As filed with the Securities and Exchange File No. 2-51739
Commission on April 11, 1997 File No. 811-2514
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
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REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Post-Effective Amendment No. 52
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 37
AETNA VARIABLE FUND
151 Farmington Avenue RE4A, Hartford, Connecticut 06156
(860) 273-7834
Susan E. Bryant, Counsel
Aetna Life Insurance and Annuity Company
151 Farmington Avenue RE4A, Hartford, Connecticut 06156
(Name and Address of Agent for Service)
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It is proposed that this filing will become effective:
X on May 1, 1997 pursuant to paragraph (b) of Rule 485
--------
Aetna Variable Fund has registered an indefinite number of its securities under
the Securities Act of 1933 pursuant to Rule 24f-2 under the Investment Company
Act of 1940. The Registrant filed its Rule 24f-2 Notice for its fiscal year
ended December 31, 1996 on February 28, 1997.
<PAGE>
Aetna Variable Fund
Cross-Reference Sheet
<TABLE>
<CAPTION>
Form N-1A
Item No. Part A Caption in Prospectus
- -------- ------ ---------------------
<S> <C> <C>
1. Cover Page........................................... Cover Page
2. Synopsis............................................. Fee Table
3. Condensed Financial Information...................... Financial Highlights
4. General Description of Registrant.................... Investment Objective;
Investment Policies and Restrictions
5. Management of the Fund............................... Management of the Fund
5A. Management's Discussion of Fund Performance.......... Not applicable
6. Capital Stock and Other Securities................... General Information;
Tax Matters
7. Purchase of Securities Being Offered................. Management of the Fund; Purchase and
Redemption of Shares; Net Asset Value
8. Redemption or Repurchase............................. Purchase and Redemption of Shares; Net
Asset Value
9. Legal Proceedings.................................... Not applicable
<PAGE>
Form N-1A Caption in Statement of
Item No. Part B Additional Information
- -------- ------ ----------------------
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................... General Information and History;
Investment Objective and Policies of the Fund;
Description of Various Securities and
Investment Techniques
14. Management of the Fund............................... Trustees and Officers of the Fund
15. Control Persons and Principal Control Persons and Principal Shareholders of
Holders of Securities................................ the Fund
16. Investment Advisory and Other Services............... Investment Advisory Agreement; Subadvisory
Agreement; Administrative Services Agreement;
Custodian; Independent Auditors
17. Brokerage Allocation................................. Brokerage Allocation and Trading Policies
18. Capital Stock and Other Securities................... Description of Shares
19. Purchase, Redemption and Pricing of Securities Being Purchase and Redemption of Shares;
Offered.............................................. Net Asset Value
20. Tax Status........................................... Tax Matters
21. Underwriters......................................... Principal Underwriter
22. Calculation of Performance Data...................... Performance Information
23. Financial Statements................................. Financial Statements
</TABLE>
<PAGE>
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>
AETNA VARIABLE FUND
151 Farmington Avenue
Hartford, Connecticut 06156-8962
1-800-238-6263
Prospectus dated: May 1, 1997
Aetna Variable Fund (Fund) is a diversified, open-end management investment
company whose shares are currently available to (i) variable annuity or variable
life insurance separate accounts to fund variable annuity contracts (VA
Contracts) and variable life insurance policies (VLI Policies) issued by Aetna
Life Insurance and Annuity Company (Aetna) and its affiliates and (ii) other
shareholders of the Fund only through dividend reinvestment.
The Fund seeks to maximize total return through investments in a diversified
portfolio of common stocks and securities convertible into common stock. It is
anticipated that capital appreciation and investment income will both be major
factors in achieving total return. An investment in the Fund is neither insured
nor guaranteed by the U.S. Government.
This Prospectus sets forth concisely the information about the Fund that you
should know before investing. Additional information about the Fund is contained
in a Statement of Additional Information (Statement) dated May 1, 1997, which
has been filed with the Securities and Exchange Commission (Commission) and is
incorporated by reference. You can obtain a Statement, without charge, by
writing to the Fund at the address listed above or by calling the Fund at
1-800-238-6263. Additional information filed with the Commission can be obtained
by contacting the Commission at its Web Site (http://www.sec.gov).
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.
LIKE ALL MUTUAL FUNDS, THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR
HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
Please read this Prospectus and retain for future reference.
<PAGE>
TABLE OF CONTENTS
FEE TABLE ............................................. 3
FINANCIAL HIGHLIGHTS ................................. 4
INVESTMENT OBJECTIVE ................................. 5
INVESTMENT POLICIES AND RESTRICTIONS .................. 5
Investment Policies ................................. 5
Industry Concentration .............................. 5
Illiquid and Restricted Securities .................. 5
Foreign Securities ................................. 5
Depositary Receipts ................................. 5
Securities Lending ................................. 5
Repurchase Agreements .............................. 6
Borrowing .......................................... 6
High-Risk, High-Yield Securities ..................... 6
Options, Futures and Other Derivatives ............... 6
MANAGEMENT OF THE FUND .............................. 6
Trustees ............................................. 6
Investment Adviser ................................. 6
Subadviser .......................................... 7
Portfolio Management ................................. 7
Expenses and Fund Administration ..................... 7
GENERAL INFORMATION ................................. 7
Declaration of Trust ................................. 7
Capital Stock ....................................... 7
Shareholder Inquiries and Distribution Options ...... 7
Shareholder Meetings ................................. 7
Voting Rights ....................................... 7
Mixed Funding ....................................... 8
TAX MATTERS .......................................... 8
The Fund ............................................. 8
Fund Distributions ................................. 8
Share Redemptions .................................... 8
Tax Withholding .................................... 8
PURCHASE AND REDEMPTION OF SHARES ..................... 8
NET ASSET VALUE ....................................... 9
2 Aetna Variable Fund
<PAGE>
FEE TABLE
The Fee Table is provided to help the investor understand the various fees and
costs that an investor will bear directly or indirectly. It does not include
charges due under a VA Contract or a VLI Policy. VA Contract holders and
participants in retirement plans holding such contracts (Participants), and VLI
Policy holders should refer to the appropriate contract or policy prospectus for
a description of the contract or policy charges or fees.
Annual Fund Operating Expenses
(as a percentage of average net assets)
Management Fee* 0.50%
Other Expenses** 0.06%
TOTAL FUND OPERATING EXPENSES 0.56%
* Effective August 1, 1996, the Investment Advisory Fee was increased for the
Fund. The Advisory Fee shown above is not based on the actual figure for the
fiscal year ended December 31, 1996, but reflects the fee payable under the
new Investment Advisory Agreement.
**Effective May 1, 1996, the Company began providing administrative services to
the Fund and assuming the Fund's ordinary recurring direct costs under an
Administrative Services Agreement. The "Other Expenses" shown are not based on
actual figures for the year ended December 31, 1996, but reflect the fee
payable under that Agreement.
Hypothetical Illustration (Example)
THE FOLLOWING EXAMPLE IS PURELY HYPOTHETICAL. IT SHOULD NOT BE CONSIDERED A
REPRESENTATION OF PAST OR FUTURE EXPENSES OR EXPECTED RETURN. ACTUAL EXPENSES
AND/OR RETURN MAY BE GREATER OR LESS THAN THOSE SHOWN BELOW.
<TABLE>
<CAPTION>
1 year 3 years 5 years 10 years
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000
investment, assuming a 5% annual return and redemption at
the end of each time period: $6 $18 $31 $70
</TABLE>
Refer to the applicable VA Contract or VLI Policy prospectus for an explanation
of contract/policy charges and expenses.
Aetna Variable Fund 3
<PAGE>
FINANCIAL HIGHLIGHTS
The selected data presented below for, and as of the end of, each of the years
in the ten-year period ended December 31, 1996 are derived from the financial
statements of the Fund, which statements have been audited by KPMG Peat Marwick
LLP, independent auditors. The financial statements and the independent
auditors' report thereon, are included in the Fund's annual report dated
December 31, 1996, which is incorporated by reference into the Statement.
<TABLE>
<CAPTION>
Year Ended December 31
--------------------------------------------------------------
1996 1995+ 1994+ 1993+ 1992+
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net asset value per share,
beginning of year .................. $29.055 $26.229 $31.245 $31.602 $30.954
------- ------- ------- ------- -------
Income From Investment
Operations
Net investment income ............ .651 .724 .765 .822 .810
Net realized and unrealized gain
(loss) on investments ............ 6.446 7.620 (1.071) 1.287 1.229
------- ------- ------- ------- -------
Total from investment
operations ..................... 7.097 8.344 (.306) 2.109 2.039
------- ------- ------- ------- -------
Less Distributions
Dividends from net investment
income ........................... (.733) (.723) (.811) (.814) (.866)
Distribution from net realized
gains on investments ............... (3.028) (4.795) (3.899) (1.652) (.525)
------- ------- ------- ------- -------
Net asset value per share,
end of year ........................ $32.391 $29.055 $26.229 $31.245 $31.602
======= ======= ======= ======= =======
Total Return* ..................... 24.46% 32.25% (.96)% 6.74% 6.70%
Net assets, end of year (millions) $ 6,954 $ 5,662 $ 4,424 $ 4,988 $ 4,552
Ratio of total expenses to average
net assets ........................ .43% .29% .30% .29% .30%
Ratio of net investment income to
average net assets ............... 2.02% 2.42% 2.52% 2.57% 2.86%
Portfolio turnover rate ............ 85.03% 96.63% 84.27% 25.22% 16.26%
Average commission rate paid per
share .............................. $ .0418 -- -- -- --
------- ------- ------- ------- -------
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31
--------------------------------------------------------------
1991+ 1990+ 1989+ 1988+ 1987+
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net asset value per share,
beginning of year .................. $25.498 $25.977 $22.461 $20.961 $23.941
------- ------- ------- ------- -------
Income From Investment
Operations
Net investment income ............ .922 .935 1.041 .874 .866
Net realized and unrealized gain
(loss) on investments ............ 5.780 (.084) 5.402 2.187 .713
------- ------- ------- ------- -------
Total from investment
operations ..................... 6.702 .851 6.443 3.061 1.579
------- ------- ------- ------- -------
Less Distributions
Dividends from net investment
income ........................... (.942) (.960) (1.056) (.892) (.868)
Distribution from net realized
gains on investments ............... (.304) (.370) (1.871) (.669) (3.691)
------- ------- ------- ------- -------
Net asset value per share,
end of year ........................ $30.954 $25.498 $25.977 $22.461 $20.961
======= ======= ======= ======= =======
Total Return* ..................... 26.41% 3.31% 29.06% 14.63% 5.40%
Net assets, end of year (millions) $ 3,818 $ 2,768 $ 2,592 $ 2,042 $ 1,834
Ratio of total expenses to average
net assets ........................ .30% .30% .29% .38% .29%
Ratio of net investment income to
average net assets ............... 3.22% 3.70% 4.01% 3.81% 3.12%
Portfolio turnover rate ............ 12.08% 19.40% 28.79% 24.96% 36.52%
Average commission rate paid per
share .............................. -- -- -- -- --
------- ------- ------- ------- -------
</TABLE>
+ Per share data calculated using weighted average number of shares outstanding
throughout the year.
* The performance data reflects deduction of an investment advisory fee at an
annual rate of 0.25% of the Fund's average daily net assets, prior to August
1, 1996 and 0.50% of average daily net assets thereafter and deductions for
Fund administrative services and other expenses at cost prior to May 1, 1996,
and at an annual rate of 0.06% of average daily net assets thereafter.
Performance data above is for the Fund and not for the separate accounts
investing in the Fund. Therefore, the performance does not reflect insurance
charges for mortality and expense risks, contract maintenance charges,
deferred sales charges or other charges relating to the separate account using
the Fund for VA Contracts or VLI Policies. Inclusion of these expenses would
reduce the total return figures.
Additional information about the performance of the Fund is contained in the
Fund's Annual Report dated December 31, 1996. The Annual Report may be obtained,
without charge, by writing to the Fund at the address listed on the cover of
this Prospectus or by calling 1-800-238-6263.
4 Aetna Variable Fund
<PAGE>
INVESTMENT OBJECTIVE
The investment objective of the Fund is to maximize total return through
investments in a diversified portfolio of common stocks and securities
convertible into common stock. It is anticipated that capital appreciation and
investment income will both be major factors in achieving total return. The
Fund's investment objective is fundamental and may not be changed without the
vote of a majority of its outstanding voting securities as defined by the
Investment Company Act of 1940 (1940 Act). There can be no assurance that the
Fund will meet its investment objective.
INVESTMENT POLICIES AND RESTRICTIONS
Investment Policies The Fund generally will seek to achieve its investment
objective by investing principally in common stocks and securities convertible
into common stock that are believed to have significant potential for capital
appreciation and/or investment income. In addition, the Fund may invest in
nonconvertible preferred stocks, debt securities, rights and warrants; the Fund
may maintain a reserve of cash and high-grade, short-term debt securities; and
the Fund may purchase securities on a when-issued or delayed-delivery basis.
Industry Concentration The Fund will not concentrate its investments in any one
industry, and, therefore the Fund will not invest 25% or more of its total
assets in securities issued by companies principally engaged in any one
industry. This limitation will not, however, apply to securities issued or
guaranteed by the U.S. government, its agencies and instrumentalities;
securities invested in, or repurchase agreements for, U.S. Government
securities; and certificates of deposit, bankers' acceptances, or securities of
banks and bank holding companies. For purposes of this restriction, finance
companies will be classified as separate industries according to the end users
of their services, such as automobile finance, computer finance and consumer
finance. Also, the Fund will not hold securities constituting more than 5% of
its total assets in the securities of any one issuer or hold more than 10% of
the outstanding voting securities of any one issuer. This latter restriction
applies only to 75% of the Fund's total assets and does not include securities
issued or guaranteed by the U.S. Government, its agencies and instrumentalities.
The Fund does not invest in the securities of companies determined by the
Adviser to be primarily involved in the production or distribution of tobacco
products.
Illiquid and Restricted Securities The Fund may invest up to 15% of its total
assets in illiquid securities. Illiquid securities are securities that are not
readily marketable or cannot be disposed of promptly within seven days in the
ordinary course of business without taking a materially reduced price. In
addition, the Fund may invest in securities that are subject to legal or
contractual restrictions on resale, including securities purchased under Rule
144A and Section 4(2) of the Securities Act of 1933. The Board of Trustees of
the Fund (Trustees) has established a policy concerning investments in
restricted and illiquid securities.
Foreign Securities The Fund may invest up to 25% of its assets in foreign equity
securities. These securities will be marketable equity securities including
common and preferred stock, depositary receipts for stock and fixed income or
equity securities exchangeable for or convertible into stock. Investments in
securities of foreign issuers or securities denominated in foreign currencies
involve risks not present in domestic markets. Such risks include: currency
fluctuations and related currency conversion costs; less liquidity; price or
income volatility; less government supervision and regulation of stock exchanges
where securities may be traded, brokers and listed companies; possible
difficulty in obtaining and enforcing judgments against foreign entities;
adverse foreign political and economic developments; different accounting
procedures and auditing standards; the possible imposition of withholding taxes
on income payable on securities or on capital gains; the possible seizure or
nationalization of foreign assets; the possible establishment of exchange
controls or other foreign laws or restrictions which might adversely affect the
payment and transferability of principal, interest and dividends on securities;
higher transaction costs; possible settlement delays; and less publicly
available information about foreign issuers.
Depositary Receipts The Fund can invest in both sponsored and unsponsored
depositary receipts. Unsponsored depositary receipts, which are typically traded
in the over-the-counter market, may be less liquid than sponsored depositary
receipts and therefore may involve more risk. In addition, there may be less
information available about issuers of unsponsored depositary receipts. The Fund
may acquire American Depositary Receipts (ADRs), which are dollar denominated,
although their market price is subject to fluctuations of the foreign currency
in which the underlying securities are denominated. All depositary receipts will
be considered foreign securities for purposes of the Fund's investment
limitation concerning investment in foreign securities.
Securities Lending The Fund may lend its portfolio securities; however, the
value of the loaned securities (together with all other assets that are loaned,
including those subject to repurchase agreements) may not exceed one-third of
the Fund's total assets. The Fund will not lend portfolio securities to
affiliates. Though fully collateralized, lending portfolio securities involves
certain risks, including the possibility that the borrower may become insolvent
or default on the loan. In the event of a disparity between the value of the
loaned security and the collateral, there is the additional risk that the
borrower may fail to return the securities or provide additional collateral. A
loan may be terminated at any time by the borrower or lender upon proper notice.
Aetna Variable Fund 5
<PAGE>
Repurchase Agreements The Fund may enter into repurchase agreements with
domestic banks and broker-dealers. Under a repurchase agreement, a Fund may
acquire a debt instrument for a relatively short period subject to an obligation
by the seller to repurchase and by the Fund to resell the instrument at a fixed
price and time. Such agreements, although fully collateralized, involve the risk
that the seller of the securities may fail to repurchase them. In that event, a
Fund may incur costs in liquidating the securities (or other collateral for the
agreement) or a loss if the securities (or collateral) decline in value. If the
default on the part of the seller is due to insolvency and the seller initiates
bankruptcy proceedings, the ability of a Fund to liquidate the collateral may be
delayed or limited.
