<PAGE> 1
VANGUARD
WELLESLEY
INCOME FUND
ANNUAL REPORT 1995
<PAGE> 2
In this Annual Report, I am delighted to formally introduce you to John J.
Brennan, who, on January 31, 1996, will assume my responsibilities as Chief
Executive Officer of Vanguard/Wellesley Income Fund and the other Funds in The
Vanguard Group. Mr. Brennan will continue to serve as President of the Funds,
and I will continue to serve as Chairman of the Board.
[FIGURE 1]
As a shareholder of the Fund for more than a quarter century and as
Chairman of all the Vanguard Funds, I want to tell you that I am enthusiastic
and confident that Jack Brennan is exactly the right person to succeed me as
Chief Executive Officer. To use yet another Vanguard nautical metaphor, he will
be the new captain. He has the qualities of leadership, integrity,
intelligence, and vision that must continue to be Vanguard's hallmark as we
move toward, and then into, the 21st century.
I know that he has these qualities, because Jack Brennan and I have
been working closely together since he joined Vanguard in 1982. He is a
graduate of Dartmouth College and Harvard Business School. He started as
Assistant to the Chairman and, rising like a rocket, became President in 1989.
While, at age 41, he may seem young, he is in fact older than I was when I
became Chief Executive Officer of Vanguard's predecessor organization in 1967,
at the age of 38. Most important of all, Jack is completely dedicated to the
Vanguard character, and believes in our basic mission: serving solely the
shareholder, free of any conflict of interest. He believes in holding our costs
of operation to a minimum, and in retaining our position as the lowest-cost
provider of financial services in the world. He is a true competitor, who
shares Vanguard's dedication to providing highly competitive returns to our
investors relative to the returns provided by other mutual funds with
comparable objectives. He also believes in reporting our results to
shareholders with complete candor. He has the full support of the Board of
Directors and our crew, and is committed to staying the course we have set for
Vanguard. You need have no doubt that the essential elements that drew you to
Vanguard in the first place will remain intact.
As for me, I expect to fill a useful, if less demanding, role as
Chairman of the Board. I shall keep a watchful eye over the interests of our
shareholders, our crew, and our investment policies. I shall also speak out on
industry affairs, reminding all who will listen of the primacy of the interests
of mutual fund shareholders. I will be readily available to provide Jack
Brennan with whatever wisdom I may have acquired during my lifetime of
experience in this wonderful industry and in my service as captain of Vanguard
since I founded this unique organization more than two decades ago.
In short, I'll still be around. Thank you for all your confidence in
me in the past and, in advance, for your continued confidence in Vanguard under
Jack Brennan's leadership.
/s/ JOHN C. BOGLE
VANGUARD/WELLESLEY INCOME FUND SEEKS TO PROVIDE AS MUCH CURRENT INCOME AS IS
CONSISTENT WITH REASONABLE RISK, WHILE ALSO OFFERING THE POTENTIAL FOR MODERATE
CAPITAL GROWTH. NORMALLY, ABOUT 65% OF THE FUND'S ASSETS ARE INVESTED IN
FIXED-INCOME SECURITIES AND 35% IN COMMON STOCKS.
<PAGE> 3
CHAIRMAN'S LETTER
FELLOW SHAREHOLDER:
Wellesley Income Fund provided shareholders with a total return of +28.9%
during the year ended December 31, 1995, the best year in the Fund's
quarter-century of operations. Both bonds and stocks enjoyed stupendous bull
markets, and our traditional balanced strategy placed the Fund in an enviable
position to participate in both explosive rallies.
The table below compares the Fund's total return (capital change plus
reinvested dividends) with those of the two unmanaged indexes of the markets in
which we invest: for stocks, the Standard and Poor's 500 Composite Stock Price
Index; and for bonds, the Lehman Long-Term Corporate Bond Index. A hypothetical
portfolio composed of the two Indexes--reflecting the Fund's typical balance of
65% bonds and 35% stocks--would have earned a return of +31.3% over the past
year, a bit better than the return of the Fund.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------
TOTAL RETURN
-----------------
YEAR ENDED
DECEMBER 31, 1995
- -------------------------------------------------------------------------
<S> <C>
WELLESLEY INCOME FUND +28.9%
- -------------------------------------------------------------------------
LEHMAN LONG-TERM CORPORATE BOND INDEX +27.9%
STANDARD & POOR'S 500 STOCK INDEX +37.6
- -------------------------------------------------------------------------
COMPOSITE BOND/STOCK INDEX* +31.3%
- -------------------------------------------------------------------------
</TABLE>
*Weighted 65% in the Lehman Long-Term Corporate Bond Index and 35% in the
Standard & Poor's 500 Index.
The Fund's return is based on an increase in our net asset value from $17.05
per share on December 31, 1994, to $20.44 on December 31, 1995, with the latter
figure adjusted to take into account the reinvestment of four quarterly
dividends totaling $1.14 per share from net investment income and distributions
totaling $.28 per share from net realized capital gains. Wellesley's dividend
yield at year end was 5.7%.
THE FISCAL YEAR IN REVIEW
The great bull market in bonds and stocks we enjoyed during the year was
continuous and virtually uninterrupted. The dimension of the increase was close
to record breaking in both markets, delighting the bulls even as it astonished
the bears.
In the bond market, a huge decline in interest rates during the year
set bond prices afire. The yield of the Lehman Long-Term Corporate Bond Index
declined from 8.9% to 6.9% during 1995, even below its level of 7.1% at the
start of 1994. The 1995 decline drove long-term bond prices up by fully +19%,
resulting in a total return (including the interest coupon) of +28%--remarkably
competitive with the +37.6% return on stocks.
Short-term rates also declined during 1995, as the Federal Reserve
reduced the Federal funds rate (the rate at which banks borrow from one
another) on two occasions, once in July and again in December. On balance
during the year, the yield on the U.S. Treasury bill eased from 5.6% to 5.0%.
This improvement in the actual (and expected) interest rate environment was
caused largely by a measurable softening in the growth of the U.S. economy,
perhaps with further weakness to come. A sluggish economy, in turn, engendered
continued optimism about the benign outlook for inflation. (Indeed, the
Consumer Price Index (CPI) was quite well-behaved in 1995, rising by but +2.6%,
its smallest increase since 1986.)
The decline in interest rates during the year not only set bond prices
afire, but also helped stimulate the stock market. The market gained further
impetus from record-breaking corporate profits, not to mention a growing
speculative fever in the marketplace, particularly during the final weeks of
the year. The rise in corporate profits was particularly striking. It's
estimated that operating earnings for the companies in the Standard & Poor's
500 Index increased about +15% in 1995, after already rising +16% in 1994.
(Since 1926, earnings growth has averaged less than +7% per year.)
If there is a cautionary signal in this boom in profits, it is that
the two-year cumulative earnings growth of +33% has been accompanied by
dividend growth of only +11%. This subdued dividend growth in the face of
sharply higher stock prices resulted in a decline in the yield on the Index to
2.2%, the lowest level on record. Nonetheless, the Wall Street chorus
1
<PAGE> 4
[FIGURE 2]
sings "this time it's different." Dividend yield and earnings growth--the two
fundamentals of stock returns--are clearly taking a back seat to the market's
high valuation of the long-term fundamentals. This is called "speculation," and
it is hardly an inconsequential component of 1995's high returns on stocks. So,
as we enter our 1996 fiscal year, this is surely a sobering statistic.
THE 1990s SO FAR
During the first five years of the 1990s, as I noted in my letter to you one
year ago, long-term bonds provided an average annual return of +8.6%, virtually
the same as the +8.7% return on stocks. While this congruence of returns on
stocks and bonds was unusual, both figures seemed reasonably consistent with
long-term fundamental measures. But the remarkable returns of 1995 have raised
both numbers substantially. With six years of the 1990s now history, the
average annual returns for bonds and stocks have grown to +11.6% and +13.1%,
respectively. Make no mistake about it--such returns are unlikely to
characterize the remainder of the decade.
