<PAGE>
VANGUARD(R)
WELLINGTON
FUND
Annual Report
November 30, 1999
[SHIP GRAPHIC]
[A MEMBER OF THE VANGUARD GROUP]
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FELLOW SHAREHOLDERS:
TWO ROADS DIVERGED IN A WOOD, AND I--I TOOK THE ONE LESS TRAVELED BY, AND THAT
HAS MADE ALL THE DIFFERENCE.
I can think of no better words than those of Robert Frost to begin this special
letter to our shareholders, who have placed such extraordinary trust in me and
in Vanguard over the past quarter century. When the firm was founded 25 years
ago, we deliberately took a new road to managing a mutual fund enterprise.
Instead of having the funds controlled by an outside management company with its
own financial interests, the Vanguard funds--there were only 11 of them
then--would be controlled by their own shareholders and operate solely in their
financial interests. The outcome of our unprecedented decision was by no means
certain. We described it then as "The Vanguard Experiment."
Well, I guess it's fair to say it's an experiment no more. During the
past 25 years, the assets we hold in stewardship for investors have grown from
$1 billion to more than $500 billion, and I believe that our reputation for
integrity, fair-dealing, and sound investment principles is second to none in
this industry. Our staggering growth--which I never sought--has come in
important part as a result of the simple investment ideas and basic human values
that are the foundation of my personal philosophy. I have every confidence that
they will long endure at Vanguard, for they are the right ideas and right
values, unshakable and eternal.
While Emerson believed that "an institution is the lengthened shadow of
one man," Vanguard today is far greater than any individual. The Vanguard crew
has splendidly implemented and enthusiastically supported our founding ideas and
values, and deserves the credit for a vital role in forging our success over the
years. It is a dedicated crew of fine human beings, working together in an
organization that is well prepared to press on regardless long after I am gone.
Creating and leading this enterprise has been an exhilarating run. Through it
all, I've taken the kudos and the blows alike, enjoying every moment to the
fullest, and even getting a second chance at life with a heart transplant three
years ago. What more could a man ask?
While I shall no longer be serving on the Vanguard Board, I want to
assure you that I will remain vigorous and active in a newly created Vanguard
unit, researching the financial markets, writing, and speaking. I'll continue to
focus whatever intellectual power and ethical strength I possess on my mission
to assure that mutual fund investors everywhere receive a fair shake. In the
spirit of Robert Frost:
BUT I HAVE PROMISES TO KEEP, AND MILES TO GO BEFORE I SLEEP, AND MILES
TO GO BEFORE I SLEEP.
You have given me your loyalty and friendship over these long years,
and I deeply appreciate your thousands of letters of support. For my part, I
will continue to keep an eagle eye on your interests, for you deserve no less.
May God bless you all, always.
/S/
JCB
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CONTENTS
REPORT FROM THE CHAIRMAN 1
AFTER-TAX RETURNS REPORT 5
NOTICE TO SHAREHOLDERS 6
THE MARKETS IN PERSPECTIVE 7
REPORT FROM THE ADVISER 9
PERFORMANCE SUMMARY 11
FUND PROFILE 12
FINANCIAL STATEMENTS 16
REPORT OF INDEPENDENT ACCOUNTANTS 28
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REPORT FROM THE CHAIRMAN
[PHOTO OF JOHN J. BRENNAN]
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Vanguard Wellington Fund's 3.6% return during the fiscal year ended November 30,
1999, was disappointing in both an absolute and a relative sense. It was the
smallest annual return for the fund since fiscal 1994, when Wellington posted a
slight decline. For the first time in the last eight fiscal years, our return
trailed that of the average balanced mutual fund. We also came up short in
relation to our unmanaged composite stock/bond index.
The table at right presents the fund's total return (capital change
plus reinvested dividends) and those of the average balanced fund and the
composite index. The index benchmark allots 65% to the Standard & Poor's 500
Index, which gained 20.9% during the year, and 35% to the Lehman Brothers Long
Corporate AA or Better Bond Index, which declined -5.8%.
TOTAL RETURNS
FISCAL YEAR ENDED
NOVEMBER 30, 1999
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Vanguard Wellington Fund 3.6%
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Average Balanced Fund* 8.9%
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Wellington Composite Index** 11.0%
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S&P 500 Index 20.9%
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Lehman Long Corporate AA or
Better Index -5.8%
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*Derived from data provided by Lipper Inc.
**Weighted 65% S&P 500 Index and 35% Lehma
Long Corporate AA or Better Index.
The fund's return is based on a decrease in net asset value from $32.29
per share on November 30, 1998, to $29.62 per share on November 30, 1999, and is
adjusted for dividends totaling $1.22 per share paid from net investment income
and a distribution of $2.44 per share paid from net realized capital gains. (Net
realized capital gains totaling $1.50 per share were distributed in December
1999 along with our fourth-quarter income dividend.) The fund's yield as of
November 30 was 3.9%.
FINANCIAL MARKETS IN REVIEW
The 12-month period ended November 30 featured plenty of positive economic news,
as well as plenty of concern over how much longer the good times can roll before
inflation begins to accelerate. The U.S. economy's expansion continued to
display remarkable staying power--inflation-adjusted economic output rose 4.3%
from the third quarter of 1998 to the third quarter of 1999, and the nation's
unemployment rate was at the lowest point in three decades. Overseas economies
also picked up steam. Despite heightened business activity and a big jump in
energy prices, inflation was moderate: Consumer prices increased 2.6% during our
fiscal year.
Of course, financial markets seek to look ahead, not behind. And a
belief that higher inflation could not be far off was reflected in a steady rise
in interest rates during the fiscal year. The Federal Reserve Board joined the
uptrend by raising its target for short-term interest rates three times by a
total of 75 basis points (0.75 percentage point) in an attempt to slow the
economy and head off inflation.
Although rising rates restrained the stock market a bit, market
averages managed an impressive advance. Technology companies powered the
ascent--tech stocks within the S&P 500 Index gained more than 66% as a group. As
noted, the S&P 500, which is dominated by large-capitalization stocks, returned
20.9%, its fifth straight year of returns higher than 20%. The entire U.S. stock
market, as represented by the Wilshire
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5000 Total Market Index, advanced an even higher 22.4%, but as with the S&P 500,
a large portion of the gain was concentrated in a relatively small number of
stocks. Many value-oriented stocks, in particular, were left far behind. For
example, within the S&P 500 Index, value stocks gained 12.5%, less than half the
28.5% return for growth stocks. The disparity was astonishing within the
small-cap Russell 2000 Index, where growth stocks gained 32.7% and value stocks
declined -1.4%.
While increasing interest rates weighed on stocks during fiscal 1999,
they dragged the bond market down to its worst year since 1994. The yield of the
30-year U.S. Treasury bond ended the fiscal year at 6.29%, up 123 basis points
from its starting point of 5.06% on November 30, 1998. The yield of 3-month U.S.
Treasury bills climbed 82 basis points during the year to 5.30%.
Bond prices move in the opposite direction from interest rates, and the
magnitude of the price change increases along with bond maturities. Long-term
Treasury bond prices fell by more than -13%. The overall bond market, as
measured by the Lehman Aggregate Bond Index, which has an intermediate-term
average maturity, had an average price decline of -6.2%, entirely offsetting
interest income of 6.2%. As a result, the index had a break-even year. On
balance, corporate bonds did a bit better than Treasury securities during the
fiscal year.
FISCAL 1999 PERFORMANCE OVERVIEW
Wellington Fund's 3.6% return during the fiscal year was 5.3 percentage points
behind the 8.9% return of the average balanced fund and 7.4 points behind the
11.0% return of our stock/bond index benchmark. The biggest reason for the
shortfall was our bias toward value stocks--those that tend to pay relatively
high dividend yields and to sell at below-average multiples of earnings and book
value. This bias has served the fund very well for decades, but not in fiscal
1999, when the stock market's gains were concentrated in the more aggressive
regions of the market, especially in technology stocks. Except during a
springtime rally for value stocks--when the fund gained 10% in two months--our
fund had a less-than-stellar performance during the year.
The tech sector's gain of more than 66% led the market, and
Wellington's tech holdings did nearly as well (up 56%). However, technology
companies accounted on average for only about 6% of our stock holdings, less
than one-third the technology weighting in the S&P 500 Index and about half the
tech weighting for the average balanced fund. In all, the light allocation to
tech stocks accounted for about 4 percentage points of our shortfall versus our
stock/bond index. Given that only 18 of the 53 technology stocks in the S&P 500
Index pay any dividend at all, this sector is likely to remain underrepresented
in Wellington Fund, whose mandate is to provide current income as well as
long-term growth.
A second factor in Wellington Fund's lackluster performance in fiscal
1999 was our emphasis on long-term bonds. Prices of long-term bonds are more
sensitive to changes in market interest rates than prices of shorter-term bonds,
a fact that has helped Wellington Fund's performance when interest rates are
falling but that hurt our results during the past year. At the end of the fiscal
year, Wellington Fund's Board of Trustees approved a change in the benchmark for
the bond segment. The switch to the Lehman Corporate A or Better Index, which is
discussed in more detail on page 6, will shift the emphasis of our fixed-income
holdings to intermediate-term bonds with an average quality rating of A or
better. We do not expect the reduction in the average maturity of our bond
holdings to significantly affect the fund's long-term total returns. However, it
should reduce by
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roughly 30% the degree to which our bond segment's price fluctuates in response
to a given short-term change in interest rates. The bond portfolio's interest
rate sensitivity will be in line with that of peer funds, most of which hold
bonds with an intermediate-term average maturity. In addition, by adding A-rated
bonds to the fund's investment options, we expand by a factor of ten the number
of high-quality investment-grade bonds available to the adviser.
Providing a reasonable level of current income--and increasing the
fund's income over time--are Wellington Fund objectives. We met these objectives
during fiscal 1999, when the fund's income dividends totaled $1.22 per share, up
about 3% from the $1.18 paid out during the previous year.
LONG-TERM PERFORMANCE OVERVIEW
Wellington Fund's long-term performance has been solid, as you can see from the
table below. It presents the average annual returns (assuming reinvestment of
dividends) for your fund, the average balanced fund, and our composite
stock/bond index, as well as the ending value of hypothetical $10,000
investments made in each a decade ago. During the decade ended November 30,
1999, Wellington earned an average annual return of 12.7%, surpassing the 11.5%
annual return achieved by the average balanced fund but trailing the 14.6% gain
of the composite index. Equal $10,000 investments would have grown to $33,156 in
Wellington Fund and to $29,645 in our average peer, a difference of $3,511, or
35% of the original sum invested. A $10,000 investment in the index--which
exists "on paper" and bears no real-world operating or transaction costs--would
have accumulated to $39,197, or $6,041 more than in Wellington Fund.
Much of our margin over the average balanced fund is due to our low
operating costs. Wellington Fund's expense ratio (annual expenses as a
percentage of average netassets) in fiscal 1999 was 0.30%, or $3 per $1,000 of
assets, less than one-quarter of the expense ratio of 1.31% ($13.10 per $1,000
of assets) charged by the average balanced fund. In essence, low operating costs
give us a head start, year after year, in our effort to outperform other funds.
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TOTAL RETURNS
10 YEARS ENDED NOVEMBER 30, 1999
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AVERAGE FINAL VALUE OF
ANNUAL A $10,000
RETURN INITIAL INVESTMENT
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Vanguard Wellington Fund 12.7% $33,156
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Average Balanced Fund 11.5% $29,645
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Wellington Composite Index 14.6% $39,197
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Our shortfall versus the index during the past decade was due to the
same trend that hurt us in fiscal 1999--the dominance of growth stocks over
value stocks. The growth-stock component of the S&P 500 Index posted an
astounding average return of 20.0% during the ten years ended November 30. This
was nearly 5 percentage points better than the 15.2% average gain for the value
side of the S&P 500. Put simply, Wellington Fund's value style of investing
faced a very stiff headwind during most of the past decade. However, over long
periods the returns from value and growth stocks have been similar, and they've
swapped places as market leaders many times. We fully expect value stocks to
rule the roost from time to time--as they did briefly this past spring.
