<PAGE> 1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT (NO. 2-11444) UNDER
THE SECURITIES ACT OF 1933
PRE-EFFECTIVE AMENDMENT NO. [X]
POST-EFFECTIVE AMENDMENT NO. 77 [X]
AND
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY
ACT OF 1940
AMENDMENT NO. 77 [X]
VANGUARD/WELLINGTON FUND, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
P.O. BOX 2600, VALLEY FORGE, PA 19482
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)
REGISTRANT'S TELEPHONE NUMBER (610) 669-1000
RAYMOND J. KLAPINSKY, ESQUIRE
P.O. BOX 876
VALLEY FORGE, PA 19482
IT IS PROPOSED THAT THIS FILING BECOME EFFECTIVE:
on March 21, 1997, pursuant to paragraph (a) of Rule 485.
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
As soon as practicable after this Registration Statement becomes effective.
WE HAVE ELECTED TO REGISTER AN INDEFINITE NUMBER OF SHARES PURSUANT TO
REGULATION 24F-2 UNDER THE INVESTMENT COMPANY ACT OF 1940. REGISTRANT FILED ITS
RULE 24F-2 NOTICE FOR THE PERIOD ENDED NOVEMBER 30, 1996 ON JANUARY 31, 1997.
================================================================================
<PAGE> 2
VANGUARD/WELLINGTON FUND, INC.
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
FORM N-1A
ITEM NUMBER LOCATION IN PROSPECTUS
<C> <S> <C>
Item 1. Cover Page.................................... Cover Page
Item 2. Synopsis...................................... Not Applicable
Item 3. Condensed Financial Information............... Financial Highlights; Fund
Expenses
Item 4. General Description of Registrant............. Investment Objective; Investment
Limitations; Investment
Policies; General Information;
Investment Risks
Item 5. Management of the Fund........................ Directors and Officers;
Management of the Fund;
Investment Adviser
Item 6. Capital Stock and Other Securities............ Opening an Account and
Purchasing Shares; Selling Your
Shares; The Fund's Share;
Dividends, Capital Gains and
Taxes; General Information
Item 7. Purchase of Securities Being Offered.......... Cover Page; Opening an Account
and Purchasing Shares
Item 8. Redemption or Repurchase...................... Selling your shares
Item 9. Pending Legal Proceedings..................... Not Applicable
<CAPTION>
FORM N-1A LOCATION IN STATEMENTS
ITEM NUMBER OF ADDITIONAL INFORMATION
<C> <S> <C>
Item 10. Cover Page.................................... Cover Page
Item 11. Table of Contents............................. Cover Page
Item 12. General Information and History............... Investment Objectives and
Policies; General Information
Item 13. Investment Objective and Policies............. Investment Objectives and
Policies; Investment Limitations
Item 14. Management of the Fund........................ Management of the Fund;
Investment Management
Item 15. Control Persons and Principal Holders of
Securities.................................... Management of the Fund; General
Information
Item 16. Investment Advisory and Other Services........ Management of the Fund;
Investment Management
Item 17. Brokerage Allocation.......................... Not Applicable
Item 18. Capital Stock and Other Securities............ General Information; Financial
Statements
Item 19. Purchase, Redemption and Pricing of Securities
Being Offered................................. Purchase of Shares; Redemption
of Shares
Item 20. Tax Status.................................... Appendix
Item 21. Underwriters.................................. Not Applicable
Item 22. Calculations of Yield Quotations of Money
Market Fund................................... Not Applicable
Item 23. Financial Statements.......................... Financial Statements
</TABLE>
<PAGE> 3
VANGUARD/WELLINGTON FUND
Prospectus
March 21, 1997
This prospectus contains financial data for the Fund through the fiscal year
ended November 30, 1996.
[GRAPHIC OF SHIP]
[VANGUARD LOGO]
<PAGE> 4
VANGUARD/WELLINGTON FUND
A Balanced Mutual Fund
<TABLE>
<CAPTION>
CONTENTS
<S> <C>
Fund Expenses 2
Financial Highlights 3
A Word About Risk 4
The Fund's Objectives 4
Who Should Invest 4
Investment Strategies 5
Investment Policies 8
Investment Limitations 9
Investment
Performance 10
Share Price 11
Dividends, Capital
Gains, and Taxes 11
The Fund and
Vanguard 12
Investment Adviser 12
General Information 13
Investing
with Vanguard 14
Services and
Account Features 14
Types of Accounts 15
Distribution Options 16
Buying Shares 16
Redeeming Shares 18
Fund and Account Updates 20
Prospectus Postscript 22
Risk Quiz 23
Investment Primer 24
Glossary Inside Back Cover
</TABLE>
INVESTMENT OBJECTIVES AND POLICIES
Vanguard/Wellington Fund (the "Fund") is a diversified open-end investment
company, or mutual fund, that seeks to conserve capital and to provide moderate
long-term capital growth and moderate income.
The Fund invests approximately 60% to 70% of its assets in dividend-paying
stocks of established, large and medium-size companies that, in the adviser's
opinion, are undervalued but whose prospects are improving. The remaining 30% to
40% of assets are invested primarily in high-quality, longer-term corporate
bonds with some exposure to U.S. Treasury, government agency, and
mortgage-backed bonds.
IT IS IMPORTANT TO NOTE THAT THE FUND'S SHARES ARE NOT GUARANTEED OR INSURED
BY THE FDIC OR ANY OTHER AGENCY OF THE U.S. GOVERNMENT. AS WITH ANY INVESTMENT
IN STOCKS (WHICH ARE SUBJECT TO WIDE FLUCTUATIONS IN MARKET VALUE) AND BONDS
(WHICH ARE SENSITIVE TO CHANGES IN INTEREST RATES), YOU COULD LOSE MONEY BY
INVESTING IN THE FUND.
FEES AND EXPENSES
The Fund is offered on a no-load basis, which means that you pay no sales
commissions or 12b-1 marketing fees. You will, however, incur expenses for
investment advisory, management, administrative, and distribution services,
which are included in the expense ratio.
ADDITIONAL INFORMATION ABOUT THE FUND
A Statement of Additional Information (dated March 21, 1997) containing more
information about the Fund is, by reference, part of this prospectus and may be
obtained without charge by writing to Vanguard or by calling our Investor
Information Department at 1-800-662-7447.
WHY READING THIS PROSPECTUS IS IMPORTANT
This prospectus explains the objectives, risks, and strategies of
Vanguard/Wellington Fund. To highlight terms and concepts important to mutual
fund investors, we have provided "Plain Talk" explanations along the way.
Reading the prospectus will help you to decide whether the Fund is the right
investment for you. We suggest that you keep it for future reference.
These securities have not been approved or disapproved by the Securities and
Exchange Commission or any state securities commission, nor has the Securities
and Exchange Commission or any state commission passed upon the accuracy or
adequacy of this prospectus. Any representation to the contrary is a criminal
offense.
4
<PAGE> 5
FUND PROFILE Vanguard/Wellington Fund
WHO SHOULD INVEST (Page 4)
- - Investors seeking moderate long-term capital growth and moderate income.
- - Investors willing to invest for the long term--at least five years.
WHO SHOULD NOT INVEST
- - Investors seeking significant dividend income.
- - Investors unwilling to accept significant share-price fluctuations.
RISKS OF THE FUND (Pages 4-9)
The Fund's total return will fluctuate within a wide range, so an investor could
lose money over short or even extended periods. The Fund is subject to -- among
other risks -- stock market risk (the chance that stock prices in general will
decline, sometimes suddenly and sharply) and interest rate risk (the chance that
bond prices will decline because of rising interest rates).
DIVIDENDS AND CAPITAL GAINS (Page 11)
Dividends are paid in March, June, September, and December. Capital gains, if
any, are paid in December. In participant accounts, all distributions are
automatically reinvested.
INVESTMENT ADVISER (Page 12)
Wellington Management Company, LLP,
Boston, MA.
INCEPTION DATE: July 1, 1929
NET ASSETS AS OF 11/30/96: $16.5 billion
FUND'S EXPENSE RATIO FOR THE
YEAR ENDED 11/30/96: 0.31%
LOADS, 12b-1 MARKETING FEES; None
SUITABLE FOR IRAs: Yes
MINIMUM INITIAL INVESTMENT: $3,000; $1,000 for IRAs and custodial accounts for
minors
NEWSPAPER ABBREVIATION: Welltn
VANGUARD FUND NUMBER: 021
ACCOUNT FEATURES (Page 14)
- - Telephone Redemption
- - Vanguard Direct Deposit Service(sm)
- - Vanguard Automatic Exchange Service(sm)
- - Vanguard Fund Express (R)
- - Vanguard Dividend Express (sm)
AVERAGE ANNUAL TOTAL RETURNS--
PERIODS ENDED NOVEMBER 30, 1996
<TABLE>
<CAPTION>
1 Year 5 Years 10 Years
---------------------------------
<S> <C> <C> <C>
Wellington Fund 21.3% 15.8% 12.7%
Composite Index* 19.8 15.2 13.5
*65% stocks, 35% bonds. See page 10 for details.
</TABLE>
QUARTERLY RETURNS (%) 1987-1996 (intended to show volatility of returns)
[GRAPH]
*65% stocks, 35% bonds. See page 10 for details.
In evaluating past performance, remember that it is not indicative of future
performance and that returns from stocks before adjusting for inflation were
relatively high during the periods shown. Performance figures include the
reinvestment of any dividends and capital gains distributions. The returns shown
are net of expenses for the Fund, but they do not reflect income taxes an
investor would have incurred. The Composite Index is a theoretical portfolio,
incurring none of the advisory fees, operating expenses, and portfolio
transaction costs that are borne by an operating mutual fund. Note, too, that
both the 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.
1
<PAGE> 6
PLAIN TALK ABOUT
THE COSTS OF INVESTING
Costs are an important consideration in choosing a mutual fund. That's because
you, as a shareholder, pay the costs of operating a fund, plus any transaction
costs associated with buying, selling, or exchanging shares. These costs can
erode a substantial portion of the gross income or capital appreciation a fund
achieves. Even seemingly small differences in fund expenses can, over time, have
a dramatic impact on a fund's performance.
PLAIN TALK ABOUT
FUND EXPENSES
All mutual funds have operating expenses. These expenses, which are deducted
from a fund's gross income, are expressed as a percentage of the net assets of
the fund. Vanguard/Wellington Fund's expense ratio in fiscal year 1996 was
0.31%, or $3.10 per $1,000 of average net assets. The average balanced mutual
fund had expenses in 1996 of 1.32%, or $13.20 per $1,000 of average net assets,
according to Lipper Analytical Services, Inc., which reports on the mutual fund
industry.
FUND EXPENSES
The examples below are designed to help you understand the various costs you
would bear, directly or indirectly, as an investor in the Fund.
As noted in this table, you do not pay fees of any kind when you buy, sell, or
exchange shares of the Fund:
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES
<S> <C>
Sales Load Imposed on Purchases: None
Sales Load Imposed on Reinvested Dividends: None
Redemption Fees: None
Exchange Fees: None
</TABLE>
The next table illustrates the operating expenses that you would incur as a
shareholder of the Fund. These expenses are deducted from the Fund's income
before it is paid to you. Expenses include investment advisory fees as well as
the costs of maintaining accounts, administering the Fund, providing shareholder
services, and other activities. The expenses shown in the table are for the
fiscal year ended November 30, 1996.
ANNUAL FUND OPERATING EXPENSES
<TABLE>
<S> <C> <C>
Management and Administrative Expenses: 0.23%
Investment Advisory Expenses: 0.04%
12b-1 Marketing Fees: None
Other Expenses
Marketing and Distribution Costs: 0.02%
Miscellaneous Expenses (e.g., Taxes, Auditing): 0.02%
----
Total Other Expenses: 0.04%
TOTAL OPERATING EXPENSES (EXPENSE RATIO): 0.31%
====
</TABLE>
The following example illustrates the hypothetical expenses that you would
incur on a $1,000 investment over various periods. The example assumes (1) that
the Fund provides a return of 5% a year and (2) that you redeem your investment
at the end of each period.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
---------------------------------------------
<S> <C> <C> <C>
$3 $10 $17 $39
</TABLE>
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF ACTUAL EXPENSES OR
PERFORMANCE FROM THE PAST OR FOR THE FUTURE, WHICH MAY BE HIGHER OR LOWER THAN
THOSE SHOWN.
2
<PAGE> 7
FINANCIAL HIGHLIGHTS
The following financial highlights table shows the results for a share
outstanding for each of the last ten years ended November 30, 1996. The
financial data were audited by Price Waterhouse LLP, independent accountants.
You should read this information in conjunction with the Fund's financial
statements and accompanying notes, which appear, along with the audit report
from Price Waterhouse, in the Fund's most recent Annual Report to shareholders.
The Annual Report is incorporated by reference in the Statement of Additional
Information and in this prospectus, and contains a more complete discussion of
the Fund's performance. You may have the Report sent to you without charge by
writing to Vanguard or by calling our Investor Information Department.
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
----------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990 1989
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $ 24.57 $ 19.33 $ 20.78 $ 19.34 $ 17.95 $ 16.29 $ 18.40 $ 16.82
----------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income 1.02 .96 .88 .92 .93 .96 1.01 1.02
Net Realized and
Unrealized Gain (Loss)
on Investments 4.00 5.19 (1.03) 1.62 1.65 1.71 (1.46) 2.12
----------------------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT
OPERATIONS 5.02 6.15 (.15) 2.54 2.58 2.67 (.45) 3.14
- -------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net
Investment Income (.97) (.88) (.92) (.94) (.96) (1.01) (1.06) (.98)
Distributions from
Realized Capital Gains (.28) (.03) (.38) (.16) (.23) -- (.60) (.58)
----------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (1.25) (.91) (1.30) (1.10) (1.19) (1.01) (1.66) (1.56)
- -------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE,
END OF PERIOD $ 28.34 $ 24.57 $ 19.33 $ 20.78 $ 19.34 $ 17.95 $ 16.29 $ 18.40
===============================================================================================================================
TOTAL RETURN 21.26% 32.70% -0.82% 13.62% 14.99% 16.81% -2.65% 19.98%
===============================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of
Period (Millions) $ 16,505 $ 12,333 $ 8,638 $ 7,917 $ 5,359 $ 3,473 $ 2,317 $ 2,035
Ratio of Expenses to
Average Net Assets 0.31% 0.33% 0.35% 0.34% 0.33% 0.35% 0.43% 0.42%
Ratio of Net Investment
Income to Average
Net Assets 4.08% 4.37% 4.35% 4.55% 4.98% 5.39% 5.99% 5.77%
Portfolio Turnover Rate 30% 24% 32% 34% 24% 35% 33% 30%
Average Commission
Rate Paid $ .0287 N/A N/A N/A N/A N/A N/A N/A
</TABLE>
<TABLE>
<CAPTION>
1988 1987
-----------------------
<S> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $ 14.92 $ 16.06
-----------------------
INVESTMENT OPERATIONS
Net Investment Income .96 .95
Net Realized and
Unrealized Gain (Loss)
on Investments 2.06 (1.55)
-----------------------
TOTAL FROM INVESTMENT
OPERATIONS 3.02 (.60)
-----------------------
DISTRIBUTIONS
Dividends from Net
Investment Income (.98) (.54)
Distributions from
Realized Capital Gains (.14) --
-----------------------
TOTAL DISTRIBUTIONS (1.12) (.54)
-----------------------
NET ASSET VALUE,
END OF PERIOD $ 16.82 $ 14.92
=======================
TOTAL RETURN 21.03% -4.26%
=======================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of
Period (Millions) $ 1,527 $ 1,274
Ratio of Expenses to
Average Net Assets 0.47% 0.43%
Ratio of Net Investment
Income to Average
Net Assets 5.88% 5.56%
Portfolio Turnover Rate 28% 27%
Average Commission
Rate Paid N/A N/A
</TABLE>
From time to time, the Vanguard funds advertise yield and total return figures.
Yield is an historical measure of dividend income, and total return is a measure
of past dividend income (assuming that it has been reinvested) plus capital
appreciation. Neither yield nor total return should be used to predict the
future performance of a fund.
PLAIN TALK ABOUT
HOW TO READ THE FINANCIAL HIGHLIGHTS TABLE
The Fund began fiscal 1996 with a net asset value (price) of $24.57 per share.
During the year, the Fund earned $1.02 per share from investment income
(interest and dividends) and $4.00 per share from investments that had
appreciated in value or that were sold for higher prices than the Fund paid for
them. Of those total earnings of $5.02 per share, $0.97 per share was returned
to shareholders in the form of dividend distributions, and $0.28 per share in
the form of capital gains distributions. The earnings ($5.02 per share) less
total distributions ($1.25 per share) resulted in a share price of $28.34 at the
end of the year, an increase of $3.77 per share (from $24.57 at the beginning of
the period to $28.34 at the end of the period). Assuming that the shareholder
had reinvested the distributions in the purchase of more shares, total return
from the Fund was 21.26% for the year.
As of November 30, 1996, the Fund had $16.5 billion in net assets; an expense
ratio of 0.31% ($3.10 per $1,000 of net assets); and net investment income
amounting to 4.08% of its average net assets. It sold and replaced securities
valued at 30% of its total net assets.
3
<PAGE> 8
PLAIN TALK ABOUT
BALANCED FUNDS
Balanced funds are "middle-of-the-road" investments that seek to provide some
combination of growth, income, and conservation of capital by investing in a
mix of stocks, bonds, and/or money market instruments. Because stocks and
bonds tend to move in different directions, balanced funds are able to use the
rewards from one type of investment to help offset the risks from another.
A WORD ABOUT RISK
This prospectus describes the risks you will face as an investor in
Vanguard/Wellington Fund. It is important to keep in mind one of the main axioms
of investing: the higher the risk of losing money, the higher the potential
reward. The reverse, also, is generally true: the lower the risk, the lower the
potential reward. However, as you consider an investment in Vanguard/Wellington
Fund, you should also take into account your personal tolerance for the daily
fluctuations of both the stock and bond markets.
Look for the "warning flag" symbol [FLAG] throughout the prospectus. It is
used to mark detailed information about each type of risk that you, as a
shareholder of the Fund, will confront.
THE FUND'S OBJECTIVES
The Fund seeks to conserve capital and to provide moderate long-term capital
growth and moderate income. These objectives are not fundamental, which means
that they can be changed by the Fund's board of directors without shareholder
approval. However, before making any important change in its objectives, the
Fund will give shareholders 30-days notice, in writing.
[FLAG] BECAUSE OF THE SEVERAL TYPES OF RISK DESCRIBED ON THE FOLLOWING PAGES,
YOUR INVESTMENT IN THE FUND, AS WITH ANY INVESTMENT IN STOCKS AND
BONDS, COULD LOSE MONEY.
WHO SHOULD INVEST
The Fund may be a suitable investment for you if:
- - You wish to add a balanced fund to your existing holdings, which could
include other stock and bond--as well as money market and
tax-exempt--investments.
- - You are seeking moderate growth of your capital over the long term--at
least five years--while, at the same time, conserving your capital as much
as possible.
- - You are seeking moderate income.
- - You want a simple way to invest in a relatively fixed percentage of stocks
and bonds.
This Fund is not an appropriate investment if you are a market-timer. Investors
who engage in excessive in-and-out trading activity generate additional costs
that are borne by all of the Fund's shareholders. To minimize such costs, which
reduce the ultimate returns achieved by you and other shareholders, the Fund has
adopted the following policies:
4
<PAGE> 9
- - The Fund reserves the right to reject any purchase request--including
exchanges from other Vanguard funds--that it regards as disruptive to the
efficient management of the Fund. This could be because of the timing of
the investment or because of a history of excessive trading by the
investor.
- - There is a limit on the number of times you can exchange into or out of the
Fund (see "Redeeming Shares" in the INVESTING WITH VANGUARD section).
- - The Fund reserves the right to stop offering shares at any time.
INVESTMENT STRATEGIES
This section explains how Vanguard/Wellington Fund's investment adviser pursues
the objectives of conservation of capital, moderate long-term capital growth,
and moderate current income. It also explains important risks--stock market
risk, interest rate risk, manager risk, and credit risk--faced by investors in
the Fund. Like the Fund's objectives, the adviser's investment strategies are
not fundamental and can be changed by the Fund's board of directors without
shareholder approval. However, before making any important change in its
strategies, the Fund will give shareholders 30-days notice, in writing.
MARKET EXPOSURE
STOCKS
Roughly two-thirds of the Fund's assets are invested in common stocks. At times,
the Fund may also invest in securities that are convertible into common stocks.
[FLAG] THE FUND IS SUBJECT TO STOCK MARKET RISK, WHICH IS THE POSSIBILITY
THAT STOCK PRICES OVERALL WILL DECLINE OVER SHORT OR EVEN EXTENDED
PERIODS. STOCK MARKETS TEND TO MOVE IN CYCLES, WITH PERIODS OF RISING
STOCK PRICES AND PERIODS OF FALLING STOCK PRICES.
To illustrate the volatility of stock prices, the following table shows the
best, worst, and average total returns (dividend income plus change in market
value) for the U.S. stock market over various periods as measured by the
Standard & Poor's 500 Composite Stock Price Index, a widely used barometer of
stock market activity. Note that the returns shown do not include the costs of
buying and selling stocks or other expenses that a real-world investment
portfolio would incur. Note, also, how the gap between best and worst tends to
narrow over the long term.
PLAIN TALK ABOUT COSTS AND MARKET TIMING
Some investors try to profit from "market timing"-switching money into
investments when they expect prices to rise, and taking money out when they
expect the market to fall. As money is shifted in and out, a fund incurs
expenses for buying and selling securities. These costs are borne by all fund
shareholders, including long-term investors who do not generate the costs.
Therefore, the Fund discourages short-term trading by, among other things,
limiting the number of exchanges it permits.
5
<PAGE> 10
PLAIN TALK ABOUT
BONDS AND INTEREST RATES
As a rule, when interest rates rise, bond prices fall. The opposite is also
true: Bond prices go up when interest rates fall. Why do bond prices and
interest rates move in opposite directions? Let's assume that you hold a bond
offering a 5% yield. A year later, interest rates are on the rise and bonds are
offered with a 6% yield. With higher-yielding bonds available, you would have
trouble selling your 5% bond for the price you paid--causing you to lower your
asking price. On the other hand, if interest rates were falling and 4% bonds
were being offered, you would be able to sell your 5% bond for more than you
paid.
PLAIN TALK ABOUT
BOND MATURITIES
A bond is issued with a specific maturity date--the date when the bond's issuer,
or seller, must pay back the bond's initial value (known as its "face value").
