but also
for non-hedging purposes intended to increase portfolio returns. Non-hedging
transactions in such investments involve greater risks and may result in losses
which may not be offset by increases in the value of portfolio securities or
declines in the cost of securities to be acquired. A Portfolio will only sell
covered options, such that liquid securities with an aggregate value equal to
an amount necessary to satisfy an option exercise will be segregated at all
times, unless the option is covered in such other manner as may be in
accordance with the rules of the exchange on which the option is traded and
applicable laws and regulations. Nevertheless, the method of covering an option
employed by the Portfolio may not fully protect it against risk of loss and, in
any event, the Portfolio could suffer losses on the option position which might
not be offset by corresponding portfolio gains.
A Portfolio also may enter into transactions in futures contracts, options on
futures contracts and forward contracts for other than hedging purposes, which
could expose the Portfolio to significant risk of loss if foreign currency
exchange rates do not move in the direction or to the extent anticipated. In
this regard, the foreign currency may be extremely volatile from time to time,
as discussed in the Prospectus and in this Statement, and the use of such
transactions for non-hedging purposes could therefore involve significant risk
of loss.
With respect to entering into straddles on securities, a Portfolio incurs the
risk that the price of the underlying security will not remain stable, that one
of the options sold will be exercised and that the resulting loss will not be
offset by the amount of the premiums received. Such transactions, therefore,
create an opportunity for increased return by providing the Portfolio with two
simultaneous premiums on the same security, but involve additional risk, since
the Portfolio may have an option exercised against it regardless of whether the
price of the security increases or decreases.
Risk of a Potential Lack of a Liquid Secondary Market--Prior to exercise or
expiration, a futures or option position can only be terminated by entering
into a closing purchase or sale transaction. This requires a secondary market
for such instruments on the exchange on which the initial transaction was
entered into. While a Portfolio will enter into options or futures positions
only if there appears to be a liquid
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secondary market therefor, there can be no assurance that such a market will
exist for any particular contracts at any specific time. In that event, it may
not be possible to close out a position held by the Portfolio, and the
Portfolio could be required to purchase or sell the instrument underlying an
option, make or receive a cash settlement or meet ongoing variation margin
requirements. Under such circumstances, if a Portfolio has insufficient cash
available to meet margin requirements, it will be necessary to liquidate
portfolio securities or other assets at a time when it is disadvantageous to do
so. The inability to close out options and futures positions, therefore, could
have an adverse impact on the Portfolio's ability effectively to hedge its
portfolio, and could result in trading losses.
The liquidity of a secondary market in the futures contract or option thereon
may be adversely affected by "daily price fluctuation limits," established by
exchanges, which limit the amount of fluctuation in the price of a contract
during a single trading day. Once the daily limit has been reached in the
contract, no trades may be entered into at a price beyond the limit, thus
preventing the liquidation of open futures or option positions and requiring
traders to make additional margin deposits. Prices have in the past moved the
daily limit on a number of consecutive trading days.
The trading of futures contracts and options is also subject to the risk of
trading halts, suspensions, exchange or clearinghouse equipment failures,
government intervention, insolvency of a brokerage firm or clearinghouse or
other disruptions of normal trading activity, which could at times make it
difficult or impossible to liquidate existing positions or to recover excess
variation margin payments.
Margin--Because of low initial margin deposits made upon the opening of a
futures or forward position and the selling of an option, such transactions
involve substantial leverage. As a result, relatively small movements in the
price of the contract can result in substantial unrealized gains or losses.
Where a Portfolio enters into such transactions for hedging purposes, any
losses incurred in connection therewith should, if the hedging strategy is
successful, be offset, in whole or in part, by increases in the value of
securities or other assets held by the Portfolio or decreases in the prices of
securities or other assets the Portfolio intends to acquire. Where a Portfolio
enters into such transactions for other than hedging purposes, the margin
requirements associated with such transactions could expose the Portfolio to
greater risk.
Trading and Position Limits--The exchanges on which futures and options are
traded may impose limitations governing the maximum number of positions on the
same side of the market and involving the same underlying instrument which may
be held by a single investor, whether acting alone or in concert with others
(regardless of whether such contracts are held on the same or different
exchanges or held or written in one or more accounts or through one or more
brokers). Further, the CFTC and the various contract markets have established
limits referred to as "speculative position limits" on the maximum net long or
net short position which any person may hold or control in a particular futures
or option contract. An exchange may order the liquidation of positions found to
be in violation of these limits and it may impose other sanctions or
restrictions. The Subadvisers do not believe that these trading and position
limits will have any adverse impact on the strategies for hedging the portfolio
of the Portfolios.
Risks of Options on Futures Contracts--The amount of risk a Portfolio assumes
when it purchases an option on a futures contract is the premium paid for the
option, plus related transaction costs. In order to profit from an option
purchased, however, it may be necessary to exercise the option and to liquidate
the underlying futures contract subject to the risks of the availability of a
liquid offset market described herein. The seller of an option on a futures
contract is subject to the risks of commodity futures trading, including the
requirement of initial and variation margin payments, as well as the additional
risk that movements in the price of the option may not correlate with movements
in the price underlying security, index, currency or futures contracts.
Risks of Transactions Related to Foreign Currencies and Transactions Not
Conducted on U.S. Exchanges --Transactions in forward contracts on foreign
currencies, as well as futures and options on foreign currencies and
transactions executed on foreign exchanges, are subject to all of the
correlation, liquidity and other risks outlined above. In addition, however,
such transactions are subject to the risk
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of governmental actions affecting trading in or the prices of currencies
underlying such contracts, which could restrict or eliminate trading and could
have a substantial adverse effect on the value of positions held by a
Portfolio. Further, the value of such positions could be adversely affected by
a number of other complex political and economic factors applicable to the
countries issuing the underlying currencies.
Further, unlike trading in most other types of instruments, there is no
systematic reporting of last sale information with respect to the foreign
currencies underlying contracts thereon. As a result, the available information
on which trading systems will be based may not be as complete as the comparable
data on which the Portfolio makes investment and trading decisions in
connection with other transactions. Moreover, because the foreign currency
market is a global, 24-hour market, events could occur in that market which
will not be reflected in the forward, futures or options markets until the
following day, thereby making it more difficult for the Portfolio to respond to
such events in a timely manner.
Settlements of exercises of over-the-counter forward contracts or foreign
currency options generally must occur within the country issuing the underlying
currency, which in turn requires traders to accept or make delivery of such
currencies in conformity with any U.S. or foreign restrictions and regulations
regarding the maintenance of foreign banking relationships, fees, taxes or
other charges.
Unlike transactions entered into by a Portfolio in futures contracts and
exchange-traded options, options on foreign currencies, forward contracts and
over-the-counter options on securities are not traded on contract markets
regulated by the CFTC or (with the exception of certain foreign currency
options) the SEC. To the contrary, such instruments are traded through
financial institutions acting as market-makers, although foreign currency
options are also traded on certain national securities exchanges, such as the
Philadelphia Stock Exchange and the Chicago Board Options Exchange, subject to
SEC regulation. In an over-the-counter trading environment, many of the
protections afforded to exchange participants will not be available. For
example, there are no daily price fluctuation limits, and adverse market
movements could therefore continue to an unlimited extent over a period of
time. Although the purchaser of an option cannot lose more than the amount of
the premium plus related transaction costs, this entire amount could be lost.
Moreover, the option seller and a trader of forward contracts could lose
amounts substantially in excess of their initial investments, due to the margin
and collateral requirements associated with such positions.
In addition, over-the-counter transactions can only be entered into with a
financial institution willing to take the opposite side, as principal, of a
Portfolio's position unless the institution acts as broker and is able to find
another counterparty willing to enter into the transaction with the Portfolio.
Where no such counterparty is available, it will not be possible to enter into
a desired transaction. There also may be no liquid secondary market in the
trading of over-the-counter contracts, and the Portfolio could be required to
retain options purchased or sold, or forward contracts entered into, until
exercise, expiration or maturity. This in turn could limit the Portfolio's
ability to profit from open positions or to reduce losses experienced, and
could result in greater losses.
Further, over-the-counter transactions are not subject to the guarantee of an
exchange clearinghouse, and the Portfolio will therefore be subject to the risk
of default by, or the bankruptcy of, the financial institution serving as its
counterparty. One or more of such institutions also may decide to discontinue
their role as market-makers in a particular currency or security, thereby
restricting the Portfolio's ability to enter into desired hedging transactions.
The Portfolio will enter into an over-the-counter transaction only with parties
whose creditworthiness has been reviewed and found satisfactory by the
Subadviser.
Options on securities, options on stock indexes, futures contracts, options on
futures contracts and options on foreign currencies may be traded on exchanges
located in foreign countries. Such transactions may not be conducted in the
same manner as those entered into on U.S. exchanges, and may be subject to
different margin, exercise, settlement or expiration procedures. As a result,
many of the risks of over-the-counter trading may be present in connection with
such transactions.
Options on foreign currencies traded on national securities exchanges are
within the jurisdiction of the SEC, as are other securities traded on such
exchanges. As a result, many of the protections provided
22 Portfolio Partners, Inc.
<PAGE>
to traders on organized exchanges will be available with respect to such
transactions. In particular, all foreign currency option positions entered into
on a national securities exchange are cleared and guaranteed by the Options
Clearing Corporation (the "OCC"), thereby reducing the risk of counterparty
default. Further, a liquid secondary market in options traded on a national
securities exchange may be more readily available than in the over-the-counter
market, potentially permitting the Portfolio to liquidate open positions at a
profit prior to exercise or expiration, or to limit losses in the event of
adverse market movements.
The purchase and sale of exchange-traded foreign currency options, however, is
subject to the risks of the availability of a liquid secondary market described
above, as well as the risks regarding adverse market movements, margining of
options written, the nature of the foreign currency market, possible
intervention by governmental authorities and the effects of other political and
economic events. In addition, exchange-traded options on foreign currencies
involve certain risks not presented by the over-the-counter market. For
example, exercise and settlement of such options must be made exclusively
through the OCC, which has established banking relationships in applicable
foreign countries for this purpose. As a result, the OCC may, if it determines
that foreign governmental restrictions or taxes would prevent the orderly
settlement of foreign currency option exercises, or would result in undue
burdens on the OCC or its clearing member, impose special procedures on
exercise and settlement, such as technical changes in the mechanics of delivery
of currency, the fixing of dollar settlement prices or prohibitions on
exercise.
Policies on the Use of Futures and Options on Futures Contracts--In order to
assure that a Portfolio will not be deemed to be a "commodity pool" for
purposes of the Commodity Exchange Act, regulations of the CFTC require that a
Portfolio enter into transactions in futures contracts and options on futures
contracts only (i) for bona fide hedging purposes (as defined in CFTC
regulations), or (ii) for non-hedging purposes, provided that the aggregate
initial margin and premiums on such non-hedging positions does not exceed 5% of
the liquidation value of the Portfolio's assets.
The staff of the SEC has taken the position that over-the-counter options and
assets used to cover sold over-the-counter options are illiquid and, therefore,
together with other illiquid securities held by a Portfolio, cannot exceed 15%
of a Portfolio's assets (the "SEC illiquidity ceiling"). Although the
Subadvisers may disagree with this position, each Subadviser intends to limit
the Portfolios' selling of over-the-counter options in accordance with the
following procedure. Except as provided below, MFS Emerging Growth and MFS
Value Equity intend to sell over-the-counter options only with primary U.S.
Government securities dealers recognized as such by the Federal Reserve Bank of
New York. Also, the contracts a Portfolio has in place with such primary
dealers provide that the Portfolio has the absolute right to repurchase an
option it sells at a maximum price to be calculated by a pre-determined
formula. Each Portfolio will treat all or a portion of the formula as illiquid
for purposes of the SEC illiquidity ceiling test. Each Portfolio may also sell
over-the-counter options with non-primary dealers, including foreign dealers
(where applicable), and will treat the assets used to cover these options as
illiquid for purposes of such SEC illiquidity ceiling test.
The policies described above are not fundamental and may be changed without
shareholder approval, as may each Portfolio's investment objective.
DIRECTORS AND OFFICERS OF THE FUND
The investments and administration of the Fund are under the direction of the
Board of Directors. The Directors and executive officers of the Fund and their
principal occupations for the past five years are listed below.
Portfolio Partners, Inc. 23
<PAGE>
<TABLE>
<CAPTION>
Principal Occupation During Past Five
Years (and Positions held with Affiliated
Position(s) Held Persons or Principal Underwriter of the
Name, Address and Birthdate with Registrant Registrant)
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
Laurie M. LeBlanc, CFP* Director and Vice President, Aetna Life Insurance
151 Farmington Avenue President and Annuity Company, January 1998 to
Hartford, Connecticut present; Vice President, Aetna Retirement
05/12/52 Services, Fund Strategy and Management,
December 1995 to January 1998; Vice
President, Connecticut Mutual Financial
Services, Investment Products, July 1994
to December 1995; Vice President, CIGNA
Investments, Inc. and CIGNA International
Investment Advisers, Ltd., October 1988 to
July 1994.
- -------------------------------------------------------------------------------------------------------
John V. Boyer Director Executive Director, The Mark Twain House
63 Penn Drive Museum, 1989 to present.
West Hartford, Connecticut
07/19/53
- -------------------------------------------------------------------------------------------------------
Richard A. Johnson Director Retired for more than five years.
