VANGUARD(R)
SELECTED VALUE FUND
[PHOTO OF SHIP]
April 30, 2000
[THE VANGUARD GROUP LOGO]
SEMIANNUAL
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HAVE THE PRINCIPLES OF INVESTING CHANGED?
In a world of frenetic change in business, technology, and the financial
markets, it is natural to wonder whether the basic principles of investing have
changed.
We don't think so.
The most successful investors over the coming decade will be those who
began the new century with a fundamental understanding of risk and who had the
discipline to stick with long-term investment programs.
Certainly, investors today confront a challenging, even unprecedented,
environment. Valuations of market indexes are at or near historic highs. The
strength and duration of the bull market in U.S. stocks have inflated people's
expectations and diminished their recognition of the market's considerable
risks. And the incredible divergence in stock returns--many technology-related
stocks gained 100% or more in 1999, yet prices fell for more than half of all
stocks--has made some investors question the idea of diversification.
And then there is the Internet. Undeniably, it is a powerful medium for
communications and transacting business. For investors, the Internet is a vast
source of information about investments, and online trading has made it
inexpensive and convenient to trade stocks and invest in mutual funds.
However, new tools do not guarantee good workmanship. Information is
not the same as wisdom. Indeed, much of the information, opinion, and rumor that
swirl about financial markets each day amounts to "noise" of no lasting
significance. And the fact that rapid-fire trading is easy does not make it
beneficial. Frequent trading is almost always counterpro-ductive because
costs--even at low commission rates--and taxes detract from the returns that the
markets provide. Sadly, many investors jump into a "hot" mutual fund just in
time to see it cool off. Meanwhile, long-term fund investors are hurt by
speculative trading activity because they bear part of the costs involved in
accommodating purchases and redemptions.
Vanguard believes that intelligent investors should resist short-term
thinking and focus instead on a few time-tested principles:
o Invest for the long term. Pursuing your long-term investment goals is
more like a marathon than a sprint.
o Diversify your investments with holdings in stocks, bonds, and cash
investments. Remember that, at any moment, some part of a diversified portfolio
will lag other parts, and be wary of taking on more risk by "piling onto" the
best-performing part of your holdings. Today's leader could well be tomorrow's
laggard.
o Step back from the daily frenzy of the markets; focus on your overall
asset allocation.
o Capture as much of the market's return as possible by minimizing costs
and taxes. Costs and taxes diminish long-term returns while doing nothing to
reduce the risks you incur as an investor.
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CONTENTS
REPORT FROM THE CHAIRMAN 1 FUND PROFILE 8
THE MARKETS IN PERSPECTIVE 4 PERFORMANCE SUMMARY 10
REPORT FROM THE ADVISER 6 FINANCIAL STATEMENTS 11
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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 5000(R)" and "Wilshire 4500" are trademarks of Wilshire Associates
Incorporated.
<PAGE>
REPORT FROM THE CHAIRMAN
[Photo of John J. Brennan]
John J. Brennan
The stock market displayed a split personality during the six months ended April
30, 2000, the first half of Vanguard Selected Value Fund's fiscal year. For the
first four months, investors enthusiastically embraced technology-related stocks
and shunned value stocks. But then the market made a 180-degree turn, and the
Selected Value Fund, which had declined nearly -11% from November through
February, roared back to gain about 21% during March and April, posting a return
of 8.3% for the full six-month period.
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TOTAL RETURNS
SIX MONTHS ENDED
APRIL 30, 2000
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Vanguard Selected Value Fund 8.3%
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Average Mid-Cap Value Fund* 13.5%
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Russell Midcap Index 17.4%
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Russell Midcap Value Index 2.2%
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*Derived from data provided by Lipper Inc.
