<PAGE> 1
VANGUARD
WELLINGTON FUND
ANNUAL REPORT 1994
THE VANGUARD VOYAGE . . . STAYING THE COURSE
<PAGE> 2
THE VANGUARD VOYAGE . . . STAYING THE COURSE
WE ARE PRESENTLY OBSERVING TWO MILESTONES IN OUR HISTORY: (1) THE 20TH
ANNIVERSARY OF THE VANGUARD GROUP; AND (2) THE 65TH ANNIVERSARY YEAR OF
WELLINGTON FUND, THE OLDEST MUTUAL FUND ASSOCIATED WITH VANGUARD. WE CELEBRATE
THESE TWO EVENTS SINCE THEY HAVE INDELIBLY ALTERED THE MUTUAL FUND INDUSTRY-- IN
OUR VIEW, FOR THE BETTER.
Wellington Fund--a pioneer in the mutual fund industry--began operations on June
30, 1929. Its first fifteen years were a struggle for survival in an industry
that was shaken to its roots by the Great Crash of 1929-1933. From an initial
base of $100,000, Wellington's assets had grown to but $27 million by the end of
World War II. The Vanguard Group was founded on September 24, 1974. Soon
thereafter, we assumed responsibility for the management of Wellington Fund and
ten associated funds, with assets aggregating $1.4 billion.
The years that followed the founding of The Vanguard Group were marked by
exceptional growth. Today, Wellington Fund, with assets of nearly $9 billion,
remains one of the largest mutual funds in the nation. And Vanguard, now
managing 85 mutual fund portfolios, is entrusted with assets of $134 billion,
and ranks as the second largest fund complex in the world.
Our durability in an era of change--and our longevity in an era of
challenge--didn't "just happen." What brought us to where we are today is what
we were when we began. Put another way, we set our original investment course
based on sound principles, and our corporate course based on a single focus:
serving solely the interests of our Fund shareholders.
FOUNDING INVESTMENT PRINCIPLES
The founding investment principles of Wellington Fund were, above all,
conservative. The Fund provided a broadly diversified portfolio at a time when
holding individual securities was the conventional strategy. It incurred no debt
in an era of high leverage that would soon come back to haunt less cautious
investors. And it was a "balanced" fund--in fact, Wellington is America's oldest
balanced fund--with holdings from each of the three basic financial asset
classes: cash reserves, bonds, and common stocks. In short, Wellington Fund was
a staid investment in an era of stock speculation that was to become, almost
within moments, an era of conservatism.
For Vanguard, these investment principles endure. "Balance" is still our
watchword, because the three basic financial asset classes have different--and
usually countervailing--investment characteristics. When it began, Wellington
Fund provided a balanced program in a single investment; in 1994, such a balance
is often achieved by a combination of Vanguard money market, bond, and stock
funds.
"Conservatism," too, remains our standard. Over the years, we have tried to
maintain the discipline to eschew offering funds that lack sound financial
principles, often based on marketplace fads that could not--and did not--endure.
Our conservatism applies not only to the funds we offer, but to the instruments
in which they invest. For example, we have steered clear of exotic derivative
securities with unpredictable investment characteristics. Too many fund managers
have been taken in by these highly risky instruments, and their shareholders
have paid a heavy price--except in cases where the manager has "made the fund
whole," when to do otherwise would have shocked investors and impaired their
confidence in the fund complex.
Speculation, it seems, comes and goes, albeit in different guises. But the
investment principles to which we have adhered since Wellington Fund began in
1929 remain firm:
* We offer Funds with sound and durable investment objectives,
designed for long-term investors.
(please turn to inside back cover)
VANGUARD/WELLINGTON FUND SEEKS CONSERVATION OF PRINCIPAL, REASONABLE CURRENT
INCOME, AND PROFITS WITHOUT UNDUE RISK. THE FUND FOLLOWS A "BALANCED" INVESTMENT
STRATEGY, WITH ABOUT 60% OF ITS NET ASSETS NORMALLY INVESTED IN COMMON STOCKS
AND 40% IN FIXED-INCOME SECURITIES, INCLUDING HIGH-GRADE BONDS AND MONEY MARKET
INSTRUMENTS.
<PAGE> 3
CHAIRMAN'S LETTER
FELLOW SHAREHOLDER:
Wellington Fund's 65th fiscal year, which ended on November 30, 1994, was a
challenging period for virtually all financial assets. Stock prices
generally eased downward, and bonds took their worst drubbing in recent memory.
Considering this environment, Wellington Fund gave a good account of
itself. We virtually "held our own" during the year, with a total return
(capital change plus income) of -0.8%. While this negative return contrasts with
the stock market's small gain, it was far less than the bond market suffered.
This table compares the Fund's return with the returns of the two unmanaged
benchmarks we use as a "balanced fund" proxy: for stocks, the Standard & Poor's
500 Composite Stock Price Index; for bonds, the Salomon Brothers High-Grade Bond
Index.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
Total Return
-----------------
Fiscal Year Ended
November 30, 1994
- -----------------------------------------------------------------------------
<S> <C>
WELLINGTON FUND -0.8%
- -----------------------------------------------------------------------------
STANDARD & POOR'S 500 STOCK INDEX +1.0%
- -----------------------------------------------------------------------------
SALOMON BROTHERS BOND INDEX -6.6
- -----------------------------------------------------------------------------
</TABLE>
Our return is based on net asset values of $20.78 per share on November 30,
1993, and $19.33 on November 30, 1994, with the latter figure adjusted to take
into account the reinvestment of four quarterly income dividends totaling $.92
per share from net investment income, and a distribution of $.38 per share from
net capital gains realized during fiscal 1993. At fiscal year end, Wellington's
income yield was 5.0%.
THE FISCAL YEAR IN REVIEW
Fiscal 1994 was, in a sense, a particularly "seasonal" year for common stock
prices. They rose last winter, tumbled in the early spring, recovered during the
summer, and fell again in the autumn. On balance, the price of the Standard &
Poor's 500 Index edged downward from 462 when the year began to 454 at year end.
The Index's positive total return, then, was accounted for entirely by the
dividends it generated.
As always, there were some important cross-currents in the financial
markets. And in 1994, many of them were just the reverse of 1993. A year ago,
stocks with smaller market capitalizations were ascendant over stocks with large
market capitalizations (which dominate the Standard & Poor's 500 Index). This
year, large cap equities led the way, if by a far more modest margin. So, just
as last year redounded to the benefit of more aggressive small cap investors,
this past year redounded to the benefit of investors in larger, more
conservative equities.
If the performance of the stock market was "so-so" during the past year,
nothing that gentle could be said about the bond market. The total return on the
Salomon Brothers High-Grade Bond Index was -6.6% (-13.7% decline in price,
partly offset by interest income of +7.1%), as yields rose from 7.2% to 8.8%.
Yields on short-term and intermediate-term bonds also rose sharply; however,
because of their shorter maturities, price declines were much smaller. This
rising rate environment was surely a major factor in dampening the return on
stocks.
A primary cause of the interest rate rise was investor fears about a
resurgence of inflation. So far, at least, the U.S. Consumer Price Index gives
little
[FIGURE 1]
1
<PAGE> 4
[FIGURE 2]
evidence of it. The CPI has risen just 2.7% over the past twelve months,
although more sensitive indicators--such as commodity prices and producer
prices--have been rising at higher rates.
In an effort to quell inflationary fears, the Federal Reserve has acted
to "tighten" the money supply in order to slow economic growth and rein in
potential future inflation. Fully six rate increases--in February, March, April,
May, August, and again in November--combined to raise the Federal funds rate (at
which banks borrow from one another) from 3.00% to 5.50%. Still, the specter of
inflation remains, and further rate increases may well lie in prospect.
The chart above compares the cumulative returns on stocks and bonds
during the past five years. It reflects the fact that during this
period--essentially the first half of the decade of the 1990s--both investment
classes provided annual rates of return that were quite comparable (stocks +8.9%
per year; bonds +8.0% per year). As a result, balanced funds such as
Wellington--which generally follow a policy of holding about 60% of assets in
stocks and 40% in bonds (and short-term reserves)--gave a good account of
themselves in terms of total return during the period, all the while assuming a
lower risk profile than an all-stock portfolio.
