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[PHOTO]
VANGUARD
SELECTED VALUE
PORTFOLIO
Semiannual Report
April 30, 1997
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THE VANGUARD GROUP: LINKING TRADITION AND INNOVATION
At Vanguard, we treasure our rich nautical heritage--even as we steer our
course toward the twenty-first century. Our Report cover reflects that blending
of tradition and innovation, of past, present, and future.
The montage includes a bronze medallion with a likeness of our namesake, HMS
Vanguard (Lord Nelson's flagship at The Battle of the Nile); a clock built
circa 1816 in Scotland, featuring a portrait of Nelson; and several views of
our recently completed campus, which is steeped in nautical imagery--from our
buildings named after Nelson's warships (Victory, Majestic, and Goliath are
three shown), to our artwork and ornamental compass rose.
CONTENTS
A Message To
Our Shareholders
1
The Markets
In Perspective
3
Report From
The Adviser
5
Performance
Summary
6
Financial
Statements
7
Directors And
Officers
INSIDE BACK COVER
All comparative mutual fund data are from Lipper Analytical Services, Inc. or
Morningstar unless otherwise noted.
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[PHOTO]
FELLOW SHAREHOLDER,
The rollicking bull market for large-capitalization stocks continued
during the six months ended April 30, 1997, and the blue-chip-dominated
Standard & Poor's 500 Composite Stock Price Index rose +14.7%. Returns were far
less generous for mid-cap stocks, however, and Vanguard Selected Value
Portfolio provided a return of +6.9% for the first half of its fiscal year.
The following table presents the six-month returns of the Portfolio and of
its two primary performance benchmarks: the average mid-cap stock mutual
fund--which declined slightly during the period--and the unmanaged Russell
Midcap Index. As you can see, the Portfolio's total return (capital change plus
reinvested dividends) surpassed both comparative standards, beating the average
competing fund by nearly 8 percentage points and the Index by the slim margin
of 0.2 percentage point. The Portfolio's return is based on an increase in net
asset value from $10.07 per share on October 31, 1996, to $10.60 per share on
April 30, 1997, with the latter figure adjusted for a dividend of $0.06 per
share paid from net investment income and a distribution of $0.11 per share
from net realized capital gains.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
TOTAL RETURN
SIX MONTHS ENDED
APRIL 30, 1997
- -----------------------------------------------------------------
<S> <C>
Vanguard Selected Value Portfolio +6.9%
- -----------------------------------------------------------------
Average Mid-Cap Fund -0.9%
- -----------------------------------------------------------------
Russell Midcap Index +6.7%
- -----------------------------------------------------------------
</TABLE>
THE PERIOD IN REVIEW
A nearly ideal climate for common stocks--strong economic growth, rising
corporate profits, and relatively low inflation--prevailed during the six
months. Yet the stock market's robust advance was bumpy and not all sectors
went along for the ride. Volatility was particularly manifest in the market's
decline of nearly 10% during the seven weeks following February 18, when the
S&P 500 Index reached a record high. To the surprise of some observers,
however, the drop was quickly aborted, and nearly all of the lost ground was
retraced during the final three weeks of the period.
Jitters about interest rates and inflation were the apparent causes of the
brief slide. Although the Federal Reserve Board raised its target for
short-term interest rates by a quarter-point to 5.50% on March 25, interest
rates on balance were up only slightly during the six months (by amounts
ranging from 0.08% on 90-day U.S. Treasury bills to roughly 0.30% for 10-year
and 30-year Treasuries). The stock market's rebound late in the period stemmed
from a combination of factors, including strong earnings reports by many key
companies, a lessening of inflation fears, and an easing in interest rates.
Whatever their causes, the price fluctuations served as a clear reminder of the
volatility that is very much a part of investing in stocks.
Selected Value Portfolio gave a good account of itself during the
half-year, after having trailed its competitive benchmarks during its
abbreviated first fiscal year. As noted, we eked out a narrow advantage over
the Russell Midcap Index. Our large advantage over competing mid-cap mutual
funds was partly due to the fact that many of them invest in mid- and small-cap
growth stocks, sectors that were hit especially hard during the market's
downturn
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in February and March. Value stocks, our bread and butter, held up better in
the downturn. Our expense advantage helps, too. Selected Value Portfolio's
expense ratio of 0.75% of average assets in fiscal 1996 was half that of the
average mid-cap fund.
