<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT (NO. 33-64845) UNDER
THE SECURITIES ACT OF 1933
PRE-EFFECTIVE AMENDMENT NO.
POST-EFFECTIVE AMENDMENT NO. 5
AND
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 8
VANGUARD WHITEHALL FUNDS
(EXACT NAME OF REGISTRANT AS SPECIFIED IN DECLARATION OF TRUST)
P.O. BOX 2600,
VALLEY FORGE, PA 19482
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)
REGISTRANT'S TELEPHONE NUMBER (610) 669-1000
R. GREGORY BARTON, ESQUIRE
P.O. BOX 876
VALLEY FORGE, PA 19482
It is requested that this filing become effective on February 5, 1999
pursuant to paragraph (a) of Rule 485.
Approximate Date of Proposed Public Offering: As soon as practicable after
this Registration Statement becomes effective.
We have elected to register an indefinite number of securities under the
Securities Act of 1933 pursuant to Rule 24f-2 of the Investment Company Act of
1940. We filed our Rule 24f-2 for the year ended October 31, 1998, on January
., 1999.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
VANGUARD WHITEHALL FUNDS
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
FORM N-1A
ITEM NUMBER LOCATION IN PROSPECTUS
<C> <C> <S>
Item 1. Front and Back Cover Pages............ Front and Back Cover Pages
Item 2. Risk/Return Summary: Investments,
Risks, and Performance................ Fund Profile
Item 3. Risk/Return Summary: Fee Table........ Fee Table
Item 4. Investment Objectives, Principal
Investment Strategies, and Related A Word About Risk; Who
Risks................................. Should Invest; Primary
Investment Strategies
Item 5. Management's Discussion of Fund
Performance........................... Herein incorporated by
reference to Registrant's
Annual Report to
Shareholders dated October
31, 1998 filed with the
Securities & Exchange
Commission's EDGAR system
on .
Item 6. Management, Organization, and Capital
Structure............................. The Fund and Vanguard;
Investment Adviser
Item 7. Shareholder Information............... Share Price; Dividends,
Capital Gains, and Taxes;
Investing with Vanguard
Item 8. Distribution Arrangements............. Not Applicable
Item 9. Financial Highlights Information...... Financial Highlights
<CAPTION>
FORM N-1A LOCATION IN STATEMENT
ITEM NUMBER OF ADDITIONAL INFORMATION
<C> <C> <S>
Item 10. Cover Page and Table of Contents...... Cover Page; Table of
Contents
Item 11. Fund History.......................... Description of the Trust
Item 12. Description of the Fund and its
Investments and Risks................. Description of the Trust;
Investment Policies;
Fundamental Investment
Limitations
Item 13. Management of the Fund................ Management of the Trust
Item 14. Control Persons and Principal Holders
of Securities......................... Management of the Trust
Item 15 Investment Advisory and Other Investment Advisory
Services.............................. Services
Item 16. Brokerage Allocation and Other Portfolio Transactions
Practices.............................
Item 17. Capital Stock and Other Securities.... Description of the Trust
Item 18. Purchase, Redemption, and Pricing of
Shares................................ Purchase of Shares;
Redemption of Shares;
Share Price
Item 19. Taxation of the Fund.................. Description of the Trust
Item 20. Underwriters.......................... Not Applicable
Item 21. Calculation of Performance Data....... Yield and Total Return
Item 22. Financial Statements.................. Financial Statements
</TABLE>
<PAGE>
Vanguard Selected Value Fund
Participant Prospectus
February 5, 1999
A Value Stock Mutual Fund
Contents
1 Fund Profile 7 Year 2000 Challenge
2 Additional Information 8 Dividends, Capital Gains, and Taxes
3 A Word About Risk 8 Share Price
3 Who Should Invest 9 Financial Highlights
3 Primary Investment Strategies 10 Investing with Vanguard
6 The Fund and Vanguard 10 Accessing Fund Information by Computer
6 Investment Adviser Glossary (inside back cover)
- --------------------------------------------------------------------------------
Why Reading This Prospectus Is Important
This prospectus explains the objective, risks, and strategies of Vanguard
Selected Value Fund. To highlight terms and concepts important to mutual fund
investors, we have provided "Plain Talk(R)" explanations along the way. Reading
the prospectus will help you to decide whether the Fund is the right investment
for you. We suggest that you keep it for future reference.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Important Note
This prospectus is intended for participants in employer-sponsored retirement or
savings plans. Another version--for investors who would like to open a personal
investment account--can be obtained by calling Vanguard at 1-800-662-7447.
- --------------------------------------------------------------------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
accuracy or adequacy of this prospectus. Any representation to the contrary is a
criminal offense.
<PAGE>
1
Fund Profile
The following profile summarizes key features of Vanguard Selected Value Fund.
INVESTMENT OBJECTIVE
The Fund is a stock fund that seeks to provide long-term growth of capital and
incidental income.
INVESTMENT STRATEGIES
The Fund invests mainly in the stocks of medium-size U.S. companies. The Fund
uses a "value" investment approach, choosing companies with relatively low
price/earnings ratios, reasonable financial strength, and strong cash flows.
These companies tend to be undervalued or out of favor with investors.
PRIMARY RISKS
The Fund's total return, like stock prices generally, will fluctuate within a
wide range, so an investor could lose money over short or even long periods. The
Fund is also subject to:
. Investment style risk, which is the chance that returns from value stocks or
stocks of medium-size companies will trail returns from other asset classes or
the overall stock market.
. Concentration risk, which is the chance that the Fund's performance may be
hurt disproportionately by the performance of relatively few stocks.
. Manager risk, which is the chance that poor security selection will cause the
Fund to underperform other funds with similar objectives.
PERFORMANCE/RISK INFORMATION
The bar chart and table below provide an indication of the risk of investing in
the Fund. The bar chart shows the Fund's performance in each calendar year since
inception. The table shows how the Fund's average annual returns for one
calendar year and since inception compare with those of a broad-based securities
market index. Keep in mind that the Fund's past performance does not indicate
how it will perform in the future.
----------------------------------------------------------------------
Annual Total Returns
----------------------------------------------------------------------
----------------------------------------------------------------------
During the period shown in the bar chart, the highest return for a calendar
quarter was .% (quarter ending __________) and the lowest return for a quarter
was -.% (quarter ending ___________).
----------------------------------------------------------------------
Average Annual Total Returns For Years Ended December 31, 1998
----------------------------------------------------------------------
1 Year Since Inception*
----------------------------------------------------------------------
Vanguard Selected Value Fund . % . %
Russell MidCap Index . .
----------------------------------------------------------------------
*February 15, 1996.
----------------------------------------------------------------------
<PAGE>
2
PLAIN TALK ABOUT
The Costs of Investing
Costs are an important consideration in choosing a mutual fund. That's because
you, as a shareholder, pay the costs of operating a fund, plus any transaction
costs associated with the fund's buying and selling of securities. These costs
can erode a substantial portion of the gross income or capital appreciation a
fund achieves. Even seemingly small differences in expenses can, over time, have
a dramatic effect on a fund's performance.
PLAIN TALK ABOUT
Fund Expenses
All mutual funds have operating expenses. These expenses, which are deducted
from a fund's gross income, are expressed as a percentage of the net assets of
the fund. Vanguard Selected Value Fund's expense ratio in fiscal year 1998 was
. %, or $ . per $1,000 of average net assets. The average mid-cap equity mutual
fund had expenses in 1997 of . %, or $ . per $1,000 of average net assets,
according to Lipper Analytical Services, which reports on the mutual fund
industry.
FEES AND EXPENSES
The following table describes the fees and expenses you would pay if you buy and
hold shares of the Fund. The expenses shown under Annual Fund Operating Expenses
are based upon those incurred during the fiscal year ended October 31, 1998.
Shareholder Fees (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fees: None
Exchange Fees: None
Annual Fund Operating Expenses (expenses deducted from the Fund's assets)
Management (Administrative and Investment Advisory) Expenses: . %
12b-1 Distribution Fees: None
Other Expenses (Marketing, Taxes, Auditing, etc.): . %
Total Operating Expenses (Expense Ratio): . %
The following example is intended to help you compare the cost of investing in
the Fund with the cost of investing in other mutual funds. It illustrates the
hypothetical expenses that you would incur over various periods if you invest
$10,000 in the Fund. This example assumes that the Fund provides a return of 5%
a year, and that operating expenses remain the same. The results apply whether
or not you redeem your investment at the end of each period.
- --------------------------------------------------------------------------------
1 Year 3 Years 5 Years 10 Years
- --------------------------------------------------------------------------------
$. $. $. $.
- --------------------------------------------------------------------------------
This example should not be considered to represent actual expenses or
performance from the past or for the future. Actual future expenses may be
higher or lower than those shown.
Additional Information
Dividends and Capital Gains
Paid annually in December
Investment Adviser
Barrow, Hanley, Mewhinney & Strauss, Inc., Dallas, Texas, since inception
Inception Date
February 15, 1996
Net Assets as of October 31, 1998
$ . million
Suitable for IRAs
Yes
Minimum Initial Investment
$3,000; $1,000 for IRAs and custodial accounts for minors
Newspaper Abbreviation
SelValu
Vanguard Fund Number
934
Cusip Number
921946109
Ticker Symbol
VASVX
<PAGE>
3
================================================================================
A Word About Risk
This prospectus describes the risks you would face as an investor in Vanguard
Selected Value Fund. It is important to keep in mind one of the main axioms of
investing: The higher the risk of losing money, the higher the potential reward.
The reverse, also, is generally true: The lower the risk, the lower the
potential reward. As you consider an investment in Vanguard Selected Value Fund,
you should also take into account your personal tolerance for the daily
fluctuations of the stock market.
Look for this [GRAPHIC APPEARS HERE] symbol throughout the prospectus.
It is used to mark detailed information about each type of risk that you would
confront as a shareholder of the Fund.
================================================================================
Who Should Invest
The Fund may be a suitable investment for you if:
. You wish to add a stock fund that emphasizes undervalued medium-size companies
to your existing holdings, which could include other stock investments as well
as bond, money market, and tax-exempt investments.
. You are seeking growth of capital over the long term--at least five years.
. You are not looking for significant levels of current income from dividends or
interest.
. You characterize your investment temperament as "moderately aggressive."
The Vanguard funds do not permit market-timing. Do not invest in this Fund if
you are a market-timer.
The Fund has adopted the following policies, among others, to discourage
short-term trading:
. The Fund reserves the right to reject any purchase request--including
exchanges from other Vanguard funds--that it regards as disruptive to the
efficient management of the Fund. This could be because of the timing of the
investment or because of a history of excessive trading by the investor.
. There is a limit on the number of times you can exchange into and out of the
Fund (see "Exchanges" in the Investing with Vanguard section).
. The Fund reserves the right to stop offering shares at any time.
Primary Investment Strategies
This section explains the strategies that the investment adviser uses in
pursuit of the Fund's objective, long-term growth of capital and incidental
income. It also explains how the adviser implements these strategies. In
addition, this section discusses several important risks--market risk,
investment style risk, concentration risk and manager risk--faced by investors
in the Fund. The Fund's Board of Trustees oversees the management of the Fund
and may change the investment strategies in the interest of shareholders.
PLAIN TALK ABOUT
Costs and Market-Timing
Some investors try to profit from market-timing--switching money into
investments when they expect prices to rise, and taking money out when they
expect the market to fall. As money is shifted in and out, a fund incurs
expenses for buying and selling securities. These costs are borne by all fund
shareholders, including the long-term investors who do not generate the costs.
Therefore, the Fund discourages short-term trading by, among other things,
limiting the number of exchanges it permits.
<PAGE>
4
PLAIN TALK ABOUT
Value Funds and Growth Funds
Value investing and growth investing are two styles employed by stock fund
managers. Value funds generally emphasize stocks of companies from which the
market does not expect strong growth. The prices of value stocks typically are
below-average in comparison to such factors as earnings and book value, and
these stocks typically pay above-average dividend yields. Growth funds generally
focus on companies believed to have above-average potential for growth in
revenue and earnings. Reflecting the market's high expectations for superior
growth, the prices of such stocks are typically above-average in relation to
such measures as revenue, earnings, book value and dividends. Value and growth
stocks have, in the past, produced similar long-term returns, though each
category has periods when it outperforms the other. In general, value funds are
appropriate for investors who want some dividend income and the potential for
capital gains but are less tolerant of share-price fluctuations. Growth funds,
by contrast, appeal to investors who will accept more volatility in hopes of a
greater increase in share price. Growth funds also may appeal to investors with
taxable accounts who want a higher proportion of returns to come as capital
gains (which may be taxed at lower rates than dividend income).
Market Exposure
The Fund's primary strategy is to invest chiefly in mid-capitalization common
stocks considered to have low prices in relation to corporate earnings and book
value.
[GRAPHIC OF FLAG The Fund is subject to market risk, which is the possibility
APPEARS HERE] that stock prices overall will decline over short or even
long periods. Stock markets tend to move in cycles, with
periods of rising prices and periods of falling prices.
To illustrate the volatility of stock prices, the following table shows the
best, worst, and average total returns for the U.S. stock market over various
periods as measured by the Standard & Poor's 500 Composite Stock Price Index, a
widely used barometer of market activity. (Total returns consist of dividend
income plus change in market price.) Note that the returns shown do not include
the costs of buying and selling stocks or other expenses that a real-world
investment portfolio would incur. Note, also, that the gap between best and
worst tends to narrow over the long term.
PLAIN TALK ABOUT
Large-Cap, Mid-Cap, and
Small-Cap Stocks
Stocks of publicly traded companies--and mutual funds that hold these
stocks--can be classified by the companies' market value, or capitalization.
Generally, Vanguard defines large-capitalization (large-cap) funds as those
holding stocks of companies whose outstanding shares have a median market value
exceeding $9 billion. Mid-cap funds hold stocks of companies with a median
market value between $1 billion and $9 billion. Small-cap funds typically hold
stocks of companies with a median market value of less than $1 billion.
- --------------------------------------------------------------------------------
U.S. Stock Market Returns (1926-1997)
- --------------------------------------------------------------------------------
1 Year 5 Years 10 Years 20 Years
- --------------------------------------------------------------------------------
Best . . . .
Worst . . . .
Average . . . .
- --------------------------------------------------------------------------------
The table covers all of the 1-, 5-, 10-, and 20-year periods from 1926 through
1997. You can see, for example, that while the average return on stocks for all
of the 5-year periods was .%, returns for individual 5-year periods ranged from
a -12.5% average (from 1928 through 1932) to 23.9% (from 1951 through 1954).
These average returns reflect past performance on common stocks; you should not
regard them as an indication of future returns from either the stock market as a
whole or this Fund in particular.
Finally, because Vanguard Selected Value Fund's holdings are not identical to
the S&P 500 Index or any other market index, the performance of the Fund will
not mirror the returns of any particular index.
<PAGE>
5
[GRAPHIC OF FLAG The Fund is subject to investment style risk, which is the
APPEARS HERE] possibility that returns from mid-capitalization stocks or
value stocks will trail returns from other asset classes or
the overall stock market. Each type of stock tends to go
through cycles of doing better--or worse--than common stocks
in general. These periods have, in the past, lasted for as
long as several years.
Security Selection
Barrow, Hanley, Mewhinney & Strauss, Inc. ("BHM&S"), adviser to the Fund, seeks
out medium-size companies that it considers to be undervalued, choosing them on
the basis of extensive research and meetings with company management. According
to BHM&S, a company is undervalued if its earnings potential is not reflected in
its stock's share price. Such stocks generally have low price/earnings ratios.
BHM&S holds an undervalued stock until its share price reflects, in BHM&S's
view, the company's underlying value.
PLAIN TALK ABOUT
Fund Diversification and
Concentration
In general, the more diversified a fund's stock holdings, the less likely it is
that a specific stock's poor performance will hurt the fund. One measure of a
fund's diversification is the percentage of its assets represented by its ten
largest holdings. The average U.S. equity mutual fund has about 30% of its
assets concentrated in its ten largest holdings, while some less-diversified
mutual funds have more than 50% of their assets invested in the stocks of just
ten companies.
[GRAPHIC OF FLAG Because the Fund invests a higher percentage of assets in its
APPEARS HERE] ten largest holdings than the average stock fund does, the
Fund is subject to concentration risk, which is the
possibility that its performance may be hurt
disproportionately by the poor performance of relatively few
stocks.
As of October 31, 1998, the Fund had invested .% of net assets in its top ten
holdings.
The Fund is run by BHM&S according to traditional methods of active investment
management. This means that securities are bought and sold according to BHM&S's
judgments about companies and their financial prospects, within the context of
the stock market and the economy in general.
The Fund is generally managed without regard to tax ramifications.
[GRAPHIC OF FLAG The Fund is subject to manager risk, which is the
APPEARS HERE] possibility that the adviser may do a poor job of selecting
stocks.
Turnover Rate
Although the Fund generally seeks to invest for the long term, it retains the
right to sell securities regardless of how long the securities have been held.
The Fund's average turnover rate since inception has been about .* %. (A
turnover rate of 100% would occur, for example, if the Fund sold and replaced
securities valued at 100% of its net assets within a one-year period.)
Other Investment Policies and Risks
Besides investing in common stocks of growth companies, the Fund may make
certain other kinds of investments to achieve its objective.
Although the Fund typically does not make significant investments in
securities of companies based outside the United States, it reserves the right
to invest up to 20% of its assets in foreign securities. These securities may be
traded in U.S. or foreign markets. To the extent that it owns foreign stocks,
the Fund is subject to (1) country risk, which is the possibility that political
events (such as a war), financial problems (such as government default), or
natural disasters (such as an earthquake) will weaken a
PLAIN TALK ABOUT
Turnover Rate
Before investing in a mutual fund, you should review its turnover rate. This
gives an indication of how transaction costs could affect the fund's future
returns. In general, the greater the volume of buying and selling by the fund,
the greater the impact that brokerage commissions and other transaction costs
will have on its return. (These costs are in addition to those described in the
fee table on page 2.) Also, funds with high turnover rates may be more likely to
generate capital gains that must be distributed to shareholders as income
subject to taxes. The average turnover rate for all domestic stock funds is
approximately 80%.
<PAGE>
6
PLAIN TALK ABOUT
Derivatives
A derivative is a financial contract whose value is based on (or "derived" from)
a traditional security (such as a stock or a bond), an asset (such as a
commodity like gold), or a market index (such as the S&P 500 Index). Futures and
options are derivatives that have been trading on regulated exchanges for more
than two decades. These "traditional" derivatives are standardized contracts
that can easily be bought and sold, and whose market values are determined and
published daily. It is these characteristics that differentiate futures and
options from the relatively new types of derivatives. If used for speculation or
as leveraged investments, derivatives can carry considerable risks.
PLAIN TALK ABOUT
Vanguard's Unique
Corporate Structure
The Vanguard Group is truly a mutual mutual fund company. It is owned jointly by
the funds it oversees and thus indirectly by the shareholders in those funds.
Most other mutual funds are operated by for-profit management companies that may
be owned by one person, by a group of individuals, or by investors who own the
management company's stock. By contrast, Vanguard provides its services on an
"at-cost" basis, and the funds' expense ratios reflect only these costs. No
separate management company reaps profits or absorbs losses from operating the
funds.
country's economy and cause investments in that country to lose money; and (2)
currency risk, which is the possibility that Americans investing abroad could
lose money because of a rise in the value of the U.S. dollar versus foreign
currencies.
The Fund may also invest, to a limited extent, in stock futures and options
contracts, which are traditional types of derivatives. Losses (or gains)
involving futures can sometimes be substantial--in part because a relatively
small price movement in a futures contract may result in an immediate and
substantial loss (or gain) for a fund. This Fund will not use futures for
speculative purposes or as leveraged investments that magnify the gains or
losses of an investment. The value of all futures contracts in which the Fund
acquires an interest cannot exceed 20% of total assets.
The reasons for which the Fund will invest in futures and options are:
. To keep cash on hand to meet shareholder redemptions or other needs while
simulating full investment in stocks.
. To reduce the Fund's transaction costs or add value when these instruments
are favorably priced.
The Fund may, from time to time, take temporary defensive measures--such as
holding cash reserves without limit--that are inconsistent with the Fund's
primary investment strategies, in response to adverse market, economic,
political, or other conditions. In taking such measures, the Fund may not
achieve its investment objective.
