<PAGE> 1
CHAIRMAN'S LETTER
FELLOW SHAREHOLDER:
During the first half of Windsor Fund's 1995 fiscal year, which ended on April
30, the stock market surged. In this period your Fund provided a solid return,
albeit one that fell well short of the market's return.
The table below compares Windsor's total return (capital change plus
income) with that of the unmanaged Standard & Poor's 500 Composite Stock Price
Index, the basic standard we use to measure our relative performance, and a
good measure of the returns achieved by blue-chip corporations with very large
market capitalizations.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------
Total Return
----------------
Six Months Ended
April 30, 1995
- ------------------------------------------------------------------------
<S> <C>
Windsor Fund + 5.9%
- ------------------------------------------------------------------------
Standard & Poor's 500 Stock Index +10.5%
- ------------------------------------------------------------------------
</TABLE>
The Fund's return is based on net asset values of $14.55 per share on October
31, 1994, and $14.17 on April 30, 1995, with the latter figure adjusted to take
into account the reinvestment of a semi-annual dividend totaling $.24 per share
from net investment income and a distribution of $.86 per share from net
realized capital gains. Both payments were the result of our operations during
1994 and were made at the end of December.
THE PERIOD IN REVIEW
During the first three months of the semi-annual period, the stock market, on
balance, went nowhere. It then sprung to life during the second quarter,
engendering a solid gain for the full period, as reflected in the table above.
As usual, there were many opinions as to the source of the market's
strength. From my view, it resulted from a combination of: (1) the sharp
decline in interest rates (the yield on the long-term U.S. Treasury bond fell
from 8.1% to 7.3%, or 80 basis points); (2) the apparently diminishing threat
of additional increases in short-term interest rates by the Federal Reserve
Board; (3) a slight softening in U.S. economic growth, resulting in continued
optimism about the outlook for inflation; (4) record-breaking corporate
profits; and (5) a hint of speculative fever in the equity market. Whatever the
case, the strong equity market resulted in a solid gain of +10.5% for the
Standard & Poor's 500 Index.
Windsor's gain of +5.9% may seem disappointing on a relative basis, but it
should be viewed in the context of the Fund's solid, superior, and consistently
better-than-Index returns during the three prior fiscal years. During the past
six months, the Index has performed splendidly, as the market's gain was led by
large blue-chip stocks. Most equity funds--which own substantial positions in
smaller and less well-known stocks--were left in the proverbial dust.
Windsor's shortfall to the Index is explained in part by our concentration
in bank stocks (20% of the Fund's net assets compared to 6% for the Index),
where our stock selections, on balance, fell short of the bank stocks in the
Index. In addition, some of our consumer, cyclical, and energy holdings lagged
both their industry groups and the market as a whole. It was this same series
of factors that caused most of our modest shortfall to the average equity
mutual fund, which turned in a gain of +6.5%, well short of the Index gain, as
the Standard & Poor's 500 Index outpaced fully 91% of the general equity funds
during the period.
Veteran Windsor shareholders, I am confident, realize that, by reason of
the Fund's industry and individual stock concentrations (41% of our assets are
invested in our 10 largest holdings), our returns will often diverge sharply
from both the market indexes and competitive norms. When our performance is
evaluated over longer periods (say, three to five years), the Fund's historical
returns have been outstanding. "Anything can happen" to our relative returns
during short periods when we like what the stock market doesn t like, but it
should be long-term results that count for the long-term investor.
(continued)
1
<PAGE> 2
Our motto is "stay the course." The Fund follows that maxim, and our
traditional emphasis is on equities that your portfolio manager believes
represent fundamental values. Shareholders, too, should follow that maxim,
taking market risk, as well as the risk of a concentrated policy, in stride. I
look forward to reporting to you in our Annual Report six months hence.
Sincerely,
/s/ JOHN C. BOGLE
- -----------------
John C. Bogle
Chairman of the Board
May 15, 1995
Note: Mutual fund data from Lipper Analytical Services, Inc.
AVERAGE ANNUAL TOTAL RETURNS--THE AVERAGE ANNUAL TOTAL RETURNS FOR THE FUND
(PERIODS ENDED MARCH 31, 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 +10.32% +11.01% +13.39% +8.10% +5.29%
</TABLE>
ALL OF THESE DATA REPRESENT PAST PERFORMANCE. THE INVESTMENT RETURN AND
PRINCIPAL VALUE OF AN INVESTMENT WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES,
WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST.
2
<PAGE> 3
REPORT FROM THE INVESTMENT ADVISOR
Our performance in the first six months of the fiscal year lagged the market
significantly, some 4.6 percentage points worse than the S&P 500. The autos,
banks, cyclicals, and energy were our laggard groups in the period, while
airlines, insurance, S&Ls, technology, and utilities were positive
contributors.
The S&P was up a surprising 10.5% for the six months, led by the consumer
nondurables (e.g., pharmaceuticals, food and beverage, tobacco, healthcare, and
household products). These make up 20% of the market and we own nothing in the
area, so this absence hurt our relative performance. Our fundamental case
against these stocks includes: (1) high P/E ratios, (2) low domestic unit
growth rates of around 1%, (3) a lot of deep pocket players that start periodic
market share wars, (4) an increasingly value-conscious consumer, and (5) first
quarter earnings help from the weak dollar that will reverse as the dollar
strengthens off its depressed base.
Relative performance for the six months was particularly weak in our first
fiscal quarter, when high interest rates impacted both our financial service
and our cyclical concentrations, judged by the market to be "interest
sensitive." In the second fiscal quarter, though, long rates moved down 40
basis points, and our financial service holdings generally benefited. Our
financials have continued to act well so far in May, and the market rightly has
started smiling a bit on the autos and commodity cyclicals as well. As a
result, at this writing, we have picked up about two points versus the S&P.
The consumer seemed to go into a bit of a shell in April, especially as far
as buying cars, but we think that this will prove somewhat aberrational, and we
are still of the view that we will have another good three years of moderate
but steady economic growth. At the margin, this outlook makes the cyclical area
of the market the most attractive to us, and we built our commodity
cyclicals--aluminum, chemicals, and steel--up to 10.8% of the portfolio during
the period. This included a large addition to the steels, a number of which are
selling at only 4-- 5 times this year's reported earnings. The U.S. steel
industry has significantly improved its competitiveness by taking costs out and
also, of course, the decline in the dollar has helped.
The downward move in the long government bond yield to 6.85% presently more
than fulfills our expectation of a correction to 7%--7 1/4%. As of this
writing, we are virtually out of the 6% intermediate-term government position
we had in this latest trip, having enjoyed a 5% gain plus the 8% carry, for a
worthwhile total return over the less than one year holding period. With our
equity ratio now down to a little over 85%, this leaves us with some 14% in
cash, but we have the market somewhat ahead of itself at this time, and we look
to put this cash to work at a more opportunity-laden juncture.