In any event, the chart to the left shows how fine the environment has
been for both bonds and stocks during this exciting period. You can see that
bonds have held their own with stocks, rather than muting the fluctuations of
the stock market, as had been customary in an earlier era. Indeed, as the chart
clearly depicts, there has been a tight correlation of stock and bond returns
so far during the 1990s. Under these circumstances, it is hardly surprising
that Wellesley's strategy of holding both bonds and stocks should have fared so
well in recent years.
That said, given the decreasing tendency of these two markets to
fluctuate independently, it would seem that a new element of relative
volatility has been introduced to funds that adhere to a "balanced" investment
strategy. During the past year, and over the five preceding years, investors
holding a balanced portfolio of bonds and stocks have been handsomely rewarded,
as both asset classes climbed steadily higher. Inevitably, this tighter
correlation will be reflected on the minus side of the ledger at some point in
the future. Nonetheless, we remain confident that Wellesley's conservative
balance of long-term bonds and income-producing stocks will continue to provide
an optimal combination of current income, modest growth of capital, and
reasonable risk.
THE FUND IN 1995
As noted at the outset, Wellesley's +28.9% return during 1995 was the best
single year in the Fund's history. However, we did not quite keep pace with the
+31.3% return of our unmanaged performance standard, a composite of bonds and
stocks weighted in accordance with Wellesley's 65% bond/35% stock allocation.
Our shortfall relative to this composite index came in the face of two
meaningful headwinds. First, in the ebullient bond market, the average maturity
of the Wellesley bond portfolio, while long enough (16 years) to provide solid
participation, was well below that of the Lehman Long-Term Corporate Bond Index
(24 years). In an environment of falling interest rates, "longer is stronger."
Second, blue-chip stocks with large market capitalizations led the market, with
the Standard & Poor's 500 Index
2
<PAGE> 5
[FIGURE 3]
<TABLE>
<CAPTION>
Average Annual Total Returns--Periods Ended December 31, 1995
- ----------------------------------------------------------------------------
1 Year 5 Years 10 Years
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
WELLESLEY INCOME FUND +28.91% +13.29% +11.93%
AVERAGE INCOME FUND +21.66 +12.12 + 9.91
COMPOSITE INDEX* +31.28 +14.03 +12.69
LEHMAN BOND INDEX +27.92 +12.63 +11.47
</TABLE>
*Composite Index is 65% Lehman Long-Term Corporate Bond Index and 35% Standard
& Poor's 500 Index.
Note: Past performance is not predictive of future performance.
outpacing fully 85% of all general equity funds during the year. In other
words, the Index proved tough competition for all equity managers.
In this regard, I would note that the return on our equity holdings
virtually matched the return on the Standard & Poor's 500 Index (+37.1% for the
Fund versus +37.6% for the Index). We achieved this favorable outcome with no
holdings whatsoever in the aggressive (i.e., volatile) technology sector, which
led the market advance during much of the past year. In contrast, we garnered
positive contributions from our major overweightings in utility and financial
stocks--as would be expected from a fund with an income orientation--which
together comprised 58% of our equity position during the year compared to 24%
for the Index. These two groups of stocks were among the strongest-performing
stock market sectors during the past year. Unfortunately, the overall advantage
we gained from our sector selections was more than offset by sub-par selections
of individual stocks. On balance, then, our equity holdings ended the year in a
virtual dead heat with the Index.
Although we lagged the results of our theoretical standard, the Fund's
return of +28.9% dwarfed the +21.7% return of the average income-oriented
mutual fund. This seven percentage point margin is one of the largest annual
advantages we have earned versus this peer group of mutual funds. (Hint: this
extraordinary margin will be virtually impossible to repeat.) Of course, as I
have noted in past Reports, this competitive group comprises only 34 funds, all
of which use disparate strategies to achieve their income objective. So, it is
probably best not to place too much emphasis on the results of any one year.
That said, Wellesley's balance between equities and bonds (36%/64%)
was quite similar to our competitors (39%/61%). But two important strategic
differences strongly contributed to our unusually favorable margin: (1) our
equity holdings were dominated by the market-leading, large-cap stocks (80% of
Wellesley's equities), while our average competitor, emphasizing the
smaller-cap segment of the stock market, had just one-half that
3
<PAGE> 6
exposure (40% of equities); and (2) while other income-oriented funds, on
average, maintained a weighting in bonds that was similar to ours, the average
maturity of our bond portfolio was much longer and the average quality higher.
Both of these bond strategies worked in our favor.
With regard to our bond position, you may recall from last year's
Annual Report that our emphasis on long-term bonds impeded our relative
performance in 1994. At that time, I explained our rationale for maintaining
our long-term bias in the face of rising interest rates and emphasized that
forecasting interest rates is "beyond the ability of experienced and amateur
investors alike." In light of the dramatic--and completely unanticipated--
reversal in interest rates during 1995, our decision to "stay the course" with
our traditional maturity and quality strategies was fully justified.
A LONGER-TERM PERSPECTIVE
The Fund's record over the past ten years is illustrated in the customary chart
on the previous page, both in percentage terms and in dollar terms based on an
initial investment of $10,000. The results may be summarized as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
TOTAL RETURN*
--------------------------
DECEMBER 31, 1985, TO
DECEMBER 31, 1995
--------------------------
FINAL VALUE
AVERAGE OF INITIAL
ANNUAL INVESTMENT
RATE OF $10,000
- ----------------------------------------------------------------------
<S> <C> <C>
WELLESLEY INCOME FUND +11.9% $30,870
- ----------------------------------------------------------------------
AVERAGE INCOME FUND + 9.9% $25,710
COMPOSITE BOND/STOCK INDEX +12.7 33,040
- ----------------------------------------------------------------------
</TABLE>
*Assumes the reinvestment of all income dividends and capital gains
distributions.
The chart reflects both ups and downs in the financial markets, and there is no
assurance that the ever-unpredictable markets of the future will provide better
returns or worse returns than those presented. However, it should be noted
that, during the past decade, the total return on the composite index (65% bond
and 35% stock) was well above its long-term norm of +7.8% going all the way
back to 1926.
The solid margin we enjoyed over our peers (+2.0 percentage points) is
extremely meaningful when achieved over a full decade. Indeed, the final value
of an initial $10,000 investment in Wellesley Income Fund--$30,870--exceeded
the comparable figure for the income fund group by $5,160, equivalent to more
than 50% of the initial investment. This large difference shows the substantial
asset accumulation that can result from a combination of excellent portfolio
management, compound interest, and exceptionally low costs. In fact, our net
annual expenses amount to but 0.34% of assets, compared to 1.09% for the
average income fund. This comparison would suggest that, all else being equal,
we should outperform our average competitor by about 0.75% each year--an
important factor in our +2.0% margin over our competitors.
It should hardly go without saying that the chart and the table also
reflect Wellesley's annual shortfall of -0.8% relative to the composite index.
This index, as you know, represents tough competition both for Wellesley and
for its peer group of mutual funds. First, it is a theoretical construct,
incurring none of the advisory fees, operating expenses, and portfolio
transaction costs that must be borne--to one extent or another--in the real
world in which mutual funds operate. (Given Wellesley's annual expense ratio of
0.34%, this factor alone would account for nearly one-half of our shortfall.)
Second, while the index is a fair standard, it does not provide a precise
guideline to the policies followed by Wellesley and its actively managed
competitors. In any event, we will continue to strive to outperform this
challenging standard.