The Fund and Vanguard
The Fund is a member of The Vanguard Group, a family of more than 35 investment
companies with more than 100 distinct investment portfolios holding assets worth
more than $.billion. All of the Vanguard funds share in the expenses associated
with business operations, such as personnel, office space, equipment, and
advertising.
Vanguard also provides marketing services to the funds. Although shareholders
do not pay sales commissions or 12b-1 distribution fees, each fund pays its
allocated share of The Vanguard Group's marketing costs.
Investment Adviser
The Fund employs Barrow, Hanley, Mewhinney & Strauss, Inc. (BHM&S), One McKinney
Plaza, 3232 McKinney Avenue, 15th Floor, Dallas, Texas 75204, as its investment
adviser. BHM&S manages the Fund subject to the control of the Trustees and
officers of the Fund.
BHM&S's advisory fee is paid quarterly. This fee is based on certain sliding
annual percentage rates applied to the Fund's average month-end assets for each
quarter.
In addition, BHM&S's advisory fee is increased or decreased, based on the
cumulative investment performance of the Fund over a trailing
<PAGE>
7
36-month period as compared with the cumulative total return of the Russell
Midcap Index over the same period. This Index is a market benchmark that covers
the smallest 800 of the 1,000 largest companies in the United States.
For the year ended October 31, 1998, the net fee paid to BHM&S was $., after
a [increase/decrease] of $. based on performance. This fee represented an
effective annual rate of .% of the Fund's average net assets.
The Fund has authorized BHM&S to choose brokers or dealers to handle the
purchase and sale of securities for the Fund, and to get the best available
price and most favorable execution from these brokers with respect to all
transactions.
In the interest of obtaining better execution of a transaction, BHM&S may
choose brokers who charge higher commissions. If more than one broker can obtain
the best available price and favorable execution of a transaction, then BHM&S is
authorized to choose a broker who, in addition to executing the transaction,
will provide research services to BHM&S or the Fund. Also, the Fund may direct
BHM&S to use a particular broker for certain transactions in exchange for
commission rebates or research services provided to the Fund. However, BHM&S
will not pay higher commissions specifically for the purpose of obtaining
research services.
The Board of Trustees may, without prior approval from shareholders, change
the terms of the advisory agreement or hire a new investment adviser, either as
a replacement for BHM&S or as an additional adviser. However, any such change
will be communicated to shareholders in writing.
PLAIN TALK ABOUT
The Fund's Adviser
Barrow, Hanley, Mewhinney & Strauss, Inc. (BHM&S) is an investment advisory firm
founded in 1979. As of October 31, 1998, BHM&S managed more than $. billion in
stock and bond portfolios for a limited number of institutional clients. Since
1985, BHM&S has managed the majority of the assets for Vanguard Windsor II Fund.
The managers responsible for overseeing the implementation of BHM&S's strategy
for Vanguard Selected Value Fund are:
James S. McClure, Principal at BHM&S; has worked in investment management
since 1974; with BHM&S since 1995; B.A. and M.B.A., University of Texas.
John P. Harloe, Principal at BHM&S; has worked in investment management since
1975; with BHM&S since 1995; B.A. and M.B.A., University of South Carolina.
Year 2000 Challenge
The common practice in computer programming of using just two digits to identify
a year has resulted in the Year 2000 challenge throughout the information
technology industry. If unchanged, many computer applications and systems could
misinterpret dates occurring after December 31, 1999, leading to errors or
failure. Such failure could adversely affect a fund's operations, including
pricing, securities trading, and the servicing of shareholder accounts.
The Vanguard Group is dedicated to providing uninterrupted, high-quality
performance from our computer systems before, during, and after 2000. In July
1998, we completed the renovation and initial testing of our internal systems.
Vanguard is diligently working with external partners, suppliers, and vendors,
including fund managers and other service providers, to assure that the systems
with which we interact remain operational at all times.
In addition to taking every reasonable step to secure our internal systems and
external relationships, Vanguard is further developing contingency plans
intended to assure that unexpected systems failures will not adversely affect
the Fund's operations. Vanguard intends to monitor these processes through the
rollover of 1999 into 2000 and to quickly implement alternate solutions if
necessary.
However, despite Vanguard's efforts and contingency plans, noncompliant
computer systems could have a material adverse effect on the Fund's business,
operations, or financial condition. Additionally, the Fund's performance could
be hurt if a computer-system failure at a company or governmental unit affects
the price of securities the Fund owns.
<PAGE>
8
PLAIN TALK ABOUT
Distributions
As a shareholder, you are entitled to your share of the fund's income from
interest and dividends, and gains from the sale of investments. You receive such
earnings as either an income dividend or a capital gains distribution. Income
dividends come from both the dividends that the fund earns from its holdings and
the interest it receives from its money market and bond investments. Capital
gains are realized whenever the fund sells securities for higher prices than it
paid for them. The capital gains are either short-term or long-term depending on
whether the fund held the securities for less than or more than one year.
Dividends, Capital Gains, and Taxes
Each December, the Fund distributes to shareholders virtually all of its income
from interest and dividends, as well as any capital gains realized from the sale
of its holdings.
Dividend and capital gains distributions of Fund shares that are held as an
investment option in an employer-sponsored retirement or savings plan will be
reinvested in additional Fund shares and accumulate on a tax-deferred basis. You
will not owe taxes on these distributions until you begin withdrawals. You
should consult your plan administrator, your plan's Summary Plan Document, or
your tax adviser about the tax consequences of an investment in the Fund and of
any plan withdrawals.
Share Price
The Fund's share price, called its net asset value, or NAV, is calculated each
business day after the close of trading on the New York Stock Exchange (the NAV
is not calculated on holidays or other days the Exchange is closed). Net asset
value per share is computed by adding up the total value of the Fund's
investments and other assets, subtracting any of its liabilities (debts), and
then dividing by the number of Fund shares outstanding:
Total Assets - Liabilities
Net Asset Value = -----------------------------------
Number of Shares Outstanding
Knowing the daily net asset value is useful to you as a shareholder because
it indicates the current value of your investment. The Fund's NAV, multiplied by
the number of shares you own, gives you the dollar amount you would have
received had you sold all of your shares back to the Fund that day.
A Note on Pricing: The Fund's investments will be priced at their market value
when market quotations are readily available. When these quotations are not
readily available, investments will be priced at their fair value, calculated
according to procedures adopted by the Fund's Board of Trustees.
The Fund's share price can be found daily in the mutual fund listings of most
major newspapers under the heading "Vanguard Funds." Different newspapers use
different abbreviations of the Fund's name, but the most common is SelValu.
<PAGE>
9
Financial Highlights
The following financial highlights table is intended to help you understand the
Fund's financial performance since inception, and reflects financial results for
a single Fund share. The total returns in the table represent the rate that an
investor would have earned each period on an investment in the Fund (assuming
reinvestment of all dividends and distributions). This information has been
audited by PricewaterhouseCoopers LLP, independent accountants, whose
report--along with the Fund's financial statements--is included in the Fund's
most recent annual report to shareholders. You may have the annual report sent
to you without charge by contacting Vanguard.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
Vanguard Selected Value Portfolio
Year Ended October 31,
---------------------- Feb. 15* to
1998 1997 Oct. 31, 1996
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period . $ 10.07 $ 10.00
Investment Operations -------------------------------------
Net Investment Income . .06 .04
Net Realized and Unrealized Gain (Loss)
on Investments . 3.02 .03
-------------------------------------
Total from Investment Operations . 3.08 .07
-------------------------------------
Distributions
Dividends from Net Investment Income . (.06) --
Distributions from Realized Capital Gains . (.11) --
-------------------------------------
Total Distributions . (.17) --
- -----------------------------------------------------------------------------------
Net Asset Value, End of Period . $ 12.98 $ 10.07
===================================================================================
Total Return . 30.92% 0.70%
===================================================================================
Ratios/Supplemental Data
Net Assets, End of Period (Millions) . $ 190 $ 93
Ratio of Total Expenses to Average Net Assets . 0.74% 0.75%**
Ratio of Net Investment Income to
Average Net Assets . 0.60% 0.75%**
Turnover Rate . 32% 25%
- -----------------------------------------------------------------------------------
</TABLE>
* Inception date.
** Annualized.
From time to time, the Vanguard funds advertise yield and total return
figures. Yield is a measure of past dividend income. Total return includes both
past dividend income (assuming that it has been reinvested) plus realized and
unrealized capital appreciation (or depreciation). Neither yield nor total
return should be used to predict the future performance of a fund.
PLAIN TALK ABOUT
How to Read the Financial Highlights Table
The Fund began fiscal 1998 with a net asset value (price) of $12.98 per share.
During the year, the Fund earned $ . per share from investment income (interest
and dividends) and $ . per share from investments that had appreciated in value
or that were sold for higher prices than the Fund paid for them.
Shareholders received $ . per share in the form of dividend and capital gains
distributions. A portion of each year's distributions may come from the prior
year's income or capital gains.
The earnings ($ . per share) minus the distributions ($ . per share)
resulted in a share price of $ . at the end of the year. This was an increase of
$ . per share (from $12.98 at the beginning of the year to $ . at the end of the
year). For a shareholder who reinvested the distributions in the purchase of
more shares, the total return from the Fund was . % for the year.
As of October 31, 1998, the Fund had $ . million in net assets. For the year,
its expense ratio was . % ($ . per $1,000 of net assets); and its net investment
income amounting to . % of its average net assets. It sold and replaced
securities valued at . % of its net assets.
"Standard & Poor's(R)," "S&P(R)," "S&P 500(R)," "Standard & Poor's 500," and
"500" are trademarks of The McGraw-Hill Companies, Inc. Frank Russell Company is
the owner of the trademarks and copyrights relating to the Russell Indexes.
<PAGE>
10
Investing with Vanguard
The Fund is an investment option in your retirement or savings plan. Your plan
administrator or your employee benefits office can provide you with detailed
information on how to participate in your plan and how to elect the Fund as an
investment option.
. If you have any questions about the Fund or Vanguard, including the Fund's
investment objective, strategies, or risks, contact Vanguard's Participant
Services Center, toll-free, at 1-800-523-1188.
. If you have questions about your account, contact your plan administrator or
the organization that provides record-keeping services for your plan.
Investment Options and Allocations
Your plan's specific provisions may allow you to change your investment
selections, the amount of your contributions, or how your contributions are
allocated among the investment choices available to you. Contact your plan
administrator or employee benefits office for more details.
Transactions
Contributions, exchanges, or redemptions of the Fund's shares are processed as
soon as they have been received by Vanguard in good order. Good order means that
your request includes complete information on your contribution, exchange, or
redemption, and that Vanguard has received the appropriate assets.
Exchanges
The exchange privilege (your ability to redeem shares from one fund to purchase
shares of another fund) may be available to you through your plan. Although we
make every effort to maintain the exchange privilege, Vanguard reserves the
right to revise or terminate this privilege, limit the amount of an exchange or
reject any exchange, at any time, without notice. Because excessive exchanges
can potentially disrupt the management of the Fund and increase its transaction
costs, Vanguard limits exchange activity to no more than four substantive "round
trips" through the Fund (at least 90 days apart) during any 12-month period. A
"round trip" is a redemption from the Fund followed by a purchase back into the
Fund. "Substantive" means a dollar amount that Vanguard determines, in its sole
discretion, could adversely affect the management of the Fund.
Before making an exchange to or from another fund available in your plan,
consider the following:
. Certain investment options, particularly funds made up of company stock or
investment contracts, may be subject to unique restrictions.
. Make sure to read that fund's prospectus. Contact Participant Services,
toll-free, at 1-800-523-1188 for a copy.
. Vanguard can accept exchanges only as permitted by your plan. Contact your
plan administrator for details on the exchange policies that apply to your
plan.
Accessing Fund Information by Computer
- --------------------------------------------------------------------------------
Vanguard on the World Wide Web www.vanguard.com
Use your personal computer to visit Vanguard's education-oriented website, which
provides timely news and information about Vanguard funds and services; an
online "university" that offers a variety of mutual fund classes; and
easy-to-use, interactive tools to help you create your own investment and
retirement strategies.
- --------------------------------------------------------------------------------
<PAGE>
[TO COME]
<PAGE>
[TO COME]
<PAGE>
Glossary of Investment Terms
Capital Gains Distribution
Payment to mutual fund shareholders of gains realized on securities that the
fund has sold at a profit, minus any realized losses.
Cash Reserves
Cash deposits, short-term bank deposits, and money market instruments which
include U.S. Treasury bills, bank certificates of deposit (CDs), repurchase
agreements, commercial paper, and banker's acceptances.
Common Stock
A security representing ownership rights in a corporation. A stockholder is
entitled to share in the company's profits, some of which may be paid out as
dividends.
Dividend Income
Payment to shareholders of income from interest or dividends generated by a
fund's investments.
Dollar-Cost Averaging
Investing equal amounts of money at regular intervals on an ongoing basis. This
technique ensures that an investor buys fewer shares when prices are high and
more shares when prices are low.
Expense Ratio
The percentage of a fund's average net assets used to pay its expenses. The
expense ratio includes management fees, administrative fees, and any 12b-1
distribution fees.
Fixed-Income Securities
Investments, such as bonds, that have a fixed payment schedule. While the level
of income offered by these securities is predetermined, their prices may
fluctuate.
Fund Diversification
Holding a variety of securities so that a fund's return is not badly hurt by the
poor performance of a single security or industry.
Growth Stock Fund
A mutual fund that emphasizes stocks of companies believed to have above-average
prospects for growth. Reflecting market expectations for superior growth, the
prices of growth stocks often are relatively high in comparison to revenue,
earnings, book value and dividends.
Investment Adviser
An organization that makes the day-to-day decisions regarding a fund's
investments.
Net Asset Value (NAV)
The market value of a mutual fund's total assets, minus liabilities, divided by
the number of shares outstanding. The value of a single share is called its
share value or share price.
Price/Earnings (P/E) Ratio
The current share price of a stock, divided by its per-share earnings (profits)
from the past year. A stock selling for $20, with earnings of $2 per share, has
a price/earnings ratio of 10.
Principal
The amount of your own money you put into an investment.
Securities
Stocks, bonds, and other investment vehicles.
Total Return
A percentage change, over a specified time period, in a mutual fund's net asset
value, with the ending net asset value adjusted to account for the reinvestment
of all distributions of dividends and capital gains.
Value Stock Fund
A mutual fund that emphasizes stocks of companies whose growth prospects are
generally regarded as subpar by the market. Reflecting these market
expectations, the prices of value stocks typically are below-average in
comparison to such factors as revenue, earnings, book value, and dividends.
Volatility
The fluctuations in value of a mutual fund or other security. The greater a
fund's volatility, the wider the fluctuations between its high and low prices.
Yield
Income (interest or dividends) earned by an investment, expressed as a
percentage of the investment's price.
<PAGE>
[GRAPHIC OF SHIP APPEARS HERE]
[LOGO OF VANGUARD GROUP APPEARS HERE]
Institutional Division
Post Office Box 2900
Valley Forge, PA 19482-2900
For More Information
If you'd like more information about Vanguard Selected Value Fund, the following
documents are available free upon request:
Annual/Semiannual Report to Shareholders
Additional information about the Fund's investments is available in the Fund's
annual and semiannual reports to shareholders. In these reports, you will find a
discussion of the market conditions and investment strategies that significantly
affected the Fund's performance during the most recent fiscal year.
Statement of Additional Information (SAI)
The SAI provides more detailed information about the Fund.
The current annual and semiannual reports and the SAI are incorporated by
reference into (and are thus legally a part of) this prospectus.
To receive a free copy of the latest annual or semiannual report or the SAI, or
to request additional information about the Fund or other Vanguard funds, please
contact us as follows:
The Vanguard Group
Participant Services Center
P.O. Box 2900
Valley Forge, PA 19482-2900
Telephone:
1-800-523-1188
Text Telephone:
1-800-523-8004
World Wide Web:
www.vanguard.com
E-mail:
[email protected]
Information provided by the Securities and Exchange Commission (SEC)
You can review and copy information about the Fund (including the SAI) at the
SEC's Public Reference Room in Washington, D.C. To find out more about this
public service, call the SEC at 1-800-SEC-0330. Reports and other information
about the Fund are also available on the SEC's website (www.sec.gov), or you can
receive copies of this information, for a fee, by writing the Public Reference
Section, Securities and Exchange Commission, Washington, DC 20549-6009.
Fund's Investment Company Act
file number: 811-07443
(C) 1999 Vanguard Marketing Corporation, Distributor. All rights reserved.
I934N-02/05/1999
<PAGE>
Vanguard Selected Value Fund
Prospectus
February 5, 1999
A Value Stock Mutual Fund
Contents
1 Fund Profile 9 Financial Highlights
2 Additional Information 11 Investing with Vanguard
3 A Word About Risk 11 Services and Account Features
3 Who Should Invest 12 Types of Accounts
3 Primary Investment Strategies 12 Buying Shares
6 The Fund and Vanguard 14 Redeeming Shares
6 Investment Adviser 17 Transferring Registration
7 Year 2000 Challenge 17 Fund and Account Updates
8 Dividends, Capital Gains, and Taxes Glossary (inside back cover)
8 Share Price
- --------------------------------------------------------------------------------
Why Reading This Prospectus Is Important
This prospectus explains the objective, risks, and strategies of Vanguard
Selected Value Fund. To highlight terms and concepts important to mutual fund
investors, we have provided "Plain Talk(R)" explanations along the way.
Reading the prospectus will help you to decide whether the Fund is the right
investment for you. We suggest that you keep it for future reference.
- --------------------------------------------------------------------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
accuracy or adequacy of this prospectus. Any representation to the contrary is a
criminal offense.
<PAGE>
1
Fund Profile
The following profile summarizes key features of Vanguard Selected Value Fund.
INVESTMENT OBJECTIVE
The Fund is a stock fund that seeks to provide long-term growth of capital and
incidental income.
INVESTMENT STRATEGIES
The Fund invests mainly in the stocks of medium-size U.S. companies. The Fund
uses a "value" investment approach, choosing companies with relatively low
price/earnings ratios, reasonable financial strength, and strong cash flows.
These companies tend to be undervalued or out of favor with investors.
PRIMARY RISKS
The Fund's total return, like stock prices generally, will fluctuate within a
wide range, so an investor could lose money over short or even long periods. The
Fund is also subject to:
. Investment style risk, which is the chance that returns from value stocks
or stocks of medium-size companies will trail returns from other asset
classes or the overall stock market.
. Concentration risk, which is the chance that the Fund's performance may be
hurt disproportionately by the performance of relatively few stocks.
. Manager risk, which is the chance that poor security selection will cause
the Fund to underperform other funds with similar objectives.
PERFORMANCE/RISK INFORMATION
The bar chart and table below provide an indication of the risk of investing in
the Fund. The bar chart shows the Fund's performance in each calendar year since
inception. The table shows how the Fund's average annual returns for one
calendar year and since inception compare with those of a broad-based securities
market index. Keep in mind that the Fund's past performance does not indicate
how it will perform in the future.
----------------------------------------------------------------------
Annual Total Returns
----------------------------------------------------------------------
During the period shown in the bar chart, the highest return for a calendar
quarter was .% (quarter ending ___________) and the lowest return for a
quarter was -.% (quarter ending __________).
----------------------------------------------------------------------
Average Annual Total Returns For Years Ended December 31, 1998
----------------------------------------------------------------------
1 Year Since Inception(*)
----------------------------------------------------------------------
Vanguard Selected Value Fund . % . %
Russell MidCap Index . .
----------------------------------------------------------------------
*February 15, 1996.
----------------------------------------------------------------------
<PAGE>
2
PLAIN TALK ABOUT
The Costs of Investing
Costs are an important consideration in choosing a mutual fund. That's because
you, as a shareholder, pay the costs of operating a fund, plus any transaction
costs associated with the fund's buying and selling of securities. These costs
can erode a substantial portion of the gross income or capital appreciation a
fund achieves. Even seemingly small differences in expenses can, over time, have
a dramatic effect on a fund's performance.
PLAIN TALK ABOUT
Fund Expenses
All mutual funds have operating expenses. These expenses, which are deducted
from a fund's gross income, are expressed as a percentage of the net assets of
the fund. Vanguard Selected Value Fund's expense ratio in fiscal year 1998 was .
