<PAGE> 1
VANGUARD/
WELLINGTON FUND
Annual Report
November 30, 1997
[PHOTO]
[THE VANGUARD GROUP LOGO]
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[PHOTO]
OUR CREW MAKES THE DIFFERENCE
Throughout our history, The Vanguard Group has received considerable attention
as the low-cost provider of mutual funds. While such accolades are gratifying,
we are most proud, not of our low operating expenses or the billions of dollars
we manage, but of our sterling reputation created by the Vanguard crew.
We recognize that it is our crew members--more than 6,000 highly motivated
men and women--who form the cornerstone of our operations. As with any
cornerstone, we could not survive long--let alone prosper--without it. That's
why we chose this fiscal year's annual report to celebrate the spirit,
enthusiasm, and achievements of our crew. (We call those who work at Vanguard
crew members, not employees, because they operate as a team to accomplish our
mission of serving you, our clients.)
But while we prize the collective contributions of our crew, we also take
time to recognize the importance of the individual. Each calendar quarter, we
present our Award For Excellence to a handful of crew members who have
demonstrated particular excellence in the performance of their jobs and who
embody "The Vanguard Spirit." Our report cover shows only a few of the more
than 300 crew members who have received this distinction since 1984.
They, along with the rest of our valiant crew, look forward to serving you
in the years ahead.
[PHOTO]
John J. Brennan
President
[PHOTO]
John C. Bogle
Chairman
CONTENTS
A Message To Our Shareholders . . . . . . . . . . . . . . . 1
The Markets In Perspective . . . . . . . . . . . . . . . . 4
Report From The Adviser . . . . . . . . . . . . . . . . . . 6
Portfolio Profile . . . . . . . . . . . . . . . . . . . . . 8
Performance Summary . . . . . . . . . . . . . . . . . . . . 12
Financial Statements . . . . . . . . . . . . . . . . . . . 13
Report Of Independent Accountants . . . . . . . . . . . . . 24
All comparative mutual fund data are from Lipper Analytical Services, Inc., or
Morningstar unless otherwise noted.
<PAGE> 3
FELLOW SHAREHOLDER,
Vanguard/Wellington Fund earned a return of +18.6% during the twelve months
ended November 30, 1997. Our 69th year of operation was a very good year
indeed, as we benefited from another powerful advance in the U.S. stock market
and a firm bond market.
We are especially pleased to report that we solidly outpaced the
average balanced mutual fund during the fiscal year, an advantage we have
earned for six successive years and in 12 of the past 15 years. Because
balanced funds hold a mix of asset classes--roughly 60% in stocks and 40% in
long-term bonds--both their returns and ours for the fiscal year were, as
usual, somewhere between those of the overall stock and bond markets.
Nonetheless, both we and the average balanced mutual fund trailed our unmanaged
composite stock/bond index. The table at right presents the twelve-month total
return (capital change plus reinvested dividends) for Wellington Fund and our
two performance yardsticks.
<TABLE>
<CAPTION>
- ---------------------------------------------------------
TOTAL RETURNS
FISCAL YEAR ENDED
NOVEMBER 30, 1997
- ---------------------------------------------------------
<S> <C>
Vanguard/Wellington Fund +18.6%
- ---------------------------------------------------------
Average Balanced Fund +16.1%
- ---------------------------------------------------------
Wellington Composite Index* +21.6%
- ---------------------------------------------------------
</TABLE>
*Weighted 65% S&P 500 Composite Stock Price
Index and 35% Lehman Brothers Long-Term
Corporate AA or Better Bond Index.
or Better Bond Index.
The Fund's return is based on an increase in net asset value from
$28.34 per share on November 30, 1996, to $31.05 per share on November 30,
1997, with the latter figure adjusted for dividends totaling $1.06 per share
paid from net investment income and distributions totaling $1.11 per share paid
from net realized capital gains. (Net realized capital gains totaling $1.57 per
share were distributed in December 1997, along with our quarterly income
dividend.)
FISCAL 1997 PERFORMANCE OVERVIEW
The United States experienced something close to economic nirvana in the past
twelve months. Growth in corporate profits and employment was robust, and the
U.S. unemployment rate at fiscal year-end was 4.6%, a 24-year low. Yet
inflation decelerated and long-term interest rates declined slightly on balance
during the year.
The stock market rose sharply for the third consecutive year, although
it suffered some setbacks. Curiously, the declines early in the fiscal year
were attributed mainly to anxiety about higher inflation, while a sharp drop in
October stemmed from concern that economic problems in Asia might result in
deflation. Anxiety receded, however, in the face of continued good news from
economic statistics and corporate profit reports. For the full year, the S&P
500 Index provided a truly remarkable total return of +28.5%.
Bond prices fell and long-term interest rates rose during the first
half of the fiscal year, then reversed course in the second half. On balance,
the yield on the bellwether 30-year U.S. Treasury bond declined 30 basis points
(0.3 percentage point), ending the fiscal year at 6.05%. Including interest and
capital increase, the total return of the Lehman Long Corporate AA or Better
Bond Index was a solid 9.3%--more than satisfactory on an absolute basis, but a
pale reflection of the return on stocks. Short-term interest rates fluctuated
within a fairly narrow band, and, on balance, the yield on three-month U.S.
Treasury bills rose 7 basis points, from 5.13% to 5.20%.
1
<PAGE> 4
Wellington Fund outperformed the average balanced fund by a solid 2.5
percentage points during the year. However, we trailed by a similar margin our
theoretical benchmark--a composite portfolio comprising 65% stocks and 35%
high-quality, long-term bonds.
Our allocation to stocks explains most of our lead over the real-world
competition. We held 60%-63% of the Fund's assets in stocks, toward the low end
of our 60%-70% range, with the remainder in long-term bonds. The average
balanced fund held 55%-60% of its assets in stocks, roughly 10% in cash, and
the remainder in bonds. Our heavier weightings in stocks and long-term bonds
were an advantage versus other funds in a year of booming returns for stocks
and solid returns from bonds.
Our equity allocation hurt us a bit compared with the composite
index's 65% weighting in stocks. However, the main reason we trailed the
benchmark was that our stock holdings (with a total return of +25%) did not do
as well as the S&P 500 Index. This shortfall was due mainly to our
overweighting in the basic materials sector (we held materials and processing
stocks that represented, on average, more than twice the 6% weighting in the
S&P 500). This sector's return (about +10% for the Index and +12% for
Wellington Fund) was, by a wide margin, the worst of any broad industry group
in the Index. We also were hurt in comparison with the Index by our
near-absence from the technology sector (about 1% of your Fund's assets during
the year versus more than 12% for the Index).
Wellington Fund's income dividends of $1.06 per share for the year
represented an increase of about 9% over the $0.97 paid in fiscal 1996. We
strive for long-term growth in income, but the growth rate will not always be
as high as in the past year. The increase in our income paralleled a
substantial increase in our bond position, reflecting sales of stocks at
ascending prices to maintain the Fund's normal equity allocation of 60%-70% of
assets.
LONG-TERM PERFORMANCE OVERVIEW
The table below presents Wellington Fund's performance over the past decade.
Our achievement during the past year added to our long-term advantage over the
average balanced mutual fund. However, neither the Fund nor our average
competitor has matched the long-term return of our theoretical benchmark, the
composite stock/bond index. The decade's returns are summarized in both
percentage and dollar terms (assuming an initial investment of $10,000 and
reinvestment of all income dividends and capital gains distributions).
<TABLE>
<CAPTION>
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TOTAL RETURNS
10 YEARS ENDED NOVEMBER 30, 1997
--------------------------------------
AVERAGE FINAL VALUE OF
ANNUAL A $10,000
RATE INITIAL INVESTMENT
- ----------------------------------------------------------------------
<S> <C> <C>
Vanguard/Wellington Fund +15.1% $40,832
- ----------------------------------------------------------------------
Average Balanced Fund +13.1% $34,131
- ----------------------------------------------------------------------
Wellington Composite Index +16.0% $44,048
- ----------------------------------------------------------------------
</TABLE>
Wellington Fund's 2.0% average annual margin of superiority over
competing funds amounted for the decade to an impressive $6,701 earnings
advantage on identical investments of $10,000--an amazing 67% of the initial
capital added to the returns of Wellington shareholders. Slightly more than
half of our advantage over competing funds is due to our lower expenses:
Wellington Fund's operating expenses amounted to 0.29% of average assets in
fiscal 1997, a full percentage point below the 1.32% expense ratio of the
average balanced fund. This is a significant edge, and one that we expect will
endure.
2
<PAGE> 5
Of course, the costs of doing business and trading securities work
against us in our performance comparison with the unmanaged index, which exists
only in theory and bears none of the operating and transaction costs that
mutual funds incur. Even so, it is our goal to surpass the return of the
composite index, and we acknowledge that we have not done so over the past
decade.
It must be noted that the ten-year returns shown on the previous page
were unusually high by historical standards, especially for the relatively
conservative strategy that balanced portfolios pursue. Although no one knows
what the future will bring, we fully expect returns on stocks and bonds to be
lower over the next decade than the remarkably generous returns earned during
the past decade.
IN SUMMARY
Wellington Fund shareholders have participated in a truly remarkable
performance by the U.S. stock and bond markets over the past three years,
during which the Fund's cumulative return exceeded +90%. When the rewards of
investing are so visible, there is a danger that investors will discount the
risks inherent to financial markets. Suffice it to say that investing is not a
one-way street, a fact that the markets will make clear from time to time.
Nonetheless, the greatest risk is not investing in the first place. We
believe that risk can be managed well through a balanced investment program of
stocks, bonds, and reserves tailored to fit your objectives, financial
situation, tolerance for risk, and time horizon. Wellington Fund has followed
such a balanced strategy since its creation nearly seven decades ago, and we
assure you that we will "stay the course" in the future.
/s/ JOHN C. BOGLE /s/ JOHN J. BRENNAN
John C. Bogle John J. Brennan
Chairman of the Board President
December 11, 1997
3
<PAGE> 6
THE MARKETS IN PERSPECTIVE
YEAR ENDED NOVEMBER 30, 1997
U.S. EQUITY MARKETS
The fiscal year ended November 30 tested investors' mettle on a number of
occasions, but most ended on a positive note. The increasingly global nature of
investing has rarely been more in evidence than it was over the period. Turmoil
in Southeast Asia raised serious questions about future growth in the region
and, significantly, called into question the earnings outlook for U.S.
companies with exposure there.
