<PAGE> 1
VANGUARD
FIXED INCOME SECURITIES FUND
ANNUAL REPORT 1995
THE VANGUARD VOYAGE . . . STAYING THE COURSE
<PAGE> 2
THE VANGUARD VOYAGE . . . STAYING THE COURSE
WE ARE PRESENTLY OBSERVING TWO MILESTONES IN OUR HISTORY: (1) THE 20TH
ANNIVERSARY OF THE VANGUARD GROUP; AND (2) THE 65TH ANNIVERSARY YEAR OF
WELLINGTON FUND, THE OLDEST MUTUAL FUND ASSOCIATED WITH VANGUARD. WE CELEBRATE
THESE TWO EVENTS SINCE THEY HAVE INDELIBLY ALTERED THE MUTUAL FUND INDUSTRY--IN
OUR VIEW, FOR THE BETTER.
Wellington Fund--a pioneer in the mutual fund industry--began operations on
June 30, 1929. Its first fifteen years were a struggle for survival in an
industry that was shaken to its roots by the Great Crash of 1929-1933. From an
initial base of $100,000, Wellington's assets had grown to but $27 million by
the end of World War II. The Vanguard Group was founded on September 24, 1974.
Soon thereafter, we assumed responsibility for the management of Wellington Fund
and ten associated funds, with assets aggregating $1.4 billion.
The years that followed the founding of The Vanguard Group were marked by
exceptional growth. Today, Wellington Fund, with assets of nearly $9 billion,
remains one of the largest mutual funds in the nation. And Vanguard, now
managing 85 mutual fund portfolios, is entrusted with assets of $134 billion,
and ranks as the second largest fund complex in the world.
Our durability in an era of change--and our longevity in an era of
challenge--didn't "just happen." What brought us to where we are today is what
we were when we began. Put another way, we set our original investment course
based on sound principles, and our corporate course based on a single focus:
serving solely the interests of our Fund shareholders.
FOUNDING INVESTMENT PRINCIPLES
The founding investment principles of Wellington Fund were, above all,
conservative. The Fund provided a broadly diversified portfolio at a time when
holding individual securities was the conventional strategy. It incurred no debt
in an era of high leverage that would soon come back to haunt less cautious
investors. And it was a "balanced" fund--in fact, Wellington is America's oldest
balanced fund--with holdings from each of the three basic financial asset
classes: cash reserves, bonds, and common stocks. In short, Wellington Fund was
a staid investment in an era of stock speculation that was to become, almost
within moments, an era of conservatism.
For Vanguard, these investment principles endure. "Balance" is still our
watchword, because the three basic financial asset classes have different--and
usually countervailing--investment characteristics. When it began, Wellington
Fund provided a balanced program in a single investment; in 1994, such a balance
is often achieved by a combination of Vanguard money market, bond, and stock
funds.
"Conservatism," too, remains our standard. Over the years, we have tried to
maintain the discipline to eschew offering funds that lack sound financial
principles, often based on marketplace fads that could not--and did not--endure.
Our conservatism applies not only to the funds we offer, but to the instruments
in which they invest. For example, we have steered clear of exotic derivative
securities with unpredictable investment characteristics. Too many fund managers
have been taken in by these highly risky instruments, and their shareholders
have paid a heavy price--except in cases where the manager has "made the fund
whole," when to do otherwise would have shocked investors and impaired their
confidence in the fund complex.
Speculation, it seems, comes and goes, albeit in different guises. But the
investment principles to which we have adhered since Wellington Fund began in
1929 remain firm:
* We offer Funds with sound and durable investment objectives, designed for
long-term investors.
(please turn to inside back cover)
VANGUARD FIXED INCOME SECURITIES FUND SEEKS TO PROVIDE THE HIGHEST LEVEL OF
CURRENT INCOME CONSISTENT WITH THE CONSERVATION OF CAPITAL AND THE INVESTMENT
POLICIES OF EACH OF ITS NINE PORTFOLIOS: LONG-TERM CORPORATE PORTFOLIO * HIGH
YIELD CORPORATE PORTFOLIO * GNMA PORTFOLIO * LONG-TERM U.S. TREASURY PORTFOLIO *
INTERMEDIATE-TERM CORPORATE PORTFOLIO * INTERMEDIATE-TERM U.S. TREASURY
PORTFOLIO * SHORT-TERM FEDERAL PORTFOLIO * SHORT-TERM CORPORATE PORTFOLIO *
SHORT-TERM U.S. TREASURY PORTFOLIO.
<PAGE> 3
CHAIRMAN'S LETTER
FELLOW SHAREHOLDER:
Following a powerful five-year bull market, the bond market took a
tumble during the twelve months ended January 31, 1995, the fiscal year of
Vanguard Fixed Income Securities Fund. During the bull market, the Fund's
Portfolios enjoyed mostly "double-digit" total returns. So, perhaps the time
had simply arrived for a partial retracement of those extraordinary gains.
Our tightly constructed Portfolios, as you would expect, achieved total
returns (capital change plus income) during the past fiscal year that were
roughly commensurate with the sectors of the bond markets they represent. To
generalize, the Short-Term Portfolios provided returns that were about
break-even, the Long-Term Portfolios provided negative returns in the area of
-6%, and the Intermediate-Term Portfolios provided returns about midway between
the two groups. (Our GNMA Portfolio "bucked the tide" with a slightly positive
return.)
The total returns for each of our nine Portfolios are shown in the table
below. As is customary, we have also shown both components of the Portfolios'
total returns: the income return, which is reasonably predictable; and the
capital return, which is highly variable and may be either positive or negative,
generally depending upon whether interest rates fall or rise. The table also
shows each Portfolio's annualized dividend yield at fiscal year end.
<TABLE>
<CAPTION>
----------------------------------------------------------------
Fiscal Year Ended January 31, 1995
----------------------------------
Components
of Return SEC
Total -------------- 30-Day
Vanguard Portfolio Return Income Capital Yield
----------------------------------------------------------------
<S> <C> <C> <C> <C>
Short-Term U.S. Treasury +0.4% +5.2% - 4.8% + 7.4%
Short-Term Federal -0.2 +5.4 - 5.6 + 7.2
Short-Term Corporate +0.6 +5.5 - 4.9 + 7.6
----------------------------------------------------------------
Intermediate-Term
U.S. Treasury -3.9% +5.7% - 9.6% + 7.6%
Intermediate-Term Corporate -3.7 +6.0 - 9.7 + 8.1
GNMA +0.4 +6.9 - 6.5 + 7.6
----------------------------------------------------------------
Long-Term U.S. Treasury -6.7% +6.3% -13.0% + 7.8%
Long-Term Corporate -5.1 +6.8 -11.9 + 8.2
----------------------------------------------------------------
High Yield Corporate -2.5% +8.6% -11.1% +10.2%
----------------------------------------------------------------
</TABLE>
The detailed per share figures for each Portfolio, including net asset
values, income dividends, and any distributions from net realized capital gains,
are shown in the table on page 6 of this Report.
THE BOND MARKET IN REVIEW
The past year was a tough one for all sectors of the bond market. Indeed,
long-term U.S. Treasury bonds turned in their second-worst record of return in
the past century. Interest rates on long-term U.S. Treasury bonds were 6.3% when
the fiscal year began, soared to 8.2% in mid-November, and then retraced a good
bit of the increase, closing the year at 7.8%. On balance, this rate increase
engendered a stunning market price decline of -14.5%, offset to some degree by
interest income of 7.0% earned during the period, bringing the year's total
return to -7.5%.
While the rate rise was in fact far sharper in Treasury bonds with shorter
maturities, their price declines were lower. The reason, of course, is that the
shorter the maturity of a bond, the less its "interest rate sensitivity." For
example, despite a 3.1% (310 "basis points") increase--from 4.4% to 7.5%--in
yield, 3-year U.S. Treasury notes actually provided a marginally positive return
of +0.9% (income return +5.6%; capital return -4.7%) for the fiscal year. The
[FIGURE 1]
1
<PAGE> 4
[FIGURE 2]
table on page 1 clearly illustrates the differences in price sensitivity across
the maturity spectrum.
The primary cause of the interest rate rise over the past year seemed to
be investor fears about a resurgence of inflation. So far, at least, the U.S.
Consumer Price Index gives little evidence of it. The CPI has risen just 2.8%
over the past twelve months, although more sensitive indicators--such as
commodity prices and producer prices--have been rising at higher rates.
In an effort to quell inflationary fears, the Federal Reserve has acted to
"tighten" the money supply in order to slow economic growth and rein in
potential future inflation. Fully six rate increases--in February, March, April,
May, August, and again in November--combined to raise the Federal funds rate (at
which banks borrow from one another) from 3.00% to 5.50%.* Still, the specter of
inflation remains, and further rate increases may well lie in prospect.
The chart above compares the yields on long-term, intermediate-term, and
short-term U.S. Treasury bonds over the past five years. Two messages, it seems
to me, stand out:
* First, however sharply long-term rates have increased during the past twelve
months, their rise has simply retraced an equally sharp earlier decline. As a
result, even today's "high" long rates are below those prevailing throughout
most of 1990-1992. Thus, investors who held long-term bonds over the full
five-year period received high yields without, on balance, suffering erosion
in principal.
* Second, there has been a wide swing in the "spread" between long-term
(30-year) and short-term (3-year) interest rates. Five years ago, both rates
were virtually identical (about 8.5%), a so-called "flat yield curve." By
mid-1992, the spread had widened to 3.1%, with long-rates at 7.4% and
short-rates at 4.3%. With the spread back down to about 0.3%, we have
returned to a flat yield curve.
Whatever else the snippets of history reflected in the chart and earlier
table may show, they provide a useful reminder that: 1) the volatility of bond
returns rises as maturity lengthens; and 2) bond yields--across the board--may
well be at levels that not only discount the present level of inflation in our
economy, but also allow room for a somewhat higher inflation rate without
faltering.
THE PORTFOLIOS IN FISCAL 1995
While negative (or only modestly positive) total returns prevailed among our
Portfolios during the past fiscal year, it is important for shareholders to
realize how rarely that circumstance has occurred in the past. This table shows,
for our four Portfolios with at least a decade of history, the high historical
"odds" in favor of positive total returns:
<TABLE>
<CAPTION>
----------------------------------------------------
Years Since Years With
Inception Positive Returns
----------------------------------------------------
<S> <C> <C>
Long-Term Corporate 21 19
High Yield Corporate 16 13
GNMA 14 14
Short-Term Corporate 12 12
----------------------------------------------------
</TABLE>
--------------
* A seventh increase on February 1, 1995, raised the Federal funds rate
to 6.00%.
2
<PAGE> 5
The point of this table is not that the asset values of our Portfolios rarely
decline. (Indeed, the Long-Term Corporate Portfolio has had negative capital
returns in 10 of its 21 full years of operations.) Rather, it is to show that
the generous income returns generated by bonds have generally overwhelmed any
negative capital returns. (The tables on pages 17-20 show the components of
our Portfolios' annual returns: income, capital, and total.)
The results of each Portfolio during the past fiscal year generally
paralleled the results of similarly structured competitive funds, as shown in
this table:
<TABLE>
<CAPTION>
------------------------------------------------------------
Total Return
-----------------------------------
Fiscal Year Ended January 31, 1995
-----------------------------------
Vanguard Competitive
Portfolio Fund Fund Average Difference
------------------------------------------------------------
<S> <C> <C> <C>
Short-Term U.S. Treasury +0.4% +0.6% -0.2%
Short-Term Federal -0.2 -1.1 +0.9
Short-Term Corporate +0.6 -0.1 +0.7
------------------------------------------------------------
Intermediate-Term
U.S. Treasury -3.9% -3.0% -0.9%
Intermediate-Term
Corporate -3.7 -3.0 -0.7
GNMA +0.4 -1.6 +2.0
------------------------------------------------------------
Long-Term U.S. Treasury -6.7% -5.6% -1.1%
Long-Term Corporate -5.1 -4.4 -0.7
------------------------------------------------------------
High Yield Corporate -2.5% -5.3% +2.8%
------------------------------------------------------------
</TABLE>
We have presented this table of relative returns in each of the past eleven
years, and we have dominated our peer groups in virtually every year. The
modest shortfalls that we experienced in fiscal 1995 in our Long-Term and
Intermediate-Term Portfolios are largely a reflection of the fact that we
maintain slightly longer maturities than our peers. This is not "news." After
the outstanding results we achieved a year ago, I acknowledged that "this
factor adds to our returns when interest rates decline, and subtracts from
them when interest rates rise." Nonetheless, our "success" rate remains
remarkable. Of 64 year-by-year comparisons in our Annual Reports (some of our
Portfolios were organized in later years), our Portfolios provided superior
returns relative to competitive norms in 53 cases, a "success rate" of 83%.
We are especially pleased with the relative performance of our GNMA and
High Yield Portfolios during the past year. The GNMA Portfolio was one of but a
handful of comparable funds to turn in a positive (if modest) total return, and
its monthly dividend increased by 25% from January 1994 (4.9(cent) per share) to
January 1995 (6.1(cent) per share).
While the return of our High Yield Portfolio was negative, we strongly
outpaced competitive norms. The relatively higher quality of our Portfolio was a
big help, even as it proved a small hindrance during the prior year. Only about
one-half of our Portfolio is currently invested in bonds rated B or lower (the
lowest-tier "junk bonds") or "unrated" bonds, far less than the 83% weighting of
our competitors.
RISK AND COST
Our Portfolios are managed by experienced and skilled managers, operating under
specific and stringent quality and maturity guidelines. The past twelve months
was surely a period in which these attributes "paid off." On the quality side,
we avoided, as a matter of policy, international debt, a sector of the
marketplace that carries both currency risk and the risk arising from the fact
that many foreign nations do not enjoy the (relative) stability of the U.S. in
terms of both government and society. The collapse of Mexico's peso and the
market for Mexico's bonds in December and January hurt many less-conservative
funds. While we felt lucky to have escaped this debacle unscathed, the fact is
that it was "policy," not luck, that protected our Portfolios.
On the maturity side, we held no exotic derivative securities, and were
therefore immune to the collapse of so many of these securities. Essentially,
such derivatives were used by some funds to speculate on the supposition
("guess") that rates would retrace their earlier sharp rise. In fact, rates
continued to rise through the summer of 1994, and the values of these high-risk
securities plummeted, in some cases by -50% or more. We do not use derivatives
that increase volatility, so again it was "policy," not luck, that protected our
Portfolios.
Why is Vanguard so conservative? Why have some of our competitors been so
willing to assume extra risk? We think the central reason is that, because of
our rock-bottom costs, we can provide excellent
3
<PAGE> 6
excellent yields without compromising on quality; conversely, competitive
funds are tempted to "climb out on a limb" and stretch for extra yield to
offset their higher expenses and, in some cases, their sales loads.
Is it really all so simple? Perhaps not. But the fact is that the annual
operating expense ratio incurred by Vanguard Fixed Income Securities Fund is
equal to 0.30% of average net assets. The comparable figure for bond funds as a
group is about 1.02%. Thus, we enter the yield competition with "the wind at our
backs" in the amount of 0.72%. Put another way, we start the race with an annual
headstart of nearly 3/4 of 1% in yield. It is no trivial advantage.
A LONGER-TERM VIEW
Suffice it to say that it is the long-term record of a fixed-income portfolio,
rather than the record in any single year, that is of the greatest significance
in evaluating performance. The charts on pages 7-11 present the long-term
picture for each of our Portfolios, showing cumulative returns for the past ten
years or since the inception of the Portfolio. This table summarizes the
long-term return of each Portfolio relative to the average return achieved by
comparable fixed-income mutual funds during the same periods:
<TABLE>
<CAPTION>
--------------------------------------------------------------
Annual Rate of Return
--------------------------------
Ten Years Ended January 31, 1995
--------------------------------
Average Annual
Vanguard Competitive Vanguard
Portfolio Fund Fund Advantage
--------------------------------------------------------------
<S> <C> <C> <C>
Short-Term U.S. Treasury* + 5.1% +4.5% +0.6%
Short-Term Federal* + 7.3 +6.8 +0.5
Short-Term Corporate + 8.5 +7.6 +0.9
--------------------------------------------------------------
Intermediate-Term
U.S. Treasury* + 6.5% +5.8% +0.7%
Intermediate-Term
Corporate* - 1.7 -1.8 +0.1
GNMA + 9.5 +8.5 +1.0
--------------------------------------------------------------
Long-Term U.S. Treasury* + 8.3% +6.8% +1.5%
Long-Term Corporate +10.4 +8.9 +1.5
--------------------------------------------------------------
High Yield Corporate +10.3% +9.5% +0.8%
--------------------------------------------------------------
</TABLE>
* Since inception: Long-Term U.S. Treasury, May 1986; Intermediate-Term U.S.
Treasury and Short-Term U.S. Treasury, October 1991; Short-Term Federal,
December 1987; Intermediate-Term Corporate, November 1993.
The ten-year returns illustrated cover a period that was--despite the
difficulties of the past twelve months--favorable on balance for bond funds of
all types, largely because of the climate of generally declining interest rates.
We do not intend to suggest that the future absolute returns of the Portfolios
will match those of the past decade. Indeed, given the yields available in the
bond market today, there is little reason to expect that future returns will
equal those shown in the table. However, given our advantages of low cost,
stringent maturity and quality policies, and professional management, we are
confident that the returns of each Portfolio will continue to be respectable
relative to competitive norms.
The charts on pages 7-11 also present the returns of each Portfolio's
comparable segment of the unmanaged Lehman Aggregate Bond Index. Emulating them
as we may, these bond market indexes represent tough performance standards for
actively managed bond funds. The reason is straightforward: indexes are merely
"paper" portfolios, existing only in computer-generated statistics and
unencumbered by the "real world" costs of doing business, including operating
expenses, advisory fees, and portfolio transaction costs. All mutual funds must
bear these costs in their daily activities; therefore, almost inevitably, nearly
all funds must fall short of the index returns. Vanguard's claim to fame, as it
were, is that we generally outpace comparable funds of similar quality and
maturity. Thus, the returns of our competitors rarely approach those of the
indexes as closely as do ours.
A (VERY) BRIEF HISTORY OF BOND RETURNS
As I mentioned at the outset, the past year produced the second-worst
performance for bonds in a century. It is worth reemphasizing, however, that
because interest income is the dominant force in shaping the total returns of
bonds, there is a limited possibility that bonds will produce negative total
returns in any given year. I won't take you through the whole century, but I
will illustrate the point using the chart below, which shows the year-by-year
returns on 10-year U.S. Treasury bonds over the past 45 years, from 1950 through
1994. (Ten-year Treasuries have a maturity
4
<PAGE> 7
[FIGURE 3]
that is slightly longer than the Intermediate-Term U.S. Treasury Portfolio's
8.7-year current average maturity.)
You can see that the annual returns moved into negative territory in but
10 of the 45 years. What is more, the average decline during these ten years, at
-2.6%, could hardly be considered devastating. On balance for the full period,
10-year Treasuries provided an average rate of return of +5.3%. What this
history lesson suggests, simply put, is that bonds have done precisely what they
are supposed to do: provide a high enough level of current income to minimize
the risk of negative total returns in bad years, and provide generous returns in
good years.
I would emphasize that the outlook for future returns on bonds would
clearly call for--although not guarantee--higher returns than the +5.3% average
reflected in the chart. The reason has to do with the fact that, over time, the
initial yield at the start of each year has been the best single forecaster of
bond returns for the subsequent decade. For instance, from 1950 through the
early 1970s, the average return on U.S. Treasury bonds was +2.7%, largely
reflecting the 3.9% average yield at the start of each year.
Since 1980, when yields at the start of each year averaged 9.3%, the average
return on Treasury bonds was +11.0%. Today, with such a bond providing an
initial yield of 7.8%, history would seem to suggest that future returns should
fall well into the upper range of the returns achieved during the 1980s and
1990s, and those achieved during the 1960s and 1970s.
Whatever the case may be, I would note that the present "real" return of
+5.0% on a 10-year U.S. Treasury bond (7.8% nominal yield less the current
inflation rate of 2.8%) is far in excess of the average real return of +1.5%
(5.7% nominal yield less 4.2% inflation) since 1950. This relationship
represents another cause for guarded optimism about future bond returns.
LOOKING AHEAD
While it is simply not possible--for anyone--to consistently and accurately
forecast the future course of interest rates, it can be said unequivocally that
the yields that fund investors receive have risen sharply over the past year. As
shown in our opening table,
5
<PAGE> 8
current yields on our Portfolios appear to be relatively generous. I believe,
therefore, that the probabilities favor much better total returns in the
coming year. (There are no guarantees!) It can also be said, virtually
unequivocally, that the lowest-cost bond funds (no sales charges, low
expense ratios) will provide higher returns than the highest-cost bond funds.
So, our advice to you remains essentially what it was one year ago. Hold
onto the Vanguard Portfolio (or combination of Portfolios) that best meets
your needs: the short-term Portfolios if you want to minimize capital risk and
achieve some durability of income (compared with, say, a money market fund);
the longer-term Portfolios if you seek more income durability and are prepared
to accept the risk of greater fluctuations in the value of your capital. This
year we would add: while the "spread" between short-term and long-term rates
has almost been eliminated, the differences in income durability and price
volatility remain.
During the past twelve months, many investors liquidated their holdings in
bond funds, presumably to move to safer havens such as money market funds. I
believe that such actions will prove to have been unwise, for they likely
reflect misunderstanding of the investment characteristics of bonds. To have
purchased bonds earlier at higher prices, only to sell bonds at lower prices,
seems counterproductive in the extreme. For the long-term investor, "stay the
course" is virtually always the best advice.
Sincerely,
/s/ JOHN C. BOGLE
-----------------
John C. Bogle
Chairman of the Board February 14, 1995
Note: Mutual fund data from Lipper Analytical Services, Inc.
FISCAL YEAR PORTFOLIO RESULTS
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
Net Asset Value Per Share Twelve Months SEC
------------------------- ------------------------ 30-Day
Average Average January 31, January 31, Income Capital Gains Total Annualized
Portfolio Maturity Quality 1994 1995 Dividends Distributions Return Yield
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Long-Term U.S. Treasury 22.0 years Aaa $10.75 $ 9.23 $.665 $.119 -6.7% 7.77%
Long-Term Corporate 20.4 years Aa3 9.36 8.18 .617 .072 -5.1 8.21
High Yield Corporate 8.6 years Ba1 8.14 7.24 .679 -- -2.5 10.24 (1)
Intermediate-Term Corporate 8.4 years A1 10.04 9.07 .587 -- -3.7 8.09
Intermediate-Term
U.S. Treasury 8.7 years Aaa 10.82 9.76 .603 .027 -3.9 7.63
GNMA 8.6 years Aaa 10.39 9.71 .693 .007 +0.4 7.70
Short-Term Federal 2.6 years Aaa 10.38 9.79 .550 .010 -0.2 7.24
Short-Term U.S. Treasury 2.4 years Aaa 10.41 9.89 .532 .020 +0.4 7.41
Short-Term Corporate 2.6 years Aa3 10.94 10.40 .596 -- +0.6 7.64
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
IMPORTANT NOTES:
(1) HIGH YIELD CORPORATE PORTFOLIO. Yield reflects a premium based on the
possibility that interest payments on some bonds may be reduced or
eliminated. Also, since bonds with higher interest coupons may be replaced
by bonds with lower coupons, income dividends are subject to reduction.
6
<PAGE> 9
CUMULATIVE PERFORMANCE
[FIGURE 4]
<TABLE>
<CAPTION>
Average Annual Total Returns--Periods Ended January 31, 1995
------------------------------------------------------------
Since
1 Year 5 Years Inception*
------------------------------------------------------------
<S> <C> <C> <C>
Long-Term Treasury Portfolio -6.68% +9.06% +8.29%
Average LT Treasury Fund -5.55 +7.51 +6.81
Lehman LT Treasury Index -7.49 +9.39 +8.95
------------------------------------------------------------
</TABLE>
* Inception: May 19, 1986. Performance begins May 31, 1986, to show
competitive data.
Note: Past performance is not predictive of future performance.
[FIGURE 5]
<TABLE>
<CAPTION>
Average Annual Total Returns--Periods Ended January 31, 1995
-----------------------------------------------------------
1 Year 5 Years 10 Years
-----------------------------------------------------------
<S> <C> <C> <C>
Long-Term Corporate Portfolio -5.12% +9.83% +10.45%
Average Corporate A-Rated Fund -4.38 +7.89 + 8.93
Lehman Corporate A-Rated Index -3.91 +8.89 +10.42
-----------------------------------------------------------
</TABLE>
Note: Past performance is not predictive of future performance.
7
<PAGE> 10
CUMULATIVE PERFORMANCE (continued)
[FIGURE 6]
<TABLE>
<CAPTION>
Average Annual Total Returns--Periods Ended January 31, 1995
---------------------------------------------------------------
1 Year 5 Years 10 Years
---------------------------------------------------------------
<S> <C> <C> <C>
High Yield Corporate Portfolio -2.52% +10.80% +10.29%
Average High Yield Bond Fund -5.31 +11.10 + 9.47
Lehman Corporate BBB-Rated Index -3.76 + 8.98 +10.54
</TABLE>
Note: Past performance is not predictive of future performance.
[FIGURE 7]
<TABLE>
<CAPTION>
Average Annual Total Returns--Periods Ended January 31, 1995
---------------------------------------------------------------
1 Year 5 Years 10 Years
---------------------------------------------------------------
<S> <C> <C> <C>
GNMA Portfolio +0.36% +8.25% + 9.54%
Average GNMA Fund -1.59 +7.34 + 8.51
Lehman GNMA Index -0.25 +8.29 +10.31
</TABLE>
Note: Past performance is not predictive of future performance.
8
<PAGE> 11
[FIGURE 8]
<TABLE>
<CAPTION>
Average Annual Total Returns--Periods Ended January 31, 1995
------------------------------------------------------------
Since
1 Year Inception*
------------------------------------------------------------
<S> <C> <C>
Intermediate-Term Treasury Portfolio -3.90% +6.50%
Average Intermediate-Term Treasury Fund -2.99 +5.76
Lehman Intermediate-Term Treasury Index -4.46 +6.58
</TABLE>
* Inception: October 28, 1991. Performance begins October 31, 1991, to show
competitive data.
Note: Past performance is not predictive of future performance.
