<PAGE> 1
VANGUARD
SELECTED VALUE FUND
ANNUAL REPORT
OCTOBER 31, 1998
[PHOTO]
[THE VANGUARD GROUP LOGO]
<PAGE> 2
AT VANGUARD, WE BELIEVE
THAT TRADITION MATTERS
Our 8,000 crew members embrace the traditional values on which our success is
built, including integrity, hard work, thrift, teamwork, and fair dealing on
behalf of our clients. This year, our report cover pays homage to three
anniversaries, each of great significance to The Vanguard Group:
- - The 200th anniversary of the Battle of the Nile, which commenced on August 1,
1798. HMS Vanguard, the victorious British flagship at the Nile, is our
namesake. And its motto-- "Leading the way"--serves as a guiding principle for
our company.
- - The 100th birthday, on July 23, of Walter L. Morgan, founder of Wellington
Fund, the oldest member of what became The Vanguard Group. Mr. Morgan was
friend and mentor to Vanguard founder John C. Bogle, and helped to shape the
standards and business principles that Mr. Bogle laid down for Vanguard at its
beginning nearly 25 years ago: a stress on balanced, diversified investments;
insistence on fair dealing and candor with clients; and a focus on long-term
investing. To our great regret, Mr. Morgan died on September 2.
- - The 70th anniversary, on December 28, of the incorporation of Vanguard
Wellington Fund. It was the nation's first balanced mutual fund, and is one of
only a handful of funds created in the 1920s that are still in operation.
Although Vanguard constantly tackles new challenges, adopts new technology, and
develops new services, we treasure the traditions and values that set us apart
in a crowded, competitive industry. And we salute our shareholders, whose
support and trust we strive to earn each and every day.
[PHOTO]
CONTENTS
A MESSAGE TO
OUR SHAREHOLDERS
1
THE MARKETS IN
PERSPECTIVE
5
REPORT FROM
THE ADVISER
7
PERFORMANCE SUMMARY
9
FUND PROFILE
10
FINANCIAL STATEMENTS
12
REPORT OF
INDEPENDENT ACCOUNTANTS
18
All comparative mutual fund data are
from Lipper Analytical Services, Inc., or
Morningstar unless otherwise noted.
<PAGE> 3
FELLOW SHAREHOLDER,
[PHOTO] [PHOTO]
John J. Brennan John C. Bogle
Chairman & CEO Senior Chairman
Vanguard Selected Value Fund performed very poorly during the fiscal year
ended October 31, 1998, producing a significant decline for shareholders. The
fund's -17.8% return lagged by nearly 15 percentage points that of the average
mid-capitalization stock fund, which itself trailed by about 7 percentage
points the unmanaged Russell Midcap Index.
We are disappointed by the fund's performance in its second full year of
operation. However, we have always anticipated that Selected Value's
strategy--holding a fairly short list of mid- and small-cap value stocks--would
result in performance that diverges from that of its peers and the overall
market. Although its implementation left much to be desired during fiscal 1998,
we believe there are sound long-term reasons for the fund's investment stance.
The adjacent table presents the fund's total return (capital change plus
reinvested dividends) for the year along with those of its average competitor
and the Russell Midcap Index, the benchmarks against which we measure our
performance. The fund's total return is based on a decrease in net asset value
from $12.98 per share on October 31, 1997, to $10.23 per share on October 31,
1998, with the ending net asset value adjusted for dividends totaling $0.05 per
share paid from net investment income and distributions totaling $0.46 per
share paid from net capital gains realized during 1997.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------
TOTAL RETURNS
FISCAL YEAR ENDED
OCTOBER 31, 1998
- ------------------------------------------------------------------------
<S> <C>
Vanguard Selected Value Fund -17.8%
- ------------------------------------------------------------------------
Average Mid-Cap Fund - 2.9%
- ------------------------------------------------------------------------
Russell Midcap Index + 4.5%
- ------------------------------------------------------------------------
</TABLE>
FINANCIAL MARKETS IN REVIEW
During the twelve months that ended October 31, the U.S. stock market was
really two markets. Large-cap stocks, as represented by the Standard & Poor's
500 Composite Stock Price Index, enjoyed a banner year, despite a severe
downdraft (-19.2%) from mid-July through August. However, conditions were far
different for mid- and small-cap stocks, which did not rise as far as large
stocks during the first part of the year and were hit even harder during the
market's six-week plunge.
After rising +31.2% from the start of the fiscal year through mid-July, the
S&P 500 Index gave back most of its gains during the summer slide. However,
stock prices rebounded again late in the year, leaving the index up by
+22.0%--twice the long-term average return of +11.0% a year for stocks. But the
large-cap-dominated S&P 500 was not representative of the rest of the market.
The Wilshire 4500 Equity Index, consisting of stocks outside of the S&P
500, actually fell -3.4% for the fiscal year. And small-cap stocks alone, as
measured by the Russell 2000 Index, lost -11.8%. Value stocks generally fared
better among medium-sized companies than did growth stocks. Within the Russell
Midcap Index, value stocks earned +5.7% as a group while growth stocks grew
just +2.4%.
Interest rates declined significantly during the year, providing
significant support for stock prices and elevating prices for bonds. The yield
on the benchmark 30-year U.S.
1
<PAGE> 4
Treasury bond began the year at 6.15%, dwindled to a low of 4.72% on October 5
amid concerns about a slowing economy, then rebounded to end the period at
5.16%. For bonds, of course, lower yields translate into higher prices. The
Lehman Brothers Aggregate Bond Index, a benchmark for taxable bonds of all
maturities, returned +9.3% during the fiscal year, as a price rise of about
2.5% augmented income of about 6.8%.
The wide and abrupt shifts in investor sentiment that swept financial
markets during the year occurred against the backdrop of a generally positive
economic environment. Inflation stayed in check: Consumer prices rose just 1.5%
during the twelve months ended October 31. The U.S. economy grew by more than
3%, although the pace of growth appeared to slow late in the period. The
economy's expansion was fueled by strong consumer spending encouraged by a
strong job market (with unemployment as low as 4.3%) and rising wages (up 4%
during the year).
The summer slump in stock prices sent broad market indexes lower by
approximately -20% or more, technically a "bear market," one of only four in
the past 20 years. Analysts cited a number of reasons for investors'
skittishness, including Asia's continuing economic distress. Whatever the
causes, investors grew more risk-averse. There was a decided movement toward
the "safe haven" of U.S. Treasury securities, and away from stocks and
corporate bonds. By October, however, many investors appeared to regain their
appetite for risk, and stock prices shot up, with the S&P 500 gaining +8.1% for
the month.