As 1994 has now made obvious, there can be extended periods in which
bonds carry higher risks than stocks. Nonetheless, there is some tendency for
the two securities markets to fluctuate independently (as exemplified in 1990
and 1994). And it is this tendency that continues to commend the balanced fund
as a particularly suitable investment for long-term investors seeking an optimal
combination of current income and growth of capital, with reasonable risk.
THE FUND IN FISCAL YEAR 1994
While the total return earned on Wellington's 1994 voyage took us into negative
territory, the dip was mild on any absolute basis. Indeed, coming after our
return of +13.6% in fiscal 1993, it hardly seems disabling. What is more, it was
only our second negative return in the past 15 years, a sequence of
accomplishment that surely was "as good as the law allows," and, in my
judgement, understates the volatility of returns we should normally expect.
On a relative basis, moreover, our Fund performed quite well. We
outpaced our Composite Market Index (65% stocks, 35% bonds), which fell -1.6%
versus our -0.8% return. We also outpaced the return on the average balanced
fund, which dipped -1.7%. If these margins seem small, I assure you they are
not. If we were to maintain them in the years ahead (no mean task!), our
cumulative return advantage would be dramatically superior.
The return on the Fund's common stock position was +1.6%, or slightly
ahead of the +1.0% gain in the Standard & Poor's 500 Index. Since the Index
outpaced about three-fourths of all equity funds during the year, our admittedly
small margin of superiority was most welcome. The positive factors accumulated
nicely and came largely from two sources: (1) our small relative commitment
(just 3% of net assets) to a very weak utilities group and (2) particularly good
selection of individual equities, notably in the basic materials, consumer
staples, financial, and transportation groups.
Our advantage over the average balanced fund came from a variety of
factors, by far the most important of which is that our peers maintained a
2
<PAGE> 5
[FIGURE 3]
<TABLE>
<CAPTION>
Average Annual Total Returns--Periods Ended November 30, 1994
- -------------------------------------------------------------------------------
1 Year 5 Years 10 Years
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
WELLINGTON FUND -0.82% +8.06% +12.41%
AVERAGE BALANCED FUND -1.74 +7.74 +11.69
COMPOSITE INDEX* -1.63 +8.63 +13.49
</TABLE>
* COMPOSITE INDEX IS 65% STANDARD & POOR'S 500 INDEX AND 35% SALOMON BROTHERS
BOND INDEX.
NOTE: PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
slightly larger bond commitment during the year (37% of net assets versus our
33%). While their position in cash reserves was much larger than Wellington's
(9% versus 2%), this safety margin was insufficient to offset Wellington's
superior equity industry weightings. Our lower commitment to utilities and
higher commitments in energy and cyclical stocks, for example, were important
contributors to our relative outperformance.
REVIEWING THE PAST DECADE
The chart above presents Wellington Fund's record over the past decade, compared
to a composite of our two unmanaged performance standards (65% Standard & Poor's
500 Index and 35% Salomon High-Grade Bond Index) and the average balanced fund.
You will note that, during the ten-year period, the Fund achieved an annual rate
of return of +12.4%, below the +13.5% return of our Composite Index. As you
know, this standard is a theoretical construct, existing only on paper and free
of the "real world" expenses of fund operations, advisory fees, portfolio
transaction costs, and the "drag" of cash reserves. Nonetheless, our objective
is to surpass this benchmark over the longer term.
Our ability to outperform our balanced fund peer group (which provided
an average annual return of +11.7%) is a worthy accomplishment. The peer group
is a demanding standard, composed, as it is, of funds managed by other
professional advisers generally seeking objectives similar to those we seek to
achieve for Wellington Fund.
That said, we would note that our advantage arises from the
competitively low expenses we incur. In fact, our expense ratio (operating
expenses plus advisory fees, taken as a percentage of the Fund's average net
assets) averaged about 0.43% annually during the decade, nearly two-thirds below
the 1.14% expense ratio incurred by the average balanced fund. This favorable
annual "spread" of 0.71% should be sustainable in the years ahead. It remains
incumbent on Wellington Management Company, our investment adviser, to surpass a
fairly chosen competitive group on a gross return basis, thereby further
enhancing our "natural" expense advantage.
(continued)
3
<PAGE> 6
I should note that the 10-year returns achieved by our peers for their
shareholders are significantly overstated in the chart. All major statistical
services calculate fund returns without taking sales charges into account.
(We're not sure why!) Such a practice suggests that all balanced funds are "no
load" funds, when in fact only a minority of balanced funds (including, of
course, Wellington Fund) meet this definition. Thus, investors in our Fund have
enjoyed an even larger margin of advantage over the competition than the chart
would suggest.
A LIFETIME RETROSPECTIVE
When Wellington Fund began operations in 1929, we were one of only a handful of
mutual funds in this then-nascent industry. Our founder and Chairman Emeritus,
Walter L. Morgan, had a pioneer's vision, not only in foreseeing the subsequent
success of the mutual fund industry, but in daring to start a balanced
(stock/bond) fund in what was then a stock fund industry.
Since then, we have, in a sense, "seen it all": war and peace,
prosperity and depression, and political change. The result: an investment of
$10,000 made at the inception of this 65-year period would today be valued at
$1,322,261--reflecting an average annual return of +7.8%. To be sure, each
decade had its own special characteristics, and we thought you would be
interested in the chart below, which illustrates our average annual return,
decade by decade, along with the highest and lowest annual return in each
decade.
Surely there can be few better examples of the long-term returns and
short-term risks involved in investing in a conservative balanced fund. I
would call your attention to the dramatic differences in the returns earned by
Wellington Fund from one decade to the next, particularly the high and low
annual returns within each period. What the future will provide is not given
to us to know, but it is hard to imagine that we will see returns that are not
within the span of returns--average, high, and low--presented in the chart.
[FIGURE 4]
4
<PAGE> 7
So far, during the decade of the 1990s, the Fund's +7.7% average annual
return is below the average returns earned during the 1950s and the 1980s,
albeit above the results achieved during the 1960s and the 1970s. Of course,
while these figures are interesting to consider, they reflect "history," and
have no bearing whatsoever on the returns the Fund may earn during the second
half of this decade and beyond. In any event, both Mr. Morgan (Wellington
Chairman from 1929 to 1970) and I (Chairman since then) look to Wellington
Fund's "next 65 years" with confidence and enthusiasm.
IN SUMMARY
In my letter to you one year ago, following the Fund's highly successful 1993, I
warned both that "today the stock market is highly valued," and that "all
yield-oriented strategies entail significant exposure to interest rate risk.
With long-term interest rates now at their lowest levels in nearly a quarter
century, some retracement is certainly possible."
As it turned out, both warnings were timely. But I hope that neither
warning deterred our shareholders from maintaining their investments in
Wellington Fund. While stocks and bonds are risky investments in the short term,
in combination, their risk is "less than the sum of its parts." For the
long-term investor, we would once again suggest that the best strategy--come
what may in the financial markets--is to "stay the course." For our part, we
assure you that we, too, will stay the course, holding fast to the conservative
investment principles that have served our investors so well over the past 65
years.