Borrowing The Fund may borrow up to 5% of the value of its total assets for
temporary or emergency purposes. The Fund does not intend to borrow for
leveraging purposes. It has the authority to do so, but only if, after the
borrowing, the value of the Fund's net assets, including proceeds from the
borrowings, is equal to at least 300% of all outstanding borrowings. Leveraging
can increase the volatility of the Fund since it exaggerates the effects of
changes in the value of the securities purchased with the borrowed funds.
High-Risk, High-Yield Securities The Fund may invest in securities rated BB or
below by Standard and Poor's Corporation or Ba or below by Moody's Investors
Services, Inc., or other ratings agencies, or, if not rated, considered by the
investment adviser to be of comparable quality (high-risk, high-yield securities
commonly called "junk bonds"). The Fund does not intend to invest more than 5%
of its assets in such securities, although it is permitted to invest up to 10%
of its total assets in high-risk, high-yield securities.
Options, Futures and Other Derivatives The Fund may occasionally engage in
hedging and other strategies using derivatives to manage its exposure to
changing interest rates, securities prices and currency exchange rates, or to
increase its investment return. A derivative is a financial instrument the value
of which is "derived" from the performance of an underlying asset (such as a
security or an index of securities). In addition to futures and options,
derivatives include such instruments as forward contracts, swaps, and structured
notes. A forward contract is a purchase or sale of a specific quantity of a
commodity, government security, foreign currency, or other financial instrument
at the current price, with delivery and settlement at a specified future date. A
swap is an exchange of one security for another and may be executed to exchange
the maturities of a bond portfolio or the quality of the issues in a stock or
bond portfolio. Structured notes are privately placed fixed income securities
whose coupon and/or final payment depends on the return of a market index,
portfolio or security. Except for the purpose of hedging, the Fund may not
invest more than 5% of its assets in derivatives which management deems to
involve high risk to the Fund, such as inverse floaters, interest-only and
principal-only securities.
The Fund may write covered call options and purchase put options, on securities
and indices. Put options will be acquired only for temporary defensive purposes.
The Fund may purchase call options and sell put options to close out positions
previously opened by the Fund. At any one time, the Fund may not have
outstanding call options on more than 30% of its assets and it may not buy put
options if more than 3% of the assets of the Fund would be invested in put
options.
The Fund may enter into futures contracts including stock index futures or
options on futures contracts only for hedging purposes. The Fund may not enter
into a futures contract if the current market prices of instruments required to
be delivered and purchased under open futures contracts would exceed 30% of the
Fund's assets. No more than 5% of the Fund's total assets may be committed to
margin deposits on futures contracts.
Options and futures contracts can be volatile investments and involve certain
risks. The Fund may be unable to limit losses by closing a position due to lack
of a liquid market or similar factors. Losses may also occur if there is not a
perfect correlation between the value of the contracts and the related
securities. The use of futures may involve a high degree of leverage because of
low margin requirements. As a result, small price movements in futures contracts
may result in immediate and potentially unlimited gains or losses to the Fund.
The amount of gains or losses on investments in futures contracts depends on the
portfolio manager's ability to predict correctly the direction of stock prices,
interest rates and other economic factors. Further information about the use of
futures, options and other derivative instruments, and the associated risks, is
contained in the Statement.
The Fund is subject to further investment restrictions that are described in the
Statement.
MANAGEMENT OF THE FUND
Trustees The operations of the Fund are managed under the direction of the
Trustees. The Trustees set broad policies for the Fund. Information about the
Trustees is found in the Statement.
Investment Adviser Aetna serves as the investment adviser for the Fund and
Aeltus Investment Management, Inc. (Aeltus) serves as the subadviser. Aetna is a
Connecticut insurance corporation with its principal offices located at 151
Farmington Avenue, Hartford, Connecticut 06156. Aetna and Aeltus (collectively,
the "Adviser") are both indirect, wholly-owned subsidiaries of Aetna Retirement
Services, Inc., which is in turn an indirect wholly-owned subsidiary of Aetna
Inc. Aetna is registered with the Commission as an investment adviser. Aetna
receives a management fee at an annual rate of 0.50% of the average daily net
assets of the Fund, payable monthly.
6 Aetna Variable Fund
<PAGE>
Subadviser. The Fund and Aetna have engaged Aeltus as subadviser of the Fund.
Aeltus is a Connecticut corporation with its principal offices located at 242
Trumbull Street, Hartford, Connecticut 06156-1205. Aeltus is registered as an
investment adviser with the Commission.
Under the Subadvisory Agreement, Aeltus is responsible for managing the assets
of the Fund in accordance with the Fund's investment objective and policies
subject to the supervision of Aetna, the Fund and the Trustees. Aeltus
determines what securities and other instruments are purchased and sold by the
Fund and handles certain related accounting and administrative functions,
including determining the Fund's net asset value on a daily basis and preparing
and providing such reports, data and information as Aetna or the Trustees
request from time to time. Aeltus receives a fee at an annual rate of up to
0.30% of the average daily net assets of the Fund, payable monthly.
Aetna has overall responsibility for monitoring the investment program
maintained by the Subadviser for compliance with applicable laws and regulations
and the Fund's investment objective and policies.
Portfolio Management Kevin Means, Managing Director, Aeltus, has been the lead
portfolio manager for the Fund since joining the Aetna organization in July,
1994. He was previously Chief Investment Officer at INVESCO Management and
Research. He also served for six years as the Director of Quantitative Research
and Equity Portfolio Manager at INVESCO Capital Management. Mr. Means is
assisted by a team of portfolio managers who specialize in various asset
classes.
Expenses and Fund Administration Under an Administrative Services Agreement 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 is also responsible for all ordinary recurring direct costs of
the Fund such as custodian fees, directors fees, transfer agency costs and
accounting expenses. For the services provided under the Administrative Services
Agreement, Aetna receives an annual fee, payable monthly, at a rate of 0.06% of
the average daily net assets of the Fund.
GENERAL INFORMATION
Declaration of Trust The Fund was organized as a "Massachusetts business trust"
under the laws of Massachusetts on January 25, 1984. It began operations on May
1, 1984 upon succeeding to the assets of Aetna Variable Fund, Inc., a
corporation that was formed in 1974. Massachusetts law provides that
shareholders of the Fund can, under certain circumstances, be held personally
liable for the obligations of the Fund. The Fund has been structured, and will
be operated in such a way, so as to ensure as much as possible, that
shareholders will not be liable for obligations of the Fund. The Declaration of
Trust (Declaration) contains an express disclaimer of shareholder liability for
acts or obligations of the Fund under Massachusetts law, and requires that
notification of this disclaimer be given in each agreement, obligation or
instrument entered into by the Fund or the Trustees. A more complete discussion
of potential liability of shareholders of the Fund under Massachusetts law is
contained in the Statement under "Description of Shares--Shareholder and Trustee
Liability."
Capital Stock The Declaration permits the Trustees to issue an unlimited number
of full and fractional shares of beneficial interest in the Fund. All shares are
nonassessable, other than as disclosed above. There are no preemptive rights.
As of March 31, 1997, there were 216,802,129 shares of the Fund outstanding,
99.50% of which were owned by Aetna and held in its separate accounts to fund
Aetna's obligations under its VA Contracts and VLI Policies. An additional 0.08%
of the Fund's shares were owned by affiliates of Aetna at that date. The balance
of the shares were held directly by shareholders who acquired their interests
before the Fund was prohibited from selling shares both directly to investors
and to fund VA contracts and VLI Policies. Direct shareholders may not purchase
additional shares except through dividend reinvestments.
Shareholder Inquiries and Distribution Options Any questions about the Fund can
be addressed to the Fund at the address listed on the cover of this Prospectus
or by calling 1-800-238-6263. Shareholders may elect to receive dividends and
capital gains distributions in cash or to reinvest in additional shares in the
Fund. See "Tax Matters--Fund Distributions" below.
Shareholder Meetings The Fund is not required to hold annual shareholder
meetings. The Declaration provides for meetings of shareholders to elect
Trustees at such time as may be determined by the Trustees or as required by the
1940 Act. If requested by the holders of at least 10% of the Fund's outstanding
shares, the Fund will hold a shareholder meeting for the purpose of voting on
the removal of one or more Trustees and will assist with communications
concerning that shareholder meeting.
Voting Rights Shareholders are entitled to one vote for each full share held and
fractional votes for fractional shares held on matters submitted to the
shareholders of the Fund. Voting rights are not cumulative. Persons who select
the Fund for investment through their VA Contract or VLI Policy are not the
shareholders of the Fund, but may have the right to direct the voting of Fund
shares at shareholder meetings if required by law. Participant voting rights are
discussed in the prospectus for the applicable VA Contract or VLI Policy.
Aetna Variable Fund 7
<PAGE>
Mixed Funding Because the Fund is sold to fund variable annuity contracts and
variable life insurance policies issued by Aetna, certain conflicts of interest
could arise. If a conflict of interest were to occur, one of the separate
accounts invested in the Fund might withdraw its investment in the Fund, which
might force the Fund to sell its portfolio securities at disadvantageous prices,
causing its per share value to decrease. The Trustees have agreed to monitor
events in order to identify any material irreconcilable conflicts which might
arise and to determine what action, if any, should be taken to address such
conflict.
TAX MATTERS
The following discussion of federal income tax consequences is based on tax laws
and regulations in effect on the date of this prospectus, and is subject to
change by legislative or administrative action. The following discussion is for
general information only; a more detailed discussion of federal income tax
considerations is contained in the Statement.
The Fund The Fund intends to continue to qualify as a regulated investment
company by satisfying the requirements under Subchapter M of the Internal
Revenue Code of 1986, as amended (Code) concerning: (1) the diversification of
assets; (2) the distribution of income; and (3) the source of income. It is the
policy of the Fund to distribute all of its investment income (net of expenses)
and any capital gains (net of capital losses). Distributions are made to the
separate accounts for shares of the Fund held under VA Contracts and VLI
Policies, and directly to shareholders who hold shares of the Fund directly, in
accordance with the timing requirements imposed by the Code. In addition, the
Fund intends to comply with the variable asset diversification requirements
under Section 817(h) of the Code, which are described more fully in the
Statement.
Fund Distributions Distributions by the Fund to shareholders other than separate
accounts of net long-term capital gains are taxable to those shareholders as
long-term capital gains regardless of the length of time a shareholder has held
the shares. Distributions by the Fund of its net investment income and its net
short-term capital gains are taxable to shareholders as ordinary income.
Distributions paid by the Fund to the insurance company separate accounts are
taxable, if at all, to the separate accounts and not to the holders of VA
Contracts and VLI Policies. Holders of VA Contracts and VLI Policies should
review the prospectus for their VA Contract or VLI Policy for information
regarding the tax treatment of their contracts and policies and distributions
from the Fund to the separate accounts.
In general, shareholders include distributions in their taxable income in the
year in which they are received (whether paid in cash or reinvested). However,
distributions declared in December and paid in January are taxable as if paid on
December 31 of the year of declaration. A statement will be sent to shareholders
indicating the tax status of all distributions made during the previous year.
Share Redemptions Any gain or loss recognized upon a taxable disposition of a
direct shareholder's shares generally will be treated as a taxable long-term or
short-term capital gain or loss (depending on whether the shareholder has held
the shares more than one year). Any loss realized upon a taxable disposition of
a Fund's shares may be subject to limitations that are described more fully in
the Statement.
Tax Withholding The Fund is required to withhold taxes from any distributions
unless the shareholder provides the Fund with a correct social security or
taxpayer identification number or certifies that the shareholder is a
corporation or otherwise exempt from or not subject to withholding by the
Internal Revenue Service (IRS). If a shareholder is subject to backup
withholding, the IRS can require the Fund to withhold 31% of taxable dividends,
capital gains distributions and redemptions.
PURCHASE AND REDEMPTION OF SHARES
Aetna is the principal underwriter of the Fund's shares. Except for the
reinvestment of dividends described under "General Information--Capital Stock,"
shares may only be purchased by Aetna or its affiliated insurance companies as
the depositor of variable annuity and variable life insurance separate accounts
as directed by the holders of the VA Contracts or VLI Policies. Refer to the
prospectus for the applicable VA Contract or VLI Policy for information on how
to direct investments in or redemptions from the Fund and any fees that may
apply.
Shares of the Fund are purchased and redeemed at their net asset value next
determined after receipt of a purchase or redemption order in acceptable form.
Shareholders redeeming directly from the Fund and not through a VA Contract or
VLI Policy must provide a signature guarantee regardless of the redemption
amount. Orders for the purchase or redemption of shares of the Fund that are
received before the close of regular trading on the New York Stock Exchange
(normally 4 p.m. eastern time) are effected at the net asset value per share
determined that day, as described below (see Net Asset Value).
The insurance company shall be the designee of the Fund for receipt of purchase
and redemption orders. Therefore, receipt of an order by the insurance company
constitutes receipt by the Fund; provided the Fund receives notice of the order
by 9:30 a.m. the next day on which the New York Stock Exchange is open for
trading.
8 Aetna Variable Fund
<PAGE>
If the value of shares held directly by a shareholder is less than $1,000, the
shares may be liquidated upon six months' notice. Shares will be redeemed at the
net asset value determined on the day the account is closed. The Fund may
suspend redemptions or postpone payments when the New York Stock Exchange is
closed or when trading is restricted for any reason (other than weekends or
holidays) or under emergency circumstances as determined by the Commission.
If such a shareholder holds shares directly having a net asset value of $5,000
or more, the shareholder may establish a systematic withdrawal program. Further
information about this program may be obtained from the Fund.
NET ASSET VALUE
The net asset value per share (NAV) is determined as of the earlier of 15
minutes after the close of the New York Stock Exchange or 4:15 p.m. eastern time
on each day that the New York Stock Exchange is open for trading. The NAV is
computed by dividing the total value of the Fund's securities, plus any cash and
other assets less all liabilities (including accrued expenses), 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 under the authority of the Trustees.
Aetna Variable Fund 9
<PAGE>
INVESTMENT ADVISER
Aetna Life Insurance
and Annuity Company
151 Farmington Avenue
Hartford, Connecticut 06156
CUSTODIAN
Mellon Bank N.A.
One Mellon Bank Center
Pittsburgh, Pennsylvania 15258
TRANSFER, DIVIDEND DISBURSING
AND REDEMPTION AGENT
Firstar Trust Company
P.O. Box 701
Milwaukee, Wisconsin 53201-0701
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP
CityPlace II
Hartford, Connecticut 06103-4103
[AETNA LOGO]
Aetna Life Insurance and Annuity Company
AVF-3
<PAGE>
Statement of Additional Information dated: May 1, 1997
AETNA VARIABLE FUND
151 Farmington Avenue
Hartford, Connecticut 06156
This Statement of Additional Information is not a prospectus and should be read
in conjunction with the current prospectus for Aetna Variable Fund dated May 1,
1997.
A free prospectus is available upon request from the local Aetna office, by
writing to Aetna Variable Fund at the address listed above or by calling
1-800-238-6263.
Read the prospectus before you invest.
TABLE OF CONTENTS
General Information and History ................................. 2
Investment Objective and Policies of the Fund ..................... 2
Description of Various Securities and Investment Techniques ...... 3
Trustees and Officers of the Fund ................................. 13
Control Persons and Principal Shareholders of the Fund ............ 16
Investment Advisory Agreement .................................... 16
Subadvisory Agreement .......................................... 16
Administrative Services Agreement ................................. 17
License Agreement ................................................ 17
Brokerage Allocation and Trading Policies ........................ 17
Description of Shares ............................................. 19
Purchase and Redemption of Shares ................................. 20
Principal Underwriter ............................................. 20
Tax Matters ...................................................... 20
Net Asset Value ................................................... 26
Performance Information .......................................... 26
Custodian ......................................................... 26
Independent Auditors ............................................. 26
Financial Statements ............................................. F-1
<PAGE>
GENERAL INFORMATION AND HISTORY
Aetna Variable Fund (Fund) is an open-end diversified management investment
company which sells its shares of beneficial interest to (i) variable annuity
and variable life insurance separate accounts to fund variable annuity contracts
(VA Contracts) or variable life insurance policies (VLI Policies) issued by
Aetna Life Insurance and Annuity Company ("Aetna" or the "Company") and its
affiliates, and (ii) other shareholders of the Fund only through reinvestment of
dividends.
INVESTMENT OBJECTIVE AND POLICIES OF THE FUND
The investment objective of the Fund is to maximize total return through
investments in a diversified portfolio of common stocks and securities
convertible into common stock. It is anticipated that capital appreciation and
investment income will both be major factors in achieving such return. The
Fund's investment adviser may invest principally in common stocks having
significant potential for capital appreciation, or may purchase common stocks
principally for their income potential through dividends and option writing, or
may acquire securities having a mix of these characteristics.
