As filed with the Securities and Exchange File No. 33-41694
Commission on December 17, 1998 File No. 811-6352
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
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REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Post-Effective Amendment No. 29
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 39
AETNA SERIES FUND, INC.
-----------------------
10 State House Square SH11, Hartford, Connecticut 06103-3602
------------------------------------------------------------
(860) 275-2032
Amy R. Doberman, Counsel
Aeltus Investment Management, Inc.
10 State House Square SH11, Hartford, Connecticut 06103-3602
------------------------------------------------------------
(Name and Address of Agent for Service)
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It is proposed that this filing will become effective:
X on March 1, 1999 pursuant to paragraph (a)(1)
--------
<PAGE>
AETNA SERIES FUND, INC.
PROSPECTUS
CLASS A, CLASS B AND CLASS C SHARES
March 1, 1999
Capital Appreciation Funds
Aetna Growth Fund (Growth)
Aetna International Fund (International)
Aetna Mid Cap Fund (Mid Cap)
Aetna Small Company Fund (Small Company)
Aetna Value Opportunity Fund (Value Opportunity)
Growth & Income Funds
Aetna Balanced Fund (Balanced)
Aetna Growth and Income Fund (Growth and Income)
Aetna Real Estate Securities Fund (Real Estate)
Income Funds
Aetna Bond Fund (Bond Fund)
Aetna Government Fund
Aetna High Yield Fund (High Yield)
Aetna Money Market Fund (Money Market)
Index Plus Funds
Aetna Index Plus Bond Fund (Index Plus Bond)
Aetna Index Plus Large Cap Fund (Index Plus Large Cap)
Aetna Index Plus Mid Cap Fund (Index Plus Mid Cap)
Aetna Index Plus Small Cap Fund (Index Plus Small Cap)
Generation Funds
Aetna Ascent Fund (Ascent)
Aetna Crossroads Fund (Crossroads)
Aetna Legacy Fund (Legacy)
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.
This Prospectus is for investors purchasing or considering purchase of Class
A, Class B or Class C shares of one or more of the Funds.
<PAGE>
TABLE OF Contents
<TABLE>
<S> <C>
THE FUNDS' INVESTMENTS 3
Investment Objectives, Principal Investment Strategies and Risks,
Volatility and Performance 3
Other Investment Strategies and Risks 25
SHAREHOLDER FEES AND FUND EXPENSES 26
MANAGEMENT OF THE FUNDS' PORTFOLIO
INVESTMENTS 33
INVESTING IN THE FUNDS 35
Opening an Account and Selecting a Share Class 35
How to Buy Shares 38
How to Sell Shares 41
Timing of Requests 42
Other Information about Shareholder Accounts and Services 42
Dividends and Distributions 44
Tax Information 44
PRIVATE ACCOUNT PERFORMANCE 45
FINANCIAL HIGHLIGHTS 47
ADDITIONAL INFORMATION 58
</TABLE>
2
<PAGE>
THE Funds' INVESTMENTS
Investment Objectives, Principal Investment Strategies and Risks, Volatility
and Performance
Below is a description of each Fund's investment objective, the principal
investment strategies employed on behalf of each Fund and the principal risks
associated with investing in each Fund.
- --------------------------------------------------------------------------------
A performance bar chart is provided for each Fund (that has been in existence
for at least one full calendar year). For each Fund that has been in existence
for at least two full calendar years, the bar chart shows changes in the Fund's
performance from year to year. The fluctuation in returns shows each Fund's
performance volatility. Sales charges are not reflected in the bar chart
performance. If sales charges were reflected, returns would be lower. This chart
is accompanied by the Fund's best and worst quarterly returns throughout the
years noted in the bar chart.
- --------------------------------------------------------------------------------
A table for each Fund (that has been in existence for at least one full calendar
year) shows its average annual total returns. These returns do reflect all
applicable sales charges. The table also compares the Fund's returns to those of
a broad-based securities market index. Each index is a widely recognized,
unmanaged index of securities. A Fund's past performance is not necessarily an
indication of how it will perform in the future.
- --------------------------------------------------------------------------------
Additional information on the Funds' investment strategies and risks is included
beginning on page 25.
- --------------------------------------------------------------------------------
Aeltus Investment Management, Inc. (Aeltus) serves as investment adviser of
the Funds.
- --------------------------------------------------------------------------------
Bradley, Foster & Sargent, Inc. (Bradley) serves as subadviser of
Value Opportunity.
- --------------------------------------------------------------------------------
Shares of the Funds will rise and fall in value and you could lose money by
investing in them. There is no guaranty the Funds will achieve their investment
objectives. Shares of the Funds are not bank deposits and are not guaranteed,
endorsed or insured by any financial institution, the FDIC or any other
government agency.
3
<PAGE>
- --------------------------------------------------------------------------------
CAPITAL APPRECIATION Funds
- --------------------------------------------------------------------------------
AETNA GROWTH FUND (GROWTH)
Fundamental Objective Seeks growth of capital through investment in a
diversified portfolio consisting primarily of common stocks and securities
convertible into common stocks believed to offer growth potential.
Principal Investment Strategies Under normal market conditions, Growth invests
at least 65% of its total assets in common and preferred stocks.
In managing Growth, Aeltus:
[bullet] Tends to emphasize stocks of larger companies, although it may invest
in stocks of companies of any size.
[bullet] Uses internally developed quantitative computer models to evaluate the
financial characteristics of approximately 1,000 companies. Aeltus
analyzes these characteristics in an attempt to identify companies it
believes have strong growth characteristics or demonstrate a positive
trend in earnings estimates, but whose full value is not reflected in
the stock price.
[bullet] Focuses on companies that it believes have strong, sustainable and
improving earnings growth, and established market positions in a
particular industry.
Principal Risks The principal risks of investing in Growth are those generally
attributable to stock investing. They include the risk of sudden and
unpredictable drops in value of the market as a whole and periods of lackluster
or negative performance.
Growth-oriented stocks typically sell at relatively high valuations as compared
to other types of stocks. If a growth stock does not exhibit the consistent
level of growth expected, its price may drop sharply. Historically,
growth-oriented stocks have been more volatile than value-oriented stocks.
AETNA GROWTH FUND VOLATILITY And PERFORMANCE
[TABULAR REPRESENTATION OF CHART]
<TABLE>
<CAPTION>
Years Ended December 31,
Year-by-Year Total Return (Class A) 1995 1996 1997 1998
<S> <C> <C> <C> <C>
</TABLE>
[triangle pointing up] Best Quarter: , up %
[triangle pointing down] Worst Quarter: , down %
<TABLE>
<CAPTION>
As of December 31, 1998
Average Annual Total Return 1 Year 5 Years Since Inception Inception Date
<S> <C> <C> <C> <C>
Class A (%)*
Class B (%)*
Class C (%)*
S&P 500 Index**
</TABLE>
- --------------
* On February 2, 1998, the Fund redesignated Adviser Class shares as Class A
Shares. The Fund introduced Class C shares and Class B shares on June 30, 1998,
and March 1, 1999, respectively. For periods prior to the Class A inception
date, Class A performance is calculated using the performance of Class I shares,
and deducting the Class A front-end sales charge and the internal fees and
expenses of the Adviser Class shares. For periods prior to the Class B and Class
C inception dates, Class B and Class C performance is calculated using the
performance of Class I shares, and deducting the internal fees and expenses of
the Class B or Class C shares, respectively. Class B and Class C share returns
for certain periods (six years and shorter for Class B; one year for Class C)
reflect the deduction of the applicable contingent deferred sales charge (CDSC)
as described under "Opening an Account and Selecting a Share Class." The returns
for periods without a front-end sales charge or CDSC are net of fund expenses
only, and do not deduct the sales load or CDSC.
** The Standard & Poor's 500 Index is a value-weighted, unmanaged index of 500
widely held stocks that assumes the reinvestment of all dividends, and is
considered to be representative of the stock market in general.
4
<PAGE>
AETNA INTERNATIONAL FUND
(INTERNATIONAL)
Fundamental Objective Seeks long-term capital growth primarily through
investment in a diversified portfolio of common stocks principally traded in
countries outside of North America. International will not target any given
level of current income.
Principal Investment Strategies Under normal market conditions, International
invests at least 65% of its total assets in securities principally traded in
three or more countries outside of North America. These securities may include
common stocks as well as securities convertible into common stocks.
In managing International, Aeltus:
[bullet] Diversifies the Fund's portfolio by investing in a mix of stocks that
it believes have the potential for long-term growth, as well as stocks
that appear to be trading below their real value.
[bullet] Allocates assets among several geographic regions and individual
countries, investing primarily in those areas that it believes have
the greatest potential for growth as well as stable exchange rates.
[bullet] Invests primarily in established foreign securities markets, although
it may invest in emerging markets as well.
[bullet] Typically invests in approximately 90 to 120 different securities at
any one time, and looks to allocate no more than 3% of the Fund's
total assets to a single security.
[bullet] Uses internally developed quantitative computer models to evaluate the
financial characteristics of over 2,000 companies. Aeltus analyzes
cash flows, earnings and dividends paid by each company, in an attempt
to select companies with long-term sustainable growth characteristics.
[bullet] Employs currency hedging strategies to protect the portfolio from
adverse effects on the U.S. dollar.
Principal Risks The principal risks of investing in International are those
generally attributable to stock investing. These risks include the sudden and
unpredictable drop in value of the market as a whole and periods of lackluster
or negative performance.
Stocks of foreign companies present additional risks for U.S. investors,
including the following:
[bullet] Stocks of foreign companies tend to be less liquid and more volatile
than their U.S. counterparts.
[bullet] Accounting standards and market regulations tend to be less
standardized in certain foreign countries, and economic and political
climates tend to be less stable.
[bullet] Stocks of foreign companies may be denominated in foreign currency.
Exchange rate fluctuations may reduce or eliminate gains or create
losses.
All these risks usually are higher in emerging markets, such as most countries
in Africa, Asia, Latin America and the Middle East, than in more established
markets, such as Europe.
5
<PAGE>
AETNA INTERNATIONAL FUND VOLATILITY And PERFORMANCE
[TABULAR REPRESENTATION OF CHART]
<TABLE>
<CAPTION>
Years Ended December 31,
Year-by-Year Total Return (Class A) 1995 1996 1997 1998
<S> <C> <C> <C> <C>
</TABLE>
[triangle pointing up] Best Quarter: , up %
[triangle pointing down] Worst Quarter: , down %
<TABLE>
<CAPTION>
As of December 31, 1998
Average Annual Total Return 1 Year 5 Years Since Inception Inception Date
<S> <C> <C> <C> <C>
Class A (%)*
Class B (%)*
Class C (%)*
MSCI EAFE Index**
</TABLE>
- --------------
*On February 2, 1998, the Fund redesignated Adviser Class shares as Class A
Shares. The Fund introduced Class C shares and Class B shares on June 30, 1998,
and March 1, 1999, respectively. For periods prior to the Class A inception
date, Class A performance is calculated using the performance of Class I shares,
and deducting the Class A front-end sales charge and the internal fees and
expenses of the Adviser Class shares. For periods prior to the Class B and Class
C inception dates, Class B and Class C performance is calculated using the
performance of Class I shares, and deducting the internal fees and expenses of
the Class B or Class C shares, respectively. Class B and Class C share returns
for certain periods (six years and shorter for Class B; one year for Class C)
reflect the deduction of the applicable contingent deferred sales charge (CDSC)
as described under "Opening an Account and Selecting a Share Class." The returns
for periods without a front-end sales charge or CDSC are net of fund expenses
only, and do not deduct the sales load or CDSC.
**The Morgan Stanley Capital International-Europe, Australia and Far East Index
is a market value-weighted average of the performance of more than 900
securities listed on the stock market exchanges of countries in Europe,
Australia and the Far East.
6
<PAGE>
AETNA MID CAP FUND (MID CAP)
Fundamental Objective Seeks growth of capital primarily through investment in a
diversified portfolio of common stocks and securities convertible into common
stocks of companies having medium market capitalizations.
Principal Investment Strategies Under normal market conditions, Mid Cap invests
at least 65% of its total assets in common stocks of mid-capitalization
companies, defined as:
[bullet] The largest 1,000 U.S. companies (as measured by market
capitalization), excluding companies in the Standard & Poor's 500
Composite Index.
[bullet] All companies in the Standard & Poor's MidCap 400 Index that are not
otherwise included in the largest 1,000 companies (as measured by
market capitalization).
In managing Mid Cap, Aeltus invests in stocks that it believes have the
potential for long-term growth, as well as those that appear to be trading below
their real value. Aeltus uses internally developed quantitative computer models
to evaluate the financial characteristics of companies. Aeltus analyzes these
characteristics in an attempt to identify companies whose full value is not
reflected in the stock price. These characteristics include a company's
potential for strong, sustainable earnings and for long-term profitability.
Principal Risks The principal risks of investing in Mid Cap are those generally
attributable to stock investing. These risks include the sudden and
unpredictable drop in value of the market as a whole and periods of lackluster
or negative performance. Stocks of medium-sized companies tend to be more
volatile and less liquid than stocks of larger companies.
- --------------------------------------------------------------------------------
AETNA SMALL COMPANY FUND
(SMALL COMPANY)
Fundamental Objective Seeks growth of capital primarily through investment in a
diversified portfolio of common stocks and securities convertible into common
stocks of companies with smaller market capitalizations.
Principal Investment Strategies Under normal market conditions, Small Company
invests at least 65% of its total assets in common and preferred stocks of
small-capitalization companies, defined as:
[bullet] The smallest 2,000 of the largest 3,000 U.S. companies (as measured by
market capitalization).
[bullet] All companies not included above that are included in the Standard &
Poor's SmallCap 600 Index.
In managing Small Company, Aeltus:
[bullet] Invests in stocks that it believes have the potential for long-term
growth, as well as those that appear to be trading below their real
value.
[bullet] Uses internally developed quantitative computer models to evaluate
financial characteristics of over 2,000 companies. Aeltus analyzes
these characteristics in an attempt to identify companies whose full
value is not reflected in the stock price.
[bullet] Considers the potential of each company to create or take advantage of
unique product opportunities, its potential to achieve long-term
sustainable growth and the quality of its management.
Principal Risks The principal risks of investing in Small Company are those
generally attributable to stock investing. These risks include the sudden and
unpredictable drop in value of the market as a whole and periods of lackluster
or negative performance.
Other risks include:
[bullet] Stocks of smaller companies carry higher risks than stocks of larger
companies. This is because smaller companies may lack the management
experience, financial resources, product diversification, and
competitive strengths of larger companies.
[bullet] In many instances, the frequency and volume of trading in these stocks
is substantially less than is typical of stocks of larger companies.
As a result, the stocks of smaller companies may be subject to wider
price fluctuations or may be less liquid.
[bullet] When making large sales, the Fund may have to sell portfolio holdings
at discounts from quoted prices or may have to make a series of small
sales over an extended period of time due to the trading volume of
smaller company stocks.
[bullet] Stocks of smaller companies can be particularly sensitive to expected
changes in interest rates, borrowing costs and earnings.
7
<PAGE>
AETNA SMALL COMPANY FUND VOLATILITY And PERFORMANCE
[TABULAR REPRESENTATION OF CHART]
<TABLE>
<CAPTION>
Years Ended December 31,
Year-by-Year Total Return (Class A) 1995 1996 1997 1998
<S> <C> <C> <C> <C>
</TABLE>
[triangle pointing up] Best Quarter: , up %
[triangle pointing down] Worst Quarter: , down %
<TABLE>
<CAPTION>
As of December 31, 1998
Average Annual Total Return 1 Year 5 Years Since Inception Inception Date
<S> <C> <C> <C> <C>
Class A (%)*
Class B (%)*
Class C (%)*
Russell 2000 Index**
</TABLE>
- --------------
*On February 2, 1998, the Fund redesignated Adviser Class shares as Class A
Shares. The Fund introduced Class C shares and Class B shares on June 30, 1998,
and March 1, 1999, respectively. For periods prior to the Class A inception
date, Class A performance is calculated using the performance of Class I shares,
and deducting the Class A front-end sales charge and the internal fees and
expenses of the Adviser Class shares. For periods prior to the Class B and Class
C inception dates, Class B and Class C performance is calculated using the
performance of Class I shares, and deducting the internal fees and expenses of
the Class B or Class C shares, respectively. Class B and Class C share returns
for certain periods (six years and shorter for Class B; one year for Class C)
reflect the deduction of the applicable contingent deferred sales charge (CDSC)
as described under "Opening an Account and Selecting a Share Class." The returns
for periods without a front-end sales charge or CDSC are net of fund expenses
only, and do not deduct the sales load or CDSC.
**The Russell 2000 Index consists of the smallest 2,000 companies in the Russell
3000 Index and represents approximately 10% of the Russell 3000 total market
capitalization. The 3,000 largest U.S. companies by market capitalization,
representing nearly 98% of the U.S. equity market, comprise the Russell 3000
Index. Both indices assume reinvestment of all dividends and are unmanaged.
8
<PAGE>
AETNA VALUE OPPORTUNITY FUND
(VALUE OPPORTUNITY)
Fundamental Objective Seeks growth of capital primarily through investment in a
diversified portfolio of common stocks and securities convertible into common
stock. Stocks are selected based on a value-oriented approach.
Principal Investment Strategies Under normal market conditions, Value
Opportunity invests at least 65% of its total assets in common and preferred
stocks. In managing Value Opportunity, Bradley tends to emphasize common stocks
of larger companies it believes are trading below their real value, although it
may invest in stocks of companies of any size. Bradley believes that Value
Opportunity's investment objective can best be achieved by investing in
companies whose stock price has been excessively discounted due to perceived
problems. In searching for investments, Bradley evaluates financial
characteristics of companies, attempting to find those companies that appear to
possess a catalyst for positive change, such as strong management, solid assets,
or market position, rather than those companies whose stocks are simply
inexpensive.
Principal Risks The principal risks of investing in Value Opportunity are those
generally attributable to stock investing. These risks include the sudden and
unpredictable drop in value of the market as a whole and periods of lackluster
or negative performance.
Further, stocks that appear to be undervalued may never appreciate to the extent
expected. Because value-oriented stocks tend to exhibit a stronger relationship
to economic cycles than growth-oriented stocks, they are more sensitive to
changing economic conditions, such as changes in interest rates, corporate
earnings and industrial production.
- --------------------------------------------------------------------------------
GROWTH & INCOME Funds
- --------------------------------------------------------------------------------
AETNA BALANCED FUND
(BALANCED)
Fundamental Objective Seeks to maximize total return with reasonable safety of
principal by investing in a diversified portfolio of stocks, bonds and money
market instruments.
Principal Investment Strategies Under normal market conditions, Balanced
allocates its assets among the following asset classes:
[bullet] Equities, such as common and preferred stocks.
[bullet] Debt, such as bonds, mortgage-related and other asset-backed
securities, and U.S. Government securities.
[bullet] Money market instruments.
Aeltus typically maintains approximately 60% of Balanced's total assets in
equities and approximately 40% of its total assets in debt (including money
market instruments), although those percentages may vary from time to time
depending on Aeltus' view of the relative attractiveness of these asset classes.
In making asset allocation decisions, Aeltus uses current market statistics and
economic indicators to attempt to forecast returns for the equity and debt
sectors of the securities market. Within each asset class, Aeltus uses
quantitative computer models to evaluate financial criteria in an attempt to
identify those issuers whose full value is not reflected in their equity or debt
securities. Aeltus generally does not attempt to respond to short-term swings in
the market by quickly changing the characteristics of the Fund's portfolio.
In managing the equity component of Balanced, Aeltus typically emphasizes
investment in stocks of larger companies, although it may invest in stocks of
smaller companies to a significant extent.
In managing the debt component of Balanced, Aeltus looks to select investments
with the opportunity to enhance the portfolio's yield and total return, focusing
on performance over the long term. The Fund may invest up to 15% of total assets
in high-yield bonds (fixed income securities rated below BBB- by Standard &
Poor's Corporation (S&P) or Baa3 by Moody's Investors Services, Inc. (Moody's)
or, if unrated, considered by Aeltus to be of comparable quality).
Principal Risks The principal risks of investing in Balanced are those generally
attributable to stock and bond investing. The success of the Fund's strategy
depends on Aeltus' skill in allocating Fund assets between equities and debt and
in choosing investments within those categories. As a result, Balanced may
underperform stock funds when stocks are in favor and underperform bond funds
when bonds are in favor.
9
<PAGE>
In the case of stocks, risks include the sudden and unpredictable drop in value
of the market as a whole and periods of lackluster or negative performance.
Stocks of smaller companies tend to be less liquid and more volatile than stocks
of larger companies. Stocks of smaller companies also can be particularly
sensitive to expected changes in interest rates, borrowing costs and earnings.
The Fund's fixed-income investments are subject to the risk that interest rates
will rise, which generally causes bond prices to fall. Also, economic and market
conditions may cause issuers to default or go bankrupt. In either case, the
price of Fund shares may fall. The value of high-yield bonds are even more
sensitive to economic and market conditions than other bonds.
The prices of mortgage-related securities, in addition to being sensitive to
changes in interest rates, also are sensitive to changes in the prepayment
patterns on the underlying securities. If the principal on the underlying
mortgage notes is repaid faster than anticipated, which typically occurs in
times of low or declining interest rates, the price of the mortgage-related
security may fall.
AETNA BALANCED FUND VOLATILITY And PERFORMANCE
[TABULAR REPRESENTATION OF CHART]
<TABLE>
<CAPTION>
Years Ended December 31,
Year-by-Year Total Return (Class A) 1995 1996 1997 1998
<S> <C> <C> <C> <C>
</TABLE>
[triangle pointing up] Best Quarter: , up %
[triangle pointing down] Worst Quarter: , down %
<TABLE>
<CAPTION>
As of December 31, 1998
Average Annual Total Return 1 Year 5 Years Since Inception Inception Date
<S> <C> <C> <C> <C>
Class A (%)*
Class B (%)*
Class C (%)*
60% S&P 500 Index/40%
Lehman Brothers Aggregate
Bond Index**
</TABLE>
- -------------
*On February 2, 1998, the Fund redesignated Adviser Class shares as Class A
Shares. The Fund introduced Class C shares and Class B shares on June 30, 1998,
and March 1, 1999, respectively. For periods prior to the Class A inception
date, Class A performance is calculated using the performance of Class I shares,
and deducting the Class A front-end sales charge and the internal fees and
expenses of the Adviser Class shares. For periods prior to the Class B and Class
C inception dates, Class B and Class C performance is calculated using the
performance of Class I shares, and deducting the internal fees and expenses of
the Class B or Class C shares, respectively. Class B and Class C share returns
for certain periods (six years and shorter for Class B; one year for Class C)
reflect the deduction of the applicable contingent deferred sales charge (CDSC)
as described under "Opening an Account and Selecting a Share Class." The returns
for periods without a front-end sales charge or CDSC are net of fund expenses
only, and do not deduct the sales load or CDSC.
**The Standard & Poor's 500 Index is a value-weighted, unmanaged index of 500
widely held stocks that assumes the reinvestment of all dividends, and is
considered to be representative of the stock market in general. The Lehman
Brothers Aggregate Bond Index is an unmanaged index of corporate, government and
mortgage bonds.
10
<PAGE>
AETNA GROWTH AND INCOME FUND
(GROWTH AND INCOME)
Fundamental Objective Seeks long-term growth of capital and income through
investment in a diversified portfolio consisting primarily of common stocks and
securities convertible into common stocks believed to offer above-average growth
potential.
Principal Investment Strategies Under normal market conditions, Growth and
Income invests at least 65% of its total assets in common stocks that Aeltus
believes have significant potential for capital or income growth. In managing
Growth and Income, Aeltus:
[bullet] Tends to emphasize stocks of larger companies.
[bullet] Looks to diversify the Fund's assets across other asset classes
(including stocks of small and medium-sized companies, international
stocks, real estate securities and fixed income securities).
[bullet] Uses internally developed quantitative computer models to determine
the relative attractiveness of each asset class and to evaluate the
financial characteristics of securities within each class. In
analyzing these characteristics, Aeltus attempts to identify momentum
and valuation characteristics in selecting securities whose full value
is not reflected in their price.
Principal Risks The principal risks of investing in Growth and Income are those
generally attributable to stock investing. These risks include the sudden and
unpredictable drop in value of the market as a whole and periods of lackluster
or negative performance. The success of the Fund's strategy depends
significantly on Aeltus' skill in allocating assets and in choosing investments.
Growth-oriented stocks typically sell at relatively high valuations as compared
to other types of stocks. If a growth stock does not exhibit the level of growth
expected, its price may drop sharply. Historically, growth-oriented stocks have
been more volatile than value-oriented stocks.
Because Aeltus emphasizes large cap stocks, the Fund may underperform when large
cap stocks are out of favor; however, because the Fund is more diversified
across asset classes than most other funds with similar investment objectives,
it may not perform as well as those funds when large cap stocks are in favor.
AETNA GROWTH AND INCOME FUND VOLATILITY And PERFORMANCE
[TABULAR REPRESENTATION OF CHART]
<TABLE>
<CAPTION>
Years Ended December 31,
Year-by-Year Total Return (Class A) 1995 1996 1997 1998
<S> <C> <C> <C> <C>
</TABLE>
[triangle pointing up] Best Quarter: , up %
[triangle pointing down] Worst Quarter: , down %
<TABLE>
<CAPTION>
As of December 31, 1998
Average Annual Total Return 1 Year 5 Years Since Inception Inception Date
<S> <C> <C> <C> <C>
Class A (%)*
Class B (%)*
Class C (%)*
S&P 500 Index**
</TABLE>
- -------------
*On February 2, 1998, the Fund redesignated Adviser Class shares as Class A
Shares. The Fund introduced Class C shares and Class B shares on June 30, 1998,
and March 1, 1999, respectively. For periods prior to the Class A inception
date, Class A performance is calculated using the performance of Class I shares,
and deducting the Class A front-end sales charge and the internal fees and
expenses of the Adviser Class shares. For periods prior to the Class B and Class
C inception dates, Class B and Class C performance is calculated using the
performance of Class I shares, and deducting the internal fees and expenses of
the Class B or Class C shares, respectively. Class B and Class C share returns
for certain periods (six years and shorter for Class B; one year for Class C)
reflect the deduction of the applicable contingent deferred sales charge (CDSC)
as described under "Opening an Account and Selecting a Share Class." The returns
for periods without a front-end sales charge or CDSC are net of fund expenses
only, and do not deduct the sales load or CDSC.
**The Standard & Poor's 500 Index is a value-weighted, unmanaged index of 500
widely held stocks that assumes the reinvestment of all dividends, and is
considered to be representative of the stock market in general.
11
<PAGE>
AETNA REAL ESTATE SECURITIES FUND
(REAL ESTATE)
Fundamental Objective Seeks maximum total return primarily through investment in
a diversified portfolio of equity securities of real estate companies, the
majority of which are real estate investment trusts (REITs).
Principal Investment Strategies Under normal market conditions, Real Estate
invests at least 65% of its total assets in stocks, convertible securities and
preferred stocks of companies principally engaged in the real estate industry.
These companies may invest in, among other things, shopping malls, healthcare
facilities, office parks and apartment communities, or may provide real estate
management and development services.
In selecting investments from a universe of equity securities of REITs and real
estate operating companies, Aeltus uses internally developed quantitative models
to forecast returns of each security. Aeltus evaluates real estate companies
based on their earnings history and long-term growth prospects, analyst
estimates of future earnings, safety and growth in dividends, balance sheet
strength and quality of management. Aeltus also considers whether the securities
appear to be trading below their real value. Aeltus allocates assets among
property types and economic and geographic regions. Aeltus attempts to construct
Real Estate's portfolio so that the overall level of risk is not in excess of
its benchmark index, the National Association of Real Estate Investment Trusts
Equity Index.
Principal Risks Concentrating in stocks of real estate-related companies
presents certain risks that are more closely associated with investing in real
estate directly. Those risks include:
[bullet] Periodic declines in the value of real estate, generally, or in the
rents and other income generated by real estate.
[bullet] 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.
[bullet] Adverse developments in the real estate industry, which may have a
greater impact on the Fund than a fund more broadly diversified.
The risks generally attributable to stock investing include the sudden and
unpredictable drop in the value of the market as a whole and periods of
lackluster or negative performance. Although Real Estate is subject to the risks
generally attributable to stock investing, because the Fund has concentrated its
assets in one industry it may be subject to more abrupt swings in value than
would a more diversified equity portfolio.
- --------------------------------------------------------------------------------
INCOME Funds
- --------------------------------------------------------------------------------
AETNA BOND FUND (BOND FUND)
Fundamental Objective Seeks to provide as high a level of total return (i.e.,
income and capital appreciation) as is consistent with reasonable risk,
primarily through investment in a diversified portfolio of investment-grade
corporate bonds, and debt securities issued or guaranteed by the U.S.
Government, its agencies or instrumentalities.
Principal Investment Strategies Under normal market conditions, Bond Fund
invests at least 65% of its total assets in:
[bullet] High-grade corporate bonds.
[bullet] Mortgage-related and other asset-backed securities.
[bullet] Securities issued or guaranteed by the U.S. Government, its agencies
or instrumentalities.
High-grade securities are rated at least A by S&P or Moody's, or if unrated,
considered by Aeltus to be of comparable quality. The Fund may also invest up to
15% of its total assets in high-yield bonds, and up to 25% of its total assets
in foreign securities.
In managing Bond Fund, Aeltus:
[bullet] Looks to construct an intermediate-term, high quality portfolio by
selecting investments with the opportunity to enhance the portfolio's
overall total return and yield, while managing volatility.
[bullet] Uses quantitative computer models to evaluate issuers whose full value
is not reflected in their security prices. As a result, Bond Fund may,
at times, emphasize one type of debt security rather than another.
Principal Risks The principal risks of investing in Bond Fund are those
generally attributable to debt investing, including increases in interest rates
and loss of principal. Generally, when interest rates rise, bond prices fall.
Bonds with longer maturities tend to be more sensitive to changes in interest
rates.
12
<PAGE>
For all bonds there is a risk that the issuer will default. High-yield bonds
generally are more susceptible to the risk of default than higher rated bonds.
The prices of mortgage-related securities, in addition to being sensitive to
changes in interest rates, also are sensitive to changes in the prepayment
patterns on the underlying securities. If the principal on the underlying
mortgage notes is repaid faster than anticipated, which typically occurs in
times of low or declining interest rates, the price of the mortgage-related
security may fall.
Foreign securities present additional risks. Some foreign securities tend to
be less liquid and more volatile than their U.S. counterparts. These risks
are usually higher for securities of companies in emerging markets.
AETNA BOND FUND VOLATILITY And PERFORMANCE
[TABULAR REPRESENTATION OF CHART]
<TABLE>
<CAPTION>
Years Ended December 31,
Year-by-Year Total Return (Class A) 1995 1996 1997 1998
<S> <C> <C> <C> <C>
</TABLE>
[triangle pointing up] Best Quarter: , up %
[triangle pointing down] Worst Quarter: , down %
<TABLE>
<CAPTION>
As of December 31, 1998
Average Annual Total Return 1 Year 5 Years Since Inception Inception Date
<S> <C> <C> <C> <C>
Class A (%)*
Class B (%)*
Class C (%)*
Lehman Brothers Aggregate
Bond Index**
</TABLE>
- -------------
*On February 2, 1998, the Fund redesignated Adviser Class shares as Class A
Shares. The Fund introduced Class C shares and Class B shares on June 30, 1998,
and March 1, 1999, respectively. For periods prior to the Class A inception
date, Class A performance is calculated using the performance of Class I shares,
and deducting the Class A front-end sales charge and the internal fees and
expenses of the Adviser Class shares. For periods prior to the Class B and Class
C inception dates, Class B and Class C performance is calculated using the
performance of Class I shares, and deducting the internal fees and expenses of
the Class B or Class C shares, respectively. Class B and Class C share returns
for certain periods (six years and shorter for Class B; one year for Class C)
reflect the deduction of the applicable contingent deferred sales charge (CDSC)
as described under "Opening an Account and Selecting a Share Class." The returns
for periods without a front-end sales charge or CDSC are net of fund expenses
only, and do not deduct the sales load or CDSC.
**The Lehman Brothers Aggregate Bond Index is an unmanaged index of corporate,
government and mortgage bonds.
13
<PAGE>
AETNA GOVERNMENT FUND
Fundamental Objective Seeks to provide income consistent with the preservation
of capital through investment in securities issued or guaranteed by the U.S.
Government, its agencies or instrumentalities.
Principal Investment Strategies Under normal market conditions, Aetna Government
Fund invests at least 65% of its total assets in U.S. Government securities.
U.S. Government securities include securities issued by the U.S. Treasury,
individual government agencies and certain organizations created through federal
legislation. Securities issued by the U.S. Treasury are backed by the full faith
and credit of the federal government, the strongest form of credit backing in
the U.S. Securities issued by individual agencies and organizations may be
backed by the full faith and credit of the federal government as to principal or
interest but are not direct obligations of the U.S. Treasury. Government
securities also include certain mortgage-related securities that are sponsored
by a U.S. Government agency or organization.
In managing Aetna Government Fund, Aeltus:
[bullet] Looks to construct an intermediate-term, high-quality portfolio by
selecting investments with the potential to enhance the portfolio's
overall yield and total return.
[bullet] Uses quantitative computer models to identify attractive investments
within the U.S. Government securities markets. As a result, Aetna
Government Fund may, at times, emphasize one type of U.S. Government
security rather than another.
Principal Risks The principal risks of investing in Aetna Government Fund are
those generally attributable to debt investing, including increases in interest
rates. Generally, when interest rates rise, bond prices fall. Bonds with longer
maturities tend to be more sensitive to changes in interest rates.
In addition to being sensitive to changes in interest rates, the prices of
mortgage-related securities also are sensitive to changes in the prepayment
patterns on the underlying securities. If the principal on the underlying
mortgage notes is repaid faster than anticipated, which typically occurs in
times of low or declining interest rates, the price of the mortgage-related
security may fall.
AETNA GOVERNMENT FUND VOLATILITY And PERFORMANCE
[TABULAR REPRESENTATION OF CHART]
<TABLE>
<CAPTION>
Years Ended December 31,
Year-by-Year Total Return (Class A) 1995 1996 1997 1998
<S> <C> <C> <C> <C>
</TABLE>
[triangle pointing up] Best Quarter: , up %
[triangle pointing down] Worst Quarter: , down %
<TABLE>
<CAPTION>
As of December 31, 1998
Average Annual Total Return 1 Year 5 Years Since Inception Inception Date
<S> <C> <C> <C> <C>
Class A (%)*
Class B (%)*
Class C (%)*
Lehman Brothers Intermediate
Government Index**
</TABLE>
- -------------
*On February 2, 1998, the Fund redesignated Adviser Class shares as Class A
Shares. The Fund introduced Class C shares and Class B shares on June 30, 1998,
and March 1, 1999, respectively. For periods prior to the Class A inception
date, Class A performance is calculated using the performance of Class I shares,
and deducting the Class A front-end sales charge and the internal fees and
expenses of the Adviser Class shares. For periods prior to the Class B and Class
C inception dates, Class B and Class C performance is calculated using the
performance of Class I shares, and deducting the internal fees and expenses of
the Class B or Class C shares, respectively. Class B and Class C share returns
for certain periods (six years and shorter for Class B; one year for Class C)
reflect the deduction of the applicable contingent deferred sales charge (CDSC)
as described under "Opening an Account and Selecting a Share Class." The returns
for periods without a front-end sales charge or CDSC are net of fund expenses
only, and do not deduct the sales load or CDSC.
**The Lehman Brothers Intermediate Government Bond Index, an unmanaged index,
includes those bonds found in the Lehman Brothers Government Bond Index that
have a maturity of one to 9.99 years.
14
<PAGE>
AETNA HIGH YIELD FUND
(HIGH YIELD)
Fundamental Objective Seeks high current income and growth of capital primarily
through investment in a diversified portfolio of fixed-income securities rated
lower than BBB- by S&P or lower than Baa3 by Moody's.
Principal Investment Strategies Under normal market conditions, High Yield
invests at least 65% of its total assets in high-yield bonds. High-yield bonds
are bonds rated below investment grade in terms of quality, and may include
bonds of companies in default or bankruptcy.
In managing High Yield, Aeltus:
[bullet] Looks to meet the Fund's objective and reduce volatility by
constructing a diversified portfolio consisting of securities with
varying maturities and credit ratings. Aeltus, however, attempts to
look beyond credit ratings to select investments that it believes
offer opportunities for high income, growth and credit improvement.
[bullet] Uses a quantitative process for evaluating the financial criteria of
issuers, such as cash flow.
[bullet] Evaluates other, less quantitative factors, such as market share,
strength of management and management's equity stake in the company.
Principal Risks When the economy weakens, cash flows weaken, making it more
difficult for issuers to pay principal and interest. For all bonds, there is a
risk that an issuer will default. High-yield bonds, however, are more
susceptible to the risk of default and their prices usually will fall if a
number of other issuers default or go bankrupt or if the market anticipates
either of those events.
Additional risks include:
[bullet] The performance of High Yield may be affected by weak equity markets,
when issuers of high-yield bonds generally find it difficult to reduce
debt by replacing debt with equity.
[bullet] Because many high-yield securities are traded only among institutional
investors, it may be difficult for Aeltus to sell the Fund's portfolio
investments at fair prices when high-yield bonds fall out of favor
with those investors.
[bullet] Generally, when interest rates rise, bond prices fall, which may cause
the value of the Fund's portfolio securities to fall as well.
- --------------------------------------------------------------------------------
AETNA MONEY MARKET FUND
(MONEY MARKET)
Fundamental Objective Seeks to provide high current return, consistent with
preservation of capital and liquidity, through investment in high-quality money
market instruments.
Principal Investment Strategies Money Market is managed in accordance with
Securities and Exchange Commission rules that are designed to ensure that money
market funds maintain a stable $1.00 share price. Money Market invests only in a
diversified portfolio of high-quality fixed income securities denominated in
U.S. dollars, with short remaining maturities. These securities include U.S.
Government securities, such as U.S. Treasury bills and securities issued or
sponsored by U.S. government agencies. They also may include corporate debt
securities, finance company commercial paper, asset-backed securities and
certain obligations of U.S. and foreign banks, each of which must be highly
rated by independent rating agencies. Money Market maintains a dollar-weighted
average portfolio maturity of not more than 90 days.
Principal Risks Although Money Market seeks to preserve the value of your
investment at $1.00 per share, it is possible to lose money by investing in
Money Market. An investment in Money Market is not insured or guaranteed by the
FDIC or any other government agency. A weak economy, strong equity markets and
changes by the Federal Reserve in its monetary policies all could affect
short-term interest rates and therefore the yield of Money Market's shares.
15
<PAGE>
AETNA MONEY MARKET FUND VOLATILITY And PERFORMANCE
[TABULAR REPRESENTATION OF CHART]
<TABLE>
<CAPTION>
Years Ended December 31,
Year-by-Year Total Return (Class A) 1995 1996 1997 1998
<S> <C> <C> <C> <C>
</TABLE>
[triangle pointing up] Best Quarter: , up %
[triangle pointing down] Worst Quarter: , down %
<TABLE>
<CAPTION>
As of December 31, 1998
Average Annual Total Return 1 Year 5 Years Since Inception Inception Date
<S> <C> <C> <C> <C>
Class A (%)*
Class B (%)*
Class C (%)*
IBC Index**
</TABLE>
- -------------
*On February 2, 1998, the Fund redesignated Adviser Class shares as Class A
Shares. The Fund introduced Class C shares and Class B shares on June 30, 1998,
and March 1, 1999, respectively. For periods prior to the Class A inception
date, Class A performance is calculated using the performance of Class I shares,
and deducting the internal fees and expenses of the Adviser Class shares. For
periods prior to the Class C inception date, Class C performance is calculated
using the performance of Class I shares. For periods prior to the Class B
inception date, Class B performance is calculated using the performance of Class
I shares, and deducting the internal fees and expenses of the Class B shares.
Class B share returns for certain periods (six years and shorter) reflect the
deduction of the applicable contingent deferred sales charge (CDSC) as described
under "Opening an Account and Selecting a Share Class." The returns for periods
without a CDSC are net of fund expenses only, and do not deduct the CDSC.
**IBC's Money Funds Report Average/All Taxable Index (IBC) is an average of the
returns of over 250 money market mutual funds surveyed each month by IBC.
To obtain current yield information, please contact 1-800-____-____.
16
<PAGE>
- --------------------------------------------------------------------------------
INDEX PLUS Funds
- --------------------------------------------------------------------------------
AETNA INDEX PLUS BOND FUND
(INDEX PLUS BOND)
Fundamental Objective Seeks maximum total return, consistent with preservation
of capital, primarily through investment in a diversified portfolio of
fixed-income securities, which will be chosen to substantially replicate the
characteristics of the Lehman Brothers Aggregate Bond Index (LBAB), an unmanaged
index comprised of approximately 6,900 securities.
Principal Investment Strategies Under normal market conditions, Index Plus Bond
invests at least 90% of its total assets in bonds, including U.S. Treasuries,
corporate bonds and mortgage-related securities.
In managing Index Plus Bond, Aeltus:
[bullet] Attempts to achieve a total return which, before deducting fund
expenses, exceeds the LBAB.
[bullet] Allocates assets among various sectors as well as individual
securities that it believes will outperform those in the LBAB, and
underweighting certain other sectors or securities it believes will
underperform.
[bullet] In determining which bonds to purchase, evaluates various criteria,
such as the financial strength of the issuer and the issuer's
potential for strong, sustained earnings growth as well as the
potential for interest rates to rise or fall.
Aeltus expects that there will be a close correlation between the performance of
Index Plus Bond and that of the LBAB in both rising and falling markets.
Inclusion of a bond in the LBAB in no way implies an opinion by Lehman Brothers
as to the bond's attractiveness as an investment. Index Plus Bond is neither
sponsored by nor affiliated with Lehman Brothers.
Principal Risks The principal risks of investing in Index Plus Bond are those
generally attributable to bond investing. Generally, when interest rates rise,
bond prices fall. Bonds with longer maturities tend to be more sensitive to
changes in interest rates. For all bonds there is a risk that an issuer will
default.
The prices of mortgage-related securities, in addition to being sensitive to
changes in interest rates, also are sensitive to changes in the prepayment
patterns on the underlying securities. If the principal on the underlying
mortgage notes is repaid faster than anticipated, which typically occurs in
times of low or declining interest rates, the price of the mortgage-related
security may fall.
The success of the Fund's strategy depends significantly on Aeltus' skill in
choosing investments, and in determining which sectors or securities it
overweights, underweights or avoids altogether.
- --------------------------------------------------------------------------------
AETNA INDEX PLUS LARGE CAP FUND
(INDEX PLUS LARGE CAP)
Fundamental Objective Seeks to outperform the total return performance of the
Standard & Poor's 500 Composite Index (S&P 500), while maintaining a market
level of risk.
Principal Investment Strategies Under normal market conditions, Index Plus Large
Cap invests at least 80% of its net assets in stocks included in the S&P 500
(other than Aetna Inc. common stock). 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 & Poor's Corporation.
In managing Index Plus Large Cap, Aeltus attempts to achieve its objective by
overweighting those stocks in the S&P 500 that it believes will outperform the
index, and underweighting (or avoiding altogether) those stocks that Aeltus
believes will underperform the index. In determining which stocks to 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 growth of earnings. At any one time, Aeltus
generally includes in the Index Plus Large Cap portfolio approximately 400
stocks included in the S&P 500. Aeltus expects that there will be a close
correlation between the performance of Index Plus Large Cap and that of the S&P
500 in both rising and falling markets.
Inclusion of a stock in the S&P 500 in no way implies an opinion by S&P as to
the stock's attractiveness as an investment. Index Plus Large Cap is neither
sponsored by nor affiliated with S&P.
Principal Risks The principal risks of investing in Index Plus Large Cap are
those generally attributable to stock investing. These risks include the sudden
and unpredictable drop in value of the market as a whole and periods of
lackluster or negative performance. The success of the Fund's strategy depends
significantly on Aeltus' skill in determining which securities it overweights,
underweights or avoids altogether.
17
<PAGE>
AETNA INDEX PLUS LARGE CAP FUND VOLATILITY And PERFORMANCE
[TABULAR REPRESENTATION OF CHART]
<TABLE>
<CAPTION>
Years Ended December 31,
Year-by-Year Total Return (Class A) 1998
<S> <C>
</TABLE>
[triangle pointing up] Best Quarter: , up %
[triangle pointing down] Worst Quarter: , down %
<TABLE>
<CAPTION>
As of December 31, 1998
Average Annual Total Return 1 Year Since Inception Inception Date
<S> <C> <C> <C>
Class A (%)*
Class B (%)*
Class C (%)*
S & P 500 Index**
</TABLE>
- -------------
*On February 2, 1998, the Fund redesignated Adviser Class shares as Class A
Shares. The Fund introduced Class C shares and Class B shares on June 30, 1998,
and March 1, 1999, respectively. For periods prior to the Class A inception
date, Class A performance is calculated using the performance of Class I shares,
and deducting the Class A front-end sales charge and the internal fees and
expenses of the Adviser Class shares. For periods prior to the Class B and Class
C inception dates, Class B and Class C performance is calculated using the
performance of Class I shares, and deducting the internal fees and expenses of
the Class B or Class C shares, respectively. Class B and Class C share returns
for certain periods (six years and shorter for Class B; one year for Class C)
reflect the deduction of the applicable contingent deferred sales charge (CDSC)
as described under "Opening an Account and Selecting a Share Class." The returns
for periods without a front-end sales charge or CDSC are net of fund expenses
only, and do not deduct the sales load or CDSC.
**The Standard & Poor's 500 Index is a value-weighted, unmanaged index of 500
widely held stocks that assumes the reinvestment of all dividends, and is
considered to be representative of the stock market in general.
18
<PAGE>
AETNA INDEX PLUS MID CAP FUND
(INDEX PLUS MID CAP)
Fundamental Objective Seeks to outperform the total return performance of the
Standard & Poor's MidCap 400 Index (S&P 400), while maintaining a market level
of risk.
Principal Investment Strategies Under normal market conditions, Index Plus Mid
Cap invests at least 80% of its net assets in stocks included in the S&P 400.
The S&P 400 is a stock market index comprised of common stocks of 400
mid-capitalization companies in the U.S. selected by Standard & Poor's
Corporation.
In managing Index Plus Mid Cap, Aeltus attempts to achieve its objective by
overweighting those stocks in the S&P 400 that Aeltus believes will outperform
the index, and underweighting (or avoiding altogether) those stocks that Aeltus
believes will underperform the index. In determining which stocks to weight more
or less heavily, Aeltus uses internally developed quantitative computer models
to evaluate various criteria, such as the financial strength of each issuer and
its potential for strong, sustained growth of earnings. Aeltus expects that
there will be a close correlation between the performance of Index Plus Mid Cap
and that of the S&P 400 in both rising and falling markets.
Inclusion of a stock in the S&P 400 in no way implies an opinion by S&P as to
the stock's attractiveness as an investment. Index Plus Mid Cap is neither
sponsored by nor affiliated with S&P.
Principal Risks The principal risks of investing in Index Plus Mid Cap are those
generally attributable to stock investing. These risks include the sudden and
unpredictable drop in value of the market as a whole and periods of lackluster
or negative performance. In addition, stocks of medium sized companies tend to
be more volatile and less liquid than stocks of larger companies. The success of
the Fund's strategy depends significantly on Aeltus' skill in determining which
securities it overweights, underweights or avoids altogether.
- --------------------------------------------------------------------------------
AETNA INDEX PLUS SMALL CAP FUND
(INDEX PLUS SMALL CAP)
Fundamental Objective Seeks to outperform the total return performance of the
Standard & Poor's SmallCap 600 (S&P 600), while maintaining a market level of
risk.
Principal Investment Strategies Under normal market conditions, Index Plus Small
Cap invests at least 80% of its net assets in stocks included in the S&P 600.
The S&P 600 is a stock market index comprised of common stock of 600
small-capitalization companies in the U.S. selected by Standard & Poor's
Corporation.
In managing Index Plus Small Cap, Aeltus attempts to achieve its objective by
overweighting those stocks in the S&P 600 that Aeltus believes will outperform
the index, and underweighting (or avoiding altogether) those stocks that Aeltus
believes will underperform the index. In determining which stocks to weight more
or less heavily, Aeltus uses internally developed quantitative computer models
to evaluate various criteria, such as the financial strength of each issuer and
its potential for strong, sustained growth of earnings. Aeltus expects that
there will be a close correlation between the performance of Index Plus Small
Cap and that of the S&P 600 in both rising and falling markets.
Inclusion of a stock in the S&P 600 in no way implies an opinion by S&P as to
the stock's attractiveness as an investment. Index Plus Small Cap is neither
sponsored by nor affiliated with S&P.
Principal Risks The principal risks of investing in Index Plus Small Cap are
those generally attributable to stock investing. These risks include the sudden
and unpredictable drop in value of the market as a whole and periods of
lackluster or negative performance. The success of the Fund's strategy depends
significantly on Aeltus' skill in determining which securities it overweights,
underweights or avoids altogether.
Other risks include:
[bullet] Stocks of smaller companies carry higher risks than stocks of larger
companies because smaller companies may lack the management
experience, financial resources, product diversification and
competitive strengths of larger companies.
[bullet] In many instances, the frequency and volume of trading in these stocks
is substantially less than is typical of stocks of larger companies.
As a result, the stocks of smaller companies may be subject to wider
price fluctuations.
[bullet] When making large sales, the Fund may have to sell portfolio holdings
at discounts from quoted prices or may have to make a series of small
sales over an extended period of time due to the trading volume of
smaller company stocks.