Sincerely,
/s/ JOHN C. BOGLE
- ---------------------
John C. Bogle
Chairman of the Board
December 5, 1994
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 SEPTEMBER 30, 1994) ARE AS FOLLOWS:
<TABLE>
<CAPTION>
10 YEARS
----------------------------------------
TOTAL CAPITAL INCOME
1 YEAR 5 YEARS RETURN RETURN RETURN
------ ------- ------ ------- -------
<S> <C> <C> <C> <C> <C>
WELLINGTON FUND +2.91% +8.58% +13.09% +6.77% +6.32%
</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
TOTAL INVESTMENT RETURN TABLE
The following table illustrates the results of a single-share investment in
Vanguard/Wellington Fund for the 25-year period ended November 30, 1994. 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*
- ------------------------------------------------------------------------------------------------------------------------------
Value With Income Wellington Fund Composite
Year Ended Net Asset Capital Gains Income Dividends & Capital --------------------------------- Stock/Bond
December 31 Value Distributions Dividends Gains Reinvested Capital Income Total Index**
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1970 $11.30 $ .25 $ .445 $12.07 + 2.0% + 4.4% + 6.4% + 9.0%
- ------------------------------------------------------------------------------------------------------------------------------
1971 11.84 -- .44 13.14 + 4.8 + 4.1 + 8.9 +13.1
- ------------------------------------------------------------------------------------------------------------------------------
1972 12.42 .25 .44 14.58 + 7.1 + 3.9 +11.0 +14.9
- ------------------------------------------------------------------------------------------------------------------------------
1973 10.26 .25 .47 12.86 -15.5 + 3.7 -11.8 - 9.2
- ------------------------------------------------------------------------------------------------------------------------------
1974 7.73 .25 .50 10.58 -22.3 + 4.6 -17.7 -18.1
- ------------------------------------------------------------------------------------------------------------------------------
1975 8.91 .25 .48 13.24 +18.6 + 6.6 +25.2 +29.2
- ------------------------------------------------------------------------------------------------------------------------------
1976 10.19 .25 .49 16.33 +17.4 + 6.0 +23.4 +22.0
- ------------------------------------------------------------------------------------------------------------------------------
1977 8.98 .25 .50 15.62 - 9.3 + 4.9 - 4.4 - 4.1
- ------------------------------------------------------------------------------------------------------------------------------
1978 8.65 .25 .54 16.45 - 0.8 + 6.1 + 5.3 + 4.2
- ------------------------------------------------------------------------------------------------------------------------------
1979 9.13 -- .66 18.68 + 5.5 + 8.0 +13.5 +10.5
- ------------------------------------------------------------------------------------------------------------------------------
1980 10.38 -- .75 22.90 +13.7 + 8.9 +22.6 +20.2
- ------------------------------------------------------------------------------------------------------------------------------
1981 9.80 -- .84 23.56 - 5.6 + 8.5 + 2.9 - 3.5
- ------------------------------------------------------------------------------------------------------------------------------
1982 11.21 -- .87 29.34 +14.4 +10.1 +24.5 +29.3
- ------------------------------------------------------------------------------------------------------------------------------
1983 12.46 .44 .91 36.26 +15.1 + 8.5 +23.6 +16.2
- ------------------------------------------------------------------------------------------------------------------------------
1984 12.32 .48 .92 40.14 + 2.8 + 7.9 +10.7 + 9.8
- ------------------------------------------------------------------------------------------------------------------------------
1985 14.50 .30 .92 51.59 +20.3 + 8.2 +28.5 +31.4
- ------------------------------------------------------------------------------------------------------------------------------
1986 15.85 .34 .94 61.08 +11.7 + 6.7 +18.4 +19.1
- ------------------------------------------------------------------------------------------------------------------------------
1987 15.15 .14 .98 62.47 - 3.5 + 5.8 + 2.3 + 3.3
- ------------------------------------------------------------------------------------------------------------------------------
1988 16.01 .58 .96 72.54 + 9.5 + 6.6 +16.1 +14.5
- ------------------------------------------------------------------------------------------------------------------------------
1989 17.78 .60 1.02 88.21 +14.9 + 6.7 +21.6 +26.2
- ------------------------------------------------------------------------------------------------------------------------------
1990 16.26 -- 1.01 85.73 - 8.5 + 5.7 - 2.8 + 0.3
- ------------------------------------------------------------------------------------------------------------------------------
1991 18.81 .23 .96 106.00 +17.2 + 6.4 +23.6 +26.7
- ------------------------------------------------------------------------------------------------------------------------------
1992 19.16 .16 .94 114.41 + 2.7 + 5.2 + 7.9 + 8.2
- ------------------------------------------------------------------------------------------------------------------------------
1993 20.40 .38 .92 129.88 + 8.5 + 5.0 +13.5 +11.2
- ------------------------------------------------------------------------------------------------------------------------------
1994 (11/30) 19.33 -- .60 126.79 - 5.2 + 2.8 - 2.4 - 2.6
- ------------------------------------------------------------------------------------------------------------------------------
CUMULATIVE TOTAL +1,018.1% +1,119.7%
- ------------------------------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN +10.2% +10.6%
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Adjusted to include reinvestment of income dividends and any capital gains
distributions for both the Fund and the Index.
** Composite index shown for comparative purposes is comprised of the Standard
& Poor's 500 Stock Index (65%) and Salomon Brothers High-Grade Bond
Index (35%).
Note: The initial net asset value was $11.34 on December 31, 1969. No adjustment
has been made for income taxes payable by shareholders on reinvested income
dividends and capital gains distributions.
6
<PAGE> 9
REPORT FROM THE INVESTMENT ADVISER
Your Fund started its 65th year with a spring in its step. The acceleration in
economic activity was no longer a lonely forecast but a reality, with much
postponed worldwide demand for houses, cars, and capital goods yet to be filled.
Inflation was a distant threat and corporations were just beginning to reap the
benefits of preceding years' cost cutting and efficiency improvements. The
prospects for common stock earnings and dividends were bright, especially for
those in economically sensitive businesses. Long-term bonds had a more limited
outlook, not just because they earlier had appreciated so much and thus yielded
less, but because it was clear that the demand for capital would rise with the
economy.
Wellington Fund's portfolio was structured in anticipation of these
developments. The proportion invested in equities had been expanded from 61% to
65% of net assets, and the emphasis on cyclically sensitive stocks was
increased. The reduced fixed-income sector had been shortened in average
maturity, and average quality was edged even higher. By the end of the third
quarter, the Fund's equities had performed substantially ahead of the +5.1%
total return of the S&P 500 Index, and the fixed-income sector, though down
somewhat, performed materially better than our benchmark Salomon Brothers High-
Grade Bond Index.
But the rise in interest rates persisted. Initially driven higher by
increased demand for funds, a typical companion to improving economic
conditions, interest rates were now forced higher by perceptions of worsening
inflation just around the corner. The Federal Reserve was (and still is)
explicit in its worries about future price trends, as it jacked up short-term
interest rates even more in order to head off inflation. Long-term rates rose as
well, partly out of the same concerns, partly because of increased demand for
capital. Interestingly, there is so far no evidence of serious inflation
anywhere among the major developed economies of the world, and arguably not much
evidence for it in the near future.
Nonetheless, by Wellington Fund's fourth quarter, interest rates did
attain levels which appeared to threaten not only the growth path of business
and profits, but the valuation of common stock earnings and dividends as well.
The impact on the financial markets and on the Fund's performance in the period
was material. The year ended with the Fund's equities up only +1.6%, slightly
ahead of the +1.0% return of the S&P 500. Our fixed-income portfolio was off
- -5.8%, disappointing, but not nearly as negative as the -6.6% decline in the
Salomon benchmark. Given these vicissitudes and cross-currents in the
marketplace, we are not displeased with the Fund's relative performance in 1994.
At the end of fiscal 1994, total net assets of $8.6 billion were
distributed as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
November 30, 1994
-------------------------------
Assets Percent of
in Millions Net Assets
- ------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS AND CONVERTIBLES
BASIC INDUSTRY $1,785 21%
FINANCE 1,091 13
APPLIED SCIENCE 972 11
ENERGY 817 9
CONSUMER 684 8
UTILITIES 250 3
- ------------------------------------------------------------------------------
TOTAL $5,599 65%
- ------------------------------------------------------------------------------
FIXED INCOME
LONG-TERM BONDS $2,891 33%
CASH AND EQUIVALENTS 148 2
- ------------------------------------------------------------------------------
TOTAL $3,039 35%
- ------------------------------------------------------------------------------
TOTAL PORTFOLIO $8,638 100%
- ------------------------------------------------------------------------------
</TABLE>
The Fund's common stocks and convertibles, which make up about 65% of total net
assets, are well diversified, with over 90 issues spread over virtually all the
major sectors of the market. Four sectors in particular have received emphasis:
1. Companies engaged in the production of basic industrial materials and
goods--21% of net assets--have built in a new high level of earnings power
that has only begun to emerge and is therefore not yet fully recognized in
the marketplace. Plant operating rates have advanced to levels that are both
more efficient and conducive to better pricing power. Indications are that
scheduled capacity additions in most areas will remain modest. These
companies' global competitive positions have rarely been stronger.
