VANGUARD(R) SELECTED VALUE FUND
ANNUAL REPORT -- OCTOBER 31, 2000
[SHIP GRAPHIC]
A member of
THE VANGUARD GROUP(R)
<PAGE>
OUR REPORTS TO
THE OWNERS
At Vanguard, we regard our investors not as mere customers but as owners of the
enterprise. For that's exactly what a mutual fund shareholder is--part owner of
an investment company.
In our reports to you on how the company is doing, we have tried to convey
information without hyperbole and in the context of broad market trends and
relevant benchmarks.
We've introduced several changes to this year's annual reports to make them
even more useful. Among the changes:
**Larger type and redesigned graphics to make the reports easier to read.
**An at-a-glance summary of key points about fund performance and the
financial markets.
**A table--included for many funds--in which the investment adviser
highlights significant changes in holdings.
**Comparisons of fund performance and characteristics against both a broad
market index and a "best fit" benchmark.
We hope you'll find that these changes make the reports even more
accessible and informative.
SUMMARY
* Vanguard Selected Value Fund returned a solid 19.1% during its 2000 fiscal
year.
* After a slow start, the fund soared during the final eight months of the
period when value stocks rebounded.
* The adviser demonstrated strong stock-picking in several market segments,
including the health care, financial services, and utilities sectors.
CONTENTS
1 Letter from the Chairman
7 Report from the Adviser
10 Fund Profile
11 Glossary of Investment Terms
12 Performance Summary
13 Report on After-Tax Returns
14 Financial Statements
21 Report of Independent Accountants
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LETTER
FROM THE CHAIRMAN
Fellow Shareholders,
VANGUARD SELECTED VALUE FUND benefited from a dramatic about-face in the
fortunes of value-oriented shares and earned an excellent return of 19.1% during
the fiscal year ended October 31, 2000.
Your fund's total return (capital change plus reinvested dividends) fell
short of the return of its average mutual fund peer, but was more than 7
percentage points ahead of the return of the Russell Midcap Value Index, the
benchmark that we consider the best fit for the Selected Value Fund.
2000 TOTAL RETURNS Fiscal Year Ended
October 31
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Vanguard Selected Value Fund 19.1%
Average Mid-Cap Value Fund* 21.6
Russell Midcap Value Index 11.9
Wilshire 5000 Index 8.1
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*Derived from data provided by Lipper Inc.
The fund's total return (capital change plus reinvested dividends) is based
on an increase in net asset value from $9.75 per share on October 31, 1999, to
$11.42 per share on October 31, 2000, and is adjusted for a dividend of $0.16
per share paid from net investment income.
If you own Vanguard Selected Value Fund in a taxable account, you may wish
to review our report on the fund's after-tax returns on page 13.
FINANCIAL MARKETS IN REVIEW
The U.S. stock market began the fiscal year like a skyrocket as investors
targeted technology-related stocks. During the first two months of the period,
the broad market gained more than 11%. Fueling the increase were favorable
economic data: Production rose rapidly, unemployment fell below 4% of the
workforce, long-term interest rates declined,
MARKET BAROMETER Average Annual Total Returns
Periods Ended October 31, 2000
One Three Five
Year Years Years
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STOCKS
S&P 500 Index (Large-caps) 6.1% 17.6% 21.7%
Russell 2000 Index (Small-caps) 17.4 5.9 12.4
Wilshire 5000 Index (Entire market) 8.1 16.0 20.1
MSCI~EAFE Index (International) -2.7 9.7 8.9
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BONDS
Lehman Aggregate Bond Index (Entire market) 7.3% 5.7% 6.3%
Lehman 10 Year Municipal Bond Index 8.2 5.0 5.7
Salomon Smith Barney 3-Month
U.S. Treasury Bill Index 5.7 5.2 5.2
================================================================================
CPI
Consumer Price Index 3.4% 2.5% 2.5%
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and inflation was well-behaved, though energy prices rose sharply during the
fiscal year.
But as the period progressed, the effects of higher short-term interest
rates--engineered by the Federal Reserve Board to slow the economy and forestall
inflation--began to show. And despite solid increases in corporate earnings,
doubts grew that the companies could sustain the growth pace amid a slowing
economy.
Investors seemed to grow wary of the lofty prices of many tech stocks in
relation to their earnings and other fundamentals. Value stocks--those
characterized by relatively low prices in relation to earnings, book value, and
dividends--generally benefited from the market's increased emphasis on current
earnings. The result was a significant split between the first- and second-half
returns for growth and value stocks, particularly among mid-capitalization
stocks, the segment of the market that the Selected Value Fund emphasizes. As
the table below shows, mid-cap growth stocks soared during the first four months
of the period, but mid-cap value stocks led the market during the final eight
months.
The year also saw huge variations in returns of various industry groups.
For example, among mid-cap stocks, technology companies led the way with a 66%
return for the 12 months, followed closely by the "other energy" group (56%) and
health care companies (54%). The laggards of the Russell Midcap Index were
materials & processing companies (-12%) and the consumer discretionary group
(-6%).
For the full 12 months, the return of the overall market, as measured by
the Wilshire 5000 Total Market Index, was shy of the double-digit gains
investors have seen in recent years. For a change, small- and mid-cap stocks
significantly outpaced their large-cap counterparts.
