<PAGE> 1
CHAIRMAN'S LETTER
FELLOW SHAREHOLDER:
The six months ended June 30, the first half of Wellesley Income Fund's
1995 fiscal year, was a highly favorable period for stocks and bonds. The stock
market, led by the blue-chip stocks, leaped upward to post one of the strongest
six-month rallies on record. And long-term bonds, rebounding from a tough 1994,
performed in like fashion.
During the six months ended June 30, Wellesley Income Fund's total return
(capital change plus income) was +16.3%. This return, to be sure, was less than
might have been expected, given the powerful returns achieved by the two
unmanaged indexes (for stocks, the Standard & Poor's 500 Composite Stock Price
Index; for bonds, the Lehman Long-Term Corporate Bond Index). However, our
performance was excellent relative to what is probably the most relevant
standard we use: the average income mutual fund, which turned in a return of
+12.0%, far short of our gain. The figures follow:
<TABLE>
<CAPTION>
----------------------------------------------------------
Total Return
----------------
Six Months Ended
June 30, 1995
----------------------------------------------------------
<S> <C>
WELLESLEY INCOME FUND +16.3%
----------------------------------------------------------
LEHMAN LONG-TERM CORPORATE +17.0%
STANDARD & POOR'S 500 STOCK INDEX +20.2
AVERAGE INCOME FUND +12.0
----------------------------------------------------------
</TABLE>
The Fund's total return is based on net asset values of $17.05 per share on
December 31, 1994, and $19.24 on June 30, 1995, with the latter figure adjusted
to take into account the reinvestment of our two quarterly dividends from net
investment income totaling $.56 per share. At June 30, 1995, our annualized
dividend yield was 6.0%.
THE PERIOD IN REVIEW
The overpowering message of the splendid performance of bonds thus far
in 1995 is clear: financial markets change quickly and unpredictably! Bond
prices fell completely apart during 1994, with the yield on the long-term U.S.
Treasury bond rising from 6.4% to 7.8% on balance. This rise of 140 basis
points engendered a -16% decline in the price of the bond. Interest rates on
the short-term U.S. Treasury bond also soared, from 4.5% to 7.8%, an even
larger increase of 330 basis points. However, given its shorter maturity (3
years versus a 30-year maturity for the long bond), short-term Treasuries
declined by but -6% in value.
This year, of course, the story is precisely the opposite. The yield on
the long-term U.S. Treasury bond has fallen to 6.6% (not so far from its level
when 1994 began), and the yield on the short-term U.S. Treasury bond has fallen
to 5.9%. Virtually none of the "experts" expected these declines. Indeed, The
Wall Street Journal survey of eminent economists and professional money
managers last December reflected a consensus yield prediction of 7.9% for the
long Treasury on June 30, 1995 (i.e., a small increase in rates). So much for
predictions!
The surprise rally of the past six months has been importantly based on
the market's perception that the Federal Reserve Board seems to have completed
its program to drive interest rates upward. After raising the Fed funds rate
(at which banks lend to one another) fully six times during 1994, the Fed
boosted rates on but one occasion during the first half of 1995.*
The Fed's actions were based largely on the perception that the threat
of inflation had diminished and on evidence of a softening of U.S. economic
growth. Bond market participants are saying, in effect, that we are in "the
best of all possible worlds": steady economic growth without significant
inflation. The idea that these two often-warring factors have finally made
peace, however, is not something one should take for granted.
As has been so often the case in recent years, the bond market set the
tone for the stock market, which responded by springing to life as 1995 began.
Since then, it has moved upward, week after week, in virtually straight-line
fashion, delighting the bulls and astonishing the bears. The stock market's
rise seems to
------------------
*After the conclusion of the period covered by this Semi-Annual Report, the Fed
actually reduced the short-term rate by 1/4 of 1%, bringing this key rate to
53/4% versus 3% one and one-half years ago.
1
<PAGE> 2
have been based on the same factors as the bond market's rise, further
accelerated by record-breaking corporate profits and, in my view at least, a
whiff of speculation in the air.
As you would expect, a strong bull market, in which technology stocks
(which provide low, or even no, dividend yields) have been the leaders and
utility stocks (which provide well-above-average yields) have been the
laggards, is not the best of environments for an income-oriented mutual fund
like Wellesley. Nonetheless, our stock position (36% of assets) provided a gain
of +18.4%, very close to the gain in the Standard & Poor's 500 Index.
Specifically, 28% of our stocks were utilities (versus 13% for the Index), and
we held no technology stocks (versus 10% for the Index). Together these two
areas were responsible for our modest relative shortfall.
Our return relative to other comparable mutual funds was singularly
strong, with Wellesley's total return of +16.3% representing a return premium
of 4.3 percentage points over the +12.0% return achieved by the average
income-oriented mutual fund. Two fundamental factors largely accounted for our
success relative to comparable funds. First, virtually all of our fixed income
assets are invested in investment-grade bonds, which led their lower-quality
brethren by a wide margin. Second, given the strength of the bond and stock
markets over the past six months, we gained a nice advantage by being
fully-invested compared to the average income fund, which held more than 6% of
its assets in cash.
With our fine results so far this year (especially compared with our
slight lag relative to the average income-oriented mutual fund last year),
Wellesley Income Fund continues to provide long-term superiority over our peer
group. Our annualized ten-year return is +11.9%, versus +9.9% for our peers. It
is this extended record, not our record in any year (or half year), that is
important.
SUMMING UP
During the past six months, both the bond market and the stock market have
come a long way in a short time. It would be, I believe, extremely unrealistic
to expect comparable returns during the second half of 1995. In my letter to
you in Wellesley Income Fund's 1994 Annual Report, I noted that "the
probabilities now favor better total returns for bonds in the coming year"
(which would favor higher-yielding stocks as well). I urged you to "stay the
course" come what may in the financial markets. So far in 1995, that strategy
has been fully justified. I reiterate it today.
Sincerely,
/s/ JOHN C. BOGLE
----------------------
John C. Bogle
Chairman of the Board July 21, 1995
Note: Mutual fund data from Lipper Analytical Services, Inc.
AVERAGE ANNUAL TOTAL RETURNS--THE CURRENT YIELD QUOTED IN THE CHAIRMAN'S
LETTER IS CALCULATED IN ACCORDANCE WITH SEC GUIDELINES. THE AVERAGE ANNUAL
TOTAL RETURNS FOR THE FUND (PERIODS ENDED JUNE 30, 1995) ARE AS FOLLOWS:
<TABLE>
<CAPTION>
10 YEARS
-----------------------------------
INCEPTION TOTAL INCOME CAPITAL
DATE 1 YEAR 5 YEARS RETURN RETURN RETURN
--------- -------- --------- --------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
WELLESLEY INCOME FUND 7/1/70 +16.73% +11.65% +11.91% +7.89% +4.02%
</TABLE>
ALL OF THESE DATA REPRESENT PAST PERFORMANCE. THE INVESTMENT RETURN AND
PRINCIPAL VALUE OF AN INVESTMENT WILL FLUCTUATE SO THAT INVESTORS' SHARES,
WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST.
