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[VANGUARD MONEY MARKET RESERVES LOGO]
ANNUAL REPORT 1995
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In this Annual Report, I am delighted to formally introduce you to John J.
Brennan, who, on January 31, 1996, will assume my responsibilities as Chief
Executive Officer of Vanguard Money Market Reserves and the other Funds in The
Vanguard Group. Mr. Brennan will continue to serve as President of the Funds,
and I will continue to serve as Chairman of the Board.
As a shareholder of the Fund since its inception in 1975, and as
Chairman of all the Vanguard Funds, I want to tell you that I am enthusiastic
and confident that Jack Brennan is exactly the right person to succeed me as
Chief Executive Officer. To use yet another Vanguard nautical metaphor, he will
be the new captain. He has the qualities of leadership, integrity,
intelligence, and vision that must continue to be Vanguard's hallmark as we
move toward, and then into, the 21st century.
I know that he has these qualities, because Jack Brennan and I have
been working closely together since he joined Vanguard in 1982. He is a
graduate of Dartmouth College and Harvard Business School. He started as
Assistant to the Chairman and, rising like a rocket, became President in 1989.
While, at age 41, he may seem young, he is in fact older than I was when I
became Chief Executive Officer of Vanguard's predecessor organization in 1967,
at the age of 38. Most important of all, Jack is completely dedicated to the
Vanguard character, and believes in our basic mission: serving solely the
shareholder, free of any conflict of interest. He believes in holding our costs
of operation to a minimum, and in retaining our position as the lowest-cost
provider of financial services in the world. He is a true competitor, who
shares Vanguard's dedication to providing highly competitive returns to our
investors relative to the returns provided by other mutual funds with
comparable objectives. He also believes in reporting our results to
shareholders with complete candor. He has the full support of the Board of
Directors and our crew, and is committed to staying the course we have set for
Vanguard. You need have no doubt that the essential elements that drew you to
Vanguard in the first place will remain intact.
[FIGURE 1]
As for me, I expect to fill a useful, if less demanding, role as
Chairman of the Board. I shall keep a watchful eye over the interests of our
shareholders, our crew, and our investment policies. I shall also speak out on
industry affairs, reminding all who will listen of the primacy of the interests
of mutual fund shareholders. I will be readily available to provide Jack
Brennan with whatever wisdom I may have acquired during my lifetime of
experience in this wonderful industry and in my service as captain of Vanguard
since I founded this unique organization more than two decades ago.
In short, I'll still be around. Thank you for all your confidence in
me in the past and, in advance, for your continued confidence in Vanguard under
Jack Brennan's leadership.
/s/ JOHN C. BOGLE
VANGUARD MONEY MARKET RESERVES SEEKS MAXIMUM CURRENT INCOME CONSISTENT WITH
PRESERVATION OF CAPITAL AND LIQUIDITY. EACH PORTFOLIO INTENDS TO MAINTAIN A
CONSTANT NET ASSET VALUE OF $1.00 PER SHARE. YOU MAY CHOOSE THE PORTFOLIO THAT
IS MOST SUITED TO YOUR PARTICULAR INVESTMENT OBJECTIVE: PRIME PORTFOLIO,
FEDERAL PORTFOLIO, OR U.S. TREASURY PORTFOLIO.
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CHAIRMAN'S LETTER
FELLOW SHAREHOLDER:
Short-term interest rates remained at high levels during the twelve months
ended November 30, the 1995 fiscal year of Vanguard Money Market Reserves. As a
result, this letter brings good news to our shareholders.
In fact, the total return of +5.82% for our Prime Portfolio during
the past year was fully 50% above our return of +3.87 for fiscal 1994, which in
turn was 28% above our return of +3.02 for the prior year. We enjoyed similar
increases in return for our Federal and U.S. Treasury Portfolios. This table
presents the past year's total returns, as well as the annualized yields at
year end and one year earlier:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------
TOTAL RETURN
----------------- YEAR-END YIELD
FISCAL YEAR ENDED ----------------------
PORTFOLIO NOVEMBER 30, 1995 1995 1994
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
PRIME +5.82% 5.50% 5.12%
FEDERAL +5.77 5.46 5.03
U.S. TREASURY +5.47 5.21 4.76
- ---------------------------------------------------------------------------
</TABLE>
You will note that our yields at year end are a bit lower than our returns for
the full year, reflecting a moderate easing of interest rates in mid-year.
Nonetheless, our Portfolios continue to provide a yield premium of about 0.32%
(32 basis points) compared to the average money market fund in their respective
competitive categories.
THE FISCAL YEAR IN REVIEW
Given the relative stability of short-term interest rates during 1995, it may
be difficult to recall just how volatile rates have been during the recent
past. For example, the yield on 90-day U.S. Treasury bills, which had reached
the 9.3% level in early 1989, dropped to 3.0% by September 1992. Short-term
rates remained there through January 1994, before climbing steadily to 6.0% by
February 1995. Since then, the rate has eased to 5.5%, about where it remained
at the end of our fiscal year on November 30, 1995.
What happened during the past three years contains an important
slice of U.S. economic history. The durability of the 3% yield from late 1992
to early 1994 reflects an economy that was beginning to emerge from recession,
albeit recovering sluggishly. But, by February 1994, the economy moved into
higher gear, and the Federal Reserve Board decided it was time to put on the
brakes to avoid the risk that inflation would soon rear its ugly head again.
At that time, the Fed engineered the first of seven increases in
the Federal funds rate (the rate at which banks borrow from one another) over
the ensuing 13 months. Taken together, the increases doubled this key rate,
from 3.0% to 6.0%. This series of increases was designed to rein in a vibrant
economy and quell inflationary fears. As it turns out, Federal Reserve Chairman
Alan Greenspan apparently achieved his objective, and inflation remains at low
levels.
By early 1995, economic growth gave signs of slowing, and in fact
did exactly that in the second quarter. In order to prevent a further economic
slowdown, the Fed reduced the Federal funds rate by 25 basis points to 5.75% in
July 1995. That is where it remains today; however, as I write this letter to
you, the money markets are anticipating a further cut in the near future.*
Along with the swings in T-bill rates over the past three years
came even wider swings in long-term interest rates. The yield on the 30-year
U.S. Treasury bond fell from 8.1% in early 1992 to a decade low of 5.9% in
October 1993, only to soar back to 8.2% in November 1994. Then, with most
market "experts" forecasting a slight reduction in 1995 to the 7.5% range,
long-term rates declined far more precipitously, falling to 6.1% as our 1995
fiscal year ended. The autumn leg of this decline appeared to anticipate
further easing by the Federal Reserve.
These rate swings engendered enormous fluctuations in the prices of
long Treasuries. The upward rate swing last year drove market prices down by
- -26%; the ensuing recovery sent prices
- -----------
* After the conclusion of the period covered by this Annual Report, the Fed
actually reduced the short-term interest rate by 1/4 of 1%, bringing this key
rate to 5 1/2%
1
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[FIGURE 2]
right back up by +28%. The avoidance of such volatility, indigenous to
long-term bonds, is a major reason that investors choose money market funds,
which continued, without exception as far as I know, to maintain net asset
values of $1.00 per share.
I should note that, in a few instances, fund sponsors had to
provide financial backing for their funds in order to maintain the $1.00
threshold. So, now is probably as good a time as any to remind you, once again,
that the $1.00 net asset value of a money market fund is not guaranteed. What's
more, unlike checking and savings deposits in banks, your investment in a money
market fund is not insured by the Federal Deposit Insurance Corporation, an
agency of the U.S. Government.
In any event, the effective cost of enjoying the principal
stability provided by Treasury bills, rather than the price volatility of
Treasury bonds, has fallen sharply during the past year. A bit more than one
year ago bonds were accorded a yield advantage of more than 300 basis points
over bills. Today, that spread is down to roughly 60 basis points. In other
words, the yield advantage of holding bonds rather than bills has dropped
dramatically, as shown in the chart to the left. Accordingly, the relative
stability of money market fund asset values is available at nearly as good a
yield as that of volatile long-term bonds, although money market fund income is
significantly less durable.
VANGUARD MONEY MARKET RESERVES IN 1995
It was, in a sense, "just another year" for Vanguard Money Market Reserves. We
provided, as usual, a solid premium over the yields available on most
comparable money market funds. This table presents the yield advantage we
enjoyed at year end:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
YIELDS AS OF
NOVEMBER 30, 1995
--------------------------------------------------
INVESTMENT VANGUARD AVERAGE VANGUARD
CATEGORY PORTFOLIO COMPETITOR ADVANTAGE
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
PRIME 5.50% 5.19% .31%
FEDERAL 5.46 5.09 .37
U.S. TREASURY 5.21 4.92 .29
- ----------------------------------------------------------------------------------
</TABLE>
Source: Donoghue's Money Fund Report.
We have all grown accustomed to "the Vanguard advantage" spelled out in the
table. It is a sustainable yield advantage derived principally from our low
operating expenses relative to those of our competitors. In fiscal 1995,
Vanguard Money Market Reserves operated at an expense ratio (expenses as a
percentage of average net assets) of 0.32%. The expense ratio of our average
competitor is 0.70%, more than twice as high as ours. The net result is that we
enjoy an annual tailwind of about 0.38% as suggested by the above table.
What is truly amazing is the number of money market funds that
maintain much higher expense ratios. Of the 250 prime money market funds
available to individual investors today, fully 43 have
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expense ratios three times as high as ours, averaging 1.18%. In a market in
which gross yields are, say, 5.5%, our Prime Portfolio would deliver a net
yield of 5.2% compared to 4.8% for the average prime portfolio, and 4.3% for
the high-cost group. Why presumably intelligent investors would own such money
market funds when their annual income could be increased by 15% to 30% is a
mystery to me. So, we will continue to preach the low-cost gospel to all who
will listen.
Our advantage is also a reflection of our skilled staff of money
market professionals in the Vanguard Fixed Income Group, who are dedicated to
serving your interests, day after day. A major part of their mission is to
maintain the highest possible portfolio yields, without compromising on
investment quality. Top credit quality is critical to the investment of the
assets of our Prime Portfolio, significant in our Federal Portfolio1, but
inconsequential--assuming that the U.S. Treasury, considered to be the highest
quality guarantor in the world, stands behind its obligations--in our U.S.
