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AETNA GET FUND
SERIES L
PROSPECTUS
DECEMBER 1, 2000
Aetna GET Fund (Fund) is an open-end investment company authorized to issue
multiple series of shares. This prospectus offers shares of Series L (Series).
Shares of the Series will be offered from December 14, 2000 through March 14,
2001 as a funding option under certain variable annuity contracts issued by
Aetna Life Insurance and Annuity Company (Aetna).
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR DETERMINED WHETHER THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANYONE
WHO REPRESENTS TO THE CONTRARY HAS COMMITTED A CRIMINAL OFFENSE.
PRO.GETL-00
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TABLE OF CONTENTS
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INVESTMENT OBJECTIVE, PRINCIPAL INVESTMENT STRATEGIES AND
RISKS....................................................... 1
OTHER CONSIDERATIONS........................................ 3
MANAGEMENT OF THE SERIES.................................... 4
INVESTMENTS IN, EXCHANGES AND REDEMPTIONS FROM THE SERIES... 5
TAX INFORMATION............................................. 6
ADDITIONAL INFORMATION...................................... 7
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INVESTMENT OBJECTIVE, PRINCIPAL INVESTMENT STRATEGIES AND RISKS
Shares of the Series are offered to Aetna separate accounts that fund variable
annuity contracts. The Series has both an Offering Period and a Guarantee
Period. The only time investors can invest in the Series is during the OFFERING
PERIOD. The Offering Period will run from December 14, 2000 through March 14,
2001. During the Offering Period all assets of the Series will be invested
exclusively in short-term instruments. Once the Offering Period terminates, the
Guarantee Period begins. The GUARANTEE PERIOD will run from March 15, 2001
through March 14, 2006 (Maturity Date). During the Guarantee Period all assets
will be invested in accordance with the investment objective and strategies
described below. Investors receive a guarantee from Aetna that on the Maturity
Date they will receive no less than the value of their separate account
investment directed to the Series as of the last day of the Offering Period,
adjusted for certain charges (Guarantee). The value of dividends and
distributions made by the Series throughout the Guarantee Period is taken into
account in determining whether, for purposes of the Guarantee, the value of a
shareholder's investment on the Maturity Date is no less than the value of their
investment as of the last day of the Offering Period. Amounts withdrawn prior to
the Maturity Date do not get the benefit of the Guarantee. Please refer to the
contract prospectus, prospectus summary or disclosure statement for more
information about the Guarantee. Aeltus Investment Management, Inc. (Aeltus)
serves as investment adviser of the Series.
SHARES OF THE SERIES WILL RISE AND FALL IN VALUE AND YOU COULD LOSE MONEY BY
INVESTING IN THE SERIES IF YOU REDEEM SHARES PRIOR TO THE MATURITY DATE. THERE
IS NO GUARANTY THAT THE SERIES WILL ACHIEVE ITS INVESTMENT OBJECTIVE. AN
INVESTMENT IN THE SERIES IS NOT A BANK DEPOSIT AND IS NOT INSURED OR GUARANTEED
BY THE FDIC OR ANY OTHER GOVERNMENT AGENCY.
INVESTMENT OBJECTIVE. The Series seeks to achieve maximum total return without
compromising a minimum targeted return (Targeted Return) by participating in
favorable equity market performance during the Guarantee Period.
PRINCIPAL INVESTMENT STRATEGIES. The Series allocates its assets among the
following asset classes:
- During the Offering Period, the Series' assets will be invested in
short-term instruments.
- During the Guarantee Period, the Series' assets will be allocated between
the:
- EQUITY COMPONENT, consisting of common stocks included in the
Standard and Poor's 500 Index (S&P 500) and futures contracts on
the S&P 500; and the
- FIXED COMPONENT, consisting primarily of short- to
intermediate-duration U.S. Government securities.
The minimum TARGETED RETURN is 1.5% per year over the Guarantee Period. The
minimum Targeted Return is set by the Fund's Board of Trustees (Board) and takes
into consideration the Series' total annual expenses as well as the insurance
company separate account expenses assessed to contract holders and participants
acquiring interests in the Fund through Aetna separate accounts. There is no
assurance that the Fund will achieve the Targeted Return. THE GUARANTEE PROMISES
INVESTORS ONLY A RETURN OF THE AMOUNT INVESTED IN THE SERIES THROUGH THE
SEPARATE ACCOUNT (LESS CERTAIN MAINTENANCE CHARGES). THE GUARANTEE DOES NOT
PROMISE THAT INVESTORS WILL EARN THE TARGETED RETURN.
EQUITY COMPONENT Aeltus invests at least 80% of the Equity Component's net
assets in stocks included in the S&P 500. The S&P 500 is a stock market index
comprised of common stocks of 500 of the largest companies in the U.S. selected
by Standard and Poor's Corporation (S&P).
Aeltus manages the Equity Component by overweighting those stocks in the S&P 500
that it believes will outperform the S&P 500, and underweighting (or avoiding
altogether) those stocks that Aeltus believes will underperform the S&P 500.
Stocks that Aeltus believes are likely to match the performance of the S&P 500
are invested in proportion to their representation in the index. To determine
which stocks to
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weight more or less heavily, Aeltus uses internally developed quantitative
computer models to evaluate various criteria, such as the financial strength of
each company and its potential for strong, sustained earnings growth. At any one
time, Aeltus generally includes in the Equity Component between 400 and 450
stocks included in the S&P 500. Although the Equity Component will not hold all
of the stocks in the S&P 500, Aeltus expects that there will be a close
correlation between the performance of the Equity Component and that of the S&P
500 in both rising and falling markets.
FIXED COMPONENT Aeltus looks to select investments for the Fixed Component with
financial characteristics that will, at any point in time, closely resemble
those of a portfolio of zero coupon bonds which mature within three months of
the Maturity Date. The Fixed Component will consist primarily (meaning no less
than 55%) of securities issued or guaranteed by the U.S. Government, its
agencies or instrumentalities, including STRIPS (Separate Trading of Registered
Interest and Principal of Securities). STRIPS are created by the Federal Reserve
Bank by separating the interest and principal components of an outstanding U.S.
Treasury or agency bond and selling them as individual securities. No more than
45% of the Fixed Component's assets may consist of mortgage backed securities
which are rated AAA or Aaa at the time of purchase by Moody's Investors
Service, Inc. (Moody's) or S&P, respectively, or corporate obligations which are
rated at the time of purchase AA- or higher by S&P and/or Aa3 or higher by
Moody's. The Fixed Component may also include U.S. Treasury futures and money
market instruments.
ASSET ALLOCATION Aeltus uses a proprietary computer model to determine on a
daily basis the percentage of assets allocated to the Equity Component and to
the Fixed Component in an attempt to meet or exceed the Targeted Return. The
model evaluates a number of factors, including the then current market value of
the Series, the then prevailing level of interest rates, equity market
volatility, the Targeted Return and the Maturity Date. The model determines the
initial allocation between the Equity Component and the Fixed Component on the
first day of the Guarantee Period and evaluates the allocations on a daily basis
thereafter. Generally, as the value of the Equity Component rises, more assets
are allocated to the Equity Component; as the value of the Equity Component
declines, more assets are allocated to the Fixed Component. The amount directed
to the Equity Component is always restricted so that even if it were to
experience a 30% decline in value on a given day and before being redirected to
the Fixed Component, the remaining assets would still be sufficient to meet the
Targeted Return.
PRINCIPAL RISKS. The principal risks of investing in the Series are those
generally attributable to stock and bond investing. The success of the Series'
strategy depends on Aeltus' skill in allocating assets between the Equity
Component and the Fixed Component and in selecting investments within each
Component. Because the Series invests in both stocks and bonds, the Series may
underperform stock funds when stocks are in favor and underperform bond funds
when bonds are in favor.
The risks associated with investing in STOCKS include sudden and unpredictable
drops in the value of the market as a whole and periods of lackluster or
negative performance. The performance of the Equity Component also depends
significantly on Aeltus' skill in determining which securities to overweight,
underweight or avoid altogether.
The principal risk associated with investing in BONDS is that interest rates may
rise, which generally causes bond prices to fall. The market prices of STRIPS
generally are more volatile than the market prices of other fixed income
securities with similar maturities that pay interest periodically. With
corporate bonds, there is a risk that the issuer will default on the payment of
principal or interest.