%, or $ . per $1,000 of average net assets. The average mid-cap equity mutual
fund had expenses in 1997 of . %, or $ . per $1,000 of average net assets,
according to Lipper Analytical Services, which reports on the mutual fund
industry.
FEES AND EXPENSES
The following table describes the fees and expenses you would pay if you buy and
hold shares of the Fund. The expenses shown under Annual Fund Operating Expenses
are based upon those incurred during the fiscal year ended October 31, 1998.
Shareholder Fees (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fees: None
Exchange Fees: None
Annual Fund Operating Expenses (expenses deducted from the
Fund's assets)
Management (Administrative and Investment Advisory) Expenses: . %
12b-1 Distribution Fees: None
Other Expenses (Marketing, Taxes, Auditing, etc.): . %
Total Operating Expenses (Expense Ratio): . %
The following example is intended to help you compare the cost of investing
in the Fund with the cost of investing in other mutual funds. It illustrates the
hypothetical expenses that you would incur over various periods if you invest
$10,000 in the Fund. This example assumes that the Fund provides are turn of 5%
a year, and that operating expenses remain the same. The results apply whether
or not you redeem your investment at the end of each period.
- --------------------------------------------------------------------------------
1 Year 3 Years 5 Years 10 Years
- --------------------------------------------------------------------------------
$. $. $. $.
- --------------------------------------------------------------------------------
This example should not be considered to represent actual expenses or
performance from the past or for the future. Actual future expenses may be
higher or lower than those shown.
Additional Information
Dividends and Capital Gains
Paid annually in December
Investment Adviser
Barrow, Hanley, Mewhinney & Strauss, Inc., Dallas, Texas,
since inception
Inception Date
February 15, 1996
Net Assets as of October 31, 1998
$ . million
Suitable for IRAs
Yes
Minimum Initial Investment
$3,000; $1,000 for IRAs and custodial accounts for minors
Newspaper Abbreviation
SelValu
Vanguard Fund Number
934
Cusip Number
921946109
Ticker Symbol
VASVX
<PAGE>
3
- --------------------------------------------------------------------------------
A Word About Risk
This prospectus describes the risks you would face as an investor in Vanguard
Selected Value Fund. It is important to keep in mind one of the main axioms of
investing: The higher the risk of losing money, the higher the potential reward.
The reverse, also, is generally true: The lower the risk, the lower the
potential reward. As you consider an investment in Vanguard Selected Value Fund,
you should also take into account your personal tolerance for the daily
fluctuations of the stock market.
Look for this [GRAPHIC OF FLAG APPEARS HERE] symbol throughout the
prospectus. It is used to mark detailed information about each type of risk that
you would confront as a shareholder of the Fund.
- --------------------------------------------------------------------------------
Who Should Invest
The Fund may be a suitable investment for you if:
. You wish to add a stock fund that emphasizes undervalued medium-size
companies to your existing holdings, which could include other stock
investments as well as bond, money market, and tax-exempt investments.
. You are seeking growth of capital over the long term--at least five years.
. You are not looking for significant levels of current income from dividends
or interest.
. You characterize your investment temperament as "moderately aggressive."
The Vanguard funds do not permit market-timing. Do not invest in this Fund if
you are a market-timer.
The Fund has adopted the following policies, among others, to discourage
short-term trading:
. The Fund reserves the right to reject any purchase request--including
exchanges from other Vanguard funds--that it regards as disruptive to the
efficient management of the Fund. This could be because of the timing of
the investment or because of a history of excessive trading by the
investor.
. There is a limit on the number of times you can exchange into and out of
the Fund (see "Redeeming Shares" in the Investing with Vanguard section).
. The Fund reserves the right to stop offering shares at any time.
PLAIN TALK ABOUT
Costs and Market-Timing
Some investors try to profit from market-timing--switching money into
investments when they expect prices to rise, and taking money out when they
expect the market to fall. As money is shifted in and out, a fund incurs
expenses for buying and selling securities. These costs are borne by all fund
shareholders, including the long-term investors who do not generate the costs.
Therefore, the Fund discourages short-term trading by, among other things,
limiting the number of exchanges it permits.
Primary Investment Strategies
This section explains the strategies that the investment adviser uses in pursuit
of the Fund's objective, long-term growth of capital and incidental income. It
also explains how the adviser implements these strategies. In addition, this
section discusses several important risks--market risk, investment style risk,
concentration risk and manager risk--faced by investors in the Fund. The Fund's
Board of Trustees oversees the management of the Fund and may change the
investment strategies in the interest of shareholders.
<PAGE>
4
PLAIN TALK ABOUT
Value Funds and Growth Funds
Value investing and growth investing are two styles employed by stock fund
managers. Value funds generally emphasize stocks of companies from which the
market does not expect strong growth. The prices of value stocks typically are
below-average in comparison to such factors as earnings and book value, and
these stocks typically pay above-average dividend yields. Growth funds generally
focus on companies believed to have above-average potential for growth in
revenue and earnings. Reflecting the market's high expectations for superior
growth, the prices of such stocks are typically above-average in relation to
such measures as revenue, earnings, book value and dividends. Value and growth
stocks have, in the past, produced similar long-term returns, though each
category has periods when it outperforms the other. In general, value funds are
appropriate for investors who want some dividend income and the potential for
capital gains but are less tolerant of share-price fluctuations. Growth funds,
by contrast, appeal to investors who will accept more volatility in hopes of a
greater increase in share price. Growth funds also may appeal to investors with
taxable accounts who want a higher proportion of returns to come as capital
gains (which may be taxed at lower rates than dividend income).
Market Exposure
The Fund's primary strategy is to invest chiefly in mid-capitalization common
stocks considered to have low prices in relation to corporate earnings and book
value.
[GRAPHIC APPEARS HERE]
The Fund is subject to market risk, which is the possibility that
stock prices overall will decline over short or even long periods. Stock
markets tend to move in cycles, with periods of rising prices and periods
of falling prices.
To illustrate the volatility of stock prices, the following table shows the
best, worst, and average total returns for the U.S. stock market over various
periods as measured by the Standard & Poor's 500 Composite Stock Price Index, a
widely used barometer of market activity. (Total returns consist of dividend
income plus change in market price.) Note that the returns shown do not include
the costs of buying and selling stocks or other expenses that a real-world
investment portfolio would incur. Note, also, that the gap between best and
worst tends to narrow over the long term.
PLAIN TALK ABOUT
Large-Cap, Mid-Cap, and Small-Cap Stocks
Stocks of publicly traded companies--and mutual funds that hold these
stocks--can be classified by the companies' market value, or capitalization.
Generally, Vanguard defines large-capitalization (large-cap) funds as those
holding stocks of companies whose outstanding shares have a median market value
exceeding $9 billion. Mid-cap funds hold stocks of companies with a median
market value between $1 billion and $9 billion. Small-cap funds typically hold
stocks of companies with a median market value of less than $1 billion.
- --------------------------------------------------------------------------------
U.S. Stock Market Returns (1926-1997)
- --------------------------------------------------------------------------------
1 Year 5 Years 10 Years 20 Years
- --------------------------------------------------------------------------------
Best . . . .
Worst . . . .
Average . . . .
- --------------------------------------------------------------------------------
The table covers all of the 1-,5-,10-, and 20-year periods from 1926 through
1997. You can see, for example, that while the average return on stocks for all
of the 5-year periods was .%, returns for individual 5-year periods ranged from
a-12.5% average (from 1928 through 1932) to 23.9% (from 1951 through 1954).
These average returns reflect past performance on common stocks; you should not
regard them as an indication of future returns from either the stock market as a
whole or this Fund in particular.
Finally, because Vanguard Selected Value Fund's holdings are not identical to
the S&P 500 Index or any other market index, the performance of the Fund will
not mirror the returns of any particular index.
<PAGE>
5
PLAIN TALK ABOUT
Fund Diversification and
Concentration
In general, the more diversified a fund's stock holdings, the less likely it is
that a specific stock's poor performance will hurt the fund. One measure of a
fund's diversification is the percentage of its assets represented by its ten
largest holdings. The average U.S. equity mutual fund has about 30% of its
assets concentrated in its ten largest holdings, while some less-diversified
mutual funds have more than 50% of their assets invested in the stocks of just
ten companies.
[GRAPHIC APPEARS HERE]
The Fund is subject to investment style risk, which is the possibility that
returns from mid-capitalization stocks or value stocks will trail returns
from other asset classes or the overall stock market. Each type of stock
tends to go through cycles of doing better--or worse--than common stocks in
general. These periods have, in the past, lasted for as long as several
years.
Security Selection
Barrow, Hanley, Mewhinney & Strauss, Inc. ("BHM&S"), adviser to the Fund, seeks
out medium-size companies that it considers to be undervalued, choosing them on
the basis of extensive research and meetings with company management. According
to BHM&S, a company is undervalued if its earnings potential is not reflected in
its stock's share price. Such stocks generally have low price/earnings ratios.
BHM&S holds an under-valued stock until its share price reflects, in BHM&S's
view, the company's underlying value.
[GRAPHIC APPEARS HERE]
Because the Fund invests a higher percentage of assets in its ten largest
holdings than the average stock fund does, the Fund is subject to
concentration risk, which is the possibility that its performance may be
hurt disproportionately by the poor performance of relatively few stocks.
As of October 31, 1998, the Fund had invested . % of net assets in its top ten
holdings.
The Fund is run by BHM&S according to traditional methods of active investment
management. This means that securities are bought and sold according to BHM&S's
judgments about companies and their financial prospects, within the context of
the stock market and the economy in general.
The Fund is generally managed without regard to tax ramifications.
[GRAPHIC APPEARS HERE]
The Fund is subject to manager risk, which is the possibility that the
adviser may do a poor job of selecting stocks.
Turnover Rate
Although the Fund generally seeks to invest for the long term, it retains the
right to sell securities regardless of how long the securities have been held.
The Fund's average turnover rate since inception has been about . %.(A turnover
rate of 100% would occur, for example, if the Fund sold and replaced securities
valued at 100% of its net assets within a one-year period.)
PLAIN TALK ABOUT
Turnover Rate
Before investing in a mutual fund, you should review its turnover rate. This
gives an indication of how transaction costs could affect the fund's future
returns. In general, the greater the volume of buying and selling by the fund,
the greater the impact that brokerage commissions and other transaction costs
will have on its return. (These costs are in addition to those described in the
fee table on page 2.) Also, funds with high turnover rates may be more likely to
generate capital gains that must be distributed to shareholders as income
subject to taxes. The average turnover rate for all domestic stock funds is
approximately 80%.
Other Investment Policies and Risks
Besides investing in common stocks of growth companies, the Fund may make
certain other kinds of investments to achieve its objective.
Although the Fund typically does not make significant investments in
securities of companies based outside the United States, it reserves the right
to invest up to 20% of its assets in foreign securities. These securities may be
traded in U.S. or foreign markets. To the extent that it owns foreign stocks,
the Fund is subject to (1) country risk, which is the possibility that
political events (such as a war), financial problems (such as government
default), or natural disasters (such as an earthquake) will weaken a
<PAGE>
6
PLAIN TALK ABOUT
Derivatives
A derivative is a financial contract whose value is based on (or "derived" from)
a traditional security (such as a stock or a bond), an asset (such as a
commodity like gold), or a market index (such as the S&P 500 Index). Futures and
options are derivatives that have been trading on regulated exchanges for more
than two decades. These "traditional" derivatives are standardized contracts
that can easily be bought and sold, and whose market values are determined and
published daily. It is these characteristics that differentiate futures and
options from the relatively new types of derivatives. If used for speculation or
as leveraged investments, derivatives can carry considerable risks.
PLAIN TALK ABOUT
Vanguard's Unique
Corporate Structure
The Vanguard Group is truly a mutual mutual fund company. It is owned jointly by
the funds it oversees and thus indirectly by the shareholders in those funds.
Most other mutual funds are operated by for-profit management companies that may
be owned by one person, by a group of individuals, or by investors who own the
management company's stock. By contrast, Vanguard provides its services on an
"at-cost" basis, and the funds' expense ratios reflect only these costs. No
separate management company reaps profits or absorbs losses from operating the
funds.
country's economy and cause investments in that country to lose money; and (2)
currency risk, which is the possibility that Americans investing abroad could
lose money because of a rise in the value of the U.S. dollar versus foreign
currencies.
The Fund may also invest, to a limited extent, in stock futures and options
contracts, which are traditional types of derivatives. Losses (or gains)
involving futures can sometimes be substantial--in part because a relatively
small price movement in a futures contract may result in an immediate and
substantial loss (or gain) for a fund. This Fund will not use futures for
speculative purposes or as leveraged investments that magnify the gains or
losses of an investment. The value of all futures contracts in which the Fund
acquires an interest cannot exceed 20% of total assets.
The reasons for which the Fund will invest in futures and options are:
. To keep cash on hand to meet shareholder redemptions or other needs
while simulating full investment in stocks.
. To reduce the Fund's transaction costs or add value when these instruments
are favorably priced.
The Fund may, from time to time,take temporary defensive measures--such as
holding cash reserves without limit--that are inconsistent with the Fund's
primary investment strategies,in response to adverse market, economic,
political, or other conditions.In taking such measures, the Fund may not achieve
its investment objective.
The Fund and Vanguard
TheFund is a member of The Vanguard Group,a family of more than 35 investment
companies with more than 100 distinct investment portfolios holding assets worth
more than $. billion. All of the Vanguard funds share in the expenses associated
with business operations,such as personnel,office space,equipment,and
advertising.
Vanguard also provides marketing services to the funds. Although shareholders
do not pay sales commissions or 12b-1 distribution fees, each fund pays its
allocated share of The Vanguard Group's marketing costs.
Investment Adviser
The Fund employs Barrow, Hanley, Mewhinney & Strauss, Inc.(BHM&S), One McKinney
Plaza, 3232 McKinney Avenue, 15th Floor, Dallas, Texas 75204, as its investment
adviser. BHM & S manages the Fund subject to the control of the Trustees and
officers of the Fund.
BHM&S's advisory fee is paid quarterly. This fee is based on certain sliding
annual percentage rates applied to the Fund's average month-end assets for each
quarter.
In addition, BHM&S's advisory fee is increased or decreased, based on the
cumulative investment performance of the Fund over a trailing
<PAGE>
7
36-month period as compared with the cumulative total return of the Russell
Midcap Index over the same period. This Index is a market benchmark that covers
the smallest 800 of the 1,000 largest companies in the United States.
For the year ended October 31, 1998, the net fee paid to BHM&S was $ *, after
a [increase/decrease] of $* based on performance. This fee represented an
effective annual rate of *% of the Fund's average net assets.
The Fund has authorized BHM&S to choose brokers or dealers to handle the
purchase and sale of securities for the Fund, and to get the best available
price and most favorable execution from these brokers with respect
to all transactions.
In the interest of obtaining better execution of a transaction, BHM&S may
choose brokers who charge higher commissions. If more than one broker can obtain
the best available price and favorable execution of a transaction,then BHM&S is
authorized to choose a broker who,in addition to executing the transaction, will
provide research services to BHM&S or the Fund. Also, the Fund may direct BHM&S
to use a particular broker for certain transactions in exchange for commission
rebates or research services provided to the Fund. However,BHM&S will not pay
higher commissions specifically for the purpose of obtaining research services.
The Board of Trustees may, without prior approval from shareholders, change
the terms of the advisory agreement or hire a new investment adviser, either as
a replacement for BHM&S or as an additional adviser. However, any such change
will be communicated to shareholders in writing.
PLAIN TALK ABOUT
The Fund's Adviser
Barrow, Hanley, Mewhinney & Strauss, Inc. (BHM&S) is an investment advisory firm
founded in 1979. As of October 31, 1998, BHM&S managed more than $* billion in
stock and bond portfolios for a limited number of institutional clients. Since
1985, BHM&S has managed the majority of the assets for Vanguard Windsor II Fund.
The managers responsible for overseeing the implementation of BHM&S's strategy
for Vanguard Selected Value Fund are:
James S. McClure, Principal at BHM&S; has worked in investment management
since 1974; with BHM&S since 1995; B.A. and M.B.A., University of Texas.
John P. Harloe, Principal at BHM&S; has worked in investment management since
1975; with BHM&S since 1995; B.A. and M.B.A., University of South Carolina.
Year 2000 Challenge
The common practice in computer programming of using just two digits to identify
a year has resulted in the Year 2000 challenge throughout the information
technology industry. If unchanged, many computer applications and systems could
misinterpret dates occurring after December 31, 1999, leading to errors or
failure. Such failure could adversely affect a fund's operations, including
pricing, securities trading, and the servicing of shareholder accounts.
The Vanguard Group is dedicated to providing uninterrupted, high-quality
performance from our computer systems before, during, and after 2000. In July
1998, we completed the renovation and initial testing of our internal systems.
Vanguard is diligently working with external partners, suppliers, and vendors,
including fund managers and other service providers, to assure that the systems
with which we interact remain operational at all times.
In addition to taking every reasonable step to secure our internal systems
and external relationships, Vanguard is further developing contingency plans
intended to assure that unexpected systems failures will not adversely affect
the Fund's operations. Vanguard intends to monitor these processes through the
rollover of 1999 into 2000 and to quickly implement alternate solutions if
necessary.
However, despite Vanguard's efforts and contingency plans, noncompliant
computer systems could have a material adverse effect on the Fund's business,
operations, or financial condition. Additionally, the Fund's performance could
be hurt if a computer-system failure at a company or governmental unit affects
the price of securities the Fund owns.
<PAGE>
8
PLAIN TALK ABOUT
Distributions
As a shareholder, you are entitled to your share of the fund's income from
interest and dividends, and gains from the sale of investments. You receive
such earnings as either an income dividend or a capital gains distribution.
Income dividends come from both the dividends that the fund earns from its
holdings and the interest it receives from its money market and bond
investments. Capital gains are realized whenever the fund sells securities for
higher prices than it paid for them. The capital gains are either short-term
or long-term depending on whether the fund held the securities for less than
or more than one year.
PLAIN TALK ABOUT
"Buying a Dividend"
Unless you are investing through a tax-deferred retirement account (such as an
IRA), it is not to your advantage to buy shares of a fund shortly before it
makes a distribution, because doing so can cost you money in taxes. This is
known as "buying a dividend." For example: on December 15, you invest $5,000,
buying 250 shares for $20 each. If the fund pays a distribution of $1 per
share on December 16, its share price would drop to $19 (not counting market
change). You still have only $5,000 (250 shares x $19 = $4,750 in share value,
plus 250 shares x $1 = $250 in distributions), but you owe tax on the $250
distribution you received--even if you reinvest it in more shares. To avoid
"buying a dividend," check a fund's distribution schedule before you invest.
Dividends, Capital Gains, and Taxes
Each December, the Fund distributes to shareholders virtually all of its income
from interest and dividends, as well as any capital gains realized from the sale
of its holdings. You can receive distributions of income or capital gains in
cash, or you can have them automatically invested in more shares of the Fund. In
either case, these distributions are taxable to you. It is important to note
that distributions of dividends and capital gains that are declared in December
- --if paid to you by the end of January--are taxed as if they had been paid to
you in December.
Vanguard will send you a statement each year showing the tax status of all
your distributions. If you have chosen to receive dividend and/or capital gains
distributions in cash, and the postal or other delivery service is unable to
deliver checks to your address of record, we will change the distribution option
so that all dividends and other distributions are automatically invested in
additional shares. We will not pay interest on uncashed distribution checks.
. The dividends and short-term capital gains that you receive are considered
ordinary income for tax purposes.
. Any distributions of net long-term capital gains by the Fund are taxable to
you as long-term capital gains, no matter how long you've owned shares in the
Fund.
. Although the Fund does not seek to realize any particular amount of capital
gains during a year, such gains are realized from time to time as by-products
of its ordinary investment activities. Consequently, distributions may vary
considerably from year to year.
. If you sell or exchange shares, any gain or loss you have is a taxable event.
This means that you may have a capital gain to report as income, or a capital
loss to report as a deduction, when you complete your federal income tax
return.
. Distributions of dividends or capital gains, and capital gains or losses
from your sale or exchange of Fund shares, may be subject to state and
local income taxes as well.