24 Sulgrave Road
West Hartford, Connecticut
03/22/36
- -------------------------------------------------------------------------------------------------------
Philip M. Markert Director Retired since March 1996; Division
164 Calhoun Street Executive, Citibank, Caribbean/Central
Washington, Connecticut America Region, February 1964 to March
06/22/38 1996.
- -------------------------------------------------------------------------------------------------------
Martin T. Conroy* Director, Vice President, Assistant Treasurer, Aetna Retirement
151 Farmington Avenue Chief Financial Officer Holdings, Inc., September 1997 to present;
Hartford, Connecticut and Treasurer Assistant Treasurer, Aetna Life Insurance
01/11/40 and Annuity Company, October 1991 to
present.
- -------------------------------------------------------------------------------------------------------
M. Katherine Johnson Secretary Counsel, Aetna Life Insurance and Annuity
151 Farmington Avenue Company, August 1995 to present;
Hartford, Connecticut Counsel, MassMutual, January 1994 to
01/07/65 August 1995.
- -------------------------------------------------------------------------------------------------------
</TABLE>
*Interested person as defined by the 1940 Act.
24 Portfolio Partners, Inc.
<PAGE>
Members of the Board of the Directors who are also directors, officers or
employees of Aetna Inc. or its affiliates are not entitled to any compensation
from the Fund. Members of the Board of Directors who are not affiliated with
Aetna or its subsidiaries are entitled to receive an annual retainer of $20,000
for service on the Board. In addition, each such member will receive a fee of
$2,500 per meeting for each regularly scheduled Board meeting; $2,500 for each
in-person Contract Committee meeting on any day on which a regular board
meeting is not scheduled; and $1,500 for each in-person committee meeting,
other than a Contract Committee meeting, on any day on which a regular Board
meeting is not scheduled. A Committee Chairperson fee of $1,500 each will be
paid to the Chairperson of the Valuation, Audit and Contract Committees. All of
the above fees are to be paid proportionately by each Portfolio based on the
net assets of the Portfolios as of the previous December 31.
CONTROL PERSONS AND PRINCIPAL SHAREHOLDERS
Shares of the Portfolios will be owned by insurance companies as depositors of
separate accounts which are used to fund variable annuity contracts ("VA
Contracts") and variable life insurance policies ("VLI Policies"). Aetna and
its subsidiary, Aetna Insurance Company of America, Inc. may be deemed a
control person of the Fund in that certain of their separate accounts hold 100%
of the shares of each Portfolio of the Fund as of April 1, 1998.
As of April 1, 1998 the following owned of record or, to the knowledge of
management, beneficially owned more than 5% of the outstanding shares of:
T. Rowe Price Growth Equity Portfolio--Aetna Life Insurance & Annuity
Company (ALIAC), c/o Aetna Retirement Plan Services, Treasury Services, 151
Farmington Avenue, Hartford, Connecticut 06156 (94.1%)
T. Rowe Price Growth Equity Portfolio--Aetna Insurance Company of America
(AICA), c/o Aetna Retirement Plan Services, Treasury Services, 151
Farmington Avenue, Hartford, Connecticut 06156 (5.9%).
MFS Emerging Equities Portfolio--Aetna Life Insurance & Annuity Company
(ALIAC), c/o Aetna Retirement Plan Services, Treasury Services, 151
Farmington Avenue, Hartford, Connecticut 06156 (96.5%).
MFS Research Growth Portfolio--Aetna Life Insurance & Annuity Company
(ALIAC), c/o Aetna Retirement Plan Services, Treasury Services, 151
Farmington Avenue, Hartford, Connecticut 06156 (96.3%).
MFS Value Equity Portfolio--Aetna Life Insurance & Annuity Company (ALIAC),
c/o Aetna Retirement Plan Services, Treasury Services, 151 Farmington
Avenue, Hartford, Connecticut 06156 (97.7%).
Scudder International Growth Portfolio--Aetna Life Insurance & Annuity
Company (ALIAC), c/o Aetna Retirement Plan Services, Treasury Services, 151
Farmington Avenue, Hartford, Connecticut 06156 (99.9%).
The Fund has no knowledge of any other owners of record of 5% or more than
the outstanding shares of a Portfolio. Shareholders owning more than 25% or
more of the outstanding shares of a Portfolio may take actions without the
approval of other investors in the Fund. See "Voting Rights" below.
Aetna is an indirect wholly owned subsidiary of Aetna Retirement Services,
Inc., which is in turn an indirect wholly owned subsidiary of Aetna Inc.
Aetna's principal office is located at 151 Farmington Avenue, Hartford,
Connecticut 06156. Aetna is registered with the SEC as an investment
adviser and as of December 31, 1997, manages over $46.8 billion in assets.
The Directors and Officers of the Fund as a group own less than 1% of the
outstanding shares of any Portfolio of the Fund.
THE INVESTMENT ADVISORY AGREEMENT
On August 11, 1997, the Fund's Board of Directors approved an investment
advisory agreement (Investment Advisory Agreement) between the Fund and Aetna
for each of the Portfolios to continue through June 30, 1999.
Portfolio Partners, Inc. 25
<PAGE>
Under the Investment Advisory Agreement and subject to the direction of the
Board of Directors of the Fund, Aetna has responsibility, among other things,
to (i) select the securities to be purchased, sold or exchanged by each
Portfolio, and place trades on behalf of each Portfolio, or delegate such
responsibility to one or more subadvisers; (ii) supervise all aspects of the
operations of the Portfolios; (iii) obtain the services of, contract with, and
provide instructions to custodians and/or subcustodians of each Portfolio's
securities, transfer agents, dividend paying agents, pricing services and other
service providers as are necessary to carry out the terms of the Investment
Advisory Agreement; (iv) monitor the investment program maintained by each
Subadviser for the Portfolios and the Subadvisers' compliance programs to
ensure that the Portfolio's assets are invested in compliance with the
Subadvisory Agreement and the Portfolio's investment objectives and policies as
adopted by the Board and described in the most current effective amendment of
the registration statement for the Portfolio, as filed with the Commission
under the 1933 Act and the 1940 Act ("Registration Statement"); (v) review all
data and financial reports prepared by each Subadviser to assure that they are
in compliance with applicable requirements and meet the provisions of
applicable laws and regulations; (vi) establish and maintain regular
communications with each Subadviser to share information it obtains with each
Subadviser concerning the effect of developments and data on the investment
program maintained by the Subadviser; (vii) oversee all matters relating to the
offer and sale of the Portfolios' shares, the Fund's corporate governance,
reports to the Board, contracts with all third parties on behalf of the
Portfolios for services to the Portfolios, reports to regulatory authorities
and compliance with all applicable rules and regulations affecting the
Portfolios' operations; and (viii) take other actions that appear to Aetna and
the Board to be necessary.
The Investment Advisory Agreement provides that Aetna shall pay (a) the
salaries, employment benefits and other related costs of those of its personnel
engaged in providing investment advice to the Portfolio, including, without
limitation, office space, office equipment, telephone and postage costs and (b)
any fees and expenses of all Directors, officers and employees, if any, of the
Fund who are employees of Aetna or an affiliated entity and any salaries and
employment benefits payable to those persons.
The Investment Advisory Agreement has an initial term of just under two years
and provides that it will remain in effect from year-to-year thereafter if
approved annually by a majority vote of the Directors, including a majority of
the Directors who are not "interested persons" as that term is defined in the
1940 Act, of the Fund or of Aetna, in person at a meeting called for that
purpose. The Investment Advisory Agreement may be terminated as to a particular
Portfolio without penalty at any time on sixty days' written notice by (i) the
Directors, (ii) a majority vote of the outstanding voting securities of that
Portfolio, or (iii) Aetna. The Investment Advisory Agreement terminates
automatically in the event of assignment.
The Prospectus contains a description of fees payable to Aetna. For the period
November 28, 1997 (commencement of operations) to December 31, 1997, the
advisory fees for the MFS Emerging Equities, MFS Research Growth, MFS Value
Equity, Scudder International Growth and T. Rowe Price Growth Equity amounted
to $482,568, $257,457, $79,213, $282,965, and $202,630, respectively.
THE SUBADVISORY AGREEMENTS
On August 11, 1997, the Fund's Board of Directors approved subadvisory
agreements ("Subadvisory Agreements") between Aetna and Massachusetts Financial
Services Company ("MFS") with respect to MFS Emerging Equities, MFS Research
Growth and MFS Value Equity; with Scudder Kemper Investments, Inc. ("Scudder
Kemper") with respect to Scudder International Portfolio; and with T. Rowe
Price Associates, Inc. ("T. Rowe Price") with respect to T. Rowe Price Growth
Equity, to continue through June 30, 1999. Each Subadvisory Agreement remains
in effect from year-to-year if approved annually by a majority vote of the
Directors, including a majority of the Directors who are not "interested
persons" of the Fund, Aetna or any Subadviser, in person, at a meeting called
for that purpose. Each Subadvisory Agreement may be terminated without penalty
at any time on sixty days' written notice by (i) the Directors, (ii) a majority
vote of the outstanding voting securities of the respective Portfolio, (iii)
Aetna, or (iv) the relevant Subadviser. Each Subadvisory Agreement terminates
automatically in the event of its assignment or in the event of the termination
of the Investment Advisory Agreement with Aetna.
26 Portfolio Partners, Inc.
<PAGE>
Under each Subadvisory Agreement, the Subadviser supervises the investment and
reinvestment of cash and securities comprising the assets of the Portfolios.
Each Subadvisory Agreement also directs the Subadviser to (a) determine the
securities to be purchased or sold by the Portfolios, and (b) take any actions
necessary to carry out its investment subadvisory responsibilities.
Each Subadviser pays the salaries, employment benefits and other related costs
of personnel engaged in providing investment advice including office space,
facilities and equipment.
As compensation, Aetna pays each Subadviser a monthly fee as described in the
Prospectus. Aetna has certain obligations under the Subadvisory Agreements and
retains overall responsibility for monitoring the investment program maintained
by the Subadviser for compliance with applicable laws and regulations and each
Portfolio's respective investment objectives. In addition, Aetna will consult
with and assist the Subadviser in maintaining appropriate policies, procedures
and records and oversee matters relating to promotion, marketing materials and
reports by the Subadvisers to the Fund's Board of Directors.
For the period November 28, 1997 (commencement of operations) to December 31,
1997, Aetna paid MFS $446,631 on behalf of MFS Emerging Equities, MFS Research
Growth and MFS Value Equity, respectively. For the period November 28, 1997
(commencement of operations) to December 31, 1997, Aetna paid Scudder Kemper
$150,126 on behalf of Scudder International Growth and T. Rowe Price $135,087
on behalf of T. Rowe Price Growth Equity.
THE ADMINISTRATIVE SERVICES AGREEMENT
Pursuant to an Administrative Services Agreement, between the Fund and Aetna,
Aetna has agreed to provide all administrative services in support of the
Portfolios. Each Portfolio's costs and fees are limited to its advisory fee and
the administrative services charge. The Administrative Services Agreement will
remain in effect until June 30, 1999. Thereafter, it will remain in effect from
year-to-year if approved annually by a majority of the Directors. It may be
terminated by either party on sixty days' written notice.
CUSTODIAN
Investors Bank, Boston, Massachusetts, serves as custodian for the assets of
the Portfolios. The custodian does not participate in determining the
investment policies of a Portfolio or in deciding which securities are
purchased or sold by a Portfolio.
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP, 99 High Street, Boston, Massachusetts 02110 serve as
independent auditors to the Portfolios. KPMG Peat Marwick LLP provides audit
services, assistance and consultation in connection with SEC filings.
PRINCIPAL UNDERWRITER
The Fund has entered into an Underwriting Agreement (the "Agreement") pursuant
to which Aetna, as agent, serves as principal underwriter for the continuous
offering of shares of the Portfolios. The Agreement, dated August 25, 1997,
will remain in effect until June 30, 1999. Thereafter, the Agreement may be
continued from year to year if approved annually by the Directors or by a vote
of holders of a majority of each Portfolio's shares, and by a vote of a
majority of the Directors who are not "interested persons" of Aetna, or the
Fund, appearing in person at a meeting called for the purpose of approving such
Agreement. The Agreement terminates automatically upon assignment, and may be
terminated at any time on sixty (60) days' written notice by the Directors or
Aetna or by vote of holders of a majority of a Portfolio's shares without the
payment of any penalty. The Underwriter has agreed to use its best efforts to
solicit orders for the purchase of shares of all the Portfolios, although it is
not obligated to sell any particular amount of shares. Aetna shall be
responsible for any costs of printing and distributing prospectuses and
Statements necessary to offer and sell the shares, and such other sales
literature, reports, forms and
Portfolio Partners, Inc. 27
<PAGE>
advertisements as it elects to prepare. The Fund shall be responsible for the
costs of registering the shares with the SEC and for the costs of preparing
prospectuses and Statements and such other documents as are required to
maintain the registration of the shares with the SEC. Aetna does not receive
compensation for providing services under the Agreement.