While our return was less than half that of the S&P 500 Index, this
disparity was due to the market's extraordinary tilt toward the largest-cap
growth stocks. One indication of the extreme bias toward large-cap stocks
during the period is that the return on the S&P 500 Index was nearly 14
percentage points higher than the scant +1.0% return on the rest of the stock
market (as represented by the Wilshire 4500 Equity Index). So it is clear that
Selected Value Portfolio's median market capitalization of $850 million (versus
$28.7 billion for the S&P 500 Index) was a handicap in this environment.
Although it is not unusual for returns on large-cap and smaller-cap stocks
to diverge, the extent and duration of the gap has been striking. The
performance gap between the S&P 500 Index and the Russell Midcap Index stands
at 14 percentage points for the past twelve months (+25.1% versus +11.0%) and
at more than 28 percentage points for the past 36 months (+91.4% versus
+63.0%).
In the past, periods of large-cap dominance have always been followed by
periods when smaller stocks perform best. However, the timing and extent of
such cycles is unpredictable.
IN SUMMARY
The sizable, sudden fluctuations in the stock market during the first half of
our fiscal year reinforced the two key messages that we have repeatedly
stressed in these Reports to you. The first message, of course, concerns the
importance of holding a balanced portfolio of stock funds (including both
large- and smaller-cap funds), bond funds, and money market funds in
proportions appropriate to your financial situation, tolerance for risk, and
investment objectives. By making it easier to ride out episodes of market
volatility, a balanced portfolio helps investors to adhere to our second
message: Always "stay the course" toward your long-term investment goals.
/s/ JOHN C. BOGLE /s/ JOHN J. BRENNAN
John C. Bogle John J. Brennan
Chairman of the Board President
May 20, 1997
2
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[PHOTO]
THE MARKETS IN PERSPECTIVE
SIX MONTHS ENDED APRIL 30, 1997
U.S. EQUITY MARKETS
The U.S. stock market continued to perform solidly over the six months,
reflecting a confidence based on moderate economic growth, quiescent inflation,
and solid increases in corporate profits. While concern grew among some
investors that continued economic expansion could lead to higher inflation, as
of the period's end there was no confirmed sign that inflation had increased.
The inflation fears nonetheless led to an erratic upward drift in interest
rates amid the ongoing strong returns from domestic equities.
Those strong returns have, however, been concentrated in the shares of
large companies. The Standard & Poor's 500 Composite Stock Price Index, for
example, gained 14.7% over the six-month period, compared to a meager 1.6% gain
for the Russell 2000 Index. In April alone, the S&P 500 Index beat the Russell
2000 Index by 5.7% (6.0% versus 0.3%). Larger companies have outperformed their
smaller-capitalization counterparts fairly consistently since the end of 1993.
There are a variety of theories as to why, including better earnings growth,
greater productivity, and fewer negative earnings surprises.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
TOTAL RETURNS
PERIODS ENDED APRIL 30, 1997
-------------------------------------------
6 MONTHS 1 YEAR 5 YEARS*
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
EQUITY
S&P 500 Index 14.7% 25.1% 17.1%
Russell 2000 Index 1.6 0.1 13.7
MSCI-EAFE Index 1.7 -0.6 10.9
- ----------------------------------------------------------------------------------------
FIXED-INCOME
Lehman Aggregate Bond Index 1.7% 7.1% 7.4%
Lehman 10-Year Municipal
Bond Index 2.3 6.4 7.5
Salomon 90-Day U.S. Treasury Bills 2.6 5.2 4.5
- ----------------------------------------------------------------------------------------
OTHER
Consumer Price Index 1.2% 2.5% 2.8%
- ----------------------------------------------------------------------------------------
</TABLE>
*Average annual.
The recent gap in performance between large and small is particularly
noticeable in two sectors: technology and health care. Over the past six
months, technology issues in the S&P 500 Index have gained 26.3% while those in
the Russell 2000 Index have dropped -11.9%. In health care, the S&P's holdings
gained 17.6%, compared to a decline of -6.8% in the Russell 2000 Index. Within
these sectors, the larger companies' dominant products and the predictable
earnings they generate appear to be the primary difference.
Financial-services firms, by contrast, have generally fared well
regardless of size, with gains of 16.9% in the S&P 500 Index and 12.2% in the
Russell 2000 Index since October. The strength of the economy, which helps to
keep bad-debt levels at a minimum, and the overall growth of consumer credit
have helped these stocks greatly.
U.S. FIXED-INCOME MARKETS
The erratic rise in interest rates during the past six months reflected rising
and falling expectations regarding economic growth and inflation. During
November, investors seemed to expect a slowing of growth, and the 10-year U.S.