The tax information in this prospectus is provided as general information
and will not apply to you if you are investing through a tax-deferred account
such as an IRA or a qualified employee benefit plan. You should consult your
tax adviser about the tax consequences of an investment in the Fund.
Share Price
The Fund's share price, called its net asset value, or NAV, is calculated each
business day after the close of trading on the New York Stock Exchange (the NAV
is not calculated on holidays or other days the Exchange is closed). Net asset
value per share is computed by adding up the total value of the Fund's
investments and other assets, subtracting any of its liabilities (debts), and
then dividing by the number of Fund shares outstanding:
<PAGE>
9
Total Assets - Liabilities
Net Asset Value = -----------------------------------
Number of Shares Outstanding
Knowing the daily net asset value is useful to you as a shareholder because it
indicates the current value of your investment. The Fund's NAV, multiplied by
the number of shares you own, gives you the dollar amount you would have
received had you sold all of your shares back to the Fund that day.
A Note on Pricing: The Fund's investments will be priced at their market
value when market quotations are readily available. When these quotations are
not readily available, investments will be priced at their fair value,
calculated according to procedures adopted by the Fund's Board of Trustees.
The Fund's share price can be found daily in the mutual fund listings of most
major newspapers under the heading "Vanguard Funds." Different newspapers use
different abbreviations of the Fund's name, but the most common is SelValu.
Financial Highlights
The following financial highlights table is intended to help you understand the
Fund's financial performance since inception, and reflects financial results for
a single Fund share. The total returns in the table represent the rate that an
investor would have earned each period on an investment in the Fund (assuming
reinvestment of all dividends and distributions). This information has been
audited by PricewaterhouseCoopers LLP, independent accountants, whose
report--along with the Fund's financial statements--is included in the Fund's
most recent annual report to shareholders. You may have the annual report sent
to you without charge by contacting Vanguard.
<TABLE>
<CAPTION>
Vanguard Selected Value Portfolio
Year Ended October 31,
--------------------- Feb. 15* to
1998 1997 Oct. 31, 1996
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period . $ 10.07 $ 10.00
- -----------------------------------------------------------------------------------
Investment Operations
Net Investment Income . .06 .04
Net Realized and Unrealized Gain (Loss)
on Investments . 3.02 .03
- -----------------------------------------------------------------------------------
Total from Investment Operations . 3.08 .07
- -----------------------------------------------------------------------------------
Distributions
Dividends from Net Investment Income . (.06) --
Distributions from Realized Capital Gains . (.11) --
- -----------------------------------------------------------------------------------
Total Distributions . (.17) --
- -----------------------------------------------------------------------------------
Net Asset Value, End of Period . $ 12.98 $ 10.07
===================================================================================
Total Return . 30.92% 0.70%
===================================================================================
Ratios/Supplemental Data
Net Assets, End of Period (Millions) . $ 190 $ 93
Ratio of Total Expenses to Average Net Assets . 0.74% 0.75%**
Ratio of Net Investment Income to
Average Net Assets . 0.60% 0.75%**
Turnover Rate . 32% 25%
- -----------------------------------------------------------------------------------
</TABLE>
*Inception date
**Annualized.
PLAIN TALK ABOUT
How to Read the Financial Highlights Table
The Fund began fiscal 1998 with a net asset value (price) of $12.98 per share.
During the year, the Fund earned $ . per share from investment income (interest
and dividends) and $ . per share from investments that had appreciated in value
or that were sold for higher prices than the Fund paid for them.
Shareholders received $ . per share in the form of dividend and capital gains
distributions. A portion of each year's distributions may come from the prior
year's income or capital gains.
The earnings ($ . per share) minus the distributions ($ . per share) resulted
in a share price of $ . at the end of the year. This was an increase of $ . per
share (from $12.98 at the beginning of the year to $ . at the end of the year).
For a shareholder who reinvested the distributions in the purchase of more
shares, the total return from the Fund was . % for the year.
As of October 31, 1998, the Fund had $ . million in net assets. For the year,
its expense ratio was . % ($ . per $1,000 of net assets); and its net investment
income amounting to . % of its average net assets. It sold and replaced
securities valued at . % of its net assets.
<PAGE>
10
From time to time, the Vanguard funds advertise yield and total return
figures. Yield is a measure of past dividend income. Total return includes both
past dividend income (assuming that it has been reinvested) plus realized and
unrealized capital appreciation (or depreciation). Neither yield nor total
return should be used to predict the future performance of a fund.
"Standard & Poor's(R)," "S&P(R)," "S&P 500(R)," "Standard & Poor's 500," and
"500" are trademarks of The McGraw-Hill Companies, Inc. Frank Russell Company is
the owner of the trademarks and copyrights relating to the Russell Indexes.
<PAGE>
11
Investing with Vanguard
Are you looking for the most convenient way to open or add money to a Vanguard
account? Obtain instant access to fund information? Establish an account for a
minor child or for your retirement savings?
Vanguard can help. Our goal is to make it easy and pleasant for you to do
business with us.
The following sections of the prospectus briefly explain the many services we
offer. Booklets providing detailed information are available on the services
marked with a [GRAPHIC APPEARS HERE]. Please call us to request copies.
Services and Account Features
Vanguard offers many services that make it convenient to buy, sell, or exchange
shares, or to obtain fund or account information.
- --------------------------------------------------------------------------------
Telephone Redemptions (Sales and Exchanges)
Automatically set up for this Fund unless you notify us otherwise.
- --------------------------------------------------------------------------------
Vanguard Direct Deposit Service(TM) [GRAPHIC APPEARS HERE]
Automatic method for depositing your paycheck or U.S. government payment
(including Social Security and government pension checks) into your account.
- --------------------------------------------------------------------------------
Vanguard Automatic Exchange Service(TM) [GRAPHIC APPEARS HERE]
Automatic method for moving a fixed amount of money from one Vanguard fund
account to another.
- --------------------------------------------------------------------------------
Vanguard Fund Express(R) [GRAPHIC APPEARS HERE]
Electronic method for buying or selling shares. You can transfer money between
your Vanguard fund account and an account at your bank, savings and loan, or
credit union on a systematic schedule or whenever you wish.
- --------------------------------------------------------------------------------
Vanguard Dividend Express(TM) [GRAPHIC APPEARS HERE]
Electronic method for transferring dividend and/or capital gains distributions
directly from your Vanguard fund account to your bank, savings and loan, or
credit union account.
- --------------------------------------------------------------------------------
Vanguard Tele-Account(R) 1-800-662-6273 [GRAPHIC APPEARS HERE]
Toll-free 24-hour access to Vanguard fund and account information--as well as
some transactions--by using any touch-tone phone. Tele-Account provides total
return, share price, price change, and yield quotations for all Vanguard funds;
gives your account balances and history (e.g., last transaction, latest dividend
distribution); and allows you to sell or exchange fund shares.
- --------------------------------------------------------------------------------
Access Vanguard(R) www.vanguard.com [GRAPHIC APPEARS HERE]
You can use your personal computer to perform certain transactions for most
Vanguard funds by accessing our website. To establish this service, you must
register through the website. We will then send to you, by mail, an account
access password that allows you to process the following financial and
administrative transactions online:
. Open a new account.*
. Buy, sell or exchange shares of most funds.
. Change your name/address.
. Add/change fund options (including dividend options, Vanguard Fund Express(R),
bank instructions, checkwriting, and Vanguard Automatic Exchange Service(TM)).
*Only current Vanguard shareholders can open a new account online, by
exchanging shares from other existing Vanguard accounts.
- --------------------------------------------------------------------------------
Investor Information Department: 1-800-662-7447 (SHIP) Text Telephone: 1-800-
952- 3335 Call Vanguard for information on our funds, fund services, and
retirement accounts, and to request literature.
- --------------------------------------------------------------------------------
Client Services Department: 1-800-662-2739 (CREW) Text Telephone: 1-800-662-2738
Call Vanguard for information on your account, account transactions, and account
statements.
- --------------------------------------------------------------------------------
Services for Clients of Vanguard's Institutional Division: 1-888-809-8102
Vanguard's Institutional Division offers a variety of specialized services for
large institutional investors, including the ability to effect account
transactions through private electronic networks and third-party record keepers.
- --------------------------------------------------------------------------------
<PAGE>
12
Types of Accounts
Individuals and institutions can establish a variety of accounts with Vanguard.
- --------------------------------------------------------------------------------
For One or More People
Open an account in the name of one (individual) or more (joint tenants) people.
- --------------------------------------------------------------------------------
For Holding Personal Trust Assets [GRAPHIC APPEARS HERE]
Invest assets held in an existing personal trust.
- --------------------------------------------------------------------------------
For Individual Retirement Accounts [GRAPHIC APPEARS HERE]
Open a traditional IRA account or a Roth IRA account. Eligibility and other
requirements are established by federal law and Vanguard custodial account
agreements. For more information, please call 1-800-662-7447 (SHIP).
- --------------------------------------------------------------------------------
For an Organization [GRAPHIC APPEARS HERE]
Open an account as a corporation, partnership, endowment, foundation, or other
entity.
- --------------------------------------------------------------------------------
For Third-Party Trustee Retirement Investments
Open an account as a retirement trust or plan based on an existing corporate or
institutional plan. These accounts are established by the trustee of the
existing plan.
- --------------------------------------------------------------------------------
Vanguard Prototype Plans
Open a variety of retirement accounts using Vanguard prototype plans for
individuals, sole proprietorships, and small businesses. For more information,
please call 1-800-662-2003.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
A Note on Investing with Vanguard Through Other Firms
You may purchase or sell Fund shares through a financial intermediary such as a
bank, broker, or investment adviser. If you invest with Vanguard through an
intermediary, please read that firm's program materials carefully to learn of
any special rules that may apply. For example, special terms may apply to
additional service features, fees or other policies. Consult your intermediary
to determine when your order will be priced.
- --------------------------------------------------------------------------------
Buying Shares
You buy your shares at the Fund's next-determined net asset value after Vanguard
receives your request. As long as your request is received before the close of
trading on the New York Stock Exchange, generally 4 p.m. Eastern time, you will
buy your shares at that day's net asset value.
- --------------------------------------------------------------------------------
Minimum Investment to . . .
open a new account
$3,000 (regular account); $1,000 (Traditional IRAs and Roth IRAs).
add to an existing account
$100 by mail or exchange; $1,000 by wire.
- --------------------------------------------------------------------------------
A Note on Low Balances
The Fund reserves the right to close any nonretirement account whose balance
falls below the minimum initial investment. The Fund will deduct a $10 annual
fee in June if your nonretirement account balance falls below $2,500.
The fee is waived if your total Vanguard account assets are $50,000 or more.
- --------------------------------------------------------------------------------
By Mail to . . . [GRAPHIC APPEARS HERE]
open a new account
Complete and sign the application form and enclose your check.
add to an existing account
Mail your check with an Invest-By-Mail form detached from your confirmation
statement to the address listed on the form.
<PAGE>
13
Make your check payable to: The Vanguard Group-934
All purchases must be made in U.S. dollars, and checks must be drawn on U.S.
banks.
First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 2600 455 Devon Park Drive
Valley Forge, PA 19482-2600 Wayne, PA 19087-1815
For clients of Vanguard's Institutional Division . . .
First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 2900 455 Devon Park Drive
Valley Forge, PA 19482-2900 Wayne, PA 19087-1815
- --------------------------------------------------------------------------------
IMPORTANT NOTE: To prevent check fraud, Vanguard will not accept checks made
payable to third parties.
- --------------------------------------------------------------------------------
By Telephone to . . .[GRAPHIC APPEARS HERE]
open a new account
Call Vanguard Tele-Account(*) 24 hours a day--or Client Services during business
hours--to exchange from another Vanguard fund account with the same registration
(name, address, taxpayer identification number, and account type).
add to an existing account
Call Vanguard Tele-Account(*) 24 hours a day--or Client Services during business
hours--to exchange from another Vanguard fund account with the same registration
(name, address, taxpayer identification number, and account type). Use Vanguard
Fund Express (see "Services and Account Features") to transfer assets from your
bank account. Call Client Services before your first use to verify that this
option is in place.
Vanguard Tele-Account Client Services
1-800-662-6273 1-800-662-2739
*You must obtain a Personal Identification Number through Tele-Account at
least seven days before you request your first exchange.
- --------------------------------------------------------------------------------
IMPORTANT NOTE: Once you've requested a telephone transaction and a confirmation
number has been assigned, the transaction cannot be revoked. We reserve the
right to refuse any purchase request.
- --------------------------------------------------------------------------------
By Wire to Open a New Account or Add to an Existing Account [GRAPHIC APPEARS
HERE]
Call Client Services to arrange your wire transaction. Wire transactions are not
available for retirement accounts, except for asset transfers and direct
rollovers.
Wire to:
FRB ABA 021001088
Marine Midland Bank, New York
For credit to:
Account: 000112046
Vanguard Incoming Wire Account
In favor of:
Vanguard Selected Value Fund--934
[Account number, or temporary number for a new account]
[Registered account owner]
[Registered address]
- --------------------------------------------------------------------------------
<PAGE>
14
Buying Shares (continued)
You can redeem (that is, sell or exchange) shares purchased by check or
Vanguard Fund Express at any time. However, while your redemption request will
be processed at the next-determined net asset value after it is received, your
redemption proceeds will not be available until payment for your purchase is
collected, which may take up to ten calendar days.
Keep in mind that if you buy or sell Fund shares through a registered
broker/dealer or investment adviser, the broker/dealer or adviser may charge you
a service fee
- --------------------------------------------------------------------------------
A Note on Large Purchases
It is important that you call Vanguard before you invest a large dollar amount.
We must consider the interests of all Fund shareholders and so reserve the right
to refuse any purchase that will disrupt the Fund's operation or performance.
- --------------------------------------------------------------------------------
Redeeming Shares
This section describes how you can redeem--that is, sell or exchange--the Fund's
shares.
When Selling Shares:
. Vanguard sends the redemption proceeds to you or a designated third party.*
. You can sell all or part of your Fund shares at any time.
* Proceeds sent to third parties require a signature guarantee; see footnote
on page 16.
When Exchanging Shares:
. The redemption proceeds are used to purchase shares of a different Vanguard
fund.
. You must meet the receiving fund's minimum investment requirements.
. Vanguard reserves the right to revise or terminate the exchange privilege,
limit the amount of an exchange, or reject an exchange at any time, without
notice.
In both cases, your transaction will be based on the Fund's next-determined
share price, subject to any special rules discussed in this prospectus. For
exchanges, the purchase side of the transaction will be based on the receiving
fund's next-determined share price, again subject to any special rules discussed
in this prospectus.
- --------------------------------------------------------------------------------
Note: Once a redemption is processed and a confirmation
number given, the transaction cannot be canceled.
- --------------------------------------------------------------------------------
HOW TO REQUEST A REDEMPTION
You can request a redemption (that is, either a sale or exchange of shares) from
your Fund account in any one of three ways: online, by telephone, or by mail.
- --------------------------------------------------------------------------------
Online Requests [GRAPHIC APPEARS HERE]
Access Vanguard at www.vanguard.com
You can use your personal computer to sell or exchange shares of most Vanguard
funds by accessing our website. To establish this service, you must register
through the website. We will then send you, by mail, an account access password
that will enable you to sell or exchange shares online (as well as perform other
transactions).
Note: The Vanguard funds whose shares you cannot exchange online or by
telephone are Vanguard U.S. Stock Index Funds, Vanguard Balanced Index Fund,
Vanguard International Stock Index Funds, Vanguard REIT Index Fund, Vanguard
Total International Stock Index Fund, and Vanguard Growth and Income Fund. These
funds do, however, permit online exchanges within IRAs and other retirement
accounts. If you sell shares of these funds online, you will receive a
redemption check at your address of record.
- --------------------------------------------------------------------------------
Telephone Requests [GRAPHIC APPEARS HERE]
All Account Types Except Retirement:
Call Vanguard Tele-Account 24 hours a day--or Client Services during business
hours--to sell or exchange shares. You can exchange shares from this Fund to
open an account in another Vanguard fund or to add to an existing Vanguard fund
account with an identical registration.
<PAGE>
15
Retirement Accounts:
You can exchange--but not sell--shares by calling Tele-Account or Client
Services.
Vanguard Tele-Account Client Services
1-800-662-6273 1-800-662-2739
- --------------------------------------------------------------------------------
Special information: We will automatically establish the telephone redemption
option for your account, unless you instruct us otherwise in writing. While
telephone redemption is easy and convenient, this account feature involves a
risk of loss from unauthorized or fraudulent transactions. Vanguard will take
reasonable precautions to protect your account from fraud. You should do the
same by keeping your account information private and immediately reviewing any
account statements that we send to you. Make sure to contact Vanguard
immediately about any transaction you believe to be unauthorized.
- --------------------------------------------------------------------------------
We reserve the right to refuse a telephone redemption if the caller is unable
to provide:
[X] The ten-digit account number.
[X] The name and address exactly as registered on the account.
[X] The primary Social Security or employer identification number as registered
on the account.
[X] The Personal Identification Number, if applicable.
Please note that Vanguard will not be responsible for any account losses due to
telephone fraud, so long as we have taken reasonable steps to verify the
caller's identity. If you wish to remove the telephone redemption feature from
your account, please notify us in writing.
- --------------------------------------------------------------------------------
A Note on Unusual Circumstances
Vanguard reserves the right to revise or terminate the redemption privilege at
any time, without notice. In addition, Vanguard can stop selling shares or
postpone payment at times when the New York Stock Exchange is closed or under
any emergency circumstances as determined by the U.S. Securities and Exchange
Commission. If you experience difficulty making a telephone redemption during
periods of drastic economic or market change, you can send us your request by
regular or express mail. Follow the instructions on selling or exchanging shares
by mail in this section.
- --------------------------------------------------------------------------------
Mail Requests [GRAPHIC APPEARS HERE]
All Account Types Except Retirement:
Send a letter of instruction signed by all registered account holders. Include
the fund name and account number and (if you are selling) a dollar amount or
number of shares OR (if you are exchanging) the name of the fund you want to
exchange into and a dollar amount or number of shares. To exchange into an
account with a different registration (including a different name, address,
taxpayer identification number, or account type), you must provide Vanguard with
written instructions that include the guaranteed signatures of all current
owners of the fund from which you wish to redeem.
Vanguard Retirement Accounts:
For information on how to request distributions from:
. Traditional IRAs and Roth IRAs--call Client Services.
. SEP-IRAs, SIMPLE IRAs, 403(b)(7) custodial accounts, and Profit-Sharing and
Money Purchase Pension (Keogh) Plans--call Individual Retirement Plans at
1-800-662-2003.
Depending on your account registration type, additional documentation may be
required.
First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 2600 455 Devon Park Drive
Valley Forge, PA 19482-2600 Wayne, PA 19087-1815
<PAGE>
16
Redeeming Shares (continued)
For clients of Vanguard's Institutional Division...
First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 2900 455 Devon Park Drive
Valley Forge, PA 19482-2900 Wayne, PA 19087-1815
- --------------------------------------------------------------------------------
A Note on Large Redemptions
It is important that you call Vanguard before you redeem a large dollar amount.
We must consider the interests of all fund shareholders and so reserve the right
to delay delivery of your redemption proceeds--up to seven days--if the amount
will disrupt the Fund's operation or performance.
If you redeem more than $250,000 worth of Fund shares within any 90-day period,
the Fund reserves the right to pay part or all of the redemption proceeds above
$250,000 in kind, i.e., in securities, rather than in cash. If payment is made
in kind, you may incur brokerage commissions if you elect to sell the securities
for cash.
- --------------------------------------------------------------------------------
OPTIONS FOR REDEMPTION PROCEEDS
You may receive your redemption proceeds in one of three ways: check, wire
(money market funds and daily dividend funds only), or exchange to another
Vanguard fund.
- --------------------------------------------------------------------------------
Check Redemptions [GRAPHIC APPEARS HERE]
Normally, Vanguard will mail your check within two business days of a
redemption.
- --------------------------------------------------------------------------------
Wire Redemptions [GRAPHIC APPEARS HERE]
The wire redemption option is not automatic; you must establish it by completing
a special form or the appropriate section of your account application. Wire
redemptions can be initiated by mail or by telephone during Vanguard's business
hours, but not online.
For Money Market Funds:
For telephone requests made by 10:30 a.m. EST, the wire will arrive at your bank
by the close of business that same day. Requests made by 4 p.m. EST will arrive
at your bank by the close of business on the following business day.