IN SUMMARY
To state the obvious, 1995 was an extraordinarily bountiful year for
shareholders of Wellesley Income Fund. We should all take (only) a moment to
bask in the light of the generous rewards we earned. We should also recognize,
however, that the financial markets are never a "one-way street," and the risks
that exist today in both the bond and stock markets may well come home to roost
in 1996 and erode our
4
<PAGE> 7
1995 bounty. Put even more bluntly, Wellesley shareholders enjoyed an
enhancement of nearly +29% in value during the year. With this gain now behind
us, even a significant market decline seems unlikely to take shareholders back
to where we were--presumably with satisfaction--just one year ago.
Under these circumstances, what course of action should shareholders
of Wellesley Income Fund follow? In my Annual Report one year ago, under very
different circumstances, I urged you to "stay the course." Today, you should
recognize that, despite the short-term risks of investing, the biggest
long-term risks are: (1) failing to invest in bonds and stocks at all; and (2)
following an erratic and ever-changing course. For our part, we intend to
manage Wellesley Income Fund under the same time-tested and conservative
principles we've followed for a quarter century. "Stay the course" proved wise
counsel a year ago; I reiterate it today.
Sincerely,
/s/ JOHN C. BOGLE
John C. Bogle
Chairman of the Board February 1, 1996
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 DECEMBER 31, 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>
VANGUARD/WELLESLEY INCOME FUND 7/1/70 +28.91% +13.29% +11.93% +7.62% +4.31%
</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.
5
<PAGE> 8
REPORT FROM THE INVESTMENT ADVISER
Intermediate and long-term interest rates declined throughout 1995 enabling the
Vanguard/Wellesley Income Fund to enjoy a +28.9% return for the year. This
return helps to offset the negative 4.4% return in 1994 when long rates rose
almost as much as they fell in 1995. Thus, the last two years have experienced
the best and the worst in terms of volatility. Patient investing seems to be
the lesson when looking back over that particular time period. Both the bond
and stock segments of the Wellesley portfolio had generous positive returns in
1995. Wellesley equities approached the S&P 500's remarkable return of +37.6%
for all of 1995 with a +37.1% return. Wellesley benefited from having its two
largest sectors, utilities and finance, perform well for the year. Similarly,
Wellesley bonds returned +25.9%, close to the return of the Lehman Long-Term
Corporate Bond Index, which was +27.9%.
The satisfying absolute return for Wellesley was achieved in a year
when the Federal Reserve reversed direction in a six-month period as it
grappled with an uncertain economic landscape. The monetary authorities raised
interest rates early in the year and then lowered them twice as consumer
spending began to labor. Fourth quarter economic activity was sluggish which
was in sharp contrast to the previous year's behavior. Real GDP probably grew
at or close to a 1% annual rate. As we have stated before, the performance of
Vanguard/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.
Throughout the fiscal year ending December 31, 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 1996
Monetary policy is still too tight. Additional reductions in short-term rates
will be necessary to keep economic growth from slowing further. The U.S.
dollar seems to be on a positive trend, which will give the Federal Reserve
more flexibility to adjust to domestic affairs. Despite the recent reduction in
the Federal funds rate, its level is over 3% in real terms. Bank reserves are
declining, and money growth is decelerating. With this backdrop, continued soft
economic data, low inflation, and eventually a constructive fiscal package will
likely compel the Federal Reserve to lower interest rates several more times in
1996. The earnings deceleration is underway. Operating earnings for the S&P 500
grew 18% in the third quarter from a year ago, down from a 28% gain in the
second quarter. Further slowing is anticipated, with 1996 earnings forecast to
rise 5%, well below the projected 15% rise for all of 1995. An environment of
stable interest rates and moderate growth is still reasonably positive for the
bonds and stocks in the Vanguard/Wellesley Income Fund.
STRATEGY IN 1996
Our strategy remains consistent with that of previous years with some marginal
adjustments. On the stock side of the portfolio, we will continue to seek
opportunities in the industrial and materials sectors, as concerns over
economic growth have created attractive valuations for some strong companies
within these sectors. We recently increased our weighting in REITs, which we
believe is one of the most undervalued income sectors of the market. REITs
provide us with a significant upfront yield of 7% to 8% (currently 100 to 200
basis points above the U.S. Treasury bond yield), and dividends should grow by
more than 5% per year on average.
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 87% higher than the yield on the average stock in the marketplace.
While we continue to look for the excuse to shorten the average
maturity and duration of the bond segment since long rates have declined 2%
over the last year, we are not actively implementing this strategy. The economy
is growing too modestly, and inflation is behaving too well to position the
portfolio much shorter. As we await the opportunity to reduce duration, high
quality will be maintained. Currently,
6
<PAGE> 9
92% of the bond portfolio is rated "A" or better. There exist only minimal
yield differences among rating categories. 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 long-term
bonds are subject to price fluctuations in the short-term. These assets
currently have an average maturity of slightly over 16 years, an average
coupon of 7.3%, and an average quality rating of "Aa."
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 twenty-two dividend
increases. We avoid investments in bonds rated below investment-grade and in
stocks with ultra-high dividends that may not be sustainable over the longer
term.
SUMMARY
After the Fund's strong total return in 1995, we are obviously more cautious
towards the financial markets. Retracements and setbacks are to be expected.
Longer term, the economic and inflation outlooks appear constructive. We will
continue to employ the same investment disciplines 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
January 22, 1996
7
<PAGE> 10
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 December 31, 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*
- --------------------------------------------------------------------------------------------------------------------------------
Composite
Wellesley Income Fund Index**
VALUE WITH INCOME ---------------------------- ---------
Year Ended NET ASSET CAPITAL GAINS INCOME DIVIDENDS & CAPITAL Capital Income Total Total
December 31 VALUE DISTRIBUTIONS DIVIDENDS GAINS REINVESTED Return Return Return Return
- --------------------------------------------------------------------------------------------------------------------------------
<S> <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 20.44 .28 1.14 185.90 +21.6 + 7.3 +28.9 +31.3
- --------------------------------------------------------------------------------------------------------------------------------
CUMULATIVE TOTAL +1,445.3% +1,222.7%
- --------------------------------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN +11.6% +10.9%
- --------------------------------------------------------------------------------------------------------------------------------
</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
Salomon Brothers High-Grade Bond Index (65%) and Standard & Poor's500
Stock Index (35%) from December 31, 1970, through December 31, 1972,
and Lehman Long-Term Corporate Bond Index (65%) and Standard & Poor's
500 Stock Index (35%) 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.
8
<PAGE> 11
STATEMENT OF NET ASSETS
FINANCIAL STATEMENTS
December 31, 1995
<TABLE>
<CAPTION>
Face Market
Amount Value
(000) (000)+
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
CORPORATE BONDS (42.1%)
- ------------------------------------------------------------------------------------------------
ASSET-BACKED SECURITIES (.3%)
NationsBank Credit Card Trust
6.00%, 12/15/05 $ 20,000 $ 19,994
-------------
- ------------------------------------------------------------------------------------------------
FINANCE (10.6%)
Allstate Corp.
7.50%, 6/15/13 20,000 21,485
Banc One Corp.
7.75%, 7/15/25 30,000 33,369
Bank of Boston
6.625%, 12/1/05 15,000 15,261
6.875%, 7/15/03 15,000 15,561
Bank of New York
7.875%, 11/15/02 15,000 16,491
Boatmen's Bancshares, Inc.
7.625%, 10/1/04 10,000 10,827
Chemical Banking Corp.
8.625%, 5/1/02 20,000 22,620
Citicorp
MTN 6.65%, 12/15/10 25,000 25,543
7.125%, 9/1/05 15,000 15,923
7.625%, 5/1/05 10,000 10,919
Comerica, Inc.
7.125%, 12/1/13 15,000 15,096
8.375%, 7/15/24 5,000 5,652
CoreStates Capital
6.625%, 3/15/05 20,000 20,204
Fifth Third Bancorp.