FISCAL 1998 PERFORMANCE OVERVIEW
As noted, the Selected Value Fund's return of -17.8% fell far behind the +4.5%
advance of the Russell Midcap Index and the -2.9% decline of the average
mid-cap fund. In comparison to the index, the fund was hurt by its much heavier
weightings in two sectors that sharply lagged the mid-cap market: producer
durables, which made up 19% of the fund on balance during the year versus 5% of
the index, and materials & processing, 20% of the fund during the period versus
10% of the index. In addition, some of the stocks selected by our
adviser--especially in the producer-durables, health-care, and
consumer-discretionary sectors--stumbled badly. The one bright spot was in the
energy group, where the single stock selected by our adviser--Vastar Resources,
Inc.--soundly outperformed the index group.
As you know, the Selected Value Fund holds about 30 mid-cap stocks that our
adviser believes are undervalued by the market, sometimes because of
challenging special situations. With about 45% of assets in our ten largest
holdings, our fund is highly concentrated relative to most mutual funds. The
characteristics of these stocks make them--individually and collectively--quite
different from the overall mid-cap market, and it can take time for other
investors to recognize the value our adviser sees. In short, down cycles such
as we encountered during fiscal 1998 must be expected periodically.
While clearly disappointed in our return during the past fiscal year, we
continue to have confidence in our adviser, Barrow, Hanley, Mewhinney &
Strauss, given its fine long-term record in large-cap value stocks. However,
your Trustees and officers will remain actively engaged in monitoring the
fund's results and will keep you fully informed of developments in our regular
reports.
LIFETIME PERFORMANCE OVERVIEW
During our first two fiscal years, our results generally paralleled those of
the Russell Midcap Index and our peers. But our performance in 1998 swamped
that modest beginning. As a result, Vanguard Selected Value Fund has provided
an average annual return of +3.0%
2
<PAGE> 5
over its brief lifetime. The table below presents the fund's returns since its
inception on February 15, 1996, alongside those of the average mid-cap fund and
the Russell Midcap Index. The table also shows the results of hypothetical
$10,000 investments made in each, assuming the reinvestment of income and
capital gains distributions. Such an investment on the fund's inception date
would have grown to $10,838 by October 31, 1998. That is $2,116 below the
result for an identical investment in our average competitor and $3,734 short
of the result for the Russell Midcap Index.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------
TOTAL RETURNS
FEB. 15, 1996, TO OCT. 31, 1998
--------------------------------
AVERAGE FINAL VALUE OF
ANNUAL A $10,000
RATE INITIAL INVESTMENT
- -------------------------------------------------------------------------
<S> <C> <C>
Vanguard Selected Value Fund + 3.0% $10,838
- -------------------------------------------------------------------------
Average Mid-Cap Fund +10.0% $12,954
- -------------------------------------------------------------------------
Russell Midcap Index +14.9% $14,572
- -------------------------------------------------------------------------
</TABLE>
We add two important considerations. First, the Selected Value Fund is
intended as an investment for the long term, which we describe as five years or
more. Second, as we have noted before, historical returns--good or bad--are not
a sure guide to the future. Over the fund's lifetime, the +23.5% average annual
return of the large-cap-dominated S&P 500 Index has overwhelmed virtually all
other sectors of the stock market. But at other times, smaller stocks have been
the market's leaders.
In addition, as it continues trying to provide not just equivalent but
superior returns, the Selected Value Fund will be aided by its low expense
ratio: Our operating costs amounted to 0.65% of average net assets during
fiscal 1998, less than half the 1.49% charged by the average mid-cap fund. Our
expense ratio in the past year in part reflects a reduction in our adviser's
fee due to a contractual penalty for the fund's underperformance.
IN SUMMARY
It is a truism that to profit from the long-term rewards of the stock market,
investors must be willing and able to endure discomforting declines, an
ever-present risk of owning stocks. This risk was, of course, evident to our
fellow shareholders in Vanguard Selected Value Fund during fiscal 1998. But the
mettle of an investment strategy is proven over many years, and we urge you to
maintain a long-term focus. Our strategy of taking significant positions in
companies that are out of favor with the crowd requires patience. And we
believe that Selected Value will be a sound choice as part of a balanced
portfolio of other stock funds, bond funds, and reserves, chosen in proportions
suited to your goals, time horizon, and tolerance for the ups and downs of the
markets. In short, we believe in thoughtfully constructing an investment plan
and sticking with it.
/s/ JOHN C. BOGLE /s/ JOHN J. BRENNAN
John C. Bogle John J. Brennan
Senior Chairman Chairman and
Chief Executive Officer
November 19, 1998
NOTE: You'll observe that we have made a minor change in the name of Vanguard
Selected Value Fund. We replaced the word "portfolio" with "fund" as part of a
broader effort to clarify the names in our fund lineup.
3
<PAGE> 6
NOTICE TO SHAREHOLDERS
At a special meeting on June 30, 1998, shareholders of Vanguard Selected Value
Fund overwhelmingly approved two proposals. The proposals and voting results
were:
1. REORGANIZATION INTO A DELAWARE BUSINESS TRUST. Based on the fund's assets at
the time of the vote, this change will reduce the amount of state taxes the
fund pays annually by $10,000. Approved by 97.72% of the shares voted, as
follows:
<TABLE>
<CAPTION>
-----------------------------------------------------------
FOR AGAINST ABSTAIN
-----------------------------------------------------------
<S> <C> <C>
10,237,682 97,937 140,870
-----------------------------------------------------------
</TABLE>
2a. INVESTMENT LIMITATION CHANGES--INTERFUND LENDING PROGRAM. This change
permits the fund to participate in Vanguard's interfund lending program, which
allows funds to loan money to each other if--and only if--it makes good
financial sense to do so on both sides of the transaction. The interfund
lending program won't be an integral part of your fund's investment program; it
is a contingency arrangement for managing unusual cash flows. Approved by
94.99% of shares voted, as follows:
<TABLE>
<CAPTION>
-----------------------------------------------------------
FOR AGAINST ABSTAIN
-----------------------------------------------------------
<S> <C> <C>
9,952,129 319,450 204,909
-----------------------------------------------------------
</TABLE>
4
<PAGE> 7
THE MARKETS IN PERSPECTIVE
YEAR ENDED OCTOBER 31, 1998 [PHOTO]
U.S. financial markets encountered strong turbulence yet produced solid overall
gains during the fiscal year ended October 31. The S&P 500 Index gained 22.0%,
overcoming a sharp six-week setback in July and August. Bond prices rose as
interest rates declined over the course of the year. Overseas, returns varied
widely, with big gains on European bourses and sharp losses in Pacific and most
emerging stock markets.
