President's Letter
Dear Fellow Shareholder:
Thank you for your confidence in Aetna and your investment in Aetna Variable
Fund. We are pleased to bring you this annual report of the status and
performance of your Fund.
During the past year, we have implemented several actions to focus our Fund
management efforts. At a Special Meeting, shareholders gave strong approval of
recommendations of the Board of Trustees. To this end, we are pleased to have
Aeltus Investment Management, Inc. as subadvisor to the Fund; a decision which
allows Aetna to consolidate its investment management expertise. Additions to
our investment staff have also enhanced our management and quantitative research
capabilities. We are pleased with the results of improvements in our stock
selection disciplines, portfolio implementation processes and investment
research.
In the financial markets, the past year has seen a slowdown of the economy and
little change in interest rates. Inflation has remained remarkably stable
despite concerns earlier in the year. This trend has resulted in an increase in
bond prices and growth in the stock market. We see this moderate growth, low
inflation and stable interest rate scenario continuing into 1997. Although this
may be favorable for investments in the bond markets, we are cautious or
somewhat neutral to cautious about the performance of the stock markets in 1997.
We are pleased to help you meet your retirement and investment needs by
bringing you quality products and services. Thank you, again, for investing in
our Fund.
Sincerely,
Shaun P. Mathews
President
<PAGE>
Aetna Variable Fund
Growth of $10,000
Average Annual Total Returns for the Year Ended
December 31, 1996*
1 Year 5 Year 10 Year
24.46% 13.16% 14.22%
[THE FOLLOWING INFORMATION WAS REPRESENTED BY A LINE CHART IN THE
PRINTED MATERIAL]
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Aetna Variable Fund 10000 10538 12081 15593 16109 20361 21726 23190 22956 30359 37785
S&P 500 Index 10000 10525 12273 16163 15660 20432 21988 24205 24524 33741 41484
</TABLE>
* 'Total Return' is calculated including reinvestment of income and capital gain
distributions. Past performance is no guarantee of future results. Performance
does not include any separate account charges imposed by ALIAC.
Aetna Variable Fund provided a return of 24.46%, net of fund expenses, for the
year ended December 31, 1996. In favorable comparison, the past year was another
amazing one for the U.S. stock market during which the S&P 500, an unmanaged
index, returned a whopping 22.95%. The Fund's outstanding performance level
placed it in the top 6% (21 out of 356) of all variable funds in the Growth and
Income universe tracked by Morningstar for 1996. Among the same universe of
funds, the Fund's ranking for 5 years is 92% (157 out of 170) and for 10 years
is 19% (17 out of 91). How does a fund like Aetna Variable Fund beat the S&P 500
during such a strong year? Looking first at what was not responsible, then
examining the ultimate strength, will help in understanding and celebrating the
Fund's success.
The Fund's outperformance was not achieved by taking more risk than the S&P 500.
Using any of a number of risk models, the portfolio "beta," or relative
volatility (how much the fund's return can change in the short term), of the
Fund compared to the S&P 500 Index would have measured between 0.85 and 0.95
during 1996, with the index measuring a slightly higher 1.0. Modest use of cash
equivalents, broad diversification into a number of sub-categories of equity
asset classes (also known as diversifying asset classes), and value-oriented
stock selection all contributed to keeping the Fund's risk profile below that of
the S&P 500.
Asset allocation also did not spur strong returns in 1996. Although our broad
diversification into stocks of mid-sized and small companies, international
stocks, and real estate stocks (equity REITs) helped to reduce the absolute
volatility in the portfolio, most asset class returns, as demonstrated by their
benchmark index return, lagged behind the S&P 500:
============================================================================
Asset Class Benchmark Index Benchmark Return
============================================================================
Large Cap Stocks S&P 500 22.95%
Mid Cap Stocks S&P Mid Cap 400 Index 19.20%
Small Cap Stocks Russell 2000 16.49%
International Stocks MSCI Europe, Australia & Far East 6.36%
Real Estate Stocks NAREIT 35.26%
Obviously, our diversification into equity REITs contributed to our excellent
returns during 1996, but even though we had great enthusiasm for this asset
class, the Fund could not invest more than about 4% in these securities because
of their limited (though growing) size and liquidity. Our tactical asset
allocation disciplines guided us to reduce or increase weightings in most asset
classes at appropriate points during the year, but frankly we would have been
better off just investing in S&P 500 stocks compared to our average asset mix
during the year.
2
<PAGE>
Finally, the Fund did not beat the S&P 500 by making large style, sector, or
industry bets. We do not place extremely heavy influence on any specific style
such as a growth style or a value style. We do not make subjective forecasts of
interest rates, the economy, or even future company earnings. We keep our
portfolios relatively close to their benchmarks with regard to macroeconomic
factors, such as sensitivity to changes in interest rates or economic activity,
and with regard to sector and industry weightings. These risk-control
disciplines keep our relative performance focused upon stock selection, where we
believe that we can add the most value for our investors.
It was the outstanding performance of our stock selection disciplines which led
to our excellent performance. We made significant improvements in both our
investment research and in our portfolio implementation processes over the past
year, which we believe will provide a solid foundation for future investment
performance. Several key additions to our professional investment staff have
greatly enhanced our quantitative research and management capabilities. We have
amassed a notable historical database of company financials, analyst earnings
estimates, insider buying and selling, stock returns, and economic variables,
and have done cutting-edge research to uncover evidence of past market
inefficiencies which we exploit in our portfolios. State-of-the-art hardware,
software, and databases enable us to analyze and rebalance our portfolios nearly
every trading day using an extremely efficient computer-based process which
quickly processes an enormous amount of market, economic, and company
information. Carefully constructed portfolio risk-control and optimization
techniques enable us to focus the risk in our portfolios upon those
characteristics which we believe will be rewarded, and to neutralize all other
risks. Characteristics we favor--attractive valuation, positive earnings
momentum, and shareholder oriented management--were strongly valued by the
market over the past year, and we believe that they are likely to continue to
help guide us to stocks which offer the potential for superior returns.
Our asset allocation disciplines, which measure the extra expected return of
stocks over bonds, indicated that as of year end, prospective stock returns were
unusually low compared to bond yields. Consequently, given the returns of asset
classes in 1996, we have recently become more cautious towards domestic
equities, and equity REITs in particular. We believe the likelihood of profit
disappointment is increasing, as corporate profit growth is expected to continue
its slow-down in coming months. Although Federal Reserve monetary policy has
been neutral of late, Chairman Greenspan has implied that he is inclined to
dampen the market's excitement, and even slight evidence of inflationary
pressure may be cause to raise interest rates. The Fund has often been close to
fully invested in stocks during the year, but we have begun to increase cash
equivalents allocation, with a target allocation of roughly 5%.
Past performance is no assurance of future returns.
Investment Summary:
=================================================
Top Ten Equity Holdings % of Portfolio
=================================================
Intel Corp. 2.7%
AT&T Corp. 1.9%
Bristol-Meyers Squibb Co. 1.9%
Travelers Group, Inc. 1.7%
Microsoft Corp. 1.7%
BankAmerica Corp. 1.6%
Cisco Systems, Inc. 1.6%
Johnson & Johnson 1.6%
Mobil Corp. 1.5%
Walt Disney Co. (The) 1.4%
3
<PAGE>
Large Cap Portfolio Sector Breakdown:
================================================================================
Portfolio S&P 500
Sector Weight Weight Over/(Under)
================================================================================
Basic Materials 2.2% 6.3% (4.1)%
Producer Goods & Services 10.0% 12.6% (2.6)%
Technology 14.5% 11.8% 2.7 %
Consumer Goods 31.5% 32.7% (1.2)%
Services 2.4% 2.3% 0.1 %
Financial Services 14.2% 14.6% (0.4)%
Utilities 25.2% 19.7% 5.5 %
<TABLE>
<CAPTION>
Asset Allocation:
=========================================================================================
Portfolio of Notional Value Notional Value Economic
Investments of Options * of Futures * Exposure *
=========================================================================================
<S> <C> <C> <C>
Large Cap Stocks 72.2% -- 3.8% 76.0%
Mid Cap Stocks 9.9% (6.0)% -- 3.9%
Small Cap Stocks 4.3% 1.4 % -- 5.7%
International Stocks 5.7% -- 0.2% 5.9%
Real Estate Stocks 3.8% -- -- 3.8%
Special Situations ** 1.1% -- 0.8% 1.9%
Convertible Securities 1.4% -- -- 1.4%
Cash Equivalents 1.6% 4.6% (4.8)% 1.4%
========= ======= ======= ==========
Total Investments 100.0% 0.0% 0.0% 100.0%
========= ======= ======= ==========
</TABLE>
* "Notional value" refers to the economic value at risk, or the exposure to
the financial instruments underlying the options and futures positions.
"Economic exposure" reflects the Fund's exposure to both changes in value
of the portfolio of investments as well as the financial instruments
underlying the options and futures positions.
** Please note that a new type of equity investment was introduced to the
Fund's lineup during the past fiscal year. The "special situations"
category was created to take advantage of investment opportunities which
are "special" in the sense that they do not fit well into our normal
valuation and modeling framework. The largest category within this group is
initial public offerings, but other categories include spin-offs, newly
created securities, and stocks of companies which derive their value from
something other than assets, earnings, and dividends.
