VANGUARD WELLESLEY(R)
INCOME FUND
JUNE 30, 2000
[A MEMBER OF
THE VANGUARD GROUP LOGO]
<PAGE>
HAVE THE PRINCIPLES OF INVESTING CHANGED? In a world of frenetic change in
business, technology, and the financial markets, it is natural to wonder whether
the basic principles of investing have changed.
We don't think so.
The most successful investors over the coming decade will be those who
began the new century with a fundamental understanding of risk and who had the
discipline to stick with long-term investment programs.
Certainly, investors today confront a challenging, even unprecedented,
environment. Valuations of market indexes are at or near historic highs. The
strength and duration of the bull market in U.S. stocks have inflated people's
expectations and diminished their recognition of the market's considerable
risks. And the incredible divergence in stock returns--many technology-related
stocks gained 100% or more in 1999, yet prices fell for more than half of all
stocks--has made some investors question the idea of diversification.
And then there is the Internet. Undeniably, it is a powerful medium for
communications and transacting business. For investors, the Internet is a vast
source of information about investments, and online trading has made it
inexpensive and convenient to trade stocks and invest in mutual funds.
However, new tools do not guarantee good workmanship. Information is not
the same as wisdom. Indeed, much of the information, opinion, and rumor that
swirl about financial markets each day amounts to "noise" of no lasting
significance. And the fact that rapid-fire trading is easy does not make it
beneficial. Frequent trading is almost always counterpro-ductive because
costs--even at low commission rates--and taxes detract from the returns that the
markets provide. Sadly, many investors jump into a "hot" mutual fund just in
time to see it cool off. Meanwhile, long-term fund investors are hurt by
speculative trading activity because they bear part of the costs involved in
accommodating purchases and redemptions.
Vanguard believes that intelligent investors should resist short-term
thinking and focus instead on a few time-tested principles:
o Invest for the long term. Pursuing your long-term investment goals is more
like a marathon than a sprint.
o Diversify your investments with holdings in stocks, bonds, and cash
investments. Remember that, at any moment, some part of a diversified
portfolio will lag other parts, and be wary of taking on more risk by
"piling onto" the best-performing part of your holdings. Today's leader
could well be tomorrow's laggard.
o Step back from the daily frenzy of the markets; focus on your overall asset
allocation.
o Capture as much of the market's return as possible by minimizing costs and
taxes.
Costs and taxes diminish long-term returns while doing nothing to reduce the
risks you incur as an investor.
--------------------------------------------------------------------------------
CONTENTS
Report From The Chairman..........1 Fund Profile..................8
The Markets In Perspective........4 Performance Summary..........12
Report From The Adviser...........6 Financial Statements.........13
--------------------------------------------------------------------------------
All comparative mutual fund data are from Lipper Inc. or Morningstar, Inc.,
unless otherwise noted.
"Standard & Poor's(R)," "S&P(R)," "S&P 500(R)," "Standard & Poor's 500," and
"500" are trademarks of The McGraw-Hill Companies, Inc.
Frank Russell Company is the owner of trademarks and copyrights relating to the
Russell Indexes.
"Wilshire 5000(R)" and "Wilshire 4500" are trademarks of Wilshire Associates
Incorporated.
<PAGE>
REPORT FROM THE CHAIRMAN
[PHOTO OF JOHN J. BRENNAN]
The stock market struggled but the bond market achieved solid results during the
first half of 2000. Vanguard Wellesley Income Fund recorded a 2.2% return for
the six months, a result that was better than those posted by its average peer,
its benchmark index, and the overall stock market.
The table at right presents the total return (capital change plus
reinvested dividends) for your fund, the average income fund, and the Wellesley
Composite Index, which is constructed of market benchmarks weighted in
proportion to your fund's typical investment mix of 65% bonds and 35%
dividend-paying stocks.
-----------------------------------------------------
TOTAL RETURNS
SIX MONTHS ENDED
JUNE 30, 2000
-----------------------------------------------------
Vanguard Wellesley Income Fund 2.2%
-----------------------------------------------------
Average Income Fund* 1.9%
-----------------------------------------------------
Wellesley Composite Index** 1.7%
-----------------------------------------------------
*Derived from data provided by Lipper Inc.
**Bond component is 65% Lehman Long Credit AA or Better Bond Index through March
31, 2000, and 65% Lehman Credit A or Better Index thereafter. Stock component is
26% S&P 500/BARRA Value Index, 4.5% S&P Utilities Index, and 4.5% S&P Telephone
Index.
Our return is based on a decrease in net asset value from $18.85 per share
on December 31, 1999, to $18.73 per share on June 30, 2000, and is adjusted for
dividends of $0.53 per share paid from net investment income (down from $0.56
paid out during the first half of 1999). As of June 30, Wellesley Income Fund's
annualized yield was 5.8%, up from 5.7% on December 31, 1999, and 5.3% on June
30, 1999.
THE PERIOD IN REVIEW
The first half of 2000 was a tumultuous time in the financial markets, which
were buffeted by a complex set of crosscurrents. The domestic economy continued
to grow at a strong pace: Output, adjusted for inflation, was 6% higher during
the second quarter of 2000 than a year before. Unemployment remained low,
hovering around 4% of the workforce.
Economic growth is generally good for corporate earnings and, thus, for
stocks. But investors and economic policymakers have worried that the
combination of rapid growth and low unemployment would trigger sharply higher
wages and inflation. The Federal Reserve Board, seeking to slow the economy's
momentum and forestall an inflationary outburst, continued to raise short-term
interest rates during the half-year. The Fed boosted the federal funds rate
three times by a total of 1.0 percentage point (100 basis points).
Although the Fed succeeded in pushing up short-term interest rates--the
yield of 3-month U.S. Treasury bills climbed 52 basis points (from 5.33% to
5.85%) during the period--it had less impact on long-term rates. After rising
early in 2000, yields for longer-term Treasuries began to fall after the
Treasury Department announced that it would take advantage of the rising federal
budget surplus to buy back billions of dollars' worth of long-term bonds. The
shrinking supply of Treasuries caused their prices to rise and their yields to
fall. On balance, the 30-year Treasury bond fell 58 basis points, to 5.90%,
during the half-year. Yields on high-quality corporate bonds were slightly
higher and prices dipped slightly.
In the stock market, a boom in technology-related sectors kept the market
averages rising during the first quarter, despite the threat of higher inflation
and the Fed's tighter
1
<PAGE>
monetary policy. But during the second quarter, tech stocks in particular cooled
off. The market may have reacted to evidence that the ideal combination of rapid
growth and low inflation could be ending. If the Fed succeeds in slowing the
economy, corporate earnings growth might slow, too. And if earnings growth
slowed, some investors reasoned, technology and telecommunications stocks would
have a tough time maintaining their lofty price/earnings multiples. The split
between the two quarters was evident in the results for the tech-heavy Nasdaq
Composite Index, which rose 12.7% in the first quarter only to slide -14.7% in
the second. End result? A -3.9% return for the half-year.
Overall, stocks provided a -0.7% return for the six months, as measured by
the Wilshire 5000 Total Market Index. Market leadership flip-flopped between
growth stocks--whose prices reflect high expectations for future
profitability--and value stocks, whose low prices in relation to earnings, book
value, and dividends reflect lower expectations. Growth stocks were in front
early on, but value stocks performed best in late March and April. Growth issues
bounced back in June, however, and for the full six months, growth generally
outpaced value: The growth stocks within the Standard & Poor's 500 Index gained
2.6%, while the value stocks returned -4.1%.
PERFORMANCE OVERVIEW
Although modest in absolute terms, Wellesley Income Fund's 2.2% return during
the first half of 2000 was better than those achieved by the average income fund
(1.9%), your fund's composite index benchmark (1.7%), or the overall stock
market (-0.7%).Wellesley's bond holdings, which made up 61% of fund assets at
mid-year, earned 2.8% during the six months. This trailed the 3.6% "spliced"
return for the bond benchmarks we used during the period (the Lehman Brothers
Long Credit AA or Better Bond Index through March 31, and the Lehman Credit A or
Better Bond Index thereafter). Your fund's stock holdings returned 0.4%--nearly
3 full percentage points above the -2.4% return for our unmanaged stock index
and even ahead of the S&P 500's -0.4% return.
In keeping with our adoption of the Lehman Credit A or Better Bond Index as
our bond benchmark, our adviser has shortened the bond portfolio's average
maturity and average duration (an estimate of how bond prices will fluctuate as
interest rates change). As of June 30, the average duration was 5.8 years, down
from 7.6 years on December 31, 1999. This means that the price of our bond
holdings should rise or fall roughly 5.8% (down from 7.6%) in response to a
1-percentage-point change in market interest rates. But while the fund's
sensitivity to changes in rates has been reduced, it remains a bit higher than
that of our new benchmark index, whose duration is 5.4 years. Given that
corporate bond prices fell slightly during the half-year, the longer duration of
our holdings hurt us a bit in relation to the index.
Our stock segment outpaced its market benchmarks primarily because of good
security selection by our adviser, Wellington Management Company. For example,
in the consumer-staples category, Wellesley's holdings earned 16.5%, far ahead
of the -4.5% return for this group in the S&P 500 Index. And Wellington
Management's picks in the utility sector, home to more than one-fifth of our
stock holdings, essentially broke even during the six months, a far better
result than the average decline of -11.8% for utilities within the S&P 500.
Our fund met its goal of providing a relatively high and stable level of
income during the half-year. These days, it seems that many investors overlook
the importance of steady income from interest and dividends. But Wellesley's
emphasis on income has served shareholders well over time, especially during
periods of high volatility in the markets.