U.S. STOCK MARKETS
Large-capitalization stocks--especially large growth stocks--overwhelmingly led
the market during the year. While the S&P 500 Index, which is dominated by
large-cap stocks, was rising 22.0%, the rest of the market was down 3.4%, more
than 25 percentage points behind the S&P. Results were even worse--a negative
return of 11.8%--for small-cap stocks, as represented by the Russell 2000
Index. The Wilshire 5000 Equity Index, a measure of the entire U.S. market,
gained 14.9%.
Even large-cap investors endured sharp fluctuations during the year. After
vaulting to a record high on July 17, the S&P 500 fell by 19.2% during the
following six weeks, just shy of the 20% mark generally considered the
"boundary" between a bear market and a mere "correction." However, declines
were certifiably bearish for most smaller stocks. The Russell 2000 Index fell
more than 30% from its peak in April before recovering somewhat during the
final two months of the fiscal year.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
AVERAGE ANNUALIZED RETURNS
PERIODS ENDED OCTOBER 31, 1998
--------------------------------
1 YEAR 3 YEARS 5 YEARS
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
STOCKS
S&P 500 Index 22.0% 26.0% 21.3%
Russell 2000 Index -11.8 10.0 9.4
MSCI EAFE Index 10.0 8.5 7.1
- ------------------------------------------------------------------------------
BONDS
Lehman Aggregate Bond Index 9.3% 8.0% 7.0%
Lehman 10-Year Municipal Bond Index 8.3 7.3 6.5
Salomon Smith Barney 3-Month
U.S. Treasury Bill Index 5.2 5.2 5.1
- ------------------------------------------------------------------------------
OTHER
Consumer Price Index 1.5% 2.2% 2.4%
- ------------------------------------------------------------------------------
</TABLE>
The July-August tumble in stock prices reflected a number of factors that
collectively raised the anxiety level for many investors. Among these factors
were deteriorating corporate earnings reports and forecasts, Russia's default
on its debts, and a murkier global economic picture. Asia's economic
troubles--which surfaced in mid-1997--persisted and began to look like a
significant threat to continued expansions in the U.S. and European economies.
But after steadying during September, stock prices bounced back strongly in
October. Although many of the risk factors remained--for example, securities
analysts continued to trim their estimates of corporate earnings--stock prices
got a lift from falling interest rates, which dropped to levels last seen in
the 1960s. (Low inflation and low interest rates help stock prices by raising
the estimated value of future dividends and earnings.)
Three forces clearly shaped the performance of industry sectors within the
overall market. They could be summarized as faith (the buoyant confidence of
consumers), fear (related to the effects of financial troubles abroad), and
fortresses (companies somewhat protected from competition). U.S. consumers
played the role of Atlas during fiscal 1998,
5
<PAGE> 8
propping up the economic world with their strong spending. Feeling flush
because of plentiful jobs (the nation's unemployment rate was as low as 4.3%)
and rising wages, consumers spent a record proportion of their income. Not
surprisingly, then, two big gainers among sectors of the S&P 500 Index were
consumer staples (+26%) and consumer discretionary firms, such as retailers
(+23%).
Fear was a factor in the lagging returns from industry groups that were
perceived by investors to be vulnerable to slowing global growth, falling
commodity prices, and heightened price competition from foreign suppliers.
Among these were exploration and services firms in the "other energy" category
(-34%); chemical, metals, and other materials & processing firms (-3%); and
makers of producer durables such as airplanes and machinery (-0.3%).
Conversely, the utilities sector was the year's top performer (+45%) in part
because utilities are seen as relatively insulated from foreign competition or
economic troubles. Fortresses are companies perceived as relatively safe from
competitors because of patented products, brands, or services. Such companies
dominated the health-care (+41%) and technology (+37%) groups.
U.S. BOND MARKETS
Interest rates declined during the fiscal year, especially for U.S. Treasury
securities, which benefited from greater aversion to risk among investors and
from a slight decrease in supply, thanks to a $70 billion federal budget
surplus. The Federal Reserve Board twice trimmed short-term rates by 0.25
percentage point, first on September 29 and then on October 15. Inflation, the
bane of bond investors, was remarkably tame--consumer prices were up just 1.5%
for the 12 months ended October 31. In this friendly environment, yields on
long-term Treasury bonds fell by roughly 1 to 1.25 percentage points, with the
30-year Treasury bond ending the fiscal year at 5.16%. Lower rates mean higher
prices for bonds, and the Lehman Brothers Long U.S. Treasury Bond Index earned
a return of 16.3%, an astounding margin of nearly 15 percentage points over the
inflation rate.
High-quality corporate bonds and mortgage-backed securities did not rise
in price as far as Treasury securities. Mortgage bonds tend to lag Treasuries
during periods of falling rates because increased refinancing activity by
homeowners results in prepayments of principal to holders of mortgage-backed
securities. The Lehman Aggregate Bond Index, which comprises high-quality
corporate and mortgage-backed bonds, as well as Treasuries, and has an
intermediate-term average maturity, earned 9.3%. Yields on long-term municipal
bonds declined only modestly during the fiscal year, and by October 31 were
only slightly lower than yields on comparable Treasury securities, even though
interest on municipals is exempt from federal income tax.
INTERNATIONAL STOCK MARKETS
Europe's stock markets outshone even the S&P 500 Index, but big declines swept
the markets of Asia and Latin America. As a group, European stocks earned 23.4%
for U.S. investors, reflecting local returns of about 21% and a gain of about
2% from a slight strengthening of several currencies against the dollar.
Reasons for Europe's bull market included continuing economic growth; increased
corporate restructuring and merger activity; and optimism about the long-term
impact of the euro, a common currency due to be adopted in 1999 by 11 nations.
In Japan, the stock market declined 14.3% in U.S.-dollar terms, reflecting
a severe recession and a shaky banking system. Declines elsewhere in the
Pacific region ranged from about 1% in Hong Kong to more than 60% in Indonesia
and Malaysia. Losses were steep in non-Asian emerging markets, too. Notable
declines in our own hemisphere occurred in Mexico (-20%), Venezuela (-64%),
Brazil (-30%), and Chile (-38%).
