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[LOGO OF AIM APPEARS HERE]
AIM VARIABLE INSURANCE FUNDS, INC.
AIM V.I. CAPITAL APPRECIATION FUND (page )
A diversified portfolio which seeks to provide capital appreciation
through investments in common stocks, with emphasis on medium-sized and
smaller emerging growth companies.
AIM V.I. DIVERSIFIED INCOME FUND (page )
A diversified portfolio which seeks to achieve a high level of current
income by investing primarily in foreign government securities, foreign
and domestic corporate debt securities, U.S. government securities and
U.S. government agency mortgage-backed securities, and lower-rated or
unrated high yield debt securities (commonly known as junk bonds) of
U.S. and foreign companies.*
AIM V.I. GROWTH (page )
A diversified portfolio which seeks to achieve long-term growth of
capital by investing primarily in dividend-paying stocks which have
prospects for both growth of capital and dividend income.
AIM V.I. VALUE (page )
A diversified portfolio which seeks to achieve long-term growth of
capital by investing primarily in equity securities judged by AIM to be
undervalued relative to the current or projected earnings of the
companies issuing the securities, or relative to current market values
of assets owned by the companies issuing the securities, or relative to
the equity market generally.
*International investing presents certain risks not associated with
investing solely in the U.S. These include risks relating to
fluctuations in the value of the U.S. dollar relative to the value of
other currencies, the custody arrangements made for the Fund's foreign
holdings, differences in accounting, political risks, and the lesser
degree of public information required to be provided by non-U.S.
companies. Investment in non-investment grade debt securities are
subject to greater risk of loss of principal and interest, and may
entail other risks that are different from or more pronounced than those
involved in higher-rated securities.
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The Managers' MARKET VOLATILITY CHALLENGES INVESTORS IN 1996
Overview
A roundtable discussion with the fund management team for
AIM Variable Insurance Funds, Inc. about the six-month
reporting period ended June 30, 1996.
Q. WHAT WERE CONDITIONS LIKE IN FINANCIAL MARKETS THE PAST
SIX MONTHS?
A. Uncertainty dominated financial markets as investors
became increasingly concerned about the possibility of
rising inflation. The economy had slowed to a feeble annual
growth rate of 0.5% in the fourth quarter of 1995, and that
began to turn around early this year. The rate of growth of
the gross domestic product shot up to 2.0% in the first
quarter of 1996, and growth in the second quarter had been
predicted at 3.5% to 5%.
The foremost concern was that the Federal Reserve Board
would nudge interest rates higher to slow economic growth
and forestall inflation, and that drove most bond yields
higher--and prices lower--during most of the reporting
period. In addition, stock investors anticipated that
corporate profit growth would fall below 1995's robust pace,
particularly if rising market interest rates began to erode
profit margins.
Q. HOW WERE THE MARKETS BY THE END OF THE REPORTING PERIOD?
A. We saw more stability in stock markets as reports began
to indicate that the U.S. economy had grown with surprising
strength, but with little evidence of inflation. Stocks
resumed a halting advance toward record levels, and market
leadership was broadly divided across selected sectors
including cyclical consumer, energy, industrial, and
technology.
Fixed-income investors seemed less certain that inflation
would be contained, and that continued to fuel bond market
volatility through the end of the reporting period. The
yield curve remained steeply sloped, with the spread between
the three-month U.S. Treasury bill, which is influenced by
rates pegged by the Fed, and the 10-year U.S. Treasury note,
whose yield is set by the market, at a relatively wide 1.56
percentage points by June 28, 1996.
Q. HOW WERE THE FUNDS POSITIONED AS OF JUNE 30?
A. The following is an overview of the fund portfolios as of
June 30. Keep in mind, the Funds' portfolio compositions are
subject to change and there is no guarantee any Fund will
continue to hold any particular security mentioned in this
report.