[bullet] Stocks of smaller companies tend to be more volatile than stocks of
larger companies and can be particularly sensitive to expected changes
in interest rates, borrowing costs and earnings.
19
<PAGE>
- --------------------------------------------------------------------------------
GENERATION Funds
- --------------------------------------------------------------------------------
AETNA ASCENT FUND
(ASCENT)
AETNA CROSSROADS FUND
(CROSSROADS)
AETNA LEGACY FUND
(LEGACY)
Fundamental Objectives Ascent seeks to provide capital appreciation.
Crossroads seeks to provide total return (i.e., income and capital appreciation,
both realized and unrealized).
Legacy seeks to provide total return consistent with preservation of capital.
Principal Investment Strategies Ascent, Crossroads and Legacy are asset
allocation funds that have been designed for investors with different investment
objectives:
[bullet] Ascent is managed for investors seeking capital appreciation who
generally have an investment horizon exceeding 15 years and who have a
high level of risk tolerance.
[bullet] Crossroads is managed for investors seeking a balance between income
and capital appreciation who generally have an investment horizon
exceeding 10 years and who have a moderate level of risk tolerance.
[bullet] Legacy is managed for investors primarily seeking total return
consistent with capital preservation, who generally have an investment
horizon exceeding 5 years and who have a low level of risk tolerance.
Under normal market conditions, Aeltus allocates the assets of each Generation
Fund, in varying degrees, among several classes of equities, fixed-income
securities, and money market instruments. To remain consistent with each
Generation Fund's investment objective and intended level of risk tolerance,
Aeltus has instituted both a benchmark percentage allocation and a Fund level
range allocation for each asset class. The benchmark percentage for each asset
class assumes neutral market and economic conditions. The Fund level range
allows Aeltus to vary the securities in each Fund and take advantage of
opportunities as market and economic conditions change. Aeltus does not attempt
to respond to short-term swings in the market by quickly changing the
characteristics of the Generation Funds' portfolios.
The Generation Funds' benchmarks and ranges are described on the following page.
The asset allocation limits apply at the time of purchase of a particular
security.
Each Generation Fund's allocation among assets may vary from the benchmark
allocation (within the permissible range) based on Aeltus' ongoing evaluation of
the expected returns and risks of each asset class relative to other classes.
Among the criteria Aeltus evaluates to determine allocations are economic and
market conditions, including changes in circumstances with respect to particular
asset classes, geographic regions, industries or issuers, and interest rate
movements. In selecting individual portfolio securities, Aeltus considers such
factors as:
[bullet] Expected dividends and returns.
[bullet] Bond yields.
[bullet] Price-to-earnings ratios.
[bullet] Dividend yields.
Each Generation Fund may invest up to 15% of its total assets in high-yield
bonds.
20
<PAGE>
Asset Class
<TABLE>
<CAPTION>
Ascent Crossroads(1) Legacy(2) Comparative Index
- ---------------------------------------------------------------------------------------------------------------------------
Equities
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Large Capitalization Stocks
Range 0-60% 0-45% 0-30% S&P 500 Index
Benchmark 20% 15% 10%
Small-/Mid-Capitalization Stocks
Range 0-40% 0-30% 0-20% Russell 2500 Index
Benchmark 20% 15% 10%
International Stocks Morgan Stanley Capital
Range 0-40% 0-30% 0-20% International Europe,
Benchmark 20% 15% 10% Australia and Far East Index
Real Estate Stocks National Association of
Range 0-40% 0-30% 0-20% Real Estate Investment Trusts
Benchmark 20% 15% 10% Equity Index
- ---------------------------------------------------------------------------------------------------------------------------
Fixed Income
- ---------------------------------------------------------------------------------------------------------------------------
U.S. Dollar Bonds
Range 0-40% 0-70% 0-100% Salomon Brothers Broad
Benchmark 10% 25% 40% Investment Grade Index
International Bonds
Range 0-20% 0-20% 0-20% Salomon Brothers Non-U.S.
Benchmark 10% 10% 10% World Government Bond Index
- ---------------------------------------------------------------------------------------------------------------------------
Money Market Instruments
- ---------------------------------------------------------------------------------------------------------------------------
Range 0-30% 0-30% 0-30% 91-Day U.S. Treasury Bill Rate
Benchmark 0% 5% 10%
</TABLE>
- ----------------
(1) Crossroads will invest no more than 60% of its assets in any combination of
the following asset classes: small-/mid-capitalization stocks, high-yield bonds,
international stocks and international fixed-income securities.
(2) Legacy will invest no more than 35% of its assets in any combination of the
following asset classes: small-/mid-capitalization stocks, high-yield bonds,
international stocks and international fixed-income securities.
21
<PAGE>
Principal Risks The principal risks of investing in each Generation Fund
are those generally attributable to stock and bond investing. The success of
each Generation Fund's strategy depends significantly on Aeltus' skill in
choosing investments and in allocating assets among the different investment
classes.
For stock investments, those risks include the sudden and unpredictable drop in
value of the market as a whole and periods of lackluster or negative
performance. Stocks of smaller companies tend to be less liquid and more
volatile than stocks of larger companies, and can be particularly sensitive to
expected changes in interest rates, borrowing costs and earnings.
The risks associated with real estate securities include periodic declines in
the value of real estate, generally, or in the rents and other income generated
by real estate caused by such factors as periodic over-building.
For bonds, generally, when interest rates rise, bond prices fall. Also, economic
and market conditions may cause issuers to default or go bankrupt. The value of
high-yield bonds are even more sensitive to economic and market conditions than
other bonds.
The prices of mortgage-related securities, in addition to being sensitive to
changes in interest rates, also are sensitive to changes in the prepayment
patterns on the underlying securities. If the principal on the underlying
mortgage notes is repaid faster than anticipated, which typically occurs in
times of low or declining interest rates, the price of the mortgage-related
security may fall.
Foreign securities present additional risks. Foreign securities tend to be less
liquid and more volatile than their U.S. counterparts, and fluctuations in
exchange rates may reduce or eliminate gains or create losses. These risks are
usually higher for securities of companies in emerging markets.
22
<PAGE>
AETNA ASCENT FUND VOLATILITY And PERFORMANCE
[TABULAR REPRESENTATION OF CHART]
<TABLE>
<CAPTION>
Years Ended December 31,
Year-by-Year Total Return (Class A) 1998
<S> <C>
</TABLE>
[triangle pointing up] Best Quarter: , up %
[triangle pointing down] Worst Quarter: , down %
<TABLE>
<CAPTION>
As of December 31, 1998
Average Annual Total Return 1 Year Since Inception Inception Date
<S> <C> <C> <C>
Class A (%)*
Class B (%)*
Class C (%)*
Ascent Composite**
</TABLE>
AETNA CROSSROADS FUND VOLATILITY And PERFORMANCE
[TABULAR REPRESENTATION OF CHART]
<TABLE>
<CAPTION>
Years Ended December 31,
Year-by-Year Total Return (Class A) 1998
<S> <C>
</TABLE>
[triangle pointing up] Best Quarter: , up %
[triangle pointing down] Worst Quarter: , down %
<TABLE>
<CAPTION>
As of December 31, 1998
Average Annual Total Return 1 Year Since Inception Inception Date
<S> <C> <C> <C>
Class A (%)*
Class B (%)*
Class C (%)*
Crossroads Composite**
</TABLE>
23
<PAGE>
AETNA LEGACY FUND VOLATILITY And PERFORMANCE
[TABULAR REPRESENTATION OF CHART]
<TABLE>
<CAPTION>
Years Ended December 31,
Year-by-Year Total Return (Class A) 1998
<S> <C>
</TABLE>
[triangle pointing up] Best Quarter: , up %
[triangle pointing down] Worst Quarter: , down %
<TABLE>
<CAPTION>
As of December 31, 1998
Average Annual Total Return 1 Year Since Inception Inception Date
<S> <C> <C> <C>
Class A (%)*
Class B (%)*
Class C (%)*
Legacy Composite**
</TABLE>
- -------------
*On February 2, 1998, Ascent, Crossroads and Legacy redesignated Adviser Class
shares as Class A Shares. Each Fund introduced Class C shares and Class B shares
on June 30, 1998, and March 1, 1999, respectively. For periods prior to the
Class A inception date, Class A performance is calculated using the performance
of Class I shares, and deducting the Class A front-end sales charge and the
internal fees and expenses of the Adviser Class shares. For periods prior to the
Class B and Class C inception dates, Class B and Class C performance is
calculated using the performance of Class I shares, and deducting the internal
fees and expenses of the Class B or Class C shares, respectively. Class B and
Class C share returns for certain periods (six years and shorter for Class B;
one year for Class C) reflect the deduction of the applicable contingent
deferred sales charge (CDSC) as described under "Opening an Account and
Selecting a Share Class." The returns for periods without a front-end sales
charge or CDSC are net of fund expenses only, and do not deduct the sales load
or CDSC.
**The Ascent Composite, Crossroads Composite and Legacy Composite are each
comprised of the seven stock and bond indices listed below in weights that
correspond to the particular benchmark weights for each Fund.
Asset Class Benchmark Index
- --------------------------------------------------------------------------------
Large Cap Stocks The Standard & Poor's 500 Index is a
value-weighted, unmanaged index of 500 widely held
stocks that assumes the reinvestment of all
dividends, and is considered to be representative
of the stock market in general.
Small-/Mid-Cap Stocks The Russell 2500 Index consists of the smallest
500 securities in the Russell 1000 Index and all
2,000 securities in the Russell 2000 Index, and
represents approximately 23% of the Russell 3000
total market capitalization. Each of these indices
assumes reinvestment of all dividends and is
unmanaged.
International Stocks The Morgan Stanley Capital International-Europe,
Australia, Far East Index is an unmanaged, market
value-weighted average of the performance of more
than 900 securities listed on the stock exchange
of countries in Europe, Australia and the Far
East.
Real Estate Stocks The National Association of Real Estate Investment
Trusts Equity Index is an unmanaged,
market-weighted average of the performance for
tax-qualified real estate investment trusts listed
on the New York Stock Exchange, American Stock
Exchange and the NASDAQ National Market System.
U.S. Dollar Bonds Salomon Brothers Broad Investment-Grade Bond Index
is an unmanaged, market-weighted index that
contains approximately 4,700 individually priced
investment-grade bonds rated BBB or better. The
index includes U.S. Treasury/Agency issues,
mortgage pass-through securities and corporate
issues.
International Bonds The Salomon Brothers Non-U.S. World Government
Bond Index serves as an unmanaged benchmark to
evaluate the performance of government bonds with
a maturity of one year or greater in the following
12 countries: Japan, United Kingdom; Germany;
France; Canada; the Netherlands; Australia;
Denmark, Italy, Belgium, Spain and Sweden.
Cash Equivalents Three-month Treasury bills are government-backed
short-term investments considered to be risk-free,
and equivalent to cash because their maturity is
only three months.
24
<PAGE>
Other Investment Strategies and Risks
In addition to the principal investments and strategies described on the
previous pages, the Funds 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).
Derivatives Each Fund (except Money Market) may use derivatives, which are
financial instruments whose value derives from another security, an interest
rate, an index or a currency. The Funds primarily use futures contracts, put
options and call options that hedge against price fluctuations or increase the
Funds' exposure to a particular asset class. To a limited extent, the Funds also
may use derivatives for speculation (investing for potential income or capital
gain). Finally, certain Funds may use currency-based derivatives for hedging
positions in foreign securities.
[bullet] Futures contracts are agreements that obligate the buyer to buy and
the seller to sell a specific quantity of securities at a specific
price on a specific date.
[bullet] Options are agreements that for a fee or premium, give the holder the
right, but not the obligation, to purchase or sell a certain amount of
securities during a specified period or on a specified date.
While hedging can guard against potential risks, it adds to the Fund's expenses
and may reduce or eliminate potential gains. There is also a risk that a
derivative intended as a hedge may not perform as expected. The main risk with
derivatives is that some types can amplify a gain or loss, potentially earning
or losing substantially more money than the actual cost of the derivative.
With some derivatives, whether used for hedging or speculation, there is also
the risk that the counterparty may fail to honor its contract terms, causing a
loss for the Fund.
Defensive Investing In response to unfavorable market conditions, each Fund may
make temporary investments that are not consistent with its principal investment
objectives and policies.
Year 2000 Aetna Inc. (on behalf of all of its subsidiaries and affiliates) has
developed and is currently executing a plan to make its computer systems and
applications accommodate date-sensitive information relating to the Year 2000.
The plan covers four stages including:
[bullet] Inventory.
[bullet] Assessment.
[bullet] Remediation.
[bullet] Testing and certification.
Aetna Inc. is now in the testing and certification stages of its plan for the
systems and applications related to the Funds, including those relating to
Aeltus. Testing and certification of these systems is targeted for completion by
mid-1999. The costs of these efforts will not affect the Funds.
Aeltus and the Funds also have relationships with broker dealers, transfer
agents, custodians and other securities industry participants and service
providers that are not affiliated with Aetna Inc. Aetna Inc. is currently
examining its relationships with third parties as part of its Year 2000 plan.
Aeltus believes that United States securities industry participants generally
are preparing their computer systems and applications to accommodate information
that is Year 2000 date-sensitive. Preparation by third parties, however, is
outside Aetna Inc.'s, Aeltus' and the Funds' control. Failure of third parties
to complete adequate, timely preparations, and any resulting systems
interruptions or other consequences, could have an adverse effect, directly or
indirectly, on the Funds, including, without limitation, its operation or the
valuation of its assets.
Risks of Conversion to Euro On January 1, 1999, 11 of the countries in the
European Monetary Union adopted the Euro as their official currency. However,
their original currencies (for example, the franc, the mark and the lire) will
continue in use for cash transactions until January 1, 2002. After that date, it
is expected that only the Euro will be used in those countries. Although a
common currency is expected to confer some benefits in those markets, the
conversion to the new currency will affect the Funds operationally and also has
some special risks. Among other things, the conversion will affect:
[bullet] Issuers in which the Funds invest, because of changes in the
competitive environment from a consolidated currency market, and
greater operational costs from converting to the new currency. This
could depress the value of their stock.
[bullet] The vendors the Funds depend on to carry out their business, such as
custodians (which hold the foreign securities the Funds buy), the
Adviser (which must price the Funds' investments to deal with the
conversion to the Euro) and brokers, foreign markets and securities
depositories. If they are not prepared, there could be delays in
settlements and additional costs to the Funds.
Aeltus is upgrading (at its expense) its computer and bookkeeping systems to
deal with the conversion. The Funds' custodians have advised Aeltus of their
plans to deal with the conversion, including how they will update their record
keeping systems and handle the redenomination of outstanding foreign debt. Each
Fund's portfolio manager also will monitor the effects of the conversion on the
issuers in which the Fund invests. The possible effect of these factors on the
Funds' investments cannot be determined with certainty at this time, but they
may reduce the value of some of the Funds' holdings and increase their
operational costs.
Portfolio Turnover Portfolio turnover refers to the frequency of portfolio
transactions and the percentage of portfolio assets being bought and sold during
the year. For the fiscal year ended October 31, 1998, Growth, International,
Small Company, Growth and Income, Government and High Yield Fund each had a
portfolio turnover rate in excess of 150%. A high portfolio turnover rate
increases a Fund's transaction costs and may increase your tax liability.
25
<PAGE>
SHAREHOLDER FEES AND FUND EXPENSES
The following tables describe the fees that you may pay if you buy and hold
shares of the Funds. Shareholder Fees are paid directly by shareholders.
Annual Fund Operating Expenses are deducted from Fund assets every year, and
are thus paid indirectly by all Fund investors.
<TABLE>
<CAPTION>
Class A Shares Class B Shares Class C Shares
Shareholder Fees (1) Shareholder Fees (1) Shareholder Fees (1)
- ------------------------------------------------------------------------------------------------------------------------------------
Maximum Maximum Maximum Maximum Maximum Maximum
Sales Deferred Sales Sales Charge Deferred Sales Sales Charge Deferred Sales
Charge (Load) Charge (Load) (Load) on Charge (Load) (Load) on Charge (Load)
on Purchases (as a percentage Purchases (as (as a percentage Purchases (as (as a percentage
(as a percentage of gross a percentage of gross a percentage of gross
of purchase redemption of purchase redemption of purchase redemption
price) proceeds)(2) price) proceeds)(3) price) proceeds)
<S> <C> <C> <C> <C> <C> <C>
Growth 5.75% None None 5.00% None 1.00%
International 5.75% None None 5.00% None 1.00%
Mid Cap 5.75% None None 5.00% None 1.00%
Small Company 5.75% None None 5.00% None 1.00%
Value Opportunity 5.75% None None 5.00% None 1.00%
- ------------------------------------------------------------------------------------------------------------------------------------
Balanced 5.75% None None 5.00% None 1.00%
Growth and Income 5.75% None None 5.00% None 1.00%
Real Estate 5.75% None None 5.00% None 1.00%
- ------------------------------------------------------------------------------------------------------------------------------------
Bond Fund 4.75% None None 5.00% None 1.00%
Aetna Government Fund 4.75% None None 5.00% None 1.00%
High Yield 4.75% None None 5.00% None 1.00%
Money Market None None None 5.00% None None
- ------------------------------------------------------------------------------------------------------------------------------------
Index Plus Bond 3.00% None None 5.00% None 0.75%
Index Plus Large Cap 3.00% None None 5.00% None 0.75%
Index Plus Mid Cap 3.00% None None 5.00% None 0.75%
Index Plus Small Cap 3.00% None None 5.00% None 0.75%
- ------------------------------------------------------------------------------------------------------------------------------------
Ascent 5.75% None None 5.00% None 1.00%
Crossroads 5.75% None None 5.00% None 1.00%
Legacy 5.75% None None 5.00% None 1.00%
</TABLE>
(1) The Funds do not impose any sales charge (load) on reinvested dividends or
exchanges.
(2) Currently, a CDSC of up to 1.00% is assessed only on certain redemptions of
Class A shares that were purchased without a front-end sales charge.
(3) The Funds charge a CDSC of 5.0% on shares redeemed in the first year,
declining to 1.00% on shares redeemed in the sixth year. No CDSC is charged
thereafter.
26
<PAGE>
Class A Shares
Annual Fund Operating Expenses(1)
(as a percentage of average daily net assets)
<TABLE>
<CAPTION>
Distribution Total Fee Waiver/
Management (12b-1) Operating Expense
Fee Fee Other Expenses Expenses Reimbursement Net Expenses
<S> <C> <C> <C> <C> <C> <C>
Growth % % % % % %
International % % % % % %
Mid Cap % % % % % %
Small Company % % % % % %
Value Opportunity % % % % % %
- -----------------------------------------------------------------------------------------------------------------------------------
Balanced % % % % % %
Growth and Income % % % % % %
Real Estate % % % % % %
- -----------------------------------------------------------------------------------------------------------------------------------
Bond Fund % % % % % %
Aetna Government Fund % % % % % %
High Yield % % % % % %
Money Market % % % % % %
- -----------------------------------------------------------------------------------------------------------------------------------
Index Plus Bond % % % % % %
Index Plus Large Cap % % % % % %
Index Plus Mid Cap % % % % % %
Index Plus Small Cap % % % % % %
- -----------------------------------------------------------------------------------------------------------------------------------
Ascent % % % % % %
Crossroads % % % % % %
Legacy % % % % % %
</TABLE>
(1) Aeltus is contractually obligated through October 31, 1999 to waive all or a
portion of its investment advisory fee and/or its administrative services fee
for certain Funds and/or to reimburse a portion of those Funds' other expenses
in order to ensure that the Fund's total operating expenses do not exceed the
percentage of the Fund's average daily net assets reflected in the table under
Net Expenses. Fee waiver/expense reimbursement obligations apply to each Fund
except Growth, Balanced, and Growth and Income. An administrative services fee
of 0.10% is included in Other Expenses.
The expenses shown are based on the year ended October 31, 1998, and have been
restated to reflect changes in certain contractual arrangements. Previously,
Class A shares (formerly Adviser Class shares) were assessed an administrative
services fee of 0.25%, a distribution (12b-1) fee of 0.50% (0.00% for Money
Market) and a shareholder services (12b-1) fee of 0.25% (0.10% for Money
Market). As of January 1, 1998, the shareholder services fee for this class of
shares was eliminated.
27
<PAGE>
CLASS A SHARES EXAMPLE
The following example is designed to help you compare the costs of investing in
the Funds with the costs of investing in other mutual funds. Using the annual
fund operating expenses percentages above, you would pay the following expenses
on a $10,000 investment, assuming a 5% annual return and redemption at the end
of each of the periods shown:
<TABLE>
<CAPTION>
1 Year* 3 Years* 5 Years* 10 Years*
<S> <C> <C> <C> <C>
Growth $ $ $ $
International
Mid Cap
Small Company
Value Opportunity
- --------------------------------------------------------------------------------------------------------------------
Balanced
Growth and Income
Real Estate
- --------------------------------------------------------------------------------------------------------------------
Bond Fund
Aetna Government Fund
High Yield
Money Market
- --------------------------------------------------------------------------------------------------------------------
Index Plus Bond
Index Plus Large Cap
Index Plus Mid Cap
Index Plus Small Cap
- --------------------------------------------------------------------------------------------------------------------
Ascent
Crossroads
Legacy
</TABLE>
*1 year figures reflect Aeltus' contractual obligation to waive fees and/or
reimburse expenses through October 31, 1999. 3, 5 and 10 year figures are based
on total operating expenses without taking into account any fee waivers or
expense reimbursements.
This example should not be considered an indication of prior or future expenses.
Actual expenses for the current year may be greater or less than those shown.
Long-term shareholders (except for Money Market shareholders) may pay more than
the economic equivalent of the maximum sales charge permitted by the National
Association of Securities Dealers, Inc. (NASD), because of the combination of
front-end sales charges and distribution (12b-1) fees. Registered
representatives may receive different levels of compensation depending on the
class sold. Additional information regarding the classes may be obtained by
calling your investment professional.
28
<PAGE>
Class B Shares
Annual Fund Operating Expenses(1)
(as a percentage of average daily net assets)
<TABLE>
<CAPTION>
Distribution and Total Fee Waiver/
Management Service (12b-1) Operating Expense
Fee Fees Other Expenses Expenses Reimbursement Net Expenses
<S> <C> <C> <C> <C> <C> <C>
Growth % % % % % %
International % % % % % %
Mid Cap % % % % % %
Small Company % % % % % %
Value Opportunity % % % % % %
- ---------------------------------------------------------------------------------------------------------------------------------
Balanced % % % % % %
Growth and Income % % % % % %
Real Estate % % % % % %
- ---------------------------------------------------------------------------------------------------------------------------------
Bond Fund % % % % % %
Aetna Government Fund % % % % % %
High Yield % % % % % %
Money Market % % % % % %
- ---------------------------------------------------------------------------------------------------------------------------------
Index Plus Bond % % % % % %
Index Plus Large Cap % % % % % %
Index Plus Mid Cap % % % % % %
Index Plus Small Cap % % % % % %
- ---------------------------------------------------------------------------------------------------------------------------------
Ascent % % % % % %
Crossroads % % % % % %
Legacy % % % % % %
</TABLE>
(1) Aeltus is contractually obligated through October 31, 1999 to waive all or a
portion of its investment advisory fee and/or its administrative services fee
for certain Funds and/or to reimburse a portion of those Funds' other expenses
in order to ensure that the Fund's total operating expenses do not exceed the
percentage of the Fund's average daily net assets reflected in the table under
Net Expenses. Fee waiver/expense reimbursement obligations apply to each Fund
except Growth, Balanced, and Growth and Income. An administrative services fee
of 0.10% is included in Other Expenses.
Because Class B shares are new, the expenses shown above are based on expenses
incurred by Class A shareholders for the year ended October 31, 1998, adjusted
for changes in certain contractual arrangements, and differences in Class B
expenses. Previously, Class A shares (formerly Adviser Class shares) were
assessed an administrative services fee of 0.25%. Class B shareholders are
charged a higher distribution (12b-1) fee and are charged a shareholder services
(12b-1) fee of 0.25%.
29
<PAGE>
CLASS B SHARES EXAMPLE
The following example is designed to help compare the costs of investing in the
Funds with the costs of investing in other mutual funds. Using the annual fund
operating expenses percentages above, you would pay the following expenses on a
$10,000 investment, assuming a 5% annual return and redemption at the end of
each of the periods shown:
<TABLE>
<CAPTION>
1 Year* 3 Years* 5 Years* 10 Years*
<S> <C> <C> <C> <C>
Growth $ $ $ $
International
Mid Cap
Small Company
Value Opportunity
- --------------------------------------------------------------------------------------------------------------
Balanced
Growth and Income
Real Estate
- --------------------------------------------------------------------------------------------------------------
Bond Fund
Aetna Government Fund
High Yield
Money Market
- --------------------------------------------------------------------------------------------------------------
Index Plus Bond
Index Plus Large Cap
Index Plus Mid Cap
Index Plus Small Cap
- --------------------------------------------------------------------------------------------------------------
Ascent
Crossroads
Legacy
</TABLE>
*1 year figures reflect Aeltus' contractual obligation to waive fees and/or
reimburse expenses through October 31, 1999. 3, 5 and 10 year figures are based
on total operating expenses without taking into account any fee waivers or
expense reimbursements.
This example should not be considered an indication of prior or future expenses.
Actual expenses for the current year may be greater or less than those shown.
Long-term shareholders (except Money Market shareholders) may pay more than the
economic equivalent of the maximum sales charge permitted by the NASD, because
of the distribution and shareholder service (12b-1) fees. Registered
representatives may receive different levels of compensation depending on the
class sold. Additional information regarding the classes may be obtained by
calling your investment professional.
30
<PAGE>
Class C Shares
Annual Fund Operating Expenses(1)
(as a percentage of average daily net assets)
<TABLE>
<CAPTION>
Distribution and Total Fee Waiver/
Management Service (12b-1) Operating Expense
Fee Fees Other Expenses Expenses Reimbursement Net Expenses
<S> <C> <C> <C> <C> <C> <C>
Growth % % % % % %
International % % % % % %
Mid Cap % % % % % %
Small Company % % % % % %
Value Opportunity % % % % % %
- ----------------------------------------------------------------------------------------------------------------------------------
Balanced % % % % % %
Growth and Income % % % % % %
Real Estate % % % % % %
- ----------------------------------------------------------------------------------------------------------------------------------
Bond Fund % % % % % %
Aetna Government Fund % % % % % %
High Yield % % % % % %
Money Market % % % % % %
- ----------------------------------------------------------------------------------------------------------------------------------
Index Plus Bond % % % % % %
Index Plus Large Cap % % % % % %
Index Plus Mid Cap % % % % % %
Index Plus Small Cap % % % % % %
- ----------------------------------------------------------------------------------------------------------------------------------
Ascent % % % % % %
Crossroads % % % % % %
Legacy % % % % % %
</TABLE>
(1) Aeltus is contractually obligated through October 31, 1999 to waive all or a
portion of its investment advisory fee and/or its administrative services fee
for certain Funds and/or to reimburse a portion of those Funds' other expenses
in order to ensure that the Fund's total operating expenses do not exceed the
percentage of the Fund's average daily net assets reflected in the table under
Net Expenses. Fee waiver/expense reimbursement obligations apply to each Fund
except Growth, Balanced, and Growth and Income. An administrative services fee
of 0.10% is included in Other Expenses.
The expenses shown above are based on the period from June 30, 1998 to October
31, 1998.
31
<PAGE>
CLASS C SHARES EXAMPLE
The following example is designed to help compare the costs of investing in the
Funds with the costs of investing in other mutual funds. Using the annual fund
operating expenses percentages above, you would pay the following expenses on a
$10,000 investment, assuming a 5% annual return and redemption at the end of
each of the periods shown:
<TABLE>
<CAPTION>
1 Year* 3 Years* 5 Years* 10 Years*
<S> <C> <C> <C> <C>
Growth $ $ $ $
International
Mid Cap
Small Company
Value Opportunity
- ---------------------------------------------------------------------------------------------------------
Balanced
Growth and Income
Real Estate
- ---------------------------------------------------------------------------------------------------------
Bond Fund
Aetna Government Fund
High Yield
Money Market
- ---------------------------------------------------------------------------------------------------------
Index Plus Bond
Index Plus Large Cap
Index Plus Mid Cap
Index Plus Small Cap
- ---------------------------------------------------------------------------------------------------------
Ascent
Crossroads
Legacy
</TABLE>
*1 year figures reflect Aeltus' contractual obligation to waive fees and/or
reimburse expenses through October 31, 1999. 3, 5 and 10 year figures are based
on total operating expenses without taking into account any fee waivers or
expense reimbursements.
This example should not be considered an indication of prior or future expenses.
Actual expenses for the current year may be greater or less than those shown.
Long-term shareholders (except Money Market shareholders) may pay more
than the economic equivalent of the maximum sales charge permitted by the NASD,
because of the distribution and shareholder service (12b-1) fees. Registered
representatives may receive different levels of compensation depending on the
class sold. Additional information regarding the classes may be obtained by
calling your investment professional.
32
<PAGE>
MANAGEMENT OF THE FUNDS' PORTFOLIO INVESTMENTS
Aeltus Investment Management, Inc., 10 State House Square, Hartford, Connecticut
06103-3602 serves as investment adviser of the Funds. Aeltus is responsible for
managing the assets of each Fund in accordance with its investment objectives
and policies, subject to oversight by the Fund's Board. Aeltus has acted as
adviser or subadviser to mutual funds since 1994 and has managed institutional
accounts since 1972.
Advisory Fees
[bullet] Listed below for Funds that have operated for at least one full fiscal
year are the aggregate advisory fees paid by each Fund for its most
recent fiscal year.
[bullet] Listed below for the Funds that have operated for less than one full
fiscal year are the advisory fees that Aeltus is entitled to receive,
expressed as an annual rate based on average daily net assets of each
Fund.
<TABLE>
<CAPTION>
Aggregate Advisory Fees as a Aggregate Advisory Fees as a
Percentage of Average Net Assets Percentage of Average Net Assets
Fund Name for Year Ended October 31, 1998 Fund Name for Year Ended October 31, 1998
Growth Aetna Government Fund
International Money Market
Small Company Index Plus Large Cap
Balanced Ascent
Growth and Income Crossroads
Bond Fund Legacy
Fund Name Rate Average Daily Net Assets
<S> <C> <C>
Mid Cap 0.750% On first $250 million
0.700% On next $250 million
0.675% On next $250 million
0.650% On next $1.25 billion
0.600% Over $2 billion
- -----------------------------------------------------------------------------------------------------------------------------------
Value Opportunity 0.700% On first $250 million
0.650% On next $250 million
0.625% On next $250 million
0.600% On next $1.25 billion
0.550% Over $2 billion
- -----------------------------------------------------------------------------------------------------------------------------------
Real Estate 0.800% On first $250 million
0.750% On next $250 million
0.725% On next $250 million
0.700% On next $1.25 billion
0.650% Over $2 billion
- -----------------------------------------------------------------------------------------------------------------------------------
High Yield 0.650% On first $250 million
0.600% On next $250 million
0.575% On next $250 million
0.550% On next $1.25 billion
0.500% Over $2 billion
- -----------------------------------------------------------------------------------------------------------------------------------
Index Plus Bond 0.350% On first $250 million
0.350% On next $250 million
0.325% On next $250 million
0.300% On next $1.25 billion
0.275% Over $2 billion
- -----------------------------------------------------------------------------------------------------------------------------------
Index Plus Mid Cap 0.450% On first $250 million
0.450% On next $250 million
0.425% On next $250 million
0.400% On next $1.25 billion
0.375% Over $2 billion
- -----------------------------------------------------------------------------------------------------------------------------------
Index Plus Small Cap 0.450% On first $250 million
0.450% On next $250 million
0.425% On next $250 million
0.400% On next $1.25 billion
0.375% Over $2 billion
</TABLE>
33
<PAGE>
On October 1, 1998, Bradley, Foster & Sargent, Inc. (Bradley), CityPlace II, 185
Asylum Street, Hartford, Connecticut 06103, was appointed as subadviser to Value
Opportunity. While Bradley had not previously served as an investment adviser or
subadviser to a mutual fund, it has managed private client assets as well as
401(k), profit sharing and other retirement plan assets since 1994.
As subadviser, Bradley is responsible for making equity investment decisions.
Aeltus remains responsible for all other aspects of managing and administering
Value Opportunity, including trade execution and cash management. Aeltus pays
Bradley a monthly subadvisory fee at an annual rate of 0.15% of Value
Opportunity's average daily net assets on the first $250 million of assets, and
0.10% on assets above $250 million.
Portfolio Management The following people are primarily responsible for the
day-to-day management of the Funds.
Capital Appreciation Funds
Growth Kenneth H. Bragdon, Portfolio Manager, Aeltus, has been managing Growth
since May 1998. Previously, Mr. Bragdon co-managed the Fund. Mr. Bragdon has
been with the Aetna organization since 1978 and has 27 years of experience in
the investment business.
International Vince Fioramonti, Portfolio Manager, Aeltus, has been managing
International since December 1995. Mr. Fioramonti manages international stocks
and non-U.S. dollar government bonds for several Aetna investment funds. Mr.
Fioramonti joined Aetna in 1994 after serving as Vice President of The Travelers
Investment Management Company. He began his investment career with Travelers in
1988.
Mid Cap Donald Townswick, Portfolio Manager, Aeltus, has been managing Mid Cap
since its inception in February 1998. He also manages small- and mid-cap stocks
for several other mutual funds managed by Aeltus. Mr. Townswick joined the Aetna
organization in July 1994 after serving for 2 years with Invesco Inc.
Small Company Thomas DiBella, Portfolio Manager, Aeltus, has been managing Small
Company since its inception in January 1994. Mr. DiBella joined Aeltus in 1991
and is currently responsible for the management of several small-capitalization
portfolios.
Value Opportunity Peter Canoni, Principal, Bradley, manages Value Opportunity.
Before joining Bradley, Mr. Canoni was a Managing Director of Aeltus and the
portfolio manager of Value Opportunity from its inception in February 1998
through August 3, 1998. Mr. Canoni had been with the Aetna organization since
1980 and has over 26 years of investment experience.
Growth & Income Funds
Balanced Geoffrey A. Brod, Portfolio Manager, Aeltus, has been managing large
cap stocks for the Fund since August 1, 1998. He has over 30 years of experience
in quantitative applications and has over 11 years of experience in equity
investments. Mr. Brod has been with the Aetna organization since 1966.
Carl Baker, Portfolio Manager, Aeltus, has been managing fixed-income securities
for the Fund since August 1, 1998. Mr. Baker has 11 years of experience in fixed
income portfolio management and has been with the Aetna organization since 1982.
Richard DiChillo, Portfolio Manager, Aeltus, has been managing small cap stocks
for the Fund since August 1, 1998. He has over 16 years of experience in
security analysis and portfolio management. Mr. DiChillo has been with the Aetna
organization since 1977.
Growth and Income Kevin M. Means, Managing Director, Aeltus, has been managing
Growth and Income since July 1994. Mr. Means joined Aetna in July 1994 after
serving as Chief Investment Officer at Invesco Management and Research since
1993. He also served from 1987 to 1993 as the Director of Quantitative Research
and Equity Portfolio Manager at Invesco Capital Management. Mr. Means heads a
team of portfolio managers each of whom specializes in a particular asset class
used in the management of Growth and Income.
Real Estate Yaniv Tepper, Portfolio Manager, Aeltus, has been managing Real
Estate since its inception in February 1998. He has been managing real estate
securities for several investment funds managed by Aeltus since 1994. Mr. Tepper
has been with the Aetna organization since 1994. He has over 10 years of
experience in direct real estate and real estate securities investments.
Income Funds
Bond Fund Steven C. Huber, Managing Director, Aeltus, has been managing the Fund
since August 1998. Mr. Huber joined the Aetna organization in 1987 as a
quantitative analyst and has been managing fixed-income portfolios since 1989.
Aetna Government Fund Hugh T.M. Whelan, Portfolio Manager, Aeltus, has been
managing Aetna Government Fund since January 1997. Mr. Whelan joined the Aetna
organization in 1989 and manages fixed-income portfolios employing different
strategies.
High Yield Gail Bruhn, Portfolio Manager, Aeltus, has been managing High Yield
since its inception in February 1998.
34
<PAGE>
She currently manages high-yield securities for several institutional accounts
managed by Aeltus. Ms. Bruhn joined Aeltus in 1995 after spending 12 years with
CIGNA Investments.
Money Market Jeanne Wong-Boehm, Managing Director, Aeltus, has been managing
Money Market since January 1992. Ms. Wong-Boehm joined the Aetna organization in
1983 as a fixed-income portfolio analyst and in 1989 she was assigned primary
responsibility for the money market operations.
Index Plus Funds
Index Plus Bond Christie Bull, Portfolio Manager, Aeltus, has been managing
Index Plus Bond since its inception in February 1998. She has been managing
fixed-income securities for several private accounts managed by Aeltus since
1993. Ms. Bull is also the Director of Fixed Income Research for Aeltus.
Ms. Bull has been with the Aetna organization since 1979.
Index Plus Large Cap Geoffrey A. Brod, Portfolio Manager, Aeltus, has been
managing Index Plus Large Cap since its inception in December 1996. He has
over 30 years of experience in quantitative applications and has over 11
years of experience in equity investments. Mr. Brod has been with the Aetna
organization since 1966.
Index Plus Mid Cap, Index Plus Small Cap Geoffrey A. Brod, Portfolio
Manager, Aeltus, and Michael F. Farrell, Portfolio Manager, Aeltus, serve as
co-managers of Index Plus Mid Cap and Index Plus Small Cap. Mr. Brod served
as the sole manager of Index Plus Mid Cap and Index Plus Small Cap from each
Fund's inception in February 1998 through February 1999. Mr. Farrell has
been with the Aetna organization since 1991 and has been responsible for
quantitative research and development of equity models.
Generation Funds
Ascent, Crossroads, Legacy Kevin M. Means, Managing Director, Aeltus, is the
lead portfolio manager for the Generation Funds and has been responsible for
determining the allocation of each Fund's investments since their inception
in January 1995. Mr. Means is also responsible for the selection of large
capitalization stocks for the Generation Funds. Mr. Means is supported by a
team of investment professionals, each of whom focuses on a particular asset
class.
Donald Townswick, Portfolio Manager, Aeltus, has been managing small and mid-cap
stocks for the Generation Funds since January 1995.
Vince Fioramonti, Portfolio Manager, Aeltus, has been managing international
stocks and non-U.S. dollar government bonds for the Generation Funds since
January 1995.
Yaniv Tepper, Portfolio Manager, Aeltus, has been managing real estate
securities for the Generation Funds since May 1995.
Carl Baker, Portfolio Manager, Aeltus, has been managing U.S. Dollar Bonds for
the Generation Funds since August 1998.
Jeanne Wong-Boehm, Managing Director, Aeltus, has been managing money market
investments for the Generation Funds since their inception in January 1995.
INVESTING IN THE FUNDS
Opening an Account and Selecting a Share Class
How to Open an Account You may open an account either through your investment
professional or through the sponsor of your employer-sponsored retirement plan.
If you are opening an account through your investment professional, he or she
will guide you through the process of investing in a Fund. If you are investing
through a retirement plan, please refer to your plan materials.
The Funds are not designed for professional market timing organizations or other
entities using programmed or frequent exchanges. The Funds reserve the right to
reject any specific purchase or exchange request, including a request made by a
market timer.
Selecting a Class
Class A Shares (except Money Market)
[bullet] Front-end sales charge applies (at the time of purchase), which will
vary depending on the Fund and the size of your purchase.
[bullet] No CDSC applies, except in certain instances when the front-end sales
charge has been waived because the aggregate investment in the Funds
was at least $1 million or the purchase was through certain
participant-directed employee benefit plans.
[bullet] Distribution (12b-1) Fee of 0.25% applies.
35
<PAGE>
Class B Shares
[bullet] No front-end sales charge applies.
[bullet] CDSC applies (if you sell your shares within six years of purchase).
[bullet] Distribution (12b-1) Fee of 0.75% applies.
[bullet] Service Fee of 0.25% applies.
[bullet] Automatic conversion to Class A shares after eight years.
Class C Shares (except Money Market)
[bullet] No front-end sales charge applies.
[bullet] CDSC applies (if you sell your shares within 18 months of purchase).
[bullet] Distribution (12b-1) Fee of 0.75% (for all Funds except the Index Plus
Funds) or 0.50% (for the Index Plus Funds) applies.
[bullet] Service Fee of 0.25% applies.
No sales charge, distribution (12b-1) fee or service fee applies to Class A or
Class C shares of Money Market. You can purchase Class B shares of Money Market
only by (i) opening a Dollar Cost Averaging account by which all of the amount
invested will be reinvested in another Fund within 24 months of the initial
purchase or (ii) exchanging Class B shares of another Fund. Orders for Class B
shares for $250,000 or more will be treated as orders for Class A shares or
declined.
Sales Charges: Class A Shares The tables below show the front-end sales charges
you will pay if you purchase Class A shares of the Funds in any amount up to $1
million.
The following table applies to these Funds:
Growth Balanced Ascent
International Growth and Income Legacy
Mid Cap Real Estate Crossroads
Small Company
Value Opportunity
<TABLE>
<CAPTION>
When you invest this amount This % is Which equals this
deducted % of your investment
for sales charges
<S> <C> <C>
under $50,000 5.75% 6.10%
$50,000 but under $100,000 4.50 4.71
$100,000 but under $250,000 3.50 3.63
$250,000 but under $500,000 2.50 2.56
$500,000 but under $1,000,000 2.00 2.04
</TABLE>
The following table applies to these Funds:
Bond Fund
Aetna Government Fund
High Yield
<TABLE>
<CAPTION>
When you invest this amount This % is Which equals this
deducted % of your investment
for sales charges
<S> <C> <C>
under $50,000 4.75% 4.99%
$50,000 but under $100,000 4.50 4.71
$100,000 but under $250,000 3.50 3.63
$250,000 but under $500,000 2.50 2.56
$500,000 but under $1,000,000 2.00 2.04
</TABLE>
36
<PAGE>
The following table applies to these Funds:
Index Plus Bond
Index Plus Large Cap
Index Plus Mid Cap
Index Plus Small Cap
<TABLE>
<CAPTION>
When you invest this amount This % is deducted Which equals this
for sales charges % of your investment
<S> <C> <C>
under $50,000 3.00% 3.09%
$50,000 but under $100,000 2.50 2.56
$100,000 but under $250,000 2.00 2.04
$250,000 but under $500,000 1.50 1.52
$500,000 but under $1,000,000 1.00 1.01
</TABLE>
Class A Shares Sales Charge Waivers Generally, no front-end sales charge applies
if you are buying Class A shares with money you received within the past 60 days
by redeeming shares of an Aeltus-advised Fund or with money you received within
the past 30 days by redeeming shares of another mutual fund on which you paid a
front-end sales charge. The Funds also waive the Class A front-end sales charge
for purchases made by certain types of investors. (See the Statement of
Additional Information or call 1-800-367-7732 for additional details.)
CDSC on Class A Shares The Funds do not impose a CDSC on Class A shares
purchased with an aggregate investment in the Funds of less than $1 million. All
Funds other than Money Market may impose a CDSC on Class A shares purchased (i)
with an aggregate investment in the Funds in excess of $1 million or (ii) by
certain participant-directed employee benefit plans. The CDSC on Class A shares
will apply only to shares for which a finder's fee is paid to investment
professionals pursuant to a distribution agreement with the Funds. The CDSC
imposed (based on the lesser of the current market value or the original cost of
the shares being redeemed) is as follows:
<TABLE>
<CAPTION>
this % is deducted from
When you invest this amount your proceeds
<S> <C>
$1 million but under $3 million Year 1 - 1.00%
Year 2 - 0.50%
$3 million but under $20 million Year 1 - 0.50%
Year 2 - 0.50%
$20 million or greater Year 1 - 0.25%
Year 2 - 0.25%
</TABLE>
Sales Charges: Class B Shares All Funds impose a CDSC on redemptions made within
six years of purchase. The table below shows the applicable CDSC based on the
time invested.
<TABLE>
<CAPTION>
Redemption During CDSC
<S> <C>
1st year since purchase 5%
2nd year since purchase 4%
3rd year since purchase 3%
4th year since purchase 3%
5th year since purchase 2%
6th year since purchase 1%
7th year since purchase None
</TABLE>
The CDSC is assessed on an amount equal to the lesser of the current market
value or the original cost of the shares being redeemed.
Sales Charges: Class C Shares All Funds other than Money Market impose a CDSC on
redemptions made within 18 months of purchase. The CDSC imposed on redemptions
is 1.00%, except for the Index Plus Funds which impose a CDSC of 0.75%. The CDSC
is assessed on an amount equal to the lesser of the current market value or the
original cost of the shares being redeemed.
Other Policies Relating to Charges and Fees
Application of a CDSC To determine whether a CDSC is payable on any redemption,
the Fund will first redeem shares not subject to any charge, and then shares
held longest during the CDSC period.
Unless otherwise specified, when you request to sell a stated dollar amount, the
Fund will redeem additional shares to cover any CDSC. For requests to sell a
stated number of shares, the Fund will deduct the amount of the CDSC, if any,
from the sale proceeds.
37
<PAGE>
When the CDSC Does Not Apply The CDSC does not apply in certain situations,
including certain exchanges, certain retirement distributions, and certain
redemptions made because of disability or death. (See the Statement of
Additional Information or call 1-800-367-7732 for additional details.)
Distribution (12b-1) Fees With respect to its Class A and Class C shares, each
Fund, other than Money Market, has adopted a plan in accordance with Rule 12b-1
under the Investment Company Act of 1940 that allows the Fund to pay fees for
the sale and distribution of Fund shares. With respect to its Class B shares,
each Fund, including Money Market, has adopted a Rule 12b-1 plan. The 12b-1 fees
are paid out of Fund assets on an ongoing basis, and as a result, over time,
these fees will increase the cost of your investment and may cost you more than
paying other types of sales charges. Some of the distribution (12b-1) fees are
used to compensate financial professionals who sell Fund shares.
Service Fee Each Fund, with respect to its Class B and Class C shares, has
adopted a Shareholder Services Plan that allows the payment of a servicing fee.
The servicing fee is used primarily to pay selling dealers and their agents for
servicing and maintaining shareholder accounts.
How to Buy Shares
Minimum Investments
<TABLE>
<CAPTION>
Initial Investment Additional Investments
<S> <C> <C>
Individual Retirement Accounts $500 [bullet] $100 except by wire or Systematic Investment
(including Roth IRAs)
[bullet] $500 by wire
[bullet] $50 by Systematic Investment
All other investments $1,000 [bullet] $100 except by wire or Systematic Investment
[bullet] $500 by wire
[bullet] $50 by Systematic Investment
</TABLE>
Instructions for Buying Fund Shares
Please contact your investment professional or consult your plan materials
regarding the purchase of Fund shares. If you are purchasing Fund shares through
your investment professional, he or she will guide you through the process of
opening an account and purchasing additional shares, as follows.
<TABLE>
<CAPTION>
To Open An Account To Purchase Additional Shares
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
By Mail Complete and sign your Fill out the investment stub from your
application, make confirmation statement or send a letter
your check payable to Aetna indicating your name, account
Series Fund, Inc. and mail to: number(s), the Fund(s) in which you
wish to invest and the amount you want
to invest in each Fund.
Aetna Series Fund, Inc.
c/o First Data Investor Services
Group, Inc. Make your check payable to Aetna
P.O. Box 9681 Series Fund, Inc. and mail to:
Providence, RI 02940
Aetna Series Fund, Inc.
Your check must be drawn on a c/o First Data Investor Services Group, Inc.
bank located within the United P.O. Box 9663
States and payable in U.S. dollars. Providence, RI 02940
Cash, credit cards and third party
checks cannot be used to open
an account.
</TABLE>
38
<PAGE>
<TABLE>
<CAPTION>
To Open An Account To Purchase Additional Shares
<S> <C> <C>
Your check must be drawn on a bank
located within the United States and
payable in U.S. dollars. The Funds will
accept checks which are made payable
to you and endorsed to Aetna Series
Fund, Inc.
- ---------------------------------------------------------------------------------------------------------
By Overnight Courier Follow the instructions above Follow the instructions above for
for "By Mail" but send your "By Mail" but send your check and
completed application and check investment stub or letter to:
to:
Aetna Series Fund, Inc.
Aetna Series Fund, Inc. c/o First Data Investor Services
c/o First Data Investor Services Group, Inc.
Group, Inc. 4400 Computer Drive
4400 Computer Drive Westborough, MA 01581
Westborough, MA 01581
- ---------------------------------------------------------------------------------------------------------
By Wire Not Available. Call 1-800-367-7732 prior to sending
the wire in order to obtain a
confirmation number.
Instruct your bank to wire funds to:
Wire to:
Boston Safe Deposit & Trust Company
ABA # 011001234
Credit to:
Boston Safe Deposit & Trust Company
Account # 176656
Further Credit to:
Name of Fund
Shareholder Account Number
Shareholder Registration
Federal funds wire purchase orders will
be accepted only when the Fund's
transfer agent and custodian bank are
open for business.
Neither the Funds nor their agents are
responsible for the consequences of
delays resulting from the banking or
Federal Reserve wire system or from
incomplete instructions.
</TABLE>
39
<PAGE>
<TABLE>
<CAPTION>
To Open An Account To Purchase Additional Shares
<S> <C> <C>
By Electronic Not Available. Use the Systematic Investment Option.
Funds Transfer Sign up for this service when opening
your account or by requesting the
appropriate information.
- ------------------------------------------------------------------------------------------------------------
By Exchange Submit a written request to the Submit a written request to the address
address listed above under listed above under "By Mail." Include:
"By Mail." Include: [bullet] Your name and account number.