Treasury's yield declined from 6.38%
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to 6.04%. The same note's yield then rose to 6.67% in late January, riding a
perception that growth was markedly stronger than analysts had expected. Then
the pattern repeated itself, with the 10-year's rate falling to 6.26% in
mid-February and rising to 6.90% at the end of March. In April, the consensus
seemed to be shifting again, with the 10-year Treasury yield falling to 6.72%.
There is a simple explanation for this interest rate seesaw. Many
investors consider it a paradox that the economy has continued to expand at a
robust pace accompanied by strong job growth and low unemployment--but no
increase in inflation. Bond investors have therefore been particularly
sensitive to economic reports that might reveal inflation to be creeping up at
last. The data have been variable, tilting the consensus back and forth between
expectations of higher or continued stable inflation rates. The most recent
releases depict an exceptionally strong economy. For example, the U.S. economy
expanded at a 5.6% rate in the first quarter with no inflationary pressures
(e.g., declining producer prices and an increase of only 2.5% in employment
costs).
The net result for bond investors has been mediocre returns. The 1.7%
generated by the Lehman Brothers Aggregate Bond Index over the past six months,
for example, consists of an income return of 3.4% and a capital decline of
- -1.7%, reflecting the modest increase in interest rates. During this period,
investors who favored shorter-maturity and lower-quality issues achieved
somewhat better returns. Mortgage-backed securities performed well on a
relative basis, as higher rates led to fewer mortgage refinancings. Municipal
issues also tended to perform better than their taxable counterparts.
INTERNATIONAL EQUITY MARKETS
With the dollar strengthening by 10% to 16% against most major currencies, U.S.
investors who held foreign equities faced a headwind during the past six
months. (The major exception was the pound sterling, which was effectively
unchanged against the dollar.) The Morgan Stanley Capital International-Europe,
Australasia, Far East Index gained 1.7% in dollar terms, while in local terms
the return was 11.2%. Those who favored Europe over the Pacific region did not
feel the pain as much, due to the strong (23.1%) return generated by the local
markets. For U.S. investors, European markets provided 11.9%. The strength of
the European markets can be attributed to several factors, including (1)
ongoing efforts to lower government deficits consistent with the Maastricht
Treaty guidelines, (2) improving economic growth, and (3) a greater commitment
by corporate executives to increasing "shareholder value."
Investors with a focus in the Pacific markets were less fortunate, as
illustrated by the weak Japanese market, which fell -3.2% (a -13.2% drop for
dollar-based investors). Despite positive news, including reports of growth in
exports, lower inventories, and higher industrial production, the focus in the
Japanese market has been the poor quality of many banks' balance sheets and the
likely effects of an increase in the consumption tax. However, according to
some observers, the level of economic activity seems to be improving now in
Japan.
4
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[PHOTO]
REPORT FROM THE ADVISER
During the six months ended April 30, Vanguard Selected Value Portfolio
provided a total return of 6.9%, compared with 6.7% for the Russell Midcap
Index and -0.9% for the average mid-cap mutual fund. Overall, for the first
141/2 months of its existence, the Portfolio's cumulative return was 7.7%
versus 15.6% for the Index and 8.2% for the average competing fund. We take no
particular satisfaction as advisers or fellow shareholders in having produced
during the past six months results more in line with the Index and a bit ahead
of other mid-cap managers. Our mission is to provide a low-risk, event-driven
source of superior long-term returns. We believe that the recent peculiar
market environment has produced opportunities that will help us to fulfill this
mission.
Over the past few years, there has been a bias toward both
large-capitalization and growth stocks that is extreme by historical standards.
The gaps between returns on various indexes of growth, value, and market
capitalization and those on the Standard & Poor's 500 Composite Stock Price
Index are both unusually large and persistent. Large-cap growth stocks have
performed far better than the S&P 500 Index, whose returns have in turn run far
ahead of those on mid-cap and value indexes. From December 31, 1993, through
April 30, 1997, the cumulative difference in performance between the S&P/BARRA
Growth Index (large-cap growth stocks) and the Russell Midcap Value Index has
been a staggering 32%. Over the same period, the full Russell Midcap Index
underperformed the full S&P 500 Index by more than 27%, producing new lows in
relative price/earnings and price/revenues ratios and near lows in relative
price-to-cash flow ratios.