BROKERAGE ALLOCATION AND TRADING POLICIES
Subject to the direction of the Directors, Aetna and the Subadvisers have
responsibility for making the Portfolios' investment decisions, for effecting
the execution of trades for the Portfolios and for negotiating any brokerage
commissions thereof. It is the policy of Aetna and the Subadvisers to obtain
the best quality of execution available, giving attention to net price
(including commissions where applicable), execution capability (including the
adequacy of a brokerage firm's capital position), research and other services
related to execution; the relative priority given to these factors will depend
on all of the circumstances regarding a specific trade. In implementing their
trading policy, Aetna and the Subadvisers may place a Portfolio's transactions
with such brokers or dealers and for execution in such markets as, in the
opinion of the Adviser or Subadvisers, will lead to the best overall quality of
execution for the Portfolio.
Aetna and the Subadvisers may receive a variety of brokerage and research
services from brokerage firms that execute trades on behalf of the Portfolios.
These services may benefit the Adviser and/or advisory clients other than the
Portfolios. These brokerage and research services include, but are not limited
to, quantitative and qualitative research information and purchase and sale
recommendations regarding securities and industries, analyses and reports
covering a broad range of economic factors and trends, statistical data
relating to the strategy and performance of the Portfolio and other investment
companies and accounts, services related to the execution of trades in a
Portfolio's securities and advice as to the valuation of securities. Aetna and
the Subadvisers may consider the quantity and quality of such brokerage and
research services provided by a brokerage firm along with the nature and
difficulty of the specific transaction in negotiating commissions for trades in
a Portfolio's securities and may pay higher commission rates than the lowest
available when it is reasonable to do so in light of the value of the brokerage
and research services received generally or in connection with a particular
transaction. Aetna's and the Subadvisers' policy in selecting a broker to
effect a particular transaction is to seek to obtain "best execution," which
means prompt and efficient execution of the transaction at the best obtainable
price with payment of commissions that are reasonable in relation to the value
of the services provided by the broker, taking into consideration research and
other services provided. When either Aetna or the Subadvisers believe that more
than one broker can provide best execution, preference may be given to brokers
who provide additional services to Aetna or the Subadvisers.
Consistent with securities laws and regulations, Aetna and the Subadvisers may
obtain such brokerage and research services regardless of whether they are paid
for (1) by means of commissions; or (2) by means of separate, non-commission
payments. Aetna's and the Subadvisers' judgment as to whether and how they will
obtain the specific brokerage and research services will be based upon their
analysis of the quality of such services and the cost (depending upon the
various methods of payment which may be offered by brokerage firms) and will
reflect Aetna's and the Subadvisers' opinion as to which services and which
means of payment are in the long-term best interests of a Portfolio. The
Portfolios have no present intention to effect any brokerage transactions in
portfolio securities through Aetna, the Subadvisers or any affiliate thereof.
If a Portfolio enters into a transaction with any such person in the future,
the transaction will comply with Rule 17e-1 under the 1940 Act. Certain
officers of Aetna and the Subadvisers also manage the securities portfolios of
their own and their affiliates. Further, Aetna and the Subadvisers also act as
investment adviser to other investment companies registered under the 1940 Act
and other client accounts.
To the extent Aetna or the Subadvisers desire to buy or sell the same publicly
traded security at or about the same time for more than one client, the
purchases or sales will normally be aggregated, and allocated as nearly as
practicable on a pro rata basis in proportion to the amounts to be purchased or
sold by each, taking into consideration the respective investment objectives of
the clients, the relative size of portfolio
28 Portfolio Partners, Inc.
<PAGE>
holdings of the same or comparable securities, availability of cash for
investment, and the size of their respective investment commitments. Prices are
averaged for those transactions. In some cases, this procedure may adversely
affect the size of the position obtained for or disposed of by a Portfolio or
the price paid or received by a Portfolio.
The Board of Directors has adopted a policy allowing trades to be made between
a Portfolio and a registered investment company or series thereof that is an
affiliated person of the Portfolio (and certain noninvestment company
affiliated persons) provided the transactions meet the terms of Rule 17a-7
under the 1940 Act. Pursuant to this policy, a Portfolio may buy a security
from or sell another security to another registered investment company or
private advisory account advised by Aetna or by one of the Subadvisers. The
Board of Directors, Aetna and each Subadviser have also adopted Codes of Ethics
governing personal trading by persons who manage, or who have access to trading
activity by, a Portfolio. The Codes allow trades to be made in securities that
may be held by a Portfolio. However, they prohibit a person from taking
advantage of Portfolio trades or from acting on inside information.
During the period November 28, 1997 (commencement of operations) to December
31, 1997 the aggregate amount of brokerage commissions paid by the Portfolios
was as follows: MFS Emerging Equities: $453,702, MFS Reserach Growth: $433,626,
MFS Value Equity: $214,636, Scudder International Growth: $66,716, and T. Rowe
Price Growth Equity: $380,629.
DESCRIPTION OF SHARES
The Articles of Incorporation authorize the Fund to issue one billion shares of
common stock with a par value of $.001 per share. The shares are nonassessable,
transferable, redeemable and do not have pre-emptive rights or cumulative
voting rights. The shares may be issued as whole or fractional shares and are
uncertificated.
The shares may be issued in series or portfolios having separate assets and
separate investment objectives and policies. Upon liquidation of a Portfolio,
its shareholders are entitled to share pro rata in the net assets of that
portfolio available for distribution to shareholders.
NET ASSET VALUE
Securities of the Portfolios are generally valued by independent pricing
services. The values for equity securities traded on registered securities
exchanges are based on the last sale price or, if there has been no sale that
day, at the mean of the last bid and asked price on the exchange where the
security is principally traded. Securities traded over-the-counter are valued
at the last sale price or at the last bid price if there has been no sale that
day. Short-term debt securities that have a maturity date of more than sixty
days will be valued at the mean of the last bid and asked price obtained from
principal market makers. Long-term debt securities are valued at the mean of
the last bid and asked price of such securities obtained from a broker that is
a market-maker in the securities or a service providing quotations based upon
the assessment of market-makers in those securities.
Options are valued at the mean of the last bid and asked price on the exchange
where the option is primarily traded. Stock index futures contracts and
interest rate futures contracts are valued daily at a settlement price based on
rules of the exchange where the futures contract is primarily traded.
PERFORMANCE INFORMATION
Total return of a Portfolio for periods longer than one year is determined by
calculating the actual dollar amount of investment return on a $1,000
investment in the Portfolio made at the beginning of each period, then
calculating the average annual compounded rate of return which would produce
the same investment return on the $1,000 investment over the same period. Total
return for a period of one year or less is equal to the actual investment
return on a $1,000 investment in the Portfolio during that period. Total
Portfolio Partners, Inc. 29
<PAGE>
return calculations assume that all Portfolio distributions are reinvested at
net asset value on their respective reinvestment dates.
The performance of the Portfolios is commonly measured as total return. An
average annual compounded rate of return ("T") may be computed by using the
redeemable value at the end of a specified period ("ERV") of a hypothetical
initial investment of $1,000 ("P") over a period of time ("n") according to the
formula:
P ( 1 + T ) (n) = ERV
Investors should not consider this performance data as an indication of the
future performance of any of the Portfolios.
The performance of a Portfolio may, from time to time, be compared to that of
other mutual funds tracked by mutual fund rating services, to broad groups of
comparable mutual funds, or to unmanaged indices which may assume investment of
dividends but generally do not reflect deductions for administrative and
management costs.
Each Portfolio is newly organized and has a limited performance record.
However, each Portfolio has the same investment objective and follows
substantially the same investment strategies as a mutual fund or funds whose
shares are currently sold to the public or through variable insurance products
and is/are managed by MFS, Scudder Kemper or T. Rowe Price, as applicable. The
Prospectus contains historical performance information of these similarly
managed funds. Advertisements for Portfolio Partners, Inc. may also include
historical performance of these similarly managed Funds, subject to regulatory
approval.
A Portfolio's investment results will vary from time to time depending upon
market conditions, the composition of its investment portfolio and its
operating expenses. The total return for a Portfolio should be distinguished
from the rate of return of a corresponding division of the insurance company's
separate account, which rate will reflect the deduction of additional insurance
charges, including mortality and expense risk charges, and will therefore be
lower. Accordingly, performance figures for a Portfolio will only be included
in sales literature if comparable performance figures for the corresponding
division of the separate account accompany the sales literature. VA Contract
owners and VLI Policy owners should consult their contract and policy
prospectuses, respectively, for further information. Each Portfolio's results
also should be considered relative to the risks associated with its investment
objectives and policies.
TAX STATUS
The following is only a summary of certain additional tax considerations
generally affecting each Portfolio that are not described in the Prospectus.
The discussions below and in the Prospectus are not intended as substitutes for
careful tax planning.
The holders of variable life insurance policies or annuity contracts should not
be subject to tax with respect to distributions made on, or redemptions of,
Portfolio shares, assuming that the variable life insurance policies and
annuity contracts qualify under the Internal Revenue Code of 1986, as amended
(the "Code"), as life insurance or annuities, respectively, and that the
shareholders are treated as owners of the Portfolio shares. See "Qualification
of Segregated Asset Accounts." Thus, this summary does not describe the tax
consequences to a holder of a life insurance policy or annuity contract as a
result of the ownership of such policies or contracts. Policy or contract
holders must consult the prospectuses of their respective policies or contracts
for information concerning the federal income tax consequences of owning such
policies or contracts. This summary also does not describe the tax consequences
applicable to the owners of the Portfolio shares because the Portfolio shares
will be sold only to insurance companies. Thus, purchasers of Portfolio shares
must consult their own tax advisers regarding the federal, state, and local tax
consequences of owning Portfolio shares.
30 Portfolio Partners, Inc.
<PAGE>
Qualification as a Regulated Investment Company
Each Portfolio has elected to be taxed as a regulated investment company under
Subchapter M of the Code. As a regulated investment company, a Portfolio is not
subject to federal income tax on the portion of its net investment income
(i.e., taxable interest, dividends and other taxable ordinary income, net of
expenses) and capital gain net income (i.e., the excess of capital gains over
capital losses) that it distributes to shareholders, provided that it
distributes at least 90% of its investment company taxable income (i.e., net
investment income and the excess of net short-term capital gain over net
long-term capital loss) for the taxable year (the "Distribution Requirement"),
and satisfies certain other requirements of the Code that are described in this
section. Distributions by a Portfolio made during the taxable year or, under
specified circumstances, within twelve months after the close of the taxable
year, will be considered distributions of income and gains of the taxable year
and will therefore satisfy the Distribution Requirement.
In addition to satisfying the Distribution Requirement, a regulated investment
company must derive at least 90% of its gross income from dividends, interest,
certain payments with respect to securities loans, gains from the sale or other
disposition of stock or securities or foreign currencies (to the extent such
currency gains are directly related to the regulated investment company's
principal business of investing in stock or securities) and other income
(including but not limited to gains from options, futures or forward contracts)
derived with respect to its business of investing in such stock, securities or
currencies (the "Income Requirement").
In general, gain or loss recognized by a Portfolio on the disposition of an
asset will be a capital gain or loss. However, gain recognized on the
disposition of a debt obligation purchased by a Portfolio at a market discount
(generally, at a price less than its principal amount) will be treated as
ordinary income to the extent of the portion of the market discount which
accrued during the period of time the Portfolio held the debt obligation. In
addition, under the rules of Code Section 988, gain or loss recognized on the
disposition of a debt obligation denominated in a foreign currency or an option
with respect thereto (but only to the extent attributable to changes in foreign
currency exchange rates), and gain or loss recognized on the disposition of a
foreign currency forward contract, futures contract, option or similar
financial instrument, or of foreign currency itself, except for regulated
futures contracts or non-equity options subject to Code Section 1256 (unless
the Portfolio elects otherwise), will generally be treated as ordinary income
or loss.
In general, for purposes of determining whether capital gain or loss recognized
by a Portfolio on the disposition of an asset is long-term or short-term, the
holding period of the asset may be affected if (as applicable, depending on the
type of Portfolio) (1) the asset is used to close a "short sale" (which
includes for certain purposes the acquisition of a put option) or is
substantially identical to another asset so used, (2) the asset is otherwise
held by the Portfolio as part of a "straddle" (which term generally excludes a
situation where the asset is stock and the Portfolio grants a qualified covered
call option (which, among other things, must not be deep-in-the-money) with
respect thereto) or (3) the asset is stock and the Portfolio grants an
in-the-money qualified covered call option with respect thereto. However, for
purposes of the Short-Short Gain Test, the holding period of the asset disposed
of may be reduced only in the case of clause (1) above. In addition, a
Portfolio may be required to defer the recognition of a loss on the disposition
of an asset held as part of a straddle to the extent of any unrecognized gain
on the offsetting position.
Any gain recognized by a Portfolio on the lapse of, or any gain or loss
recognized by a Portfolio from a closing transaction with respect to, an option
written by the Portfolio will be treated as a short-term capital gain or loss.
For purposes of the Short-Short Gain Test, the holding period of an option
written by a Portfolio will commence on the date it is written and end on the
date it lapses or the date a closing transaction is entered into. Accordingly,
a Portfolio may be limited in its ability to write options which expire within
three months and to enter into closing transactions at a gain within three
months of the writing of options.
Certain transactions that may be engaged in by a Portfolio (such as regulated
futures contracts, certain foreign currency contracts, and options on stock
indexes and futures contracts) will be subject to special tax treatment as
"Section 1256 contracts." Section 1256 contracts are treated as if they are
sold for their
Portfolio Partners, Inc. 31
<PAGE>
fair market value on the last day of the taxable year, even though a taxpayer's
obligations (or rights) under such contracts have not terminated (by delivery,
exercise, entering into a closing transaction or otherwise) as of such date.