Over the 12 months, large-capitalization stocks continued their
advance, propelling the S&P 500 Index to a 28.5% gain. Small-cap stocks also
fared well, as illustrated by the 23.4% increase of the Russell 2000 Index.
These gains withstood a rocky October, when the sharp declines in Asian markets
led many investors to question their expectations regarding U.S. equities.
Although the domestic market dropped substantially--the Dow Jones Industrial
Average fell 554 points, or 7.2%, on October 27--it then rebounded smartly over
the next few days.
Among large-cap stocks, the financial services sector was again one of
the best performers, with an increase of 34.8% in fiscal 1997. Also noteworthy
was a November surge in utility stocks, which brought that sector's 12-month
return up to 34.5%. Utilities, those seemingly perennial cellar-dwellers, were
boosted by a drop in interest rates and by a general consensus that their
valuations at last adequately reflected the risks associated with the new
competitive landscape. In the final quarter of the fiscal year, utility stocks
jumped 23.6%, roughly three times the return generated by the S&P 500 Index
(6.7%). In sharp contrast were a number of market sectors that felt the brunt
of the disarray in Asian economies and--while showing positive gains for the
year--turned in negative fourth fiscal quarters. As the fiscal year ended,
there were growing indications from technology and manufacturing companies that
the economic distress in Southeast Asia would likely reduce their current and
future earnings.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------
AVERAGE ANNUALIZED RETURNS
PERIODS ENDED NOVEMBER 30, 1997
----------------------------------
1 YEAR 3 YEARS 5 YEARS
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
EQUITY
S&P 500 Index 28.5% 31.1% 20.2%
Russell 2000 Index 23.4 22.7 16.8
MSCI EAFE Index -0.1 6.5 11.6
- ---------------------------------------------------------------------------
FIXED INCOME
Lehman Aggregate Bond Index 7.6% 10.3% 7.6%
Lehman 10-Year Municipal Bond Index 7.1 10.3 7.5
Salomon Brothers Three-Month
U.S. Treasury Bill Index 5.2 5.4 4.7
- ---------------------------------------------------------------------------
OTHER
Consumer Price Index 1.8% 2.6% 2.6%
- ---------------------------------------------------------------------------
</TABLE>
While small-company stocks failed to match the outsized advance of the
S&P 500 Index, their performance grew notably stronger in the second half of
the fiscal year. For the year, the Russell 2000 Index gained 23.4%. During the
second six months, the Russell 2000's 13.8% essentially matched the S&P 500's
13.6%. The improved performance of smaller companies cannot be attributed to
any single factor, but is, rather, due to a combination of attractive
valuations and good earnings.
<PAGE> 7
U.S. FIXED-INCOME MARKETS
Bonds were overshadowed by stocks for much of the year. Investors' returns from
bonds, however, were quite respectable. As the year progressed, investors grew
more confident that four seemingly strange bedfellows--strong economic growth,
reasonable inflation, low unemployment, and stable wage growth--would continue
to coexist peacefully. As a result, when interest rates dipped noticeably
toward the fiscal year's end, they fell furthest for issues with the longest
maturities. The yield on the 30-year U.S. Treasury bond closed the fiscal year
at 6.05%, compared to 6.35% on November 30, 1996. Falling rates flattened the
yield curve considerably: Only 0.85% separated the yield on Treasury bills from
the yield on the 30-year issue, down from a spread of 1.22% at the previous
fiscal year-end.
The positive effect of the yield drop on bond prices was apparent in
the 7.6% return of the Lehman Aggregate Bond Index, the broadest measure of
investment-grade issues. Investors in lower-quality securities fared even
better, as shown by the 12.6% gain of the Lehman High Yield Bond Index. The
strength of the economy, together with the lack of inflationary pressure,
produced an ideal environment for junk bonds.
INTERNATIONAL EQUITY MARKETS
Arguably, investors' greatest disappointments were in international
markets--and, of course, Asian markets in particular. During the fiscal year,
the Morgan Stanley Capital International (MSCI) Pacific Index declined by 26.3%
in U.S. dollar terms; the index fell 17.3% in the fourth quarter alone. Among
individual markets, the fiscal year saw sharp declines (in U.S. dollar terms)
in Japan, down 24.5%, including a 16.1% drop in the fourth quarter; Hong Kong,
down 25%; Malaysia, down 68%; and Singapore, down 23%. The general slump in
Asian markets began in midsummer with currency devaluations by a number of
countries. Because the values of many of these currencies had been linked to
the U.S. dollar, their fall caused it to appreciate greatly--so much so that
Asian businesses soon found it difficult to purchase American-made products and
to repay dollar-denominated loans. This situation raised questions about how
the region's economic growth would be affected. Related worries focused on
imprudent aspects of various countries' financial systems and the probability
of corporate bankruptcies. In short, there was no place to hide.
By contrast, the European markets continued to provide U.S. investors
with solid returns, although they, too, stumbled in late October and recovered
in November. The MSCI Europe Index posted a gain of 21.8% for the 12 months.
The robust character of the European markets reflects strong corporate earnings
and optimism that the European Monetary Union will provide a solid framework
for future fiscal responsibility and economic growth.
5
<PAGE> 8
REPORT FROM THE ADVISER
Vanguard/Wellington Fund provided a total return of 18.6% during the fiscal
year ended November 30, 1997. This compares with a return of 16.1% for the
average balanced fund and 21.6% for our unmanaged index, a composite
weighted 65% in stocks and 35% in bonds.
From our perspective, while it is gratifying to do better than our
competitors, it is not gratifying to lag an unmanaged index. Our
underperformance versus the index stemmed from the fact that during most of the
fiscal year we maintained a conservative equity exposure--at the low end of our
60%-70% of assets range. This same conservative attitude prevailed with respect
to our equity selections. We avoided areas with high valuations, which in
fiscal 1997 caused us to lag the S&P 500 Index. Our fixed-income securities,
managed by Paul Kaplan, outpaced the long-term bond index.
Wellington Fund's equities, which accounted for 60%-63% of assets
during the year, provided a net return of 24.8%, versus 28.5% for the S&P 500
Index. The average yield on securities bought was 2.6% at the time of purchase,
while the average yield of stocks sold was 2.7% at the time of sale. The yield
of our equity segment at year-end was 2.3%, compared with 1.6% for the S&P 500
Index. This was a relatively large premium compared with previous years, and
was the result, in part, of our increased allocation to the utility sector,
which now stands at over 9% of equities, up from 4% two years ago. Our high
yield relative to the S&P 500 Index also is partly due to our emphasis on
stocks whose dividends are increasing. The companies in the S&P 500 Index have
generated annual earnings growth well into the double digits since the early
1990s, though we expect the growth rate to decline--to perhaps 6%--within a few
years. We believe there are limits to how much further companies can reduce
such costs as wages and interest. In a slow earnings-growth environment, the
average investor will become more interested in dividends, especially if there
are prospects for regular increases.
The financial-services sector continues to carry the largest weighting
among the Fund's stock holdings, accounting for almost 23% of our equities,
versus about 17% of the S&P 500 Index. Banks benefited during the fiscal year
from a benign interest rate environment and continued consolidation in the
industry. Our Fund's relative performance was helped by its overweighting in
this sector and by the excellent performance of such large holdings as U.S.
Bancorp and Allstate. Companies added to the Fund in 1997 include Fannie Mae
and Marsh & McLennan.
The materials and processing sector, where we have invested 17% of our
equity assets, compared with 6% of the S&P 500 Index, suffered late in the
fiscal year from the financial crises in Asia. Although the tumult certainly
has affected the region's near-term demand for raw materials such as copper, in
the long run Asian countries will continue to grow at above-average rates and
will consume large amounts of imported commodities. In our view, the outlook
for key holdings of the Fund such as DuPont and Alcoa is better than current
market valuations indicate.
6
<PAGE> 9
The Fund's equity exposure to producer durable stocks is about 8%.
Northrop Grumman, previously one of our larger holdings, was sold after it
received a takeover offer from Lockheed Martin, another aerospace company. We
have added Boeing to our holdings because we believe that the recent reduction
in its stock price--a result of production delays and fears that Asian
customers will cancel orders--represents an opportunity.
We continue to emphasize health care; about 12% of our equity holdings
are in this sector, compared with 11% for the S&P 500 Index. We pare those
holdings whose stock prices are climbing very high, while rotating into
companies such as Pharmacia & Upjohn, where valuations are more attractive
because the future is less clear.
The integrated oils/other energy sector, which is slightly overweight
(over 9% of Wellington Fund's equities) versus the Index (less than 9%),
continued to benefit from the realization by investors that operating rates are
high and that substantial investments are required to maintain capacity. Oil
and gas prices may weaken further early in 1998, so we are emphasizing
companies with strong cash generation and good potential for dividend growth.
We remain quite underexposed to the information technology sector--1%
of our equities versus 12% for the S&P 500 Index. We made a profitable
investment in IBM early in the fiscal year, when the company's stock came into
our valuation range. It is generally difficult to find dividend-paying
technology stocks within the valuation parameters we have set for the Fund.
We now have close to the market weight (10%) in the utility sector
because these stocks provide good income and excellent defensive
characteristics. We also retain a large interest in the transportation sector
and have increased the Fund's position in Union Pacific, which has suffered
lately from transportation bottlenecks that in our estimation are transitory.
The past year brought grudging recognition in the bond market that
inflation is, for the time being, under control. Yields on long-term U.S.
Treasury bonds declined to approximately 6%, and the Fund's substantial
holdings in corporate bonds performed well. It is hard to envision further
dramatic reductions in yields from today's levels. However, we remain
optimistic that inflation will remain controlled.
Wellington Fund's conservative approach to investing--with its
emphasis on high quality, low valuations, and growth in dividend income--has
not prevented us from participating vigorously in the historic bull market we
have witnessed in the last three years. As we enter 1998, we are hopeful that
economic growth will slow to a sustainable rate and that inflation will be
moderate. We believe the Fund is well positioned for such an environment.
