<PAGE>
VANGUARD(R)
SELECTED VALUE
FUND
Annual Report
October 31, 1999
[SHIP GRAPHIC]
[A MEMBER OF THE VANGUARD GROUP]
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[PHOTO OF JOHN C. BOGLE]
JOHN C. BOGLE
FELLOW SHAREHOLDERS:
TWO ROADS DIVERGED IN A WOOD, AND I--I TOOK THE ONE LESS TRAVELED BY, AND
THAT HAS MADE ALL THE DIFFERENCE.
I can think of no better words than those of Robert Frost to begin this special
letter to our shareholders, who have placed such extraordinary trust in me and
in Vanguard over the past quarter century. When the firm was founded 25 years
ago, we deliberately took a new road to managing a mutual fund enterprise.
Instead of having the funds controlled by an outside management company with its
own financial interests, the Vanguard funds--there were only 11 of them
then--would be controlled by their own shareholders and operate solely in their
financial interests. The outcome of our unprecedented decision was by no means
certain. We described it then as "The Vanguard Experiment."
Well, I guess it's fair to say it's an experiment no more. During the past
25 years, the assets we hold in stewardship for investors have grown from $1
billion to more than $500 billion, and I believe that our reputation for
integrity, fair-dealing, and sound investment principles is second to none in
this industry. Our staggering growth--which I never sought--has come in
important part as a result of the simple investment ideas and basic human values
that are the foundation of my personal philosophy. I have every confidence that
they will long endure at Vanguard, for they are the right ideas and right
values, unshakable and eternal.
While Emerson believed that "an institution is the lengthened shadow of one
man," Vanguard today is far greater than any individual. The Vanguard crew has
splendidly implemented and enthusiastically supported our founding ideas and
values, and deserves the credit for a vital role in forging our success over the
years. It is a dedicated crew of fine human beings, working together in an
organization that is well prepared to press on regardless long after I am gone.
Creating and leading this enterprise has been an exhilarating run. Through it
all, I've taken the kudos and the blows alike, enjoying every moment to the
fullest, and even getting a second chance at life with a heart transplant three
years ago. What more could a man ask?
While I shall no longer be serving on the Vanguard Board, I want to assure
you that I will remain vigorous and active in a newly created Vanguard unit,
researching the financial markets, writing, and speaking. I'll continue to focus
whatever intellectual power and ethical strength I possess on my mission to
assure that mutual fund investors everywhere receive a fair shake. In the spirit
of Robert Frost:
But I have promises to keep, and miles to go before I sleep, and miles to go
before I sleep.
You have given me your loyalty and friendship over these long years,
and I deeply appreciate your thousands of letters of support. For my part, I
will continue to keep an eagle eye on your interests, for you deserve no less.
May God bless you all, always.
/s/
JCB
CONTENTS
REPORT FROM THE CHAIRMAN .............1
AFTER-TAX RETURNS REPORT .............4
THE MARKETS IN PERSPECTIVE ...........5
REPORT FROM THE ADVISER ..............7
PERFORMANCE SUMMARY ..................9
FUND PROFILE ........................10
FINANCIAL STATEMENTS ................12
REPORT OF INDEPENDENT ACCOUNTANTS....19
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REPORT FROM THE CHAIRMAN
[PHOTO OF JOHN J. BRENNAN]
JOHN J. BRENNAN
Vanguard Selected Value Fund posted a return of -0.6% during the fiscal year
ended October 31, 1999. This was a very disappointing result that fell far short
of the returns of the fund's comparative benchmarks.
The table at right presents our fiscal year total return (capital change
plus reinvested dividends) along with those of the average mid-capitalization
value fund and the Russell Midcap Index. The fund's return is based on a decline
in net asset value from $10.23 per share on October 31, 1998, to $9.75 per share
on October 31, 1999. The return is adjusted for a dividend of $0.08 per share
paid from net investment income and a distribution of $0.33 per share paid in
December 1998 from net realized capital gains.
- --------------------------------------------------------------------------------
TOTAL RETURNS
FISCAL YEAR ENDED
OCTOBER 31, 1999
- --------------------------------------------------------------------------------
Vanguard Selected Value Fund -0.6%
- --------------------------------------------------------------------------------
Average Mid-Cap Value Fund* 8.7%
- --------------------------------------------------------------------------------
Russell Midcap Index 17.1%
- --------------------------------------------------------------------------------
*Derived from data provided by Lipper Inc.
FINANCIAL MARKETS IN REVIEW
The fiscal year ended October 31 comprised two distinctly different halves. For
most of the first half, stock prices worldwide were rebounding strongly from a
slump in the summer of 1998 that had been prompted by economic crises in Asia,
Russia, and parts of Latin America. The stock market's comeback was aided by a
pickup in global economic activity and by three separate interest rate
reductions by the Federal Reserve Board that autumn. These developments--and the
continued ebullience of the U.S. economy--erased investors' fears that the
troubles abroad would depress business activity and profits at home. Even though
interest rates rose during the six months from October 31 through April 30, the
stock market, as measured by the Wilshire 5000 Total Market Index, gained 22.8%.
However, during the second half of our fiscal year, most stock prices
stagnated or fell (with the notable exception of technology stocks). The
Wilshire 5000 advanced 2.3%, bringing its full-year return to 25.7%.