If at the inception of, or any time during, the Guarantee Period interest rates
are low, the Series' assets may be largely invested in the Fixed Component in
order to increase the likelihood of achieving the Targeted Return at the
Maturity Date. The effect of low interest rates on the Series would likely be
more pronounced at the inception of the Guarantee Period, as the initial
allocation of assets would include more fixed income securities. In addition, if
during the Guarantee Period the equity markets
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experienced a major decline, the Series' assets may become largely invested in
the Fixed Component in order to increase the likelihood of achieving the
Targeted Return at the Maturity Date. In fact, if the value of the Equity
Component were to decline by 30% in a single day, a complete reallocation to the
Fixed Component would likely occur to ensure that the Targeted Return would be
achieved at the end of the Guarantee Period. USE OF THE FIXED COMPONENT REDUCES
THE SERIES' ABILITY TO PARTICIPATE AS FULLY IN UPWARD EQUITY MARKET MOVEMENTS,
AND THEREFORE REPRESENTS SOME LOSS OF OPPORTUNITY, OR OPPORTUNITY COST, COMPARED
TO A PORTFOLIO THAT IS FULLY INVESTED IN EQUITIES.
Because the Series is new, it does not have return information an investor might
find useful in evaluating the risks of investing in the Fund.
OTHER CONSIDERATIONS
In addition to the principal investments, strategies and risks described above,
the Series may also invest in other securities, engage in other practices, and
be subject to additional risks, as discussed below and in the STATEMENT OF
ADDITIONAL INFORMATION (SAI).
FUTURES CONTRACTS. The Series may invest in futures contracts, which provide for
the future sale by one party and purchase by another party of a specified amount
of a financial instrument or a specific stock market index for a specified price
on a designated date. The Series uses futures for hedging purposes or to
temporarily increase or limit exposure to a particular asset class.
The main risk with futures contracts is that they can amplify a gain or loss,
potentially earning or losing substantially more money than the actual
investment made in the futures contract.
CLOSING THE FUND. If the Series assets do not reach $100 million by the end of
the Offering Period, or in the event of severe market volatility or adverse
market conditions during the Offering Period, the Board reserves the right not
to operate the Series in accordance with its investment objective. In that
event, Aeltus will continue to invest the Series assets in short-term
instruments and Aetna will notify investors within 15 days after the end of the
Offering Period that the Series is being discontinued. Investors will have 45
days following the end of the Offering Period to transfer their money from the
Series. If, at the end of the 45-day period, an investor does not make an
election, his or her investment in the Series will be transferred to Aetna Money
Market VP.
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MANAGEMENT OF THE SERIES
Aeltus Investment Management, Inc., 10 State House Square, Hartford, Connecticut
06103-3602, serves as investment adviser of the Series. Aeltus is responsible
for managing the assets of the Series in accordance with its investment
objective and policies, subject to oversight by the Board. Aeltus has acted as
adviser or subadviser to mutual funds since 1994 and has managed institutional
accounts since 1972.
Aeltus is an indirect wholly owned subsidiary of Aetna Inc. Aetna Inc. has
entered into an agreement to sell certain of its businesses, including Aeltus,
to ING Groep N.V., an integrated financial services provider.
The transaction is targeted to close by the end of 2000. Consummation of the
transaction is subject to a number of contingencies, including regulatory
approvals, the approval of the shareholders of Aetna Inc., and other closing
conditions. Under the Investment Company Act of 1940, the transaction would
result in a change in control of Aeltus and, therefore, constitute an assignment
of the Fund's investment advisory agreement, which would result in a termination
of that agreement. Consequently, Aeltus will seek approval of a new investment
advisory agreement by the Fund's Board of Trustees prior to consummation of the
transaction. The new investment advisory agreement is substantially identical to
the current agreement, except for the date of execution and termination. If
approved by the Board of Trustees, the new investment advisory agreement is to
become effective upon the termination of the current investment management
agreement.
ADVISORY FEES. For its services, Aeltus is entitled to receive an advisory fee,
which is set forth below. The advisory fee is expressed as an annual rate based
on the average daily net assets of the Series.
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Offering Period 0.25%
Guarantee Period 0.60%
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PORTFOLIO MANAGEMENT
ASSET ALLOCATION. Neil Kochen, Managing Director, Aeltus, is responsible for
overseeing the overall strategy of the Series and the allocation of the Series
assets between the Equity and Fixed Components. Prior to joining Aeltus in 1996,
Mr. Kochen served as head of fixed income quantitative research, head of
investment strategy and policy, and as a senior portfolio manager with Aetna.
The following people are primarily responsible for the day-to-day management of
the Series:
EQUITY COMPONENT. Geoffrey A. Brod, Portfolio Manager, Aeltus, manages the
Equity Component. He has over 30 years of experience in quantitative
applications and has over 12 years of experience in equity investments.
FIXED COMPONENT. The Fixed Component is managed by a team of fixed-income
specialists.
4 Aetna GET Fund
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INVESTMENTS IN, EXCHANGES AND REDEMPTIONS FROM THE SERIES
Please refer to the documents pertaining to the contract or policy for
information on how to direct investments in or redemptions from (including
making exchanges into or out of) the Series and any fees that may apply, AND
WHAT YOUR OPTIONS ARE ON THE MATURITY DATE.
Orders for the purchase or redemption of Fund shares that are received before
the close of regular trading on the New York Stock Exchange (normally 4:00 p.m.
eastern time) are effected at the net asset value (NAV) per share determined
that day, as described below. Aetna has been designated an agent of the Fund for
receipt of purchase and redemption orders. Therefore, receipt of an order by
Aetna constitutes receipt by the Fund, provided that the Fund receives notice of
the orders by 9:30 a.m. eastern time the next day on which the New York Stock
Exchange is open for trading.
NET ASSET VALUE. The NAV of the Fund is determined as of the close of regular
trading on the New York Stock Exchange (normally 4:00 p.m. eastern time).
In calculating the NAV, securities are valued primarily by independent pricing
services using market quotations. Short-term debt securities maturing in 60 days
or less are valued using amortized cost. Securities for which market quotations
are not readily available are valued at their fair value, subject to procedures
adopted by the Board.
BUSINESS HOURS. The Fund is open on the same days as the New York Stock Exchange
(generally, Monday through Friday). Representatives are available from
8:00 a.m. to 10:00 p.m. eastern time Monday through Friday and from 8:00 a.m. to
4:00 p.m. eastern time on Saturday.
The Fund may refuse to accept any purchase request, especially if as a result of
such request, in Aeltus' judgment, it would be too difficult to invest
effectively in accordance with the Series' investment objective.
The Fund reserves the right to suspend the offering of shares. The Fund may
suspend redemptions or postpone payments when the New York Stock Exchange is
closed or when trading is restricted for any reason or under emergency
circumstances as determined by the Securities and Exchange Commission.
MATURITY DATE. Before the Maturity Date, Aetna will send a notice to investors
who have amounts in the Series to remind them that the Maturity Date is
approaching and to choose other investment options into which Series amounts
will be transferred to at the close of business on the Maturity Date. If
investors do not make a choice, at the close of business on the Maturity Date
Aetna will transfer investors Series amounts to another available series of the
Fund that is accepting deposits, or if no series is available, to the fund or
funds designated by Aetna.
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TAX INFORMATION
The Series intends to qualify as a regulated investment company by satisfying
the requirements of Subchapter M of the Internal Revenue Code of 1986, as
amended (Code), including requirements with respect to diversification of
assets, distribution of income and sources of income. As a regulated investment
company, the Series generally will not be subject to tax on its ordinary income
and net realized capital gains.
The Series also intends to comply with the diversification requirements of
Section 817(h) of the Code for those investors who acquire shares through Aetna
variable annuity contracts so that those contract owners should not be subject
to federal tax on distributions from the Series to Aetna's separate accounts.
Contract owners should review their contract prospectus, prospectus summary or
disclosure statement for information regarding the personal tax consequences of
purchasing a contract.
DIVIDENDS AND DISTRIBUTIONS. Dividends and capital gains distributions, if any,
are paid on an annual basis around the end of the calendar year.
Both income dividends and capital gains distributions are paid by the Series on
a per share basis. As a result, at the time of payment, the share price of the
Series will be reduced by the amount of the payment.
6 Aetna GET Fund
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ADDITIONAL INFORMATION
The SAI, which is incorporated by reference into this Prospectus, contains
additional information about the Series and the Fund generally.
You may request free of charge the current SAI or other information about the
Series, by calling 1-800-262-3862 or writing to:
Aetna GET Fund
151 Farmington Avenue
Hartford, Connecticut 06156-8962
The SEC also makes available to the public reports and information about the
Fund. Certain reports and information, including the SAI, are available on the
EDGAR Database on the SEC's website (http://www.sec.gov) or at the SEC's public
reference room in Washington, D.C. You may call 1-202-942-8090 to get
information about the operations of the public reference room. You may obtain
copies of reports and other information about the Fund, after paying a
duplicating fee, by sending an e-mail request to: [email protected], or by
writing to the SEC's Public Reference Section, Washington, D.C. 20549-0102.
