<PAGE> 1
VANGUARD
FIXED INCOME
SECURITIES FUND
Semiannual Report - July 31, 1998
[PHOTO]
[THE VANGUARD GROUP LOGO]
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OUR CREW MAKES THE DIFFERENCE
Throughout our history, The Vanguard Group has received considerable attention
as the low-cost provider of mutual funds. While such accolades are gratifying,
we are most proud, not of our low operating expenses or the billions of dollars
we manage, but of our sterling reputation created by the Vanguard crew.
We recognize that it is our crew members--more than 7,000 highly
motivated men and women--who form the cornerstone of our operations. We could
not survive long--let alone prosper--without them. That's why we chose this
fiscal year's fund reports to celebrate the spirit, enthusiasm, and achievements
of our crew. (We call those who work at Vanguard crew members, not employees,
because they operate as a team to accomplish our mission of serving you, our
clients.)
But while we prize the collective contributions of our crew, we also take
time to recognize the importance of the individual. Each calendar quarter, we
present our Award For Excellence to a handful of crew members who have
demonstrated particular excellence in the performance of their jobs and who
embody "The Vanguard Spirit." Our report cover shows only a few of the more than
300 crew members who have received this distinction since 1984.
They, along with the rest of our valiant crew, look forward to serving
you in the years ahead.
[PHOTO] [PHOTO]
John C. Bogle John J. Brennan
Senior Chairman Chairman & CEO
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CONTENTS
<S> <C>
A MESSAGE TO OUR SHAREHOLDERS .......................................... 1
THE MARKETS IN PERSPECTIVE ............................................. 7
REPORTS FROM THE ADVISERS .............................................. 9
PERFORMANCE SUMMARIES .................................................. 13
PORTFOLIO PROFILES ..................................................... 18
FINANCIAL STATEMENTS ................................................... 28
</TABLE>
All comparative mutual fund data are from Lipper Analytical Services, Inc., or
Morningstar unless otherwise noted.
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FELLOW SHAREHOLDER,
Interest rates held relatively steady during the first half of Vanguard
Fixed Income Securities Fund's fiscal year, an environment in which the return
of each of our nine portfolios was essentially equal to its rate of interest
income. During the six months ended July 31, 1998, total returns ranged from
+2.3% for our Short-Term U.S. Treasury Portfolio to +3.5% for our Long-Term U.S.
Treasury and High Yield Corporate Portfolios. Each portfolio's return topped
that of its average mutual fund peer and was in line with the segment of the
bond market that it represents.
The adjacent table presents the six-month total return (capital change
plus reinvested dividends) for each portfolio compared with that of its average
mutual fund competitor.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
TOTAL RETURNS
SIX MONTHS ENDED JULY 31, 1998
---------------------------------
VANGUARD PEER GROUP
PORTFOLIO PORTFOLIO AVERAGE
- --------------------------------------------------------------------------------
<S> <C> <C>
Short-Term U.S. Treasury +2.3% +2.2%
Short-Term Federal +2.4 +2.1
Short-Term Corporate +2.6 +2.3
- --------------------------------------------------------------------------------
Intermediate-Term U.S. Treasury +2.4% +2.0%
Intermediate-Term Corporate +2.6 +2.5
GNMA +2.8 +2.5
- --------------------------------------------------------------------------------
Long-Term U.S. Treasury +3.5% +2.5%
Long-Term Corporate +3.2 +2.5
- --------------------------------------------------------------------------------
High Yield Corporate +3.5% +3.1%
- --------------------------------------------------------------------------------
Short-Term Corporate-
Institutional Shares +2.7% +2.3%
- --------------------------------------------------------------------------------
</TABLE>
Details on each portfolio, including per-share net asset values, income
dividends, and any capital gains distributions, are presented in the table that
follows this letter. The table also lists the portfolios' annualized yields,
which on July 31 ranged from 5.38% for our Short-Term U.S. Treasury Portfolio to
8.13% for our High Yield Corporate Portfolio. It's important to note that
semiannual returns for bond funds account for only half of the year's interest
income, while price changes occur immediately in response to changes in interest
rates. Over the long run, however, interest income accounts for virtually all of
the total return of a bond fund. For this reason, we think it's useful to
present a full year's interest income. The table on page 2 presents each
portfolio's return for the past twelve months, divided into its income and
capital components.
It illustrates the impact of the fall in interest rates over the past
twelve months, which was most significant--as you would expect--for the
Long-Term U.S. Treasury Portfolio. During the period, yields on 30-year and
10-year Treasuries declined about 50 basis points (0.50 percentage point). Price
fluctuations engendered by interest rate changes, to be sure, can either add to,
or subtract from, the income return.
THE PERIOD IN REVIEW
For most of the six months ended July 31, 1998, optimism prevailed in U.S.
financial markets. The domestic economy grew at a robust rate, yet inflation and
interest rates remained stable at relatively low levels, making the United
States seem somewhat insulated from severe economic problems in Asia, Russia,
and several emerging markets. In fact, Asia's storm clouds had a silver lining
for U.S. investors. Interest rates and inflation
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were held down by lower commodity prices and by the dollar's steep rise against
a number of currencies, which reduced costs of imported goods. This turmoil
drove capital to the "safe haven" of dollar- denominated assets, helping keep
U.S. interest rates low.
The yield on the benchmark 30-year U.S. Treasury bond ranged from 5.57%
to 6.07% during the half-year, and ended the period at 5.71%, 9 basis points
below the 5.80% yield that prevailed on January 31. Similarly, the yield on
3-month Treasury bills declined from 5.18% on January 31 to 5.07% on July 31.
The yield on 3-year Treasuries, however, rose 13 basis points to 5.46% at the
end of the six months.
<TABLE>
<CAPTION>
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COMPONENTS OF TOTAL RETURNS
TWELVE MONTHS ENDED JULY 31, 1998
---------------------------------------
INCOME CAPITAL TOTAL
RETURN RETURN RETURN
- -----------------------------------------------------------------------
<S> <C> <C> <C>
SHORT-TERM PORTFOLIOS
U.S. Treasury +5.8% +0.2% + 6.0%
Federal +6.1 -0.1 + 6.0
Corporate +6.3 0.0 + 6.3
- -----------------------------------------------------------------------
INTERMEDIATE-TERM PORTFOLIOS
U.S. Treasury +6.3% +1.6% + 7.9%
Corporate +6.6 +0.6 + 7.2
GNMA +7.0 +0.5 + 7.5
- -----------------------------------------------------------------------
LONG-TERM PORTFOLIOS
U.S. Treasury +6.6% +5.2% +11.8%
Corporate +7.0 +2.4 + 9.4
- -----------------------------------------------------------------------
HIGH YIELD CORPORATE +8.8% +0.7% + 9.5%
- -----------------------------------------------------------------------
</TABLE>
Though it may have seemed a ho-hum half-year in the bond market, it was a
mercurial six months for stocks. On balance, the Standard & Poor's 500 Composite
Stock Price Index rose sharply, returning +15.2% during the six months. However,
as the period progressed, an ever-narrower segment of giant blue chips was
carrying the load. The Wilshire 4500 Index, which represents the U.S. stock
market beyond the S&P 500 Index, earned +4.7% during the period, and the Russell
2000 Index of small stocks had a negative return of -2.0%.
As noted earlier, the total returns for the portfolios of Vanguard Fixed
Income Securities Fund consisted primarily of their interest earnings during the
six months. The return of our Long-Term U.S. Treasury Portfolio received a wee
boost from the slight decline in interest rates during the half-year, while our
Long-Term Corporate Portfolio felt no price impact. The remainder of our
portfolios saw their six-month total returns slightly diminished by tiny
negative capital returns, reflecting the minor uptick in interest rates in the
shorter- to intermediate-term segments of the bond market. For more detailed
information on capital and income returns for each portfolio, see the
Performance Summaries beginning on page 13.
On a relative basis, it was a very good six months for Vanguard Fixed
Income Securities Fund. Each portfolio's return outpaced that of its average
peer--by a full percentage point in the case of our Long-Term U.S. Treasury
Portfolio. Generally, we have held portfolios with maturities that are slightly
longer than those of our peers, which aids us when interest rates are stable or
falling, as in the latest half-year, just as it works to our detriment when
rates are rising. In addition, the returns of our portfolios closely tracked
those of their relevant benchmark indexes, as shown by the Performance Summaries
later in this report. This is a notable achievement, given that our portfolios
incur operating expenses and transaction costs (at an extremely low level) that
the indexes do not.
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IN SUMMARY
Bond returns fell short of stock returns during the past six months, just as
they have for the better part of the past decade. But bonds have played
important roles in balanced portfolios--and will continue to do so in the
future--by providing regular interest income and cushioning the volatility of
the stock market. For this reason we urge you to construct and maintain a
diversified portfolio that is suited to your objectives, time horizon, and
tolerance for risk. We look forward to reporting to you in further detail in our
annual report six months hence.
/s/ JOHN C. BOGLE /s/ JOHN J. BRENNAN
John C. Bogle John J. Brennan
Senior Chairman Chairman and
Chief Executive Officer
August 19, 1998
<TABLE>
<CAPTION>
PORTFOLIO STATISTICS
- -------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE
PER SHARE SIX MONTHS TWELVE MONTHS SEC
------------------- -------------------------- -------------------------- 30-DAY
JAN. 31, JUL. 31, INCOME CAPITAL GAINS INCOME CAPITAL GAINS ANNUALIZED
PORTFOLIO 1998 1998 DIVIDENDS DISTRIBUTION DIVIDENDS DISTRIBUTION YIELD
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Short-Term U.S. Treasury $10.27 $10.23 $0.276 -- $0.574 -- 5.38%
Short-Term Federal 10.19 10.14 0.293 -- 0.600 -- 5.64
Short-Term Corporate 10.87 10.82 0.330 -- 0.666 -- 5.93
Short-Term Corporate-
Institutional Shares 10.87 10.82 0.337 -- 0.566* -- 6.05
- -------------------------------------------------------------------------------------------------------------------------
Intermediate-Term
U.S. Treasury $10.80 $10.74 $0.316 -- $0.641 -- 5.47%
Intermediate-Term
Corporate 10.03 9.96 0.315 $0.015 0.636 $0.026 6.24
GNMA 10.48 10.42 0.348 0.002 0.707 0.002 6.51
- -------------------------------------------------------------------------------------------------------------------------
Long-Term U.S. Treasury $10.79 $10.84 $0.318 -- $0.640 -- 5.62%
Long-Term Corporate 9.32 9.24 0.294 $0.082 0.602 $0.153 6.32
- -------------------------------------------------------------------------------------------------------------------------
High Yield Corporate $ 8.17 $ 8.12 $0.332 -- $0.680 -- 8.13%
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Income dividends since operations commenced, September 30, 1997.
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<PAGE> 6
Notice to Shareholders
At a special meeting on May 29, 1998, shareholders of Vanguard Fixed Income
Securities Fund overwhelmingly approved four proposals. (For the Short-Term U.S.
Treasury Portfolio, the meeting was on July 31, 1998.) The proposals and voting
results were:
1. REORGANIZATION INTO A DELAWARE BUSINESS TRUST. This change will reduce the
amount of state taxes the fund pays annually by approximately $2,187,000 at
current asset levels. Approved as follows:
<TABLE>
<CAPTION>
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PORTFOLIO FOR AGAINST ABSTAIN APPROVED BY
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Short-Term U.S. Treasury 46,608,992 986,321 2,137,566 93.72%
--------------------------------------------------------------------------------------------
Short-Term Federal 79,053,833 887,211 1,188,383 97.44%
--------------------------------------------------------------------------------------------
Short-Term Corporate 278,306,132 3,776,738 3,108,343 97.59%
--------------------------------------------------------------------------------------------
Intermediate-Term
U.S. Treasury 80,027,400 3,506,033 3,028,713 92.45%
--------------------------------------------------------------------------------------------
Intermediate-Term
Corporate 51,037,188 463,058 566,117 98.02%
--------------------------------------------------------------------------------------------
GNMA 566,040,928 6,317,236 11,379,946 96.97%
--------------------------------------------------------------------------------------------
Long-Term U.S. Treasury 57,046,997 583,213 1,580,180 96.35%
--------------------------------------------------------------------------------------------
Long-Term Corporate 274,250,508 2,678,147 3,883,587 97.66%
--------------------------------------------------------------------------------------------
High Yield Corporate 371,892,047 4,339,971 5,626,044 97.39%
--------------------------------------------------------------------------------------------
</TABLE>
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2a. INVESTMENT LIMITATION CHANGES--INTERFUND LENDING PROGRAM. This change
permits Vanguard Fixed Income Securities Fund to participate in Vanguard's
interfund lending program, which allows funds to lend money to each other
if--and only if--it makes good financial sense to do so on both sides of the
transaction. The interfund lending program won't be an integral part of the
fund's investment program; it is a contingency arrangement for managing unusual
cash flows. Approved as follows:
<TABLE>
<CAPTION>
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PORTFOLIO FOR AGAINST ABSTAIN APPROVED BY
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Short-Term U.S. Treasury 44,522,552 2,498,972 2,711,354 89.52%
--------------------------------------------------------------------------------------------
Short-Term Federal 77,216,566 2,133,839 1,779,023 95.18%
--------------------------------------------------------------------------------------------
Short-Term Corporate 273,895,374 6,811,854 4,483,984 96.04%
--------------------------------------------------------------------------------------------
Intermediate-Term
U.S. Treasury 80,634,790 2,320,977 3,606,380 93.15%
--------------------------------------------------------------------------------------------
Intermediate-Term
Corporate 50,053,559 1,279,519 733,285 96.13%
--------------------------------------------------------------------------------------------
GNMA 549,935,292 18,024,679 15,778,139 94.21%
--------------------------------------------------------------------------------------------
Long-Term U.S. Treasury 54,626,417 2,217,597 2,366,377 92.26%
--------------------------------------------------------------------------------------------
Long-Term Corporate 267,940,925 7,376,929 5,494,391 95.42%
--------------------------------------------------------------------------------------------
High Yield Corporate 364,952,642 9,115,521 7,789,900 95.57%
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</TABLE>
(continued on next page)
5
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2b. INVESTMENT LIMITATION CHANGES--BORROWING MONEY AND PLEDGING ASSETS. This
change sets standard limits of 15% of net assets on the amount of money Vanguard
funds can borrow from all sources and the amount of assets that can be pledged
to secure any loans. Approved as follows:
<TABLE>
<CAPTION>
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PORTFOLIO FOR AGAINST ABSTAIN APPROVED BY
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Short-Term U.S. Treasury 43,740,395 3,658,850 2,333,632 87.95%
--------------------------------------------------------------------------------------------
Short-Term Federal 76,269,339 2,838,548 2,021,540 94.01%
--------------------------------------------------------------------------------------------
Short-Term Corporate 269,610,327 8,801,849 6,779,035 94.54%
--------------------------------------------------------------------------------------------
Intermediate-Term
U.S. Treasury 80,893,666 3,785,432 1,883,048 93.45%
--------------------------------------------------------------------------------------------
Intermediate-Term
Corporate 49,461,013 1,742,926 862,424 95.00%
--------------------------------------------------------------------------------------------
GNMA 540,878,318 24,502,927 18,356,864 92.66%
--------------------------------------------------------------------------------------------
Long-Term U.S. Treasury 53,810,360 3,138,963 2,261,068 90.88%
--------------------------------------------------------------------------------------------
Long-Term Corporate 264,302,917 10,257,053 6,252,273 94.12%
--------------------------------------------------------------------------------------------
High Yield Corporate 360,120,586 12,675,731 9,061,746 94.31%
--------------------------------------------------------------------------------------------
</TABLE>
2e. INVESTMENT LIMITATION CHANGES--INVESTMENTS IN BOND FUTURES AND OPTIONS. This
change permits Vanguard Fixed Income Securities Fund-Short-Term Federal
Portfolio to invest in bond futures and options in order to manage its cash
reserves, risk, and transaction costs. Approved by 92.69% of the shares voted,
as follows:
<TABLE>
<CAPTION>
------------------------------------------------
FOR AGAINST ABSTAIN
------------------------------------------------
<S> <C> <C>
75,194,966 3,888,541 2,045,920
------------------------------------------------
</TABLE>
6
<PAGE> 9
THE MARKETS IN PERSPECTIVE
Six Months Ended July 31, 1998
The U.S. financial markets turned in a generally solid performance during the
six months ended July 31, 1998. Interest rates held fairly steady, so bond
prices were little changed. The stock market advanced, with large-capitalization
stocks gaining the most.
The economy's rapid expansion early in 1998--when it grew at a 5.5%
pace--cooled down a bit in the spring and early summer. Even so, the nation was
producing 3.5% more goods and services during the April-June quarter of 1998
than during the same period a year earlier. Americans kept the economy humming
by continuing to spend, or as economists say, consume. Consumption spending was
5.2% higher in the April-June quarter than a year before, and the savings rate
plunged to a microscopic 0.2% in June, meaning that consumers in aggregate spent
an incredible 99.8% of after-tax, or disposable, income. Their ebullience was
not without foundation--unemployment hovered around 4.5% during the period;
wages were rising (personal income in June was 5% higher than in June 1997); and
inflation was tame (consumer prices in July were up only 1.7% from a year
before).
Consumers gave the economy more than enough momentum to offset the drag
caused by Asia's economic problems, which have been unexpectedly severe and
long-lasting. Asia's weakened currencies and shrinking economies have reduced
U.S. exports and cut the cost of Asian imports, sending the U.S. trade deficit
to record levels. However, the "Asian contagion" also has lessened the
inflationary pressures in the U.S. economy.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
TOTAL RETURNS
PERIODS ENDED JULY 31, 1998
--------------------------------------
6 MONTHS 1 YEAR 5 YEARS*
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
EQUITY
S&P 500 Index 15.2% 19.3% 22.9%
Russell 2000 Index -2.0 2.3 13.8
MSCI EAFE Index 12.1 5.8 9.8
- --------------------------------------------------------------------------------
FIXED-INCOME
Lehman Aggregate Bond Index 2.8% 7.9% 6.8%
Lehman 10-Year Municipal Bond Index 1.6 5.7 6.6
Salomon Smith Barney 3-Month
U.S. Treasury Bill Index 2.6 5.2 5.0
- --------------------------------------------------------------------------------
OTHER
Consumer Price Index 1.0% 1.7% 2.5%
- --------------------------------------------------------------------------------
</TABLE>
*Annualized.
U.S. EQUITY MARKETS
Favorable economic conditions led to a continued rise in U.S. stock prices.
Although market averages set records, the advance was not uniform. Large-cap
growth stocks led the way, while small-cap stocks trailed well behind. However,
sentiment seemed to change abruptly in mid-July, and stock prices tumbled during
the final two weeks of the half-year. Problems that investors had shrugged off
earlier in the year--such as Asia's crises and a slowing in the growth of
corporate earnings--were now accorded greater weight. On balance, the
large-cap-dominated S&P 500 Index earned 15.2% during the six months, far above
the 4.7% return of the rest of the market (as measured by the Wilshire 4500
Index) and a remarkable 17.2 percentage points above the return of the small-cap
Russell 2000 Index, which declined 2.0%. There also was a wide disparity within
the S&P 500, as its growth-stock component rose 19.0%, well above the 11.1%
return on its value stocks.
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<PAGE> 10
The rise in large-cap stock prices occurred despite lackluster growth in
corporate earnings--less than 5% for the stocks in the S&P 500. July was the
11th consecutive month in which securities analysts lowered their forecasts for
corporate earnings in 1998, according to I/B/E/S International, a financial
research group. It takes optimism for investors to reconcile sluggish earnings
growth with record price/earnings ratios on stocks, and some of that optimism
seemed to evaporate during late July.
Technology was the market's best-performing sector during the period,
with a 28% return. Other sector leaders included auto and transportation (up
24%), consumer discretionary (up 21%), and financial services (up 19%). Among
the laggards were companies hurt by falling commodity prices, such as
oil-services and oil-drilling firms and makers of paper, chemicals, and steel.
Prices also declined for companies seen as vulnerable to the stronger dollar,
including manufacturers of aircraft and construction equipment.
U.S. FIXED-INCOME MARKETS
Interest rates fluctuated within a band of roughly half a percentage point
during the six months, ending the period little changed. The 2.8% total return
of the Lehman Aggregate Bond Index during the half-year brought its return for
the 12 months ended July 31 to 7.9%, a generous 6.2% return above inflation. The
yield on 30-year U.S. Treasury bonds declined by 9 basis points (0.09 percentage
point) to 5.71% during the six months. Yields were slightly higher (13 basis
points) on 3-year Treasury notes, while the yield on 3-month Treasury bills
declined on balance by 11 basis points to 5.07%. Mild inflation kept the bond
market stable despite the economy's strong growth.
Yields rose a bit on corporate bonds and mortgage-backed securities,
which therefore had slight price declines and underperformed Treasury bonds.
Treasuries benefited to some degree from a "flight to quality" among some
investors, whereas corporate bond prices were weighed down by a large supply of
newly issued bonds. Mortgage-backed securities lagged Treasuries largely because
of expectations that many homeowners would pay off old, higher-coupon mortgage
loans and refinance with new, lower-rate loans.
INTERNATIONAL EQUITY MARKETS
Europe's bull market in stocks galloped upward, while stocks in Asia and most
emerging markets registered significant declines in U.S. dollar terms. Overall,
international markets gained 12.1% in U.S. dollars, as measured by the Morgan
Stanley Capital International Europe, Australasia, Far East Index.
Europe's bourses, which as a group rose 22.3% in local currencies, rose
23.9% in U.S. dollars, thanks to a slight strengthening of most European
currencies against the dollar. Stocks benefited from optimism about economic
growth throughout the continent and the impending adoption by 11 countries of
the euro as a single European currency. Markets were also buoyed by signs of a
new corporate emphasis on increasing shareholder value.
The mood in most Asian and emerging stock markets was decidedly downbeat
as Japan--which had been counted on as the engine to propel the region's
weakened economies--itself fell into recession. Japanese stocks--which rose
slightly in yen but fell 11.7% in U.S.-dollar terms--were actually Asia's bright
spot during the period. Declines were worse in Singapore (-16.7%), Hong Kong
(-20.6%), and Malaysia (-29.6%), and the Pacific markets as a group were down
- -12.4%. Stock prices also tumbled for oil producers Mexico (-10.7%) and
Venezuela (-38.5%). Despite gains in some eastern European countries, emerging
markets on balance declined 7.5% during the half-year.
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<PAGE> 11
REPORT FROM VANGUARD FIXED INCOME GROUP
Short-Term U.S. Treasury, Federal, and Corporate Portfolios;
Intermediate-Term U.S. Treasury and Corporate Portfolios; and
Long-Term U.S. Treasury Portfolio
The half-year ended July 31, 1998, was a period of relatively
mind-numbing tranquillity in the bond markets. Yields were little changed
point-to-point, and equally placid from month-to-month-to-month. In short, it
was a yawner. The portfolios of Vanguard Fixed Income Securities Fund generally
produced total returns consistent with six months' income, with very minor
hiccups in principal value. For long-term investors, this is precisely what the
doctor ordered; steady, positive, attractive nominal and real rates of interest
acting as a welcome counterbalance to the adrenaline-pumping gyrations of the
equity asset classes.
At present, we are witnessing a rare confluence of opposing forces so
evenly balanced that they appear to foster stability in the bond markets.
Principal among these are two: the economic crisis in Asia and the exuberant
confidence of Americans.
The Asian crisis has spread and began, with the April-June quarter, to
noticeably affect manufacturing in the United States. The weakening of the
economies of Japan, South Korea, Hong Kong, Thailand, Indonesia, Malaysia, and
the other countries along the Pacific Rim created turmoil in their currency and
stock markets, and is now producing secondary effects on their trade with each
other and with this country. The U.S. dollar has appreciated dramatically
against most Asian currencies, thereby making American-made goods much more
expensive there while making Asian products cheaper here. The weakening of Asian
economies also reduces demand within the region, further shrinking the market
for U.S. goods and services. Economists estimate that the resulting increase in
the U.S. trade deficit reduced the annual growth rate of U.S. gross domestic
product by about 2 percentage points during the first half of 1998. As all these
inter- related forces play out, the bottom line for bondholders is bullish.
Asian economic weakness beneficially influences our domestic inflation, widens
our trade gap, and, in so doing, takes some excess steam out of the quite robust
U.S. economy.
Although the drag caused by Asia is strong, for now it seems to be
counterbalanced by equally strong and resilient demand in the United States.
Economic conditions here remain about as good as they can get. The nation enjoys
full employment and jobs are being created at a rapid pace, indeed far beyond
the demographic capacity of the population to fill them. Consumer confidence is
at or near all-time highs, and the stock market's historic boom creates a
"wealth effect." Rising stock prices make people feel wealthier and they spend
more, thereby boosting corporate profits and household incomes. Paradoxically,
the United States has been in danger of too much of a good thing, at least from
the perspective of bondholders. The ebullient state of the domestic economy has
put upward pressure on labor costs and threatened to exacerbate the benign
inflation we've been enjoying for so long. Even taking into account the effects
from Asia, our economy has expanded at a very healthy 3.5% annual rate so far in
1998.
9
<PAGE> 12
The weakness from abroad has aided the bondholder by keeping our own
economy from overheating and keeping the Federal Reserve from tightening
monetary policy and raising interest rates. Whether this dynamic equilibrium can
remain in place for long is open to conjecture. Even Federal Reserve Chairman
Alan Greenspan has conceded that the outlook today is as problematic as any he's
encountered in his 40 years of economic forecasting. The fact is that no one is
endowed with the prescience to say with certainty what will happen over the next
six to twelve months. It's entirely possible that the pushes and pulls will
neutralize each other for a while longer, maybe even months; however, this
situation is unlikely to continue indefinitely. Sooner or later, one force will
outweigh the others, creating disequilibrium (perhaps akin to what's occurring
in the stock market as we write this letter). If so, we can look forward to more
volatility than we've seen recently.
Regardless, volatility, rather than tranquillity, is the more typical
state of affairs in the bond market. Shareholders with long-term horizons can
and do marvel at the market's ups and downs, yet they are able to face an
uncertain future with confidence that over the long haul the month-to-month
noise tends to fade away, leaving reasonable and realistic rates of return. For
bond investors with long horizons, the best predictor of future returns is a
portfolio's starting yield.
In this regard, another unusual market condition prevails--the so-called
"flat" yield curve. The U.S. Treasury issues bills, notes, and bonds in
maturities that range from a few months to 30 years. If these securities' yields
are arrayed in ascending order of their term to maturity, the result is referred
to as a yield curve. Typically, the yield curve slopes upward, with 3-month
T-bills yielding the least and yields increasing along with terms to maturity. A
normal yield curve might have a spread of 2 to 3 percentage points between
short-term and long-term interest rates.
Not today. In the current market, the yield differential between
short-and long-term securities has effectively disappeared. A 1-year T-bill
carries a yield of about 5.30%, barely distinguishable from the 5.60% available
on a 30-year Treasury bond. Thus, among most of the investment-grade portfolios
of the Vanguard Fixed Income Securities Fund, there is little income
differentiation at present. This condition, like the recent bond market
stability, is unlikely to prevail for long.
Ian A. MacKinnon, Managing Director
Robert F. Auwaerter, Principal
John W. Hollyer, Principal
August 6, 1998
INVESTMENT PHILOSOPHY
The fund reflects a belief that no one bond portfolio is right for all
investors. The fund offers an array of portfolios with specific maturity and
quality characteristics so investors can select the portfolio or combination of
portfolios appropriate to their needs.
10
<PAGE> 13
REPORT FROM WELLINGTON MANAGEMENT COMPANY, LLP
GNMA Portfolio, Long-Term Corporate Portfolio, and
High Yield Corporate Portfolio
The direction of interest rates is the critical factor in the absolute
performance of the GNMA, Long-Term Corporate, and High Yield Corporate
Portfolios. All three hold fixed-income investments with intermediate- to
long-term maturities. However, changes in rates affect each portfolio
differently.
During the six months ended July 31, 1998, intermediate- and long-term
bond yields were essentially unchanged; over the last 12 months, however, rates
have declined by more than 50 basis points (0.5 percentage point), establishing
a favorable environment for bonds. Long-term bonds with call protection
performed better than intermediate securities. One of the pleasant surprises
over the twelve-month period was that the drop in rates occurred while the
economy was very strong. Historically, a booming economy has been an unfavorable
backdrop for bonds because economic strength usually leads to rising interest
rates. This time, rates fell because inflation was tame and because of mounting
concerns over the economic health of Asian countries.
Risk premiums--the higher yields offered on long-term, investment-grade
corporate bonds versus riskless U.S. Treasuries--rose over the last six months,
but they should stabilize if there is a slowing in new issuance of both
investment-grade and below-investment-grade corporate bonds, currently entering
the market at a record pace. Mortgage-backed securities continue to offer a
generous yield premium to reward investors for risking potential interest rate
volatility. However, if rates do not drop sharply and prepayments of mortgage
principal therefore do not materialize, the yield premium on GNMA
mortgage-backed securities will turn out to be overly generous for the actual
risk. If rates stay in a fairly stable trading range over the next six months,
as we expect, the current yields on high-yield bonds, long-term corporate bonds,
and GNMA mortgages offer reasonable value.