For Daily Dividend Funds:
For telephone requests made by 4 p.m. EST, the wire will arrive at your bank by
the close of business on the following business day.
- --------------------------------------------------------------------------------
Exchange Redemptions
As described above, an exchange involves using the proceeds of your redemption
to purchase shares of another Vanguard fund.
- --------------------------------------------------------------------------------
FOR OUR MUTUAL PROTECTION
For your best interests and ours, Vanguard applies these additional requirements
to redemptions:
Request in "Good Order"
All redemption requests must be received by Vanguard in "good order." This means
that your request must include:
[X] The Fund name and account number.
[X] The amount of the transaction (in dollars or shares).
[X] Signatures of all owners exactly as registered on the account (for mail
requests).
[X] Signature guarantees (if required).*
[X] Any supporting legal documentation that may be required.
[X] Any outstanding certificates representing shares to be redeemed.
*For instance, a signature guarantee must be provided by all registered
account shareholders when redemption proceeds are to be sent to a different
person or address. A signature guarantee can be obtained from most banks,
credit unions, and licensed brokers.
Transactions are processed at the next-determined share price after Vanguard has
received all required information.
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
Limits on Account Activity
Because excessive account transactions can disrupt management of the Fund and
increase the Fund's costs for all shareholders, Vanguard limits account activity
as follows:
. You may make no more than two substantive "round trips" through
the Fund during any 12-month period.
. Your round trips through the Fund must be at least 30 days apart.
. The Fund may refuse a share purchase at any time, for any reason.
. Vanguard may revoke an investor's telephone exchange privilege at any time,
for any reason.
A "round trip" is a redemption from the Fund followed by a purchase back into
the Fund. Also, "round trip" covers transactions accomplished by any combination
of methods, including transactions conducted by check, wire, or exchange to/from
another Vanguard fund. "Substantive" means a dollar amount that Vanguard
determines, in its sole discretion, could adversely affect management of the
Fund.
- --------------------------------------------------------------------------------
Return Your Share Certificates
Any portion of your account represented by share certificates cannot be redeemed
until you return the certificates to Vanguard. Certificates must be returned
(unsigned), along with a letter requesting the sale or exchange you wish to
process, via certified mail to:
The Vanguard Group
455 Devon Park Drive
Wayne, PA 19087-1815
- --------------------------------------------------------------------------------
All Trades Final
Vanguard will not cancel any transaction request (including any purchase or
redemption) that we believe to be authentic once the request has been received
and a confirmation number assigned.
- --------------------------------------------------------------------------------
Transferring Registration
You can transfer the registration of your Fund shares to another owner by
completing a transfer form and sending it to Vanguard.
First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 2600 455 Devon Park Drive
Valley Forge, PA 19482-2600 Wayne, PA 19087-1815
For clients of Vanguard's Institutional Division . . .
First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 2900 455 Devon Park Drive
Valley Forge, PA 19482-2900 Wayne, PA 19087-1815
- --------------------------------------------------------------------------------
Fund and Account Updates
STATEMENTS AND REPORTS
We will send you clear, concise account and tax statements to help you keep
track of your Fund account throughout the year as well as when you are preparing
your income tax returns.
In addition, you will receive financial reports about the Fund twice a year.
These comprehensive reports include an assessment of the Fund's performance (and
a comparison to its industry benchmark), an overview of the markets, a report
from the advisers, a listing of the Fund's holdings, and other financial
statements.
<PAGE>
18
Fund and Account Updates (continued)
To keep the Fund's costs as low as possible (so that you and other
shareholders can keep more of the Fund's investment earnings), Vanguard attempts
to eliminate duplicate mailings to the same address. When we find that two or
more Fund shareholders have the same last name and address, we send just one
Fund report to that address--instead of mailing separate reports to each
shareholder. If you want us to send separate reports, however, you may notify
our Investor Information Department at 1-800-662-7447.
- --------------------------------------------------------------------------------
Confirmation Statement
Sent each time you buy, sell, or exchange shares; confirms the trade date and
the amount of your transaction.
- --------------------------------------------------------------------------------
Portfolio Summary [GRAPHIC OF BOOK APPEARS HERE]
Mailed quarterly for most accounts; shows the market value of your account at
the close of the statement period, as well as distributions, purchases, sales,
and exchanges for the current calendar year.
- --------------------------------------------------------------------------------
Fund Financial Reports
Mailed in December and June for this Fund.
- --------------------------------------------------------------------------------
Tax Statements
Generally mailed in January; report previous year's dividend and capital gains
distributions, proceeds from the sale of shares, and distributions from IRAs or
other retirement accounts.
- --------------------------------------------------------------------------------
Average Cost Review Statement
Issued quarterly for most taxable accounts (accompanies your Portfolio Summary);
shows the average cost of shares that you redeemed during the calendar year,
using the average cost single category method.
- --------------------------------------------------------------------------------
<PAGE>
[TO COME]
<PAGE>
[TO COME]
<PAGE>
Glossary of Investment Terms
Capital Gains Distribution
Payment to mutual fund shareholders of gains realized on securities that the
fund has sold at a profit, minus any realized losses.
Cash Reserves
Cash deposits, short-term bank deposits, and money market instruments which
include U.S. Treasury bills, bank certificates of deposit (CDs), repurchase
agreements, commercial paper, and banker's acceptances.
Common Stock
A security representing ownership rights in a corporation. A stockholder is
entitled to share in the company's profits, some of which may be paid out as
dividends.
Dividend Income
Payment to shareholders of income from interest or dividends generated by a
fund's investments.
Dollar-Cost Averaging
Investing equal amounts of money at regular intervals on an ongoing basis. This
technique ensures that an investor buys fewer shares when prices are high and
more shares when prices are low.
Expense Ratio
The percentage of a fund's average net assets used to pay its expenses. The
expense ratio includes management fees, administrative fees, and any 12b-1
distribution fees.
Fixed-Income Securities
Investments, such as bonds, that have a fixed payment schedule. While the level
of income offered by these securities is predetermined, their prices may
fluctuate.
Fund Diversification
Holding a variety of securities so that a fund's return is not badly hurt by the
poor performance of a single security or industry.
Growth Stock Fund
A mutual fund that emphasizes stocks of companies believed to have above-average
prospects for growth. Reflecting market expectations for superior growth, the
prices of growth stocks often are relatively high in comparison to revenue,
earnings, book value and dividends.
Investment Adviser
An organization that makes the day-to-day decisions regarding a fund's
investments.
Net Asset Value (NAV)
The market value of a mutual fund's total assets, minus liabilities, divided by
the number of shares outstanding. The value of a single share is called its
share value or share price.
Price/Earnings (P/E) Ratio
The current share price of a stock, divided by its per-share earnings (profits)
from the past year. A stock selling for $20, with earnings of $2 per share, has
a price/earnings ratio of 10.
Principal
The amount of your own money you put into an investment.
Securities
Stocks, bonds, and other investment vehicles.
Total Return
A percentage change, over a specified time period, in a mutual fund's net asset
value, with the ending net asset value adjusted to account for the reinvestment
of all distributions of dividends and capital gains.
Value Stock Fund
A mutual fund that emphasizes stocks of companies whose growth prospects are
generally regarded as subpar by the market. Reflecting these market
expectations, the prices of value stocks typically are below-average in
comparison to such factors as revenue, earnings, book value, and dividends.
Volatility
The fluctuations in value of a mutual fund or other security. The greater a
fund's volatility, the wider the fluctuations between its high and low prices.
Yield
Income (interest or dividends) earned by an investment, expressed as a
percentage of the investment's price.
<PAGE>
[LOGO OF THE VANGUARD GROUP APPEARS HERE]
Post Office Box 2600
Valley Forge, PA 19482-2600
For More Information
If you'd like more information about Vanguard Selected Value Fund, the following
documents are available free upon request:
Annual/Semiannual Report to Shareholders
Additional information about the Fund's investments is available in the Fund's
annual and semiannual reports to shareholders. In these reports, you will find a
discussion of the market conditions and investment strategies that significantly
affected the Fund's performance during the most recent fiscal year.
Statement of Additional Information (SAI)
The SAI provides more detailed information about the Fund.
The current annual and semiannual reports and the SAI are incorporated by
reference into (and are thus legally a part of) this prospectus.
To receive a free copy of the latest annual or semiannual report or the SAI, or
to request additional information about the Fund or other Vanguard funds, please
contact us as follows:
The Vanguard Group
Investor Information Department
P.O. Box 2600
Valley Forge, PA 19482-2600
Telephone:
1-800-662-7447 (SHIP)
Text Telephone:
1-800-952-3335
World Wide Web
www.vanguard.com
E-mail:
[email protected]
If you are a current Fund shareholder and would like information about your
account, account transactions, and/or account statements, please call:
Client Services Department
Telephone:
1-800-662-2739 (CREW)
Text Telephone:
1-800-662-2738
Information provided by the Securities and Exchange Commission (SEC)
You can review and copy information about the Fund (including the SAI) at the
SEC's Public Reference Room in Washington, D.C. To find out more about this
public service, call the SEC at 1-800-SEC-0330. Reports and other information
about the Fund are also available on the SEC's website (www.sec.gov), or you can
receive copies of this information, for a fee, by writing the Public Reference
Section, Securities and Exchange Commission, Washington, DC 20549-6009.
Fund's Investment Company Act
file number: 811-07443
(C) 1999 Vanguard Marketing Corporation, Distributor. All rights reserved.
P934N-02/05/1999
<PAGE>
PART B
VANGUARD WHITEHALL FUNDS
(THE "TRUST")
STATEMENT OF ADDITIONAL INFORMATION
FEBRUARY 5, 1999
This Statement is not a prospectus but should be read in conjunction with
the Trust's current Prospectus (dated February 5, 1999). To obtain the
Prospectus please call:
INVESTOR INFORMATION DEPARTMENT:
1-800-662-7447
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Description of the Trust................................................... B-1
Investment Policies........................................................ B-3
Fundamental Investment Limitations......................................... B-8
Management of the Trust.................................................... B-10
Investment Advisory Services............................................... B-13
Portfolio Transactions..................................................... B-15
Yield and Total Return..................................................... B-16
Purchase of Shares......................................................... B-16
Redemption of Shares....................................................... B-17
Share Price................................................................ B-17
Financial Statements....................................................... B-19
Comparative Indexes........................................................ B-20
</TABLE>
DESCRIPTION OF THE TRUST
ORGANIZATION
The Trust was organized as a Maryland corporation in 1995, and was reorga-
nized as a Delaware business trust in June, 1998. Prior to its reorganization
as a Delaware business trust, the Trust was known as Vanguard Whitehall Funds,
Inc. The Trust is registered with the United States Securities and Exchange
Commission under the Investment Company Act of 1940 (the "1940 Act") as an
open-end, diversified management investment company. It currently offers the
following fund and class of shares:
VANGUARD SELECTED VALUE FUND (THE "FUND")
The Trust has the ability to offer additional funds or classes of shares.
There is no limit on the number of full and fractional shares that the Trust
may issue for a single fund or class of shares.
SERVICE PROVIDERS
CUSTODIAN. State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02110 serves as the Fund's custodian. The custodian is responsi-
ble for maintaining the Fund's assets and keeping all necessary accounts and
records.
INDEPENDENT PUBLIC ACCOUNTANT. PricewaterhouseCoopers LLP, 30 South 17th
Street, Philadelphia, Pennsylvania 19103, serves as the Fund's independent
public accountant. The accountant audits the Fund's financial statements and
provides other related services.
B-1
<PAGE>
TRANSFER AND DIVIDEND-PAYING AGENT. The Fund's transfer agent and dividend-
paying agent is The Vanguard Group, Inc., 100 Vanguard Boulevard, Malvern,
Pennsylvania 19355.
CHARACTERISTICS OF THE TRUST'S SHARES
RESTRICTIONS ON HOLDING OR DISPOSING OF SHARES. There are no restrictions on
the right of shareholders to retain or dispose of the Trust's shares, other
than the possible future termination of the Trust or any of its funds. The
Trust or any of its fund(s) may be terminated by reorganization into another
mutual fund or by liquidation and distribution of the assets of the affected
fund. Unless terminated by reorganization or liquidation, the Trust and its
fund(s) will continue indefinitely.
SHAREHOLDER LIABILITY. The Trust is organized under Delaware law, which pro-
vides that shareholders of a business trust are entitled to the same limita-
tions of personal liability as shareholders of a corporation organized under
Delaware law. Effectively, this means that a shareholder of the Trust will not
be personally liable for payment of the Trust's debts except by reason of his
or her own conduct or acts. In addition, a shareholder could incur a financial
loss on account of a Trust obligation only if the Trust itself had no remain-
ing assets with which to meet such obligation. We believe that the possibility
of such a situation arising is extremely remote.
DIVIDEND RIGHTS. The shareholders of a fund are entitled to receive any div-
idends or other distributions declared for such fund. No shares have priority
or preference over any other shares of the same fund with respect to distribu-
tions. Distributions will be made from the assets of a fund, and will be paid
ratably to all shareholders of the fund (or class) according to the number of
shares of such fund (or class) held by shareholders on the record date. The
amount of income dividends per share may vary between separate share classes
of the same fund based upon differences in the way that expenses are allocated
between share classes pursuant to a multiple class plan.
VOTING RIGHTS. Shareholders are entitled to vote on a matter if: (i) a
shareholder vote is required under the 1940 Act; (ii) the matter concerns an
amendment to the Declaration of Trust that would adversely affect to a mate-
rial degree the rights and preferences of the shares of any class or series;
or (iii) the Trustees determine that it is necessary or desirable to obtain a
shareholder vote. The 1940 Act requires a shareholder vote under various cir-
cumstances, including to elect or remove Trustees upon the written request of
shareholders representing 10% or more of the Trust's net assets, and to change
any fundamental policy of the Trust. Shareholders of the Trust receive one
vote for each dollar of net asset value owned on the record date, and a frac-
tional vote for each fractional dollar of net asset value owned on the record
date. However, only the shares of the fund affected by a particular matter are
entitled to vote on that matter. Voting rights are non-cumulative and cannot
be modified without a majority vote of shareholders.
LIQUIDATION RIGHTS. In the event of liquidation, shareholders will be enti-
tled to receive a pro rata share of the net assets of applicable funds of the
Trust.
PREEMPTIVE RIGHTS. There are no preemptive rights associated with the Trust.
CONVERSION RIGHTS. There are no conversion rights associated with the Trust.
REDEMPTION PROVISIONS. The Trust's redemption provisions are described in
its current prospectus and elsewhere in this Statement of Additional Informa-
tion.
SINKING FUND PROVISIONS. The Trust has no sinking fund provisions.
CALLS OR ASSESSMENT. The Trust's shares are fully paid and non-assessable.
B-2
<PAGE>
TAX STATUS OF THE TRUST
The Fund qualifies as a "regulated investment company" under Subchapter M of
the Internal Revenue Code. This special tax status means that the Fund will
not be liable for federal tax on income and capital gains distributed to
shareholders. In order to preserve its tax status, the Fund must comply with
certain requirements. If it fails to meet these requirements in any taxable
year, it will be subject to tax on its taxable income at corporate rates, and
all distributions from earnings and profits, including any distributions of
net tax-exempt income and net long-term capital gains, will be taxable to
shareholders as ordinary income. In addition, the Fund could be required to
recognize unrealized gains, pay substantial taxes and interest, and make sub-
stantial distributions before regaining its tax status as a regulated invest-
ment company.
INVESTMENT POLICIES
The following policies supplement the Trust's Investment objectives and pol-
icies set forth in the Prospectus.
FUTURES CONTRACTS
Selected Value Fund may enter into futures contracts, options, and options
on futures contracts for several reasons: to maintain cash reserves while re-
maining fully invested, to facilitate trading, to reduce transaction costs, or
to seek higher investment returns when a futures contract is priced more at-
tractively than the underlying equity security or index. Futures contracts
provide for the future sale by one party and purchase by another party of a
specified amount of a specific security at a specified future time and at a
specified price. Futures contracts which are standardized as to maturity date
and underlying financial instrument are traded on national futures exchanges.
Futures exchanges and trading are regulated under the Commodity Exchange Act
by the Commodity Futures Trading Commission ("CFTC"), a U.S. Government agen-
cy. Assets committed to futures contracts will be segregated to the extent re-
quired by law.
Although futures contracts by their terms call for actual delivery or ac-
ceptance of the underlying securities, in most cases the contracts are closed
out before the settlement date without the making or taking of delivery. Clos-
ing out an open futures position is done by taking an opposite position ("buy-
ing" a contract which has previously been "sold," or "selling" a contract pre-
viously purchased) in an identical contract to terminate the position. Broker-
age commissions are incurred when a futures contract is bought or sold.
Futures traders are required to make a good faith margin deposit in cash or
government securities with a broker or custodian to initiate and maintain open
positions in futures contracts. A margin deposit is intended to assure comple-
tion of the contract (delivery or acceptance of the underlying security) if it
is not terminated prior to the specified delivery date. Minimal initial margin
requirements are established by the futures exchange and may be changed. Bro-
kers may establish deposit requirements which are higher than the exchange
minimums. Futures contracts are customarily purchased and sold on margin which
may range upward from less than 5% of the value of the contract being traded.
After a futures contract position is opened, the value of the contract is
marked to market daily. If the futures contract price changes to the extent
that the margin on deposit does not satisfy margin requirements, payment of
additional "variation" margin will be required. Conversely, change in the con-
tract value may reduce the required margin, resulting in a repayment of excess
margin to the contract holder. Variation margin payments are made to and from
the futures broker for as long as the contract remains open. The Fund expects
to earn interest income on its margin deposits.
Traders in futures contracts may be broadly classified as either "hedgers"
or "speculators." Hedgers use the futures markets primarily to offset unfavor-
able changes in the value of securities otherwise
B-3
<PAGE>
held for investment purposes or expected to be acquired by them. Speculators
are less inclined to own the securities underlying the futures contracts which
they trade, and use futures contracts with the expectation of realizing prof-
its from fluctuations in the prices of underlying securities. The Fund intends
to use futures contracts only for bona fide hedging purposes.
Regulations of the CFTC applicable to the Fund require that all of its
futures transactions constitute bona fide hedging transactions except to the
extent that the aggregate initial margins and premiums required to establish
any non-hedging positions do not exceed five percent of the value of the
Fund's portfolio. The Fund will only sell futures contracts to protect securi-
ties it owns against price declines or purchase contracts to protect against
an increase in the price of securities it intends to purchase. As evidence of
this hedging interest, the Fund expects that approximately 75% of its futures
contract purchases will be "completed;" that is, equivalent amounts of related
securities will have been purchased or are being purchased by the Fund upon
sale of open futures contracts.
Although techniques other than the sale and purchase of futures contracts
could be used to control the Fund's exposure to market fluctuations, the use
of futures contracts may be a more effective means of hedging this exposure.
While the Fund will incur commission expenses in both opening and closing out
futures positions, these costs are lower than transaction costs incurred in
the purchase and sale of the underlying securities.
RESTRICTIONS ON THE USE OF FUTURES CONTRACTS
The Fund will not enter into futures contract transactions to the extent
that, immediately thereafter, the sum of its initial margin deposits on open
contracts exceeds 5% of the market value of the Fund's total assets. In addi-
tion, the Fund will not enter into futures contracts to the extent that its
outstanding obligations to purchase securities under these contracts would ex-
ceed 20% of the Fund's total assets.
RISK FACTORS IN FUTURES TRANSACTIONS
Positions in futures contracts may be closed out only on an Exchange which
provides a secondary market for such futures. However, there can be no assur-
ance that a liquid secondary market will exist for any particular futures con-
tract at any specific time. Thus, it may not be possible to close a futures
position. In the event of adverse price movements, the Fund would continue to
be required to make daily cash payments to maintain its required margin. In
such situations, if the Fund has insufficient cash, it may have to sell port-
folio securities to meet daily margin requirements at a time when it may be
disadvantageous to do so. In addition, the Fund may be required to make deliv-
ery of the instruments underlying futures contracts it holds. The inability to
close options and futures positions also could have an adverse impact on the
ability to effectively hedge. The Fund will minimize the risk that it will be
unable to close out a futures contract by only entering into futures which are
traded on national futures exchanges and for which there appears to be a liq-
uid secondary market.