6.75%, 7/15/05 25,000 25,988
First Bank NA
7.55%, 6/15/04 8,000 8,671
First Bank System
6.625%, 5/15/03 10,000 10,217
7.625%, 5/1/05 7,500 8,200
First Chicago Corp.
6.375%, 1/30/09 5,000 4,956
7.625%, 1/15/03 15,000 16,298
First Union Corp.
6.00%, 10/30/08 15,000 14,339
7.50%, 4/15/35 (2) 11,000 12,181
Fleet Financial Group
6.875%, 3/1/03 30,000 31,166
7.625%, 12/1/99 15,000 15,838
General Electric Capital Corp.
8.125%, 5/15/12 10,000 11,679
General Electric Capital Services
7.50%, 8/21/35 12,000 13,608
General Motors Acceptance Corp.
7.00%, 9/15/02 30,000 31,130
Household Finance Corp.
6.45%, 2/1/09 5,000 5,011
7.65%, 5/15/07 10,000 11,019
J. P. Morgan & Co., Inc.
5.75%, 10/15/08 20,000 18,951
6.25%, 1/15/09 20,000 19,747
Morgan Guaranty Trust
7.375%, 2/1/02 20,000 21,386
NBD Bank N.A.
6.25%, 8/15/03 20,000 19,969
National City Cleveland Bank
6.50%, 5/1/03 10,000 10,130
National City Corp.
7.20%, 5/15/05 20,000 21,250
NationsBank Corp.
7.25%, 10/15/25 20,000 20,754
7.75%, 8/15/04 20,000 21,911
Norwest Corp.
6.00%, 3/15/00 15,000 15,072
Norwest Financial Corp.
7.95%, 5/15/02 10,000 11,048
Republic New York Corp.
5.875%, 10/15/08 15,000 14,363
Society National Bank
7.85%, 11/1/02 7,500 8,144
State Street Boston
5.95%, 9/15/03 5,000 4,946
Suntrust Banks
6.125%, 2/15/04 20,000 19,811
7.375%, 7/1/02 16,000 17,080
Wachovia Corp.
6.375%, 4/15/03 20,000 20,385
6.605%, 10/1/25 30,000 31,020
Wells Fargo & Co.
6.125%, 11/1/03 15,000 14,861
-------------
GROUP TOTAL 760,080
-------------
- ------------------------------------------------------------------------------------------------
INDUSTRIAL (14.3%)
Air Products & Chemicals, Inc.
7.375%, 5/1/05 15,000 16,450
8.75%, 4/15/21 7,750 9,696
Alcan Aluminium Ltd.
9.625%, 7/15/19 7,000 8,075
Aluminum Co. of America
5.75%, 2/1/01 20,000 19,836
Amoco Canada Petroleum Co.
6.75%, 9/1/23 25,000 24,695
BP America
7.875%, 5/15/02 15,000 16,572
Browning-Ferris Industries, Inc.
7.40%, 9/15/35 30,000 32,100
</TABLE>
9
<PAGE> 12
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Face Market
Amount Value
(000) (000)+
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Burlington Northern Santa Fe
6.375%, 12/15/05 $ 12,500 $ 12,554
Burlington Resources, Inc.
7.15%, 5/1/99 10,000 10,410
The Coca-Cola Co.
6.00%, 7/15/03 10,000 10,015
Coca-Cola Enterprises, Inc.
7.875%, 2/1/02 10,000 10,966
E.I. du Pont de Nemours & Co.
8.25%, 1/15/22 30,000 33,070
Eastman Chemical Co.
7.25%, 1/15/24 25,000 26,342
Eaton Corp.
6.50%, 6/1/25 10,000 10,579
7.625%, 4/1/24 10,000 11,099
Ford Motor Co.
8.875%, 1/15/22 20,000 24,808
General Motors Corp.
7.40%, 9/1/25 20,000 21,338
9.40%, 7/15/21 20,000 25,970
Georgia-Pacific Corp.
8.625%, 4/30/25 10,000 11,008
9.50%, 5/15/22 10,000 11,639
Gillette Co.
5.75%, 10/15/05 20,000 19,597
6.25%, 8/15/03 10,000 10,135
Hertz Corp.
6.00%, 2/1/01 15,000 14,975
Hubbell Inc.
6.625%, 10/1/05 10,000 10,436
International Business Machines Corp.
8.375%, 11/1/19 10,000 11,995
International Paper Co.
7.625%, 1/15/07 15,000 16,482
Johnson & Johnson
6.73%, 11/15/23 20,000 20,724
Johnson Controls
8.20%, 6/15/24 6,000 6,471
Knight-Ridder, Inc.
8.50%, 9/1/01 10,000 10,972
Eli Lilly & Co.
7.125%, 6/1/25 40,000 42,883
Lockheed Corp.
6.75%, 3/15/03 7,000 7,251
McDonald's Corp.
7.05%, 11/15/25 23,300 24,105
7.375%, 7/15/33 8,500 9,042
Mobil Corp.
8.625%, 8/15/21 20,000 25,302
Monsanto Co.
6.00%, 7/1/00 18,750 18,874
8.13%, 12/15/06 5,000 5,625
8.20%, 4/15/25 20,000 22,120
Motorola Inc.
7.50%, 5/15/25 40,000 45,106
New York Times
8.25%, 3/15/25 26,000 29,843
Norfolk Southern Corp.
9.00%, 3/1/21 5,000 6,434
Northrop-Grumman
9.375%, 10/15/24 15,000 17,893
PPG Industries, Inc.
9.00%, 5/1/21 15,000 19,247
Philips Electronics NV
7.75%, 4/15/04 10,000 10,954
Phillips Petroleum Co.
9.375%, 2/15/11 10,000 12,519
Praxair Inc.
6.75%, 3/1/03 25,000 25,530
Procter & Gamble Co.
9.36%, 1/2/21 30,000 38,325
Raytheon Co.
7.375%, 7/15/25 25,000 26,039
Rohm & Haas Co.
9.80%, 4/15/20 10,000 13,220
Talisman Energy
7.125%, 6/1/07 20,000 20,987
Texaco Capital
8.625%, 4/1/32 30,000 37,784
United Parcel Service
8.375%, 4/1/20 10,000 12,075
Unocal Corp.
8.75%, 8/15/01 10,000 11,133
Wal-Mart Stores, Inc.
5.875%, 10/15/05 25,000 24,634
6.50%, 6/1/03 10,000 10,301
Weyerhaeuser Co.
8.50%, 1/15/25 20,000 24,586
Whirlpool Corp.
9.00%, 3/1/03 10,000 11,634
Witco Chemical Corp.
6.60%, 4/1/03 5,000 5,137
-------------
GROUP TOTAL 1,027,592
-------------
- ------------------------------------------------------------------------------------------------
UTILITY (16.9%)
AT&T Corp.
7.125%, 1/15/02 30,000 31,769
8.625%, 12/1/31 40,000 46,542
Arizona Public Service Co.
6.625%, 3/1/04 10,000 10,207
9.50%, 4/15/21 10,000 11,639
</TABLE>
10
<PAGE> 13
<TABLE>
<CAPTION>
Face Market
Amount Value
(000) (000)+
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Baltimore Gas & Electric Co.
7.25%, 7/1/02 $ 15,000 $ 16,012
8.375%, 8/15/01 10,000 11,107
BellSouth Telecommunications
6.25%, 5/15/03 12,000 12,194
7.00%, 10/1/25 10,000 10,629
8.25%, 7/1/32 35,000 39,981
Carolina Power & Light Co.
6.875%, 8/15/23 10,000 10,160
Carolina Telephone & Telegraph Co.