The table at right shows the half-year results for the Selected Value
Fund, the average mid-cap value fund, and two unmanaged benchmarks: the Russell
Midcap Index and the value-stock portion of that benchmark, the Russell Midcap
Value Index. As you can see, our return trailed those of the average mid-cap
value fund and the Russell Midcap Index, but exceeded the return of the value
index, which most closely mirrors our investment emphasis.
The Selected Value 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 $10.38 per share on April 30, 2000. The return is adjusted
for a $0.16-per-share dividend paid from net investment income.
THE PERIOD IN REVIEW
The U.S. economy displayed remarkable vigor during the six months. Its staying
power was impressive, too: April marked the 109th month of uninterrupted
expansion--more than nine years without a recession. Preliminary estimates for
the first quarter of 2000 indicated that the economy was growing at a 5.4%
annual rate, a strong follow-up to the previous quarter's astounding 7.3% rate.
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TOTAL RETURNS
-------------------------------------
OCT. 31, 1999, TO FEB. 29 TO
INDEX FEB. 29, 2000 APR. 30, 2000
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Russell 1000 Growth 16.3% 2.1%
Russell 1000 Value -10.7 10.9
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Russell Midcap Growth 56.7% -9.6%
Russell Midcap Value -9.2 12.6
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MSCI EAFE* Growth 18.9% -4.8%
MSCI EAFE* Value -1.4 2.0
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Nasdaq Composite 58.8% -17.7%
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*Morgan Stanley Capital International Europe, Australasia,
Far East Index(divided into its components of growth and value stocks).
A growing economy creates a good climate for stocks, and corporate profits
posted robust gains as well. The overall stock market, as measured by the
Wilshire 5000 Total Market Index, rose 9.7% for the half-year. However, concerns
about inflation and the high valuations of many tech stocks led to frequent and
wide market fluctuations.
The table at right shows the striking shift in leadership from growth
stocks in the first four months of the period to value stocks in the final two.
The Russell Midcap
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Growth Index, for example, saw an astounding 56.7% gain from October 31 through
February 29, followed by a -9.6% decline in March and April. Meanwhile, the
Russell Midcap Value Index went the opposite way. It posted a -9.2% decline from
November through February, and a 12.6% gain in March and April.
The bull market in stocks continued despite three quarter-point increases
in short-term interest rates by the Federal Reserve Board, which boosted its
target federal-funds rate from 5.25% to 6.00%. The yield on 3-month U.S.
Treasury bills responded by climbing 74 basis points (0.74 percentage point), to
5.83% as of April 30. However, long-term interest rates went the other way. The
yield of the 30-year Treasury bond fell 20 basis points, on balance, ending the
half-year at 5.96%, and the yield for the 10-year Treasury note rose just 19
basis points, to 6.21%. The overall bond market, as measured by the Lehman
Brothers Aggregate Bond Index, recorded a 1.4% total return.
PERFORMANCE OVERVIEW
The first four months of the fiscal year seemed, to borrow the famous line from
Yogi Berra, to be a case of deja vu all over again, as Vanguard Selected Value
Fund appeared to be repeating its subpar 1999 performance. Highly priced
technology-related stocks kept getting more highly priced. And the market's
attitude toward the kind of value stocks held by your fund seemed to have turned
from indifference to outright hostility.
But as night follows day, market sentiment switched. Many of the
high-flying tech stocks tumbled, while our share price rose by more than 20% in
the final two months of the period. Selected Value's loyal shareholders had
endured a long wait for such a turnabout to bring some good news. But we
recognize that our fund--and value stocks in general--have a long way to go to
close the performance gap that opened up in recent years.
Selected Value's six-month shortfall versus the Russell Midcap Index,
which comprises both growth and value stocks, can be traced entirely to one
market sector: technology. While tech stocks constituted more than one-quarter
of the assets of the Midcap Index, they accounted on average for only 3% of
Selected Value's assets. Given that tech stocks (both those in the index and
those owned by your fund) gained about 70% during the half-year, this
underweighting was a huge disadvantage for us.
