<PAGE> 1
VANGUARD
SELECTED VALUE
FUND
[PHOTO]
SEMIANNUAL REPORT
APRIL 30, 1999
[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. 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, 1998, 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, 1998.
- - The 70th anniversary, on December 28, 1998, of the incorporation of
Vanguard Wellington Fund. It is the nation's oldest balanced mutual fund,
and 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
4
REPORT FROM
THE ADVISER
6
PERFORMANCE SUMMARY
7
FUND PROFILE
8
FINANCIAL STATEMENTS
10
All comparative mutual fund data
are from Lipper or Morningstar,
unless otherwise noted.
<PAGE> 3
FELLOW SHAREHOLDER,
[PHOTO] [PHOTO]
JOHN J. BRENNAN JOHN C. BOGLE
CHAIRMAN & CEO SENIOR CHAIRMAN
During a very rewarding six months for U.S. stocks, Vanguard Selected Value
Fund earned a disappointing return of +7.1%, falling far short of the returns
of its comparative benchmarks for the first half of the fund's 1999 fiscal
year.
The table below presents the fund's total return for the six months
ended April 30, 1999, along with the returns of its two comparative benchmarks:
the average mid-capitalization mutual fund and the unmanaged Russell Midcap
Index. As you can see, our return was more than 16 percentage points behind the
+23.2% return of our average peer and more than 11 percentage points below the
+18.5% return of the mid-cap index. The fund's total return (capital change
plus reinvested dividends) is based on an increase in net asset value from
$10.23 per share on October 31, 1998, to $10.51 per share on April 30, 1999,
adjusted for a dividend of $0.08 per share paid from net investment income and
a distribution of $0.33 per share paid from net realized capital gains.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------
TOTAL RETURNS
SIX MONTHS ENDED
APRIL 30, 1999
- -------------------------------------------------------------------------
<S> <C>
Vanguard Selected Value Fund + 7.1%
- -------------------------------------------------------------------------
Average Mid-Cap Fund +23.2%
- -------------------------------------------------------------------------
Russell Midcap Index +18.5%
- -------------------------------------------------------------------------
</TABLE>
Needless to say, the fund's performance for the half-year--and indeed
since its inception in February 1996--is unsatisfactory. As we wrote to you on
March 25, the Board of Trustees announced a change in Selected Value's
portfolio manager, while retaining Barrow, Hanley, Mewhinney & Strauss as the
fund's investment adviser. James P. Barrow, who is a founding partner and vice
president of Barrow, Hanley and who manages a large portion of Vanguard Windsor
II Fund, has assumed the investment management duties for the Selected Value
Fund. After serious consideration, your Board decided that this change was
appropriate in the endeavor to improve the fund's returns and to increase the
predictability of the fund's performance relative to its mid-cap benchmarks.
The fund will continue to seek long-term growth of capital and income
and to concentrate on stocks with value characteristics, such as below-average
price/earnings ratios and above-average dividend yields. It will remain a
mid-cap fund, although we expect the median market capitalization of the
corporations in the fund's portfolio to rise from the lower end of the mid-cap
range toward the middle of the range ($3 billion to $5 billion). In addition,
the fund will be somewhat more broadly diversified than in the past, though it
is likely to be slightly more concentrated than its average peer.
We are confident that the repositioning of the fund, which is nearly
completed, is in the best long-term interests of shareholders. For more details
on how the change in portfolio managers will affect Selected Value's makeup,
see the adviser's report on page 6.
THE PERIOD IN REVIEW
A remarkable domestic economic environment--in which rapid growth in business
activity and high employment coexisted with tame inflation--set the stage for
the U.S. stock market's surge during the six months ended April 30. The overall
stock
1
<PAGE> 4
market, as measured by the Wilshire 5000 Equity Index, gained +22.8%, just
ahead of the +22.3% return of the best-known benchmark for large-cap stocks,
the Standard & Poor's 500 Composite Stock Price Index.
In contrast to the previous year, when large-cap growth stocks far
outperformed large-cap value stocks, returns from these segments of the S&P 500
Index during the half-year were similar: +22.6% for growth stocks and +21.7%
for value stocks. However, among mid-cap stocks, growth far outperformed value.