4
<PAGE>
Portfolio of Investments
December 31, 1996
================================================================================
Number
of Market
Shares Value
------ ------
COMMON STOCKS (97.4%)
United States (91.7%)
Aerospace and Defense (1.3%)
General Dynamics Corp. ...................... 23,200 $ 1,635,600
Gulfstream Aerospace Corp. + ................ 125,600 3,045,800
McDonnell Douglas Corp. ..................... 971,000 62,143,999
United Technologies Corp. ................... 404,800 26,716,800
------------
93,542,199
------------
Agriculture (0.2%)
Pioneer Hi-Bred International, Inc........... 182,500 12,775,000
------------
Apparel (1.4%)
Fruit of the Loom, Inc. + ................... 735,000 27,838,125
Gap, Inc. ................................... 97,200 2,928,150
Jones Apparel Group, Inc. + ................. 40,300 1,506,213
Liz Claiborne, Inc. ......................... 1,033,700 39,926,662
Nike, Inc. Class B .......................... 391,400 23,386,150
------------
95,585,300
------------
Autos and Auto Equipment (1.6%)
Borg Warner Automotive, Inc. ................ 61,700 2,375,450
Chrysler Corp. .............................. 2,699,200 89,073,599
Dura Automotive Systems, Inc. + ............. 27,900 627,750
Kaydon Corp. ................................ 38,000 1,790,750
Smith (A.O.) Corp. .......................... 93,100 2,781,363
Snap-On, Inc. ............................... 378,200 13,473,375
SPX Corp. ................................... 85,300 3,305,375
------------
113,427,662
------------
Banks (7.4%)
Bank United Corp. ........................... 46,500 1,243,875
BankAmerica Corp. ........................... 1,147,000 114,413,249
Bankers Corp. ............................... 42,000 845,250
CCB Financial Corp. ......................... 14,500 989,625
Charter One Financial, Inc. ................. 428,400 17,992,800
City National Corp. ......................... 210,800 4,558,550
Comerica, Inc. .............................. 45,000 2,356,875
Commercial Federal Corp. .................... 57,200 2,745,600
Cullen/Frost Bankers, Inc. .................. 76,000 2,527,000
FFY Financial Corp. ......................... 21,500 544,219
First American Corp. (Tenn.) ................ 84,900 4,892,363
First Chicago Corp. ......................... 1,422,072 76,436,369
First Commonwealth Financial Corp. .......... 18,900 352,013
First Empire State Corp. .................... 3,900 1,123,200
First of America Bank Corp. ................. 61,700 3,709,713
First Union Corp. ........................... 1,120,100 82,887,399
Golden West Financial Corp. ................. 103,500 6,533,438
GreenPoint Financial Corp. .................. 260,300 12,299,175
H. F. Ahmanson & Co. ........................ 1,129,400 36,705,500
Investors Financial Services Corp. .......... 105,300 2,922,075
NationsBank Corp. ........................... 926,300 90,545,824
North Fork Bancorp, Inc. .................... 61,600 2,194,500
ONBANCorp, Inc. ............................. 11,900 331,713
Queens County Bancorp, Inc. ................. 66,666 3,158,302
Number
of Market
Shares Value
------ ------
Banks (continued)
Reliance Bancorp, Inc. ...................... 13,400 $ 261,300
Republic New York Corp. ..................... 295,600 24,128,350
Security Capital Corp. ...................... 33,000 2,433,750
St. Francis Capital Corp. ................... 12,200 317,200
Star Banc Corp. ............................. 62,100 5,705,438
Trustmark Corp. ............................. 17,900 456,450
UnionBancal Corp. ........................... 78,100 4,139,300
Zion Bancorporation ......................... 36,500 3,796,000
------------
513,546,415
------------
Building Materials and Construction (0.9%)
American Buildings Co. + .................... 60,500 1,444,438
Armstrong World Industries, Inc. ............ 377,800 26,257,100
Arvin Industries, Inc. ...................... 43,100 1,066,725
Butler Manufacturing Co. .................... 9,300 376,650
Centex Corp. ................................ 143,800 5,410,475
Champion Enterprises, Inc. + ................ 403,404 7,866,378
Continental Homes Holding Corp. ............. 37,300 792,625
Elcor Corp. ................................. 36,800 786,600
Granite Construction, Inc. .................. 128,850 2,448,150
Jacobs Engineering Group, Inc. + ............ 32,800 774,900
Lennar Corp. ................................ 238,000 6,485,500
Masco Corp. ................................. 67,400 2,426,400
NCI Building Systems, Inc. + ................ 14,300 493,350
Skyline Corp. ............................... 32,400 801,900
Texas Industries, Inc. ...................... 39,900 2,019,938
Tredegar Industries, Inc. ................... 17,300 694,163
Vulcan Materials Co. ........................ 35,800 2,179,325
------------
62,324,617
------------
Chemicals (1.7%)
Arcadian Corp. .............................. 207,600 5,501,400
ARCO Chemical Co. ........................... 66,200 3,243,800
Chemed Corp. ................................ 19,300 704,450
Cytec Industries + .......................... 335,100 13,613,438
Dow Chemical Co. ............................ 903,900 70,843,162
Du Pont (E.I.) de Nemours ................... 65,200 6,153,250
Goodrich (B.F.) Co. ......................... 128,000 5,184,000
Monsanto Co. ................................ 245,600 9,547,700
OM Group, Inc. .............................. 42,300 1,142,100
PPG Industries, Inc. ........................ 57,700 3,238,413
------------
119,171,713
------------
Commercial Services (0.5%)
AccuStaff, Inc. + ........................... 44,000 929,500
APAC Teleservices, Inc. + ................... 16,600 637,025
Billing Information Concepts + .............. 39,400 1,132,750
Devry, Inc. + ............................... 171,200 4,023,200
Employee Solutions, Inc. + .................. 155,600 3,189,800
FactSet Research Systems, Inc. + ............ 43,700 917,700
GATX Corp. .................................. 95,000 4,607,500
Kindercare Learning Centers, Inc. + ......... 59,500 1,115,625
May & Speh, Inc. + .......................... 32,200 394,450
Quintiles Transnational Corp. + ............. 1,300 86,125
See Notes to Portfolio of Investments. 5
<PAGE>
Portfolio of Investments
December 31, 1996 (continued)
================================================================================
Number
of Market
Shares Value
------ ------
United States (continued)
Commercial Services (continued)
Robert Half International, Inc. + ........... 286,800 $ 9,858,750
US Filter Corp. + ........................... 106,100 3,368,675
Wackenhut Corp. Class B ..................... 66,900 1,020,225
------------
31,281,325
------------
Computer Software (5.2%)
Access Health, Inc. + ....................... 54,900 2,456,775
Acxiom Corp. + .............................. 71,800 1,723,200
Analysts International Corp. ................ 17,400 491,550
BMC Software, Inc. + ........................ 985,600 40,779,199
Boole & Babbage, Inc. + ..................... 36,150 903,750
Cadence Design Systems, Inc. + .............. 303,600 12,068,100
CCC Information Services Group + ............ 9,200 147,200
Cisco Systems, Inc. + ....................... 1,789,320 113,845,484
Computer Associates International, Inc....... 850,175 42,296,205
Computer Sciences Corp. + ................... 1 82
Compuware Corp. + ........................... 404,300 20,265,538
Document Sciences Corp. + ................... 9,300 91,838
Edify Corp. + ............................... 25,600 409,600
Engineering Animation, Inc. + ............... 37,200 902,100
Hyperion Software Corp. + ................... 100,100 2,127,125
Kronos, Inc. + .............................. 30,350 971,200
Memco Software Ltd. + ....................... 9,800 172,725
Microsoft Corp. + ........................... 1,399,200 115,608,899
Peerless Systems Corp. + .................... 1,000 17,000
Project Software & Development, Inc. +...... 27,600 1,169,550
SPSS, Inc. + ................................ 16,800 468,300
Sungard Data Systems, Inc. + ................ 125,300 4,949,350
------------
361,864,770
------------
Computers and Office Equipment (4.8%)
3Com Corp. + ................................ 400,000 29,350,000
Ceridian Corp. + ............................ 347,200 14,061,600
Comdisco, Inc. .............................. 92,850 2,947,988
Compaq Computer Corp. + ..................... 993,100 73,737,674
Comverse Technology, Inc. + ................. 94,451 3,571,428
Dell Computer Corp. + ....................... 1,677,900 89,138,437
EMC Corp. + ................................. 277,800 9,202,125
FORE Systems, Inc. + ........................ 168,600 5,542,725
Gateway 2000, Inc. + ........................ 171,600 9,191,325
Harris Corp. ................................ 107,300 7,363,463
HBO & Co. ................................... 65,700 3,900,938
Herman Miller, Inc. ......................... 116,100 6,574,163
Moore Corp. Ltd. ............................ 667,400 13,598,275
Standard Register Co. ....................... 31,700 1,030,250
Sun Microsystems, Inc. + .................... 2,268,500 58,272,093
Trident Microsystems, Inc. + ................ 35,300 595,688
Wallace Computer Services, Inc. ............. 58,200 2,007,900
Western Digital Corp. + ..................... 107,200 6,097,000
------------
336,183,072
------------
Consumer Products (0.2%)
First Brands Corp. .......................... 139,200 3,949,800
Number
of Market
Shares Value
------ ------
Consumer Products (continued)
Premark International, Inc. ................. 297,300 $ 6,614,925
------------
10,564,725
------------
Diversified (2.7%)
Amway Asia Pacific Ltd. ..................... 19,800 839,025
General Electric Co. ........................ 778,600 76,984,074
Harsco Corp. ................................ 95,700 6,555,450
Oakley, Inc. + .............................. 790,400 8,595,600
Plantronics, Inc. + ......................... 9,100 409,500
Raychem Corp. ............................... 117,200 9,390,650
Rohm & Haas Co. ............................. 72,700 5,934,138
Textron, Inc. ............................... 611,600 57,643,299
Varlen Corp. ................................ 26,400 542,850
VF Corp. .................................... 306,200 20,668,500
------------
187,563,086
------------
Electrical and Electronics (3.2%)
ADT Ltd. + .................................. 186,800 4,273,050
Cymer, Inc. + ............................... 5,530 266,131
Dynatech Corp. + ............................ 188,400 8,336,700
Esterline Technologies + .................... 68,400 1,786,950
Hadco Corp. + ............................... 112,400 5,507,600
Integrated Packaging Assembly Corp. +........ 13,500 109,055
Intel Corp. ................................. 1,433,000 187,633,437
Logicon, Inc. ............................... 93,200 3,401,800
MTS Systems Corp. ........................... 22,600 452,000
Novellus Systems, Inc. + .................... 116,100 6,291,169
Symbol Technologies, Inc. + ................. 16,800 743,400
Technitrol, Inc. ............................ 17,700 679,238
Waters Corp. + .............................. 93,000 2,824,875
------------
222,305,405
------------
Electrical Equipment (0.6%)
Belden, Inc. ................................ 89,000 3,293,000
Berg Electronics Corp. + .................... 125,900 3,698,313
Burr-Brown Corp. + .......................... 35,150 913,900
C-Cube Microsystems, Inc. + ................. 35,000 1,292,813
Charter Power Systems, Inc. ................. 14,900 454,450
Dionex Corp. + .............................. 18,000 630,000
Methode Electronics, Inc. Class A ........... 52,500 1,063,125
Pittway Corp. Class A ....................... 1,000 53,500
SCI Systems, Inc. + ......................... 75,600 3,373,650
Tektronix, Inc. ............................. 472,300 24,205,375
------------
38,978,126
------------
Financial Services (3.4%)