2
<PAGE>
IN SUMMARY
During the first half of 2000 we witnessed very sharp day-to-day price
fluctuations for stocks, significant swings in market sentiment, and sudden
shifts in market leadership. All of this volatility, squeezed into a mere six
months, underscored the fact that unpredictability is par for the course in
financial markets. The timing, extent, and duration of such episodes are
impossible to foretell with precision, but investors must be willing to endure
them to reap the long-term rewards of investing.
At Vanguard, we reiterate our long-standing recommendation for navigating
stormy seas toward long-term financial goals. First, create an investment plan
with a balance of stock funds, bond funds, and money market funds suited to your
time horizon, investment objectives, and tolerance for market fluctuations.
Wellesley Income Fund, of course, was founded on this principle of balanced
investing. Once you have a diversified plan in place, stick with it. Avoid the
impulse to alter it based on short-term events--whether those be unsettling
turbulence in the market or glittery returns from some particular corner of the
market. "Stay the course" is timeless investment wisdom.
/s/
John J. Brennan
Chairman and Chief Executive Officer
July 14, 2000
--------------------------------------------------------------------------------
IN MEMORY
--------------------------------------------------------------------------------
It is with great sadness that I report the death of John C. Sawhill, an
independent trustee of the fund and a member of The Vanguard Group's board of
directors since 1991. John, an economist who was president and chief executive
officer of The Nature Conservancy, died on May 18 at age 63. He was a senior
lecturer at the Harvard Business School and had formerly served as president of
New York University and as deputy secretary of the U.S. Department of Energy
under President Jimmy Carter. John was a remarkable man who was full of energy,
vigor, and life. His experience and wisdom added a great deal to Vanguard, and
his death is a blow to everyone who knew and loved him. Though John's work on
behalf of our funds was often carried on behind the scenes, he was a dedicated
advocate for the best interests of our shareholders. He will be missed.
--------------------------------------------------------------------------------
NOTICE TO SHAREHOLDERS
In the past, the quarterly income dividend that Vanguard Wellesley Income Fund
distributed to shareholders was paid at a set rate of $0.28 per share. Any
income the fund earned in excess of the set rate was distributed in the December
income dividend. Beginning with the dividend of $0.27 per share that was paid in
March 2000, the fund is distributing income on a "pay as you go" basis, rather
than according to a set rate. This policy change provides for a more even
distribution of income throughout the year.
--------------------------------------------------------------------------------
3
<PAGE>
THE MARKETS IN PERSPECTIVE
SIX MONTHS ENDED JUNE 30, 2000
The perpetual tug-of-war in the financial markets ended in a near stalemate
during the first half of 2000, despite lots of back-and-forth movement. On
average, neither stock nor bond prices ended the period far from where they
began it. However, bonds, thanks to their superior income, outpaced stocks in
total return.
Economic signals were conflicting. Growth continued at a rapid pace, and
corporate profits rose smartly. On the other hand, stock prices as the year
began already reflected high levels of optimism, and the market administered
severe punishment to companies that failed to live up to earnings expectations.
Also weighing on the market were concerns that the economy's vigor at a time of
low unemployment would inevitably push labor costs and other prices higher.
Indeed, higher costs for oil and natural gas pushed broad gauges of inflation
higher (the Consumer Price Index gained 2.4% for the six months and 3.7% for the
twelve months ended June 30). Yet core inflation, which excludes energy and food
items, registered a moderate 2.4% gain during the 12 months ended June 30.
The Federal Reserve Board raised short-term interest rates by 0.25
percentage point in February and again in March, before adding a half-point
boost in May. These steps, which followed three quarter-percentage-point
increases in 1999, took the Fed's target for short-term rates to 6.5%.
Thereafter, signs of a slowing in economic activity cropped up, although it was
not certain that the Fed was done trying to throttle down the economic engine.
--------------------------------------------------------------------------------
TOTAL RETURNS
PERIODS ENDED JUNE 30, 2000
------------------------------------------
6 MONTHS 1 YEAR 5 YEARS*
--------------------------------------------------------------------------------
STOCKS
S&P 500 Index -0.4% 7.2% 23.8%
Russell 2000 Index 3.0 14.3 14.3
Wilshire 5000 Index -0.7 10.0 22.6
MSCI EAFE Index -4.0 17.4 11.6
--------------------------------------------------------------------------------
BONDS
Lehman Aggregate Bond Index 4.0% 4.6% 6.3%
Lehman 10 Year Municipal Bond Index 4.0 4.5 6.0
Salomon Smith Barney 3-Month
U.S. Treasury Bill Index 2.8 5.3 5.2
--------------------------------------------------------------------------------
OTHER
Consumer Price Index 2.4% 3.7% 2.5%
--------------------------------------------------------------------------------
*Annualized.
U.S. STOCK MARKETS
Stock prices were quite volatile during the half-year, and large day-to-day
price fluctuations in market averages were commonplace. There also were two
swift shifts in market leadership. The year began with a continuance in the
rapid rise for the "TMT" stocks (technology, media, telecommunications) that
were the market's darlings during 1999. Through mid-March, the surge in these
"new economy" groups left "old economy" stocks far behind. For example, the
Nasdaq Composite Index, which is dominated by tech-related stocks, gained 15.6%
and the Russell 1000 Value Index fell -10.4% during January and February. But in
mid-March, value stocks took charge and TMT stocks slumped. The Russell 1000
Value Index returned 12.1% while the Nasdaq plummeted to a -27.4% return in the
March-May period. But June brought another flip-flop: The value index declined
-4.6%, while the Nasdaq rebounded with a 14.5% return.
4
<PAGE>
When the half-year was over, most broad market indexes had modest declines.
The all-market Wilshire 5000 Index returned -0.7%, the large-capitalization S&P
500 Index slipped -0.4%, and the Nasdaq fell -3.9%. Small- and mid-cap stocks
did better: The small-cap Russell 2000 Index gained 3.0% and the Wilshire 4500
Completion Index, comprising virtually all the U.S. stocks outside of the S&P
500, eked out a 0.3% return.
U.S. BOND MARKETS
The Federal Reserve most directly influences interest rates of short-term
securities. The Fed pushed up its target federal funds rate (charged on
overnight loans between banks) by 1 percentage point to 6.5%. But yields of
3-month U.S. Treasury bills rose only half as far (0.52 percentage point, or 52
basis points to 5.85%). And yields actually declined on long-term Treasury
securities, whose prices rose. Big federal budget surpluses are causing a
shrinking supply of Treasury bonds. The 10-year Treasury note's yield fell 41
basis points to 6.03% as of June 30, and the yield of the 30-year Treasury
declined 58 basis points--from 6.48% to 5.90%--during the half-year.
The upshot was an unusual "inversion" in the yield curve. Instead of
sloping upward--with yields increasing along with the maturity of Treasury
securities--the curve descended. The 5.90% yield of 30-year Treasuries on June
30 was 49 basis points below the 6.39% yield on 3-year Treasury notes.
Corporate bonds did not perform as well as Treasuries for two main
reasons: a record level of new offerings and investors' concern that credit
quality might be declining. The rise in yields (and fall in prices) was slight
for higher-quality corporate bonds but more severe for high-yield "junk" bonds.
Investors grew wary of riskier bonds due to an increase in defaults. The Lehman
High Yield Bond Index saw a price decline of -5.7% during the first half of
2000, more than offsetting its six-month income of 4.5%. Tax-exempt municipal
bonds generally outperformed corporates but did not do as well as Treasury
securities. The overall taxable bond market, as measured by the Lehman Aggregate
Bond Index, returned 4.0%, as a price gain of 0.4% augmented a 3.6% income
return.
INTERNATIONAL STOCK MARKETS
International stock markets were generally unprofitable for U.S. investors due
to lack-luster local market performances and a stronger U.S. dollar during the
half-year. Although economic growth in most of Europe appeared to be
strengthening, stocks were hurt by continued economic weakness in Japan and from
expectations of higher interest rates. On the other hand, European stock prices
got some support from an increase in corporate takeovers.
In local currencies, European stocks posted a 1.7% return in the aggregate
and stocks from the Pacific region recorded a modest decline of -2.6%. However,
the dollar's strength diminished those results for U.S. investors, for whom the
Morgan Stanley Capital International (MSCI) Europe Index returned -3.0% and the
MSCI Pacific Free Index returned -5.9%. The MSCI Europe, Australasia, Far East
(EAFE) Index of developed foreign markets registered a -4.0% return for U.S.
investors.
The Select Emerging Markets Free Index fell -9.6% in U.S. dollars, having
declined -3.5% in local currencies. The index was hit by weakness in South
Africa (-15%) and several emerging Asian markets, including Indonesia (-44%),
Thailand (-36%), and the Philippines (-36%). The biggest gains among emerging
markets were in Israel (+27%) and Venezuela (+19%).
5
<PAGE>
REPORT FROM THE ADVISER
Vanguard Wellesley Income Fund outperformed its unmanaged benchmark for the
first six months of 2000. During the half-year ended June 30, the fund returned
2.2%, versus 1.7% for the unmanaged benchmark.
The stock segment returned 0.4% for the half-year, following full-year
returns of -2.7% in 1999, 15.6% in 1998, and 32.8% in 1997. Overall returns for
various stock indexes are mixed so far in 2000, but Wellesley's stock portfolio
outpaced the -2.4% return of the equity portion of its benchmark. A general lack
of exposure to technology companies--due mostly to our income-oriented
charter--and an overweighting in energy versus the benchmark index contributed
to the fund's outperformance. The blended stock composite index is weighted 75%
in the S&P 500/BARRA Value Index, 12.5% in the S&P Utilities Index, and 12.5% in
the S&P Telephone Index.