The Russell Midcap Index returned +18.5% for the six months, but its value
component was up just +13.1% while its growth segment gained +27.4%.
The strength of the U.S. economy's expansion, which buoyed stock
prices for the commodity sectors, was worrisome to bond investors, who are
ever-vigilant for signs that inflation may accelerate. Inflation is the
bondholder's bane because it erodes the value of future interest and principal
payments. (Inflation also erodes the value of future stock dividends and
earnings, but stockholders, unlike bondholders, can hope to benefit if a
general increase in the prices for goods and services also translates into
higher corporate profits.)
Interest rates rose moderately during the period, with the yield of
the benchmark 30-year U.S. Treasury bond ending the half-year at 5.66%, 50
basis points above the bond's 5.16% yield at the beginning of the period. As
interest rates rise, bond prices decline. During the half-year, these price
declines shaved 2.3 percentage points from the return of the Lehman Brothers
Aggregate Bond Index, offsetting most of its interest income and resulting in a
total return of +0.7%.
PERFORMANCE OVERVIEW
Vanguard Selected Value Fund's six-month return of +7.1% was less than
one-third of the return of its average peer and, as we noted, more than 11
percentage points lower than the return of the Russell Midcap Index.
Though our emphasis on mid-sized value stocks during the period partly
explains our competitive shortfall, the major reason lay in poor stock
selection, notably in the producer-durables and consumer-discretionary groups.
Our picks among the auto & transportation, financial-services, and materials &
processing sectors also hurt our relative performance. In addition, our
relatively heavy commitment to the poorly performing health-care segment
(averaging about 15% of net assets during the period, versus about 7% for the
index) detracted from our results. Our shortfall versus the average mid-cap
mutual fund was largely the result of our heavier concentration during the
period on stocks that were, on average, much smaller--and more strongly
value-oriented--than those held by our average peer.
We believe that, under the direction of a new portfolio manager, our
adviser's investment approach to selecting stocks with potential for long-term
growth--combined with the built-in advantage of our low costs--will help the
fund provide long-term returns that are fully competitive with those of similar
mutual funds.
IN SUMMARY
This half-year was a difficult one for Vanguard Selected Value Fund. But it's
important to remember that a fund's performance is best measured over years and
decades rather than weeks or months. We are confident that the changes your
Board has approved for
2
<PAGE> 5
Selected Value will benefit long-term investors who include the fund in a
balanced investment program of stock funds, bond funds, and money market funds.
Once such a program is in place, we believe that sticking with it--"staying the
course"--is a sound investment approach.
We look forward to reporting to you on the full 1999 fiscal year six
months hence.
/s/ JOHN C. BOGLE /s/ JOHN J. BRENNAN
John C. Bogle John J. Brennan
Senior Chairman Chairman and
Chief Executive Officer
May 17, 1999
3
<PAGE> 6
THE MARKETS IN PERSPECTIVE
SIX MONTHS ENDED APRIL 30, 1999
[PHOTO]
Global stock markets chalked up solid gains during the six months ended April
30, 1999, aided by the efforts of central banks around the world to ease
monetary policy and lower short-term interest rates.
The remarkably strong U.S. economy helped out by playing locomotive
for the world's economies, soaking up record volumes of imported goods. Indeed,
the United States was the only major nation whose policymakers and bondholders
had to ponder whether growth was too rapid. Concern about a potential surge in
inflation was one reason that interest rates rose modestly and bond prices
generally slipped in the United States.
U.S. STOCK MARKETS
Stock prices soared during the half-year, reflecting both the domestic
economy's strength and the investing public's confidence in future growth of
the economy and corporate profits. The overall market, as measured by the
Wilshire 5000 Equity Index, rose 22.8% during the six months ended April 30,
while the S&P 500 Index, a proxy for large-capitalization stocks, gained 22.3%.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------
TOTAL RETURNS
PERIODS ENDED APRIL 30, 1999
------------------------------------
6 MONTHS 1 YEAR 5 YEARS*
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
STOCKS
S&P 500 Index 22.3% 21.8% 26.9%
Russell 2000 Index 15.2 -9.3 13.0
Wilshire 5000 Index 22.8 17.0 24.5
MSCI EAFE Index 15.4 9.8 9.0
- ---------------------------------------------------------------------------
BONDS
Lehman Aggregate Bond Index 0.7% 6.3% 8.0%
Lehman 10-Year Municipal Bond Index 1.5 7.1 7.5
Salomon Smith Barney 3-Month
U.S. Treasury Bill Index 2.2 4.8 5.2
- ---------------------------------------------------------------------------
OTHER
Consumer Price Index 1.3% 2.3% 2.4%
- ---------------------------------------------------------------------------
</TABLE>
*Annualized.