Large-capitalization growth stocks were the strongest market sector--the
growth stocks within the large-cap Standard & Poor's 500 Index gained 31.6%,
while value stocks within the index returned 19.0%. Returns were much lower for
smaller stocks--the Russell Midcap Index gained 17.1% for the year--and the
growth/value split was even wider among mid-caps. The growth stocks within the
Russell Midcap Index gained 37.7% versus a modest 5.7% return for the index's
value stocks.
One drag on the stock market was a strong uptrend in interest rates that
began in February. The Federal Reserve encouraged this move, acting in late June
and again in August to boost short-term interest rates by a total of 0.5
percentage point. Fears of a global economic slump were supplanted by worries
that economic growth--especially in the United States--was so strong that it
would cause wages and commodity prices to surge, pushing up inflation.
For the full year, yields on long-term U.S. Treasury bonds rose
significantly. The yield on the 30-year Treasury increased exactly 1 percentage
point (100 basis points) to 6.16% on October 31, 1999. Bond prices, which move
in the opposite direction from
1
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interest rates, fell during the year. The Lehman Brothers Aggregate Bond Index,
a benchmark for taxable bonds, eked out a return of 0.5% for the year, as its
interest income of 6.2% only barely offset price declines of -5.7%.
FISCAL 1999 PERFORMANCE OVERVIEW
Vanguard Selected Value Fund's -0.6% return badly lagged the returns of the
average mid-cap value fund (by 9.3 percentage points) and of the unmanaged
Russell Midcap Index (by 17.7 points). The fund suffered from an emphasis on the
wrong market sectors and poor stock selection within sectors. For example, in
technology--by far the strongest market sector, with gains of about
67%--Selected Value's stake averaged about 3.5% of assets, only about
one-quarter the weight of tech stocks in the Midcap Index. Given the fund's
emphasis on value stocks, its relatively light weighting in technology was not
surprising, but it was a significant negative. In health care, the sector with
the worst returns during fiscal 1999, Selected Value held 11% of its assets,
versus an index weighting of less than 7%. Our adviser's selections in oil and
other energy stocks performed well, but in most other sectors Selected Value's
holdings produced below-market returns. Among financial-services stocks, our
biggest industry weighting, our selections had a -3% return, while the financial
stocks in the index gained about 8%.
As we told you in our semiannual report, the Board of Trustees on March 25
announced a change in Selected Value's portfolio manager. On that date,
investment management duties were assumed by James P. Barrow, a founding partner
and vice president of our adviser, Barrow, Hanley, Mewhinney & Strauss. We are
confident that Mr. Barrow will do an excellent job and that the Selected Value
Fund will provide fully competitive long-term returns.
LIFETIME PERFORMANCE OVERVIEW
Vanguard Selected Value Fund has struggled in the nearly four years since its
founding, providing an average annual return of only 2%. As shown in the table
below, the fund's results have been poor compared with the 10.7% annualized
return for the average mid-cap value fund and the 15.3% annualized return for
the Russell Midcap Index.
An initial investment of $10,000 in our fund, assuming the reinvestment of
income and capital gains distributions, would have grown to $10,771 by October
31, 1999. That is $3,793 below the result for an identical investment in our
average competitor and $6,193 short of the result for the index.
- --------------------------------------------------------
TOTAL RETURNS
FEBRUARY 15, 1996, THROUGH
OCTOBER 31, 1999
---------------------------
AVERAGE FINAL VALUE OF
ANNUAL A $10,000
RETURN INITIAL INVESTMENT
- --------------------------------------------------------
Vanguard Selected Value Fund 2.0% $10,771
- --------------------------------------------------------
Average Mid-Cap Value Fund 10.7% $14,564
- --------------------------------------------------------
Russell Midcap Index 15.3% $16,964
- --------------------------------------------------------
We would expect Selected Value to perform differently from the overall market
and from peer funds because of its strict value orientation and willingness to
make large bets on certain stocks--the fund held just 36 stocks on October
31--and certain sectors of the market. However, we acknowledge that our
variation so far has mostly been on the downside.
2
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IN SUMMARY
The U.S. stock market again provided big gains for investors during the past 12
months; it was the fifth year in a row during which the S&P 500 Index returned
more than 20%. This is an unprecedented streak, although the gains have been
lopsided in favor of large technology stocks. Many investors may now be tempted
to count on more of the same. This can lead to some mistakes, such as chasing
"hot" market sectors and forgetting about diversification; adopting
unrealistically high expectations for returns; and--perhaps most
dangerous--underestimating risks.
To prepare for the market's risks--and I assure you those risks are
significant--Vanguard believes that investors should diversify by holding
balanced portfolios of both value and growth stock funds along with bond funds
and short-term reserves. With such a mix, in proportions suitable to your
personal investment time horizon, goals, and financial situation, you're in
position to keep on course to your financial goals, despite the turbulence
you're sure to encounter along the journey.
/s/
John J. Brennan
Chairman and Chief Executive Officer
November 18, 1999
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A NOTE OF THANKS TO OUR FOUNDER
================================================================================
As you may have read on the inside cover of our report, our founder, John C.
Bogle, is retiring December 31, 1999, as Senior Chairman of our Board after
nearly 25 years of devoted service to Vanguard and our shareholders. Vanguard
investors have Jack to thank for creating a truly mutual mutual fund company
that operates solely in the interest of its fund shareholders. And mutual fund
investors everywhere have benefited from his energetic efforts to improve this
industry. Finally, on a personal note, I am forever grateful to Jack for giving
me the opportunity to join this great company in 1982.