Ernst H. von Metzsch, Senior Vice President and Portfolio Manager
Wellington Management Company, LLP
December 11, 1997
INVESTMENT PHILOSOPHY
The adviser believes that a reasonable level of current income and long-term
growth in capital can be achieved without undue risk by holding 60% to 70% of
assets in equities and the balance in fixed-income securities. Consistent with
this approach, dividend paying stocks dominate the Fund's equity segment, while
long-term, high-quality corporate, U.S. Treasury, and mortgage-backed
securities make up the bond segment.
7
<PAGE> 10
PORTFOLIO PROFILE
Wellington Fund
This Profile provides a snapshot of the Fund's characteristics as of November
30, 1997, compared where appropriate to an unmanaged index. Key elements of
this Profile are defined on pages 10 and 11.
<TABLE>
<CAPTION>
TOTAL FUND CHARACTERISTICS
- --------------------------------------------
<S> <C>
Turnover Rate 27%
Expense Ratio 0.29%
Cash Reserves 1.8%
</TABLE>
PORTFOLIO ASSET ALLOCATION
- --------------------------------------------
[CHART]
<TABLE>
<S> <C>
STOCKS 63%
BONDS 35%
CASH RESERVES 2%
</TABLE>
<TABLE>
<CAPTION>
TOTAL FUND VOLATILITY MEASURES
- ------------------------------------------
WELLINGTON S&P 500
- ------------------------------------------
<S> <C> <C>
R-Squared 0.86 1.00
Beta 0.69 1.00
</TABLE>
<TABLE>
<CAPTION>
TEN LARGEST STOCKS (% OF EQUITIES)
- -------------------------------------------
<S> <C>
Allstate Corp. 3.5%
U.S. Bancorp 3.4
Citicorp 2.6
Union Pacific Corp. 2.3
Wachovia Corp. 2.3
Xerox Corp. 2.2
Ford Motor Co. 2.1
Kimberly-Clark Corp. 2.1
General Electric Co. 2.0
AT&T Corp. 2.0
- -------------------------------------------
Top Ten 24.5%
- -------------------------------------------
Top Ten as % of Total Net Assets 15.4%
</TABLE>
<TABLE>
<CAPTION>
SECTOR DIVERSIFICATION (% OF COMMON STOCK)
- --------------------------------------------------------------------------
NOVEMBER 30, 1996 NOVEMBER 30, 1997
-----------------------------------------------
WELLINGTON WELLINGTON S&P 500
-----------------------------------------------
<S> <C> <C> <C>
Auto & Transportation . . 8.3% 8.3% 3.5%
Consumer Discretionary . 3.1 3.4 9.8
Consumer Staples . . . . . 2.3 3.2 11.3
Financial Services . . . . 20.1 22.6 17.0
Health Care . . . . . . . 12.4 12.4 11.2
Integrated Oils . . . . . 12.0 8.5 7.3
Other Energy . . . . . . . 0.0 0.7 1.5
Materials & Processing . . 20.1 17.1 6.3
Producer Durables . . . . 7.2 8.0 4.2
Technology . . . . . . . . 0.0 1.2 12.4
Utilities . . . . . . . . 7.8 9.4 10.3
Other . . . . . . . . . . 6.7 5.2 5.2
- --------------------------------------------------------------------------
</TABLE>
8
<PAGE> 11
<TABLE>
<CAPTION>
EQUITY CHARACTERISTICS
- --------------------------------------------------
WELLINGTON S&P 500
- --------------------------------------------------
<S> <C> <C>
Number of Stocks 97 500
Median Market Cap $19.7B $37.3B
Price/Earnings Ratio 17.2x 21.9x
Price/Book Ratio 3.0x 4.0x
Dividend Yield 2.3% 1.6%
Return on Equity 16.9% 20.4%
Earnings Growth Rate 14.0% 17.8%
Foreign Holdings 8.1% 1.9%
</TABLE>
EQUITY INVESTMENT FOCUS
- --------------------------------------------------
[CHART]
<TABLE>
<CAPTION>
FIXED-INCOME CHARACTERISTICS
- --------------------------------------------------
<S> <C>
Number of Bonds 203
Average Coupon 7.3%
Average Maturity 18.0 years
Average Quality Aa2
Average Duration 9.2 years
</TABLE>
FIXED-INCOME INVESTMENT FOCUS
- --------------------------------------------------
[CHART]
<TABLE>
<CAPTION>
DISTRIBUTION BY ISSUER (% OF BONDS)
- ------------------------------------------------
<S> <C>
Asset-Backed --
Finance 18.0%
Foreign 16.9
Industrial 22.8
Mortgage 3.7
U.S. Government and Agency 1.7
U.S. Treasury 23.8
Utilities 12.1
Other 1.0
- ------------------------------------------------
Total 100.0%
</TABLE>
<TABLE>
<CAPTION>
DISTRIBUTION BY CREDIT QUALITY (% OF BONDS)
- ------------------------------------------------
<S> <C>
Aaa 37.4%
Aa 17.2
A 34.5
Baa 9.9
Ba --
B --
Not Rated 1.0
- ------------------------------------------------
Total 100.0%
</TABLE>
9
<PAGE> 12
AVERAGE COUPON. The average interest rate paid on the securities held by a
portfolio. It is expressed as a percentage of face value.
AVERAGE DURATION. An estimate of how much a bond portfolio's share price will
fluctuate in response to a change in interest rates. To see how the price
could shift, multiply the portfolio's duration by the change in rates. If
interest rates rise by one percentage point, the share price of a portfolio
with an average duration of five years would decline by about 5%. If rates
decrease by a percentage point, the portfolio's share price would rise by 5%.
AVERAGE MATURITY. The average length of time until bonds held by a portfolio
reach maturity (or are called) and are repaid. In general, the longer the
average maturity, the more a portfolio's share price will fluctuate in response
to changes in market interest rates.
AVERAGE QUALITY. An indicator of credit risk, this figure is the average of the
ratings assigned to a portfolio's securities holdings by credit-rating
agencies. The agencies make their judgment after appraising an issuer's ability
to meet its obligations. Quality is graded on a scale, with Aaa or AAA
indicating the most creditworthy bond issuers and A-1 or MIG-1 indicating the
most creditworthy issuers of money market securities.
BETA. A measure of the magnitude of a portfolio's past share-price fluctuations
in relation to the ups and downs of the overall market (or appropriate market
index). The market (or index) is assigned a beta of 1.00, so a portfolio with a
beta of 1.20 would have seen its share price rise or fall by 12% when the
overall market rose or fell by 10%.
CASH RESERVES. The percentage of a portfolio's net assets invested in "cash
equivalents"--highly liquid, short-term, interest-bearing securities. This
figure does not include cash invested in futures contracts to simulate stock
investment.
DISTRIBUTION BY CREDIT QUALITY. This breakdown of a portfolio's securities by
credit rating can help in gauging the risk that returns could be affected by
defaults or other credit problems.
DISTRIBUTION BY ISSUER. A breakdown of a portfolio's holdings by type of issuer
or type of instrument.
DIVIDEND YIELD. The current, annualized rate of dividends paid on a share of
stock, divided by its current share price. For a portfolio, the weighted
average yield for stocks it holds.
EARNINGS GROWTH RATE. The average annual rate of growth in earnings over the
past five years for the stocks now in a portfolio.
EXPENSE RATIO. The percentage of a portfolio's average net assets used to pay
its annual administrative and advisory expenses. These expenses directly reduce
returns to investors.
FOREIGN HOLDINGS. The percentage of a portfolio's net assets represented by
stocks or American Depository Receipts of companies based outside the United
States.
INVESTMENT FOCUS. This grid indicates the focus of a portfolio in terms of two
attributes. For equity portfolios, the attributes are market capitalization
(large, medium, or small) and relative valuation (growth, value, or a blend).
For fixed-income portfolios, the attributes are average maturity (short,
medium, or long) and average credit quality (high, medium, or low).
MEDIAN MARKET CAP. The midpoint of market capitalization (market price x shares
outstanding) of the stocks in a portfolio. Half the stocks in the portfolio
have higher market capitalizations and half lower.
NUMBER OF BONDS. An indicator of diversification. The more separate issues a
portfolio holds, the less susceptible it is to a price decline stemming from
the problems of a particular bond issuer.
NUMBER OF STOCKS. An indicator of diversification. The more stocks a portfolio
holds, the more diversified it is and the more likely to perform in line with
the overall stock market.
10
<PAGE> 13
PORTFOLIO ASSET ALLOCATION. This chart shows the distribution, by type of
asset, of the Fund's holdings.
PRICE/BOOK RATIO. The share price of a stock divided by its net worth, or book
value, per share. For a portfolio, the weighted average price/book ratio of the
stocks it holds.
PRICE/EARNINGS RATIO. The ratio of a stock's current price to its per-share
earnings over the past year. For a portfolio, the weighted average P/E of the
stocks it holds. P/E is an indicator of market expectations about corporate
prospects; the higher the P/E, the greater the expectations for a company's
future growth.
R-SQUARED. A measure of how much of a portfolio's past returns can be explained
by the returns from the overall market (or its benchmark index). If a
portfolio's total return were precisely synchronized with the overall market's
return, its R-squared would be 1.00. If a portfolio's returns bore no
relationship to the market's returns, its R-squared would be 0.
RETURN ON EQUITY. The annual average rate of return generated by a company
during the past five years for each dollar of shareholder's equity (net income
divided by shareholder's equity). For a portfolio, the weighted average return
on equity for the companies whose stocks it holds.
SECTOR DIVERSIFICATION. The percentages of a portfolio's common stocks that
come from each of the major industry groups that compose the stock market.
TEN LARGEST STOCKS. The percentage of equity assets that a portfolio has
invested in its ten largest holdings. (The average for stock mutual funds is
about 30%.) As this percentage rises, returns are likely to be more volatile,
since they are more dependent on the fortunes of a few companies.
TURNOVER RATE. An indication of trading activity during the past year.
Portfolios with high turnover rates incur higher transaction costs and are more
likely to distribute capital gains (which are taxable to investors).
11
<PAGE> 14
PERFORMANCE SUMMARY
Wellington Fund
All of the data on this page represent past performance, which cannot be used
to predict future returns that may be achieved by the Fund. Note, too, that
both share price and return can fluctuate widely so that an investment in the
Fund could lose money.
