<PAGE> 1
[VANGUARD WINDSOR FUND LOGO]
ANNUAL REPORT 1995
<PAGE> 2
In this Annual Report, I am de-lighted to formally introduce you to John J.
Brennan, who, on January 31, 1996, will assume my responsibilities as Chief
Executive Officer of Vanguard/Windsor Fund 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.
[FIGURE 1]
As a shareholder of the Fund for more than a quarter century 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.
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/WINDSOR FUND SEEKS TO PROVIDE LONG-TERM GROWTH OF CAPITAL AND INCOME
BY INVESTING PRIMARILY IN COMMON STOCKS. THE FUND'S SECONDARY OBJECTIVE IS TO
PROVIDE CURRENT INCOME. IT GENERALLY HOLDS A RELATIVELY CONCENTRATED PORTFOLIO
OF STOCKS DEEMED TO REPRESENT ATTRACTIVE FUNDAMENTAL VALUES.
<PAGE> 3
CHAIRMAN'S LETTER
FELLOW SHAREHOLDER:
During the twelve months ended October 31, 1995--our 37th fiscal year--Windsor
Fund enjoyed a solid total return of +17.8%. However, it was a year for
blue-chip growth stocks rather than our trademark value stocks, and the stock
market's gains were considerably larger.
The table that follows compares the Fund's total return (capital change
plus income) for the year with the return on the unmanaged Standard & Poor's
500 Composite Stock Price Index--dominated by blue-chip stocks--and the average
value (growth and income) mutual fund. This competitive peer group reflects the
investment philosophy to which Windsor has adhered since its inception in 1958.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
TOTAL RETURN
-----------------
FISCAL YEAR ENDED
OCTOBER 31, 1995
-----------------
<S> <C>
VANGUARD/WINDSOR FUND +17.8%
- --------------------------------------------------------------------
AVERAGE VALUE FUND +20.7%
STANDARD & POOR'S 500 STOCK INDEX +26.4
- --------------------------------------------------------------------
</TABLE>
The Fund's return is based on net asset values of $14.55 per share on October
31, 1994, and $15.55 on October 31, 1995, with the latter figure adjusted to
take into account the reinvestment of two semi-annual dividends totaling $.44
per share from net investment income and a December 1994 distribution of $.86
per share from net realized capital gains. Net capital gains realized during
1995, presently estimated at $1.37 per share, will be distributed in December,
along with our semi-annual income dividend.
THE FISCAL YEAR IN REVIEW
The great bull market in stocks during our fiscal year began in mid-December
1994 and has continued quite dramatically since then. The pace of this gain
was virtually uninterrupted, and the dimension, if not unprecedented, was
extraordinary, delighting the bulls even as it astonished the bears.
There were many opinions as to the source of the strength in the stock
market. In my view, it resulted from a combination of: (1) record-breaking
corporate profits; (2) a sharp decline in long-term interest rates, with the
yield on the U.S. Treasury bond falling from 8.1% to 6.2%, engendering a +26%
price increase; (3) the diminishing threat of additional increases in
short-term interest rates by the Federal Reserve Board; (4) a softening in U.S.
economic growth, resulting in continued optimism about the outlook for
inflation; and (5) a hint of speculative fever in the equity marketplace.
The rise in corporate profits was particularly striking. It is
estimated that operating earnings for the companies in the Standard & Poor's
500 Index will increase about +15% in 1995, after rising some +16% during 1994.
(Since 1926, earnings growth has averaged less than +7% per year.) If there is
a cautionary signal in this boom in profits, it is that the two-year cumulative
earnings growth of +33% has been accompanied by dividend growth of only +11%.
The result of this subdued dividend growth in the face of sharply higher stock
prices was a decline in the yield on the Index to 2.3%, the lowest level on
record. As we enter our 1996 fiscal year, this is surely a sobering statistic.
Just as 1992 and 1993 were excellent years for value stocks (those with
above-average yields and below-average market price-to-book values), so 1994
and 1995 were excellent years for growth stocks (those with lower yields and
higher rates of earnings growth). The chart on page 2 reflects some of the
characteristic oscillations between these two basic stock types. Nonetheless,
for the full five-year period, the returns for these two groups of stocks were
virtually identical: +17.2% for the Value Index and +17.1% for the Growth
Index--the two components of the Standard & Poor's 500 Index. I should note
that both of these returns are far above the long-term average annual return of
+10.6% (since 1926) for stocks as a group, yet another cautionary signal.
As I noted one year ago, the idea that the returns of value stocks and
growth stocks will fluctuate from year to year but tend to converge over time
is hardly surprising, given the ebb and flow of the enthusiasms of the
marketplace. My conclusion then, as it is now, was that wise investors should
stick to their objectives rather than attempt to guess
1
<PAGE> 4
[FIGURE 2]
whether growth stocks or value stocks will win the subsequent year's quest for
dominance. A combination of the two styles in relatively stable proportions, of
course, is also an acceptable strategy.
WINDSOR FUND IN FISCAL 1995
In the context of our outpacing the Standard & Poor's 500 Index for three of
our four prior fiscal years, Windsor's 1995 relative return can hardly be
considered shabby. Our shortfall for the year resulted from: (1) our minimal
commitment to the year's best performing groups, technology and health care, in
which we placed only 3% of our net assets versus 20% for the Index; and (2) our
high exposure to the energy group (14% for Windsor versus 10% for the Index),
which was among the year's laggards. We did, however, get another strong, but
not offsetting, positive thrust from our high concentration in the financial
group. Banks and insurance companies were among the year's leaders and the
contribution of our 25% position (12% for the Index) was further enhanced by
excellent stock selection.
As noted at the outset, fiscal year 1995 was a year that favored
neither value funds in general nor Windsor Fund in particular. Our return fell
somewhat behind that of our peers (+17.8% versus +20.7%), for reasons similar
to those that shaped our shortfall to the Standard & Poor's 500 Index. Again,
our substantial overweighting in financial stocks was a major plus since value
funds as a group held a market-like weighting. However, we paid a (relative)
price for our light weighting in the explosive, market-leading technology and
health-care groups (3% of our assets versus 19% for our peers), which together
provided a remarkable +47% return.
A LONGER-TERM PERSPECTIVE
I underscore that it is the results of the long race that count, not the
results of a single lap. While I will later discuss the Windsor record for the
past decade, as is customary, let's begin with the Fund's record under the
aegis of John B. Neff. He has been our portfolio manager since 1964, a tenure
that is among the longest and most successful in the history of the mutual fund
industry.
As you know, Mr. Neff is retiring from Wellington Management Company,
the Fund's investment adviser, at the end of December (although he will remain
a senior investment consultant to Wellington thereafter). I'd like to begin by
personally thanking him for his service to Windsor Fund and extending to him a
hearty "well done." I am confident that I also do so on your behalf.
The table below summarizes the Windsor record since Mr. Neff took the
helm in June 1964. It compares the Fund's total return with the return on the
average value fund and the Standard & Poor's 500 Index. It is a remarkable
record, indeed.
<TABLE>
<CAPTION>
- --------------------------------------------------------
TOTAL RETURN
------------------------
JUNE 30, 1964, TO
OCTOBER 31, 1995
- --------------------------------------------------------
FINAL VALUE
AVERAGE OF INITIAL
ANNUAL INVESTMENT
RATE OF $10,000
- --------------------------------------------------------
<S> <C> <C>
VANGUARD/WINDSOR FUND +13.7% $564,637
- --------------------------------------------------------
AVERAGE VALUE FUND +10.2% $212,377
STANDARD & POOR'S 500 INDEX +10.6 232,974
- --------------------------------------------------------
</TABLE>
2
<PAGE> 5
CUMULATIVE PERFORMANCE OCTOBER 31, 1985, TO OCTOBER 31, 1995
<TABLE>
<CAPTION>
Average Annual Total Returns--Periods Ended October 31, 1995
- -------------------------------------------------------------------
1 Year 5 Years 10 Years
- -------------------------------------------------------------------
<S> <C> <C> <C>
VANGUARD/WINDSOR FUND +17.80% +20.51% +13.93%
AVERAGE VALUE FUND +20.74 +15.95 +13.17
STANDARD & POOR'S 500 INDEX +26.41 +17.19 +15.42
</TABLE>
[FIGURE 3]
Note: Past performance is not predictive of future performance.
The year-by-year returns for this period appear in the table on page 9 and the
cumulative record of an initial $10,000 investment in the Fund is shown in
the chart on page 10. You will note that the record is replete with both ups
and downs. There is no assurance that the ever-unpredictable markets of the
future will provide better or worse returns than those presented in the
table. Interestingly, the +10.6% return for the market since 1964 is
identical to its long-term return of +10.6% (since 1926). Thus, the table
offers a fair and crystal-clear example of the miraculous power of
compounding combined with special investment management skill.
In candor, the Fund's results during the past decade, while solid
in absolute terms, are less impressive on a relative basis, particularly
with respect to the Standard & Poor's 500 Index. The return for the past ten
years is shown on a cumulative basis in the chart above, and in summary form
in the table to the right. As impressive as these results may seem, I
reiterate my earlier cautionary notes about projecting the return of the past
into the future.
<TABLE>
<CAPTION>
- ------------------------------------------------------------
TOTAL RETURN
----------------------------
OCTOBER 31, 1985, TO
OCTOBER 31, 1995
- ------------------------------------------------------------
FINAL VALUE
AVERAGE OF INITIAL
ANNUAL INVESTMENT
RATE OF $10,000
- ------------------------------------------------------------
<S> <C> <C>
VANGUARD/WINDSOR FUND +13.9% $36,843
- -----------------------------------------------------------
AVERAGE VALUE FUND +13.2% $34,446
STANDARD & POOR'S 500 INDEX +15.4 41,976
- -----------------------------------------------------------
</TABLE>
It should go without saying that the Standard & Poor's 500 Index is a tough
competitor, both for Windsor and for its peer group of mutual funds. The
Index as you know, is a theoretical construct, incurring none of the
advisory fees, operating expenses, and portfolio transaction costs that must
be borne--to one extent or another--in the real world in which mutual funds
operate. What's more, the record of the Index during the past decade happened
to marginally favor growth stocks over value stocks, making the period a bit
3
<PAGE> 6
tougher than usual for value-driven funds such as Windsor.
Finally, I'd like to make one special comment about Windsor's future:
on December 31, 1995, Charles T. Freeman will succeed Mr. Neff as manager of
our portfolio. He has worked directly with Mr. Neff over the past 26 years,
and your Officers and Directors are confident that he and his experienced
Windsor Fund team will give a good account of themselves as the laps of the
long race continue. We recognize that Chuck, as they say, "has big shoes to
fill," but we believe that his experience and investment skill will not let
you down. "Welcome aboard," Chuck.
IN SUMMARY
Windsor Fund's basic objectives and strategies remain intact. We remain
committed to value investing as our long-term focus. We also remain committed
to holding a portfolio that is relatively concentrated--less
diversified--when compared to the portfolios of most mutual funds. We expect
that the former commitment will provide us with above-average long-term
returns, even as the latter commitment will give us above-average
variability from one year to the next, relative to the total stock market.
In fiscal 1995, that variability was negative; I'm sure that many positive
years lie ahead.
That said, let me be clear that no mutual fund can eliminate the risks
of participation in the financial markets today. As I noted earlier, given the
relatively high returns of stocks that we have had the good fortune to enjoy
during the past decade, the risks of investing have evidently increased. And
yet, perhaps the biggest long-term risks to investors are: (1) failing to
invest in the financial markets at all; and (2) following an erratic and
ever-changing course. In my Annual Report a year ago, I urged you, rather, to
"stay the course," maintaining your Windsor Fund investment as part of a
balanced portfolio of stock funds, bond funds, and money market funds suitable
to your own objectives. It proved wise counsel then; I reiterate it today.
Sincerely,
/s/ JOHN C. BOGLE
- -------------------------------
John C. Bogle
Chairman of the Board
November 8, 1995
Note: Mutual fund data from Lipper Analytical Services, Inc.
4
<PAGE> 7
AVERAGE ANNUAL TOTAL RETURNS
THE AVERAGE ANNUAL TOTAL RETURNS FOR THE FUND (PERIODS ENDED SEPTEMBER 30,
1995) ARE AS FOLLOWS:
<TABLE>
<CAPTION>
10 YEARS
-------------------------------
INCEPTION TOTAL CAPITAL INCOME
DATE 1 YEAR 5 YEARS RETURN RETURN RETURN
--------- -------- ------- -------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
VANGUARD/WINDSOR FUND 10/23/58 +26.29% +20.19% +14.94% +9.68% +5.26%
</TABLE>
ALL OF THESE DATA REPRESENT PAST PERFORMANCE. THE INVESTMENT RETURN AND
PRINCIPAL VALUE OF AN INVESTMENT WILL FLUCTUATE SO THAT INVESTORS' SHARES,
WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST.