6
<PAGE> 9
REPORT FROM THE ADVISER [PHOTO]
The last six months of the fiscal year ended October 31 have been among the
most difficult in years for investors in the stocks of small- and medium-size
companies. Our 24.5% drop in the second half resulted in a disappointing 17.8%
decline for the full fiscal year. The average mid-capitalization mutual fund
was down 15.3% in the second half and posted a 2.9% decline for the full year,
while the Russell Midcap Index declined 10.6% in the second half but gained
4.5% for the full fiscal year.
Over the summer, as concerns about the Asian, Russian, and Latin American
economies grew to near-panic proportions, investors flocked toward the "safe
haven" of dollar-denominated investments, mostly U.S. Treasury bonds and
liquid, large-cap stocks. Earlier in the fiscal year, the broad market merely
lagged the large-cap-dominated S&P 500 Index--continuing a trend in place since
1994. But by late summer, small- and mid-cap stock indexes plunged into
negative territory. At the bottom of this downturn, in early October, the
performance gap between the S&P 500 and indexes of smaller stocks widened to
between 15 and 25 percentage points (depending on the index). Valuations of
smaller stocks in relation to large stocks declined to levels not seen since
the 1973-1974 bear market.
During the final two weeks or so of the fiscal year, in what we believe
may represent an important departure, the stock market recovery became much
sharper for stocks outside the S&P 500 Index; indeed, the smaller the market
capitalization represented by an index, the greater the recovery. In that brief
period, our own recovery--both in absolute terms and relative to popular
benchmarks--has been encouraging, although far from sufficient to win back the
earlier shortfall.
From the point of view of sector allocation, our holdings in
already-depressed basic-materials, capital-goods, and health-care issues were
knee-jerk targets for selling during the market melee in the second half of the
year. When the desire for a "calm port" overcomes considerations of longer-term
business value, companies where questions exist may encounter extreme pressure
(and in the case of many of our holdings, the pressure was certainly felt).
During the decline, we spent time with many of the companies we hold, and we
reexamined our financial projections and valuation assessments. In many cases,
we then bought more stock--expecting to turn a difficult situation to our
long-term advantage. We have been through a few similar periods in the last 27
years, and are grateful for the perspective. Fortunately, as Asian markets and
currencies generally stabilized and recovered during October, these
investments, along with our consumer cyclicals and technology holdings,
generally rose considerably further than the market as a whole.
A few examples are in order. We believe that generally the economic value
of most businesses follows a more or less predictable path over time,
determined largely by earning power, cash generation, growth prospects, and a
capitalization rate based on the attractive-
7
<PAGE> 10
ness of alternative investments. These factors change over time but not
normally in unison or quickly; hence, real-world values are not terribly
volatile. Imagine our amazement when one of our holdings, J.B. Hunt Transport
Services, rose in price from less than $20 per share to $37 per share between
January and July and declined to less than $13 in the first week of October.
Our calculation of J.B. Hunt's business value never changed. We sold what we
could in the mid-$30s at what we believed was fair value. As the stock price
declined, we believed it offered increasingly attractive returns, so we rebuilt
our position. Indeed, those purchases and a subsequent rebound in the share
price have placed it among our larger holdings. We still estimate its fair
value in the mid-$30s. Snap-On Inc., Pacific Century Financial, Canandaigua
Brands, and Raychem Corp., among others, experienced similar price volatility
about, we believe, stable and much higher business values. In some cases, we
bought more shares; in others we chose to partially sell to generate funds to
buy stocks we considered even more attractive.
We believe the most important questions now concern the durability of the
broad market upturn and whether or not the fund is well positioned for the long
haul. Worldwide monetary and fiscal authorities are supplying significant
liquidity, support, and long-term structural solutions to deal with problems
that are well known. As the prospects for global stability grow over the coming
months, we expect our fund to benefit both from our focus on stocks with
relatively small market capitalization and from the economic sensitivity of our
holdings. We believe the combination offers the potential for recovery and
attractive returns.
Barrow, Hanley, Mewhinney & Strauss, Inc.
November 12, 1998
INVESTMENT PHILOSOPHY
The adviser believes that superior long-term investment results can be
obtained by emphasizing medium-size companies with reasonable financial
strength whose stocks are out of favor and undervalued by the market, often
because of special situations that have temporarily depressed profits.
8
<PAGE> 11
PERFORMANCE SUMMARY
SELECTED VALUE FUND
All of the data on this page represent past performance, which cannot be used
to predict future returns that may be achieved by the fund. Note, too, that
both share price and return can fluctuate widely, so an investment in the fund
could lose money.
<TABLE>
<CAPTION>
TOTAL INVESTMENT RETURNS: FEBRUARY 15, 1996-OCTOBER 31, 1998
- -----------------------------------------
SELECTED VALUE FUND RUSSELL
INDEX*
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- -----------------------------------------
<S> <C> <C> <C> <C>
1996 0.7% 0.0% 0.7% 8.3%
1997 30.2 0.7 30.9 28.8
1998 -18.1 0.3 -17.8 4.5
- -----------------------------------------
</TABLE>
*Russell Midcap Index.
See Financial Highlights table on page 16 for dividend and capital gains
information since the fund's inception.
<TABLE>
<CAPTION>
CUMULATIVE PERFORMANCE: FEBRUARY 15, 1996-OCTOBER 31, 1998
- -----------------------------------------------------------------------------
Selected Value Fund Average Mid-Cap Fund Russell Midcap Index
<S> <C> <C> <C>
2/15/96 10000 10000 10000
199604 10630 10701 10422
199607 9490 9818 9775
199610 10070 10863 10833
199701 11051 11652 11801
199704 10767 10819 11563
199707 13336 13256 13881
199710 13184 13339 13950
199801 12734 13322 14399
199804 14355 15394 16301
199807 11982 14278 15252
199810 10838 12954 14572
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED OCTOBER 31, 1998
-------------------------------------- FINAL VALUE OF A
1 YEAR SINCE INCEPTION $10,000 INVESTMENT
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Selected Value Fund -17.80% 3.02% $10,838
Average Mid-Cap Fund -2.89 10.03 12,954
Russell Midcap Index 4.46 14.92 14,572
- ---------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED SEPTEMBER 30, 1998*
- ---------------------------------------------------------------------------------------------------------------------------
INCEPTION SINCE INCEPTION
-----------------------------
DATE 1 YEAR CAPITAL INCOME TOTAL
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Selected Value Fund 2/15/1996 -29.86% -1.25% 0.36% -0.89%
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
*SEC rules require that we provide this average annual total return information
through the latest calendar quarter.