GNMA PORTFOLIO
Your portfolio, and the GNMA market in general, continued to provide attractive
total return and yield during the first half of the fiscal year. These results
might be surprising, considering that mortgage interest rates now are quite low
compared with the rates at which many outstanding mortgage loans were made. As a
result, mortgage refinancing has picked up and there has been an acceleration of
prepayments on the securities in the portfolio. Because of these prepayments, we
have begun to see a modest decline in income as we reinvest returned principal
at lower prevailing interest rates. However, this prepayment effect has not
prevented the portfolio from generating solid total returns.
The question is, where do we go from here? As noted above, because of
investors' heightened concern over refinancing and prepayments, GNMAs offer a
substantial yield premium over comparable U.S. Treasury securities. Although
further declines in interest rates probably would produce more fear in the GNMA
market, we believe that the yield premium is a powerful cushion against any
negative effects from such fear. Having said that, let us emphasize that we make
every effort to protect your assets from the negative aspects of prepayment.
Although we cannot entirely prevent such effects, we believe that the GNMA
Portfolio will continue to offer both attractive current yield and competitive
total return compared with other high-quality alternatives.
11
<PAGE> 14
LONG-TERM CORPORATE PORTFOLIO
The portfolio's average maturity exceeds 20 years, in keeping with its charter
as an investment-grade, long-term corporate bond fund. The portfolio's average
duration--more than 9 years--is also long, which means that its share price and
total return are extremely sensitive to changes in long-term interest rates.
Shareholders should understand this sensitivity when investing in this
portfolio. For example, if rates move up or down by 1 percentage point (100
basis points), the portfolio's net asset value would fluctuate by about 9%.
Because rates fell over the last 12 months, capital appreciation augmented the
portfolio's coupon, or interest, return. The portfolio has excellent call
protection, which means that most of the securities we own cannot be redeemed by
their issuers if rates decline further. This helps to protect the portfolio's
income stream from falling interest rates.
We wish, as always, to highlight the portfolio's risks. The major one is
a rise in long-term interest rates. Over half of the portfolio is invested (and
is intended always to be so) in corporate bonds with an average maturity
exceeding 15 years. We hold minimal cash. The second ever-present risk is
deterioration in the creditworthiness of corporate issuers. To mitigate this
risk, the portfolio is well-diversified by issuer and industry. Over 80% of
assets are in issues rated A or better. The portfolio does not own
below-investment-grade bonds, emerging-market debt, or foreign bonds denominated
in non-U.S. currencies. We generally buy bonds of large, established companies
with stable operating histories.
HIGH YIELD CORPORATE PORTFOLIO
The below-investment-grade, or high-yield, market acts at times like a hybrid:
Under some market conditions, it follows the direction of the stock market; at
other times, it behaves like the rest of the bond market. When the stock market
is very volatile, as it was during the latter part of the half-year,
below-investment-grade bonds usually follow the stock market. When the stock and
bond markets are reasonably stable, the high-yield bond market tends to behave
like the investment-grade bond market.
With concerns about an economic slowdown surfacing and with rates falling
over the last year, the high-yield market has marginally lagged noncallable
long-term, investment-grade bonds. Investors in high-yield bonds began worrying
that the stock market would not be a ready source of capital for companies with
large debts. Also, if the economy slows, companies' profits and their ability to
pay down debt are likely to fall.
We expect economic growth to slow somewhat this year, although not enough
to cause a sharp rise in bond defaults. Companies with stable cash flows should
outperform those issuers whose fortunes are more sensitive to economic ups and
downs. We do not foresee any major problems in the economy that would cause your
portfolio to suffer meaningful deterioration in credit quality.
We remain very selective when examining the large number of new issues.
We are avoiding the smaller, start-up companies and continuing to emphasize the
higher-quality end of the below-investment-grade market. We conduct in-depth
credit research on a company-by-company basis and emphasize diversification. The
portfolio owns issues representing a broad range of industries and companies,
and our holdings continue to be focused on cash-paying issues rated B or better.
We maintain a modest reserve of U.S. Treasury securities in the event that
liquidity is necessary.
Paul D. Kaplan, Senior Vice President and Portfolio Manager
Earl E. McEvoy, Senior Vice President and Portfolio Manager
August 14, 1998
12
<PAGE> 15
PERFORMANCE SUMMARIES
All of the data on this page represent past performance, which cannot be used to
predict future returns that may be achieved by the portfolios. Note, too, that
both share price and return can fluctuate, so an investment in the portfolios
could lose money.
<TABLE>
<CAPTION>
SHORT-TERM U.S. TREASURY PORTFOLIO
TOTAL INVESTMENT RETURNS: OCTOBER 28, 1991-JULY 31, 1998
- --------------------------------------------------------------
SHORT-TERM U.S. TREASURY PORTFOLIO LEHMAN*
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- --------------------------------------------------------------
<S> <C> <C> <C> <C>
1992 1.2% 1.4% 2.6% 3.0%
1993 3.3 5.4 8.7 9.0
1994 0.8 4.7 5.5 6.1
1995 -4.8 5.2 0.4 -0.1
1996 4.8 6.6 11.4 12.0
1997 -1.9 5.8 3.9 4.1
1998 1.1 6.0 7.1 7.9
1999** -0.4 2.7 2.3 2.4
- --------------------------------------------------------------
</TABLE>
*Lehman 1-5 Year U.S. Treasury Index.
**Six months ended July 31, 1998.
See Financial Highlights table on page 38 for dividend and capital gains
information for the past five years.
<TABLE>
<CAPTION>
SHORT-TERM FEDERAL PORTFOLIO
TOTAL INVESTMENT RETURNS: DECEMBER 31, 1987-JULY 31, 1998
- --------------------------------------------------------------
SHORT-TERM FEDERAL PORTFOLIO LEHMAN*
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- --------------------------------------------------------------
<S> <C> <C> <C> <C>
1988 0.5% 0.5% 1.0% 1.9%
1989 -2.7 8.4 5.7 5.0
1990 1.1 9.0 10.1 10.5
1991 1.9 8.6 10.5 11.1
1992 3.1 7.5 10.6 11.3
1993 2.3 6.2 8.5 8.9
1994 1.1 5.1 6.2 6.1
1995 -5.6 5.4 -0.2 -0.1
1996 5.0 6.4 11.4 12.0
1997 -1.7 6.2 4.5 4.1
1998 0.8 6.3 7.1 7.9
1999** -0.5 2.9 2.4 2.4
- --------------------------------------------------------------
</TABLE>
*Lehman 1-5 Year U.S. Government Index.
**Six months ended July 31, 1998.
See Financial Highlights table on page 39 for dividend and capital gains
information for the past five years.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED JUNE 30, 1998*
- -------------------------------------------------------------------------------------------------------------------------
10 YEARS
INCEPTION -------------------------------
DATE 1 YEAR 5 YEARS CAPITAL INCOME TOTAL
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Short-Term U.S. Treasury Portfolio 10/28/1991 6.84% 5.42% 0.56%** 5.64%** 6.20%**
Short-Term Federal Portfolio 12/31/1987 6.83 5.50 0.58 6.80 7.38
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
*SEC rules require that we provide this average annual total return information
through the latest calendar quarter.
**Since inception.
13
<PAGE> 16
PERFORMANCE SUMMARIES (continued)
All of the data on this page represent past performance, which cannot be used to
predict future returns that may be achieved by the portfolios. Note, too, that
both share price and return can fluctuate, so an investment in the portfolios
could lose money.
<TABLE>
<CAPTION>
SHORT-TERM CORPORATE PORTFOLIO
TOTAL INVESTMENT RETURNS: OCTOBER 29, 1982-JULY 31, 1998
- ------------------------------------------------------
SHORT-TERM CORPORATE PORTFOLIO LEHMAN*
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- ------------------------------------------------------
<S> <C> <C> <C> <C>
1983 0.5% 2.7% 3.2% 4.6%
1984 -1.1 10.6 9.5 10.9
1985 2.3 11.7 14.0 14.1
1986 3.7 10.5 14.2 14.6
1987 2.9 8.7 11.6 11.9
1988 -2.2 7.4 5.2 6.8
1989 -1.9 8.2 6.3 6.5
1990 1.1 9.1 10.2 10.7
1991 1.5 9.0 10.5 9.8
1992 3.6 8.1 11.7 13.4
1993 2.6 6.7 9.3 9.5
1994 0.4 5.7 6.1 7.9
1995 -4.9 5.5 0.6 0.3
1996 5.2 6.8 12.0 13.8
1997 -1.7 6.2 4.5 4.6
1998 1.1 6.4 7.5 8.0
1999** -0.5 3.1 2.6 2.6
- ------------------------------------------------------
</TABLE>
*Lehman 1-5 Year Investment Grade Index.
**Six months ended July 31, 1998.
See Financial Highlights table on page 39 for dividend and capital gains
information for the past five years.
<TABLE>
<CAPTION>
SHORT-TERM CORPORATE PORTFOLIO-INSTITUTIONAL SHARES
TOTAL INVESTMENT RETURNS: SEPTEMBER 30, 1997-JULY 31, 1998
- ----------------------------------------------------------
SHORT-TERM CORPORATE PORTFOLIO-
INSTITUTIONAL SHARES LEHMAN*
FISCAL CAPITAL INCOME TOTAL TOTAL
PERIOD RETURN RETURN RETURN RETURN
- ----------------------------------------------------------
<S> <C> <C> <C> <C>
1998 0.6% 2.2% 2.8% 3.6%
1999** -0.5 3.2 2.7 2.6
- ----------------------------------------------------------
</TABLE>
*Lehman 1-5 Year Investment Grade Index.
**Six months ended July 31, 1998.
See Financial Highlights table on page 40 for dividend and capital gains
information since the portfolio's inception.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED JUNE 30, 1998*
- --------------------------------------------------------------------------------------------------------------------
10 YEARS
INCEPTION -------------------------------
DATE 1 YEAR 5 YEARS CAPITAL INCOME TOTAL
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Short-Term Corporate Portfolio 10/29/1982 7.33% 5.93% 0.70% 7.08% 7.78%
Short-Term Corporate Portfolio-
Institutional Shares 9/30/1997 -- -- 0.19** 4.80** 4.99**
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
*SEC rules require that we provide this average annual total return information
through the latest calendar quarter.
**Since inception.
14
<PAGE> 17
All of the data on this page represent past performance, which cannot be used to
predict future returns that may be achieved by the portfolios. Note, too, that
both share price and return can fluctuate widely, so an investment in the
portfolios could lose money.
<TABLE>
<CAPTION>
INTERMEDIATE-TERM U.S. TREASURY PORTFOLIO
TOTAL INVESTMENT RETURNS: OCTOBER 28, 1991-JULY 31, 1998
- ------------------------------------------------------
INTERMEDIATE-TERM
U.S. TREASURY PORTFOLIO LEHMAN*
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- ------------------------------------------------------
<S> <C> <C> <C> <C>
1992 1.9% 1.7% 3.6% 4.0%
1993 6.1 7.0 13.1 13.2
1994 4.1 6.0 10.1 10.6
1995 -9.6 5.7 -3.9 -4.5
1996 11.7 7.3 19.0 19.6
1997 -4.9 6.2 1.3 1.3
1998 4.1 6.7 10.8 11.7
1999** -0.6 3.0 2.4 2.5
- ------------------------------------------------------
</TABLE>
*Lehman 5-10 Year U.S. Treasury Index.
**Six months ended July 31, 1998.
See Financial Highlights table on page 40 for dividend and capital gains
information for the past five years.
<TABLE>
<CAPTION>
INTERMEDIATE-TERM CORPORATE PORTFOLIO
TOTAL INVESTMENT RETURNS: NOVEMBER 1, 1993-JULY 31, 1998
- --------------------------------------------------------
CORPORATE PORTFOLIO LEHMAN*
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- --------------------------------------------------------
<S> <C> <C> <C> <C>
1994 0.4% 1.3% 1.7% 2.4%
1995 -9.7 6.0 -3.7 -4.0
1996 12.1 7.8 19.9 21.1
1997 -4.2 6.5 2.3 2.7
1998 3.3 6.9 10.2 10.4
1999** -0.5 3.1 2.6 2.6
- --------------------------------------------------------
</TABLE>
*Lehman 5-10 Year Investment Grade Index.
**Six months ended July 31, 1998.
See Financial Highlights table on page 41 for dividend and capital gains
information since the portfolio's inception.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED JUNE 30, 1998*
- ----------------------------------------------------------------------------------------------------------------------
SINCE INCEPTION
INCEPTION --------------------------------
DATE 1 YEAR 5 YEARS CAPITAL INCOME TOTAL
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Intermediate-Term U.S. Treasury Portfolio 10/28/1991 10.72% 6.36% 1.76% 6.44% 8.20%
Intermediate-Term Corporate Portfolio 11/1/1993 10.07 -- 0.08 6.66 6.74
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
*SEC rules require that we provide this average annual total return information
through the latest calendar quarter.
15
<PAGE> 18
PERFORMANCE SUMMARIES (continued)
All of the data on this page represent past performance, which cannot be used to
predict future returns that may be achieved by the portfolios. Note, too, that
both share price and return can fluctuate widely, so an investment in the
portfolios could lose money.
<TABLE>
<CAPTION>
GNMA PORTFOLIO
TOTAL INVESTMENT RETURNS: JUNE 27, 1980-JULY 31, 1998
- --------------------------------------------------------
GNMA PORTFOLIO LEHMAN*
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- --------------------------------------------------------
<S> <C> <C> <C> <C>
1981 -12.5% 6.2% -6.3% -8.8%
1982 -9.5 13.5 4.0 1.7
1983 16.3 15.8 32.1 39.6
1984 -0.1 12.3 12.2 12.0
1985 0.5 13.0 13.5 15.4
1986 7.2 12.4 19.6 22.6
1987 1.9 10.3 12.2 13.6
1988 -4.1 9.4 5.3 6.8
1989 -3.6 9.4 5.8 6.6
1990 2.1 9.9 12.0 12.9
1991 3.2 9.7 12.9 13.2
1992 4.1 8.9 13.0 12.9
1993 2.4 8.0 10.4 10.1
1994 -1.0 6.2 5.2 6.1
1995 -6.5 6.9 0.4 -0.3
1996 7.6 8.0 15.6 15.5
1997 -2.1 7.3 5.2 5.6
1998 2.5 7.4 9.9 9.8
1999** -0.6 3.4 2.8 2.9
- --------------------------------------------------------
</TABLE>
*Lehman GNMA Index.
**Six months ended July 31, 1998.
See Financial Highlights table on page 41 for dividend and capital gains
information for the past five years.
<TABLE>
<CAPTION>
LONG-TERM U.S. TREASURY PORTFOLIO
TOTAL INVESTMENT RETURNS: MAY 19, 1986-JULY 31, 1998
- ------------------------------------------------------
LONG-TERM U.S. TREASURY PORTFOLIO LEHMAN*
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- ------------------------------------------------------
<S> <C> <C> <C> <C>
1987 3.1% 5.5% 8.6% 11.9%
1988 -7.7 8.0 0.3 1.5
1989 -2.2 8.6 6.4 5.1
1990 2.7 8.6 11.3 12.3
1991 2.2 8.8 11.0 11.6
1992 4.1 8.3 12.4 13.4
1993 6.1 8.0 14.1 14.6
1994 8.9 7.2 16.1 16.7
1995 -13.0 6.3 -6.7 -7.5
1996 18.7 8.0 26.7 27.4
1997 -8.2 6.4 -1.8 -1.6
1998 9.7 7.1 16.8 18.3
1999** 0.5 3.0 3.5 3.7
- ------------------------------------------------------
</TABLE>
*Lehman Long U.S. Treasury Index.
**Six months ended July 31, 1998.
See Financial Highlights table on page 42 for dividend and capital gains
information for the past five years.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED JUNE 30, 1998*
- ---------------------------------------------------------------------------------------------------------------------
10 YEARS
INCEPTION --------------------------------
DATE 1 YEAR 5 YEARS CAPITAL INCOME TOTAL
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
GNMA Portfolio 6/27/1980 8.93% 6.96% 0.96% 8.03% 8.99%
Long-Term U.S. Treasury Portfolio 5/19/1986 18.37 8.49 3.02 7.67 10.69
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
*SEC rules require that we provide this average annual total return information
through the latest calendar quarter.
16
<PAGE> 19
All of the data on this page represent past performance, which cannot be used to
predict future returns that may be achieved by the portfolios. Note, too, that
both share price and return can fluctuate widely, so an investment in the
portfolios could lose money.
<TABLE>
<CAPTION>
LONG-TERM CORPORATE PORTFOLIO
TOTAL INVESTMENT RETURNS: JANUARY 31, 1978-JULY 31, 1998
- ----------------------------------------------------------
LONG-TERM CORPORATE PORTFOLIO LEHMAN*
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- ----------------------------------------------------------
<S> <C> <C> <C> <C>
1979 -4.8% 8.5% 3.7% 2.6%
1980 -13.8 8.8 -5.0 -12.0
1981 -3.5 11.7 8.2 3.0
1982 -4.7 13.2 8.5 -0.8
1983 13.3 15.0 28.3 43.4
1984 -2.0 12.3 10.3 9.9
1985 0.0 13.4 13.4 17.4
1986 7.4 12.9 20.3 25.1
1987 5.6 10.9 16.5 21.1
1988 -7.5 9.3 1.8 3.0
1989 -2.5 9.6 7.1 6.6
1990 1.1 9.6 10.7 11.2
1991 0.3 9.5 9.8 11.2
1992 7.6 9.5 17.1 15.5
1993 6.6 8.5 15.1 13.8
1994 6.5 7.3 13.8 12.6
1995 -11.9 6.8 -5.1 -5.3
1996 15.3 8.3 23.6 23.9
1997 -6.0 6.9 0.9 0.7
1998 7.9 7.6 15.5 15.6
1999** 0.0 3.2 3.2 3.3
- ----------------------------------------------------------
</TABLE>
*Lehman Long Corporate AA or Better Bond Index.
**Six months ended July 31, 1998.
See Financial Highlights table on page 42 for dividend and capital gains
information for the past five years.
<TABLE>
<CAPTION>
HIGH YIELD CORPORATE PORTFOLIO
TOTAL INVESTMENT RETURNS: DECEMBER 27, 1978-JULY 31, 1998
- ---------------------------------------------------------
HIGH YIELD CORPORATE PORTFOLIO LEHMAN*
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- ---------------------------------------------------------
<S> <C> <C> <C> <C>
1979 3.3% 0.0% 3.3% 2.0%
1980 -10.4 11.9 1.5 -8.7
1981 -8.2 13.0 4.8 4.6
1982 -7.3 15.3 8.0 3.3
1983 13.7 18.6 32.3 39.7
1984 0.1 14.1 14.2 11.8
1985 -5.0 14.4 9.4 10.0
1986 3.8 14.6 18.4 22.6
1987 6.9 13.2 20.1 20.7
1988 -8.6 11.1 2.5 4.2
1989 -1.1 12.5 11.4 10.8
1990 -13.4 11.6 -1.8 -3.0
1991 -15.3 12.1 -3.2 -5.1
1992 17.4 13.9 31.3 47.3
1993 4.0 10.7 14.7 15.1
1994 7.7 9.8 17.5 16.3
1995 -11.1 8.6 -2.5 -1.8
1996 9.0 10.0 19.0 19.7
1997 -0.3 9.3 9.0 10.5
1998 3.8 9.3 13.1 13.7
1999** -0.6 4.1 3.5 3.2
- ---------------------------------------------------------
</TABLE>
*Lehman Mutual Fund BBB Rated or Better Bond Index through January 1984; Lehman
High Yield Bond Index thereafter.
**Six months ended July 31, 1998.
See Financial Highlights table on page 43 for dividend and capital gains
information for the past five years.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED JUNE 30, 1998*
- -------------------------------------------------------------------------------------------------------------------------
10 YEARS
INCEPTION --------------------
DATE 1 YEAR 5 YEARS CAPITAL INCOME TOTAL
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Long-Term Corporate Portfolio 7/9/1973 16.39% 8.53% 2.65% 8.25% 10.90%
High Yield Corporate Portfolio** 12/27/1978 11.24 9.74 -0.53 10.62 10.09
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
*SEC rules require that we provide this average annual total return information
through the latest calendar quarter.
**Total returns do not reflect the 1% fee assessed on redemptions of shares held
for less than one year.
17
<PAGE> 20
PORTFOLIO PROFILE
Short-Term U.S. Treasury Portfolio
This Profile provides a snapshot of the portfolio's characteristics as of July
31, 1998, compared where appropriate to an unmanaged index. Key elements of
this Profile are defined on page 19.
<TABLE>
<CAPTION>
FINANCIAL ATTRIBUTES
- ----------------------------------------------------------
<S> <C>
Number of Issues 29
Yield 5.4%
Yield to Maturity 5.6%
Average Coupon 6.1%
Average Maturity 2.7 years
Average Quality U.S. Treasury
Average Duration 2.2 years
Expense Ratio 0.27%*
Cash Reserves 1.9%
</TABLE>
*Annualized.
<TABLE>
<CAPTION>
VOLATILITY MEASURES
- ----------------------------------------------------------
SHORT-TERM LEHMAN
U.S. TREASURY INDEX*
- ----------------------------------------------------------
<S> <C> <C>
R-Squared 0.91 1.00
Beta 0.44 1.00
</TABLE>
*Lehman Aggregate Bond Index.
<TABLE>
<CAPTION>
DISTRIBUTION BY MATURITY (% OF PORTFOLIO)
- -------------------------------------------------------
<S> <C>
Under 1 Year 2.0%
1-3 Years 48.5
3-5 Years 38.1
Over 5 Years 11.4
- -------------------------------------------------------
Total 100.0%
</TABLE>
INVESTMENT FOCUS
- ------------------------------------------------------
[GRAPH]
<TABLE>
<CAPTION>
DISTRIBUTION BY CREDIT QUALITY (% OF PORTFOLIO)
- ------------------------------------------------------
<S> <C>
U.S. Treasury 100.0%
</TABLE>
18
<PAGE> 21
AVERAGE COUPON. The average interest rate paid on the securities held by a
portfolio. It is expressed as a percentage of face value.
AVERAGE DURATION. An estimate of how much a bond portfolio's share price will
fluctuate in response to a change in interest rates. To see how the price could
shift, multiply the portfolio's duration by the change in rates. If interest
rates rise by 1 percentage point, the share price of a portfolio with an
average duration of five years would decline by about 5%. If rates decrease by
a percentage point, the portfolio's share price would rise by 5%.
AVERAGE MATURITY. The average length of time until bonds held by a portfolio
reach maturity (or are called) and are repaid. In general, the longer the
average maturity, the more a portfolio's share price will fluctuate in response
to changes in market interest rates.
AVERAGE QUALITY. An indicator of credit risk, this figure is the average of the
ratings assigned to a portfolio's securities holdings by credit-rating
agencies. The agencies make their judgment after appraising an issuer's ability
to meet its obligations. Quality is graded on a scale, with Aaa or AAA
indicating the most creditworthy bond issuers and A-1 or MIG-1 indicating the
most credit-worthy issuers of money market securities. U.S. Treasury and
agency securities are considered to have the highest credit quality.
BETA. A measure of the magnitude of a portfolio's past share-price fluctuations
in relation to the ups and downs of the overall market (or appropriate market
index). The market (or index) is assigned a beta of 1.00, so a portfolio with a
beta of 1.20 would have seen its share price rise or fall by 12% when the
overall market rose or fell by 10%.
CASH RESERVES. The percentage of a portfolio's net assets invested in "cash
equivalents"--highly liquid, short-term, interest-bearing securities. This
figure does not include cash invested in futures contracts to simulate bond
investment.
DISTRIBUTION BY COUPON. A breakdown of the securities in a portfolio according
to coupon rate--the interest rate that an issuer promises to pay, expressed as
an annual percentage of face value. Securities with unusually high coupon rates
may be subject to call risk, the possibility that they will be redeemed (or
"called") early by the issuer.
DISTRIBUTION BY CREDIT QUALITY. This breakdown of a portfolio's securities by
credit rating can help in gauging the risk that returns could be affected by
defaults or other credit problems.
DISTRIBUTION BY ISSUER. A breakdown of a portfolio's holdings by type of issuer
or type of instrument.
DISTRIBUTION BY MATURITY. An indicator of interest-rate risk. In general, the
higher the concentration of longer-maturity issues, the more a portfolio's
share price will fluctuate in response to changes in interest rates.
EXPENSE RATIO. The percentage of a portfolio's average net assets used to pay
its annual administrative and advisory expenses. These expenses directly reduce
returns to investors.
INVESTMENT FOCUS. This grid indicates the focus of a portfolio in terms of two
attributes: average maturity (short, medium, or long) and average credit
quality (high, medium, or low).
NUMBER OF ISSUES. An indicator of diversification. The more separate issues a
portfolio holds, the less susceptible it is to a price decline stemming from
the problems of a particular issue.
R-SQUARED. A measure of how much of a portfolio's past returns can be explained
by the returns from the overall market (or its benchmark index). If a
portfolio's total return were precisely synchronized with the overall market's
return, its R-squared would be 1.00. If a portfolio's returns bore no
relationship to the market's returns, its R-squared would be 0.
YIELD. A snapshot of a portfolio's interest income. The yield, expressed as a
percentage of the portfolio's net asset value, is based on income earned over
the past 30 days and is annualized, or projected forward for the coming year.
YIELD TO MATURITY. The rate of return an investor would receive if the
securities held by a portfolio were held to their maturity dates.
19
<PAGE> 22
PORTFOLIO PROFILE
Short-Term Federal Portfolio
This Profile provides a snapshot of the portfolio's characteristics as of July
31, 1998, compared where appropriate to an unmanaged index. Key elements of
this Profile are defined on page 19.
<TABLE>
<CAPTION>
FINANCIAL ATTRIBUTES
- -----------------------------------------------------------
<S> <C>
Number of Issues 75
Yield 5.6%
Yield to Maturity 5.8%
Average Coupon 6.4%
Average Maturity 2.8 years
Average Quality Agency
Average Duration 2.2 years
Expense Ratio 0.27%*
Cash Reserves 4.6%
</TABLE>
*Annualized.
<TABLE>
<CAPTION>
VOLATILITY MEASURES
- -----------------------------------------------------------
SHORT-TERM LEHMAN
FEDERAL INDEX*
- -----------------------------------------------------------
<S> <C> <C>
R-Squared 0.92 1.00
Beta 0.43 1.00
</TABLE>
*Lehman Aggregate Bond Index.
<TABLE>
<CAPTION>
DISTRIBUTION BY MATURITY (% OF PORTFOLIO)
- -------------------------------------------------------
<S> <C>
Under 1 Year 15.0%
1-3 Years 39.0
3-5 Years 41.6
Over 5 Years 4.4
- -------------------------------------------------------
Total 100.0%
</TABLE>
INVESTMENT FOCUS
- -------------------------------------------------------
[GRAPH]
<TABLE>
<CAPTION>
DISTRIBUTION BY CREDIT QUALITY (% OF PORTFOLIO)
- -------------------------------------------------------
<S> <C>
U.S. Treasury 10.3%
Agency 89.7
- -------------------------------------------------------
Total 100.0%
</TABLE>
20
<PAGE> 23
PORTFOLIO PROFILE
Short-Term Corporate Portfolio
This Profile provides a snapshot of the portfolio's characteristics as of July
31, 1998, compared where appropriate to an unmanaged index. Key elements of
this Profile are defined on page 19.
<TABLE>
<CAPTION>
FINANCIAL ATTRIBUTES
- -----------------------------------------------------------
<S> <C>
Number of Issues 271
Yield 5.9%
Yield--Institutional Shares 6.1%
Yield to Maturity 6.0%
Average Coupon 6.7%
Average Maturity 2.7 years
Average Quality A1
Average Duration 2.3 years
Expense Ratio 0.27%*
Expense Ratio--Institutional Shares 0.15%*
Cash Reserves 3.2%
</TABLE>
*Annualized.
<TABLE>
<CAPTION>
VOLATILITY MEASURES
- ----------------------------------------------------------
SHORT-TERM LEHMAN
CORPORATE INDEX*
- ----------------------------------------------------------
<S> <C> <C>
R-Squared 0.93 1.00
Beta 0.46 1.00
</TABLE>
*Lehman Aggregate Bond Index.
<TABLE>
<CAPTION>
DISTRIBUTION BY MATURITY (% OF PORTFOLIO)
- -------------------------------------------------------
<S> <C>
Under 1 Year 14.1%
1-3 Years 52.5
3-5 Years 22.0
Over 5 Years 11.4
- -------------------------------------------------------
Total 100.0%
</TABLE>
INVESTMENT FOCUS
- -------------------------------------------------------
[GRAPH]
<TABLE>
<CAPTION>
DISTRIBUTION BY CREDIT QUALITY (% OF PORTFOLIO)
- -------------------------------------------------------
<S> <C>
Treasury/Agency 4.2%
Aaa 13.3
Aa 15.1
A 44.1
Baa 22.3
Ba 0.0
B 0.0
Not Rated 1.0
- -------------------------------------------------------
Total 100.0%
</TABLE>
<TABLE>
<CAPTION>
DISTRIBUTION BY ISSUER (% OF PORTFOLIO)
- -------------------------------------------------------
<S> <C>
Asset-Backed 13.9%
Finance 48.9
Foreign 10.3
Industrial 16.1
Mortgage 1.8
U.S. Government & Agency 0.6
U.S. Treasury 0.3
Utilities 7.4
Other 0.7
- -------------------------------------------------------
Total 100.0%
</TABLE>
21
<PAGE> 24
PORTFOLIO PROFILE
Intermediate-Term U.S. Treasury Portfolio
This Profile provides a snapshot of the portfolio's characteristics as of July
31, 1998, compared where appropriate to an unmanaged index. Key elements of
this Profile are defined on page 19.