ALBANK Financial Corp. ...................... 15,020 471,253
Alex Brown & Sons, Inc. ..................... 74,200 5,379,500
Astoria Financial Corp. ..................... 99,400 3,665,375
Bankers Trust New York Corp. ................ 155,000 13,368,750
Bear Stearns Co., Inc. ...................... 363,825 10,141,622
Beneficial Corp. ............................ 107,300 6,800,138
Chase Manhattan Corp. ....................... 115,768 10,332,294
ContiFinancial Corp. + ...................... 28,000 1,011,500
Deposit Guaranty Corp. ...................... 51,600 1,599,600
6 See Notes to Portfolio of Investments.
<PAGE>
================================================================================
Number
of Market
Shares Value
------ ------
United States (continued)
Financial Services (continued)
Great Financial Corp. ....................... 41,000 $ 1,194,125
Liberty Financial Co. ....................... 4 156
Merrill Lynch & Co., Inc. ................... 247,400 20,163,100
Olympic Financial Ltd. + .................... 165,000 2,371,875
PHH Corp. ................................... 128,600 5,529,800
Salomon, Inc. ............................... 723,200 34,080,800
SunAmerica, Inc. ............................ 78,400 3,479,000
Travelers Group, Inc. ....................... 2,632,540 119,451,502
------------
239,040,390
------------
Foods and Beverages (4.1%)
Archer-Daniels-Midland Co. .................. 179,200 3,942,400
Cagle's, Inc. ............................... 21,200 304,750
Campbell Soup Co. ........................... 812,400 65,195,099
Coca-Cola Co. ............................... 839,600 44,183,949
General Mills, Inc. ......................... 253,500 16,065,563
Hershey Foods Corp. ......................... 565,000 24,718,750
Hudson Foods, Inc. Class A .................. 148,800 2,827,200
Interstate Bakeries Corp. ................... 75,000 3,684,375
Kroger Co. (The) + .......................... 1,292,100 60,082,649
Mondavi (Robert) Corp. Class A + ............ 56,500 2,062,250
Nash-Finch Co. .............................. 17,000 361,250
Ralcorp Holdings, Inc. + .................... 46,500 982,313
Ralston-Ralston Purina Group ................ 16,600 1,218,025
Sara Lee Corp. .............................. 1,289,300 48,026,424
Supervalu, Inc. ............................. 320,000 9,080,000
------------
282,734,997
------------
Health Services (1.6%)
Allegiance Corp. ............................ 70,020 1,934,303
Beverly Enterprises + ....................... 1,051,500 13,406,625
FPA Medical Management, Inc. + .............. 599,600 13,416,050
Genesis Health Ventures, Inc. + ............. 72,300 2,250,338
Genetics Institute, Inc. + .................. 26,900 2,279,775
Invacare Corp. .............................. 81,700 2,246,750
Lincare Holdings, Inc. + .................... 379,100 15,543,100
Manor Care, Inc. ............................ 240,900 6,504,300
Maxicare Health Plans, Inc. + ............... 141,200 3,141,700
MedPartners, Inc. + ......................... 37,200 781,200
Oxford Health Plans, Inc. + ................. 558,500 32,707,156
Sunrise Assisted Living, Inc. + ............. 14,000 390,250
Tenet Healthcare Corp. + .................... 577,300 12,628,438
Universal Health Services, Inc. + ........... 140,500 4,021,813
Wellpoint Health Networks, Inc. ............. 28,881 992,784
------------
112,244,582
------------
Home Furnishings and Appliances (0.0%)
Haverty Furniture Co., Inc. ................. 32,000 364,000
Kimball International, Inc. Class B ......... 11,500 475,813
Sunbeam Corp. ............................... 93,100 2,397,325
------------
3,237,138
------------
Number
of Market
Shares Value
------ ------
Hotels and Restaurants (0.9%)
HFS, Inc. + ................................. 46,300 $ 2,766,425
Interstate Hotels Co. + ..................... 9,300 262,725
Marcus Corp. ................................ 13,200 280,500
Marriott International, Inc. ................ 879,900 48,614,474
Prime Hospitality Corp. + ................... 110,000 1,773,750
Promus Hotel Corp. + ........................ 101,800 3,015,825
RFS Hotel Investors, Inc. ................... 180,000 3,555,000
------------
60,268,699
------------
Insurance (2.2%)
Allied Group, Inc. .......................... 27,600 900,450
Allstate Corp. .............................. 223,101 12,911,970
AMBAC, Inc. ................................. 109,500 7,268,063
American Bankers Insurance Group ............ 77,900 3,982,638
Bankers Life Holding Corp. .................. 27,200 680,000
Capital American Financial Corp. ............ 14,700 534,713
Cigna Corp. ................................. 358,700 49,007,387
CMAC Investment Corp. ....................... 201,000 7,386,750
Conseco, Inc. ............................... 308,600 19,673,250
Fremont General Corp. ....................... 111,470 3,455,570
Highlands Insurance Co. + ................... 74,610 1,510,853
IPC Holdings Ltd. ........................... 159,300 3,564,338
ITT Hartford Group, Inc. .................... 265,700 17,934,750
Lawyers Title Corp. ......................... 18,200 357,175
MAIC Holdings, Inc. + ....................... 11,236 380,620
Markel Corp. + .............................. 5,000 450,000
Mutual Risk Management Ltd. ................. 105,466 3,902,242
Old Republic International Corp. ............ 275,728 7,375,724
Orion Capital Corp. ......................... 36,000 2,200,500
Pxre Corp. .................................. 15,900 393,525
Security-Connecticut Corp. .................. 19,100 670,888
Selective Insurance Group, Inc. ............. 32,000 1,216,000
Transatlantic Holdings, Inc. ................ 92,800 7,470,400
Vesta Insurance Group, Inc. ................. 93,000 2,917,875
------------
156,145,681
------------
Machinery and Equipment (2.0%)
Barnes Group, Inc. .......................... 23,600 1,416,000
Blount, Inc. Class A ........................ 45,700 1,753,738
Brunswick Corp. ............................. 72,900 1,749,600
Case Corp. .................................. 415,300 22,633,850
Caterpillar, Inc. ........................... 508,000 38,226,999
Cooper Cameron Corp. + ...................... 279,500 21,381,750
Global Industrial Technologies, Inc +........ 107,800 2,385,075
Harnischfeger Industries, Inc. .............. 724,800 34,881,000
JLG Industries, Inc. ........................ 120,000 1,920,000
Parker-Hannifin Corp. ....................... 231,400 8,966,750
Stanley Works ............................... 147,700 3,987,900
------------
139,302,662
------------
Media and Entertainment (2.1%)
Callaway Golf Co. ........................... 230,900 6,638,375
Carnival Corp. .............................. 39,136 1,291,488
7
<PAGE>
Portfolio of Investments
December 31, 1996 (continued)
================================================================================
Number
of Market
Shares Value
------ ------
United States (continued)
Media and Entertainment (continued)
Clear Channel Communications, Inc. + ........ 54,600 $ 1,972,425
Fleetwood Enterprises, Inc. ................. 111,000 3,052,500
Harrah's Entertainment, Inc. + .............. 28,800 572,400
Heritage Media Corp. Class A + .............. 46,500 523,125
International Game Technology ............... 93,300 1,702,725
Jones Intercable, Inc. + .................... 11,600 120,350
King World Production, Inc. + ............... 461,700 17,025,188
Regal Cinemas, Inc. + ....................... 221,100 6,798,825
Renaissance Communications + ................ 50,000 1,787,500
Speedway Motorsports, Inc. + ................ 37,600 789,600
Walt Disney Co. (The) ....................... 1,452,200 101,109,424
Young Broadcasting Corp. + .................. 32,500 950,625
------------
144,334,550
------------
Medical Supplies (1.3%)
Bio-Rad Labs, Inc. Class A + ................ 58,400 1,752,000
Biomet, Inc. ................................ 342,700 5,183,338
Coherent, Inc. + ............................ 79,800 3,371,550
Collagen Corp. .............................. 26,000 474,500
Guidant Corp. ............................... 1,026,419 58,505,882
Hillenbrand Industries, Inc. ................ 37,500 1,359,375
Mallinckrodt, Inc. .......................... 272,500 12,024,063
Sola International, Inc. + .................. 54,700 2,078,600
Steris Corp. + .............................. 18,700 813,450
Sybron International Corp. + ................ 101,800 3,359,400
------------
88,922,158
------------
Metals and Mining (1.0%)
AK Steel Holding Corp. ...................... 46,400 1,838,600
Ashland Coal Inc. ........................... 13,300 369,075
Carpenter Technology Corp. .................. 73,200 2,680,950
Cleveland-Cliffs, Inc. ...................... 58,000 2,631,750
Commonwealth Aluminum Corp. ................. 70,000 1,076,250
MAF Bancorp, Inc. ........................... 12,900 448,275
Mueller Industries, Inc. + .................. 122,700 4,723,950
Newmont Mining Corp. ........................ 158,100 7,074,975
RMI Titanium Co. + .......................... 249,600 7,020,000
Timken Co. .................................. 835,500 38,328,562
Titanium Metals Corp. + ..................... 76,000 2,498,500
Trinity Industries, Inc. .................... 95,200 3,570,000
------------
72,260,887
------------
Oil and Gas (9.6%)
Amoco Corp. ................................. 1,200,709 96,657,074
Atlantic Richfield Co. ...................... 632,300 83,779,749
Belco Oil & Gas Corp. + ..................... 43,200 1,182,600
Camco International, Inc. ................... 112,900 5,207,513
Columbia Gas System, Inc. ................... 673,000 42,819,624
Exxon Corp. ................................. 440,700 43,188,599
Halliburton Co. ............................. 240,400 14,484,100
Kerr-Mcgee Corp. ............................ 906,700 65,282,399
Laclede Gas Co. ............................. 41,200 993,950
Mobil Corp. ................................. 861,500 105,318,374
Number
of Market
Shares Value
------ ------
Oil and gas (continued)
National Fuel Gas Co. ....................... 22,200 $ 915,750
Occidental Petroleum Corp. .................. 248,500 5,808,688
Oneok, Inc. ................................. 70,000 2,100,000
Phillips Petroleum Co. ...................... 1,613,100 71,379,674
Tesoro Petroleum Corp. + .................... 79,100 1,107,400
Texaco, Inc. ................................ 874,500 85,810,312
The Williams Cos., Inc. ..................... 78,450 2,941,875
Tidewater, Inc. ............................. 129,000 5,837,250
Tosco Corp. ................................. 131,900 10,436,588
Unocal Corp. ................................ 55,400 2,250,625
USX-Marathon Group .......................... 960,900 22,941,488
------------
670,443,632
------------
Paper and Containers (0.1%)
Mead Corp. .................................. 88,500 5,144,063
------------
Pharmaceuticals (7.2%)
Allergan, Inc. .............................. 303,600 10,815,750
American Home Products Corp. ................ 677,500 39,718,437
Amgen, Inc. + ............................... 87,200 4,741,500
Becton, Dickinson & Co. ..................... 988,600 42,880,524
Biogen, Inc. + .............................. 248,800 9,641,000
Bristol-Myers Squibb Co. .................... 1,201,900 130,706,624
Dura Pharmaceuticals, Inc. + ................ 129,300 6,174,075
Eli Lilly & Co. ............................. 46,500 3,394,500
Immulogic Pharmaceutical Corp. + ............ 42,100 268,388
Johnson & Johnson ........................... 2,237,408 111,311,047
Jones Medical Industries, Inc. .............. 72,475 2,654,397
Merck & Co., Inc. ........................... 686,900 54,436,824
Rhone-Poulenc Rorer, Inc. ................... 15,100 1,179,688
Schering Plough ............................. 1,238,900 80,218,774
------------
498,141,528
------------
Printing and Publishing (2.2%)
Banta Corp. ................................. 233,400 5,339,025
Central Newspapers, Inc. Class A ............ 50,700 2,230,800
Devon Group, Inc. + ......................... 17,700 486,750
Gannett Co., Inc. ........................... 748,600 56,051,424
Lexmark International Group, Inc. ........... 46,900 1,295,613
Meredith Corp. .............................. 48,400 2,553,100
New York Times Co. .......................... 525,600 19,972,800
Pulitzer Publishing Co. ..................... 54,666 2,535,136
Scholastic Corp. + .......................... 66,000 4,438,500
Times Mirror Co. ............................ 441,000 21,939,750
Tribune Co. ................................. 474,100 37,394,638
------------
154,237,536
------------
Real Estate Investment Trusts (3.8%)