[bullet] Your name and account number. [bullet] The name of the Fund into and out of
[bullet] The name of the Fund into and which you wish to exchange.
out of which you wish to [bullet] The amount to be exchanged and the
exchange. signatures of all shareholders.
[bullet] The amount to be exchanged
and the signatures of all You may also exchange your shares by
shareholders. calling 1-800-367-7732. Please be
prepared to provide:
[bullet] The Funds' names.
You may also exchange your [bullet] Your account number(s).
shares by calling 1-800-367-7732. [bullet] Your Social Security number or
Please be prepared to provide: taxpayer identification number.
[bullet] The Funds' names. [bullet] Your address.
[bullet] Your account number(s). [bullet] The amount to be exchanged.
[bullet] Your Social Security number or
taxpayer identification number.
[bullet] Your address.
[bullet] The amount to be exchanged.
</TABLE>
40
<PAGE>
How to Sell Shares
To redeem all or a portion of the shares in your account, you should submit a
redemption request through your investment professional, plan sponsor or as
described below. Your investment professional may charge you a fee for selling
your shares.
Redemption requests in amounts up to $25,000 may be made in writing or by
telephone. The Company requires a signature guarantee if the amount of the
redemption request is over $25,000. You may obtain a signature guarantee at most
banks and securities dealers. Please note that notaries public cannot provide
signature guarantees.
Once your redemption request is received in good order, the Fund normally will
send the proceeds of such redemption within one or two business days. However,
if making immediate payment could adversely affect a Fund, the Fund may defer
distribution for up to seven days or a longer period if permitted. If you redeem
shares of a Fund shortly after purchasing them, the Fund will hold payment of
redemption proceeds until 12 calendar days have elapsed since those shares were
purchased. A redemption request made within 15 calendar days after submission of
a change of address is permitted only if the request is in writing and is
accompanied by a signature guarantee.
<TABLE>
<S> <C>
Redemptions by Mail You may redeem shares you own in any Fund by sending written
instructions to:
Aetna Series Fund, Inc.
c/o First Data Investor Services Group, Inc.
P.O. Box 9681
Providence, RI 02940
Your instructions should
identify:
[bullet] The Fund.
[bullet] The number of shares or dollar amount to be redeemed.
[bullet] Your name and account number.
Your instructions must be signed by all person(s) required to sign for the
Fund account, exactly as the shares are registered, and, if necessary,
accompanied by a signature guarantee(s).
- ----------------------------------------------------------------------------------------------------------
Redemptions by Wire A minimum redemption of $1,000 is required for wire transfers.
Redemption proceeds will be transferred by wire to your previously
designated bank account or to another destination if the federal funds wire
instructions provided with your redemption request are accompanied by a
signature guarantee. A $12.00 fee will be charged for this service.
- ----------------------------------------------------------------------------------------------------------
Redemptions by Telephone Call 1-800-367-7732. Please be prepared to provide your account number,
account name and the amount of the redemption, which generally
must be no less than $500 and no more than $25,000.
</TABLE>
41
<PAGE>
Timing of Requests
Orders that are received before the close of regular trading on the New York
Stock Exchange (usually 4:00 p.m. eastern time) will be processed at the Net
Asset Value (NAV) calculated that business day (adjusted for the front-end sales
charge or CDSC, if applicable). Orders received after the close of regular
trading on the New York Stock Exchange will be processed at the NAV calculated
on the following business day (adjusted for the front-end sales charge or
contingent deferred sales charge, if applicable).
Aetna Series Fund, Inc. (Company) may appoint certain institutions
(Institutions) as parties that may accept purchase and redemption orders on
behalf of the Company. If you purchase or redeem shares in connection with
programs offered by these Institutions, your shares will be purchased or
redeemed at the NAV determined the business day the Institution receives your
order if the order is received before the close of regular trading on the New
York Stock Exchange, subject to the applicable front-end sales charge or CDSC.
Institutions may be authorized to designate other intermediaries to accept
purchase and redemption orders on the Company's behalf, subject to the Company's
approval. Thus, the Company will be deemed to have received a purchase or
redemption order when the Institution or, if applicable, the Institution's
authorized designee, accepts the order.
Institutions may charge you fees or assess other charges for the services they
provide to their customers. These fees or charges are retained by the
Institution and are not remitted to the Company.
Investors purchasing through an Institution should refer to the Institution's
materials for a discussion of any specific instructions on the timing of or
restrictions relating to the purchase or redemption of shares.
Other Information about Shareholder Accounts and Services
Business Hours Each Fund is open on the same days as the New York Stock Exchange
(generally, Monday through Friday). Fund representatives are available from 8
a.m. to 8 p.m. eastern time on those days.
Net Asset Value The NAV of each Fund is determined as of the earlier of:
[bullet] 15 minutes after the close of regular trading on the New York Stock
Exchange.
[bullet] 4:15 p.m. eastern time, on each day that the New York Stock Exchange
is open for regular trading.
In calculating the NAV, the securities held by Money Market are valued using
amortized cost. For all other Funds, securities are valued primarily by
independent pricing services using market quotations. Short-term debt securities
maturing in less than 60 days 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. With respect to any Fund that
invests in foreign securities, because those securities may be traded on markets
that are open on days when the Fund does not price its shares, the Fund's NAV
may change even though Fund shareholders may not be permitted to sell or redeem
Fund shares.
Exchange Privileges There is no fee to exchange shares from one Fund to another.
However, a sales charge may apply upon an exchange of Class A shares of Money
Market for Class A shares of another Fund. When you exchange shares, your new
Fund shares will be in the equivalent class of your current shares. For Class B
and Class C shares, any CDSC that apply to your current shares will apply to the
new shares. The CDSC will be calculated from the date of your original purchase.
There are no limits on the number of exchanges you can make. However, the Funds
may suspend or terminate your exchange privilege if you make more than five
exchanges out of a single Fund in any calendar year, and the Funds may refuse to
accept any exchange requests, especially if as a result of the exchange, in
Aeltus' judgment, it would be too difficult to invest effectively in accordance
with the Fund's investment objective.
Cross Investing
[bullet] Dividend Investing You may elect to have dividend and/or capital gains
distributions automatically invested in the same class of one other
Fund.
[bullet] Systematic Exchange You may establish an automatic exchange of shares
from one Fund to another.
Telephone Exchange and Redemption Privileges You automatically receive telephone
exchange and redemption privileges when you establish your account. If you do
not want these telephone privileges, you may call 1-800-367-7732 to have them
removed. All telephone transactions may be recorded, and you will be asked for
certain identifying information.
42
<PAGE>
Telephone redemption requests will be accepted if the request is for a minimum
of $500 or a maximum of $25,000. Telephone redemption requests will not be
accepted if you:
[bullet] Have submitted a change of address within the preceding 15 calendar
days.
[bullet] Are selling shares in a retirement plan account held in trust.
The Funds reserve the right to amend telephone exchange and redemption purchases
at any time upon notice to shareholders and may refuse a telephone exchange or
redemption if the Funds believe it is advisable to do so.
Minimum Account Balance You must maintain a minimum balance of $500 in each Fund
account. If you do not, the Fund may give you 60 days' notice to increase the
account balance to the $500 minimum. If you fail to increase your account
balance to the minimum, the Fund may redeem all of your remaining shares and
mail the proceeds to you at the address of record. The Fund will not redeem
shares for failing to maintain an adequate account balance if the account
balance falls below the minimum balance only because the value of Fund shares
has decreased.
Additional Rights Each Fund retains certain rights, including the rights to:
[bullet] Refuse orders to purchase shares.
[bullet] Vary its requirements for initial or additional investments,
exchanges, reinvestments, periodic investment plans, retirement and
employee benefit plans, sponsored arrangements and similar programs.
[bullet] Change or discontinue its sales charge waivers and orders acceptance
practices.
Additional Services Each Fund offers these additional investor services. Each
Fund reserves the right to terminate or amend these services at any time. For
all of the services, certain terms and conditions apply. See the Statement of
Additional Information or call 1-800-367-7732 for additional information on any
of these services.
[bullet] Systematic Investment You can make automatic monthly investments in
any Fund.
[bullet] Letter of Intent If you agree to purchase a specific amount of Class A
shares of one or more Funds (other than Money Market) over a 13-month
period, the front-end sales charge will be calculated at the rate that
would have been charged had you purchased the entire amount all at
once. You may qualify for a reduced front-end sales charge by
notifying us of your intent no later than 90 days after the date of
your initial investment and by completing and returning to us the
relevant portion of your application. After the Letter of Intent is
filed, each additional investment will be entitled to the front-end
sales charge applicable to the level of investment indicated on the
Letter of Intent.
[bullet] Right of Accumulation/Cumulative Quantity Discounts To determine if
you may pay a reduced front-end sales charge on Class A purchases, you
may add the amount of your current purchase to the cost or current
value, whichever is higher, of other Class A shares of the Funds
(other than Money Market) owned by you, your family and your company
(if you are the sole owner).
[bullet] Automatic Cash Withdrawal Plan The Automatic Cash Withdrawal Plan
provides a convenient way for you to receive a systematic distribution
while maintaining an investment in a Fund.
[bullet] Checkwriting Service Checkwriting is available with Class A and Class
C shares of Money Market. There currently is no transaction charge for
this service, and the initial checkbook you receive is free. However,
you will be charged a $3.00 fee for each checkbook reorder. Checks
must be for a minimum of $250 and the checkwriting service may not be
used for a complete redemption of your shares. This service is not
available for IRA or other retirement accounts. You will be charged a
$25 fee for stop payment requests and for Money Market checks that are
returned due to insufficient funds.
[bullet] TDD Service Telecommunication Device for the Deaf (TDD) services are
offered for hearing impaired investors. The dedicated number for this
service is 1-800-684-4889.
[bullet] Tax-Deferred Retirement Plans Each Fund may be used for investment by
a variety of tax-deferred retirement plans, such as individual
retirement accounts (IRAs, including Roth IRAs) and 401(k) and 403(b)
programs sponsored by employers. Purchases made in connection with
IRAs and 403(b)(7) accounts may be subject to an annual custodial fee
of $12.50 per fund account up to an annual cap of $25. This fee will
be deducted directly from your account(s). There is no minimum
investment or minimum account balance applicable to investments in
403(b)(7) accounts.
Payments to Securities Dealers and Selection of Executing Brokers From time to
time, ACI or its affiliates may make payments to other dealers and/or their
agents, who may not be affiliates of Aetna, who sell shares or who provide
shareholder services. The value of a shareholder's investment will be unaffected
by these payments. Other dealers and/or their investment representatives may not
use sales of the
43
<PAGE>
Fund's shares to qualify for this compensation if prohibited by the laws of any
state or self-regulatory organization, such as the NASD.
Aeltus may consider the sale of shares of the Funds and of other investment
companies advised by Aeltus as a factor in the selection of brokerage firms to
execute the Funds' portfolio transactions, subject to Aeltus' duty to obtain
best execution.
Payments to Institutions Investors purchasing through an Institution or
financial intermediary should refer to the Institution's or financial
intermediary's material for a discussion of any fees or charges relating to the
purchase or redemption of shares.
Dividends and Distributions
Dividends Dividends are declared and paid as follows:
[bullet] declared daily and paid monthly Money Market
[bullet] declared monthly and paid monthly Aetna Government Fund
Bond Fund
High Yield
Index Plus Bond
[bullet] declared and paid semiannually Balanced
Growth and Income
[bullet] declared and paid annually All other Funds
Capital gains distributions, if any, are paid on an annual basis around the end
of the year, December 31. To comply with federal tax regulations, each Fund may
also pay an additional capital gains distribution, usually in June.
Money Market shares begin to accrue dividends the business day after they are
purchased. A redemption of Money Market shares will include dividends declared
through the redemption date.
Both income dividends and capital gains distributions are paid by each Fund on a
per share basis. As a result, at the time of this payment, the share price of a
Fund (except Money Market) will be reduced by the amount of the payment.
Distribution Options When completing your application, you must select one of
the following three options for dividends and capital gains distributions:
[bullet] Full Reinvestment Both dividends and capital gains distributions from
a Fund will be reinvested in additional shares of the same class of
shares of that Fund. This option will be selected automatically unless
one of the other options is specified.
[bullet] Capital Gains Reinvestment Capital gains distributions from a Fund
will be reinvested in additional shares of the same class of shares of
that Fund and all net income from dividends will be distributed in
cash.
[bullet] All Cash Dividends and capital gains distributions will be paid in
cash. If you select a cash distribution option, you can elect to have
distributions automatically invested in shares of another Fund.
Distributions paid in shares will be credited to your account at the next
determined NAV per share.
Tax Information
[bullet] In general, dividends and short-term capital gains distributions you
receive from any Fund are taxable as ordinary income.
[bullet] Distributions of other capital gains generally are taxable as capital
gains.
[bullet] Ordinary income and capital gains are taxed at different rates.
[bullet] The rates that you will pay on capital gains distributions will depend
on how long the Fund holds its portfolio securities. This is true no
matter how long you have owned your shares in the Fund or whether you
reinvest your distributions or take them as cash.
[bullet] The sale of shares in your account may produce a gain or loss, and
typically is a taxable event. For tax purposes, an exchange is the
same as a sale.
Every year, the Funds will send you information detailing the amount of ordinary
income and capital gains distributed to you for the previous year. You should
consult your tax professional for assistance in evaluating the tax implications
of investing in the Funds.
Backup Withholding By law, the Funds must withhold 31% of your distributions and
proceeds if you have not provided complete, correct taxpayer information.
44
<PAGE>
PRIVATE ACCOUNT PERFORMANCE
Index Plus Large Cap, Index Plus Bond and High Yield are recently organized and
do not yet have long-term performance records. However, Index Plus Large Cap,
Index Plus Bond and High Yield have investment objectives, policies and
strategies substantially similar to those employed by Aeltus with respect to
certain Private Accounts. Therefore, the performance of these Private Accounts
is provided below. The performance of Index Plus Large Cap, Index Plus Bond and
High Yield may vary from the Private Account composite performance because their
investments will vary over time and will not be identical to the past portfolio
investments of the Private Accounts. Moreover, the Private Accounts, unlike the
Funds, are not subject to certain investment limitations, diversification
requirements and other restrictions imposed by the Investment Company Act of
1940 (1940 Act) and the Internal Revenue Code of 1986, as amended, which, if
applicable, could have adversely affected the Private Accounts' performance.
The Private Account Performance data, shown below, was calculated in accordance
with recommended standards of the Association for Investment Management and
Research (AIMR). AIMR is a nonprofit membership and educational organization
that, among other things, has formulated a set of performance presentation
standards for investment advisers.
All Private Account Performance data:
[bullet] Was calculated on a total return basis and includes all dividends and
interest, accrued income and realized and unrealized gains and losses.
[bullet] Reflects the reinvestment of dividends and distributions.
[bullet] Reflects the deduction of investment advisory fees and brokerage
commissions paid by Aeltus' Private Accounts, but does not reflect the
deduction of custodial fees.
[bullet] Includes cash and cash equivalents.
The historical fees and expenses paid by the Private Accounts are significantly
lower than those paid by the Funds. Had Fund level expenses been charged to the
Private Accounts, performance would have been lower.
The following table shows average annual total returns for the periods ended
December 31, 1998 for the Funds, the comparable Private Accounts and their
respective benchmark indices. Investors should not consider the performance of
the Private Accounts as an indication of the future performance of the Funds.
45
<PAGE>
Private Account Composite and Fund Performance
INDEX PLUS LARGE CAP
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
SINCE
1 YEAR 5 YEARS INCEPTION
<S> <C> <C> <C>
Index Plus Large Cap, Class A (assuming payment
of maximum front-end sales charge)(1) % N/A % (12/10/96)
Index Plus Large Cap, Class A (without payment of
front-end sales charge)(1) % N/A % (12/10/96)
Index Plus Large Cap Private Account Composite % % N/A
S&P 500 Stock Index % % N/A
</TABLE>
INDEX PLUS BOND
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
SINCE
1 YEAR 5 YEARS 10 YEARS INCEPTION
<S> <C> <C> <C> <C>
Index Plus Bond, Class A (assuming payment
of maximum front-end sales charge) N/A N/A N/A % (2/4/98)
Index Plus Bond, Class A (without payment of
front-end sales charge) N/A N/A N/A % (2/4/98)
Index Plus Bond Private Account Composite % % % N/A
LBAB Index % % % N/A
</TABLE>
HIGH YIELD
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
SINCE
1 YEAR 3 YEARS INCEPTION
<S> <C> <C> <C>
High Yield, Class A (assuming payment of
maximum front-end sales charge) N/A N/A % (2/4/98)
High Yield, Class A (without payment of
front-end sales charge) N/A N/A % (2/4/98)
High Yield Private Account % % N/A
Merrill Lynch High Yield Master Index % % N/A
</TABLE>
(1) The Fund redesignated its Adviser Class shares as Class A shares commencing
on February 2, 1998. For periods prior to the Class A inception date, Class A
performance is calculated by using the performance of Class I shares and
deducting the maximum Class A front-end sales load and internal fees and
expenses of the Adviser Class.
46
<PAGE>
FINANCIAL HIGHLIGHTS
These highlights are intended to help you understand the Funds' performance for
the past 5 years (or since commencement of operations, if shorter). The
information in these tables has been __________________________________,
independent auditors, whose reports, along with the Funds' Financial Statements,
are included in ________________________, which are available upon request.
<TABLE>
<CAPTION>
Growth
----------------------------------------------------------------------------------------------
Class A Class C
------------------------------------------------------------------------------ --------------
Period from Period from
April 15, June 30,
Year ended Year ended Year ended Year ended 1994 to 1998 to
October 31, October 31, October 31, October 31, October 31, October 31,
1998 1997 1996 1995 1994 1998
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period
Income From Investment
Operations:
Net investment income
Net realized and change in unrealized
gain or loss on investments
Total from investment operations
Less Distributions:
From net investment income
From net realized gains on
investments
Total distributions
Net asset value, end of period
Total Return (does not reflect
applicable sales charges)
Net assets, end of period (000's)
Ratio of total expenses to
average net assets
Ratio of net investment income to
average net assets
Ratio of net expense before
reimbursement and waiver to average
net assets
Ratio of net investment income before
reimbursement and waiver to average
net assets
Portfolio turnover rate
</TABLE>
(1) Annualized.
Per share data calculated using weighted average number of shares outstanding
throughout the period.
47
<PAGE>
<TABLE>
<CAPTION>
International Mid-Cap
- ---------------------------------------------------------------------------------------------- ----------------------------
Class A Class C Class A Class C
- ------------------------------------------------------------------------------ -------------- ------------- -------------
Period from Period from Period from Period from
April 15, June 30, February 4, June 30,
Year ended Year ended Year ended Year ended 1994 to 1998 to 1998 to 1998 to
October 31, October 31, October 31, October 31, October 31, October 31, October 31, October 31,
1998 1997 1996 1995 1994 1998 1998 1998
<S> <C> <C> <C> <C> <C> <C> <C>
</TABLE>
48
<PAGE>
Financial Highlights (continued)
(for one outstanding share throughout each period)
<TABLE>
<CAPTION>
Small Company
----------------------------------------------------------------------------------------------
Class A Class C
------------------------------------------------------------------------------ --------------
Period from Period from
April 15, June 30,
Year ended Year ended Year ended Year ended 1994 to 1998 to
October 31, October 31, October 31, October 31, October 31, October 31,
1998 1997 1996 1995 1994 1998
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period
Income From Investment
Operations:
Net investment income
Net realized and change in unrealized
gain or loss on investments
Total from investment operations
Less Distributions:
From net investment income
From net realized gains on
investments
Total distributions
Net asset value, end of period
Total Return (does not reflect
applicable sales charges)
Net assets, end of period (000's)
Ratio of total expenses to
average net assets
Ratio of net investment income to
average net assets
Ratio of net expense before
reimbursement and waiver to average
net assets
Ratio of net investment income before
reimbursement and waiver to average
net assets
Portfolio turnover rate
</TABLE>
(1) Annualized.
Per share data calculated using weighted average number of shares outstanding
throughout the period.
49
<PAGE>
<TABLE>
<CAPTION>
Value Opportunity Balanced
- ---------------------------- ----------------------------------------------------------------------------------------------
Class A Class C Class A Class C
- ------------- ------------- ------------------------------------------------------------------------------- -------------
Period from Period from Period from Period from
February 2, June 30, April 15, June 30,
1998 to 1998 to Year ended Year ended Year ended Year ended 1994 to 1998 to
October 31, October 31, October 31, October 31, October 31, October 31, October 31, October 31,
1998 1998 1998 1997 1996 1995 1994 1998
<S> <C> <C> <C> <C> <C> <C> <C>
</TABLE>
50
<PAGE>
Financial Highlights (continued)
(for one outstanding share throughout each period)
<TABLE>
<CAPTION>
Growth and Income
----------------------------------------------------------------------------------------------
Class A Class C
------------------------------------------------------------------------------ --------------
Period from Period from
April 15, June 30,
Year ended Year ended Year ended Year ended 1994 to 1998 to
October 31, October 31, October 31, October 31, October 31, October 31,
1998 1997 1996 1995 1994 1998
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period
Income From Investment
Operations:
Net investment income
Net realized and change in unrealized
gain or loss on investments
Total from investment operations
Less Distributions:
From net investment income
From net realized gains on
investments
Total distributions
Net asset value, end of period
Total Return (does not reflect
applicable sales charges)
Net assets, end of period (000's)
Ratio of total expenses to
average net assets
Ratio of net investment income to
average net assets
Ratio of net expense before
reimbursement and waiver to average
net assets
Ratio of net investment income before
reimbursement and waiver to average
net assets
Portfolio turnover rate
</TABLE>
(1) Annualized.
Per share data calculated using weighted average number of shares outstanding
throughout the period.
51
<PAGE>
<TABLE>
<CAPTION>
Real Estate Bond
- ---------------------------- ----------------------------------------------------------------------------------------------
Class A Class C Class A Class C
- ------------- ------------- ------------------------------------------------------------------------------- -------------
Period from Period from Period from Period from
February 2, June 30, April 15, June 30,
1998 to 1998 to Year ended Year ended Year ended Year ended 1994 to 1998 to
October 31, October 31, October 31, October 31, October 31, October 31, October 31, October 31,
1998 1998 1998 1997 1996 1995 1994 1998
<S> <C> <C> <C> <C> <C> <C> <C>
</TABLE>
52
<PAGE>
Financial Highlights (continued)
(for one outstanding share throughout each period)
<TABLE>
<CAPTION>
Aetna Government Fund
----------------------------------------------------------------------------------------------
Class A Class C
------------------------------------------------------------------------------ --------------
Period from Period from
April 15, June 30,
Year ended Year ended Year ended Year ended 1994 to 1998 to
October 31, October 31, October 31, October 31, October 31, October 31,
1998 1997 1996 1995 1994 1998
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period
Income From Investment
Operations:
Net investment income
Net realized and change in unrealized
gain or loss on investments
Total from investment operations
Less Distributions:
From net investment income
From net realized gains on
investments
Total distributions
Net asset value, end of period
Total Return (does not reflect
applicable sales charges)
Net assets, end of period (000's)
Ratio of total expenses to
average net assets
Ratio of net investment income to
average net assets
Ratio of net expense before
reimbursement and waiver to average
net assets
Ratio of net investment income before
reimbursement and waiver to average
net assets
Portfolio turnover rate
</TABLE>
(1) Annualized.
Per share data calculated using weighted average number of shares outstanding
throughout the period.
53
<PAGE>
<TABLE>
<CAPTION>
High Yield Money Market
- ---------------------------- ----------------------------------------------------------------------------------------------
Class A Class C Class A Class C
- ------------- ------------- ------------------------------------------------------------------------------- -------------
Period from Period from Period from Period from
February 2, June 30, April 15, June 30,
1998 to 1998 to Year ended Year ended Year ended Year ended 1994 to 1998 to
October 31, October 31, October 31, October 31, October 31, October 31, October 31, October 31,
1998 1998 1998 1997 1996 1995 1994 1998
<S> <C> <C> <C> <C> <C> <C> <C>
</TABLE>
54
<PAGE>
Financial Highlights (continued)
(for one outstanding share throughout each period)
<TABLE>
<CAPTION>
Index Plus Bond Index Plus Large Cap
- ------------------------------------------------------------------------ ------------------------------------------------
Class A Class C Class A Class C
- ------------------------------------------------------- ------------- ------------------------------ ---------------
Period from Period from Period from Period from
February 4, June 30, February 3, June 30,
1998 to 1998 to Year ended 1997 to 1998 to
October 31, October 31, October 31, October 31, October 31,
1998 1998 1998 1997 1998
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period
Income From Investment
Operations:
Net investment income
Net realized and change in unrealized
gain or loss on investments
Total from investment operations
Less Distributions:
From net investment income
From net realized gains on
investments
Total distributions
Net asset value, end of period
Total Return (does not reflect
applicable sales charges)
Net assets, end of period (000's)
Ratio of total expenses to
average net assets
Ratio of net investment income to
average net assets
Ratio of net expense before
reimbursement and waiver to average
net assets
Ratio of net investment income before
reimbursement and waiver to average
net assets
Portfolio turnover rate
</TABLE>
(1) Annualized.
Per share data calculated using weighted average number of shares outstanding
throughout the period.
55
<PAGE>
<TABLE>
<CAPTION>
Index Plus Mid Cap Index Plus Small Cap Ascent
- ---------------------------- -------------------------------- -----------------------------------------------------
Class A Class C Class A Class C Class A Class C
- ------------- ------------- -------------- ---------------- ----------------------------------- --------------
Period from Period from Period from Period from Period from Period from
February 3, June 30, February 3, June 30, January 20, June 30,
1998 to 1998 to 1998 to 1998 to Year ended 1997 to 1998 to
October 31, October 31, October 31, October 31, October 31, October 31, October 31,
1998 1998 1998 1998 1998 1997 1998
<S> <C> <C> <C> <C> <C> <C>
</TABLE>
56
<PAGE>
Financial Highlights (continued)
(for one outstanding share throughout each period)
<TABLE>
<CAPTION>
Crossroads Legacy
- ------------------------------------------------------------------------------------ -------------------------------------------
Class A Class C Class A Class C
- ----------------------------------------------------------------------- --------- ----------------------------- ------------
Period from Period from Period from Period from
January 20, June 30, January 20, June 30,
Year ended 1997 to 1998 to Year ended 1997 to 1998 to
October 31, October 31, October 31, October 31, October 31, October 31,
1998 1997 1998 1998 1997 1998
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period
Income From Investment
Operations:
Net investment income
Net realized and change in unrealized
gain or loss on investments
Total from investment operations
Less Distributions:
From net investment income
From net realized gains on
investments
Total distributions
Net asset value, end of period
Total Return (does not reflect
applicable sales charges)
Net assets, end of period (000's)
Ratio of total expenses to
average net assets
Ratio of net investment income to
average net assets
Ratio of net expense before
reimbursement and waiver to average
net assets
Ratio of net investment income before
reimbursement and waiver to average
net assets
Portfolio turnover rate
</TABLE>
(1) Annualized.
Per share data calculated using weighted average number of shares outstanding
throughout the period.
57
<PAGE>
ADDITIONAL INFORMATION
The SAI, which is incorporated by reference into this Prospectus, contains
additional information about the Funds. The Funds' most recent annual and
semi-annual reports contain information about the Funds' investments. The most
recent annual report also contains a discussion of the market conditions and
investment strategies that significantly affected the Fund's performance during
the past fiscal year.
You may request free of charge the current SAI or the most recent annual and
semi-annual reports, or other information about the Funds, by calling
1-800-367-7732 or writing to:
Aetna Series Fund, Inc.
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
SEC's web site (http://www.sec.gov) or at the SEC's Public Reference Room in
Washington, D.C. You may call 1-800-SEC-0330 to get information on the
operations of the Public Reference Room or you may write to Public Reference
Section, Washington, D.C. 20549-6009 to get information from the Public
Reference Section. The Public Reference Section will charge a duplicating fee
for copying and sending any information you request.
Investment Company Act File No. 811-____.
58
<PAGE>
AETNA SERIES FUND, INC.
PROSPECTUS
CLASS I SHARES
March 1, 1999
Capital Appreciation Funds
Aetna Growth Fund (Growth)
Aetna International Fund (International)
Aetna Mid Cap Fund (Mid Cap)
Aetna Small Company Fund (Small Company)
Aetna Value Opportunity Fund (Value Opportunity)
Growth & Income Funds
Aetna Balanced Fund (Balanced)
Aetna Growth and Income Fund (Growth and Income)
Aetna Real Estate Securities Fund (Real Estate)
Income Funds
Aetna Bond Fund (Bond Fund)
Aetna Government Fund
Aetna High Yield Fund (High Yield)
Aetna Money Market Fund (Money Market)
Index Plus Funds
Aetna Index Plus Bond Fund (Index Plus Bond)
Aetna Index Plus Large Cap Fund (Index Plus Large Cap)
Aetna Index Plus Mid Cap Fund (Index Plus Mid Cap)
Aetna Index Plus Small Cap Fund (Index Plus Small Cap)
Generation Funds
Aetna Ascent Fund (Ascent)
Aetna Crossroads Fund (Crossroads)
Aetna Legacy Fund (Legacy)
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.
This Prospectus is for investors purchasing or considering purchase of Class I
shares of one or more of the Funds. Only certain investors are eligible to
purchase Class I shares. All other investors may purchase Class A, Class B
and Class C shares. Investors who wish to purchase Class A, Class B or Class C
shares of the Funds may request a separate prospectus by calling 1-800-367-7732.
<PAGE>
TABLE OF Contents
<TABLE>
<S> <C>
THE FUNDS' INVESTMENTS 3
Investment Objectives, Principal Investment Strategies and
Risks, Volatility and Performance 3
Other Investment Strategies and Risks 27
SHAREHOLDER FEES AND FUND EXPENSES 28
MANAGEMENT OF THE FUNDS' PORTFOLIO
INVESTMENTS 30
INVESTING IN THE FUNDS 33
Opening an Account and Eligibility for Class I Shares 33
How to Buy Shares 33
How to Sell Shares 36
Timing of Requests 37
Other Information about Shareholder Accounts and Services 37
Dividends and Distributions 38
Tax Information 39
PRIVATE ACCOUNT PERFORMANCE 39
FINANCIAL HIGHLIGHTS 41
ADDITIONAL INFORMATION 52
</TABLE>
2
<PAGE>
THE Funds' INVESTMENTS
Investment Objectives, Principal Investment Strategies and Risks, Volatility
and Performance
Below is a description of each Fund's investment objective, the principal
investment strategies employed on behalf of each Fund, and the principal risks
associated with investing in each Fund.
- --------------------------------------------------------------------------------
A bar chart for each Fund (that has been in existence for at least one full
calendar year) shows changes in the Fund's performance from year to year. The
fluctuation in returns shows each Fund's performance volatility. This chart is
accompanied by the Fund's best and worst quarterly returns throughout the years
noted in the bar chart.
- --------------------------------------------------------------------------------
A table for each Fund (that has been in existence for at least one full calendar
year) shows its average annual total returns. The table also compares the Fund's
returns to those of a broad-based securities market index. Each index is a
widely recognized, unmanaged index of securities. A Fund's past performance is
not necessarily an indication of how it will perform in the future.
- --------------------------------------------------------------------------------
Additional information on the Funds' investment strategies and risks is
included, beginning on page 27.
- --------------------------------------------------------------------------------
Aeltus Investment Management, Inc. (Aeltus) serves as investment adviser of the
Funds.
- --------------------------------------------------------------------------------
Bradley, Foster & Sargent, Inc. (Bradley) serves as subadviser of Value
Opportunity.
- --------------------------------------------------------------------------------
Shares of the Funds will rise and fall in value and you could lose money by
investing in them. There is no guaranty the Funds will achieve their investment
objectives. Shares of the Funds are not bank deposits and are not guaranteed,
endorsed or insured by any financial institution, the FDIC or any other
government agency.
3
<PAGE>
- --------------------------------------------------------------------------------
CAPITAL APPRECIATION Funds
- --------------------------------------------------------------------------------
AETNA GROWTH FUND (GROWTH)
Fundamental Objective Seeks growth of capital through investment in a
diversified portfolio consisting primarily of common stocks and securities
convertible into common stocks believed to offer growth potential.
Principal Investment Strategies Under normal market conditions, Growth invests
at least 65% of its total assets in common and preferred stocks.
In managing Growth, Aeltus:
[bullet] Tends to emphasize stocks of larger companies, although it may invest
in stocks of companies of any size.
[bullet] Uses internally developed quantitative computer models to evaluate the
financial characteristics of approximately 1,000 companies. Aeltus
analyzes these characteristics in an attempt to identify companies it
believes have strong growth characteristics or demonstrate a positive
trend in earnings estimates, but whose full value is not reflected in
the stock price.
[bullet] Focuses on companies that it believes have strong, sustainable and
improving earnings growth, and established market positions in a
particular industry.
Principal Risks The principal risks of investing in Growth are those generally
attributable to stock investing. They include the risk of sudden and
unpredictable drops in value of the market as a whole and periods of lackluster
or negative performance.
Growth-oriented stocks typically sell at relatively high valuations as compared
to other types of stocks. If a growth stock does not exhibit the consistent
level of growth expected, its price may drop sharply. Historically,
growth-oriented stocks have been more volatile than value-oriented stocks.
AETNA GROWTH FUND VOLATILITY And PERFORMANCE
[TABULAR REPRESENTATION OF CHART]
<TABLE>
<CAPTION>
Years Ended December 31,
Year-by-Year Total Return (Class I) 1994 1995 1996 1997 1998
<S> <C> <C> <C> <C> <C>
</TABLE>
[triangle pointing up] Best Quarter: , up %
[triangle pointing down] Worst Quarter: , down %
<TABLE>
<CAPTION>
As of December 31, 1998
Average Annual Total Return 1 Year 5 Years Since Inception Inception Date
<S> <C> <C> <C> <C>
Class I (%)
S&P 500 Index**
</TABLE>
- --------------
*The Standard & Poor's 500 Index is a value-weighted, unmanaged index of 500
widely held stocks that assumes the reinvestment of all dividends, and is
considered to be representative of the stock market in general.
4
<PAGE>
AETNA INTERNATIONAL FUND
(INTERNATIONAL)
Fundamental Objective Seeks long-term capital growth primarily through
investment in a diversified portfolio of common stocks principally traded in
countries outside of North America. International will not target any given
level of current income.
Principal Investment Strategies Under normal market conditions, International
invests at least 65% of its total assets in securities principally traded in
three or more countries outside of North America. These securities may include
common stocks as well as securities convertible into common stocks.
In managing International, Aeltus:
[bullet] Diversifies the Fund's portfolio by investing in a mix of stocks that
it believes have the potential for long-term growth, as well as stocks
that appear to be trading below their real value.
[bullet] Allocates assets among several geographic regions and individual
countries, investing primarily in those areas that it believes have the
greatest potential for growth as well as stable exchange rates.
[bullet] Invests primarily in established foreign securities markets, although
it may invest in emerging markets as well.
[bullet] Typically invests in approximately 90 to 120 different securities at
any one time, and looks to allocate no more than 3% of the Fund's total
assets to a single security.
[bullet] Uses internally developed quantitative computer models to evaluate the
financial characteristics of over 2,000 companies. Aeltus analyzes cash
flows, earnings and dividends paid by each company, in an attempt to
select companies with long-term sustainable growth characteristics.
[bullet] Employs currency hedging strategies to protect the portfolio from
adverse effects on the U.S. dollar.
Principal Risks The principal risks of investing in International are those
generally attributable to stock investing. These risks include the sudden and
unpredictable drop in value of the market as a whole and periods of lackluster
or negative performance.
Stocks of foreign companies present additional risks for U.S. investors,
including the following:
[bullet] Stocks of foreign companies tend to be less liquid and more volatile
than their U.S. counterparts.
[bullet] Accounting standards and market regulations tend to be less
standardized in certain foreign countries, and economic and political
climates tend to be less stable.
[bullet] Stocks of foreign companies may be denominated in foreign currency.
Exchange rate fluctuations may reduce or eliminate gains or create
losses.
All these risks usually are higher in emerging markets, such as most countries
in Africa, Asia, Latin America and the Middle East, than in more established
markets, such as Europe.
5
<PAGE>
AETNA INTERNATIONAL FUND VOLATILITY And PERFORMANCE
[TABULAR REPRESENTATION OF CHART]
<TABLE>
<CAPTION>
Years Ended December 31,
Year-by-Year Total Return (Class I) 1992 1993 1994 1995 1996 1997 1998
<S> <C> <C> <C> <C> <C> <C> <C>
</TABLE>
[triangle pointing up] Best Quarter: , up %
[triangle pointing down] Worst Quarter: , down %
<TABLE>
<CAPTION>
As of December 31, 1998
Average Annual Total Return 1 Year 5 Years Since Inception Inception Date
<S> <C> <C> <C> <C>
Class I (%)
MSCI EAFE Index*
</TABLE>
- ----------
*The Morgan Stanley Capital International-Europe, Australia and Far East Index
is a market value-weighted average of the performance of more than 900
securities listed on the stock market exchanges of countries in Europe,
Australia and the Far East.
6
<PAGE>
AETNA MID CAP FUND
(MID CAP)
Fundamental Objective Seeks growth of capital primarily through investment in a
diversified portfolio of common stocks and securities convertible into common
stocks of companies having medium market capitalizations.
Principal Investment Strategies Under normal market conditions, Mid Cap invests
at least 65% of its total assets in common stocks of medium capitalization
companies, defined as:
[bullet] The largest 1,000 U.S. companies (as measured by market
capitalization), excluding companies in the Standard & Poor's 500
Composite Index; and
[bullet] All companies in the Standard & Poor's MidCap 400 Index that are not
otherwise included in the largest 1,000 companies (as measured by
market capitalization).
In managing Mid Cap, Aeltus invests in stocks that it believes have the
potential for long-term growth, as well as those that appear to be trading below
their real value. Aeltus uses internally developed quantitative computer models
to evaluate the financial characteristics of companies. Aeltus analyzes these
characteristics in an attempt to identify companies whose full value is not
reflected in the stock price. These characteristics include a company's
potential for strong, sustainable earnings and for long-term profitability.
Principal Risks The principal risks of investing in Mid Cap are those generally
attributable to stock investing. These risks include the sudden and
unpredictable drop in value of the market as a whole and periods of lackluster
or negative performance. Stocks of medium-sized companies tend to be more
volatile and less liquid than stocks of larger companies.
- --------------------------------------------------------------------------------
AETNA SMALL COMPANY FUND
(SMALL COMPANY)
Fundamental Objective Seeks growth of capital primarily through investment in a
diversified portfolio of common stocks and securities convertible into common
stocks of companies with smaller market capitalizations.
Principal Investment Strategies Under normal market conditions, Small Company
invests at least 65% of its total assets in common and preferred stocks of
small-capitalization companies, defined as:
[bullet] The smallest 2,000 of the largest 3,000 U.S. companies (as measured by
market capitalization); and
[bullet] All companies not included above that are included in the Standard &
Poor's SmallCap 600 Index.
In managing Small Company, Aeltus:
[bullet] Invests in stocks that it believes have the potential for long-term
growth, as well as those that appear to be trading below their real
value.
[bullet] Uses internally developed quantitative computer models to evaluate
financial characteristics of over 2,000 companies. Aeltus analyzes
these characteristics in an attempt to identify companies whose full
value is not reflected in the stock price.
[bullet] Considers the potential of each company to create or take advantage of
unique product opportunities, its potential to achieve long-term
sustainable growth and the quality of its management.
Principal Risks The principal risks of investing in Small Company are those
generally attributable to stock investing. These risks include the sudden and
unpredictable drop in value of the market as a whole and periods of lackluster
or negative performance.
Other risks include:
[bullet] Stocks of smaller companies carry higher risks than stocks of larger
companies. This is because smaller companies may lack the management
experience, financial resources, product diversification, and
competitive strengths of larger companies.
[bullet] In many instances, the frequency and volume of trading in these stocks
is substantially less than is typical of stocks of larger companies. As
a result, the stocks of smaller companies may be subject to wider price
fluctuations or may be less liquid.
[bullet] When making large sales, the Fund may have to sell portfolio holdings
at discounts from quoted prices or may have to make a series of small
sales over an extended period of time due to the trading volume of
smaller company stocks.
[bullet] Stocks of smaller companies can be particularly sensitive to expected
changes in interest rates, borrowing costs and earnings.
7
<PAGE>
AETNA SMALL COMPANY FUND VOLATILITY And PERFORMANCE
[TABULAR REPRESENTATION OF CHART]
<TABLE>
<CAPTION>
Years Ended December 31,
Year-by-Year Total Return (Class I) 1994 1995 1996 1997 1998
<S> <C> <C> <C> <C> <C>
</TABLE>
[triangle pointing up] Best Quarter: , up %
[triangle pointing down] Worst Quarter: , down %
<TABLE>
<CAPTION>
As of December 31, 1998
Average Annual Total Return 1 Year 5 Years Since Inception Inception Date
<S> <C> <C> <C> <C>
Class I (%)
Russell 2000 Index*
</TABLE>
- ----------
*The Russell 2000 Index consists of the smallest 2,000 companies in the Russell
3000 Index and represents approximately 10% of the Russell 3000 total market
capitalization. The 3,000 largest U.S. companies by market capitalization,
representing nearly 98% of the U.S. equity market, comprise the Russell 3000
Index. Both indices assume reinvestment of all dividends and are unmanaged.
8
<PAGE>
AETNA VALUE OPPORTUNITY FUND
(VALUE OPPORTUNITY)
Fundamental Objective Seeks growth of capital primarily through investment in a
diversified portfolio of common stocks and securities convertible into common
stock. Stocks are selected based on a value-oriented approach.
Principal Investment Strategies Under normal market conditions, Value
Opportunity invests at least 65% of its total assets in common and preferred
stocks. In managing Value Opportunity, Bradley tends to emphasize common stocks
of larger companies it believes are trading below their real value, although it
may invest in stocks of companies of any size. Bradley believes that Value
Opportunity's investment objective can best be achieved by investing in
companies whose stock price has been excessively discounted due to perceived
problems. In searching for investments, Bradley evaluates financial
characteristics of companies, attempting to find those companies that appear to
possess a catalyst for positive change, such as strong management, solid assets,
or market position, rather than those companies whose stocks are simply
inexpensive.
Principal Risks The principal risks of investing in Value Opportunity are those
generally attributable to stock investing. These risks include the sudden and
unpredictable drop in value of the market as a whole and periods of lackluster
or negative performance.
Further, stocks that appear to be undervalued may never appreciate to the extent
expected. Because value-oriented stocks tend to exhibit a stronger relationship
to economic cycles than growth-oriented stocks, they are more sensitive to
changing economic conditions, such as changes in interest rates, corporate
earnings and industrial production.
- --------------------------------------------------------------------------------
GROWTH & INCOME Funds
- --------------------------------------------------------------------------------
AETNA BALANCED FUND
(BALANCED)
Fundamental Objective Seeks to maximize total return with reasonable safety of
principal by investing in a diversified portfolio of stocks, bonds and money
market instruments.
Principal Investment Strategies Under normal market conditions, Balanced
allocates its assets among the following asset classes:
[bullet] Equities, such as common and preferred stocks.
[bullet] Debt, such as bonds, mortgage-related and other asset-backed
securities, and U.S. Government securities.
[bullet] Money market instruments.
Aeltus typically maintains approximately 60% of Balanced's total assets in
equities and approximately 40% of its total assets in debt (including money
market instruments), although those percentages may vary from time to time
depending on Aeltus' view of the relative attractiveness of these asset classes.
In making asset allocation decisions, Aeltus uses current market statistics and
economic indicators to attempt to forecast returns for the equity and debt
sectors of the securities market. Within each asset class, Aeltus uses
quantitative computer models to evaluate financial criteria in an attempt to
identify those issuers whose full value is not reflected in their equity or debt
securities.
Aeltus generally does not attempt to respond to short-term swings in the market
by quickly changing the characteristics of the Fund's portfolio.
In managing the equity component of Balanced, Aeltus typically emphasizes
investment in stocks of larger companies, although it may invest in stocks of
smaller companies to a significant extent.
In managing the debt component of Balanced, Aeltus looks to select investments
with the opportunity to enhance the portfolio's yield and total return, focusing
on performance over the long term. The Fund may invest up to 15% of total assets
in high-yield bonds (fixed income securities rated below BBB- by Standard &
Poor's Corporation (S&P) or Baa3 by Moody's Investors Services, Inc. (Moody's)
or, if unrated, considered by Aeltus to be of comparable quality).
Principal Risks The principal risks of investing in Balanced are those generally
attributable to stock and bond investing. The success of the Fund's strategy
depends on Aeltus' skill in allocating Fund assets between equities and debt and
in choosing investments within those categories. As a result, Balanced may
underperform stock funds when stocks are in favor and underperform bond funds
when bonds are in favor.
9
<PAGE>
In the case of stocks, risks include the sudden and unpredictable drop in value
of the market as a whole and periods of lackluster or negative performance.
Stocks of smaller companies tend to be less liquid and more volatile than stocks
of larger companies. Stocks of smaller companies also can be particularly
sensitive to expected changes in interest rates, borrowing costs and earnings.
The Fund's fixed-income investments are subject to the risk that interest rates
will rise, which generally causes bond prices to fall. Also, economic and market
conditions may cause issuers to default or go bankrupt. In either case, the
price of Fund shares may fall. The value of high-yield bonds are even more
sensitive to economic and market conditions than other bonds.
The prices of mortgage-related securities, in addition to being sensitive to
changes in interest rates, also are sensitive to changes in the prepayment
patterns on the underlying securities. If the principal on the underlying
mortgage notes is repaid faster than anticipated, which typically occurs in
times of low or declining interest rates, the price of the mortgage-related
security may fall.
AETNA BALANCED FUND VOLATILITY And PERFORMANCE
[TABULAR REPRESENTATION OF CHART]
<TABLE>
<CAPTION>
Years Ended December 31,
Year-by-Year Total Return (Class I) 1992 1993 1994 1995 1996 1997 1998
<S> <C> <C> <C> <C> <C> <C> <C>
</TABLE>
[triangle pointing up] Best Quarter: , up %
[triangle pointing down] Worst Quarter: , down %
<TABLE>
<CAPTION>
As of December 31, 1998
Average Annual Total Return 1 Year 5 Years Since Inception Inception Date
<S> <C> <C> <C> <C>
Class I (%)
60% S&P 500 Index/40%
Lehman Brothers Aggregate
Bond Index*
</TABLE>
- ----------
*The Standard & Poor's 500 Index is a value-weighted, unmanaged index of 500
widely held stocks that assumes the reinvestment of all dividends and is
considered to be representative of the stock market in general. The Lehman
Brothers Aggregate Bond Index is an unmanaged index of corporate, government and
mortgage bonds.
10
<PAGE>
AETNA GROWTH AND INCOME FUND
(GROWTH AND INCOME)
Fundamental Objective Seeks long-term growth of capital and income through
investment in a diversified portfolio consisting primarily of common stocks and
securities convertible into common stocks believed to offer above-average growth
potential.
Principal Investment Strategies Under normal market conditions, Growth and
Income invests at least 65% of its total assets in common stocks that Aeltus
believes have significant potential for capital or income growth. In managing
Growth and Income, Aeltus:
[bullet] Tends to emphasize stocks of larger companies.
[bullet] Looks to diversify the Fund's assets across other asset classes
(including stocks of small and medium-sized companies, international
stocks, real estate securities and fixed income securities).
[bullet] Uses internally developed quantitative computer models to determine the
relative attractiveness of each asset class and to evaluate the
financial characteristics of securities within each class. In analyzing
these characteristics, Aeltus attempts to identify momentum and
valuation characteristics in selecting securities whose full value is
not reflected in their price.
Principal Risks The principal risks of investing in Growth and Income are those
generally attributable to stock investing. These risks include the sudden and
unpredictable drop in value of the market as a whole and periods of lackluster
or negative performance. The success of the Fund's strategy depends
significantly on Aeltus' skill in allocating assets and in choosing investments.
Growth-oriented stocks typically sell at relatively high valuations as compared
to other types of stocks. If a growth stock does not exhibit the level of growth
expected, its price may drop sharply. Historically, growth-oriented stocks have
been more volatile than value-oriented stocks.
Because Aeltus emphasizes large cap stocks, the Fund may underperform when large
cap stocks are out of favor; however, because the Fund is more diversified
across asset classes than most other funds with similar investment objectives,
it may not perform as well as those funds when large cap stocks are in favor.
AETNA GROWTH AND INCOME FUND VOLATILITY And PERFORMANCE
[TABULAR REPRESENTATION OF CHART]
<TABLE>
<CAPTION>
Years Ended December 31,
Year-by-Year Total Return (Class I) 1992 1993 1994 1995 1996 1997 1998
<S> <C> <C> <C> <C> <C> <C> <C>
</TABLE>
[triangle pointing up] Best Quarter: , up %
[triangle pointing down] Worst Quarter: , down %
<TABLE>
<CAPTION>
As of December 31, 1998
Average Annual Total Return 1 Year 5 Years Since Inception Inception Date
<S> <C> <C> <C> <C>
Class I (%)
S&P 500 Index*
</TABLE>
- ----------
*The Standard & Poor's 500 Index is a value-weighted, unmanaged index of 500
widely held stocks that assumes the reinvestment of all dividends and is
considered to be representative of the stock market in general.
11
<PAGE>
AETNA REAL ESTATE SECURITIES FUND
(REAL ESTATE)
Fundamental Objective Seeks maximum total return primarily through investment in
a diversified portfolio of equity securities of real estate companies, the
majority of which are real estate investment trusts (REITs).