5
<PAGE> 8
REPORT FROM THE INVESTMENT ADVISER
We must confess to being deeply disappointed that we didn't come up with a
better result for Windsor shareholders in my last full year as your portfolio
manager, as I will be formally retiring on December 31, 1995. In an overall
good period for equities in general, a +17.8% advance, however decent
absolutely, compares unfavorably with a +26.4% spurt in the S&P 500.
Obviously, our "four yards and a cloud of dust" type of investing does
not always do well in an adrenaline type of market. Moreover, this has been a
particularly bubbly market in that technology, broadly speaking, was the
spectacular engine of common stock advance, as it captured the imagination of
the marketplace virtually for the whole year with a knockout 50% advance.
Interestingly, while hardly market-weighted, we did have a 5.0% representation
in technology starting out the fiscal year and benefited accordingly with
particularly participative results in Seagate Technology and Intel.
Also, two areas making up about one-quarter of the portfolio, namely
autos and oil and gas, were lackluster to say the least. Obviously, a more
normal winter or even colder than normal, compensating for last year's
unusually warm one, would be a major benefit to natural gas stocks which make
up about 50% of this industry representation. We also think the autos are
noticeably behind the market considering their uniquely good yields and very
low price-earnings ratios.
Last year we mentioned we had sharply reduced our basic commodity
participation opportunistically in the aluminums, steels, and chemicals, from
16.1% to 7.2%, as they were embraced by the marketplace in the fall of 1994.
Subsequently, they sharply underperformed the averages, and by fiscal year end
we had rebuilt this area to 21.8% of your Fund. This expanded part of Windsor
also was a performance detriment.
On the positive side, the very heavily over-weighted financial sector
(37.1% of assets at the end of last year), was a major contributor as
outstanding individual and collective results were chalked up for Windsor
shareholders (see report card for details).
The major addition to the basic commodity portion of the portfolio was
in the paper and forest products area which we, in recent months, have built up
from nothing to now 9.5% of assets. The paper industry shares some of the same
characteristics of other commodity areas in a prospective moderate growth
economy over the next three years or so. These characteristics are limited
growth in capacity with little so called greenfield expansion, excess cash
generation flowing into stock purchase programs and/or dividend increases, a
good international competitive position, and industry consolidation involving
acquisitions, which, of course, do not expand industry capacity.
We would concede that the market seems a bit on the optimistic side and
have an "anchor-to-windward," accordingly, in our 19.1% cash equivalent
position. This is available to take advantage of market opportunities at lower
prices.
We continue to think that we have a moderate economic wind to our back
as reflected in a 2% to 212% prospective annual growth in real GDP. Traditional
excesses in areas such as consumer credit, capital expenditures, and
inventories strike us as not out-of-line and, accordingly, not in need of sharp
correction, although, we are currently going through a bit of a mini-adjustment
in inventories.
There is considerable media and "Street" consternation in respect to
the consumer being over-extended as manifest in present installment credit
levels. However, we have really just returned to the credit level relationships
of the late eighties relative to consumer disposable income. Additionally, we
use consumer credit for a wider potpourri of applications such as travel,
supermarket, and the recent mania of frequent-flier point qualification.
Despite the poor performance of the last couple of months (we were
actually up 74 basis points for the fiscal year relative to the S&P 500 through
September 5, 1995), we think the current portfolio is positioned to reward
shareholders in the near future as major market areas such as technology and
consumer nondurables seem extended (i.e., overvalued). The current Windsor Fund
portfolio, excluding oils (which we evaluate on a net asset
6
<PAGE> 9
basis), is valued at about seven times our estimate of individual company 1996
earnings, or a more than 50% discount to that of the S&P 500, our incentive or
penalty performance yardstick. In our view, this represents much too high a
discount relative to the quality, financial wherewithal, and potential growth
of these companies. While not remarkable in terms of extraordinary growth
prospects, they are above average at a "friendly" price, in our judgment, and
should serve Windsor Fund shareholders well.
For over thirty-one years, I have had the pleasure of serving and
representing Windsor Fund shareholders, and while not every year was studded
with accomplishment (witness the most recent one), overall we have done pretty
well, as a 310 basis point annual edge would attest. The power of compounding
makes this comparison even more sharply etched. As noted in the Chairman's
letter, when reflected in actual dollars, it is almost two and one-half times
better than the S&P 500 over this period.
During this same period, I have had the additional satisfaction of
building Windsor Fund's portfolio team to carry on the important responsibility
of "staying the course" in continuing the Windsor record of accomplishment.
Chuck Freeman and I have been together for over twenty-six years in forging
your Fund's record in the crucible of the marketplace. He has been an intimate
and vital part of the Windsor record and is eminently well-prepared as
portfolio manager to carry on Windsor's never-ending quest for superior
performance. He will be ably-assisted by Jim Averill and Jim Mordy, who have
been brought up over the last ten years in the trenches of analyzing and
evaluating the fundamentals of the very large "neck-out" positions that we take
in Windsor in our constant effort to prove something out of the ordinary. In
addition, Dave Fassnacht joined us four years ago. And let's not forget our
stellar trader, Danny Hannafin. They all are remarkably well qualified, in my
judgment, to carry on the Windsor effort. They, in turn, are buttressed and
supported by over 500 employees of Wellington Management Company.
I would be remiss if I did not mention the Vanguard tradition in
general, and Jack Bogle in particular, as a particularly favorable backdrop to
our thirty-one-year accomplishment. Jack Bogle, as well as the Vanguard Board
of Directors, have provided support, encouragement, and challenge over this
entire period, which has been critical, particularly during the occasional
"rough patches" we have experienced. I am very appreciative and grateful for
their confidence.
Well, it has been a long and worthwhile journey and I have loved and
basked in the warmth of virtually every minute of it. As I reflect back, I
have been truly blessed, as I don't know anything I would have rather done than
"perform" for Windsor Fund shareholders.
Respectfully,
John B. Neff, Managing Partner
Portfolio Manager
Charles T. Freeman, Senior Vice President
Assistant Portfolio Manager
Wellington Management Company
November 9, 1995
7
<PAGE> 10
WINDSOR 1995 REPORT CARD
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
(S&P 500 Percent Change 10/31/94-10/31/95 = +23.1%*)
10/31/95 S&P
Percent Group Performance of Meaningful
of Net Percentage Windsor Positions
Industry Groups Assets Change* (In Order of Size) Grade Critique
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
AIRLINES 0.9% 14.8% Delta Air Lines (+25.4%) A- Fundamentals confirmed and earnings
vaulted--even better than obvious in
Delta as sold very profitably
equally large positions in UAL and
AMR.
- ------------------------------------------------------------------------------------------------------------------------------------
AUTOS 11.1% 4.6% Chrysler Corp. (+5.9%), D POOR TO DATE, BUT STOCKS CHEAP WITH
Ford Motor (-2.5%)good yields; we
think 1996 will show noticeably
higher earnings.
- ------------------------------------------------------------------------------------------------------------------------------------
BANKS 14.3% 30.4% Citicorp (+35.9%), A- Great concentrations and good
First Union (+10.3%), performance--only Bankers Trust
NationsBank (+32.8%), failure kept it from being A+.
BankAmerica (+32.2%),
KeyCorp (+17.9%),
Chemical Banking (+49.7%),
Bankers Trust (-4.5%)
- ------------------------------------------------------------------------------------------------------------------------------------
BUILDING & 1.8% 19.8% Owens-Corning Fiberglas A OCF and homebuilders showed
CONSTRUCTION (Bldg. Materials) (+30.9%) excellent move.
- ------------------------------------------------------------------------------------------------------------------------------------
CHEMICALS 4.4% 8.3% Freeport-McMoRan Resource A- FRP +29% total return, and built
Partners (+15.6%) position during year for 1996.
- ------------------------------------------------------------------------------------------------------------------------------------
EDP 3.2% 37.8% Advanced Micro Devices A- Seagate bell-ringer and even AMD
(Computer (-9.5%), much better than seems as traded
Systems) Seagate Tech. (+76.4%), very successfully during year.
Western Digital (-8.8%)
- ------------------------------------------------------------------------------------------------------------------------------------
ELECTRIC UTILITIES 1.2% 19.2% Unicom Corp. (+51.4%) A Finally a good move.
- ------------------------------------------------------------------------------------------------------------------------------------
INSURANCE 4.5% 39.3% CIGNA Corp. (+50.5%), A Our patience paid off quite well
(Multi-Line) Allstate Corp. (+52.3%), versus negative "Street" consensus.
Aetna Life & Cas. (+52.6%)
- ------------------------------------------------------------------------------------------------------------------------------------
NONFERROUS 3.9% 13.3% Reynolds Metals (-9.0%), C- Not so hot, but pricing and
METALS (Aluminum) Alcoa (+19.6%) earnings going our way.
- ------------------------------------------------------------------------------------------------------------------------------------
OIL & GAS 14.1% -7.2% Atlantic Richfield (-1.5%), D- Terrible concentration, although
(Domestic Integ.) Burlington Resources (-14.8%), we had some better performers--
11.3% USX-Marathon Group (-5.3%), due for a cold winter.
(Natural Gas) Pennzoil (-26.7%),
Valero Energy (+9.2%),
ENSERCH Corp. (+1.8%),
Oryx Energy (-20.7%),
Ultramar Corp. (-5.3%)
- ------------------------------------------------------------------------------------------------------------------------------------
SAVINGS 6.4% 28.6% Golden West Finl. (+28.5%), B+ Good journeymen result in
& LOAN Great Western Finl. (+26.6%), large position.
H.F. Ahmanson (+30.7%)
- ------------------------------------------------------------------------------------------------------------------------------------
TEXTILES/ 0.7% -9.1% Burlington Industries B- Okay.
HOME FURN. (+18.7%)
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Capital change only.
8
<PAGE> 11
TOTAL INVESTMENT RETURN TABLE
The following table illustrates the results of a single-share investment in
Vanguard/Windsor Fund for the period from June 30, 1964, to October 31, 1995.
(This period reflects the tenure of long-time Portfolio Manager John B. Neff.)