Respectfully,
John B. Neff, Managing Partner
Portfolio Manager
Charles T. Freeman, Senior Vice President
Assistant Portfolio Manager
Wellington Management Company
May 19, 1995
3
<PAGE> 4
TOTAL INVESTMENT RETURN TABLE
The following table illustrates the results of a single-share investment in
VANGUARD/WINDSOR FUND for the 25-year period ended April 30, 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*
- ------------------------------------------------------------------------------------------------------------------------------------
Value with Income Windsor Fund
------------------------------
Year Ended Net Asset Capital Gains Income Dividends & Capital Capital Income Total S&P 500 Index
December 31 Value Distributions Dividends Gains Reinvested Return Return Return Total Return
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1971 $ 9.34 $ .50 $.29 $ 10.19 + 4.3% +3.2% + 7.5% +14.2%
- ------------------------------------------------------------------------------------------------------------------------------------
1972 9.39 .57 .29 11.23 + 6.9 +3.3 +10.2 +19.0
- ------------------------------------------------------------------------------------------------------------------------------------
1973 6.64 .14 .32 8.42 -28.0 +3.0 -25.0 -14.7
- ------------------------------------------------------------------------------------------------------------------------------------
1974 5.25 -- .31 7.00 -20.9 +4.1 -16.8 -26.3
- ------------------------------------------------------------------------------------------------------------------------------------
1975 7.77 -- .32 10.82 +48.0 +6.5 +54.5 +37.1
- ------------------------------------------------------------------------------------------------------------------------------------
1976 10.68 .22 .38 15.84 +40.7 +5.7 +46.4 +23.8
- ------------------------------------------------------------------------------------------------------------------------------------
1977 9.77 .56 .40 16.00 - 3.0 +4.0 + 1.0 - 7.2
- ------------------------------------------------------------------------------------------------------------------------------------
1978 9.12 1.01 .48 17.40 + 3.8 +5.0 + 8.8 + 6.5
- ------------------------------------------------------------------------------------------------------------------------------------
1979 9.72 .85 .53 21.33 +16.4 +6.2 +22.6 +18.4
- ------------------------------------------------------------------------------------------------------------------------------------
1980 10.42 .79 .59 26.15 +15.7 +6.9 +22.6 +32.4
- ------------------------------------------------------------------------------------------------------------------------------------
1981 9.92 1.49 .69 30.53 + 9.9 +6.9 +16.8 - 4.9
- ------------------------------------------------------------------------------------------------------------------------------------
1982 10.36 .99 .62 37.16 +14.8 +6.9 +21.7 +21.5
- ------------------------------------------------------------------------------------------------------------------------------------
1983 11.69 1.03 .70 48.34 +23.0 +7.1 +30.1 +22.5
- ------------------------------------------------------------------------------------------------------------------------------------
1984 12.64 .48 .76 57.75 +12.4 +7.1 +19.5 + 6.2
- ------------------------------------------------------------------------------------------------------------------------------------
1985 14.50 .74 .79 73.93 +21.1 +6.9 +28.0 +31.6
- ------------------------------------------------------------------------------------------------------------------------------------
1986 13.95 2.59 .85 88.92 +14.3 +6.0 +20.3 +18.6
- ------------------------------------------------------------------------------------------------------------------------------------
1987 11.11 2.21 .87 90.01 - 4.7 +5.9 + 1.2 + 5.2
- ------------------------------------------------------------------------------------------------------------------------------------
1988 13.07 .55 .63 115.85 +22.6 +6.1 +28.7 +16.5
- ------------------------------------------------------------------------------------------------------------------------------------
1989 13.41 .85 .75 133.25 + 9.2 +5.8 +15.0 +31.6
- ------------------------------------------------------------------------------------------------------------------------------------
1990 10.30 .32 .74 112.60 -20.8 +5.3 -15.5 - 3.1
- ------------------------------------------------------------------------------------------------------------------------------------
1991 11.72 .84 .57 144.74 +22.7 +5.9 +28.6 +30.4
- ------------------------------------------------------------------------------------------------------------------------------------
1992 12.74 .38 .49 168.62 +12.0 +4.5 +16.5 + 7.6
- ------------------------------------------------------------------------------------------------------------------------------------
1993 13.91 .89 .37 201.29 +16.3 +3.1 +19.4 +10.1
- ------------------------------------------------------------------------------------------------------------------------------------
1994 12.59 .86 .44 200.98 - 3.3 +3.2 - 0.1 + 1.3
- ------------------------------------------------------------------------------------------------------------------------------------
1995 (4/30) 14.17 -- -- 226.19 +12.5 0.0 +12.5 +13.0
- ------------------------------------------------------------------------------------------------------------------------------------
CUMULATIVE TOTAL +2,286.0% +1,358.3%
- ------------------------------------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL RATE OF RETURN +13.9% +11.6%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Includes reinvestment of income dividends and any capital gains distributions
both for the Fund and the Index.
Note: The net asset value was $9.48 on December 31, 1970, the beginning of the
period illustrated. No adjustment has been made for income taxes payable by
shareholders on reinvested income dividends and capital gains distributions.
4
<PAGE> 5
FINANCIAL STATEMENTS
(unaudited)
April 30, 1995
STATEMENT OF NET ASSETS
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- -----------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (87.1%)
- -----------------------------------------------------------------------------
BASIC MATERIALS (10.8%)
- -----------------------------------------------------------------------------
CHEMICALS (1.6%)
Bayer AG ADR 790,000 $ 19,355
(1) Freeport McMoRan Resource
Partners LP 5,798,300 94,947
Lyondell Petrochemical Co. 3,170,000 78,854
METALS & MINING (5.0%)
(2) Aluminum Co. of America 6,839,400 306,918
(1) Reynolds Metals Co. 5,441,500 274,116
STEEL (4.2%)
* (1) AK Steel Holding Corp. 1,900,000 51,063
* (1) Bethlehem Steel Corp. 10,640,600 150,298
* Geneva Steel Class A 1,525,200 16,587
(1) Inland Steel Industries, Inc. 2,633,000 66,812
* (1) LTV Corp. 7,800,000 111,150
* (1) National Steel Corp. Class B 2,094,500 26,705
Rouge Steel Co. Class A 1,470,500 32,902
* (1) WHX Corp. 1,601,200 17,213
* (1) Weirton Steel 3,063,600 22,594
---------
GROUP TOTAL 1,269,514
---------
- -----------------------------------------------------------------------------
CAPITAL GOODS & CONSTRUCTION (2.3%)
- -----------------------------------------------------------------------------
* Beazer Homes USA, Inc. 190,000 2,708
(1) Continental Homes
Holding Corp. 688,500 7,918
MDC Holdings, Inc. 498,600 2,618
* National Gypsum Co. 110,900 5,406
* (1) Owens-Corning Fiberglas Corp. 4,373,100 160,165
(1) Pulte Corp. 1,800,000 38,925
(1) Ryland Group, Inc. 935,200 13,677
(1) Standard Pacific Corp. 1,750,000 10,281
* (1) Toll Brothers, Inc. 2,200,000 26,125
* USG Corp. 255,000 6,024
---------
GROUP TOTAL 273,847
---------
- -----------------------------------------------------------------------------
CONSUMER CYCLICAL (14.1%)
- -----------------------------------------------------------------------------
APPAREL & TEXTILES (.8%)
* (1) Burlington Industries 6,700,000 73,700
* (1) Cone Mills Corp. 1,900,000 21,612
AUTO & TRUCK MANUFACTURING (10.7%)
(2) Chrysler Corp. 14,785,200 637,612
(2) Ford Motor Co. 22,754,700 614,377
RETAIL (2.6%)
* Burlington Coat Factory
Warehouse Corp. 1,403,000 15,082
(1) Circuit City Stores, Inc. 5,010,100 129,636
* Federated Department Stores 539,715 11,401
* Federated Department Stores
Warrants Exp. 12/19/99 359,501 1,618
* Federated Department Stores
Warrants Exp. 12/1/01 359,501 1,798
Kmart Corp. 6,376,800 88,478
Sears, Roebuck & Co. 1,039,000 56,366
---------
GROUP TOTAL 1,651,680
---------
- -----------------------------------------------------------------------------
ENERGY (16.9%)
- -----------------------------------------------------------------------------
Amerada Hess Corp. 600,000 30,375
(2) Atlantic Richfield Co. 4,919,000 563,226
(1)(2) Burlington Resources, Inc. 9,841,900 385,064
(1) Cabot Oil & Gas Corp. 1,325,000 20,537
(1) ENSERCH Corp. 6,603,300 113,907
* (1) Oryx Energy Co. 6,533,000 89,829
(1) Pennzoil Co. 3,490,100 170,579
Phillips Petroleum Co. 266,700 9,335
Plains Petroleum Co. 51,000 1,192