Treasury Portfolio.
What is more, we maintain average portfolio maturities--normally 50
to 60 days--that should protect against even quantum leaps in rates. Some other
money market funds forgot the importance of high quality and limited maturity
during the sharp increase in short-term rates in 1994-1995. They were
ill-served by their negligence. An estimated 40 money market funds (half of
which were managed by banks, often said to have good credentials in managing
risk) required financial assistance from their sponsors in order to maintain
their net asset values at $1.00 per share.
I am pleased to report that all three Portfolios of Vanguard Money
Market Reserves maintained net asset values at the $1.00 level, without the
need for "heroic measures." I am confident that our tough policies, implemented
by professional managers, were responsible for this positive outcome.
Nonetheless, I reiterate that there are no guarantees--either by us or by our
competitors--that this traditionally stable net asset value, under all possible
circumstances, will remain sacrosanct.
A LONGER-TERM VIEW
The importance of Vanguard Money Market Reserves' annual cost advantage is
indicated by the fact that, over the past decade, we emerge at the top in
comparisons of total returns of money market funds. For example, our Prime
Portfolio ranked #1 among all comparable portfolios.
Our average annualized return of +6.1% stands tall relative to the
+5.7% average return of our peers in operation throughout the full decade. The
table below compares Prime's average annual rate of return not only with that
of our average competitor, but also, just for the fun of it, with the return of
the lowest-performing fund in the group.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
TOTAL RETURN*
----------------------------------
TEN YEARS ENDED
NOVEMBER 30, 1995
----------------------------------
FINAL VALUE
AVERAGE OF $10,000
ANNUAL INITIAL
RATE INVESTMENT
- --------------------------------------------------------------------------
<S> <C> <C>
VANGUARD PRIME PORTFOLIO 6.13% $18,134
- --------------------------------------------------------------------------
AVERAGE MONEY MARKET FUND 5.66% $17,344
- --------------------------------------------------------------------------
LOWEST PERFORMING COMPETITOR 4.52% $15,560
- --------------------------------------------------------------------------
</TABLE>
* Assuming reinvestment of all dividends.
As you can see, the table also presents the cumulative results of an investment
of $10,000, at the start of the period. Our final value of $18,130 exceeded the
final value of $17,340 for our peer group by roughly $800. Compared to the
lowest performer, our excess gain was more than $2,500, or fully 25% of the
initial investment. So, we believe the record is clear that we have succeeded
in providing what you have every right to expect--top returns.
- --------------
(1) A curious anomaly is that, because of our low costs, our Federal
Portfolio's yield of 5.46% at year end nicely exceeded the yield of
5.19% for the average competitor of our Prime Portfolio. Our Federal
Portfolio invests in obligations of agencies of the U.S. Government. In
this case, therefore, investors can obtain higher yields hand-in-hand
with higher quality. It is a valuable combination, rarely found in
efficient markets.
(continued)
3
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My philosophy, and Vanguard's corporate policy, is not to brag
about "#1" ratings. They have proven to be evanescent to a fault, with today's
"first" fund apt to be tomorrow's "last." Usually, these rankings have been
achieved only with extraordinary risks, especially among equity funds, but also
among long-term and short-term bond funds.
In the money market field, however, risks remain relatively
consistent among competitive money market funds, since all must meet certain
credit and quality standards set by the Securities and Exchange Commission.
This oversight allows only limited latitude in straying from the flock. (Of
course, as noted earlier, a few "lost sheep" pushed these limits to the edge in
1994 and 1995, and paid an appropriate penalty.)
In money market funds, therefore, the essential difference between
high and low returns is cost. A fund's expense ratio is what dominates,
overpoweringly, the net yield that you receive. For example, the ten
highest-yielding money market funds today are earning gross yields that are
roughly the same as the ten lowest-yielding funds. However, the winners have
much lower expense ratios, which provides their net advantage. This table
provides a stark reminder of this elementary fact:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
YIELDS AS OF
NOVEMBER 30, 1995
-----------------------------------------------
GROSS YIELD NET YIELD
EARNED EXPENSE EARNED
BY FUND RATIO BY INVESTOR
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
PRIME PORTFOLIO 5.82% .32% 5.50%
- -----------------------------------------------------------------------------------------
HIGHEST YIELDING FUNDS* 5.91% .44% 5.47%
- -----------------------------------------------------------------------------------------
LOWEST YIELDING FUNDS 5.83% 1.14% 4.69%
- -----------------------------------------------------------------------------------------
</TABLE>
*Including Vanguard's Prime Portfolio.
So, this table makes the case for low-cost money funds in general, and,
obviously, Vanguard Money Market Reserves in particular. (I have omitted from
the high-yielding group those money market funds that are waiving advisory fees
or expenses for "a temporary period." In my mind, this practice raises serious
disclosure and legal questions. In the box on page seven, I express my
reservations.)
A WORD ABOUT LEADERSHIP
Speaking of the consistent success of our Portfolios presents me with
an opportunity to applaud the leadership, integrity, and professional
competence of Ian A. MacKinnon, Senior Vice President of The Vanguard Group.
Mr. MacKinnon joined Vanguard when our Fixed Income Group was formed in
mid-1981, and he has headed it ever since. At that time, the Directors of The
Vanguard Group, Inc., and Vanguard Money Market Reserves had determined that
Vanguard itself, rather than an external fee-paid investment adviser, should
assume the responsibility of the Fund's portfolio management. The reason was
two-fold: (1) to receive investment management services on an "at-cost" basis,
thereby providing the opportunity to achieve material savings for the Fund and
thus enhancing our yields; and (2) to have direct oversight and control of the
Fund's investment policies, and thus ensure that credit quality standards would
be maintained at the highest levels.
We are pleased that Ian MacKinnon has proved to be an outstanding
choice for the job. In the 14 years that have followed, he has lived up to our
highest expectations. Initial assets under the management of the Fixed Income
Group in 1981 were slightly above $1 billion; today, the Group manages some $67
billion, including not only the three Portfolios of Vanguard Money Market
Reserves, but also a family of 39 other fixed-income funds, including
tax-exempt money market funds, municipal bond funds, U.S. Treasury bond funds,
corporate bond funds, and bond index funds.
These assets have accrued to Vanguard, in my view, because we
designed a family of conservative fixed-income funds whose merits were premised
on professional management, high quality, specific maturity ranges, and low
cost. Basically, we told shareholders, with candor, what could be expected of
each Portfolio, and we have consistently delivered what we promised. We wanted
funds with good results and "no surprises," and that's just what Ian and his
group have delivered. I know that when I express
4
<PAGE> 7
[FIGURE 3]
gratitude for Ian's professional skills and leadership, I do so on your behalf
as well as my own.
The net results achieved by our approach to fixed-income fund
management since Ian joined us in late 1981 are impressive. The chart above
shows the cumulative return of the Prime Portfolio compared to the average
prime money market fund during the period from the close of 1981 to the close
of fiscal 1995. This table summarizes the message:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------
TOTAL RETURN*
-------------------------------
DECEMBER 31, 1981, TO
NOVEMBER 30, 1995
-------------------------------
FINAL VALUE
AVERAGE OF $10,000
ANNUAL INITIAL
RATE INVESTMENT
- ------------------------------------------------------------------------
<S> <C> <C>
VANGUARD PRIME PORTFOLIO 7.24% $26,450
AVERAGE MONEY MARKET FUND 6.79 24,960
- ------------------------------------------------------------------------
</TABLE>
*Assuming reinvestment of all dividends.
As you can see, an initial investment of $10,000 in our Prime Portfolio at the
end of 1981 would be valued at $26,450 today, some $1,500 more than a
comparable initial investment in the average money market fund. The percentage
difference may appear small, and even our $1,500 advantage may seem modest. But
the point is that this advantage may as well go to you as a shareholder of our
Fund rather than to high-priced "external" investment advisers who put your
interests in the back seat and retain the difference as profit.
IN SUMMARY
We are proud not only of our past record, but of the high principles under
which it has been achieved. We see no reason, absent an international financial
crisis of staggering proportions (which would, of course, affect all financial
assets), that our "extra" returns will not persist in the years ahead. So, we
will continue at our work of managing your cash reserves with professional
skill, low cost, and high quality, and providing you with yields that will
essentially track
5
<PAGE> 8
those of the overall money market, including Treasury bills and other
short-term instruments.
Our adherence to these first principles of investment management of
cash reserves is what makes the Fund especially suitable for your savings. We
expect Vanguard Money Market Reserves to remain as the preferred choice of
intelligent investors. It is your harbor against the risks, even as you
relinquish the possible extra returns, of the stock and bond markets. We shall,
as ever, "stay the course" on your behalf.
Sincerely,
/s/ JOHN C. BOGLE
- ----------------------
John C. Bogle
Chairman of the Board December 13, 1995
Note: Mutual fund data from Lipper Analytical Services, Inc.
PRIME PORTFOLIO INSTITUTIONAL SHARES
Shareholders of Vanguard Institutional Money Market Portfolio have approved the
Board of Directors' proposal to reorganize the Institutional Portfolio into a
separate class of shares of the Prime Portfolio of Vanguard Money Market
Reserves. On October 27, 1995, shares of the Institutional Portfolio were
exchanged for an equal-dollar amount of shares of the Prime Portfolio
"Institutional Shares."
The investment objectives of the Portfolios are identical: to
provide maximum income that is consistent with the preservation of capital and
liquidity by investing in high-quality money market instruments. Both also
operate under the same investment policies and credit quality standards and are
managed by the same adviser, Vanguard Fixed Income Group.
The reorganization is designed to take advantage of a multiple class
structure, which reduces some of the expense of managing and administering
separate funds. Instead of investing in a stand-alone money market fund with
total assets of $730 million, our Institutional Money Market shareholders now
participate in a money market fund--the Prime Portfolio--with assets of some
$20 billion. Both the expense ratio (0.15%) and the initial investment
requirement ($10,000,000) of the Prime Portfolio Institutional Shares remain
unchanged from those of Vanguard Institutional Money Market Portfolio.