3
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A REPORT ON YOUR FUND'S AFTER-TAX RETURNS
Beginning with this annual report, Vanguard is pleased to provide a review of
the Selected Value Fund's after-tax performance. The figures on this page
demonstrate the considerable impact that federal income taxes can have on a
fund's return--an important consideration for investors who own mutual funds in
taxable accounts. While the pretax return is most often used to tally a fund's
performance, the fund's after-tax return, which accounts for taxes on
distributions of capital gains and income dividends, is a better representation
of the return that many investors actually received. If you own the Selected
Value Fund in a tax-deferred account such as an individual retirement account or
a 401(k), this information does not apply to you. Such accounts are not subject
to current taxes.
The table below presents the pretax and after-tax returns for your fund and
an appropriate peer group of mutual funds. Two things to keep in mind:
o The after-tax return calculations use the top federal income tax rates in
effect at the time of each distribution. The tax burden, therefore, would be
somewhat less, and the after-tax return somewhat more, for those in lower tax
brackets.
o The peer funds' returns are based on data from Morningstar, Inc.
(Elsewhere in this report, returns for comparable mutual funds are based on data
from Lipper Inc., which differ somewhat.)
- --------------------------------------------------------------------------------
AVERAGE ANNUAL RETURNS: PRETAX AND AFTER-TAX
PERIODS ENDED OCTOBER 31, 1999
---------------------------------------------------
1 YEAR SINCE INCEPTION*
----------------- ---------------------------
PRETAX AFTER-TAX PRETAX AFTER-TAX
- --------------------------------------------------------------------------------
Selected Value Fund -0.6% -1.6% 2.0% 1.2%
Average Mid-Cap Value Fund** 8.7 6.6 N.A. N.A.
- --------------------------------------------------------------------------------
*February 15, 1996.
**Based on data from Morningstar, Inc.
As you can see, the Selected Value Fund's pretax total return of -0.6% for
the 12 months ended October 31, 1999, was reduced by taxes to -1.6%. In other
words, for investors in the highest tax bracket, taxes had the effect of
reducing the fund's return by an additional percentage point. In comparison, the
average mid-cap value fund earned a pretax return of 8.7% and an after-tax
return of 6.6%, a difference of 2.1 percentage points. Since its inception on
February 15, 1996, the Selected Value Fund's annualized pretax return of 2.0%
was reduced to 1.2% by taxes. Morningstar does not provide after-tax returns for
such specific periods.
We stress that because many interrelated factors affect how tax-friendly a
fund may be, it's very difficult to predict tax efficiency. A fund's tax
efficiency can be influenced by its turnover rate, the types of securities it
holds, the accounting practices it uses when selling shares, and the net cash
flow it receives.
Finally, it's important to understand that our calculation does not reflect
the tax effect of your own investment activities. Specifically, you may incur
additional capital gains taxes--thereby lowering your after-tax return--if you
sell all or some of your shares.
A NOTE ABOUT OUR CALCULATIONS: Pretax total returns assume that all
distributions received (income dividends, short-term capital gains, and
long-term capital gains) are reinvested in new shares, while our after-tax
returns assume that distributions are reduced by any taxes owed on them before
reinvestment. When calculating the taxes due, we used the highest individual
federal income tax rates at the time of the distributions. Those rates are
currently 39.6% for dividends and short-term capital gains and 20% for long-term
capital gains. State and local income taxes were not considered. The competitive
group returns provided by Morningstar are calculated in a manner consistent with
that used for Vanguard funds.
4
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THE MARKETS IN PERSPECTIVE
YEAR ENDED OCTOBER 31, 1999
Caution followed exuberance in the U.S. stock market during the fiscal year
ended October 31, 1999. Improving economic conditions during the first half of
the year set off a raucous rally from the lows of summer 1998, when fears of a
global economic slump swept world markets. However, during the second half of
the fiscal year, interest rates kept rising, pulling down bond prices and
tempering the stock market's optimism. The notion of a global slump was replaced
by worries that economic growth might be so strong as to threaten a surge in
inflation.
U.S. STOCK MARKETS
A booming U.S. economy and solid increases in corporate earnings lifted the U.S.
stock market, especially during the first half of the fiscal year. The nation's
economic output increased by about 4% during the year. Consumer spending, which
accounts for roughly two-thirds of economic activity, powered the expansion.
Americans spent virtually every dollar they earned, encouraged by rising wealth
from a long bull market, plentiful employment, and rising incomes. (After-tax
personal income rose about 5% during the year; unemployment fell to a 30-year
low of 4.1% of the workforce in October.)
- --------------------------------------------------------------------------------
AVERAGE ANNUAL RETURNS
PERIODS ENDED OCTOBER 31, 1999
--------------------------------
1 YEAR 3 YEARS 5 YEARS
- --------------------------------------------------------------------------------
STOCKS
S&P 500 Index 25.7% 26.5% 26.0%
Russell 2000 Index 14.9 9.4 12.6
Wilshire 5000 Index 25.7 23.8 23.8
MSCI EAFE Index 23.4 12.5 9.5
- --------------------------------------------------------------------------------
BONDS
Lehman Aggregate Bond Index 0.5% 6.2% 7.9%
Lehman 10 Year Municipal Bond Index -1.2 5.2 7.0
Salomon Smith Barney 3-Month
U.S. Treasury Bill Index 4.6 5.0 5.2
- --------------------------------------------------------------------------------
OTHER
Consumer Price Index 2.6% 2.0% 2.4%
- --------------------------------------------------------------------------------
From October 31, 1998, through April 30, 1999, the stock market rose 22.8%,
as measured by the Wilshire 5000 Total Market Index. Investor confidence,
already high due to the booming economy, was bolstered by easier monetary
policy--the Federal Reserve cut short-term interest rates in November 1998 for
the third time in less than two months. But by summer, the Fed reversed course,
twice boosting its target for short-term interest rates to slow the economy and
reduce inflationary pressures.