[FIGURE 9]
<TABLE>
<CAPTION>
Average Annual Total Returns--Periods Ended January 31, 1995
------------------------------------------------------------
Since
1 Year Inception*
------------------------------------------------------------
<S> <C> <C>
Intermediate-Term Corporate Portfolio -3.73% -1.71%
Average IT Investment Grade Fund -3.02 -1.79
Lehman IT Investment Grade Index -4.03 -2.17
</TABLE>
*Inception: November 1, 1993. Performance begins October 31, 1993, to show
competitive data.
Note: Past performance is not predictive of future performance.
9
<PAGE> 12
CUMULATIVE PERFORMANCE (continued)
[FIGURE 10]
<TABLE>
<CAPTION>
Average Annual Total Returns--Periods Ended January 31, 1995
----------------------------------------------------------------
Since
1 Year 5 Years Inception*
----------------------------------------------------------------
<S> <C> <C> <C>
Short-Term Federal Portfolio -0.21% +7.04% +7.33%
Average Short-Term Government Fund -1.10 +6.28 +6.75
Lehman Short-Term Government Index -0.09 +7.38 +7.67
</TABLE>
* Inception: December 31, 1987.
Note: Past performance is not predictive of future performance.
[FIGURE 11]
<TABLE>
<CAPTION>
Average Annual Total Returns--Periods Ended January 31, 1995
------------------------------------------------------------
Since
1 Year Inception*
------------------------------------------------------------
<S> <C> <C>
Short-Term Treasury Portfolio +0.40% +5.14%
Average Short-Term Treasury Fund +0.55 +4.46
Lehman Short-Term Treasury Index -0.12 +5.34
</TABLE>
*Inception: October 28, 1991. Performance begins October 31, 1991, to show
competitive data.
Note: Past performance is not predictive of future performance.
10
<PAGE> 13
[FIGURE 12]
<TABLE>
<CAPTION>
Average Annual Total Returns--Periods Ended January 31, 1995
------------------------------------------------------------
1 Year 5 Years 10 Years
------------------------------------------------------------
<S> <C> <C> <C>
Short-Term Corporate Portfolio +0.60% +7.56% +8.50%
Average ST Investment Grade Fund -0.08 +6.51 +7.60
Lehman ST Investment Grade Index +0.27 +8.08 +9.06
</TABLE>
Note: Past performance is not predictive of future performance.
11
<PAGE> 14
AVERAGE ANNUAL TOTAL RETURNS
THE CURRENT YIELDS QUOTED IN THE CHAIRMAN'S LETTER AND THE PORTFOLIO SUMMARY
ARE CALCULATED IN ACCORDANCE WITH SEC GUIDELINES. THE AVERAGE ANNUAL TOTAL
RETURNS FOR THE PORTFOLIOS (PERIODS ENDED DECEMBER 31, 1994) ARE AS FOLLOWS:
<TABLE>
<CAPTION>
10 YEARS
----------------------------
INCEPTION TOTAL INCOME CAPITAL
PORTFOLIO DATE 1 YEAR 5 YEARS RETURN RETURN RETURN
-------------------------------- -------- ------ ------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
LONG-TERM U.S. TREASURY 5/19/86 -7.03% + 7.69% + 8.00%* + 7.97%* +0.03%*
LONG-TERM CORPORATE 7/9/73 -5.30 + 8.85 +10.44 + 9.53 +0.91
HIGH YIELD CORPORATE 12/27/78 -1.71 +10.03 +10.57 +11.89 -1.32
INTERMEDIATE-TERM CORPORATE 11/1/93 -4.20 - 3.45* - 3.45* + 5.64* -9.09*
INTERMEDIATE-TERM U.S. TREASURY 10/28/91 -4.33 + 6.37* + 6.37* + 6.23* +0.14*
GNMA 6/27/80 -0.95 + 7.62 + 9.52 + 9.13 +0.39
SHORT-TERM FEDERAL 12/31/87 -0.94 + 6.67 + 7.19* + 7.14* +0.05*
SHORT-TERM U.S. TREASURY 10/28/91 -0.58 + 4.90* + 4.90* + 5.14* -0.24*
SHORT-TERM CORPORATE 10/29/82 -0.08 + 7.21 + 8.48 + 7.89 +0.59
</TABLE>
ALL OF THESE DATA REPRESENT PAST PERFORMANCE. THE INVESTMENT RETURN AND
PRINCIPAL VALUE OF AN INVESTMENT WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES,
WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST.
* SINCE PORTFOLIO'S INCEPTION.
12
<PAGE> 15
REPORT FROM WELLINGTON MANAGEMENT COMPANY
MARKET REVIEW
The large increase in interest rates in 1994 caused the long-term bond market to
have its worst year since 1969, as principal values declined sharply. During the
second half of the Fund's fiscal year, three-month U.S. Treasury bill rates rose
1.6% (160 "basis points"), as the Federal Reserve continued to tighten credit.
Long-term rates, however, only rose 30 basis points, as the bond market began to
stabilize. Thus, the differential between short- and long-term interest rates
narrowed. Long-term fixed-income investors began to believe that the monetary
authorities would succeed in their efforts to contain inflation. In the last
three months, long-term interest rates actually fell as short rates continued to
rise.
During this period, the issuance of new corporate bonds fell off sharply
and bond mutual funds were losing cash through redemptions. As a result, supply
and demand were kept in balance. This balance is reflected in the continuing
tight yield spreads of corporate notes and bonds versus Treasury securities. The
domestic bond market appeared unaffected by such noteworthy events as the Orange
County default and the Mexican peso devaluation. Liquidity remained strong as
speculative excesses continued to be wrung out of the financial system. The
surprising news during the past six months has been the low inflation rate at a
time when the domestic economy is growing at an annualized rate of 4%.
While we expect continued upward pressure on short-term rates, we are
forecasting that long-term rates will stabilize or decline slightly. The average
spread between ten- and thirty-year U.S. Treasury bonds has been about 30 basis
points over the last ten years. Currently, the differential between the two
maturities is approximately ten basis points. We believe that the spread will
begin to widen back to the average as ten-year rates decline more than
thirty-year rates as the year progresses.
We believe that economic growth should moderate and that the markets will
begin anticipating a termination of Federal Reserve tightening. Short- and
intermediate-term rates would then decline more than long rates. The market
focus should then shift from anticipating the next Fed tightening to waiting for
the initial Fed easing.
LONG-TERM CORPORATE PORTFOLIO
The Long-Term Corporate Portfolio's average maturity remained at 20 years, as
the Portfolio pursued its charter as a long-term corporate bond fund. As rates
rose during the past twelve months, we were able to purchase high-quality
securities with attractive absolute yields that exceeded the current inflation
rate by a margin of 5 percentage points. With inflation below 3% and long rates
hovering near 8%, we see value in the long-term bond market.
Our strategy of maintaining a long average maturity in this environment
with excellent call-protection should lead to rising income in the future. Three
quarters of the Portfolio's assets are invested in corporate bonds, with the
remainder in U.S. Treasuries, mortgage-backeds, and cash reserves. More than
80% of the holdings are invested in issues rated A or better.
The major risk to this particular Portfolio, which became glaringly
apparent over the past year, is rising long-term interest rates. When rates
rise, principal values decline, and this fund's net asset value suffers.
However, long-term, income-oriented investors should not be overly concerned by
this disappointing market performance, since the net decline was in the
neighborhood of -5%, considerably less than what the newspaper headlines would
lead one to believe. The Portfolio's price decline is not attributable to the
emerging market debt crisis or to credit defaults.
The second risk to our Portfolio, which is always present, is credit
deterioration. In the current economic environment, with sales and profits
growing for a majority of companies, credit upgrades should exceed credit
downgrades. Our one concern in this otherwise favorable credit environment is
that merger and acquisition activity will continue. Mergers and acquisitions
generate heavier debt loads and, consequently, credit ratings deteriorate. When
a recession occurs, servicing the additional debt becomes more onerous. We
emphasize well-established large companies that employ multiple financing
alternatives and can reduce debt by issuing public stock.
GNMA PORTFOLIO
The GNMA Portfolio suffered during the past year as a result of the sharp
increases in interest rates which
13
<PAGE> 16
shook all sectors of the fixed-income markets. In spite of the negative effect
on principal values, the Portfolio's sensitivity to the increase in interest
rates was consistent with the performance of intermediate-term bond portfolios.
Furthermore, the rise in rates has pushed yields for the GNMA Portfolio back
to levels that appear attractive relative to either current or anticipated
inflation rates.
Away from the after effects of the rise in interest rates, the most
significant change affecting the GNMA Portfolio during the year was a
substantial increase in the level of income per share. A portion of that
increase was the result of reinvesting cash flow in higher interest rate
securities, but a second portion of the increase occurred because mortgage
refinancings, and therefore prepayments on securities held in the Portfolio,
fell dramatically. The record high refinancing rates of the summer and fall of
1993 all but disappeared during 1994, as refinancing became "uneconomic." Since
losses on security holdings generated by prepayments reduce income, the absence
of prepayments has been a real plus for the Portfolio's income level.
The GNMA Portfolio's total returns should thrive during periods when
interest rates remain fairly stable. After the extreme interest rate volatility
of 1993 and 1994, it seems likely that we will experience a more subdued
interest rate environment for the foreseeable future. If so, the GNMA
shareholder should experience a much more comfortable return than that of the
past two years.
HIGH YIELD CORPORATE PORTFOLIO
The market for below-investment-grade debt had the "wind at its back" in fiscal
1995, given that the economy grew at a 4% rate. While credit trends were
generally positive because of the healthy domestic economy, the markets were
roiled by the sharp upward spike in interest rates in the first half of 1994.
During the summer and fall, the market quieted significantly, with limited cash
flows into mutual funds. Mutual funds account for almost one-half of the demand
for high-yield bonds. New issuance also dried up, which kept supply and demand
in balance.
The default rate was 1.7% in 1994, which is the lowest level in thirteen
years. According to Moody's Investor's Services, the high-yield default rate
reached 9.5% in 1991. In 1993, the rate was 3.1%. The default rate may rise
slightly in 1995, because of issuance in 1993 by several marginal borrowers when
the markets were filled with speculative excesses and were experiencing
substantial flows into mutual funds. We remain positive about the prospects for
the holdings in our Portfolio, because the economic environment is still very
conducive for issuers to increase sales and to reduce debt.
The Portfolio's holdings are focused on cash-paying issues rated "B" or
better. We continue to maintain a Treasury reserve for liquidity purposes and a
modest position in securities rated "Baa." The portfolio owns more than 100
issuers, which provides diversification among industries and companies. We
continue to see positive momentum in commodity cyclicals such as paper,
chemicals, and steel. We prefer companies that are targeting debt reduction with
the excess cash flow generated in this economic recovery. We must remain
vigilant to the risks of a weakening economy. We believe that conditions are now
in place for a stabilization or possibly an increase in income in future
periods.
Respectfully,
Paul D. Kaplan, Senior Vice President
Portfolio Manager
Earl E. McEvoy, Senior Vice President
Portfolio Manager
Wellington Management Company
February 13, 1995
14
<PAGE> 17
REPORT FROM VANGUARD FIXED INCOME GROUP
A BRUTAL YEAR
It would be difficult to overstate the severity of the rise in interest rates
that occurred during the twelve months ended January 31, Vanguard Fixed
Income Securities Fund's 1995 fiscal year. Historians would have to harken
back to the days of the "flivver" to find bond market disruptions as large as
the ones we saw last year. In all, interest rates increased anywhere from
1.58% to 3.28%, depending on a specific bond's term to maturity.
The following table lists the dramatic changes in government bond yields
in ascending order of their maturities. It is particularly noteworthy to
emphasize the significant change in the shape of the so-called yield curve.
<TABLE>
<CAPTION>
------------------------------------------------
1/31/94 1/31/95 Change
------------------------------------------------
<S> <C> <C> <C>
3 Month 3.02% 5.99% 2.97%
6 Month 3.23 6.40 3.17
1 Year 3.50 6.78 3.28
3 Year 4.37 7.51 3.14
5 Year 5.02 7.50 2.48
10 Year 5.68 7.75 2.07
30 Year 6.26 7.84 1.58
------------------------------------------------
</TABLE>
The above statistics reveal what is known as a flattening of the yield curve.
Under these conditions, yields on short- and intermediate-term bonds rise more
than yields on long-term bonds, thereby lowering the yield differential among
the three broad maturity classifications. Flattening yield curves have the
unfortunate consequence of putting extreme pressure on short- and
intermediate-term bonds. In other words, the inherent bear-market protection
afforded by securities with shorter maturities was less than it would have been
had the yield curve not flattened.
Regardless, the Portfolios we manage were hunkered down within their
mandated maturity ranges during most of last year; as a result, they avoided
some of the principal losses they would otherwise have incurred. As readers of
our previous Annual Reports will recall, we do not profess to be market timers.
Each of our Portfolios represents a specific combination of potential interest
income (and durability of income) and market risk. Without exception, we adhere
to those specifications. However, we do manage the price sensitivity of the
Portfolios within the permissible maturity ranges, and our activities in 1994
did shelter the Portfolios from the worst of the bear market. That said, and
given the magnitude of the drops in bond prices, our generally good relative
performance provided pretty cold comfort.
Within the broader context of generalized interest rate movements during
the 1990s, it becomes clear that for all the apparent carnage of 1994, the
markets have only retraced a portion of the gains produced during the bountiful
antecedent four years. At the beginning of the decade, short-term interest rates
were about 1.2 percentage points higher than they are today, and long-term rates
were about 0.6 points higher. Hence, the first five years of the decade have
produced attractive total returns consisting of decent levels of interest income
and overall principal gains. Relative to inflation, our Portfolios produced real
returns that are all the more impressive. Details of specific Portfolio returns
are given in the Chairman's letter. Suffice it to say, we emerged from a brutal
1994 bloodied but unbowed, and from a longer-term perspective we have delivered
good absolute and relative performance.
WHAT THE FED SAW
The fiscal year began with the bellwether Federal funds rate (the overnight
interest rate charged by member banks to lend to one another) at 3.0%. At such a
low level, banks and other financial intermediaries were finding it extremely
profitable to borrow short and lend long. It had been a profitable strategy for
several years, and as long as interest rates remained quiescent (and the
differential between short and long rates remained large), it would continue to
make lots of money. By most appearances, it was as easy as "falling off the
proverbial log."
Unfortunately, on February 4, 1994, the Federal Reserve Bank policymakers
tightened monetary policy and everything changed; and for some reckless
individuals and institutions, things changed disastrously. One of the more
prominently victimized players was the $7 billion Orange County Investment Pool,
which lost $2 billion in market value as interest rates rose, thereby
precipitating the largest municipal bankruptcy ever. It didn't have to be that
way. The Fed did not act precipitously or irrationally. Their staff reviewed the
recently released statistics for late 1993
15
<PAGE> 18
macroeconomic growth and leading price indicators only to find emerging signs
of significant inflationary pressures. In response to these developments, the
Fed began a fairly gradual series of tightening moves designed to induce a
higher Federal funds rate. In all, the tightening was accomplished in seven
separate initiatives over the next twelve months. Their actions directly
brought the Fed funds rate from 3.0% to 6.0%, as of this writing.
The Fed's more restrictive regime had indirect effects as well,
particularly out along the yield curve among the bonds of longer-term
maturities. The prices of 5-, 10-, or 20-year bonds reflect not only current Fed
policy, but also inflationary expectations over the life of the security.
Institutional investors reacted to both the Fed initiatives and the inflation
indicators that prompted the Fed action by selling bonds in sufficient
quantities to drive prices lower and yields higher. Thirty-year Treasury bonds
were particularly hard-hit, losing about 15% of their market value over the
year.
What exactly was the Fed concerned about? The answer lies in their policy
focus on non-inflationary economic growth. They believe that the economy can
enjoy sustained growth without inflationary pressures at a rate equal to the sum
of its increases in productivity and increases in the workforce. The long-term
sum of these two factors is about 2.5%. Consequently, any economic growth
exceeding 2.5% suggests building inflationary pressures (prompting monetary
restraint), and any rate below 2.5% would suggest moderating inflationary
pressures (permitting monetary ease). What the Fed saw in 1994 were quarterly
economic growth rates well in excess of this equilibrium 2.5% annual rate.
It may seem ironic that, for all the concern over worsening inflation, the
Consumer Price Index and the Producer Price Index were up only 2.8% and 1.6%,
respectively, for the twelve months ended January 31, 1995. Regrettably, such
backward-looking analysis ignores the fact that by the time inflation gets
visibly bad, it is sufficiently entrenched to require painful remedial action.
The Fed appears to believe that by acting early, before inflation seriously
accelerates, they can avert more aggressive tightening down the road. We believe
they stand a good chance of success.
PORTFOLIO STRATEGIES
Aside from defensively positioning our Portfolios, we also sought to add value
through selective strategies and tactics. For the most part, these activities
were confined to the Short-Term Corporate, Short-Term Federal, and
Intermediate-Term Corporate Portfolios. Specifically, we adjusted the sector
weights in the Portfolios to exploit changing value relationships among the
various classes of issuers of bonds.
In the Portfolios permitted to own corporate bonds, we held somewhat
higher weights in those quality sectors that we believed were likely to benefit
from the protracted economic recovery. Our additions to the middle and lower
investment-grade cyclical sectors (now 55% of assets in the Short-Term Corporate
Portfolio) are a direct result of the combination of a favorable macroeconomic
view and rigorous individual credit selection. As favorable corporate sales and
earnings reports are released, we stand to profit from ratings services upgrades
on the bonds we own. Typically, a ratings upgrade is associated with an increase
in the price of a bond, which falls directly to the shareholders' bottom line in
the form of enhanced total return. In the last fiscal year, our two Corporate
Portfolios have benefited from 34 upgrade events.
The U.S. Treasury Portfolios and the Short-Term Federal Portfolio also
actively seek out the best relative values. In practice, this entails selection
of high-yielding off-the-run notes and bonds.
In all, our Portfolio management strategies complement the natural
advantage provided by our structurally low fund expenses. In these harsh and
competitive times, every basis point counts. We are pleased to be a part of this
enduring benefit to shareholders.
Sincerely,
Ian A. MacKinnon, Senior Vice President
Robert F. Auwaerter, Vice President
John W. Hollyer, Assistant Vice President
Vanguard Fixed Income Group
February 13, 1995
16
<PAGE> 19
TOTAL INVESTMENT RETURN TABLE
The following tables illustrate the lifetime results of single-share investments
in the Portfolios through January 31, 1995. The percentage figures show results
on a "total return" basis and assume the reinvestment of both income dividends
and any capital gains distributions. During the periods illustrated, long-term
bond prices fluctuated widely; these results should not be considered a
representation of the dividend income or capital gain or loss that may be
realized from an investment made in the Portfolios today.
<TABLE>
<CAPTION>
HIGH YIELD CORPORATE PORTFOLIO (BEGAN OPERATIONS DECEMBER 27, 1978)
------------------------------------------------------------------------------------------------------------------------------------
PERIOD PER SHARE DATA TOTAL INVESTMENT RETURN
------------------------------------------------------------------------------------------------------------------------------------
High-Yield Corporate Portfolio
Value with Income ------------------------------ Lehman Mutual Fund
Year Ended Net Asset Capital Gains Income Dividends & Capital Capital Income Total "BBB" Rated Bond
January 31 Value Distributions Dividends Gains Reinvested Return Return Return Index Total Return
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INITIAL (12/27/78) $10.00 -- -- $10.00 -- -- -- --
------------------------------------------------------------------------------------------------------------------------------------
1979* 10.33 -- -- 10.33 + 3.3% -- + 3.3% + 2.0%
------------------------------------------------------------------------------------------------------------------------------------
1980 9.26 -- $1.235 10.49 -10.4 +11.9% + 1.5 - 8.7
------------------------------------------------------------------------------------------------------------------------------------
1981 8.50 -- 1.18 10.99 - 8.2 +13.0 + 4.8 + 4.6
------------------------------------------------------------------------------------------------------------------------------------
1982 7.88 -- 1.24 11.87 - 7.3 +15.3 + 8.0 + 3.3
------------------------------------------------------------------------------------------------------------------------------------
1983 8.96 -- 1.28 15.70 +13.7 +18.6 +32.3 +39.7
------------------------------------------------------------------------------------------------------------------------------------
1984 8.97 -- 1.20 17.93 + 0.1 +14.1 +14.2 +11.8
------------------------------------------------------------------------------------------------------------------------------------
1985 8.52 -- 1.18 19.62 - 5.0 +14.4 + 9.4 +16.7
------------------------------------------------------------------------------------------------------------------------------------
1986 8.84 -- 1.14 23.23 + 3.8 +14.6 +18.4 +21.5
------------------------------------------------------------------------------------------------------------------------------------
1987 9.33 $.118 1.08 27.91 + 6.9 +13.2 +20.1 +18.2
------------------------------------------------------------------------------------------------------------------------------------
1988 8.53 -- 1.01 28.62 - 8.6 +11.1 + 2.5 + 4.3
------------------------------------------------------------------------------------------------------------------------------------
1989 8.44 -- 1.02 31.89 - 1.1 +12.5 +11.4 + 6.7
------------------------------------------------------------------------------------------------------------------------------------
1990 7.31 -- 1.00 31.31 -13.4 +11.6 - 1.8 +11.0
------------------------------------------------------------------------------------------------------------------------------------
1991 6.19 -- .90 30.30 -15.3 +12.1 - 3.2 + 9.8
------------------------------------------------------------------------------------------------------------------------------------
1992 7.27 -- .77 39.78 +17.4 +13.9 +31.3 +15.6
------------------------------------------------------------------------------------------------------------------------------------
1993 7.56 -- .73 45.62 + 4.0 +10.7 +14.7 +12.6
------------------------------------------------------------------------------------------------------------------------------------
1994 8.14 -- .70 53.62 + 7.7 + 9.8 +17.5 +11.7
------------------------------------------------------------------------------------------------------------------------------------
1995 7.24 -- .68 52.27 -11.1 + 8.6 - 2.5 - 3.8
------------------------------------------------------------------------------------------------------------------------------------
LIFETIME +422.7% +399.9%
------------------------------------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL RATE OF RETURN +10.8% +10.5%
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Performance for the Index begins on 12/31/78.
17
<PAGE> 20
TOTAL INVESTMENT RETURN TABLE (continued)
<TABLE>
<CAPTION>
LONG-TERM U.S. TREASURY PORTFOLIO (BEGAN OPERATIONS MAY 19, 1986)
------------------------------------------------------------------------------------------------------------------------------------
PERIOD PER SHARE DATA TOTAL INVESTMENT RETURN
------------------------------------------------------------------------------------------------------------------------------------
Long-Term U.S. Treasury Portfolio
Value with Income --------------------------------- Lehman Long-Term
Year Ended Net Asset Capital Gains Income Dividends & Capital Capital Income Total Treasury Bond Index
January 31 Value Distributions Dividends Gains Reinvested Return Return Return Total Return
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INITIAL (5/19/86) $10.00 -- -- $10.00 -- -- -- --
------------------------------------------------------------------------------------------------------------------------------------
1987* 10.28 $.034 $.530 10.88 + 3.6% +5.2% + 8.8% +12.1%
------------------------------------------------------------------------------------------------------------------------------------
1988 9.49 -- .776 10.91 - 7.7 +8.0 + 0.3 + 1.5
------------------------------------------------------------------------------------------------------------------------------------
1989 9.28 -- .778 11.61 - 2.2 +8.6 + 6.4 + 5.1
------------------------------------------------------------------------------------------------------------------------------------
1990 9.53 -- .781 12.93 + 2.7 +8.6 +11.3 +12.3
------------------------------------------------------------------------------------------------------------------------------------
1991 9.74 -- .776 14.35 + 2.2 +8.8 +11.0 +11.6
------------------------------------------------------------------------------------------------------------------------------------
1992 10.14 -- .763 16.14 + 4.1 +8.3 +12.4 +13.4
------------------------------------------------------------------------------------------------------------------------------------
1993 10.04 .700 .733 18.41 + 6.1 +8.0 +14.1 +14.6
------------------------------------------------------------------------------------------------------------------------------------
1994 10.75 .176 .685 21.38 + 8.9 +7.2 +16.1 +16.7
------------------------------------------------------------------------------------------------------------------------------------
1995 9.23 .119 .665 19.95 -13.0 +6.3 - 6.7 - 7.5
------------------------------------------------------------------------------------------------------------------------------------
LIFETIME +99.5% +110.3%
------------------------------------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL RATE OF RETURN +8.3% +9.0%
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Performance for the Fund and the Index begins on 5/31/86.
<TABLE>
<CAPTION>
SHORT-TERM CORPORATE PORTFOLIO (BEGAN OPERATIONS OCTOBER 29, 1982)
------------------------------------------------------------------------------------------------------------------------------------
PERIOD PER SHARE DATA TOTAL INVESTMENT RETURN
------------------------------------------------------------------------------------------------------------------------------------
Short-Term Corporate Portfolio
Value with Income ------------------------------ Lehman Mutual Fund
Year Ended Net Asset Capital Gains Income Dividends & Capital Capital Income Total Short-Term Investment
January 31 Value Distributions Dividends Gains Reinvested Return Return Return Grade Total Return
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INITIAL (10/29/82) $10.00 -- -- $10.00 -- -- -- --
------------------------------------------------------------------------------------------------------------------------------------
1983* 10.05 -- $ .270 10.32 +0.5% + 2.7% + 3.2% + 4.6%
------------------------------------------------------------------------------------------------------------------------------------
1984 9.94 -- 1.019 11.30 -1.1 +10.6 + 9.5 +10.9
------------------------------------------------------------------------------------------------------------------------------------
1985 10.17 -- 1.067 12.88 +2.3 +11.7 +14.0 +14.1
------------------------------------------------------------------------------------------------------------------------------------
1986 10.55 -- 1.001 14.72 +3.7 +10.5 +14.2 +14.6
------------------------------------------------------------------------------------------------------------------------------------
1987 10.67 $.184 .877 16.42 +2.9 + 8.7 +11.6 +11.9
------------------------------------------------------------------------------------------------------------------------------------
1988 10.43 -- .761 17.27 -2.2 + 7.4 + 5.2 + 6.8
------------------------------------------------------------------------------------------------------------------------------------
1989 10.23 -- .833 18.36 -1.9 + 8.2 + 6.3 + 6.5
------------------------------------------------------------------------------------------------------------------------------------
1990 10.34 -- .895 20.23 +1.1 + 9.1 +10.2 +10.7
------------------------------------------------------------------------------------------------------------------------------------
1991 10.50 -- .876 22.35 +1.5 + 9.0 +10.5 + 9.8
------------------------------------------------------------------------------------------------------------------------------------
1992 10.88 -- .804 24.96 +3.6 + 8.1 +11.7 +13.4
------------------------------------------------------------------------------------------------------------------------------------
1993 10.99 .165 .695 27.28 +2.6 + 6.7 + 9.3 + 9.5
------------------------------------------------------------------------------------------------------------------------------------
1994 10.94 .099 .605 28.95 +0.4 + 5.7 + 6.1 + 7.9
------------------------------------------------------------------------------------------------------------------------------------
1995 10.40 -- .596 29.12 -4.9 + 5.5 + 0.6 + 0.3
------------------------------------------------------------------------------------------------------------------------------------
LIFETIME +191.2% +215.1%
------------------------------------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL RATE OF RETURN +9.1% +9.8%
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Performance for the Index begins on 10/31/82.