TOTAL INVESTMENT RETURNS: NOVEMBER 30, 1977-NOVEMBER 30, 1997
<TABLE>
<CAPTION>
- ---------------------------------------------------------
WELLINGTON FUND COMPOSITE*
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- ---------------------------------------------------------
<S> <C> <C> <C> <C>
1978 -0.3% 6.2% 5.9% 3.7%
1979 4.9 7.9 12.8 10.1
1980 18.1 9.2 27.3 21.8
1981 -5.6 8.4 2.8 -0.4
1982 10.1 9.7 19.8 22.4
1983 17.0 8.7 25.7 19.2
1984 0.6 7.7 8.3 7.2
1985 18.3 8.2 26.5 27.5
1986 17.3 7.0 24.3 26.4
1987 -7.1 2.8 -4.3 -2.0
1988 13.8 7.2 21.0 19.3
1989 13.4 6.6 20.0 25.7
1990 -8.4 5.8 -2.6 -0.2
1991 10.2 6.6 16.8 19.2
1992 9.2 5.8 15.0 15.9
1993 8.4 5.2 13.6 11.8
1994 -5.2 4.4 -0.8 -1.6
1995 27.3 5.4 32.7 33.0
1996 16.7 4.6 21.3 19.8
1997 14.2 4.4 18.6 21.6
- ---------------------------------------------------------
</TABLE>
*65% S&P 500 Index, 35% Lehman Long Corporate AA or Better Bond Index.
See Financial Highlights table on page 21 for dividend and capital gains
information for the past five years.
CUMULATIVE PERFORMANCE: NOVEMBER 30, 1987-NOVEMBER 30, 1997
- -----------------------------------------------------------------------------
[CHART]
<TABLE>
<CAPTION>
- --------------------------------------------------------
Average S&P
Wellington Balanced Composite 500
Fund Fund Index Index
- --------------------------------------------------------
<S> <C> <C> <C> <C>
1987 11 10000 10000 10000 10000
1988 02 11644 11234 11433 11736
1988 05 11421 11121 11181 11599
1988 08 11592 11270 11350 11675
1988 11 12103 11603 11928 12333
1989 02 12761 12121 12481 13131
1989 05 13789 13101 13725 14707
1989 08 14789 13970 14868 16256
1989 11 14521 13960 14988 16137
1990 02 14260 13576 14568 15613
1990 05 14931 14311 15592 17151
1990 08 13902 13511 14593 15446
1990 11 14136 13704 14952 15577
1991 02 15696 15132 16636 17904
1991 05 16553 15890 17548 19170
1991 08 16889 16336 18077 19597
1991 11 16512 16240 17829 18743
1992 02 17764 17614 19270 20759
1992 05 18333 17679 19603 21055
1992 08 18595 17835 20014 21148
1992 11 18988 18525 20660 22199
1993 02 19902 19194 21656 22968
1993 05 20656 19631 22053 23496
1993 08 21622 20479 23131 24358
1993 11 21574 20434 23091 24436
1994 02 21948 20892 23338 24878
1994 05 21688 20265 22662 24494
1994 08 22652 20861 23532 25688
1994 11 21396 20097 22720 24691
1995 02 23136 21141 24498 26707
1995 05 25372 22601 26890 29432
1995 08 26561 23770 28131 31190
1995 11 28393 24629 30218 33810
1996 02 29404 25506 31305 35965
1996 05 30104 26189 32016 37796
1996 08 30441 25964 31718 37029
1996 11 34430 28646 36210 43230
1997 02 35060 29159 37117 45374
1997 05 36683 30363 39103 48914
1997 08 38764 32130 41403 52081
1997 11 40832 34131 44048 55612
- --------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED NOVEMBER 30, 1997
------------------------------------- FINAL VALUE OF A
1 YEAR 5 YEARS 10 YEARS $10,000 INVESTMENT
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Wellington Fund 18.60% 16.55% 15.11% $40,832
Average Balanced Fund 16.10 12.83 13.06 34,131
Composite Index* 21.65 16.35 15.98 44,048
S&P 500 Index 28.51 20.15 18.72 55,612
- -------------------------------------------------------------------------------------
</TABLE>
*65% S&P 500 Index, 35% Lehman Long Corporate AA or Better Bond Index.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED SEPTEMBER 30, 1997*
- --------------------------------------------------------------------------------------------------
10 YEARS
INCEPTION ---------------------------------
DATE 1 YEAR 5 YEARS CAPITAL INCOME TOTAL
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Wellington Fund 7/1/1929 27.73% 16.49% 7.35% 5.51% 12.86%
- --------------------------------------------------------------------------------------------------
</TABLE>
*SEC rules require that we provide this average annual total return information
through the latest calendar quarter.
12
<PAGE> 15
FINANCIAL STATEMENTS
November 30, 1997
STATEMENT OF NET ASSETS
This Statement provides a detailed list of the Fund's holdings, including each
security's market value on the last day of the reporting period. Securities are
grouped and subtotaled by asset type (common stocks, preferred stocks, bonds,
etc.) and by industry sector. Other assets are added to, and liabilities are
subtracted from, the value of Total Investments to calculate the Fund's Net
Assets. Finally, Net Assets are divided by the outstanding shares of the Fund
to arrive at its share price, or Net Asset Value (NAV) Per Share.
At the end of the Statement of Net Assets, you will find a table
displaying the composition of the Fund's net assets on both a dollar and
per-share basis. Because all income and any realized gains must be distributed
to shareholders each year, the bulk of net assets consists of Paid in Capital
(money invested by shareholders). The amounts shown for Undistributed Net
Investment Income and Accumulated Net Realized Gains usually approximate the
sums the Fund had available to distribute to shareholders as income dividends
or capital gains as of the statement date. Any Accumulated Net Realized Losses,
and any cumulative excess of distributions over net income or net realized
gains, will appear as negative balances. Unrealized Appreciation (Depreciation)
is the difference between the market value of the Fund's investments and their
cost, and reflects the gains (losses) that would be realized if the Fund were
to sell all of its investments at their statement-date values.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
MARKET
VALUE*
WELLINGTON FUND SHARES (000)
- -----------------------------------------------------------------------------------------------
COMMON STOCKS (62.4%)
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
AUTO & TRANSPORTATION (5.2%)
Canadian National Railway Co. 2,000,000 $ 103,375
Chrysler Corp. 2,978,500 102,200
Ford Motor Co. 6,664,515 286,574
General Motors Corp. 1,991,000 121,451
KLM Royal Dutch Air Lines NV 3,901,500 140,454
Norfolk Southern Corp. 1,400,100 44,541
Union Pacific Corp. 5,195,500 311,730
------------
1,110,325
------------
CONSUMER DISCRETIONARY (2.1%)
Eastman Kodak Co. 1,929,600 116,982
May Department Stores Co. 1,508,000 81,055
J.C. Penney Co., Inc. 1,791,700 115,117
Sears, Roebuck & Co. 3,000,000 137,438
------------
450,592
------------
CONSUMER STAPLES (2.0%)
American Stores Co. 1,775,000 35,167
General Mills, Inc. 1,000,000 74,000
H.J. Heinz Co. 3,000,000 150,188
Philip Morris Cos., Inc. 2,500,000 108,750
SuperValu Inc. 1,574,200 61,886
------------
429,991
------------
FINANCIAL SERVICES (14.1%)
Allstate Corp. 5,500,000 472,312
BankAmerica Corp. 3,420,800 249,718
CIGNA Corp. 1,600,000 267,600
Citicorp 2,850,000 341,822
CoreStates Financial Corp. 1,600,000 123,700
Fannie Mae 3,256,300 171,973
First Union Corp. 4,614,400 224,952
Jefferson-Pilot Corp. 1,300,000 99,206
MBIA, Inc. 1,677,600 105,479
Marsh & McLennan Cos., Inc. 2,095,000 155,947
Spieker Properties, Inc. REIT 1,000,000 40,625
U.S. Bancorp 4,249,800 457,119
Wachovia Corp. 3,977,400 306,260
------------
3,016,713
------------
HEALTH CARE (7.7%)
Abbott Laboratories 2,700,000 175,500
American Home Products Corp. 2,000,000 139,750
C.R. Bard, Inc. 2,437,000 72,958
Baxter International, Inc. 3,200,000 162,000
Bristol-Myers Squibb Co. 2,500,000 234,063
Columbia/HCA Healthcare Corp. 3,000,000 88,500
Johnson & Johnson 3,200,000 201,400
Pfizer, Inc. 2,800,000 203,700
Pharmacia & Upjohn, Inc. 6,865,400 231,707
Rhone-Poulenc SA ADR 3,122,316 140,114
------------
1,649,692
------------
INTEGRATED OILS (5.3%)
Amoco Corp. 1,300,000 117,000
Ashland, Inc. 1,000,000 46,688
Atlantic Richfield Co. 400,000 32,600
Chevron Corp. 1,400,000 112,263
(1) Equitable Resources, Inc. 2,000,000 64,750
Exxon Corp. 1,400,000 85,400
Kerr-McGee Corp. 500,000 33,156
Phillips Petroleum Co. 2,200,000 106,563
Repsol SA ADR 3,197,700 137,901
Royal Dutch Petroleum Co. ADR 3,012,048 158,697
Texaco Inc. 1,000,000 56,500
Total SA ADR 1,999,999 105,125
Unocal Corp. 1,850,000 73,653
------------
1,130,296
------------
</TABLE>
13
<PAGE> 16
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
MARKET
VALUE*
WELLINGTON FUND SHARES (000)
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
OTHER ENERGY (0.4%)
Occidental Petroleum Corp. 3,000,000 $ 89,063
------------
MATERIALS & PROCESSING (10.7%)
Aluminum Co. of America 2,700,000 181,575
BOC Group PLC ADR 2,000,000 63,750
British Steel PLC ADR 3,363,200 80,717
Cabot Corp. 2,200,000 57,613
Dow Chemical Co. 2,463,300 243,251
E.I. du Pont de Nemours & Co. 4,000,000 242,250
Imperial Chemical Industries
PLC ADR 685,900 40,768
International Paper Co. 2,000,000 94,875
Kimberly-Clark Corp. 5,300,000 275,931
Lubrizol Corp. 2,500,000 97,500
Norsk Hydro AS ADR 2,000,000 103,625
PPG Industries, Inc. 1,700,000 98,494
(1) Phelps Dodge Corp. 3,304,900 218,950
Reynolds Metals Co. 1,600,000 91,100
Temple-Inland Inc. 1,984,600 113,370
Westvaco Corp. 3,080,200 100,492
Willamette Industries, Inc. 2,981,000 104,708
Witco Chemical Corp. 1,714,200 73,925
------------
2,282,894
------------
PRODUCER DURABLES (5.0%)
AMP, Inc. 1,200,000 52,125
The Boeing Co. 3,400,000 180,625
Caterpillar, Inc. 1,904,600 91,302
Honeywell, Inc. 3,047,900 199,637
Lockheed Martin Corp. 1,200,000 117,075
United Technologies Corp. 1,700,000 127,394
Xerox Corp. 3,779,300 293,604
------------
1,061,762
------------
TECHNOLOGY (0.8%)
International Business
Machines Corp. 1,510,000 165,439
------------
UTILITIES (5.9%)
AT&T Corp. 4,800,000 268,200
ALLTEL Corp. 723,400 28,755
Bell Atlantic Corp. 1,067,999 95,319
BellSouth Corp. 2,500,000 136,875
Carolina Power & Light Co. 2,000,000 74,750
CINergy Corp. 3,155,000 112,397
Duke Energy Corp. 2,500,000 130,000
PacifiCorp 3,150,000 73,434
Pinnacle West Capital Corp. 2,194,000 84,606
SBC Communications Inc. 1,436,300 104,581
Texas Utilities Co. 2,490,000 99,600
U S WEST Communications Group 964,856 43,599
------------
1,252,116
------------
OTHER (3.2%)
Canadian Pacific Ltd. 5,592,300 158,332
Cooper Industries, Inc. 2,116,500 109,264
General Electric Co. 3,700,000 272,875
Minnesota Mining &
Manufacturing Co. 1,500,000 146,156
------------
686,627
------------
- -----------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(COST $7,869,444) 13,325,510
- -----------------------------------------------------------------------------------------------
CONVERTIBLE PREFERRED STOCKS (0.3%)
- -----------------------------------------------------------------------------------------------
Cyprus Amax Minerals Co. $4.00
Cvt. Pfd. Series A 480,000 24,000
Sun Co., Inc. $1.80
Cvt. Pfd. Series A 1,300,000 45,663
- -----------------------------------------------------------------------------------------------
TOTAL CONVERTIBLE PREFERRED STOCKS
(COST $56,824) 69,663
- -----------------------------------------------------------------------------------------------
<CAPTION>
FACE
AMOUNT
(000)
- -----------------------------------------------------------------------------------------------
CORPORATE BONDS (18.7%)
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
FINANCE (6.4%)
Allstate Corp.