2
<PAGE> 3
TOTAL INVESTMENT RETURN TABLE
The following table illustrates the results of a single-share investment in
Vanguard/Wellesley Income Fund for the 25-year period ended June 30, 1995.
During the period illustrated, stock and bond prices fluctuated widely; these
results should not be considered a representation of the dividend income or
capital gain or loss that may be realized from an investment made in the Fund
today.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------------
PERIOD PER SHARE DATA TOTAL INVESTMENT RETURN*
--------------------------------------------------------------------------------------------------------------------------------
Wellesley Income Fund Composite
Value with Income ------------------------------- Stock/Bond
Year Ended Net Asset Capital Gains Income Dividends & Capital Capital Income Total Index**
December 31 Value Distributions Dividends Gains Reinvested Return Return Return Total Return
--------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1971 $12.56 $.38 $ .85 $ 13.84 + 7.6% + 7.4% +15.0% +12.1%
--------------------------------------------------------------------------------------------------------------------------------
1972 12.66 .26 .82 15.19 + 2.9 + 6.8 + 9.7 +11.4
--------------------------------------------------------------------------------------------------------------------------------
1973 11.40 -- .83 14.66 -10.0 + 6.5 - 3.5 - 4.4
--------------------------------------------------------------------------------------------------------------------------------
1974 9.84 -- .82 13.71 -13.7 + 7.3 - 6.4 -14.2
--------------------------------------------------------------------------------------------------------------------------------
1975 10.69 -- .82 16.11 + 8.6 + 8.9 +17.5 +24.4
--------------------------------------------------------------------------------------------------------------------------------
1976 12.23 -- .88 19.86 +14.4 + 8.9 +23.3 +22.0
--------------------------------------------------------------------------------------------------------------------------------
1977 11.81 -- .93 20.71 - 3.4 + 7.7 + 4.3 - 0.8
--------------------------------------------------------------------------------------------------------------------------------
1978 11.27 -- .96 21.46 - 4.6 + 8.2 + 3.6 + 2.2
--------------------------------------------------------------------------------------------------------------------------------
1979 10.98 -- 1.00 22.79 - 2.6 + 8.8 + 6.2 + 3.8
--------------------------------------------------------------------------------------------------------------------------------
1980 11.08 -- 1.14 25.49 + 0.9 +11.0 +11.9 + 9.7
--------------------------------------------------------------------------------------------------------------------------------
1981 10.74 -- 1.25 27.70 - 3.1 +11.8 + 8.7 - 1.8
--------------------------------------------------------------------------------------------------------------------------------
1982 11.82 -- 1.26 34.16 +10.1 +13.2 +23.3 +36.5
--------------------------------------------------------------------------------------------------------------------------------
1983 12.66 -- 1.31 40.51 + 7.1 +11.5 +18.6 +13.3
--------------------------------------------------------------------------------------------------------------------------------
1984 13.28 -- 1.37 47.25 + 4.9 +11.7 +16.6 +13.6
--------------------------------------------------------------------------------------------------------------------------------
1985 15.31 .10 1.38 60.20 +16.0 +11.4 +27.4 +29.3
--------------------------------------------------------------------------------------------------------------------------------
1986 16.27 .47 1.33 71.24 + 9.2 + 9.1 +18.3 +18.7
--------------------------------------------------------------------------------------------------------------------------------
1987 14.57 .38 1.04 69.88 - 8.1 + 6.2 - 1.9 + 2.8
--------------------------------------------------------------------------------------------------------------------------------
1988 15.26 -- 1.23 79.39 + 4.7 + 8.9 +13.6 +12.6
--------------------------------------------------------------------------------------------------------------------------------
1989 16.82 .24 1.31 96.00 +11.8 + 9.1 +20.9 +21.0
--------------------------------------------------------------------------------------------------------------------------------
1990 16.02 .08 1.30 99.61 - 4.3 + 8.1 + 3.8 + 3.1
--------------------------------------------------------------------------------------------------------------------------------
1991 18.08 -- 1.27 121.10 +12.9 + 8.7 +21.6 +24.3
--------------------------------------------------------------------------------------------------------------------------------
1992 18.16 .21 1.21 131.60 + 1.6 + 7.1 + 8.7 + 8.7
--------------------------------------------------------------------------------------------------------------------------------
1993 19.24 .40 1.14 150.88 + 8.2 + 6.4 +14.6 +12.4
--------------------------------------------------------------------------------------------------------------------------------
1994 17.05 .24 1.11 144.18 -10.2 + 5.8 - 4.4 - 3.3
--------------------------------------------------------------------------------------------------------------------------------
1995 (6/30) 19.24 -- .56 167.68 +12.8 + 3.5 +16.3 +18.1
--------------------------------------------------------------------------------------------------------------------------------
CUMULATIVE TOTAL +1,293.9% +1,089.9%
--------------------------------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN +11.4% +10.6%
--------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Includes reinvestment of income dividends and any capital gains distributions
for both the Fund and the Index.
** Composite index shown for comparative purposes is composed of the Standard &
Poor's 500 Stock Index (35%) and Salomon Brothers High-Grade Bond Index (65%)
from December 31, 1970, through December 31, 1972, and Standard & Poor's 500
Stock Index (35%) and Lehman Long-Term Corporate Bond Index (65%) thereafter.
Note: The initial net asset value was $12.03 on December 31, 1970. No
adjustment has been made for income taxes payable by shareholders on reinvested
income dividends and capital gains distributions.
3
<PAGE> 4
REPORT FROM THE INVESTMENT ADVISER
In February 1995, the Federal Reserve Board raised short-term rates for
the seventh time since February 1994. The economy finally felt the cumulative
effects of higher interest rates as growth slowed during the first six months of
this year. Long-term interest rates have declined by 11/4% since the end of last
year, giving a large boost to Wellesley's net asset value. The performance of
Wellesley Income Fund remains extremely sensitive to the general direction of
long-term interest rates because of the long average maturity of the Fund's
bonds and because of our meaningful weighting in high-yielding,
interest-rate-sensitive stocks. Both the bond and stock segments of the
Wellesley portfolio have had generous positive returns thus far in 1995.e
In the first half of the fiscal year ended June 30, 1995, the Fund
maintained its traditional posture of 60% to 65% of assets invested in
longer-term bonds of investment-grade quality, and 35% to 40% of assets invested
in dividend-paying equities. We do not anticipate a change in that strategy
going forward.