Ambassador Apartments, Inc. ................. 59,100 1,396,238
American General Hospitality Corp. .......... 55,800 1,325,250
American Health Properties, Inc. ............ 59,000 1,408,625
AMLI Residential Properities Trust .......... 55,900 1,306,663
Apartment Investment & Management Co......... 165,500 4,675,375
Arden Realty Group, Inc. .................... 93,800 2,602,950
Associated Estates Realty Corp. ............. 133,100 3,161,125
8 See Notes to Portfolio of Investments.
<PAGE>
================================================================================
Number
of Market
Shares Value
------ ------
United States (continued)
Real Estate Investment Trusts (continued)
Beacon Properties Corp. ..................... 288,700 $ 10,573,638
Brandywine Realty Trust ..................... 25,900 505,050
Bre Properties, Inc. Class A ................ 29,100 720,225
CALI Realty Corp. ........................... 175,000 5,403,125
Camden Property Trust ....................... 25,500 729,938
Capstone Capital Trust, Inc. ................ 51,500 1,152,313
Carr Realty Corp. ........................... 102,000 2,983,500
CBL & Associates Properties, Inc. ........... 124,800 3,229,200
Chelsea GCA Realty, Inc. .................... 131,500 4,553,188
Colonial Properties Trust ................... 159,800 4,853,925
Cousins Properties, Inc. .................... 43,200 1,215,000
Crescent Real Estate Equities, Inc. ......... 231,700 12,222,175
Crown America Realty Trust .................. 228,300 1,712,250
Developers Diversified Realty Corp. ......... 309,100 11,475,338
Duke Realty Investments, Inc. ............... 293,900 11,315,150
Equity Residential Properties Trust ......... 159,600 6,583,500
Essex Property Trust, Inc. .................. 108,100 3,175,438
Evans Withycombe Residential, Inc. .......... 90,500 1,900,500
Excel Realty Trust, Inc. .................... 139,300 3,534,738
First Industrial Realty Trust, Inc. ......... 173,400 5,267,025
General Growth Properties ................... 230,100 7,420,725
Healthcare Realty Trust, Inc. ............... 121,200 3,211,800
Highwood Properties, Inc. ................... 138,600 4,677,750
Home Properties of New York, Inc. ........... 6,300 141,750
Innkeepers USA Trust ........................ 135,900 1,885,613
JDN Realty Corp. ............................ 39,200 1,082,900
Kimco Realty Corp. .......................... 301,900 10,528,763
LTC Properties, Inc. ........................ 56,900 1,052,650
Macerich Co. (The) .......................... 83,100 2,170,988
Manufactured Home Communities, Inc. ......... 126,000 2,929,500
Merry Land & Investment Co., Inc. ........... 51,700 1,111,550
MGI Properties, Inc. ........................ 75,500 1,661,000
Mid-America Apartment Communities, Inc....... 100,500 2,901,938
National Golf Properties, Inc. .............. 141,100 4,462,288
National Health Investors, Inc. ............. 125,000 4,734,375
Oasis Residential, Inc. ..................... 277,700 6,317,675
OMEGA Healthcare Investors, Inc. ............ 48,000 1,596,000
Patriot American Hospitality, Inc. .......... 41,500 1,789,688
Post Properties, Inc. ....................... 157,400 6,335,350
Prime Retail, Inc. .......................... 46,900 586,250
Public Storage, Inc. ........................ 471,300 14,610,300
Ramco-Gerhenson Properties .................. 22,675 382,641
Reckson Associates Realty Corp. ............. 138,900 5,868,525
Rouse Co. ................................... 51,000 1,619,250
Security Capital Industrial Trust ........... 200,525 4,286,222
Simon Debartolo Group, Inc. ................. 306,244 9,493,564
Smith (Charles E.) Residential Realty Co..... 40,100 1,172,925
South West Property Trust ................... 459,500 7,754,063
Spieker Properties, Inc. .................... 214,700 7,729,200
Storage USA, Inc. ........................... 28,400 1,068,550
Starwood Lodging Trust ...................... 173,700 9,575,213
Number
of Market
Shares Value
------ ------
Real Estate Investment Trusts (continued)
Summit Properties, Inc. ..................... 81,800 $ 1,809,825
Tanger Factory Outlet Centers, Inc. ......... 94,100 2,552,463
Universal Health Realty Income Trust......... 32,800 672,400
Vornado Realty Trust ........................ 168,400 8,841,000
Walden Residential Properties, Inc. ......... 206,000 5,124,250
Weeks Corp. ................................. 3,000 99,750
Weingarten Realty Investors ................. 101,000 4,103,125
-----------
262,343,261
-----------
Retail (5.9%)
American Stores Co. ......................... 1,610,800 65,841,449
Borders Group, Inc. + ....................... 75,800 2,719,325
Carson Pirie Scott & Co. + .................. 22,800 575,700
CVS Corp. ................................... 46,600 1,928,075
Dayton Hudson Corp. ......................... 2,021,100 79,328,174
Fabri-Centers of America Class A + .......... 27,300 440,213
Fabri-Centers of America Class B + .......... 8,300 127,613
Footstar, Inc. + ............................ 13,416 333,723
Hasbro, Inc. ................................ 18,600 723,075
Hibbett Sporting Goods, Inc. + .............. 7,600 110,200
May Department Stores Co. ................... 41,900 1,958,825
Mercantile Stores Co., Inc. ................. 324,700 16,032,063
Payless ShoeSource, Inc. + .................. 23,492 880,950
Price/Costco, Inc. + ........................ 750,500 18,856,313
Proffitt's, Inc. + .......................... 23,000 848,125
Revco D.S., Inc. + .......................... 427,000 15,799,000
Ross Stores, Inc. ........................... 504,500 25,225,000
Russ Berrie & Co., Inc. ..................... 33,000 594,000
Safeway, Inc. + ............................. 307,100 13,128,525
Saks Holdings, Inc. + ....................... 23,300 629,100
Santa Isabel S.A ............................ 67,500 1,527,188
Sears, Roebuck & Co. ........................ 1,612,200 74,362,724
Shopko Stores, Inc. ......................... 383,700 5,755,500
Talbots, Inc. ............................... 46,500 1,331,063
The Finish Line, Inc. + ..................... 23,300 492,213
TJX Companies, Inc. ......................... 796,800 37,748,400
United Auto Group, Inc. + ................... 9,300 239,475
Urban Shopping Centers, Inc. ................ 137,200 3,978,800
Vons Companies, Inc. + ...................... 133,000 7,963,375
Wet Seal, Inc. + ............................ 89,100 1,904,513
Williams-Sonoma, Inc. + ..................... 37,200 1,353,150
Woolworth Corp. + ........................... 488,700 10,690,313
Zale Corp. + ................................ 955,300 18,270,113
------------
411,696,275
------------
Specialty Consumer Durables (0.1%)
Harley-Davidson, Inc. ....................... 134,900 6,340,300
------------
Telecommunications (1.3%)
360 Communications Co. + .................... 187,700 4,340,563
Ameritech Corp. ............................. 1,172,600 71,088,874
Aspect Telecommunications Corp. + ........... 47,845 3,038,158
Cascade Communications Corp. + .............. 158,400 8,731,800
DSP Communications, Inc. + .................. 14,400 279,000
LCC International, Inc. Class A + ........... 33,400 617,900
9
<PAGE>
Portfolio of Investments
December 31, 1996 (continued)
================================================================================
Number
of Market
Shares Value
------ ------
United States (continued)
Telecommunications (continued)
Lightbridge, Inc. + ......................... 3,670 $ 31,424
Lucent Technologies, Inc. ................... 51,100 2,363,375
Teleport Communications Group, Inc. +........ 27,900 850,950
U.S. Long Distance Corp. + .................. 39,300 314,400
------------
91,656,444
------------
Transportation (1.9%)
AMR Corp. + ................................. 956,300 84,273,937
Comair Holdings, Inc. ....................... 272,850 6,548,400
CSX Corp. ................................... 525,400 22,198,150
Eagle USA Airfreight, Inc. + ................ 18,200 477,750
Expeditors International of Washington, Inc.. 54,200 1,246,600
Harper Group, Inc. .......................... 45,000 1,068,750
UAL Corp. + ................................. 207,800 12,987,500
USAir Group, Inc. + ......................... 27,900 652,163
Werner Enterprises, Inc. .................... 42,000 761,250
------------
130,214,500
------------
Utilities - Electric (4.0%)
Boston Edison Co. ........................... 367,200 9,868,500
Calenergy, Inc. + ........................... 93,911 3,157,757
Central Hudson Gas & Electric Co. ........... 43,100 1,352,263
Commonwealth Energy System Co. .............. 48,700 1,144,450
Consolidated Edison Co. of New York, Inc. ... 715,400 20,925,450
DQE, Inc. ................................... 78,050 2,263,450
Edison International ........................ 309,800 6,157,275
Enova Corp. ................................. 100,000 2,275,000
Entergy Corp. ............................... 2,343,700 65,037,674
Long Island Lighting Corp. .................. 118,800 2,628,450
MDU Resources Group, Inc. ................... 17,200 395,600
Ohio Edison Co. ............................. 421,000 9,577,750
Orange & Rockland Utilities, Inc. ........... 40,000 1,435,000
Pinnacle West Capital Corp. ................. 329,300 10,455,275
Public Service Co. of New Mexico ............ 180,000 3,532,500
Public Service Enterprise Group, Inc. ....... 210,600 5,738,850
Sierra Pacific Resources .................... 124,400 3,576,500
SIGCORP, Inc. ............................... 15,000 519,375
Texas Utilities Co. ......................... 1,703,800 69,429,849
Unicom Corp. ................................ 2,179,400 59,116,224
United Illuminating Co. ..................... 36,000 1,129,500
------------
279,716,692
------------
Utilities - Oil and Gas (0.7%)
AGL Resources, Inc. ......................... 107,200 2,264,600
Brooklyn Union Gas Co. (The) ................ 82,700 2,491,338
Coastal Corp. (The) ......................... 617,400 30,175,425
Connecticut Energy Corp. .................... 14,700 312,375
New Jersey Resources Corp. .................. 43,000 1,257,750
Northwest Natural Gas Co. ................... 18,150 435,600
Pacific Enterprises ......................... 225,100 6,837,413
Valero Energy Corp. ......................... 88,000 2,519,000
------------
46,293,501
------------
Number
of Market
Shares Value
------ ------
Utilities - Telephone (4.6%)
Aerial Communications, Inc. + ............... 213,900 $ 1,737,938
AT&T Corp. .................................. 3,044,600 132,440,099
BellSouth Corp. ............................. 1,735,900 70,086,962
Century Telephone Enterprises ............... 156,000 4,816,500
Cincinnati Bell, Inc. ....................... 347,600 21,420,850
LCI International, Inc. + ................... 65,900 1,416,850
NYNEX Corp. ................................. 1,658,600 79,820,124
Southern New England
Telecommunications Corp.................... 211,600 8,225,950
------------
319,965,273
------------
Total United States 6,373,798,164
------------
Foreign Common Stocks (5.7%)
Argentina (0.1%)
Banco Frances del Rio de la Plata SA
(Banks).. ................................. 141,450 3,889,875
Quilmes Industrial SA (Foods and
Beverages) ................................ 114,600 1,045,725
------------
Total Argentina 4,935,600
------------
Australia (0.1%)
Australian Gas Light Co. Ltd. (Oil and Gas)... 325,000 1,848,229
Goodman Fielder Ltd. (Foods and
Beverages) ................................ 2,580,000 3,196,714
Ita Group + (Foods and Beverages) .......... 1,250,000 1,360,160
Reinsurance Australia Corp. Ltd.
(Insurance) ............................... 985,000 3,833,467
------------
Total Australia 10,238,570
------------
Austria (0.1%)
Austria Mikro Systeme International AG
(Electrical and Electronics) .............. 5,865 452,339
Oesterreichische Elektrizitaetswirtschafts-
AG (Utilities - Electric).................. 25,000 1,869,314
Strabag Oesterreich AG (Building Materials
and Construction) ......................... 4,760 266,115
VA Technologie AG (Commercial Services)..... 25,300 3,966,715
------------
Total Austria 6,554,483
------------
Belgium (0.1%)
Cimenteries CBR Cementbedrijven (Building
Materials and Construction)................ 46,000 4,177,934
G.I.B. Holdings Ltd. (Retail) ............... 85,300 3,818,621
------------
Total Belgium 7,996,555
------------
Brazil (0.0%)
Companhia Energetica de Minas
Gerais (Utilities - Electric) ............. 12,000 408,817
Telecomunicacoes Brasileiras SA
(Utilities - Telephone) ................... 25,950 1,985,175
------------
Total Brazil ................................ 2,393,992
------------
Canada (0.2%)
Anderson Exploration Ltd. (Oil and Gas)...... 158,500 2,046,798
BCE, Inc. (Utilities - Telephone) ........... 48,432 2,307,386
10 See Notes to Portfolio of Investments.
<PAGE>
================================================================================
Number
of Market
Shares Value
------ ------
Canada (continued)
Canadian National Railway (Transportation) .. 120,000 $ 4,560,000
Dofasco, Inc. (Metals and Mining) ........... 13,411 253,416
Intertape Polymer Group, Inc. ...............
(Paper and Containers) .................... 96,600 2,216,513
Petro-Canada (Oil and Gas) .................. 183,100 2,584,889
Royal Bank of Canada (Banks) ................ 92,800 3,256,609
------------
Total Canada ................................ 17,225,611
------------
Chile (0.0%)
Empresa Nacional Electricidad SA
(Utilities - Electric) ...................... 40,000 620,000
------------
Denmark (0.2%)
Carli Gry International A/S + ............... 74,900 3,580,629
(Apparel)
Falck A/S (Commercial Services) ............. 12,630 3,768,291
ISS International Service System
A/S (Diversified) ......................... 128,100 3,365,963
Tele Danmark A/S (Utilities - Telephone)..... 69,800 3,845,628
------------
Total Denmark 14,560,511
------------
Finland (0.1%)
Huhtamaki Group (Diversified) ............... 78,700 3,654,104
Neste (Oil and Gas) ......................... 36,600 889,388
Oy Nokia Ab (Telecommunications) ............ 76,000 4,399,383
UPM-Kymmene Corp. + (Paper and
Containers) ............................... 55,500 1,162,017
------------
Total Finland 10,104,892
------------
France (0.3%)
Credit Local de France (Financial Services).. 28,800 2,503,993
Elf Aquitaine SA (Oil and Gas) .............. 33,600 3,052,526
Eridania Beghin-Say SA (Foods and
Beverages) ................................ 12,500 2,007,699
Lafarge SA (Building Materials and
Construction) ............................. 33,600 2,011,966
Pathe SA + (Media and Entertainment)........ 13,030 3,132,972
Pernod Ricard (Foods and Beverages).......... 19,500 1,076,511
Scor SA (Insurance) ......................... 50,600 1,776,297
Union des Assurances Federales
(Insurance) ............................... 29,400 3,619,341
Usinor Sacilor (Metals and Mining) .......... 6,900 100,207
------------
Total France 19,281,512
------------
Germany (0.4%)
BASF AG (Chemicals) ......................... 91,100 3,487,683
Commerzbank AG (Banks) ...................... 135,000 3,425,131
Deutsche Pfandbrief &
Hypothekenbank AG (Banks) ................. 69,200 3,116,249
GEA AG (Machinery and Equipment) ............ 6,700 2,069,419
Leifheit AG (Home Furnishings and
Appliances) ............................... 46,800 1,806,881
Moebel Walther AG (Home
Furnishings and Appliances) ............... 17,000 1,114,133
Schering AG (Pharmaceuticals) ............... 38,100 3,211,447
Number
of Market
Shares Value
------ ------
Germany (continued)
Schmalbach Lubeca AG (Paper and
Containers) ............................... 14,300 $ 3,507,474
VEBA AG (Utilities - Electric) .............. 62,050 3,563,294
Viag AG (Diversified) ....................... 2,800 1,094,666
Volkswagen AG (Autos and Auto
Equipment) ................................ 8,830 3,652,646
------------
Total Germany ............................... 30,049,023
------------
Hong Kong (0.3%)
China Light & Power Co. Ltd. ................