We believe that Vanguard Selected Value Portfolio represents the best
value within the mid-cap market, which in turn appears to be a good value
versus the S&P 500 Index. To substantiate our case, we offer the following
evidence. For the companies whose stocks we hold today, the average
price/earnings ratio is at an all-time low in comparison with the Russell
Midcap Index; the price-to-sales ratio in relation to the Index is less than
half the ten-year median; and the price-to-cash flow ratio relative to that of
the Index is fully one-third lower than the midpoint of its long-term range.
Not only do we regard valuations as extraordinarily attractive, but we
project significant acceleration in earnings as a result of strong revenue
growth coupled with improving profit margins. As always, the portfolio is
constructed stock by stock, with each standing on its own in terms of
fundamental promise and valuation. In the present environment, which grossly
favors large-cap stocks and growth characteristics, the process has been made
easier because there are more attractive alternatives in the mid-cap universe.
This should eventually translate into superior long-term returns.
INVESTMENT PHILOSOPHY
The adviser believes that superior long-term investment results can be
obtained by emphasizing medium-size companies with reasonable financial
strength whose stocks are out of favor and undervalued by the market, often
because of special situations that have temporarily depressed profits.
Barrow, Hanley, Mewhinney & Strauss, Inc.
May 12, 1997
5
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PERFORMANCE SUMMARY
All of the data on this page represent past performance, which cannot be used
to predict future returns that may be achieved by the Portfolio. Note, too,
that both share price and return can fluctuate widely so that an investment in
the Portfolio could lose money.
<TABLE>
<CAPTION>
SELECTED VALUE PORTFOLIO
TOTAL INVESTMENT RETURNS: FEBRUARY 15, 1996-APRIL 30, 1997
- ------------------------------------------------------------------------
SELECTED VALUE PORTFOLIO RUSSELL INDEX*
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- ------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1996 0.7% 0.0% 0.7% 8.3%
1997** 6.3 0.6 6.9 6.7
- ------------------------------------------------------------------------
</TABLE>
*Russell Midcap Index.
**Six months ended April 30, 1997.
See Financial Highlights table on page 11 for dividend and capital gains
information since the Portfolio's inception.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED MARCH 31, 1997*
- -----------------------------------------------------------------------------------------------------
SINCE INCEPTION
INCEPTION -------------------------------------
DATE 1 YEAR CAPITAL INCOME TOTAL
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Selected Value Portfolio 2/15/96 3.95% 5.31% 0.51% 5.82%
- -----------------------------------------------------------------------------------------------------
</TABLE>
*SEC rules require that we provide this average annual total return information
through the latest calendar quarter.
6
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[PHOTO]
FINANCIAL STATEMENTS
APRIL 30, 1997 (unaudited)
STATEMENT OF NET ASSETS
This Statement provides a detailed list of the Portfolio's holdings, including
each security's market value on the last day of the reporting period.
Securities are grouped and subtotaled by asset type (common stocks, preferred
stocks, bonds, etc.) and by industry sector. Other assets are added to, and
liabilities are subtracted from, the value of Total Investments to calculate
the Portfolio's Net Assets. Finally, Net Assets are divided by the outstanding
shares of the Portfolio to arrive at its share price, or Net Asset Value (NAV)
Per Share.
At the end of the Statement of Net Assets, you will find a table displaying
the composition of the Portfolio's net assets on both a dollar and per-share
basis. Because all income and any realized gains must be distributed to
shareholders each year, the bulk of net assets consists of Paid in Capital
(money invested by shareholders). The amounts shown for Undistributed Net
Investment Income and Accumulated Net Realized Gains usually approximate the
sums the Portfolio had available to distribute to shareholders as income
dividends or capital gains as of the statement date. Any Accumulated Net
Realized Losses, and any cumulative excess of distributions over net income or
net realized gains, will appear as negative balances. Unrealized Appreciation
(Depreciation) is the difference between the market value of the Portfolio's
investments and their cost, and reflects the gains (losses) that would be
realized if the Portfolio were to sell all of its investments at their
statement-date values.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
MARKET
VALUE*
SELECTED VALUE PORTFOLIO SHARES (000)
- ------------------------------------------------------------------------------
COMMON STOCKS (98.2%)
- ------------------------------------------------------------------------------
<S> <C> <C>
AUTO & TRANSPORTATION (9.7%)
# Kirby Corp. 247,800 $ 4,522
# Lear Corp. 106,200 3,797
Polaris Industries, Inc. 79,000 2,172
-----------
10,491
-----------
CONSUMER DISCRETIONARY (16.6%)
# Smith & Nephew PLC 1,354,200 3,855
Dillard Department Stores
Class A 88,500 2,732
Heilig-Meyers Co. 283,200 4,248
Sturm, Ruger & Co., Inc. 137,400 2,113
# Valassis Communications, Inc. 205,400 5,032
-----------
17,980
-----------
CONSUMER STAPLES (3.5%)