Bond maturities generally range from less than one year (short term) to 30 years
(long term). The longer a bond's maturity, the more risk you, as a bond
investor, face as interest rates rise--but also the more interest you could
receive. Long-term bonds are more suitable for investors willing to take greater
risks in hope of higher yields; short-term bond investors should be willing to
accept lower yields in return for less fluctuation in the value of their
investment.
<TABLE>
<CAPTION>
U.S. Stock Market Returns (1926-1996)
- --------------------------------------------------------------------------------
1 Year 5 Years 10 Years 20 Years
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Best 53.9% 23.9% 20.1% 16.9%
Worst -43.3% -12.5% -0.9% 3.1%
Average 12.7% 10.4% 10.8% 10.8%
- --------------------------------------------------------------------------------
</TABLE>
The table covers all of the 1-, 5-, 10-, and 20-year periods from 1926 through
1996. For example, while the average return on stocks for all of the 5-year
periods was 10.4%, returns for these 5-year periods ranged from a -12.5% average
(from 1928 through 1932), to 23.9% (from 1950 through 1954). These average
returns reflect past performance on common stocks and should not be regarded as
an indication of future returns from either the stock market as a whole or this
Fund in particular.
Finally, because Vanguard/Wellington Fund does not hold the same securities
held in the S&P 500 Index or any other market index, the performance of the Fund
will not mirror the returns of any particular index.
BONDS
Approximately one-third of the Fund's assets are invested in bonds.
[FLAG] The Fund is subject to interest rate risk, which is the possibility
that bond prices overall will decline over short, or even extended,
periods due to rising interest rates. Interest rate risk should be
modest for shorter-term bonds and high for longer-term bonds.
Although bonds are often thought to be less risky than stocks, there have been
periods when bond values have fallen significantly due to rising interest rates.
For instance, prices of long-term bonds fell by almost 48% between December 1976
and September 1981.
To illustrate the relationship between bond prices and interest rates, the
following table shows the impact of a 2% change (both up and down) in interest
rates on three $1,000 bonds, each with a different maturity.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
HOW INTEREST RATE CHANGES AFFECT BONDS*
- --------------------------------------------------------------------------------
Value of a $1,000 Bond Value of a $1,000 Bond
After a 2% Increase After a 2% Decrease
Maturity in Interest Rates in Interest Rates
- --------------------------------------------------------------------------------
<S> <C> <C>
Short-Term (2.5 years) $956 $1,046
Intermediate-Term (10 years) $870 $1,156
Long-Term (20 years) $816 $1,251
- --------------------------------------------------------------------------------
</TABLE>
*Assuming a 7% yield.
These figures are for illustrative purposes only and should not be regarded as
an indication of future returns from the bond market as a whole, or the Fund in
particular.
6
<PAGE> 11
Finally, because stock and bond prices often move in different directions, the
Fund's bond holdings help to dampen--but not eliminate--some of the stock market
volatility experienced by the Fund. Likewise, changes in interest rates may not
have as dramatic an effect on Wellington Fund as they would on a fund made up
entirely of bonds.
SECURITY SELECTION
Wellington Management Company, LLP (WMC), adviser to the Fund, invests
approximately 60% to 70% of the Fund's assets in dividend-paying common stocks
and the remaining 30% to 40% of assets in high-quality bonds. While the mix of
stocks and bonds varies from time to time depending on the adviser's views of
economic and market conditions, the stock portion can be expected to represent
at least 60% of the Fund's holdings.
The Fund is run by WMC according to traditional methods of active investment
management. Securities are bought and sold based on WMC's judgments about
companies and their financial prospects, and about bond issuers and the general
level of interest rates. To achieve the Fund's objectives of conservation of
capital, moderate long-term growth, and moderate income, the adviser follows
specific strategies for stock selection and bond selection.
[FLAG] THE FUND IS SUBJECT TO MANAGER RISK, WHICH IS THE POSSIBILITY THAT WMC
MAY DO A POOR JOB OF SELECTING STOCKS AND BONDS.
STOCKS
WMC uses extensive research to find what it considers to be undervalued stocks
of established, large- and medium-size companies. WMC considers a stock to be
undervalued if company earnings, or potential earnings, are not fully reflected
in the stock's share price. In other words, the current prices of these large-
and mid-cap stocks may be less than what the adviser thinks they are truly
worth.
The adviser's goal is to identify and purchase these securities before their
value is recognized by other investors. The adviser emphasizes stocks that, on
average, provide a higher level of dividend income than stocks in the overall
market generally provide. By adhering to this stock selection strategy and by
investing in a wide variety of companies and industries, the adviser expects to
moderate overall risk.
The Fund's top ten stock holdings (which amounted to 16% of the Fund's net
assets) as of November 30, 1996, follow.
1. General Electric Co.
2. Allstate Corp.
3. Citicorp
4. First Bank System, Inc.
5. Kimberly-Clark Corp.
6. Northrop Grumman Corp.
7. Bristol-Myers Squibb Co.
8. Dow Chemical Co.
9. General Motors Corp.
10. Ford Motor Co.
PLAIN TALK ABOUT
LARGE-CAP, MID-CAP, AND SMALL-CAP STOCKS
Stocks of publicly traded companies--and mutual funds that hold these
stocks--can be classified by the companies' market value, or capitalization.
Vanguard defines large-capitalization, or large-cap, funds as those holding
stocks of companies with a median market value of their outstanding shares
exceeding $5 billion. Mid-cap funds hold stocks of companies with a median
market value between $1 billion and $5 billion. Small-cap funds hold stocks of
companies with a median market value of less than $1 billion. Historically,
large-cap funds have exhibited lower volatility than mid-cap and small-cap
funds.
7
<PAGE> 12
PLAIN TALK ABOUT
TYPES OF BONDS
Bonds are issued (sold) by many sources: corporations issue corporate bonds; the
federal government issues U.S. Treasury bonds; agencies of the federal
government issue agency bonds; and mortgage holders issue "mortgage-backed"
bonds such as Government National Mortgage Association (GNMA). Each issuer is
responsible for paying back the bond's initial value as well as periodic
interest payments.
PLAIN TALK ABOUT
CREDIT QUALITY
A bond's credit quality depends on the issuer's ability to pay interest on the
bond and, ultimately, to repay the debt. The lower the rating by one of the
independent bond-rating agencies (for example, Moody's or Standard & Poor's),
the greater the chance (in the rating agency's opinion) that the bond issuer
will default, or fail to meet its payment obligations. All things being equal,
the lower a bond's credit rating, the higher the yield the bond seeks to pay (as
compensation for the risks an investor must take).
PLAIN TALK ABOUT
PORTFOLIO TURNOVER
Before investing in a mutual fund, you should review its portfolio turnover rate
for an indication of the potential effect of transaction costs on the fund's
future returns. In general, the greater the volume of buying and selling by the
fund, the greater the impact that brokerage commissions and other transaction
costs will have on its return. Also, funds with high portfolio turnover rates
may be more likely than low-turnover funds to generate capital gains that must
be distributed to shareholders as taxable income. The average turnover rate for
actively managed balanced funds is 86%.
Keep in mind that, because the stock makeup of the Fund changes daily, this
listing is only a "snapshot" at one point in time.
BONDS
WMC selects high-quality bonds that, it believes, will generate a high and
sustainable level of income. These bonds would include intermediate- and
long-term corporate bonds, U.S. Treasury, government agency, and mortgage-backed
and asset-backed bonds.
A breakdown of the Fund's bond holdings (which amounted to 34% of the Fund's
total net assets) as of November 30, 1996, follows.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
TYPE PERCENTAGE OF
OF BOND FUND'S ASSETS
- --------------------------------------------------------------------------------
<S> <C>
Corporate 19%
U.S. Treasury and
government agency 12
Foreign issuers 3
Other 0
- --------------------------------------------------------------------------------
</TABLE>
[FLAG] THE FUND IS SUBJECT, TO A LIMITED EXTENT, TO CREDIT RISK, WHICH IS THE
POSSIBILITY THAT A BOND ISSUER WILL FAIL TO REPAY INTEREST AND
PRINCIPAL IN A TIMELY MANNER.
WMC purchases bonds that are primarily investment-grade quality--that is, the
bonds are rated at least Baa by Moody's Investors Service, Inc., or BBB by
Standard & Poor's Corporation. The average quality of bonds held by the Fund, as
of November 30, 1996, was Aa2, according to Moody's.
The U.S. government guarantees the timely payment of interest and principal for
its Treasury bonds, but does not guarantee its bonds' prices. In other words,
while the Treasury bonds enjoy the highest credit ratings, their prices--like
the prices of other bonds in the Fund--will fluctuate with changes in interest
rates.
PORTFOLIO TURNOVER
Although the Fund generally seeks to invest for the long term, it retains the
right to sell securities regardless of how long they have been held. It is not
expected that the Fund's turnover rate would exceed 50% in the future. (A
turnover rate of 100% would occur, for example, if the Fund sold and replaced
securities valued at 100% of its total net assets within a one-year period.)
INVESTMENT POLICIES
Besides investing in stocks of large and medium-size companies and high-quality
intermediate- and long-term bonds issued by corporations, the U.S. government,
and its agencies, the Fund may follow a number of investment policies to achieve
its objectives.
8
<PAGE> 13
Up to 15% of the Fund's assets may be invested in the common stocks of foreign
companies as well as securities that are convertible into foreign stocks. The
Fund may engage in currency transactions with respect to these securities. The
Fund may also invest in fixed-income securities issued by foreign governments
and non-U.S.-based companies; however, these securities must be valued in U.S.
dollars and meet the Fund's credit quality standards. Over the years, the prices
of foreign investments and the prices of U.S. investments have often moved in
different directions. In addition, international markets operate differently
from U.S. markets. For instance, foreign exchanges, brokers, and companies
generally have less government supervision and regulation than in the U.S.
The Fund may invest up to 15% of its assets in restricted securities with
limited marketability or other illiquid securities.
The Fund may also invest in derivatives.
[FLAG] THE FUND RESERVES THE RIGHT TO INVEST, TO A LIMITED EXTENT, IN STOCK AND
BOND (INTEREST RATE) FUTURES AND OPTIONS CONTRACTS, WHICH ARE TRADITIONAL
TYPES OF DERIVATIVES. THE FUND MAY ALSO INVEST MODESTLY IN LESS RISKY
CLASSES OF COLLATERALIZED MORTGAGE OBLIGATIONS (CMOs).
Losses (or gains) involving futures can sometimes be substantial--in part
because a relatively small price movement in a futures contract may result in an
immediate and substantial loss (or gain) for a Fund. This Fund will not use
futures and options for speculative purposes or as leveraged investments that
magnify the gains or losses of an investment. If it holds futures and options,
the Fund will keep separate cash reserves or short-term cash-equivalent
securities in the amount of the obligation underlying the futures contract. Only
a limited percentage of the Fund's assets--up to 5% if required for deposit and
no more than 20% of total assets--may be committed to such contracts.
The reasons for which the Fund may use futures and options are:
- - To keep cash on hand to meet shareholder redemptions or other needs while
simulating full investment in stocks and bonds.
- - To make it easier to trade.
- - To reduce costs by buying futures instead of actual stocks or bonds when
futures are cheaper.
Please see the Statement of Additional Information for a more detailed
discussion of the Fund's investments in derivatives. The Fund will usually hold
only a small percentage of its assets in cash reserves, although if the
investment adviser believes that market conditions warrant a temporary defensive
measure, the Fund may hold cash reserves without limit.
INVESTMENT LIMITATIONS
To reduce risk and maintain diversification, the Fund has adopted limits on some
of its investment policies. Specifically, the Fund will not:
PLAIN TALK ABOUT
DERIVATIVES
A derivative is a financial contract whose value is based on (or "derived"
from) a traditional security (such as a stock or a bond), an asset (such as a
commodity like gold), or a market index (such as the S&P 500 Index). Futures
and options are derivatives that have been trading on regulated exchanges for
more than two decades. These "traditional" derivatives are standardized
contracts that can easily be bought and sold, and whose market values are
determined and published daily. It is these characteristics that differentiate
futures and options from the relatively new, exotic types of derivatives -- some
of which can carry considerable risks.
9
<PAGE> 14
PLAIN TALK ABOUT
PAST PERFORMANCE
Whenever you see information on a fund's performance, do not consider the
figures to be an indication of the performance you could expect by making an
investment in the fund today. The past is an imperfect guide to the future;
history does not repeat itself in neat, predictable patterns.
- - Invest more than 5% of its assets in the securities of companies that have
been in business for less than three years.
- - Invest more than 25% of its assets in any one industry.
- - Borrow money, except for the purpose of meeting shareholder requests to
redeem shares. Amounts borrowed will not exceed 10% of the Fund's net
assets.
With respect to 75% of its assets, this Fund will not:
- - Invest more than 5% in the securities of any one company.
- - Buy more than 10% of the outstanding voting securities of any company.
The limitations listed in this prospectus and in the Statement of Additional
Information are fundamental and may be changed only by approval of a majority of
the Fund's shareholders.
INVESTMENT PERFORMANCE
As a balanced fund, Vanguard/Wellington Fund invests primarily in stocks, with a
sizable holding of bonds--so Fund performance is closely tied to both the stock
and bond markets. Historically, stock market performance has been characterized
by sharp up-and-down swings in the short term, and by more stable growth over
the long term. Bond market performance has been--and remains--strongly
influenced by changes in interest rates.
AVERAGE ANNUAL TOTAL RETURNS
FOR PERIODS ENDED 11/30/96
[BAR GRAPH]
The results shown represent the Fund's "average annual total return"
performance, which assumes that any distributions of capital gains and dividends
were reinvested for the indicated periods. Also included is comparative
information on an unmanaged "composite index" of 65% stocks and 35% bonds. The
Standard & Poor's 500 Composite Stock Price Index represents the stock portion
of the composite index, while the Lehman Brothers Long-Term Corporate AA or
Better Bond Index makes up the bond portion. The chart does not make any
allowance for federal, state, or local income taxes that shareholders must pay
on a current basis.
10
<PAGE> 15
PLAIN TALK ABOUT
DISTRIBUTIONS
As a shareholder, you are entitled to your share of the fund's income from
interest and dividends, and gains from the sale of investments. You receive such
earnings as either an income dividend or capital gains distribution. Income
dividends come from interest the fund earns from its money market and bond
investments as well as dividends it receives from its stock investments.
Capital gains are realized whenever the fund sells securities for higher prices
than it paid for them. These capital gains are either short-term or long-term
depending on whether the fund held the securities for less than or more than
one year.
PLAIN TALK ABOUT
"BUYING A DIVIDEND"
Unless you are investing in a tax-deferred retirement account (such as an IRA),
it is not to your advantage to buy shares of a fund shortly before it makes a
distribution, because part of your investment will come back to you as a
taxable distribution. This is known as "buying a dividend." For example: On
December 15, you invest $5,000, buying 250 shares for $20 each. If the fund pays
a distribution of $1 per share on December 16, its share price would drop to
$19 (not counting market change). You would still only have $5,000 (250 shares
x $19 = $4,750 in share value, plus 250 shares x $1 = $250 in distributions),
but you would owe tax on the $250 distribution you received, even if you had
reinvested the dividends in more shares. To avoid "buying a dividend," check a
fund's distribution schedule before you invest.
SHARE PRICE
The Fund's share price, called its net asset value, is calculated each business
day after the close of trading (generally 4 p.m. Eastern time) of the New York
Stock Exchange. Net asset value per share is calculated by adding up the total
assets of the Fund, subtracting all of its liabilities, or debts, and then
dividing by the total number of Fund shares outstanding:
TOTAL ASSETS - LIABILITIES
NET ASSET VALUE = ----------------------------------------
NUMBER OF SHARES OUTSTANDING
The daily net asset value, or NAV, is useful to you as a shareholder
because the NAV, multiplied by the number of Fund shares you own, gives you the
dollar amount you would have received had you sold all of your shares back to
the Fund that day.
The Fund's share price can be found daily in the mutual fund listings of
most major newspapers under the heading Vanguard Group. Different newspapers use
different abbreviations of the Fund's name, but the most common is WELLTN.
DIVIDENDS, CAPITAL GAINS, AND TAXES
Each March, June, September, and December, the Fund distributes to shareholders
virtually all of its income from interest and dividends. Any capital gains
realized from the sale of securities are distributed in December. Your
distributions of income and capital gains are automatically invested in more
shares of the Fund unless you elect to receive the distributions in cash. In
either case, distributions of dividends and capital gains that are declared in
December--even if paid to you in January--are taxed as if they had been paid
to you in December. Vanguard will process your dividend distribution and send
you a statement each year showing the tax status of all your distributions.
[ ] The dividends and short-term capital gains that you receive are taxable to
you as ordinary income. Any distributions of net long-term capital gains by
the Fund are taxable to you as long-term capital gains, no matter how long
you've owned shares in the Fund. Both dividend and capital gains
distributions are taxable to you whether received in cash or reinvested in
additional shares. Although the Fund does not seek to realize any particular
amount of capital gains during a year, such gains are realized from time to
time as byproducts of the ordinary investment activities of the Fund.
Consequently, distributions may vary considerably from year to year.
[ ] If you sell or exchange shares, any gain or loss you have is a taxable
event, which means you may have a capital gain to report as income, or a
capital loss to report as a deduction, when you complete your federal income
tax return.
11
<PAGE> 16
PLAIN TALK ABOUT
VANGUARD'S UNIQUE CORPORATE STRUCTURE
The Vanguard Group, Inc. is the only mutual mutual fund company. It is owned
jointly by the funds it oversees and by the shareholders in those funds. Other
mutual funds are operated by for-profit management companies that may be owned
by one person, by a group of individuals, or by investors who bought the
management company's publicly traded stock. Because of its structure, Vanguard
operates its funds at cost. Instead of distributing profits from operations to a
separate management company, Vanguard returns profits to fund shareholders in
the form of lower operating expenses.
PLAIN TALK ABOUT
THE FUND'S ADVISER
Wellington Management Company, LLP (WMC), an investment advisory firm founded in
1933, currently manages more than $133 billion in stock and bond portfolios,
including 13 Vanguard funds. The managers responsible for overseeing
Vanguard/Wellington Fund are:
ERNST H. VON METZSCH, CFA, Senior Vice President of WMC; 27 years investment
experience, 24 years with WMC; M.Sc. from The University of Leiden, The
Netherlands, Ph.D. from Harvard University.
PAUL D. KAPLAN, Senior Vice President of WMC; 23 years investment experience,
19 years with WMC; B.S. from Dickinson College, M.S. from The Sloan School of
Management, Massachusetts Institute of Technology.
[] Distributions of dividends or capital gains, and capital gains or losses from
your sale or exchange of Fund shares, may be subject to state and local
income taxes as well.
The tax information in this prospectus is provided as general information
and will not apply to you if you are investing in a tax-deferred account such
as an IRA. You should consult your own tax adviser about the tax consequences
of an investment in the Fund.
THE FUND AND VANGUARD
The Fund is a member of The Vanguard Group, a family of more than 30 investment
companies with more than 90 distinct investment portfolios and total net assets
of more than $250 billion. All of the Vanguard Funds share in the expenses
associated with business operations, such as personnel, office space, equipment,
and advertising.
Vanguard also provides marketing services to the funds. Although shareholders
do not pay sales commissions or 12b-1 marketing fees, each fund pays its
allocated share of The Vanguard Group's costs.
A list of the Fund's directors and officers, and their present positions and
principal occupations during the past five years, can be found in the Statement
of Additional Information.
INVESTMENT ADVISER
The Fund employs Wellington Management Company, LLP (WMC), 75 State Street,
Boston, MA 02109, as its investment adviser. WMC manages the Fund subject to the
control of the officers and directors of the Fund.
Each quarter, WMC is paid an advisory fee based on average month-end net assets
of the Fund and a sliding percentage scale:
<TABLE>
<CAPTION>
ASSETS MANAGED FEE
<S> <C>
First $1 billion 0.10%
Next $2 billion 0.05
Next $7 billion 0.04
Assets over $10 billion 0.03
</TABLE>
The advisory fee can be increased or decreased based on the difference between
the Fund's total return performance and that of an unmanaged "composite index,"
which is made up of the S&P 500 Index (65% of the composite index) and Lehman
Brothers Long- Term Corporate AA or Better Bond Index (35% of the composite
index). Under the fee schedule, the base fee may be increased or decreased by up
to 30%. The incentive/penalty fee will not be in full operation until the
quarter ending May 31, 1999. Until that date, the incentive/penalty fee will be
calculated using certain transition rules that are explained in the Statement of
Additional Information.
12
<PAGE> 17
For the year ended November 30, 1996, the investment advisory fee paid to WMC
was $6.12 million.
The agreement authorizes WMC to choose brokers or dealers to handle the
purchase and sale of the Fund's securities, and directs
WMC to get the best available price and most favorable execution from these
brokers with respect to all transactions. At times, WMC may choose brokers who
charge higher commissions in the interest of obtaining better execution of a
transaction. If more than one broker can obtain the best available price and
favorable execution of a transaction, then WMC is authorized to choose a broker
who, in addition to executing the transaction, will provide research services to
WMC or the Fund. However, WMC will not pay higher commissions specifically for
the purpose of obtaining research services. The Fund may direct WMC to use a
particular broker for certain transactions in exchange for commission rebates or
research services provided to the Fund.
The board of directors may, without prior approval from shareholders, change
the terms of the advisory agreement or hire a new investment adviser, either as
a replacement for WMC or as an additional adviser. However, no such change would
be made before giving shareholders 30-days notice, in writing.
GENERAL INFORMATION
Vanguard/Wellington Fund is a corporation organized under the laws of the state
of Maryland. Shareholders of the Fund have rights and privileges similar to
those enjoyed by other corporate shareholders. For example, shareholders will
not be responsible for any liabilities of the corporation. If any matters are to
be voted on by shareholders (such as the election of directors), each share
outstanding at that point would be entitled to one vote. Annual meetings will
not be held by the Fund except as required by the Investment Company Act of
1940. A meeting will be scheduled if the holders of at least 10% of the Fund's
shares request a meeting in writing.
13
<PAGE> 18
INVESTING WITH VANGUARD
Are you looking for the most convenient way to open or add money to a Vanguard
account? Obtain instant access to fund information? Establish an account for a
minor child or for your retirement savings?
Vanguard can help. Our goal is to make it easy and pleasant for you to do
business with us.
The following sections of the prospectus briefly explain the many services we
offer you as a Vanguard/Wellington Fund shareholder. Booklets providing detailed
information are available on the services marked with a [BOOK GRAPHIC] . Please
call us to request copies.
SERVICES AND ACCOUNT FEATURES
Vanguard offers many services that make it convenient to buy, sell, or exchange
shares.
<TABLE>
<S> <C>
Telephone Redemptions Automatically set up for this Fund unless you notify us
(Sales and Exchanges) otherwise.