Investment Company Act File No. 811-5062.
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PRO.GETL-00 December 2000
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AETNA GET FUND
SERIES L
STATEMENT OF ADDITIONAL INFORMATION DATED DECEMBER 1, 2000
This Statement of Additional Information (Statement) is not a Prospectus and
should be read in conjunction with the current Prospectus for Aetna GET Fund
(Fund), Series L (Series). Capitalized terms not defined herein are used as
defined in the Prospectus. The Fund is authorized to issue multiple series of
shares, each representing a diversified portfolio of investments with different
investment objectives, policies and restrictions. This Statement applies to the
Series.
A free copy of the Series' Prospectus is available upon request by writing to
the Fund at: 151 Farmington Avenue, Hartford, Connecticut 06156-8962, or by
calling: (800) 262-3862.
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TABLE OF CONTENTS
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GENERAL INFORMATION.................................................................................1
INVESTMENT OBJECTIVE AND RESTRICTIONS...............................................................2
INVESTMENT TECHNIQUES AND RISK FACTORS..............................................................3
OTHER CONSIDERATIONS................................................................................8
THE ASSET ALLOCATION PROCESS........................................................................8
TRUSTEES AND OFFICERS OF THE FUND...................................................................9
CONTROL PERSONS AND PRINCIPAL SHAREHOLDERS.........................................................11
INVESTMENT ADVISORY AGREEMENT......................................................................12
ADMINISTRATIVE SERVICES AGREEMENT..................................................................12
CUSTODIAN..........................................................................................12
TRANSFER AGENT.....................................................................................12
INDEPENDENT AUDITORS...............................................................................13
PRINCIPAL UNDERWRITER..............................................................................13
BROKERAGE ALLOCATION AND TRADING POLICIES..........................................................13
PURCHASE AND REDEMPTION OF SHARES..................................................................14
NET ASSET VALUE....................................................................................14
TAX STATUS.........................................................................................15
PERFORMANCE INFORMATION............................................................................16
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GENERAL INFORMATION
ORGANIZATION The Fund was organized as a Massachusetts business trust on
March 9, 1987. The Series currently operates under a Declaration of Trust
(Declaration) dated March 9, 1987.
CAPITAL STOCK Shares of the Series have no preemptive or conversion rights.
Each share has the same rights to share in dividends declared by the Series.
Upon liquidation of the Series, shareholders are entitled to share pro rata in
the net assets of the Fund available for distribution to shareholders. Shares
of the Series are fully paid and nonassessable.
SHAREHOLDER LIABILITY The Fund is organized as a "Massachusetts business
trust." Under Massachusetts law, shareholders of such a business trust may,
under certain circumstances, be held personally liable as partners for the
obligations of the Series, which is not true in the case of a corporation. The
Declaration of Trust provides that shareholders shall not be subject to any
personal liability for the acts or obligations of the Fund and that every
written agreement, obligation, instrument or undertaking made by the Series
shall contain a provision to the effect that shareholders are not personally
liable thereunder. With respect to tort claims, contract claims where the
provision referred to is omitted from the undertaking, and claims for taxes and
certain statutory liabilities in other jurisdictions, a shareholder may be held
personally liable to the extent that claims are not satisfied by the Series.
However, upon payment of any such liability the shareholder will be entitled to
reimbursement from the general assets of the Fund. The Board of Trustees
(Board) intends to conduct the operations of the Series, with the advice of
counsel, in such a way as to avoid, as much as possible, ultimate liability of
the shareholders for liabilities of the Fund.
VOTING RIGHTS Shareholders of the Series are entitled to one vote for each full
share held (and fractional votes for fractional shares held) and will vote in
the election of the Board (to the extent hereinafter provided) and on other
matters submitted to the vote of shareholders. Investors who select the Series
for investment through their Aetna Life Insurance and Annuity Company (Aetna)
variable annuity contract (VA Contract) are not the shareholders of the Fund.
Aetna is the true shareholder, but generally passes through voting to investors
as described in the prospectus for the applicable VA Contract. Once the initial
members of the Board are elected, no meeting of the shareholders for the
purpose of electing Trustees will be held unless and until such time as less
than a majority of the Board holding office have been elected by the
shareholders, or shareholders holding 10% or more of the outstanding shares
request such a vote. The Board members then in office will call a shareholder
meeting for election of Trustees. Vacancies occurring between any such meeting
shall be filled as allowed by law, provided that immediately after filling any
such vacancy, at least two-thirds of the Board holding office have been elected
by the shareholders. Except as set forth above, the Trustees shall continue to
hold office and may appoint successor Trustees. A Trustee may be removed from
office (1) at any time by two-thirds vote of the Board; (2) by a majority vote
of the Board where any Trustee becomes mentally or physically incapacitated; or
(3) at a special meeting of shareholders by a two-thirds vote of the
outstanding shares. Trustees may be removed at any meeting of shareholders by
the vote of a majority of all shares entitled to vote. Any Trustee may also
voluntarily resign from office. Voting rights are not cumulative, so that the
holders of more than 50% of the shares voting in the election of Trustees can,
if they choose to do so, elect all the Trustees of the Series, in which event
the holders of the remaining shares will be unable to elect any person as a
Trustee.
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INVESTMENT OBJECTIVE AND RESTRICTIONS
The investment objective for the Series is to achieve maximum total return by
participating in favorable equity market performance without compromising a
minimum targeted rate of return during a specified five year period, the
"Guarantee Period," from March 15, 2001 through March 14, 2006, the Maturity
Date. In seeking to achieve its investment objective, the Series has adopted
the following restrictions which are matters of fundamental policy and cannot
be changed without approval by the holders of the lesser of: (i) 67% of the
shares of the Series present or represented at a shareholders' meeting at which
the holders of more than 50% of such shares are present or represented; or (ii)
more than 50% of the outstanding shares of the Series.
As a matter of fundamental policy, the Series will not:
(1) Borrow money, except that (a) the Series may enter into certain
futures contracts and options related thereto; (b) the Series may enter into
commitments to purchase securities in accordance with the Series' investment
program, including delayed delivery and when-issued securities and reverse
repurchase agreements; (c) the Series may borrow money for temporary or
emergency purposes in amounts not exceeding 15% of the value of its total
assets at the time when the loan is made; and (d) for purposes of leveraging,
the Series may borrow money from banks (including its custodian bank) only if,
immediately after such borrowing, the value of the Series' assets, including
the amount borrowed, less its liabilities, is equal to at least 300% of the
amount borrowed, plus all outstanding borrowings. If at any time the value of
the Series' assets fails to meet the 300% coverage requirement relative only to
leveraging, the Series shall, within three days (not including Sundays and
holidays), reduce its borrowings to the extent necessary to meet the 300% test.
(2) Act as an underwriter of securities except to the extent that, in
connection with the disposition of securities by the Series for its portfolio,
the Series or the Fund may be deemed to be an underwriter under the provisions
of the 1933 Act.
(3) Purchase real estate, interests in real estate or real estate limited
partnership interests except that, to the extent appropriate under its
investment program, the Series may invest in securities secured by real estate
or interests therein or issued by companies, including real estate investment
trusts, which deal in real estate or interests therein.
(4) Make loans, except that, to the extent appropriate under its
investment program, the Series may purchase bonds, debentures or other debt
securities, including short-term obligations and enter into repurchase
transactions.
(5) Invest in commodity contracts, except that the Series may, to the
extent appropriate under its investment program, purchase securities of
companies engaged in such activities; may enter into futures contracts and
related options, may engage in transactions on a when-issued or forward
commitment basis.
(6) Alter, amend or modify either the Investment Objective or the
Principal Investment Strategies of the Series, as described in the Prospectus.
(7) With respect to 75% of its total assets, invest more than 5% of its
total assets in the securities of any one issuer excluding securities issued or
guaranteed by the U.S. Government or its agencies or instrumentalities, or
purchase more than 10% of the outstanding voting securities of any issuer.
(8) Concentrate its investments in any one industry except that the Series
may invest up to 25% of its total assets in securities issued by companies
principally engaged in any one industry. For purposes of this restriction,
finance companies will be classified as separate industries according to the
end users of their services, such as automobile finance, computer finance and
consumer finance. This limitation will not apply to securities issued or
guaranteed as to principal and/or interest by the U.S. Government, its agencies
or instrumentalities.