The Fund will operate under the following restrictions, which together with its
investment objective, are matters of fundamental policy and cannot be changed
without the approval of a majority of the outstanding voting securities of the
Fund as defined by the Investment Company Act of 1940 (1940 Act). This means the
lesser of: (i) 67% of the shares of the Fund present or represented at a
shareholders' meeting if the holders of more than 50% of the shares then
outstanding are present or represented; or (ii) more than 50% of the outstanding
voting securities of the Fund.
In seeking to accomplish its investment objective, the Fund will not:
(1) issue any senior security (as defined in the 1940 Act), except that (a) the
Fund may enter into commitments to purchase securities in accordance with
the Fund's investment program, including reverse repurchase agreements,
delayed-delivery and when-issued securities, which may be considered the
issuance of senior securities; (b) the Fund may engage in transactions that
may result in the issuance of a senior security to the extent permitted
under applicable regulations, interpretations of the 1940 Act or an
exemptive order; (c) the Fund may engage in short sales of securities to
the extent permitted in its investment program and other restrictions; (d)
the purchase or sale of futures contracts or related options shall not be
considered to involve the issuance of a senior security; and (e) subject to
fundamental restrictions, the Fund may borrow money as authorized by the
1940 Act;
(2) with respect to 75% of the value of the Fund's total assets, hold more than
5% of the value of its total assets in the securities of any one issuer or
hold more than 10% of the outstanding voting securities of any one issuer.
Securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities are excluded from these restrictions;
(3) concentrate its investments in any one industry except that the Fund may
invest up to 25% of its total assets in securities issued by companies
principally engaged in any one industry. This limitation will not, however,
apply to securities issued or guaranteed by the U.S. Government, its
agencies or instrumentalities;
(4) make loans, except that, to the extent appropriate under its investment
program, the Fund may (a) purchase bonds, debentures or other debt
securities, including short-term obligations, (b) enter into repurchase
transactions and (c) lend portfolio securities provided that the value of
such loaned securities does not exceed one-third of the Fund's total
assets;
(5) invest in commodity contracts, except that the Fund may, to the extent
appropriate under its investment program, purchase securities of companies
engaged in such activities, may enter into transactions in financial and
index futures contracts and related options, may engage in transactions on
a when-issued or forward-commitment basis, and may enter into forward
currency contracts;
2 Aetna Variable Fund
<PAGE>
(6) borrow money, except that (a) the Fund may enter into certain futures
contracts or options related thereto; (b) the Fund may enter into
commitments to purchase securities in accordance with the Fund's investment
program, including delayed-delivery and when-issued securities and reverse
repurchase agreements; (c) for temporary, emergency purposes, the Fund may
borrow money in amounts not exceeding 5% of the value of its total assets
at the time the loan is made; and (d) for purposes of leveraging, the Fund
may borrow money from banks (including its custodian bank) only if,
immediately after such borrowing, the value of the Fund's assets, including
the amount borrowed, less its liabilities, is equal to at least 300% of the
amount borrowed, plus all outstanding borrowings. If, at any time, the
value of the Fund's assets fails to meet the 300% asset coverage
requirement relative only to leveraging, the Fund will, within three days
(not including Sundays and holidays), reduce its borrowings to the extent
necessary to meet the 300% test;
(7) purchase real estate, interests in real estate or real estate limited
partnership interests except that, to the extent appropriate under its
investment program, the Fund may invest in securities secured by real
estate or interests therein or issued by companies, including real estate
investment trusts, which deal in real estate or interests therein; or
(8) act as an underwriter of securities except to the extent that, in
connection with the disposition of portfolio securities by the Fund, the
Fund may be deemed to be an underwriter under the provisions of the
Securities Act of 1933, as amended (1933 Act).
The Fund has also adopted certain other investment restrictions that may be
changed by the Fund's Trustees and without shareholder vote. Under such
restrictions, the Fund will not:
(1) make short sales of securities, other than short sales "against the box,"
or 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 Fund;
(2) invest in companies for the purpose of exercising control or management;
(3) purchase the securities of any other investment company, except as
permitted under the 1940 Act or by Order of the Securities and Exchange
Commission (Commission); or
(4) invest more than 15% of its total assets in illiquid securities. Illiquid
securities are securities that are not readily marketable or cannot be
disposed of promptly within seven days and in the usual course of business
without taking a materially reduced price. 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 or
securities offered pursuant to Section 4(2) of the 1933 Act, shall not be
deemed illiquid solely by reason of being unregistered. The Investment
Adviser shall determine whether a particular security is deemed to be
liquid based on the trading markets for the specific security and other
factors.
Where the Fund's investment objective or policies restrict it to a specified
percentage of its total assets in any type of instrument, that percentage is
measured at the time of purchase. There will be no violation of any investment
policy or restriction if that restriction is complied with at the time of
purchase notwithstanding a later change in the market value of an investment, in
net or total assets, in securities rating of the investment, or any other
change.
DESCRIPTION OF VARIOUS SECURITIES AND INVESTMENT TECHNIQUES
The following information supplements and should be read in conjunction with the
section of the prospectus entitled "Investment Policies and Restrictions."
Futures Contracts
The Fund may enter into stock index futures contracts ("futures" or "futures
contracts") or options thereon as a hedge against changes in prevailing levels
of equities prices and in anticipation of future purchases or sales of
securities. The Fund's investment techniques may include sales of futures as an
offset against
Aetna Variable Fund 3
<PAGE>
the effect of expected declines in equities prices. The Fund will enter into
futures contracts or options thereon for hedging purposes only and will only
enter into futures contracts or options thereon that are traded on national
futures exchanges and are standardized as to maturity date and underlying
financial instrument. Futures exchanges and trading are regulated under the
Commodity Exchange Act by the Commodities Futures Trading Commission (CFTC).
Although techniques other than sales and purchases of futures contracts could be
used to reduce the Fund's exposure to market fluctuations, the Fund may be able
to hedge its exposure more effectively and perhaps at a lower cost through using
futures contracts. The Fund will not enter into a futures contract if, as a
result thereof, (i) the then current aggregate futures market prices of
financial instruments required to be delivered and purchased under open futures
contracts would exceed 30% of the Fund's total assets (taken at market value at
the time of entering into the contract), or (ii) more than 5% of the Fund's
total assets (taken at market value at the time of entering into the contract)
would be committed to margin deposits on such futures contracts.
A futures contract provides for the future sale by one party and purchase by
another party of a specified amount of a specific financial instrument(s) (debt
security) or a specific stock market index for a specified price at a designated
date, time, and place. Brokerage fees are incurred when a futures contract is
bought or sold and at expiration and margin deposits must be maintained. Stock
index futures contracts do not contemplate actual future delivery and will be
settled in cash at expiration or closed out prior to expiration. Closing out an
open futures contract sale or purchase is effected by entering into an
offsetting futures contract purchase or sale, respectively, for the same
aggregate amount of the identical type of underlying instrument and the same
delivery date. There can be no assurance, however, that the Fund will be able to
enter into an offsetting transaction with respect to a particular contract at a
particular time. If the Fund is not able to enter into an offsetting
transaction, it will continue to be required to maintain the margin deposits on
the contract.
Persons who engage in futures contracts transactions may be broadly classified
as "hedgers" and "speculators." Hedgers, such as the Fund, whose business
activity involves investment in securities, use the futures markets primarily to
offset unfavorable changes in value that may occur because of fluctuations in
the value of the securities held or expected to be acquired by them. Debtors and
other obligors may also hedge the interest cost of their obligations. The
speculator, like the hedger, generally expects neither to deliver nor to receive
the financial instrument underlying the futures contract, but, unlike the
hedger, hopes to profit from fluctuations in prevailing equities prices.
"Margin" is the amount of funds that must be deposited by the the Fund with a
commodities broker in a custodian account in order to initiate futures trading
and to maintain open positions in the Fund's futures contracts. A margin deposit
is intended to assure the Fund's performance of the futures contract. The margin
required for a particular futures contract is set by the exchange on which the
Contract is traded and may be significantly modified from time to time by the
exchange during the term of the contract. If the price of an open futures
contract changes (by increase in the case of a sale or by decrease in the case
of a purchase) so that the loss on the futures contract reaches a point at which
the margin on deposit does not satisfy margin requirements, the broker will
require an increase in the margin. However, if the value of a position increases
because of favorable price changes in the futures contract so that the margin
deposit exceeds the required margin, the broker will promptly pay the excess to
the Fund. These daily payments to and from the Fund are called variation margin.
At times of extreme price volatility such as occurred during the week of October
19, 1987, intra-day variation margin payments may be required. In computing
daily net asset values, the Fund will mark to market the current value of its
open futures contracts. The Fund expects to earn interest income on its initial
margin deposits.
Because of the low margin deposits required, futures trading involves an
extremely high degree of leverage. As a result, small price movements in futures
contracts may result in immediate and potentially unlimited loss or gain to the
Fund relative to the size of the margin commitment. For example, if at the time
of purchase 10% of the value of the futures contract is deposited as margin, a
subsequent 10% decrease
4 Aetna Variable Fund
<PAGE>
in the value of the futures contract would result in a total loss of the margin
deposit before any deduction for the transaction costs, if the contract were
then closed out. A 15% decrease in the value of the futures contract would
result in a loss equal to 150% of the original margin deposit, if the contract
were closed out. Thus, a purchase or sale of a futures contract may result in
losses in excess of the amount initially invested in the futures contract.
However, the Fund would presumably have sustained comparable losses if, instead
of the futures contract, it had invested in the underlying financial instrument
and sold it after the decline. With regard to transactions involving futures
contracts, the Fund maintains a segregated account holding liquid assets in
accordance with applicable Commission staff positions.
Restrictions on the Use of Futures and Option Contracts
CFTC regulations require that all short futures positions be entered into for
the purpose of hedging the value of securities held in the Fund's portfolio, and
that all long futures positions either constitute bona fide hedging
transactions, as defined in such regulations, or have a total value not in
excess of an amount determined by reference to certain cash and securities
positions maintained for the Fund, and accrued profits on such positions.
The Fund's ability to engage in the hedging transactions described herein may be
limited by the current federal income tax requirement that a Fund derive less
than 30% of its gross income from the sale or other disposition of stock or
securities held for less than three months.
Call and Put Options on Securities
The Fund may write (sell) covered call options (call options) and purchase put
options (put options) on securities and indices, and purchase call and sell put
options to close out positions previously opened by the Fund, provided, however,
that it will not have call options outstanding at any one time on more than 30%
of its total assets nor will it buy put options if more than 3% of the assets of
the Fund immediately following such purchase would consist of put options. The
purpose of writing call options and purchasing put options on securities will be
to reduce the effect of price fluctuations of the securities owned by the Fund
(and underlying the options) on the net asset value per share of the Fund.
A call option gives the holder (buyer) the right to purchase a security at a
specified price (the exercise price) at any time until a certain date (the
expiration date). So long as the obligation of the writer of a call option
continues, he may be assigned an exercise notice by the broker-dealer through
whom such option was settled, requiring him to deliver the underlying security
against payment of the exercise price. This obligation terminates upon the
expiration of the call option, the exercise of the call option, or by entering
into an offsetting transaction. To secure his obligation to deliver the
underlying security in the case of a call option, a writer is required to
deposit in escrow the underlying security or other assets in accordance with the
rules of the clearing corporations and of the exchanges. A put option gives the
holder (buyer) the right to sell a security at a specified price (the exercise
price) at any time until a certain date (the expiration date). The Fund will
only write a call option on a security that it already owns and will not write
call options on when-issued securities. The Fund may purchase a put option on a
security that it already owns and on stock indices.
The Fund will write call options and purchase put options in standard contracts
listed on national securities exchanges, or write call options with and purchase
put options directly from investment dealers meeting the creditworthiness
criteria of the Company.
When writing a call option, the Fund, in return for the premium, gives up the
opportunity to profit from a price increase in the underlying security above the
exercise price, but conversely retains the risk of loss should the price of the
security decline. If a call option which the Fund has written expires, the Fund
will realize a gain in the amount of the premium; however, such gain may be
offset by a decline in the market value of the underlying security during the
option period. If the call option is exercised, the Fund will realize a gain or
loss from the sale of the underlying security. The Fund will purchase put
options involving portfolio securities only when the Company believes that a
temporary defensive position is desirable in light of market conditions, but
does not desire to sell the portfolio security. Therefore, the purchase of put
options will be used to protect the Fund's holdings in an underlying security
against a substantial decline
Aetna Variable Fund 5
<PAGE>
in market value. Such protection is, of course, only provided during the life of
the put option when the Fund, as the holder of the put option, is able to sell
the underlying security at the put exercise price regardless of any decline in
the underlying security's market price. By using put options in this manner, the
Fund will reduce any profit it might otherwise have realized in its underlying
security by the premium paid for the put option and by transaction costs. The
security covering the call or put option will be segregated at the Fund's
custodian.
The premium the Fund will receive from writing a call option, or the Fund will
pay when purchasing a put option, will reflect, among other things, the current
market price of the underlying security, the relationship of the exercise price
to such market price, the historical price volatility of the underlying
security, the length of the option period, and the general interest rate
environment. The premium received by the Fund for writing covered call options
will be recorded as a liability in the statement of assets and liabilities of
the Fund. This liability will be adjusted daily to the option's current market
value. The liability will be extinguished upon expiration of the option, by the
exercise of the option, or by entering into an offsetting transaction.
Similarly, the premium paid by the Fund when purchasing a put option will be
recorded as an asset in the statement of assets and liabilities of the Fund.
This asset will be adjusted daily to the option's current market value. The
asset will be extinguished upon expiration of the option, by selling an
identical option in a closing transaction, or exercising the option.
Closing transactions will be effected in order to realize a profit on an
outstanding call or put option, to prevent an underlying security from being
called or put, or to permit the exchange or tender of the underlying security.
Furthermore, effecting a closing transaction will permit the Fund to write
another call option, or purchase another put option, on the underlying security
with either a different exercise price or expiration date or both. If the Fund
desires to sell a particular security from its portfolio on which it has written
a call option, or purchased a put option, it will seek to effect a closing
transaction prior to, or concurrently with, the sale of the security. There is,
of course, no assurance that the Fund will be able to effect such closing
transactions at a favorable price. If the Fund cannot enter into such a
transaction, it may be required to hold a security that it might otherwise have
sold, in which case it would continue to be at market risk on the security. The
Fund will pay brokerage commissions in connection with the sale or purchase of
options to close out previously established option positions. Such brokerage
commissions are normally higher as a percentage of underlying asset values than
those applicable to purchases and sales of portfolio securities.
The exercise price of the options may be below, equal to, or above the current
market values of the underlying securities at the time the options are written.
From time to time, the Fund may purchase an underlying security for delivery in
accordance with an exercise notice of a call option assigned to it, rather than
delivering such security from its portfolio. In such cases additional brokerage
commissions will be incurred. The Fund will realize a profit or loss from a
closing purchase transaction if the cost of the transaction is less or more than
the premium received from the writing of the call option; however, any loss so
incurred in a closing purchase transaction may be partially or entirely offset
by the premium received from a simultaneous or subsequent sale of a different
call or put option. Also, 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 is likely to be offset
in whole or in part by appreciation of the underlying security owned by the
Fund. Any profits from writing covered call options are considered short-term
gain for federal income tax purposes and, when distributed by the Fund, are
taxable as ordinary income.
Additional Risk Factors for Futures and Options
In addition to any risk factors described above, the following sets forth
certain information regarding the potential risks associated with the Fund's
futures and options transactions.
Risk of Imperfect Correlation--The Fund's ability to hedge effectively all or a
portion of its portfolio through transactions in futures, options on futures or
options on securities and indexes depends on the degree to which movements in
the value of the securities or index underlying such hedging instrument
correlate with movements in the value of the relevant portion of the Fund's
portfolio. If the values of the
6 Aetna Variable Fund
<PAGE>
portfolio securities being hedged do not move in the same amount or direction as
the underlying security or index, the hedging strategy for the Fund might not be
successful and the Fund could sustain losses on its hedging transactions which
would not be offset by gains on its portfolio. It is also possible that there
may be a negative correlation between the security or index underlying a futures
or option contract and the portfolio securities being hedged, which could result
in losses both on the hedging transaction and the portfolio securities. In such
instances, the Fund's overall return could be less than if the hedging
transactions had not been undertaken. Stock index futures or options based on a
narrower index of securities may present greater risk than options or futures
based on a broad market index, as a narrower index is more susceptible to rapid
and extreme fluctuations resulting from changes in the value of a small number
of securities. The Fund would, however, effect transactions in such futures or
options only for hedging purposes (or to close out open positions).