7.50%, 6/15/2013 $ 15,000 15,873
Ambac, Inc.
7.50%, 5/1/2023 25,000 26,524
American Re Corp.
7.45%, 12/15/2026 45,000 47,887
Associates Corp. of North America
6.875%, 11/15/2008 45,000 45,752
BB&T Corp.
7.25%, 6/15/2007 36,900 38,267
Banc One Corp.
7.625%, 10/15/2026 20,000 21,581
9.875%, 3/1/2009 20,000 24,853
BankAmerica Corp.
7.20%, 4/15/2006 20,000 20,779
BankBoston Corp.
6.625%, 12/1/2005 27,000 27,023
CIGNA Corp.
7.875%, 5/15/2027 50,000 53,563
The Chase Manhattan Corp.
6.50%, 1/15/2009 30,000 29,401
Citicorp
6.75%, 8/15/2005 30,000 30,238
Comerica Bank
7.875%, 9/15/2026 20,000 21,983
8.375%, 7/15/2024 20,500 22,891
Dean Witter, Discover & Co.
6.75%, 10/15/2013 24,275 24,031
Dean Witter, Discover & Co. MTN
7.07%, 2/10/2014 17,500 17,900
Exxon Capital Corp.
6.00%, 7/1/2005 13,500 13,269
First Chicago Corp.
6.375%, 1/30/2009 15,000 14,554
First Colony Corp.
6.625%, 8/1/2003 31,550 31,898
First Union Corp.
7.50%, 4/15/2035 30,000 33,710
General Electric Capital Corp.
8.125%, 5/15/2012 30,000 34,348
General Electric Capital Services
7.50%, 8/21/2035 11,000 12,230
General Electric Global
Insurance Holdings
7.00%, 2/15/2026 35,000 35,942
General Motors Acceptance Corp.
6.00%, 4/1/2011 27,370 25,565
General Re Corp.
9.00%, 9/12/2009 32,000 38,340
</TABLE>
14
<PAGE> 17
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
FACE MARKET
AMOUNT VALUE*
(000) (000)
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
John Hancock
7.375%, 2/15/2024 $ 44,000 $ 45,512
Jackson National Life
Insurance Co.
8.15%, 3/15/2027 40,000 43,648
Liberty Mutual Insurance Co.
7.875%, 10/15/2026 40,000 42,329
Lumbermens Mutual Casualty
9.15%, 7/1/2026 45,000 51,404
Metropolitan Life Insurance Co.
7.70%, 11/1/2015 43,620 46,092
NBD Bancorp, Inc.
7.125%, 5/15/2007 25,000 25,810
National City Bank Pennsylvania
7.25%, 10/21/2011 20,000 20,713
National City Columbus
7.25%, 7/15/2010 25,000 25,845
NationsBank Corp.
7.80%, 9/15/2016 45,000 49,053
Norwest Financial Inc.
6.25%, 12/15/2007 35,000 34,269
Pacific Mutual Life
7.90%, 12/30/2023 17,000 18,591
Republic New York Corp.
7.75%, 5/15/2009 10,000 10,882
9.50%, 4/15/2014 5,000 6,272
9.70%, 2/1/2009 5,000 6,193
Sears, Roebuck & Co.
Acceptance Corp.
6.875%, 10/15/2017 30,000 29,649
SunTrust Bank Atlanta
7.25%, 9/15/2006 35,000 36,477
Texaco Capital, Inc.
9.75%, 3/15/2020 15,000 20,181
Torchmark Corp.
7.875%, 5/15/2023 32,500 34,514
TransAmerica Financial
6.50%, 3/15/2011 29,265 28,237
U S WEST Capital Funding, Inc.
7.90%, 2/1/2027 35,000 38,040
Wachovia Corp.
6.375%, 2/1/2009 35,000 34,094
------------
1,356,207
------------
INDUSTRIAL (8.0%)
ARCO Chemical Co.
9.80%, 2/1/2020 15,000 19,934
Air Products & Chemicals, Inc.
8.75%, 4/15/2021 26,650 32,602
Albertson's Inc.
7.75%, 6/15/2026 30,000 33,554
Amoco Corp.
6.50%, 8/1/2007 25,000 25,343
Anheuser-Busch Cos., Inc.
7.00%, 12/1/2025 30,000 29,940
Archer-Daniels-Midland Co.
7.50%, 3/15/2027 40,000 43,189
Baxter International, Inc.
7.65%, 2/1/2027 35,000 38,116
Becton, Dickinson & Co.
7.00%, 8/1/2027 25,000 25,684
8.70%, 1/15/2025 20,000 22,705
The Boeing Co.
8.75%, 8/15/2021 40,200 49,838
Bristol-Myers Squibb Co.
6.80%, 11/15/2026 45,000 46,192
Browning-Ferris Industries, Inc.
6.375%, 1/15/2008 34,000 33,397
CPC International, Inc.
7.25%, 12/15/2026 30,500 32,742
CSX Corp.
7.90%, 5/1/2017 40,000 43,550
Coca-Cola Enterprises, Inc.
8.50%, 2/1/2022 40,000 46,973
Dean Foods Co.
6.90%, 10/15/2017 38,000 38,432
Eastman Chemical Co.
7.60%, 2/1/2027 40,000 42,017
Eaton Corp.
7.00%, 4/1/2011 10,600 10,592
7.625%, 4/1/2024 15,000 16,264
Fluor Corp.
6.95%, 3/1/2007 30,000 30,908
Ford Motor Co.
8.875%, 1/15/2022 45,000 54,854
General Motors Corp.
7.70%, 4/15/2016 25,000 27,162
Georgia-Pacific Corp.
9.625%, 3/15/2022 22,000 24,567
International Business
Machines Corp.
8.375%, 11/1/2019 25,000 29,217
Johnson & Johnson
6.73%, 11/15/2023 15,000 15,461
Johnson Controls, Inc.
7.125%, 7/15/2017 27,300 28,150
Eli Lilly & Co.
7.125%, 6/1/2025 43,000 45,262
Lockheed Martin Corp.
7.65%, 5/1/2016 40,000 42,778
Lucent Technologies Inc.
7.25%, 7/15/2006 35,000 36,891
McDonald's Corp.
7.375%, 7/15/2033 15,000 15,705
Mead Corp.
7.35%, 3/1/2017 16,250 17,103
Mobil Corp.
8.625%, 8/15/2021 20,000 24,750
Morton International, Inc.
9.25%, 6/1/2020 21,000 26,933
Motorola, Inc.
7.50%, 5/15/2025 46,500 51,432
News America Holdings Inc.
8.00%, 10/17/2016 35,000 36,807
Norfolk Southern Corp.
7.70%, 5/15/2017 40,000 43,335
PPG Industries, Inc.
6.875%, 2/15/2012 13,600 14,058
9.00%, 5/1/2021 19,750 24,793
J.C. Penney Co., Inc.
7.95%, 4/1/2017 35,000 38,672
Phillips Petroleum Co.
9.375%, 2/15/2011 20,000 24,782
</TABLE>
15
<PAGE> 18
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
FACE MARKET
AMOUNT VALUE*
WELLINGTON FUND (000) (000)
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Procter & Gamble Co. ESOP
9.36%, 1/1/2021 $ 20,000 $ 25,629
Raytheon Co.
7.20%, 8/15/2027 25,000 25,512
7.375%, 7/15/2025 18,000 18,214
Rockwell International Corp.
7.875%, 2/15/2005 17,000 18,506
Rohm & Haas Co.
9.80%, 4/15/2020 15,000 18,907
Sears, Roebuck & Co.
9.375%, 11/1/2011 14,000 17,533
Stanford Univ.
7.65%, 6/15/2026 29,000 32,916
Tenneco Inc.
7.875%, 4/15/2027 35,000 38,586
Tosco Corp.
7.80%, 1/1/2027 35,000 38,070
Union Pacific Corp.