18
<PAGE> 21
<TABLE>
<CAPTION>
GNMA PORTFOLIO (BEGAN OPERATIONS JUNE 27, 1980)
------------------------------------------------------------------------------------------------------------------------------------
PERIOD PER SHARE DATA TOTAL INVESTMENT RETURN
------------------------------------------------------------------------------------------------------------------------------------
GNMA Portfolio
Value with Income ----------------------------- Lehman Mutual Fund
Year Ended Net Asset Capital Gains Income Dividends & Capital Capital Income Total Fund GNMA
January 31 Value Distributions Dividends Gains Reinvested Return Return Return Total Return
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INITIAL (6/27/80) $10.00 -- -- $10.00 -- -- -- --
------------------------------------------------------------------------------------------------------------------------------------
1981* 8.75 -- $ .61 9.37 -12.5% + 6.2% - 6.3% - 7.3%
------------------------------------------------------------------------------------------------------------------------------------
1982 7.92 -- 1.12 9.74 - 9.5 +13.5 + 4.0 + 1.7
------------------------------------------------------------------------------------------------------------------------------------
1983 9.21 -- 1.11 12.87 +16.3 +15.8 +32.1 +39.6
------------------------------------------------------------------------------------------------------------------------------------
1984 9.20 -- 1.07 14.43 - 0.1 +12.3 +12.2 +12.0
------------------------------------------------------------------------------------------------------------------------------------
1985 9.25 -- 1.08 16.39 + 0.5 +13.0 +13.5 +15.4
------------------------------------------------------------------------------------------------------------------------------------
1986 9.92 -- 1.04 19.59 + 7.2 +12.4 +19.6 +22.6
------------------------------------------------------------------------------------------------------------------------------------
1987 10.10 $.006 .96 21.98 + 1.9 +10.3 +12.2 +13.6
------------------------------------------------------------------------------------------------------------------------------------
1988 9.69 -- .89 23.15 - 4.1 + 9.4 + 5.3 + 6.8
------------------------------------------------------------------------------------------------------------------------------------
1989 9.34 -- .88 24.49 - 3.6 + 9.4 + 5.8 + 6.6
------------------------------------------------------------------------------------------------------------------------------------
1990 9.54 -- .88 27.42 + 2.1 + 9.9 +12.0 +12.9
------------------------------------------------------------------------------------------------------------------------------------
1991 9.85 -- .85 30.95 + 3.2 + 9.7 +12.9 +13.2
------------------------------------------------------------------------------------------------------------------------------------
1992 10.25 -- .83 34.97 + 4.1 + 8.9 +13.0 +12.9
------------------------------------------------------------------------------------------------------------------------------------
1993 10.50 -- .78 38.61 + 2.4 + 8.0 +10.4 +10.1
------------------------------------------------------------------------------------------------------------------------------------
1994 10.39 -- .64 40.61 - 1.0 + 6.2 + 5.2 + 6.1
------------------------------------------------------------------------------------------------------------------------------------
1995 9.71 .007 .69 40.76 - 6.5 + 6.9 + 0.4 - 0.3
------------------------------------------------------------------------------------------------------------------------------------
LIFETIME +307.6% +353.4%
------------------------------------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL RATE OF RETURN +10.1% +10.9%
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Performance for the Index begins on 6/30/80.
<TABLE>
<CAPTION>
SHORT-TERM FEDERAL PORTFOLIO (BEGAN OPERATIONS DECEMBER 31, 1987)
------------------------------------------------------------------------------------------------------------------------------------
Period PER SHARE DATA TOTAL INVESTMENT RETURN
------------------------------------------------------------------------------------------------------------------------------------
Short-Term Federal Portfolio
Value with Income ---------------------------- Lehman Mutual Fund
Year Ended Net Asset Capital Gains Income Dividends & Capital Capital Income Total Short-Term U.S. Gov't
January 31 Value Distribution Dividends Gains Reinvested Return Return Return Index Total Return
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INITIAL (12/31/87) $10.00 -- -- $10.00 -- -- -- --
------------------------------------------------------------------------------------------------------------------------------------
1988 10.05 -- $.050 10.10 +0.5% +0.5% + 1.0% + 1.9%
------------------------------------------------------------------------------------------------------------------------------------
1989 9.78 -- .817 10.67 -2.7 +8.4 + 5.7 + 5.0
------------------------------------------------------------------------------------------------------------------------------------
1990 9.89 -- .842 11.75 +1.1 +9.0 +10.1 +10.5
------------------------------------------------------------------------------------------------------------------------------------
1991 10.08 -- .801 12.98 +1.9 +8.6 +10.5 +11.1
------------------------------------------------------------------------------------------------------------------------------------
1992 10.31 $.077 .720 14.35 +3.1 +7.5 +10.6 +11.3
------------------------------------------------------------------------------------------------------------------------------------
1993 10.38 .162 .609 15.57 +2.3 +6.2 + 8.5 + 8.9
------------------------------------------------------------------------------------------------------------------------------------
1994 10.38 .110 .522 16.54 +1.1 +5.1 + 6.2 + 6.1
------------------------------------------------------------------------------------------------------------------------------------
1995 9.79 .010 .550 16.51 -5.6 +5.4 - 0.2 - 0.1
------------------------------------------------------------------------------------------------------------------------------------
LIFETIME +65.1% +68.8%
------------------------------------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL RATE OF RETURN +7.3% +7.7%
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
19
<PAGE> 22
TOTAL INVESTMENT RETURN TABLE (continued)
<TABLE>
<CAPTION>
LONG-TERM CORPORATE PORTFOLIO (BEGAN OPERATIONS JULY 9, 1973)
------------------------------------------------------------------------------------------------------------------------------------
PERIOD PER SHARE DATA TOTAL INVESTMENT RETURN
------------------------------------------------------------------------------------------------------------------------------------
Long-Term Corporate Portfolio
Value with Income ----------------------------- Lehman Mutual Fund
Year Ended Net Asset Capital Gains Income Dividends & Capital Capital Income Total "A" Rated Bond Index
January 31 Value Distributions Dividends Gains Reinvested Return Return Return Total Return*
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INITIAL (7/9/73) $10.00 -- -- $10.00 -- -- -- --
------------------------------------------------------------------------------------------------------------------------------------
1974** 9.93 $.030 $.38 10.34 - 0.4% + 3.8% + 3.4% + 0.8%
------------------------------------------------------------------------------------------------------------------------------------
1975 9.20 -- .74 10.39 - 7.4 + 7.8 + 0.4 + 3.3
------------------------------------------------------------------------------------------------------------------------------------
1976 9.25 -- .73 11.32 + 0.5 + 8.5 + 9.0 +10.2
------------------------------------------------------------------------------------------------------------------------------------
1977 9.61 -- .74 12.71 + 3.9 + 8.4 +12.3 +12.9
------------------------------------------------------------------------------------------------------------------------------------
1978 9.36 -- .77 13.42 - 2.6 + 8.1 + 5.5 + 4.0
------------------------------------------------------------------------------------------------------------------------------------
1979 8.91 -- .79 13.92 - 4.8 + 8.5 + 3.7 + 2.7
------------------------------------------------------------------------------------------------------------------------------------
1980 7.68 -- .82 13.22 -13.8 + 8.8 - 5.0 -12.3
------------------------------------------------------------------------------------------------------------------------------------
1981 7.41 -- .88 14.30 - 3.5 +11.6 + 8.1 + 4.4
------------------------------------------------------------------------------------------------------------------------------------
1982 7.06 -- .93 15.51 - 4.7 +13.2 + 8.5 + 2.2
------------------------------------------------------------------------------------------------------------------------------------
1983 8.00 -- .96 19.91 +13.3 +15.0 +28.3 +38.3
------------------------------------------------------------------------------------------------------------------------------------
1984 7.84 -- .95 21.95 - 2.0 +12.3 +10.3 +10.9
------------------------------------------------------------------------------------------------------------------------------------
1985 7.84 -- .96 24.90 0.0 +13.4 +13.4 +16.6
------------------------------------------------------------------------------------------------------------------------------------
1986 8.42 -- .92 29.96 + 7.4 +12.9 +20.3 +21.5
------------------------------------------------------------------------------------------------------------------------------------
1987 8.77 .123 .85 34.89 + 5.6 +10.9 +16.5 +18.0
------------------------------------------------------------------------------------------------------------------------------------
1988 8.11 -- .77 35.50 - 7.5 + 9.3 + 1.8 + 3.9
------------------------------------------------------------------------------------------------------------------------------------
1989 7.91 -- .74 38.03 - 2.5 + 9.6 + 7.1 + 6.3
------------------------------------------------------------------------------------------------------------------------------------
1990 8.00 -- .73 42.09 + 1.1 + 9.6 +10.7 +11.0
------------------------------------------------------------------------------------------------------------------------------------
1991 8.02 -- .72 46.22 + 0.3 + 9.5 + 9.8 +10.7
------------------------------------------------------------------------------------------------------------------------------------
1992 8.63 -- .71 54.12 + 7.6 + 9.5 +17.1 +15.0
------------------------------------------------------------------------------------------------------------------------------------
1993 9.04 .151 .68 62.27 + 6.6 + 8.5 +15.1 +12.5
------------------------------------------------------------------------------------------------------------------------------------
1994 9.36 .259 .63 70.88 + 6.5 + 7.3 +13.8 +11.3
------------------------------------------------------------------------------------------------------------------------------------
1995 8.18 .072 .62 67.26 -11.9 + 6.8 - 5.1 - 3.9
------------------------------------------------------------------------------------------------------------------------------------
LIFETIME +572.6% +523.6%
------------------------------------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL RATE OF RETURN +9.2% +8.8%
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Salomon Brothers High-Grade Bond Index through 1980; Lehman Brothers Mutual
Fund "A" Rated Bond Index thereafter.
** Performance for the Index begins on 6/30/73.
20
<PAGE> 23
PORTFOLIO SUMMARY
<TABLE>
<CAPTION>
Average Percent of
Total SEC 30-Day Weighted Quality Total
Portfolio Net Assets Annualized Yield Maturity Ratings Investments
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Long-Term U.S. Treasury $ 671,446,000 7.77% 22.0 years Aaa 98
Portfolio Temporary Cash Investments 2
----
Average Quality: Aaa 100
------------------------------------------------------------------------------------------------------------------------------
Long-Term $ 2,607,327,000 8.21% 20.4 years Aaa 35
Corporate Aa1, Aa2, Aa3 15
Portfolio A1, A2, A3 37
Average Quality: Aa3 Baa1, Baa2, Baa3 12
Temporary Cash Investments 1
----
100
------------------------------------------------------------------------------------------------------------------------------
High Yield Corporate $ 2,162,300,000 10.24% 8.6 years Aaa 9
Portfolio A3 1
Average Quality: Ba1 Baa1, Baa2, Baa3 4
Ba1, Ba2, Ba3 30
B1, B2, B3 52
Temporary Cash Investments 4
----
100
------------------------------------------------------------------------------------------------------------------------------
Intermediate-Term $ 162,801,000 8.09% 8.4 years Aaa 23
Corporate Portfolio Aa1, Aa2, Aa3 14
Average Quality: A1 A1, A2, A3 40
Baa1, Baa2 22
Temporary Cash Investments 1
----
100
------------------------------------------------------------------------------------------------------------------------------
Intermediate-Term $ 848,164,000 7.63% 8.7 years Aaa 95
U.S. Treasury Portfolio Temporary Cash Investments 5
----
Average Quality: Aaa 100
------------------------------------------------------------------------------------------------------------------------------
GNMA Portfolio $ 5,850,835,000 7.70% 8.6 years Aaa 95
Average Quality: Aaa Temporary Cash Investments 5
----
100
------------------------------------------------------------------------------------------------------------------------------
Short-Term Federal $ 1,474,165,000 7.24% 2.6 years Aaa 100
Portfolio
Average Quality: Aaa
Short-Term U.S. $ 754,319,000 7.41% 2.4 years Aaa 96
Treasury Portfolio Temporary Cash Investments 4
----
Average Quality: Aaa 100
------------------------------------------------------------------------------------------------------------------------------
Short-Term Corporate $ 2,924,048,000 7.64% 2.6 years Aaa 25
Portfolio Aa1, Aa2, Aa3 18
Average Quality: Aa3 A1, A2, A3 34
Baa1, Baa2, Baa3 20
Temporary Cash Investments 3
----
100
------------------------------------------------------------------------------------------------------------------------------
Total Fund Assets $17,455,405,000
------------------------------------------------------------------------------------------------------------------------------
</TABLE>
A VANGUARD GLOSSARY-QUALITY RATINGS
Aaa Judged to be the best quality, carrying the smallest degree of investment
risk. U.S. Government and Agency Securities are considered to have Aaa
ratings.
Aa Judged to be of high quality by all standards.
A Possess many favorable investment attributes and are to be considered as
higher medium-grade obligations.
Baa Considered to be medium-grade obligations, neither highly protected nor
poorly secured.
Ba Judged to have speculative elements; their future cannot be considered as
well-assured.
B Generally lacks characteristics of the desirable investment.
Caa Poor standing; may be in default.
N.R. Not Rated.
Note: Moody's applies numerical modifiers, 1, 2, and 3, in each generic rating
classification from Aa through Baa in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
21
<PAGE> 24
Financial Statements
January 31, 1995
STATEMENT OF NET ASSETS
<TABLE>
<CAPTION>
Face Market
Amount Value
GNMA PORTFOLIO (000) (000)+
---------------------------------------------------------------------------------
<S> <C> <C>
GOVERNMENT NATIONAL MORTGAGE
ASSOCIATION OBLIGATIONS (97.1%)
---------------------------------------------------------------------------------
6.50%, 5/15/23 5/15/25 $ 541,247 $ 478,659
7.00%, 4/15/07 6/15/24 1,336,459 1,234,834
7.50%, 12/15/01 4/15/24 1,308,476 1,250,240
8.00%, 1/15/02 11/15/24 1,126,768 1,102,848
8.25%, 8/15/04 7/15/08 8,795 8,728
8.50%, 7/15/01 4/15/32 677,233 676,047
9.00%, 6/15/01 2/15/23 519,209 529,407
9.25%, 5/15/16 6/15/18 4,078 4,180
9.50%, 12/15/00 1/15/25 361,380 376,135
10.00%, 7/20/14 5/15/19 5,916 6,175
11.00%, 2/15/10 2/20/16 1,918 2,038
11.25%, 9/15/95 2/20/16 1,112 1,188
11.50%, 6/15/10 11/20/15 2,158 2,311
11.75%, 9/15/95 10/15/95 5 6
12.00%, 10/15/10 1/20/16 3,975 4,225
12.50%, 6/15/10 7/20/15 2,331 2,495
12.75%, 6/15/14 1/15/15 392 425
13.00%, 12/15/10 5/20/15 1,729 1,887
13.25%, 8/15/14 10/15/14 172 188
13.50%, 5/15/10 12/15/14 685 759
13.75%, 9/20/14 17 19
14.00%, 6/15/11 9/15/12 307 346
15.00%, 9/15/11 5/15/12 184 212
---------------------------------------------------------------------------------
TOTAL GOVERNMENT NATIONAL MORTGAGE
ASSOCIATION OBLIGATIONS
(Cost $5,884,261) 5,683,352
---------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENT (4.7%)
---------------------------------------------------------------------------------
REPURCHASE AGREEMENT
Collateralized by U.S.
Government Obligations in
a Pooled Cash Account
5.82%, 2/1/95
(Cost $272,669) 272,669 272,669
---------------------------------------------------------------------------------
TOTAL INVESTMENTS (101.8%)
(Cost $6,156,930) 5,956,021
---------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES ( 1.8%)
---------------------------------------------------------------------------------
Other Assets Note C $ 123,913
Liabilities (229,099)
----------
(105,186)
---------------------------------------------------------------------------------
NET ASSETS (100%)
---------------------------------------------------------------------------------
Applicable to 602,550,454
outstanding $.001 par
value shares (authorized
850,000,000 shares) $5,850,835
---------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE $9.71
=================================================================================
</TABLE>
+ See Note A to Financial Statements.
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------
AT JANUARY 31, 1995,
NET ASSETS CONSISTED OF:
---------------------------------------------------------------------------------
Amount Per
(000) Share
---------- ------
<S> <C> <C>
Paid in Capital $6,061,930 $10.06
Undistributed Net
Investment Income -- --
Accumulated Net
Realized Losses-Note E (10,186) (.02)
Unrealized Depreciation
of Investments-Note F (200,909) (.33)
---------------------------------------------------------------------------------
NET ASSETS $5,850,835 $ 9.71
---------------------------------------------------------------------------------
</TABLE>
22
<PAGE> 25
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
LONG-TERM LONG-TERM
U.S. TREASURY CORPORATE
PORTFOLIO PORTFOLIO
---------------------------------------------------------------------------------------------------------------
Year Ended Year Ended
January 31, 1995 January 31, 1995
(000) (000)
---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT INCOME
INCOME
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . -- --
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . $ 49,543 $ 207,988
---------------------------------------------------------------------------------------------------------------
Total Income . . . . . . . . . . . . . . . . . . . . . 49,543 207,988
---------------------------------------------------------------------------------------------------------------
EXPENSES
Investment Advisory Fees--Note B . . . . . . . . . . . . . . 82 1,131
The Vanguard Group--Note C
Management and Administrative . . . . . . . . . . . . . . . 1,553 6,521
Marketing and Distribution . . . . . . . . . . . . . . . . 161 592
Taxes (other than income taxes) . . . . . . . . . . . . . . . 42 217
Custodians' Fees . . . . . . . . . . . . . . . . . . . . . . 21 63
Legal Fees . . . . . . . . . . . . . . . . . . . . . . . . . -- --
Auditing Fees . . . . . . . . . . . . . . . . . . . . . . . . 6 8
Shareholders' Reports . . . . . . . . . . . . . . . . . . . . 38 180
Annual Meeting and Proxy Costs . . . . . . . . . . . . . . . 5 25
Directors' Fees and Expenses . . . . . . . . . . . . . . . . 3 10
---------------------------------------------------------------------------------------------------------------
Total Expenses . . . . . . . . . . . . . . . . . . . . 1,911 8,747
---------------------------------------------------------------------------------------------------------------
Net Investment Income . . . . . . . . . . . . . . . 47,632 199,241
---------------------------------------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS)
Investment Securities Sold . . . . . . . . . . . . . . . . . 7,526 (18,694)
Futures Contracts . . . . . . . . . . . . . . . . . . . . . . 143 --
---------------------------------------------------------------------------------------------------------------
Realized Net Gain (Loss) . . . . . . . . . . . . . . 7,669 (18,694)
---------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION)
Investment Securities . . . . . . . . . . . . . . . . . . . . (111,331) (346,597)
Futures Contracts . . . . . . . . . . . . . . . . . . . . . . 432 --
---------------------------------------------------------------------------------------------------------------
Change in Unrealized
Appreciation (Depreciation) . . . . . . . . . . . (110,899) (346,597)
---------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations . . . . . . . . . . . . $(55,598) $(166,050)
===============================================================================================================
</TABLE>
The Statements of Net Assets of the Long-Term U.S. Treasury, Long-Term
Corporate, High Yield Corporate, Intermediate-Term Corporate, Intermediate-Term
U.S. Treasury, Short-Term Federal, Short-Term U.S. Treasury, and Short-Term
Corporate Portfolios, integral parts of the financial statements for each such
Portfolio, and the Report of Independent Accountants are included as an insert
to this Report.