9
<PAGE> 12
FUND PROFILE
SELECTED VALUE FUND
This Profile provides a snapshot of the fund's characteristics as of October
31, 1998, compared where appropriate to an unmanaged index. Key elements of
this Profile are defined on page 11.
<TABLE>
<CAPTION>
PORTFOLIO CHARACTERISTICS
- -----------------------------------------
SELECTED RUSSELL
VALUE MIDCAP
- -----------------------------------------
<S> <C> <C>
Number of Stocks 27 774
Median Market Cap $0.9B $4.7B
Price/Earnings Ratio 17.1x 19.5x
Price/Book Ratio 1.7x 2.8x
Yield 0.7% 1.7%
Return on Equity 11.7% 16.3%
Earnings Growth Rate 12.3% 14.4%
Foreign Holdings 2.4% 0.0%
Turnover Rate 47% --
Expense Ratio 0.65% --
Cash Reserves 2.3% --
</TABLE>
INVESTMENT FOCUS
- --------------------------
[GRAPH]
<TABLE>
<Caption
TEN LARGEST HOLDINGS (% OF TOTAL NET ASSETS)
- ---------------------------------------------------
<S> <C>
Canandaigua Brands, Inc. Class A 5.7%
Coventry Health Care Inc. 5.5
Polaris Industries, Inc. 5.0
Mentor Graphics Corp. 4.9
RPM Inc. (Ohio) 4.7
Silicon Valley Group, Inc. 4.2
PacifiCare Health Systems, Inc. Class B 4.0
Raychem Corp. 3.8
J. Ray McDermott SA 3.8
J.B. Hunt Transport Services, Inc. 3.7
- ---------------------------------------------------
Top Ten 45.3%
</TABLE>
<TABLE>
<CAPTION>
SECTOR DIVERSIFICATION (% OF COMMON STOCKS)
- ----------------------------------------------------------------------------------------
OCTOBER 31, 1997 OCTOBER 31, 1998
-------------------------------------------------
SELECTED VALUE SELECTED VALUE RUSSELL MIDCAP
-------------------------------------------------
<S> <C> <C> <C>
Auto & Transportation 16.1% 14.4% 3.7%
Consumer Discretionary 14.4 5.9 17.2
Consumer Staples 5.8 5.8 4.8
Financial Services 7.4 7.3 21.7
Health Care 7.4 16.3 6.7
Integrated Oils 0.0 0.0 1.7
Other Energy 4.0 3.4 3.8
Materials & Processing 19.0 25.8 9.3
Producer Durables 20.5 16.1 4.9
Technology 5.4 5.0 10.3
Utilities 0.0 0.0 13.7
Other 0.0 0.0 2.2
- ----------------------------------------------------------------------------------------
</TABLE>
10
<PAGE> 13
CASH RESERVES. The percentage of a fund's net assets invested in "cash
equivalents"--highly liquid, short-term, interest-bearing securities. This
figure does not include cash invested in futures contracts to simulate stock
investment.
EARNINGS GROWTH RATE. The average annual rate of growth in earnings over the
past five years for the stocks now in a fund.
EXPENSE RATIO. The percentage of a fund's average net assets used to pay its
annual administrative and advisory expenses. These expenses directly reduce
returns to investors.
FOREIGN HOLDINGS. The percentage of a fund's equity assets represented by
stocks or American Depositary Receipts of companies based outside the United
States.
INVESTMENT FOCUS. This grid indicates the focus of a fund in terms of two
attributes: market capitalization (large, medium, or small) and relative
valuation (growth, value, or a blend).
MEDIAN MARKET CAP. An indicator of the size of companies in which a fund
invests; the midpoint of market capitalization (market price x shares
outstanding) of a fund's stocks, weighted by the proportion of the fund's
assets invested in each stock. Stocks representing half of the fund's assets
have market capitalizations above the median, and the rest are below it.
NUMBER OF STOCKS. An indicator of diversification. The more stocks a fund
holds, the more diversified it is and the more likely to perform in line with
the overall stock market.
PRICE/BOOK RATIO. The share price of a stock divided by its net worth, or book
value, per share. For a fund, the weighted average price/book ratio of the
stocks it holds.
PRICE/EARNINGS RATIO. The ratio of a stock's current price to its per-share
earnings over the past year. For a fund, the weighted average P/E of the stocks
it holds. P/E is an indicator of market expectations about corporate prospects;
the higher the P/E, the greater the expectations for a company's future growth.
RETURN ON EQUITY. The annual average rate of return generated by a company
during the past five years for each dollar of shareholder's equity (net income
divided by shareholder's equity). For a fund, the weighted average return on
equity for the companies whose stocks it holds.
SECTOR DIVERSIFICATION. The percentages of a fund's common stocks that come
from each of the major industry groups that compose the stock market.
TEN LARGEST HOLDINGS. The percentage of net assets that a fund has invested in
its ten largest holdings. (The average for stock mutual funds is about 30%.) As
this percentage rises, a fund's returns are likely to be more volatile because
they are more dependent on the fortunes of a few companies.
TURNOVER RATE. An indication of trading activity during the past year. Funds
with high turnover rates incur higher transaction costs and are more likely to
distribute capital gains (which are taxable to investors).
YIELD. A snapshot of a fund's income from interest and dividends. The yield,
expressed as a percentage of the fund's net asset value, is based on income
earned over the past 30 days and is annualized, or projected forward for the
coming year. The index yield is based on the current annualized rate of
dividends paid on stocks in the index.
11
<PAGE> 14
FINANCIAL STATEMENTS
OCTOBER 31, 1998
STATEMENT OF NET ASSETS [PHOTO]
This Statement provides a detailed list of the fund's holdings, including each
security's market value on the last day of the reporting period. Securities are
grouped and subtotaled by asset type (common stocks, bonds, etc.) and by
industry sector. Other assets are added to, and liabilities are subtracted
from, the value of Total Investments to calculate the fund's Net Assets.
Finally, Net Assets are divided by the outstanding shares of the fund to arrive
at its share price, or Net Asset Value (NAV) Per Share.
At the end of the Statement of Net Assets, you will find a table displaying
the composition of the fund's net assets on both a dollar and per-share basis.