Where the Fund's investment objective or policy restricts it to holding or
investing a specified percentage of its assets in any type of instrument, that
percentage is measured at the time of purchase. There will be no violation of
any investment policy or restriction if that restriction is complied with at
the time the relevant action is taken, notwithstanding a later
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change in the market value of an investment, in net or total assets, in
securities rating of the investment or any other change. With respect to
fundamental policy number (8), industry classifications are determined in
accordance with the classifications established by Standard & Poor's, a
division of The McGraw-Hill Companies, (S&P).
The Series also has adopted certain other investment policies and restrictions
reflecting the current investment practices of the Series, which may be changed
by the Board and without shareholder vote. Under such policies and
restrictions, the Series will not:
(1) Mortgage, pledge or hypothecate its assets except in connection with
loans of securities as described in (4) above, borrowings as described in (1)
above, and permitted transactions involving options, futures contracts and
options on such contracts.
(2) Invest in companies for the purpose of exercising control or
management.
(3) Make short sales of securities, other than short sales "against the
box," or purchase securities on margin except for short-term credits necessary
for clearance of portfolio transactions, provided that this restriction will
not be applied to limit the use of options, futures contracts and related
options in the manner otherwise permitted by the investment restrictions,
policies and investment programs of the Series.
INVESTMENT TECHNIQUES AND RISK FACTORS
FUTURES CONTRACTS
The Series may enter into future contracts, described below and in the
Prospectus, as a means of achieving its investment objective. The Series may
invest up to 30% of its assets in derivatives to gain additional exposure to
certain markets for investment purposes while maintaining liquidity to meet
shareholder redemptions and minimizing trading costs.
The Series may enter into futures contracts subject to the restrictions
described below under "Additional Restrictions on the Use of Futures
Contracts." The Series will only enter into futures contracts on the S&P 500
Index and U.S. Treasury securities. S&P 500 Index futures may not exceed 20% of
the market value of the Equity Component. The notional value of U.S. Treasury
futures may not exceed 50% of the market value of the Fixed Component. Futures
contracts may not be used for speculative purposes. The futures exchanges and
trading in the U.S. are regulated under the Commodity Exchange Act by the
Commodity Futures Trading Commission (CFTC).
A futures contract provides for the future sale by one party and purchase by
another party of a specified amount of a financial instrument or a specific
stock market index for a specified price on a designated date. Brokerage fees
are incurred when a futures contract is bought or sold and at expiration, and
margin deposits must be maintained.
Although interest rate futures contracts typically require actual future
delivery of and payment for the underlying instruments, those contracts are
usually closed out before the delivery date. Stock index futures contracts do
not contemplate actual future delivery and will be settled in cash at
expiration or closed out prior to expiration. Closing out an open futures
contract sale or purchase is effected by entering into an offsetting futures
contract purchase or sale, respectively, for the same aggregate amount of the
identical type of underlying instrument and the same delivery date.
There can be no assurance, however, that the Series will be able to enter into
an offsetting transaction with respect to a particular contract at a particular
time. If the Series is not able to enter into an offsetting transaction, it
will continue to be required to maintain the margin deposits on the contract.
The prices of futures contracts are volatile and are influenced by, among other
things, actual and anticipated changes in interest rates and equity prices,
which in turn are affected by fiscal and monetary policies and national and
international political and economic events. Small price movements in futures
contracts may result in immediate and potentially
3
<PAGE>
unlimited loss or gain to the Series relative to the size of the margin
commitment. A purchase or sale of a futures contract may result in losses in
excess of the amount initially invested in the futures contract.
When using futures contracts as a hedging technique, at best, the correlation
between changes in prices of futures contracts and of the instruments or
securities being hedged can be only approximate. The degree of imperfection of
correlation depends upon circumstances such as: variations in speculative
market demand for futures and for securities, including technical influences in
futures trading, and differences between the financial instruments being hedged
and the instruments underlying the standard futures contracts available for
trading. Even a well-conceived hedge may be unsuccessful to some degree because
of unexpected market behavior or stock market or interest rate trends as well
as the expenses associated with creating the hedge.
Most U.S. futures exchanges limit the amount of fluctuation permitted in
interest rate futures contract prices during a single trading day, and
temporary regulations limiting price fluctuations for stock index futures
contracts are also in effect. The daily limit establishes the maximum amount
that the price of a futures contract may vary either up or down from the
previous day's settlement price at the end of a trading session. Once the daily
limit has been reached in a particular type of contract, no trades may be made
on that day at a price beyond that limit. The daily limit governs only price
movement during a particular trading day and therefore does not limit potential
losses, because the limit may prevent the liquidation of unfavorable positions.
Futures contract prices have occasionally moved to the daily limit for several
consecutive trading days with little or no trading, thereby preventing prompt
liquidation of futures positions and subjecting some persons engaging in
futures transactions to substantial losses.
"Margin" is the amount of funds that must be deposited by the Series with a
commodities broker in a custodian account in order to initiate futures trading
and to maintain open positions in the Series' futures contracts. A margin
deposit is intended to assure the Series' performance of the futures contract.
The margin required for a particular futures contract is set by the exchange on
which the contract is traded and may be significantly modified from time to
time by the exchange during the term of the contract.
If the price of an open futures contract changes (by increase in the case of a
sale or by decrease in the case of a purchase) so that the loss on the futures
contract reaches a point at which the margin on deposit does not satisfy the
margin requirement, the broker will require an increase in the margin. However,
if the value of a position increases because of favorable price changes in the
futures contract so that the margin deposit exceeds the required margin, the
broker will promptly pay the excess to the Series. These daily payments to and
from the Series are called variation margin. At times of extreme price
volatility, intra-day variation margin payments may be required. In computing
daily net asset values, the Series will mark-to-market the current value of its
open futures contracts. The Series expects to earn interest income on its
initial margin deposits.
When the Series buys or sells a futures contract, unless it already owns an
offsetting position, it will designate cash and/or liquid securities having an
aggregate value at least equal to the full "notional" value of the futures
contract, thereby insuring that the leveraging effect of such futures contract
is minimized, in accordance with regulatory requirements.
The Series may purchase and sell futures contracts under the following
conditions: (a) the then-current aggregate futures market prices of financial
instruments required to be delivered and purchased under open futures contracts
shall not exceed 30% of the Series' total assets at market value at the time of
entering into a contract and (b) no more than 5% of the assets, at market value
at the time of entering into a contract, shall be committed to margin deposits
in relation to futures contracts.
ADDITIONAL RESTRICTIONS ON THE USE OF FUTURES CONTRACTS CFTC regulations
require that to prevent the Series from being a commodity pool, the Series
enter into all short futures for the purpose of hedging the value of securities
held, and that all long futures positions either constitute bona fide hedging
transactions, as defined in such regulations, or have a total value not in
excess of an amount determined by reference to certain cash and securities
positions maintained, and accrued profits on such positions. As evidence of its
hedging intent, the Series expects that at least 75% of futures contract
purchases will be "completed"; that is, upon the sale of these long contracts,
equivalent amounts of related securities will have been or are then being
purchased by it in the cash market.
4
<PAGE>
ADDITIONAL RISK FACTORS IN USING FUTURES In addition to any risk factors which
may be described elsewhere in this section, or in the Prospectus, the following
sets forth certain information regarding the potential risks associated with
the Series' transactions in derivatives.
RISK OF IMPERFECT CORRELATION The Series' ability to hedge effectively all or a
portion of its portfolio through transactions in futures on securities and
indices depends on the degree to which movements in the value of the securities
or index underlying such hedging instrument correlates with movements in the
value of the assets being hedged. If the value of the assets being hedged do
not move in the same amount or direction as the underlying security or index,
the hedging strategy for the Series might not be successful and it could
sustain losses on its hedging transactions which would not be offset by gains
on its portfolio. It is also possible that there may be a negative correlation
between the security or index underlying a futures contract and the portfolio
securities being hedged, which could result in losses both on the hedging
transaction and the portfolio securities. In such instances, the Series'
overall return could be less than if the hedging transactions had not been
undertaken.
POTENTIAL LACK OF A LIQUID SECONDARY MARKET Prior to exercise or expiration, a
futures position may be terminated only by entering into a closing sale
transaction, which requires a secondary market on the exchange on which the
position was originally established. While the Series will establish a futures
position only if there appears to be a liquid secondary market therefor, there
can be no assurance that such a market will exist for any particular futures
contract at any specific time. In such event, it may not be possible to close
out a position held by the Series which could require it to purchase or sell
the instrument underlying the position, make or receive a cash settlement, or
meet ongoing variation margin requirements. The inability to close out futures
positions also could have an adverse impact on the Series' ability to
effectively hedge its portfolio, or the relevant portion thereof.