The bond segment's return of 2.8% for the first six months of 2000 trailed
the 3.6% return of a "spliced" benchmark consisting of the result for the Lehman
Long Credit AA or Better Index, for the first three months of the year and the
return of the Lehman Credit A or Better Index, for the second quarter. The
fund's new bond benchmark has an intermediate-term average maturity and is
significantly less sensitive to changes in interest rates than the old, which
has a long average maturity.
The bond segment's positive return was notable, given that the Federal
Reserve Board continued to raise interest rates this year. Typically, when the
Fed raises short-term rates, yields rise for most securities of all maturities
and bond prices fall. This year, however, a shrinking supply of U.S. Treasury
securities and debt buybacks by the Treasury dampened Treasury yields. From a
business-cycle standpoint, we anticipate an end to Fed tightening before too
long, slower U.S. economic growth, and receding inflationary pressures, all of
which should provide a positive underpinning to the U.S. bond market in the near
future.
We reduced the interest rate risk of the Wellesley Income Fund bond
portfolio throughout the year by shortening the portfolio's duration
meaningfully. However, the portfolio is currently longer in duration than the
new benchmark, implying that a given change in interest rates will cause the
principal value of the fund's bond segment to change more than that of the
index. Despite the new shorter-duration benchmark, we should emphasize that both
the absolute and relative performance of the fund's bond segment will be hurt if
interest rates move higher.
The fund has maintained its traditional posture--investing 60%-65% of
assets in investment-grade bonds and 35%-40% of assets in dividend-paying
stocks. In general, the fund's performance is sensitive to changes in interest
rates because of its sizable weighting in bonds and its substantial allocation
to high-yielding, interest-rate-sensitive stocks.
--------------------------------------------------------------------------------
INVESTMENT PHILOSOPHY
The fund reflects a belief that relatively high current income and moderate
long-term growth in income and capital can be achieved without undue risk by
holding 60% to 65% of assets in fixed income securities and the balance in
income-oriented common stocks. Consistent with this approach, the fund's bond
segment comprises intermediate- and long-term U.S. Treasury securities and
high-quality corporate bonds; its equity segment is dominated by stocks with
above-average dividend yields and strong potential for dividend increases.
--------------------------------------------------------------------------------
6
<PAGE>
OUTLOOK FOR THE SECOND HALF
Given accumulating evidence of a slower U.S. economy, we believe the Fed will
temporarily move to the sidelines. We don't expect a rate increase in the next
several months. However, we are not convinced that the Fed has completed its
task. In the past, the Fed stopped raising interest rates once it could observe
a pattern of slowing consumption, weaker housing activity, and moderating
manufacturing activity, even if inflation indicators continued to deteriorate.
The economy still remains on solid footing. Investment, especially in
technology, continues to accelerate. Real GDP (gross domestic product) is
forecast to rise 5% on average in 2000, a higher rate than previously predicted,
reflecting first-quarter strength. Going forward, however, the key message is
decelerating growth. The economy is projected to expand at a healthy 4% average
rate in 2001.
Operating earnings for the S&P 500 Index companies increased 23% in the
first quarter, the strongest gain in profits since 1995. We expect that
second-quarter earnings will grow at a similar pace; for the full year, we
estimate earnings growth of 18%. In 2001, we forecast earnings growth of 12%,
which is still a fairly robust rate.
STRATEGY GOING FORWARD
Our strategy for the fund remains consistent. The percentage of assets invested
in stocks varies only between 35% and 40%. We reduced the stock portion of the
fund from 40% at the end of 1999 to 36% as of June 30. We had been at the upper
end of the 35%-40% range because we believed that strong earnings generated by
expansion in the global economy could support the valuations. We now expect to
stay around the midpoint of the range because there is a risk that earnings may
not meet expectations. The S&P 500 Index is up 7.2% for the last 12 months, and
is down -0.4% for the six months ended June 30. We believe that the prospect for
stable interest rates will bring an improved equity market performance in the
year ahead.
The strategy for the stock portfolio is to buy shares of companies with
above-market yields across different industries. We sell stocks usually because
they have either risen toward our target prices or experienced deteriorating
fundamentals. Most of Wellesley's stocks have above-average dividend yields. The
average yield of our stocks is 3.8%, which is 245% higher than the 1.1% average
yield of the S&P 500 Index.
The duration of the fund's bond portfolio will revolve around that of the
new benchmark to reduce the portfolio's sensitivity to changes in interest
rates. We purchase only investment-grade bonds denominated in U.S. dollars, and
we emphasize issuers with stable or improving credit fundamentals.
The dominant theme guiding the fund's investment strategy is our ongoing
obligation to provide an attractive level of income by investing in high-quality
securities. Our long-term goal is to achieve increases in Wellesley's dividend.
Earl E. McEvoy, Senior Vice President
John R. Ryan, Senior Vice President
Wellington Management Company, LLP
July 13, 2000
7
<PAGE>
FUND PROFILE
WELLESLEY INCOME FUND
This Profile provides a snapshot of the fund's characteristics as of June 30,
2000, compared where appropriate to an unmanaged index. Key elements of this
Profile are defined on pages 10 and 11.
TOTAL FUND CHARACTERISTICS
---------------------------
Yield 5.8%
Turnover Rate 28%*
Expense Ratio 0.31%*
Cash Investments 3.0%
*Annualized.
FUND ASSET ALLOCATION
---------------------------
CASH INVESTMENTS 3%
STOCKS 36%
BONDS 61%
TOTAL FUND VOLATILITY MEASURES
-------------------------------------
WELLESLEY S&P 500
-------------------------------------
R-Squared 0.44 1.00
Beta 0.29 1.00
TEN LARGEST STOCKS
(% OF EQUITIES)
------------------------------------------
Exxon Mobil Corp. 6.4%
Baxter International, Inc. 3.5
BP Amoco PLC ADR 3.4
Equitable Resources, Inc. 3.3
Shell Transport & Trading Co. ADR 3.2
USX-Marathon Group 3.2
Bell Atlantic Corp. 3.1
Marsh & McLennan Cos., Inc. 3.0
Ford Motor Co. 2.9
Wachovia Corp. 2.8
------------------------------------------
Top Ten 34.8%
------------------------------------------
Top Ten as % of Total Net Assets 12.6%
SECTOR DIVERSIFICATION (% OF COMMON STOCKS)
--------------------------------------------------------------------------------
JUNE 30, 1999 JUNE 30, 2000
------------------------------------------
WELLESLEY WELLESLEY S&P 500
------------------------------------------
Auto & Transportation.......... 5.9% 3.7% 1.6%
Consumer Discretionary......... 5.5 5.3 11.8
Consumer Staples............... 5.8 4.8 5.7
Financial Services............. 17.2 17.3 13.4
Health Care.................... 5.4 5.5 11.7
Integrated Oils................ 18.3 17.0 4.5
Other Energy................... 0.0 5.7 1.8
Materials & Processing......... 9.6 8.9 2.2
Producer Durables.............. 0.0 3.8 2.9
Technology..................... 0.0 0.0 29.9
Utilities...................... 26.5 22.5 8.6
Other.......................... 5.8 5.5 5.9
--------------------------------------------------------------------------------
8
<PAGE>
EQUITY CHARACTERISTICS
----------------------------------------------------
WELLESLEY S&P 500
----------------------------------------------------
Number of Stocks 68 500
Median Market Cap $11.0B $94.9B
Price/Earnings Ratio 14.7x 28.7x
Price/Book Ratio 2.2x 5.2x
Dividend Yield 3.8% 1.1%
Return on Equity 16.8% 24.5%
Earnings Growth Rate 5.0% 17.3%
Foreign Holdings 8.1% 1.2%
EQUITY INVESTMENT FOCUS
------------------------------------
STYLE VALUE
MARKET CAP LARGE
FIXED INCOME CHARACTERISTICS
----------------------------------------------------
WELLESLEY LEHMAN*
----------------------------------------------------
Number of Bonds 146 5,632
Yield to Maturity 7.5% 7.3%
Average Coupon 6.7% 6.9%
Average Maturity 10.6 years 8.8 years
Average Quality Aa2 Aaa
Average Duration 5.8 years 4.9 years
*Lehman Aggregate Bond Index.
FIXED INCOME INVESTMENT FOCUS
----------------------------------------------------
AVERAGE MATURITY MEDIUM
CREDIT QUALITY INVESTMENT-GRADE CORPORATE
DISTRIBUTION BY ISSUER
(% OF BONDS)
----------------------------------------------------
Asset-Backed 0.0%
Commercial Mortgage-Backed 0.0
Finance 22.3
Foreign 0.8
Government Mortgage-Backed 18.5
Industrial 31.2
Treasury/Agency 16.1
Utilities 11.1
----------------------------------------------------
Total 100.0%
DISTRIBUTION BY CREDIT QUALITY (% OF BONDS)
----------------------------------------------------
Treasury/Agency* 34.6%
Aaa 2.9
Aa 18.4
A 32.1
Baa 11.5
Ba 0.5
B 0.0
Not Rated 0.0
----------------------------------------------------
Total 100.0%
*Includes Government Mortgage-Backed.
9
<PAGE>
AVERAGE COUPON. The average interest rate paid on the securities held by a fund.