TOTAL RETURNS
Oct. 31, 1999, to Feb. 29, 2000, to Fiscal
Feb. 29, 2000 Oct. 31, 2000 2000
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Russell Midcap Growth Index 56.7% -11.5% 38.7%
Russell Midcap Value Index -9.2 23.2 11.9
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STRONG RETURNS FROM BONDS
In general, bonds produced solid results during the 12 months. The Lehman
Brothers Aggregate Bond Index, a proxy for taxable investment-grade bonds,
returned 7.3%, outpacing the S&P 500 Index. However, the deceleration in
economic growth prompted bond investors to shy away from speculative issues, and
prices of high-yield bonds fell. Mortgage-backed securities and high-quality
corporate bonds performed well.
Short-term interest rates rose substantially during the year, with the
yield of 3-month U.S. Treasury bills increasing 1.3 percentage points. The
increase
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essentially matched the 1.25-point boost in the federal funds rate accomplished
in four steps by the Federal Reserve. Yields were relatively flat, on balance,
for most longer-term securities. A rising federal budget surplus shrank the
supply of U.S. Treasury bonds, and their yields declined slightly for the fiscal
year: The 30-year Treasury's yield fell from 6.16% to 5.79%. Yields on 10-year
Treasuries fell by about a quarter-point.
FISCAL 2000 PERFORMANCE OVERVIEW
Vanguard Selected Value Fund's 19.1% return for the fiscal year ended October 31
represented a terrific turnaround. After declining -10.8% from November through
February, the fund returned a remarkable 33.6% during the remaining eight
months. As noted above, your fund's full-year return was slightly behind that of
its average mutual fund peer, but well ahead of results for the Russell Midcap
Value Index. The fund's return was more than twice that of the broad stock
market.
The turnaround was largely a product of the spirited revival in value
stocks that took hold in early spring. For the most part, your fund's investment
adviser stuck with shares whose value had not been fully recognized by the
market and avoided high-priced stocks.
Our margin over the Russell Midcap Value Index came down to strong
stock-picking in several sectors. Specifically, our health care stocks, which
accounted for about 7% of the fund's assets on average, returned nearly 120%
during the period--a surge led by Watson Pharmaceuticals, a California-based
drug maker. Our selections within the producer durables group and the utilities
sector also helped Selected Value to outpace the index. We also earned
relatively strong results from our financial services stocks, which represented
about one-quarter of the fund's assets.
On the downside, we were hurt by our picks in the auto & transportation
sector and in the materials & processing group. Our near-avoidance of technology
shares--tech stocks made up about 2% of the fund's assets on average--was a
detriment relative to the Russell Midcap Value Index. The index's tech shares,
which accounted for roughly 9% of its market capitalization, returned 63% during
the period.
THE MARKET TURNS TOWARD VALUE
The past year showed that patience is a necessary virtue for value investors,
who by definition are choosing securities that have been shunned by many other
investors and whose prices are relatively low in comparison with past and
potential earnings.
We thank our shareholders for their patience during the past few years, a
period when value stocks generated returns that were well below the glittery
gains of growth issues. We recognize that it took discipline to stick with value
investing when price momentum--buying stocks merely because their prices
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had risen--was a driving force on Wall Street. However, it appears that
pundits who declared the death of value investing were off target.
We note that many individuals who gave into the temptation to alter their
investment allocations paid a heavy price. Consider that the largest flows of
cash into technology-related mutual funds and the largest outflows of cash from
value funds like Selected Value occurred in February and March of 2000. The
timing of these flows couldn't have been worse.
That said, we don't pretend to know what the market has in store next, but
we continue to believe that long-term investors are well-advised to maintain
exposure to both value stocks and growth stocks. As fiscal year 2000
demonstrated, market leadership can switch suddenly and decisively from growth
to value and back again.
LIFETIME PERFORMANCE OVERVIEW
Though a review of a fund's fiscal year is helpful, we believe that investment
performance should be measured over the long haul. To that end, the table below
presents the average annual returns for your fund, the average mid-cap value
fund, and two market benchmarks. It also presents the results of hypothetical
$10,000 investments made at the fund's inception.
Vanguard Selected Value Fund's shortfall versus its average competitor over
this period is significant, amounting to nearly $5,000. (Our record versus the
broad stock market is worse, but that is because the Wilshire 5000 Index
contains both growth and value stocks--a significant advantage during the past
decade, when growth stocks were the best performers.)
Plainly, over its lifetime, the Selected Value Fund has not yet done what
it set out to do: provide returns that exceed those of similar funds. Of course,
we expect the fund to perform differently than the overall stock market and peer
funds. The fund adheres closely to its value discipline and holds a relatively
small number of stocks--36 securities on October 31. We note that the fund has
gained some ground since James P. Barrow, a founding partner of our investment
adviser, Barrow, Hanley, Mewhinney & Strauss, took over investment management
duties in March 1999. From the end of March 1999 through October 2000, the fund
returned 23.0%, compared with the 14.4% return of the Russell Midcap Value Index
and the 28.6% return of the average mid-cap value mutual fund. We are monitoring
the fund's progress, and we expect it to continue to improve relative to its
comparative standards.
TOTAL RETURNS February 15, 1996, to
October 31, 2000
Average Final Value of
Annual a $10,000
Return Initial Investment
--------------------------------------------------------------------------------
Vanguard Selected Value Fund 5.4% $12,828
Average Mid-Cap Value Fund 12.9 17,714
Russell Midcap Value Index 13.2 17,940
Wilshire 5000 Index 18.9 22,574
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A key distinction between the Selected Value Fund and similar mutual funds
is cost. Your fund's annualized expense ratio is 0.63%, or $6.30 per $1,000 of
assets, versus the 1.53% ($15.30 per $1,000) charged by the average mid-cap
value fund, according to data provided by Lipper Inc. This cost advantage gives
your fund a head start versus competitors, year after year, in its quest to
provide superior returns. However, in comparison with indexes, all funds are at
a disadvantage, since funds incur operating and transaction costs (such as
brokerage commissions and bid-asked spreads) that the theoretical indexes do not
incur.