The trading of futures and options on indexes involves the additional risk of
imperfect correlation between movements in the futures or option price and the
value of the underlying index. The anticipated spread between the prices may be
distorted due to 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 futures and options market. The purchase of an option on a
futures contract also involves the risk that changes in the value of underlying
futures contract will not be fully reflected in the value of the option
purchased. The risk of imperfect correlation, however, generally tends to
diminish as the maturity date of the futures contract or termination date of the
option approaches. The risk incurred in purchasing an option on a futures
contract is limited to the amount of the premium plus related transaction costs,
although it may be necessary under certain circumstances to exercise the option
and enter into the underlying futures contract in order to realize a profit.
Under certain extreme market conditions, it is possible that the Fund will not
be able to establish hedging positions, or that any hedging strategy adopted
will be insufficient to completely protect the Fund.
The Fund will purchase or sell futures contracts or options only if, in the
Company's judgment, there is expected to be a sufficient degree of correlation
between movements in the value of such instruments and changes in the value of
the relevant portion of the Fund's portfolio for the hedge to be effective.
There can be no assurance that the Company's judgment will be accurate.
Potential Lack of a Liquid Secondary Market--The ordinary spreads between prices
in the cash and futures markets, due to differences in the natures of those
markets, are subject to distortions. First, all participants in the futures
market are subject to initial deposit and variation margin requirements. This
could require the Fund to post additional cash or cash equivalents as the value
of the position fluctuates. Further, rather than meeting additional variation
margin requirements, investors may close futures contracts through offsetting
transactions which could distort the normal relationship between the cash and
futures markets. Second, the liquidity of the futures or options market may be
lacking. Prior to exercise or expiration, a futures or option position may be
terminated only by entering into a closing purchase or sale transaction, which
requires a secondary market on the exchange on which the position was originally
established. While the Fund will establish a futures or option position only if
there appears to be a liquid secondary market therefor, there can be no
assurance that such a market will exist for any particular futures or option
contract at any specific time. In such event, it may not be possible to close
out a position held by the Fund, which could require the Fund to purchase or
sell the instrument underlying the position, make or receive a cash settlement,
or meet ongoing variation margin requirements. The inability to close out
futures or option positions also could have an adverse impact on the Fund's
ability effectively to hedge its portfolio, or the relevant portion thereof.
The liquidity of a secondary market in a futures contract or an option on a
futures contract may be adversely affected by "daily price fluctuation limits"
established by the exchanges, which limit the amount of fluctuation in the price
of a contract during a single trading day and prohibit trading beyond such
limits once they have been reached. The trading of futures and options contracts
also is subject to the risk of trading halts, suspensions, exchange or clearing
house equipment failures, government intervention, insolvency of the brokerage
firm or clearing house 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.
Aetna Variable Fund 7
<PAGE>
Risk of Predicting Interest Rate Movements--Investments in futures contracts on
fixed income securities and related indexes involve the risk that if the
Company's investment judgment concerning the general direction of interest rates
is incorrect, the Fund's overall performance may be poorer than if it had not
entered into any such contract. For example, if the Fund has been hedged against
the possibility of an increase in interest rates which would adversely affect
the price of bonds held in its portfolio and interest rates decrease instead,
the Fund will lose part or all of the benefit of the increased value of its
bonds which have been hedged because it will have offsetting losses in its
futures positions. In addition, in such situations, if the Fund has insufficient
cash, it may have to sell bonds from its portfolio to meet daily variation
margin requirements, possibly at a time when it may be disadvantageous to do so.
Such sale of bonds may be, but will not necessarily be, at increased prices that
reflect the rising market.
Trading and Position Limits--Each contract market on which futures and option
contracts are traded has established a number of limitations governing the
maximum number of positions which may be held by a trader, whether acting alone
or in concert with others. The Company does not believe that these trading and
position limits will have an adverse impact on the hedging strategies regarding
the Fund's portfolio.
Repurchase Agreements
The Fund may enter into repurchase agreements with domestic banks and
broker-dealers meeting certain size and creditworthiness standards established
by the Fund's Board of Trustees. A repurchase agreement allows the Fund to
determine the yield during the Fund's holding period. This results in a fixed
rate of return insulated from market fluctuations during such period. Such
underlying debt instruments serving as collateral will meet the quality
standards of the Fund. The market value of the underlying debt instruments will,
at all times, be equal to the dollar amount invested. Repurchase agreements,
although fully collateralized, involve the risk that the seller of the
securities may fail to repurchase them from the Fund. In that event, the Fund
may incur (a) disposition costs in connection with liquidating the collateral,
or (b) a loss if the collateral declines in value. Also, if the default on the
part of the seller is due to insolvency and the seller initiates bankruptcy
proceedings, the Fund's ability to liquidate the collateral may be delayed or
limited. Under the 1940 Act, repurchase agreements are considered loans by the
Fund. Repurchase agreements maturing in more than seven days will not exceed 10
percent of the total assets of the Fund. The Fund does not intend to use reverse
repurchase agreements.
Securities Lending
The Fund may lend up to one-third of its total assets, although it is
anticipated that less than 10% of such assets will be on loan at any one time.
In the Company's opinion, lending portfolio securities to qualified
broker-dealers affords the Fund a means of increasing the yield on its
portfolio. All such loans will be fully collateralized with either cash or
direct obligations of the U.S. government or agencies thereof, and the Fund will
be entitled either to receive a fee from the borrower or to retain some or all
of the income derived from its investment of cash collateral. The Fund will
continue to receive the interest or dividends paid on any securities loaned, or
amounts equivalent thereto. Although voting rights will pass to the borrower of
securities, whenever a material event affecting the borrowed securities is to be
voted on, the Fund may terminate the loan to vote such proxy.
The primary risk the Fund assumes in loaning securities is that the borrower may
become insolvent on a day on which the loaned security is rapidly increasing in
price. In such event, if the borrower fails to return the loaned securities, the
existing collateral might be insufficient to purchase back the full amount of
security loaned, and the borrower would be unable to furnish additional
collateral. The borrower would be liable for any shortage, but the Fund would be
an unsecured creditor as to such shortage and might not be able to recover all
or any of it. A loan may be terminated at any time by the borrower or lender
upon proper notice.
Foreign Securities
The Fund may invest up to 25% of its total assets in foreign equity securities.
These securities will be marketable equity securities (including common and
preferred stock, depository receipts for stock and fixed income or equity
securities exchangeable for or convertible into stock) of foreign companies
which generally are listed on recognized foreign securities exchanges or are
traded in a foreign over-the-counter
8 Aetna Variable Fund
<PAGE>
market. The Fund also invests in foreign securities listed on recognized U.S.
securities exchanges or traded in the U.S. over-the-counter market. Such foreign
securities may be issued by foreign companies located in developing countries in
various regions of the world. A "developing country" is a country in the initial
stages of its industrial cycle. As compared to investment in the securities
markets of developed countries, investment in the securities markets of
developing countries involves exposure to markets that may have substantially
less trading volume and greater price volatility, economic structures that are
less diverse and mature, and political systems that may be less stable.
Depositary receipts are typically dollar denominated, although their market
price is subject to fluctuations of the foreign currency in which the underlying
securities are denominated. Depositary receipts include: (1) American Depositary
Receipts (ADRs), which are typically designed for U.S. investors and held either
in physical form or in book entry form; (2) European Depositary Receipts (EDRs),
which are similar to ADRs but may be listed and traded on a European exchange
(typically, Luxembourg) as well as in the United States; and (3) Global
Depositary Receipts (GDRs), which are similar to EDRs although they may be held
through foreign clearing agents such as Euroclear and other foreign
depositaries. All depositary receipts will be considered foreign securities for
purposes of a Fund's investment limitation concerning investment in foreign
securities.
Investments in securities of foreign issuers involve certain risks not
ordinarily associated with investments in securities of domestic issuers. These
risks include the following:
Currency Risk--The value of the Fund's foreign investments will be affected by
changes in currency exchange rates. The U.S. dollar value of a foreign security
decreases when the value of the U.S. dollar rises against the foreign currency
in which the security is denominated, and increases when the value of the U.S.
dollar falls against such currency.
Political and Economic Risk--The economies of many of the countries in which the
Fund may invest are not as developed as the U.S. economy and may be subject to
significantly different forces. Political or social instability, expropriation
or confiscatory taxation and limitation upon the removal of funds or other
assets could adversely affect the value of the Fund's investments.
Regulatory Risk--Foreign companies are not registered with the Commission and
are generally not subject to the regulatory controls imposed on United States
issuers and, as a consequence, there is generally less publicly available
information about foreign securities than is available regarding domestic
securities. Foreign companies are not subject to uniform accounting, auditing
and financial standards, practices and requirements comparable to those
applicable to U.S. companies. Income from foreign securities owned by the Fund
may be subject to withholding taxes imposed at the source which would reduce
dividend income payable to the Fund's shareholders.
Market Risk--The securities markets in many of the countries in which the Fund
may invest have substantially less trading volume than the major U.S. markets.
Consequently, the securities of some foreign issuers may be less liquid and
experience more price volatility than comparable domestic securities. Indeed,
custodian costs, as well as administrative costs (such as the need to use
foreign custodians) may be associated with the maintenance of assets in foreign
jurisdictions. There is generally less government regulation and supervision of
foreign stock exchanges, brokers and issuers which may make it difficult to
enforce contractual obligations. In addition, transaction costs in foreign
commission rates in foreign jurisdictions are likely to be higher than in the
United States.
High-Risk, High-Yield Securities
The Fund may invest in high risk, high-yield securities (junk bonds) which are
fixed income securities that offer a current yield above that generally
available on debt securities rated in the four highest categories by Moody's
Investors Service, Inc. (Moody's) and Standard & Poor's Corporation (S&P) or, if
unrated, considered to be of comparable quality by the investment adviser. These
securities include:
(a) fixed rate corporate debt obligations (including bonds, debentures and
notes) rated Ba or lower by Moody's or BB or lower by S&P;
Aetna Variable Fund 9
<PAGE>
(b) preferred stocks that have yields comparable to those of high-yielding debt
securities; and (c) any securities convertible into any of the foregoing.
Debt obligations rated BB/Ba, by Standard & Poor's and Moody's, respectively, or
lower, are regarded as speculative, and generally involve more risk of loss of
principal and income than higher-rated securities. Also their yields and market
values tend to fluctuate more. Fluctuations in value do not affect the cash
income from the securities but are reflected in the Fund's net asset value. The
greater risks and fluctuations in yield and value occur, in part, because
investors generally perceive issuers of lower-rated and unrated securities to be
less creditworthy. Lower ratings, however, may not necessarily indicate higher
risks. In pursuing the Fund's objectives, the Company seeks to identify
situations in which the rating agencies have not fully perceived the value of
the security or in which the Company believes that future developments will
enhance the creditworthiness and the ratings of the issuer.
High-risk, high-yield securities (junk bonds) may not constitute more than 10%
of the total assets of the Fund. The Fund will not invest in any debt security
rated lower than B.
The yields earned on high-risk, high-yield securities (junk bonds) generally are
related to the quality ratings assigned by recognized ratings agencies. These
securities tend to offer higher yields than those of other securities with the
same maturities because of the additional risks associated with them. These
risks include:
(1) Sensitivity to Interest Rate and Economic Changes. High-risk, high-yield
securities (junk bonds) are more sensitive to adverse economic changes or
individual corporate developments but less sensitive to interest rate
changes than are investment grade bonds. As a result, when interest rates
rise, causing bond prices to fall, the value of these securities may not
fall as much as investment grade corporate bonds. Conversely, when interest
rates fall, these securities may underperform investment grade corporate
bonds because the prices of these securities tend not to rise as much as
the prices of these other bonds.
Also, the financial stress resulting from an economic downturn or adverse
corporate developments could have a greater negative effect on the ability
of issuers of high-risk, high-yield securities (junk bonds) to service
their principal and interest payments, to meet projected business goals and
to obtain additional financing, than on more creditworthy issuers. Holders
of these securities could also be at greater risk because these securities
are generally unsecured and subordinated to senior debt holders and secured
creditors. If the issuer of a high-risk, high-yield security (junk bond)
owned by the Fund defaults, the Fund may incur additional expenses to seek
recovery. In addition, periods of economic uncertainty and changes can be
expected to result in increased volatility of market prices of these
securities and the Fund's net asset value. Furthermore, in the case of
high-risk, high-yield securities (junk bonds) structured as zero coupon or
pay-in-kind securities, their market prices are affected to a greater
extent by interest rate changes and thereby tend to be more speculative and
volatile than securities which pay interest periodically and in cash.
(2) Payment Expectations. High-risk, high-yield securities (junk bonds), like
other debt instruments, present risks based on payment expectations. For
example, these securities may contain redemption or call provisions. If an
issuer exercises these provisions in a declining interest rate market, the
Fund may have to replace the securities with a lower yielding security,
resulting in a decreased return for investors. Also, the value of these
securities may decrease in a rising interest rate market. In addition,
there is a higher risk of non-payment of interest and/or principal by
issuers of junk bonds than in the case of investment-grade bonds.
(3) Liquidity and Valuation Risks. High-risk, high-yield securities (junk
bonds) are often traded among a small number of broker-dealers rather than
in a broad secondary market. Purchasers of these securities in the past
tended to be institutions rather than individuals, a factor that further
limits the secondary market. Many of these securities may not be as liquid
as investment-grade bonds. The ability to value or sell these securities
will be adversely affected to the extent that such
10 Aetna Variable Fund
<PAGE>
securities are thinly traded or illiquid. Adverse publicity and investor
perceptions, whether or not based on fundamental analysis, may decrease or
increase the values and liquidity of high-risk, high-yield securities (junk
bonds) more than other securities, especially in a thinly-traded market.
(4) Limitations of Credit Ratings. The credit ratings assigned to high-risk,
high-yield securities (junk bonds) may not accurately reflect the true
risks of an investment. Credit ratings typically evaluate the safety of
principal and interest payments rather than the market value risk of such
securities. In addition, credit agencies may fail to adjust credit ratings
to reflect rapid changes in economic or company conditions that affect a
security's market value. Although the ratings of recognized rating services
such as Moody's and S&P are considered, the Company primarily relies on its
own credit analysis which includes a study of existing debt, capital
structure, ability to service debts and to pay dividends, the issuer's
sensitivity to economic conditions, its operating history and the current
trend of earnings. Thus the achievement of the Fund's investment objective
may be more dependent on the Company's own credit analysis than might be
the case for a fund which does not invest in high risk high-yield
securities (junk bonds).
(5) Legislation. Legislation may have a negative impact on the market for
high-risk, high-yield securities (junk bonds), such as legislation
requiring federally insured savings and loan associations to divest
themselves of their investments in these securities.
Zero Coupon and Pay-in-Kind Securities
Zero coupon, or deferred interest, securities are debt obligations that do not
entitle the holder to any periodic payment of interest prior to maturity or a
specified date when the securities begin paying current interest (cash payment
date) and therefore are issued and traded at a discount from their face amounts
or par value. The discount varies, depending on the time remaining until
maturity or cash payment date, prevailing interest rates, liquidity of the
security and the perceived credit quality of the issuer. The discount, in the
absence of financial difficulties of the issuer, decreases as the final maturity
or cash payment date of the security approaches. The market prices of zero
coupon and deferred interest securities generally are more volatile than the
market prices of securities with similar maturities that pay interest
periodically and are likely to respond to changes in interest rates to a greater
degree than do non-zero coupon securities having similar maturities and credit
quality.
The risks associated with lower-rated debt securities may apply to zero coupon
and pay-in-kind securities. These securities are also subject to the risk that
in the event of a default, the Fund may realize no return on its investment,
because these securities do not pay cash interest.
When-Issued or Delayed-Delivery Securities
During any period that the Fund has outstanding a commitment to purchase
securities on a when-issued or delayed-delivery basis, the Fund will maintain a
segregated account consisting of cash, U.S. Government securities or other
high-quality debt obligations with its custodian bank. To the extent that the
market value of securities held in this segregated account falls below the
amount that the Fund will be required to pay on settlement, additional assets
may be required to be added to the segregated account. Such segregated accounts
could affect the Fund's liquidity and ability to manage its portfolio. When the
Fund engages in when-issued or delayed-delivery transactions, it is effectively
relying on the seller of such securities to consummate the trade; failure of the
seller to do so may result in the Fund's incurring a loss or missing an
opportunity to invest funds held in the segregated account more advantageously.
The Fund will not pay for securities purchased on a when-issued or
delayed-delivery basis, or start earning interest on such securities, until the
securities are actually received. However, any security so purchased will be
recorded as an asset of the Fund at the time the commitment is made. Because the
market value of securities purchased on a when-issued or delayed-delivery basis
may increase or decrease prior to settlement as a result of changes in interest
rates or other factors, such securities will be subject to changes in market
value prior to settlement and a loss may be incurred if the value of the
security to be purchased declines prior to settlement.
Aetna Variable Fund 11
<PAGE>
Convertibles
A convertible bond or convertible preferred stock gives the holder the option of
converting these securities into common stock. Convertible securities also
contain a call feature whereby the issuer may redeem the security at a
stipulated price, thereby limiting the possible appreciation.