23
<PAGE> 26
STATEMENT OF OPERATIONS (continued)
<TABLE>
<CAPTION>
HIGH YIELD INTERMEDIATE-TERM
CORPORATE GNMA CORPORATE
PORTFOLIO PORTFOLIO PORTFOLIO
---------------------------------------------------------------------------------------------------------------
Year Ended Year Ended Year Ended
January 31, 1995 January 31, 1995 January 31, 1995
(000) (000) (000)
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INVESTMENT INCOME
INCOME
Dividends . . . . . . . . . . . . . . . . . . . . $ 345 -- --
Interest . . . . . . . . . . . . . . . . . . . . 209,654 $ 451,113 $ 7,663
---------------------------------------------------------------------------------------------------------------
Total Income . . . . . . . . . . . . . . . 209,999 451,113 7,663
---------------------------------------------------------------------------------------------------------------
EXPENSES
Investment Advisory Fees--Note B . . . . . . . . 1,389 1,286 10
The Vanguard Group--Note C
Management and Administrative . . . . . . . . 4,804 13,959 260
Marketing and Distribution . . . . . . . . . . 452 1,355 18
Taxes (other than income taxes) . . . . . . . . . 184 572 7
Custodians' Fees . . . . . . . . . . . . . . . . 132 819 10
Legal Fees . . . . . . . . . . . . . . . . . . . 492 -- --
Auditing Fees . . . . . . . . . . . . . . . . . . 8 12 5
Shareholders' Reports . . . . . . . . . . . . . . 134 491 7
Annual Meeting and Proxy Costs . . . . . . . . . 15 70 1
Directors' Fees and Expenses . . . . . . . . . . 8 23 --
---------------------------------------------------------------------------------------------------------------
Total Expenses . . . . . . . . . . . . . . 7,618 18,587 318
---------------------------------------------------------------------------------------------------------------
Net Investment Income . . . . . . . . . 202,381 432,526 7,345
---------------------------------------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS)
Investment Securities Sold . . . . . . . . . . . (3,102) 231 (3,240)
Futures Contracts . . . . . . . . . . . . . . . . -- -- --
---------------------------------------------------------------------------------------------------------------
Realized Net Gain (Loss) . . . . . . . . (3,102) 231 (3,240)
---------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION)
Investment Securities . . . . . . . . . . . . . . (276,810) (441,790) (6,144)
Futures Contracts . . . . . . . . . . . . . . . . -- -- --
---------------------------------------------------------------------------------------------------------------
Change in Unrealized
Appreciation (Depreciation) . . . . . (276,810) (441,790) (6,144)
---------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations . . . . . . $ (77,531) $ (9,033) $ (2,039)
===============================================================================================================
</TABLE>
24
<PAGE> 27
<TABLE>
<CAPTION>
INTERMEDIATE-TERM SHORT-TERM
U.S. TREASURY FEDERAL
PORTFOLIO PORTFOLIO
---------------------------------------------------------------------------------------------------------------
Year Ended Year Ended
January 31, 1995 January 31, 1995
(000) (000)
---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT INCOME
INCOME
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . -- --
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . $ 55,210 $ 96,393
---------------------------------------------------------------------------------------------------------------
Total Income . . . . . . . . . . . . . . . . . . . . . 55,210 96,393
---------------------------------------------------------------------------------------------------------------
EXPENSES
Investment Advisory Fees--Note B . . . . . . . . . . . . . . 105 204
The Vanguard Group--Note C
Management and Administrative . . . . . . . . . . . . . . . 1,921 3,713
Marketing and Distribution . . . . . . . . . . . . . . . . 244 459
Taxes (other than income taxes) . . . . . . . . . . . . . . . 72 132
Custodians' Fees . . . . . . . . . . . . . . . . . . . . . . 12 48
Legal Fees . . . . . . . . . . . . . . . . . . . . . . . . . -- --
Auditing Fees . . . . . . . . . . . . . . . . . . . . . . . . 6 7
Shareholders' Reports . . . . . . . . . . . . . . . . . . . . 76 85
Annual Meeting and Proxy Costs . . . . . . . . . . . . . . . 18 23
Directors' Fees and Expenses . . . . . . . . . . . . . . . . 3 6
---------------------------------------------------------------------------------------------------------------
Total Expenses . . . . . . . . . . . . . . . . . . . . 2,457 4,677
---------------------------------------------------------------------------------------------------------------
Net Investment Income . . . . . . . . . . . . . . . 52,753 91,716
---------------------------------------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS)
Investment Securities Sold . . . . . . . . . . . . . . . . . (43,870) (40,359)
Futures Contracts . . . . . . . . . . . . . . . . . . . . . . 817 --
---------------------------------------------------------------------------------------------------------------
Realized Net Gain (Loss) . . . . . . . . . . . . . . (43,053) (40,359)
---------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION)
Investment Securities . . . . . . . . . . . . . . . . . . . . (49,819) (62,827)
Futures Contracts . . . . . . . . . . . . . . . . . . . . . . (12) --
---------------------------------------------------------------------------------------------------------------
Change in Unrealized
Appreciation (Depreciation) . . . . . . . . . . . (49,831) (62,827)
---------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations . . . . . . . . . . . . $(40,131) $(11,470)
===============================================================================================================
</TABLE>
25
<PAGE> 28
STATEMENT OF OPERATIONS (continued)
<TABLE>
<CAPTION>
SHORT-TERM SHORT-TERM
U.S. TREASURY CORPORATE
PORTFOLIO PORTFOLIO
---------------------------------------------------------------------------------------------------------------
Year Ended Year Ended
January 31, 1995 January 31, 1995
(000) (000)
---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT INCOME
INCOME
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . -- --
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . $ 39,295 $ 193,620
---------------------------------------------------------------------------------------------------------------
Total Income . . . . . . . . . . . . . . . . . . . . . 39,295 193,620
---------------------------------------------------------------------------------------------------------------
EXPENSES
Investment Advisory Fees-Note B . . . . . . . . . . . . . . . 81 391
The Vanguard Group-Note C
Management and Administrative . . . . . . . . . . . . . . . 1,563 7,417
Marketing and Distribution . . . . . . . . . . . . . . . . 189 882
Taxes (other than income taxes) . . . . . . . . . . . . . . . 55 192
Custodians' Fees . . . . . . . . . . . . . . . . . . . . . . 11 90
Legal Fees . . . . . . . . . . . . . . . . . . . . . . . . . -- 7
Auditing Fees . . . . . . . . . . . . . . . . . . . . . . . . 6 9
Shareholders' Reports . . . . . . . . . . . . . . . . . . . . 48 161
Annual Meeting and Proxy Costs . . . . . . . . . . . . . . . 12 34
Directors' Fees and Expenses . . . . . . . . . . . . . . . . 3 12
---------------------------------------------------------------------------------------------------------------
Total Expenses . . . . . . . . . . . . . . . . . . . . 1,968 9,195
---------------------------------------------------------------------------------------------------------------
Net Investment Income . . . . . . . . . . . . . . . 37,327 184,425
---------------------------------------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS)
Investment Securities Sold . . . . . . . . . . . . . . . . . (18,532) (46,697)
Futures Contracts . . . . . . . . . . . . . . . . . . . . . . 639 3,411
---------------------------------------------------------------------------------------------------------------
Realized Net Gain (Loss) . . . . . . . . . . . . . . (17,893) (43,286)
---------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION)
Investment Securities . . . . . . . . . . . . . . . . . . . . (16,949) (130,924)
Futures Contracts . . . . . . . . . . . . . . . . . . . . . . (9) 146
---------------------------------------------------------------------------------------------------------------
Change in Unrealized
Appreciation (Depreciation) . . . . . . . . . . . (16,958) (130,778)
---------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations . . . . . . . . . . . . $ 2,476 $ 10,361
===============================================================================================================
</TABLE>
26
<PAGE> 29
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
LONG-TERM LONG-TERM
U.S. TREASURY PORTFOLIO CORPORATE PORTFOLIO
----------------------------------------------------------------------------------------------------------------
YEAR ENDED Year Ended YEAR ENDED Year Ended
JANUARY 31, January 31, JANUARY 31, January 31,
1995 1994 1995 1994
(000) (000) (000) (000)
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income . . . . . . . . . . . . . . . . $ 47,632 $ 55,218 $ 199,241 $ 211,799
Realized Net Gain (Loss) . . . . . . . . . . . . . . 7,669 13,897 (18,694) 100,448
Change in Unrealized
Appreciation (Depreciation) . . . . . . . . . . . . (110,899) 59,084 (346,597) 87,879
----------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations . . . . . . . . (55,598) 128,199 (166,050) 400,126
----------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS (1)
Net Investment Income . . . . . . . . . . . . . . . . (47,632) (55,218) (199,241) (211,799)
Realized Net Gain . . . . . . . . . . . . . . . . . . (8,474) (13,707) (23,247) (86,017)
----------------------------------------------------------------------------------------------------------------
Total Distributions . . . . . . . . . . . . (56,106) (68,925) (222,488) (297,816)
----------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (2)
Issued - Regular . . . . . . . . . . . . . . . . . 127,478 220,546 319,926 787,811
- In Lieu of Cash Distributions . . . . . . 42,818 54,090 176,448 239,014
- Exchange . . . . . . . . . . . . . . . . . 127,038 139,197 270,850 367,355
Redeemed - Regular . . . . . . . . . . . . . . . . . (155,346) (146,329) (435,204) (432,784)
- Exchange . . . . . . . . . . . . . . . . . (187,408) (372,634) (502,225) (660,165)
----------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) from
Capital Share Transactions . . . . . . . . . (45,420) (105,130) (170,205) 301,231
----------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) . . . . . . . . . . . . . (157,124) (45,856) (558,743) 403,541
----------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Period . . . . . . . . . . . . . . . . . 828,570 874,426 3,166,070 2,762,529
----------------------------------------------------------------------------------------------------------------
End of Period . . . . . . . . . . . . . . . . . . . . $ 671,446 $ 828,570 $2,607,327 $3,166,070
================================================================================================================
(1) Distributions Per Share
Net Investment Income . . . . . . . . . . . . . . $.665 $.685 $.617 $.632
Realized Net Gain . . . . . . . . . . . . . . . . $.119 $.176 $.072 $.259
----------------------------------------------------------------------------------------------------------------
(2) Shares Issued and Redeemed
Issued . . . . . . . . . . . . . . . . . . . . . 27,480 33,901 70,326 123,115
Issued in Lieu of Cash Distributions . . . . . . 4,560 5,104 21,118 25,580
Redeemed . . . . . . . . . . . . . . . . . . . . (36,391) (49,022) (110,976) (115,961)
----------------------------------------------------------------------------------------------------------------
(4,351) (10,017) (19,532) 32,734
----------------------------------------------------------------------------------------------------------------
</TABLE>
27
<PAGE> 30
STATEMENT OF CHANGES IN NET ASSETS (continued)
<TABLE>
<CAPTION>
HIGH YIELD GNMA
CORPORATE PORTFOLIO PORTFOLIO
----------------------------------------------------------------------------------------------------------------
YEAR ENDED Year Ended YEAR ENDED Year Ended
JANUARY 31, January 31, JANUARY 31, January 31,
1995 1994 1995 1994
(000) (000) (000) (000)
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income . . . . . . . . . . . . . . . . $ 202,381 $ 214,955 $ 432,526 $ 457,010
Realized Net Gain (Loss) . . . . . . . . . . . . . . (3,102) 73,388 231 16,031
Change in Unrealized
Appreciation (Depreciation) . . . . . . . . . . . . (276,810) 105,882 (441,790) (91,310)
----------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations . . . . . . . . (77,531) 394,225 (9,033) 381,731
----------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS (1)
Net Investment Income . . . . . . . . . . . . . . . . (202,381) (214,955) (432,526) (457,010)
Realized Net Gain . . . . . . . . . . . . . . . . . . -- -- (4,202) --
----------------------------------------------------------------------------------------------------------------
Total Distributions . . . . . . . . . . . . (202,381) (214,955) (436,728) (457,010)
----------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (2)
Issued - Regular . . . . . . . . . . . . . . . . . 260,680 429,778 626,098 1,625,726
- In Lieu of Cash Distributions . . . . . . 138,818 155,738 327,946 341,948
- Exchange . . . . . . . . . . . . . . . . . 346,291 435,507 345,136 525,223
Redeemed - Regular . . . . . . . . . . . . . . . . . (290,865) (305,037) (1,092,663) (1,308,458)
- Exchange . . . . . . . . . . . . . . . . . (637,676) (454,744) (953,131) (1,232,541)
----------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) from
Capital Share Transactions . . . . . . . . . (182,752) 261,242 (746,614) (48,102)
----------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) . . . . . . . . . . . . . (462,664) 440,512 (1,192,375) (123,381)
----------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Period . . . . . . . . . . . . . . . . . 2,624,964 2,184,452 7,043,210 7,166,591
----------------------------------------------------------------------------------------------------------------
End of Period . . . . . . . . . . . . . . . . . . . $2,162,300 $2,624,964 $5,850,835 $7,043,210
================================================================================================================
(1) Distributions Per Share
Net Investment Income . . . . . . . . . . . . . . $.679 $.695 $.693 $.641
Realized Net Gain . . . . . . . . . . . . . . . . -- -- $.007 --
----------------------------------------------------------------------------------------------------------------
(2) Shares Issued and Redeemed
Issued . . . . . . . . . . . . . . . . . . . . . 81,260 110,276 98,532 205,094
Issued in Lieu of Cash Distributions . . . . . . 18,773 19,717 33,480 32,680
Redeemed . . . . . . . . . . . . . . . . . . . . (123,489) (96,776) (207,195) (242,896)
----------------------------------------------------------------------------------------------------------------
(23,456) 33,217 (75,183) (5,122)
----------------------------------------------------------------------------------------------------------------
</TABLE>
28
<PAGE> 31
<TABLE>
<CAPTION>
INTERMEDIATE-TERM INTERMEDIATE-TERM
CORPORATE PORTFOLIO U.S. TREASURY PORTFOLIO
--------------------------------------------------------------------------------------------------------------------------
YEAR ENDED November 1, 1993- YEAR ENDED Year Ended
JANUARY 31, January 31, JANUARY 31, January 31,
1995 1994 1995 1994
(000) (000) (000) (000)
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income . . . . . . . . . . . . . . . . $ 7,345 $ 709 $ 52,753 $ 49,421
Realized Net Gain (Loss) . . . . . . . . . . . . . . (3,240) (31) (43,053) 37,592
Change in Unrealized
Appreciation (Depreciation) . . . . . . . . . . . . (6,144) 504 (49,831) (6,417)
--------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations . . . . . . . . (2,039) 1,182 (40,131) 80,596
--------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS (1)
Net Investment Income . . . . . . . . . . . . . . . . (7,345) (709) (52,753) (49,421)
Realized Net Gain . . . . . . . . . . . . . . . . . . -- -- (2,427) (36,377)
--------------------------------------------------------------------------------------------------------------------------
Total Distributions . . . . . . . . . . . . (7,345) (709) (55,180) (85,798)
--------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (2)
Issued - Regular . . . . . . . . . . . . . . . . . 65,624 11,955 192,104 432,961
- In Lieu of Cash Distributions . . . . . . 5,477 554 40,939 68,732
- Exchange . . . . . . . . . . . . . . . . . 86,434 80,109 152,011 247,710
Redeemed - Regular . . . . . . . . . . . . . . . . . (16,092) (2,211) (197,947) (141,247)
- Exchange . . . . . . . . . . . . . . . . . (54,195) (5,943) (250,713) (268,780)
--------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) from
Capital Share Transactions . . . . . . . . . 87,248 84,464 (63,606) 339,376
--------------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) . . . . . . . . . . . . . 77,864 84,937 (158,917) 334,174
--------------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Period . . . . . . . . . . . . . . . . . 84,937 -- 1,007,081 672,907
--------------------------------------------------------------------------------------------------------------------------
End of Period . . . . . . . . . . . . . . . . . . . . $162,801 $84,937 $ 848,164 $1,007,081
==========================================================================================================================
(1) Distributions Per Share
Net Investment Income . . . . . . . . . . . . . . $.587 $.125 $.603 $.617
Realized Net Gain . . . . . . . . . . . . . . . . -- -- $.027 $.413
(2) Shares Issued and Redeemed
Issued . . . . . . . . . . . . . . . . . . . . . 16,489 9,222 35,143 61,461
Issued in Lieu of Cash Distributions . . . . . . 597 56 4,125 6,305
Redeemed . . . . . . . . . . . . . . . . . . . . (7,597) (817) (45,489) (37,038)
--------------------------------------------------------------------------------------------------------------------------
9,489 8,461 (6,221) 30,728
--------------------------------------------------------------------------------------------------------------------------
</TABLE>
29
<PAGE> 32
STATEMENT OF CHANGES IN NET ASSETS (continued)
<TABLE>
<CAPTION>
SHORT-TERM SHORT-TERM
FEDERAL PORTFOLIO U.S. TREASURY PORTFOLIO
-------------------------------------------------------------------------------------------------------------------------
YEAR ENDED Year Ended YEAR ENDED Year Ended
JANUARY 31, January 31, JANUARY 31, January 31,
1995 1994 1995 1994
(000) (000) (000) (000)
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income . . . . . . . . . . . . . . . . $ 91,716 $ 90,529 $ 37,327 $ 29,410
Realized Net Gain (Loss) . . . . . . . . . . . . . . (40,359) 17,705 (17,893) 4,552
Change in Unrealized
Appreciation (Depreciation) . . . . . . . . . . . . (62,827) (569) (16,958) (438)
----------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations . . . . . . . . (11,470) 107,665 2,476 33,524
----------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS (1)
Net Investment Income . . . . . . . . . . . . . . . . (91,716) (90,529) (37,327) (29,410)
Realized Net Gain . . . . . . . . . . . . . . . . . . (1,751) (19,891) (1,367) (4,906)
----------------------------------------------------------------------------------------------------------------
Total Distributions . . . . . . . . . . . . (93,467) (110,420) (38,694) (34,316)
----------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (2)
Issued - Regular . . . . . . . . . . . . . . . . . 349,688 748,469 225,562 329,379
- In Lieu of Cash Distributions . . . . . . 78,745 93,218 34,277 30,424
- Exchange . . . . . . . . . . . . . . . . . 126,121 200,040 175,994 162,763
Redeemed - Regular . . . . . . . . . . . . . . . . . (556,402) (468,457) (222,881) (188,793)
- Exchange . . . . . . . . . . . . . . . . . (355,446) (322,602) (151,003) (130,120)
----------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) from
Capital Share Transactions . . . . . . . . . (357,294) 250,668 61,949 203,653
----------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) . . . . . . . . . . . . . (462,231) 247,913 25,731 202,861
----------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Period . . . . . . . . . . . . . . . . . 1,936,396 1,688,483 728,588 525,727
----------------------------------------------------------------------------------------------------------------
End of Period . . . . . . . . . . . . . . . . . . . $1,474,165 $1,936,396 $ 754,319 $ 728,588
================================================================================================================
(1) Distributions Per Share
Net Investment Income . . . . . . . . . . . . . . $.550 $.522 $.532 $.486
Realized Net Gain . . . . . . . . . . . . . . . . $.010 $.110 $.020 $.079
----------------------------------------------------------------------------------------------------------------
(2) Shares Issued and Redeemed
Issued . . . . . . . . . . . . . . . . . . . . . 47,838 90,760 40,501 47,041
Issued in Lieu of Cash Distributions . . . . . . 7,941 8,944 3,434 2,913
Redeemed . . . . . . . . . . . . . . . . . . . . (91,716) (75,737) (37,618) (30,479)
----------------------------------------------------------------------------------------------------------------
(35,937) 23,967 6,317 19,475
----------------------------------------------------------------------------------------------------------------
</TABLE>
30
<PAGE> 33
<TABLE>
<CAPTION>
SHORT-TERM
CORPORATE PORTFOLIO
---------------------------------------------------------------------------------------------------------------
YEAR ENDED Year Ended
JANUARY 31, January 31,
1995 1994
(000) (000)
---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income . . . . . . . . . . . . . . . . . . . . . $ 184,425 $ 176,510
Realized Net Gain (Loss) . . . . . . . . . . . . . . . . . . . (43,286) 14,837
Change in Unrealized
Appreciation (Depreciation) . . . . . . . . . . . . . . . . . (130,778) (621)
---------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations . . . . . . . . . . . . . 10,361 190,726
---------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS (1)
Net Investment Income . . . . . . . . . . . . . . . . . . . . . (184,425) (176,510)
Realized Net Gain . . . . . . . . . . . . . . . . . . . . . . . -- (29,029)
---------------------------------------------------------------------------------------------------------------
Total Distributions . . . . . . . . . . . . . . . . . (184,425) (205,539)
---------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (2)
Issued - Regular . . . . . . . . . . . . . . . . . . . . . . 880,717 1,519,236
- In Lieu of Cash Distributions . . . . . . . . . . . 152,829 174,887
- Exchange . . . . . . . . . . . . . . . . . . . . . . 381,200 587,118
Redeemed - Regular . . . . . . . . . . . . . . . . . . . . . . (1,121,979) (936,720)
- Exchange . . . . . . . . . . . . . . . . . . . . . . (767,664) (567,308)
---------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) from
Capital Share Transactions . . . . . . . . . . . . . . (474,897) 777,213
---------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) . . . . . . . . . . . . . . . . . . (648,961) 762,400
---------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Period . . . . . . . . . . . . . . . . . . . . . . 3,573,009 2,810,609
---------------------------------------------------------------------------------------------------------------
End of Period . . . . . . . . . . . . . . . . . . . . . . . . $2,924,048 $3,573,009
===============================================================================================================
(1) Distributions Per Share
Net Investment Income . . . . . . . . . . . . . . . . . . . $.596 $.605
Realized Net Gain . . . . . . . . . . . . . . . . . . . . . -- $.099
---------------------------------------------------------------------------------------------------------------
(2) Shares Issued and Redeemed
Issued . . . . . . . . . . . . . . . . . . . . . . . . . . 119,706 191,689
Issued in Lieu of Cash Distributions . . . . . . . . . . . 14,548 15,933
Redeemed . . . . . . . . . . . . . . . . . . . . . . . . . (179,811) (136,865)
---------------------------------------------------------------------------------------------------------------
(45,557) 70,757
---------------------------------------------------------------------------------------------------------------
</TABLE>
31
<PAGE> 34
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
LONG-TERM U.S. TREASURY PORTFOLIO
------------------------------------------------------------------------------------------------------------------------------
Year Ended January 31,
-------------------------------------------------------------------
For a Share Outstanding Throughout Each Year 1995 1994 1993 1992 1991
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR . . . . . . . . . $10.75 $10.04 $10.14 $ 9.74 $9.53
-------- -------- -------- ------- -------
INVESTMENT OPERATIONS
Net Investment Income . . . . . . . . . . . . . . .665 .685 .733 .763 .776
Net Realized and Unrealized Gain (Loss)
on Investments . . . . . . . . . . . . . . . . . (1.401) .886 .600 .400 .210
-------- -------- -------- ------- -------
TOTAL FROM INVESTMENT OPERATIONS . . . . . . (.736) 1.571 1.333 1.163 .986
------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income . . . . . . . (.665) (.685) (.733) (.763) (.776)
Distributions from Realized Capital Gains . . . . . (.119) (.176) (.700) -- --
-------- -------- -------- ------- -------
TOTAL DISTRIBUTIONS . . . . . . . . . . . . . (.784) (.861) (1.433) (.763) (.776)
------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR . . . . . . . . . . . . $9.23 $10.75 $10.04 $10.14 $9.74
==============================================================================================================================
Total Return . . . . . . . . . . . . . . . . . . . . -6.68% +16.09% +14.12% +12.44% +11.00%
------------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) . . . . . . . . . $671 $829 $874 $833 $722
Ratio of Expenses to Average Net Assets . . . . . . . .28% .26% .27% .26% .30%
Ratio of Net Investment Income to
Average Net Assets . . . . . . . . . . . . . . . . 7.02% 6.44% 7.26% 7.72% 8.29%
Portfolio Turnover Rate . . . . . . . . . . . . . . . 85% 7% 170% 89% 147%
------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
LONG-TERM CORPORATE PORTFOLIO
------------------------------------------------------------------------------------------------------------------------------
Year Ended January 31,
-------------------------------------------------------------------
For a Share Outstanding Throughout Each Year 1995 1994 1993 1992 1991
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR . . . . . . . . . $9.36 $9.04 $8.63 $8.02 $8.00
-------- -------- -------- ------- -------
INVESTMENT OPERATIONS
Net Investment Income . . . . . . . . . . . . . . .617 .632 .680 .706 .720
Net Realized and Unrealized Gain (Loss)
on Investments . . . . . . . . . . . . . . . . . (1.108) .579 .561 .610 .020
-------- -------- -------- ------- -------
TOTAL FROM INVESTMENT OPERATIONS . . . . . . (.491) 1.211 1.241 1.316 .740
------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income . . . . . . . (.617) (.632) (.680) (.706) (.720)
Distributions from Realized Capital Gains . . . . . (.072) (.259) (.151) -- --
-------- -------- -------- ------- -------
TOTAL DISTRIBUTIONS . . . . . . . . . . . . . (.689) (.891) (.831) (.706) (.720)
------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year . . . . . . . . . . . . $8.18 $9.36 $9.04 $8.63 $8.02
==============================================================================================================================
Total Return . . . . . . . . . . . . . . . . . . . . -5.12% +13.83% +15.06% +17.09% +9.81%
------------------------------------------------------------------------------------------------------------------------------
Ratios/Supplemental Data
Net Assets, End of Year (Millions) . . . . . . . . . $2,607 $3,166 $2,763 $1,992 $1,254
Ratio of Expenses to Average Net Assets . . . . . . . .32% .30% .31% .31% .37%
Ratio of Net Investment Income to
Average Net Assets . . . . . . . . . . . . . . . . 7.37% 6.71% 7.68% 8.46% 9.16%
Portfolio Turnover Rate . . . . . . . . . . . . . . . 43% 77% 50% 72% 62%
------------------------------------------------------------------------------------------------------------------------------
</TABLE>
32
<PAGE> 35
<TABLE>
<CAPTION>
HIGH YIELD CORPORATE PORTFOLIO
------------------------------------------------------------------------------------------------------------------------------
Year Ended January 31,
-------------------------------------------------------------------
For a Share Outstanding Throughout Each Year 1995 1994 1993 1992 1991
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR . . . . . . . . . $8.14 $7.56 $7.27 $6.19 $7.31
------ -------- -------- ------- -------
INVESTMENT OPERATIONS
Net Investment Income . . . . . . . . . . . . . . .679 .695 .727 .770 .904
Net Realized and Unrealized Gain (Loss)
on Investments . . . . . . . . . . . . . . . . . (.900) .580 .290 1.080 (1.120)
------ -------- -------- ------- -------
TOTAL FROM INVESTMENT OPERATIONS . . . . . . (.221) 1.275 1.017 1.850 (.216)
------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income . . . . . . . (.679) (.695) (.727) (.770) (.904)
Distributions from Realized Capital Gains . . . . . -- -- -- -- --
------ -------- -------- ------- -------
TOTAL DISTRIBUTIONS . . . . . . . . . . . . . (.679) (.695) (.727) (.770) (.904)
------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR . . . . . . . . . . . . $7.24 $8.14 $7.56 $7.27 $6.19
==============================================================================================================================
Total Return . . . . . . . . . . . . . . . . . . . . -2.52% +17.54% +14.68% +31.27% -3.21%
------------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) . . . . . . . . . $2,162 $2,625 $2,184 $1,593 $699
Ratio of Expenses to Average Net Assets . . . . . . . .34% .32% .34% .34% .40%
Ratio of Net Investment Income to
Average Net Assets . . . . . . . . . . . . . . . . 9.13% 8.81% 9.82% 11.13% 13.35%
Portfolio Turnover Rate . . . . . . . . . . . . . . . 33% 51% 83% 44% 61%
------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
GNMA PORTFOLIO
------------------------------------------------------------------------------------------------------------------------------
Year Ended January 31,
-------------------------------------------------------------------
For a Share Outstanding Throughout Each Year 1995 1994 1993 1992 1991
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR . . . . . . . . . $10.39 $10.50 $10.25 $9.85 $9.54
------ -------- -------- ------- -------
INVESTMENT OPERATIONS
Net Investment Income . . . . . . . . . . . . . . .693 .641 .778 .831 .855
Net Realized and Unrealized Gain (Loss)
on Investments . . . . . . . . . . . . . . . . . (.673) (.110) .250 .400 .310
------ -------- -------- ------- -------
TOTAL FROM INVESTMENT OPERATIONS . . . . . . .020 .531 1.028 1.231 1.165
------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income . . . . . . . (.693) (.641) (.778) (.831) (.855)
Distributions from Realized Capital Gains . . . . . (.007) -- -- -- --
------ -------- -------- ------- -------
TOTAL DISTRIBUTIONS . . . . . . . . . . . . . (.700) (.641) (.778) (.831) (.855)
------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR . . . . . . . . . . . . $9.71 $10.39 $10.50 $10.25 $9.85
==============================================================================================================================
TOTAL RETURN . . . . . . . . . . . . . . . . . . . . +0.36% +5.18% +10.40% +13.00% +12.85%
------------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) . . . . . . . . . $5,851 $7,043 $7,167 $5,207 $2,711
Ratio of Expenses to Average Net Assets . . . . . . . .30% .28% .29% .29% .34%
Ratio of Net Investment Income to
Average Net Assets . . . . . . . . . . . . . . . . 7.04% 6.19% 7.38% 8.22% 8.95%
Portfolio Turnover Rate . . . . . . . . . . . . . . . 35% 2% 7% 1% 1%
------------------------------------------------------------------------------------------------------------------------------
</TABLE>
33
<PAGE> 36
FINANCIAL HIGHLIGHTS (continued)
<TABLE>
<CAPTION>
INTERMEDIATE-TERM CORPORATE PORTFOLIO
-------------------------------------------------------------------------------------------------------------------------
YEAR ENDED November 1, 1993-
For a Share Outstanding Throughout Each Period JANUARY 31, 1995 January 31, 1994
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD . . . . . . . . . . . $10.04 $10.00
-------- -------
INVESTMENT OPERATIONS
Net Investment Income . . . . . . . . . . . . . . . . . .587 .125
Net Realized and Unrealized Gain (Loss)
on Investments . . . . . . . . . . . . . . . . . . . . (.970) .040
-------- -------
TOTAL FROM INVESTMENT OPERATIONS . . . . . . . . (.383) .165
-------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income . . . . . . . . . . (.587) (.125)
Distributions from Realized Capital Gains . . . . . . . -- --
-------- -------
TOTAL DISTRIBUTIONS . . . . . . . . . . . . . . . (.587) (.125)
-------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD . . . . . . . . . . . . . . $9.07 $10.04
=========================================================================================================================
TOTAL RETURN . . . . . . . . . . . . . . . . . . . . . . . -3.73% +1.66%
-------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) . . . . . . . . . . . $163 $85
Ratio of Expenses to Average Net Assets . . . . . . . . . . .28% .25%*
Ratio of Net Investment Income to
Average Net Assets . . . . . . . . . . . . . . . . . . . 6.46% 5.11%*
Portfolio Turnover Rate . . . . . . . . . . . . . . . . . . 97% 74%
-------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Annualized.
<TABLE>
<CAPTION>
INTERMEDIATE-TERM U.S. TREASURY PORTFOLIO
-------------------------------------------------------------------------------------------------------------------------
Year Ended January 31,
------------------------------------- October 28, 1991-
For a Share Outstanding Throughout Each Period 1995 1994 1993 January 31, 1992
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD . . . . . . . . . . . $10.82 $10.79 $10.19 $10.00
------- -------- -------- --------
INVESTMENT OPERATIONS
Net Investment Income . . . . . . . . . . . . . . . . . .603 .617 .676 .170
Net Realized and Unrealized Gain (Loss)
on Investments . . . . . . . . . . . . . . . . . . . . (1.033) .443 .617 .190
------- -------- -------- --------
TOTAL FROM INVESTMENT OPERATIONS . . . . . . . . (.430) 1.060 1.293 .360
-------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income . . . . . . . . . . (.603) (.617) (.676) (.170)
Distributions from Realized Capital Gains . . . . . . . (.027) (.413) (.017) --
------- -------- -------- --------
TOTAL DISTRIBUTIONS . . . . . . . . . . . . . . . (.630) (1.030) (.693) (.170)
-------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD . . . . . . . . . . . . . . $9.76 $10.82 $10.79 $10.19
=========================================================================================================================
TOTAL RETURN . . . . . . . . . . . . . . . . . . . . . . . -3.90% +10.09% +13.14% +3.59%
-------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) . . . . . . . . . . . $848 $1,007 $673 $190
Ratio of Expenses to Average Net Assets . . . . . . . . . . .28% .26% .26% .26%*
Ratio of Net Investment Income to
Average Net Assets . . . . . . . . . . . . . . . . . . . 6.05% 5.55% 6.44% 6.47%*
Portfolio Turnover Rate . . . . . . . . . . . . . . . . . . 128% 118% 123% 32%
-------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Annualized.