It is expressed as a percentage of face value.
AVERAGE DURATION. An estimate of how much a bond fund's share price will
fluctuate in response to a change in interest rates. To see how the price could
shift, multiply the fund's duration by the change in rates. If interest rates
rise by one percentage point, the share price of a fund with an average duration
of five years would decline by about 5%. If rates decrease by a percentage
point, the fund's share price would rise by 5%.
AVERAGE MATURITY. The average length of time until bonds held by a fund reach
maturity (or are called) and are repaid. In general, the longer the average
maturity, the more a fund's share price will fluctuate in response to changes in
market interest rates.
AVERAGE QUALITY. An indicator of credit risk, this figure is the average of the
ratings assigned to a fund's securities holdings by credit-rating agencies. The
agencies make their judgment after appraising an issuer's ability to meet its
obligations. Quality is graded on a scale, with Aaa or AAA indicating the most
creditworthy bond issuers and A-1 or MIG-1 indicating the most creditworthy
issuers of money market securities. U.S. Treasury securities are considered to
have the highest credit quality.
BETA. A measure of the magnitude of a fund's past share-price fluctuations in
relation to the ups and downs of the overall market (or appropriate market
index). The market (or index) is assigned a beta of 1.00, so a fund with a beta
of 1.20 would have seen its share price rise or fall by 12% when the overall
market rose or fell by 10%.
CASH INVESTMENTS. The percentage of a fund's net assets invested in "cash
equivalents"--highly liquid, short-term, interest-bearing instruments. This
figure does not include cash invested in futures contracts to simulate stock or
bond investment.
DISTRIBUTION BY CREDIT QUALITY. This breakdown of a fund's securities by credit
rating can help in gauging the risk that returns could be affected by defaults
or other credit problems.
DISTRIBUTION BY ISSUER. A breakdown of a fund's holdings by type of issuer or
type of instrument.
DIVIDEND YIELD. The current, annualized rate of dividends paid on a share of
stock, divided by its current share price. For a fund, the weighted average
yield for stocks it holds.
EARNINGS GROWTH RATE. The average annual rate of growth in earnings over the
past five years for the stocks now in a fund.
EQUITY INVESTMENT FOCUS. This grid indicates the focus of a fund's equity
holdings in terms of two attributes: market capitalization (large, medium, or
small) and relative valuation (growth, value, or a blend).
EXPENSE RATIO. The percentage of a fund's average net assets used to pay its
annual administrative and advisory expenses. These expenses directly reduce
returns to investors.
FIXED INCOME INVESTMENT FOCUS. This grid indicates the focus of a fund's fixed
income holdings in terms of two attributes: average maturity (short, medium, or
long) and average credit quality (Treasury/agency, investment-grade corporate,
or below investment-grade).
FOREIGN HOLDINGS. The percentage of a fund's equity assets represented by stocks
or American Depositary Receipts of companies based outside the United States.
FUND ASSET ALLOCATION. This chart shows the proportions of a fund's holdings
allocated to different types of assets.
10
<PAGE>
MEDIAN MARKET CAP. An indicator of the size of companies in which a fund
invests; the midpoint of market capitalization (market price x shares
outstanding) of a fund's stocks, weighted by the proportion of the fund's assets
invested in each stock. Stocks representing half of the fund's assets have
market capitalizations above the median, and the rest are below it.
NUMBER OF BONDS. An indicator of diversification. The more separate issues a
fund holds, the less susceptible it is to a price decline stemming from the
problems of a particular bond issuer.
NUMBER OF STOCKS. An indicator of diversification. The more stocks a fund holds,
the more diversified it is and the more likely to perform in line with the
overall stock market.
PRICE/BOOK RATIO. The share price of a stock divided by its net worth, or book
value, per share. For a fund, the weighted average price/book ratio of the
stocks it holds.
PRICE/EARNINGS RATIO. The ratio of a stock's current price to its per-share
earnings over the past year. For a fund, the weighted average P/E of the stocks
it holds. P/E is an indicator of market expectations about corporate prospects;
the higher the P/E, the greater the expectations for a company's future growth.
R-SQUARED. A measure of how much of a fund's past returns can be explained by
the returns from the overall market (or its benchmark index). If a fund's total
return were precisely synchronized with the overall market's return, its
R-squared would be 1.00. If a fund's returns bore no relationship to the
market's returns, its R-squared would be 0.
RETURN ON EQUITY. The annual average rate of return generated by a company
during the past five years for each dollar of shareholder's equity (net income
divided by shareholder's equity). For a fund, the weighted average return on
equity for the companies whose stocks it holds.
SECTOR DIVERSIFICATION. The percentages of a fund's common stocks that come from
each of the major industry groups that compose the stock market.
TEN LARGEST STOCKS. The percentage of equity assets that a fund has invested in
its ten largest stocks. As this percentage rises, a fund's returns are likely to
be more volatile because they are more dependent on the fortunes of a few
companies.
TURNOVER RATE. An indication of trading activity during the period. Funds with
high turnover rates incur higher transaction costs and are more likely to
distribute capital gains (which aretaxable to investors).
YIELD. A snapshot of a fund's income from interest and dividends. The yield,
expressed as a percentage of the fund's net asset value, is based on income
earned over the past 30 days and is annualized, or projected forward for the
coming year. The index yield is based on the current annualized rate of
dividends paid on stocks in the index.
YIELD TO MATURITY. The rate of return an investor would receive if the
securities held by a fund were held to their maturity dates.
11
<PAGE>
PERFORMANCE SUMMARY
WELLESLEY INCOME FUND
All of the data on this page represent past performance, which cannot be used to
predict future returns that may be achieved by the fund. Note, too, that both
share price and return can fluctuate widely. An investor's shares, when
redeemed, could be worth more or less than their original cost.
TOTAL INVESTMENT RETURNS: DECEMBER 31, 1979-JUNE 30, 2000
--------------------------------------------------------------------------------
WELLESLEY INCOME FUND COMPOSITE*
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
--------------------------------------------------------------------------------
1980 0.9% 11.0% 11.9% 9.4%
1981 -3.1 11.8 8.7 -1.7
1982 10.1 13.2 23.3 36.3
1983 7.1 11.5 18.6 13.2
1984 4.9 11.7 16.6 13.8
1985 16.0 11.4 27.4 29.4
1986 9.2 9.1 18.3 19.9
1987 -8.1 6.2 -1.9 2.5
1988 4.7 8.9 13.6 13.7
1989 11.8 9.1 20.9 21.0
1990 -4.3 8.1 3.8 2.5
1991 12.9% 8.7% 21.6% 20.5%
1992 1.6 7.1 8.7 9.2
1993 8.2 6.4 14.6 14.6
1994 -10.2 5.8 -4.4 -4.6
1995 21.6 7.3 28.9 30.7
1996 3.3 6.1 9.4 6.8
1997 13.8 6.4 20.2 19.4
1998 6.4 5.4 11.8 13.9
1999 -9.2 5.1 -4.1 -1.4
2000** -0.6 2.8 2.2 1.7
--------------------------------------------------------------------------------
*Bond component is 65% Lehman Long-Term Credit Bond Index through December 31,
1985; 65% Lehman Long Credit AA or Better Index through March 31, 2000; 65%
Lehman Credit A or Better Index thereafter. Stock component is 35% S&P 500 Index
through December 31, 1985; 26% S&P 500/BARRA Value Index, and 9% S&P Utilities
Index through June 30, 1996, when the S&P Utilities component was separated into
the S&P Utilities Index and the S&P Telephone Index.
**Six months ended June 30, 2000.
See Financial Highlights table on page 20 for dividend and capital gains
information for the past five years.
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED JUNE 30, 2000
--------------------------------------------------------------------------------
10 YEARS
INCEPTION -------------------------
DATE 1 YEAR 5 YEARS CAPITAL INCOME TOTAL
--------------------------------------------------------------------------------
Wellesley Income Fund 7/1/1970 -1.79% 9.82% 4.18% 6.55% 10.73%
--------------------------------------------------------------------------------
12
<PAGE>
FINANCIAL STATEMENTS
JUNE 30, 2000 (UNAUDITED)
STATEMENT OF NET ASSETS
This Statement provides a detailed list of the fund's holdings, including each
security's market value on the last day of the reporting period. Securities are
grouped and subtotaled by asset type (common stocks, bonds, etc.) and by
industry sector. Other assets are added to, and liabilities are subtracted from,
the value of Total Investments to calculate the fund's Net Assets. Finally, Net
Assets are divided by the outstanding shares of the fund to arrive at its share
price, or Net Asset Value (NAV) Per Share.
At the end of the Statement of Net Assets, you will find a table displaying
the composition of the fund's net assets on both a dollar and per-share basis.
Because all income and any realized gains must be distributed to shareholders
each year, the bulk of net assets consists of Paid in Capital (money invested by
shareholders). The amounts shown for Undistributed Net Investment Income and
Accumulated Net Realized Gains usually approximate the sums the fund had
available to distribute to shareholders as income dividends or capital gains as
of the statement date, but may differ because certain investments or
transactions may be treated differently for financial statement and tax
purposes. Any Accumulated Net Realized Losses, and any cumulative excess of
distributions over net income or net realized gains, will appear as negative
balances. Unrealized Appreciation (Depreciation) is the difference between the
market value of the fund's investments and their cost, and reflects the gains
(losses) that would be realized if the fund were to sell all of its investments
at their statement-date values.