Of course, our goal is to provide long-term returns that beat those of both
peer funds and our index benchmark. We hope to improve both our absolute and
relative returns in future years, but acknowledge that it's unlikely that the
broad market will match the returns achieved during the past ten years. The
stock market's performance during the 1990s was one of its best ever; returns
were far above the 11% to 12% annual average returns on stocks for the past 75
years or so. It's best, we believe, when crafting plans to make modest
assumptions about future returns. If the market exceeds them, the result is not
bad: You'll merely get to your objectives sooner.
IN SUMMARY
The financial markets during the past 12 months certainly reinforced the
importance of diversification. Just as it seemed that a single hot sector of the
stock market was the only place to be, technology-related stocks swooned and
value stocks came to the fore. And bonds--the asset class many investors forgot
in the excitement of the bull market in stocks--posted solid results.
Perhaps the one safe prediction for the next 12 months is that markets will
continue to be quite unpredictable. But uncertainty and volatility--risk, to use
a four-letter word--are a constant companion for investors. A balanced
investment program--a mix of short-term investments, bonds, and both value and
growth stocks--can help you manage risk. Once you've built such a program in
accordance with your objectives, time horizon, financial situation, and
tolerance for market fluctuations, we recommend staying the course.
Sincerely,
October 17, 2000
[PHOTO--JOHN J. BRENNAN]
JOHN J. BRENNAN
CHAIRMAN AND
CHIEF EXECUTIVE OFFICER
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NOTICE TO SHAREHOLDERS: CHANGE IN OWNERSHIP
FOR BARROW, HANLEY, MEWHINNEY & STRAUSS, INC.
In July 2000, Old Mutual plc agreed to acquire United Asset Management
Corporation (UAM), the parent company of Barrow, Hanley, Mewhinney & Strauss,
Inc. (BHMS), the investment adviser for Vanguard Selected Value Fund. UAM will
continue to own BHMS, and the change in the parent companyIs ownership is not
expected to have any practical effect on the fund. There will be no change in
BHMSIs role as the fundIs investment adviser, in the personnel who advise the
fund, or in the fees charged to the fund. However, as is required by the
Investment Company Act of 1940, your fundIs advisory contract with BHMS
automatically terminated with the change in ownership.
Accordingly, on September 14, 2000, your fundIs board of trustees approved
a new investment advisory contract with BHMS that took effect when the ownership
of BHMSIs parent company officially changed in early October. All of the terms
of the new contract, except for its commencement and termination dates, are the
same as those in the previous contract. Your board believes that, similar to the
previous advisory contract, the new contract will enable the fund to obtain
services of high quality at reasonable cost and that the new contract is in the
best interests of the fund and its shareholders. (In 1993, your fund received
permission from the U.S. Securities and Exchange Commission and from its
shareholders for the trustees to enter into a new advisory agreement without the
delay and expense of a shareholder vote. This special permission was made
subject to several conditions, including the requirement that shareholders be
notified of changes to the fundIs investment advisory agreement.)
In July, Old Mutual plc announced the terms of a tender offer under which
it would acquire all of UAMIs outstanding shares. The directors of UAM
recommended that its shareholders accept Old MutualIs offer, and UAM tendered
all of its shares. The acquisition became effective on October 5, 2000.
BHMS, which is registered as an investment adviser with the Securities and
Exchange Commission, is located at One McKinney Plaza, 3232 McKinney Avenue,
15th Floor, Dallas, TX 75204. UAM began providing investment advisory services
in December 1980. Today, the principal operating subsidiaries of UAM manage both
domestic and international investment portfolios for corporate, government, and
union benefit plans; mutual funds; individuals; endowments; and foundations.
Together with its subsidiaries, UAM manages or advises approximately $195
billion in assets.
6
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REPORT
FROM THE ADVISER BARROW, HANLEY, MEWHINNEY & STRAUSS, INC.
The SELECTED VALUE FUND returned 19.1% for the fiscal year ended October 31,
2000. Our return was somewhat behind those of the Russell Midcap Index (23.7%)
and our average mutual fund peer (21.6%), but was more than 7 percentage points
ahead of that of the Russell Midcap Value Index. The Selected Value Fund is a
true value fund, and its performance reflects this: The fundIs return during the
second half of the fiscal year,,when value stocks surged,,was a strong 10.0%,
which compared with returns of 5.4% for the Russell Midcap Index and 9.4% for
the Russell Midcap Value Index.
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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.
--------------------------------------------------------------------------------
THE INVESTMENT ENVIRONMENT
During the early part of our fiscal year, equity markets in the United
States,,particularly the technology-dominated Nasdaq Composite Index,,shot up.
Nasdaq returned an astonishing 58.8% during the first four months of our fiscal
year. However, in the aggregate, these companies had no earnings.
Things seemed to change after February, when a period of unprecedented
money flow into growth stocks ended. Suddenly, investors became interested in
things like earnings, dividends, and business plans, and they began to forget
about concepts, Internet addresses, and venture capital. It will probably take a
long time for investors' infatuation with nnew economyi ideas to go away, but it
will. Because many mutual fund investors seemed to have difficulty
distinguishing between fund manager competence and market focus during the
fiscal year, many may well have sold value shares at their low and bought growth
shares at their high.
OUR SUCCESSES
Our investments in defense contractors had a very positive impact on our return
during the last six months of the fiscal year. These holdings included
BFGoodrich, as well as Lockheed Martin, which entered our portfolio when it
bought COMSAT, which we already owned.