INVESTMENT OUTLOOK FOR SECOND HALF OF 1995
The decline in rates has set the stage for a rebound in housing and for
an increase in refinancings of fixed rate mortgages. Thus, the Federal Reserve
should achieve its "soft landing" for the economy and avoid a recession. Soft
landings are temporary slowdowns in the pace of economic activity, and are
usually short in duration. The Federal Reserve engineered the current slowdown
such that a reacceleration in growth should begin late this year or early next.
This suggests that we will not see a recession or an economic scenario which
would cause rates to drop much further in the near term. We expect that
inflation will remain moderate, which should prevent long rates from rising
significantly over the short run. We also believe that the Federal Reserve will
not have to ease further, with unemployment under 6% and with capacity
utilization still relatively high.
Fiscal and monetary policies are steering a course towards more
consistent and steady growth with low inflation over the long term; however,
weakness in the dollar still reveals skepticism by global investors in the
staying power of politicians and monetary authorities. As evidence develops that
lower deficits and moderate inflation are sincere goals, the markets, both bond
and stock, can rally. However, we do not expect the second half of the fiscal
year to repeat the sizzling absolute returns handed to investors in the first
half of 1995. Some retrenchment must be expected.
We are mildly optimistic about the prospects for the stock market. The
economy should rebound after the recent drop in rates, and bonds look less
competitive after the drop in rates. Strong corporate earnings can still support
the broad market averages, in contrast, for instance, to 1987 when the market
raced ahead of earnings as rates were rising.
STRATEGY IN 1995
Our strategy remains consistent with that of previous years. The dominant
theme which guides the investment strategy for Wellesley Income Fund is our
ongoing obligation to shareholders to achieve an attractive absolute level of
income with high-quality securities. Our long-term goal is to achieve
increases in Wellesley's dividend by purchasing stocks of strong companies which
are able to pass onto shareholders higher dividends generated from rising
earnings spurred by successful business strategies. Since we wrote to you six
months ago, the equity portfolio has had thirty-one dividend increases. We avoid
investments in bonds rated below investment-grade and in stocks with ultra-high
dividends which may not be sustainable over the longer term.
STOCK TRANSACTIONS
We scaled back on the stocks of energy companies as share prices edged ahead
of eroding fundamentals. Our weighting in the energy sector declined to 13% of
the stock portfolio which is toward the low end of our normal 10% to 25%
range. We also scaled back our weighting in the finance sector as the decline in
interest rates pushed the stocks toward our target prices. We shifted most of
the proceeds from these two sectors into utilities and REITs, which have lagged
this year, but offer very compelling valuations and great dividend yields. Our
utility weighting increased by close to 100 basis points during the quarter, the
third quarter in a row that we have increased our utility weighting. We continue
to search
4
<PAGE> 5
and to find selective values in the utility industry, and during the
last three months we had an opportunity to increase our weighting in the
regional phone companies as the stocks weakened due to concerns of growing
competition.
Given the diminished dividend growth potential, however, we have no
plans to restore utility weightings to their historical levels. After a good
1994, REITs have lagged the market in 1995. The stocks typically are very
interest-rate-sensitive, but have not kept up with the moves in both the equity
and bond markets, leaving their valuations very compelling. The REITs continue
to provide us with the fundamentals which we expected, that is, very high
initial dividend yields and dividends which should grow mid-to-high single digit
percent per year based on underlying cash flow strength.
The majority of Wellesley's stocks are New York Stock Exchange listed
issues and generally have above-average yields. The average yield on our stocks
is currently 88% higher than the yield on the average stock in the marketplace.
BOND TRANSACTIONS
The Fund's bond investments will continue to have a long average maturity and
excellent call protection, which should lend sustainability to the Fund's
income stream, even though the Fund is subject to price fluctuations in the
short term. The Fund's bond assets currently have an average maturity of 15
years, an average coupon of 7.2%, and an average quality rating of "Aa." Over
ninety percent of the bond assets are rated "A" or better. Over the long term,
we believe that high-quality, long-term bonds with call protection will provide
attractive real returns.
SUMMARY
After the large decrease in rates and the strong stock market this year,
resulting in the Fund's strongly positive total return, a caution flag must be
raised. Some setback should be expected and tolerated. We will nevertheless
continue to utilize the same investment disciplines that have been utilized for
Wellesley Income Fund over the past two decades.
Respectfully,
Earl E. McEvoy
Senior Vice President
John R. Ryan
Senior Vice President
Wellington Management Company
July 11, 1995
5
<PAGE> 6
FINANCIAL STATEMENTS
(unaudited)
June 30, 1995
STATEMENT OF NET ASSETS
<TABLE>
<CAPTION>
Face Market
Amount Value
(000) (000)+
----------------------------------------------------------
<S> <C> <C>
CORPORATE BONDS (39.8%)
----------------------------------------------------------
ASSET-BACKED SECURITIES (1.0%)
Discover Card Trust
6.25%, 8/16/00 $ 20,000 $ 19,956
6.80%, 6/16/00 25,000 25,227
NationsBank Credit Card Trust
6.00%, 12/15/05 20,000 19,162
----------
GROUP TOTAL 64,345
----------
----------------------------------------------------------
FINANCE (9.1%)
Allstate Corp.
7.50%, 6/15/13 20,000 19,874
Bank of Boston
6.625%, 12/1/05 15,000 14,473
6.875%, 7/15/03 15,000 14,834
Bank of New York
7.875%, 11/15/02 15,000 15,738
Boatmen's Bancshares, Inc.
7.625%, 10/1/04 10,000 10,453
Chase Manhattan Corp.
6.50%, 8/1/05 15,000 14,372
Chemical Bank
8.625%, 5/1/02 20,000 21,815
Citicorp
7.625%, 5/1/05 10,000 10,414
Comerica, Inc.
7.125%, 12/1/13 15,000 13,865
8.375%, 7/15/24 5,000 5,260
CoreStates Capital
6.625%, 3/15/05 20,000 19,400
First Bank NA
7.55%, 6/15/04 8,000 8,328
First Bank System
6.625%, 5/15/03 10,000 9,797
7.625%, 5/1/05 7,500 7,901
First Chicago Corp.
6.375%, 1/30/09 5,000 4,610
7.625%, 1/15/03 15,000 15,537
First Union Corp.
6.00%, 10/30/08 15,000 13,313
Fleet Financial Group
6.875%, 3/1/03 30,000 29,859
7.625%, 12/1/99 15,000 15,548
Ford Motor Credit Corp.
5.625%, 12/15/98 20,000 19,479
General Electric Capital Corp.