# Canandaigua Wine Co., Inc.
Class A 150,500 3,838
-----------
ENERGY (6.0%)
Pogo Producing Co. 75,538 2,767
Vastar Resources, Inc. 118,300 3,697
-----------
6,464
-----------
FINANCIAL SERVICES (10.1%)
American States Financial Corp. 102,300 3,427
# First Federal Financial Corp. 176,000 4,114
Pacific Century Financial Corp. 79,700 3,407
-----------
10,948
-----------
HEALTH CARE (9.8%)
Astra AB ADR 70,300 2,882
# Coventry Corp. 221,300 2,849
# Magellan Health Services Corp. 185,900 4,880
-----------
10,611
-----------
MATERIALS & PROCESSING (16.1%)
H.B. Fuller Co. 104,600 5,596
# International Specialty
Products, Inc. 295,300 3,839
Quanex Corp. 177,000 4,469
RPM Inc. 212,400 3,505
-----------
17,409
-----------
PRODUCER DURABLES (23.2%)
Harnischfeger Industries Inc. 112,900 4,699
Keystone International, Inc. 194,700 3,845
Raychem Corp. 69,000 4,451
# Silicon Valley Group, Inc. 207,700 4,258
Snap-On Inc. 92,900 3,577
Stewart & Stevenson
Services, Inc. 177,000 4,226
-----------
25,056
-----------
TECHNOLOGY (3.2%)
# Mentor Graphics Corp. 496,400 3,506
-----------
- ------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(COST $102,053) 106,303
- ------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
- ------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENT (1.5%)
- ------------------------------------------------------------------------------
<S> <C> <C>
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled Cash Account
5.31%, 5/1/97
(COST $1,584) $1,584 1,584
- ------------------------------------------------------------------------------
TOTAL INVESTMENTS (99.7%)
(COST $103,637) 107,887
- ------------------------------------------------------------------------------
</TABLE>
7
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<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
MARKET
VALUE*
SELECTED VALUE PORTFOLIO (000)
- ------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (0.3%)
- ------------------------------------------------------------------------------
<S> <C>
Other Assets--Notes C and F 717
Liabilities--Note F (373)
-----------
344
- ------------------------------------------------------------------------------
NET ASSETS (100%)
- ------------------------------------------------------------------------------
Applicable to 10,210,216 outstanding
$.001 par value shares
(authorized 250,000,000 shares) $108,231
==============================================================================
NET ASSET VALUE PER SHARE $10.60
==============================================================================
</TABLE>
*See Note A in Notes to Financial Statements.
#Non-Income Producing Security.
ADR--American Depository Receipt.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- ------------------------------------------------------------------------------
AT APRIL 30, 1997, NET ASSETS CONSISTED OF:
- ------------------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $103,813 $10.17
Undistributed Net
Investment Income 154 .01
Accumulated Net
Realized Gains 14 --
Unrealized Appreciation--Note E 4,250 .42
- ------------------------------------------------------------------------------
NET ASSETS $108,231 $10.60
==============================================================================
</TABLE>
8
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STATEMENT OF OPERATIONS
This Statement shows dividend and interest income earned by the Portfolio
during the reporting period, and details the operating expenses charged to the
Portfolio. These expenses directly reduce the amount of investment income
available to pay to shareholders as dividends. This Statement also shows any
Net Gain (Loss) realized on the sale of investments, and the increase or
decrease in the Unrealized Appreciation (Depreciation) on investments during
the period.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
SELECTED VALUE PORTFOLIO
SIX MONTHS ENDED APRIL 30, 1997
(000)
- -------------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME
INCOME
Dividends $ 621
Interest 143
--------
Total Income 764
--------
EXPENSES
Investment Advisory Fees--Note B
Basic Fee 211
Performance Adjustment (42)
The Vanguard Group--Note C
Management and Administrative 141
Marketing and Distribution 14
Taxes (other than income taxes) 4
Custodian Fees 3
Auditing Fees 4
Shareholders' Reports 29
Annual Meeting and Proxy Costs 1
--------
Total Expenses 365
- -------------------------------------------------------------------------------------
NET INVESTMENT INCOME 399
- -------------------------------------------------------------------------------------
REALIZED NET GAIN ON INVESTMENT SECURITIES SOLD 39
- -------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) OF INVESTMENT SECURITIES 5,769
- -------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $6,207
=====================================================================================
</TABLE>
9
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STATEMENT OF CHANGES IN NET ASSETS
This Statement shows how the Portfolio's total net assets changed during the