During this period, stock prices fluctuated widely; these results should not be
considered a representation of future returns.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
PERIOD PER SHARE DATA* TOTAL INVESTMENT RETURN
- ----------------------------------------------------------------------------------------------------------------------------------
Windsor Fund S&P 500
Value with Income ----------------------------------- --------
Year Ended Net Asset Capital Gains Income Dividends & Capital Capital Income Total Total
December 31 Value Distributions Dividends Gains Reinvested Return Return Return Return
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Initial (6/30/64) $ 7.75 -- -- $ 7.75 -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------------------
1964 7.79 $ .24 $.06 8.09 + 3.6% +0.7% + 4.3% + 5.4%
- ----------------------------------------------------------------------------------------------------------------------------------
1965 9.42 .49 .11 10.44 +27.6 +1.5 +29.1 +12.5
- ----------------------------------------------------------------------------------------------------------------------------------
1966 8.28 .66 .15 10.10 - 4.8 +1.5 - 3.3 -10.0
- ----------------------------------------------------------------------------------------------------------------------------------
1967 9.43 1.19 .21 13.28 +28.8 +2.7 +31.5 +23.9
- ----------------------------------------------------------------------------------------------------------------------------------
1968 10.27 .90 .21 16.12 +18.9 +2.5 +21.4 +11.0
- ----------------------------------------------------------------------------------------------------------------------------------
1969 9.19 .52 .21 15.51 - 5.7 +1.9 - 3.8 - 8.4
- ----------------------------------------------------------------------------------------------------------------------------------
1970 9.48 .02 .24 16.49 + 3.4 +3.0 + 6.4 - 3.9
- ----------------------------------------------------------------------------------------------------------------------------------
1971 9.34 .50 .29 17.73 + 4.3 +3.2 + 7.5 +14.2
- ----------------------------------------------------------------------------------------------------------------------------------
1972 9.39 .57 .29 19.54 + 6.9 +3.3 +10.2 +19.0
- ----------------------------------------------------------------------------------------------------------------------------------
1973 6.64 .14 .32 14.65 -28.0 +3.0 -25.0 -14.7
- ----------------------------------------------------------------------------------------------------------------------------------
1974 5.25 -- .31 12.19 -20.9 +4.1 -16.8 -26.3
- ----------------------------------------------------------------------------------------------------------------------------------
1975 7.77 -- .32 18.83 +48.0 +6.5 +54.5 +37.1
- ----------------------------------------------------------------------------------------------------------------------------------
1976 10.68 .22 .38 27.56 +40.7 +5.7 +46.4 +23.8
- ----------------------------------------------------------------------------------------------------------------------------------
1977 9.77 .56 .40 27.84 - 3.0 +4.0 + 1.0 - 7.2
- ----------------------------------------------------------------------------------------------------------------------------------
1978 9.12 1.01 .48 30.28 + 3.8 +5.0 + 8.8 + 6.5
- ----------------------------------------------------------------------------------------------------------------------------------
1979 9.72 .85 .53 37.10 +16.4 +6.2 +22.6 +18.4
- ----------------------------------------------------------------------------------------------------------------------------------
1980 10.42 .79 .59 45.50 +15.7 +6.9 +22.6 +32.4
- ----------------------------------------------------------------------------------------------------------------------------------
1981 9.92 1.49 .69 53.12 + 9.9 +6.9 +16.8 - 4.9
- ----------------------------------------------------------------------------------------------------------------------------------
1982 10.36 .99 .62 64.66 +14.8 +6.9 +21.7 +21.5
- ----------------------------------------------------------------------------------------------------------------------------------
1983 11.69 1.03 .70 84.10 +23.0 +7.1 +30.1 +22.5
- ----------------------------------------------------------------------------------------------------------------------------------
1984 12.64 .48 .76 100.47 +12.4 +7.1 +19.5 + 6.2
- ----------------------------------------------------------------------------------------------------------------------------------
1985 14.50 .74 .79 128.63 +21.1 +6.9 +28.0 +31.6
- ----------------------------------------------------------------------------------------------------------------------------------
1986 13.95 2.59 .85 154.70 +14.3 +6.0 +20.3 +18.6
- ----------------------------------------------------------------------------------------------------------------------------------
1987 11.11 2.21 .87 156.61 - 4.7 +5.9 + 1.2 + 5.2
- ----------------------------------------------------------------------------------------------------------------------------------
1988 13.07 .55 .63 201.55 +22.6 +6.1 +28.7 +16.5
- ----------------------------------------------------------------------------------------------------------------------------------
1989 13.41 .85 .75 231.83 + 9.2 +5.8 +15.0 +31.6
- ----------------------------------------------------------------------------------------------------------------------------------
1990 10.30 .32 .74 195.89 -20.8 +5.3 -15.5 - 3.1
- ----------------------------------------------------------------------------------------------------------------------------------
1991 11.72 .84 .57 251.82 +22.7 +5.9 +28.6 +30.4
- ----------------------------------------------------------------------------------------------------------------------------------
1992 12.74 .38 .49 293.37 +12.0 +4.5 +16.5 + 7.6
- ----------------------------------------------------------------------------------------------------------------------------------
1993 13.91 .89 .37 350.20 +16.3 +3.1 +19.4 +10.1
- ----------------------------------------------------------------------------------------------------------------------------------
1994 12.59 .86 .44 349.67 - 3.3 +3.2 - 0.1 + 1.3
- ----------------------------------------------------------------------------------------------------------------------------------
1995 (10/31) 15.55 -- .20 437.59 +23.5 +1.7 +25.2 +29.3
- ----------------------------------------------------------------------------------------------------------------------------------
CUMULATIVE TOTAL +5,546.4% +2,229.7%
- ----------------------------------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN +13.7% +10.6%
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Adjusted for the 2-for-1 stock split, April 29, 1969.
Note: No adjustment has been made for income taxes payable by shareholders on
reinvested income dividends and capital gains distributions.
9
<PAGE> 12
WINDSOR FUND PERFORMANCE JUNE 30, 1964, TO OCTOBER 31, 1995*
WINDSOR FUND YEAR-END VALUE (WITH ALL INCOME DIVIDENDS AND CAPITAL GAINS
DISTRIBUTIONS REINVESTED)
STANDARD & POOR'S 500 INDEX YEAR-END VALUE (WITH ALL DIVIDENDS REINVESTED)
[FIGURE 4]
<TABLE>
<CAPTION>
TOTAL RETURN PERFORMANCE SUMMARY
PERIODS ENDING OCTOBER 31, 1995
- -----------------------------------------------------------------------------------------
Cumulative Average Annual
----------------------------------------------------------------------
Windsor S&P 500 Windsor S&P 500
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
5 Years + 154.2% + 121.1% +20.5% +17.2%
- -----------------------------------------------------------------------------------------
10 Years + 268.4 + 319.8 +13.9 +15.4
- -----------------------------------------------------------------------------------------
15 Years + 902.3 + 696.0 +16.6 +14.8
- -----------------------------------------------------------------------------------------
20 Years +2,314.6 +1,352.4 +17.3 +14.3
- -----------------------------------------------------------------------------------------
Lifetime* +5,546.4% +2,229.7% +13.7% +10.6%
</TABLE>
*Reflects tenure of Portfolio Manager John B. Neff.
10
<PAGE> 13
STATEMENT OF NET ASSETS
FINANCIAL STATEMENTS
October 31, 1995
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- ---------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (80.7%)
- ---------------------------------------------------------------------------------------
BASIC MATERIALS (21.6%)
- ---------------------------------------------------------------------------------------
CHEMICALS (4.3%)
Bayer AG ADR 590,000 $ 15,635
(1) Freeport-McMoRan Resource
Partners LP 6,085,800 112,587
(1) Geon Co. 2,480,000 61,690
(1) Georgia Gulf Corp. 2,628,900 87,082
(1) Lyondell Petrochemical Co. 7,375,000 157,641
Union Carbide Corp. 3,222,900 122,067
METALS & MINING (3.7%)
Aluminum Co. of America 3,542,300 180,657
(1)(2) Reynolds Metals Co. 6,177,800 311,207
PAPER & FOREST PRODUCTS (9.5%)
Federal Paper Board Co., Inc. 566,900 23,810
(1)(2) Georgia-Pacific Corp. 7,410,400 611,358
International Paper Co. 3,305,000 122,285
(1) Stone Container Corp. 9,023,000 148,880
(1)(2) Union Camp Corp. 6,430,800 327,167
STEEL (4.1%)
(1) AK Steel Holding Corp. 2,580,100 79,983
*(1) Bethlehem Steel Corp. 10,880,600 142,808
* Geneva Steel Class A 1,525,200 11,058
(1) Inland Steel Industries, Inc. 2,901,300 67,818
*(1) LTV Corp. 7,800,000 109,200
*(1) National Steel Corp. Class B 3,094,500 41,002
(1) Rouge Steel Co. Class A 1,926,600 41,904
*(1) WHX Corp. 1,601,200 16,612
*(1) Weirton Steel 3,963,600 17,836
----------
GROUP TOTAL 2,810,287
----------
- ---------------------------------------------------------------------------------------
CAPITAL GOODS & CONSTRUCTION (1.8%)
- ---------------------------------------------------------------------------------------
* Beazer Homes USA, Inc. 153,700 2,690
(1) Continental Homes Holding Corp. 650,000 13,325
MDC Holdings, Inc. 498,600 3,677
*(1) Owens-Corning Fiberglas Corp. 3,709,700 157,198
(1) Ryland Group, Inc. 925,200 13,531
(1) Standard Pacific Corp. 1,750,000 11,375
* Toll Brothers, Inc. 1,247,700 22,303
* USG Corp. 255,000 7,427
----------
GROUP TOTAL 231,526
----------
- ---------------------------------------------------------------------------------------
CONSUMER CYCLICAL (12.2%)
- ---------------------------------------------------------------------------------------
APPAREL & TEXTILES (.7%)
*(1) Burlington Industries 6,700,000 74,537
*(1) Cone Mills Corp. 1,848,800 20,106
AUTO & TRUCKS (11.1%)
(2) Chrysler Corp. 14,785,200 763,286
(2) Ford Motor Co. 23,467,200 674,682
RETAIL (.4%)
* Burlington Coat Factory
Warehouse Corp. 1,922,100 21,383
Circuit City Stores, Inc. 260,100 8,681
Kmart Corp. 2,358,500 19,163
----------
GROUP TOTAL 1,581,838
----------
- ---------------------------------------------------------------------------------------
ENERGY (14.1%)
- ---------------------------------------------------------------------------------------
Amerada Hess Corp. 600,000 27,075
(2) Atlantic Richfield Co. 4,589,600 489,940
(2) Burlington Resources, Inc. 12,455,000 448,380
(1) Cabot Oil & Gas Corp. 1,325,000 17,722
(1) ENSERCH Corp. 5,467,700 79,282
*(1) Oryx Energy Co. 6,533,000 75,129
(1) Pennzoil Co. 3,309,500 124,934
Phillips Petroleum Co. 180,000 5,805
Ultramar Corp. 1,753,200 42,734
(1)(2) USX-Marathon Group 24,027,200 426,483
(1) Valero Energy Corp. 4,069,000 96,130
----------
GROUP TOTAL 1,833,614
----------
- ---------------------------------------------------------------------------------------
FINANCIAL (25.2%)
- ---------------------------------------------------------------------------------------
BANKS (14.3%)
Bancorp Hawaii, Inc. 123,200 4,127
BankAmerica Corp. 3,789,053 217,871
Bankers Trust New York Corp. 1,385,019 88,295
Chemical Banking Corp. 1,884,700 107,192
(2) Citicorp 9,551,200 619,634
(2) First Union Corp. 7,429,300 368,679
KeyCorp 5,258,623 177,478
NationsBank, Inc. 4,339,900 285,348
INSURANCE (4.5%)
Aetna Life & Casualty Co. 1,206,686 84,920
Allstate Corp. 6,770,500 248,816
CIGNA Corp. 2,525,800 250,370
SAVINGS & LOANS (6.4%)
(1) H.F. Ahmanson & Co. 9,770,545 244,264
* Coast Savings Financial, Inc. 642,100 16,935
(1) Golden West Financial Corp. 5,837,800 292,620
(1) Great Western Financial Corp. 11,653,593 263,663
(1) SFFED Corp. 401,500 12,246
----------
GROUP TOTAL 3,282,458
----------
- ---------------------------------------------------------------------------------------
TECHNOLOGY (3.2%)
- ---------------------------------------------------------------------------------------
COMPUTER RELATED (1.2%)
* Conner Peripherals, Inc. 1,324,000 23,832
* Seagate Technology 2,962,800 132,585
ELECTRONICS (2.0%)
(1) Advanced Micro Devices, Inc. 7,510,400 179,311
*(1) Western Digital Corp. 4,788,500 74,222
----------
GROUP TOTAL 409,950
----------
- ---------------------------------------------------------------------------------------
</TABLE>
11
<PAGE> 14
Statement Of Net Assets
(continued)
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- ---------------------------------------------------------------------------------------
<S> <C> <C>
TRANSPORT & SERVICES (.9%)
- ---------------------------------------------------------------------------------------
AIRLINES (.9%)
Delta Air Lines, Inc. 1,672,000 $ 109,725
TRUCKING & SHIPPING
(1) Maritrans Inc. 954,000 5,247
------------
GROUP TOTAL 114,972
------------
- ---------------------------------------------------------------------------------------
UTILITIES (1.2%)
- ---------------------------------------------------------------------------------------
*(1) El Paso Electric Co. 2,271,900 772
Unicom Corp. 4,904,999 160,639
------------
Group Total 161,411
------------
- ---------------------------------------------------------------------------------------
MISCELLANEOUS (.5%) 64,753
- ---------------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost $9,072,523) 10,490,809
- ---------------------------------------------------------------------------------------
CONVERTIBLE PREFERRED STOCKS (.2%)
- ---------------------------------------------------------------------------------------
Atlantic Richfield Cvt. 9.00% 610,000 13,649
(Convertible Into Lyondell
Petrochemical Co.)
Reynolds Metals Co. $3.31 180,000 8,977
Bethlehem Steel Corp. $5.00 123,900 6,567
- ---------------------------------------------------------------------------------------
TOTAL CONVERTIBLE PREFERRED STOCKS
(Cost $30,648) 29,193
- ---------------------------------------------------------------------------------------
U.S. GOVERNMENT OBLIGATION (1.6%)
- ---------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Face
Amount
(000)
---------
<S> <C> <C>
U.S. TREASURY NOTE
7.25%, 11/15/96
(Cost $208,600) $ 204,500 207,823
- ---------------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENTS (17.7%)
- ---------------------------------------------------------------------------------------
COMMERCIAL PAPER (4.5%)
Abbott Laboratories
5.69%, 11/16/95 16,000 15,962
Chevron Oil Finance
5.70%, 11/17/95 50,000 49,873
5.70%, 11/30/95 50,000 49,770
5.71%, 11/14/95 50,000 49,897
Duke Power Co.