(1)(2) USX-Marathon Group 24,027,200 450,510
Ultramar Corp. 1,753,200 45,802
(1) Valero Energy Corp. 4,255,500 92,025
---------
GROUP TOTAL 1,972,381
---------
- -----------------------------------------------------------------------------
FINANCIAL (34.8%)
- -----------------------------------------------------------------------------
BANKS (19.6%)
Bancorp Hawaii, Inc. 123,200 3,465
BankAmerica Corp. 5,183,853 256,601
(1) Bankers Trust New York Corp. 4,701,219 255,041
Chemical Banking Corp. 6,009,900 250,913
(2) Citicorp 15,971,200 740,664
First Tennessee National Corp. 70,800 2,974
(2) First Union Corp. 8,448,800 382,308
KeyCorp 6,272,923 167,801
NationsBank, Inc. 4,837,900 241,895
INSURANCE COMPANIES (8.1%)
(1)(2) Aetna Life & Casualty Co. 5,890,486 335,758
Allstate Corp. 6,230,800 189,261
(1)(2) CIGNA Corp. 5,835,500 423,803
SAVINGS & LOANS (7.1%)
(1) H.F. Ahmanson & Co. 10,859,145 228,042
Bay View Capital Corp. 134,900 3,271
* (1) Coast Savings Financial, Inc. 1,131,600 23,481
(1) Golden West Financial Corp. 6,222,400 284,675
(1) Great Western Financial Corp. 13,428,496 283,677
(1) SFFED Corp. 401,500 7,277
---------
GROUP TOTAL 4,080,907
---------
- -----------------------------------------------------------------------------
TECHNOLOGY (3.1%)
- -----------------------------------------------------------------------------
COMPUTER RELATED (1.6%)
* Conner Peripherals, Inc. 1,000,000 10,625
* (1) Seagate Technology 5,530,800 176,294
</TABLE>
5
<PAGE> 6
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- -----------------------------------------------------------------------------
<S> <C> <C>
ELECTRONICS (1.5%)
Advanced Micro Devices, Inc. 2,710,400 $ 97,575
* (1) Western Digital Corp. 4,658,000 74,528
---------
GROUP TOTAL 359,022
---------
- -----------------------------------------------------------------------------
TRANSPORT & SERVICES (2.5%)
- -----------------------------------------------------------------------------
AIRLINES (2.4%)
* AMR Corp. 464,200 31,275
Delta Air Lines, Inc. 2,502,400 163,594
* (1) UAL Corp. 625,100 75,012
TRUCKING & SHIPPING (.1%)
(1) Maritrans Inc. 954,000 6,082
Sea Containers Ltd. Class A 738,600 11,264
---------
GROUP TOTAL 287,227
---------
- -----------------------------------------------------------------------------
UTILITIES (2.6%)
- -----------------------------------------------------------------------------
* (1) El Paso Electric Co. 2,271,900 3,124
Telefonica de Espana ADR 164,900 6,060
(1) Unicom Corp. 11,221,499 294,564
---------
GROUP TOTAL 303,748
---------
- -----------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost $8,964,114) 10,198,326
- -----------------------------------------------------------------------------
CONVERTIBLE PREFERRED STOCK
- -----------------------------------------------------------------------------
Bethlehem Steel Corp. $5.00
(Cost $6,414) 123,900 6,257
- -----------------------------------------------------------------------------
U.S. GOVERNMENT OBLIGATIONS (6.8%)
- -----------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Face
Amount
(000)
--------
<S> <C> <C>
U.S. TREASURY BONDS (5.0%)
10.375%, 11/15/12
(first call 11/15/07) $240,000 298,949
12.00%, 8/15/13
(first call 8/15/08) 205,000 285,110
---------
GROUP TOTAL 584,059
---------
- -----------------------------------------------------------------------------
U.S. TREASURY NOTE (1.8%)
7.25%, 11/15/96 204,500 206,737
---------
- -----------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT OBLIGATIONS
(Cost $778,630) 790,796
- -----------------------------------------------------------------------------
TEMPORARY CASH INVESTMENTS (5.0%)
- -----------------------------------------------------------------------------
COMMERCIAL PAPER (2.7%)
Abbott Laboratories
5.95%, 5/22/95 10,000 9,965
Chevron Oil Finance Corp.
5.92%, 5/10/95 50,000 49,926
5.93%, 5/16/95 50,000 49,860
</TABLE>
<TABLE>
<CAPTION>
Face Market
Amount Value
(000) (000)+
- -----------------------------------------------------------------------------
<S> <C> <C>
Emerson Electric Co.
5.92%, 5/11/95 $ 50,000 $ 49,918
General Electric Capital Corp.
5.95%, 5/30/95 50,000 49,760
McDonald's Corp.
5.93%, 5/11/95 32,500 32,446
Prudential Funding Corp.
5.95%, 5/25/95 50,000 49,802
5.95%, 5/31/95 25,000 24,876
---------
GROUP TOTAL 316,553
---------
- -----------------------------------------------------------------------------
REPURCHASE AGREEMENT (2.3%)
Collateralized by U.S.
Government Obligations in
a Pooled Cash Account
5.93%, 5/1/95 268,849 268,849
- -----------------------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(Cost $585,402) 585,402
- -----------------------------------------------------------------------------
TOTAL INVESTMENTS (98.9%)
(Cost $10,334,560) 11,580,781
- -----------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (1.1%)
- -----------------------------------------------------------------------------
Other Assets--Notes C and E 212,891
Liabilities--Note E (79,890)
---------
133,001
- -----------------------------------------------------------------------------
NET ASSETS (100%)
- -----------------------------------------------------------------------------
Applicable to 826,507,358
outstanding $.01 par value shares
(authorized 1,000,000,000 shares) $11,713,782
- -----------------------------------------------------------------------------
NET ASSET VALUE PER SHARE $14.17
=============================================================================
</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 41.3% of net assets.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
AT APRIL 30, 1995, NET ASSETS CONSISTED OF:
- -----------------------------------------------------------------------------
Amount Per
(000) Share
----------- -----
<S> <C> <C>
Paid in Capital $10,143,477 $12.27
Undistributed Net
Investment Income 110,533 .13
Accumulated Net
Realized Gains 213,551 .26
Unrealized Appreciation
of Investments--Note D 1,246,221 1.51
- -----------------------------------------------------------------------------
NET ASSETS $11,713,782 $14.17
- -----------------------------------------------------------------------------
</TABLE>
6
<PAGE> 7
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Six Months Ended
April 30, 1995
(000)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT INCOME
INCOME
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $163,324
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41,187
- --------------------------------------------------------------------------------------------------------------------
Total Income . . . . . . . . . . . . . . . . . . . . . . . . 204,511
- --------------------------------------------------------------------------------------------------------------------
EXPENSES
Investment Advisory Fee--Note B
Basic Fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,804
Performance Adjustment . . . . . . . . . . . . . . . . . . . . . . 3,727 12,531
--------
The Vanguard Group--Note C
Management and Administrative . . . . . . . . . . . . . . . . . . 10,046
Marketing and Distribution . . . . . . . . . . . . . . . . . . . . 862 10,908
--------
Taxes (other than income taxes) . . . . . . . . . . . . . . . . . . . 439
Custodian's Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Auditing Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Shareholders Reports . . . . . . . . . . . . . . . . . . . . . . . . 153
Annual Meeting and Proxy Costs . . . . . . . . . . . . . . . . . . . . 52
Directors Fees and Expenses . . . . . . . . . . . . . . . . . . . . . 19
- --------------------------------------------------------------------------------------------------------------------
Total Expenses . . . . . . . . . . . . . . . . . . . . . . . 24,119
- --------------------------------------------------------------------------------------------------------------------
Net Investment Income . . . . . . . . . . . . . . . . . 180,392
- --------------------------------------------------------------------------------------------------------------------
REALIZED NET GAIN ON INVESTMENT
SECURITIES SOLD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 211,454
- --------------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION) OF INVESTMENT SECURITIES . . . . . . . . . . . . . . . . . 255,298
- --------------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from Operations. . . $647,144
====================================================================================================================
</TABLE>
7
<PAGE> 8
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SIX MONTHS ENDED Year Ended
APRIL 30, 1995 October 31, 1994
(000) (000)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net Investment Income . . . . . . . . . . . . . . . . . . . . . . . . $ 180,392 $ 340,128
Realized Net Gain . . . . . . . . . . . . . . . . . . . . . . . . . 211,454 676,522
Change in Unrealized Appreciation (Depreciation) . . . . . . . . . . . 255,298 (338,197)
- --------------------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from Operations . . . . . 647,144 678,453