Illiquid and Restricted Securities
The Fund may invest up to 15% of its total assets in illiquid securities. For
this purpose, "illiquid securities" are those which cannot be sold in seven days
in the ordinary course of business without taking a materially reduced price.
Because of the absence of a trading market for these investments, the Fund may
take longer to liquidate the position and may realize less than the amount
originally paid by the Fund. The Fund may purchase securities, which, while
privately placed, are eligible for purchase and sale pursuant to Rule 144A under
the 1933 Act. This rule permits certain qualified institutional buyers, such as
the Fund, to trade in privately placed securities even though such securities
are not registered under the 1933 Act. The Company, under the supervision of the
Board of Trustees of the Fund, will consider whether securities purchased under
Rule 144A and other restricted securities are illiquid and thus subject to the
Fund's restriction of investing no more than 15% of the Fund's total assets in
illiquid securities. In making this determination, the Company will consider the
trading markets for the specific security taking into account the unregistered
nature of the Rule 144A security. In addition, the Company may consider, among
other things, the (i) frequency of trades and quotes, (ii) number of dealers and
potential purchasers, (iii) dealer undertakings to make a market, and (iv) the
nature of the security and market place trades. The liquidity of Rule 144A
securities will also be monitored by the Company and, if as a result of changed
conditions, it is determined that a Rule 144A security is no longer liquid, the
Fund's holdings of illiquid securities will be reviewed to assure that the Fund
does not invest more than 15% of its total assets in illiquid securities.
Investing in Rule 144A securities could have the effect of increasing the amount
of the Fund's investments in illiquid securities if qualified institutional
buyers are unwilling to purchase such securities. At the present time, it is not
possible to predict with certainty how the market for Rule 144A securities will
continue to operate.
Warrants
Warrants allow the holder to purchase new shares in the issuing company at a
predetermined price within either a specified length of time or perpetually.
Warrants may be sold individually or attached to preferred stock or bonds.
The purchaser of a warrant expects that the market price of a security will
exceed the purchase price of the warrant plus the exercise price of the warrant,
thus giving him a profit. Since the market price may never exceed the exercise
price before the expiration date of the warrant, the purchaser of the warrant
risks the loss of the entire purchase price of the warrant.
Borrowing
The Fund may borrow up to 5% of the value of its total assets for temporary or
emergency purposes. The Fund may also borrow up to one-third of the value of its
total assets from banks (including its custodian bank) to increase its holdings
of portfolio securities. Leveraging by means of borrowing may affect the Fund's
net asset value by exaggerating any increase or decrease in the value of
portfolio securities, and money borrowed is subject to interest and other costs
which may or may not exceed the income derived from the securities purchased
with borrowed funds. There is no present intention to leverage the Fund.
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. The Fund does not intend to make a general practice of short-term trading,
although it may occasionally realize short-term gains or losses. Purchases and
sales will be made whenever such action is deemed prudent and consistent with
investment objectives. It is anticipated that under normal market conditions the
average annual portfolio turnover rate will not exceed 125%. A high turnover
rate involves greater expenses and may involve greater risk to the Fund. The
portfolio turnover rates for 1995 and 1996 were 97% and 85% respectively.
12 Aetna Variable Fund
<PAGE>
TRUSTEES AND OFFICERS OF THE FUND
The investments and administration of the Fund are under the direction of the
Board of Trustees. The Trustees and executive officers of the Fund and their
principal occupations for the past five years are listed below. Those trustees
who are "interested persons," as defined in the 1940 Act, are indicated by an
asterisk (*). All Trustees and officers hold similar positions with other
investment companies in the same Fund Complex managed by the Investment Adviser.
Fund Complex presently consists of: Aetna Series Fund, Inc., Aetna Variable
Fund, Aetna Income Shares, Aetna Variable Encore Fund, Aetna Investment Advisers
Fund, Inc., Aetna GET Fund (Series B and Series C) Aetna Generation Portfolios,
Inc. and Aetna Variable Portfolios, Inc.
<TABLE>
<CAPTION>
Principal Occupation During Past Five Years
Position(s) Held (and Positions held with Affiliated Persons or
Name, Address and Age with Registrant Principal Underwriters of the Registrant)
---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Shaun P. Mathews* Trustee and Vice President/Senior Vice President, Aetna Life
151 Farmington Avenue President Insurance and Annuity Company, March 1991 to present
Hartford, Connecticut and Vice President, Aetna Life Insurance Company, 1991
Age 41 to present. Directorand President, Aetna Investment
Services, Inc.; and Director and Senior Vice President,
Aetna Insurance Company of America, March 1991 to present.
Wayne F. Baltzer Vice President Assistant Vice President, Aetna Life Insurance and
151 Farmington Avenue Annuity Company, May 1991 to present; Vice President,
Hartford, Connecticut Aetna Investment Services, Inc. July 1993 to present.
Age 53
Martin T. Conroy Vice President Assistant Treasurer, Aetna Life Insurance and Annuity
151 Farmington Avenue Company, October 1991 to present.
Hartford, Connecticut
Age 57
J. Scott Fox Vice President Director and Senior Vice President, Aetna Life
242 Trumbull Street and Treasurer Insurance and Annuity Company, March 1997 to
Hartford, Connecticut present; Director, Managing Director, Chief Operating
Age 42 Officer, Chief Financial Officer and Treasurer, Aeltus
Investment Management, Inc. (Aeltus), April 1994 to
present; Managing Director and Treasurer, Equitable
Capital Management Corp., March 1987 to September
1993. Director and Chief Financial Officer, Aeltus
Capital, Inc. and Aeltus Trust Company, Inc.; Director,
President and Chief Executive Officer, Aetna
Investment Management, (Bermuda) Holding, Ltd.
Susan E. Bryant Secretary Counsel, Aetna Inc. (formerly Aetna Life and Casualty
151 Farmington Avenue Company), March 1993 to present; General Counsel
Hartford, Connecticut and Corporate Secretary, First Investors Corporation,
Age 49 April 1991 to March 1993. Secretary, Aetna
Investment Services, Inc. and Vice President and
Senior Counsel, Aetna Financial Services, Inc.
Morton Ehrlich Trustee Chairman and Chief Executive Officer, Integrated
1000 Venetian Way Management Corp. (an entrepreneurial company) and
Miami, Florida Universal Research Technologies, 1992 to present;
Age 62 Director and Chairman, Audit Committee, National
Bureau of Economic Research, 1985 to 1992.
</TABLE>
Aetna Variable Fund 13
<PAGE>
<TABLE>
<CAPTION>
Principal Occupation During Past Five Years
Position(s) Held (and Positions held with Affiliated Persons or
Name, Address and Age with Registrant Principal Underwriters of the Registrant)
-----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Maria T. Fighetti Trustee Manager/Attorney, Health Services, New York City
325 Piermont Road Department of Mental Health, Mental Retardation
Closter, New Jersey and Alcohol Services, 1973 to present.
Age 53
David L. Grove Trustee Private Investor; Economic/Financial Consultant,
5 The Knoll December 1985 to present.
Armonk, New York
Age 78
Timothy A. Holt* Trustee Director, Senior Vice President and Chief Financial
151 Farmington Avenue Officer, Aetna Life Insurance and Annuity Company,
Hartford, Connecticut February 1996 to present; Vice President, Portfolio
Age 43 Management/Investment Group, Aetna Inc. (formerly
Aetna Life and Casualty Company), June 1991 to February
1996. Director and Vice President Aetna Retirement
Holdings, Inc.
Daniel P. Kearney* Trustee Director, President, and Chief Executive Officer,
151 Farmington Avenue Aetna Life Insurance and Annuity Company, December 1993
Hartford, Connecticut to present; Executive Vice President, Aetna Inc.
Age 57 (formerly Aetna Life and Casualty Company), December
1993 to present; Group Executive, Aetna Inc. (formerly
Aetna Life and Casualty Company), 1991 to 1993;
Director, Aetna Investment Services, Inc., November
1994 to present; Director, Aetna Insurance Company of
America, May 1994 to present.
Sidney Koch Trustee Financial Adviser, self-employed, January 1993 to
455 East 86th Street present; Senior Adviser, Daiwa Securities America,
New York, New York Inc., January 1992 to January 1993; Executive Vice
Age 61 President, Member of Executive Committee, Daiwa
Securities America, Inc., January 1986 to January 1992.
Corine T. Norgaard Trustee, Chair Dean of the Barney School of Business, University of
556 Wormwood Hill Audit Committee Hartford, (West Hartford, CT), August 1996 to
Mansfield Center, and Contract present; Professor, Accounting and Dean of the School
Connecticut Committee of Management, Binghamton University,
Age 59 (Binghamton, NY), August 1993 to August 1996;
Professor, Accounting, University of Connecticut,
(Storrs, Connecticut), September 1969 to June 1993;
Director, The Advest Group (holding company for
brokerage firm) through September 1996.
Richard G. Scheide Trustee Trust and Private Banking Consultant, David Ross
11 Lily Street Palmer Consultants, July 1991 to present.
Nantucket, Massachusetts
Age 67
</TABLE>
* Interested persons as defined in the 1940 Act.
14 Aetna Variable Fund
<PAGE>
During the year ended December 31, 1996, members of the Boards of the Funds
within the Aetna Mutual Fund Complex who are also directors, officers or
employees of Aetna Inc. and its affiliates were not entitled to any compensation
from the Funds. Effective November 1, 1995, members of the Boards who are not
affiliated as employees of Aetna or its subsidiaries are entitled to receive an
annual retainer of $30,000 for service on the Boards of the Funds within the
Aetna Mutual Fund Complex. In addition, each such member will receive a fee of
$5,000 per meeting for each regularly scheduled Board meeting; $5,000 for each
Contract Committee meeting which is held on any day on which a regular Board
meeting is not scheduled; and $3,000 for each committee meeting other than for a
Contract Committee meeting on any day on which a regular Board meeting is not
scheduled. A Committee Chairperson fee of $2,000 each will be paid to the
Chairperson of the Contract and Audit Committees. All of the above fees are to
be allocated proportionately to each Fund within the Aetna Mutual Fund Complex
based on the net assets of the Fund as of the date compensation is earned.
As of December 31, 1996, the unaffiliated members of the Board of Trustees were
compensated as follows:
Total
Compensation
from Registrant
Aggregate and Fund
Name of Person, Compensation Complex Paid
Position from Registrant to Trustees
- --------------------- ------------------ -----------------
Corine Norgaard $45,922.00 $72,950.00
Trustee and
Chairman, Audit and
Contract Committees
Sidney Koch $45,922.00 $72,950.00
Trustee and
Member, Audit and
Contract Committees
Maria T. Fighetti $40,256.00 $63,950.00
Trustee and
Member, Audit and
Contract Committees
Morton Ehrlich $40,256.00 $63,950.00
Trustee and
Member, Audit and
Contract Committees
Richard G. Scheide $43,404.00 $68,950.00
Trustee and
Member, Audit and
Contract Committees
David L. Grove* $43,404.00 $68,950.00
Trustee and
Member, Audit and
Contract Committees
* Mr. Grove elected to defer all such compensation under an existing deferred
compensation plan.
The Fund has applied for an Order by the Securities and Exchange Commission to
allow the Members of the Board of Trustees who are not affiliated with Aetna
Inc. or any of its subsidiaries to defer all or a portion of their compensation
in accordance with the terms of a new Deferred Compensation Plan (Plan).
Under the Plan, compensation deferred by an unaffiliated Trustee is periodically
adjusted as though an equivalent amount had been invested and reinvested in
shares of one or more Series of Aetna Series Fund, Inc. designated by the
Trustee. The amount paid to the unaffiliated Trustee under the Plan will be
based upon the performance of such investments. Deferral of compensation in
accordance with the Plan will have a negligible effect on the assets,
liabilities, and net income per share, and will not obligate the Fund to retain
the services of any Trustee or to pay any particular level of compensation to
the Trustee.
Aetna Variable Fund 15
<PAGE>
CONTROL PERSONS AND PRINCIPAL SHAREHOLDERS OF THE FUND
As of March 31, 1997 (99.58%) shares of the Fund were owned by the Company and
its affiliates and allocated to variable annuity and variable life insurance
separate accounts to fund obligations under VA Contracts and VLI Policies.
Contract holders in these separate accounts are provided the right to direct the
voting of Fund shares at shareholder meetings. The Company and its affiliates
vote the shares they own in these separate accounts in accordance with contract
holders' directions. Undirected shares of the Fund will be voted for each
Account in the same proportion as directed shares.
INVESTMENT ADVISORY AGREEMENT
The Fund has entered into an Investment Advisory Agreement (Advisory Agreement)
appointing Aetna as its Investment Adviser. The Advisory Agreement was adopted
by the Board of Trustees in February 1996, and approved by the shareholders in
June, 1996. The Advisory Agreement has been effective since August 1, 1996. The
Advisory Agreement will remain in effect if approved at least annually by a
majority of the Trustees, including a majority of the Trustees who are not
"interested persons" of the Fund, at a meeting called for that purpose and held
in person. The Advisory Agreement may be terminated without penalty at any time
by the Trustees or, by a majority vote of the outstanding voting securities of
the Fund, or it may be terminated on sixty days' written notice by Aetna. The
Advisory Agreement terminates automatically in the event of assignment.
This Advisory Agreement replaces a prior agreement with Aetna that was approved
by shareholders in April 1994. Under both advisory agreements, and subject to
the direction of the Board of Trustees, Aetna has responsibility for supervising
all aspects of the operations of the Fund including the selection, purchase and
sale of securities, the calculation of net asset values and the preparation of
financial and other reports as requested by the Board. Under both the old and
the new agreements, Aetna is given the right to delegate any or all of its
obligations to a subadviser.
The Advisory Agreement provides that Aetna is responsible for payment of all
costs of its personnel, its overhead and of its employees who also serve as
officers or Trustees of the Fund. The Fund is responsible for payment of all of
its other costs; however, under the Administrative Services Agreement described
below, Aetna has agreed to pay all direct expenses for the fund except for
broker's commissions and other costs incurred in effecting transactions on
behalf of the Fund.
For its services under the prior agreement, Aetna received a monthly fee at an
annual rate of 0.25% of the average daily net assets of the Fund. Under the new
Advisory Agreement, Aetna receives an advisory fee at an annual rate of 0.50% of
the average daily net assets of the Fund, payable monthly. For the years ended
December 31, 1993, 1994, 1995 and 1996, the Fund paid Aetna investment advisory
fees of $11,939,379, $11,824,204, $12,573,737 and $22,537,554, respectively.
SUBADVISORY AGREEMENT
The Fund and Aetna have entered into a Subadvisory Agreement with Aeltus
Investment Management, Inc. (Aeltus) effective August 1, 1996. The Subadvisory
Agreement will remain in effect if approved at least annually by a majority of
the Trustees, including a majority of the Trustees who are not "interested
persons" of the Fund, at a meeting called for that purpose and held in person.
The Subadvisory Agreement may be terminated without penalty at any time by the
Trustees or by a majority of the outstanding voting securities of the Fund or
terminated on sixty days' written notice by the Adviser, the Fund, or the
Subadviser. The Subadvisory Agreement terminates automatically in the event of
its assignment.
Under the Subadvisory Agreement, Aeltus is responsible for managing the assets
of the Fund in accordance with the Fund's investment objective and policies
subject to the supervision of Aetna and the Trus-
16 Aetna Variable Fund
<PAGE>
tees, and for preparing and providing accounting and financial information as
requested by the Adviser and the Trustees. The Subadviser pays the salaries,
employment benefits and other related costs of its personnel. For its services,
Aetna has agreed to pay the Subadviser a fee at an annual rate of up to 0.30% of
the average daily net assets of the Fund, payable monthly. This fee is not
charged to the Fund but is paid by Aetna out of its investment advisory fees.
Aetna, as the Investment Adviser, retains overall responsibility for monitoring
the investment program maintained by Aeltus for compliance with applicable laws
and regulations and the Fund's investment objective and policies.
ADMINISTRATIVE SERVICES AGREEMENT
The Fund entered into an Administrative Services Agreement with Aetna effective
May 1, 1996 under which Aetna provides all administrative services for the Fund
and pays all ordinary recurring costs of the Fund (except brokerage costs and
other transaction costs). These are costs that the fund would otherwise be
required to pay under the terms of the Investment Advisory Agreement. As a
result, the fund's costs and fees are limited to the advisory fee, the
administrative services charge and brokerage and transaction costs. For its
services and as reimbursement for the costs it incurs under the Administrative
Services Agreement, Aetna receives an annual fee, payable monthly, at a rate of
0.06% of the average daily net assets of the Fund.
The Administrative Services Agreement will remain in effect if approved annually
by a majority of the Trustees. It may be terminated by either party on sixty
days' written notice.
Prior to May 1, 1996, Aetna provided administrative services under an agreement
that allowed for the reimbursement of a proportionate share of Aetna's overhead
in administering the Fund and the Fund reimbursed Aetna directly for all other
costs. The total of the direct costs and administrative costs reimbursed to
Aetna for the years ended December 31, 1993, 1994, 1995 and 1996 were
$2,080,230, $2,445,487, $2,202,944, and $3,258,759, respectively.