The risk of loss in trading futures contracts in some strategies can be sub-
stantial, due both to the low margin deposits required, and the extremely high
degree of leverage involved in futures pricing. As a result, a relatively
small price movement in a futures contract may result in immediate and sub-
stantial loss (as well as gain) to the investor. For example, if at the time
of purchase, 10% of the value of the futures contract is deposited as margin,
a subsequent 10% decrease in the value of the futures contract would result in
a total loss of the margin deposit, before any deduction for the transaction
costs, if the account were then closed out. A 15% decrease would result in a
loss equal to 150% of the original margin deposit if the contract were closed
out. Thus, a purchase or sale of a futures contract may result in losses in
excess of the amount invested in the contract. However, because the futures
strategies of the Fund are engaged in only for hedging purposes, the Adviser
does not believe that the Fund is subject to the risks of loss frequently as-
sociated with futures transactions. The Fund would presumably
B-4
<PAGE>
have sustained comparable losses if, instead of the futures contract, it had
invested in the underlying financial instrument and sold it after the decline.
Utilization of futures transactions by the Fund does involve the risk of im-
perfect or no correlation where the securities underlying futures contracts
have different maturities than the portfolio securities being hedged. It is
also possible that the Fund could both lose money on futures contracts and
also experience a decline in value of its portfolio securities. There is also
the risk of loss by the Fund of margin deposits in the event of bankruptcy of
a broker with whom the Fund has an open position in a futures contract or re-
lated option.
Most futures exchanges limit the amount of fluctuation permitted in futures
contract prices during a single trading day. 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 unfa-
vorable 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 future positions and subjecting some
futures traders to substantial losses.
FEDERAL TAX TREATMENT OF FUTURES CONTRACTS
Except for transactions which Selected Value Fund has identified as hedging
transactions, the Fund is required for Federal income tax purposes to recog-
nize as income for each taxable year its net unrealized gains and losses on
certain futures contracts as of the end of the year as well as those actually
realized during the year. In most cases, any gain or loss recognized with re-
spect to a futures contract is considered to be 60% long-term capital gain or
loss and 40% short-term capital gain or loss, without regard to the holding
period of the contract. Furthermore, sales of futures contracts which are in-
tended to hedge against a change in the value of securities held by the Fund
may affect the holding period of such securities and, consequently, the nature
of the gain or loss on such securities upon disposition. The Fund may be re-
quired to defer the recognition of losses on futures contracts to the extent
of any unrecognized gains on related positions held by the Fund.
In order for the Fund to continue to qualify for Federal income tax treat-
ment as a regulated investment company, at least 90% of its gross income for a
taxable year must be derived from qualifying income; i.e., dividends, inter-
est, income derived from loans of securities, gains from the sale of securi-
ties or foreign currencies or other income derived with respect to the Fund's
business of investing in securities. It is anticipated that any net gain real-
ized from the closing out of futures contracts will be considered qualifying
income for purposes of the 90% requirement.
The Fund will distribute to shareholders annually any net capital gains
which have been recognized for Federal income tax purposes (including
unrealized gains at the end of the Fund's fiscal year) on futures transac-
tions. Such distributions will be combined with distributions of capital gains
realized on the Fund's other investments and shareholders will be advised on
the nature of the transactions.
REPURCHASE AGREEMENTS
Selected Value Fund may invest in repurchase agreements with commercial
banks, brokers or dealers either for defensive purposes due to market condi-
tions or to generate income from its excess cash balances. A repurchase agree-
ment is an agreement under which the Fund acquires a money market instrument
(generally a security issued by the U.S Government or an agency thereof, a
banker's acceptance or a certificate of deposit) from a commercial bank, bro-
ker or dealer, subject to resale to the seller at an agreed upon price and
date (normally, the next business day). A repurchase agreement may be
B-5
<PAGE>
considered a loan collateralized by securities. The resale price reflects an
agreed upon interest rate effective for the period the instrument is held by
the Fund and is unrelated to the interest rate on the underlying instrument.
In these transactions, the securities acquired by the Fund (including accrued
interest earned thereon) must have a total value in excess of the value of the
repurchase agreement and are held by a Custodian Bank until repurchased. In
addition, the Trust's Board of Trustees will monitor the Fund's repurchase
agreement transactions generally and will establish guidelines and standards
for review by the investment adviser of the creditworthiness of any bank, bro-
ker or dealer party to a repurchase agreement with the Fund.
The use of repurchase agreements involves certain risks. For example, if the
other party to the agreement defaults on its obligation to repurchase the un-
derlying security at a time when the value of the security has declined, the
Fund may incur a loss upon disposition of the security. If the other party to
the agreement becomes insolvent and subject to liquidation or reorganization
under the Bankruptcy Code or other laws, a court may determine that the under-
lying security is collateral for a loan by the Fund not within the control of
the Fund and therefore the realization by the Fund on such collateral may be
automatically stayed. Finally, it is possible that the Fund may not be able to
substantiate its interest in the underlying security and may be deemed an
unsecured creditor of the other party to the agreement. While the Trust's man-
agement acknowledges these risks, it is expected that they can be controlled
through careful monitoring procedures.
ILLIQUID SECURITIES
The Fund may invest up to 15% of its net assets in illiquid securities. Il-
liquid securities are securities that may not be sold or disposed of in the
ordinary course of business within seven business days at approximately the
value at which they are being carried on the Fund's books.
The Fund may invest in restricted, privately placed securities that, under
SEC rules, may be sold only to qualified institutional buyers. Because these
securities can be resold only to qualified institutional buyers, they may be
considered illiquid securities--meaning that they could be difficult for the
Fund to convert to cash if needed.
If a substantial market develops for a restricted security held by the Fund,
it will be treated as a liquid security, in accordance with procedures and
guidelines approved by the Trust's Board of Trustees. This generally includes
securities that are unregistered than can be sold to qualified institutional
buyers in accordance with Rule 144A under the 1933 Act. While the Fund's in-
vestment adviser determines the liquidity of restricted securities on a daily
basis, the Board oversees and retains ultimate responsibility for the advis-
er's decisions. Several factors the Board considers in monitoring these deci-
sions include the valuation of a security, the availability of qualified in-
stitutional buyers, and the availability of information about the security's
issuer.
LENDING OF SECURITIES
Selected Value Fund may lend its securities on a short-term or long-term
basis to qualified institutional investors (typically brokers, dealers, banks
or other financial institutions) who need to borrow securities in order to
complete certain transactions, such as covering short sales, avoiding failures
to deliver securities or completing arbitrage operations. By lending its
securities, the Fund will be attempting to increase its net investment income
through the receipt of interest on the loan. Any gain or loss in the market
price of the securities loaned that might occur during the term of the loan
would be for the account of the Fund. The terms and the structure and the
aggregate amount of such loans must be consistent with the Investment Company
Act of 1940, and the Rules and Regulations or interpretations of the
Securities and Exchange Commission (the "Commission") thereunder. These
provisions limit the amount of securities a fund may lend to 33 1/3% of the
Fund's total assets, and require that (a) the borrower pledge and maintain
with the Fund collateral consisting of cash, an
B-6
<PAGE>
irrevocable letter of credit or securities issued or guaranteed by the United
States Government having a value at all times not less than 100% of the value
of the securities loaned, (b) the borrower add to such collateral whenever the
price of the securities loaned rises (i.e., the borrower "marks to the market"
on a daily basis), (c) the loan be made subject to termination by the Fund at
any time and (d) the Fund receive reasonable interest on the loan which may
include the Fund's investing any cash collateral in interest bearing short-
term investments, any distribution on the loaned securities and any increase
in their market value. Loan arrangements made by the Fund will comply with all
other applicable regulatory requirements, including the rules of the New York
Stock Exchange, which rules presently require the borrower, after notice, to
redeliver the securities within the normal settlement time of three business
days. All relevant facts and circumstances, including the credit-worthiness of
the broker, dealer or institution, will be considered in making decisions with
respect to the lending of securities, subject to review by the Trust's Board
of Trustees.
VANGUARD INTERFUND LENDING PROGRAM
The SEC has issued an exemptive order permitting the Fund to participate in
Vanguard's interfund lending program. This program allows the Vanguard funds
to borrow money from and loan money to each other for temporary or emergency
purposes. The program is subject to a number of conditions, including the re-
quirement that no fund may borrow or lend money through the program unless it
receives a more favorable interest rate than is available from a typical bank
for a comparable transaction. In addition, a fund may participate in the pro-
gram only if and to the extent that such participation is consistent with the
fund's investment objective and other investment policies. The Boards of
Trustees of the Vanguard funds are responsible for ensuring that the interfund
lending program operates in compliance with all conditions of the SEC's
exemptive order.
FOREIGN INVESTMENTS
Vanguard Selected Value Fund may invest up to 20% of its assets in securi-
ties of foreign companies. Investors should recognize that investing in for-
eign companies involves certain special considerations which are not typically
associated with investing in U.S. companies.
CURRENCY RISK
Since the stocks of foreign companies are frequently dominated in foreign
currencies, and since the Fund may temporarily hold uninvested reserves in
bank deposits in foreign currencies, the Fund will be affected favorably or
unfavorably by changes in currency rates and in exchange control regulations,
and may incur costs in connection with conversions between various currencies.
COUNTRY RISK
As foreign companies are not generally subject to uniform accounting, audit-
ing and financial reporting standards and practices comparable to those appli-
cable to domestic companies, there may be less publicly available information
about certain foreign companies than about domestic companies. Securities of
some foreign companies are generally less liquid and more volatile than secu-
rities of comparable domestic companies. There is generally less government
supervision and regulation of stock exchanges, brokers and listed companies
than in the U.S. In addition, with respect to certain foreign countries, there
is the possibility of expropriation or confiscatory taxation, political or so-
cial instability, or diplomatic developments which could affect U.S. invest-
ments in those countries.
Although the Fund will endeavor to achieve most favorable execution costs in
its portfolio transactions, fixed commissions on many foreign stock exchanges
are generally higher than negotiated commissions on U.S. exchanges. In addi-
tion, it is expected that the expenses for custodial arrangements of the
Fund's foreign securities will be somewhat greater than the expenses for cus-
todial arrangements for handling U.S. securities of equal value.
B-7
<PAGE>
Certain foreign governments levy withholding taxes against dividend and in-
terest income. Although in some countries a portion of these taxes is recover-
able, the non-recovered portion of foreign withholding taxes will reduce the
income received from foreign companies held by the Fund. However, these for-
eign withholding taxes are not expected to have a significant impact on the
Fund, since the Fund seeks long-term capital appreciation and any income
should be considered incidental.
FEDERAL TAX TREATMENT OF NON-U.S. TRANSACTIONS
Special rules govern the Federal income tax treatment of certain transac-
tions denominated in foreign currency or determined by reference to the value
of one or more foreign currencies. The types of transactions covered by the
special rules include the following: (i) the acquisition of, or becoming the
obligor under, a bond or other debt instrument (including, to the extent pro-
vided in Treasury regulations, preferred stock); (ii) the accruing of certain
trade receivables and payables; and (iii) the entering into or acquisition of
any forward contract, futures contract, option and similar financial instru-
ment if such instrument is not marked to market. The disposition of a currency
other than the U.S. dollar by a U.S. taxpayer is also treated as a transaction
subject to the special currency rules. However, foreign currency-related regu-
lated futures contracts and nonequity options are generally not subject to the
special currency rules if they are or would be treated as sold for their fair
market value at year-end under the marking-to-market rules applicable to other
futures contracts unless an election is made to have such currency rules ap-
ply. With respect to transactions covered by the special rules, foreign cur-
rency gain or loss is calculated separately from any gain or loss on the un-
derlying transaction is normally taxable as ordinary gain or loss. A taxpayer
may elect to treat as capital gain or loss foreign currency gain or loss aris-
ing from certain identified forward contracts, futures contracts and options
that are capital assets in the hands of the taxpayer and which are not part of
a straddle. The Treasury Department issued regulations under which certain
transactions subject to the special currency rules that are part of a "section
988 hedging transaction" (as defined in the Internal Revenue Code of 1986, as
amended, and the Treasury regulations) will be integrated and treated as a
single transaction or otherwise treated consistently for purposes of the Code.
Any gain or loss attributable to the foreign currency component of a transac-
tion engaged in by a fund which is not subject to the special currency rules
(such as foreign equity investments other than certain preferred stocks) will
be treated as capital gain or loss and will not be segregated from the gain or
loss on the underlying transaction.
INVESTMENT IN SHORT-TERM FIXED INCOME SECURITIES
Although it normally seeks to remain substantially invested in equity secu-
rities, Selected Value Fund may invest for temporary purposes in certain
short-term fixed income securities. Such securities may be used to invest un-
committed cash balances, to maintain liquidity to meet shareholder redemp-
tions, or to take a temporary defensive position against potential stock mar-
ket declines. These securities include: obligations of the United States Gov-
ernment and its agencies or instrumentalities; commercial paper, bank certifi-
cates of deposit, and banker's acceptances; and repurchase agreements collat-
eralized by these securities.
FUNDAMENTAL INVESTMENT LIMITATIONS
The Fund is subject to the following fundamental investment limitations,
which cannot be changed in any material way without the approval of the hold-
ers of a majority of the Fund's shares. For these purposes, a "majority" of
the Fund's shares means shares representing the lesser of: (i) 67% or more of
the Fund's net asset value, so long as shares representing more than 50% of
the Fund's net asset value are present or represented by proxy; or (ii) more
than 50% of the Fund's net asset value.
BORROWING. The Fund may not borrow money, except for temporary or emergency
purposes in an amount not exceeding 15% of the Fund's net assets. The Fund may
borrow money through banks,
B-8
<PAGE>
reverse repurchase agreements, or Vanguard's interfund lending program only,
and must comply with all applicable regulatory conditions. The Fund may not
make any additional investments whenever its outstanding borrowings exceed 5%
of net assets.
COMMODITIES. The Fund may not invest in commodities, except that it may in-
vest in stock futures contracts, stock options, options on stock futures con-
tracts, and forward foreign currency exchange transactions. No more than 5% of
the Fund's total assets may be used as initial margin deposit for futures con-
tracts, and no more than 20% of the Fund's total assets may be invested in
swap agreements at any time.
DIVERSIFICATION. With respect to 75% of its total assets, the Fund may not:
(i) purchase more than 10% of the outstanding voting securities of any one is-
suer; or (ii) purchase securities of any issuer if, as a result, more than 5%
of the Fund's total assets would be invested in that issuer's securities. This
limitation does not apply to obligations of the United States Government, its
agencies, or instrumentalities.
ILLIQUID SECURITIES. The Fund may not acquire any security if, as a result,
more than 15% of its net assets would be invested in securities that are il-
liquid.
INDUSTRY CONCENTRATION. The Fund may not invest more than 25% of its total
assets in any one industry.
INVESTING FOR CONTROL. The Fund may not invest in a company for purposes of
controlling its management.
INVESTMENT COMPANIES. The Fund may not invest in any other investment compa-
ny, except through a merger, consolidation or acquisition of assets approved
by the Fund's shareholders, or to the extent permitted by Section 12 of the
1940 Act. Investment companies whose shares the Fund acquires pursuant to Sec-
tion 12 must have investment objectives and investment policies consistent
with those of the Fund.
LOANS. The Fund may not lend money to any person except by purchasing fixed
income securities that are publicly distributed or customarily purchased by
institutional investors, by lending its portfolio securities, or through Van-
guard's interfund lending program.
MARGIN. The Fund may not purchase securities on margin or sell securities
short, except as permitted by the Fund's investment policies relating to com-
modities.
PLEDGING ASSETS. The Fund may not pledge, mortgage or hypothecate more than
15% of its net assets.
REAL ESTATE. The Fund may not invest directly in real estate, although it
may invest in securities of companies that deal in real estate and bonds se-
cured by real estate.
SENIOR SECURITIES. The Fund may not issue senior securities, except in com-
pliance with the 1940 Act.
UNDERWRITING. The Fund may not engage in the business of underwriting secu-
rities issued by other persons. The Fund will not be considered an underwriter
when disposing of its investment securities.
UNSEASONED COMPANIES. The Fund may not invest more than 5% of its assets in
companies that have less than three years operating history (including the op-
erating history of any predecessors).
PUTS AND CALLS. The Fund may not purchase or sell put options or call op-
tions, except as provided in the prospectus.
B-9
<PAGE>
The above-mentioned investment limitations are considered at the time in-
vestment securities are purchased.
None of these limitations prevents the Trust from participating in The Van-
guard Group ("Vanguard"). Because the Trust is a member of the Group, the Fund
may own securities issued by Vanguard, make loans to Vanguard, and contribute
to Vanguard's costs or other financial requirement. See "Management of the
Trust" for more information.
MANAGEMENT OF THE TRUST
THE VANGUARD GROUP
The Trust is a member of The Vanguard Group of Investment Companies which
consists of more than 30 investment companies (the "Trusts"). Through their
jointly-owned subsidiary, The Vanguard Group, Inc. ("Vanguard"), the Trust and
the other Trusts in The Vanguard Group obtain at cost virtually all of their
corporate management, administrative and distribution services. Vanguard also
provides investment advisory services on an at-cost basis to several of the
Vanguard Trusts.
Vanguard employs a supporting staff of management and administrative person-
nel needed to provide the requisite services to the Trusts and also furnishes
the Trusts with necessary office space, furnishings and equipment. Each Trust
pays its share of Vanguard's total expenses which are allocated among the
Trusts under procedures approved by the Trustees of each Trust. In addition,
each Trust bears its own direct expenses such as legal, auditing and custodian
fees.
The Officers of the Trusts are also Officers and employees of Vanguard. No
Officer or employee is permitted to own any securities of any external adviser
for the Trusts.
Vanguard adheres to a Code of Ethics established pursuant to Rule 17j-1 un-
der the Investment Company Act of 1940. The Code is designed to prevent unlaw-
ful practices in connection with the purchase or sale of securities by persons
associated with Vanguard. Under Vanguard's Code of Ethics certain officers and
employees of Vanguard who are considered access persons are permitted to en-
gage in personal securities transactions. However, such transactions are sub-
ject to procedures and guidelines similar to, and in many cases more restric-
tive than, those recommended by a blue ribbon panel of mutual fund industry
executives.
Vanguard was established and operates under an Amended and Restated Funds'
Service Agreement which was approved by the shareholders of each of the
Trusts. The amounts which each of the Trusts has invested are adjusted from
time to time in order to maintain the proportionate relationship between each
Trust's relative net assets and its contribution to Vanguard's capital. The
Amended and Restated Funds' Service Agreement provides as follows: (a) each
Vanguard Trust may invest up to .40% of its current assets in Vanguard, and
(b) there is no other limitation on the dollar amount that each Vanguard Trust
may contribute to Vanguard's capitalization. At October 31, 1998, the Trust
had contributed capital of . to Vanguard, representing . % of Vanguard's
capitalization.
TRUSTEES AND OFFICERS
The Officers of the Trust manage its day-to-day operations and are responsi-
ble to the Trust's Board of Trustees. The Trustees set broad policies for the
Trust and choose its Officers. The following is a list of the Trustees and Of-
ficers of the Trust and a statement of their present positions and principal
occupations during the past five years. As a group, the Trust's Trustees and
Officers own less than 1% of the outstanding shares of the Trust. Each Trustee
also serves as a Director of The Vanguard Group, Inc., and as a Trustee of
each of the 35 investment companies administered by Vanguard (34 in the case
of Mr. Malkiel and 28 in the case of Mr. MacLaury). The mailing address of the
Trustees and Officers of the Trust is Post Office Box 876, Valley Forge, Penn-
sylvania 19482.
B-10
<PAGE>
JOHN C. BOGLE, (DOB: 5/8/1929) Senior Chairman and Trustee*
Senior Chairman and Director of The Vanguard Group, Inc., and Trustee of each
of the investment companies in The Vanguard Group; Director of The Mead Corp.
(Paper Products), General Accident Insurance, and Chris-Craft Industries, Inc.
(Broadcasting & Plastics Manufacturer).
JOHN J. BRENNAN, (DOB: 7/29/1954) Chairman, Chief Executive Officer & Trustee*
Chairman, Chief Executive Officer and Director of The Vanguard Group, Inc.,
and Trustee of each of the investment companies in The Vanguard Group.