- --------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS (1)
Net Investment Income . . . . . . . . . . . . . . . . . . . . . . . . (187,934) (274,533)
Realized Net Gain . . . . . . . . . . . . . . . . . . . . . . . . . (673,431) (629,907)
- --------------------------------------------------------------------------------------------------------------------------
Total Distributions . . . . . . . . . . . . . . . . . . . . . . (861,365) (904,440)
- --------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (2)
Issued --Regular . . . . . . . . . . . . . . . . . . . . . 514,616 1,036,121
--In Lieu of Cash Distributions . . . . . . . . . . 821,538 859,055
--Exchange . . . . . . . . . . . . . . . . . . . . 103,971 319,619
Redeemed --Regular . . . . . . . . . . . . . . . . . . . . . (706,536) (896,047)
--Exchange . . . . . . . . . . . . . . . . . . . . (211,891) (223,720)
- --------------------------------------------------------------------------------------------------------------------------
Net Increase from Capital Share Transactions . . . . . . . . . 521,698 1,095,028
- --------------------------------------------------------------------------------------------------------------------------
Total Increase . . . . . . . . . . . . . . . . . . . . . . . . 307,477 869,041
- --------------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Period . . . . . . . . . . . . . . . . . . . . . . . . . 11,406,305 10,537,264
- --------------------------------------------------------------------------------------------------------------------------
End of Period (3) . . . . . . . . . . . . . . . . . . . . . . . . . $11,713,782 $11,406,305
==========================================================================================================================
(1) Distributions Per Share
Net Investment Income . . . . . . . . . . . . . . . . . . . . $.24 $.37
Realized Net Gain . . . . . . . . . . . . . . . . . . . . . . $.86 $.89
- --------------------------------------------------------------------------------------------------------------------------
(2) Shares Issued and Redeemed
Issued. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46,313 95,222
Issued in Lieu of Cash Distributions . . . . . . . . . . . . . 65,566 62,430
Redeemed. . . . . . . . . . . . . . . . . . . . . . . . . . . . (69,108) (78,940)
- --------------------------------------------------------------------------------------------------------------------------
42,771 78,712
- --------------------------------------------------------------------------------------------------------------------------
(3) Undistributed Net Investment Income . . . . . . . . . . . . . $ 110,533 $ 118,075
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
8
<PAGE> 9
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Year Ended October 31,
SIX MONTHS ENDED -------------------------------------------------------
For a Share Outstanding Throughout Each Period APRIL 30, 1995 1994 1993 1992 1991 1990
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD . . . . . . . . . . $14.55 $14.95 $12.37 $12.79 $ 9.72 $15.17
------- ------- ------- ------- ------- -------
INVESTMENT OPERATIONS
Net Investment Income . . . . . . . . . . . . . . . . .22 .44 .37 .49 .58 .74
Net Realized and Unrealized Gain
(Loss) on Investments . . . . . . . . . . . . . . .50 .42 2.98 .50 3.55 (4.59)
------- ------- ------- ------- ------- -------
TOTAL FROM INVESTMENT OPERATIONS . . . . . . . .72 .86 3.35 .99 4.13 (3.85)
- --------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income . . . . . . . . (.24) (.37) (.39) (.57) (.74) (.75)
Distributions from Realized Capital Gains . . . . . . (.86) (.89) (.38) (.84) (.32) (.85)
------- ------- ------- ------- ------- -------
TOTAL DISTRIBUTIONS . . . . . . . . . . . . . (1.10) (1.26) (.77) (1.41) (1.06) (1.60)
- --------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD . . . . . . . . . . . . . $14.17 $14.55 $14.95 $12.37 $12.79 $9.72
================================================================================================================================
TOTAL RETURN . . . . . . . . . . . . . . . . . . . . . . +5.94% +6.35% +28.29% +9.30% +44.69% -27.93%
- --------------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net Assets, End of Period (Millions) . . . . . . . . . . $11,714 $11,406 $10,537 $8,250 $7,859 $5,841
Ratio of Expenses to Average Net Assets . . . . . . . . . .43%* .45% .40% .26% .30% .37%
Ratio of Net Investment Income to
Average Net Assets . . . . . . . . . . . . . . . . . 3.24%* 3.11% 2.68% 3.89% 4.84% 5.82%
Portfolio Turnover Rate . . . . . . . . . . . . . . . . . 21%* 34% 25% 32% 36% 21%
- --------------------------------------------------------------------------------------------------------------------------------
*Annualized.
</TABLE>
9
<PAGE> 10
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: Common stocks 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; such securities not traded are
valued at the mean of the latest quoted bid and asked prices; those
securities not listed are valued at the latest quoted bid prices. Bonds 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. 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 the Fund's custodian bank
until maturity of each repurchase agreement. Provisions of the agreement
ensure that the market value of the collateral is sufficient in the event of
default; however, in the event of default or bankruptcy by the other party
to the agreement, realization and/or retention of the collateral may be
subject to legal proceedings.
4. 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. 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 six months ended April 30, 1995, the investment
advisory fee represented an effective annual rate of .16 of 1% of Fund average
net assets before an increase of $3,727,000 (.07 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 April 30, 1995, the Fund had contributed capital of $1,628,000 to
Vanguard (included in Other Assets), representing 8.1% 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
10
<PAGE> 11
used solely to reduce the Fund's administrative expenses. For the six months
ended April 30, 1995, directed brokerage arrangements reduced the Fund s
expenses by $831,000 (an annual rate of .02 of 1% of average net assets).
D. During the six months ended April 30, 1995, the Fund made purchases of
$1,107,968,000 and sales of $1,408,156,978 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 $522,780,000, respectively.
At April 30, 1995, unrealized appreciation for financial reporting and Federal
income tax purposes aggregated $1,246,221,000, of which $1,696,850,000 related
to appreciated securities and $450,629,000 related to depreciated securities.
E. The market value of securities on loan to broker/dealers at April 30, 1995,
was $5,769,000, for which the Fund had received cash collateral of $6,182,000.
11
<PAGE> 12
THE VANGUARD FAMILY OF FUNDS
FIXED INCOME FUNDS
MONEY MARKET FUNDS
Vanguard Admiral Funds
U.S. Treasury Money
Market Portfolio
Vanguard Money Market Reserves
TAX-EXEMPT MONEY MARKET FUNDS
Vanguard Municipal Bond Fund
Money Market Portfolio
Vanguard State Tax-Free Funds
Money Market Portfolios
(CA, NJ, OH, PA)
TAX-EXEMPT INCOME FUNDS
Vanguard Municipal Bond Fund
Vanguard State Tax-Free Funds
Insured Longer-Term Portfolios
(CA, FL, NJ, NY, OH, PA)
INCOME FUNDS
Vanguard Admiral Funds
Vanguard Fixed Income Securities Fund
Vanguard Preferred Stock Fund
EQUITY AND BALANCED FUNDS
GROWTH AND INCOME FUNDS
Vanguard Convertible
Securities Fund
Vanguard Equity Income Fund
Vanguard Quantitative Portfolios
Vanguard/Trustees' Equity Fund
U.S. Portfolio
Vanguard/Windsor Fund
Vanguard/Windsor II
BALANCED FUNDS
Vanguard Asset Allocation Fund
Vanguard LifeStrategy Funds
Income Portfolio
Conservative Growth Portfolio
Moderate Growth Portfolio
Growth Portfolio
Vanguard STAR Fund
Vanguard/Wellesley Income Fund
Vanguard/Wellington Fund
GROWTH FUNDS
Vanguard/Morgan Growth Fund
Vanguard/PRIMECAP Fund
Vanguard U.S. Growth Portfolio
AGGRESSIVE GROWTH FUNDS
Vanguard Explorer Fund
Vanguard Specialized Portfolios
INTERNATIONAL FUNDS
Vanguard International
Growth Portfolio
Vanguard/Trustees' Equity Fund
International Portfolio
INDEX FUNDS
Vanguard Index Trust
Total Stock Market Portfolio
500 Portfolio
Extended Market Portfolio
Growth Portfolio
Value Portfolio
Small Capitalization Stock Portfolio
Vanguard International Equity
Index Fund
European Portfolio
Pacific Portfolio
Emerging Markets Portfolio
Vanguard Bond Index Fund
Vanguard Tax-Managed Fund
Vanguard Balanced Index Fund
[THE VANGUARD GROUP LOGO]
<TABLE>
<S> <C>
Vanguard Financial Center Valley Forge, Pennsylvania 19482
New Account Information: 1-(800) 662-7447 Shareholder Account Services: 1-(800) 662-2739
</TABLE>
This Report has been prepared for shareholders and may be distributed to others
only if preceded or accompanied by a current prospectus. All Funds in the
Vanguard Family are offered by prospectus only.