Because all income and any realized gains must be distributed to shareholders
each year, the bulk of net assets consists of Paid in Capital (money invested
by shareholders). The amounts shown for Undistributed Net Investment Income and
Accumulated Net Realized Gains usually approximate the sums the fund had
available to distribute to shareholders as income dividends or capital gains as
of the statement date. Any Accumulated Net Realized Losses, and any cumulative
excess of distributions over net income or net realized gains, will appear as
negative balances. Unrealized Appreciation (Depreciation) is the difference
between the market value of the fund's investments and their cost, and reflects
the gains (losses) that would be realized if the fund were to sell all of its
investments at their statement-date values.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
MARKET
VALUE*
SELECTED VALUE FUND SHARES (000)
- ----------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (97.7%)
- ----------------------------------------------------------------------
AUTO & TRANSPORTATION (14.0%)
J.B. Hunt Transport Services, Inc. 335,000 $ 5,611
- Kirby Corp. 194,400 4,119
- Lear Corp. 122,200 3,926
Polaris Industries, Inc. 222,400 7,645
--------
21,301
--------
CONSUMER DISCRETIONARY (5.8%)
Danka Business Systems PLC 643,300 3,578
Snap-On Inc. 144,500 5,121
--------
8,699
--------
CONSUMER STAPLES (5.7%)
- Canandaigua Brands, Inc.
Class A 172,000 8,622
--------
ENERGY (3.3%)
Vastar Resources, Inc. 105,100 5,025
--------
FINANCIAL SERVICES (7.1%)
- Annuity and Life Re
(Holdings), Ltd. 232,200 5,428
Pacific Century Financial Corp. 261,600 5,330
--------
10,758
--------
HEALTH CARE (15.9%)
- Coventry Health Care Inc. 855,000 8,283
- Magellan Health Services, Inc. 587,800 5,327
- PacifiCare Health Systems, Inc.
Class B 77,200 6,080
- Syncor International Corp. 243,600 4,446
--------
24,136
--------
MATERIALS & PROCESSING (25.3%)
Ferro Corp. 215,150 5,486
H.B. Fuller Co. 105,900 4,355
- International Specialty
Products, Inc. 394,800 5,305
MacMillan Bloedel Ltd. 546,069 5,230
- J. Ray McDermott SA 182,450 5,724
Quanex Corp. 308,900 5,213
RPM Inc. (Ohio) 425,150 7,148
--------
38,461
--------
PRODUCER DURABLES (15.7%)
Harnischfeger Industries Inc. 371,300 3,504
Pall Corp. 187,300 4,729
Raychem Corp. 189,600 5,795
- Silicon Valley Group, Inc. 497,800 6,378
Thomas & Betts Corp. 76,954 3,439
--------
23,845
--------
TECHNOLOGY (4.9%)
- Mentor Graphics Corp. 915,600 7,382
--------
- ----------------------------------------------------------------------
TOTAL COMMON STOCKS
(COST $168,180) 148,229
- ----------------------------------------------------------------------
</TABLE>
12
<PAGE> 15
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
FACE MARKET
AMOUNT VALUE*
(000) (000)
- ----------------------------------------------------------------------
<S> <C>
TEMPORARY CASH INVESTMENT (2.6%)
- ----------------------------------------------------------------------
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
5.41%, 11/2/1998
(COST $3,950) $3,950 $ 3,950
- ----------------------------------------------------------------------
TOTAL INVESTMENTS (100.3%)
(COST $172,130) 152,179
- ----------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-0.3%)
- ----------------------------------------------------------------------
Other Assets--Note C 856
Liabilities (1,251)
--------
(395)
- ----------------------------------------------------------------------
NET ASSETS (100%)
- ----------------------------------------------------------------------
Applicable to 14,843,266 outstanding $.001
par value shares of beneficial interest
(unlimited authorization) $151,784
======================================================================
NET ASSET VALUE PER SHARE $10.23
======================================================================
*See Note A in Notes to Financial Statements.
- - Non-Income-Producing Security.
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- ----------------------------------------------------------------------
AT OCTOBER 31, 1998, NET ASSETS CONSISTED OF:
- ----------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $166,131 $11.19
Undistributed Net
Investment Income 892 .06
Accumulated Net Realized Gains 4,712 .32
Unrealized Depreciation--Note E (19,951) (1.34)
- ----------------------------------------------------------------------
NET ASSETS $151,784 $10.23
======================================================================
</TABLE>
13
<PAGE> 16
STATEMENT OF OPERATIONS
This Statement shows dividend and interest income earned by the fund during the
reporting period, and details the operating expenses charged to the fund. These
expenses directly reduce the amount of investment income available to pay to
shareholders as dividends. This Statement also shows any Net Gain (Loss)
realized on the sale of investments, and the increase or decrease in the
Unrealized Appreciation (Depreciation) on investments during the period.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
SELECTED VALUE FUND
YEAR ENDED OCTOBER 31, 1998
(000)
- -------------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME
INCOME
Dividends $ 1,962
Interest 352
Security Lending 6
---------
Total Income 2,320
---------
EXPENSES
Investment Advisory Fees--Note B
Basic Fee 712
Performance Adjustment (282)
The Vanguard Group--Note C
Management and Administrative 671
Marketing and Distribution 56
Taxes (other than income taxes) 10
Custodian Fees 21
Auditing Fees 9
Shareholders' Reports 29
Annual Meeting and Proxy Costs 4
---------
Total Expenses 1,230
- -------------------------------------------------------------------------------------
NET INVESTMENT INCOME 1,090
- -------------------------------------------------------------------------------------
REALIZED NET GAIN ON INVESTMENT SECURITIES SOLD 4,745
- -------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) OF INVESTMENT SECURITIES (41,276)
- -------------------------------------------------------------------------------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $(35,441)
=====================================================================================
</TABLE>
14
<PAGE> 17
STATEMENT OF CHANGES IN NET ASSETS
This Statement shows how the fund's total net assets changed during the two
most recent reporting periods. The Operations section summarizes information
detailed in the Statement of Operations. The amounts shown as Distributions to
shareholders from the fund's net income and capital gains may not match the
amounts shown in the Operations section, because distributions are determined
on a tax basis and may be made in a period different from the one in which the
income was earned or the gains were realized on the financial statements. The
Capital Share Transactions section shows the amount shareholders invested in
the fund, either by purchasing shares or by reinvesting distributions, as well
as the amounts redeemed. The corresponding numbers of Shares Issued and
Redeemed are shown at the end of the Statement.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
SELECTED VALUE FUND
YEAR ENDED OCTOBER 31,
---------------------------
1998 1997
(000) (000)
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income $ 1,090 $ 787
Realized Net Gain 4,745 6,810
Change in Unrealized Appreciation (Depreciation) (41,276) 22,843
-----------------------------
Net Increase (Decrease) in Net Assets Resulting from Operations (35,441) 30,440
-----------------------------
DISTRIBUTIONS
Net Investment Income (741) (568)
Realized Capital Gain (6,818) (1,042)
-----------------------------
Total Distributions (7,559) (1,610)
CAPITAL SHARE TRANSACTIONS(1) -----------------------------
Issued 73,513 106,636
Issued in Lieu of Cash Distributions 7,233 1,544
Redeemed (75,874) (39,764)
-----------------------------
Net Increase from Capital Share Transactions 4,872 68,416
- ------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) (38,128) 97,246
- ------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Year 189,912 92,666
-----------------------------
End of Year $151,784 $189,912
============================================================================================================
(1)Shares Issued (Redeemed)
Issued 6,056 8,742
Issued in Lieu of Cash Distributions 610 143
Redeemed (6,449) (3,458)
-----------------------------
Net Increase in Shares Outstanding 217 5,427
============================================================================================================
</TABLE>
15
<PAGE> 18
FINANCIAL HIGHLIGHTS
This table summarizes the fund's investment results and distributions to
shareholders on a per-share basis. It also presents the fund's Total Return and
shows net investment income and expenses as percentages of average net assets.