7.00%, 2/1/2016 35,000 34,699
United Parcel Service
8.375%, 4/1/2020 30,070 36,041
United Technologies Corp.
8.75%, 3/1/2021 32,000 39,000
Wal-Mart Stores, Inc.
7.25%, 6/1/2013 24,000 25,587
Wendy's International, Inc.
6.35%, 12/15/2005 25,500 24,936
Weyerhaeuser Co.
6.95%, 8/1/2017 40,000 39,895
------------
1,718,715
------------
UTILITIES (4.3%)
AT&T Corp.
7.75%, 3/1/2007 40,000 43,408
Ameritech Capital Funding
6.875%, 10/15/2027 40,000 40,307
Atlantic City Electric Co.
(2) 7.00%, 9/1/2023 18,000 17,950
BellSouth Telecommunications
5.875%, 1/15/2009 15,000 14,371
7.50%, 6/15/2033 30,000 30,627
Carolina Power & Light Co.
8.625%, 9/15/2021 31,000 37,269
Chesapeake & Potomac
Telephone Co. (MD)
7.15%, 5/1/2023 10,000 10,112
Chesapeake & Potomac
Telephone Co. (VA)
7.625%, 12/1/2012 16,400 17,729
Consolidated Edison Co.
of New York, Inc.
7.50%, 6/15/2023 25,000 25,389
Duke Energy Corp.
7.00%, 10/15/2006 25,000 25,818
7.00%, 7/1/2033 10,000 9,956
El Paso Natural Gas Co.
7.50%, 11/15/2026 35,000 36,871
GTE North, Inc.
6.90%, 11/1/2008 30,000 30,418
GTE Southwest, Inc.
6.00%, 1/15/2006 30,000 28,889
Illinois Bell Telephone Co.
6.625%, 2/1/2025 27,725 26,358
Indiana Bell Telephone Co., Inc.
7.30%, 8/15/2026 42,000 44,999
New Jersey Bell Telephone Co.
8.00%, 6/1/2022 34,019 39,244
New York Telephone Co.
6.70%, 11/1/2023 11,000 10,565
7.25%, 2/15/2024 20,000 20,059
Northern States Power Co.
7.125%, 7/1/2025 45,000 46,902
Ohio Bell Telephone Co.
7.85%, 12/15/2022 20,000 21,176
Pacific Bell
7.125%, 3/15/2026 40,000 41,651
Pacific Gas & Electric Co.
7.05%, 3/1/2024 25,000 26,191
PacifiCorp
6.71%, 1/15/2026 21,000 20,370
PacifiCorp MTN
6.625%, 6/1/2007 20,500 20,583
Southern California Edison Co.
6.90%, 10/1/2018 20,750 20,336
Southwestern Bell Telephone Co.
7.25%, 7/15/2025 25,000 25,196
Southwestern Bell
Telephone Co. MTN
7.60%, 4/26/2007 7,000 7,567
Tennessee Gas Pipeline Co.
7.50%, 4/1/2017 40,000 42,080
Texas Utilities Electric Co.
7.875%, 4/1/2024 14,000 14,624
U S WEST Communications Group
6.875%, 9/15/2033 30,000 28,479
Washington Gas Light Co. MTN
6.15%, 1/26/2026 43,500 43,113
Wisconsin Electric Power Co.
7.70%, 12/15/2027 29,100 30,459
Wisconsin Gas Co.
6.60%, 9/15/2013 13,100 13,222
------------
912,288
------------
- -----------------------------------------------------------------------------------------------
TOTAL CORPORATE BONDS
(COST $3,729,481) 3,987,210
- -----------------------------------------------------------------------------------------------
FOREIGN BONDS (U.S. DOLLAR-DENOMINATED) (6.0%)
- -----------------------------------------------------------------------------------------------
ABN-AMRO BK NV (Chicago)
7.25%, 5/31/2005 40,000 41,563
Abbey National PLC
6.69%, 10/17/2005 25,000 25,176
Abbey National First Capital
8.20%, 10/15/2004 20,000 21,820
Amoco Canada Petroleum Co.
7.95%, 10/1/2022 20,000 21,249
Asian Development Bank
9.125%, 6/1/2000 10,000 10,698
BBV International Finance
7.00%, 12/1/2025 37,500 36,675
BHP Finance USA Ltd.
7.25%, 3/1/2016 35,000 36,132
Bank of Montreal
7.80%, 4/1/2007 15,000 16,208
Banque Nationale de Paris-NY
7.20%, 1/15/2007 35,000 35,800
</TABLE>
16
<PAGE> 19
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
FACE MARKET
AMOUNT VALUE*
(000) (000)
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Banque Paribas-NY
6.875%, 3/1/2009 $ 35,000 $ 34,801
Bayerische Landesbank-NY
6.375%, 10/15/2005 25,000 24,910
Deutsche Bank Financial Inc.
6.70%, 12/13/2006 40,000 40,357
Enersis SA
7.40%, 12/1/2016 35,000 35,094
Husky Oil Ltd.
7.55%, 11/15/2016 30,000 31,607
Republic of Ireland MTN
7.64%, 1/2/2002 30,000 31,463
Republic of Italy Global Bond
6.875%, 9/27/2023 50,000 51,164
Japan Financial Corp.
7.375%, 4/27/2005 38,500 40,917
KFW International Finance
7.00%, 3/1/2013 10,000 10,455
7.20%, 3/15/2014 25,000 26,782
Norsk Hydro AS
7.15%, 11/15/2025 30,000 30,796
9.00%, 4/15/2012 20,000 24,296
Province of Manitoba
9.125%, 1/15/2018 20,000 25,647
9.25%, 4/1/2020 20,000 26,133
Province of New Brunswick
6.75%, 8/15/2013 20,400 20,827
Province of Nova Scotia
8.25%, 7/30/2022 30,000 35,149
Province of Ontario
7.00%, 8/4/2005 40,000 41,517
Petro-Canada
7.875%, 6/15/2026 32,000 35,593
Province of Quebec
7.50%, 7/15/2023 25,000 26,497
Province of Quebec MTN
6.86%, 4/15/2026 20,000 20,856
Rheinische Hypothekenbank AG
6.875%, 6/18/2007 24,750 25,567
Royal Bank of Scotland
6.375%, 2/1/2011 30,000 28,781
Saga Petroleum ASA
7.25%, 9/23/2027 38,000 38,680
Province of Saskatchewan
(3) 7.125%, 3/15/2008 11,000 11,715
Scotland International Finance
8.85%, 11/1/2006 24,000 27,404
SmithKline Beecham MTN
7.375%, 4/15/2005 15,000 15,907
Societe Generale-NY
7.40%, 6/1/2006 25,000 25,833
Southern Investments UK PLC
6.80%, 12/1/2006 35,000 35,524
Sun Canada Financial Co.
6.625%, 12/15/2007 40,000 40,158
Talisman Energy, Inc.
7.125%, 6/1/2007 20,000 20,453
Toronto-Dominion Bank
6.45%, 1/15/2009 14,000 13,752
6.50%, 8/15/2008 10,000 9,880
Ultramar Diamond Shamrock
7.20%, 10/15/2017 40,000 40,628
Westdeutsche Landesbank-NY
6.75%, 6/15/2005 40,000 40,808
Zeneca Wilmington Inc.
7.00%, 11/15/2023 36,500 37,913
- -----------------------------------------------------------------------------------------------
TOTAL FOREIGN BONDS
(COST $1,206,170) 1,273,185
- -----------------------------------------------------------------------------------------------
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (9.1%)
- -----------------------------------------------------------------------------------------------
Agency for International
Development (Israel)
(U.S. Government Guaranteed)
5.89%, 8/15/2005 23,000 22,652
Federal Home Loan Bank
7.66%, 7/20/2004 10,000 10,821
Federal Home Loan Mortgage Corp.
6.19%, 1/21/2004 15,000 14,783
Federal National Mortgage Assn.
6.28%, 2/3/2004 25,000 24,619
Tennessee Valley Authority
Global Bond
6.75%, 11/1/2025 50,000 52,505
U.S. Treasury Bonds
6.25%, 8/15/2023 440,000 446,886
7.25%, 5/15/2016 350,000 393,719
7.50%, 11/15/2016 235,000 270,823
U.S. Treasury Notes
6.50%, 8/15/2005 355,000 367,737
6.50%, 10/15/2006 265,000 275,555
7.875%, 11/15/2004 50,000 55,581
- -----------------------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT AND AGENCY OBLIGATIONS
(COST $1,802,580) 1,935,681
- -----------------------------------------------------------------------------------------------
COMMERCIAL MORTGAGE-BACKED SECURITIES (1.3%)
- -----------------------------------------------------------------------------------------------
Asset Securitization Corp.
(4) 6.75%, 2/14/2041 35,000 35,427
(4) 7.49%, 4/14/2029 34,000 36,130
Chase Commercial Mortgage
Securities Corp.
(4) 6.60%, 12/18/2029 27,000 27,002
Credit Suisse First Boston
Mortgage Securities Corp.
(4) 7.24%, 6/20/2029 35,000 36,509
DLJ Mortgage Acceptance Corp.
(4) 7.60%, 5/15/2030 36,000 38,588
First Union-Lehman Brothers
Commercial Mortgage Trust
(4) 6.65%, 11/18/2029 33,000 33,051
(4) 7.38%, 4/18/2029 35,000 36,684
Morgan Stanley Capital I Inc.
(4) 7.22%, 7/15/2029 35,000 36,684
- -----------------------------------------------------------------------------------------------
TOTAL COMMERCIAL MORTGAGE-BACKED SECURITIES
(COST $274,839) 280,075
- -----------------------------------------------------------------------------------------------
MUNICIPAL BONDS (0.3%)
- -----------------------------------------------------------------------------------------------
Oakland CA Pension Obligation
6.98%, 12/15/2009 20,000 20,963
Southern CA Public Power Auth.
(Power Project)
6.93%, 5/15/2017 30,000 31,042
</TABLE>
17
<PAGE> 20
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
FACE MARKET
AMOUNT VALUE*
WELLINGTON FUND (000) (000)
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Chelan County WA Public
Utility Dist.