Q732-4/95
[VANGUARD WINDSOR FUND LOGO]
SEMI-ANNUAL REPORT
APRIL 30, 1995
<PAGE> 13
CHAIRMAN'S LETTER
FELLOW SHAREHOLDER:
During the first half of Windsor II's 1995 fiscal year, which ended on April
30, the stock market surged. In this period your Fund provided a good return,
albeit one that fell slightly short of the market's return.
The table below compares Windsor II's total return (capital change plus
income) with that of the unmanaged Standard & Poor's 500 Composite Stock Price
Index, the basic standard we use to measure our relative performance, and a
good measure of the returns achieved by blue-chip corporations with very large
market capitalizations.
<TABLE>
<CAPTION>
- -------------------------------------------------------
Total Return
----------------
Six Months Ended
April 30, 1995
- -------------------------------------------------------
<S> <C>
Windsor II + 9.1%
- -------------------------------------------------------
Standard & Poor's 500 Stock Index +10.5%
- -------------------------------------------------------
</TABLE>
The Fund's return is based on net asset values of $17.33 per share on October
31, 1994, and $17.98 on April 30, 1995, with the latter figure adjusted to take
into account the reinvestment of a semi-annual dividend totaling $.35 per share
from net investment income and a distribution of $.47 per share from net
realized capital gains. Both payments were the result of our operations during
1994 and were made at the end of December.
THE PERIOD IN REVIEW
During the first three months of the semi-annual period, the stock market, on
balance, went nowhere. It then sprung to life during the second quarter,
engendering a solid gain for the full period, as reflected in the table above.
As usual, there were many opinions as to the source of the market's
strength. From my view, it resulted from a combination of: (1) the sharp
decline in interest rates (the yield on the long-term U.S. Treasury bond fell
from 8.1% to 7.3%, or 80 basis points); (2) the apparently diminishing threat
of additional increases in short-term interest rates by the Federal Reserve
Board; (3) a slight softening in U.S. economic growth, resulting in continued
optimism about the outlook for inflation; (4) record-breaking corporate
profits; and (5) a hint of speculative fever in the equity market. Whatever the
case, the strong equity market resulted in a solid gain of +10.5% for the
Standard & Poor's 500 Index.
Windsor II's gain of +9.1%, a bit short of the gain in the Index, should be
viewed in the context of the Fund's better-than-Index returns over the past
three years. During the past six months, the Index has performed splendidly, as
the market's gain was led by large blue-chip stocks. In fact, the Index
outpaced fully 91% of the general equity mutual funds during the period, as the
large blue-chip stocks it comprises achieved greatly superior returns relative
to the smaller and often riskier stocks that find their way into the portfolios
of many mutual funds.
Our slight shortfall to the Index is explained largely by our modest
exposure to the technology group (2% of the Fund's net assets versus a 10%
Index weight). This sector continued to lead the market, with a gain of +22.7%
versus +9.3% for the remaining stocks in the Index during the six-month period.
Our policy bias toward stocks with higher yields basically limits our exposure
to these low-yielding stocks. The remainder of our performance differential is
explained by small shortfalls of individual stocks in several other industry
groups. Relative to other equity mutual funds, our choice of industry sectors
and individual stocks was superior, and proved sufficient to earn us a nice
margin of +2.6 percentage points of excess return. The average equity fund
turned in a gain of +6.5% for the period.
I hardly need remind you that, for better (relative to our peers) or for
worse (relative to the Index), six months is a grossly inadequate period in
which to evaluate the returns of any mutual fund. Windsor II will complete its
first decade of operations on June 24, 1995, and we are perfectly prepared to
have you base your judgment on our lifetime record.
(continued)
1
<PAGE> 14
Our motto is "stay the course." The Fund follows that maxim, with our
traditional emphasis on equities that our portfolio managers believe represent
fundamental values. Shareholders, too, should follow that maxim, accepting both
market risk and the risk that a strategy based on fundamental value rather than
growth may from time to time fail to fully measure up. I look forward to
reporting to you in our Annual Report six months hence.
Sincerely,
/s/ JOHN C. BOGLE
- ------------------------
John C. Bogle
Chairman of the Board
May 15, 1995
Note: Mutual fund data from Lipper Analytical Services, Inc.
AVERAGE ANNUAL TOTAL RETURNS--THE AVERAGE ANNUAL TOTAL RETURNS FOR THE FUND
(PERIODS ENDED MARCH 31, 1995) ARE AS FOLLOWS:
<TABLE>
<CAPTION>
SINCE INCEPTION
-------------------------------
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 +13.65% +10.86% +13.24% +8.90% +4.34%
</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.
2
<PAGE> 15
REPORT FROM BARROW, HANLEY, MEWHINNEY & STRAUSS, INC.
The first half of fiscal year 1995 was favorable in the absolute for Windsor
II, but relative to the S&P 500 Index we lagged, as did most value funds.
Technology and consumer staples were market leading sectors, but we were
underweighted in these areas since many such stocks do not have the
characteristics we seek in our portfolio holdings. The underperformance of the
energy sector for the first four months of the period did not help. We see
things changing so that our Fund should catch up in the second half of the
fiscal year.
MARKET PERSPECTIVE
It is said that bull markets climb a wall of worry . . . this is the wall!
Indeed, 1995 began with most "market pundits" bearish. For more than a year,
the Federal Reserve had been restrictive. Interest rates were high and yet had
no effect on a too-strong economy. The goal of the Fed was a "soft landing,"
something which seldom, if ever, has been engineered by any central bank. Could
inflationary pressures be released without the usual pain of a credit and
economic cycle?
Add to this concern the growing crisis in Mexico, with a currency depressed
40% and an untested political leadership. To the north, Canada's currency has
been under pressure because of fears of a separatist movement. The U.S. dollar
seemed fairly valued when, due to a basic oversupply and serious economic
problems in Japan, it fell as if it were a third world currency. In this
environment, the U.S. equity market has achieved new heights! Even though none
of the concerns of the past six months are any closer to resolution, many of
those same market pundits are now bullish.
As interest rates have fallen and the economy has slowed, earnings have
been above expectations, and price--earnings multiples are low. The equity
market has gone through several rotations: from cyclicals to non-cyclicals, out
of and into financials, into and out of oils. All of this movement has made it
difficult to best the averages. Funds which had significant cash reserves have
been penalized because of the magnitude of the market's advance.
As the year goes on, we may well see how this new monetary management
affects inflation and economics. We will see whether the new low value of the
dollar will slow the trade deficit with Japan, and we will see how stock
returns fare in the second half of the fiscal year.
PORTFOLIO COMMENTS
The Fund has cash reserves only slightly above what is deemed necessary for
liquidity. We have a balanced exposure with some special emphasis on bank,
insurance, petroleum, retail, and drug stocks. The utility area is relatively
light, as we are concerned about prices holding up as deregulation occurs. As
the economy slows, we believe the earnings momentum in low P/E stocks will
allow these issues to perform well when the equity market slows down.
Respectfully,
Barrow, Hanley, Mewhinney & Strauss, Inc.
May 16, 1995
3
<PAGE> 16
TOTAL INVESTMENT RETURN TABLE
The following table illustrates the results of a single-share investment in
VANGUARD/WINDSOR II since inception through April 30, 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 Index Total
December 31 Value Distributions Dividends Gains Reinvested Return Return Return Return
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <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 (4/30) 17.98 -- -- 34.85 +13.7 0.0 +13.7 +13.0
- --------------------------------------------------------------------------------------------------------------------------
LIFETIME +248.5% +273.5%
- --------------------------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL
RATE OF RETURN +13.5% +14.3%
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Includes reinvestment of income dividends and any capital gains distributions
both for 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.