Our portfolio manager, James P. Barrow, is no technophobe. Rather, the
fund's small exposure to the tech sector stems from his disciplined approach to
selecting securities that are selling at below-average prices relative to such
fundamentals as earnings, revenues, and dividends. Few tech stocks fit this
definition, even after the recent declines. But we believe that such
fundamentals are the ultimate drivers of stock prices and that this approach is
a sound long-term investment strategy.
Two sectors where the fund was overweighted compared with the
index--financial services and materials & processing--were market laggards
during the half-year, although our holdings in both sectors did much better than
average. We also benefited from strong stock-picking in the utilities and
health-care groups.
IN SUMMARY
During the first half of our fiscal year, the stock market provided some useful
lessons about unpredictability. Daily price swings were unusually wide, and
there was a sudden change in fashion during the spring, when downtrodden value
stocks finally rose.
Sudden price movements and shifts in market leadership are certain to
occur now and then, but the timing and duration of such movements are extremely
unpredictable.
2
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That is why we advocate diversification and a long-term orientation. Investors
who maintain exposure to the major asset classes through balanced portfolios of
value and growth stock funds, bond funds, and money market funds have generally
found it easier to maintain equilibrium in turbulent times. We urge you to base
your investment plans on your own goals, time horizon, and risk tolerance--and
then to stick with those plans over the long haul.
/s/
John J. Brennan
Chairman and Chief Executive Officer
May 16, 2000
3
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THE MARKETS IN PERSPECTIVE
SIX MONTHS ENDED APRIL 30, 2000
A surging economy, rising corporate profits, and enthusiasm for technology
stocks carried broad stock market indexes higher during the volatile but
generally rewarding six months ended April 30, 2000.
Stocks rose despite a modest pickup in inflation and a rise in interest
rates, both of which did some damage to bond prices. Through the first four
months of the period, the stock market was dominated by optimism about the
long-term outlook for technology, telecommunications, and media companies. But
sentiment then shifted and the tech and telecom groups fell sharply, giving back
some of the spectacular gains achieved over the previous year or so.
For both bond and stock investors, uncertainty centered mainly on how
the Federal Reserve Board would react to the surprising performance of the U.S.
economy, which grew at a 7.3% pace in the final three months of 1999 and at a
still-robust 5.4% during the first quarter of 2000. With U.S. unemployment at a
three-decade low of 3.9%, Fed policymakers grew increasingly concerned that
inflation was bound to worsen. The Fed raised short-term interest rates by 0.25
percentage point three times during the six-month period. These boosts,
following identical increases in June and August of 1999, took the Fed's target
for short-term rates to 6.0%. Yet the economy continued to soar--including even
the housing and automobile sectors, which often are the first to slow down in
response to higher interest rates.
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TOTAL RETURNS
PERIODS ENDED APRIL 30, 2000
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6 MONTHS 1 YEAR 5 YEARS*
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STOCKS
S&P 500 Index 7.2% 10.1% 25.3%
Russell 2000 Index 18.7 18.4 15.3
Wilshire 5000 Index 9.7 12.2 23.9
MSCI EAFE Index 6.8 14.2 10.7
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BONDS
Lehman Aggregate Bond Index 1.4% 1.3% 6.8%
Lehman 10 Year Municipal Bond Index 2.4 -0.3 6.1
Salomon Smith Barney 3-Month
U.S. Treasury Bill Index 2.7 5.1 5.2
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OTHER
Consumer Price Index 1.8% 3.0% 2.4%
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*Annualized.
Inflation gauges provided ambiguous readings. The Consumer Price Index
increased 1.8% and 3.0% for the 6- and 12-month periods ended April 30, but much
of the acceleration in inflation was due to higher energy and food prices. The
core inflation rate, which excludes those sectors, was up a less-ominous 2.2%
over the year.