These data will help you assess: the variability of the fund's net income and
total returns from year to year; the relative contributions of net income and
capital gains to the fund's total return; how much it costs to operate the
fund; and the extent to which the fund tends to distribute capital gains. The
table also shows the Portfolio Turnover Rate, a measure of trading activity. A
turnover rate of 100% means that the average security is held in the fund for
one year.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
SELECTED VALUE FUND
YEAR ENDED OCTOBER 31, FEB. 15* TO
------------------------
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD 1998 1997 OCT. 31, 1996
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $12.98 $10.07 $10.00
- ----------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .07 .06 .04
Net Realized and Unrealized Gain (Loss) on Investments (2.31) 3.02 .03
-------------------------------------
Total from Investment Operations (2.24) 3.08 .07
-------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.05) (.06) --
Distributions from Realized Capital Gains (.46) (.11) --
-------------------------------------
Total Distributions (.51) (.17) --
- ----------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $10.23 $12.98 $10.07
==========================================================================================================
TOTAL RETURN -17.80% 30.92% 0.70%
=========================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $152 $190 $93
Ratio of Total Expenses to Average Net Assets 0.65% 0.74% 0.75%**
Ratio of Net Investment Income to Average Net Assets 0.58% 0.60% 0.75%**
Portfolio Turnover Rate 47% 32% 25%
==========================================================================================================
</TABLE>
*Commencement of operations.
**Annualized.
16
<PAGE> 19
NOTES TO FINANCIAL STATEMENTS
Vanguard Selected Value Fund is registered under the Investment Company Act of
1940 as a diversified open-end investment company, or mutual fund.
A. The following significant accounting policies conform to generally accepted
accounting principles for mutual funds. The fund consistently follows such
policies in preparing its financial statements.
1. SECURITY VALUATION: Equity securities are valued at the latest quoted
sales prices as of the close of trading on the New York Stock Exchange
(generally 4:00 p.m. Eastern time) on the valuation date; such securities not
traded on the valuation date are valued at the mean of the latest quoted bid
and asked prices. Prices are taken from the primary market in which each
security trades. Temporary cash investments are valued at cost, which
approximates market value. Securities for which market quotations are not
readily available are valued by methods deemed by the Board of Trustees to
represent fair value.
2. FEDERAL INCOME TAXES: The fund intends to continue to qualify as a
regulated investment company and distribute all of its taxable income.
Accordingly, no provision for federal income taxes is required in the financial
statements.
3. REPURCHASE AGREEMENTS: The fund, along with other members of The
Vanguard Group, transfers uninvested cash balances to a Pooled Cash Account,
which is invested in repurchase agreements secured by U.S. government
securities. Securities pledged as collateral for repurchase agreements are held
by a custodian bank until the agreements mature. Each agreement requires that
the market value of the collateral be sufficient to cover payments of interest
and principal; however, in the event of default or bankruptcy by the other
party to the agreement, retention of the collateral may be subject to legal
proceedings.
4. DISTRIBUTIONS: Distributions to shareholders are recorded on the
ex-dividend date.
5. OTHER: Dividend income is recorded on the ex-dividend date. Security
transactions are accounted for on the date securities are bought or sold. Costs
used to determine realized gains (losses) on the sale of investment securities
are those of the specific securities sold.
B. Barrow, Hanley, Mewhinney & Strauss, Inc., provides investment advisory
services to the fund for a fee calculated at an annual percentage rate of
average net assets. The basic fee is subject to quarterly adjustments based on
performance relative to the Russell Midcap Index. For the year ended October
31, 1998, the advisory fee represented an effective annual basic rate of 0.38%
of the fund's average net assets before a decrease of $282,000 (0.15%) based on
performance.
C. The Vanguard Group furnishes at cost corporate management, administrative,
marketing, and distribution services. The costs of such services are allocated
to the fund under methods approved by the Board of Trustees. The fund has
committed to provide up to 0.40% of its net assets in capital contributions to
Vanguard. At October 31, 1998, the fund had contributed capital of $28,000 to
Vanguard (included in Other Assets), representing 0.02% of the fund's net
assets and 0.04% of Vanguard's capitalization. The fund's Trustees and officers
are also Directors and officers of Vanguard.
D. During the year ended October 31, 1998, the fund purchased $92,837,000 of
investment securities and sold $86,036,000 of investment securities, other than
temporary cash investments.
E. At October 31, 1998, net unrealized depreciation of investment securities
for financial reporting and federal income tax purposes was $19,951,000,
consisting of unrealized gains of $14,145,000 on securities that had risen in
value since their purchase and $34,096,000 in unrealized losses on securities
that had fallen in value since their purchase.
17
<PAGE> 20
REPORT OF INDEPENDENT
ACCOUNTANTS
To the Shareholders and
Board of Trustees of
Vanguard Selected Value Fund [PHOTO]
In our opinion, the accompanying statement of net assets and the related
statements of operations and of changes in net assets and the financial
highlights present fairly, in all material respects, the financial position of
Vanguard Selected Value Fund (the "Fund") at October 31, 1998, the results of
its operations for the year then ended, the changes in its net assets for each
of the two years in the period then ended and the financial highlights for each
of the two years in the period then ended and for the period February 15, 1996
(commencement of operations) through October 31, 1996, in conformity with
generally accepted accounting principles. These financial statements and
financial highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits, which included confirmation of securities at October 31, 1998 by
correspondence with the custodian, provide a reasonable basis for the opinion
expressed above.