LICENSE AGREEMENT
The Fund uses the service mark of the Aetna Variable Fund and the name "Aetna"
with the permission of Aetna Inc. granted under a License Agreement. The
continued use is subject to the right of Aetna Inc. to withdraw this permission
in the event Aetna or another subsidiary or affiliated corporation of Aetna Inc.
should not be the investment adviser of the Fund.
BROKERAGE ALLOCATION AND TRADING POLICIES
Subject to the direction of the Trustees, Aetna and Aeltus have responsibility
for making the Fund's investment decisions, for effecting the execution of
trades for the Fund and for negotiating any brokerage commissions thereof. It is
the policy of Aetna and Aeltus 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 Aeltus may place the Fund's
transactions with such brokers or dealers and for execution in such markets as,
in the opinions of Aetna and Aeltus, will lead to the best overall quality of
execution.
Aetna and Aeltus currently receive a variety of brokerage and research services
from brokerage firms in return for the execution by such brokerage firms of
trades in securities held by the Fund. 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 Fund
and other investment companies and accounts, services related to the
Aetna Variable Fund 17
<PAGE>
execution of trades in the Fund's securities and advice as to the valuation of
securities. Aetna and Aeltus 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 Fund'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 and Aeltus' 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 which 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 Aeltus believes that more than one
broker can provide best execution, preference may be given to brokers who
provide additional services to Aetna or Aeltus.
Consistent with securities laws and regulations, Aetna and Aeltus 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 Aeltus' 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 Aeltus'
opinion as to which services and which means of payment are in the long-term
best interests of the Fund. Research services furnished by brokers through whom
the Fund effects securities transactions may be used by Aetna and Aeltus in
servicing all their accounts; not all such services will be used by Aetna and
Aeltus to benefit the Fund. The Fund has no present intention to effect any
brokerage transactions in Fund securities with Aetna or any affiliate of the
Fund or Aetna except in accordance with applicable Commission rules. All
transactions will comply with Rule 17e-1 under the 1940 Act.
Certain officers of Aetna and Aeltus also manage the securities portfolios of
Aetna's own accounts. Further, Aetna and Aeltus also act as investment adviser
to other investment companies registered under the 1940 Act and other client
accounts. Aetna and Aeltus have adopted policies designed to prevent
disadvantaging the Fund in placing orders for the purchase and sale of
securities for the Fund.
To the extent Aetna or Aeltus desires to buy or sell the same security at or
about the same time for more than one client, the purchases or sales will
normally be aggregated (or "bunched") 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 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 the Fund or the price paid or received by the Fund.
The Board of Trustees has adopted a policy allowing trades to be made between
registered investment companies provided they meet the terms of Rule 17a-7 under
the 1940 Act. Pursuant to this policy, the Fund may buy a security from or sell
another security to another registered investment company advised by Aetna.
The Trustees have adopted a Code of Ethics governing personal trading by persons
who manage or who have access to trading activity by a Fund. The Code of Ethics
allows trades to be made in securities that may be held by a Fund; however, it
prohibits a person from taking advantage of Fund trades or from acting on inside
information.
For 1993, 1994, 1995, and 1996, the Fund paid brokerage commissions of
$4,270,255, $13,406,837, $17,298,663, and $12,769,947, respectively.
For the fiscal year ended December 31, 1996, portfolio transactions in the
amount of $2,646,215,503 were directed to certain brokers because of research
services, of which commissions in the amount of
18 Aetna Variable Fund
<PAGE>
$2,790,782 were paid with respect to such transactions. No brokerage business
was placed with any brokers affiliated with Aetna during the last three fiscal
years.
DESCRIPTION OF SHARES
Aetna Variable Fund was originally established as a Maryland corporation in 1974
and was converted to a Massachusetts business trust on May 1, 1984. It operates
under a Declaration of Trust (Declaration) dated January 25, 1984.
The Declaration permits the Trustees to issue an unlimited number of full and
fractional shares of beneficial interest of a single class, each of which
represents a proportionate interest in the Fund equal to each other share. The
Trustees have the power to divide or combine the shares into a greater or lesser
number of shares without thereby changing the proportional beneficial interest
in the Fund.
Upon liquidation of the Fund, shareholders are entitled to share pro rata in the
net assets of the Fund available for distribution to shareholders. Fund shares
are fully paid and nonassessable, except as set forth below.
Shareholder and Trustee Liability
The Fund is an entity of the type commonly known as a "Massachusetts business
trust." Under Massachusetts law, shareholders of such business trusts may, under
certain circumstances, be held personally liable as partners for the obligations
of the Fund, which is not true in the case of a corporation. The Declaration
provides that shareholders shall not be subject to any personal liability for
the acts or obligations of the Fund and that every written agreement,
obligation, instrument or undertaking made by the Fund shall contain a provision
to the effect that shareholders are not personally liable thereunder. With
respect to tort claims, contract claims where the provision referred to is
omitted from the undertaking, and claims for taxes and certain statutory
liabilities in other jurisdictions, a shareholder may be held personally liable
to the extent that claims are not satisfied by the Fund. However, upon payment
of any such liability the shareholder will be entitled to reimbursement from the
general assets of the Fund. The Trustees intend to conduct the operations of the
Fund, with the advice of counsel, in such a way as to avoid, as far as possible,
ultimate liability of the shareholders for liabilities of the Fund.
The Declaration further provides that the Trustees will not be liable for errors
of judgment or mistakes of fact or law, but nothing in the Declaration protects
a Trustee against any liability to which he or she would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of his or her office.
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 Trustees (to
the extent hereinafter provided) and on other matters submitted to the vote of
shareholders. Participants who select the Fund for investment through their VA
Contract or VLI Policy are not the shareholders of the Fund. The insurance
company depositors of the separate accounts pass voting rights for shares held
for VA Contracts or VLI Policies through to Contract holders or Participants as
described in the prospectus for the applicable VA Contract or VLI Policy. A
meeting of the shareholders at which Trustees were elected was held most
recently on April 13, 1994. Thereafter, no further meeting of shareholders for
the purpose of electing Trustees will be held unless and until such time as less
than a majority of the Trustees holding office have been elected by
shareholders, at which time the Trustees then in office will call a
shareholders' meeting for election of Trustees. Vacancies occurring between such
meetings shall be filled in an otherwise legal manner if, immediately after
filling any such vacancy, at least two-thirds of the Trustees holding office
have been elected by shareholders. Except as set forth above, the Trustees shall
continue to hold office and may appoint successor Trustees. Trustees may be
removed from office (1) at any time by two-thirds vote of the Trustees; (2) by a
majority vote of Trustees where any Trustee becomes mentally or physically
incapacitated; (3) at a special meeting of shareholders by a two-thirds vote of
the outstanding shares; (4) by written declaration filed with Mellon Bank, N.A.,
the Fund's custodian, signed by two-thirds of the Fund's shareholders. Any
Trustee may also
Aetna Variable Fund 19
<PAGE>
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 Trustees can,
if they choose to do so, elect all the Trustees of the Fund, in which event the
holders of the remaining shares will be unable to elect any person as a Trustee.
The Declaration may be amended by an affirmative vote of a majority of the
shares at any meeting of shareholders or by written instrument signed by a
majority of the Trustees and consented to by a majority of the shareholders. The
Trustees may also amend the Declaration without the vote or consent of
shareholders if they deem it necessary to conform the Declaration to the
requirements of applicable federal laws or regulations or the requirements of
the regulated investment company provisions of the Internal Revenue Code of
1986, as amended, but the Trustees shall not be liable for failing to do so.
Shares have no preemptive or conversion rights.
PURCHASE AND REDEMPTION OF SHARES
Shares of the Fund are purchased and redeemed at the net asset value next
determined after receipt of a purchase or redemption order in acceptable form by
Firstar Trust Company ("Firstar"). No sales charge or redemption charge is made.
The value of shares redeemed may be more or less than the shareholder's cost,
depending upon the market value of the portfolio securities at the time of
redemption. Payment for shares redeemed will be made within seven days after the
redemption request is received in proper form by Firstar. Any written request to
redeem shares must bear the signatures of all the registered holders of those
shares. The signatures must be guaranteed by a commercial bank, trust company or
a member of a national securities exchange. Firstar will, on request, explain
any additional requirements for shares held in the name of a corporation,
partnership, trustee, guardian or in any other representative capacity. However,
the right to redeem Fund shares may be suspended or payment therefore postponed
for any period during which (a) trading on the New York Stock Exchange is
restricted as determined by the Commission or such Exchange is closed for other
than weekends and holidays; (b) an emergency exists, as determined by the
Commission, as a result of which (i) disposal by the Fund of securities owned by
it is not reasonably practicable, or (ii) it is not reasonably practicable for
the Fund to determine fairly the value of its net assets; or (c) the Commission
by order so permits for the protection of shareholders of the Fund.
An open account is automatically set up and maintained for each shareholder to
facilitate the voluntary accumulation of Fund shares. The open account system
makes unnecessary the issuance and delivery of stock certificates, thereby
relieving shareholders of the responsibility of safekeeping. Through the open
account system, each shareholder is informed of his or her holdings after any
transaction affecting the number of shares he or she owns. Share certificates
will not be issued.
PRINCIPAL UNDERWRITER
The Company is the principal underwriter of the Fund pursuant to a contract
(Underwriting Agreement) between it and the Fund. The Underwriting Agreement
will remain in effect through December 1997 and may be continued annually
thereafter if approved annually by the Board of Trustees of the Fund or by a
vote of holders of a majority of the Fund's shares. The Underwriting Agreement
may be terminated at any time, by either party, without the payment of any
penalty, on sixty (60) days' written notice to the other party.
TAX MATTERS
The following is only a summary of certain additional tax considerations
generally affecting the Fund and its shareholders that are not described in the
Prospectus. No attempt is made to present a detailed explanation of the tax
treatment of the Fund or its shareholders, and the discussions here and in the
Prospectus are not intended as substitutes for careful tax planning. Holders of
VA Contracts or VLI Policies must consult the prospectuses of their respective
contracts or policies for information concerning the federal income tax
consequences of owning such VA Contracts or VLI Policies.
20 Aetna Variable Fund
<PAGE>
Qualification as a Regulated Investment Company
The Fund has elected to be taxed as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986, as amended (Code). As a
regulated investment company, the Fund generally 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 (Distribution Requirement), and satisfies certain other requirements of the
Code that are described below. Distributions by the Fund 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 can therefore satisfy the Distribution Requirement.
In addition to satisfying the Distribution Requirement, a regulated investment
company must: (1) 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 (Income Requirement); and (2) derive less than 30% of its gross
income (exclusive of certain gains on designated hedging transactions that are
offset by realized or unrealized losses on offsetting positions) from the sale
or other disposition of stock, securities or foreign currencies (or options,
futures or forward contracts thereon) held for less than three months
(Short-Short Gain Test). However, foreign currency gains, including those
derived from options, futures and forwards, will not in any event be
characterized as Short-Short Gain if they are directly related to the regulated
investment company's investments in stock or securities (or options or futures
thereon). Because of the Short-Short Gain Test, the Fund may have to limit the
sale of appreciated securities that it has held for less than three months.
However, the Short-Short Gain Test will not prevent the Fund from disposing of
investments at a loss, since the recognition of a loss before the expiration of
the three-month holding period is disregarded for this purpose. Interest
(including original issue discount) received by the Fund at maturity or upon the
disposition of a security held for less than three months will not be treated as
gross income derived from the sale or other disposition of such security within
the meaning of the Short-Short Gain Test. However, income that is attributable
to realized market appreciation will be treated as gross income from the sale or
other disposition of securities for this purpose.
In general, gain or loss recognized by the Fund 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 the Fund 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 Fund 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, will generally be treated as ordinary income or loss.
For purposes of determining whether capital gain or loss recognized by the Fund
on the disposition of an asset is long-term or short-term, the holding period of
the asset may be affected if (i) 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, (ii) the asset is otherwise
held by the Fund as part of a "straddle" (which term generally excludes a
situation where the asset is stock and the Fund grants a qualified covered call
option (which, among other things, must not be deep-in-the-money) with respect
thereto) or (iii) the asset is stock and the Fund 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 (i) above. In addition, the Fund may be
required to defer the recognition
Aetna Variable Fund 21
<PAGE>
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 the Fund on the lapse of, or any gain or loss recognized
by the Fund from a closing transaction with respect to, an option written by the
Fund 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 the Fund 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, the Fund 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.
Transactions that may be engaged in by the Fund (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
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. The Fund, 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 Fund that are not Section 1256
contracts. The IRS has held in several private rulings that 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, provided
that the contract is actually held by the Fund uninterrupted for a total of at
least three months.
Because only a few regulations regarding the treatment of swap agreements and
other financial derivatives have been issued, the tax consequences of
transactions in these types of instruments are not always entirely clear. The
Fund intends to account for derivatives transactions in a manner deemed by it to
be appropriate, but the Internal Revenue Service might not necessarily accept
such treatment. If it did not, the status of a Fund as a regulated investment
company and/or its compliance with the diversification requirement under Code
section 817(h) might be affected. The Fund intends to monitor developments in
this area. Certain requirements that must be met under the Code in order for the
Fund to qualify as a regulated investment company may limit the extent to which
it will be able to engage in swap agreements.
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.
Finally, the Fund 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 the Fund's taxable year, at least 50% of the value of the Fund'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 which the
Fund has not invested more than 5% of the value of the Fund's total assets in
securities of such issuer and as to which the Fund 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 in two or more issuers which the Fund controls and
which are engaged in the same or similar 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
22 Aetna Variable Fund
<PAGE>
any formal or informal authority which identifies the issuer of such instrument.
For purposes of asset diversification testing, obligations issued by or
guaranteed by agencies and instrumentalities of the U.S. Government such as the
Federal Agricultural Mortgage Corporation, the Farm Credit System Financial
Assistance Corporation, the Federal Home Loan Bank, the Federal Home Loan
Mortgage Corporation, the Federal National Mortgage Association, the Government
National Mortgage Corporation, and the Student Loan Marketing Association are
treated as U.S. Government securities.
If for any taxable year the Fund 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 Fund'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 segregated asset account upon which a variable
annuity contract or variable life insurance policy is based must be "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 a fund'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 while each U.S. Government agency and instrumentality is considered a
separate issuer, a particular foreign government and its agencies,
instrumentalities and political subdivisions may be considered the same issuer.
As a safe harbor, a separate 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.
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 the regulated investment
company satisfies certain conditions relating to the ownership of the shares.
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 988 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).
The Fund 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 the Fund may in certain circumstances be required to liquidate
portfolio investments to make sufficient distributions to avoid excise tax
liability.
Aetna Variable Fund 23
<PAGE>
Fund Distributions
The Fund anticipates distributing substantially all of its investment company
taxable income for each taxable year. Such distributions will be taxable to
shareholders as ordinary income and treated as dividends for federal income tax
purposes, but they may qualify for the dividends-received deduction for
corporate shareholders to the extent discussed below.
The Fund may either retain or distribute to shareholders its net capital gain
for each taxable year. The Fund currently intends to distribute any such
amounts. If net capital gain is distributed and designated as a capital gain
dividend, it will be taxable to shareholders as long-term capital gain,
regardless of the length of time a shareholder has held its shares or whether
such gain was recognized by the Fund prior to the date on which the shareholder
acquired his shares. All distributions paid to Aetna or its affiliates, whether
characterized as ordinary income or capital gain, are not taxable to VA Contract
or VLI Policy holders.
If the Fund elects to retain its net capital gain, the Fund will be taxed
thereon (except to the extent of any available capital loss carryovers) at the
35% corporate tax rate. Where the Fund elects to retain its net capital gain, it
is expected that the Fund also will elect to have shareholders of record on the
last day of its taxable year treated as if each received a distribution of his
pro rata share of such gain, with the result that each shareholder will be
required to report his pro rata share of such gain on his tax return as
long-term capital gain, will receive a refundable tax credit for his pro rata
share of tax paid by the Fund on the gain, and will increase the tax basis for
his shares by an amount equal to the deemed distribution less the tax credit.