5.70%, 11/13/95 65,000 64,876
General Electric Capital Corp.
5.70%, 11/10/95 50,000 49,929
5.70%, 12/14/95 50,000 49,660
5.72%, 11/3/95 50,000 49,984
5.73%, 11/14/95 50,000 49,897
Harvard University
5.73%, 11/9/95 18,373 18,350
</TABLE>
<TABLE>
<CAPTION>
Face Market
Amount Value
(000) (000)+
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Procter & Gamble
5.68%, 12/14/95 $ 36,000 $ 35,748
Shell Oil Co.
5.68%, 11/20/95 50,000 49,850
5.68%, 11/21/95 50,000 49,842
-------------
GROUP TOTAL 583,638
-------------
- ---------------------------------------------------------------------------------------
REPURCHASE AGREEMENT (13.2%)
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
5.89%, 11/1/95 1,722,239 1,722,239
- ---------------------------------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(Cost $2,305,885) 2,305,877
- ---------------------------------------------------------------------------------------
TOTAL INVESTMENTS (100.2%)
(Cost $11,617,656) 13,033,702
- ---------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-.2%)
Other Assets--Notes C and E 116,268
Liabilities--Note E (142,205)
-------------
(25,937)
- ---------------------------------------------------------------------------------------
NET ASSETS (100%)
- --------------------------------------------------------------------------------------
Applicable to 836,253,109 outstanding
$.01 par value shares
(authorized 1,000,000,000 shares) $13,007,765
- ---------------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE $15.55
=======================================================================================
</TABLE>
+ See Note A to Financial Statements.
* Non-Income Producing Security.
(1) Considered an affiliated company as the Fund owns more than 5% of the
outstanding voting securities of such company.
(2) Ten largest common stock investments representing 38.8% of net assets.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
AT OCTOBER 31, 1995,
NET ASSETS CONSISTED OF:
- ---------------------------------------------------------------------------------------
Amount Per
(000) Share
----------- ------
<S> <C> <C>
Paid in Capital $10,306,976 $12.32
Undistributed Net
Investment Income 125,491 .15
Accumulated Net
Realized Gains 1,159,252 1.39
Unrealized Appreciation
of Investments--Note D 1,416,046 1.69
- ---------------------------------------------------------------------------------------
NET ASSETS $13,007,765 $15.55
- ---------------------------------------------------------------------------------------
</TABLE>
12
<PAGE> 15
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended
October 31, 1995
(000)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT INCOME
INCOME
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 301,566
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109,887
- ------------------------------------------------------------------------------------------------------------------
Total Income . . . . . . . . . . . . . . . . . . . . . . . 411,453
- ------------------------------------------------------------------------------------------------------------------
EXPENSES
Investment Advisory Fee--Note B
Basic Fee . . . . . . . . . . . . . . . . . . . . . . . . . . . $19,022
Performance Adjustment . . . . . . . . . . . . . . . . . . . . . 7,752 26,774
-------
The Vanguard Group--Note C
Management and Administrative . . . . . . . . . . . . . . . . . 23,760
Marketing and Distribution . . . . . . . . . . . . . . . . . . . 1,875 25,635
-------
Taxes (other than income taxes) . . . . . . . . . . . . . . . . . . 953
Custodians' Fees . . . . . . . . . . . . . . . . . . . . . . . . . 26
Auditing Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Shareholders' Reports . . . . . . . . . . . . . . . . . . . . . . . 388
Annual Meeting and Proxy Costs . . . . . . . . . . . . . . . . . . 134
Directors' Fees and Expenses . . . . . . . . . . . . . . . . . . . 43
- ------------------------------------------------------------------------------------------------------------------
Total Expenses . . . . . . . . . . . . . . . . . . . . . . 53,973
Expenses Paid Indirectly--Note C . . . . . . . . . . . . . (2,576)
- ------------------------------------------------------------------------------------------------------------------
Net Expenses . . . . . . . . . . . . . . . . . . . . . . 51,397
- ------------------------------------------------------------------------------------------------------------------
Net Investment Income . . . . . . . . . . . . . . . . . 360,056
REALIZED NET GAIN ON INVESTMENT
SECURITIES SOLD . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,167,670
- ------------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION) OF INVESTMENT SECURITIES . . . . . . . . . . . . . . . 425,123
- ------------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from Operations . . . . $1,952,849
==================================================================================================================
</TABLE>
13
<PAGE> 16
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED Year Ended
OCTOBER 31, 1995 October 31, 1994
(000) (000)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net Investment Income . . . . . . . . . . . . . . . . . . . . . . $ 360,056 $ 340,128
Realized Net Gain . . . . . . . . . . . . . . . . . . . . . . . . 1,167,670 676,522
Change in Unrealized Appreciation (Depreciation) . . . . . . . . . 425,123 (338,197)
- ------------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from Operations . . 1,952,849 678,453
- ------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS (1)
Net Investment Income . . . . . . . . . . . . . . . . . . . . . . (352,640) (274,533)
Realized Net Gain . . . . . . . . . . . . . . . . . . . . . . . . (673,435) (629,907)
- ------------------------------------------------------------------------------------------------------------------
Total Distributions . . . . . . . . . . . . . . . . . . . (1,026,075) (904,440)
- ------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (2)
Issued --Regular . . . . . . . . . . . . . . . . . . . . . . 1,029,502 1,036,121
--In Lieu of Cash Distributions . . . . . . . . . . . 976,040 859,055
--Exchange . . . . . . . . . . . . . . . . . . . . . . 253,536 319,619
Redeemed --Regular . . . . . . . . . . . . . . . . . . . . . . (1,211,487) (896,047)
--Exchange . . . . . . . . . . . . . . . . . . . . . . (372,905) (223,720)
- ------------------------------------------------------------------------------------------------------------------
Net Increase from Capital Share Transactions . . . . . . 674,686 1,095,028
- ------------------------------------------------------------------------------------------------------------------
Total Increase . . . . . . . . . . . . . . . . . . . . . 1,601,460 869,041
- ------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Year . . . . . . . . . . . . . . . . . . . . . . . . 11,406,305 10,537,264
- -------------------------------------------------------------------------------------------------------------------
End of Year (3) . . . . . . . . . . . . . . . . . . . . . . . . . $13,007,765 $11,406,305
==================================================================================================================
(1) Distributions Per Share
Net Investment Income . . . . . . . . . . . . . . . . . . . $.44 $.37
Realized Net Gain . . . . . . . . . . . . . . . . . . . . . $.86 $.89
- ------------------------------------------------------------------------------------------------------------------
(2) Shares Issued and Redeemed
Issued . . . . . . . . . . . . . . . . . . . . . . . . . . . 89,000 95,222
Issued in Lieu of Cash Distributions . . . . . . . . . . . . 75,852 62,430
Redeemed . . . . . . . . . . . . . . . . . . . . . . . . . . (112,335) (78,940)
- ------------------------------------------------------------------------------------------------------------------
52,517 78,712
- ------------------------------------------------------------------------------------------------------------------
(3) Undistributed Net Investment Income . . . . . . . . . . . . $ 125,491 $ 118,075
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
14
<PAGE> 17
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Year Ended October 31,
---------------------------------------------------
For a Share Outstanding Throughout Each Year 1995 1994 1993 1992 1991
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR . . . . . . . . . $14.55 $14.95 $12.37 $12.79 $ 9.72
------ ------ ------ ------ --------
INVESTMENT OPERATIONS
Net Investment Income . . . . . . . . . . . . . . .44 .44 .37 .49 .58
Net Realized and Unrealized Gain
on Investments . . . . . . . . . . . . . . . . 1.86 .42 2.98 .50 3.55
------ ------ ------ ------ --------
TOTAL FROM INVESTMENT OPERATIONS . . . . . 2.30 .86 3.35 .99 4.13
- -------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income . . . . . . . (.44) (.37) (.39) (.57) (.74)
Distributions from Realized Capital Gains . . . . (.86) (.89) (.38) (.84) (.32)
------ ------ ------ ------ --------
TOTAL DISTRIBUTIONS . . . . . . . . . . . . (1.30) (1.26) (.77) (1.41) (1.06)
- -------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR . . . . . . . . . . . . $15.55 $14.55 $14.95 $12.37 $12.79
===================================================================================================================
TOTAL RETURN . . . . . . . . . . . . . . . . . . . . +17.80% +6.35% +28.29% +9.30% +44.69%
- -------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net Assets, End of Year (Millions) . . . . . . . . . $13,008 $11,406 $10,537 $8,250 $7,859
Ratio of Expenses to Average Net Assets . . . . . . . .45%+ .45% .40% .26% .30%
Ratio of Net Investment Income to
Average Net Assets . . . . . . . . . . . . . . . . 3.01% 3.11% 2.68% 3.89% 4.84%
Portfolio Turnover Rate . . . . . . . . . . . . . . . 32% 34% 25% 32% 36%
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
+ Effective in fiscal 1995, does not include expense reductions from directed
brokerage arrangements. The 1995 Ratio of Expenses to Average Net Assets is
.43% after including these reductions. See Note C.
15
<PAGE> 18
NOTES TO FINANCIAL STATEMENTS
Vanguard/Windsor Fund is a Portfolio of the Vanguard/Windsor Funds, which are
comprised of two independent Portfolios, each of which is registered under the
Investment Company Act of 1940 as a diversified open-end investment company.
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 listed on an exchange are valued at the
latest quoted sales prices as of the close of the New York Stock Exchange
(generally 4:00 PM) on the valuation date; securities not traded are
valued at the mean of the latest quoted bid and asked prices. Securities
not listed are valued at the latest quoted bid prices. Bonds, and
temporary cash investments acquired over sixty days to maturity, are
valued utilizing the latest quoted bid prices and on the basis of a matrix
system (which considers such factors as security prices, yields,
maturities, and ratings), both as furnished by independent pricing
services. Other temporary cash investments are valued at cost which
approximates market value.
2. FEDERAL INCOME TAXES: The Fund intends to continue to qualify as a
regulated investment company and distribute all of its taxable income.
Accordingly, no provision for Federal income taxes is required in the
financial statements.
3. REPURCHASE AGREEMENTS: The Fund, along with other members of The Vanguard
Group of Investment Companies, transfers uninvested cash balances into a
Pooled Cash Account, the daily aggregate of which is invested in
repurchase agreements secured by U.S. Government obligations. Securities
pledged as collateral for repurchase agreements are held by a custodian
bank until maturity of each repurchase agreement. Provisions of the
agreement require that the market value of the collateral is sufficient in
the event of default; however, in the event of default or bankruptcy by
the other party to the agreement, realization and/or retention of the
collateral may be subject to legal proceedings.
4. OTHER: Security transactions are accounted foron the date the securities
are purchased or sold. Costs used in determining realized gains and losses
on sales of investment securities are those of specific securities sold.
Dividend income and distributions to shareholders are recorded on the
ex-dividend date. Discounts and premiums on debt securities purchased are
amortized to interest income over the lives of the respective securities.
B. Under the terms of a contract which expires May 31, 1996, the Fund pays
Wellington Management Company a basic advisory fee calculated at an annual
percentage rate of average net assets. The basic fee thus computed is subject
to quarterly adjustments based on performance relative to the Standard & Poor's
500 Stock Index. For the year ended October 31, 1995, the investment advisory
fee represented an effective annual rate of .16 of 1% of Fund average net
assets before an increase of $7,752,000 (.06 of 1%) based on performance.
C. The Vanguard Group, Inc. furnishes at cost corporate management,
administrative, marketing, and distribution services. The costs of such
services are allocated to the Fund under methods approved by the Board of
Directors. At October 31, 1995, the Fund had contributed capital of $1,662,000
to Vanguard (included in Other Assets), representing 8.3% of Vanguard's
capitalization. The Fund's directors and officers are also directors and
officers of Vanguard.
Vanguard has requested the Fund's investment adviser to direct certain
portfolio trades, subject to obtaining the best price and execution, to brokers
who have agreed to rebate or credit to the Fund a portion of the commissions
generated. Such rebates or credits are used solely to reduce the Fund's
administrative expenses. For the year ended October 31, 1995, directed
brokerage arrangements reduced
16
<PAGE> 19
the Fund's expenses by $2,576,000 (.02 of 1% of average net assets).
D. During the year ended October 31, 1995, the Fund made purchases of
$3,418,052,000 and sales of $4,491,846,000 of investment securities other than
U.S. Government securities and temporary cash investments. Purchases and sales
of U.S. Government securities were $58,375,000 and $1,126,425,000,
respectively.