The total return for our institutional shareholders for the fiscal
year ending November 30, 1995, was 6.00%. * At fiscal year end, the yield of
the Institutional Shares of the Prime Portfolio was 5.67%. This yield exceeded
the yield of 5.50% for the regular Prime Portfolio by virtue of the lower
expenses applicable to the Institutional Shares.
- -----------
* The one-year return of +6.00% represents a blended return combining the
return of +5.45% for Vanguard Institutional Money Market Portfolio from
November 30, 1994, through October 27, 1995, and the return of +0.53% for
the Institutional Shares of the Prime Portfolio from October 28, 1995,
through November 30, 1995.
6
<PAGE> 9
"TEASER RATES": A QUESTION OF DISCLOSURE
As yield (and therefore price) competition rises in the marketplace, the
pressure on fund organizations to raise the stated net yields of their money
market funds increases constantly. One might have hoped that in a free
enterprise system competition might drive down the enormously profitable
advisory fees paid by some funds. Alas, this has not been the case. However,
there are three manifestations of the fact that at least limited price
competition is emerging. Two of them are creditable, one is not:
(1) Relatively few investors have been lured into the very high-priced (say,
expense ratios of more than 1.00%) funds, which have generally been
unable to build large asset bases. The funds with average expense ratios
of less than 50 basis points, led by Vanguard Money Market Reserves, have
dominated the marketplace, accumulating asset bases that average over $1
billion. (Total assets of Vanguard Money Market Reserves are presently
$25 billion.) The average high-priced fund, on the other hand, has an
asset base of less than $200 million.
(2) Lower cost "lines" of funds, available only to investors with substantial
assets of, say, more than $25,000, have emerged. Try as they might,
however, these low-cost funds cannot seem to nearly match the yields
available to all shareholders in Vanguard Money Market Reserves. Their
annual expense ratios typically run in the area of 0.50%, compared to
0.32% for our Fund. As a result, they have not been particularly
competitive in the marketplace.
(3) "Teaser rates" have come into fashion. Roughly two-thirds of prime money
market funds follow this practice of waiving investment advisory fees
"for a temporary period of time." At the same time, they usually agree to
reimburse the fund for its operating expenses. At a later (unknown) time,
without disclosure to shareholders, the fund's expenses return to their
true level, with a commensurate reduction (often sharp) in the fund's
reported yield. The net result of this practice is to attract assets into
the fund when the yield is artificially high, and hope that shareholders
will not notice the difference when the fees are reinstated.
Leaving aside the dubious ethics of the teaser rate practice, I have serious
questions about its legality. The Investment Company Act of 1940 provides that
investment advisory contracts must "precisely describe" the fees payable to the
adviser, hardly the case with fee waivers. Ultimately, of course (after, say,
five years), the fund's sponsor can "brag" about the fund's superiority, even
though its yield has fallen by, say, 60 to 80 basis points. The spurious teaser
yields are sad evidence of illusory competition against Vanguard's extremely
low costs. We welcome real competition that would benefit money market fund
shareholders, even as we doubt that many competitors would (or could) sacrifice
their profits in order to give their shareholders "a fair shake."
7
<PAGE> 10
AVERAGE ANNUAL TOTAL RETURNS
THE CURRENT YIELDS QUOTED IN THE CHAIRMAN'S LETTER ARE CALCULATED IN ACCORDANCE
WITH SEC GUIDELINES. THE AVERAGE ANNUAL TOTAL RETURNS FOR THE PORTFOLIOS
(PERIODS ENDED SEPTEMBER 30, 1995) ARE AS FOLLOWS:
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
INCEPTION -----------------------------------------
PORTFOLIO DATE 1 YEAR 5 YEARS 10 YEARS
- ------------------ ------------ -------- --------- -----------
<S> <C> <C> <C> <C>
PRIME 6/4/75 +5.70% +4.68% +6.17%
FEDERAL 7/13/81 +5.65 +4.59 +6.01
U.S. TREASURY 3/13/89* +5.35 +4.39 +5.78
PRIME INSTITUTIONAL 10/27/95** +5.89 +4.83 +5.46***
</TABLE>
* TOTAL RETURNS PROVIDED PRIOR TO MARCH 13, 1989, ARE FOR THE INSURED
PORTFOLIO, WHICH BEGAN OPERATIONS ON MARCH 9, 1983.
** TOTAL RETURNS PROVIDED PRIOR TO OCTOBER 28, 1995, ARE FOR VANGUARD
INSTITUTIONAL MONEY MARKET PORTFOLIO, WHICH BEGAN OPERATIONS ON OCTOBER 3,
1989.
*** SINCE THE INCEPTION OF VANGUARD INSTITUTIONAL MONEY MARKET PORTFOLIO.
ALL OF THESE DATA REPRESENT PAST PERFORMANCE; FUTURE RETURNS WILL FLUCTUATE. AN
INVESTMENT IN A MONEY MARKET FUND IS NEITHER INSURED NOR GUARANTEED BY THE U.S.
GOVERNMENT, AND THERE IS NO ASSURANCE THAT THE FUND WILL BE ABLE TO MAINTAIN A
STABLE NET ASSET VALUE OF $1.00 PER SHARE.
8
<PAGE> 11
REPORT FROM THE INVESTMENT ADVISER
In the midst of a booming bond market in 1995, money market interest rates have
been the least volatile of all sectors, with interest rates on typical
three-month investments falling by only one-quarter to one-half a percent
during the fiscal year ended November 30, 1995. This is in sharp contrast with
long-term bond markets, where 30-year Treasury bond yields fell by nearly two
full percentage points. This set of circumstances has led to a happy outcome
for money market and bond investors alike.
Money market returns, which are entirely in the form of interest,
have held relatively constant at a level well above the rate of inflation.
(Please refer to the Chairman's letter for more details about the Portfolios'
returns). Bond total returns, composed of interest income and any change in
value of the bonds, have been boosted by the big price increases that
accompanied this year's sharp rate declines in the longer maturity sectors of
the market.
The primary reason that short- and long-term rates have fallen by
such widely different magnitudes is that long-term rates are determined by
market forces, while short-term interest rates are strongly influenced by the
Federal Reserve (the Fed) through the implementation of its monetary policy.
Market participants holding long-term maturities have been quick to factor in
the good news that the bond markets have received this year (good news for
bonds is often bad news for the economy).
Indeed, economic growth has moderated from the torrid pace at which
it opened the year. By mid-1995, goods-producing industries and job growth had
slowed, while bloated inventories were worked off. In addition, politicians in
Washington appear to be attempting serious deficit reduction. Slowdowns in the
economy and the expectation of lower government spending have decreased the
demand for credit, putting downward pressure on interest rates, the price of
credit.
The Fed, however, may be reluctant to lower short-term rates until
longer-term trends in the economic data develop and fiscal restraint becomes a
reality. The reason is that changes in monetary policy affect the economy with
highly variable magnitudes and time lags. Central bank officials do not want to
spur inflation by providing stimulus to an economy that is merely "napping as
opposed to hibernating." This disinclination to ease has bolstered the central
bank's credibility as an inflation fighter. The reputation is well-deserved,
since the most favorable indicator for the long-term health of the economy and
financial markets today is the stable and relatively low rate of inflation.
Given that most of the action has been in other sectors of the bond
market, we have "charted a moderate course" in managing the various Portfolios
of Vanguard Money Market Reserves. As in previous years, we avoided extremes of
interest rate and credit risk, taking advantage of our low expense ratio to
provide competitive returns. During the year, we moderately elevated the price
sensitivity of the Portfolios, from the lower end of our market neutral range
to the upper end of that range. This helped to lock in some of the higher
yields that were available earlier in the year, without making excessive
commitments to the market now that the term structure of money market interest
rates reflects expectations of Fed easing. In addition, our long-standing
prohibition on investments in Japanese banks served us well, as the problems at
those institutions have grown more serious.
On occasion, we have extended the interest rate sensitivity of the
Treasury Portfolio when quirks in the short-term Treasury market have offered
anomalous yield enhancements for relatively small changes in maturity. In
particular, the Treasury has relied more heavily than usual on the issuance of
unscheduled "cash management" bills in its financial maneuvering around the
Federal debt ceiling.
In recent months, many investors have expressed their concern,
fostered by irresponsible comments from politicians, about the possibility of a
default by the Treasury on its obligations. It is unfortunate that some
politicians have chosen to use the threat of a default as a negotiating tool.
It is our feeling that whatever short-term disturbances are experienced in the
process of increasing the debt limit, Treasury securities ultimately will
maintain their value due to the status of the United States as the world's
largest and most creditworthy borrower.
While money market investment returns have been relatively stable
with a healthy premium above
9
<PAGE> 12
inflation this year, it is important to realize that they may not (almost
certainly will not) always be so. Some economists would argue that the
long-term equilibrium level of short-term interest rates should approximate the
inflation rate, which would put some investors behind inflation after paying
taxes. Regardless of these prospective changes in yields, we will endeavor (as
we always have) to provide a few constants: conservative management, low costs,
and competitive returns.
Sincerely,
Ian A. MacKinnon, Senior Vice President
Robert F. Auwaerter, Principal
John Hollyer, Principal
Vanguard Fixed Income Group
December 13, 1995
10
<PAGE> 13
STATEMENT OF NET ASSETS
FINANCIAL STATEMENTS
November 30, 1995
<TABLE>
<CAPTION>
Face Market
Amount Value
PRIME PORTFOLIO (000) (000)+
- -----------------------------------------------------------------------------------------
<S> <C> <C>
U.S. GOVERNMENT AND AGENCY
OBLIGATIONS (19.2%)
- -----------------------------------------------------------------------------------------
Federal Home Loan Bank
5.69%-5.83%,
12/1/95-3/11/96(1) $1,803,100 $1,802,214
5.86%-9.50%,
12/26/95-6/6/96 67,615 67,580
Federal Home Loan
Mortgage Corp.
5.703%, 12/4/95(1) 100,000 99,981
5.898%, 3/28/96 29,000 28,466
Federal National Mortgage Assn.