U.S. STOCK MARKETS
The technology sector, which accounts for about one-quarter of the stock
market's total value, dominated the market during the half-year, despite
suffering a sharp setback late in the period. Even after a -34% fall from March
10 through mid-April, the tech-heavy Nasdaq Composite Index registered a 30.8%
return for the six months.
The overall stock market, as measured by the Wilshire 5000 Total Market
Index, gained 9.7%. There was a decided split in results from large- and
small-capitalization stocks.
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The large-cap S&P 500 Index returned 7.2%, while the rest of the U.S. stock
market gained 19.2%.
Top performers during the half-year were companies in computer software
and hardware, semiconductors, Internet-related businesses, and wireless
communications. Fully half of the 58 companies in the S&P 500's technology group
gained more than 50%, and the average return for tech stocks exceeded 39%. A
number of tech-related companies in the producer-durables sector also posted
impressive gains, and the sector as a whole returned 32%. A return of 34% was
achieved by the oil-drilling and services companies in the "other energy"
category, which benefited from higher oil and gas prices. The worst-performing
sector was consumer staples (-18%), a category that includes supermarket, food,
beverage, and tobacco stocks. Next in line were financial-services companies
(-7%), hurt by higher short-term interest rates, which tend to raise borrowing
costs for banks and can lead to increased loan defaults.
U.S. BOND MARKETS
The Federal Reserve Board's three rate increases succeeded in elevating other
short-term rates. For example, yields of 3-month U.S. Treasury bills rose during
the half-year to 5.83%, an increase of 0.74 percentage point (74 basis points)
that virtually matched the Fed's target. However, long-term rates didn't move
nearly as far. The 10-year Treasury note rose just 19 basis points, to 6.21%, as
of April 30. And yields actually fell a bit for very long-term Treasury bonds, a
result of shrinking supply. Because of the federal government's budget surplus,
the U.S. Treasury decided to reduce issuance of new bonds and to buy back some
of its existing long-term bonds. As investors reacted, the yield of the 30-year
Treasury declined 20 basis points--from 6.16% to 5.96%--during the half-year.
The result of higher short-term rates and relatively stable long-term
rates was an unusual inversion in the Treasury yield curve. Instead of the usual
upward-sloping curve--which shows yields increasing in tandem with
maturities--there was a pronounced drop-off. As of April 30, the yield of
30-year Treasuries was two-thirds of a percentage point below the 6.62% yield on
3-year Treasury notes.
A similar pattern emerged outside the Treasury market, although
long-term yields remained above yields for short-term corporate, municipal, and
mortgage-backed securities. The overall bond market, as measured by the Lehman
Aggregate Bond Index, provided a 1.4% return, as an average price decline of
-2.0% offset most of a 3.4% income return.
INTERNATIONAL STOCK MARKETS
Despite declines in March and April, stock markets in Europe, Asia, and many
emerging markets produced strong half-year gains as investors responded to
improving global economic growth and a rise in corporate merger-and-acquisition
activity. However, many of the gains were slashed for U.S. investors as the
dollar gained strength against most other currencies. (Conversely, when the
dollar falls in value, returns from abroad are enhanced for U.S. investors.)
In U.S.-dollar terms, the overall return from developed foreign markets
was a very solid 6.8%, as measured by the Morgan Stanley Capital International
Europe, Australasia, Far East Index. However, in local currencies, the EAFE
Index return was 16.4%.
In Europe, an average 21.1% gain in local-currency terms was reduced to
8.4% for U.S. investors because of the dollar's strength. Stocks in the Pacific
region, which is dominated by Japan, returned 3.6% in dollars, less than half
the 7.5% gain in local currencies. The Select Emerging Markets Free Index
returned 12.3% in U.S. dollars, with the biggest gains in Turkey (+148%), Russia
(+123%), and Israel (+50%).