two most recent reporting periods. The Operations section summarizes
information that is detailed in the Statement of Operations. The amounts shown
as Distributions to shareholders from the Portfolio's net income and capital
gains may not match the amounts shown in the Operations section, because
distributions are determined on a tax basis and may be made in a period
different from the one in which the income was earned or the gains were
realized on the financial statements. The Capital Share Transactions section
shows the amount shareholders invested in the Portfolio, either by purchasing
shares or by reinvesting distributions, as well as the amounts redeemed. The
corresponding numbers of Shares Issued and Redeemed are shown at the end of the
Statement.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
SELECTED VALUE PORTFOLIO
----------------------------------
SIX MONTHS
ENDED FEB. 15* TO
APR. 30, 1997 OCT. 31, 1996
(000) (000)
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net Investment Income $ 399 $ 324
Realized Net Gain 39 1,018
Change in Unrealized Appreciation (Depreciation) 5,769 (1,519)
----------------------------------
Net Increase (Decrease) in Net Assets Resulting from Operations 6,207 (177)
----------------------------------
DISTRIBUTIONS
Net Investment Income (569) --
Realized Capital Gain (1,043) --
----------------------------------
Total Distributions (1,612) --
----------------------------------
CAPITAL SHARE TRANSACTIONS(1)
Issued 32,517 108,104
Issued in Lieu of Cash Distributions 1,544 --
Redeemed (23,091) (15,361)
----------------------------------
Net Increase from Capital Share Transactions 10,970 92,743
- --------------------------------------------------------------------------------------------------------------
Total Increase 15,565 92,566
- --------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Period--Note G 92,666 100
----------------------------------
End of Period $108,231 $ 92,666
==============================================================================================================
(1)Shares Issued (Redeemed)
Issued 3,028 10,732
Issued in Lieu of Cash Distributions 143 --
Redeemed (2,161) (1,542)
----------------------------------
Net Increase in Shares Outstanding 1,010 9,190
==============================================================================================================
</TABLE>
*Commencement of operations.
10
<PAGE> 13
FINANCIAL HIGHLIGHTS
This table summarizes the Portfolio's investment results and distributions to
shareholders on a per-share basis. It also presents the Portfolio's Total
Return and shows net investment income and expenses as percentages of average
net assets. These data will help you assess: the variability of the Portfolio's
net income and total returns from year to year; the relative contributions of
net income and capital gains to the Portfolio's total return; how much it costs
to operate the Portfolio; and the extent to which the Portfolio tends to
distribute capital gains.
The table also shows the Portfolio Turnover Rate, a measure of trading
activity. A turnover rate of 100% means that the average security is held in
the Portfolio for one year. Finally, the table lists the Portfolio's Average
Commission Rate Paid, a disclosure required by the SEC beginning in 1996. This
rate is calculated by dividing total commissions paid on portfolio securities
by the total number of shares purchased and sold on which commissions were
charged.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
SELECTED VALUE PORTFOLIO
------------------------------------
SIX MONTHS
ENDED FEB. 15* TO
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD APR. 30, 1997 OCT. 31, 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.07 $10.00
- -------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .03 .04
Net Realized and Unrealized Gain (Loss) on Investments .67 .03
--------------------------
Total from Investment Operations .70 .07
--------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.06) --
Distributions from Realized Capital Gains (.11) --
--------------------------
Total Distributions (.17) --
- -------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $10.60 $10.07
===================================================================================================================
TOTAL RETURN 6.92% 0.70%
===================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $108 $93
Ratio of Total Expenses to Average Net Assets 0.70%** 0.75%**
Ratio of Net Investment Income to Average Net Assets 0.77%** 0.75%**
Portfolio Turnover Rate 25%** 25%
Average Commission Rate Paid $.0532 $.0537
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
*Commencement of operations.
**Annualized.
11
<PAGE> 14
NOTES TO FINANCIAL STATEMENTS
Vanguard Selected Value Portfolio is registered under the Investment Company
Act of 1940 as a diversified open-end investment company, or mutual fund.
A. The following significant accounting policies conform to generally accepted
accounting principles for mutual funds. The Portfolio consistently follows such
policies in preparing its financial statements.