A cautionary note is in order. While we would not be a bit surprised to
see value stocks outperform growth stocks over the next decade, we would be
amazed to see stock returns even close to those achieved in the golden decades
of the 1980s and 1990s.
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During the past 20 years, the U.S. stock market has gained 16.8% per year--a
two-decade stretch unmatched in financial history. We don't expect a threepeat
in the next decade. Indeed, investors will be fortunate to receive 10% to 11%
annually from stocks, the average return over the past seven decades. Bond
returns also are very likely to be lower over the next decade than in the past
decade (when the U.S. bond market averaged a 7.8% annual return). Interest rates
are more than 1 percentage point lower today than ten years ago, and interest
income is the main long-term component of bond returns.
I am not forecasting gloom and doom. If inflation remains in the 2% to
3% range, current bond yields provide an attractive real yield, and it would
take stock returns of only 7% to 9% annually to provide an inflation-adjusted
return of 5% to 6%, in line with the long-term average for common stocks.
Realistic return assumptions are important--especially for individuals planning
for long-term financial goals such as retirement. If you base your plans on the
assumption that the fabulous returns of the past 20 years will continue, you run
the risk of falling well short of your financial goals.
IN SUMMARY
When one asset class performs so well, as stocks did again in fiscal 1999, and
another performs poorly, as did bonds, it would be easy to conclude that
diversification has no value. That conclusion would be dead wrong. Wellington
Fund, which completed its 70th year of operation on June 30, 1999, is proof of
the long-term merits of diversification. Its balanced approach to
investing--holding a mix of stocks for capital appreciation and bonds for income
and relative stability--has served shareholders well through both good and bad
times.
At Vanguard, we continue to believe that most investors should hold
balanced portfolios of stock funds, bond funds, and short-term reserves, in
proportions suitable for each person's unique investment goals, time horizon,
and tolerance for risk. With such a plan in place, investors are well-advised to
"stay the course."
John J. Brennan
Chairman and Chief Executive Officer
December 13, 1999
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A NOTE OF THANKS TO OUR FOUNDER
================================================================================
As you may have read on the inside cover of our report, our founder, John C.
Bogle, is retiring December 31, 1999, as Senior Chairman of our Board after
nearly 25 years of devoted service to Vanguard and our shareholders. Vanguard
investors have Jack to thank for creating a truly mutual mutual fund company
that operates solely in the interest of its fund shareholders. And mutual fund
investors everywhere have benefited from his energetic efforts to improve this
industry. Finally, on a personal note, I am forever grateful to Jack for giving
me the opportunity to join this great company in 1982.
4
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A REPORT ON YOUR FUND'S AFTER-TAX RETURNS
Beginning with this annual report, Vanguard is pleased to provide a review of
Wellington Fund's after-tax performance. The figures on this page demonstrate
the considerable impact that federal income taxes can have on a fund's
return--an important consideration for investors who own mutual funds in taxable
accounts. While the pretax return is most often used to tally a fund's
performance, the fund's after-tax return, which accounts for taxes on
distributions of capital gains and income dividends, is a better representation
of the return that many investors actually received. If you own Wellington Fund
in a tax-deferred account such as an individual retirement account or a 401(k),
this information does not apply to you. Such accounts are not subject to current
taxes.
The table below presents the pretax and after-tax returns for your fund
and an appropriate peer group of mutual funds. Two things to keep in mind:
o The after-tax return calculations use the top federal income tax
rates in effect at the time of each distribution. The tax burden, therefore,
would be somewhat less, and the after-tax return somewhat more, for those in
lower tax brackets.
o The peer funds' returns are provided by Morningstar, Inc. (Elsewhere
in this report, returns for comparable mutual funds are derived from data
provided by Lipper Inc. which differ somewhat.)
As you can see, Wellington Fund's pretax total return of 3.6% for the
12 months ended November 30, 1999, was reduced by taxes to 0.3%. In other words,
for investors in the highest bracket, taxes cut the fund's pretax return by 3.3
percentage points. In comparison, the average comparable fund earned a pretax
return of 8.4% and an after-tax return of 6.1%, a difference of 2.3 percentage
points.
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AVERAGE ANNUAL RETURNS: PRETAX AND AFTER-TAX
PERIODS ENDED NOVEMBER 30, 1999
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1 YEAR 5 YEARS 10 YEARS
----------------- ----------------- -----------------
PRETAX AFTER-TAX PRETAX AFTER-TAX PRETAX AFTER-TAX
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Vanguard Wellington Fund 3.6% 0.3% 17.6% 14.8% 12.7% 10.1%
Average Domestic
Hybrid Fund* 8.4 6.1 15.0 12.2 11.1 8.6
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*Based on data from Morningstar, Inc.
Over longer periods, Wellington Fund's returns have exceeded those of
the average fund in Morningstar's "domestic hybrid" category both before and
after taxes. For the ten years ended November 30, 1999, Wellington outpaced its
average peer by about 1.5 percentage points both before and after taxes. Both
Wellington Fund and its average peer lost an average of about 2.5 percentage
points annually to taxes.
We stress that because many interrelated factors affect how
tax-friendly a fund may be, it's very difficult to predict tax efficiency. A
fund's tax efficiency can be influenced by its turnover rate, the types of
securities it holds, the accounting practices it uses when selling shares, and
the net cash flow it receives.
Finally, it's important to understand that our calculation does not
reflect the effect of your own investment activities. Specifically, you may
incur additional capital gains taxes--thereby lowering your after-tax return--if
you decide to sell all or some of your shares.
A NOTE ABOUT OUR CALCULATIONS: Pretax total returns assume that all
distributions received (income dividends, short-term capital gains, and
long-term capital gains) are reinvested in new shares, while our after-tax
returns assume that distributions are reduced by any taxes owed on them before
reinvestment. When calculating the taxes due, we used the highest individual
federal income tax rates at the time of the distributions. Those rates are
currently 39.6% for dividends and short-term capital gains and 20% for long-term
capital gains. State and local income taxes were not considered. The competitive
group returns provided by Morningstar are calculated in a manner consistent with
that used for Vanguard funds.
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NOTICE TO SHAREHOLDERS
CHANGE IN BOND BENCHMARK
The Board of Trustees of Vanguard Wellington Fund has approved a change in the
investment benchmark for the bond segment of the fund, effective beginning March
1, 2000. The benchmark will change from the Lehman Brothers Long Corporate AA or
Better Bond Index to the Lehman Brothers Corporate A or Better Bond Index, which
represents a much larger universe of high-quality bonds. Although the fund's
prospectus permits investments in this larger universe of bonds, the fund has
not previously exercised this flexibility.
As the fund broadens its bond holdings to reflect the new benchmark,
shareholders should benefit over the long term from reduced volatility in the
fund's net asset value.
In actively managing the fund, Wellington Management Company, llp,
strives to keep key characteristics of the fund's bond segment--such as credit
quality, average maturity, and average duration--consistent with a bond
benchmark. The fund's current benchmark is significantly more sensitive to
changes in interest rates than the new benchmark. As a result, the fund has been
much more sensitive to changes in interest rates than most other balanced mutual
funds. For example, the average duration of the current benchmark is 9.2 years,
versus 5.6 years for the new benchmark. This means that a change of 1 percentage
point in interest rates would cause a change of approximately 9.2% in the market
value of the current benchmark and a change of about 5.6% in the value of the
new benchmark.
The second key reason for the change is that the current benchmark
constrains the fund's bond investments to a shrinking segment of the
investment-grade bond market and limits the adviser's ability to purchase new
issues, which often have attractive yields relative to bonds trading in the
secondary market. Since 1973, the percentage of the investment-grade corporate
bond market rated AA or higher has dropped from 58% to 24%. An even more
dramatic reduction has occurred in the proportion of newly issued bonds rated AA
or better. In the first 11 months of 1999, only 9.5% of investment-grade bond
issues with a maturity of 6 years or more carried a credit rating of AA or
higher. By contrast, A-rated bonds accounted for 41.5% of new issues. At
present, approximately 250 corporate bond issuers have ratings of AA or better,
while approximately 2,300 have ratings of A or better.
EFFECT ON CREDIT QUALITY, YIELD, AND RETURNS
After the benchmark change is implemented, the average credit quality for
Wellington Fund's bond segment will be reduced slightly, although it will remain
high, solidly within the investment-grade category. As of November 30, 1999, the
yield of the existing benchmark, the Lehman Long Corporate AA or Better Index,
was 0.30% higher than the yield of the new benchmark, the Lehman Corporate A or
Better Index. However, because of its greater price volatility and the narrower
universe of bonds within it, the existing benchmark does not necessarily lead to
a superior long-term return. The Board believes that the benefit from reduced
interest rate risk due to the benchmark change far outweighs the modest
reduction in yield and any reduction in total return potential.
ADVISORY CONTRACT
Wellington Management Company's compensation as investment adviser is tied to
the fund's investment performance relative to that of the benchmark.
Accordingly, the fund's advisory contract will be amended to adopt the new
benchmark for determining the adviser's compensation after March 1, 2000. All
other terms of the advisory contract will remain the same.
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THE MARKETS IN PERSPECTIVE
YEAR ENDED NOVEMBER 30, 1999
Strong economic expansion sent global stock markets charging higher but dealt a
blow to bond prices during the fiscal year ended November 30, 1999. The
powerhouse U.S. economy led the global growth parade, joined by Asian, European,
and Latin American economies that had slumped or stagnated in 1998.
Interest rates rose sharply as investors and monetary policymakers grew
increasingly worried that such strong economic growth would cause inflation to
surge. Although the rise in rates caused bond prices to fall, it only tempered
the stock market's advance.
U.S. STOCK MARKETS
Against the backdrop of a booming economy, U.S. companies reported solid
increases in earnings during the fiscal year. The nation's economic output
increased at an inflation-adjusted rate of 4.3%--a very rapid pace for such a
large, mature economy. Consumer spending, which accounts for roughly two-thirds
of economic activity, powered the expansion. Americans spent freely, encouraged
by rising wealth from a long bull market, a hot job market, and climbing
incomes.
The stock market, as measured by the Wilshire 5000 Index, gained 22.4%
overall. For a change, mid-capitalization and small-cap stocks outpaced their
large-cap brethren. The large-cap S&P 500 Index, which accounts for more than
75% of the U.S. stock market's total value, gained 20.9% during the year; the
rest of the market (as measured by the Wilshire 4500 Index) gained 29.0%.
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AVERAGE ANNUAL RETURNS
PERIODS ENDED NOVEMBER 30, 1999
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1 YEAR 3 YEARS 5 YEARS
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STOCKS
S&P 500 Index 20.9% 24.3% 27.5%
Russell 2000 Index 15.7 10.1 14.8
Wilshire 5000 Index 22.4 22.6 25.6
MSCI EAFE Index 21.4 12.3 11.4
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BONDS
Lehman Aggregate Bond Index 0.0% 5.6% 8.0%
Lehman 10 Year Municipal Bond Index -0.4 4.8 7.6
Salomon Smith Barney 3-Month
U.S. Treasury Bill Index 4.7 5.0 5.2
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OTHER
Consumer Price Index 2.6% 2.0% 2.4%
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Increasingly optimistic expectations for future corporate earnings more
than offset the negative effects of rising interest rates during fiscal 1999.