The trading of futures contracts also is subject to the risk of trading halts,
suspensions, exchange or clearing house equipment failures, government
intervention, insolvency of the brokerage firm or clearing house or other
disruptions of normal trading activity, which could at times make it difficult
or impossible to liquidate existing positions or to recover excess variation
margin payments.
RISK OF PREDICTING INTEREST RATE MOVEMENTS Investments in futures contracts on
U.S. Treasury securities involve the risk that if Aeltus' judgment concerning
the general direction of interest rates is incorrect, the overall performance
of the Series may be poorer than if it had not entered into any such contract.
For example, if the Series has been hedged against the possibility of an
increase in interest rates which would adversely affect the price of bonds held
in the Fixed Component and interest rates decrease instead, the Series will
lose part or all of the benefit of the increased value of its bonds which have
been hedged because it will have offsetting losses in its futures positions. In
addition, in such situations, if the Series has insufficient cash, it may have
to sell bonds from the Fixed Component to meet daily variation margin
requirements, possibly at a time when it may be disadvantageous to do so. Such
sale of bonds may be, but will not necessarily be, at increased prices which
reflect the rising market.
COUNTERPARTY RISK With some derivatives there is also the risk that the
counterparty may fail to honor its contract terms, causing a loss for the
Series.
5
<PAGE>
FOREIGN SECURITIES
The Series may invest in depositary receipts of foreign companies included in
the S&P 500. Depositary receipts are typically dollar denominated, although
their market price is subject to fluctuations of the foreign currency in which
the underlying securities are denominated. Depositary receipts are typically
American Depositary Receipts (ADRs), which are designed for U.S. investors and
held either in physical form or in book entry form.
REAL ESTATE SECURITIES
The Series may invest in real estate securities through interests in real
estate investment trusts (REITs) included in the S&P 500. REITs are trusts that
sell securities to investors and use the proceeds to invest in real estate or
interests in real estate. A REIT may focus on a particular project, such as
apartment complexes, or geographic region, such as the Northeastern U.S., or
both.
Investing in stocks of real estate-related companies presents certain risks
that are more closely associated with investing in real estate directly than
with investing in the stock market generally, including: periodic declines in
the value of real estate, generally, or in the rents and other income generated
by real estate; periodic over-building, which creates gluts in the market, as
well as changes in laws (such as zoning laws) that impair the property rights
of real estate owners; and adverse developments in the real estate industry.
BANK OBLIGATIONS
The Series may invest in obligations issued by domestic banks (including
banker's acceptances, commercial paper, bank notes, time deposits and
certificates of deposit).
ILLIQUID SECURITIES
The Series may invest in illiquid securities. Illiquid securities are
securities that are not readily marketable or cannot be disposed of promptly
within seven days and in the usual course of business without taking a
materially reduced price. Such securities include, but are not limited to, time
deposits and repurchase agreements with maturities in excess of seven days.
Securities that may be resold under Rule 144A under the Securities Act of 1933,
as amended (1933 Act) or securities offered pursuant to Section 4(2) of the
1933 Act shall not be deemed illiquid solely by reason of being unregistered.
Aeltus shall determine whether a particular security is deemed to be illiquid
based on the trading markets for the specific security and other factors.
Illiquid securities will not exceed 15% of the net assets of the Series.
CORPORATE BONDS
The Fixed Component may consist of non-callable corporate bonds, provided that
no less than 40% of the Series' assets are allocated to the Equity Component.
Any corporate bond purchased must mature on a date no more than three years
before or after the Maturity Date. The duration of each such bond must be
within 90 days of the Maturity Date. In addition, each such bond must be rated
AA- or higher by S&P or Aa3 or higher by Moody's, provided that if both S&P and
Moody's have issued a rating on the security, such rating shall not be less
than AA-/Aa3. If a corporate bond is downgraded below this level, Aeltus shall
divest the security within 15 business days following the public announcement
of such downgrade. No more than 2% of the Series' assets shall be invested in
corporate debt securities of any issuer or its affiliates at the time of
investment therein.
MORTGAGE-RELATED DEBT SECURITIES
The Series may invest in mortgage-related debt securities, collateralized
mortgage obligations (CMOs) and real estate mortgage investment conduits
(REMICs). However, each such security must be rated AAA or higher by S&P or Aaa
or higher by Moody's, provided that if both S&P and Moody's have issued a
rating on the security, such rating shall not be
6
<PAGE>
less than AAA/Aaa. If a mortgage related debt security is downgraded below this
level, Aeltus shall divest the security within 15 business days following the
public announcement of such downgrade.
Federal mortgage-related securities include obligations issued or guaranteed by
the Government National Mortgage Association (GNMA), the Federal National
Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corporation
(FHLMC). GNMA is a wholly owned corporate instrumentality of the U.S., the
securities and guarantees of which are backed by the full faith and credit of
the U.S. FNMA, a federally chartered and privately owned corporation, and
FHLMC, a federal corporation, are instrumentalities of the U.S. with
Presidentially appointed board members. The obligations of FNMA and FHLMC are
not explicitly guaranteed by the full faith and credit of the federal
government.
Pass-through mortgage-related securities are characterized by monthly payments
to the holder, reflecting the monthly payments made by the borrowers who
received the underlying mortgage loans. The payments to the security holders,
like the payments on the underlying loans, represent both principal and
interest. Although the underlying mortgage loans are for specified periods of
time, often twenty or thirty years, the borrowers can, and typically do, repay
such loans sooner. Thus, the security holders frequently receive repayments of
principal, in addition to the principal that is part of the regular monthly
payment. A borrower is more likely to repay a mortgage bearing a relatively
high rate of interest. This means that in times of declining interest rates,
some higher yielding securities held by the Series might be converted to cash,
and the Series could be expected to reinvest such cash at the then prevailing
lower rates. The increased likelihood of prepayment when interest rates decline
also limits market price appreciation of mortgage-related securities. If the
Series buys mortgage-related securities at a premium, mortgage foreclosures or
mortgage prepayments may result in losses of up to the amount of the premium
paid since only timely payment of principal and interest is guaranteed.
CMOs and REMICs are securities which are collateralized by mortgage
pass-through securities. Cash flows from underlying mortgages are allocated to
various classes or tranches in a predetermined, specified order. Each
sequential tranche has a "stated maturity" - the latest date by which the
tranche can be completely repaid, assuming no repayments - and has an "average
life" - the average time to receipt of a principal weighted by the size of the
principal payment. The average life is typically used as a proxy for maturity
because the debt is amortized, rather than being paid off entirely at maturity,
as would be the case in a straight debt instrument.
CMOs and REMICs are typically structured as "pass-through" securities. In these
arrangements, the underlying mortgages are held by the issuer, which then
issues debt collateralized by the underlying mortgage assets. The security
holder thus owns an obligation of the issuer and payment of interest and
principal on such obligations is made from payment generated by the underlying
mortgage assets. The underlying mortgages may or may not be guaranteed as to
payment of principal and interest by an agency or instrumentality of the U.S.
Government such as GNMA or otherwise backed by FNMA or FHLMC. Alternatively,
such securities may be backed by mortgage insurance, letters of credit or other
credit enhancing features. Both CMOs and REMICs are issued by private entities.
They are not directly guaranteed by any government agency and are secured by
the collateral held by the issuer. CMOs and REMICs are subject to the type of
prepayment risk described above due to the possibility that prepayments on the
underlying assets will alter the cash flow.
STRIPS (SEPARATE TRADING OF REGISTERED INTEREST AND PRINCIPAL OF SECURITIES)
The Series may invest in STRIPS. STRIPS are created by the Federal Reserve Bank
by separating the interest and principal components of an outstanding U.S.
Treasury or agency bond and selling them as individual securities. STRIPS
generally trade like zero coupon securities, which do not pay interest
periodically but accrue interest until maturity. STRIPS tend to include the
same risks as zero coupon securities. The market prices of STRIPS generally are
more volatile than the market prices of securities with similar maturities that
pay interest periodically and are likely to respond to changes in interest
rates to a greater degree than do non-zero coupon securities having similar
maturities and credit quality.