(continued)
7
<PAGE> 10
2. Shares of well-managed banks are notably undervalued, especially as the
year's rise in interest rates have led to a trimming of earnings
expectations. Nevertheless, gains in 1995 and beyond should be satisfactory,
bolstered by the efficiencies of mergers and consolidations that are expected
to occur. Once interest rates level off and decline, stock price appreciation
may be substantial from current depressed prices. Banks account for most of
the 13% in our financial holdings.
3. Investors in health care stocks haven't yet fully recovered from a near-panic
over the initial and now-defunct proposals of the Clinton Administration to
regulate the industry. Though the stocks of the best companies have risen
nicely from their lows, we believe they have further to go as they continue
to report excellent earnings in a less inflationary environment. We have
focused on companies with exceptional new product outlooks. They make up the
majority of the 11% position in applied science.
4. We believe there is a lot less excess production capacity in the global oil
and natural gas industry (9% of net assets) than today's softness in prices
would suggest. This will become more evident as demand grows and companies
trim new investment and cut costs. When prices strengthen, the effect on
profits (and stock prices) will be worthwhile. In the meantime, most of the
stocks provide generous dividend returns.
The foregoing sectors account for most of the Fund's commitment to equities, the
remainder being made up of a variety of other exposures.
Long-term bonds comprise 33% of total net assets and reflect our
continued emphasis on high quality and call protection. Having shortened
maturities during fiscal 1993, over the course of the last six months we "nailed
down" the higher rates which we felt were out of line with future inflation.
Average maturity increased as a result to 18 years, as against 14 years twelve
months ago.
Looking ahead, there is no question that high and rising interest rates
cast a shadow over the economy, corporate profits, and the prices of stocks and
bonds. But to the degree the culprit is a fear of overly strong business and
high inflation on the part of the Federal Reserve and fixed-income investors,
there may be relief in sight. The business environment even now cannot be
described as overheated or inflationary, and it is not likely to become so. Yet
it has been assaulted by more than 2 1/2 percentage points of increased interest
costs in a short time. Conceivably, rates could stabilize and start down as the
economy slows next year. If that proves to be the case, a major impediment to
improved financial markets and continued progress for your Fund will have been
removed. We'll see.
Respectfully,
Vincent Bajakian, Senior Vice President
Portfolio Manager
Wellington Management Company
December 10, 1994
8
<PAGE> 11
FINANCIAL STATEMENTS
November 30, 1994
STATEMENT OF NET ASSETS
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- ------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (62.7%)
- ------------------------------------------------------------------------------
APPLIED SCIENCE & RESEARCH (11.2%)
- ------------------------------------------------------------------------------
DEFENSE ELECTRONICS & AEROSPACE (1.8%)
(2)Northrop Grumman Corp. 2,628,800 $ 106,795
United Technologies Corp. 850,000 49,725
MEDICAL PRODUCTS & SERVICES (8.1%)
Abbott Laboratories, Inc. 2,600,000 82,875
American Home Products Corp. 1,625,000 105,828
Baxter International, Inc. 3,800,000 97,850
Bristol-Myers Squibb Co. 1,470,000 84,892
Johnson & Johnson 2,000,000 106,750
* Pfizer, Inc. 2,570,600 198,900
Zeneca Group ADR 650,000 25,675
OFFICE EQUIPMENT (1.3%)
* Xerox Corp. 1,150,000 112,988
----------
GROUP TOTAL 972,278
----------
- ------------------------------------------------------------------------------
BASIC INDUSTRY (19.4%)
- ------------------------------------------------------------------------------
CHEMICALS (3.9%)
CABOT CORP. 900,000 23,513
DOW CHEMICAL CO. 1,441,200 92,237
E.I. DU PONT DE NEMOURS & CO. 2,000,000 107,750
EASTMAN CHEMICAL 226,150 10,657
PPG INDUSTRIES, INC. 1,800,000 64,800
WITCO CHEMICAL CORP. 1,447,500 37,997
MANUFACTURING (4.9%)
* GENERAL ELECTRIC CO. 3,589,300 165,108
HANSON PLC ADR 4,500,000 82,125
HONEYWELL, INC. 2,920,600 85,428
MINNESOTA MINING &
MANUFACTURING CO. 1,200,000 61,500
THOMAS & BETTS CORP. 450,000 29,812
METAL (3.1%)
ALUMINUM CO. OF AMERICA 1,286,000 104,970
BRITISH STEEL PLC ADR 2,300,000 57,787
J&L SPECIALTY STEEL INC. 1,500,000 25,313
REYNOLDS METALS CO. 865,000 40,763
USX-U.S. STEEL GROUP 1,000,000 34,375
PAPER (3.6%)
GEORGIA-PACIFIC CORP. 1,000,000 71,500
INTERNATIONAL PAPER CO. 1,000,000 71,500
RAYONIER INC. 200,300 5,608
TEMPLE-INLAND, INC. 1,540,000 69,108
WESTVACO CORP. 1,500,000 51,563
WILLAMETTE INDUSTRIES, INC. 1,000,000 42,250
TRANSPORTATION & OTHER SERVICES (3.9%)
BRITISH AIRWAYS PLC ADR 1,328,475 79,875
CANADIAN PACIFIC LTD. 5,000,000 77,586
THE DUN & BRADSTREET CORP. 700,000 37,012
NORFOLK SOUTHERN CORP. 613,700 37,129
UNION PACIFIC CORP. 1,301,700 60,529
WMX TECHNOLOGIES, INC. 1,900,000 48,925
----------
GROUP TOTAL 1,676,720
----------
- ------------------------------------------------------------------------------
CONSUMER & SERVICES (7.4%)
- ------------------------------------------------------------------------------
CONSUMER PRODUCTS & SERVICES (4.5%)
Brunswick Corp. 2,500,000 43,125
Eastman Kodak Co. 804,600 36,710
Ford Motor Co. 3,300,000 89,513
General Motors Corp. 2,700,000 102,938
* Kimberly-Clark Corp. 2,250,000 112,781
RETAIL (2.9%)
May Department Stores Co. 1,400,000 50,750
J.C. Penney Co., Inc. 1,500,000 69,000
Sears, Roebuck and Co. 1,223,200 57,796
SuperValu, Inc. 2,000,000 49,000
Woolworth Corp. 1,752,500 24,754
----------
GROUP TOTAL 636,367
----------
- ------------------------------------------------------------------------------
ENERGY (9.5%)
Amerada Hess Corp. 1,500,000 68,250
Amoco Co. 400,000 24,300
Ashland Oil, Inc. 600,000 20,400
Atlantic Richfield Co. 700,000 72,450
Chevron Corp. 800,000 34,900
* Exxon Corp. 2,000,000 120,750
Kerr-McGee Corp. 800,000 37,800
Mobil Corp. 1,275,000 108,694
Norsk Hydro AS ADR 800,000 30,500
Pennzoil Co. 433,400 20,966
Phillips Petroleum Co. 1,248,800 41,210
Repsol SA ADR 1,600,000 46,200
Royal Dutch Petroleum Co. ADR 535,512 58,170
Texaco, Inc. 1,012,000 62,870
USX-Marathon Group 900,000 16,200
Unocal Corp. 2,000,000 53,250
----------
GROUP TOTAL 816,910
----------
- ------------------------------------------------------------------------------
FINANCE (12.3%)
- ------------------------------------------------------------------------------
BANKS & FINANCE (9.4%)
* Banc One Corp. 4,300,000 115,562
* The Bank of New York Co., Inc. 4,700,000 131,012
BankAmerica Corp. 344,900 14,141
* Citicorp 2,775,000 115,509
CoreStates Financial Corp. 2,700,000 66,825
* First Bank System, Inc. 3,307,000 109,958
First Union Corp. 1,000,000 39,875
KeyCorp 2,000,000 48,750
Norwest Corp. 4,349,700 94,606
Wachovia Corp. 2,377,400 77,563
</TABLE>
9
<PAGE> 12
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- ------------------------------------------------------------------------------
<S> <C> <C>
INSURANCE & SERVICES (2.9%)
Allstate Corp. 4,000,000 $ 94,500
CIGNA Corp. 200,000 12,675
* General Re Corp. 1,200,000 140,850
----------
GROUP TOTAL 1,061,826
----------
- ------------------------------------------------------------------------------
UTILITIES (2.9%)
- ------------------------------------------------------------------------------
ELECTRIC (.7%)
Entergy Corp. 1,500,000 33,750
PECO Energy Corp. 1,000,800 24,144
TELEPHONE (2.2%)
AT&T Corp. 1,000,000 49,125
Bell Atlantic Corp. 400,000 20,050
NYNEX Corp. 700,000 26,338
Pacific Telesis Group 524,600 15,213
Southwestern Bell Corp. 1,150,000 47,581
U.S. West Corp. 964,856 34,011
----------
GROUP TOTAL 250,212
----------
- ------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost $4,569,646) 5,414,313
- ------------------------------------------------------------------------------
CONVERTIBLE PREFERRED STOCKS (2.1%)
- ------------------------------------------------------------------------------
Alumax, Inc. $4.00 239,997 26,640
Bethlehem Steel Corp. 144A $3.50 500,000 24,375
Cyprus Amax $4.00 479,995 27,240
Ford Motor Co. $4.20 275,000 24,200
Norwest Corp. $3.50 490,000 29,522
Reynolds Metals Co. $3.31 633,000 29,514
Sears, Roebuck and Co. Inc.