(Utilities - Electric) .................... 309,000 1,374,222
Goldlion Holdings Ltd. (Retail) ............. 2,330,000 1,912,800
Great Eagle Holdings Ltd. (Real
Estate Investment Trusts) ................. 474,000 1,954,830
Guangnan Holdings (Commercial ............... 3,788,000 3,256,653
Services)
Hong Kong Land Holdings Ltd. (Real
Estate Investment Trusts) ................. 853,291 2,372,149
HSBC Holdings Plc (Banks) ................... 128,482 2,749,035
Hysan Development Co. Ltd. (Real
Estate Investment Trusts) ................. 518,000 2,062,626
Ng Fung Hong Ltd. (Foods and Beverages).... 770,000 691,856
Regal Hotels International (Hotels
and Restaurants) .......................... 7,900,000 2,757,597
Tai Cheung Holdings Ltd. (Real
Estate Investment Trusts) ................. 105,000 99,095
Wheelock & Co. Ltd. (Real Estate
Investment Trusts) ........................ 468,000 1,334,118
------------
Total Hong Kong 20,564,981
------------
Indonesia (0.1%)
Asia Pulp & Paper Co. Ltd. +
(Paper and Containers) .................... 58,900 669,988
Bank Negara Indonesia + (Banks) ............ 239,000 126,455
P.T. Pasifik Satelit Nusantara ADR
+ (Telecommunications) ................... 31,300 375,600
PT Alumindo Perkasa (Metals and Mining)...... 1,910,000 1,051,005
PT Bank Danamon Indonesia (Banks) ........... 1,038,000 977,587
PT Citra Marga Nusaphala Persada
(Commercial Services) ..................... 1,651,000 1,292,846
PT Semen Gresik (Building
Materials and Construction) ............... 568,000 1,827,217
Steady Safe (Foreign-Registered
shares) (Transportation) .................. 680,000 870,688
------------
Total Indonesia 7,191,386
------------
Ireland (0.1%)
Adare Printing Group Plc (Printing
and Publishing) ........................... 197,935 1,909,543
Golden Vale Plc (Foods and Beverages)........ 1,331,000 1,441,750
Irish Life Plc (Insurance) .................. 354,416 1,628,603
Waterford Wedgewood Plc (Home
Furnishings and Appliances) ............... 1,768,938 2,245,463
------------
Total Ireland 7,225,359
------------
11
<PAGE>
Portfolio of Investments
December 31, 1996 (continued)
================================================================================
Number
of Market
Shares Value
------ ------
Italy (0.2%)
Credito Italiano (Banks) .................... 2,736,000 $ 2,997,814
Istituto Mobiliare Italiano S.p.A ...........
(Financial Services) ...................... 31,600 270,174
Pirelli S.p.A. (Autos and Auto Equipment).... 1,836,500 3,400,031
Stet Societa' Finanziaria
Telefonica S.p.A (Telecommunications)...... 1,110,000 3,741,368
------------
Total Italy
10,409,387
------------
Japan (0.9%)
AJL PEPS Trust (Consumer Products) .......... 76,800 1,257,600
Bank of Tokyo-Mitsubishi (Banks) ............ 214,000 3,963,987
Daibiru Corp. (Real Estate
Investment Trusts) ........................ 110,000 1,014,043
Daiichi Pharmaceutical (Pharmaceuticals)..... 227,000 3,637,632
DDI Corp. (Utilities - Telephone) ........... 504 3,326,131
Exedy Corp. (Autos and Auto ................. 159,400 1,977,565
Equipment)
Familymart (Retail) ......................... 30 1,197
Fuji Photo Film (Chemicals) ................. 106,000 3,488,584
Fujitsu Denso (Diversified) ................. 22,100 773,033
Furukawa Electric Co. (Electrical
Equipment) ................................ 475,000 2,246,704
Hitachi Koki (Electrical Equipment).......... 317,000 2,264,091
Hitachi Ltd. (Electrical and Electronics).... 138,200 1,285,914
Ito-Yokado Co. Ltd. (Retail) ................ 70,000 3,039,545
Komatsu Ltd. (Machinery and Equipment)....... 323,000 2,643,663
Konica Corp. (Chemicals) .................... 361,000 2,388,627
Matsushita Electric Industrial Co. ..........
Ltd. (Electrical and Electronics).......... 191,000 3,110,106
Mitsubishi Heavy Industries Ltd. ............
(Aerospace and Defense) ................... 396,000 3,138,795
Mizuno Corp. (Consumer Products) ............ 207,000 1,565,831
NAMCO (Media and Entertainment) ............. 109,500 3,349,056
Nintendo Co. Ltd. (Electrical and
Electronics) .............................. 8,000 571,379
Nippon Densetsu Kogyo (Building
Materials and Construction) ............... 13,000 120,961
Nishimatsu Construction +
(Building Materials and Construction) ..... 45,000 391,574
NTT Data Communications Systems
Co. (Computer Software) ................... 100 2,920,651
Rohm Co. (Electrical and Electronics)........ 23,000 1,505,988
Shin-Etsu Chemical Co. (Chemicals) .......... 1,200 21,814
Shinmaywa Industries Ltd. (Autos
and Auto Equipment) ....................... 181,000 1,330,171
Takara Standard (Building
Materials and Construction) ............... 307,000 2,552,382
TDK Corp. (Electrical and Electronics)....... 25,000 1,626,174
Tsukishima Kikai (Machinery and
Equipment) ................................ 72,700 1,196,321
West Japan Railway (Transportation).......... 928 2,998,191
------------
Total Japan 59,707,710
------------
Number
of Market
Shares Value
------ ------
Malaysia (0.2%)
AMMB Holdings Bhd (Financial Services)....... 397,000 $ 3,332,560
Leader Universal Holdings Bhd
(Diversified) ............................. 481,500 1,010,471
Lion Land Bhd (Financial Services) .......... 1,651,000 1,706,236
MBF Capital Bhd (Financial Services)......... 1,835,000 2,979,007
Oriental Holdings Bhd ....................... 348,300 2,372,103
(Diversified)
UMW Holdings Bhd (Diversified) .............. 101,000 471,905
------------
Total Malaysia 11,872,282
------------
Mexico (0.2%)
ALFA, SA de C.V. (Diversified) .............. 776,726 3,571,822
Gruma SA (Foods and Beverages) .............. 150,000 910,820
Panamerican Beverages, Inc. (Foods
and Beverages) ............................ 81,000 3,796,875
Transportacion Maritima Mexicana
SA de CV (Transportation) ................. 158,100 830,025
Tubos de Acero de Mexico SA +
(Metals and Mining) ....................... 152,000 2,413,000
------------
Total Mexico 11,522,542
------------
Netherlands (0.2%)
Fortis Amev N.V. (Financial Services)........ 73,916 2,585,317
Getronics NV (Computers and Office
Equipment) ................................ 133,000 3,606,155
ING Groep N.V. (Banks) ...................... 107,588 3,868,781
Philips Electronics N.V
(Electrical and Electronics) .............. 88,500 3,581,469
------------
Total Netherlands 13,641,722
------------
New Zealand (0.0%)
Telecom Corp. of New Zealand Ltd.
(Telecommunications) .................... 175,000 892,707
------------
Norway (0.3%)
Den norske Bank ASA (Banks) ................. 996,850 3,809,193
Kvaerner ASA (Transportation) ............... 71,600 3,481,673
Merkantildata ASA (Computer Software)........ 189,000 3,463,068
Saga Petroleum ASA (Oil and Gas) ............ 165,000 2,584,028
Schibsted ASA (Printing and Publishing)...... 215,500 3,965,505
Tomra Systems ASA (Paper and
Containers) ............................... 150,000 2,337,371
------------
Total Norway 19,640,838
------------
Philippines (0.1%)
Ayala Land, Inc. (Real Estate
Investment Trusts) ........................ 2,060,000 2,349,809
DMCI Holdings, Inc. + (Building
Materials and Construction) ............... 1,980,000 1,298,669
------------
Total Philippines 3,648,478
------------
Singapore (0.2%)
City Developements Ltd. (Real
Estate Investment Trusts) ................. 358,000 3,224,720
Clipsal Industries Ltd. .....................
(Electrical Equipment) .................... 675,000 2,457,000
12 See Notes to Portfolio of Investments
<PAGE>
Portfolio of Investments
December 31, 1996 (continued)
================================================================================
Number
of Market
Shares Value
------ ------
Singapore (continued)
Development Bank of Singapore Ltd.
(Banks) ................................... 256,000 $ 3,458,918
NatSteel Ltd.
(Metals and Mining) ....................... 336,000 763,844
Wing Tai Holdings Ltd. ...................... 1,413,000 4,040,551
(Diversified)
------------
Total Singapore 13,945,033
------------
South Korea (0.0%)
Korea Electric Power Corp. ..................