At October 31, 1995, unrealized appreciation for financial reporting and
Federal income tax purposes aggregated $1,416,046,000, of which $1,951,883,000
related to appreciated securities and $535,837,000 related to depreciated
securities.
E. The market value of securities on loan to broker/dealers at October 31,
1995, was $52,662,000, for which the Fund had received cash collateral of
$57,116,000.
17
<PAGE> 20
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors
Vanguard/Windsor Fund
In our opinion, the accompanying statement of net assets and the related
statements of operations and of changes in net assets and the financial
highlights present fairly, in all material respects, the financial position of
Vanguard/Windsor Fund (the "Fund") at October 31, 1995, and the results of its
operations, the changes in its net assets and the financial highlights for each
of the respective periods presented, in conformity with generally accepted
accounting principles. These financial statements and financial highlights
(hereafter referred to as "financial statements") are the responsibility of the
Fund's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities 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
November 30, 1995
18
<PAGE> 21
SPECIAL TAX INFORMATION
SPECIAL 1995 TAX INFORMATION (UNAUDITED)
FOR VANGUARD/WINDSOR FUND
Corporate shareholders should note that for the fiscal year ended October 31,
1995, 58.5% of the investment income (i.e., dividend income plus short-term
capital gains, if any) qualifies for the intercorporate dividends received
deduction.
19
<PAGE> 22
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
20
<PAGE> 23
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
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
Q220-10/95
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 decimated 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> 24
[PHOTO]
<PAGE> 25
WINDSOR FUND
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 appear at the top of pages one through four.
A line chart of the Indexed Value (Standard & Poor's Value Index, and Standard
& Poor's Growth Index) of Vanguard/Windsor Fund for the fiscal years 1991
through 1995 appears at the upper left of page two.
Line charts illustrating cumulative performance between Vanguard/Windsor Fund,
Standard & Poor's 500 Index and Average Value Fund, average Annual Total
Returns for the period October 31, 1985, to October 31, 1995 appears at the top
of page three.
A running head featuring an hour glass, compass & telescope, and battleships in
the background appears at the top of page five.
A running head featuring ships wheel, rope and battleships in the background
appears at the top of pages six & seven.
A running head featuring a cannon and battleships in the background appears at
the top of pages eight through ten.
A running head featuring open log book, pen and battleships in the background
appears at the top of pages eleven through eighteen.
A running head featuring an hour glass, compass & telescope, and battleships in
the background appears at the top of page nineteen.
A running head featuring a sextant, a map, and battleships in the background
appears at the top of page 20.
A running head featuring birds flying and ship in the background appears at the
top of the inside back cover.
<PAGE> 26
[VANGUARD WINDSOR II LOGO]
ANNUAL REPORT 1995
<PAGE> 27
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/Windsor II 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 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 5]
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/WINDSOR II SEEKS HIGH CURRENT INCOME AND RELATIVELY LOW VOLATILITY AND
HAS THE POTENTIAL FOR REASONABLE CAPITAL GROWTH. THE FUND EMPHASIZES COMMON
STOCKS FROM LARGE, WELL-ESTABLISHED, HIGH-QUALITY U.S. CORPORATIONS THAT OFFER
ABOVE-AVERAGE DIVIDEND YIELDS AND ARE BELIEVED TO HAVE RELATIVELY ATTRACTIVE
LONG-TERM INVESTMENT VALUE.
<PAGE> 28
CHAIRMAN'S LETTER
FELLOW SHAREHOLDER:
During the twelve months ended October 31, 1995, our tenth full fiscal year,
Windsor II enjoyed a solid total return of +23.1%. While it was a year in
which blue-chip growth stocks rather than value stocks led the market upward,
the Fund substantially outpaced its value-oriented peers.
The table that follows compares the Fund's total return (capital
change plus income) for the year with the return of the unmanaged Standard &
Poor's 500 Composite Stock Price Index--dominated by blue-chip stocks--and the
average value (growth and income) mutual fund, which better reflects the
investment philosophy of Windsor II.
<TABLE>
<CAPTION>
- ------------------------------------------------------
TOTAL RETURN
-----------------
FISCAL YEAR ENDED
OCTOBER 31, 1995
- ------------------------------------------------------
<S> <C>
VANGUARD/WINDSOR II +23.1%
- ------------------------------------------------------
AVERAGE VALUE FUND +20.7%
STANDARD & POOR'S 500 STOCK INDEX +26.4
- ------------------------------------------------------
</TABLE>
The Fund's return is based on net asset values of $17.33 per share on October
31, 1994, and $20.06 on October 31, 1995, with the latter figure adjusted to
take into account the reinvestment of two semi-annual dividends totaling $.55
per share from net investment income and a December 1994 distribution of $.47
per share from net realized capital gains. Net capital gains realized during
1995, presently estimated at $.69 per share, will be distributed in December,
along with our semi-annual dividend.
THE FISCAL YEAR IN REVIEW
The great bull market in stocks during our fiscal year began in mid-December
1994 and has continued quite dramatically since then. The pace of this gain
was virtually uninterrupted, and the dimension, if not unprecedented, was
extraordinary, delighting the bulls even as it astonished the bears.
There were many opinions as to the source of the strength in the stock
market. In my view, it resulted from a combination of: (1) record-breaking
corporate profits; (2) a sharp decline in long-term interest rates, with the
yield on the U.S. Treasury bond falling from 8.1% to 6.2%, engendering a +26%
price increase; (3) the diminishing threat of additional increases in
short-term interest rates by the Federal Reserve Board; (4) a softening in U.S.
economic growth, resulting in continued optimism about the outlook for
inflation; and (5) a hint of speculative fever in the equity marketplace.
The rise in corporate profits was particularly striking. It is
estimated that operating earnings for the companies in the Standard & Poor's
500 Index will increase about +15% in 1995, after rising +16% during 1994.
(Since 1926, earnings growth has averaged less than +7% per year.) If there is
a cautionary signal in this boom in profits, it is that the two-year cumulative
earnings growth of +33% has been accompanied by dividend growth of only +11%.
The result of this subdued dividend growth in the face of sharply higher stock
prices was a decline in the yield on the Index to 2.3%, the lowest level on
record. As we enter our 1996 fiscal year, this is surely a sobering statistic.
Just as 1992 and 1993 were excellent years for value stocks (usually
those with above-average yields and below-average market price-to-book values),
so 1994 and 1995 were excellent years for growth stocks (those with lower
yields and higher rates of earnings growth). The chart on page 2 reflects some
of the characteristic oscillations between these two basic stock types.
Nonetheless, for the full five-year period, the returns for these two groups of
stocks were virtually identical: +17.2% for the Value Index and +17.1% for the
Growth Index--the two components of the Standard & Poor's 500 Index. I should
note that both of these returns are far above the long-term average annual
return (since 1926) of +10.6% for stocks as a group, yet another cautionary
signal.
As I noted one year ago, the idea that the returns of value stocks and
growth stocks will fluctuate from year to year but tend to converge over time
is hardly surprising, given the ebb and flow of the enthusiasms of the
marketplace. My conclusion then, as it is now, was that wise investors should
stick to their objectives rather than attempt to guess
1
<PAGE> 29
[FIGURE 6]
whether growth stocks or value stocks will win the subsequent year's quest for
dominance. A combination of the two styles in relatively stable proportions, of
course, is also an acceptable strategy.
WINDSOR II IN FISCAL 1995
The Standard & Poor's 500 Index enjoyed an extraordinary year; so did Windsor
II, but not quite as extraordinary. The edge achieved by the Index lies simply
in the fact that it includes both growth stocks and value stocks. For example,
the Index weighting in the income-oriented financial group is 12%, less than
one-half of the Fund's 25% weighting. On the other hand, the Index has a 20%
weighting in the low-yielding technology and health-care groups, almost double
the Fund's combined weighting of 12%.
The financial sector provided a strong +35% gain for the year, well
ahead of the Standard & Poor's 500 Index, and our particular selections of
individual bank and insurance stocks registered even larger gains. Both of
these distinctions provided a major enhancement to our return. However, with
technology stocks strongly leading the market (total return of +49%), our
underweighting in this group was a major negative factor. Our large commitment
to the energy group (15% of our assets versus 10% for the Index) was also
relatively costly, as this group's market-lagging return was but +10%.
While this combination of factors held the Fund's return short of that
of the Index, we enjoyed a solid positive advantage in performance (+23.1%
versus +20.7%) over our peer group of value-oriented funds. On average, our
peers held a lower weighting (16%) than ours in the strong financial group, but
held a larger position (19%)--albeit below that of the Index--in the technology
and health-care stocks. Their market-like weighting (8% of assets) in the
energy group was approximately one-half our concentration. On balance, these
latter two factors helped our peers, but not sufficiently to offset Windsor
II's other advantages.
I am pleased to report that all four of the advisers which now
comprise our multi-manager structure outpaced the value fund objective group.
Three earned solid positive margins over our peers. The fourth, Tukman Capital
Management, earned extraordinary returns for the second consecutive year. (You
may recall that Tukman follows a strategy of holding a small and concentrated
number of equities, including some growth-oriented issues.) The share of our
assets supervised by each of our portfolio managers is presented in this table:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------
TOTAL NET ASSETS
---------------------------------------
MILLIONS PERCENTAGE
- ------------------------------------------------------------------------
<S> <C> <C>
BARROW, HANLEY, MEWHINNEY
& STRAUSS, INC. $ 6,838 67%
EQUINOX CAPITAL MANAGEMENT 935 9
TUKMAN CAPITAL MANAGEMENT 1,030 10
VANGUARD CORE MANAGEMENT 712 7
CASH RESERVE 757 7
- ------------------------------------------------------------------------
TOTAL $10,272 100%
- ------------------------------------------------------------------------
</TABLE>
These percentages remained relatively stable during the year. Given our
satisfaction with each adviser's performance, no major changes in allocations
are contemplated for the foreseeable future.
2
<PAGE> 30
[FIGURE 7]
<TABLE>
<CAPTION>
Average Annual Total Returns--Periods Ended October 31, 1995
- -------------------------------------------------------------------------
1 Year 5 Years 10 Years
- -------------------------------------------------------------------------
<S> <C> <C> <C>
VANGUARD/WINDSOR II +23.08% +18.24% +14.64%
AVERAGE VALUE FUND +20.74 +15.95 +13.17
STANDARD & POOR'S 500 INDEX +26.41 +17.19 +15.42
</TABLE>
A LONGER-TERM PERSPECTIVE
At the tenth anniversary of Windsor II, it seems particularly appropriate to
review our ten-year record beginning on October 31, 1985. The chart above and
the table that follows present the results of an assumed initial investment of
$10,000 in the Fund, the average value fund, and the Standard & Poor's 500
Index:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------
TOTAL RETURN
--------------------------------------
OCTOBER 31, 1985, TO
OCTOBER 31, 1995
- -------------------------------------------------------------------------
FINAL VALUE
ANNUALIZED OF INITIAL
TOTAL INVESTMENT
RETURN OF $10,000
- -------------------------------------------------------------------------
<S> <C> <C>
VANGUARD/WINDSOR II +14.6% $39,217
- -------------------------------------------------------------------------
AVERAGE VALUE FUND +13.2% $34,446
STANDARD & POOR'S 500 INDEX +15.4 41,976
- -------------------------------------------------------------------------
</TABLE>
The chart reflects both ups and downs in the stock market, and there is no
assurance that the ever-unpredictable markets of the future will provide better
or worse returns than those presented. Indeed, during the decade, the total
return on stocks was well above the long-term norm of +10.6% for the Standard &
Poor's 500 Index.
The solid margin we enjoyed over our peers is extremely meaningful
when achieved over a full decade. Indeed, the $39,217 final value of the
initial $10,000 invested in Windsor II exceeded the comparable figure for the
value fund group by $4,771, equivalent to nearly 50% of the initial investment.
This large difference shows the substantial incremental asset growth that can
result from a combination of excellent portfolio management and compound
interest.
It should go without saying that the Standard & Poor's 500 Index was a
tough competitor during the past decade, both for Windsor II and for its peer
group of mutual funds. The Index, as you know, is a theoretical construct,
incurring none of the advisory fees, operating expenses, and portfolio
transaction costs that must be borne--to one extent or another--in the real
world in which mutual funds operate. What's more, the record of the Index
during the past decade happened to marginally favor growth stocks
3
<PAGE> 31
over value stocks, making the period a bit tougher than usual for value-driven
funds such as Windsor II.