5.75%, 8/15/00 5,000 4,975
Chesapeake & Potomac Telephone Co., MD
7.15%, 5/1/23 20,000 21,064
Chesapeake & Potomac Telephone Co., VA
7.875%, 1/15/22 15,000 17,476
Cincinnati Gas & Electric Co.
6.90%, 6/1/25 9,500 10,252
7.20%, 10/1/23 15,100 15,207
Coastal Corp.
7.75%, 10/15/35 10,000 10,382
8.125%, 9/15/02 10,000 10,938
9.75%, 8/1/03 11,275 13,467
10.00%, 2/1/01 27,000 31,169
Commonwealth Edison Co.
7.375%, 9/15/02 10,000 10,573
Consolidated Edison Co. of NY
6.375%, 4/1/03 20,000 20,229
Duke Power Co.
5.875%, 6/1/01 19,900 19,747
7.00%, 7/1/33 30,000 30,328
Enron Corp.
6.875%, 10/15/07 20,000 20,750
7.00%, 8/15/23 10,000 9,857
Florida Power & Light Co.
5.375%, 4/1/00 12,500 12,309
GTE Florida, Inc.
6.31%, 12/15/02 20,000 20,313
Houston Lighting & Power Co.
7.50%, 7/1/23 20,000 20,877
Illinois Bell Telephone Co.
6.625%, 2/1/25 10,000 9,907
7.25%, 3/15/24 20,000 20,887
Illinois Power Co.
5.625%, 4/15/00 10,000 9,887
6.50%, 8/1/03 10,000 10,104
7.50%, 7/15/25 10,000 10,071
Iowa-Illinois Gas & Electric Co.
6.95%, 10/15/25 5,000 5,078
Kansas Gas & Electric Co.
6.50%, 8/1/05 6,500 6,613
Kentucky Utilities
7.92%, 5/15/07 5,000 5,683
MCI Communications Corp.
7.125%, 1/20/00 15,000 15,629
7.50%, 8/20/04 15,000 16,365
Michigan Bell Telephone Co.
7.50%, 2/15/23 35,000 37,384
New Jersey Bell Telephone Co.
8.00%, 6/1/22 35,000 41,294
New York Telephone Co.
6.50%, 3/1/05 30,000 30,672
7.25%, 2/15/24 15,000 15,150
Northern Illinois Gas
7.26%, 10/15/25 5,000 5,227
Northern States Power Co.
6.375%, 4/1/03 8,000 8,162
7.125%, 7/1/25 30,000 32,125
Ohio Bell Telephone Co.
6.125%, 5/15/03 15,000 15,194
Oklahoma Gas & Electric Co.
7.30%, 10/15/25 15,000 15,671
Pacific Bell Telephone Co.
7.00%, 7/15/04 5,000 5,298
7.125%, 3/15/26 25,000 26,508
7.25%, 7/1/02 10,000 10,703
Pacific Gas & Electric Co.
8.25%, 11/1/22 25,000 28,405
PacifiCorp
6.625%, 6/1/07 10,000 10,339
PECO Energy Corp.
6.50%, 5/1/03 30,000 30,396
Pennsylvania Power & Light Co.
6.50%, 4/1/05 15,000 15,328
6.75%, 10/1/23 9,000 8,727
Southern California Edison Co.
6.25%, 6/15/03 6,050 6,060
8.875%, 6/1/24 10,000 10,858
Southern California Gas Co.
6.875%, 11/1/25 15,000 14,400
Southwestern Bell Telephone Co.
7.20%, 10/15/26 32,500 33,691
7.25%, 7/15/25 37,500 39,264
Southwestern Public Service Co.
7.25%, 7/15/04 10,000 10,739
8.20%, 12/1/22 12,500 13,760
Texas Utilities Co.
6.75%, 7/1/05 10,000 10,315
8.00%, 6/1/02 10,000 11,019
9.75%, 5/1/21 10,000 11,787
</TABLE>
11
<PAGE> 14
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Face Market
Amount Value
(000) (000)+
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Union Electric Co.
6.75%, 10/15/99 $ 7,250 $ 7,481
6.875%, 8/1/04 10,000 10,528
U S WEST Communications Group
7.50%, 6/15/23 45,000 47,624
Virginia Electric & Power Co.
6.00%, 8/1/02 10,000 10,029
6.75%, 10/1/23 20,000 19,346
Wisconsin Public Service Co.
7.30%, 10/1/02 6,700 7,192
8.80%, 9/1/21 5,000 5,892
-------------
GROUP TOTAL 1,216,945
-------------
- ------------------------------------------------------------------------------------------------
TOTAL CORPORATE BONDS
(Cost $2,827,227) 3,024,611
- ------------------------------------------------------------------------------------------------
FOREIGN BONDS (U.S. DOLLAR DENOMINATED) (1.1%)
- ------------------------------------------------------------------------------------------------
Province of Manitoba
6.125%, 1/19/04 7,000 7,013
8.875%, 9/15/21 10,000 12,710
Province of Nova Scotia
8.875%, 7/1/19 9,500 11,529
9.50%, 2/1/19 10,000 12,857
Province of Ontario
7.75%, 6/4/02 15,000 16,330
Province of Saskatchewan
8.50%, 7/15/22 19,000 22,869
- ------------------------------------------------------------------------------------------------
TOTAL FOREIGN BONDS
(Cost $80,751) 83,308
- ------------------------------------------------------------------------------------------------
U.S. GOVERNMENT & AGENCY
OBLIGATIONS (17.7%)
- ------------------------------------------------------------------------------------------------
U.S. GOVERNMENT SECURITIES (8.6%)
U.S. Treasury Bond
7.25%, 5/15/16 150,000 171,281
U.S. Treasury Notes
5.75%, 8/15/03 125,000 126,504
7.125%, 2/29/00 300,000 319,359
-------------
GROUP TOTAL 617,144
-------------
- ------------------------------------------------------------------------------------------------
AGENCY BONDS AND NOTES (1.0%)
Federal Home Loan Mortgage Corp.
8.14%, 9/29/04 25,000 27,078
Tennessee Valley Authority
8.625%, 11/15/29 40,000 45,359
-------------
GROUP TOTAL 72,437
-------------
- ------------------------------------------------------------------------------------------------
MORTGAGE-BACKED SECURITIES (8.1%)
Federal National Mortgage Assn.
6.00%, 9/1/01 869 893
Government National Mortgage Assn.