<TABLE>
<CAPTION>
FINANCIAL ATTRIBUTES
- ----------------------------------------------------------
<S> <C>
Number of Issues 25
Yield 5.5%
Yield to Maturity 5.7%
Average Coupon 7.6%
Average Maturity 6.9 years
Average Quality U.S. Treasury
Average Duration 5.5 years
Expense Ratio 0.27%*
Cash Reserves 7.4%
</TABLE>
*Annualized.
<TABLE>
<CAPTION>
VOLATILITY MEASURES
- ----------------------------------------------------------
Intermediate-Term Lehman
U.S. Treasury Index*
- ----------------------------------------------------------
<S> <C> <C>
R-Squared 0.99 1.00
Beta 1.22 1.00
</TABLE>
*Lehman Aggregate Bond Index.
<TABLE>
<CAPTION>
DISTRIBUTION BY MATURITY (% OF PORTFOLIO)
- -------------------------------------------------------
<S> <C>
Under 1 Year 6.0%
1-5 Years 6.7
5-10 Years 82.9
10-20 Years 4.4
20-30 Years 0.0
Over 30 Years 0.0
- -------------------------------------------------------
Total 100.0%
</TABLE>
INVESTMENT FOCUS
- -------------------------------------------------------
[GRAPH]
<TABLE>
<CAPTION>
DISTRIBUTION BY CREDIT QUALITY (% OF PORTFOLIO)
- ------------------------------------------------------
<S> <C>
U.S. Treasury 100.0%
</TABLE>
22
<PAGE> 25
PORTFOLIO PROFILE
Intermediate-Term Corporate Portfolio
This Profile provides a snapshot of the portfolio's characteristics as of July
31, 1998, compared where appropriate to an unmanaged index. Key elements of
this Profile are defined on page 19.
<TABLE>
<CAPTION>
FINANCIAL ATTRIBUTES
- ----------------------------------------------------------
<S> <C>
Number of Issues 163
Yield 6.2%
Yield to Maturity 6.4%
Average Coupon 7.0%
Average Maturity 7.0 years
Average Quality A2
Average Duration 5.3 years
Expense Ratio 0.27%*
Cash Reserves 2.3%
</TABLE>
*Annualized.
<TABLE>
<CAPTION>
VOLATILITY MEASURES
- ----------------------------------------------------------
INTERMEDIATE-TERM LEHMAN
CORPORATE INDEX*
- ----------------------------------------------------------
<S> <C> <C>
R-Squared 0.98 1.00
Beta 1.18 1.00
</TABLE>
*Lehman Aggregate Bond Index.
<TABLE>
<CAPTION>
DISTRIBUTION BY MATURITY (% OF PORTFOLIO)
- -------------------------------------------------------
<S> <C>
Under 1 Year 0.6%
1-5 Years 23.4
5-10 Years 72.4
10-20 Years 3.6
20-30 Years 0.0
Over 30 Years 0.0
- -------------------------------------------------------
Total 100.0%
</TABLE>
INVESTMENT FOCUS
- ----------------------------------------------------------
[GRAPH]
<TABLE>
<CAPTION>
DISTRIBUTION BY CREDIT QUALITY (% OF PORTFOLIO)
- -------------------------------------------------------
<S> <C>
Treasury 1.8%
Aaa 3.8
Aa 13.7
A 58.1
Baa 21.7
Ba 0.0
B 0.0
Not Rated 0.9
- -------------------------------------------------------
Total 100.0%
</TABLE>
<TABLE>
<CAPTION>
DISTRIBUTION BY ISSUER (% OF PORTFOLIO)
- -------------------------------------------------------
<S> <C>
Asset-Backed 2.2%
Finance 48.6
Foreign 18.1
Industrial 23.9
Mortgage 0.0
U.S. Government & Agency 0.0
U.S. Treasury 1.3
Utilities 5.9
- -------------------------------------------------------
Total 100.0%
</TABLE>
23
<PAGE> 26
PORTFOLIO PROFILE
GNMA Portfolio
This Profile provides a snapshot of the portfolio's characteristics as of July
31, 1998, compared where appropriate to an unmanaged index. Key elements of
this Profile are defined on page 19.
<TABLE>
<CAPTION>
FINANCIAL ATTRIBUTES
- -----------------------------------------------------------
<S> <C>
Number of Issues 25
Yield 6.5%
Yield to Maturity 6.7%
Average Coupon 7.1%
Average Maturity 6.8 years
Average Quality U.S. Treasury
Average Duration 3.8 years
Expense Ratio 0.31%*
Cash Reserves 1.4%
</TABLE>
*Annualized.
<TABLE>
<CAPTION>
VOLATILITY MEASURES
- ----------------------------------------------------------
LEHMAN
GNMA INDEX*
- ----------------------------------------------------------
<S> <C> <C>
R-Squared 0.94 1.00
Beta 0.79 1.00
</TABLE>
*Lehman Aggregate Bond Index.
INVESTMENT FOCUS
- ----------------------------------------------------------
[GRAPH]
<TABLE>
<CAPTION>
DISTRIBUTION BY COUPON (% OF PORTFOLIO)
- -------------------------------------------------------
<S> <C>
Under 6% 0.0%
6%-7% 32.0
7%-8% 50.2
8%-9% 13.6
9%-10% 4.1
Over 10% 0.1
- -------------------------------------------------------
Total 100.0%
</TABLE>
24
<PAGE> 27
PORTFOLIO PROFILE
Long-Term U.S. Treasury Portfolio
This Profile provides a snapshot of the portfolio's characteristics as of July
31, 1998, compared where appropriate to an unmanaged index. Key elements of
this Profile are defined on page 19.
<TABLE>
<CAPTION>
FINANCIAL ATTRIBUTES
- ----------------------------------------------------------
<S> <C>
Number of Issues 15
Yield 5.6%
Yield to Maturity 5.8%
Average Coupon 8.0%
Average Maturity 20.6 years
Average Quality U.S. Treasury
Average Duration 10.4 years
Expense Ratio 0.27%*
Cash Reserves 5.5%
</TABLE>
*Annualized.
<TABLE>
<CAPTION>
VOLATILITY MEASURES
- ----------------------------------------------------------
LONG-TERM LEHMAN
U.S. TREASURY INDEX*
- ----------------------------------------------------------
<S> <C> <C>
R-Squared 0.96 1.00
Beta 2.16 1.00
</TABLE>
*Lehman Aggregate Bond Index.
<TABLE>
<CAPTION>
DISTRIBUTION BY MATURITY (% OF PORTFOLIO)
- -------------------------------------------------------
<S> <C>
Under 1 Year 3.1%
1-5 Years 0.0
5-10 Years 6.1
10-20 Years 22.8
20-30 Years 68.0
Over 30 Years 0.0
- -------------------------------------------------------
Total 100.0%
</TABLE>
INVESTMENT FOCUS
- ----------------------------------------------------------
[GRAPH]
<TABLE>
<CAPTION>
DISTRIBUTION BY CREDIT QUALITY (% OF PORTFOLIO)
- ------------------------------------------------------
<S> <C>
U.S. Treasury 100.0%
</TABLE>
25
<PAGE> 28
PORTFOLIO PROFILE
Long-Term Corporate Portfolio
This Profile provides a snapshot of the portfolio's characteristics as of July
31, 1998, compared where appropriate to an unmanaged index. Key elements of
this Profile are defined on page 19.
<TABLE>
<CAPTION>
FINANCIAL ATTRIBUTES
- ----------------------------------------------------------
<S> <C>
Number of Issues 147
Yield 6.3%
Yield to Maturity 6.5%
Average Coupon 7.3%
Average Maturity 20.3 years
Average Quality A1
Average Duration 9.6 years
Expense Ratio 0.31%*
Cash Reserves 5.1%
</TABLE>
*Annualized.
<TABLE>
<CAPTION>
VOLATILITY MEASURES
- ----------------------------------------------------------
LONG-TERM LEHMAN
CORPORATE INDEX*
- ----------------------------------------------------------
<S> <C> <C>
R-Squared 0.95 1.00
Beta 1.86 1.00
</TABLE>
*Lehman Aggregate Bond Index.
<TABLE>
DISTRIBUTION BY MATURITY (% OF PORTFOLIO)
- -------------------------------------------------------
<S> <C>
Under 1 Year 3.0%
1-5 Years 4.0
5-10 Years 18.2
10-20 Years 16.0
20-30 Years 55.9
Over 30 Years 2.9
- -------------------------------------------------------
Total 100.0%
</TABLE>
INVESTMENT FOCUS
- ----------------------------------------------------------
[GRAPH]
<TABLE>
<CAPTION>
DISTRIBUTION BY CREDIT QUALITY (% OF PORTFOLIO)
- -------------------------------------------------------
<S> <C>
Treasury/Agency 11.2%
Aaa 6.1
Aa 17.6
A 46.4
Baa 17.4
Ba 0.0
B 0.0
Not Rated 1.3
- -------------------------------------------------------
Total 100.0%
</TABLE>
<TABLE>
<CAPTION>
DISTRIBUTION BY ISSUER (% OF PORTFOLIO)
- -------------------------------------------------------
<S> <C>
Asset-Backed 0.0%
Finance 25.0
Foreign 7.4
Industrial 47.8
Mortgage 0.0
U.S. Government & Agency 0.0
U.S. Treasury 8.4
Utilities 11.4
- -------------------------------------------------------
Total 100.0%
</TABLE>
26
<PAGE> 29
PORTFOLIO PROFILE
High Yield Corporate Portfolio
This Profile provides a snapshot of the portfolio's characteristics as of July
31, 1998, compared where appropriate to an unmanaged index. Key elements of
this Profile are defined on page 19.
<TABLE>
<CAPTION>
FINANCIAL ATTRIBUTES
- ----------------------------------------------------------
<S> <C>
Number of Issues 223
Yield 8.1%
Yield to Maturity 8.3%
Average Coupon 8.9%
Average Maturity 6.9 years
Average Quality Ba3
Average Duration 4.8 years
Expense Ratio 0.30%*
Cash Reserves 2.7%
</TABLE>
*Annualized.
<TABLE>
<CAPTION>
VOLATILITY MEASURES
- ----------------------------------------------------------
HIGH YIELD LEHMAN
CORPORATE INDEX*
- ----------------------------------------------------------
<S> <C> <C>
R-Squared 0.40 1.00
Beta 0.56 1.00
</TABLE>
*Lehman Aggregate Bond Index.
<TABLE>
<CAPTION>
DISTRIBUTION BY MATURITY (% OF PORTFOLIO)
- -------------------------------------------------------
<S> <C>
Under 1 Year 1.7%
1-5 Years 16.5
5-10 Years 78.5
10-20 Years 3.3
20-30 Years 0.0
Over 30 Years 0.0
- -------------------------------------------------------
Total 100.0%
</TABLE>
INVESTMENT FOCUS
- ---------------------------------------------------------
[GRAPH]
<TABLE>
<CAPTION>
DISTRIBUTION BY CREDIT QUALITY (% OF PORTFOLIO)
- -------------------------------------------------------
<S> <C>
Treasury/Agency 6.6%
Aaa 0.0
Aa 0.0
A 0.0
Baa 0.0
Ba 41.6
B 51.8
Not Rated 0.0
- -------------------------------------------------------
Total 100.0%
</TABLE>
<TABLE>
<CAPTION>
DISTRIBUTION BY ISSUER (% OF PORTFOLIO)
- -------------------------------------------------------
<S> <C>
Asset-Backed 0.0%
Finance 4.3
Foreign 0.0
Industrial 84.2
Mortgage 0.0
U.S. Government & Agency 0.0
U.S. Treasury 5.5
Utilities 6.0
- -------------------------------------------------------
Total 100.0%
</TABLE>
27
<PAGE> 30
FINANCIAL STATEMENTS
July 31, 1998 (unaudited)
The Statements of Net Assets, integral parts of the Financial Statements for
each of the Vanguard Fixed Income Securities Fund portfolios, are included as an
insert to this report (except for the GNMA Portfolio, whose Statement of Net
Assets is provided below).
STATEMENT OF NET ASSETS
This Statement provides a detailed list of each portfolio's holdings, including
each security's market value on the last day of the reporting period. Securities
are grouped and subtotaled by bond type (U.S. government and agency issues,
corporate bonds, foreign bonds, etc.); corporate bonds are further classified by
industry sector. Other assets are added to, and liabilities are subtracted from,
the value of Total Investments to calculate the portfolio's Net Assets. Finally,
Net Assets are divided by the outstanding shares of the portfolio to arrive at
its share price, or Net Asset Value (NAV) Per Share.
At the end of the Statement of Net Assets of each portfolio, you will
find a table displaying the composition of the portfolio's net assets.
Undistributed Net Investment Income is usually zero because the portfolio
distributes its net income to shareholders as a dividend each day. Any realized
gains must be distributed annually, so the bulk of net assets consists of Paid
in Capital (money invested by shareholders). The balance shown for Accumulated
Net Realized Gains usually approximates the amount available to distribute to
shareholders as capital gains as of the statement date, but may differ because
certain investments or transactions may be treated differently for financial
statement and tax purposes. Any Accumulated Net Realized Losses, and any
cumulative excess of distributions over net realized gains, will appear as
negative balances. Unrealized Appreciation (Depreciation) is the difference
between the value of the portfolio's investments and their cost, and reflects
the gains (losses) that would be realized if the portfolio were to sell all of
its investments at their statement-date values.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
GNMA PORTFOLIO COUPON DATE (000) (000)
- --------------------------------------------------------------------------------------------------------------------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION OBLIGATIONS (98.6%)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Government National Mortgage Assn. 6.00% 10/15/2023-5/20/2028 (1) $ 817,104 $ 799,220
Government National Mortgage Assn. 6.50% 8/19/1998-8/1/2028 (1) 2,355,490 2,354,125
Government National Mortgage Assn. 7.00% 4/15/2007-9/15/2029 (1) 2,680,302 2,725,816
Government National Mortgage Assn. 7.25% 12/15/2026-2/15/2027 (1) 4,580 4,683
Government National Mortgage Assn. 7.50% 12/15/2001-5/15/2028 (1) 2,146,369 2,214,082
Government National Mortgage Assn. 7.75% 2/15/2027 (1) 14,614 15,100
Government National Mortgage Assn. 8.00% 5/15/2001-9/15/2026 (1) 966,515 1,007,572
Government National Mortgage Assn. 8.25% 8/15/2004-7/15/2008 (1) 4,335 4,582
Government National Mortgage Assn. 8.50% 1/20/2005-12/15/2024 (1) 308,501 327,240
Government National Mortgage Assn. 9.00% 9/15/2001-2/15/2023 (1) 246,329 265,388
Government National Mortgage Assn. 9.25% 5/15/2016-6/15/2018 (1) 1,806 1,948
Government National Mortgage Assn. 9.50% 12/15/2000-12/15/2022 (1) 121,426 132,630
Government National Mortgage Assn. 10.00% 7/20/2014-8/20/2018 (1) 2,492 2,728
Government National Mortgage Assn. 11.00% 2/15/2010-2/20/2016 (1) 744 831
Government National Mortgage Assn. 11.25% 6/15/2013-2/20/2016 (1) 532 597
Government National Mortgage Assn. 11.50% 1/15/2013-11/20/2015 (1) 873 982
Government National Mortgage Assn. 12.00% 10/15/2010-1/20/2016 (1) 1,350 1,549
Government National Mortgage Assn. 12.50% 12/20/2013-7/20/2015 (1) 796 922
Government National Mortgage Assn. 12.75% 12/15/2014 (1) 28 33
Government National Mortgage Assn. 13.00% 1/15/2011-1/20/2015 (1) 732 852
Government National Mortgage Assn. 13.25% 8/15/2014-10/15/2014 (1) 128 149
Government National Mortgage Assn. 13.50% 6/15/2010-12/15/2014 (1) 228 268
Government National Mortgage Assn. 13.75% 9/20/2014 (1) 9 11
</TABLE>
28
<PAGE> 31
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
GNMA PORTFOLIO COUPON DATE (000) (000)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Government National Mortgage Assn. 14.00% 6/15/2011-9/15/2012 (1) $ 197 $ 232
Government National Mortgage Assn. 15.00% 9/15/2011-5/15/2012 (1) 127 150
- --------------------------------------------------------------------------------------------------------------------------
TOTAL GOVERNMENT NATIONAL MORTGAGE ASSOCIATION OBLIGATIONS
(COST $9,614,908) 9,861,690
- --------------------------------------------------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENT (4.0%)
- --------------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENT
Collateralized by U.S. Government Obligations in a
Pooled Cash Account
(COST $401,647) 5.64% 8/3/1998 401,647 401,647
- --------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (102.6%)
(COST $10,016,554) 10,263,337
- --------------------------------------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-2.6%)
- --------------------------------------------------------------------------------------------------------------------------
Other Assets--Note C 116,705
Payables for Investment Securities Purchased (348,051)
Other Liabilities (27,026)
-----------
(258,372)
- --------------------------------------------------------------------------------------------------------------------------
NET ASSETS (100%)
- --------------------------------------------------------------------------------------------------------------------------
Applicable to 959,782,281 outstanding $.001 par value shares of beneficial interest
(unlimited authorization) $10,004,965
==========================================================================================================================
NET ASSET VALUE PER SHARE $10.42
==========================================================================================================================
*See Note A in Notes to Financial Statements.
(1) The average maturity is shorter than the final maturity shown due to scheduled interim principal payments.
- --------------------------------------------------------------------------------------------------------------------------
AT JULY 31, 1998, NET ASSETS CONSISTED OF:
- --------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Amount Per
(000) Share
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $ 9,748,348 $10.15
Undistributed Net Investment Income -- --
Accumulated Net Realized Gains 9,834 .01
Unrealized Appreciation--Note F 246,783 .26
- --------------------------------------------------------------------------------------------------------------------------
NET ASSETS $10,004,965 $10.42
==========================================================================================================================
</TABLE>
29
<PAGE> 32
STATEMENT OF OPERATIONS
This Statement shows interest earned by each portfolio during the reporting
period, and details the operating expenses charged to each class of its shares.
These expenses directly reduce the amount of investment income available to pay
to shareholders as income dividends. This Statement also shows any Net Gain
(Loss) realized on the sale of investments, and the increase or decrease in the
Unrealized Appreciation (Depreciation) on investments during the period. If a
portfolio invested in futures contracts during the period, the results of these
investments are shown separately.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
SHORT-TERM SHORT-TERM SHORT-TERM INTERMEDIATE-TERM
U.S. TREASURY FEDERAL CORPORATE U.S. TREASURY
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
---------------------------------------------------------------------------
SIX MONTHS ENDED JULY 31, 1998
---------------------------------------------------------------------------
(000) (000) (000) (000)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
INCOME
Interest $28,913 $44,661 $165,066 $50,302
---------------------------------------------------------------------------
Total Income 28,913 44,661 165,066 50,302
---------------------------------------------------------------------------
EXPENSES
Investment Advisory Fees--Note B 69 100 345 109
The Vanguard Group--Note C
Management and Administrative 449 707 2,528 872
Shareholder Account Maintenance(1) 625 873 2,775 880
Marketing and Distribution(1) 150 204 825 233
Taxes (other than income taxes) 31 45 155 50
Custodian Fees 6 7 21 7
Auditing Fees 3 3 5 3
Shareholders' Reports(1) 22 33 63 26
Annual Meeting and Proxy Costs(1) 4 5 11 5
Trustees' Fees and Expenses 1 1 5 2
---------------------------------------------------------------------------
Total Expenses 1,360 1,978 6,733 2,187
- -------------------------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME 27,553 42,683 158,333 48,115
- -------------------------------------------------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS)
Investment Securities Sold 2,515 313 5,793 7,086
Futures Contracts -- -- (1,489) 215
- -------------------------------------------------------------------------------------------------------------------------
REALIZED NET GAIN 2,515 313 4,304 7,301
- -------------------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION)
Investment Securities (6,371) (6,861) (29,949) (15,847)
Futures Contracts -- -- 1,194 (18)
- -------------------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION) (6,371) (6,861) (28,755) (15,865)
- -------------------------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $23,697 $36,135 $133,882 $39,551
=========================================================================================================================
</TABLE>
The Statements of Net Assets for the Short-Term U.S. Treasury, Short-Term
Federal, Short-Term Corporate, and Intermediate-Term U.S. Treasury Portfolios,
integral parts of the Financial Statements for each portfolio, are included as
an insert to this report.
(1)Expenses of the Short-Term Corporate Portfolio by class of shares are:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
(000)
-------------------------------------------------
INVESTOR INSTITUTIONAL
SHARES SHARES TOTAL
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Class-Specific Expenses:
Shareholder Account Maintenance $2,735 $ 40 $2,775
Marketing and Distribution 825 -- 825
Shareholders' Reports 63 -- 63
Annual Meeting and Proxy Costs 11 -- 11
------------------------------------------------
Total Class-Specific Expenses 3,634 40 3,674
All Other Portfolio Expenses 2,895 164 3,059
- -------------------------------------------------------------------------------------------------------------------------
Total Expenses $6,529 $204 $6,733
=========================================================================================================================
</TABLE>
See Note D in Notes to Financial Statements.
30
<PAGE> 33
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
INTERMEDIATE-TERM LONG-TERM LONG-TERM
CORPORATE GNMA U.S. TREASURY CORPORATE
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
-----------------------------------------------------------------------------
SIX MONTHS ENDED JULY 31, 1998
-----------------------------------------------------------------------------
(000) (000) (000) (000)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
INCOME
Interest $32,029 $328,439 $33,622 $128,491
-----------------------------------------------------------------------------
Total Income 32,029 328,439 33,622 128,491
-----------------------------------------------------------------------------
EXPENSES
Investment Advisory Fees--Note B 64 591 73 517
The Vanguard Group--Note C
Management and Administrative 715 7,088 447 2,461
Shareholder Account Maintenance 315 4,860 699 2,279
Marketing and Distribution 156 1,092 148 433
Taxes (other than income taxes) 29 282 33 116
Custodian Fees 1 465 16 21
Auditing Fees 3 7 3 5
Shareholders' Reports 8 48 22 56
Annual Meeting and Proxy Costs 2 24 4 9
Trustees' Fees and Expenses 1 9 1 4
-----------------------------------------------------------------------------
Total Expenses 1,294 14,566 1,446 5,901
- -------------------------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME 30,735 313,873 32,176 122,590
- -------------------------------------------------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS)
Investment Securities Sold 3,637 9,931 (67) 37,903
Futures Contracts -- -- 83 --
- -------------------------------------------------------------------------------------------------------------------------
REALIZED NET GAIN 3,637 9,931 16 37,903
- -------------------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION)
Investment Securities (8,862) (58,295) 5,836 (34,968)
Futures Contracts -- -- (41) --
- -------------------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION) (8,862) (58,295) 5,795 (34,968)
- -------------------------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $25,510 $265,509 $37,987 $125,525
=========================================================================================================================
</TABLE>
The Statements of Net Assets for the Intermediate-Term Corporate, Long-Term U.S.
Treasury, and Long-Term Corporate Portfolios, integral parts of the Financial
Statements for each portfolio, are included as an insert to this report.
31
<PAGE> 34
STATEMENT OF OPERATIONS (continued)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
HIGH YIELD
CORPORATE
PORTFOLIO
----------------
SIX MONTHS ENDED
JULY 31, 1998
----------------
(000)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME
INCOME
Interest $211,552
----------------
Total Income 211,552
----------------
EXPENSES
Investment Advisory Fees--Note B 908
The Vanguard Group--Note C
Management and Administrative 3,341
Shareholder Account Maintenance 2,159
Marketing and Distribution 575
Taxes (other than income taxes) 151
Custodian Fees 15
Auditing Fees 5
Shareholders' Reports 70
Annual Meeting and Proxy Costs 12
Trustees' Fees and Expenses 5
----------------
Total Expenses 7,241
- ------------------------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME 204,311
- ------------------------------------------------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS)
Investment Securities Sold 50,168
Futures Contracts --
- ------------------------------------------------------------------------------------------------------------------------
REALIZED NET GAIN 50,168
- ------------------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION)
Investment Securities (85,781)
Futures Contracts --
- ------------------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) (85,781)
- ------------------------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $168,698
========================================================================================================================
</TABLE>
The Statement of Net Assets for the High Yield Corporate Portfolio, an integral
part of the Financial Statements for the portfolio, is included as an insert to
this report.
32
<PAGE> 35
STATEMENT OF CHANGES IN NET ASSETS
This Statement shows how each portfolio's total net assets changed during the
two most recent reporting periods. The Operations section summarizes
information detailed in the Statement of Operations. Because the portfolio
distributes its income to shareholders each day, the amounts of
Distributions--Net Investment Income generally equal the net income earned as
shown under the Operations section. The amounts of Distributions--Realized
Capital Gain may not match the capital gains shown in the Operations section,
because distributions are determined on a tax basis and may be made in a period
different from the one in which the gains were realized on the financial
statements. The Capital Share Transactions section shows the amount
shareholders invested in the portfolio, either by purchasing shares or by
reinvesting distributions, and the amounts redeemed. The corresponding numbers
of Shares Issued and Redeemed are shown at the end of the Statement.