(Utilities - Electric) ...................... 108,300 2,220,150
------------
Spain (0.2%)
Cubiertas y Mzov SA (Building
Materials and Construction) ............... 43,700 3,359,599
Empresa Nacional de Electricidad
SA (Utilities - Electric) ................. 49,400 3,509,175
Repsol SA (Oil and Gas) ..................... 100,300 3,840,045
Telefonica de Espana (Utilities - ........... 90,000 2,086,104
Telephone)
------------
Total Spain 12,794,923
------------
Sweden (0.3%)
Enator AB + (Commercial Services) .......... 161,120 4,117,653
Frontec AB + (Computer Software) ........... 227,000 3,922,950
Mo och Domsjo AB (Paper and ................. 121,500 3,416,508
Containers)
Skandinaviska Enskilda Banken ............... 387,000 3,967,472
(Banks)
Volvo AB (Autos and Auto .................... 170,200 3,751,465
Equipment)
------------
Total Sweden 19,176,048
------------
Switzerland (0.0%)
Baloise Holding Ltd. (Insurance) ............ 160 320,543
------------
Taiwan (0.0%)
China Steel Corp. ++
(Metals and Mining)......................... 128,000 2,568,000
------------
United Kingdom (0.8%)
Bank of Scotland (Banks) .................... 640,354 3,380,660
British Airways Plc (Transportation)......... 291,200 3,017,392
British Telecommunications Plc
(Utilities - Telephone) ................... 442,700 2,988,702
Burton Group Plc (Retail) ................... 1,513,759 4,060,602
Commercial Union Plc (Insurance) ............ 285,600 3,340,588
Cowie Group Plc (Autos and Auto
Equipment) ................................ 483,000 3,335,161
D.F.S. Furniture Co. Plc + (Home
Furnishings and Appliances) ............... 256,290 2,646,885
Glaxo Wellcome Plc .......................... 185,600 3,011,012
(Pharmaceuticals)
Granada Group Plc (Diversified) ............. 214,839 3,167,339
Hillsdown Holdings Plc (Foods and
Beverages) ................................ 1,113,704 3,811,763
Inchcape Plc (Retail) ....................... 314,316 1,465,747
Ladbroke Group Plc (Media and
Entertainment) ............................ 817,696 3,232,437
National Power Plc (Utilities - Electric).... 72,050 2,440,694
Pearson Plc (Printing and Publishing)........ 238,000 3,052,634
Pilkington Plc (Building Materials
and Construction) ......................... 796,800 2,133,977
Railtrack Group Plc (Transportation)......... 385,000 2,553,046
Number
of Market
Shares Value
------ ------
United Kingdom (continued)
Shell Transport & Trading Co. (Oil and Gas).. 210,000 $ 3,635,058
Slough Estates Plc (Real Estate
Investment Trusts) ........................ 487,125 2,321,627
T & N Plc (Autos and Auto Equipment)......... 460,000 1,365,789
------------
Total United Kingdom 54,961,113
------------
Total Foreign Common Stocks 396,263,951
------------
Total Common Stocks (cost $5,172,979,766) 6,770,062,115
------------
PREFERRED STOCKS (0.3%)
United States (0.3%)
Alexander & Alexander ++
(Financial Services) ...................... 49,000 2,560,250
AMC Entertainment (Media and
Entertainment) ............................ 15,850 427,950
Case Corp. ++ (Machinery and Equipment)..... 14,200 1,909,900
Corning Delaware L.P. (Foods and
Beverages) ................................ 13,900 884,388
Cyprus Amax Minerals Co. (Metals
and Mining) ............................... 42,100 2,294,450
Freeport McMoRan, Inc. (Metals and
Mining) ................................... 23,000 646,875
International Paper Co. ++ (Paper
and Containers) ........................... 9,300 430,125
Sea Containers Ltd. (Diversified) ........... 36,000 1,638,000
Security Capital Pacific Trust
(Real Estate Investment Trusts) ........... 19,400 594,125
Tanger Factory Outlet Centers, Inc.(Retail).. 55,800 1,374,075
Union Planters Co. (Foods and Beverages).... 18,600 921,863
Valero Energy Corp.(Utilities - Oil and Gas).. 37,200 2,148,300
William Cos., Inc. (Commercial Services)...... 27,900 2,476,125
------------
Total United States 18,306,426
------------
Foreign Preferred Stocks (0.0%)
Austria (0.0%)
Creditanstalt-Bankverein (Banks) ............ 24,100 1,111,671
------------
Germany (0.0%)
Gerry Weber International AG (Apparel)....... 60,059 2,455,191
------------
Total Foreign Preferred Stocks
3,566,862
------------
Total Preferred Stocks (cost $19,823,223).... 21,873,288
------------
Principal Market
Amount Value
--------- ------
LONG-TERM BONDS AND NOTES (1.2%)
Corporate and Convertible Bonds (1.2%)
Agnico-Eagle Mines Ltd., 3.50%, 01/27/04..... $2,900,000 $ 2,679,497
Alza Corp., 0.00%, 07/14/14 ................. 1,860,000 760,275
Alza Corp., 5.00%, 05/01/06 ................. 930,000 897,450
Apache Corp., 6.00%, 01/15/02 ............... 1,470,000 1,837,500
Automatic Data Processing, Inc.,
0.00%, 02/20/12 ........................... 3,800,000 2,201,347
Baker Hughes, Inc., 0.00%, 05/05/08 ......... 9,975,000 7,573,512
13
<PAGE>
Portfolio of Investments
December 31, 1996 (continued)
================================================================================
Principal Market
Amount Value
--------- ------
Corporate and Convertible Bonds
(continued)
Battle Mountain Gold Co., 6.00%, 01/04/05... $ 500,000 $ 430,000
Bindley Western, 6.50%, 10/01/02 ........... 930,000 1,009,251
Boston Chicken, Inc., 0.00%, 06/01/15....... 3,730,000 1,142,313
Career Horizons, Inc., 7.00%, 11/01/02....... 930,000 1,826,288
Checkpoint Systems, Inc., 5.25%, 11/01/05.... 1,162,000 1,652,945
Cityscape Financial Corp. ++ ,
6.00%, 05/01/06 ........................... 1,160,000 1,218,000
Comverse Technology Inc. ++ ,
5.75%, 10/01/06 ........................... 4,600,000 4,784,000
Consolidated Natural Gas Co.,
7.25%, 12/15/15 ........................... 950,000 1,017,688
Continental Airlines, Inc. ++ ,
6.75%, 04/15/06 ........................... 1,860,000 2,111,100
Continental Homes Holding Corp.,
6.875%, 11/01/02 .......................... 700,000 741,125
Costco Wholesale, Inc., 5.75%, 05/15/02...... 2,225,000 2,168,082
Cross Timbers Oil Co., 5.25%, 11/01/03....... 465,000 517,894
Fpa Medical Management, 4.50%, 12/15/01...... 1,860,000 1,869,300
Fremont General Corp., 0.00%, 10/12/13....... 930,000 556,838
Healthsouth Rehab Corp., 5.00%, 04/01/01..... 465,000 934,650
Home Depot, Inc., 3.25%, 10/01/01 ........... 930,000 911,400
Integrated Health Services, 5.75%, 01/01/01.. 930,000 918,375
Marriott International, Inc. ++ , 0.00%,
03/25/11 .................................. 2,730,000 1,535,625
NAC Re Corp. ++ , 5.25%, 12/15/02 ........... 930,000 895,125
National Semiconductor Corp. ++ ,
6.50%, 10/01/02 ........................... 4,650,000 4,557,000
Office Depot, Inc., 0.00%, 12/11/07 ......... 1,100,000 668,250
Ogden Corp., 6.00%, 06/01/02 ................ 475,000 453,625
Pennzoil Co., 4.75%, 10/01/03 ............... 1,000,000 1,170,000
Pennzoil Co., 6.50%, 01/15/03 ............... 465,000 719,588
Phycor Inc., 4.50%, 02/15/03 ................ 1,395,000 1,379,306
Phymatrix Corp., 6.75%, 06/15/03 ............ 2,300,000 1,897,500
Pioneer Financial Services, 6.50%,
04/01/03 .................................. 1,395,000 1,867,556
Pogo Producing, 5.50%, 03/15/04 ............. 930,000 2,051,813
Potomac Electric Power, 7.00%, 01/15/18...... 750,000 772,500
Prime Hospitality Corp., 7.00%, 04/15/02..... 795,000 1,148,775
Proffitt's, Inc., 4.75%, 11/01/03 ........... 3,665,000 3,674,163
Richey Electronics, Inc. ++ ,
7.00%, 03/01/06 ........................... 1,859,000 1,861,324
Rotech Medical Corp. ++ , 5.25%, 06/01/03.... 3,255,000 3,271,275
Sanmina Corp. ++ , 5.50%, 08/15/02 ......... 930,000 1,897,200
SCI Systems, Inc. ++ , 5.00%, 05/01/06....... 695,000 816,625
Sholodge Inc., 7.50%, 05/01/04 .............. 2,562,000 2,292,990
Theratx Inc., 8.00%, 02/01/02 ............... 1,920,000 1,804,800
Thermo Instrument System ++ ,
4.50%, 10/15/03 ........................... 930,000 953,250
U.S. Filter Corp., 6.00%, 09/15/05 ......... 3,165,000 5,570,400
US Cellular Corp., 0.00%, 06/15/15 ......... 2,325,000 770,156
US Office Products Co. ++ , 5.50%, 02/01/01.. 930,000 1,213,650
Veterinary Centers of America ++ ,
5.25%, 05/01/06 ........................... 465,000 313,871
------------
Total Long-Term Bonds and Notes
(cost $76,105,184) 83,315,197
------------
Number
of Market
Contracts Value
--------- ------
CALL OPTIONS PURCHASED (0.1%)
Russell 2000 Index, Strike $340, March 97.... 1,500 $ 4,575,000
Russell 2000 Index, Strike $355, March 97.... 1,213 2,410,838
------------
Total Call Options Purchased
(cost $6,170,939) ......................... 6,985,838
------------
PUT OPTIONS PURCHASED (0.1%)
S & P MidCap Index, Strike $240, ............ 10,380 4,476,375
March 97
S & P MidCap Index, Strike $250, ............ 6,048 4,158,000
March 97
------------
Total Put Options Purchased
(cost $9,655,684) ......................... 8,634,375
------------
SHORT-TERM INVESTMENTS (1.6%)
A.H. Robins Co., Inc. ++ , Comm
Paper, 6.50%, 01/02/97 .................... $18,685,000 $ 18,685,000
American Express Credit Corp.,
Comm. Paper, 5.50%, 01/02/97 .............. 31,391,000 31,391,000
Countrywide Home Loans, Comm
Paper, 6.75%, 01/02/97 .................... 4,388,000 4,388,000
Dana Credit Corp., Comm. Paper,
6.95%, 01/03/97 ........................... 18,195,000 18,191,487
Occidental Petroleum, Comm. Paper,
6.20%, 01/06/97 ........................... 9,200,000 9,193,662
U.S. Treasury Bill +++ , Time
Deposit, 5.08%, 08/21/97 .................. 26,800,000 25,913,456
U.S. Treasury Bill +++ , Time
Deposit, 5.115%, 08/21/97 ................. 1,000,000 967,179
------------
Total Short-Term Investments
(cost $108,742,737) ....................... 108,729,784
------------
TOTAL INVESTMENTS
(cost $5,393,477,533)(a) .................. 6,999,600,597
Other assets less liabilities
(45,370,101)
============
Total Net Assets
$6,954,230,496
============
Notes to Portfolio of Investments
(a) The cost of investments for federal income tax purposes amounted to
$5,403,059,920. Unrealized gains and losses, based on identified tax cost at
December 31, 1996, are as follows:
Unrealized gains .................. $1,652,529,593
Unrealized losses ................. (55,988,916)
---------------
Net unrealized gain ............. $1,596,540,677
===============
+ Non-income producing security.
++ Securities that may be resold to "qualified institutional buyers" under Rule
144A or securities offered pursuant to section 4(2) of the Securities Act of
1933, as amended. These securities have been determined to be liquid under
guidelines established by the Board of Trustees.
+++ Security pledged to cover initial margin requirements on open futures
contracts at December 31, 1996.
Category percentages are based on net assets.
14 See Notes to Financial Statements.
<PAGE>
================================================================================
Notes to Portfolio of Investments (continued)
Information concerning open futures contracts at December 31, 1996 is shown
below:
No.of Initial
Long Notional Expiration Unrealized
Contracts Value Date Gain/(Loss)
--------- ----------- ---------- -----------
All Ordinaries Share
Price Index Future... 27 $ 1,251,060 March 97 $ 61,436
TSE 35 Index .......... 19 2,137,791 March 97 71,528
Future
FTSE 100 Index ........ 10 1,664,238 March 97 36,686
Future
Topix Index ........... 70 9,655,323 March 97 (488,843)
Future
S & P 500 Index
Future .............. 862 317,607,905 March 97 3,271,594
------------ -----------
$332,316,317 $ 2,952,401
============ ===========
Information concerning written option contracts at December 31, 1996 is shown
below:
Exercise Expiration Market
Call Options Contracts Price Date Value
- ------------ --------- ----- ---- -----
S & P Midcap Index 6,048 $240 March 97 $ (8,202,600)
S & P Midcap Index 10,380 250 March 97 (21,668,250)
Sunbeam Corporation 233 20 Jan 97 (135,431)
Put Options
- -----------
Russell 2000 Index 1,500 340 March 97 (1,087,500)
Russell 2000 Index 1,213 355 March 97 (1,379,788)
--------------
Total Deferred Premiums on Written Options $ (32,473,569)
=============
15
<PAGE>
Statements of Assets and Liabilities
December 31, 1996
================================================================================
Assets:
Investments, at market value .............................. $6,999,600,597
Cash ...................................................... 570,345
Cash denominated in foreign currencies .................... 17,452,396
Receivable for:
Dividends and interest .................................. 15,176,349
Investments sold ........................................ 44,357,935
Fund shares sold ........................................ 4,862
Recoverable taxes ....................................... 30,776
Gross unrealized gain on forward
foreign currency exchange contracts ..................... 3,413,755
---------------
Total assets ..................................... 7,080,607,015
---------------
Liabilities:
Payable for:
Dividends to shareholders ............................... 208,220
Investments purchased ................................... 81,514,754
Fund shares redeemed .................................... 2,366,252
Variation margin ........................................ 6,314,572
Gross unrealized loss on forward
foreign currency exchange contracts ..................... 221,844
Deferred premiums on written options, at market value ..... 32,473,569
Accrued investment advisory fees .......................... 2,926,168
Accrued administrative and service fees ................... 351,140
---------------
Total liabilities ................................ 126,376,519
---------------
NET ASSETS ................................................ $6,954,230,496
===============
Net assets represented by:
Paid-in capital ........................................... $5,049,843,917
Net unrealized gain on investments ........................ 1,611,529,652
Distributions in excess of net investment income .......... (116,078)
Accumulated net realized gain on investments .............. 292,973,005
---------------
NET ASSETS ................................................ $6,954,230,496
===============
Shares authorized ......................................... Unlimited
Par value ................................................. $1.00
Shares outstanding ........................................ 214,694,270
Net asset value per share (net assets
divided by shares outstanding) .......................... $32.391
Cost of investments ....................................... $5,393,477,533
Cost of cash denominated in foreign currencies ............ $17,458,127
See Notes to Financial Statements.