8.125%, 5/15/12 10,000 10,975
General Motors Acceptance Corp.
7.00%, 9/15/02 30,000 30,036
J. P. Morgan & Co., Inc.
5.75%, 10/15/08 20,000 17,786
6.25%, 1/15/09 20,000 18,769
Morgan Guaranty Trust
7.375%, 2/1/02 20,000 20,630
NBD Bank
6.25%, 8/15/03 20,000 19,192
National City Cleveland Bank
6.50%, 5/1/03 10,000 9,753
National City Corp.
7.20%, 5/15/05 20,000 20,524
NationsBank Corp.
7.75%, 8/15/04 20,000 20,982
Norwest Corp.
6.00%, 3/15/00 15,000 14,695
6.65%, 10/15/23 20,000 18,006
Norwest Financial Corp.
7.95%, 5/15/02 10,000 10,726
Republic New York Corp.
5.875%, 10/15/08 15,000 13,559
Society National Bank
7.85%, 11/1/02 7,500 7,870
State Street Boston
5.95%, 9/15/03 5,000 4,703
Suntrust Banks
6.125%, 2/15/04 20,000 18,998
7.375%, 7/1/02 16,000 16,581
Wachovia Corp.
6.375%, 4/15/03 20,000 19,532
Wells Fargo & Co.
6.125%, 11/1/03 15,000 14,174
----------
GROUP TOTAL 592,361
----------
----------------------------------------------------------
INDUSTRIAL (13.2%)
Air Products & Chemicals
7.375%, 5/1/05 15,000 15,782
Alcan Aluminium Ltd.
9.625%, 7/15/19 7,000 7,903
Aluminum Co. of America
5.75%, 2/1/01 20,000 19,279
American Home Products
7.90%, 2/15/05 15,050 16,175
Amoco Canada Petroleum Co.
6.75%, 9/1/23 25,000 23,257
Archer-Daniels-Midland Co.
8.375%, 4/15/17 5,000 5,628
BP America
7.875%, 5/15/02 15,000 16,114
Burlington Resources
7.15%, 5/1/99 10,000 10,214
</TABLE>
6
<PAGE> 7
<TABLE>
<CAPTION>
Face Market
Amount Value
(000) (000)+
----------------------------------------------------------
<S> <C> <C>
Chevron Corp.
9.375%, 6/1/16 $ 10,000 $ 10,553
Coca-Cola Co.
6.00%, 7/15/03 10,000 9,578
Coca-Cola Enterprises, Inc.
7.875%, 2/1/02 10,000 10,627
E.I. du Pont de Nemours & Co.
8.25%, 1/15/22 30,000 31,378
Eastman Chemical
7.25%, 1/15/24 25,000 24,371
Eaton Corp.
6.50%, 6/1/25 10,000 9,850
7.625%, 4/1/24 10,000 10,229
Ford Motor Co.
8.875%, 1/15/22 10,000 11,504
General Motors Corp.
9.40%, 7/15/21 20,000 23,878
Georgia-Pacific Corp.
8.625%, 4/30/25 10,000 10,411
9.50%, 5/15/22 10,000 11,087
Gillette Co.
5.75%, 10/15/05 20,000 18,654
6.25%, 8/15/03 10,000 9,750
Hertz Corp.
6.00%, 2/1/01 15,000 14,463
International Paper Co.
7.625%, 1/15/07 15,000 15,893
Johnson & Johnson
6.73%, 11/15/23 20,000 19,189
Johnson Controls
8.20%, 6/15/24 6,000 6,331
Knight-Ridder, Inc.
8.50%, 9/1/01 10,000 10,875
Eli Lilly & Co.
7.125%, 6/1/25 30,000 29,491
Lockheed Corp.
6.75%, 3/15/03 7,000 6,997
McDonald's Corp.
7.375%, 7/15/33 8,500 8,514
Mobil Corp.
8.625%, 8/15/21 20,000 23,362
Monsanto Co.
6.00%, 7/1/00 18,750 18,400
8.13%, 12/15/06 5,000 5,366
8.20%, 4/15/25 20,000 21,175
Motorola Inc.
7.50%, 5/15/25 30,000 31,017
New York Times
8.25%, 3/15/25 20,000 21,351
Norfolk Southern Corp.
9.00%, 3/1/21 5,000 6,023
Northrop-Grumman
9.375%, 10/15/24 15,000 16,916
PPG Industries, Inc.
9.00%, 5/1/21 10,000 11,844
Philips Electronic NV
7.75%, 4/15/04 10,000 10,558
Phillips Petroleum Co.
9.375%, 2/15/11 10,000 11,651
Praxair Inc.
6.75%, 3/1/03 25,000 24,583
Procter & Gamble Co.
9.36%, 1/1/21 30,000 36,557
Rohm & Haas Co.
9.80%, 4/15/20 10,000 12,284
Talisman Energy
7.125%, 6/1/07 20,000 19,943
Tenneco, Inc.
7.875%, 10/1/02 20,000 21,005
Texaco Capital
8.625%, 4/1/32 30,000 34,541
United Parcel Service
8.375%, 4/1/20 10,000 11,402
Unocal Corp.
8.75%, 8/15/01 10,000 11,013
WMX Technologies
6.375%, 12/1/03 20,000 19,439
Wal-Mart Stores Inc.
5.875%, 10/15/05 25,000 23,371
6.50%, 6/1/03 10,000 9,878
Weyerhaeuser Co.
8.50%, 1/15/25 20,000 22,599
Whirlpool Corp.
9.00%, 3/1/03 10,000 11,320
Witco Chemical Corp.
6.60%, 4/1/03 5,000 4,951
----------
GROUP TOTAL 858,524
----------
----------------------------------------------------------
UTILITY (16.5%)
AT&T CORP.
6.75%, 4/1/04 10,000 10,005
7.125%, 1/15/02 33,750 34,709
8.625%, 12/1/31 40,000 43,185
Arizona Public Service Co.
6.625%, 3/1/04 10,000 9,802
9.50%, 4/15/21 10,000 10,980
Baltimore Gas & Electric Co.
7.25%, 7/1/02 15,000 15,360
8.375%, 8/15/01 10,000 10,890
</TABLE>
7
<PAGE> 8
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Face Market
Amount Value
(000) (000)+
----------------------------------------------------------
<S> <C> <C>
BellSouth Telecommunications
6.25%, 5/15/03 $ 12,000 $ 11,758
8.25%, 7/1/32 35,000 38,061
British Telecom Finance
9.625%, 2/15/19 5,000 5,672
Carolina Power & Light Co.
6.875%, 8/15/23 10,000 9,397
Carolina Telephone &
Telegraph Co.