Distributions, Capital Share Transactions, and Shares Issued and Redeemed are
shown separately for each class of shares.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
SHORT-TERM SHORT-TERM
U.S. TREASURY PORTFOLIO FEDERAL PORTFOLIO
----------------------------------------------------------------------
SIX MONTHS YEAR SIX MONTHS YEAR
ENDED ENDED ENDED ENDED
JUL. 31, 1998 JAN. 31, 1998 JUL. 31, 1998 JAN. 31, 1998
(000) (000) (000) (000)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net Investment Income $ 27,553 $ 57,004 $ 42,683 $ 83,019
Realized Net Gain (Loss) 2,515 3,983 313 5,665
Change in Unrealized Appreciation
(Depreciation) (6,371) 6,845 (6,861) 5,862
----------------------------------------------------------------------
Net Increase in Net Assets
Resulting from Operations 23,697 67,832 36,135 94,546
----------------------------------------------------------------------
DISTRIBUTIONS
Net Investment Income (27,553) (57,004) (42,683) (83,019)
Realized Capital Gain -- -- -- --
----------------------------------------------------------------------
Total Distributions (27,553) (57,004) (42,683) (83,019)
----------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS(1)
Issued 181,909 310,935 223,217 399,771
Issued in Lieu of Cash Distributions 24,331 50,737 36,566 71,077
Redeemed (184,422) (332,999) (202,825) (369,801)
----------------------------------------------------------------------
Net Increase from Capital
Share Transactions 21,818 28,673 56,958 101,047
- -------------------------------------------------------------------------------------------------------------------------
Total Increase 17,962 39,501 50,410 112,574
- -------------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Period 1,009,243 969,742 1,460,436 1,347,862
----------------------------------------------------------------------
End of Period $1,027,205 $1,009,243 $1,510,846 $1,460,436
=========================================================================================================================
(1)Shares Issued (Redeemed)
Issued 17,783 30,582 21,993 39,559
Issued in Lieu of Cash Distributions 2,380 4,990 3,604 7,036
Redeemed (18,028) (32,757) (19,985) (36,610)
----------------------------------------------------------------------
Net Increase in Shares Outstanding 2,135 2,815 5,612 9,985
=========================================================================================================================
</TABLE>
33
<PAGE> 36
STATEMENT OF CHANGES IN NET ASSETS (continued)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
SHORT-TERM
CORPORATE PORTFOLIO
--------------------------------
SIX MONTHS YEAR
ENDED ENDED
JUL. 31, 1998 JAN. 31, 1998
(000) (000)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net Investment Income $ 158,333 $ 289,231
Realized Net Gain (Loss) 4,304 1,279
Change in Unrealized Appreciation (Depreciation) (28,755) 52,731
--------------------------------
Net Increase in Net Assets Resulting from Operations 133,882 343,241
--------------------------------
DISTRIBUTIONS
Net Investment Income
Investor Shares (149,809) (283,686)
Institutional Shares (8,524) (5,545)
Realized Capital Gain
Investor Shares -- --
Institutional Shares -- --
--------------------------------
Total Distributions (158,333) (289,231)
--------------------------------
CAPITAL SHARE TRANSACTIONS--INVESTOR SHARES(1)
Issued 1,077,976 1,761,294
Issued in Lieu of Cash Distributions 130,242 245,843
Redeemed (770,876) (1,881,581)
--------------------------------
Net Increase--Investor Shares 437,342 125,556
--------------------------------
CAPITAL SHARE TRANSACTIONS--INSTITUTIONAL SHARES(2)
Issued 91,923 273,772
Issued in Lieu of Cash Distributions 7,938 5,544
Redeemed (28,772) (18,443)
--------------------------------
Net Increase--Institutional Shares 71,089 260,873
- -------------------------------------------------------------------------------------------------------------------------
Total Increase 483,980 440,439
- -------------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Period 4,971,177 4,530,738
End of Period $5,455,157 $4,971,177
=========================================================================================================================
(1)Shares Issued (Redeemed)--Investor Shares
Issued 99,591 163,623
Issued in Lieu of Cash Distributions 12,037 22,845
Redeemed (71,209) (174,866)
--------------------------------
Net Increase in Shares Outstanding 40,419 11,602
=========================================================================================================================
(2)Shares Issued (Redeemed)--Institutional Shares
Issued 8,495 25,348
Issued in Lieu of Cash Distributions 734 512
Redeemed (2,658) (1,706)
--------------------------------
Net Increase in Shares Outstanding 6,571 24,154
=========================================================================================================================
</TABLE>
34
<PAGE> 37
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
INTERMEDIATE-TERM INTERMEDIATE-TERM
U.S. TREASURY PORTFOLIO CORPORATE PORTFOLIO
---------------------------------------------------------------------
SIX MONTHS YEAR SIX MONTHS YEAR
ENDED ENDED ENDED ENDED
JUL. 31, 1998 JAN. 31, 1998 JUL. 31, 1998 JAN. 31, 1998
(000) (000) (000) (000)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net Investment Income $ 48,115 $ 84,087 $ 30,735 $ 46,556
Realized Net Gain (Loss) 7,301 (5,459) 3,637 1,083
Change in Unrealized Appreciation
(Depreciation) (15,865) 63,116 (8,862) 24,555
---------------------------------------------------------------------
Net Increase in Net Assets
Resulting from Operations 39,551 141,744 25,510 72,194
---------------------------------------------------------------------
DISTRIBUTIONS
Net Investment Income (48,115) (84,087) (30,735) (46,556)
Realized Capital Gain -- -- (1,434) (952)
---------------------------------------------------------------------
Total Distributions (48,115) (84,087) (32,169) (47,508)
---------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS(1)
Issued 292,897 602,871 224,719 415,063
Issued in Lieu of Cash Distributions 35,439 61,945 26,734 39,277
Redeemed (254,296) (406,226) (99,128) (171,911)
---------------------------------------------------------------------
Net Increase from Capital
Share Transactions 74,040 258,590 152,325 282,429
- ------------------------------------------------------------------------------------------------------------------------
Total Increase 65,476 316,247 145,666 307,115
- ------------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Period 1,594,832 1,278,585 898,888 591,773
---------------------------------------------------------------------
End of Period $1,660,308 $1,594,832 $1,044,554 $898,888
========================================================================================================================
(1)Shares Issued (Redeemed)
Issued 27,319 57,416 22,533 42,302
Issued in Lieu of Cash Distributions 3,308 5,919 2,684 4,003
Redeemed (23,733) (38,931) (9,945) (17,547)
---------------------------------------------------------------------
Net Increase in Shares Outstanding 6,894 24,404 15,272 28,758
========================================================================================================================
</TABLE>
35
<PAGE> 38
STATEMENT OF CHANGES IN NET ASSETS (continued)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
LONG-TERM
GNMA PORTFOLIO U.S. TREASURY PORTFOLIO
--------------------------------------------------------------------
SIX MONTHS YEAR SIX MONTHS YEAR
ENDED ENDED ENDED ENDED
JUL. 31, 1998 JAN. 31, 1998 JUL. 31, 1998 JAN. 31, 1998
(000) (000) (000) (000)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net Investment Income $ 313,873 $ 559,144 $ 32,176 $ 58,983
Realized Net Gain (Loss) 9,931 1,871 16 (701)
Change in Unrealized Appreciation
(Depreciation) (58,295) 202,766 5,795 88,314
--------------------------------------------------------------------
Net Increase in Net Assets
Resulting from Operations 265,509 763,781 37,987 146,596
--------------------------------------------------------------------
DISTRIBUTIONS
Net Investment Income (313,873) (559,144) (32,176) (58,983)
Realized Capital Gain (1,767) (1,985) -- --
--------------------------------------------------------------------
Total Distributions (315,640) (561,129) (32,176) (58,983)
--------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS(1)
Issued 1,718,643 2,326,765 238,880 389,064
Issued in Lieu of Cash Distributions 239,926 424,132 25,093 45,242
Redeemed (797,539) (1,459,563) (188,357) (358,440)
--------------------------------------------------------------------
Net Increase from Capital
Share Transactions 1,161,030 1,291,334 75,616 75,866
- ------------------------------------------------------------------------------------------------------------------
Total Increase 1,110,899 1,493,986 81,427 163,479
- ------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Period 8,894,066 7,400,080 1,061,422 897,943
--------------------------------------------------------------------
End of Period $10,004,965 $8,894,066 $1,142,849 $1,061,422
==================================================================================================================
(1)Shares Issued (Redeemed)
Issued 164,667 225,661 22,262 38,081
Issued in Lieu of Cash Distributions 23,011 41,195 2,336 4,478
Redeemed (76,420) (141,703) (17,565) (35,474)
--------------------------------------------------------------------
Net Increase in Shares Outstanding 111,258 125,153 7,033 7,085
==================================================================================================================
</TABLE>
36
<PAGE> 39
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
LONG-TERM HIGH YIELD
CORPORATE PORTFOLIO CORPORATE PORTFOLIO
-----------------------------------------------------------------
SIX MONTHS YEAR SIX MONTHS YEAR
ENDED ENDED ENDED ENDED
JUL. 31, 1998 JAN. 31, 1998 JUL. 31, 1998 JAN. 31, 1998
(000) (000) (000) (000)
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE IN NET ASSETS
Operations
Net Investment Income $ 122,590 $ 233,907 $ 204,311 $ 356,175
Realized Net Gain (Loss) 37,903 61,205 50,168 55,757
Change in Unrealized Appreciation
(Depreciation) (34,968) 204,284 (85,781) 105,470
-----------------------------------------------------------------
Net Increase in Net Assets
Resulting from Operations 125,525 499,396 168,698 517,402
-----------------------------------------------------------------
DISTRIBUTIONS
Net Investment Income (122,590) (233,907) (204,311) (356,175)
Realized Capital Gain (33,816) (29,076) -- --
-----------------------------------------------------------------
Total Distributions (156,406) (262,983) (204,311) (356,175)
-----------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS(1)
Issued 466,732 811,295 739,278 1,300,054
Issued in Lieu of Cash Distributions 131,737 216,458 143,375 249,424
Redeemed (342,401) (867,427) (351,148) (637,696)
-----------------------------------------------------------------
Net Increase from Capital
Share Transactions 256,068 160,326 531,505 911,782
- --------------------------------------------------------------------------------------------------------------
Total Increase 225,187 396,739 495,892 1,073,009
- --------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Period 3,720,278 3,323,539 4,746,951 3,673,942
-----------------------------------------------------------------
End of Period $3,945,465 $3,720,278 $5,242,843 $4,746,951
==============================================================================================================
(1)Shares Issued (Redeemed)
Issued 50,509 90,509 90,734 162,853
Issued in Lieu of Cash Distributions 14,291 24,157 17,630 31,269
Redeemed (37,030) (97,058) (43,183) (80,332)
-----------------------------------------------------------------
Net Increase in Shares Outstanding 27,770 17,608 65,181 113,790
==============================================================================================================
</TABLE>
37
<PAGE> 40
FINANCIAL HIGHLIGHTS
This table summarizes each portfolio's investment results and distributions to
shareholders on a per-share basis for each class of shares. It also presents the
Total Return and shows net investment income and expenses as percentages of
average net assets. These data will help you assess: the variability of the
portfolio's net income and total returns from year to year; the relative
contributions of net income and capital gains to the portfolio's total return;
how much it costs to operate the portfolio; and the extent to which the
portfolio tends to distribute capital gains. The table also shows the Portfolio
Turnover Rate, a measure of trading activity. A turnover rate of 100% means that
the average security is held in the portfolio for one year.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
SHORT-TERM U.S. TREASURY PORTFOLIO
YEAR ENDED JANUARY 31,
FOR A SHARE OUTSTANDING SIX MONTHS ENDED --------------------------------------------------------------
THROUGHOUT EACH PERIOD JULY 31, 1998 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.27 $10.16 $10.36 $9.89 $10.41 $10.41
- --------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .276 .590 .586 .625 .532 .486
Net Realized and Unrealized Gain (Loss)
on Investments (.040) .110 (.200) .470 (.500) .079
-------------------------------------------------------------------------
Total from Investment Operations .236 .700 .386 1.095 .032 .565
-------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.276) (.590) (.586) (.625) (.532) (.486)
Distributions from Realized Capital Gains -- -- -- -- (.020) (.079)
-------------------------------------------------------------------------
Total Distributions (.276) (.590) (.586) (.625) (.552) (.565)
- --------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $10.23 $10.27 $10.16 $10.36 $9.89 $10.41
==========================================================================================================================
TOTAL RETURN 2.33% 7.11% 3.89% 11.37% 0.40% 5.54%
==========================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $1,027 $1,009 $970 $919 $754 $729
Ratio of Total Expenses to
Average Net Assets 0.27%* 0.27% 0.25% 0.27% 0.28% 0.26%
Ratio of Net Investment Income to
Average Net Assets 5.43%* 5.80% 5.77% 6.14% 5.33% 4.64%
Portfolio Turnover Rate 130%* 83% 86% 93% 126% 86%
- --------------------------------------------------------------------------------------------------------------------------
*Annualized.
</TABLE>
38
<PAGE> 41
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
SHORT-TERM FEDERAL PORTFOLIO
YEAR ENDED JANUARY 31,
FOR A SHARE OUTSTANDING SIX MONTHS ENDED -----------------------------------------------------------
THROUGHOUT EACH PERIOD JULY 31, 1998 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.19 $10.11 $10.28 $ 9.79 $10.38 $10.38
- -------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .293 .611 .615 .601 .550 .522
Net Realized and Unrealized Gain (Loss)
on Investments (.050) .080 (.170) .490 (.580) .110
------------------------------------------------------------------------
Total from Investment Operations .243 .691 .445 1.091 (.030) .632
------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.293) (.611) (.615) (.601) (.550) (.522)
Distributions from Realized Capital Gains -- -- -- -- (.010) (.110)
------------------------------------------------------------------------
Total Distributions (.293) (.611) (.615) (.601) (.560) (.632)
- -------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $10.14 $10.19 $10.11 $10.28 $ 9.79 $10.38
=========================================================================================================================
TOTAL RETURN 2.42% 7.06% 4.51% 11.43% -0.21% 6.23%
=========================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $1,511 $1,460 $1,348 $1,402 $1,474 $1,936
Ratio of Total Expenses to
Average Net Assets 0.27%* 0.27% 0.25% 0.27% 0.28% 0.26%
Ratio of Net Investment Income to
Average Net Assets 5.82%* 6.04% 6.09% 5.93% 5.53% 4.98%
Portfolio Turnover Rate 126%* 94% 57% 74% 57% 49%
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Annualized.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
SHORT-TERM CORPORATE PORTFOLIO-INVESTOR SHARES
YEAR ENDED JANUARY 31,
FOR A SHARE OUTSTANDING SIX MONTHS ENDED -----------------------------------------------------------
THROUGHOUT EACH PERIOD JULY 31, 1998 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.87 $10.75 $10.94 $10.40 $10.94 $10.99
- -------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .330 .664 .663 .671 .596 .605
Net Realized and Unrealized Gain (Loss)
on Investments (.050) .120 (.190) .540 (.540) .049
-----------------------------------------------------------------------
Total from Investment Operations .280 .784 .473 1.211 .056 .654
-----------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.330) (.664) (.663) (.671) (.596) (.605)
Distributions from Realized Capital Gains -- -- -- -- -- (.099)
-----------------------------------------------------------------------
Total Distributions (.330) (.664) (.663) (.671) (.596) (.704)
- -------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD 10.82 $10.87 $ 10.75 $10.94 $10.40 $10.94
=========================================================================================================================
TOTAL RETURN 2.62% 7.53% 4.52% 11.95% 0.60% 6.11%
=========================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $5,123 $4,709 $4,531 $3,873 $2,924 $3,573
Ratio of Total Expenses to
Average Net Assets 0.27%* 0.28% 0.25% 0.27% 0.28% 0.26%
Ratio of Net Investment Income to
Average Net Assets 6.15%* 6.17% 6.18% 6.23% 5.66% 5.48%
Portfolio Turnover Rate 51%* 45% 45% 62% 69% 61%
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Annualized.
39
<PAGE> 42
FINANCIAL HIGHLIGHTS (continued)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
SHORT-TERM CORPORATE PORTFOLIO-INSTITUTIONAL SHARES
SIX MONTHS ENDED SEP. 30, 1997* TO
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD JULY 31, 1998 JAN. 31, 1998
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.87 $10.80
- ---------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .337 .229
Net Realized and Unrealized Gain (Loss) on Investments (.050) .070
--------------------------------------
Total from Investment Operations .287 .299
--------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.337) (.229)
Distributions from Realized Capital Gains -- --
--------------------------------------
Total Distributions (.337) (.229)
- ---------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $10.82 $10.87
===========================================================================================================================
TOTAL RETURN 2.68% 2.79%
===========================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $332 $263
Ratio of Total Expenses to Average Net Assets 0.15%** 0.15%**
Ratio of Net Investment Income to Average Net Assets 6.26%** 6.28%**
Portfolio Turnover Rate 51%** 45%
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Inception.
**Annualized.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
INTERMEDIATE-TERM U.S. TREASURY PORTFOLIO
YEAR ENDED JANUARY 31,
FOR A SHARE OUTSTANDING SIX MONTHS ENDED -----------------------------------------------------------
THROUGHOUT EACH PERIOD JULY 31, 1998 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.80 $10.37 $10.90 $ 9.76 $10.82 $10.79
- -------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .316 .647 .649 .662 .603 .617
Net Realized and Unrealized Gain (Loss)
on Investments (.060) .430 (.530) 1.140 (1.033) .443
-----------------------------------------------------------------------
Total from Investment Operations .256 1.077 .119 1.802 (.430) 1.060
-----------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.316) (.647) (.649) (.662) (.603) (.617)
Distributions from Realized Capital Gains -- -- -- -- (.027) (.413)
-----------------------------------------------------------------------
Total Distributions (.316) (.647) (.649) (.662) (.630) (1.030)
- -------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $10.74 $10.80 $10.37 $10.90 $ 9.76 $10.82
=========================================================================================================================
TOTAL RETURN 2.41% 10.78% 1.28% 18.96% -3.90% 10.09%
=========================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $1,660 $1,595 $1,279 $1,226 $848 $1,007
Ratio of Total Expenses to
Average Net Assets 0.27%* 0.27% 0.25% 0.28% 0.28% 0.26%
Ratio of Net Investment Income to
Average Net Assets 5.93%* 6.19% 6.26% 6.34% 6.05% 5.55%
Portfolio Turnover Rate 58%* 30% 42% 56% 128% 118%
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Annualized.
40
<PAGE> 43
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
INTERMEDIATE-TERM CORPORATE PORTFOLIO
YEAR ENDED JANUARY 31,
FOR A SHARE OUTSTANDING SIX MONTHS ENDED ----------------------------------------------- NOV. 1, 1993* TO
THROUGHOUT EACH PERIOD JULY 31, 1998 1998 1997 1996 1995 JAN. 31, 1994
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.03 $ 9.72 $10.17 $ 9.07 $10.04 $10.00
- -------------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .315 .638 .639 .658 .587 .125
Net Realized and Unrealized Gain (Loss)
on Investments (.055) .321 (.430) 1.100 (.970) .040
----------------------------------------------------------------------------
Total from Investment Operations .260 .959 .209 1.758 (.383) .165
----------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.315) (.638) (.639) (.658) (.587) (.125)
Distributions from Realized Capital Gains (.015) (.011) (.020) -- -- --
----------------------------------------------------------------------------
Total Distributions (.330) (.649) (.659) (.658) (.587) (.125)
- -------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 9.96 $10.03 $ 9.72 $10.17 $ 9.07 $10.04
===============================================================================================================================
TOTAL RETURN 2.64% 10.24% 2.29% 19.94% -3.73% 1.66%
===============================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $1,045 $899 $592 $424 $163 $85
Ratio of Total Expenses to
Average Net Assets 0.27%** 0.26% 0.25% 0.28% 0.28% 0.25%**
Ratio of Net Investment Income to
Average Net Assets 6.36%** 6.51% 6.61% 6.70% 6.46% 5.11%**
Portfolio Turnover Rate 66%** 69% 85% 78% 97% 74%
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Commencement of operations.
**Annualized.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
GNMA PORTFOLIO
YEAR ENDED JANUARY 31,
FOR A SHARE OUTSTANDING SIX MONTHS ENDED ----------------------------------------------------------
THROUGHOUT EACH PERIOD JULY 31, 1998 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.48 $10.23 $10.45 $ 9.71 $10.39 $10.50
- -------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .348 .718 .727 .734 .693 .641
Net Realized and Unrealized Gain (Loss)
on Investments (.058) .253 (.220) .740 (.673) (.110)
-----------------------------------------------------------------------
Total from Investment Operations .290 .971 .507 1.474 .020 .531
-----------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.348) (.718) (.727) (.734) (.693) (.641)
Distributions from Realized Capital Gains (.002) (.003) -- -- (.007) --
-----------------------------------------------------------------------
Total Distributions (.350) (.721) (.727) (.734) (.700) (.641)
- -------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $10.42 $10.48 $10.23 $10.45 $ 9.71 $10.39
=========================================================================================================================
TOTAL RETURN 2.81% 9.86% 5.15% 15.64% 0.36% 5.18%
=========================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $10,005 $8,894 $7,400 $6,998 $5,851 $7,043
Ratio of Total Expenses to
Average Net Assets 0.31%* 0.31% 0.27% 0.29% 0.30% 0.28%
Ratio of Net Investment Income to
Average Net Assets 6.72%* 6.97% 7.16% 7.22% 7.04% 6.19%
Portfolio Turnover Rate 13%* 3% 12% 7% 35% 2%
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Annualized.
41
<PAGE> 44
FINANCIAL HIGHLIGHTS (continued)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
LONG-TERM U.S. TREASURY PORTFOLIO
YEAR ENDED JANUARY 31,
FOR A SHARE OUTSTANDING SIX MONTHS ENDED ------------------------------------------------------------
THROUGHOUT EACH PERIOD JULY 31, 1998 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.79 $ 9.84 $10.73 $ 9.23 $10.75 $10.04
- -------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .318 .643 .655 .669 .665 .685
Net Realized and Unrealized Gain (Loss)
on Investments .050 .950 (.877) 1.725 (1.401) .886
----------------------------------------------------------------------
Total from Investment Operations .368 1.593 (.222) 2.394 (.736) 1.571
----------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.318) (.643) (.655) (.669) (.665) (.685)
Distributions from Realized Capital Gains -- -- (.013) (.225) (.119) (.176)
----------------------------------------------------------------------
Total Distributions (.318) (.643) (.668) (.894) (.784) (.861)
- -------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $10.84 $10.79 $ 9.84 $10.73 $ 9.23 $10.75
=========================================================================================================================
TOTAL RETURN 3.47% 16.85% -1.85% 26.72% -6.68% 16.09%
=========================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $1,143 $1,061 $898 $916 $671 $829
Ratio of Total Expenses to
Average Net Assets 0.27%* 0.27% 0.25% 0.27% 0.28% 0.26%
Ratio of Net Investment Income to
Average Net Assets 5.96%* 6.38% 6.66% 6.57% 7.02% 6.44%
Portfolio Turnover Rate 6%* 18% 31% 105% 85% 7%
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Annualized.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
LONG-TERM CORPORATE PORTFOLIO
YEAR ENDED JANUARY 31,
FOR A SHARE OUTSTANDING SIX MONTHS ENDED ----------------------------------------------------------
THROUGHOUT EACH PERIOD JULY 31, 1998 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $9.32 $8.71 $9.43 $8.18 $9.36 $9.04
- -------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .294 .613 .619 .627 .617 .632
Net Realized and Unrealized Gain (Loss)
on Investments .002 .685 (.566) 1.250 (1.108) .579
---------------------------------------------------------------------
Total from Investment Operations .296 1.298 .053 1.877 (.491) 1.211
---------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.294) (.613) (.619) (.627) (.617) (.632)
Distributions from Realized Capital Gains (.082) (.075) (.154) -- (.072) (.259)
---------------------------------------------------------------------
Total Distributions (.376) (.688) (.773) (.627) (.689) (.891)
- -------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $9.24 $9.32 $8.71 $9.43 $8.18 $9.36
=========================================================================================================================
TOTAL RETURN 3.25% 15.52% 0.86% 23.64% -5.12% 13.83%
=========================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $3,945 $3,720 $3,324 $3,376 $2,607 $3,166
Ratio of Total Expenses to
Average Net Assets 0.31%* 0.32% 0.28% 0.31% 0.32% 0.30%
Ratio of Net Investment Income to
Average Net Assets 6.40%* 6.87% 7.06% 7.03% 7.37% 6.71%
Portfolio Turnover Rate 35%* 33% 30% 49% 43% 77%
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Annualized.
42
<PAGE> 45
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
HIGH YIELD CORPORATE PORTFOLIO
YEAR ENDED JANUARY 31,
FOR A SHARE OUTSTANDING SIX MONTHS ENDED ----------------------------------------------------------
THROUGHOUT EACH PERIOD JULY 31, 1998 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $8.17 $7.87 $7.89 $7.24 $8.14 $7.56
- -------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .332 .688 .688 .678 .679 .695
Net Realized and Unrealized Gain (Loss)
on Investments (.050) .300 (.020) .650 (.900) .580
----------------------------------------------------------------------
Total from Investment Operations .282 .988 .668 1.328 (.221) 1.275
----------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.332) (.688) (.688) (.678) (.679) (.695)
Distributions from Realized Capital Gains -- -- -- -- -- --
----------------------------------------------------------------------
Total Distributions (.332) (.688) (.688) (.678) (.679) (.695)
- -------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $8.12 $8.17 $7.87 $7.89 $7.24 $8.14
=========================================================================================================================
TOTAL RETURN* 3.51% 13.14% 9.01% 19.01% -2.52% 17.54%
=========================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $5,243 $4,747 $3,674 $3,007 $2,162 $2,625
Ratio of Total Expenses to
Average Net Assets 0.30%** 0.28% 0.29% 0.34% 0.34% 0.32%
Ratio of Net Investment Income to
Average Net Assets 8.21%** 8.63% 8.92% 8.85% 9.13% 8.81%
Portfolio Turnover Rate 39%** 45% 23% 38% 33% 51%
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Total returns do not reflect the 1% fee assessed on redemptions of shares
held for less than one year.
**Annualized.
43
<PAGE> 46
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, or mutual fund, and
comprises the Short-Term U.S. Treasury, Short-Term Federal, Short-Term
Corporate, Intermediate-Term U.S. Treasury, Intermediate-Term Corporate, GNMA,
Long-Term U.S. Treasury, Long-Term Corporate, and High Yield Corporate
Portfolios. Certain of the fund's investments 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 conform to generally accepted
accounting principles for mutual funds. The fund consistently follows such
policies in preparing its financial statements.
1. SECURITY VALUATION: Bonds, and temporary cash investments acquired
over 60 days to maturity, are valued using the latest bid prices or using
valuations based on a matrix system (which considers such factors as security
prices, yields, maturities, and credit ratings), both as furnished by
independent pricing services. Other temporary cash investments are valued at
amortized cost, which approximates market value. Securities for which market
quotations are not readily available are valued by methods deemed by the Board
of Trustees to represent fair value.
2. FEDERAL INCOME TAXES: Each portfolio intends to continue to
qualify as a regulated investment company and distribute all of its income.
Accordingly, no provision for federal income taxes is required in the financial
statements.
3. REPURCHASE AGREEMENTS: Each portfolio, along with other members of
The Vanguard Group, transfers uninvested cash balances to a Pooled Cash Account,
the daily aggregate of which is invested in repurchase agreements secured by
U.S. government securities. Securities pledged as collateral for repurchase
agreements are held by a custodian bank until the agreements mature. Each
agreement requires that the market value of the collateral be sufficient to
cover payments of interest and principal; however, in the event of default or
bankruptcy by the other party to the agreement, retention of the collateral may
be subject to legal proceedings.
4. FUTURES CONTRACTS: Each portfolio, except the Short-Term Federal
Portfolio, may use Municipal Bond Index, U.S. Treasury Bond, and U.S. Treasury
Note futures contracts, with the objectives of enhancing returns, managing
interest-rate risk, maintaining liquidity, diversifying credit risk and
minimizing transaction costs. The portfolios may purchase or sell futures
contracts instead of bonds to take advantage of pricing differentials between
the futures contracts and the underlying 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. The aggregate principal amounts of the contracts are not recorded in the
financial statements. Fluctuations in the value of the contracts are recorded in
the Statement of Net Assets as an asset (liability) and in the Statement of
Operations as unrealized appreciation (depreciation) until the contracts are
closed, when they are recorded as realized futures gains (losses).
5. DISTRIBUTIONS: Distributions from net investment income are
declared daily and paid on the first business day of the following month. Annual
distributions from realized capital gains, if any, are recorded on the
ex-dividend date.
6. OTHER: Security transactions are accounted for on the date
securities are bought or sold. Costs used to determine realized gains (losses)
on the sale of investment securities are those of the specific securities sold.
Premiums and discounts on debt securities purchased are amortized and
44
<PAGE> 47
accreted, respectively, to interest income over the lives of the respective
securities. Fees assessed on redemptions of High Yield Corporate Portfolio
capital shares are credited to paid in capital.
B. The Vanguard Group furnishes investment advisory services to the Short-Term
U.S. Treasury, Short-Term Federal, Short-Term Corporate, Intermediate-Term U.S.
Treasury, Intermediate-Term Corporate, and Long-Term U.S. Treasury Portfolios on
an at-cost basis.
Wellington Management Company, LLP provides investment advisory
services to the GNMA, Long-Term Corporate, and High Yield Corporate Portfolios
for fees calculated at an annual percentage rate of average net assets. For the
six months ended July 31, 1998, the investment advisory fees of the GNMA,
Long-Term Corporate, and High Yield Corporate Portfolios represented effective
annual rates of 0.01%, 0.03%, and 0.04%, respectively, of average net assets.
C. The Vanguard Group furnishes at cost corporate management, administrative,
shareholder account maintenance, marketing, and distribution services. The costs
of such services are allocated to the fund under methods approved by the Board
of Trustees. At July 31, 1998, the fund had contributed capital aggregating
$5,859,000 to Vanguard (included in Other Assets), representing 8.4% of
Vanguard's capitalization. The fund's Trustees and officers are also Directors
and officers of Vanguard.
D. The Short-Term Corporate Portfolio offers two classes of shares, Investor
Shares and Institutional Shares. Institutional Shares are designed primarily for
institutional investors that meet certain administrative and servicing criteria
and have a minimum investment of $50 million. Investor Shares are offered to all
other investors. Both classes of shares have equal rights to assets and
earnings, except that each class bears certain class-specific expenses related
to its shareholder activity. Class-specific expenses for the six months ended
July 31, 1998, represented the following percentages of average net assets:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
PORTFOLIO INVESTOR SHARES INSTITUTIONAL SHARES
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Short-Term Corporate 0.15%* 0.03%*
- ---------------------------------------------------------------------------------------------------
</TABLE>
*Annualized.
Income, expenses not attributable to a specific class, and realized and
unrealized gains and losses on investments are allocated to each class of shares
based on its relative net assets.