Higher rates often hurt stock prices because many investors use current rates to
discount the value of a stock's projected earnings and dividends. The higher the
interest rate, the more future earnings are discounted, and the less investors
will pay for the stock now.
Because of a remarkable surge in prices for technology stocks, growth
stocks again outperformed value stocks during the past year. Within the S&P 500
Index, growth stocks--characterized by high prices in relation to earnings, book
value, and dividends--recorded a 28.5% return, 16 percentage points above the
12.5% return for value stocks. The disparity was even greater in the small-cap
segment of the market; growth stocks within the small-cap Russell 2000 Index
gained 32.7%, while value stocks posted a -1.4% return.
Technology stocks within the S&P 500 Index gained 66%. QUALCOMM posted
an eye-popping 1,200% return, and a number of computer-related stocks doubled or
tripled in
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price, including Sun Microsystems (+257%), Apple Computer (+206%), Oracle
(+197%), Gateway (+172%), Texas Instruments (+152%), and Cisco Systems (+136%).
Big gains for wireless telecommunications and cable-TV stocks powered
the utilities category to an overall gain of nearly 28%. The producer-durables
group, which includes some technology-related manufacturers as well as aircraft
and equipment makers, gained 27%. Oil exploration and service firms in the
"other energy" category posted a 26% return, assisted by a jump in prices for
oil and natural gas.
The year's worst-performing sector was consumer staples (down nearly
- -12%). This group suffered as severe price competition and a stronger dollar in
Europe crimped profits for many food and beverage makers, and the specter of
litigation costs caused tobacco stocks to slump. The auto & transportation group
declined -2% overall, with airline stocks hurt by rising prices for jet fuel.
U.S. BOND MARKETS
Stock investors may cheer a fast-growing economy, but rapid growth tends to
worry bond investors. Early in the fiscal year, inflation seemed
dormant--plunging oil prices had taken commodity price indexes to the lowest
point in a quarter-century. But as the world economy began hitting on all
cylinders, the bond market feared that a minuscule U.S. unemployment rate,
rising commodity prices, and capacity constraints would cause inflation to
accelerate. Although oil prices were up nearly 150% during the fiscal year, the
overall price level, as measured by the Consumer Price Index, increased by a
moderate 2.6%.
The Federal Reserve Board, anticipating price pressures, abandoned its
bias toward easier monetary policy, and by mid-year was boosting interest rates
to try to throttle back the economic engines. The bond market was ahead of the
Fed--interest rates began rising sharply in February. By fiscal year-end, the
yield of 30-year U.S. Treasury bonds had risen 1.23 percentage points (123 basis
points) to 6.29%. The 10-year Treasury note's yield rose 148 basis points, from
4.71% to 6.19%. The rise in short-term rates was more restrained; 3-month
Treasury bill yields were up 82 basis points to 5.30% at fiscal year-end.
Bond prices fall when interest rates rise, and long-term bond prices
are most sensitive to changing rates. Long-term Treasury bond prices fell by
more than -13%, resulting in total returns of -8%. The Lehman Aggregate Bond
Index, a measure of the overall taxable bond market, which has an
intermediate-term structure on average, broke even on the year, as interest
income of 6.2% was offset by price declines. The damage to municipal bond prices
was not as severe as for Treasuries, and the intermediate-term Lehman 7 Year
Municipal Bond Index recorded a price decline of -3.7% and a total return of
0.5%.
INTERNATIONAL STOCK MARKETS
International markets had a strong year, with European stocks gaining 21.9% in
local-currency terms and Pacific-region stocks advancing 30.2%. However,
currency effects significantly altered the returns to U.S.-based investors. The
U.S. dollar rose in value against most European currencies but fell sharply
against the Japanese yen. As a result, returns from Europe plunged to 9.8% in
dollar terms while returns from the Pacific soared to 51.0%.
Overall, U.S. investors earned 21.4% in the major developed
international markets, as measured by the Morgan Stanley Capital International
Europe, Australasia, Far East (EAFE) Index. The bull markets in most nations
stemmed from renewed optimism that economic growth would continue to accelerate.
Japan and the rest of Asia, which were hit hardest by currency and economic
crises in 1997 and 1998, saw the biggest stock gains.
Emerging markets, as measured by the Select Emerging Markets Free
Index, gained 37.1% in U.S.-dollar terms, as investors regained an appetite for
the considerable risks of smaller markets.
8
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REPORT FROM THE ADVISER
Vanguard Wellington Fund gained 3.6% in the fiscal year ended November 30, 1999.
In comparison, the average balanced fund returned 8.9%, and the unmanaged
composite 65% stock/35% bond index returned 11.0%.
Two factors were mainly responsible for our disappointing shortfall
versus our benchmarks. First, the equity portion of your fund, about 64% of
assets at year-end, returned only 8.3% during the fiscal year, compared with a
gain of 20.9% for the S&P 500 Index. We were hurt by our focus on value
stocks--those with attractive valuation characteristics such as low
price/earnings ratios and above-average dividend yields. At fiscal year-end, the
average stock held by Wellington Fund sold at a price 20.1 times earnings during
the trailing 12 months, versus a P/E ratio of 31.6 for the S&P 500. Our average
stock's dividend yield was 2.3%, versus 1.2% for the index.
For most of fiscal 1999, the market ignored value stocks and rewarded
growth stocks. Stocks in the S&P 500 Index with P/E ratios above the median
gained 28.2% on average, while those with P/E ratios below the median gained
0.3%. Similarly, stocks with dividend yields above the median gained 3.6% versus
a 32.8% average gain for those with yields below the median. Most of the gains
for the S&P 500 came from emerging technology stocks, which sell at very high
valuations and do not pay dividends. The total return of the technology sector
within the S&P 500 was more than 66%, while the rest of the index returned about
11%.
The second key factor in our performance relates to the fund's bond
segment, which accounts for about 34% of assets. We invest mostly in long-term
corporate and U.S. Treasury bonds that generally provide higher income than
short-term bonds but that decline more in value when interest rates are rising
rapidly, as during 1999. Our return of -5.4% in the fixed-income portion of your
fund was in line with the Lehman Long Corporate AA or Better Index, our bond
benchmark. However, most of our peers held bonds with shorter maturities, so
they earned better returns during the year.
For stocks, the investment environment in fiscal 1999 was mixed.
Corporate earnings resumed growth at a low double-digit pace in 1999, after
declining in 1998 due mainly to the Asian financial crisis. This good news on
profits was partially offset by rising interest rates during fiscal 1999. The
outlook for next year is promising, as the world economy continues to improve.
We foresee a national economic growth rate of over 3.0% and only modest further
increases in interest rates. During 1999, we made relatively few changes in our
stock portfolio--our equity turnover rate was low at 16%, and there were no
major shifts in sector allocations. We continued to emphasize
financial-services, materials & processing, energy, and health-care stocks.
In the finance sector (17% of equity assets), Citigroup, in contrast to
1998, was a major contributor
================================================================================
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
high-quality corporate, U.S. Treasury, and mortgage-backed securities make up
the bond segment.
================================================================================
9
<PAGE>
to performance. We sold our large position in First Union early in the year,
before its earnings difficulties became widely evident. Financial-services
stocks have been quite volatile; we recently added Bank One after its price
declined due to a series of earnings shortfalls that we believe are temporary.
The materials & processing sector (15% of equities), which had suffered
severely from the economic slowdown in Asia, staged a respectable recovery, with
basic commodity producers such as Alcoa and Corus (formerly British Steel)
producing sharp gains. We also added Alcan, the aluminum producer.
We recently reduced our exposure to the energy sector after this group
started to benefit from rebounding oil prices. Our exposure (12% of equities)
remains large, as we expect the energy markets will remain firm in 2000. Our
largest position in the sector is BP Amoco, which is quite active in the oil
industry's consolidation wave.
Our exposure to health care (10% of equities) remained about the same
in 1999. We sold Bristol-Myers Squibb, which had become quite expensive by our
standards, and added such names as Pall and AstraZeneca. The producer-durables
sector (8% of equities) was a disappointing one. The benefits to this group from
world economic recovery were overshadowed by company-specific problems. We
eliminated our holding in Lockheed Martin before a sharp price decline, but held
Xerox through a price drop.
In the technology sector (7% of equities) we did well in absolute
returns--gaining 56% overall, thanks to such holdings as Motorola, IBM, and
Hewlett-Packard--but these stocks did not do as well as more speculative,
non-income-producing tech stocks.
Our utility stocks (8% of equity assets) provided a return of about 6%,
based on a combination of gains in the telephone sector and declines in the
electric utilities. We remain active in the transportation sector (10% of
equities), with a recent purchase of British Airways, and retain large holdings
in automotive companies, which are attractively priced and have ongoing
restructuring opportunities.
In the bond market, there was a marked shift in sentiment during fiscal
1999. A year ago, investors generally believed that the world economy was weak
and getting weaker, and that central banks would need to lower interest rates
aggressively to prevent further declines. Today, the U.S. economy continues to
show remarkable strength, while the rest of the world has resumed growing, too.
Central banks (including the U.S. Federal Reserve Board) have been raising
interest rates to slow growth and prevent inflation. The changes in economic
conditions and perceptions produced a sharp increase in interest rates during
the 12 months. We think that interest rates may rise more before the U.S.
economy finally slows. We find corporate bonds more attractive than Treasuries,
and have raised our commitment to corporates.
Since the early 1980s, Vanguard Wellington Fund has benefited from its
emphasis on long-term bonds, because interest rates have generally declined
during the past 18 years. But in today's environment, it makes good sense for us
to reduce the average maturity of our fixed-income assets going forward.
In looking back, we note that early in 1999, value stocks enjoyed two
months in the sunlight. Looking forward, we believe that in the not-too-distant
future investors will again recognize that good returns can be obtained outside
the technology sector, and that markets will respond accordingly.
Ernst H. von Metzsch, Senior Vice President and Portfolio Manager
Wellington Management Company, llp
December 14, 1999
10
<PAGE>
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. An investor's shares, when
redeemed, could be worth more or less than their original cost.
TOTAL INVESTMENT RETURNS: NOVEMBER 30, 1979-NOVEMBER 30, 1999
- --------------------------------------------------------------------------------
WELLINGTON FUND COMPOSITE*
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- --------------------------------------------------------------------------------
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
1998 9.6 4.2 13.8 20.1
1999 -0.5 4.1 3.6 11.0
- --------------------------------------------------------------------------------
*Weighted 65% S&P 500 Index and 35% Lehman Long Corporate AA or Better Index.
See Financial Highlights table on page 25 for dividend and capital gains
information for the past five years.