Principal Investment Strategies Under normal market conditions, Real Estate
invests at least 65% of its total assets in stocks, convertible securities and
preferred stocks of companies principally engaged in the real estate industry.
These companies may invest in, among other things, shopping malls, healthcare
facilities, office parks and apartment communities, or may provide real estate
management and development services.
In selecting investments from a universe of equity securities of REITs and real
estate operating companies, Aeltus uses internally developed quantitative models
to forecast returns of each security. Aeltus evaluates real estate companies
based on their earnings history and long-term growth prospects, analyst
estimates of future earnings, safety and growth in dividends, balance sheet
strength and quality of management. Aeltus also considers whether the securities
appear to be trading below their real value. Aeltus allocates assets among
property types and economic and geographic regions. Aeltus attempts to construct
Real Estate's portfolio so that the overall level of risk is not in excess of
its benchmark index, the National Association of Real Estate Investment Trusts
Equity Index.
Principal Risks Concentrating in stocks of real estate-related companies
presents certain risks that are more closely associated with investing in real
estate directly. Those risks include:
[bullet] Periodic declines in the value of real estate, generally, or in the
rents and other income generated by real estate.
[bullet] 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.
[bullet] Adverse developments in the real estate industry, which may have a
greater impact on the Fund than a fund more broadly diversified.
The risks generally attributable to stock investing include the sudden and
unpredictable drop in the value of the market as a whole and periods of
lackluster or negative performance. Although Real Estate is subject to the risks
generally attributable to stock investing, because the Fund has concentrated its
assets in one industry it may be subject to more abrupt swings in value than
would a more diversified equity portfolio.
12
<PAGE>
- --------------------------------------------------------------------------------
INCOME Funds
- --------------------------------------------------------------------------------
AETNA BOND FUND (BOND FUND)
Fundamental Objective Seeks to provide as high a level of total return (i.e.,
income and capital appreciation) as is consistent with reasonable risk,
primarily through investment in a diversified portfolio of investment-grade
corporate bonds, and debt securities issued or guaranteed by the U.S.
Government, its agencies or instrumentalities.
Principal Investment Strategies Under normal market conditions, Bond Fund
invests at least 65% of its total assets in:
[bullet] High-grade corporate bonds.
[bullet] Mortgage-related and other asset-backed securities.
[bullet] Securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities.
High-grade securities are rated at least A by S&P or Moody's, or if unrated,
considered by Aeltus to be of comparable quality. The Fund may also invest up to
15% of its total assets in high-yield bonds, and up to 25% of its total assets
in foreign securities.
In managing Bond Fund, Aeltus looks to construct an intermediate-term,
high-quality portfolio by selecting investments with the opportunity to enhance
the portfolio's overall total return and yield, while managing volatility.
Aeltus uses quantitative computer models to evaluate issuers whose full value is
not reflected in their security prices. As a result, Bond Fund may, at times,
emphasize one type of debt security rather than another.
Principal Risks The principal risks of investing in Bond Fund are those
generally attributable to debt investing, including increases in interest rates
and loss of principal. Generally, when interest rates rise, bond prices fall.
Bonds with longer maturities tend to be more sensitive to changes in interest
rates.
For all bonds there is a risk that the issuer will default. High-yield bonds
generally are more susceptible to the risk of default than higher rated bonds.
The prices of mortgage-related securities, in addition to being sensitive to
changes in interest rates, also are sensitive to changes in the prepayment
patterns on the underlying securities. If the principal on the underlying
mortgage notes is repaid faster than anticipated, which typically occurs in
times of low or declining interest rates, the price of the mortgage-related
security may fall.
Foreign securities present additional risks. Some foreign securities tend to be
less liquid and more volatile than their U.S. counterparts. These risks are
usually higher for securities of companies in emerging markets.
13
<PAGE>
AETNA BOND FUND VOLATILITY And PERFORMANCE
[TABULAR REPRESENTATION OF CHART]
<TABLE>
<CAPTION>
Years Ended December 31,
Year-by-Year Total Return (Class I) 1992 1993 1994 1995 1996 1997 1998
<S> <C> <C> <C> <C> <C> <C> <C>
</TABLE>
[triangle pointing up] Best Quarter: , up %
[triangle pointing down] Worst Quarter: , down %
<TABLE>
<CAPTION>
As of December 31, 1998
Average Annual Total Return 1 Year 5 Years Since Inception Inception Date
<S> <C> <C> <C> <C>
Class I (%)
Lehman Brothers Aggregate
Bond Index*
</TABLE>
- ----------
*The Lehman Brothers Aggregate Bond Index is an unmanaged index of corporate,
government and mortgage bonds.
14
<PAGE>
AETNA GOVERNMENT FUND
Fundamental Objective Seeks to provide income consistent with the preservation
of capital through investment in securities issued or guaranteed by the U.S.
Government, its agencies or instrumentalities.
Principal Investment Strategies Under normal market conditions, Aetna Government
Fund invests at least 65% of its total assets in U.S. Government securities.
U.S. Government securities include securities issued by the U.S. Treasury,
individual government agencies and certain organizations created through federal
legislation. Securities issued by the U.S. Treasury are backed by the full faith
and credit of the federal government, the strongest form of credit backing in
the U.S. Securities issued by individual agencies and organizations may be
backed by the full faith and credit of the federal government as to principal or
interest but are not direct obligations of the U.S. Treasury. Government
securities also include certain mortgage-related securities that are sponsored
by a U.S. Government agency or organization.
In managing Aetna Government Fund, Aeltus:
[bullet] Looks to construct an intermediate-term, high-quality portfolio by
selecting investments with the potential to enhance the portfolio's
overall yield and total return.
[bullet] Uses quantitative computer models to identify attractive investments
within the U.S. Government securities markets. As a result, Aetna
Government Fund may, at times, emphasize one type of U.S. Government
security rather than another.
Principal Risks The principal risks of investing in Aetna Government Fund are
those generally attributable to debt investing, including increases in interest
rates. Generally, when interest rates rise, bond prices fall. Bonds with longer
maturities tend to be more sensitive to changes in interest rates.
In addition to being sensitive to changes in interest rates, the prices of
mortgage-related securities also are sensitive to changes in the prepayment
patterns on the underlying securities. If the principal on the underlying
mortgage notes is repaid faster than anticipated, which typically occurs in
times of low or declining interest rates, the price of the mortgage-related
security may fall.
15
<PAGE>
AETNA GOVERNMENT FUND VOLATILITY And PERFORMANCE
[TABULAR REPRESENTATION OF CHART]
<TABLE>
<CAPTION>
Years Ended December 31,
Year-by-Year Total Return (Class I) 1994 1995 1996 1997 1998
<S> <C> <C> <C> <C> <C>
</TABLE>
[triangle pointing up] Best Quarter: , up %
[triangle pointing down] Worst Quarter: , down %
<TABLE>
<CAPTION>
As of December 31, 1998
Average Annual Total Return 1 Year 5 Years Since Inception Inception Date
<S> <C> <C> <C> <C>
Class I (%)
Lehman Brothers Intermediate
Government Index*
</TABLE>
- ----------
*The Lehman Brothers Intermediate Government Bond Index, an unmanaged index,
includes those bonds found in the Lehman Brothers Government Bond Index that
have a maturity of one to 9.99 years.
16
<PAGE>
AETNA HIGH YIELD FUND
(HIGH YIELD)
Fundamental Objective Seeks high current income and growth of capital primarily
through investment in a diversified portfolio of fixed-income securities rated
lower than BBB- by S&P or lower than Baa3 by Moody's.
Principal Investment Strategies Under normal market conditions, High Yield
invests at least 65% of its total assets in high-yield bonds. High-yield bonds
are bonds rated below investment grade in terms of quality, and may include
bonds of companies in default or bankruptcy.
In managing High Yield, Aeltus:
[bullet] Looks to meet the Fund's objective and reduce volatility by
constructing a diversified portfolio consisting of securities with
varying maturities and credit ratings. Aeltus, however, attempts to
look beyond credit ratings to select investments that it believes offer
opportunities for high income, growth and credit improvement.
[bullet] Uses a quantitative process for evaluating the financial criteria of
issuers, such as cash flow.
[bullet] Evaluates other, less quantitative factors, such as market share,
strength of management and management's equity stake in the company.
Principal Risks When the economy weakens, cash flows weaken, making it more
difficult for issuers to pay principal and interest. For all bonds, there is a
risk that an issuer will default. High-yield bonds, however, are more
susceptible to the risk of default and their prices usually will fall if a
number of other issuers default or go bankrupt or if the market anticipates
either of those events.
Additional risks include:
[bullet] The performance of High Yield may be affected by weak equity markets,
when issuers of high-yield bonds generally find it difficult to reduce
debt by replacing debt with equity.
[bullet] Because many high-yield securities are traded only among institutional
investors, it may be difficult for Aeltus to sell the Fund's portfolio
investments at fair prices when high-yield bonds fall out of favor with
those investors.
[bullet] Generally, when interest rates rise, bond prices fall, which may cause
the value of the Fund's portfolio securities to fall as well.
- --------------------------------------------------------------------------------
AETNA MONEY MARKET FUND
(MONEY MARKET)
Fundamental Objective Seeks to provide high current return, consistent with
preservation of capital and liquidity, through investment in high-quality money
market instruments.
Principal Investment Strategies Money Market is managed in accordance with
Securities and Exchange Commission rules that are designed to ensure that money
market funds maintain a stable $1.00 share price. Money Market invests only in a
diversified portfolio of high-quality fixed income securities denominated in
U.S. dollars, with short remaining maturities. These securities include U.S.
Government securities, such as U.S. Treasury bills and securities issued or
sponsored by U.S. government agencies. They also may include corporate debt
securities, finance company commercial paper, asset-backed securities, and
certain obligations of U.S. and foreign banks, each of which must be highly
rated by independent rating agencies. Money Market maintains a dollar-weighted
average portfolio maturity of not more than 90 days.
Principal Risks Although Money Market seeks to preserve the value of your
investment at $1.00 per share, it is possible to lose money by investing in
Money Market. An investment in Money Market is not insured or guaranteed by the
FDIC or any other government agency. A weak economy, strong equity markets and
changes by the Federal Reserve in its monetary policies all could affect
short-term interest rates and, therefore, the yield of Money Market's shares.
17
<PAGE>
AETNA MONEY MARKET FUND VOLATILITY And PERFORMANCE
[TABULAR REPRESENTATION OF CHART]
<TABLE>
<CAPTION>
Years Ended December 31,
Year-by-Year Total Return (Class I) 1992 1993 1994 1995 1996 1997 1998
<S> <C> <C> <C> <C> <C> <C> <C>
</TABLE>
[triangle pointing up] Best Quarter: , up %
[triangle pointing down] Worst Quarter: , down %
<TABLE>
<CAPTION>
As of December 31, 1998
Average Annual Total Return 1 Year 5 Years Since Inception Inception Date
<S> <C> <C> <C> <C>
Class I (%)
IBC Index*
</TABLE>
- ----------
*IBC's Money Funds Report Average/All Taxable Index (IBC) is an average of the
returns of over 250 money market mutual funds surveyed each month by IBC.
To obtain current yield information, please contact 1-800-____-____.
18
<PAGE>
- --------------------------------------------------------------------------------
INDEX PLUS Funds
- --------------------------------------------------------------------------------
AETNA INDEX PLUS BOND FUND
(INDEX PLUS BOND)
Fundamental Objective Seeks maximum total return, consistent with preservation
of capital, primarily through investment in a diversified portfolio of
fixed-income securities, which will be chosen to substantially replicate the
characteristics of the Lehman Brothers Aggregate Bond Index (LBAB), an unmanaged
index comprised of approximately 6,900 securities.
Principal Investment Strategies Under normal market conditions, Index Plus Bond
invests at least 90% of its total assets in bonds, including U.S. Treasuries,
corporate bonds and mortgage-related securities.
In managing Index Plus Bond, Aeltus:
[bullet] Attempts to achieve a total return which, before deducting fund
expenses, exceeds the LBAB.
[bullet] Allocates assets among various sectors as well as individual securities
that it believes will outperform those in the LBAB, and underweighting
certain other sectors or securities it believes will underperform.
[bullet] In determining which bonds to purchase, evaluates various criteria,
such as the financial strength of the issuer and the issuer's potential
for strong, sustained earnings growth as well as the potential for
interest rates to rise or fall.
Aeltus expects that there will be a close correlation between the performance of
Index Plus Bond and that of the LBAB in both rising and falling markets.
Inclusion of a bond in the LBAB in no way implies an opinion by Lehman Brothers
as to the bond's attractiveness as an investment. Index Plus Bond is neither
sponsored by nor affiliated with Lehman Brothers.
Principal Risks The principal risks of investing in Index Plus Bond are those
generally attributable to bond investing. Generally, when interest rates rise,
bond prices fall. Bonds with longer maturities tend to be more sensitive to
changes in interest rates. For all bonds there is a risk that an issuer will
default.
The prices of mortgage-related securities, in addition to being sensitive to
changes in interest rates, also are sensitive to changes in the prepayment
patterns on the underlying securities. If the principal on the underlying
mortgage notes is repaid faster than anticipated, which typically occurs in
times of low or declining interest rates, the price of the mortgage-related
security may fall.
The success of the Fund's strategy depends significantly on Aeltus' skill in
choosing investments, and in determining which sectors or securities it
overweights, underweights or avoids altogether.
- --------------------------------------------------------------------------------
AETNA INDEX PLUS LARGE CAP FUND
(INDEX PLUS LARGE CAP)
Fundamental Objective Seeks to outperform the total return performance of the
Standard & Poor's 500 Composite Index (S&P 500), while maintaining a market
level of risk.
Principal Investment Strategies Under normal market conditions, Index Plus Large
Cap invests at least 80% of its net assets in stocks included in the S&P 500
(other than Aetna Inc. common stock). 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 & Poor's Corporation.
In managing Index Plus Large Cap, Aeltus attempts to achieve its objective by
overweighting those stocks in the S&P 500 that it believes will outperform the
index, and underweighting (or avoiding altogether) those stocks that Aeltus
believes will underperform the index. In determining which stocks to 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 growth of earnings. At any one time, Aeltus
generally includes in the Index Plus Large Cap portfolio approximately 400
stocks included in the S&P 500. Aeltus expects that there will be a close
correlation between the performance of Index Plus Large Cap and that of the S&P
500 in both rising and falling markets.
Inclusion of a stock in the S&P 500 in no way implies an opinion by S&P as to
the stock's attractiveness as an investment. Index Plus Large Cap is neither
sponsored by nor affiliated with S&P.
Principal Risks The principal risks of investing in Index Plus Large Cap are
those generally attributable to stock investing. These risks include the sudden
and unpredictable drop in value of the market as a whole and periods of
lackluster or negative performance. The success of the Fund's strategy depends
significantly on Aeltus' skill in determining which securities it overweights,
underweights or avoids altogether.
19
<PAGE>
AETNA INDEX PLUS LARGE CAP FUND VOLATILITY And PERFORMANCE
[TABULAR REPRESENTATION OF CHART]
<TABLE>
<CAPTION>
Years Ended December 31,
Year-by-Year Total Return (Class I) 1997 1998
<S> <C> <C>
</TABLE>
[triangle pointing up] Best Quarter: , up %
[triangle pointing down] Worst Quarter: , down %
<TABLE>
<CAPTION>
As of December 31, 1998
Average Annual Total Return 1 Year Since Inception Inception Date
<S> <C> <C> <C>
Class I (%)
S&P 500 Index*
</TABLE>
- ----------
*The Standard & Poor's 500 Index is a value-weighted, unmanaged index of 500
widely held stocks that assumes the reinvestment of all dividends, and is
considered to be representative of the stock market in general.
20
<PAGE>
AETNA INDEX PLUS MID CAP FUND
(INDEX PLUS MID CAP)
Fundamental Objective Seeks to outperform the total return performance of the
Standard & Poor's MidCap 400 Index (S&P 400), while maintaining a market level
of risk.
Principal Investment Strategies Under normal market conditions, Index Plus Mid
Cap invests at least 80% of its net assets in stocks included in the S&P 400.
The S&P 400 is a stock market index comprised of common stocks of 400
mid-capitalization companies in the U.S. selected by Standard & Poor's
Corporation.
In managing Index Plus Mid Cap, Aeltus attempts to achieve its objective by
overweighting those stocks in the S&P 400 that Aeltus believes will outperform
the index, and underweighting (or avoiding altogether) those stocks that Aeltus
believes will underperform the index. In determining which stocks to weight more
or less heavily, Aeltus uses internally developed quantitative computer models
to evaluate various criteria, such as the financial strength of each issuer and
its potential for strong, sustained growth of earnings. Aeltus expects that
there will be a close correlation between the performance of Index Plus Mid Cap
and that of the S&P 400 in both rising and falling markets.
Inclusion of a stock in the S&P 400 in no way implies an opinion by S&P as to
the stock's attractiveness as an investment. Index Plus Mid Cap is neither
sponsored by nor affiliated with S&P.
Principal Risks The principal risks of investing in Index Plus Mid Cap are those
generally attributable to stock investing. These risks include the sudden and
unpredictable drop in value of the market as a whole and periods of lackluster
or negative performance. In addition, stocks of medium sized companies tend to
be more volatile and less liquid than stocks of larger companies. The success of
the Fund's strategy depends significantly on Aeltus' skill in determining which
securities it overweights, underweights or avoids altogether.
- --------------------------------------------------------------------------------
AETNA INDEX PLUS SMALL CAP FUND
(INDEX PLUS SMALL CAP)
Fundamental Objective Seeks to outperform the total return performance of the
Standard & Poor's SmallCap 600 Index (S&P 600), while maintaining a market level
of risk.
Principal Investment Strategies Under normal market conditions, Index Plus Small
Cap invests at least 80% of its net assets in stocks included in the S&P 600.
The S&P 600 is a stock market index comprised of common stock of 600
small-capitalization companies in the U.S. selected by Standard & Poor's
Corporation.
In managing Index Plus Small Cap, Aeltus attempts to achieve its objective by
overweighting those stocks in the S&P 600 that Aeltus believes will outperform
the index, and underweighting (or avoiding altogether) those stocks that Aeltus
believes will underperform the index. In determining which stocks to weight more
or less heavily, Aeltus uses internally developed quantitative computer models
to evaluate various criteria, such as the financial strength of each issuer and
its potential for strong, sustained growth of earnings. Aeltus expects that
there will be a close correlation between the performance of Index Plus Small
Cap and that of the S&P 600 in both rising and falling markets.
Inclusion of a stock in the S&P 600 in no way implies an opinion by S&P as to
the stock's attractiveness as an investment. Index Plus Small Cap is neither
sponsored by nor affiliated with S&P.
Principal Risks The principal risks of investing in Index Plus Small Cap are
those generally attributable to stock investing. These risks include the sudden
and unpredictable drop in value of the market as a whole and periods of
lackluster or negative performance. The success of the Fund's strategy depends
significantly on Aeltus' skill in determining which securities it overweights,
underweights or avoids altogether.
Other risks include:
[bullet] Stocks of smaller companies carry higher risks than stocks of larger
companies because smaller companies may lack the management experience,
financial resources, product diversification and competitive strengths
of larger companies.
[bullet] In many instances, the frequency and volume of trading in these stocks
is substantially less than is typical of stocks of larger companies. As
a result, the stocks of smaller companies may be subject to wider price
fluctuations.
21
<PAGE>
[bullet] When making large sales, the Fund may have to sell portfolio holdings
at discounts from quoted prices or may have to make a series of small
sales over an extended period of time due to the trading volume of
smaller company stocks.
[bullet] Stocks of smaller companies tend to be more volatile than stocks of
larger companies and can be particularly sensitive to expected changes
in interest rates, borrowing costs and earnings.
- --------------------------------------------------------------------------------
GENERATION Funds
- --------------------------------------------------------------------------------
AETNA ASCENT FUND
(ASCENT)
AETNA CROSSROADS FUND
(CROSSROADS)
AETNA LEGACY FUND
(LEGACY)
Fundamental Objectives Ascent seeks to provide capital appreciation.
Crossroads seeks to provide total return (i.e., income and capital appreciation,
both realized and unrealized).
Legacy seeks to provide total return consistent with preservation of capital.
Principal Investment Strategies Ascent, Crossroads and Legacy are asset
allocation funds that have been designed for investors with different investment
objectives:
[bullet] Ascent is managed for investors seeking capital appreciation who
generally have an investment horizon exceeding 15 years and who have a
high level of risk tolerance.
[bullet] Crossroads is managed for investors seeking a balance between income
and capital appreciation who generally have an investment horizon
exceeding 10 years and who have a moderate level of risk tolerance.
[bullet] Legacy is managed for investors primarily seeking total return
consistent with capital preservation, who generally have an investment
horizon exceeding 5 years and who have a low level of risk tolerance.
Under normal market conditions, Aeltus allocates the assets of each Generation
Fund, in varying degrees, among several classes of equities, fixed-income
securities and money market instruments. To remain consistent with each
Generation Fund's investment objective and intended level of risk tolerance,
Aeltus has instituted both a benchmark percentage allocation and a Fund level
range allocation for each asset class. The benchmark percentage for each asset
class assumes neutral market and economic conditions. The Fund level range
allows Aeltus to vary the securities in each Fund and take advantage of
opportunities as market and economic-conditions change. Aeltus does not attempt
to respond to short-term swings in the market by quickly changing the
characteristics of the Generation Funds' portfolios.
The Generation Funds' benchmarks and ranges are described on the following page.
The asset allocation limits apply at the time of purchase of a particular
security.
22
<PAGE>
ASSET CLASS
<TABLE>
<CAPTION>
Ascent Crossroads(1) Legacy(2) Comparative Index
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------
Equities
- ---------------------------------------------------------------------------------------------------------------------------
Large Capitalization Stocks
Range 0-60% 0-45% 0-30% S&P 500 Index
Benchmark 20% 15% 10%
Small-/Mid-Capitalization Stocks
Range 0-40% 0-30% 0-20% Russell 2500 Index
Benchmark 20% 15% 10%
International Stocks Morgan Stanley Capital
Range 0-40% 0-30% 0-20% International Europe,
Benchmark 20% 15% 10% Australia and Far East Index
Real Estate Stocks National Association of
Range 0-40% 0-30% 0-20% Real Estate Investment Trusts
Benchmark 20% 15% 10% Equity Index
- ---------------------------------------------------------------------------------------------------------------------------
Fixed Income
- ---------------------------------------------------------------------------------------------------------------------------
U.S. Dollar Bonds
Range 0-40% 0-70% 0-100% Salomon Brothers Broad
Benchmark 10% 25% 40% Investment Grade Index
International Bonds
Range 0-20% 0-20% 0-20% Salomon Brothers Non-U.S.
Benchmark 10% 10% 10% World Government Bond Index
- ---------------------------------------------------------------------------------------------------------------------------
Money Market Instruments
- ---------------------------------------------------------------------------------------------------------------------------
Range 0-30% 0-30% 0-30% 91-Day U.S. Treasury Bill Rate
Benchmark 0% 5% 10%
</TABLE>
- ----------------
(1) Crossroads will invest no more than 60% of its assets in any combination of
the following asset classes: small-/mid-capitalization stocks, high-yield bonds,
international stocks and international fixed-income securities.
(2) Legacy will invest no more than 35% of its assets in any combination of the
following asset classes: small-/mid-capitalization stocks, high-yield bonds,
international stocks and international fixed-income securities.
23
<PAGE>
Each Generation Fund's allocation among assets may vary from the benchmark
allocation (within the permissible range) based on Aeltus' ongoing evaluation of
the expected returns and risks of each asset class relative to other classes.
Among the criteria Aeltus evaluates to determine allocations are economic and
market conditions, including changes in circumstances with respect to particular
asset classes, geographic regions, industries or issuers and interest rate
movements. In selecting individual portfolio securities, Aeltus considers such
factors as:
[bullet] Expected dividend and returns.
[bullet] Bond yields.
[bullet] Price-to-earnings ratios.
[bullet] Dividend yields.
Each Generation Fund may invest up to 15% of its total assets in high-yield
bonds.
Principal Risks The principal risks of investing in each Generation Fund are
those generally attributable to stock and bond investing. The success of each
Generation Fund's strategy depends significantly on Aeltus' skill in choosing
investments and in allocating assets among the different investment classes.
For stock investments, those risks include the sudden and unpredictable drop in
value of the market as a whole and periods of lackluster or negative
performance. Stocks of smaller companies tend to be less liquid and more
volatile than stocks of larger companies, and can be particularly sensitive to
expected changes in interest rates, borrowing costs and earnings.
The risks associated with real estate securities include periodic declines in
the value of real estate, generally, or in the rents and other income generated
by real estate caused by such factors as periodic over-building.
For bonds, generally, when interest rates rise, bond prices fall. Also, economic
and market conditions may cause issuers to default or go bankrupt. The value of
high-yield bonds are even more sensitive to economic and market conditions than
other bonds.
The prices of mortgage-related securities, in addition to being sensitive to
changes in interest rates, also are sensitive to changes in the prepayment
patterns on the underlying securities. If the principal on the underlying
mortgage notes is repaid faster than anticipated, which typically occurs in
times of low or declining interest rates, the price of the mortgage-related
security may fall.
Foreign securities present additional risks. Foreign securities tend to be less
liquid and more volatile than their U.S. counterparts, and fluctuations in
exchange rates may reduce or eliminate gains or create losses. These risks are
usually higher for securities of companies in emerging markets.
24
<PAGE>
AETNA ASCENT FUND VOLATILITY And PERFORMANCE
[TABULAR REPRESENTATION OF CHART]
<TABLE>
<CAPTION>
Years Ended December 31,
Year-by-Year Total Return (Class I) 1995 1996 1997 1998
<S> <C> <C> <C> <C>
</TABLE>
[triangle pointing up] Best Quarter: , up %
[triangle pointing down] Worst Quarter: , down %
<TABLE>
<CAPTION>
As of December 31, 1998
Average Annual Total Return 1 Year Since Inception Inception Date
<S> <C> <C> <C>
Class I (%)
Ascent Composite*
</TABLE>
AETNA CROSSROADS FUND VOLATILITY And PERFORMANCE
[TABULAR REPRESENTATION OF CHART]
<TABLE>
<CAPTION>
Years Ended December 31,
Year-by-Year Total Return (Class I) 1995 1996 1997 1998
<S> <C> <C> <C> <C>
</TABLE>
[triangle pointing up] Best Quarter: , up %
[triangle pointing down] Worst Quarter: , down %
<TABLE>
<CAPTION>
As of December 31, 1998
Average Annual Total Return 1 Year Since Inception Inception Date
<S> <C> <C> <C>
Class I (%)
Crossroads Composite*
</TABLE>
25
<PAGE>
AETNA LEGACY FUND VOLATILITY And PERFORMANCE
[TABULAR REPRESENTATION OF CHART]
<TABLE>
<CAPTION>
Years Ended December 31,
Year-by-Year Total Return (Class I) 1995 1996 1997 1998
<S> <C> <C> <C> <C>
</TABLE>
[triangle pointing up] Best Quarter: , up %
[triangle pointing down] Worst Quarter: , down %
<TABLE>
<CAPTION>
As of December 31, 1998
Average Annual Total Return 1 Year Since Inception Inception Date
<S> <C> <C> <C>
Class I (%)
Legacy Composite*
</TABLE>
- ----------
*The Ascent Composite, Crossroads Composite and Legacy Composite are each
comprised of the seven stock and bond indices listed below in weights that
correspond to the particular benchmark weights for each Fund.
<TABLE>
<CAPTION>
Asset Class Benchmark Index
- -----------------------------------------------------------------------------------------------------------------------
<S> <C>
Large Cap Stocks The Standard & Poor's 500 Index is a value-weighted, unmanaged index of 500 widely held stocks
that assumes the reinvestment of all dividends, and is considered to be representative of the
stock market in general.
Small-/Mid-Cap Stocks The Russell 2500 Index consists of the smallest 500 securities in the Russell 1000 Index and
all 2,000 securities in the Russell 2000 Index, and represents approximately 23% of the Russell
3000 total market capitalization. Each of these indices assumes reinvestment of all dividends
and is unmanaged.
International Stocks The Morgan Stanley Capital International-Europe, Australia, Far East Index is an unmanaged,
market value-weighted average of the performance of more than 900 securities listed on the
stock exchange of countries in Europe, Australia and the Far East.
Real Estate Stocks The National Association of Real Estate Investment Trusts Equity Index is an unmanaged,
market-weighted average of the performance for tax-qualified real estate investment trusts
listed on the New York Stock Exchange, American Stock Exchange and the NASDAQ National Market
System.
U.S. Dollar Bonds Salomon Brothers Broad Investment-Grade Bond Index is an unmanaged, market-weighted index that
contains approximately 4,700 individually priced investment-grade bonds rated BBB or better.
The index includes U.S. Treasury/Agency issues, mortgage pass-through securities and corporate
issues.
International Bonds The Salomon Brothers Non-U.S. World Government Bond Index serves as an unmanaged benchmark to
evaluate the performance of government bonds with a maturity of one year or greater in the
following 12 countries: Japan, United Kingdom; Germany; France; Canada; the Netherlands;
Australia; Denmark, Italy, Belgium, Spain and Sweden.
Cash Equivalents Three-month Treasury bills are government-backed short-term investments considered to be
risk-free, and equivalent to cash because their maturity is only three months.
</TABLE>
26
<PAGE>
Other Investment Strategies and Risks
In addition to the principal investments and strategies described above, the
Funds 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).
Derivatives Each Fund (except Money Market) may use derivatives, which are
financial instruments whose value derives from another security, an interest
rate, an index or a currency. The Funds primarily use futures contracts, put
options and call options that hedge against price fluctuations or increase the
Funds' exposure to a particular asset class. To a limited extent, the Funds also
may use derivatives for speculation (investing for potential income or capital
gain). Finally, certain Funds may use currency-based derivatives for hedging
positions in foreign securities.
[bullet] Futures contracts are agreements that obligate the buyer to buy and the
seller to sell a specific quantity of securities at a specific price on
a specific date.
[bullet] Options are agreements that for a fee or premium, give the holder the
right, but not the obligation, to purchase or sell a certain amount of
securities during a specified period or on a specified date.
While hedging can guard against potential risks, it adds to the Fund's expenses
and may reduce or eliminate potential gains. There is also a risk that a
derivative intended as a hedge may not perform as expected. The main risk with
derivatives is that some types can amplify a gain or loss, potentially earning
or losing substantially more money than the actual cost of the derivative.
With some derivatives, whether used for hedging or speculation, there is also
the risk that the counterparty may fail to honor its contract terms, causing a
loss for the Fund.
Defensive Investing In response to unfavorable market conditions, each Fund may
make temporary investments that are not consistent with its principal investment
objectives and policies.
Year 2000 Aetna Inc. (on behalf of all of its subsidiaries and affiliates) has
developed and is currently executing a plan to make its computer systems and
applications accommodate date-sensitive information relating to the Year 2000.
The plan covers four stages including:
[bullet] Inventory.
[bullet] Assessment.
[bullet] Remediation.
[bullet] Testing and certification.
Aetna Inc. is now in the testing and certification stages of its plan for the
systems and applications related to the Funds, including those relating to
Aeltus. Testing and certification of these systems is targeted for
completion by mid-1999. The costs of these efforts will not affect the
Funds.
Aeltus and the Funds also have relationships with broker dealers, transfer
agents, custodians and other securities industry participants and service
providers that are not affiliated with Aetna Inc. Aetna Inc. is currently
examining its relationships with third parties as part of its Year 2000 plan.
Aeltus believes that United States securities industry participants generally
are preparing their computer systems and applications to accommodate information
that is Year 2000 date-sensitive. Preparation by third parties, however, is
outside Aetna Inc.'s, Aeltus' and the Funds' control. Failure of third parties
to complete adequate, timely preparations, and any resulting systems
interruptions or other consequences, could have an adverse effect, directly or
indirectly, on the Funds, including, without limitation, its operation or the
valuation of its assets.
Risks of Conversion to Euro On January 1, 1999, 11 of the countries in the
European Monetary Union adopted the Euro as their official currency. However,
their original currencies (for example, the franc, the mark, and the lire) will
continue in use for cash transactions until January 1, 2002. After that date, it
is expected that only the Euro will be used in those countries. Although a
common currency is expected to confer some benefits in those markets, the
conversion to the new currency will affect the Funds operationally and also has
some special risks. Among other things, the conversion will affect:
[bullet] Issuers in which the Funds invest, because of changes in the
competitive environment from a consolidated currency market, and
greater operational costs from converting to the new currency. This
could depress the value of their stock.
[bullet] The vendors the Funds depend on to carry out their business, such as
custodians (which hold the foreign securities the Funds buy), the
Adviser (which must price the Funds' investments to deal with the
conversion to the Euro) and brokers, foreign markets and securities
depositories. If they are not prepared, there could be delays in
settlements and additional costs to the Funds.
Aeltus is upgrading (at its expense) its computer and bookkeeping systems to
deal with the conversion. The Funds' custodians have advised Aeltus of their
plans to deal with the conversion, including how they will update their record
keeping systems and handle the redenomination of outstanding foreign debt. Each
Fund's portfolio manager also will monitor the effects of the conversion on the
issuers in which the Fund invests. The possible effect of these factors on the
Funds' investments cannot be determined with certainty at this time, but they
may reduce the value of some of the Funds' holdings and increase their
operational costs.
27
<PAGE>
Portfolio Turnover Portfolio turnover refers to the frequency of portfolio
transactions and the percentage of portfolio assets being bought and sold during
the year. For the fiscal year ended October 31, 1998, Growth, International,
Small Company, Growth and Income, Government and High Yield Fund each had a
portfolio turnover rate in excess of 150%. A high portfolio turnover rate
increases a Fund's transaction costs and may increase your tax liability.
SHAREHOLDER FEES AND FUND EXPENSES
The following tables describe the fees that you and the Funds may pay if you buy
and hold shares of the Funds. Annual Fund Operating Expenses are deducted from
Fund assets every year, and are thus paid indirectly by all Fund investors.
CLASS I SHAREHOLDER FEES
There are no sales charges deducted on initial purchases of Class I shares,
deferred sales charges applied on redemptions, sales charges applied to
dividend reinvestments or exchange fees.
Class I Shares
Annual Fund Operating Expenses(1)
(as a percentage of average daily net assets)
<TABLE>
<CAPTION>
Total Fee Waiver/
Management Operating Expense
Fee Other Expenses Expenses Reimbursement Net Expenses
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
Growth % % % % %
International % % % % %
Mid Cap % % % % %
Small Company % % % % %
Value Opportunity % % % % %
- ---------------------------------------------------------------------------------------------------------------------------------
Balanced % % % % %
Growth and Income % % % % %
Real Estate % % % % %
- ---------------------------------------------------------------------------------------------------------------------------------
Bond Fund % % % % %
Aetna Government Fund % % % % %
High Yield % % % % %
Money Market % % % % %
- ---------------------------------------------------------------------------------------------------------------------------------
Index Plus Bond % % % % %
Index Plus Large Cap % % % % %
Index Plus Mid Cap % % % % %
Index Plus Small Cap % % % % %
- ---------------------------------------------------------------------------------------------------------------------------------
Ascent % % % % %
Crossroads % % % % %
Legacy % % % % %
</TABLE>
(1) Aeltus is contractually obligated through October 31, 1999 to waive all or a
portion of its investment advisory fee and/or its administrative services fee
for certain Funds and/or to reimburse a portion of those Funds' other expenses
in order to ensure that the Fund's total operating expenses do not exceed the
percentage of the Fund's average daily net assets reflected in the table under
Net Expenses. Fee waiver/expense reimbursement obligations apply to each Fund
except Growth, Balanced, and Growth and Income. An administrative services fee
of 0.10% is included in Other Expenses.
The expenses shown above are based on the year ended October 31, 1998, and have
been restated to reflect changes in certain contractual arrangements.
Previously, Class I shares (formerly Select Class shares) were assessed an
administrative services fee of 0.25%.
28
<PAGE>
CLASS I SHARES EXAMPLE
The following example is designed to help you compare the costs of investing in
the Funds with the costs of investing in other mutual funds. Using the annual
fund operating expenses percentages above, you would pay the following expenses
on a $10,000 investment, assuming a 5% annual return and redemption at the end
of each of the periods shown:
<TABLE>
<CAPTION>
1 Year* 3 Years* 5 Years* 10 Years*
<S> <C> <C> <C> <C>
Growth $ $ $ $
International
Mid Cap
Small Company
Value Opportunity
- ---------------------------------------------------------------------------------------------------------------------------------
Balanced
Growth and Income
Real Estate
- ---------------------------------------------------------------------------------------------------------------------------------
Bond Fund
Aetna Government Fund
High Yield
Money Market
- ---------------------------------------------------------------------------------------------------------------------------------
Index Plus Bond
Index Plus Large Cap
Index Plus Mid Cap
Index Plus Small Cap
- ---------------------------------------------------------------------------------------------------------------------------------
Ascent
Crossroads
Legacy
</TABLE>
*1 year figures reflect Aeltus' contractual obligation to waive fees and/or
reimburse expenses through October 31, 1999. 3, 5 and 10 year figures are based
on total operating expenses without taking into account any fee waivers or
expense reimbursements.
This example should not be considered an indication of prior or future expenses.
Actual expenses for the current year may be greater or less than those shown.
Additional information regarding Class I shares may be obtained by calling your
investment professional or 1-800-367-7732.
29
<PAGE>
MANAGEMENT OF THE FUNDS' PORTFOLIO INVESTMENTS
Aeltus Investment Management, Inc., 10 State House Square, Hartford, Connecticut
06103-3602 serves as investment adviser of the Funds. Aeltus is responsible for
managing the assets of each Fund in accordance with its investment objectives
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.
Advisory Fees
[bullet] Listed below for Funds that have operated for at least one full fiscal
year are the aggregate advisory fees paid by each Fund for its most
recent fiscal year.
[bullet] Listed below for the Funds that have operated for less than one full
fiscal year are the advisory fees that Aeltus is entitled to receive,
expressed as an annual rate based on average daily net assets of each
Fund.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Aggregate Advisory Fees as a Aggregate Advisory Fees as a
Percentage of Average Net Assets Percentage of Average Net Assets
Fund Name for Year Ended October 31, 1998 Fund Name for Year Ended October 31, 1998
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Growth Aetna Government Fund
International Money Market
Small Company Index Plus Large Cap
Balanced Ascent
Growth and Income Crossroads
Bond Fund Legacy
- ----------------------------------------------------------------------------------------------------------------------------------
Fund Name Rate Average Daily Net Assets
- ----------------------------------------------------------------------------------------------------------------------------------
Mid Cap 0.750% On first $250 million
0.700% On next $250 million
0.675% On next $250 million
0.650% On next $1.25 billion
0.600% Over $2 billion
- ----------------------------------------------------------------------------------------------------------------------------------
Value Opportunity 0.700% On first $250 million
0.650% On next $250 million
0.625% On next $250 million
0.600% On next $1.25 billion
0.550% Over $2 billion
- ----------------------------------------------------------------------------------------------------------------------------------
Real Estate 0.800% On first $250 million
0.750% On next $250 million
0.725% On next $250 million
0.700% On next $1.25 billion
0.650% Over $2 billion
- ----------------------------------------------------------------------------------------------------------------------------------
High Yield 0.650% On first $250 million
0.600% On next $250 million
0.575% On next $250 million
0.550% On next $1.25 billion
0.500% Over $2 billion
- ----------------------------------------------------------------------------------------------------------------------------------
Index Plus Bond 0.350% On first $250 million
0.350% On next $250 million
0.325% On next $250 million
0.300% On next $1.25 billion
0.275% Over $2 billion
- ----------------------------------------------------------------------------------------------------------------------------------
Index Plus Mid Cap 0.450% On first $250 million
0.450% On next $250 million
0.425% On next $250 million
0.400% On next $1.25 billion
0.375% Over $2 billion
- ----------------------------------------------------------------------------------------------------------------------------------
Index Plus Small Cap 0.450% On first $250 million
0.450% On next $250 million
0.425% On next $250 million
0.400% On next $1.25 billion
0.375% Over $2 billion
</TABLE>
30
<PAGE>
On October 1, 1998, Bradley, Foster & Sargent, Inc. (Bradley), CityPlace II, 185
Asylum Street, Hartford, Connecticut 06103, was appointed as subadviser to Value
Opportunity. While Bradley had not previously served as an investment adviser or
subadviser to a mutual fund, it has managed private client assets as well as
401(k), profit sharing and other retirement plan assets since 1994.
As subadviser, Bradley is responsible for making equity investment decisions.
Aeltus remains responsible for all other aspects of managing and administering
Value Opportunity, including trade execution and cash management. Aeltus pays
Bradley a monthly subadvisory fee at an annual rate of 0.15% of Value
Opportunity's average daily net assets on the first $250 million of assets, and
0.10% on assets above $250 million.
Portfolio Management The following people are primarily responsible for the
day-to-day management of the Funds.
Capital Appreciation Funds
Growth Kenneth H. Bragdon, Portfolio Manager, Aeltus, has been managing Growth
since May 1998. Previously, Mr. Bragdon co-managed the Fund. Mr. Bragdon has
been with the Aetna organization since 1978 and has 27 years of experience in
the investment business.
International Vince Fioramonti, Portfolio Manager, Aeltus, has been managing
International since December 1995. Mr. Fioramonti manages international stocks
and non-U.S. dollar government bonds for several Aetna investment funds. Mr.
Fioramonti joined Aetna in 1994 after serving as Vice President of The Travelers
Investment Management Company. He began his investment career with Travelers in
1988.
Mid Cap Donald Townswick, Portfolio Manager, Aeltus, has been managing Mid Cap
since its inception in February 1998. He also manages small- and mid-cap stocks
for other mutual funds managed by Aeltus. Mr. Townswick joined the Aetna
organization in July 1994 after serving 2 years with Invesco Inc.
Small Company Thomas DiBella, Portfolio Manager, Aeltus, has been managing Small
Company since its inception in January 1994. Mr. DiBella joined Aeltus in 1991
and is currently responsible for the management of several small-capitalization
portfolios.
Value Opportunity Peter Canoni, Principal, Bradley, manages Value Opportunity.
Before joining Bradley, Mr. Canoni was a Managing Director of Aeltus and the
portfolio manager of Value Opportunity from its inception in February 1998
through August 3, 1998. Mr. Canoni had been with the Aetna organization since
1980 and has over 26 years of investment experience.
Growth & Income Funds
Balanced Geoffrey A. Brod, Portfolio Manager, Aeltus, has been managing large
cap stocks for the Fund since August 1, 1998. He has over 30 years of experience
in quantitative applications and has over 11 years of experience in equity
investments. Mr. Brod has been with the Aetna organization since 1966.
Carl Baker, Portfolio Manager, Aeltus, has been managing fixed-income securities
for the Fund since August 1, 1998. Mr. Baker has 11 years of experience in fixed
income portfolio management and has been with the Aetna organization since 1982.
Richard DiChillo, Portfolio Manager, Aeltus, has been managing small cap stocks
for the Fund since August 1, 1998. He has over 16 years of experience in
security analysis and portfolio management. Mr. DiChillo has been with the Aetna
organization since 1977.
Growth and Income Kevin M. Means, Managing Director, Aeltus, has been managing
Growth and Income since July 1994. Mr. Means joined Aetna in July 1994 after
serving as Chief Investment Officer at Invesco Management and Research since
1993. He also served from 1987 to 1993 as the Director of Quantitative Research
and Equity Portfolio Manager at Invesco Capital Management. Mr. Means heads a
team of portfolio managers each of whom specializes in a particular asset class
used in the management of Growth and Income.
Real Estate Yaniv Tepper, Portfolio Manager, Aeltus, has been managing Real
Estate since its inception in February 1998. He has been managing real estate
securities for several investment funds managed by Aeltus since 1994. Mr. Tepper
has been with the Aetna organization since 1994. He has over 10 years of
experience in direct real estate and real estate securities investments.
31
<PAGE>
Income Funds
Bond Fund Steven C. Huber, Managing Director, Aeltus, has been managing the Fund
since August 1998. Mr. Huber joined the Aetna organization in 1987 as a
quantitative analyst and has been managing fixed-income portfolios since 1989.
Aetna Government Fund Hugh T.M. Whelan, Portfolio Manager, Aeltus, has been
managing Aetna Government Fund since January 1997. Mr. Whelan joined the Aetna
organization in 1989 and manages fixed-income portfolios employing different
strategies.
High Yield Gail Bruhn, Portfolio Manager, Aeltus, has been managing High Yield
since its inception in February 1998. She currently manages high-yield
securities for several institutional accounts managed by Aeltus. Ms. Bruhn
joined Aeltus in 1995 after spending 12 years with CIGNA Investments.
Money Market Jeanne Wong-Boehm, Managing Director, Aeltus, has been managing
Money Market since January 1992. Ms. Wong-Boehm joined the Aetna organization in
1983 as a fixed-income portfolio analyst and in 1989 she was assigned primary
responsibility for the money market operations.
Index Plus Funds
Index Plus Bond Christie Bull, Portfolio Manager, Aeltus, has been managing
Index Plus Bond since its inception in February 1998. She has been managing
fixed-income securities for several private accounts managed by Aeltus since
1993. Ms. Bull is also the Director of Fixed Income Research for Aeltus. Ms.
Bull has been with the Aetna organization since 1979.
Index Plus Large Cap Geoffrey A. Brod, Portfolio Manager, Aeltus, has been
managing Index Plus Large Cap since its inception in December 1996.
Index Plus Mid Cap, Index Plus Small Cap Geoffrey A. Brod, Portfolio Manager,
Aeltus, and Michael F. Farrell, Portfolio Manager, Aeltus, serve as co-managers
of Index Plus Mid Cap and Index Plus Small Cap. Mr. Brod served as the sole
manager of Index Plus Mid Cap and Index Plus Small Cap from each Fund's
inception in February 1998 through February 1999. Mr. Farrell has been with the
Aetna organization since 1991 and has been responsible for quantitative research
and development of equity models.
Generation Funds
Ascent, Crossroads, Legacy Kevin M. Means, Managing Director, Aeltus, is the
lead portfolio manager for the Generation Funds and has been responsible for
determining the allocation of each Fund's investments since their inception in
January 1995. Mr. Means is also responsible for the selection of large
capitalization stocks for the Generation Funds. Mr. Means is supported by a team
of investment professionals, each of whom focuses on a particular asset class.
Donald Townswick, Portfolio Manager, Aeltus, has been managing small and mid-cap
stocks for the Generation Funds since January 1995.
Vince Fioramonti, Portfolio Manager, Aeltus, has been managing international
stocks and non-U.S. dollar government bonds for the Generation Funds since
January 1995.
Yaniv Tepper, Portfolio Manager, Aeltus, has been managing real estate
securities for the Generation Funds since May 1995.
Carl Baker, Portfolio Manager, Aeltus, has been managing U.S. Dollar Bonds
for the Generation Funds since August 1998.
Jeanne Wong-Boehm, Managing Director, Aeltus, has been managing money market
investments for the Generation Funds since their inception in January 1995.
32
<PAGE>
INVESTING IN THE FUNDS
Opening an Account and Eligibility for Class I Shares
How to Open an Account You may open an account either through your investment
professional, through the sponsor of your employer-sponsored retirement plan or
by yourself. If you are opening an account through your investment professional,
he or she will guide you through the process of investing in a Fund. If you are
investing through a retirement plan, please refer to your plan materials. If you
wish to open an account on your own, you must submit a completed application to
the Fund.
To submit an application without the help of an investment professional,
complete and sign an account application and mail it to:
Aetna Series Fund, Inc.
c/o First Data Investor Services Group
P.O. Box 9681
Providence, RI 02940
Your check must be drawn on a bank located within the United States and
payable in U.S. dollars. The Funds are not designed for professional market
timing organizations or other entities using programmed or frequent
exchanges. The Funds reserve the right to reject any specific purchase or
exchange request, including a request made by a market timer.
Class I Eligibility
Class I shares are offered to:
[bullet] Certain retirement plans.
[bullet] Certain registered investment advisers having an agreement with the
Funds to invest a minimum of $1 million within one year of initial
purchase.
[bullet] Employees and retired employees of Aetna Inc. and its affiliates
(including members of employees' and retired persons' immediate
families, board members and trustees, and their immediate families).
[bullet] Insurance companies (including separate accounts).
[bullet] Registered investment companies.
[bullet] Shareholders holding Select Class shares at the time such shares were
redesignated as Class I shares, and their immediate family members, as
long as they maintain a shareholder account.
[bullet] Certain bank and independent trust companies investing on behalf of
their clients for which they charge trust and investment management
fees.
[bullet] Members of the Board of Directors of Aetna Series Fund, Inc. (Company).
[bullet] NASD-registered representatives of Aeltus Capital or any affiliated
broker-dealer (including members of their immediate families).
[bullet] Other groups as may be approved by the Company's Board of Directors
from time to time.
How to Buy Shares
<TABLE>
<CAPTION>
Minimum Investments
Initial Investment Additional Investments
<S> <C> <C>
Individual Retirement Accounts $500 [bullet] $100 except by wire or Systematic
(including Roth IRAs) Investment
[bullet] $500 by wire
[bullet] $50 by Systematic Investment
All other investments $1,000 [bullet] $100 except by wire or Systematic
Investment
[bullet] $500 by wire
[bullet] $50 by Systematic Investment
</TABLE>
33
<PAGE>
INSTRUCTIONS FOR BUYING FUND SHARES
<TABLE>
<CAPTION>
To Open An Account To Purchase Additional Shares
<S> <C> <C>
Through Your Contact your investment Contact your investment professional
Investment professional or consult your plan or consult your plan materials.
Professional or materials.