5.75%, 8/15/00 5,000 4,837
Central Illinois Public
Service Co.
6.375%, 4/1/03 4,000 3,938
Chesapeake & Potomac
Telephone Co., MD
7.15%, 5/1/23 20,000 19,684
Chesapeake & Potomac
Telephone Co., VA
7.875%, 1/15/22 15,000 16,220
Cincinnati Gas & Electric Co.
6.90%, 6/1/25 9,500 9,473
7.20%, 10/1/23 10,000 9,581
Coastal Corp.
8.125%, 9/15/02 10,000 10,524
9.75%, 8/1/03 11,275 12,889
10.00%, 2/1/01 27,000 30,635
Commonwealth Edison Co.
7.375%, 9/15/02 10,000 10,204
Consolidated Edison Co. of NY
6.375%, 4/1/03 20,000 19,476
Duke Power Co.
5.875%, 6/1/01 19,900 19,286
7.00%, 7/1/33 10,000 9,479
Enron Corp.
7.00%, 8/15/23 10,000 9,155
Florida Power & Light Co.
5.375%, 4/1/00 12,500 11,970
GTE Florida Inc.
6.31%, 12/15/02 20,000 19,573
Houston Lighting & Power Co.
7.50%, 7/1/23 20,000 19,765
Illinois Bell Telephone Co.
6.625%, 2/1/25 10,000 9,092
7.25%, 3/15/24 20,000 19,527
Illinois Power Co.
5.625%, 4/15/00 10,000 9,564
6.50%, 8/1/03 10,000 9,722
7.50%, 7/15/25 10,000 9,654
Iowa-Illinois Gas &
Electric Co.
6.95%, 10/15/25 5,000 4,689
Kansas Gas & Electric Co.
6.50%, 8/1/05 6,500 6,311
Kentucky Utilities
7.92%, 5/15/07 5,000 5,422
MCI Communications Corp.
7.125%, 1/20/00 15,000 15,383
7.50%, 8/20/04 15,000 15,739
Michigan Bell Telephone Co.
7.50%, 2/15/23 35,000 35,236
Michigan Consolidated Gas
8.25%, 5/1/14 3,200 3,534
Mountain States Telephone Co.
9.50%, 5/1/00 1,500 1,683
New England Telephone Co.
6.875%, 10/1/23 15,000 14,182
9.00%, 8/1/31 10,000 11,524
New Jersey Bell Telephone Co.
8.00%, 6/1/22 35,000 38,228
New York Telephone Co.
6.50%, 3/1/05 30,000 29,423
Northern States Power Co.
6.375%, 4/1/03 8,000 7,861
7.125%, 7/1/25 25,000 24,650
Ohio Bell Telephone Co.
6.125%, 5/15/03 15,000 14,619
Pacific Bell Telephone Co.
7.00%, 7/15/04 5,000 5,078
7.125%, 3/15/26 25,000 24,303
7.25%, 7/1/02 10,000 10,384
Pacific Gas & Electric Co.
8.25%, 11/1/22 25,000 26,288
PacifiCorp
6.625%, 6/1/07 10,000 9,827
PECO Energy Corp.
6.50%, 5/1/03 30,000 29,172
Pennsylvania Power & Light Co.
6.50%, 4/1/05 15,000 14,561
6.75%, 10/1/23 9,000 8,228
Southern California Edison Co.
6.25%, 6/15/03 6,050 5,862
8.875%, 6/1/24 10,000 10,440
Southern California Gas Co.
6.875%, 11/1/25 15,000 13,862
Southwestern Bell Telephone Co.
7.25%, 7/15/25 15,000 14,534
Southwestern Public Service Co.
7.25%, 7/15/04 10,000 10,326
8.20%, 12/1/22 12,500 13,313
</TABLE>
8
<PAGE> 9
<TABLE>
<CAPTION>
Face Market
Amount Value
(000) (000)+
----------------------------------------------------------
<S> <C> <C>
Texas Utilities Co.
6.75%, 7/1/05 $ 10,000 $ 9,888
8.00%, 6/1/02 10,000 10,655
9.75%, 5/1/21 10,000 11,425
Union Electric Co.
6.75%, 10/15/99 7,250 7,312
6.875%, 8/1/04 10,000 10,110
U.S. West Communications
7.50%, 6/15/23 45,000 44,519
Virginia Electric & Power Co.
5.875%, 4/1/00 13,000 12,662
6.00%, 8/1/02 10,000 9,678
6.75%, 10/1/23 20,000 18,420
Wisconsin Gas Co.
6.60%, 9/15/13 2,500 2,375
Wisconsin Public Service Co.
7.30%, 10/1/02 5,000 5,150
8.80%, 9/1/21 5,000 5,698
----------
GROUP TOTAL 1,066,621
----------
----------------------------------------------------------
TOTAL CORPORATE BONDS
(Cost $2,529,851) 2,581,851
----------------------------------------------------------
U.S. GOVERNMENT & AGENCY
OBLIGATIONS (23.0%)
----------------------------------------------------------
U.S. GOVERNMENT SECURITIES (9.7%)
U.S. Treasury Bonds
7.25%, 5/15/16 225,000 238,464
8.125%, 8/15/19 50,000 58,172
U.S. Treasury Notes
5.75%, 8/15/03 50,000 48,477
6.875%, 10/31/96 20,000 20,266
7.125%, 2/29/00 250,000 261,133
----------
GROUP TOTAL 626,512
----------
----------------------------------------------------------
AGENCY BONDS AND NOTES (2.1%)
Federal Home Loan Mortgage Corp.
8.14%, 9/29/04 25,000 26,426
Federal National Mortgage Assn.
6.625%, 4/10/03 25,000 24,652
Tennessee Valley Authority
6.125%, 7/15/03 16,400 15,862
7.75%, 12/15/22 25,000 24,691
8.625%, 11/15/29 40,000 43,916
----------
GROUP TOTAL 135,547
----------
----------------------------------------------------------
MORTGAGE-BACKED SECURITIES (11.2%)
Federal National Mortgage Assn.
6.00%, 9/1/01 1,079 1,062
7.00%, 12/1/07-1/1/08 21,757 21,796
7.50%, 6/1/19-1/1/23 7,500 7,529
Government National
Mortgage Assn.