PricewaterhouseCoopers LLP
Thirty South Seventeenth Street
Philadelphia, Pennsylvania 19103
November 30, 1998
18
<PAGE> 21
SPECIAL 1998 TAX INFORMATION (UNAUDITED) FOR VANGUARD SELECTED VALUE FUND
This information for the fiscal year ended October 31, 1998, is included
pursuant to provisions of the Internal Revenue Code.
The fund distributed $3,483,000 as capital gain dividends (from net long-term
capital gains) to shareholders in December 1997, all of which was designated as
a 20% rate gain distribution.
For corporate shareholders, 100% of investment income (dividend income plus
short-term gains, if any) qualifies for the dividends-received deduction.
19
<PAGE> 22
TRUSTEES AND OFFICERS
JOHN C. BOGLE
Founder, Senior Chairman of the Board, and Director/Trustee of The Vanguard
Group, Inc., and each of the investment companies in The Vanguard Group.
JOHN J. BRENNAN
Chairman of the Board, Chief Executive Officer, and Director/Trustee of The
Vanguard Group, Inc., and each of the investment companies in The Vanguard
Group.
BARBARA BARNES HAUPTFUHRER
Director of The Great Atlantic and Pacific Tea Co., IKON Office Solutions,
Inc., Raytheon Co., Knight-Ridder, Inc., Massachusetts Mutual Life Insurance
Co., and Ladies Professional Golf Association; Trustee Emerita of Wellesley
College.
JOANN HEFFERNAN HEISEN
Vice President, Chief Information Officer, and a member of the Executive
Committee of Johnson & Johnson; Director of Johnson & JohnsonoMerck Consumer
Pharmaceuticals Co., Women First HealthCare, Inc., Recording for the Blind and
Dyslexic, The Medical Center at Princeton, and Women's Research and Education
Institute.
BRUCE K. MACLAURY
President Emeritus of The Brookings Institution; Director of American Express
Bank Ltd., The St. Paul Companies, Inc., and National Steel Corp.
BURTON G. MALKIEL
Chemical Bank Chairman's Professor of Economics, Princeton University; Director
of Prudential Insurance Co. of America, Banco Bilbao Gestinova, Baker Fentress
& Co., The Jeffrey Co., and Southern New England Telecommunications Co.
ALFRED M. RANKIN, JR.
Chairman, President, and Chief Executive Officer
of NACCO Industries, Inc.; Director of NACCO Industries, The BFGoodrich Co.,
and The Standard Products Co.
JOHN C. SAWHILL
President and Chief Executive Officer of The Nature Conservancy; formerly,
Director and Senior Partner of McKinsey & Co. and President of New York
University; Director of Pacific Gas and Electric Co., Procter & Gamble Co.,
NACCO Industries, and Newfield Exploration Co.
JAMES O. WELCH, JR.
Retired Chairman of Nabisco Brands, Inc.; retired Vice Chairman and Director of
RJR Nabisco; Director of TECO Energy, Inc., and Kmart Corp.
J. LAWRENCE WILSON
Chairman and Chief Executive Officer of Rohm & Haas C.; Director of Cummins
Engine Co. and The Mead Corp; Trustee of Vanderbilt University.
OTHER FUND OFFICERS
RAYMOND J. KLAPINSKY
Secretary; Managing Director and Secretary of The Vanguard Group, Inc.;
Secretary of each of the investment companies in The Vanguard Group.
THOMAS J. HIGGINS
Treasurer; Principal of The Vanguard Group, Inc.; Treasurer of each of the
investment companies in The Vanguard Group.
KAREN E. WEST
Controller; Principal of The Vanguard Group, Inc.; Controller of each of the
investment companies in The Vanguard Group.
OTHER VANGUARD OFFICERS
R. GREGORY BARTON
Managing Director, Legal Department.
ROBERT A. DISTEFANO
Managing Director, Information Technology.
JAMES H. GATELY
Managing Director, Individual Investor Group.
KATHLEEN C. GUBANICH
Managing Director, Human Resources.
IAN A. MACKINNON
Managing Director, Fixed Income Group.
F. WILLIAM MCNABB, III
Managing Director, Institutional Investor Group.
MICHAEL S. MILLER
Managing Director, Planning and Development.
RALPH K. PACKARD
Managing Director and Chief Financial Officer.
GEORGE U. SAUTER
Managing Director, Core Management Group.
"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 TRADEMARKS AND COPYRIGHTS RELATING TO THE
RUSSELL INDEXES. "WILSHIRE 4500" AND "WILSHIRE 5000" ARE
TRADEMARKS OF WILSHIRE ASSOCIATES.
20
<PAGE> 23
VANGUARD
MILESTONES
[PHOTO]
The Vanguard Group is
named for HMS Vanguard,
Admiral Horatio Nelson's flagship
at the Battle of the Nile on
August 1, 1798. Our founder,
John C. Bogle, chose the name
after reading Nelson's inspiring
tribute to his fleet: "Nothing could
withstand the squadron . . .
with the judgment of the captains,
together with their valour, and that
of the officers and men of every
description, it was absolutely irresistible."
[PHOTO]
Walter L. Morgan, founder of
Wellington Fund, the nation's
first balanced mutual fund
and forerunner of today's family
of some 100 Vanguard funds,
celebrated his 100th birthday on
July 23, 1998. Mr. Morgan,
a true investment pioneer, died
six weeks later on September 2.
[PHOTO]
Wellington Fund,
The Vanguard Group's oldest fund,
was incorporated by Mr. Morgan
70 years ago, on December 28, 1928.
The fund was named after
the Duke of Wellington,
whose forces defeated
Napoleon Bonaparte at the
Battle of Waterloo in 1815.
[THE VANGUARD GROUP LOGO]
Post Office Box 2600
Valley Forge, Pennsylvania 19482
FUND INFORMATION
1-800-662-7447
INDIVIDUAL ACCOUNT SERVICES
1-800-662-2739
INSTITUTIONAL INVESTOR SERVICES
1-800-523-1036
www.vanguard.com
[email protected]
All Vanguard funds are offered by prospectus only. Prospectuses contain more
complete information on advisory fees, distribution charges, and other expenses
and should be read carefully before you invest or send money. Prospectuses can
be obtained directly from The Vanguard Group.
Q9340-12/17/1998
(C) 1998 Vanguard Marketing
Corporation, Distributor.
All rights reserved.