Higher interest rates helped take the steam out of the stock market's
rally during the second half of the fiscal year, even though estimates of
corporate earnings kept rising. Higher rates tend to hurt stocks because many
investors use current interest rates to discount the value of a stock's
projected earnings and dividends. The higher the rate, the more future earnings
are discounted, and the less investors will pay for the stock now. After a
second-half gain of 2.3%, the Wilshire 5000 Index recorded a 25.7% return for
the full fiscal year.
Big stocks outperformed small stocks in fiscal 1999, and growth stocks
outpaced value stocks. The S&P 500 Index, which is dominated by
large-capitalization stocks, gained
5
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25.7%, while the small-cap Russell 2000 Index was up 14.9%. Growth stocks--whose
high prices in relation to earnings, book value, and dividends indicate high
expectations for future growth--lost none of their appeal, despite soaring
valuations for many. Both large- and small-cap growth issues gained roughly 30%,
while value stocks within the S&P 500 Index were up 19.0%, and the Russell
2000's value stocks had a scant 0.7% return.
The growth/value gap was due partly to the incredible performance of
technology stocks, most of which are classified as growth issues. Within the S&P
500 Index, tech stocks gained 67% during the fiscal year. Advances of about 30%
were recorded by retailers and other consumer-discretionary stocks and by the
utilities sector, where gains were concentrated in telecommunications stocks.
The only sector with a loss was consumer staples (-8%), where food and beverage
company stocks suffered from falling profits. Other laggards were the auto &
transportation sector (+6%) and health-care stocks (+9%).
U.S. BOND MARKETS
Rapid economic growth was a help to the stock market but a hindrance to bonds.
Investors worried that, with unemployment so low, growth above the 2.5% to 3%
range would cause wages and prices to accelerate. Indeed, inflation did rise a
bit, although the Consumer Price Index was up a relatively modest 2.6% during
the 12-month period.
As mentioned, the Fed sought to combat inflationary pressures by increasing
short-term interest rates by a quarter-point on June 30 and again on August 24.
The bond market was already pushing up rates well before the Fed acted. Yields
of long-term U.S. Treasury bonds began rising significantly in February. By
fiscal year-end, the 30-year Treasury bond's yield was 6.16%, up precisely 1
percentage point for the year. The 10-year Treasury's yield rose 1.41 percentage
points, from 4.61% to 6.02%. Short-term interest rates didn't rise as far, and
3-month Treasury bill yields were up 0.77 point to 5.09% at fiscal year-end.
Rising interest rates mean lower prices for existing bonds, of course.
Price declines were higher for longer-term bonds, which are most sensitive to
changing rates. For the taxable bond market as a whole, as measured by the
Lehman Aggregate Bond Index, prices fell -5.7%, resulting in a total return of
just 0.5% for the fiscal year. High-yield (junk) bonds and mortgage-backed
securities posted higher returns than Treasuries.
INTERNATIONAL STOCK MARKETS
International markets soared in local currencies during the 12 months ended
October 31, with European stocks gaining 22.7% and Pacific-region stocks
advancing 37.8%. The U.S. dollar rose in value against most European currencies
but fell against the Japanese yen. For U.S. investors, the upshot of these
currency fluctuations was to trim returns from Europe to 12.7% in dollar terms
and to boost returns from the Pacific to 50.5%.
In the major developed international markets, U.S. investors earned 23.4%
as measured by the Morgan Stanley Capital International Europe, Australasia, Far
East (EAFE) Index. The bull markets in most nations stemmed from a renewed
appetite for risk on the part of investors encouraged by clear signs of
expanding business activity and generally easier monetary policy. Japan and the
rest of Asia, which were hit hardest by currency and economic crises in 1997 and
1998, saw the biggest gains. In Japan, massive government spending programs
appeared to be working--at least in the short run--to lift that nation out of a
recession.
Emerging markets, as measured by the Select Emerging Markets Free Index,
gained 34.1% for U.S. investors, as local returns of better than 70% were cut
nearly in half by weaker currencies in Latin America and eastern Europe.
6
<PAGE>
REPORT FROM THE ADVISER
The past six months have been most disappointing on both a relative and absolute
basis for Vanguard Selected Value Fund. The fund's total return during the
fiscal year ended October 31, 1999, was -0.6%, trailing both the average mid-cap
value fund return of 8.7% and the 17.1% gain for the Russell Midcap Index.
While this will not soften the blow much, it is worth repeating that the
fund is a true value mid-cap portfolio. And fiscal 1999 was not a banner year
for mid-cap value stocks. The fund is well diversified, with 36 holdings, none
of which represents more than 5% of assets. In more logical markets, we feel the
composition of this fund will deliver much-improved performance.
The market's gains during the fiscal year were concentrated in a fairly
narrow group of stocks. For example, over the past six months, the top 10% of
performers in the Russell Midcap Index as a group contributed 831 basis points
(8.31 percentage points) of that benchmark's total return, which overall was
- -1.2%. This top-performing group has an average price/earnings ratio of 84.4, a
price/book value ratio of 13.4, and a current dividend yield of 0.4%. Selected
Value, with a weighted average price/earnings ratio of 15.9, price/book ratio of
1.7, and dividend yield of 2.6%, seems much more attractively priced, but good
value hasn't produced good performance thus far.