7
<PAGE>
ZERO COUPON SECURITIES
The Series may invest in zero coupon securities. Zero coupon securities are
debt obligations that do not entitle the holder to any periodic payment of
interest prior to maturity or a specified date when the securities begin paying
current interest (the "cash payment date") and therefore are issued and traded
at a discount from their face amounts or par value. The discount varies,
depending on the time remaining until maturity or cash payment date, prevailing
interest rates, liquidity of the security and the perceived credit quality of
the issuer. The discount, in the absence of financial difficulties of the
issuer, decreases as the final maturity or cash payment date of the security
approaches. The market prices of zero coupon securities generally are more
volatile than the market prices of securities with similar maturities that pay
interest periodically and are likely to respond to changes in interest rates to
a greater degree than do non-zero coupon securities having similar maturities
and credit quality.
The risks associated with lower debt securities apply to these securities. Zero
coupon securities are also subject to the risk that in the event of a default,
the Series may realize no return on its investment, because these securities do
not pay cash interest.
OTHER CONSIDERATIONS
In extreme circumstances, Aetna reserves the right to accept additional
deposits, including both new annuity monies and internal variable annuity
transfers, during the Guarantee Period and to discontinue this practice at its
discretion at any time.
THE ASSET ALLOCATION PROCESS
In pursuing the Series' investment objective, Aeltus looks to allocate assets
among the Equity Component and the Fixed Component. The allocation of assets
depends on a variety of factors, including, but not limited to, the then
prevailing level of interest rates, equity market volatility, the then current
market value of the Series, the Targeted Return and the Maturity Date. If
interest rates are low (particularly at the inception of the Guarantee Period),
the Series' assets may be largely invested in the Fixed Component in order to
increase the likelihood of meeting the investment objective. In addition, if
during the Guarantee Period the equity markets experienced a major decline, the
Series' assets may become largely invested in the Fixed Component in order to
increase the likelihood of meeting the investment objective.
The initial allocation of the Series' assets between the Equity Component and
the Fixed Component will be determined principally by the prevailing level of
interest rates and the volatility of the stock market at the beginning of the
Guarantee Period. If at the inception of the Guarantee Period interest rates
are low, more assets may have to be allocated to the Fixed Component. Aeltus
will monitor the allocation of the Series' assets on a daily basis.
The asset allocation process will also be affected by Aeltus' ability to manage
the Fixed Component. If the Fixed Component provides a return better than that
assumed by Aeltus' proprietary software model, fewer assets would have to be
allocated to the Fixed Component. On the other hand, if the performance of the
Fixed Component is poorer than expected, more assets would have to be allocated
to the Fixed Component, and the ability of the Series to participate in any
subsequent upward movement in the equity market would be limited.
The asset allocation process results in additional transaction costs such as
brokerage commissions. This process can have adverse effect on the performance
of the Series during periods of increased equity market volatility. To moderate
such costs, Aeltus has built into the proprietary software program a factor
that will require reallocations only when Equity Component and Fixed Component
values have deviated by more than certain minimal amounts since the last
reallocation.
8
<PAGE>
TRUSTEES AND OFFICERS OF THE FUND
The investments and administration of the Fund are under the direction of the
Board. The Board and executive officers of the Fund and their principal
occupations for the past five years are listed below. Those Trustees who are
"interested persons," as defined in the 1940 Act, are indicated by an asterisk
(*). Trustees and officers hold the same positions with other investment
companies in the same Fund Complex: Aetna Series Fund, Inc., Aetna Variable
Fund, Aetna Income Shares, Aetna Variable Encore Fund, Aetna Balanced VP, Inc.,
Aetna Generation Portfolios, Inc., Aetna Variable Portfolios, Inc. and Portfolio
Partners, Inc.
<TABLE>
<CAPTION>
--------------------------------- ------------------------------ ---------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST FIVE YEARS (AND
NAME, POSITION(S) HELD POSITIONS HELD WITH AFFILIATED PERSONS OR PRINCIPAL
ADDRESS AND AGE WITH EACH FUND UNDERWRITERS OF THE FUND)
--------------------------------- ------------------------------ ---------------------------------------------------------------
<S> <C> <C>
J. Scott Fox* Trustee and President Director, Managing Director, Chief Operating Officer, Chief
10 State House Square (Principal Executive Officer) Financial Officer, Aeltus Investment Management, Inc., April
Hartford, Connecticut 1994 to present; Senior Vice President -- Operations, Aetna
Age 45 Life Insurance and Annuity Company, March 1997 to December 1997.
--------------------------------- ------------------------------ ---------------------------------------------------------------
Wayne F. Baltzer Vice President Vice President, Aeltus Capital, Inc., May 1998 to present;
10 State House Square Vice President, Aetna Investment Services, Inc., July 1993 to
Hartford, Connecticut May 1998.
Age 57
--------------------------------- ------------------------------ ---------------------------------------------------------------
Daniel E. Burton Secretary Assistant General Counsel and Assistant Secretary, Aeltus
10 State House Square Investment Management, Inc., July 2000 to present; Assistant
Hartford, Connecticut General Counsel and Assistant Secretary, Aeltus Capital,
Age 33 Inc., July 2000 to present; Counsel, Aetna Financial Services,
September 1997 to present; Attorney, Securities and Exchange
Commission, August 1996 to August 1997; Associate, Kirkpatrick &
Lockhart LLP, September 1992 to August 1996.
--------------------------------- ------------------------------ ---------------------------------------------------------------
Albert E. DePrince, Jr. Trustee Director, Business and Economic Research Center, 1999 to
3029 St. Johns Drive present; Professor of Economics and Finance, Middle Tennessee
Murfreesboro, Tennessee State University, 1991 to present.
Age 59
--------------------------------- ------------------------------ ---------------------------------------------------------------
Stephanie A. DeSisto Vice President, Vice President, Mutual Fund Accounting, Aeltus Investment
10 State House Square Treasurer and Chief Management, Inc., November 1995 to present.
Hartford, Connecticut Financial Officer (Principal
Age 47 Financial and Accounting
Officer)
--------------------------------- ------------------------------ ---------------------------------------------------------------
9
<PAGE>
--------------------------------- ------------------------------ ---------------------------------------------------------------
Maria T. Fighetti Trustee Associate Commissioner for Contract Management, 1996 to present,
325 Piermont Road and Manager/Attorney, 1973 to 1996, Health Services, New York
Closter, New Jersey City Department of Mental Health, Mental Retardation and Alcohol
Age 57 Services.
--------------------------------- ------------------------------ ---------------------------------------------------------------
David L. Grove Trustee Private Investor; Economic/Financial Consultant, December 1985
5 The Knoll to present.
Armonk, New York
Age 82
--------------------------------- ------------------------------ ---------------------------------------------------------------
John Y. Kim* Trustee Director, President, Chief Executive Officer, Chief Investment
10 State House Square Officer, Aeltus Investment Management, Inc., December 1995 to
Hartford, Connecticut present; President, Aetna Life Insurance and Annuity Company,
Age 40 May 2000 to September 2000; Chief Investment Officer, Aetna
Life Insurance and Annuity Company, May 2000 to present;
Director, Aetna Life Insurance and Annuity Company, February
1995 to September 2000; Senior Vice President, Aetna Life
Insurance and Annuity Company, September 1994 to May 2000 and
September 2000 to present.
--------------------------------- ------------------------------ ---------------------------------------------------------------
Sidney Koch Trustee Financial Adviser, self-employed, January 1993 to present.
455 East 86th Street
New York, New York
Age 65
--------------------------------- ------------------------------ ---------------------------------------------------------------
Frank Litwin Vice President Managing Director, Aeltus Investment Management, Inc., August
10 State House Square 1997 to present; Vice President, Fidelity Investments
Hartford, Connecticut Institutional Services Company, April 1992 to August 1997.
Age 51
--------------------------------- ------------------------------ ---------------------------------------------------------------
Corine T. Norgaard Trustee Dean of the Barney School of Business, University of Hartford
556 Wormwood Hill (West Hartford, CT), August 1996 to present; Professor,
Mansfield Center, Connecticut Accounting and Dean of the School of Management, SUNY
Age 63 Binghamton (Binghamton, NY), August 1993 to August 1996
--------------------------------- ------------------------------ ---------------------------------------------------------------
Richard G. Scheide Trustee Principal, LoBue Associates Inc., October 1999 to present;
11 Lily Street Trust and Private Banking Consultant, David Ross Palmer
Nantucket, Massachusetts Consultants, July 1991 to present.
Age 71
--------------------------------- ------------------------------ ---------------------------------------------------------------
</TABLE>
10
<PAGE>
During the fiscal year ended December 31, 1999, members of the Board who are
also directors, officers or employees of Aeltus and its affiliates were not
entitled to any compensation from the Funds. As of December 31, 1999, the
unaffiliated members of the Board received compensation in the amounts included
in the following table. No member of the Board was entitled to receive pension
or retirement benefits.