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REPORT FROM THE ADVISER
For Vanguard Selected Value Fund, the first half of the fiscal year comprised
two divergent quarters. The first saw a continuation of the most depressing
situation a disciplined investor can experience: Just about all the stocks
demonstrating value characteristics were going down. Meanwhile, companies with
little or no earnings, many of which haven't even a hope of profits, were going
up. We felt the pain of being in the wrong place. Investors redeemed significant
amounts of shares from this and other value funds, chasing stocks and stock
funds that had posted high gains recently (and, in the process, locking in
losses). Things seemed bleak, and then the market changed. Mid-capitalization
value stocks--Selected Value Fund's bailiwick--began to rebound, and over the
rest of the fiscal half-year our share value improved dramatically. We did not
do things any differently--the environment changed. We thank you for your
patience. We expect the reward will be worthwhile.
In our letter to you six months ago, we mentioned that there was
evidence of inflation that the Federal Reserve Board appeared to be missing. Now
these signs can be seen without reading glasses. We expect that record low
unemployment, red-hot consumer demand, and rising prices will evoke a stronger
response from the Fed this month. Further actions by the Fed to raise short-term
interest rates should begin to slow economic activity, which will be a good
thing in the long run.
Corporate profits reported for the first quarter of 2000 were strong,
and your fund's holdings have generally issued good earnings reports. We don't
see many sectors of weakness and, in fact, expect much improved results from our
energy and chemical company holdings.
The dollar has been quite strong versus most major currencies, even in
light of the nation's large negative balance of trade. The reason for the
strength is the significant inflow of investment funds into our markets. Over
the longer term, we would not be surprised to see these flows reverse and the
dollar decline.
Is the bear market in value stocks over? We don't know in an absolute
sense, because it's possible for the overall market to fall from today's levels.
But on a relative basis, mid-cap value stocks are so underpriced that they
should handily outperform both growth and large-cap equities.
So far in calendar 2000, Selected Value is doing better than many other
funds, as you no doubt have noticed. That is because we have maintained its
character as a mid-cap value fund and were positioned to benefit from this
sector's return to favor. Various market indexes have a significant exposure to
the high-technology sector and thus to many nonprofitable companies. In some
cases, the tech weighting is as high as 40%. We, on the other hand, have little
such exposure. Selected Value Fund's price/earnings ratio is only about
two-thirds that of the Russell Midcap Index and about half that of the S&P 500
Index--an all-time low. And, although current yield seems unimportant to "new
era" investors, we believe that a dividend yield more than twice that of the S&P
500 is a valuable incentive.
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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.
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6
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Mid-cap value could be the right place to be on a relative basis for
several years. Those chasing high returns have long since left this sector,
while industry and private-market investors seem to be moving in--as evidenced
by rising takeover activity. We should be well situated to take long-term
advantage of this mismatch in market valuations.
James P. Barrow, Portfolio Manager
Barrow, Hanley, Mewhinney & Strauss, Inc.
May 10, 2000
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FUND PROFILE
SELECTED VALUE FUND
This Profile provides a snapshot of the fund's characteristics as of April 30,
2000, compared where appropriate to an unmanaged index. Key elements of this
Profile are defined on page 9.
PORTFOLIO CHARACTERISTICS INVESTMENT FOCUS
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SELECTED RUSSELL
VALUE MIDCAP [grid]
---------------------------------------------
Number of Stocks 33 766 STYLE VALUE
Median Market Cap $3.2B $7.0B MARKET CAP MEDIUM
Price/Earnings Ratio 14.3x 20.1x
Price/Book Ratio 1.6x 3.3x
Yield 2.6% 1.3%
Return on Equity 13.0% 17.9%
Earnings Growth Rate -3.1% 13.9%
Foreign Holdings 0.0% 0.0%
Turnover Rate 25%* --
Expense Ratio 0.64%* --
Cash Reserves 5.0% --
*Annualized.