The financial services area was also a good investment arena for us. In
particular, XL Capital, MBIA, MGIC Investment Corporation, and USA Education
(formerly SLM Holding Corporation) performed well. In the consumer staples
sector, UST (U.S. Tobacco) rebounded from an earlier slump,
7
<PAGE>
helping our performance. Our lack of holdings in technology and
telecommunications companies, which we viewed as too expensive, benefited our
performance significantly relative to those of our index benchmark and some of
our peers during the final six months of the fiscal year.
OUR SHORTFALLS
Our underperforming stocks included seemingly unrelated holdings such as Ryder
System, Deluxe Corporation, Kmart, Service Corporation International, Dana
Corporation, and Armstrong Holdings. Some of the declines in these holdings were
motivated by investorsI irrational fears that these companies would suffer
financial failure, an outcome that we feel is very unlikely. All are profitable,
have positive cash flow, and have viable long-term business plans. None of these
companies is likely to be made obsolete by the Internet,,they just havenIt
produced impressive short-term growth. We are confident that these
companies,,most of which account for a relatively small portion of your
fund,,are being hurt by investorsI selling shares to book losses for tax
purposes, and we expect them to rebound by year-end.
OUR PORTFOLIO POSITION
On a weighted-average basis, our stocks have a price/earnings ratio of about 18,
significantly lower than the P/E of the Russell Midcap Index. Our yield is 3.0%,
or more than double that of the Russell Midcap Index. We hold the stocks of 36
companies, which are diversified across many industries, and no single holding
accounts for as much as 5% of our assets. The largest difference between the
fund and the Russell Midcap Index is that we have almost no technology exposure,
an area that we feel is very expensive. In addition, we donIt own any bank
stocks, though we do own a lot of other financial intermediaries. Our utilities
holdings are electric companies, not telecommunications concerns, many of which
we believe have significant excess capacity. In conclusion, the fund is
positioned to participate in a rising market, but it should also perform
relatively well in the event of a market decline.
James P. Barrow, Portfolio Manager
November 10, 2000
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PORTFOLIO CHANGES Fiscal Year Ended October 31, 2000
Comments
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ADDITIONS
Global Marine* Provides exposure to U.S. gas exploration.
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Murphy Oil* Provides exposure to Canadian gas exploration.
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Entergy* Electric utility with significant growth potential.
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Wendy's International* Improving play in domestic fast foods.
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USA Education* Good opportunity resulting from legislation.
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GPU* Selling at a discount to acquisition price.
================================================================================
REDUCTIONS
Watson Pharmaceuticals Took profit in significant winner.
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Coventry Health Care** Stock reached fair market value.
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Harris** Stock reached fair market value.
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XL Capital Reduced large holding.
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UST Reduced large holding.
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Diebold** Company did not perform as expected.
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*New holding in portfolio.
**Eliminated from portfolio.
SEE PAGE 14
FOR A COMPLETE
LISTING OF THE
FUND'S HOLDINGS.
9
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FUND PROFILE As of October 31, 2000
FOR SELECTED VALUE FUND
This Profile provides a snapshot of the fund's characteristics, compared where
appropriate to both an unmanaged index that we consider a "best fit" for the
fund and a broad market index. Key terms are defined on page 11.
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PORTFOLIO CHARACTERISTICS
Wilshire
Fund Best Fit* 5000
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Number of Stocks 36 604 6,768
Median Market Cap $3.5B $6.1B $46.1B
Price/Earnings Ratio 18.2x 17.9x 29.8x
Price/Book Ratio 2.0x 2.2x 4.5x
Yield 3.0% 2.2% 1.1%
Return on Equity 15.6% 15.5% 22.8%
Earnings Growth Rate 3.6% 8.5% 16.8%
Foreign Holdings 0.0% 0.0% 0.0%
Turnover Rate 40% ,, ,,
Expense Ratio 0.63% ,, ,,
Cash Investments 4.0% ,, ,,
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TEN LARGEST HOLDINGS
(% of total net assets)
Lockheed Martin Corp. 3.8%
(aerospace & defense)
Wendy's International, Inc. 3.4
(restaurants)
Pall Corp. 3.4
(manufacturing)
Toys R Us, Inc. 3.3
(retail)
The BFGoodrich Co. 3.3
(aerospace & defense)
MGIC Investment Corp. 3.2
(insurance)
Kerr-McGee Corp. 3.2
(oil)
ITT Industries, Inc. 3.2
(conglomerate)
Jefferson-Pilot Corp. 3.2
(insurance)
Entergy Corp. 3.1
(electrical utilities)
--------------------------------------------
Top Ten 33.1%
--------------------------------------------
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VOLATILITY MEASURES
Wilshire
Fund Best Fit* Fund 5000
---------------------------------------------
R-Squared 0.81 1.00 0.32 1.00
Beta 1.24 1.00 0.77 1.00
---------------------------------------------
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SECTOR DIVERSIFICATION
(% of common stocks)
Wilshire
Fund Best Fit* 5000
--------------------------------------------------------------------------------
Auto & Transportation 5.9% 6.2% 1.7%
Consumer Discretionary 10.2 12.8 12.0
Consumer Staples 3.1 5.5 5.3
Financial Services 27.0 25.6 17.0
Health Care 5.3 6.0 12.4
Integrated Oils 6.5 1.9 3.1
Other Energy 3.1 5.4 2.6
Materials & Processing 11.0 7.8 2.5
Producer Durables 10.9 4.9 3.3
Technology 0.0 5.5 26.4
Utilities 8.3 16.3 8.7
Other 8.7 2.1 5.0
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*Russell Midcap Value Index.