7.07%, 6/1/2007 $ 10,000 $ 10,523
7.10%, 6/1/2008 12,000 12,701
- -----------------------------------------------------------------------------------------------
TOTAL MUNICIPAL BONDS
(COST $72,000) 75,229
- -----------------------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENTS (1.2%)
- -----------------------------------------------------------------------------------------------
REPURCHASE AGREEMENTS
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
5.70%, 12/1/1997 50,941 50,941
5.71%-5.72%, 12/1/1997--Note F 200,747 200,747
- -----------------------------------------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(COST $251,688) 251,688
- -----------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (99.3%)
(COST $15,263,026) 21,198,241
- -----------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (0.7%)
- -----------------------------------------------------------------------------------------------
Other Assets--Note C 432,100
Liabilities--Note F (290,059)
------------
142,041
- -----------------------------------------------------------------------------------------------
NET ASSETS (100%)
- -----------------------------------------------------------------------------------------------
Applicable to 687,313,675 outstanding
$1.00 par value shares
(authorized 1,100,000,000 shares) $21,340,282
===============================================================================================
NET ASSET VALUE PER SHARE $31.05
===============================================================================================
</TABLE>
*See Note A in Notes to Financial Statements.
(1) Considered an affiliated company as the Fund owns more than 5% of the
outstanding voting securities of the company. The total market value of
investments in affiliated companies was $283,700,000.
(2) Scheduled principal and interest payments are guaranteed by MBIA (Municipal
Bond Insurance Association).
(3) Scheduled principal and interest payments are guaranteed by FSA (Financial
Security Assurance).
(4) The average maturity is shorter than the final maturity shown due to
scheduled interim principal payments.
ADR--American Depository Receipt.
MTN--Medium-Term Note.
REIT--Real Estate Investment Trust.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- -----------------------------------------------------------------------------------------------
AT NOVEMBER 30, 1997, NET ASSETS CONSISTED OF:
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $14,034,024 $20.42
Undistributed Net
Investment Income 291,723 .42
Accumulated Net
Realized Gains 1,079,320 1.57
Unrealized Appreciation--
Note E 5,935,215 8.64
- -----------------------------------------------------------------------------------------------
NET ASSETS $21,340,282 $31.05
===============================================================================================
</TABLE>
18
<PAGE> 21
STATEMENT OF OPERATIONS
This Statement shows dividend and interest income earned by the Fund during the
reporting period, and details the operating expenses charged to the Fund. These
expenses directly reduce the amount of investment income available to pay to
shareholders as dividends. This Statement also shows any Net Gain (Loss)
realized on the sale of investments, and the increase or decrease in the
Unrealized Appreciation (Depreciation) on investments during the period.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
WELLINGTON FUND
YEAR ENDED NOVEMBER 30, 1997
(000)
- -----------------------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME
INCOME
Dividends* $ 293,200
Interest 498,501
------------
Total Income 791,701
------------
EXPENSES
Investment Advisory Fees--Note B
Basic Fee 7,447
Performance Adjustment (244)
The Vanguard Group--Note C
Management and Administrative 40,886
Marketing and Distribution 3,933
Taxes (other than income taxes) 1,380
Custodian Fees 296
Auditing Fees 38
Shareholders' Reports 579
Annual Meeting and Proxy Costs 198
Directors' Fees and Expenses 43
------------
Total Expenses 54,556
Expenses Paid Indirectly--Note C (1,516)
------------
Net Expenses 53,040
- -----------------------------------------------------------------------------------------------
NET INVESTMENT INCOME 738,661
- -----------------------------------------------------------------------------------------------
REALIZED NET GAIN ON INVESTMENT SECURITIES SOLD* 1,079,218
- -----------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) OF INVESTMENT SECURITIES 1,409,192
- -----------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $3,227,071
===============================================================================================
</TABLE>
*Dividend income and realized net gain from affiliated companies were
$11,008,000 and $10,622,000 respectively.
19
<PAGE> 22
STATEMENT OF CHANGES IN NET ASSETS
This Statement shows how the Fund's total net assets changed during the two
most recent reporting periods. The Operations section summarizes information
that is detailed in the Statement of Operations. The amounts shown as
Distributions to shareholders from the Fund's net income and capital gains may
not match the amounts shown in the Operations section, because distributions
are determined on a tax basis and may be made in a period different from the
one in which the income was earned or the gains were realized on the financial
statements. The Capital Share Transactions section shows the amount
shareholders invested in the Fund, either by purchasing shares or by
reinvesting distributions, as well as the amounts redeemed. The corresponding
numbers of Shares Issued and Redeemed are shown at the end of the Statement.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
WELLINGTON FUND
YEAR ENDED NOVEMBER 30,
-----------------------------------------
1997 1996
(000) (000)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net Investment Income $ 738,661 $ 572,006
Realized Net Gain 1,079,218 695,226
Change in Unrealized Appreciation (Depreciation) 1,409,192 1,544,678
-----------------------------------------
Net Increase in Net Assets Resulting from Operations 3,227,071 2,811,910
-----------------------------------------
DISTRIBUTIONS
Net Investment Income (661,099) (519,183)
Realized Capital Gain (647,264) (141,199)
-----------------------------------------
Total Distributions (1,308,363) (660,382)
-----------------------------------------
CAPITAL SHARE TRANSACTIONS(1)
Issued 4,070,135 3,193,817
Issued in Lieu of Cash Distributions 1,236,753 617,054
Redeemed (2,390,687) (1,789,640)
-----------------------------------------
Net Increase from Capital Share Transactions 2,916,201 2,021,231
- ----------------------------------------------------------------------------------------------------------------------
Total Increase 4,834,909 4,172,759
- ----------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Year 16,505,373 12,332,614
-----------------------------------------
End of Year $21,340,282 $16,505,373
======================================================================================================================
(1)Shares Issued (Redeemed)
Issued 143,031 126,321
Issued in Lieu of Cash Distributions 46,059 24,884
Redeemed (84,173) (70,741)
-----------------------------------------
Net Increase in Shares Outstanding 104,917 80,464
======================================================================================================================
</TABLE>
20
<PAGE> 23
FINANCIAL HIGHLIGHTS
This table summarizes the Fund's investment results and distributions to
shareholders on a per-share basis. It also presents the Fund's Total Return and
shows net investment income and expenses as percentages of average net assets.
These data will help you assess: the variability of the Fund's net income and
total returns from year to year; the relative contributions of net income and
capital gains to the Fund's total return; how much it costs to operate the
Fund; and the extent to which the Fund tends to distribute capital gains.
The table also shows the Portfolio Turnover Rate, a measure of trading
activity. A turnover rate of 100% means that the average security is held in
the Fund for one year. Finally, the table lists the Fund's Average Commission
Rate Paid, a disclosure required by the SEC beginning in 1996. This rate is
calculated by dividing total commissions paid on portfolio securities by the
total number of shares purchased and sold on which commissions were charged.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
WELLINGTON FUND
YEAR ENDED NOVEMBER 30,
-------------------------------------------------------------------
FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR 1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $28.34 $24.57 $19.33 $20.78 $19.34
- -----------------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income 1.11 1.02 .96 .88 .92
Net Realized and Unrealized Gain (Loss) on Investments 3.77 4.00 5.19 (1.03) 1.62
-------------------------------------------------------------------
Total from Investment Operations 4.88 5.02 6.15 (.15) 2.54
-------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (1.06) (.97) (.88) (.92) (.94)
Distributions from Realized Capital Gains (1.11) (.28) (.03) (.38) (.16)
-------------------------------------------------------------------
Total Distributions (2.17) (1.25) (.91) (1.30) (1.10)
- -----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $31.05 $28.34 $24.57 $19.33 $20.78
===================================================================================================================================
TOTAL RETURN 18.60% 21.26% 32.70% -0.82% 13.62%
===================================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $21,340 $16,505 $12,333 $8,638 $7,917
Ratio of Total Expenses to Average Net Assets 0.29% 0.31% 0.33% 0.35% 0.34%
Ratio of Net Investment Income to Average Net Assets 3.97% 4.08% 4.37% 4.35% 4.55%
Portfolio Turnover Rate 27% 30% 24% 32% 34%
Average Commission Rate Paid $.0571 $.0572 N/A N/A N/A
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
21
<PAGE> 24
NOTES TO FINANCIAL STATEMENTS
Vanguard/Wellington Fund is registered under the Investment Company Act of 1940
as a diversified open-end investment company, or mutual fund.
A. The following significant accounting policies conform to generally
accepted accounting principles for mutual funds. The Fund consistently follows
such policies in preparing its financial statements.
1. SECURITY VALUATION: Common stocks listed on an exchange are valued at
the latest quoted sales prices as of the close of trading on the New York Stock
Exchange (generally 4:00 p.m. Eastern time) on the valuation date; such
securities not traded on the valuation date are valued at the mean of the
latest quoted bid and asked prices. Securities not listed on an exchange are
valued at the latest quoted bid prices. Bonds are valued using the latest bid
prices and using valuations based on a matrix system (which considers such
factors as security prices, yields, maturities, and ratings), both as furnished
by independent pricing services. Temporary cash investments are valued at
cost, which approximates market value.
2. FEDERAL INCOME TAXES: The Fund intends to continue to qualify as a
regulated investment company and distribute all of its taxable income.
Accordingly, no provision for federal income taxes is required in the financial
statements.
3. REPURCHASE AGREEMENTS: The Fund, along with other members of The
Vanguard Group, transfers uninvested cash balances to a Pooled Cash Account,
which is invested in repurchase agreements secured by U.S. government
securities. Securities pledged as collateral for repurchase agreements are held
by a custodian bank until the agreements mature. Each agreement requires that
the market value of the collateral be sufficient to cover payments of interest
and principal; however, in the event of default or bankruptcy by the other
party to the agreement, retention of the collateral may be subject to legal
proceedings.
4. DISTRIBUTIONS: Distributions to shareholders are recorded on the
ex-dividend date.
5. OTHER: Dividend income is recorded on the ex-dividend date. Security
transactions are accounted for on the date securities are bought or sold. Costs
used to determine realized gains (losses) on the sale of investment securities
are those of the specific securities sold. Premiums and discounts on debt
securities purchased are amortized and accreted, respectively, to interest
income over the lives of the respective securities.