6.50%, 6/15/08-10/15/24 505,451 487,058
7.00%, 4/15/17-6/15/24 151,375 149,231
7.50%, 5/15/16-8/15/22 59,720 60,102
----------
GROUP TOTAL 726,778
----------
----------------------------------------------------------
TOTAL U.S. GOVERNMENT & AGENCY
OBLIGATIONS
(Cost $1,425,073) 1,488,837
----------------------------------------------------------
COMMON STOCKS (35.2%)
----------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
----------------------------------------------------------
Shares
----------
<S> <C> <C>
BASIC MATERIALS (3.2%)
Dow Chemical Co. 405,000 29,109
E.I. du Pont de Nemours & Co. 408,700 28,098
Federal Paper Board Co., Inc. 151,700 5,366
Kimberly-Clark Corp. 730,000 43,709
Union Camp Corp. 972,900 56,306
Witco Chemical Corp. 1,286,500 41,490
----------
GROUP TOTAL 204,078
----------
----------------------------------------------------------
CONSUMER CYCLICAL (3.0%)
Ford Motor Co. 2,081,000 61,910
Kmart Corp. 450,000 6,581
Eastman Kodak Co. 604,800 36,666
J.C. Penney Co., Inc. 1,562,600 75,005
Sears, Roebuck & Co. 182,893 10,951
----------
GROUP TOTAL 191,113
----------
----------------------------------------------------------
CONSUMER STAPLES (.9%)
Flowers Industries, Inc. 1,699,400 33,563
Universal Corp. 1,159,600 24,352
----------
GROUP TOTAL 57,915
----------
----------------------------------------------------------
ENERGY (4.6%)
Atlantic Richfield Co. 518,000 56,850
Dresser Industries, Inc. 683,200 15,201
Metrogas ADS 700,000 6,037
Questar Corp. 500,000 14,375
Royal Dutch Petroleum Co. 659,500 80,376
Sun Co., Inc. 67,200 1,840
Texaco, Inc. 1,404,200 92,151
USX-Marathon Group 1,687,000 33,318
----------
GROUP TOTAL 300,148
----------
----------------------------------------------------------
FINANCIAL (10.7%)
Aetna Life & Casualty Co. 139,500 8,771
Banc One Corp. 581,900 18,766
BankAmerica 1,540,000 81,042
</TABLE>
9
<PAGE> 10
STATEMENT OF NET ASSETS (Continued)
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
----------------------------------------------------------
<S> <C> <C>
Bankers Trust New York Corp. 575,900 $ 35,706
Bay Apartment Communities,
Inc. REIT 476,200 9,286
Boatmen's Bancshares, Inc. 1,454,000 51,072
(1)CBL & Associates Properties,
Inc. REIT 855,500 17,003
(1)Colonial Properties REIT 713,200 16,404
Comerica, Inc. 569,000 18,279
CoreStates Financial Corp. 3,253,600 113,469
Equity Residential Properties
Trust REIT 358,200 9,985
First Union Corp. 834,200 37,747
General Growth Properties REIT 574,100 11,697
(1)Home Properties of
New York REIT 515,800 9,091
Keycorp 2,104,050 66,014
J.P. Morgan & Co., Inc. 669,644 46,959
JP Realty Inc. REIT 110,500 2,265
NationsBank, Inc. 396,000 21,235
PNC Bank Corp. 1,356,800 35,786
Paragon Group, Inc. REIT 600,000 11,175
Post Properties, Inc. REIT 382,800 11,580
Roc Communities, Inc. REIT 417,600 9,239
Simon Property Group REIT 314,200 7,894
Spieker Properties REIT 744,300 16,654
(1)Town & Country Trust REIT 947,000 13,613
Urban Shopping Centers REIT 600,700 12,464
----------
GROUP TOTAL 693,196
----------
-----------------------------------------------------------
HEALTH CARE (1.3%)
Bristol-Myers Squibb Co. 877,000 59,746
Upjohn Co. 593,000 22,460
U.S. Healthcare, Inc. 150,000 4,594
----------
GROUP TOTAL 86,800
----------
-----------------------------------------------------------
TRANSPORTATION (.6%)
Union Pacific Corp. 715,000 39,593
----------
-----------------------------------------------------------
UTILITY (10.1%)
BCE, Inc. 1,286,200 41,319
Bell Atlantic Corp. 200,000 11,200
BellSouth Corp. 286,000 18,161
CINergy Corp. 487,972 12,809
Consolidated Edison Co.
of New York 527,400 15,558
DQE Inc. 1,207,050 28,366
Detroit Edison Co. 1,238,200 36,527
Entergy Corp. 704,000 16,984
Equitable Resources, Inc. 450,000 12,994
GTE Corp. 1,227,700 41,895
General Public Utilities Corp. 817,400 24,318
Houston Industries, Inc. 279,700 11,782
Montana Power Co. 451,800 10,391
National Fuel & Gas Co. 318,800 9,126
Niagara Mohawk Power Corp. 420,400 6,201
NICOR, Inc. 862,100 23,169
Nova Scotia Power 718,300 6,012
NYNEX Corp. 1,431,772 57,629
Pacific Enterprises 485,000 11,883
Pacific Gas & Electric Co. 2,205,200 63,951
Pacific Telesis Group 516,000 13,803
PacifiCorp 256,800 4,815
PECO Energy Corp. 396,200 10,945
PP&L Resources Inc. 563,000 10,908
Public Service Co. of Colorado 349,900 11,372
Rochester Gas & Electric Corp. 531,600 11,297
SCECorp. 1,498,000 25,653
Sierra Pacific Resources 744,300 16,189
Southern Co. 1,476,000 33,026
Unicom Corp. 867,207 23,089
US West Corp. 865,000 36,006
----------
GROUP TOTAL 657,378
----------
-----------------------------------------------------------
MISCELLANEOUS (.8%)
Minnesota Mining &
Manufacturing Co. 556,400 31,854
Tenneco, Inc. 500,000 23,000
----------
GROUP TOTAL 54,854
----------
-----------------------------------------------------------
TOTAL COMMON STOCKS
(Cost $2,029,935) 2,285,075
-----------------------------------------------------------
CONVERTIBLE PREFERRED STOCKS (.8%)
-----------------------------------------------------------
H.F. Ahmanson 6.00% 516,000 26,058
Reynolds Metals $3.00 267,600 12,845
Santa Fe Energy 8.25% 1,071,600 10,180
Storage Technology $3.50 78,300 4,463
-----------------------------------------------------------
TOTAL CONVERTIBLE PREFERRED STOCKS
(Cost $53,157) 53,546
-----------------------------------------------------------
</TABLE>
10
<PAGE> 11
<TABLE>
<CAPTION>
Face Market
Amount Value
(000) (000)+
----------------------------------------------------------
<S> <C> <C>
TEMPORARY CASH INVESTMENT (.5%)
----------------------------------------------------------
REPURCHASE AGREEMENT
Collateralized by U.S.