The economy seems to be doing just fine, with growth well above the
long-term trend line, unemployment the lowest in recent memory, and, if we can
believe the reports, very little inflation. We would take issue with the last
point, as we are seeing significant price increases in housing, building
materials, energy, chemicals, transportation, hotels, and business rents. In
general, these increases more than offset productivity gains and the declines in
some other prices, such as computer prices. The Federal Reserve is diligent in
monitoring inflation, but Fed officials also seem concerned about any possible
fallout from the Y2K problem, and they may not increase interest rates further
until it is clear that any economic disruptions are behind us. While Chairman
Alan Greenspan has voiced concern about an overexuberant stock market, the Fed
seems hesitant to interrupt the party. Throughout the economy, we are seeing
companies reaching to achieve earnings growth above their revenue growth and, in
many cases, failing. This in part explains the volatility of individual stocks.
The biggest factor in Selected Value's underperformance relative to its
benchmarks in fiscal 1999 was a lack of technology investments, which had a
return of 67% within the Russell Midcap Index. That was a sin of omission. The
sin of commission was our holdings in the aerospace-defense industry. In the
past couple of months, several well-known companies reported a slowing in
business and a significant lowering of expectations for next year. The stocks in
this group are very cheap and in time should rebound. It's also quite possible
that, in the meantime, these companies could become acquisition candidates.
Our investments in retailers have come under pressure as the market worries
about Internet competition. The retail companies are doing fine, however,
================================================================================
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.
================================================================================
7
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with reasonable profit growth, single-digit price/earnings ratios, and progress
in same-store sales (sales at stores open a year or more). Although e-commerce
is exciting and will experience significant growth (albeit from a small base),
it will not become dominant in sales to consumers for most goods and services.
The very nature of Internet commerce allows for intense price comparison and
competition, ensuring the slimmest of margins, and to date Internet retailers
have not generated any profits. We find many of their business models to be
flawed, and we expect a significant rebound in traditional retailers.
Every day we expect the market's obsession with technology companies
(frequently having little or no earnings) to end, and it just doesn't. We wonder
how long this can go on. The level of speculation is quite high, margin debt is
off the charts, and investors fear nothing. The new paradigm suggests that one
should own only new technology companies whose share prices are going up and
ignore the price paid for the shares.
This rationale is fundamentally illogical and we will not subscribe to it. We
have a portfolio of very cheap stocks by any measure and feel that, when things
change, we will reap a handsome reward.
James P. Barrow, Portfolio Manager
Barrow, Hanley, Mewhinney & Strauss, Inc.
November 12, 1999
8
<PAGE>
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. An investor's shares, when
redeemed, could be worth more or less than their original cost.
<TABLE>
<CAPTION>
TOTAL INVESTMENT RETURNS: FEBRUARY 15, 1996-OCTOBER 31, 1999
- ----------------------------------------------------------------------------------------------------
SELECTED VALUE FUND RUSSELL SELECTED VALUE FUND RUSSELL
INDEX* INDEX*
FISCAL CAPITAL INCOME TOTAL TOTAL FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN YEAR RETURN RETURN RETURN RETURN
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1996 0.7% 0.0% 0.7% 8.3% 1998 -18.1% 0.3% -17.8% 4.5%
1997 30.2 0.7 30.9 28.8 1999 -1.4% 0.8% -0.6 17.1
- -----------------------------------------------------------------------------------------------------
</TABLE>
*Russell Midcap Index.
See Financial Highlights table on page 16 for dividend and capital gains
information since the fund's inception.
CUMULATIVE PERFORMANCE: FEBRUARY 15, 1996-OCTOBER 31, 1999
- ------------------------------------------------------------------
Selected Average Mid-Cap Russell
Value Fund Value Fund Midcap Index
---------- --------------- ------------
2/16/1994 10000 10000 10000
199604 10630 10612 10422
199607 9490 10049 9775
199610 10070 11008 10833
199701 11051 11983 11801
199704 10767 11652 11563
199707 13336 13944 13881
199710 13184 14299 13950
199801 12734 14405 14399
199804 14355 16309 16301
199807 11982 14557 15252
199810 10838 13399 14572
199901 11136 14328 16129
199904 11611 14971 17269
199907 12229 15536 17337
199910 10771 14564 17067
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED OCTOBER 31, 1999
------------------------------
FINAL VALUE OF A
1 YEAR SINCE INCEPTION $10,000 INVESTMENT
- --------------------------------------------------------------------------------
Selected Value Fund -0.61% 2.02% $10,771
Average Mid-Cap Value
Fund* 8.69 10.67 14,564
Russell Midcap Index 17.12 15.32 16,964
- --------------------------------------------------------------------------------
*Derived from data provided by Lipper Inc.
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED SEPTEMBER 30, 1999*
- --------------------------------------------------------------------------------
SINCE INCEPTION
INCEPTION -------------------------------
DATE 1 YEAR CAPITAL INCOME TOTAL
- --------------------------------------------------------------------------------
Selected Value Fund 2/15/1996 13.89% 2.49% 0.50% 2.99%
- --------------------------------------------------------------------------------
*SEC rules require that we provide this average annual total return information
through the latest calendar quarter.