Ordinary income dividends paid by the Fund with respect to a taxable year may
qualify for the dividends-received deduction generally available to corporations
(other than corporations, such as S corporations, which are not eligible for the
deduction because of their special characteristics and other than for purposes
of special taxes such as the accumulated earnings tax and the personal holding
company tax) to the extent of the amount of qualifying dividends received by the
Fund from domestic corporations for the taxable year and if the shareholder
meets eligibility requirements in the Code. A dividend received by the Fund will
not be treated as a qualifying dividend (1) if it has been received with respect
to any share of stock that the Fund has held for less than 46 days (91 days in
the case of certain preferred stock), excluding for this purpose under the rules
of Code Section 246(c) (3) and (4): (i) any day more than 45 days (or 90 days in
the case of certain preferred stock) after the date on which the stock becomes
ex-dividend and (ii) any period during which the Fund has an option to sell, is
under a contractual obligation to sell, has made and not closed a short sale of,
is the grantor of a deep-in-the-money or otherwise nonqualified option to buy,
or has otherwise diminished its risk of loss by holding other positions with
respect to, such (or substantially identical) stock; (2) to the extent that the
Fund is under an obligation (pursuant to a short sale or otherwise) to make
related payments with respect to positions in substantially similar or related
property; or (3) to the extent the stock on which the dividend is paid is
treated as debt-financed under the rules of Code Section 246A. Moreover, the
dividends-received deduction for a corporate shareholder may be disallowed or
reduced (i) if the corporate shareholder fails to satisfy the foregoing
requirements with respect to its shares of the Fund or (ii) by application of
Code Section 246(b) which in general limits the dividends-received deduction.
Alternative Minimum Tax (AMT) is imposed in addition to, but only to the extent
it exceeds, the regular tax and is computed at a maximum marginal rate of 28%
for noncorporate taxpayers and 20% for corporate taxpayers on the excess of the
taxpayer's alternative minimum taxable income (AMTI) over an exemption amount.
In addition, under the Superfund Amendments and Reauthorization Act of 1986, a
tax is imposed for taxable years beginning after 1986 and before 1996 at the
rate of 0.12% on the excess of a corporate taxpayer's AMTI (determined without
regard to the deduction for this tax and the AMT net operating loss deduction)
over $2 million. For purposes of the corporate AMT and the environmental super
fund tax (which are discussed above), the corporate dividends-received deduction
is not itself an item of tax preference that must be added back to taxable
income or is otherwise disallowed in determining a corporation's AMTI. However,
corporate shareholders will generally be required to take the full amount of any
dividend received from the Fund into account (without a dividends-received
deduction) in determining its adjusted current earnings, which are used in
computing an additional corporate preference item
24 Aetna Variable Fund
<PAGE>
(i.e., 75% of the excess of a corporate taxpayer's adjusted current earnings
over its AMTI (determined without regard to this item and the AMT net operating
loss deduction)) includable in AMTI.
Investment income that may be received by the Fund from sources within foreign
countries may be subject to foreign taxes withheld at the source. The United
States has entered into tax treaties with many foreign countries which entitle
the Fund to a reduced rate of, or exemption from, taxes on such income. It is
impossible to determine the effective rate of foreign tax in advance since the
amount of the Fund's assets to be invested in various countries is not known.
Distributions by the Fund that do not constitute ordinary income dividends or
capital gain dividends will be treated as a return of capital to the extent of
(and in reduction of) the shareholder's tax basis in his shares; any excess will
be treated as gain from the sale of his shares, as discussed below.
Distributions paid to Aetna and its affiliates will be reinvested in additional
shares. Distributions to other shareholders will be reinvested in additional
Fund shares unless Firstar Trust Company, the Fund's transfer agent, is
otherwise notified in writing prior to the record date for such distributions.
Shareholders receiving a distribution in the form of either cash or additional
shares will be treated as receiving a distribution in an amount equal to the
fair market value of the shares received, determined as of the reinvestment
date. In addition, if the net asset value at the time a shareholder purchases
shares of the Fund reflects undistributed net investment income or recognized
capital gain net income, or unrealized appreciation in the value of the assets
of the Fund, distributions of such amounts will be taxable to the shareholder in
the manner described above, although such distributions economically constitute
a return of capital to the shareholder.
Ordinarily, shareholders are required to take distributions by the Fund into
account in the year in which the distributions are made. However, dividends
declared in October, November or December of any year and payable to
shareholders of record on a specified date in such a month will be deemed to
have been received by the shareholders (and made by the Fund) on December 31 of
such calendar year if such dividends are actually paid in January of the
following year. Shareholders will be advised annually as to the U.S. federal
income tax consequences of distributions made (or deemed made) during the year.
Sale or Redemption of Shares
Shareholders will recognize gain or loss on the sale or redemption of shares of
the Fund in an amount equal to the difference between the proceeds of the sale
or redemption and the shareholder's adjusted tax basis in the shares. All or a
portion of any loss so recognized may be disallowed if the shareholder purchases
other shares of the Fund within 30 days before or after the sale or redemption.
In general, any gain or loss arising from (or treated as arising from) the sale
or redemption of shares of the Fund will be considered capital gain or loss and
will be long-term capital gain or loss if the shares were held for longer than
one year. However, any capital loss arising from the sale or redemption of
shares held, or deemed under Code rules to be held, for six months or less will
be treated as a long-term capital loss to the extent of the amount of capital
gain dividends received on such shares. Although gain or loss realized on shares
redeemed through the direction of VA Contract or VLI Policy holders is taxable
to Aetna or its affiliates, such VA Contract or VLI Policy holders will not be
subject to tax.
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 of ordinary income dividends and capital gain
dividends from regulated investment companies 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 these and other state and local tax
rules affecting investment in the Fund.
Aetna Variable Fund 25
<PAGE>
NET ASSET VALUE
Securities of the Fund are generally valued by independent pricing services.
Equity securities of the Fund which are traded on a registered securities
exchange 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 mean of the last bid and asked price if current market quotations are not
readily available. Short-term debt securities which 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. Short-term debt securities maturing in
sixty days or less at the date of purchase will be valued using the "amortized
cost" method of valuation. This involves valuing an instrument at its cost and
thereafter assuming a constant amortization of premium or increase of discount.
Long-term debt securities traded on a national securities exchange are valued at
the mean of the last bid and asked price of such securities obtained from a
broker who is a market-maker in the securities or a service providing quotations
based upon the assessment of market-makers in those securities.
Call options written by the Fund and put options are valued at the mean of the
last bid and asked price on the principal exchange where the option is 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 Fund for periods longer than one year is determined by
calculating the actual dollar amount of investment return on a $10,000
investment in the Fund 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 $10,000 investment over the same period. Total return
for a period of one year or less is equal to the actual investment return on a
$10,000 investment in the Fund during that period. Total return calculations
assume that all Fund distributions are reinvested at net asset value on their
respective reinvestment dates.
The performance of the Fund 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.
The performance of the Fund 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 $10,000 ("P") over a period of time ("n") according to the
formula:
n
P(1 + T) = ERV
The total returns of the Fund calculated based on the formula above for the one,
five and ten year periods ended December 31, 1996 are 24.46%, 13.16% and 14.22%,
respectively.
CUSTODIAN
Mellon Bank, N.A., One Mellon Bank Center, Pittsburgh, Pennsylvania, 15258
serves as custodian for assets of the Fund. The custodian does not participate
in determining the investment policies of the Fund or in deciding which
securities are purchased or sold by the Fund. The Fund, however, may invest in
obligations of the custodian and may purchase or sell securities from or to the
custodian.
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP, CityPlace II, Hartford, Connecticut 06103-4103 serves as
independent auditors to the Fund. KPMG Peat Marwick LLP provides audit services,
assistance and consultation in connection with Commission filings.
26 Aetna Variable Fund
<PAGE>
FINANCIAL STATEMENTS
Financial Statements for Aetna Variable Fund are incorporated herein by
reference to the Annual Report dated December 31, 1996. The Annual Report is
available upon request and without charge by calling 1-800-238-6263 or by
writing to Aetna Variable Fund at 151 Farmington Avenue, Hartford, CT 06156.
F-1
<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 by incorporation by reference to the Fund's
Annual Report dated December 31, 1996, as filed electronically
with the Securities and Exchange Commission on March 7, 1997
(File No. 811-2514):
Portfolio of Investments
Statement of Assets and Liabilities as of December 31, 1996
Statement of Operations for the year ended December 31, 1996
Statements of Changes in Net Assets for the years ended
December 31, 1996 and 1995
Notes to Financial Statements
Independent Auditors' Report
(b) Exhibits:
(1) Charter (Declaration of Trust)(1)
(2) Amended and Restated Bylaws (adopted by Board of
Trustees September 14, 1994)(1)
(3) Not Applicable
(4) Instruments Defining Rights of Holders(2)
(5)(a) Investment Advisory Agreement between Aetna Life
Insurance and Annuity Company and Aetna Variable Fund
(August 1, 1996)(3)
(5)(b) Subadvisory Agreement between Aetna Life Insurance and
Annuity Company and Aetna Variable Fund (August 1,
1996)(3)
(6) Underwriting Agreement between Aetna Life Insurance and
Annuity Company and Aetna Variable Fund (April 30,
1996)(3)
(7) Not Applicable
(8) Custodian Agreements and Depository Contracts
(September 1, 1992)(1)
(9)(a) Administrative Services Agreement between Aetna Life
Insurance and Annuity Company and Aetna Variable Fund
(May 1, 1996)(2)
(9)(b) License Agreement (August 8, 1974)
(10)(a) Opinion of Counsel(4)
(10)(b) Consent of Counsel
(11) Consent of Independent Auditors
<PAGE>
(12) Not Applicable
(13) Not Applicable
(14) Not Applicable
(15) Not Applicable
(16) Schedule for Computation of Performance Data
(17) See exhibit 27 below
(18) Not Applicable
(19) Powers of Attorney
(27) Financial Data Schedule
1. Incorporated by reference to Post-Effective Amendment No. 48 to Registration
Statement on Form N-1A (File No. 2-51739), as filed electronically on April
25, 1996.
2. Incorporated by reference to Post-Effective Amendment No. 50 to Registration
Statement on Form N-1A (File No. 2-51739), as filed electronically on June 7,
1996.
3. Incorporated by reference to Post-Effective Amendment No. 51 to Registration
Statement on Form N-1A (File No. 2-51739), as filed electronically on
February 18, 1997.
4. Incorporated by reference to Registrant's Rule 24f-2 Notice for the fiscal
year ended December 31, 1996, as filed with the Securities and Exchange
Commission on February 28, 1997.
<PAGE>
Item 25. Persons Controlled by or Under Common Control
Registrant is a Massachusetts business trust for which separate
financial statements are filed. As of February 28, 1997, Aetna Life
Insurance and Annuity Company owned 98.48% of Registrant's outstanding
voting securities.
Aetna Life Insurance and Annuity Company is a wholly-owned subsidiary
of Aetna Retirement Holdings, Inc., which is in turn a wholly-owned
subsidiary of Aetna Retirement Services, Inc. and an indirect
wholly-owned subsidiary of Aetna Inc.
A list of all persons directly or indirectly under common control with
the Registrant is incorporated herein by reference to Item 26 of
Post-Effective Amendment No. 2 to the Registration Statement on Form
N-4 (File No. 33-61897), as filed electronically with the Securities
and Exchange Commission on April 11, 1997.
Item 26. Number of Holders of Securities
(1) Title of Class (2) Number of Record Holders
-------------- ------------------------
Shares of Beneficial Interest 744 as of February 28, 1997
$1.00 par value
Item 27. Indemnification
Article V of the Registrant's Declaration of Trust which is
incorporated by reference to Exhibit 24(b)(1) to Registrant's
Post-Effective Amendment No. 48 to Registration Statement on Form N-1A
(File No. 2-51739), as filed electronically on April 25, 1996, provides
indemnification for Registrant's trustees and officers.
In addition, the Registrant's trustees and officers are covered under
director and officer liability policies, issued by National Union Fire
Insurance Company, which generally indemnify the Registrant's trustees
and officers for judgments and expenses in proceedings brought against
them solely by reason of their positions as trustees and officers (in
the absence of gross neglect or misfeasance). The policy expires on
October 1, 1997.
<PAGE>
Item 28. Business and Other Connections of Investment Adviser
The 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. It also acts as the
principal underwriter and investment adviser for the Registrant and
Aetna Series Fund, Inc., Aetna Income Shares, Aetna Variable Encore
Fund, Aetna Investment Advisers Fund, Inc., Aetna GET Fund, Aetna
Generation Portfolios, Inc., 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>
-----------------------------------------------------------------------------------------------------------------
Name Positions and Offices Other Principal Position(s) Held
with Investment Adviser Since Oct. 31, 1994/Addresses*/**
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Daniel P. Kearney Director, President and Executive Director and President (since March 1996) --
Officer Aetna Retirement Holdings, Inc.; President
(since December 1995) -- Aetna Retirement
Services, Inc.; President (since December 1993)
-- Aetna Life Insurance and Annuity Company;
Executive Vice President (since December 1993)
-- Aetna Inc. (formerly Aetna Life and Casualty
Company); Director (since 1992) -- MBIA, Inc.
<PAGE>
-----------------------------------------------------------------------------------------------------------------
Name Positions and Offices Other Principal Position(s) Held
with Investment Adviser Since Oct. 31, 1994/Addresses*/**
-----------------------------------------------------------------------------------------------------------------
Christopher J. Burns Director and Senior Vice Director, Aetna Financial Services, Inc.
President (since January 1996), and Aetna Investment
Services, Inc. (since July 1992) and
President, Chief Operations Officer (since
November 1996) -- Aetna Investment Services,
Inc.; Director (since March 1996) -- Aetna
Retirement Holdings, Inc.
Laura R. Estes Director and Senior Vice President Director (since December 1996) -- Aetna
Insurance Agency Holding Company, Inc.);
Director (since March 1996) -- Aetna
Retirement Holdings, Inc.; Senior Vice
President (since March 1991) -- Aetna Life
Insurance and Annuity Company.
J. Scott Fox Director and Senior Vice President Director and Senior Vice President (since
March 1997) -- Aetna Retirement Holdings,
Inc.; Senior Vice President (since March
1997) -- Aetna Life Insurance and Annuity
Company; Managing Director, Chief Operating
Officer, Chief Financial Officer, Treasurer
(April 1994 - March 1997) -- Aeltus
Investment Management, Inc.
<PAGE>
-----------------------------------------------------------------------------------------------------------------
Name Positions and Offices Other Principal Position(s) Held
with Investment Adviser Since Oct. 31, 1994/Addresses*/**
-----------------------------------------------------------------------------------------------------------------
Timothy A. Holt Director, Senior Vice President Senior Vice President and Chief Financial
and Chief Financial Officer Officer (since February 1996) -- Aetna Life
Insurance and Annuity Company; Vice President
(June 1991 - February 1996) -- Portfolio
Management/Investment Group, Aetna Inc.
(formerly known as Aetna Life and Casualty
Company); Director (since March 1996) -- Aetna
Retirement Holdings, Inc.; Vice President
(since September 1996) -- Aetna Retirement
Holdings, Inc.
Gail P. Johnson Director and Vice President Vice President (since December 1992) --
Aetna Life Insurance and Annuity Company.
John Y. Kim Director and Senior Vice President President (since December 1995) -- Aeltus
Investment Management, Inc.; Chief
Investment Officer (since May 1994) -- Aetna
Life Insurance and Annuity Company.
Shaun P. Mathews Director and Vice President Director (since December 1996) -- Aetna
Insurance Agency Holding Company, Inc.; Vice
President (since February 1996), Senior Vice
President (March 1991 - Present) -- Aetna
Life Insurance and Annuity Company;
Director, Aetna Investment Services, Inc.
(since July 1993), and Aetna Insurance
Company of America (since February 1993).
Glen Salow Director and Vice President Vice President (since 1992) -- Aetna Life
Insurance and Annuity Company.
<PAGE>
-----------------------------------------------------------------------------------------------------------------
Name Positions and Offices Other Principal Position(s) Held
with Investment Adviser Since Oct. 31, 1994/Addresses*/**
-----------------------------------------------------------------------------------------------------------------
Creed R. Terry Director and Vice President Vice President (since February 1996), Market
Strategist (August 1995 - February 1996) --
Aetna Life Insurance and Annuity Company;
President, (1991 - 1995) Chemical Technology
Corporation (a subsidiary of Chemical Bank).
Kirk P. Wickman Vice President, General Counsel Vice President, General Counsel and
and Secretary Corporate Secretary (since March 1997) --
Aetna Retirement Holdings, Inc.; Vice
President, General Counsel and Secretary (since
November 1996) -- Aetna Life Insurance and
Annuity Company; Vice President and Counsel
(June 1992 - November 1996) -- Aetna Life
Insurance Company.
Deborah Koltenuk Vice President and Treasurer, Vice President, Investment Planning and
Corporate Controller Financial Reporting (April 1996 to July
1996) -- Aetna Life Insurance Company; Vice
President, Investment Planning and Financial
Reporting (October 1994 to April 1996) Aetna
Life Insurance Company, 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.
Frederick D. Kelsven Vice President and Chief Director of Compliance (January 1985 to
Compliance Officer September 1996) -- Nationwide Life Insurance
Company.
</TABLE>
* The principal business address of each person named is 151 Farmington
Avenue, Hartford, Connecticut 06156.
<PAGE>
** 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 that are not deemed to be principal
positions.