PERCS $3.75 427,400 23,667
- ------------------------------------------------------------------------------
TOTAL CONVERTIBLE PREFERRED STOCKS
(Cost $151,300) 185,158
- ------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Face Market
Rating(1) Amount Value
(Moody's) (000) (000)+
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
BONDS (19.4%)
- ------------------------------------------------------------------------------
BANKS & FINANCE (6.5%)
- ------------------------------------------------------------------------------
Abbey National First Capital
8.20%, 10/15/04 Aa3 $ 15,000 $ 14,631
H.F. Ahmanson & Co.
8.25%, 10/1/02 Baa1 10,000 9,791
Allstate Corp.
7.50%, 6/15/13 A2 15,000 12,833
American Express
Credit Europe
5.375%, 7/16/01 Aaa 22,000 18,666
Asian Development Bank
9.125%, 6/1/00 Aaa 10,000 10,442
Banc One Corp.
9.875%, 3/1/09 A1 20,000 21,572
BankAmerica Corp.
7.20%, 4/15/06 A3 20,000 17,573
7.50%, 10/15/02 A3 10,000 9,342
Bank of Boston Corp.
6.625%, 12/1/05 Baa2 27,000 22,603
Bank of Hawaii
6.875%, 6/1/03 A2 10,000 8,896
Chase Manhattan Corp.
6.50%, 1/15/09 Baa1 30,000 23,789
Chemical Banking Corp.
6.50%, 1/15/09 A3 25,000 19,891
Comerica, Inc.
7.125%, 12/1/13 A2 7,000 5,897
8.375%, 7/15/24 A2 15,000 13,996
Continental Bank Corp.
12.50%, 4/1/01 A2 15,000 17,818
Dean Witter Discover
& Co.
6.75%, 10/15/13 A2 19,275 15,511
Discover Card
5.50%, 5/16/98 Aaa 25,000 24,539
European Investment Bank
9.125%, 6/1/02 Aaa 10,000 10,495
Exxon Capital Corp.
6.00%, 7/1/05 Aaa 9,000 7,557
First Chicago Corp.
6.375%, 1/30/09 A3 15,000 11,933
General Electric
Capital Corp.
8.125%, 5/15/12 Aaa 27,500 26,221
General Motors Acceptance
Corp. MTN
7.50%, 6/9/00 Baa1 24,500 23,307
General Re Corp.
9.00%, 9/12/09 Aa1 15,000 15,382
</TABLE>
10
<PAGE> 13
<TABLE>
<CAPTION>
Face Market
Rating(1) Amount Value
(Moody's) (000) (000)+
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Great Western
Financial Corp.
6.125%, 6/15/98 Baa2 $ 20,000 $ 18,675
International Bank for
Reconstruction and
Development
8.625%, 10/15/16 Aaa 15,000 15,168
9.25%, 7/15/17 Aaa 5,000 5,379
KFW International Finance
7.00%, 3/1/13 Aaa 10,000 8,577
7.20%, 3/15/14 Aaa 15,000 13,142
MBNA Credit Card
5.40%, 9/30/00 Aaa 25,000 22,781
National Westminster Bank
9.45%, 5/1/01 Aa3 10,000 10,533
Republic New York Corp.
9.50%, 4/15/14 A1 5,000 5,327
9.70%, 2/1/09 A1 5,000 5,406
Sears Credit Account
Trust 91B
8.60%, 5/15/98 Aaa 36,000 36,450
Swedish Export Credit
8.625%, 4/15/26 Aa2 14,600 13,541
Toronto-Dominion Bank
6.45%, 1/15/09 Aa3 14,000 11,409
6.50%, 8/15/08 Aa3 10,000 8,251
Transamerica Finance
6.50%, 3/15/11 A2 11,000 8,880
Wells Fargo & Co.
6.125%, 11/1/03 A3 22,000 18,528
----------
GROUP TOTAL 564,732
----------
- ------------------------------------------------------------------------------
DRUGS & PHARMACEUTICALS (.4%)
- ------------------------------------------------------------------------------
American Home Products
7.25%, 3/1/23 A2 20,000 17,162
Zeneca
7.00%, 11/15/23 A1 20,000 16,362
----------
GROUP TOTAL 33,524
----------
- ------------------------------------------------------------------------------
INDUSTRIAL (7.4%)
- ------------------------------------------------------------------------------
Air Products &
Chemicals, Inc.
8.75%, 4/15/21 A1 10,000 9,991
Amoco Canada
Petroleum Co.
7.95%, 10/1/22 Aa1 20,000 18,249
Archer-Daniels-Midland Co.
8.375%, 4/15/17 Aa2 30,000 29,366
Arco Chemical Co.
9.80%, 2/1/20 A3 15,000 16,343
Auburn Hills
12.375%, 5/1/20 B2 10,000 13,125
Boeing Co.
8.75%, 8/15/21 A1 20,000 19,912
British Petroleum Co.
7.875%, 5/15/02 Aa1 20,000 19,529
10.00%, 7/1/18 Aa1 10,000 10,726
Chevron Corp.
9.375%, 6/1/16 Aa2 15,000 15,387
Coca-Cola Enterprises, Inc.
8.50%, 2/1/22 A3 30,000 29,168
Crown Cork & Seal Co., Inc.
5.875%, 4/15/98 Baa1 14,000 13,043
Delta Air Lines, Inc.
9.75%, 5/15/21 Ba1 15,000 13,444
Dow Capital Corp.
8.70%, 5/15/22 A1 30,000 28,922
E.I. du Pont de Nemours
& Co.
8.25%, 1/15/22 Aa2 25,000 23,743
Eaton Corp.
7.00%, 4/1/11 A2 10,600 9,019
7.625%, 4/1/24 A2 15,000 13,262
Ford Motor Co.
8.875%, 1/15/22 A2 25,000 25,137
Gannett Co.
5.25%, 3/1/98 Aa3 25,000 23,013
Georgia Pacific Corp.
9.625%, 3/15/22 Baa3 22,000 22,137
International Business
Machines Corp.
8.375%, 11/1/19 A3 5,000 4,755
McDonald's Corp.
7.375%, 7/15/33 Aa2 14,000 11,904
Morton International, Inc.
9.25%, 6/1/20 A1 10,000 10,563
Occidental Petroleum Corp.
11.75%, 3/15/11 Baa3 18,565 20,212
Philips Electronics
7.75%, 4/15/04 A3 15,000 14,069
Phillips Petroleum Co.
9.375%, 2/15/11 Baa2 20,000 20,900
PPG Industries, Inc.
9.00%, 5/1/21 A1 10,000 10,264
Procter & Gamble ESOP
9.36%, 6/23/15 Aa2 20,000 21,477
Rohm & Haas Co.
9.80%, 1/14/08 A1 15,000 16,497
Sears, Roebuck and Co.
9.375%, 11/1/11 Baa1 14,000 14,658
Southwest Airlines Co.