VISIT OUR WEBSITE
WWW.VANGUARD.COM
FOR REGULARLY UPDATED FUND INFORMATION.
[COMPUTER GRAPHIC]
10
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GLOSSARY
OF INVESTMENT TERMS
BETA. A measure of the magnitude of a fund's past share-price fluctuations in
relation to the ups and downs of the fund's "best fit" index benchmark and an
overall market index. Each index is assigned a beta of 1.00. Compared with a
given index, a fund with a beta of 1.20 would have seen its share price rise or
fall by 12% when the index rose or fell by 10%.
--------------------------------------------------------------------------------
CASH INVESTMENTS. 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.
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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.
--------------------------------------------------------------------------------
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.
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R-SQUARED. A measure of how much of a fund's past returns can be explained by
the returns from the market in general, as measured by the fund's nbest fiti
index benchmark and by an overall market index. If a fundIs total returns were
precisely synchronized with an indexIs returns, its R-squared would be 1.00. If
the fund's returns bore no relationship to the index's returns, its R-squared
would be 0.
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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.
--------------------------------------------------------------------------------
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.
--------------------------------------------------------------------------------
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PERFORMANCE SUMMARY
FOR 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.
--------------------------------------------------------------------------------
TOTAL INVESTMENT RETURNS (%) February 15, 1996-October 31, 2000
SELECTED VALUE FUND RUSSELL MIDCAP VALUE INDEX
1996 0.7 8.3
1997 30.9 32.5
1998 -17.8 5.7
1999 -0.6 5.7
2000 19.1 11.9
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See Financial Highlights table on page 18 for dividend and capital gains
information since inception.
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CUMULATIVE PERFORMANCE February 15, 1996-October 31, 2000
[MOUNTAIN CHART]
INITIAL INVESTMENT OF $10,000
Selected Average Russell Russell Wilshire
Value Fund Mid-Cap Midcap Value Midcap 5000
Value Index Index Index Index
199604 10630 10612 10359 10150
199607 9490 10049 9716 9769
199610 10070 11008 10767 10831
199701 11051 11983 11730 11823
199704 10767 11652 11493 11952
199707 13336 13944 13797 14100
199710 13184 14299 13865 14350
199801 12734 14405 14312 15103
199804 14355 16309 16203 16847
199807 11982 14557 15160 15669
199810 10838 13399 14484 15174
199901 11136 14328 16031 15808
199904 11611 14971 17164 17166
199907 12229 15536 17232 16998
199910 10771 14564 16964 16039
200001 10244 15259 18358 15200
200004 11660 16620 19912 16396
200007 11727 16951 19735 16431
200010 12828 17714 20989 17940
Average Annual Total Returns
Periods Ended October 31, 2000 Final Value
------------------------------ of a $10,000
1 Year Since Inception Investment
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Selected Value Fund 19.10% 5.43% $12,828
Average Mid-Cap Value Fund* 21.63 12.91 17,714
Russell Midcap Value Index 11.85 13.22 17,940
Russell Midcap Index 23.73 17.06 20,989
Wilshire 5000 Index 8.10 18.88 22,574
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*Derived from data provided by Lipper Inc.
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A REPORT
ON YOUR FUND'S AFTER-TAX RETURNS
This table presents pre-tax and after-tax returns for your fund and an
appropriate peer group of mutual funds. The after-tax returns represent the
fundIs past results only and should not be used to predict future tax
efficiency.
If you own the 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.
Income taxes can have a considerable impact on a fundIs return,,an
important consideration for investors who own mutual funds in taxable accounts.
While the pre-tax return is most often used to tally a fundIs performance, the
fundIs after-tax return, which accounts for taxes on distributions of capital
gains and income dividends, is an important measure of the return that many
investors actually received.
PRE-TAX AND AFTER-TAX Periods Ended October 31, 2000
AVERAGE ANNUAL TOTAL RETURNS
One Year Since Inception*
-----------------------------------------
Pre-Tax After-Tax Pre-Tax After-Tax
--------------------------------------------------------------------------------
Vanguard Selected Value Fund 19.1% 18.3% 5.4% 4.6%
Average Mid-Cap Value Fund** 17.0 14.1 -- --
--------------------------------------------------------------------------------
*February 15, 1996.
**Based on data from Morningstar, Inc. Elsewhere in this report, returns for
comparable funds are derived from data provided by Lipper Inc., which may differ
somewhat.
The after-tax return calculations use the top federal income tax rates in
effect at the time of each distribution. The tax burden would be less, and the
after-tax return higher, for those in lower tax brackets.
We must stress that because many interrelated factors affect how
tax-friendly a fund may be, itIs very difficult to predict tax efficiency. A
fundIs tax efficiency can be influenced by its turnover rate, the types of
securities it holds, the accounting practices it uses, 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
decide to sell all or some of your shares.
--------------------------------------------------------------------------------
A NOTE ABOUT OUR CALCULATIONS: Pre-tax 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.
(c)2000 by Morningstar(R), Inc. All rights reserved. Average return
information for comparative fund groups is proprietary information of
Morningstar, Inc. It may not be copied or redistributed, and it may only be used
for noncommercial, personal purposes. Morningstar does not warrant that this
information is accurate, correct, complete, or timely, and Morningstar is not
responsible for investment decisions, damages, or other losses resulting from
use of this information. Past performance is no guarantee of future performance.
Morningstar, Inc., has not consented to be considered or deemed an nexperti
under the Securities Act of 1933.