WINDSOR II AND WINDSOR FUND
Finally, a word about Windsor II and Windsor Fund, its "Vanguard value" cousin.
Veteran shareholders will recall that in mid-1985, Windsor Fund was closed to
new investors. We did so in order to protect Windsor's shareholders against
burgeoning cash flows that may well have driven its assets to levels at which
its strategies could no longer be effectively implemented. Vanguard then
elected to form a new fund with a similar value orientation, albeit with a new
portfolio manager so as to avoid having additional responsibilities imposed on
Windsor Fund's outstanding manager, John B. Neff.
We made it clear at the time that Barrow, Hanley, Mewhinney & Strauss,
the adviser we selected, was completely unaffiliated with Wellington Management
Company and Mr. Neff, and would operate with different strategies (although
with the same value orientation). Nonetheless, as a result of our decision to
close Windsor and offer Windsor II, investors flocked to the new Fund,
presumably as the best Vanguard option then available. The initial offering of
Windsor II received considerable attention in the marketplace, as it has ever
since, and the Fund's assets currently total $10.3 billion.
In our 1990 Annual Report, with the completion of Windsor II's first
five years, I felt obliged to present to shareholders a performance comparison
of Windsor II and Windsor Fund during that period. As it happened, this period
was to include one of Windsor Fund's rare "dry spells," and Windsor II in fact
provided the higher five-year return. Now, five years later, as Windsor II
celebrates its tenth anniversary, it seems only appropriate to update that
comparison. Since our inception, Windsor II's annual rate of return has been
+14.1%, a hair ahead of the +13.7% return achieved by Windsor Fund. (Our return
differs slightly from that shown in our ten-year chart, since Windsor II began
operations on June 24, 1985, in advance of its fiscal year end on October 31.)
I believe that Windsor II has lived up to our own high initial
expectations and has delivered more-than-satisfactory results to shareholders
during its first decade. I also believe that Windsor II has "won its spurs" and
earned the right to stand on its own. So, we will no longer focus on the
relative records of the "two Windsors" but will rely solely on the Standard &
Poor's 500 Index and our peer group of value funds for the comparisons we
regularly present. They are both fair--and demanding--standards.
IN SUMMARY
The basic objectives and strategies of Windsor II remain intact. We are
committed to equity investing as our long-term focus. We also remain committed
to a value-driven approach to stock selection, emphasizing equities with
reasonable yields rather than those that may have greater potential for
long-term growth, but usually carrying higher price/earnings ratios. While the
balance was tipped toward growth stocks in 1995--and indeed, by a slight
margin, over the past decade--I am confident that the day for value will
reappear, and that the Fund will continue to provide above-average returns
relative to our peers.
That said, let me be clear that no mutual fund can eliminate the risks
of participation in the financial markets today. As I noted earlier, given the
relatively high returns of stocks that we have enjoyed during the past decade,
the risks of investing have evidently increased. And yet, perhaps the biggest
long-term risks to investors are: (1) failing to invest in the financial
markets at all; and (2) following an erratic and ever-changing course. In my
Annual Report a year ago, I urged you, rather, to "stay the course,"
maintaining your Windsor II investment as part of a balanced portfolio of stock
funds, bond funds, and money market funds suitable to your own objectives. It
proved wise counsel then; I reiterate it today.
Sincerely,
/s/ JOHN C. BOGLE
- ---------------------
John C. Bogle
Chairman of the Board November 14, 1995
Note: Mutual fund data from Lipper Analytical Services, Inc.
4
<PAGE> 32
REPORT FROM BARROW, HANLEY, MEWHINNEY & STRAUSS, INC.
While fiscal year 1995 was a period of dramatic returns, we were
disappointed to have lagged the S&P 500, as did most value funds. A very
significant portion of the Index return was generated by the technology sector,
which posted a +49% gain. As you might suspect, we had modest holdings in this
area, as it tends to have characteristics that we eschew--weighted average
price/earnings ratio of 25 times, price/book value ratio of 5.4 times, and 0.5%
current yield. In retrospect, however, we wish we had owned them.
While recent economic reports look robust, we do not necessarily view
this as a good omen for the holiday season. Previous spurts in durable goods
purchases have likely robbed demand from the fourth quarter. Auto leases, so
popular currently, should be viewed as installment purchases. The consumer is
rather extended versus his disposable income and his credit cards are near
their limit. Delinquencies are picking up, and the expected year-end cut in
interest rates by the Federal Reserve will be too little, too late, making the
holiday season difficult and quite price sensitive. Robust growth in jobs and a
fall in the unemployment rate would be welcome economic news.
The world news is unsettling, with problems in the Balkans, the Middle
East, Japan, Canada, and Mexico. These have not seemed to affect either the
U.S. economy or the domestic securities markets. The conflict between
Republicans and Democrats over the Budget Resolution Bill and the threat of not
extending the debit limit will probably end with lots of burnt midnight oil and
closed-door meetings on the assumed inflation rate included in the cost of
living adjustment.
MARKET PERSPECTIVE
In our last letter to shareholders, we talked about the market having to climb
a wall of worry in 1995, and climb it did. Improvement in interest rates has
helped equities go to new highs. Investor sentiment has shifted to positive.
This powerful climb has been led by very impressive returns in the technology
sector. We do not remember many groups posting such large gains in a
twelve-month period. That trend seems to have stopped and is probably in the
early stage of a correction. With the very definition of technology stocks
being rapid obsolescence and high reinvestment requirements, we are usually
quite cautious about investing there.
PORTFOLIO COMMENTS
Although your Fund has modest liquidity reserves, in very strong markets even
the smallest of non-equity holdings causes a noticeable drag on portfolio
results. We are sorry for the penalty but pleased by the dramatic return. We
are comfortable with the concentration of holdings in the financial sector;
however, we have not added to this area and have actually "taken some money off
the table" as the stocks moved up. The Fund's holdings in consumer staples,
significantly health care, have the ability to perform well fundamentally, even
in a sluggish consumer environment.
Our lower-than-average utility commitment reflects concern about
competition, regulation, and slow demand. While this group could do well
defensively, we feel that prices on individual issues do not reflect the
fundamentals. While this is a seemingly contrary opinion, we feel that energy
stocks, particularly those with modest chemical commitments, could prove
successful in the coming months, and for this reason we are relatively
overexposed to this area. In general, we are comfortable with the long-term
potential of Windsor II's holdings.
Respectfully,
Barrow, Hanley, Mewhinney & Strauss, Inc.
November 8, 1995
5
<PAGE> 33
TOTAL INVESTMENT RETURN TABLE
The following table illustrates the results of a single-share investment in
Vanguard/Windsor II since inception through October 31, 1995. During the period
illustrated, stock prices fluctuated widely; these results should not be
considered a representation of the dividend income or capital gain or loss that
may be realized from an investment made in the Fund today.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
PERIOD PER SHARE DATA TOTAL INVESTMENT RETURN*
- -------------------------------------------------------------------------------------------------------------------
Windsor II
Value with Income ----------------------------- S&P 500
Year Ended Net Asset Capital Gains Income Dividends & Capital Capital Income Total Total
December 31 Value Distributions Dividends Gains Reinvested Return Return Return Return
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
INITIAL (6/85) $10.00 -- -- $10.00 -- -- -- --
- -------------------------------------------------------------------------------------------------------------------
1985 10.99 -- $.11 11.11 + 9.9% +1.2% +11.1% +14.1%
- -------------------------------------------------------------------------------------------------------------------
1986 12.39 $.52 .43 13.49 +17.4 +4.0 +21.4 +18.6
- -------------------------------------------------------------------------------------------------------------------
1987 10.75 .80 .61 13.20 - 6.8 +4.7 - 2.1 + 5.2
- -------------------------------------------------------------------------------------------------------------------
1988 12.81 -- .57 16.47 +19.2 +5.5 +24.7 +16.5
- -------------------------------------------------------------------------------------------------------------------
1989 14.96 .61 .74 21.05 +21.7 +6.1 +27.8 +31.6
- -------------------------------------------------------------------------------------------------------------------
1990 12.46 .28 .73 18.95 -14.8 +4.8 -10.0 - 3.1
- -------------------------------------------------------------------------------------------------------------------
1991 14.89 .44 .61 24.38 +23.4 +5.3 +28.7 +30.4
- -------------------------------------------------------------------------------------------------------------------
1992 15.91 .22 .52 27.31 + 8.3 +3.7 +12.0 + 7.6
- -------------------------------------------------------------------------------------------------------------------
1993 17.04 .50 .51 31.02 +10.3 +3.3 +13.6 +10.1
- -------------------------------------------------------------------------------------------------------------------
1994 15.82 .47 .55 30.66 - 4.4 +3.2 - 1.2 + 1.3
- -------------------------------------------------------------------------------------------------------------------
1995 (10/31) 20.06 -- .20 39.29 +26.8 +1.4 +28.2 +29.3
- -------------------------------------------------------------------------------------------------------------------
LIFETIME +292.9% +327.4%
- -------------------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN +14.1% +15.1%
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
* Includes reinvestment of income dividends and any capital gains distributions
for both the Fund and the Index.
Note: No adjustment has been made for income taxes payable by shareholders on
reinvested income dividends and capital gains distributions.
AVERAGE ANNUAL TOTAL RETURNS--THE AVERAGE ANNUAL TOTAL RETURNS FOR THE FUND
(PERIODS ENDED SEPTEMBER 30, 1995) ARE AS FOLLOWS:
<TABLE>
<CAPTION>
10 YEARS
-------------------------------
INCEPTION TOTAL CAPITAL INCOME
DATE 1 YEAR 5 YEARS RETURN RETURN RETURN
--------- ------ ------- ------ ------- ------
<S> <C> <C> <C> <C> <C> <C>
VANGUARD/WINDSOR II 6/24/85 +28.31% +18.29% +15.38% +10.94% +4.44%
</TABLE>
ALL OF THESE DATA REPRESENT PAST PERFORMANCE. THE INVESTMENT RETURN AND
PRINCIPAL VALUE OF AN INVESTMENT WILL FLUCTUATE SO THAT INVESTORS' SHARES, WHEN
REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST.