7.875%, 9/1/07 Baa1 9,950 9,254
8.75%, 10/15/03 Baa1 5,000 5,046
</TABLE>
11
<PAGE> 14
<TABLE>
<CAPTION>
STATEMENT OF NET ASSETS (continued)
Face Market
Rating(1) Amount Value
(Moody's) (000) (000)+
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Standard Oil of Ohio
9.00%, 6/1/19 A1 $ 18,000 $ 17,904
Tele-Communications, Inc.
9.25%, 1/15/23 Baa3 15,000 13,766
Texaco, Inc.
9.75%, 3/15/20 A1 15,000 16,515
Tyco Laboratories, Inc.
9.50%, 5/1/22 Baa3 20,000 20,416
United Parcel Service
8.375%, 4/1/20 Aaa 27,000 26,658
Wal-Mart Stores
7.25%, 6/1/13 Aa1 24,000 21,206
Whirlpool Corp.
9.10%, 2/1/08 A3 6,715 6,872
----------
GROUP TOTAL 636,452
----------
- ------------------------------------------------------------------------------
UTILITIES (3.0%)
- ------------------------------------------------------------------------------
Arizona Public Service Co.
9.50%, 4/15/21 Baa2 5,000 4,979
BellSouth
Telecommunications
7.50%, 6/15/33 Aaa 16,000 13,705
Chesapeake Telephone
7.625%, 12/1/12 Aaa 8,000 7,364
Coastal Corp.
9.75%, 8/1/03 Baa3 7,000 7,254
10.25%, 10/15/04 Baa3 15,000 16,166
Consolidated Edison Co.
of New York, Inc.
7.50%, 6/15/23 Aa3 25,000 21,439
Duke Power Co.
7.00%, 7/1/33 Aa2 10,000 8,087
8.625%, 3/1/22 Aa2 8,000 7,784
Illinois Bell Telephone Co.
6.625%, 2/1/25 Aa1 22,000 17,386
Long Island Lighting Co.
9.00%, 11/1/22 Ba1 15,000 12,574
Louisiana Power & Light
10.30%, 1/2/05 Baa3 22,739 23,263
New Jersey Bell Telephone
8.00%, 6/1/22 Aaa 19,000 17,886
New York Telephone
7.25%, 2/15/24 A2 10,000 8,230
Ohio Bell Telephone
7.85%, 12/15/22 Aaa 20,000 18,567
Pacific Gas & Electric Co.
MTN 7.83%, 11/12/98 A1 10,000 9,859
8.375%, 5/1/25 A1 10,000 9,289
Southern Indiana Gas
& Electric
8.875%, 6/1/16 Aa2 5,000 5,099
Texas Utilities Electric Co.
7.875%, 4/1/24 Baa2 14,000 12,063
U.S. West Communications
6.875%, 9/15/33 Aa3 18,000 14,062
Wisconsin Electric Power
7.70%, 12/15/27 Aa2 29,100 25,882
----------
GROUP TOTAL 260,938
----------
- ------------------------------------------------------------------------------
FOREIGN (2.1%)
- ------------------------------------------------------------------------------
Bank of Scotland
8.85%, 11/1/06 A2 12,500 12,515
Quebec-Hydro Electric
Commission
8.40%, 1/15/22 A1 30,000 27,941
Italy Global Bond
6.875%, 9/27/23 A1 24,000 18,687
Kingdom of Sweden
8.625%, 3/25/16 Aa2 7,595 7,043
Korea Electric Power
6.375%, 12/1/03 A1 8,000 6,757
Norsk Hydro AS
7.75%, 6/15/23 A3 9,000 7,794
9.00%, 4/15/12 A3 20,000 20,282
Ontario Hydro
5.80%, 3/31/98 Aa3 25,000 23,394
Province of Ontario
7.375%, 1/27/03 Aa3 28,000 26,313
Republic of Ireland MTN
7.64%, 1/2/02 Aa2 30,000 28,843
----------
GROUP TOTAL 179,569
----------
- ------------------------------------------------------------------------------
TOTAL BONDS
(Cost $1,791,527) 1,675,215
- ------------------------------------------------------------------------------
U.S. GOVERNMENT & AGENCY
OBLIGATIONS (14.1%)
- ------------------------------------------------------------------------------
FEDERAL HOME LOAN
MORTGAGE CORP.
6.19%, 1/21/04 15,000 12,802
7.66%, 7/20/04 10,000 9,584
8.00%, 10/15/98 4,882 4,773
11.875%, 6/15/13 225 236
FEDERAL NATIONAL
MORTGAGE ASSOCIATION
6.28%, 2/3/04 25,000 21,571
8.50%, 10/25/97 2,952 2,975
14.75%, 3/1/12 89 103
15.50%, 10/1/12 15 18
</TABLE>
12
<PAGE> 15
<TABLE>
Caption>
Face Market
Amount Value
(000) (000)+
- ------------------------------------------------------------------------------
<S> <C> <C>
GOVERNMENT NATIONAL
MORTGAGE ASSOCIATION
6.50%, 5/15/23-6/15/24 $273,753 $ 235,525
7.00%, 11/15/22-7/15/24 84,172 75,222
11.00%, 8/15/10-8/15/15 603 661
11.25%, 10/15/95-8/15/15 366 396
11.50%, 5/15/13-6/15/15 110 121
TENNESSEE VALLEY AUTHORITY
8.625%, 11/15/29 25,000 24,316
U.S. TREASURY BONDS
6.25%, 8/15/23 90,000 72,042
7.125%, 2/15/23 148,500 133,233
7.25%, 5/15/16 200,000 182,812
7.50%, 11/15/16 230,000 215,662
U.S. TREASURY NOTES
6.25%, 2/15/03 150,000 135,211
7.50%, 11/15/01 39,000 38,311
7.875%, 11/15/04 50,000 49,867
- ------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT
& AGENCY OBLIGATIONS
(Cost $1,299,735) 1,215,441
- ------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENT (1.4%)
- ------------------------------------------------------------------------------
Repurchase Agreement
Collateralized by U.S. Government
Obligations in a Pooled Cash
Account 5.75%, 12/1/94
(Cost $123,649) 123,649 123,649
- ------------------------------------------------------------------------------
TOTAL INVESTMENTS (99.7%)
(Cost $7,935,857) 8,613,776
- ------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (.3%)
- ------------------------------------------------------------------------------
Other Assets--Notes C and E 184,860
Liabilities--Note E (160,363)
--------
24,497
- ------------------------------------------------------------------------------
NET ASSETS (100%)
- ------------------------------------------------------------------------------
Applicable to 446,802,795 outstanding
$1.00 par value shares
(authorized 550,000,000 shares) $8,638,273
- ------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE $19.33
==============================================================================
</TABLE>
+ See Note A to Financial Statements.
* Ten largest common stock investments representing 15.3% of net assets.
(1) Unaudited.