6.50%, 6/15/08-10/15/24 482,767 479,494
7.00%, 4/15/17-10/15/23 96,251 97,695
-------------
GROUP TOTAL 578,082
-------------
- ------------------------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT & AGENCY OBLIGATIONS
(Cost $1,170,065) 1,267,663
- ------------------------------------------------------------------------------------------------
COMMON STOCKS (35.4%)
- ------------------------------------------------------------------------------------------------
Shares
-------------
BASIC MATERIALS (3.6%)
Dow Chemical Co. 585,000 41,169
E.I. du Pont de Nemours & Co. 386,200 26,986
Federal Paper Board Co., Inc. 225,300 11,687
Kimberly-Clark Corp. 770,000 63,718
Olin Corp. 160,400 11,910
Union Camp Corp. 1,284,900 61,193
Witco Chemical Corp. 1,321,400 38,651
-------------
GROUP TOTAL 255,314
-------------
- ------------------------------------------------------------------------------------------------
CAPITAL GOODS & CONSTRUCTION (.3%)
Cooper Industries, Inc. 600,000 22,050
-------------
- ------------------------------------------------------------------------------------------------
CONSUMER CYCLICAL (2.8%)
Chrysler Corp. 561,500 31,093
Eastman Kodak Co. 321,800 21,561
Ford Motor Co. 2,631,000 76,299
J.C. Penney Co., Inc. 1,573,800 74,952
-------------
GROUP TOTAL 203,905
-------------
- ------------------------------------------------------------------------------------------------
CONSUMER STAPLES (1.3%)
American Brands, Inc. 620,000 27,668
Flowers Industries, Inc. 2,609,100 31,635
* Schweitzer-Mauduit International, Inc. 77,000 1,781
Universal Corp. 1,159,600 28,265
-------------
GROUP TOTAL 89,349
-------------
- ------------------------------------------------------------------------------------------------
ENERGY (5.6%)
Amoco Corp. 850,000 61,094
Atlantic Richfield Co. 518,000 57,369
Dresser Industries, Inc. 783,200 19,091
Metrogas ADS 659,800 6,433
Questar Corp. 520,000 17,420
Royal Dutch Petroleum Co. ADR 659,500 93,072
Sun Co., Inc. 281,833 7,715
Texaco, Inc. 1,354,200 106,305
USX-Marathon Group 1,787,000 34,847
-------------
GROUP TOTAL 403,346
-------------
- ------------------------------------------------------------------------------------------------
</TABLE>
12
<PAGE> 15
<TABLE>
<CAPTION>
Face Market
Amount Value
(000) (000)+
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
FINANCIAL (10.5%)
Allstate Corp. $ 169,548 $ 6,973
BankAmerica 1,560,000 101,010
Bankers Trust New York Corp. 111,800 7,435
Bay Apartment Communities,
Inc. REIT 576,200 13,973
Boatmen's Bancshares, Inc. 1,254,000 51,257
CBL & Associates Properties,
Inc. REIT 945,400 20,562
(1) Colonial Properties REIT 785,000 20,017
CoreStates Financial Corp. 3,253,600 123,230
DeBartolo Realty Corp. REIT 800,000 10,400
Equity Residential Properties
Trust REIT 383,200 11,735
First Union Corp. 1,238,200 68,875
General Growth Properties REIT 702,600 14,579
(1) Home Properties of
New York REIT 529,300 9,064
Keycorp 2,104,050 76,272
JP Realty Inc. REIT 500,000 10,937
Macerich Co. REIT 417,000 8,340
J.P. Morgan & Co., Inc. 419,644 33,676
NationsBank, Inc. 396,000 27,570
Ohio Casualty Corp. 450,000 17,212
PNC Bank Corp. 1,356,800 43,757
Paragon Group, Inc. REIT 600,000 10,425
Post Properties, Inc. REIT 329,600 10,506
Roc Communities, Inc. REIT 417,600 10,022
Simon Property Group REIT 314,200 7,658
Spieker Properties REIT 637,800 16,025
(1) Town & Country Trust REIT 947,000 12,311
Urban Shopping Centers REIT 600,700 12,840
-------------
GROUP TOTAL 756,661
-------------
- ------------------------------------------------------------------------------------------------
HEALTH CARE (1.0%)
Bristol-Myers Squibb Co. 877,000 75,312
-------------
- ------------------------------------------------------------------------------------------------
UTILITY (9.7%)
BCE, Inc. 1,286,200 44,374
Bell Atlantic Corp. 200,000 13,375
BellSouth Corp. 572,000 24,882
CINergy Corp. 487,972 14,944
Consolidated Edison Co.
of New York 527,400 16,877
DQE Inc. 1,207,050 37,117
DTE Energy Co. 1,238,200 42,718
Equitable Resources, Inc. 489,000 15,281
GTE Corp. 1,227,700 54,019
General Public Utilities Corp. 847,000 28,812
Montana Power Co. 421,400 9,534
National Fuel & Gas Co. 577,100 19,405
Niagara Mohawk Power Corp. 100,400 966
NICOR, Inc. 862,100 23,708
Nova Scotia Power 718,300 6,496
NYNEX Corp. 1,431,772 77,316
Pacific Enterprises 485,000 13,701
Pacific Gas & Electric Co. 2,205,200 62,573
Pacific Telesis Group 516,000 17,351
PacifiCorp 256,800 5,457
PECO Energy Corp. 396,200 11,936
Public Service Co. of Colorado 349,900 12,378
Rochester Gas & Electric Corp. 531,600 12,027
SCEcorp 1,366,000 24,247
Sierra Pacific Resources 744,300 17,398
Southern Co. 1,176,000 28,959
Unicom Corp. 867,207 28,401
U S WEST Communications Group 865,000 30,924
-------------
GROUP TOTAL 695,176
-------------
- ------------------------------------------------------------------------------------------------
MISCELLANEOUS (.6%)
Minnesota Mining &
Manufacturing Co. 637,700 42,248
-------------
- ------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost $2,057,603) 2,543,361
- ------------------------------------------------------------------------------------------------
CONVERTIBLE PREFERRED STOCKS (.9%)
- ------------------------------------------------------------------------------------------------
H.F. Ahmanson 6.00% 516,000 30,444
Reynolds Metals $3.31 267,600 13,514
Santa Fe Energy 8.25% 1,071,600 10,448
Time Warner, Inc. PERC $1.24 300,100 9,378
- ------------------------------------------------------------------------------------------------
TOTAL CONVERTIBLE PREFERRED STOCKS
(Cost $57,497) 63,784
- ------------------------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENT (2.1%)
- ------------------------------------------------------------------------------------------------
<CAPTION>
Face
Amount
(000)
-------------
<S> <C> <C>
REPURCHASE AGREEMENT
Collateralized by U.S.
Government Obligations in
a Pooled Cash Account
5.89%, 1/2/96
(Cost $149,732) $149,732 149,732
- ------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (99.3%)
(Cost $6,342,875) 7,132,459
- ------------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (.7%)
- ------------------------------------------------------------------------------------------------
Other Assets--Notes C and E 146,599
Liabilities--Note E (98,322)
-------------
48,277
- ------------------------------------------------------------------------------------------------
</TABLE>
13
<PAGE> 16
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Market
Value
(000)+
- ------------------------------------------------------------------------------------------------
<S> <C>
NET ASSETS (100%)
- ------------------------------------------------------------------------------------------------
Applicable to 351,261,955 outstanding
$.10 par value shares
(authorized 450,000,000 shares) $7,180,736
- ------------------------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE $20.44
================================================================================================
</TABLE>
+ See Note A to Financial Statements.
* Non-income Producing Security.
(1) Considered an affiliated company as the Fund owns more than 5% of the
outstanding voting securities of such company.
MTN--Medium-Term Note.