Any gain or loss recognized as a consequence of the year-end deemed disposition
of Section 1256 contracts is taken into account for the taxable year together
with any other gain or loss that was previously recognized upon the termination
of Section 1256 contracts during that taxable year. Any capital gain or loss
for the taxable year with respect to Section 1256 contracts (including any
capital gain or loss arising as a consequence of the year-end deemed sale of
such contracts) is generally treated as 60% long-term capital gain or loss and
40% short-term capital gain or loss. A Portfolio, however, may elect not to
have this special tax treatment apply to Section 1256 contracts that are part
of a "mixed straddle" with other investments of the Portfolio that are not
Section 1256 contracts. Under Treasury regulations, gains arising from Section
1256 contracts will be treated for purposes of the Short-Short Gain Test as
being derived from securities held for not less than three months if the gains
arise as a result of a constructive sale under Code Section 1256.
A Portfolio may enter into notional principal contracts, including interest
rate swaps, caps, floors, and collars. Under Treasury regulations, in general,
the net income or deduction from a notional principal contract for a taxable
year is included in or deducted from income for that taxable year. The net
income or deduction from a notional principal contract for a taxable year
equals the total of all the periodic payments (generally, payments that are
payable or receivable at fixed periodic intervals of one year or less during
the entire term of the contract) that are recognized from that contract for the
taxable year and all of the non-periodic payments (including premiums for caps,
floors and collars) that are recognized from that contract for the taxable
year. No portion of a payment by a party to a notional principal contract is
recognized prior to the first year to which any portion of a payment by the
counterparty relates. A periodic payment is recognized ratable over the period
to which it relates. In general, a non-periodic payment must be recognized over
the term of the notional principal contract in a manner that reflects the
economic substance of the contract. A non-periodic payment that relates to an
interest rate swap, cap, floor or collar shall be recognized over the term of
the contract by allocating it in accordance with the values of a series of
cash-settled forward or option contracts that reflect the specified index and
notional principal amount upon which the notional principal contract is based
(or, in the case of a swap, a cap or floor, under an alternative method
contained in the regulations).
A Portfolio may purchase securities of certain foreign investment funds or
trusts which constitute passive foreign investment companies ("PFIC") for
federal income tax purposes. If a Portfolio invests in a PFIC, it may elect to
treat the PFIC as a qualified electing fund (a "QEF") in which event the
Portfolio will each year have ordinary income equal to its pro rata share of
the PFIC's ordinary earnings for the year and long-term capital gain equal to
its pro rata share of the PFIC's net capital gain for the year, regardless of
whether the Portfolio receives distributions of any such ordinary earnings or
capital gain from the PFIC. If a Portfolio does not elect to treat the PFIC as
a QEF, then in general (1) any gain recognized by the Portfolio upon sale or
other disposition of its interest in the PFIC or any excess distribution
received by the Portfolio from the PFIC will be allocated ratably over the
Portfolio's holding period of its interest in the PFIC, (2) the portion of such
gain or excess distribution so allocated to the year in which the gain is
recognized or the excess distribution is received shall be included in the
Portfolio's gross income for such year as ordinary income (and the distribution
of such portion by the Portfolio to shareholders will be taxable as an ordinary
income dividend, but such portion will not be subject to tax at the Portfolio
level), (3) the Portfolio shall be liable for tax on the portions of such gain
or excess distribution so allocated to prior years in an amount equal to, for
each such prior year, the sum of (i) the amount of gain or excess distribution
allocated to such prior year multiplied by the highest tax rate (individual or
corporate) in effect for such prior year and (ii) interest on the amount
determined under clause (i) for the period from the due date for filing a
return for such prior year until the date for filing a return for the year in
which the gain is recognized or the excess distribution is received at the
rates and methods applicable to underpayments of tax for such period, and (4)
the distribution by the portfolio to shareholders of the portions of such gain
or excess distribution so allocated to prior years (net of the tax payable by
the Portfolio thereon) will again be taxable to the shareholders as an ordinary
income dividend.
32 Portfolio Partners, Inc.
<PAGE>
Under proposed Treasury Regulations a Portfolio can elect to recognize as gain
the excess, as of the last day of its taxable year, of the fair market value of
each share of PFIC stock over the Portfolio's adjusted tax basis in that share
("mark to market gain"). Such mark to market gain will constitute ordinary
income and will not be subject to the Short-Short Gain Test, and the
Portfolio's holding period with respect to such PFIC stock will commence on the
first day of the next taxable year. If a Portfolio makes such election in the
first taxable year it holds PFIC stock, it will not incur the tax described in
the previous paragraph.
Treasury Regulations permit a regulated investment company, in determining its
investment company taxable income and net capital gain (i.e., the excess of net
long-term capital gain over net short-term capital loss) for any taxable year,
to elect (unless it has made a taxable year election for excise tax purposes as
discussed below) to treat all or any part of any net capital loss, any net
long-term capital loss or any net foreign currency loss incurred after October
31 as if it had been incurred in the succeeding year.
In addition to satisfying the requirements described above, each Portfolio must
satisfy an asset diversification test in order to qualify as a regulated
investment company. Under this test, at the close of each quarter of a
Portfolio's taxable year, at least 50% of the value of the Portfolio's assets
must consist of cash and cash items, U.S. Government securities, securities of
other regulated investment companies, and securities of other issuers (as to
each of which the Portfolio has not invested more than 5% of the value of the
Portfolio's total assets in securities of such issuer and does not hold more
than 10% of the outstanding voting securities of such issuer), and no more than
25% of the value of its total assets may be invested in the securities of any
one issuer (other than U.S. Government securities and securities of other
regulated investment companies), or of two or more issuers which the Portfolio
controls and which are engaged in the same or similar trades or businesses or
related trades or businesses. Generally, an option (call or put) with respect
to a security is treated as issued by the issuer of the security not the issuer
of the option. However, with regard to forward currency contracts, there does
not appear to be any formal or informal authority which identifies the issuer
of such instrument.
If for any taxable year a Portfolio does not qualify as a regulated investment
company, all of its taxable income (including its net capital gain) will be
subject to tax at regular corporate rates without any deduction for
distributions to shareholders, and such distributions will be taxable to the
shareholders as ordinary dividends to the extent of the Portfolio's current and
accumulated earnings and profits. Such distributions generally will be eligible
for the dividends-received deduction in the case of corporate shareholders.
Qualification of Segregated Asset Accounts
Under Code Section 817(h), a variable life insurance or annuity contract will
not be treated as a life insurance policy or annuity contract, respectively,
under the Code, unless the segregated asset account upon which such contract or
policy is based is "adequately diversified." A segregated asset account will be
adequately diversified if it satisfies one of two alternative tests set forth
in the Treasury Regulations. Specifically, the Treasury Regulations provide
that, except as permitted by the "safe harbor" discussed below, as of the end
of each calendar quarter (or within 30 days thereafter) no more than 55% of the
segregated asset account's total assets may be represented by any one
investment, no more than 70% by any two investments, no more than 80% by any
three investments and no more than 90% by any four investments. For this
purpose, all securities of the same issuer are considered a single investment,
and each U.S. Government agency and instrumentality is considered a separate
issuer. As a safe harbor, a segregated asset account will be treated as being
adequately diversified if the diversification requirements under Subchapter M
are satisfied and no more than 55% of the value of the account's total assets
are cash and cash items, U.S. Government securities and securities of other
regulated investment companies. In addition, a segregated asset account with
respect to a variable life insurance contract is treated as adequately
diversified to the extent of its investment in securities issued by the United
States Treasury.
For purposes of these alternative diversification tests, a segregated asset
account investing in shares of a regulated investment company will be entitled
to "look through" the regulated investment company to its pro rata portion of
the regulated investment company's assets, provided that the shares of such
regulated investment company are held only by insurance companies and certain
fund managers (a "Closed Fund").
Portfolio Partners, Inc. 33
<PAGE>
If the segregated asset account upon which a variable contract is based is not
"adequately diversified" under the foregoing rules for each calendar quarter,
then (a) the variable contract is not treated as a life insurance contract or
annuity contract under the Code for all subsequent periods during which such
account is not "adequately diversified" and (b) the holders of such contract
must include as ordinary income the "income on the contract" for each taxable
year. Further, the income on a life insurance contract for all prior taxable
years is treated as received or accrued during the taxable year of the
policyholder in which the contract ceases to meet the definition of a "life
insurance contract" under the Code. The "income on the contract" is, generally,
the excess of (i) the sum of the increase in the net surrender value of the
contract during the taxable year and the cost of the life insurance protection
provided under the contract during the year, over (ii) the premiums paid under
the contract during the taxable year. In addition, if a Portfolio does not
constitute a Closed Fund, the holders of the contracts and annuities which
invest in the Portfolio through a segregated asset account may be treated as
owners of Portfolio shares and may be subject to tax on distributions made by
the Portfolio.
Excise Tax on Regulated Investment Companies
A 4% non-deductible excise tax is imposed on a regulated investment company
that fails to distribute in each calendar year an amount equal to 98% of
ordinary taxable income for the calendar year and 98% of capital gain net
income for the one-year period ended on October 31 of such calendar year (or,
at the election of a regulated investment company having a taxable year ending
November 30 or December 31, for its taxable year (a "taxable year election")).
The balance of such income must be distributed during the next calendar year.
For the foregoing purposes, a regulated investment company is treated as having
distributed any amount on which it is subject to income tax for any taxable
year ending in such calendar year.
For purposes of the excise tax, a regulated investment company shall (1) reduce
its capital gain net income (but not below its net capital gain) by the amount
of any net ordinary loss for the calendar year, and (2) exclude foreign
currency gains and losses from Section 998 transactions incurred after October
31 of any year (or after the end of its taxable year if it has made a taxable
year election) in determining the amount of ordinary taxable income for the
current calendar year (and, instead, include such gains and losses in
determining ordinary taxable income for the succeeding calendar year).
Each Portfolio intends to make sufficient distributions or deemed distributions
of its ordinary taxable income and capital gain net income prior to the end of
each calendar year to avoid liability for the excise tax. However, investors
should note that a Portfolio may in certain circumstances be required to
liquidate portfolio investments to make sufficient distributions to avoid
excise tax liability.
Effect of Future Legislation; Local Tax Considerations
The foregoing general discussion of U.S. federal income tax consequences is
based on the Code and the Treasury Regulations issued thereunder as in effect
on the date of this Statement of Additional Information. Future legislative or
administrative changes or court decisions may significantly change the
conclusions expressed herein, and any such changes or decisions may have a
retroactive effect with respect to the transactions contemplated herein.
Rules of state and local taxation often differ from the rules for U.S. federal
income taxation described above. Shareholders are urged to consult their tax
advisers as to the consequences of state and local tax rules affecting
investment in a Portfolio.
VOTING RIGHTS
Shareholders are entitled to one vote for each full share held (and fractional
votes for fractional shares held) and will vote in the election of Directors
(to the extent hereinafter provided) and on other matters submitted to the vote
of the shareholders. The shareholders of the Portfolios are the insurance
companies for their separate accounts using the Portfolios to fund VA Contracts
and VLI Policies. The insurance company depositors of the separate accounts
pass voting rights attributable to shares held for VA Contracts
34 Portfolio Partners, Inc.
<PAGE>
and VLI Policies through to Contract owners and Policy owners as described in
the prospectus for the applicable VA Contract or VLI Policy.
The Directors of the Fund shall continue to hold office until the Annual
Meeting of Shareholders next held after his/her election, or until his/her
successor is duly elected and qualified. No meeting of the shareholders for the
purpose of electing Directors will be held. However, Shareholders holding a
majority of outstanding shares may request a special meeting for the purpose of
removing and replacing a Director. Vacancies on the Board occurring between any
such meetings shall be filled by the remaining Directors. Any Director may also
voluntarily resign from office. Voting rights are not cumulative, so that the
holders of more than 50% of the shares voting in the election of Directors can,
if they choose to do so, elect all the Directors of the Fund, in which event
the holders of the remaining shares will be unable to elect any person as a
Director.
Special shareholder meetings may be called when requested in writing by the
holders of not less than 50% of the outstanding voting shares of a Portfolio.
Any request must state the purposes of the proposed meeting.
The Articles may be amended if duly advised by a majority of the Directors and
approved by the affirmative vote of a majority of votes entitled to be cast.
FINANCIAL STATEMENTS
The financial statements and independent auditors' report thereon for MFS
Emerging Equities, MFS Research Growth, MFS Value Equity, Scudder International
Growth and T. Rowe Price Growth Equity are incorporated by reference to the
Fund's Annual Report as of and for the period ended December 31, 1997 and have
been incorporated by reference into this Statement.
Portfolio Partners, Inc. 35
<PAGE>
APPENDIX A
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 RATING SERVICE
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.
36
<PAGE>
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.
FITCH INVESTORS SERVICES, INC.
AAA: Bonds considered to be investment grade and of the highest
quality. The obligor has an exceptionally strong ability to pay interest and
repay principal which is unlikely to be affected by reasonably foreseeable
events.
AA: Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is very
strong although not quite as strong as bonds rated "AAA". Because bonds rated in
the "AAA" and "AA" categories are not significantly vulnerable to foreseeable
future developments, short-term debt of these issuers is generally rated "F-1+".