1. SECURITY VALUATION: Securities listed on an exchange are valued at the
latest quoted sales prices as of the close of trading on the New York Stock
Exchange (generally 4:00 p.m. Eastern time) on the valuation date; such
securities not traded on the valuation date are valued at the mean of the
latest quoted bid and asked prices. Securities not listed on an exchange are
valued at the latest quoted bid prices. Temporary cash investments are valued
at cost, which approximates market value.
2. FEDERAL INCOME TAXES: The Portfolio intends to continue to qualify as a
regulated investment company and distribute all of its taxable income.
Accordingly, no provision for federal income taxes is required in the financial
statements.
3. REPURCHASE AGREEMENTS: The Portfolio, along with other members of The
Vanguard Group, transfers uninvested cash balances to a Pooled Cash Account,
which is invested in repurchase agreements secured by U.S. government
securities. Securities pledged as collateral for repurchase agreements are held
by a custodian bank until the agreements mature. Each agreement requires that
the market value of the collateral be sufficient to cover payments of interest
and principal; however, in the event of default or bankruptcy by the other
party to the agreement, retention of the collateral may be subject to legal
proceedings.
4. DISTRIBUTIONS: Distributions to shareholders are recorded on the
ex-dividend date.
5. OTHER: Dividend income is recorded on the ex-dividend date. Security
transactions are accounted for on the date securities are bought or sold. Costs
used to determine realized gains (losses) on the sale of investment securities
are those of the specific securities sold.
B. Barrow, Hanley, Mewhinney & Strauss, Inc., provides investment advisory
services to the Portfolio for a fee calculated at an annual percentage rate of
average net assets. The basic fee is subject to quarterly adjustments based on
performance relative to the Russell Midcap Index. For the six months ended
April 30, 1997, the advisory fee represented an effective annual basic rate of
0.40% of the Portfolio's average net assets before a decrease of $42,000 (an
annual rate of 0.08%) based on performance.
C. The Vanguard Group furnishes at cost corporate management, administrative,
marketing, and distribution services. The costs of such services are allocated
to the Portfolio under methods approved by the board of directors. At April 30,
1997, the Portfolio had contributed capital of $9,000 to Vanguard (included in
Other Assets), representing 0.04% of Vanguard's capitalization. The Portfolio's
directors and officers are also directors and officers of Vanguard.
D. During the six months ended April 30, 1997, the Portfolio purchased
$25,587,000 of investment securities and sold $12,654,000 of investment
securities, other than temporary cash investments.
E. At April 30, 1997, net unrealized appreciation of investment securities for
financial reporting and federal income tax purposes was $4,250,000, consisting
of unrealized gains of $10,770,000 on securities that had risen in value since
their purchase and $6,520,000 in unrealized losses on securities that had
fallen in value since their purchase.
F. The market value of securities on loan to broker/dealers at April 30, 1997,
was $128,000, for which the Portfolio held cash collateral of $135,000.
G. The Portfolio was organized on November 27, 1995, and its operations up to
February 15, 1996, were limited to the sale and issuance of 10,000 shares of
its common stock to an officer of the Portfolio's investment adviser.
12
<PAGE> 15
DIRECTORS AND OFFICERS
JOHN C. BOGLE, Chairman of the Board and Director of The Vanguard Group, Inc.
and of each of the investment companies in The Vanguard Group.
JOHN J. BRENNAN, President, Chief Executive Officer, and Director of The
Vanguard Group, Inc. and of each of the investment companies in The
Vanguard Group.
ROBERT E. CAWTHORN, Chairman Emeritus and Director of Rhone-Poulenc Rorer,
Inc.; Managing Director of Global Health Care Partners/DLJ Merchant
Banking Partners; Director of Sun Company, Inc., and Westinghouse
Electric Corp.
BARBARA BARNES HAUPTFUHRER, Director of The Great Atlantic and Pacific Tea Co.,
Ikon Business Solutions, Inc., Raytheon Co., Knight-Ridder, Inc., and
Massa-chusetts Mutual Life Insurance Co.; Trustee Emerita of Wellesley
College.
BRUCE K. MACLAURY, President Emeritus of The Brookings Institution; Director of
American Express Bank Ltd., The St. Paul Companies, Inc., and National
Steel Corp.
BURTON G. MALKIEL, Chemical Bank Chairman's Professor of Economics, Princeton
University; Director of Prudential Insurance Co. of America, Amdahl
Corp., Baker Fentress & Co., The Jeffrey Co., and Southern New England
Communications Co.