Vanguard Direct Deposit Automatic method for depositing your paycheck or U.S. gov-
Service ernment payment (including Social Security and government pension
[BOOK GRAPHIC] checks) into your account.
Vanguard Automatic Exchange Automatic method for moving a fixed amount of money from
Service one Vanguard fund account to another.*
[BOOK GRAPHIC]
Vanguard Fund Express Electronic method for buying or selling
[BOOK GRAPHIC] shares. You can transfer money between your Vanguard fund
account and an account at your bank, savings and loan, or
credit union on a systematic schedule or whenever you
wish.*
Vanguard Dividend Express Electronic method for transferring
[BOOK GRAPHIC] dividends and/or capital gains distributions directly from
your Vanguard fund account to your bank, savings and loan,
or credit union account or to another Vanguard fund
account.
Vanguard Brokerage Services A cost-effective way to trade stocks, bonds, and
[VBS] options on (VBS) major exchanges, the Nasdaq Stock Market,
[BOOK GRAPHIC] and other domestic over-the-counter markets at reduced rates,
and to buy and sell shares of non-Vanguard mutual funds.
Call VBS (1-800-992-8327) for additional information and the
appropriate forms.
</TABLE>
*Can be used to "dollar-cost average" [BOOK GRAPHIC] or to contribute to an IRA
or other retirement plan.
14
<PAGE> 19
TYPES OF ACCOUNTS
INDIVIDUAL OR OTHER ENTITY
Vanguard's account registration form can be used to establish a variety of
non-retirement accounts.
FOR ONE OR MORE PEOPLE To open an account in the name of one (individual) or
[BOOK GRAPHIC] more (joint tenants) people. $3,000 minimum initial
investment.
FOR A MINOR CHILD To open an account as an UGMA/UTMA (Uniform
[BOOK GRAPHIC] Gifts/Transfers to Minors Act). Age of majority and
other requirements are set by state law. $1,000
minimum initial investment.
FOR HOLDING TRUST ASSETS To invest assets held in an existing trust. $3,000
minimum initial investment.
FOR THIRD-PARTY TRUSTEE
RETIREMENT INVESTMENTS
(VANGUARD IS NOT THE
CUSTODIAN OR TRUSTEE.) To open an account as a retirement trust or plan
based on an existing corporate or institutional plan.
These accounts are established by the custodian or
trustee of the existing plan.
FOR AN ORGANIZATION To open an account as a corporation, partnership, or
other entity. These accounts may require a corporate
resolution or other documents to name the individuals
authorized to act. $3,000 minimum initial investment.
RETIREMENT
You establish these accounts with a Vanguard adoption agreement -- not a
Vanguard account registration form. To request the appropriate adoption
agreement and forms, or to ask questions about investing for retirement, call
Investor Information.
FOR AN INDIVIDUAL
RETIREMENT ACCOUNT (IRA) To open a retirement account in the name of an
(Vanguard Fiduciary individual. IRAs can be established with a
Trust Company is the contribution, a direct rollover from an employer's
custodian.) plan, such as a 401(k), or an asset transfer or
rollover from another financial institution, such as
a bank or mutual fund company. $1,000 minimum initial
investment.
FOR A SIMPLIFIED EMPLOYEE
PENSION PLAN ACCOUNT
(SEP-IRA)
(Vanguard Fiduciary Trust
Company is the custodian.) To open a retirement account in the name of an
employee. SEPs allow employers to make deductible
contributions directly to IRAs established by their
employees. A SEP can be established by people who are
self-employed, small-business owners, partnerships,
or corporations.
15
<PAGE> 20
STOR INFORMATION 1-800-662-7447
CLIENT SERVICES 1-800-662-2739
TELE-ACCOUNT 1-800-662-6273
TYPES OF ACCOUNTS (CONTINUED)
FOR A SAVINGS INCENTIVE
MATCH PLAN FOR EMPLOYEES
ACCOUNT (SIMPLE-IRA)
(Vanguard Fiduciary Trust
Company is the custodian.) To open a retirement account in the name of an
employee. Created as part of the Small Business Job
Protection Act of 1996, SIMPLEs replace SAR-SEPs.
SIMPLEs are exclusively for employers that had 100 or
fewer employees in the most recent calendar year and
that do not maintain another employer-sponsored
retirement plan. A SIMPLE can be established by
people who are self-employed, small business owners,
partnerships, or corporations. Salary reduction
contributions may be made by the employee, with
matching or non-matching contributions from the
employer.
FOR A QUALIFIED
RETIREMENT PROGRAM
ACCOUNT (VANGUARD
Fiduciary Trust
Company can be the
custodian.) To open a retirement account that allows
small-business owners or people who are self-employed
to make tax-deductible retirement contributions for
themselves and their employees into Profit-Sharing
and Money Purchase Pension (Keogh) plans.
FOR A 403(b)(7) CUSTODIAL
ACCOUNT
(Vanguard Fiduciary Trust
Company is the custodian.) To open a retirement account that allows employees of
tax-exempt institutions (for example, schools or
hospitals) to make pre-tax retirement contributions.
DISTRIBUTION OPTIONS
You can receive distributions of dividends and/or capital gains in a number of
ways:
REINVESTMENT Dividends and capital gains are automatically reinvested
in additional shares of the Fund unless you request a
different distribution method.
DIVIDENDS IN CASH Dividends are paid by check and mailed to your
account's address of record, and capital gains are
reinvested in additional shares of the Fund.
DIVIDENDS AND
CAPITAL GAINS
IN CASH Both dividends and capital gains are paid by check
and mailed to your account's address of record.
To electronically transfer cash dividends and/or capital gains to your bank,
savings and loan, or credit union account, or to another Vanguard fund account,
see Vanguard Dividend Express under "Services and Account Features."
BUYING SHARES
You buy your shares at the Fund's next-determined net asset value after Vanguard
receives your request, provided we receive your request before 4 p.m. Eastern
time (the close of trading on the New York Stock Exchange). The Fund is offered
on a no-load basis, meaning that you do not pay sales commissions or 12b- 1
marketing fees.
16
<PAGE> 21
Buying Shares
You buy your shares at the Fund's next-determined net asset value after Vanguard
receives your request, provided we receive your request before 4 p.m. Eastern
time (the close of trading on the New York Stock Exchange). The Fund is offered
on a no-load basis, meaning that you do not pay sales commissions or 12b- 1
marketing fees.
16
<PAGE> 22
Buying Shares (continued)
<TABLE>
<CAPTION>
Open A New Account Add To An Existing Account
<S> <C> <C>
Minimum Investment $3,000 (regular account); $1,000 $100 by mail or exchange; $1,000
(IRAs and custodial accounts for by wire.
minors).
By Mail Complete and sign the applica- Mail your check with an Invest-
[ENVELOPE] tion form. By-Mail form detached from
FIRST-CLASS mail to: your confirmation statement to
The Vanguard Group the address listed on the form.
P.O. Box 2600 Make your check payable to: Make your check payable to:
Valley Forge, PA 19482 The Vanguard Group-21 The Vanguard Group-21
EXPRESS or REGISTERED mail to:
The Vanguard Group All purchases must be made in All purchases must be made in
455 Devon Park Drive U.S. dollars, and checks must be U.S. dollars, and checks must be
Wayne, PA 19087 drawn on U.S. banks. drawn on U.S. banks.
IMPORTANT NOTE: To prevent check fraud, Vanguard will not accept checks made payable to third parties.
By Telephone Call Vanguard Tele--Account*24 Call Vanguard Tele--Account*24
[TELEPHONE RECEIVER] hours a day--or Client Services hours a day--or Client Services
during business hours--to ex- during business hours--to ex-
change from another Vanguard change from another Vanguard
fund account with the same reg- fund account with the same reg-
istration (name, address, taxpay- istration (name, address, taxpay-
er I.D., and account type.) er I.D., and account type.)
Use Vanguard Fund Express (see
"Services and Account Features")
to transfer assets from your bank
account. Call Client Services be-
fore your first use to verify that
this option is in place.
*You must obtain a Personal Identification Number through Tele-Account at
least seven days before you request your first exchange.
IMPORTANT NOTE: Once a telephone transaction has been approved by you and a confirmation number assigned,
it cannot be revoked. We reserve the right to refuse any purchase.
By Wire Call Client Services to arrange Call Client Services to arrange
[WIRE] your wire transaction. your wire transaction.
Wire to: Wire transactions are not avail- Wire transactions are not avail-
CoreStates Bank, N.A. able for retirement accounts. able for retirement accounts.
ABA 031000011
CoreStates No 01019897
[Temporary Account Number]
Vanguard/Wellington Fund
[Account Registration]
Attention: Vanguard
</TABLE>
Investor Information 1-800-662-7447 - Client Services 1-800-662-2739 -
Tele-Account 1-800-662-6273
17
<PAGE> 23
Buying Shares (continued)
Investor Information 1-800-662-7447 - Client Services 1-800-662-2739 -
Tele-Account 1-800-662-6273
Open A New Account Add To An Existing Account
-- Vanguard offers a variety of ways
Automatically that you can add to your account
[Graphic of Arrows in a Circle] automatically. See "Services and
Account Features."
You can redeem (that is, sell or exchange) shares purchased by check or Vanguard
Fund Express at any time. However, while your redemption request will be
processed at the next-determined net asset value after it is received, your
redemption proceeds will not be available until payment for your purchase is
collected, which may take up to ten days.
NOTE: If you buy Fund shares through a registered broker-dealer or investment
adviser, the broker-dealer or adviser may charge you a service fee.
It is important that you call Vanguard before you invest a large dollar amount
by wire or check. We must consider the interests of all Fund shareholders and so
reserve the right to delay or refuse any purchase that will disrupt the Fund's
operation or performance.
REDEEMING SHARES
IMPORTANT TAX NOTE: Any sale or exchange of shares in a non-retirement account
could result in a taxable gain or a loss.
The ability to redeem (that is, sell or exchange) Fund shares by telephone is
automatically established for your account unless you tell us in writing that
you do not want this option.
To protect your account from unauthorized or fraudulent telephone
instructions, Vanguard follows specific security procedures. When we receive a
call requesting an account transaction, we require the caller to provide:
- - Fund name.
- - 10-digit account number.
- - Name and address exactly as registered on that account.
- - Social Security or Employer Identification number as registered on that
account.
If you call to sell shares, the sale proceeds will be made payable to you, as
the registered shareholder, and mailed to your account's address of record.
If we follow reasonable security procedures, neither the Fund nor Vanguard
will be responsible for the authenticity of transaction instructions received by
telephone. We believe that these procedures are reasonable and that, if we
follow them, you bear the risk of any losses resulting from unauthorized or
fraudulent telephone transactions on your account.
HOW TO SELL SHARES
You may withdraw any part of your account, at any time, by selling shares. Sale
proceeds are normally mailed within two business days after Vanguard receives
your request. The sale price of your shares will be the Fund's next-determined
net asset value after Vanguard receives all required documents in good order.
18
<PAGE> 24
REDEEMING SHARES (continued)
Good order means that the request includes:
check mark Fund name and account number.
check mark Amount of the transaction (in dollars or shares).
check mark Signatures of all owners exactly as registered on the account.
check mark Signature guarantees (if required).
check mark Any supporting legal documentation that may be required.
check mark Any certificates you are holding for the account.
Sales or exchange requests received after the close of trading on the New York
Stock Exchange (generally 4 p.m. Eastern time) are processed at the next
business day's net asset value.
The Fund reserves the right to close any non-retirement or UGMA/UTMA account
whose balance falls below the minimum initial investment. The Fund will deduct a
$10 annual fee if your non-retirement account balance falls below $2,500 or if
your UGMA/UTMA account balance falls below $500. The fee is waived if your total
Vanguard account assets are $50,000 or more.
Some written requests require a signature guarantee from a bank, broker, or
other acceptable institution. A notary public cannot provide a signature
guarantee.
HOW TO EXCHANGE SHARES
An exchange is the selling of shares of one Vanguard fund to purchase shares of
another.
Although we make every effort to maintain the exchange privilege, Vanguard
reserves the right to revise or terminate the exchange privilege, limit the
amount of an exchange, or reject any exchange, at any time, without notice.
Because excessive exchanges can potentially disrupt the management of the Fund
and increase transaction costs, Vanguard limits exchange activity to two
SUBSTANTIVE EXCHANGE REDEMPTIONS (at least 30 days apart) from the Fund during
any 12-month period. "Substantive" means either a dollar amount large enough to
have a negative impact on the Fund or a series of movements between Vanguard
funds.
Before you exchange into a new Vanguard fund, be sure to read its prospectus.
For a copy and for answers to questions you might have, call Investor
Information.
SELLING OR EXCHANGING
SHARES ACCOUNT TYPE
BY TELEPHONE ALL TYPES EXCEPT RETIREMENT:
[Telephone Receiver] Call Vanguard Tele-Account* 24 hours a day -- or Client
1-800-662-6273 Services during business hours -- to sell or exchange
Vanguard Tele-Account shares. You can exchange shares from this Fund to open
1-800-662-2739 an account in another Vanguard fund or to add to an
Client Services existing Vanguard fund account with an identical
registration.
RETIREMENT:
You can exchange -- but not sell -- shares by calling
Tele-Account or Client Services.
*You must obtain a Personal Identification Number
through Tele-Account at least seven days before you
request your first redemption.
INVESTOR INFORMATION 1-800-662-7447
CLIENT SERVICES 1-800-662-2739
TELE-ACCOUNT 1-800-662-6273
19
<PAGE> 25
REDEEMING SHARES (continued)
SELLING OR EXCHANGING SHARES ACCOUNT TYPE
BY MAIL ALL TYPES EXCEPT RETIREMENT:
[ENVELOPE] Send a letter of instruction signed by all
FIRST-CLASS mail to: registered account holders. Include the fund
The Vanguard Group name and account number and (if you are
Vanguard/Wellington Fund selling) a dollar amount or number of shares OR
P.O. Box 1120 (if you are exchanging) the name of the fund
Valley Forge, PA 19482 you want to exchange into and a dollar amount
EXPRESS or REGISTERED mail to: or number of shares.
The Vanguard Group
Vanguard/Wellington Fund RETIREMENT:
455 Devon Park Drive
Wayne, PA 19087 For information on how to request distributions
from . . .- IRAs, call Client Services. -
SEP-IRAs, 403(b)(7) custodial accounts, and
Profit- Sharing
and Money Purchase Pension (Keogh) Plans,
call Individual Retirement Services at
1-800-662-2003.
Depending on your account registration type,
additional documentation may be required.
AUTOMATICALLY ALL TYPES EXCEPT RETIREMENT:
[Graphic of Arrows
in a circle] Vanguard offers several ways to sell or
exchange shares automatically (see "Services
and Account Features"). Call Investor
Information for the appropriate booklet and
application if you did not elect this feature
when you opened your account.
It is important that you call Vanguard before you redeem a large dollar
amount. We must consider the interests of all Fund shareholders and so reserve
the right to delay your redemption proceeds -- up to seven days -- if the amount
will disrupt the Fund's operation or performance.
A NOTE ON UNUSUAL CIRCUMSTANCES
Vanguard reserves the right to revise or terminate the telephone redemption
privilege at any time, without notice. In addition, Vanguard can stop selling
shares or postpone payment at times when the New York Stock Exchange is closed
or under any emergency circumstances as determined by the United States
Securities and Exchange Commission. If you experience difficulty making a
telephone redemption during periods of drastic economic or market change, you
can send us your request by regular or express mail. Follow the instructions on
selling or exchanging shares by mail in the "Redeeming Shares" section.
FUND AND ACCOUNT UPDATES
STATEMENTS AND REPORTS
We will send you clear, concise account and tax statements to help you keep
track of your Vanguard/Wellington Fund account throughout the year as well as
when you are preparing your income tax returns.
In addition, you will receive financial reports about the Fund twice a year.
These comprehensive reports include an assessment of the Fund's performance (and
a comparison to its industry benchmark), an overview of the markets, a report
from the adviser, as well as a listing of its holdings and other financial
statements.
INVESTOR INFORMATION 1-800-662-7447 - CLIENT SERVICES 1-800-662-2739 -
TELE-ACCOUNT 1-800-662-6273
20
<PAGE> 26
FUND AND ACCOUNT UPDATES (continued)
CONFIRMATION STATEMENT Sent each time you buy, sell, or exchange
shares; confirms the date and the amount of
your transaction.
PORTFOLIO SUMMARY Mailed quarterly; shows the market
value of your account at the close of the
statement period, as well as distributions,
purchases, sales, and exchanges for the
current calendar year.
FUND FINANCIAL REPORTS Mailed in January and July for this Fund.
TAX STATEMENTS Generally mailed in January; report previous
year's dividend distributions, proceeds from
the sale of shares, and distributions from
IRAs or other retirement accounts.
AVERAGE COST STATEMENT Issued quarterly for taxable
[BOOK] accounts (accompanies your Portfolio
Summary); shows the average cost of shares
that you redeemed during the previous
quarter, using the average cost single
category method.
AUTOMATED TELEPHONE ACCESS
VANGUARD TELE-ACCOUNT Toll-free access to Vanguard fund and
1-800-662-6273 account information -- as well as some
Any time, seven days a week, transactions -- through any TouchTone(TM)
from anywhere in the continental telephone. Tele-Account provides total
United States and Canada return, share price, price change, and yield
[BOOK] quotations for all Vanguard funds; gives
your account balances and history (e.g.,
last transaction, latest dividend
distribution); and allows you to sell or
exchange fund shares.
COMPUTER ACCESS
VANGUARD ON THE Use your personal computer to visit
WORLD WIDE WEB Vanguard's education-oriented website,
http://www.vanguard.com which provides timely news and information
about Vanguard funds and services; an
on-line "university" that offers a variety
of mutual fund classes; and easy-to-use,
interactive tools to help you create your
own investment and retirement strategies.
VANGUARD ONLINE (sm) Use your personal computer to learn more
KEYWORD: Vanguard about Vanguard funds and services; keep in
touch with your Vanguard accounts; map out a
long-term investment strategy; and ask
questions, make suggestions, and send
messages to Vanguard. Vanguard Online is
offered through America Online(R) (AOL). To
establish an AOL account, call 1-800-
238-6336.
Investor Information 1-800-662-7447 - Client Services 1-800-662-2739 -
Tele-Account 1-800-662-6273
21
<PAGE> 27
PLAIN TALK ABOUT
KEEPING YOUR PROSPECTUS
Reading this prospectus will help you to decide whether Vanguard/Wellington
Fund is suitable for your investment goals. If you decide to invest, don't throw
the prospectus out; you will no doubt need it for future reference.
PROSPECTUS POSTSCRIPT
This prospectus is designed to provide you with pertinent information about
Vanguard/Wellington Fund, including its investment objective, risks, strategies,
and expenses, as well as services available to you as a shareholder.
It is important that you understand these facts so that you can decide whether
an investment in this Fund is right for you. The following questions offer a
quick review of some of the subjects covered by this prospectus.
IN READING THE PROSPECTUS, DID YOU LEARN . . .
/ / The Fund's objectives? (page 4)
/ / The Fund's investment strategies? (page 5)
/ / Who should invest in the Fund? (page 4)
/ / The risks associated with the Fund? (pages 4 - 8)
/ / Whether the Fund is federally insured?
(inside front cover)
/ / The Fund's expenses? (page 2)
/ / The background of the Fund's investment managers?
(page 12)
/ / How to open an account? (page 16)
/ / How to sell or exchange shares? (page 18)
/ / How often you'll receive statements and financial reports?
(page 20)
22
<PAGE> 28
A SIMPLE RISK QUIZ
A. I HAVE BEEN INVESTING IN STOCK AND BOND MUTUAL FUNDS (OR IN INDIVIDUAL
STOCKS OR BONDS) FOR . . .
1. Less than a year
2. 1 - 2 years
3. 3 - 4 years
4. 5 - 9 years
5. 10 years or more
B. WHEN IT COMES TO INVESTING IN STOCK OR BOND MUTUAL FUNDS (OR INDIVIDUAL
STOCKS OR BONDS), I WOULD SAY I'M . . .
1. A very inexperienced investor
2. A somewhat inexperienced investor
3. A somewhat experienced investor
4. An experienced investor
5. A very experienced investor
C. I AM COMFORTABLE WITH INVESTMENTS THAT MAY LOSE MONEY FROM TIME TO TIME IF
THEY OFFER THE POTENTIAL FOR HIGHER RETURNS.
1. I strongly disagree
2. I disagree
3. I somewhat agree
4. I agree
5. I strongly agree
D. I WILL KEEP AN INVESTMENT EVEN IF IT LOSES 10% OF ITS VALUE OVER THE COURSE
OF A YEAR.
1. I strongly disagree
2. I disagree
3. I somewhat agree
4. I agree
5. I strongly agree
E. IN ADDITION TO MY LONG-TERM INVESTMENTS, I HAVE EMERGENCY SAVINGS EQUAL TO
____ MONTHS OF MY TAKE- HOME PAY.
1. Zero
2. One
3. Two
4. Three
5. Four or more
F. I FIND IT EASY TO PAY MY MONTHLY BILLS FROM MY CURRENT PAY.
1. I strongly disagree
2. I disagree
3. I somewhat agree
4. I agree
5. I strongly agree
G. OVERALL, MY PERSONAL FINANCIAL SITUATION IS SECURE.
1. I strongly disagree
2. I disagree
3. I somewhat agree
4. I agree
5. I strongly agree
ABOUT THE QUIZ
Knowing your risk tolerance is important when you are making an investment
decision. To give you a general idea of your comfort level with investing,
circle the response that most closely matches your personal situation. Keep in
mind, though, that there is no "foolproof" way to accurately gauge your risk
tolerance. Scoring for the quiz is below.
HOW TO SCORE THE QUIZ
Use the number of your answer as the number of points scored. For instance, if
you chose answer #3 to a question, that's worth three points. Add up your points
and check below for the type of investor you are. (Note: If you chose answer #1
or #2 to Question C, subtract five points from your total score.)
- - If you scored between 0 and 25 points, you are considered a conservative
investor.
- - If you scored between 26 and 32 points, you are considered a moderate
investor.
- - If you scored between 33 and 35 points, you are considered an aggressive
investor.
23
<PAGE> 29
PLAIN TALK ABOUT
INFLATION AND YOUR INVESTMENTS
No matter how you invest your money, inflation -- the rising cost of living --
is a constant threat to your investment returns. The chart below shows how
stocks, bonds, and cash reserves have fared against inflation over time.
INFLATION'S EFFECT ON
INVESTMENT RETURNS
(1926-1995)
<TABLE>
<CAPTION>
CASH
RESERVES BONDS STOCKS
<S> <C> <C> <C>
Average Annual Rate of Inflation 5.4% 5.4% 5.4%
Real Return After Inflation 1.3% 2.5% 5.3%
---- ---- -----
6.7% 7.9% 10.7%
</TABLE>
Source: Stocks, Bonds, Bills, and Inflation 1996 Yearbook(TM), Ibbotson
Associates, Chicago (annually updates work by Roger G. Ibbotson and Rex A.