REIT--Real Estate Investment Trust.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
AT DECEMBER 31, 1995, NET ASSETS CONSISTED OF:
- ------------------------------------------------------------------------------------------------
Amount Per
(000) Share
------------- -------------
<S> <C> <C>
Paid in Capital $6,348,207 $18.07
Undistributed Net Investment Income 11,952 .03
Accumulated Net Realized Gains 30,993 .09
Unrealized Appreciation
of Investments--Note D 789,584 2.25
- ------------------------------------------------------------------------------------------------
NET ASSETS $7,180,736 $20.44
- ------------------------------------------------------------------------------------------------
</TABLE>
14
<PAGE> 17
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended
December 31, 1995
(000)
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT INCOME
INCOME
Dividends . . . . . . . . . . . . . . . . . . . . . . . . $ 111,108
Interest . . . . . . . . . . . . . . . . . . . . . . . . 292,762
- -----------------------------------------------------------------------------------------------------
Total Income . . . . . . . . . . . . . . . . . . 403,870
- -----------------------------------------------------------------------------------------------------
EXPENSES
Investment Advisory Fee--Note B . . . . . . . . . . . . . 4,349
The Vanguard Group--Note C
Management and Administrative . . . . . . . . . . . . $15,223
Marketing and Distribution . . . . . . . . . . . . . . 1,346 16,569
-------
Taxes (other than income taxes) . . . . . . . . . . . . . 504
Custodian Fees . . . . . . . . . . . . . . . . . . . . . 242
Auditing Fees . . . . . . . . . . . . . . . . . . . . . . 18
Shareholders' Reports . . . . . . . . . . . . . . . . . . 305
Annual Meeting and Proxy Costs . . . . . . . . . . . . . 186
Directors' Fees and Expenses . . . . . . . . . . . . . . 25
- -----------------------------------------------------------------------------------------------------
Total Expenses . . . . . . . . . . . . . . . . . 22,198
Expenses Paid Indirectly--Note C . . . . . . . . (433)
- -----------------------------------------------------------------------------------------------------
Net Expenses . . . . . . . . . . . . . . . . . 21,765
- -----------------------------------------------------------------------------------------------------
Net Investment Income . . . . . . . . . . . . 382,105
- -----------------------------------------------------------------------------------------------------
REALIZED NET GAIN ON INVESTMENT
SECURITIES SOLD . . . . . . . . . . . . . . . . . . . . . . 141,798
- -----------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION) OF INVESTMENT SECURITIES . . . . . . . . . . 1,096,772
- -----------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from Operations $1,620,675
=====================================================================================================
</TABLE>
15
<PAGE> 18
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED Year Ended
DECEMBER 31, 1995 December 31, 1994
(000) (000)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income . . . . . . . . . . . . . . . . . . . $ 382,105 $ 370,199
Realized Net Gain . . . . . . . . . . . . . . . . . . . . . 141,798 46,034
Change in Unrealized Appreciation (Depreciation) . . . . . . 1,096,772 (696,906)
- ---------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations . . . . . . . . . . . . 1,620,675 (280,673)
- ---------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS (1)
Net Investment Income . . . . . . . . . . . . . . . . . . . (383,294) (368,591)
Realized Net Gain . . . . . . . . . . . . . . . . . . . . . (95,611) (78,686)
- ---------------------------------------------------------------------------------------------------------------
Total Distributions . . . . . . . . . . . . . . . . (478,905) (447,277)
- ---------------------------------------------------------------------------------------------------------------
NET EQUALIZATION CREDITS--Note A . . . . . . . . . . . . . . . 71 617
- ---------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (2)
Issued --Regular . . . . . . . . . . . . . . . . . . . . . 674,938 1,065,849
--In Lieu of Cash Distributions . . . . . . . . . . 409,690 379,611
--Exchange . . . . . . . . . . . . . . . . . . . . 288,957 497,331
Redeemed --Regular . . . . . . . . . . . . . . . . . . . . . (579,972) (732,681)
--Exchange . . . . . . . . . . . . . . . . . . . . (435,345) (813,628)
- ---------------------------------------------------------------------------------------------------------------
Net Increase from Capital Share Transactions . . . . 358,268 396,482
- ---------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) . . . . . . . . . . . . . 1,500,109 (330,851)
- ---------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Year . . . . . . . . . . . . . . . . . . . . . 5,680,627 6,011,478
- ---------------------------------------------------------------------------------------------------------------
End of Year (3) . . . . . . . . . . . . . . . . . . . . . . $7,180,736 $5,680,627
===============================================================================================================
(1) Distributions Per Share
Net Investment Income . . . . . . . . . . . . . . . . . $1.14 $1.11
Realized Net Gain . . . . . . . . . . . . . . . . . . . $ .28 $.24
- ---------------------------------------------------------------------------------------------------------------
(2) Shares Issued and Redeemed
Issued . . . . . . . . . . . . . . . . . . . . . . . . 51,153 85,297
Issued in Lieu of Cash Distributions . . . . . . . . . . 21,137 21,438
Redeemed . . . . . . . . . . . . . . . . . . . . . . . (54,185) (86,104)
- ---------------------------------------------------------------------------------------------------------------
18,105 20,631
- ---------------------------------------------------------------------------------------------------------------
(3) Undistributed Net Investment Income . . . . . . . . . . $ 11,952 $ 13,070
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
16
<PAGE> 19
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------
For a Share Outstanding Throughout Each Year 1995 1994 1993 1992 1991
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR . . . . . . . . . . . . . . $17.05 $19.24 $18.16 $18.08 $16.02
------- ------- ------- ------- -------
INVESTMENT OPERATIONS
Net Investment Income . . . . . . . . . . . . . . . . . . . 1.13 1.11 1.14 1.21 1.27
Net Realized and Unrealized Gain (Loss)
on Investments . . . . . . . . . . . . . . . . . . . . . . 3.68 (1.95) 1.48 .29 2.06
------- ------- ------- ------- -------
TOTAL FROM INVESTMENT OPERATIONS . . . . . . . . . . . 4.81 (.84) 2.62 1.50 3.33
- ---------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income . . . . . . . . . . . . (1.14) (1.11) (1.14) (1.21) (1.27)
Distributions from Realized Capital Gains . . . . . . . . . . (.28) (.24) (.40) (.21) --
------- ------- ------- ------- ------
TOTAL DISTRIBUTIONS . . . . . . . . . . . . . . . . . (1.42) (1.35) (1.54) (1.42) (1.27)
- ---------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR . . . . . . . . . . . . . . . . . $20.44 $17.05 $19.24 $18.16 $18.08
=====================================================================================================================
TOTAL RETURN . . . . . . . . . . . . . . . . . . . . . . . . . +28.91% -4.44% +14.65% +8.67% +21.57%
- ---------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net Assets, End of Year (Millions) . . . . . . . . . . . . . . $7,181 $5,681 $6,011 $3,178 $1,934
Ratio of Expenses to Average Net Assets . . . . . . . . . . . . .35%+ .34% .33% .35% .40%
Ratio of Net Investment Income to
Average Net Assets . . . . . . . . . . . . . . . . . . . . . 5.96% 6.16% 5.79% 6.50% 7.08%
Portfolio Turnover Rates:
Common Stocks . . . . . . . . . . . . . . . . . . . . . . . 27% 32% 26% 16% 19%
Bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . 32% 31% 18% 24% 34%
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
+ Effective in 1995, does not include reductions from directed brokerage
arrangements. The 1995 Ratio of Expenses to Average Net Assets is .34% after
including these reductions. See Note C.
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.
17
<PAGE> 20
NOTES TO FINANCIAL STATEMENTS (continued)
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 a 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 1, 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 year ended
December 31, 1995, the investment advisory fee represents an effective annual
rate of .07 of 1% of average net assets after giving effect to a fee waiver of
$337,000 (.01% 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 December 31, 1995, the Fund had contributed capital of $820,000
to Vanguard (included at cost in Other Assets), representing 4.1% 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 year ended December 31, 1995, directed
brokerage arrangements reduced the Fund's expenses by $433,000 (.01 of 1% of
average net assets).
D. During the year ended December 31, 1995, the Fund made purchases of
$1,602,064,000 and sales of $1,317,755,000 of investment securities other than
U.S. Government securities and temporary cash investments. Purchases and sales
of U.S. Government obligations were $620,566,000 and $700,282,000,
respectively.
At December 31, 1995, net unrealized net appreciation for financial reporting
and Federal income tax purposes aggregated $789,584,000, of which $813,442,000
related to appreciated securities and $23,858,000 related to depreciated
securities.
E. The market value of securities on loan to broker/dealers at December 31,
1995, was $61,486,000, for which the Fund had received as collateral cash of
$48,756,000 and U.S. Treasury securities with a market value of $14,665,000.
18
<PAGE> 21
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors
Vanguard/Wellesley Income Fund
In our opinion, the accompanying statement of net assets and the related
statements of operations and of changes in net assets and the financial
highlights present fairly, in all material respects, the financial position of
Vanguard/Wellesley Income Fund (the "Fund") at December 31, 1995, and the
results of its operations, the changes in its net assets and the financial
highlights for each of the respective periods presented, in conformity with
generally accepted accounting principles. These financial statements and
financial highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits, which included confirmation of securities by correspondence with
the custodian and brokers and the application of alternative auditing
procedures where confirmations from brokers were not received, provide a
reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Thirty South Seventeenth Street
Philadelphia, Pennsylvania 19103
January 31, 1996
SPECIAL 1995 TAX INFORMATION (UNAUDITED)
FOR VANGUARD/WELLESLEY INCOME FUND, INC.