BARBARA BARNES HAUPTFUHRER, (DOB: 10/11/1928) Trustee
Director of The Great Atlantic and Pacific Tea Co. (Retail Stores), IKON Of-
fice Solutions, Inc. (Office Products), Raytheon Co. (Defense/ Electronics),
Knight-Ridder, Inc. (Publishing), Massachusetts Mutual Life Insurance Co., and
Ladies Professional Golf Association; and Trustee Emerita of Wellesley Col-
lege.
JOANN HEFFERNAN HEISEN, (DOB: 1/25/1950) Trustee
Vice President, Chief Information Officer, and member of the Executive Commit-
tee of Johnson and Johnson (Pharmaceuticals/Consumer Products), Director of
Johnson & Johnson*MERCK Consumer Pharmaceuticals Co., Women First HealthCare,
Inc. (Research and Education Institution), Recording for the Blind and
Dyslexic, The Medical Center at Princeton, and Women's Research and Education
Institute.
BRUCE K. MACLAURY, (DOB: 5/7/1931) Trustee
President Emeritus of The Brookings Institution (Independent Non-Partisan Re-
search Organization); Director of American Express Bank, Ltd., The St. Paul
Companies, Inc. (Insurance and Financial Services), and National Steel Corp.
BURTON G. MALKIEL, (DOB: 8/28/1932) Trustee
Chemical Bank Chairman's Professor of Economics, Princeton University; Direc-
tor of Prudential Insurance Co. of America, Banco Bilbao Gestinova, Baker
Fentress & Co. (Investment Management), The Jeffrey Co. (Holding Company), and
Southern New England Telecommunications Co.
ALFRED M. RANKIN, JR., (DOB: 10/8/1941) Trustee
Chairman, President, Chief Executive Officer, and Director of NACCO Industries
(Machinery/Coal/ Appliances); Director of The BFGoodrich Co. (Aircraft
Systems/Manufacturing/Chemicals), and The Standard Products Co. (Rubber Prod-
ucts Company).
JOHN C. SAWHILL, (DOB: 6/12/1936) Trustee
President and Chief Executive Officer of The Nature Conservancy (Non-Profit
Conservation Group); Director of Pacific Gas and Electric Co., Procter & Gam-
ble Co., NACCO Industries (Machinery/Coal/Appliances), and Newfield Explora-
tion Co. (Energy); formerly, Director and Senior Partner of McKinsey & Co.,
and President of New York University.
JAMES O. WELCH, JR., (DOB: 5/13/1931) Trustee
Retired Chairman of Nabisco Brands, Inc. (Food Products); retired Vice Chair-
man and Director of RJR Nabisco (Food and Tobacco Products); Director of TECO
Energy, Inc., and Kmart Corp.
J. LAWRENCE WILSON, (DOB: 3/2/1936) Trustee
Chairman and Chief Executive Officer of Rohm & Haas Co. (Chemicals); Director
of Cummins Engine Co. (Diesel Engine Company), and The Mead Corp. (Paper Prod-
ucts); and Trustee of Vanderbilt University.
RAYMOND J. KLAPINSKY, (DOB: 12/7/1938) Secretary*
Managing Director of The Vanguard Group, Inc.; Secretary of The Vanguard
Group, Inc. and of each of the investment companies in The Vanguard Group.
B-11
<PAGE>
THOMAS J. HIGGINS, (DOB: 5/21/1957) Treasurer*
Principal of The Vanguard Group, Inc.; Treasurer of each of the investment
companies in The Vanguard Group.
ROBERT D. SNOWDEN, (DOB: 9/04/1961) Controller*
Principal of The Vanguard Group, Inc.; Controller of each of the investment
companies in The Vanguard Group.
- --------
*Officers of the Trust are "interested persons" as defined in the Investment
Company Act of 1940.
MANAGEMENT
Corporate management and administrative services include: (1) executive
staff; (2) accounting and financial; (3) legal and regulatory; (4) shareholder
account maintenance; (5) monitoring and control of custodian relationships;
(6) shareholder reporting; and (7) review and evaluation of advisory and other
services provided to the Vanguard Trusts by third parties. During the year
ended October 31, 1998, the Trust's share of Vanguard's actual net costs of
operation relating to management and administrative services (including trans-
fer agency) totaled approximately $ . .
DISTRIBUTION
Vanguard Marketing Corporation, a wholly-owned subsidiary of The Vanguard
Group, Inc., provides all distribution and marketing services for the Trusts
in the Group. The principal distribution expenses are for advertising, promo-
tional materials and marketing personnel. Distribution services may also in-
clude organizing and offering to the public, from time to time, one or more
new investment companies which will become members of The Vanguard Group. The
Trustees and Officers of Vanguard determine the amount to be spent annually on
distribution activities, the manner and amount to be spent on each Trust, and
whether to organize new investment companies.
One half of the distribution expenses of a marketing and promotional nature
is allocated among the Trusts based upon their relative net assets. The re-
maining one half of these expenses is allocated among the Trusts based upon
each Trust's sales for the preceding 24 months relative to the total sales of
the Trusts as a Group. Provided, however, that no Trust's aggregate quarterly
rate of contribution for distribution expenses of a marketing and promotional
nature shall exceed 125% of the average distribution expense rate for The Van-
guard Group, and that no Trust shall incur annual distribution expenses in ex-
cess of 20/100 of 1% of its average month-end net assets. During the fiscal
year ended October 31, 1998, the Trust paid approximately $ . of The Vanguard
Group's distribution and marketing expenses, which represented an effective
annual rate of . % of the Trust's average month-end net assets.
INVESTMENT ADVISORY SERVICES
Vanguard also provides investment advisory services to several Vanguard
Trusts. These services are provided on an at-cost basis from a money manage-
ment staff employed directly by Vanguard. The compensation and other expenses
of this staff are paid by the Trusts utilizing these services.
TRUSTEE COMPENSATION
The individuals in the following table serve as Trustees of all Vanguard
Trusts, and each Trust pays a proportionate share of the Trustees' compensa-
tion. The Trusts employ their officers on a shared basis, as well. However,
officers are compensated by The Vanguard Group, Inc., not the Trusts.
B-12
<PAGE>
INDEPENDENT TRUSTEES. The Trusts compensate their independent Trustees--that
is, the ones who are not also officers of the Trust--in three ways:
. The independent Trustees receive an annual fee for their service to the
Trusts, which is subject to reduction based on absences from scheduled
Board meetings.
. The independent Trustees are reimbursed for the travel and other
expenses that they incur in attending Board meetings.
. Upon retirement, the independent Trustees receive an aggregate annual
fee of $1,000 for each year served on the Board, up to fifteen years of
service. This annual fee is paid for ten years following retirement or
until each Trustee's death.
"INTERESTED" TRUSTEES. The Trusts' interested Trustees--Messrs. Bogle and
Brennan--receive no compensation for their service in that capacity. However,
they are paid in their role as officers of The Vanguard Group, Inc.
COMPENSATION TABLE. The following table provides compensation details for
each of the Trustees. For the Trust, we list the amounts paid as compensation
and accrued as retirement benefits by the Trust for each Trustee. In addition,
the table shows the total amount of benefits that we expect each Trustee to
receive from all Vanguard Trusts upon retirement, and the total amount of com-
pensation paid to each Trustee by all Vanguard Trusts. All information shown
is for the fiscal year ended October 31, 1998.
VANGUARD WHITEHALL FUNDS
COMPENSATION TABLE
<TABLE>
<CAPTION>
TOTAL
PENSION OR COMPENSATION
RETIREMENT ESTIMATED FROM ALL
BENEFITS ANNUAL VANGUARD
AGGREGATE ACCRUED AS BENEFITS TRUSTS PAID
COMPENSATION PART OF TRUST UPON TO
NAMES OF TRUSTEES FROM TRUST EXPENSES RETIREMENT TRUSTEES(1)
- ----------------- ------------ ------------- ---------- ------------
<S> <C> <C> <C> <C>
John C. Bogle................ -- -- -- --
John J. Brennan.............. -- -- -- --
Barbara Barnes Hauptfuhrer... $ . $ . $ . $ .
JoAnn Heffernan Heisen....... $ . $ . $ . $ .
Robert E. Cawthorn(2)........ $ . $ . $ . $ .
Bruce K. MacLaury............ $ . $ . $ . $ .
Burton G. Malkiel............ $ . $ . $ . $ .
Alfred M. Rankin, Jr. ....... $ . $ . $ . $ .
John C. Sawhill.............. $ . $ . $ . $ .
James O. Welch, Jr. ......... $ . $ . $ . $ .
J. Lawrence Wilson........... $ . $ . $ . $ .
</TABLE>
- --------
(1) The amounts reported in this column reflect the total compensation paid to
each Trustee for his or her service as Trustee of 35 Vanguard Trusts (34
in the case of Mr. Malkiel; 28 in the case of Mr. MacLaury).
(2) Mr. Cawthorn has retired from the Trust's Board, effective May 31, 1998.
INVESTMENT ADVISORY SERVICES
INVESTMENT ADVISORY AGREEMENT WITH BARROW, HANLEY, MEWHINNEY &
STRAUSS. Vanguard Selected Value Fund is managed by Barrow, Hanley, Mewhinney
& Strauss ("BHM&S"), One McKinney Plaza, 3232 McKinney Avenue, 15th Floor,
Dallas, TX 75204 under the terms of an agreement. BHM&S is owned by United As-
set Management, International Place, Boston, MA 02110.
B-13
<PAGE>
The investment philosophy of BHM&S is to use fundamental research to iden-
tify undervalued stocks. Jim McClure and John Harloe have been designated as
portfolio managers for the assets of the Fund. Jim McClure has worked in in-
vestment management since 1974; with BHM&S since 1995. John Harloe has worked
in investment management since 1975; with BHM&S since 1995.
For the services rendered by BHM&S, the Fund pays BHM&S a base advisory fee,
at the end of each quarter, adjusted by an incentive/penalty adjustment re-
flecting the investment performance of the Fund relative to the total return
of the Russell Midcap Index. The Russell Midcap Index is prepared by Frank
Russell Company (which is not affiliated with the Trust or any of the Trust's
affiliates), and is composed of the 800 smallest stocks (by market capitaliza-
tion) in the Russell 1000 Index. BHM&S's fees are calculated according to the
following rules:
a) TOTAL QUARTERLY FEE PAYABLE. The total quarterly fee payable by the
Fund to BHM&S is the base advisory fee for the quarter plus the performance
adjustment (which may be negative).
b) BASE ADVISORY FEE FOR THE QUARTER. The base advisory fee for the quar-
ter is calculated by applying the following quarterly percentage rates to
the average of month-end assets of the Fund for the quarter:
<TABLE>
<CAPTION>
ANNUAL QUARTERLY
NET ASSETS RATE RATE
---------- ------ ---------
<S> <C> <C>
First $100 million.......................................... 0.40% 0.1000%
Next $200 million........................................... 0.35% 0.0875%
Next $300 million........................................... 0.25% 0.0625%
Next $400 million........................................... 0.20% 0.0500%
Over $1 billion............................................. 0.15% 0.0375%
</TABLE>
c) PERFORMANCE ADJUSTMENT. The performance adjustment is calculated as
follows:
i) prior to March 1, 1997, the performance adjustment formula was not
operative.
ii) beginning with the quarter ended April 30, 1997 and thereafter,
the performance adjustment is calculated for the relevant performance
period. The performance period is the 36 months preceding the quarter-
end, or the months that have elapsed between March 1, 1996 and the end
of the quarter for which the fee is being computed, whichever is short-
er. A base fee for the performance period is calculated based on the
Fund's average month-end assets during the performance period multi-
plied by the quarterly rates used in calculating the base advisory fee
for the quarter. An incentive/penalty adjustment reflecting the invest-
ment performance of the Fund relative to the total return of the Rus-
sell Midcap Index is applied to the base fee for the performance peri-
od. The following table sets forth the calculation of the performance
adjustment:
<TABLE>
<CAPTION>
CUMULATIVE 36-
MONTH PERFORMANCE
VS. THE RUSSELL MIDCAP INDEX PERFORMANCE ADJUSTMENT
---------------------------- ---------------------------------------
<S> <C>
Less than -12%................... -0.50 X Base Fee for Performance Period
Between -12% and -6%............. -0.25 X Base Fee for Performance Period
Between -6% and +6%.............. 0 X Base Fee for Performance Period
Between +6% and +12%............. 0.25 X Base Fee for Performance Period
More than +12%................... 0.50 X Base Fee for Performance Period
</TABLE>
iii) Until the quarter ending April 30, 1999, the performance adjust-
ment for BHM&S will be calculated according to the following transition
rules:
(a) March 1, 1996 through April 30, 1999. Beginning with the quar-
ter ended April 30, 1997, and until the quarter ending April 30,
1999, the performance adjustment will be computed based upon a com-
parison of the investment performance of the Fund and that of the
Russell Midcap Index over the number of months that have elapsed be-
tween
B-14
<PAGE>
March 1, 1996 and the end of the quarter for which the fee is com-
puted. The number of percentage points by which the investment per-
formance of the Fund must exceed the investment record of the Rus-
sell Midcap Index shall increase proportionately from 4.67% and
2.33%, respectively, for the fourteen months ended April 30, 1997,
to 12% and 6%, for the thirty-six months ending April 30, 1999.
(b) After April 30, 1999. For the quarter ending July 31, 1999 and
thereafter, the period used to calculate the incentive/penalty ad-
justment shall be the 36 months preceding the end of the quarter for
which the fee is being computed, and the number of percentage points
used shall be twelve and six.
CALCULATING RELATIVE INVESTMENT PERFORMANCE. The investment performance of
the Fund for a period, expressed as a percentage of the net asset value per
share of the Fund at the beginning of such period, shall be the sum of: (i)
the change in the net asset value per share of the Fund during such period;
(ii) the value of the cash distributions per share of the Fund accumulated to
the end of such period; and (iii) the value of capital gains taxes per share
paid or payable by the Fund on undistributed realized long-term capital gains
accumulated to the end of such period.
The investment record of the Russell Midcap Index will be calculated monthly
by (i) multiplying the total return for the month (change in market price plus
dividends) of each stock included in the Russell Midcap Index by its weighting
in the Russell Midcap Index at the beginning of the month, and (ii) adding the
values discussed in (i). For any period, therefore, the investment record of
the Russell Midcap Index will be the compounded monthly returns of the Russell
Midcap Index.
For the period February 15 to October 31, 1996, the Fund paid approximately
$190,000 to BHM&S for investment advisory services. For the years ended Octo-
ber 31, 1997 and 1998, the Fund paid $424,000 and $ . , respectively, to BHM&S
for investment advisory services.
RELATED INFORMATION CONCERNING BHM&S. BHM&S, One McKinney Plaza, 3232 McKin-
ney Avenue, 15th Floor, Dallas, Texas, 75204, is an independent, owner-managed
investment management firm founded in 1979, which provides investment advisory
services to individuals, employee benefit plans, investment companies and
other institutions. BHM&S is owned by United Asset Management, 1 International
Place, Boston, Massachusetts 02110. As of October 31, 1998, BHM&S provided in-
vestment advisory services to clients having assets with an approximate value
of $ . billion.
The agreement will be renewable for successive one-year periods, only if
each renewal is specifically approved by a vote of the Trust's Board of Trust-
ees, including the affirmative votes of a majority of the Trustees who are not
parties to the agreement or "interested persons" (as defined in the Investment
Company Act of 1940) of any such party cast in person at a meeting called for
the purpose of considering such approval. The agreement is automatically ter-
minated if assigned, and may be terminated by the Fund without penalty, at any
time, (1) either by vote of the Board of Trustees of the Trust on sixty (60)
days' written notice to BHM&S, or (2) by BHM&S upon ninety (90) days' written
notice to the Trust. Any such change will be communicated to shareholders in
writing.
PORTFOLIO TRANSACTIONS
The investment advisory agreement authorizes BHM&S (with the approval of the
Trust's Board of Trustees) to select the brokers or dealers that will execute
the purchases and sales of portfolio securities for the Fund, and directs
BHM&S to use its best efforts to obtain the best available price and most fa-
vorable execution with respect to all transactions for the Fund. The invest-
ment adviser has undertaken to execute each investment transaction at a price
and commission which provides the most favorable total cost or proceeds rea-
sonably obtainable under the circumstances. During the period February 15,
1996 to October 31, 1996 the Fund paid $161,469 in brokerage commissions; dur-
ing the years
B-15
<PAGE>
ended October 31, 1997 and 1998, the Fund paid $169,499 and $ . , respective-
ly, in brokerage commissions.
In placing portfolio transactions, BHM&S will use its best judgment to
choose the broker most capable of providing the brokerage services necessary
to obtain best available price and most favorable execution. The full range
and quality of brokerage services available will be considered in making these
determinations. In those instances where it is reasonably determined that more
than one broker can offer the brokerage services needed to obtain the best
available price and most favorable execution, consideration may be given to
those brokers which supply investment research and statistical information,
and provide other services in addition to execution services to the Fund
and/or the investment adviser. The investment adviser considers the investment
services it receives useful in the performance of its obligations under the
agreement but is unable to determine the amount by which such services may re-
duce its expenses.
The investment advisory agreement also incorporates the concepts of Section
28(e) of the Securities Exchange Act of 1934 by providing that, subject to the
approval of the Trust's Board of Trustees, the investment adviser may cause
the Fund to pay a broker-dealer which furnishes brokerage and research serv-
ices a higher commission than that which might be charged by another broker-
dealer for effecting the same transaction; provided that such commission is
deemed reasonable in terms of either that particular transaction or the over-
all responsibilities of the investment adviser to the Fund and the other Funds
in Vanguard.
Currently, it is the Fund's policy that the investment adviser may at times
pay higher commissions in recognition of brokerage services felt necessary for
the achievement of better execution of certain securities transactions that
otherwise might not be available. An investment adviser will only pay such
higher commissions if it believes this to be in the best interest of the Fund.
Some brokers or dealers who may receive such higher commissions in recognition
of brokerage services related to execution of securities transactions are also
providers of research information to the investment adviser and/or the Fund.
However, the investment adviser has informed the Fund that it will not pay
higher commission rates specifically for the purpose of obtaining research
services.
Some securities considered for investment by the Fund may also be appropri-
ate for the other Vanguard Funds and/or other clients served by the investment
adviser. If purchase or sale of securities consistent with the investment pol-
icies of a Fund, the other Vanguard Funds and/or one or more of these other
clients are considered at or about the same time, transactions in such securi-
ties will be allocated among the Vanguard Funds and clients in a manner deemed
equitable by the investment adviser. Although there will be no specified for-
mula for allocating such transactions, the allocation methods used, and the
results of such allocations, will be subject to periodic review by the Trust's
Board of Trustees.
YIELD AND TOTAL RETURN
The yield of the Fund for the 30-day period ended October 31, 1998 was . %.
Yields are calculated daily and premiums and discounts on asset-backed ac-
counts are not amortized. The average annual total return for Selected Value
Fund for the year ended October 31, 1998, and since its inception on February
15, 1996, was . % and . %, respectively.
PURCHASE OF SHARES
The Trust reserves the right in its sole discretion (i) to suspend the of-
fering of its shares, (ii) to reject purchase orders when in the judgment of
management such rejection is in the best interest of the
B-16
<PAGE>
Trust, and (iii) to reduce or waive the minimum investment for or any other
restrictions on initial and subsequent investments for certain fiduciary ac-
counts, such as employee benefit plans, or under circumstances where certain
economies can be achieved in sales of the Trust's shares.
The Fund has authorized Charles Schwab & Co., Inc. ("Schwab") to accept on
its behalf purchase and redemption orders under certain terms and conditions.
Schwab is also authorized to designate other intermediaries to accept purchase
and redemption orders on the Fund's behalf subject to those terms and condi-
tions. Under this arrangement, the Fund will be deemed to have received a pur-
chase or redemption order when Schwab or, if applicable, Schwab's authorized
designee, accepts the order in accordance with the Fund's instructions. Cus-
tomer orders that are properly transmitted to the Fund by Schwab, or if appli-
cable, Schwab's authorized designee, will be priced as follows:
Orders received by Schwab before 3 p.m. Eastern time on any business day,
will be sent to Vanguard that day and your share price will be based on the
Fund's net asset value calculated at the close of trading that day. Orders
received by Schwab after 3 p.m. Eastern time, will be sent to Vanguard on
the following business day and your share price will be based on the Fund's
net asset value calculated at the close of trading that day.