The midsummer shock of 1998--when the overall stock market fell by
more than 20%--seemed to be quickly forgotten by investors. Most apparently
overlooked the fact that corporate earnings were flat to slightly lower,
focusing instead on the potential for future earnings. Investors' confidence
was bolstered by the market's quick rebound from its summer stumble and by a
general easing of monetary policy by the world's central banks. The Federal
Reserve Board made three separate quarter-percentage-point reductions in
short-term interest rates during autumn 1998. Central banks in Europe, Asia,
and Latin America also cut rates. These actions lessened fears that the major
economies would be dragged down by the lingering effects of the economic crisis
that struck emerging markets beginning in mid-1997.
U.S. consumers demonstrated their confidence in economic conditions by
spending freely, boosting sales of cars, houses, and goods in stores. And why
shouldn't they have been happy? U.S. gross domestic product grew by an annual
rate of 4.1% in the first three months of 1999, and the nation's unemployment
rate closed the period at 4.3%.
Improved prospects for global growth were a key factor in the
continuing advance of technology stocks (up nearly 42% for the six months) and
the resurgence of some value-stock sectors, such as materials & processing (up
27%) and energy (integrated oil
4
<PAGE> 7
companies rose 22%; "other energy" stocks gained 23%). Retailers and other
companies in the consumer-discretionary sector gained 34%, reflecting the
strength of consumer spending. Not all consumer-related stocks benefited,
however. Consumer-staples companies, locked in tough price competition and
still feeling the effects of falling profits from overseas operations, were the
worst-performing group in the half-year, down 3%.
U.S. BOND MARKETS
For bond investors, the powerful economic expansion evident during the
November-April period was too much of a good thing. Economists confessed to
puzzlement that the expansion was not triggering an acceleration in wages or
consumer prices. But with oil prices rising, U.S. economic growth expanding at
a 4.1% annual pace, and unemployment at 4.3% of the labor force, the lowest
point since February 1970, bond market participants figured that inflation was
bound to accelerate eventually. (This view gained credence shortly after the
period's end, when the Consumer Price Index was reported to have risen 0.7% in
April, the biggest monthly increase in eight years.)
Despite the Fed's actions to cut short-term interest rates, yields on
U.S. Treasury issues increased over the six months by one-half to
three-quarters of a percentage point. The yield of the 30-year Treasury bond
rose 50 basis points, to 5.66% on April 30 from 5.16% six months earlier. The
yield of the 10-year Treasury rose to 5.35% from 4.61%. Very short-term rates
didn't rise as far: Yields on 3-month T-bills rose 22 basis points to 4.54% on
April 30. Bond prices, which move in the opposite direction from interest
rates, fell. The Lehman Brothers Aggregate Bond Index, a benchmark for
investment-grade taxable bonds, earned just 0.7%, as falling prices offset most
of the index's 3.0% interest income for the six-month period.
Municipal bonds suffered only slight price declines and outperformed
Treasury securities--a turnaround from the previous six months, when Treasuries
were bid up by investors seeking a safe haven during the summer 1998 market
turmoil.
Not all bond prices fell during the half-year. For high-yield issues,
the strong economy was a tonic. These bonds had suffered considerably during
the market turmoil of summer 1998, as investors feared a global economic
downturn would result in higher defaults by weaker companies. But when economic
growth turned out to be stronger than expected, high-yield bond prices
rebounded, augmenting the bonds' interest income. The Lehman High Yield Index
returned 8.3% during the half-year.
INTERNATIONAL STOCK MARKETS
Overseas stock markets posted gains during the period, despite lingering
economic weakness in Asia and sluggish growth in most of Europe's developed
economies. Crises in some key developing markets, including those of Brazil and
Russia, appeared to be easing as the semiannual period drew to a close.