B. Wellington Management Company, LLP, provides investment advisory services
to the Fund for a fee calculated at an annual percentage rate of average net
assets. The basic fee is subject to quarterly adjustments based on performance
relative to a combined index comprising the S&P 500 Index and the Lehman
Long-Term Corporate AA or Better Bond Index. For the year ended November 30,
1997, the advisory fee represented an effective annual basic rate of 0.04% of
the Fund's average net assets before a decrease of $244,000 based on
performance.
C. The Vanguard Group furnishes at cost corporate management, administrative,
marketing, and distribution services. The costs of such services are allocated
to the Fund under methods approved by the Board of Directors. At November 30,
1997, the Fund had contributed capital of $1,416,000 to Vanguard (included in
Other Assets), representing 7.1% of Vanguard's capitalization. The Fund's
Directors and officers are also Directors and officers of Vanguard.
Vanguard has asked the Fund's investment adviser to direct certain
portfolio trades, subject to obtaining the best price and execution, to brokers
who have agreed to rebate to the Fund part of the commissions generated. Such
rebates are used solely to reduce the Fund's administrative expenses. For the
year ended November 30, 1997, these arrangements reduced the Fund's expenses by
$1,516,000 (an annual rate of 0.01% of average net assets).
22
<PAGE> 25
D. During the year ended November 30, 1997, the Fund purchased $5,230,645,000
of investment securities and sold $2,870,986,000 of investment securities,
other than U.S. government securities and temporary cash investments. Purchases
and sales of U.S. government securities were $1,950,465,000 and $2,032,877,000,
respectively.
E. At November 30, 1997, net unrealized appreciation of investment securities
for financial reporting and federal income tax purposes was $5,935,215,000,
consisting of unrealized gains of $5,968,540,000 on securities that had risen
in value since their purchase and $33,325,000 in unrealized losses on
securities that had fallen in value since their purchase.
F. The market value of securities on loan to broker/dealers at November 30,
1997, was $418,397,000, for which the Fund had received as collateral cash of
$200,747,000 and U.S. Treasury securities with a market value of $234,548,000.
Cash collateral received is invested in repurchase agreements. Security loans
are required to be secured at all times by collateral at least equal to the
market value of securities loaned; however, in the event of default or
bankruptcy by the other party to the agreement, retention of the collateral may
be subject to legal proceedings.
23
<PAGE> 26
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and
Board of Directors of
Vanguard/Wellington Fund
In our opinion, the accompanying statement of net assets and the related
statements of operations and of changes in net assets and the financial
highlights present fairly, in all material respects, the financial position of
Vanguard/Wellington Fund (the "Fund") at November 30, 1997, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended and the financial highlights for each of
the five years in the period then ended, in conformity with generally accepted
accounting principles. These financial statements and financial highlights
(hereafter referred to as "financial statements") are the responsibility of the
Fund's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at November 30, 1997 by correspondence with the
custodian and the application of alternative auditing procedures where
securities purchased had not been settled, provide a reasonable basis for the
opinion expressed above.
PRICE WATERHOUSE LLP
Thirty South Seventeenth Street
Philadelphia, Pennsylvania 19103
January 6, 1998
SPECIAL 1997 TAX INFORMATION (UNAUDITED) FOR VANGUARD/WELLINGTON FUND
This information for the fiscal year ended November 30, 1997, is included
pursuant to provisions of the Internal Revenue Code.
The Fund designates $918,975,000 as capital gain dividends (from net
long-term capital gains), which will be distributed in December 1997. Of the
$918,975,000 capital gain dividends, the Fund designates $527,790,000 as a 20%
rate gain distribution.
For corporate shareholders, 30.1% of investment income (dividend income
plus short-term gains, if any) qualifies for the dividends-received deduction.
24
<PAGE> 27
HONORARY CHAIRMAN
WALTER L. MORGAN, Founder.
DIRECTORS AND OFFICERS
JOHN C. BOGLE
Chairman of the Board and Director of The Vanguard Group, Inc., and of each of
the investment companies in The Vanguard Group.
JOHN J. BRENNAN
President, Chief Executive Officer, and Director of The Vanguard Group, Inc.,
and of each of the investment companies in The Vanguard Group.
ROBERT E. CAWTHORN
Chairman Emeritus and Director of Rhone-Poulenc Rorer, Inc.; Managing Director
of Global Health Care Partners/DLJ Merchant Banking Partners; Director of Sun
Company, Inc., and Westinghouse Electric Corp.
BARBARA BARNES HAUPTFUHRER
Director of The Great Atlantic and Pacific Tea Co., IKON Office Solutions, Inc.,
Raytheon Co., Knight-Ridder, Inc., Massachusetts Mutual Life Insurance Co., and
Ladies Professional Golf Association; Trustee Emerita of Wellesley College.
BRUCE K. MACLAURY
President Emeritus of The Brookings Institution; Director of American Express
Bank Ltd., The St. Paul Companies, Inc., and National Steel Corp.
BURTON G. MALKIEL
Chemical Bank Chairman's Professor of Economics, Princeton University; Director
of Prudential Insurance Co. of America, Amdahl Corp., Baker Fentress & Co., The
Jeffrey Co., and Southern New England Telecommunications Co.
ALFRED M. RANKIN, JR.
Chairman, President, and Chief Executive Officer of NACCO Industries, Inc.;
Director of NACCO Industries, The BFGoodrich Co., and The Standard Products Co.
JOHN C. SAWHILL
President and Chief Executive Officer of The Nature Conservancy; formerly,
Director and Senior Partner of McKinsey & Co. and President of New York
University; Director of Pacific Gas and Electric Co., Procter & Gamble Co., and
NACCO Industries.
JAMES O. WELCH, JR.
Retired Chairman of Nabisco Brands, Inc.; retired Vice Chairman and Director of
RJR Nabisco; Director of TECO Energy, Inc., and Kmart Corp.
J. LAWRENCE WILSON
Chairman and Chief Executive Officer of Rohm & Haas Co.; Director of Cummins
Engine Co. and The Mead Corp.; Trustee of Vanderbilt University.
OTHER FUND OFFICERS
RAYMOND J. KLAPINSKY
Secretary; Managing Director and Secretary of The Vanguard Group, Inc.;
Secretary of each of the investment companies in The Vanguard Group.
RICHARD F. HYLAND
Treasurer; Principal of The Vanguard Group, Inc.; Treasurer 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.
OTHER VANGUARD OFFICERS
R. GREGORY BARTON
Managing Director, Legal Department.
ROBERT A. DISTEFANO
Managing Director, Information Technology.
JAMES H. GATELY
Managing Director, Individual Investor Group.
KATHLEEN C. GUBANICH
Managing Director, Human Resources.
IAN A. MACKINNON
Managing Director, Fixed Income Group.
F. WILLIAM MCNABB, III
Managing Director, Institutional Investor Group.
MICHAEL S. MILLER
Managing Director, Planning and Development.
RALPH K. PACKARD
Managing Director and Chief Financial Officer.
GEORGE U. SAUTER
Managing Director, Core Management Group.
"Standard & Poor's 500," "S&P 500(R)," "Standard & Poor's(R)," "S&P(R)," and
"500" are trademarks of The McGraw-Hill Companies, Inc. Frank Russell Company
is the owner of trademarks and copyrights relating to the Russell Indexes.
"Wilshire 4500" and "Wilshire 5000" are trademarks of Wilshire Associates.
<PAGE> 28
VANGUARD FAMILY OF FUNDS
STOCK FUNDS
Convertible Securities Fund
Equity Income Fund
Explorer Fund
Growth and Income Portfolio
Horizon Fund
Aggressive Growth Portfolio
Capital Opportunity Portfolio
Global Equity Portfolio
Index Trust
500 Portfolio
Extended Market Portfolio
Growth Portfolio
Small Capitalization Stock
Portfolio
Total Stock Market Portfolio
Value Portfolio
Institutional Index Fund
International Equity Index Fund
Emerging Markets Portfolio
European Portfolio
Pacific Portfolio
International Growth Portfolio
International Value Portfolio
Morgan Growth Fund
PRIMECAP Fund
Selected Value Portfolio
Specialized Portfolios
Energy Portfolio
Gold & Precious Metals
Portfolio
Health Care Portfolio
REIT Index Portfolio
Utilities Income Portfolio
Tax-Managed Fund
Capital Appreciation
Portfolio
Growth and Income Portfolio
Total International Portfolio
Trustees' Equity Fund
U.S. Portfolio
U.S. Growth Portfolio
Windsor Fund
Windsor II
BALANCED FUNDS
Asset Allocation Fund
Balanced Index Fund
Horizon Fund
Global Asset Allocation
Portfolio
LifeStrategy Portfolios
Conservative Growth
Portfolio
Growth Portfolio
Income Portfolio
Moderate Growth Portfolio
STAR Portfolio
Tax-Managed Fund
Balanced Portfolio
Wellesley Income Fund
Wellington Fund
BOND FUNDS
Admiral Funds
Intermediate-Term U.S.
Treasury Portfolio
Long-Term U.S. Treasury
Portfolio
Short-Term U.S. Treasury
Portfolio
Bond Index Fund
Intermediate-Term Bond
Portfolio
Long-Term Bond Portfolio
Short-Term Bond Portfolio
Total Bond Market Portfolio
Fixed Income Securities Fund
GNMA Portfolio
High Yield Corporate Portfolio
Intermediate-Term Corporate
Portfolio
Intermediate-Term U.S.
Treasury Portfolio
Long-Term Corporate
Portfolio
Long-Term U.S. Treasury
Portfolio
Short-Term Corporate
Portfolio
Short-Term Federal Portfolio
Short-Term U.S. Treasury
Portfolio
Municipal Bond Fund
High-Yield Portfolio
Insured Long-Term Portfolio
Intermediate-Term Portfolio
Limited-Term Portfolio
Long-Term Portfolio
Short-Term Portfolio
Preferred Stock Fund
State Tax-Free Funds
(CA, FL, NJ, NY, OH, PA)
MONEY MARKET FUNDS
Admiral Funds
U.S. Treasury Money Market
Portfolio
Money Market Reserves
Federal Portfolio
Prime Portfolio
Municipal Bond Fund
Money Market Portfolio
Treasury Money Market Portfolio
State Tax-Free Funds
(CA, NJ, NY, OH, PA)
Q210-11/97
(C) 1998 Vanguard Marketing
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contain more complete information on advisory fees, distribution charges, and
other expenses and should be read carefully before you invest or send money.
Prospectuses can be obtained directly from The Vanguard Group.