9
<PAGE>
FUND PROFILE
SELECTED VALUE FUND
This Profile provides a snapshot of the fund's characteristics as of October 31,
1999, compared where appropriate to an unmanaged index. Key elements of this
Profile are defined on page 11.
PORTFOLIO CHARACTERISTICS
- ----------------------------------------
Selected Russell
Value Midcap
- ----------------------------------------
Number of Stocks 36 784
Median Market Cap $3.0B $5.2B
Price/Earnings Ratio 15.9x 19.2x
Price/Book Ratio 1.7x 2.9x
Yield 2.6% 1.5%
Return on Equity 14.3% 16.9%
Earnings Growth Rate 8.3% 13.3%
Foreign Holdings 1.7% 0.0%
Turnover Rate 102% ---
Expense Ratio 0.73% ---
Cash Reserves 3.7% ---
INVESTMENT FOCUS
- -------------------------------------------
[grid]
STYLE VALUE
MARKET VALUE MEDIUM
VOLATILITY MEASURES
- -------------------------------------------
Selected
Value S&P 500
- -------------------------------------------
R-Squared 0.49 1.00
Beta 0.88 1.00
TEN LARGEST HOLDINGS
(% OF TOTAL NET ASSETS)
- -------------------------------------------
MGIC Investment Corp. 4.5%
Northeast Utilities 4.0
American Power Conversion Corp. 3.9
Vastar Resources, Inc. 3.7
Kerr-McGee Corp. 3.6
XL Capital Ltd. Class A 3.3
Ryder System, Inc. 3.3
Watson Pharmaceuticals, Inc. 3.3
Diebold, Inc. 3.3
Dana Corp. 3.2
- -------------------------------------------
Top Ten 36.1%
SECTOR DIVERSIFICATION (% OF COMMON STOCKS)
- --------------------------------------------------------------------------------
OCTOBER 31, 1998 OCTOBER 31, 1999
----------------------------------------------------
SELECTED VALUE SELECTED VALUE RUSSELL MIDCAP
----------------------------------------------------
Auto & Transportation ...... 14.4% 9.8% 4.2%
Consumer Discretionary ..... 2.4 6.8 16.8
Consumer Staples ........... 5.8 3.0 3.8
Financial Services ......... 7.3 24.2 19.3
Health Care ................ 16.3 6.5 5.6
Integrated Oils ............ 3.4 3.8 3.7
Materials & Processing ..... 25.9 14.9 7.8
Producer Durables .......... 19.5 13.0 5.2
Technology ................. 5.0 2.7 17.3
Utilities .................. 0.0 8.4 12.7
Other ...................... 0.0 3.1 1.8
- --------------------------------------------------------------------------------
10
<PAGE>
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
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.
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 35%.) 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>
FINANCIAL STATEMENTS
OCTOBER 31, 1999
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.
- ---------------------------------------------------
MARKET
VALUE*
SELECTED VALUE FUND SHARES (000)
- ---------------------------------------------------
COMMON STOCKS (96.3%)
- ---------------------------------------------------
AUTO & TRANSPORTATION (9.4%)
Dana Corp. 210,000 6,208
Genuine Parts Co. 230,000 5,994
Norfolk Southern Corp. 200,000 4,888
J.B. Hunt Transport Services,
Inc. 86,700 1,116
--------
18,206
- ---------------------------------------------------
CONSUMER DISCRETIONARY (6.5%)
o Toys R Us, Inc. 360,000 5,085
o Kmart Corp. 440,000 4,427
o Danka Business Systems
PLC ADR 300,000 3,131
--------
12,643
--------
CONSUMER STAPLES (2.9%)
UST, Inc. 200,000 5,538
--------
FINANCIAL SERVICES (23.3%)
MGIC Investment Corp. 145,000 8,664
XL Capital Ltd. Class A1 20,000 6,442
Ryder System, Inc. 300,000 6,413
Deluxe Corp. 210,000 5,932
ProLogis Trust REIT 290,000 5,601
Crescent Real Estate,
Inc. REIT 300,000 5,006
Jefferson-Pilot Corp. 52,900 3,971
MBIA, Inc. 52,100 2,973
--------
45,002
--------
HEALTH CARE (6.3%)
o Watson Pharmaceuticals,
Inc. 201,300 6,391
o Magellan Health Services,
Inc. 512,500 3,107
o Coventry Health Care Inc. 462,100 2,657
--------
12,155
--------
INTEGRATED OILS (3.6%)
Kerr-McGee Corp. 130,000 6,988
--------
OTHER ENERGY (3.7%)
Vastar Resources, Inc. 120,000 7,088
--------
MATERIALS & PROCESSING (14.4%)
Eastman Chemical Co. 160,000 6,170
Millennium Chemicals, Inc. 280,000 5,180
RPM Inc. (Ohio) 415,950 4,965
Lyondell Chemical Co. 400,000 4,850
Armstrong World Industries
Inc. 110,000 4,111
MacMillan Bloedel Ltd. 149,669 2,479
--------
27,755
--------
PRODUCER DURABLES (12.5%)
o American Power
Conversion Corp. 340,000 7,629
Diebold, Inc. 240,000 6,300
Pall Corp. 250,000 5,484
The BFGoodrich Co. 200,000 4,737
--------
24,150
--------
TECHNOLOGY (2.6%)
Harris Corp. 223,300 5,010
--------
UTILITIES (8.1%)
o Northeast Utilities 375,000 7,805
COMSAT Corp. 312,780 5,845
Kinder Morgan, Inc. 100,000 2,012
--------
15,662
--------
OTHER (3.0%)
Brunswick Corp. 260,000 5,883
--------
- ---------------------------------------------------
TOTAL COMMON STOCKS
(COST $205,908) 186,080
- ---------------------------------------------------
12
<PAGE>
- --------------------------------------------------------------
FACE MARKET
AMOUNT VALUE*
(000) (000)
- --------------------------------------------------------------
TEMPORARY CASH INVESTMENTS (5.0%)
- --------------------------------------------------------------
REPURCHASE AGREEMENTS
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
5.24%, 11/1/1999 $5,814 5,814
5.26%, 11/1/1999--Note F 3,826 3,826
- --------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(COST $9,640) 9,640
- --------------------------------------------------------------
TOTAL INVESTMENTS (101.3%)
(COST $215,548) 195,720
- --------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-1.3%)
- --------------------------------------------------------------
Receivables for Investment Securities Sold 7,297
Other Assets--Note C 883
Payables for Investment Securities
Purchased (6,015)
Other Liabilities--Note F (4,591)
--------
(2,426)
- --------------------------------------------------------------
NET ASSETS (100%)
- --------------------------------------------------------------
Applicable to 19,825,058 outstanding $.001
par value shares of beneficial interest
(unlimited authorization) $193,294
==============================================================
NET ASSET VALUE PER SHARE $9.75
==============================================================
*See Note A in Notes to Financial Statements.