Sinquefield). Used with permission. All rights reserved.
AN INVESTMENT PRIMER
Whether you are investing for the short or long term, keep these three points in
mind:
1. INVEST IN ALL THREE OF THE MAJOR ASSET CLASSES.
Most people use a combination of . . .
- - Stocks, which are considered the "riskiest" of the three asset classes. Day
to day, or even year to year, stocks tend to have wide price swings.
Despite this potential for significant price fluctuation, however, stocks
have historically offered higher returns than the other major asset classes
over longer periods.
- - Bonds, which are chiefly influenced by changes in interest rates. When
interest rates climb, bond prices drop; when interest rates fall, bond
prices rise.
- - Cash reserves, which offer more share-price (or capital) stability than
stocks or bonds -- but also generate lower returns. Some examples are
Treasury bills and money market funds.
2. REMEMBER THAT SAFETY HAS A PRICE.
Many people want a "no-risk" investment. Remember, though, that the more safety
you seek, the less potential reward you can expect -- and the less you can
expect in returns after inflation. Inflation affects not only the price you pay
for goods and services; it also eats away at your investment returns over time.
What is left is known as your "real" return -- the actual return you receive
after you factor in inflation (see the chart at left).
3. CHANCES ARE GOOD THAT YOU CAN AFFORD TO TAKE MORE RISK.
As the chart shows, inflation cuts into the returns of all three asset classes.
However, stocks and bonds have had an easier time of outpacing inflation over
time -- which means that, to beat inflation, you may need to invest more
aggressively.
Don't be put off by potential downswings in the value of your investment,
especially if you are investing for long periods. Time acts as a shock absorber,
letting you ride out the short-term bumps that investments often provide. The
longer you hold an investment, the more likely it is that you will earn a
positive return.
24
<PAGE> 30
GLOSSARY OF INVESTMENT TERMS
BALANCED FUND
A mutual fund that seeks to provide some combination of income, capital growth,
and conservation of capital by investing in stocks, bonds, and/or money market
instruments.
BOND
A debt security (IOU) issued by a corporation, government, or government agency
in exchange for the money you lend it. In most instances, the issuer agrees to
pay back the loan by a specific date and make regular interest payments until
that date.
CAPITAL GAINS DISTRIBUTION
Payment to mutual fund shareholders of gains realized during the year on
securities that the fund has sold at a profit, minus any realized losses.
CASH RESERVES
Cash deposits as well as short-term bank deposits, money market instruments,
U.S. Treasury bills, commercial paper, and banker's acceptances.
COMMON STOCK
A security representing ownership rights in a corporation. A stockholder is
entitled to share in the company's profits, some of which may be paid out as
dividends.
CREDIT QUALITY
A measure of a bond issuer's ability to repay interest and principal in a timely
manner.
DIVIDEND INCOME
Payment to shareholders of income from interest or dividends generated by a
fund's investments.
EXPENSE RATIO
The percentage of a fund's average net assets used to pay its expenses. The
expense ratio includes management fees, administrative fees, and any 12b-1
marketing fees.
FACE VALUE
The value of a bond at the time it was issued (that is, initially sold).
FIXED-INCOME SECURITIES
Investments, such as bonds, that have a fixed payment schedule. While the level
of income offered by these securities is predetermined, their prices may
fluctuate.
INVESTMENT GRADE
Bonds whose credit quality is considered to be among the highest by independent
bond-rating agencies.
MATURITY
The date when a bond issuer agrees to repay the bond's principal, or face value,
to the bond's buyer.
MUTUAL FUND
An investment company that pools the money of many people and invests it in a
variety of securities in an effort to achieve a specific objective over time.
NET ASSET VALUE (NAV)
The market value of a mutual fund's total assets, minus liabilities, divided by
the number of shares outstanding. The value of a single share is called its
share value or share price.
PORTFOLIO DIVERSIFICATION
Holding a variety of securities so that a portfolio's return is not hurt by the
poor performance of a single security or industry.
PRICE/EARNINGS (P/E) RATIO
The current share price of a stock, divided by its per-share earnings (profits)
from the past year. A stock selling for $20, with earnings of $2 per share, has
a price/earnings ratio of 10.
TOTAL RETURN
A percentage change, over a specified time period, in a mutual fund's net asset
value, with the ending net asset value adjusted to account for the reinvestment
of all distributions of dividends and capital gains.
VOLATILITY
The fluctuations in value of a mutual fund or other security. The greater a
fund's volatility, the wider the fluctuations between its high and low prices.
YIELD
Current income (interest or dividends) earned by an investment, expressed as a
percentage of the investment's price.
<PAGE> 31
[THE VANGUARD GROUP LOGO]
<TABLE>
<S> <C> <C>
INVESTOR INFORMATION VANGUARD BROKERAGE ELECTRONIC ACCESS TO THE
DEPARTMENT SERVICES VANGUARD MUTUAL FUND
1-800-662-7447 (SHIP) 1-800-992-8327 EDUCATION AND INFORMATION
TEXT TELEPHONE: For information on trading CENTER
1-800-952-3335 stocks, bonds, and options World Wide Web
For information on our funds, at reduced commissions http://www.vanguard.com
fund services, and retirement
accounts; requests for VANGUARD TELE-ACCOUNT (R) E-mail
literature 1-800-662-6273 (ON-BOARD) [email protected]
For 24-hour automated access
CLIENT SERVICES DEPARTMENT to price and yield, information
1-800-662-2739 (CREW) on your account, certain
TEXT TELEPHONE: transactions
1-800-662-2738
For information on your
account, account transactions,
account statements
</TABLE>
<PAGE> 32
VANGUARD/
WELLINGTON FUND
Institutional Prospectus
March 21, 1997
This prospectus contains
financial data for the
Fund through the
fiscal year ended
November 30, 1996.
[LOGO]
<PAGE> 33
VANGUARD/WELLINGTON FUND A Balanced Mutual Fund
CONTENTS
Fund Expenses 2
Financial Highlights 3
A Word About Risk 4
The Fund's Objectives 4
Who Should Invest 4
Investment Strategies 5
Investment Policies 8
Investment Limitations 9
Investment Performance 10
Share Price 11
Dividends, Capital Gains, and Taxes 11
The Fund and Vanguard 12
Investment Adviser 12
General Information 13
Investing with Vanguard
- - For Plan Participants 14
- - For Other Institutional Investors 14
Accessing Fund Information By Computer 15
Prospectus Postscript 16
Glossary Inside Back Cover
INVESTMENT OBJECTIVES AND POLICIES
Vanguard/Wellington Fund (the "Fund") is a diversified open-end investment
company, or mutual fund, that seeks to conserve capital and to provide moderate
long-term capital growth and moderate income.
The Fund invests approximately 60% to 70% of its assets in
dividend-paying stocks of established, large and medium-size companies that, in
the adviser's opinion, are undervalued but whose prospects are improving. The
remaining 30% to 40% of assets are invested primarily in high-quality,
longer-term corporate bonds with some exposure to U.S. Treasury, government
agency, and mortgage-backed bonds.
IT IS IMPORTANT TO NOTE THAT THE FUND'S SHARES ARE NOT GUARANTEED OR
INSURED BY THE FDIC OR ANY OTHER AGENCY OF THE U.S. GOVERNMENT. AS WITH ANY
INVESTMENT IN STOCKS (WHICH ARE SUBJECT TO WIDE FLUCTUATIONS IN MARKET VALUE)
AND BONDS (WHICH ARE SENSITIVE TO CHANGES IN INTEREST RATES), YOU COULD LOSE
MONEY BY INVESTING IN THE FUND.
FEES AND EXPENSES
The Fund is offered on a no-load basis, which means that you pay no sales
commissions or 12b-1 marketing fees. You will, however, incur expenses for
investment advisory, management, administrative, and distribution services,
which are included in the expense ratio.
IMPORTANT NOTE
This prospectus is intended for institutional clients and for participants in
employer-sponsored retirement or savings plans. Another version -- for investors
who would like to open a personal investment account -- can be obtained by
calling Vanguard at 1-800-662-7447.
ADDITIONAL INFORMATION ABOUT THE FUND
A Statement of Additional Information (dated March 21, 1997) containing more
information about the Fund is, by reference, part of this prospectus and may be
obtained without charge by contacting Vanguard (see back cover).
WHY READING THIS PROSPECTUS IS IMPORTANT
This prospectus explains the objectives, risks, and strategies of
Vanguard/Wellington Fund. To highlight terms and concepts important to mutual
fund investors, we have provided "Plain Talk" explanations along the way.
Reading the prospectus will help you to decide whether the Fund is the right
investment for your needs. We suggest that you keep it for future reference.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
<PAGE> 34
FUND PROFILE Vanguard/Wellington Fund
WHO SHOULD INVEST (page 4)
- - Investors seeking moderate long-term capital growth and moderate income.
- - Investors willing to invest for the long term -- at least five years.
WHO SHOULD NOT INVEST
- - Investors seeking significant dividend income.
- - Investors unwilling to accept significant share-price fluctuations.
RISKS OF THE FUND (pages 4 - 9)
The Fund's total return will fluctuate within a wide range, so an investor could
lose money over short or even extended periods. The Fund is subject to -- among
other risks -- stock market risk (the chance that stock prices in general will
decline, sometimes suddenly and sharply) and interest rate risk (the chance that
bond prices will decline because of rising interest rates).
DIVIDENDS AND CAPITAL GAINS (page 11)
Dividends are paid in March, June, September, and December. Capital gains, if
any, are paid in December. In participant accounts, all distributions are
automatically reinvested.
INVESTMENT ADVISER (page 12)
Wellington Management Company, LLP,
Boston, MA.
INCEPTION DATE: JULY 1, 1929
NET ASSETS AS OF 11/30/96: $16.5 billion
FUND'S EXPENSE RATIO FOR THE
YEAR ENDED 11/30/96: 0.31%
NEWSPAPER ABBREVIATION: Welltn
VANGUARD FUND NUMBER: 021
AVERAGE ANNUAL TOTAL RETURNS --
PERIODS ENDED NOVEMBER 30, 1996
1 Year 5 Years 10 Years
------------------------------------------
Wellington Fund 21.3% 15.8% 12.7%
Composite Index* 19.8 15.2 13.5
*65% stocks, 35% bonds. See page 10 for details
QUARTERLY RETURNS (%) 1987 - 1996 (intended to show volatility of returns)
[PLOT POINTS TO COME FOR BAR CHART GOING HERE]
*65% stocks, 35% bonds. See page 10 for details.
In evaluating past performance, remember that it is not indicative of future
performance and that returns from stocks before adjusting for inflation were
relatively high during the periods shown. Performance figures include the
reinvestment of any dividends and capital gains distributions. The returns shown
are net of expenses for the Fund, but they do not reflect income taxes an
investor would have incurred. The Composite Index is a theoretical portfolio,
incurring none of the advisory fees, operating expenses, and portfolio
transaction costs that are borne by an operating mutual fund. Note, too, that
both the 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.
1
<PAGE> 35
PLAIN TALK ABOUT
THE COSTS OF INVESTING
Costs are an important consideration in choosing a mutual fund. That's because
you, as a shareholder, pay the costs of operating a fund, plus any transaction
costs associated with buying, selling, or exchanging shares. These costs can
erode a substantial portion of the gross income or capital appreciation a fund
achieves. Even seemingly small differences in fund expenses can, over time, have
a dramatic impact on a fund's performance.
PLAIN TALK ABOUT
FUND EXPENSES
All mutual funds have operating expenses. These expenses, which are deducted
from a fund's gross income, are expressed as a percentage of the net assets of
the fund. Vanguard/Wellington Fund's expense ratio in fiscal year 1996 was
0.31%, or $3.10 per $1,000 of average net assets. The average balanced mutual
fund had expenses in 1996 of 1.32%, or $13.20 per $1,000 of average net assets,
according to Lipper Analytical Services, Inc., which reports on the mutual fund
industry.
FUND EXPENSES
The examples below are designed to help you understand the various costs you
would bear, directly or indirectly, as an investor in the Fund.
As noted in this table, you do not pay fees of any kind when you buy,
sell, or exchange shares of the Fund:
SHAREHOLDER TRANSACTION EXPENSES
Sales Load Imposed on Purchases: None
Sales Load Imposed on Reinvested Dividends: None
Redemption Fees: None
Exchange Fees: None
The next table illustrates the operating expenses that you would incur as
a shareholder of the Fund. These expenses are deducted from the Fund's income
before it is paid to you. Expenses include investment advisory fees as well as
the costs of maintaining accounts, administering the Fund, providing shareholder
services, and other activities. The expenses shown in the table are for the
fiscal year ended November 30, 1996.
ANNUAL FUND OPERATING EXPENSES
Management and Administrative Expenses: 0.23%
Investment Advisory Expenses: 0.04%
12b-1 Marketing Fees: None
Other Expenses
Marketing and Distribution Costs: 0.02%
Miscellaneous Expenses (e.g., Taxes, Auditing): 0.02%
----
Total Other Expenses: 0.04%
----
TOTAL OPERATING EXPENSES (EXPENSE RATIO): 0.31%
====
The following example illustrates the hypothetical expenses that you would
incur on a $1,000 investment over various periods. The example assumes (1) that
the Fund provides a return of 5% a year and (2) that you redeem your investment
at the end of each period.
-----------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
-----------------------------------------
$3 $10 $17 $39
-----------------------------------------
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF ACTUAL EXPENSES OR
PERFORMANCE FROM THE PAST OR FOR THE FUTURE, WHICH MAY BE HIGHER OR LOWER THAN
THOSE SHOWN.
2
<PAGE> 36
FINANCIAL HIGHLIGHTS
The following financial highlights table shows the results for a share
outstanding for each of the last ten years ended November 30, 1996. The
financial data were audited by Price Waterhouse LLP, independent accountants.
You should read this information in conjunction with the Fund's financial
statements and accompanying notes, which appear, along with the audit report
from Price Waterhouse, in the Fund's most recent Annual Report to shareholders.
The Annual Report is incorporated by reference in the Statement of Additional
Information and in this prospectus, and contains a more complete discussion of
the Fund's performance. You may have the Report sent to you without charge by
writing to Vanguard (see back cover).
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
Year Ended November 30,
-----------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $ 24.57 $ 19.33 $20.78 $ 19.34 $17.95 $16.29 $18.40 $16.82 $14.92 $ 16.06
-----------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income 1.02 .96 .88 .92 .93 .96 1.01 1.02 .96 .95
Net Realized and
Unrealized Gain (Loss)
on Investments 4.00 5.19 (1.03) 1.62 1.65 1.71 (1.46) 2.12 2.06 (1.55)
-----------------------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT
OPERATIONS 5.02 6.15 (.15) 2.54 2.58 2.67 (.45) 3.14 3.02 (.60)
- -------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net
Investment Income (.97) (.88) (.92) (.94) (.96) (1.01) (1.06) (.98) (.98) (.54)
Distributions from
Realized Capital Gains (.28) (.03) (.38) (.16) (.23) -- (.60) (.58) (.14) --
-----------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (1.25) (.91) (1.30) (1.10) (1.19) (1.01) (1.66) (1.56) (1.12)
- -------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE,
END OF PERIOD $ 28.34 $ 24.57 $19.33 $ 20.78 $19.34 $17.95 $16.29 $18.40 $16.82 $ 14.92
===============================================================================================================================
TOTAL RETURN 21.26% 32.70% -0.82% 13.62% 14.99% 16.81% -2.65% 19.98% 21.03% -4.26%
===============================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of
Period (Millions) $16,505 $12,333 $8,638 $ 7,917 $5,359 $3,473 $2,317 $2,035 $1,527 $ 1,274
Ratio of Expenses to
Average Net Assets 0.31% 0.33% 0.35% 0.34% 0.33% 0.35% 0.43% 0.42 0.47% 0.43%
Ratio of Net Investment
Income to Average
Net Assets 4.08% 4.37% 4.35% 4.55% 4.98% 5.39% 5.99% 5.77% 5.88% 5.56%
Portfolio Turnover Rate 30% 24% 32% 34% 24% 35% 33% 30% 28% 27%
Average Commission
Rate Paid $ .0287 N/A N/A N/A N/A N/A N/A N/A N/A N/A
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
From time to time, the Vanguard funds advertise yield and total return
figures. Yield is an historical measure of dividend income, and total return is
a measure of past dividend income (assuming that it has been reinvested) plus
capital appreciation. Neither yield nor total return should be used to predict
the future performance of a fund.
PLAIN TALK ABOUT
HOW TO READ THE FINANCIAL HIGHLIGHTS TABLE
The Fund began fiscal 1996 with a net asset value (price) of $24.57 per share.
During the year, the Fund earned $1.02 per share from investment income
(interest and dividends) and $4.00 per share from investments that had
appreciated in value or that were sold for higher prices than the Fund paid for
them. Of those total earnings of $5.02 per share, $0.97 per share was returned
to shareholders in the form of dividend distributions, and $0.28 per share in
the form of capital gains distributions. The earnings ($5.02 per share) less
total distributions ($1.25 per share) resulted in a share price of $28.34 at the
end of the year, an increase of $3.77 per share (from $24.57 at the beginning of
the period to $28.34 at the end of the period). Assuming that the shareholder
had reinvested the distributions in the purchase of more shares, total return
from the Fund was 21.26% for the year.
As of November 30, 1996, the Fund had $16.5 billion in net assets; an
expense ratio of 0.31% ($3.10 per $1,000 of net assets); and net investment
income amounting to 4.08% of its average net assets. It sold and replaced
securities valued at 30% of its total net assets.
3
<PAGE> 37
PLAIN TALK ABOUT
BALANCED FUNDS
Balanced funds are "middle-of-the-road" investments that seek to provide
some combination of growth, income, and conservation of capital by investing in
a mix of stocks, bonds, and/or money market instruments. Because stocks and
bonds tend to move in different directions, balanced funds are able to use the
rewards from one type of investment to help offset the risks from another.
A WORD ABOUT RISK
This prospectus describes the risks you will face as an investor in
Vanguard/Wellington Fund. It is important to keep in mind one of the main axioms
of investing: the higher the risk of losing money, the higher the potential
reward. The reverse, also, is generally true: the lower the risk, the lower the
potential reward. However, as you consider an investment in Vanguard/Wellington
Fund, you should also take into account your personal tolerance for the daily
fluctuations of both the stock and bond markets.
Look for the "warning flag" symbol [FLAG GRAPHIC] throughout the prospectus.
It is used to mark detailed information about each type of risk that you, as a
shareholder of the Fund, will confront.
THE FUND'S OBJECTIVES
The Fund seeks to conserve capital and to provide moderate long-term capital
growth and moderate income. These objectives are not fundamental, which means
that they can be changed by the Fund's board of directors without shareholder
approval. However, before making any important change in its objectives, the
Fund will give shareholders 30-days notice, in writing.
[FLAG BECAUSE OF THE SEVERAL TYPES OF RISK DESCRIBED ON THE FOLLOWING
GRAPHIC] PAGES, YOUR INVESTMENT IN THE FUND, AS WITH ANY INVESTMENT IN STOCKS
AND BONDS, COULD LOSE MONEY.
WHO SHOULD INVEST
The Fund may be a suitable investment for you if:
- - You wish to add a balanced fund to your existing holdings, which could
include other stock and bond -- as well as money market and tax-exempt --
investments.
- - You are seeking moderate growth of your capital over the long term -- at
least five years -- while, at the same time, conserving your capital as much
as possible.
- - You are seeking moderate income.
- - You want a simple way to invest in a relatively fixed percentage of stocks
and bonds.
This Fund is not an appropriate investment if you are a market-timer.
Investors who engage in excessive in-and-out trading activity generate
additional costs that are borne by all of the Fund's shareholders. To minimize
such costs, which reduce the ultimate returns achieved by you and other
shareholders, the Fund has adopted the following policies:
4
<PAGE> 38
- - The Fund reserves the right to reject any purchase request -- including
exchanges from other Vanguard funds -- that it regards as disruptive to the
efficient management of the Fund. This could be because of the timing of the
investment or because of a history of excessive trading by the investor.
- - There is a limit on the number of times you can exchange into or out of the
Fund. If you own shares of the Fund as an investment option in an
employer-sponsored retirement or savings plan, your plan dictates the rules
governing exchanges. Contact your plan administrator for details.
- - The Fund reserves the right to stop offering shares at any time.
INVESTMENT STRATEGIES
This section explains how Vanguard/Wellington Fund's investment adviser pursues
the objectives of conservation of capital, moderate long-term capital growth,
and moderate current income. It also explains important risks -- stock market
risk, interest rate risk, manager risk, and credit risk -- faced by investors in
the Fund. Like the Fund's objectives, the adviser's investment strategies are
not fundamental and can be changed by the Fund's board of directors without
shareholder approval. However, before making any important change in its
strategies, the Fund will give shareholders 30-days notice, in writing.
MARKET EXPOSURE
STOCKS
Roughly two-thirds of the Fund's assets are invested in common stocks. At times,
the Fund may also invest in securities that are convertible into common stocks.
[FLAG THE FUND IS SUBJECT TO STOCK MARKET RISK, WHICH IS THE POSSIBILITY
GRAPHIC] THAT STOCK PRICES OVERALL WILL DECLINE OVER SHORT OR EVEN EXTENDED
PERIODS. STOCK MARKETS TEND TO MOVE IN CYCLES, WITH PERIODS OF
RISING STOCK PRICES AND PERIODS OF FALLING STOCK PRICES.
To illustrate the volatility of stock prices, the following table shows the
best, worst, and average total returns (dividend income plus change in market
value) for the U.S. stock market over various periods as measured by the
Standard & Poor's 500 Composite Stock Price Index, a widely used barometer of
stock market activity. Note that the returns shown do not include the costs of
buying and selling stocks or other expenses that a real-world investment
portfolio would incur. Note, also, how the gap between best and worst tends to
narrow over the long term.
PLAIN TALK ABOUT
COSTS AND MARKET TIMING
Some investors try to profit from "market timing" -- switching money into
investments when they expect prices to rise, and taking money out when they
expect the market to fall. As money is shifted in and out, a fund incurs
expenses for buying and selling securities. These costs are borne by all fund
shareholders, including long-term investors who do not generate the costs.
Therefore, the Fund discourages short-term trading by, among other things,
closely monitoring daily transactions.