CUMULATIVE PERFORMANCE: NOVEMBER 30, 1989-NOVEMBER 30, 1999
- --------------------------------------------------------------------------------
198911 10000 10000 10000 10000
199002 9820 9725 9720 9676
199005 10283 10251 10403 10629
199008 9574 9678 9737 9572
199011 9735 9816 9976 9653
199102 10809 10839 11100 11095
199105 11400 11382 11708 11882
199108 11631 11702 12061 12147
199111 11372 11633 11896 11617
199202 12234 12617 12857 12868
199205 12625 12664 13079 13052
199208 12806 12776 13354 13110
199211 13077 13270 13784 13763
199302 13706 13749 14449 14239
199305 14225 14062 14714 14568
199308 14891 14670 15433 15104
199311 14857 14638 15406 15152
199402 15115 14966 15571 15426
199405 14936 14517 15120 15188
199408 15600 14943 15700 15930
199411 14735 14396 15159 15311
199502 15933 15144 16345 16562
199505 17473 16190 17941 18255
199508 18292 17027 18769 19347
199511 19554 17901 20162 20973
199602 20250 18538 20887 22310
199605 20732 19035 21361 23446
199608 20964 18871 21162 22970
199611 23711 20820 24160 26817
199702 24145 21193 24764 28146
199705 25263 22068 26089 30342
199708 26696 23353 27624 32307
199711 28120 24163 29389 34463
199802 29838 25642 31617 37999
199805 30975 26265 32849 39653
199808 28277 23959 30489 34922
199811 32011 26841 35311 42617
199902 31268 27421 36494 45498
199905 33793 28542 37550 47991
199908 33484 28388 37622 48829
199911 33156 29645 39197 51523
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED NOVEMBER 30, 1999
-----------------------------------
FINAL VALUE OF A
1 YEAR 5 YEARS 10 YEARS $10,000 INVESTMENT
- --------------------------------------------------------------------------------
Wellington Fund 3.58% 17.61% 12.73% $33,156
Average Balanced
Fund* 8.93 15.35 11.48 29,645
Wellington Composite
Index** 11.01 20.92 14.64 39,197
S&P 500 Index 20.90 27.47 17.81 51,523
- --------------------------------------------------------------------------------
*Derived from data provided by Lipper Inc.
**Weighted 65% S&P 500 Index and 35% Lehman Long Corporate AA or Better Index.
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED SEPTEMBER 30, 1999*
- --------------------------------------------------------------------------------
10 YEARS
INCEPTION -----------------------------
DATE 1 YEAR 5 YEAR CAPITAL INCOME TOTAL
- --------------------------------------------------------------------------------
Wellington Fund 7/1/1929 9.46% 16.47% 7.40% 5.06% 12.46%
- --------------------------------------------------------------------------------
*SEC rules require that we provide this average annual total return information
through the latest calendar quarter.
11
<PAGE>
FUND PROFILE
WELLINGTON FUND
This Profile provides a snapshot of the fund's characteristics as of November
30, 1999, compared where appropriate to an unmanaged index. Key elements of this
Profile are defined on pages 14 and 15.
TOTAL FUND CHARACTERISTICS
- ---------------------------------------
Yield 3.9%
Turnover Ratio 22%
Expense Ratio 0.30%
Cash Reserves 1.7%
FUND ASSET ALLOCATION
- ---------------------------------------
[CHART]
CASH RESERVES 2%
BONDS 34%
STOCKS 64%
FUND ASSET ALLOCATION
- ---------------------------------------
TOTAL FUND VOLATILITY MEASURES
- ---------------------------------------
WELLINGTON S&P 500
- ---------------------------------------
R-Squared 0.81 1.00
Beta 0.58 1.00
TEN LARGEST STOCKS
(% OF EQUITY ASSETS)
- ---------------------------------------
Citigroup, Inc. 4.0%
Alcoa Inc. 2.9
Motorola, Inc. 2.8
Pharmacia & Upjohn, Inc. 2.6
CIGNA Corp. 2.4
Kimberly-Clark Corp. 2.2
International Business Machines
Corp. 2.1
Ford Motor Co. 2.1
Dow Chemical Co. 2.0
Bell Atlantic Corp. 2.0
- ---------------------------------------
Top Ten 25.1%
- ---------------------------------------
Top Ten as % of Total Net Assets 16.0%
SECTOR DIVERSIFICATION (% OF COMMON STOCKS)
- -------------------------------------------------------------------------
NOVEMBER 30, 1998 NOVEMBER 30, 1999
-------------------------------------------------
WELLINGTON WELLINGTON S&P 500
-------------------------------------------------
Auto & Transportation 10.1% 10.0% 2.1%
Consumer Discretionary 6.4 6.9 12.5
Consumer Staples 3.7 2.2 7.1
Financial Services 17.0 17.4 15.0
Health Care 10.2 9.7 10.8
Integrated Oils 10.5 9.8 5.1
Other Energy 1.9 2.2 1.4
Materials & Processing 15.1 14.6 3.0
Producer Durables 7.0 7.8 3.4
Technology 5.5 6.6 22.5
Utilities 8.9 8.3 11.2
Other 3.7 4.5 5.9
- -------------------------------------------------------------------------
12
<PAGE>
EQUITY CHARACTERISTICS
- -----------------------------------------------------
Wellington S&P 500
- -----------------------------------------------------
Number of Stocks 100 500
Median Market Cap $24.0B $75.1B
Price/Earnings Ratio 20.1x 27.9x
Price/Book Ratio 2.8x 5.3x
Dividend Yield 2.3% 1.2%
Return on Equity 18.5% 23.1%
Earnings Growth Rate 10.3% 15.5%
Foreign Holdings 14.1% 1.3%
EQUITY INVESTMENT FOCUS
- -----------------------------------------------------
[grid]
STYLE VALUE
MARKET CAP LARGE
FIXED-INCOME CHARACTERISTICS
- -----------------------------------------------------
Lehman
Wellington Index*
- -----------------------------------------------------
Number of Bonds 234 5,521
Yield to Maturity 7.5% 7.0%
Average Coupon 7.1% 6.8%
Average Maturity 17.4 years 8.9 years
Average Quality Aa3 Aaa
Average Duration 8.5 years 4.9 years
*Lehman Aggregate Bond Index.
FIXED-INCOME INVESTMENT FOCUS
- -----------------------------------------------------
[grid]
AVERAGE MATURITY LONG
CREDIT QUALITY INVESTMENT-GRADE CORPORATE
DISTRIBUTION BY ISSUER
(% OF BONDS)
- -----------------------------------------------------
Asset-Backed 0.0%
Commercial Mortgage-Backed 2.6
Finance 22.9
Foreign 10.8
Government Mortgage-Backed 6.5
Industrial 31.5
Treasury/Agency 9.8
Utilities 15.2
Other 0.7
- -----------------------------------------------------
Total 100.0%
DISTRIBUTION BY CREDIT QUALITY
(% OF BONDS)
- -----------------------------------------------------
Treasury/Agency 9.8%
Aaa 13.9
Aa 22.6
A 41.4
Baa 11.3
Ba 0.4
B 0.4
Not Rated 0.2
- -----------------------------------------------------
Total 100.0%
13
<PAGE>
AVERAGE COUPON. The average interest rate paid on the securities held by a fund.
It is expressed as a percentage of face value.
AVERAGE DURATION. An estimate of how much a bond fund's share price will
fluctuate in response to a change in interest rates. To see how the price could
shift, multiply the fund's duration by the change in rates. If interest rates
rise by one percentage point, the share price of a fund with an average duration
of five years would decline by about 5%. If rates decrease by a percentage
point, the fund's share price would rise by 5%.
AVERAGE MATURITY. The average length of time until bonds held by a
fund reach maturity (or are called) and are repaid. In general, the longer the
average maturity, the more a fund's share price will fluctuate in response to
changes in market interest rates.
AVERAGE QUALITY. An indicator of credit risk, this figure is the average of the
ratings assigned to a fund's securities holdings by credit-rating agencies. The
agencies make their judgment after appraising an issuer's ability to meet its
obligations. U.S. Treasury securities are considered to have the highest credit
quality.
BETA. A measure of the magnitude of a fund's past share-price fluctuations in
relation to the ups and downs of the overall market (or appropriate market
index). The market (or index) is assigned a beta of 1.00, so a fund with a beta
of 1.20 would have seen its share price rise or fall by 12% when the overall
market rose or fell by 10%.
CASH RESERVES. The percentage of a fund'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 and
bond investment.
DISTRIBUTION BY CREDIT QUALITY. This breakdown of a fund's securities by credit
rating can help in gauging the risk that returns could be affected by defaults
or other credit problems.
DISTRIBUTION BY ISSUER. A breakdown of a fund's holdings by type of issuer or
type of instrument. Dividend Yield. The current, annualized rate of dividends
paid on a share of stock, divided by its current share price. For a fund, the
weighted average yield for stocks it holds.
EARNINGS GROWTH RATE. The average annual rate of growth in earnings over the
past five years for the stocks now in a fund.
EQUITY INVESTMENT FOCUS. This grid indicates the focus of a fund's equity
holdings in terms of two attributes: market capitalization (large, medium, or
small) and relative valuation (growth, value, or a blend).
EXPENSE RATIO. The percentage of a fund's average net assets used to pay its
annual administrative and advisory expenses. These expenses directly reduce
returns to investors.
FIXED-INCOMEINVESTMENT FOCUS. This grid indicates the focus of a fund's
fixed-income holdings in terms of two attributes: average maturity (short,
medium, or long) and average credit quality (Treasury/agency, investment-grade
corporate, or below investment-grade).
FOREIGN HOLDINGS. The percentage of a fund's equity
assets represented by stocks or American Depositary Receipts of companies based
outside the United States.
FUND ASSET ALLOCATION. This chart shows the proportions of a fund's holdings
allocated to different types of assets.
MEDIAN MARKET CAP. An indicator of the size of companies in which a fund
invests; the midpoint of market capitalization (market price x shares
outstanding) of a fund's stocks, weighted by the proportion of the fund's assets
invested in each stock. Stocks representing half of the fund's assets have
market capitalizations above the median, and the rest are below it.
14
<PAGE>
NUMBER OF BONDS. An indicator of diversification. The more separate issues a
fund holds, the less susceptible it is to a price decline stemming from the
problems of a particular bond issuer
NUMBER OF STOCKS. An indicator of diversification. The more stocks a fund holds,
the more diversified it is and the more likely to perform in line with the
overall stock market.
PRICE/BOOK RATIO. The share price of a stock divided by its net worth, or book
value, per share. For a fund, the weighted average price/book ratio of the
stocks it holds.
PRICE/EARNINGS RATIO. The ratio of a stock's current price to its per-share
earnings over the past year. For a fund, the weighted average P/E of the stocks
it holds.
P/E is an indicator of market expectations about corporate prospects; the higher
the P/E, the greater the expectations for a company's future growth.
R-SQUARED. A measure of how much of a fund's past returns can be explained by
the returns from the overall market (or its benchmark index). If a fund's total
return were precisely synchronized with the overall market's return, its
R-squared would be 1.00. If a fund's returns bore no relationship to the
market's returns, its R-squared would be 0.
RETURN ON EQUITY. The annual average rate of return generated by a company
during the past five years for each dollar of shareholder's equity (net income
divided by shareholder's equity). For a fund, the weighted average return on
equity for the companies whose stocks it holds.
SECTOR DIVERSIFICATION. The percentages of a fund's common stocks that come from
each of the major industry groups that compose the stock market.
TEN LARGEST STOCKS. The percentage of equity assets that a fund has invested in
its ten largest stocks. As this percentage rises, a fund's returns are likely to
be more volatile because they are more dependent on the fortunes of a few
companies.
TURNOVER RATE. An indication of trading activity during the past year. Funds
with high turnover rates incur higher transaction costs and are more likely to
distribute capital gains (which are taxable to investors).
YIELD. A snapshot of a fund's income from interest and dividends. The yield,
expressed as a percentage of the fund's net asset value, is based on income
earned over the past 30 days and is annualized, or projected forward for the
coming year.
YIELD TO MATURITY. The rate of return an investor would receive if the
securities held by a fund were held to their maturity dates.
15
<PAGE>
FINANCIAL STATEMENTS
NOVEMBER 30, 1999
STATEMENT OF NET ASSETS
This Statement provides a detailed list of the fund's holdings, including each
security's market value on the last day of the reporting period. Securities are
grouped and subtotaled by asset type (common stocks, bonds, etc.) and by
industry sector. Other assets are added to, and liabilities are subtracted from,
the value of Total Investments to calculate the fund's Net Assets. Finally, Net
Assets are divided by the outstanding shares of the fund to arrive at its share
price, or Net Asset Value (NAV) Per Share.