Overall, the developed markets outside the United States gained 15.4% in
U.S.-dollar terms, as measured by the Morgan Stanley Capital International
Europe, Australasia, Far East (EAFE) Index. Stocks in Europe and Asia were
boosted by mergers and takeover activity and by signs that corporations were
focusing more intently on increasing shareholder value.
The biggest gains were in the Pacific region and in emerging markets,
the bourses that had suffered the biggest declines during 1997 and 1998. The
Pacific region gained 27.4%, despite a continuing recession in Japan, while the
MSCI Select Emerging Markets Free Index rose 30.8%. European stocks were up
nearly 20% in local currencies, but these gains were cut to 10.9% for U.S.
investors because of the dollar's gains against the euro, a common currency
adopted by 11 nations, and other European currencies.
5
<PAGE> 8
REPORT FROM THE ADVISER
[PHOTO]
The first half of the fiscal year for Vanguard Selected Value Fund has been
most disappointing in terms of our performance relative to market benchmarks.
Our 7.1% return significantly lagged those of the S&P 500 Index (22.3%), the
Russell Midcap Index (18.5%), and the average mid-cap mutual fund (23.2%). On
the bright side, things have been on the mend for the past few weeks, and our
recent performance has been reflective of the fund's benchmarks.
Effective March 25, 1999, the Board of Trustees of the Selected Value
Fund decided to reposition our fund in a more diversified mid-cap format in an
effort to improve the predictability of the fund's performance relative to its
comparative standards: the Russell Midcap Index and its peer group of mid-cap
value funds.
To implement this change, it was necessary to change managers and to
make a number of shifts in portfolio holdings and adjustments to the fund's
characteristics. While this process is not complete, it is well under way: So
far, we have eliminated six holdings and initiated twelve new positions. Other
changes will occur over the next quarter as market conditions allow. We are
being careful not to sell securities that are depressed simply for the sake of
housekeeping. We believe the repositioning of the fund can be accomplished with
a minimum of tax consequences and quite low transaction costs. As of this
writing, we have completed about 80% of our repositioning.
When it is finished, the fund will be invested in companies with
market capitalizations between $1 billion and $10 billion, with an average
market cap of $3 billion to $5 billion. This will be higher than in the past,
when the average market cap of our holdings was closer to $1 billion. Our
holdings will have a low average price/earnings ratio, probably between 15 and
20 times earnings. The fund's dividend yield, before expenses, will be higher
than the market average; in the present environment, we are targeting a yield
above 2%. Eventually, we would expect to have approximately three dozen
holdings of roughly equal size, except for those positions that are being
purchased or sold. During this transition period, the luxury of strong cash
flow allows us to hold several depressed issues until the expected rebound, so
the number of holdings will go up for a time.
We believe that our focus on building a well-diversified portfolio of
cheap stocks will reward the patient investor.
James P. Barrow, Portfolio Manager
Barrow, Hanley, Mewhinney & Strauss, Inc.
May 12, 1999
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.
6
<PAGE> 9
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-April 30, 1999
- -------------------------------------------------------------------
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
1999** 6.3 0.8 7.1 18.5
- -------------------------------------------------------------------
</TABLE>
*Russell Midcap Index.
**Six months ended April 30, 1999.
See Financial Highlights table on page 14 for dividend and capital gains
information since the fund's inception.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED MARCH 31, 1999*
- -----------------------------------------------------------------------------------------------------------
SINCE INCEPTION
INCEPTION --------------------------------
DATE 1 YEAR CAPITAL INCOME TOTAL
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Selected Value Fund 2/15/1996 -27.35% 0.79% 0.56% 1.35%
- -----------------------------------------------------------------------------------------------------------
</TABLE>
*SEC rules require that we provide this average annual total return information
through the latest calendar quarter.
7
<PAGE> 10
FUND PROFILE
SELECTED VALUE FUND
This Profile provides a snapshot of the fund's characteristics as of April 30,
1999, compared where appropriate to an unmanaged index. Key elements of this
Profile are defined on page 9.