<TABLE>
<CAPTION>
------------------------------------ ------------------------------------------ -------------------------------------------------
NAME OF PERSON AGGREGATE COMPENSATION FROM TOTAL COMPENSATION FROM THE FUNDS
POSITION AETNA GET FUND AND FUND COMPLEX PAID TO TRUSTEES
------------------------------------ ------------------------------------------ -------------------------------------------------
<S> <C> <C>
Corine Norgaard $6,267 $75,500
Trustee
------------------------------------ ------------------------------------------ -------------------------------------------------
Sidney Koch 6,267 75,500
Trustee
------------------------------------ ------------------------------------------ -------------------------------------------------
Maria T. Fighetti* 6,475 78,000
Trustee
------------------------------------ ------------------------------------------ -------------------------------------------------
Richard G. Scheide 6,682 80,500
Trustee, Chairperson
Audit Committee
------------------------------------ ------------------------------------------ -------------------------------------------------
David L. Grove* 6,682 80,500
Trustee
------------------------------------ ------------------------------------------ -------------------------------------------------
Albert E. DePrince, Jr.** 6,475 78,000
Trustee, Chairperson
Contract Committee
------------------------------------ ------------------------------------------ -------------------------------------------------
</TABLE>
* During the fiscal year ended December 31, 1999, Ms. Fighetti and Dr. Grove
elected to defer compensation in the amount of $25,000 and $80,500,
respectively.
** Dr. DePrince replaced Dr. Grove as Chairperson of the Contract Committee as
of April 2000.
CONTROL PERSONS AND PRINCIPAL SHAREHOLDERS
It is expected that the Series shares will be sold to Aetna and allocated to
variable annuity separate accounts to fund obligations thereunder. Contract
holders in these separate accounts are provided the right to direct the voting
of fund shares at shareholder meetings. Aetna votes the shares that it owns in
these separate accounts in accordance with contract holders' directions.
Undirected shares of the Series will be voted for each account in the same
proportion as directed shares.
Aeltus is a wholly owned subsidiary of Aetna. Aetna is registered with the
Commission as an investment adviser. Aetna is an indirect wholly owned
subsidiary of Aetna Retirement Services, Inc., which is, in turn, an indirect
wholly owned subsidiary of Aetna Inc. Aetna Inc. has entered into an agreement
to sell certain of its businesses, including Aeltus, to ING Groep N.V. (ING),
an integrated financial services provider. The transaction is targeted to close
by the end of 2000. Upon the closing of the transaction, Aeltus will become an
indirect wholly owned subsidiary of ING.
11
<PAGE>
INVESTMENT ADVISORY AGREEMENT
The Fund entered into an investment advisory agreement (Advisory Agreement)
appointing Aeltus as the investment adviser of the Series. Under the Advisory
Agreement, and subject to the supervision of the Board, Aeltus has
responsibility for supervising all aspects of the operations of the Series
including the selection, purchase and sale of securities. Under the Advisory
Agreement, Aeltus is given the right to delegate any or all of its obligations
to a subadviser.
The Advisory Agreement provides that Aeltus is responsible for payment of all
costs of its personnel, its overhead and of its employees who also serve as
officers or members of the Board and that the Series is responsible for payment
of all other of its costs.
For the services under the Advisory Agreement, Aeltus will receive an annual
fee, payable monthly, as described in the Prospectus.
ADMINISTRATIVE SERVICES AGREEMENT
Pursuant to an Administrative Services Agreement, Aeltus acts as administrator
and provides certain administrative and shareholder services necessary for the
Series' operations and is responsible for the supervision of other service
providers. The services provided by Aeltus include: (1) internal accounting
services; (2) monitoring regulatory compliance, such as reports and filings
with the Commission and state securities commissions; (3) preparing financial
information for proxy statements; (4) preparing semi-annual and annual reports
to shareholders; (5) calculating the net asset value (NAV); (6) preparing
certain shareholder communications; (7) supervising the custodian and transfer
agent; and (8) reporting to the Board.
Aeltus is the administrator for the Series. Aeltus has responsibility for
certain administrative and internal accounting and reporting services,
maintenance of relationships with third party service providers such as the
transfer agent and custodian, calculation of the NAV and other financial
reports prepared for the Series.
Listed below is the administrative services fee Aeltus is entitled to receive
on an annual rate based on average daily net assets of the Series:
<TABLE>
<CAPTION>
ADMINISTRATIVE FEE SERIES ASSETS
------------------ -------------
<S> <C>
0.075% on the first $5 billion
0.050% on all assets over $5 billion
</TABLE>
Aeltus is contractually obligated through the Maturity Date to waive all or a
portion of its investment advisory fee and/or its administrative services fee
and/or to reimburse a portion of the Series' other expenses in order to ensure
that the Series' total expense ratio does not exceed 0.75% of the average daily
net assets.
CUSTODIAN
Mellon Bank, N.A., One Mellon Bank Center, Pittsburgh, Pennsylvania, 15258,
serves as custodian for the assets of the Series. The custodian does not
participate in determining the investment policies of the Series nor in
deciding which securities are purchased or sold by the Series. The Series may,
however, invest in obligations of the custodian and may purchase or sell
securities from or to the custodian.
TRANSFER AGENT
PFPC Inc., 4400 Computer Drive, Westborough, Massachusetts 01581 serves as the
transfer agent and dividend-paying agent to the Series.
12
<PAGE>
INDEPENDENT AUDITORS
KPMG LLP, Hartford, Connecticut 06103 serves as independent auditors to the
Series. KPMG LLP provides audit services, assistance and consultation in
connection with the Commission filings.
PRINCIPAL UNDERWRITER
Aetna Investment Services, LLC (AIS) has agreed to use its best efforts to
distribute the shares as the principal underwriter of the Series pursuant to an
Underwriting Agreement between it and the Fund. The Agreement was approved on
September 27, 2000 to continue through December 31, 2000. The Underwriting
Agreement may be continued from year to year thereafter if approved annually by
the Trustees or by a vote of holders of a majority of the Series' shares, and
by a vote of a majority of the Trustees who are not "interested persons," as
that term is defined in the 1940 Act, of AIS, and who are not interested
persons of the Fund, appearing in person at a meeting called for the purpose of
approving such Agreement. This Agreement terminates automatically upon
assignment, and may be terminated at any time on sixty (60) days' written
notice by the Trustees or AIS or by vote of holders of a majority of the
Series' shares without the payment of any penalty.
AIS is currently an indirect wholly owned subsidiary of Aetna Inc. Upon
closing of the ING transaction (see CONTROL PERSONS AND PRINCIPAL SHAREHOLDERS
on page 11), AIS will become an indirect wholly owned subsidiary of ING.
BROKERAGE ALLOCATION AND TRADING POLICIES
Subject to the supervision of the Board, Aeltus has responsibility for making
investment decisions, for effecting the execution of trades and for negotiating
any brokerage commissions thereon. It is Aeltus' policy to obtain the best
quality of execution available, giving attention to net price (including
commissions where applicable), execution capability (including the adequacy of
a firm's capital position), research and other services related to execution.
The relative priority given to these factors will depend on all of the
circumstances regarding a specific trade. Aeltus may also consider the sale of
shares of registered investment companies advised by Aeltus as a factor in the
selection of brokerage firms to execute the Series' portfolio transactions or
in the designation of a portion of the commissions charged on those
transactions to be paid to other broker-dealers, subject to Aeltus' duty to
obtain best execution.
Aeltus receives a variety of brokerage and research services from brokerage
firms in return for the execution by such brokerage firms of trades on behalf
of the Series. These brokerage and research services include, but are not
limited to, quantitative and qualitative research information and purchase and
sale recommendations regarding securities and industries, analyses and reports
covering a broad range of economic factors and trends, statistical data
relating to the strategy and performance of the Series and other investment
companies, services related to the execution of trades on behalf of the Series
and advice as to the valuation of securities, the providing of equipment used
to communicate research information and specialized consultations with Fund
personnel with respect to computerized systems and data furnished to the Series
as a component of other research services. Aeltus considers the quantity and
quality of such brokerage and research services provided by a brokerage firm
along with the nature and difficulty of the specific transaction in negotiating
commissions for trades in the Series' securities and may pay higher commission
rates than the lowest available when it is reasonable to do so in light of the
value of the brokerage and research services received generally or in
connection with a particular transaction. Aeltus' policy in selecting a broker
to effect a particular transaction is to seek to obtain "best execution," which
means prompt and efficient execution of the transaction at the best obtainable
price with payment of commissions which are reasonable in relation to the value
of the services provided by the broker, taking into consideration research and
brokerage services provided. When the trader believes that more than one broker
can provide best execution, preference may be given to brokers that provide
additional services to Aeltus.