--------------------------------------------------------------------------------
FACE MARKET
AMOUNT VALUE*
WELLESLEY INCOME FUND (000) (000)
--------------------------------------------------------------------------------
CORPORATE BONDS (39.2%)
--------------------------------------------------------------------------------
FINANCE (13.6%)
Allstate Corp.
7.50%, 6/15/2013 $ 20,000 $ 18,869
American Re Corp.
7.45%, 12/15/2026 23,645 21,886
Associates Corp. of North America
6.25%, 11/1/2008 25,000 22,408
Banc One Corp.
7.75%, 7/15/2025 25,000 23,389
Bank of America Corp.
7.875%, 5/16/2005 25,000 25,275
BankBoston Corp.
6.875%, 7/15/2003 10,000 9,813
6.625%, 12/1/2005 15,000 14,231
Boatmen's Bancshares Inc.
7.625%, 10/1/2004 10,000 10,025
Cincinnati Financial Corp.
6.90%, 5/15/2028 21,750 18,178
Citicorp
6.65%, 12/15/2010 25,000 23,109
7.125%, 9/1/2005 15,000 14,796
CoreStates Capital Corp.
6.625%, 3/15/2005 20,000 18,969
Farmers Exchange Capital
7.05%, 7/15/2028 16,750 13,260
Fifth Third Bancorp
6.75%, 7/15/2005 25,000 24,188
First Bank N.A.
7.55%, 6/15/2004 8,000 7,976
First Bank System
6.625%, 5/15/2003 10,000 9,749
7.625%, 5/1/2005 7,500 7,456
First Chicago Corp.
7.625%, 1/15/2003 15,000 14,944
First Union Corp.
6.00%, 10/30/2008 15,000 13,055
Fleet Financial Group, Inc.
6.875%, 3/1/2003 30,000 29,467
Ford Motor Credit Co.
7.25%, 1/15/2003 15,000 14,875
General Electric Capital Corp.
7.25%, 2/1/2005 50,000 50,133
7.375%, 1/19/2010 10,000 10,080
8.125%, 5/15/2012 10,000 10,624
General Motors Acceptance Corp.
7.00%, 9/15/2002 30,000 29,762
7.75%, 1/19/2010 15,000 14,893
Liberty Mutual Insurance Co.
8.50%, 5/15/2025 25,000 21,865
Lumbermens Mutual Casualty Co.
9.15%, 7/1/2026 20,000 17,328
MBIA Inc.
7.00%, 12/15/2025 19,500 16,706
Metropolitan Life Insurance Co.
7.80%, 11/1/2025 25,000 23,411
J.P. Morgan & Co., Inc.
5.75%, 10/15/2008 20,000 17,369
6.25%, 1/15/2009 20,000 17,926
NBD Bank N.A.
6.25%, 8/15/2003 20,000 19,275
13
<PAGE>
--------------------------------------------------------------------------------
FACE MARKET
AMOUNT VALUE*
WELLESLEY INCOME FUND (000) (000)
--------------------------------------------------------------------------------
National City Bank Cleveland
6.50%, 5/1/2003 $ 10,000 $ 9,733
National City Bank Pennsylvania
7.25%, 10/21/2011 22,000 20,588
National City Corp.
7.20%, 5/15/2005 20,000 19,584
NationsBank Corp.
7.75%, 8/15/2004 20,000 20,137
Republic New York Corp.
5.875%, 10/15/2008 15,000 12,959
SunTrust Banks, Inc.
6.00%, 2/15/2026 10,000 9,210
6.125%, 2/15/2004 20,000 19,028
Transamerica Financial Corp.
6.125%, 11/1/2001 25,000 24,534
UNUM Corp.
6.75%, 12/15/2028 25,000 18,095
Wachovia Corp.
6.375%, 4/15/2003 20,000 19,457
6.605%, 10/1/2025 15,000 14,360
Wells Fargo & Co.
6.625%, 7/15/2004 25,000 24,362
-------
817,337
-------
INDUSTRIAL (18.9%)
AirTouch Communications, Inc.
6.35%, 6/1/2005 25,000 23,740
Baxter International, Inc.
7.65%, 2/1/2027 25,000 23,523
Bestfoods
6.625%, 4/15/2028 25,000 21,810
Burlington Northern Santa Fe Corp.
6.375%, 12/15/2005 12,500 11,825
CPC International, Inc.
6.15%, 1/15/2006 3,085 2,919
Coca Cola Enterprises
5.75%, 11/1/2008 25,000 22,145
Comcast Cable Communications
6.20%, 11/15/2008 25,000 22,521
Cox Communications, Inc.
7.75%, 8/15/2006 25,000 24,924
DaimlerChrysler North America
Holding Corp. Global Notes
7.40%, 1/20/2005 25,000 24,877
The Walt Disney Co.
6.75%, 3/30/2006 15,000 14,654
E.I. du Pont de Nemours & Co.
6.75%, 10/15/2004 25,000 24,623
6.75%, 9/1/2007 25,000 24,272
Eaton Corp.
6.50%, 6/1/2025 10,000 9,553
Ferro Corp.
7.125%, 4/1/2028 10,000 8,450
Ford Motor Co.
8.90%, 1/15/2032 20,000 21,719
General Motors Corp.
9.40%, 7/15/2021 20,000 22,763
Georgia-Pacific Group
7.25%, 6/1/2028 25,000 21,427
Gillette Co.
5.75%, 10/15/2005 35,000 32,794
6.25%, 8/15/2003 10,000 9,780
Hershey Foods Corp.
6.95%, 3/1/2007 13,000 12,704
Hewlett-Packard Co.
7.15%, 6/15/2005 25,000 25,060
Hubbell Inc.
6.625%, 10/1/2005 10,000 9,779
Illinois Tool Works, Inc.
5.75%, 3/1/2009 25,000 22,400
International Business
Machines Corp.
7.00%, 10/30/2025 25,000 23,565
International Paper Co.
7.625%, 1/15/2007 15,000 14,713
Johnson & Johnson
6.73%, 11/15/2023 15,000 14,081
Kimberly-Clark Corp.
6.25%, 7/15/2018 25,000 22,008
Eli Lilly & Co.
7.125%, 6/1/2025 25,000 24,363
Lockheed Corp.
6.75%, 3/15/2003 7,000 6,812
Mead Corp.
7.35%, 3/1/2017 10,350 9,558
Minnesota Mining &
Manufacturing Corp.
6.375%, 2/15/2028 25,000 22,031
Mobil Corp.
8.625%, 8/15/2021 20,000 22,275
New York Times Co.
8.25%, 3/15/2025 26,000 25,254
News America Holdings
8.50%, 2/15/2005 10,000 10,235
8.625%, 2/1/2003 20,000 20,312
Norfolk Southern Corp.
6.20%, 4/15/2009 25,000 22,231
PPG Industries, Inc.
6.875%, 2/15/2012 10,200 9,600
9.00%, 5/1/2021 15,000 16,606
Phelps Dodge Corp.
7.125%, 11/1/2027 12,500 10,446
Praxair, Inc.
6.75%, 3/1/2003 25,000 24,478
Procter & Gamble Co.
5.25%, 9/15/2003 15,000 14,207
6.45%, 1/15/2026 25,000 22,037
Procter & Gamble Co. ESOP
9.36%, 1/1/2021 25,000 28,680
Raytheon Co.
7.90%, 3/1/2003 25,000 25,068
Rohm & Haas Co.
6.95%, 7/15/2004 25,000 24,629
E.W. Scripps Co.
6.625%, 10/15/2007 20,000 18,915
J Seagram & Sons
7.00%, 4/15/2008 20,000 19,159
Tenneco Packaging
8.125%, 6/15/2017 20,000 17,040
8.375%, 4/15/2027 20,000 17,067
Texaco Capital
8.625%, 4/1/2032 25,000 27,730
Time Warner Inc.
7.48%, 1/15/2008 20,000 19,632
14
<PAGE>
--------------------------------------------------------------------------------
FACE MARKET
AMOUNT VALUE*
(000) (000)
--------------------------------------------------------------------------------
Tribune Co.
6.875%, 11/1/2006 20,000 19,181
USX Corp.
6.85%, 3/1/2008 25,000 23,514
USA Waste Services Inc.
7.00%, 7/15/2028 25,000 19,545
Ultramar Diamond Shamrock
7.20%, 10/15/2017 25,000 22,541
Vulcan Materials Co.
6.00%, 4/1/2009 25,000 22,320
Washington Post Co.
5.50%, 2/15/2009 50,000 43,948
Weyerhaeuser Co.
8.50%, 1/15/2025 10,000 10,209
Whirlpool Corp.
9.00%, 3/1/2003 10,000 10,262
---------
1,142,514
---------
UTILITIES (6.7%)
AT&T Corp.
6.50%, 3/15/2029 25,000 20,927
Alabama Power Co.
5.49%, 11/1/2005 8,250 7,514
Arizona Public Service Co.
6.625%, 3/1/2004 10,000 9,696
Baltimore Gas & Electric Co.
7.25%, 7/1/2002 15,000 14,963
BellSouth Telecommunications
6.25%, 5/15/2003 12,000 11,675
Chesapeake & Potomac Telephone
Co. (VA)
7.875%, 1/15/2022 16,000 15,798
Consolidated Edison Co. of
New York, Inc.
6.375%, 4/1/2003 20,000 19,560
Enron Corp.
6.875%, 10/15/2007 20,000 19,115
GTE California Inc.
6.70%, 9/1/2009 25,000 23,103
GTE Southwest, Inc.
6.00%, 1/15/2006 10,000 9,258
Illinois Power Co.