<TABLE>
<CAPTION>
PORTFOLIO CHARACTERISTICS
- ----------------------------------------------------
SELECTED RUSSELL
VALUE MIDCAP
- ----------------------------------------------------
<S> <C> <C>
Number of Stocks 36 758
Median Market Cap $ 2.2B $ 5.9B
Price/Earnings Ratio 18.3x 22.3x
Price/Book Ratio 1.8x 3.2x
Yield 1.4% 1.5%
Return on Equity 13.3% 16.8%
Earnings Growth Rate 6.3% 13.8%
Foreign Holdings 1.9% 0.0%
Turnover Rate 107%* --
Expense Ratio 0.63%* --
Cash Reserves 5.1% --
</TABLE>
*Annualized.
INVESTMENT FOCUS
- ---------------------------
[GRAPH]
<TABLE>
<CAPTION>
VOLATILITY MEASURES
- ----------------------------------------------------
SELECTED S&P
VALUE 500
- ----------------------------------------------------
<S> <C> <C>
R-Squared 0.61 1.00
Beta 1.01 1.00
</TABLE>
<TABLE>
<CAPTION>
TEN LARGEST HOLDINGS (% OF TOTAL NET ASSETS)
- ----------------------------------------------------
<S> <C>
Coventry Health Care Inc. 3.6%
Millennium Chemicals, Inc. 3.5
MGIC Investment Corp. 3.5
XL Capital Ltd. Class A 3.4
Eastman Chemical Co. 3.3
Toys R Us, Inc. 3.1
Brunswick Corp. 3.1
Thomas & Betts Corp. 3.1
Kerr-McGee Corp. 3.1
UST, Inc. 3.0
- ----------------------------------------------------
Top Ten 32.7%
</TABLE>
<TABLE>
<CAPTION>
SECTOR DIVERSIFICATION (% OF COMMON STOCKS)
- ----------------------------------------------------------------------------------------------
APRIL 30, 1998 APRIL 30, 1999
-------------------------------------------------------
SELECTED VALUE SELECTED VALUE RUSSELL MIDCAP
-------------------------------------------------------
<S> <C> <C> <C>
Auto & Transportation 16.5% 8.3% 4.2%
Consumer Discretionary 9.6 14.1 18.5
Consumer Staples 7.7 5.9 3.8
Financial Services 3.2 17.6 21.8
Health Care 14.9 7.9 5.9
Integrated Oils 0.0 3.2 1.9
Other Energy 3.9 2.8 3.2
Materials & Processing 22.6 16.9 9.7
Producer Durables 17.3 19.2 5.2
Technology 4.3 0.0 11.0
Utilities 0.0 0.9 13.2
Other 0.0 3.2 1.6
- ----------------------------------------------------------------------------------------------
</TABLE>
8
<PAGE> 11
BETA. A measure of the magnitude of a fund's past share-price fluctuations in
relation to the ups and downs of the overall market (or appropriate market
index). The market (or index) is assigned a beta of 1.00, so a fund with a beta
of 1.20 would have seen its share price rise or fall by 12% when the overall
market rose or fell by 10%.
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
investments.
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.
R-SQUARED. A measure of how much of a fund's past returns can be explained by
the returns from the overall market (or its benchmark index). If a fund's total
return were precisely synchronized with the overall market's return, its
R-squared would be 1.00. If a fund's returns bore no relationship to the
market's returns, its R-squared would be 0.
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 period. 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.
9
<PAGE> 12
FINANCIAL STATEMENTS
APRIL 30, 1999 (UNAUDITED)
[PHOTO]
STATEMENT OF NET ASSETS
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)
- --------------------------------------------------------------------------------
COMMON STOCKS (94.9%)
- --------------------------------------------------------------------------------
<S> <C> <C>
AUTO & TRANSPORTATION (7.8%)
Dana Corp. 95,000 $ 4,477
J.B. Hunt Transport Services, Inc. 192,500 4,006
- - Kirby Corp. 183,100 3,479
----------
11,962
----------
CONSUMER DISCRETIONARY (13.4%)
- - Toys R Us, Inc. 220,000 4,785
Snap-On Inc. 140,000 4,559
Wendy's International, Inc. 165,000 4,465
- - Kmart Corp. 257,500 3,830
Danka Business Systems PLC 606,000 2,803
----------
20,442
----------
CONSUMER STAPLES (5.6%)
UST, Inc. 165,000 4,599
- - Canandaigua Brands, Inc.