A: Bonds considered to be investment grade and of high credit quality.
The obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB: Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is considered
to be adequate. Adverse changes in economic conditions, however, are more likely
to have adverse impact on these bonds, and therefore impair timely payment. The
likelihood that the ratings of these bonds will fall below investment grade is
higher than for bonds with higher ratings.
BB: Bonds are considered speculative. The obligor's ability to pay
interest and repay principal may be affected over time by adverse economic
changes. However, business and financial alternatives can be identified which
could assist the obligor in satisfying its debt service requirements.
B: Bonds are considered highly speculative. While bonds in this class
are currently meeting debt service requirements, the probability of continued
timely payment of principal and interest reflects the obligor's limited margin
of safety and the need for reasonable business and economic activity throughout
the life of the issue.
CCC: Bonds have certain identifiable characteristics which, if not
remedied, may lead to default. The ability to meet obligations requires an
advantageous business and economic environment.
CC: Bonds are minimally protected. Default in payment of interest
and/or principal seems probable over time.
C: Bonds are in imminent default in payment of interest or principal.
Plus (+) Minus (-): Plus and minus signs are used with a rating symbol to
indicate the relative position of a credit within the rating category. Plus and
minus signs, however, are not used in the "AAA" category.
37
<PAGE>
NR: Indicates that Fitch does not rate the specific issue.
Conditional: A conditional rating is premised on the successful completion of a
project or the occurrence of a specific event.
Suspended: A rating is suspended when Fitch deems the amount of information
available from the issuer to be inadequate for rating purposes.
Withdrawn: A rating will be withdrawn when an issue matures or is called or
refinanced, and, at Fitch's discretion, when an issuer fails to furnish proper
and timely information.
FitchAlert: Ratings are placed on FitchAlert to notify investors of an
occurrence that is likely to result in a rating change and the likely direction
of such change. These are designated as "Positive", indicating a potential
upgrade, "Negative", for potential downgrade, or "Evolving", where ratings may
be raised or lowered. FitchAlert is relatively short-term, and should be
resolved within 12 months.
38
<PAGE>
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
a. FINANCIAL STATEMENTS
(1) Included in Part A:
-- Financial Highlights
(2) Included in Part B:
* Audited Financial Statements as of December 31, 1997, which include
the following:
Schedules of Investments as of December 31, 1997
Statement of Assets and Liabilities of each of the Portfolios as of
December 31, 1997
Statement of Operations of each of the Portfolios from November 28,
1997 (commencement of operations) to December 31, 1997
Statement of Changes in Net Assets of each of the Portfolios from
November 28, 1997 (commencement of operations) to December 31,
1997
Notes to Financial Statements
Independent Auditors' Report
* Incorporated by reference in Part B to the Fund's Annual Report
dated December 31, 1997, as filed electronically with the
Securities and Exchange Commission on February 25, 1998
(File No. 811-8319) (Accession Nos. 0000950146-98-000281).
<TABLE>
<CAPTION>
b. EXHIBITS
<S> <C> <C>
EX-99.B1 Articles of Incorporation(1)
EX-99.B2 By-laws(1)
EX-99.B3 Not Applicable
EX-99.B4 Not Applicable
EX-99.B5(a) Investment Advisory Agreement between Portfolio Partners, Inc. and Aetna Life
Insurance and Annuity Company ("Aetna")(2)
EX-99.B5(b) Subadvisory Agreement between Aetna and Massachusetts Financial Services
Company(2)
EX-99.B5(c) Subadvisory Agreement between Aetna and Scudder Kemper Investments, Inc.(2)
EX-99.B5(d) Subadvisory Agreement between Aetna and T. Rowe Price Associates, Inc.(2)
EX-99.B6 Underwriting Agreement between the Registrant and Aetna Life Insurance and
Annuity Company(2)
EX-99.B7 Not Applicable
EX-99.B8 Custodian Agreement(2)
EX-99.B9(a) Administrative Services Agreement(2)
EX-99.B9(b) License Agreement between Aetna and T. Rowe Price Associates, Inc.(1)
EX-99.B10 Opinion and Consent of Counsel(2)
EX-99.B11 Consent of Independent Auditors
EX-99.B12 Not Applicable
EX-99.B13 Agreement re: Initial Contribution to Working Capital(1)
EX-99.B14 Not Applicable
EX-99.B15 Not Applicable
EX-99.B16 Schedule for Computation of Performance Data(**)
EX-99.B17 (See Exhibit 27 below)
EX-99.B18 Not Applicable
EX-99.B19(a) Power of Attorney(2)
EX-99.B19(b) Power of Attorney(2)
27 Financial Data Schedules
</TABLE>
______________________________
** To be filed by amendment.
(1) Incorporated by reference to the Registrant's initial Registration
Statement on Form N-1A ("Registration Statement") filed July 31, 1997
(Accession No. 0000950146-97-001124).
(2) Incorporated by reference to Post-Effective Amendment No. 1 to the
Registration Statement on Form N-1A (File No. 333-32575), as filed
February 26, 1998 (Accession No. 0000950146-98-000287).
<PAGE>
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL
Registrant is a Maryland Corporation for which separate financial statements are
filed. As of April 1, 1998, Aetna Life Insurance and Annuity Company ("Aetna")
owned 100% of the Registrant's outstanding voting Securities.
A list of all persons directly or indirectly under common control with the
Registrant which indicates principal business of each such company referenced is
incorporated herein by reference to Item 26 of the Post-Effective Amendment No.
9 to the Registration Statement on Form N-4 (File No. 333-01107), as filed
electronically with the Securities and Exchange Commission on April 7, 1998
(Accession No. 0000950146-98-000564).
ITEM 26. NUMBER OF HOLDERS OF SECURITIES
Number of
Portfolio Record Holders
- --------- --------------
MFS Emerging Equities Portfolio ............................ 3
MFS Research Growth Portfolio .............................. 3
MFS Value Equity Portfolio ................................. 3
Scudder International Growth Portfolio ..................... 3
T. Rowe Price Growth Equity Portfolio ...................... 3
ITEM 27. INDEMNIFICATION
Article Ninth, Section (d) of the Registrant's Articles of Incorporation
provides for indemnification of directors and officers. In addition, the
Registrant's officers and directors will be covered under a directors and
officers errors and omissions liability insurance policy issued by Gulf
Insurance Company which expires on October 1, 1999.
Reference is also made to Section 2-418 of the Corporations and Associations
Article of the Annotated Code of Maryland which provides generally that (1) a
corporation may (but is not required to) indemnify its directors for judgments,
fines and expenses in proceedings in which the director is named a party solely
by reason of being a director, provided the director has not acted in bad faith,
dishonestly or unlawfully, and provided further that the director has not
received any "improper personal benefit"; and (2) that a corporation must
(unless otherwise provided in the corporation's charter or articles of
incorporation) indemnify a director if he or she is successful on the merits in
defending a suit against him or her by reason of being a director. The statutory
provisions are not exclusive; a corporation may provide greater indemnification
rights than those provided by statute.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
Aetna Life Insurance and Annuity Company ("Aetna") is an insurance company that
issues variable and fixed annuities and variable and universal life insurance
policies, and acts as principal underwriter and depositor for separate accounts
holding assets for variable contracts and policies. Aetna acts as the investment
adviser, administrator and principal underwriter for the Registrant and as
principal underwriter for Aetna Variable Fund, Aetna Income Shares, Aetna
Variable Encore Fund, Aetna Balanced VP, Inc. (formerly Aetna Investment
Adviser's Fund, Inc.), Aetna Generation Portfolios, Inc., Aetna GET Fund and
Aetna Variable Portfolios, Inc. (all management investment companies registered
under the Investment Company Act of 1940 (1940 Act). Additionally, Aetna acts as
the principal underwriter and depositor for Variable Annuity Account B of Aetna,
Variable Annuity Account C of Aetna, Variable Annuity Account G of Aetna, and
Variable Life Account B of Aetna (separate accounts of Aetna registered as unit
investment trusts under the 1940 Act). Aetna is also the principal underwriter
for Variable Annuity Account I of Aetna Insurance Company of America (AICA) (a
separate account of AICA registered as a unit investment trust under the 1940
Act).
The following table summarizes the business connections of the directors and
principal officers of the Investment Adviser.
<TABLE>
<CAPTION>
Positions and Offices Other Principal Position(s) Held
Name with Investment Adviser Since Oct. 31, 1995/Addresses*/**
- ---- ----------------------- ---------------------------------
<S> <C> <C>
<PAGE>
Thomas J. McInerney Director and President President (since August 1997) -- Aetna Retirement
Services, Inc.; Director and President (since
September 1997) -- Aetna Life Insurance and Annuity
Company; Director and President (since September 1997) --
Aetna Retirement Holdings, Inc.; Director and President
(since September 1997) -- Aetna Insurance Company of America;
Executive Vice President (since August 1997) -- Aetna Inc.;
Vice President, Strategy (March 1997 - August 1997) -- Aetna
Inc.; Vice President, Marketing and Sales (December 1996 -
March 1997) -- Aetna U.S. Healthcare; Vice President, National
Accounts (April 1996 - December 1996) -- Aetna U.S. Healthcare;
Vice President, Strategy, Finance & Administration (July 1995 -
April 1996) -- Aetna Inc.
Shaun P. Mathews Director and Senior Vice Director (since December 1997) -- Aetna
President Retirement Holdings, Inc.; Director (since December
1996) -- Aetna Insurance Agency Holding Company,
Inc.; Senior Vice President (since September 1997),
Vice President (February 1996 - September 1997),
Senior Vice President (March 1991 - February 1996)
-- Aetna Life Insurance and Annuity Company;
Director and Senior Vice President (since July 1993)
-- Aetna Investment Services, Inc.; Director and
Senior Vice President (since September 1992) --
Aetna Insurance Company of America.
Catherine H. Smith Director, Senior Vice Director, Senior Vice President (since March 1998) --
President and Chief Aetna Retirement Holdings, Inc.; Director (since March 1998)
Financial Officer Aetna Insurance Company of America; Director, Senior Vice
President and Chief Financial Officer (since February 1998)
-- Aetna Life Insurance and Annuity Company; Chief Financial
Officer (since February 1998) -- Aetna Retirement Services,
Inc.; Vice President, Strategy, Finance and Administration,
Financial Relations (September 1996 - February 1998) -- Aetna Inc.;
Chief of Staff, Health/Group Life, Strategy and Communication
(April 1993 - September 1996) -- Aetna U.S. Healthcare; Managing
Director, Finance and Administration, Corporate Planning (October
1990 - April 1993) -- Aetna Inc.
Robert D. Friedhoff Senior Vice President Director (February 1998 - March 1998) and Senior Vice President
(since February 1998) -- Aetna Life Insurance and Annuity
Company; Managing Director (November 1997 - January 1998) --
Price Waterhouse, LLP; Executive Vice President (February 1979 -
March 1997) -- Sallie Mae.
Frederick D. Kelsven Vice President and Chief Vice President and Chief Compliance Officer (since
Compliance Officer October 1996) -- Aetna Life Insurance and Annuity Company;
Director of Compliance (January 1985 - September
1996) -- Nationwide Life Insurance Company.
John Y. Kim Senior Vice President Director, President, Chief Executive Officer,
Chief Investment Officer (since December 1995) --
Aeltus Investment Management, Inc.; Director
February 1995 - March 1998) -- Aetna Life Insurance and
Annuity Company; Senior Vice President (since September
1994) -- Aetna Life Insurance and Annuity Company.
<PAGE>
Deborah Koltenuk Vice President and Treasurer, Vice President and Treasurer, Corporate Controller
Corporate Controller (since February 1996) -- Aetna Life Insurance and Annuity
Company; Vice President, Investment Planning and Financial
Reporting (April 1996 - July 1996) -- Aetna Life Insurance
Company; Vice President, Investment Planning and
Financial Reporting (October 1994 - April 1996) --
The Aetna Casualty and Surety Company and The Standard
Fire and Insurance Company; Vice President and Treasurer,
Corporate Controller (since March 1996) -- Aetna Retirement
Holdings, Inc.
Kirk P. Wickman Vice President, General Vice President, General Counsel and Corporate
Counsel and Corporate Secretary (since March 1997) -- Aetna Retirement
Secretary Holdings, Inc.; Vice President, General Counsel
and Corporate Secretary (since November 1996) --
Aetna Life Insurance and Annuity Company; Vice
President and Counsel (June 1992 - November 1996) --
Aetna Life Insurance Company.
</TABLE>
* Except with respect to Mr. Kim, the principal business address of
each person named is 151 Farmington Avenue, Hartford, Connecticut
06156. The address for Mr. Kim is 242 Trumbull Street, Hartford,
Connecticut 06103-1205.
** Certain officers and directors of the Investment Adviser currently
hold (or have held during the past two years) other positions with
affiliates of the Registrant which are not deemed to be principal
positions.
The following information relates to the Subadvisers of the Registrant.