At the end of the Statement of Net Assets, you will find a table
displaying the composition of the fund's net assets on both a dollar and
per-share basis. Because all income and any realized gains must be distributed
to shareholders each year, the bulk of net assets consists of Paid in Capital
(money invested by shareholders). The amounts shown for Undistributed Net
Investment Income and Accumulated Net Realized Gains usually approximate the
sums the fund had available to distribute to shareholders as income dividends or
capital gains as of the statement date, but may differ because certain
investments or transactions may be treated differently for financial statement
and tax purposes. Any Accumulated Net Realized Losses, and any cumulative excess
of distributions over net income or net realized gains, will appear as negative
balances. Unrealized Appreciation (Depreciation) is the difference between the
market value of the fund's investments and their cost, and reflects the gains
(losses) that would be realized if the fund were to sell all of its investments
at their statement-date values.
- --------------------------------------------------------------------------------
MARKET
VALUE*
WELLINGTON FUND SHARES (000)
- --------------------------------------------------------------------------------
COMMON STOCKS (63.8%)
- --------------------------------------------------------------------------------
AUTO & TRANSPORTATION (6.4%)
Ford Motor Co. 6,789,515 $ 342,871
Union Pacific Corp. 6,195,500 291,576
General Motors Corp. 3,791,000 272,952
British Airways PLC 2,600,000 153,887
Delphi Automotive
Systems Corp. 8,649,643 136,232
Canadian National Railway Co. 4,400,000 131,725
Norfolk Southern Corp. 5,500,100 117,565
CSX Corp. 3,000,000 106,687
KLM Royal Dutch Air Lines
NV ADR 3,958,646 98,471
-----------
1,651,966
-----------
CONSUMER DISCRETIONARY (4.4%)
Kimberly-Clark Corp. 5,600,000 357,700
Whirlpool Corp. 2,420,000 147,620
Gillette Co. 3,505,000 140,857
Black & Decker Corp. 3,000,000 134,625
May Department Stores Co. 3,462,000 116,410
Sears, Roebuck & Co. 3,000,000 102,562
Eastman Kodak Co. 1,600,000 99,000
J.C. Penney Co., Inc. 1,547,000 34,517
-----------
1,133,291
-----------
CONSUMER STAPLES (1.4%)
Philip Morris Cos., Inc. 5,000,000 131,562
H.J. Heinz Co. 3,000,000 125,625
Bestfoods 2,000,000 109,625
-----------
366,812
-----------
FINANCIAL SERVICES (11.1%)
Citigroup, Inc. 12,396,000 667,834
CIGNA Corp. 4,800,000 394,800
Wachovia Corp. 4,000,000 309,750
U.S. Bancorp 8,430,300 288,211
Marsh & McLennan Cos., Inc. 3,442,500 270,667
MBIA, Inc. 2,677,600 133,880
Bank of America Corp. 2,102,680 123,007
Fannie Mae 1,700,000 113,262
Bank One Corp. 2,858,800 100,773
Jefferson-Pilot Corp. 1,450,000 98,419
Equity Office Properties
Trust REIT 4,000,000 87,750
Spieker Properties, Inc. REIT 2,000,000 70,000
Ace, Ltd. 4,000,000 68,000
Archstone Communities
Trust REIT 3,000,000 60,188
Equity Residential Properties
Trust REIT 1,300,000 52,244
Starwood Hotels & Resorts
Worldwide, Inc. 1,126,500 25,135
-----------
2,863,920
-----------
HEALTH CARE (6.2%)
Pharmacia & Upjohn, Inc. 7,865,400 430,139
Johnson & Johnson 3,100,000 321,625
Baxter International, Inc. 3,874,700 261,784
American Home Products Corp. 4,174,700 217,084
Abbott Laboratories 5,400,000 205,200
Columbia/HCA Healthcare Corp. 3,747,700 102,125
AstraZeneca Group PLC ADR 1,315,900 58,558
-----------
1,596,515
-----------
16
<PAGE>
- --------------------------------------------------------------------------------
MARKET
VALUE*
SHARES (000)
- --------------------------------------------------------------------------------
INTEGRATED OILS (6.2%)
BP Amoco PLC ADR 4,700,000 286,406
Royal Dutch Petroleum Co. ADR 4,100,000 237,800
Repsol SA ADR 9,700,000 210,975
Chevron Corp. 2,000,000 177,125
Total SA ADR 2,500,000 165,313
Conoco Inc. Class B 5,706,267 149,433
USX-Marathon Group 5,000,000 132,188
Phillips Petroleum Co. 2,033,700 97,236
Texaco Inc. 1,477,000 90,005
Unocal Corp. 1,945,000 64,550
-----------
1,611,031
-----------
OTHER ENERGY (1.4%)
Schlumberger Ltd. 2,800,000 168,175
Halliburton Co. 2,521,100 97,535
Sunoco, Inc. 3,000,000 76,688
Baker Hughes, Inc. 731,500 18,470
-----------
360,868
-----------
MATERIALS & PROCESSING (9.3%)
Alcoa Inc. 7,242,200 474,364
Dow Chemical Co. 2,838,400 332,448
Phelps Dodge Corp. 3,604,900 187,455
Rhone-Poulenc SA ADR 2,922,316 179,905
E.I. du Pont de Nemours & Co. 2,710,872 161,127
PPG Industries, Inc. 2,700,000 158,119
Alcan Aluminium Ltd. 4,000,000 136,000
Willamette Industries, Inc. 3,171,000 131,200
International Paper Co. 2,500,000 130,469
Corus Group PLC ADR 6,000,000 122,625
Temple-Inland Inc. 1,984,600 113,618
Imperial Chemical
Industries PLC ADR 2,515,000 102,801
Lubrizol Corp. 2,000,000 54,750
Weyerhaeuser Co. 862,600 52,834
Cabot Corp. 2,238,300 42,668
CK Witco Corp. 2,508,463 26,809
-----------
2,407,192
-----------
PRODUCER DURABLES (5.0%)
Alcatel SA ADR 5,900,000 224,569
Xerox Corp. 7,800,000 211,088
Emerson Electric Co. 3,000,000 171,000
Northrop Grumman Corp. 3,000,000 168,562
Caterpillar, Inc. 3,000,000 139,125
Pall Corp. 4,923,700 115,399
Thomas & Betts Corp. 2,284,500 93,665
United Technologies Corp. 1,500,000 84,750
Parker Hannifin Corp. 1,704,800 80,23
-----------
1,288,390
-----------
TECHNOLOGY (4.2%)
Motorola, Inc. 4,000,000 457,000
International Business
Machines Corp. 3,400,000 350,412
Hewlett-Packard Co. 3,010,800 285,650
-----------
1,093,06
-----------
UTILITIES (5.3%)
Bell Atlantic Corp. 5,136,000 325,173
ALLTEL Corp. 2,571,400 222,426
Duke Energy Corp. 4,000,000 202,750
SBC Communications Inc. 2,872,600 149,196
Cinergy Corp. 4,155,000 105,173
Unicom Corp. 3,000,000 95,813
Texas Utilities Co. 2,490,000 89,173
Carolina Power & Light Co 2,000,000 60,250
Pinnacle West Capital Corp. 1,763,600 58,529
Scottish Power PLC 1,571,916 54,919
-----------
1,363,402
-----------
OTHER (2.9%)
(1) Cooper Industries, Inc. 5,085,700 218,367
Minnesota Mining &
Manufacturing Co. 2,000,000 191,125
Canadian Pacific Ltd. 7,000,800 151,830
Norsk Hydro AS ADR 3,556,300 140,029
Raytheon Co. Class A 1,818,500 52,964
-----------
754,315
-----------
- --------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost $11,262,263) 16,490,764
- --------------------------------------------------------------------------------
FACE
AMOUNT
(000)
- --------------------------------------------------------------------------------
CORPORATE BONDS (24.0%)
- --------------------------------------------------------------------------------
FINANCE (7.9%)
Allstate Corp.
6.75%, 5/15/2018 $ 45,000 40,814
Ambac, Inc.
7.50%, 5/1/2023 25,000 23,932
American Re Corp.
7.45%, 12/15/2026 54,000 51,809
Aon Corp.
6.90%, 7/1/2004 48,000 47,381
Associates Corp. of North America
6.875%, 11/15/2008 50,000 48,958
BB&T Corp.
7.25%, 6/15/2007 36,900 36,222
Banc One Corp.
7.625%, 10/15/2026 20,000 19,513
9.875%, 3/1/2019 20,000 23,182
BankAmerica Corp.
7.20%, 4/15/2006 20,000 19,979
BankBoston Corp.
6.625%, 12/1/2005 27,000 26,063
British Gas Finance
6.625%, 6/1/2018 50,000 44,499
CIGNA Corp.
7.875%, 5/15/2027 50,000 47,699
The Chase Manhattan Corp.
6.50%, 1/15/2009 50,000 47,480
Cincinnati Financial Corp.
6.90%, 5/15/2028 50,000 44,355
Citicorp
6.75%, 8/15/2005 40,000 39,305
Citigroup, Inc.
6.625%, 1/15/2028 50,000 43,378
Comerica Bank
7.875%, 9/15/2026 20,000 20,047
8.375%, 7/15/2024 20,500 20,545
Dean Witter, Discover & Co.
6.75%, 10/15/2013 24,275 22,378
7.07%, 2/10/2014 17,500 16,594
17
<PAGE>
- --------------------------------------------------------------------------------
FACE MARKET
AMOUNT VALUE
WELLINGTON FUND (000) (000)
- --------------------------------------------------------------------------------
Equitable Companies Inc.
7.00%, 4/1/2028 50,000 45,545
Farmers Exchange Capital
7.05%, 7/15/2028 50,750 43,353
First Chicago Corp.
6.375%, 1/30/2009 48,500 45,157
First Colony Corp.
6.625%, 8/1/2003 34,605 34,161
First Union Corp.
7.50%, 4/15/2035 30,000 30,225
Fleet Financial Group
6.875%, 1/15/2028 50,000 45,003
General Electric Capital Corp.
8.125%, 5/15/2012 30,000 31,763
General Electric Capital Services
7.50%, 8/21/2035 11,000 10,794
General Electric Global
Insurance Holdings Corp.
7.00%, 2/15/2026 35,000 32,615
General Motors Acceptance Corp.
6.00%, 4/1/2011 27,370 23,847
General Re Corp.
9.00%, 9/12/2009 32,000 36,050
John Hancock Mutual Life
Insurance Co.
7.375%, 2/15/2024 45,000 42,450
Jackson National Life Insurance Co.
8.15%, 3/15/2027 50,000 50,527
Liberty Mutual Insurance Co.
7.875%, 10/15/2026 56,210 51,670
Lumbermens Mutual Casualty Co.
9.15%, 7/1/2026 55,000 52,871
Metropolitan Life Insurance Co.
7.70%, 11/1/2015 51,000 50,296
NBD Bancorp, Inc.
7.125%, 5/15/2007 25,000 24,647
National City Bank Columbus
7.25%, 7/15/2010 25,000 24,508
National City Bank Pennsylvania
7.25%, 10/21/2011 20,000 19,572
NationsBank Corp.
7.80%, 9/15/2016 50,000 51,015
Norwest Financial Inc.
6.25%, 12/15/2007 35,000 32,847
Pacific Mutual Life
7.90%, 12/30/2023 35,000 34,618
Pitney Bowes Credit Corp.
8.55%, 9/15/2009 41,890 45,886
Provident Cos., Inc.
7.25%, 3/15/2028 40,000 35,431
Prudential Insurance Co.
8.30%, 7/1/2025 50,845 52,478
Frank Russell Co.
5.625%, 1/15/2009 50,000 44,570
Sears Roebuck & Co.