16
<PAGE>
Statement of Operations
Year Ended December 31, 1996
================================================================================
Investment Income:
Interest .................................................... $139,992,261
Dividend .................................................... 14,155,684
---------------
154,147,945
Foreign taxes withheld ...................................... (949,544)
---------------
Total investment income ............................ 153,198,401
---------------
Expenses:
Investment advisory fees .................................... 22,537,554
Administrative services fees ................................ 3,258,759
Miscellaneous ............................................... 1,111,267
---------------
Total expenses ..................................... 26,907,580
---------------
Net investment income ....................................... 126,290,821
---------------
Net Realized and Unrealized Gain (Loss):
Net realized gain or loss on:
Sale of investments ....................................... 921,185,560
Written options ........................................... (5,254,213)
Futures and forward foreign currency exchange contracts ... 26,321,398
Foreign currency related transactions ..................... (122,246)
---------------
Net realized gain or loss on investments ........... 942,130,499
---------------
Net change in unrealized gain or loss on:
Investments ............................................... 307,754,298
Written Options ........................................... (673,615)
Futures and forward foreign currency exchange contracts ... 4,275,567
Foreign currency related transactions ..................... (14,837)
---------------
Net change in unrealized gain or loss on investments 311,341,413
---------------
Net realized and change in unrealized gain .................. 1,253,471,912
---------------
Net increase in net assets resulting from operations ........ $1,379,762,733
===============
See Notes to Financial Statements. 17
<PAGE>
Statements of Changes in Net Assets
===============================================================================
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, December 31,
1996 1995
--------------- ---------------
<S> <C> <C>
Operations:
Net investment income ............................................. $126,290,821 $121,449,354
Net realized gain ................................................. 942,130,499 618,484,874
Net change in unrealized gain ..................................... 311,341,413 655,688,100
--------------- ---------------
Net increase in net assets resulting from operations ............ 1,379,762,733 1,395,622,328
--------------- ---------------
Distributions to Shareholders:
From net investment income ........................................ (142,295,877) (121,467,727)
From net realized gains ........................................... (587,939,494) (812,495,987)
--------------- ---------------
Decrease in net assets from distributions to shareholders ....... (730,235,371) (933,963,714)
--------------- ---------------
Share Transactions:
Proceeds from shares sold ......................................... 157,493,741 293,617,310
Net asset value of shares issued upon reinvestment of distributions 730,007,966 933,736,815
Payments for shares redeemed ...................................... (244,305,179) (451,382,489)
--------------- ---------------
Net increase in net assets from share transactions .............. 643,196,528 775,971,636
--------------- ---------------
Change in net assets .............................................. 1,292,723,890 1,237,630,250
Net assets:
Beginning of year ................................................. 5,661,506,606 4,423,876,356
--------------- ---------------
End of year ....................................................... $6,954,230,496 $5,661,506,606
=============== ===============
End of year net assets includes undistributed
(distributions in excess of) net investment income .............. $(116,078) $13,766,310
=============== ===============
Share Transactions:
Number of shares sold ............................................. 4,987,093 10,162,782
Number of shares issued upon reinvestment of distributions ........ 22,399,165 31,806,470
Number of shares redeemed ......................................... (7,542,873) (15,783,222)
--------------- ---------------
Net increase .................................................... 19,843,385 26,186,030
=============== ===============
</TABLE>
See Notes to Financial Statements.
18
<PAGE>
Notes to Financial Statements
December 31, 1996
================================================================================
1. Summary of Significant Accounting Policies
Aetna Variable Fund (the Fund) is registered under the Investment Company Act of
1940 as a diversified, open-end management investment company whose shares are
currently sold to Aetna Life Insurance and Annuity Company (the Company), an
Aetna Life Insurance Company Separate Account, and to other shareholders of the
Fund only through reinvestment of distributions. The Company's shares are
allocated to certain of its variable life/annuity accounts. The Company's
accounts and affiliates held 99.6% of the Fund's shares outstanding at December
31, 1996. 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.
The Company serves as Investment Adviser and principal underwriter to the Fund.
It is an indirect wholly-owned subsidiary of Aetna Retirement Services, Inc.,
which in turn, is a wholly-owned subsidiary of Aetna Inc.
The accompanying financial statements of the Fund have been prepared in
accordance with generally accepted accounting principles. The preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect amounts
reported therein. Although actual results could differ from these estimates, any
such differences are expected to be immaterial to the net assets of the Fund.
A. Valuation of Investments
Investments are stated at market values based upon closing sales prices as
reported on national securities exchanges or, for over-the-counter securities,
at the mean of the bid and asked prices. Short-term investments maturing in more
than sixty days for which market quotations are readily available are valued at
current market value. Short-term investments maturing in less than sixty days
are valued at amortized cost which when combined with accrued interest
approximates market. Securities for which market quotations are not considered
to be readily available are valued in good faith using methods approved by the
Board of Trustees.
The accounting records of the Fund are maintained in U.S. dollars. Investment
securities and other assets and liabilities denominated in a foreign currency
are translated into U.S. dollars at the prevailing rates of exchange at the end
of the period. Purchases and sales of securities, income receipts, and expense
payments are translated into U.S. dollars at the prevailing exchange rate on the
respective dates of the transactions.
B. Option Contracts
The Fund may purchase put and call options and write put and covered call
options as a hedge against adverse movements in the value of portfolio holdings
or to increase market exposure.
Option contracts are valued daily. Unrealized gains or losses are recorded based
upon the last sales price on the principal exchange on which the option is
traded.
The Fund will realize a gain or loss upon the expiration or closing of the
option contract. When an option is exercised, the proceeds on sales of the
underlying security for a written call option, the purchase cost of the security
for a written put option, or the cost of the security for a purchased put or
call option is adjusted by the amount of premium received or paid.
The risk in writing a call option is that the Fund gives up the opportunity for
profit if the market price of the security increases and the option is
exercised. The risk in writing a put option is that the Fund may incur a loss if
the market price of the security decreases and the option is exercised. The risk
in buying an option is that the Fund pays a premium whether or not the option is
exercised. Risks may also arise from an illiquid secondary market, or from the
inability of counterparties to meet the terms of the contract.
C. Futures and Foreign Currency Exchange Contracts
A futures contract is an agreement between two parties to buy and sell a
specific amount of a commodity, security or financial instrument including an
index of stocks at a set price on a future date. The Fund "sells" futures
contracts as a hedge against declines in the value of portfolio securities. The
Fund may enter into futures contracts to manage the risk of changes in interest
rates, equity prices, currency exchange rates or in anticipation of future
purchases and sales of portfolio securities.
19
<PAGE>
Notes to Financial Statements
December 31, 1996 (continued)
================================================================================
1. Summary of Significant Accounting Policies (continued)
C. Futures and Foreign Currency Exchange Contracts (continued)
Upon entering into a futures contract, the Fund is required to deposit with a
broker an amount (initial margin) equal to a percentage of the purchase price
indicated by the futures contract. Subsequent deposits (variation margin) are
received or paid each day by the Fund equal to the daily fluctuations in the
market value of the contract. These amounts are recorded by the Fund as
unrealized gains or losses. When a contract is closed, the Fund records a
realized gain or loss equal to the difference between the value of the contract
at the time it was opened and the value at the time it was closed. Generally,
futures contracts held by the Fund are closed prior to expiration.
A forward foreign currency exchange contract is an agreement to pay or receive
specific amounts of a currency at a future date in exchange for another currency
at an agreed upon exchange rate. The Fund may use forward foreign currency
exchange contracts to hedge certain foreign currency assets. Contracts are
recorded at market value and marked-to-market daily.
The risks associated with futures and forward foreign currency exchange
contracts may arise from an imperfect correlation between the change in market
value of the securities held by the Fund and the price of futures contracts.
Risks may also arise from an illiquid secondary market, or from the inability of
counterparties to meet the terms of the contract.
Realized and unrealized gains or losses on futures and foreign currency exchange
contracts are reflected in the accompanying financial statements. The amounts at
risk under such futures and foreign currency exchange contracts may exceed the
amounts reflected in the financial statements. The notional amounts of these
contracts are disclosed in the Portfolio of Investments and elswhere in the
Notes to Financial Statements. For federal income tax purposes, any futures and
forward foreign currency exchange contracts which remain open at the end of the
fiscal year are marked-to-market and the resultant net gain or loss is included
in federal taxable income.
D. Illiquid and Restricted Securities
Illiquid securities are securities that are not readily marketable. Disposing of
illiquid investments may involve time-consuming negotiation and legal expenses,
and it may be difficult or impossible for the Fund to sell them promptly at an
acceptable price. Restricted securities are subject to legal or contractual
restrictions on resale and may not be publicly sold without registration under
the Securities Act of 1933. The Fund may invest up to 15% of its total assets in
illiquid securities. Illiquid and restricted securities are valued using market
quotations when readily available. In the absence of market quotations, the
securities are valued based upon their fair value determined under procedures
approved by the Board of Trustees. The Fund will not pay the costs of
disposition of restricted securities other than ordinary brokerage fees, if any.
E. Delayed Delivery Transactions
The Fund may purchase or sell securities on a when-issued or forward commitment
basis. The price of the underlying securities and date when the securities will
be delivered and paid for are fixed at the time the transaction is negotiated.
The market value of the securities purchased or sold are identified in the
Fund's portfolio of investments. Losses may arise due to changes in the market
value of the securities or from the inability of counterparties to meet the
terms of the contract.
F. Federal Income Taxes
As a qualified regulated investment company, the Fund is relieved of federal
income and excise taxes by distributing its net taxable investment income and
capital gains, if any, in compliance with the applicable provisions of the
Internal Revenue Code.
20
<PAGE>
================================================================================
1. Summary of Significant Accounting Policies (continued)
G. Distributions
The Fund distributes all net investment income and net capital gains, if any, to
shareholders annually. Distributions from net investment income are based on
taxable net income. Distributions are recorded on the ex-dividend date. Income
and capital gain distributions are determined in accordance with income tax
regulations which may differ from generally accepted accounting principles.
These differences are primarily due to differing treatments for foreign currency
transactions and deferred losses on wash sales.
H. Other
Investment transactions are accounted for on the day following trade-date,
except same day settlements which are accounted for on the trade date. Interest
income is recorded on an accrual basis. Discounts and premiums on securities
purchased are amortized, using an effective yield method, over the life of the
respective security. Dividend income and stock splits are recorded on the
ex-dividend date. Realized gains and losses from investment transactions are
determined on an identified cost basis.
2. Investment Advisory and Administrative Services Fees
For the period January 1 through July 31, 1996, the Fund paid the Company (its
investment adviser) an investment advisory fee at an annual rate of one-quarter
of one percent (0.25%) of its average daily net assets. On June 17, 1996, the
shareholders of the Fund approved a new Investment Advisory Agreement, effective
August 1, 1996, which provides for an increase in the annual advisory fee to
0.50% of average daily net assets of the Fund.
The Fund had entered into an administrative services agreement (the Agreement)
with the Company whereby the Company was reimbursed for a share of its overhead
related to managing the Fund. In addition, the Company had been paying, and the
Fund had been reimbursing the Company for the Fund's ordinary, recurring
expenses such as legal fees, trustees' fees, custodial fees and insurance
premiums. Effective May 1, 1996, the Agreement was modified to enable the Fund
to fix the amount of its costs and expenses. Under the terms of the new
Agreement, the Company will receive a fixed fee in exchange for providing the
services described above, including reimbursement of its overhead related to
managing the Fund. The new Agreement provides for the Company to receive a fixed
fee at an annual rate of 0.06% of average daily net assets of the Fund.
During June, the shareholders of the Fund voted to approve a subadvisory
agreement (the Subadvisory Agreement) among the Fund, the Company and the
Company's affiliate, Aeltus Investment Management, Inc. (Aeltus). Under the
terms of the Subadvisory Agreement, Aeltus will supervise the investment and
reinvestment of cash and securities and provide certain related administrative
services for the Fund in exchange for fees to be paid by the Company.