5.58%-5.85%,
12/1/95-2/15/96(1) 1,497,000 1,496,380
5.83%-9.20%, 1/10/96-6/6/96 260,590 260,490
- -----------------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT AND
AGENCY OBLIGATIONS
(Cost $3,755,111) 3,755,111
- -----------------------------------------------------------------------------------------
COMMERCIAL PAPER (45.2%)
- -----------------------------------------------------------------------------------------
BANK HOLDING COMPANIES (2.4%)
Banc One Corp.
5.756%-5.758%,
12/27/95-12/28/95 40,000 39,830
CoreStates Capital
5.777%-5.785%, 12/1/95-1/18/96 75,000 74,626
J.P. Morgan & Co., Inc.
5.722%-5.785%, 2/27/96-4/4/96 234,000 230,464
Norwest Corp.
5.768%-5.804%, 12/14/95-2/16/96 70,000 69,416
Republic New York Corp.
5.767%, 2/15/96 67,000 66,198
------------
GROUP TOTAL 480,534
------------
- -----------------------------------------------------------------------------------------
FINANCE--AUTO (2.5%)
Daimler-Benz N.A. Co.
5.755%-5.79%, 12/11/95-1/17/96 154,500 153,590
Ford Motor Credit Corp.
5.75%-5.762%, 12/1/95-2/13/96 332,000 329,071
------------
GROUP TOTAL 482,661
------------
- -----------------------------------------------------------------------------------------
FINANCE--OTHER (16.4%)
A.I. Credit Corp.
5.72%-5.755%, 2/2/96-2/16/96 68,000 67,239
American Express Credit Corp.
5.718%-5.751%, 12/7/95-2/27/96 248,000 246,046
American General Finance
5.75%-5.751%, 12/15/95-12/21/95 50,000 49,866
Ameritech Capital Funding Corp.
5.73%-5.952%, 12/11/95-2/12/96 70,000 69,590
Asset Securitization Cooperative Corp.
5.70%-5.791%, 12/8/95-2/27/96 267,000 264,270
Associates Corp.
5.674%-5.77%, 12/1/95-3/19/96 330,000 326,649
Cargill Financial Services Corp.
5.71%, 2/15/96 15,000 14,822
Ciesco L.P.
5.693%-5.778%, 12/7/95-2/21/96 275,300 273,055
CIT Group Holdings Inc.
5.76%-5.781%, 1/23/96-2/27/96 350,000 346,506
Commercial Credit Co.
5.753%, 1/18/96 50,000 49,620
Corporate Asset Funding Corp.
5.734%-5.777%, 12/14/95-2/13/96 268,000 265,568
Dean Witter Discover & Co.
5.788%-5.789%, 1/23/96-1/24/96 47,995 47,587
Delaware Funding
5.738%-5.764%, 12/7/95-1/19/96 50,861 50,703
Eiger Capital Corp.
5.758%-5.798%, 12/7/95-1/12/96 149,909 149,208
General Electric Capital Corp.
5.61%-5.787%, 12/14/95-4/26/96 708,176 699,061
Household Finance Corp.
5.758%-5.778%, 12/7/95-1/12/96 100,000 99,618
Norwest Financial
5.77%, 1/22/96 50,000 49,589
Panasonic Finance
5.901%, 12/1/95 30,000 30,000
Pitney Bowes Credit Corp.
5.717%-5.722%, 12/8/95-12/15/95 54,000 53,899
Transamerica Finance
5.769%, 1/19/96 50,000 49,611
------------
GROUP TOTAL 3,202,507
------------
- -----------------------------------------------------------------------------------------
INDUSTRIAL (7.6%)
Bayer Corp.
5.754%, 12/4/95 57,000 56,973
Campbell Soup Co.
5.731%, 12/19/95 35,000 34,901
Cargill Inc.
5.708%-5.76%, 12/11/95-2/16/96 198,300 196,561
Chevron U.K.
5.751%, 12/15/95 20,000 19,956
</TABLE>
11
<PAGE> 14
STATEMENT OF NET ASSETS
(continued)
<TABLE>
<CAPTION>
Face Market
Amount Value
PRIME PORTFOLIO (continued) (000) (000)+
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Chevron Oil Finance Co.
5.752%, 12/1/95 $ 50,000 $ 50,000
Chevron Transport Corp.
5.705%-5.808%, 12/11/95-3/20/96 30,000 29,642
The Coca-Cola Co.
5.677%-5.724%, 12/8/95-12/15/95 48,800 48,724
E.I. du Pont de Nemours & Co.
5.754%, 12/4/95 4,000 3,998
The Dun & Bradstreet Corp.
5.687%-5.796%, 12/14/95-1/9/96 64,000 63,660
Electronic Data Systems Corp.
5.799%, 12/1/95 28,000 28,000
Hewlett Packard Co.
5.711%-5.75%, 12/12/95-12/20/95 68,030 67,833
Koch Industries
5.881%, 12/1/95 17,768 17,768
Eli Lilly & Co.
5.677%-5.798%, 1/12/96-4/18/96 288,000 284,136
Mobil Australia Finance Co.
5.731%-5.754%, 12/12/95-2/2/96 24,434 24,318
Norfolk Southern Corp.
5.739%-5.74%, 2/16/96-2/21/96 55,000 54,320
Procter & Gamble Co.
5.682%-5.746%, 12/18/95-1/30/96 114,000 113,418
Rockwell International
5.765%, 12/21/95 47,000 46,851
Schering Corp.
5.729%-5.737%, 2/27/96-4/29/96 67,550 66,361
Stanford University
5.764%, 4/11/96 6,000 5,877
Toys R Us Inc.
5.736%, 12/6/95 57,000 56,955
Wal-Mart Stores Inc.
5.73%-5.756%, 12/5/95-12/21/95 173,000 172,827
Warner Lambert Co.
5.587%-5.739%, 12/13/95-5/2/96 44,500 43,566
------------
GROUP TOTAL 1,486,645
------------
- -----------------------------------------------------------------------------------------
INSURANCE (1.7%)
AIG Funding Inc.
5.71%, 2/26/96 23,675 23,357
MetLife Funding Corp.
5.724%-5.801%, 12/4/95-12/11/95 98,000 97,882
Prudential Funding Corp.
5.777%, 1/16/96 50,000 49,635
SAFECO Credit Co. Inc.
5.736%, 12/20/95 13,000 12,961
USAA Capital Corp.
5.725%-5.766%, 12/14/95-2/14/96 155,600 154,245
------------
GROUP TOTAL 338,080
------------
- -----------------------------------------------------------------------------------------
UTILITIES (2.2%)
AT&T Corp.
5.707%-5.768%, 12/28/95-2/15/96 378,000 374,449
Ameritech Corp.
5.732%, 12/28/95 49,000 48,794
------------
GROUP TOTAL 423,243
------------
- -----------------------------------------------------------------------------------------
FOREIGN BANKS (4.0%)
ABN AMRO
5.752%-5.794%, 1/30/96-2/23/96 162,000 160,092
Abbey National
5.657%-5.736%, 12/5/95-3/15/96 112,648 111,020
Canadian Imperial Holdings Inc.
5.78%, 12/29/95 25,000 24,889
Commonwealth Bank of Australia
5.732%, 12/1/95 7,014 7,014
Halifax Building Society
5.746%-5.75%, 2/6/96-3/1/96 116,000 114,532
Bank of Montreal
5.803%, 1/23/96 31,700 31,433
Societe Generale
5.714%, 2/9/96 100,000 98,905
Toronto Dominion Holdings USA Inc.
5.70%-5.743%, 12/8/95-2/20/96 201,507 199,410
UBS Finance (Delaware) Inc.
5.726%, 12/6/95 18,264 18,249
Royal Bank of Canada
5.792%, 1/29/96 20,000 19,813
------------
GROUP TOTAL 785,357
------------
- -----------------------------------------------------------------------------------------
CANADIAN GOVERNMENT--
NATIONAL AND PROVINCIAL (3.0%)
Canada Bills
5.679%-5.75%, 1/18/96-2/8/96 250,000 247,738
Canadian Wheat Board
5.689%-5.794%, 2/13/96-4/25/96 210,022 206,930
Federal Business Development Bank
5.744%, 12/27/95 25,000 24,898
Province of Alberta
5.679%, 1/16/96 10,000 9,929
Province of British Columbia
5.636%-5.819%, 1/8/96-3/15/96 88,832 87,665
------------
GROUP TOTAL 577,160
------------
- -----------------------------------------------------------------------------------------
</TABLE>
12
<PAGE> 15
<TABLE>
<CAPTION>
Face Market
Amount Value
(000) (000)+
- -----------------------------------------------------------------------------------------
<S> <C> <C>
OTHER FOREIGN GOVERNMENT (3.3%)
Caisse des Depots et Consignations
5.659%-5.777%, 12/12/95-2/13/96 $ 269,766 $ 267,717
KFW International Finance Inc.
5.733%-5.786%, 12/8/95-2/27/96 120,000 118,822
New South Wales Treasury Corp.
5.701%-5.784%, 12/15/95-1/25/96 63,630 63,317
Oesterreichische Kontrollbank
5.627%-5.722%, 1/11/96-2/16/96 148,100 146,704
Wool International
5.744%-5.759%, 2/9/96-2/16/96 53,294 52,687
------------
GROUP TOTAL 649,247
------------
- -----------------------------------------------------------------------------------------
FOREIGN INDUSTRIAL (1.8%)
Glaxo Wellcome
5.722%-5.777%, 1/22/96-2/29/96 193,000 190,550
Siemens Corp.
5.628%-5.632%, 1/12/96-1/16/96 50,000 49,665
Unilever Capital Corp.
5.739%, 12/8/95-12/14/95 103,000 102,813
------------
GROUP TOTAL 343,028
------------
- -----------------------------------------------------------------------------------------
FOREIGN UTILITIES (.3%)
Electricite de France
5.732%-5.741%, 2/1/96-2/8/96 70,000 69,267
------------
- -----------------------------------------------------------------------------------------
TOTAL COMMERCIAL PAPER
(Cost $8,837,729) 8,837,729
- -----------------------------------------------------------------------------------------
CORPORATE BONDS (.5%)
- -----------------------------------------------------------------------------------------
Amtrak Trust
5.957%, 12/4/95(1) 78,561 78,562
Toyota Motor Credit Corp.