5
<PAGE> 39
PLAIN TALK ABOUT
BONDS AND INTEREST RATES
As a rule, when interest rates rise, bond prices fall. The opposite is also
true: Bond prices go up when interest rates fall. Why do bond prices and
interest rates move in opposite directions? Let's assume that you hold a bond
offering a 5% yield. A year later, interest rates are on the rise and bonds are
offered with a 6% yield. With higher-yielding bonds available, you would have
trouble selling your 5% bond for the price you paid -- causing you to lower your
asking price. On the other hand, if interest rates were falling and 4% bonds
were being offered, you would be able to sell your 5% bond for more than you
paid.
PLAIN TALK ABOUT
BOND MATURITIES
A bond is issued with a specific maturity date -- the date when the bond's
issuer, or seller, must pay back the bond's initial value (known as its "face
value"). Bond maturities generally range from less than one year (short term) to
30 years (long term). The longer a bond's maturity, the more risk you, as a bond
investor, face as interest rates rise -- but also the more interest you could
receive. Long-term bonds are more suitable for investors willing to take greater
risks in hope of higher yields; short-term bond investors should be willing to
accept lower yields in return for less fluctuation in the value of their
investment.
- ------------------------------------------------------------------
U.S. STOCK MARKET RETURNS (1926 - 1996)
- ------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS 20 YEARS
- ------------------------------------------------------------------
Best 53.9% 23.9% 20.1% 16.9%
Worst - 43.3% - 12.5% - 0.9% 3.1%
Average 12.7% 10.4% 10.8% 10.8%
- ------------------------------------------------------------------
The table covers all of the 1-, 5-, 10-, and 20-year periods from 1926
through 1996. For example, while the average return on stocks for all of the
5-year periods was 10.4%, returns for these 5-year periods ranged from a -12.5%
average (from 1928 through 1932), to 23.9% (from 1950 through 1954). These
average returns reflect past performance on common stocks and should not be
regarded as an indication of future returns from either the stock market as a
whole or this Fund in particular.
Finally, because Vanguard/Wellington Fund does not hold the same securities
held in the S&P 500 Index or any other market index, the performance of the Fund
will not mirror the returns of any particular index.
BONDS
Approximately one-third of the Fund's assets are invested in bonds.
[FLAG THE FUND IS SUBJECT TO INTEREST RATE RISK, WHICH IS THE POSSIBILITY
GRAPHIC] THAT BOND PRICES OVERALL WILL DECLINE OVER SHORT, OR EVEN EXTENDED,
PERIODS DUE TO RISING INTEREST RATES. INTEREST RATE RISK SHOULD BE
MODEST FOR SHORTER-TERM BONDS AND HIGH FOR LONGER-TERM BONDS.
Although bonds are often thought to be less risky than stocks, there have
been periods when bond values have fallen significantly due to rising interest
rates. For instance, prices of long-term bonds fell by almost 48% between
December 1976 and September 1981.
To illustrate the relationship between bond prices and interest rates, the
following table shows the impact of a 2% change (both up and down) in interest
rates on three $1,000 bonds, each with a different maturity.
- --------------------------------------------------------------------------
HOW INTEREST RATE CHANGES AFFECT BONDS*
- --------------------------------------------------------------------------
VALUE OF A $1,000 BOND VALUE OF A $1,000 BOND
AFTER A 2% INCREASE AFTER A 2% DECREASE
MATURITY IN INTEREST RATES IN INTEREST RATES
- --------------------------------------------------------------------------
Short-Term (2.5 years) $956 $1,046
Intermediate-Term (10 years) $870 $1,156
Long-Term (20 years) $816 $1,251
- --------------------------------------------------------------------------
*Assuming a 7% yield.
These figures are for illustrative purposes only and should not be regarded
as an indication of future returns from the bond market as a whole, or the Fund
in particular.
6
<PAGE> 40
Finally, because stock and bond prices often move in different directions,
the Fund's bond holdings help to dampen -- but not eliminate -- some of the
stock market volatility experienced by the Fund. Likewise, changes in interest
rates may not have as dramatic an effect on Wellington Fund as they would on a
fund made up entirely of bonds.
SECURITY SELECTION
Wellington Management Company, LLP (WMC), adviser to the Fund, invests
approximately 60% to 70% of the Fund's assets in dividend-paying common stocks
and the remaining 30% to 40% of assets in high-quality bonds. While the mix of
stocks and bonds varies from time to time depending on the adviser's views of
economic and market conditions, the stock portion can be expected to represent
at least 60% of the Fund's holdings.
The Fund is run by WMC according to traditional methods of active investment
management. Securities are bought and sold based on WMC's judgments about
companies and their financial prospects, and about bond issuers and the general
level of interest rates. To achieve the Fund's objectives of conservation of
capital, moderate long-term growth, and moderate income, the adviser follows
specific strategies for stock selection and bond selection.
[FLAG THE FUND IS SUBJECT TO MANAGER RISK, WHICH IS THE POSSIBILITY THAT
GRAPHIC] WMC MAY DO A POOR JOB OF SELECTING STOCKS AND BONDS.
STOCKS
WMC uses extensive research to find what it considers to be undervalued stocks
of established, large- and medium-size companies. WMC considers a stock to be
undervalued if company earnings, or potential earnings, are not fully reflected
in the stock's share price. In other words, the current prices of these large-
and mid-cap stocks may be less than what the adviser thinks they are truly
worth.
The adviser's goal is to identify and purchase these securities before their
value is recognized by other investors. The adviser emphasizes stocks that, on
average, provide a higher level of dividend income than stocks in the overall
market generally provide. By adhering to this stock selection strategy and by
investing in a wide variety of companies and industries, the adviser expects to
moderate overall risk.
The Fund's top ten stock holdings (which amounted to 16% of the Fund's net
assets) as of November 30, 1996, follow.
1. General Electric Co.
2. Allstate Corp.
3. Citicorp
4. First Bank System, Inc.
5. Kimberly-Clark Corp.
6. Northrop Grumman Corp.
7. Bristol-Myers Squibb Co.
8. Dow Chemical Co.
9. General Motors Corp.
10. Ford Motor Co.
PLAIN TALK ABOUT
LARGE-CAP, MID-CAP, AND SMALL-CAP STOCKS
Stocks of publicly traded companies -- and mutual funds that hold these stocks
- -- can be classified by the companies' market value, or capitalization. Vanguard
defines large-capitalization, or large-cap, funds as those holding stocks of
companies with a median market value of their outstanding shares exceeding $5
billion. Mid-cap funds hold stocks of companies with a median market value
between $1 billion and $5 billion. Small-cap funds hold stocks of companies with
a median market value of less than $1 billion. Historically, large-cap funds
have exhibited lower volatility than mid-cap and small-cap funds.
7
<PAGE> 41
PLAIN TALK ABOUT
TYPES OF BONDS
Bonds are issued (sold) by many sources: corporations issue corporate bonds; the
federal government issues U.S. Treasury bonds; agencies of the federal
government issue agency bonds; and mortgage holders issue "mortgage-backed"
bonds such as Government National Mortgage Association (GNMA). Each issuer is
responsible for paying back the bond's initial value as well as periodic
interest payments.
PLAIN TALK ABOUT
CREDIT QUALITY
A bond's credit quality depends on the issuer's ability to pay interest on the
bond and, ultimately, to repay the debt. The lower the rating by one of the
independent bond-rating agencies (for example, Moody's or Standard & Poor's),
the greater the chance (in the rating agency's opinion) that the bond issuer
will default, or fail to meet its payment obligations. All things being equal,
the lower a bond's credit rating, the higher the yield the bond seeks to pay (as
compensation for the risks an investor must take).
PLAIN TALK ABOUT
PORTFOLIO TURNOVER
Before investing in a mutual fund, you should review its portfolio turnover rate
for an indication of the potential effect of transaction costs on the fund's
future returns. In general, the greater the volume of buying and selling by the
fund, the greater the impact that brokerage commissions and other transaction
costs will have on its return. The average turnover rate for actively managed
balanced funds is 86%.
Keep in mind that, because the stock makeup of the Fund changes daily, this
listing is only a "snapshot" at one point in time.
BONDS
WMC selects high-quality bonds that, it believes, will generate a high and
sustainable level of income. These bonds would include intermediate- and
long-term corporate bonds, U.S. Treasury, government agency, and mortgage-backed
and asset-backed bonds.
A breakdown of the Fund's bond holdings (which amounted to 34% of the Fund's
total net assets) as of November 30, 1996, follows.
------------------------------------------
TYPE PERCENTAGE OF
OF BOND FUND'S ASSETS
------------------------------------------
Corporate 19%
U.S. Treasury and
government agency 12
Foreign issuers 3
Other 0
------------------------------------------
[FLAG THE FUND IS SUBJECT, TO A LIMITED EXTENT, TO CREDIT RISK, WHICH IS
GRAPHIC] THE POSSIBILITY THAT A BOND ISSUER WILL FAIL TO REPAY INTEREST AND
PRINCIPAL IN A TIMELY MANNER.
WMC purchases bonds that are primarily investment-grade quality -- that is,
the bonds are rated at least Baa by Moody's Investors Service, Inc., or BBB by
Standard & Poor's Corporation. The average quality of bonds held by the Fund, as
of November 30, 1996, was Aa2, according to Moody's.
The U.S. government guarantees the timely payment of interest and principal
for its Treasury bonds, but does not guarantee its bonds' prices. In other
words, while the Treasury bonds enjoy the highest credit ratings, their prices
- -- like the prices of other bonds in the Fund -- will fluctuate with changes in
interest rates.
PORTFOLIO TURNOVER
Although the Fund generally seeks to invest for the long term, it retains the
right to sell securities regardless of how long they have been held. It is not
expected that the Fund's turnover rate would exceed 50% in the future. (A
turnover rate of 100% would occur, for example, if the Fund sold and replaced
securities valued at 100% of its total net assets within a one-year period.)
INVESTMENT POLICIES
Besides investing in stocks of large and medium-size companies and high-quality
intermediate- and long-term bonds issued by corporations, the U.S. government,
and its agencies, the Fund may follow a number of investment policies to achieve
its objectives.
8
<PAGE> 42
Up to 15% of the Fund's assets may be invested in the common stocks of
foreign companies as well as securities that are convertible into foreign
stocks. The Fund may engage in currency transactions with respect to these
securities. The Fund may also invest in fixed-income securities issued by
foreign governments and non-U.S.-based companies; however, these securities must
be valued in U.S. dollars and meet the Fund's credit quality standards. Over the
years, the prices of foreign investments and the prices of U.S. investments have
often moved in different directions. In addition, international markets operate
differently from U.S. markets. For instance, foreign exchanges, brokers, and
companies generally have less government supervision and regulation than in the
U.S.
The Fund may invest up to 15% of its assets in restricted securities with
limited marketability or other illiquid securities.
The Fund may also invest in derivatives.
[FLAG THE FUND RESERVES THE RIGHT TO INVEST, TO A LIMITED EXTENT, IN STOCK
GRAPHIC] AND BOND (INTEREST RATE) FUTURES AND OPTIONS CONTRACTS, WHICH ARE
TRADITIONAL TYPES OF DERIVATIVES. THE FUND MAY ALSO INVEST MODESTLY
IN LESS RISKY CLASSES OF COLLATERALIZED MORTGAGE OBLIGATIONS (CMOS).
Losses (or gains) involving futures can sometimes be substantial -- in part
because a relatively small price movement in a futures contract may result in an
immediate and substantial loss (or gain) for a Fund. This Fund will not use
futures and options for speculative purposes or as leveraged investments that
magnify the gains or losses of an investment. If it holds futures and options,
the Fund will keep separate cash reserves or short-term cash-equivalent
securities in the amount of the obligation underlying the futures contract. Only
a limited percentage of the Fund's assets -- up to 5% if required for deposit
and no more than 20% of total assets -- may be committed to such contracts.
The reasons for which the Fund may use futures and options are:
- - To keep cash on hand to meet shareholder redemptions or other needs while
simulating full investment in stocks and bonds.
- - To make it easier to trade.
- - To reduce costs by buying futures instead of actual stocks or bonds when
futures are cheaper.
Please see the Statement of Additional Information for a more detailed
discussion of the Fund's investments in derivatives. The Fund will usually hold
only a small percentage of its assets in cash reserves, although if the
investment adviser believes that market conditions warrant a temporary defensive
measure, the Fund may hold cash reserves without limit.
INVESTMENT LIMITATIONS
To reduce risk and maintain diversification, the Fund has adopted limits on some
of its investment policies. Specifically, the Fund will not:
PLAIN TALK ABOUT
DERIVATIVES
A derivative is a financial contract whose value is based on (or "derived" from)
a traditional security (such as a stock or a bond), an asset (such as a
commodity like gold), or a market index (such as the S&P 500 Index). Futures and
options are derivatives that have been trading on regulated exchanges for more
than two decades. These "traditional" derivatives are standardized contracts
that can easily be bought and sold, and whose market values are determined and
published daily. It is these characteristics that differentiate futures and
options from the relatively new, exotic types of derivatives -- some of which
can carry considerable risks.
9
<PAGE> 43
PLAIN TALK ABOUT
PAST PERFORMANCE
Whenever you see information on a fund's performance, do not consider the
figures to be an indication of the performance you could expect by making an
investment in the fund today. The past is an imperfect guide to the future;
history does not repeat itself in neat, predictable patterns.
- - Invest more than 5% of its assets in the securities of companies that have
been in business for less than three years.
- - Invest more than 25% of its assets in any one industry.
- - Borrow money, except for the purpose of meeting shareholder requests to
redeem shares. Amounts borrowed will not exceed 10% of the Fund's net assets.
With respect to 75% of its assets, this Fund will not:
- - Invest more than 5% in the securities of any one company.
- - Buy more than 10% of the outstanding voting securities of any company.
The limitations listed in this prospectus and in the Statement of Additional
Information are fundamental and may be changed only by approval of a majority of
the Fund's shareholders.
INVESTMENT PERFORMANCE
As a balanced fund, Vanguard/Wellington Fund invests primarily in stocks, with a
sizable holding of bonds -- so Fund performance is closely tied to both the
stock and bond markets. Historically, stock market performance has been
characterized by sharp up-and-down swings in the short term, and by more stable
growth over the long term. Bond market performance has been -- and remains --
strongly influenced by changes in interest rates.
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
FOR PERIODS ENDED 11/30/96
- --------------------------------------------------------------------------------
[PLOT POINTS TO COME FOR BAR CHART GOING HERE]
The results shown represent the Fund's "average annual total return"
performance, which assumes that any distributions of capital gains and dividends
were reinvested for the indicated periods. Also included is comparative
information on an unmanaged "composite index" of 65% stocks and 35% bonds. The
Standard & Poor's 500 Composite Stock Price Index represents the stock portion
of the composite index, while the Lehman Brothers Long-Term Corporate AA or
Better Bond Index makes up the bond portion. The chart does not make any
allowance for federal, state, or local income taxes that shareholders must pay
on a current basis.
10
<PAGE> 44
SHARE PRICE
The Fund's share price, called its net asset value, is calculated each business
day after the close of trading (generally 4 p.m. Eastern time) of the New York
Stock Exchange. Net asset value per share is calculated by adding up the total
assets of the Fund, subtracting all of its liabilities, or debts, and then
dividing by the total number of Fund shares outstanding:
Total Assets - Liabilities
Net Asset Value = ----------------------------
Number of Shares Outstanding
The daily net asset value, or NAV, is useful to you as a shareholder because
the NAV, multiplied by the number of Fund shares you own, gives you the dollar
amount you would have received had you sold all of your shares back to the Fund
that day.
The Fund's share price can be found daily in the mutual fund listings of most
major newspapers under the heading Vanguard Group. Different newspapers use
different abbreviations of the Fund's name, but the most common is WELLTN.
DIVIDENDS, CAPITAL GAINS, AND TAXES
Each March, June, September, and December, the Fund distributes to shareholders
virtually all of its income from interest and dividends. Any capital gains
realized from the sale of securities are distributed in December.
If you own shares of the Fund as an investment option in an
employer-sponsored retirement or savings plan, these dividend and capital gains
distributions will be reinvested in additional Fund shares and accumulate on a
tax-deferred basis. You will not owe taxes on these distributions until you
begin withdrawals. You should consult your plan administrator, your plan's
Summary Plan Document, or your own tax adviser about the tax consequences of an
investment in the Portfolio and of any plan withdrawals.
If your Vanguard/Wellington Fund investment is not part of an
employer-sponsored plan, you can receive distributions of income or capital
gains in cash, or you may have them automatically reinvested in more shares of
the Fund. Both dividend and capital gains distributions -- whether received in
cash or reinvested in additional shares -- are subject to federal (and possibly
state and local) income taxes, no matter how long you have held the shares in
the Fund. You should consult your own tax adviser about other tax consequences
of an investment in the Fund.
PLAIN TALK ABOUT
DISTRIBUTIONS
As a shareholder, you are entitled to your share of the fund's income from
interest and dividends, and gains from the sale of investments. You receive such
earnings as either an income dividend or capital gains distribution. Income
dividends come from interest the fund earns from its money market and bond
investments as well as dividends it receives from its stock investments. Capital
gains are realized whenever the fund sells securities for higher prices than it
paid for them. These capital gains are either short-term or long-term depending
on whether the fund held the securities for less than or more than one year.
11
<PAGE> 45
PLAIN TALK ABOUT
VANGUARD'S UNIQUE CORPORATE STRUCTURE
The Vanguard Group, Inc. is the only MUTUAL mutual fund company. It is owned
jointly by the funds it oversees and by the shareholders in those funds. Other
mutual funds are operated by for-profit management companies that may be owned
by one person, by a group of individuals, or by investors who bought the
management company's publicly traded stock. Because of its structure, Vanguard
operates its funds at cost. Instead of distributing profits from operations to a
separate management company, Vanguard returns profits to fund shareholders in
the form of lower operating expenses.
PLAIN TALK ABOUT
THE FUND'S ADVISER
Wellington Management Company, LLP (WMC), an investment advisory firm founded in
1933, currently manages more than $133 billion in stock and bond portfolios,
including 13 Vanguard funds. The managers responsible for overseeing
Vanguard/Wellington Fund are:
ERNST H. VON METZSCH, CFA, Senior Vice President of WMC; 27 years investment
experience, 24 years with WMC; M.Sc. from The University of Leiden, The
Netherlands, Ph.D. from Harvard University.
PAUL D. KAPLAN, Senior Vice President of WMC; 23 years investment experience,
19 years with WMC; B.S. from Dickinson College, M.S. from The Sloan School of
Management, Massachusetts Institute of Technology.
THE FUND AND VANGUARD
The Fund is a member of The Vanguard Group, a family of more than 30 investment
companies with more than 90 distinct investment portfolios and total net assets
of more than $250 billion. All of the Vanguard Funds share in the expenses
associated with business operations, such as personnel, office space, equipment,
and advertising.
Vanguard also provides marketing services to the funds. Although shareholders
do not pay sales commissions or 12b-1 marketing fees, each fund pays its
allocated share of The Vanguard Group's costs.
A list of the Fund's directors and officers, and their present positions and
principal occupations during the past five years, can be found in the Statement
of Additional Information.
INVESTMENT ADVISER
The Fund employs Wellington Management Company, LLP (WMC), 75 State Street,
Boston, MA 02109, as its investment adviser. WMC manages the Fund subject to the
control of the officers and directors of the Fund.
Each quarter, WMC is paid an advisory fee based on average month-end net
assets of the Fund and a sliding percentage scale:
--------------------------------
ASSETS MANAGED FEE
--------------------------------
First $1 billion 0.10%
Next $2 billion 0.05
Next $7 billion 0.04
Assets over $10 billion 0.03
--------------------------------
The advisory fee can be increased or decreased based on the difference
between the Fund's total return performance and that of an unmanaged "composite
index," which is made up of the S&P 500 Index (65% of the composite index) and
Lehman Brothers Long-Term Corporate AA or Better Bond Index (35% of the
composite index). Under the fee schedule, the base fee may be increased or
decreased by up to 30%. The incentive/penalty fee will not be in full operation
until the quarter ending May 31, 1999. Until that date, the incentive/penalty
fee will be calculated using certain transition rules that are explained in the
Statement of Additional Information.
For the year ended November 30, 1996, the investment advisory fee paid to WMC
was $6.12 million.
The agreement authorizes WMC to choose brokers or dealers to handle the
purchase and sale of the Fund's securities, and directs WMC to get the best
available price and most favorable execution from these brokers with respect to
all transactions. At times, WMC may choose brokers who charge higher commissions
in the interest of obtaining better execution of a transaction. If more than one
broker can obtain the best available price and favorable execution of a
12
<PAGE> 46
transaction, then WMC is authorized to choose a broker who, in addition to
executing the transaction, will provide research services to WMC or the Fund.
However, WMC will not pay higher commissions specifically for the purpose of
obtaining research services. The Fund may direct WMC to use a particular broker
for certain transactions in exchange for commission rebates or research services
provided to the Fund.
The board of directors may, without prior approval from shareholders, change
the terms of the advisory agreement or hire a new investment adviser, either as
a replacement for WMC or as an additional adviser. However, no such change would
be made before giving shareholders 30-days notice, in writing.
GENERAL INFORMATION
Vanguard/Wellington Fund is a corporation organized under the laws of the state
of Maryland. Shareholders of the Fund have rights and privileges similar to
those enjoyed by other corporate shareholders. For example, shareholders will
not be responsible for any liabilities of the corporation. If any matters are to
be voted on by shareholders (such as the election of directors), each share
outstanding at that point would be entitled to one vote. Annual meetings will
not be held by the Fund except as required by the Investment Company Act of
1940. A meeting will be scheduled if the holders of at least 10% of the Fund's
shares request a meeting in writing.
13
<PAGE> 47
INVESTING WITH VANGUARD
FOR PLAN PARTICIPANTS
Vanguard/Wellington Fund is an investment option in your retirement or savings
plan. Your plan administrator or your employee benefits office can provide you
with detailed information on how to participate in your plan and how to elect
the Fund as an investment option.
- - If you have any questions about the Fund or Vanguard, including the Fund's
investment objective, strategies, or risks, contact Vanguard's Participant
Services Department, toll-free, at 1-800-523-1188.
- - If you have questions about your account, contact your plan administrator
or the organization that provides recordkeeping services for your plan.
INVESTMENT OPTIONS AND ALLOCATIONS
Your plan's specific provisions may allow you to change your investment
selections, the amount of your contributions, or how your contributions are
allocated among the investment choices available to you. Contact your plan
administrator or employee benefits office for more details.
TRANSACTIONS
Contributions, exchanges, or redemptions of the Fund's shares are processed as
soon as they have been received by Vanguard in good order. Good order means that
your request includes complete information on your contribution, exchange, or
redemption, and that Vanguard has received the appropriate assets.
EXCHANGES
The exchange privilege (your ability to redeem shares from one fund to purchase
shares of another fund) may be available to you through your plan. However,
because excessive exchanges can potentially disrupt the management of the Fund
and increase its transaction costs, Vanguard reserves the right to refuse any
exchange request. In addition, certain investment options, particularly funds
made up of company stock or investment contracts, may be subject to unique
restrictions. Contact your plan administrator for details on the exchange
policies that apply to your plan.