Massachusetts Financial Services Company (MFS)
- ----------------------------------------------
MFS serves as investment adviser to the following open-end Funds
comprising the MFS Family of Funds: Massachusetts Investors Trust, Massachusetts
Investors Growth Stock Fund, MFS Growth Opportunities Fund, MFS Government
Securities Fund, MFS Government Limited Maturity Fund, MFS Series Trust I (which
has thirteen series: MFS Managed Sectors Fund, MFS Cash Reserve Fund, MFS World
Asset Allocation Fund, MFS Aggressive Growth Fund, MFS Research Growth and
Income Fund, MFS Core Growth Fund, MFS Equity Income Fund, MFS Special
Opportunities Fund, MFS Convertible Securities Fund, MFS Blue Chip Fund, MFS New
Discovery Fund, MFS Science and Technology Fund and MFS Research International
Fund), MFS Series Trust II (which has four series: MFS Emerging Growth Fund, MFS
Capital Growth Fund, MFS Intermediate Income Fund and MFS Gold & Natural
Resources Fund), MFS Series Trust III (which has two series: MFS High Income
Fund and MFS Municipal High Income Fund), MFS Series Trust IV (which has four
series: MFS Money Market Fund, MFS Government Money Market Fund, MFS Municipal
Bond Fund and MFS OTC Fund), MFS Series Trust V (which has two series: MFS Total
Return Fund and MFS Research Fund), MFS Series Trust VI (which has three series:
MFS World Total Return Fund, MFS Utilities Fund and MFS World Equity Fund), MFS
Series Trust VII (which has two series: MFS World Governments Fund and MFS Value
Fund), MFS Series Trust VIII (which has two series: MFS Strategic Income Fund
and MFS World Growth Fund), MFS Series Trust IX (which has three series: MFS
Bond Fund, MFS Limited Maturity Fund and MFS Municipal Limited Maturity Fund),
MFS Series Trust X (which has four series: MFS Government Mortgage Fund,
MFS/Foreign & Colonial Emerging Markets Equity Fund, MFS/Foreign & Colonial
International Growth Fund and MFS/Foreign & Colonial International Growth and
Income Fund), and MFS Municipal Series Trust (which has 16 series: MFS Alabama
Municipal Bond Fund, MFS Arkansas Municipal Bond Fund, MFS California Municipal
Bond Fund, MFS Florida Municipal Bond Fund, MFS Georgia Municipal Bond Fund, MFS
Maryland Municipal Bond Fund, MFS Massachusetts Municipal Bond Fund, MFS
Mississippi Municipal Bond Fund, MFS New York Municipal Bond Fund, MFS North
Carolina Municipal Bond Fund, MFS Pennsylvania
<PAGE>
Municipal Bond Fund, MFS South Carolina Municipal Bond Fund, MFS Tennessee
Municipal Bond Fund, MFS Virginia Municipal Bond Fund, MFS West Virginia
Municipal Bond Fund and MFS Municipal Income Fund) (the "MFS Funds"). The
principal business address of each of the aforementioned Funds is 500 Boylston
Street, Boston, Massachusetts 02116.
MFS also serves as investment adviser of the following no-load,
open-end Funds: MFS Institutional Trust ("MFSIT") (which has seven series), MFS
Variable Insurance Trust ("MVI") (which has twelve series) and MFS Union
Standard Trust ("UST"). The principal business address of each of the
aforementioned Funds is 500 Boylston Street, Boston, Massachusetts 02116.
In addition, MFS serves as investment adviser to the following
closed-end Funds: MFS Municipal Income Trust, MFS Multimarket Income Trust, MFS
Government Markets Income Trust, MFS Intermediate Income Trust, MFS Charter
Income Trust and MFS Special Value Trust (the "MFS Closed-End Funds"). The
principal business address of each of the MFS closed-end Funds is 500 Boylston
Street, Boston, Massachusetts 02116.
Lastly, MFS serves as investment adviser to MFS/Sun Life Series Trust
("MFS/SL"), Money Market Variable Account, High Yield Variable Account, Capital
Appreciation Variable Account, Government Securities Variable Account, World
Government Variable Account, Total Return Variable Account and Managed Sectors
Variable Account. The principal business address of each of the aforementioned
funds is One Sun Life Executive Park, Wellesley Hills, Massachusetts 02181.
MFS International Ltd. ("MIL"), a limited liability company organized
under the laws of Bermuda and a subsidiary of MFS, whose principal business
address is Cedar House, 41 Cedar Avenue, Hamilton HM12 Bermuda, serves as
investment adviser to and distributor for MFS American Funds (which has six
portfolios: MFS American Funds-U.S. Equity Fund, MFS American Funds-U.S.
Emerging Growth Fund, MFS American Funds-U.S. High Yield Bond Fund, MFS American
Funds-U.S. Dollar Reserve Fund, MFS American Funds-Charter Income Fund and MFS
American Fund-U.S. Research Fund) (the "MIL Funds"). The MIL Funds are organized
in Luxembourg and qualify as an undertaking for collective investments in
transferable securities (UCITS). The principal business address of the MIL Funds
is 47, Boulevard Royal, L-2449 Luxembourg.
MIL also serves as investment adviser to and distributor for MFS
Meridian U.S. Government Bond Fund, MFS Meridian Charter Income Fund, MFS
Meridian Global Government Fund, MFS Meridian U.S. Emerging Growth Fund, MFS
Meridian Global Equity Fund, MFS Meridian Limited Maturity Fund, MFS Meridian
World Growth Fund, MFS Meridian Money Market Fund, MFS Meridian World Total
Return Fund, MFS Meridian U.S. Equity Fund, MFS Meridian Research Fund, MFS
Meridian U.S. High Yield Fund and MFS Emerging Markets Debt Fund" (collectively
the "MFS Meridian Funds"). Each of the MFS Meridian Funds is organized as an
exempt company under the laws of the Cayman Islands. The principal business
address of each of the MFS Meridian Funds is P.O. Box 309, Grand Cayman, Cayman
Islands, British West Indies.
MFS International (U.K.) Ltd. ("MIL-UK"), a private limited company
registered with the Registrar of Companies for England and Wales whose current
address is 4 John Carpenter Street, London, England ED4Y 0NH, is involved
primarily in marketing and investment research activities with respect to
private clients and the MIL Funds and the MFS Meridian Funds.
MFS Fund Distributors, Inc. ("MFD"), a wholly owned subsidiary of MFS,
serves as distributor for the MFS Funds, MVI, UST and MFSIT.
Clarendon Insurance Agency, Inc. ("CIAI"), a wholly owned subsidiary of
MFS, serves as distributor for certain life insurance and annuity contracts
issued by Sun Life Assurance Company of Canada (U.S.).
<PAGE>
MFS Service Center, Inc. ("MFSC"), a wholly owned subsidiary of MFS,
serves as shareholder servicing agent to the MFS Funds, the MFS Closed-End
Funds, MFSIT, MVI and UST.
MFS Institutional Advisors, Inc. ("MFSI"), a wholly owned subsidiary of
MFS, provides investment advice to substantial private clients.
MFS Retirement Services, Inc. ("RSI"), a wholly owned subsidiary of
MFS, markets MFS products to retirement plans and provides administrative and
record keeping services for retirement plans.
MFS
---
The Directors of MFS are Jeffrey L. Shames, Arnold D. Scott, Donald A.
Stewart and John D. McNeil. Mr. Shames is the President, Mr. Scott is a Senior
Executive Vice President and Secretary, Bruce C. Avery, William S. Harris,
William W. Scott, Jr., Patricia A. Zlotin, John W. Ballen, Thomas J. Cashman,
Jr., Joseph W. Dello Russo and Kevin R. Parke are Executive Vice Presidents,
Stephen E. Cavan is a Senior Vice President, General Counsel and an Assistant
Secretary, Robert T. Burns is a Senior Vice President, Associate General Counsel
and an Assistant Secretary of MFS, and Thomas B. Hastings is a Vice President
and Treasurer of MFS.
Massachusetts Investors Trust
-----------------------------
Massachusetts Investor Growth Stock Fund
----------------------------------------
MFS Growth Opportunities Fund
-----------------------------
MFS Government Securities Fund
------------------------------
MFS Series Trust I
------------------
MFS Series Trust V
------------------
MFS Series Trust VI
-------------------
MFS Series Trust X
------------------
MFS Government Limited Maturity Fund
------------------------------------
Stephen E. Cavan is the Secretary, W. Thomas London is the Treasurer,
James O. Yost, Vice President of MFS, is the Assistant Treasurer, James R.
Bordewick, Jr., Senior Vice President and Associate General Counsel of MFS, is
the Assistant Secretary.
MFS Series Trust II
-------------------
Leslie J. Nanberg, Senior Vice President of MFS, is a Vice President,
Stephen E. Cavan is the Secretary, W. Thomas London is the Treasurer, James O.
Yost is the Assistant Treasurer, and James R. Bordewick, Jr., is the Assistant
Secretary.
MFS Government Markets lncome Trust
-----------------------------------
MFS Intermediate Income Trust
-----------------------------
Leslie J. Nanberg, Senior Vice President of MFS, is a Vice President,
Stephen E. Cavan is the Secretary, W. Thomas London is the Treasurer, James O.
Yost is the Assistant Treasurer, and James R. Bordewick, Jr., is the Assistant
Secretary.
MFS Series Trust III
--------------------
James T. Swanson, Robert J. Manning, Cynthia M. Brown and Joan S.
Batchelder, Senior Vice Presidents of MFS, and Bernard Scozzafava, Vice
President of MFS are Vice Presidents, Sheila Burns-Magnan, Assistant Vice
President of MFS, and Daniel E. McManus, Vice President of MFS, are Assistant
Vice Presidents, Stephen E. Cavan is the Secretary, W. Thomas
<PAGE>
London is the Treasurer, James O. Yost is the Assistant Treasurer, and James R.
Bordewick, Jr., is the Assistant Secretary.
MFS Series Trust IV
-------------------
MFS Series Trust IX
-------------------
Robert A. Dennis and Geoffrey L. Kurinsky, Senior Vice Presidents of
MFS, are Vice Presidents, Stephen E. Cavan is the Secretary, W. Thomas London is
the Treasurer, James O. Yost is the Assistant Treasurer and James R. Bordewick,
Jr., is the Assistant Secretary.
MFS Series Trust VII
--------------------
Leslie J. Nanberg and Stephen C. Bryant, Senior Vice Presidents of MFS,
are Vice Presidents, Stephen E. Cavan is the Secretary, W. Thomas London is the
Treasurer, James O. Yost is the Assistant Treasurer and James R. Bordewick, Jr.,
is the Assistant Secretary.
MFS Series Trust VIII
---------------------
Jeffrey L. Shames, Leslie J. Nanberg, Patricia A. Zlotin, James T.
Swanson and John D. Laupheimer, Jr., Vice President of MFS, are Vice Presidents,
Stephen E. Cavan is the Secretary, W. Thomas London is the Treasurer, James O.
Yost is the Assistant Treasurer and James R. Bordewick, Jr., is the Assistant
Secretary.
MFS Municipal Series Trust
--------------------------
Cynthia M. Brown and Robert A. Dennis are Vice Presidents, David B.
Smith, Geoffrey L. Schechter and David R. King, Vice Presidents of MFS, are Vice
Presidents, Daniel E. McManus, Vice President of MFS, is an Assistant Vice
President, Stephen E. Cavan is the Secretary, W. Thomas London is the Treasurer,
James O. Yost is the Assistant Treasurer and James R. Bordewick, Jr., is the
Assistant Secretary.
MFS Variable Insurance Trust
----------------------------
MFS Union Standard Trust
------------------------
MFS Institutional Trust
-----------------------
Stephen E. Cavan is the Secretary, W. Thomas London is the Treasurer,
James O. Yost is the Assistant Treasurer and James R. Bordewick, Jr. is the
Assistant Secretary.
MFS Municipal Income Trust
--------------------------
Cynthia M. Brown and Robert J. Manning are Vice Presidents, Stephen E.
Cavan is the Secretary, W. Thomas London is the Treasurer, James O. Yost is the
Assistant Treasurer and James R. Bordewick, Jr., is the Assistant Secretary.
MFS Multimarket Income Trust
----------------------------
MFS Charter Income Trust
------------------------
Leslie J. Nanberg and James T. Swanson are Vice Presidents, Stephen E.
Cavan is the Secretary, W. Thomas London is the Treasurer, James O. Yost, Vice
President of MFS, is the Assistant Treasurer and James R. Bordewick, Jr., is the
Assistant Secretary.
<PAGE>
MFS Special Value Trust
-----------------------
Jeffrey L. Shames and Robert J. Manning are Vice Presidents, Stephen E.
Cavan is the Secretary, W. Thomas London is the Treasurer, James O. Yost is the
Assistant Treasurer and James R. Bordewick, Jr., is the Assistant Secretary.
MFS/Sun Life Series Trust
-------------------------
John D. McNeil, Chairman and Director of Sun Life Assurance Company of
Canada, is the Chairman, Stephen E. Cavan is the Secretary, W. Thomas London is
the Treasurer, James O. Yost, is the Assistant Treasurer and James R. Bordewick
Jr., is the Assistant Secretary,
Money Market Variable Account
-----------------------------
High Yield Variable Account
---------------------------
Capital Appreciation Variable Account
-------------------------------------
Government Securities Variable Account
--------------------------------------
Total Return Variable Account
-----------------------------
World Governments Variable Account
----------------------------------
Managed Sectors Variable Account
--------------------------------
John D. McNeil is the Chairman, Stephen E. Cavan is the Secretary, and
James R. Bordewick, Jr., is the Assistant Secretary.
MIL
---
Arnold D. Scott and Jeffrey L. Shames are Directors, Thomas J. Cashman,
Jr., an Executive Vice President of MFS, is a Senior Vice President, Stephen E.