17.00%, 3/11/96 25,000 25,750
- -----------------------------------------------------------------------------------------
TOTAL CORPORATE BONDS
(Cost $104,312) 104,312
- -----------------------------------------------------------------------------------------
CERTIFICATES OF DEPOSIT (21.5%)
- -----------------------------------------------------------------------------------------
U.S. BANKS (2.1%)
National Bank of Detroit
5.775%, 12/1/95 196,000 196,000
Wachovia Bank of Georgia
5.70%-5.76%, 12/26/95-1/11/96 225,000 224,999
------------
GROUP TOTAL 420,999
------------
- -----------------------------------------------------------------------------------------
YANKEE CERTIFICATES OF DEPOSIT--
CANADIAN BRANCHES (.4%)
ABN AMRO
5.732%-5.739%, 2/20/96-2/27/96 40,000 39,459
Barclays Bank
5.84%, 2/23/96 15,000 14,802
National Westminster Bank
5.64%, 4/30/96 17,000 16,607
------------
GROUP TOTAL 70,868
------------
- -----------------------------------------------------------------------------------------
YANKEE CERTIFICATES OF DEPOSIT--
U.S. BRANCHES (19.0%)
Bank of Nova Scotia
5.73%-5.81%, 12/13/95-2/5/96 242,000 242,003
Barclays Bank
5.78%, 2/1/96 248,000 248,000
Bayerische Landesbank Girozentrale
5.67%-5.78%, 12/15/95-1/10/96 120,000 119,999
Bayerische Vereinsbank
5.625%-5.76%, 12/5/95-3/4/96 346,000 346,000
Canadian Imperial Bank of Commerce
5.81%, 1/26/96 180,000 179,999
Caisse Nationale de Credit Agricole
5.60%-5.78%, 12/11/95-3/27/96 270,000 270,000
Credit Suisse
5.61%-5.78%, 12/4/95-3/25/96 445,000 444,996
Deutsche Bank
5.76%, 1/29/96 100,000 100,001
Dresdner Bank
5.79%-6.65%, 3/1/96-3/15/96 202,000 202,003
Lloyds Bank
5.64%-6.34%, 1/16/96-2/1/96 109,000 109,027
National Westminster Bank
5.71%-5.78%, 1/16/96-3/8/96 64,000 64,004
Rabobank Nederlanden
5.75%-5.84%, 12/4/95-4/17/96 308,000 308,013
Societe Generale
5.75%-5.82%, 1/5/96-2/29/96 250,000 250,000
Swiss Bank
5.625%-5.75%, 12/4/95-4/1/96 535,000 534,996
Union Bank of Switzerland
5.75%, 12/28/95 13,000 13,001
Westdeutsche Landesbank Girozentrale
5.62%-7.45%, 12/4/95-1/18/96 285,000 285,010
------------
GROUP TOTAL 3,717,052
------------
- -----------------------------------------------------------------------------------------
TOTAL CERTIFICATES OF DEPOSIT
(Cost $4,208,919) 4,208,919
- -----------------------------------------------------------------------------------------
EURODOLLAR CERTIFICATES
OF DEPOSIT (13.2%)
- -----------------------------------------------------------------------------------------
Abbey National
5.65%-5.76%, 12/8/95-3/15/96 302,000 301,992
ABN AMRO
5.72%-5.78%, 1/31/96-3/1/96 148,000 148,004
</TABLE>
13
<PAGE> 16
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Face Market
PRIME Amount Value
PORTFOLIO (continued) (000) (000)+
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Bank of Nova Scotia
5.73%-5.81%, 1/26/96-2/13/96 $ 85,000 $ 85,000
Barclays Bank
5.79%, 1/17/96-1/29/96 149,000 149,001
Bayerische Hypo Bank
5.69%-5.73%, 12/13/95-12/22/95 125,000 124,996
Bayerische Landesbank Girozentrale
5.63%-5.85%, 12/14/95-3/1/96 234,000 234,006
Bayerische Vereinsbank
5.80%, 2/6/96 143,000 143,010
Canadian Imperial Bank of Commerce
5.82%, 1/29/96 25,000 25,000
Caisse Nationale de Credit Agricole
6.23%, 3/15/96 25,000 25,021
Deutsche Bank
5.72%-5.85%, 12/22/95-3/1/96 460,000 460,016
Dresdner Bank
5.75%, 2/6/96 30,000 30,001
Landesbank Hessen-Thueringen
5.75%, 2/15/96 20,000 20,000
Lloyds Bank
6.33%, 1/22/96 2,000 2,001
Morgan Guaranty
5.80%, 4/4/96 100,000 100,003
National Westminster Bank
5.63%-5.80%, 12/1/95-2/29/96 416,000 416,003
Rabobank Nederlanden
5.74%-5.85%, 2/13/96-2/20/96 120,000 120,004
Royal Bank of Canada
5.79%, 2/1/96 40,000 40,001
Union Bank of Switzerland
5.82%, 2/20/96 50,000 50,002
Westdeutsche Landesbank Girozentrale
5.76%-5.80%, 1/25/96-2/1/96 100,000 100,002
- -----------------------------------------------------------------------------------------
TOTAL EURODOLLAR
CERTIFICATES OF DEPOSIT
(Cost $2,574,063) 2,574,063
- -----------------------------------------------------------------------------------------
BANKERS ACCEPTANCES (1.2%)
- -----------------------------------------------------------------------------------------
U.S. BANKS (.9%)
CoreStates Bank
5.754%, 12/22/95 18,300 18,239
Republic National Bank of New York
5.731%-5.762%, 12/6/95-12/26/95 67,700 67,556
Wachovia Bank of Georgia
5.763%, 2/1/96 87,300 86,446
------------
GROUP TOTAL 172,241
------------
- -----------------------------------------------------------------------------------------
YANKEE BANKERS ACCEPTANCES (.3%)
Barclays Bank
5.728%, 3/5/96 20,000 19,706
Canadian Imperial Bank of Commerce
5.706%, 12/14/95 12,000 11,976
Union Bank of Switzerland
5.768%-5.794%, 1/22/96-1/26/96 39,000 38,671
------------
GROUP TOTAL 70,353
------------
- -----------------------------------------------------------------------------------------
TOTAL BANKERS ACCEPTANCES
(Cost $242,594) 242,594
- -----------------------------------------------------------------------------------------
OTHER NOTES (1.1%)
- -----------------------------------------------------------------------------------------
Morgan Bank (Delaware)
5.56%, 12/5/95(1) 50,000 49,997
State Street Bank & Trust
5.87%, 12/1/95 60,000 60,000
Wachovia Bank of North Carolina
5.945%, 1/2/96(1) 100,000 100,000
- -----------------------------------------------------------------------------------------
TOTAL OTHER NOTES
(Cost $209,997) 209,997
- -----------------------------------------------------------------------------------------
REPURCHASE AGREEMENT (1.3%)
- -----------------------------------------------------------------------------------------
Greenwich Capital Markets
5.90%, 12/1/95
(Collateralized by U.S. Treasury
Notes 7.50%, 10/31/99)
(Cost $250,000) 250,000 250,000
- -----------------------------------------------------------------------------------------
TOTAL INVESTMENTS (103.2%)
(Cost $20,182,725) 20,182,725
- -----------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-3.2%)
- -----------------------------------------------------------------------------------------
Other Assets--Note B 194,204
Liabilities (820,079)
------------
(625,875)
- -----------------------------------------------------------------------------------------
NET ASSETS (100%) $19,556,850
=========================================================================================
</TABLE>
14
<PAGE> 17
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
AT NOVEMBER 30, 1995,
NET ASSETS CONSISTED OF:
- -----------------------------------------------------------------------------------------
Amount
(000)
------------
<S> <C>
Paid in Capital $19,556,762
Undistributed Net
Investment Income --
Accumulated Net
Realized Gains 88
Unrealized Appreciation
of Investments --
- -----------------------------------------------------------------------------------------
NET ASSETS $19,556,850
- -----------------------------------------------------------------------------------------
INDIVIDUAL CLASS--
Net Assets Applicable to
18,763,806,258 outstanding
$.001 par value shares
(authorized 25,000,000,000 shares) $18,763,901
- -----------------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE--
INDIVIDUAL CLASS $1.00
=========================================================================================
INSTITUTIONAL CLASS--
Net Assets Applicable to
792,955,617 outstanding $.001 par
value shares (authorized
2,000,000,000 shares) $ 792,949
- -----------------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE--
INSTITUTIONAL CLASS $1.00
=========================================================================================
</TABLE>
+ See Note A to Financial Statements.
(1) Floating Rate Note.
<TABLE>
<CAPTION>
Face Market
Amount Value
FEDERAL PORTFOLIO (000) (000)+
- -----------------------------------------------------------------------------------------
<S> <C> <C>
U.S. GOVERNMENT AND AGENCY
OBLIGATIONS (83.4%)
- -----------------------------------------------------------------------------------------
Federal Home Loan Bank
5.69%-5.83%, 12/1/95-12/27/95(1) $ 294,965 $ 294,812
5.57%-5.68%, 1/19/96-4/2/96 364,190 359,875
Federal Home Loan Mortgage Corp.
5.703%, 12/4/95(1) 100,000 99,981
5.611%-5.898%, 12/1/95-4/1/96 235,372 233,133
Federal National Mortgage Assn.
5.49%-5.681%, 12/8/95-4/26/96 1,118,240 1,105,086
Overseas Private Investment Corp.
(U.S. Government Guaranteed)
5.749%-6.114%,
12/5/95-2/26/96(1) 107,392 107,392
- -----------------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT AND
AGENCY OBLIGATIONS
(Cost $2,200,279) 2,200,279
- -----------------------------------------------------------------------------------------
REPURCHASE AGREEMENTS (16.5%)
- -----------------------------------------------------------------------------------------
Dresdner Bank
5.91%, 12/1/95
(Collateralized by U.S. Treasury
Note 7.50%, 12/31/96) 200,000 200,000
Greenwich Capital Markets
5.90%, 12/1/95
(Collateralized by U.S. Treasury
Note 6.875%, 3/31/00) 34,281 34,281
SBC Capital Markets Inc.
5.91%, 12/1/95
(Collateralized by U.S.