For information regarding Aeltus Investment Management, Inc. (Aeltus), the
subadviser for the Fund, reference is hereby made to "Management of The Fund" in
the Prospectus. For information as to the business, profession, vocation or
employment of a substantial nature of each of the officers and directors of
Aeltus, reference is hereby made to the current Form ADV (File No. 801-9046) of
Aeltus filed under the Investment Advisers Act of 1940, incorporated herein by
reference.
Item 29. Principal Underwriters
a) In addition to serving as the principal underwriter and investment
adviser for the Registrant, Aetna Life Insurance and Annuity Company
Aetna also acts as the principal underwriter and investment adviser for
Aetna Series Fund, Inc., Aetna Generation Portfolios, Inc., Aetna
Variable Encore Fund, Aetna Income Shares, Aetna Investment Advisers
Fund, Inc., Aetna Variable Portfolios, Inc., and Aetna GET Fund (all
registered management investment companies under the Investment Company
Act of 1940 (1940 Act)). Additionally, Aetna acts as the principal
underwriter and depositor for Variable Annuity Accounts 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).
(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>
Daniel P. Kearney Director and President Trustee
Timothy A. Holt Director, Senior Vice President and Chief Trustee
Financial Officer
Christopher J. Burns Director and Senior Vice President
Laura R. Estes Director and Senior Vice President
J. Scott Fox Director and Senior Vice President Vice President and Treasurer
<PAGE>
Gail P. Johnson Director and Vice President
John Y. Kim Director and Senior Vice President
Shaun P. Mathews Director and Vice President Trustee and President
Glen Salow Director and Vice President
Creed R. Terry Director and Vice President
Kirk P. Wickman Vice President, General Counsel and Secretary
Deborah Koltenuk Vice President and Treasurer, Corporate
Controller
Frederick D. Kelsven Vice President and Chief Compliance Officer
</TABLE>
* The principal business address of all directors and officers listed is
151 Farmington Avenue, Hartford, Connecticut 06156.
(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 and other documents, at their
principal place of business located at:
151 Farmington Avenue
Hartford, Connecticut 06156
Sharholder records of direct shareholders are maintained by the
transfer agent, Firstar Trust Company, 615 East Michigan Street,
Milwaukee, Wisconsin 53261.
Item 31. Management Services
Not applicable.
Item 32. Undertakings
The Registrant undertakes that if requested by the holders of at least
10% of the Registrant's outstanding shares, the Registrant will hold a
shareholder meeting for the
<PAGE>
purpose of voting on the removal of one or more Trustees and will
assist with communication concerning that shareholder meeting as if
Section 16(c) of the 1940 Act applied.
The Registrant undertakes to furnish to each person to whom a
prospectus is delivered a copy of its 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,
Aetna Variable Fund (Registrant) certifies that it meets the requirements of
Securities Act Rule 485(b) for effectiveness of this Post-Effective Amendment
No. 52 to Registration Statement on Form N-1A (File No. 2-51739) and has duly
caused this Post-Effective Amendment No. 52 to the Registration Statement to be
signed on its behalf by the undersigned, thereto duly authorized, in the City of
Hartford, and State of Connecticut, on the 11th day of April, 1997.
AETNA VARIABLE FUND
-------------------
Registrant
By Shaun P. Mathews *
-------------------------
Shaun P. Mathews
President
Pursuant to the requirements of the Securities Act of 1933, this Post-Effective
Amendment to the Registration Statement has been signed below by the following
persons on April 11, 1997 in the capacities indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C> <C>
Shaun P. Mathews* President and Trustee )
- ------------------------------------------ (Principal Executive Officer) )
Shaun P. Mathews )
)
Morton Ehrlich* Trustee )
- ------------------------------------------ )
Morton Ehrlich )
) April
Maria T. Fighetti* Trustee ) 11, 1997
- ------------------------------------------ )
Maria T. Fighetti )
)
David L. Grove* Trustee )
- ------------------------------------------ )
David L. Grove )
)
Timothy A. Holt* Trustee )
- ------------------------------------------ )
Timothy A. Holt )
)
Daniel P. Kearney* Trustee )
- ------------------------------------------ )
Daniel P. Kearney )
<PAGE>
)
Sidney Koch* Trustee )
- ------------------------------------------ )
Sidney Koch )
)
Corine T. Norgaard* Trustee )
- ------------------------------------------ )
Corine T. Norgaard )
)
Richard G. Scheide* Trustee )
- ------------------------------------------ )
Richard G. Scheide )
)
J. Scott Fox* Vice President and Treasurer )
- ------------------------------------------ (Principal Financial and Accounting Officer) )
J. Scott Fox )
</TABLE>
By: /s/ Susan E. Bryant
--------------------------------------
*Susan E. Bryant
Attorney-in-Fact
<PAGE>
Aetna Variable Fund
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Exhibit Page
- ----------- ------- ----
<S> <C> <C>
99-(b)(1) Charter (Declaration of Trust) *
99-(b)(2) Amended and Restated Bylaws *
99-(b)(4) Instruments Defining Rights of Holders *
99-(b)(5)(a) Investment Advisory Agreement between Aetna Life Insurance and Annuity *
Company and Aetna Variable Fund
99-(b)(5)(b) Subadvisory Agreement between Aetna Life Insurance and Annuity Company *
and Aetna Variable Fund
99-(b)(6) Underwriting Agreement between Aetna Life Insurance and Annuity Company *
and Aetna Variable Fund
99-(b)(8) Custodian Agreements and Depository Contracts *
99-(b)(9)(a) Administrative Services Agreement between Aetna Life Insurance and *
Annuity Company and Aetna Variable Fund
99-(b)(9)(b) License Agreement
--------------------
99-(b)(10)(a) Opinion of Counsel *
99-(b)(10)(b) Consent of Counsel
--------------------
99-(b)(11) Consent of Independent Auditors
--------------------
99-(b)(16) Schedule for Computation of Performance Data
--------------------
99-(b)(19) Powers of Attorney --------------------
(27) Financial Data Schedule
--------------------
</TABLE>
* Incorporated by reference
LICENSE AGREEMENT
This Agreement, made at Hartford, Connecticut, this 8th day of August,
1974, by and between Aetna Life and Casualty Company, a Connecticut corporation
("Aetna"), and Aetna Variable Fund, Inc. (the "Fund"), a Maryland corporation,
WITNESSETH:
WHEREAS, Aetna and its affiliates have for many years been engaged in
the insurance business and related financial services, and the name "Aetna" has
become associated with the high quality of insurance and financial services
provided by Aetna and its affiliates;
WHEREAS, Aetna is the owner of two service marks registered on the
Principal Register of the United States Patent Office and identifiable as the
following:
a. Reg. No. 822,577, Class 102, issued January 17, 1967 (block design,
with legend "Life & Casualty"),
b. Reg. No. 951,544, Class 102, issued January 23, 1973 (block design,
without legend);
WHEREAS, such service marks (hereinafter collectively referred to as
"Aetna Logo") have become universal symbols of the high quality of services
provided by Aetna and its affiliated companies;
WHEREAS, the Fund anticipates that it will enter into a contract with
Aetna Variable Annuity Life Insurance Company (the "Management Company") whereby
the Management Company will manage the investment portfolio of the Fund;
WHEREAS, all of the common stock of the Management Company is owned by
Aetna and by reason of this relationship Aetna is concerned with the growth and
development of the Management Company and therefore of the Fund; and
WHEREAS, the Fund desires a license to use the name "Aetna Variable
Fund, Inc." and the Aetna Logo in connection with the promotion, advertisement
and sale of its shares;
NOW, THEREFORE, in consideration of the corporate interrelations and
the common interests and objectives of Aetna, the Management Company, and the
Fund, and the benefit of the Management Company which may be derived from the
growth and development of the Fund, and for other good and valuable
consideration, the receipt whereof is hereby acknowledged,
<PAGE>
Aetna hereby grants to the Fund a nonexclusive license to use the name "Aetna
Variable Fund, Inc." and the Aetna Logo throughout the world in connection with
the business of the Fund; provided, however, that Aetna reserves the right to
withdraw the license herein granted in the event that the Fund's investment
portfolio shall cease to be managed by the Management Company or some other
corporation controlling, controlled by, or under common control with Aetna. The
use by the Fund of its name and the Aetna Logo shall in no way prevent Aetna or
any corporation controlling, controlled by or under common control with it or
its successors or assigns from using, or permitting the use of, the name "Aetna"
alone or in conjunction with any other word or words and the Aetna Logo for, by
or in connection with any other entity or business whether or not the same
directly or indirectly competes with or conflicts with the Fund or its business
in any manner.
IN WITNESS WHEREOF, the parties hereto have set their hands and seals
at Hartford. Connecticut, this 8th day of August, 1974.
AETNA LIFE AND CASUALTY COMPANY
By: /s/ Donald M. Johnson
------------------------------------------
DONALD M. JOHNSON
President
AETNA VARIABLE FUND, INC.
By: /s/ Donald G. Conrad
------------------------------------------
DONALD G. CONRAD
Vice President
2
151 Farmington Avenue
Hartford, CT 06156
April 11, 1997 Susan E. Bryant
Counsel
Law Division, RE4A
Investments & Financial Services
(860) 273-7834
Fax: (860) 273-0356
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Dear Sir or Madam:
As Counsel of Aetna Life Insurance and Annuity Company (the "Company"), I hereby
consent to the use of my opinion dated February 28, 1997 (incorporated herein by
reference to the Rule 24f-2 Notice for the fiscal year ended December 31, 1996
filed on behalf of Aetna Variable Fund) as an exhibit to this Post-Effective
Amendment No. 52 to the Registration Statement on Form N-1A (File No. 2-51739
and 811-2514).
Sincerely,
/s/ Susan E. Bryant
Susan E. Bryant
Counsel
Consent of Independent Auditors
The Board of Trustees
Aetna Variable Fund:
We consent to the use of our report incorporated herein by reference and to the
references to our Firm under the headings "Financial Highlights" in the
Prospectus and "Independent Auditors" in the Statement of Additional
Information.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Hartford, Connecticut
April 11, 1997
SCHEDULE FOR COMPUTATION OF PERFORMANCE DATA
AETNA VARIABLE FUND
TOTAL RETURN CALCULATION
One Year Period Ended December 31, 1996
n
Formula P (1+T) = ERV
Initial Investment 10,000.00 = P
Ending Redeemable Value 12,445.85 = ERV
One Year Period Ended 12/31/96 1 = n
TOTAL RETURN FOR THE PERIOD 24.46% = T
TOTAL RETURN CALCULATION
Five Year Period Ended December 31, 1996
n
Formula P (1+T) = ERV
Initial Investment 10,000.00 = P
Ending Redeemable Value 18,556.92 = ERV
Five Year Period Ended 12/31/96 5 = n
TOTAL RETURN FOR THE PERIOD 13.16% = T
<PAGE>
TOTAL RETURN CALCULATION
Ten Year Period Ended December 31, 1996
n
Formula P (1+T) = ERV
Initial Investment 10,000.00 = P
Ending Redeemable Value 37,786.32 = ERV
Ten Year Period Ended 12/31/96 10 = n
TOTAL RETURN FOR THE PERIOD 14.22% = T
POWER OF ATTORNEY
We, the undersigned trustees and officers of Aetna GET Fund, Aetna Income
Shares, Aetna Variable Fund and Aetna Variable Encore Fund, hereby severally
constitute and appoint Susan E. Bryant, Amy R. Doberman, and Julie E. Rockmore,
and each of them individually, our true and lawful attorneys, with full power to
them and each of them to sign for us, and in our names and in the capacities
indicated below, any and all amendments, to the Registration Statements listed
below filed with the Securities and Exchange Commission under the Securities Act
of 1933, and under the Investment Company Act of 1940:
Registration Statements filed under the Securities Act of 1933:
Aetna GET Fund 33-12723
Aetna Income Shares 2-47232
Aetna Variable Fund 2-51739
Aetna Variable Encore Fund 2-53038
Registration Statements filed under the Investment Company Act of 1940:
Aetna GET Fund 811-5062
Aetna Income Shares 811-2361
Aetna Variable Fund 811-2514
Aetna Variable Encore Fund 811-2565
hereby ratifying and confirming on this 3rd day of April, 1997, our signatures
as they may be signed by our said attorneys to any such Registration Statements
and any and all amendments thereto.
Signature/Title Signature/Title
--------------- ---------------
/s/ Shaun P. Mathews /s/ J. Scott Fox
- --------------------------------- --------------------------------------------
Shaun P. Mathews J. Scott Fox
President and Trustee Treasurer and Vice President
(Principal Executive Officer) (Principal Financial and Accounting Officer)
/s/ Morton Ehrlich
- --------------------------------- --------------------------------------------
Morton Ehrlich, Trustee Timothy A. Holt, Trustee
/s/ Maria T. Fighetti /s/ Sidney Koch
- --------------------------------- --------------------------------------------
Maria T. Fighetti, Trustee Sidney Koch, Trustee
/s/ David L. Grove /s/ Corine T. Norgaard
- --------------------------------- --------------------------------------------
David L. Grove, Trustee Corine T. Norgaard, Trustee
/s/ Richard G. Scheide
- --------------------------------- --------------------------------------------
Daniel P. Kearney, Trustee Richard G. Scheide, Trustee
<PAGE>
POWER OF ATTORNEY
We, the undersigned trustees and officers of Aetna GET Fund, Aetna Income
Shares, Aetna Variable Fund and Aetna Variable Encore Fund, hereby severally
constitute and appoint Susan E. Bryant, Amy R. Doberman, and Julie E. Rockmore,
and each of them individually, our true and lawful attorneys, with full power to
them and each of them to sign for us, and in our names and in the capacities
indicated below, any and all amendments, to the Registration Statements listed
below filed with the Securities and Exchange Commission under the Securities Act
of 1933, and under the Investment Company Act of 1940:
Registration Statements filed under the Securities Act of 1933:
Aetna GET Fund 33-12723
Aetna Income Shares 2-47232
Aetna Variable Fund 2-51739
Aetna Variable Encore Fund 2-53038
Registration Statements filed under the Investment Company Act of 1940:
Aetna GET Fund 811-5062
Aetna Income Shares 811-2361
Aetna Variable Fund 811-2514
Aetna Variable Encore Fund 811-2565
hereby ratifying and confirming on this 8th day of April, 1997, our signatures
as they may be signed by our said attorneys to any such Registration Statements
and any and all amendments thereto.
Signature/Title Signature/Title
--------------- ---------------
- ----------------------------- --------------------------------------------
Shaun P. Mathews J. Scott Fox
President and Trustee Treasurer and Vice President
(Principal Executive Officer) (Principal Financial and Accounting Officer)
/s/ Timothy A. Holt
- ----------------------------- --------------------------------------------
Morton Ehrlich, Trustee Timothy A. Holt, Trustee
- ----------------------------- --------------------------------------------
Maria T. Fighetti, Trustee Sidney Koch, Trustee
- ----------------------------- --------------------------------------------
David L. Grove, Trustee Corine T. Norgaard, Trustee
/s/ Daniel P. Kearney
- ----------------------------- --------------------------------------------
Daniel P. Kearney, Trustee Richard G. Scheide, Trustee
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000002664
<NAME> AETNA VARIABLE FUND
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 5,393,477,533
<INVESTMENTS-AT-VALUE> 6,999,600,597
<RECEIVABLES> 59,569,922
<ASSETS-OTHER> 21,436,496
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 7,080,607,015
<PAYABLE-FOR-SECURITIES> 81,514,754
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 44,861,765
<TOTAL-LIABILITIES> 126,376,519
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 5,049,843,917
<SHARES-COMMON-STOCK> 214,694,270
<SHARES-COMMON-PRIOR> 194,850,885
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (116,078)
<ACCUMULATED-NET-GAINS> 292,973,005
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1,611,529,652
<NET-ASSETS> 6,954,230,496
<DIVIDEND-INCOME> 139,042,717
<INTEREST-INCOME> 14,155,684
<OTHER-INCOME> 0
<EXPENSES-NET> (26,907,580)
<NET-INVESTMENT-INCOME> 126,290,821
<REALIZED-GAINS-CURRENT> 942,130,499
<APPREC-INCREASE-CURRENT> 311,341,413
<NET-CHANGE-FROM-OPS> 1,379,762,733
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (142,295,877)
<DISTRIBUTIONS-OF-GAINS> (587,939,494)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 4,987,093
<NUMBER-OF-SHARES-REDEEMED> (7,542,873)
<SHARES-REINVESTED> 22,399,165
<NET-CHANGE-IN-ASSETS> 1,292,723,890
<ACCUMULATED-NII-PRIOR> 13,766,310
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> (68,276,614)
<GROSS-ADVISORY-FEES> 22,537,554
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 26,907,580
<AVERAGE-NET-ASSETS> 6,242,513,379
<PER-SHARE-NAV-BEGIN> 29.055
<PER-SHARE-NII> 0.651
<PER-SHARE-GAIN-APPREC> 6.446
<PER-SHARE-DIVIDEND> (0.733)
<PER-SHARE-DISTRIBUTIONS> (3.028)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 32.391
<EXPENSE-RATIO> .43
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