34
<PAGE> 37
<TABLE>
<CAPTION>
SHORT-TERM FEDERAL PORTFOLIO
------------------------------------------------------------------------------------------------------------------------------
Year Ended January 31,
-------------------------------------------------------------------
For a Share Outstanding Throughout Each Year 1995 1994 1993 1992 1991
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR . . . . . . . . . $10.38 $10.38 $10.31 $10.08 $9.89
-------- -------- -------- ------- -------
INVESTMENT OPERATIONS
Net Investment Income . . . . . . . . . . . . . . .550 .522 .609 .720 .801
Net Realized and Unrealized Gain (Loss)
on Investments . . . . . . . . . . . . . . . . . (.580) .110 .232 .307 .190
-------- -------- -------- ------- -------
TOTAL FROM INVESTMENT OPERATIONS . . . . . . (.030) .632 .841 1.027 .991
------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income . . . . . . . (.550) (.522) (.609) (.720) (.801)
Distributions from Realized Capital Gains . . . . . (.010) (.110) (.162) (.077) --
-------- -------- -------- ------- -------
TOTAL DISTRIBUTIONS . . . . . . . . . . . . . (.560) (.632) (.771) (.797) (.801)
------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR . . . . . . . . . . . . $9.79 $10.38 $10.38 $10.31 $10.08
==============================================================================================================================
TOTAL RETURN . . . . . . . . . . . . . . . . . . . . -0.21% +6.23% +8.49% +10.59% +10.46%
------------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) . . . . . . . . . $1,474 $1,936 $1,688 $1,274 $508
Ratio of Expenses to Average Net Assets . . . . . . . .28% .26% .27% .26% .30%
Ratio of Net Investment Income to
Average Net Assets . . . . . . . . . . . . . . . . 5.53% 4.98% 5.88% 6.98% 8.06%
Portfolio Turnover Rate . . . . . . . . . . . . . . . 57% 49% 70% 111% 141%
------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
SHORT-TERM U.S. TREASURY PORTFOLIO
------------------------------------------------------------------------------------------------------------------------------
Year Ended January 31,
------------------------------------- October 28, 1991-
For a Share Outstanding Throughout Each Period 1995 1994 1993 January 31, 1992
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD . . . . . . . . . . . $10.41 $10.41 $10.12 $10.00
-------- -------- -------- -------
INVESTMENT OPERATIONS
Net Investment Income . . . . . . . . . . . . . . . . . .532 .486 .528 .140
Net Realized and Unrealized Gain (Loss)
on Investments . . . . . . . . . . . . . . . . . . . . (.500) .079 .332 .120
-------- -------- -------- -------
TOTAL FROM INVESTMENT OPERATIONS . . . . . . . . .032 .565 .860 .260
------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income . . . . . . . . . . (.532) (.486) (.528) (.140)
Distributions from Realized Capital Gains . . . . . . . (.020) (.079) (.042) --
-------- -------- -------- -------
TOTAL DISTRIBUTIONS . . . . . . . . . . . . . . . (.552) (.565) (.570) (.140)
------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD . . . . . . . . . . . . . . $9.89 $10.41 $10.41 $10.12
==============================================================================================================================
TOTAL RETURN . . . . . . . . . . . . . . . . . . . . . . . +0.40% +5.54% +8.74% +2.60%
------------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) . . . . . . . . . . . $754 $729 $526 $102
Ratio of Expenses to Average Net Assets . . . . . . . . . . .28% .26% .26% .26%*
Ratio of Net Investment Income to
Average Net Assets . . . . . . . . . . . . . . . . . . . 5.33% 4.64% 5.12% 5.22%*
Portfolio Turnover Rate . . . . . . . . . . . . . . . . . . 126% 86% 71% 40%
------------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Annualized.
35
<PAGE> 38
FINANCIAL HIGHLIGHTS (continued)
<TABLE>
<CAPTION>
SHORT-TERM CORPORATE PORTFOLIO
------------------------------------------------------------------------------------------------------------------------------
Year Ended January 31,
-------------------------------------------------------------------
For a Share Outstanding Throughout Each Year 1995 1994 1993 1992 1991
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR . . . . . . . . . $10.94 $10.99 $10.88 $10.50 $10.34
-------- ------- -------- ------- --------
INVESTMENT OPERATIONS
Net Investment Income . . . . . . . . . . . . . . .596 .605 .695 .804 .876
Net Realized and Unrealized Gain (Loss)
on Investments . . . . . . . . . . . . . . . . . (.540) .049 .275 .380 .160
-------- ------- -------- ------- --------
TOTAL FROM INVESTMENT OPERATIONS . . . . . . .056 .654 .970 1.184 1.036
------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income . . . . . . . (.596) (.605) (.695) (.804) (.876)
Distributions from Realized Capital Gains . . . . . -- (.099) (.165) -- --
-------- ------- -------- ------- --------
TOTAL DISTRIBUTIONS . . . . . . . . . . . . . (.596) (.704) (.860) (.804) (.876)
------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR . . . . . . . . . . . . $10.40 $10.94 $10.99 $10.88 $10.50
==============================================================================================================================
TOTAL RETURN . . . . . . . . . . . . . . . . . . . . +0.60% +6.11% +9.29% +11.70% +10.47%
------------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) . . . . . . . . . $2,924 $3,573 $2,811 $1,911 $829
Ratio of Expenses to Average Net Assets . . . . . . . .28% .26% .27% .26% .31%
Ratio of Net Investment Income to
Average Net Assets . . . . . . . . . . . . . . . . 5.66% 5.48% 6.33% 7.44% 8.48%
Portfolio Turnover Rate . . . . . . . . . . . . . . . 69% 61% 71% 99% 107%
------------------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTES TO FINANCIAL STATEMENTS
Vanguard Fixed Income Securities Fund is registered under the Investment
Company Act of 1940 as a diversified open-end investment company and consists
of the Long-Term U.S. Treasury, Long-Term Corporate, High Yield Corporate,
GNMA, Intermediate-Term Corporate, Intermediate-Term U.S. Treasury, Short-Term
Federal, Short-Term U.S. Treasury, and Short-Term Corporate Portfolios. Certain
investments of the Long-Term Corporate, High Yield Corporate, Intermediate-Term
Corporate, and Short-Term Corporate Portfolios are in corporate debt
instruments; the issuers' abilities to meet these obligations may be affected
by economic developments in their respective industries.
A. The following significant accounting policies are in conformity with
generally accepted accounting principles for investment companies. Such
policies are consistently followed by the Fund in the preparation of financial
statements.
1. SECURITY VALUATION: Securities are valued utilizing the latest bid prices
and on the basis of a matrix system (which considers such factors as
security prices, yields, maturities and ratings), both as furnished by
independent pricing services. Temporary cash investments are valued at
amortized cost which approximates market value.
2. FEDERAL INCOME TAXES: Each Portfolio of 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.
36
<PAGE> 39
3. REPURCHASE AGREEMENTS: The Fund, along with other members of The Vanguard
Group of Investment Companies, transfers uninvested cash balances into a
Pooled Cash Account, the daily aggregate of which is invested in
repurchase agreements secured by U.S. Government obligations. Securities
pledged as collateral for repurchase agreements are held by the Fund's
custodian banks until maturity of each repurchase agreement. Provisions of
the agreement ensure that the market value of the collateral is sufficient
in the event of default; however, in the event of default or bankruptcy by
the other party to the agreement, realization and/or retention of the
collateral may be subject to legal proceedings.
4. FUTURES: The Long-Term, Intermediate-Term, and Short-Term U.S. Treasury
Portfolios and the Short-Term Corporate Portfolio utilize Municipal Bond
Index, U.S. Treasury Bond, and U.S. Treasury Note futures contracts to a
limited extent, with the objectives of enhancing returns, managing
interest rate risk, maintaining liquidity and minimizing transaction
costs. The Portfolios may purchase futures contracts instead of bonds when
futures contracts are believed to be priced more attractively than bonds.
The Portfolios may also seek to take advantage of price differences among
bond market sectors by simultaneously buying futures (or bonds) of one
market sector and selling futures (or bonds) of another sector. Futures
contracts may also be used to simulate a fully invested position in the
underlying bonds while maintaining a cash balance for liquidity.
The primary risks associated with the use of futures contracts are
imperfect correlation between changes in market values of bonds held by
the Portfolios and the prices of futures contracts, and the possibility of
an illiquid market. Futures contracts are valued based upon their quoted
daily settlement prices. Fluctuations in the values of futures contracts
are recorded as unrealized appreciation (depreciation) until terminated at
which time realized gains (losses) are recognized. Unrealized appreciation
(depreciation) related to open futures contracts is required to be treated
as realized gain (loss) for Federal income tax purposes.
5. OTHER: Security transactions are accounted for on the date the securities
are purchased or sold. Costs used in determining realized gains and losses
on sales of investment securities are those of specific securities sold.
Discounts and premiums on securities purchased are amortized to interest
income over the lives of the respective securities. Distributions from net
investment income are declared on a daily basis payable on the first
business day of the following month. Annual distributions from realized
gains, if any, are recorded on the ex-dividend date.
B. Under the terms of a contract expiring August 31, 1995, the Fund pays
Wellington Management Company for investment advisory services performed for
the Long-Term Corporate, High Yield Corporate, and GNMA Portfolios at a fee
calculated at an annual percentage rate of average net assets. For the year
ended January 31, 1995, the investment advisory fees of the Long-Term
Corporate, High Yield Corporate, and GNMA Portfolios represent effective annual
rates of .04 of 1%, .06 of 1%, and .02 of 1% of average net assets,
respectively.
The Vanguard Group, Inc. furnishes investment advisory services to the
Intermediate-Term and Short-Term Corporate, Short-Term Federal, and the
Long-Term, Intermediate-Term, and Short-Term U.S. Treasury Portfolios on an
at-cost basis.
C. The Vanguard Group, Inc. furnishes at cost corporate management,
administrative, marketing, and distribution services. The costs of such
services are allocated to the Fund under methods approved by the Board of
Directors. At January 31, 1995, the Fund had contributed capital of $2,676,000
to Vanguard (included in Other Assets), representing 13.4% of Vanguard's
capitalization. The Fund's directors and officers are also directors and
officers of Vanguard.
D. During the year ended January 31, 1995, purchases and sales of investment
securities, other
37
<PAGE> 40
than U.S. Government securities and temporary cash investments, were:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------
(000)
------------------------------
Portfolio Purchases Sales
---------------------------------------------------------------------------------
<S> <C> <C>
LONG-TERM CORPORATE $ 632,567 $ 884,980
HIGH YIELD CORPORATE 613,177 801,194
INTERMEDIATE-TERM CORPORATE 119,320 47,840
SHORT-TERM CORPORATE 1,613,932 2,045,572
---------------------------------------------------------------------------------
</TABLE>
Purchases and sales of U.S. Government securities were:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------
(000)
------------------------------
Portfolio Purchases Sales
---------------------------------------------------------------------------------
<S> <C> <C>
LONG-TERM U.S. TREASURY $ 540,688 $ 565,417
LONG-TERM CORPORATE 483,038 327,267
HIGH YIELD CORPORATE 83,442 59,414
GNMA 2,116,432 2,969,497
INTERMEDIATE-TERM CORPORATE 71,490 55,433
INTERMEDIATE-TERM U.S. TREASURY 1,082,001 1,174,828
SHORT-TERM FEDERAL 912,504 1,095,481
SHORT-TERM U.S. TREASURY 936,842 862,409
SHORT-TERM CORPORATE 578,494 508,854
---------------------------------------------------------------------------------
</TABLE>
E. Capital gain distributions are determined on a tax basis and may differ
from realized capital gains for financial reporting purposes depending on the
timing of realization of gains. For Federal tax purposes, capital gains
required to be distributed in December 1994 included net gains realized through
October 31, 1994. Subsequent capital losses realized by the Portfolios are
available to offset future net capital gains.
At January 31, 1995, the aggregate capital losses available to offset future
net capital gains were:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------
Expiration
Fiscal Year(s)
Ending Amount
Portfolio January 31 (000)
---------------------------------------------------------------------------------
<S> <C> <C>
LONG-TERM U.S. TREASURY 2004 $ 1,071,000
LONG-TERM CORPORATE 2003-2004 18,694,000
HIGH YIELD CORPORATE 1999-2004 122,827,000
GNMA 2004 10,023,000
INTERMEDIATE-TERM CORPORATE 2002-2004 3,271,000
INTERMEDIATE-TERM U.S. TREASURY 2003-2004 43,066,000
SHORT-TERM FEDERAL 2003-2004 40,359,000
SHORT-TERM U.S. TREASURY 2003-2004 17,902,000
SHORT-TERM CORPORATE 2003-2004 45,568,000
---------------------------------------------------------------------------------
</TABLE>
F. At January 31, 1995, unrealized depreciation of investment securities for
financial reporting and Federal income tax purposes was:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------
(000)
--------------------------------------------------
Net
Appreciated Depreciated Unrealized
Portfolio Securities Securities Depreciation
--------------------------------------------------------------------------------
<S> <C> <C> <C>
LONG-TERM
U.S. TREASURY $ 663 $ (14,296) $ (13,633)
LONG-TERM CORPORATE 47,122 (118,036) (70,914)
HIGH YIELD CORPORATE 21,689 (108,022) (86,333)
GNMA 59,474 (260,383) (200,909)
INTERMEDIATE-TERM
CORPORATE 726 (6,366) (5,640)
INTERMEDIATE-TERM
U.S. TREASURY 1,421 (33,043) (31,622)
SHORT-TERM FEDERAL 2,306 (35,135) (32,829)
SHORT-TERM
U.S. TREASURY 1,723 (10,540) (8,817)
SHORT-TERM CORPORATE 3,662 (76,126) (72,464)
---------------------------------------------------------------------------------
</TABLE>
G. The market values of securities on loan to broker/ dealers at January 31,
1995, and collateral received with respect to such loans, were:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------
(000)
-----------------------------------------------
Collateral Received
-------------------------------
Market Market
Value of Cash Value of
Loaned Collateral U.S. Treasury
Portfolio Securities Received Securities
---------------------------------------------------------------------------------
<S> <C> <C> <C>
LONG-TERM U.S. TREASURY $37,668 $ 38,266 --
LONG-TERM CORPORATE 32,028 32,550 --
HIGH YIELD CORPORATE 135,313 138,125 --
INTERMEDIATE-TERM
CORPORATE 2,020 2,060 --
INTERMEDIATE-TERM
U.S. TREASURY 2,106 2,140 --
SHORT-TERM FEDERAL 57,591 55,004 $ 3,780
SHORT-TERM U.S. TREASURY 4,409 4,484 --
SHORT-TERM CORPORATE 73,557 -- 75,759
---------------------------------------------------------------------------------
</TABLE>
Security loans are required to be secured at all times by collateral at least
equal to the market value of securities loaned; however, in the event of
default or bankruptcy by the other party to the agreement, realization and/or
retention of the collateral may be subject to legal proceedings.
38
<PAGE> 41
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors
Vanguard Fixed Income Securities Fund
GNMA Portfolio
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
the GNMA Portfolio of Vanguard Fixed Income Securities Fund (the "Fund") at
January 31, 1995, the results of its operations, the changes in its net assets
and the financial highlights for each of the respective periods presented, in
conformity with generally accepted accounting principles. These financial
statements and financial highlights (hereafter referred to as "financial
statements") are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits, which included confirmation of
securities at January 31, 1995 by correspondence with the custodian and brokers
and the application of alternative auditing procedures where confirmations from
brokers were not received, provide a reasonable basis for the opinion expressed
above.
We have also audited the financial statements of the other Portfolios included
in the Fund at January 31, 1995 and we have issued an unqualified opinion
thereon. An insert to this Annual Report containing our report on the financial
statements of the other Portfolios is available from the Fund.
PRICE WATERHOUSE LLP
Thirty South Seventeenth Street
Philadelphia, Pennsylvania 19103
March 3, 1995
39
<PAGE> 42
DIRECTORS AND OFFICERS
JOHN C. BOGLE, Chairman and Chief Executive Officer
Chairman and Director of The Vanguard Group, Inc., and of each of the
investment companies in The Vanguard Group.
JOHN J. BRENNAN, President
President and Director of The Vanguard Group, Inc., and of each of the
investment companies in The Vanguard Group.
ROBERT E. CAWTHORN, Chairman of Rhone-Poulenc Rorer, Inc.; Director of Sun
Company, Inc.
BARBARA BARNES HAUPTFUHRER, Director of The Great Atlantic and Pacific Tea
Company, Alco Standard Corp., Raytheon Company, Knight- Ridder, Inc., and
Massachusetts Mutual Life Insurance Co.
BRUCE K. MACLAURY, President of The Brookings Institution; Director of American
Express Bank Ltd., The St. Paul Companies, Inc., and Scott Paper Company.
BURTON G. MALKIEL, Chemical Bank Chairman's Professor of Economics, Princeton
University; Director of Prudential Insurance Co. of America, Amdahl
Corporation, Baker Fentress & Co., The Jeffrey Co., and Southern New England
Communications Company.
ALFRED M. RANKIN, JR., Chairman, President, and Chief Executive Officer of
NACCO Industries, Inc.; Director of NACCO Industries, The BFGoodrich Company,
Reliance Electric Company, and The Standard Products Company.
JOHN C. SAWHILL, President and Chief Executive Officer of The Nature
Conservancy; formerly, Director and Senior Partner of McKinsey & Co. and
President of New York University; Director of Pacific Gas and Electric Company
and NACCO Industries.
JAMES O. WELCH, JR., Retired Chairman of Nabisco Brands, Inc.; retired Vice
Chairman and Director of RJR Nabisco; Director of TECO Energy, Inc.
J. LAWRENCE WILSON, Chairman and Chief Executive Officer of Rohm & Haas
Company; Director of Cummins Engine Company; Trustee of Vanderbilt University
and the Culver Educational Foundation.
OTHER FUND OFFICERS
RICHARD F. HYLAND, Treasurer; Treasurer of The Vanguard Group, Inc., and of
each of the investment companies in The Vanguard Group.
RAYMOND J. KLAPINSKY, Secretary; Senior Vice President and Secretary of The
Vanguard Group, Inc.; Secretary of each of the investment companies in The
Vanguard Group.
KAREN E. WEST, Controller; Vice President of The Vanguard Group, Inc.;
Controller of each of the investment companies in The Vanguard Group.
OTHER VANGUARD GROUP OFFICERS
<TABLE>
<S> <C>
ROBERT A. DISTEFANO VINCENT S. MCCORMACK
Senior Vice President Senior Vice President
Information Technology Operations
JEREMY G. DUFFIELD F. WILLIAM MCNABB III
Senior Vice President Senior Vice President
Planning & Development Institutional
JAMES H. GATELY RALPH K. PACKARD
Senior Vice President Senior Vice President
Individual Chief Financial Officer
IAN A. MACKINNON
Senior Vice President
Fixed Income Group
</TABLE>
40
<PAGE> 43
THE VANGUARD VOYAGE . . . STAYING THE COURSE
(continued from inside front cover)
* We set specific standards for each Fund's investment policies and
principles.
* We adhere to the highest standards of investment quality, consistent with
each Fund's objectives.
* We offer candor in our Fund descriptions (including full disclosure of
risk) to prospective investors, and in our description to
shareholders of each Fund's success (or, sometimes, lack of the same).
These principles make at least as much sense today as they did in 1929,
perhaps even more. For we live in an era when many fund organizations have
become asset-gathering machines, capitalizing on past performance that is
unrepeatable and investment fads that today, as yesterday, will come and go.
The new marketing policy is too often "if investors want it, we'll sell it to
them." But our principle remains "if it makes sound investment sense, we'll
offer it, even if it takes years to attract substantial assets."
FOUNDING CORPORATE VALUES
With the founding of The Vanguard Group in 1974, a new concept of values was
brought to bear on mutual fund management. Unlike other fund organizations,
Vanguard alone is structured to serve only its Funds' shareholders. Vanguard's
corporate structure places not the fund management company, but the fund
shareholders, "at the top" of the organizational chart. Vanguard Fund
shareholders are literally the owners of the firm and are entitled to all of the
benefits that, at other fund firms, accrue to the owners of the management
company.
Because of this unique structure, Vanguard has become best known for its low
costs, which we believe are just as essential a consideration in investing in
mutual funds as risk potential and total return. We call this relationship
between risk, return, and cost the "eternal triangle" of mutual fund investing.
We take special pride in our position as (by far) the lowest-cost provider
of financial services in the world. Under our "no-load" offering structure,
shareholders begin their Vanguard investment program with $1,000 of assets
(not, say, $950) for each $1,000 investment. Then, under our "at-cost"
operating structure, each $1,000 is managed for only about $3 per year; our
competitors may charge three, four, or even five times that amount.
In all, Vanguard has distinguished itself by providing Funds with sound and
durable goals to investors with long-term time horizons, and doing so at the
fairest financial terms available. We believe that the unique Vanguard structure
"promotes a healthy and viable mutual fund complex within which each Fund can
better prosper; enables the Funds to realize substantial savings from advisory
fee reductions; promotes savings from economies of scale; and provides the Funds
with direct and conflict-free control over distribution functions." We are not
alone in this belief. Indeed, the quotation is taken verbatim from the unanimous
decision of the U.S. Securities and Exchange Commission when, in 1981, it
approved our application for the structure under which we operate today.
A CLOSING THOUGHT
We are proud of what Wellington Fund, the other Vanguard Funds, and The Vanguard
Group have come to represent, and we are grateful for the success and growth
with which we have been blessed. We are an industry leader, and, as a competitor
observed a few years ago, we are "the standard by which all fund organizations
are judged."
In battle terms, "the vanguard" is the first wave of troops or ships, and
Vanguard surely is in the first wave of the battle for investment survival. As
we look behind us, however, the "second wave" is not in sight. No fund
organization has followed our lead, leaving ours a lonely course. No matter. We
have an organization that places the interests of our Fund shareholders first.
We have Funds that shall endure the vicissitudes of the future. Come what may,
we intend to "stay the course," and we shall do our very best to continue to
deserve your confidence and loyalty. We hope that you will stay the course with
us.
<PAGE> 44
THE VANGUARD FAMILY OF FUNDS
FIXED INCOME FUNDS
MONEY MARKET FUNDS
Vanguard Admiral Funds
U.S. Treasury Money Market Portfolio
Vanguard Money Market Reserves
TAX-EXEMPT MONEY MARKET FUNDS
Vanguard Municipal Bond Fund
Money Market Portfolio
Vanguard State Tax-Free Funds
Money Market Portfolios (CA, NJ, OH, PA)
TAX-EXEMPT INCOME FUNDS
Vanguard Municipal Bond Fund
Vanguard State Tax-Free Funds
Insured Longer-Term Portfolios
(CA, FL, NJ, NY, OH, PA)
INCOME FUNDS
Vanguard Admiral Funds
Vanguard Fixed Income Securities Fund
Vanguard Preferred Stock Fund
EQUITY AND BALANCED FUNDS
GROWTH AND INCOME FUNDS
Vanguard Convertible Securities Fund
Vanguard Equity Income Fund
Vanguard Quantitative Portfolios
Vanguard/Trustees' Equity Fund
U.S. Portfolio
Vanguard/Windsor Fund
Vanguard/Windsor II
BALANCED FUNDS
Vanguard Asset Allocation Fund
Vanguard STAR Fund
Vanguard/Wellesley Income Fund
Vanguard/Wellington Fund
GROWTH FUNDS
Vanguard/Morgan Growth Fund
Vanguard/PRIMECAP Fund
Vanguard U.S. Growth Portfolio
AGGRESSIVE GROWTH FUNDS
Vanguard Explorer Fund
Vanguard Specialized Portfolios
INTERNATIONAL FUNDS
Vanguard International Growth Portfolio
Vanguard/Trustees' Equity Fund
International Portfolio
INDEX FUNDS
Vanguard Index Trust
Total Stock Market Portfolio
500 Portfolio
Extended Market Portfolio
Growth Portfolio
Value Portfolio
Small Capitalization Stock Portfolio
Vanguard International Equity Index Fund
European Portfolio
Pacific Portfolio
Emerging Markets Portfolio
Vanguard Bond Index Fund
Vanguard Tax-Managed Fund
Vanguard Balanced Index Fund
[LOGO]
<TABLE>
<S> <C>
Vanguard Financial Center Valley Forge, Pennsylvania 19482
New Account Information: 1-(800) 662-7447 Shareholder Account Services: 1-(800) 662-2739
</TABLE>
This Report has been prepared for shareholders and may be distributed to
others only if preceded or accompanied by a current prospectus. All
Funds in the Vanguard Family are offered by prospectus only.
Q280-01/95
<PAGE> 45
FINANCIAL STATEMENTS
January 31, 1995
STATEMENT OF NET ASSETS
<TABLE>
<CAPTION>
Face Market
LONG-TERM Amount Value
U.S. TREASURY PORTFOLIO (000) (000)+
<S> <C> <C>
-----------------------------------------------------------------------
U.S. GOVERNMENT & AGENCY
OBLIGATIONS (95.5%)
-----------------------------------------------------------------------
U.S. TREASURY BONDS
7.125%, 2/15/23 $ 9,000 $ 8,374
7.875%, 2/15/21 136,900 138,055
8.125%, 8/15/19 75,900 78,497
8.875%, 8/15/17-2/15/19 148,200 164,870
9.25%, 2/15/16 124,700 143,055
10.375%, 11/15/12 45,900 55,381
10.625%, 8/15/15 16,600 21,357
11.25%, 2/15/15 17,600 23,705
13.875%, 5/15/11 2,000 2,906
AGENCY FOR INTERNATIONAL
DEVELOPMENT (INDONESIA)
(U.S. Government Guaranteed)
8.90%, 6/1/21 5,000 5,058
-----------------------------------------------------------------------
TOTAL U.S. GOVERNMENT & AGENCY
OBLIGATIONS (Cost $654,891) 641,258
-----------------------------------------------------------------------
TEMPORARY CASH INVESTMENT (1.6%)
-----------------------------------------------------------------------
REPURCHASE AGREEMENT
Collateralized by U.S.