Treasury Bond 9.25%, 2/15/16) 200,000 200,000
- -----------------------------------------------------------------------------------------
TOTAL REPURCHASE AGREEMENTS
(Cost $434,281) 434,281
- -----------------------------------------------------------------------------------------
TOTAL INVESTMENTS (99.9%)
(Cost $2,634,560) 2,634,560
- -----------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (.1%)
- -----------------------------------------------------------------------------------------
Other Assets--Note B 12,910
Liabilities (10,865)
------------
2,045
- -----------------------------------------------------------------------------------------
NET ASSETS (100%)
- -----------------------------------------------------------------------------------------
Applicable to 2,636,503,864 outstanding
$.001 par value shares
(authorized 5,000,000,000 shares) $2,636,605
- -----------------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE $1.00
=========================================================================================
</TABLE>
+ See Note A to Financial Statements.
(1) Floating Rate Note.
15
<PAGE> 18
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
FEDERAL
PORTFOLIO (continued)
- -----------------------------------------------------------------------------------------
AT NOVEMBER 30, 1995,
NET ASSETS CONSISTED OF:
- -----------------------------------------------------------------------------------------
Amount Per
(000) Share
------------ --------
<S> <C> <C>
Paid in Capital $2,636,533 $1.00
Undistributed Net
Investment Income -- --
Accumulated Net
Realized Gains 72 --
Unrealized Appreciation
of Investments -- --
- -----------------------------------------------------------------------------------------
NET ASSETS $2,636,605 $1.00
- -----------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Face Market
Amount Value
U.S. TREASURY PORTFOLIO (000) (000)+
- -----------------------------------------------------------------------------------------
<S> <C> <C>
U.S. GOVERNMENT OBLIGATIONS (99.3%)
- -----------------------------------------------------------------------------------------
U.S. Treasury Bills
5.373%-6.75%, 12/7/95-2/15/96 $1,094,375 $1,089,130
U.S. Treasury Notes
4.00%-9.25%, 1/15/96-2/29/96 1,418,900 1,420,831
- -----------------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT
OBLIGATIONS
(Cost $2,509,961) 2,509,961
- -----------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (.7%)
- -----------------------------------------------------------------------------------------
Receivables for Securities Sold 224,306
Other Assets--Note B 34,718
Payables for Securities Purchased (224,546)
Other Liabilities (17,013)
------------
17,465
- -----------------------------------------------------------------------------------------
NET ASSETS (100%)
- -----------------------------------------------------------------------------------------
Applicable to 2,527,187,558 outstanding
$.001 par value shares
(authorized 5,000,000,000 shares) $2,527,426
- -----------------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE $1.00
- -----------------------------------------------------------------------------------------
</TABLE>
+See Note A to Financial Statements.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
AT NOVEMBER 30, 1995,
NET ASSETS CONSISTED OF:
- -----------------------------------------------------------------------------------------
Amount Per
(000) Share
------------ --------
<S> <C> <C>
Paid in Capital $2,527,206 $1.00
Undistributed Net
Investment Income -- --
Accumulated Net
Realized Gains 220 --
Unrealized Appreciation
of Investments -- --
- -----------------------------------------------------------------------------------------
NET ASSETS $2,527,426 $1.00
- -----------------------------------------------------------------------------------------
</TABLE>
16
<PAGE> 19
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
PRIME FEDERAL U.S. TREASURY
PORTFOLIO PORTFOLIO PORTFOLIO
- -----------------------------------------------------------------------------------------------------------------------------
Year Ended Year Ended Year Ended
November 30, 1995 November 30, 1995 November 30, 1995
(000) (000) (000)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME
INCOME
Interest . . . . . . . . . . . . . . . . . . . . $1,022,302 $142,222 $130,244
- -----------------------------------------------------------------------------------------------------------------------------
Total Income . . . . . . . . . . . . . . 1,022,302 142,222 130,244
- -----------------------------------------------------------------------------------------------------------------------------
EXPENSES
The Vanguard Group--Note B
Investment Advisory Services . . . . . . . . . $ 2,181 $ 310 $ 297
Management and Administrative . . . . . . . . 14,663 2,859 3,192
Shareholder Account Maintenance+ . . . . . . . 29,637 3,298 2,780
Marketing and Distribution+ . . . . . . . . . . 4,614 51,095 655 7,122 627 6,896
------- ------ ------
Custodians' Fees . . . . . . . . . . . . . . . . 457 92 59
Taxes (other than income taxes) . . . . . . . . . 1,381 210 183
Auditing Fees . . . . . . . . . . . . . . . . . . 21 9 8
Shareholders' Reports+ . . . . . . . . . . . . . 606 92 75
Annual Meeting and Proxy Costs+ . . . . . . . . . 592 87 94
Directors' Fees and Expenses . . . . . . . . . . 65 9 9
- -----------------------------------------------------------------------------------------------------------------------------
Total Expenses . . . . . . . . . . . . . 54,217 7,621 7,324
- -----------------------------------------------------------------------------------------------------------------------------
Net Investment Income . . . . . . . . . 968,085 134,601 122,920
- -----------------------------------------------------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS) ON
INVESTMENT SECURITIES SOLD . . . . . . . . . . . . (95) (5) 47
- -----------------------------------------------------------------------------------------------------------------------------
UNREALIZED APPRECIATION
(DEPRECIATION) OF
INVESTMENT SECURITIES . . . . . . . . . . . . . . -- -- --
- -----------------------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets
Resulting from Operations . . . . . . $967,990 $134,596 $122,967
=============================================================================================================================
</TABLE>
+ Expenses of the Prime Portfolio by Class are:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
(000)
------------------------------------------
Individual Institutional
Class Class Total
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
Class-Specific Expenses:
Shareholder Account Maintenance $29,635 $ 2 $29,637
Marketing and Distribution 4,597 17 4,614
Shareholders' Reports 606 -- 606
Annual Meeting and Proxy Costs 592 -- 592
------- ---- -------
Total Class-Specific Expenses 35,430 19 35,449
All Other Portfolio Expenses 18,677 91 18,768
------- ---- -------
Total Expenses $54,107 $110 $54,217
- ---------------------------------------------------------------------------------
</TABLE>
The Institutional Class commenced operations October 28, 1995. See Note C.
17
<PAGE> 20
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
PRIME FEDERAL
PORTFOLIO PORTFOLIO
- -----------------------------------------------------------------------------------------------------------------------------
YEAR ENDED Year Ended YEAR ENDED Year Ended
NOVEMBER 30, November 30, NOVEMBER 30, November 30,
1995 1994 1995 1994
(000) (000) (000) (000)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net Investment Income . . . . . . . . . . . . . . $ 968,085 $ 510,164 $ 134,601 $ 76,777
Realized Net Gain (Loss) . . . . . . . . . . . . . (95) (97) (5) (55)
Unrealized Appreciation (Depreciation) . . . . . . -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets
Resulting from Operations . . . . . . . . . 967,990 510,067 134,596 76,722
- -----------------------------------------------------------------------------------------------------------------------------
DIVIDENDS FROM
NET INVESTMENT INCOME
Individual Class+ . . . . . . . . . . . . . . . . (963,945) (510,164) (134,601) (76,777)
Institutional Class . . . . . . . . . . . . . . . (4,140) -- -- --
- -----------------------------------------------------------------------------------------------------------------------------
Total Dividends . . . . . . . . . . . . . . . (968,085) (510,164) (134,601) (76,777)
- -----------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS--
INDIVIDUAL CLASS+ (AT $1.00)
Issued . . . . . . . . . . . . . . . . . . . . . . 20,415,125 17,731,785 2,174,887 1,946,245
Issued In Lieu of Cash Distributions . . . . . . . 920,077 489,573 128,608 73,348
Redeemed . . . . . . . . . . . . . . . . . . . . . (17,679,924) (15,479,781) (1,863,309) (1,730,176)
- -----------------------------------------------------------------------------------------------------------------------------
Net Increase--Individual Class . . . . . . . 3,655,278 2,741,577 440,186 289,417
- -----------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS--
INSTITUTIONAL CLASS (AT $1.00)
Issued . . . . . . . . . . . . . . . . . . . . . . 78,717 -- -- --
Issued In Lieu of Cash Distributions . . . . . . . 6,578 -- -- --
Issued In Exchange for Net Assets of Vanguard
Institutional Money Market Portfolio--Note D . 734,329 -- -- --
Redeemed . . . . . . . . . . . . . . . . . . . . . (26,674) -- -- --
- -----------------------------------------------------------------------------------------------------------------------------
Net Increase--Institutional Class . . . . . . 792,950 -- -- --
- -----------------------------------------------------------------------------------------------------------------------------
Total Increase . . . . . . . . . . . . . . . 4,448,133 2,741,480 440,181 289,362
- -----------------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Year . . . . . . . . . . . . . . . . 15,108,717 12,367,237 2,196,424 1,907,062
- -----------------------------------------------------------------------------------------------------------------------------
End of Year . . . . . . . . . . . . . . . . . . . $ 19,556,850 $ 15,108,717 $ 2,636,605 $ 2,196,424
=============================================================================================================================
</TABLE>
+ Amounts for the Federal and U.S. Treasury Portfolios are Portfolio totals.