Government Obligations in
a Pooled Cash Account
6.13%, 7/3/95
(Cost $34,054) $34,054 $ 34,054
----------------------------------------------------------
TOTAL INVESTMENTS (99.3%)
(Cost $6,072,070) 6,443,363
----------------------------------------------------------
OTHER ASSETS AND LIABILITIES (.7%)
----------------------------------------------------------
Other Assets--Notes C and E 136,918
Liabilities--Note E (91,298)
-----------
45,620
----------------------------------------------------------
NET ASSETS (100%)
----------------------------------------------------------
Applicable to 337,305,516 outstanding
$.10 par value shares
(authorized 450,000,000 shares) $6,488,983
----------------------------------------------------------
NET ASSET VALUE PER SHARE $19.24
==========================================================
</TABLE>
+ See Note A to Financial Statements.
(1)Considered an affiliated company as the Fund owns more than
5% of the outstanding voting securities of such company.
----------------------------------------------------------
AT JUNE 30, 1995, NET ASSETS CONSISTED OF:
----------------------------------------------------------
<TABLE>
<CAPTION>
Amount Per
(000) Share
---------- -------
<S> <C> <C>
Paid in Capital $6,068,509 $17.99
Undistributed Net
Investment Income 10,483 .03
Accumulated Net
Realized Gains 38,698 .12
Unrealized Appreciation
of Investments--Note D 371,293 1.10
----------------------------------------------------------
NET ASSETS $6,488,983 $19.24
----------------------------------------------------------
</TABLE>
11
<PAGE> 12
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Six Months Ended
June 30, 1995
(000)
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT INCOME
INCOME
Dividends................................................................... $ 53,160
Interest ................................................................... 142,636
-----------------------------------------------------------------------------------------------------------------------
Total Income....................................................... 195,796
-----------------------------------------------------------------------------------------------------------------------
EXPENSES
Investment Advisory Fee--Note B............................................. 2,268
The Vanguard Group--Note C
Management and Administrative............................................ $8,024
Marketing and Distribution............................................... 650 8,674
------
Taxes (other than income taxes)............................................. 239
Custodian's Fees............................................................ 115
Auditing Fees ............................................................. 10
Shareholders' Reports....................................................... 168
Annual Meeting and Proxy Costs.............................................. 87
Directors' Fees and Expenses................................................ 13
-----------------------------------------------------------------------------------------------------------------------
Total Expenses..................................................... 11,574
-----------------------------------------------------------------------------------------------------------------------
Net Investment Income........................................... 184,222
-----------------------------------------------------------------------------------------------------------------------
REALIZED NET GAIN ON INVESTMENT
SECURITIES SOLD ............................................................. 53,892
-----------------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION) OF INVESTMENT SECURITIES ....................................... 678,481
-----------------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from Operations............ $916,595
=======================================================================================================================
</TABLE>
12
<PAGE> 13
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SIX MONTHS ENDED Year Ended
JUNE 30, 1995 December 31, 1994
(000) (000)
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income............................................... $ 184,222 $ 370,199
Realized Net Gain .................................................. 53,892 46,034
Change in Unrealized Appreciation (Depreciation) ................... 678,481 (696,906)
-----------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations.................................. 916,595 (280,673)
-----------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS (1)
Net Investment Income............................................... (186,687) (368,591)
Realized Net Gain................................................... -- (78,686)
-----------------------------------------------------------------------------------------------------------------------
Total Distributions........................................... (186,687) (447,277)
-----------------------------------------------------------------------------------------------------------------------
NET EQUALIZATION CREDITS (CHARGES)--NOTE A............................. (122) 617
-----------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (2)
Issued --Regular................................................. 328,602 1,065,849
--In Lieu of Cash Distributions........................... 156,454 379,611
--Exchange................................................ 156,301 497,331
Redeemed --Regular................................................. (326,835) (732,681)
--Exchange................................................ (235,952) (813,628)
-----------------------------------------------------------------------------------------------------------------------
Net Increase from Capital Share Transactions.................. 78,570 396,482
-----------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease)..................................... 808,356 (330,851)
-----------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Period................................................. 5,680,627 6,011,478
-----------------------------------------------------------------------------------------------------------------------
End of Period (3)................................................... $6,488,983 $5,680,627
=======================================================================================================================
(1) Distributions Per Share
Net Investment Income......................................... $.56 $1.11
Realized Net Gain............................................. -- $.24
-----------------------------------------------------------------------------------------------------------------------
(2) Shares Issued and Redeemed
Issued........................................................ 26,870 85,297
Issued in Lieu of Cash Distributions.......................... 8,438 21,438
Redeemed...................................................... (31,159) (86,104)
-----------------------------------------------------------------------------------------------------------------------
4,149 20,631
-----------------------------------------------------------------------------------------------------------------------
(3) Undistributed Net Investment Income .......................... $ 10,483 $ 13,070
-----------------------------------------------------------------------------------------------------------------------
</TABLE>
13
<PAGE> 14
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Year Ended December 31,
SIX MONTHS ENDED --------------------------------------------------
For a Share Outstanding Throughout Each Period JUNE 30, 1995 1994 1993 1992 1991 1990
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD ............... $17.05 $19.24 $18.16 $18.08 $16.02 $16.82
-------- ------- ------- ------- ------- -------
INVESTMENT OPERATIONS
Net Investment Income ............................ .55 1.11 1.14 1.21 1.27 1.30
Net Realized and Unrealized Gain (Loss)
on Investments................................. 2.20 (1.95) 1.48 .29 2.06 (.72)
-------- ------- ------- ------- ------- -------
TOTAL FROM INVESTMENT OPERATIONS ........... 2.75 (.84) 2.62 1.50 3.33 .58
------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income.............. (.56) (1.11) (1.14) (1.21) (1.27) (1.30)
Distributions from Realized Capital Gains......... -- (.24) (.40) (.21) -- (.08)
-------- ------- ------- ------- ------- -------
TOTAL DISTRIBUTIONS ........................ (.56) (1.35) (1.54) (1.42) (1.27) (1.38)
------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD ..................... $19.24 $17.05 $19.24 $18.16 $18.08 $16.02
==============================================================================================================================
TOTAL RETURN ........................................ +16.28% -4.44% +14.65% +8.67% +21.57% +3.76%
------------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
------------------------
Net Assets, End of Period (Millions)................. $6,489 $5,681 $6,011 $3,178 $1,934 $1,022
Ratio of Expenses to Average Net Assets.............. .38%* .34% .33% .35% .40% .45%
Ratio of Net Investment Income to
Average Net Assets................................ 6.05%* 6.16% 5.79% 6.50% 7.08% 7.77%
Portfolio Turnover Rates:
Common Stocks..................................... 27%* 32% 26% 16% 19% 12%
Bonds ............................................ 33%* 31% 18% 24% 34% 23%
------------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Annualized.