Before making an exchange, you should consider the following:
- - Before you exchange to another Vanguard fund available in your plan, you
should read that fund's prospectus. Contact Participant Services, toll-free,
at 1-800-523-1188 for a copy.
- - Vanguard can accept exchanges only as permitted by your plan. Your plan
administrator can explain how frequently exchanges are allowed.
FOR OTHER INSTITUTIONAL INVESTORS
If you have questions about Vanguard/Wellington Fund, including how to establish
an account, call Vanguard, toll-free, at 1-800-523-1036.
If you have questions about an existing account, contact your Vanguard
account administrator.
TRANSACTIONS
Purchases, exchanges, or redemptions of the Fund's shares are processed as soon
as they have been received by Vanguard in good order. Good order means that your
request
14
<PAGE> 48
INVESTING WITH VANGUARD (continued)
includes complete information on your purchase, exchange, or redemption, and
that Vanguard has received the appropriate assets. The price of shares bought,
exchanged, or sold will be the Fund's next-determined net asset value after
Vanguard has processed your request, provided your request has been received
before 4 p.m. Eastern time.
Vanguard must consider the interests of all Fund shareholders and so
reserves the right to . . .
- - Delay or reject any purchase or exchange request that may disrupt the
Fund's operation or performance.
- - Revise or terminate the exchange privilege or limit the amount of an
exchange, at any time, without notice.
- - Take up to seven days to deliver your redemption proceeds.
- - Pay redemption proceeds -- in whole or in part -- through a distribution in
kind of readily marketable securities. Investing with Vanguard
(continued)
ACCESSING FUND INFORMATION BY COMPUTER
VANGUARD ON THE
WORLD WIDE WEB
http://www.vanguard.com
Use your personal computer to visit Vanguard's education-oriented website, which
provides timely news and information about Vanguard funds and services; an
on-line "university" that offers a variety of mutual fund classes; and
easy-to-use, interactive tools to help you create your own investment and
retirement strategies.
VANGUARD ONLINE(SM)
KEYWORD: Vanguard
Use your personal computer to learn more about Vanguard funds and services; map
out a long-term investment strategy; and ask questions, make suggestions, and
send messages to Vanguard. Vanguard Online is offered through America Online(R)
(AOL). To establish an AOL account, call 1-800-238-6336.
15
<PAGE> 49
PLAIN TALK ABOUT
KEEPING YOUR PROSPECTUS
Reading this prospectus will help you to decide whether Vanguard/Wellington Fund
is suitable for your investment goals. If you decide to invest, don't throw the
prospectus out; you will no doubt need it for future reference.
PROSPECTUS POSTSCRIPT
This prospectus is designed to provide you with pertinent information about
Vanguard/Wellington Fund, including its investment objective, risks, strategies,
and expenses, as well as services available to you as a shareholder.
It is important that you understand these facts so that you can decide
whether an investment in this Fund is right for you. The following questions
offer a quick review of some of the subjects covered by this prospectus.
IN READING THE PROSPECTUS, DID YOU LEARN . . .
- The Fund's objectives? (page 4)
- The Fund's investment strategies? (page 5)
- Who should invest in the Fund? (page 4)
- The risks associated with the Fund? (pages 4 - 9)
- Whether the Fund is federally insured?
(inside front cover)
- The Fund's expenses? (page 2)
- The background of the Fund's investment managers?
(page 12)
16
<PAGE> 50
GLOSSARY OF INVESTMENT TERMS
BALANCED FUND
A mutual fund that seeks to provide some combination of income, capital growth,
and conservation of capital by investing in stocks, bonds, and/or money market
instruments.
BOND
A debt security (IOU) issued by a corporation, government, or government agency
in exchange for the money you lend it. In most instances, the issuer agrees to
pay back the loan by a specific date and make regular interest payments until
that date.
CAPITAL GAINS DISTRIBUTION
Payment to mutual fund shareholders of gains realized during the year on
securities that the fund has sold at a profit, minus any realized losses.
CASH RESERVES
Cash deposits as well as short-term bank deposits, money market instruments,
U.S. Treasury bills, commercial paper, and banker's acceptances.
COMMON STOCK
A security representing ownership rights in a corporation. A stockholder is
entitled to share in the company's profits, some of which may be paid out as
dividends.
CREDIT QUALITY
A measure of a bond issuer's ability to repay interest and principal in a timely
manner.
DIVIDEND INCOME
Payment to shareholders of income from interest or dividends generated by a
fund's investments.
EXPENSE RATIO
The percentage of a fund's average net assets used to pay its expenses. The
expense ratio includes management fees, administrative fees, and any 12b-1
marketing fees.
FACE VALUE
The value of a bond at the time it was issued (that is, initially sold).
FIXED-INCOME SECURITIES
Investments, such as bonds, that have a fixed payment schedule. While the level
of income offered by these securities is predetermined, their prices may
fluctuate.
INVESTMENT GRADE
Bonds whose credit quality is considered to be among the highest by independent
bond-rating agencies.
MATURITY
The date when a bond issuer agrees to repay the bond's principal, or face value,
to the bond's buyer.
MUTUAL FUND
An investment company that pools the money of many people and invests it in a
variety of securities in an effort to achieve a specific objective over time.
NET ASSET VALUE (NAV)
The market value of a mutual fund's total assets, minus liabilities, divided by
the number of shares outstanding. The value of a single share is called its
share value or share price.
PORTFOLIO DIVERSIFICATION
Holding a variety of securities so that a portfolio's return is not hurt by the
poor performance of a single security or industry.
PRICE/EARNINGS (P/E) RATIO
The current share price of a stock, divided by its per-share earnings (profits)
from the past year. A stock selling for $20, with earnings of $2 per share, has
a price/earnings ratio of 10.
TOTAL RETURN
A percentage change, over a specified time period, in a mutual fund's net asset
value, with the ending net asset value adjusted to account for the reinvestment
of all distributions of dividends and capital gains.
VOLATILITY
The fluctuations in value of a mutual fund or other security. The greater a
fund's volatility, the wider the fluctuations between its high and low prices.
YIELD
Current income (interest or dividends) earned by an investment, expressed as a
percentage of the investment's price.
<PAGE> 51
[Logo]
Institutional Division
Post Office Box 2900
Valley Forge, PA 19482
FOR PARTICIPANTS IN
EMPLOYER-SPONSORED PLANS
PARTICIPANT SERVICES
DEPARTMENT
1-800-523-1188
TEXT TELEPHONE:
1-800-523-8004
For information on the
Vanguard funds in your plan,
Monday through Friday
8:30 a.m. to 7 p.m.,
Eastern time
FOR OTHER INSTITUTIONAL
INVESTORS
1-800-523-1036
For information on Vanguard
funds and services
ELECTRONIC ACCESS TO THE
VANGUARD MUTUAL FUND
EDUCATION AND INFORMATION
CENTER
World Wide Web
http://www.vanguard.com
E-mail
[email protected]
(C) 1997 Vanguard Marketing
Corporation, Distributor
1021N
<PAGE> 52
PART B
VANGUARD/WELLINGTON FUND, INC.
STATEMENT OF ADDITIONAL INFORMATION
MARCH 21, 1997
This Statement is not a prospectus but should be read in conjunction with
the Fund's current Prospectus (dated March 21, 1997). To obtain the Prospectus
please call the Investor Information Department:
1-800-662-7447
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Objectives and Policies.................................................... 1
Yield & Total Return.................................................................. 5
Purchase of Shares.................................................................... 6
Redemption of Shares.................................................................. 6
Investment Limitations................................................................ 7
Management of the Fund................................................................ 8
Investment Advisory Services.......................................................... 10
Portfolio Transactions................................................................ 12
Financial Statements.................................................................. 13
Performance Measures.................................................................. 13
</TABLE>
INVESTMENT OBJECTIVES AND POLICIES
The following policies supplement the Fund's investment objectives and
policies set forth in the Prospectus.
REPURCHASE AGREEMENTS The Fund may invest in repurchase agreements with
commercial banks, brokers, or dealers either for defensive purposes due to
market conditions or to generate income from its excess cash balances. A
repurchase agreement is an agreement under which the Fund acquires a money
market instrument (generally a security issued by the U.S. Government or an
agency thereof, a banker's acceptance or a certificate of deposit) from a
commercial bank, broker or dealer, subject to resale to the seller at an agreed
upon price and date (normally, the next business day). A repurchase agreement
may be considered a loan collateralized by securities. The resale price reflects
an agreed upon interest rate effective for the period the instrument is held by
the Fund and is unrelated to the interest rate on the underlying instrument. In
these transactions, the securities acquired by the Fund (including accrued
interest earned thereon) must have a total value in excess of the value of the
repurchase agreement and are held by a Custodian Bank until repurchased. In
addition, the Fund's Board of Directors will monitor the Fund's repurchase
agreement transactions generally and will establish guidelines and standards for
review by the investment adviser of the creditworthiness of any bank, broker or
dealer party to a repurchase agreement with the Fund. No more than an aggregate
of 15% of the Fund's assets, at the time of investment, will be invested in
repurchase agreements having maturities longer than seven days and securities
subject to legal or contractual restrictions on resale for which there are no
readily available market quotations. See "Illiquid Securities" on page 2.
The use of repurchase agreements involves certain risks. For example, if
the other party to the agreement defaults on its obligation to repurchase the
underlying security at a time when the value of the security has declined, the
Fund may incur a loss upon disposition of the security. If the other party to
the agreement becomes insolvent and subject to liquidations or reorganization
under the Bankruptcy Code or other laws, a court may determine that the
underlying security is collateral for a loan by the Fund not within the control
of the Fund and therefore the realization by the Fund on such collateral may be
automatically stayed. Finally, it is possible that the Fund may not be able to
substantiate its interest in the underlying security and may be deemed an
unsecured creditor of the other party to the agreement. While the Fund's
management acknowledges these risks, it is expected that they can be controlled
through careful monitoring procedures.
1
<PAGE> 53
LENDING OF SECURITIES The Fund may lend its portfolio securities to
qualified institutional investors who need to borrow securities in order to
complete certain transactions, such as covering short sales, avoiding failures
to deliver securities or completing arbitrage operations. By lending its
portfolio securities, the Fund attempts to increase its income through the
receipt of interest on the loan. Any gain or loss in the market price of the
securities loaned that might occur during the term of the loan would be for the
account of the Fund. The Fund may lend its portfolio securities to qualified
brokers, dealers, banks or other financial institutions, so long as the terms,
the structure and the aggregate amount of such loans are consistent with the
Investment Company Act of 1940, or the Rules and Regulations or interpretations
of the Securities and Exchange Commission (the "Commission") thereunder, which
currently require that (a) the borrower pledge and maintain with the Fund
collateral consisting of cash, a letter of credit issued by a domestic U.S.
bank, or securities issued or guaranteed by the United States Government having
a value at all times not less than 100% of the value of the securities loaned,
(b) the borrower add to such collateral whenever the price of the securities
loaned rises (i.e., the borrower "marks to the market" on a daily basis), (c)
the loan be made subject to termination by the Fund at any time, and (d) the
Fund receive reasonable interest on the loan (which may include the Fund's
investing any cash collateral in interest bearing short-term investments), any
distribution on the loaned securities and any increase in their market value.
Loan arrangements made by the Fund will comply with all other applicable
regulatory requirements, including the rules of the New York Stock Exchange,
whose rules presently require the borrower, after notice, to redeliver the
securities within the normal settlement time of three business days. All
relevant facts and circumstances, including the creditworthiness of the broker,
dealer or institution, will be considered in making decisions with respect to
the lending of securities, subject to review by the Fund's Board of Directors.
At the present time, the Staff of the Commission does not object if an
investment company pays reasonable negotiated fees in connection with loaned
securities, so long as such fees are set forth in a written contract and
approved by the investment company's directors. In addition, voting rights pass
with the loaned securities but if a material event will occur affecting an
investment on loan, the loan must be called and the securities voted.
ILLIQUID SECURITIES Illiquid securities are securities that may not be
sold or disposed of in the ordinary course of business within seven business
days at approximately the value at which they are being carried on a Fund's
books. An illiquid security includes repurchase agreements which have a maturity
of longer than seven days, securities which are illiquid by virtue of the
absence of a readily available market, and demand instruments with a demand
notice exceeding seven days. Illiquid securities may include securities that are
not registered under the Securities Act of 1933 (the "1933 Act"); however,
unregistered securities that can be sold to "qualified institutional buyers" in
accordance with Rule 144A under the 1933 Act will not be considered illiquid so
long as it is determined by the Fund's advisor that an adequate trading market
exists for the security. From time to time, the Fund's Board of Directors or the
Fund's Adviser may determine that certain restricted securities known as Rule
144A securities are liquid and not subject to the 15% limitation described
above.
MORTGAGE-BACKED SECURITIES The Fund may invest in mortgage-backed
securities. Mortgage-backed securities are instruments that entitle the holder
to a share of all interest and principal payments from mortgages underlying the
security. The mortgages backing these securities include conventional
thirty-year fixed rate mortgages, graduated payment mortgages and adjustable
rate mortgages. During periods of declining interest rates, prepayment of
mortgages underlying mortgage-backed securities may be expected to accelerate.
Prepayment of mortgages which underlie securities purchased at a premium often
results in capital losses, while prepayment of mortgages purchased at a discount
often results in capital gains. Because of these unpredictable prepayment
characteristics, it is often not possible to predict accurately the average life
or realized yield of a particular issue.
COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS") CMOs are debt obligations or
multi-class pass-through certificates issues by agencies or instrumentalities of
the U.S. Government, or by private originators or investors in mortgage loans.
In a CMO, series of bonds or certificates are usually issued in multiple
classes, with principal and interest allocated to each class in a variety of
ways. Each class of a CMO or "tranche" is issued with a specific fixed or
floating coupon rate and has a stated maturity or final distribution date. The
Fund will invest modestly in those CMO classes which feature a high degree of
cash flow predictability and moderate vulnerability to prepayment risk, and that
carry high-quality investment grade credit ratings.
2
<PAGE> 54
FOREIGN INVESTMENTS As indicated in the Prospectus, the Fund may invest up
to 15% of its equity assets in foreign common stocks and securities convertible
into common stocks. The Fund may also invest in U.S. dollar denominated debt
securities issued by foreign governments, their agencies and instrumentalities,
supranational entities and companies located outside the U.S. without limit.
Investors should recognize that investing in foreign companies involves certain
special considerations which are not typically associated with investing in U.S.
companies.
Country Risk As foreign companies are not generally subject to uniform
accounting, auditing and financial reporting standards and practices comparable
to those applicable to domestic companies, there may be less publicly available
information about certain foreign companies than about domestic companies.
Securities of some foreign companies are generally less liquid and more volatile
than securities of comparable domestic companies. There is generally less
government supervision and regulation of stock exchanges, brokers and listed
companies than in the U.S. In addition, with respect to certain foreign
countries, there is the possibility of expropriation or confiscatory taxation,
political or social instability, or diplomatic developments which could affect
U.S. investments in those countries.
Although the Fund will endeavor to achieve most favorable execution costs
in its portfolio transactions in foreign securities, fixed commissions on many
foreign stock exchanges are generally higher than negotiated commissions on U.S.
exchanges. In addition, it is expected that the expenses for custodial
arrangements of the Fund's foreign securities will be somewhat greater than the
expenses for the custodial arrangement for handling U.S. securities of equal
value.
Certain foreign governments levy withholding taxes against dividend and
interest income. Although in some countries a portion of these taxes is
recoverable, the non-recovered portion of foreign withholding taxes will reduce
the income the Fund receives from its foreign investments.
Currency Risk Since the stocks of foreign companies are frequently
denominated in foreign currencies, and since the Fund may temporarily hold
uninvested reserves in bank deposits in foreign currencies, the Fund will be
affected favorably or unfavorably by changes in currency rates and in exchange
control regulations, and may incur costs in connection with conversions between
various currencies. The investment policies of the Fund permit it to enter into
forward foreign currency exchange contracts in order to hedge holdings and
commitments against changes in the level of future currency rates. Such
contracts involve an obligation to purchase or sell a specific currency at a
future date at a price set at the time of the contract.
FUTURES CONTRACTS The Fund may enter into futures contracts, options, and
options on futures contracts for the purpose of simulating full investment and
reducing transactions costs. Futures contracts provide for the future sale by
one party and purchase by another party of a specified amount of a specific
security at a specified future time and at a specified price. Futures contracts
which are standardized as to maturity date and underlying financial instrument
are traded on national futures exchanges. Futures exchanges and trading are
regulated under the Commodity Exchange Act by the Commodity Futures Trading
Commission ("CFTC"), a U.S. Government agency. Assets committed to futures
contracts will be segregated at the Fund's custodian bank to the extent required
by law.
Although futures contracts by their terms call for actual delivery or
acceptance of the underlying securities, in most cases the contracts are closed
out before the settlement date without the making or taking of delivery. Closing
out an open futures position is done by taking an opposite position ("buying" a
contract which has previously been "sold," or "selling" a contract previously
purchased) in an identical contract to terminate the position. Brokerage
commissions are incurred when a futures contract is bought or sold.
Futures traders are required to make a good faith margin deposit in cash or
government securities with a broker or custodian to initiate and maintain open
positions in futures contracts. A margin deposit is intended to assure
completion of the contract (delivery or acceptance of the underlying security)
if it is not terminated prior to the specified delivery date. Minimal initial
margin requirements are established by the futures exchange and may be changed.
Brokers may establish deposit requirements which are higher than the exchange
minimums. Futures contracts are customarily purchased and sold, and margin
requirements may range upward from less than 5% of the value of the contract
being traded.
3
<PAGE> 55
After a futures contract position is opened, the value of the contract is
marked to market daily. If the futures contract price changes to the extent that
the margin on deposit does not satisfy margin requirements, payment of
additional "variation" margin will be required. Conversely, change in the
contract value may reduce the required margin, resulting in a repayment of
excess margin to the contract holder. Variation margin payments are made to and
from the futures broker as long as the contract remains open. The Fund expects
to earn interest income on its margin deposits.
Traders in futures contracts may be broadly classified as either "hedgers"
or "speculators." Hedgers use the futures market primarily to offset unfavorable
changes in the value of securities otherwise held for investment purposes or
expected to be acquired by them. Speculators are less inclined to own the
securities underlying the futures contracts which they trade, and use futures
contracts with the expectation of realizing profits from fluctuations in the
prices of underlying securities. The Fund intends to use futures contracts only
for bona fide hedging purposes.
Regulations of CFTC applicable to the Fund require that all of its futures
transactions constitute bona fide hedging transactions. The Fund will only sell
futures contracts to protect securities it owns against price declines or
purchase contracts to protect against an increase in the price of securities it
intends to purchase. As evidence of this hedging interest, the Fund expects that
approximately 75% of its futures contract purchases will be "completed," that
is, equivalent amounts of related securities will have been purchased or are
being purchased by the Fund upon sale of open futures contracts.
Although techniques other than the sale and purchase of futures contracts
could be used to control the Fund's exposure to market fluctuations, the use of
futures contracts may be a more effective means of hedging this exposure. While
the Fund will incur commission expenses in both opening and closing out futures
positions, these costs are lower than transaction costs incurred in the purchase
and sale of underlying securities.
RESTRICTIONS ON THE USE OF FUTURES CONTRACTS The Fund will not enter into
futures contract transactions to the extent that, immediately thereafter, the
sum of its initial margin deposits on open contracts exceeds 5% of the market
value of the Fund's total assets. In addition, the Fund will not enter into
futures contracts to the extent that its outstanding obligations to purchase
securities under these contracts would exceed 20% of the Fund's total assets.
RISK FACTORS IN FUTURES TRANSACTIONS Positions in futures contracts may be
closed out only on an exchange which provides a secondary market for such
futures. However, there can be no assurance that a liquid secondary market will
exist for any particular futures contract at any specific time. Thus, it may not
be possible to close a futures position. In the event of adverse price
movements, the Fund would continue to be required to make daily cash payments to
maintain its required margin. In such situations, if the Fund has insufficient
cash, it may have to sell portfolio securities to meet daily margin requirements
at a time when it may be disadvantageous to do so. In addition, the Fund may be
required to make delivery of the instruments underlying futures contracts it
holds. The inability to close options and futures positions also could have an
adverse impact on the ability to hedge effectively.
The Fund will minimize the risk that it will be unable to close out a
futures contract by only entering into futures which are traded on national
futures exchanges and for which there appears to be a liquid secondary market.
The risk of loss in trading futures contracts in some strategies can be
substantial, due both to the low margin deposits required, and the extremely
high degree of leverage involved in futures pricing. As a result, a relatively
small price movement in a futures contract may result in immediate and
substantial loss (as well as gain) to the investor. For example, if at the time
of purchase, 10% of the value of the futures contract is deposited as margin, a
subsequent 10% decrease in the value of the futures contract would result in a
total loss of the margin deposit, before any deduction for the transaction
costs, if the account were then closed out. A 15% decrease would result in a
loss equal to 150% of the original margin deposit if the contract were closed
out. Thus, a purchase or sale of a futures contract may result in losses in
excess of the amount invested in the contract. However, because the futures
strategies of the Fund are engaged in only for hedging purposes, the Adviser
does not believe that the Fund is subject to the risks of loss frequently
associated with futures transactions. The Fund would presumably
4
<PAGE> 56
have sustained comparable losses if, instead of the futures contract, it had
invested in the underlying financial instrument and sold it after the decline.
Utilization of futures transactions by the Fund does involve the risk of
imperfect or no correlation where the securities underlying futures contracts
have different maturities than the portfolio securities being hedged. It is also
possible that the Fund could both lose money on futures contacts and also
experience a decline in value of its portfolio securities. There is also the
risk of loss by the Fund of margin deposits in the event of bankruptcy of a
broker with whom the Fund has an open position in a futures contract or related
option.
Most futures exchanges limit the amount of fluctuation permitted in futures
contract prices during a single trading day. The daily limit establishes the
maximum amount that the price of a futures contract may vary either up or down
from the previous day's settlement price at the end of a trading session. Once
the daily limit has been reached in a particular type of contract, no trades may
be made on that day at a price beyond that limit. The daily limit governs only
price movement during a particular trading day and therefore does not limit
potential losses, because the limit may prevent the liquidation of unfavorable
positions. Futures contract prices have occasionally moved to the daily limit
for several consecutive trading days with little or no trading, thereby
preventing prompt liquidation of future positions and subjecting some futures
traders to substantial losses.