18
<PAGE> 21
<TABLE>
<CAPTION>
U.S. TREASURY
PORTFOLIO
- ------------------------------------------------------------------------------------------
YEAR ENDED Year Ended
NOVEMBER 30, November 30,
1995 1994
(000) (000)
- ------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net Investment Income . . . . . . . . . . . . . . . $ 122,920 $ 69,207
Realized Net Gain (Loss) . . . . . . . . . . . . . 47 (24)
Unrealized Appreciation (Depreciation) . . . . . . -- --
- ------------------------------------------------------------------------------------------
Net Increase in Net Assets
Resulting from Operations . . . . . . . . . 122,967 69,183
- ------------------------------------------------------------------------------------------
DIVIDENDS FROM
NET INVESTMENT INCOME
Individual Class+ . . . . . . . . . . . . . . . . (122,920) (69,207)
Institutional Class . . . . . . . . . . . . . . . . -- --
- ------------------------------------------------------------------------------------------
Total Dividends . . . . . . . . . . . . . . . . (122,920) (69,207)
- -------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS--
INDIVIDUAL CLASS+ (AT $1.00)
Issued . . . . . . . . . . . . . . . . . . . . . . 2,714,966 2,178,457
Issued In Lieu of Cash Distributions . . . . . . . 117,383 66,010
Redeemed . . . . . . . . . . . . . . . . . . . . . (2,361,027) (1,939,613)
- -------------------------------------------------------------------------------------------
Net Increase--Individual Class . . . . . . . . 471,322 304,854
- -------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS--
INSTITUTIONAL CLASS (AT $1.00)
Issued . . . . . . . . . . . . . . . . . . . . . . -- --
Issued In Lieu of Cash Distributions . . . . . . . -- --
Issued In Exchange for Net Assets of Vanguard
Institutional Money Market Portfolio--Note D . . -- --
Redeemed . . . . . . . . . . . . . . . . . . . . . -- --
- ------------------------------------------------------------------------------------------
Net Increase--Institutional Class . . . . . . -- --
- ------------------------------------------------------------------------------------------
Total Increase . . . . . . . . . . . . . . . . 471,369 304,830
- ------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Year . . . . . . . . . . . . . . . . . 2,056,057 1,751,227
- ------------------------------------------------------------------------------------------
End of Year . . . . . . . . . . . . . . . . . . . . $2,527,426 $ 2,056,057
==========================================================================================
</TABLE>
+ Amounts for the Federal and U.S. Treasury Portfolios are Portfolio totals.
19
<PAGE> 22
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
PRIME PORTFOLIO--INDIVIDUAL CLASS
- -------------------------------------------------------------------------------------------------------------------
Year Ended November 30,
------------------------------------------------------
For a Share Outstanding Throughout Each Year 1995 1994 1993 1992 1991
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR . . . . . . . . . . . $1.00 $1.00 $1.00 $1.00 $1.00
------ ------ ------ ------ ------
INVESTMENT OPERATIONS
Net Investment Income . . . . . . . . . . . . . . . . .057 .038 .030 .038 .062
Net Realized and Unrealized Gain (Loss)
on Investments . . . . . . . . . . . . . . . . . . -- -- -- -- --
------ ------ ------ ------ ------
TOTAL FROM INVESTMENT OPERATIONS . . . . . . . .057 .038 .030 .038 .062
- -------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income . . . . . . . . . (.057) (.038) (.030) (.038) (.062)
Distributions from Realized Capital Gains . . . . . . -- -- -- -- --
------ ------ ------ ------ ------
TOTAL DISTRIBUTIONS . . . . . . . . . . . . . . (.057) (.038) (.030) (.038) (.062)
- -------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR . . . . . . . . . . . . . . $1.00 $1.00 $1.00 $1.00 $1.00
===================================================================================================================
TOTAL RETURN . . . . . . . . . . . . . . . . . . . . . . +5.82% +3.87% +3.02% +3.89% +6.39%
- -------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net Assets, End of Year (Millions) . . . . . . . . . . . $18,764 $15,109 $12,367 $12,638 $13,496
Ratio of Expenses to Average Net Assets . . . . . . . . . .32% .32% .32% .30% .30%
Ratio of Net Investment Income to
Average Net Assets . . . . . . . . . . . . . . . . . . 5.64% 3.84% 2.98% 3.82% 6.20%
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
PRIME PORTFOLIO--INSTITUTIONAL CLASS(1)
- ----------------------------------------------------------------------------------------------------------------------------------
Year Ended November 30,
OCT. 28, 1995- DEC. 1, 1994- -------------------------------------------
For a Share Outstanding Throughout Each Period NOV. 30, 1995 OCT. 27, 1995 1994 1993 1992 1991
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD . . . . . . . . . . $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
------ ------ ------ ------ ------ ------
INVESTMENT OPERATIONS
Net Investment Income . . . . . . . . . . . . . . . . .005 .053 .040 .031 .040 .063
Net Realized and Unrealized Gain (Loss)
on Investments . . . . . . . . . . . . . . . . . . -- -- -- -- -- --
------ ------ ------ ------ ------ ------
TOTAL FROM INVESTMENT OPERATIONS . . . . . . . .005 .053 .040 .031 .040 .063
- ----------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income . . . . . . . . . (.005) (.053) (.040) (.031) (.040) (.063)
Distributions from Realized Capital Gains . . . . . . -- -- -- -- -- --
------ ------ ------ ------ ------ ------
TOTAL DISTRIBUTIONS . . . . . . . . . . . . . . (.005) (.053) (.040) (.031) (.040) (.063)
- ----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD . . . . . . . . . . . . . $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
==================================================================================================================================
TOTAL RETURN . . . . . . . . . . . . . . . . . . . . . . +.53% +5.45% +4.06% +3.19% +4.02% +6.52%
- ----------------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net Assets, End of Period (Millions) . . . . . . . . . . $793 $734 $677 $306 $269 $218
Ratio of Expenses to Average Net Assets . . . . . . . . . .15%* .15%* .15% .15% .15% .15%
Ratio of Net Investment Income to
Average Net Assets . . . . . . . . . . . . . . . . . . 5.65%* 5.85%* 4.14% 3.14% 3.93% 6.14%
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Annualized.
(1) Results up to October 27, 1995, are for the former Vanguard Institutional
Money Market Portfolio. See Note D to Financial Statements.
20
<PAGE> 23
<TABLE>
<CAPTION>
FEDERAL PORTFOLIO
- -------------------------------------------------------------------------------------------------------------
Year Ended November 30,
----------------------------------------------------
For a Share Outstanding Throughout Each Year 1995 1994 1993 1992 1991
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR . . . . . . . $1.00 $1.00 $1.00 $1.00 $1.00
------ ------ ------ ------ ------
INVESTMENT OPERATIONS
Net Investment Income . . . . . . . . . . . . . .056 .038 .029 .038 .060
Net Realized and Unrealized Gain (Loss)
on Investments . . . . . . . . . . . . . . . -- -- -- -- --
------ ------ ------ ------ ------
TOTAL FROM INVESTMENT OPERATIONS . . . . .056 .038 .029 .038 .060
- -------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income . . . . . (.056) (.038) (.029) (.038) (.060)
Distributions from Realized Capital Gains . . . -- -- -- -- --
------ ------ ------ ------ ------
TOTAL DISTRIBUTIONS . . . . . . . . . . . (.056) (.038) (.029) (.038) (.060)
- -------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR . . . . . . . . . . $1.00 $1.00 $1.00 $1.00 $1.00
=============================================================================================================
TOTAL RETURN . . . . . . . . . . . . . . . . . . +5.77% +3.82% +2.98% +3.83% +6.18%
- -------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net Assets, End of Year (Millions) . . . . . . . $2,637 $2,196 $1,907 $1,986 $2,000
Ratio of Expenses to Average Net Assets . . . . . .32% .32% .32% .30% .30%
Ratio of Net Investment Income to
Average Net Assets . . . . . . . . . . . . . . 5.61% 3.78% 2.94% 3.76% 6.01%
- ------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
U.S. TREASURY PORTFOLIO
- -------------------------------------------------------------------------------------------------------------
Year Ended November 30,
----------------------------------------------------
For a Share Outstanding Throughout Each Year 1995 1994 1993 1992 1991
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR . . . . . . . $1.00 $1.00 $1.00 $1.00 $1.00
------ ------ ------ ------ ------
INVESTMENT OPERATIONS
Net Investment Income . . . . . . . . . . . . . .053 .036 .028 .036 .058
Net Realized and Unrealized Gain (Loss)
on Investments . . . . . . . . . . . . . . . -- -- -- -- --
------ ------ ------ ------ ------
TOTAL FROM INVESTMENT OPERATIONS . . . . .053 .036 .028 .036 .058
- -------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income . . . . . (.053) (.036) (.028) (.036) (.058)
Distributions from Realized Capital Gains . . . -- -- -- -- --
------ ------ ------ ------ ------
TOTAL DISTRIBUTIONS . . . . . . . . . . . (.053) (.036) (.028) (.036) (.058)
- -------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR . . . . . . . . . . $1.00 $1.00 $1.00 $1.00 $1.00
=============================================================================================================
TOTAL RETURN . . . . . . . . . . . . . . . . . . +5.47% +3.63% +2.86% +3.68% +5.94%
- -------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net Assets, End of Year (Millions) . . . . . . . $2,527 $2,056 $1,751 $2,321 $2,092
Ratio of Expenses to Average Net Assets . . . . . .32% .32% .32% .30% .30%
Ratio of Net Investment Income to
Average Net Assets . . . . . . . . . . . . . . 5.33% 3.59% 2.83% 3.60% 5.76%
- -------------------------------------------------------------------------------------------------------------
</TABLE>
21
<PAGE> 24
NOTES TO FINANCIAL STATEMENTS
Vanguard Money Market Reserves is registered under the Investment Company Act
of 1940 as a diversified open-end investment company and consists of the Prime,
Federal, and U.S. Treasury Portfolios. The Prime Portfolio invests in
short-term debt instruments of companies primarily operating in specific
industries; the issuers' abilities to meet their obligations may be affected by
economic developments in such industries. The Federal Portfolio invests in
short-term debt instruments issued by the U.S. Government or its agencies and
instrumentalities. The U.S. Treasury Portfolio invests in short-term debt
instruments backed by the full faith and credit of the U.S. Government.
A. The following significant accounting policies are in conformity with
generally accepted accounting principles for investment companies. Such
policies are consistently followed by the Fund in the preparation of financial
statements.
1. SECURITY VALUATION: Securities are stated at amortized cost which
approximates market value.
2. FEDERAL INCOME TAXES: Each Portfolio of the Fund intends to continue to
qualify as a regulated investment company and distribute all of its taxable
income. Accordingly, no provision for Federal income taxes is required in
the financial statements.
3. OTHER: Security transactions are accounted for on the date the securities
are purchased or sold. Costs used in determining realized gains and losses
on the sale of investment securities are those of specific securities sold.
Discounts and premiums are accreted and amortized, respectively, to
interest income over the lives of the respective securities. Distributions
from net investment income are declared on a daily basis payable on the
first business day of the following month.