4
<PAGE> 17
FINANCIAL STATEMENTS
(unaudited)
April 30, 1995
STATEMENT OF NET ASSETS
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- -----------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (91.6%)
- -----------------------------------------------------------------------
BASIC MATERIALS (4.4%)
Bowater, Inc. 55,900 $ 2,138
Champion International Corp. 47,100 2,072
Cyprus Amax 111,100 3,097
* Cytec Industries, Inc. 10,714 390
Dow Chemical Co. 546,300 37,968
E.I. du Pont de Nemours & Co. 151,500 9,980
Eastman Chemical 2,811,500 159,552
* FMC Corp. 53,400 3,277
Georgia Gulf Corp. 80,600 2,630
Georgia-Pacific Corp. 27,600 2,191
The BF Goodrich Co. 757,200 35,304
W.R. Grace & Co. 870,000 46,654
M.A. Hanna Co. 43,300 1,077
International Paper Co. 456,300 35,135
* LTV Corp. 167,500 2,387
* Magma Copper Co. Class B 155,800 2,610
Phelps Dodge Corp. 53,900 3,052
Union Carbide Corp. 37,900 1,213
Weyerhaeuser Co. 70,200 2,948
Witco Chemical Corp. 1,523,100 43,599
-----------
GROUP TOTAL 397,274
-----------
- -----------------------------------------------------------------------
CAPITAL GOODS & CONSTRUCTION (5.6%)
Cooper Industries, Inc. 64,700 2,523
Deere & Co. 53,600 4,395
GATX Corp. 37,400 1,683
General Electric Co. 1,187,600 66,506
Honeywell, Inc. 2,338,100 90,309
Johnson Controls, Inc. 36,200 1,964
Lockheed Martin Corp. 24,300 1,403
McDonnell Douglas Corp. 78,900 4,892
Parker Hannifin Corp. 58,800 3,058
Raytheon Co. 2,552,900 185,723
The Timkin Co. 28,400 1,147
Tyco International Ltd. 50,000 2,625
Westinghouse Electric Corp. 8,824,400 132,366
-----------
GROUP TOTAL 498,594
-----------
- -----------------------------------------------------------------------
CONSUMER CYCLICAL (14.6%)
Brunswick Corp. 3,839,200 82,063
CBS, Inc. 544,595 34,922
Capital Cities/ABC, Inc. 1,063,400 89,857
Chrysler Corp. 31,000 1,337
Dayton-Hudson Corp. 57,200 3,840
Dow Jones & Co., Inc. 164,800 5,768
The Dun & Bradstreet Corp. 553,800 28,867
Eastman Kodak Co. 3,073,600 176,732
Fleetwood Enterprises, Inc. 12,300 283
Ford Motor Co. 7,204,600 194,524
Gannett Co., Inc. 1,329,300 69,954
General Motors Corp. 1,892,800 85,413
Kmart Corp. 9,891,600 137,246
May Department Stores Co. 329,700 11,952
* Maytag Corp. 178,200 3,074
National Service Industries, Inc. 95,900 2,709
J.C. Penney Co., Inc. 3,294,700 144,143
(1)Sears, Roebuck & Co. 4,222,500 229,071
Whirlpool Corp. 22,600 1,237
-----------
GROUP TOTAL 1,302,992
-----------
- -----------------------------------------------------------------------
CONSUMER STAPLES (10.1%)
American Brands, Inc. 26,700 1,081
American Stores Co. 200,800 5,145
(1)Anheuser-Busch Co., Inc. 5,496,500 319,484
Archer-Daniels-Midland Co. 245,900 4,488
Ball Corp. 100,800 3,452
Brown-Forman Corp. Class B 49,200 1,624
H.J. Heinz Co. 1,706,500 71,673
Hormel Foods Corp. 45,500 1,246
IBP, Inc. 42,200 1,561
Kellogg Co. 364,700 23,158
PepsiCo, Inc. 2,905,200 120,929
(1)Philip Morris Cos., Inc. 3,018,000 204,470
RJR Nabisco Holdings Corp. 4,697,820 128,603
Riverwood International Corp. 4,600 106
Sara Lee Corp. 514,700 14,347
-----------
GROUP TOTAL 901,367
-----------
- -----------------------------------------------------------------------
ENERGY (16.2%)
Amoco Corp. 3,033,600 199,080
Ashland Inc. 79,600 2,945
Atlantic Richfield Co. 78,600 9,000
Baker Hughes, Inc. 10,700 241
Chevron Corp. 650,000 30,794
Coastal Corp. 64,100 1,907
(1)Exxon Corp. 3,041,500 211,764
Halliburton Co. 3,177,400 121,933
Kerr-McGee Corp. 75,000 3,891
Mobil Corp. 596,700 56,612
Occidental Petroleum Corp. 269,000 6,187
Panhandle Eastern Corp. 5,681,118 136,347
Phillips Petroleum Co. 5,313,400 185,969
Royal Dutch
Petroleum Co. ADR 275,400 34,149
Schlumberger Ltd. 2,966,900 186,544
Texaco, Inc. 2,678,000 183,108
USX-Marathon Group 4,408,900 82,667
-----------
GROUP TOTAL 1,453,138
-----------
- -----------------------------------------------------------------------
FINANCIAL (21.5%)
AT&T Capital Corp. 32,500 869
(1)Aetna Life & Casualty Co. 3,528,900 201,147
American Express Co. 5,444,608 189,200
</TABLE>
5
<PAGE> 18
STATEMENT OF NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- -----------------------------------------------------------------------
<S> <C> <C>
American General Corp. 66,100 $ 2,181
American International Group, Inc. 670,750 71,603
Aon Corp. 156,550 5,773
Bank of Boston Corp. 215,200 7,209
The Bank of New York Co., Inc. 140,200 4,609
BankAmerica Corp. 3,914,183 193,752
Bankers Trust New York Corp. 510,500 27,695
BayBanks, Inc. 19,400 1,208
(1)The Chase Manhattan Corp. 5,378,911 235,327
(1)Chemical Banking Corp. 5,297,716 221,180
The Chubb Corp. 43,300 3,464
CIGNA Corp. 17,800 1,293
* Citicorp 184,100 8,538
CoreStates Financial Corp. 56,685 1,849
Dean Witter Discover & Co. 65,900 2,793
A.G. Edwards & Sons, Inc. 64,400 1,473
Equity Residential Properties Trust 34,800 931
Exel Ltd. 2,001,100 91,050
Federal National Mortgage Assn. 1,081,900 95,478
First Bank System, Inc. 57,600 2,333
First Chicago Corp. 3,501,789 193,474
First Commerce Corp. 4,200 114
First Tennessee National Corp. 90,300 3,793
First Union Corp. 230,300 10,421
Fleet Financial Group, Inc. 156,300 5,119
GEICO Corp. 1,253,900 63,165
Health and Retirement
Properties Trust 72,900 1,093
Hibernia Corp. Class A 220,400 1,763
Household International, Inc. 31,700 1,486
Jefferson-Pilot Corp. 34,800 1,975
Kimco Realty Corp. 28,100 1,061
Leucadia National Corp. 18,800 841
Meditrust 34,000 1,037
Merrill Lynch & Co., Inc. 16,000 728
Midlantic Corp. 88,000 3,201
J.P. Morgan & Co., Inc. 300,000 19,688
Morgan Stanley Group, Inc. 19,100 1,327
NationsBank, Inc. 104,200 5,210
New Plan Realty Trust 52,000 1,079
Old Republic International Corp. 34,200 881
PaineWebber Group, Inc. 496,950 8,510
St. Paul Cos., Inc. 61,300 2,950
Star Banc Corp. 29,000 1,211
Student Loan Marketing Assn. 3,700 150
Transamerica Corp. 29,900 1,693
(1)Travelers Group Inc. 5,136,637 212,528
USF&G Corp. 194,200 2,864
Union Bank of San Francisco 23,100 895
-----------
GROUP TOTAL 1,919,212
-----------
- -----------------------------------------------------------------------
HEALTH CARE (8.7%)
Allergan, Inc. 2,287,450 $ 62,047
(1)American Home Products Corp. 2,779,700 214,384
Becton, Dickinson & Co. 67,300 3,752
(1)Bristol-Myers Squibb Co. 3,727,300 242,741
Johnson & Johnson 556,800 36,192
Eli Lilly & Co. 2,428,200 181,508
Warner-Lambert Co. 413,000 32,937
-----------
GROUP TOTAL 773,561
-----------
- -----------------------------------------------------------------------
TECHNOLOGY (2.3%)
Advanced Micro Devices, Inc. 23,000 828
Apple Computer, Inc. 27,600 1,052
Harris Corp. 67,000 3,149
Intel Corp. 391,200 40,049
International Business
Machines Corp. 196,400 18,609
* Seagate Technology 179,000 5,706
Tektronix, Inc. 27,500 1,251
Xerox Corp. 1,129,007 139,009
-----------
GROUP TOTAL 209,653
-----------
- -----------------------------------------------------------------------
TRANSPORT & SERVICES (.5%)
* AMR Corp. 48,600 3,274
Burlington Northern, Inc. 20,800 1,238
CSX Corp. 428,600 34,127
Delta Air Lines, Inc. 12,500 817
Norfolk Southern Corp. 21,900 1,476
* Northwest Airlines Corp. Class A 144,100 4,287
Ryder System, Inc. 51,600 1,206
Union Pacific Corp. 32,200 1,767
-----------
GROUP TOTAL 48,192
-----------
- -----------------------------------------------------------------------
UTILITIES (7.2%)
American Water Works Co., Inc. 49,700 1,435
Ameritech Corp. 169,100 7,610
Bell Atlantic Corp. 56,400 3,095
CMS Energy Corp. 133,200 3,113
Centerior Energy Corp. 132,900 1,179
Cincinnati Bell, Inc. 58,900 1,414
CINergy Corp. 65,700 1,651
* Columbia Gas Systems, Inc. 108,800 3,210
Consolidated Edison Co.