FEDERAL TAX TREATMENT OF FUTURES CONTRACTS The Fund is required for
federal income tax purposes to recognize as income for each taxable year its net
unrealized gains and losses on certain futures contracts as of the end of the
year as well as those actually realized during the year. In most cases, any gain
or loss recognized with respect to a futures contract is considered to be 60%
long-term capital gain or loss and 40% short-term capital gain or loss, without
regard to the holding period of the contract. Furthermore, sales of futures
contracts which are intended to hedge against a change in the value of
securities held by the Fund may affect the holding period of such securities
and, consequently, the nature of the gain or loss on such securities upon
disposition. The Fund may be required to defer the recognition of losses on
futures contracts to the extent of any unrecognized gains on related positions
held by the Fund.
In order for the Fund to continue to qualify for federal income tax
treatment as a regulated investment company, at least 90% of its gross income
for a taxable year must be derived from qualifying income; i.e., dividends,
interest, income derived from loans of securities, gains from the sale of
securities or of foreign currencies or other income derived with respect to the
Fund's business of investing in securities. In addition, gains realized on the
sale or other disposition of securities held for less than three months must be
limited to less than 30% of the Fund's annual gross income. It is anticipated
that any net gain realized from the closing out of futures contracts will be
considered gain from the sale of securities and therefore be qualifying income
for purposes of the 90% requirement. In order to avoid realizing excessive gains
on securities held less than three months, the Fund may be required to defer the
closing out of futures contracts beyond the time when it would otherwise be
advantageous to do so. It is anticipated that unrealized gains on futures
contracts, which have been open for less than three months as of the end of the
Fund's fiscal year and which are recognized for tax purposes, will not be
considered gains on sales of securities held less than three months for the
purpose of the 30% test.
The Fund will distribute to shareholders annually any net capital gains
which have been recognized for Federal income tax purposes (including unrealized
gains at the end of the Fund's fiscal year) on futures transactions. Such
distributions will be combined with distributions of capital gains realized on
the Fund's other investments and shareholders will be advised on the nature of
the transactions.
YIELD AND TOTAL RETURN
The yield of the Fund for the 30-day period ended November 30, 1996 was
+3.85%. Yields are calculated daily and premiums and discounts on asset-backed
accounts are not amortized.
The average annual total return of the Fund for the one-, five- and
ten-year periods ending November 30, 1996 was +21.26%, +15.83% and +12.67%,
respectively. Total return is computed by finding the average compounded rates
of return over the one-, five- and ten-year periods set forth above that would
equate an initial amount invested at the beginning of the periods to the ending
redeemable value of the investment.
5
<PAGE> 57
PURCHASE OF SHARES
The purchase price of shares of the Fund is the net asset value next
determined after the order is received. The net asset value is calculated as of
the close of the New York Stock Exchange on each day the Exchange is open for
business. An order received prior to the close of the Exchange will be executed
at the price computed on the date of receipt; and an order received after the
close of the Exchange will be executed at the price computed on the next day the
Exchange is open.
The Fund reserves the right in its sole discretion (i) to suspend the
offering of its shares, (ii) to reject purchase orders when in the judgment of
management such rejection is in the best interest of the Fund, and (iii) to
reduce or waive the minimum investment for or any other restrictions on initial
and subsequent investments for certain fiduciary accounts such as employee
benefit plans or under circumstances where certain economies can be achieved in
sales of the Fund's shares.
REDEMPTION OF SHARES
The Fund may suspend redemption privileges or postpone the date of payment
(i) during any period that the New York Stock Exchange is closed, or trading on
the Exchange is restricted as determined by the Securities and Exchange
Commission (the "Commission"), (ii) during any period when an emergency exists
as defined by the rules of the Commission as a result of which it is not
reasonably practicable for the Fund to dispose of securities owned by it, or
fairly to determine the value of its assets, and (iii) for such other periods as
the Commission may permit.
The Fund has made an election with the Commission to pay in cash all
redemptions requested by any shareholder of record limited in amount during any
90-day period to the lesser of $250,000 or 1% of the net assets of the Fund at
the beginning of such period. Such commitment is irrevocable without the prior
approval of the Commission. Redemptions in excess of the above limits may be
paid in whole or in part, in investment securities or in cash, as the Directors
may deem advisable; however, payment will be made wholly in cash unless the
Directors believe that economic or market conditions exist which would make such
a practice detrimental to the best interest of the Fund. If redemptions are paid
in investment securities, such securities will be valued as set forth in the
Prospectus under "The Fund's Share Price" and a redeeming shareholder would
normally incur brokerage expenses if he converted these securities to cash.
No charge is made by the Fund for redemptions. Any redemption may be more
or less than the shareholder's cost depending on the market value of the Fund's
portfolio securities.
SIGNATURE GUARANTEES To protect your account, the Fund and Vanguard from
fraud, signature guarantees are required for certain redemptions. Signatures
guarantees enable the Fund to verify the identity of the person who has
authorized a redemption from your account. SIGNATURE GUARANTEES ARE REQUIRED IN
CONNECTION WITH: (1) ALL REDEMPTIONS, REGARDLESS OF THE AMOUNT INVOLVED, WHEN
THE PROCEEDS ARE TO BE PAID TO SOMEONE OTHER THAN THE REGISTERED OWNER(S) AND/OR
TO AN ADDRESS OTHER THAN THE ADDRESS OF RECORD; AND (2) SHARE TRANSFER REQUESTS.
These requirements are not applicable to redemptions in Vanguard's prototype
plans except in connection with: (1) distributions made when the proceeds are to
be paid to someone other than the plan participant; (2) certain authorizations
to effect exchanges by telephone; and (3) when proceeds are to be wired. These
requirements may be waived by the Fund in certain instances.
Signature guarantees may be provided by banks, brokers, or any other
guarantor institution that Vanguard deems acceptable. NOTARIES PUBLIC ARE NOT
ACCEPTABLE GUARANTORS.
The signature guarantees must appear either: (1) on the written request for
redemption; (2) on a separate instrument for assignment ("stock power") which
should specify the total number of shares to be redeemed; or (3) on all stock
certificates tendered for redemption and, if shares held by the Fund are also
being redeemed, on the letter or stock power.
6
<PAGE> 58
INVESTMENT LIMITATIONS
The Fund is subject to the following restrictions which may not be changed
without the approval of at least a majority of the outstanding voting securities
of the Fund. The Fund will not: (1) invest in commodities or real estate
although it may purchase and sell securities of companies which deal in real
estate or interests therein, and it may invest in stock and bond futures
contracts and options to the extent that not more than 5% of its assets are
required as deposit to secure obligations under futures contracts and not more
than 20% of the Fund's assets are invested in futures and options at any time;
(2) make loans except (i) by purchasing a portion of an issue of bonds,
debentures or similar obligations (including repurchase agreements) which are
publicly distributed or customarily purchased by institutional investors, and
(ii) as provided under "Lending of Securities" (See page 2); (3) with respect to
75% of the Fund's total assets, purchase the securities of any issuer (except
obligations of the United States Government and its instrumentalities) if as a
result the Fund would hold more than 10% of the outstanding voting securities of
the issuer, or more than 5% of the value of the Fund's total assets would be
invested in the securities of such issuer; (4) borrow money except up to a limit
of 10% of total assets for extraordinary or emergency purposes (the Fund has
never borrowed money and intends to limit any future borrowing to 5% of the
lower of the market value or cost of its assets); (5) engage in the business of
underwriting securities issued by other persons except to the extent that the
Fund may technically be deemed to be an underwriter under the Securities Act of
1933, as amended, in disposing of portfolio securities. Additionally, the Fund
will not purchase or otherwise acquire any security if, as a result, more than
15% of its net assets would be invested in securities that are illiquid (this
limitation includes the Fund's investment in The Vanguard Group, Inc.); (6)
purchase securities on margin (except as provided for above in (1)), or sell
securities short; (7) invest in securities of other investment companies, except
as may be acquired as a part of a merger, consolidation or acquisition of assets
or otherwise to the extent permitted by Section 12 of the Investment Company Act
of 1940. The Fund will invest only in investment companies which have investment
objectives and investment policies consistent with those of the Fund; (8) invest
to control other companies nor concentrate its investments in a particular
industry or group of industries.
The above-mentioned investment limitations are considered at the time
investment securities are purchased. Notwithstanding these limitations, the Fund
may own the securities of, or make loans to, or contribute to the costs or other
financial requirements of any company which will be wholly-owned by the Fund and
one or more other investment companies and is primarily engaged in the business
of providing, at cost, management, administrative or related services to the
Fund and other investment companies (See "The Vanguard Group", page 8). As a
non-fundamental policy, the Fund will not purchase or retain securities of an
issuer if (i) one or more officers or directors of the Fund or its investment
adviser individually own or would own, directly or beneficially, more than 1/2
of 1% of the securities of such issuer and (ii) such persons own or would own in
the aggregate 5% of such securities.
7
<PAGE> 59
MANAGEMENT OF THE FUND
DIRECTORS AND OFFICERS
The Officers of the Fund manage its day-to-day operations and are responsible to
the Fund's Board of Directors. The Directors set broad policies for the Fund and
choose its Officers. The following is a list of Directors and Officers of the
Fund and a statement of their present positions and principal occupations during
the past five years. The mailing address of the Fund's Directors and Officers is
Post Office Box 876, Valley Forge, PA 19482.
JOHN C. BOGLE, Chairman and Director*
Chairman and Director of The Vanguard Group, Inc., and of each of the
investment companies in The Vanguard Group; Director of the Mead Corporation,
General Accident Insurance and Chris-Craft Industries, Inc.
JOHN J. BRENNAN, President, Chief Executive Officer & Director*
President, Chief Executive Officer and Director of The Vanguard Group, Inc.
and of each of the other investment companies in The Vanguard Group.
ROBERT E. CAWTHORN, Director
Chairman Emeritus of Rhone-Poulenc Rorer, Inc.; Director of Sun Company, Inc.
and Westinghouse Electric Corporation.
BARBARA BARNES HAUPTFUHRER, Director
Director of The Great Atlantic and Pacific Tea Company, ALCO Standard Corp.,
Raytheon Company, Knight-Ridder, Inc., and Massachusetts Mutual Life Insurance
Co., and Trustee Emerita of Wellesley College.
BRUCE K. MACLAURY, Director
President Emeritus of The Brookings Institution; Director of American Express
Bank, Ltd., The St. Paul Companies, Inc., and National Steel Corporation.
BURTON G. MALKIEL, Director
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, Director
Chairman, President, and Chief Executive Officer of NACCO Industries, Inc.;
Director of the BFGoodrich Company, and The Standard Products Company.
JOHN C. SAWHILL, Director
President and Chief Executive Officer, The Nature Conservancy; formerly,
Director and Senior Partner, McKinsey & Co., President, New York University;
Director of Pacific Gas and Electric Company and NACCO Industries.
JAMES O. WELCH, JR., Director
Retired Chairman of Nabisco Brands Inc., retired Vice Chairman and Director of
RJR Nabisco; Director of TECO Energy, Inc. and Kmart Corporation.
J. LAWRENCE WILSON, Director
Chairman and Chief Executive Officer of Rohm & Haas Company; Director of
Cummins Engine Company and Trustee of Vanderbilt University.
RAYMOND J. KLAPINSKY, Secretary*
Senior Vice President and Secretary of The Vanguard Group, Inc.; Secretary of
each of the investment companies in The Vanguard Group.
RICHARD F. HYLAND, Treasurer*
Treasurer of The Vanguard Group, Inc., and of each of the investment companies
in The Vanguard Group.
KAREN E. WEST, Controller*
Principal of The Vanguard Group, Inc.; Controller of each of the investment
companies in The Vanguard Group.
- ------------
*Officers of the Fund are "interested persons" as defined in the Investment
Company Act of 1940.
THE VANGUARD GROUP
The Fund is a member of The Vanguard Group of Investment Companies. Through
their jointly-owned subsidiary, The Vanguard Group, Inc. ("Vanguard"), the Fund
and the other Funds in the Group obtain at cost virtually all of their corporate
management, administrative and distribution services. Vanguard also provides
investment advisory services on an at-cost basis to several of the Vanguard
Funds.
Vanguard employs a supporting staff of management and administrative
personnel needed to provide the requisite services to the Funds and also
furnishes the Funds with necessary office space, furnishings and equipment. Each
Fund pays its share of Vanguard's total expenses which are allocated among the
Funds under methods approved by the Board of Directors (Trustees) of each Fund.
In addition, each Fund bears its own direct expenses such as legal, auditing and
custodian fees.
8
<PAGE> 60
The Fund's Officers are also Officers and employees of Vanguard. No Officer
or employee owns, or is permitted to own, any securities of any external adviser
for the Funds.
The Vanguard Group adheres to a Code of Ethics established pursuant to Rule
17j-1 under the Investment Company Act of 1940. The Code is designed to prevent
unlawful practices in connection with the purchase or sale of securities by
persons associated with Vanguard. Under Vanguard's Code of Ethics certain
officers and employees of Vanguard who are considered access persons are
permitted to engage in personal securities transactions. However, such
transactions are subject to procedures and guidelines substantially similar to
those recommended by the mutual fund industry and approved by the U.S.
Securities and Exchange Commission.
The Vanguard Group was established and operates under a Funds' Service
Agreement which was approved by the shareholders of each of the Funds. The
amounts which each of the Funds has invested are adjusted from time to time in
order to maintain the proportionate relationship between each Fund's relative
net assets and its contribution to Vanguard's capital. At November 30, 1996, the
Fund had contributed capital of $1,445,000 to Vanguard, representing 7.2% of
Vanguard's capitalization. The Funds' Service Agreement provides as follows: (a)
each Vanguard Fund may invest up to .40% of its current assets in Vanguard, and
(b) there is no other limitation on the amount that each Vanguard Fund may
contribute to Vanguard's capitalization.
MANAGEMENT Corporate management and administrative services include: (1)
executive staff; (2) accounting and financial; (3) legal and regulatory; (4)
shareholder account maintenance; (5) monitoring and control of custodian
relationships; (6) shareholder reporting, and (7) review and evaluation of
advisory and other services provided to the Funds by third parties. During the
fiscal year ended November 30, 1996, the Fund's share of Vanguard's actual net
costs of operation relating to management and administrative services (including
transfer agency) totaled approximately $32,343,000.
DISTRIBUTION Vanguard provides all distribution and marketing activities
for the Funds in the Group. Vanguard Marketing Corporation, a wholly-owned
subsidiary of The Vanguard Group, Inc., acts as Sales Agent for shares of the
Funds, in connection with any sales made directly to investors in the states of
Florida, Missouri, New York, Ohio, Texas and such other states as it may be
required.
The principal distribution expenses are for advertising, promotional
materials and marketing personnel. Distribution services may also include
organizing and offering to the public, from time to time, one or more new
investment companies which will become members of the Group. The Directors and
Officers of Vanguard determine the amount to be spent annually on distribution
activities, the manner and amount to be spent on each Fund, and whether to
organize new investment companies.
One half of the distribution expenses of a marketing and promotional nature
is allocated among the Funds based upon their relative net assets. The remaining
one half of these expenses is allocated among the Funds based upon each Fund's
sales for the preceding 24 months relative to the total sales of the Funds as a
Group, provided, however, that no Fund's aggregate quarterly rate of
contribution for distribution expenses of a marketing and promotional nature
shall exceed 125% of the average distribution expense rate for the Group, and
that no Fund shall incur annual distribution expenses in excess of .20 of 1% of
its average month end net assets. During the fiscal year ended November 30,
1996, the Fund paid approximately $2,818,000, of the Group's distribution and
marketing expenses.
INVESTMENT ADVISORY SERVICES Vanguard provides Vanguard Money Market
Reserves, Vanguard Admiral Funds, Vanguard Municipal Bond Fund, several
Portfolios of Vanguard Fixed Income Securities Fund, Vanguard International
Equity Index Fund, Vanguard Balanced Index Fund, Vanguard Institutional Index
Fund, Vanguard Bond Index Fund, Vanguard Index Trust, several Portfolios of
Vanguard Variable Insurance Fund, the Vanguard California Tax-Free Fund,
Vanguard Florida Insured Tax-Free Fund, Vanguard New York Insured Tax-Free Fund,
Vanguard New Jersey Tax-Free Fund, Vanguard Ohio Tax-Free Fund, Vanguard
Pennsylvania Tax-Free Fund, Vanguard Tax-Managed Fund, the Aggressive Growth
Portfolio of Vanguard Horizon Fund, the Total International Portfolio of
Vanguard STAR Fund, the REIT Index Portfolio of Vanguard Specialized Portfolio,
a portion of Vanguard/Windsor II, a portion of Vanguard/Morgan Growth Fund as
well as several indexed separate accounts with investment advisory services.
These services are provided on an at-cost basis from a money management
9
<PAGE> 61
staff employed directly by Vanguard. The compensation and other expenses of this
staff are paid by the Funds utilizing these services.
REMUNERATION OF DIRECTORS AND OFFICERS
The Fund pays each Director, who is not also an Officer an annual fee plus
travel and other expenses incurred in attending Board meetings. The Fund's
Officers and employees are paid by Vanguard which, in turn, is reimbursed by the
Fund, and each other Fund in the Group, for its proportionate share of Officers'
and employees' salaries and retirement benefits. For the fiscal year ended
November 30, 1996, the Fund's proportionate share of remuneration for all
Officers as a group was approximately $-- and its proportionate share of the
amounts contributed to the retirement plans of all Officers as a group was
approximately $10,800.
The following table provides detailed information with respect to the
amounts paid or accrued for the Directors and Officers of the Fund for whom the
Fund's proportionate share of remuneration exceeded $60,000 for the fiscal year
ended November 30, 1996.
VANGUARD/WELLINGTON FUND
COMPENSATION TABLE
<TABLE>
<CAPTION>
AGGREGATE PENSION OR RETIREMENT ESTIMATED TOTAL COMPENSATION
COMPENSATION BENEFITS ACCRUED AS ANNUAL BENEFITS FROM ALL VANGUARD FUNDS
NAMES OF DIRECTORS FROM FUND PART OF FUND EXPENSES UPON RETIREMENT PAID TO DIRECTORS(2)
- --------------------------- ------------ --------------------- --------------- -----------------------
<S> <C> <C> <C> <C>
John C. Bogle(1) $ -- $ 2,160 -- --
John J. Brennan(1) $ -- $ 2,160 -- --
Barbara Barnes Hauptfuhrer $4,878 $ 757 $15,000 $65,000
Robert E. Cawthorn $4,878 $ 631 $13,000 $65,000
Bruce K. MacLaury $5,287 $ 741 $12,000 $60,000
Burton G. Malkiel $4,878 $ 505 $15,000 $65,000
Alfred M. Rankin, Jr. $4,878 $ 399 $15,000 $65,000
John C. Sawhill $4,878 $ 473 $15,000 $65,000
James O. Welch, Jr. $4,878 $ 583 $15,000 $65,000
J. Lawrence Wilson $4,878 $ 421 $15,000 $65,000
</TABLE>
(1)As "Interested Directors," Messrs. Bogle and Brennan receive no compensation
for their service as Directors.
(2)The amounts reported in this column reflect the total compensation paid to
each Director for their service as Director or Trustee of 34 Vanguard Funds
(33 in the case of Mr. Malkiel; 27 in the case of Mr. MacLaury).
INVESTMENT ADVISORY SERVICES
The Fund employs Wellington Management Company, LLP (WMC) under an
investment advisory agreement dated March 1, 1996 to manage the investment and
reinvestment of the assets of the Fund and to continuously review, supervise and
administer the Fund's investment program. WMC discharges its responsibilities
subject to the control of the Officers and Directors of the Fund.
The Fund pays WMC a Basic Fee at the end of each fiscal quarter, calculated
by applying a quarterly rate, based on the following annual percentage rates, to
the Fund's average month-end net assets for the quarter:
<TABLE>
<CAPTION>
NET ASSETS RATE
------------------------------------------------ ----
<S> <C>
First $1 billion................................ .100%
Next $2 billion................................. .050%
Next $7 billion................................. .040%
Over $10 billion................................ .030%
</TABLE>
10
<PAGE> 62
During the fiscal years ended November 30, 1994, 1995 and 1996, the Fund
paid the following advisory fees:
<TABLE>
<CAPTION>
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
Basic Fee................................................ $4,570,000 $5,261,000 $6,042,000
Increase (Decrease) for Performance Adjustment........... -- -- 79,000
---------- ---------- ----------
Total.................................................. $4,570,000 $5,261,000 $6,121,000
========= ========= =========
</TABLE>
The basic advisory fee may be increased or decreased by applying an
adjustment formula based on the investment performance of the Fund relative to
the investment record of the "Composite Index" 65% of which shall be comprised
of the Standard & Poor's Composite Stock Price Index and 35% of which shall be
comprised of the Lehman Long-Term Corporate AA or Better Bond Index.
<TABLE>
<CAPTION>
CUMULATIVE 36-MONTH PERFORMANCE PERFORMANCE FEE
VERSUS THE COMPOSITE INDEX ADJUSTMENT
-------------------------------------------------------------- -------------------
<S> <C>
Less than -6% points.......................................... -0.30 X Basic Fee*
Between -3% points and -6% points............................. -0.15 X Basic Fee
Between -3% points and 3% points.............................. 0 X Basic Fee
Between 3% points and 6% points............................... 0.15 X Basic Fee
More than 6% points........................................... 0.30 X Basic Fee
</TABLE>
* For purposes of this calculation, the Basic Fee is calculated by
applying the quarterly rate based on the Annual Basic Fee Rate using
average assets over the same 36-month period over which the
performance is measured.
The new incentive penalty fee will not be fully operable until the quarter
ending February 28, 1999. Until that date, a "blended" fee rate consisting of
varying percentages of (i) the performance adjustment based on the schedule set
forth above (the "new rate"), and (ii) the performance adjustment based on the
schedule set forth in the previous investment advisory agreement((1)) (the
"previous rate") as follows:
1. QUARTER ENDING MAY 31, 1997. 41.6% of the incentive/penalty fee
shall be calculated according to the new rate and 58.4% of the
incentive/penalty fee shall be calculated according to the previous rate.
2. QUARTER ENDING AUGUST 31, 1997. 50% of the incentive/penalty fee
shall be calculated according to the new rate and 50% of the
incentive/penalty fee shall be calculated according to the previous rate.
3. QUARTER ENDING NOVEMBER 30, 1997. 58.4% of the incentive/penalty
fee shall be calculated according to the new rate and 41.6% of the
incentive/penalty fee shall be calculated according to the previous rate.
4. QUARTER ENDING FEBRUARY 28, 1998. 67% of the incentive/penalty fee
shall be calculated according to the new rate and 33% of the
incentive/penalty fee shall be calculated according to the previous rate.
5. QUARTER ENDING MAY 31, 1988. 75% of the incentive/penalty fee
shall be calculated according to the new rate and 25% of the
incentive/penalty fee shall be calculated according to the previous rate.