6.50%, 8/1/2003 10,000 9,668
Kentucky Utilities Co.
7.92%, 5/15/2007 5,000 5,108
MCI Communications Corp.
7.50%, 8/20/2004 15,000 14,941
Michigan Bell Telephone Co.
7.85%, 1/15/2022 25,000 24,747
New Jersey Bell Telephone Co.
8.00%, 6/1/2022 14,585 14,661
New York Telephone Co.
6.50%, 3/1/2005 30,000 28,690
Northern States Power Co.
6.375%, 4/1/2003 8,000 7,767
Ohio Bell Telephone Co.
6.125%, 5/15/2003 15,000 14,565
Oklahoma Gas & Electric Co.
6.50%, 4/15/2028 10,000 8,463
PacifiCorp
6.625%, 6/1/2007 10,000 9,418
Pennsylvania Power & Light Co.
6.50%, 4/1/2005 15,000 14,165
PECO Energy
6.50%, 5/1/2003 30,000 29,126
Southwestern Public Service Co.
7.25%, 7/15/2004 10,000 9,762
Sprint Capital Corp.
6.875%, 11/15/2028 20,000 17,373
Texas Utilities Electric Co.
6.75%, 7/1/2005 10,000 9,511
Union Electric Co.
6.875%, 8/1/2004 10,000 9,732
Wisconsin Electric Power Co.
6.50%, 6/1/2028 16,715 14,177
Wisconsin Power & Light
5.70%, 10/15/2008 12,650 10,928
-------
404,411
-------
--------------------------------------------------------------------------------
TOTAL CORPORATE BONDS
(Cost $2,492,358) 2,364,262
--------------------------------------------------------------------------------
FOREIGN BONDS (U.S. Dollar-Denominated)(0.5%)
--------------------------------------------------------------------------------
Province of Manitoba
6.125%, 1/19/2004 7,000 6,766
Province of Ontario
6.00%, 2/21/2006 25,000 23,580
--------------------------------------------------------------------------------
TOTAL FOREIGN BONDS
(Cost $31,830) 30,346
--------------------------------------------------------------------------------
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (20.9%)
--------------------------------------------------------------------------------
U.S. GOVERNMENT SECURITIES (4.9%)
U.S. Treasury Bond
5.50%, 8/15/2028 50,000 45,842
U.S. Treasury Notes
6.25%, 8/31/2002 125,000 124,618
6.875%, 5/15/2006 125,000 128,680
-------
299,140
-------
AGENCY BONDS & NOTES (4.8%)
Federal Home Loan Bank
5.125%, 9/15/2003 75,000 71,322
Federal Home Loan Mortgage Corp.
5.75%, 7/15/2003 75,000 72,397
Federal National Mortgage Assn.
5.75%, 6/15/2005 75,000 71,046
6.50%, 8/15/2004 75,000 73,558
-------
288,323
-------
MORTGAGE OBLIGATIONS (11.2%)
Federal National Mortgage Assn.
(1)5.735%, 1/1/2009 14,754 13,343
(1)6.50%, 7/1/2014-11/1/2019 47,219 45,315
Government National Mortgage Assn.
(1)6.00%, 6/15/2028-3/15/2029 426,312 392,810
(1)6.50%, 10/15/2008-8/15/2029 236,005 224,681
-------
676,149
-------
--------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT AND AGENCY OBLIGATIONS
(Cost $1,317,908) 1,263,612
--------------------------------------------------------------------------------
15
<PAGE>
--------------------------------------------------------------------------------
FACE MARKET
AMOUNT VALUE*
WELLESLEY INCOME FUND (000) (000)
--------------------------------------------------------------------------------
COMMON STOCKS (36.4%)
--------------------------------------------------------------------------------
AUTO & TRANSPORTATION (1.3%)
Ford Motor Co. 1,500,500 $ 64,521
Norfolk Southern Corp. 964,600 14,348
Visteon Corp. 196,465 2,382
-------
81,251
-------
CONSUMER DISCRETIONARY (1.9%)
Eastman Kodak Co. 916,000 54,502
May Department Stores Co. 1,960,000 47,040
The Stanley Works 600,000 14,250
Kimberly-Clark Corp. 10,000 574
-------
116,366
-------
CONSUMER STAPLES(1.8%)
H.J. Heinz Co. 1,000,800 43,785
Philip Morris Cos., Inc. 1,645,000 43,695
Flowers Industries, Inc. 510,400 10,176
Universal Corp. 400,000 8,450
-------
106,106
-------
FINANCIAL SERVICES (6.3%)
Marsh & McLennan Cos., Inc. 638,000 66,631
Wachovia Corp. 1,123,900 60,972
National City Corp. 2,828,800 48,266
American General Corp. 500,000 30,500
General Growth Properties
Inc. REIT 837,400 26,587
Washington Mutual, Inc. 880,200 25,416
Urban Shopping Centers,
Inc. REIT 682,000 22,975
Sun Communities, Inc. REIT 685,600 22,925
FelCor Lodging Trust, Inc. REIT 630,000 11,655
St. Paul Cos., Inc. 340,000 11,602
The Macerich Co. REIT 519,100 11,453
First Union Corp. 400,000 9,925
Brandywine Realty Trust REIT 484,500 9,266
CBL & Associates Properties,
Inc. REIT 249,100 6,212
HSB Group Inc. 190,700 5,936
Colonial Properties Trust REIT 204,900 5,609
Nationwide Health Properties,
Inc. REIT 371,600 5,179
-------
381,109
-------
HEALTH CARE (2.0%)
Baxter International, Inc. 1,097,700 77,182
Pharmacia Corp. 852,115 44,044
-------
121,226
-------
INTEGRATED OILS (6.2%)
Exxon Mobil Corp. 1,779,463 139,688
BP Amoco PLC ADR 1,338,708 75,721
USX-Marathon Group 2,766,100 69,325
Texaco Inc. 1,070,000 56,978
Royal Dutch Petroleum Co. ADR 523,000 32,197
-------
373,909
-------
OTHER ENERGY (2.1%)
Equitable Resources, Inc. 1,491,100 71,946
Ashland, Inc. 1,030,000 36,114
Ultramar Diamond Shamrock
Corp. 501,100 12,434
Sunoco, Inc. 150,000 4,416
-------
124,910
-------
MATERIALS & PROCESSING (3.2%)
The Timber Co. 2,277,000 $ 49,240
Weyerhaeuser Co. 1,144,000 49,192
Eastman Chemical Co. 1,023,400 48,867
Air Products & Chemicals, Inc. 800,000 24,650
Westvaco Corp. 700,700 17,386
Temple-Inland Inc. 149,100 6,262
-------
195,597
-------
PRODUCER DURABLES (1.4%)
Emerson Electric Co. 829,000 50,051
Cooper Industries, Inc. 995,900 32,429
-------
82,480
-------
UTILITIES (8.2%)
Bell Atlantic Corp. 1,320,000 67,073
DTE Energy Co. 1,388,200 42,427
Questar Corp. 2,000,000 38,750
PECO Energy Corp. 910,000 36,684
AT&T Corp. 1,120,500 35,436
Southern Co. 1,340,000 31,239
Constellation Energy Group 850,000 27,678
GPU, Inc. 1,008,600 27,295
Pinnacle West Capital Corp. 760,000 25,745
SCANA Corp. 1,021,600 24,646
American Electric Power
Co., Inc. 799,380 23,682
NICOR, Inc. 722,300 23,565
Consolidated Edison Inc. 747,400 22,142
DQE Inc. 528,000 20,889
Duke Energy Corp. 300,000 16,912
FPL Group, Inc. 260,000 12,870
National Fuel Gas Co. 182,100 8,877
MCN Energy Group Inc. 351,100 7,505
-------
493,415
-------
OTHER (2.0%)
Shell Transport & Trading Co.
ADR 1,397,900 69,808
Minnesota Mining &
Manufacturing Co. 625,000 51,562
-------
121,370
-------
--------------------------------------------------------------------------------
(Cost $1,944,978) 2,197,739
--------------------------------------------------------------------------------
FACE
AMOUNT
(000)
--------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENTs (6.3%)
--------------------------------------------------------------------------------
REPURCHASE AGREEMENTS
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
6.71%, 7/3/2000 $182,126 182,126
6.71%-6.73%, 7/3/2000--Note G 201,517 201,517
--------------------------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(COST $383,643) 383,643
--------------------------------------------------------------------------------
TOTAL INVESTMENTS (103.3%)
(Cost $6,170,717) 6,239,602
--------------------------------------------------------------------------------
16
<PAGE>
--------------------------------------------------------------------------------
MARKET
VALUE*
(000)
--------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-3.3%)
--------------------------------------------------------------------------------
Other Assets--Note C 72,429
Liabilities--Note G (273,225)
-------
(200,796)
--------------------------------------------------------------------------------
NET ASSETS (100%)
--------------------------------------------------------------------------------
Applicable to 322,343,258 outstanding
$.001 par value shares of beneficial interest
(unlimited authorization) $6,038,806
================================================================================
NET ASSET VALUE PER SHARE $18.73
================================================================================
*See Note A in Notes to Financial Statements.
(1)The average maturity is shorter than the final maturity shown due to
scheduled interim principal payments.
ADR--American Depositary Receipt.
REIT--Real Estate Investment Trust.