E. During the six months ended July 31, 1998, purchases and sales of investment
securities other than U.S. government securities and temporary cash investments
were:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
(000)
-----------------------------------
PORTFOLIO PURCHASES SALES
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Short-Term Corporate $1,728,436 $996,424
Intermediate-Term Corporate 361,139 216,236
Long-Term Corporate 544,694 527,564
High Yield Corporate 1,429,213 930,496
- ------------------------------------------------------------------------------------------------
</TABLE>
45
<PAGE> 48
NOTES TO FINANCIAL STATEMENTS (continued)
Purchases and sales of U.S. government securities were:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
(000)
--------------------------------
PORTFOLIO PURCHASES SALES
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Short-Term U.S. Treasury $ 674,637 $653,356
Short-Term Federal 975,948 904,679
Short-Term Corporate 105,386 292,665
Intermediate-Term U.S. Treasury 457,626 461,172
Intermediate-Term Corporate 101,350 98,353
GNMA 2,574,005 582,477
Long-Term U.S. Treasury 119,819 32,360
Long-Term Corporate 236,605 117,327
High Yield Corporate 71,620 25,580
- ---------------------------------------------------------------------------------------------
</TABLE>
At January 31, 1998, the portfolios had the following capital losses
available to offset future net capital gains:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
EXPIRATION
FISCAL YEAR(S) AMOUNT
PORTFOLIO ENDING JANUARY 31, (000)
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Short-Term U.S. Treasury 2003-2004 $ 4,362
Short-Term Federal 2003-2004 25,371
Short-Term Corporate 2003-2004 27,840
Intermediate-Term U.S. Treasury 2003-2006 30,935
Long-Term U.S. Treasury 2005 4,788
High Yield Corporate 2000 25,958
- ----------------------------------------------------------------------------------------------
</TABLE>
F. At July 31, 1998, net unrealized appreciation of investment securities for
financial reporting and federal income tax purposes was:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
(000)
--------------------------------------------------------
APPRECIATED DEPRECIATED NET UNREALIZED
PORTFOLIO SECURITIES SECURITIES APPRECIATION
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Short-Term U.S. Treasury $ 3,264 $ (415) $ 2,849
Short-Term Federal 7,011 (559) 6,452
Short-Term Corporate 40,141 (4,445) 35,696
Intermediate-Term U.S. Treasury 55,561 (296) 55,265
Intermediate-Term Corporate 19,230 (2,199) 17,031
GNMA 257,269 (10,486) 246,783
Long-Term U.S. Treasury 128,569 (54) 128,515
Long-Term Corporate 234,410 (1,840) 232,570
High Yield Corporate 134,489 (26,729) 107,760
- ----------------------------------------------------------------------------------------------
</TABLE>
46
<PAGE> 49
At July 31, 1998, the aggregate settlement value of open futures contracts
expiring in September 1998 and the related unrealized depreciation were:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
(000)
---------------------------------
NUMBER OF AGGREGATE
LONG (SHORT) SETTLEMENT UNREALIZED
PORTFOLIO/FUTURES CONTRACTS CONTRACTS VALUE DEPRECIATION
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Intermediate-Term U.S. Treasury/
U.S. Treasury Note 567 $69,511 $(18)
Long-Term U.S. Treasury/
U.S. Treasury Note 276 31,343 (26)
U.S. Treasury Bond (149) 18,266 (15)
- ----------------------------------------------------------------------------------------------
</TABLE>
G. The market values of securities on loan to brokers/dealers at July 31, 1998,
and collateral received with respect to such loans, were:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
(000)
---------------------------------------------------------
COLLATERAL RECEIVED
----------------------------------
MARKET VALUE
OF LOANED U.S. TREASURY
PORTFOLIO SECURITIES CASH SECURITIES
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Short-Term U.S. Treasury $ 21,751 $ 22,208 --
Short-Term Federal 33,717 29,218 $ 5,265
Short-Term Corporate 20,561 21,034 --
Intermediate-Term
U.S. Treasury 198,575 166,289 37,162
Intermediate-Term
Corporate 2,060 2,105 --
Long-Term U.S. Treasury 64,506 50,252 15,846
High Yield Corporate 244,707 253,132 --
- ----------------------------------------------------------------------------------------------
</TABLE>
Cash collateral received is invested in repurchase agreements. Security loans
are required to be secured at all times by collateral at least equal to the
market value of securities loaned; however, in the event of default or
bankruptcy by the other party to the agreement, retention of the collateral may
be subject to legal proceedings.
47
<PAGE> 50
TRUSTEES AND OFFICERS
JOHN C. BOGLE
Senior Chairman of the Board and Director of The Vanguard Group, Inc., and
Trustee of each of the investment companies in The Vanguard Group.
JOHN J. BRENNAN
Chairman, Chief Executive Officer, and Director of The Vanguard Group, Inc., and
Trustee of each of the investment companies in The Vanguard Group.
BARBARA BARNES HAUPTFUHRER
Director of The Great Atlantic and Pacific Tea Co., IKON Office Solutions, Inc.,
Raytheon Co., Knight-Ridder, Inc., Massachusetts Mutual Life Insurance Co., and
Ladies Professional Golf Association; Trustee Emerita of Wellesley College.
JOANN HEFFERNAN HEISEN
Vice President, Chief Information Officer, and a member of the Executive
Committee of Johnson & Johnson; Director of Johnson & Johnson-Merck Consumer
Pharmaceuticals Co., Women First HealthCare, Inc., Recording for the Blind and
Dyslexic, The Medical Center at Princeton, and Women's Research and Education
Institute.
BRUCE K. MACLAURY
President Emeritus of The Brookings Institution; Director of American Express
Bank Ltd., The St. Paul Companies, Inc., and National Steel Corp.
BURTON G. MALKIEL
Chemical Bank Chairman's Professor of Economics, Princeton University; Director
of Prudential Insurance Co. of America, Banco Bilbao Gestinova, Baker Fentress &
Co., The Jeffrey Co., and Southern New England Telecommunications Co.
ALFRED M. RANKIN, JR.
Chairman, President, and Chief Executive Officer of NACCO Industries, Inc.;
Director of NACCO Industries, The BFGoodrich Co., and The Standard Products Co.
JOHN C. SAWHILL
President and Chief Executive Officer of The Nature Conservancy; formerly,
Director and Senior Partner of McKinsey & Co. and President of New York
University; Director of Pacific Gas and Electric Co., Procter & Gamble Co.,
NACCO Industries, and Newfield Exploration Co.
JAMES O. WELCH, JR.
Retired Chairman of Nabisco Brands, Inc.; retired Vice Chairman and Director of
RJR Nabisco; Director of TECO Energy, Inc., and Kmart Corp.
J. LAWRENCE WILSON
Chairman and Chief Executive Officer of Rohm & Haas Co.; Director of Cummins
Engine Co. and The Mead Corp.; Trustee of Vanderbilt University.
OTHER FUND OFFICERS
RAYMOND J. KLAPINSKY
Secretary; Managing Director and Secretary
of The Vanguard Group, Inc.; Secretary of
each of the investment companies in The Vanguard Group.
RICHARD F. HYLAND
Treasurer; Principal of The Vanguard Group, Inc.; Treasurer of each of the
investment companies in The Vanguard Group.
KAREN E. WEST
Controller; Principal of The Vanguard Group, Inc.; Controller of each of the
investment companies in The Vanguard Group.
OTHER VANGUARD OFFICERS
R. GREGORY BARTON
Managing Director, Legal Department.
ROBERT A. DISTEFANO
Managing Director, Information Technology.
JAMES H. GATELY
Managing Director, Individual Investor Group.
KATHLEEN C. GUBANICH
Managing Director, Human Resources.
IAN A. MACKINNON
Managing Director, Fixed Income Group.
F. WILLIAM MCNABB, III
Managing Director, Institutional Investor Group.
MICHAEL S. MILLER
Managing Director, Planning and Development.
RALPH K. PACKARD
Managing Director and Chief Financial Officer.
GEORGE U. SAUTER
Managing Director, Core Management Group.
"Standard & Poor's(R)," "S&P(R)," "S&P 500(R)," "Standard & Poor's
500," and "500" are trademarks of The McGraw-Hill Companies, Inc. Frank
Russell Company is the owner of trademarks and copyrights relating to the
Russell Indexes. "Wilshire 4500" and "Wilshire 5000" are trademarks of
Wilshire Associates.
<PAGE> 51
VANGUARD FAMILY OF FUNDS
STOCK FUNDS
Convertible Securities Fund
Equity Income Fund
Explorer Fund
Growth and Income Portfolio
Horizon Fund
Aggressive Growth Portfolio
Capital Opportunity Portfolio
Global Equity Portfolio
Index Trust
500 Portfolio
Extended Market Portfolio
Growth Portfolio
Mid Capitalization Stock
Portfolio
Small Capitalization Growth
Stock Portfolio
Small Capitalization Stock
Portfolio
Small Capitalization Value
Stock Portfolio
Total Stock Market Portfolio
Value Portfolio
Institutional Index Fund
International Equity Index Fund
Emerging Markets Portfolio
European Portfolio
Pacific Portfolio
International Growth Portfolio
International Value Portfolio
Morgan Growth Fund
PRIMECAP Fund
Selected Value Portfolio
Specialized Portfolios
Energy Portfolio
Gold & Precious Metals
Portfolio
Health Care Portfolio
REIT Index Portfolio
Utilities Income Portfolio
Tax-Managed Fund
Capital Appreciation
Portfolio
Growth and Income Portfolio
Total International Portfolio
U.S. Growth Portfolio
Windsor Fund
Windsor II
MONEY MARKET FUNDS
Admiral Funds
U.S. Treasury Money Market
Portfolio
Money Market Reserves
Federal Portfolio
Prime Portfolio
Municipal Bond Fund
Money Market Portfolio
State Tax-Free Funds
(CA, NJ, NY, OH, PA)
Treasury Money Market Portfolio
BOND FUNDS
Admiral Funds
Intermediate-Term U.S.
Treasury Portfolio
Long-Term U.S. Treasury
Portfolio
Short-Term U.S. Treasury
Portfolio
Bond Index Fund
Intermediate-Term Bond
Portfolio
Long-Term Bond Portfolio
Short-Term Bond Portfolio
Total Bond Market Portfolio
Fixed Income Securities Fund
GNMA Portfolio
High Yield Corporate Portfolio
Intermediate-Term Corporate
Portfolio
Intermediate-Term U.S.
Treasury Portfolio
Long-Term Corporate
Portfolio
Long-Term U.S. Treasury
Portfolio
Short-Term Corporate
Portfolio
Short-Term Federal Portfolio
Short-Term U.S. Treasury
Portfolio
Municipal Bond Fund
High-Yield Portfolio
Insured Long-Term Portfolio
Intermediate-Term Portfolio
Limited-Term Portfolio
Long-Term Portfolio
Short-Term Portfolio
Preferred Stock Fund
State Tax-Free Funds
(CA, FL, NJ, NY, OH, PA)
BALANCED FUNDS
Asset Allocation Fund
Balanced Index Fund
Horizon Fund
Global Asset Allocation
Portfolio
LifeStrategy Portfolios
Conservative Growth
Portfolio
Growth Portfolio
Income Portfolio
Moderate Growth Portfolio
STAR Portfolio
Tax-Managed Fund
Balanced Portfolio
Wellesley Income Fund
Wellington Fund
Q282-7/1998
(C) 1998 Vanguard Marketing
Corporation, Distributor.
All rights reserved.
[THE VANGUARD GROUP LOGO]
Post Office Box 2600
Valley Forge, Pennsylvania 19482
FUND INFORMATION
1-800-662-7447
INDIVIDUAL ACCOUNT SERVICES
1-800-662-2739
INSTITUTIONAL INVESTOR SERVICES
1-800-523-1036
www.vanguard.com
[email protected]
All Vanguard funds are offered by prospectus only. Prospectuses contain more
complete information on advisory fees, distribution charges, and other expenses
and should be read carefully before you invest or send money. Prospectuses can
be obtained directly from The Vanguard Group.
<PAGE> 52
VANGUARD FIXED INCOME SECURITIES FUND
FINANCIAL STATEMENTS
July 31, 1998 (unaudited)
The Statements of Net Assets should be read in conjunction with the Statement
of Operations, Statements of Changes in Net Assets, Financial Highlights, and
Notes to Financial Statements, all of which appear in the accompanying report.
The Statement of Net Assets for the GNMA Portfolio begins on page 28 of that
report.
STATEMENT OF NET ASSETS
This Statement provides a detailed list of each portfolio's holdings, including
each security's market value on the last day of the reporting period.
Securities are grouped and subtotaled by bond type (U.S. government and agency
issues, corporate bonds, foreign bonds, etc.); corporate bonds are further
classified by industry sector. Other assets are added to, and liabilities are
subtracted from, the value of Total Investments to calculate the portfolio's
Net Assets. Finally, Net Assets are divided by the outstanding shares of the
portfolio to arrive at its share price, or Net Asset Value (NAV) Per Share.
At the end of the Statement of Net Assets of each portfolio, you will find
a table displaying the composition of the portfolio's net assets. Undistributed
Net Investment Income is usually zero because the portfolio distributes its net
income to shareholders as a dividend each day. Any realized gains must be
distributed annually, so the bulk of net assets consists of Paid in Capital
(money invested by shareholders). The balance shown for Accumulated Net Realized
Gains usually approximates the amount available to distribute to shareholders as
capital gains as of the statement date, but may differ because certain
investments or transactions may be treated differently for financial statement
and tax purposes. Any Accumulated Net Realized Losses, and any cumulative excess
of distributions over net realized gains, will appear as negative balances.
Unrealized Appreciation (Depreciation) is the difference between the value of
the portfolio's investments and their cost, and reflects the gains (losses) that
would be realized if the portfolio were to sell all of its investments at their
statement-date values.
<TABLE>
---------------------------------------------------------
CONTENTS
<S> <C>
Short-Term U.S. Treasury Portfolio 1
Short-Term Federal Portfolio 3
Short-Term Corporate Portfolio 6
Intermediate-Term U.S. Treasury Portfolio 12
Intermediate-Term Corporate Portfolio 14
Long-Term U.S. Treasury Portfolio 18
Long-Term Corporate Portfolio 19
High Yield Corporate Portfolio 23
---------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
SHORT-TERM U.S. TREASURY PORTFOLIO COUPON DATE (000) (000)
- -------------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT SECURITIES (98.1%)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury Inflation-Indexed Note 3.375% 1/15/2007 $ 31,326 $ 30,807
U.S. Treasury Note 5.625% 10/31/1999 117,000 117,140
U.S. Treasury Note 5.75% 8/15/2003 83,000 83,740
U.S. Treasury Note 5.75% 10/31/2002 66,700 67,140
U.S. Treasury Note 5.875% 8/31/1999 139,163 139,699
U.S. Treasury Note 5.875% 11/30/2001 29,900 30,196
U.S. Treasury Note 6.125% 12/31/2001 51,700 52,600
U.S. Treasury Note 6.25% 4/30/2001 4,000 4,074
U.S. Treasury Note 6.50% 5/31/2001 13,200 13,529
U.S. Treasury Note 6.50% 5/31/2002 13,000 13,415
U.S. Treasury Note 6.50% 8/31/2001 48,600 49,910
U.S. Treasury Note 6.625% 4/30/2002 7,000 7,243
U.S. Treasury Note 6.625% 7/31/2001 95,000 97,862
U.S. Treasury Note 6.875% 8/31/1999 117,000 118,657
U.S. Treasury Note 7.50% 11/15/2001 38,700 40,934
U.S. Treasury Note 7.875% 8/15/2001 4,500 4,791
</TABLE>
1
<PAGE> 53
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
SHORT-TERM U.S. TREASURY PORTFOLIO COUPON DATE (000) (000)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Bariven, SA Eximbank Guaranteed Export Financing
(U.S. Government Guaranteed) 6.277% 4/15/2001 (1)(3) $ 10,200 $ 10,266
Banco Nacional de Comercio Exterior
(U.S. Government Guaranteed) 4.62% 10/15/1998 (1)(2) 2,000 1,995
Banco Nacional de Comercio Exterior
(U.S. Government Guaranteed) 6.475% 5/15/2000 (1) 5,200 5,231
Banco Nacional de Comercio Exterior
(U.S. Government Guaranteed) 6.82% 4/15/1999 (1)(2) 1,429 1,435
Banco Nacional de Comercio Exterior
(U.S. Government Guaranteed) 8.038% 1/15/2000 (1) 4,500 4,581
EximBank Guaranteed Export
(U.S. Government Guaranteed) 5.73% 1/15/2003 (1)(2) 39,600 39,427
Government Export Trust (U.S. Government Guaranteed) 7.75% 1/1/2000 (1)(2) 4,000 4,067
Guaranteed Export Certificates
(U.S. Government Guaranteed) 4.743% 9/15/1998 (1) 2,600 2,598
Guaranteed Trade Trust (U.S. Government Guaranteed) 6.104% 7/15/2003 (1) 27,917 28,037
Overseas Private Investment Corp.
(U.S. Government Guaranteed) 5.696% 2/1/2005 (1) 8,000 7,890
Overseas Private Investment Corp.
(U.S. Government Guaranteed) 5.926% 6/15/2005 (1) 16,000 15,997
Overseas Private Investment Corp.
(U.S. Government Guaranteed) 5.735% 1/15/2002 (1) 9,217 9,199
Private Export Funding Corp.
(U.S. Government Guaranteed) 5.65% 3/15/2003 (1) 5,317 5,315
- --------------------------------------------------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT SECURITIES (COST $1,004,926) 1,007,775
- --------------------------------------------------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENTS (2.7%)
- --------------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENTS
Collateralized by U.S. Government Obligations in a
Pooled Cash Account 5.64% 8/3/1998 5,749 5,749
Collateralized By U.S. Government Obligations in a
Pooled Cash Account--Note G 5.65% 8/3/1998 22,208 22,208
- --------------------------------------------------------------------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(COST $27,957) 27,957
- --------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (100.8%)
(COST $1,032,883) 1,035,732
- --------------------------------------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-0.8%)
- --------------------------------------------------------------------------------------------------------------------------
Other Assets--Note C 17,436
Liabilities--Note G (25,963)
-----------
(8,527)
- --------------------------------------------------------------------------------------------------------------------------
NET ASSETS (100%)
- --------------------------------------------------------------------------------------------------------------------------
Applicable to 100,374,723 outstanding $.001 par value shares of beneficial interest (unlimited authorization) $1,027,205
==========================================================================================================================
NET ASSET VALUE PER SHARE $10.23
==========================================================================================================================
</TABLE>
*See Note A in Notes to Financial Statements.
(1) The average maturity is shorter than the final maturity shown due to
scheduled interim principal payments.
(2) Security exempt from registration under Rule 144A of the Securities Act of
1933. These securities may be sold in trans- actions exempt from
registration, normally to qualified institutional buyers. At July 31, 1998,
the aggregate value of these securities was $46,924,000, representing 4.6%
of net assets.
(3) Restricted security representing 1.0% of net assets at July 31, 1998.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
AT JULY 31,1998, NET ASSETS CONSISTED OF:
- --------------------------------------------------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $1,026,262 $10.22
Undistributed Net Investment Income -- --
Accumulated Net Realized Losses (1,906) (.02)
Unrealized Appreciation--Note F 2,849 .03
- --------------------------------------------------------------------------------------------------------------------------
NET ASSETS $1,027,205 $10.23
==========================================================================================================================
</TABLE>
2
<PAGE> 54
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
SHORT-TERM FEDERAL PORTFOLIO COUPON DATE (000) (000)
- -------------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (95.4%)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. GOVERNMENT SECURITIES (9.8%)
U.S. Treasury Inflation-Indexed Note 3.375% 1/15/2007 $ 47,265 $ 45,714
Banco Nacional de Comercio Exterior
(U.S. Government Guaranteed) 6.82% 1/13/1999 (1)(3) 1,117 1,122
Banco Nacional de Comercio Exterior
(U.S. Government Guaranteed) 8.038% 1/15/2000 (1) 4,500 4,581
Government Export Trust (U.S. Government Guaranteed) 4.61% 9/1/1998 (1) 2,400 2,397
Government Export Trust (U.S. Government Guaranteed) 5.41% 3/1/1999 (1)(3) 1,773 1,773
Government Export Trust (U.S. Government Guaranteed) 6.61% 9/15/1999 (1) 6,174 6,197
Government Export Trust (U.S. Government Guaranteed) 7.50% 8/15/1999 (1) 6,911 7,015
Guaranteed Export Certificates
(U.S. Government Guaranteed) 4.743% 9/15/1998 (1) 376 375
Guaranteed Export Certificates
(U.S. Government Guaranteed) 4.813% 12/15/1998 (1) 884 881
Guaranteed Export Certificates
(U.S. Government Guaranteed) 5.23% 5/15/2005 (1) 16,085 15,814
Overseas Private Investment Corp.
(U.S. Government Guaranteed) 7.815% 5/15/2000 (1) 4,375 4,520
Overseas Private Investment Corp.
(U.S. Government Guaranteed) 8.75% 5/15/2000 (1) 6,563 6,882
Private Export Funding Corp.
(U.S. Government Guaranteed) 6.31% 9/30/2004 10,000 10,241
Private Export Funding Corp.
(U.S. Government Guaranteed) 7.03% 10/31/2003 5,000 5,269
Private Export Funding Corp.
(U.S. Government Guaranteed) 9.45% 12/31/1999 33,580 35,265
---------
148,046
---------
AGENCY BONDS & NOTES (80.0%)
Federal Farm Credit Bank 5.70% 6/18/2003 10,000 9,953
Federal Farm Credit Bank 5.72% 6/3/2003 10,000 9,962
Federal Farm Credit Bank 6.10% 11/4/2004 5,000 5,070
Federal Home Loan Bank 5.20% 10/20/2000 31,000 30,989
Federal Home Loan Bank 5.40% 1/15/2003 29,575 29,131
Federal Home Loan Bank 5.42% 1/22/2003 30,000 29,572
Federal Home Loan Bank 5.43% 2/25/1999 10,000 9,996
Federal Home Loan Bank 5.456% 8/25/1998 (2) 25,000 24,814
Federal Home Loan Bank 5.565% 7/17/2000 10,000 9,989
Federal Home Loan Bank 5.735% 7/22/2003 41,000 40,914
Federal Home Loan Bank 5.97% 12/12/2000 10,000 10,059
Federal Home Loan Bank 9.30% 1/25/1999 38,050 38,721
Federal Home Loan Mortgage Corp. 5.75% 7/15/2003 9,250 9,237
Federal Home Loan Mortgage Corp. 5.875% 3/22/2000 15,000 15,054
Federal Home Loan Mortgage Corp. 6.35% 3/18/2001 (1) 10,000 10,019
Federal Home Loan Mortgage Corp. 6.43% 12/19/2000 (1) 48,000 48,090
Federal Home Loan Mortgage Corp. 6.52% 1/2/2002 23,000 23,555
Federal Home Loan Mortgage Corp. 6.53% 11/25/2010 (1) 16,733 16,785
Federal Home Loan Mortgage Corp. 6.59% 6/25/2012 (1) 40,000 40,069
Federal Home Loan Mortgage Corp. 6.92% 1/25/2012 (1) 17,829 17,929
Federal National Mortgage Assn. 5.72% 1/9/2001 10,000 10,004
Federal National Mortgage Assn. 5.72% 3/13/2001 9,000 9,002
Federal National Mortgage Assn. 5.83% 10/16/2000 15,000 15,042
Federal National Mortgage Assn. 5.89% 11/6/2002 52,300 52,538
Federal National Mortgage Assn. 5.90% 10/10/2002 47,000 47,201
Federal National Mortgage Assn. 5.94% 9/10/1999 16,000 16,046
Federal National Mortgage Assn. 5.96% 4/23/2003 86,000 85,775
Federal National Mortgage Assn. 5.97% 10/2/2000 11,000 11,061
Federal National Mortgage Assn. 5.98% 11/12/2002 9,800 9,878
Federal National Mortgage Assn. 6.00% 4/23/2003 30,000 29,952
Federal National Mortgage Assn. 6.06% 5/7/2003 31,000 30,994
</TABLE>
3
<PAGE> 55
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
SHORT-TERM FEDERAL PORTFOLIO COUPON DATE (000) (000)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Federal National Mortgage Assn. 6.10% 5/21/2003 $ 20,000 $ 20,025
Federal National Mortgage Assn. 6.14% 11/1/1999 19,000 19,103
Federal National Mortgage Assn. 6.18% 12/10/2001 10,000 10,023
Federal National Mortgage Assn. 6.26% 7/22/2002 45,500 46,309
Federal National Mortgage Assn. 6.375% 1/16/2002 95,000 96,891
Federal National Mortgage Assn. 6.40% 5/2/2001 18,630 18,953
Federal National Mortgage Assn. 6.43% 4/11/1999 23,500 23,628
Federal National Mortgage Assn. 6.44% 11/15/2001 28,635 28,817
Federal National Mortgage Assn. 6.45% 2/14/2002 10,000 10,089
Federal National Mortgage Assn. 6.58% 10/2/2001 22,480 23,022
Federal National Mortgage Assn. 6.59% 4/17/2000 10,000 10,150
Federal National Mortgage Assn. 6.60% 6/24/1999 30,000 30,255
Federal National Mortgage Assn. 6.70% 5/6/2002 12,750 13,154
Federal National Mortgage Assn. 7.23% 9/15/1999 15,000 15,250
Federal National Mortgage Assn. 7.50% 2/11/2002 17,830 18,822
Federal National Mortgage Assn. 8.45% 7/12/1999 17,845 18,304
Federal National Mortgage Assn. 9.05% 4/10/2000 8,955 9,438
Federal National Mortgage Assn. 11.50% 11/1/1999 46,000 49,168
----------
1,208,802
----------
MORTGAGE-BACKED SECURITIES (5.6%)
Federal Home Loan Mortgage Corp. 5.50% 2/5/1998 (1) 1,348 1,347
Federal Home Loan Mortgage Corp. 5.50% 5/1/1999 (1) 5,014 5,008
Federal Home Loan Mortgage Corp. 5.50% 11/1/2000 (1) 10,259 10,460
Federal Home Loan Mortgage Corp. 5.50% 1/1/2001 (1) 9,209 9,142
Federal Home Loan Mortgage Corp. 5.50% 1/1/2001 (1) 18,050 17,918
Federal Home Loan Mortgage Corp. 6.00% 9/1/1998 (1) 13,230 13,228
Federal Home Loan Mortgage Corp. 6.00% 10/1/1998 (1) 4,925 4,925
Federal Home Loan Mortgage Corp. 6.00% 1/1/1999 (1) 3,537 3,536
Federal Home Loan Mortgage Corp. 6.00% 3/1/1999 (1) 3,855 3,853
Federal Home Loan Mortgage Corp.
(Collateralized Mortgage Obligation) 6.50% 3/15/2000 (1) 14,047 14,090
Federal National Mortgage Assn.
(Collateralized Mortgage Obligation) 5.50% 9/25/2000 (1) 1,006 1,002
----------
84,509
----------
- -------------------------------------------------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT AND AGENCY OBLIGATIONS
(COST $1,434,905) 1,441,357
- -------------------------------------------------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENTS (4.5%)
- -------------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENTS
Collateralized by U.S. Government Obligations in a
Pooled Cash Account 5.64% 8/3/1998 38,744 38,744
Collateralized by U.S. Government Obligations in a
Pooled Cash Account--Note G 5.65% 8/3/1998 29,218 29,218
- -------------------------------------------------------------------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(COST $67,962) 67,962
- -------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (99.9%)
(COST $1,502,867) 1,509,319
- -------------------------------------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES--NET (0.1%) 1,527
- -------------------------------------------------------------------------------------------------------------------------
NET ASSETS (100%)
- -------------------------------------------------------------------------------------------------------------------------
Applicable to 148,956,728 outstanding $.001 par value
shares of beneficial interest (unlimited authorization) $1,510,846
=========================================================================================================================
NET ASSET VALUE PER SHARE $10.14
=========================================================================================================================
</TABLE>
*See Note A in Notes to Financial Statements.
(1) The average maturity is shorter than the final maturity shown due to
scheduled interim principal payments.
(2) Floating Rate Note.
(3) Security exempt from registration under Rule 144A of the Securities Act of
1933. These securities may be sold in trans- actions exempt from
registration, normally to qualified institutional buyers. At July 31, 1998,
the aggregate value of these securities was $2,895,000, representing 0.2% of
net assets.