Retirement Plan
- -------------------------------------------------------------------------------------------------------------
By Mail Complete and sign your Fill out the investment stub from your
application, make confirmation statement or send a letter
your check payable to Aetna indicating your name, account
Series Fund, Inc. and mail to: number(s), the Fund(s) in which you
wish to invest and the amount you want
Aetna Series Fund, Inc. to invest in each Fund.
c/o First Data Investor Services
Group, Inc. Make your check payable to Aetna
P.O. Box 9681 Series Fund, Inc. and mail to:
Providence, RI 02940
Aetna Series Fund, Inc.
Cash, credit cards and third party c/o First Data Investor Services Group, Inc.
checks cannot be used to open an P.O. Box 9663
account. Providence, RI 02940
The Funds will accept checks which are
made payable to you and endorsed to
Aetna Series Fund, Inc.
- -------------------------------------------------------------------------------------------------------------
By Overnight Courier Follow the instructions above Follow the instructions above for
for "By Mail" but send your "By Mail" but send your check and
completed application and check investment stub or letter to:
to:
Aetna Series Fund, Inc.
Aetna Series Fund, Inc. c/o First Data Investor Services
c/o First Data Investor Services Group, Inc.
Group, Inc. 4400 Computer Drive
4400 Computer Drive Westborough, MA 01581
Westborough, MA 01581
- -------------------------------------------------------------------------------------------------------------
By Wire Not Available. Call 1-800-367-7732 prior to sending
the wire in order to obtain a
confirmation number.
Instruct your bank to wire funds to:
Wire to:
Boston Safe Deposit & Trust Company
ABA # 011001234
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
To Open An Account To Purchase Additional Shares
<S> <C> <C>
Credit to:
Boston Safe Deposit & Trust Company
Account # 176656
Further Credit to:
Name of Fund
Shareholder Account Number
Shareholder Registration
Federal funds wire purchase orders will
be accepted only when the Fund's
transfer agent and custodian bank are
open for business.
Neither the Funds nor their agents are
responsible for the consequences of
delays resulting from the banking or
Federal Reserve wire system or from
incomplete instructions.
- -------------------------------------------------------------------------------------------------------------------------
By Electronic Not Available. Use the Systematic Investment Option.
Funds Transfer Sign up for this service when opening
your account or by requesting the
appropriate information.
- -------------------------------------------------------------------------------------------------------------------------
By Exchange Submit a written request to the Submit a written request to the address
address listed above under listed above under "By Mail." Include:
"By Mail." Include: [bullet] Your name and account number
[bullet] Your name and account number. [bullet] The name of the Fund into and out of
[bullet] The name of the Fund into and which you wish to exchange.
out of which you wish to [bullet] The amount to be exchanged and the
exchange. signatures of all shareholders.
[bullet] The amount to be exchanged
and the signatures of all You may also exchange your shares by
shareholders. calling 1-800-367-7732. Please be
prepared to provide:
You may also exchange your [bullet] The Funds' names.
shares by calling 1-800-367-7732. [bullet] Your account number(s).
Please be prepared to provide: [bullet] Your Social Security number or
[bullet] The Funds' names. taxpayer identification number.
[bullet] Your account number(s). [bullet] Your address.
[bullet] Your Social Security number or [bullet] The amount to be exchanged.
taxpayer identification number.
[bullet] Your address.
[bullet] The amount to be exchanged.
</TABLE>
35
<PAGE>
How to Sell Shares
To redeem all or a portion of the shares in your account, you should submit a
redemption request through your investment professional, plan sponsor or as
described below.
Redemption requests in amounts up to $25,000 may be made in writing or by
telephone. The Company requires a signature guarantee if the amount of the
redemption request is over $25,000. You may obtain a signature guarantee at most
banks and securities dealers. Please note that notaries public cannot provide
signature guarantees.
Once your redemption request is received in good order, the Fund normally will
send the proceeds of such redemption within one or two business days. However,
if making immediate payment could adversely affect a Fund, the Fund may defer
distribution for up to seven days or a longer period if permitted. If you redeem
shares of a Fund shortly after purchasing them, the Fund will hold payment of
redemption proceeds until 12 calendar days have elapsed since those shares were
purchased. A redemption request made within 15 calendar days after submission of
a change of address is permitted only if the request is in writing and is
accompanied by a signature guarantee.
<TABLE>
<S> <C>
Redemptions by Mail You may redeem shares you own in any Fund by sending written
instructions to:
Aetna Series Fund, Inc.
c/o First Data Investor Services Group, Inc.
P.O. Box 9681
Providence, RI 02940
Your instructions should identify:
[bullet] The Fund.
[bullet] The number of shares or dollar amount to be redeemed.
[bullet] Your name and account number.
Your instructions must be signed by all person(s) required to sign for the
Fund account, exactly as the shares are registered, and, if necessary,
accompanied by a signature guarantee(s).
- -------------------------------------------------------------------------------------------------------------
Redemptions by Wire A minimum redemption of $1,000 is required for wire transfers.
Redemption proceeds will be transferred by wire to your previously
designated bank account or to another destination if the federal funds wire
instructions provided with your redemption request are accompanied by a
signature guarantee. A $12.00 fee will be charged for this service.
- -------------------------------------------------------------------------------------------------------------
Redemptions by Telephone Call 1-800-367-7732. Please be prepared to provide your account number,
account name and the amount of the redemption, which generally
must be no less than $500 and no more than $25,000.
</TABLE>
36
<PAGE>
Timing of Requests
Orders that are received before the close of regular trading on the New York
Stock Exchange (usually 4:00 p.m. eastern time) will be processed at the Net
Asset Value (NAV) calculated that business day. Orders received after the close
of regular trading on the New York Stock Exchange will be processed at the NAV
calculated on the following business day.
The Company may appoint certain institutions (Institutions) as parties that may
accept purchase and redemption orders on behalf of the Company. If you purchase
or redeem shares in connection with programs offered by these Institutions, your
shares will be purchased or redeemed at the NAV determined the business day the
Institution receives your order if the order is received before the close of
regular trading on the New York Stock Exchange.
Institutions may be authorized to designate other intermediaries to accept
purchase and redemption orders on the Company's behalf, subject to the Company's
approval. Thus, the Company will be deemed to have received a purchase or
redemption order when the Institution or, if applicable, the Institution's
authorized designee, accepts the order.
Investors purchasing through an Institution should refer to the Institution's
materials for a discussion of any specific instructions on the timing of or
restrictions relating to the purchase or redemption of shares.
Other Information about Shareholder Accounts and Services
Business Hours Each Fund is open on the same days as the New York Stock Exchange
(generally, Monday through Friday). Fund representatives are available from 8:00
a.m. to 8:00 p.m. eastern time on those days.
Net Asset Value The NAV of each Fund is determined as of the earlier of:
[bullet] 15 minutes after the close of regular trading on the New York Stock
Exchange.
[bullet] 4:15 p.m. eastern time, on each day that the New York Stock Exchange is
open for regular trading.
In calculating the NAV, the securities held by Money Market are valued using
amortized cost. For all other Funds, securities are valued primarily by
independent pricing services using market quotations. Short-term debt securities
maturing in less than 60 days 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. With respect to any Fund that
invests in foreign securities, because those securities may be traded on markets
that are open on days when the Fund does not price its shares, the Fund's NAV
may change even though Fund shareholders may not be permitted to sell or redeem
Fund shares.
Exchange Privileges There is no fee to exchange shares from one Fund to another.
When you exchange shares, your new Fund shares will be in the equivalent class
of your current shares.
There are no limits on the number of exchanges you can make. However, the Funds
may suspend or terminate your exchange privilege if you make more than five
exchanges out of a single Fund in any calendar year, and the Funds may refuse to
accept any exchange requests, especially if as a result of the exchange, in
Aeltus' judgment, it would be too difficult to invest effectively in accordance
with the Fund's investment objective.
Cross Investing
[bullet] Dividend Investing You may elect to have dividend and/or capital gains
distributions automatically invested in the same class of one other
Fund.
[bullet] Systematic Exchange You may establish an automatic exchange of share
from one fund to another.
Telephone Exchange and Redemption Privileges You automatically receive telephone
exchange and redemption privileges when you establish your account. If you do
not want these telephone privileges, you may call 1-800-367-7732 to have them
removed. All telephone transactions may be recorded, and you will be asked for
certain identifying information.
Telephone redemption requests will be accepted if the request is for a minimum
of $500 or a maximum of $25,000. Telephone redemption requests will not be
accepted if you:
[bullet] Have submitted a change of address within the preceding 15 calendar
days.
[bullet] Are selling shares in a retirement plan account held in trust.
The Funds reserve the right to amend telephone exchange and redemption purchases
at any time upon notice to shareholders and may refuse a telephone exchange or
redemption if the Funds believe it is advisable to do so.
37
<PAGE>
Minimum Account Balance You must maintain a minimum balance of $500 in each Fund
account. If you do not, the Fund may give you 60 days' notice to increase the
account balance to the $500 minimum. If you fail to increase your account
balance to the minimum, the Fund may redeem all of your remaining shares and
mail the proceeds to you at the address of record. The Fund will not redeem
shares for failing to maintain an adequate account balance if the account
balance falls below the minimum balance only because the value of Fund shares
has decreased.
Additional Rights Each Fund retains certain rights, including the rights to:
[bullet] Refuse orders to purchase shares;
[bullet] Vary its requirements for initial or additional investments, exchanges,
reinvestments, periodic investment plans, retirement and employee
benefit plans, sponsored arrangements and similar programs; and
[bullet] Change or discontinue its orders acceptance practices.
Additional Services Each Fund offers these additional investor services. Each
Fund reserves the right to terminate or amend these services at any time. For
all of the services, certain terms and conditions apply. See the Statement of
Additional Information or call 1-800-367-7732 for additional information on any
of these services.
[bullet] Systematic Investment You can make automatic monthly investments in any
Fund.
[bullet] Automatic Cash Withdrawal Plan The Automatic Cash Withdrawal Plan
provides a convenient way for you to receive a systematic distribution
while maintaining an investment in a Fund.
[bullet] Checkwriting Service Checkwriting is available with Money Market. There
currently is no transaction charge for this service, and the initial
checkbook you receive is free. However, you will be charged a $3.00 fee
for each checkbook reorder. Checks must be for a minimum of $250 and
the checkwriting service may not be used for a complete redemption of
your shares. This service is not available for IRA or other retirement
accounts. You will be charged a $25 fee for stop payment requests and
for Money Market checks that are returned due to insufficient funds.
[bullet] TDD Service Telecommunication Device for the Deaf (TDD) services are
offered for hearing impaired investors. The dedicated number for this
service is 1-800-684-4889.
[bullet] Tax-Deferred Retirement Plans Each Fund may be used for investment by a
variety of tax-deferred retirement plans, such as individual retirement
accounts (IRAs, including Roth IRAs) and 401(k) and 403(b) programs
sponsored by employers. Purchases made in connection with IRAs and
403(b)(7) accounts may be subject to an annual custodial fee of $12.50
per fund account up to an annual cap of $25. This fee will be deducted
directly from your account(s). There is no minimum investment or
minimum account balance applicable to investments in 403(b)(7)
accounts.
Payments to Securities Dealers and Selection of Executing Brokers From time to
time, ACI or its affiliates may make payments to other dealers and/or their
agents, who may not be affiliates of Aetna, who sell shares or who provide
shareholder services. The value of a shareholder's investment will be unaffected
by these payments. Other dealers and/or their investment representatives may not
use sales of the Fund's shares to qualify for this compensation if prohibited by
the laws of any state or self-regulatory organization, such as the NASD.
Aeltus may consider the sale of shares of the Funds and of other investment
companies advised by Aeltus as a factor in the selection of brokerage firms to
execute the Fund's portfolio transactions, subject to Aeltus' duty to obtain
best execution.
Payments to Institutions Investors purchasing through an Institution or
financial intermediary should refer to the Institution's or financial
intermediary's materials for a discussion of any fees or charges relating to the
purchase or redemption of shares.
Dividends and Distributions
<TABLE>
<CAPTION>
Dividends Dividends are declared and paid as follows:
<S> <C>
[bullet] declared daily and paid monthly Money Market
[bullet] declared monthly and paid monthly Aetna Government
Fund
Bond Fund
High Yield
Index Plus Bond
[bullet] declared and paid semiannually Balanced
Growth and Income
[bullet] declared and paid annually All other Funds
</TABLE>
Capital gains distributions, if any, are paid on an annual basis around the end
of the year, December 31. To comply with federal tax regulations, each Fund may
also pay an additional capital gains distribution, usually in June.
Money Market shares begin to accrue dividends the business day after they are
purchased. A redemption of Money Market shares will include dividends declared
through the redemption date.
38
<PAGE>
Both income dividends and capital gains distributions are paid by each Fund on a
per share basis. As a result, at the time of this payment, the share price of a
Fund (except Money Market) will be reduced by the amount of the payment.
Distribution Options When completing your application, you must select one of
the following three options for dividends and capital gains distributions:
[bullet] Full Reinvestment Both dividends and capital gains distributions from a
Fund will be reinvested in additional shares of the same class of
shares of that Fund. This option will be selected automatically unless
one of the other options is specified.
[bullet] Capital Gains Reinvestment Capital gains distributions from a Fund will
be reinvested in additional shares of the same class of shares of that
Fund and all net income from dividends will be distributed in cash.
[bullet] All Cash Dividends and capital gains distributions will be paid in
cash. If you select a cash distribution option, you can elect to have
distributions automatically invested in shares of another Fund.
Distributions paid in shares will be credited to your account at the next
determined NAV per share.
Tax Information
[bullet] In general, dividends and short-term capital gains distributions you
receive from any Fund are taxable as ordinary income.
[bullet] Distributions of other capital gains generally are taxable as capital
gains.
[bullet] Ordinary income and capital gains are taxed at different rates.
[bullet] The rates that you will pay on capital gains distributions will depend
on how long the Fund holds its portfolio securities. This is true no
matter how long you have owned your shares in the Fund or whether you
reinvest your distributions or take them as cash.
[bullet] The sale of shares in your account may produce a gain or loss, and
typically is a taxable event. For tax purposes, an exchange is the same
as a sale.
Every year, the Funds will send you information detailing the amount of ordinary
income and capital gains distributed to you for the previous year. You should
consult your tax professional for assistance in evaluating the tax implications
of investing in the Funds.
Backup Withholding By law, the Funds must withhold 31% of your distributions
and proceeds if you have not provided complete, correct taxpayer information.
PRIVATE ACCOUNT PERFORMANCE
Index Plus Large Cap, Index Plus Bond and High Yield are recently organized and
do not yet have long-term performance records. However, Index Plus Large Cap,
Index Plus Bond and High Yield have investment objectives, policies and
strategies substantially similar to those employed by Aeltus with respect to
certain Private Accounts. Therefore, the performance of these Private Accounts
is provided below. The performance of Index Plus Large Cap, Index Plus Bond and
High Yield may vary from the Private Account composite information because their
investments will vary over time and will not be identical to the past portfolio
investments of the Private Accounts. Moreover, the Private Accounts, unlike the
Fund, are not subject to certain investment limitations, diversification
requirements and other restrictions imposed by the 1940 Act and the Internal
Revenue Code of 1986, as amended, which, if applicable, could have adversely
affected the Private Accounts' performance.
The Private Account Performance data, shown below, was calculated in accordance
with recommended standards of the Association for Investment Management and
Research (AIMR). AIMR is a nonprofit membership and education organization that,
among other things, has formulated a set of performance presentation standards
for investment advisers.
All Private Account Performance data:
[bullet] Was calculated on a total return basis and includes all dividends and
interest, accrued income, and realized and unrealized gains and losses.
[bullet] Reflects the reinvestment of dividends and distributions.
[bullet] Reflects the deduction of investment advisory fees and brokerage
commissions paid by Aeltus' Private Accounts, but does not reflect the
deduction of custodial fees.
[bullet] Includes cash and cash equivalents.
The historical fees and expenses paid by the Private Accounts are significantly
lower than those paid by the Series. Had higher expenses been charged to the
Private Accounts performance would have been lower.
The following table shows average annual total returns for the periods ended
December 31, 1998 for the Series, the comparable private accounts and their
respective benchmark indices. Investors should not consider the performance of
the Private Accounts as an indication of the future performance of the Series.
39
<PAGE>
Private Account Composite and Fund Performance
<TABLE>
<CAPTION>
INDEX PLUS LARGE CAP
- ---------------------------------------------------------------------------------------------
SINCE
1 YEAR 5 YEARS INCEPTION
<S> <C> <C> <C>
Index Plus Large Cap (Class I) % N/A % (12/10/96)
Index Plus Large Cap Private Account
Composite % % N/A
S&P 500 Stock Index % % N/A
<CAPTION>
INDEX PLUS BOND
- -------------------------------------------------------------------------------------------------------------------
SINCE
1 YEAR 5 YEARS 10 YEARS INCEPTION
<S> <C> <C> <C> <C>
Index Plus Bond (Class I) N/A N/A N/A % (2/4/98)
Index Plus Bond Private Account
Composite % % % N/A
LBAB Index % % % N/A
<CAPTION>
HIGH YIELD
- -------------------------------------------------------------------------------------------------------------------
SINCE
1 YEAR 3 YEARS INCEPTION
<S> <C> <C> <C>
High Yield (Class I) N/A N/A % (2/2/98)
High Yield Private Account % % N/A
Merrill Lynch High Yield Master Index % % N/A
</TABLE>
40
<PAGE>
FINANCIAL HIGHLIGHTS
(for one outstanding share throughout each period)
These highlights are intended to help you understand the Funds' performance for
the past 5 years (or since commencement of operations, if shorter). The
information in these tables has been _________________________________,
independent auditors, whose reports, along with the Funds' Financial Statements,
are included in the ____________________, which are available upon request.
CLASS I SHARES
<TABLE>
<CAPTION>
Growth
- ----------------------------------------------------------------------------------------------------------------------------------
Ten Month
Year ended Year ended Year ended Year ended Year ended
October 31, October 31, October 31, October 31, October 31,
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period
Income From Investment Operations:
Net investment income
Net realized and change in unrealized gain or loss
on investments
Total from investment operations
Less Distributions:
From net investment income
In excess of net investment income
From net realized gains on investments
Total distributions
Net asset value, end of period
Total Return
Net assets, end of period (000's)
Ratio of total expenses to average net assets
Ratio of net investment income to average net assets
Ratio of net expense before reimbursement and
waiver to average net assets
Ratio of net investment income before reimbursement
and waiver to average net assets
Portfolio turnover rate
</TABLE>
(1) Annualized.
Per share data calculated using weighted average number of shares outstanding
throughout the period.
41
<PAGE>
<TABLE>
<CAPTION>
International Mid Cap
- ----------------------------------------------------------------------------------------- ---------------
Period from
Ten Month February 4,
Year Ended Year Ended Year Ended Year Ended Period Ended Year Ended 1998 to
October 31, October 31, October 31, October 31, October 31, December 31, October 31,
1998 1997 1996 1995 1994 1993 1998
<S> <C> <C> <C> <C> <C> <C>
</TABLE>
42
<PAGE>
Financial Highlights (continued)
(for one outstanding share throughout each period)
CLASS I SHARES
<TABLE>
<CAPTION>
Small Company
- ------------------------------------------------------------------------------------------------------------------------------------
Ten Month
Year Ended Year Ended Year Ended Year Ended Year Ended
October 31, October 31, October 31, October 31, October 31,
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period
Income From Investment Operations:
Net investment income
Net realized and change in unrealized gain or loss
on investments
Total from investment operations
Less Distributions:
From net investment income
In excess of net investment income
From net realized gains on investments
Total distributions
Net asset value, end of period
Total Return
Net assets, end of period (000's)
Ratio of total expenses to average net assets
Ratio of net investment income to average net assets
Ratio of net expense before reimbursement and
waiver to average net assets
Ratio of net investment income before reimbursement and
waiver to average net assets
Portfolio turnover rate
</TABLE>
(1) Annualized.
Per share data calculated using weighted average number of shares outstanding
throughout the period.
43
<PAGE>
<TABLE>
<CAPTION>
Value
Opportunity Balanced
- ----------------- --------------------------------------------------------------------------------------------------------
Period From Ten Month
February 2, 1998 Year Ended Year Ended Year Ended Year Ended Period Ended Year Ended
to October 31, October 31, October 31, October 31, October 31, October 31, December
1998 1998 1997 1996 1995 1994 31, 1993
<S> <C> <C> <C> <C> <C> <C>
</TABLE>
44
<PAGE>
Financial Highlights (continued)
(for one outstanding share throughout each period)
CLASS I SHARES
<TABLE>
<CAPTION>
Growth and Income
- ------------------------------------------------------------------------------------------------------------------------------------
Ten Month
Year Ended Year Ended Year Ended Year Ended Period Ended Year Ended
October 31, October 31, October 31, October 31, October 31, December
1998 1997 1996 1995 1994 31, 1993
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period
Income From Investment
Operations:
Net investment income
Net realized and change in
unrealized gain or loss
on investments
Total from investment operations
Less Distributions:
From net investment income
In excess of net investment income
From net realized gains
on investments
Total distributions
Net asset value, end of period
Total Return
Net assets, end of period (000's)
Ratio of total expenses to average
net assets
Ratio of net investment income to
average net assets
Ratio of net expense before
reimbursement and
waiver to average net assets
Ratio of net investment income
before reimbursement
and waiver to average net assets
Portfolio turnover rate
</TABLE>
(1) Annualized.
45
<PAGE>
<TABLE>
<CAPTION>
Real Estate Bond
- -------------- -----------------------------------------------------------------------------------------------------------------
Period From
February 2, Ten Month
1998 to Year Ended Year Ended Year Ended Year Ended Period Ended Year Ended
October 31, October 31, October 31, October 31, October 31, October 31, December
1998 1998 1997 1996 1995 1994 31, 1993
<S> <C> <C> <C> <C> <C> <C>
</TABLE>
46
<PAGE>
Financial Highlights (continued)
(for one outstanding share throughout each period)
CLASS I SHARES
<TABLE>
<CAPTION>
Aetna Government Fund
- ------------------------------------------------------------------------------------------------------------------------------------
Ten Month
Period
Year Ended Year Ended Year Ended Year Ended Ended
October 31, October 31, October 31, October 31, October 31,
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period
Income From Investment Operations:
Net investment income
Net realized and change in unrealized gain or loss
on investments
Total from investment operations
Less Distributions:
From net investment income
In excess of net investment income
From net realized gains on investments
Total distributions
Net asset value, end of period
Total Return
Net assets, end of period (000's)
Ratio of total expenses to average net assets
Ratio of net investment income to average net assets
Ratio of net expense before reimbursement and
waiver to average net assets
Ratio of net investment income before reimbursement
and waiver to average net assets
Portfolio turnover rate
</TABLE>
(1) Annualized.
Per share data calculated using weighted average number of shares outstanding
throughout the period.
47
<PAGE>
<TABLE>
<CAPTION>
High Yield Money Market
- ------------------ ------------------------------------------------------------------------------------------------
Ten Month
Period From Period
February 2, Year Ended Year Ended Year Ended Year Ended Ended Year Ended
1998 to October October 31, October 31, October 31, October 31, October 31, December
31, 1998 1998 1997 1996 1995 1994 31, 1993
<S> <C> <C> <C> <C> <C> <C>
</TABLE>
48
<PAGE>
Financial Highlights (continued)
(for one outstanding share throughout each period)
CLASS I SHARES
<TABLE>
<CAPTION>
Index Plus Index Plus Index Plus Index Plus
Bond Large Cap Mid Cap Small Cap
- ------------------------------------------------------------------- ---------------------------- -------------- -----------------
Period From Period From Period From Period From
February 4, December February February 3,
1998 to Year Ended 10, 1996 to 3, 1998 to 1998 to
October 31, October 31, October 31, October 31, October 31,
1998 1998 1997 1998 1998
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period
Income From Investment Operations:
Net investment income
Net realized and change in unrealized gain or loss
on investments
Total from investment operations
Less Distributions:
From net investment income
In excess of net investment income
From net realized gains on investments
Total distributions
Net asset value, end of period
Total Return
Net assets, end of period (000's)
Ratio of total expenses to average net assets
Ratio of net investment income to average net assets
Ratio of net expense before reimbursement and
waiver to average net assets
Ratio of net investment income before reimbursement
and waiver to average net assets
Portfolio turnover rate
</TABLE>
(1) Annualized.
Per share data calculated using weighted average number of shares outstanding
throughout the period.
49
<PAGE>
<TABLE>
<CAPTION>
Ascent Crossroads
- ----------------------------------------------------------- ----------------------------------------------------------------------
Period From Period From
January 4, January 4,
Year Ended Year Ended Year Ended 1995 to Year Ended Year Ended Year Ended 1995 to
October 31, October 31, October 31, October 31, October 31, October 31, October 31, October 31,
1998 1997 1996 1995 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C> <C> <C>
</TABLE>
50
<PAGE>
Financial Highlights (continued)
(for one outstanding share throughout each period)
CLASS I SHARES
<TABLE>
<CAPTION>
Legacy
- ---------------------------------------------------------------------------------------------------------------
Period From
January 4,
Year Ended Year Ended Year Ended 1995 to
October 31, October 31, October 31, October 31,
1998 1997 1996 1995
<S> <C> <C> <C> <C>
Net asset value, beginning of period
Income From Investment Operations:
Net investment income
Net realized and change in unrealized gain or loss
on investments
Total from investment operations
Less Distributions:
From net investment income
In excess of net investment income
From net realized gains on investments
Total distributions
Net asset value, end of period
Total Return
Net assets, end of period (000's)
Ratio of total expenses to average net assets
Ratio of net investment income to average net assets
Ratio of net expense before reimbursement and
waiver to average net assets
Ratio of net investment income before reimbursement
and waiver to average net assets
Portfolio turnover rate
</TABLE>
(1) Annualized.
Per share data calculated using weighted average number of shares outstanding
throughout the period.
51
<PAGE>
ADDITIONAL INFORMATION
The SAI, which is incorporated by reference into this Prospectus, contains
additional information about the Funds. The Funds' most recent annual and
semi-annual reports contain information about the Funds' investments. The most
recent annual report also contains a discussion of the market conditions and
investment strategies that significantly affected the Fund's performance during
the past fiscal year.
You may request free of charge the current SAI or the most recent annual and
semi-annual reports, or other information about the Funds, by calling
1-800-367-7732 or writing to:
Aetna Series Fund, Inc.
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
SEC's web site (http://www.sec.gov) or at the SEC's Public Reference Room in
Washington, D.C. You may call 1-800-SEC-0330 to get information on the
operations of the Public Reference Room or you may write to Public Reference
Section, Washington, D.C. 20549-6009 to get information from the Public
Reference Section. The Public Reference Section will charge a duplicating fee
for copying and sending any information you request.
Investment Company Act File No. 811-____.
52
<PAGE>
CLASS A, CLASS B, CLASS C AND CLASS I SHARES
AETNA SERIES FUND, INC.
Statement of Additional Information dated March 1, 1999
This Statement of Additional Information (Statement) is not a Prospectus and
should be read in conjunction with the current Prospectus for Class A, Class B
and Class C shares of Aetna Series Fund, Inc. (Company) and the current
Prospectus for Class I shares of the Company, each dated March 1, 1999, for the
following funds (Funds). Capitalized terms not defined herein are used as
defined in the Prospectuses.
Capital Appreciation Funds
Aetna Growth Fund (Growth)
Aetna International Fund (International)
Aetna Mid Cap Fund (Mid Cap)
Aetna Small Company Fund (Small Company)
Aetna Value Opportunity Fund (Value Opportunity)
Growth & Income Funds
Aetna Balanced Fund (Balanced)
Aetna Growth and Income Fund (Growth and Income)
Aetna Real Estate Securities Fund (Real Estate)
Income Funds
Aetna Bond Fund (Bond Fund)
Aetna Government Fund
Aetna High Yield Fund (High Yield)
Aetna Money Market Fund (Money Market)
Index Plus Funds
Aetna Index Plus Bond Fund (Index Plus Bond)
Aetna Index Plus Large Cap Fund (Index Plus Large Cap)
Aetna Index Plus Mid Cap Fund (Index Plus Mid Cap)
Aetna Index Plus Small Cap Fund (Index Plus Small Cap)
Generation Funds
Aetna Ascent Fund (Ascent)
Aetna Crossroads Fund (Crossroads)
Aetna Legacy Fund (Legacy)
The Funds' Financial Statements and the independent auditors' reports thereon,
included in the Company's Annual Report, shall be incorporated by reference in
this Statement by amendment. A free copy of the Company's Annual Report and each
Prospectus is available upon request by writing to: Aetna Series Fund, Inc., 10
State House Square, Hartford, Connecticut 06103-3602, or by calling: (800)
367-7732.
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TABLE OF CONTENTS
GENERAL INFORMATION...........................................................3
ADDITIONAL INVESTMENT RESTRICTIONS AND POLICIES...............................4
INVESTMENT TECHNIQUES AND RISK FACTORS........................................7
DIRECTORS AND OFFICERS.......................................................24
CONTROL PERSONS AND PRINCIPAL SHAREHOLDERS...................................27
THE INVESTMENT ADVISORY AGREEMENTS...........................................28
THE SUBADVISORY AGREEMENT....................................................33
THE ADMINISTRATIVE SERVICES AGREEMENT........................................33
CUSTODIAN....................................................................35
TRANSFER AGENT...............................................................35
INDEPENDENT AUDITORS.........................................................35
PRINCIPAL UNDERWRITER........................................................35
DISTRIBUTION AND SHAREHOLDER SERVICING ARRANGEMENTS..........................36
PURCHASE AND REDEMPTION OF SHARES............................................39
BROKERAGE ALLOCATION AND TRADING POLICIES....................................44
SHAREHOLDER ACCOUNTS AND SERVICES............................................47
NET ASSET VALUE..............................................................48
TAX STATUS...................................................................49
PERFORMANCE INFORMATION......................................................50
FINANCIAL STATEMENTS.........................................................56
2
<PAGE>
GENERAL INFORMATION
Incorporation The Company was incorporated under the laws of Maryland on June
17, 1991.
Series and Classes The Company currently offers 19 separate series, all of which
are listed on the first page of the Statement. The Board of Directors (Board)
has the authority to subdivide each series into classes of shares having
different attributes so long as each share of each class represents a
proportionate interest in the series equal to each other share in that series.
Shares of each Fund currently are classified into four classes: Class A, Class
B, Class C and Class I. Class I shares are shares that are offered to certain
retirement plans; certain registered investment advisers having an agreement
with the Funds to invest a minimum of $1 million within one year of initial
purchase; employees and retired employees of Aetna Inc. and its affiliates
(including members of employees' and retired persons' immediate families, board
members and trustees, and their immediate families); insurance companies
(including separate accounts); registered investment companies; shareholders
holding Select Class shares at the time such shares were redesignated as Class I
shares, and their immediate family members, as long as they maintain a
shareholder account; certain bank and independent trust companies investing on
behalf of their clients for which they charge trust and investment management
fees; members of the Board; NASD-registered representatives of Aeltus Capital or
any affiliated broker-dealer (including members of their immediate families);
and of such other groups as may be approved by the Company's Board from time to
time. Class A, Class B and Class C shares are shares that are offered to
accounts not eligible to buy Class I shares. Each class of shares has the same
rights, privileges and preferences, except with respect to: (a) the effect of
sales charges, if any, for each class; (b) the distribution fees borne by each
class; (c) the expenses allocable exclusively to each class; (d) voting rights
on matters exclusively affecting a single class; and (e) the exchange privilege
of each class.
Capital Stock Fund shares are fully paid and nonassessable when issued. Fund
shares have no preemptive or conversion rights, except that Class B shares
automatically convert to Class A shares after 8 years. Each share of a Fund has
the same rights to share in dividends declared by a Fund. Upon liquidation of
any Fund, shareholders of shares representing an interest in that Fund are
entitled to share pro rata in the net assets of the Fund available for
distribution to shareholders.
Voting Rights Shareholders of each class are entitled to one vote for each full
share held (and fractional votes for fractional shares of each class held) and
will vote on the election of Directors and on other matters submitted to the
vote of shareholders. Generally, all shareholders have voting rights on all
matters except matters affecting only the interests of one Fund or one class of
shares. Voting rights are not cumulative, so that the holders of more than 50%
of the shares voting in the election of Directors can, if they choose to do so,
elect all the Directors, in which event the holders of the remaining shares will
be unable to elect any person as a Director.
3
<PAGE>
The Articles may be amended by an affirmative vote of a majority of the shares
at any meeting of shareholders or by written instrument signed by a majority of
the Directors and consented to by a majority of the shareholders.
Shareholder Meetings The Company is not required, and does not intend, to hold
annual shareholder meetings. The Articles provide for meetings of shareholders
to elect Directors at such times as may be determined by the Directors or as
required by the Investment Company Act of 1940, as amended (1940 Act). If
requested by the holders of at least 10% of the Company's outstanding shares,
the Company will hold a shareholder meeting for the purpose of voting on the
removal of one or more Directors and will assist with communication concerning
that shareholder meeting.
1940 Act Classification The Company is an open-end management company, as that
term is defined under the 1940 Act. Each Fund is a diversified company, as that
term is defined under the 1940 Act. The 1940 Act generally requires that with
respect to 75% of its total assets, a diversified company may not invest more
than 5% of its total assets in the securities of any one issuer. Money Market is
subject to this restriction with respect to 100% of its total assets.
ADDITIONAL INVESTMENT RESTRICTIONS AND POLICIES
The investment objectives and certain investment policies of each Fund are
matters of fundamental policy for purposes of the 1940 Act and therefore cannot
be changed without the approval of a majority of the outstanding voting
securities of that Fund. This means the lesser of (a) 67% of the shares of a
Fund present at a shareholders' meeting if the holders of more than 50% of the
shares of that Fund then outstanding are present in person or by proxy; or (b)
more than 50% of the outstanding voting securities of the Fund.
As a matter of fundamental policy, a Fund will not:
(1) hold more than 5% of the value of its total assets in the securities of
any one issuer or hold more than 10% of the outstanding voting
securities of any one issuer. This restriction applies only to 75% of
the value of a Fund's total assets. Securities issued or guaranteed by
the U.S. Government, its agencies and instrumentalities are excluded
from this restriction;
(2) except for Real Estate, concentrate its investments in any one
industry, although a Fund 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 user of their services,
such as automobile finance, computer finance and consumer finance. In
addition, for purposes of this restriction, for Ascent, Crossroads and
Legacy, real estate stocks will be classified as separate industries
according to property type, such as apartment, retail, office and
industrial. This limitation will not apply to any Fund's investment in
securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities.
4
<PAGE>
Additionally for Money Market, investments in the following shall not
be subject to the 25% limitation: securities invested in, or repurchase
agreements for, U.S. Government securities, certificates of deposit,
bankers' acceptances, and securities of banks;
(3) make loans, except that, to the extent appropriate under its investment
program, a Fund may (i) purchase bonds, debentures or other debt
instruments, including short-term obligations; (ii) enter into
repurchase transactions; and (iii) lend portfolio securities provided
that the value of such loaned securities does not exceed one-third of
the Fund's total assets;
(4) issue any senior security (as defined in the 1940 Act), except that (i)
a Fund may enter into commitments to purchase securities in accordance
with that Fund's investment program, including reverse repurchase
agreements, delayed delivery and when-issued securities, which may be
considered the issuance of senior securities; (ii) a Fund may engage in
transactions that may result in the issuance of a senior security to
the extent permitted under applicable regulations, interpretations of
the 1940 Act or an exemptive order; (iii) a Fund (other than Money
Market) may engage in short sales of securities to the extent permitted
in its investment program and other restrictions; (iv) the purchase or
sale of futures contracts and related options shall not be considered
to involve the issuance of senior securities; and (v) subject to
certain fundamental restrictions set forth below, a Fund may borrow
money as authorized by the 1940 Act;
(5) except for Real Estate, purchase real estate, interests in real estate
or real estate limited partnership interests except that: (i) to the
extent appropriate under its investment program, a Fund may invest in
securities secured by real estate or interests therein or issued by
companies, including real estate investment trusts, which deal in real
estate or interests therein; or (ii) a Fund may acquire real estate as
a result of ownership of securities or other interests (this could
occur for example if a Fund holds a security that is collateralized by
an interest in real estate and the security defaults);
(6) invest in commodity contracts, except that a Fund may, to the extent
appropriate under its investment program, purchase securities of
companies engaged in such activities; may (other than Money Market)
enter into transactions in financial and index futures contracts and
related options; and may enter into forward currency contracts;
(7) borrow money, except that (i) a Fund (other than Money Market) may
enter into certain futures contracts and options related thereto; (ii)
a Fund may enter into commitments to purchase securities in accordance
with that Fund's investment program, including delayed delivery and
when-issued securities and reverse repurchase agreements; (iii) for
temporary emergency purposes, a Fund may borrow money in amounts not
exceeding 5% of the value of its total assets at the time the loan is
made; and (iv) for purposes of leveraging, a Fund (other than Money
Market) may borrow money from banks (including its custodian bank) only
if, immediately after such borrowing, the value of that Fund's assets,
including the amount borrowed, less its liabilities, is equal to at
least 300% of the amount borrowed, plus all outstanding borrowings. If,
at any time, the value of that Fund's assets fails to
5
<PAGE>
meet the 300% asset coverage requirement relative only to leveraging,
that Fund will, within three days (not including Sundays and holidays),
reduce its borrowings to the extent necessary to meet the 300% test;
(8) act as an underwriter of securities except to the extent that, in
connection with the disposition of portfolio securities by a Fund, that
Fund may be deemed to be an underwriter under the provisions of the
Securities Act of 1933 (1933 Act).
The Board has adopted certain other investment restrictions which may be changed
by the Board and without shareholder vote. The Funds will not:
(1) make short sales of securities, other than short sales "against the
box," or purchase securities on margin except for short-term credits
necessary for clearance of portfolio transactions, provided that this
restriction will not be applied to limit the use of options, futures
contracts and related options, in the manner otherwise permitted by the
investment restrictions, policies and investment programs of each Fund,
as described in this Statement and in the Prospectuses;
(2) except for International, Ascent, Crossroads and Legacy, invest more
than 25% of its total assets in securities or obligations of foreign
issuers, including marketable securities of, or guaranteed by, foreign
governments (or any instrumentality or subdivision thereof). A Fund
will invest in securities or obligations of foreign banks only if such
banks have a minimum of $5 billion in assets and a primary capital
ratio of at least 4.25%. Money Market may only purchase foreign
securities or obligations that are U.S.-dollar denominated;
(3) invest in companies for the purpose of exercising control or
management;
(4) purchase interests in oil, gas or other mineral exploration programs;
however, this limitation will not prohibit the acquisition of
securities of companies engaged in the production or transmission of
oil, gas, or other minerals;
(5) invest more than 15% (10% for Money Market, Index Plus Bond, Index Plus
Large Cap, Index Plus Mid Cap and Index Plus Small Cap) of its net
assets in illiquid securities. Illiquid securities are securities that
are not readily marketable or cannot be disposed of promptly within
seven days and in the usual course of business without taking a
materially reduced price. Such securities include, but are not limited
to, time deposits and repurchase agreements with maturities longer than
seven days. Securities that may be resold under Rule 144A under, or
securities offered pursuant to Section 4(2) of, the 1933 Act, shall not
be deemed illiquid solely by reason of being unregistered. Aeltus
Investment Management, Inc. (Aeltus), the investment adviser, shall
determine whether a particular security is deemed to be liquid based on
the trading markets for the specific security and other factors;
6
<PAGE>
(6) except for High Yield, invest more than 15% (10% for Index Plus Large
Cap, Index Plus Mid Cap and Index Plus Small Cap) of the total value of
its assets in high yield bonds (securities rated below BBB- by Standard
& Poor's Corporation (S&P) or Baa3 by Moody's Investors Service, Inc.
(Moody's), or, if unrated, considered by Aeltus to be of comparable
quality);
(7) except for Index Plus Bond, Index Plus Large Cap, Index Plus Mid Cap
and Index Plus Small Cap, invest in securities issued by any entity
listed in the Wall Street Journal's Quarterly "Corporate Performance
Report" under the heading "Consumer, Noncyclical-Tobacco," or are
otherwise determined by Aeltus to be primarily involved in the
production or distribution of tobacco products.
Where a 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 change in the market
value of an investment, in net or total assets, in the securities rating of the
investment or any other change.
INVESTMENT TECHNIQUES AND RISK FACTORS
Options, Futures and Other Derivative Instruments
Each Fund (except Money Market) may use derivative instruments as described
below and in the Prospectuses. Derivatives that may be used by a Fund include
forward contracts, swaps, structured notes, collateralized mortgage obligations
(CMOs), futures, options, and U.S. Government derivatives. For purposes other
than hedging, a Fund will invest no more than 5% of its assets in derivatives
which at the time of purchase are considered by management to involve high risk
to the Fund, such as inverse floaters, interest-only and principal-only debt
instruments. Each Fund (other than Money Market) may invest up to 30% of its
assets in lower risk derivatives for hedging or to gain additional exposure to
certain markets for investment purposes while maintaining liquidity to meet
shareholder redemptions and minimizing trading costs. Forward exchange contracts
are not subject to this 30% limitation.
The following provides additional information about these instruments.
Futures Contracts Each Fund may enter into futures contracts and options thereon
subject to restrictions described below under "Additional Restrictions on the
Use of Futures and Option Contracts." A Fund may enter into futures contracts or
options thereon that are traded on national futures exchanges and are
standardized as to maturity date and underlying financial instrument. The
futures exchanges and trading in the U.S. are regulated under the Commodity
Exchange Act by the Commodities 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(s) or a specific
stock market index for a specified price
7
<PAGE>
at a designated date, time, and place. Brokerage fees are incurred when a
futures contract is bought or sold and at expiration, and margin deposits must
be maintained.
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 a Fund will be able to enter into an offsetting transaction with
respect to a particular contract at a particular time. If a Fund 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, among other
things, by actual and anticipated changes in interest rates and equities 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 unlimited loss or gain to a
Fund 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 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.
Most U.S. futures exchanges limit the amount of fluctuation permitted in
interest rate futures contract prices during a single trading day, and, as
noted, temporary regulations limiting price fluctuations for stock index futures
contracts are also now 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.
Sales of futures contracts which are intended to hedge against a change in the
value of securities held by a Fund may affect the holding period of such
securities and, consequently, the nature of the gain or loss on such securities
upon disposition.
8
<PAGE>
"Margin" is the amount of funds that must be deposited by a Fund with a
commodities broker in a custodian account in order to initiate futures trading
and to maintain open positions in a Fund's futures contracts. A margin deposit
is intended to assure the Fund's performance of the futures contract. The margin
required for a particular futures contract is set by the exchange on which the
contract is traded and may be significantly modified from time to time by the
exchange during the term of the contract.
If the price of an open futures contract changes (by increase in the case of a
sale or by decrease in the case of a purchase) so that the loss on the futures
contract reaches a point at which the margin on deposit does not satisfy margin
requirements, the broker will require an increase in the margin. However, if the
value of a position increases because of favorable price changes in the futures
contract so that the margin deposit exceeds the required margin, the broker will
promptly pay the excess to a Fund. These daily payments to and from a Fund are
called variation margin. At times of extreme price volatility intra-day
variation margin payments may be required. In computing daily net asset values,
each Fund will mark-to-market the current value of its open futures contracts.
Each Fund expects to earn interest income on its initial margin deposits.
When a Fund 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.
A Fund can buy and write (sell) options on futures contracts. A Fund may
purchase and sell futures contracts and related options 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 a Fund's total assets (100% in the case of Ascent and
60% in the case of Crossroads) 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. See "Call and Put Options" below for additional restrictions.
Call and Put Options Each Fund may purchase and write (sell) call options and
put options on securities, indices and futures as discussed in the Prospectuses,
subject to the restrictions described in this section and under "Restrictions on
the Use of Futures and Option Contracts." A call option gives the holder (buyer)
the right to buy and to obligate the writer (seller) to sell a security or
financial instrument at a stated price (strike price) at any time until a
designated future date when the option expires (expiration date). A put option
gives the holder (buyer) the right to sell and to obligate the writer (seller)
to purchase a security or financial instrument at a stated price at any time
until the expiration date. A Fund may write or purchase put or call options
listed on national securities exchanges in standard contracts or may write or
purchase put or call options with or directly from investment dealers meeting
the creditworthiness criteria of Aeltus.
Each Fund, except Ascent, Crossroads and Legacy, is prohibited from having
written call options outstanding at any one time on more than 30% of its total
assets. A Fund will not write a put if it
9
<PAGE>
will require more than 50% of the Fund's net assets to be designated to cover
all put obligations. No Fund may buy put options if more than 3% of its assets
immediately following such purchase would consist of put options. The Funds,
except Ascent, Crossroads and Legacy, may purchase call and sell put options on
equity securities only to close out positions previously opened. No Fund will
write a call option on a security unless the call is "covered" (i.e., it already
owns the underlying security). Securities it "already owns" include any stock
which it has the right to acquire without any additional payment, at its
discretion for as long as the call remains outstanding. This restriction does
not apply to the writing of calls on securities indices or futures contracts.
The Funds will not write call options on when-issued securities. The Funds
purchase call options primarily as a temporary substitute for taking positions
in certain securities or in the securities that comprise a relevant index,
particularly if Aeltus (or Bradley, in the case of Value Opportunity) considers
these instruments to be undervalued relative to the prices of particular
securities or of the securities underlying that index. A Fund may also purchase
call options on an index to protect against increases in the price of securities
underlying that index that the Fund intends to purchase pending its ability to
invest in such securities in an orderly manner.
So long as the obligation of the writer of a call option continues, the writer
may be assigned an exercise notice by the broker-dealer through which such
option was settled, requiring the writer to deliver the underlying security
against payment of the exercise price. This obligation terminates upon the
expiration of the call option, by the exercise of the call option, or by
entering into an offsetting transaction.
When writing a call option, in return for the premium, the writer gives up the
opportunity to profit from the price increase in the underlying security above
the exercise price, but conversely retains the risk of loss should the price of
the security decline. If a call option expires unexercised, the writer will
realize a gain in the amount of the premium; however, such gain may be offset by
a decline in the market value of the underlying security during the option
period. If the call option is exercised, the writer would realize a gain or loss
from the transaction depending on what it received from the call and what it
paid for the underlying security.
An option on an index (or a particular security) is a contract that gives the
purchaser of the option, in return for the premium paid, the right to receive
from the writer of the option cash equal to the difference between the closing
price of the index (or security) and the exercise price of the option, expressed
in dollars, times a specified multiple (the multiplier).
A Fund may write calls on securities indices and futures contracts provided that
it enters into an appropriate offsetting position or that it designates liquid
assets in an amount sufficient to cover the underlying obligation in accordance
with regulatory requirements. The risk involved in writing call options on
futures contracts or market indices is that a Fund would not benefit from any
increase in value above the exercise price. Usually, this risk can be eliminated
by entering into an offsetting transaction. However, the cost to do an
offsetting transaction and terminate the Fund's obligation might be more or less
than the premium received when it originally wrote the option. Further, a Fund
might occasionally not be able to close the option because of insufficient
activity in the options market.
10
<PAGE>
In the case of a put option, as long as the obligation of the put writer
continues, it may be assigned an exercise notice by the broker-dealer through
which such option was sold, requiring the writer to take delivery of the
underlying security against payment of the exercise price. A writer has no
control over when it may be required to purchase the underlying security, since
it may be assigned an exercise notice at any time prior to the expiration date.
This obligation terminates earlier if the writer effects a closing purchase
transaction by purchasing a put of the same series as that previously sold.
If a put option is sold by a Fund, the Fund will designate liquid securities
with a value equal to the exercise price, or else will hold an offsetting
position in accordance with regulatory requirements. In writing puts, there is
the risk that a writer may be required to buy the underlying security at a
disadvantageous price. The premium the writer receives from writing a put option
represents a profit, as long as the price of the underlying instrument remains
above the exercise price. If the put is exercised, however, the writer is
obligated during the option period to buy the underlying instrument from the
buyer of the put at the exercise price, even though the value of the investment
may have fallen below the exercise price. If the put lapses unexercised, the
writer realizes a gain in the amount of the premium. If the put is exercised,
the writer may incur a loss, equal to the difference between the exercise price
and the current market value of the underlying instrument.
A Fund may purchase put options when Aeltus (or Bradley, in the case of Value
Opportunity) believes that a temporary defensive position is desirable in light
of market conditions, but does not desire to sell a portfolio security. The
purchase of put options may be used to protect a Fund's holdings in an
underlying security against a substantial decline in market value. Such
protection is, of course, only provided during the life of the put option when a
Fund, as the holder of the put option, is able to sell the underlying security
at the put exercise price regardless of any decline in the underlying security's
market price. By using put options in this manner, a Fund will reduce any profit
it might otherwise have realized in its underlying security by the premium paid
for the put option and by transaction costs.
The premium received from writing a call or put option, or paid for purchasing a
call or put option will reflect, among other things, the current market price of
the underlying security, the relationship of the exercise price to such market
price, the historical price volatility of the underlying security, the length of
the option period, and the general interest rate environment. The premium
received by a Fund for writing call options will be recorded as a liability in
the statement of assets and liabilities of that Fund. This liability will be
adjusted daily to the option's current market value. The liability will be
extinguished upon expiration of the option, by the exercise of the option, or by
entering into an offsetting transaction. Similarly, the premium paid by a Fund
when purchasing a put option will be recorded as an asset in the statement of
assets and liabilities of that Fund. This asset will be adjusted daily to the
option's current market value. The asset will be extinguished upon expiration of
the option, by selling an identical option in a closing transaction, or by
exercising the option.
Closing transactions will be effected in order to realize a profit on an
outstanding call or put option, to prevent an underlying security from being
called or put, or to permit the exchange or tender of the underlying security.