NOTES TO FINANCIAL STATEMENTS
Vanguard/Wellesley Income Fund is registered under the Investment Company Act
of 1940 as a diversified open-end investment company. Certain of the Fund's
investments are in long-term corporate debt instruments; the issuers'
abilities to meet these obligations may be affected by economic developments in
their respective industries.
A. The following significant accounting policies are in conformity with
generally accepted accounting principles for investment companies. Such
policies are consistently followed by the Fund in the preparation of financial
statements.
1. SECURITY VALUATION: Common stocks listed on an exchange are valued at the
latest quoted sales prices as of the close of the New York Stock Exchange
(generally 4:00 PM) on the valuation date; such securities not traded are valued
at the mean of the latest quoted bid and asked prices; those securities not
listed are valued at the latest quoted bid prices. Bonds are valued utilizing
the latest bid prices and on the basis of a matrix system (which considers such
factors as security prices, yields, maturities and ratings), both as furnished
by independent pricing services. Temporary cash investments are valued at cost
which approximates market value.
14
<PAGE> 15
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. EQUALIZATION: The Fund follows the accounting practice known as
"equalization," under which a portion of the price of capital shares issued and
redeemed, equivalent to undistributed net investment income per share on the
date of the transaction, is credited or charged to undistributed income. As a
result, undistributed income per share is unaffected by Fund share sales or
redemptions.
4. REPURCHASE AGREEMENTS: The Fund, along with other members of The Vanguard
Group of Investment Companies, transfers uninvested cash balances into a Pooled
Cash Account, the daily aggregate of which is invested in repurchase agreements
secured by U.S. Government obligations. Securities pledged as collateral for
repurchase agreements are held by the Fund's custodian bank until maturity of
each repurchase agreement. Provisions of each agreement require that the market
value of this collateral is sufficient in the event of default; however, in the
event of default or bankruptcy by the other party to the agreement, realization
and/or retention of the collateral may be subject to legal proceedings.
5. OTHER: Security transactions are accounted for on the date the
securities are purchased or sold. Costs used in determining realized gains and
losses on the sale of investment securities are those of specific securities
sold. Dividend income and distributions to shareholders are recorded on the
ex-dividend date. Discounts and premiums on debt securities purchased are
amortized to interest income over the lives of the respective securities.
B. Under the terms of a contract expiring April 30, 1996, the Fund pays
Wellington Management Company an investment advisory fee calculated at an
annual percentage rate of average net assets of the fund. For the six months
ended June 30, 1995, the investment advisory fee represents an effective annual
rate of .07 of 1% of average net assets.
C. The Vanguard Group, Inc. 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 Directors. At
June 30, 1995, the Fund had contributed capital of $877,000 to Vanguard
(included at cost in Other Assets), representing 4.4% of Vanguard's
capitalization. The Fund's directors and officers are also directors and
officers of Vanguard.
Vanguard has requested the Fund's investment adviser to direct certain
portfolio trades, subject to obtaining the best price and execution, to brokers
who have agreed to rebate or credit to the Fund a portion of the commissions
generated. Such rebates or credits are used solely to reduce the Fund's
administrative expenses. For the six months ended June 30, 1995, directed
brokerage arrangements reduced the Fund's expenses by $147,000 (an annual rate
of .01 of 1% of average net assets).
D. During the six months ended June 30, 1995, the Fund made purchases of
$639,205,000 and sales of $692,214,000 of investment securities other than U.S.
Government securities and temporary cash investments. Purchases and sales of
U.S. Government obligations were $474,598,000 and $307,030,000, respectively.
At June 30, 1995, unrealized appreciation for financial reporting and Federal
income tax purposes aggregated $371,293,000, of which $455,469,000 related to
appreciated securities and $84,176,000 related to depreciated securities.
E. The market value of securities on loan to broker/dealers at June 30, 1995,
was $22,769,000, for which the Fund had received cash collateral of
$23,746,000.
15
<PAGE> 16
THE VANGUARD FAMILY OF FUNDS
FIXED INCOME FUNDS
MONEY MARKET FUNDS
Vanguard Admiral Funds
U.S. Treasury Money
Market Portfolio
Vanguard Money Market Reserves
TAX-EXEMPT MONEY MARKET FUNDS
Vanguard Municipal Bond Fund
Money Market Portfolio
Vanguard State Tax-Free Funds
Money Market Portfolios
(CA, NJ, OH, PA)
TAX-EXEMPT INCOME FUNDS
Vanguard Municipal Bond Fund
Vanguard State Tax-Free Funds
Insured Longer-Term Portfolios
(CA, FL, NJ, NY, OH, PA)
INCOME FUNDS
Vanguard Admiral Funds
Vanguard Fixed Income
Securities Fund
Vanguard Preferred Stock Fund
EQUITY AND BALANCED FUNDS
GROWTH AND INCOME FUNDS
Vanguard Convertible
Securities Fund
Vanguard Equity Income Fund
Vanguard Quantitative Portfolios
Vanguard/Trustees' Equity Fund
U.S. Portfolio
Vanguard/Windsor Fund
Vanguard/Windsor II
BALANCED FUNDS
Vanguard Asset Allocation Fund
Vanguard LifeStrategy Funds
Income Portfolio
Conservative Growth Portfolio
Moderate Growth Portfolio
Growth Portfolio
Vanguard STAR Portfolio
Vanguard/Wellesley Income Fund
Vanguard/Wellington Fund
GROWTH FUNDS
Vanguard/Morgan Growth Fund
Vanguard/PRIMECAP Fund
Vanguard U.S. Growth Portfolio
AGGRESSIVE GROWTH FUNDS
Vanguard Explorer Fund
Vanguard Specialized Portfolios
INTERNATIONAL FUNDS
Vanguard International
Growth Portfolio
Vanguard/Trustees' Equity Fund
International Portfolio
INDEX FUNDS
Vanguard Index Trust
Total Stock Market Portfolio
500 Portfolio
Extended Market Portfolio
Growth Portfolio
Value Portfolio
Small Capitalization Stock Portfolio
Vanguard International Equity
Index Fund
European Portfolio
Pacific Portfolio
Emerging Markets Portfolio
Vanguard Bond Index Fund
Vanguard Tax-Managed Fund
Vanguard Balanced Index Fund
[LOGO]
Vanguard Financial Center Valley Forge, Pennsylvania 19482
New Account Information: Shareholder Account Services:
1-(800) 662-7447 1-(800) 662-2739
This Report has been prepared for shareholders and may be distributed to
others only if preceded or accompanied by a current prospectus. All Funds in
the Vanguard Family are offered by prospectus only.
Q272-6/95
[VANGUARD WELLESLEY INCOME FUND LOGO]
SEMI-ANNUAL REPORT
JUNE 30, 1995