YOU CAN USE VANGUARD'S ONLINE
AFTER-TAX RETURN CALCULATOR AT
WWW.VANGUARD.COM/?AFTERTAX
TO GET A CUSTOMIZED CALCULATION.
[COMPUTER GRAPHIC]
13
<PAGE>
FINANCIAL STATEMENTS
OCTOBER 31, 2000
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, but may differ because certain investments or
transactions may be treated differently for financial statement and tax
purposes. 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 (96.0%)
--------------------------------------------------------------------------------
AUTO & TRANSPORTATION (5.6%)
Genuine Parts Co. 205,800 $ 4,386
Dana Corp. 187,900 4,169
---------
8,555
---------
CONSUMER DISCRETIONARY (9.8%)
Wendy's International, Inc. 240,000 5,220
*Toys R Us, Inc. 293,600 5,046
*Kmart Corp. 462,800 2,748
*Service Corp. International 787,900 1,822
---------
14,836
---------
CONSUMER STAPLES (3.0%)
UST, Inc. 177,400 4,479
---------
FINANCIAL SERVICES (26.0%)
FINANCE--SMALL LOAN (2.9%)
USA Education Inc. 80,000 4,470
FINANCIAL DATA PROCESS SERVICES (2.4%)
Deluxe Corp. 159,200 3,592
FINANCIAL MISCELLANEOUS (6.2%)
MGIC Investment Corp. 70,900 4,830
MBIA, Inc. 62,000 4,507
INSURANCE,,LIFE (3.2%)
Jefferson-Pilot Corp. 69,700 4,792
INSURANCE,,PROPERTY,,CASUALTY (2.8%)
XL Capital Ltd. Class A 56,000 4,305
REAL ESTATE INVESTMENT TRUST (5.8%)
Crescent Real Estate, Inc. REIT 229,100 4,611
ProLogis Trust REIT 197,700 4,152
RENT & LEASE SERVICES--COMMERCIAL (2.7%)
Ryder System, Inc. 206,900 4,086
---------
39,345
---------
HEALTH CARE (5.1%)
*Patterson Dental Co. 106,100 3,322
*Watson Pharmaceuticals, Inc. 46,900 2,934
Mylan Laboratories, Inc. 52,800 1,478
---------
7,734
---------
INTEGRATED OILS (6.2%)
Kerr-McGee Corp. 73,900 4,827
Murphy Oil Corp. 79,900 4,629
---------
9,456
---------
OTHER ENERGY (3.0%)
*Global Marine, Inc. 172,300 4,566
---------
14
<PAGE>
MATERIALS & PROCESSING (10.6%)
Eastman Chemical Co. 108,500 4,652
Lyondell Chemical Co. 265,900 3,822
Millennium Chemicals, Inc. 231,700 3,736
Engelhard Corp. 167,400 3,494
Armstrong Holdings, Inc. 100,000 288
---------
15,992
---------
PRODUCER DURABLES (10.5%)
Lockheed Martin Corp. 162,500 5,826
Pall Corp. 236,300 5,095
The BFGoodrich Co. 121,800 4,986
---------
15,907
---------
UTILITIES (8.0%)
Entergy Corp. 124,100 4,755
Northeast Utilities 202,600 4,128
GPU, Inc. 98,500 3,257
---------
12,140
---------
OTHER (8.2%)
ITT Industries, Inc. 147,700 4,809
Brunswick Corp. 215,700 4,193
Fortune Brands, Inc. 118,200 3,480
---------
12,482
---------
--------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost $145,437) 145,492
--------------------------------------------------------------------------------
Face
Amount
(000)
--------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENT (3.6%)
--------------------------------------------------------------------------------
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled Cash Account
6.56%, 11/1/2000
(COST $5,477) $5,477 5,477
--------------------------------------------------------------------------------
TOTAL INVESTMENTS (99.6%)
(Cost $150,914) 150,969
--------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (0.4%)
--------------------------------------------------------------------------------
Other Assets--Note C 984
Liabilities (377)
---------
607
---------
--------------------------------------------------------------------------------
NET ASSETS (100%)
--------------------------------------------------------------------------------
Applicable to 13,275,396 outstanding $.001
par value shares of beneficial interest
(unlimited authorization) $151,576
================================================================================
NET ASSET VALUE PER SHARE $11.42
================================================================================
.See Note A in Notes to Financial Statements.
*Non-income-producing security.
REIT--Real Estate Investment Trust.