Furthermore, effecting a closing transaction will permit a Fund
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to write another call option, or purchase another put option, on the underlying
security with either a different exercise price or expiration date or both. If a
Fund desires to sell a particular security from its portfolio on which it has
written a call option, or purchased a put option, it will seek to effect a
closing transaction prior to, or concurrently with, the sale of the security.
There is, of course, no assurance that a Fund will be able to effect a closing
transaction at a favorable price. If a Fund cannot enter into such a
transaction, it may be required to hold a security that it might otherwise have
sold, in which case it would continue to be at market risk on the security. A
Fund will pay brokerage commissions in connection with the sale or purchase of
options to close out previously established option positions. These brokerage
commissions are normally higher as a percentage of underlying asset values than
those applicable to purchases and sales of portfolio securities.
Foreign Futures Contracts and Foreign Options The Funds may engage in
transactions in foreign futures contracts and foreign options. Participation in
foreign futures contracts and foreign options transactions involves the
execution and clearing of trades on or subject to the rules of a foreign board
of trade. Neither the CFTC, the National Futures Association (NFA) nor any
domestic exchange regulates activities of any foreign boards of trade including
the execution, delivery and clearing of transactions, or has the power to compel
enforcement of the rules of a foreign board of trade or any applicable foreign
laws. Generally, the foreign transaction will be governed by applicable foreign
law. This is true even if the exchange is formally linked to a domestic market
so that a position taken on the market may be liquidated by a transaction on
another market. Moreover, such laws or regulations will vary depending on the
foreign country in which the foreign futures contracts or foreign options
transaction occurs. Investors that trade foreign futures contracts or foreign
options contracts may not be afforded certain of the protective measures
provided by domestic exchanges, including the right to use reparations
proceedings before the CFTC and arbitration proceedings provided by the NFA. In
particular, funds received from customers for foreign futures contracts or
foreign options transactions may not be provided the same protections as funds
received for transactions on U.S. futures exchange. The price of any foreign
futures contracts or foreign options contract and, therefore, the potential
profit and loss thereon, may be affected by any variance in the foreign exchange
rate between the time an order is placed and the time it is liquidated, offset
or exercised.
Options on Foreign Currencies Each Fund may write and purchase calls on foreign
currencies. A Fund may purchase and write puts and calls on foreign currencies
that are traded on a securities or commodities exchange or quoted by major
recognized dealers in such options for the purpose of protecting against
declines in the dollar value of foreign securities and against increases in the
dollar cost of foreign securities to be acquired. If a rise is anticipated in
the dollar value of a foreign currency in which securities to be acquired are
denominated, the increased cost of such securities may be partially offset by
purchasing calls or writing puts on that foreign currency. If a decline in the
dollar value of a foreign currency is anticipated, the decline in value of
portfolio securities denominated in that currency may be partially offset by
writing calls or purchasing puts on that foreign currency. In such
circumstances, the Fund collateralizes the position by designating cash and/or
liquid securities in an amount not less than the value of the underlying foreign
currency in U.S. dollars marked-to-market daily. In the event of rate
fluctuations adverse to a Fund's position, it would lose the premium it paid and
transactions costs. A call written on a
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foreign currency by a Fund is covered if the Fund owns the underlying foreign
currency covered by the call or has an absolute and immediate right to acquire
that foreign currency without additional cash consideration (or for additional
cash consideration specially designated) upon conversion or exchange of other
foreign currency held in its portfolio.
Forward Exchange Contracts Each Fund may enter into forward contracts for
foreign currency (forward exchange contracts), which obligate the seller to
deliver and the purchaser to take a specific amount of a specified foreign
currency at a future date at a price set at the time of the contract. These
contracts are generally traded in the interbank market conducted directly
between currency traders and their customers. A Fund may enter into a forward
exchange contract in order to "lock in" the U.S. dollar price of a security
denominated in a foreign currency which it has purchased or sold but which has
not yet settled (a transaction hedge); or to lock in the value of an existing
portfolio security (a position hedge); or to protect against a possible loss
resulting from an adverse change in the relationship between the U.S. dollar and
a foreign currency. Forward exchange contracts include standardized foreign
currency futures contracts which are traded on exchanges and are subject to
procedures and regulations applicable to futures. Each Fund may also enter into
a forward exchange contract to sell a foreign currency that differs from the
currency in which the underlying security is denominated. This is done in the
expectation that there is a greater correlation between the foreign currency of
the forward exchange contract and the foreign currency of the underlying
investment than between the U.S. dollar and the foreign currency of the
underlying investment This technique is referred to as "cross hedging." The
success of cross hedging is dependent on many factors, including the ability of
Aeltus (or Bradley, in the case of Value Opportunity) to correctly identify and
monitor the correlation between foreign currencies and the U.S. dollar. To the
extent that the correlation is not identical, a Fund may experience losses or
gains on both the underlying security and the cross currency hedge.
Each Fund may use forward exchange contracts to protect against uncertainty in
the level of future exchange rates. The use of forward exchange contracts does
not eliminate fluctuations in the prices of the underlying securities the Fund
owns or intends to acquire, but it does fix a rate of exchange in advance. In
addition, although forward exchange contracts limit the risk of loss due to a
decline in the value of the hedged currencies, at the same time they limit any
potential gain that might result should the value of the currencies increase.
The precise matching of the forward contract amounts and the value of the
securities involved will not generally be possible because the future value of
such securities in foreign currencies will change as a consequence of market
movements in the value of these securities between the date the forward contract
is entered into and the date it is sold. Accordingly, it may be necessary for a
Fund to purchase additional foreign currency on the spot (i.e., cash) market
(and bear the expense of such purchase), if the market value of the security is
less than the amount of foreign currency the Fund is obligated to deliver and if
a decision is made to sell the security and make delivery of the foreign
currency. Conversely, it may be necessary to sell on the spot market some of the
foreign currency received upon the sale of the portfolio security if its market
value exceeds the amount of foreign currency the Fund is obligated to deliver.
The projection of short-term currency market movements is extremely difficult,
and the successful execution of a short-term hedging strategy is highly
uncertain. Forward contracts involve the risk that anticipated currency
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movements will not be accurately predicted, causing the Fund to sustain losses
on these contracts and transactions costs.
At or before the maturity of a forward exchange contract requiring a Fund to
sell a currency, the Fund may either sell a portfolio security and use the sale
proceeds to make delivery of the currency or retain the security and offset its
contractual obligation to deliver the currency by purchasing a second contract
pursuant to which the Fund will obtain, on the same maturity date, the same
amount of the currency that it is obligated to deliver. Similarly, a Fund may
close out a forward contract requiring it to purchase a specified currency by
entering into a second contract entitling it to sell the same amount of the same
currency on the maturity date of the first contract. The Fund would realize a
gain or loss as a result of entering into such an offsetting forward contract
under either circumstance to the extent the exchange rate(s) between the
currencies involved moved between the execution dates of the first contract and
the offsetting contract.
The cost to a Fund of engaging in forward exchange contracts varies with factors
such as the currencies involved, the length of the contract period and the
market conditions then prevailing. Because forward contracts are usually entered
into on a principal basis, no fees or commissions are involved. Because such
contracts are not traded on an exchange, the Adviser must evaluate the credit
and performance risk of each particular counterparty under a forward contract.
Although the Funds value their assets daily in terms of U.S. dollars, they do
not intend to convert their holdings of foreign currencies into U.S. dollars on
a daily basis. The Funds may convert foreign currency from time to time. Foreign
exchange dealers do not charge a fee for conversion, but they do seek to realize
a profit based on the difference between the prices at which they buy and sell
various currencies. Thus, a dealer may offer to sell a foreign currency to the
Funds at one rate, while offering a lesser rate of exchange should the Funds
desire to resell that currency to the dealer.
Additional Restrictions on the Use of Futures and Option Contracts CFTC
regulations require that to prevent a Fund from being a commodity pool the Funds
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, each Fund 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 that Fund in the cash market. With respect to futures contracts or
related options that are entered into for purposes that may be considered
speculative, the aggregate initial margin for future contracts and premiums for
options will not exceed 5% of a Fund's net assets, after taking into account
realized profits and unrealized losses on such futures contracts.
Interest Rate Swap Transactions Swap agreements entail both interest rate risk
and credit risk. There is a risk that, based on movements of interest rates in
the future, the payments made by a Fund under a swap agreement will have been
greater than those received by it. Credit risk arises from the possibility that
the counterparty will default. If the counterparty to an interest rate swap
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defaults, a Fund's loss will consist of the net amount of contractual interest
payments that a Fund has not yet received. Aeltus will monitor the
creditworthiness of counterparties to a Fund's interest rate swap transactions
on an ongoing basis. A Fund will enter into swap transactions with appropriate
counterparties pursuant to master netting agreements. A master netting agreement
provides that all swaps done between a Fund and that counterparty under that
master agreement shall be regarded as parts of an integral agreement. If on any
date amounts are payable in the same currency in respect of one or more swap
transactions, the net amount payable on that date in that currency shall be
paid. In addition, the master netting agreement may provide that if one party
defaults generally or on one swap, the counterparty may terminate the swaps with
that party. Under such agreements, if there is a default resulting in a loss to
one party, the measure of that party's damages is calculated by reference to the
average cost of a replacement swap with respect to each swap (i.e., the
mark-to-market value at the time of the termination of each swap). The gains and
losses on all swaps are then netted, and the result is the counterparty's gain
or loss on termination. The termination of all swaps and the netting of gains
and losses on termination is generally referred to as "aggregation."
Additional Risk Factors in Using Derivatives In addition to any risk factors
which may be described elsewhere in this section, or in the Prospectuses, the
following sets forth certain information regarding the potential risks
associated with a Fund's transactions in derivatives.
Risk of Imperfect Correlation A Fund's ability to hedge effectively all or a
portion of its portfolio through transactions in futures, options on futures or
options on securities and indexes depends on the degree to which movements in
the value of the securities or index underlying such hedging instrument
correlate with movements in the value of the assets being hedged. If the values
of the assets being hedged do not move in the same amount or direction as the
underlying security or index, the hedging strategy for a Fund might not be
successful and the Fund could sustain losses on its hedging transactions which
would not be offset by gains on its portfolio. It is also possible that there
may be a negative correlation between the security or index underlying a futures
or option contract and the portfolio securities being hedged, which could result
in losses both on the hedging transaction and the portfolio securities. In such
instances, the Fund's overall return could be less than if the hedging
transactions had not been undertaken.
Potential Lack of a Liquid Secondary Market Prior to exercise or expiration, a
futures or option position may be terminated only by entering into a closing
purchase or sale transaction, which requires a secondary market on the exchange
on which the position was originally established. While a Fund will establish a
futures or option position only if there appears to be a liquid secondary market
therefor, there can be no assurance that such a market will exist for any
particular futures or option contract at any specific time. In such event, it
may not be possible to close out a position held by the Fund, which could
require the Fund to purchase or sell the instrument underlying the position,
make or receive a cash settlement, or meet ongoing variation margin
requirements. The inability to close out futures or option positions also could
have an adverse impact on the Fund's ability effectively to hedge its portfolio,
or the relevant portion thereof.
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The trading of futures and options contracts also is subject to the risk of
trading halts, suspensions, exchange or clearing house equipment failures,
government intervention, insolvency of the brokerage firm or clearing house or
other disruptions of normal trading activity, which could at times make it
difficult or impossible to liquidate existing positions or to recover excess
variation margin payments.
Risk of Predicting Interest Rate Movements Investments in futures contracts on
fixed income securities and related indices involve the risk that if Aeltus' (or
Bradley's, in the case of Value Opportunity) judgment concerning the general
direction of interest rates is incorrect, a Fund's overall performance may be
poorer than if it had not entered into any such contract. For example, if a Fund
has been hedged against the possibility of an increase in interest rates which
would adversely affect the price of bonds held in its portfolio and interest
rates decrease instead, the Fund will lose part or all of the benefit of the
increased value of its bonds which have been hedged because it will have
offsetting losses in its futures positions. In addition, in such situations, if
the Fund has insufficient cash, it may have to sell bonds from its portfolio to
meet daily variation margin requirements, possibly at a time when it may be
disadvantageous to do so. Such sale of bonds may be, but will not necessarily
be, at increased prices which reflect the rising market.
Trading and Position Limits Each contract market on which futures and option
contracts are traded has established a number of limitations governing the
maximum number of positions which may be held by a trader, whether acting alone
or in concert with others. The Company does not believe that these trading and
position limits will have an adverse impact on the hedging strategies regarding
the Funds.
Funds' Investment in Equity and Debt Securities
Each Fund may invest in equity and debt securities (except that Aetna Government
Fund and Money Market may not invest in equity securities). Equity securities
are subject to a decline in the stock market or in the value of the issuing
company and preferred stocks have price risk and some interest rate and credit
risk. The value of fixed income or debt securities may be affected by changes in
general interest rates and in the creditworthiness of the issuer. Debt
securities with longer maturities (for example, over ten years) are more
affected by changes in interest rates and provide less price stability than
securities with short-term maturities (for example, one to ten years). Also, for
each debt security, there is a risk of principal and interest default which will
be greater with higher-yielding, lower-grade securities. International may hold
up to 10% of its total assets in long-term debt securities with an S&P or
Moody's rating of AA/Aa or above, or, if unrated, are considered by Aeltus to be
of comparable quality. Balanced maintains at least 25% of its total assets in
debt securities.
Repurchase Agreements
Each Fund may enter into repurchase agreements with domestic banks and
broker-dealers meeting certain size and creditworthiness standards approved by
the Board. Under a repurchase agreement, a Fund may acquire a debt instrument
for a relatively short period (usually not more than one week) subject to an
obligation of the seller to repurchase and the Fund to resell the
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instrument at a fixed price and time, thereby determining the yield during the
Fund's holding period. This results in a fixed rate of return insulated from
market fluctuations during such period. Such underlying debt instruments serving
as collateral will meet the quality standards of a Fund. The market value of the
underlying debt instruments will, at all times, be equal to the dollar amount
invested. Repurchase agreements, although fully collateralized, involve the risk
that the seller of the securities may fail to repurchase them from a Fund. In
that event, the Fund may incur (a) disposition costs in connection with
liquidating the collateral, or (b) a loss if the collateral declines in value.
Also, if the default on the part of the seller is due to insolvency and the
seller initiates bankruptcy proceedings, a Fund's ability to liquidate the
collateral may be delayed or limited. Repurchase agreements maturing in more
than seven days will not exceed 10% of the total assets of a Fund.
Variable Rate Demand Instruments
Each Fund, except International, may invest in variable rate demand instruments.
Variable rate demand instruments (including floating rate instruments) held by a
Fund may have maturities of more than one year, provided: (i) the Fund is
entitled to the payment of principal at any time, or during specified intervals
not exceeding one year, upon giving the prescribed notice (which may not exceed
30 days), and (ii) the rate of interest on such instruments is adjusted at
periodic intervals not to exceed one year. In determining whether a variable
rate demand instrument has a remaining maturity of one year or less, each
instrument will be deemed to have a maturity equal to the longer of the period
remaining until its next interest rate adjustment or the period remaining until
the principal amount can be recovered through demand. A Fund will be able (at
any time or during specified periods not exceeding one year, depending upon the
note involved) to demand payment of the principal of a note. If an issuer of a
variable rate demand note defaulted on its payment obligation, a Fund might be
unable to dispose of the note and a loss would be incurred to the extent of the
default. A Fund may invest in variable rate demand notes only when the
investment is deemed to involve minimal credit risk. The continuing
creditworthiness of issuers of variable rate demand notes held by a Fund will
also be monitored to determine whether such notes should continue to be held.
Variable and floating rate instruments with demand periods in excess of seven
days and which cannot be disposed of promptly within seven business days and in
the usual course of business without taking a reduced price will be treated as
illiquid securities.
Foreign Securities
All Funds may invest in foreign securities. Investments in securities of foreign
issuers involve certain risks not ordinarily associated with investments in
securities of domestic issuers. Such risks include fluctuations in exchange
rates, adverse foreign political and economic developments, and the possible
imposition of exchange controls or other foreign governmental laws or
restrictions. Because the Funds (other than Money Market) may invest in
securities denominated or quoted in currencies other than the U.S. dollar,
changes in foreign currency exchange rates will affect the value of securities
in the portfolio and the unrealized appreciation or depreciation of investments
so far as U.S. investors are concerned. In addition, with respect to certain
countries, there is the possibility of expropriation of assets, confiscatory
taxation, political or social instability, or diplomatic developments that could
adversely affect investments in those countries.
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There may be less publicly available information about a foreign issuer than
about a U.S. company, and foreign issuers may not be subject to accounting,
auditing, and financial reporting standards and requirements comparable to or as
uniform as those of U.S. issuers. Foreign securities markets, while growing in
volume, have, for the most part, substantially less volume than U.S. markets.
Securities of many foreign issuers are less liquid and their prices more
volatile than securities of comparable U.S. issuers. Transactional costs in
non-U.S. securities markets are generally higher than in U.S. securities
markets. There is generally less government supervision and regulation of
exchanges, brokers, and issuers than there is in the U.S. The Company might have
greater difficulty taking appropriate legal action with respect to foreign
investments in non-U.S. courts than with respect to domestic issuers in U.S.
courts. In addition, transactions in foreign securities may involve greater time
from the trade date until settlement than domestic securities transactions and
involve the risk of possible losses through the holding of securities by
custodians and securities depositories in foreign countries.
Depositary receipts are typically dollar denominated, although their market
price is subject to fluctuations of the foreign currency in which the underlying
securities are denominated. Depositary receipts include: (a) American Depositary
Receipts (ADRs), which are typically designed for U.S. investors and held either
in physical form or in book entry form; (b) European Depositary Receipts (EDRs),
which are similar to ADRs but may be listed and traded on a European exchange as
well as in the U.S. (typically, these securities are traded on the Luxembourg
exchange in Europe); and (c) Global Depositary Receipts (GDRs), which are
similar to EDRs although they may be held through foreign clearing agents such
as Euroclear and other foreign depositories. Depositary receipts denominated in
U.S. dollars will not be considered foreign securities for purposes of the
investment limitation concerning investment in foreign securities.
Mortgage-Related Debt Securities
Money Market, Aetna Government Fund, Bond Fund, High Yield, Balanced, Real
Estate, Index Plus Bond and the Generation Funds may invest in mortgage-related
debt securities. 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.
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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 a Fund might be converted to cash, and the Fund
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 a Fund 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.
The Funds may also invest in CMOs and real estate mortgage investment conduits
(REMICs). 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 payment 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 payments 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.
Asset-Backed Securities
Each Fund may invest in asset-backed securities. Asset-backed securities are
collateralized by short-term loans such as automobile loans, home equity loans,
or credit card receivables. The payments from the collateral are generally
passed through to the security holder. As noted above with respect to CMOs and
REMICs, the average life for these securities is the conventional proxy for
maturity. Asset-backed securities may pay all interest and principal to the
holder, or they may pay a fixed rate of interest, with any excess over that
required to pay interest going either into a reserve account or to a subordinate
class of securities, which may be retained by the originator. The originator may
guarantee interest and principal payments. These guarantees often do not extend
to the whole amount of principal, but rather to an amount equal to a multiple of
the historical loss experience of similar portfolios.
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Two varieties of asset-backed securities are CARs and CARDs. CARs are
securities, representing either ownership interests in fixed pools of automobile
receivables, or debt instruments supported by the cash flows from such a pool.
CARDs are participations in fixed pools of credit accounts. These securities
have varying terms and degrees of liquidity.
The collateral behind certain asset-backed securities (such as CARs and CARDs)
tends to have prepayment rates that do not vary with interest rates; the
short-term nature of the loans may also tend to reduce the impact of any change
in prepayment level. Other asset-backed securities, such as home equity
asset-backed securities, have prepayment rates that are sensitive to interest
rates. Faster prepayments will shorten the average life and slower prepayments
will lengthen it. Asset-backed securities may be pass-through, representing
actual equity ownership of the underlying assets, or pay-through, representing
debt instruments supported by cash flows from the underlying assets.
The coupon rate of interest on mortgage-related and asset-backed securities is
lower than the interest rates paid on the mortgages included in the underlying
pool, by the amount of the fees paid to the mortgage pooler, issuer, and/or
guarantor. Actual yield may vary from the coupon rate, however, if such
securities are purchased at a premium or discount, traded in the secondary
market at a premium or discount, or to the extent that the underlying assets are
prepaid as noted above.
High-Yield Bonds
All Funds, except International, Aetna Government Fund and Money Market, may
invest in high-yield bonds, subject to the limits described above. High-yield
bonds are fixed income securities that offer a current yield above that
generally available on debt securities rated in the four highest categories by
Moody's and S&P or other rating agencies, or, if unrated, are considered to be
of comparable quality by Aeltus (or Bradley, in the case of Value Opportunity).
These securities include:
(a) fixed rate corporate debt obligations (including bonds, debentures and
notes) rated below Baa3 by Moody's or BBB- by S&P;
(b) preferred stocks that have yields comparable to those of high-yielding
debt securities; and
(c) any securities convertible into any of the foregoing.
Debt obligations rated below Baa3/BBB- generally involve more risk of loss of
principal and income than higher-rated securities. Their yields and market
values tend to fluctuate more. Fluctuations in value do not affect the cash
income from the securities but are reflected in a Fund's net asset value. The
greater risks and fluctuations in yield and value occur, in part, because
investors generally perceive issuers of lower-rated and unrated securities to be
less creditworthy. Lower ratings, however, may not necessarily indicate higher
risks. In pursuing a Fund's objectives, Aeltus seeks to identify situations in
which Aeltus believes that future developments will enhance the creditworthiness
and the ratings of the issuer.
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Some of the risks associated with high-yield bonds include:
Sensitivity to Interest Rate and Economic Changes High-yield bonds are more
sensitive to adverse economic changes or individual corporate developments but
generally less sensitive to interest rate changes than are investment grade
bonds. As a result, when interest rates rise, causing bond prices to fall, the
value of these securities may not fall as much as investment grade corporate
bonds. Conversely, when interest rates fall, these securities may underperform
investment grade corporate bonds.
Also, the financial stress resulting from an economic downturn or adverse
corporate developments could have a greater negative effect on the ability of
issuers of these securities to service their principal and interest payments, to
meet projected business goals and to obtain additional financing, than on more
creditworthy issuers. In addition, periods of economic uncertainty and changes
can be expected to result in increased volatility of market prices of these
securities and a Fund's net asset value. Furthermore, in the case of high-yield
bonds structured as zero coupon or pay-in-kind securities, their market prices
are affected to a greater extent by interest rate changes and thereby tend to be
more speculative and volatile than securities which pay interest periodically
and in cash.
Payment Expectations High-yield bonds present risks based on payment
expectations. For example, these securities may contain redemption or call
provisions. If an issuer exercises these provisions in a declining interest rate
market, the Funds may have to replace the securities with a lower yielding
security, resulting in a decreased return for investors. In addition, there is a
higher risk of non-payment of interest and/or principal by issuers of these
securities than in the case of investment-grade bonds.
Liquidity and Valuation Risks Some issuers of high-yield bonds may be traded
among a limited number of broker-dealers rather than in a broad secondary
market. Many of these securities may not be as liquid as investment grade bonds.
The ability to value or sell these securities will be adversely affected to the
extent that such securities are thinly traded or illiquid. Adverse publicity and
investor perceptions, whether or not based on fundamental analysis, may decrease
or increase the value and liquidity of these securities more than other
securities, especially in a thinly-traded market.
Limitations of Credit Ratings The credit ratings assigned to high-yield bonds
may not accurately reflect the true risks of an investment. Credit ratings
typically evaluate the safety of principal and interest payments rather than the
market value risk of such securities. In addition, credit agencies may fail to
adjust credit ratings to reflect rapid changes in economic or company conditions
that affect a security's market value. Although the ratings of recognized rating
services such as Moody's and S&P are considered, Aeltus primarily relies on its
own credit analysis which includes a study of existing debt, capital structure,
ability to service debts and to pay dividends, the issuer's sensitivity to
economic conditions, its operating history and the current trend of earnings.
Thus the achievement of a Fund's investment objective may be more dependent on
Aeltus' own credit analysis than might be the case for a fund which does not
invest in these securities.
21
<PAGE>
Zero Coupon and Pay-in-Kind Securities
All of the Funds may invest in zero coupon securities and all Funds except Money
Market may invest in pay-in-kind securities. In addition, the Funds may invest
in STRIPS (Separate Trading of Registered Interest and Principal of Securities).
Zero coupon or deferred interest securities are debt obligations that do not
entitle the holder to any periodic payment of interest prior to maturity or a
specified date when the securities begin paying current interest (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. STRIPS are created by the
Federal Reserve Bank by separating the interest and principal components of an
outstanding U.S. treasury bond and selling them as individual securities. The
market prices of zero coupon, STRIPS and deferred interest securities generally
are more volatile than the market prices of securities with similar maturities
that pay interest periodically and are likely to respond to changes in interest
rates to a greater degree than do non-zero coupon securities having similar
maturities and credit quality.
The risks associated with lower-rated debt securities apply to these securities.
Zero coupon and pay-in-kind securities are also subject to the risk that in the
event of a default, a Fund may realize no return on its investment, because
these securities do not pay cash interest.
Convertibles
All Funds except Aetna Government Fund may invest in convertible securities. A
convertible bond or convertible preferred stock gives the holder the option of
converting these securities into common stock. Some convertible securities
contain a call feature whereby the issuer may redeem the security at a
stipulated price, thereby limiting the possible appreciation.
Real Estate Securities
All Funds except Bond Fund, Aetna Government Fund, High Yield and Money Market
may invest in real estate securities, including interests in real estate
investment trusts (REITs), real estate development, real estate operating
companies, and companies engaged in other real estate related businesses. 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.
Equity Securities of Smaller Companies
All Funds other than Bond Fund, Aetna Government Fund, Money Market, High Yield
and Index Plus Bond may invest in equity securities issued by smaller, less
well-known U.S. companies. These companies may be in an early developmental
stage or may be older companies entering a new stage of growth due to management
changes, new technology, products or markets. The
22
<PAGE>
securities of small-capitalization companies may also be undervalued due to poor
economic conditions, market decline or actual or unanticipated unfavorable
developments affecting the companies. Securities of small-capitalization
companies tend to offer greater potential for growth than securities of larger,
more established issuers but there are additional risks associated with them.
These risks include: limited marketability; more abrupt or erratic market
movements than securities of larger capitalization companies; and less publicly
available information about the company and its securities. In addition, these
companies may be dependent on relatively few products or services, have limited
financial resources and lack of management depth, and may have less of a track
record or historical pattern of performance.
Supranational Agencies
Each Fund, except Mid Cap, Real Estate, International, Small Company and Growth,
may invest in securities of supranational agencies. Those securities are not
considered government securities and are not supported directly or indirectly by
the U.S. Government. Examples of supranational agencies include, but are not
limited to, the International Bank for Reconstruction and Development (commonly
referred to as the World Bank), which was chartered to finance development
projects in developing member countries; the European Community, which is a
twelve-nation organization engaged in cooperative economic activities; the
European Coal and Steel Community, which is an economic union of various
European nations' steel and coal industries; and the Asian Development Bank,
which is an international development bank established to lend funds, promote
investment and provide technical assistance to member nations in the Asian and
Pacific regions. Each of Index Plus Large Cap, Ascent, Crossroads and Legacy may
invest up to 10% of its net assets in such securities; there is no limitation on
the amount any of the other Funds may invest in those securities.
Borrowing
Each Fund may borrow up to 5% of the value of its total assets from a bank for
temporary or emergency purposes. The Funds do not intend to borrow, except that
they may invest in leveraged derivatives which have certain risks as outlined
above. The Funds may borrow for leveraging purposes only if after the borrowing,
the value of the Funds' net assets including proceeds from the borrowings, is
equal to at least 300% of all outstanding borrowings. Leveraging can increase
the volatility of a Fund since it exaggerates the effects of changes in the
value of the securities purchased with the borrowed funds.
Bank Obligations
Each Fund may invest in obligations issued by domestic or foreign banks
(including banker's acceptances, commercial paper, bank notes, time deposits and
certificates of deposit) provided the issuing bank has a minimum of $5 billion
in assets and a primary capital ratio of at least 4.25%.
23
<PAGE>
Portfolio Turnover
The portfolio turnover rate for Small Company was significantly higher in 1998
than in 1997 because of increased volatility in the market for
small-capitalization stocks. The portfolio turnover rate for Bond Fund was
significantly higher in 1998 than in 1997 because of a change in portfolio
managers which led to a reallocation of Fund assets. The portfolio turnover rate
for Index Plus Large Cap was significantly higher in 1998 than in 1997 because
of increased volatility in the quantitative rankings used in managing the Fund.
DIRECTORS AND OFFICERS
The investments and administration of the Company are under the supervision of
the Board. The Directors and executive officers of the Company and their
principal occupations for the past five years are listed below. Those Directors
who are "interested persons," as defined in the 1940 Act, are indicated by an
asterisk (*). Directors and officers hold similar positions with certain other
investment companies in the same Fund Complex. Those investment companies are:
Aetna Variable Fund, Aetna Income Shares, Aetna Variable Encore Fund, Aetna
Balanced VP, Inc., Aetna GET Fund, Aetna Generation Portfolios, Inc. and Aetna
Variable Portfolios, Inc.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
Principal Occupation During Past Five Years (and
Name, Position(s) Held Positions held with Affiliated Persons or
Address and Age with the Company Principal Underwriters of the Company)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
J. Scott Fox* Director and President Director, Managing Director, Chief Operating
10 State House Square Investment Management, Inc., October 1997 to
Hartford, Connecticut Officer, Chief Financial Officer, Aeltuspresent;
Age 44 Vice President, Aetna Retirement Services, Inc.,
April 1997 to present; Director and Senior Vice
President, Aetna Life Insurance and Annuity Company,
March 1997 to February 1998; Director, Aeltus
Capital, Inc., November 1997 to present; Managing
Director, Chief Operating Officer, Chief Financial
Officer, Aeltus Capital, Inc., February 1998 to
present; Director, Managing Director, Chief
Operating Officer, Chief Financial Officer and
Treasurer, Aeltus, April 1994 to March 1997.
Wayne F. Baltzer Vice President Vice President, Aeltus Capital, Inc., May 1998 to
10 State House Square present; Vice President, Aetna Investment
Hartford, Connecticut Services, Inc., July 1993 to present.
Age 55
- ----------------------------------------------------------------------------------------------------------------------
24
<PAGE>
Albert E. DePrince, Jr. Director Professor, Middle Tennessee State University,
3029 St. Johns Drive 1991 to present.
Murfreesboro, Tennessee
Age 57
- ----------------------------------------------------------------------------------------------------------------------
Amy R. Doberman Secretary Secretary, Aeltus Capital, Inc., April 1998 to
10 State House Square present; Vice President, Law, and Secretary,
Hartford, Connecticut Aeltus Investment Management, Inc., April 1998 to
Age 36 present; Counsel, Aetna Life Insurance and
Annuity Company, December 1996 to present; Attorney,
Securities and Exchange Commission, March 1990 to
November 1996.
- ---------------------------------------------------------------------------------------------------------------------
Maria T. Fighetti Director Manager/Attorney, Health Services, New York City
325 Piermont Road Department of Mental Health, Mental Retardation
Closter, New Jersey and Alcohol Services, 1973 to present.
Age 55
- ---------------------------------------------------------------------------------------------------------------------
David L. Grove Director Private Investor; Economic/Financial Consultant,
5 The Knoll December 1985 to present.
Armonk, New York
Age 80
- ---------------------------------------------------------------------------------------------------------------------
John Y. Kim* Director Director, President, Aeltus Capital, Inc., March
10 State House Square 1996 to present; Director, President, Chief
Hartford, Connecticut Executive Officer, Chief Investment Officer,
Age 38 Aeltus Investment Management, Inc., December 1995
to present; Director, Aetna Life Insurance and
Annuity Company, February 1995 to present; Senior
Vice President, Aetna Life Insurance and Annuity
Company, September 1994 to present.
- ---------------------------------------------------------------------------------------------------------------------
Sidney Koch Director Financial Adviser, self-employed, January 1993 to
455 East 86th Street present.
New York, New York
Age 63
- ---------------------------------------------------------------------------------------------------------------------
Frank Litwin Vice President Managing Director, Aeltus Capital, Inc., May 1998
10 State House Square to present; Managing Director, Aeltus Investment
Hartford, Connecticut Management, Inc., August 1997 to present; Vice
Age 49 President, Fidelity Investments Institutional
Services Company, April 1992 to August 1997.
- ---------------------------------------------------------------------------------------------------------------------
25
<PAGE>
Shaun P. Mathews* Director Vice President/Senior Vice President, Aetna Life
151 Farmington Avenue Insurance and Annuity Company, March 1991 to
Hartford, Connecticut present; Vice President, Aetna Life Insurance
Age 43 Company, 1991 to present; Director and Senior Vice
President, Aetna Investment Services, Inc., July 1993
to present; Director and Senior Vice President, Aetna
Insurance Company of America, September 1992 to
present.
- ---------------------------------------------------------------------------------------------------------------------
Corine T. Norgaard Director Dean of the Barney School of Business, University
556 Wormwood Hill of Hartford (West Hartford, CT), August 1996 to
Mansfield Center, Connecticut present; Professor, Accounting and Dean of the
Age 61 School of Management, SUNY Binghamton
(Binghamton, NY), August 1993 to August 1996
- ---------------------------------------------------------------------------------------------------------------------
Richard G. Scheide Director Trust and Private Banking Consultant, David Ross
11 Lily Street Palmer Consultants, July 1991 to present.
Nantucket, Massachusetts
Age 69
- ---------------------------------------------------------------------------------------------------------------------
Stephanie A. DeSisto Vice President, Vice President, Mutual Fund Accounting, Aeltus
10 State House Square Treasurer and Chief Investment Management, Inc., November 1995 to
Hartford, Connecticut Financial Officer present; Director, Mutual Fund Accounting, Aetna
Age 45 Life Insurance and Annuity Company, August 1994
to November 1995; Assistant Vice President,
Investors Bank & Trust, January 1993 to August
1994.
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
During the period ended October 31, 1998, members of the Board who are also
directors, officers or employees of Aetna Inc. and its affiliates were not
entitled to any compensation from the Company. As of October 31, 1998, the
unaffiliated members of the Board received compensation in the amounts included
in the following table. None of these Directors was entitled to receive pension
or retirement benefits.
26
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Name of Person Aggregate Compensation from the Total Compensation from the Company
Position Company and Fund Complex Paid to Directors
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Corine Norgaard
Director
- ---------------------------------------------------------------------------------------------------------------------
Sidney Koch
Director
- ---------------------------------------------------------------------------------------------------------------------
Maria T. Fighetti
Director
- ---------------------------------------------------------------------------------------------------------------------
Richard G. Scheide
Director, Chairperson
Audit Committee
- ---------------------------------------------------------------------------------------------------------------------
David L. Grove
Director, Chairperson
Contract Committee
- ---------------------------------------------------------------------------------------------------------------------
Albert E. DePrince, Jr.
Director
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
The Company has obtained an order from the Securities and Exchange Commission
(Commission) that allows the Directors who are not affiliated with Aetna Inc. or
any of its subsidiaries to defer all or a portion of their compensation in
accordance with the terms of a Deferred Compensation Plan (Plan). Under the
Plan, compensation deferred by an unaffiliated Director is periodically adjusted
as though an equivalent amount had been invested and reinvested in shares of one
or more Funds designated by the Director. The amount paid to the unaffiliated
Director under the Plan will be based upon the performance of such investments.
Deferral of compensation in accordance with the Plan will have a negligible
effect on the assets, liabilities and net income per share of any Fund and will
not obligate the Company to retain the services of any Director or to pay any
particular level of compensation to any Director. During the fiscal year ended
October 31, 1998, Ms. Fighetti and Dr. Grove deferred $__________ and
$___________, respectively, of their compensation pursuant to this arrangement.
CONTROL PERSONS AND PRINCIPAL SHAREHOLDERS
As of November 30, 1998, Aetna Life Insurance and Annuity Company (Aetna), a
Connecticut corporation, and its affiliates, had the following interest in the
Funds, through direct ownership or through one of Aetna's separate accounts:
<TABLE>
<CAPTION>
% Aetna and its affiliates
------------------------------------------------------------
Class I Class A Class C
<S> <C> <C> <C>
Aetna Bond Fund 50.08% 27.04%
Aetna Government Fund 87.75% 87.11%
Aetna High Yield Fund 99.52% 38.11% 41.11%
27
<PAGE>
Aetna Index Plus Bond Fund 99.97% 35.35% 49.02%
Aetna Index Plus Large Cap Fund 63.91% 7.38%
Aetna Index Plus Mid Cap Fund 99.54% 36.96% 47.82%
Aetna Index Plus Small Cap Fund 99.27% 19.73% 43.97%
Aetna International Fund 23.05% 50.27% 53.39%
Aetna Mid Cap Fund 99.03% 76.81% 95.61%
Aetna Money Market Fund 46.13% 5.29%
Aetna Real Estate Securities Fund 98.43% 30.79% 75.89%
Aetna Small Company Fund 68.32% 7.46%
Aetna Value Opportunity Fund 97.95% 19.68% 83.31%
Aetna Ascent Fund 89.79% 65.94%
Aetna Crossroads Fund 94.67% 46.82%
Aetna Legacy Fund 92.04% 34.87%
Aetna Growth Fund 14.02% 23.39%
Aetna Growth and Income Fund 11.69% 12.66%
Aetna Balanced Fund 13.74% 38.56%
</TABLE>
Shares of the Funds held beneficially by Aetna and its affiliates are voted in
the same proportion as shares held by non-Aetna shareholders of that Fund.
As of October 31, 1998, officers and Directors owned less than 1% of the
outstanding shares of any of the Funds.
Aetna (like Aeltus) is an indirect wholly-owned subsidiary of Aetna Retirement
Services, Inc., which is in turn an indirect wholly-owned subsidiary of Aetna
Inc. Aetna's principal office is located at 151 Farmington Avenue, Hartford,
Connecticut 06156. Aetna is registered with the Commission as an investment
adviser.
THE INVESTMENT ADVISORY AGREEMENTS
The Company, on behalf of each Fund, has entered into investment advisory
agreements (Advisory Agreements) appointing Aeltus as the Investment Adviser of
each Fund. Under the Advisory Agreements and subject to the supervision of the
Board, Aeltus has responsibility for supervising all aspects of the operations
of each Fund including the selection, purchase and sale of securities on behalf
of each Fund. Under the Advisory Agreements, Aeltus is given the right to
delegate any or all of its obligations to a subadviser. Aeltus is an indirect
wholly-owned subsidiary of Aetna Inc., a publicly-owned holding company whose
principal operating subsidiaries engage in the health benefits, insurance and
financial services businesses in the U.S. and internationally.
The Advisory Agreements provide that Aeltus is responsible for payment of all
costs of its personnel, its overhead and of its employees who also serve as
officers or Directors of the Company and each Fund is responsible for payment of
all other of its costs.
Advisory Fees for each Fund are allocated to a particular class on the basis of
the net assets of that class in relation to the net assets of the Fund. Listed
below are the Advisory Fees that Aeltus is entitled to receive from each Fund at
an annual rate based on average daily net assets of each Fund:
28
<PAGE>
<TABLE>
<CAPTION>
Advisory Fee Assets
<S> <C> <C>
CAPITAL APPRECIATION FUNDS
Growth 0.700% On first $250 million
0.650% On next $250 million
0.625% On next $250 million
0.600% On next $1.25 billion
0.550% Over $2 billion
International 0.850% On first $250 million
0.800% On next $250 million
0.775% On next $250 million
0.750% On next $1.25 billion
0.700% Over $2 billion
Mid Cap 0.750% On first $250 million
0.700% On next $250 million
0.675% On next $250 million
0.650% On next $1.25 billion
0.600% Over $2 billion
Small Company 0.850% On first $250 million
0.800% On next $250 million
0.775% On next $250 million
0.750% On next $1.25 billion
0.725% Over $2 billion
Value Opportunity 0.700% On first $250 million
0.650% On next $250 million
0.625% On next $250 million
0.600% On next $1.25 billion
0.550% Over $2 billion
GROWTH & INCOME FUNDS
Balanced 0.800% On first $500 million
0.750% On next $500 million
0.700% On next $1 billion
0.650% Over $2 billion
Growth and Income 0.700% On first $250 million
0.650% On next $250 million
0.625% On next $250 million
0.600% On next $1.25 billion
0.550% Over $2 billion
Real Estate 0.800% On first $250 million
29
<PAGE>
0.750% On next $250 million
0.725% On next $250 million
0.700% On next $1.25 billion
0.650% Over $2 billion
INCOME FUNDS
Bond Fund 0.500% On first $250 million
0.475% On next $250 million
0.450% On next $250 million
0.425% On next $1.25 billion
0.400% Over $2 billion
Aetna Government Fund 0.500% On first $250 million
0.475% On next $250 million
0.450% On next $250 million
0.425% On next $1.25 billion
0.400% Over $2 billion
High Yield 0.650% On first $250 million
0.600% On next $250 million
0.575% On next $250 million
0.550% On next $1.25 billion
0.500% Over $2 billion
Money Market 0.400% On first $500 million
0.350% On next $500 million
0.340% On next $1 billion
0.330% On next $1 billion
0.300% Over $3 billion
INDEX PLUS FUNDS
Index Plus Bond 0.350% On first $250 million
0.350% On next $250 million
0.325% On next $250 million
0.300% On next $1.25 billion
0.275% Over $2 billion
Index Plus Large Cap 0.450% On first $250 million
0.450% On next $250 million
0.425% On next $250 million
0.400% On next $250 million
0.400% On next $1 billion
0.375% Over $2 billion
Index Plus Mid Cap 0.450% On first $250 million
0.450% On next $250 million
30
<PAGE>
0.425% On next $250 million
0.400% On next $1.25 billion
0.375% Over $2 billion
Index Plus Small Cap 0.450% On first $250 million
0.450% On next $250 million
0.425% On next $250 million
0.400% On next $1.25 billion
0.375% Over $2 billion
GENERATION FUNDS
Ascent Fund 0.800% On first $500 million
0.775% On next $500 million
0.750% On next $500 million
0.725% On next $500 million
0.700% Over $2 billion
Crossroads Fund 0.800% On first $500 million
0.775% On next $500 million
0.750% On next $500 million
0.725% On next $500 million
0.700% Over $2 billion
Legacy Fund 0.800% On first $500 million
0.775% On next $500 million
0.750% On next $500 million
0.725% On next $500 million
0.700% Over $2 billion
</TABLE>
For the fiscal years ended October 31, 1998, October 31, 1997 and October 31,
1996, investment advisory fees were paid to Aetna (investment adviser to the
Funds prior to February 2, 1998) and Aeltus (for the period February 2, 1998
through October 31, 1998) as follows:
Year Ended October 31, 1998
- ---------------------------
<TABLE>
<CAPTION>
Total Investment Net Advisory
Company Name Advisory Fees Waiver Fees Paid
- ------------ ---------------- ------ ------------
<S> <C> <C> <C>
Growth
International
Mid Cap*
Small Company
Value Opportunity**
Balanced
Growth and Income
Real Estate**
31
<PAGE>
Bond Fund
Aetna Government Fund
High Yield**
Money Market
Index Plus Bond*
Index Plus Large Cap
Index Plus Mid Cap***
Index Plus Small Cap***
Ascent
Crossroads
Legacy
</TABLE>
Year Ended October 31, 1997
- ---------------------------
<TABLE>
<CAPTION>
Total Investment Net Advisory
Company Name Advisory Fees Waiver Fees Paid
- ------------ ---------------- ------ ------------
<S> <C> <C> <C>
Growth
International
Small Company
Balanced
Growth and Income
Bond Fund
Aetna Government Fund
Money Market
Index Plus Large Cap****
Ascent
Crossroads
Legacy
</TABLE>
Year Ended October 31, 1996
- ---------------------------
<TABLE>
<CAPTION>
Total Investment Net Advisory
Company Name Advisory Fees Waiver Fees Paid
- ------------ ---------------- ------ ------------
<S> <C> <C> <C>
Growth
International
Small Company
Balanced
Growth and Income
Bond Fund
Aetna Government Fund
Money Market
Ascent
Crossroads
Legacy
</TABLE>
*Mid Cap and Index Plus Bond commenced operations on February 4, 1998.
Investment Advisory Fees shown are for the period from February 4, 1998 to
October 31, 1998.
**Value Opportunity, Real Estate and High Yield commenced operations on
February 2, 1998. Investment Advisory Fees shown are for the period from
February 2, 1998 to October 31, 1998.
***Index Plus Mid Cap and Index Plus Small Cap commenced operations on
February 3, 1998. Investment Advisory Fees shown are for the period from
February 3, 1998 to October 31, 1998.
32
<PAGE>
****Index Plus Large Cap commenced operations on December 10, 1996. Investment
Advisory Fees shown are for the period from December 10, 1996 to October
31, 1997.
THE SUBADVISORY AGREEMENT
Aeltus and the Company, on behalf of Aetna Value Opportunity Fund (Value
Opportunity), have entered into an agreement (Subadvisory Agreement) with
Bradley, Foster & Sargent, Inc. (Bradley) effective October 1, 1998 appointing
Bradley as subadviser of Value Opportunity. Bradley is managed by its six
principals, Robert H. Bradley, Peter B. Canoni, Timothy H. Foster, Jeffrey G.
Marsted, J. Edward Roney, Jr., and Joseph D. Sargent.
The Subadvisory Agreement gives Bradley broad latitude to select securities for
Value Opportunity consistent with the investment objective and policies of the
Fund, subject to Aeltus' oversight. The Agreement contemplates that Bradley will
be responsible only for making equity investment decisions. Aeltus will remain
responsible for all other aspects of managing and administering Value
Opportunity, including trade execution and cash management.
For the services under the Subadvisory Agreement, Bradley will receive an annual
fee payable monthly as described in the Prospectuses. Subadvisory Fees are
allocated to a particular class on the basis of the net assets of that class in
relation to the net assets of Value Opportunity.
For the month ended October 31, 1998, Aeltus paid Bradley subadvisory fees of
__________.
Aeltus has also retained Bradley to provide certain shareholder communication
services and marketing assistance with respect to Value Opportunity, through
December 31, 1999. The fee for these services is $13,000 per month and is paid
out of Aeltus' revenues, not the assets of the Fund.
THE ADMINISTRATIVE SERVICES AGREEMENT
Pursuant to the Administrative Services Agreement, Aeltus acts as administrator
and provides certain administrative and shareholder services necessary for Fund
operations and is responsible for the supervision of other service providers.
The services provided by Aeltus include: (a) internal accounting services; (b)
monitoring regulatory compliance, such as reports and filings with the
Commission and state securities regulatory authorities; (c) preparing financial
information for proxy statements; (d) preparing semiannual and annual reports to
shareholders; (e) calculating net asset values; (f) preparation of certain
shareholder communications; (g) supervision of the custodians and transfer
agent; and (h) reporting to the Board.
For its services, each Fund pays Aeltus a fee at an annual rate of 0.10% of its
average daily net assets.
For the years ended October 31, 1998, October 31, 1997 and October 31, 1996,
administrative services fees were paid to Aetna (administrative services agent
to the Funds prior to February 2, 1998) and Aeltus (for the period February 2,
1998 through October 31, 1998) as follows:
33
<PAGE>
Year Ended October 31, 1998
- ---------------------------
<TABLE>
<CAPTION>
Total Administrative Administrator Net Administrative
Company Name Services Fees Waiver Services Fees Paid
- ------------ -------------------- ------------- ------------------
<S> <C> <C> <C>
Growth
International
Mid Cap*
Small Company
Value Opportunity**
Balanced
Growth and Income
Real Estate**
Bond Fund
Aetna Government Fund
High Yield**
Money Market
Index Plus Bond*
Index Plus Large Cap****
Index Plus Mid Cap***
Index Plus Small Cap***
Ascent
Crossroads
Legacy
</TABLE>
Year Ended October 31, 1997
- ---------------------------
<TABLE>
<CAPTION>
Total Administrative Administrator Net Administrative
Company Name Services Fees Waiver Services Fees Paid
- ------------ -------------------- ------------- ------------------
<S> <C> <C> <C>
Growth
International
Small Company
Balanced
Growth and Income
Bond Fund
Aetna Government Fund
Money Market
Index Plus Large Cap****
Ascent
Crossroads
Legacy
</TABLE>
Year Ended October 31, 1996
- ---------------------------
<TABLE>
<CAPTION>
Total Administrative Administrator Net Administrative
Company Name Services Fees Waiver Services Fees Paid
- ------------ -------------------- ------------- ------------------
<S> <C> <C> <C>
Growth
International
Small Company
Balanced
34
<PAGE>
Growth and Income
Bond Fund
Aetna Government Fund
Money Market
Ascent
Crossroads
Legacy
</TABLE>
*Mid Cap and Index Plus Bond commenced operations on February 4, 1998.
Administrative Services Fees shown are for the period from February 4, 1998
to October 31, 1998.
**Value Opportunity, Real Estate and High Yield commenced operations on
February 2, 1998. Administrative Services Fees shown are for the period
from February 2, 1998 to October 31, 1998.
***Index Plus Mid Cap and Index Plus Small Cap commenced operations on
February 3, 1998. Administrative Services Fees shown are for the period
from February 3, 1998 to October 31, 1998.
****Index Plus Large Cap commenced operations on December 10, 1996.
Administrative Services Fees shown are for the period from December 10,
1996 to October 31, 1997.