Cavan is a Director, Senior Vice President and the Clerk, James F. Bordewick,
Jr. is a Director, Vice President and an Assistant Clerk, Robert T. Burns is an
Assistant Clerk, Joseph W. Dello Russo, Executive Vice President and Chief
Financial Officer of MFS, is the Treasurer and Thomas D. Hastings is the
Assistant Treasurer.
MIL-UK
------
Arnold D. Scott, Jeffrey L. Shames, and James R. Bordewick, Jr., are
Directors. Stephen E. Cavan is a Director and the Secretary, James E. Russell is
the Treasurer, and Robert T. Burns is the Assistant Secretary.
MIL Funds
---------
Richard B. Bailey, John A. Brindle, Richard W. S. Baker and William F.
Waters are Directors, Stephen E. Cavan is the Secretary, W. Thomas London is the
Treasurer, James O. Yost is the Assistant Treasurer and James R. Bordewick, Jr.,
is the Assistant Secretary.
MFS Meridian Funds
------------------
Richard B. Bailey, John A. Brindle, Richard W. S. Baker, Arnold D.
Scott, Jeffrey L. Shames and William F. Waters are Directors, Stephen E. Cavan
is the Secretary, W. Thomas London is the Treasurer, James R. Bordewick, Jr., is
the Assistant Secretary and James O. Yost is the Assistant Treasurer.
<PAGE>
MFD
---
Arnold D. Scott and Jeffrey L. Shames are Directors, William W. Scott,
Jr., an Executive Vice President of MFS, is the President, Stephen E. Cavan is
the Secretary, Robert T. Burns is the Assistant Secretary, Joseph W. Dello Russo
is the Treasurer, and Thomas B. Hastings is the Assistant Treasurer.
CIAI
----
Arnold D. Scott and Jeffery L. Shames are Directors, Cynthia Orcott is
President, Bruce C. Avery is the Vice President, Joseph W. Dello Russo is the
Treasurer, Thomas B. Hastings is the Assistant Treasurer, Stephen E. Cavan is
the Secretary, and Robert T. Burns is the Assistant Secretary.
MFSC
----
Arnold D. Scott and Jeffrey L. Shames are Directors, Joseph A.
Recomendes, a Senior Vice President of MFS, is Vice Chairman and a Director,
Janet A. Clifford is the Executive Vice President, Joseph W. Dello Russo is the
Treasurer, Thomas B. Hastings is the Assistant Treasurer, Stephen E. Cavan is
the Secretary, and Robert T. Burns is the Assistant Secretary.
MFSI
----
Jeffrey L. Shames and Arnold D. Scott are Directors, Thomas J. Cashman,
Jr., is the President and a Director, Leslie J. Nanberg is a Senior Vice
President, a Managing Director and a Director, George F. Bennett, Carol A.
Corley, John A. Gee, Brianne Grady and Kevin R. Parke are Senior Vice Presidents
and Managing Directors, Joseph W. Dello Russo is the Treasurer, Thomas B.
Hastings is the Assistant Treasurer and Robert T. Burns is the Secretary.
RSI
---
William W. Scott, Jr. and Bruce Avery are Directors, Arnold D. Scott is
the Chairman and a Director, Joseph W. Dello Russo is the Treasurer, Thomas B.
Hastings is the Assistant Treasurer, Stephen E. Cavan is the Secretary, Robert
T. Burns is the Assistant Secretary and Sharon A. Brovelli and Martin E.
Beaulieu are Senior Vice Presidents.
In addition, the following persons, Directors or officers of MFS, have
the affiliations indicated:
Donald A. Stewart President and a Director, Sun Life Assurance
Company of Canada, Sun Life Centre, 150 King
Street West, Toronto, Ontario, Canada (Mr.
Stewart is also an officer and/or Director
of various subsidiaries and affiliates of
Sun Life)
<PAGE>
John D. McNeil Chairman, Sun Life Assurance Company of
Canada, Sun Life Centre, 150 King Street
West, Toronto, Ontario, Canada (Mr. McNeil
is also an officer and/or Director of
various subsidiaries and affiliates of Sun
Life)
Joseph W. Dello Russo Director of Mutual Fund Operations,
The Boston Company, Exchange Place, Boston,
Massachusetts (until August, 1994)
Scudder Kemper Investments, Inc.
- --------------------------------
Scudder Kemper Investments, Inc. has stockholders and employees who are
denominated officers but do not as such have corporation-wide responsibilities.
Such persons are not considered officers for the purpose of this Item 28.
<TABLE>
<CAPTION>
Name Business and Other Connections of Board of Directors
---- ----------------------------------------------------
<S> <C>
Stephen R. Beckwith Treasurer and Chief Financial Officer, Scudder Kemper Investments, Inc.
(investment adviser)**
Lynn S. Birdsong Director and Corporate Vice President, Scudder Kemper Investments, Inc.
(investment adviser)**
Supervisory Director, The Latin America Income and Appreciation Fund N.V.
(investment company) +
Supervisory Director, The Venezuela High Income Fund N.V. (investment company) xx
Supervisory Director, Scudder Mortgage Fund (investment company)+
Supervisory Director, Scudder Floating Rate Funds for Mortgage Securities
I & II (investment company)+
Director, Scudder, Stevens & Clark (Luxembourg) S.A. (investment manager)#
Trustee, Scudder Funds Trust (investment company)*
President & Director, Scudder High Income Fund (investment company)**
Director, Canadian High Income Fund (investment company)#
Director, Hot Growth Companies Fund (investment company)#
President, The Japan Fund, Inc. (investment company)**
Supervisory Director, Sovereign High Yield Investment Company (investment company)+
<PAGE>
Kathryn L. Quirk General Counsel & Secretary, Scudder Kemper Investments, Inc. (investment adviser)**
Vice President, Scudder Fund, Inc. (investment company)**
Vice President, Scudder Institutional Fund, Inc. (investment company)**
Vice President & Assistant Secretary, Scudder Global High Income Opportunities Fund, Inc.
(investment company)**
Vice President & Assistant Secretary, The Korea Fund, Inc. (investment company)**
Vice President & Assistant Secretary, The Argentina Fund, Inc. (investment
company)**
Vice President & Assistant Secretary, The Brazil Fund, Inc. (investment company)**
Vice President & Assistant Secretary, Scudder International Fund, Inc. (investment
company)**
Vice President & Assistant Secretary, Scudder Equity Trust (investment company)**
Vice President & Assistant Secretary, Scudder Securities Trust (investment company)*
Vice President & Assistant Secretary, Scudder Funds Trust (investment company)**
Vice President & Assistant Secretary, Scudder Global Fund, Inc.(investment
company)**
Vice President & Assistant Secretary, Montgomery Street Income Securities, Inc.
(investment company)(o)
Vice President & Assistant Secretary, Scudder Mutual Funds, Inc. (investment
company)**
Vice President & Assistant Secretary, Scudder New Europe Fund, Inc. (investment
company)**
Vice President & Assistant Secretary, Scudder Variable Life Investment Fund (investment
company)*
Vice President & Assistant Secretary, Scudder Spain and Portugal Fund, Inc.
(investment company)**
Vice President & Secretary, AARP Growth Trust (investment company)**
Vice President & Secretary, AARP Income Trust (investment company)**
<PAGE>
Vice President & Secretary, AARP Tax Free Income Trust (investment company)**
Vice President & Secretary, AARP Cash Investment Funds (investment company)**
Vice President, Scudder GNMA Fund (investment company)*
Vice President & Secretary, The Japan Fund, Inc. (investment company)**
Director, Vice President & Secretary, Scudder Fund Accounting Corporation (in-house
fund accounting agent)*
Senior Vice President, Scudder Investor Services, Inc. (broker/dealer)*
Director, Vice President & Secretary, Scudder Realty Holdings Corporation (a real
estate holding company)*
Vice President & Assistant Secretary, Scudder Precious Metals, Inc.(xxx)
Cornelia M. Small Director and Corporate Vice President, Scudder Kemper Investments, Inc.
(investment adviser)**
Vice President, Scudder Global Fund, Inc. (investment company)**
Vice President, AARP Cash Investment Funds (investment company)**
Vice President, AARP Growth Trust (investment company)**
Vice President, AARP Income Trust (investment company)**
Vice President, AARP Tax Free Income Trust (investment company)**
Edmond D. Villani Director, President & Chief Executive Officer, Scudder Kemper Investments, Inc.
(investment adviser)**
Director, Scudder Realty Advisors, Inc. (realty investment adviser)(x)
Supervisory Director, Scudder Mortgage Fund (investment company)+
Director, Scudder, Stevens & Clark Japan, Inc. (investment adviser)###
Supervisory Director, Scudder Floating Rate Funds for Mortgage Securities & II
(investment company)+
Director, Indosuez High Yield Bond Fund (investment company) Luxembourg
Director, IBJ Global Investment Management S.A. (Luxembourg investment
management company) Luxembourg, Grand-Duchy of Luxembourg
</TABLE>
<TABLE>
<S> <C> <C>
* Two International Place, Boston, MA
x 333 South Hope Street, Los Angeles, CA
** 345 Park Avenue, New York, NY
++ Two Prudential Plaza, 180 N. Stetson Avenue, Chicago, IL
+++ 5 Industrial Way, Salem, NH
o 101 California Street, San Francisco, CA
# Societe Anonyme, 47, Boulevard Royal, L-2449 Luxembourg, R.C. Luxembourg B 34.564
+ John B. Gorsiraweg 6, Willemstad Curacao, Netherlands Antilles
xx De Ruyterkade 62, P.O. Box 812, Willemstad Curacao, Netherlands Antilles
## 2 Boulevard Royal, Luxembourg
<PAGE>
*** B1 2F3F 248 Section 3, Nan King East Road, Taipei, Taiwan
xxx Grand Cayman, Cayman Islands, British West Indies
oo 20-5, Ichibancho, Chiyoda-ku, Tokyo, Japan
### 1-7, Kojimachi, Chiyoda-ku, Tokyo, Japan
@ c/o Sinclair Hendersen Limited, 23 Cathedral Yard, Exeter, Devon
</TABLE>
T. Rowe Price Associates, Inc. (T. Rowe Price)
- ----------------------------------------------
Listed below are the Directors of T. Rowe Price who have other substantial
businesses, professions, vocations, or employment aside from that of Director of
T. Rowe Price:
James E. Halbkat, Jr., President of U.S. Monitor Corporation,
a provider of public response systems. Mr. Halbkat's address
is P.O. Box 23109, Hilton Head Island, South Carolina 29925.
Richard L. Menschel, limited partner of the Goldman Sachs
Group, L.P. Mr. Menschel's address is 85 Broad Street, 2nd
Floor, New York, New York 10004.
John W. Rosenblum, Dean of the Jepson School of Leadership
Studies at the University of Richmond, and a Director of:
Cheaspeake Corporation, a manufacturer of paper products,
Camdus Corp., a provider of printing and communication
services, Comdial Corporation, a manufacturer of telephone
systems for business, Cone Mills Corporation, a textiles
producer. Mr. Rosenblum's address is University of Richmond,
Virginia 23173.
Robert L. Strickland, Chairman of Loew's Companies, Inc., a
retailer of specialty home supplies, and a Director of
Hannaford Bros, Co., a food retailer. Mr. Strickland's address
is 604 Piedmont Building, Winston-Salem, North Carolina 27104.
Phillip C. Walsh, Consultant to Cyprus Amax Minerals Company,
Englewood, Colorado. Mr. Walsh's address is Pleasant Valley,
Peapack, New Jersey 07977.
Ann Marie Whittemore, partner of the law firm of McGuire,
Woods, Battle and Boothe and is a director of Owens & Minor,
Inc.; USF&G Corporation, the James River Corporation of
Virginia. Mrs. Whittemore's address is One James Center,
Richmond, Virginia 23219.
With the exception of Messrs. Halbkat, Menschel, Rosenblum, Strickland, Walsh,
and Mrs. Whittemore (listed above), all Directors of T. Rowe Price are employees
of T. Rowe Price. Listed below are the additional Directors and the principal
executive officer of T. Rowe Price:
James S. Riepe, M. David Testa, Henry H. Hopkins, Charles P.
Smith, Peter Van Dyke, James A. C. Kennedy II, John H.
Laporte, Jr., William T. Reynolds, Brian C. Rogers, George J.
Collins
George A. Roche, Chairman of the Board and President of T.
Rowe Price.
The address of each of the above individuals is 100 East Pratt Street,
Baltimore, Maryland 21202.
ITEM 29. PRINCIPAL UNDERWRITER
(a) In addition to serving as the principal underwriter, investment adviser
and administrator for the Registrant, Aetna also acts as the principal
underwriter for
<PAGE>
Aetna Variable Fund, Aetna Income Shares, Aetna Variable Encore Fund,
Aetna Balanced VP, Inc. (formerly Aetna Investment Advisers Fund,
Inc.), Aetna Generation Portfolios, Inc., Aetna GET Fund and Aetna
Variable Portfolios, Inc. (all management investment companies
registered under the 1940 Act). Additionally, Aetna is the principal
underwriter and depositor for Variable Annuity Account B of Aetna,
Variable Annuity Account C of Aetna, Variable Annuity Account G of
Aetna and Variable Life Account B of Aetna (separate accounts of Aetna
registered as unit investment trusts under the 1940 Act). Aetna is also
the principal underwriter for Variable Annuity Account I of AICA (a
separate account of AICA registered as a unit investment trust under
the 1940 Act).