Government Obligations in
a Pooled Cash Account
5.82%, 2/1/95
(Cost $10,548) 10,548 10,548
-----------------------------------------------------------------------
TOTAL INVESTMENTS (97.1%)
(Cost $665,439) 651,806
-----------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (2.9%)
-----------------------------------------------------------------------
Other Assets--Notes C and G 61,893
Liabilities--Note G (42,253)
-------
19,640
-----------------------------------------------------------------------
NET ASSETS (100%)
-----------------------------------------------------------------------
Applicable to 72,753,517 outstanding
$.001 par value shares
(authorized 300,000,000 shares) $671,446
-----------------------------------------------------------------------
NET ASSET VALUE PER SHARE $9.23
=======================================================================
+ See Note A to Financial Statements.
-----------------------------------------------------------------------
AT JANUARY 31, 1995,
NET ASSETS CONSISTED OF:
-----------------------------------------------------------------------
Amount Per
(000) Share
--------- -----
Paid in Capital $686,115 $9.43
Undistributed Net
Investment Income -- --
Accumulated Net
Realized Losses--Note E (1,036) (.01)
Unrealized Depreciation
of Investments--Note F (13,633) (.19)
-----------------------------------------------------------------------
NET ASSETS $671,446 $9.23
-----------------------------------------------------------------------
</TABLE>
THE PORTFOLIO LISTINGS BEGIN ON THE FOLLOWING PAGES:
LONG-TERM U.S. TREASURY PORTFOLIO . . . . . . 1
LONG-TERM CORPORATE PORTFOLIO . . . . . . . . 2
HIGH YIELD CORPORATE PORTFOLIO . . . . . . . 5
INTERMEDIATE-TERM CORPORATE PORTFOLIO . . . . 8
INTERMEDIATE-TERM U.S. TREASURY PORTFOLIO . . 11
SHORT-TERM FEDERAL PORTFOLIO . . . . . . . . 12
SHORT-TERM U.S. TREASURY PORTFOLIO . . . . . 14
SHORT-TERM CORPORATE PORTFOLIO . . . . . . . 15
1
<PAGE> 46
<TABLE>
<CAPTION>
Face Market
LONG-TERM Rating(1) Amount Value
CORPORATE PORTFOLIO (Moody's) (000) (000)+
------------------------------------------------------------------------
<S> <C> <C> <C>
CORPORATE BONDS (77.9%)
------------------------------------------------------------------------
ASSET-BACKED SECURITIES (3.9%)
American Express Master Trust
6.60%, 7/15/99 Aaa $25,000 $23,742
Daimler-Benz Trust
5.95%, 12/15/00 Aaa 11,952 11,740
Ford Credit Auto Loan
6.875%, 1/15/97 Aaa 27,250 26,850
MBNA Master Credit Card Trust
5.40%, 9/30/98 Aaa 25,000 23,078
Nissan Auto Receivables
4.30%, 9/15/97 Aaa 5,375 5,298
Sears, Roebuck & Co. Credit
Card Account Trust
8.60%, 5/15/98 Aaa 10,000 10,128
---------
GROUP TOTAL 100,836
---------
------------------------------------------------------------------------
BANKS & FINANCE (21.7%)
H.F. Ahmanson Co.
8.25%, 10/1/02 Baa1 10,000 9,844
Allstate Corp.
7.50%, 6/15/13 A2 10,000 8,713
AMBAC, Inc.
7.50%, 5/1/23 Aa2 20,000 17,891
Asian Development Bank
9.125%, 6/1/00 Aaa 15,000 15,819
Associates Corp.
5.25%, 9/1/98 A1 16,000 14,630
BankAmerica
7.50%, 10/15/02 A3 5,000 4,745
10.00%, 2/1/03 A3 20,000 21,800
Bank of Boston
6.625%, 12/1/05 Baa2 48,000 41,135
Barnett Banks, Inc.
8.50%, 1/15/07 A3 20,000 19,692
British Telecom Finance
9.625%, 2/15/19 Aaa 17,000 18,129
Chase Manhattan Corp.
6.50%, 1/15/09 A3 10,000 8,119
Chemical Banking Corp.
8.625%, 5/1/02 A3 10,000 10,137
Chrysler Financial Corp.
5.625%, 1/15/99 A3 15,000 13,655
Comerica Bank
7.125%, 12/1/13 A2 10,000 8,605
8.375%, 7/15/24 A2 20,000 18,936
Continental Bank
11.25%, 7/1/01 A2 6,000 6,542
12.50%, 4/1/01 A2 15,000 17,951
European Investment Bank
9.125%, 6/1/02 Aaa 25,000 26,584
First Chicago Corp.
6.375%, 1/30/09 A3 20,000 16,268
First Union Corp.
6.00%, 10/30/08 A3 10,000 7,910
General Electric Capital Corp.
8.125%, 5/15/12 Aaa 42,000 41,546
General Motors
Acceptance Corp. MTN
7.85%, 5/8/97 Baa1 25,000 24,888
8.50%, 1/1/03 Baa1 15,000 14,963
General RE Corp.
9.00%, 9/12/09 Aa1 15,000 15,730
Golden West Financial Corp.
6.00%, 10/1/03 A3 25,000 21,413
International Bank for
Reconstruction &
Development
8.625%, 10/15/16 Aaa 15,000 15,557
8.875%, 3/1/26 Aaa 10,000 10,832
KFW International Finance
8.20%, 6/1/06 Aaa 25,000 24,945
NationsBank Corp.
7.75%, 8/15/04 A3 15,000 14,153
Norwest Corp.
6.65%, 10/15/23 A1 20,000 15,872
Republic New York Corp.
9.70%, 2/1/09 A1 20,000 22,092
Suntrust Bank
7.375%, 7/1/02 A1 10,000 9,570
Transamerica Corp.
9.375%, 3/1/08 A2 10,000 10,389
Wells Fargo & Co.
6.125%, 11/1/03 A3 20,000 17,211
---------
GROUP TOTAL 566,266
---------
------------------------------------------------------------------------
INDUSTRIAL (37.5%)
Alcan Aluminum Ltd.
9.625%, 7/15/19 A2 7,000 7,258
Amoco Canada Petroleum Co.
7.95%, 10/1/22 Aa1 30,000 28,397
Archer-Daniels-Midland
8.375%, 4/15/17 Aa2 25,000 25,080
ARCO Chemical Co.
9.80%, 2/1/20 A3 25,000 28,228
Auburn Hills MI Trust
12.00%, 5/1/20 A3 20,000 27,108
Bristol-Meyers Squibb Co.
7.15%, 6/15/23 Aaa 25,000 22,062
Burlington Resources, Inc.
7.15%, 5/1/99 A3 10,000 9,688
Chevron Corp.
9.375%, 6/1/16 Aa2 25,000 26,115
Coastal Corp.
9.625%, 5/15/12 Baa3 20,000 20,651
Coca-Cola Enterprises, Inc.
8.50%, 2/1/22 A3 20,000 20,124
</TABLE>
2
<PAGE> 47
<TABLE>
<CAPTION>
Face Market
Rating(1) Amount Value
(Moody's) (000) (000)+
------------------------------------------------------------------------
<S> <C> <C> <C>
Dow Capital Corp.
8.70%, 5/15/22 A1 $10,000 $9,817
Dresser Industries, Inc.
6.25%, 6/1/00 A1 9,000 8,311
E.I. du Pont
de Nemours & Co.
8.25%, 1/15/22 Aa2 35,000 34,266
Eastman Chemical Co.
7.25%, 1/15/24 A3 20,000 17,159
Eaton Corp.
7.625%, 4/1/24 A2 15,000 13,610
Exxon Capital Corp.
6.00%, 7/1/05 Aaa 10,000 8,505
Ford Motor Co.
8.875%, 1/15/22 A2 30,000 30,961
General Motors Corp.
9.40%, 7/15/21 Baa1 20,000 21,305
Georgia Pacific Corp.
9.50%, 5/15/22 Baa3 10,000 10,189
9.875%, 11/1/21 Baa3 30,000 31,404
Grand Metropolitan
8.00%, 9/15/22 A2 25,000 23,570
Harcourt General, Inc.
8.875%, 6/1/22 Baa1 25,000 24,826
International Business
Machines Corp.
8.375%, 11/1/19 A3 20,000 19,549
International Paper Co.
8.125%, 6/15/24 A3 24,000 22,815
Johnson & Johnson
8.72%, 11/1/24 Aaa 25,000 25,902
Johnson Controls
8.20%, 6/15/24 A2 10,000 9,555
McDonald's Corp.
7.375%, 7/15/33 Aaa 7,500 6,610
Mead Corp.
8.125%, 2/1/23 A3 15,000 14,348
Mobil Corp.
8.625%, 8/15/21 Aa2 22,000 22,782
Monsanto Co.
8.875%, 12/15/09 A1 20,000 20,918
Morton International
9.25%, 6/1/20 A1 10,000 10,859
Norfolk Southern Corp.
9.00%, 3/1/21 Aa3 15,000 16,059
Northrop-Grumman
9.375%, 10/15/24 Baa3 20,000 20,174
Philips Electronics
7.75%, 4/15/04 A3 10,000 9,564
Phillips Petroleum Co.
9.18%, 9/15/21 Baa2 25,000 25,327
Procter & Gamble Co.
8.50%, 8/10/09 Aa2 10,000 10,171
Procter & Gamble Employee
Stock Option Plan
9.36%, 1/1/21 Aa2 $35,000 $38,388
Rohm & Haas Co.
9.375%, 11/15/19 A1 10,000 10,511
9.80%, 4/15/20 A1 10,000 11,310
Sears, Roebuck & Co.
9.375%, 11/1/11 A2 20,000 21,392
Tele-Communications, Inc.
9.25%, 1/15/23 Baa3 20,000 18,412
Tenneco Credit
9.625%, 8/15/01 Baa2 10,000 10,536
Texaco Capital, Inc.
8.625%, 11/15/31 A1 13,000 13,178
9.75%, 3/15/20 A1 17,000 19,274
TRW, Inc.
9.375%, 4/15/21 A3 4,000 4,302
United Parcel Service
8.375%, 4/1/20 Aaa 35,000 35,525
United Technologies Corp.
8.875%, 11/15/19 A2 20,000 20,693
Wal-Mart Stores, Inc.
7.25%, 6/1/13 Aa1 25,000 22,572
Westvaco Corp.
9.75%, 6/15/20 A1 15,000 16,991
Weyerhaeuser Co.
8.50%, 1/15/25 A2 30,000 30,294
Whirlpool Corp.
9.10%, 2/1/08 A3 20,000 20,907
---------
GROUP TOTAL 977,552
---------
------------------------------------------------------------------------
RAILROAD (.7%)
Consolidated Rail Corp.
7.875%, 5/15/43 A2 20,000 18,470
------------------------------------------------------------------------
TELEPHONE (8.4%)
AT&T Corp.
6.75%, 4/1/04 Aa3 10,000 9,157
8.625%, 12/1/31 Aa3 40,000 39,945
BellSouth Telecommunications
7.50%, 6/15/33 Aaa 25,000 22,206
General Telephone South
9.375%, 6/15/30 A2 20,000 20,458
GTE Florida, Inc.
6.31%, 12/15/02 A2 10,000 8,985
Michigan Bell Telephone Co.
7.85%, 1/15/22 Aa1 20,000 19,276
New Jersey Bell Telephone Co.
8.00%, 6/1/22 Aaa 20,000 19,433
New York Telephone Co.
9.375%, 7/15/31 A2 10,000 10,464
Pacific Bell Telephone Co.
7.125%, 3/15/26 Aa3 15,000 12,906
7.375%, 6/15/25 Aa3 10,000 8,753
</TABLE>
3
<PAGE> 48
<TABLE>
<CAPTION>
Face Market
Rating(1) Amount Value
(Moody's) (000) (000)+
------------------------------------------------------------------------
<S> <C> <C> <C>
Southwestern Bell Telephone Co.
7.25%, 7/15/25 A1 $15,000 $12,973
United Telephone of Florida
9.25%, 9/15/19 A2 15,000 15,006
U.S. West Communications
6.875%, 9/15/33 Aa3 25,000 20,181
---------
GROUP TOTAL 219,743
---------
------------------------------------------------------------------------
UTILITIES (5.7%)
Carolina Power & Light Co.
9.00%, 4/1/22 A2 10,000 10,007
Consolidated Edison Co.
of New York, Inc.
6.375%, 4/1/03 Aa3 20,000 17,901
Duke Power Co.
7.00%, 7/1/33 Aa2 10,000 8,397
Houston Lighting & Power
9.15%, 3/15/21 A2 20,000 21,328
Michigan Consolidated Gas
8.25%, 5/1/14 A2 3,200 3,188
Niagara Mohawk Power Co.
6.875%, 3/1/01 Baa2 8,500 7,668
9.50%, 3/1/21 Baa2 10,000 9,626
Pacific Gas & Electric Co.
8.25%, 11/1/22 A2 25,000 23,921
8.375%, 5/1/25 A2 10,000 9,581
Southern California Edison Co.
9.25%, 6/15/21 A2 19,000 19,180
Texas Utilities Electric Co.
9.75%, 5/1/21 Baa2 5,000 5,279
Virginia Electric & Power Co.
8.75%, 4/1/21 A2 10,000 10,017
Wisconsin Gas Co.
6.60%, 9/15/13 Aa3 2,500 2,128
---------
GROUP TOTAL 148,221
---------
------------------------------------------------------------------------
TOTAL CORPORATE BONDS
(Cost $2,065,256) 2,031,088
------------------------------------------------------------------------
U.S. GOVERNMENT & AGENCY
OBLIGATIONS (19.6%)
------------------------------------------------------------------------
Federal Home Loan
Mortgage Corp.
6.19%, 1/21/04 5,000 4,328
8.14%, 9/29/04 10,000 9,850
Federal National
Mortgage Assn.
6.28%, 2/3/04 25,000 22,102
15.50%, 10/1/12 15 17
Government National
Mortgage Assn.
6.50%, 9/15/23-7/15/24 86,923 76,832
7.00%, 9/15/23 20,221 18,554
Tennessee Valley Authority
7.75%, 12/15/22 $25,000 $23,360
8.625%, 11/15/29 10,000 9,981
U.S. Treasury Bonds
7.125%, 2/15/23 153,000 142,362
7.25%, 5/15/16 75,000 70,828
8.125%, 8/15/19 65,000 67,224
U.S. Treasury Notes
5.875%, 2/15/04 35,000 31,084
7.50%, 11/15/01 35,000 34,869
------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT &
AGENCY OBLIGATIONS
(Cost $548,137) 511,391
------------------------------------------------------------------------
TEMPORARY CASH INVESTMENT (.9%)
------------------------------------------------------------------------
REPURCHASE AGREEMENT
Collateralized by U.S.
Government Obligations in
a Pooled Cash Account
5.82%, 2/1/95
(Cost $23,608) 23,608 23,608
------------------------------------------------------------------------
TOTAL INVESTMENTS (98.4%)
(Cost $2,637,001) 2,566,087
------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (1.6%)
------------------------------------------------------------------------
Other Assets--Notes C and G 96,790
Liabilities--Note G (55,550)
---------
41,240
------------------------------------------------------------------------
NET ASSETS (100%)
------------------------------------------------------------------------
Applicable to 318,702,377 outstanding
$.001 par value shares
(authorized 450,000,000 shares) $2,607,327
------------------------------------------------------------------------
NET ASSET VALUE PER SHARE $8.18
========================================================================
+ See Note A to Financial Statements.
(1) Unaudited.
MTN-Medium-Term Note.
------------------------------------------------------------------------
AT JANUARY 31, 1995,
NET ASSETS CONSISTED OF:
------------------------------------------------------------------------
Amount Per
(000) Share
----------- -----
Paid in Capital $2,697,153 $8.46
Undistributed Net
Investment Income----
Accumulated Net Realized
Losses--Note E (18,912) (.06)
Unrealized Depreciation of
Investments--Note F (70,914) (.22)
------------------------------------------------------------------------
NET ASSETS $2,607,327 $8.18
------------------------------------------------------------------------
</TABLE>
4
<PAGE> 49
<TABLE>
<CAPTION>
Face Market
HIGH YIELD Rating(1) Amount Value
CORPORATE PORTFOLIO (Moody's) (000) (000)+
<S> <C> <C> <C>
------------------------------------------------------------------------
CORPORATE BONDS (84.7%)
------------------------------------------------------------------------
AEROSPACE & DEFENSE (.9%)
K&F Industries
13.75%, 8/1/01 B2 $20,000 $19,100
---------
------------------------------------------------------------------------
BASIC INDUSTRIES (12.1%)
American Standard, Inc.
9.875%, 6/1/01 B1 20,000 19,550
11.375%, 5/15/04 Ba3 20,000 21,000
Auburn Hills MI Trust
12.00%, 5/1/20 A3 15,000 20,330
Cincinnati Milacron
8.375%, 3/15/04 Ba2 11,500 10,638
Coltec Industries
10.25%, 4/1/02 B1 19,000 18,810
Congoleum
9.00%, 2/1/01 B1 6,000 5,550
Dominion Textile (USA), Inc.
8.875%, 11/1/03 Ba3 14,750 13,423
Essex Group
10.00%, 5/1/03 B1 11,000 10,175
EXIDE Corp.
10.75%, 12/15/02 B1 8,000 8,120
JPS Automotive Products
11.125%, 6/15/01 B2 8,000 7,660
Koppers Industries, Inc.
8.50%, 2/1/04 B1 9,000 7,920
Lear Siegler Seating Corp.
8.25%, 2/1/02 B2 13,000 11,375
11.25%, 7/15/00 B2 10,730 10,971
Mark IV Industries
8.75%, 4/1/03 B1 9,500 8,835
Owens Illinois, Inc.
10.00%, 8/1/02 B2 22,000 21,230
10.25%, 4/1/99 B2 23,000 22,770
Reeves Industries, Inc.
11.00%, 7/15/02 Ba3 5,600 5,656
Schuller International Group
10.875%, 12/15/04 Ba3 28,000 28,735
Wolverine Tube, Inc.
10.125%, 9/1/02 Ba3 9,000 9,135
---------
GROUP TOTAL 261,883
---------
------------------------------------------------------------------------
CABLE (8.2%)
Adelphia Communications Corp.
11.875%, 9/15/04 B3 10,000 8,700
Cablevision Systems
9.875%, 2/15/13 B3 15,000 13,950
Century Communications
11.875%, 10/15/03 B2 10,000 10,375
Comcast Corp.
9.50%, 1/15/08 B1 18,750 16,875
10.625%, 7/15/12 B1 27,000 26,730
Continental Cablevision Co.
9.00%, 9/1/08 Ba2 30,000 27,075
11.00%, 6/1/07 B1 15,000 15,263
Rogers Cablesystem
9.625%, 8/1/02 Ba3 12,000 11,430
10.125%, 9/1/12 Ba3 10,000 9,550
Storer Communications, Inc.
10.00%, 5/15/03 B1 8,308 7,768
Tele-Communications, Inc.
9.25%, 4/15/02 Baa3 20,000 20,168
10.125%, 4/15/22 Baa3 10,000 10,197
---------
GROUP TOTAL 178,081
---------
------------------------------------------------------------------------
CHEMICALS (5.0%)
Agricultural Mineral & Chemical
10.75%, 9/30/03 Ba3 13,350 13,517
Arcadian Partner
10.75%, 5/1/01 B2 25,000 24,312
General Chemical
9.25%, 8/15/03 B2 10,000 9,300
Huntsman Corp.
10.625%, 4/15/01 B1 20,000 20,500
11.00%, 4/15/04 B1 10,000 10,450
Sherritt Gordon
10.50%, 3/31/14 B1 9,000 8,618
UCC Investors Holdings
11.00%, 5/1/03 B3 21,000 20,580
---------
GROUP TOTAL 107,277
---------
------------------------------------------------------------------------
COMPUTERS & ELECTRONIC EQUIPMENT (1.3%)
Digital Equipment Corp.
7.125%, 10/15/02 Ba1 25,000 20,893
7.75%, 4/1/23 Ba1 10,000 7,567
---------
GROUP TOTAL 28,460
---------
------------------------------------------------------------------------
CONSUMER GOODS & SERVICES (4.8%)
Dr. Pepper Bottling Co.
10.25%, 2/15/00 B3 2,250 2,272
Kinder Care Learning Centers
10.375%, 6/1/01 Ba3 10,000 10,075
Playtex Family Products
9.00%, 12/15/03 B3 25,000 21,938
Sealy Corp.
9.50%, 5/1/03 B1 6,000 5,670
Sweetheart Cup
9.625%, 9/1/00 Ba3 19,000 17,860
10.50%, 9/1/03 B2 11,000 10,230
Westpoint Stevens
8.75%, 12/15/01 B1 20,000 18,650
9.375%, 12/15/05 B3 20,000 17,950
---------
GROUP TOTAL 104,645
---------
------------------------------------------------------------------------
</TABLE>
5
<PAGE> 50
<TABLE>
<CAPTION>
Face Market
HIGH YIELD Rating(1) Amount Value
CORPORATE PORTFOLIO (Moody's) (000) (000)+
<S> <C> <C> <C>
------------------------------------------------------------------------
ENERGY & RELATED GOODS & SERVICES (3.4%)
Coastal Corp.
8.125%, 9/15/02 Baa3 $15,000 $14,398
Maxus Energy Corp.
9.375%, 11/1/03 B1 15,000 13,050
Noble Drilling
9.25%, 10/1/03 Ba3 10,000 9,525
Santa Fe Energy Resources
11.00%, 5/15/04 B2 8,000 8,020
Seagull Energy Corp.
8.625%, 8/1/05 B1 10,000 8,400
Tosco Corp.
9.625%, 3/15/02 Baa3 3,000 3,075
Transco Energy Corp.
11.25%, 7/1/99 Ba3 15,000 16,050
--------
GROUP TOTAL 72,518
--------
------------------------------------------------------------------------
FINANCIAL SERVICES (3.0%)
American Reinsurance
10.875%, 9/15/04 Baa2 10,000 10,691
Anchor Bancorp
8.938%, 7/9/03 Ba3 8,000 7,040
Coast Federal Bank
13.00%, 12/31/02 Ba2 5,700 6,184
Coast Savings Financial, Inc.
10.00%, 3/1/00 Baa2 5,000 4,713
Dime Bancorp Inc.
10.50%, 11/15/05 BB* 8,000 7,980
First Federal Financial
11.75%, 10/1/04 B2 5,000 4,975
Imperial Credit Industries
9.75%, 1/15/04 B1 7,500 5,775
Riggs National Corp.
8.50%, 2/1/06 Ba3 10,000 9,250
Western Financial Savings
8.50%, 7/1/03 Ba3 10,000 9,000
--------
GROUP TOTAL 65,608
--------
------------------------------------------------------------------------
FOOD & LODGING (2.8%)
ARA Group, Inc.
8.50%, 6/1/03 B1 10,000 9,150
ARA Services, Inc.
10.625%, 8/1/00 Ba2 10,000 10,525
Flagstar Corp.
10.875%, 12/1/02 B2 2,000 1,840
La Quinta Inns
9.25%, 5/15/03 B2 12,000 11,460
Purina Mills
10.25%, 9/1/03 B2 20,000 18,700
Red Roof Inns
9.625%, 12/15/03 B3 8,680 7,986
--------
GROUP TOTAL 59,661
--------
------------------------------------------------------------------------
GROCERY STORES (4.7%)
Kroger Co.
8.50%, 6/15/03 Ba1 $15,000 $14,400
9.75%, 2/15/04 Ba3 10,000 10,225
Pathmark Stores
9.625%, 5/1/03 B2 20,000 17,900
Penn Traffic Co.
9.625%, 4/15/05 B2 8,000 7,120
10.25%, 2/15/02 Ba3 12,000 11,700
10.375%, 10/1/04 Ba3 10,000 9,750
Safeway, Inc.
9.65%, 1/15/04 Ba3 15,000 15,263
10.00%, 12/1/01 Ba3 10,000 10,400
Stop & Shop
9.75%, 2/1/02 Ba2 5,000 5,050
--------
GROUP TOTAL 101,808
--------
------------------------------------------------------------------------
HEALTHCARE (4.0%)
Abbey Healthcare
9.50%, 11/1/02 B1 10,000 9,250
Healthtrust, Inc.
8.75%, 3/15/05 B1 21,000 20,475
10.75%, 5/1/02 B1 7,000 7,507
Hillhaven Corp.
10.125%, 9/1/01 B2 13,830 14,037
Manor Care, Inc.
9.50%, 11/15/02 Ba2 8,000 8,200
OrNda Healthcorp
11.375%, 8/15/04 B2 12,000 12,420
12.25%, 5/15/02 B2 13,000 13,878
--------
GROUP TOTAL 85,767
--------
------------------------------------------------------------------------
HOME BUILDING & REAL ESTATE (1.5%)
Toll Corp.
10.50%, 3/15/02 Ba3 3,075 2,902
Triangle Pacific Corp.
10.50%, 8/1/03 B2 12,000 11,520
Del E. Webb & Co.
9.00%, 2/15/06 B2 10,000 7,775
10.875%, 3/31/00 Ba3 10,000 9,750
--------
GROUP TOTAL 31,947
--------
------------------------------------------------------------------------
MEDIA & COMMUNICATIONS (9.4%)
Act III Broadcast
9.625%, 12/15/03 B3 9,000 8,370
Heritage Media Services
11.00%, 6/15/02 Ba3 2,600 2,652
Infinity Broadcasting
10.375%, 3/15/02 Ba3 15,000 15,075
News America Holdings
10.125%, 10/15/12 Ba1 20,000 20,774
Paging Network
8.875%, 2/1/06 B2 19,000 15,865
</TABLE>
6
<PAGE> 51
<TABLE>
<CAPTION> Face Market
HIGH YIELD Rating(1) Amount Value
CORPORATE PORTFOLIO (Moody's) (000) (000)+
<S> <C> <C> <C>
------------------------------------------------------------------------
Rogers Cantel Mobile
10.75%, 11/1/01 Ba3 $ 17,000 $ 17,128
11.125%, 7/15/02 B2 20,000 20,150
Time Warner, Inc.