ALFRED M. RANKIN, JR., Chairman, President, and Chief Executive Officer of
NACCO Industries, Inc.; Director of NACCO Industries, The BFGoodrich
Co., and The Standard Products Co.
JOHN C. SAWHILL, President and Chief Executive Officer of The Nature
Conservancy; formerly, Director and Senior Partner of McKinsey & Co.
and President of New York University; Director of Pacific Gas and
Electric Co., Procter & Gamble Co., and NACCO Industries.
JAMES O. WELCH, JR., Retired Chairman of Nabisco Brands, Inc.; retired Vice
Chairman and Director of RJR Nabisco; Director of TECO Energy, Inc.
and Kmart Corp.
J. LAWRENCE WILSON, Chairman and Chief Executive Officer of Rohm & Haas Co.;
Director of Cummins Engine Co.; Trustee of Vanderbilt University.
OTHER FUND OFFICERS
RAYMOND J. KLAPINSKY, Secretary; Senior Vice President and Secretary of The
Vanguard Group, Inc.; Secretary of each of the investment companies
in The Vanguard Group.
RICHARD F. HYLAND, Treasurer; Principal of The Vanguard Group, Inc.; Treasurer
of each of the investment companies in The Vanguard Group.
KAREN E. WEST, Controller; Principal of The Vanguard Group, Inc.; Controller of
each of the investment companies in The Vanguard Group.
OTHER VANGUARD OFFICERS
ROBERT A. DISTEFANO, Senior Vice President,
Information Technology.
JAMES H. GATELY, Senior Vice President,
Individual Investor Group.
IAN A. MACKINNON, Senior Vice President,
Fixed Income Group.
F. WILLIAM MCNABB III, Senior Vice President,
Institutional.
RALPH K. PACKARD, Senior Vice President and
Chief Financial Officer.
[THE VANGUARD GROUP LOGO]
Please send your comments to us at:
Post Office Box 2600, Valley Forge, Pennsylvania 19482
Fund Information: 1-800-662-7447
Individual Account Services: 1-800-662-2739
Institutional Investor Services: 1-800-523-1036
http://www.vanguard.com [email protected]
All Vanguard funds are offered by prospectus only. Prospectuses contain more
complete information on advisory fees, distribution charges, and other expenses
and should be read carefully before investing or sending money. Prospectuses
may be obtained directly from The Vanguard Group.
(C) 1997 Vanguard Marketing Corporation, Distributor
<PAGE> 16
[PHOTO]
THE VANGUARD FAMILY OF FUNDS
EQUITY AND BALANCED FUNDS
GROWTH AND INCOME FUNDS
Vanguard/Windsor Fund
Vanguard/Windsor II
Vanguard Equity Income Fund
Vanguard Growth and Income Portfolio
Vanguard Selected Value Portfolio
Vanguard/Trustees' Equity-U.S. Portfolio
Vanguard Convertible Securities Fund
BALANCED FUNDS
Vanguard/Wellington Fund
Vanguard/Wellesley Income Fund
Vanguard STAR Portfolio
Vanguard Asset Allocation Fund
Vanguard LifeStrategy Portfolios
GROWTH FUNDS
Vanguard/Morgan Growth Fund
Vanguard/PRIMECAP Fund
Vanguard U.S. Growth Portfolio
AGGRESSIVE GROWTH FUNDS
Vanguard Explorer Fund
Vanguard Specialized Portfolios
Vanguard Horizon Fund
INTERNATIONAL FUNDS
Vanguard International Growth Portfolio
Vanguard International Value Portfolio
INDEX FUNDS
Vanguard Index Trust
Vanguard Tax-Managed Fund
Vanguard Balanced Index Fund
Vanguard Bond Index Fund
Vanguard International Equity Index Fund
Vanguard Total International Portfolio
FIXED-INCOME FUNDS
MONEY MARKET FUNDS
Vanguard Money Market Reserves
Vanguard Treasury Money Market Portfolio
Vanguard Admiral Funds
INCOME FUNDS
Vanguard Fixed Income Securities Fund
Vanguard Admiral Funds
Vanguard Preferred Stock Fund
TAX-EXEMPT MONEY MARKET FUNDS
Vanguard Municipal Bond Fund
Vanguard State Tax-Free Funds
(CA, NJ, OH, PA)
TAX-EXEMPT INCOME FUNDS
Vanguard Municipal Bond Fund
Vanguard State Tax-Free Funds
(CA, FL, NJ, NY, OH, PA)
Q9342-4/97