TEN LARGEST HOLDINGS
VOLATILITY MEASURES (% OF TOTAL NET ASSETS)
--------------------------------------------- --------------------------------
SELECTED COMSAT Corp. 4.6%
VALUE S&P 500 Vastar Resources, Inc. 4.3
--------------------------------------------- Watson Pharmaceuticals, Inc.4.2
R-Squared 0.54 1.00 Lyondell Chemical Co. 4.0
Beta 1.00 1.00 Dana Corp. 3.8
The BFGoodrich Co. 3.8
Eastman Chemical Co. 3.8
Northeast Utilities 3.8
Genuine Parts Co. 3.6
Pall Corp. 3.5
--------------------------------
Top Ten 39.4%
SECTOR DIVERSIFICATION (% OF COMMON STOCKS)
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APRIL 30, 1999 APRIL 30, 2000
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SELECTED VALUE SELECTED VALUE RUSSELL MIDCAP
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Auto & Transportation.......... 8.3% 9.2% 3.7%
Consumer Discretionary......... 14.1 8.1 14.7
Consumer Staples............... 5.9 2.1 2.6
Financial Services............. 17.6 24.0 14.5
Health Care.................... 7.9 7.2 5.7
Integrated Oils................ 3.2 3.6 1.5
Other Energy................... 2.8 4.5 4.7
Materials & Processing......... 16.9 14.5 6.5
Producer Durables.............. 19.2 9.5 5.8
Technology..................... 0.0 2.4 28.5
Utilities...................... 0.9 8.8 10.6
Other.......................... 3.2 6.1 1.2
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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 period. Funds with
high turnover rates incur higher transaction costs and are more likely to
distribute capital gains (which are taxable to investors).
YIELD. A snapshot of a fund's income from interest and dividends. The yield,
expressed as a percentage of the fund's net asset value, is based on income
earned over the past 30 days and is annualized, or projected forward for the
coming year. The index yield is based on the current annualized rate of
dividends paid on stocks in the index.
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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.
TOTAL INVESTMENT RETURNS: FEBRUARY 15, 1996-APRIL 30, 2000
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SELECTED VALUE FUND RUSSELL RUSSELL
INDEX* INDEX*
FISCAL CAPITAL INCOME TOTAL TOTAL FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN YEAR RETURN RETURN RETURN RETURN
--------------------------------------------------------------------------------
1996 0.7% 0.0% 0.7% 8.3% 1999 -1.4% 0.8% -0.6% 17.1%
1997 30.2 0.7 30.9 28.8 2000** 6.5 1.8 8.3 17.4
1998 -18.1 0.3 -17.8 4.5
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*Russell Midcap Index.
**Six months ended April 30, 2000.
See Financial Highlights table on page 15 for dividend and capital gains
information since the fund's inception.
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED MARCH 31, 2000*
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SINCE INCEPTION
INCEPTION -----------------------
DATE 1 YEAR CAPITAL INCOME TOTAL
--------------------------------------------------------------------------------
Selected Value Fund 2/15/1996 8.36% 2.16% 0.85% 3.01%
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*SEC rules require that we provide this average annual total return information
through the latest calendar quarter.
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FINANCIAL STATEMENTS
APRIL 30, 2000 (UNAUDITED)
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.