9.125%, 1/15/13 Ba1 30,000 27,144
9.15%, 2/1/23 Ba1 35,000 31,224
Turner Broadcasting System
8.375%, 7/1/13 Ba2 30,000 24,461
World Color Press
9.125%, 3/15/03 B1 15,000 13,987
Young Broadcasting
11.75%, 11/14/04 B2 6,000 6,105
--------
GROUP TOTAL 202,935
--------
------------------------------------------------------------------------
METAL (8.3%)
AK Steel Holding Corp.
10.75%, 4/1/04 B1 27,000 26,932
Acme Metal Inc.
12.50%, 8/1/02 B1 8,000 7,920
Armco Steel
9.375%, 11/01/00 B2 12,000 11,040
11.375%, 10/15/99 B2 10,000 10,000
Bethlehem Steel
10.375%, 9/1/03 B1 10,500 10,343
Federal Industries
10.25%, 6/15/00 B3 7,000 6,510
Geneva Steel
9.50%, 1/15/04 B1 13,000 10,920
11.125%, 3/15/01 B1 8,000 7,520
Inland Steel
12.75%, 12/15/02 Ba3 10,000 10,725
Kaiser Aluminum International
9.875%, 2/15/02 B1 15,000 14,063
Magma Copper
12.00%, 12/15/01 Ba3 20,000 21,600
Northwestern Steel & Wire
9.50%, 6/15/01 B1 11,500 10,580
Weirton Steel Corp.
10.875%, 10/15/99 B2 11,000 10,862
11.50%, 3/1/98 B2 7,000 7,035
Wheeling-Pittsburgh Corp.
9.375%, 11/15/03 B1 15,000 13,162
--------
GROUP TOTAL 179,212
--------
------------------------------------------------------------------------
PAPER (10.3%)
Buckeye Cellulose
10.25%, 5/15/01 B2 3,100 2,984
Container Corp. of America
9.75%, 4/1/03 B2 40,000 38,000
Doman Industries, Ltd.
8.75%, 3/15/04 Ba3 11,100 9,796
Domtar Inc.
11.75%, 3/15/99 Ba1 13,250 13,780
12.00%, 4/15/01 Ba1 8,945 9,415
Fort Howard Corp.
8.25%, 2/1/02 B1 10,000 8,950
9.00%, 2/1/06 B2 19,000 16,055
9.25%, 3/15/01 B1 49,500 45,787
Rainy River Forest
10.75%, 10/15/01 Ba3 11,000 11,055
Riverwood International
11.25%, 6/15/02 B1 10,000 10,375
Stone Container
9.875%, 2/1/01 B1 33,000 30,937
10.75%, 4/1/02 B2 14,000 13,405
11.00%, 8/15/99 B2 12,500 12,250
--------
GROUP TOTAL 222,789
--------
------------------------------------------------------------------------
RETAIL STORES (.5%)
Levitz Furniture
9.625%, 7/15/03 B2 10,000 7,250
Musicland Stores
9.00%, 6/15/03 B1 5,000 4,050
--------
GROUP TOTAL 11,300
--------
------------------------------------------------------------------------
TRANSPORTATION (.3%)
Southern Pacific Railroad
9.375%, 8/15/05 Ba3 8,000 7,400
--------
------------------------------------------------------------------------
UTILITIES (4.2%)
First Public Venture Funding
10.15%, 1/15/16 Ba3 20,000 19,225
Long Island Lighting Co.
9.00%, 11/1/22 Ba1 30,000 24,925
Midland Cogeneration Venture
11.75%, 10/26/04 B2 25,000 23,011
Texas Gas Transmission
8.625%, 4/1/04 Baa1 9,775 9,677
Texas-New Mexico Power
10.75%, 9/15/03 B1 13,000 12,805
--------
GROUP TOTAL 89,643
--------
------------------------------------------------------------------------
TOTAL CORPORATE BONDS
(Cost $1,910,731) 1,830,034
------------------------------------------------------------------------
U.S. GOVERNMENT &
AGENCY OBLIGATIONS (8.9%)
------------------------------------------------------------------------
U.S. TREASURY NOTES
4.00%, 1/31/96 25,000 24,313
4.25%, 12/31/95 25,000 24,430
4.375%, 8/15/96 25,000 24,004
4.625%, 2/29/96 25,000 24,406
4.75%, 9/30/98 25,000 22,844
5.125%, 3/31/96 25,000 24,480
5.50%, 4/30/96 25,000 24,543
5.50%, 9/30/97 25,000 23,895
------------------------------------------------------------------------
</TABLE>
7
<PAGE> 52
<TABLE>
<CAPTION>
Face Market
Amount Value
(000) (000)+
<S> <C> <C>
------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT &
AGENCY OBLIGATIONS
(Cost $198,551) $ 192,915
------------------------------------------------------------------------
TEMPORARY CASH INVESTMENT (4.1%)
------------------------------------------------------------------------
Repurchase Agreement
Collateralized by U.S.
Government Obligations in
a Pooled Cash Account
5.82%, 2/1/95
(Cost $88,820) $ 88,820 88,820
------------------------------------------------------------------------
TOTAL INVESTMENTS (97.7%)
(Cost $2,198,102) 2,111,769
------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (2.3%)
------------------------------------------------------------------------
Other Assets--Notes C and G 223,388
Liabilities--Note G (172,857)
---------
50,531
------------------------------------------------------------------------
NET ASSETS (100%)
------------------------------------------------------------------------
Applicable to 298,825,627 outstanding
$.001 par value shares
(authorized 450,000,000 shares) $2,162,300
------------------------------------------------------------------------
NET ASSET VALUE PER SHARE $ 7.24
========================================================================
+See Note A to Financial Statements.
(1)Unaudited.
*Rated by Standard & Poor's.
------------------------------------------------------------------------
AT JANUARY 31, 1995,
NET ASSETS CONSISTED OF:
------------------------------------------------------------------------
Amount Per
(000) Share
---------- -----
Paid in Capital $2,375,077 $ 7.95
Undistributed Net
Investment Income -- --
Accumulated Net Realized
Losses--Note E (126,444) (.42)
Unrealized Depreciation of
Investments--Note F (86,333) (.29)
------------------------------------------------------------------------
NET ASSETS $2,162,300 $7.24
------------------------------------------------------------------------
Intermediate-Term
Corporate Portfolio
------------------------------------------------------------------------
CORPORATE BONDS (65.0%)
------------------------------------------------------------------------
FINANCE--AUTOMOBILE (2.3%)
Chrysler Financial Corp.
6.625%, 8/15/00 A3 $ 1,000 $ 930
12.75%, 11/1/99 A3 750 878
Ford Motor Credit Corp.
7.50%, 6/15/04 A2 1,000 942
7.75%, 11/15/02 A2 1,000 965
--------
GROUP TOTAL 3,715
--------
------------------------------------------------------------------------
FINANCE--BANKS (6.6%)
Chemical Bank
6.70%, 8/15/08 A2 1,000 838
Citicorp
6.75%, 8/15/05 A3 2,000 1,756
First Interstate Bancorp.
10.875%, 4/15/01 A3 1,000 1,117
First USA Bank
5.75%, 1/15/99 Baa3 2,000 1,826
National City Corp.
6.625%, 3/1/04 A2 2,000 1,776
NationsBank Corp.
7.75%, 8/15/04 A3 1,000 944
Republic New York Corp.
7.75%, 5/15/09 A1 1,500 1,424
Security Pacific Corp.
11.00%, 3/1/01 A3 1,000 1,123
--------
GROUP TOTAL 10,804
--------
------------------------------------------------------------------------
FINANCE--CONSUMERS (3.9%)
Beneficial Corp.
6.80%, 9/10/99 A2 1,000 948
Fleet Mortgage Group
6.50%, 9/15/99 A3 1,000 932
Household Affinity Credit
Card Master Trust
5.60%, 5/15/02 Aaa 2,000 1,800
Norwest Financial, Inc.
6.875%, 12/15/99 Aa3 1,000 955
Standard Credit Card
Master Trust
8.25%, 11/7/03 Aaa 1,800 1,807
--------
GROUP TOTAL 6,442
--------
------------------------------------------------------------------------
FINANCE--DIVERSIFIED (4.2%)
Associates Corp. of North America
7.875%, 9/30/01 A1 2,000 1,961
Dean Witter Discover & Co.
6.875%, 3/1/03 A2 1,000 910
General Electric Capital Corp.
8.70%, 2/15/03 Aaa 1,000 1,036
Goldman Sachs Group
7.80%, 7/15/02 A1 1,000 955
</TABLE>
8
<PAGE> 53
<TABLE>
<CAPTION>
Face Market
Rating(1) Amount Value
(Moody's) (000) (000)+
------------------------------------------------------------------------
<S> <C> <C> <C>
Morgan Stanley Group
9.375%, 6/15/01 A1 $1,000 $ 1,043
Charles Schwab
6.06%, 10/2/00 Baa1 1,000 887
--------
GROUP TOTAL 6,792
--------
------------------------------------------------------------------------
INDUSTRIAL (37.3%)
Anheuser Busch Co.
8.75%, 12/1/99 A1 2,300 2,372
Apache Corp.
9.25%, 6/1/02 Baa3 2,000 2,077
Applied Materials
8.00%, 9/1/04 Baa3 2,000 1,948
The Boeing Co.
8.10%, 11/15/06 A1 2,000 1,986
Burlington Resources, Inc.
7.15%, 5/1/99 A3 1,000 969
CSC Enterprises
6.80%, 4/15/99 A3 1,000 953
CSX Corp.
9.50%, 8/1/00 A3 1,000 1,056
Cardinal Health, Inc.
6.50%, 2/15/04 Baa1 1,000 889
The Coca-Cola Co.
7.875%, 9/15/98 Aa3 1,301 1,302
Compaq Computer Corp.
7.25%, 3/15/04 Baa2 2,000 1,842
Crown Cork & Seal
7.00%, 6/15/99 Baa1 1,000 961
R.R. Donnelley & Sons Co.
7.96%, 11/8/99 Aa3 2,000 1,998
Eastman Chemical Co.
6.375%, 1/15/04 A3 1,500 1,316
Federal Express
9.875%, 4/1/02 Baa2 2,000 2,165
General Motors Corp.
8.875%, 6/11/01 Baa1 1,000 1,022
9.22%, 7/18/01 Baa1 1,000 1,039
Hertz Corp.
6.00%, 2/1/01 Baa1 1,000 895
Hoechst-Celanese
6.125%, 2/1/04 A2 2,000 1,747
International Paper Co.
9.70%, 3/15/00 A3 2,000 2,132
Knight-Ridder
9.875%, 4/15/09 A1 3,750 4,289
Eli Lilly & Co.
8.375%, 12/1/06 Aa3 2,000 2,032
Lockheed Corp.
9.375%, 10/15/99 Baa1 1,125 1,177
McDonnell Douglas
9.25%, 4/1/02 Baa3 2,000 2,083
Mobil Corp.
7.25%, 3/15/99 Aa2 2,000 1,956
J.C. Penney Co., Inc.
6.00%, 5/1/06 A1 1,000 838
9.05%, 3/1/01 A1 1,240 1,294
Penske Truck Leasing
7.75%, 5/15/99 Baa3 1,000 978
Philips Petroleum Co.
8.00%, 4/12/99 Baa2 1,000 993
9.00%, 6/1/01 Baa2 1,000 1,034
Sears, Roebuck & Co.
8.52%, 5/13/02 A2 1,000 1,004
Southern Pacific Transportation Co.
8.66%, 1/2/06 Baa1 2,000 1,987
Texaco Capital Corp.
7.70%, 12/15/99 A1 1,065 1,053
Texas Instruments, Inc.
9.00%, 3/15/01 A3 1,600 1,659
Timken Co.
7.30%, 8/13/02 A3 2,500 2,356
Union Carbide Corp.
7.00%, 8/1/99 Baa2 2,000 1,912
Union Oil of California
6.375%, 2/1/04 Baa2 1,000 882
Union Pacific Railroad Co.
6.12%, 2/1/04 Aa1 2,000 1,738
Wal-Mart Stores, Inc.
5.875%, 10/15/05 Aa1 1,000 842
Western Atlas, Inc.
7.875%, 6/15/04 Baa3 2,000 1,924
--------
GROUP TOTAL 60,700
--------
------------------------------------------------------------------------
INSURANCE (2.2%)
CNA Financial
6.25%, 11/15/03 A1 1,000 840
The Equitable Cos., Inc.
6.75%, 12/1/00 BBB+* 1,000 935
Harleysville Group
6.75%, 11/15/03 Baa2 1,000 873
Progressive Corp.
6.60%, 1/15/04 A3 1,000 888
--------
GROUP TOTAL 3,536
--------
------------------------------------------------------------------------
UTILITIES (7.3%)
BellSouth
Telecommunications
6.50%, 2/1/00 Aaa 2,000 1,888
Chesapeake & Potomac
Telephone Co. (MD)
6.00%, 5/1/03 Aa3 2,000 1,761
GTE North Inc.
5.50%, 2/15/99 A1 1,000 914
</TABLE>
9
<PAGE> 54
<TABLE>
<CAPTION>
Face Market
Rating(1) Amount Value
(Moody's) (000) (000)+
------------------------------------------------------------------------
<S> <C> <C> <C>
GTE Southwest
5.82%, 12/1/99 A3 $1,250 $1,140
MCI Communications Corp.
7.50%, 8/20/04 A2 1,500 1,442
New Jersey Telephone Co.
5.875%, 2/1/04 Aaa 1,000 863
NYNEX Corp. Capital Funding
8.75%, 12/1/04 A3 2,000 2,052
Public Service of Colorado
6.00%, 1/1/01 Baa1 1,000 900
Texas Utilities Co.
6.75%, 3/1/03 Baa2 1,000 909
--------
GROUP TOTAL 11,869
--------
------------------------------------------------------------------------
RESERVE-OTHER (1.2%)(2)
Caterpillar Financial Services
6.012%, 5/9/97 A3 1,000 998
Ford Motor Credit Corp.
5.867%, 11/1/97 A2 1,000 999
--------
GROUP TOTAL 1,997
--------
------------------------------------------------------------------------
TOTAL CORPORATE BONDS
(Cost $110,499) 105,855
------------------------------------------------------------------------
U.S. GOVERNMENT & AGENCY
OBLIGATIONS (14.5%)
------------------------------------------------------------------------
FEDERAL NATIONAL MORTGAGE ASSN.
6.90%, 12/25/03 1,772 1,675
GUARANTEED TRADE TRUST
(U.S. Government Guaranteed)
8.17%, 1/15/07 5,000 5,016
U.S. TREASURY BONDS
8.875%, 8/15/17 1,600 1,779
10.375%, 11/15/12 12,500 15,082
------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT &
AGENCY OBLIGATIONS
(Cost $23,827) 23,552
------------------------------------------------------------------------
FOREIGN BONDS (12.6%)
------------------------------------------------------------------------
Australia & New Zealand
Banking Group Ltd.
6.25%, 2/1/04 A2 1,000 868
KFW International Finance
8.20%, 6/1/06 Aaa 3,750 3,742
National Westminster
Bancorp Inc.
9.375%, 11/15/03 Aa3 2,000 2,120
Noranda, Inc.
8.125%, 6/15/04 Baa2 1,510 1,476
8.625%, 7/15/02 Baa2 1,000 1,011
Bank of Nova Scotia
6.25%, 9/15/08 A1 1,000 816
Philips Electronics
8.375%, 9/15/06 A3 1,000 991
Province of Ontario
7.625%, 6/22/04 Aa3 2,000 1,919
Province of Saskatchewan
7.125%, 3/15/08 A3 2,000 1,790
Republic of Ireland
7.875%, 12/1/01 Aa2 2,000 1,978
Republic of Portugal
5.75%, 10/8/03 A1 2,000 1,705
Toronto-Dominion Bank
6.45%, 1/15/09 Aa3 2,500 2,075
------------------------------------------------------------------------
TOTAL FOREIGN BONDS
(Cost $20,840) 20,491
------------------------------------------------------------------------
TAXABLE MUNICIPAL SECURITIES (4.7%)
------------------------------------------------------------------------
Contra Costa County
Pension Obligations
6.30%, 6/1/02 A1 1,000 887
Dade County Aviation Rev.
8.60%, 10/1/02 Aaa 2,000 2,037
Los Angeles County Pension
Obligation
8.42%, 6/30/03 A 2,000 2,000
Mississippi Business
Finance Corp.
(Guaranteed by
Kimberly-Clark)
7.55%, 6/1/04 Aa2 1,000 962
San Diego County
Pension-Obligation
5.85%, 8/15/00 A 2,000 1,739
------------------------------------------------------------------------
TOTAL TAXABLE MUNICIPAL SECURITIES
(Cost $7,997) 7,625
------------------------------------------------------------------------
TEMPORARY CASH INVESTMENT (1.0%)
------------------------------------------------------------------------
REPURCHASE AGREEMENT
Collateralized by U.S.
Government Obligations in
a Pooled Cash Account
5.82%, 2/1/95
(Cost $1,656) 1,656 1,656
------------------------------------------------------------------------
TOTAL INVESTMENTS (97.8%)
(Cost $164,819) 159,179
------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (2.2%)
------------------------------------------------------------------------
Other Assets--Notes C and G 6,105
Liabilities--Note G (2,483)
-------
3,622
------------------------------------------------------------------------
</TABLE>
10
<PAGE> 55
<TABLE>
<CAPTION>
------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSETS (100%)
------------------------------------------------------------------------
Applicable to 17,949,823 outstanding
$.001 par value shares
(authorized 250,000,000 shares) $162,801
------------------------------------------------------------------------
NET ASSET VALUE PER SHARE $9.07
========================================================================
+See Note A to Financial Statements.
(1)Unaudited.
(2)Floating Rate Notes.
*Rated by Standard & Poor's.
<CAPTION>
------------------------------------------------------------------------
AT JANUARY 31, 1995,
NET ASSETS CONSISTED OF:
------------------------------------------------------------------------
Amount Per
(000) Share
-------- -----
<S> <C> <C>
Paid in Capital $171,712 $9.57
Undistributed Net
Investment Income -- --
Accumulated Net
Realized Losses--Note E (3,271) (.18)
Unrealized Depreciation
of Investments--Note F (5,640) (.32)
------------------------------------------------------------------------
NET ASSETS $162,801 $9.07
------------------------------------------------------------------------
<CAPTION>
Face Market
INTERMEDIATE-TERM Amount Value
U.S. TREASURY PORTFOLIO (000) (000)+
------------------------------------------------------------------------
<S> <C> <C>
U.S. GOVERNMENT & AGENCY
OBLIGATIONS (92.7%)
------------------------------------------------------------------------
U.S. TREASURY BONDS
10.375%, 11/15/12 $184,500 $222,610
10.75%, 2/15/03-5/15/03 9,100 10,800
11.625%, 11/15/02-11/15/04 78,550 97,804
11.875%, 11/15/03 20,700 26,218
12.00%, 8/15/13 49,000 66,058
U.S. TREASURY NOTES
5.125%, 11/30/98 11,525 10,623
5.75%, 8/15/03 6,000 5,307
6.25%, 2/15/03 19,425 17,865
6.375%, 8/15/02 95,000 88,498
7.875%, 8/15/01 72,000 73,158
AGENCY FOR INTERNATIONAL
DEVELOPMENT
(U.S. Government Guaranteed)
5.25%, 9/15/00 5,000 4,419
GOVERNMENT EXPORT TRUST
(U.S. Government Guaranteed)
6.00%, 3/15/05 21,354 19,566
7.46%, 12/15/05 36,826 35,777
8.21%, 12/29/06 32,000 32,259
GUARANTEED TRADE TRUST
(U.S. Government Guaranteed)
7.02%, 9/1/04 17,500 16,816
7.80%, 8/15/06 10,762 10,628
8.17%, 1/15/07 9,000 9,028
OVERSEAS PRIVATE INVESTMENT CORP.
(U.S. Government Guaranteed)
5.735%, 1/15/02 22,800 20,883
5.94%, 6/20/06 20,000 17,775
------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT & AGENCY
OBLIGATIONS (Cost $817,714) 786,092
------------------------------------------------------------------------
TEMPORARY CASH INVESTMENT (5.3%)
------------------------------------------------------------------------
REPURCHASE AGREEMENT
Collateralized by U.S.
Government Obligations in
a Pooled Cash Account
5.82%, 2/1/95
(Cost $45,496) 45,496 45,496
------------------------------------------------------------------------
TOTAL INVESTMENTS (98.0%)
(Cost $863,210) 831,588
------------------------------------------------------------------------
</TABLE>
11
<PAGE> 56
<TABLE>
<CAPTION>
Market
Value
(000)+
------------------------------------------------------------------------
<S> <C> <C>
OTHER ASSETS AND LIABILITIES (2.0%)
------------------------------------------------------------------------
Other Assets--Notes C and G $21,766
Liabilities--Note G (5,190)
-------
16,576
------------------------------------------------------------------------
NET ASSETS (100%)
------------------------------------------------------------------------
Applicable to 86,865,754 outstanding
$.001 par value shares
(authorized 250,000,000 shares) $848,164
------------------------------------------------------------------------
NET ASSET VALUE PER SHARE $9.76
========================================================================
+See Note A to Financial Statements.
------------------------------------------------------------------------
AT JANUARY 31, 1995,
NET ASSETS CONSISTED OF:
------------------------------------------------------------------------
<CAPTION>
Amount Per
(000) Share
-------- ------
<S> <C> <C>
Paid in Capital $922,860 $10.62
Undistributed Net
Investment Income -- --
Accumulated Net
Realized Losses--Note E (43,074) (.50)
Unrealized Depreciation
of Investments--Note F (31,622) (.36)
------------------------------------------------------------------------
NET ASSETS $848,164 $9.76
------------------------------------------------------------------------
<CAPTION>
Face Market
SHORT-TERM Amount Value
FEDERAL PORTFOLIO (000) (000)+
------------------------------------------------------------------------
<S> <C> <C>
U.S. GOVERNMENT & AGENCY
OBLIGATIONS (98.5%)
------------------------------------------------------------------------
AGENCY FOR INTERNATIONAL
DEVELOPMENT (ISRAEL)
(U.S. Government Guaranteed)
7.75%, 10/28/96 $20,145 $20,202
FEDERAL HOME LOAN BANK
5.43%, 2/25/99 10,000 9,197
5.80%, 7/25/00(1) 25,000 24,625
5.80%, 10/20/95(1) 25,000 24,965
6.00%, 5/16/97 25,000 24,520
6.25%, 4/21/99 25,000 24,150
6.37%, 6/30/97 22,000 21,395
6.95%, 11/8/96 23,000 22,799
7.64%, 9/21/98 19,900 19,916
8.25%, 5/27/96 5,000 5,055
FEDERAL HOME LOAN MORTGAGE CORP.
6.50%, 10/1/97 11,869 11,620
6.83%, 9/29/97 27,000 26,519
7.00%, 8/3/99 5,100 4,970
(Collateralized Mortgage Obligations)
6.50%, 3/15/00 28,458 26,559
6.75%, 7/15/06 12,800 12,514
FEDERAL NATIONAL MORTGAGE ASSN.
3.00%, 7/13/98 27,000 25,258
4.94%, 10/30/98 20,000 18,194
5.33%, 6/26/98 17,535 16,226
6.00%, 6/27/97 30,000 29,458
6.27%, 4/3/96 9,000 8,925
6.50%, 4/28/99 35,000 34,172
6.52%, 9/8/97 7,500 7,332
6.84%, 10/3/97 23,500 23,096
6.875%, 5/19/99 25,000 24,579
7.09%, 10/14/97 49,450 48,961
7.60%, 1/10/97 9,000 9,014
7.70%, 12/10/96 25,000 25,070
7.80%, 6/10/02 18,200 17,921
8.15%, 8/12/96-5/11/98 40,000 40,416
8.50%, 6/10/96-2/1/05 92,000 92,903
8.632%, 1/1/96 26,500 26,799
8.80%, 7/25/97 25,000 25,640
(Collateralized Mortgage Obligations)
0.00%, 12/25/15 1,119 997
5.50%, 9/25/00 29,337 27,586
6.00%, 9/25/18 4,740 4,563
6.50%, 11/25/20 3,633 3,385
6.90%, 12/25/03 5,918 5,596
7.00%, 5/25/01-4/25/20 50,879 49,143
7.50%, 3/25/05 12,833 12,742
8.00%, 7/25/18 4,800 4,782
9.00%, 6/25/18 8,160 8,231
</TABLE>
12
<PAGE> 57
<TABLE>
<CAPTION>
Face Market
Amount Value
(000) (000)+
------------------------------------------------------------------------
<S> <C> <C>
U.S. TREASURY NOTES
5.125%, 6/30/98 $ 17,000 $ 15,810
6.75%, 2/28/97-5/31/99 47,000 46,206
8.50%, 4/15/97-7/15/97 111,000 113,748
BANAMEX EXPORT FUNDING CORP.
(U.S. Government Guaranteed)
4.91%, 10/15/98 29,352 27,855
6.46%, 4/15/99 21,870 21,266
BANCO NATIONAL DE
COMMERCIO EXTERIOR
(U.S. Government Guaranteed)
5.10%, 4/15/98 8,057 7,732
5.295%, 10/15/97 15,930 15,443
5.48%, 10/15/97 6,300 6,125
5.95%, 4/15/97 8,500 8,352
6.82%, 4/15/99 5,027 4,928
8.038%, 1/15/00 15,000 15,086
BANK LEUMI LE-ISRAEL
(U.S. Export Finance--
U.S. Government Guaranteed)
8.375%, 2/10/96 1,653 1,667
GOVERNMENT EXPORT TRUST
(U.S. Government Guaranteed)
4.61%, 9/1/98 19,200 18,249
4.85%, 11/1/97 21,000 20,235
5.41%, 3/1/99 7,977 7,634
5.69%, 2/1/98 22,833 22,265
5.79%, 1/1/97 6,726 6,610
GUARANTEED EXPORT CERTIFICATES
(U.S. Government Guaranteed)
4.43%, 6/15/98 24,314 23,027
4.743%, 9/15/98 3,005 2,862
4.813%, 12/15/98 16,140 15,334
6.61%, 9/15/99 24,374 23,849
GUARANTEED TRADE TRUST
(U.S. Government Guaranteed)
4.86%, 4/1/98 7,000 6,713
OVERSEAS PRIVATE INVESTMENT CORP.
(U.S. Government Guaranteed)
7.815%, 11/15/01 8,750 8,698
8.75%, 11/15/01 13,125 13,418
8.89%, 11/1/95 3,750 3,786
PRIVATE EXPORT FUNDING CORP.