CUSTODIAN
Mellon Bank, N.A., One Mellon Bank Center, Pittsburgh, Pennsylvania, 15258
serves as custodian for the assets of all Funds except International. Brown
Brothers Harriman & Company, 40 Water Street, Boston, Massachusetts 02109 serves
as custodian for the assets of International. Neither custodian participates in
determining the investment policies of a Fund or in deciding which securities
are purchased or sold by a Fund. A Fund may, however, invest in obligations of
the custodian and may purchase or sell securities from or to the custodian.
For portfolio securities which are purchased and held outside the U.S., Mellon
Bank, N.A. and Brown Brothers Harriman & Company have entered into sub-custodian
agreements (which are designed to comply with Rule 17f-5 under the 1940 Act)
with certain foreign banks or clearing agencies.
TRANSFER AGENT
First Data Investor Services Group, Inc. 4400 Computer Drive, Westborough,
Massachusetts 01581 serves as the transfer agent and dividend-paying agent to
the Funds.
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP, CityPlace II, Hartford, Connecticut 06103 serves as
independent auditors to the Company. KPMG Peat Marwick LLP provides audit
services, assistance and consultation in connection with the Commission filings.
PRINCIPAL UNDERWRITER
Shares of each Fund are offered on a continuous basis. Effective May 1, 1998,
the Company's Board approved a change in the Company's principal underwriter
from Aetna Investment Services, Inc. (AISI), 151 Farmington Avenue, Hartford,
Connecticut 06156, to Aeltus Capital, Inc (ACI), 10 State House Square,
Hartford, Connecticut 06103-3602. ACI is a Connecticut
35
<PAGE>
corporation, and is a wholly-owned subsidiary of Aeltus and an indirect
wholly-owned subsidiary of Aetna Inc. ACI has agreed to use its best efforts to
distribute the shares as the principal underwriter of the Funds pursuant to an
Underwriting Agreement between it and the Company.
DISTRIBUTION AND SHAREHOLDER SERVICING ARRANGEMENTS
Fund shares are distributed by ACI. With respect to Class A shares of the Funds
(other than Money Market), ACI is paid an annual distribution fee at the rate of
0.25% of the value of average daily net assets attributable to those shares
under a Distribution Plan adopted by the Company pursuant to Rule 12b-1 under
the 1940 Act ("Distribution Plan"). With respect to Class B shares of the Funds,
ACI is paid an annual distribution fee at the rate of 0.75% of the value of
average daily net assets attributable to those shares under a Distribution Plan.
With respect to Class C shares of the Funds (other than Money Market), ACI is
paid an annual distribution fee at the rate of 0.75% (0.50% for the Index Plus
Funds) of the value of average daily net assets attributable to those shares
under a Distribution Plan. The distribution fee for a specific class may be used
to cover expenses incurred in promoting the sale of that class of shares,
including (a) the costs of printing and distributing to prospective investors
Prospectuses, statements of additional information and sales literature; (b)
payments to investment professionals and other persons who provide support
services in connection with the distribution of shares; (c) overhead and other
distribution related expenses; and (d) accruals for interest on the amount of
the foregoing expenses that exceed distribution fees and contingent deferred
sales charges. ACI may reallow all or a portion of these fees to broker-dealers
entering into selling agreements with it, including its affiliates.
Class B and Class C shares each are also subject to a Shareholder Services Plan
adopted pursuant to Rule 12b-1. Under the Class B Shareholder Services Plan, ACI
is paid a servicing fee at an annual rate of 0.25% of the average daily net
assets of the Class B shares of each Fund. Under the Class C Shareholder
Services Plan, ACI is paid a servicing fee at an annual rate of 0.25% of the
average daily net assets of the Class C shares of each Fund except Money Market.
The Service Fee may be used by ACI primarily to pay selling dealers and their
agents for servicing and maintaining shareholder accounts.
ACI is required to report in writing to the Board at least quarterly on the
amounts and purpose of any payment made under each Distribution or Shareholder
Services Plan and any related agreements, as well as to furnish the Board with
such other information as may reasonably be requested in order to enable the
Board to make an informed determination whether each Plan should be continued.
The terms and provisions of the Plans relating to required reports, term, and
approval are consistent with the requirements of Rule 12b-1.
Prior to February 2, 1998, with respect to Adviser Class (redesignated Class A)
shares, AISI received a Rule 12b-1 fee at the rate of 0.50% and a Shareholder
Service fee at the rate of 0.25% (0.10% for Money Market) of the value of
average daily net assets.
For the years ended October 31, 1998, 1997 and 1996, Shareholder Services and
Distribution fees were paid to Aetna (principal underwriter of the Company prior
to August 1, 1997), AISI (for the
36
<PAGE>
period August 1, 1997 through April 30, 1998) and ACI (for the period May 1,
1998 through October 31, 1998) as follows:
Year Ended October 31, 1998
- ---------------------------
<TABLE>
<CAPTION>
Company Name Total Underwriting Fees Amount Retained
- ------------ ----------------------- ----------------
<S> <C> <C>
Growth
International
Mid Cap*
Small Company
Value Opportunity**
Balanced
Growth and Income
Real Estate**
Bond Fund
Aetna Government Fund
High Yield**
Money Market
Index Plus Bond*
Index Plus Large Cap
Index Plus Mid Cap***
Index Plus Small Cap***
Ascent
Crossroads
Legacy
</TABLE>
Year Ended October 31, 1997
- ---------------------------
<TABLE>
<CAPTION>
Company Name Total Underwriting Fees Amount Retained
- ------------ ----------------------- ----------------
<S> <C> <C>
Growth
International
Small Company
Balanced
Growth and Income
Bond Fund
Aetna Government Fund
Money Market
Index Plus Large Cap****
Ascent*****
Crossroads*****
Legacy*****
</TABLE>
Year Ended October 31, 1996
- ---------------------------
<TABLE>
<CAPTION>
Company Name Total Underwriting Fees Amount Retained
- ------------ ----------------------- ----------------
<S> <C> <C>
Growth
International
Small Company
Balanced
Growth and Income
37
<PAGE>
Bond Fund
Aetna Government Fund
Money Market
Ascent
Crossroads
Legacy
</TABLE>
*Mid Cap and Index Plus Bond commenced operations on February 4, 1998.
**Value Opportunity, Real Estate and High Yield commenced operations on
February 2, 1998.
***Index Plus Mid Cap and Index Plus Small Cap commenced operations on
February 3, 1998.
****Index Plus Large Cap commenced operations on December 10, 1996.
*****Ascent, Crossroads and Legacy Class A Shares commenced operations on
January 20, 1997.
Fees in the amount of $_________, $________ and $_______, for the years ended
December 31, 1998, 1997, and 1996, respectively, were waived for Money Market.
The Distribution Plans and Shareholder Services Plans continue from year to
year, provided such continuance is approved annually by vote of the Board,
including a majority of Independent Directors. The Distribution Plans may not be
amended to increase the amount to be spent for the services provided by ACI
without shareholder approval. All amendments to the Distribution Plans must be
approved by the Board in the manner described above. The Distribution Plans may
be terminated at any time, without penalty, by vote of a majority of the
Independent Directors upon not more than thirty (30) days' written notice to any
other party to the Distribution Plans. All persons who are under common control
with the Funds could be deemed to have a financial interest in the Plans. No
other interested person of the Funds has a financial interest in the Plans.
For the fiscal year ended October 31, 1998, approximately $_______, $_______,
$_______, $_______, $_______ and $_______ of total distribution expenses were
expended in connection with advertising, printing and mailing of prospectuses to
other than current shareholders, compensation to underwriters, compensation to
broker-dealers and compensation to sales personnel, respectively.
Other Payments to Securities Dealers
Typically, a portion of the front-end sales charge on Class A shares is paid to
your investment professional as shown in the following tables. Your investment
professional may, however, receive up to the entire amount of the front-end
sales charge.
The following table applies to Growth, International, Mid Cap, Small Company,
Value Opportunity, Balanced, Growth and Income, Real Estate, Ascent, Legacy and
Crossroads:
<TABLE>
<CAPTION>
When you invest this amount Amount of sales charge typically reallowed to dealers as
a percentage of offering price
<S> <C>
under $50,000 5.00%
$50,000 but under $100,000 3.75
$100,000 but under $250,000 2.75
38
<PAGE>
$250,000 but under $500,000 2.00
$500,000 but under $1,000,000 1.75
</TABLE>
The following table applies to Bond Fund, Aetna Government Fund and High Yield:
<TABLE>
<CAPTION>
When you invest this amount Amount of sales charge typically reallowed to dealers as
a percentage of offering price
<S> <C>
under $50,000 4.00%
$50,000 but under $100,000 3.75
$100,000 but under $250,000 2.75
$250,000 but under $500,000 2.00
$500,000 but under $1,000,000 1.75
</TABLE>
The following table applies to Index Plus Bond, Index Plus Large Cap, Index Plus
Mid Cap and Index Plus Small Cap:
<TABLE>
<CAPTION>
When you invest this amount Amount of sales charge typically reallowed to dealers as
a percentage of offering price
<S> <C>
under $50,000 2.50%
$50,000 but under $100,000 2.00
$100,000 but under $250,000 1.50
$250,000 but under $500,000 1.25
$500,000 but under $1,000,000 0.75
</TABLE>
Securities dealers who initiate and are responsible for purchases of Class A
shares of $1 million or more or are responsible for purchases of Class A shares
by certain retirement plans pursuant to a sales charge waiver will be entitled
to receive the following commissions:
<TABLE>
<CAPTION>
Commission
<S> <C>
o on sales of $1 million to $3 million; 1.00%
o on sales over $3 million to $20 million; and 0.50%
o on sales over $20 million. 0.25%
</TABLE>
These breakpoints are reset every 12 months for purposes of additional
purchases. ACI may make these payments in the form of contingent advance
payments, which may be recovered from the securities dealer or set off against
other payments due to the dealer if shares are sold within 12 months of the
calendar month of purchase. Other conditions may apply.
PURCHASE AND REDEMPTION OF SHARES
Class I shares of the Company are purchased and redeemed at the net asset value
of each Fund next determined after a purchase or redemption order is received,
as described in the Prospectus. Class B and Class C shares of the Company are
purchased at the net asset value of each Fund next determined after a purchase
order is received. Class B and Class C shares are redeemed at the net
39
<PAGE>
asset value of each Fund next determined less any applicable contingent deferred
sales charge (CDSC) after a redemption request is received, as described in the
Prospectus. Class A shares of the Company are purchased at the net asset value
of each Fund next determined after a purchase order is received less any
applicable front-end sales charge and redeemed at the net asset value of each
Fund next determined adjusted for any applicable CDSC after a redemption request
is received, as described in the Prospectus.
Payment for shares redeemed will be made within seven days (or the maximum
period allowed by law, if shorter) after the redemption request is received in
proper form by the transfer agent. The right to redeem shares may be suspended
or payment therefore postponed for any period during which (a) trading on the
NYSE is restricted as determined by the Commission or the NYSE is closed for
other than weekends and holidays; (b) an emergency exists, as determined by the
Commission, as a result of which (i) disposal by a Fund of securities owned by
it is not reasonably practicable, or (ii) it is not reasonably practicable for a
Fund to determine fairly the value of its net assets; or (c) the Commission by
order so permits for the protection of shareholders of a Fund.
Any written request to redeem shares in amounts in excess of $25,000 must bear
the signatures of all the registered holders of those shares. The signatures
must be guaranteed by a national or state bank, trust company or a member of a
national securities exchange. Information about any additional requirements for
shares held in the name of a corporation, partnership, trustee, guardian or in
any other representative capacity can be obtained from the transfer agent.
A Fund has the right to satisfy redemption requests by delivering securities
from its investment portfolio rather than cash when it decides that distributing
cash would not be in the best interests of shareholders. However, a Fund is
obligated to redeem its shares solely in cash up to an amount equal to the
lesser of $250,000 or 1% of its net assets for any one shareholder of a Fund in
any 90-day period. To the extent possible, the Fund will distribute readily
marketable securities, in conformity with applicable rules of the Commission. In
the event such redemption is requested by institutional investors, the Fund will
weigh the effects on nonredeeming shareholders in applying this policy.
Securities distributed to shareholders may be difficult to sell and may result
in additional costs to the shareholders.
Purchases and exchanges should be made for investment purposes only. The Funds
reserve the right to reject any specific purchase or exchange request. In the
event a Fund rejects an exchange request, neither the redemption nor the
purchase side of the exchange will be processed until the Fund receives further
redemption instructions.
The Funds are not designed for professional market timing organizations or other
entities using programmed or frequent exchanges. The Funds define a "market
timer" as an individual, or entity acting on behalf of one or more individuals,
if (i) the individual or entity makes three or more exchange requests out of any
Fund per calendar year and (ii) any one of such exchange requests represents
shares equal in value to 1/2 of 1% or more of the Fund's net assets at the time
of the request. Accounts under common ownership or control, including accounts
administered by market timers, will be aggregated for purposes of this
definition.
40
<PAGE>
Front-end Sales Charge Waivers
Front-end sales charges will not apply if you are buying Class A shares with
proceeds from the following sources:
1. Redemptions from any Aeltus-advised Fund if you:
[bullet] Originally paid a front-end sales charge on the shares;
[bullet] Reinvest the money within 60 days of the redemption date; and
[bullet] Reinvest the money in the same class of shares.
2. Redemptions from other mutual funds if you:
[bullet] Originally paid a front-end sales charge on the shares;
[bullet] Reinvest the money within 30 days of the redemption date; and
[bullet] Reinvest the money in the same class of shares.
The Fund's front-end sales charges will also not apply to Class A purchases by:
3. Investors who purchase Fund shares with redemption proceeds received in
connection with a distribution from a retirement plan investing either
directly in any Fund or indirectly through an unregistered separate account
sponsored by Aetna Life Insurance and Annuity Company (Aetna) or any
affiliate thereof.
4. Certain trust companies and bank trust departments agreeing to invest in
the Fund over a 13-month period at least $1 million of assets over which
the trust companies and bank trust departments have full or shared
investment discretion.
5. Certain retirement plans that are sponsored by an employer with at least 25
employees and either (a) have plan assets of $1 million or more or (b)
agree to invest at least $500,000 in the Fund over a 13-month period.
6. Broker-dealers, registered investment advisers and financial planners that
have entered into a selling agreement with ACI (or otherwise having an
arrangement with a broker-dealer or financial institution with respect to
sales of fund shares) on behalf of clients participating in advisory fee
programs.
7. Current employees of broker-dealers and financial institutions that have
entered into a selling agreement with ACI (or otherwise having an
arrangement with a broker-dealer or financial institution with respect to
sales of fund shares) and their immediate family members, as allowed by the
internal policies of their employer.
8. Investment companies exchanging shares or selling assets pursuant to a
merger, acquisition or exchange offer.
9. Shareholders of the Adviser Class at the time such shares were redesignated
as Class A shares.
41
<PAGE>
Contingent Deferred Sales Charge
Certain Class A shares, all Class B shares and all Class C shares (except for
Money Market) are subject to a CDSC, as described in the Prospectus. There is no
CDSC imposed on:
[bullet] redemptions of shares purchased through reinvestment of dividends or
capital gains distributions;
[bullet] shares purchased more than two years (in the case of Class A shares),
six years (in the case of Class B shares) or eighteen months (in the
case of Class C shares) prior to the redemption; and
[bullet] redemptions of Money Market Class A and Class C shares unless:
[bullet] those shares were purchased through an exchange from
another Fund within two years (in the case of Class A
shares) or eighteen months (in the case of Class C shares)
prior to the redemption; and
[bullet] the original purchase of the shares exchanged was subject
to a CDSC.
CDSC Waivers
The CDSC will be waived for:
[bullet] Exchanges to other Funds of the same class;
[bullet] Redemptions following the death or disability of the shareholder or
beneficial owner;
[bullet] Redemptions related to certain distributions from retirement plans or
accounts which are permitted without penalty pursuant to the Internal
Revenue Code.
[bullet] Tax-free returns of excess contributions from employee benefit plans;
[bullet] Distributions from employee benefit plans, including those due to
plan termination or plan transfer; and
[bullet] Redemptions made in connection with the Automatic Cash Withdrawal
Plan (see Shareholder Services and Other Features), provided that
such redemptions:
[bullet] are limited annually to no more than 12% of the original
account value;
[bullet] are made in equal monthly amounts, not to exceed 1% per
month; and
[bullet] the minimum account value at the time the Automatic Cash
Withdrawal Plan was initiated was no less than $10,000.
Letter of Intent
You may qualify for a reduced sales charge when you buy Class A shares (other
than Money Market), as described in the Prospectus. At any time within 90 days
after the first investment that you want to qualify for a reduced sales charge,
you may file with the Company a signed
42
<PAGE>
shareholder application with the Letter of Intent section completed. After the
Letter of Intent is filed, each additional investment will be entitled to the
sales charge applicable to the level of investment indicated on the Letter of
Intent. Sales charge reductions based on purchases in more than one Fund will be
effective only after notification to ACI that the investment qualifies for a
discount. Your holdings in the Company (other than Money Market shares) acquired
more than 90 days before the Letter of Intent is filed will be counted towards
completion of the Letter of Intent but will not be entitled to a retroactive
downward adjustment in the sales charge. Any redemptions you make during the
13-month period, except in the case of certain retirement plans, will be
subtracted from the amount of the purchases for purposes of determining whether
the terms of the Letter of Intent have been completed. If the Letter of Intent
is not completed within the 13-month period, there will be an upward adjustment
of the sales charge, depending on the amount actually purchased (less
redemptions) during the period. If you execute a Letter of Intent before a
change in the sales charge structure of the Company, you may complete the Letter
of Intent at the lower of the new sales charge structure or the sales charge
structure in effect at the time the Letter of Intent was filed.
Five percent (5%) of the amount of the total intended purchase will be reserved
in Class A shares of the Company registered in your name until you fulfill the
Letter of Intent. This policy of reserving shares does not apply to certain
retirement plans. If total purchases, less redemptions, equal the amount
specified under the Letter of Intent, the reserved shares will be deposited to
an account in your name or delivered to you or as you direct. If total
purchases, less redemptions, exceed the amount specified under the Letter of
Intent and are in an amount that would qualify for a further quantity discount,
a retroactive price adjustment will be made by ACI and the securities dealer
through whom purchases were made pursuant to the Letter of Intent (to reflect
such further quantity discount) on purchases made within 90 days before and on
those made after filing the Letter. The resulting difference will be applied to
the purchase of additional shares in an amount equivalent to a single purchase
or the dollar amount of the total purchases. If the total purchases, less
redemptions, are less than the amount specified under the Letter of Intent, you
will remit to ACI an amount equal to the difference in the dollar amount of
sales charge actually paid and the amount of sales charge that would have
applied to the aggregate purchases if the total of the purchases had been made
at a single time. Upon remittance, the reserved shares held for your account
will be deposited to an account in your name or delivered to you or as you
direct. If within 20 days after written request the difference in sales charge
is not paid, the redemption of an appropriate number of reserved shares to
realize the difference will be made. In the event of a total redemption of the
account before fulfillment of the Letter of Intent, the additional sales charge
due will be deducted from the proceeds of the redemption, and the balance will
be forwarded to you.
If a Letter of Intent is executed on behalf of certain retirement plans, the
level and any reduction in sales charge for these plans will be based on actual
plan participation and the projected investments in the Company (other than
Money Market) under the Letter of Intent. These plans are not subject to the
requirement to reserve 5% of the total intended purchase, or to any penalty as a
result of the early termination of a plan, nor are these plans entitled to
receive retroactive adjustments in price for investments made before executing
the Letter of Intent.
43
<PAGE>
Right of Accumulation/Cumulative Quantity Discount
A purchaser of Class A shares may qualify for a cumulative quantity discount by
combining a current purchase (or combined purchases as described above) with
certain other Class A shares (excluding Money Market) of the Funds already
owned. To determine if you may pay a reduced front-end sales charge, the amount
of your current purchase is added to the cost or current value, whichever is
higher, of your other Class A shares (excluding Money Market), as well as those
Class A shares (excluding Money Market) of your spouse and children under the
age of 21. If you are the sole owner of a company, you may also add any company
accounts, including retirement plan accounts invested in Class A shares
(excluding Money Market) of the Funds. Companies with one or more retirement
plans may add together the total plan assets invested in Class A shares
(excluding Money Market) of the Funds to determine the front-end sales charge
that applies.
To qualify for the cumulative quantity discount on a purchase through an
investment dealer, when each purchase is made the investor or dealer must
provide the Company with sufficient information to verify that the purchase
qualifies for the privilege or discount. The shareholder must furnish this
information to the Company when making direct cash investments.
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 the
Funds and of other investment companies advised by Aeltus as a factor in the
selection of brokerage firms to execute the Funds' portfolio transactions,
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 Fund. These brokerage and research services include, but are not limited to,
quantitative and qualitative research information and purchase and sale
recommendations regarding securities and industries, analyses and reports
covering a broad range of economic factors and trends, statistical data relating
to the strategy and performance of the Funds and other investment companies,
services related to the execution of trades in a Fund's securities and advice as
to the valuation of securities, the providing of equipment used to communicate
research information and specialized consultations with Company personnel with
respect to computerized systems and data furnished to the Funds 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 a Fund's securities and may pay higher commission rates than the
lowest available when it is reasonable to do so in light of the value of the
brokerage and research services received generally or in connection with a
particular
44
<PAGE>
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 who provide
additional services to Aeltus.
Research services furnished by brokers through whom the Funds effect 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 Funds.
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 Funds.
The Funds have not effected, and have no present intention of effecting, any
brokerage transactions in portfolio securities with Aeltus or any other
affiliated person of the Company.
A Fund 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 a Fund 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.
Brokerage commissions were paid as follows:
<TABLE>
<CAPTION>
For Year Ended For Year Ended For Year Ended
Fund Name Oct. 31, 1998 Oct. 31, 1997 Oct. 31, 1996
- --------- ------------- ------------- -------------
<S> <C> <C> <C>
Growth
International
Mid Cap*
Small Company
Value Opportunity**
Balanced
Growth and Income
Real Estate**
Bond Fund
Aetna Government Fund
High Yield**
Money Market
45
<PAGE>
Index Plus Bond*
Index Plus Large Cap***
Index Plus Mid Cap****
Index Plus Small Cap****
Ascent
Crossroads
Legacy
</TABLE>
*Mid Cap and Index Plus Bond commenced operations on February 4, 1998.
**Value Opportunity, Real Estate and High Yield commenced operations on
February 2, 1998.
***Index Plus Large Cap commenced operations December 10, 1996.
****Index Plus Mid Cap and Index Plus Small Cap commenced operations on
February 3, 1998.
For the fiscal year ended October 31, 1998, commissions in the amounts listed
below were paid with respect to portfolio transactions directed to certain
brokers because of research services:
<TABLE>
<CAPTION>
Company Name Commissions Paid on Total Transactions
- ------------ -------------------------------------=
<S> <C>
Growth
International
Mid Cap*
Small Company
Value Opportunity**
Balanced
Growth and Income
Real Estate**
Bond Fund
Aetna Government Fund
High Yield**
Money Market
Index Plus Bond*
Index Plus Large Cap
Index Plus Mid Cap***
Index Plus Small Cap***
Ascent
Crossroads
Legacy
</TABLE>
*Mid Cap and Index Plus Bond commenced operations on February 4, 1998.
**Value Opportunity, Real Estate and High Yield commenced operations on
February 2, 1998.
***Index Plus Mid Cap and Index Plus Small Cap commenced operations on
February 3, 1998.
The Board has 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 Board has also adopted a Code of Ethics governing personal trading by
persons who manage, or who have access to trading activity by, a Fund. The Code
of Ethics allows trades to be made in securities that may be held by a Fund.
However, it prohibits a person from taking advantage of
46
<PAGE>
Fund trades or from acting on inside information. Aeltus also has adopted a Code
of Ethics, which the Board reviews annually.
SHAREHOLDER ACCOUNTS AND SERVICES
Systematic Investment
The Systematic Investment feature, using the EFT capability, allows you to make
automatic monthly investments in any Fund. On the application, you may select
the amount of money to be moved and the Fund in which it will be invested. In
order to elect EFT, you must first have established an account, subject to the
minimum amount specified in the Prospectuses. Thereafter, the minimum monthly
Systematic Investment is currently $50 per Fund, and we reserve the right to
increase that amount. EFT transactions will be effective 15 days following the
receipt by the Transfer Agent of your application. The Systematic Investment
feature and EFT capability will be terminated upon total redemption of your
shares. Payment of redemption proceeds will be held until a Systematic
Investment has cleared, which may take up to 12 calendar days.
Shareholder Information
The Fund's transfer agent will maintain your account information. Account
statements will be sent at least quarterly. A Form 1099 generally will also be
sent each year by January 31. Annual and semiannual reports will also be sent to
shareholders. The transfer agent may charge you a fee for special requests such
as historical transcripts of your account and copies of canceled checks.
Consolidated statements reflecting current values, share balances and
year-to-date transactions generally will be sent to you each quarter. All
accounts identified by the same social security number and address will be
consolidated. For example, you could receive a consolidated statement showing
your individual and IRA accounts. With the prior permission of the other
shareholders involved, you have the option of requesting that accounts
controlled by other shareholders be shown on one consolidated statement. For
example, information on your individual account, your IRA, your spouse's
individual account and your spouse's IRA may be shown on one consolidated
statement.
Automatic Cash Withdrawal Plan
A CDSC may be applied to withdrawals made under this plan. The Automatic Cash
Withdrawal Plan permits you to have payments of $100 or more automatically
transferred from a Fund to your designated bank account on a monthly basis. To
enroll in this plan, you must have a minimum balance of $10,000 in a Fund. Your
automatic cash withdrawals will be processed on a regular basis beginning on or
about the first day of the month. There may be tax consequences associated with
these transactions. Please consult your tax adviser.
47
<PAGE>
Checkwriting Service
Checkwriting is available with Class A, Class C and Class I shares of Money
Market. If the amount of the check is greater than the value of your shares, the
check will be returned unpaid. In addition, checks written against shares
purchased by check or Systematic Investment during the preceding 12 calendar
days will be returned unpaid due to uncollected funds. You may select the
checkwriting service by indicating your election on the application or by
calling (800) 367-7732. All notices with respect to checks must be given to the
transfer agent.
Cross Investing
Dividend Investing You may elect to have dividend and/or capital gains
distributions automatically invested in the same class of one other Fund.
Systematic Exchange You may establish an automatic exchange of shares from
one Fund to another. The exchange will occur on or about the 15th day of
each month and must be for a minimum of $50 per month. Because this
transaction is treated as an exchange, the policies related to the exchange
privilege apply. There may be tax consequences associated with these
exchanges. Please consult your tax adviser.
Cross investing may only be made in a Fund that has been previously established
with the minimum investment. To request information or to initiate a transaction
under either or both of these features, please call (800) 367-7732.
Signature Guarantee
A signature guarantee is verification of the authenticity of the signature given
by certain authorized institutions. The Company requires a signature guarantee
for redemption requests in amounts in excess of $25,000. In addition, if you
wish to have your redemption proceeds transferred by wire to your designated
bank account, paid to someone other than the shareholder of record, or sent
somewhere other than the shareholder address of record, you must provide a
signature guarantee with your written redemption instructions regardless of the
amount of redemption.
The Company reserves the right to amend or discontinue this policy at any time
and establish other criteria for verifying the authenticity of any redemption
request. You can obtain a signature guarantee from any one of the following
institutions: a national or state bank (or savings bank in New York or
Massachusetts only); a trust company; a federal savings and loan association; or
a member firm of the New York, American, Boston, Midwest, or Pacific Stock
Exchanges. Please note that signature guarantees are not provided by notaries
public.
NET ASSET VALUE
Securities of the Funds are generally valued by independent pricing services
which have been approved by the Board. The values for equity securities traded
on registered securities exchanges
48
<PAGE>
are based on the last sale price or, if there has been no sale that day, at the
mean of the last bid and asked price on the exchange where the security is
principally traded. Securities traded over the counter are valued at the mean of
the last bid and asked price if current market quotations are not readily
available. Short-term debt securities that have a maturity date of more than
sixty days and long-term debt securities are valued at the mean of the last bid
and asked price of such securities obtained from a broker who is a market-maker
in the securities or a service providing quotations based upon the assessment of
market-makers in those securities. Short-term debt securities maturing in sixty
days or less at the date of purchase, and all securities in Money Market, 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. Options are valued at the mean of the last bid
and asked price on the exchange where the option is primarily traded. 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.
TAX STATUS
The following is only a limited discussion of certain additional tax
considerations generally affecting each Fund. No attempt is made to present a
detailed explanation of the tax treatment of each Fund and no explanation is
provided with respect to the tax treatment of any Fund shareholder. The
discussions here and in the Prospectus are not intended as substitutes for
careful tax planning.
Qualification as a Regulated Investment Company
Each Fund has elected to be taxed as a regulated investment company under
Subchapter M of the Code. If for any taxable year a Fund does not qualify as a
regulated investment company, all of its taxable income (including its net
capital gain) will be subject to tax at regular corporate rates without any
deduction for distributions to shareholders, and such distributions will be
taxable to the shareholders as ordinary dividends to the extent of the Fund's
current and accumulated earnings and profits. Such distributions generally will
be eligible for the dividends-received deduction in the case of corporate
shareholders.
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 a Fund's assets to be invested in
various countries is not known.
If more than 50% of International's total assets at the close of its fiscal year
consist of securities of foreign corporations, that Fund will be eligible to,
and may, file an election with the Internal Revenue Service (IRS) pursuant to
which shareholders will be required to include their pro rata portions of
foreign taxes paid by the Fund as income received by them. Shareholders may then
either deduct such pro rata portion in computing their taxable income or use
them as foreign tax
49
<PAGE>
credits against their U.S. income taxes. If International makes such an
election, it will report annually to each shareholder the amount of foreign
taxes to be included in income and then either deducted or credited.
Alternatively, if the amount of foreign taxes paid by International is not large
enough to warrant its making such an election, the Fund may claim the amount of
foreign taxes paid as a deduction against its own gross income. In that case
shareholders would not be required to include any amount of foreign taxes paid
by the International in their income and would not be permitted either to deduct
any portion of foreign taxes from their own income or to claim any amount tax
credit for taxes paid by the Fund.
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 (taxable
year election)). 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.
Each Fund intends to make sufficient distributions or deemed distributions of
its ordinary taxable income and capital gain net income prior to the end of each
calendar year to avoid liability for the excise tax. However, investors should
note that a Fund may in certain circumstances be required to liquidate portfolio
investments to make sufficient distributions to avoid excise tax liability.
PERFORMANCE INFORMATION
Performance information for each class of shares including the yield and
effective yield of Money Market, the yield of Bond Fund, Aetna Government Fund,
High Yield and Index Plus Bond and the total return of all Funds, may appear in
reports or promotional literature to current or prospective shareholders.
Money Market Yields
Current yield for Money Market will be based on a recently ended seven-day
period, computed by determining the net change, exclusive of capital changes and
income other than investment income, in the value of a hypothetical pre-existing
account having a balance of one share at the beginning of the period,
subtracting a hypothetical charge reflecting deductions from that shareholder
account, and dividing the difference by the value of the account at the
beginning of the base period to obtain the base period return. This base period
return is then multiplied by 365/7 with the resulting yield figure carried to at
least the nearest hundredth of one percent. Calculation of "effective yield"
begins with the same "base period return" used in the calculation of yield,
which is then annualized to reflect weekly compounding pursuant to the following
formula:
50
<PAGE>
Effective Yield = [(Base Period Return + 1)(365/7)] - 1
The yield and effective yield for Money Market for the seven days ended October
31, 1998 were ____% and ____%, respectively.
30-Day Yield for Certain Non-Money Market Funds
Quotations of yield for Bond Fund, Aetna Government Fund, High Yield and Index
Plus Bond will be based on all investment income per share earned during a
particular 30-day period, less expenses accrued during the period (net
investment income), and will be computed by dividing net investment income by
the value of a share on the last day of the period, according to the following
formula:
YIELD = 2[(a - b + 1)(6) - 1]
-----
cd
Where:
a = dividends and interest earned during the period
b = the expenses accrued for the period (net of reimbursements)
c = the average daily number of shares outstanding during the period
d = the maximum offering price per share on the last day of the period
For the 30-day period ended October 31, 1998:
<TABLE>
<CAPTION>
Yield Effective Yield
Name of Fund Class A Class I Class A Class I
------------ ------- ------- ------- -------
<S> <C> <C> <C> <C>
Bond Fund
Aetna Government Fund
High Yield
Index Plus Bond
</TABLE>
Average Annual Total Return
Quotations of average annual total return for any Fund will be expressed in
terms of the average annual compounded rate of return of a hypothetical
investment in a Fund over a period of one, five and ten years (or, if less, up
to the life of the Fund), calculated pursuant to the formula:
P(1 + T)(n) = 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).
51
<PAGE>
The Company may also from time to time include in such advertising a total
return figure for Class A, Class B and/or Class C that is not calculated
according to the formula set forth above. Specifically, the Company may include
performance for Class A that does not take into account payment of the
applicable front-end sales load, or the Company may include performance for
Class B or Class C that does not take into account the imposition of the
applicable CDSC.
All the following figures are based on actual investment performance.
In February 1998, the Funds redesignated Adviser Class shares as Class A shares.
For periods prior to the Class A inception date, Class A performance is
calculated by using the performance of Class I (formerly Select Class) shares
and deducting the Class A front-end sales load and internal fees and expenses of
the Adviser Class. In June 1998, the Funds introduced Class C shares. For
periods prior to the Class C inception date, Class C performance is calculated
using the performance of Class I (formerly Select Class) shares, and deducting
the internal fees and expenses applicable to the Class C shares. CDSC applies
for all shares redeemed prior to the end of the first eighteen months of
ownership. The 1-year returns without CDSC are net of fund expenses only, and do
not deduct a CDSC. In March 1999, the Funds introduced Class B shares. For
periods prior to the Class B inception date, Class B performance is calculated
using the performance of Class I (formerly Select Class) shares, and deducting
the internal fees and expenses applicable to the Class B shares. Class B share
returns with a CDSC reflect the deduction of the applicable CDSC, as described
in the Prospectus. The returns without CDSC are net of fund expenses only, and
do not deduct a CDSC. Neither a front-end sales load nor a CDSC applies to Money
Market (except that the CDSC applies to Class B shares of Money Market).
Total Return Quotations as of October 31, 1998:
- -----------------------------------------------
Class I
<TABLE>
<CAPTION>
Fund Name 1 Year 5 Years Since Inception Inception Date*
<S> <C> <C> <C> <C>
Money Market 1/3/92
Aetna Government Fund 1/4/94
Bond Fund 1/3/92
Balanced 1/3/92
Growth and Income 1/3/92
Growth 1/4/94
Index Plus Large Cap 12/10/96
Small Company 1/4/94
International 1/3/92
Ascent Fund 1/4/95
Crossroads Fund 1/4/95
Legacy Fund 1/4/95
High Yield 2/2/98
Index Plus Bond 2/4/98
Index Plus Mid Cap 2/3/98
Index Plus Small Cap 2/3/98
52
<PAGE>
Mid Cap 2/4/98
Real Estate 2/2/98
Value Opportunity 2/2/98
</TABLE>
Class A (assuming payment of the front-end sales load)
<TABLE>
<CAPTION>
Fund Name 1 Year 5 Years Since Inception Inception Date*
<S> <C> <C> <C> <C>
Aetna Government Fund 1/4/94
Bond Fund 1/3/92
Balanced 1/3/92
Growth and Income 1/3/92
Growth 1/4/94
Index Plus Large Cap 12/10/96
Small Company 1/4/94
International 1/3/92
Ascent Fund 1/4/95
Crossroads Fund 1/4/95
Legacy Fund 1/4/95
High Yield 2/2/98
Index Plus Bond 2/4/98
Index Plus Mid Cap 2/3/98
Index Plus Small Cap 2/3/98
Mid Cap 2/4/98
Real Estate 2/2/98
Value Opportunity 2/2/98
</TABLE>
Class A (without payment of the front-end sales load)
<TABLE>
<CAPTION>
Fund Name 1 Year 5 Years Since Inception Inception Date*
<S> <C> <C> <C> <C>
Money Market 1/3/92
Aetna Government Fund 1/4/94
Bond Fund 1/3/92
Balanced 1/3/92
Growth and Income 1/3/92
Growth 1/4/94
Index Plus Large Cap 12/10/96
Small Company 1/4/94
International 1/3/92
Ascent Fund 1/4/95
Crossroads Fund 1/4/95
Legacy Fund 1/4/95
High Yield 2/2/98
Index Plus Bond 2/4/98
Index Plus Mid Cap 2/3/98
Index Plus Small Cap 2/3/98
Mid Cap 2/4/98
Real Estate 2/2/98
Value Opportunity 2/2/98
</TABLE>
53
<PAGE>
Class B (assuming payment of the CDSC)
<TABLE>
<CAPTION>
Fund Name 1 Year 5 Years Since Inception Inception Date*
<S> <C> <C> <C> <C>
Money Market 1/3/92
Aetna Government Fund 1/4/94
Bond Fund 1/3/92
Balanced 1/3/92
Growth and Income 1/3/92
Growth 1/4/94
Index Plus Large Cap 12/10/96
Small Company 1/4/94
International 1/3/92
Ascent Fund 1/4/95
Crossroads Fund 1/4/95
Legacy Fund 1/4/95
High Yield 2/2/98
Index Plus Bond 2/4/98
Index Plus Mid Cap 2/3/98
Index Plus Small Cap 2/3/98
Mid Cap 2/4/98
Real Estate 2/2/98
Value Opportunity 2/2/98
</TABLE>
Class B (without payment of the CDSC)
<TABLE>
<CAPTION>
Fund Name 1 Year 5 Years Since Inception Inception Date*
<S> <C> <C> <C> <C>
Money Market 1/3/92
Aetna Government Fund 1/4/94
Bond Fund 1/3/92
Balanced 1/3/92
Growth and Income 1/3/92
Growth 1/4/94
Index Plus Large Cap 12/10/96
Small Company 1/4/94
International 1/3/92
Ascent Fund 1/4/95
Crossroads Fund 1/4/95
Legacy Fund 1/4/95
High Yield 2/2/98
Index Plus Bond 2/4/98
Index Plus Mid Cap 2/3/98
Index Plus Small Cap 2/3/98
Mid Cap 2/4/98
Real Estate 2/2/98
Value Opportunity 2/2/98
</TABLE>
Class C (assuming payment of the CDSC)
<TABLE>
<CAPTION>
Fund Name 1 Year 5 Years Since Inception Inception Date*
<S> <C> <C> <C> <C>
Aetna Government Fund 1/4/94
Bond Fund 1/3/92
54
<PAGE>
Balanced 1/3/92
Growth and Income 1/3/92
Growth 1/4/94
Index Plus Large Cap 12/10/96
Small Company 1/4/94
International 1/3/92
Ascent Fund 1/4/95
Crossroads Fund 1/4/95
Legacy Fund 1/4/95
High Yield 2/2/98
Index Plus Bond 2/4/98
Index Plus Mid Cap 2/3/98
Index Plus Small Cap 2/3/98
Mid Cap 2/4/98
Real Estate 2/2/98
Value Opportunity 2/2/98
</TABLE>
Class C (without payment of the CDSC)
<TABLE>
<CAPTION>
Fund Name 1 Year 5 Years Since Inception Inception Date*
<S> <C> <C> <C> <C>
Money Market 1/3/92
Aetna Government Fund 1/4/94
Bond Fund 1/3/92
Balanced 1/3/92
Growth and Income 1/3/92
Growth 1/4/94
Index Plus Large Cap 12/10/96
Small Company 1/4/94
International 1/3/92
Ascent Fund 1/4/95
Crossroads Fund 1/4/95
Legacy Fund 1/4/95
High Yield 2/2/98
Index Plus Bond 2/4/98
Index Plus Mid Cap 2/3/98
Index Plus Small Cap 2/3/98
Mid Cap 2/4/98
Real Estate 2/2/98
Value Opportunity 2/2/98
</TABLE>
- ---------------
* The inception dates above represent the commencement of investment operations,
which may not coincide with the effective date of the post-effective amendment
to the registration statement through which the Funds was added.
Performance information for a Fund may be compared, in reports and promotional
literature, to: (a) the Standard & Poor's 500 Stock Index (S&P 500), the Russell
2000 Index, the Russell 3000 Index, Lehman Brothers Aggregate Bond Index, Lehman
Brothers Intermediate Government Bond Index, Merrill Lynch High Yield Index, Dow
Jones Industrial Average (DJIA), or other 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 Lipper Analytical Services, a widely used independent research firm
that ranks mutual funds and other investment companies by overall performance,
investment objectives, and assets,
55
<PAGE>
or tracked by other services, companies, publications, or persons who rank such
investment companies on overall performance or other criteria; (c) the Consumer
Price Index (measure for inflation) to assess the real rate of return from an
investment in a Fund; and (d) the Morgan Stanley Capital International Europe,
Australia, Far East (EAFE) Index.
From time to time sales materials and advertisements may include comparisons of
the cost of borrowing a specific amount of money at a given loan rate over a set
period of time to the cost of a monthly investment program, over the same time
period, which earns the same rate of return. The comparison may involve
historical rates of return on a given index, or may involve performance of any
of the Funds.
FINANCIAL STATEMENTS
The Financial Statements and the independent auditors' reports thereon shall be
incorporated by reference in this Statement by amendment. The Companies' Annual
Reports are available upon request and without charge by calling (800) 367-7732.
ASF(S)- Aetna Series Fund, Inc. Statement of Additional Information
SAI.SERIES-98
56
<PAGE>
PART C
OTHER INFORMATION
Item 23. Exhibits
(a.1) Articles of Amendment and Restatement (September 2,
1997)(1)
(a.2) Articles of Amendment (October 29, 1997)(2)
(a.3) Articles Supplementary (October 29, 1997)(2)
(a.4) Articles of Amendment (January 26, 1998)(3)
(a.5) Articles Supplementary (June 25, 1998)(4)
(a.6) Articles Supplementary*
(b) By-laws (as amended September 13, 1994)(5)
(c) Instruments Defining Rights of Holders (set forth in the
Articles of Amendment and Restatement)(1)
(d.1) Investment Advisory Agreement between Aeltus Investment
Management, Inc. and Aetna Series Fund, Inc., on behalf of
Aetna Balanced Fund, Aetna Bond Fund, Aetna Growth Fund,
Aetna Growth and Income Fund, Aetna Government Fund, Aetna
Index Plus Large Cap Fund, Aetna International Fund, Aetna
Money Market Fund, Aetna Small Company Fund, Aetna Ascent
Fund, Aetna Crossroads Fund, Aetna Legacy Fund, Aetna High
Yield Fund, Aetna Index Plus Bond Fund, Aetna Index Plus
Mid Cap Fund, Aetna Index Plus Small Cap Fund, Aetna Mid
Cap Fund, Aetna Real Estate Securities Fund, and Aetna
Value Opportunity Fund(3)
(d.2) Subadvisory Agreement between Aeltus Investment
Management, Inc., Aetna Series Fund, Inc., on behalf of
its Aetna Value Opportunity Fund, and Bradley, Foster &
Sargent, Inc.(6)
(e.1) Underwriting Agreement between Aeltus Capital, Inc. and
Aetna Series Fund, Inc.(3)
(e.2) Master Selling Dealer Agreement(3)
(f) Directors' Deferred Compensation Plan(1)
(g.1) Custodian Agreement - Mellon Bank, N.A. (September 1,
1992)(5)
(g.2) Amendment to Custodian Agreement - Mellon Bank, N.A. (May
11, 1994)(2)
(g.3) Amendment to Custodian Agreement - Mellon Bank, N.A.
(September 14, 1994)(5)
(g.4) Amendment to Custodian Agreement - Mellon Bank, N.A.
(October 11, 1996)(7)
(g.5) Amendment to Custodian Agreement - Mellon Bank, N.A.
(January 29, 1998)(3)
(g.6) Custodian Agreement - Brown Brothers Harriman & Company
(Aetna International Fund) (December 12, 1991)(8)
(h.1) Administrative Services Agreement between Aeltus
Investment Management, Inc. and Aetna Series Fund, Inc. on
behalf of Aetna Balanced Fund, Aetna Bond Fund, Aetna
Growth Fund, Aetna Growth and Income Fund, Aetna
Government Fund, Aetna Index Plus Large Cap Fund, Aetna
International Fund, Aetna Money Market Fund, Aetna Small
Company Fund, Aetna Ascent Fund, Aetna Crossroads Fund,
<PAGE>
Aetna Legacy Fund, Aetna High Yield Fund, Aetna Index Plus
Bond Fund, Aetna Index Plus Mid Cap Fund, Aetna Index Plus
Small Cap Fund, Aetna Mid Cap Fund, Aetna Real Estate
Securities Fund, and Aetna Value Opportunity Fund(3)
(h.2) License Agreement(5)
(h.3) Transfer Agent Agreement(4)
(h.4) Amendment No. 1 to the Transfer Agency and Services
Agreement
(h.5) Amendment No. 2 to the Transfer Agency and Services
Agreement
(i) Opinion and Consent of Counsel
(j) Consent of Independent Auditors*
(k) Not applicable
(l) Initial Capital Agreement
(m.1) Distribution Plan (Class A)(3)
(m.2) Distribution Plan (Class C)(3)
(m.3) Form of Distribution Plan (Class B)
(m.4) Shareholder Service Plan (Class C)(3)
(m.5) Shareholder Service Plan (Class B)
(n) Financial Data Schedules*
(o) Multiple Class Plan
(p.1) Power of Attorney (November 6, 1998)
(p.2) Authorization for Signatures(9)
*To be filed
1. Incorporated herein by reference to Post-Effective Amendment No. 24 to
Registration Statement on Form N-1A (File No. 33-41694), as filed with the
Securities and Exchange Commission on January 16, 1998.
2. Incorporated herein by reference to Post-Effective Amendment No. 23 to
Registration Statement on Form N-1A, (File No. 33-41694), as filed with the
Securities and Exchange Commission on November 3, 1997.
3. Incorporated herein by reference to Post-Effective Amendment No. 25 to
Registration Statement on Form N-1A, (File No. 33-41694), as filed with the
Securities and Exchange Commission on April 24, 1998.
4. Incorporated herein by reference to Post-Effective Amendment No. 26 to
Registration Statement on Form N-1A (File No. 33-41694), as filed with the
Securities and Exchange Commission on June 29, 1998.
5. Incorporated herein by reference to Post-Effective Amendment No. 1 to
Registration Statement on Form N-1A, (File No. 33-85620), as filed with the
Securities and Exchange Commission on June 28, 1995.
6. Incorporated herein by reference to Post-Effective Amendment No. 28 to
Registration Statement on Form N-1A (File No. 33-41694), as filed with the
Securities and Exchange Commission on September 30, 1998.
7. Incorporated herein by reference to Post-Effective Amendment No. 16 to
Registration Statement on Form N-1A (File No. 33-41694), as filed with the
Securities and Exchange Commission on December 10, 1996.
<PAGE>
8. Incorporated herein by reference to Post-Effective Amendment No. 14 to
Registration Statement on Form N-1A (File No. 33-41694), as filed with the
Securities and Exchange Commission on September 20, 1996.
9. Incorporated herein by reference to Post-Effective Amendment No. 2 to
Registration Statement on Form N-1A (File No. 333-05173), as filed with the
Securities and Exchange Commission on September 26, 1997.
<PAGE>
Item 24. Persons Controlled by or Under Common Control
Registrant is a Maryland corporation for which separate financial
statements are filed. As of November 30, 1998, Aetna Life Insurance and
Annuity Company ("Aetna"), and its affiliates, had the following
interest in the series of the Registrant, through direct ownership or
through one of Aetna's separate accounts:
<TABLE>
<CAPTION>
% Aetna
------------------------------------------------------------
Class I Class A Class C
------- ------- -------
<S> <C> <C> <C>
Aetna Bond Fund 52.08% 27.04%
Aetna Government Fund 87.75% 87.11%
Aetna High Yield Fund 99.52% 38.11% 41.11%
Aetna Index Plus Bond Fund 99.97% 35.35% 49.02%
Aetna Index Plus Large Cap Fund 63.91% 7.38%
Aetna Index Plus Mid Cap Fund 99.54% 36.96% 47.82%
Aetna Index Plus Small Cap Fund 99.27% 19.73% 43.97%
Aetna International Fund 23.05% 50.27% 53.39%
Aetna Mid Cap Fund 99.03% 76.81% 95.61%
Aetna Money Market Fund 46.13% 5.29%
Aetna Real Estate Securities Fund 98.43% 30.79% 75.89%
Aetna Small Company Fund 68.32% 7.46%
Aetna Value Opportunity Fund 97.95% 19.68% 83.31%
Aetna Ascent Fund 89.79% 65.94%
Aetna Crossroads Fund 94.67% 46.82%
Aetna Legacy Fund 92.04% 34.87%
Aetna Growth Fund 14.20% 23.39%
Aetna Growth and Income Fund 11.69% 12.66%
Aetna Balanced Fund 13.74% 38.56%
</TABLE>
Aetna is an indirect wholly owned subsidiary of Aetna Inc.
A list of all persons directly or indirectly under common control with
the Registrant is incorporated herein by reference to Item 26 of
Post-Effective Amendment No. 2 to the Registration Statement on Form N-4
(File No. 333-56297), as filed electronically with the Securities and
Exchange Commission on December 14, 1998.
Item 25. Indemnification
Article 12, Section (d) of the Registrant's Articles of Amendment and
Restatement, incorporated herein by reference to Exhibit (a.1) to
Registrant's Registration Statement on Form N-1A (File No. 33-41694), as
filed electronically on November 3, 1997, provides for indemnification of
directors and officers. In addition, the Registrant's officers and
directors are covered under a directors and officers/errors and omissions
liability insurance policy issued by Gulf Insurance Company which expires
October 1, 1999.