4
<PAGE> 56
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
MARKET
VALUE*
(000)
- -------------------------------------------------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
- -------------------------------------------------------------------------------------------------------------------------
<S> <C>
ASSETS
Investments in Securities, at Value $1,509,319
Receivables for Investment Securities Sold 63,639
Other Assets--Note C 24,757
-----------
Total Assets 1,597,715
-----------
LIABILITIES
Payables for Investment Securities Purchased (47,201)
Other Liabilities--Note G (39,668)
-----------
Total Liabilities (86,869)
- -------------------------------------------------------------------------------------------------------------------------
NET ASSETS $1,510,846
=========================================================================================================================
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
AT JULY 31, 1998, NET ASSETS CONSISTED OF:
- -------------------------------------------------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $1,529,577 $10.27
Undistributed Net Investment Income -- --
Accumulated Net Realized Losses (25,183) (.17)
Unrealized Appreciation--Note F 6,452 .04
- -------------------------------------------------------------------------------------------------------------------------
NET ASSETS $1,510,846 $10.14
=========================================================================================================================
</TABLE>
5
<PAGE> 57
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
SHORT-TERM CORPORATE PORTFOLIO COUPON DATE (000) (000)
- -------------------------------------------------------------------------------------------------------------------------
CORPORATE BONDS (83.5%)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSET-BACKED SECURITIES (13.5%)
Advanta Mortgage Loan Trust 6.25% 2/25/2014 (1) $ 39,000 $ 39,012
CIT Home Equity Loan Trust 6.08% 12/15/2007 (1) 25,000 24,996
CIT Home Equity Loan Trust 6.37% 3/15/2012 (1) 21,000 21,055
California Infrastructure & Economic Development
Bank SP Trust PG&E-1 6.15% 6/25/2002 (1) 10,150 10,199
California Infrastructure & Economic Development
Bank SP Trust SCE-1 6.14% 3/25/2002 (1) 14,600 14,663
Chase Manhattan Auto Trust 6.65% 9/15/2003 (1) 17,576 17,895
The Chase Manhattan Corp. Grantor Trust 6.00% 9/17/2001 (1) 6,024 6,032
Chemical Master Credit Card Trust 6.38% 6/15/2003 (1) 10,000 10,130
Citibank Credit Card Master Trust 5.75% 1/15/2003 (1) 9,400 9,382
Citibank Credit Card Master Trust 6.35% 8/15/2002 (1) 28,000 28,231
Citibank Credit Card Master Trust 6.70% 2/15/2004 (1) 13,000 13,247
Contimortgage Home Equity Loan Trust 6.68% 5/15/2012 (1) 32,538 32,602
Countrywide ABS Certificate Series 6.675% 2/25/2012 (1) 12,700 12,737
Credit Card Merchant Voucher Receivables Master Trust 6.23% 8/1/2002 (1)(3) 20,978 20,986
Discover Card Master Trust I Series 5.75% 4/15/2001 (1) 77,290 76,957
Discover Card Master Trust I Series 6.55% 2/18/2003 (1) 15,700 15,909
Ford Credit Auto Loan Master Trust 6.50% 8/15/2002 (1) 35,000 35,434
Ford Credit Auto Owner Trust 6.15% 12/15/2001 (1) 25,000 25,064
General Electric Capital Mortgage Services 6.26% 12/25/2012 (1) 14,700 14,717
Household Credit Card Master Trust 5.90% 5/15/2002 (1) 20,000 19,964
MBNA Master Credit Card Trust 6.60% 8/15/2000 (1) 10,000 10,158
Mellon Bank Home Equity Installment Loan Trust Series 6.21% 8/25/2009 (1) 11,500 11,494
NationsBank Credit Card Master Trust 6.45% 4/15/2003 (1) 17,000 17,160
Neiman Marcus Credit Card Master Trust 7.60% 6/15/2003 (1) 5,000 5,137
PNC Mortgage Securities Corp. 6.49% 7/25/2000 (1) 37,011 37,092
Premier Auto Trust 6.55% 9/6/2003 (1) 5,000 5,051
Providian Master Trust Series 6.25% 6/15/2007 (1) 40,000 40,630
Providian Master Trust Series 6.45% 6/15/2007 (1) 10,000 10,240
Residential Asset Securities Corp. Series 6.285% 9/25/2020 (1) 34,000 34,106
Standard Credit Card Master Trust 5.90% 2/7/2001 (1) 25,000 25,049
Standard Credit Card Master Trust 7.875% 1/7/2000 (1) 16,100 16,197
Toyota Auto Grantor Trust 5.85% 3/15/2001 (1) 3,700 3,702
Toyota Auto Lease Trust 6.20% 9/27/2000 (1) 70,000 70,234
-----------
735,462
-----------
FINANCE (47.3%)
AUTO (5.1%)
Chrysler Financial Corp. 6.08% 4/6/2001 100,000 100,427
Ford Motor Credit Co. 5.37% 9/8/1998 14,475 14,472
Ford Motor Credit Co. 6.55% 9/10/2002 25,000 25,424
Ford Motor Credit Co. 6.85% 8/15/2000 5,000 5,085
General Motors Acceptance Corp. 6.00% 12/30/1998 5,000 5,009
General Motors Acceptance Corp. 6.21% 9/19/2000 35,000 35,143
General Motors Acceptance Corp. 6.65% 5/24/2000 30,000 30,395
General Motors Acceptance Corp. 7.25% 4/30/1999 21,100 21,312
General Motors Acceptance Corp. 7.50% 4/11/2000 12,750 13,059
General Motors Acceptance Corp. 8.40% 10/15/1999 5,000 5,141
General Motors Acceptance Corp. 8.50% 12/21/1998 20,000 20,218
BANKS (12.8%)
Bank South Inc. 10.20% 6/1/1999 12,500 12,947
Bankers Trust NY Corp. 9.50% 6/14/2000 11,930 12,651
Capital One Bank 6.40% 5/8/2003 15,000 14,993
Capital One Bank 6.58% 4/17/2001 15,000 15,117
Capital One Bank 6.60% 8/20/2001 10,200 10,303
The Chase Manhattan Corp. 8.00% 6/15/1999 19,450 19,822
The Chase Manhattan Corp. 10.00% 6/15/1999 20,840 21,555
</TABLE>
6
<PAGE> 58
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
COUPON DATE (000) (000)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CoreStates Capital Corp. 5.75% 1/15/2001 $ 6,000 $ 5,973
CoreStates Capital Corp. 6.186% 10/2/2000 35,000 35,155
First Bank System, Inc. 5.686% 8/19/1998 (2) 24,000 24,000
First Fidelity Bancorp 9.625% 8/15/1999 23,540 24,400
First National Bank of Commerce 6.50% 1/14/2000 25,000 25,180
First Union Corp. 9.45% 6/15/1999 6,649 6,845
Huntington Bancshares 5.68% 12/8/1998 10,000 10,001
Long Island Savings Bank 7.00% 6/13/2002 13,500 13,833
MBNA America Bank 5.816% 8/7/1998 (2) 40,650 40,627
Manufacturers Hanover Corp. 8.50% 2/15/1999 9,272 9,401
Mellon Financial Co. 6.00% 3/1/2004 7,950 7,901
Meridian Bancorp, Inc. 6.625% 6/15/2000 26,550 26,882
The Money Store Inc. 8.05% 4/15/2002 10,277 10,902
National City Bank-Cleveland 6.10% 4/3/2003 20,000 20,030
National City Bank-Cleveland 6.35% 3/15/2001 36,860 37,246
NationsBank Corp. 5.80% 1/31/2001 14,675 14,645
NationsBank Corp. 6.375% 5/15/2005 50,000 50,389
Norwest Corp. 6.125% 10/15/2000 6,000 6,029
PNC Funding Corp. 6.125% 9/1/2003 6,000 5,977
PNC Funding Corp. 9.875% 3/1/2001 5,565 6,063
Provident Bank of Ohio 6.125% 12/15/2000 12,700 12,713
Providian National Bank 6.70% 3/15/2003 32,380 32,750
Security Pacific Corp. 9.75% 5/15/1999 5,000 5,144
Security Pacific Corp. 11.00% 3/1/2001 20,907 23,395
Southern National Corp. 7.05% 5/23/2003 24,469 25,273
Summit Bancorp 8.625% 12/10/2002 21,725 23,686
U.S. Bancorp PATS 5.90% 8/17/1998 (2)(3) 55,700 55,728
U.S. Oregon PATS 5.791% 8/27/1998 (3) 25,000 25,000
Wells Fargo & Co. 6.125% 11/1/2003 5,000 5,001
CONSUMERS (2.7%)
Aristar Inc. 6.125% 12/1/2000 48,000 48,078
Norwest Financial, Inc. 6.68% 9/15/1999 46,000 46,405
Norwest Financial, Inc. 7.95% 5/15/2002 4,200 4,473
Sears Roebuck Acceptance Corp. 6.22% 11/8/2000 48,000 48,164
DIVERSIFIED (5.9%)
AT&T Capital Corp. 6.70% 2/15/2001 50,000 50,657
Associates Corp. of North America 6.00% 4/15/2003 45,000 44,800
Associates Corp. of North America 8.37% 12/21/1999 19,000 19,617
Associates Corp. of North America 8.40% 11/29/1999 10,000 10,310
CIT Group Holdings 5.70% 12/15/1998 20,000 20,006
CIT Group Holdings 6.00% 5/8/2001 19,000 19,010
CIT Group Holdings 6.25% 10/25/1999 31,000 31,124
CIT Group Holdings 6.375% 8/1/2002 9,900 10,011
Caterpillar Financial Services 6.10% 6/17/1999 16,000 16,037
Comdisco Inc. 6.34% 6/25/1999 25,000 25,084
Finova Capital Corp. 6.05% 9/15/1999 25,000 25,013
Finova Capital Corp. 6.375% 4/15/1999 21,000 21,065
General Electric Capital Corp. 5.72% 8/3/2000 20,000 19,975
General Electric Capital Corp. 5.84% 5/8/2000 5,000 5,007
General Electric Capital Corp. 8.10% 1/26/1999 5,000 5,058
INSURANCE (4.3%)
CNA Financial Corp 6.50% 4/15/2005 32,000 31,966
Conseco Inc. 6.40% 2/10/2003 30,000 29,612
Orion Capital Corp. 9.125% 9/1/2002 15,225 16,689
Progressive Corp. 10.00% 12/15/2000 7,000 7,594
Prudential Insurance Co. of America 6.375% 7/23/2006 (3) 20,000 19,926
SunAmerica Inc. 6.20% 10/31/1999 26,000 26,049
SunAmerica Inc. 6.58% 1/15/2002 5,000 5,063
</TABLE>
7
<PAGE> 59
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
SHORT-TERM CORPORATE PORTFOLIO COUPON DATE (000) (000)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Travelers Property Casualty Corp. 6.25% 10/1/1999 $ 50,000 $ 50,185
Travelers Property Casualty Corp. 6.75% 9/1/1999 30,000 30,261
USF&G Corp. 8.375% 6/15/2001 17,545 18,536
OTHER (16.5%)
Associated Estates Realty Corp. 6.88% 12/9/2004 5,000 5,023
Associated Estates Realty Corp. 8.375% 4/15/2000 15,680 16,144
Bay Apartment Communities 6.50% 1/15/2005 8,300 8,196
Bear, Stearns & Co., Inc. 7.625% 9/15/1999 10,000 10,173
Bear, Stearns & Co., Inc. 7.625% 4/15/2000 26,900 27,599
Bradley Operating LP 7.00% 11/15/2004 5,000 5,002
Camden Property Trust 6.087% 8/10/1998 (2) 20,000 20,000
Chelsea GCA Realty Partner 7.75% 1/26/2001 10,000 10,240
Colonial Realty LP 6.96% 7/26/2004 22,000 22,081
Donaldson Lufkin & Jenrette, Inc. 6.70% 6/30/2000 15,000 15,172
EOP Operating LP 6.50% 6/15/2004 (3) 7,000 6,961
Equity Residential Properties Trust Operating LP 7.95% 4/15/2002 7,000 7,352
First Industrial PATS 7.375% 5/15/2004 (3) 12,000 12,255
Gables Realty LP 6.80% 3/15/2005 10,000 9,934
Goldman Sachs Group 6.087% 10/26/1998 (2)(3) 14,000 14,000
Goldman Sachs Group 6.625% 12/1/2004 (3) 20,000 20,343
Goldman Sachs Group 6.875% 9/15/1999 (3) 16,175 16,325
Goldman Sachs Group 7.25% 10/1/2005 (3) 19,400 20,343
HRPT Properties Trust 6.70% 2/23/2005 25,000 24,938
Highwoods Forsyth LP 7.19% 6/15/2004 (3) 26,000 26,175
JDN Realty Corp. 6.80% 8/1/2004 10,500 10,483
Lehman Brothers Holdings Inc. 6.006% 8/18/1998 (2) 10,000 9,992
Lehman Brothers Holdings Inc. 6.15% 3/15/2000 25,000 25,039
Lehman Brothers Holdings Inc. 6.20% 1/15/2002 20,000 20,005
Lehman Brothers Holdings Inc. 6.25% 4/1/2003 47,000 46,981
Lehman Brothers Holdings Inc. 8.375% 2/15/1999 5,000 5,063
Merrill Lynch & Co., Inc. 6.07% 10/15/2001 35,000 35,133
Merrill Lynch & Co., Inc. 7.26% 3/25/2002 50,000 51,380
Merry Land & Investment Co., Inc. 7.25% 10/1/2002 9,325 9,608
Morgan Stanley, Dean Witter, Discover & Co. 5.75% 2/15/2001 10,500 10,450
Morgan Stanley, Dean Witter, Discover & Co. 5.875% 2/28/2001 55,000 54,929
Oasis Residential Inc. 6.75% 11/15/2001 21,050 21,117
PaineWebber Group 6.32% 3/18/2003 25,000 25,061
PaineWebber Group 7.16% 6/15/1999 25,000 25,247
Post Apartment Homes LP 5.938% 9/3/1998 (2) 30,000 29,854
Post Apartment Homes LP 7.02% 4/2/2001 20,000 20,332
Salomon Smith Barney Holdings Inc. 5.50% 1/15/1999 11,000 10,984
Salomon Smith Barney Holdings Inc. 7.00% 5/15/2000 15,500 15,753
Salomon Smith Barney Holdings Inc. 7.30% 5/15/2002 25,000 25,972
Salomon Smith Barney Holdings Inc. 7.50% 5/1/2002 11,500 11,997
Salomon Smith Barney Holdings Inc. 7.98% 3/1/2000 17,500 18,014
Simon DeBartolo Group, Inc. 6.875% 10/27/2005 10,000 10,006
Simon DeBartolo PATS 6.75% 11/15/2003 (3) 23,000 22,979
Summit Properties Inc. 6.625% 12/15/2003 16,000 15,967
Summit Properties Inc. 6.80% 8/15/2002 20,000 20,137
Summit Properties Inc. 6.95% 8/15/2004 12,500 12,526
Summit Properties Inc. 7.20% 8/15/2007 5,000 5,065
Topaz Ltd. 6.92% 3/10/2007 (1)(3) 14,844 15,250
Trinet Corp. Realty Trust 7.30% 5/15/2001 5,500 5,592
United Dominion Realty Trust 7.02% 11/15/2005 8,000 8,143
Wellsford Residential Property Trust 9.375% 2/1/2002 5,175 5,660
-----------
2,581,992
-----------
INDUSTRIAL (15.6%)
Allied Corp. 0.00% 9/15/1998 7,500 7,453
CBI Industries 7.53% 8/26/1999 15,000 15,244
</TABLE>
8
<PAGE> 60
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
COUPON DATE (000) (000)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CSC Enterprises 6.50% 11/15/2001 (3) $ 27,500 $ 27,821
CSC Enterprises 6.80% 4/15/1999 (3) 21,500 21,640
Continental Airlines Pass-Through Trust 6.331% 10/15/2004 (1) 15,000 14,999
Continental Airlines Pass-Through Trust 6.465% 4/15/2006 (1) 11,000 11,004
Continental Airlines Pass-Through Trust 6.541% 3/15/2018 (1) 15,000 14,902
Continental Airlines Pass-Through Trust 6.80% 1/2/2008 (1) 12,000 12,258
Cox Communications, Inc. 6.375% 6/15/2000 37,000 37,173
R.R. Donnelley & Sons Co. 7.96% 11/8/1999 15,000 15,378
Electronic Data Systems Corp. 6.85% 5/15/2000 (3) 18,000 18,264
Federal Express Corp. 9.875% 4/1/2002 8,195 9,153
Federal Express Corp. 10.00% 4/15/1999 6,255 6,421
Federated Department Stores, Inc. 8.125% 10/15/2002 5,000 5,342
Federated Department Stores, Inc. 8.50% 6/15/2003 10,000 10,921
Food Lion, Inc. 8.41% 9/26/2001 5,000 5,358
James River Corp. 7.65% 12/26/2000 10,000 10,316
James River Corp. 8.375% 11/15/2001 12,220 12,990
Halliburton Co. 6.30% 8/5/2002 26,250 26,570
Hertz Corp. 6.50% 4/1/2000 5,000 5,037
International Business Machines Corp. 5.80% 5/15/2001 25,000 24,953
Knight Ridder, Inc. 8.50% 9/1/2001 17,025 17,669
Lafarge Corp. 6.375% 7/15/2005 7,000 6,981
Lockheed Martin Corp. 6.55% 5/15/1999 10,000 10,039
Lockheed Martin Corp. 6.85% 5/15/2001 47,000 47,758
McDonald's Corp. 8.375% 10/29/1999 8,550 8,808
Mobil Corp. ESOP 9.17% 2/29/2000 (1) 32,565 33,590
Norfolk Southern Corp. 6.875% 5/1/2001 100,000 102,233
Occidental Petroleum Corp. 6.75% 9/16/1999 6,000 6,045
Occidental Petroleum Corp. 8.50% 11/9/2001 10,000 10,688
PanAmSat Corp. 6.125% 1/15/2005 (3) 30,000 29,560
J.C. Penney & Co., Inc. 5.375% 11/15/1998 13,350 13,324
Phillips Petroleum Co. 8.00% 4/12/1999 4,000 4,054
Praxair, Inc. 6.70% 4/15/2001 50,000 50,696
Raytheon Co. 6.45% 8/15/2002 20,250 20,475
Rockwell International Corp. 8.875% 9/15/1999 33,860 34,953
Safeway Inc. 6.85% 9/15/2004 7,480 7,691
Sara Lee Corp. 6.50% 5/16/2000 15,000 15,155
Sara Lee Corp. 6.70% 9/9/1999 10,000 10,090
Sara Lee Corp. 7.75% 2/3/2000 18,700 19,193
Telecommunications, Inc. 6.375% 9/15/1999 25,000 25,072
Telecommunications, Inc. 8.25% 1/15/2003 10,000 10,763
Telecommunications, Inc. 8.65% 9/15/2004 25,000 27,772
Union Carbide Corp. 7.00% 8/1/1999 12,315 12,413
Union Pacific Corp. 7.00% 6/15/2000 10,000 10,155
Union Pacific Railroad Co. (Equipment Trust Certificate) 6.99% 4/19/1999 2,670 2,694
-----------
851,068
-----------
UTILITIES (7.1%)
Baltimore Gas & Electric Co. 6.68% 10/11/2001 16,000 16,340
Edison Mission Energy Funding Corp. 6.77% 9/15/2003 (1)(3) 18,713 19,010
Florida Gas Transmission 8.14% 11/1/1999 (3) 10,000 10,262
Florida Power & Light Corp. 5.50% 7/1/1999 20,600 20,553
GTE Corp. 6.39% 9/11/2000 10,000 10,078
GTE North Inc. 5.50% 2/15/1999 18,175 18,151
GTE Southwest Inc. 5.82% 12/1/1999 18,650 18,616
Idaho Power Co. 5.33% 9/1/1998 4,500 4,499
Indiana Michigan Power Co. 6.40% 3/1/2000 20,000 20,128
Kansas City Power & Light Co. 6.50% 11/14/2001 5,000 5,075
Kern River Funding Corp. 6.42% 3/31/2001 (1)(3) 11,584 11,656
MCI Communications Corp. 6.25% 3/23/1999 12,000 12,019
MCN Investment Corp. 6.03% 2/1/2001 4,000 3,977
MCN Investment Corp. 6.82% 5/13/1999 28,000 28,124
</TABLE>
9
<PAGE> 61
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
SHORT-TERM CORPORATE PORTFOLIO COUPON DATE (000) (000)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Nevada Power Co. 7.06% 5/1/2000 $ 12,000 $ 12,217
NYNEX Corp. Capital Funding 8.10% 11/1/1999 5,070 5,205
NYNEX Corp. Capital Funding 8.11% 11/1/1999 15,000 15,402
NYNEX Credit Co. 6.50% 9/15/2000 (3) 30,000 30,340
PSE&G Capital Corp. 6.74% 10/23/2001 (3) 26,000 26,265
Progress Capital Holdings 6.88% 8/1/2001 (3) 20,000 20,486
Public Service Electric & Gas 6.50% 6/1/2000 28,000 28,259
Texas Utilities Co. 9.50% 8/1/1999 8,500 8,749
U S West Capital Funding, Inc. 6.125% 7/15/2002 32,000 32,067
United Telecom 9.75% 4/1/2000 10,550 11,161
-----------
388,639
-----------
- -------------------------------------------------------------------------------------------------------------------------
TOTAL CORPORATE BONDS
(COST $4,527,448) 4,557,161
- -------------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (2.7%)
- -------------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT SECURITIES (0.3%)
U.S. Treasury Note 5.375% 6/30/2003 5,000 4,971
U.S. Treasury Note 5.625% 5/15/2001 10,000 10,037
-----------
15,008
-----------
AGENCY BONDS & NOTES (0.6%)
Federal Home Loan Mortgage Corp. 6.43% 2/25/2013 (1) 15,000 15,028
Federal Home Loan Mortgage Corp. 6.92% 1/25/2012 (1) 15,000 15,084
Government Export Trust (U.S. Government Guaranteed) 6.61% 9/15/1999 (1) 2,375 2,383
-----------
32,495
-----------
MORTGAGE-BACKED SECURITIES (1.8%)
Federal Home Loan Mortgage Corp. 5.50% 10/1/2000 (1) 17,769 17,649
Federal Home Loan Mortgage Corp. 6.00% 9/1/1998 (1) 2,021 2,021
Federal Home Loan Mortgage Corp. 6.00% 12/1/1999 (1) 10,578 10,580
Federal Home Loan Mortgage Corp. 6.00% 1/1/2001 (1) 14,601 14,608
Federal Home Loan Mortgage Corp. 6.50% 10/1/1999 (1) 8,610 8,644
Federal Home Loan Mortgage Corp. 7.00% 3/1/2000 (1) 15,524 15,626
Federal Home Loan Mortgage Corp. 7.00% 5/1/2000 (1) 13,848 13,902
Federal National Mortgage Assn. 6.00% 1/1/2001 (1) 10,595 10,603
Federal National Mortgage Assn. 8.00% 6/1/1999 (1) 3,278 3,299
-----------
96,932
-----------
- -------------------------------------------------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT AND AGENCY OBLIGATIONS
(COST $144,646) 144,435
- -------------------------------------------------------------------------------------------------------------------------
FOREIGN BONDS (U.S. DOLLAR-DENOMINATED)(10.0%)
- -------------------------------------------------------------------------------------------------------------------------
Australia & New Zealand Banking Group Ltd. 6.25% 2/1/2004 20,000 19,743
Avon Energy Partners Holdings 6.73% 12/11/2002 (3) 47,900 48,621
Avon Energy Partners Holdings 7.05% 12/11/2007 (3) 5,000 5,171
Banco Latinoamericano de Exportaciones 6.35% 4/10/2000 (3) 25,000 24,934
Banco Santiago SA 7.00% 7/18/2007 11,830 10,869
Bank of Nova Scotia 9.00% 10/1/1999 12,394 12,801
Bass America Inc. 8.125% 3/31/2002 15,000 15,972
Province of British Columbia 7.00% 1/15/2003 25,000 25,955
CIBC Capital Funding, LP 6.25% 12/17/2002 (3) 25,000 25,182
Cable & Wireless Communications PLC 6.625% 3/6/2005 44,000 44,299
Canadian Imperial Bank of Commerce (NY Branch) 6.20% 8/1/2000 70,525 71,007
Enersis SA 6.60% 12/1/2026 11,235 10,670
Enersis SA 6.90% 12/1/2006 8,000 7,516
KFW International Finance, Inc. 9.125% 5/15/2001 7,995 8,650
Korea Development Bank 7.125% 9/17/2001 57,820 51,916
Province of Manitoba 7.75% 2/1/2002 7,310 7,719
Province of Manitoba 8.75% 5/15/2001 7,000 7,502
Province of Manitoba 9.50% 9/15/1998 10,000 10,041
Province of Manitoba 9.625% 3/15/1999 10,000 10,226
National Australia Bank (NY) 9.70% 10/15/1998 12,150 12,242
National Westminster Bancorp Inc. 9.45% 5/1/2001 8,881 9,636
</TABLE>
10
<PAGE> 62
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
COUPON DATE (000) (000)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Noranda, Inc. 8.00% 6/1/2003 $ 20,000 $ 21,088
Noranda, Inc. 8.625% 7/15/2002 15,000 16,011
Oil Enterprises Ltd. 6.239% 6/30/2008 (1)(3) 42,000 41,920
Placer Dome Inc. 6.14% 1/29/2002 15,000 14,801
Westpac Banking 9.125% 8/15/2001 10,000 10,787
- --------------------------------------------------------------------------------------------------------------------------
TOTAL FOREIGN BONDS
(COST $539,081) 545,279
- --------------------------------------------------------------------------------------------------------------------------
TAXABLE MUNICIPAL BOND (0.6%)
- --------------------------------------------------------------------------------------------------------------------------
Power Auth. of the State of New York Rev.
(COST $35,000) 6.05% 2/15/2015 35,000 34,996
- --------------------------------------------------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENTS (4.2%)
- --------------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENTS
Collateralized by U.S. Government Obligations in a
Pooled Cash Account 5.64% 8/3/1998 208,299 208,299
Collateralized by U.S. Government Obligations in a
Pooled Cash Account--Note G 5.64%-5.65% 8/3/1998 21,034 21,034
- --------------------------------------------------------------------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(COST $229,333) 229,333
- --------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (101.0%)
(COST $5,475,508) 5,511,204
- --------------------------------------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-1.0%)
Other Assets--Note C 103,036
Liabilities--Note G (159,083)
------------
(56,047)
- --------------------------------------------------------------------------------------------------------------------------
NET ASSETS (100%) $5,455,157
==========================================================================================================================
</TABLE>
*See Note A in Notes to Financial Statements.
(1) The average maturity is shorter than the final maturity shown due to
scheduled interim principal payments.
(2) Floating Rate Notes.
(3) Securities exempt from registration under Rule 144A of the Securities Act
of 1933. These securities may be sold in transactions exempt from
registration, normally to qualified institutional buyers. At July 31,1998,
the aggregate value of these securities was $637,403,000, representing 11.7%
of net assets.
PATS--Putable Asset Trust Securities.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
AT JULY 31, 1998, NET ASSETS CONSISTED OF:
- -------------------------------------------------------------------------------------------------------------------------
AMOUNT
(000)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C>
Paid in Capital $5,444,670
Undistributed Net Investment Income --
Accumulated Net Realized Losses (25,209)
Unrealized Appreciation--Note F 35,696
- -------------------------------------------------------------------------------------------------------------------------
NET ASSETS $5,455,157
=========================================================================================================================
Investor Shares--Net Assets applicable to 473,592,914 outstanding $.001 par value shares
of beneficial interest (unlimited authorization) $5,122,801
- -------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE--INVESTOR SHARES $10.82
=========================================================================================================================
Institutional Shares--Net Assets applicable to 30,725,653 outstanding $.001 par value shares
of beneficial interest (unlimited authorization) $332,356
- -------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE--INSTITUTIONAL SHARES $10.82
=========================================================================================================================
</TABLE>
11
<PAGE> 63
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
INTERMEDIATE-TERM U.S. TREASURY PORTFOLIO COUPON DATE (000) (000)
- -------------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT SECURITIES (92.6%)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury Bond 10.375% 11/15/2012 (2) $ 248,550 $ 330,872
U.S. Treasury Bond 11.625% 11/15/2004 27,300 35,926
U.S. Treasury Inflation-Indexed Note 3.375% 1/15/2007 16,984 16,427
U.S. Treasury Note 6.50% 10/15/2006 159,200 168,505
U.S. Treasury Note 6.625% 5/15/2007 33,700 36,073
U.S. Treasury Note 6.875% 5/15/2006 44,250 47,797
U.S. Treasury Note 7.25% 5/15/2004 72,784 78,786
U.S. Treasury Note 7.25% 8/15/2004 4,500 4,886
U.S. Treasury Note 7.50% 2/15/2005 246,300 271,960
U.S. Treasury Note 7.875% 11/15/2004 226,000 253,197
Export Funding Trust (U.S. Government Guaranteed) 8.21% 12/29/2006 (1) 25,454 27,932
Government Export Trust (U.S. Government Guaranteed) 6.00% 3/15/2005 (1) 14,063 14,111
Guaranteed Export Certificates
(U.S. Government Guaranteed) 7.46% 12/15/2005 (1) 25,109 26,487
Guaranteed Trade Trust (U.S. Government Guaranteed) 6.69% 1/15/2009 (1) 28,417 29,403
Guaranteed Export Trust (U.S. Government Guaranteed) 7.80% 8/15/2006 (1) 7,623 8,139
Guaranteed Trade Trust (U.S. Government Guaranteed) 7.02% 9/1/2004 (1) 11,510 11,894
Guaranteed Trade Trust (U.S. Government Guaranteed) 7.39% 6/26/2006 (1) 4,093 4,284
Guaranteed Trade Trust (U.S. Government Guaranteed) 8.17% 1/15/2007 (1) 6,375 6,934
Overseas Private Investment Corp.
(U.S. Government Guaranteed) 5.94% 6/20/2006 (1) 16,842 16,828
Overseas Private Investment Corp.
(U.S. Government Guaranteed) 6.08% 8/15/2004 (1) 21,150 21,213
Overseas Private Investment Corp.
(U.S. Government Guaranteed) 6.726% 9/15/2010 (1) 17,000 17,636
Overseas Private Investment Corp.
(U.S. Government Guaranteed) 6.75% 12/15/2008 (1) 11,638 12,039
Private Export Funding Corp.
(U.S. Government Guaranteed) 7.11% 4/15/2007 13,100 14,190
Private Export Funding Corp.
(U.S. Government Guaranteed) 6.49% 7/15/2007 8,500 8,836
Private Export Funding Corp.