Corporate shareholders should note that for the fiscal year ended December 31,
1995, 25.5% of the Fund's investment income (i.e., dividend income plus
short-term capital gains, if any) qualifies for the intercorporate dividends
received deduction.
19
<PAGE> 22
DIRECTORS AND OFFICERS
JOHN C. BOGLE, Chairman and Chief Executive Officer
Chairman and Director of The Vanguard Group, Inc., and of each of the
investment companies in The Vanguard Group.
JOHN J. BRENNAN, President
President and Director of The Vanguard Group, Inc., and of each of the
investment companies in The Vanguard Group.
ROBERT E. CAWTHORN, Chairman of Rhone-Poulenc Rorer Inc.; Director of Sun
Company, Inc.
BARBARA BARNES HAUPTFUHRER, Director of The Great Atlantic and Pacific Tea Co.,
Alco Standard Corp., Raytheon Co., Knight-Ridder, Inc., and Massachusetts
Mutual Life Insurance Co.
BRUCE K. MACLAURY, President of The Brookings Institution; Director of American
Express Bank Ltd. and The St. Paul Companies, Inc.
BURTON G. MALKIEL, Chemical Bank Chairman's Professor of Economics, Princeton
University; Director of Prudential Insurance Co. of America, Amdahl Corp.,
Baker Fentress & Co., The Jeffrey Co., and Southern New England Communications
Co.
ALFRED M. RANKIN, JR., Chairman, President, and Chief Executive Officer of
NACCO Industries, Inc.; Director of NACCO Industries, The BFGoodrich Co., and
The Standard Products Co.
JOHN C. SAWHILL, President and Chief Executive Officer of The Nature
Conservancy; formerly, Director and Senior Partner of McKinsey & Co. and
President of New York University; Director of Pacific Gas and Electric Co. and
NACCO Industries.
JAMES O. WELCH, JR., Retired Chairman of Nabisco Brands, Inc.; retired Vice
Chairman and Director of RJR Nabisco; Director of TECO Energy, Inc. and Kmart
Corp.
J. LAWRENCE WILSON, Chairman and Chief Executive Officer of Rohm & Haas Co.;
Director of Cummins Engine Co.; Trustee of Vanderbilt University.
OTHER FUND OFFICERS
RAYMOND J. KLAPINSKY, Secretary; Senior Vice President and Secretary of The
Vanguard Group, Inc.; Secretary of each of the investment companies in The
Vanguard Group.
RICHARD F. HYLAND, Treasurer; Treasurer of The Vanguard Group, Inc., and of
each of the investment companies in The Vanguard Group.
KAREN E. WEST, Controller; Vice President of The Vanguard Group, Inc.;
Controller of each of the investment companies in The Vanguard Group.
OTHER VANGUARD GROUP OFFICERS
ROBERT A. DISTEFANO IAN A. MACKINNON
Senior Vice President Senior Vice President
Information Technology Fixed Income Group
JEREMY G. DUFFIELD F. WILLIAM MCNABB III
Senior Vice President Senior Vice President
Planning & Development institutional
JAMES H. GATELY RALPH K. PACKARD
Senior Vice President Senior Vice President
Individual Investor Group Chief Financial Officer
20
<PAGE> 23
THE VANGUARD FAMILY OF FUNDS
EQUITY AND BALANCED FUNDS
GROWTH AND INCOME FUNDS
Vanguard/Windsor Fund
Vanguard/Windsor II
Vanguard Equity Income Fund
Vanguard Quantitative Portfolios
Vanguard/Trustees' Equity Fund
U.S. Portfolio
Vanguard Convertible
Securities Fund
BALANCED FUNDS
Vanguard/Wellington Fund
Vanguard/Wellesley Income Fund
Vanguard STAR Portfolio
Vanguard Asset Allocation Fund
Vanguard LIFEStrategy Funds
GROWTH FUNDS
Vanguard/Morgan Growth Fund
Vanguard/PRIMECAP Fund
Vanguard U.S. Growth Portfolio
AGGRESSIVE GROWTH FUNDS
Vanguard Explorer Fund
Vanguard Specialized Portfolios
Vanguard Horizon Fund
Global Equity Portfolio
Global Asset Allocation Portfolio
Capital Opportunity Portfolio
Aggressive Growth Portfolio
INTERNATIONAL FUNDS
Vanguard International
Growth Portfolio
Vanguard/Trustees' Equity Fund
International Portfolio
INDEX FUNDS
Vanguard Index Trust
500 Portfolio
Total Stock Market Portfolio
Extended Market Portfolio
Growth Portfolio
Value Portfolio
Small Capitalization Stock Portfolio
Vanguard Tax-Managed Fund
Vanguard Balanced Index Fund
Vanguard Bond Index Fund
Total Bond Market Portfolio
Short-Term Bond Portfolio
Intermediate-Term Bond Portfolio
Long-Term Bond Portfolio
Vanguard International Equity
Index Fund
European Portfolio
Pacific Portfolio
Emerging Markets Portfolio
FIXED INCOME FUNDS
MONEY MARKET FUNDS
Vanguard Money Market Reserves
Vanguard Admiral Fund
U.S. Treasury Money Market Portfolio
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 Fixed Income
Securities Fund
Vanguard Admiral Fund
Vanguard Preferred Stock Fund
[THE VANGUARD GROUP LOGO]
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.
Vanguard Financial Center
Valley Forge, Pennsylvania 19482
New Account Information:
1 (800) 662-7447
Shareholder Account Services:
1 (800) 662-2739
Q270-12/95
ON OUR COVER: On the evening of August 1, 1798, Lord Horatio Nelson sailed his
flagship, HMS Vanguard, into Egypt's Aboukir Bay. In a night encounter, the
British fleet annihilated Napoleon Bonaparte's ships of the line in what is
still considered to be the most complete victory ever recorded in naval
history. Our Report's cover illustration is Thomas Luny's 1830 painting, The
Battle Of The Nile, in which the French flagship, L'Orient, is shown as it
exploded at 10:00 p.m. under a gibbous moon.
<PAGE> 24
VANGUARD /WELLESLEY INCOME FUND
EDGAR APPENDIX
This appendix describes the components of the printed version of this report
that do not translate into a format acceptable to the EDGAR system.
The cover of the printed version of this report features Thomas Luny's 1830
painting "The Battle Of The Nile"
A photograph of John C. Brennan and John C. Bogle appears on the inside cover
top-center.
A running head featuring a sword, helmet, gloves and battleships in the
background appears at the top of pages one through five.
A line chart of the Indexed Value between Standard & Poor's 500 Stock Index and
Lehman Long-Term Corporate Bond Index for the fiscal years 1990 through 1995
appears at the top of page two.
A line chart illustrating cumulative performance between Vanguard/Wellesley
Income Fund, Composite Index, Lehman Long-Term Corporate Bond Index, and
Average Income Fund, average Annual Total Returns for the period December 31,
1985, to December 31, 1995 appears at the top of page three.
A running head featuring ships wheel, rope and battleships in the background
appears at the top of pages six & seven.
A running head featuring a cannon and battleships in the background appears at
the top of page eight.
A running head featuring open log book, pen and battleships in the background
appears at the top of pages nine through nineteen.
A running head featuring a sextant, a map, and battleships in the background
appears at the top of page twenty.
A running head featuring birds flying and ships in the background appears at
the top of the inside back cover.