oNon-Income-Producing Security.
ADR--American Depositary Receipt.
REIT--Real Estate Investment Trust.
==============================================================
AMOUNT PER
(000) SHARE
AT OCTOBER 31, 1999, NET ASSETS CONSISTED OF:
- --------------------------------------------------------------
Paid in Capital $223,105 $11.25
Undistributed Net
Investment Income 2,023 .10
Accumulated Net Realized
Losses--Note D (12,006) (.60)
Unrealized Depreciation--Note E(19,828)(1.00)
- --------------------------------------------------------------
NET ASSETS $193,294 $ 9.75
==============================================================
13
<PAGE>
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.
- --------------------------------------------------------------------------------
Selected Value Fund
Year Ended October 31, 1999
(000)
- --------------------------------------------------------------------------------
INVESTMENT INCOME
INCOME
Dividends $ 3,221
Interest 312
Security Lending 23
---------
Total Income 3,556
EXPENSES ---------
Investment Advisory Fees--Note B
Basic Fee 668
Performance Adjustment (294)
The Vanguard Group--Note C
Management and Administrative 821
Marketing and Distribution 33
Custodian Fees 12
Auditing Fees 9
Shareholders' Reports 18
---------
Total Expenses 1,267
- --------------------------------------------------------------------------------
NET INVESTMENT INCOME 2,289
- --------------------------------------------------------------------------------
REALIZED NET LOSS ON INVESTMENT SECURITIES SOLD (11,940)
- --------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION)
OF INVESTMENT SECURITIES 123
- --------------------------------------------------------------------------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $(9,528)
================================================================================
14
<PAGE>
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.
- --------------------------------------------------------------------------------
Selected Value Fund
Year Ended October 31,
--------------------------
1999 1998
(000) (000)
- --------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income 2,289 1,090
Realized Net Gain (Loss) (11,940) 4,745
Change in Unrealized Appreciation (Depreciation) 123 (41,276)
------------------------
Net Decrease in Net Assets Resulting
from Operations (9,528) (35,441)
------------------------
DISTRIBUTIONS
Net Investment Income (1,158) (741)
Realized Capital Gain (4,778) (6,818)
------------------------
Total Distributions (5,936) (7,559)
------------------------
CAPITAL SHARE TRANSACTIONS1
Issued 152,679 73,513
Issued in Lieu of Cash Distributions 5,686 7,233
Redeemed (101,391) (75,874)
------------------------
Net Increase from Capital Share Transactions 56,974 4,872
- --------------------------------------------------------------------------------
Total Increase (Decrease) 41,510 (38,128)
- --------------------------------------------------------------------------------
NET ASSETS
Beginning of Year 151,784 189,912
----------------------
End of Year $193,294 $151,784
================================================================================
1Shares Issued (Redeemed)
Issued 14,258 6,056
Issued in Lieu of Cash Distributions 594 610
Redeemed (9,870) (6,449
------------------------
Net Increase in Shares Outstanding 4,982 217
================================================================================
15
<PAGE>
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,
-------------------------
<S> <C> <C> <C> <C>
FEB.15* TO
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD 1999 1998 1997 OCT. 31, 1996
- ------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $10.23 $12.98 $10.07 $10.00
- ------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .12 .07 .06 .04
Net Realized and Unrealized Gain (Loss)
on Investments (.19) (2.31) 3.02 .03
-------------------------------------------------
Total from Investment Operations (.07) (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 $ 9.75 $10.23 $12.98 $10.07
======================================================================================================
TOTAL RETURN -0.61% -17.80% 30.92% 0.70%
======================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $193 $152 $190 $93
Ratio of Total Expenses to Average Net Assets 0.73% 0.65% 0.74% 0.75%**
Ratio of Net Investment Income to Average Net Assets 1.31% 0.58% 0.60% 0.75%**
Portfolio Turnover Rate 102% 47% 32% 25%
======================================================================================================
*Inception.
**Annualized.
</TABLE>
16
<PAGE>
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 for the preceding three years relative to the Russell Midcap Index.