(2) Considered an affiliated company as the Fund owns more than 5% of the
outstanding voting securities of the company. MTN--Medium-Term Note.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
AT NOVEMBER 30, 1994,
NET ASSETS CONSISTED OF:
- ------------------------------------------------------------------------------
Amount Per
(000) Share
---------- -------
<S> <C> <C>
Paid in Capital $7,826,067 $17.51
Undistributed Net
Investment Income 121,695 .27
Accumulated Net
Realized Gains 12,592 .03
Unrealized Appreciation
of Investments--Note D 677,919 1.52
- ------------------------------------------------------------------------------
NET ASSETS $8,638,273 $19.33
- ------------------------------------------------------------------------------
</TABLE>
13
<PAGE> 16
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended
November 30, 1994
(000)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT INCOME
INCOME
Dividends............................................................ $ 185,205
Interest............................................................. 211,245
- -----------------------------------------------------------------------------------------------------------------------
Total Income................................................ 396,450
- -----------------------------------------------------------------------------------------------------------------------
EXPENSES
Investment Advisory Fee--Note B
Basic Fee......................................................... $ 4,570
Performance Adjustment............................................ -- 4,570
The Vanguard Group--Note C -------
Management and Administrative..................................... 21,378
Marketing and Distribution........................................ 1,649 23,027
Taxes (other than income taxes)...................................... ------- 667
Custodian's Fees..................................................... 251
Legal Fees........................................................... 109
Auditing Fees........................................................ 15
Shareholders' Reports................................................ 398
Annual Meeting and Proxy Costs....................................... 114
Directors' Fees and Expenses......................................... 44
- -----------------------------------------------------------------------------------------------------------------------
Total Expenses.............................................. 29,195
- -----------------------------------------------------------------------------------------------------------------------
Net Investment Income.................................... 367,255
- -----------------------------------------------------------------------------------------------------------------------
REALIZED NET GAIN ON INVESTMENT
SECURITIES SOLD ...................................................... 14,803
- -----------------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION) OF INVESTMENT SECURITIES ................................ (469,401)
- -----------------------------------------------------------------------------------------------------------------------
Net Decrease in Net Assets Resulting from Operations..... $ (87,343)
=======================================================================================================================
</TABLE>
14
<PAGE> 17
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED Year Ended
NOVEMBER 30, 1994 November 30, 1993
(000) (000)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net Investment Income.................................................. $ 367,255 $ 305,945
Realized Net Gain...................................................... 14,803 144,672
Change in Unrealized Appreciation (Depreciation)....................... (469,401) 367,865
- -----------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets Resulting from Operations.. (87,343) 818,482
- -----------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS (1)
Net Investment Income.................................................. (376,406) (295,893)
Realized Net Gain...................................................... (145,379) (44,728)
- -----------------------------------------------------------------------------------------------------------------------
Total Distributions.............................................. (521,785) (340,621)
- -----------------------------------------------------------------------------------------------------------------------
NET EQUALIZATION CREDITS--NOTE A........................................... 8,194 12,644
- -----------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (2)
Issued --Regular.................................................... 1,718,981 2,074,771
--In Lieu of Cash Distributions.............................. 479,469 306,837
--Exchange................................................... 473,982 575,236
Redeemed --Regular.................................................... (861,047) (604,925)
--Exchange................................................... (488,846) (284,816)
- -----------------------------------------------------------------------------------------------------------------------
Net Increase from Capital Share Transactions..................... 1,322,539 2,067,103
- -----------------------------------------------------------------------------------------------------------------------
Total Increase................................................... 721,605 2,557,608
- -----------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Year...................................................... 7,916,668 5,359,060
- -----------------------------------------------------------------------------------------------------------------------
End of Year (3)........................................................ $8,638,273 $7,916,668
=======================================================================================================================
(1) Distributions Per Share
Net Investment Income.............................................. $.92 $.94
Realized Net Gain.................................................. $.38 $.16
- -----------------------------------------------------------------------------------------------------------------------
(2) Shares Issued and Redeemed
Issued............................................................. 109,655 132,624
Issued in Lieu of Cash Distributions............................... 23,956 15,703
Redeemed........................................................... (67,803) (44,382)
- -----------------------------------------------------------------------------------------------------------------------
65,808 103,945
- -----------------------------------------------------------------------------------------------------------------------
(3) Undistributed Net Investment Income................................ $ 121,695 $ 122,652
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
15
<PAGE> 18
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Year Ended November 30,
--------------------------------------------------
For a Share Outstanding Throughout Each Year 1994 1993 1992 1991 1990
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR .................. $20.78 $19.34 $17.95 $16.29 $18.40
------ ------ ------ ------ ------
INVESTMENT OPERATIONS
Net Investment Income............................. .88 .92 .93 .96 1.01
Net Realized and Unrealized Gain
(Loss) on Investments.......................... (1.03) 1.62 1.65 1.71 (1.46)
------ ------ ------ ------ ------
TOTAL FROM INVESTMENT OPERATIONS ........... (.15) 2.54 2.58 2.67 (.45)
- ----------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income.............. (.92) (.94) (.96) (1.01) (1.06)
Distributions from Realized Capital Gains......... (.38) (.16) (.23) -- (.60)
------ ------ ------ ------ ------
TOTAL DISTRIBUTIONS ........................ (1.30) (1.10) (1.19) (1.01) (1.66)
- ----------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR ........................ $19.33 $20.78 $19.34 $17.95 $16.29
================================================================================================================
TOTAL RETURN ........................................ -0.82% +13.62% +14.99% +16.81% -2.65%
- ----------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net Assets, End of Year (Millions)................... $8,638 $7,917 $5,359 $3,473 $2,317
Ratio of Expenses to Average Net Assets.............. .35% .34% .33% .35% .43%
Ratio of Net Investment Income to
Average Net Assets................................ 4.35% 4.55% 4.98% 5.39% 5.99%
Portfolio Turnover Rate.............................. 32% 34% 24% 35% 33%
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
16
<PAGE> 19
NOTES TO FINANCIAL STATEMENTS
Vanguard/Wellington 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.
2. FEDERAL INCOME TAXES: The Fund intends to continue to qualify as a regulated
investment company and distribute all of its taxable income. Accordingly, no
provision for Federal income taxes is required in the financial statements.
3. EQUALIZATION: The Fund follows the accounting practice known as
"equalization," under which a portion of the price of capital shares issued
and redeemed, equivalent to undistributed net investment income per share on
the date of the transaction, is credited or charged to undistributed income.
As a result, undistributed income per share is unaffected by Fund share sales
or redemptions.
4. REPURCHASE AGREEMENTS: The Fund, along with other members of The Vanguard
Group of Investment Companies, transfers uninvested cash balances into a
Pooled Cash Account, the daily aggregate of which is invested in repurchase
agreements secured by U.S. Government obligations. Securities pledged as
collateral for repurchase agreements are held by the Fund's custodian bank
until maturity of each repurchase agreement. Provisions of the agreement
ensure that the market value of the 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 which expires March 31, 1995, the Fund pays
Wellington Management Company a basic investment advisory fee calculated at an
annual percentage rate of the average net assets of the Fund. The basic fee thus
computed is subject to quarterly adjustments based on performance relative to a
combined index comprised of the Standard & Poor's 500 Stock Index and the
Salomon Brothers High-Grade Corporate Bond Index. For the year ended November
30, 1994, the investment advisory fee represented an effective annual base rate
of .05 of 1% of average net assets. No performance adjustments were required
during the year.
17
<PAGE> 20
NOTES TO FINANCIAL STATEMENTS (continued)
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 November 30, 1994, the Fund had contributed capital of $1,365,000
to Vanguard (included in Other Assets), representing 6.8% 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 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 November 30, 1994, directed brokerage arrangements
reduced the Fund's expenses by $507,000 (.01 of 1% of average net assets).
D. During the year ended November 30, 1994, the Fund made purchases of
$2,114,249,000 and sales of $1,365,529,000 of investment securities other than
U.S. Government securities and temporary cash investments. Purchases and sales
of U.S. Government securities were $1,718,151,000 and $1,242,105,000,
respectively.
At November 30, 1994, unrealized appreciation for financial reporting and
Federal income tax purposes aggregated $677,919,000 of which $1,011,985,000
related to appreciated securities and $334,066,000 related to depreciated
securities.
E. The market value of securities on loan to broker/dealers at November 30,
1994, was $292,155,000 for which the Fund had received as collateral cash of
$90,613,000 and U.S. Treasury securities with a market value of $208,510,000.
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, realization and/or retention
of the collateral may be subject to legal proceedings.
18
<PAGE> 21
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors
Vanguard/Wellington 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/Wellington Fund (the "Fund") at November 30, 1994, 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 at November 30, 1994, 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
December 30, 1994
SPECIAL TAX INFORMATION
SPECIAL 1994 TAX INFORMATION (UNAUDITED)
FOR VANGUARD/WELLINGTON FUND, INC.
Corporate shareholders should note that for the fiscal year ended November
30, 1994, 46.5% of the Fund's investment income (i.e., dividend income plus
short-term capital gains) 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 and Chief Executive Officer of Rhone-Poulenc
Rorer Inc.; Director of Sun Company, Inc.
BARBARA BARNES HAUPTFUHRER, Director of The Great Atlantic and Pacific Tea
Company, Alco Standard Corp., Raytheon Company, Knight-Ridder, Inc., and
Massachusetts Mutual Life Insurance Co.
BRUCE K. MACLAURY, President of The Brookings Institution; Director of American
Express Bank Ltd., The St. Paul Companies, Inc., and Scott Paper Company.