6. QUARTER ENDING AUGUST 31, 1998. 83.4% of the incentive/penalty fee
shall be calculated according to the new rate and 16.6% of the
incentive/penalty fee shall be calculated according to the previous rate.
7. QUARTER ENDING NOVEMBER 30, 1998. 91.7% of the incentive/penalty
fee shall be calculated according to the new rate and 8.3% of the
incentive/penalty fee shall be calculated according to the previous rate.
8. QUARTER ENDING FEBRUARY 28, 1999. New rate fully operable.
- ---------------
(1) The previous incentive/penalty fee structure provided that the Basic Fee be
increased or decreased by an amount equal to .02% per annum (.005% per
quarter) of the average month-end assets of the Fund if the Fund's
investment performance for the thirty-six months preceding the end of the
quarter is six percentage points or more above or below, respectively, the
investment record of the Salomon Brothers High- Grade Corporate Bond Index.
11
<PAGE> 63
The present agreement continues until February 28, 1998. The agreement is
renewable thereafter, for successive one-year periods, only if each renewal is
specifically approved by a vote of the Fund's Board of Directors, including the
affirmative votes of a majority of the directors who are not parties to the
contract or "interested persons" (as defined in the Investment Company Act of
1940) of any such party, cast in person at a meeting called for the purpose of
considering such approval. The agreement is automatically terminated if
assigned, and may be terminated without penalty at any time (1) by vote of the
Board of Directors of the Fund on 60 days' written notice to WMC, or (2) by WMC
upon 90 days' written notice to the Fund.
The Fund's Board of Directors may, without the approval of shareholders,
provide for:
A. The employment of a new investment adviser pursuant to the terms of
a new advisory agreement, either as a replacement for an existing adviser
or as an additional adviser.
B. A change in the terms of an advisory agreement.
C. The continued employment of an existing adviser on the same
advisory contract terms where a contract has been assigned because of a
change in control of the adviser.
Any such change will only be made upon not less than 30 days' prior written
notice to shareholders, which shall include the information concerning the
adviser that would have normally been included in a proxy statement.
The agreement is automatically terminated if assigned, and may be
terminated without penalty at any time (1) by vote of the Board of Directors of
the Fund on 60 days' written notice to WMC, or (2) by WMC upon 90 days' written
notice to the Fund.
Because WMC provides only investment advisory services to the Fund and has
no control over the Fund's expenses, WMC has not undertaken to guarantee
expenses of the Fund. The Officers of the Fund have worked out alternative
arrangements with state authorities which require an expense guarantee.
DESCRIPTION OF WMC. WMC is a Massachusetts limited liability partnership
of which the following persons are managing partners: Robert W. Doran, Duncan M.
McFarland, and John R. Ryan.
PORTFOLIO TRANSACTIONS
The investment advisory agreement authorizes WMC (with the approval of the
Fund's Board of Directors) to select the brokers or dealers that will execute
the purchases and sales of portfolio securities for the Fund and directs WMC to
use its best efforts to obtain the best available price and most favorable
execution as to all transactions for the Fund. WMC has undertaken to execute
each investment transaction at a price and commission which provides the most
favorable total cost or proceeds reasonably obtainable under the circumstances.
In placing portfolio transactions, WMC will use its best judgment to choose
the broker most capable of providing the brokerage services necessary to obtain
best available price and most favorable execution. The full range and quality of
brokerage services available will be considered in making these determinations.
In those instances where it is reasonably determined that more than one broker
can offer the brokerage services needed to obtain the best available price and
most favorable execution, consideration may be given to those brokers which
supply investment research and statistical information and provide other
services in addition to execution services to the Fund and/or WMC. WMC considers
such information useful in the performance of its obligations under the
agreement but is unable to determine the amount by which such services may
reduce its expenses.
The investment advisory agreement also incorporates the concepts of Section
28(e) of the Securities Exchange Act of 1934 by providing that, subject to the
approval of the Fund's Board of Directors, WMC may cause the Fund to pay a
broker-dealer which furnishes brokerage and research services a higher
commission than that which might be charged by another broker-dealer for
effecting the same transaction; provided that such commission is deemed
reasonable in terms of either that particular transaction or the overall
responsibilities of WMC to the Fund and the other Funds in the Group.
12
<PAGE> 64
Currently, it is the Fund's policy that WMC may at times pay higher
commissions in recognition of brokerage services felt necessary for the
achievement of better execution of certain securities transactions that
otherwise might not be available. WMC will only pay such higher commissions if
it believes this to be in the best interest of the Fund. Some brokers or dealers
who may receive such higher commissions in recognition of brokerage services
related to execution of securities transactions are also providers of research
information to WMC and/or the Fund. However, WMC has informed the Fund that it
will not pay higher commission rates specifically for the purpose of obtaining
research services.
Since the Fund does not market its shares through intermediary brokers or
dealers, it is not the Fund's practice to allocate brokerage or principal
business on the basis of sales of its shares which may be through such firms.
However, the Fund may place portfolio orders with qualified broker-dealers who
recommend the Fund to other clients, or who act as agent in the purchase of the
Fund's shares for their clients, and may, when a number of brokers and dealers
can provide comparable best price and execution on a particular transaction,
consider the sale of Fund shares by a broker or dealer in selecting among
qualified broker-dealers.
During the fiscal years ended November 30, 1994, 1995 and 1996 the Fund
paid $2,583,152, $2,478,087 and $5,563,124 in brokerage commissions,
respectively. These fees were paid pursuant to the terms of a previous
investment advisory agreement that called for a lower rate of fees.
Some securities considered for investment by the Fund may also be
appropriate for other Funds and/or clients served by WMC. If purchase or sale of
securities consistent with the investment policies of the Fund and one or more
of these other Funds or clients served by WMC are considered at or about the
same time, transactions in such securities will be allocated among the several
Funds and clients in a manner deemed equitable by WMC.
FINANCIAL STATEMENTS
The Fund's Financial Statements for the year ended November 30, 1996,
including the financial highlights for each of the five years in the period
ended November 30, 1996, appearing in the Vanguard/Wellington Fund 1996 Annual
Report to Shareholders, and the report thereon of Price Waterhouse LLP,
independent accountants, also appearing therein, are incorporated by reference
in this Statement of Additional Information. The Fund's 1996 Annual Report to
Shareholders is enclosed with this Statement of Additional Information.
PERFORMANCE MEASURES
Vanguard may use reprinted material discussing The Vanguard Group, Inc. or
any of the member funds of The Vanguard Group of Investment Companies.
Each of the investment company members of The Vanguard Group Inc.,
including Vanguard/Wellington Fund, may from time to time, use one or more of
the following unmanaged indexes for comparative performance purposes.
STANDARD AND POOR'S 500 COMPOSITE STOCK PRICE INDEX -- is a well diversified
list of 500 companies representing the U.S. Stock Market.
WILSHIRE 5000 EQUITY INDEX -- consists of more than 7,000 common equity
securities, covering all stocks in the U.S. for which daily pricing is
available.
WILSHIRE 4500 EQUITY INDEX -- consists of all stocks in the Wilshire 5000 except
for the 500 stocks in the Standard and Poor's 500 Index.
RUSSELL 3000 STOCK INDEX -- a diversified portfolio of approximately 3,000
common stocks accounting for over 90% of the market value of publicly-traded
stocks in the U.S.
RUSSELL 2000 STOCK INDEX -- a subset of approximately 2,000 of the smallest
stocks contained in the Russell 3000; a widely-used benchmark for small
capitalization common stocks.
13
<PAGE> 65
MORGAN STANLEY CAPITAL INTERNATIONAL EAFE INDEX -- is an arithmetic, market
value-weighted average of the performance of over 900 securities listed on the
stock exchanges of countries in Europe, Australasia and the Far East.
GOLDMAN SACHS 100 CONVERTIBLE BOND INDEX -- currently includes 71 bonds and 29
preferreds. The original list of names was generated by screening for
convertible issues of $100 million or greater in market capitalization. The
index is priced monthly.
SALOMON BROTHERS GNMA INDEX -- includes pools of mortgages originated by private
lenders and guaranteed by the mortgage pools of the Government National Mortgage
Association.
SALOMON BROTHERS HIGH-GRADE CORPORATE BOND INDEX -- consists of publicly-issued,
nonconvertible corporate bonds rated Aa or Aaa. It is a value-weighted, total
return index, including approximately 800 issues with maturities of 12 years or
greater.
LEHMAN LONG-TERM TREASURY BOND INDEX -- is composed of all bonds covered by the
Shearson Lehman Hutton Treasury Bond Index with maturities of 10 years or
greater.
MERRILL LYNCH CORPORATE & GOVERNMENT BOND INDEX -- consists of over 4,500 U.S.
Treasury, agency and investment grade corporate bonds.
LEHMAN CORPORATE (BAA) BOND INDEX -- all publicly offered fixed-rate,
nonconvertible domestic corporate bonds rated Baa by Moody's, with a maturity
longer than 1 year and with more than $25 million outstanding. This index
includes over 1,000 issues.
LEHMAN BROTHERS LONG-TERM CORPORATE BOND INDEX -- is a subset of the Lehman
Corporate Bond Index covering all corporate, publicly issued, fixed-rate,
nonconvertible U.S. debt issues rated at least Baa, with at least $50 million
principal outstanding and maturity greater than 10 years.
BOND BUYER MUNICIPAL BOND INDEX -- is a yield index on current coupon high-grade
general obligation municipal bonds.
STANDARD & POOR'S PREFERRED INDEX -- is a yield index based upon the average
yield of four high-grade, non-callable preferred stock issues.
NASDAQ INDUSTRIAL INDEX -- is composed of more than 3,000 industrial issues. It
is a value-weighted index calculated on price change only and does not include
income.
COMPOSITE INDEX -- 70% Standard & Poor's 500 Index and 30% NASDAQ Industrial
Index.
COMPOSITE INDEX -- 65% Standard & Poor's 500 Index and 35% Lehman Long-Term
Corporate AA or Better Bond Index.
COMPOSITE INDEX -- 65% Lehman Long-Term Corporate AA or Better Bond Index and
35% weighting in a blended equity composite (75% Standard & Poor's/BARRA Value
Index and 25% Standard & Poor's Utilities Index).
LEHMAN LONG-TERM CORPORATE AA OR BETTER BOND INDEX -- consists of all publicly
issued, fixed rate, nonconvertible investment grade, dollar-denominated,
SEC-registered corporate debt rated AA or AAA.
LEHMAN BROTHERS AGGREGATE BOND INDEX -- is a market-weighted index that contains
individually priced U.S. Treasury, agency, corporate, and mortgage pass-through
securities corporate rated BBB - or better. The Index has a market value of over
$4 trillion.
LEHMAN BROTHERS MUTUAL FUND SHORT (1-5) GOVERNMENT/CORPORATE INDEX -- is a
market-weighted index that contains individually priced U.S. Treasury, agency,
and corporate investment grade bonds rated BBB - or better with maturities
between 1 and 5 years. The index has a market value of over $1.3 trillion.
LEHMAN BROTHERS MUTUAL FUND INTERMEDIATE (5-10) GOVERNMENT/CORPORATE INDEX -- is
a market-weighted index that contains individually priced U.S. Treasury, agency,
and corporate securities rated BBB - or better with maturities between 5 and 10
years. The index has a market value of over $600 billion.
14
<PAGE> 66
LEHMAN BROTHERS MUTUAL FUND LONG (10+) GOVERNMENT/CORPORATE INDEX -- is a
market-weighted index that contains individually priced U.S. Treasury, agency,
and corporate securities rated BBB - or better with maturities greater than 10
years. The index has a market value of over $900 billion.
LIPPER SMALL COMPANY GROWTH FUND AVERAGE -- the average performance of small
company growth funds as defined by Lipper Analytical Services, Inc. Lipper
defines a small company growth fund as a fund that by prospectus or portfolio
practice, limits its investments to companies on the basis of the size of the
company. From time to time, Vanguard may advertise using the average performance
and/or the average expense ratio of the small company growth funds. (This fund
category was first established in 1982. For years prior to 1982, the results of
the Lipper Small Company Growth category were estimated using the returns of the
Funds that constituted the Group at its inception.)
LIPPER BALANCED FUND AVERAGE -- an industry benchmark of average balanced funds
with similar investment objectives and policies, as measured by Lipper
Analytical Services, Inc.
LIPPER NON-GOVERNMENT MONEY MARKET FUND AVERAGE -- an industry benchmark of
average non-government money market funds with similar investment objectives and
policies, as measured by Lipper Analytical Services, Inc.
LIPPER GOVERNMENT MONEY MARKET FUND AVERAGE -- an industry benchmark of average
government money market funds with similar investment objectives and policies,
as measured by Lipper Analytical Services, Inc.
LIPPER GENERAL EQUITY FUND AVERAGE -- an industry benchmark of average general
equity funds with similar investment objectives and policies, as measured by
Lipper Analytical Services, Inc.
LIPPER FIXED INCOME FUND AVERAGE -- an industry benchmark of average fixed
income funds with similar investment objectives and policies, as measured by
Lipper Analytical Services, Inc.
15
<PAGE> 67
PART C
VANGUARD/WELLINGTON FUND, INC.
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(A) FINANCIAL STATEMENTS
The Registrant's Financial Statements for the year ended November 30, 1996,
including Price Waterhouse LLP's report thereon, are incorporated by reference,
in the Statement of Additional Information, from the Registrant's 1996 Annual
Report to Shareholders which has been filed with the Commission. The Financial
Statements included in the Annual Report are:
1. Statement of Net Assets as of November 30, 1996.
2. Statement of Operations for the year ended November 30, 1996.
3. Statement of Changes in Net Assets for each of the two years in the
period ended November 30, 1996.
4. Financial Highlights for each of the five years in the period ended
November 30, 1996.
5. Notes to Financial Statements.
6. Report of Independent Accountants.
<TABLE>
<S> <C>
(B) EXHIBITS
Exhibit Number Description
1............... Articles of Incorporation**
2............... By-Laws of Registrant**
3............... Not Applicable
4............... Not Applicable
5............... Not Applicable
6............... Not Applicable
7............... Reference is made to the section entitled "Management of the Fund"
in the Registrant's Statement of Additional Information
8............... Form of Custody Agreement**
9............... Form of Vanguard Service Agreement**
10............... Opinion of Counsel**
11............... Consent of Independent Accountants*
12............... Financial Statements--reference is made to (a) above
13............... Not Applicable
14............... Not Applicable
15............... Not Applicable
16............... Schedule for Computation of Performance Quotations*
27............... Financial Data Schedule*
</TABLE>
- ------------
*Filed herewith
**Previously filed
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
Registrant is not controlled by or under common control with any person.
The Officers of the Registrant, the investment companies in The Vanguard Group
of Investment Companies and The Vanguard Group, Inc. are identical. Reference is
made to the caption "The Vanguard Group" in the Prospectus constituting Part A
and "Management of the Fund" in the Statement of Additional Information
constituting Part B of this Registration Statement.
<PAGE> 68
ITEM 26. NUMBER OF HOLDERS OF SECURITIES
As of November 30, 1996 there were 681,154 shareholders.
ITEM 27. INDEMNIFICATION
Reference is made to Article XI of Registrant's Articles of Incorporation.
Insofar as indemnification for liability arising under the Securities Act of
1933 may be permitted to Directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceedings) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
Reference is made to the caption "Investment Adviser" in each of the
prospectuses constituting Part A on this Registration Statement and "Investment
Advisory Services" in Part B of this Registration Statement.
Wellington Management Company is a Massachusetts limited liability
partnership of which the following persons are managing partners: Robert W.
Doran, Duncan M. McFarland and John R. Ryan.
Wellington Management Company, LLP ("Wellington Management") is an
investment adviser registered under the Investment Advisers Act of 1940, as
amended (the "Advisers Act"). The list required by this Item 28 of officers and
partners of Wellington Management, together with any information as to any
business profession, vocation or employment of a substantial nature engaged in
by such officers and partners during the past two years, is incorporated herein
by reference to Schedules A and D of Form ADV filed by Wellington Management
pursuant to the Advisers Act (SEC File No. 801-159089).
ITEM 29. PRINCIPAL UNDERWRITERS
(a) None.
(b) Not Applicable.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
The books, accounts and other documents required by Section 31(a) under the
Investment Company
Act and the rules promulgated thereunder will be maintained in the physical
possession of Registrant; Registrant's Transfer Agent, The Vanguard Group, Inc.
c/o The Vanguard Financial Center, Valley Forge, Pennsylvania 19482; and the
Registrant's Custodian, State Street Bank and Trust Company, 225 Franklin
Street, Boston, Massachusetts 02105.
ITEM 31. MANAGEMENT SERVICES
Other than the Amended and Restated Funds Service Agreement with The
Vanguard Group, Inc., which was previously filed as Exhibit 9(c) and described
in Part B hereof under "Management of the Fund," the Registrant is not a party
to any management-related service contract.
ITEM 32. UNDERTAKINGS
Registrant hereby undertakes to provide an Annual Report to Shareholders or
prospective investors, free of charge, upon request.
<PAGE> 69
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940 the Registrant has duly caused this
Post-Effective Amendment to this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized in the Town of Valley Forge
and the Commonwealth of Pennsylvania, on the 14th day of March, 1997.
VANGUARD/WELLINGTON FUND, INC.
BY: (Raymond J. Klapinsky) John J. Brennan*, Chief Executive Officer and
President
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment to the Registration Statement has been signed below by
the following persons in the capacities and on the date indicated:
BY: (Raymond J. Klapinsky)
John C. Bogle*, Chairman of the Board and Director
March 14, 1997
BY: (Raymond J. Klapinsky)
John J. Brennan*, Director, Chief Executive Officer and President
March 14, 1997
BY: (Raymond J. Klapinsky)
Robert E. Cawthorn*, Director
March 14, 1997
BY: (Raymond J. Klapinsky)
Barbara B. Hauptfuhrer*, Director
March 14, 1997
BY: (Raymond J. Klapinsky)
Bruce K. MacLaury*, Director
March 14, 1997
BY: (Raymond J. Klapinsky)
Burton G. Malkiel*, Director
March 14, 1997
BY: (Raymond J. Klapinsky)
Alfred M. Rankin*, Director
March 14, 1997
BY: (Raymond J. Klapinsky)
John C. Sawhill*, Director
March 14, 1997
BY: (Raymond J. Klapinsky)
James O. Welch, Jr.*, Director
March 14, 1997
BY: (Raymond J. Klapinsky)
J. Lawrence Wilson*, Director
March 14, 1997
BY: (Raymond J. Klapinsky)
Richard F. Hyland*, Treasurer and Principal
Financial Officer and Accounting Officer
March 14, 1997
*By Power of Attorney. See File Number 2-14336, January 23, 1990. Incorporated
by Reference.
<PAGE> 70
VANGUARD/WELLINGTON FUND, INC.
INDEX TO EXHIBITS
<TABLE>
<S> <C>
Consent of Independent Accountants.............................................. EX-99. B11
Schedule for Computation of Performance Quotations.............................. EX-99. B16
Financial Data Schedule......................................................... EX-27
</TABLE>
<PAGE> 1
EX-99. B11
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectuses and
Statement of Additional Information constituting parts of this Post-Effective
Amendment No. 77 to the registration statement on Form N-1A (the "Registration
Statement") of our report dated December 31, 1996 relating to the financial
statements and financial highlights appearing in the November 30, 1996 Annual
Report to Shareholders of Vanguard/Wellington Fund, which are also incorporated
by reference into the Registration Statement. We also consent to the references
to us under the heading "Financial Highlights" in the Prospectuses and under the
heading "Financial Statements" in the Statement of Additional Information.
PRICE WATERHOUSE LLP
Philadelphia, PA
March 13, 1997
<PAGE> 1
EX-99. B16
SCHEDULE FOR COMPUTATION OF PERFORMANCE QUOTATIONS
VANGUARD/WELLINGTON FUND
1. Average Annual Total Return (As of November 30, 1996)
P (1 + T)n = ERV
<TABLE>
<S> <C> <C>
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
N = number of years
ERV = ending redeemable value at the end of the period
EXAMPLE:
One Year
P = $1,000
T = +21.26%
N = 1
ERV = $1,212.60
Five Years
P = $1,000
T = +15.83%
N = 5
ERV = $2,085.12
Ten Years
P = $1,000
T = +12.67%
N = 10
ERV = $3,296.48
</TABLE>
2. YIELD (30 Days Ended November 30, 1996)
<TABLE>
<C> <S> <C>
a - b
Yield = 2[( c X d + 1)(6) - 1]
Where: a = dividends and interest paid during the period
b = expense dollars during the period (net of reimbursements)
c = the average daily number of shares outstanding during the period
d = the maximum offering price per share on the last day of the period
Example a = $56,356,015.34
b = $3,892,327.83
c = 580,944,206.512
d = $28.34
Yield = 3.85%
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000105563
<NAME> VANGUARD/WELLINGTON FUND, INC.
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLAR
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> NOV-30-1996
<PERIOD-START> DEC-01-1995
<PERIOD-END> NOV-30-1996
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 11,829,341
<INVESTMENTS-AT-VALUE> 16,355,364
<RECEIVABLES> 632,557
<ASSETS-OTHER> 1,449
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 16,989,370
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 483,997
<TOTAL-LIABILITIES> 483,997
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 11,117,823
<SHARES-COMMON-STOCK> 582,396
<SHARES-COMMON-PRIOR> 501,933
<ACCUMULATED-NII-CURRENT> 214,161
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 647,366
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 4,526,023
<NET-ASSETS> 16,505,373
<DIVIDEND-INCOME> 264,486
<INTEREST-INCOME> 349,635
<OTHER-INCOME> 0
<EXPENSES-NET> 42,115
<NET-INVESTMENT-INCOME> 572,006
<REALIZED-GAINS-CURRENT> 695,226
<APPREC-INCREASE-CURRENT> 1,544,678
<NET-CHANGE-FROM-OPS> 2,811,910
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 519,183
<DISTRIBUTIONS-OF-GAINS> 141,199
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 126,321
<NUMBER-OF-SHARES-REDEEMED> 70,741
<SHARES-REINVESTED> 24,884
<NET-CHANGE-IN-ASSETS> 4,172,759
<ACCUMULATED-NII-PRIOR> 174,074
<ACCUMULATED-GAINS-PRIOR> 140,033
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 6,121
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 43,298
<AVERAGE-NET-ASSETS> 14,013,393
<PER-SHARE-NAV-BEGIN> 24.57
<PER-SHARE-NII> 1.02
<PER-SHARE-GAIN-APPREC> 4.00
<PER-SHARE-DIVIDEND> 0.97
<PER-SHARE-DISTRIBUTIONS> 0.28
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 28.34
<EXPENSE-RATIO> 0.31
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