Class A 77,800 4,007
----------
8,606
----------
FINANCIAL SERVICES (16.7%)
MGIC Investment Corp. 109,400 5,313
XL Capital Ltd. Class A 85,000 5,159
Crescent Real Estate, Inc. REIT 201,000 4,497
ProLogis Trust REIT 185,000 3,885
Annuity and Life Re
(Holdings), Ltd. 175,100 3,458
Pacific Century Financial Corp. 146,500 3,186
----------
25,498
----------
HEALTH CARE (7.5%)
- - Coventry Health Care Inc. 592,100 5,440
- - Magellan Health Services, Inc. 565,100 3,073
- - Syncor International Corp. 100,800 2,873
----------
11,386
----------
INTEGRATED OILS (3.1%)
Kerr-McGee Corp. 110,000 $ 4,661
----------
OTHER ENERGY (2.7%)
Vastar Resources, Inc. 74,900 4,110
----------
MATERIALS & PROCESSING (16.0%)
Millennium Chemicals, Inc. 200,000 5,400
Eastman Chemical Co. 90,000 5,012
Armstrong World Industries Inc. 75,000 4,106
H.B. Fuller Co. 50,800 3,461
MacMillan Bloedel Ltd. 260,069 3,413
RPM Inc. (Ohio) 215,950 3,037
----------
24,429
----------
PRODUCER DURABLES (18.2%)
Thomas & Betts Corp. 111,154 4,669
Pall Corp. 240,400 4,432
- - American Power
Conversion Corp. 130,000 4,290
Diebold, Inc. 172,300 4,146
- - Silicon Valley Group, Inc. 300,000 3,975
Raychem Corp. 135,700 3,588
Harnischfeger Industries Inc. 280,000 2,730
----------
27,830
----------
UTILITIES (0.8%)
COMSAT Corp. 39,100 1,271
----------
OTHER (3.1%)
Brunswick Corp. 195,000 4,680
----------
- --------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(COST $145,148) 144,875
- --------------------------------------------------------------------------------
</TABLE>
10
<PAGE> 13
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
FACE MARKET
AMOUNT VALUE*
(000) (000)
- --------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENT (10.5%)
- --------------------------------------------------------------------------------
<S> <C> <C>
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
4.89%, 5/3/1999
(Cost $16,028) $16,028 $ 16,028
- --------------------------------------------------------------------------------
TOTAL INVESTMENTS (105.4%)
(COST $161,176) 160,903
- --------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-5.4%)
- --------------------------------------------------------------------------------
Other Assets--Note C 1,814
Payables for Investment
Securities Purchased (9,696)
Other Liabilities (418)
----------
(8,300)
- --------------------------------------------------------------------------------
NET ASSETS (100%)
- --------------------------------------------------------------------------------
Applicable to 14,526,409 outstanding $.001
par value shares of beneficial interest
(unlimited authorization) $152,603
================================================================================
NET ASSET VALUE PER SHARE $10.51
================================================================================
</TABLE>
* See Note A in Notes to Financial Statements.
- - Non-Income-Producing Security.