(U.S. Government Guaranteed)
5.75%, 4/30/98 9,800 9,251
7.125%, 10/31/96 10,000 9,953
8.95%, 10/31/97 7,575 7,818
U.S. EXIM TRUST
(U.S. Government Guaranteed)
5.20%, 8/25/97 21,600 20,981
U.S. GOVERNMENT TRUST CERTIFICATES
(U.S. Government Guaranteed)
7.45%, 10/3/95 6,115 6,124
7.50%, 10/19/97 15,450 15,329
8.00%, 9/27/96 19,617 19,742
8.55%, 11/15/97 26,960 27,315
9.25%, 12/24/95 6,316 6,423
9.40%, 1/10/96 3,002 3,067
------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT &
AGENCY OBLIGATIONS
(Cost $1,485,725) 1,452,896
------------------------------------------------------------------------
TEMPORARY CASH INVESTMENT (.4%)
------------------------------------------------------------------------
REPURCHASE AGREEMENT
Collateralized by U.S.
Government Obligations in
a Pooled Cash Account
5.82%, 2/1/95
(Cost $5,331) 5,331 5,331
------------------------------------------------------------------------
TOTAL INVESTMENTS (98.9%)
(Cost $1,491,056) 1,458,227
------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (1.1%)
------------------------------------------------------------------------
Other Assets--Notes C and G 77,338
Liabilities--Note G (61,400)
-------
15,938
------------------------------------------------------------------------
NET ASSETS (100%)
------------------------------------------------------------------------
Applicable to 150,643,570 outstanding
$.001 par value shares
(authorized 300,000,000 shares) $1,474,165
------------------------------------------------------------------------
NET ASSET VALUE PER SHARE $9.79
========================================================================
+See Note A to Financial Statements.
(1)Floating Rate Note.
------------------------------------------------------------------------
AT JANUARY 31, 1995,
NET ASSETS CONSISTED OF:
------------------------------------------------------------------------
<CAPTION>
Amount Per
(000) Share
---------- ------
<S> <C> <C>
Paid in Capital $1,547,479 $10.28
Undistributed Net
Investment Income----
Accumulated Net
Realized Losses--Note E (40,485) (.27)
Unrealized Depreciation
of Investments--Note F (32,829) (.22)
------------------------------------------------------------------------
NET ASSETS $1,474,165 $9.79
------------------------------------------------------------------------
</TABLE>
13
<PAGE> 58
<TABLE>
<CAPTION>
Face Market
SHORT-TERM Amount Value
U.S. TREASURY PORTFOLIO (000) (000)+
------------------------------------------------------------------------
<S> <C> <C>
U.S. GOVERNMENT & AGENCY
OBLIGATIONS (95.5%)
------------------------------------------------------------------------
U.S. TREASURY NOTES
5.125%, 3/31/98-6/30/98 $221,300 $206,129
5.25%, 7/31/98 90,000 83,897
5.50%, 4/30/96 14,900 14,628
5.75%, 10/31/97 3,000 2,881
5.875%, 5/31/96 17,300 17,038
6.00%, 12/31/97 7,000 6,748
6.50%, 8/15/97 95,000 93,159
6.75%, 6/30/99 18,000 17,480
7.50%, 1/31/96-2/29/96 22,500 22,628
7.625%, 4/30/96 18,000 18,124
7.875%, 2/15/96 45,389 45,800
8.50%, 11/15/95-5/15/97 74,400 76,168
8.75%, 10/15/97 5,000 5,162
BANAMEX EXPORT FUNDING
(U.S. Government Guaranteed)
4.91%, 10/15/98 4,800 4,555
BANCO NATIONAL DE
COMMERCIO EXTERIOR
(U.S. Government Guaranteed)
4.62%, 10/15/98 16,000 15,124
5.95%, 4/15/97 5,400 5,306
6.82%, 4/15/99 6,429 6,303
8.038%, 1/15/00 15,000 15,086
GOVERNMENT EXPORT TRUST
(U.S. Government Guaranteed)
4.85%, 11/1/97 3,000 2,891
5.69%, 2/1/98 8,400 8,191
5.79%, 1/1/97 2,000 1,966
7.75%, 1/1/00 13,333 13,318
GOVERNMENT TRUST
CERTIFICATE (ISRAEL)
(U.S. Government Guaranteed)
8.55%, 11/15/97 2,188 2,217
GUARANTEED EXPORT CERTIFICATES
(U.S. Government Guaranteed)
4.743%, 9/15/98 20,800 19,809
GUARANTEED TRADE TRUST
(U.S. Government Guaranteed)
4.77%, 11/1/97 4,020 3,865
PRIVATE EXPORT FUNDING CORP.
(U.S. Government Guaranteed)
5.65%, 3/15/03 7,140 6,214
SMALL BUSINESS ADMINISTRATION
(U.S. Government Guaranteed)
6.95%, 6/1/97 6,000 5,894
------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT &
AGENCY OBLIGATIONS
(Cost $729,398) 720,581
------------------------------------------------------------------------
TEMPORARY CASH INVESTMENT (4.2%)
------------------------------------------------------------------------
REPURCHASE AGREEMENT
Collateralized by U.S.
Government Obligations in
a Pooled Cash Account
5.82%, 2/1/95
(Cost $31,143) 31,143 31,143
------------------------------------------------------------------------
TOTAL INVESTMENTS (99.7%)
(Cost $760,541) 751,724
------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (.3%)
------------------------------------------------------------------------
Short-Term
U.S. Treasury Portfolio
------------------------------------------------------------------------
Other Assets--Notes C and G 18,462
Liabilities--Note G (15,867)
--------
2,595
------------------------------------------------------------------------
NET ASSETS (100%)
------------------------------------------------------------------------
Applicable to 76,280,778 outstanding
$.001 par value shares
(authorized 250,000,000 shares) $754,319
------------------------------------------------------------------------
NET ASSET VALUE PER SHARE $9.89
========================================================================
+See Note A to Financial Statements.
------------------------------------------------------------------------
AT JANUARY 31, 1995,
NET ASSETS CONSISTED OF:
------------------------------------------------------------------------
<CAPTION>
Amount Per
(000) Share
--------- -------
<S> <C> <C>
Paid in Capital $781,098 $10.24
Undistributed Net
Investment Income -- --
Accumulated Net
Realized Losses--Note E (17,962) (.23)
Unrealized Depreciation
of Investments--Note F (8,817) (.12)
------------------------------------------------------------------------
NET ASSETS $754,319 $9.89
------------------------------------------------------------------------
</TABLE>
14
<PAGE> 59
<TABLE>
<CAPTION>
Face Market
SHORT-TERM Rating(1) Amount Value
CORPORATE PORTFOLIO (Moody's) (000) (000)+
<S> <C> <C> <C>
------------------------------------------------------------------------
CORPORATE BONDS (77.2%)
------------------------------------------------------------------------
FINANCE--AUTOMOBILE (5.4%)
Carco Auto Loan
Master Trust
7.875%, 7/15/99 Aaa $32,000 $32,060
Chase Manhattan Grantor
Trust 1991-A
6.90%, 9/15/97 Aaa 1,510 1,509
Chrysler Financial Corp.
7.44%, 10/20/97 A3 15,000 14,804
8.44%, 12/28/98 A3 25,000 25,136
10.34%, 5/15/96 A3 16,634 17,147
12.75%, 11/1/99 A3 9,250 10,830
Ford Credit 1991-B
Grantor Trust
6.50%, 11/15/96 Aaa 3,749 3,744
Ford Motor Credit Corp.
5.37%, 9/8/98 A2 10,000 9,140
8.875%, 8/1/96 A2 10,410 10,586
9.10%, 7/18/96 A2 5,000 5,110
General Motors
Acceptance Corp.
6.10%, 3/31/97 Baa1 5,000 4,814
8.50%, 12/21/98 Baa1 20,000 20,081
RCSB 1991-B
6.70%, 4/15/97 Aaa 4,573 4,571
--------
GROUP TOTAL 159,532
--------
------------------------------------------------------------------------
FINANCE--BANKS (7.7%)
Capital One Bank
8.625%, 1/15/97 Baa3 16,000 16,103
CoreStates Capital
5.50%, 12/3/96 A1 10,000 9,633
First Fidelity
9.625%, 8/15/99 A3 15,000 15,795
First Interstate Bancorp.
10.50%, 3/1/96 A2 5,000 5,151
First USA Bank
5.75%, 1/15/99 Baa3 10,375 9,471
Huntington National Bank
4.48%, 10/14/96 A1 44,200 41,999
NationsBank Corp.
4.75%, 8/15/96 A2 16,000 15,356
PNC Funding Corp.
4.25%, 1/10/96 A1 10,900 10,605
Provident Bank of Ohio
5.00%, 6/15/96 A3 15,000 14,499
U.S. Bancorp
6.16%, 12/8/95 A2 10,000 9,909
Wachovia Bank
4.25%, 9/20/96 Aa2 $22,000 $20,920
4.47%, 8/26/96 Aa2 20,000 19,130
4.60%, 11/15/96 Aa2 21,000 20,011
5.35%, 11/13/98 Aa2 20,000 18,402
--------
GROUP TOTAL 226,984
--------
------------------------------------------------------------------------
FINANCE--CONSUMERS (10.7%)
Advanta Corp.
5.125%, 11/15/96 Baa3 15,000 14,305
6.84%, 9/23/96 Baa3 15,000 14,735
Bank One Credit Card
Master Trust
7.55%, 12/15/99 Aaa 43,000 42,839
Beneficial Corp.
8.375%, 12/29/99 A2 15,500 15,612
CIT Group Holdings
5.50%, 2/28/97 Aa3 25,000 23,963
5.65%, 11/15/95 Aa3 5,000 4,946
6.00%, 2/15/97 Aa3 42,630 41,971
8.875%, 6/15/96 Aa3 13,250 13,473
Commercial Credit Corp.
6.70%, 8/1/99 A1 5,000 4,723
Countrywide Funding
6.11%, 8/5/96 A3 5,000 4,882
7.85%, 3/3/97 A3 9,800 9,806
Discover Card Master Trust
6.70%, 2/6/00 Aaa 5,000 4,880
First Chicago Master Credit
Card Trust
6.25%, 8/15/99 Aaa 10,500 10,119
First Deposit Credit
Card Trust
6.80%, 11/15/99 Aaa 8,494 8,442
Fleet Mortgage Group
6.08%, 11/24/95 A3 21,800 21,581
MBNA Master Credit
Card Trust
6.20%, 8/15/99 Aaa 10,000 9,634
NationsBank Credit
Card Trust
4.75%, 9/15/98 Aaa 42,500 40,428
Standard Credit Card
Master Trust
8.50%, 8/7/97 Aaa 25,000 25,336
--------
GROUP TOTAL 311,675
--------
------------------------------------------------------------------------
FINANCE--DIVERSIFIED (11.0%)
Associates Corp.
8.25%, 12/1/99 A1 25,000 25,131
8.37%, 12/21/99 A1 19,000 19,144
8.40%, 11/29/99 A1 10,000 10,086
8.625%, 6/15/97 A1 6,000 6,096
</TABLE>
15
<PAGE> 60
<TABLE>
<CAPTION>
Face Market
Rating(1) Amount Value
(Moody's) (000) (000)+
<S> <C> <C> <C>
------------------------------------------------------------------------
Caterpillar Financial Services
4.44%, 10/22/03 A3 $6,500 $6,173
Dean Witter Discover & Co.
5.00%, 4/1/96 A2 23,750 23,099
General Electric
Capital Corp.
4.70%, 11/19/96 Aaa 38,000 36,208
4.84%, 2/10/97 Aaa 10,000 9,491
6.20%, 3/15/97 Aaa 49,695 48,912
Goldman Sachs Group
6.10%, 4/15/98 A1 30,000 28,211
ITT Financial
10.05%, 4/15/96 A3 4,000 4,104
Morgan Stanley Group
6.93%, 3/12/97 A1 24,000 23,716
7.32%, 1/15/97 A1 11,500 11,396
Pitney Bowes Credit Corp.
7.43%, 4/15/97 Aa3 14,000 13,917
Series 1991-A Mortgage Trust
(Prudential Support Agreement)
7.20%, 12/15/02 Aa2 5,534 5,460
Charles Schwab Corp.
5.32%, 10/15/97 Baa1 8,000 7,442
Smith Barney Holdings
5.375%, 6/1/96 A3 19,000 18,448
Transamerica Finance
9.08%, 2/18/97 A2 5,000 5,125
U.S. West Financial Services
8.45%, 4/24/96 A2 18,500 18,716
--------
GROUP TOTAL 320,875
--------
------------------------------------------------------------------------
INDUSTRIAL (31.0%)
Burlington Resources, Inc.
7.15%, 5/1/99 A3 22,500 21,797
CBI Industries
7.53%, 8/26/99 Baa2 15,000 14,634
CSC Enterprises
6.80%, 4/15/99 A3 21,500 20,485
CSX Corp.
9.04%, 2/28/97 A3 8,500 8,707
9.50%, 11/15/95 A3 5,000 5,084
The Coca-Cola Co.
7.875%, 9/15/98 Aa3 18,000 18,014
Compaq Computer Corp.
6.50%, 3/15/99 Baa2 38,500 36,297
Crown Cork & Seal
7.00%, 6/15/99 Baa1 25,900 24,882
RR Donnelley & Sons
7.27%, 10/1/97 Aa3 15,000 14,836
7.96%, 11/8/99 Aa3 40,000 39,961
Federal Express Co.
10.00%, 9/1/98 Baa2 21,050 22,258
10.00%, 4/15/99 Baa2 6,255 6,645
Ford Holdings
9.25%, 7/15/97 A2 $10,000 $10,274
Gannett Co.
5.25%, 3/1/98 Aa3 40,000 37,205
W.R. Grace Co.
6.50%, 12/1/95 Baa3 34,400 34,113
7.09%, 5/12/97 Baa3 5,000 4,903
7.09%, 5/15/97 Baa3 15,000 14,707
Hertz Corp.
9.50%, 3/15/95 A3 5,350 5,364
9.625%, 6/15/96 A3 7,600 7,780
International Paper Co.
7.40%, 3/4/97 A3 10,000 9,924
Kellogg Co.
5.90%, 7/15/97 Aaa 30,565 29,364
Lockheed Corp.
5.65%, 4/1/97 Baa1 30,000 28,708
McDonnell Douglas Corp.
8.10%, 1/27/97 Baa3 10,000 10,039
8.11%, 1/30/97 Baa3 10,000 10,041
8.625%, 4/1/97 Baa3 17,500 17,724
Minnesota Mining &
Manufacturing Co.
6.25%, 3/29/99 Aaa 15,000 14,193
Mobil Oil Corp.
9.17%, 2/29/00 Aa2 74,865 77,374
Penske Truck Leasing
7.75%, 5/15/99 Baa3 10,000 9,783
PepsiCo., Inc.
5.00%, 2/24/97 A1 32,000 30,405
7.875%, 8/15/96 A1 12,500 12,562
Phillips Petroleum Co.
7.66%, 4/9/97 Baa2 5,000 4,982
8.00%, 4/12/99 Baa2 4,000 3,973
Sears, Roebuck & Co.
5.25%, 2/24/97 A2 10,000 9,533
7.36%, 8/15/97 A2 35,000 34,787
8.00%, 3/8/99 A2 5,000 4,979
9.12%, 1/10/97 A2 5,000 5,115
9.25%, 4/15/98 A2 13,100 13,562
Southern Pacific
Transportation Co.
6.92%, 7/2/96 Baa1 7,076 7,012
7.61%, 7/2/98 Baa1 7,873 7,766
Tenneco, Inc.
10.00%, 8/1/98 Baa2 29,500 31,111
Texaco Capital Corp.
6.87%, 6/30/97 A1 30,000 29,404
8.22%, 2/12/97 A1 15,000 15,137
8.65%, 1/30/98 A1 16,750 17,066
9.00%, 11/15/97 A1 8,000 8,219
Texas Instruments, Inc.
9.00%, 7/15/99 A3 15,192 15,443
</TABLE>
16
<PAGE> 61
<TABLE>
<CAPTION>
Face Market
Rating(1) Amount Value
(Moody's) (000) (000)+
------------------------------------------------------------------------
<S> <C> <C> <C>
Union Carbide
7.00%, 8/1/99 Baa2 $12,315 $11,770
Union Oil of California
6.33%, 2/28/97 Baa2 20,000 19,407
6.38%, 2/18/97 Baa2 15,000 14,577
6.625%, 2/28/97 Baa2 15,000 14,638
8.97%, 3/6/98 Baa2 6,000 6,152
Union Pacific Railroad Co.
(Equipment Trust Certificate)
6.99%, 12/24/99 Aa1 10,000 9,780
9.625%, 3/15/02 Aa1 18,350 18,961
United Technologies Corp.
9.625%, 5/15/99 A2 5,000 5,115
--------
GROUP TOTAL 906,552
--------
------------------------------------------------------------------------
INSURANCE (.4%)
The Equitable Cos. Inc.
6.75%, 12/1/00 BBB+* 11,500 10,751
------------------------------------------------------------------------
UTILITIES (7.8%)
AT&T Capital
4.50%, 2/15/96 Aa3 35,000 34,062
4.89%, 8/25/95 Aa3 11,000 10,893
COSO Funding Corp.
7.22%, 6/30/95 Baa3 15,000 14,950
Enron Corp.
8.10%, 12/15/96 Baa2 14,000 14,081
8.50%, 2/1/00 Baa2 10,000 10,000
Florida Gas Transmission
7.75%, 11/1/97 Baa2 6,000 5,962
GTE North, Inc.
5.50%, 2/15/99 A1 18,175 16,612
GTE Southwest
5.82%, 12/1/99 A3 33,650 30,702
MCI Communications Corp.
6.25%, 3/23/99 A2 5,000 4,703
7.625%, 11/7/96 A2 14,250 14,254
NYNEX Corp. Capital Funding
8.01%, 11/1/99 A3 15,000 14,898
Texas Utilities Co.
6.375%, 8/1/97 Baa2 5,000 4,821
9.25%, 12/5/95 Baa3 11,500 11,667
9.39%, 11/21/96 Baa2 5,850 6,009
Wisconsin Electric Power
5.875%, 10/1/97 Aa2 30,000 28,700
Wisconsin Power & Light
6.125%, 7/15/97 Aa2 5,000 4,825
--------
GROUP TOTAL 227,139
--------
------------------------------------------------------------------------
RESERVES--OTHER (3.2%)(2)
Caterpillar Financial Services
6.012%, 5/9/97 A3 21,000 20,958
Ford Motor Credit Corp.
5.868%, 11/1/97 A2 30,000 $29,964
General Motors
Acceptance Corp.
5.976%, 5/6/96 Baa1 30,000 29,960
Goldman Sachs Group
6.025%, 1/25/99 A1 14,000 13,983
--------
GROUP TOTAL 94,865
--------
------------------------------------------------------------------------
TOTAL CORPORATE BONDS
(Cost $2,321,301) 2,258,373
------------------------------------------------------------------------
U.S. GOVERNMENT & AGENCY
OBLIGATIONS (14.2%)
------------------------------------------------------------------------
Federal Home Loan Bank
6.00%, 5/16/97 50,000 49,040
6.25%, 4/21/99 25,000 24,150
Federal Home Loan
Mortgage Corp.
(Collateralized Mortgage
Obligations)
6.75%, 5/15/06 18,000 17,183
7.50%, 5/1/02 1,711 1,703
Federal National Mortgage Assn.
6.00%, 6/27/97 30,000 29,458
6.50%, 4/28/99 90,000 87,871
6.875%, 5/19/99 19,600 19,270
Federal National Mortgage Assn.
(Collateralized Mortgage
Obligations)
7.00%, 8/25/18-5/25/20 45,580 43,452
8.00%, 12/1/02 2,029 2,022
8.95%, 5/25/03 3,019 3,053
Government Export Trust
(U.S. Government Guaranteed)
4.85%, 11/1/97 13,200 12,719
6.61%, 9/15/99 9,375 9,172
Overseas Private Investment Corp.
(U.S. Government Guaranteed)
8.89%, 11/1/95 3,125 3,155
U.S. Treasury Note
7.75%, 11/30/99 112,000 112,927
------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT & AGENCY
OBLIGATIONS (Cost $423,064) 415,175
------------------------------------------------------------------------
TAXABLE MUNICIPAL SECURITIES (1.6%)
------------------------------------------------------------------------
Health Insurance Plan of
Greater New York
10.65%, 7/1/95 A-* 1,525 1,541
Lower Colorado River Auth.
7.375%, 1/1/97 A2 25,000 24,795
</TABLE>
17
<PAGE> 62
<TABLE>
<CAPTION>
Face Market
Rating(1) Amount Value
(Moody's) (000) (000)+
<S> <C> <C> <C>
------------------------------------------------------------------------
Massachusetts Industrial
Finance Agency
9.125%, 8/1/95 A-* $2,015 $2,025
New York City GO
10.00%, 11/15/96 Baa1 6,000 6,131
Sacramento Municipal
Utility Dist.
5.25%, 11/15/96 A2 5,000 4,790
5.625%, 11/15/97 A2 7,000 6,598
------------------------------------------------------------------------
TOTAL TAXABLE MUNICIPAL SECURITIES
(Cost $46,474) 45,880
------------------------------------------------------------------------
FOREIGN BONDS (3.3%)
------------------------------------------------------------------------
Province of Alberta
9.20%, 11/1/97 Aa2 23,000 23,834
Province of Manitoba
6.00%, 10/15/97 A1 30,000 28,737
Noranda, Inc.
8.00%, 6/1/03 Baa2 20,000 19,475
8.625%, 7/15/02 Baa2 15,000 15,159
Kingdom of Spain
9.27%, 11/1/96 Aa2 10,000 10,245
------------------------------------------------------------------------
TOTAL FOREIGN BONDS
(Cost $98,503) 97,450
------------------------------------------------------------------------
TEMPORARY CASH INVESTMENT (3.0%)
------------------------------------------------------------------------
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled Cash Account
5.82%, 2/1/95
(Cost $85,892) 85,892 85,892
------------------------------------------------------------------------
TOTAL INVESTMENTS (99.3%)
(Cost $2,975,234) 2,902,770
------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (.7%)
------------------------------------------------------------------------
Other Assets--Notes C and G 70,260
Liabilities--Note G (48,982)
-------
21,278
------------------------------------------------------------------------
NET ASSETS (100%)
------------------------------------------------------------------------
Applicable to 281,040,381 outstanding
$.001 par value shares
(authorized 400,000,000 shares) $2,924,048
------------------------------------------------------------------------
NET ASSET VALUE PER SHARE $10.40
========================================================================
+See Note A to Financial Statements.
(1)Unaudited.
(2)Floating Rate Notes.
*Rated by Standard & Poor's.
GO--General Obligation.
------------------------------------------------------------------------
AT JANUARY 31, 1995,
NET ASSETS CONSISTED OF:
------------------------------------------------------------------------
<CAPTION>
Amount Per
(000) Share
----------- -------
<S> <C> <C>
Paid in Capital $3,042,080 $10.82
Undistributed Net
Investment Income -- --
Accumulated Net
Realized Losses--Note E (45,568) (.16)
Unrealized Depreciation
of Investments--Note F (72,464) (.26)
------------------------------------------------------------------------
NET ASSETS $2,924,048 $10.40
------------------------------------------------------------------------
</TABLE>
18
<PAGE> 63
Report Of Independent Accountants
To the Shareholders and Board of Directors
Vanguard Fixed Income Securities Fund
Long-Term U.S. Treasury, Long-Term Corporate, High Yield Corporate,
Intermediate-Term Corporate, Intermediate-Term U.S. Treasury, Short-Term
Federal, Short-Term U.S. Treasury and Short-Term Corporate Portfolios
In our opinion, the accompanying statements of net assets and the related
statements of operations and of changes in net assets and the financial
highlights appearing in the Vanguard Fixed Income Securities Fund (the "Fund")
1995 Annual Report (the "Annual Report") present fairly, in all material
respects, the financial position of the Long-Term U.S. Treasury, Long-Term
Corporate, High Yield Corporate, Intermediate-Term Corporate, Intermediate-Term
U.S. Treasury, Short-Term Federal, Short-Term U.S. Treasury, and Short-Term
Corporate Portfolios of the Fund at January 31, 1995, the results of each of
their operations, the changes in each of their net assets and the financial
highlights for each of the respective periods presented, in conformity with
generally accepted accounting principles. These financial statements and
financial highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits, which included confirmation of securities at January 31, 1995 by
correspondence with the custodians and brokers and the application of
alternative auditing procedures where confirmations from brokers were not
received, provide a reasonable basis for the opinion expressed above.
We have also audited the financial statements of the GNMA Portfolio of the Fund
at January 31, 1995, and we have issued an unqualified opinion thereon. The
Annual Report containing our report on the financial statements of the GNMA
Portfolio is available from the Fund.
PRICE WATERHOUSE LLP
Thirty South Seventeenth Street
Philadelphia, Pennsylvania 19103
March 3, 1995
19
<PAGE> 64
EDGAR APPENDIX
This appendix describes the components of the printed version of this
report that do not translate into a format acceptable to the EDGAR system.
The front cover of the printed version of this report features the
Vanguard ship in the crashing sea.
A small picture of a rear view of the Vanguard ship crashing through
the sea appears at the top of the inside covers of the report.
A running head featuring a sextant appears on pages one through
eleven.
A photograph of John C. Bogle appears at the lower-right of page one.
A line chart comparing the month-end yields of a 30-Year U.S. Treasury
Bond, a 10-Year U.S. Treasury Bond, and a 3-Year U.S. Treasury Note for the
fiscal years 1991 to 1995 appears at the upper-left of page two.
A bar chart depicting Annual Total Returns on Ten-Year U.S. Treasury
Bonds for the calendar years 1950-1994 appears at the top of page five.
Cumulative performance line charts for the nine portfolios of Vanguard
Fixed Income Securities Fund, including average annual total returns,
appear on pages seven through eleven.
A running head featuring a coiled rope appears on page twelve.
A running head featuring a map and telescope appears on pages thirteen
through sixteen.
A running head featuring a lantern appears on pages seventeen through
twenty-one.
A running head featuring a log book and pen appears on pages twenty-
two through thirty-nine, as well as pages one, two, five, eight, eleven,
twelve, fourteen and nineteen of the insert which is included as part of
the annual report.
A running head featuring a compass appears on page forty.
At the bottom of the back cover there appears a triangle with the
sides labeled "risk," "cost," and "return."
A seagull in flight is featured at the top of the outside back cover
of the report.