Acceptance Corp.
6.875%, 10/15/2017 30,000 26,045
SunTrust Bank Atlanta
7.25%, 9/15/2006 54,000 53,781
Torchmark Corp.
7.875%, 5/15/2023 45,000 40,885
Toyota Motor Credit Corp.
5.50%, 12/15/2008 50,000 44,566
Transamerica Financial Corp.
6.40%, 9/15/2008 29,265 27,353
UNUM Corp.
6.75%, 12/15/2028 30,000 24,919
US Bank NA Minnesota
5.625%, 11/30/2005 50,000 46,207
Wachovia Corp.
5.625%, 12/15/2008 55,000 49,103
Washington Mutual Inc.
7.50%, 8/15/2006 50,000 50,373
-----------
2,039,264
-----------
INDUSTRIAL (10.9%)
Airtouch Communications Inc.
6.65%, 5/1/2008 50,000 47,907
Albertson's Inc.
7.75%, 6/15/2026 50,000 50,266
Aluminum Co. of America
6.50%, 6/15/2018 50,000 44,341
Amoco Corp.
6.50%, 8/1/2007 25,000 24,159
Anheuser-Busch Cos., Inc.
7.00%, 12/1/2025 30,000 27,337
Archer-Daniels-Midland Co.
7.50%, 3/15/2027 50,000 48,957
Autozone Inc.
6.50%, 7/15/2008 50,000 45,755
Baxter International, Inc.
7.65%, 2/1/2027 40,000 38,872
Becton, Dickinson & Co.
7.00%, 8/1/2027 25,000 22,477
8.70%, 1/15/2025 20,000 20,510
The Boeing Co.
8.75%, 8/15/2021 40,200 44,509
Bristol-Myers Squibb Co.
6.80%, 11/15/2026 50,000 47,337
CPC International, Inc.
7.25%, 12/15/2026 55,000 53,094
CSX Corp.
7.90%, 5/1/2017 40,000 40,176
Caterpillar Inc.
6.625%, 7/15/2028 50,000 44,013
Champion International Corp.
7.35%, 11/1/2025 40,140 37,088
Coca-Cola Enterprises, Inc.
8.50%, 2/1/2022 50,000 54,312
Conoco Inc.
6.95%, 4/15/2029 50,000 46,238
Continenatal Airlines, Inc.
6.648%, 3/15/2019 32,564 29,797
6.90%, 7/2/2019 29,376 27,379
Dean Foods Co.
6.90%, 10/15/2017 38,000 34,891
Diageo PLC
6.125%, 8/15/2005 50,530 48,330
Dover Corp.
6.65%, 6/1/2028 50,000 44,222
18
<PAGE>
- --------------------------------------------------------------------------------
FACE MARKET
AMOUNT VALUE*
(000) (000
- --------------------------------------------------------------------------------
E.I. du Pont de Nemours & Co.
6.50%, 1/15/2028 60,000 53,500
Federal Express Corp.
6.72%, 1/15/2022 42,893 39,661
Fluor Corp.
6.95%, 3/1/2007 42,000 40,395
Ford Motor Co.
8.90%, 1/15/2032 45,000 50,959
Fortune Brands Inc.
6.25%, 4/1/2008 40,000 37,234
General Motors Corp.
7.70%, 4/15/2016 25,000 25,411
Georgia-Pacific Corp.
9.625%, 3/15/2022 22,000 23,340
International Business
Machines Corp.
6.50%, 1/15/2028 25,000 22,589
8.375%, 11/1/2019 25,000 27,789
Johnson Controls, Inc.
7.125%, 7/15/2017 36,300 33,637
KN Energy, Inc.
7.25%, 3/1/2028 40,000 36,436
Kimberly-Clark Corp.
6.375%, 1/1/2028 50,000 44,549
Eli Lilly & Co.
7.125%, 6/1/2025 50,000 48,644
Lockheed Martin Corp.
7.65%, 5/1/2016 45,500 41,723
Lucent Technologies Inc.
7.25%, 7/15/2006 35,000 35,631
Masco Corp.
6.625%, 4/15/2018 52,500 47,221
Massachusetts Institute
of Technology
7.125%, 11/2/2026 22,000 21,340
Mattel Inc.
6.125%, 7/15/2005 35,000 31,624
McDonald's Corp.
6.375%, 1/8/2028 40,000 35,379
7.375%, 7/15/2033 15,000 13,874
Merck & Co.
6.40%, 3/1/2028 50,000 44,958
Minnesota Mining &
Manufacturing Corp.
6.375%, 2/15/2028 60,000 53,447
Mobil Corp.
8.625%, 8/15/2021 20,000 22,736
Monsanto Co.
6.75%, 12/15/2027 40,000 35,857
Morton International, Inc.
9.25%, 6/1/2020 21,000 23,833
Motorola, Inc.
7.50%, 5/15/2025 51,500 51,080
News America Holdings Inc.
8.00%, 10/17/2016 44,856 44,149
Norfolk Southern Corp.
7.70%, 5/15/2017 50,000 49,467
PPG Industries, Inc.
6.875%, 2/15/2012 13,600 12,953
9.00%, 5/1/2021 19,750 22,416
Phillips Petroleum Co.
9.375%, 2/15/2011 20,000 22,896
Procter & Gamble Co. ESOP
9.36%, 1/1/2021 59,145 69,127
Raytheon Co.
7.20%, 8/15/2027 32,000 28,349
7.375%, 7/15/2025 18,000 15,400
Rockwell International Corp.
6.70%, 1/15/2028 40,000 35,621
7.875%, 2/15/2005 17,000 17,424
Rohm & Haas Co.
(3)9.80%, 4/15/2020 15,000 17,405
Joseph Seagram & Sons, Inc.
7.50%, 12/15/2018 50,000 48,035
Sears, Roebuck & Co.
9.375%, 11/1/2011 14,000 15,152
Southwest Airlines Co.
7.54%, 6/29/2015 30,772 30,736
Stanford University
6.875%, 2/1/2024 24,045 22,446
7.65%, 6/15/2026 30,000 30,751
Tenneco Packaging Inc.
8.375%, 4/15/2027 35,000 32,468
Texaco Capital, Inc.
9.75%, 3/15/2020 15,000 18,266
The Timken Co.
6.875%, 5/8/2028 40,000 34,452
Tosco Corp.
7.80%, 1/1/2027 35,000 33,658
Tyco International Group
7.00%, 6/15/2028 40,000 35,201
USA Waste Services Inc.
7.00%, 7/15/2028 46,500 33,556
Ultramar Diamond Shamrock
7.20%, 10/15/2017 40,000 36,097
United Technologies Corp.
6.70%, 8/1/2028 15,000 13,524
8.75%, 3/1/2021 32,000 36,018
Vastar Resources, Inc.
6.50%, 4/1/2009 49,095 46,295
Wal-Mart Stores, Inc.
6.875%, 8/10/2009 35,000 34,731
7.25%, 6/1/2013 30,000 30,325
Warner Lambert
6.00%, 1/15/2008 20,000 18,572
Wendy's International, Inc.
6.35%, 12/15/2005 25,500 24,143
Weyerhaeuser Co.
6.95%, 8/1/2017 40,000 37,372
-----------
2,811,819
-----------
UTILITIES (5.2%)
AT&T Corp.
7.75%, 3/1/2007 40,000 41,255
Ameritech Capital Funding
6.875%, 10/15/2027 47,250 43,239
Atlantic City Electric Co.
(2)7.00%, 9/1/2023 18,000 16,180
BellSouth Telecommunications
5.875%, 1/15/2009 15,000 13,805
7.50%, 6/15/2033 30,000 28,252
Carolina Power & Light Co.
5.95%, 3/1/2009 20,000 18,427
8.625%, 9/15/2021 31,000 33,992
19
<PAGE>
- --------------------------------------------------------------------------------
FACE MARKET
AMOUNT VALUE*
WELLINGTON FUND (000) (000)
- --------------------------------------------------------------------------------
Central Illinois Public Service
6.125%, 12/15/2028 54,000 44,439
Chesapeake & Potomac
Telephone Co. (MD)
7.15%, 5/1/2023 10,000 9,202
Chesapeake & Potomac
Telephone Co. (VA)
7.625%, 12/1/2012 16,400 16,976
Cincinnati Bell, Inc.
6.30%, 12/1/2028 60,000 45,087
Consolidated Edison Co. of
New York, Inc.
6.45%, 12/1/2007 20,000 18,979
7.50%, 6/15/2023 25,000 23,427
Duke Energy Corp.
6.00%, 12/1/2028 50,000 40,185
7.00%, 7/1/2033 10,000 8,785
El Paso Natural Gas Co.
7.50%, 11/15/2026 47,030 43,942
Florida Power Corp.
6.75%, 2/1/2028 49,955 44,769
GTE North, Inc.
6.90%, 11/1/2008 30,000 29,367
GTE Southwest, Inc.
6.00%, 1/15/2006 30,000 28,123
Illinois Bell Telephone Co.
6.625%, 2/1/2025 27,725 24,148
Indiana Bell Telephone Co., Inc.
7.30%, 8/15/2026 50,000 48,165
Indiana Michigan Power Co.
6.875%, 7/1/2004 45,000 43,614
NGC Corp.
7.125%, 5/15/2018 35,000 31,628
National Rural Utilities
5.75%, 12/1/2008 50,000 45,340
New Jersey Bell Telephone Co.
8.00%, 6/1/2022 34,019 35,655
New York Telephone Co.
6.50%, 4/15/2028 20,000 17,406
7.25%, 2/15/2024 20,000 18,201
Northern States Power Co.
7.125%, 7/1/2025 55,000 51,470
Ohio Bell Telephone Co.
7.85%, 12/15/2022 20,000 19,375
Oklahoma Gas & Electric Co.
6.50%, 4/15/2028 25,545 21,512
Pacific Bell
7.125%, 3/15/2026 40,000 37,793
Pacific Gas & Electric Co.
7.05%, 3/1/2024 25,000 23,534
PacifiCorp
6.625%, 6/1/2007 20,500 19,742
6.71%, 1/15/2026 21,000 18,562
Pan Energy Corp.
7.00%, 10/15/2006 25,000 24,175
Southwestern Bell Telephone Co.
7.25%, 7/15/2025 25,000 22,836
7.60%, 4/26/2007 7,000 7,129
Sprint Capital Corp.
6.125%, 11/15/2008 50,000 46,082
Tennessee Gas Pipeline Co.
7.50%, 4/1/2017 40,000 38,489
U S WEST Communications Group
6.875%, 9/15/2033 30,000 25,314
Washington Gas Light Co.
6.15%, 1/26/2026 43,500 42,028
Wisconsin Electric Power Co.
6.50%, 6/1/2028 20,000 17,241
7.70%, 12/15/2027 29,100 27,204
Wisconsin Gas Co.
6.60%, 9/15/2013 13,100 12,230
Wisconsin Public Service
6.08%, 12/1/2028 45,000 37,341
WorldCom Inc.
6.40%, 8/15/2005 48,000 46,543
-----------
1,351,188
-----------
- --------------------------------------------------------------------------------
TOTAL CORPORATE BONDS
(Cost $6,585,734) 6,202,271
- --------------------------------------------------------------------------------
FOREIGN BONDS (u.s. Dollar-Denominated)(3.7%)
- --------------------------------------------------------------------------------
Abbey National First Capital
8.20%, 10/15/2004 20,000 20,788
Abbey National PLC
6.69%, 10/17/2005 25,000 24,330
Amoco Canada Petroleum Co.
7.95%, 10/1/2022 20,000 20,587
BBV International Finance
7.00%, 12/1/2025 37,500 33,229
BHP Finance USA Ltd.