--------------------------------------------------------------------------------
Amount Per
(000) Share
--------------------------------------------------------------------------------
AT JUNE 30, 2000, NET ASSETS CONSISTED OF:
--------------------------------------------------------------------------------
Paid in Capital $5,940,210 $18.43
Overdistributed Net
Investment Income (3,288) (.01)
Accumulated Net Realized Gains 32,999 .10
Unrealized Appreciation--Note F 68,885 .21
--------------------------------------------------------------------------------
NET ASSETS $6,038,806 $18.73
================================================================================
17
<PAGE>
STATEMENT OF OPERATIONS
This Statement shows dividend and interest income earned by the fund during the
reporting period, and details the operating expenses charged to the fund. These
expenses directly reduce the amount of investment income available to pay to
shareholders as dividends. This Statement also shows any Net Gain (Loss)
realized on the sale of investments, and the increase or decrease in the
Unrealized Appreciation (Depreciation) on investments during the period.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------
WELLESLEY INCOME FUND
SIX MONTHS ENDED JUNE 30, 2000
(000)
-----------------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME
Income
Dividends* $ 47,066
Interest 135,772
Security Lending 157
-------
Total Income 182,995
-------
Expenses
Investment Advisory Fees--Note B
Basic Fee 1,635
Performance Adjustment (384)
The Vanguard Group--Note C
Management and Administrative 8,183
Marketing and Distribution 413
Custodian Fees 48
Auditing Fees 6
Shareholders' Reports 116
Trustees' Fees and Expenses 4
-------
Total Expenses 10,021
Expenses Paid Indirectly--Note D (125)
-------
Net Expenses 9,896
-----------------------------------------------------------------------------------------
NET INVESTMENT INCOME 173,099
-----------------------------------------------------------------------------------------
REALIZED NET GAIN ON INVESTMENT SECURITIES SOLD* 40,261
-----------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) OF INVESTMENT SECURITIES (89,898)
-----------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $123,462
=========================================================================================
</TABLE>
*Dividend income and realized net gain from affiliated companies were $
1,247,000 and $14,934,000, respectively.
18
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
This Statement shows how the fund's total net assets changed during the two
most recent reporting periods. The Operations section summarizes
information detailed in the Statement of Operations. The amounts shown as
Distributions to shareholders from the fund's net income and capital gains
may not match the amounts shown in the Operations section, because
distributions are determined on a tax basis and may be made in a period
different from the one in which the income was earned or the gains were
realized on the financial statements. The Capital Share Transactions
section shows the amount shareholders invested in the fund, either by
purchasing shares or by reinvesting distributions, as well as the amounts
redeemed. The corresponding numbers of Shares Issued and Redeemed are shown
at the end of the Statement.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------
WELLESLEY INCOME FUND
---------------------------------
SIX MONTHS YEAR
ENDED ENDED
JUN. 30, 2000 DEC. 31, 1999
(000) (000)
--------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income $ 173,099 $ 413,224
Realized Net Gain 40,261 370,860
Change in Unrealized Appreciation (Depreciation) (89,898) (1,110,605)
---------------------------------
Net Increase (Decrease) in Net Assets Resulting from Operations 123,462 (326,521)
---------------------------------
DISTRIBUTIONS
Net Investment Income (172,398) (414,744)
Realized Capital Gain -- (444,853)
---------------------------------
Total Distributions (172,398) (859,597)
---------------------------------
CAPITAL SHARE TRANSACTIONS1
Issued 158,953 778,086
Issued in Lieu of Cash Distributions 139,733 739,241
Redeemed (1,187,329) (1,852,604)
---------------------------------
Net Increase (Decrease) from Capital Share Transactions (888,643) (335,277)
--------------------------------------------------------------------------------------------------------
Total Decrease (937,579) (1,521,395)
--------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Period 6,976,385 8,497,780
---------------------------------
End of Period $6,038,806 $6,976,385
========================================================================================================
1Shares Issued (Redeemed)
Issued 8,479 36,384
Issued in Lieu of Cash Distributions 7,493 37,674
Redeemed (63,644) (88,183)
---------------------------------
Net Increase (Decrease) in Shares Outstanding (47,672) (14,125)
========================================================================================================
</TABLE>
19
<PAGE>
FINANCIAL HIGHLIGHTS
This table summarizes the fund's investment results and distributions to
shareholders on a per-share basis. It also presents the fund's Total Return
and shows net investment income and expenses as percentages of average net
assets. These data will help you assess: the variability of the fund's net
income and total returns from year to year; the relative contributions of
net income and capital gains to the fund's total return; how much it costs
to operate the fund; and the extent to which the fund tends to distribute
capital gains. The table also shows the Portfolio Turnover Rate, a measure
of trading activity. A turnover rate of 100% means that the average
security is held in the fund for one year.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------
WELLESLEY INCOME FUND
----------------------------------------
FOR A SHARE OUTSTANDING SIX MONTHS ENDED YEAR ENDED DECEMBER 31,
THROUGHOUT EACH PERIOD JUNE 30, 2000 1999 1998 1997 1996 1995
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $18.85 $22.12 $21.86 $20.51 $20.44 $17.05
INVESTMENT OPERATIONS
Net Investment Income .53 1.120 1.13 1.190 1.17 1.13
Net Realized and Unrealized Gain (Loss)
on Investments (.12) (2.025) 1.40 2.805 .66 3.68
--------------------------------------------------------
Total from Investment Operations .41 (.905) 2.53 3.995 1.83 4.81
--------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.53) (1.120) (1.13) (1.200) (1.16) (1.14)
Distributions from Realized Capital Gains -- (1.245) (1.14) (1.445) (.60) (.28
--------------------------------------------------------
Total Distributions (.53) (2.365) (2.27) (2.645) (1.76) (1.42)
------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $18.73 $18.85 $22.12 $21.86 $20.51 $20.44
========================================================================================================================
Total Return 2.21% -4.14% 11.84% 20.19% 9.42% 28.91%
========================================================================================================================
Ratios/Supplemental Data
Net Assets, End of Period (Millions) $6,039 $6,976 $8,498 $7,646 $7,013 $7,181
Ratio of Total Expenses to
Average Net Assets 0.31%* 0.30% 0.31% 0.31% 0.31% 0.35%
Ratio of Net Investment Income to
Average Net Assets 5.48%* 5.22% 5.05% 5.47% 5.74% 5.96%
Portfolio Turnover Rate 28%* 20% 32% 36% 26% 32%
========================================================================================================================
</TABLE>
Annualized.
20
<PAGE>
NOTES TO FINANCIAL STATEMENTS
Vanguard Wellesley Income Fund is registered under the Investment Company Act of
1940 as a diversified open-end investment company, or mutual fund. 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 conform to generally accepted
accounting principles for mutual funds. The fund consistently follows such
policies in preparing its financial statements.
1. SECURITY VALUATION: Equity securities are valued at the latest quoted
sales prices as of the close of trading on the New York Stock Exchange
(generally 4:00 p.m. Eastern time) on the valuation date; such securities not
traded on the valuation date are valued at the mean of the latest quoted bid and
asked prices. Prices are taken from the primary market in which each security
trades. Bonds are valued using the latest bid prices or using valuations based
on 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.
Securities for which market quotations are not readily available are valued by
methods deemed by the board of trustees to represent fair value.
2. FEDERAL INCOME TAXES: The fund intends to continue to qualify as a
regulated investment company and distribute all of its taxable income.
Accordingly, no provision for federal income taxes is required in the financial
statements.
3. REPURCHASE AGREEMENTS: The fund, along with other members of The
Vanguard Group, transfers uninvested cash balances to a pooled cash account,
which is invested in repurchase agreements secured by U.S. government
securities. Securities pledged as collateral for repurchase agreements are held
by a custodian bank until the agreements mature. Each agreement requires that
the market value of the collateral be sufficient to cover payments of interest
and principal; however, in the event of default or bankruptcy by the other party
to the agreement, retention of the collateral may be subject to legal
proceedings.
4. DISTRIBUTIONS: Distributions to shareholders are recorded on the
ex-dividend date. Distributions are determined on a tax basis and may differ
from net investment income and realized capital gains for financial reporting
purposes.
5. OTHER: Dividend income is recorded on the ex-dividend date. Security
transactions are accounted for on the date securities are bought or sold. Costs
used to determine realized gains (losses) on the sale of investment securities
are those of the specific securities sold. Premiums and discounts on debt
securities purchased are amortized and accreted, respectively, to interest
income over the lives of the respective securities.
B. Wellington Management Company, LLP, provides investment advisory services to
the fund for a fee calculated at an annual percentage rate of average net
assets. The basic fee is subject to quarterly adjustments based on performance
for the preceding three years relative to a combined index comprising the Lehman
Credit A or Better Index, the Lehman Long Credit AA or Better Index (through
March 31, 2000), the S&P 500/BARRA Value Index, the S&P Utilities Index, and the
S&P Telephone Index. For the six months ended June 30, 2000, the advisory fee
represented an effective annual basic rate of 0.05% of the fund's average net
assets before a decrease of $384,000 (0.01%) based on performance.
C. The Vanguard Group furnishes at cost corporate management, administrative,
marketing, and distribution services. The costs of such services are allocated
to the fund under methods approved by the board of trustees. The fund has
committed to provide up to 0.40% of its net assets in capital contributions to
Vanguard. At June 30, 2000, the fund had contributed capital of $1,204,000 to
Vanguard (included in Other Assets), representing 0.02% of the fund's net assets
and 1.2% of Vanguard's capitalization. The fund's trustees and officers are also
directors and officers of Vanguard.