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MARKET
VALUE*
SELECTED VALUE FUND SHARES (000)
-------------------------------------------------
COMMON STOCKS (95.0%)
-------------------------------------------------
AUTO & TRANSPORTATION (8.7%)
Dana Corp. 190,800 5,795
Genuine Parts Co. 209,000 5,485
Norfolk Southern Corp. 110,000 1,939
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13,219
------
CONSUMER DISCRETIONARY (7.7%)
o Toys R Us, Inc. 308,100 4,699
o Kmart Corp. 469,900 3,818
Service Corp. International 600,000 3,075
------
11,592
------
CONSUMER STAPLES (1.9%)
UST, Inc. 196,700 2,951
------
FINANCIAL SERVICES (22.7%)
MGIC Investment Corp. 100,000 4,781
XL Capital Ltd. Class A 100,000 4,763
Jefferson-Pilot Corp. 70,800 4,713
Crescent Real Estate, Inc.REIT 272,600 4,668
MBIA, Inc. 85,600 4,232
Deluxe Corp. 161,700 4,073
ProLogis Trust REIT 187,800 3,697
Ryder System, Inc. 160,100 3,552
------
34,479
------
HEALTH CARE (6.9%)
o Watson Pharmaceuticals, Inc. 141,400 6,354
o Coventry Health Care Inc. 260,000 2,763
o Magellan Health Services, Inc. 345,800 1,297
------
10,414
------
INTEGRATED OILS (3.4%)
Kerr-McGee Corp. 100,000 5,175
------
OTHER ENERGY (4.3%)
Vastar Resources, Inc. 80,000 6,450
------
MATERIALS & PROCESSING (13.8%)
Lyondell Chemical Co. 327,600 6,020
Eastman Chemical Co. 110,000 5,754
Millennium Chemicals, Inc. 235,300 4,691
Armstrong World Industries Inc. 227,200 4,445
------
20,910
------
PRODUCER DURABLES (9.0%)
The BFGoodrich Co. 181,700 5,792
Pall Corp. 239,900 5,353
Diebold, Inc. 80,100 2,313
o Lanier Worldwide, Inc. 117,900 228
------
13,686
------
TECHNOLOGY (2.3%)
Harris Corp. 106,800 3,451
------
UTILITIES (8.4%)
COMSAT Corp. 284,280 6,947
Northeast Utilities 265,700 5,713
------
12,660
------
OTHER (5.9%)
ITT Industries, Inc. 150,000 4,734
Brunswick Corp. 219,000 4,202
------
8,936
------
-------------------------------------------------
TOTAL COMMON STOCKS
(Cost $155,067) 143,923
-------------------------------------------------
11
<PAGE>
------------------------------------------------------
FACE MARKET
AMOUNT VALUE*
SELECTED VALUE FUND (000) (000)
------------------------------------------------------
TEMPORARY CASH INVESTMENT (4.4%)
------------------------------------------------------
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
5.75%, 5/1/2000
(Cost $6,758) $6,758 $6,758
------------------------------------------------------
TOTAL INVESTMENTS (99.4%)
(Cost $161,825) 150,681
------------------------------------------------------
OTHER ASSETS AND LIABILITIES (0.6%)
------------------------------------------------------
Other Assets--Note C 1,640
Liabilities (762)
------
878
------------------------------------------------------
NET ASSETS (100%)
------------------------------------------------------
Applicable to 14,604,388 outstanding $.001
par value shares of beneficial interest
(unlimited authorization) $151,559
======================================================
NET ASSET VALUE PER SHARE $10.38
======================================================
*See Note A in Notes to Financial Statements.
oNon-Income-Producing Security.
REIT--Real Estate Investment Trust.