REDEMPTION OF SHARES
The Trust may suspend redemption privileges or postpone the date of payment
(i) during any period that the New York Stock Exchange is closed, or trading
on the Exchange is restricted as determined by the Securities and Exchange
Commission (the "Commission"), (ii) during any period when an emergency exists
as defined by the rules of the Commission as a result of which it is not rea-
sonably practicable for the Fund to dispose of securities owned by it, or
fairly to determine the value of its assets, and (iii) for such other periods
as the Commission may permit.
SHARE PRICE
The Fund's share price, or "net asset value" per share, is calculated by di-
viding the total assets of the Fund, less all liabilities, by the total number
of shares outstanding. The net asset value is determined as of the close of
the New York Stock Exchange (generally 4:00 p.m. Eastern time) on each day
that the Exchange is open for trading.
Portfolio securities for which market quotations are readily available
(which include those securities listed on national securities exchanges, as
well as those quoted on the NASDAQ Stock Market) will be valued at the last
quoted sales price on the day the valuation is made. Such securities which are
not traded on the valuation date are valued at the mean of the bid and ask
prices. Price information on exchange-listed securities is taken from the ex-
change where the security is primarily traded. Securities may be valued on the
basis of prices provided by a pricing service when such prices are believed to
reflect the fair market value of such securities.
Short term instruments (those with remaining maturities of 60 days or less)
may be valued at cost, plus or minus any amortized discount or premium, which
approximates market value.
Bonds and other fixed income securities may be valued on the basis of prices
provided by a pricing service when such prices are believed to reflect the
fair market value of such securities. The prices provided by a pricing service
may be determined without regard to bid or last sale prices of each security,
but take into account institutional-size transactions in similar groups of se-
curities as well as any developments related to specific securities.
Foreign securities are valued at the last quoted sales price, according to
the broadest and most representative market, available at the time the Fund is
valued. If events which materially affect the
B-17
<PAGE>
value of a Fund's investments occur after the close of the securities markets
on which such securities are primarily traded, those investments may be valued
by such methods as the Board of Trustees deems in good faith to reflect fair
value.
In determining the Fund's net asset value per share, all assets and liabili-
ties initially expressed in foreign currencies will be converted into U.S.
dollars using the officially quoted daily exchange rates used by Morgan Stan-
ley Capital International in calculating various benchmarking indices. This
officially quoted exchange rate may be determined prior to or after the close
of a particular securities market. If such quotations are not available, the
rate of exchange will be determined in accordance with policies established in
good faith by the Board of Trustees.
Other assets and securities for which no quotations are readily available or
which are restricted as to sale (or resale) are valued by such methods as the
Board of Trustees deems in good faith to reflect fair value.
The share price for each Fund can be found daily in the mutual fund listings
of most major newspapers under the heading of "Vanguard Funds".
B-18
<PAGE>
FINANCIAL STATEMENTS
The Fund's Financial Statements for the year ended October 31, 1998, includ-
ing the financial highlights for the period February 15, 1996 through October
31, 1996 and the year ended October 31, 1997, appearing in the Vanguard Se-
lected Value Fund 1998 Annual Report to Shareholders and the report thereon of
PricewaterhouseCoopers LLP, independent accountants, also appearing therein,
are incorporated by reference in this Statement of Additional Information. For
a more complete discussion of the Fund's performance, please see the Fund's
1998 Annual Report to Shareholders, which may be obtained without charge.
B-19
<PAGE>
COMPARATIVE INDEXES
Vanguard may use reprinted material discussing The Vanguard Group, Inc. or
any of the member trusts of The Vanguard Group of Investment Companies.
The Fund may use one or more of the following unmanaged indices for compara-
tive performance purposes:
STANDARD AND POOR'S 500 COMPOSITE STOCK PRICE INDEX--contains the stocks of
500 of the largest domestic companies.
STANDARD & POOR'S MIDCAP 400 INDEX--is composed of 400 medium sized domestic
stocks.
STANDARD & POOR'S SMALLCAP 600/BARRA VALUE INDEX--contains stocks of the S&P
SmallCap 600 Index which have a lower than average price-to-book ratio.
STANDARD & POOR'S SMALLCAP 600/BARRA GROWTH INDEX--contains stocks of the
S&P SmallCap 600 Index which have a higher than average price-to-book ratio.
RUSSELL 1000 VALUE INDEX--consists of the stocks in the Russell 1000 Index
(comprising the 1,000 largest U.S.-based companies measured by total market
capitalization) with the lowest price-to-book ratios, comprising 50% of the
market capitalization of the Russell 1000.
WILSHIRE 5000 EQUITY INDEX--consists of approximately 7,000 common equity
securities, covering all stocks in the U.S. for which daily pricing is avail-
able.
WILSHIRE 4500 EQUITY INDEX--consists of all stocks in the Wilshire 5000 ex-
cept for the 500 stocks in the Standard and Poor's 500 Index.
MORGAN STANLEY CAPITAL INTERNATIONAL EAFE INDEX--is an arithmetic, market
value-weighted average of the performance of over 900 securities listed on the
stock exchanges of countries in Europe, Australia, Asia, and the Far East.
MORGAN STANLEY CAPITAL INTERNATIONAL ALL COUNTRY INDEX--is an arithmetic,
market value-weighted average of the performance of over 2,427 securities
listed on the stock exchanges of countries included in the EAFE Index, United
States, Canada, and Emerging Markets.
CAPITAL OPPORTUNITIES FUND STOCK INDEX--the Index is composed of the various
common stocks that are held in the largest aggressive growth stock mutual
funds, using year-end net assets, monitored by Morningstar, Inc.
GLOBAL BALANCED INDEX--a fixed weighted index of global stocks, bonds and
U.S. cash reserves, the component parts of which are derived from the adjusted
capitalization weighted averages of individual currency adjusted local country
indices.
MORGAN STANLEY CAPITAL INTERNATIONAL WORLD INDEX--an arithmetic, market val-
ue-weighted average of the performance of over 1,460 securities listed on the
stock exchanges of 23 countries.
SALOMON BROTHERS WORLD GOVERNMENT BOND INDEX--a market capitalization-
weighted index consisting of government bond markets of 14 countries.
GOLDMAN SACHS 100 CONVERTIBLE BOND INDEX--currently includes 71 bonds and 29
preferreds. The original list of names was generated by screening for convert-
ible issues of $100 million or greater in market capitalization. The index is
priced monthly.
B-20
<PAGE>
SALOMON BROTHERS GNMA INDEX--includes pools of mortgages originated by pri-
vate lenders and guaranteed by the mortgage pools of the Government National
Mortgage Association.
SALOMON BROTHERS HIGH-GRADE CORPORATE BOND INDEX--consists of publicly is-
sued, non-convertible corporate bonds rated AA or AAA. It is a value-weighted,
total return index, including approximately 800 issues with maturities of 12
years or greater.
LEHMAN LONG-TERM TREASURY BOND INDEX--is composed of all bonds covered by
the Shearson Lehman Hutton Treasury Bond Index with maturities of 10 years or
greater.
MERRILL LYNCH CORPORATE & GOVERNMENT BOND INDEX--consists of over 4,500 U.S.
Treasury, Agency and investment grade corporate bonds.
LEHMAN CORPORATE (BAA) BOND INDEX--all publicly offered fixed-rate, noncon-
vertible domestic corporate bonds rated Baa by Moody's, with a maturity longer
than 1 year and with more than $25 million outstanding. This index includes
over 1,000 issues.
BOND BUYER MUNICIPAL BOND INDEX--is a yield index on current coupon high-
grade general obligation municipal bonds.
STANDARD & POOR'S PREFERRED INDEX--is a yield index based upon the average
yield for four high-grade, non-callable preferred stock issues.
NASDAQ INDUSTRIAL INDEX--is composed of more than 3,000 industrial issues.
It is a value-weighted index calculated on price change only and does not in-
clude income.
COMPOSITE INDEX--70% Standard & Poor's 500 Index and 30% NASDAQ Industrial
Index.
COMPOSITE INDEX--65% Standard & Poor's 500 Index and 35% Lehman Long-Term
Corporate AA or Better Bond Index.
COMPOSITE INDEX--65% Lehman Long-Term Corporate AA or Better Bond Index and
a 35% weighting in a blended equity composite (75% Standard & Poor's/BARRA
Value Index, 12.5% Standard & Poor's Utilities Index and 12.5% Standard &
Poor's Telephone Index).
LEHMAN LONG-TERM CORPORATE AA OR BETTER BOND INDEX--consists of all publicly
issued, fixed rate, nonconvertible investment grade, dollar-denominated, SEC-
registered corporate debt rated AA or AAA.
LEHMAN BROTHERS AGGREGATE BOND INDEX--is a market weighted index that con-
tains individually priced U.S. Treasury, agency, corporate, and mortgage pass-
through securities corporate rated BBB- or better. The Index has a market
value of over $4 trillion.
LEHMAN BROTHERS MUTUAL FUND SHORT (1-5) GOVERNMENT/CORPORATE INDEX--is a
market weighted index that contains individually priced U.S. Treasury, agency,
and corporate investment grade bonds rated BBB- or better with maturities be-
tween 1 and 5 years. The index has a market value of over $1.6 trillion.
LEHMAN BROTHERS MUTUAL FUND INTERMEDIATE (5-10) GOVERNMENT/CORPORATE INDEX--
is a market weighted index that contains individually priced U.S. Treasury,
agency, and corporate securities rated BBB- or better with maturities between
5 and 10 years. The index has a market value of over $700 billion.
B-21
<PAGE>
LEHMAN BROTHERS LONG (10+) GOVERNMENT/CORPORATE INDEX--is a market weighted
index that contains individually priced U.S. Treasury, agency, and corporate
securities rated BBB- or better with maturities greater than 10 years. The in-
dex has a market value of over $900 billion.
LIPPER BALANCED FUND AVERAGE--An industry benchmark of average balanced
funds with similar investment objectives and policies, as measured by Lipper
Analytical Services, Inc.
LIPPER NON-GOVERNMENT MONEY MARKET FUND AVERAGE--An industry benchmark of
average non-government money market funds with similar investment objectives
and policies, as measured by Lipper Analytical Services, Inc.
LIPPER GOVERNMENT MONEY MARKET FUND AVERAGE--An industry benchmark of aver-
age government money market funds with similar investment objectives and poli-
cies, as measured by Lipper Analytical Services, Inc.
LIPPER SMALL COMPANY GROWTH FUND AVERAGE--the average performance of small
company growth funds as defined by Lipper Analytical Services, Inc. Lipper de-
fines a small company growth fund as a fund that by prospectus or portfolio
practice, limits its investments to companies on the basis of the size of the
company. From time to time, Vanguard may advertise using the average perfor-
mance and/or the average expense ratio of the small company growth funds.
(This fund category was first established in 1982. For years prior to 1982,
the results of the Lipper Small Company Growth category were estimated using
the returns of the Funds that constituted the Group at its inception.)
RUSSELL 3000 INDEX--consists of approximately the 3,000 largest stocks of
U.S. domiciled companies commonly traded on the New York and American Stock
Exchanges or the NASDAQ over-the-counter market, accounting for over 90% of
the market value of publicly traded Stocks in the U.S.
RUSSELL 2000 STOCK INDEX--composed of the 2,000 smallest securities in the
Russell 3000 Index, representing approximately 7% of the Russell 3000 total
market capitalization.
RUSSELL 2000(R) VALUE INDEX--contains stocks from the Russell 2000 Index
with a less-than-average growth orientation.
RUSSELL MIDCAP(TM) INDEX--composed of all medium and medium/small companies
in the Russell 1000 Index.
Advertisements which refer to the use of the Fund as a potential investment
for Individual Retirement Accounts may quote a total return based upon com-
pounding of dividends on which it is presumed no Federal income tax applies.
In assessing such comparisons of yields, an investor should keep in mind
that the composition of the investments in the reported averages is not iden-
tical to the Fund's portfolio and that the items included in the calculations
of such averages may not be identical to the formula used by the Fund to cal-
culate its yield. In addition there can be no assurance that the Fund will
continue its performance as compared to such other averages.
B-22
<PAGE>
PART C
VANGUARD WHITEHALL FUNDS
OTHER INFORMATION
ITEM 23. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
------- -----------
<C> <S>
(a) Declaration of Trust*
(b) By-Laws*
(c) Not Applicable
(d) Investment Advisory Contract*
(e) Not Applicable
(f) Reference is made to the section entitled "Management of the Trust" in
the Registrant's Statement of Additional Information
(g) Custodian Agreement*
(h) Amended and Restated Funds' Service Agreement*
(i) Legal Opinion*
(j) Consent of Independent Accountants**
(k) Not Applicable
(l) Not Applicable
(m) Not Applicable
(n) Financial Data Schedule+
(o) Not Applicable
</TABLE>
- --------
* Filed previously
** To be filed by Amendment
+ Filed herewith
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE FUND
Registrant is not controlled by or under common control with any person.
ITEM 25. INDEMNIFICATION
The Registrant's organizational documents contain provisions indemnifying
Trustees and Officers against liability incurred in their official capacity.
Article VII, Section 2 of the Declaration of Trust provides that the Regis-
trant may indemnify and hold harmless each and every Trustee and Officer from
and against any and all claims, demands, costs, losses, expenses, and damages
whatsoever arising out of or related to the performance of his or her duties
as a Trustee or Officer. However, this provision does not cover any liability
to which a Trustee or Officer would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his or her office. Article VI of the By-Laws gener-
ally provides that the Registrant shall indemnify its Trustees and Officers
from any liability arising out of their past or present service in that capac-
ity. Among other things, this provision excludes any liability arising by rea-
son of willful misfeasance, bad faith, gross negligence, or the reckless dis-
regard of the duties involved in the conduct of the Trustee's or Officer's of-
fice with the Registrant.
ITEM 26. BUSINESS AND OTHER CONNECTIONS OF THE INVESTMENT ADVISER
Barrow, Hanley, Mewhinney & Strauss, Inc. ("BHM&S") is an investment adviser
registered under the Investment Advisers Act of 1940, as amended (the "Advis-
ers Act"). The list required by this Item 26 of officers and directors of
BHM&S, together with any information as to any business profession, vocation
or employment of a substantial nature engaged in by such officers and direc-
tors during the past two years, is incorporated herein by reference from
Schedules B and D of Form ADV filed by BHM&S pursuant to the Advisers Act (SEC
File No. 801-14861).
C-1
<PAGE>
ITEM 27. PRINCIPAL UNDERWRITERS
(a) Not Applicable
(b) Not Applicable
(c) Not Applicable
ITEM 28. LOCATION OF ACCOUNTS AND RECORDS
The books, accounts and other documents required by Section 31(a) under the
Investment Company Act and the rules promulgated thereunder will be maintained
in the physical possession of Registrant; and Registrant's Transfer Agent, The
Vanguard Group, Inc., Valley Forge, Pennsylvania 19482; and the Registrant's
Custodian, State Street Bank and Trust Company, Boston, Massachusetts 02105.
ITEM 29. MANAGEMENT SERVICES
Other than as set forth under the description of The Vanguard Group in Part
B of this Registration Statement, Registrant is not a party to any management-
related service contract.
ITEM 30. UNDERTAKINGS
Not applicable
C-2
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933 AND THE INVEST-
MENT COMPANY ACT OF 1940, THE REGISTRANT HAS DULY CAUSED THIS REGISTRATION
STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHO-
RIZED, IN THE TOWN OF VALLEY FORGE AND THE COMMONWEALTH OF PENNSYLVANIA, ON
THE 7TH DAY OF DECEMBER, 1998.
VANGUARD WHITEHALL FUNDS
By: (signature)
---------------------------------
(HEIDI STAM)
JOHN J. BRENNAN*,
CHAIRMAN AND CHIEF EXECUTIVE
OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS POST-EFFEC-
TIVE AMENDMENT TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOL-
LOWING PERSONS IN THE CAPACITIES AND ON THE DATE INDICATED:
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<S> <C> <C>
By: (signature) Senior Chairman of December 7, 1998
--------------------------------- the Board and
(HEIDI STAM) Trustee
JOHN C. BOGLE*
By: (signature) Chairman, Chief December 7, 1998
--------------------------------- Executive Officer
(HEIDI STAM) and Trustee
JOHN J. BRENNAN*
By: (signature) Trustee December 7, 1998
---------------------------------
(HEIDI STAM)
BARBARA B. HAUPTFUHRER*
By: (signature) Trustee December 7, 1998
----------------------------
(HEIDI STAM)
JOANN HEFFERNAN HEISEN*
By: (signature) Trustee December 7, 1998
---------------------------------
(HEIDI STAM)
BURTON G. MALKIEL*
By: (signature) Trustee December 7, 1998
---------------------------------
(HEIDI STAM)
BRUCE K. MACLAURY*
By: (signature) Trustee December 7, 1998
---------------------------------
(HEIDI STAM)
ALFRED M. RANKIN, JR.*
By: (signature) Trustee December 7, 1998
---------------------------------
(HEIDI STAM)
JOHN C. SAWHILL*
By: (signature) Trustee December 7, 1998
---------------------------------
(HEIDI STAM)
JAMES O. WELCH, JR.*
By: (signature) Trustee December 7, 1998
---------------------------------
(HEIDI STAM)
J. LAWRENCE WILSON*
By: (signature) Treasurer and December 7, 1998
--------------------------------- Principal Financial
(HEIDI STAM) Officer and
THOMAS J. HIGGINS* Accounting Officer
</TABLE>
* By Power of Attorney. See 1933 Act File Number 333-63579, filed on December
4, 1998. Incorporated by Reference.
<PAGE>
EXHIBIT INDEX
<TABLE>
<S> <C>
Financial Data Schedule................................................ EX-99.BN
</TABLE>
<PAGE>
[ARTICLE] 6
[CIK] 0001004655
[NAME] VANGUARD WHITEHALL FUNDS, INC.
[SERIES]
[NUMBER] 001
[NAME] VANGUARD SELECTED VALUE PORTFOLIO
[MULTIPLIER] 1,000
[CURRENCY] U.S.
<TABLE>
<S> <C>
[PERIOD-TYPE] 6-MOS
[FISCAL-YEAR-END] OCT-31-1998
[PERIOD-START] NOV-01-1997
[PERIOD-END] APR-30-1998
[EXCHANGE-RATE] 1
[INVESTMENTS-AT-COST] 191,130
[INVESTMENTS-AT-VALUE] 227,556
[RECEIVABLES] 696
[ASSETS-OTHER] 13
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 228,265
[PAYABLE-FOR-SECURITIES] 0
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 428
[TOTAL-LIABILITIES] 428
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 188,723
[SHARES-COMMON-STOCK] 16,811
[SHARES-COMMON-PRIOR] 14,627
[ACCUMULATED-NII-CURRENT] 258
[OVERDISTRIBUTION-NII] 0
[ACCUMULATED-NET-GAINS] 2,430
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 36,426
[NET-ASSETS] 227,837
[DIVIDEND-INCOME] 856
[INTEREST-INCOME] 289
[OTHER-INCOME] 0
[EXPENSES-NET] 689
[NET-INVESTMENT-INCOME] 456
[REALIZED-GAINS-CURRENT] 2,462
[APPREC-INCREASE-CURRENT] 15,102
[NET-CHANGE-FROM-OPS] 18,020
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] 741
[DISTRIBUTIONS-OF-GAINS] 6,818
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 3,707
[NUMBER-OF-SHARES-REDEEMED] 2,133
[SHARES-REINVESTED] 610
[NET-CHANGE-IN-ASSETS] 37,925
[ACCUMULATED-NII-PRIOR] 543
[ACCUMULATED-GAINS-PRIOR] 6,786
[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 241
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 689
[AVERAGE-NET-ASSETS] 204,414
[PER-SHARE-NAV-BEGIN] 12.98
[PER-SHARE-NII] .03
[PER-SHARE-GAIN-APPREC] 1.05
[PER-SHARE-DIVIDEND] .05
[PER-SHARE-DISTRIBUTIONS] .46
[RETURNS-OF-CAPITAL] 0
[PER-SHARE-NAV-END] 13.55
[EXPENSE-RATIO] .68
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
</TABLE>