21
<PAGE>
NOTES TO FINANCIAL STATEMENTS (continued)
D. The fund has asked its investment adviser to direct certain security trades,
subject to obtaining the best price and execution, to brokers who have agreed to
rebate to the fund part of the commissions generated. Such rebates are used
solely to reduce the fund's management and administrative expenses. For the six
months ended June 30, 2000, these arrangements reduced expenses by $125,000.
E. During the six months ended June 30, 2000, the fund purchased $577,952,000 of
investment securities and sold $1,834,138,000 of investment securities, other
than U.S. government securities and temporary cash investments. Purchases of
U.S. government securities were $287,211,000.
F. At June 30, 2000, net unrealized appreciation of investment securities for
financial reporting and federal income tax purposes was $68,885,000, consisting
of unrealized gains of $424,116,000 on securities that had risen in value since
their purchase and $355,231,000 in unrealized losses on securities that had
fallen in value since their purchase.
G. The market value of securities on loan to broker/dealers at June 30, 2000,
was $256,800,000, for which the fund held cash collateral of $201,517,000 and
U.S. Treasury securities with a market value of $63,475,000. Cash collateral
received is invested in repurchase agreements. Security loans are required to be
secured at all times by collateral at least equal to the market value of
securities loaned; however, in the event of default or bankruptcy by the other
party to the agreement, retention of the collateral may be subject to legal
proceedings.
22
<PAGE>
THE VANGUARD(R)FAMILY OF FUNDS
STOCK FUNDS
---------------------------------------
500 Index Fund
Aggressive Growth Fund
Capital Opportunity Fund
Convertible Securities Fund
Emerging Markets Stock
Index Fund
Energy Fund
Equity Income Fund
European Stock Index Fund
Explorer(TM) Fund
Extended Market Index Fund*
Global Equity Fund
Gold and Precious Metals Fund
Growth and Income Fund
Growth Index Fund*
Health Care Fund
Institutional Index Fund*
International Growth Fund
International Value Fund
Mid-Cap Index Fund*
Morgan(TM) Growth Fund
Pacific Stock Index Fund
PRIMECAP Fund
REIT Index Fund
Selected Value Fund
Small-Cap Growth Index Fund*
Small-Cap Index Fund*
Small-Cap Value Index Fund*
Tax-Managed Capital Appreciation Fund*
Tax-Managed Growth and Income Fund*
Tax-Managed International Fund*
Tax-Managed Small-Cap Fund*
Total International Stock
Index Fund
Total Stock Market Index Fund*
U.S. Growth Fund
Utilities Income Fund
Value Index Fund*
Windsor(TM) Fund
Windsor(TM) II Fund
BALANCED FUNDS
---------------------------------------
Asset Allocation Fund
Balanced Index Fund
Global Asset Allocation Fund
LifeStrategy(R) Conservative
Growth Fund
LifeStrategy(R) Growth Fund
LifeStrategy(R) Income Fund
LifeStrategy(R) Moderate
Growth Fund
STAR(TM) Fund
Tax-Managed Balanced Fund
Wellesley(R) Income Fund
Wellington(TM) Fund
BOND FUNDS
---------------------------------------
Admiral(TM) Intermediate-Term
Treasury Fund
Admiral(TM)Long-Term Treasury Fund
Admiral(TM)Short-Term Treasury Fund
GNMA Fund
High-Yield Corporate Fund
High-Yield Tax-Exempt Fund
Insured Long-Term Tax-Exempt Fund
Intermediate-Term Bond Index Fund
Intermediate-Term Corporate Fund
Intermediate-Term Tax-Exempt Fund
Intermediate-Term Treasury Fund
Limited-Term Tax-Exempt Fund
Long-Term Bond Index Fund
Long-Term Corporate Fund
Long-Term Tax-Exempt Fund
Long-Term Treasury Fund
Preferred Stock Fund
Short-Term Bond Index Fund
Short-Term Corporate Fund*
Short-Term Federal Fund
Short-Term Tax-Exempt Fund
Short-Term Treasury Fund
State Tax-Exempt Bond Funds
(California, Florida,
Massachusetts, New Jersey,
New York, Ohio, Pennsylvania)
Total Bond Market Index Fund*
MONEY MARKET FUNDS
---------------------------------------
Admiral(TM) Treasury Money
Market Fund
Federal Money Market Fund
Prime Money Market Fund*
State Tax-Exempt Money Market Funds
(California, New Jersey, New York
Ohio, Pennsylvania)
Tax-Exempt Money Market Fund
Treasury Money Market Fund
VARIABLE ANNUITY PLAN
---------------------------------------
Balanced Portfolio
Diversified Value Portfolio
Equity Income Portfolio
Equity Index Portfolio
Growth Portfolio
High-Grade Bond Portfolio
High Yield Bond Portfolio
International Portfolio
Mid-Cap Index Portfolio
Money Market Portfolio
REIT Index Portfolio
Short-Term Corporate Portfolio
Small Company Growth Portfolio
*Offers Institutional Shares.
For information about Vanguard funds and our variable annuity plan, including
charges and expenses, obtain a prospectus from The Vanguard Group, P.O. Box
2600, Valley Forge, PA 19482-2600.
Read it carefully before you invest or send money.
23
<PAGE>
--------------------------------------------------------------------------------
THE PEOPLE WHO GOVERN YOUR FUND
The Trustees of your mutual fund are there to see that the fund is operated and
managed in your best interests since, as a shareholder, you are part owner of
the fund. Your fund Trustees also serve on the Board of Directors of The
Vanguard Group, which is owned by the funds and exists solely to provide
services to them on an at-cost basis.
Seven of Vanguard's eight board members are independent, meaning that they
have no affiliation with Vanguard or the funds they oversee, apart from the
sizable personal investments they have made as private individuals. They bring
distinguished backgrounds in business, academia, and public service to their
task of working with Vanguard officers to establish the policies and oversee the
activities of the funds.
Among board members' responsibilities are selecting investment advisers for
the funds; monitoring fund operations, performance, and costs; reviewing
contracts; nominating and selecting new Trustees/Directors; and electing
Vanguard officers.
The list below provides a brief description of each Trustee's
professional affiliations. Noted in parentheses is the year in which the Trustee
joined the Vanguard Board.
TRUSTEES
JOHN J. BRENNAN (1987) Chairman of the Board, Chief Executive Officer, and
Director/Trustee of The Vanguard Group, Inc., and each of the investment
companies in The Vanguard Group.
JOANN HEFFERNAN HEISEN (1998) Vice President, Chief Information Officer, and a
member of the Executive Committee of Johnson & Johnson; Director of Johnson &
JohnsonoMerck Consumer Pharmaceuticals Co., The Medical Center at Princeton, and
Women's Research and Education Institute.
BRUCE K. MACLAURY (1990) President Emeritus of The Brookings Institution;
Director of American Express Bank Ltd., The St. Paul Companies, Inc., and
National Steel Corp.
BURTON G. MALKIEL (1977) Chemical Bank Chairman's Professor of Economics,
Princeton University; Director of Prudential Insurance Co. of America, Banco
Bilbao Gestinova, Baker Fentress & Co., The Jeffrey Co., and Select Sector SPDR
Trust.
ALFRED M. RANKIN, JR. (1993) Chairman, President, Chief Executive Officer, and
Director of NACCO Industries, Inc.; Director of The BFGoodrich Co.
JAMES O. WELCH, JR. (1971) Retired Chairman of Nabisco Brands, Inc.; retired
Vice Chairman and Director of RJR Nabisco; Director of TECO Energy, Inc., and
Kmart Corp.
J. LAWRENCE WILSON (1985) Retired Chairman of Rohm & Haas Co.; Director of
AmeriSource Health Corporation, Cummins Engine Co., and The Mead Corp.; Trustee
of Vanderbilt University.
--------------------------------------------------------------------------------
OTHER FUND OFFICERS
RAYMOND J. KLAPINSKY Secretary; Managing Director and Secretary of The
Vanguard Group, Inc.; Secretary of each of the investment companies in The
Vanguard Group.
THOMAS J. HIGGINS Treasurer; Principal of The Vanguard Group, Inc.; Treasurer of
each of the investment companies in The Vanguard Group.
VANGUARD MANAGING DIRECTORS
R. GREGORY BARTON Legal Department.
ROBERT A. DISTEFANO Information Technology.
JAMES H. GATELY Individual Investor Group.
KATHLEEN C. GUBANICH Human Resources.
IAN A. MACKINNON Fixed Income Group.
F. WILLIAM MCNABB, III Institutional Investor Group.
MICHAEL S. MILLER Planning and Development.
RALPH K. PACKARD Chief Financial Officer.
GEORGE U. SAUTER Quantitative Equity Group.
<PAGE>
[SHIP]
[THE VANGAURD GROUP LOGO]
Post Office Box 2600
Valley Forge, Pennsylvania 19482-2600
ABOUT OUR COVER
Our cover art, depicting HMS Vanguard at sea, is a
reproduction of Leading the Way, a 1984 work created
and copyrighted by noted naval artist Tom Freeman,
of Forest Hill, Maryland.
WORLD WIDE WEB
www.vanguard.com
FUND INFORMATION
1-800-662-7447
INDIVIDUAL ACCOUNT SERVICES
1-800-662-2739
INSTITUTIONAL INVESTOR SERVICES
1-800-523-1036
This report is intended for the fund's
shareholders. It may not be distributed
to prospective investors unless it
is preceded or accompanied by the
current fund prospectus.
Q272 082000
(C)2000 The Vanguard Group, Inc.
All rights reserved.
Vanguard Marketing Corporation,
Distributor.