6
<PAGE> 34
STATEMENT OF NET ASSETS
FINANCIAL STATEMENTS
October 31, 1995
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- ------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (92.5%)
- ------------------------------------------------------------------------------
BASIC MATERIALS (3.7%)
Bowater, Inc. 55,900 $ 2,474
Champion International Corp. 60,100 3,215
Dow Chemical Co. 609,300 41,813
E.I. du Pont de Nemours & Co. 152,100 9,487
Eastman Chemical 2,333,300 138,831
* FMC Corp. 53,400 3,825
Georgia Gulf Corp. 20,000 663
Georgia-Pacific Corp. 85,300 7,037
The BF Goodrich Co. 736,500 48,517
Great Lakes Chemical Corp. 345,000 23,158
IMC Global Inc. 29,700 2,079
International Paper Co. 1,045,000 38,665
* LTV Corp. 167,500 2,345
Phelps Dodge Corp. 41,900 2,655
Rayonier Inc. 8,200 308
Stone Container Corp. 1,800 30
Union Carbide Corp. 64,900 2,458
Witco Chemical Corp. 1,793,900 50,678
-----------
GROUP TOTAL 378,238
-----------
- ------------------------------------------------------------------------------
CAPITAL GOODS & CONSTRUCTION (5.6%)
Caterpillar, Inc. 49,700 2,789
Cummins Engine Co., Inc. 41,000 1,440
Deere & Co. 37,400 3,343
GATX Corp. 38,900 1,848
General Electric Co. 1,256,000 79,442
Honeywell, Inc. 2,386,200 100,220
Johnson Controls, Inc. 39,000 2,272
Parker Hannifin Corp. 88,200 2,977
Raytheon Co. 4,824,200 210,456
Rockwell International Corp. 125,900 5,603
TRW, Inc. 63,300 4,162
Tecumseh Products Co. Class A 47,100 2,214
The Timkin Co. 43,200 1,739
United Technologies Corp. 78,800 6,994
WMX Technologies Inc. 172,700 4,857
Westinghouse Electric Corp. 10,338,400 146,030
-----------
GROUP TOTAL 576,386
-----------
- ------------------------------------------------------------------------------
CONSUMER CYCLICAL (11.7%)
Armstrong World Industries Inc. 700 42
Brunswick Corp. 4,683,000 91,319
Capital Cities/ABC, Inc. 1,025,900 121,697
Dana Corp. 109,500 2,806
Dayton-Hudson Corp. 4,000 275
Dillard Department Stores Class A 135,500 3,675
R.R. Donnelley & Sons Co. 109,400 3,993
The Dun & Bradstreet Corp. 895,700 53,518
Eastman Kodak Co. 3,525,100 220,759
Eaton Corp. 33,100 1,696
Ford Motor Co. 7,087,700 203,771
Gannett Co., Inc. 1,783,100 96,956
General Motors Corp. 2,289,000 100,144
Kmart Corp. 9,394,800 76,333
Knight-Ridder, Inc. 17,000 944
May Department Stores Co. 735,900 28,884
Maytag Corp. 178,200 3,386
* Navistar International Corp. 126,800 1,300
J.C. Penney Co., Inc. 3,701,800 155,938
* Price/Costco Inc. 88,000 1,496
Sears, Roebuck & Co. 975,100 33,153
Tandy Corp. 27,700 1,368
Washington Post Co. Class B 7,600 2,204
Wendy's International, Inc. 2,100 42
-----------
GROUP TOTAL 1,205,699
-----------
- ------------------------------------------------------------------------------
CONSUMER STAPLES (9.6%)
American Stores Co. 200,800 5,999
(1)Anheuser-Busch Co., Inc. 5,289,600 349,114
Archer-Daniels-Midland Co. 292,405 4,715
Brown-Forman Corp. Class B 55,600 2,120
Campbell Soup Co. 38,000 1,990
Great Atlantic & Pacific
Tea Co., Inc. 54,100 1,096
H.J. Heinz Co. 1,719,000 79,934
Hormel Foods Corp. 39,700 913
IBP, Inc. 42,200 2,527
Kellogg Co. 367,300 26,537
PepsiCo, Inc. 1,001,000 52,803
(1)Philip Morris Cos., Inc. 2,988,500 252,528
RJR Nabisco Holdings Corp. 5,926,220 182,231
Sara Lee Corp. 815,600 23,958
* Vons Cos., Inc. 95,400 2,421
-----------
GROUP TOTAL 988,886
-----------
- ------------------------------------------------------------------------------
ENERGY (14.5%)
Amoco Corp. 2,535,100 161,929
Atlantic Richfield Co. 62,300 6,650
Chevron Corp. 650,000 30,387
Coastal Corp. 82,500 2,671
Dresser Industries, Inc. 7,298,800 151,450
(1)Exxon Corp. 3,010,900 229,957
Halliburton Co. 70,900 2,942
Mobil Corp. 442,700 44,602
Occidental Petroleum Corp. 294,800 6,338
Panhandle Eastern Corp. 5,839,518 147,448
Phillips Petroleum Co. 6,259,000 201,853
Royal Dutch Petroleum Co. ADR 275,400 33,840
Schlumberger Ltd. 3,166,900 197,139
Texaco Inc. 2,678,000 182,439
USX-Marathon Group 4,882,500 86,664
-----------
GROUP TOTAL 1,486,309
-----------
- ------------------------------------------------------------------------------
</TABLE>
7
<PAGE> 35
STATEMENT OF NET ASSETS
(continued)
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- ------------------------------------------------------------------------------
<S> <C> <C>
FINANCIAL (24.9%)
AT&T Capital Corp. 56,100 $ 2,244
Aetna Life & Casualty Co. 1,427,100 100,432
H.F. Ahmanson & Co. 82,800 2,070
(1)Allstate Corp. 6,503,322 238,997
(1)American Express Co. 5,444,608 221,187
American General Corp. 66,100 2,173
American International
Group, Inc. 999,825 84,360
Aon Corp. 2,307,650 94,902
Banc One Corp. 1,132,800 38,232
BankAmerica Corp. 3,826,183 220,006
Bank of Boston Corp. 188,840 8,403
The Bank of New York Co., Inc. 149,400 6,275
Bear Stearns Co., Inc. 155,500 3,090
CIGNA Corp. 56,900 5,640
* CNA Financial Corp. 19,400 2,212
(1)The Chase Manhattan Corp. 5,309,281 302,629
(1)Chemical Banking Corp. 5,321,516 302,661
The Chubb Corp. 22,000 1,977
Citicorp 95,000 6,163
CoreStates Financial Corp. 130,685 4,754
Dean Witter Discover & Co. 51,100 2,542
A.G. Edwards & Sons, Inc. 130,600 3,330
Exel Ltd. 2,113,000 113,046
Federal National Mortgage Assn. 1,062,400 111,419
First Chicago Corp. 3,040,389 206,366
First Tennessee National Corp. 71,300 3,815
Fleet Financial Group, Inc. 138,300 5,359
GEICO Corp. 1,438,300 99,243
Household International, Inc. 34,220 1,925
Leucadia National Corp. 4,400 242
Merrill Lynch & Co., Inc. 70,600 3,918
Midlantic Corp. 47,100 2,496
NationsBank, Inc. 115,100 7,568
Old Republic International Corp. 70,200 2,009
PNC Bank Corp. 5,871,700 154,132
PaineWebber Group, Inc. 241,750 5,318
Republic New York Corp. 45,700 2,679
St. Paul Cos., Inc. 81,100 4,116
Star Banc Corp. 34,800 1,927
* Transport Holdings, Inc. Class A 346 14
Travelers Group Inc. 3,581,437 180,862
Union Bank of San Francisco 23,466 1,173
-----------
GROUP TOTAL 2,561,906
-----------
- ------------------------------------------------------------------------------
HEALTH CARE (9.2%)
Allergan, Inc. 2,383,550 70,017
(1)American Home Products Corp. 3,030,000 268,534
Bausch & Lomb, Inc. 42,600 1,475
Baxter International, Inc. 175,300 6,771
Beckman Instruments 28,300 937
Becton, Dickinson & Co. 67,300 4,375
Bergen Brunswig Corp. Class A 84,200 1,747
(1)Bristol-Myers Squibb Co. 2,896,800 220,881
Johnson & Johnson 512,100 41,736
Eli Lilly & Co. 1,577,800 152,455
Warner-Lambert Co. 1,999,900 170,241
-----------
GROUP TOTAL 939,169
-----------
- ------------------------------------------------------------------------------
TECHNOLOGY (3.0%)
Apple Computer, Inc. 1,663,200 60,291
Harris Corp. 26,900 1,564
Intel Corp. 579,000 40,458
International Business
Machines Corp. 140,900 13,703
* Read-Right Corp. 28,000 977
* Seagate Technology 82,800 3,705
Tektronix, Inc. 27,500 1,629
Xerox Corp. 1,408,807 182,793
-----------
GROUP TOTAL 305,120
-----------
- ------------------------------------------------------------------------------
TRANSPORT & SERVICES (.5%)
* AMR Corp. 48,600 3,208
CSX Corp. 536,900 44,965
Norfolk Southern Corp. 21,900 1,692
* Northwest Airlines Corp. Class A 77,500 3,110
Ryder System, Inc. 1,700 41
-----------
GROUP TOTAL 53,016
-----------
- ------------------------------------------------------------------------------
UTILITIES (9.0%)
AT&T Corp. 2,275,000 145,600
American Water Works Co., Inc. 29,000 924
Ameritech Corp. 73,000 3,942
Bell Atlantic Corp. 29,800 1,896
BellSouth Corp. 33,800 2,586
Boston Edison Co. 77,200 2,113
CMS Energy Corp. 138,600 3,829
Centerior Energy Corp. 3,046,800 30,468
Consolidated Edison Co. of
New York, Inc. 99,500 3,022
Detroit Edison Co. 78,900 2,663
(1)Entergy Corp. 8,941,100 254,821
FPL Group, Inc. 10,500 440
Frontier Corp. 65,900 1,779
GTE Corp. 220,800 9,108
General Public Utilities Corp. 636,200 19,881
Long Island Lighting Co. 81,700 1,389
MCI Communications Corp. 1,727,600 42,974
New York State Electric & Gas Corp. 63,500 1,603
Niagara Mohawk Power Corp. 92,400 993
Northeast Utilities 49,500 1,225
Northern States Power Co. 32,400 1,531
NYNEX Corp. 132,300 6,218
</TABLE>
8
<PAGE> 36
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- ------------------------------------------------------------------------------
<S> <C> <C>
Ohio Edison Co. 147,300 $ 3,369
Oklahoma Gas & Electric Co. 50,000 2,000
Pacific Enterprises 11,900 295
Pacific Gas & Electric Co. 210,000 6,169
Pacific Telesis Group 5,761,700 175,012
Portland General Electric Co. 132,900 3,605
Public Service Enterprise Group Inc. 95,900 2,817
SBC Communications Inc. 68,000 3,800
SCEcorp 264,600 4,498
Southern New England
Telecommunications Corp. 143,000 5,166
Sprint Corp. 151,300 5,825
Unicom Corp. 4,208,900 137,841
U S WEST, Inc. 824,000 39,243
Utilicorp United, Inc. 9,400 271
-----------
GROUP TOTAL 928,916
-----------
- ------------------------------------------------------------------------------
MISCELLANEOUS (.8%)
AlliedSignal Inc. 9,100 387
The Dial Corp. 62,200 1,516
ITT Corp. 31,000 3,798
McKesson Corp. 41,000 1,958
Minnesota Mining & Manufacturing Co. 519,000 29,518
Ogden Corp. 116,300 2,646
Tenneco, Inc. 860,000 37,733
Textron, Inc. 51,600 3,548
-----------
GROUP TOTAL 81,104
-----------
- ------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost $7,422,137 ) 9,504,749
- ------------------------------------------------------------------------------
CONVERTIBLE PREFERRED STOCK (.1%)
- ------------------------------------------------------------------------------
RJR Nabisco Class C $.6012
(Cost $11,376) 1,770,700 10,846
- ------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENTS (7.0%)
- ------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Face
Amount
(000)
------------
<S> <C> <C>
U.S. TREASURY BILL--Note E
5.40%, 12/21/95 $ 600 596
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account 5.89%, 11/1/95 717,714 717,714
- ------------------------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(Cost $718,310) 718,310
- ------------------------------------------------------------------------------
TOTAL INVESTMENTS (99.6%)
(Cost $8,151,823) 10,233,905
- ------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (.4%)
- ------------------------------------------------------------------------------
Other Assets--Notes C and F 105,997
Liabilities--Note F (67,737)
-----------
38,260
- ------------------------------------------------------------------------------
NET ASSETS (100%)
- ------------------------------------------------------------------------------
Applicable to 511,973,797 outstanding
$.01 par value shares
(authorized 600,000,000 shares) $10,272,165
- ------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE $20.06
==============================================================================
</TABLE>
+See Note A to Financial Statements.
*Non-Income Producing Security.