BURTON G. MALKIEL, Chemical Bank Chairman's Professor of Economics, Princeton
University; Director of Prudential Insurance Co. of America, Amdahl Corporation,
Baker Fentress & Co., The Jeffrey Co., and Southern New England Communications
Company.
ALFRED M. RANKIN, JR., Chairman, President, and
Chief Executive Officer of NACCO Industries, Inc.; Director of NACCO Industries,
The BFGoodrich Company, Reliance Electric Company, and The Standard Products
Company.
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 Company 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.
J. LAWRENCE WILSON, Chairman and Chief Executive Officer of Rohm & Haas Company;
Director of Cummins Engine Company; Trustee of Vanderbilt University and the
Culver Educational Foundation.
HONORARY CHAIRMAN
WALTER L. MORGAN, Founder
OTHER FUND OFFICERS
RICHARD F. HYLAND, Treasurer; Treasurer of The Vanguard Group, Inc., and of each
of the investment companies in The Vanguard Group.
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.
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
JEREMY G. DUFFIELD VINCENT S. MCCORMACK
Senior Vice President Senior Vice President
Planning & Development Operations
JAMES H. GATELY RALPH K. PACKARD
Senior Vice President Senior Vice President
Institutional Chief Financial Officer
IAN A. MACKINNON
Senior Vice President
Fixed Income Group
20
<PAGE> 23
THE VANGUARD VOYAGE . . . STAYING THE COURSE
(continued from inside front cover)
* We set specific standards for each Fund's investment policies and
principles.
* We adhere to the highest standards of investment quality, consistent with
each Fund's objectives.
* We offer candor in our Fund descriptions (including full disclosure of
risk) to prospective investors, and in our description to shareholders
of each Fund's success (or, sometimes, lack of the same).
These principles make at least as much sense today as they did in 1929, perhaps
even more. For we live in an era when many fund organizations have become
asset-gathering machines, capitalizing on past performance that is unrepeatable
and investment fads that today, as yesterday, will come and go. The new
marketing policy is too often "if investors want it, we'll sell it to them." But
our principle remains "if it makes sound investment sense, we'll offer it, even
if it takes years to attract substantial assets."
FOUNDING CORPORATE VALUES
With the founding of The Vanguard Group in 1974, a new concept of values was
brought to bear on mutual fund management. Unlike other fund organizations,
Vanguard alone is structured to serve only its Funds' shareholders. Vanguard's
corporate structure places not the fund management company, but the fund
shareholders, "at the top" of the organizational chart. Vanguard Fund
shareholders are literally the owners of the firm and are entitled to all of the
benefits that, at other fund firms, accrue to the owners of the management
company.
Because of this unique structure, Vanguard has become best known for its
low costs, which we believe are just as essential a consideration in investing
in mutual funds as risk potential and total return. We call this relationship
between risk, return, and cost the "eternal triangle" of mutual fund investing.
We take special pride in our position as (by far) the lowest-cost provider
of financial services in the world. Under our "no-load" offering structure,
shareholders begin their Vanguard investment program with $1,000 of assets (not,
say, $950) for each $1,000 investment. Then, under our "at-cost" operating
structure, each $1,000 is managed for only about $3 per year; our competitors
may charge three, four, or even five times that amount.
In all, Vanguard has distinguished itself by providing Funds with sound and
durable goals to investors with long-term time horizons, and doing so at the
fairest financial terms available. We believe that the unique Vanguard structure
"promotes a healthy and viable mutual fund complex within which each Fund can
better prosper; enables the Funds to realize substantial savings from advisory
fee reductions; promotes savings from economies of scale; and provides the Funds
with direct and conflict-free control over distribution functions." We are not
alone in this belief. Indeed, the quotation is taken verbatim from the unanimous
decision of the U.S. Securities and Exchange Commission when, in 1981, it
approved our application for the structure under which we operate today.
A CLOSING THOUGHT
We are proud of what Wellington Fund, the other Vanguard Funds, and The Vanguard
Group have come to represent, and we are grateful for the success and growth
with which we have been blessed. We are an industry leader, and, as a competitor
observed a few years ago, we are "the standard by which all fund organizations
are judged."
In battle terms, "the vanguard" is the first wave of troops or ships, and
Vanguard surely is in the first wave of the battle for investment survival. As
we look behind us, however, the "second wave" is not in sight. No fund
organization has followed our lead, leaving ours a lonely course. No matter. We
have an organization that places the interests of our Fund shareholders first.
We have Funds that shall endure the vicissitudes of the future. Come what may,
we intend to "stay the course," and we shall do our very best to continue to
deserve your confidence and loyalty. We hope that you will stay the course with
us.
<PAGE> 24
THE VANGUARD FAMILY OF FUNDS
FIXED INCOME FUNDS
MONEY MARKET FUNDS
Vanguard Admiral Funds
U.S. Treasury Money Market Portfolio
Vanguard Money Market Reserves
TAX-EXEMPT MONEY MARKET FUNDS
Vanguard Municipal Bond Fund
Money Market Portfolio
Vanguard State Tax-Free Funds
Money Market Portfolios (CA, NJ, OH, PA)
TAX-EXEMPT INCOME FUNDS
Vanguard Municipal Bond Fund
Vanguard State Tax-Free Funds
Insured Longer-Term Portfolios
(CA, FL, NJ, NY, OH, PA)
INCOME FUNDS
Vanguard Admiral Funds
Vanguard Fixed Income Securities Fund
Vanguard Preferred Stock Fund
EQUITY AND BALANCED FUNDS
GROWTH AND INCOME FUNDS
Vanguard Convertible Securities Fund
Vanguard Equity Income Fund
Vanguard Quantitative Portfolios
Vanguard/Trustees' Equity Fund
U.S. Portfolio
Vanguard/Windsor Fund
Vanguard/Windsor II
BALANCED FUNDS
Vanguard Asset Allocation Fund
Vanguard STAR Fund
Vanguard/Wellesley Income Fund
Vanguard/Wellington Fund
GROWTH FUNDS
Vanguard/Morgan Growth Fund
Vanguard/PRIMECAP Fund
Vanguard U.S. Growth Portfolio
AGGRESSIVE GROWTH FUNDS
Vanguard Explorer Fund
Vanguard Specialized Portfolios
INTERNATIONAL FUNDS
Vanguard International Growth Portfolio
Vanguard/Trustees' Equity Fund
International Portfolio
INDEX FUNDS
Vanguard Index Trust
Total Stock Market Portfolio
500 Portfolio
Extended Market Portfolio
Growth Portfolio
Value Portfolio
Small Capitalization Stock Portfolio
Vanguard International Equity Index Fund
European Portfolio
Pacific Portfolio
Emerging Markets Portfolio
Vanguard Bond Index Fund
Vanguard Tax-Managed Fund
Vanguard Balanced Index Fund
[LOGO]
<TABLE>
<S> <C>
Vanguard Financial Center Valley Forge, Pennsylvania 19482
New Account Information: 1-(800) 662-7447 Shareholder Account Services: 1-(800) 662-2739
</TABLE>
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.
Q210-11/94
<PAGE> 25
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 front cover of the printed version of this report features the
Vanguard ship in the crashing sea.
A small picture of a rear view of the Vanguard ship crashing through
the sea appears at the top of the inside covers of the report.
A running head featuring a sextant appears on pages one through five.
A photograph of John C. Bogle appears at the lower-right of page one.
A line chart depicting the indexed values of the Salomon High-Grade
Bond Index and the Standard & Poor's 500 Index for the fiscal years 1990 to
1994 appears at the upper-left of page two.
A cumulative performance line chart for the period November 30, 1984,
to November 30, 1994, including average annual total returns, appears on page
3.
A bar chart depicting Wellington Fund's Annual Returns Over Seven
Decades appears at the bottom of page 4.
A running head featuring a lantern appears on page six.
A running head featuring a map and telescope appears on pages seven and
eight.
A running head featuring a log book and pen appears on pages nine
through nineteen.
A running head featuring a compass appears on page twenty.
At the bottom of the back cover there appears a triangle with the sides
labeled "risk," "cost," and "return."
A seagull in flight is featured at the top of the outside back cover of
the report.