------------------------------------------------------
AMOUNT PER
(000) SHARE
------------------------------------------------------
AT APRIL 30, 2000, NET ASSETS CONSISTED OF:
------------------------------------------------------
Paid in Capital $175,805 $12.04
Undistributed Net
Investment Income 993 .07
Accumulated Net Realized Losses (14,095) (.97)
Unrealized Depreciation--Note E (11,144) (.76)
------------------------------------------------------
NET ASSETS $151,559 $10.38
======================================================
12
<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
SIX MONTHS ENDED APRIL 30, 2000
(000)
--------------------------------------------------------------------------------
INVESTMENT INCOME
INCOME
Dividends $2,444
Interest 88
Security Lending 3
---------
Total Income 2,535
---------
EXPENSES
Investment Advisory Fees--Note B
Basic Fee 313
Performance Adjustment (165)
The Vanguard Group--Note C
Management and Administrative 356
Marketing and Distribution 15
Custodian Fees 6
Auditing Fees 4
Shareholders' Reports 9
---------
Total Expenses 538
--------------------------------------------------------------------------------
NET INVESTMENT INCOME 1,997
--------------------------------------------------------------------------------
REALIZED NET LOSS ON INVESTMENT SECURITIES SOLD (2,089)
--------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) OF INVESTMENT SECURITIES 8,684
--------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $8,592
================================================================================
13
<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
----------------------------
SIX MONTHS YEAR
ENDED ENDED
APR. 30, 2000 OCT. 31, 1999
(000) (000)
--------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income $1,997 2,289
Realized Net Loss (2,089) (11,940)
Change in Unrealized Appreciation (Depreciation) 8,684 123
Net Increase (Decrease) in Net Assets -------------------------
Resulting from Operations 8,592 (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 53,919 152,679
Issued in Lieu of Cash Distributions 2,783 5,686
Redeemed (104,002) (101,391)
Net Increase (Decrease) from Capital -------------------------
Share Transactions (47,300) 56,974
--------------------------------------------------------------------------------
Total Increase (Decrease) (41,735) 41,510
--------------------------------------------------------------------------------
Net Assets
Beginning of Period 193,294 151,784
-------------------------
End of Period $151,559 $193,294
================================================================================
1Shares Issued (Redeemed)
Issued 5,571 14,258
Issued in Lieu of Cash Distributions 292 594
Redeemed (11,084) (9,870)
-------------------------
Net Increase (Decrease) in Shares Outstanding (5,221) 4,982
================================================================================
14
<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,
SIX MONTHS ENDED ------------------------- FEB. 15* TO
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD APR. 30, 2000 1999 1998 1997 OCT. 31, 1996
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.75 $10.23 $12.98 $10.07 $10.00
-------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .13 .12 .07 .06 .04
Net Realized and Unrealized Gain (Loss)
on Investments .66 (.19) (2.31) 3.02 .03
------------------------------------------------------
Total from Investment Operations .79 (.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 $10.38 $ 9.75 $10.23 $12.98 $10.07
===================================================================================================================
TOTAL RETURN 8.25% -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 0.64%** 0.73% 0.65% 0.74% 0.75%**
Ratio of Net Investment Income to Average Net Assets 2.37%** 1.31% 0.58% 0.60% 0.75%**
Portfolio Turnover Rate 25%** 102% 47% 32% 25%
===================================================================================================================
*Inception.
**Annualized.
</TABLE>
15
<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 six months ended April 30, 2000, the advisory fee represented an
effective annual basic rate of 0.37% of the fund's average net assets before a
decrease of $165,000 (0.20%) based on performance.
C. The Vanguard Group furnishes at cost corporate management, administrative,
marketing, and distribution services. The costs of such services are allocated
to the fund under methods approved by the Board of Trustees. The fund has
committed to provide up to 0.40% of its net assets in capital contributions to
Vanguard. At April 30, 2000, the fund had contributed capital of $28,000 to
Vanguard (included in Other Assets), representing 0.02% of the fund's net assets
and 0.03% of Vanguard's capitalization. The fund's Trustees and officers are
also Directors and officers of Vanguard.
D. During the six months ended April 30, 2000, the fund purchased $20,950,000 of
investment securities and sold $69,704,000 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.
E. At April 30, 2000, net unrealized depreciation of investment securities for
financial reporting and federal income tax purposes was $11,144,000, consisting
of unrealized gains of $13,162,000 on securities that had risen in value since
their purchase and $24,306,000 in unrealized losses on securities that had
fallen in value since their purchase.
16
<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 eight 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 J. BRENNAN (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
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 Individual Investor Group.
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.
17
<PAGE>
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Valley Forge, Pennsylvania 19482-2600
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.
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.
Q9342 062000
(c)2000 The Vanguard Group, Inc.
All rights reserved.
Vanguard Marketing
Corporation, Distributor.