(1)Ten largest common stock investments representing 25.7% of net assets.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
AT OCTOBER 31, 1995, NET ASSETS CONSISTED OF:
- ------------------------------------------------------------------------------
Amount Per
(000) Share
------------ ------
<S> <C> <C>
Paid in Capital $ 7,698,742 $15.03
Undistributed Net Investment Income 139,405 .27
Accumulated Net Realized Gains 351,956 .69
Unrealized Appreciation
of Investments--Note E 2,082,062 4.07
- ------------------------------------------------------------------------------
NET ASSETS $10,272,165 $20.06
- ------------------------------------------------------------------------------
</TABLE>
9
<PAGE> 37
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended
October 31, 1995
(000)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT INCOME
INCOME
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . $ 290,221
Interest . . . . . . . . . . . . . . . . . . . . . . . . . 39,666
- -------------------------------------------------------------------------------------------------------------------
Total Income . . . . . . . . . . . . . . . . . . . 329,887
- -------------------------------------------------------------------------------------------------------------------
EXPENSES
Investment Advisory Fees--Note B
Basic Fees . . . . . . . . . . . . . . . . . . . . . . . $12,380
Performance Adjustments . . . . . . . . . . . . . . . . 86 12,466
-------
The Vanguard Group--Note C
Management and Administrative . . . . . . . . . . . . . 20,622
Marketing and Distribution . . . . . . . . . . . . . . . 1,622 22,244
-------
Taxes (other than income taxes) . . . . . . . . . . . . . . 727
Custodians' Fees . . . . . . . . . . . . . . . . . . . . . 62
Auditing Fees . . . . . . . . . . . . . . . . . . . . . . . 17
Shareholders' Reports . . . . . . . . . . . . . . . . . . . 298
Annual Meeting and Proxy Costs . . . . . . . . . . . . . . 90
Directors' Fees and Expenses . . . . . . . . . . . . . . . 34
- -------------------------------------------------------------------------------------------------------------------
Total Expenses . . . . . . . . . . . . . . . . . . 35,938
Expenses Paid Indirectly--Note C . . . . . . . . . (667)
- -------------------------------------------------------------------------------------------------------------------
Net Expenses . . . . . . . . . . . . . . . . . . 35,271
- -------------------------------------------------------------------------------------------------------------------
Net Investment Income . . . . . . . . . . . . . 294,616
- -------------------------------------------------------------------------------------------------------------------
REALIZED NET GAIN
Investment Securities Sold . . . . . . . . . . . . . . . . 353,712
Futures Contracts . . . . . . . . . . . . . . . . . . . . . 488
- -------------------------------------------------------------------------------------------------------------------
Realized Net Gain . . . . . . . . . . . . . . . 354,200
- -------------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION)
Investment Securities . . . . . . . . . . . . . . . . . . . 1,244,407
Futures Contracts (375)
- -------------------------------------------------------------------------------------------------------------------
Change in Unrealized Appreciation (Depreciation) 1,244,032
- -------------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets
Resulting from Operations . . . . . . . . . . $1,892,848
===================================================================================================================
</TABLE>
10
<PAGE> 38
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED Year Ended
OCTOBER 31, 1995 October 31, 1994
(000) (000)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net Investment Income . . . . . . . . . . . . . . . . . . . . . $ 294,616 $ 256,027
Realized Net Gain . . . . . . . . . . . . . . . . . . . . . . . 354,200 226,060
Change in Unrealized Appreciation (Depreciation) . . . . . . . . 1,244,032 (296,749)
- -------------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from Operations . 1,892,848 185,338
- -------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS (1)
Net Investment Income . . . . . . . . . . . . . . . . . . . . . (267,796) (225,292)
Realized Net Gain . . . . . . . . . . . . . . . . . . . . . . . (225,725) (212,053)
- -------------------------------------------------------------------------------------------------------------------
Total Distributions . . . . . . . . . . . . . . . . . . (493,521) (437,345)
- -------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (2)
Issued --Regular . . . . . . . . . . . . . . . . . . . . 1,001,261 1,268,276
--In Lieu of Cash Distributions . . . . . . . . . 476,777 423,624
--Exchange . . . . . . . . . . . . . . . . . . . . 479,324 620,011
Redeemed --Regular . . . . . . . . . . . . . . . . . . . . (627,443) (604,566)
--Exchange . . . . . . . . . . . . . . . . . . . . (703,230) (694,803)
- -------------------------------------------------------------------------------------------------------------------
Net Increase from Capital Share Transactions . . . . . 626,689 1,012,542
- -------------------------------------------------------------------------------------------------------------------
Total Increase . . . . . . . . . . . . . . . . . . . . 2,026,016 760,535
- -------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Year . . . . . . . . . . . . . . . . . . . . . . . 8,246,149 7,485,614
- -------------------------------------------------------------------------------------------------------------------
End of Year (3) . . . . . . . . . . . . . . . . . . . . . . . . $10,272,165 $8,246,149
===================================================================================================================
(1) Distributions Per Share
Net Investment Income . . . . . . . . . . . . . . . . . . $.55 $.51
Realized Net Gain . . . . . . . . . . . . . . . . . . . . $.47 $.50
- -------------------------------------------------------------------------------------------------------------------
(2) Shares Issued and Redeemed
Issued . . . . . . . . . . . . . . . . . . . . . . . . . . 81,880 110,672
Issued in Lieu of Cash Distributions . . . . . . . . . . . 29,313 25,156
Redeemed . . . . . . . . . . . . . . . . . . . . . . . . . (74,940) (76,350)
- -------------------------------------------------------------------------------------------------------------------
36,253 59,478
- -------------------------------------------------------------------------------------------------------------------
(3) Undistributed Net Investment Income . . . . . . . . . . $ 139,405 $ 112,585
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
11
<PAGE> 39
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Year Ended October 31,
---------------------------------------------------
For a Share Outstanding Throughout Each Year 1995 1994 1993 1992 1991
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR . . . . . . . $17.33 $17.98 $15.75 $15.07 $11.91
-------- ------- ------- ------- -------
INVESTMENT OPERATIONS
Net Investment Income . . . . . . . . . . . . .58 .55 .50 .56 .62
Net Realized and Unrealized Gain (Loss)
on Investments . . . . . . . . . . . . . . 3.17 (.19) 2.47 1.17 3.55
-------- ------- ------- ------- -------
TOTAL FROM INVESTMENT OPERATIONS . . . 3.75 .36 2.97 1.73 4.17
- -------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income . . . . . (.55) (.51) (.52) (.61) (.73)
Distributions from Realized Capital Gains . . (.47) (.50) (.22) (.44) (.28)
-------- -------- -------- ------- -------
TOTAL DISTRIBUTIONS . . . . . . . . . . (1.02) (1.01) (.74) (1.05) (1.01)
- -------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR . . . . . . . . . . $20.06 $17.33 $17.98 $15.75 $15.07
===================================================================================================================
TOTAL RETURN . . . . . . . . . . . . . . . . . . +23.08% +2.22% +19.51% +12.50% +36.61%
- -------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net Assets, End of Year (Millions) . . . . . . . $10,272 $8,246 $7,486 $4,878 $3,298
Ratio of Expenses to Average Net Assets . . . . . .40%* .39% .39% .41% .48%
Ratio of Net Investment Income to
Average Net Assets . . . . . . . . . . . . . . 3.27% 3.26% 3.11% 3.72% 4.51%
Portfolio Turnover Rate . . . . . . . . . . . . . 30% 24% 26% 23% 41%
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
*Effective in fiscal 1995; does not include expense reductions from directed
brokerage arrangements. The 1995 Ratio of Expenses to Average Net Assets is
.39% after including these reductions. See Note C.
12
<PAGE> 40
NOTES TO FINANCIAL STATEMENTS
Vanguard/Windsor II is a Portfolio of the Vanguard/Windsor Funds, which are
comprised of two independent Portfolios, each of which is registered under the
Investment Company Act of 1940 as a diversified open-end investment company.
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 listed on an exchange are valued at the
latest quoted sales prices as of the close of the New York Stock Exchange
(generally 4:00 PM) on the valuation date; securities not traded are valued
at the mean of the latest quoted bid and asked prices. Securities not
listed are valued at the latest quoted bid prices. Temporary cash
investments are valued at amortized cost which approximates market value.
2. FEDERAL INCOME TAXES: The Fund intends to continue to qualify as a
regulated investment company and distribute all of its taxable income.
Accordingly, no provision for Federal income taxes is required in the
financial statements.
3. REPURCHASE AGREEMENTS: The Fund, along with other members of The Vanguard
Group of Investment Companies, transfers uninvested cash balances into a
Pooled Cash Account, the daily aggregate of which is invested in repurchase
agreements secured by U.S. Government obligations. Securities pledged as
collateral for repurchase agreements are held by a custodian bank until
maturity of each repurchase agreement. Provisions of each agreement require
that the market value of the collateral is sufficient in the event of
default; however, in the event of default or bankruptcy by the other party
to the agreement, realization and/or retention of the collateral may be
subject to legal proceedings.
4. FUTURES: The Fund utilizes Standard & Poor's 500 Index futures contracts to
a limited extent, with the objectives of maintaining full exposure to the
stock market, maintaining liquidity and minimizing transaction costs. The
Fund may purchase futures contracts to immediately position incoming cash
in the market, thereby simulating a fully invested position in the
underlying index while maintaining a cash balance for liquidity. In the
event of redemptions, the Fund may pay departing shareholders from its cash
balance and reduce its futures position accordingly.
The primary risks associated with the use of futures contracts are
imperfect correlation between changes in market value of stocks held by the
Fund and the prices of futures contracts, and the possibility of an
illiquid market. Futures contracts are valued based upon their quoted daily
settlement prices. Fluctuations in the values of futures contracts are
recorded as unrealized appreciation (depreciation) until terminated, at
which time realized gains (losses) are recognized. Unrealized appreciation
(depreciation) related to open futures contracts is required to be treated
as realized gain (loss) for Federal income tax purposes.
5. OTHER: Security transactions are accounted for on the date the securities
are purchased or sold. Costs used in determining realized gains and losses
on sales of investment securities are those of specific securities sold.
Dividend income and distributions to shareholders are recorded on the
ex-dividend date.
B. Under the terms of investment advisory contracts, the Fund pays Barrow,
Hanley, Mewhinney & Strauss, Inc., Equinox Capital Management, Inc., and Tukman
Capital Management, Inc. investment advisory fees calculated at an annual
percentage rate of average net assets of the Fund. The basic fees thus computed
13
<PAGE> 41
NOTES TO FINANCIAL STATEMENTS (continued)
for Barrow, Hanley, Mewhinney & Strauss, Inc. are subject to quarterly
adjustments based on performance relative to the Standard & Poor's/BARRA Value
Index; such fees for Equinox Capital Management, Inc. and Tukman Capital
Management, Inc. are subject to quarterly adjustments based on performance
relative to the Standard & Poor's 500 Stock Index. For the year ended October
31, 1995, the aggregate investment advisory fee represented an effective annual
rate of .14 of 1% of average net assets before an increase of $86,000 based on
performance.
The Vanguard Group, Inc. provides investment advisory services to a portion of
the Fund on an at-cost basis.
C. The Vanguard Group, Inc. furnishes at cost corporate management,
administrative, marketing, and distribution services. The costs of such
services are allocated to the Fund under methods approved by the Board of
Directors. At October 31, 1995, the Fund had contributed capital of $1,273,000
to Vanguard (included in Other Assets), representing 6.4% of Vanguard's
capitalization. The Fund's directors and officers are also directors and
officers of Vanguard.
Vanguard has requested the Fund's investment advisers to direct certain
portfolio trades, subject to obtaining the best price and execution, to brokers
who have agreed to rebate or credit to the Fund a portion of the commissions
generated. Such rebates or credits are used solely to reduce the Fund's
administrative expenses. For the year ended October 31, 1995, directed
brokerage arrangements reduced the Fund's expenses by $667,000 (an annual rate
of .01 of 1% of average net assets).
D. During the year ended October 31, 1995, the Fund made purchases of
$2,735,932,000 and sales of $2,486,514,000 of investment securities other than
U.S. Government securities and temporary cash investments.
E. At October 31, 1995, unrealized appreciation of investment securities for
financial reporting and Federal income tax purposes aggregated $2,082,082,000
of which $2,283,990,000 related to appreciated securities and $201,908,000
related to depreciated securities.
At October 31, 1995, the aggregate settlement value of open Standard & Poor's
500 Index futures contracts expiring in December 1995, the related unrealized
depreciation, and the market value of U.S. Treasury Bills deposited as initial
margin for those contracts were $2,919,000, $20,000, and $596,000,
respectively.
F. The market value of securities on loan to broker/dealers at October 31,
1995, was $6,404,000 for which the Fund had received cash collateral of
$6,869,000.
14
<PAGE> 42
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors
Vanguard/Windsor II
In our opinion, the accompanying statement of net assets and the related
statements of operations and of changes in net assets and the financial
highlights present fairly, in all material respects, the financial position of
Vanguard/Windsor II (the "Fund") at October 31, 1995, and the results of its
operations, the changes in its net assets and the financial highlights for each
of the respective periods presented, in conformity with generally accepted
accounting principles. These financial statements and financial highlights
(hereafter referred to as "financial statements") are the responsibility of the
Fund's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities 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
November 30, 1995
SPECIAL 1995 TAX INFORMATION (UNAUDITED)
FOR VANGUARD/WINDSOR II
Corporate shareholders should note that for the fiscal year ended October 31,
1995, 74.6% of the Fund's investment income (i.e., dividend income plus
short-term capital gains, if any) qualifies for the intercorporate dividends
received deduction.
15
<PAGE> 43
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
16
<PAGE> 44
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
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
Q730-10/95
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 decimated 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> 45
[PHOTO]
<PAGE> 46
WINDSOR II FUND
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 appear at the top of pages one through four.
A line chart of the Indexed Value (Standard & Poor's Value Index, and Standard
& Poor's Growth Index) of Vanguard/Windsor II Fund for the fiscal years 1991
through 1995 appears at the upper left of page two.
Line charts illustrating cumulative performance between Vanguard/Windsor II
Fund, Standard & Poor's 500 Index and Average Value Fund, average Annual Total
Returns for the period October 31, 1985, to October 31, 1995 appear at the top
of page three.
A running head featuring ships wheel, rope and battleships in the background
appears at the top of page five.
A running head featuring a cannon and battleships in the background appears at
the top of page six.
A running head featuring open log book, pen and battleships in the background
appears at the top of pages seven through fifteen.
A running head featuring a sextant, a map, and battleships in the background
appears at the top of page sixteen.
A running head featuring birds flying and ships in the background appears at
the top of the back cover.