<PAGE>
Section XI.B of the Administrative Services Agreement, incorporated
herein by reference to Exhibit (h.1) to Registrant's Registration
Statement on Form N-1A (File No. 33-41694), as filed electronically on
April 24, 1998, provides for indemnification of the Administrator.
Section 8 of the Underwriting Agreement, incorporated herein by reference
to Exhibit (e.1) to Registrant's Registration Statement on Form N-1A
(File No. 33-41694), as filed electronically on April 24, 1998, provides
for indemnification of the Underwriter, its several officers and
directors, and any person who controls the Underwriter within the meaning
of Section 15 of the Securities Act of 1933.
Reference is also made to Section 2-418 of the Corporations and
Associations Article of the Annotated Code of Maryland which provides
generally that (1) a corporation may (but is not required to) indemnify
its directors for judgments, fines and expenses in proceedings in which
the director is named a party solely by reason of being a director,
provided the director has not acted in bad faith, dishonestly or
unlawfully, and provided further that the director has not received any
"improper personal benefit"; and (2) that a corporation must (unless
otherwise provided in the corporation's charter or articles of
incorporation) indemnify a director who is successful on the merits in
defending a suit against him by reason of being a director for
"reasonable expenses." The statutory provisions are not exclusive; i.e.,
a corporation may provide greater indemnification rights than those
provided by statute.
Item 26. Business and Other Connections of Investment Adviser
The investment adviser, Aeltus Investment Management, Inc. ("Aeltus"), is
registered as an investment adviser with the Securities and Exchange
Commission. In addition to serving as investment adviser and
administrator for Aetna Series Fund, Inc., Aeltus acts as investment
adviser and administrator for Aetna Variable Fund, Aetna Income Shares,
Aetna Variable Encore Fund, Aetna Balanced VP, Inc., Aetna GET Fund,
Aetna Generation Portfolios, Inc., and Aetna Variable Portfolios, Inc.
(all management investment companies registered under the Investment
Company Act of 1940 (the "1940 Act")). It also acts as investtment
adviser to certain private accounts.
The following table summarizes the business connections of the directors
and principal officers of the Investment Adviser.
<TABLE>
<CAPTION>
- ------------------------------ ----------------------------------- ------------------------------------------------------
Name Positions and Offices Other Principal Position(s) Held
- ---- with Investment Adviser Since Oct. 31, 1996/Addresses*
----------------------- ------------------------------
- ------------------------------ ----------------------------------- ------------------------------------------------------
<S> <C> <C>
John Y. Kim Director, President, Chief Director (since February 1995) -- Aetna Life
Executive Officer, Chief Insurance and Annuity Company; Senior Vice President
Investment Officer (since September 1994) -- Aetna Life Insurance and
Annuity Company.
<PAGE>
- ------------------------------ ----------------------------------- ------------------------------------------------------
Name Positions and Offices Other Principal Position(s) Held
- ---- with Investment Adviser Since Oct. 31, 1996/Addresses*
----------------------- ------------------------------
- ------------------------------ ----------------------------------- ------------------------------------------------------
J. Scott Fox Director, Managing Director, Vice President (since April 1997) -- Aetna
Chief Operating Officer, Chief Retirement Services, Inc.; Director and Senior Vice
Financial Officer President (March 1997 - February 1998) -- Aetna Life
Insurance and Annuity Company; Managing Director,
Chief Operating Officer, Chief Financial Officer,
Treasurer (April 1994 - March 1997 -- Aeltus
Investment Management, Inc.
Thomas J. McInerney Director President (since August 1997) -- Aetna Retirement
Services, Inc.; Director and President (since
September 1997) -- Aetna Life Insurance and Annuity
Company; Executive Vice President (since August
1997) -- Aetna Inc.; Vice President, Strategy (March
1997 - August 1997) -- Aetna Inc.; Vice President,
Marketing and Sales (December 1996 - March 1997) --
Aetna U.S. Healthcare; Vice President, National
Accounts (April 1996 - December 1996) -- Aetna U.S.
Healthcare.
Catherine H. Smith Director Chief Financial Officer (since February 1998) --
Aetna Retirement Services, Inc.; Director, Senior
Vice President and Chief Financial Officer (since
February 1998) -- Aetna Life Insurance and Annuity
Company; Vice President, Strategy, Finance and
Administration, Financial Relations (September 1996
- February 1998) -- Aetna Inc.
Lennart A. Carlson Managing Director, Fixed Income Managing Director (since January 1996) -- Aeltus
Investments Trust Company.
Steven C. Huber Managing Director, Fixed Income Managing Director (since August 1996) -- Aeltus
Investments Trust Company.
<PAGE>
- ------------------------------ ----------------------------------- ------------------------------------------------------
Name Positions and Offices Other Principal Position(s) Held
- ---- with Investment Adviser Since Oct. 31, 1996/Addresses*
----------------------- ------------------------------
- ------------------------------ ----------------------------------- ------------------------------------------------------
Brian K. Kawakami Vice President, Chief Compliance Chief Compliance Officer & Director (since January
Officer 1996) -- Aeltus Trust Company; Chief Compliance
Officer (since August 1993) -- Aeltus Capital, Inc.
Neil Kochen Managing Director, Product Managing Director (since April 1996) -- Aeltus Trust
Development Company; Managing Director (since August 1996) --
Aeltus Capital, Inc.
Frank Litwin Managing Director, Retail Vice President, Strategic Marketing (April, 1992 -
Marketing and Sales August, 1997) -- Fidelity Investments Institutional
Services Company.
Kevin M. Means Managing Director, Equity Managing Director (since August 1996) -- Aeltus
Investments Trust Company.
L. Charles Meythaler Managing Director, Institutional Director (since July 1997) -- Aeltus Trust Company;
Marketing Managing Director (since June 1997) -- Aeltus Trust
and Sales Company; President (June 1993 - April 1997) -- New
England Investment Association.
Jeanne Wong-Boehm Managing Director, Fixed Income Managing Director (since August 1996) -- Aeltus
Investments Trust Company.
</TABLE>
* Except with respect to Mr. McInerney and Ms. Smith, the principal
business address of each person named is 10 State House Square,
Hartford, Connecticut 06103-3602. The address of Mr. McInerney and Ms.
Smith is 151 Farmington Avenue, Hartford, Connecticut 06156.
For information regarding Bradley, Foster & Sargent, Inc. (Bradley), the
subadviser for Aetna Value Opportunity Fund, reference is made to the section
entitled "Subadviser" in the Class A and C Prospectus, the Class I Prospectus
and the Statement of Additional Information each dated March 1, 1999. For
information as to the business, profession, vocation or employment of a
substantial nature of each of the officers of Bradley, reference is made to
Bradley's current Form ADV (File No. 801-46616) filed under the Investment
Advisers Act of 1940, incorporated herein by reference.
Item 27. Principal Underwriters
(a) None
<PAGE>
(b) The following are the directors and principal officers of Aeltus
Capital, Inc., the principal underwriter of the Registrant:
<TABLE>
<CAPTION>
Name and Principal Positions and Offices Positions and Offices
Business Address* with Principal Underwriter with Registrant
- ----------------- -------------------------- ---------------
<S> <C> <C>
John Y. Kim Director and President Director
J. Scott Fox Director, Managing Director, Chief Operating Director and President
Officer, Chief Financial Officer
Brian K. Kawakami Director, Vice President, Chief Compliance None
Officer
Daniel F. Wilcox Vice President - Finance, and Treasurer None
</TABLE>
*The principal business address of all directors and officers listed is 10
State House Square, Hartford, Connecticut 06103-3602.
(c) Not applicable.
Item 28. Location of Accounts and Records
As required by Section 31(a) of the 1940 Act and the rules thereunder,
the Registrant and its investment adviser, Aeltus, maintain physical
possession of each account, book or other document, at 10 State House
Square, Hartford, Connecticut 06103-3602.
Shareholder records are maintained by the transfer agent, First Data
Investor Services Group, Inc., 4400 Computer Drive, Westboro,
Massachusetts 01581.
Item 29. Management Services
Not applicable.
Item 30. Undertakings
Not applicable
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act and the Investment Company
Act, Aetna Series Fund, Inc. has duly caused this Registration Statement to be
signed on its behalf by the undersigned, duly authorized, in the City of
Hartford and State of Connecticut on the 17th day of December, 1998.
AETNA SERIES FUND, INC.
-------------------------------
Registrant
By J. Scott Fox*
----------------------------
J. Scott Fox
President
Pursuant to the requirements of the Securities Act , this Registration Statement
has been signed below by the following persons in the capacities and on the
date(s) indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
J. Scott Fox* President and Director )
- ------------------------------------------- (Principal Executive Officer) )
J. Scott Fox )
)
Albert E. DePrince, Jr.* Director )
- ------------------------------------------- )
Albert E. DePrince, Jr. )
)
Maria T. Fighetti* Director ) December
- ------------------------------------------- ) 17, 1998
Maria T. Fighetti )
)
David L. Grove* Director )
- ------------------------------------------- )
David L. Grove )
)
John Y. Kim* Director )
- ------------------------------------------- )
John Y. Kim )
)
Sidney Koch* Director )
- ------------------------------------------- )
Sidney Koch )
)
Shaun P. Mathews* Director )
- ------------------------------------------- )
Shaun P. Mathews )
<PAGE>
Corine T. Norgaard* Director )
- ------------------------------------------- )
Corine T. Norgaard )
)
Richard G. Scheide* Director )
- ------------------------------------------- )
Richard G. Scheide )
)
Stephanie A. DeSisto* Treasurer and Chief Financial Officer )
- ------------------------------------------- (Principal Financial and Accounting )
Stephanie A. DeSisto Officer) )
)
</TABLE>
By: /s/ Amy R. Doberman
-------------------
*Amy R. Doberman
Attorney-in-Fact
*Executed pursuant to Power of Attorney dated November 6, 1998 and filed
herein as exhibit (p.1) with the Securities and Exchange Commission.
<PAGE>
Aetna Series Fund, Inc.
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Exhibit Page
----------- ------- ----
<S> <C> <C>
99-(a.6) Articles Supplementary *
99-(h.4) Amendment No. 1 to the Transfer Agency and Services Agreement -----------------
99-(h.5) Amendment No. 2 to the Transfer Agency and Services Agreement for
DCXchange and DAZL Services -----------------
99-(i) Opinion and Consent of Counsel -----------------
99-(j) Consent of Independent Auditors *
99-(l) Initial Capital Agreement -----------------
99-(m.3) Form of Distribution Plan (Class B) -----------------
99-(m.5) Shareholder Services Plan (Class B) -----------------
99-(n) Financial Data Schedules *
99-(o) Multiple Class Plan -----------------
99-(p.1) Power of Attorney (November 6, 1998) -----------------
</TABLE>
*To be filed
AMENDMENT No. 1
TO THE TRANSFER AGENCY AND SERVICES AGREEMENT
THIS AMENDMENT, dated as of August 25, 1998, is made to the Transfer
Agency and Services Agreement dated July 3, 1998 (the "Transfer Agent
Agreement") between Aetna Series Fund, Inc. (the "Fund") and FIRST DATA INVESTOR
SERVICES GROUP, INC. ("Investor Services Group")
WITNESSETH
WHEREAS, Investor Services Group and the Fund desire to amend the
Agreement to identify certain services provided by Investor Services Group in
connection with various retirement plan products offered by the Fund.
NOW THEREFORE, the Fund and Investor Services Group agree that as of the date
first referenced above, the Transfer Agent Agreement shall be amended as
follows:
1. Schedule A - Duties of Investor Services Group is hereby amended by adding
the following new section:
"Retirement Plans. In connection with the individual retirement account,
simplified employee pension plan, rollover individual retirement plan,
educational IRA and Roth individual retirement account (each hereinafter
referred to as an "IRA" and, collectively, the "IRAs") within the meaning of
Section 408 of the Internal Revenue Code of 1986, as amended (the "Code")
offered by the Fund (such IRAs as amended from time to time being hereinafter
sometimes referred to individually as a "Plan" and collectively as "Plans") for
which contributions of the Fund's shareholders (the "Participants") in the Plans
are invested in shares of Portfolios of the Fund, Investor Services Group shall
provide the following administrative services on behalf of the Fund and Aeltus
Trust Company, the custodian for the Plans, in addition to those services
described herein:
(a) Establish a record of types and reasons for distributions
(i.e., attainment of age 59-1/2, disability, death, return of excess
contributions, etc.);
(b) Record method of distribution requested and/or made;
(c) Receive and process designation of the beneficiary forms;
(d) Examine and process requests for direct transfers between
custodians/trustees, transfer and pay over to the successor assets in the
account and records pertaining thereto as requested and execute any such
transfer of asset forms required by the prior custodian;
(e) Prepare any annual reports or returns required to be prepared
and/or filed by a custodian of a Plan, including, but not limited to, an annual
fair market value report, Forms 1099R and 5498 and file with the IRS and provide
to Participant/Beneficiary; and
<PAGE>
(f) Perform applicable federal withholding and send
Participants/Beneficiaries an annual TEFRA notice regarding required federal tax
withholding.
Notwithstanding anything in the Agreement to the contrary, Investor
Services Group hereby acknowledges that in addition to the Fund, the provisions
of Articles 10, 11 and 12 of the Agreement shall apply to Aeltus Trust Company
with respect to the services provided by Investor Services Group under this
"Retirement Plans" section of this Schedule A - Duties of Investor Services
Group."
This Amendment contains the entire understanding between the parties with
respect to the transactions contemplated hereby. To the extent that any
provision of this Amendment modifies or is otherwise inconsistent with any
provision of the Transfer Agent Agreement and related agreements, this Amendment
shall control, but the Transfer Agent Agreement and all related documents shall
otherwise remain in full force and effect.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed by their duly authorized officers, as of the day and year first above
written.
AETNA SERIES FUND,INC.
By: /s/ Wayne F. Baltzer
---------------------------------------------
Title: Vice President
-------------------------------------------
FIRST DATA INVESTOR SERVICES
GROUP, INC.
By: /s/ Mark Hourihan
---------------------------------------------
Title: Exec. Vice President
-------------------------------------------
2
AMENDMENT No. 2
TO THE TRANSFER AGENCY AND SERVICES AGREEMENT
for DCXchange(sm) and DAZL Services
THIS AMENDMENT, dated as of October 1, 1998, is made to the Transfer
Agency and Services Agreement dated July 3, 1998 (the "Transfer Agent
Agreement") between AETNA SERIES FUND, INC. (the "Fund") and FIRST DATA INVESTOR
SERVICES GROUP, INC. ("Investor Services Group").
WITNESSETH
WHEREAS, Investor Services Group has developed a recordkeeping service
link ("DCXchange(sm)") between investment companies and benefit plan consultants
(the "Recordkeepers") which administer employee benefit plans, including plans
qualified under Section 401(a) of the Internal Revenue Code (the "Plans"); and
WHEREAS, Investor Services Group has entered into agreements with
various Recordkeepers relating to the recordkeeping and related services
performed on behalf of such Plans in connection with daily valuation and
processing of orders for investment and reinvestment of assets of the Plans in
various investment options available to the participants under such Plans (the
"Participants"); and
WHEREAS, the Fund, on behalf of the Portfolios set forth in the
attached Exhibit 1, desires to participate in the DCXchange(sm) Program and
retain Investor Services Group to perform such services with respect to shares
of the Funds ("Shares") held by or on behalf of the Participants as further
described herein and Investor Services Group is willing and able to furnish such
services on the terms and conditions hereinafter set forth.
WHEREAS, the Fund desires to utilize Investor Services Group's
proprietary Data Access Zip Link ("DAZL") and Investor Services Group desires to
provide the Fund with such services.
NOW THEREFORE, the Fund and Investor Services Group agree that as of
the date first referenced above, the Transfer Agent Agreement shall be amended
as follows:
1. DCXchange(sm). Investor Services Group agrees to perform recordkeeping and
related services for the benefit of the Plan Participants that maintain shares
of the Fund through Plans administered by certain Recordkeepers. Investor
Services Group shall subcontract with Recordkeepers to link the Investor
Services Group recordkeeping system with the Recordkeepers, in order for the
Recordkeepers to maintain Fund shares positions for each Participant. Fund
positions of the Participants shall constitute open accounts for which the Fund
shall pay to Investor Services Group the annual fees specified in the schedule
of fees attached hereto as Schedule A.
<PAGE>
2. DAZL. In accordance with the following terms, Investor Services Group shall,
through its proprietary DAZL product, provide the Fund and such financial
planners and investment advisors (the "FP's") which, pursuant to agreements with
the Fund, distribute shares of such funds, with online access to Fund (including
Portfolios) and shareholder account information for the shareholders of the
Funds or such financial planners of investment advisors.
(a) Investor Services Group Responsibility. Investor Services Group
shall provide the Fund with the appropriate documentation and
procedures (the "DAZL Documentation") to enable the Fund to properly
use DAZL. In addition to and as more fully described in the DAZL
Documentation, Investor Services Group shall run & complete data
extracts after the transfer agent nightly cycles in order to provide
files to the end user i.e., financial planner, or direct to firms based
upon the profiles that the onlines designate.
(b) Fund Responsibilities. In addition to and as may be more fully
described in the DAZL Documentation, the Fund has responsibility (i)
for setting the FSR on-lines with the appropriate data in order to feed
into the DAZL extract; (ii) with respect to those FP's utilizing a 3rd
party software vendor to access information through DAZL, ensuring the
vendor provides the translation of the DAZL file to the appropriate
software package formats; (iii) for the Fund's errors and mistakes in
the use of DAZL; (iv) for the Fund's failure to use and employ DAZL in
accordance with the procedures and documentation made available by
Investor Services Group; (v) for the Fund's utilization of the control
procedures set forth and described in such user documentation; and (vi)
the Fund's failure to verify promptly reports or output received
through use of DAZL.
(c) Fees. In consideration of the DAZL services provided by Investor
Services Group hereunder, the Fund shall pay to Investor Services Group
the Fees set forth in Schedule B attached hereto.
This Amendment contains the entire understanding between the parties
with respect to the transactions contemplated hereby. To the extent that any
provision of this Amendment modifies or is otherwise inconsistent with any
provision of the Transfer Agent Agreement and related agreements, this Amendment
shall control, but the Transfer Agent Agreement and all related documents shall
otherwise remain in full force and effect.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed by their duly authorized officers, as of the day and year first above
written.
AETNA SERIES FUND, INC.
By: /s/Wayne Baltzer
---------------------------
Title: Vice President
------------------------
FIRST DATA INVESTOR SERVICES
GROUP, INC.
By: /s/Mark Hourihan
---------------------------
Title: Executive Vice President
-----------------------
<PAGE>
EXHIBIT 1
LIST OF PORTFOLIOS
Aetna Money Market Fund
Aetna Government Fund
Aetna Bond Fund
Aetna High Yield Fund
Aetna Balanced Fund
Aetna Growth and Income Fund
Aetna Real Estate Securities Fund
Aetna Value Opportunity Fund
Aetna Growth Fund
Aetna Mid Cap Fund
Aetna Small Company Fund
Aetna International Fund
Aetna Index Plus Large Cap Fund
Aetna Index Plus Mid Cap Fund
Aetna Index Plus Small Cap Fund
Aetna Index Plus Bond Fund
Aetna Ascent Fund
Aetna Crossroads Fund
Aetna Legacy Fund
<PAGE>
Schedule A
DCXchange(sm) Fees
The Fund shall pay Investor Services Group annualized fees of $12.00 for each
Plan Participant account in the respective portfolio that is open during any
monthly period. These fees shall be billed by Investor Services Group monthly in
arrears on a prorated basis of 1/12 of the annualized fee for all accounts that
are open during such month.
The Fund shall reimburse Investor Services Group monthly for such other
out-of-pocket expenses reasonably incurred by Investor Services Group in
performing its duties and responsibilities under this Agreement, as pre-approved
by the Fund. The Fund further agrees that any volume discounts achieved by
Investor Services Group on behalf of its clients shall be returned by Investor
Services Group, unless otherwise agreed to by Investor Services Group and the
Fund.
<PAGE>
Schedule B
DAZL Fees*
<TABLE>
<CAPTION>
DAZL Base Product
<S> <C>
One-time set-up fee $5,000 (To Be Waived)
Monthly Fee $1,000
Fee per record transmitted $0.025
Fee per price record transmitted $0.015
DAZL Direct fee per record transmitted $0.01
DAZL Interactive fee per record transmitted $0.01
</TABLE>
* To be paid out of the Fund's 12(b)-1 fee. The foregoing statement is
included for the Fund's internal purposes only and is in no way to be
interpreted or construed to affect the Fund's obligation to make such
payments.
[Aetna letterhead] Aetna, Inc.
[Aetna logo] 242 Trumbull Street
Hartford, CT 06103-1205
Amy R. Doberman
Counsel
Law Division, ALT5
December 17, 1998 Investments & Financial Services
(860) 275-2032
Fax: (860) 275-2158
U.S. Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Aetna Series Fund, Inc.
Post-Effective Amendment No. 29 to
Registration Statement on Form N-1A
(File No. 33-41694 and 811-6352)
Dear Sir or Madam:
The undersigned serves as counsel to Aeltus Investment Management, Inc., the
investment adviser to Aetna Series Fund, Inc., a Maryland corporation (the
"Company"). It is my understanding that the Company has registered an indefinite
number of shares of beneficial interest under the Securities Act of 1933 (the
"1933 Act") pursuant to Rule 24f-2 under the Investment Company Act of 1940 (the
"1940 Act").
Insofar as it relates or pertains to the Company, I have reviewed the prospectus
and the Company's Registration Statement on Form N-1A, as amended to the date
hereof, filed with the Securities and Exchange Commission under the 1933 Act and
the 1940 Act, pursuant to which the Shares will be sold (the "Registration
Statement"). I have also examined originals or copies, certified or otherwise
identified to my satisfaction, of such documents and other instruments I have
deemed necessary or appropriate for the purpose of this opinion. For purposes of
such examination, I have assumed the genuineness of all signatures on original
documents and the conformity to the original of all copies.
I am admitted to practice law in Connecticut, Maryland and the District of
Columbia. My opinion herein as to Maryland law is based upon a limited inquiry
thereof that I have deemed appropriate under the circumstances.
<PAGE>
Page 2
December 17, 1998
Based upon the foregoing, and assuming the securities are issued and sold in
accordance with the provisions of the Company's Articles of Incorporation and
the Registration Statement, I am of the opinion that the securities will when
sold be legally issued, fully paid and nonassessable.
I consent to the filing of this opinion as an exhibit to the Registration
Statement.
Sincerely,
/s/ Amy R. Doberman
- -------------------
Amy R. Doberman
Counsel
[Aetna letterhead]
[Aetna logo]
151 Farmington Avenue
Hartford, CT 06156
Shaun P. Mathews
Senior Vice President
Aetna Life Insurance and Annuity
September 24, 1997 Company, TN41
(860) 273-4908
Fax: (860) 273-4247
Board of Directors
Aetna Series Fund, Inc.
151 Farmington Avenue
Hartford, CT 06156
Ladies and Gentlemen:
Aetna Life Insurance and Annuity Company ("Aetna") will provide on or before
December 19, 1997 a minimum of $100,000.00 of initial capital to each of Aetna
Index Plus Bond Fund, Aetna Index Plus Mid Cap Fund, Aetna Mid Cap Fund, Aetna
Index Plus Small Cap Fund, Aetna High Yield Fund, Aetna Real Estate Securities
Fund and Aetna Value Opportunity Fund ("Series"), new series of Aetna Series
Fund, Inc. (the "Fund").
Form N-1A under the Securities Act of 1933 and the Investment Company Act of
1940 requires that there be filed with the Fund's registration statement, as an
exhibit, "copies of any agreements or understandings made in consideration for
providing the initial capital between or among the Registrant, the underwriter,
adviser, promoter or initial stockholders and written assurances from promoters
or initial stockholders that their purchases were made for investment purposes
without any present intention of redeeming or reselling;...."
This will advise you that, while there are no formal agreements or
understandings between the Fund and Aetna in consideration for Aetna's providing
the initial capital, Aetna hereby assures you that its purchase of $100,000.00
worth of shares of each of the Series will be made for investment purposes and
that Aetna has no present intention of redeeming or reselling those shares.
Aetna does, however, reserve the right to make additional investments in shares
of each of the Series and to redeem any or all of its shares in a manner which
would be consistent with the Securities Act of 1933 and the Investment Company
Act of 1940.
Sincerely,
/s/ Shaun P. Mathews
Shaun P. Mathews
Senior Vice President
Aetna Life Insurance and Annuity Company
Form of
DISTRIBUTION PLAN
Aetna Series Fund, Inc.
Class B
This Distribution Plan (the "Plan") is adopted in accordance with Rule 12b-1
(the "Rule") under the Investment Company Act of 1940, as amended (the "1940
Act"), by AETNA SERIES FUND, INC. (the "Fund"), a Maryland corporation, on
behalf of the Class B shares of each of its Series as set forth in Appendix A,
as amended from time to time, subject to the following terms and conditions:
Section 1. Annual Fees.
Distribution Fee. Each Series will pay to the underwriter of its shares, Aeltus
Capital, Inc. (the "Underwriter"), a Connecticut corporation, a distribution fee
under the Plan at the annual rate of 0.75% of the average daily net assets of
each Series attributable to its Class B shares (the "Distribution Fee").
Adjustment to Fees. The Distribution Fee may be reduced with respect to the
Class B shares of any Series if agreed upon by the Board of Directors of the
Fund (the "Board") and the Underwriter and if approved in the manner specified
in Section 3.
Payment of Fees. The Distribution Fee will be calculated daily and paid monthly
by each Series set forth in Appendix A with respect to its Class B shares at the
annual rate indicated above.
Section 2. Expenses Covered by the Plan.
The Distribution Fee may be used by the Underwriter for: (a) costs of printing
and distributing the Series' prospectus, statement of additional information and
reports to prospective investors in the Series; (b) costs involved in preparing,
printing and distributing sales literature pertaining to the Series; (c) an
allocation of overhead and other branch office distribution-related expenses of
the Underwriter; (d) payments made to persons who provide support services in
connection with the distribution of the Series' shares, including but not
limited to, office space and equipment, telephone facilities, answering routine
inquiries regarding the Series, processing shareholder transactions and
providing any other shareholder services not otherwise provided by the Fund's
transfer agent; (e) accruals for interest on the amount of the foregoing
expenses that exceed the Distribution Fee and the contingent deferred sales
charge received by the Underwriter; and (f) any other expense primarily intended
to result in the sale of a Series' shares, including, without limitation,
payments to selling dealers and their agents, if applicable.
The amount of the Distribution Fee payable under Section 1 is not related
directly to expenses incurred by the Underwriter and this Section 2 does not
obligate a Series to reimburse the Underwriter for such expenses. The
Distribution Fees will be paid by each
<PAGE>
Series to the Underwriter unless and until (a) the Plan is terminated pursuant
to Section 5, or (b) the Plan is not renewed with respect to a Series or Class B
thereof pursuant to Section 4. Any distribution expenses incurred by the
Underwriter on behalf of a Series in excess of the Distribution Fees specified
in Section 1 which the Underwriter has accrued through the termination date are
the sole responsibility and liability of the Underwriter and are not an
obligation of a Series.
Section 3. Approval of Directors.
Neither the Plan nor any related agreements will take effect until approved by a
majority of both (a) the Board of Directors of the Fund and (b) those Directors
who are not interested persons of the Fund and who have no direct or indirect
financial interest in the operation of the Plan or in any agreements related to
it (the "Qualified Directors"), cast in person at a meeting called for the
purpose of voting on the Plan and the related agreements.
Section 4. Continuance of the Plan.
The Plan shall become effective on March 1, 1999 and shall remain in force and
effect through December 31, 1999, unless earlier terminated. Following the
expiration of its initial term, the Plan shall continue in force and effect for
a one-year period, provided such continuance is specifically approved at least
annually:
1. by a majority of the members of the Board, or by vote of a majority of
each Series' Class B shares, and
2. by the vote of a majority of the Qualified Directors cast in person at
a meeting specifically called for such purpose.
Section 5. Termination.
The Plan may be terminated at any time with respect to Class B shares of any
Series (a) by the vote of a majority of that Series' outstanding voting Class B
securities, or (b) by a vote of a majority of the Qualified Directors. The Plan
may remain in effect with respect to a Series even if the Plan has been
terminated in accordance with this Section 5 with respect to any other Series.
Section 6. Amendments.
The Plan may not be amended with respect to any Series so as to increase
materially the amounts of the Distribution Fees described in Section 1 unless
the amendment is approved by a vote of the holders of at least a majority of the
outstanding voting Class B securities of that Series. No material amendment to
the Plan may be made unless approved in the manner described in Section 3.
- 2 -
<PAGE>
Section 7. Selection of Certain Directors.
While the Plan is in effect, the selection and nomination of the Fund's
Directors who are not interested persons of the Fund will be committed to the
discretion of the Directors then in office who are not interested persons of the
Fund.
Section 8. Written Reports.
In each year during which the Plan remains in effect, any person authorized to
direct the disposition of monies paid or payable by a Series pursuant to the
Plan or any related agreement will prepare and furnish to the Board, and the
Board will review, at least quarterly, written reports setting out the amounts
expended under the Plan, the purposes for which those expenditures were made,
and otherwise complying with the requirements of the Rule.
Section 9. Preservation of Materials.
The Fund will preserve copies of the Plan, any agreement relating to the Plan
and any report made pursuant to Section 8, for a period of not less than six (6)
years (the first two (2) years in an easily accessible place) from the date of
the Plan, agreement or report.
Section 10. Meanings of Certain Terms.
As used in the Plan, the terms "interested person" and "majority of the
outstanding voting securities" will be deemed to have the same meaning ascribed
to those terms under the 1940 Act.
IN WITNESS WHEREOF, the Fund, on behalf of the Class B Shares of each of its
Series, has executed this Plan as of this _____ day of _______________, 1998.
AETNA SERIES FUND, INC.
on behalf of its CLASS B shares
By: _________________________
J. Scott Fox, President
- 3 -
<PAGE>
Appendix A
Aetna Money Market Fund
Aetna Bond Fund
Aetna Balanced Fund
Aetna Growth and Income Fund
Aetna International Fund
Aetna Government Fund
Aetna High Yield Fund
Aetna Growth Fund
Aetna Small Company Fund
Aetna Ascent Fund
Aetna Crossroads Fund
Aetna Legacy Fund
Aetna Mid Cap Fund
Aetna Value Opportunity Fund
Aetna Real Estate Securities Fund
Aetna Index Plus Bond Fund
Aetna Index Plus Large Cap Fund
Aetna Index Plus Small Cap Fund
Aetna Index Plus Mid Cap Fund
SHAREHOLDER SERVICES PLAN
Aetna Series Fund, Inc.
Class B
This Shareholder Services Plan (the "Plan") is adopted in accordance with Rule
12b-1 under the Investment Company Act of 1940, as amended (the "1940 Act"), by
Aetna Series Fund, Inc. (the "Fund"), a Maryland corporation, on behalf of the
Class B shares of each of its Series as set forth in Appendix A ("Series"), as
amended from time to time, subject to the following terms and conditions:
Section 1. Annual Fees.
Service Fee. The Series will pay to the underwriter of its shares, Aeltus
Capital, Inc. (the "Underwriter"), a Connecticut corporation, a service fee
under the Plan at the annual rate of 0.25% of the average daily net assets of
the Series attributable to Class B shares (the "Service Fee").
Adjustment to Fees. The Service Fee may be reduced if approved by the
Underwriter and the Board of Directors of the Fund (the "Board") in the manner
specified in Section 3.
Payment of Fees. The Service Fee will be calculated daily and paid monthly by
the Series.
Section 2. Expenses Covered by the Plan.
The Service Fee may be used by the Underwriter primarily to pay selling dealers
and their agents for servicing shareholder accounts, including a continuing fee
which shall begin to accrue immediately after the sale of such shares.
The amount of the Service Fee is not related directly to expenses incurred by
the Underwriter, and this Section 2 does not obligate the Series to reimburse
the Underwriter for such expenses. The Service Fee will be paid by the Series to
the Underwriter unless and until (a) the Plan is terminated in accordance with
Section 5; or (b) the Plan is not renewed with respect to the Series or Class B
pursuant to Section 4. Any service expenses in excess of the Service Fee which
the Underwriter has incurred on behalf of a Series and accrued through the
termination date are the sole responsibility and liability of the Underwriter
and are not an obligation of the Series.
Section 3. Approval of Directors.
Neither the Plan nor any related agreements will take effect until approved by a
majority of both (a) the Board of Directors of the Fund and (b) those Directors
who are not interested persons of the Fund and who have no direct or indirect
financial interest in the operation of the Plan or in any agreements related to
it (the "Qualified Directors"), cast in
<PAGE>
person at a meeting called for the purpose of voting on the Plan and the related
agreements.
Section 4. Continuance of the Plan.
The Plan shall become effective on March 1, 1999 and shall remain in force and
effect through December 31, 1999, unless earlier terminated. Following the
expiration of its initial term, the Plan shall continue in force and effect for
a one-year period, provided such continuance is specifically approved at least
annually:
1. by a majority of the members of the Board, or by vote of a majority of
each Series' Class B shares; and
2. by the vote of a majority of the Qualified Directors cast in person at
a meeting specifically called for such purpose.
Section 5. Termination.
The Plan may be terminated at any time with respect to Class B of any Series,
without the payment of any penalty, by (a) the vote of a majority of that
Series' outstanding voting Class B securities, or (b) a vote of a majority of
the Qualified Directors. The Plan may remain in effect with respect to a Series
even if the Plan has been terminated in accordance with this Section 5 with
respect to any other Series.
Section 6. Amendments.
The Plan may not be amended with respect to any Series so as to increase
materially the amounts of the Service Fee described in Section 1 unless the
amendment is approved by a vote of the holders of at least a majority of the
outstanding voting Class B securities of that Series. No material amendment to
the Plan may be made unless approved in the manner described in Section 3.
Section 7. Written Reports.
In each year during which the Plan remains in effect, any person authorized to
direct the disposition of monies paid or payable by the Series pursuant to the
Plan, or any related agreement, will prepare and furnish to the Board, and the
Board shall review, at least quarterly, written reports setting out the amounts
expended under the Plan and the purposes for which those expenditures were made.
Section 8. Preservation of Materials.
The Fund will preserve copies of the Plan, any agreement relating to the Plan
and any report made pursuant to Section 7, for a period of not less than six (6)
years (the first two (2) years in an easily accessible place) from the date of
the Plan, agreement or report.
2
<PAGE>
Section 9. Meanings of Certain Terms.
As used in the Plan, the terms "interested person" and "majority of the
outstanding voting securities" will be deemed to have the same meaning ascribed
to those terms under the 1940 Act.
IN WITNESS WHEREOF, the Fund, on behalf of the Class B Shares of each of its
Series, has executed this Plan as of this 17th day of December, 1998.
AETNA SERIES FUND, INC.
on behalf of the Class B Shares
of each of its Series
By: /s/ J. Scott Fox
-----------------------
J. Scott Fox, President
3
<PAGE>
APPENDIX A
Aetna Money Market Fund
Aetna Government Fund
Aetna Bond Fund
Aetna High Yield Fund
Aetna Balanced Fund
Aetna Growth and Income Fund
Aetna Real Estate Securities Fund
Aetna Value Opportunity Fund
Aetna Growth Fund
Aetna Mid Cap Fund
Aetna Small Company Fund
Aetna International Fund
Aetna Index Plus Large Cap Fund
Aetna Index Plus Small Cap Fund
Aetna Index Plus Mid Cap Fund
Aetna Index Plus Bond Fund
Aetna Ascent Fund
Aetna Crossroads Fund
Aetna Legacy Fund
4
AETNA SERIES FUND, INC.
RULE 18f-3
MULTI-CLASS PLAN
Introduction:
Pursuant to Rule 18f-3 under the Investment Company Act of 1940, as
amended (the "1940 Act"), the following sets forth the separate class
arrangements and expense allocations as well as the exchange privileges of each
class of shares issued by each series ("Series") comprising the Aetna Series
Fund, Inc. (the "Fund"). Except as described below, each class has the same
rights and obligations as each other class as required by Rule 18f-3.
Terms of the Plan:
The Fund currently consists of the following nineteen (19) Series:
Aetna Money Market Fund Aetna Mid Cap Fund
Aetna Government Fund Aetna Growth and Income Fund
Aetna Bond Fund Aetna Growth Fund
Aetna High Yield Fund Aetna Small Company Fund
Aetna Balanced Fund Aetna International Fund
Aetna Ascent Fund Aetna Index Plus Large Cap Fund
Aetna Crossroads Fund Aetna Index Plus Small Cap Fund
Aetna Legacy Fund Aetna Index Plus Mid Cap Fund
Aetna Value Opportunity Fund Aetna Index Plus Bond Fund
Aetna Real Estate Securities Fund
Aetna International Fund, Aetna Small Company Fund, Aetna Growth Fund,
Aetna Growth and Income Fund, Aetna Balanced Fund, Aetna Ascent Fund, Aetna
Crossroads Fund, Aetna Legacy Fund, Aetna Real Estate Securities Fund, Aetna Mid
Cap Fund and Aetna Value Opportunity Fund are collectively referred to herein as
the "Equity Funds". Aetna Government Fund, Aetna Bond Fund and Aetna High Yield
Fund are collectively referred to herein as the "Fixed Income Funds". Aetna
Index Plus Large Cap Fund, Aetna Index Plus Bond Fund, Aetna Index Plus Mid Cap
Fund and Aetna Index Plus Small Cap Fund are collectively referred to herein as
the "Enhanced Index Funds".
<PAGE>
1. Class Designations:
The shares are divided into four classes: Class I, Class A, Class B and
Class C.
Class I shares are shares that are offered to:
o certain retirement plans;
o certain registered investment advisers having an agreement with
the Fund to invest a minimum of $1 million within one year of
initial purchase;
o employees and retired employees of Aetna Inc. and its
affiliates (including members of employees' and retired
persons' immediate families, board members and trustees, and
their immediate families);
o insurance companies (including separate accounts);
o registered investment companies;
o shareholders holding Select Class shares at the time such
shares were redesignated as Class I shares, and their immediate
family members, as long as they maintain a shareholder account;
o certain bank and independent trust companies investing on
behalf of their clients for which they charge trust and
investment management fees;
o members of the Board of Directors of the Fund ("Board");
o NASD registered representatives of Aeltus Capital, Inc. or any
affiliated broker-dealers (including members of their immediate
families); and
o members of such other groups as may be approved by the Fund's
Board from time to time.
Class A, Class B and Class C shares are shares that are offered to
accounts not eligible to buy Class I shares.
2. Differences in Distribution Arrangements:
a. Class I Shares.
Class I shares are distributed with no sales charges, distribution fees
or service fees.
b. Class A Shares.
Class A shares of each Series, except Aetna Money Market Fund, are
subject to the imposition of a front-end sales load at the time of purchase. The
Equity Funds, Fixed Income Funds and Enhanced Index Funds have maximum front-end
sales loads of 5.75%, 4.75% and 3.00%, respectively. Front-end sales loads for
all series decline to 0% based on discounts for volume purchases (aggregate
investment in any registered investment company for which Aeltus Investment
Management, Inc. acts as investment adviser), as set forth in the table below.
2
<PAGE>
<TABLE>
<CAPTION>
Sales Charge
-----------------------------------------------------------------------
Aggregate Investment Equity Funds Fixed Income Funds Enhanced Index Funds
- -------------------- ------------ ------------------ --------------------
<S> <C> <C> <C>
Under $50,000 5.75% 4.75% 3.00%
$50,000 but under $100,000 4.50% 4.50% 2.50%
$100,000 but under $250,000 3.50% 3.50% 2.00%
$250,000 but under $500,000 2.50% 2.50% 1.50%
$500,000 but under $1,000,000 2.00% 2.00% 1.00%
$1,000,000 or more None None None
</TABLE>
Class A shares of each Series, except Aetna Money Market Fund, are
subject to a distribution fee based on the average daily net assets attributable
to Class A shares. This fee is imposed pursuant to a Distribution Plan adopted
under Rule 12b-1 under the 1940 Act, in the amount of 0.25%.
Class A shares are not subject to a service fee.
Class A shares purchased with an aggregate investment in the Fund's
Series of less than $1,000,000 are not subject to a contingent deferred sales
charge (CDSC). Class A shares purchased with an aggregate investment in the
Fund's Series of $1,000,000 or more (including purchases made in connection with
an agreement to invest $1 million or more under a Letter of Intent), may be
subject to a CDSC imposed on redemptions within two (2) years of purchase. The
CDSC will apply only to shares for which a finder's fee is paid to selling
broker-dealers, banks or other investment professionals, pursuant to a
distribution agreement with the Fund's principal underwriter. The charge is
assessed on an amount equal to the lesser of the current market value or the
original cost of the shares being redeemed. Thus, there is no sales charge on
increases in the net asset value of shares above the initial purchase price.
There is no CDSC on redemptions of Class A shares:
(1) exchanged to other Funds of the same class of shares;
(2) purchased through reinvestment of dividends or capital gains
distributions;
(3) purchased more than two (2) years prior to the redemption;
(4) in the event of the owner's death or disability;
(5) related to certain distributions from retirement plans or accounts
which are permitted without penalty pursuant to the Internal Revenue
Code of 1986, as amended;
(6) related to distributions or tax-free return of excess contributions
from employee benefit plans; or,
(7) in connection with the Fund's systematic withdrawal plan.
In addition, there is no CDSC on Aetna Money Market Fund (Class A)
redemptions unless (i) those shares were purchased through an exchange from
another Series within
3
<PAGE>
two (2) years prior to the redemption and (ii) the original purchase of the
shares exchanged was subject to a CDSC.
A CDSC in the amount shown below will be imposed within the first year or
second year after purchase on redemptions of such shares. In determining the
number of years the shares have been held, the Fund will aggregate all purchases
of Class A shares made during a month and consider them made on the first day of
the month. The finders fee payable with respect to such Class A purchases shall
be as follows:
<TABLE>
<CAPTION>
Cumulative Purchase Amount($) Commission CDSC
----------------------------- ---------- ----
<S> <C> <C>
1,000,000 but under 3,000,000 1.00% Year 1 - 1.00%
Year 2 - 0.50%
3,000,000 but under 20,000,000 0.50% Year 1 - 0.50%
Year 2 - 0.50%
20,000,000 or greater 0.25% Year 1 - 0.25%
Year 2 - 0.25%
</TABLE>
c. Class B Shares.
Class B shares of each Series are subject to a distribution fee based on
the average daily net assets attributable to Class B shares. This fee is imposed
pursuant to a Distribution Plan adopted under Rule 12b-1 under the 1940 Act, in
the amount of 0.75%.
Class B shares of each Series are subject to a service fee based on the
average daily net assets attributable to Class B shares in the amount of 0.25%.
Class B shares of each Series are not subject to a front-end sales load.
However, a CDSC will be imposed on redemptions of Class B shares made within a
specified number of years from the date of purchase, as shown below.
<TABLE>
<CAPTION>
Year 1 2 3 4 5 6 7+
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
CDSC 5% 4% 3% 3% 2% 1% 0%
</TABLE>
The CDSC is assessed on an amount equal to the lesser of the current
market value or the original cost of the shares being redeemed. Thus, there is
no sales charge on increases in the net asset value of shares above the initial
purchase price. There is no CDSC on redemptions of Class B shares:
(1) exchanged to other Funds of the same class of shares;
(2) purchased through reinvestment of dividends or capital gains
distributions;
(3) purchased more than six (6) years prior to the redemption (in
determining the number of years the shares have been held, the Fund
will aggregate all purchases of Class B shares made during a month
and consider them made on the first day of the month);
4
<PAGE>
(4) in the event of the owner's death or disability;
(5) related to certain distributions from retirement plans or accounts
which are permitted without penalty pursuant to the Internal Revenue
Code of 1986, as amended;
(6) related to distributions or tax-free return of excess contributions
from employee benefit plans; or,
(7) in connection with the Fund's systematic withdrawal plan.
d. Class C Shares.
Class C shares of each Series, except Aetna Money Market Fund, are
subject to a distribution fee based on the average daily net assets attributable
to Class C shares. This fee is imposed pursuant to a Distribution Plan adopted
under Rule 12b-1 under the 1940 Act, in the amount of 0.75%, except for the
Enhanced Index Funds, which are subject to a distribution fee in the amount of
0.50%.
Class C shares of each Series, except Aetna Money Market Fund, are
subject to a service fee based on the average daily net assets attributable to
Class C shares in the amount of 0.25%.
Class C shares of each Series are subject to the imposition of a CDSC on
redemptions made within eighteen (18) months of purchase. The Equity Funds and
Fixed Income Funds impose a CDSC of 1.00%, and the Enhanced Index Funds impose a
CDSC of 0.75%. The CDSC is assessed on an amount equal to the lesser of the
current market value or the original cost of the shares being redeemed. Thus,
there is no sales charge on increases in the net asset value of shares above the
initial purchase price. There is no CDSC on redemptions of Class C shares:
(1) exchanged to other Funds of the same class of shares;
(2) purchased through reinvestment of dividends or capital gains
distributions;
(3) purchased more than eighteen (18) months prior to the redemption (in
determining the number of months the shares have been held, the Fund
will aggregate all purchases of Class C shares made during a month
and consider them made on the first day of the month);
(4) in the event of the owner's death or disability;
(5) related to certain distributions from retirement plans or accounts
which are permitted without penalty pursuant to the Internal Revenue
Code of 1986, as amended;
(6) related to distributions or tax-free return of excess contributions
from employee benefit plans; or
(7) in connection with the Fund's systematic withdrawal plan.
In addition, there is no CDSC on Aetna Money Market Fund (Class C)
redemptions unless (i) those shares were purchased through an exchange from
another Series within
5
<PAGE>
eighteen (18) months prior to the redemption and (ii) the original purchase of
the shares exchanged was subject to a CDSC.
3. Expense Allocation:
In addition to the Distribution and Service Fees described above, the
following expenses shall be allocated, to the extent practicable, on a
class-by-class basis:
(1) expense of administrative personnel and services required to support
the shareholders of each class;
(2) transfer agency fees payable by each class;
(3) costs of printing the prospectuses relating to those classes;
(4) Securities and Exchange Commission and any "Blue Sky" registration
fees;
(5) litigation or other legal expenses; and
(6) directors' fees incurred as a result of issues related to a
particular class.
Income, realized and unrealized capital gains and losses, and expenses,
other than those allocated as described in paragraph 3, of each Series are
allocated to a particular class on the basis of the net asset value of that
class in relation to the net asset value of the Series.
4. Exchange Privileges:
Each class of shares may be exchanged for shares of the same class in
another Series of the Fund. Currently, shares of each class may be exchanged at
the net asset value for shares of any other Series of the same class, subject to
minimum investment requirements.
5. Conversion Features:
Class B shares must be converted to Class A shares eight (8) years from
the date of purchase. No other class of shares of a particular Series is
convertible into another class of shares of that Series.
6. Voting Rights:
Each class shall have exclusive voting rights on any matter submitted to
shareholders that relates solely to its arrangement. Furthermore, each class
shall have separate voting rights on any matter submitted to shareholders in
which the interests of one class differ from the interests of any other class.
Effective: March 1, 1999
6
POWER OF ATTORNEY
We, the undersigned directors and officers of Aetna Series Fund, Inc., Aetna
Balanced VP, Inc., Aetna Generation Portfolios, Inc. and Aetna Variable
Portfolios, Inc. hereby severally constitute and appoint Amy R. Doberman, Daniel
E. Burton and Michael J. Gioffre, and each of them individually, our true and
lawful attorneys, with full power to them and each of them to sign for us, and
in our names and in the capacities indicated below, any and all amendments to
the Registration Statements listed below filed with the Securities and Exchange
Commission under the Securities Act of 1933 and the Investment Company Act of
1940:
<TABLE>
<CAPTION>
Registration Statements filed under the Securities Act of 1933:
<S> <C>
Aetna Series Fund, Inc. 33-41694
Aetna Balanced VP, Inc. 33-27247
Aetna Generation Portfolios, Inc. 33-88334
Aetna Variable Portfolios, Inc. 333-05173
</TABLE>
<TABLE>
<CAPTION>
Registration Statements filed under the Investment Company Act of 1940:
<S> <C>
Aetna Series Fund, Inc. 811-6352
Aetna Balanced VP, Inc. 811-5773
Aetna Generation Portfolios, Inc. 811-8934
Aetna Variable Portfolios, Inc. 811-7651
</TABLE>
hereby ratifying and confirming on this 6th day of November, 1998, our
signatures as they may be signed by our said attorneys to any and all amendments
to such Registration Statements.
<TABLE>
<CAPTION>
Signature/Title Signature/Title
<S> <C>
/s/ J. Scott Fox /s/ Stephanie A. DeSisto
- -------------------------------------------------------- ------------------------------------------------------
J. Scott Fox Stephanie A. DeSisto
President and Director Treasurer and Chief Financial Officer
(Principal Executive Officer) (Principal Financial and Accounting Officer)
/s/ Albert E. DePrince, Jr. /s/ Sidney Koch
- -------------------------------------------------------- ------------------------------------------------------
Albert E. DePrince, Jr., Director Sidney Koch, Director
/s/ Maria T. Fighetti /s/ Shaun P. Mathews
- -------------------------------------------------------- ------------------------------------------------------
Maria T. Fighetti, Director Shaun P. Mathews, Director
/s/ David L. Grove /s/ Corine T. Norgaard
- -------------------------------------------------------- ------------------------------------------------------
David L. Grove, Director Corine T. Norgaard, Director
/s/ John Y. Kim /s/ Richard G. Scheide
- -------------------------------------------------------- ------------------------------------------------------
John Y. Kim, Director Richard G. Scheide, Director
</TABLE>