of New York, Inc. 73,900 2,051
Detroit Edison Co. 59,400 1,678
Entergy Corp. 6,847,400 148,931
FPL Group, Inc. 10,500 386
Frontier Corp. 193,000 3,884
General Public Utilities Corp. 873,300 24,889
Hawaiian Electric Industries Inc. 28,200 976
Long Island Lighting Co. 81,700 1,215
MCI Communications Corp. 1,410,000 30,491
</TABLE>
6
<PAGE> 19
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- -----------------------------------------------------------------------
<S> <C> <C>
MCN Corp. 142,100 $ 2,735
Midwest Resources Inc. 92,200 1,314
Montana Power Co. 26,500 613
New York State
Electric & Gas Corp. 63,500 1,389
Niagara Mohawk Power Corp. 92,400 1,282
Northeast Utilities 49,500 1,083
Northern States Power Co.
of Minnesota 32,400 1,434
NYNEX Corp. 44,300 1,811
Ohio Edison Co. 2,621,800 52,764
Oklahoma Gas & Electric Co. 131,700 4,527
Pacific Gas & Electric Co. 54,600 1,467
Pacific Telesis Group 5,645,000 174,289
Portland General Electric Co. 161,600 3,353
Potomac Electric Power Co. 54,300 1,059
Public Service Enterprise Group Inc. 76,500 2,104
Southern New England
Telecom Corp. 133,400 4,419
SBC Communications, Inc. 165,000 7,281
Unicom Corp. 4,162,300 109,260
U.S. West Corp. 874,000 36,162
Utilicorp United, Inc. 32,900 921
-----------
GROUP TOTAL 646,475
-----------
- -----------------------------------------------------------------------
MISCELLANEOUS (.5%)
Loews Corp. 26,500 2,700
Ogden Corp. 116,300 2,369
Tenneco, Inc. 774,000 35,507
Textron, Inc. 66,400 3,785
-----------
GROUP TOTAL 44,361
-----------
- -----------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost $6,785,282 ) 8,194,819
- -----------------------------------------------------------------------
CONVERTIBLE PREFERRED STOCK (.1%)
- -----------------------------------------------------------------------
RJR Nabisco Holdings Corp.
Class C $.6012
(Cost $11,376) 1,770,700 10,403
-----------
- -----------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- -----------------------------------------------------------------------
<S> <C> <C>
TEMPORARY CASH INVESTMENTS (7.4%)
- -----------------------------------------------------------------------
U.S. TREASURY BILL--Note E
5.77%, 6/22/95 $ 600 $ 595
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
5.93%, 5/1/95 662,172 662,172
- -----------------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(Cost $662,767) 662,767
- -----------------------------------------------------------------------
TOTAL INVESTMENTS (99.1%)
(Cost $7,459,425) 8,867,989
- -----------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (.9%)
Other Assets--Notes C and F 103,613
Liabilities--Note F (28,015)
----------
75,598
- -----------------------------------------------------------------------
NET ASSETS (100%)
- -----------------------------------------------------------------------
Applicable to 497,465,399 outstanding
$.01 par value shares
(authorized 600,000,000 shares) $8,943,587
- -----------------------------------------------------------------------
NET ASSET VALUE PER SHARE $17.98
=======================================================================
</TABLE>
+ See Note A to Financial Statements.
* Non-Income Producing Security.
(1) Ten largest common stock investments representing 25.6% of
net assets.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------
AT APRIL 30, 1995,
NET ASSETS CONSISTED OF:
- -----------------------------------------------------------------------
Amount Per
(000) Share
---------- --------
<S> <C> <C>
Paid in Capital $7,415,095 $14.91
Undistributed Net
Investment Income 84,763 .17
Accumulated Net
Realized Gains 35,043 .07
Unrealized Appreciation
of Investments--Note E 1,408,686 2.83
- -----------------------------------------------------------------------
NET ASSETS $8,943,587 $17.98
- -----------------------------------------------------------------------
</TABLE>
7
<PAGE> 20
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Six Months Ended
April 30, 1995
(000)
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT INCOME
INCOME
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . $141,141
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,677
- ----------------------------------------------------------------------------------------------------
Total Income . . . . . . . . . . . . . . . . . . . . . . 157,818
- ----------------------------------------------------------------------------------------------------
EXPENSES
Investment Advisory Fees--Note B
Basic Fees . . . . . . . . . . . . . . . . . . . . . . . . . . $5,764
Performance Adjustments . . . . . . . . . . . . . . . . . . . (77) 5,687
------
The Vanguard Group--Note C
Management and Administrative . . . . . . . . . . . . . . . . 10,501
Marketing and Distribution . . . . . . . . . . . . . . . . . . 762 11,263
------
Taxes (other than income taxes) . . . . . . . . . . . . . . . . . 343
Custodian's Fees . . . . . . . . . . . . . . . . . . . . . . . . 33
Auditing Fees . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Shareholders' Reports . . . . . . . . . . . . . . . . . . . . . . 172
Annual Meeting and Proxy Costs . . . . . . . . . . . . . . . . . 30
Directors' Fees and Expenses . . . . . . . . . . . . . . . . . . 15
- ----------------------------------------------------------------------------------------------------
Total Expenses . . . . . . . . . . . . . . . . . . . . . 17,549
- ----------------------------------------------------------------------------------------------------
Net Investment Income . . . . . . . . . . . . . . . . 140,269
- ----------------------------------------------------------------------------------------------------
REALIZED NET GAIN
Investment Securities Sold . . . . . . . . . . . . . . . . . . . 37,001
Futures Contracts . . . . . . . . . . . . . . . . . . . . . . . . 284
- ----------------------------------------------------------------------------------------------------
Realized Net Gain . . . . . . . . . . . . . . . . . . 37,285
- ----------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION)
Investment Securities . . . . . . . . . . . . . . . . . . . . . . 570,889
Futures Contracts . . . . . . . . . . . . . . . . . . . . . . . . (233)
- ----------------------------------------------------------------------------------------------------
Change in Unrealized Appreciation (Depreciation) . . 570,656
- ----------------------------------------------------------------------------------------------------
Net Increase in Net Assets
Resulting from Operations . . . . . . . . . . . . . $748,210
====================================================================================================
</TABLE>
8
<PAGE> 21
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SIX MONTHS ENDED Year Ended
APRIL 30, 1995 October 31, 1994
(000) (000)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net Investment Income . . . . . . . . . . . . . . . . . . . . . . $ 140,269 $ 256,027
Realized Net Gain . . . . . . . . . . . . . . . . . . . . . . . . 37,285 226,060
Change in Unrealized Appreciation (Depreciation) . . . . . . . . . 570,656 (296,749)
- -------------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from Operations . . 748,210 185,338
- -------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS (1)
Net Investment Income . . . . . . . . . . . . . . . . . . . . . . (168,091) (225,292)
Realized Net Gain . . . . . . . . . . . . . . . . . . . . . . . . (225,723) (212,053)
- -------------------------------------------------------------------------------------------------------------------
Total Distributions . . . . . . . . . . . . . . . . . . . (393,814) (437,345)
- -------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (2)
Issued --Regular . . . . . . . . . . . . . . . . . . . . . . . 452,770 1,268,276
--In Lieu of Cash Distributions . . . . . . . . . . . . 381,264 423,624
--Exchange . . . . . . . . . . . . . . . . . . . . . . 239,753 620,011