REIT--Real Estate Investment Trust.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- --------------------------------------------------------------------------------
AT APRIL 30, 1999, NET ASSETS CONSISTED OF:
- --------------------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $163,383 $11.25
Undistributed Net
Investment Income 222 .02
Accumulated Net Realized Losses (10,729) (.74)
Unrealized Depreciation--Note E (273) (.02)
- --------------------------------------------------------------------------------
NET ASSETS $152,603 $10.51
================================================================================
</TABLE>
11
<PAGE> 14
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
SIX MONTHS ENDED APRIL 30, 1999
(000)
- -----------------------------------------------------------------------------------------------------
INVESTMENT INCOME
<S> <C>
INCOME
Dividends $ 830
Interest 103
Security Lending 7
-----------
Total Income 940
-----------
EXPENSES
Investment Advisory Fees--Note B
Basic Fee 271
Performance Adjustment (140)
The Vanguard Group--Note C
Management and Administrative 281
Marketing and Distribution 18
Custodian Fees 5
Auditing Fees 4
Shareholders' Reports 13
-----------
Total Expenses 452
- -----------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME 488
- -----------------------------------------------------------------------------------------------------
REALIZED NET LOSS ON INVESTMENT SECURITIES SOLD (10,663)
- -----------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) OF INVESTMENT SECURITIES 19,678
- -----------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 9,503
=====================================================================================================
</TABLE>
12
<PAGE> 15
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
---------------------------------
SIX MONTHS YEAR
ENDED ENDED
APR. 30, 1999 OCT. 31, 1998
(000) (000)
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income $ 488 $ 1,090
Realized Net Gain (Loss) (10,663) 4,745
Change in Unrealized Appreciation (Depreciation) 19,678 (41,276)
-------------------------------
Net Increase (Decrease) in Net Assets Resulting from Operations 9,503 (35,441)
-------------------------------
DISTRIBUTIONS
Net Investment Income (1,158) (741)
Realized Capital Gain (4,778) (6,818)
-------------------------------
Total Distributions (5,936) (7,559)
-------------------------------
CAPITAL SHARE TRANSACTIONS(1)
Issued 40,680 73,513
Issued in Lieu of Cash Distributions 5,686 7,233
Redeemed (49,114) (75,874)
-------------------------------
Net Increase (Decrease) from Capital Share Transactions (2,748) 4,872
- ------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) 819 (38,128)
- ------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Period 151,784 189,912
-------------------------------
End of Period $152,603 $151,784
============================================================================================================
(1)Shares Issued (Redeemed)
Issued 4,011 6,056
Issued in Lieu of Cash Distributions 594 610
Redeemed (4,922) (6,449)
-------------------------------
Net Increase (Decrease) in Shares Outstanding (317) 217
============================================================================================================
</TABLE>
13
<PAGE> 16
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,
FOR A SHARE OUTSTANDING SIX MONTHS ENDED ------------------------- FEB. 15* TO
THROUGHOUT EACH PERIOD APR. 30, 1999 1998 1997 OCT. 31, 1996
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.23 $ 12.98 $10.07 $10.00
- ----------------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .04 .07 .06 .04
Net Realized and Unrealized Gain (Loss) on Investments .65 (2.31) 3.02 .03
--------------------------------------------------------------
Total from Investment Operations .69 (2.24) 3.08 .07
--------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.08) (.05) (.06) --
Distributions from Realized Capital Gains (.33) (.46) (.11) --
--------------------------------------------------------------
Total Distributions (.41) (.51) (.17) --
- ----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $10.51 $ 10.23 $12.98 $10.07
==================================================================================================================================
TOTAL RETURN 7.13% -17.80% 30.92% 0.70%
==================================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $ 153 $ 152 $ 190 $ 93
Ratio of Total Expenses to Average Net Assets 0.63%** 0.65% 0.74% 0.75%**
Ratio of Net Investment Income to Average Net Assets 0.68%** 0.58% 0.60% 0.75%**
Portfolio Turnover Rate 107%** 47% 32% 25%
==================================================================================================================================
</TABLE>
*Inception.
**Annualized.
14
<PAGE> 17
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 six months ended
April 30, 1999, the advisory fee represented an effective annual basic rate of
0.38% of the fund's average net assets before a decrease of $140,000 (0.20%)
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 April 30, 1999, the fund had contributed capital of $21,000 to
Vanguard (included in Other Assets), representing 0.01% of the fund's net
assets and 0.03% of Vanguard's capitalization. The fund's Trustees and officers
are also Directors and officers of Vanguard.
D. During the six months ended April 30, 1999, the fund purchased $74,139,000
of investment securities and sold $87,836,000 of investment securities, other
than temporary cash investments.
E. At April 30, 1999, net unrealized depreciation of investment securities
for financial reporting and federal income tax purposes was $273,000,
consisting of unrealized gains of $17,933,000 on securities that had risen in
value since their purchase and $18,206,000 in unrealized losses on securities
that had fallen in value since their purchase.
15
<PAGE> 18
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.
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 Co.; 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.
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.
<PAGE> 19
VANGUARD
MILESTONES
[GRAPHIC]
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."
[GRAPIC]
Walter L. Morgan, founder of
Wellington Fund, the nation's
oldest 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.
[GRAPHIC]
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
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.
Q9342-06/17/1999
(C) 1999 The Vanguard Group, Inc.
All rights reserved.
Vanguard Marketing Corporation, Distributor.