For the year ended October 31, 1999, the advisory fee represented an effective
annual basic rate of 0.38% of the fund's average net assets before a decrease of
$294,000 (0.17%) 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, 1999, the fund had contributed capital of $40,000 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, 1999, the fund purchased $222,443,000 of
investment securities and sold $172,773,000 of investment securities, other than
temporary cash investments.
At October 31, 1999, the fund had available a capital loss carryforward of
$11,941,000 to offset future net capital gains through October 31, 2007.
17
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
E. At October 31, 1999, net unrealized depreciation of investment securities for
financial reporting and federal income tax purposes was $19,828,000, consisting
of unrealized gains of $16,160,000 on securities that had risen in value since
their purchase and $35,988,000 in unrealized losses on securities that had
fallen in value since their purchase.
F. The market value of securities on loan to broker/dealers at October 31, 1999,
was $3,608,000, for which the fund held cash collateral of $3,826,000. Cash
collateral received is invested in repurchase agreements.
18
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Trustees of
Vanguard Selected Value Fund
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, 1999, 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 three 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, 1999 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, 1999
19
<PAGE>
================================================================================
SPECIAL 1999 TAX INFORMATION (UNAUDITED) FOR
VANGUARD SELECTED VALUE FUND
This information for the fiscal year ended October 31, 1999, is included
pursuant to provisions of the Internal Revenue Code.
The fund distributed $4,778,000 as capital gain dividends (from net
long-term capital gains) to shareholders in December 1998, all of which is
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.
================================================================================
20
<PAGE>
- --------------------------------------------------------------------------------
THE PEOPLE WHO GOVERN YOUR FUND
The Trustees of your mutual fund are there to see that the fund is operated and
managed in your best interests since, as a shareholder, you are part owner of
the fund. Your fund Trustees also serve on the Board of Directors of The
Vanguard Group, which is owned by the funds and exists solely to provide
services to them on an at-cost basis.
Seven of Vanguard's nine board members are independent, meaning that they
have no affiliation with Vanguard or the funds they oversee, apart from the
sizable personal investments they have made as private individuals. They bring
distinguished backgrounds in business, academia, and public service to their
task of working with Vanguard officers to establish the policies and oversee the
activities of the funds.
Among board members' responsibilities are selecting investment advisers for
the funds; monitoring fund operations, performance, and costs; reviewing
contracts; nominating and selecting new Trustees/Directors; and electing
Vanguard officers.
The list below provides a brief description of each Trustee's
professional affiliations. Noted in parentheses is the year in which the Trustee
joined the Vanguard Board.
TRUSTEES
JOHN C. BOGLE (1967) 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 v (1987) 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 (1998) Vice President, Chief Information Officer, and a
member of the Executive Committee of Johnson & Johnson; Director of Johnson &
JohnsonoMerck Consumer Pharmaceuticals Co., The Medical Center at Princeton, and
Women's Research and Education Institute.
BRUCE K. MACLAURY (1990) President Emeritus of The Brookings Institution;
Director of American Express Bank Ltd., The St. Paul Companies, Inc., and
National Steel Corp.
Burton G. Malkiel (1977) 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 Select Sector SPDR
Trust.
ALFRED M. RANKIN, JR. (1993) Chairman, President, Chief Executive Officer, and
Director of NACCO Industries, Inc.; Director of The BFGoodrich Co.
JOHN C. SAWHILL (1991) 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. (1971) 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 (1985) Retired Chairman of Rohm & Haas Co.; Director of
Cummins Engine Co. and The Mead Corp.; Trustee of Vanderbilt University.
- --------------------------------------------------------------------------------
OTHER FUND OFFICERS
RAYMOND J. KLAPINSKY v Secretary; Managing Director and Secretary of The
Vanguard Group, Inc.; Secretary of each of the investment companies in The
Vanguard Group.
THOMAS J. HIGGINS v Treasurer; Principal of The Vanguard Group, Inc.; Treasurer
of each of the investment companies in The Vanguard Group.
VANGUARD MANAGING DIRECTORS
R. GREGORY BARTON v Legal Department.
ROBERT A. DISTEFANO v Information Technology.
JAMES H. GATELY v Individual Investor Group.
KATHLEEN C. GUBANICH v Human Resources.
IAN A. MACKINNON v Fixed Income Group.
F. WILLIAM MCNABB, III v Institutional Investor Group.
MICHAEL S. MILLER v Planning and Development.
RALPH K. PACKARD v Chief Financial Officer.
GEORGE U. SAUTER v Core Management Group.
<PAGE>
ABOUT OUR COVER
Our cover art, depicting HMS Vanguard at sea, is a reproduction of Leading the
Way, a 1984 work created and copyrighted by noted naval artist Tom Freeman, of
Forest Hill, Maryland.
[SHIP]
[THE VANGUARD GROUP LOGO]
Post Office Box 2600
Valley Forge, Pennsylvania 19482-2600
All comparative mutual fund data are from Lipper Inc. or Morningstar, Inc.,
unless otherwise noted.
"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.
World Wide Web
www.vanguard.com
Fund Information
1-800-662-7447
Individual Account Services
1-800-662-2739
Institutional Investor Services
1-800-523-1036
This report is intended for the fund's shareholders. It may not be distributed
to prospective investors unless it is preceded or accompanied by the current
fund prospectus.
Q9340-12/16/1999
(C) 1999 The Vanguard Group, Inc.
All rights reserved.
Vanguard Marketing
Corporation, Distributor.