--------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
--------------------------------------------------------------------------------
AT OCTOBER 31, 2000, NET ASSETS CONSISTED OF:
--------------------------------------------------------------------------------
Paid in Capital $ 161,827 $12.19
Undistributed Net
Investment Income 2,814 .21
Accumulated Net Realized Losses (13,120) (.99)
Unrealized Appreciation,,Note E 55 .01
--------------------------------------------------------------------------------
NET ASSETS $151,576 $11.42
================================================================================
15
<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, 2000
(000)
--------------------------------------------------------------------------------
INVESTMENT INCOME
INCOME
Dividends $ 4,648
Interest 174
Security Lending 3
--------------------------------------------------------------------------------
Total Income 4,825
--------------------------------------------------------------------------------
EXPENSES
Investment Advisory Fees--Note B
Basic Fee 622
Performance Adjustment (358)
The Vanguard Group--Note C
Management and Administrative 681
Marketing and Distribution 25
Custodian Fees 13
Auditing Fees 9
Shareholders' Reports 15
--------------------------------------------------------------------------------
Total Expenses 1,007
--------------------------------------------------------------------------------
NET INVESTMENT INCOME 3,818
--------------------------------------------------------------------------------
REALIZED NET LOSS ON INVESTMENT SECURITIES SOLD (1,114)
--------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) OF INVESTMENT SECURITIES 19,883
--------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $22,587
================================================================================
16
<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,
-----------------------
2000 1999
(000) (000)
--------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
Operations
Net Investment Income $ 3,818 $ 2,289
Realized Net Loss (1,114) (11,940)
Change in Unrealized Appreciation (Depreciation) 19,883 123
--------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations 22,587 (9,528)
--------------------------------------------------------------------------------
DISTRIBUTIONS
Net Investment Income (3,027) (1,158)
Realized Capital Gain -- (4,778)
Total Distributions (3,027) (5,936)
--------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS1
Issued 86,666 152,679
Issued in Lieu of Cash Distributions 2,783 5,686
Redeemed (150,727) (101,391)
Net Increase (Decrease) from Capital
Share Transactions (61,278) 56,974
--------------------------------------------------------------------------------
Total Increase (Decrease) (41,718) 41,510
--------------------------------------------------------------------------------
NET ASSETS
Beginning of Year 193,294 151,784
--------------------------------------------------------------------------------
End of Year $151,576 $193,294
================================================================================
1Shares Issued (Redeemed)
Issued 8,624 14,258
Issued in Lieu of Cash Distributions 292 594
Redeemed (15,466) (9,870)
--------------------------------------------------------------------------------
Net Increase (Decrease) in Shares Outstanding (6,550) 4,982
================================================================================
17
<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>
<S> <C> <C> <C> <C> <C>
------------------------------------------------------------------------------------------------------------
SELECTED VALUE FUND
YEAR ENDED OCTOBER 31,
----------------------------------- FEB. 15* TO
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD 2000 1999 1998 1997 OCT. 31, 1996
------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.75 $10.23 $12.98 $10.07 $10.00
------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .27 .12 .07 .06 .04
Net Realized and Unrealized Gain (Loss)on Investments 1.56 (.19) (2.31) 3.02 .03
------------------------------------------------------------------------------------------------------------
Total from Investment Operations 1.83 (.07) (2.24) 3.08 .07
------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.16) (.08) (.05) (.06) --
Distributions from Realized Capital Gains -- (.33) (.46) (.11) --
------------------------------------------------------------------------------------------------------------
Total Distributions (.16) (.41) (.51) (.17) --
------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $11.42 $ 9.75 $10.23 $12.98 $10.07
============================================================================================================
TOTAL RETURN 19.10% -0.61% -17.80% 30.92% 0.70%
============================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $152 $193 $152 $190 $93
Ratio of Total Expenses to Average Net Assets 0.63% 0.73% 0.65% 0.74% 0.75%**
Ratio of Net Investment Income to Average Net Assets 2.40% 1.31% 0.58% 0.60% 0.75%**
Portfolio Turnover Rate 40% 102% 47% 32% 25%
============================================================================================================
*Inception.
**Annualized.
</TABLE>
18
<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 U.S. 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, 2000, the advisory fee represented an effective
annual basic rate of 0.39% of the fundIs average net assets before a decrease of
$358,000 (0.23%) 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, 2000, the fund had contributed capital of $27,000 to
Vanguard (included in Other Assets), representing 0.02% of the fundIs net assets
and 0.03% of VanguardIs capitalization. The fund's trustees and officers are
also directors and officers of Vanguard.
D. During the year ended October 31, 2000, the fund purchased $62,875,000 of
investment securities and sold $121,989,000 of investment securities, other than
temporary cash investments.
At October 31, 2000, the fund had available a capital loss carryforward of
$12,972,000 to offset future net capital gains of $11,940,000 through October
31, 2007, and $1,032,000 through October 31, 2008.
19
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
E. At October 31, 2000, net unrealized appreciation of investment securities for
financial reporting and federal income tax purposes was $55,000, consisting of
unrealized gains of $20,374,000 on securities that had risen in value since
their purchase and $20,319,000 in unrealized losses on securities that had
fallen in value since their purchase.
20
<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 nFundi) at October 31, 2000, 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 four years in the period then ended and for the period February 15, 1996
(commencement of operations) through October 31, 1996, in conformity with
accounting principles generally accepted in the United States of America. These
financial statements and financial highlights (hereafter referred to as
nfinancial statementsi) are the responsibility of the FundIs 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 auditing standards generally accepted in the United States of America,
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, 2000 by correspondence with the
custodian, provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
November 29, 2000
--------------------------------------------------------------------------------
SPECIAL 2000 TAX INFORMATION (UNAUDITED) FOR
VANGUARD SELECTED VALUE FUND
This information for the fiscal year ended October 31, 2000, is included
pursuant to provisions of the Internal Revenue Code.
For corporate shareholders, 100% of investment income (dividend income plus
short-term gains, if any) qualifies for the dividends-received deduction.