7.25%, 3/1/2016 35,000 32,178
Bank of Montreal
7.80%, 4/1/2007 15,000 15,355
Banque Nationale de Paris-NY
7.20%, 1/15/2007 40,000 38,864
Banque Paribas NY
6.95%, 7/22/2013 40,000 36,319
Bayerische Landesbank-NY
6.375%, 10/15/2005 25,000 23,905
The Development Bank of
Singapore Ltd.
7.875%, 8/10/2009 31,620 31,769
Husky Oil Ltd.
7.55%, 11/15/2016 30,000 27,263
Inter-American Dev. Bank
8.875%, 6/1/2009 50,000 56,151
KFW International Finance
7.00%, 3/1/2013 10,000 9,893
7.20%, 3/15/2014 25,000 25,165
Norsk Hydro AS
7.15%, 11/15/2025 30,000 27,433
9.00%, 4/15/2012 20,000 21,840
Petro-Canada
7.875%, 6/15/2026 32,000 31,347
Province of Manitoba
9.125%, 1/15/2018 20,000 23,494
9.25%, 4/1/2020 20,000 23,921
Province of New Brunswick
6.75%, 8/15/2013 20,400 19,463
Province of Nova Scotia
8.25%, 7/30/2022 30,000 31,911
20
<PAGE>
- --------------------------------------------------------------------------------
FACE MARKET
AMOUNT VALUE*
(000) (000)
- --------------------------------------------------------------------------------
Province of Ontario
7.00%, 8/4/2005 40,000 40,197
Province of Quebec
6.86%, 4/15/2026 20,000 19,597
Royal Bank of Scotland
6.375%, 2/1/2011 40,775 36,705
Scotland International Finance
8.85%, 11/1/2006 28,000 29,846
SmithKline Beecham
7.375%, 4/15/2005 15,000 15,323
Societe Generale-NY
7.40%, 6/1/2006 40,000 39,749
Southern Investments UK PLC
6.80%, 12/1/2006 35,000 32,919
Sun Canada Financial Co.
6.625%, 12/15/2007 40,000 38,922
Talisman Energy, Inc.
7.125%, 6/1/2007 20,000 19,219
Toronto-Dominion Bank
6.45%, 1/15/2009 14,000 13,002
6.50%, 8/15/2008 10,000 9,354
Westdeutsche Landesbank-NY
6.75%, 6/15/2005 50,000 48,472
Zeneca Wilmington Inc.
7.00%, 11/15/2023 50,000 47,224
- --------------------------------------------------------------------------------
TOTAL FOREIGN BONDS
(Cost $977,977) 965,73
- --------------------------------------------------------------------------------
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (5.6%)
- --------------------------------------------------------------------------------
U.S. GOVERNMENT SECURITIES (3.0%)
Aid-Israel State
5.89%, 8/15/2005 23,000 22,385
U.S. Treasury Bonds
6.25%, 8/15/2023 400,000 386,600
7.25%, 5/15/2016 75,000 79,765
U.S. Treasury Notes
5.625%, 2/15/2006 45,000 43,655
5.625%, 5/15/2008 100,000 95,643
6.50%, 8/15/2005 100,000 101,253
7.875%, 11/15/2004 50,000 53,478
-----------
782,779
-----------
AGENCY BONDS & NOTES (0.3%)
Federal Home Loan Bank
5.24%, 12/18/2008 45,000 39,966
Tennessee Valley Authority
Global Bond
6.75%, 11/1/2025 50,000 47,738
-----------
87,704
-----------
MORTGAGE-BACKED SECURITIES (2.3%)
Federal National Mortgage Assn.
(3)5.735%, 1/1/2009 39,621 37,485
(3)6.032%, 1/1/2009 60,458 58,275
(3)6.504%, 7/1/2009 60,579 59,689
(3)6.79%, 7/1/2009 63,240 62,192
Government National Mortgage Assn.
(3)6.00%, 9/15/2028 472 436
(3)6.00%, 11/15/2028 4,340 4,006
(3)6.00%, 12/15/2028 95,824 88,465
(3)6.00%, 1/15/2029 145,548 134,375
(3)6.00%, 2/15/2029 53,260 49,171
(3)6.00%, 3/15/2029 8,154 7,529
(3)6.00%, 4/15/2029 10,745 9,920
(3)6.00%, 5/15/2029 26,871 24,804
(3)6.00%, 6/15/2029 15,800 14,587
(3)6.00%, 7/15/2029 19,822 18,297
(3)6.00%, 8/15/2029 10,293 9,500
-----------
578,731
-----------
- --------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT AND AGENCY OBLIGATIONS
(Cost $1,494,312) 1,449,214
- --------------------------------------------------------------------------------
COMMERCIAL MORTGAGE-BACKED SECURITIES (0.9%)
- --------------------------------------------------------------------------------
ASSET SECURITIZATION CORP.
(3)6.75%, 2/14/2041 35,000 33,824
(3)7.49%, 4/14/2029 34,000 34,367
Credit Suisse First Boston
Mortgage Securities Corp.
7.24%, 6/20/2029 35,000 34,716
DLJ Mortgage Acceptance Corp.
(3)6.82%, 10/15/2030 25,000 24,220
(3)7.60%, 5/15/2030 36,000 36,013
Morgan Stanley Capital I Inc.
(3)7.22%, 7/15/2029 35,000 35,126
Nomura Asset Securities Corp.
(3)6.69%, 3/15/2030 34,000 31,722
- --------------------------------------------------------------------------------
TOTAL COMMERCIAL MORTGAGE-BACKED SECURITIES
(Cost $238,829) 229,988
- --------------------------------------------------------------------------------
TAXABLE MUNICIPAL BONDS (0.3%)
- --------------------------------------------------------------------------------
Oakland CA Pension Obligation
6.98%, 12/15/2009 20,000 19,591
Chelan County WA Public Util. Dist.
7.07%, 6/1/2007 10,000 9,829
7.10%, 6/1/2008 12,000 11,761
Southern California Public
Power Auth.
6.93%, 5/15/2017 30,000 28,913
- --------------------------------------------------------------------------------
TOTAL TAXABLE MUNICIPAL BONDS
(Cost $72,000) 70,094
- --------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENTS (1.4%)
- --------------------------------------------------------------------------------
REPURCHASE AGREEMENTS
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
5.67%, 12/1/1999 123,713 123,713
5.68%-5.69%, 12/1/1999--Note G 248,944 248,944
- --------------------------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(Cost $372,657) 372,657
- --------------------------------------------------------------------------------
TOTAL INVESTMENTS (99.7%)
(Cost $21,003,772) 25,780,722
- --------------------------------------------------------------------------------
21
<PAGE>
- --------------------------------------------------------------------------------
MARKET
VALUE*
WELLINGTON (000)
- --------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (0.3%)
- --------------------------------------------------------------------------------
Other Assets--Note C $ 402,745
Liabilities--Note G (337,154)
-----------
65,591
- --------------------------------------------------------------------------------
NET ASSETS (100%)
- --------------------------------------------------------------------------------
Applicable to 872,625,975 outstanding $.001
par value shares of beneficial interest
(unlimited authorization) $25,846,313
================================================================================
NET ASSET VALUE PER SHARE $29.62
================================================================================
*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.
(2)Scheduled principal and interest payments are guaranteed by MBIA (Municipal
Bond Insurance Association).
(3)The average maturity is shorter than the final maturity shown due to
scheduled interim principal payments.
ADR--American Depositary Receipt.
REIT--Real Estate Investment Trust.
- --------------------------------------------------------------------------------
Amount Per
(000) Share
- --------------------------------------------------------------------------------
AT NOVEMBER 30, 1999, NET ASSETS CONSISTED OF:
- --------------------------------------------------------------------------------
Paid in Capital $19,524,857 $22.38
Undistributed Net
Investment Income 243,616 .28
Accumulated Net Realized Gains 1,300,890 1.49
Unrealized Appreciation--
Note F 4,776,950 5.47
- --------------------------------------------------------------------------------
NET ASSETS $25,846,313 $29.62
================================================================================
22
<PAGE>
STATEMENT OF OPERATIONS
This Statement shows dividend and interest income earned by the fund during the
reporting period, and details the operating expenses charged to the fund. These
expenses directly reduce the amount of investment income available to pay to
shareholders as dividends. This Statement also shows any Net Gain (Loss)
realized on the sale of investments, and the increase or decrease in the
Unrealized Appreciation (Depreciation) on investments during the period.
- ---------------------------------------------------------------------
WELLINGTON FUND
YEAR ENDED NOVEMBER 30, 1999
(000)
- ---------------------------------------------------------------------
INVESTMENT INCOME
INCOME
Dividends* $ 422,331
Interest 629,113
Security Lending 4,348
----------
Total Income 1,055,792
----------
EXPENSES
Investment Advisory Fees--Note B
Basic Fee 9,658
Performance Adjustment (2,480)
The Vanguard Group--Note C
Management and Administrative 67,010
Marketing and Distribution 4,161
Custodian Fees 181
Auditing Fees 21
Shareholders' Reports 816
Trustees' Fees and Expenses 39
----------
Total Expenses 79,406
Expenses Paid Indirectly--Note D (1,471)
----------
Net Expenses 77,935
- ---------------------------------------------------------------------
NET INVESTMENT INCOME 977,857
- ---------------------------------------------------------------------
REALIZED NET GAIN ON INVESTMENT SECURITIES SOLD* 1,305,304
- ---------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION)
OF INVESTMENT SECURITIES (1,372,702)
- ---------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS 910,459
=====================================================================
*Dividend income and realized net loss from affiliated
companies were $13,953,000 and $7,037,000, respectively.
23
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
This Statement shows how the fund's total net assets changed during the two most
recent reporting periods. The Operations section summarizes information detailed
in the Statement of Operations. The amounts shown as Distributions to
shareholders from the fund's net income and capital gains may not match the
amounts shown in the Operations section, because distributions are determined on
a tax basis and may be made in a period different from the one in which the
income was earned or the gains were realized on the financial statements. The
Capital Share Transactions section shows the amount shareholders invested in the
fund, either by purchasing shares or by reinvesting distributions, as well as
the amounts redeemed. The corresponding numbers of Shares Issued and Redeemed
are shown at the end of the Statement.
- --------------------------------------------------------------------------------
WELLINGTON FUND
YEAR ENDED NOVEMBER 30,
-------------------------
1999 1998
(000) (000)
- --------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income $ 977,857 $ 874,690
Realized Net Gain 1,305,304 1,953,295
Change in Unrealized Appreciation (Depreciation) (1,372,702) 214,437
------------------------
Net Increase in Net Assets Resulting
from Operations 910,459 3,042,422
------------------------
DISTRIBUTIONS
Net Investment Income (1,029,186) (871,468)
Realized Capital Gain (1,954,145) (1,082,884)
------------------------
Total Distributions (2,983,331) (1,954,352)
------------------------
CAPITAL SHARE TRANSACTIONS1
Issued 4,178,637 4,860,919
Issued in Lieu of Cash Distributions 2,839,521 1,853,402
------------------------
Redeemed (4,928,194) (3,313,452)
------------------------
Net Increase from Capital
Share Transactions 2,089,964 3,400,869
- --------------------------------------------------------------------------------
Total Increase 17,092 4,488,939
- --------------------------------------------------------------------------------
NET ASSETS
Beginning of Year 25,829,221 21,340,282
End of Year $25,846,313 $25,829,221
===============================================================================
1Shares Issued (Redeemed)
Issued 139,191 157,319
Issued in Lieu of Cash Distributions 97,975 62,577
Redeemed (164,432) (107,318
------------------------
Net Increase in Shares Outstanding 72,734 112,578
================================================================================
24
<PAGE>
FINANCIAL HIGHLIGHTS
This table summarizes the fund's investment results and distributions to
shareholders on a per-share basis. It also presents the fund's Total Return and
shows net investment income and expenses as percentages of average net assets.