4. REPURCHASE AGREEMENTS: Securities pledged as collateral for repurchase
agreements are held by a custodian bank until maturity of the repurchase
agreement. Provisions of each agreement ensure that the market value of the
collateral is sufficient in the event of default; however, in the event of
default or bankruptcy by the other party to the agreement, realization
and/or retention of the collateral may be subject to legal proceedings.
B. The Vanguard Group, Inc. furnishes at cost investment advisory, corporate
management, administrative, shareholder accounting, marketing, and distribution
services. The costs of such services are allocated to the Fund under methods
approved by the Board of Directors. At November 30, 1995, the Fund had
contributed capital of $2,887,000 to Vanguard (included in Other Assets),
representing 14.4% of Vanguard's capitalization. The directors and officers of
the Fund are also directors and officers of Vanguard.
C. The Prime Portfolio offers two classes of shares, the Individual Class and
the Institutional Class. Institutional shares are designed primarily for
institutional investors that meet certain administrative and servicing criteria
and have a minimum investment of $10 million. Individual shares are offered to
all other investors. Both classes of shares have equal rights as to assets and
earnings, except that each class bears certain class-specific expenses related
to its shareholder activity.
D. In accordance with the terms of an agreement approved by the shareholders
of Vanguard Institutional Money Market Portfolio (the "Portfolio"), on October
27, 1995, the Prime Portfolio issued 734,329,000 of its Institutional Class
shares in exchange for the net assets of the Portfolio of $734,329,000;
combined net assets were $19,180,185,000 as of the merger date. Shareholders of
the Portfolio received 1.000 Prime Portfolio-Institutional Class share for each
share of the Portfolio. This tax-free exchange has been accounted for by
combining the assets and liabilities of the Prime Portfolio and the Portfolio
at their values on the date of the merger. The identified cost of investments
were similarly combined. The financial statements include results of operations
of the Prime Portfolio-Institutional Class beginning October 28, 1995.
22
<PAGE> 25
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors
Vanguard Money Market Reserves
In our opinion, the accompanying statements of net assets and the related
statements of operations and of changes in net assets and the financial
highlights present fairly, in all material respects, the financial position of
the Prime Portfolio, Federal Portfolio, and U.S. Treasury Portfolio of Vanguard
Money Market Reserves (the "Fund") at November 30, 1995, and the results of
each of their operations, the changes in each of their net assets and the
financial highlights for each of the respective periods presented, in
conformity with generally accepted accounting principles. These financial
statements and financial highlights (hereafter referred to as "financial
statements") are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits, which included confirmation of
securities at November 30, 1995, by correspondence with the custodian and
brokers and the application of alternative auditing procedures where
confirmations from brokers were not received, provide a reasonable basis for
the opinion expressed above.
PRICE WATERHOUSE LLP
Thirty South Seventeenth Street
Philadelphia, Pennsylvania 19103
December 29, 1995
23
<PAGE> 26
DIRECTORS AND OFFICERS
JOHN C. BOGLE, Chairman and Chief Executive Officer
Chairman and Director of The Vanguard Group, Inc., and of each of the
investment companies in The Vanguard Group.
JOHN J. BRENNAN, President
President and Director of The Vanguard Group, Inc., and of each of the
investment companies in The Vanguard Group.
ROBERT E. CAWTHORN, Chairman of Rhone-Poulenc Rorer Inc.; Director of Sun
Company, Inc.
BARBARA BARNES HAUPTFUHRER, Director of The Great Atlantic and Pacific Tea Co.,
Alco Standard Corp., Raytheon Co., Knight-Ridder, Inc., and Massachusetts
Mutual Life Insurance Co.
BRUCE K. MACLAURY, President of The Brookings Institution; Director of American
Express Bank Ltd. and The St. Paul Companies, Inc.
BURTON G. MALKIEL, Chemical Bank Chairman's Professor of Economics, Princeton
University; Director of Prudential Insurance Co. of America, Amdahl Corp.,
Baker Fentress & Co., The Jeffrey Co., and Southern New England Communications
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. and
NACCO Industries.
JAMES O. WELCH, JR., Retired Chairman of Nabisco Brands, Inc.; retired Vice
Chairman and Director of RJR Nabisco; Director of TECO Energy, Inc. and Kmart
Corp.
J. LAWRENCE WILSON, Chairman and Chief Executive Officer of Rohm & Haas Co.;
Director of Cummins Engine Co.; Trustee of Vanderbilt University.
OTHER FUND OFFICERS
RAYMOND J. KLAPINSKY, Secretary; Senior Vice President and Secretary of The
Vanguard Group, Inc.; Secretary of each of the investment companies in The
Vanguard Group.
RICHARD F. HYLAND, Treasurer; Treasurer of The Vanguard Group, Inc., and of
each of the investment companies in The Vanguard Group.
KAREN E. WEST, Controller; Vice President of The Vanguard Group, Inc.;
Controller of each of the investment companies in The Vanguard Group.
OTHER VANGUARD GROUP OFFICERS
ROBERT A. DISTEFANO IAN A. MACKINNON
Senior Vice President Senior Vice President
Information Technology Fixed Income Group
JEREMY G. DUFFIELD F. WILLIAM MCNABB III
Senior Vice President Senior Vice President
Planning & Development Institutional
JAMES H. GATELY RALPH K. PACKARD
Senior Vice President Senior Vice President
Individual Investor Group Chief Financial Officer
24
<PAGE> 27
THE VANGUARD FAMILY OF FUNDS
EQUITY AND BALANCED FUNDS
GROWTH AND INCOME FUNDS
Vanguard/Windsor Fund
Vanguard/Windsor II
Vanguard Equity Income Fund
Vanguard Quantitative Portfolios
Vanguard/Trustees' Equity Fund
U.S. Portfolio
Vanguard Convertible
Securities Fund
BALANCED FUNDS
Vanguard/Wellington Fund
Vanguard/Wellesley Income Fund
Vanguard STAR Portfolio
Vanguard Asset Allocation Fund
Vanguard LifeStrategy Funds
GROWTH FUNDS
Vanguard/Morgan Growth Fund
Vanguard/PRIMECAP Fund
Vanguard U.S. Growth Portfolio
AGGRESSIVE GROWTH FUNDS
Vanguard Explorer Fund
Vanguard Specialized Portfolios
Vanguard Horizon Fund
Global Equity Portfolio
Global Asset Allocation Portfolio
Capital Opportunity Portfolio
Aggressive Growth Portfolio
INTERNATIONAL FUNDS
Vanguard International
Growth Portfolio
Vanguard/Trustees' Equity Fund
International Portfolio Money
INDEX FUNDS
Vanguard Index Trust
500 Portfolio
Total Stock Market Portfolio
Extended Market Portfolio
Growth Portfolio
Value Portfolio
Small Capitalization Stock Portfolio
Vanguard Tax-Managed Fund
Vanguard Balanced Index Fund
Vanguard Bond Index Fund
Total Bond Market Portfolio
Short-Term Bond Portfolio
Intermediate-Term Bond Portfolio
Long-Term Bond Portfolio
Vanguard International Equity
Index Fund
European Portfolio
Pacific Portfolio
Emerging Markets Portfolio
FIXED INCOME FUNDS
MONEY MARKET FUNDS
Vanguard Money Market Reserves
Vanguard Admiral Fund
U.S. Treasury Money Market Portfolio
TAX-EXEMPT MONEY MARKET FUNDS
Vanguard Municipal Bond Fund
Money Market Portfolio
Vanguard State Tax-Free Funds
Money Market Portfolios
(CA, NJ, OH, PA)
TAX-EXEMPT INCOME FUNDS
Vanguard Municipal Bond Fund
Vanguard State Tax-Free Funds
Insured Longer-Term Portfolios
(CA, FL, NJ, NY, OH, PA)
INCOME FUNDS
Vanguard Fixed Income Securities Fund
Vanguard Admiral Fund
Vanguard Preferred Stock Fund
[THE VANGUARD GROUP LOGO]
This Report has been prepared for shareholders and may be distributed to others
only if preceded or accompanied by a current prospectus. All Funds in the
Vanguard Family are offered by prospectus only.
Vanguard Financial Center
Valley Forge, Pennsylvania 19482
New Account Information:
1 (800) 662-7447
Shareholder Account Services:
1 (800) 662-2739
Q300-11/95
ON OUR COVER: On the evening of August 1, 1798, Lord Horatio Nelson sailed his
flagship, HMS Vanguard, into Egypt's Aboukir Bay. In a night encounter, the
British fleet annihilated Napoleon Bonaparte's ships of the line in what is
still considered to be the most complete victory ever recorded in naval
history. Our Report's cover illustration is Thomas Luny's 1830 painting, The
Battle Of The Nile, in which the French flagship, L'Orient, is shown as it
exploded at 10:00 p.m. under a gibbous moon.
<PAGE> 28
VANGUARD MONEY MARKET RESERVES
EDGAR APPENDIX
This appendix describes the components of the printed version of this report
that do not translate into a format acceptable to the EDGAR system.
The cover of the printed version of this report features Thomas Luny's 1830
painting "The Battle Of The Nile".
A photograph of John C. Brennan and John C. Bogle appears on the inside cover
top-center.
A running head featuring a sword, helmet, gloves and battleships in the
background appears at the top of pages one through seven.
A line chart of the Month-End Yields (30-Year U.S. Treasury Bond, 90-Day U.S.
Treasury Bill, and Yield Spread) of Vanguard Money Market Reserves for the
fiscal years 1991 through 1995 appears at the upper left of page two.
Line charts illustrating cumulative performance between Vanguard Money Market
Reserves-Prime Portfolio and Average Money Market Fund, average Annual Total
Returns for the period December 31, 1981, to November 30, 1995 appear at the
top of page five.
A running head featuring an hour glass, compass & telescope, and battleships in
the background appears at the top of page eight.
A running head featuring ships wheel, rope and battleships in the background
appears at the top of pages nine & ten.
A running head featuring open log book, pen and battleships in the background
appears at the top of pages eleven through twenty three.
A running head featuring a sextant, a map, and battleships in the background
appears at the top of page twenty four.
A running head featuring birds flying and ship in the background appears at the
top of the inside back cover.