Redeemed --Regular . . . . . . . . . . . . . . . . . . . . . . . (345,408) (604,566)
--Exchange . . . . . . . . . . . . . . . . . . . . . . (385,337) (694,803)
- -------------------------------------------------------------------------------------------------------------------
Net Increase from Capital Share Transactions . . . . . . 343,042 1,012,542
- -------------------------------------------------------------------------------------------------------------------
Total Increase . . . . . . . . . . . . . . . . . . . . . 697,438 760,535
- -------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Period . . . . . . . . . . . . . . . . . . . . . . . 8,246,149 7,485,614
- -------------------------------------------------------------------------------------------------------------------
End of Period (3) . . . . . . . . . . . . . . . . . . . . . . . . $8,943,587 $8,246,149
===================================================================================================================
(1) Distributions Per Share
Net Investment Income . . . . . . . . . . . . . . . . . . . $.35 $.51
Realized Net Gain . . . . . . . . . . . . . . . . . . . . . $.47 $.50
- -------------------------------------------------------------------------------------------------------------------
(2) Shares Issued and Redeemed
Issued . . . . . . . . . . . . . . . . . . . . . . . . . . . 41,198 110,672
Issued in Lieu of Cash Distributions . . . . . . . . . . . . 24,192 25,156
Redeemed . . . . . . . . . . . . . . . . . . . . . . . . . . (43,645) (76,350)
- -------------------------------------------------------------------------------------------------------------------
21,745 59,478
- -------------------------------------------------------------------------------------------------------------------
(3) Undistributed Net Investment Income. . . . . . . . . . . . . $ 84,763 $ 112,585
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
9
<PAGE> 22
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION> Year Ended October 31,
SIX MONTHS ENDED -------------------------------------------------------
For a Share Outstanding Throughout Each Period APRIL 30, 1995 1994 1993 1992 1991 1990
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD . . . . . $17.33 $17.98 $15.75 $15.07 $11.91 $15.81
-------- -------- -------- -------- -------- ---------
INVESTMENT OPERATIONS
Net Investment Income . . . . . . . . . . . .28 .55 .50 .56 .62 .67
Net Realized and Unrealized Gain
(Loss) on Investments . . . . . . . . . . 1.19 (.19) 2.47 1.17 3.55 (3.22)
TOTAL FROM INVESTMENT OPERATIONS . . 1.47 .36 2.97 1.73 4.17 (2.55)
- --------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income . . . . (.35) (.51) (.52) (.61) (.73) (.74)
Distributions from Realized Capital Gains . (.47) (.50) (.22) (.44) (.28) (.61)
TOTAL DISTRIBUTIONS . . . . . . . . . (.82) (1.01) (.74) (1.05) (1.01) (1.35)
- --------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD . . . . . . . . $17.98 $17.33 $17.98 $15.75 $15.07 $11.91
==========================================================================================================================
TOTAL RETURN . . . . . . . . . . . . . . . . . +9.15% +2.22% +19.51% +12.50% +36.61% -17.48%
- --------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net Assets, End of Period (Millions) . . . . . $8,944 $8,246 $7,486 $4,878 $3,298 $2,087
Ratio of Expenses to Average Net Assets . . . . .42%* .39% .39% .41% .48% .52%
Ratio of Net Investment Income to
Average Net Assets . . . . . . . . . . . . . 3.36%* 3.26% 3.11% 3.72% 4.51% 4.93%
Portfolio Turnover Rate . . . . . . . . . . . . 25%* 24% 26% 23% 41% 20%
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Annualized.
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 the Fund's custodian bank
until maturity of each repurchase agreement. Provisions of each agreement
ensure that the market value of the collateral is sufficient in the event
of default; however, in the event of default or bankruptcy by the other
party to the agreement, realization and/or retention of the collateral may
be subject to legal proceedings.
10
<PAGE> 23
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 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 period ended April
30, 1995, the aggregate investment advisory fee represented an effective annual
rate of .14 of 1% of average net assets before a decrease of $77,000 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
April 30, 1995, the Fund had contributed capital of $1,245,000 to Vanguard
(included in Other Assets), representing 6.2% 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 six months ended April 30, 1995, directed
brokerage arrangements reduced the Fund's expenses by $314,000 (an annual rate
of .01 of 1% of average net assets).
D. During the six months ended April 30, 1995, the Fund made purchases of
$954,051,000 and sales of $1,025,171,000 of investment securities other than
U.S. Government securities and temporary cash investments.
E. At April 30, 1995, unrealized appreciation of investment securities for
financial reporting and Federal income tax purposes aggregated $1,408,564,000
of which $1,540,720,000 related to appreciated securities and $132,156,000
related to depreciated securities.
At April 30, 1995, the aggregate settlement value of open Standard & Poor's 500
index futures contracts expiring in June 1995, the related unrealized
appreciation, and the market value of securities deposited as initial margin
for those contracts were $4,651,000, $122,000, and $595,000, respectively.
F. The market value of securities on loan to broker/dealers at April 30, 1995,
was $6,432,000 for which the Fund had received cash collateral of $6,637,000.
11
<PAGE> 24
THE VANGUARD FAMILY OF FUNDS
FIXED INCOME FUNDS
MONEY MARKET FUNDS
Vanguard Admiral Funds
U.S. Treasury Money
Market Portfolio
Vanguard Money Market Reserves
TAX-EXEMPT MONEY MARKET FUNDS
Vanguard Municipal Bond Fund
Money Market Portfolio
Vanguard State Tax-Free Funds
Money Market Portfolios
(CA, NJ, OH, PA)
TAX-EXEMPT INCOME FUNDS
Vanguard Municipal Bond Fund
Vanguard State Tax-Free Funds
Insured Longer-Term Portfolios
(CA, FL, NJ, NY, OH, PA)
INCOME FUNDS
Vanguard Admiral Funds
Vanguard Fixed Income Securities Fund
Vanguard Preferred Stock Fund
EQUITY AND BALANCED FUNDS
GROWTH AND INCOME FUNDS
Vanguard Convertible
Securities Fund
Vanguard Equity Income Fund
Vanguard Quantitative Portfolios
Vanguard/Trustees' Equity Fund
U.S. Portfolio
Vanguard/Windsor Fund
Vanguard/Windsor II
BALANCED FUNDS
Vanguard Asset Allocation Fund
Vanguard LifeStrategy Funds
Income Portfolio
Conservative Growth Portfolio
Moderate Growth Portfolio
Growth Portfolio
Vanguard STAR Fund
Vanguard/Wellesley Income Fund
Vanguard/Wellington Fund
GROWTH FUNDS
Vanguard/Morgan Growth Fund
Vanguard/PRIMECAP Fund
Vanguard U.S. Growth Portfolio
AGGRESSIVE GROWTH FUNDS
Vanguard Explorer Fund
Vanguard Specialized Portfolios
INTERNATIONAL FUNDS
Vanguard International
Growth Portfolio
Vanguard/Trustees' Equity Fund
International Portfolio
INDEX FUNDS
Vanguard Index Trust
Total Stock Market Portfolio
500 Portfolio
Extended Market Portfolio
Growth Portfolio
Value Portfolio
Small Capitalization Stock Portfolio
Vanguard International Equity
Index Fund
European Portfolio
Pacific Portfolio
Emerging Markets Portfolio
Vanguard Bond Index Fund
Vanguard Tax-Managed Fund
Vanguard Balanced Index Fund
[THE VANGUARD GROUP LOGO]
<TABLE>
<S> <C>
Vanguard Financial Center Valley Forge, Pennsylvania 19482
New Account Information: 1-(800) 662-7447 Shareholder Account Services: 1-(800) 662-2739
</TABLE>
This Report has been prepared for shareholders and may be distributed to others
only if preceded or accompanied by a current prospectus. All Funds in the
Vanguard Family are offered by prospectus only.
Q732-4/95
[VANGUARD
WINDSOR II FUND LOGO]
SEMI-ANNUAL REPORT
APRIL 30, 1995