AIM V.I. CAPITAL APPRECIATION FUND--The Fund took advantage
of volatile markets by adding new names to its portfolio,
taking it to over 320 during the reporting period. The mix
of securities was also further diversified by paring its
weightings in technology stocks from 45% to 25%, and
increasing its emphasis on health care stocks and consumer
cyclicals like retail stocks. Among the largest technology
holdings were software developers and computer designers
like Parametric Technology Corp. and Cisco Systems, Inc. The
Fund also featured such medical patient service companies as
HEALTHSOUTH Corp. and Columbia/HCA Healthcare Corp. We were
also interested in a variety of companies in the retail
sector that dominated specific themes--The Gap, Inc.,
Staples, Inc., and PetSmart Inc.
AIM V.I. DIVERSIFIED INCOME FUND--The Fund increased its
holdings in high-yield bonds, and that helped to moderate
the effects of market volatility during the reporting
period. When economic growth accelerated during the
reporting period, investors in higher-grade bonds worried
about the potential consequences of rising inflation. High-
yield bonds, by comparison, reacted more positively to news
of a stronger economy. Healthy economic growth tends to
improve the earnings capacity of the bond-issuing companies
and ease credit concerns for lower-quality debt issuers.
During the six months covered by this report, high-yield
bonds were the top-performing domestic fixed-income sector,
according to The Wall Street Journal.
Higher-yielding, lower-rated corporate bonds are commonly
known as "junk bonds." These bonds have a greater risk of
price fluctuation and loss of principal and income than U.S.
government securities, such as U.S. Treasury bonds, notes,
and bills, which offer a government guarantee as to the
repayment of principal and interest if held to maturity.
AIM V.I. GROWTH FUND--The changing earnings environment set
the stage for significant changes in market leadership
during the reporting period. The Fund increased its holdings
to approximately 250, spread across more than 50 industry
categories. Among the Fund's top holdings were securities in
the health care sector, particularly medical patient service
companies and drugmakers including Cardinal Health, Inc. and
Schering-Plough Corp. Also featured were selected technology
companies engaged in software development and computer
networking and computer peripherals, including ADC
Telecommunications, Inc. and Cisco Systems, Inc. The Fund
featured such well-known names in the retail sector as
Dayton-Hudson Corp. and The Home Depot, Inc.
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AIM V.I. VALUE FUND--The Fund's investment strategy seeks
equities that are relatively undervalued in the market--a
task made increasingly difficult during a prolonged domestic
bull market. The Fund responded by raising its cash position
to prepare for improved market pricing on attractive
opportunities. The Fund also increased its foreign holdings,
particularly in Europe, where companies are just embarking
on the major cost-cutting, restructuring, and consolidation
efforts that helped improved profitability for American
companies during the last decade.
The Fed expects Q. WHAT IS YOUR MARKET OUTLOOK FOR THE NEXT FEW MONTHS?
economic growth A. We anticipate continued volatility in fixed-income
to slow during markets for months to come. The specter of possible
the second half inflation continues to concern investors, despite mounting
of the year, and evidence that the U.S. economy is growing reasonably and
that would lessen that inflationary pressures remain modest. In its July
the likelihood meeting, the Fed elected to leave monetary policy unchanged;
that monetary the outlook for the rest of 1996 is less certain.
policy would be
tightened. Reports of accelerating economic growth during the first
half of 1996, and possibly in the third quarter as well,
have prompted some analysts to predict that the Fed will
raise short-term interest rates in the coming months. Others
have suggested that market interest rates that have been
rising for most of the year may have forestalled any
inflation threat, precluding the necessity for Fed
intervention. The Fed expects economic growth will slow
during the second half of the year, and that would lessen
the likelihood that monetary policy would be tightened.
The continued pace of economic growth is the key.
Interestingly, the consumer may play an important role in
determining the strength of the economy in the second half
of the year. Strong consumer demand has helped spur economic
growth. While there has been much speculation about the
climbing level of consumer debt and its eroding effect on
demand, household balance sheets have thus far remained
healthy.
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