Research services furnished by brokers through whom the Series effects
securities transactions may be used by Aeltus in servicing all of its accounts;
not all such services will be used by Aeltus to benefit the Series.
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Consistent with federal law, Aeltus may obtain such brokerage and research
services regardless of whether they are paid for (1) by means of commissions,
or (2) by means of separate, non-commission payments. Aeltus' judgment as to
whether and how it will obtain the specific brokerage and research services
will be based upon its analysis of the quality of such services and the cost
(depending upon the various methods of payment which may be offered by
brokerage firms) and will reflect Aeltus' opinion as to which services and
which means of payment are in the long-term best interests of the Series.
The Series and another advisory client of Aeltus or Aeltus itself, may desire
to buy or sell the same security at or about the same time. In such a case, the
purchases or sales will normally be aggregated, and then allocated as nearly as
practicable on a pro rata basis in proportion to the amounts to be purchased or
sold by each. In some cases the smaller orders will be filled first. In
determining the amounts to be purchased and sold, the main factors to be
considered are the respective investment objectives of the Series and the other
accounts, the relative size of portfolio holdings of the same or comparable
securities, availability of cash for investment, and the size of their
respective investment commitments. Prices are averaged for aggregated trades.
The Board adopted a policy allowing trades to be made between affiliated
registered investment companies or series thereof provided they meet the terms
of Rule 17a-7 under the 1940 Act.
The Fund and Aeltus each have adopted a Code of Ethics (in accordance with Rule
17j-1 under the 1940 Act). The Code of Ethics allows personnel subject to the
Codes to invest in securities, including securities that may be purchased or
held by the Series. However, it prohibits a person from taking advantage of
Series trades or from acting on inside information.
PURCHASE AND REDEMPTION OF SHARES
Shares of the Series are purchased and redeemed at the NAV next determined
after receipt of a purchase or redemption order in acceptable form as described
in the Prospectus.
The value of shares redeemed may be more or less than a shareholder's cost,
depending upon the market value of the portfolio securities at the time of
redemption. Payment for shares redeemed will be made by the Series within seven
days or the maximum period allowed by law, if shorter, after the redemption
request is received by the Series or by Aetna.
NET ASSET VALUE
Securities of the Series are generally valued by independent pricing services,
which have been approved by the Board. The values for equity securities traded
on registered securities exchanges (except as otherwise noted below) are based
on the last sale price or, if there has been no sale that day, at the mean of
the last bid and asked price on the exchange where the security is principally
traded. Securities traded over the counter are valued at the last sale price
or, if there has been no sale that day, at the mean of the last bid and asked
price. Fixed-income securities may be valued on the basis of prices provided by
a pricing service when such prices are believed to reflect the fair market
value of such securities. The prices provided by a pricing service take into
account many factors, including institutional size trading in similar groups of
securities and any developments related to specific securities. Securities for
which prices are not obtained from a pricing service are valued based upon the
assessment of market-makers in those securities. Debt securities maturing in
sixty days or less at the date of valuation will be valued using the "amortized
cost" method of valuation. This involves valuing an instrument at its cost and
thereafter assuming a constant amortization of premium or increase of discount.
Futures contracts are valued daily at a settlement price based on rules of the
exchange where the futures contract is primarily traded. Securities for which
market quotations are not readily available are valued at their fair value in
such manner as may be determined, from time to time, in good faith, by or under
the authority of, the Board.
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TAX STATUS
The following is only a limited discussion of certain additional tax
considerations generally affecting the Series. No attempt is made to present a
detailed explanation of the tax treatment of the Series and no explanation is
provided with respect to the tax treatment of any shareholder. The discussions
here and in the Prospectus are not intended as substitutes for careful tax
planning. Holders of VA Contracts must consult their contract prospectus,
prospectus summary or disclosure statement for information concerning the
federal income tax consequences of owning such contracts.
QUALIFICATION AS A REGULATED INVESTMENT COMPANY
The Series has elected to be taxed as a regulated investment company under
Subchapter M of the Code. If for any taxable year the Series does not qualify
as a regulated investment company, all of its taxable income (including its net
capital gain) will be subject to tax at regular corporate rates without any
deduction for distributions to shareholders, and such distributions will be
taxable to the shareholders as ordinary dividends to the extent of the Series'
current and accumulated earnings and profits. Such distributions generally will
be eligible for the dividends-received deduction in the case of corporate
shareholders.
QUALIFICATION OF SEGREGATED ASSET ACCOUNTS
Under Code section 817(h), a segregated asset account upon which a variable
annuity contract is based must be "adequately diversified." A segregated asset
account will be adequately diversified if it satisfies one of two alternative
tests set forth in the Treasury Regulations. Specifically, the Treasury
Regulations provide, that except as permitted by the "safe harbor" discussed
below, as of the end of each calendar quarter (or within 30 days thereafter) no
more than 55% of the Series' total assets may be represented by any one
investment, no more than 70% by any two investments, no more than 80% by any
three investments and no more than 90% by any four investments. For this
purpose, all securities of the same issuer are considered a single investment,
and while each U.S. Government agency and instrumentality is considered a
separate issuer, a particular foreign government and its agencies,
instrumentalities and political subdivisions may be considered the same issuer.
As a safe harbor, a separate account will be treated as being adequately
diversified if the diversification requirements under Subchapter M are
satisfied and no more than 55% of the value of the account's total assets are
cash and cash items, U.S. government securities and securities of other
regulated investment companies.
For purposes of these alternative diversification tests, a segregated asset
account investing in shares of a regulated investment company will be entitled
to "look-through" the regulated investment company to its pro rata portion of
the regulated investment company's assets, provided the regulated investment
company satisfies certain conditions relating to the ownership of the shares.
FOREIGN INVESTMENTS
Investment income from foreign securities may be subject to foreign taxes
withheld at the source. It is impossible to determine the effective rate of
foreign tax in advance since the amount of the Series' assets to be invested in
various countries is not known.
EXCISE TAX ON REGULATED INVESTMENT COMPANIES
A 4% non-deductible excise tax is imposed on the undistributed income of a
regulated investment company that fails to distribute in each calendar year an
amount equal to 98% of ordinary taxable income for the calendar year and 98% of
capital gain net income for the one-year period ended on October 31 of such
calendar year (or, at the election of a regulated investment company having a
taxable year ending November 30 or December 31, for its taxable year ).
Tax-exempt interest on municipal obligations is not subject to the excise tax.
The balance of such income must be distributed during the next calendar year.
For the foregoing purposes, a regulated investment company is treated as having
distributed any amount on which it is subject to income tax for any taxable
year ending in such calendar year.
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The Series intends to make sufficient distributions or deemed distributions of
its ordinary taxable income and capital gain net income prior to the end of
each calendar year to avoid liability for the excise tax. However, shareholders
should note that the Series may in certain circumstances be required to
liquidate portfolio investments to make sufficient distributions to avoid
excise tax liability.
PERFORMANCE INFORMATION
Performance information for the Series including the total return, may appear
in reports or promotional literature to current or prospective shareholders.
AVERAGE ANNUAL TOTAL RETURN
Quotations of average annual total return for the Series will be expressed in
terms of the average annual compounded rate of return of a hypothetical
investment in the Series over a period of one and five years (or, if the Series
has not been in existence for such periods, up to the life of the Series),
calculated pursuant to the formula:
n
P(1 + T) = ERV
Where:
P = a hypothetical initial payment of $1,000
T = an average annual total return
n = the number of years
ERV = the ending redeemable value of a hypothetical $1,000 payment made at the
beginning of the 1, 5, or 10 year period at the end of the 1, 5, or 10 year
period (or fractional portion thereof).
Performance information for the Series may be compared, in reports and
promotional literature, to: (a) the S&P 500 and/or the Lehman Brothers
Aggregate Bond Index, or other indices (including, where appropriate, a
blending of indices) that measure performance of a pertinent group of
securities widely regarded by investors as representative of the securities
markets in general; (b) other groups of investment companies tracked by
Morningstar or Lipper Analytical Services, widely used independent research
firms that rank mutual funds and other investment companies by overall
performance, investment objectives, and assets, or tracked by other services,
companies, publications, or persons who rank such investment companies on
overall performance or other criteria; and (c) the Consumer Price Index
(measure for inflation) to assess the real rate of return from an investment in
the Series.
SAI.GETL-00 Statement of Additional Information
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