The Subsidiary Agreement provides that the Company will pay Aeltus a fee at an
annual rate of 0.30% of the average daily net assets of the Fund. For the period
ended December 31, 1996, the Company paid Aeltus $7,750,390 in accordance with
the terms of the Subadvisory Agreement.
3. Purchases and Sales of Investments
Purchases and sales of investment securities, excluding short-term investments,
for the year ended December 31, 1996 were $5,332,645,688 and $5,117,253,372,
respectively.
21
<PAGE>
Notes to Financial Statements
December 31, 1996 (continued)
================================================================================
4. Options
The following reflects the Fund's call and put option activity for the year
ended December 31, 1996:
Call Options Written
-----------------------------------------------
Number of Option Deferred Premium Realized
Contracts Received Gain (Loss)
--------- -------- ----------
Outstanding December 31, 1995 -- $ -- $ --
Written ..................... 70,790 84,573,623 --
Closed ...................... (51,862) (54,058,443) (9,892,119)
Expired ..................... (1,711) (1,495,967) 1,495,967
Exercised ................... (556) (152,322) --
----------- ------------ ------------
Outstanding December 31, 1996 16,661 $ 28,866,891 $ (8,396,152)
=========== ============ ============
Put Options Written
-----------------------------------------------
Number of Option Deferred Premium Realized
Contracts Received Gain (Loss)
--------- -------- ----------
Outstanding December 31, 1995 -- $ -- $ --
Written ..................... 6,618 6,743,979 --
Closed ...................... (2,742) (2,562,686) 1,893,710
Expired ..................... (1,163) (1,248,229) 1,248,229
Exercised ................... -- -- --
----------- ------------ ------------
Outstanding December 31, 1996 2,713 $ 2,933,064 $ 3,141,939
=========== ============ ============
5. Forward Foreign Currency Exchange Contracts
At December 31, 1996, the Fund had the following open forward foreign currency
exchange contracts that obligate the Fund to deliver currencies at specified
future dates. The net unrealized gain of $3,191,911 on these contracts is
included in the accompanying financial statements. The terms of the open
contracts are as follows:
<TABLE>
<CAPTION>
Exchange Currency to U.S. $ Value Currency to U.S. $ Value Unrealized
Date be Delivered December 31, 1996 be Received December 31, 1996 Gain (Loss)
---- ------------ ----------------- ----------- ----------------- -----------
Contracts to Buy
- ----------------
<S> <C> <C> <C> <C> <C>
2/10/97 311,187 $311,187 400,000 $299,139 $(12,048)
U.S. Dollar Swiss Franc
- ---------------------------------------------------------------------------------------------------------------------------
2/10/97 2,332,861 2,332,861 3,130,000 2,340,764 7,903
U.S. Dollar Swiss Franc
- ---------------------------------------------------------------------------------------------------------------------------
3/13/97 2,763,445 2,763,445 305,380,000 2,657,714 (105,731)
U.S. Dollar Japanese Yen
- ---------------------------------------------------------------------------------------------------------------------------
1/24/97 682,035 682,035 75,000,000 648,583 (33,452)
U.S. Dollar Japanese Yen
- ---------------------------------------------------------------------------------------------------------------------------
1/6/97 311,496 311,496 485,000 312,820 1,324
U.S. Dollar German Deutschemark
- ---------------------------------------------------------------------------------------------------------------------------
1/2/97 716,941 716,941 424,000 716,458 (483)
U.S. Dollar British Pounds
- ---------------------------------------------------------------------------------------------------------------------------
1/2/97 246,444 246,444 1,906,000 246,384 (60)
U.S. Dollar Hong Kong Dollars
- ---------------------------------------------------------------------------------------------------------------------------
1/2/97 223,619 223,619 5,870,000 225,006 1,387
U.S. Dollar Philipinnes Peso
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
22
<PAGE>
================================================================================
5. Forward Foreign Currency Exchange Contracts (continued)
<TABLE>
<CAPTION>
Exchange Currency to U.S. $ Value Currency to U.S. $ Value Unrealized
Date be Delivered December 31, 1996 be Received December 31, 1996 Gain (Loss)
---- ------------ ----------------- ----------- ----------------- -----------
Contracts to Sell
- -----------------
<S> <C> <C> <C> <C> <C>
2/10/97 3,123,000 $2,335,530 2,624,370 $2,624,370 $288,840
Swiss Franc U.S. Dollar
- ---------------------------------------------------------------------------------------------------------------------------
3/3/97 24,544,000 15,989,646 16,426,348 16,426,348 436,702
German Deutschemark U.S. Dollar
- ---------------------------------------------------------------------------------------------------------------------------
3/3/97 9,263,000 6,036,868 5,990,689 5,990,689 (46,179)
German Deutschemark U.S. Dollar
- ---------------------------------------------------------------------------------------------------------------------------
2/13/97 867,000 564,198 562,767 562,767 (1,431)
German Deutschemark U.S. Dollar
- ---------------------------------------------------------------------------------------------------------------------------
2/13/97 60,367,300 11,641,813 11,905,790 11,905,790 263,977
French Franc U.S. Dollar
- ---------------------------------------------------------------------------------------------------------------------------
2/13/97 1,572,000 303,160 300,236 300,236 (2,924)
French Franc U.S. Dollar
- ---------------------------------------------------------------------------------------------------------------------------
3/13/97 1,917,560,000 16,688,471 17,820,743 17,820,743 1,132,272
Japanese Yen U.S. Dollar
- ---------------------------------------------------------------------------------------------------------------------------
3/17/97 1,434,050,000 12,487,761 13,129,921 13,129,921 642,160
Japanese Yen U.S. Dollar
- ---------------------------------------------------------------------------------------------------------------------------
1/24/97 1,775,150,000 15,351,104 15,925,650 15,925,650 574,546
Japanese Yen U.S. Dollar
- ---------------------------------------------------------------------------------------------------------------------------
4/18/97 12,814,600 7,461,715 7,526,359 7,526,359 64,644
Dutch Guilder U.S. Dollar
- ---------------------------------------------------------------------------------------------------------------------------
4/18/97 3,414,000 1,987,912 1,973,479 1,973,479 (14,433)
Dutch Guilder U.S. Dollar
- ---------------------------------------------------------------------------------------------------------------------------
1/7/97 3,775,554,000 2,472,575 2,467,472 2,467,472 (5,103)
Italian Lira U.S. Dollar
- ---------------------------------------------------------------------------------------------------------------------------
$3,191,911
============
</TABLE>
6. Certain Reclassifications
In accordance with Statement of Position 93-2, the Fund made the following
reclassifications to the Statement of Assets and Liabilities:
<TABLE>
Undistributed Net Investment Accumulated Net Realized Gain
Paid-in Capital Income (Loss) on Investments
-------------------------- --------------------------------- --------------------------------
<S> <C> <C> <C>
$(9,181,282) $2,122,668 $7,058,614
</TABLE>
These reclassifications have no impact on the net asset value of the Fund and
are designed to present the Fund's capital accounts on a tax basis.
================================================================================
Federal Tax Status of Dividends Declared During the Fiscal Year (Unaudited)
As of December 31, 1996, the Fund declared a long term capital gain dividend per
share of $2.68.
All of the income dividends paid by the Fund were ordinary income for federal
income tax purposes. The percentage of income dividends that were qualifying
dividends for the corporate dividends received deduction were 65.33%.
23
<PAGE>
Financial Highlights
================================================================================
Selected data for a fund share outstanding throughout each year:
<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 ............................ 0.651 0.724 0.765 0.822 0.810
Net realized and unrealized gain (loss) .......... 6.446 7.620 (1.071) 1.287 1.229
----------- ----------- ----------- ----------- -----------
Total from investment operations ........... 7.097 8.344 (0.306) 2.109 2.039
----------- ----------- ----------- ----------- -----------
Less distributions:
From net investment income ....................... (0.733) (0.723) (0.811) (0.814) (0.866)
From net realized gains on investments ........... (3.028) (4.795) (3.899) (1.652) (0.525)
----------- ----------- ----------- ----------- -----------
Total distributions ........................ (3.761) (5.518) (4.710) (2.466) (1.391)
----------- ----------- ----------- ----------- -----------
Net asset value per share, end of year ............. $ 32.391 $ 29.055 $ 26.229 $ 31.245 $ 31.602
=========== =========== =========== =========== ===========
Total return* ...................................... 24.46% 32.25% (0.96)% 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 ...... 0.43% 0.29% 0.30% 0.29% 0.30%
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 ............. $ 0.0418 -- -- -- --
</TABLE>
* The total return percentage does not reflect any separate account charges
under variable annuity contracts and life policies.
+ Per share data calculated using weighted average number of shares outstanding
throughout the year.
See Notes to Financial Statements.
24
<PAGE>
Independent Auditors' Report
The Shareholders and Board of Trustees
Aetna Variable Fund:
We have audited the accompanying statement of assets and liabilities of Aetna
Variable Fund (the Fund), including the portfolio of investments, as of December
31, 1996, the related statement of operations for the year then ended, the
statements of changes in net assets for each of the years in the two-year period
then ended, and financial highlights for each of the years in the five-year
period then ended. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1996, by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of Aetna
Variable Fund as of December 31, 1996, the results of its operations for the
year then ended, the changes in its net assets for each of the years in the
two-year period then ended and financial highlights for each of the years in the
five-year period then ended in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Hartford, Connecticut
February 14, 1997
25
<PAGE>
Special Meeting of Shareholders
(Unaudited)
================================================================================
On June 17, 1996, a Special Shareholder Meeting was held. Shareholders of record
on April 30, 1996 were entitled to vote at the meeting. The shareholders voted
to elect nine Trustees, approve a subadvisory agreement among the Fund, the
Company and Aeltus, and approve a new Investment Advisory Agreement between the
Fund and the Company. In addition, shareholders voted to amend the Fund's
Declaration of Trust to modify the Fund's liability and indemnification
provisions. Following is a brief description and the results of each vote.
A. Election of Trustees
The following individuals were elected to serve as Trustees for the Fund. Every
individual named served as a Trustee of the Fund prior to this election. There
are no other individuals currently serving as Trustees to the Fund.
Votes Cast Votes
Trustee For Withheld
- -------------------------------------------------------------
Morton Ehrlich 161,372,922 5,644,517
Maria T. Fighetti 160,954,146 6,063,293
David L. Grove 160,793,454 6,223,985
Timothy A. Holt 161,309,064 5,708,375
Daniel P. Kearney 161,063,795 5,953,644
Sidney Koch 161,306,419 5,711,020
Shaun P. Mathews 161,204,997 5,812,442
Corine T. Norgaard 160,946,263 6,071,176
Richard G. Scheide 161,220,137 5,797,302
B. Approval of Subadvisory Agreement
The shareholders of the Fund voted to approve a Subadvisory Agreement with
Aeltus. (See Note 2 of Notes to Financials for a description of the services
provided and the compensation arrangement defined by the terms of the
agreement.)
Results of the vote were:
Votes Cast Votes Cast
For Against Abstentions
-------------------- ---------------- -----------------
146,516,837 12,670,365 7,830,237
C. Approval of New Investment Advisory Agreement
Shareholders of the Fund voted to approve a new Investment Advisory Agreement
(the Agreement) between the Fund and the Company. The Agreement was updated in
the following respects: the language was simplified where possible; the
liability provisions made it clear that the Company is liable to the Fund for
the Company's negligence, and it expanded the Company's ability to use brokerage
commissions to pay Fund expenses. Additionally shareholders of the Fund voted to
increase the annual investment advisory fee from 0.25% of average daily net
assets to 0.40% of average daily net assets for the Fund.
Results of the vote were:
Votes Cast Votes Cast
For Against Abstentions
-------------------- ---------------- -----------------
135,248,579 23,840,887 7,927,973
D. Amendment to Fund's Declaration of Trust
Shareholders of the Fund voted to delete and restate certain articles in the
Fund's Declaration of Trust related to the liability of Trustees to the Fund and
the indemnification by the Fund of Trustees and officers for liabilities
incurred while acting as Trustees of the Fund. The primary purpose of the
amendment is to allow a Fund to advance costs to a Trustee if that Trustee is
named in an action for which the Fund would ultimately be obligated to indemnify
the Trustee without the Trustee being required to post collateral.
Results of the vote were:
Votes Cast Votes Cast
For Against Abstentions
-------------------- ---------------- -----------------
145,455,619 12,351,797 9,210,023
26