(U.S. Government Guaranteed) 5.87% 7/31/2008 73,300 73,131
- -------------------------------------------------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT SECURITIES
(COST $1,482,221) 1,537,486
- -------------------------------------------------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENTS (16.0%)
- -------------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENTS
Collateralized by U.S. Government Obligations in a
Pooled Cash Account 5.64% 8/3/1998 100,151 100,151
Collateralized by U.S. Government Obligations in a
Pooled Cash Account--Note G 5.65% 8/3/1998 166,289 166,289
- -------------------------------------------------------------------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(COST $266,440) 266,440
- -------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (108.6%)
(COST $1,748,661) 1,803,926
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
12
<PAGE> 64
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
MARKET
VALUE*
(000)
- -------------------------------------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-8.6%)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C>
Other Assets--Note C $ 36,806
Security Lending Collateral Payable to Brokers--Note G (166,289)
Other Liabilities (14,135)
---------
(143,618)
- -------------------------------------------------------------------------------------------------------------------------
NET ASSETS (100%)
- -------------------------------------------------------------------------------------------------------------------------
Applicable to 154,544,822 outstanding $.001 par value shares of beneficial interest
(unlimited authorization) $1,660,308
=========================================================================================================================
NET ASSET VALUE PER SHARE $10.74
=========================================================================================================================
</TABLE>
*See Note A in Notes to Financial Statements.
(1) The average maturity is shorter than the final maturity shown due to
scheduled interim principal payments.
(2) Securities with a value of $2,662,000 have been segregated as initial
margin for open futures contracts.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
AT JULY 31, 1998, NET ASSETS CONSISTED OF:
- -------------------------------------------------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $1,633,608 $10.57
Undistributed Net Investment Income -- --
Accumulated Net Realized Losses (28,547) (.18)
Unrealized Appreciation (Depreciation)--Note F
Investment Securities 55,265 .35
Futures Contracts (18) --
- -------------------------------------------------------------------------------------------------------------------------
NET ASSETS $1,660,308 $10.74
=========================================================================================================================
</TABLE>
13
<PAGE> 65
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
INTERMEDIATE-TERM CORPORATE PORTFOLIO COUPON DATE (000) (000)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CORPORATE BONDS (78.8%)
- --------------------------------------------------------------------------------------------------------------------------
ASSET-BACKED SECURITIES (2.2%)
California Infrastructure & Economic Development
Bank SP Trust PG&E 6.32% 9/25/2005 (1) $ 1,650 $ 1,672
California Infrastructure & Economic Development
Bank SP Trust PG&E 6.42% 9/25/2008 (1) 1,800 1,834
Citibank Credit Card Master Trust 6.70% 2/15/2004 (1) 5,000 5,095
Ford Credit Auto Loan Master Trust 6.50% 8/15/2002 (1) 4,000 4,050
Providian Master Trust Series 6.25% 6/15/2007 (1) 10,000 10,157
----------
$ 22,808
----------
FINANCE (47.5%)
AUTO (0.5%)
General Motors Acceptance Corp. 6.125% 1/22/2008 5,000 4,902
BANKS (19.4%)
Bank of New York Co., Inc. 6.625% 6/15/2003 6,000 6,115
Bank of New York Co., Inc. 8.50% 12/15/2004 10,000 11,170
BankAmerica Corp. 7.20% 4/15/2006 10,000 10,539
Chase Manhattan Corp. 7.125% 2/1/2007 5,000 5,216
Chase Manhattan Corp. 8.625% 5/1/2002 5,000 5,415
Citicorp 6.75% 8/15/2005 5,000 5,125
Citicorp 7.00% 7/1/2007 10,000 10,427
CoreStates Capital Corp. 6.75% 11/15/2006 10,000 10,251
First Bank N.A. 6.00% 10/15/2003 4,200 4,153
First Bank System, Inc. 6.875% 9/15/2007 10,000 10,391
Mellon Bank Corp. 7.00% 3/15/2006 6,000 6,234
Mellon Bank Corp. 7.625% 9/15/2007 5,000 5,452
Meridian Bancorp, Inc. 6.625% 3/15/2003 3,000 3,052
National City Bank-Cleveland 6.10% 4/3/2003 15,000 15,023
National City Corp. 6.625% 3/1/2004 5,700 5,814
NationsBank Corp. 6.375% 2/15/2008 20,000 20,016
PNC Funding Corp. 9.875% 3/1/2001 5,000 5,448
PNC Bank N.A. 7.875% 4/15/2005 5,000 5,425
Southern National Corp. 7.05% 5/23/2003 10,000 10,329
Summit Bancorp 8.625% 12/10/2002 5,775 6,296
Summit Bank 6.75% 6/15/2003 5,510 5,633
Suntrust Banks Inc. 6.25% 6/1/2008 11,000 10,909
Wachovia Corp. 9.25% 8/4/2008 15,000 14,919
Wells Fargo & Co. 6.25% 4/15/2008 10,000 9,918
CONSUMERS (2.5%)
Norwest Financial, Inc. 6.625% 7/15/2004 5,000 5,122
Norwest Financial, Inc. 7.20% 5/1/2007 5,000 5,311
Norwest Financial, Inc. 7.50% 4/15/2005 5,000 5,352
Sears, Roebuck Acceptance Corp. 6.69% 4/30/2001 5,000 5,079
Sears, Roebuck Acceptance Corp. 6.80% 10/9/2002 5,000 5,128
DIVERSIFIED (2.2%)
Associates Corp. of North America 5.75% 10/15/2003 5,000 4,913
Associates Corp. of North America 6.00% 4/15/2003 5,000 4,978
Associates Corp. of North America 7.54% 4/14/2004 3,000 3,186
Donaldson Lufkin & Jenrette Inc. 6.50% 4/1/2008 5,000 4,988
Finova Capital Corp. 6.75% 11/15/2004 5,000 5,118
INSURANCE (8.5%)
CNA Financial Corp. 6.50% 4/15/2005 5,000 4,995
Conseco Inc. 6.40% 2/10/2003 10,000 9,871
Harleysville Group 6.75% 11/15/2003 7,500 7,643
Horace Mann Educators Corp. 6.625% 1/15/2006 8,250 8,236
NAC Re Corp. 7.15% 11/15/2005 6,500 6,710
</TABLE>
14
<PAGE> 66
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
COUPON DATE (000) (000)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Orion Capital Corp. 9.125% 9/1/2002 10,000 $ 10,961
Prudential Insurance Co. of America 6.375% 7/23/2006 (2) 10,000 9,963
RGA Reinsurance Group of America Inc. 7.25% 4/1/2006 (2) 10,000 10,446
Travelers Property Casualty Corp. 6.75% 11/15/2006 7,500 7,688
USF&G Corp. 7.125% 6/1/2005 5,000 5,197
USF&G Corp. 8.375% 6/15/2001 6,425 6,788
OTHER (14.4%)
Associated Estates Realty Corp. 6.88% 12/9/2004 2,000 2,009
BRE Properties, Inc. 7.20% 6/15/2007 2,000 2,052
Bear Stearns & Co., Inc. 7.00% 3/1/2007 5,000 5,181
Bradley Operating LP 7.20% 1/15/2008 4,000 4,012
Camden Property Trust 7.172% 6/21/2004 3,000 3,072
Colonial Realty LP 6.96% 7/26/2004 3,000 3,011
Commercial Net Lease Realty Inc. Notes 7.125% 3/15/2008 5,000 5,024
Donaldson Lufkin & Jenrette, Inc. 6.50% 6/1/2008 10,000 9,975
EOP Operating LP 6.50% 6/15/2004 (2) 2,000 1,989
Evans Withycombe Residential, Inc. 7.50% 4/15/2004 3,000 3,137
First Industrial LP 7.60% 5/15/2007 3,000 3,115
Gables Realty LP 6.80% 3/15/2005 5,000 4,967
Goldman Sachs Group 7.80% 7/15/2002 (2) 5,000 5,285
Goldman Sachs Group 7.20% 3/1/2007 (2) 5,000 5,276
Highwoods Forsyth LP 7.19% 6/15/2004 (2) 5,000 5,034
Irvine Apartment Communities Inc. 7.00% 10/1/2007 3,000 3,019
JDN Realty Corp. 6.80% 8/1/2004 3,500 3,494
LG&E Capital Corp. 6.46% 1/15/2008 (2) 5,000 5,020
Lehman Brothers, Inc. 6.625% 2/15/2008 15,000 15,075
Merry Land & Investment Co., Inc. 6.875% 11/1/2004 2,000 2,029
Merry Land & Investment Co., Inc. 6.90% 8/1/2007 5,000 5,065
New Plan Realty Trust Medium Term Notes 7.35% 6/15/2007 3,000 3,128
Oasis Residential Inc. 6.75% 11/15/2001 2,500 2,508
Realty Income Corp. 7.75% 5/6/2007 3,000 3,114
Salomon, Inc. 6.74% 12/15/2003 5,000 5,117
Salomon, Inc. 6.75% 2/15/2003 5,000 5,105
Salomon Smith Barney Holdings Inc. 6.875% 6/15/2005 5,000 5,157
Security Capital Group 7.15% 6/15/2007 (2) 2,000 2,006
Security Capital Pacific Trust 7.375% 10/15/2006 3,000 3,078
Shurgard Storage Centers, Inc. 7.50% 4/25/2004 3,000 3,123
Simon DeBartolo Group, Inc. 6.875% 11/15/2006 3,000 3,000
Simon DeBartolo PATS 6.75% 11/15/2003 (2) 3,000 2,997
SUSA Partnership LP 7.00% 12/1/2007 4,000 3,998
Topaz Ltd. 6.92% 3/10/2007 (1)(2) 10,855 11,151
----------
496,168
----------
INDUSTRIAL (23.4%)
Allied Signal Inc. 6.20% 2/1/2008 8,300 8,280
Anheuser-Busch Cos., Inc. 6.75% 6/1/2005 2,000 2,037
Anheuser-Busch Cos., Inc. 7.10% 6/15/2007 10,000 10,464
Applied Materials, Inc. 8.00% 9/1/2004 2,000 2,141
Burlington Northern Railroad Co. Equipment Trust 7.33% 6/23/2010 (1) 4,626 4,840
Cardinal Health, Inc. 6.00% 1/15/2006 8,845 8,660
Cardinal Health, Inc. 6.50% 2/15/2004 3,500 3,537
Comcast Cablevision 8.375% 5/1/2007 8,000 8,973
Continental Airlines Pass-Through Trust 6.41% 10/15/2008 (1) 3,500 3,497
Continental Airlines Pass-Through Trust 6.748% 9/15/2018 (1) 10,000 9,960
Cox Communications, Inc. 6.50% 11/15/2002 2,000 2,025
Cox Communications, Inc. 6.69% 9/20/2004 8,430 8,579
Delta Airlines, Inc. Pass-Through Trust 7.541% 10/11/2011 (1) 4,618 4,868
Delta Airlines, Inc. Pass-Through Trust 8.54% 1/2/2007 (1) 2,784 3,052
Dillards Inc. 6.69% 8/1/2007 5,000 4,997
Eastman Chemical Co. 6.375% 1/15/2004 1,500 1,499
</TABLE>
15
<PAGE> 67
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
INTERMEDIATE-TERM CORPORATE PORTFOLIO COUPON DATE (000) (000)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Electronic Data Systems Corp. 6.85% 5/15/2000 (2) $ 5,000 $ 5,073
Federated Department Stores, Inc. 8.50% 6/15/2003 5,000 5,461
First Data Corp. 6.375% 12/15/2007 12,000 12,143
Food Lion, Inc. 7.55% 4/15/2007 7,000 7,552
Halliburton Co. 6.30% 8/5/2002 10,000 10,122
IBP, Inc. 6.125% 2/1/2006 4,000 3,981
Kroger Co. 8.15% 7/15/2006 5,000 5,542
Lafarge Corp. 6.375% 7/15/2005 4,750 4,737
Levi Strauss & Co. 6.80% 11/1/2003 (2) 4,000 4,017
Lexmark International, Inc. 6.75% 5/15/2008 5,000 4,980
Eli Lilly & Co. 8.375% 12/1/2006 3,000 3,439
Lockheed Martin Corp. 7.25% 5/15/2006 6,000 6,321
Lucent Technologies Inc. 7.25% 7/15/2006 10,000 10,660
Northwest Airlines Corp. Pass-Through Trust 8.07% 1/2/2015 (1) 11,275 12,224
PanAmSat Corp. 6.375% 1/15/2008 (2) 5,000 4,955
Praxair, Inc. 6.70% 4/15/2001 5,000 5,070
Safeway Inc. 6.85% 9/15/2004 7,000 7,197
TCI Communications, Inc. 6.875% 2/15/2006 7,000 7,194
TCI Communications, Inc. 7.25% 8/1/2005 7,000 7,297
Tektronix 7.50% 8/1/2003 2,000 2,070
Tektronix 7.625% 8/15/2002 5,310 5,508
Texaco Capital, Inc. 8.50% 2/15/2003 5,000 5,492
Time Warner Inc. 7.48% 1/15/2008 4,250 4,512
Union Pacific Railroad Co. Equipment Trust 6.12% 2/1/2004 2,000 2,007
The Upjohn Co. Employee Stock Ownership Trust 9.79% 2/1/2004 (1) 6,276 7,020
Western Atlas, Inc. 7.875% 6/15/2004 2,000 2,169
----------
244,152
----------
UTILITIES (5.7%)
Baltimore Gas & Electric Co. 6.25% 12/8/2005 5,000 5,022
Baltimore Gas & Electric Co. 6.70% 12/1/2006 9,000 9,286
GTE South Inc. 6.125% 6/15/2007 7,000 6,915
KN Energy, Inc. 6.80% 3/1/2008 5,000 4,976
Kansas City Power & Light Co. 6.50% 11/14/2001 5,000 5,075
MCI Communications Corp. 7.50% 8/20/2004 1,500 1,587
Midamerican Energy Holdings Co. 6.375% 6/15/2006 5,000 4,976
NIPSCO Capital Markets 7.39% 4/1/2004 6,000 6,314
Pennsylvania Power & Light Co. 6.875% 3/1/2004 5,000 5,151
Progress Capital Holdings 7.45% 9/1/2003 (2) 10,000 10,580
----------
59,882
----------
- --------------------------------------------------------------------------------------------------------------------------
TOTAL CORPORATE BONDS
(COST $806,751) 823,010
- --------------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT SECURITIES (1.2%)
- --------------------------------------------------------------------------------------------------------------------------
U.S. Treasury Note 5.50% 2/15/2008 10,000 9,952
U.S. Treasury Note 5.875% 11/15/2005 3,000 3,052
- --------------------------------------------------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT SECURITIES
(COST $12,984) 13,004
- --------------------------------------------------------------------------------------------------------------------------
FOREIGN BONDS (U.S. DOLLAR-DENOMINATED)(17.6%)
- --------------------------------------------------------------------------------------------------------------------------
ABN AMRO Bank NV (Chicago Branch) 7.55% 6/28/2006 10,000 10,707
Aegon NV 8.00% 8/15/2006 4,150 4,574
Australia & New Zealand Banking Group 7.55% 9/15/2006 14,500 15,396
Avon Energy Partners Holdings 7.05% 12/11/2007 (2) 10,000 10,342
Banco Latinoamericano de Exportaciones 6.35% 4/10/2000 (2) 5,000 4,987
Banco Santiago SA 7.00% 7/18/2007 5,000 4,594
Bayer Corp. 6.50% 10/1/2002 (2) 6,000 6,114
Cable & Wireless Communications PLC 6.625% 3/6/2005 12,000 12,081
Embotelladora Andina SA 7.00% 10/1/2007 5,000 4,647
Enersis SA 6.90% 12/1/2006 10,000 9,395
Korea Development Bank 7.125% 9/17/2001 9,830 8,826
</TABLE>
16
<PAGE> 68
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
COUPON DATE (000) (000)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Province of Manitoba 8.75% 5/15/2001 $ 3,000 $ 3,215
National Australia Bank 6.60% 12/10/2007 5,000 5,050
Oil Enterprises Ltd. 6.239% 6/30/2008 (1)(2) 8,000 7,985
Province of Ontario 7.625% 6/22/2004 5,000 5,384
Province of Ontario 8.00% 10/17/2001 10,000 10,588
PacifiCorp Australia LLC 6.15% 1/15/2008 (2)(3) 14,000 13,868
Petrozuata Finance Inc. Series A 7.63% 2/22/2007 (2) 10,000 9,954
Placer Dome, Inc. 7.125% 5/15/2003 5,000 5,104
Santander Financial Issuances Ltd. 7.00% 4/1/2006 5,000 5,138
Swiss Bank Corp. 6.75% 7/15/2005 5,000 5,124
Union Bank of Switzerland (NY Branch) 7.25% 7/15/2006 5,000 5,295
United Utilities PLC 6.45% 4/1/2008 10,000 9,897
Yorkshire Power Finance Ltd. 6.496% 2/25/2008 (2) 6,000 6,017
- --------------------------------------------------------------------------------------------------------------------------
TOTAL FOREIGN BONDS
(COST $183,530) 184,282
- --------------------------------------------------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENTS (1.2%)
- --------------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENTS
Collateralized by U.S. Government Obligations in a
Pooled Cash Account 5.64% 8/3/1998 10,047 10,047
Collateralized by U.S. Government Obligations in a
Pooled Cash Account--Note G 5.65% 8/3/1998 2,060 2,105
- --------------------------------------------------------------------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(COST $12,152) 12,152
- --------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (98.8%)
(COST $1,015,417) 1,032,448
- --------------------------------------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (1.2%)
- --------------------------------------------------------------------------------------------------------------------------
Other Assets--Note C 36,738
Liabilities--Note G (24,632)
-----------
12,106
- --------------------------------------------------------------------------------------------------------------------------
NET ASSETS (100%)
- --------------------------------------------------------------------------------------------------------------------------
Applicable to 104,897,377 outstanding $.001 par value shares of beneficial interest
(unlimited authorization) $1,044,554
==========================================================================================================================
NET ASSET VALUE PER SHARE $9.96
==========================================================================================================================
</TABLE>
*See Note A in Notes to Financial Statements.
(1) The average maturity is shorter than the final maturity shown due to
scheduled interim principal payments.
(2) Security exempt from registration under Rule 144A of the Securities Act of
1933. These securities may be sold in trans- actions exempt from
registration, normally to qualified institutional buyers. At July 31, 1998,
the aggregate value of these securities was $143,059,000, representing
13.7% of net assets.
(3) Scheduled principal and interest payments are guaranteed by Ambac Assurance
Corporation.
PATS--Putable Asset Trust Securities.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
AT JULY 31, 1998, NET ASSETS CONSISTED OF:
- --------------------------------------------------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $1,025,238 $9.78
Undistributed Net Investment Income -- --
Accumulated Net Realized Gains 2,285 .02
Unrealized Appreciation--Note F 17,031 .16
- --------------------------------------------------------------------------------------------------------------------------
NET ASSETS $1,044,554 $9.96
==========================================================================================================================
</TABLE>
17
<PAGE> 69
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
LONG-TERM U.S. TREASURY PORTFOLIO COUPON DATE (000) (000)
- --------------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT SECURITIES (94.5%)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury Bond 6.00% 2/15/2026 $ 6,350 $ 6,528
U.S. Treasury Bond 6.375% 8/15/2027 13,950 15,144
U.S. Treasury Bond 6.50% 11/15/2026 22,200 24,363
U.S. Treasury Bond 6.625% 2/15/2027 64,050 71,534
U.S. Treasury Bond 6.75% 8/15/2026 16,450 18,607
U.S. Treasury Bond 6.875% 8/15/2025 6,850 7,840
U.S. Treasury Bond 7.125% 2/15/2023 67,050 78,416
U.S. Treasury Bond 7.875% 2/15/2021 174,452 218,935
U.S. Treasury Bond 8.125% 8/15/2019 102,015 130,419
U.S. Treasury Bond 8.875% 8/15/2017 149,550 201,966
U.S. Treasury Bond 8.875% 2/15/2019 127,810 174,318
U.S. Treasury Bond 9.875% 11/15/2015 36,200 52,256
U.S. Treasury Bond 10.375% 11/15/2012 (1) 47,950 63,832
U.S. Treasury Inflation-Indexed Note 3.625% 4/15/2028 11,459 11,312
U.S. Treasury Note 6.125% 8/15/2007 4,350 4,512
- --------------------------------------------------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT SECURITIES
(COST $951,467) 1,079,982
- --------------------------------------------------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENTS (7.5%)
- --------------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENTS
Collateralized by U.S. Government Obligations in a
Pooled Cash Account 5.64% 8/3/1998 35,294 35,294
Collateralized by U.S. Government Obligations in a
Pooled Cash Account--Note G 5.65% 8/3/1998 50,252 50,252
- --------------------------------------------------------------------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(COST $85,546) 85,546
- --------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (102.0%)
(COST $1,037,013) 1,165,528
- --------------------------------------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-2.0%)
- --------------------------------------------------------------------------------------------------------------------------
Other Assets--Note C 31,044
Security Lending Collateral Payable to Brokers--Note G (50,252)
Other Liabilities (3,471)
-----------
(22,679)
- --------------------------------------------------------------------------------------------------------------------------
NET ASSETS (100%)
- --------------------------------------------------------------------------------------------------------------------------
Applicable to 105,403,523 outstanding $.001 par value shares of beneficial interest
(unlimited authorization) $1,142,849
==========================================================================================================================
NET ASSET VALUE PER SHARE $10.84
==========================================================================================================================
</TABLE>
*See Note A in Notes to Financial Statements.
(1) Securities with a value of $2,662,000 have been segregated as initial margin
for open futures contracts.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
AT JULY 31, 1998, NET ASSETS CONSISTED OF:
- --------------------------------------------------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $1,022,562 $ 9.70
Undistributed Net Investment Income -- --
Accumulated Net Realized Losses (8,187) (.08)
Unrealized Appreciation (Depreciation)--Note F
Investment Securities 128,515 1.22
Futures Contracts (41) --
- --------------------------------------------------------------------------------------------------------------------------
NET ASSETS $1,142,849 $10.84
==========================================================================================================================
</TABLE>
18
<PAGE> 70
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
LONG-TERM CORPORATE PORTFOLIO COUPON DATE (000) (000)
- --------------------------------------------------------------------------------------------------------------------------
CORPORATE BONDS (79.8%)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FINANCE (23.7%)
Allstate Corp. 6.75% 5/15/2018 $ 20,000 $ 20,062
Allstate Corp. 7.50% 6/15/2013 10,000 10,889
Ambac, Inc. 7.50% 5/1/2023 20,000 22,307
American Re Corp. 7.45% 12/15/2026 18,267 20,067
Banc One Corp. 7.75% 7/15/2025 30,000 33,495
Banc One Corp. 8.00% 4/29/2027 15,000 17,277
BankBoston Corp. 6.625% 12/1/2005 30,000 30,474
CIGNA Corp. 7.875% 5/15/2027 25,000 27,455
Cincinnati Financial Corp. 6.90% 5/15/2028 25,000 25,345
Citicorp 7.125% 9/1/2005 15,000 15,693
Equitable Cos. Inc. 7.00% 4/1/2028 25,000 25,246
Exxon Capital Corp. 6.00% 7/1/2005 10,000 9,998
Farmers Exchange Capital 7.05% 7/15/2028 (2) 25,000 24,595
Fifth Third Bancorp 6.75% 7/15/2005 20,000 20,541
First Chicago Corp. 6.375% 1/30/2009 15,000 14,967
First Union Corp. 6.00% 10/30/2008 10,000 9,706
First Union Corp. 7.50% 4/15/2035 11,000 12,557
Fleet Financial Group 6.875% 1/15/2028 25,000 25,170
General Electric Capital Corp. 8.125% 5/15/2012 42,000 48,841
General Electric Capital Services 7.50% 8/21/2035 10,960 12,625
General Electric Global Insurance Holdings Corp. 7.00% 2/15/2026 50,000 52,913
General Re Corp. 9.00% 9/12/2009 15,000 18,193
John Hancock Mutual Life Insurance Co. 7.375% 2/15/2024 (2) 50,000 53,141
Liberty Mutual Group 8.50% 5/15/2025 (2) 35,000 41,689
Lumbermens Mutual Casualty Co. 9.15% 7/1/2026 (2) 35,000 41,705
MBIA Inc. 7.00% 12/15/2025 7,550 7,909
Massachusetts Mutual Life 7.50% 3/1/2024 (1)(2) 8,710 9,478
Massachusetts Mutual Life 7.625% 11/15/2023 (2) 14,500 16,046
Metropolitan Life Insurance Co. 7.80% 11/1/2025 (2) 30,000 32,623
National City Bank Pennsylvania 7.25% 10/21/2011 14,000 14,915
National City Corp. 7.20% 5/15/2005 10,000 10,495
NationsBank Corp. 7.25% 10/15/2025 20,000 21,156
NationsBank Corp. 7.75% 8/15/2004 15,000 16,167
NationsBank Corp. 7.75% 8/15/2015 10,000 11,056
NationsBank Corp. 8.50% 1/15/2007 15,000 17,006
Republic New York Corp. 9.70% 2/1/2009 15,000 18,774
SunTrust Banks 6.00% 2/15/2026 20,000 19,649
Transamerica Corp. 9.375% 3/1/2008 10,000 12,022
Travelers Group Inc. 6.625% 1/15/2028 25,000 24,599
Travelers Property Casualty Corp. 7.75% 4/15/2026 25,000 27,939
Wachovia Corp. 6.605% 10/1/2025 30,000 31,474
Wachovia Corp. 6.80% 6/1/2005 10,000 10,306
----------
936,565
----------
INDUSTRIAL (45.2%)
AEROSPACE & DEFENSE (1.6%)
Lockheed Martin Corp. 7.65% 5/1/2016 35,000 38,134
Raytheon Co. 7.20% 8/15/2027 25,000 26,224
AUTOMOTIVE (4.5%)
Chrysler Corp. 7.45% 3/1/2027 25,000 27,505
Eaton Corp. 6.50% 6/1/2025 10,000 10,333
Eaton Corp. 7.625% 4/1/2024 15,000 16,646
Ford Motor Co. 8.90% 1/15/2032 40,000 51,416
General Motors Corp. 7.40% 9/1/2025 30,000 32,405
General Motors Corp. 7.70% 4/15/2016 10,000 11,170
General Motors Corp. 9.40% 7/15/2021 20,000 26,251
</TABLE>
19
<PAGE> 71
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
LONG-TERM CORPORATE PORTFOLIO COUPON DATE (000) (000)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BASIC INDUSTRIES (5.0%)
Caterpillar Inc. 6.625% 7/15/2028 $ 25,000 $ 24,885
Fluor Corp. 6.95% 3/1/2007 20,000 20,980
Hubbell Inc. 6.625% 10/1/2005 10,000 10,327
Minnesota Mining & Manufacturing Corp. 6.375% 2/15/2028 35,000 35,020
Morton International, Inc. 9.25% 6/1/2020 10,000 13,081
PPG Industries, Inc. 6.875% 2/15/2012 10,200 10,830
PPG Industries, Inc. 9.00% 5/1/2021 9,750 12,566
Parker-Hannifin Corp. 7.30% 5/15/2011 20,000 21,546
Worthington Industries, Inc. 6.70% 12/1/2009 20,500 20,686
Worthington Industries, Inc. 7.125% 5/15/2006 24,525 25,868
BUILDING MATERIALS (0.6%)
Georgia-Pacific Group 7.25% 6/1/2028 25,000 25,147
CHEMICALS (5.0%)
Air Products & Chemicals, Inc. 7.375% 5/1/2005 15,000 16,009
Air Products & Chemicals, Inc. 8.75% 4/15/2021 12,550 15,629
E.I. du Pont de Nemours & Co. 6.50% 1/15/2028 25,000 24,770
E.I. du Pont de Nemours & Co. 6.75% 9/1/2007 25,000 25,900
Eastman Chemical Co. 7.25% 1/15/2024 20,000 20,420
Eastman Chemical Co. 7.60% 2/1/2027 20,000 21,214
Ferro Corp. 7.125% 4/1/2028 10,000 10,153
Monsanto Co. 6.75% 12/15/2027 25,000 24,932
Monsanto Co. 8.875% 12/15/2009 20,000 24,071
Witco Corp. 6.875% 2/1/2026 15,000 14,953
CONSUMER GOODS & SERVICES (5.6%)
Bestfoods 6.625% 4/15/2028 30,000 29,859
CPC International, Inc. 7.25% 12/15/2026 30,000 32,399
The Walt Disney Co. 6.75% 3/30/2006 25,000 26,051
Kimberly-Clark Corp. 6.25% 7/15/2018 25,000 24,717
Procter & Gamble Co. 6.45% 1/15/2026 27,000 27,275
Procter & Gamble Co. 8.50% 8/10/2009 10,000 11,928
Procter & Gamble Co. ESOP 9.36% 1/1/2021 35,000 45,853
Whirlpool Corp. 9.10% 2/1/2008 20,000 23,433
ENERGY & RELATED GOODS & SERVICES (4.0%)
Mobil Corp. 8.625% 8/15/2021 22,000 27,838
Texaco Capital, Inc. 8.625% 11/15/2031 13,000 16,525
Texaco Capital, Inc. 9.75% 3/15/2020 17,000 23,239
USX Corp. 6.85% 3/1/2008 45,000 45,362
Ultramar Diamond Shamrock 7.20% 10/15/2017 25,000 25,388
United Technologies Corp. 8.875% 11/15/2019 15,000 18,908
HEALTH CARE (3.8%)
Baxter International, Inc. 7.65% 2/1/2027 25,000 27,931
Bristol-Myers Squibb Co. 6.80% 11/15/2026 35,000 37,193
Eli Lilly & Co. 7.125% 6/1/2025 50,000 54,134
Merck & Co. 6.30% 1/1/2026 30,000 29,918
HOME BUILDING & REAL ESTATE (0.5%)
Masco Corp. 6.625% 4/15/2018 20,000 20,008
MEDIA & ENTERTAINMENT (2.7%)
New York Times Co. 8.25% 3/15/2025 30,000 32,867
News America Holdings Inc. 8.00% 10/17/2016 30,000 33,021
E.W. Scripps Co. 6.625% 10/15/2007 20,000 20,652
Tribune Co. 6.875% 11/1/2006 20,000 20,972
</TABLE>
20
<PAGE> 72
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
COUPON DATE (000) (000)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
METAL (1.0%)
Aluminum Co. of America 6.75% 1/15/2028 $ 25,000 $ 25,253
Phelps Dodge Corp. 7.125% 11/1/2027 12,500 13,071
PAPER (3.8%)
Champion International Corp. 7.35% 11/1/2025 30,000 30,636
International Paper Co. 6.875% 11/1/2023 10,000 9,600
Mead Corp. 7.35% 3/1/2017 10,350 11,126
Tenneco Inc. 7.625% 6/15/2017 20,000 21,199
Tenneco Inc. 7.875% 4/15/2027 20,000 21,962
Westvaco Corp. 9.75% 6/15/2020 15,000 19,848
Weyerhaeuser Co. 8.50% 1/15/2025 30,000 35,837
RETAIL (0.4%)
J.C. Penney Co., Inc. 7.95% 4/1/2017 15,000 16,805
TECHNOLOGY & RELATED (2.7%)
International Business Machines Corp. 7.00% 10/30/2025 50,000 52,699
Motorola, Inc. 7.50% 5/15/2025 50,000 54,804
TRANSPORTATION (3.4%)
Burlington Northern Santa Fe Corp. 6.375% 12/15/2005 12,500 12,554
Burlington Northern Santa Fe Corp. 6.875% 12/1/2027 25,000 25,168
CSX Corp. 7.95% 5/1/2027 35,000 39,463
Norfolk Southern Corp. 7.80% 5/15/2027 35,000 39,826
Union Tank Car Co. 7.125% 2/1/2007 15,000 15,748
OTHER (0.6%)
USA Waste Services Inc. 7.00% 7/15/2028 25,000 25,060
----------
1,785,201
----------
UTILITIES (10.9%)
BellSouth Telecommunications 7.00% 10/1/2025 10,000 10,513
Cincinnati Gas & Electric Co. 6.90% 6/1/2025 16,000 16,767
Coastal Corp. 7.75% 10/15/2035 20,000 21,523
Coastal Corp. 9.625% 5/15/2012 15,000 18,743
El Paso Natural Gas Co. 7.50% 11/15/2026 25,000 26,718
Enron Corp. 6.875% 10/15/2007 10,000 10,218
Florida Power Corp. 6.75% 2/1/2028 22,375 22,865
GTE California Inc. 6.70% 9/1/2009 25,000 25,639
GTE Southwest, Inc. 6.00% 1/15/2006 10,000 9,821
Indiana Bell Telephone Co., Inc. 7.30% 8/15/2026 27,000 29,879
Michigan Bell Telephone Co. 7.85% 1/15/2022 25,000 29,030
NGC Corp. 7.125% 5/15/2018 20,000 20,113
New Jersey Bell Telephone Co. 8.00% 6/1/2022 25,000 29,371
Northern States Power Co. 7.125% 7/1/2025 30,000 32,084
Oklahoma Gas & Electric Co. 6.50% 4/15/2028 12,770 12,684
Pacific Bell 7.125% 3/15/2026 15,000 16,052
PacifiCorp 6.625% 6/1/2007 10,000 10,146
PacifiCorp 6.71% 1/15/2026 10,000 10,024
Tennessee Gas Pipeline Co. 7.50% 4/1/2017 25,000 26,366
U S WEST Capital Funding, Inc. 6.875% 7/15/2028 25,000 24,760
Wisconsin Electric Power Co. 6.50% 6/1/2028 25,000 25,193
----------
428,509
----------
- -------------------------------------------------------------------------------------------------------------------------
TOTAL CORPORATE BONDS
(COST $2,933,747) 3,150,275
- -------------------------------------------------------------------------------------------------------------------------
FOREIGN BONDS (U.S. DOLLAR-DENOMINATED)(7.1%)
- -------------------------------------------------------------------------------------------------------------------------
Province of British Columbia 6.50% 1/15/2026 35,000 36,137
Husky Oil Ltd. 7.55% 11/15/2016 20,000 20,660
Inter-American Development Bank 6.125% 3/8/2006 25,000 25,414
</TABLE>
21
<PAGE> 73
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
LONG-TERM CORPORATE PORTFOLIO COUPON DATE (000) (000)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Province of Manitoba 8.875% 9/15/2021 $ 24,042 $ 31,485
Province of Ontario 6.00% 2/21/2006 25,000 24,901
Province of Quebec 7.50% 7/15/2023 50,000 55,331
Saga Petroleum ASA 7.25% 9/23/2027 20,000 19,573
Province of Saskatchewan 8.50% 7/15/2022 19,000 23,661
Talisman Energy, Inc. 7.125% 6/1/2007 20,000 20,740
Talisman Energy, Inc. 7.25% 10/15/2027 20,000 20,818
- -------------------------------------------------------------------------------------------------------------------------
TOTAL FOREIGN BONDS
(COST $264,141) 278,720
- -------------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (8.0%)
- -------------------------------------------------------------------------------------------------------------------------
Federal National Mortgage Assn.