These data will help you assess: the variability of the fund's net income and
total returns from year to year; the relative contributions of net income and
capital gains to the fund's total return; how much it costs to operate the fund;
and the extent to which the fund tends to distribute capital gains. The table
also shows the Portfolio Turnover Rate, a measure of trading activity. A
turnover rate of 100% means that the average security is held in the fund for
one year.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
WELLINGTON FUND
YEAR ENDED NOVEMBER 30,
FOR A SHARE OUTSTANDING
THROUGHOUT EACH YEAR 1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF YEAR $32.29 $31.05 $28.34 $24.57 $19.33
- -------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income 1.13 1.13 1.11 1.02 .96
Net Realized and Unrealized
Gain (Loss) on Investments (0.14) 2.86 3.77 4.00 5.19
Total from InvestmentOperations ------------------------------------------
0.99 3.99 4.88 5.02 6.1
------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (1.22) (1.18) (1.06) (.97) (.88)
Distributions from Realized Capital Gains (2.44) (1.57) (1.11) (.28) (.03)
------------------------------------------
Total Distributions (3.66) (2.75) (2.17) (1.25) (.91)
- -------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $29.62 $32.29 $31.05 $28.34 $24.57
=======================================================================================================
TOTAL RETURN 3.58% 13.84% 18.60% 21.26% 32.70%
=======================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $25,846 $25,829 $21,340 $16,505 $12,333
Ratio of Total Expenses to Average Net Assets 0.30% 0.31% 0.29% 0.31% 0.33%
Ratio of Net Investment Income to Average Net Assets 3.74% 3.68% 3.97% 4.08% 4.37%
Portfolio Turnover Rate 22% 29% 27% 30% 24%
=======================================================================================================
</TABLE>
25
<PAGE>
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: Equity securities are valued at the latest
quoted sales prices as of the close of trading on the New York Stock Exchange
(generally 4:00 p.m. Eastern time) on the valuation date; such securities not
traded on the valuation date are valued at the mean of the latest quoted bid and
asked prices. Prices are taken from the primary market in which each security
trades. Bonds are valued using the latest bid prices 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.
Securities for which market quotations are not readily available are valued by
methods deemed by the Board of Trustees to represent fair value.
2. FEDERAL INCOME TAXES: The fund intends to continue to qualify as a
regulated investment company and distribute all of its taxable income.
Accordingly, no provision for federal income taxes is required in the financial
statements.
3. REPURCHASE AGREEMENTS: The fund, along with other members of The
Vanguard Group, transfers uninvested cash balances to a Pooled Cash Account,
which is invested in repurchase agreements secured by U.S. government
securities. Securities pledged as collateral for repurchase agreements are held
by a custodian bank until the agreements mature. Each agreement requires that
the market value of the collateral be sufficient to cover payments of interest
and principal; however, in the event of default or bankruptcy by the other party
to the agreement, retention of the collateral may be subject to legal
proceedings.
4. DISTRIBUTIONS: Distributions to shareholders are recorded on the
ex-dividend date. Distributions are determined on a tax basis and may differ
from net investment income and realized capital gains for financial reporting
purposes.
5. OTHER: Dividend income is recorded on the ex-dividend date. Security
transactions are accounted for on the date securities are bought or sold. Costs
used to determine realized gains (losses) on the sale of investment securities
are those of the specific securities sold. Premiums and discounts on debt
securities purchased are amortized and accreted, respectively, to interest
income over the lives of the respective securities.
B. Wellington Management Company, llp, provides investment advisory services to
the fund for a fee calculated at an annual percentage rate of average net
assets. The basic fee is subject to quarterly adjustments based on performance
for the preceding three years relative to a combined index comprising the S&P
500 Index and the Lehman Brothers Long Corporate AA or Better Bond Index. For
the year ended November 30, 1999, the advisory fee represented an effective
annual basic rate of 0.04% of the fund's average net assets before a decrease of
$2,480,000 (0.01%) based on performance.
C. The Vanguard Group furnishes at cost corporate management, administrative,
marketing, and distribution services. The costs of such services are allocated
to the fund under methods approved by the Board of Trustees. The fund has
committed to provide up to 0.40% of its net assets in capital contributions to
Vanguard. At November 30, 1999, the fund had contributed capital of $5,463,000
to Vanguard (included in Other Assets), representing 0.02% of the fund's net
assets and 5.5% of Vanguard's capitalization. The fund's Trustees and officers
are also Directors and officers of Vanguard.
26
<PAGE>
D. Vanguard has asked the fund's investment adviser to direct certain security
trades, subject to obtaining the best price and execution, to brokers who have
agreed to rebate to the fund part of the commissions generated. Such rebates are
used solely to reduce the fund's management and administrative expenses. The
fund's custodian bank has also agreed to reduce its fees when the fund maintains
cash on deposit in the non-interest-bearing custody account. For the year ended
November 30, 1999, these arrangements reduced the fund's expenses by $1,454,000
and $17,000, respectively. The total expense reduction represented an effective
annual rate of 0.01% of the fund's average net assets.
E. During the year ended November 30, 1999, the fund purchased $4,198,917,000 of
investment securities and sold $4,037,638,000 of investment securities, other
than U.S. government securities and temporary cash investments. Purchases and
sales of U.S. government securities were $1,271,057,000 and $1,305,051,000,
respectively.
F. At November 30, 1999, net unrealized appreciation of investment securities
for financial reporting and federal income tax purposes was $4,776,950,000,
consisting of unrealized gains of $6,026,707,000 on securities that had risen in
value since their purchase and $1,249,757,000 in unrealized losses on securities
that had fallen in value since their purchase.
G. The market value of securities on loan to broker/dealers at November 30,
1999, was $433,141,000, for which the fund had received as collateral cash of
$248,944,000 and U.S. Treasury securities with a market value of $200,985,000.
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.
27
<PAGE>
Report Of Independent Accountants
To the Shareholders and Trustees 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, 1999, 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, 1999 by correspondence with the
custodian, provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Thirty South Seventeenth Street
Philadelphia, Pennsylvania 19103
December 31, 1999
================================================================================
SPECIAL 1999 TAX INFORMATION (UNAUDITED) FOR
VANGUARD WELLINGTON FUND
This information for the fiscal year ended November 30, 1999, is included
pursuant to provisions of the Internal Revenue Code.
The fund distributed $1,922,110,000 as capital gain dividends (from net
long-term capital gains) to shareholders in December 1998, all of which is
designated as a 20% rate gain distribution.
For corporate shareholders, 26.8% of investment income (dividend income
plus short-term gains, if any) qualifies for the dividends-received deduction.
================================================================================
28
<PAGE>
THE PEOPLE WHO GOVERN YOUR FUND
The Trustees of your mutual fund are there to see that the fund is operated and
managed in your best interests since, as a shareholder, you are part owner of
the fund. Your fund Trustees also serve on the Board of Directors of The
Vanguard Group, which is owned by the funds and exists solely to provide
services to them on an at-cost basis.
Seven of Vanguard's nine board members are independent, meaning that
they have no affiliation with Vanguard or the funds they oversee, apart from the
sizable personal investments they have made as private individuals. They bring
distinguished backgrounds in business, academia, and public service to their
task of working with Vanguard officers to establish the policies and oversee the
activities of the funds.
Among board members' responsibilities are selecting investment advisers
for the funds; monitoring fund operations, performance, and costs; reviewing
contracts; nominating and selecting new Trustees/Directors; and electing
Vanguard officers.
The list below provides a brief description of each Trustee's
professional affiliations. Noted in parentheses is the year in which the Trustee
joined the Vanguard Board.
TRUSTEES
JOHN C. BOGLE ? (1967) Founder, Senior Chairman of the Board, and
Director/Trustee of The Vanguard Group, Inc., and each of the investment
companies in The Vanguard Group.
JOHN J. BRENNAN ? (1987) Chairman of the Board, Chief Executive Officer, and
Director/Trustee of The Vanguard Group, Inc., and each of the investment
companies in The Vanguard Group.
JOANN HEFFERNAN HEISEN ?(1998) Vice President, Chief Information Officer, and a
member of the Executive Committee of Johnson & Johnson; Director of Johnson &
JohnsonoMerck Consumer Pharmaceuticals Co., The Medical Center at Princeton, and
Women's Research and Education Institute.
BRUCE K. MACLAURY ? (1990) President Emeritus of The Brookings Institution;
Director of American Express Bank Ltd., The St. Paul Companies, Inc., and
National Steel Corp.
BURTON G. MALKIEL ? (1977) Chemical Bank Chairman's Professor of Economics,
Princeton University; Director of Prudential Insurance Co. of America, Banco
Bilbao Gestinova, Baker Fentress & Co., The Jeffrey Co., and Select Sector SPDR
Trust.
ALFRED M. RANKIN, JR. ? (1993) Chairman, President, Chief Executive
Officer, and Director of NACCO Industries, Inc.; Director of The BFGoodrich Co.
JOHN C. SAWHILL ? (1991) 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., NACCO Industries, and Newfield Exploration Co.
JAMES O. WELCH, JR. ? (1971) Retired Chairman of Nabisco Brands, Inc.; retired
Vice Chairman and Director of RJR Nabisco; Director of TECO Energy, Inc., and
Kmart Corp. J. Lawrence Wilson ? (1985) Retired Chairman of Rohm & Haas Co.;
Director of Cummins Engine Co. and The Mead Corp.; Trustee of Vanderbilt
University.
OTHER FUND OFFICERS
RAYMOND J. KLAPINSKY v Secretary; Managing Director and Secretary of The
Vanguard Group, Inc.; Secretary of each of the investment companies in The
Vanguard Group.
THOMAS J. HIGGINS v Treasurer; Principal of The Vanguard Group, Inc.; Treasurer
of each of the investment companies in The Vanguard Group.
VANGUARD MANAGING DIRECTORS
R. GREGORY BARTON v Legal Department.
ROBERT A. DISTEFANO v Information Technology.
JAMES H. GATELY v Individual Investor Group.
KATHLEEN C. GUBANICH v Human Resources.
IAN A. MACKINNON v Fixed Income Group.
F. WILLIAM MCNABB, III v Institutional Investor Group.
MICHAEL S. MILLER v Planning and Development.
RALPH K. PACKARD v Chief Financial Officer.
GEORGE U. SAUTER v Core Management Group.
<PAGE>
ABOUT OUR COVER
Our cover art, depicting HMS Vanguard at sea, is a reproduction of Leading the
Way, a 1984 work created and copyrighted by noted naval artist Tom Freeman, of
Forest Hill, Maryland.
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Post Office Box 2600
Valley Forge, Pennsylvania 19482-2600
All comparative mutual fund data are from Lipper Inc. or Morningstar, Inc.,
unless otherwise noted.
"Standard & Poor's(R)," "S&P(R)," "S&P 500(R)," "Standard & Poor's 500," and
"500" are trademarks of The McGraw-Hill Companies, Inc.
Frank Russell Company is the owner of trademarks and copyrights relating to the
Russell Indexes. "Wilshire 4500" and "Wilshire 5000" are trademarks of Wilshire
Associates.
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www.vanguard.com
FUND INFORMATION
1-800-662-7447
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1-800-662-2739
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1-800-523-1036
This report is intended for the fund's shareholders. It may not be distributed
to prospective investors unless it is preceded or accompanied by the current
fund prospectus.
Q210-01/14/2000
(C) 2000 The Vanguard Group, Inc.
All rights reserved.
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Corporation, Distributor.