(b) The following are the directors and principal officers of the
Underwriter:
<TABLE>
<CAPTION>
Name and Principal Positions and Offices Positions and Offices
Business Address* with Principal Underwriter with Registrant
- ----------------- -------------------------- ---------------
<S> <C> <C>
Thomas J. McInerney Director and President None
Shaun P. Mathews Director and Senior Vice President None
Catherine H. Smith Director, Senior Vice President and None
Chief Financial Officer
Robert D. Friedhoff Senior Vice President None
Frederick D. Kelsven Vice President and Chief Compliance Officer None
John Y. Kim Senior Vice President None
Deborah Koltenuk Vice President and Treasurer, Corporate None
Controller
Kirk P. Wickman Vice President, General Counsel and None
Corporate Secretary
</TABLE>
* Except with respect to Mr. Kim, the principal business address of all
directors and officers listed is 151 Farmington Avenue, Hartford,
Connecticut 06156. The address of Mr. Kim is 242 Trumbull Street,
Hartford, Connecticut 06103-1205.
(c) Not applicable.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
As required by Section 31(a) of the 1940 Act and the rules thereunder, the
Registrant and its investment adviser, Aetna, maintain physical possession of
each account, book or other documents at its principal place of business located
at:
151 Farmington Avenue
Hartford, Connecticut 06156.
<PAGE>
Shareholder records are maintained by the transfer agent, Investors Bank & Trust
Company, 200 Clarendon Street, Boston, Massachusetts 02116.
ITEM 31. MANAGEMENT SERVICES
Not Applicable
ITEM 32. UNDERTAKINGS
The Registrant undertakes that if requested by the holders of at least 10% of a
Portfolio's outstanding shares, the Registrant 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 as if Section
16(c) of the Investment Company Act of 1940 applied.
The Registrant undertakes to furnish to each person to whom a prospectus is
delivered a copy of the Registrant's latest annual report to shareholders, upon
request and without charge.
Insofar as indemnification for liability arising under the Securities Act of
1933 (1933 Act) may be permitted to directors, officers and controlling persons
of the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
1933 Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question of whether such
indemnification by it is against public policy as expressed in the 1933 Act and
will be governed by the final adjudication of such issue.
<PAGE>
SIGNATURES
Pursuant to the Securities Act of 1933 and the Investment Company Act of 1940,
Portfolio Partners, Inc. certifies that it meets the requirements of Securities
Act Rule 485(b) for effectiveness of this Post-Effective Amendment to the
Registration Statement on Form N-1A (File No. 333-32575) and has duly caused
this Post-Effective Amendment to be signed on its behalf by the undersigned
thereto duly authorized, in the City of Hartford and State of Connecticut on the
17th day of April, 1998.
PORTFOLIO PARTNERS, INC.
By: /s/ Laurie M. LeBlanc*
-------------------------------
Laurie M. LeBlanc
President
Pursuant to the requirements of the Securities Act of 1933 this Post-Effective
Amendment No. 2 to the Registration Statement has been signed below by the
following persons on April 17, 1998 in the capacities indicated.
SIGNATURE TITLE
/s/ Laurie M. LeBlanc* Director and President
----------------------- (Principal and Executive
Laurie M. LeBlanc Officer)
/s/ Martin T. Conroy* Director, Vice President,
---------------------- Chief Financial Officer
Martin T. Conroy and Treasurer
/s/ John V. Boyer* Director
----------------------
John V. Boyer
/s/ Richard A. Johnson* Director
----------------------
Richard A. Johnson
/s/ Philip M. Markert* Director
----------------------
Philip M. Markert
*By: /s/ Susan C. Mosher
----------------------
Susan C. Mosher
Attorney-in-Fact
(Executed pursuant to Powers of Attorney dated December 10, 1997 and
February 12, 1998 and filed with the Securities and Exchange Commission on
February 26, 1998 (Accession No. 0000950146-98-000287)).
<PAGE>
PORTFOLIO PARTNERS, INC.
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Exhibit Page
- ----------- ------- ----
<S> <C> <C>
EX-99.B5(a) Investment Advisory Agreement between
Portfolio Partners, Inc. and Aetna *
EX-99.B5(b) Subadvisory Agreement between Aetna and
Massachusetts Financial Services Company *
EX-99.B5(c) Subadvisory Agreement between Aetna and
Scudder Kemper Investments, Inc. *
EX-99.B5(d) Subadvisory Agreement between Aetna and
T. Rowe Price Associates, Inc. *
EX-99.B6 Underwriting Agreement between the Registrant
and Aetna Life Insurance and Annuity Company *
EX-99.B8 Custodian Agreement *
EX-99.B9 Administrative Services Agreement *
EX-99.B-10 Opinion and Consent of Counsel *
EX-99.B11 Consent of Independent Auditors ____
EX-99.B16 Schedule for Computation of Performance Data **
EX-99.B19(a) Power of Attorney *
EX-99.B19(b) Power of Attorney *
EX-27 Financial Data Schedules ____
</TABLE>
- ---------------------------------
* Incorporated herein by reference
** To be filed by amendment
Consent of Independent Auditors
The Board of Directors and Shareholders
Portfolio Partners, Inc.:
We consent to the use of our report dated January 30, 1998 incorporated by
reference herein and to the references to our firm under the captions "FINANCIAL
HIGHLIGHTS" in the prospectus and "INDEPENDENT AUDITORS" in the statement of
additional information.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Boston, Massachusetts
April 17, 1998
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
This schedule contains summary financial information extracted from Portfolio
Partners, Inc. financial statements at December 31, 1997 and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<CIK> 0001039001
<NAME> MFS
<SERIES>
<NUMBER> 1
<NAME> MFS Emerging Equities Portfolio
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 756,263,198
<INVESTMENTS-AT-VALUE> 745,219,750
<RECEIVABLES> 469,025
<ASSETS-OTHER> 85,889,140
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 831,577,915
<PAYABLE-FOR-SECURITIES> 54,731,311
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 8,738,411
<TOTAL-LIABILITIES> 63,469,722
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 776,543,294
<SHARES-COMMON-STOCK> 17,899,936
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 1,629,226
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (1,143,817)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (8,920,510)
<NET-ASSETS> 768,108,193
<DIVIDEND-INCOME> 83,557
<INTEREST-INCOME> 2,120,093
<OTHER-INCOME> 0
<EXPENSES-NET> (574,424)
<NET-INVESTMENT-INCOME> 1,629,226
<REALIZED-GAINS-CURRENT> (1,143,817)
<APPREC-INCREASE-CURRENT> (8,920,510)
<NET-CHANGE-FROM-OPS> (8,435,101)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 19,024,246
<NUMBER-OF-SHARES-REDEEMED> (1,124,771)
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 768,088,193
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 482,568
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 574,424
<AVERAGE-NET-ASSETS> 758,539,266
<PER-SHARE-NAV-BEGIN> 43.39
<PER-SHARE-NII> 0.09
<PER-SHARE-GAIN-APPREC> (0.57)
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 42.91
<EXPENSE-RATIO> 0.81
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
This schedule contains summary financial information extracted from Portfolio
Partners, Inc. financial statements at December 31, 1997 and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<CIK> 0001039001
<NAME> MFS
<SERIES>
<NUMBER> 2
<NAME> MFS Research Growth Portfolio
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 391,424,116
<INVESTMENTS-AT-VALUE> 388,637,236
<RECEIVABLES> 49,246,971
<ASSETS-OTHER> 23,452,943
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 461,337,150
<PAYABLE-FOR-SECURITIES> 59,954,518
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,834,499
<TOTAL-LIABILITIES> 61,789,017
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 406,878,167
<SHARES-COMMON-STOCK> 41,145,690
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 81,976
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (4,625,200)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (2,786,810)
<NET-ASSETS> 399,548,133
<DIVIDEND-INCOME> 309,734
<INTEREST-INCOME> 84,868
<OTHER-INCOME> 0
<EXPENSES-NET> (312,626)
<NET-INVESTMENT-INCOME> 81,976
<REALIZED-GAINS-CURRENT> (4,625,200)
<APPREC-INCREASE-CURRENT> (2,786,810)
<NET-CHANGE-FROM-OPS> (7,330,034)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 41,744,286
<NUMBER-OF-SHARES-REDEEMED> (600,618)
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 399,528,133
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 257,457
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 312,626
<AVERAGE-NET-ASSETS> 394,839,470
<PER-SHARE-NAV-BEGIN> 9.89
<PER-SHARE-NII> 0.00
<PER-SHARE-GAIN-APPREC> (0.18)
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 9.71
<EXPENSE-RATIO> 0.85
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
This schedule contains summary financial information extracted from Portfolio
Partners, Inc. financial statements at December 31, 1997 and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<CIK> 0001039001
<NAME> MFS
<SERIES>
<NUMBER> 3
<NAME> MFS Value Equity Portfolio
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 124,600,362
<INVESTMENTS-AT-VALUE> 126,474,079
<RECEIVABLES> 518,141
<ASSETS-OTHER> 14,006,140
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 140,998,360
<PAYABLE-FOR-SECURITIES> 6,321,371
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 168,828
<TOTAL-LIABILITIES> 6,490,199
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 132,623,488
<SHARES-COMMON-STOCK> 4,497,589
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 241,611
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (223,629)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1,866,691
<NET-ASSETS> 134,508,161
<DIVIDEND-INCOME> 77,775
<INTEREST-INCOME> 273,515
<OTHER-INCOME> 0
<EXPENSES-NET> (109,679)
<NET-INVESTMENT-INCOME> 241,611
<REALIZED-GAINS-CURRENT> (223,629)
<APPREC-INCREASE-CURRENT> 1,866,691
<NET-CHANGE-FROM-OPS> 1,884,673
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 4,519,003
<NUMBER-OF-SHARES-REDEEMED> (22,092)
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 134,488,161
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 79,213
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 109,679
<AVERAGE-NET-ASSETS> 130,826,584
<PER-SHARE-NAV-BEGIN> 29.49
<PER-SHARE-NII> 0.05
<PER-SHARE-GAIN-APPREC> 0.37
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 29.91
<EXPENSE-RATIO> 0.90
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
This schedule contains summary financial information extracted from Portfolio
Partners, Inc. financial statements at December 31, 1997 and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<CIK> 0001039001
<NAME> MFS
<SERIES>
<NUMBER> 4
<NAME> Scudder International Growth Portfolio
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 350,842,864
<INVESTMENTS-AT-VALUE> 356,707,971
<RECEIVABLES> 7,497,354
<ASSETS-OTHER> 24,766,239
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 388,971,564
<PAYABLE-FOR-SECURITIES> 5,267,640
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 5,503,747
<TOTAL-LIABILITIES> 10,771,387
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 372,261,993
<SHARES-COMMON-STOCK> 26,828,266
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 40,929
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 41,533
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 5,855,722
<NET-ASSETS> 378,200,177
<DIVIDEND-INCOME> 293,707
<INTEREST-INCOME> 100,928
<OTHER-INCOME> 0
<EXPENSES-NET> (353,706)
<NET-INVESTMENT-INCOME> 40,929
<REALIZED-GAINS-CURRENT> 41,533
<APPREC-INCREASE-CURRENT> 5,855,722
<NET-CHANGE-FROM-OPS> 5,938,184
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 28,251,298
<NUMBER-OF-SHARES-REDEEMED> (1,424,473)
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 378,180,177
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 282,965
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 353,706
<AVERAGE-NET-ASSETS> 379,714,001
<PER-SHARE-NAV-BEGIN> 13.88
<PER-SHARE-NII> 0.00
<PER-SHARE-GAIN-APPREC> 0.22
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 14.10
<EXPENSE-RATIO> 1.00
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
This schedule contains summary financial information extracted from Portfolio
Partners, Inc. financial statements at December 31, 1997 and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<CIK> 0001039001
<NAME> MFS
<SERIES>
<NUMBER> 5
<NAME> T. Rowe Price Growth Equity Portfolio
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 364,594,397
<INVESTMENTS-AT-VALUE> 369,655,687
<RECEIVABLES> 2,621,148
<ASSETS-OTHER> 2,763,613
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 375,040,448
<PAYABLE-FOR-SECURITIES> 3,239,507
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 607,331
<TOTAL-LIABILITIES> 3,846,838
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 363,796,621
<SHARES-COMMON-STOCK> 8,512,069
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 532,313
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 1,797,504
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 5,067,172
<NET-ASSETS> 371,193,610
<DIVIDEND-INCOME> 347,296
<INTEREST-INCOME> 438,305
<OTHER-INCOME> 0
<EXPENSES-NET> (253,288)
<NET-INVESTMENT-INCOME> 532,313
<REALIZED-GAINS-CURRENT> 1,797,504
<APPREC-INCREASE-CURRENT> 5,067,172
<NET-CHANGE-FROM-OPS> 7,396,989
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 8,787,184
<NUMBER-OF-SHARES-REDEEMED> (275,583)
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 371,173,610
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 202,630
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 253,288
<AVERAGE-NET-ASSETS> 362,548,806
<PER-SHARE-NAV-BEGIN> 42.74
<PER-SHARE-NII> 0.06
<PER-SHARE-GAIN-APPREC> 0.81
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 43.61
<EXPENSE-RATIO> 0.75
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