(Pooled Mortgage Notes) 15.50% 10/1/2012 (1) 8 9
U.S. Treasury Note 6.25% 8/31/2002 150,000 153,632
U.S. Treasury Note 6.875% 5/15/2006 150,000 162,023
- -------------------------------------------------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT AND AGENCY OBLIGATIONS
(COST $314,201) 315,664
- -------------------------------------------------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENT (2.9%)
- -------------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENT
Collateralized by U.S. Government Obligations in a
Pooled Cash Account
(COST $115,513) 5.64% 8/3/1998 115,513 115,513
- -------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (97.8%)
(COST $3,627,602) 3,860,172
- -------------------------------------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (2.2%)
- -------------------------------------------------------------------------------------------------------------------------
Other Assets--Note C 150,398
Liabilities (65,105)
----------
85,293
- -------------------------------------------------------------------------------------------------------------------------
NET ASSETS (100%)
- -------------------------------------------------------------------------------------------------------------------------
Applicable to 426,816,758 outstanding $.001 par value shares of beneficial interest
(unlimited authorization) $3,945,465
=========================================================================================================================
NET ASSET VALUE PER SHARE $9.24
=========================================================================================================================
</TABLE>
* See Note A in Notes to Financial Statements.
(1) The average maturity is shorter than the final maturity shown due to
scheduled interim principal payments.
(2) Security exempt from registration under Rule 144A of the Securities Act of
1933. These securities may be sold in transactions exempt from
registration, normally to qualified institutional buyers. At July 31, 1998,
the aggregate value of these securities was $219,277,000, representing 5.6%
of net assets.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
AT JULY 31, 1998, NET ASSETS CONSISTED OF:
- -------------------------------------------------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $3,675,197 $8.61
Undistributed Net Investment Income -- --
Accumulated Net Realized Gains 37,698 .09
Unrealized Appreciation--Note F 232,570 .54
- -------------------------------------------------------------------------------------------------------------------------
NET ASSETS $3,945,465 $9.24
=========================================================================================================================
</TABLE>
22
<PAGE> 74
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
HIGH YIELD CORPORATE PORTFOLIO COUPON DATE (000) (000)
- -------------------------------------------------------------------------------------------------------------------------
CORPORATE BONDS (91.9%)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FINANCE (4.2%)
Amresco, Inc. 9.875% 3/15/2005 $ 15,000 $ 15,225
Amresco, Inc. 10.00% 3/15/2004 15,000 15,525
Bank United Corp. 8.875% 5/1/2007 33,000 36,034
Chevy Chase Savings Bank 9.25% 12/1/2008 15,000 15,225
ContiFinancial Corp. 8.125% 4/1/2008 25,000 24,381
FirstFed Financial Corp. 11.75% 10/1/2004 5,000 5,400
Imperial Credit Industries, Inc. 9.875% 1/15/2007 20,000 20,100
Navistar Financial Corp. 9.00% 6/1/2002 15,000 15,694
Olympic Financial Ltd. 11.50% 3/15/2007 22,160 21,329
United Companies Financial, Corp. 8.375% 7/1/2005 20,000 19,214
Western Financial Savings Bank 8.50% 7/1/2003 17,000 15,385
Western Financial Savings Bank 8.875% 8/1/2007 20,000 17,800
----------
221,312
----------
INDUSTRIAL (81.8%)
AEROSPACE & DEFENSE (2.4%)
Argo-Tech Corp. 8.625% 10/1/2007 19,000 19,190
K & F Industries, Inc. 9.25% 10/15/2007 27,750 28,166
L-3 Communications Corp. 8.50% 5/15/2008 8,425 8,614
L-3 Communications Corp. 10.375% 5/1/2007 20,000 22,200
Newport News Shipbuilding Inc. 8.625% 12/1/2006 25,000 26,437
Newport News Shipbuilding Inc. 9.25% 12/1/2006 20,000 21,350
AUTOMOTIVE (6.3%)
Accuride Corp. 9.25% 2/1/2008 (1) 20,000 20,200
Collins & Aikman Products Co. 11.50% 4/15/2006 40,000 44,100
Delco Remy International Inc. 8.625% 12/15/2007 5,000 5,125
Delco Remy International Inc. 10.625% 8/1/2006 10,000 10,875
Exide Corp. 10.00% 4/15/2005 25,000 26,000
Federal-Mogul Corp. 7.75% 7/1/2006 46,270 46,566
Federal-Mogul Corp. 8.80% 4/15/2007 18,750 19,922
Hayes Wheels International, Inc. 9.125% 7/15/2007 30,000 31,725
Hayes Wheels International, Inc. 11.00% 7/15/2006 25,000 28,125
Johnstown America Industries, Inc. 11.75% 8/15/2005 27,000 29,903
Key Plastics, Inc. 10.25% 3/15/2007 11,540 12,030
LDM Technologies Inc. 10.75% 1/15/2007 8,000 8,360
Lear Corp. 9.50% 7/15/2006 20,000 21,900
Navistar International Corp. 8.00% 2/1/2008 25,000 25,187
BASIC INDUSTRIES (6.0%)
Advanced Lighting Technologies, Inc. 8.00% 3/15/2008 (1) 15,000 14,737
Anchor Glass Container Corp. 11.25% 4/1/2005 8,000 8,680
Cincinnati Milacron, Inc. 8.375% 3/15/2004 11,500 12,181
Clark-Schwebel Inc. 10.50% 4/15/2006 9,295 10,271
Coltec Industries Inc. 7.50% 4/15/2008 (1) 30,000 30,090
Consumers International 10.25% 4/1/2005 (1) 17,000 18,360
Goss Graphic Systems, Inc. 12.00% 10/15/2006 10,000 9,650
Grove Worldwide LLC 9.25% 5/1/2008 (1) 30,000 29,400
Idex Corp. 6.875% 2/15/2008 22,435 22,313
International Wire Group 11.75% 6/1/2005 15,000 16,462
Mastec, Inc. 7.75% 2/1/2008 30,000 29,250
Neenah Corp. 11.125% 5/1/2007 22,100 24,089
Numatics Inc. 9.625% 4/1/2008 (1) 16,500 16,830
Park-Ohio Industries, Inc. 9.25% 12/1/2007 22,500 23,119
Roller Bearing Co. of America Inc. 9.625% 6/15/2007 16,500 16,665
Scotsman Group Inc. 8.625% 12/15/2007 8,260 8,260
Terex Corp. 8.875% 4/1/2008 (1) 22,500 22,444
</TABLE>
23
<PAGE> 75
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
HIGH YIELD CORPORATE PORTFOLIO COUPON DATE (000) (000)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BUILDING MATERIALS (2.7%)
American Standard Cos. Inc. 7.375% 2/1/2008 $ 50,000 $ 49,500
American Standard Cos. Inc. 7.625% 2/15/2010 41,250 41,198
Falcon Building Products, Inc. 9.50% 6/15/2007 21,750 21,424
Henry Co. 10.00% 4/15/2008 (1) 10,000 10,100
Nortek, Inc. 9.25% 3/15/2007 17,500 17,981
CABLE (7.2%)
CSC Holdings, Inc. 7.875% 12/15/2007 30,000 31,500
CSC Holdings, Inc. 8.125% 8/15/2009 25,000 26,350
CSC Holdings, Inc. 9.25% 11/1/2005 30,000 32,100
CSC Holdings, Inc. 9.875% 2/15/2013 15,000 16,575
Century Communications Inc. 8.875% 1/15/2007 9,525 10,287
Classic Cable Inc. 9.875% 8/1/2008 (1) 3,905 4,081
Comcast Corp. 9.125% 10/15/2006 25,000 26,750
Comcast Corp. 9.375% 5/15/2005 24,000 25,740
Comcast Corp. 9.50% 1/15/2008 20,000 21,150
Comcast Corp. 10.625% 7/15/2012 30,000 38,250
Falcon Holdings Group LP 8.375% 4/15/2010 (1) 20,000 20,200
Jones Intercable Inc. 7.625% 4/15/2008 20,000 20,250
Lenfest Communications, Inc. 8.375% 11/1/2005 70,000 74,550
Rifkin Acquisition Partners LP 11.125% 1/15/2006 15,000 16,687
Rogers Cablesystem Ltd. 9.625% 8/1/2002 12,000 12,900
CHEMICALS (3.3%)
Acetex Corp. 9.75% 10/1/2003 20,000 20,500
Buckeye Cellulose Corp. 8.50% 12/15/2005 15,000 15,150
Huntsman Corp. 9.50% 7/1/2007 (1) 17,000 17,510
LaRoche Industries, Inc. 9.50% 9/15/2007 15,000 14,775
Lilly Industries, Inc. 7.75% 12/1/2007 15,000 15,343
PCI Chemical Canada, Inc. 9.25% 10/15/2007 22,500 21,712
Pioneer Americas Acquisition Corp. 9.25% 6/15/2007 20,000 19,100
Sifto Canada Inc. 8.50% 7/15/2000 10,000 10,250
Sovereign Specialty Chemicals, Inc. 9.50% 8/1/2007 18,000 18,540
Texas Petrochemicals Corp. 11.125% 7/1/2006 17,500 18,812
CONSUMER GOODS & SERVICES (1.9%)
Chattem, Inc. 8.875% 4/1/2008 10,000 10,075
Muzak LP/Muzak Capital Corp. 10.00% 10/1/2003 10,000 10,450
Playtex Products, Inc. 8.875% 7/15/2004 10,000 10,275
Revlon Consumer Products Corp. 8.625% 2/1/2008 50,000 51,125
Safelite Glass Corp. 9.875% 12/15/2006 (1) 10,000 10,350
Sealy Mattress Co. 9.875% 12/15/2007 9,000 9,270
CONTAINERS (2.9%)
BWAY Corp. 10.25% 4/15/2007 15,000 16,275
Gaylord Container Corp. 9.375% 6/15/2007 30,000 27,300
Owens-Illinois, Inc. 7.85% 5/15/2004 15,000 15,553
Owens-Illinois, Inc. 8.10% 5/15/2007 35,000 36,965
Silgan Corp. 9.00% 6/1/2009 41,000 42,640
Sweetheart Cup Co., Inc. 9.625% 9/1/2000 5,000 4,988
Sweetheart Cup Co., Inc. 10.50% 9/1/2003 11,000 10,973
ENERGY & RELATED GOODS & SERVICES (6.6%)
AmeriGas Partners, LP 10.125% 4/15/2007 10,000 10,637
Clark Refining & Marketing, Inc. 8.375% 11/15/2007 15,000 14,962
Cross Timbers Oil Co. 8.75% 11/1/2009 25,000 25,000
Cross Timbers Oil Co. 9.25% 4/1/2007 17,000 17,552
Dailey International, Inc. 9.50% 2/15/2008 10,000 9,450
Energy Corp. of America 9.50% 5/15/2007 30,000 29,700
Flores & Rucks, Inc. 9.75% 10/1/2006 16,000 17,240
</TABLE>
24
<PAGE> 76
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
COUPON DATE (000) (000)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
J. Ray McDermott, SA 9.375% 7/15/2006 $ 25,000 $ 27,094
Newfield Exploration Co. 7.45% 10/15/2007 15,000 14,847
Newpark Resources, Inc. 8.625% 12/15/2007 15,000 15,187
Ocean Energy, Inc. 8.875% 7/15/2007 15,000 15,300
Oryx Energy Co. 8.00% 10/15/2003 10,000 10,443
Oryx Energy Co. 8.125% 10/15/2005 15,000 15,807
Plains Resources, Inc. 10.25% 3/15/2006 19,000 19,855
Pride Petroleum Services, Inc. 9.375% 5/1/2007 32,000 33,600
Santa Fe Energy Resources, Inc. 11.00% 5/15/2004 10,000 10,675
Seagull Energy Corp. 8.625% 8/1/2005 10,000 10,241
Tesoro Petroleum Corp. 9.00% 7/1/2008 (1) 10,000 10,075
Tuboscope Inc. 7.50% 2/15/2008 15,000 14,996
Wesco Distribution Inc. 9.125% 6/1/2008 (1) 25,000 24,937
FOOD & LODGING (1.8%)
Aurora Foods Inc. 8.75% 7/1/2008 (1) 4,930 5,078
B & G Foods, Inc. 9.625% 8/1/2007 15,000 15,300
CapStar Hotel Co. 8.75% 8/15/2007 20,000 20,750
Purina Mills Inc. 9.00% 3/15/2010 (1) 25,000 25,687
Tricon Global Restaurants, Inc. 7.65% 5/15/2008 25,000 25,159
HEALTH CARE (6.6%)
Beverly Enterprises Inc. 9.00% 2/15/2006 18,000 18,180
Columbia/HCA Healthcare Corp. 6.91% 6/15/2005 25,000 23,957
Columbia/HCA Healthcare Corp. 7.00% 7/1/2007 22,400 21,326
Columbia/HCA Healthcare Corp. 7.25% 5/20/2008 30,000 28,873
Integrated Health Services, Inc. 9.50% 9/15/2007 30,000 30,750
Kinetic Concepts, Inc. 9.625% 11/1/2007 30,000 30,975
Leiner Health Products, Inc. 9.625% 7/1/2007 12,750 13,547
Owens & Minor, Inc. 10.875% 6/1/2006 15,000 16,144
Packard Bioscience Co. 9.375% 3/1/2007 3,530 3,442
PharMerica Inc. 8.375% 4/1/2008 (1) 35,000 34,825
Tenet Healthcare Corp. 8.125% 12/1/2008 (1) 75,000 76,313
Tenet Healthcare Corp. 8.625% 1/15/2007 45,000 46,519
HOME BUILDING & REAL ESTATE (1.5%)
Kaufman & Broad Home Corp. 7.75% 10/15/2004 26,250 26,250
Nortek Inc. 8.875% 8/1/2008 (1) 7,840 7,879
Standard Pacific Corp. 8.00% 2/15/2008 15,000 14,963
Standard Pacific Corp. 8.50% 6/15/2007 15,000 15,413
Toll Corp. 7.75% 9/15/2007 15,000 15,000
MEDIA & ENTERTAINMENT (7.8%)
American Radio Systems Corp. 9.00% 2/1/2006 10,000 10,750
Big Flower Press Holdings 8.875% 7/1/2007 15,000 15,450
CBS Corp. 7.15% 5/20/2005 (1) 75,000 74,790
Chancellor Media Corp. 8.125% 12/15/2007 20,000 20,275
Chancellor Media Corp. 9.375% 10/1/2004 17,000 17,914
Fox/Liberty Networks LLC 8.875% 8/15/2007 60,000 62,400
JCAC, Inc. 10.125% 6/15/2006 10,000 10,975
Jacor Communications Inc. 8.75% 6/15/2007 10,000 10,475
Lin Television Corp. 8.375% 3/1/2008 (1) 41,000 41,923
Loews Cineplex Entertainment 8.875% 8/1/2008 (1) 13,950 13,967
Outdoor Systems Inc. 9.375% 10/15/2006 13,040 14,018
PRIMEDIA, Inc. 7.625% 4/1/2008 20,000 19,700
Telecommunication Techniques Co. 9.75% 5/15/2008 (1) 24,000 24,780
Von Hoffman Press Inc. 10.375% 5/15/2007 (1) 15,000 15,713
Westinghouse Electric Corp. 6.875% 9/1/2003 13,000 12,885
Westinghouse Electric Corp. 8.375% 6/15/2002 15,000 15,660
Westinghouse Electric Corp. 8.875% 6/1/2001 15,000 15,708
Young Broadcasting Inc. 9.00% 1/15/2006 10,000 10,625
</TABLE>
25
<PAGE> 77
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
HIGH YIELD CORPORATE PORTFOLIO COUPON DATE (000) (000)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
METAL (4.6%)
AK Steel Corp. 9.125% 12/15/2006 $ 55,000 $ 57,613
Algoma Steel Inc. 12.375% 7/15/2005 25,000 27,250
AmeriSteel Corp. 8.75% 4/15/2008 (1) 10,000 10,125
Armco, Inc. 9.00% 9/15/2007 22,525 22,412
Bethlehem Steel Corp. 10.375% 9/1/2003 10,500 11,288
GS Technologies Operating Co., Inc. 12.25% 10/1/2005 12,500 13,344
LTV Corp. 8.20% 9/15/2007 45,000 44,100
P & L Coal Holdings Corp. 8.875% 5/15/2008 (1) 18,000 18,698
Ryerson Tull, Inc. 9.125% 7/15/2006 11,960 13,335
Weirton Steel Corp. 10.75% 6/1/2005 12,500 12,969
Wells Aluminum Corp. 10.125% 6/1/2005 10,500 10,946
PAPER & PACKAGING (5.9%)
Buckeye Technologies, Inc. 8.00% 10/15/2010 (1) 12,460 12,585
Container Corp. of America 9.75% 4/1/2003 50,000 53,500
Doman Industries, Ltd. 8.75% 3/15/2004 30,000 27,750
Domtar Inc. 8.75% 8/1/2006 15,000 15,713
Domtar Inc. 9.50% 8/1/2016 18,750 20,438
Fonda Group Inc. 9.50% 3/1/2007 15,000 14,475
NoramPac Inc. 9.50% 2/1/2008 (1) 15,000 15,600
Owens-Illinois Inc. 7.35% 5/15/2008 45,000 45,388
Paperboard Industries International Inc. 8.375% 9/15/2007 18,750 18,797
Repap New Brunswick, Inc. 9.00% 6/1/2004 (1) 11,860 11,860
Stone Container Corp. 9.875% 2/1/2001 16,000 16,480
Tembec Finance Corp. 9.875% 9/30/2005 25,000 26,500
U.S. Timberlands LLC 9.625% 11/15/2007 30,000 31,200
RETAIL (0.4%)
Nash Finch Co. 8.50% 5/1/2008 (1) 20,000 20,000
TECHNOLOGY & RELATED (6.7%)
Advanced Micro Devices, Inc. 11.00% 8/1/2003 54,000 56,160
Amphenol Corp. 9.875% 5/15/2007 20,000 21,150
Beckman Instruments, Inc. 7.45% 3/4/2008 (1) 30,000 29,889
Fairchild Semiconductor Corp. 10.125% 3/15/2007 35,000 34,212
Fisher Scientific International 9.00% 2/1/2008 60,000 60,450
Iron Mountain, Inc. 8.75% 9/30/2009 33,000 34,320
Iron Mountain, Inc. 10.125% 10/1/2006 16,500 17,944
Pierce Leahy Corp. 9.125% 7/15/2007 15,000 15,637
PSINet Inc. 10.00% 2/15/2005 50,000 52,625
Unisys Corp. 7.875% 4/1/2008 30,000 31,125
TELECOMMUNICATIONS (5.2%)
Comcast Cellular Holdings, Inc. 9.50% 5/1/2007 15,000 15,900
GCI, Inc. 9.75% 8/1/2007 20,000 20,900
ITC DeltaCom, Inc. 8.875% 3/1/2008 24,250 25,220
ITC DeltaCom, Inc. 11.00% 6/1/2007 9,751 11,043
Intermedia Communications Inc. 8.50% 1/15/2008 45,000 45,675
Intermedia Communications Inc. 8.875% 11/1/2007 10,000 10,325
Level 3 Communications, Inc. 9.125% 5/1/2008 (1) 50,000 49,813
MJD Communications Inc. 9.50% 5/1/2008 (1) 10,085 10,438
McLeodUSA Inc. 8.375% 3/15/2008 15,000 15,263
McLeodUSA Inc. 9.25% 7/15/2007 15,000 15,788
Paging Network, Inc. 8.875% 2/1/2006 10,000 10,025
Paging Network, Inc. 10.125% 8/1/2007 25,000 26,438
Rogers Cantel, Inc. 8.30% 10/1/2007 15,000 15,075
TEXTILES & RELATED (2.0%)
Galey & Lord Inc. 9.125% 3/1/2008 20,000 19,400
Pillowtex Corp. 9.00% 12/15/2007 20,000 20,600
</TABLE>
26
<PAGE> 78
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
COUPON DATE (000) (000)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Tultex Corp. 9.625% 4/15/2007 $ 10,000 $ 9,500
Tultex Corp. 10.625% 3/15/2005 15,000 14,775
Westpoint Stevens Inc. 7.875% 6/15/2005 (1) 40,000 41,000
----------
4,289,272
----------
UTILITIES (5.9%)
AES Corp. 8.375% 8/15/2007 32,500 32,988
AES Corp. 8.50% 11/1/2007 25,000 25,563
CMS Energy Corp. 7.625% 11/15/2004 18,000 18,207
CMS Energy Corp. 8.125% 5/15/2002 30,000 30,851
CalEnergy Co., Inc. 9.50% 9/15/2006 16,000 17,280
Calpine Corp. 7.875% 4/1/2008 (1) 36,380 35,743
Cleveland Electric Illuminating Co. 7.43% 11/1/2009 22,500 23,376
El Paso Electric Co. Series C 8.25% 2/1/2003 15,000 15,914
El Paso Electric Co. Series D 8.90% 2/1/2006 23,000 25,731
El Paso Electric Co. Series E 9.40% 5/1/2011 28,000 32,120
Midland Cogeneration Venture LP 11.75% 7/23/2005 25,000 29,479
Niagara Mohawk Power Corp. 7.75% 10/1/2008 5,320 5,477
Texas-New Mexico Power Co. 10.75% 9/15/2003 14,000 15,086
----------
307,815
----------
- -------------------------------------------------------------------------------------------------------------------------
TOTAL CORPORATE BONDS
(COST $4,714,314) 4,818,399
- -------------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT SECURITIES (5.4%)
- -------------------------------------------------------------------------------------------------------------------------
U.S. Treasury Note 5.75% 8/15/2003 100,000 100,892
U.S. Treasury Note 6.50% 5/31/2001 75,000 76,871
U.S. Treasury Note 6.50% 5/31/2002 100,000 103,192
- -------------------------------------------------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT SECURITIES
(COST $277,280) 280,955
- -------------------------------------------------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENTS (6.0%)
- -------------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENTS
Collateralized by U.S. Government Obligations in a
Pooled Cash Account 5.64% 8/3/1998 60,975 60,975
Collateralized by U.S. Government Obligations in a
Pooled Cash Account--Note G 5.64%-5.65% 8/3/1998 253,132 253,132
- -------------------------------------------------------------------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(COST $314,107) 314,107
- -------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (103.3%)
(COST $5,305,701) 5,413,461
- -------------------------------------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-3.3%)
Other Assets--Note C 126,708
Security Lending Collateral Payable to
Brokers--Note G (253,132)
Other Liabilities (44,194)
----------
(170,618)
- -------------------------------------------------------------------------------------------------------------------------
NET ASSETS (100%)
- -------------------------------------------------------------------------------------------------------------------------
Applicable to 645,982,122 outstanding $.001 par value
shares of beneficial interest (unlimited authorization) $5,242,843
=========================================================================================================================
NET ASSET VALUE PER SHARE $8.12
=========================================================================================================================
</TABLE>
*See Note A in Notes to Financial Statements.
(1) Security exempt from registration under Rule 144A of the Securities Act of
1933. These securities may be sold in transactions exempt from
registration, normally to qualified institutional buyers. At July 31, 1998,
the aggregate value of these securities was $826,020,000, representing
15.8% of net assets.
27
<PAGE> 79
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
AMOUNT PER
HIGH YIELD CORPORATE PORTFOLIO (000) SHARE
- -------------------------------------------------------------------------------------------------------------------------
AT JULY 31, 1998, NET ASSETS CONSISTED OF:
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $5,114,490 $7.92
Undistributed Net Investment Income -- --
Accumulated Net Realized Gains 20,593 .03
Unrealized Appreciation--Note F 107,760 .17
- -------------------------------------------------------------------------------------------------------------------------
NET ASSETS $5,242,843 $8.12
=========================================================================================================================
</TABLE>
28
F282-7/1998