21
<PAGE>
THE VANGUARD(R)
FAMILY OF FUNDS
STOCK FUNDS
500 Index Fund
Calvert Social Index(TM) Fund
Capital Opportunity Fund
Convertible Securities Fund
Developed Markets Index Fund
Emerging Markets Stock Index Fund
Energy Fund
Equity Income Fund
European Stock Index Fund
Explorer(TM) Fund
Extended Market Index Fund
Global Equity Fund
Gold and Precious Metals Fund
Growth and Income Fund
Growth Equity Fund
Growth Index Fund
Health Care Fund
Institutional Developed Markets Index Fund
Institutional Index Fund
International Growth Fund
International Value Fund
Mid-Cap Index Fund
Morgan(TM)Growth Fund
Pacific Stock Index Fund
PRIMECAP Fund
REIT Index Fund
Selected Value Fund
Small-Cap Growth Index Fund
Small-Cap Index Fund
Small-Cap Value Index Fund
Strategic Equity Fund
Tax-Managed Capital Appreciation Fund
Tax-Managed Growth and Income Fund
Tax-Managed International Fund
Tax-Managed Small-Cap Fund
Total International Stock Index Fund
Total Stock Market Index Fund
U.S. Growth Fund
U.S. Value Fund
Utilities Income Fund
Value Index Fund
Windsor(TM) Fund
Windsor(TM) II Fund
BALANCED FUNDS
Asset Allocation Fund
Balanced Index Fund
Global Asset Allocation Fund
LifeStrategy(R) Conservative Growth Fund
LifeStrategy(R) Growth Fund
LifeStrategy(R) Income Fund
LifeStrategy(R) Moderate Growth Fund
STAR(TM) Fund
Tax-Managed Balanced Fund
Wellesley(R) Income Fund
Wellington(TM) Fund
BOND FUNDS
Admiral(TM) Intermediate-Term Treasury Fund
Admiral(TM) Long-Term Treasury Fund
Admiral(TM) Short-Term Treasury Fund
GNMA Fund
High-Yield Corporate Fund
High-Yield Tax-Exempt Fund
Inflation-Protected Securities Fund
Insured Long-Term Tax-Exempt Fund
Intermediate-Term Bond Index Fund
Intermediate-Term Corporate Fund
Intermediate-Term Tax-Exempt Fund
Intermediate-Term Treasury Fund
Limited-Term Tax-Exempt Fund
Long-Term Bond Index Fund
Long-Term Corporate Fund
Long-Term Tax-Exempt Fund
Long-Term Treasury Fund
Preferred Stock Fund
Short-Term Bond Index Fund
Short-Term Corporate Fund
Short-Term Federal Fund
Short-Term Tax-Exempt Fund
Short-Term Treasury Fund
State Tax-Exempt Bond Funds (California, Florida, Massachusetts, New Jersey,
New York, Ohio, Pennsylvania)
Total Bond Market Index Fund
MONEY MARKET FUNDS
Admiral(TM) Treasury Money Market Fund
Federal Money Market Fund
Prime Money Market Fund
State Tax-Exempt Money Market Funds (California, New Jersey, New York,
Ohio, Pennsylvania)
Tax-Exempt Money Market Fund
Treasury Money Market Fund
VARIABLE ANNUITY PLAN
Balanced Portfolio
Diversified Value Portfolio
Equity Income Portfolio
Equity Index Portfolio
Growth Portfolio
High-Grade Bond Portfolio
High Yield Bond Portfolio
International Portfolio
Mid-Cap Index Portfolio
Money Market Portfolio
REIT Index Portfolio
Short-Term Corporate Portfolio
Small Company Growth Portfolio
For information about Vanguard funds and our variable annuity plan, including
charges and expenses, obtain a prospectus from The Vanguard Group, P.O. Box
2600, Valley Forge, PA 19482-2600. Read it carefully before you invest or send
money.
22
<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.
Six of Vanguard's seven 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. The year in which the trustee joined the Vanguard board is noted
in parentheses.
--------------------------------------------------------------------------------
TRUSTEES
JOHN J. BRENNAN (1987) Chairman of the Board, Chief Executive Officer, and
Director/Trustee of The Vanguard Group, Inc., and of 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 &
Johnson*Merck 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 Argentaria, Gestion, BKF Capital, The Jeffrey Co., NeuVis, Inc., 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.
JAMES O. WELCH, JR. (1971) Retired Chairman of Nabisco Brands, Inc. (Food
Products); retired Vice Chairman and Director of RJR Nabisco (Food and Tobacco
Products); Director of TECO Energy, Inc., and Kmart Corp.
J. LAWRENCE WILSON (1985) Retired Chairman and Chief Executive Officer of Rohm &
Haas Co.; Director of AmeriSource Health Corporation, 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.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
VANGUARD MANAGING DIRECTORS
R. GREGORY BARTON, Legal Department.
ROBERT A. DISTEFANO, Information Technology.
JAMES H. GATELY, Direct Investor Services.
KATHLEEN C. GUBANICH, Human Resources.
IAN A. MACKINNON, Fixed Income Group.
F. WILLIAM MCNABB, III, Institutional Investor Group.
MICHAEL S. MILLER, Planning and Development.
RALPH K. PACKARD, Chief Financial Officer.
GEORGE U. SAUTER, Quantitative Equity Group.
--------------------------------------------------------------------------------
JOHN C. BOGLE
Founder; Chairman and Chief Executive, 1974-1996.
<PAGE>
[SHIP LOGO]
THE VANGUARD GROUP
Post Office Box 2600
Valley Forge, PA 19482-2600
ABOUT OUR COVER
Our cover art evokes both Vanguard's rich past and the course we've set for the
future--our determination to provide superior investment performance and
top-notch service. The image is based on two works: a painting titled The First
Journey of 'Victory,' by the English artist W.L. Wyllie (1851-1931), and a
sculpture of a compass rose on Vanguard's campus near Valley Forge,
Pennsylvania.
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, 500, S&P MidCap
400, and S&P SmallCap 600 are trademarks of The McGraw-Hill Companies, Inc. All
other index names may contain trademarks and are exclusive property of their
respective owners.
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.
(C)2000 The Vanguard Group, Inc.
All rights reserved.
Vanguard Marketing
Corporation, Distributor.
Q9340 122000
